As the end of the year approaches, the trading atmosphere in the Hong Kong stock market for 2024 has improved significantly. Looking ahead to 2025, Open-source Securities' overseas market team believes that in the next six months, a package of policies is expected to stimulate the basic fundamentals of the Chinese economy successively, providing support for the Hong Kong stock market. Later, the improvement in macroeconomic conditions and the recovery of corporate profits are expected to drive more active long-term funds to flow back, and the Hong Kong stock market may still have significant upside potential.

Open-source Securities pointed out that leading technology companies in Hong Kong stocks have the characteristics of cyclical recovery and benefit from the long-term trend of AI, thus having long-term allocation value. The internet sector still stands out in terms of performance growth, valuation, and comprehensive cost-effectiveness, suitable for stable and conservative allocation; supplemented by optical, semiconductor, automotive ADAS, and power tools as tactical investments.

In the short-term, observe fund momentum; in the mid-term, look at the intensity of policies; in the long-term, monitor the improvement in fundamentals.

By the end of September 2024 and during the National Day period, the upward slope and trading volume of Hong Kong stocks and Chinese concept stocks exceeded the expectations of most investors. The capital pressure initially forced short positions, followed by institutional allocation driving up. The previous structural features of sectors indicated a 'bull market' in policy and financial reforms, with financial real estate leading the first echelon, highly correlated with national policies and market sentiment; technology, healthcare, and consumption were the second echelon in terms of previous gains.

Looking specifically at the various subsectors of the Hang Seng Technology Index, Hong Kong internet stocks and emerging automotive powers led the way in the increase, followed by computers and semiconductors. After a rapid rise in the short term, a subsequent pullback adjustment was normal for profit taking; in the mid-term, the trend of financial reform may continue; in the long term, it will take more than half a year to verify the transformation from policy to improved fundamental data. If the logic of fundamental reversal is realized and drives more active long-term funds to flow back, the Hong Kong stock market may still have significant upside potential.

Profit expectations determine the mid-term direction, with the policy bottom appearing and the fundamental aspects awaiting verification in the second half of 2025.

Greater attention has been paid to the people's livelihoods in the Chinese economy, and the policy framework of the power struggle between China and the US has become clearer after the US election. In the next six months, it is expected that a package of policies will successively stimulate the basic fundamentals of the Chinese economy, which can provide support for the Hong Kong stock market. Later, the improvement in macroeconomic conditions and the increase in corporate profits are expected to drive greater upside potential.

Which sectors are worth paying attention to in 2025?

Internet: The industry fundamentals are stable, and valuation remains the primary determinant as the macro environment improves.

Industry fundamentals are relatively stable, with companies in stable patterns and strong barriers under existing competition showing more certainty. The domestic mobile internet user base is growing moderately in scale and duration, with overseas markets potentially becoming the second growth curve. Currently, the overseas business proportion of most internet companies remains low. Considering user leisure time and consumption trends, there are still structural opportunities in segmented tracks and sinking markets. In the short term, AI has limited performance boost for internet companies; attention is on subsequent technological and application evolution.

The valuation approach is gradually shifting, with short-term value more significant than growth attributes. Valuation recovery is still primarily determined by the favorable macro environment. With the expected slowdown in income growth, internet companies with high profit margins, ample cash flow, and continuous repurchases have robust allocation value. Despite rebounding, valuations remain in a historically low range. Future valuation recovery still relies on the macro environment, with a focus on the impact of Sino-American relations, Chinese economic policy expectations on global asset reallocation, company repurchase efforts, and progress in large-scale AI application landing.

Gaming: Demand driven by supply, favoring top manufacturers of high-quality products, betting on potential explosive product cycles.

Gaming user base growth is slowing down, while increasing ARPU is driving steady market growth; it is expected that gaming license supervision policies will remain stable, focusing on potential explosive product cycles. In 2023, the domestic gaming market size grew by +13.95% YoY, while the user base grew by +0.6% YoY. Future demand is intensifying due to aging trends, with short-term user penetration rates potentially stable, growth relying on increasing existing user ARPU, coupled with limited overall number of licenses on the supply side, leading to refined development as the inevitable choice, giving top manufacturers an advantage.

E-commerce: Significant consumption segmentation trends, with opportunities in market share optimization and monetization rate increase.

Significant consumption segmentation trends, with live e-commerce growth slowing down, shelf e-commerce focusing on low stock price and user experience, opportunities in optimizing market share and increasing monetization rate.

On the demand side of e-commerce, consumer income expectations tend to be cautious, seeking value for money, while presenting a significant trend of consumption stratification. In January-March 2024, the online retail sales of physical goods increased by 7.9% year-on-year, accounting for 25.7% of total social retail sales; in terms of categories, categories such as food & beverages and outdoor products have seen rapid online growth.

On the platform side, the competition has shifted from low-price homogeneity to a phase where both low-price and differentiation competition are important. Livestreaming e-commerce merchants face high operation costs that are unsustainable, while platform commercialized traffic is limited, resulting in a slowdown in GMV growth. Shelf e-commerce relies on low-price subsidies, putting pressure on profit margins and focusing on achieving both low prices and GMV growth.

Open Source Securities expects that Alibaba's market share in the domestic e-commerce business will gradually stabilize, and the monetization rate is expected to enter a stable upward trend by 2025. Benefiting from the improvement of its platform competitiveness, adjustments in technology service fees, and later full-site push model penetration to further increase the monetization rate.

In addition, according to Open Source Securities' research report, compared to U.S. and Hong Kong internet companies, Hong Kong internet companies offer more cost-effective valuations.

Editor/Lambor