Beware of valuation and profitability mismatches. The selection logic of Huatai Wealth Hong Kong Stock Connect Technology Select Hybrid Initiated C(025545) in portfolio construction

The Hong Kong stock market is known as a “valuation lowland,” but for active managers, “low valuation” has never been a reason to buy; instead, it can be the most dangerous trap. In technology stock investing, a mismatch between valuation and profitability—where the stock price seems cheap but fundamentals have quietly deteriorated—is the core reason for negative long-term returns. The construction logic of the Harvest Hong Kong Stock Connect Technology Select Hybrid Initiating Class C (025545) portfolio is based on a deep understanding of this risk.

Core Perspective: The “Low Valuation Trap” Phenomenon in the Hong Kong Market

The valuation system in the Hong Kong market differs significantly from A-shares. Due to factors like international capital dominance, liquidity stratification, and a high proportion of institutional pricing, Hong Kong tech stocks often show a polarized pattern of “good companies are expensive, bad companies are even cheaper.” The so-called “low valuation trap” refers to stocks that appear to have low P/E or P/B ratios historically but continue to decline in price, with valuation centers shifting downward—often due to fundamental deterioration leading to “value destruction.”

This phenomenon is especially common in the Hong Kong tech sector. When a tech company’s product competitiveness declines, market share is eroded, or R&D investments fail to translate into effective output, earnings expectations are continually revised downward. However, because stock prices react with a lag, valuation metrics may remain “cheap” for a considerable period, attracting investors to buy on the left side, ultimately falling into the dilemma of “buying more as it falls, falling more as it is bought.”

For active management funds, identifying and avoiding such stocks is more important than finding winning stocks—because just one “valuation trap” stock in the portfolio can drag down overall returns.

Identification Logic 1: Using Financial Penetration to Detect Deterioration in Fundamentals

The core logic of the Harvest Hong Kong Stock Connect Technology Select Hybrid Initiating Class C (025545) is to detect early signals of declining earnings quality through in-depth financial analysis. According to the fund’s “Prospectus,” which emphasizes “healthy and stable financial conditions” and “cash flow analysis,” the active management team focuses on the following indicators:

Accounts receivable: A “watermark” for profit quality

When a company’s net profit grows but accounts receivable rises sharply and extends payment terms, it often indicates the company is expanding revenue by relaxing credit policies—this growth is “on paper” wealth, not real cash inflow. If accounts receivable turnover days continue to worsen, it usually signals declining downstream customer payment ability or weakening product competitiveness—an early sign of fundamental deterioration.

Operating cash flow: A test of the company’s “self-sustaining” ability

For tech companies, cash flow is more real than profit. The active management team closely tracks the alignment between operating cash flow (OCF) and net profit. If a company reports positive net profit for several consecutive quarters but operating cash flow remains negative or significantly below net profit over the long term, it often means the company relies on accounts receivable or inventory buildup to maintain book profits—raising concerns about actual cash-generating ability. Such stocks, even if they appear cheap in valuation, will be excluded from the core stock pool.

R&D investment efficiency: Distinguishing “true tech” from “pseudo-growth”

Tech companies must invest in R&D, but “burning money” does not equal “moat.” The research team continuously tracks the relationship between R&D expenditure and subsequent gross margin and revenue growth. Companies with high R&D investment over the long term but declining gross margins and delayed contribution from new products are often signals of technical route obstacles or deteriorating competitive landscape—these companies may appear “cheap” in valuation but have lost growth value.

Portfolio Construction: Removing Poor Assets Through Dynamic Optimization

If financial penetration is the process of “risk elimination,” then portfolio construction is the result of “selecting the best.” The active management approach of Harvest Hong Kong Stock Connect Technology Select Hybrid Initiating Class C (025545) not only involves identifying good companies but also eliminating bad ones.

According to the disclosed investment strategy in the “Prospectus,” the fund manager “evaluates value based on industry-appropriate valuation metrics, selects targets whose stock prices do not fully reflect their long-term investment value, and constructs the portfolio after weighing risk and return.” This means that when a company’s fundamentals change or its risk-return profile worsens, the active management team will make dynamic adjustments.

4. The Value of Active Management: Finding Certainty in Structural Differentiation

The Q4 2025 fund report shows that the top ten holdings of Harvest Hong Kong Stock Connect Technology Select Hybrid Initiating Class C (025545) account for about 60%, concentrated in leading companies like Tencent Holdings, Alibaba-W, Meituan-W, and SMIC, which have stable cash flows and fit the tech theme.

This holding structure exemplifies the active selection logic: choosing leading companies with high operating cash flow and healthy accounts receivable, avoiding valuation traps; selecting hard tech stocks like SMIC and Hua Hong Semiconductor with high R&D efficiency and stable gross margins; continuously monitoring financial indicators and promptly removing stocks with deteriorating fundamentals.

The Hong Kong tech sector has entered a “structural differentiation” phase—only a few high-quality leaders continue to enjoy valuation premiums, while many companies lacking core competitiveness fall into “valuation traps.” Against this backdrop, the core value of active management lies in deep financial analysis, identifying genuine growth amid valuation-profit mismatches, and building a more certain investment portfolio.

Harvest Hong Kong Tech Allocation Observation Toolbox:

【Hong Kong Tech Broad Market · Classic Vehicle】 Harvest Hang Seng Tech ETF Connect Initiating Class (QDII) C (013128): A one-click way to position in internet platform leaders, serving as a flagship broad-based ETF with high industry representativeness. Aims to balance allocation of core Hong Kong tech assets and capture long-term growth momentum of China’s new economy.

【AI Full Industry Chain · High Purity】 Harvest Hang Seng Hong Kong Stock Connect China Tech ETF Connect C (025167): Focuses on “Hong Kong M7” core assets, with deep coverage of AI computing power, terminals, and application industry chains. Pure style, excluding non-tech sectors like pharmaceuticals and traditional auto manufacturing, making it a precise tool for capturing AI core value.

【Selected Core Assets · Active Strategy】 Harvest Hong Kong Stock Connect Technology Select Hybrid Initiating Class C (025545): Uses active management within the Hong Kong Stock Connect scope to dynamically select companies with strong competitive barriers and core advantages. Combining industry trend analysis, aims to discover high-potential assets and generate excess returns beyond the index.