Are Hong Kong shares worth their high prices?

Hong Kong share prices, although currently faltering, have reached a level where they are being described as 'dangerously overheated' or, as optimists would put it, 'finally realising their potential'. However, both optimists and pessimists agree that the local market today is far from normal and that Hong Kong share valuations are moving out of line with other markets.

This is a good time to consider a question shareholders rarely ask, namely: how much are their shares worth? The basic answer is simple: shares are worth whatever price they have reached in stock market trading. But there is another way of looking at this that goes to the roots of equity investment.

A person buying shares becomes a member of a company and, as the name implies, is entitled to a share in its profits. He also takes on the burden of loss. Hence, investors are advised to pay closer attention to the value of their shares.

This requires judgment and there are two most commonly applied ratios for measuring value: yield and price/earnings ratios.

The yield figures, presented alongside stock price listings, should properly be described as 'dividend yield per share' because they do not reflect earnings, merely the amount of profits the company directors decide to distribute to shareholders.

In Hong Kong companies tend to distribute a high percentage of their profits because the major shareholders derive the bulk of their income from dividend payments, as opposed to salaries which are subject to taxation.