Hengke evaporates 600 billion dollars—what is the market afraid of?

```

Domestic tech giants are facing a valuation re-rating triggered by the AI arms race.

Since its high last October, the Hang Seng Tech Index has fallen by 28%, with nearly $600 billion erased from its market value. Tencent and Alibaba have borne the brunt, while competitors such as ByteDance continue to ramp up capital expenditures. The core market concern is: the fierce AI subsidy war is eroding profits, and who will ultimately emerge victorious remains uncertain.

According to data from Morgan Stanley, ByteDance, Alibaba, Tencent, and Baidu together spent about $1.1 billion in subsidies during the Spring Festival holiday to compete for users. Goldman Sachs last week promptly lowered its target price for Alibaba, citing that the company’s capital expenditure to vie for AI leadership will exceed previous expectations through 2028.

The upcoming earnings reports will be the next key test. Alibaba’s quarterly net profit through last December is expected to decline 45% year-on-year, while Tencent may face its slowest quarterly profit growth since 2023.

AI Subsidy War: Burning Cash for Market Share, Returns in Doubt

The AI boom sparked by DeepSeek at the beginning of last year has gradually faded, replaced by concerns similar to those facing U.S. hyperscale cloud providers—soaring memory chip costs, AI’s potential impact on existing businesses, and broader market downturns triggered by U.S.-Iran tensions.

Lorraine Tan, Director of Equity Research, Asia, at Morningstar, said that given the previous strong performance of tech stocks and worries related to AI, "investors are gradually taking profits." She noted, "China’s AI spending is still reasonable for now, but the market is concerned that fierce competition could lead to wasted resources and low returns."

It is worth noting that a batch of Chinese AI startups are significantly less sensitive to global market fluctuations. Since their IPOs in January this year, shares of AI model developers MiniMax and TuPu Technology have each surged more than 280%.

Bo Ning, an analyst at China Merchants Securities (Hong Kong), described this phenomenon as a "clear 'seesaw' crowding-out effect between traditional internet giants and emerging AI firms and high-growth hardware sectors." He also noted, "Market sentiment remains cautious, waiting for companies like Tencent and Alibaba to provide clearer AI strategies."

Valuations Now Attractive, But Disagreements Remain

In terms of valuation, the Hang Seng Tech Index currently has a price-to-earnings ratio of less than 17 (based on forward earnings estimates), lower than the five-year average of about 22. Bo Ning recommends buying oversold large tech stocks on dips to bet on their rebound potential.

However, more investors are choosing to wait and see. Song Zhe, emerging markets equity specialist at BNP Paribas Asset Management, said the firm currently underweights Chinese internet stocks. "It's hard to determine the winner now," he said. "If subsidies stop, whether users will stay is a big question mark."

Risk warning and disclaimerThe market involves risk, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, viewpoints, or conclusions contained in this article are suitable for their particular situation. Investing accordingly is at your own risk. ```