EWH - EWH: Hong Kong Is Finally Opening Up For Business

Summary

• China and Hong Kong have struggled with nearly 3 years of strict Covid restrictions, but it is coming to an end.
• Hong Kong will have a negative GDP growth this year but will bounce back.
• Hong Kong Chief Executive John Lee Ka-Chiu delivered a Christmas present to the people of Hong Kong.

Will 2023 be the year Hong Kong stocks will shine?

It has certainly not been an easy time in China and in Hong Kong for the last few years.

One problem seems to be overshadowed by the next one.

However, every dog will have its day. We revisit BlackRock's iShares MSCI Hong Kong ETF (EWH) to see if the next year will be a better year.

The share price has followed the general market downtrend this year, but we have seen a sharper improvement since early November this year.

The 3-year equity beta is 0.52 and its standard deviation over that period was 24.1%. Standard deviation measures how dispersed returns are around the average. A higher standard deviation indicates that returns are spread out over a larger range of values and thus, more volatile. As a comparison, [[SPY]] has a slightly lower standard deviation of 20.8%

Its trailing 12-month dividend yield, as of November 30th, was 2.95%

Let us look at the top 10 companies on the list and check whether there have been any changes to it over the last year.

When we compare this top ten list above with what was the top ten in October last year, there are some changes. Sun Hung Kai Properties ( SUHJF ) has moved from 5th to 3rd place.

Techtronic, which was 3rd took over the 5th place. Another company that has climbed on the list is CK Hutchison ( CKHUY ) which was in 7th place last year. These additions and reductions are very much in line with our assessment of the future business prospects of these 3 companies.

Two companies that were in the top 10 but did not make it to the list are HK China Gas and China Light & Power. They are both in a difficult business environment with energy prices going up and limitations on how much of this they can pass on to their customers. HK China Gas had a 16% reduction in their profit for FY 2021 and a further decline of 21% in profit in FH 2022.

The story at CLP is even worse. Earnings in FY 2021 were down 26% and losses in Australia caused them to post a record loss of HKD 4.8 billion in FH of 2022.

Back on the top 10 came Galaxy Entertainment ( GXYEF ) which are in the gaming industry in Macau plus BOC Hong Kong, which is Bank of China's Hong Kong business.

Update on Hong Kong's economy

This year was the year that inflation finally reared its ugly head.

Many investors, and some economists, knew it would come even though Mr. Powell tried to convince the world for a long time that it was all just a transitory event. In my opinion, the Federal Reserve gets things wrong most of the time anyway.

When they finally started to take action, we need to understand that it does have a large impact on Hong Kong, as its currency is linked to the mighty US dollar. And mighty it has been.

The USD Index was up as much as 18% by November this year but has since fallen down to an 8.5% rise.

This index is a basket of six currencies against the US dollar. They are the Euro, GBP, Yen, Canadian dollar, Swedish Krone, and Swiss Franc.

Hong Kong does import most, if not all, of the consumer goods it uses. A strong dollar has helped them considerably in curtailing inflation.

According to the Hong Kong Government, as of 11 November 2022, the underlying CPI for 2022 is revised down to 1.8%.

This is taking into account the actual outturn in the first 3 quarters of the year and the subdued short-term outlook The real GDP growth forecast for 2022 has been revised down to -3.2%.

The connection between Hong Kong and the Greater Bay Area

As of the 21st of December, the number of overseas visitors to Hong Kong had increased by 25% since travel restrictions were eased a week earlier.

But tourism experts warned the sector still faced a long road to recovery.

Statistics released by the Immigration Department on Wednesday showed 20,400 overseas visitors arrived between December 14 and 20, the first full week since travel restrictions were eased. This number does not include the most important arrivals which are those of people traveling to and from mainland China.

To put things in context, Hong Kong attracted 65.1 million visitors, an average of 1.2 million a week, in 2018.

As much as 80% of this was people arriving from the mainland.

That is why it is crucial that the land border between China and Hong Kong resumes full free movement of people again.

Arrivals in Hong Kong still have to take a PCR test upon arrival plus another PCR on the third day after they arrived. The good news is that there are no quarantine requirements. People can also freely go to restaurants and bars.

Hong Kong's Chief Executive John Lee Ka-Chiu gave Hong Kong people the Christmas present they were asking for by announcing on Christmas eve that the much-awaited reopening of the border with the mainland can now be achieved," as he said that he had received the green light from Beijing.

This will be a positive catalyst for the economy.

Summary

We believe that Beijing has finally understood that the negative impact on the economy and on society at large is huge should they continue to lock down people. Eventually, they seem to have realized that even China has to learn to live with Covid-19. The same goes for Hong Kong.

This is going to help kick-start the economy in 2023. It will help both consumers and business sentiment by the middle of the year.

A continued risk to the thesis is the international sentiment of doing business and living in Hong Kong.

Some multinational companies, talent, and money themselves have gravitated toward Singapore.

Whether Hong Kong can reverse this trend still remains to be seen. There is a place for both Singapore and Hong Kong to thrive together. Hong Kong's physical location and the fact that it is an integral part of China should be an advantage.

EWH is still a good proxy for Hong Kong's stock market.

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