Source: Wall Street Journal
GF SEC believes that there is still room for the mid-term contraction of the AH premium rate, driven by the increased trading activity of Hong Kong stocks, improved quality of listed companies, and the scarce attractiveness of new IPO companies in Hong Kong. However, in the short term, market sentiment is weakening, the Range of fluctuations is narrowing, and changes in premium rates may be more reflected in the differentiation of Sectors and individual stocks.
Is the AH Premium Rate at a five-year low, indicating potential valuation recovery for Hong Kong stocks?
Last week, Wall Street Insights mentioned that the Hang Seng Stock Connect China AH Premium Index shows that the premium rate of A-shares compared to the same company's H-shares is 27%, marking the lowest record since August 2020.
The current Hang Seng AH Premium Index has significantly fallen below the 130-point threshold, which represents a 30% premium rate for A-shares. Historically, when the premium rate falls below 30%, the valuation gap tends to widen again.
According to news from the Trading Desk, the latest Research Reports published by GF SEC analysts Liu Chenming, Zheng Kai, and Xu Xiangzhen indicate that the phenomenon of AH premium rate hitting a new low is attributed to a combined effect of the liquidity discount recovery of Hong Kong stocks, strong performance of growth stocks, and pressure from high dividend symbols lowering the premium.
GF SEC further points out that from a medium-term perspective, there is still room for further narrowing of the AH premium rate, and short-term market sentiment fluctuations may lead to changes being more evident at the sector and individual stock levels.
Liquidity discount recovery highlights the resilience of Hong Kong stocks.
Analysis from GF SEC's Research Reports shows that from 2021 to present, the AH premium rate has a negative correlation with the Csi 300 Index (correlation coefficient -0.46), meaning that within the same range, Hong Kong stocks tend to be more resilient most of the time. This indicates that during market uptrends or stabilization phases, Hong Kong stocks often outperform A-shares, leading to a narrowing of the premium.
This contrasts with the situation from 2013 to 2020 when the A-shares were more elastic.
The report shows that the reasons for the relative enhancement in Hong Kong stocks’ elasticity include: on one hand, after 2021, the core asset bubble burst, and the decline in A-shares' trading volume was more significant, leading to a correction in the liquidity discount of Hong Kong stocks relative to A-shares. On the other hand, in the past three years, active foreign capital has continuously withdrawn from Chinese assets, and the trading and speculative attributes of Hong Kong stocks have strengthened, resulting in increased volatility.
Data shows that since 2024, the Turnover Ratio of the Hang Seng Small Cap Index has risen, indicating an increase in market activity.
Growth stocks contribute to a narrowing premium rate, while financial stocks still dominate.
Since the beginning of this year, the weighted AH premium rate calculated by GF SEC has narrowed from 64.6% to 42.2%, a decrease of 22.4 percentage points.
The report points out that besides the companies in the Bank, Non-Bank, and Oil and Petrochemical sectors leading the AH premium rate, the significant rise of some growth stocks in Hong Kong this year is also helping to bridge the price gap in the AH market.
From an industry perspective, the sectors with the highest contribution rates are Non-Bank Financial (-5.4 percentage points), Bank (-5.3 percentage points), Oil and Petrochemical (-2.9 percentage points), Semiconductor (-1.5 percentage points), and Electrical Equipment (-1.0 percentage points).
From the industry's own perspective, the top five industries with the most significant narrowing of the AH premium rate this year are Electrical Equipment, CSI SWS Health Care index, Nonferrous Metals (Gold), Semiconductor, and Autos, most of which are growing sectors. Traditional high-dividend industries are in the second tier in terms of narrowing.
In terms of individual stocks, Contemporary Amperex Technology, as a new company listed on the Hong Kong stock market this year, currently has an A-share discount of 10.9% compared to H-shares. The premium rate of Semiconductor Manufacturing International Corporation has narrowed from 221.3% at the beginning of the year to 129.7%.
Research Reports data indicate that the level of dividend yield is an important influencing factor of individual stock premium rates. High dividend yield stocks basically do not have high premium rates, and once the dividend yield reaches over 4%, the probability of the premium rate exceeding 50% will significantly decrease.
Among companies with a market cap of over 20 billion yuan and a minimum and average dividend yield of over 4% in the past three years, the premium rate of these companies' AH stocks is generally lower than the current median (62.8%). However, there are still significant differences within high dividend-paying companies, especially for individual stocks with poor performance in the latest Earnings Reports showing a higher overall premium rate.
Mid-term outlook: There is further room for convergence in the AH premium rate.
The report summarizes that the key factors affecting the AH premium rate include: First, whether the trading activity in the Hong Kong stock market can continue to improve, which determines the extent of correction for liquidity discounts in Hong Kong stocks; Second, the quality of companies listed in both markets, specifically whether profit stability and dividend stability can be enhanced; Third, the qualifications and rarity of new IPO companies in A-shares going to Hong Kong.
This year, high-quality A-shares such as Contemporary Amperex Technology have gone public in Hong Kong, with financing mainly used for overseas business expansion, which aligns with market expectations for Chinese companies to break through. An increasing number of non-traditional financial and energy companies are listing in Hong Kong, indicating that more quality Chinese assets can be purchased in the Hong Kong stock market in the future.
The report indicates that over a longer window period, the AH premium rate is expected to further converge, and more scenarios may arise where Hong Kong stocks are premium to A-shares. However, under the current backdrop of weakening market sentiment and narrowing volatility Range, changes in the AH premium rate may be presented more in terms of Sector and individual stocks.
Editor/jayden
