Hengke's evaporation of $600 billion, what is the market afraid of

Domestic tech giants are facing a valuation re-evaluation driven by an AI arms race.

Since reaching a peak in October last year, the Hang Seng Tech Index has fallen by 28%, with a market value evaporating nearly $600 billion. Tencent and Alibaba are at the forefront, while competitors like ByteDance continue to increase capital expenditure. The core market concern is: fierce AI subsidy battles are eroding profits, and who will ultimately win remains uncertain.

According to Morgan Stanley data, ByteDance, Alibaba, Tencent, and Baidu collectively spent about $1.1 billion on subsidies during the Spring Festival holiday to attract users. Goldman Sachs downgraded Alibaba’s target price last week, citing that the company’s capital expenditure to compete for AI leadership will exceed previous expectations before 2028.

The upcoming earnings report will be the next critical test. Alibaba’s net profit for the quarter ending December last year is expected to decline 45% year-over-year, and Tencent may face its slowest quarterly profit growth since 2023.

AI Subsidy War: Burning Money for Market Share, Returns Uncertain

The AI rally sparked by DeepSeek early last year has gradually subsided, replaced by concerns similar to those of US large-scale cloud providers—rising memory chip costs, potential impacts of AI on existing businesses, and broader market downturns triggered by US-Iran tensions.

Lorraine Tan, Director of Asia Stock Research at Morningstar, said that given the previous strong performance of tech stocks and AI-related worries, “investors are gradually taking profits.” She pointed out that, “China’s AI spending remains reasonable for now, but the market worries about resource wastage and low returns due to intense competition.”

Notably, a group of emerging Chinese AI companies are less sensitive to global market fluctuations. Since going public in January this year, AI model developer MiniMax and Graph Technology have seen their stock prices surge by over 280%.

Bo Ning, an analyst at China Merchants Securities (Hong Kong), described this phenomenon as a clear “tug-of-war” effect between traditional internet giants, emerging AI firms, and high-growth hardware sectors. He also noted that “market sentiment remains cautious, awaiting clearer AI strategies from Tencent, Alibaba, and others.”

Valuations Are Becoming Attractive, But Disagreements Persist

From a valuation perspective, the Hang Seng Tech Index currently has a forward P/E ratio of less than 17, below the five-year average of about 22. Bo Ning recommends buying large tech stocks that are oversold on dips, betting on their rebound potential.

However, many investors prefer to wait and see. Zhe Song, an emerging market equity specialist at Paris Asset Management, said that the firm currently holds a low allocation to China’s internet sector. “It’s very hard to tell who the winner is now,” he said. “If subsidies stop, will users stay? That’s a big question.”

Risk Warning and Disclaimer

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest at your own risk.