According to a research report released by China Securities Co., Ltd. (ASX: 601066), Hang Seng Tech awaits an AI narrative re-rating while US stocks require a software-hardware rebalancing.
In 2026, the Hang Seng Tech Index ranked at the bottom among major global equity benchmarks. On one hand, tighter overseas macroeconomic liquidity suppressed valuation recovery. On the other hand, the index structure is misaligned with China's AI industry trends, with cyclical assets such as internet and autos carrying excessive weight and dragged down by the domestic macroeconomy, while semiconductors and AI software account for less than 20% and contribute limited upward momentum to the index.
The problem for US stocks does not lie in AI demand, but in the fact that the cost of failed validation will be amplified by high valuations and high concentration: the second derivative of capex turning negative, concentrated depreciation realization, and unresolved antitrust issues all act simultaneously on the earnings quality of tech leaders. The valuation gap between hardware and software has reached a switching threshold, and allocation must be anchored to cash flow and margin of safety.
Key Views from China Securities Co., Ltd.
Hang Seng Tech awaits an AI narrative re-rating while US stocks require a software-hardware rebalancing. In 2026, the Hang Seng Tech Index ranked at the bottom among major global equity benchmarks. On one hand, tighter overseas macroeconomic liquidity suppressed valuation recovery. On the other hand, the index structure is misaligned with China's AI industry trends, with cyclical assets such as internet and autos carrying excessive weight and dragged down by the domestic macroeconomy, while semiconductors and AI software account for less than 20% and contribute limited upward momentum to the index.
Looking ahead to 2027, Hang Seng Tech earnings face two offsetting forces: moderate nominal growth recovery and anti-involution-driven improvement in competitive dynamics benefit core business profit recovery, but concentrated realization of AI capex depreciation erodes profits and cash flow. On the valuation side, pressure from the overseas rate hike cycle persists, and a re-rating of the internet AI narrative is still needed. Therefore, a major index-level rally may be difficult to achieve, and structural opportunities are more likely, concentrated in rebalancing under extreme valuations, cooling rate hike expectations, and AI narrative catalysts. In terms of sectors, we prioritize high shareholder return segments, vertical e-commerce and gaming sectors with weak macro correlation, and selected AI directions.
The problem for US stocks does not lie in AI demand, but in the fact that the cost of failed validation will be amplified by high valuations and high concentration: the second derivative of capex turning negative, concentrated depreciation realization, and unresolved antitrust issues all act simultaneously on the earnings quality of tech leaders. The valuation gap between hardware and software has reached a switching threshold, and allocation must be anchored to cash flow and margin of safety.
AI & Internet: Commercialization Extending from Coding to Broader Tasks, Platform Value Re-Rating Depends on New Profit Realization
Improved model capabilities and declining inference costs together lower the application threshold for Agents, and industry competition will shift from model trials and user acquisition toward complex task delivery and paid conversion. Looking ahead to 2027, we believe there are three main themes: 1) The core question for internet platforms shifts from "can they keep up with model capabilities" to "can they convert investment into profits." On the enterprise side, office Agents will expand paid demand from developers to non-R&D roles, and cloud vendors can simultaneously capture software subscriptions, model API calls, and supporting compute demand. On the individual side, Agents are moving from information Q&A to advertising and transactions, and existing user entry points, merchant resources, and payment systems will lower commercialization costs. Full-stack collaboration determines supply and cost advantages, while the application ecosystem determines demand and monetization efficiency, together supporting capital returns. Under base-case estimates, Alibaba's IaaS and MaaS ROIC are 13.1% and 17.7% respectively, and Tencent's Xiaowei is approximately 16.4%, indicating that AI investment has a foundation for generating positive profits. 2) AI entry point migration does not equal loss of domestic platform commercial value. Data authorization, transaction payments, and offline fulfillment constitute ecosystem barriers, and external Agents find it difficult to independently complete transaction loops. The impact of AI on platforms is more likely to manifest as improved recommendation, ad placement, and operational efficiency, with strengthened core business profitability and new application revenue together supporting valuations. 3) Model competition will ultimately return to intelligence improvement, and on-device penetration opens the next phase of space. Rapid iteration of the cost-performance frontier makes pure price cuts difficult to form lasting advantages, and post-training and infrastructure engineering capabilities determine the upper limit for undertaking high-value tasks.
Consumer Internet: Overall Sentiment Remains Weak, Marginal Improvement in Competitive Landscape Has Become the Dominant Variable, Stock Selection Logic Shifts from Share Expansion to Profit Margin and Certainty
In e-commerce, consumption remains in a policy-supported weak recovery, but the growth gap between platforms is converging, Douyin and Kuaishou are slowing more than expected, and the industry's second derivative continues to improve, with an inflection point in the first derivative potentially appearing in the next 2-3 years. Compared with GMV growth, the rise in monetization rate is a more important variable for 2027. Cross-border e-commerce still has room for expansion, but the US and Europe have successively eliminated small-value tax exemptions and added ESG legislation, systematically narrowing the cost advantage of direct mail. The industry is shifting toward three paths: compliance, localization, and branding, with policy being the core disruption. Vertical e-commerce is one of our most favored directions: pharmaceuticals, MRO, and second-hand 3C are all in the early-to-mid stage of institutional expansion, and low penetration means growth is driven by category expansion rather than share capture. Competitive factors are category depth and fulfillment compliance assets rather than subsidy intensity, and profit growth is systematically faster than revenue growth. The easing of local life competition mainly benefits from strategic adjustments by competitors such as Alibaba and ByteDance increasing AI investment. Meituan's CLC has turned profitable and food delivery UE has turned positive, providing financial sustainability. However, Keeta may be the biggest expectation gap for 2027: the market expects it to enter a harvest period with new business losses narrowing, but overseas expansion is a firm strategic direction for Meituan (ASX: 03690), and dual-front operations in Brazil plus potential expansion in Southeast Asia imply contingent amplification of investment.
