Can the Chinese internet stocks and Hang Seng Tech index take off this time?

After the market closed yesterday afternoon, Tencent and Alibaba respectively announced their first-quarter operating results. Looking at the overall revenue and profit performance for the first quarter, it wasn't particularly good, especially Alibaba's profit, which fell significantly short of market expectations. Therefore, immediately after the results were released, Tencent and Alibaba's stock prices fell. However, during the subsequent management conference calls, both companies emphasized the intensity and progress of their AI transformation.

In Figures 2 and 3, I've visualized Alibaba's quarterly report and key points from the conference call.

Both companies emphasized during the calls that they will increase AI capital expenditures in the future and will use relevant domestic chips to address computing power needs. Consequently, the US-listed shares of Tencent and Alibaba traded that night rose sharply, with Alibaba ultimately gaining over 8% and Tencent over 4%. This also shows that the current market isn't overly concerned about near-term profit damage; it's more focused on whether Tencent and Alibaba will be left behind during the AI transformation process. On the contrary, increasing AI capital expenditures has somewhat alleviated the market's AI FOMO sentiment towards Tencent and Alibaba. The market will also reference the path of US tech stocks last year, which increased capital expenditures and ultimately achieved revenue and profit growth, to value and envision the future for Tencent and Alibaba.

Over the past six months, Hong Kong tech stocks and China concept internet stocks have indeed lagged far behind the overall tech sector. This isn't solely due to the Hong Kong market itself but also because these large internet companies play a dual role: they are both investors in AI and end-users of AI applications. Therefore, within the current domestic tech stock landscape, they are underperforming in the short term compared to pure-play AI hardware beneficiaries of upstream capital expenditures, such as optical communications and chips. However, as long as these large internet companies take action and actively build ecosystems around AI, their current moats remain solid, especially given that US tech stocks and A-share tech stocks are already relatively highly valued. The Hong Kong internet and tech sector is a rare, relatively not overly overvalued sector.

(Not investment advice)

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