A 30% pullback from the high, can Hang Seng Tech bottom out?

Questioning AI · Has the Hang Seng Tech’s Low Valuation Fully Reflect All Risks?

Market attention on Hang Seng Tech mainly focuses on two issues: first, whether the AI narrative can truly translate into profit growth; second, whether the current low valuation has fully priced in pessimistic expectations.

Text | “Finance” Reporter Huang Huiling Intern Zhou Zhou

Editor | Guo Nan, Lu Ling

After half a year of deep adjustment, the index fell 15.70% in the first quarter, yet many investors still hope the Hang Seng Tech Index will rebound from its lows.

On April 2, the Hang Seng Tech Index closed at 4,679 points, down 1.69% that day, over 15% decline since the start of the year, and a 30% retreat from its October 2, 2025 high.

On the capital front, undercurrents are brewing. Since the beginning of the year, ETFs related to Hang Seng Tech have seen net inflows exceeding 50 billion yuan, becoming the ETF-related index with the largest net inflow in the market. Valuation-wise, the PE-TTM of Hang Seng Tech is below 22 times, lower than over 75% of the past ten years.

There have also been moves at the index compilation level. Recently, Hang Seng Index Company announced an optimization plan to add more detailed sub-themes under each tech theme, improving disclosure standards and transparency. The adjustments will officially take effect on June 8.

Market focus on Hang Seng Tech centers on two questions: first, can the AI (artificial intelligence) narrative truly convert into profit growth; second, has the low valuation fully priced in pessimistic expectations.

Kejie Yu, head of Morgan Stanley Asia’s Internet and Telecom Stock Research Team, told “Finance” that AI remains a catalyst over the next 6-9 months, and the release of domestic chip capacity in 2026 will improve supply-side constraints. Wang Xinchen, fund manager at Harvest Fund, believes that by 2026, AI applications will be implemented in more scenarios, and the valuation repair space for Hong Kong stocks is huge.

CICC’s Managing Director and Chief Overseas & Hong Kong Strategy Analyst Liu Gang offers a more macro perspective, highlighting structural pressures. “Upside needs some catalysts. Either external conditions ease, such as a thaw in geopolitical tensions or a rekindling of Fed rate cut expectations; or industry catalysts, like major internet firms regaining trust in the AI narrative.”

“Short-term, we warn of risks. The US-Iran conflict has triggered global stagflation concerns, and the Fed’s rate cut expectations have cooled. Under such geopolitical shocks, stock assets often face phased pressure,” said Li Zhao, head of macro-asset allocation research at CICC, in an interview with “Finance.” Historical review shows that markets generally take 1 to 2 months to digest negative factors after such shocks, so short-term investments in the Hang Seng Tech Index should be cautious with risk control.

Why is Hang Seng Tech Underperforming?

Under multiple factors—such as the switch from old to new AI narratives, tightening dollar liquidity, and increased profit worries due to delivery subsidies around the Spring Festival—Hang Seng Tech has continued to decline. Wind data shows that since its October high last year, it has retreated 30%, and this year alone, down 15%.

Unlike most broad-based indices, Hang Seng Tech’s weight is highly concentrated, with only 30 constituent stocks covering sectors like internet platforms, consumer, semiconductors, and AI large models. The top ten weights are BYD, Meituan, Xiaomi, Tencent, NetEase, Alibaba, SMIC, JD.com, Kuaishou, and Baidu, accounting for nearly 70% of the index.

Why does Hang Seng Tech remain sluggish? Feng Beijia, fund manager at China-Europe Fund, believes that the recent correction in Hong Kong stocks reflects three main factors: continued downward revisions of earnings in key sectors; intensified internet competition and worsening costs in new energy vehicles; liquidity impacts from dollar rebound and IPO siphoning; and geopolitical conflicts causing risk appetite to plummet.

Liu Gang further analyzed the deep logic behind the adjustment: “Credit cycles determine the index’s potential. In 2026, China’s credit cycle is expected to be volatile, which constrains the overall upward space of the index; industry structure influences the prosperity direction. The previously favored hard tech theme is absent in Hong Kong stocks, especially for internet giants, due to prior delivery wars or slow AI progress, making them lag behind; liquidity fluctuations are amplified by geopolitical tensions, oil prices surging, high US bond yields, large IPO financing needs, and slowing southbound capital flows, leading to a tight liquidity environment.”

Behind the shift in AI narratives, the phased bottleneck in chip supply has also heightened concerns about the AI implementation capacity of Hang Seng Tech stocks. Yu Jie believes that 2025 is a critical period when export restrictions on chips and domestic capacity expansion are still limited, but from 2026 onward, domestic chip capacity will significantly improve this situation.

Recently, Hang Seng Tech’s heavy holdings entered a period of intensive earnings disclosures, with notable divergence in performance.

Tencent’s Q4 revenue grew 13% year-over-year, with adjusted net profit up 17%, driven by AI-enhanced ad targeting and cloud service scale profitability; Alibaba’s Q4 net profit fell 66% YoY, but cloud and smart group revenue grew 36%, with AI-related products achieving triple-digit YoY growth for the tenth consecutive quarter; Meituan lost 23.4 billion yuan in 2025 but turned profitable with 35.8 billion yuan in 2024, due to increased competition spending, rider subsidies, and AI R&D; Kuaishou maintained double-digit growth, but JPMorgan expects core business revenue growth to slow from 12% in 2025 to 3% in 2026 and 2027, temporarily weakening sector sentiment.

Why Are Funds Increasingly Buying on Dips?

Despite the decline, capital flows into Hang Seng Tech have been increasing.

Wind data shows that as of April 2, Hang Seng Tech had the largest net ETF fund inflows this year, totaling 51.2 billion yuan, even surpassing gold in net subscription and redemption amounts.

