THE MYTH OF “LOW” VALUATION
OF STOCKS IN THE
HONG KONG MARKET:
TRUE OPPORTUNITIES TO
INVESTORS AND ISSUERS
Chief China Economist’s Office
July 2016
2
AGENDA
2
1
3
4
General Market Perceptions
Price Differentials in the Secondary Market
Price Differentials in the Primary Market
Sources of Difference
5 Opportunities Offered by the Hong Kong Market
6 Conclusion
3
DISCLAIMER
The information contained in this presentation is for general informational purposes only and does not constitute an offer, solicitation, invitation or recommendation to subscribe for or purchase any securities or other products or to provide any investment advice of any kind. This presentation is not directed at, and is not intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Hong Kong Exchanges and Clearing Limited (“HKEX”) to any registration requirement within such jurisdiction or country. This presentation contains forward-looking statements which are based on the current expectations, estimates, projections, beliefs and assumptions of HKEX about the businesses and the markets in which it and its subsidiaries operate or aspires to operate in. These forward-looking statements are not guarantees of future performance and are subject to market risk, uncertainties and factors beyond the control of HKEX. Therefore, actual outcomes and returns may differ materially from the assumptions made and the statements contained in this presentation. The implementation of these initiatives is subject to a number of external factors, including government policy, regulatory approval, the behaviour of market participants, competitive developments and, where relevant, the identification of and successful entry into agreements with potential business partners. As such, there is no guarantee that the initiatives described herein will be implemented, or that they will be implemented in the form and timeframe described herein. Although the information contained in this presentation is obtained or compiled from sources believed to be reliable, HKEX does not guarantee the accuracy, validity, timeliness or completeness of the information or data for any particular purpose, and shall not accept any responsibility for, or be liable for, errors, omissions or other inaccuracies in the information or for the consequences thereof. The information set out in this presentation is provided on an “as is” and “as available” basis and may be amended or changed. It is not a substitute for professional advice which takes account of your specific circumstances and nothing in this document constitutes legal advice. HKEX shall not be responsible or liable for any loss or damage, directly or indirectly, arising from the use of or reliance upon any information provided in this presentation.
4
1. General Market Perceptions
Valuation by market capitalisation (MC)-weighted PE ratio of market index
• Low PE ratio of Hang Seng Composite Index vs A-share indices
• A shares at a premium as measured by the Hang Seng China AH Premium Index
• Superficially, the Hong Kong market has lower valuation than the Mainland A-share
market
Data source: Wind
Month-end PE ratios of HK and Mainland Hang Seng China AH Premium Index
9.12
14.16
47.53
0
10
20
30
40
50
60
70
80
01/2
010
03/2
010
05/2
010
07/2
010
09/2
01
0
11/2
010
01/2
011
03/2
011
05/2
011
07/2
011
09/2
011
11/2
011
01/2
012
03/2
012
05/2
012
07/2
012
09/2
012
11/2
012
01/2
013
03/2
013
05/2
013
07/2
013
09/2
013
11/2
013
01/2
014
03/2
01
4
05/2
014
07/2
014
09/2
014
11/2
014
01/2
015
03/2
015
05/2
