Growth diffusion - Hong Kong stock industry comparative investment strategy in the second half of 2025.
According to Zhitong Finance APP, SWHY released a Research Report stating that considering five factors: fundamentals, valuation, chips, policies, and market trading characteristics, investment opportunities in Hong Kong stocks will continue to spread in the second half of 2025. There will be a focus on investment opportunities in the broadly defined growth sectors represented by Internet Technology and Health Care. Mid-term, new consumption stocks still have alpha advantages, but short-term they face a lack of cost-effectiveness.
The main points of SWHY are as follows:
First question: Are opportunities in Hong Kong stocks only focused on leaders?
As an important offshore financial market in China, the market characteristics previously displayed by the Hong Kong stock market and the cognition framework formed by investors show that Hong Kong stocks have a high similarity to US stocks, mainly focusing on leader investments. However, this year, the Hong Kong stock market, as the pioneer of asset revaluation in China, has shown strong stock price performance. Since April 2025, the trading volume proportion of small and medium-sized companies in the Hong Kong Stock Connect has rapidly increased, reflecting that the market's exploration of Hong Kong stock opportunities has already deepened, particularly in the Health Care industry where the spread to small and medium-sized companies is especially evident. Future investments in Hong Kong stocks will not only be in the Hang Seng TECH Index and major large-cap companies, but also in the systematic spread of quality companies.
Second question: What does 'civil special valuation' in Hong Kong stocks mean?
Since the fourth quarter of 2024, policies to promote the development of the private economy and the Hong Kong stock market have been frequently issued. Marked by the private entrepreneurs' symposium in February this year, there has been a noticeable increase in inclination towards private enterprises from the policy side. New generation information technology, artificial intelligence, and biotechnology are seen as new economic growth drivers, and it is found that Hong Kong private companies are nurturing new core assets. Looking at the A-share and Hong Kong Stock Connect markets in combination, among SWHY’s secondary industries, the largest market cap companies in 30 industries have already appeared in Hong Kong stocks, and they are almost all private enterprises.
Three questions: What position is the profit cycle of Hong Kong stocks in?
Analyzing the performance of the Hong Kong Stock Connect for the 2024 annual report, the Industry revenue, profit, gross margin TTM, and ROE TTM all stabilized and rebounded in the 2024 annual report: In the 2024 annual report, the revenue growth rate of the Hong Kong Stock Connect is 2.4%, an increase of 0.8 percentage points compared to 24H1, and the net profit growth rate attributable to shareholders is 7.4%, an increase of 7.7 percentage points compared to 24H1. The gross margin TTM is 9.3%, an increase of 0.1 percentage points compared to 24H1, and the ROE TTM is 12.4%, an increase of 0.3 percentage points compared to 24H1. Analyzing ROE with the DuPont method shows that both the net profit margin and asset turnover rate contribute positively, also indicating that the performance improvement of the Hong Kong Stock Connect comes from both volume and price increases, with a high certainty of improved profitability.
Four questions: Which sectors and industries of Hong Kong stocks are experiencing simultaneous volume and price increases?
From a major sector perspective, the TMT and Health Care industries show significant improvements in profit margins in the 2024 annual report. The revenue and profit growth rates of the TMT and Health Care sectors in 2024 increased compared to 24H1, and the ROE TTM shows a clear margin improvement, with both the net profit margin and asset turnover rate contributing positively. At the primary industry level, the Computer, Machinery, Health Care, Autos, Transportation, Retail, Bank, Textile & Apparel, Non-bank, and Social Services industries are all experiencing simultaneous volume and price increases. The Power Equipment and Real Estate sectors are facing simultaneous decreases in volume and price. Compared to A-shares, the Hong Kong Stock Connect has a highly concentrated industry characteristic. Excluding the impact of large-cap companies, analyzing the proportion of companies in each industry with improved net profit growth attributable to shareholders compared to 24H1 will reveal that the average profitability improvement level in the consumer industry lags behind.
Five questions: Is the allocation limit of public funds to Hong Kong stocks 20%?
According to the Q1 2025 data on the heavy stocks of public funds, the proportion of active equity public funds allocated to Hong Kong stocks has increased from 14.5% in Q4 2024 to 19.2% in Q1 2025, raising concerns among some investors about whether public funds' increasing allocation to Hong Kong stocks is nearing its limit. Currently, Hong Kong stocks can be compared to the GEM of 2012, as both are concentrated listing locations for emerging technology assets and core assets under specific historical backgrounds. From 2010 to 2015, the allocation percentage of the GEM went from non-existent to about 26%. In terms of passive funds, the current market value of cross-border Hong Kong stock ETFs accounts for 1.09% of the market cap of the Hong Kong Stock Connect, correspondingly, the proportion for active equity public funds is 1.01%, indicating that there is also room for growth.
Six questions: What are the five major industry directions for passive fund allocation to the Hong Kong Stock Connect?
In addition to index ETFs, passive funds are mainly allocated to five major industry directions in Hong Kong stocks: Internet, Health Care, Autos, Consumer, and Dividends (State-owned Enterprises). In the first quarter of 2025, the shares of Dividends, Consumer, Internet, and Autos expanded, while the share of Health Care declined.
Question seven: What are the differences in sector allocations between the Hong Kong Stock Connect and various foreign capital?
The consensus direction of both domestic and foreign capital is in the health care sector. In the Hong Kong Stock Connect's symbol pool: the sectors where southbound funds and foreign capital have increased positions recently are the CSI SWS Health Care index and light industry manufacturing; the sectors where both have decreased positions recently are Real Estate, Computer, CSI SWS Food & Beverage index, and electronics; the sector where southbound funds have increased and foreign capital has decreased is social services; and the sectors where southbound funds have decreased and foreign capital has increased are media and Autos.
Question eight: Where will the next destination for funds leaving the U.S. be?
Against the backdrop of the current China-U.S. trade conflict and the declining credibility of the U.S. dollar, global funds will also undergo a rebalancing; it can already be observed that funds are leaving the U.S. stock market and flowing into the European stock market. As high-quality assets in Hong Kong increase, the first stop for foreign capital returning to Chinese assets will be in Hong Kong stocks.
Question nine: What is the valuation situation across different sectors in Hong Kong stocks?
Considering that some companies in growth sectors (such as Computer and health care) may still be in a loss phase, and measuring with PE, PB, and PS valuations: industries with all three metrics below the 40th percentile are: media, Real Estate, and household appliances; industries with all three metrics above the 70th percentile are: light industry manufacturing, textiles and apparel, and coal.
Question ten: Will the A-H premium converge in the future?
Overall, the property of Hong Kong stocks being undervalued still exists, with the A-H premium at about 140%. However, it has also been discovered that some stocks listed on both A-shares and Hong Kong stocks have higher valuations in the Hong Kong market than in the A-share market (WUXI APPTEC, CM BANK, etc.). In the future, during the process of reconstructing the global financial order, Hong Kong will play an important role and become the core capital market of local onshore funds + the new global order. The prosperity of high-quality assets in Hong Kong stocks will continue to rise, and the A-H premium will keep converging.
Risk Warning: 1) The macroeconomic performance of China is below expectations, and the speed of Foreign Inflow is slowing; 2) Considering that the fiscal year of some companies under the Hong Kong Stock Connect is not entirely consistent with the Calendar year, and some companies only disclose annual and semi-annual reports, the quarterly performance of Hong Kong Stock Connect companies has been split based on the seasonal trends of the A-share Industry, and the quarterly Operating conditions of certain companies are derived from logical estimates.
