China Galaxy Securities: The narrative of Hong Kong Stock's cost-effectiveness will not disappear. Grasp three main investment strategies.

China Galaxy Securities released a research report stating that the narrative of cost-effectiveness in Hong Kong stocks will not disappear, but will transition from comprehensive valuation repair to structural defense and left-side layout. Hong Kong stocks are currently in a contradictory stage where valuation has a bottom, but external liquidity is restrained. The current market is experiencing short-term volatility and differentiation. If external pressure eases in the medium term, there is still considerable room for valuation repair in Hong Kong stocks. Investment strategies should focus on three main themes: (1) Technology sector. It is recommended to focus on semiconductors/hardware equipment. The previously popular AI concept stocks have seen a significant pullback, and short-term pressure remains. It is recommended to avoid overbought targets and wait for adjustments before entering. The logic for Token's overseas expansion in AI applications is still valid, and there may be new models released in May, so it is worth keeping an eye on. (2) Innovative pharmaceutical sector. ASCO conference is approaching, and the window for allocation is still open. It is advisable to pay attention to stocks with high earnings certainty. (3) High dividend/dividend assets. Utilities also benefit from the logic of overseas expansion of power equipment, providing both offense and defense, and possessing defensive and growth characteristics. Key points from China Galaxy Securities: Hong Kong stock market performance: Last week (April 27 to May 1), except for the UK FTSE 100, Japanese Nikkei 225, French CAC40 index, Hang Seng Technology, Hang Seng Index, South Korea KOSDAQ, and Hang Seng H-Share Index ETF index fell, major global broad-based indices rose. All three major Hong Kong indices showed a downward trend, with the Hang Seng Index falling by 0.78%, the Hang Seng Technology Index by 0.63%, and the Hang Seng H-Share Index ETF index by 1.07%. (2) Among the primary industries in Hong Kong stocks, 8 industries rose while 3 industries fell last week. Among them, energy rose by 4.19%, real estate by 1.38%, communication services by 0.68%, industrial sector fell by 4.41%, materials by 3.74%, and healthcare by 2.53%. Hong Kong stock liquidity: (1) Average daily trading volume on the Hong Kong Stock Exchange was 266.041 billion Hong Kong dollars last week, an increase of 32.536 billion Hong Kong dollars compared to the previous week. The average daily short selling amount was 37.087 billion Hong Kong dollars last week, an increase of 8.906 billion Hong Kong dollars compared to the previous week; the ratio of short selling amount to trading volume averaged 13.90%, an increase of 1.86 percentage points. (2) Southbound funds accumulated a net inflow of 18.671 billion Hong Kong dollars last week, an increase of 1.893 billion Hong Kong dollars compared to the previous week. (3) In the past 7 days ending on April 29, among Chinese stocks listed in Hong Kong, global active foreign funds had a net outflow of 249 million US dollars, a decrease of 106 million US dollars from the previous week, while global passive foreign funds had a net inflow of 470 million US dollars, a decrease of 775 million US dollars from the previous week. Valuation and risk appetite of Hong Kong stocks: (1) As of May 1, 2026, the PE and PB ratios of the Hang Seng Index were 12.36 times and 1.23 times, respectively, which are at the 80th and 55th percentile levels since 2010. (2) As of April 30, 2026, the 10-year US Treasury bond yield rose by 9 basis points to 4.40% compared to last Friday, and the risk premium of the Hang Seng Index was 3.69%, which is 1.66 times the 3-year rolling average standard deviation and the 2nd percentile since 2010. Can Hong Kong stocks continue to play the "cost-effectiveness narrative": The narrative of cost-effectiveness in Hong Kong stocks will not disappear, but will transition from comprehensive valuation repair to structural defense and left-side layout. Hong Kong stocks are currently in a contradictory stage where valuation has a bottom, but external liquidity is restrained. The current market is experiencing short-term volatility and differentiation. If external pressure eases in the medium term, there is still considerable room for valuation repair in Hong Kong stocks. High oil prices bring mixed blessings to Hong Kong stocks, benefiting sectors such as energy and high dividend stocks, but pushing up US bond rates suppresses overall valuations. The cost-effectiveness narrative is valid in high dividend asset structures, but index level support is under pressure. The cost-effectiveness of Hong Kong stocks relative to US bonds is at historically low levels, reducing attractiveness to foreign investors. For the cost-effectiveness narrative to continue, a decline in US bond rates or upward revision of Hong Kong stock earnings is needed. Overall valuation of Hong Kong stocks is not cheap (PE in the 80th percentile), but the structural valuation advantages of technology sector and energy sectors, among other high dividend sectors, are still valid. The cost-effectiveness narrative shifts from "comprehensive undervaluation" to "structural undervaluation." Risk warning: Risks of domestic policy measures falling short of expectations; risks of overseas rate cuts falling short of expectations; risks of unstable market sentiment.