Guosen: There are structural differences in technology assets between A-shares and H-shares. In the short term, A-share technology assets may continue to outperform.

Guosen released a research report stating that the current technological trend led by AI is deepening, and technology assets have become the most attention-grabbing industry mainstream in the bull market. Chinese technology assets are widely distributed in both A-share and Hong Kong stock markets. However, from the current bull market perspective, there are differences in the performance of technology assets in A-shares and Hong Kong stocks, and there may even be contrasting phenomena. A-shares and Hong Kong stocks have structural differences in their technology assets. A-shares focus more on hard technology manufacturing, while Hong Kong stocks focus on the softer application ecosystem. Currently, A-shares have a higher premium and better performance compared to Hong Kong stocks in the technology sector. In this AI cycle, A-share technology outperforms in profit verification stage, while Hong Kong stocks are driven by accelerated application expectations. In addition, overseas liquidity and geopolitical disturbances have a greater impact on Hong Kong stocks. A-shares with stronger short-term earnings certainty may continue to outperform, while undervalued Hong Kong stocks may have significant room for growth if there is a breakthrough in AI applications and improvement in overseas liquidity environment in the medium term. Guosen's main points are as follows: 1. What are the differences in technology assets between the two markets? China is currently in a key period of transformation from old to new drivers of growth, and the development of new productive forces represented by science and technology industries is crucial to the medium and long-term structural transformation of the economy. With the deepening evolution of the new technological revolution led by AI, Chinese technology assets have become the flag bearers of the bull market. Currently, Chinese technology assets are distributed in both A-shares and Hong Kong stocks. In this 24-year bull market, technology assets in both markets have performed well, but there is a phenomenon of mismatch in the market: the Hang Seng Technology Index has risen by 30% from the end of 24 to 25/07, outperforming the A-share Shuangchuang Index by about 30 percentage points. However, since 25/07 (as of 5/20, unless otherwise stated, the data in the following text is as of the same date), A-share technology has shown significantly better performance compared to Hong Kong stocks. The cumulative increase in the Innovation 50 Index and the ChiNext Index is 79% and 70% respectively, significantly outperforming the Hang Seng Technology Index by over 80 percentage points. Why have technology assets in the two markets shown differentiation and mismatch in this bull market? The bank first analyzed the differences in industry structure, market characteristics, and fundamentals of technology assets in the two markets. The banks divided A-share and Hong Kong technology assets into eight sub-sectors: communications equipment, semiconductors, electronic equipment, advanced manufacturing, software, IT Internet, media, and telecom services, with 1672 and 504 listed companies respectively in the two technology sectors. In the following text, the bank will compare the market characteristics of the two from three perspectives. 1.1 Industry structure: A-shares focus on technology manufacturing, Hong Kong stocks focus on application ecosystem A-shares focus more on hard technology manufacturing, while Hong Kong stocks focus more on the soft application ecosystem. The bank observes the industry distribution of A-share and Hong Kong technology assets from the perspective of market capitalization, profitability, etc. From the market capitalization perspective: A-share technology manufacturing accounts for as high as 82% of the total, with electronic equipment (accounting for 28% of the market value proportion of the technology sector) and advanced manufacturing (22% of the proportion) at the forefront; Hong Kong's technology application ecosystem accounts for 51% of the total, with a peak of nearly 70% in the past, and a higher proportion in the IT Internet (34%) and telecom services (11%) subsectors. Profit contribution: In A-share technology, the advanced manufacturing (accounting for 38% of the technology sector's net profit attributable to the parent company, the same below) and electronic equipment (24%) sectors contribute more than 60% of the profitability, with the technology manufacturing sector as a whole accounting for more than 70%; in the Hong Kong technology sector, the IT Internet (40%) and telecom services (23%) sectors contribute more than 60% of profitability, and the application ecosystem sector as a whole accounts for close to 70% of the total. Leading stocks situation: A-shares and Hong Kong technology sector leading stocks demonstrate the characteristics of A-shares focusing on technology manufacturing and Hong Kong stocks focusing on the application ecosystem. Among the leading technology stocks in the two markets, excluding stocks listed in both markets, from the perspective of market capitalization and other dimensions, the top two leading stocks in A-share technology are