Societe Generale Securities released a research report saying that China has entered a new stage of high-quality development, and the current liquidity environment is relaxed, the risk-free yield has dropped below 3%. The yield of bank wealth management products continues to decline, and high-quality assets that can provide stable and high returns are relatively scarce. As a result, high-quality value stocks with a dividend rate of 8% or higher in the Hong Kong stock market are favored. The bank said that the high-dividend strategy for Hong Kong stocks also includes “non-mainland” Hong Kong stocks. In particular, local Hong Kong stocks are worth paying attention to, such as high-quality high-dividend companies in the fields of local utilities, finance, real estate, and integrated industries in Hong Kong.
Societe Generale Securities views the following:
At the macro level, China has entered a new stage of high-quality development. The low interest rate environment may be the norm for a long period of time, and the demand for steady asset allocation of social wealth is a trending force.
China has entered a new stage of high-quality development, and the current liquidity environment is relaxed. The risk-free yield has dropped below 3%. The yield on bank wealth management products continues to decline, and high-quality assets that can provide stable and high returns are relatively scarce. As a result, high-quality value stocks with dividends of 8% or higher in the Hong Kong stock market are favored. From the perspective of dividend rates and treasury bond spreads, as of February 23, 2024, the dividend rate of the Hang Seng Hong Kong Stock Connect High Dividend Low Volatility Index was 7.4%, at the 62% quantile level since 2020. The spread with the 10-year Chinese treasury bond yield reached 5.0 percentage points, which is at a historically high quantile level.
At the meso level, the dividend ratio of high-quality central state-owned enterprises is expected to continue to rise under the guidance of state-owned enterprise reform policies. State-owned enterprise reform policies have been introduced frequently in recent years, and the dividend stability and momentum of central state-owned enterprises has increased.
Increased profit stability and increased cash flow levels are important support for improving dividend capacity. The “Plan” and the State Assets Administration Commission optimized the operating index system for central enterprises to “one profit and five rates”, showing that in the new era, central state-owned enterprises are shifting from focusing on revenue scale to focusing on profitability and cash dividends.
Incorporating “market value management” into the performance assessment system uses this as a baton to guide listed companies to “convey confidence, stabilize expectations, and increase cash dividends in a timely manner through the application of market-based holdings increase and repurchases.”
In recent years, the overall ROE and dividend ratio of high-dividend high-quality central and state-owned enterprises represented by three barrels of oil, four major banks, and three major operators has shown a steady upward trend.
At the micro level, Beishui gradually obtained pricing rights for Hong Kong stocks with high dividends from central state-owned enterprises.
Since the beginning of 2022, we have continued to remind Hong Kong stocks of the allocation value of high-quality central state-owned enterprises with high dividends, and proposed that Chinese investors will obtain pricing rights from high-quality central state-owned enterprises.
In recent years, allocation-type Chinese investors have faced an “asset shortage” to a certain extent. In particular, mainland public fund companies' fixed income departments, insurance, bank financial management agencies and other institutions have strong demand for allocation of high-quality and effective assets. Compared with A-shares, high-quality Hong Kong stocks with deep dividends are more cost-effective and attract capital inflows from the south.
Currently, the AH premium is at an all-time high, and Hong Kong stocks have a high cost performance ratio. Subsequent Hong Kong stock high-dividend assets are expected to continue to attract capital inflows from the south due to their “low-wave dividend” characteristics. Historically, whenever the AH premium rose soon after it became high, south-bound capital poured in actively until the AH premium once again converged. As of February 23, the AH premium index was 151.80, which is at the 98.6% quantile level since 2015.
Comparing the dividend rate of AH shares listed in the two places (nearly 12 months), H shares have a higher dividend rate than A shares (nearly 12 months). Even after deducting the dividend tax of about 20-28% that Hong Kong stocks will face when investing in Hong Kong Stock Connect, the dividend rate of Hong Kong stock with high dividend stocks is more attractive.
Southbound capital gradually replaced the pricing power of foreign investors to obtain high dividend targets in Hong Kong stocks, and became the leading force in revaluing the high dividend targets. In recent years, taking central state-owned enterprises with high dividends as an example, their share share of Hong Kong Stock Connect has been rising year by year, from 5.3% at the end of 2018 to 13.5% on February 21, 2024, while the share of international intermediaries measuring foreign holdings declined markedly, from 26% at the end of 2018 to 16.6%.
The high dividend strategy for Hong Kong stocks also includes “non-mainland” Hong Kong stocks. In particular, local Hong Kong stocks are worth paying attention to.
In addition to high-quality central state-owned enterprise targets, another important component of the Hong Kong stock market pool with high dividend targets is local Hong Kong stocks, such as high-quality high-dividend companies in the fields of local utilities, finance, real estate, and integrated industries in Hong Kong.
Hong Kong's local stock dividends are growing steadily every year. Take Hong Kong-funded housing enterprises as an example. From 2015 to 2022, dividends per share showed a steady upward trend. Most companies had a compound growth rate of more than 3% per share in 2015-2022; some local Hong Kong stocks promised higher and stable dividends. Furthermore, in 2022, the dividend ratio of some representative companies in Hong Kong's local finance, utilities, and integrated industries remained high, and the dividend per share basically returned to the level of 2019.
Hibor interest rates have declined, and the attractiveness of local Hong Kong stocks with high dividend rates has increased. With the Federal Reserve's interest rate hike in early 2022 and the rise in interest rates on US ten-year treasury bonds, the Hibor interest rate in the Hong Kong market rose rapidly, and the spread with Hong Kong's local stock dividend rate continued to narrow, surpassing the dividend rate on local stocks at one point. Since October 2023, as expectations of interest rate cuts from the Federal Reserve continue to heat up, the Hibor interest rate falls, and the spread between Hong Kong's local stock dividend rate and the Hibor interest rate widens again, Hong Kong's local stocks are expected to regain the favor of investors.
Investment opportunities: High-dividend assets are the target of medium- to long-term core allocation of Hong Kong stocks.
In the medium to long term, in a relatively complex domestic and international environment, assets that can provide stable high dividends are invaluable. High-dividend assets are one of the key investment strategies for allocating China's equity assets in the future. Investors are advised to allocate leading central state-owned enterprises in the fields of energy (oil, coal), telecom operators, utilities, real estate, finance, highways, etc. based on a long-term, strict “low-wave dividend, convertible bond-like” strategy, as well as high-quality high-dividend companies in Hong Kong's local utilities, finance, real estate, and integrated industries.
Risk warning: the risk of a game between major powers; the risk that the Fed's policy easing falls short of expectations; the risk that the decline in global economic growth exceeds expectations