the myth of “low” valuation of stocks in the hong kong market

THE MYTH OF “LOW” VALUATION

OF STOCKS IN THE

HONG KONG MARKET:

TRUE OPPORTUNITIES TO

INVESTORS AND ISSUERS

Chief China Economist’s Office

July 2016

2

AGENDA

2

1

3

4

General Market Perceptions

Price Differentials in the Secondary Market

Price Differentials in the Primary Market

Sources of Difference

5 Opportunities Offered by the Hong Kong Market

6 Conclusion

3

DISCLAIMER

The information contained in this presentation is for general informational purposes only and does not constitute an offer, solicitation, invitation or recommendation to subscribe for or purchase any securities or other products or to provide any investment advice of any kind. This presentation is not directed at, and is not intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Hong Kong Exchanges and Clearing Limited (“HKEX”) to any registration requirement within such jurisdiction or country. This presentation contains forward-looking statements which are based on the current expectations, estimates, projections, beliefs and assumptions of HKEX about the businesses and the markets in which it and its subsidiaries operate or aspires to operate in. These forward-looking statements are not guarantees of future performance and are subject to market risk, uncertainties and factors beyond the control of HKEX. Therefore, actual outcomes and returns may differ materially from the assumptions made and the statements contained in this presentation. The implementation of these initiatives is subject to a number of external factors, including government policy, regulatory approval, the behaviour of market participants, competitive developments and, where relevant, the identification of and successful entry into agreements with potential business partners. As such, there is no guarantee that the initiatives described herein will be implemented, or that they will be implemented in the form and timeframe described herein. Although the information contained in this presentation is obtained or compiled from sources believed to be reliable, HKEX does not guarantee the accuracy, validity, timeliness or completeness of the information or data for any particular purpose, and shall not accept any responsibility for, or be liable for, errors, omissions or other inaccuracies in the information or for the consequences thereof. The information set out in this presentation is provided on an “as is” and “as available” basis and may be amended or changed. It is not a substitute for professional advice which takes account of your specific circumstances and nothing in this document constitutes legal advice. HKEX shall not be responsible or liable for any loss or damage, directly or indirectly, arising from the use of or reliance upon any information provided in this presentation.

4

1. General Market Perceptions

Valuation by market capitalisation (MC)-weighted PE ratio of market index

• Low PE ratio of Hang Seng Composite Index vs A-share indices

• A shares at a premium as measured by the Hang Seng China AH Premium Index

• Superficially, the Hong Kong market has lower valuation than the Mainland A-share

market

Data source: Wind

Month-end PE ratios of HK and Mainland Hang Seng China AH Premium Index

9.12

14.16

47.53

0

10

20

30

40

50

60

70

80

01/2

010

03/2

010

05/2

010

07/2

010

09/2

01

0

11/2

010

01/2

011

03/2

011

05/2

011

07/2

011

09/2

011

11/2

011

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

01

4

05/2

014

07/2

014

09/2

014

11/2

014

01/2

015

03/2

015

05/2

015

07/2

015

09/2

015

11/2

015

01/2

016

03/2

016

05/2

016

PE

ra

tio

(ti

me

s)

Month/Year

Month-end PE ratios of Hong Kong, Shanghai and Shenzhen markets (2010 - May 2016)

HS Composite SSE A SZSE A CSI300

SSE A

Hang Seng Composite

SZSE A

CSI300

SSE A

Hang Seng Composite

SZSE A

CS

11.84

0

1,000

2,000

3,000

4,000

5,000

6,000

80

90

100

110

120

130

140

150

160

04

/01

/201

0

04

/03

/201

0

04

/05

/201

0

04

/07

/201

0

04

/09

/201

0

04

/11

/201

0

04

/01

/201

1

04

/03

/201

1

04

/05

/201

1

04

/07

/201

1

04

/09

/201

1

04

/11

/201

1

04

/01

/201

2

04

/03

/201

2

04

/05

/201

2

04

/07

/201

2

04

/09

/201

2

04

/11

/201

2

04

/01

/201

3

04

/03

/201

3

04

/05

/201

3

04

/07

/201

3

04

/09

/201

3

04

/11

/201

3

04

/01

/201

4

04

/03

/201

4

04

/05

/201

4

04

/07

/201

4

04

/09

/201

4

04

/11

/201

4

04

/01

/201

5

04

/03

/201

5

04

/05

/201

5

04

/07

/201

5

04

/09

/201

5

04

/11

/201

5

04

/01

/201

6

04

/03

/201

6

04

/05

/201

6

Daily closings of Hang Seng China AH Premium Index (2010 - May 2016)

