Domestic technology 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 the slowest quarterly profit growth since 2023.
<h2>AI Subsidy War: Burning Money for Market Share, Returns in Doubt</h2>
The AI market triggered by DeepSeek early last year has gradually receded, replaced by concerns similar to those faced by U.S. hyperscale 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 reasonable, but the market is worried about resource waste 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 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 right 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 October last year, with a market value evaporating by nearly $600 billion, mainly affected by the AI arms race. Tencent and Alibaba are facing intense AI subsidy wars, leading to increased market concerns about profits. Morgan Stanley data shows that the four major tech companies collectively invested about $1.1 billion in subsidies during the Spring Festival. Goldman Sachs has lowered Alibaba's target price, expecting its capital expenditures to exceed expectations. Despite attractive valuations, market sentiment remains cautious, waiting for a clearer AI strategy

- China's major tech giants are undergoing a valuation reassessment triggered by an AI arms race, with the Hang Seng Tech Index falling 28% since October, resulting in nearly $600 billion lost in market value.  
- Competitive pressure has led firms like Tencent and Alibaba to significantly increase spending on AI, with a collective $1.1 billion in user subsidies during the Spring Festival, raising concerns over profitability and market returns.  
- Analysts note the diverging fortunes between traditional tech giants and emerging AI firms, advising cautious investment as the market awaits clearer AI strategies from major players like Tencent and Alibaba.

Hengke evaporated 600 billion dollars, what is the market afraid of?