What is so great about the debut of the Shenzhen-Hong Kong Stock Connect

Source: CNBC.com, Getty Images

The Shenzhen-Hong Kong Stock Connect kicked off its trading debut on Monday (December 05, 2016) with a lacklustre showing. According to several press reports covering the market debut, the demand from offshore investors for shares listed on the Shenzhen Stock Exchange reached just CNY2.67 billion (S$55.15 billion). The downbeat market debut was also impacted somewhat by the Italian referendum on December 04 where its Prime Minister resigned abruptly due to the lack of voter confidence in his government.

So, what exactly is Shenzhen-Hong Kong Stock Connect

The Shenzhen-Hong Kong Stock Connect is modelled after the Shanghai-Hong Kong Stock Connect. The link gives offshore investors access to over 800 stocks (mostly small-cap and technology-oriented stocks) on the Shenzhen Stock Exchange. In addition, Mainland Chinese brokers will also be given access to transactions in 417 stocks listed in Hong Kong.

How did both Hong Kong and Shenzhen stock indices fare

Source: Bloomberg.com

As one might notice from the chart above, there has been a divergence in both the Hang Seng Index (HSI) in Hong Kong and the Shenzhen Stock Exchange Composite Index (SZE) where the former is standing at a positive year-to-date (YTD) performance of 2.43 per cent, while the latter is still catching up with a negative YTD performance of close to 8.1 per cent as of December 07, 2016.

The Shenzhen-Hong Kong Stock Connect debut is merely three days old (At the time of writing on December 07, 2016), and is still receiving quite muted support. The total trading volume on December 06 (where the latest data is last available) was about 15.3 billion as compared to the turbulent January 2016 where volumes topped over 20 to 25 billion. Incidentally, January and February 2016 were the two months where the Mainland stocks suffered its worst declines in many years.

What are the positives about the Shenzhen-Hong Kong Stock Connect

According to Maybank Kim Eng, the positive factors for participating in the Shenzhen-Hong Kong Stock Connect are:

  1. The Shenzhen Stock Exchange has 1,828 listed companies compared to more than 1,146 listings in Shanghai. This works out to a total market capitalisation of around CNY 15 trillion as of November 29, 2016.
  2. The Shenzhen-Hong Kong Stock Connect gives access to one of China’s most popular technology offerings like Lanpec Technologies, AVIC Aviation High-Technology, and Guangdong Guanhao High-Tech.
  3. The Shenzhen Stock Exchange’s average stock turnover of around CNY230 billion is considered among the largest, eclipsing the Nasdaq and BATS Global Market in the United States as the second most active market during several months in 2016.
  4. The Shenzhen Stock Exchange offers plenty of liquidity with value of share trading totalling almost US$679 billion in October 2016, and is about 1.5 times higher than Shanghai’s stock exchange at US$457 billion.
  5. The Shenzhen-Hong Kong Stock Connect aims to narrow the valuation spreads between the Mainland ‘A’ shares and Hong Kong’s ‘H’ shares (A and H shares denote Mainland-listed companies having their respective listings in both China and Hong Kong).

What might naysayers think about the Shenzhen-Hong Kong Stock Connect

  1. The market is untested and judging by the lacklustre debut, there is still more work to do before the Shenzhen-Hong Kong Stock Connect can rival other exchanges.
  2. China is clamping on foreign capital outflows, and the authorities have the power to impose different rules on foreign investors.
  3. The perception of a lack of corporate transparency among the small-cap names in Shenzhen Stock Exchange opens up more questions.
  4. The lack of history among foreign investors taking up stakes in Shenzhen ‘A’ shares could pose questions about foreign participation in the market.
  5. The weakening Chinese Yuan might pose challenges among foreign investors wanting to own a slice of the onshore ‘A’ share market.

What are some of the potential stock names cited in Shenzhen-Hong Kong Stock Connect

According to a CNBC interview session with Alexander Lee, director at DBS Vickers Securities, he noted names like wind turbine manufacturer Xinjiang Goldwind Science and Technology, sportswear maker Li Ning and software manufacturer, Kingdee as potential stocks to consider.

For example, Goldwind shares traded on the Mainland is about 70 per cent higher than its ‘H’ share counterpart in Hong Kong with the Hong Kong shares paying out 5 to 6 per cent dividends.

Source: Phillip POEMS Stock Trading Platform

Although the trailing-twelve month (TTM) Price-to-Earnings (P/E) ratio is 9 to 10 times, along with dividend yield of 4 to 5 per cent, and an interest coverage ratio of around 25 to 26 times, potential investors in the stock might want to pay close attention to the negative free cash flows which stands at a negative figure of around HK$5 billion.

Technical chart of Goldwind

Source: Phillip POEMS Stock Trading Platform

The one-year chart of Goldwind seems to suggest that price is hovering around HK$11 to HK$12, with 14-day relative strength index (RSI) at a mild level of 50 to 51. There is hardly any trading volume of the stock, and the stock price is unlikely to show any major fluctuations given the 50-day, 100-day and 200-day moving averages continue to stay stable at the HK$11 to HK$12 price levels.

Summary

Potential investors seeking to participate in the Shenzhen-Hong Kong Stock Connect link are advised to conduct their due diligence carefully. Due to the nature of the small-cap, and technology-focused companies being listed on the Shenzhen Stock Exchange, there is lack of research coverage. Until there is a widespread acceptance and investment coverage of these companies, investors should tread with caution and try to spend a good amount of time researching these companies.

Disclaimer: All the stock quotes and references expressed in this article are drawn from public information and proprietary sources. Investors interested in putting trades on any stock names quoted in this article are advised to seek the opinions of their licensed financial advisers. Investors are advised to do their own due diligence and research before putting their money into any investments.

This article is written by Tay Hock Meng (Peak Hour), a licensed financial advisory consultant with Phillip Securities. MAS representative number is THM300399401. For a free financial health check/discussion, please contact tayhm@phillip.com.sg, or +(65)9721 3987.

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About Peak Hour 87 Articles
I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.