Tencent has surged 1623% in the past ten years! When will the new round of gains for Hong Kong's technology stocks begin?

The leading technology companies represented by the Internet are the core assets of the Hong Kong stock market. How well have they performed in the past decade?

According to the analysis by Wang Xueheng, an analyst at Guosen Securities:

From 2010 to 2020, except for Kuaishou, which went public in 2021, the top ten technology stocks have outperformed the index, with many stocks achieving growth of ten to twenty times. For example, Tencent, Kingdee International, and Ali Health have seen their stock prices increase by 1623%, 2126%, and 2693% respectively from 2010 to 2020, outperforming the Hang Seng Index by 1599pct, 2101pct, and 2668pct.

However, it is also important to note:

(1) In the long term, technology and consumption are the driving forces of China's future economic growth, and reducing the proportion of cyclical and traditional industries in the index is what the Hong Kong stock market has been striving for in the past and present.

(2) In the process of incorporating the Internet, these companies are still in the stage of capital investment, and some companies are still incurring losses and have no ability to pay dividends. The more companies are included, the more it will drag down the profitability, dividends, and stock dividends of the Hang Seng Index.

(3) In this process, Hang Seng Technology, represented by the Internet, and some Hong Kong consumer stocks have experienced high growth to medium-speed growth, and their valuations have dropped significantly, which has also dragged down the valuation of the Hang Seng Index (compared to the old Hang Seng Index). During this period, the objective reasons for pushing up and dragging down valuations include the Federal Reserve's release and withdrawal of liquidity.

(4) Due to the insignificant recovery of the Hang Seng Index's profitability (with a YoY growth of 6.6% in 2023, compared to the Nasdaq 100's growth of over 20%), the market is pricing based on a pessimistic observation.

If the past ten years have been good, how should we view the growth potential and profitability of the Hong Kong stock market in the future?

Considering the abundant liquidity in the United States, the current PB valuation of 1-2 times is too low.

Because ROE is a stable indicator, the predictability of the ROE of these Internet companies is relatively poor, so it is difficult to value them using value stocks. Investing in Hong Kong Internet stocks is more based on the divisional valuation method and the PS valuation method.

However, based on the observation of liquidity, especially after the weakening of liquidity, both the PS valuation and the divisional valuation will be abandoned by investors. In the long run, the valuation system of ROE/PB is more stable.

Therefore, once the ROE of Internet companies becomes predictable and more stable, there will be a huge room for PB repair. Therefore, the investment value of the Hang Seng Technology Index is promising, and it is expected to become an alternative to the A/Hong Kong consumer sector: the advantages are no inventory, strong platform bargaining power, and more significant expectations for ROE improvement.

Currently, the bottom conditions of the Hong Kong stock market are in place, waiting for the end of the Federal Reserve's interest rate hike. 1. HS Technology's EPS Accelerates Upward Revision

After reaching a low point in October 2022, the forward EPS of the Hang Seng Index reached a peak in May 2023 and then declined, remaining stable in the second half of August.

In contrast, the HS Technology Index has been on an upward trend since reaching a low point in March 2023, especially during the August window of the second quarter report, showing an accelerated upward revision.

1. Valuation and Risk Premium Approach Historical Extremes

As the Hang Seng Index has declined, the current P/E ratio has reached a low level not seen since 2018, with a percentile of 3.7%.

Therefore, the corresponding risk premium rate has also returned to a relatively high historical level of 7.1% (or 76.6% percentile). The current period is the second half of the base expansion cycle (the first half of this year being the first half), and the model shows that the extreme value of the risk premium corresponds to 7.65-8.26% (75%-95% percentile). Based on a 4.2% US bond yield, the limit of the Hang Seng Index is estimated to be 16561-17414 points, which is close to the low price on August 22, 2023.

Guosen Securities believes that the Hang Seng Index has already formed a bottom here and is eager to test it, welcoming the year-end market trend. The trigger for this is the solidification of the signal of the end of the US interest rate hike. Currently, there are signs of weakening in the US economy based on indicators such as unemployment rate, PMI, imports, and job vacancies. It requires 1-2 months of observation. Once a downward trend line is formed, it is highly likely to be the start of a new round of Hong Kong stock market rally.