CITIC Securities: Hong Kong Internet Valuations Hit Bottom, China AI Asset Revaluation Window Opens
Claire Weston
CITIC Securities argues that global tech capital is rotating from hardware to cloud and applications, and Hong Kong-listed internet giants — sitting at both low positioning and low valuations — are the prime destination for this AI re-rating cycle.
Why is money moving from hardware to internet?
Year-to-date through July 17, hardware surged — the Philadelphia Semiconductor Index rose 65% and South Korea's KOSPI gained 53%. Meanwhile, the Hang Seng Tech Index fell 16% and the KraneShares CSI China Internet Index dropped 29%.
Since July, the tide has turned: the SOX fell 18%, while Meta gained 5.4%, Microsoft 2.5%, and the Hang Seng Tech / China Internet indices rebounded 3.4% and 12% respectively.
This means → overcrowded hardware positions are unwinding, and capital is migrating down the chain from "AI infrastructure capex" to "AI output" — cloud and applications. Under-owned, under-valued HK internet stocks sit right at the receiving end.
Who is buying — and who hasn't shown up yet?
CITIC's roadshow feedback: mainstream foreign funds are underweight China, and within China they are underweight internet — a double underweight.
Asia-Pacific hardware has turned volatile since July: Samsung fell 19%, SK Hynix 28%, Kioxia 41%. This turbulence in Japan and Korea may push regional capital to reallocate toward HK internet.
On the domestic side, Hong Kong-listed ETFs have seen net outflows of RMB 5.4 bn in July and RMB 43.1 bn year-to-date. Mainland positioning remains low.
In plain terms = foreign funds have room to close a double underweight, domestic funds have room to flip from outflows to inflows — neither has moved yet.
Is the earnings trough almost over?
Per Visible Alpha consensus, major Chinese internet companies' combined Non-GAAP net profit fell 8% year-on-year in Q2 2026 — a sharp improvement from the -32% decline in Q1.
Q3 and Q4 profit growth is expected to recover to +12% and +46%; full-year 2026 revenue is forecast to grow 8% year-on-year.
This means → Q1 was the worst quarter for profits; Q2 marks the narrowing, and H2 flips positive — the earnings inflection point most likely lands in the second half of 2026.
CITIC also notes that losses in traditional businesses such as instant retail are "clearly and rapidly shrinking," and pessimistic expectations are largely priced in.
How close are domestic AI models to the frontier?
The recent launch of Kimi K3 drew significant attention overseas. CITIC estimates the lag between Chinese models and global flagships has narrowed to roughly three months.
Chinese model developers are entering a new round of rapid iteration in H2, challenging global leaders on both capability ceilings and cost-efficiency.
This means → domestic models are no longer just "cheap alternatives" — they are closing in on the performance frontier. This reshapes how foreign investors anchor valuations for Chinese AI companies.
How cheap are valuations right now?
The Hang Seng Tech Index trades at an NTM P/E — forward price-to-earnings ratio based on the next twelve months — of 18.9×, sitting at the 27.5th percentile of its five-year range. Put simply, for three-quarters of the past five years the index was more expensive than it is today.
CITIC sees scope for a dual recovery in both valuations and earnings, driven by the earnings trough and a re-ignited AI narrative.
In plain terms = valuations are near historic lows, profits are about to turn positive, and the AI story is still accelerating — all three lines are inflecting upward at once. That is what "dual recovery" means.
What risks should investors watch?
Key risks flagged by CITIC: less-than-expected monetary easing, slower-than-expected cost optimization at internet companies, and new-business expansion falling short or investment losses exceeding expectations.
Additional risks include major-shareholder sell-downs and domestic large-model catch-up slowing.
This means → the bull case rests on three pillars — capital willing to flow in, profits actually inflecting, and models continuing to close the gap. A break in any one of them would stall the re-rating.
Content is for reference only, not financial advice.