Since Q2 2026, the Hang Seng Tech Index has been trading within a low valuation range, with the sector's core pricing drivers shifting from external risk appetite divergence to market liquidity expectations, earnings resilience, and cash flow conditions.

Looking ahead to the second half of the year, sector performance is expected to continue revolving around AI advancements and the earnings certainty of core businesses. From an AI perspective, attention should be directed toward potential catalysts from model iterations, the pace of agent adoption, application expansions, and commercialization progress among leading internet companies. From an industry standpoint, companies with strong earnings visibility, solid cash flows, and attractive shareholder returns are worth monitoring.

Market Review: Low Valuation Range, Focus on Profitability and Cash Flow

During Q2 2026, the Hang Seng Tech Index and the China Internet Index recorded cumulative returns of -3.8% and -13.9%, respectively, compared with the Nasdaq's +21.4% over the same period. From Q3 2026 through September 11, the Hang Seng Tech Index and the China Internet Index posted cumulative returns of -3.4% and +0.5%, respectively, versus the Nasdaq's +0.5%. Since July, the sector's primary pricing factors have transitioned from external risk sentiment differentiation to market liquidity expectations, earnings delivery, and cash flow performance. As of September 11, the Hang Seng Tech Index's NTM P/E stood at 15.2x, near one standard deviation below its historical average, with valuations oscillating at low levels.

Earnings Review: Steady Revenue Growth, Divergent Profit Recovery

On the revenue front, domestic major internet companies reported aggregate Q2 2026 revenue growth of 5% year-over-year, matching the pace seen in Q1 2026. Notably, Meituan (+14% YoY), BOSS Zhipin (+14% YoY), and Tencent Holdings (+11% YoY) delivered solid growth. On the profitability side, aggregate Non-GAAP net profit for these companies declined 9% year-over-year in Q2 2026, a marked improvement from the -32% contraction recorded in Q1 2026.

For the second half of the year, revenue momentum is expected to remain steady. According to Visible Alpha consensus estimates, combined revenue for major internet companies is projected to grow 8% and 9% year-over-year in Q3 and Q4, respectively. Profit recovery is anticipated to extend, with aggregate Non-GAAP net profit forecast to rise 8% and 37% year-over-year in Q3 and Q4, respectively.

AI Progress: Chinese Models Accelerate, Balancing Investment and Returns

Since July, Chinese large language models have accelerated their iteration pace. Based on Artificial Analysis data, Kimi K3 and GLM5.3 have approached the evaluation levels of GPT-5.6 and Fable 5 with a lag of roughly two months. Models from DeepSeek, Qwen, and Hunyuan have also shown continuous capability improvements, positioning multiple domestic players within the global first tier. Additionally, during Q2 2026, both domestic and international cloud vendors provided clearer guidance on the return on invested capital for AI spending. According to Alibaba's earnings call, at current average gross margins for AI products, AI capex could achieve payback within approximately three years. Tencent Holdings noted on its earnings call that current market demand for computing power remains robust, and even if all computing capacity were leased externally to Tencent Cloud customers, it would generate substantial revenue. Moving forward, under the AI narrative, attention should be given to potential catalysts stemming from model iterations, agent adoption trajectories, application expansions, and commercialization milestones among leading internet companies.

Industry Perspective: Shareholder Returns Provide a Safety Margin, Earnings Certainty Offers Upside

In terms of shareholder returns, as of August 31, JOYY, Cloud Music, BOSS Zhipin, and TME had year-to-date buyback yields of 5.9%, 5.3%, 3.8%, and 3.2%, respectively. Meanwhile, Weibo, Vipshop, JOYY, and JD.com had year-to-date dividend yields of 9.1%, 4.8%, 3.9%, and 3.5%, respectively. Moreover, JOYY has enhanced its shareholder return program for 2026-2028, while Manbang Group and BOSS Zhipin have maintained their medium-to-long-term shareholder return guidance, all of which provide a robust safety margin. On the earnings front, certain companies are poised to reach inflection points, supported by favorable product cycles and base effects.

Key Risks

Risks include macroeconomic growth deceleration leading to weaker-than-expected performance in e-commerce, gaming, and advertising; valuation downside from Sino-U.S. relationship volatility; a downward shift in market valuation multiples due to insufficient liquidity easing; slower-than-anticipated cost optimization and profit recovery among internet firms; disappointing new business or market expansion, along with potential investment losses exceeding expectations; core shareholder selling pressure; delays in policy implementation; and intensifying competitive dynamics.