015
07/2
015
09/2
015
11/2
015
01/2
016
03/2
016
05/2
016
PE
ra
tio
(ti
me
s)
Month/Year
Month-end PE ratios of Hong Kong, Shanghai and Shenzhen markets (2010 - May 2016)
HS Composite SSE A SZSE A CSI300
SSE A
Hang Seng Composite
SZSE A
CSI300
SSE A
Hang Seng Composite
SZSE A
CS
11.84
0
1,000
2,000
3,000
4,000
5,000
6,000
80
90
100
110
120
130
140
150
160
04
/01
/201
0
04
/03
/201
0
04
/05
/201
0
04
/07
/201
0
04
/09
/201
0
04
/11
/201
0
04
/01
/201
1
04
/03
/201
1
04
/05
/201
1
04
/07
/201
1
04
/09
/201
1
04
/11
/201
1
04
/01
/201
2
04
/03
/201
2
04
/05
/201
2
04
/07
/201
2
04
/09
/201
2
04
/11
/201
2
04
/01
/201
3
04
/03
/201
3
04
/05
/201
3
04
/07
/201
3
04
/09
/201
3
04
/11
/201
3
04
/01
/201
4
04
/03
/201
4
04
/05
/201
4
04
/07
/201
4
04
/09
/201
4
04
/11
/201
4
04
/01
/201
5
04
/03
/201
5
04
/05
/201
5
04
/07
/201
5
04
/09
/201
5
04
/11
/201
5
04
/01
/201
6
04
/03
/201
6
04
/05
/201
6
Daily closings of Hang Seng China AH Premium Index (2010 - May 2016)
Hang Seng China AH Premium Index (LHS)
SSE A-Share Index (RHS)
HSI (rebased on 1/12/2014 at SSE A-Share Index level)
A s
ha
res
at
pre
miu
mA
sh
are
sa
t d
isco
un
t
New premium range
5
2. Price Differentials in the Secondary Market
Differentials across indices in a market
Data source: Wind
• Valuation of different Mainland
stocks listed in HK also varies.
• On Shanghai Stock Exchange (SSE)
and Shenzhen Stock Exchange
(SZSE), the more smaller-sized
stocks are included in an index, the
higher the PE ratio tends to be.
PE of key indices in HK vs Shanghai
PE of key indices on SSE PE of key indices on SZSE
8.87
6.55
12.38
9.25
0
5
10
15
20
25
01/2
010
03/2
010
05/2
010
07/2
010
09/2
01
0
11/2
010
01/2
011
03/2
011
05/2
011
07/2
011
09/2
011
11/2
011
01/2
012
03/2
012
05/2
012
07/2
012
09/2
012
11/2
012
01/2
013
03/2
013
05/2
013
07/2
013
09/2
013
11/2
013
01/2
014
03/2
01
4
05/2
014
07/2
014
09/2
014
11/2
014
01/2
015
03/2
015
05/2
015
07/2
015
09/2
015
11/2
015
01/2
016
03/2
016
05/2
016
PE
ra
tio
(ti
me
s)
Month/Year
Month-end PE ratios of key indices in Hong Kong and Shanghai (2010 - May 2016)
HSI HSCEI HSCCI SSE 50
HSCEI
HSI
SSE 50
HSCCI
14.16
9.2510.31
41.45
0
10
20
30
40
50
60
70
01/2
010
03/2
010
05/2
010
07/2
010
09/2
010
11/2
010
01/2
011
03/2
011
05/2
011
07/2
011
09/2
011
11/2
011
01/2
012
03/2
012
05/2
012
07/2
012
09/2
012
11/2
012
01/2
013
03/2
013
05/2
013
07/2
013
09/2
013
11/2
013
01/2
014
03/2
014
05/2
014
07/2
014
09/2
014
11/2
014
01/2
015
03/2
015
05/2
015
07/2
015
09/2
015
11/2
015
01/2
016
03/2
016
05/2
016
Tim
es
Month/Year
Month-end PE ratio of key indices in Shanghai (2010 - May 2016)
SSE A SSE 50 SSE 180 SSE 380
SSE 50
SSE A
SSE 380
SSE 180
47.53
31.70
56.34
77.71
0
20
40
60
80
100
120
140
160
01/2
01
0
03/2
01
0
05/2
01
0
07/2
01
0
09/2
010
11/2
01
0
01/2
01
1
03/2
01
1
05/2
01
1
07/2
01
1
09/2
01
1
11/2
01
1
01/2
01
2
03/2
01
2
05/2
01
2
07/2
01
2
09/2
01
2
11/2
01
2
01/2
01
3
03/2
01
3
05/2
01
3
07/2
01
3
09/2
01
3
11/2
01
3
01/2
01
4
03/2
014
05/2
01
4
07/2
01
4
09/2
01
4
11/2
01
4
01/2
01
5
03/2
01
5
05/2
01
5
07/2
01
5
09/2
01
5
11/2
01
5
01/2
01
6
03/2
01
6
05/2
01
6
Tim
es
Month/Year
Month-end PE ratio of key indices in Shenzhen (2010 - May 2016)
SZSE A SZSE Component SME ChiNext
ChiNext
SME
SZSE A
SZSE Component
6
2. Price Differentials in the Secondary Market
Differentials across company size
Source: HKEX analysis based on data from Wind for SSE and SZSE, HKEX market data for HKEX
• On SSE and SZSE, the larger the
company size (measured by MC),
the lower the PE ratio tends to be.
