Is there still opportunity in Hong Kong stocks?

The Hong Kong stock market was originally the worst-performing stock market globally, but at the end of September, driven by mainland economic stimulus measures, it experienced a brief but spectacular rally, boosting the performance of the benchmark index this year.

At the current level of 20,600.26 points, the $Hang Seng Index(00HSI.HK) , which reflects the performance of the Hong Kong stock market, has accumulated a gain of 20.84% this year, higher than the 12.80% gain of the Dow Jones Industrial Average (DJI.US) (based on 42,514.95 points). From the Hang Seng Index chart, it can be seen that the index's performance since the beginning of the year was not particularly outstanding until it started to rally in mid-September, reaching a temporary high of 23,099.78 points on October 7, a gain of 35.50%, before pulling back.

The same goes for the Hang Seng Tech Index, which reflects the performance of tech stocks. At the current level of 4558.10 points, the $Hang Seng TECH Index(STECH.HK) has accumulated a gain of 21.09% this year. From its chart, it can be seen that the index's performance in the first three quarters of the year was lackluster, but it started to rally in mid-September, suddenly pushing the year-to-date gain above 20%, catching up with the 21.75% gain of the Nasdaq Composite Index (IXIC.US), which reflects the performance of tech stocks in the U.S. market.

Since mid-October, the Hang Seng Index and Hang Seng Tech Index have pulled back. Many may be more concerned about whether this pullback will continue and whether the Hong Kong stock market's performance is just a flash in the pan. Let's look at it from the following perspectives.

The Positive Impact of Economic Stimulus Measures Has Yet to Be Felt

In mid-September, the Hong Kong and A-share markets surged sharply, mainly due to the support of multiple favorable policies introduced by the central government. The subsequent pullback may be primarily because the actual implementation of these measures was not as early as the market had expected.

However, from a long-term perspective, the details of these policies have not been fully released or implemented, and their impact on the economy and even listed companies is still unclear. To take a step back, if the initial announcement of the framework measures boosted market confidence, it proves that there is still space and capacity in the capital market—what's lacking now is just confidence.

As the policies are actually implemented and their effects gradually materialize, they should provide support for the Hong Kong stock market.

Recently, the Bank of Canada and the European Central Bank have cut interest rates to stimulate their economies, and the Federal Reserve's rate-cutting cycle will continue, potentially unleashing a wave of liquidity.

Hong Kong Stock Valuations Remain Low

Although the Hong Kong stock market has caught up with the U.S. market in terms of performance this year after the recent rally, valuations in Hong Kong are still generally low.

Data from Wind shows that the Hang Seng Index's price-to-earnings ratio is only 9.93x, far below the Dow's 30.17x; the Hang Seng Tech Index's P/E ratio is only 25.64x, significantly lower than the Nasdaq's 43.76x.

When chasing risk assets, growth prospects and valuations are both important factors to consider: From a growth perspective, thanks to the central government's economic stimulus measures and the boost from global accommodative monetary policies, Hong Kong-listed companies are expected to bottom out and rebound; from a valuation perspective, the Hong Kong market is not only lower than the U.S. market but also lower than surrounding markets, including India (the P/E ratio of India's Sensex30 Index is 23.06x), Japan (the Nikkei 225's P/E ratio is 21.27x), and South Korea (the KOSPI's current P/E ratio is estimated at 14.61x).

Heavyweight Constituents Should Benefit from Their Own Reforms and Economic Recovery

$TENCENT(00700.HK) , $BABA-W(09988.HK) , JD Group-SW (09618.HK), and $MEITUAN(03690.HK) are all heavyweight constituents of the Hang Seng Index and Hang Seng Tech Index.

According to September data, the three largest companies by weight in the Hang Seng Index were $Alibaba(BABA.US) , Tencent, and Meituan, with weights of 9.18%, 7.86%, and 7.82%, respectively; the three largest companies by weight in the Hang Seng Tech Index were JD, Meituan, and Alibaba, with weights of 9.39%, 8.53%, and 8.10%, respectively.

