The Hong Kong stock market has firmly established itself as a robust ground for deep value investment, particularly due to its cash dividend and buyback amounts, which significantly exceed financing levels. This trend has captivated mainland investors, enhancing their interest in allocating funds within this market. The influence of the so-called "Northbound Capital," which refers to the influx of investment from mainland China into Hong Kong stocks, regarding pricing power is also on the rise.
Since 2016, the aggregate amount of cash dividends and stock repurchases in the Hong Kong market has consistently outpaced annual financing totals. This gap grew even wider in 2022, reaching an astounding 1.1 trillion Hong Kong dollars (HKD). Specifically, in 2022, Hong Kong's cash dividends totaled approximately 12.44 billion HKD, while stock buybacks accounted for around 1.05 billion HKD. In stark contrast, the initial public offerings (IPOs) and subsequent fundraising from these listings barely reached 251.9 billion HKD, highlighting an unmistakable divergence where the sum of cash returns vastly overshadowed the financing amounts.
From early 2023 up to September, the total achieved through cash dividends and buybacks was around 12 trillion HKD, with IPOs and post-listing fundraising only amounting to 99.2 billion HKD. This further illustrates a persistent disparity exceeding 1.1 trillion HKD between these mechanisms for returning value to investors and new capital injections into the market.
During the second quarter of 2023, the Hang Seng Index reported a dividend yield of 3.51% coupled with a buyback yield of 0.42%, bringing the total yield to an attractive 3.93%. These figures signal the market's robust nature as a source of return for shareholders, enhancing its appeal even amid fluctuating economic conditions.
A detailed analysis of the constituent stocks within the Hang Seng Index reveals a commendable percentage of companies engaging in cash distribution to investors. In 2021 and 2022, respectively, 338 and 331 companies declared dividends, indicating that roughly 64% of the constituent companies were involved in returning cash to shareholders. Remarkably, in 2022 alone, nearly 32% of these firms had a payout ratio of at least 50%, while 18.43% exceeded a payout of 70%.
Key sectors contributing to this cash dividend phenomenon primarily include financial services, energy, telecommunications, and non-essential consumption sectors. The financial industry alone generated a staggering cash dividend surplus of over 350 billion HKD in 2022, leading all sectors. A breakdown indicates that banking firms contributed 72% of this total, while insurance companies contributed nearly 20%.
The energy sector followed suit with almost 137 billion HKD in cash dividends, with major players such as China National Offshore Oil Corporation, Sinopec, and China Shenhua leading the charge. A notable trend has been the increase of payout ratios within these companies, allowing them to capitalize on favorable market conditions.
Telecommunications also played an integral role in cash distribution, contributing around 9.29% to the overall market total cash payout in 2022, accompanied by a nearly 30% year-on-year growth as companies like China Mobile began propelling their payout percentages.
Meanwhile, the non-essential consumption sector, including companies like MTR Corporation and Chow Tai Fook, initiated dividends exceeding 78 billion HKD in 2022, reflecting a near 10% growth from the prior year.
The technology sector also emerged as a significant player, with cash dividends climbing nearly 50%, driven particularly by software companies reporting over 65% growth in cash return.
From 2021 onward, the trend of stock repurchase activity in the Hong Kong market has undergone a strong uptick, culminating in around 1.05 billion HKD spent in buybacks in 2022—an increase of 668 billion HKD year-on-year. Over these years, the number of companies engaging in buybacks has also progressively risen, signifying a broader acceptance of returning capital to shareholders by reducing the number of shares outstanding.
A significant contributor in this sphere has been the technology sector, where 31 firms participated in buybacks, totaling approximately 40 billion HKD, highlighted by Tencent's notable repurchase of over 33.8 billion HKD in 2022.
The financial sector also made a substantial impression, with 17 companies repurchasing shares for over 33 billion HKD, notably influenced by AIA's repurchase plan aimed at returning up to 10 billion USD of capital to shareholders.
Medium to long-term forecasts unveil a downward trend in capital costs across the society, presenting a favorable environment for investments focused on assets that generate stable and high dividends. This strategy entails embracing industry leaders with bond-like characteristics, eyeing consistent returns as operational dynamics evolve in the complex domestic and international landscape.
The overall economic climate in China has shifted toward a path of high-quality development, where excessive expansion is decreasing, cash flows are bolstering, and consequently, dividend ratios are rising. Both the A-share and Hong Kong stock markets reflect an upward trajectory in payout ratios, with 70% plus ratios observed for 18.43% of firms listed on the Hang Seng Index in 2022, marking a historic high.
As of mid-October 2023, the dividend yields from high-yield indices in Hong Kong have significantly widened compared to the 10-year government bond yields by historical benchmarks, attracting continued investor interest amidst volatile market conditions. The high dividend yield strategy since 2021 has evidently outperformed the broader Hang Seng Index, demonstrating its resilience during periods of market turbulence.
The influence of "Northbound Capital" since early 2022 continues to propel the revaluation of value stocks within Hong Kong's stock market. This influx has helped mitigate adverse impacts from foreign capital withdrawals, particularly benefitting state-owned enterprises with stable dividend characteristics.
In conclusion, the Hong Kong stock market's ongoing increase in dividends and share buybacks enhances its attractiveness as a solid investment avenue. With the current economic parameters and an elevated dividend yield relative to other class assets, investors are presented with unique opportunities for portfolio diversification and potential growth.