Source: Dai Qing Strategy Research
Author：Dai Qing，Wang Yifan

preface

The Politburo meeting of the Central Committee set a positive tone on real estate. First-tier cities such as Guangzhou and Shenzhen in the north responded one after another. Market expectations for relaxation of real estate policies are heating up, and the Hong Kong stock real estate chain may be ushered in investment opportunities. This report compares the current relationship between Hong Kong stocks and A-sharesIndustrial chainIn terms of valuation, Hong Kong stocks are cheaper; after a deep review of historical policy catalyzed market performance, the Hong Kong stock real estate chain started slowly, but the increase was relatively greater.

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1. Real estate sentiment declined somewhat from the second quarter

Judging from real estate investment demand, commercial housing sales have recently declined somewhat from the end of the second quarter. Overall, they are weaker than seasonal, and the second-hand housing transaction area has also continued to weaken.In terms of commercial housing sales, as of July 30, 2023, the sales area of commercial housing in first-tier cities fell 42% from the high at the end of the second quarter, and the sales area of commercial housing in second-tier and third-tier cities fell 49% and 35%, respectively, from the highs in the first quarter, and was weaker than seasonal overall. In terms of second-hand housing, the second-hand housing listings index has continued to weaken since March 2023, and is significantly lower than the same period in history. As for the weekly sales area of second-hand housing in key cities, Beijing and Hangzhou declined significantly from the highs at the end of the second quarter, at -56% and 59%, respectively. Beijing, Shenzhen, and Hangzhou all fell below the same period in history, while second-hand housing transactions in Chengdu performed relatively well.

2. The valuations of the Hong Kong stock real estate chain industry and individual stocks are significantly lower than A-shares

The “interconnection” was followed by the integration of the Shanghai, Shenzhen, and Hong Kong markets. Since the signing of the “Joint Notice” in 2016, the Hong Kong Stock Connect stock range has been expanded twice on November 27, 2020 and March 3, 2023. The correlation between Hong Kong stocks and A-shares is increasing. The business of listed companies in the AH market is highly related, and the boom cycle converges. We discuss the valuation situation between AH and industry leaders in the upper, middle, and lower reaches of the real estate chain, as well as companies and industry leaders listed on the AH market at the same time, to provide investors with a new perspective.

2.1. Industry valuations

Due to the different trading styles between mainland and overseas markets, under the same cyclical trend, there will also be some differences in the valuation performance of companies of the same type listed in different regions.When the overall background trend of the industry is the same, the A-share market focuses on changes in expectations, so stock price performance is most obvious when direction changes, while Hong Kong stocks pay more attention to changes in performance. On the profit side, especially when the company's sales are realized, the stock price performance is most obvious.

The valuation of A-shares in the real estate chain industry is significantly higher than that of Hong Kong stocks. At the same time, both valuation centers continue to decline.Due to differences in investor structure, liquidity, and investment logic, the valuation of the Hong Kong stock real estate chain industry is significantly lower than that of A-shares, and has maintained a relatively stable trend. As China's social and economic development enters a mature period and the urbanization process slows down, the real estate industry gradually moves from a growth period to a period of stability. The market capitalization scale of companies within the matching industry continues to rise, but the valuation center continues to decline, reflecting changes in the development of the industry.

1) Upstream industries: coal, iron and steel, non-ferrous metals

The degree of coincidence of AH shares in the upstream industry is very high. The sector index trend is extremely correlated, and the overall valuation of Hong Kong stocks is lower than that of A shares.

1) Since 2017, the A-share and Hong Kong stock coal sector indices have risen 75% and 165% respectively, the corresponding sectorPEThe valuation of A-shares fell 63% to 6.5 times from 17.4 times in 2017, the PE of Hong Kong stocks fell 48% to 4.7 times from 9.2 times in 2017, and the AH premium rate was 37%.

2) Steel is a strong cycle industry. Since April 2017, the A-share and Hong Kong stock steel sector indices have risen 5% and fallen 31% respectively. The corresponding sector, PE, the valuation of A-shares, fell 9% to 25.0 times from 27.5 times in 2017, and the Hong Kong stock PE rose 70% to 46.5 times from 27.3 times, with valuations higher than A-shares.

