GF Securities: How do you view the continued narrowing of the premium rate for A and H shares?

This week, the Hang Seng AH Premium Index fell below 128 points, reaching the lowest level since June 2020. In the past three years, the AH premium rate has experienced several rapid contractions - in January 2023, May 2024, and October 2024, it came close to 130 points, but then widened again. This year, there have been some new changes in the Hong Kong stock market from the primary market to the secondary market, and the market is paying attention to whether the current round of AH premium rates has further room to shrink. (1) Improved trading volume is one of the important drivers for repairing the liquidity discount of Hong Kong stocks. The relative elasticity between A-shares and Hong Kong stocks underwent certain changes around 2021. From 2013 to 2020, the AH premium rate was positively correlated with the performance of the Shanghai and Shenzhen 300 Index (correlation coefficient +0.83), meaning that they moved in the same direction. Most of the time, A-shares had greater elasticity, and the convergence of AH premiums mainly occurred during downturns in the Chinese market. From 2021 to the present, the AH premium rate has been negatively correlated with the performance of the Shanghai and Shenzhen 300 Index (correlation coefficient -0.46), meaning they moved in the same direction. Most of the time, Hong Kong stocks had greater elasticity, and the convergence of AH premiums mainly occurred during the upswing of the Chinese market. Since 2024, the recovery of AH premiums has also occurred during market uptrends or stabilization phases. One reason for the increased relative elasticity of Hong Kong stocks compared to A-shares may be that after 2021, the core asset bubble burst, leading to a greater contraction in A-share trading volume. The turnover ratio of the Shanghai and Shenzhen 300 Index to the Hang Seng Index turnover ratio decreased, contributing to the long-term repair of the liquidity discount of Hong Kong stocks. In addition, over the past three years (especially in 2022-2023), active foreign capital continued to withdraw from Chinese assets, making the trading and speculative attributes of Hong Kong stocks stronger, with increased volatility. Although the market has been more focused on trading leaders in the technology sector this year, the turnover ratio of the Hang Seng Small Cap Index has also increased since 2024. (2) In terms of industry contributions, financial stocks remain dominant, but the narrowing of AH premium rates for growth stocks is also significant this year. From the median of individual stocks and our calculated market-cap-weighted index, since November last year, the AH premium rate has formed a relatively smooth narrowing trend. Looking at the distribution of industries listed in both markets, the combined market capitalization of banks, non-banks, and petrochemicals accounts for nearly 60%, so the trend of the premium rates of these companies directly determines the overall calculation results. However, we have also observed this year that the sharp rise of some growth stocks in the Hong Kong stock market is helping to narrow the price difference in the AH market. Specifically, from the beginning of this year, our calculated weighted AH premium rate has narrowed from 64.6% to 42.2% (as of June 6, the index has dropped by 22.4 percentage points). According to the Wind sub-industry classification, the highest contribution rates are from non-banks, banks, petrochemicals, semiconductors, and electrical equipment, with contributions of -5.4%, -5.3%, -2.9%, -1.5%, -1.0%, respectively (in percentage points). In addition, the automotive and pharmaceutical growth industries have also made contributions of -0.9% and -0.6 percentage points, respectively. From the perspective of the industries themselves, the top 5 industries with the most significant narrowing of premium rates this year are electrical equipment, pharmaceuticals and biotechnology, non-ferrous metals (gold), semiconductors, and automotive, which are mainly prosperous growth industries. The narrowing situation of traditional high-dividend stocks is in the second tier, mainly including banks, petrochemicals, and coal. The overall narrowing of premiums in cyclical industries is not significant. In terms of individual stocks, the main contributors to the overall narrowing of AH premium rates this year are mainly bank, insurance, and petrochemical stocks, including China Life Insurance, PetroChina, Industrial and Commercial Bank of China, Bank Of China, Agricultural Bank Of China, Sinopec, The People's Insurance, etc. At the same time, Semiconductor Manufacturing International Corporation, Contemporary Amperex Technology, BYD Company Limited, and other stocks are among the top contributors. Semiconductor Manufacturing International Corporation's premium rate has narrowed from 221.3% at the beginning of the year to 129.7%; Contemporary Amperex Technology is a new company listed in Hong Kong this year, with a discount of -10.9% in A-shares compared to H-shares. (3) In terms of individual characteristics, high-dividend stocks generally do not have high premiums. Data show that the dividend yield level is an important factor affecting the premium rate of individual stocks. The chart below shows that companies with low dividend yield levels do not follow a clear pattern, but high dividend-yielding individual stocks generally do not have high premium rates. If the dividend yield reaches 4% or higher, the probability of a premium rate higher than 50% will significantly decrease. Table 2 lists companies with a market capitalization of over 20 billion RMB, and with a minimum dividend yield and average dividend yield of over 4% in the past three years. It can be seen that the AH premium rates of these companies are generally lower than the current median (62.8%). However, there is still a significant difference within high-dividend companies, especially those with poor recent financial performance, which tend to have higher overall premium rates. Whether we will see a convergence of these differences in the future will depend on factors such as sector trading, individual stock profit stability, and dividend stability. (4) Overall conclusion: In the medium term, there is further room for AH premium rates to converge. Combining the above discussions, we can identify several key factors that affect AH premium rates: Firstly, whether the trading activity in the Hong Kong stock market can continue to increase, which will determine the extent of the repair of the liquidity discount of Hong Kong stocks. This trend has been positive in the past two years. Secondly, the quality of companies listed in both markets, including profit stability and dividend stability, must improve. Against the backdrop of a downturn in the real estate cycle, companies face increased growth pressure, but in recent years, under policy guidance, AH-listed companies have seen an overall improvement in dividends.The rate and repurchase rate have instead increased. From the above analysis, the increase in dividend yield can lower the probability of a high premium rate.The third factor is the qualifications and scarcity of newly listed A-share companies in Hong Kong, which determines the overall attractiveness of the Hong Kong stock market. This year, a typical example is Contemporary Amperex Technology, whose H-share price has consistently been higher than its A-share price since its listing in Hong Kong. The possible reasons for this may be: on the one hand, A-share companies submitting for Hong Kong IPO this year, including Ningde, have mentioned overseas business expansion as the purpose of financing, which aligns with the market's understanding of how Chinese companies can break through. On the other hand, more and more non-traditional financial and energy companies are listing in Hong Kong, which means that in the future, more high-quality Chinese assets can be bought in the Hong Kong stock market, and these companies will attract incremental capital transactions. Therefore, we believe that in the longer term, the AH premium rate is expected to further converge, and there may be more cases where Hong Kong stocks are premium to A-shares in the future. However, looking at the current situation, with the market sentiment weakening and the trading range narrowing, changes in the AH premium rate may be more evident in the form of sectors and individual stocks. Risk warning: Geopolitical and US bond risks exceeding expectations may lead to a significant tightening of global liquidity and pressure on risk assets. The acceleration of Hong Kong IPOs may bring short-term liquidity shocks. If domestic growth stabilizing policies are not as expected, leading to a weak economic recovery and listed companies' profit levels lingering at the bottom for a long time, this may further dampen market risk appetite, among other factors. This article is reproduced from the WeChat public account "Chen Ming's deep strategic thinking", author: GF Strategy; GMTEight editor: Xu Wenqiang.