Hong Kong shares nearing record high as strong company profits draw Chinese money

The Hang Seng Index closes at its highest in a decade and analysts say the good times are set to continue

PUBLISHED : Wednesday, 22 November, 2017, 6:00pm
UPDATED : Wednesday, 22 November, 2017, 11:32pm

Hong Kong stocks surged to within a whisper of an all-time high on Wednesday, propelled to their highest levels in a decade by money pouring in from mainland Chinese investors and by the strength of technology giants including Tencent Holdings, with analysts predicting the good times are going to continue.

The Hang Seng Index has risen 36 per cent so far this year – almost double the 19 per cent for the US Dow Jones Index and well above the 10.5 per cent for the Shanghai index – and closed above 30,000 on Wednesday, a level last seen in late 2007, before the financial crisis.

That prompted Lee Shau-kee, the billionaire chairman of Hong Kong property firm Henderson Land, to say that he would keep a promise he made in 2010 to donate HK$1 billion (US$128 million) to help the needy in the city if the index topped 30,000. A spokeswoman for Lee said 10 education and charity proposals were being considered, with a decision due by the end of the year.

Analysts said that the rise was unlikely to stop in the foreseeable future because strong profits at mainland Chinese companies listed in Hong Kong, including Tencent and financial firms like Ping An Insurance Group and China Construction Bank, are drawing deep-pocketed investors from the mainland to buy Hong Kong shares via the Stock Connect scheme that links markets in the two locations.

“The trend is still there and we don’t see any change in any element supporting the trend in the near term,” said Ken Chen Hao, a strategist at broker KGI in Shanghai. “There’s a big chance that the Hong Kong market will refresh its record high going forward.”

The Hang Seng Index ended the day 0.6 per cent higher at 30,003.49, leaving it 5.4 per cent shy of the all-time high of 31,958.41 set on October 30, 2007. Asia’s major stock markets joined in the gains, with indices from Japan and Korea to Taiwan and China all rising.

But even with the strong gains, Hong Kong stocks still look cheap to global investors, according to one measure that looks at the earnings of companies in an index in relation to the index’s value. That measure puts the Hang Seng Index at a cheaper 13.7 times estimated earnings for this year, compared with 19.5 times for the S&P 500 Index and 15.5 times for the Stoxx Europe 50 Index, according to data compiled by Bloomberg.

Also drawing the interest of investors across the border is the fact that shares of Chinese companies listed in both the mainland and Hong Kong are now 31 times more pricey in the mainland than they are in Hong Kong, according to a gauge by the Hang Seng Bank which monitors price differences between the two markets.

Citic Securities, China’s biggest publicly traded brokerage, said mainland Chinese buying already makes up about 10 per cent of the daily turnover on the Hong Kong exchange.

It recommends buying Hong Kong-listed Chinese financial stocks, citing improving asset quality at banks and accelerating earnings growth for insurers next year.

China’s biggest banks all reported profit increases in their latest earnings statements, while government efforts to reform traditional loss-making industries such as cement and steel are also helping to reduce the amount of bad loans banks hold.

“Earnings growth is strong,” said Karine Hirn, a Hong Kong-based partner with East Capital, which has US$3 billion in assets under management.

“Even the old-economy stocks look better thanks to the [state-owned enterprise] reforms squeezing away some supply.”

New economy stocks, meanwhile, go from strength to strength.

Tencent, which surpassed Facebook as the world’s fifth most-valuable technology company this week, has contributed almost a third of the Hang Seng Index’s gains this year, with its stock surging 125 per cent thanks to earnings that beat expectations. The stock retreated a little on Wednesday after four straight days of gains.

KGI’s Chen sees the buying spreading to hitherto overlooked cheaper shares, such as for example CRRC Corp. Shares in the company, China’s biggest train maker, jumped 5.7 per cent on Wednesday, bringing gains to 6.8 per cent so far this year.