CMSC: Why are we confident in Hang Seng Technology currently?

CMSC released a research report stating that the recent weakness in the Hang Seng Technology Index is seen as a sharp liquidity shock, but the fundamentals and long logic of Hong Kong-listed technology stocks have not changed. From a liquidity perspective, the peak of overseas liquidity shock has passed, and "buy the dip" is considered an effective strategy. From a valuation standpoint, the discount of Hong Kong-listed technology stocks relative to A-share technology stocks is close to historical highs, suggesting a potential rebound. In terms of industry trends, there is a wide range of developments, indicating progress. Looking ahead, buying on dips and holding stocks for the long term are considered effective strategies. CMSC's main points are as follows: Confident outlook on Hang Seng Technology: The recent decline in the overall direction of Hong Kong-listed technology stocks, represented by the Hang Seng Technology Index, has created a breeding ground for various pessimistic narratives. However, the extreme pessimism in narratives from regulations to industry trends after a brief liquidity shock has created significant value in the current position of Hang Seng Technology. Firstly, the recent market volatility is only a result of a sharp liquidity shock. Secondly, there is nothing new under the sun, and the current market volatility is fundamentally not very different from that of November 2025. Lastly, looking ahead, positive factors are continuously accumulating. 1. Overseas Liquidity - The peak of the shock has passed. The recent flow of liquidity brought about by the Wash trading has led to a sharp decline in Hong Kong stocks. However, looking ahead, the short-term shock is expected to gradually come to an end. On one hand, the Federal Reserve faces strong obstacles to balance sheet reduction in the current environment, making it difficult for the logic of a weak dollar to substantially reverse, and more likely to be a short-term disturbance. On the other hand, the impact of the recent Wash trading mainly remains at the micro level, serving as a correction to the past loose liquidity chase and "empty cash" trading, without causing systemic liquidity shock to the financial markets. Once the US dollar index begins to decline and enters a downward trend, Hong Kong stocks will benefit significantly from improved liquidity expectations. 2. Domestic Liquidity - The disruptions caused by public funds over-allocating to Hong Kong stocks have come to an end. The excess allocation of public funds to Hong Kong stocks, far exceeding the benchmark, has led to significant selling pressure, which was an important narrative in the market during the headwinds of late 2025. Currently, this narrative has been greatly alleviated, with the scale of public funds over-allocating to Hong Kong stocks significantly reduced. Looking ahead, the net selling resulting from surpassing the benchmark may come to an end. 3. Valuation - Hong Kong-listed technology sector's relative valuation is at historically low levels. Measuring the AH premium of the technology sector with the Hang Seng Technology Index/A-share dual innovation index, it currently stands close to historically low levels. The previous lows were in March 22, October 22 (rapid outflow of foreign capital), and the end of 23 (game regulation), with the current regulatory environment for internet companies and economic development being significantly better than in 2022 and 2023. In the backdrop of the era of AI development and technological national rejuvenation, it is clear that Hong Kong-listed technology stocks are significantly undervalued. Looking ahead, the odds and winning rates of going long on Hong Kong-listed technology stocks are high. 4. Fund Demand - Tight control on IPO sponsor quality drives market sentiment. Strict control on the quality of IPOs will to some extent boost market sentiment, as excessive IPOs have been used as a common narrative to explain the weak performance of Hong Kong stocks. However, there is no necessary connection between IPOs and market performance; more often, they follow the adage of "market creating fundamentals." Hong Kong IPOs have characteristics of being pro-cyclical, weakly correlated, having layered liquidity, and attracting foreign investment. In the long term, the supply of quality companies through IPOs will contribute to the healthy development of the market. 5. Fundamentals - Hong Kong-listed fundamentals remain strong, with earnings expectations stabilizing. The recent divergence in performance between the Hang Seng Index and the Hang Seng Technology Index corresponds to the divergence in earnings expectations of the two indices. Overall, earnings expectations for the Hang Seng Index have recently been modestly raised, which is a key reason behind the Hang Seng Index's resilience. Earnings per share expectations for the Hang Seng Technology Index have been continuously revised downwards since September, but have now stabilized, indicating that the current stock price reflects the market's temporary downward revision of earnings. 6. Industry Trends - Smooth progress on the industrial side, with a wide range of developments. Looking at the progress on the industrial side of Hong Kong-listed technology, there are continuous catalysts, with recent initiatives from Tencent and Alibaba during the Chinese New Year period, faster-than-expected ARR growth in Kuaishou, and the release of the latest V4 large model by DeepSeek during the Chinese New Year. Risk Warning: Economic data falling short of expectations, incomplete policy understanding, and unexpected overseas policy tightening.