• In the HK market, the PE is rather
stock specific, irrespective of the
company size.
PE by MC on HKEX
PE by MC on SSE PE by MC on SZSE
0
10
20
30
40
50
60
70
80
90
100
0 500 1,000 1,500
PE
ra
tio
by
(tim
es
)
Market capitalisation (RMB bil)
Scatterplot of PE ratio and MC of listed A shares on SSE (as of 31/5/2016)(Excluding PE ratios > 100 times)
Rank correlation coefficient:-0.4341*
* Statistically significant at 0.1% level
0
10
20
30
40
50
60
70
80
90
100
0 50 100 150 200 250
PE
ra
tio
by
(tim
es
)
Market capitalisation (RMB bil)
Scatterplot of PE ratio and MC of listed A shares on SZSE (as of 31/5/2016)(Excluding PE ratios > 100 times)
Rank correlation coefficient:-0.2393*
* Statistically significant at 0.1% level
0
10
20
30
40
50
60
70
80
90
100
0 500 1,000 1,500 2,000
PE
ra
tio
by
(tim
es
)
Market capitalisation (HKD bil)
Scatterplot of PE ratio and MC of listed stocks on HKEX (as of 31/5/2016)(Excluding PE ratios > 100 times)
Rank correlation coefficient:0.0294*
* Statistically insignificant
7
2. Price Differentials in the Secondary Market
Differentials across industrial sectors
• SSE stocks in the relatively mature industries of Financials and Utilities had similarly low (MC-weighted) PE as their HK counterparts.
• HK-listed H shares had higher (MC-weighted) PE than the HK blue chips in the Industrials and Energy sectors but lower (MC-weighted) PE in other sectors where both had constituent stocks for comparison.
• The SZSE market, consisting of mostly small growth companies, had the highest (MC-weighted) PE across almost all sectors.
• Industrial sector may not be a crucial factor in stocks’ PE but stocks in certain sectors, by sector nature, may tend to have higher or lower PE than other sectors.
(See chart on next slide)
8
MC-weighted PE by sector in Hong Kong and Mainland (31 May 2016)
Source: HKEX analysis based on GICS classification, MC and earnings data from Bloomberg.
2. Price Differentials in the Secondary Market
Differentials across industrial sectors
7.54
7.36
11.71
27.14
14.50
7.27
5.42
18.97
42.95^
5.13
8.95
8.70
11.72
7.73
19.24
21.02
38.45
37.65
14.35
50.02
31.42
59.97
49.41
7.61
16.36
14.89
30.58
34.86
6.95
11.19
9.59
24.88
0 50 100
Financials
Industrials
Consumer Discretionary
Information Technology
Materials
Times
MC-weighted PE ratio by sector of HK and Mainland indices(31 May 2016)
A50
CSI300
SZSE Composite
SSE Composite
HSCEI
HSI
HK (All market)
^ Based on a singlecompany only
18.12
18.70
18.12
13.80
14.21
18.95
19.26
14.84
14.04
19.69
17.93^
21.47^
8.36
11.84^
32.83
28.61
31.29
15.71
32.49
54.12
32.72
43.42
17.16
97.73^
32.63
20.33
28.95
14.32
32.49
33.00
20.05^
72.76^
13.52
31.93^
0 50 100
Energy
Consumer Staples
Health Care
Utilities
TelecommunicationServices
Times
MC-weighted PE ratio by sector of HK and Mainland indices(31 May 2016)
A50
CSI300
SZSE Composite
SSE Composite
HSCEI
HSI
HK (All market)
^ Based on a singlecompany only
9
2. Price Differentials in the Secondary Market
Differentials across A-H stocks
Source: HKEX analysis based on GICS classification and price data from Bloomberg.
