AI Applications Are Booming, And The Most Worth Watching May Be Hong Kong Internet

In a prior ETF review I identified several principal investment themes for 2026; those themes have already accelerated at the start of the year, with AI applications emerging as the most pronounced catalyst. Two specific AI‑application indices were highlighted previously—Hong Kong Internet and Animation & Gaming—and while neither has been the single most explosive performer in the current AI wave, both represent among the most reliable exposures. The Hong Kong Internet theme, in particular, aggregates multiple subthemes (including animation and gaming) and a broad set of vertical AI applications, while offering relative advantages in valuation, return‑volatility characteristics and capital‑flow dynamics. Given these attributes, a concise assessment of the investment case for Hong Kong Internet at the present juncture is warranted.

From a thematic perspective, Hong Kong Internet’s index constituents are dominated by internet leaders that serve as core enablers of AI adoption and cover multiple application directions. Using the Hong Kong Internet ETF (513770), which tracks the CSI Hong Kong Stock Connect Internet Index (931637.CSI), as a reference point, the index’s top holdings as of January 13, 2026 were concentrated among leading Hong Kong technology names. The three largest weights—Alibaba‑W, Tencent Holdings and Xiaomi Group‑W—accounted for 14.71%, 14.64% and 12.26% respectively, and the top ten holdings collectively represented more than 76% of the index, reflecting a pronounced leader concentration across AI cloud computing, large‑model platforms and downstream AI applications.

Operationally, Alibaba and Tencent function both as providers of foundational compute and model infrastructure and as major AI application players. Vertical AI use cases are visible across the index: Alibaba Health and JD Health exemplify AI+Healthcare, Kingdee International represents AI+Finance and Taxation, and Kingsoft illustrates AI+Office Software. The AI+Advertising and Marketing segment is represented by companies such as Kuaishou and Bilibili. The transition of these internet leaders toward AI‑enabled offerings has the potential to generate new growth trajectories and to prompt valuation re‑rating, a dynamic already observable in the early‑year market moves. As of January 14, 2026, five of the index’s top ten holdings had advanced more than 20% (with Alibaba approaching that threshold), while Bilibili and Alibaba Health recorded gains of 33.75% and 54.06% respectively.

On valuation metrics, Hong Kong technology remains a relative value area within the global technology complex, and internet leaders listed in Hong Kong stand out as scarce, high‑quality assets. The Hong Kong Stock Connect Internet Index’s price‑to‑earnings ratio (PE TTM) was 26.23 times as of January 13, 2026, placing it at the 34.82% percentile of its five‑year historical distribution. Cross‑market comparisons as of January 12–13, 2026 show the index’s PE at approximately 25.96 times, broadly in line with the Hang Seng Tech Index but materially below the Nasdaq‑100’s 36.53 times and well under A‑share technology benchmarks such as the ChiNext Index at 43.42 times and the CSI TMT Index at 41.14 times; the STAR 50 Index remained at an elevated 178.50 times. Taken together, both longitudinal and cross‑market perspectives indicate that Hong Kong technology valuations are positioned at relatively low levels, supporting an attractive risk‑return profile for investors seeking exposure to AI‑driven catch‑up.

Regarding return dynamics, Hong Kong technology indices exhibit pronounced elasticity, and the Hong Kong Stock Connect Internet Index is among the most responsive. Historical performance highlights include a 226.22% surge in a prior bull cycle, two rallies exceeding 80% during the 2023–2024 period despite broader market weakness, and a 72.13% advance from early 2025 to October 2025. High elasticity implies elevated volatility, and the index is one of the more volatile Hong Kong technology benchmarks; its long‑term volatility is comparable to the Hang Seng Internet Technology Industry Index while delivering higher long‑term returns, and it is meaningfully more volatile than other Hong Kong technology indices such as Hong Kong Stock Connect Technology, Hang Seng Tech and China Internet 50. Volatility is a neutral characteristic, but when combined with a disciplined regular‑investment approach and timely profit‑taking it can translate into superior expected returns. An additional advantage of the index is the breadth of thematic exposure among its constituents, which creates multiple potential breakout points—media and entertainment names as well as healthcare‑oriented constituents have both contributed to recent upside under the AI narrative.

Capital‑flow dynamics further support the Hong Kong Internet investment case. In 2025 southbound flows reached HKD 1,404.845 billion, a record annual net inflow, and cumulative net purchases via the Stock Connect mechanism have exceeded HKD 5.1 trillion since inception. Internet leaders were primary beneficiaries of these flows: Alibaba‑W recorded net purchases of HKD 178.104 billion in 2025, ranking first, while Meituan‑W, Xiaomi Group‑W, Tencent Holdings and Kuaishou‑W also ranked among the top net buys. Notably, none of the index constituents appeared among the largest net outflows. The persistence of southbound inflows reflects structural allocation decisions driven by Hong Kong’s relative valuation, the scarcity of high‑quality Hong Kong‑listed technology assets and long‑term growth narratives such as AI; sustained incremental capital is therefore a material supporting factor for the sector.

In summary, AI has become the principal driver of the current market advance, and the investment emphasis is shifting from upstream infrastructure toward mid‑ and downstream applications represented by large models and AI use cases. The Hong Kong Internet ETF (513770), which tracks the CSI Hong Kong Stock Connect Internet Index, provides a targeted instrument to capture this transition and is available alongside off‑exchange linked funds (Class A 017125 and Class C 017126). The index’s current valuation sits below its historical midpoint while its constituents are beginning to demonstrate AI‑driven growth potential. That combination of relatively low valuation, ongoing southbound capital inflows and high index elasticity creates a distinct allocation window. As AI moves from laboratory research into industrial deployment, the Hong Kong Stock Connect Internet Index may well anchor one of the broadest and most certain commercial opportunities in the evolving AI ecosystem.