The Zhitong Finance App learned that Societe Generale Securities released a research report saying that the essence of the Hong Kong stock market in 2024 is that excellent companies that emphasize shareholder returns carry out valuation repairs, which is expected to lead the Hong Kong stock investment logic for many years to come. Whether it's a dividend asset or a core asset, the key is to focus on shareholder returns. Dividend assets return investors through stable dividends, while core assets provide comprehensive returns to shareholders through continuous performance growth and moderate dividend and repurchase returns.

Societe Generale Securities's main views are as follows:

1. The necessary conditions for the second phase of the Hong Kong stock market within 2024 are ripe

1.1. In mid-late May, it was pointed out that the first phase of the Hong Kong stock market driven by “short recovery” has basically come to an end. Hong Kong stocks are volatile in June and July, and the second phase of the market is expected to start in August.

1.2. After more than 2 months of adjustments, the risk of Hong Kong stocks was fully released, and the allocation value was once again highlighted.

Market sentiment declined markedly, and the share of short sales in Hong Kong stocks rose again from around 10% in late May to a historically high level. On July 26, short sales of Hong Kong stocks accounted for 21.8%.

The latest valuation level of Hong Kong stocks has once again returned to a historically low range. The PE (TTM) of the Hang Seng Index once rebounded to its median level since 2015 in May, but has now fallen 8.73 times, and is at the 12.7% quantile level since 2015. The Hang Seng Index's PB also fell back nearly 1 times from its May high to 0.85 times the current 0.85 times, which is at the 3.7% quantile level since 2015.

1.3. Structurally, the allocation value of the core assets and dividend assets of Hong Kong stocks is prominent, and the return on shareholders is high.

In the Hong Kong stock dividend sector, the dividend rate is still very attractive, even considering dividend tax. As of July 30, the interest rate on 10-year Chinese Treasury bonds was 2.15%, while the Hang Seng Hong Kong Stock Connect High Dividend Low Volatility Index had a dividend rate of 7.04%.

The core assets represented by leading Internet companies are actively repurchasing and increasing dividend payouts, so that their dividend+repurchase yield has risen to around 5%.

2. Looking ahead to the second phase of the Hong Kong stock market: the core driving force is the increase in profit forecasts of leading companies+continuous repurchases

2.1. Hong Kong stocks ushered in the mid-reporting season in August. The overall performance of the Hang Seng Index is difficult to fall short of the current pessimistic consensus expectations. With the transformation of old and new momentum and the improvement of the competitive landscape, the performance guidelines for core assets are expected to exceed expectations.

2.2. In the context of a new era of high-quality development, investors will pay more attention to shareholder returns. Leading Hong Kong stock companies will continue to increase dividends and repurchases, which will help increase the attractiveness of allocations.

The wave of repurchases of Hong Kong stock listed companies accelerated further in 2024. As of July 23, the amount of Hong Kong stock repurchases in 2024 reached HK$1521.3 billion, which has exceeded the repurchase amount for the full year of 2023.

As China's economy shifts from high growth to high-quality development, expectations for return on investment gradually shift from simply chasing high profit growth to sustainable performance and focusing on dividends and stock repurchases. On the one hand, core assets represented by leading Internet companies are significantly increasing their buyback efforts. On the other hand, under further policy restrictions and incentives, the dividend stability and momentum of central and state-owned enterprises will continue to increase.

The Hong Kong Stock Exchange revised the stock treasury mechanism in June to help encourage listed companies to repurchase. Under the new mechanism: 1) Shares obtained from repurchases do not need to be cancelled as soon as possible; they exist in the form of treasury shares. 2) Treasury stocks can be used to stabilize stock prices, flexible financing, equity incentives, payment of consideration for the acquisition of assets, etc. Since shares in the form of treasury stock are not included in the calculation of the basic EPS denominator and do not enjoy dividend distribution, it is still possible to increase investors' dividend per share and increase the basic EPS per share.

3. The driving force of the second phase of the Hong Kong stock market: phased improvement in the capital aspects of Hong Kong stocks

3.1. Local capital in Hong Kong is expected to benefit from a decline in long-term interest rates on US bonds after August. As US inflation and economic data weaken further in the second half of the year, interest rates on 10-year US bonds will fall moderately, and the US dollar may be constrained by the US election.

3.2. Hong Kong stock bears are expected to make up another wave in the third quarter, attracting capital from emerging markets to increase their holdings in Hong Kong stocks. Political uncertainty before the US election will continue to suppress previously overcrowded transactions. The strategy to prolong US large-cap technology stocks has backfired, and the strategy of doing airport stocks will also face reverse trading.

