Valuation returns to historical lows! How to bet on the Hang Seng TECH Index?

Source: Wu Liuyan, Open Source Securities

The upward trend of the Hang Seng Index from November 2022 to February 2023 is mainly driven by the denominator: optimization of domestic epidemic prevention and control measures, expectations of strong economic recovery, and short covering driving the rapid recovery of Hong Kong stock valuations.

However, from February to April this year, Hong Kong stocks experienced consolidation: pressure from profit-taking by southbound funds, concerns about the US credit crisis, and expectations of weak economic recovery in China.

Analysts pointed out that the second and third quarters of 2023 are important windows, and the low-entry opportunities in the Hong Kong stock technology sector are worth paying attention to.

Outlook

The Hang Seng Technology Index has returned to its historical low, with a PE-TTM of about 35 times, close to the historical low point in 2021.

In the short term, geopolitical risks and risks of adjustment in the US stock market are still disturbing factors. The focus is on the low-entry opportunities in the second and third quarters, and the acceleration of China's economic growth momentum and the expected decline in US bond yields are expected to drive the valuation of Hong Kong's technology sector.

Investment advice

Consumer electronics:

(1) SUNNY OPTICAL, the improvement of the mobile phone optical pattern and the smooth progress of overseas major customers will drive the stabilization and recovery of the mobile phone optical business, and the automotive and AR/VR businesses will drive rapid growth in performance in 2024-2025.

(2) COWELL is expected to enter the post-camera module business of overseas major customers in 2024, and at the same time, layout MR/lidar business, which is expected to drive high growth in performance in 2024-2025.

Semiconductor:

Focus on recommending SMIC and Huahong Semiconductor, with low valuations and opportunities to layout the left side of the semiconductor cycle. The wafer foundry industry is expected to recover significantly in 2023Q4; ASMPacific, a beneficiary of the global semiconductor packaging equipment leader, the industry's prosperity is still under pressure, but the valuation is low, suitable for bottom layout.

Automobile:

(1) Xiaopeng Motors, the company's management optimization in 2023 is expected to drive stable operation, and the establishment of new car matrix and low-cost ADAS solutions in 2024 will drive expected reversal.

(2) INTRON TECH, a rare high-growth and low-valuation target, benefits from the continuous increase in the value of automotive semiconductors.

Internet:

Focus on recommending Meituan, the company actively responds to competition from Douyin in the local life field, and the rapid growth and steady realization of in-store business are expected to drive valuation repair.

Beneficiaries Tencent, still a deterministic opportunity in the Internet sector, focusing on the landing of AI large models and industry applications.

Computer:

(1) KINGSOFT, continuously benefits from the Xinchuang + AIGC trend;

(2) LENOVO GROUP, as a leading company in the PC industry, has stabilized and rebounded cyclically, while the AI intelligent server business has boosted its valuation.