Tianfeng: What are we trading now by going long on AH premiums?

Tianfeng released a research report stating that the reason for the decrease in the AH premium is not due to assets that Hong Kong stocks have and A shares do not, but rather because recently, similar old economy assets (resource stocks, financials, companies with names starting with 'China') have seen a higher increase in Hong Kong stocks compared to A shares. Trading AH premium based on the "range of fluctuations over the past 20 years" may pose risks as the aforementioned old economy style continues to perform better in Hong Kong stocks, and institutional holdings in A shares (the core assets in the barbell) are still being suppressed by the style; therefore, the AH premium index may potentially break downwards. Conversely, if one believes that Hong Kong stocks have seen excessive outperformance recently, and A share core assets should revert to the mean or catch up, then trading AH premiums may be viable. Tianfeng's main points are as follows: The reason for the decrease in the AH premium is not due to assets that Hong Kong stocks have, while A shares do not, but rather because recently, similar old economy assets (resource stocks, financials, companies with names starting with 'China') have seen a higher increase in Hong Kong stocks compared to A shares. Moreover, A shares' core assets have shown relative weakness in 25Q2, and Hong Kong stocks such as Contemporary Amperex Technology, BYD Company Limited, and China Merchants Bank have all shown a premium relative to A shares. The market is currently focused on the fact that the AH premium has reached the lower end of the past five years, with a high success rate in trading within the range of fluctuations being to bet that it cannot break through. However, it is important to understand the fundamental logic behind a trade. There are two possible explanations for the decline in the AH premium over the past 25 years: One is that since the weak US dollar cycle, Chinese assets have continuously broken previous biases of foreign countries and have been steadily revalued, with Hong Kong stocks having higher flexibility; this narrative has been present since the DS rally in Q1. Another explanation is that Hong Kong stocks have assets which some A shares do not, such as Tencent and other internet platforms, POP MART and other new consumer goods, and some innovative drugs. In conclusion, it can be stated that the "scarce assets unique to Hong Kong stocks" are not the direct cause of the decrease in the AH premium. This is because the AH premium is an index that requires components within the index to be listed synchronously in both A and Hong Kong stocks. Among the 105 selected component stocks, the total free float market value in both locations is weighted to calculate the contribution to the total AH premium index. Assets like Tencent, Alibaba, LAOPU GOLD, and certain innovative drugs that are not available in A shares do not contribute to the AH premium. In fact, looking at the contribution of various industries to the trend of the AH premium, the financial sector (banks + securities + insurance) has accounted for 64% of the decline in the AH premium index over the past 25 years, 60% since April 7, and 76% since June. The recent contributions of innovative drugs and new consumer goods, which the market is more attentive to, to the decline in the AH premium have been relatively small. In terms of individual stock contributions, the decline in the AH premium has been primarily driven by the top 25 stocks, most of which represent the "old economy" dominated by state-owned major banks, resource stocks, and companies with names starting with 'China', with additional core assets such as China Merchants Bank among them. These top 25 stocks have accounted for 79% of the decline in the AH premium over the past 25 years, 71% since April 7, and 85% since June. Therefore, Tianfeng believes that the decrease in the AH premium from 144.6 on January 25 to 128 on June 12 is primarily due to: 1) The increase in Hong Kong stocks compared to A shares for the same old economy assets (resource stocks, financials, companies with names starting with 'China'). Tianfeng believes that the underlying reasons could be that internet platforms saw significant gains in Q1, leading AI options and corporate reform in China's technology assets to be revalued early; and allocation-oriented institutions have revalued old economy Hong Kong stocks in the name of dividends, currently being the incremental capital driving force. 2) A shares' core assets' style showed relative weakness in 25Q2, with Contemporary Amperex Technology, BYD Company Limited, and China Merchants Bank in Hong Kong all showing a premium relative to A shares. Risk warning: 1) Past historical experience has limitations; 23) Geopolitical risks exceed expectations; 3) Policies being implemented and landing with uncertainty.