Source: Finance Association

On Friday, it was reported online that mainland individual investors may be exempted from the 20% dividend tax on the Hong Kong Stock Connect. Investors' risk appetite for the Hong Kong stock market, especially related high-dividend sectors, has increased markedly, driving many Hong Kong stock dividend-related ETFs to soar.

It is worth noting that Hong Kong stocks have gone from being pessimistic for four consecutive years at the beginning of the year to leading the global rise for 10 days this month. As of May 10, the Hang Seng Index, Hang Seng Technology Index, and Hang Seng Hong Kong Chinese Enterprises Index have risen by 14.64%, 13.94%, and 16.28% respectively since entering April. So, if the Hong Kong Stock Connect dividend tax level is lowered, will high-dividend assets be more sought after? Can the Hong Kong stock dividend tax theme lead Hong Kong stocks to break through another wave of opportunities? Isn't there an immediate need for regular investors to follow up?

Agencies are not advised to follow up on the subject of dividend tax in the short term

Regarding the above issues, Guoxin Securities overseas research indicates that in the short term, they still believe that the short-term slope of Hong Kong stocks is too high; in terms of structure, sentiment has been unleashed into industries where small and medium capitals and Hong Kong stocks are relatively unpopular. Therefore, they are still cautious about Hong Kong stocks in the short term, and there is no need for immediate follow-up in the short term.

Discussions on the Hong Kong Stock Connect dividend tax began earlier this year. During the March 2 meetings this year, Lei Tianliang, deputy to the National People's Congress and chairman of the Hong Kong Securities Regulatory Commission, proposed lowering the dividend tax level for Hong Kong Stock Connect individual investors and lowering the entry standards for Hong Kong Stock Connect mainland investors. In addition, National People's Congress deputy Sin Handy also proposed reducing the cross-border dividend tax that individual investors must pay to invest in the Hong Kong capital market through the Hong Kong Stock Connect from 20% to 10%, in line with the regulations for overseas investors to invest in the domestic capital market through the Shenzhen-Shanghai Stock Connect.

According to current regulations, when an onshore investor invests in A-shares, they are subject to 20% dividend tax; those who hold shares for less than a month to a year are subject to 10% dividend tax; those who hold shares for more than a year are exempt from dividend tax. However, when investing in Hong Kong stocks through Hong Kong Stock Connect, the current practice is to levy a uniform 20% dividend tax.

Wang Xueheng, an analyst at Guoxin Securities, said that through simple mathematical calculations, it can be determined that if the dividend tax is lowered from 20% to 10%, then the valuation of Hong Kong stock dividend assets can theoretically increase by up to 12.5% under the dividend valuation framework; if the dividend tax is completely exempted, the valuation of Hong Kong stock dividend assets can theoretically increase by up to 25%. Therefore, if the relevant proposals are finally implemented, this is expected to become a strong stimulus policy for Hong Kong stocks.

CICC, on the other hand, said that the scale of direct dividend tax relief is relatively limited, but it helps to boost sentiment. The total amount of dividend tax collected by the Hong Kong Stock Connect mechanism is about HK$45 billion each year. 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. 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.

According to J.P. Morgan, according to the 30-day moving average, the average daily turnover of Hong Kong stocks is HK$115 billion, which is almost the same as the 10-year level of HK$106 billion. If the turnover rises by 1 standard deviation to HK$141 billion, it will have an 11% impact on the Hong Kong Stock Exchange's earnings per share.

The Hong Kong Stock Connect industry is more diversified

It is worth noting that J.P. Morgan believes that exempting Hong Kong Stock Connect dividend profits tax would benefit banks and brokerage stocks.

As the after-tax yield gap between H shares and A shares will widen, CCB is expected to benefit bank stocks. CCB shares are expected to benefit the most, because CCB's dividend return of 5.7%, but CCB's H share dividend return is 8.3%, or 2.6% between H shares and A shares. In addition, the dividends between Agricultural Bank, Bank of China, and ICBC H shares and A shares are 1.8%, 1.8%, and 1.9%, respectively. In terms of brokerage stocks, CICC, Huatai Securities, and CITIC Securities account for a relatively high share trading volume in Hong Kong stocks. If the Hong Kong Stock Connect dividend profits tax is exempt, the above stocks will perform well in the short term.

Looking at the capital composition of Hong Kong stocks, Chen Guo from CITIC Construction Investment mentioned that historically, Hong Kong stocks were dominated by foreign capital and Hong Kong capital. With the continuous inflow of southbound capital, the Hong Kong stock market is currently showing a situation where domestic capital, foreign capital, and Hong Kong capital are on three legs. With policy support, the right to price southbound capital is expected to increase dramatically. Foreign investors mainly prefer science and network enterprises; domestic capital allocation is more balanced and diversified, and they prefer central state-owned enterprises. The main allocation of Hong Kong stocks this year is still the dividend sector. Under the AH share premium phenomenon, Hong Kong stocks have a higher dividend ratio and are relatively cost-effective. The SciNet sector focuses on leading stocks that have improved recently.

In terms of changes in the allocation of southbound capital, Chen Guo believes that there is a trend of diffusion from the dividend sector to other sectors. Specifically, southbound capital began flowing into Hong Kong stocks in January of this year, initially allocating dividend assets with safe-haven properties. Recently, with foreign capital inflows and overall market improvements, the risk appetite for southbound capital has increased, and capital has gradually spilled out to new economic sectors such as media and new energy vehicles.

Looking at the allocation of the Hong Kong Stock Connect industry, as of April 30, the allocation for the past quarter was mainly concentrated in industries with high dividend rates such as banking, petroleum and petrochemicals, and telecommunications. Since January, capital has gradually spilled into the new economy sector, and the media industry, which is dominated by Internet companies, has jumped to second place, accounting for 9.9% of Hong Kong Stock Connect's net inflow.

editor/tolk