Thesis
Hong Kong has observed an exodus of foreign capital since the 2019 protests that occurred due to the introduction of the National Security Law. Suffice it to say that the HK market has been under-weight foreign investors and has been unloved by the international community for a long period.
In late 2023, the Hang Seng had lost over 50 percent of its value due to a confluence of factors; the Chinese property sector had collapsed, which affected the perception of the knock-on effect for Hong Kong property and retail spending; China policy had shifted away from technology superpowers, thus affecting the valuations of Tencent and Alibaba, the HS Indexes two most active names; and the euphoria of Hong Kong Exchange and Clearning’s initiative to create a bio-tech IPO centers wanned.
But, 2023 possibly could have been the bottom. In Oct 2024 and Feb 2025, the Hang Seng has observed a flurry of trading activity, with market volume exceeding $US18 billion of daily turnover. The pain a several difficult years could be nearing an end.
Thus far, the trading activity has been concentrated in a handful of the most liquid names, which are the technology and financial services sectors. Consequently, on a broader perspective, the value sector has lagged the overall market rally, and may be due for a “catch-up” rally.
Value Stocks (Long) versus Hang Seng (Short)
As many Hong Kong value stocks remain near historically low P/E ratios, and relatively attractive dividend yields, if the overall market rally continues, this represents a timely entry point for asset allocation into HK value stocks.
Analysis
It is painful to even discuss the Hong Kong stock market. While the S&P Index has grown 6x since the 2009 market lows, the Hong Kong market is … flat.
Think about that for a moment. 16 years of no growth. If one were to be a true optimist, perhaps they would at least say that Hong Kong has been a good preservation of wealth investment.
S&P Index (Short) versus Hang Seng (Long)
Over the past 15 years, I do recall there were a couple periods when investors started to get excited about the Hong Kong market.
In 2014/15, the Hong Kong Exchange (HKEx) launched a very innovative program, the Stock Connect, to link the market with Chinese exchanges, to facilitate for northbound and southbound investment from the mainland investors.
In 2021, the HKEx introduced new listing regimes to faciliate listing of pre-revenue biotech companies; correspondingly, over the next two years, Hong Kong was the 2nd largest market globally for IPOs of biotech.
In both occassions we did experience tremendous inflows of trading activity, and these initiatives by the HKEx are certainly an overwhelming success story of innovation and integration with the mainland market. But, sustainable interest in the Hong Kong market has ultimately suffered from the greater macro factors, discussed earlier.
And, thus, the overall recognition and interest in the traditional “boring” sectors of the market, such as resources, infrastructure, utilities, and so on, has lagged.
Presently, (as of Feb 2025) a variety of high dividend stocks remain trading below the overall Hang Seng index. Many are trading at the low-end of their 5-year return, and have a dividend yield in the range of 7 or 8 percent.
Name | Code | Yield |
Shenzhen Expressway | 9.7% | |
LINK Reit | 8.5% | |
Kerry Logistics | 7.8% | |
Yanzhou Coal Mining | 6.5% | |
Want Want China | 5.9% | |
BOC Hong Kong | 5.4% | |
CLP Holdings Limited | 4.7% | |
Bank Of China Ltd | 7.2% | |
China Merchants Bank | 4.8% | |
China Life Insurance | 6.8% | |
Ping An Insurance | 7.3% | |
VTech Holdings Ltd. | 10.9% | |
Jiangsu Expressway | 6.6% | |
China Merchants Holdings | 7.1% | |
PCCW Ltd | 9.2% | |
Power Assets | 6.0% | |
Overall | - | 7.1% |
On a longer-term basis, it should be recognized that many of the HK value stocks were highly correlated to the Hang Seng Index over the past 15-years. They historically trade a premium to the overall market.
Hang_Seng (Short) vs Value Stocks (Long)
In the last five years, they have largely traded sideways, and had periods of strong sell-offs. Over that period, China’s property market has collapsed by over 70 percent and that has had a knock-off effect on the Hong Kong market too.
As a consequence, a number of prominent names, such as LINK REIT, and at all-time lows. The LINK is currently trading at an attractive range with an 8 percent dividend yield, reflecting perceived weakness in the Hong Kong property sector.
LINK REIT (0883.HK)
Similarly, Want Want China is technically due for a rebound, based on cyclical indicators. The stock is trading at the lower bound of its 2-year range, and has a 7 percent dividend yield to provide price support.
Want Want China (0151.HK)
V-Tech Holdings is another example of the numerous small capitalization stocks that have lagged the recent overall market rally.
VTech Holdings (0303.HK)
Considerations
This particular type of investment requires the view that the overall Hong Kong rally of late 2024 / early 2025 has some further legs to go.
Although value stocks require analysis on particular risks of their sector, they offer a discount to the broader market as a whole, and do not involve the speculative risks of the technology sector (which doesn’t pay dividends).
I have no confidence that the Hang Seng is a strong buy and that this time will be different (with respect to the rally). But, since the market has been flat for over 15 years, I think one could conclude that there is limited downside, and I’ll take a 7.1 percent coupon in the meantime.