Hong Kong 2H25 Investment Outlook: Upgrade the market to 3.0 Stars 'Attractive'

• Recent regulatory shifts in China are fostering a more business-friendly environment, strengthening investor confidence in the private sector’s growth prospects.  

• AI innovation, led by private enterprises, is a key driver of growth in technology, semiconductors, and cloud sectors, supporting earnings potential.

• A rebound in Hong Kong’s IPO market signals stronger liquidity and rising investor interest in core Chinese assets.

• We upgraded the Hong Kong stock market’s star rating from 2.5 star “Neutral” to 3.0 stars “Attractive”. We have also raised the Hang Seng Index’s fair P/E ratio to 11X, setting a target price of 29,085 points by the end of 2027, implying a potential upside of 18%.

The HSI surged by nearly 13% in SGD terms in the 1H25, ranking among the top-performing global indices. The rise of AI triggered a revaluation of Chinese assets. Subsequently, Laopu Gold, Pop Mart and Mixue Group hit record highs, sparking a new wave of investment in consumer sector. Are there structural factors supporting this rally? What are the key drivers for future market gains? The following section will explain each point in detail. 

Highlights for the Hang Seng Index

Effective 6 June 2025, the number of Hang Seng Index (HSI) constituents increased from 83 to 85, with the addition of home appliance manufacturer Midea Group (300.HK) and express delivery firm ZTO Express (2057.HK).

Table 1: New Hang Seng Index Constituents

Ticker	GICS Sector	Weight	2025 Earnings Growth	2026 Earnings Growth	2027 Earnings Growth
ZTO EXPRESS	Industrials	0.44%	-6.4%	12.3%	12.0%
MIDEA GROUP	Consumer Discretionary	0.33%	4.3%	9.3%	9.0%
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 30 June 2025.

2H25 Outlook for Hong Kong Equity Market

Shift in Regulation for Private Sector

In February, a symposium was held in Beijing, attended by leading Chinese entrepreneurs including Alibaba’s Jack Ma and Tencent’s Pony Ma. Key policy pledge included: 1) Promoting fair market competition; 2) Addressing financing issues for private sector; 3) Addressing the problem of arrears to private enterprises; 4) Protecting the legitimate rights of private enterprises; and 5) Developing healthy government-business relations. This was the first such meeting since 2018, widely viewed as a turning point for private sector policies. Additionally, the National People’s Congress approved the first-ever law on promoting the private economy, including fair competition, investment and financing, technological innovation, regulatory guidance, service guarantees, rights protection, and legal responsibilities. This new law is expected to further boost confidence and expectations for the private economy.

Historically, regulatory measures targeting private enterprises including the suspension of Ant Group’s IPO in 2020, the education sector overhaul in July 2021, crackdowns on internet giants, and the introduction of the “three red lines” for real estate financing in September 2021 have been key factors in the valuation decline of private enterprises. However, recent policy shifts suggest a more supportive environment for private businesses. State-owned enterprises (SOEs) in the HSI have outperformed private-owned enterprises (POEs) for four consecutive years, but this trend is now reversing (Figure 1). There is a shift toward a more business-friendly environment, moving away from the “state advances, private retreats” pattern of the past four years. The symposium signals that private enterprises may once again take the lead in driving economic growth.

Figure 1: Average Return of HSI Constituents

AI Driving Private Enterprise Growth

DeepSeek has transformed the outlook for Chinese tech stocks, prompting investors to reassess AI’s impact on corporate earnings growth and fostering optimism about the Chinese market. We view POEs hold a competitive edge over SOEs in AI development. POEs dominate AI-related tech sectors including semiconductors, infrastructure and power, data and cloud, and software, reflecting their leadership in technological innovation and infrastructure development (Figure 2). AI is also expected to drive increased capital expenditure and R&D investment, boosting earnings growth expectations for POEs.

Figure 2: AI-Related Sectors

Earnings Projections for Hang Seng Index Remain Robust

The Hang Seng Index’s earnings forecasts bottomed out in June 2024, preceding policy turnaround in September 2024. Despite pressures from US tariff policies, earnings forecasts have been revised upward this year, reflecting a shift in market sentiment. This stability reduces downside risks, as the market moves away from years of downward revisions. Moreover, the Hang Seng Index’s forward price-to-earnings (P/E) ratio remains below its 10-year average, indicating room for valuation expansion.

Figure 3: Hang Seng Index Earnings Revision

Figure 4: Hang Seng Index Forward P/E

Improving Liquidity in Hong Kong Equity Market

With rising market liquidity and growing demand for Chinese core assets, Hong Kong’s IPO market has shown significant recovery in the first half of the year. By the end of June, new listing volumes on the Hong Kong Stock Exchange jumped to USD 14 billion in the first half of this year, surpassing the full-year totals of each of the past three years. The largest IPO was leading battery manufacturer CATL, raising over HKD 30 billion. Supported by policy incentives, more companies are expected to list in Hong Kong.

Figure 5: Hong Kong IPO

Sectoral views remain positive

Consumer Discretionary

Table 2: Consumer Discretionary

Ticker	GICS Sector	Weight	2025 Earnings Growth	2026 Earnings Growth	2027 Earnings Growth
BABA-W	Consumer Discretionary	8.00%	12.6%	13.8%	10.3%
MEITUAN-W	Consumer Discretionary	5.18%	-6.4%	31.0%	23.6%
BYD COMPANY	Consumer Discretionary	3.44%	25.7%	27.7%	11.4%
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 30 June 2025.

