Upside potential of 40%! Southbound funds aggressively increase positions, how to buy Hong Kong stocks in September?

Source: Guosen Securities, Wang Xueheng

Will the Hong Kong stock market continue its upward trend in September? If so, how should we invest in Hong Kong stocks?

Cost-effectiveness of Hong Kong stocks

As of August 31st, the profit growth rate of the Hang Seng Index has been revised down to 5.2% YoY, and the revenue growth rate has been revised down to 3.6% YoY. The corresponding PE ratio of the index is 9.2 times, PB ratio is 1.0 times, and dividend yield is 3.9%.

From a valuation perspective, the current valuation level of the Hang Seng Index is at its lowest point since 2018, making it very attractive in terms of cost-effectiveness.

From a performance perspective, the performance of the Hang Seng Index has experienced both upward and downward revisions since the beginning of the year, and it is currently showing a slight turning point. The Hang Seng Tech Index, on the other hand, has experienced a clear upward trend since March. Therefore, in terms of certainty, the Hang Seng Tech Index has a better level of certainty.

Cost-effectiveness of Hong Kong stocks continues to improve, southbound funds reach record high

By combining the latest 2024 US Treasury yield of 3.6% with the risk premium model, the target range for the Hang Seng Index in 2024 is projected to be 25,753-27,251 points, or rounded to 26,000-27,000 points. This represents a 41-46% upside potential compared to the closing price of 18,382 points on August 31st, which is very attractive.

During the market correction in August, southbound funds increased by a record 69.6 billion yuan in a single month, surpassing the 59 billion yuan in March and the 67.6 billion yuan in October last year.

In other words, southbound funds have already regarded the current situation as a strategic opportunity equivalent to October last year. Therefore, the Hong Kong stock market has entered a window of "buying on dips," and the trigger point is likely to be when the US stops raising interest rates.

Investment recommendations

1. The top recommendation is Hang Seng Tech. Since the beginning of the year, their performance has been upwardly revised, and their stock prices have risen relatively less. In addition, their business has uniqueness, and we repeatedly emphasize the improvement space of the Hang Seng Tech Index's ROE, which is just beginning.

2. In addition, the power equipment and new energy, as well as transportation sectors, are worth paying attention to. Their performance has been revised upwards, but their stock prices have fallen. Therefore, they have a good cost-performance ratio.

3. The coal, non-ferrous metals, and communication sectors have seen an improvement in performance, and their stock prices have also risen. These companies can be considered as "good performance/good price" ones. We recommend continuing to hold them and switching to counter-cyclical industries after the end of the Fed's interest rate hike.

4. The light industry sector has not seen a significant decline in performance, but its stock prices have fallen significantly. Once the market warms up, this sector may have obvious opportunities for recovery.

5. As for the food and beverage, consumer services, pharmaceutical, and textile and clothing sectors, their performance has declined to some extent, and their stock prices have also fallen. We recommend gradually increasing positions and waiting for the validation of their fundamentals to improve.