2 Types of Investing in the Hong Kong Stock Market

November 7, 2020

Uncover - China new and old economy stocks

For investors, Hong Kong perfectly captures the dichotomy between the dynamism of private enterprise in China versus the inertia of state-backed companies.

Investors would have seen shares of Meituan Dianping (SEHK: 3690), the Tencent-backed “super app” focused on food delivery and online travel, soar this year after a series of great earnings.

In late August, the company posted better-than-expected revenue of RMB 24.7 billion while it even beat on the bottom line – reporting a surprise net income of RMB 2.2 billion versus an expectation of a loss.

On the flip side, take a look at state-backed oil and gas giant China Petroleum & Chemical Corporation (SEHK: 386), also known as Sinopec.

The firm recently reported a set of horrific results, a record net loss of RMB 21.7 billion. Why are there such diverging fortunes for these two types of companies in China; the so-called “new economy” and “old economy” stocks?

China’s tech fairytale

I view Meituan as one of the fairytales of the Hong Kong market. Beating out competition in the food delivery space from Alibaba-backed Ele.me, the company is now the dominant player in the sector.

What’s more, it’s actually stolen some of the thunder of the big two of Alibaba and Tencent. A few years ago, no one would have thought any tech upstarts in China would be able to dislodge their dominance.

Meituan has proven the doubters wrong. It’s been a resounding success. After hitting a low of around HK$44 a few months after going public in late 2018, shares are now up six-fold.

By focusing on creating a dominant food delivery platform, and then expanding into the vastly profitable online travel sector, the company has been methodical in slowly expanding its land grab.

Now it’s launching its own payments system (Meituan Pay) and is targeting the massive market of online grocery delivery in China by leveraging its extensive logistics know-how and network.

Governance issues

So what about Sinopec? We all know that oil and gas companies have been terrible investments in the past decade.

The structural story is absolutely abysmal but value investors have kept the faith, attracted by high dividend yields and blind faith in the “return of oil”.

Besides these issues, one of the main problems with Sinopec is its strategic importance to the Chinese government. The big three oil and gas giants, with CNOOC and PetroChina being the other two, are all state-owned.

Deals by these companies tend to be highly questionable from a shareholder perspective. For example, Sinopec recently agreed to transfer its pipeline assets to a fellow state-owned national pipeline company for cash and equity.

After having transferred the stake, Sinopec then agreed to subscribe to RMB 47.1 billion of registered capital in the recently-created pipeline company.

Losers keep losing

Are readers lost? I’m not surprised, it’s quite a typical transaction between state-owned firms that tends to be opaque and lacking in any rationale whatsoever for how it benefits shareholders (and not just the Chinese government).

It’s been no surprise that all three state-owned oil and gas giants have been massive losers in the stock market.

Sinopec shares in September 2010 were trading at HK$5.29 apiece and they now sit at HK$3.49 a decade later.

Analysts keep talking about a turnaround for Sinopec and its “massive dividend yield” of 9.8%. But if the dividend yield is high because of a falling share price and unsustainable dividends, exactly what is the benefit for long-term investors? As investors we should be looking to grow wealth and not destroy it.

A “special interim dividend” that was declared of 7 fen per share was substantially lower than the 12 fen per share announced in the first half of 2019.

Bet on the winners of the future

Privately-owned companies in China are where investors should be focusing their time. Is it any surprise that privately-owned firms generate over 60% of China’s GDP growth?

Operating in an environment where state-owned firms get first dibs on capital and bank loans, it’s a miracle in itself that we’ve seen privately-owned success stories like Meituan in recent years.

However, the type of innovation that is going on in China’s tech sector is breathtaking while the slow decay of China’s state-owned industries continues.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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