Hong Kong internet sector opens a recovery window: AI monetization, fund inflows, and valuation re-rating in sync

Keywords: Hong Kong internet, AI industry chain, valuation repair, southbound funds, Hong Kong Internet ETF (513720)

Introduction

After a long period of correction, the Hong Kong internet sector is gradually shaking off the drag of pessimistic expectations and returning to investors' radar. Unlike the previous phase of "cheap valuations but no catalyst," the sector is now seeing a three-way convergence of improving earnings expectations, better capital flows, and valuation re-rating. In particular, as AI moves from a concept story to actual earnings delivery, the fundamentals of leading Hong Kong internet names are being repriced, which has significantly lifted market attention on the sector.

1. Signs of an earnings inflection emerge as AI shifts from "storytelling" to "earnings delivery"

From a fundamentals perspective, the most important change in the Hong Kong internet sector is that the earnings side is showing clear signs of an inflection. On July 8, market chatter about Alibaba's Q1 results outlook for the new fiscal year coming in above expectations directly boosted sentiment in related Hong Kong stocks and the broader sector. This shows that the market is no longer just pricing in AI's long-term imagination, but is beginning to verify AI spending's real contribution to revenue, profit, and operating efficiency.

More importantly, the pressure from earlier earnings downgrades at major internet companies is easing at the margin. As consensus expectations gradually stabilize, the sector's Non-GAAP net profit growth is expected to bottom in 2026Q2 and then move onto a quarter-by-quarter recovery path in 2026H2. This means profits that were previously suppressed by heavy investment may once again release upside as scale effects and efficiency gains kick in. For the capital market, this positive loop of "AI investment—business growth—profit delivery" is often the most important foundation for valuation repair.

At the same time, some negative factors that weighed on sentiment are also improving. The food-delivery subsidy war has shown signs of cooling, while the low base created by heavier food-delivery investment in July last year will also support year-on-year growth in Q3. In other words, the factors that previously suppressed sector valuations are gradually shifting from "ongoing deterioration" to "step-by-step clearance."

2. Capital sentiment is improving as Hong Kong becomes a key destination for global reallocation

Changes in fund flows are an important clue for judging whether a rally can last. At present, the Hong Kong internet sector is benefiting not only from its own fundamental recovery, but also from a global capital rebalancing. As volatility rises in Japan and Korea's AI hardware supply chain and upstream hardware valuations pull back at the margin, global funds are starting to look for more cost-effective and more earnings-visible directions within the AI theme. Compared with hardware assets at elevated levels, leading Hong Kong internet names combine lower valuations, stronger cash flow, and a clearer path to earnings recovery, making them more likely to become the destination for capital rotation.

At the same time, continued southbound inflows into Hong Kong stocks are providing the sector with a steady incremental boost. Since July, southbound capital has accelerated into the market, reflecting mainland investors' renewed recognition of the allocation value of Hong Kong assets. For Hong Kong internet stocks, such flows not only improve trading activity, but also amplify valuation elasticity during sentiment recovery.

In addition, the market is gradually digesting expectations for Fed tightening, and the liquidity pressure on Hong Kong as an offshore market is easing. The marginally friendlier external rate environment, combined with greater volatility in U.S. dollar assets, has further increased the appeal of Hong Kong as a valuation trough. The shift in capital from "high growth, high valuation" to "low valuation, monetizable" is one of the defining features of the current market.

3. Valuations are at historical lows, and the value case is becoming clear

If earnings improvement and capital inflows are the "catalysts" for a recovery rally, then valuation levels determine whether the sector has enough room to rise. Based on current data, the valuation advantage of the Hong Kong internet sector is already very clear. The CSI Hong Kong Connect Internet Index tracked by Hong Kong Internet ETF (513720) has a latest trailing P/E ratio of less than 20x, near a historical low; the Hang Seng Tech Index has also fallen back to around its end-2024 level, and overall pricing is clearly below previous highs seen in earlier tech rallies.

Against the backdrop of unchanged long-term trends in the AI industry and continuously strengthening commercialization capabilities of leading platforms, such valuation levels imply a high margin of safety. Especially for long-term investors, the market is often more willing to pay for both "growth visibility + valuation repair room" at the same time, and the Hong Kong internet sector happens to have this combination.

Conclusion

Overall, the Hong Kong internet sector is entering an important phase in which pessimistic expectations are giving way to fundamental delivery. AI applications moving into implementation, an emerging earnings inflection, a marginally improving competitive environment, continued southbound inflows, and Hong Kong's overall valuations sitting at historical lows together shape the current investment case for the sector.

For investors who are bullish on the long-term value of leading Hong Kong internet names and can tolerate some volatility, Hong Kong Internet ETF (513720) already offers meaningful attention and allocation value. At this point, the market may not be pricing the "cheapest" internet sector, but rather repricing the core assets most likely to achieve a simultaneous recovery in both valuations and earnings first.