HSBC: Six reasons to be bullish on Hong Kong stocks! AI, value stocks, overseas enterprises, and state-owned enterprises will shine

HSBC recently released a research report stating that there is increasing evidence that investor sentiment towards A-shares is improving, and it is expected that the Hong Kong stock market will also be boosted. HSBC stated that from the perspective of economic data and policy support, the fundamentals of the Hong Kong stock market are improving. HSBC has set the year-end target for the Hang Seng Index in 2024 at 19,230 points, indicating a potential upside of about 15% from current levels.

Six Signs of Improved Confidence

Investor confidence is a key issue. The research report indicates that the performance of the Hong Kong stock market over the past four years has been poor, and investors are wondering if the recent rebound is sustainable and if investor confidence is truly beginning to recover. To these two questions, HSBC gave affirmative answers and listed six signs of confidence improvement.

1. Reduction in earnings forecast downgrades. HSBC stated that in the most recent earnings season, the number of times analysts consensus earnings per share were downgraded decreased. This should bring some comfort to investors, and if there is an increase in earnings forecast upgrades in the coming months, it will support investor sentiment.

2. Bright spots in earnings growth prospects. The report indicates that the overall consensus earnings growth expectations for the Hong Kong stock market will increase from 5.3% in 2023 to 8.8% in 2024, with significant contributions from the financial, non-essential consumer goods, and communication services industries. Moreover, multiple industries may bring double-digit earnings growth, with healthcare, non-essential consumer goods, and daily consumer goods leading the way. In 2024, it is expected that 49% of companies with market capitalization exceeding $1 billion will achieve over 10% earnings growth, and 37% of companies with market capitalization exceeding $1 billion will achieve over 15% earnings growth.

3. Stock prices are starting to react to positive news. The report points out that unlike last year, investors are reacting more positively to earnings announcements. In particular, the market is beginning to generously reward good news. In 2023, even companies that delivered strong performance did not receive rewards. At the same time, the proportion of companies exceeding profit expectations is increasing.

4. More dividends. More dividends indicate that companies have sufficient cash flow and management confidence in the sustainability of their business. In the most recent earnings season, about 35% of companies increased their dividends per share (DPS) 5. Stock Repurchase. The research report indicates that stock repurchases can convey signals about the company's prospects and potential undervaluation, and can also help restore investor confidence by providing additional returns. Currently, stock repurchases in the Hong Kong stock market are increasing, with the scale expected to increase from around HKD 110 billion in 2022 to an estimated HKD 131 billion in 2023. Based on the average repurchase rate over the past three months, the repurchase amount in 2024 may reach a new high of HKD 178 billion.

5. 6. Mainland Investors Increasing Investment in Hong Kong Stocks. The research report indicates that fund flows are another good indicator of investor confidence, and data shows that in the first quarter of 2024, the net inflow through the Southbound Stock Connect totaled HKD 133 billion, a year-on-year increase of 76% and a month-on-month increase of 169%; with the highest inflow in March reaching HKD 86 billion. These fund inflows are mainly concentrated in sectors such as finance, energy, and communication services, with the highest net outflow in growth sectors such as the internet.

Four Major Investment Themes for 2024

Building on improved confidence, HSBC has identified four investment themes that are expected to perform well this year.

1. Monetization and Cost Optimization of AI. The research report states that the generative AI narrative in the Hong Kong stock market is mainly focused on the internet and telecommunications sectors, with improvements in monetization benefiting online advertising, e-commerce, cloud computing, and content platforms. Additionally, AI can bring cost optimization to multiple industries, including helping to reduce costs in areas such as gaming, video, and online comic platforms; HSBC analysts estimate that R&D expenses for gaming companies (about 20% of revenue) can be reduced by approximately 40% over five years.

2. Revaluation of Value Stocks. According to the research report, given that internet and non-essential consumer stocks account for a considerable proportion, these stocks are sensitive to changes in interest rates, with global bond yields being particularly important for Hong Kong stocks. Currently, HSBC still expects the Fed to cut rates for the first time in June, with a cumulative 75 basis points cut in 2024. Many value stocks have performed well so far this year, and with the end of the tightening cycle, stocks with attractive yields may undergo further revaluation HSBC believes that stocks with a market value exceeding USD 200 million, a 3-month average daily trading volume (ADTV) of USD 5 million or more, a 12-month forward dividend yield of 7% or higher, projected dividends per share (DPS) for 2024 expected to be higher than last year, and projected earnings per share (EPS) for 2024 expected to be stable or higher than last year will be beneficiaries.

3. Enterprises Going Global. The research report indicates that an increasing number of Chinese mainland companies are seeking global expansion to diversify revenue sources and expand their businesses. HSBC believes that companies that can penetrate foreign markets and gain significant market share will surpass their peers in terms of revenue growth and profit margins.

4. Policy Support Expected to Help State-Owned Enterprises Outperform Expectations. The research report suggests that state-owned enterprises (SOEs) have outperformed private enterprises so far, and HSBC believes that SOEs may bring surprises to the market in terms of good profit growth and higher shareholder returns. In January of this year, the State-owned Assets Supervision and Administration Commission (SASAC) revised the performance indicators for central enterprises, with one of the most important developments being the inclusion of capital market performance in the evaluation of senior management as one of the key performance indicators (KPIs). By supporting additional share buybacks and dividend payments to improve investor returns, HSBC believes that the performance of SOEs will improve. In the Hong Kong stock market, value stocks such as energy and telecommunications benefit the most, showing in dividends and share buybacks. Furthermore, these reforms may lead to a re-rating of SOEs with good profitability and strong cash flow. For example, telecom and oil giants have led the way in enhancing market value and initiating a "China-style valuation system".