Foxconn Industrial Internet and Zhongji Innolight, representing high-quality companies in the technology manufacturing sector, while Tencent and Alibaba are the leaders in the application ecosystem field in Hong Kong. In summary, A-shares have a better advantage in the technology manufacturing sectors such as advanced manufacturing and electronic equipment, while Hong Kong stocks dominate in the application ecosystem led by technology such as the internet. The different characteristics of the two markets' industry structures are primarily due to the differences in the listing systems of technology companies on A-shares and Hong Kong stocks. On the one hand, the listing system of A-shares has higher requirements for the profitability and technical achievements of technology companies, making it more suitable for technology manufacturing companies with relatively clear profit models. The listing system of Hong Kong stocks is more diversified and more inclusive, making it more suitable for application ecosystem companies with higher profit uncertainty. The GEM market in Hong Kong, in particular, has a higher concentration of software services, media, and other application ecosystem technology companies. On the other hand, the tolerance for special architecture companies is higher in Hong Kong stocks than in A-shares. In A-shares, companies that control profits and technological achievements through agreements (VIE architecture) are explicitly not allowed to list; although the Sci-Tech Innovation Board allows companies with different rights to list, more stringent conditions are enforced. In Hong Kong, the Stock Exchange's April 2018 "Listing Rules" allow overseas listed companies with WVR structures to return to Hong Kong if certain conditions are met. In addition, the Stock Exchange also adopts a conditional acceptance attitude towards stocks with VIE structures. As of now, after the new regulations, the number of special architecture companies listed in Hong Kong's stock market is mainly concentrated in the software services (34 companies, accounting for 39% of the total number of companies in the industry) and media (29 companies, 57%) sectors. 1.2 Market characteristics: A-shares have a higher premium in technology compared to Hong Kong stocks Among the technology stocks listed in both markets, A-shares have a higher premium compared to Hong Kong stocks. Over the past 5 years, the average price-earnings ratio (PE, TTM, overall method) of A-share and Hong Kong stock technology stocks has been 45.1 times and 23.6 times respectively. Moreover, if we compare the price-to-sales ratio (PS, TTM, overall method) which is more suitable for high-growth sectors, the average midpoint values of the two over the past 5 years have been 2.3 times and 1.7 times respectively. This indicates that the valuation of technology portfolios in A-shares is higher than that of technology portfolios in Hong Kong stocks. With the accelerated listing of A-share technology companies in Hong Kong in recent years, A-share and Hong Kong stock technology stocks account for 24% and 42% of the market value, respectively. This suggests that over 90% of the dual-listed stocks have a premium in A-shares compared to Hong Kong stocks, with around 60% of technology stocks having an AH premium rate of over 50%. This indicates that the prices of technology stocks in A-shares are higher than those in Hong Kong stocks in the dual-listed stocks. The differences in investor structure lead to liquidity discounts in Hong Kong technology. There is a significant difference in the liquidity of the technology sectors in the two markets. The participation of institutional investors in the A-share market is not very high, with the proportion of institutional investors' holdings of free-floating market capitalization in Q1 26 being 39%, where insurers, national teams, and long-term foreign investors account for less than 20%. In addition, insurers and other long-term investors are more concentrated in traditional value sectors. Therefore, the trading activity of A-share technology stocks is relatively high. In the Hong Kong stock market, institutional investors have absolute pricing power. Foreign investment accounts for 56% of the market in Hong Kong, with nearly seven-tenths of foreign investors being stable investors with lower trading frequency, which suggests that the dominant advantage in the Hong Kong stock technology sector lies with configuration-oriented funds. Therefore, the trading activity in Hong Kong's technology sector is lower than in A-shares, leading to a liquidity discount in the Hong Kong stock technology sector. As of April this year, the central values of the overall turnover rates of the A-share and Hong Kong technology sectors over the past 5 years have been 39% and 8% respectively as a proportion of monthly average market capitalization. 