3) Since the non-ferrous sector divides many types of metals, including gold, copper, aluminum, and rare metals, and there is a big difference in revenue and net profit source structures between AH and listed companies, the correlation between AH sector index trends is weak, and the valuation difference is greatest. Since April 2017, the A-share and Hong Kong non-ferrous sector indices have risen 38% and 52% respectively. The corresponding sector PE valuation of A shares fell 74% to 15.3 times from 58.5 times in 2017, Hong Kong stock PE fell 70% to 9.0 times from 29.9 times in 2017, and the AH premium rate was 70%.

2) Midstream industry: real estate, property

The real estate and property valuations of Hong Kong stocks are significantly lower than A-shares. Among them, the real estate sector has a higher AH premium rate.

1) Since the 2016 Central Economic Work Conference first proposed “don't fry housing,” both A-share and Hong Kong stock real estate indices have shown a volatile downward trend. Since April 2017, the A-share and Hong Kong real estate sector indices have declined by 26% and 24% respectively. The corresponding sector PE valuation of A-shares fell 28% to 12.5 times from 17.3 times in 2017, Hong Kong stock PE fell 41% to 5.9 times from 9.9 times in 2017. The AH premium rate was extremely high, at 113%.

2) The A-share and Hong Kong stock property management sector indices have each declined by 2% and 51% since 2020. The corresponding sector PE valuation of A-shares fell 14% to 25.3 times from 29.6 times in 2021, Hong Kong stock PE fell 15% to 21.9 times from 25.7 times, and the AH premium rate was 15%.

3) Downstream industries: home appliances, light industry

The overall valuation of the home appliance and light industry manufacturing sectors of the Hong Kong stock is lower than that of A-shares.

1) Home appliances are downstream in the real estate chain. The completion of real estate relatively directly affects demand for home appliances on the real estate side, but from index observations, we found that the real estate restriction policy did not have a significant impact on the home appliance industry. Since April 2017, the A-share and Hong Kong-stock home appliance sector indices have risen 43% and 156% respectively. The corresponding sector PE valuation of A shares fell 25% to 16.2 times from 21.6 times in 2017, Hong Kong stock PE fell 23% to 13.7 times from 17.8 times in 2017, and the AH premium rate was 18%.

2) The A-share and Hong Kong light industry sector indices have each declined by 12% and 55% since 2017. The corresponding sector PE valuation of A-shares fell 7% to 34.8 times from 37.5 times in 2017, Hong Kong stock PE increased 63% to 24.8 times from 15.2 times, and the AH premium rate was 40%.

2.2. Individual stock valuations

1) Upstream industries: coal, non-ferrous metals, iron and steel.

The overall valuation of Hong Kong-listed upstream resource products companies is lower than A-shares.

1) The leading listed companies in the coal industry are basically listed in AH: China Shenhua, Yankuang Energy, and China Coal Energy, as well as Shaanxi Coal, an industry leader that is not listed on the Hong Kong stock market. The average PE of leading A-share companies was 5.6 times, higher than the average PE of Hong Kong stocks of 3.7 times.

2) There are many AH companies in the non-ferrous metals industry listed at the same time: Zijin Mining, Tianqi Lithium, Ganfeng Lithium, China Aluminum, Luoyang Molybdenum, and Shandong Gold. Leaders not listed on the Hong Kong stock market include Huayou Cobalt, Northern Rare Earth, and Yunlu Co., Ltd. The average PE of leading A-share companies is 23.5 times, slightly higher than the average PE of Hong Kong stocks of 19.6 times.

3) Key Hong Kong-listed companies in the steel industry include Angang Steel Co., Ltd., Tiangong International, and China Oriental Group. Leading A-shares include Baosteel Co., Ltd., Baogang Co., Ltd., and Valin Steel. The average PE of leading A-share companies was -27.7 times, lower than the average PE of Hong Kong stocks of 1.4 times.

2) Midstream industry: real estate, property.

The valuations of Midstream Real Estate and Hong Kong-listed property companies are slightly lower than A-shares.

1) Leading Hong Kong stocks in the real estate industry include Sun Hung Kai Properties, China Resources Land, Changshi Group and China Overseas Development. A-shares include Poly Development, Vanke A, China Merchants Shekou, and Jindi Group. The average PE of leading A-share companies is 12.5 times, slightly higher than the average PE of Hong Kong stocks of 9.6 times.

