Is the bull market in the Hong Kong stock market over? Industrial: Hang Seng Index has a potential upside of 10%-15% focusing on the three main themes of "technology, prosperity, and dividends".

Industrial's research report suggests that the Hang Seng Index may still have a 10%-15% upside potential. With the support of the domestic "dual-width" policy, the cautious easing of the Federal Reserve, the continuation of the AI narrative, and ERP maintaining at a low level, the Hang Seng Index may target a range of 28000-29000. Focus on structural opportunities in technology, economy, and dividends. In terms of technology, with the continuation of the AI narrative, technology remains a focus, but it is important to note that the current Terrific10 companies' profit valuations are basically matched, and further valuation increases may require profit-driven or more ample liquidity support. In terms of the economy, with the prospects for weak recovery and declining valuation price ratios, the effectiveness of the economic strategy may be maintained at a high level. On the dividend side, in the low-interest rate asset shortage environment combined with stronger dividend repurchase intentions from companies, dividends still have value in a core configuration. Industrial's main points are as follows: Has the bull market in Hong Kong stocks ended? From a long-term perspective, the bull market in Hong Kong stocks is highly correlated with the domestic fundamentals and USD liquidity. Since 1997, Hong Kong stocks have experienced six complete bull and bear cycles and are currently in the seventh bull market. Looking at the denominator, in the seven bull markets, including the current one, six of them have had declining or low USD and US bond rates, global capital inflows have made it easier for international "hot money" to flow into the offshore Hong Kong stock market, helping to drive the bull market. Looking at the numerator, the bull markets often coincide with the stabilization and recovery of the Chinese economy, especially when the year-on-year growth rate of profits of large industrial enterprises turns from negative to positive and the year-on-year growth rate of the producer price index rebounds, Hong Kong stocks are more likely to start an uptrend. The logic of both the denominator and numerator currently remains favorable, and we believe that this round of Hong Kong stock bull market has not ended. How is this bull market different from the previous ones? Looking back at the four bull markets since the opening of the Southbound connection, the main differences in this round's transition from bear to bull market are in the interest rate spread between China and the United States, the participation level of Southbound capital, and market returns. Similarities: Support policies in the domestic capital market or industry, the Federal Reserve in an interest rate cut cycle, a weaker US dollar, and relatively loose liquidity, and declining AH premiums. Differences: 1) There is a continuous and significant divergence between the interest rate spread of China and the United States and the performance of the Hang Seng Index. During this bull market process, the interest rate spread between China and the United States is inverted, and the extent of inversion has not shown clear relief. This may reflect a decrease in the dependence of this bull market on international capital flow with the massive inflow of Southbound capital support. 2) The participation level and pricing power of Southbound funds have significantly increased, with the Hong Kong Stock Connect accounting for more than 20% of total market turnover, significantly increasing the pricing power for industries such as trade, retail, petroleum, banking, and coal. There is a high correlation between the amount of buying or selling and the industry index's fluctuations, with a shift in behavior from "chasing gains" to "buying on dips", and the net purchase amounts are consistently negatively correlated with the performance of the Hang Seng Index. 3) The market returns of Hong Kong stocks have significantly improved, with the heat of stock repurchases by listed companies increasing since 2023 and remaining at high levels, with the weekly average repurchase amount stabilizing at over HK$3 billion, and the market return rate reaching 4.13% in 2024. How should we understand the sluggish performance of Hong Kong stocks at the beginning of the year? The trend of the Heng Seng Index does not completely represent the overall Hong Kong stock market, and when the morale of the Heng Seng Index will be revitalized still needs further observation. Firstly, aside from the significant underperformance of the Heng Science and Technology Index compared to the ChiNext and Sci-Tech Innovation Board, the performance of Hong Kong stocks at the beginning of the year compared to similar sectors in the A-share market is not poor, or even outperforms. Weakness in the Heng Science and Technology Index does not equate to weakness in Hong Kong stocks entirely, nor does it mean that there are no opportunities in the Hong Kong stock market. Secondly, in terms of influencing factors, the concerns at the beginning of the year about "AI Kills Software" have been the main reason suppressing market sentiment towards internet companies and the reason for foreign capital selling off leading companies like Tencent. The stabilization of the internet technology sector still depends on the progress of the AI narrative and its performance. How do we view the opportunities for Hong Kong stocks in the second half of the year? Looking ahead, with a weak recovery and loose monetary policy continuing, we place emphasis on structural opportunities. In terms of profit, based on consensus forecasts from foreign media, with a weak recovery in the domestic economy and neutral liquidity, the cumulative net profit growth rate of non-financial companies in the Hang Seng Index in 2026 is estimated to be around 4.6%. Although the recovery continues, the slope is more gradual. In terms of funds, the incremental space for Southbound capital in 2026 may be between HK$630-1050 billion. Considering the situation where the proportion of Hong Kong stocks in portfolios is increased and the stable scale of new fund offerings, the incremental space for active public funds may be between HK$100-200 billion. Referring to the net inflow scale of Hong Kong ETFs in the past three years and considering narratives around "deposit relocation", passive index funds may have an incremental space of HK$120-340 billion. Considering the increase in equity asset allocation by insurance institutions and new premium incomes, the incremental space for insurance companies is estimated to be between HK$410-510 billion. The Hang Seng Index may still have a 10%-15% upside potential. With the support of the domestic "dual-width" policy, the cautious easing of the Federal Reserve, the continuation of the AI narrative, and ERP maintaining at a low level, the Hang Seng Index may target a range of 28000-29000. Focus on structural opportunities in technology, economy, and dividends. 1) Technology: With the continuation of the AI narrative, technology remains the focus, but it is important to note that the current Terrific10 companies' profit valuations are basically matched, and further valuation increases may require profit-driven or more ample liquidity support. 2) Economy: Against the background of a weak recovery and weakening valuation price ratios, the effectiveness of economic strategies may be maintained at a high level. 3) Dividends: In an environment of low interest rates and stronger dividend repurchase intentions from companies, dividends still have value in a core configuration. Risks: 1) Federal Reserve interest rate cuts fall short of expectations; 2) Economic recovery in the domestic market falls short of expectations; 3) Escalation of geopolitical conflicts; 4) Industrial acts as a market maker for Semiconductor Manufacturing International Corporation.