These four large tech companies are involved in every aspect of consumers' and businesses' lives nationwide, from consumption to logistics, food delivery, enterprise services, and financial services. They are arguably the biggest beneficiaries of economic stimulus measures.

In addition to benefiting from policies, these four tech companies all hold leading positions in their respective sectors.

Tencent is a global leader in social media, continuously exploring new monetization models through its social platform WeChat, such as mini-programs, advertising, and mini-games. According to Wind data, at the current price of HK$420.80, its 2024 forward P/E ratio is only 20.43x, far below Meta's (META.US) 26.93x, as shown in the table below.

Alibaba has undergone organizational restructuring to focus resources on its core businesses, optimizing efficiency and reducing costs. At the current price of HK$93.60, Wind data shows Alibaba's FY2025 (ending March 2025) P/E ratio is only 16.29x, far below U.S. e-commerce peer eBay's (EBAY.US) 21.58x and even better than South Korean e-commerce platform Coupang, which is still loss-making but has a higher market cap than profitable eBay.

Food delivery platform Meituan has seen improvements in both its delivery business and new initiatives. In the first half of 2024, its adjusted EBITDA margin rose 3.8 percentage points year-over-year to 14.8%, and adjusted net profit grew 60.4% year-over-year to RMB21.095 billion. At the current price of HK$188.50, Wind data shows Meituan's 2024 forward P/E ratio is 35.23x. In comparison, the U.S. version of Meituan, DoorDash (DASH.US), is still loss-making, and according to Wall Street analysts' forecasts, it may turn a profit in 2024, but the profit level remains extremely low and disproportionate to its market cap, far less reasonable than Meituan's current valuation.

Logistics giant JD's Hong Kong stock price is currently HK$154.50, with a 2024 forward P/E ratio of 16.11x according to Wind. U.S. peer Amazon (AMZN.US), which also focuses on self-operated e-commerce and has built a logistics and warehousing solutions advantage, has a 2024 forward P/E ratio as high as 42.18x.

Additionally, these four Hong Kong-listed tech giants have all spent heavily on share buybacks.

Alibaba and JD mainly repurchase shares in the U.S. market. According to Wind statistics, this year, Alibaba and JD have repurchased a total of $4.786 billion and $2.234 billion in the U.S. market, equivalent to approximately HK$37.181 billion and HK$17.355 billion, respectively.

Tencent and Meituan are the tech companies with the highest buyback amounts in the Hong Kong market, repurchasing HK$90.558 billion and HK$28.158 billion worth of shares this year, respectively.

Moreover, the four giants will further increase buybacks and dividends. For example, JD announced a new $5 billion share repurchase plan in August, Meituan said it would repurchase up to $1 billion from time to time, and Alibaba still had $22 billion (approximately HK$170.9 billion) in buyback authorization as of September 30, 2024.

These measures, along with their solid fundamentals, should support their stock prices. As these four tech stocks are heavyweight constituents of the benchmark indices, their stable performance can also serve as an anchor for the indices (and the stock market).

Conclusion

Given their reliable fundamentals, these four tech stocks are strong contenders for the "Top 100 Hong Kong Stocks" ranking.

The "Top 100 Hong Kong Stocks" aims to be professional, objective, fair, and accurate, selecting Hong Kong-listed companies with strong development and investment value to set a benchmark for investors and promote the healthy and prosperous development of Hong Kong's capital market.

The 2024 Hong Kong Listed Companies Development Summit Forum and the 11th "Top 100 Hong Kong Stocks" Awards Ceremony, hosted by the Top 100 Hong Kong Stocks Research Center and co-organized by Finet and Futu, with support from media organizations such as Hong Kong Ta Kung Wen Wei Media Group, will be held grandly at the Hong Kong Convention and Exhibition Centre on the afternoon of November 11, 2024.

What rankings will Tencent, Alibaba, Meituan, and JD achieve in this year's "Top 100 Hong Kong Stocks"? Stay tuned.

By Mao Ting