Hang Seng China AH Premium Index (LHS)

SSE A-Share Index (RHS)

HSI (rebased on 1/12/2014 at SSE A-Share Index level)

A s

ha

res

at

pre

miu

mA

sh

are

sa

t d

isco

un

t

New premium range

5

2. Price Differentials in the Secondary Market

Differentials across indices in a market

Data source: Wind

• Valuation of different Mainland

stocks listed in HK also varies.

• On Shanghai Stock Exchange (SSE)

and Shenzhen Stock Exchange

(SZSE), the more smaller-sized

stocks are included in an index, the

higher the PE ratio tends to be.

PE of key indices in HK vs Shanghai

PE of key indices on SSE PE of key indices on SZSE

8.87

6.55

12.38

9.25

0

5

10

15

20

25

01/2

010

03/2

010

05/2

010

07/2

010

09/2

01

0

11/2

010

01/2

011

03/2

011

05/2

011

07/2

011

09/2

011

11/2

011

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

01

4

05/2

014

07/2

014

09/2

014

11/2

014

01/2

015

03/2

015

05/2

015

07/2

015

09/2

015

11/2

015

01/2

016

03/2

016

05/2

016

PE

ra

tio

(ti

me

s)

Month/Year

Month-end PE ratios of key indices in Hong Kong and Shanghai (2010 - May 2016)

HSI HSCEI HSCCI SSE 50

HSCEI

HSI

SSE 50

HSCCI

14.16

9.2510.31

41.45

0

10

20

30

40

50

60

70

01/2

010

03/2

010

05/2

010

07/2

010

09/2

010

11/2

010

01/2

011

03/2

011

05/2

011

07/2

011

09/2

011

11/2

011

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

014

05/2

014

07/2

014

09/2

014

11/2

014

01/2

015

03/2

015

05/2

015

07/2

015

09/2

015

11/2

015

01/2

016

03/2

016

05/2

016

Tim

es

Month/Year

Month-end PE ratio of key indices in Shanghai (2010 - May 2016)

SSE A SSE 50 SSE 180 SSE 380

SSE 50

SSE A

SSE 380

SSE 180

47.53

31.70

56.34

77.71

0

20

40

60

80

100

120

140

160

01/2

01

0

03/2

01

0

05/2

01

0

07/2

01

0

09/2

010

11/2

01

0

01/2

01

1

03/2

01

1

05/2

01

1

07/2

01

1

09/2

01

1

11/2

01

1

01/2

01

2

03/2

01

2

05/2

01

2

07/2

01

2

09/2

01

2

11/2

01

2

01/2

01

3

03/2

01

3

05/2

01

3

07/2

01

3

09/2

01

3

11/2

01

3

01/2

01

4

03/2

014

05/2

01

4

07/2

01

4

09/2

01

4

11/2

01

4

01/2

01

5

03/2

01

5

05/2

01

5

07/2

01

5

09/2

01

5

11/2

01

5

01/2

01

6

03/2

01

6

05/2

01

6

Tim

es

Month/Year

Month-end PE ratio of key indices in Shenzhen (2010 - May 2016)

SZSE A SZSE Component SME ChiNext

ChiNext

SME

SZSE A

SZSE Component

6


Differentials across company size

Source: HKEX analysis based on data from Wind for SSE and SZSE, HKEX market data for HKEX

• On SSE and SZSE, the larger the

company size (measured by MC),

the lower the PE ratio tends to be.

• In the HK market, the PE is rather

stock specific, irrespective of the

company size.