2) Leading Hong Kong stocks in the property industry include China Resources Vientiane Life, CNOOC Properties, Country Garden Service and Greentown Service. A-shares include investment savings, special distribution services, and Royal Palace International. The average PE of leading A-share companies was 32.6 times, slightly higher than the average PE of Hong Kong stocks of 23.4 times.

3) Downstream industries: home appliances, light industry.

The valuations of leading Hong Kong stock companies in the downstream home appliances and light industry are significantly lower than A-shares.

1) In the home appliance industry, AH listed companies include Haier Smart Home Appliance and Hisense Home Appliance. Leading A-shares include Midea Group, Gree Electric, and Sanhua Intelligent Control. The average PE of leading A-share companies was 18.8 times, slightly higher than the average PE of Hong Kong stocks of 16.0 times.

2) Hong Kong stock leaders in the light industry include SMOORE International and Minhua Holdings, while A-share leaders include Oupai Home, Gujia Home, and Sun Paper. The average PE of leading A-share companies was -4.6 times, slightly lower than the average PE of Hong Kong stocks of -0.2 times.

3. Resumption of the elastic history of AH shares in the real estate chain

In order to compare the price elasticity of AH Real Estate stocks when the market arrived, we have reviewed several stages of sharp increases in the real estate index in history, from July 2005 to October 2007, November 2008 to July 2009, October 2011 to January 2013, and March 2014 to February 2018. Looking back at the past few cycles,The valuation catalytic factor for A-share real estate companies is mainly the industry policy environment. Every time the real estate industry experiences a stage where policies are relaxed and implemented, the increase is the biggest, and the certainty is high. The valuations of Hong Kong stock real estate companies also have a certain reaction to policy relaxation, but the main increase is still concentrated on the profit implementation stage. The increase in transaction scale is the most direct factor catalyzing the rise of real estate companies in Hong Kong, China.

Looking at it in stages, in 05-07, the urbanization process progressed rapidly, and the immediate demand for housing and the popularity of investment speculation continued to drive the rapid rise in real estate prices. In March 2005, the State Council issued the “Notice on Effectively Stabilizing Housing Prices,” the “Eight Rules of the State.” A total of eight opinions were put forward to stabilize housing prices. Although the “Notice” “brakes” housing prices, the relationship between supply and demand fundamentally determines that the rise in housing prices is difficult to control. The A-share real estate index soared 837% during the period, while the Hong Kong stock real estate index rose 220%. The biggest increase in the range of leading A-share companies was 1605%, and the average increase in the range of leading Hong Kong stock companies was 591%. The valuation of leading A-share companies increased from 8.5 times to 98.1 times, and the valuation of leading Hong Kong stock companies increased from 15.9 times to 42.3 times.

In 08-09, due to the favorable market environment and the cooperation of the profit side of the real estate industry, the A-share real estate index rose 217% and the Hong Kong stock real estate index rose 160% during the period. The average biggest increase for mainstream A-share real estate companies reached 250%, while the average biggest increase for Hong Kong-listed real estate companies reached 184%. The average PE level of leading A-share real estate companies increased 233% to 42 times from 12.6 times, while the valuation level of listed Hong Kong real estate companies increased 225% to 35.1 times from 10.8 times. At the end of 2011, credit policies began to be gradually relaxed. Interest rates were continuously lowered and cut in the first half of 2012, and performance on the profit side gradually improved. There was a certain difference in the valuation performance of A-share and Hong Kong-stock real estate companies in the process of industry policy and profit shift. The stock prices of A-share companies began to react when stimulus policies appeared at the end of '11, and the industry index rose 38%. Hong Kong stock real estate companies did not immediately show a clear rise after policy expectations were changed. Instead, they only improved after trading volume was realized in the second half of 2012. The index rose 76%, and the elasticity was greater than that of A-shares. The biggest average increase for leading A-share companies during the period was 81%, and the biggest increase in Hong Kong stocks was 139%. In terms of valuation, the average valuation of leading A-shares did not change much, from 10.3 times to 10.9 times, while the valuation of Hong Kong stocks increased sharply by 89% to 11.3 times from 6 times.