• The larger the company size, the smaller the A-H price premium irrespective of the industrial sector (believed to owe to the negative relationship between stock valuation and MC for stocks listed in the Mainland).
A-H price premium vs MC (31 May 2016) A-H price premium across sector (31 May 2016)
-100%
0%
100%
200%
300%
400%
500%
600%
700%
0 500 1,000 1,500
Pri
ce
pre
miu
m
Stock (A+H) market capitalisation (HKD bil)
Scatterplot of AH share price premium (as of 31/5/2016)
Rank correlation coefficient:-0.5929*
* Statistically insignificant
38%
119%
130%
126%
111%
115%
25%
62%
82%
0% 20% 40% 60% 80% 100% 120% 140%
Financials
Industrials
Consumer Discretionary
Information Technology
Materials
Energy
Consumer Staples
Health Care
Utilities
Average A-shares price premium over H shares
Average A-H price premium across industrial sector (31 May 2016)
Note: Excluding two cases without price data.
Price premium differentials are statistically insignificant
across sectors
10
3. Price Differentials in the Primary Market
• During the period of 2012 to May 2016, IPOs in Hong Kong had higher valuation than
IPOs in Shanghai in a number of sectors (and higher valuation than IPOs in Shenzhen for some of these sectors) — Consumer Discretionary, Consumer Staples, Energy, Health care and Utilities.
Source: HKEX analysis based on data from Bloomberg.
MC-weighted PE of IPOs in HK vs Mainland (2012 – May 2016)
By year By industrial sector
18.319.9
17.7
23.3
13.9
23.5
21.2
24.2
18.2
33.6
24.4
19.9 20.1
0
5
10
15
20
25
30
35
40
2012 2013 2014 2015 Jan-May 2016
PE
rati
o (
tim
es)
MC-weighted PE ratio of IPOs in Hong Kong and Mainland by year (2012 - May 2016)
HK Shanghai Shenzhen
[53] [22] [127] [94] [0] [0] [95] [41] [81] [102] [89] [129] [26] [20] [28]
[ ] No. of IPOs (excluding cases with negative or null PE value)
[ ] No. of IPOs
Note: Excluding cases with negative or null PE value.
26 29 30
13
43
1420 17
28
169
2125
9
2922 22 25
20 2126 27
35
2628
25 28 24
38
0
20
40
60
80
100
120
140
160
180
Co
nsu
me
rD
iscre
tio
nary
Co
nsu
me
rS
tap
les
Ene
rgy
Fin
ancia
ls
He
alth
Ca
re
Ind
ustr
ials IT
Ma
teri
als
Utilities
Te
lecom
Serv
ices
PE
rati
o (
tim
es)
MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (2012 - May 2016)
HK Shanghai Shenzhen
11
25
21
22
25
22
29
22
17
28
7
24
30
22
20
18
29
32
8
47
11
36
14
20
0 10 20 30 40 50
ConsumerDiscretionary
ConsumerStaples
Energy
Financials
Health Care
Industrials
IT
Materials
Utilities
PE ratio (times)
MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (2014)
HK Shanghai Shenzhen
[6][3][0]
[7][3][8]
[9][7][24]
[16][11][23]
[4][4][9]
[14][0][1]
[0][1][0]
[8][4][5]
[31][8][11]
[ ] No. of IPOs
Note: Excluding cases with negative or null PE value.
3. Price Differentials in the Primary Market
• IPO in Hong Kong had higher valuation than those in the Mainland for multiple sectors in each year after 2013.
Source: HKEX analysis based on data from Bloomberg.