Valuation-wise, the PE-TTM of Hang Seng Tech is 21.98 times, at the 24th percentile over the past decade, trading at a nearly 33% discount to the Nasdaq 100 (32.25x) and about 45% below the ChiNext index (40x), making it highly cost-effective among global tech sectors.

On the rule side, index optimization is enhancing the tech purity of Hang Seng Tech.

Previously, the index was criticized for being too broad and unfocused. On March 26, Hang Seng Index Company announced an index optimization, breaking down six major tech themes into dozens of specific sub-themes, covering cloud computing, semiconductors, AI, autonomous driving, and other frontier areas.

Liu Fangyuan, index researcher at E Fund, analyzed that the calculation method remains unchanged, but transparency has improved: clearer standards for inclusion, reasons for inclusion, and more explicit criteria. This optimization makes the index rules clearer, with more verifiable constituent selection, requiring existing stocks to continuously demonstrate “tech purity,” and potential inclusions to have a clear list, further strengthening the index’s role as a tech beta tool.

Some institutions predict that the next adjustment may include hot AI companies like MINIMAX-W and Zhipu, raising concerns about the index passively “picking up” at high valuations. Liu Fangyuan told “Finance” that as a passive index, Hang Seng Tech’s constituent inclusion is mainly based on preset screening criteria, not valuation levels.

“Under this mechanism, some companies with high valuations may be included, but this is a common feature of broad or sector indices, reflecting the index’s tracking of market structure changes rather than active judgment of short-term pricing. Rather than viewing this as ‘passive picking,’ it’s better to see it as the index tracking and reflecting industry trends at different stages,” Liu said.

Regarding valuation methods, despite some companies facing short-term profit pressures, some institutions are adopting differentiated valuation approaches for AI-related businesses. Yu Jie uses SOTP (sum-of-the-parts) valuation to split Alibaba’s cloud, chip, and model businesses, estimating its valuation center at $245.

Some believe that Hang Seng Tech’s core stocks are highly dependent on the domestic market, mainly in consumer-oriented sectors like local services, e-commerce, and social media, which may not align with the high-growth logic of global tech stocks. Liu Fangyuan argues that, from an index perspective, Hang Seng Tech is better understood as platform-based tech companies with integrated consumer scenarios in the digital economy. Its growth logic stems from both technological progress and expanding application scenarios.

“In investment, simply applying the valuation frameworks of global tech stocks or domestic consumption stocks has limitations. A more reasonable approach is to evaluate from the perspective of platform economy + technological empowerment, considering long-term growth potential and commercialization,” Liu said.

What Does Hang Seng Tech Need for a Rebound?

Regarding the future trend of the Hong Kong tech index, several interviewed institutions expressed a relatively optimistic view.

“Reaching this level, Hang Seng Tech’s bottom valuation is attractive, already priced in many pessimistic expectations. As long as there are no extreme shocks, some funds are willing to start positioning on the left side,” Liu Gang said. While a “good trade” still requires fundamental support, attractive valuations make it gradually “not a bad trade,” with some “cost-effectiveness.” Catalysts for a rebound include easing external tensions, rekindled Fed rate cut expectations, or major internet firms regaining trust in the AI narrative.

“China’s economic recovery continues, with policy support and domestic demand potential providing backing. Currently, Hong Kong stocks are at historically low valuations, and with fundamentals improving, valuation repair space is large,” Wang Xinchen said.

Fubai Jia believes that the recent correction in Hong Kong stocks was deeper and earlier, and pessimistic pricing has been fully reflected. “From earnings, except for some tech hardware with ongoing downward revisions, cash-rich cyclical companies show resilience; from valuation, Hong Kong equities are at a clear low relative to global peers; from risk premium, the long-term stability of RMB assets offers a certain premium, and global capital reallocation will likely bring inflows into Hong Kong stocks.”

Everbright Securities’ research reports that the current Hang Seng Tech Index has formed a “super-sold undervalued zone + contrarian capital inflows + improving AI fundamentals + buyback ramp-up” four-layer bottom feature. Short-term sentiment disturbances have been fully released, making it a golden window for medium- and long-term strategic allocation.

The AI industry trend is creating structural opportunities for Hang Seng Tech. “In our 2026 outlook report released earlier this year, we maintained a positive view on China’s internet sector,” Yu Jie said. The sector’s valuation has become more attractive since the start of the year, and core drivers like AI development will continue to catalyze over the next 6 to 9 months.

Wang Xinchen believes that AI application deployment is the most promising direction for 2026. “Although AI investment fluctuated in 2025, the trend of improving fundamentals is certain. DeepSeek has demonstrated China’s AI strength, and by 2026, AI applications will be implemented in more scenarios.” He focuses on the transformation of AI capabilities by major internet firms, growth in public cloud services, and the application of AIAgent across industries. Additionally, in autonomous driving, Wang believes the long-term trend of equal rights for smart driving will not change. As technology matures, costs decrease, and regulations clarify, autonomous driving is expected to shift from supply-driven to demand-driven growth.

“We also see that after competitive pressures, consumer internet companies’ valuations have already reflected many pessimistic expectations,” Wang said. As domestic demand recovers and the competitive landscape stabilizes, some undervalued high-quality stocks will revalue.

On risks, Li Zhao warns that geopolitical conflicts involving the US, Israel, and Iran could trigger global stagflation concerns, and cooling Fed rate cut expectations typically take 1-2 months for markets to digest negative factors. Short-term, risk control is essential.

Huatai Securities believes that a trend reversal may still require waiting, and a rebound needs lower positions and positive catalysts, such as peaking competition expectations, recovery in consumption outlook, and positive progress in major firms’ AI applications.

Title image source: Visual China