On August 13, renowned economist Hao Hong shared his outlook on the future of the AI rally in an interview. The key points summarized are as follows:

1. After two months of correction, many individual stocks have fallen back to more realistic price levels, with valuations becoming more reasonable.

2. This AI-driven rally has entered its second phase. Essentially, quality now outweighs the narrative itself or the number of targets. The market is entering a divergence phase: high-quality targets will perform well, while those that only tell stories will continue to underperform the broader sector.

3. Chinese semiconductor companies now dominate the mid-to-low-end segment. Semiconductor exports are still growing, with a year-on-year increase of 50% to 60%, a very high double-digit rate. So, many targets are expected to continue performing well, but considering valuations and the sustainability of earnings growth, some lower-quality targets will lag behind.

4. Companies like Tencent and Alibaba are still on the path of transitioning from traditional internet companies to new AI and cloud computing firms, with a long way to go. Although the stock prices of these companies have risen recently, most of the gains are just technical rebounds.

Hao Hong believes that after two months of correction, Chinese tech stocks have returned to reasonable valuations, and the AI rally has moved from a "storytelling" phase to a "quality-focused" second phase. High-quality targets with proven performance will continue to outperform, while those that rely solely on narratives will fall behind. Additionally, South Korean capital is rotating into Hong Kong stocks, becoming a new variable in the market, though it has not yet changed the structure of the Hong Kong market.

Below are the key takeaways shared in the interview:

Many tech stocks have become more reasonably valued after the correction

Interviewer: Do you believe that the July correction also helped bring the valuations of Chinese tech stocks back to more attractive levels, making you more optimistic about the market?

Hao Hong: Yes, I think after two months of correction, many individual stocks have dropped to more realistic price levels, with valuations becoming more reasonable. Therefore, some overvaluation and extreme relative gains have been ironed out. As a result, many funds are re-evaluating these targets. I've also heard that some foreign investors are re-examining Chinese AI targets.

This AI rally enters its second phase

Interviewer: However, have the criteria for evaluating Chinese targets changed? Previously, it was simply about participating in the AI trade. Now, how much focus is on whether these companies' investments can translate into actual performance?

Hao Hong: Yes, I believe this rally has entered its second phase. Essentially, quality now outweighs the narrative itself or the number of targets. In the Chinese AI sector, many targets have stories to tell, and they are good stories, but almost none have delivered performance. So, I think the market is entering a divergence phase: high-quality targets will perform well, while those that only tell stories will continue to underperform the broader sector.

Selecting high-quality companies

Interviewer: What indicators truly define quality? Is it cash flow, monetization ability, capital expenditure, or returns?

Hao Hong: Yes, some companies are still in the early stages of development, but many have already shown promising results. For example, DeepSeek's newly released Pro model and Kimi 3鈥攎any models now have capabilities comparable to their US counterparts but at a significantly lower cost. So, I think many such companies are heading to the capital markets for financing and will receive a strong response. Additionally, some existing companies, if they continue to show progress in model development and token consumption, will also remain in focus. On the other hand, some targets reported stellar results last quarter, with profit growth potentially reaching 1000%. However, many doubt whether such strong earnings growth is sustainable, as their production capacity still relies on overseas orders to fill. I believe Chinese semiconductor companies now dominate the mid-to-low-end segment. Looking at recent Chinese export data, semiconductor exports are still growing, with a year-on-year increase of 50% to 60%, a very high double-digit rate. So, many targets are expected to continue performing well, but considering valuations and the sustainability of earnings growth, some lower-quality targets will lag behind.

The recent stock price increases of Tencent and Alibaba are technical rebounds; they have a long way to go in transitioning from internet companies to AI cloud computing firms

Interviewer: What about tech giants like Tencent and Alibaba? For example, with Tencent, we saw its revenue exceed expectations, but at the same time, its AI and computing power spending doubled. When will their AI investments generate returns? How should investors weigh this? Also, what about their dependence on the Chinese domestic market, especially retail?

Hao Hong: Yes, I think these companies are investing heavily in AI, but most investors still see them as old-economy companies, internet platform companies, or gaming companies. Despite significant investments, some have achieved certain results鈥攆or instance, Tencent's Yuanbao, a popular AI tool in China, has performed well. However, the issue is that the AI business still contributes relatively little to the overall group performance. So, I believe they are still on the path of transitioning from traditional internet companies to new AI and cloud computing firms, with a long way to go. Therefore, although the stock prices of these companies have risen recently, most of the gains are just technical rebounds. For example, the latest news headlines show that short positions in many individual stocks have fallen from their peaks鈥攂ut this is often a contrarian indicator, suggesting that the technical rebound has already captured most of the gains in this move, and the easiest money in this rebound has been made. So, entering the second phase, we need to look for quality and the new earnings drivers of these companies.

Exports are strong, but stimulating consumption is more urgent

Interviewer: Expanding this issue to the broader Chinese economy: We see a boom in the AI industry, along with related manufacturing and export strength. On the other hand, domestic demand is shrinking. Will the pressure from demand鈥攖he sluggish economy and weak consumption鈥攅ventually outweigh the more positive and brighter aspects of the Chinese economy?

Hao Hong: I think China is handling it well so far, with the export sector steadily rising. Our exports are still maintaining a very high double-digit growth rate. Currently, the export sector and high-end manufacturing are contributors to growth, but the urgency to stimulate consumption is becoming increasingly prominent鈥攃onsumption growth and retail sales growth are slowing significantly. Growth cannot rely solely on exports. China's share of global exports is at a historic high. Basically, many trading partners find it difficult to compete with China. I believe almost every industry in China is recording a trade surplus鈥擟hinese manufacturers enjoy an absolute advantage. Recently, we have heard increasingly strong criticism from the EU, and there is growing academic evidence that Chinese exports are essentially taking away the jobs of European exporters. So, I think we will see more trade frictions, especially between China and Europe.

South Korean capital flows into Hong Kong stocks, becoming a new force in the market

Interviewer: You wrote in your notes that under the AI boom, aggressive South Korean traders are entering the Hong Kong market. Of course, after this round of market volatility, will this have a substantial impact on the structure of the Hong Kong market? Is there anything worth noting?

Hao Hong: It won't have an impact yet. I think South Korean traders are known for their risk appetite and high risk tolerance. Look, the rebound in the Hong Kong market over the past two weeks has been quite impressive鈥攖he Hang Seng Index has risen over 15% from its bottom. You have to admit that new money has come in. I've heard that a significant portion of this capital is actually rotating from the South Korean market to Hong Kong in search of opportunities鈥攚ith cheap valuations here and many Chinese AI targets still to be discovered. So, I think this is a new force in the market. Hong Kong welcomes this new type of trader that brings both capital and risk appetite.