Media & Internet: 2026 Keyword Is Reallocation Amid Deceleration
The key phrase for media and internet in 2026 is reallocation amid deceleration: short video advertising and e-commerce are both slowing, AI video is moving from model competition into price wars and commercialization, and music and short dramas are undergoing a new round of competitive divergence. Looking toward 2027, we recommend focusing on three clues: 1) Whether core business cash flow can be maintained (Douyin and Kuaishou): in 2026, short video core businesses all slowed, mainly due to weak macro conditions, the broader e-commerce and advertising market decelerating, pressure from e-commerce taxes and livestreaming regulation, and additional profit erosion from AI investment. In 2027, focus on the core business inflection point. 2) Multimodal video models: capability boundaries continue to rise and pricing competition begins. 2026 is the year AI video crosses the producible threshold, with generation duration and reference materials greatly improved, model success rates increasing more than 9x, and production bottlenecks shifting from generation to scripting, IP, and traffic投放. In terms of model capabilities, the landscape has converged to 2+2. ByteDance's Seedance and Kuaishou (ASX: 01024)'s Kling hold dual leadership in performance and revenue; MINIMAX-W (ASX: 00100) H3 breaks through the price anchor with open source + 2K + low pricing; Alibaba's Wanxiang 3.0 enters the productivity entry point with all-purpose reference + document input. Domestic models as a whole have entered the first tier. 3) Inflection points in content platform dynamics (Soda Music, Hongguo, WeChat Green Bubble): for music platforms, competition is expected to improve marginally in 2027, but an inflection point still requires conditions, with the core being Soda Music's growth deceleration. For short dramas, 2027 is expected to see a growth downgrade and structural divergence, moving from AI volume expansion to premium+ content, with Tencent's Green Bubble entry bringing the biggest variable.
Physical AI & Intelligent Driving: Recent Main Theme Shifting from Humanoid Robot Mass Production to World Models and Data Closed Loops
The recent main theme in physical AI is shifting from humanoid robot mass production to world models and data closed loops, but real progress still follows hardware scaling first and intelligence catching up later. The landmark change in the past two months is that world models for the first time simultaneously possess three product forms: "interactive, reconstructable, and action-conditionable." Looking ahead to 2027, the core points are: 1) World models enter the product year, but general world models have not yet converged. 2) Robot brains move from upper-body grasping to whole-body mobile manipulation and compositional generalization, but remain excellent demonstrations in controlled scenarios. 3) Industrialization scales first, intelligence follows. In intelligent driving, L2 enters a strong regulatory cycle in 2026, while L3 moves from pilot to limited commercialization, with responsibility boundaries, access mechanisms, and standards systems beginning to form. L4/Robotaxi enters a large-scale validation phase under China-US resonance. Based on the industry inflection point in intelligent driving, segments such as robotaxi, intelligent driving chips, and LiDAR are expected to benefit fully.
Major North American Cloud Vendors: Supply Constraints Shifting from GPU to Power, High-Bandwidth Memory, and Delivery Capability in 2027
In 2027, supply constraints for North American cloud vendors shift from GPU to power, high-bandwidth memory, and delivery capability. Investors should allocate assets based on return per unit of compute and cash conversion capability. Amazon.com (NASDAQ: AMZN) relies on AI workloads to drive CPU cloud demand and combines high-margin advertising business, possessing the strongest cash conversion path. Microsoft (NASDAQ: MSFT) maintains robust B2B commercialization performance and operating cash flow through Copilot's large-scale penetration and enterprise permission governance barriers. Alphabet (NASDAQ: GOOGL) achieved simultaneous expansion in search and cloud businesses, but quarterly free cash flow turned negative. Subsequent valuation expansion depends on revenue conversion from $707 billion in purchase commitments and free cash flow recovery. Meta Platforms (NASDAQ: META) improved advertising efficiency, but capex reached 51% of revenue and litigation expenses added pressure, leaving the thinnest free cash flow safety cushion and requiring a free cash flow inflection point.
US Software Sector: Investment Should Shift from Concept Speculation to Infrastructure Platforms with Cross-System Process Data, High Net Revenue Retention (NRR), and High Free Cash Flow Margins (Rule of 40 Compliant)
ServiceNow holds the cross-system action entry point, and 50% of new business has completed non-seat-based billing migration. SAP has deep underlying data barriers and benefits from the 2027 cloud migration cycle. Workday has lagged in paid conversion. Salesforce is recommended underweight due to slowing organic growth and ceding of the interface layer. For data infrastructure, Snowflake is the top pick (NRR at 126%, directly benefiting from private data governance and inference consumption), with MongoDB as a high-beta trading vehicle.
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