Source: Securities Times
Author: Roman

Hong Kong stocks collectively closed down today. At the close, the Hang Seng Index fell 0.78% and the Hang Seng Technology Index fell nearly 2%. Industries or concept sectors such as AIGC, automobiles, and pharmaceuticals registered the highest declines; sectors such as air cargo and logistics, and beverages rose, and logistics stocks were active.

The Hong Kong stock market has continued to decline this year. The Hang Seng Index has now fallen more than 20% from its high at the beginning of the year. The cumulative decline since this year has exceeded 13%. The Hang Seng Technology Index has also fallen more than 20% from its high at the beginning of the year, with a cumulative decline of over 9% this year. Overall, with the exception of the Hang Seng Shanghai-Shenzhen-Hong Kong Stock AH Stock Premium Index, all of Hang Seng's flagship indices have declined by varying degrees.

As the Hong Kong stock market continues to decline, Hong Kong-listed companies are vigorously buying back stocks in order to boost valuations. According to the reporter's statistics, since this year, the amount of Hong Kong stock repurchases has reached HK$80.9 billion, which is about 79% of last year's full year. This is already the third year in a row that Hong Kong stocks have been increasingly repurchased.

Judging from historical experience, when Hong Kong stock repurchases surged, the Hang Seng Index was in the bottom zone. Furthermore, the inflow of southbound capital into Hong Kong stocks is also accelerating this year. Wind statistics show that the net inflow of southbound capital into Hong Kong stocks in September exceeded HK$50 billion, and the cumulative net inflow for this year has been close to HK$270 billion.

Various signals suggest that Hong Kong stocks seem to be in the bottom zone, but judging from the comprehensive press interview on whether the current layout is worthwhile, opinions are mixed, and there are also major differences about the future trend of Hong Kong stocks.

The wave of Hong Kong stock buybacks continues

According to the reporter's statistics, as of September 28, the total repurchase amount of Hong Kong stocks this year reached HK$80.9 billion, accounting for about 79% of the repurchase amount for the full year of last year. The repurchase amount for the full year of last year was HK$102.4 billion, and the repurchase amount for 2021 was HK$38.1 billion. Judging from historical points, the repurchase amount of Hong Kong stocks in 2021 was a ten-year high. This means that Hong Kong stocks have continued to increase their buybacks for three years in a row.

Wind statistics show that since this year, 156 Hong Kong stock companies have made repurchases. Judging from the repurchase amount, “shareholder” Tencent has made 86 repurchases since this year, with a total repurchase amount of HK$31.36 billion, accounting for 39% of the total repurchase amount of Hong Kong stocks, followed by AIA. There were 135 repurchases. The repurchase amount was HK$20.08 billion, accounting for 25% of the total repurchase amount. The two companies together accounted for 64% of the total repurchase amount.

However, the reporter's statistics show that overall, the 156 companies that made repurchases “lost more and made less money,” and only 41 had an average repurchase price lower than the current price. Among them, AIA had the biggest book loss, with an average repurchase price of HK$80, current price of HK$6.29 billion, and a book loss of HK$4.3 billion; followed by Tencent, with a book loss of HK$3.64 billion; Great Wall Motor's repurchase book loss of HK$420 million; and Changshi Group's repurchase book loss of HK$150 million.

Hang Seng Index Company believes the Hong Kong stock market is undervalued

Earlier, Hang Seng Index Company stated that the high share repurchase trend in 2022 would continue until 2023. It is estimated that the annual repurchase amount in 2023 may reach HK$92.9 billion, 3.9 times the annual average for the previous 5 years. A high level of repurchase amount may reflect that companies believe their Hong Kong-listed stocks are undervalued, prompting them to “buy at bargain prices” during the period.

“The motives for companies to repurchase shares vary depending on their industry and company conditions, or are related to factors such as their capital structure, financial costs, and cash levels. Generally speaking, companies think their listed stocks are being undervalued, and if they think they can be effectively revalued in the future, they will carry out stock repurchases to support stock prices, improve financial conditions, and increase shareholder returns.” According to Hang Seng, the company said.

Marvin Chen, an industry research strategy analyst, told reporters that the increase in buybacks meant “undervaluation and relative value”. In addition, there were also factors that compensated and mitigated the pressure to sell stocks, such as Tencent Holdings and Alibaba. Although buybacks may indicate that company directors think their own shares are cheap, they may also be a means to adjust financial statements, or indicate that management lacks ideas on how to use capital to expand or diversify.

However, pessimism still envelops the Hong Kong stock market. A number of analysts who did not wish to be named told reporters that although they know that Hong Kong stock valuations are cheap, investors are also worried about falling into a “valuation trap,” because if the liquidity of Hong Kong stocks is not fundamentally improved, even the cheapest valuations are not suitable for layout.

In the first eight months of 2023, the average daily turnover of the Hong Kong stock market was HK$112 billion, down 12% from the previous year. Currently, it is lower than the long-term upward trend. In response, the Hang Seng Index Company believes that the decline in daily turnover does not mean that Hong Kong stocks have lost their vitality. In August 2023, the Hong Kong stock trading turnover rate (turnover value/market value) was 85%. It can be seen that market trading still remains dynamic. In particular, the average transaction turnover rate of the Hang Seng Technology Index since its launch was 91%, which is more active than market trading.

There are also analysts who are optimistic that many Hong Kong stock valuations are currently being suppressed. From a fundamental point of view, the performance of core companies such as Alibaba and Tencent has bottomed out and rebounded, and the entire Internet rectification has ended in stages. In the first half of this year, the revenue and net profit of these technology companies have all resumed steady growth, and a new round of growth guidelines — artificial intelligence — has begun.

Currently, Hong Kong-owned Internet companies such as Tencent, Ali, Baidu, and Kuaishou have all begun continuous research and development in big models, autonomous driving, metaverse, etc., and are stealing tickets to the next wave of AI.

On September 25, Hang Seng Index also announced the launch of the Hang Seng Artificial Intelligence Themed Index. The purpose is to track the performance of Hong Kong listed companies involved in the AI technology industry chain. Its business must include one of the following items: 1. Core computing resources: special computing chips, high-performance computers, cloud computing, high-speed networks, etc.; 2. Artificial intelligence technology: machine learning, big data, natural language processing, digitalization, generative artificial intelligence, etc.; 3. Artificial intelligence applications: smart life, smart cities, smart healthcare, smart finance, etc.

The Hang Seng Artificial Intelligence Themed Index includes 40 constituent stocks. According to market capitalization rankings, it is not yet included in the scope of interconnection transactions. It faces adjustments every quarter. The upper weight limit for each constituent stock is 10%.

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