Yesterday (October 28), the Shanghai Composite Index briefly surpassed the 4,000-point mark, with technology stocks being the primary driver behind the index reaching a decade-high. The strong performance of tech stocks has bridged the A-share and H-share markets, contributing to the overall positive performance of Chinese assets.

However, Hong Kong stocks have outperformed their mainland counterparts. From the beginning of the year (January 2, 2025) to October 25, 2025, the CSI 300 Index rose by 18.44%, while the Hang Seng Index surged by 30.41%.

Several factors explain Hong Kong's stronger performance, including lower valuations and greater upside potential, as well as sustained inflows of southbound capital.

An analysis of net southbound capital inflows since 2019 reveals a noticeable acceleration starting from Q4 2024. The active participation of A-share investors has also enhanced liquidity in the Hong Kong market.

### 1. Capturing Undervalued Hong Kong Tech Stocks Hong Kong's ability to attract significant capital inflows is partly due to its distinctive "high-quality assets," such as relatively undervalued semiconductor companies.

The semiconductor industry benefits from strong investment fundamentals, including robust policy support. Recent high-level meetings repeatedly emphasized "technological self-reliance," with semiconductors playing a pivotal role in domestic substitution efforts, carrying both economic and strategic significance.

Additionally, technological breakthroughs—such as New Kailai's announcement of mass-producing 28nm lithography machines—and the full localization of key equipment (e.g., EPI, ALD, and CVD) further bolster the sector's prospects.

However, A-share semiconductor valuations are notably high, with some stocks trading at P/E ratios exceeding 1,000.

As of October 24, 2025, the STAR 50 Index's P/E ratio surpassed 180x, nearing historical extremes. In contrast, Hong Kong-listed semiconductor stocks trade at more reasonable valuations—for instance, a leading domestic chip foundry trades at 140x P/E in Hong Kong versus 250x in the A-share market.

One index focusing on Hong Kong's semiconductor sector is the **CSI Hong Kong Stock Connect Information Technology Index**, currently trading at around 40x P/E—below major global tech indices like the ChiNext and Nasdaq. Unlike other Hong Kong tech indices that include internet giants like Tencent and Alibaba, this index is purely hardware (70%) and software (30%), targeting AI-related hard tech sectors.

The only ETF tracking this index is the newly listed **Hong Kong Information Technology ETF (159131)**, which also offers T+0 trading—a rare feature for Hong Kong tech-focused products.

### 2. Better Investment Experience with Hong Kong Tech Assets Compared to the Hang Seng Tech Index and the Hong Kong Stock Connect Internet Index, the **CSI Hong Kong Stock Connect IT Index** has delivered superior returns—92.76% from January 3, 2023, to October 24, 2025, versus 46.77% and 32.5% for the other two indices, respectively.

The index's high concentration—with top holdings like SMIC (over 20% weight) and the top 10 stocks accounting for 70%—gives it sharper exposure to Hong Kong's AI and hard tech sectors.

Despite concerns about higher volatility, its maximum drawdown (-36.31%) was better than the Hang Seng Tech (-37.55%) and HKSC Internet (-48.49%) indices during the same period.

Semiconductors remain a dominant theme in 2025, but A-share valuations are stretched. Investors seeking exposure with a reasonable valuation buffer may consider Hong Kong's first hard tech-focused ETF (159131), especially given its T+0 feature and exclusion of mega-cap internet stocks.