The pace and valuation of the AH real estate sector in 14-18 also showed a big difference. In June 2014, real estate companies in the two places respectively reached the lowest valuation levels in history. A-share real estate companies were 8.7 times, while Hong Kong stocks were 4.4 times. Starting in July 2014, purchase restriction policies in various regions were relaxed one after another, and then over a period of nearly 4 quarters until the 3rd quarter of '15, the real estate industry continued to release benefits from policy to capital. Judging from the performance of A-share real estate companies, from July '14 to June '15, superpositionbull marketThe impact is that valuations have continuously risen from their lowest level for nearly 3 quarters, reaching an increase of 241%. However, at this stage, Hong Kong stocks did not show the same enthusiasm; they only rose 34%. The increase in valuation of mainstream Hong Kong stock real estate companies mainly occurred during the period of sharp year-on-year increase in sales area. Among them, the year-on-year growth rate of sales area turned positive in March 2015, and the valuation level increased by 41%; the 4th quarter of 2015 was also a period of sharp sales growth, and the valuation level of Hong Kong stocks remained high for the full year of 2016. From the fourth quarter of 2016 to 17, after regulatory policies were introduced, sales performance exceeded expectations, and the real estate industry index rose 59%. At this stage, the A-share real estate industry index rose only 13%. In terms of valuation, from the fourth quarter of 2016 to February 2018, the average valuation of leading Hong Kong stock companies rose sharply by 45% from 8.7 times to 12.6 times, while the average valuation of leading A-share companies fell 9% from 12.9 times to 11.5 times. There was a clear difference in the pace and valuation of real estate companies in the two places.

4. Policy expectations are heating up, and investment in the Hong Kong stock real estate chain is worth paying attention to

Faced with the downward pressure on the real estate market, there have been obvious positive changes in real estate policies recently.The restoration trend of real estate sales slowed in the first half of 2023, and indicators such as new construction area, construction area, and development investment maintained negative growth. The real estate policy recently set a new tone. The statement on real estate at the Politburo meeting of the Central Committee mentioned the need to “adapt to the new situation of major changes in the supply and demand relationship in China's real estate market and adjust and optimize the real estate policy in due course.” The biggest change compared to previous Politburo meetings was that “housing is not hyped up,” and a judgment on the relationship between real estate supply and demand appeared for the first time, setting the tone for the subsequent formulation of real estate policies.

In addition, Minister of Housing and Construction Ni Hong further clarified the specific direction of supporting real estate policies during an enterprise symposium held on July 28, mainly including “it is necessary to continue to consolidate the steady upward trend in the real estate market, strongly support rigid and improved housing demand, and further implement policy measures such as reducing the down payment ratio and loan interest rate for the purchase of the first housing unit, tax relief for improved housing purchases, and 'no need to buy a loan' for personal housing loans.”

After the policy was set positively, first-tier cities responded one after another.

1) The Beijing Municipal Housing and Construction Commission stated that it adheres to the general tone of the work of stabilization and progress, and works with relevant departments to quickly carry out implementation work, strongly support and better meet the rigid and improved housing needs of residents, and promote the stable and healthy development of the Beijing real estate market.

2) The Housing and Construction Bureau of Shenzhen Municipality stated that it will take into account the actual real estate situation in Shenzhen and work with relevant municipal departments, central agencies and districts to better meet residents' rigid and improved housing needs, solidly push forward construction maintenance work, effectively maintain order in the real estate market, and promote the stable and healthy development of the real estate market in Shenzhen.

3) The Guangzhou Municipal Housing and Construction Bureau also stated that it will adhere to the general tone of the work of stabilization and progress, and push forward implementation as soon as possible in line with Guangzhou's actual situation to strongly support and better meet the needs of rigid and improved housing and promote the stable and healthy development of the Guangzhou real estate market.

4) The Shanghai Municipal Housing and Construction Commission and the Municipal Housing Administration stated that they will adhere to the general tone of the work of stability and progress, fully, accurately and comprehensively implement the new development concept, support rigid and improved housing needs according to the city's policies, do a good job of protecting traffic buildings, people's livelihood, and stability, and promote the stable and healthy development of the Shanghai real estate market.

Through a review of the market, we have discovered that in the past 10 years, after the introduction of the local production incentive policy, A-shares have been driven by expectations. The pace of Hong Kong stocks has lagged behind, often until sales, profit and other indicators have been fulfilled before they begin to rise. The price elasticity is superior to that of A-shares. If local real estate restriction policies open in the third quarter, the Hong Kong stock real estate chain may welcome greater investment opportunities.

5. risk factors

1) The recovery of the domestic economy falls short of expectations; 2) Policies fall short of expectations.

Editor/jadyen