To The Moon

Hang Seng Index Breaks 3-Year High: How Far Can the AI-Driven Rally Go? Major Banks Set Targets Up to 25,700

Today's Hang Seng Index pullback may offer a buying opportunity for investors seeking to capitalize on Hong Kong's strong market momentum. While short-term fluctuations are normal, the overall trend remains positive, with the market showing significant gains since the start of the year.

Hong Kong equities are undergoing a valuation revolution fueled by AI breakthroughs. As of Feb 24, the $Hang Seng Index - main 2502(HSImain)$   has gained 17% YTD, while the $Hang Seng Tech Index - main 2502(HTImain)$  surged 30.95%, hitting 2022 highs. With DeepSeek's technological breakthrough catalyzing market sentiment, institutions including BOC International have raised year-end targets, with the most bullish forecast at 25,700 points implying nearly 10% upside potential.

How might this AI-driven valuation shift impact Hong Kong's equity market in the near term, and what key factors should investors consider in this rapidly evolving landscape?

Institutional Targets Landscape

• BOC International: 25,700 (11.7x forward P/E)

• Morgan Stanley: 24,000 (ROE improvement to 10.2%)

• Citi: 24,500 (earnings growth upgraded to 5.1%)

• CICC: 23,000-25,000 (risk premium 6%-5.5% range)

Tech Revolution Rewrites Valuation Models

BOC International's Feb 13 report highlights that DeepSeek's trillion-parameter model, developed at 1/10th the cost of international peers, is reshaping global investors' perception. While the Hang Seng Tech Index's forward P/E has climbed to 17.9x from 14.3x in late 2023, it still trades at a 45% discount to Nasdaq 100's 31.2x.

Capital Flows Reveal Market Dynamics

Market liquidity shows structural divergence. Southbound inflows totaled HK$26.6 billion in two weeks, exceeding Q4 2023 monthly averages. However, foreign flows are bifurcated: passive ETFs attracted $1.94 billion inflows while hedge funds' tech derivatives positions reached 18% of daily turnover, suggesting near-term volatility risks.

Balanced Strategy for Risk-Reward Optimization

While valuations remain attractive (HIS's 9.9x P/E vs 10-year average of 11.7x), the tech sector's RSI at 78.3 signals overbought conditions. A "core-satellite" approach is advisable in the current market environment. This strategy offers a balanced perspective, combining stability with potential for growth.

1. Core holdings: reasonably valued AI infrastructure leaders like $TENCENT(00700)$  , $BABA-W(09988)$  , $BIDU-SW (09888.HK)$ / $Baidu (BIDU.US)$, and $NVIDIA (NVDA.US)$.

2. Satellite positions: policy-sensitive consumer electronics firms such as $XIAOMI-W (01810.HK)$ and $Apple (AAPL.US)$, smart vehicle chains like $BYD COMPANY (01211.HK)$ and $Tesla (TSLA.US)$.

3. Hedge tools: utilize HSI futures (HSIF) and S&P 500 E-mini futures (ES) for volatility management

The market approaches a critical policy inflection point. Potential stimulus measures at March's NPC session, including special bond issuance (estimated RMB4.5 trillion) and tech tax incentives, could catalyze a breakout above 24,000.

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