CITIC Securities: China's AI assets are expected to usher in a revaluation and optimistic that the Hong Kong stock internet sector will converge and repair the market

The Zhitong Finance App learned that CITIC Securities released a research report saying that the rebalance of capital and flow is driving the market from diversification to convergence. The bottom of performance resonates with AI narratives, and the Hong Kong stock Internet industry is bullish. Looking back at the global technology market, the pricing focus over the past year was focused on the “investment side” of AI infrastructure. With the continuous rise in model capabilities and the gradual clarification of commercialization paths, the pricing focus is shifting from the “input side” to the “output side”, and the revaluation window for China's AI assets is opening. In this revaluation process, the cloud, model, and application all have opportunities: the cloud is the first stop for AI demand to be implemented; high computing power drives revenue acceleration, and the path of capital expenditure to revenue is gradually becoming clear; the model is the core of intelligent supply. The intelligent upper limit of domestic models continues to rise, and the gap with global flagship models continues to narrow, becoming an anchor of confidence in the revaluation; the application is the carrier of commercial implementation. The scope, model and end side of AI penetration continues to exceed expectations. On this basis, leading Hong Kong stock internet companies are the core assets that undertook this round of revaluation.

CITIC Securities's main views are as follows:

Structural rebalancing: The convergence and repair of K-type differentiation is in progress.

Since the beginning of 2026 (as of July 17, same below), there has been significant K-type differentiation in the domestic market: the CITIC Electronics/Communications Index on the hardware side is +35%/+32% respectively, while the Hang Seng Technology/China Internet Index is -16%/-29%, and the Internet sector has lagged significantly behind. From a global perspective, the differentiation is also extreme. SOX/KOSPI/Nikkei has increased 65%/+53%/+24% respectively since the beginning of 225, and the excess hardware benefits are remarkable. Since July, differentiation has loosened: SOX has accumulated a cumulative decline of -18%, Microsoft/Amazon/Google/META +2.5%/-4%/+5.4% respectively during the same period, and Hang Seng Technology/China Internet Index +3.4%/+12%.

The bank believes that K-type differentiation is gradually moving towards convergence and repair. The overcrowded hardware position, along with Hyperscaler's interpretation in the expected restoration of the model commercialization, is leading the global capital structure to gradually switch from hardware to cloud and application; the Hong Kong stock Internet with low positions and undervalued values is expected to become an important flow of capital switching, and the bank is optimistic about the sector's convergence and repair market.

Flow rebalancing: capital is low, and return flow is being built up.

Feedback from the bank's recent exchange with overseas investors during a roadshow showed that the current mainstream positions are in low-allocation China, and the Internet is under-allocated within Chinese assets. Since July, fluctuations in the Asia-Pacific hardware sector, represented by storage, have increased significantly. KOSPI/Nikkei 225 has accumulated -18%/-9% since July, Samsung Electronics/SK Hynix/Kioxia is -19%/-28%/-41% respectively. High fluctuations in the Japanese and South Korean markets or drive regional capital reallocation, which favors the Hong Kong stock internet with low positions and undervalued values; compounded by the further rise of the Chinese AI narrative, the “Long Tech Short Internet” hedge fund, or long-term foreign investment in China and the Internet, are all motivated to consider holding structures With the rebalancing, the return flow of foreign capital is being built up.

In terms of domestic capital, according to Wind, Hong Kong stock ETFs have also continued to have a net outflow of 54/43.1 billion yuan since July/beginning of the year, and the overall allocation of domestic capital to the Internet sector is still low. Currently, the sector's capital level is both low. Both types of capital have the momentum to increase positions. Following the promotion of rebalancing and the catalytic implementation of AI, there is clear room for improvement in capital.

Performance dimensions: Pessimistic expectations have taken hold, and 26H2 is expected to reach an inflection point in profit.

Since 2025, the main reason for the adjustments experienced by the Hong Kong stock Internet sector is due to the downsizing of EPS. The core is revenue pressure under macroeconomic pressure, as well as profit pressure and uncertainty brought about by AI and new business investment. As of July 17, Hang Seng Technology's profit growth rate for 2026/27 is expected to be 11%/22%. Currently, the bank believes that pessimistic expectations have been relatively sufficient, and traditional business losses represented by instant retail are clearly shrinking rapidly.

According to Visible Alpha's unanimous expectations, the total revenue of major domestic Internet companies in 26Q2 continued to grow steadily. Total non-GAAP net profit was -8% year-on-year, the decline was significantly narrower than 26Q1 (-32%), and profit would improve significantly; the 26Q3/4 non-GAAP net profit growth rate will further rise to +12%/+46%, and the total revenue for the full year 26 will be +8% year-on-year.

The sector's performance growth rate has bottomed out, and it is expected that the improvement in profit in the main business will further support continued investment in the AI business, forming a positive cycle of “main business hematopoiesis - AI investment - growth and implementation”. The quarterly restoration expected by EPS not only forms a safe margin for the current position, but is also expected to be an upward catalyst for the sector. It is recommended to focus on the pace of performance release of Internet companies.

Valuation dimensions: The domestic AI narrative restarts, and overseas funds reassess China's AI assets.

After the recent release of Kimi K3, it sparked significant reactions overseas. Under high ROI, the catch-up time between Chinese manufacturers and overseas flagship models has been shortened to about 3 months, and there is a buzz in the market about whether to usher in a “second DeepSeek moment.” The bank believes that K3's performance is the first recent facet of domestic AI's accelerated catch-up. In the second half of the year, Chinese model makers will enter a new round of intensive iteration and will continue to challenge global flagships in terms of intelligence and cost performance, helping to move from “following” to “running side by side.”

Second, along with the recent WAIC conference, upstream computing power has accelerated iteration in terms of supernodes, connectivity, and adaptation to domestic models; downstream applications are in full bloom, covering more diverse scenarios (office, programming, physical use, consumer entertainment, etc.), richer modes (text, images, video, voice are fully blossoming), and carriers are accelerating to the end side (AI phones, glasses, robots, etc.). The breadth and depth of AI penetration continues to exceed expectations. Meanwhile, the increase in the upper limit of Chinese model intelligence and the high certainty of downstream commercialization will push overseas investors to re-examine the competitive advantages and valuation potential of Chinese model companies and reassess the transmission of cloud and model-related assets expected from the primary market to the secondary market. Currently, Hang Seng Technology's NTM PE is 18.9x (Wind agrees), at 27.5% in the past 5 years. The bottom of performance resonates with AI narratives, and the sector has room for both valuation and profit recovery.

Risk factors:

Liquidity easing falls short of expectations, leading to a decline in the market valuation center; Internet companies' performance recovery falls short of expectations due to cost reduction and efficiency falling short of expectations; new business and market expansion falling short of expectations, or investment losses exceeding expectations; investment strategies such as risk reduction of core shareholders; progress in policy implementation falls short of expectations; and large domestic models are not as fast as expected to catch up with foreign peers.