How to buy Hong Kong stocks in 2024? Find the local dividend havens

With foreign investors pulling out and the Hang Seng Index at a four-year slump, overlooked local firms delivering historically high dividend yields offer great value

Ronald Chan

Published: 9:30am, 10 Jan 2024

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Investors have some important decisions to make in 2024. This year will see 2 billion people across 50 countries go to the polls, including in the United States, United Kingdom, India, Indonesia and Taiwan. These elections have the potential to create immense economic turbulence and uncertainty, which are likely to affect investor confidence and global stock markets.

Closer to home, investors in the Hong Kong stock market have had to adjust to a long losing streak. The Hang Seng Index has dropped for a fourth year in a row, a record-breaking underperformance since the creation of the index in 1969. Investors have good reason to feel aggrieved when they see the Hang Seng being outperformed by other stock market indices around the world.

Over the same four years, for example, the Nasdaq composite index has increased by 61 per cent and the S&P 500 by 45 per cent. For those who had invested in the Hang Seng Index, however, HK$1,000 put in the beginning of 2020 would be worth about HK$580 (US$74) today. Ouch.

On top of stock markets performing well globally, investors have had many reasons to sell down mainland China and Hong Kong over the past few years. Geopolitics, regulatory uncertainty created by the Chinese government and the crisis in the property sector, which affected close to a third of the Chinese economy, have battered the stock markets and disappointed everyone.

With China increasingly cited as uninvestable, international investors have been reducing their exposure to it through Hong Kong from 2021. According to a Morgan Stanley report, foreign capital accounted for 37 per cent, on average, of market participation at the Hong Kong stock exchange from 2016 to 2020. This, however, began to drop afterwards, to 27 per cent in 2021, then 23 per cent in 2022. As of last September, the figure stood at 25 per cent.

So where do opportunities exist in Hong Kong? The answer: hidden value lies in many overlooked Hong Kong-listed local companies, seemingly trading in their own vacuum.

The exodus of international capital has mainly dampened the stock prices of mainland companies. The remainder, largely local Hong Kong companies, are smaller by market capitalisation and less covered by market analysts and international investors, so their sell-off has been more short-lived and less severe.

As international capital thins out, Hong Kong has looked to attract more mainland investors via the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes.

But while these investors have shown a steady interest in Hong Kong, their main stock selections remain primarily mainland Chinese companies. The reality is that Hong Kong’s local companies still feel too unknown and “foreign” to them.

The Hong Kong stock exchange is home to some 2,600 public companies, with about 300 being Hong Kong local companies. Among these, around 190 pay dividends and, of this 190, around 70 generate sustainable free cash flow, have reputable business operations, high quality management and, most importantly, have a long-term track record of paying out dividends.

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The stark reality is few investors are looking at these companies. This may be an opportunity missed as they are delivering historically high dividend yields, and at the same time, trading at historical low valuations when considering accepted metrics such as price-to-book, price-to-sales and price-to-earnings ratios.

Great examples would be infrastructure company NWS, toy manufacturer VTech and the real estate investment trust Link Reit. Annualised dividends for these companies are eight per cent, 10 per cent and over 6 per cent, respectively.

Many of these companies have fallen to the equivalent of their investment ocean floor. And since September, many of them have been outperforming the market.

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For reference, the Hang Seng Utilities Index, which can be considered a gauge of high-dividend local companies, had returned 8.2 per cent up from October last year to January 5 this year, while the Hang Seng Index dropped 7.2 per cent during the same period.

Hong Kong’s stock market is among the 10 largest in the world. In terms of dividends paid to investors, it has ranked among the top five over the last several years. With an uncertain outlook for 2024 at best, I believe local Hong Kong companies offer a valuable dividend haven. If interest rates begin to drop later in the year, these dividends may become even more attractive.

To tweak a phrase from billionaire investor Warren Buffett, buy Hong Kong in 2024. I am.

Ronald Chan is the founder and chief investment officer of Chartwell Capital Limited, a Hong Kong-based asset management company