Alibaba has performed strongly this year, driven by optimism about its AI and Cloud business. In FY2025, Alibaba repurchased USD 11.9 billion in shares, reducing total shares outstanding by 5.1%, reflecting confidence in its growth. Its e-commerce business remains robust, with the take rate (revenue as a percentage of GMV) rising steadily, driving customer management revenue (CMR) growth. The highest spending consumer group 88VIP exceeded 50 million members, achieving double-digit year-on-year growth. As the top cloud services provider in China, Alibaba Cloud saw double-digit revenue growth, with AI-related products posting triple-digit growth for seven straight quarters. Alibaba also released the Qwen3 model, which are optimized based on Apple's MLX framework. Market positions it as a potential AI model partner for Apple in China, making “AI + Cloud” a core growth engine.

Meituan’s Q1 revenue and adjusted profit beat market estimates, driven by improved core business margins and reduced losses in new businesses. Meituan Instashopping maintained robust growth trajectory, with over 500 million cumulative transaction users by March and non-food retail daily orders exceeding 18 million. However, earnings growth is expected to decline in 2025 due to competition from JD.com in the food delivery market, requiring higher subsidies and overseas expansion to maintain leadership. Despite competitive pressures, Meituan’s strengths in merchant and rider should ensure its dominance.

BYD’s Q1 revenue and vehicle sales slightly lower than expectations, but it maintained a 20% gross margin and more than doubled its net profit year-on-year thanks to the expansion and maturity of its EV production scale. With 80% of revenue from automobile and related products, BYD remains leading EV company in China. Apart from winning in the mainland market, BYD's overseas target is in full swing. In the first 4 months, BYD's overseas sales steadily accounted for 20% of the total EV sales, with a cumulative total of over 200,000 units. This year, the management has mentioned that the overseas sales target is 800,000 units, and the market is optimistic that the target will be achieved after the release of the first-quarter results. Overall, BYD has risen to the top of the electric vehicle industry over the past 20 years, and its vertically integrated development model has enabled the company to build a strong moat and maintain its gross profit margin. Therefore, based on the above development trend and analysis, we believe BYD's future potential is attractive.

Information Technology

Table 3: Information Technology

Ticker	GICS Sector	Weight	2025 Earnings Growth	2026 Earnings Growth	2027 Earnings Growth
XIAOMI CORP-W	Information Technology	6.18%	46.5%	30.3%	23.0%
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 30 June 2025.

Xiaomi continued to advance “Human x Car x Home” strategy and Q1 adjusted profit was higher than CNY 10 billion for the first time. Its smartphone and AIoT businesses delivered strong performance, with smartphone shipments achieved year-over-year growth for the seventh consecutive quarters and AIoT platform connected devices and Mi Home app monthly active users achieving double-digit growth. Besides, smart home appliance revenue doubled year-on-year, with shipments of washing machines and refrigerators reaching record highs. Supported by the trade-in policy, this segment is expected to continue driving earnings growth. The SU7 series delivered over 75,000 vehicles in Q1, with cumulative deliveries exceeding 250,000. The YU7 series, launched on June 26, received nearly 290,000 orders in the first hour, demonstrating Xiaomi’s competitiveness in China’s EV market.

Communication Services

Table 4: Communication Services

Ticker	GICS Sector	Weight	2025 Earnings Growth	2026 Earnings Growth	2027 Earnings Growth
TENCENT	Communication Services	8.00%	15.8%	12.5%	11.1%
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 30 June 2025.

Tencent’s Q1 revenue growth beat market estimates, with improved gross margins. Value-added services, accounting for over half of revenue, saw accelerated growth, driven by the growth of domestic and overseas games revenue. Marketing services grew 20% year-on-year. This growth was primarily due to robust advertiser demand for Video Accounts, Mini Programs and Weixin Search inventories, supported by higher user engagement, ongoing AI upgrades to advertising platform, and improvements to the transaction ecosystem within Weixin. AI technology has significantly impacted advertising and gaming business. In February, Tencent integrated DeepSeek into its mobile game Game for Pease, enabling language interactions and tactical guidance. Tencent has also introduced AI capabilities within WeChat, utilizing AI technology to optimize both advertisement creation and placement, thereby significantly enhancing conversion performance.

Upgrading Hong Kong to “Attractive” Rating

The core drivers of this market rally are optimism about AI applications, improved business environments for POEs, and strong performances by leading companies in consumer discretionary, information technology, and communication services sectors. Stable earnings forecasts and a recovering IPO volume indicate improving investor sentiment. With supportive policies and a more favourable stance toward POEs, Hong Kong and China markets could outperform this year. While market performance has partially met our expectations, we anticipate further improvements in the POEs and AI’s impact on fundamentals.

Based on these factors, we upgraded the Hong Kong stock market’s star rating from 2.5 star “Neutral” to 3.0 stars “Attractive”. We have also raised the Hang Seng Index’s fair P/E ratio to 11X, setting a target price of 29,085 points by the end of 2027, implying a potential upside of 18%.

Table 5: Hang Seng Index’s earnings projections till 2027

Hang Seng Index	2024A	2025E	2026E	2027E
EPS	2,125	2,235	2,434	2,658
Earnings Growth	8.5%	5.2%	8.9%	9.2%
PE Ratio	11.6	11.0	10.1	9.3
Projected Fair Price (based on fair PE ratio of 11x)				29,085
Upside				18%
Source: iFAST Estimates. Data as of 15 Jul 2025.

Table 6: Investment Products

Market	Funds	ETFs
Hong Kong	Fidelity China Focus A-SGD Allianz Hong Kong Equity AT Acc SGD	Tracker Fund of Hong Kong (HKEX:2800)  iShares Hang Seng TECH ETF (HKEX:3067) Lion-OCBC Securities Hang Seng TECH ETF (SGX:HST)

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.