HK stocks may take a pause amid China party congress

October 18, 2017 10:40
Xi Jinping walks towards the stand to deliver his speech during the opening session of the Chinese Communist Party’s 19th National Congress in Beijing on Wednesday. Investors will be watching the event closely for clues on policy initiatives for the next

China's top officials are gathering in Beijing this week for the Communist Party's 19th national congress. The world will be watching the event closely as it will provide guidance on President Xi Jinping's plans for the next five years.

While the main focus will be on politics and changes among the top party members, investors will be looking for clues on initiatives related to the nation's monetary and economic policy.

In a previous column, I had outlined my optimism in relation to China's potential economic restructuring in the coming two years, and set a two-year target for Hong Kong’s benchmark stock index at 40,000.

A strong rally this year has pushed the Hang Seng Index to fresh 10-year high this week. I believe the market has mostly priced in almost all favorable factors for the short term.

As the largest index constituent, the financial sector, particularly China banks, play a decisive role in the index performance.

ICBC (1398.HK) has led the advances, with its share price jumping 37 percent year to date. The bank's H-shares are trading at 0.93 price-to-book ratio in Hong Kong, while its Shanghai-traded A-shares are at over 1 ratio.

Trading at a discount to its US counterparts such as JPMorgan and Goldman Sachs, there could be further upside for ICBC shares in the medium and long term.

The Chinese banking giant will announce its third-quarter earnings results this month. One thing that investors should bear in mind that very high loan growth is not preferred for China banks; the focus should be on the bad-debt ratio and the bank's ability to deal with bad loans, as well as growth in interest margin.

Among other sectors, Chinese property developers, which had been the hottest part of Hong Kong's market in recent weeks, are likely to ease down.

Housing sales during the recent Chinese Golden Week holiday period were largely unsatisfactory. While analysts put the blame on tightened control measures, I would say the real reason is simply that home prices have become too high. Property sales in China’s first-tier cities have been cooling down for some time.

Chinese automobile stocks, another hot sector in the market, have seen a long rising streak. Auto sales in China have been just average, yet investors were excited by themes such as consumption upgrade, development of local auto brands and the government's electric vehicles promotion.

Shares of carmakers such as Geely Automobile (175.HK), BYD (1211.HK), Brilliance Auto (1114.HK), and Great Wall Motor (2333.HK) have significantly advanced this year, and they are certainly not cheap when compared to foreign automakers (except Tesla). Hence, the sector uptrend may slow down in the short term.

Accounting for about 10 percent of index weighting, Hong Kong property developers such as CK Asset (1113.HK), Sun Hung Kai Properties (16.HK), Henderson Land (12.HK) and Wharf (4.HK) have seen share price gains of between 30 to 50 percent.

As key farmland holders in the city, the firms have hoarded huge agricultural land banks. Successful conversion of the farmland into development sites would give an additional boost to their business.

Meanwhile, some self-made property tycoons, including sugar-to-palm-oil and hotel baron Robert Kuok, are getting ready to hand over reins to the younger generation. As more succession plans are revealed, we can expect more corporate actions and group restructuring which can help unlock the value of some assets.

Kerry Properties (683.HK), Shangri-La Asia (69.HK), Sino Land (83.HK) and Hongkong & Shanghai Hotels (45.HK) should be among the stocks to watch.

According to previous statistics, the Hong Kong stock market turned slack during China Communist Party congress sessions and remained stagnant for a while after the events. The market may stick to the usual 'plotline' now.

But in case the market sees some over-excitement and undue speculation, I would advise a cautious approach.

This article appeared in the Hong Kong Economic Journal on Oct 17

Translation by Ben Ng

[Chinese version 中文版]

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Eddie Tam is the founder and CEO of Central Asset Investments.