Hong Kong Strategy 19 February 2019Hong Kong Equity Strategy
Page2
UBS Research THESIS MAP
PIVOTAL QUESTIONS Q: Why monetary amount of DPS can be more important than payout ratio for HK stocks
For listcos that hold investment properties, eg. real estate companies that operate as landlords,
their bottom lines are usually a mix of core earnings and revaluation gains of the investment
properties. Such gains are recorded as non-cash profits, thus the listcos do not set their dividend
payout ratios on the reported earnings.
In addition, the deposit interest rates in HK has been low, perhaps partly due to concentrated
market shares by the local banks, vs much higher deposit interest rates in mainland China, with
more fragmented market share and interest rate liberalization. Hence HK investors have been
willing to accept moderate but steadily growing dividend per share.
Q: How would the arrival of GBA impact MSCI-HK
The GBA should lift overall economic growth and wealth creation in the underlying
geographies. But this will also narrow pricing gaps in HK and rest of GBA, and open up Hong
Kong businesses to greater competition. There will be a period of adjustment for many listed
HK stocks in our view, as mainland competitors offer cheaper solutions at lower margins.
Insurance, Macau gaming & leisure, properties and discretionary retail will benefit from
strong economic growth, but in the case of property, may see more supply overtime.
Gas and IPPs, which are licensed businesses and serve Hong Kong local residents, are less
unaffected for now. Given the price differential vs the rest of GBA, we believe there is a risk
that such gaps are becoming better recognized by the society in general.
Banks, stock exchanges and transport, which have greater mainland and international
exposure, are more exposed to rising competition from the mainland.
UBS VIEW UBS's North Asia economist Li Zeng believes 1) there is a better chance for US and China to reach
agreement on trade, and there is little risk of US stop treating HK as a separate customs territory; 2)
the HK physical property market will continue to adjust but deep correction is unlikely with less than
previously expected interest rate hike. Combining that macro backdrop with our analyst bottom up
assessments, we set our year-end price target of 13,072 on the MSCI-HK, for 6% upside.
WHAT'S PRICED IN HK equity investors seem to have been prepared to pay elevated multiples for utility businesses,
without necessarily recognising how elevated tariffs are (by regional and global standards).Similarly,
prices paid for some conglomerates/real estate would suggest that investors haven’t focussed enough
on the proportion of earnings that are essentially revaluation gains.
UPSIDE/DOWNSIDE
SPECTRUM
Source:UBS estimates
+24%
+6%
-11%
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
201720182019
Upside:
Base:
Downside:
15,251
13,072
10,894
MSCI Hong Kong Target price2019E
BPS y-y2019E P/Bimplied
+4.4%1.4x
+4.4%1.2x
+4.4%1.0x
Hong Kong Strategy 19 February 2019After decades of wealth creation…
Hong Kong (HK) was a small fishing village in the Qing Dynasty (17th-early 20th
century). Standing up to and striving under varying global political/economic
dynamics in the past two centuries, HK's remarkable growth is visible and well-
known worldwide.
From 1962 to 2017, HK posted ≥6% YoY nominal GDP growth in 41 of the 56
years. Twelve years between 1962 and 1987 registered ≥10% YoY real GDP
growth (≥15% YoY nominal GDP growth), and its GDP was 21% of the combined
HK and mainland GDP in 1993 (Figure 1-Figure 2).
Figure 1: Hong Kong: YoY GDP growthFigure 2: HK's nominal GDP as a % of combined HK and
mainland GDP since 1961
Source:Census and Statistics Department of Hong Kong, UBSSource:World Bank, UBS
Figure 3: HK's resident population as a % of combined HK
and mainland population since 1961
Figure 4: Resident population comparison: HK vs. Beijing,
Shanghai, Guangzhou and Shenzhen since 1960
Source:World Bank, UBSSource:World Bank, NBS, Wind, UBS
Indeed, Hong Kong had been the fastest growing city in the world, with real GDP
CAGRs of 8.8%/8.9%/7.4% over the 1960s/1970s/1980s, before slowing to
around 3-4% in the 1990s-2010s. It has been only eclipsed by Shenzhen in recent
years.
HK's geographical location, common law system, access to the mainland market,
and adaptive people enabled it to first turn into a gateway for trade and transport
of goods, and later a global gateway for capital and investments. HK's share of
-100100
200
300
400
-10%
0%
10%
20%
30%
40%61656973778185899397010509
2020HK GDP (US$ bn)
y-y% nominal GDPgrowth
y-y% real GDPgrowth
0%
5%
10%
15%
20%
25%50
100
150
200
250
300
350
40060646872768084889296000408
2020HK GDP (US$ bn)as a % of HK+China GDP (RHS)
0.42%
0.44%
0.46%
0.48%
0.50%
0.52%
0.54%135719
6063666972757881848790939699020508
202020HK population (mn)
as a % of HK+China population (RHS)
HK
Beijing
Shanghai
Shenzhen
Guangzhou5152560646872768084889296000408
2020(mn)
Hong Kong Strategy 19 February 2019world market cap has risen from 0.6% in 1983 to 5.2% in 2009 and stabilised
since then. In comparison, China's share of global stock market cap has taken off
from 1.2% in 2003 to 11.0% in 2017.
Figure 5: HK's stock market cap as a % of world total has
stabilised at around 5% since 2009
Figure 6: China's share of world's total stock market cap
rose from 1.2% in 2003 to 11.0% in 2017
Source:World Bank, CEIC, UBSSource:World Bank, CEIC, UBS
…more leading tycoon families…
Given the prominence of family-controlled or family-led businesses in Hong Kong
and Macau, investors are essentially investing along with these families, according
to Niall Macleod, UBS's head of APAC equity strategy. Hence, besides examining
the economic and sector specifics, we pay particular attention to the families and
their plans for the future.
First, we picked MSCI-HK as the universe to study.
Figure 7: MSCI-HK geographical composition: by company
revenue
Figure 8: MSCI-HK sector mix: by market cap
Note: FY2017 revenue grouped by constituents' primary country of risks
considering the locations of incorporation and core business operation, etc.
Source:Thomson Reuters, UBS
Note: Data as of 18 February 2019. Source:Thomson Reuters, UBS
1983: 0.6%
1995: 1.8%
2009: 5.2%
2017: 5.5%1,000
2,000
3,000
4,000
5,000
6,000
0%
1%
2%
3%
4%
5%
6%
7%
8%8084889296000408
2020HK market cap (USD bn, RHS)
HK market cap as % of world total
2003: 1.2%
2009, 8.0%
2017: 11.0%1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0%
2%
4%
6%
8%
10%
12%
14%8084889296000408
2020China market cap (USD bn, RHS)
China market cap as % of world total
HK-based
listcos
86%
Macau
gaming
9%
China
listcos
3% Others 2%
Real Estate
27%
Insurers
11%
Banks
10%
Brokers
4%
Macau
Gaming
10%
Cons. Stp.
3%
Cons. Disc.
2%
Health Care
1%
Auto
0.4%
Tech
0.5%
Telecom
2%
Utilities
11%
Conglomerates
19%。