Hong Kong Stock Market Review: Returns Determine Valuation

The stock market continues to be under pressure, primarily due to rising long-term interest rates weakening overseas risk appetite. The Hong Kong stock market also maintains a pattern of "strong defense, weak growth." Coal, banks, and high-dividend stocks are relatively strong, while previously popular sectors such as AI large models, chips, PCBs, and optical communications are clearly under pressure.

However, what is truly worth watching today is the comparison between two AI companies.

SK Hynix announced a buyback and cancellation of approximately 40 trillion won worth of stock, amounting to about $28.6 billion, while committing to use over 50% of its free cash flow for shareholder returns from 2025 to 2027. This is not only one of the largest buybacks in the history of South Korean listed companies but also addresses one of the market's concerns once again.

The trend of returns in the storage sector is becoming increasingly clear. Previously, SanDisk had already positioned long-term high margins and returning excess cash to shareholders as its core narrative, and SK Hynix is now following up, which is expected to change the market's valuation approach for storage stocks. For example, shipping stocks, particularly seeing Seaspan Corporation distribute a special dividend today, although profits have not yet returned to the highs of previous years, the stock price has already more than doubled compared to those years.

In contrast, the situation for Baidu is completely different.

Baidu's Q2 revenue declined year-on-year, and net profit plummeted; although AI business grew by 25% year-on-year, it has already shown a decline quarter-on-quarter. The traditional advertising business continues to drag down overall performance, while CapEx surged by 200% year-on-year, turning free cash flow negative. Since the beginning of the year, only $259 million has been repurchased, accounting for about 0.7% of market capitalization, with the pace slowing down quarter-on-quarter.

This is the model that the market currently dislikes the most: AI investment is indeed increasing, but revenue and cash flow have not yet formed a sufficiently strong positive cycle. AI companies that are still in a phase of heavy investment and slow commercialization will continue to face valuation pressure.

Of course, Baidu has more internal issues, with AI cloud growth slowing, C-end products performing flat for two to three consecutive quarters, and overall search continuing to decline. The stock price can only look to the two windows of R&D and Kunlun Chip for some stimulation, with the former expected to be realized within the year, and the latter's listing process advancing.

Another example is China Unicom, which saw profits decline by about 35% year-on-year in the first half of the year. Although its operating cash flow reached 32.9 billion yuan, profits were retained for capital expenditures in computing power, which increased by 80% year-on-year, ultimately announcing no interim dividend, leading to a stock price drop of over 12%.

This also prompts us to rethink domestic banks. The market currently views Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China as high-yield defensive assets, primarily due to stable profits and dividends. Currently, the dividend yield of several major banks in the Hong Kong stock market is generally around 5% to 7%.

While banks do not need to invest in AI, they also need to retain capital to support asset expansion. If interest margins narrow again in the future, profit growth stagnates, and there is a need to replenish capital, then even if the current dividend rate is maintained, the market may still worry about the stability of dividends. Of course, this is the cornerstone of stabilizing the index, and it is highly likely that this will not happen.

In conclusion, the Hong Kong stock market is likely to continue the "strong defense, weak growth" pattern of box fluctuations. If long-term interest rates continue to rise, the stock market will still face downward pressure. However, from the perspective of individual stocks, profits determine how far a company can go, cash flow determines how high the valuation can be, and the money that can truly return to shareholders is the hardest bottom line for stock prices