1.3 Fundamental characteristics: A-share technology manufacturing has better profitability In recent years, A-share profit growth has been significantly better than that of Hong Kong stocks. From the revenue perspective, the revenue growth of A-share technology is similar to that of Hong Kong technology, with the total revenue growth of A-share technology increasing from 6% in 24 to 12% in 25, and for Hong Kong technology increasing from 8% to 12% for the same period. From the profitability perspective, the increase in profit growth has been more significant in A-shares in recent years, with A-share technology's net profit attributable to the parent company increasing from 2.5% and 6.3% to 18.7% and 7.2%, while in Hong Kong technology, profit growth has decreased from 30.6% and 9.4% to 7% and 9.3%. Looking at the sub-sectors, the prosperity of the A-share technology manufacturing sector has risen rapidly, with revenue growth, net profit growth, and ROE increasing by 7 percentage points, 13 percentage points, and 0.9 percentage points respectively in 25 compared to 24, while the application ecosystem sector of Hong Kong stocks has shown a clear weakening in prosperity, with net profit growth and ROE declining by 31 percentage points and 0.3 percentage points respectively during the same period. Profitability differences are evident, with the current AI hardware supply chain delivering performance, while profit realizations in the middle and lower applications may still be pending. Since the launch of the ChatGPT large model in 2022, the global generative AI industry has entered a rapid development stage. The demand for AI computing power and storage for large models has surged, driving up the prices of core hardware such as memory chips and computing power since 25. For example, the average price of DDR5 memory has risen from around $5 in early 25 to nearly $40 in April 26. A-shares dominate in the upstream hardware sector, and with the surge in hardware prices, the prosperity of the A-share technology sector is relatively high. In contrast, the increase in upstream costs directly affects the profit margins of downstream players in large models, cloud computing, and other related businesses. Hong Kong's technology sector mainly comprises assets in the application ecosystem and is mostly positioned in the middle to lower segments of the AI industry chain. With no clear signs of profit realization in the near term, and given the intensifying competition among Hong Kong technology companies, profit performance may be affected. 2. What are the determining factors for the differentiation of technology assets in the two markets? As mentioned earlier, A-shares have a larger proportion of the technology manufacturing sector, while Hong Kong stocks have a clear advantage in the application ecosystem technology sector. If the Innovation 50 Index and the Hang Seng Technology Index are chosen as representatives of A-shares and Hong Kong's technology assets, it is often observed that there is a marked differentiation in the market trends of the two. So, what factors influence the performance of technology portfolios in A-shares and Hong Kong stocks? This section analyzes them. 2.1 Industry Narratives: Hong Kong has an advantage in the AI technology breakthrough period, while A-shares excel in the profit verification stage Since the end of 2022, a global wave of AI technology has swept through the capital markets, during which Chinese technology assets have shown impressive performance. Due to the different focuses of A-shares and Hong Kong stocks in the technology industry chain, in different stages of the evolution of the AI industry trend, "long-term expectations" and "short-term profit drive" alternately impact the performance of A-shares and Hong Kong stock technology sectors. Significant breakthroughs in technology have catalyzed Hong Kong stocks outperforming under the premise of the AI business narrative. The Hong Kong technology sector has a high concentration of application ecosystem stocks, with its core value lying in a vast user network, rich application scenarios, and a strong ecosystem monetization potential, such as Tencent, Alibaba, and Meituan. Therefore, when major breakthroughs are achieved in AI technology, the market initially trades on the macro narrative of technology redefining business models and opening up new growth spaces. For example, the explosive popularity of ChatGPT at the end of 22 and the breakthrough of DeepSeek technology in early 25 have accelerated the narrative of commercializing AI, driving up the revaluation of Hong Kong technology assets. During the periods of November 22 to January 23 and January to March 25, the Hang Seng Technology Index showed excess returns of 45% and 23% respectively compared to the ChiNext Index. A-shares have excelled in the profit validation stage with high capital expenditure trends. For instance, despite the absence of new "killer applications," global technology giants' capital expenditures in the AI sector have continued to increase, with the total capital expenditure for the four major North American cloud companies reaching nearly a billion dollars in 25, a 74% increase over 24. The significant investments in AI infrastructure have made companies like NVIDIA, a giant in AI computing, a leading figure in the AI era. Upstream hardware companies in A-shares, such as optical modules, PCBs, and liquid cooling, are deeply tied to overseas computing giants, and their profits continue to be verified, driving the outperformance of A-share technology over Hong Kong stocks since the second quarter of 25. 