Chinese Tech Stocks Hinge on AI and Earnings Certainty, CITIC Says

The performance of Chinese internet stocks in the second half of the year will be shaped by progress in artificial intelligence and the earnings certainty of core operations, according to a new research report from CITIC Securities. The firm noted that the market's primary focus has shifted from external risk factors to domestic fundamentals, including liquidity, earnings resilience, and cash flow.

Market Shifts to Domestic Fundamentals

CITIC Securities highlighted the recent underperformance of Chinese tech benchmarks, with the Hang Seng Tech Index and the China In-Cap Internet Index falling 3.8% and 13.9% respectively in the second quarter. This contrasts sharply with the Nasdaq's 21.4% gain over the same period. The report stated that valuations remain depressed, with the Hang Seng Tech Index's next-twelve-months (NTM) price-to-earnings ratio trading near one standard deviation below its historical average.

According to the analysis, this valuation pressure reflects a change in market drivers. Investors are now prioritizing factors such as domestic liquidity expectations and the ability of companies to consistently deliver on earnings and generate strong cash flow, rather than reacting primarily to external risk sentiment.

Earnings Recovery and AI Focus

Major Chinese internet companies reported stable aggregate revenue growth of 5% year-over-year in the second quarter, matching the pace of the first quarter. While aggregate non-GAAP net profit declined by 9% year-over-year, this marked a significant improvement from the 32% contraction seen in the first quarter.

Looking ahead, CITIC cited consensus estimates from Visible Alpha, which project an acceleration in fundamentals:

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• Revenue Growth: Expected to reach 8% in Q3 and 9% in Q4.
• Non-GAAP Net Profit Growth: Forecast to be 8% in Q3 and jump to 37% in Q4.

Alongside the earnings recovery, CITIC emphasized the rapid development of China's large language models, which are narrowing the gap with global leaders. The report also pointed to a greater focus on the return on invested capital (ROIC) from AI-related capital expenditures. Both Alibaba and Tencent have provided positive guidance on the monetization of AI, with Alibaba noting an estimated payback period of around three years for its AI investments.

Investment Outlook

CITIC Securities suggests investors focus on two key themes for the remainder of the year: AI developments and companies with high earnings certainty. The firm sees potential catalysts from major tech companies' model iterations, AI agent adoption, and new commercial applications.

Furthermore, the report identified strong shareholder returns as a key factor providing a "safety margin" for investors. Several companies were highlighted for robust buyback and dividend programs, including JOYY, Weibo, and JD.com, which offer investors a buffer amid market volatility.