MC-weighted PE of IPOs in HK vs Mainland by sector
2012 2014
Note: IPOs in the Mainland market was suspended in 2013.
Excluding cases with negative or null PE ratios.
MC-weighted PE of IPOs in HK higher than in Mainland
Utilities
Materials
IT
Industrials
Health Care
Financials
Energy
Consumer
Staples
Consumer
Discretionary 33
39
47
48
35
30
38
27
38
24
16
20
34
20
14
13
18
22
11
10
11
19
0 10 20 30 40 50 60
ConsumerDiscretionary
ConsumerStaples
Energy
Financials
Health Care
Industrials
IT
Materials
Utilities
PE ratio (times)
MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (2012)
HK Shanghai Shenzhen
[2][0][2]
[10][5][20]
[5][3][38]
[12][6][31]
[0][0][12]
[6][0][1]
[1][1][2]
[2][0][5]
[15][7][16]
[ ] No. of IPOs
Note: Excluding cases with negative or null PE value.
Utilities
Materials
IT
Industrials
Health Care
Financials
Energy
Consumer
Staples
Consumer
Discretionary
[ ] No. of IPOs [ ] No. of IPOs
12
Utilities
Materials
IT
Industrials
Health Care
Financials
Energy
Consumer
Staples
Consumer
Discretionary 21
20
22
20
15
23
19
16
20
19
21
37
10
15
13
42
0 5 10 15 20 25 30 35 40 45 50
ConsumerDiscretionary
ConsumerStaples
Financials
Health Care
Industrials
IT
Materials
PE ratio (times)
MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (Jan-May 2016)
HK Shanghai Shenzhen
[0][5][2]
[2][0][4]
[6][3][16]
[1][1][0]
[7][0][1]
[0][2][4]
[5][4][1]
[ ] No. of IPOs
Note: Excluding cases with negative or null PE value.
Materials
Consumer
Discretionary
IT
Industrials
Health Care
Financials
Consumer
Staples
21
20
21
22
21
18
20
21
22
21
29
21
19
21
21
21
33
26
41
13
43
16
18
12
96
169
0 20 40 60 80 100 120 140 160 180
ConsumerDiscretionary
ConsumerStaples
Energy
Financials
Health Care
Industrials
InformationTechnology
Materials
Utilities
TelecomServices
PE ratio (times)
MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (2015)
HK Shanghai Shenzhen
[1][0][0]
[2][2][0]
[5][14][23]
[28][22][40]
[19][3][0]
[10][6][3]
[ ] No. of IPOs
[10][7][28]
[12][7][13]
[1][3][2]
[14][25][20]
Note: Excluding cases with negative or null PE value.
3. Price Differentials in the Primary Market
Source: HKEX analysis based on data from Bloomberg.
MC-weighted PE of IPOs in HK vs Mainland by sector
2015 Jan – May 2016
Note: Excluding cases with negative or null PE ratios.
MC-weighted PE of IPOs in HK higher than in Mainland
Telecom
Services
[ ] No. of IPOs [ ] No. of IPOs
13
4. Sources of Difference
Market norms of PE ratio
• Each stock market in the world1, irrespective of the degree of openness, tends to maintain its “normal” level of PE ratio during a period of time — the market norm.
• Possible underlying factors: industry composition, listed companies’ stage of development, investor base or structure, investor maturity and their investment behavior.
1 The Korean market is a special case where the PE ratio fluctuated a lot.
Data source: Wind for HSI Composite, Bloomberg for other indices (data is not available for KOSPI during Mar-Aug 2013).