2.2 Liquidity Environment: Hong Kong stocks are sensitive to US dollar liquidity, while A-shares are more independent There is a significant disparity in the investor structure of the technology sectors between Hong Kong stocks and A-shares, and changes in domestic and international liquidity environments affect the trends of technology assets in the two markets. As of Q1 26, the average percentage of Northbound holdings in the components of the ChiNext Index in A-shares was 3%, while in the Hang Seng Technology Index in Hong Kong stocks, the proportion of international intermediaries in the free float market capitalization averaged 52%. This suggests that foreign capital plays a greater role in the Hong Kong stock market, and the valuation of Hong Kong technology stocks is more influenced by US Treasury bond rates. Additionally, under the linked exchange rate system, Hong Kong's monetary policy is highly tied to the US Federal Reserve, making US dollar liquidity an important factor in the performance of the Hong Kong technology sector. Hong Kong may outperform A-shares in technology assets when the US dollar weakens significantly. During periods from April to September 24, when the US added jobs slowed down and consumer confidence declined, leading to rising expectations of rate cuts by the Federal Reserve, the US dollar index continued to weaken. Moreover, in the first half of 25, Trump's tariff policies weakened US credit, and the US dollar index also saw a substantial decline. During these two periods of US dollar depreciation, the Hang Seng Index showed clear excess returns compared to the ChiNext Index, with gains of 17 and 18 percentage points respectively. However, in the first quarter of 24, concerns about the downward stagnation of US inflation and worries about a weakening labor market led to a significant contraction in expectations for a rate cut by the Federal Reserve, barely impacting Hang Seng Technology's performance against the ChiNext Index. On the other hand, A-shares have relatively weaker linkage with international liquidity and geopolitics, making them more resilient to changes in global events. Amid intensified geopolitical tensions between major powers, Hong Kong stocks' technology sector may face pressure, while A-shares may experience a rally in domestic alternative markets. As an offshore market, Hong Kong's capital pricing power is more reliant on foreign investors, which makes it less tolerant to political and geopolitical risks. For example, during the escalation of US-China tensions in 22 and the scrutiny on Chinese companies listed in the US, Hong Kong stocks have shown marked underperformance. For A-share technology, the characteristics of technology manufacturing are more pronounced, and tensions in global geopolitics could strengthen expectations for domestic policies and order bias, more often leading to a rally of domestic alternatives. During the heightening of US-China tensions in 18-19, US restrictions on Chinese tech companies catalyzed market rallies in A-share sectors such as semiconductors and technology services. Moreover, the correlation between Hong Kong's technology sector and macroeconomic fundamentals was traditionally high, but has become less apparent post-22. The presence of a high proportion of internet platforms in Hong Kong's technology sector allows it to exhibit certain cyclicality due to its close relation to the recovery in domestic consumption. On the other hand, the profit trends in A-share technology are driven by technological industry trends, and the performance of tech stocks in A-shares is weakly correlated to economic fundamentals. However, since the advent of the AI wave at the end of 22, Hong Kong's tech enterprises have increasingly invested in AI developments, gradually shifting their valuation anchors away from direct macroeconomic impacts. 3. How are the future prospects of technology assets in the two markets likely to unfold? The performance of technology assets in A-shares and Hong Kong stocks has been vastly different since the beginning of the year, with the ChiNext Index posting gains of 26% and reaching historic new highs while the Hang Seng Technology Index dropped by 7.6%. As discussed earlier, industry trends and liquidity environments tend to determine the strengths of technology assets in A-shares and Hong Kong stocks. Looking ahead, how are the trends in the Chinese technology market likely to unfold, and which market - A-shares or Hong Kong stocks - will fare better in technology? 3.1 Industry Narratives: A-shares provide stronger short-term technology certainty As the bull market in A-shares continues, technology assets with stronger earnings certainty may continue to outperform. This year, following the trend in US stocks, the AI industry wave in A-shares continues to evolve, with the TMT sector seeing increased congestion. The subsectors of electronic communications funds have holdings that account for as high as 21.7% and 13.0% respectively, marking the highest levels in 96% and 100% of encounters in the past 13 years. From valuation, transactions, and turnover perspectives, sectors such as optical communications, network components, and elements of AI hardware have reached historical peaks. Drawing on historical trends from the mobile internet industry in 12-15 and the new energy sector in 19-21, when industry booms are not yet over, market enthusiasm and fund allocations in related industry chains are likely to remain at high levels for a considerable period. Going forward