4. The driving force of the second phase of the Hong Kong stock market: Starting in August, China's macroeconomic policies are expected to be further optimized

Starting in August, investors' expectations for China's macroeconomic economy and macroeconomic policies are expected to improve marginally. As the internal and external situation changes, after the Third Plenary Session of the Central Committee, especially starting in August, China's macroeconomic policy will be further optimized, space for monetary policy will open up, and the fiscal sector will also enter a period of acceleration and strength. The “Third Plenary Session” resolution communiqué emphasizes the need to unswervingly achieve economic and social development goals throughout the year. The July 30 Politburo meeting pointed out that macroeconomic policies should continue to be vigorous and more effective.

After the Third Plenary Session of the Central Committee, various ministries and departments began joint action, which is expected to enter a period of fiscal acceleration and strength. 1) Expansion of the scope of use of special treasury bonds. The National Development and Reform Commission took the lead in arranging about 300 billion yuan of ultra-long-term special treasury bond funds to increase support for large-scale equipment upgrades and consumer goods trade-in. 2) In the next 5 years, central enterprises are expected to arrange a total investment of more than 3 trillion yuan for large-scale equipment upgrades. 3) There is still room for strengthening local finance. According to Xing Zheng's macroeconomic estimates, as of July 21, the government debt budget at the beginning of the year still had about 5 trillion yuan to be used. If balance limits are taken into account, the potential space is about 7 trillion yuan, which is quite sufficient.

Monetary policy space opens up, and the pressure to depreciate the RMB exchange rate is expected to ease. After the “Third Plenary Session”, China's monetary policy initiative increased. On July 22, 2024, the central bank cut interest rates and promoted the improvement of the monetary policy framework, which helped protect real confidence and continue to consolidate economic recovery momentum.

Structural highlights of the economy in the second half of the year may be expected to “promote consumption” policy effects. The Politburo meeting on July 30 emphasized that domestic demand should be expanded with a focus on boosting consumption, that the focus of economic policy should shift more to benefit people's livelihood and promote consumption, increase residents' income through multiple channels, enhance the consumption capacity and willingness of low- and middle-income groups, use service consumption as an important gripper for expanding and upgrading consumption, and support consumption such as cultural tourism, pension, childcare, and housekeeping.

5. Investment Strategy: Work with outstanding Hong Kong stock companies that value “shareholder return”, help them out

The essence of the Hong Kong stock market in 2024 is that excellent companies that emphasize shareholder returns carry out valuation repairs, which is expected to lead the Hong Kong stock investment logic for many years to come.

Whether it's a dividend asset or a core asset, the key is to focus on shareholder returns. Dividend assets return investors through stable dividends, while core assets provide comprehensive returns to shareholders through continuous performance growth and moderate dividend and repurchase returns.

5.1. Main line 1: Select “core assets in the new era”, and focus on “poor expectations” of repurchases and performance after August

The concept of “core assets for a new era” was proposed in May 2024. What distinguishes the core assets from 2016 is the “new era” and macro background. More emphasis is placed on the sustainability of shareholder returns, and companies that can continue to pay dividends or repurchases are selected, and their performance growth is not less than 2 times the nominal GDP growth rate.

Priority is given to TMT industry leaders such as the Internet. 1) Benefiting from cost-effective consumer trends and the implementation of AI applications, the fundamentals of leading Internet companies have improved. 2) Internet leaders are increasing their efforts to pay dividends and repurchases. 3) At the trading level, there is strong momentum for bears to make up. As of July 19, 2024, the number of open short sales of Tencent and others as a proportion of total share capital has returned to a high level since 2020.

Selected opportunities for revaluation of leading industry segments in emerging service industries (emotional value consumption, leisure and entertainment, digital economy, etc.), biomedicine, education, gold and copper, advanced manufacturing, food and beverage, etc., are expected to benefit from the improvement in domestic demand expectations in China and the decline in US bond yields in the second half of the year.

5.2. Main line 2: Hong Kong stock dividend assets are still worth allocating for a long time

Dividend assets of central state-owned enterprises: 1) Utilities such as urban combustion, water, and nuclear power are expected to further increase the dividend ratio in the future, benefiting from factors such as price increases, business model optimization, and positive free cash flow. 2) Taking advantage of the adjustments, allocate the three major operators, highways, banks, etc. that still have dividend rates above 6%.

High-quality high-dividend dividend assets in local stocks in Hong Kong. The dividend rates and dividend ratios of some representative companies in Hong Kong's local finance, utilities, and integrated industries have remained high. Subsequently, as US bond yields declined, the Hibor interest rate declined, and the spread between Hong Kong's local stock dividend rate and the Hibor interest rate widened again, and local stocks in Hong Kong are expected to be revalued.

Risk warning:

Great power game risk; risk of US monetary policy exceeding expectations; risk of a decline in economic growth exceeding expectations.