Month-end PE ratios of selected world key indices (Jan 2011 – May 2016)
5
10
15
20
25
30
35
01/2
01
1
03/2
01
1
05/2
01
1
07/2
01
1
09/2
01
1
11/2
01
1
01/2
01
2
03/2
012
05/2
01
2
07/2
01
2
09/2
01
2
11/2
01
2
01/2
01
3
03/2
01
3
05/2
01
3
07/2
01
3
09/2
01
3
11/2
01
3
01/2
014
03/2
01
4
05/2
01
4
07/2
01
4
09/2
01
4
11/2
01
4
01/2
01
5
03/2
01
5
05/2
01
5
07/2
01
5
09/2
01
5
11/2
01
5
01/2
01
6
03/2
01
6
05/2
01
6
PE
rati
o (
tim
es)
Month-end PE ratio of world key indices (2011 - May 2016)
HSI Composite DJIA S&P500 Nasdaq100 Nikkei 225 KOSPI FT STI
HSI Composite
DJIA
S&P500
Nasdaq100
KOSPI
FT STI
Nikkei 225
Source: Wind for HSI Composite, Bloomberg for other indices (data is not available for KOSPI during Mar-Aug 2013).
14
4. Sources of Difference
Industry composition of listed companies
• Markets with more weighting by MC in new economy industries (e.g. technology and health care) would tend to have a higher MC-weighted average PE level.
• Markets with more weighting in the financial industry would tend to have a lower PE level.
* As at 31 May 2016; source: HKEX analysis based on data from Bloomberg
^ As at end-2015; source: “The Nasdaq-100, Trading Innovation in Large-Cap Growth”, Feb 2016
** As at 31 May 2016; source: HKEX analysis based on data from Bloomberg
HK vs US market HK vs Mainland market**
MC weighting PE
Financials IT Health care
All HK
stock* 43% 10% 2% 9.12
DJIA^ 20% 14% 12% 15.61
S&P500^ 17% 17% 14% 19.18
Nasdaq
100^ 0.1% 52% 14% 23.50
MC weighting PE
Financials IT Health care
HSCEI 81% — 1% 5.78
FTSE A50 61% 2% 1% 9.06
HSI 48% 13% — 9.68
CSI300 42% 5% 4% 11.83
SSE 37% 4% 4% 13.47
SZSE 10% 22% 10% 35.94
15
4. Sources of Difference
Dividend yield as part of stock valuation
Data source: Wind
• Indices having higher PE ratio tend
to have a lower dividend yield and
vice versa, probably due to the
nature of the constituents (growth
stocks vs mature stocks).
• Stocks/markets with low PE may be
compensated by high dividend
yields in total return.
Dividend yield in HK, Shanghai and US
Dividend yield of key indices in Shanghai Dividend yield of key indices in Shenzhen
4.12
5.27
4.25
3.19
0.74 0.93
1.20 1.19 1.11 1.15
1.81
2.10 2.14 1.48 1.90
2.08
0
1
2
3
4
5
6
7
01/2
010
03/2
010
05/2
010
07/2
010
09/2
010
11/2
010
01/2
011
03/2
011
05/2
011
07/2
011
09/2
011
11/2
011
01/2
012
03/2
012
05/2
012
07/2
012
09/2
012
11/2
012
01/2
013
03/2
013
05/2
013
07/2
013
09/2
013
11/2
013
01/2
014
03/2
014
05/2
014
07/2
014
09/2
014
11/2
014
01/2
015
03/2
015
05/2
015
07/2
015
09/2
015
11/2
015
01/2
016
03/2
016
05/2
016
Per
cen
t (%
)
Month/Year
Month-end 12-mth dividend yield of key indices in Hong Kong, Shanghai & US (2010 - May 2016)
HSI HSCEI HSCCI SSE 50 Nasdaq 100 S&P 500
HSCEI
HSI
SSE 50
HSCCI
S&P 500
Nasdaq 100
1.98
3.19
2.70
0.99
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
01/2
010
03/2
010
05/2
010
07/2
010
09/2
010
11/2
010
01/2
011
03/2
011
05/2
011
07/2
011
09/2
011
11/2
011
01/2
012
03/2
012
05/2
012
07/2
012
09/2
012
11/2
012
01/2
013
03/2
013
05/2
013
07/2
013
09/2
013
11/2
013
01/2
014
03/2
014
05/2
014
07/2
014
09/2
014
11/2
014
01/2
015
03/2
015
05/2
015
07/2
015
09/2
015
11/2
015
01/2
016
03/2
016
05/2
016
Per
cen
t (%
)
Month/Year
Month-end 12-mth dividend yield of key indices in Shanghai (2010 - May 2016)
SSE A SSE 50 SSE 180 SSE 380
SSE 50
SSE A
SSE 380
SSE 180
0.59
0.81
0.52
0.27
0.0
0.5
1.0
1.5
2.0
2.5
01/2
010
03/2
010
05/2
010
