Domestic tech giants are facing a valuation reassessment triggered by an AI arms race.
The Hang Seng TECH Index has fallen 28% since its peak in October last year, with a market value evaporating by nearly $600 billion. Tencent and Alibaba are at the forefront, while competitors like ByteDance continue to ramp up capital expenditures, leading to the core market concern: the fierce AI subsidy war is eroding profits, and it remains uncertain who will ultimately prevail.
According to Morgan Stanley data, ByteDance, Alibaba, Tencent, and Baidu collectively spent about $1.1 billion on subsidies during the Spring Festival holiday to compete for users. Goldman Sachs subsequently lowered Alibaba's target price last week, citing that the company's capital expenditures to compete for AI leadership will exceed previous expectations before 2028.
The upcoming financial reports will be the next key test, with Alibaba's net profit for the quarter ending last December expected to decline by 45% year-on-year, and Tencent may face its slowest quarterly profit growth since 2023.
<h2>AI Subsidy War: Burning Cash for Market Share, Returns in Doubt</h2>
The AI boom triggered by DeepSeek early last year has gradually receded, replaced by concerns similar to those faced by major U.S. cloud computing companies—soaring memory chip costs, the potential impact of AI on existing businesses, and a broader market downturn triggered by U.S.-Iran tensions.
Lorraine Tan, Director of Asian Equity Research at Morningstar, stated that given the previous strong performance of tech stocks and AI-related concerns, &#34;investors are gradually taking profits.&#34; She pointed out that &#34;China's AI spending is currently still reasonable, but the market is worried about resource wastage and low returns due to fierce competition.&#34;
It is worth mentioning that a group of emerging Chinese AI companies shows significantly lower sensitivity to global market fluctuations. AI model developer MiniMax and Graph Technology have both seen their stock prices soar over 280% since going public in January this year.
Bo Ning, an analyst at China Merchants Securities (Hong Kong), described this phenomenon as a clear &#34;seesaw&#34; effect between traditional internet giants and emerging AI companies and high-growth hardware sectors. He also noted that &#34;market sentiment remains cautious, waiting for Tencent, Alibaba, and other companies to provide clearer AI strategies.&#34;
<h2>Valuations Are Appealing, But Discrepancies Remain</h2>
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), below the nearly five-year average of about 22 times. Bo Ning recommends buying large tech stocks that have fallen sharply, betting on their rebound potential.
However, more investors are choosing to wait and see. Song Zhe, an emerging markets equity investment expert at BNP Paribas Asset Management, stated that the company currently holds an underweight position on the Chinese internet sector. &#34;It's hard to determine who the winner is now,&#34; he said, &#34;If subsidies stop, will users stay—that's a big question mark.&#34;

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The Hang Seng TECH Index has fallen 28% since its peak in October last year, with a market value evaporating by nearly $60 billion. Although valuations have dropped below historical averages, the core concern of "burning money for market share, with questionable returns" remains difficult to conceal. During the Spring Festival, major players spent $1.1 billion to acquire users, and the upcoming financial reports will be the next critical test

- Domestic tech giants are facing a valuation reassessment sparked by an AI arms race, with the Hang Seng Tech Index falling 28% since last October, losing nearly $600 billion in market value.  
- Major players like Tencent and Alibaba are under pressure as competition intensifies with rivals like ByteDance boosting capital expenditure, raising concerns over profitability amidst aggressive AI subsidy wars.  
- Upcoming financial reports are critical, with expectations of significant profit declines for Alibaba and slow growth for Tencent, while investor sentiment remains cautious pending clearer AI strategies from these companies.

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