PE by MC on HKEX

PE by MC on SSE PE by MC on SZSE

0

10

20

30

40

50

60

70

80

90

100

0 500 1,000 1,500

PE

ra

tio

by

(tim

es

)

Market capitalisation (RMB bil)

Scatterplot of PE ratio and MC of listed A shares on SSE (as of 31/5/2016)(Excluding PE ratios > 100 times)

Rank correlation coefficient:-0.4341*

* Statistically significant at 0.1% level

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150 200 250

PE

ra

tio

by

(tim

es

)

Market capitalisation (RMB bil)

Scatterplot of PE ratio and MC of listed A shares on SZSE (as of 31/5/2016)(Excluding PE ratios > 100 times)


* Statistically significant at 0.1% level

0

10

20

30

40

50

60

70

80

90

100

0 500 1,000 1,500 2,000

PE

ra

tio

by

(tim

es

)

Market capitalisation (HKD bil)

Scatterplot of PE ratio and MC of listed stocks on HKEX (as of 31/5/2016)(Excluding PE ratios > 100 times)

Rank correlation coefficient:0.0294*

* Statistically insignificant

7


Differentials across industrial sectors

• SSE stocks in the relatively mature industries of Financials and Utilities had similarly low (MC-weighted) PE as their HK counterparts.

• HK-listed H shares had higher (MC-weighted) PE than the HK blue chips in the Industrials and Energy sectors but lower (MC-weighted) PE in other sectors where both had constituent stocks for comparison.

• The SZSE market, consisting of mostly small growth companies, had the highest (MC-weighted) PE across almost all sectors.

• Industrial sector may not be a crucial factor in stocks’ PE but stocks in certain sectors, by sector nature, may tend to have higher or lower PE than other sectors.

(See chart on next slide)

8

MC-weighted PE by sector in Hong Kong and Mainland (31 May 2016)

Source: HKEX analysis based on GICS classification, MC and earnings data from Bloomberg.


Differentials across industrial sectors

7.54

7.36

11.71

27.14

14.50

7.27

5.42

18.97

42.95^

5.13

8.95

8.70

11.72

7.73

19.24

21.02

38.45

37.65

14.35

50.02

31.42

59.97

49.41

7.61

16.36

14.89

30.58

34.86

6.95

11.19

9.59

24.88

0 50 100

Financials

Industrials

Consumer Discretionary

Information Technology

Materials

Times

MC-weighted PE ratio by sector of HK and Mainland indices(31 May 2016)

A50

CSI300

SZSE Composite

SSE Composite

HSCEI

HSI

HK (All market)

^ Based on a singlecompany only

18.12

18.70

18.12

13.80

14.21

18.95

19.26

14.84

14.04

19.69

17.93^

21.47^

8.36

11.84^

32.83

28.61

31.29

15.71

32.49

54.12

32.72

43.42

17.16

97.73^

32.63

20.33

28.95

14.32

32.49

33.00

20.05^

72.76^

13.52

31.93^

0 50 100

Energy

Consumer Staples

Health Care

Utilities

TelecommunicationServices

Times

MC-weighted PE ratio by sector of HK and Mainland indices(31 May 2016)

A50

CSI300

SZSE Composite

SSE Composite

HSCEI

HSI

HK (All market)

^ Based on a singlecompany only

9


Differentials across A-H stocks

Source: HKEX analysis based on GICS classification and price data from Bloomberg.

• The larger the company size, the smaller the A-H price premium irrespective of the industrial sector (believed to owe to the negative relationship between stock valuation and MC for stocks listed in the Mainland).

A-H price premium vs MC (31 May 2016) A-H price premium across sector (31 May 2016)

-100%

0%

100%

200%

300%

400%

500%

600%

700%

0 500 1,000 1,500

Pri

ce

pre

miu

m

Stock (A+H) market capitalisation (HKD bil)

Scatterplot of AH share price premium (as of 31/5/2016)


* Statistically insignificant

38%

119%

130%

126%

111%

115%

25%

62%

82%

0% 20% 40% 60% 80% 100% 120% 140%

Financials

Industrials

Consumer Discretionary

Information Technology

Materials

Energy

Consumer Staples

Health Care

Utilities

Average A-shares price premium over H shares

Average A-H price premium across industrial sector (31 May 2016)

Note: Excluding two cases without price data.

Price premium differentials are statistically insignificant

across sectors

10

3. Price Differentials in the Primary Market

• During the period of 2012 to May 2016, IPOs in Hong Kong had higher valuation than

IPOs in Shanghai in a number of sectors (and higher valuation than IPOs in Shenzhen for some of these sectors) — Consumer Discretionary, Consumer Staples, Energy, Health care and Utilities.

Source: HKEX analysis based on data from Bloomberg.