07/2
010
09/2
010
11/2
010
01/2
011
03/2
011
05/2
011
07/2
011
09/2
011
11/2
011
01/2
012
03/2
012
05/2
012
07/2
012
09/2
012
11/2
012
01/2
013
03/2
013
05/2
013
07/2
013
09/2
013
11/2
013
01/2
014
03/2
014
05/2
014
07/2
014
09/2
014
11/2
014
01/2
015
03/2
015
05/2
015
07/2
015
09/2
015
11/2
015
01/2
016
03/2
016
05/2
016
Tim
es
Month/Year
Month-end 12-mth dividend yield of key indices in Shenzhen (2010 - May 2016)
SZSE A SZSE Component SME ChiNext
ChiNext
SME
SZSE ASZSE Component
16
4. Sources of Difference
Mainland’s specific factors
Mainland Hong Kong
• Dominance of local retail investors
• Investor preference in small-sized,
high-risk stocks for higher potential
gains
• Smaller the company size, higher
the PE
• High turnover velocity (2015):
SSE — 499%
SZSE — 521%
• Investors would be willing to pay
more for stocks with higher liquidity
• Lack of structured products and
equity derivatives investment
concentrated in stocks, lacking
arbitrage and hedging opportunities
• Dominance of global professional,
institutional investors
• Even retail investors are relatively
mature
• Less speculative trading and more
reliance on stock fundamentals
• Turnover velocity not as high: 106%
(in 2015)
• Partial connectivity through
Shanghai-HK Stock Connect is
limited for levelling out the liquidity
differential
• Abundant structured products and
arbitrage/hedging tools like index
futures and options
• Supporting rational price seeking in
stocks
Investor
preference
Liquidity
premium
Hedging/arbitrage
opportunities
17
5. Opportunities Offered by the Hong Kong Market
Benefit from higher dividend yield than holding corresponding A shares on
the same stock fundamentals
Lower-priced
H shares of AH
stocks
Enhanced capability to cope with risky market conditions and exposed to
more profit opportunities than in the Mainland
Comprehensive
range of investment
tools
E.g. consumer goods, energy and health care Higher IPO pricing
in certain industries
Plenty of room for more stocks in new economy industries like IT and health
care
Market appetite for
new economy
stocks
Enabling timely commercial decision of IPO and post-listing fund raising
activities
More flexible IPO
and post-listing
fund raising regime
A platform with international investment practice and regulatory standards
and professional investor base to offer issuers opportunities in international
branding and global business expansion
International listing
platform
18
6. Conclusion
Myth
“Low” valuation of stocks
listed in Hong Kong vis-à-vis
Mainland China
Facts
• Mainland market has
positive valuation
differentials at the macro
level
• Hong Kong market has
positive valuation
differentials at the micro
level of individual stocks
and industries
Sources of price
differentials
• Difference in market
characteristics — each
market has its “market
norm” of PE level
• Industry composition
varies
• Dividend yield as part of
stock valuation
• Mainland investors’
preference for small-sized
high-risk stocks
• Liquidity premium in the
Mainland
• Lack of investment
opportunities and
instruments for
hedging/arbitrage
Opportunities offered by
HK
• Lower-priced higher yield
H shares of A-H stocks
• Profit opportunities and
risk management offered
by hedging/arbitrage tools
• Higher pricing in certain
industry sectors
• Market appetite for stocks
in new economy
industries
• Flexible IPO and fund
raising regime
• International listing
platform