Hong Kong Outlook 2H26: From delivery price war to the AI wave, can Hong Kong regain momentum?

• The Hang Seng Index lagged regional peers in 1H26 because it has limited exposure to AI hardware and was weighed down by weak earnings from Chinese internet companies, particularly as the food-delivery subsidy war between Meituan, Alibaba and JD.com compressed margins.
  
  
• The food-delivery price war is showing signs of easing, with losses narrowing and earnings expectations improving. As companies shift their focus from aggressive subsidies to profitability under China's "anti-involution" policy, discretionary sector earnings are expected to recover.
  
  
• China's domestic AI ecosystem is gaining momentum. Chinese AI models have surpassed US models in token usage on OpenRouter, while companies such as Zhipu AI and MiniMax continue to narrow the technology gap with leading US models through competitive performance, lower costs and stronger open-source support. Hong Kong is also becoming an important listing venue for China's AI champions.
  
  
• Valuations remain supportive. The Hang Seng Index traded below their historical average valuations, providing downside protection while leaving room for further upside. Against a backdrop of improving earnings and stronger AI fundamentals, the Hang Seng Index is projected to reach HKD 29,600 by 2028, implying around 26% upside. 

1H26 Performance Review

In the first half of this year, the Hang Seng Index underperformed regional peers, while Korea and Taiwan equities both recorded significant gains over the same period. This divergence mainly reflects investors focusing on AI capital expenditure. By contrast, the Hang Seng Index remains weighted towards traditional sectors, and even its Chinese internet constituents are concentrated in the AI application layer rather than AI hardware, leaving the index relatively behind in a hardware-driven global AI rally.

Additionally, the long-term core driver of index performance is corporate earnings. Overall earnings for Hong Kong equities were weak in 1Q26, with the biggest drag coming from a sustained price war among Meituan, Alibaba, and JD.com in the food-delivery sector. This price war significantly eroded margins in the discretionary consumption sector and became a key headwind for the Hang Seng Index (Figure 1). Looking ahead to 2H26, we believe the key to a renewed uptrend in the Hang Seng Index lies in two main themes: an easing of the food-delivery price war and domestic AI substitution.

Figure 1: Key Hang Seng Index Constituents

Note: Meituan's earnings turned from positive to negative, therefore the percentage change cannot be calculated.

Hong Kong Outlook 2H26: From reflation to earnings recovery

We previously argued in Hong Kong Equity Outlook 2026 that 2026 would be shaped by "reflation and technology," and predicted that PPI would bottom out and recover in the first half, with the US-Iran war acting as a catalyst that helped end a 41-month deflation. However, leading indicators have pulled back recently, suggesting the structural recovery driven by domestic demand has lost some momentum (Figure 2). As tensions in the Middle East ease, the rapid rise in PPI driven by imported inflation may struggle to persist, and the durability of the inflation still depends on domestic demand.

Figure 2: China PPI and Monetary Supply

Hong Kong Outlook 2H26: The second half of the food delivery war

In 2025, the food-delivery war eroded profit far more than the market expectation. Meituan's Core Local Commerce segment swung from an operating profit to an operating loss and issued more than RMB 20 billion in bonds to ease funding pressure. Alibaba's spending on instant retail rose sharply, causing e-commerce EBITA to fall by nearly 50% YoY, while JD.com's food-delivery expansion likewise weighed on the group's overall earnings.

In 1H26, the pace of earnings decline slowed. Meituan's Core Local Commerce segment posted an operating loss of RMB 2 billion, a sharp narrowing from the RMB 13.5 billion loss in the previous quarter. Although the share price has remained weak in the short term, earnings expectations have risen rather than fallen since the Q1 results were released (see Figure 3), reflecting a gradual recovery in investor confidence in the earnings.

