Source: Broker China
Author: Shi Qian

Yesterday evening, news about “the dividend tax to be paid by mainland individual investors to invest in Hong Kong stocks may be considered for reduction” spread rapidly in the industry. However, this has not been officially confirmed.

However, a research report from a leading brokerage firm this morning once again opened up this expectation. CICC believes that if the Hong Kong Stock Connect dividend tax relief is implemented, it is expected to further boost the enthusiasm of mainland investors to invest in Hong Kong stocks, especially in high-dividend-related sectors, boost sentiment in the short term, and help improve the liquidity of the Hong Kong stock market in the long term.

According to estimates, the total dividend tax collected by the Hong Kong Stock Connect mechanism is about HK$45 billion each year. Assuming that mainland individual investors account for about 1/4 of Hong Kong Stock Connect's investment, the direct tax relief brought about by this potential adjustment is about HK$10 billion each year. If public funds are included, the resulting tax relief could be extended to around HK$20 billion.

Some Hong Kong investors said that this is a major benefit for Hong Kong stocks. Currently, the industry also has high expectations for this, because the tax was actually quite high before. If the benefits are realized, the increase in Hong Kong stocks may expand compared to A-shares, and the AH premium index may return to the level of 120.

Hong Kong stocks are very favorable

During the two sessions this year, Chairman Lei Tianliang of the Hong Kong Securities Regulatory Commission also proposed lowering the dividend dividend tax level for Hong Kong Stock Connect individual investors and lowering the entry standards for Hong Kong Stock Connect mainland investors. CICC believes that if the Hong Kong Stock Connect dividend tax relief is implemented, it is expected to further boost the enthusiasm of mainland investors to invest in Hong Kong stocks, especially in high-dividend-related sectors, boost sentiment in the short term, and help improve the liquidity of the Hong Kong stock market in the long term.

For dividend dividends obtained by mainland individual investors through Hong Kong Stock Connect by investing in H shares listed on the Hong Kong Stock Exchange, H share companies withhold personal income tax at a rate of 20%; dividend dividends obtained by investing in non-H shares listed on the Hong Kong Stock Exchange are subject to personal income tax at a rate of 20% by China Settlement. Individual investors who have already paid withholding tax abroad can apply for a tax credit from the tax authority in charge of settlement in China. For red chip stocks listed in Hong Kong, on the basis of Hong Kong Stock Connect's 20% personal income tax, it will also involve whether the company's announced dividends have already been subject to 10% corporate income tax.

CICC said that the scale of the direct relief is relatively limited, but it helps to boost sentiment. Over the past three years, the total cumulative dividends of all Hong Kong Stock Bills have averaged around HK$1.8 trillion per year. Further, calculate the share of Hong Kong Stock Connect investors' holdings in each stock and the Hong Kong Stock Connect dividend tax standard of 20%. According to estimates, the total dividend tax levied by the Hong Kong Stock Connect mechanism is about HK$45 billion each year.

Assuming that mainland individual investors account for about 1/4 of the Hong Kong Stock Connect investment, it is estimated that the direct tax relief brought about by this potential adjustment will be around HK$10 billion each year. If public funds are included, the resulting tax relief could be extended to around HK$20 billion. However, considering that the average daily turnover of the main board of the Hong Kong stock market has been around HK$100 billion since this year, the short-term direct relief brought about by this potential adjustment may be limited in scale, but it may provide a boost on an emotional level. In the medium to long term, it will help boost the attractiveness of Hong Kong stocks as high-dividend assets, enhance the liquidity of Hong Kong stocks, and even help some companies' AH premiums to settle.

Recently, Hong Kong's Hang Seng Dividend ETF and Hang Seng High Dividend ETF have clearly strengthened. In early trading today, the former opened 1.65% higher, and once surged more than 4% after opening. The increase since this year has also been quite impressive. The state-owned enterprise index rose by more than 1% today, with a cumulative increase of more than 15% during the year; the red chip index rose more than 2%, with a cumulative increase of more than 16% during the year.

How is the market going?

As positive developments continue to appear, Hong Kong stocks have recently shown impressive gains, and the main indices have already entered a technical bull market. In early trading today, the Hang Seng Index opened up another 0.71%, the Hang Seng Technology Index rose 0.72%, and the Hong Kong Stock Exchange rose about 3.5% to lead the blue chip increase. At this point, however, differences also began to emerge.

Dai Kang of GF Securities believes that since April of this year, the main line of global asset trading has experienced a process of switching back from “fundamentals” to “liquidity”, resulting in a global capital rebalance — the lower the valuation of the market (industry), the better, and Hong Kong stocks have significantly benefited from this.

Two major characteristics of Hong Kong stocks determine their position in global asset allocation: First, their low correlation with various types of global assets determines that Hong Kong stocks are an important means of risk diversification. Hong Kong stocks have undoubtedly assumed the role of bridgehead and portfolio value for Chinese stocks in global capital allocation. The second is the characteristic of high elasticity, which determines that Hong Kong stocks are an important direction for the elasticity of game combinations.

After the sharp rise in Hong Kong stocks, the odds were still agreed. The current valuation of the Hang Seng Index still has a certain price/performance ratio. As of May 7, the Hang Seng Index's forward PE is below the average of -1 STD, which has rarely stayed since 2010, and the Hang Seng Index ERP, which is based on 10Y US Treasury interest rate estimates, is near the historical average since 2010. From a structural perspective, the current price of Hong Kong stocks is already more pessimistic. Long-term concerns such as sluggish real estate and rebalancing of residents' balance sheets have been expressed a lot in the Hong Kong stock structure.

However, Tianfeng Securities believes that the price-performance ratio of Hong Kong stocks is indeed quite attractive. The risk premium for Hong Kong stocks, which is based on domestic bond yields, is at an all-time high of over 90%, and the valuation is cheap. From the perspective of foreign investment, the rebound in interest rates on US bonds has led to a further deterioration in the price-performance ratio of US stocks. Based on US bonds, the risk premium for Hong Kong stocks is currently at a neutral level, but it is also higher than the major US stock indices (risk premiums for the S&P 500, Dow Jones, and NASDAQ are in the 36%, 15%, and 19% levels, respectively). However, in terms of trading, the profit and loss ratio of the Hang Seng Index is currently not high. The trading congestion of the Hang Seng Index has risen rapidly and has reached a new high in the past year. Currently, it is in the 89% congestion range. The Call-Put Ratio (a technical indicator that measures market sentiment and predicts short-term stock market trends) of the Hong Kong Stock China Enterprise Index also rose to 1.8 in April, reaching a record high.

How to find high dividend stocks?

Newcomers can easily find their favorite stocks by going to Discover > Markets > Select Hong Kong Stocks > High Dividend Ratio List.

Editor/Somer