Alibaba Leaps on AI News as Hong Kong Call Already Pays Off

Well, that was quick! 

My call on Wednesday to go long on China-based companies that are listed in Hong Kong is getting a big boost after Alibaba Group Holdings BABA (HK:9988) suddenly leapt on strong earnings and executive guidance that it’s making a big play on artificial intelligence.

Alibaba shares jumped an eye-popping 14.6% in Hong Kong today, adding to their 8.1% climb on Wall Street the day before.

Alibaba on Thursday reported December quarter earnings that saw sales and profits narrowly outdo expectations. CEO Eddie Wu told analysts that the company would invest more into AI and cloud computing over the next three years, although he didn’t specify any numbers. Its cloud-intelligence group saw sales rise 13% compared with last year.

Alibaba shares are now up 77.3% since Chinese shares as a whole dipped to a low on January 13, one week before U.S. President Donald Trump took office. Meanwhile The Wall Street Journal conveys that activist investor Ryan Cohen has built his personal stake in Alibaba to roughly $1 billion in recent months. We know the likes of David Tepper last year started selling Magnificent Seven stocks to buy Alibaba and China as a whole. 

Now, all the bets are that the U.S.-China relationship will warm under the second Trump presidency. Abandoning the 60% tariffs on China that he championed on the campaign trail, Trump has now imposed “just” an extra 10%.

He also appears set to work on a second trade deal with China, to augment the “Phase One” deal he inked during his first term. China has not followed through on those agreements at all, although the pandemic did rear its head in between.

Besides BABA, there was some really interesting back-and-forth with readers in the comments on my last column, as to which Chinese companies to target.

To be clear, I’m recommending that U.S. investors focus on the U.S.-listed members of three overlapping indexes: the Hang Seng Index, the Hang Seng Tech Index and the Hang Seng China Enterprises Index.

Today’s shot in the arm sees the Hang Seng end Hong Kong Friday trade up 4.0%, the China Enterprises index up 4.1%, and the Hang Seng Tech up 6.5%.

The Hang Seng is a Dow-like broad-market index tracking Hong Kong stocks, which were serial under-performers for much of this decade. Both at the end of 2022 and at the end of 2023, if you looked at your long-term returns, you had made precisely zero money on investments bought at the turn of this century. The Hang Seng crossed 17,000 in February 2000 and was back below that level.

Some folks fault the Hang Seng for its over-dependence on financials (Hong Kong has big pan-Asia banks) and property developers (another mainstay of the city’s economy). The index operator has tried to add more “new economy” stocks, but also offers subindexes to track.

The Hang Seng China Enterprises Index cuts out all the Hong Kong-based companies to focus exclusively on “H-shares,” mainland China-based private companies listed in Hong Kong, and “red chips,” similar stocks with an element of state-government ownership.

The Hang Seng Tech Index highlights the 30 biggest companies listed in Hong Kong that are tech-focused. So, they don’t have to be China-based or China-focused. But the bulk are.

One key way of accessing these stocks is via an exchange-traded fund. The KraneShares Hang Seng Tech Index ETF KTEC aims to track the index of the same name.

There are limited Hong Kong-specific ETFs. But mainland stocks in Shanghai and Shenzhen are not enjoying nearly the same degree of rally as the Hong Kong listings. Mainland investors are able to buy some Hong Kong stocks as of the “Stock Connect” link, but they have limited local options. So the “A Shares” listed in Shanghai and Shenzhen have not fallen as far as their Hong Kong counterparts.

It is also in Hong Kong that major global allocators can most easily express their China views and get their China exposure. You can buy and sell freely in Hong Kong, whereas there’s limited participation by non-Chinese players in the mainland markets.

It used to be the case that the biggest, best Chinese companies went public on Wall Street. That’s been changing, as companies list first in Hong Kong or in both places. Companies such as Alibaba have converted to a “dual primary” structure, a change I explained when it occurred last August.

Chinese companies have also been choosing to delist from Wall Street. This applies most prominently to “red chips” and state-owned enterprises. Sometimes, the delisting has been voluntary. At other times, it has been forced because the Chinese company has been added to a U.S. Treasury Department list of companies determined to be part of the “Chinese military-industrial complex.” U.S. citizens and companies are barred from owning those securities.

Companies such as Chinese chipmaker SMIC (HK:0981) have voluntarily abandoned their U.S. listing, while state-owned oil giant CNOOC (HK:0883) and the Chinese mobile operators China Mobile (HK:0941), China Telecom (HK:0728) and China Unicom (HK:0762) had their hand forced by being added to the list.

