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November 21, 2016

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HK firms hit the road to woo mainland cash

SCORES of Hong Kong-listed companies — many small — are on a roadshow blitz on the mainland to whet the appetite of investors ahead of the launch of a cross-border investment link between Shenzhen and Hong Kong.

Mainland investors are enthusiastic, viewing the cross-border channel as a way to buy relatively cheap growth companies and hedge against a rapidly falling yuan, which hit an eight-year low against the dollar on Friday.

“Valuations of Hong Kong stocks are very low. In addition, the Hong Kong dollar is pegged to the US dollar, so when you buy Hong Kong dollar assets, you’re actually buying into the US dollar,” Ma Hong, general manager of Shanghai TopFund Investment Management Co, said at an event in Shanghai promoting the Hong Kong-Shenzhen Connect trading link.

“For us, the Hong Kong market represents a strong currency plus cheap assets ... we need to embrace it.”

The mainland and Hong Kong have not specified when the link would open, but the head of Hong Kong Exchanges and Clearing Ltd said on Friday it would go live “in a few more days.”

The link would allow mainland investors access to about 100 smaller companies listed in Hong Kong. The existing Shanghai-to-Hong Kong link allows investment in 318 bigger Hong Kong-listed companies.

Since the Shanghai link opened two years ago, mainland investors have bought a net 294.7 billion yuan (US$42.8 billion) of Hong Kong shares, more than double the purchases of Shanghai shares by Hong Kong. The southbound money flow has halved the premium that mainland listed shares had over Hong Kong shares this year alone.

UBS forecast net inflows from the mainland into Hong Kong next year would be 160 billion yuan under the two links, but some are making bolder predications.

Industrial Securities, a mainland brokerage, estimated that insurers, which have recently been allowed to participate in the connect schemes, will invest 400-600 billion yuan into Hong Kong stocks by the end of 2017.

China maintains tight controls on capital movements across its borders and since the stock market crash last year has been clamping down on capital outflows.

Zhou Jie, chairman of Haitong Securities, told a promotional event sponsored by the brokerage in Shanghai that there is pent up demand in the mainland for global investment opportunities.

The Shanghai and Shenzhen trading links provide a valve for that demand. But while they give investors on the mainland a chance to hedge against the falling yuan, they are closed systems aimed at preventing domestic money leaking offshore.

Mainland investors pay for their Hong Kong purchases in yuan and receive the proceeds in yuan when they sell the shares. They can not use their Hong Kong shares as collateral for offshore loans.

Charm offensive

A range of companies, including Kingdee International Software Group Co, Bloomage Biotechnology Corp and sportswear maker 361 Degrees, have taken part in the charm offensive.

Others include Concord New Energy Group, natural gas seller Blue Sky Power Holdings Co and public relations firm Wonderful Sky Financial Group Holdings.

Many are hoping investment from the mainland will lift their share prices and market valuations and so boost their fund raising potential. It could also add liquidity to trading in their stock, making the equity more attractive to a broader investment base.

Still, companies will have to expect greater volatility, said Li Qian, board secretary of BYD Co Ltd, a Chinese automaker which is dual-listed in Shenzhen and Hong Kong.

“Mainland investors hold stocks for a much shorter period (than global peers),” he said, noting the firm’s Chinese shareholders change frequently while global institutional holdings are more stable.

Pang Jiahong, chief financial officer at Hong Kong-listed Universal Medical Financial & Technical Advisory Services Co, welcomes speculation.

“If mainland investors take a shorter-term trading approach, I think that’s good for the company in terms of the stock’s liquidity.”

Universal, which counts CITIC Capital Partners, the Vanguard Group Inc, and Hanwha Asset Management Co as major shareholders, trades at a price-to-earnings ratio of 13. That is significantly lower than the average of 52 for the healthcare sector on the Shenzhen exchange.

The mainland’s small-caps are about 4-6 times more expensive than their Hong Kong peers, so investment opportunities under the Shenzhen connect are very attractive, said Zhou Weida, vice general manager at Invesco Great Wall Asset Management Co.

Outperformance by the Hang Seng Small-cap Index suggests that some investors in Hong Kong may already be pre-empting the demand.

The index is up over 12 percent since the Shenzhen link was approved by China in August. It has outpaced rises of around 9 percent in both the Hang Seng Composite Mid-cap Index and the Hang Seng Composite LargeCap Index respectively, which are included in the Shanghai link.


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