China Galaxy Securities: Hengkezheng is in a historically undervalued state with a high margin of safety.

China Galaxy Securities released a research report stating that international liquidity largely determines the pricing power of Hong Kong-listed technology stocks. Over the past two years, Southbound funds have continued to increase their holdings in Hong Kong stocks, which is actually the inevitable result of mainland funds seeking high cost-effective assets globally. This is mainly due to the two major advantages of Hong Kong stocks: the low valuation effect and the scarcity of high dividend stocks. The current historical undervalued state of the Hang Seng Technology Index also implies that there is limited downward potential for the index, with a high safety margin. In the long term, as the proportion of AI business revenue continues to increase, the valuation system of the index will transition from "Internet valuation" to "technology growth valuation." The main points of China Galaxy Securities are as follows: Review of the current deep adjustment of the Hang Seng Technology Index Since reaching a temporary high on October 2, 2025, the Hang Seng Technology Index has continued to be in a downward trend. As of May 11, 2026, the Hang Seng Technology Index has fallen by 23.59%. During this period, the Hang Seng Technology Index has formed a sharp contrast with the structural bull market driven by technology in global stock markets. Who has the pricing power of Hang Seng Technology? International liquidity largely determines the pricing power of Hong Kong-listed technology stocks, but over the past two years, Southbound funds have continued to provide incremental capital for Hong Kong stocks. From October 2, 2025, to May 11, 2026, there has been a net outflow of $29.931 billion in funds from Hong Kong stocks. In particular, the sudden acceleration of capital outflows and the weakening of the Hang Seng Technology Index after January 21 are highly correlated in time, reflecting the severe impact of liquidity tightening on valuation-sensitive (high beta + growth) technology sectors. From the perspective of passive and active funds, the outflow of funds is mainly from passive funds, and this part of the funds is more based on systematic reallocation. Foreign funds have net inflows of $27.978 billion in Chinese stocks and may have flowed into sectors such as finance, energy, and semiconductors. The constituent stocks of the Hang Seng Technology Index are not only heavily favored by foreign funds but also an important direction for the Hong Kong stock connect program. This "dual coverage of domestic and foreign funds" structure means that during the rising stage, domestic and foreign funds join forces, providing greater resilience. During the downturn, even if Southbound funds attempt to take over when foreign funds are flowing out, the difference in size makes it difficult to fully hedge. Why do Southbound funds buy more as prices fall? The continuous increase in holdings of Hong Kong stocks by Southbound funds over the past two years is actually the inevitable result of mainland funds seeking high cost-effective assets globally. This is mainly because Hong Kong stocks have the two major advantages of the low valuation effect and the scarcity of high dividend stocks. Looking at the capital flow data of individual stocks in the Hang Seng Technology Index, after an earlier adjustment, Southbound funds believed that the valuation of the Hang Seng Technology Index had entered an attractive risk-to-reward ratio range. Information technology and consumer discretionary are the "dual engines" for Southbound funds to allocate the Hang Seng Technology Index, with a total net inflow of HK$171.701 billion, accounting for 95.09% of the total net inflow of HK$180.56 billion in the four major industries (accounting for 35.41% of the total net inflow of Southbound funds). Why is the Hang Seng Technology Index falling behind? The rise and fall of the Hang Seng Technology Index is actually contributed by a few leading companies in the industry, especially the leading companies in information technology and consumer discretionary. At a macro level, the outflow of funds from the Hang Seng Technology Index coincided with the expected heating up of the Federal Reserve and escalating geopolitical risks. At the industry level, first, the decline of the weighted stocks in the technology sector is because Byte has directly impacted the profit expectations and market share of constituent stocks. Secondly, the intensification of internal competition among weighted stocks. The "food delivery war" and "red envelope war" have consumed a large amount of funds. Thirdly, the HALO trading strategy has further intensified the decline of individual stocks in the Hang Seng Technology Index. Internet platform companies and consumer electronics companies account for the dominant positions in the constituent stocks of the Hang Seng Technology Index, with a low proportion of "hard technology" and a strong consumer attribute. Finally, the Hang Seng Technology Index lacks a second-tier team to hedge the decline of leading stocks. What conditions are needed for the rebound of Hang Seng Technology? The current historical undervalued state of the Hang Seng Technology Index also implies that there is limited downward potential for the index, with a high safety margin. In the short term, from the perspective of the exchange rate, it is necessary to wait for the US dollar to fall to a reasonable range. In the medium term, one should buy before "certainty," wait for the bottom rebound of the index, and expect to enter a critical stage of income realization in 2026-2027. In the long term, as the proportion of AI business revenue continues to increase, the valuation system of the index will transition from "Internet valuation" to "technology growth valuation." Risk warning Risks include domestic policy strength and effectiveness falling short of expectations, overseas interest rate cuts falling short of expectations, and market sentiment instability.