According to the Futu Securities APP, HTSC released a research report, maintaining a medium-term strategic perspective. The current allocation of ROE resilience & assets sensitive to USD interest rates has preliminarily verified the core views in the medium-term strategy, and the performance resilience has also been the basic color for the recent outperformance of Hong Kong stocks relative to the A-share market. Considering: 1) under the reversal of risk-off sentiment, the marginal liquidity environment of Hong Kong stocks is warming up; 2) the valuation of Hong Kong stocks may find support in mid-April, therefore, the allocation is still based on the medium-term strategic perspective. Combining the current environmental changes, it is recommended to: consider ROE stability as resilient assets, allocate to telecommunications, utilities, software and services, and retail trade; and consider the sensitivity to USD interest rates as flexible assets, and may appropriately increase/overweight pharmaceutical stocks with high sensitivity to interest rates.

Here are the main points of HuaTai Securities:

The performance resilience is the logical cornerstone for the recent relative outperformance of Hong Kong stocks. As of 23rd August 2024, the market cap disclosure rate of Hong Kong stocks/ADRs of Chinese stocks is about 29%. In terms of structure, telecommunications (74%) and information technology (91%, including some internet leading companies) have relatively high disclosure rates. Overall, the major leading stocks that have been disclosed all demonstrate profit resilience (non-restricted ROE and operating cash flow year-on-year growth rate, TTM basis, the latter also indicates the resilience of subsequent dividends / buybacks, and also the logical cornerstone for the relatively strong performance of the Hong Kong stock market. By observing changes in Bloomberg's consensus earnings expectations for interim earnings, the 24E EPS Bloomberg consensus expectations from May to July this year show obvious resilience, and the marginal strength is stronger than the Shanghai and Shenzhen 300 Index, or it reflects recent foreign expectations for the profitability of Hong Kong stocks/ADRs of Chinese stocks.

Hong Kong internet: Leading companies may gradually shift from 'reducing costs' to 'increasing efficiency'. The software and services industry currently has a high market cap disclosure rate (93%). Current data may indicate a shift from 'reducing costs' to 'increasing efficiency':

1) Gross margin is the key to improving non-restricted net profit margin and ROE (shifting operational focus to high-gross-margin businesses and catalyzing performance release), such as the increase in the gross profit margin of local games/network advertising businesses of industry leaders, and the significant increase in the proportion of the latter's income; 2) The 'cost reduction' space is limited: during 1H24, the marginal increase in the expense ratio, the Q2 quarter-on-quarter increase in the number of employees of industry leaders, the marginal decline in the interest-free liability ratio/interest-free liability as a proportion of liabilities can all prove this; 3) The operating cash flow TTM during 1H24 maintained a relatively high growth rate and EBITDA TTM remained stable compared to 2H23, indicating that the industry's weight can continue to maintain the current pace of buybacks, which is conducive to maintaining market cap/ROE resilience.

Hong Kong dividends: Telecommunications verify performance resilience, high-frequency data indicate marginal weakening of energy profits. Currently, only the telecommunications industry has a relatively high disclosure rate among typical dividend industries (all three major telecommunications companies have disclosed). From the disclosed interim reports, the non-restricted ROE TTM of telecommunications has remained stable and increased, the revenue/non-restricted profit TTM year-on-year have both been on the rise, and the latter has turned positive, and the operating cash flow TTM year-on-year is also basically stable (about -5%, with no significant fluctuations), verifying profit resilience. Considering further marginal decreases in CAPEX/D&A, it is not ruled out that telecommunications weight-bearing stocks may further increase the dividend distribution ratio in the future.

For other dividend sectors: 1) High-frequency data indicates that energy sector commodity prices may be weak or at least exert pressure on its ROE from the perspective of profit margin, and the weaker "resilience" also conforms to the judgment in the medium-term strategy; 2) Recently, the financial reports of some banks in Greater China have been weak or have weakened the market's confidence in non-state-owned banks.

Risk warning: Data disclosure errors, data calculation errors.