MC-weighted PE of IPOs in HK vs Mainland (2012 – May 2016)

By year By industrial sector

18.319.9

17.7

23.3

13.9

23.5

21.2

24.2

18.2

33.6

24.4

19.9 20.1

0

5

10

15

20

25

30

35

40

2012 2013 2014 2015 Jan-May 2016

PE

rati

o (

tim

es)

MC-weighted PE ratio of IPOs in Hong Kong and Mainland by year (2012 - May 2016)

HK Shanghai Shenzhen

[53] [22] [127] [94] [0] [0] [95] [41] [81] [102] [89] [129] [26] [20] [28]

[ ] No. of IPOs (excluding cases with negative or null PE value)

[ ] No. of IPOs

Note: Excluding cases with negative or null PE value.

26 29 30

13

43

1420 17

28

169

2125

9

2922 22 25

20 2126 27

35

2628

25 28 24

38

0

20

40

60

80

100

120

140

160

180

Co

nsu

me

rD

iscre

tio

nary

Co

nsu

me

rS

tap

les

Ene

rgy

Fin

ancia

ls

He

alth

Ca

re

Ind

ustr

ials IT

Ma

teri

als

Utilities

Te

lecom

Serv

ices

PE

rati

o (

tim

es)

MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (2012 - May 2016)


11

25

21

22

25

22

29

22

17

28

7

24

30

22

20

18

29

32

8

47

11

36

14

20

0 10 20 30 40 50

ConsumerDiscretionary

ConsumerStaples

Energy

Financials

Health Care

Industrials

IT

Materials

Utilities

PE ratio (times)

MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (2014)


[6][3][0]

[7][3][8]

[9][7][24]

[16][11][23]

[4][4][9]

[14][0][1]

[0][1][0]

[8][4][5]

[31][8][11]

[ ] No. of IPOs



• IPO in Hong Kong had higher valuation than those in the Mainland for multiple sectors in each year after 2013.


MC-weighted PE of IPOs in HK vs Mainland by sector

2012 2014

Note: IPOs in the Mainland market was suspended in 2013.

Excluding cases with negative or null PE ratios.

MC-weighted PE of IPOs in HK higher than in Mainland

Utilities

Materials

IT

Industrials

Health Care

Financials

Energy

Consumer

Staples

Consumer

Discretionary 33

39

47

48

35

30

38

27

38

24

16

20

34

20

14

13

18

22

11

10

11

19

0 10 20 30 40 50 60


ConsumerStaples

Energy

Financials

Health Care

Industrials

IT

Materials

Utilities

PE ratio (times)



[2][0][2]

[10][5][20]

[5][3][38]

[12][6][31]

[0][0][12]

[6][0][1]

[1][1][2]

[2][0][5]

[15][7][16]

[ ] No. of IPOs


Utilities

Materials

IT

Industrials

Health Care

Financials

Energy

Consumer

Staples

Consumer

Discretionary

[ ] No. of IPOs [ ] No. of IPOs

12

Utilities

Materials

IT

Industrials

Health Care

Financials

Energy

Consumer

Staples

Consumer

Discretionary 21

20

22

20

15

23

19

16

20

19

21

37

10

15

13

42

0 5 10 15 20 25 30 35 40 45 50


ConsumerStaples

Financials

Health Care

Industrials

IT

Materials

PE ratio (times)

MC-weighted PE ratio of IPOs in Hong Kong and Mainland by sector (Jan-May 2016)


[0][5][2]

[2][0][4]

[6][3][16]

[1][1][0]

[7][0][1]

[0][2][4]

[5][4][1]

[ ] No. of IPOs


Materials

Consumer

Discretionary

IT

Industrials

Health Care

Financials

Consumer

Staples

21

20

21

22

21

18

20

21

22

21

29

21

19

21

21

21

33

26

41

13

43

16

18

12

96

169

0 20 40 60 80 100 120 140 160 180


ConsumerStaples

Energy

Financials

Health Care

Industrials

InformationTechnology

Materials

Utilities

TelecomServices

PE ratio (times)



[1][0][0]

[2][2][0]

[5][14][23]

[28][22][40]

[19][3][0]

[10][6][3]

[ ] No. of IPOs

[10][7][28]

[12][7][13]

[1][3][2]

[14][25][20]




MC-weighted PE of IPOs in HK vs Mainland by sector

2015 Jan – May 2016

Note: Excluding cases with negative or null PE ratios.

