Hong Kong Protests Intensify: 2 Mainland Picks
Pro-democracy protesters have paralyzed key areas of Hong Kong since Monday. More and more people have been flocking into the center of the city and the protests are expected to continue till Wednesday, which is a national holiday. However, these protests threaten to undermine investor confidence in a city which is characterized as an entry point for global capital into Asia.
Protests for Democracy
Violent confrontations took place between pro-democracy supporters and the Hong Kong government on Monday. Protests were centered on China’s decision to levy restrictions on how Hong Kong voters elect their leaders. Beijing has refused to allow open selection of candidates for the position of the chief executive.
The chief executive will be elected through the city’s first ever democratic election scheduled for 2017. Currently, Hong Kong is under the control of China in an arrangement called “one country, two systems.”
Pro-democracy supporters took to the streets and agitated against the Hong Kong government, which backs China’s election plan. Most of those agitating were students. Police blocked roads and used tear gas to disband the mob. Several schools and offices also shut down, as agitation spread to other sections of the city.
Financial Sector Suffers
Hong Kong’s financial industry took a beating as several banks had to close their branches. HSBC Holdings plc (HSBC) and Standard Chartered plc were some of the banks that had to close down branches following clashes between protesters and the police over the weekend. Hong Kong’s de facto central bank, the Hong Kong Monetary Authority, said offices, ATMs and nearly 44 branches were closed on Monday.
The likes of KPMG also had to suffer, asking employees working at its Central and Causeway Bay offices to work from home. Accounting major Ernst & Young have also worked out a plan enabling employees working in these areas to work from other offices or from home.
The Hong Kong Monetary Authority has worked out a contingency plan and is ready to pump liquidity into the banking system. It believes that Hong Kong’s money markets will work normally. On the whole, the financial sector has been opposed to these protests and earlier expressed concerns that they might severely impact investor confidence in the city.
Valuation Gap Vanishing
Consequently, Hong Kong’s benchmark, the Hang Seng, has suffered. The benchmark index has experienced its largest two-day drop since February. The Hang Seng lost 1.3% today after experiencing a 1.9% decline on Monday. Political concerns have forced the markets to go into correction mode.
The decline of the Hang Seng has effectively eliminated the difference between dual-listed shares. Stocks listed on Hong Kong have been weighed down by pro-democracy protests. In contrast, indications that the Chinese government may take steps to boost the economy have boosted shares listed on the mainland.
The Hang Seng has lost 1.1% over the quarter compared with a 15% gain for the Shanghai Composite Index. This is the highest difference in performance in nearly five years. Today, the Hang Seng AH Premium Index has increased to 100.36. This index gauges the difference between the largest shares listed on both exchanges.
This is the highest difference since the exchange link was proposed in April. The link between the Shanghai and Hong Kong exchanges is expected to create a massive inflow into shares listed on the mainland. This makes A-shares a more lucrative proposition than H-shares at the moment.
Our Choices
Below we present two A-shares which will gain from these trends, each of which also has a good Zacks Rank.
YY Inc. (YY) is a communication social platform. YY Inc. enables users to engage in online group activities using voice, text and video. The company's platform is made up of YY Client, the YY.com and Duowan.com web portals, Mobile YY and web-based YY. It generates revenues through online advertisements as well as from charges paid for playing Internet-based game and membership.
YY Inc. holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 121.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 26.29.
Perfect World Co., Ltd. (PWRD) is a leading online game developer and operator in China. Perfect World primarily develops three-dimensional ("3D") online games based on the proprietary Angelica 3D game engine and game development platform. The company's strong technology and creative game design capabilities combined with extensive local knowledge and experience enable it to frequently and rapidly introduce popular games designed to cater to changing customer preferences and market trends in China.
The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 24.8%. It has a P/E (F1) of 10.53.
The ongoing protests in Hong Kong have made stocks listed on the mainland a relatively more attractive proposition. A mutually acceptable resolution to the standoff seems unlikely at the present, even as the Chinese government takes steps to boost its economy. This is why these two stocks would make good additions to your portfolio.
Read the Full Research Report on HSBC
Read the Full Research Report on YY
Read the Full Research Report on PWRD
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