The Hang Seng Tech Index has plummeted 28% from its peak in October last year, with a market value loss of nearly USD 600 billion. Although valuations have fallen below historical averages, the core concern of 'burning cash for market share with questionable returns' remains unresolved. During the Spring Festival, major giants spent USD 11 billion to attract users, and the upcoming earnings reports will be the next critical test.
Domestic technology giants are facing a revaluation triggered by an AI arms race.
The Hang Seng Tech Index has fallen 28% since its high in October last year, with nearly $600 billion in market value wiped out. Tencent and Alibaba have borne the brunt, while competitors such as ByteDance continue to ramp up capital expenditures. The core market concern lies in the fact that fierce AI subsidy wars are eroding profits, and it remains unclear who will ultimately prevail.
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According to Morgan Stanley data, ByteDance, Alibaba, Tencent, and Baidu collectively spent approximately $1.1 billion on subsidies during the Spring Festival holiday to vie for users. Goldman Sachs subsequently lowered Alibaba's target price last week, citing that the company’s capital expenditure through 2028 to secure AI leadership would exceed previous expectations.
The upcoming earnings reports will be the next critical test. Alibaba’s net profit for the quarter ending December last year is expected to decline by 45% year-on-year, while Tencent may face its slowest quarterly profit growth since 2023.
AI Subsidy War: Burning Cash for Market Share, Returns in Question
The AI rally initially sparked by DeepSeek early last year has gradually receded, replaced by concerns similar to those faced by U.S. hyperscale cloud providers—soaring memory chip costs, potential disruptions from AI to existing businesses, and broader market downturns triggered by tensions between the U.S. and Iran.
Lorraine Tan, Director of Equity Research at Morningstar Asia, stated that given the strong performance of tech stocks and AI-related concerns, "investors are gradually taking profits." She noted, "China’s AI spending remains reasonable at present, but the market is concerned about resource wastage and low returns caused by intense competition."
Notably, a group of Chinese AI startups exhibits significantly lower sensitivity to global market volatility. Since their listing in January this year, shares of AI model developer MiniMax and Tupu Technology have surged over 280% cumulatively.
Bo Ning, an analyst at China Merchants Securities (Hong Kong), described this phenomenon as a "distinct 'seesaw' displacement effect between traditional internet giants and emerging AI companies alongside high-growth hardware sectors." He also pointed out, "Market sentiment remains cautious, awaiting clearer AI strategies from companies like Tencent and Alibaba."
Valuations Are Becoming Attractive, But Disagreements Remain
From a valuation perspective, the Hang Seng Tech Index currently has a price-to-earnings ratio of less than 17 times (based on forward earnings forecasts), which is below the five-year average of approximately 22 times. Bo Ning recommends buying oversold large-cap technology stocks at lower prices, betting on their rebound potential.
However, more investors are choosing to adopt a wait-and-see approach. Song Zhe, an emerging markets equity investment specialist at BNP Paribas Asset Management, stated that the company is currently underweight in China's internet sector. "It is difficult to determine who the winners are at this stage," he said. "Whether users will stay if subsidies stop — this remains a major question mark."
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