Don’t confuse Tencent Holdings TCEHY (HK:0700) with the above. Tencent was added in January to a Pentagon list of military-linked companies (different from the Treasury list). I think that’s a mistake, and Tencent agrees, immediately asking for reconsideration. Tencent, which operates the super app WeChat and has extensive operations in video games, music streaming and e-commerce, is so large that some part of its empire is bound to be used by state entities. But it’s hardly supplying semiconductors for nuclear bombs.

In any case, as I explained in January, being on that list doesn’t have any immediate consequences for Tencent. In the long run, it only means that the Pentagon would have to cut out any orders from such companies starting in mid-2026.

Tencent would certainly be one of the stocks I would recommend, even if it doesn’t have a primary Wall Street listing. Business software maker Kingdee International Software KGDEY (HK:0268) is another company in that position, although I would exert caution with the “Microsoft of China” since Kingdee stock has skyrocketed 74.8% this year already.

Smartphone maker Xiaomi XIACY (HK:1810) is another stock with solid business underpinnings. It’s up 49.0% in 2025!

There are plenty of other entirely private companies that remain listed on Wall Street and in Hong Kong. Streaming and games operator Bilibili BILI (HK:9629) is among the big gainers today, up 16.5% after it too delivered exciting earnings. There’s a good case for looking further down the tech-index list to e-commerce giant JD.com JD (HK:9618), video game designer NetEase NTES (HK:9999), online travel agency Trip.com TCOM (HK:9961), and the like.

If you, like me, would like to access the booming market for Chinese electric vehicles, you have BYD BYDDY (HK:1211), Li Auto LI (HK:2015), and XPeng XPEV (HK:9868), all stocks where I have long positions.

But there will be losers as the Chinese EV makers wage a fierce price war. I have sold out of Nio NIO (HK:9866) because I lost faith that a company constantly struggling to complete its order backlog could compete.

There is heavy geopolitical risk with these stocks. Not only are Sino-U.S. tensions riding high, but both the Chinese government and the current U.S. administration can make market-moving announcements that change the picture completely, virtually overnight.

The Chinese government had been on a crusade to take Chinese Big Tech down a notch or two. This all started with the last-minute cancellation in November 2020 of the initial public offering of Alibaba spinoff Ant Group, two days before the largest IPO in world history was due to occur, as I explained at the time.

That flex of strength came at the cost of Alibaba co-founder Jack Ma, who due to intense heat subsequently stepped down from his positions with the company, and essentially took to exile, traveling the world and taking on a teaching position in Japan.

The crackdown spread from Alibaba to include all of China’s Big Tech companies. That appears to be over. That’s why it was big news when Chinese President Xi Jinping hosted a symposium at the start of this week that featured the CEOs of China’s top private companies.

China watchers have been mapping out the seating plan and analyzing every minute gesture of a meeting that functions as a signal that Xi, who views the private sector with distrust, has at least suspended his war on Big Tech.

The photo of Alibaba figurehead Jack Ma shaking hands with President Xi Jinping is the “most important photo in China in the past five years,” according to Christopher Wood, the global head of equity strategy at Jefferies. Wood says in his "Greed & Fear" newsletter that he agrees with a London-based colleague who came to that assessment.

Ma was given a seat at the main table along with namesake (but no relative) Pony Ma at Tencent, DeepSeek founder Liang Wenfeng, BYD founder Wang Chuanfu and the chiefs at battery maker CATL, Xiaomi, and telecom Huawei.

Finally, someone, somewhere among the crowd of “yes” men and women surrounding Xi has managed to voice up that the private sector, which employs more than 80% of the urban work force in China, is kind of important to the economy. That’s regardless of how all-powerful and all-conquering the Mmghty Chinese Communist Party “with Xi at its core,” the boilerplate added to many official releases, may believe itself to be.

We still hear who participated from the Communist Party first, ahead of any company chiefs, in state-run news service Xinhua’s report on the symposium. Every photo caption focuses entirely on Xi.

And the Nikkei is reporting that the three-year antitrust “rectification period” for grocery-delivery app operator Meituan MPNGY (HK:3690) has been extended, with no clear timeframe as to when it will end. Meituan shares are still enjoying solid support, up 18.6% since that China stock lull on January 13.

The political cross-currents could see the U.S.-listed Hong Kong plays derailed. But for now the momentum is causing a rapid, massive uptick in these shares. 

At the time of publication, McMillan had no positions in any securities mentioned.