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Hong Kong Strategy Summary

Core Content

The document outlines the implications of the "Shanghai-HK Through Train" trial program, a cross-border trading initiative that allows mainland investors to trade Hong Kong stocks and vice versa. This program is expected to have a positive impact on the Hong Kong market, particularly on mid and small-cap stocks, due to increased access and investment flows from mainland China. It also highlights the potential benefits for brokers and the possible narrowing of A-H share price gaps.

Main Points

• The 'Through Train' has arrived: The initiative was announced on 10 April 2014, after a six-month preparation period, aiming to boost cross-border trading between Shanghai and Hong Kong.
• Trading Quotas:
  • Mainland investors trading HK stocks (HK Through Train): Total quota of RMB 250bn, daily quota of RMB 10.5bn.
  • HK investors trading in Shanghai (Shanghai Through Train): Total quota of RMB 300bn, daily quota of RMB 13.0bn.
• Investor Qualifications:
  • HK Through Train: Limited to institutional investors and retail investors with AUM over RMB 500,000.
  • Shanghai Through Train: Open to overseas investors, including those not previously restricted.
• Qualified Stocks:
  • In HK: Constituents of the Hang Seng Composite Large Cap Index, Hang Seng Composite Mid Cap Index, and A+H dual-listed stocks.
  • In Shanghai: Constituents of the Shanghai 180 Index, Shanghai 380 Index, and A+H dual-listed stocks.

Key Beneficiaries

1. Quality Mid/Small Caps Not Listed on A-shares

• These stocks are less accessible to mainland investors and may see increased interest.
• Sectors include gaming/lottery, TMT, gas distribution, renewable energy, dairy, paper, restaurants, textiles, exporters, and jewellery retailing.

2. Stocks with 'Hot Themes'

• These are stocks that have performed well in the A-share market and are now cheaper in HK.
• Examples include China Gas, Beijing Enterprises Water, China Everbright Int'l, Shenzhen Int'l, Phoenix Satellite, Towngas, China Resources Gas, China Longyuan, Kingsoft, CIMC Enric, Kerry Logistics, and Sinopec Kantons.

3. Dual-listed Stocks Trading at Large Discounts

• The price gap between A and H shares is expected to narrow, especially for those with significant discounts.
• Notable examples include Zhejiang Shiba (discount of -81%), Shandong Molon (-73%), and others with discounts exceeding 30%.

Impact on Brokers

• Long-term benefit: China brokers are expected to benefit from increased cross-market trading, especially those with high-end retail clients.
• Short-term earnings: Near-term gains are limited, with estimated increases in net income for CITIC, Haitong, and Galaxy ranging from 0.7% to 3.0%.
• HK subsidiaries: May face increased competition from mainland brokers, unless they expand into international markets.
• Haitong International is highlighted as an exception due to its strong local retail client base.

Potential Risks

• Vulnerable Sectors: Some sectors in the Shanghai 380 Index may be more attractive to mainland investors due to superior quality or valuations.
• Sectors at Risk: Pharmaceuticals, home appliances, furniture, retail, and machinery are identified as potentially vulnerable.
• HK Mid-Caps: Are generally cheaper than Shanghai mid-caps on a PER basis, which could make them more appealing to mainland investors.

Conclusion

The Through Train is expected to positively impact the HK market, especially mid and small-cap stocks, and to enhance the role of brokers in cross-border trading. While the program is more about sentiment than liquidity, it could lead to increased trading activity and valuation improvements in certain sectors. Brokers with strong retail bases and HK subsidiaries that expand into international markets are likely to benefit the most.