MC-weighted PE of IPOs in HK higher than in Mainland

Telecom

Services

[ ] No. of IPOs [ ] No. of IPOs

13

4. Sources of Difference

Market norms of PE ratio

• Each stock market in the world1, irrespective of the degree of openness, tends to maintain its “normal” level of PE ratio during a period of time — the market norm.

• Possible underlying factors: industry composition, listed companies’ stage of development, investor base or structure, investor maturity and their investment behavior.

1 The Korean market is a special case where the PE ratio fluctuated a lot.

Data source: Wind for HSI Composite, Bloomberg for other indices (data is not available for KOSPI during Mar-Aug 2013).

Month-end PE ratios of selected world key indices (Jan 2011 – May 2016)

5

10

15

20

25

30

35

01/2

01

1

03/2

01

1

05/2

01

1

07/2

01

1

09/2

01

1

11/2

01

1

01/2

01

2

03/2

012

05/2

01

2

07/2

01

2

09/2

01

2

11/2

01

2

01/2

01

3

03/2

01

3

05/2

01

3

07/2

01

3

09/2

01

3

11/2

01

3

01/2

014

03/2

01

4

05/2

01

4

07/2

01

4

09/2

01

4

11/2

01

4

01/2

01

5

03/2

01

5

05/2

01

5

07/2

01

5

09/2

01

5

11/2

01

5

01/2

01

6

03/2

01

6

05/2

01

6

PE

rati

o (

tim

es)

Month-end PE ratio of world key indices (2011 - May 2016)

HSI Composite DJIA S&P500 Nasdaq100 Nikkei 225 KOSPI FT STI

HSI Composite

DJIA

S&P500

Nasdaq100

KOSPI

FT STI

Nikkei 225

Source: Wind for HSI Composite, Bloomberg for other indices (data is not available for KOSPI during Mar-Aug 2013).

14


Industry composition of listed companies

• Markets with more weighting by MC in new economy industries (e.g. technology and health care) would tend to have a higher MC-weighted average PE level.

• Markets with more weighting in the financial industry would tend to have a lower PE level.

* As at 31 May 2016; source: HKEX analysis based on data from Bloomberg

^ As at end-2015; source: “The Nasdaq-100, Trading Innovation in Large-Cap Growth”, Feb 2016

** As at 31 May 2016; source: HKEX analysis based on data from Bloomberg

HK vs US market HK vs Mainland market**

MC weighting PE

Financials IT Health care

All HK

stock* 43% 10% 2% 9.12

DJIA^ 20% 14% 12% 15.61

S&P500^ 17% 17% 14% 19.18

Nasdaq

100^ 0.1% 52% 14% 23.50

MC weighting PE

Financials IT Health care

HSCEI 81% — 1% 5.78

FTSE A50 61% 2% 1% 9.06

HSI 48% 13% — 9.68

CSI300 42% 5% 4% 11.83

SSE 37% 4% 4% 13.47

SZSE 10% 22% 10% 35.94

15


Dividend yield as part of stock valuation

Data source: Wind

• Indices having higher PE ratio tend

to have a lower dividend yield and

vice versa, probably due to the

nature of the constituents (growth

stocks vs mature stocks).

• Stocks/markets with low PE may be

compensated by high dividend

yields in total return.

Dividend yield in HK, Shanghai and US

Dividend yield of key indices in Shanghai Dividend yield of key indices in Shenzhen

4.12

5.27

4.25

3.19

0.74 0.93

1.20 1.19 1.11 1.15

1.81

2.10 2.14 1.48 1.90

2.08

0

1

2

3

4

5

6

7

01/2

010

03/2

010

05/2

010

07/2

010

09/2

010

11/2

010

01/2

011

03/2

011

05/2

011

07/2

011

09/2

011

11/2

011

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

014

05/2

014

07/2

014

09/2

014

11/2

014

01/2

015

03/2

015

05/2

015

07/2

015

09/2

015

11/2

015

01/2

016

03/2

016

05/2

016

Per

cen

t (%

)

Month/Year

Month-end 12-mth dividend yield of key indices in Hong Kong, Shanghai & US (2010 - May 2016)

