News 2024-06-26

Is There Still Hope for Hong Kong Stocks?

The Hong Kong stock market, historically viewed as one of the poorest performers globally, witnessed an unexpected resurgence at the end of September. This surge was prompted by a series of economic stimulus measures initiated by mainland China. As a result, the Hang Seng Index (HSI.HK), a reflection of the overall market performance, reported a remarkable increase, which has significantly shaped its performance trajectory for the year.

As of now, the Hang Seng Index stands at 20,600.26 points, showing a cumulative increase of 20.84% for the year. This nearly doubles the performance of the Dow Jones Industrial Average (DJI.US), which saw a cumulative rise of 12.80% at 42,514.95 points. Upon examining the graphs of the Hang Seng Index, it becomes evident that the index had relatively unimpressive results at the beginning of the year. However, a turning point occurred around mid-September, leading to a peak of 23,099.78 points on October 7, reflecting a staggering growth of 35.50% before a slight pullback.

The technology sector has similarly mirrored this trend. The Hang Seng Tech Index (HSTECH.HK) is currently at 4,558.10 points, recording a year-to-date increase of 21.09%. A closer look at its trajectory reveals that this sector followed a similar pattern as the main index, lagging until mid-September before surging and ultimately achieving a competitive momentum, akin to what was seen with the Nasdaq Index (IXIC.US), which reported a cumulative increase of 21.75%.

However, following the highs of October, both the Hang Seng Index and the Hang Seng Tech Index experienced a descent. Investors are now left questioning whether this decline is a temporary setback or an indication of a more lasting trend in Hong Kong's stock performance. To navigate this uncertainty, we can explore several angles.

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Firstly, the impact of economic stimulus measures has yet to be fully realized. The substantial rise in both the Hong Kong and A-share markets in mid-September can be attributed primarily to several favorable policies introduced by the central government. The subsequent retreat may be correlated to the delayed implementation of these measures, which did not occur as promptly as investors had anticipated.

Looking at the long-term perspective, the specifics of these policies have not been exhaustively released or executed, making it difficult to assess their real impact on the economy and listed companies. If the announcement of framework measures has already bolstered market confidence, it suggests that there remains a considerable amount of potential within the capital markets; what is currently lacking is a revival in trust among investors.

As the practical ramifications of these policies unfold, they should provide tangible support for the Hong Kong stock market. Notably, the recent decisions by the Bank of Canada and the European Central Bank to lower interest rates serve to stimulate their economies, and the Fed's continuing rate-cutting cycle could unleash a tidal wave of liquidity into the markets.

Another critical point is that Hong Kong stocks remain undervalued despite the recent uptick. Although the stock market in Hong Kong has begun to align its performance with that of U.S. markets this year, a glance at the valuation metrics reveals that it still trails behind. Current data indicates that the Hang Seng Index holds a price-to-earnings ratio (P/E) of only 9.93, starkly lower than the Dow's P/E of 30.17. Similarly, the Hang Seng Tech Index's P/E stands at 25.64, significantly less than the Nasdaq’s 43.76.

Investors are typically keen on riskier assets, weighing both growth prospects and valuations. With the support of central economic stimulus measures and global easing monetary policies, there is optimism that Hong Kong-listed companies will rebound, tackling the downturn that has plagued them in recent years. Furthermore, the Hong Kong market is undervalued compared to neighboring markets, including India's Sensex30 which has a P/E of 23.06, Japan's Nikkei 225 at 21.27, and Korea's KOSPI at around 14.61.

Not to be overlooked are the heavyweight constituents of the Hang Seng Index, such as Tencent (00700.HK), Alibaba (09988.HK), JD.com (09618.HK), and Meituan (03690.HK). These companies could significantly benefit from their own reforms and the broader economic recovery opportunities. According to September data, Alibaba, Tencent, and Meituan rank as the top three companies weighted in the Hang Seng Index with respective weights of 9.18%, 7.86%, and 7.82%. Within the Hang Seng Tech Index, JD.com, Meituan, and Alibaba occupy the top positions with weights of 9.39%, 8.53%, and 8.10%.

These four tech giants encompass a vast array of services that cater to consumers and businesses alike, spanning areas from e-commerce and logistics to food delivery and financial services, positioning them well to capitalize on stimulus measures. Beyond benefiting from government incentives, these companies possess formidable standings within their respective sectors. For instance, Tencent is a leading global social media giant, consistently innovating within its WeChat platform through various monetization models, including mini-programs and advertisements.

As per Wind data, Tencent's expected P/E for 2024 is projected at a mere 20.43 times against a backdrop of its current share price of HKD 420.80, significantly trailing Facebook's parent company Meta (META.US), which has an expected P/E of 26.93.

Alibaba, on the other hand, has been revamping its organizational structure to streamline its operations and enhance cost efficiency. Currently priced at HKD 93.60, Wind estimates Alibaba's P/E for the fiscal year 2025 to be just 16.29, comparatively lower than its U.S. e-commerce peer Ebay (EBAY.US), which stands at 21.58, and more attractive than the Korean platform Coupang, which is still grappling with losses despite a market cap that exceeds that of profitable Ebay.

Food delivery service Meituan has also reported improvements across its delivery and new business segments. In the first half of 2024, its adjusted EBITDA margin improved by 3.8 percentage points year-on-year, reaching 14.8%, and adjusted net profits surged by 60.4%, amounting to RMB 21.095 billion. Currently trading at HKD 188.50, Wind projects Meituan's expected P/E for 2024 at 35.23; this is noteworthy, especially when comparing it to the U.S. counterpart DoorDash (DASH.US), which is currently operating at a loss, with forecasts suggesting it may break even by 2024; however, its expected profitability appears negligible relative to its market cap, leaving Meituan’s valuation as considerably more reasonable in the current landscape.

JD.com, operating in the same segment as the self-operated e-commerce business, is currently valued at HKD 154.50, with an expected P/E ratio of 16.11 for 2024. In comparison, U.S.-based Amazon (AMZN.US) shows an exorbitantly high expected P/E of 42.18.

These four prominent technology companies are also actively engaging in significant share buybacks. Alibaba and JD.com are particularly active in the U.S. markets where, according to Wind statistics, they have repurchased a total of USD 4.786 billion and USD 2.234 billion respectively this year, translating to approximately HKD 37.181 billion and HKD 17.355 billion. Meanwhile, Tencent and Meituan hold the top spots for the largest buybacks among technology firms in the Hong Kong market, having repurchased respectively HKD 90.558 billion and HKD 28.158 billion this year.

Moreover, these four tech giants are likely to continue engaging in further repurchases and dividend distributions, with JD.com announcing a USD 5 billion share buyback program in August, Meituan stating it would periodically buy back up to USD 1 billion, and Alibaba maintaining a repurchase capacity of USD 22 billion (approximately HKD 170.9 billion) until September 30, 2024.

The combination of these financial strategies alongside their robust fundamentals should provide substantial support for their stock prices. Given that these technology stocks are heavyweights within the larger index, their stability can play a crucial role in steadying the index and, by extension, the overall market.

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