'Stock Connect' buyers shun Hong Kong blue chips
A surge of cash from mainland China into Hong Kong stocks has mostly found its way into companies little known to global investors, a development already starting to alter the city’s market.
Mainland investors have plowed a net 26.4 billion yuan ($ 4.25 billion) into stocks traded in the former British colony since Wednesday, sending shares of Hong Kong-listed Chinese companies skyrocketing and the city’s share-trading volumes to record highs. But blue-chip perennials, names such as HSBC Holdings PLC, CK Hutchison Holdings Ltd. and Swire Pacific Ltd., weren’t among the 10 most traded by mainland investors.
Instead, these investors have focused on company names recognized in China, or firms that are dual listed and trade at a wide discount in Hong Kong. Firms such as Hanergy Thin Film Power Group Ltd. and Golden Eagle Retail Group Ltd. have attracted significant turnover through the Shanghai-Hong Kong Stock Connect, which links the two stock exchanges.
For these Chinese buyers, the hope is to avoid big blue-chip stocks widely held by international investors. Mainland investors fear that their smaller influence could be quickly overwhelmed, said Wang Zhihua, chief investment officer and portfolio manager of CSOP’s China New Balance Opportunity Fund, a mainland asset manager.
“Chinese investors are aware that the pricing power of large-cap in Hong Kong is controlled by institutional investors, especially overseas investors,” he said. “So generally, the investors coming from mainland China would trade small-cap instead of large-cap.”
Hong Kong Stock Exchange Chief Executive Charles Li, in a blog post published Thursday, said that mainland investors bring “differences in investment values, risk awareness and regulatory cultures.” In a message that appeared designed to cool some of last week’s trading passions, he said their arrival “will bring new challenges and risks to Hong Kong investors, particularly retail ones. Staying calm and exercising caution in a more active market will be a challenge to each investor in Hong Kong.”
That said, most of the mainland trading hitting Hong Kong’s market smacks of common sense. Many Chinese traders are simply buying familiar firms that aren’t listed on the mainland and had been out of reach for these investors.
This has left foreign fund managers and brokers saying they are trying to figure out what will be the next hot stock among buyers tapping the market through Stock Connect.
“Chinese investors may go for brands they are familiar with,” said Winner Lee, Asia equity derivatives strategist at BNP Paribas SA. These include electronics retailer GOME Electrical Appliances Holding Ltd. and Internet giant Tencent Holdings Ltd., which operates the popular WeChat instant messaging app.
Shares of GOME Electrical Appliances, one of two leading Chinese electronics retailers, rose 46% in the last three days of last week. It was the most-traded stock by mainland investors via Stock Connect on Friday.
Compared with its Shenzhen-listed rival Suning Appliance Co., it still looks cheap, according to Jingwen Wang, an analyst at Haitong International Research Ltd. “Suning trades at a forward [price-to-earnings ratio] of about 100 times, versus GOME which, before the rally, was at roughly 12 times forward P/E,” said Ms. Wang.
The trading is also about capturing the valuation gap between stocks listed both in Hong Kong and China. Hong Kong equities trade at an average discount of 23.4% to the their mainland counterparts, even after last week’s rally, which boosted the Hang Seng Index by 7.9%.
Hong Kong-listed shares of power company Shanghai Electric Group Co. Ltd. and chemical producer China Molybdenum Co. Ltd., two of the top-traded companies by mainlanders via Stock Connect, were trading at a discount of 49% before the rally.
There is also a self-reinforcing dynamic. Mainland investors are buying Chinese brokerage stocks such as Haitong International Securities Group Ltd. and Citic Securities Co. Ltd., reasoning that their business will boom as a result of the Connect program.
Two mainland blue chips that surged were railway giants CSR Corp. Ltd. and China CNR Corp. Ltd., which each rose more than 18% after they announced they received regulatory approval from Beijing to merge. Mainland investors scooped up the stocks, making CSR the top traded company through Stock Connect on Wednesday and Thursday. It was among the top five Friday.
“Hong Kong’s market may become more sensitive to Chinese policies in the future,” said Ms. Lee of BNP.
William Fong, a fund manager at Baring Asset Management, said mainland investors are astute about their local economy, and invest accordingly. Sectors that aren’t growing, such as the tightly regulated global banking industry, are unlikely to attract Chinese investment.
“The mainland investor is not stupid,” he said. “We can’t just rely on what the mainlander is thinking.”
Write to Gregor Stuart Hunter at email@example.com
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