HSI HSCEI HSCCI SSE 50 Nasdaq 100 S&P 500

HSCEI

HSI

SSE 50

HSCCI

S&P 500

Nasdaq 100

1.98

3.19

2.70

0.99

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

01/2

010

03/2

010

05/2

010

07/2

010

09/2

010

11/2

010

01/2

011

03/2

011

05/2

011

07/2

011

09/2

011

11/2

011

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

014

05/2

014

07/2

014

09/2

014

11/2

014

01/2

015

03/2

015

05/2

015

07/2

015

09/2

015

11/2

015

01/2

016

03/2

016

05/2

016

Per

cen

t (%

)

Month/Year

Month-end 12-mth dividend yield of key indices in Shanghai (2010 - May 2016)

SSE A SSE 50 SSE 180 SSE 380

SSE 50

SSE A

SSE 380

SSE 180

0.59

0.81

0.52

0.27

0.0

0.5

1.0

1.5

2.0

2.5

01/2

010

03/2

010

05/2

010

07/2

010

09/2

010

11/2

010

01/2

011

03/2

011

05/2

011

07/2

011

09/2

011

11/2

011

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

014

05/2

014

07/2

014

09/2

014

11/2

014

01/2

015

03/2

015

05/2

015

07/2

015

09/2

015

11/2

015

01/2

016

03/2

016

05/2

016

Tim

es

Month/Year

Month-end 12-mth dividend yield of key indices in Shenzhen (2010 - May 2016)

SZSE A SZSE Component SME ChiNext

ChiNext

SME

SZSE ASZSE Component

16


Mainland’s specific factors

Mainland Hong Kong

• Dominance of local retail investors

• Investor preference in small-sized,

high-risk stocks for higher potential

gains

• Smaller the company size, higher

the PE

• High turnover velocity (2015):

SSE — 499%

SZSE — 521%

• Investors would be willing to pay

more for stocks with higher liquidity

• Lack of structured products and

equity derivatives investment

concentrated in stocks, lacking

arbitrage and hedging opportunities

• Dominance of global professional,

institutional investors

• Even retail investors are relatively

mature

• Less speculative trading and more

reliance on stock fundamentals

• Turnover velocity not as high: 106%

(in 2015)

• Partial connectivity through

Shanghai-HK Stock Connect is

limited for levelling out the liquidity

differential

• Abundant structured products and

arbitrage/hedging tools like index

futures and options

• Supporting rational price seeking in

stocks

Investor

preference

Liquidity

premium

Hedging/arbitrage

opportunities

17

5. Opportunities Offered by the Hong Kong Market

Benefit from higher dividend yield than holding corresponding A shares on

the same stock fundamentals

Lower-priced

H shares of AH

stocks

Enhanced capability to cope with risky market conditions and exposed to

more profit opportunities than in the Mainland

Comprehensive

range of investment

tools

E.g. consumer goods, energy and health care Higher IPO pricing

in certain industries

Plenty of room for more stocks in new economy industries like IT and health

care

Market appetite for

new economy

stocks

Enabling timely commercial decision of IPO and post-listing fund raising

activities

More flexible IPO

and post-listing

fund raising regime

A platform with international investment practice and regulatory standards

and professional investor base to offer issuers opportunities in international

branding and global business expansion

International listing

platform

18

6. Conclusion

Myth

“Low” valuation of stocks

listed in Hong Kong vis-à-vis

Mainland China

Facts

• Mainland market has

positive valuation

differentials at the macro

level

• Hong Kong market has

positive valuation

differentials at the micro

level of individual stocks

and industries

Sources of price

differentials

• Difference in market

characteristics — each

market has its “market

norm” of PE level

• Industry composition

varies

• Dividend yield as part of

stock valuation

• Mainland investors’

preference for small-sized

high-risk stocks

• Liquidity premium in the

Mainland

• Lack of investment

opportunities and

instruments for

hedging/arbitrage

Opportunities offered by

HK

• Lower-priced higher yield

H shares of A-H stocks

• Profit opportunities and

risk management offered

by hedging/arbitrage tools

• Higher pricing in certain

industry sectors

• Market appetite for stocks

in new economy

industries

• Flexible IPO and fund

raising regime

• International listing

platform

the myth of “low” valuation of stocks in the hong kong market

Documents