Figure 3: Meituan Share Price Performance and EPS

We previously argued in China’s delivery price war nears inflection: positioning ahead of the turn that shifting from subsidies to profitability is the key to the sector's earnings recovery in 2026. We believe the most intense phase of the food-delivery war is now behind us, and corporate earnings should recover and provide support for a rebound in share prices under the "anti-involution" policies. On valuation, the current rally in China and Hong Kong equities began with the rebound in September 2024, and valuations for Chinese internet stocks have since fallen back to relatively low levels (Figure 4), providing a reasonable valuation margin of safety for the recovery ahead.

Figure 4: Forward P/E of Chinese Internet Stocks

Hong Kong Outlook 2H26: The AI boom continues

Chinese AI models' share of token consumption on the world's leading API platform OpenRouter has continued to rise. As Figure 5 shows, Chinese AI models' token share overtook that of U.S. models for the first time in 1H26, which is a complete reversal of the 2025 competitive landscape.

Figure 5: OpenRouter China vs. U.S. Model Share

Hong Kong's stock market is accelerating its shift towards high-growth technology sectors. IPO fundraising in 2026 was concentrated in semiconductors, AI and biotechnology, giving global investors a unique opportunity to gain direct exposure to Chinese AI companies.

Zhipu AI and MiniMax were added to the Hang Seng TECH Index in May, becoming the world's first listed AI model companies. In June, both MiniMax and Zhipu AI launched their latest models. MiniMax M3 delivers strong performance on specialized tasks such as coding and agentic workflows by adopting a new MSA (MiniMax Sparse Attention) architecture, it significantly boosts performance while maintaining high cost-efficiency and supporting 1M context windows. Meanwhile, Zhipu's GLM-5.2 model focuses on strengthening code generation and long-horizon tasks, with significant improvement versus the prior generation. It narrows the coding-capability gap with leading U.S. models considerably, while retaining a clear edge in cost and open-source ecosystem support. In addition, according to Artificial Analysis Intelligence Index, both Zhipu GLM-5.2 and MiniMax M3 recorded substantial gains in overall performance versus their previous versions (Figure 6).

Figure 6: Zhipu AI and MiniMax

In the near term, Hong Kong's two leading listed AI model companies are approaching their first major lock-up expiry window since listing. However, both companies have received support from core investors. Zhipu's largest cornerstone investor, JSC International Investment (holding over 30% of shares in the global offering), has stated it will continue to hold its stake given confidence in the company's long-term development. Meanwhile, MiniMax's core strategic shareholders, Alibaba and miHoYo, have expressed a long-term positive view. In addition, MiniMax's founding team has voluntarily set a 12-month lock-up period, which is well above the industry-standard 6 months.

Hang Seng Index Valuation

As Figure 7 shows, the Hang Seng Index's forward P/E is now below its 10-year average. This lower valuation should provide downside protection for Hong Kong equities while preserving room for valuation upside.

Figure 7: Hang Seng Index Forward P/E

Investment implications

In summary, the key to Hong Kong equities' performance in the second half depends on two main themes, an easing of the food-delivery war and China's domestic AI substitution. The food-delivery price war has already shown signs of cooling and profit margins in the discretionary consumption sector should gradually recover. On the AI front, Zhipu AI and MiniMax have successively launched GLM-5.2 and MiniMax M3, which are competitive on performance, cost and open-source ecosystem support. On valuation, both the Hang Seng Index and Chinese internet stocks remain at relatively low levels, offering Hong Kong equities better downside protection and a margin of safety while preserving upside potential. Taking these factors into account, we expect the Hang Seng Index to reach a target level of 29,600 points by 2028, implying potential upside of 26% (as of 6 July 2026).

Table 1: Hang Seng Index

Hang Seng Index	2025A	2026E	2027E	2028E
EPS	2,150	2,265	2,541	2,693
Earnings Growth	2.1%	5.3%	12.2%	6.0%
PE Ratio	10.9	10.4	9.2	8.7
Projected Fair Price (based on fair PE ratio of 11x)				29,600
Upside				26%

Table 2: Recommended Products