Hong Kong Firms Turn On the Charm Ahead of Shenzhen Investment Link

November 20, 2016, 4:35 PM UTC
A thin haze of pollution sits over the city's skyline on a clear day in Hong Kong on February 1, 2013. Emissions from factories in southern China, which seep over Hong Kong's border, combined with local emissions from power plants and transport, generate an almost daily thick blanket of haze over the teeming metropolis. AFP PHOTO / Philippe Lopez (Photo credit should read PHILIPPE LOPEZ/AFP/Getty Images)
Photograph by Philippe Lopez ‚ AFP via Getty Images

Scores of Hong Kong-listed companies—many small—are on a roadshow blitz in China to whet the appetite of mainland investors ahead of the launch of a cross-border investment link between Shenzhen and Hong Kong.

Mainland investors are enthusiastic, viewing the cross-border channel as a way to buy relatively cheap growth companies and hedge against a rapidly falling yuan, which hit an eight-year low on Friday against the dollar.

“Valuations of Hong Kong stocks are very low. In addition, the Hong Kong dollar is pegged to the U.S. dollar, so when you buy Hong Kong dollar assets, you’re actually buying into the U.S. dollar,” Ma Hong, general manager of Shanghai TopFund Investment Management Co, said at an event in Shanghai promoting the Hong Kong-Shenzhen Connect trading link.

“For us, the Hong Kong market represents a strong currency plus cheap assets … we need to embrace it.”

China and Hong Kong have not specified when the link would open, but the head of Hong Kong Exchanges and Clearing Ltd. said on Friday it would go live “in a few more days.”

The link would allow Chinese investors access to about 100 smaller companies listed in Hong Kong. The existing Shanghai-to-Hong Kong link allows investment in 318 bigger Hong Kong-listed companies.

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Since the Shanghai link opened two years ago, Chinese investors have bought a net 294.7 billion yuan ($42.8 billion) of Hong Kong shares, more than double the purchases of Shanghai shares by Hong Kong, highlighting the more lukewarm interest of foreign investors in Chinese shares.

The southbound money flow has halved the premium that Chinese listed shares had over Hong Kong shares this year alone.

UBS forecast net inflows from China into Hong Kong next year would be 160 billion yuan under the two links, but some are making bolder predications.

Industrial Securities, a Chinese brokerage, estimated that Chinese insurers, which have recently been allowed to participate in the connect schemes, will invest 400-600 billion yuan into Hong Kong stocks by the end of 2017.

China maintains tight controls on capital movements across its borders and since the stock market crash last year has been clamping down on capital outflows.

Zhou Jie, chairman of Haitong Securities, told a promotional event sponsored by the brokerage in Shanghai that there is pent up demand in China for global investment opportunities.

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The Shanghai and Shenzhen trading links provide a valve for that demand. But while they give Chinese investors a chance to hedge against the falling yuan, they are closed systems aimed at preventing Chinese money leaking offshore.

Chinese investors pay for their Hong Kong purchases in yuan and receive the proceeds in yuan when they sell the shares. They can not use their Hong Kong shares as collateral for offshore loans.

A range of companies, including Kingdee International Software Group, Bloomage Biotechnology, and sportswear maker 361 Degrees, have taken part in the charm offensive.

Others include Concord New Energy Group, natural gas seller Blue Sky Power Holdings and public relations firm Wonderful Sky Financial Group Holdings.

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Many are hoping Chinese investment will lift their share prices and market valuations and so boost their fund raising potential.

It could also add liquidity to trading in their stock, making the equity more attractive to a broader investment base.

Still, companies will have to expect greater volatility, said Li Qian, board secretary of BYD Co Ltd , a Chinese automaker which is dual-listed in Shenzhen and Hong Kong.

“Mainland investors hold stocks for a much shorter period (than global peers),” he said, noting the firm’s Chinese shareholders change frequently while global institutional holdings are more stable.

Pang Jiahong, chief financial officer at Hong Kong-listed Universal Medical Financial & Technical Advisory Services Co , said she welcomes speculation.

“If mainland investors take a shorter-term trading approach, I think that’s good for the company in terms of the stock’s liquidity.”

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Universal, which counts CITIC Capital Partners, the Vanguard Group Inc, and Hanwha Asset Management Co as major shareholders, trades at a price-to-earnings ratio—a common measure of comparative value—of 13. That is significantly lower than the average of 52 for the healthcare sector on the Shenzhen exchange.

China’s small-caps are about 4-6 times more expensive than their Hong Kong peers, so investment opportunities under the Shenzhen connect are very attractive, said Zhou Weida, vice general manager at Invesco Great Wall Asset Management Co.

Outperformance by the Hang Seng Small-cap Index suggests that some investors in Hong Kong may already be pre-empting the Chinese demand.

The index is up over 12% since the Shenzhen link was approved by China in August. It has outpaced rises of around 9% in both the Hang Seng Composite Mid-cap Index and the Hang Seng Composite LargeCap Index respectively, which are included in the Shanghai link.