一家之言聽聽無妨

China Focus Strategy for Hong Kong

BOCI

Pay close attention to a potential pre-ex-dividend rally for H-share banks in June

Thanks to large and continued southbound net inflows, the old adage of “sell in May and go away” has not worked out too well in the Hong Kong stock market this year. The Hong Kong stock market has risen significantly in the first five months of this year. For 3Q17, we continue to hold optimistic views on the market as we believe that a systemic crisis in China’s economy and financial system is unlikely before the 19th Party Congress this year and southbound trading volume via mainland-HK stock links should increase YoY in 2017. In June, we recommend investors to pay close attention to a potential pre-ex-dividend rally for H-share banks. We noted that major H-share banks generally outperform the market within two weeks before their ex-dividend dates over the past two years. Many H-share banks will soon go ex-dividend in June and early July this year.

.
.
.

HK Stock Market Valuations are Still Attractive 

At present, the valuation of the HK stock market remains attractive compared to the A-share and other major global markets. According to Bloomberg consensus, on 26 May 2017:

 HSI traded at 12.6x 2017E P/E and 1.3x 2017E P/B, representing 2% and 20.4% discounts respectively to the average forward P/E and P/B over the past 12 years.
 HSCEI traded at 8.5x 2017E P/E and 1.0x 2017E P/B, representing 21.6% and 42.8% discounts respectively to the average forward P/E and P/B over the past 12 years.

 In our view, the current valuation of the HK stock market remains below its historical average and hence is attractive, even when compared to the levels seen during the previous two global financial crises:

 2008 global financial crisis (GFC). From October to November 2008, the HSI traded at average P/E of 9.9x (within 7.6-12x range) and P/B of 1.3x (within 1.0-1.6x range); and the HSCEI traded at average P/E of 8.7x (within 6.1-11.0x range) and P/B of 1.4x (within 1.0-1.8x range).
 2011 European debt crisis. From September to October 2011, the HSI traded at average P/E of 10x (within 8.7-11.0x range) and P/B of 1.3x (within 1.1-1.4x range); and the HSCEI traded at average P/E of 7.9x (within 6.6-9.0x range) and P/B of 1.3x (within 1.1-1.5x range).