The Zhitong Finance App learned that Huachuang Securities released a research report saying that the free cash flow advantage of Hong Kong stocks is obvious, and the next six months will be a rare window for long-term investors to collect dividend-value assets. Dividend value assets of Hong Kong stocks are screened from the three perspectives of high dividends (high free cash flow), undervaluation, and large market capitalization. The dividend value will expand into three major sectors: consumer domestic demand, cyclical resource products, and low dividend waves. The overall profit forecast for Hong Kong stocks was slightly revised in November, and the industrial and financial sectors were revised; in the past month, Hong Kong stocks rose slightly, leading the telecommunications industry; in terms of style, the small-market style continued to dominate; in terms of transactions, the turnover and turnover rate of the Hang Seng Index continued to decline.

The main views of Huachuang Securities are as follows:

The free cash flow advantage of Hong Kong stocks is obvious. The next six months will be a rare window for long-term investors to collect dividend-value assets

On the one hand, if we examine the overall ability of Hong Kong stocks to generate free cash flow, Hong Kong stocks have stabilized at a free cash flow ratio of close to 30% since 2019. Compared with the 23% free cash flow ratio of A shares (2023 report), Hong Kong stocks have relatively more abundant dividend capacity. On the other hand, under the domestic monetary and fiscal policy, financial assets are expected to take the lead in the process of re-inflation, while physical re-inflation may still have to wait for the smooth transmission of M1-PPI-EPS, and dividend value may be difficult to achieve rapid recovery in performance in the short term.

However, from the perspective of long-term value investment, investors actually don't need to wait until M1, PPI rectification, and economic reality recovers before buying. Currently, valuation (PE) is low due to short-term performance still under pressure. Instead, it provides a margin of safety and a better chip collection period. Even from a relative perspective, as remaining liquidity boosts small market growth, it will instead present more opportunities to sell chips. As a result, this moment just provides a rare chip collection window for dividend-value assets, similar to Sun Zhengyi and GIC's choices ten years ago.

Screening criteria for dividend value: high dividend (high free cash flow), undervaluation, large market capitalization

Since companies usually do not hoard large amounts of cash after forming free cash flow, the dividend rate often becomes the ultimate reflection of shareholder returns. Currently, we choose to use the dividend rate as an alternative indicator of free cash flow. Select according to the following three criteria to explore current dividend value stocks in Hong Kong stocks: 1) The scale is more suitable for long-term value investors: market capitalization of HK$50 billion or more; 2) Higher dividend return: dividend rate (nearly 12 months) >; 3%; 3) The market currently gives lower valuations: PE has a quantile of less than 50% in the past 10 years. In the end, 68 listed companies were selected, mainly in the banking, electricity and utilities, insurance, communications, transportation, real estate, food and beverage industries.

The dividend value will be expanded into three major sectors: consumer and domestic demand, cyclical resource products, and low dividend

1) Domestic consumer demand: As debt relief local debt pressure and asset prices stabilize, wage income and property income of the residential sector are expected to improve, debt-side debt repayment pressure is expected to decrease, and consumer spending is expected to be stimulated. Traditional consumer sectors such as food and beverage, home appliances, and pharmaceuticals may benefit. At the same time, the country itself is a consumer market with huge potential. Against the backdrop of periphery uncertainties next year, expanding domestic demand represented by promoting consumption may become a key direction for policy development.

2) Cyclical resources: In the medium to long term, China is still a global manufacturing center. With the rise of manufacturing, there is always demand for upstream: ports, highways, industrial metals. However, these industries have generally completed supply-side clearance, and under the logic of steady demand and rigid supply, they are expected to provide abundant free cash flow generation.

3) Low dividend: Electricity is the core provider of economic recovery (superimposed on the energy transition background), and banks act as capital intermediaries in the economic recovery process. After the economic recovery, both industries are expected to experience strong performance growth. At the same time, combined with the background of low interest rates, their stable long-term dividend return attribute value is prominent.

The overall profit forecast for Hong Kong stocks was slightly revised in November

As of 24/11/30, the overall EPS growth rate of Hong Kong stocks in 2024 (Bloomberg's unanimous expectations) improved slightly in November, with the Hang Seng Index up 0.3 pct, Hang Seng China Enterprise Index up 0.3 pct, and the Hang Seng Composite Index revised 0.3 pct; profit forecasts for most industries in the Hang Seng Industry Index were revised down, with the highest increases: 1.7 pct for industry and 1.4 pct for finance; the decline was the highest: healthcare industry - 19.2 pct, real estate and construction - 6.8 pct.

The small market style of Hong Kong stocks continues to dominate, and transactions continue to shrink

The overall small market style of Hong Kong stocks dominated in the past month, with the telecommunications industry leading the way. As of 24/12/13, Hong Kong stocks rose slightly in the past month. Among the main indices, the Hang Seng Index rose 0.6%, Hang Seng Technology rose 0.5%, and the Hang Seng State-owned Enterprises Index rose 0.8%. Stylistically, the Hang Seng Large Cap Index rose 0.9%, and the Hang Seng Small Cap Index rose 2.9%, and the small-cap style continued to dominate. In terms of industry, telecommunications (up and down 6.8% in the past month), essential consumption (3.8%), and information technology (3.8%) had the highest increases; real estate and construction (-4.9%), healthcare (-4.1%), and raw materials (-3.5%) experienced significant declines.

The net capital inflow to the south reached HK$125 billion in November, the highest value in a single month in nearly four years. As of November 30, the net southbound capital inflow for the first 11 months of this year reached HK$712.4 billion, and the net southbound capital inflow in November was HK$125 billion, the highest value in a single month since February 2021. By industry, Southbound capital mainly went to banking, pharmaceuticals, commercial retail and other sectors in November; Alibaba-W (net purchase of HK$11 billion, same below), Tencent Holdings (HK$8.2 billion), and Xiaomi Group-W (HK$6.2 billion) ranked in the top three in net purchases; China Financial Insurance (net sales of HK$1 billion, same below), BYD shares (HK$0.9 billion), and CNOOC (0.7 billion billion) HKD) ranked in the top three net sales.

Transactions contracted, and the Hang Seng Index's turnover and turnover rate continued to decline. In terms of transaction popularity, the overall turnover and turnover rate of Hong Kong stocks continued to decline after the Hang Seng Index peaked on 10/7; as of 12/13, the average daily turnover of the Hang Seng Index for the past four weeks was 144.8 billion yuan, which is in the 84% position for the past 10 years; the average daily turnover rate of the Hang Seng Index for the past four weeks was 0.28%, which is in the 84% position for the past 10 years.

December Hong Kong Stock Gold Stock Portfolio

Tencent Holdings (00700), NetEase (09999), Meituan-W (03690), Dashi (01405), Yum China (09987), Hong Kong Stock Exchange (00388), China Financial Insurance (02328), China Resources Beer (00291), Mengniu Dairy (02319), Bubble Mart (09992), BYD Electronics (00285), Greentown China (03900), Sichuan-Chongqing Expressway (00107), Geely Automobile 00175), Cinda Biotech (01801).

Risk Alerts

1. Macroeconomic recovery falls short of expectations.

2. Weak overseas economies may have an impact on related industrial chains and domestic exports.

3. Historical experience does not represent the future: due to changes in the market environment and other factors, the experience derived from historical data may not work in the future.