CGS International Securities
September 3, 2025
China’s Hang Seng Index in 2025: How AI, Subsidy Wars, and Involution Are Reshaping Hong Kong Equities

Executive Summary: A Year of Earnings Erosion and Technology-Driven Growth

The first half of 2025 marked a turbulent period for Hong Kong’s Hang Seng Index (HSI), with earnings battered by fierce competition and aggressive food delivery subsidies. Despite some bright spots in tech and financials, involution-style competition drove downward revisions for key sectors. As the AI revolution takes hold, investors must navigate both the promise of technology and the pitfalls of unsustainable market practices.

Hang Seng Index 1H25: Headwinds and Sector Winners

The Hang Seng Index saw aggregate revenue rise 6.6% year-on-year, while net profit increased a modest 1.5%—broadly in line with expectations. Excluding Financials and Real Estate, net profit growth slowed to just 0.7%, missing consensus by 1.6%. Standout performers included Information Technology (+49.5% yoy), Financial Services (+40.3% yoy), Media & Entertainment (+11.8% yoy), and Health Care (+11.0% yoy). IT delivered the largest positive earnings surprise, exceeding consensus by 9.8%.
In contrast, Consumer Services posted the biggest earnings miss, as Meituan’s outsized spending on rider incentives and subsidies—spurred by escalating competition—dragged on profitability. Excluding Meituan, HSI net profits would have risen 3.1% yoy, beating consensus by 1.7%.

Subsidy Wars and Involution: Downward Earnings Revisions

Since June 2025, consensus estimates for HSI topline revenue have remained largely unchanged. However, net profit forecasts for 2025F/2026F have been cut by 4.9%/2.6%, and by 10.3%/5.5% for the index excluding Financials and Real Estate. The steepest downward revisions hit Consumer Discretionary Distribution and Consumer Services—reflecting the impact of Alibaba, JD.com, and Meituan’s subsidy-driven competition—as well as Autos & Components.
As a result, consensus now expects HSI earnings to decline by 3.0% in 2025F, and by 5.0% for the index excluding Financials and Real Estate. Excluding Meituan, Alibaba, and JD.com, HSI would still generate earnings growth of 2.2% in 2025F, or 6.6% if Financials and Real Estate are also excluded.

Sector Earnings Table: Hang Seng Index 1H25 and Forecasts

AI Revolution: Tangible Value Creation in 2Q25

China’s “DeepSeek moment” ushered in the first clear signs of artificial intelligence’s impact on topline and profitability for key HSI heavyweights. Notable highlights include:

• Tencent Holdings: Acceleration in revenue growth and margin expansion, powered by AI investments that enhanced ad recommendation, conversions, and game development efficiency.
• Alibaba: Reinforced its position as China’s leading cloud hyperscaler, with renewed cloud revenue growth narrative and compounding potential.

Outlook: Addressing Market Involution for Sustainable Growth

Consensus expects HSI to rebound with 11.1% net profit growth in 2026F, benefiting from a lower base in 2025F. Excluding Meituan, Alibaba, and JD.com, the growth estimates are 7.3% for HSI and 11.9% for the index without Financials and Real Estate. However, persistent downward earnings revisions remain a risk, underlining the need to tackle involution-style competition for long-term compounded returns.

Top Stock Picks: High Conviction China/Hong Kong Names

Company Highlights

• Tencent Holdings (700 HK): Leading in AI-driven ad tech and gaming, robust double-digit EPS growth expected for 2025 and 2026.
• Trip.com (9961 HK): Moderate EPS growth, strong market cap, stable valuation ratios.
• Pop Mart (9992 HK): Explosive EPS growth in 2025, followed by continued momentum; premium P/E and P/BV reflect growth expectations.
• Xiaomi (1810 HK): Accelerated EPS growth, strong tech hardware momentum, competitive P/E and P/BV ratios.
• XPeng (9868 HK): Auto sector innovator, high P/E, positioned for future growth.
• Hesai (HSAI US): Exceptional EPS growth, high valuation, leader in auto components.
• CATL (300750 CH): Solid EPS growth, stable valuation, capital goods sector standout.
• AIA Group (1299 HK) & Prudential (2378 HK): Steady insurance plays with moderate EPS growth and attractive dividend yields.
• China Merchants Bank (3968 HK): Consistent EPS growth, low P/E, high dividend yield.
• HKEX (388 HK): Strong financial services growth, premium valuation, solid dividend yield.
• BeOne (BeiGene, 6160 HK) & Duality Bio (9606 HK): Health care sector leaders with high EPS growth; BeiGene stands out for its growth trajectory.

Sector and Country Ratings Framework

• Stock Ratings: “Add” indicates expected total return above 10% over the next year, “Hold” is 0-10%, and “Reduce” is below 0%.
• Sector Ratings: “Overweight,” “Neutral,” or “Underweight” reflect market cap-weighted recommendations.
• Country Ratings: Same structure as sector ratings—guiding investors on portfolio allocation for optimal performance.

Conclusion: Navigating Hong Kong Equities Amid Disruption

The 1H25 earnings wrap-up for Hang Seng underscores the critical role of technological progress—especially AI—in driving value for Chinese tech companies. Yet, the persistence of involution-style competition and aggressive subsidy wars pose ongoing risks to sustainable growth. For institutional investors, analysts, and market watchers, sector rotation, company selection, and a keen eye on policy shifts will be essential to unlock robust returns in the evolving landscape of Hong Kong and China equities.

Distribution Insights

• For the quarter ended June 30, 2025, 70.6% of rated stocks were “Add,” 20.5% “Hold,” and 8.9% “Reduce.”
• Investment banking client engagement remains low across all ratings, suggesting research independence.