Top picks for a rollercoaster rideTravel | Tereza Cai 26 Aug 2019
Technology stocks and insurers are preferred by analysts among the blue-chips amid volatility in the local stock market against the backdrop of social unrest, as well as increasing worries about a looming global recession.
The Hong Kong equity market has experienced a significant pullback recently.
Since end June, the Hang Seng Index has plunged by 2,363 points to 26,179 points as of last Friday, becoming the worst-performing stock market in the world, while the Dow Jones Industrial Average dropped modestly from 26,599 points to 25,252 last Thursday.
The volatile Hong Kong stock market witnessed an intraday high of 29,007 points on July 4 and an intraday low of 24,899 points on August 15.
Local major developers were seriously hit. Sun Hung Kai Properties (0016) closed at an eight-month low of HK$108.30 on August 13.
As the economy continues to slow, property developers would lose their attractiveness in the coming 12 months, according to LW Asset Management fund manager Andy Wong Yiu-chung.
Wong forecasts the local developers' profit growth to slow down, and there will be a period for the sector to build a solid base before getting a rebound.
Even the defensive utility stocks do not stand out. Towngas (0003) hit a more-than-six-month low at HK$15.62 last Thursday, while Power Assets (0006) also saw a five-month low on August 14 at HK$52.85.
Wong thinks technology leader Tencent (0700), which is barely affected by external and Hong Kong factors, is the top pick-up stock among the heavyweight blue-chips.
With an investment period of one year, there is a buy-in opportunity for Tencent if its shares price is in the range of HK$290 to HK$300, Wong believes, adding that if investors are not so pessimistic, they could buy Tencent when its price drops to below HK$320, versus the closing price of HK$334.20 last Friday.
UBS lowered Tencent's target price from HK$450 to HK$440, while reiterating the buy rating on the stock.
It expects the revenue of the tech giant to grow rapidly for the full year, boosted by the accelerating development of mobile game business, although the group's second-quarter revenue was slightly short of the market estimates.
Shares of Meituan Dianping (3690), the second Hong Kong-listed stock with weighted voting rights, gained over 69.9 percent year to date. It is worth monitoring as there is a prospect of being included in the Stock Connect, which could attract mainland investors.
With regard to technology stocks, Prudential Brokerage associate director Alvin Cheung Chi-wai cautions that the cellphone components makers, such as Sunny Optical Technology (2382), should only be for short-term speculation, and investors should be careful about risk management, given the extreme risk in the ever-changing trade talks.
Cheung is convinced that the Link REIT (0823) and AIA Group (1299) are the most attractive.
Link REIT has a relatively attractive distribution yield especially in a low-interest-rate environment cycle. Also it has actively revamped its malls, he explains.
Link REIT declares 90 percent of revenue as payout, Wong adds, saying it is worth buying below HK$90, given all these supportive factors.
He thinks Link REIT as an industry leader could hit another high after the unrest ends, which he expects to be within a year, while local property developers don't have such high winning odds.
Morgan Stanley set the target price at HK$93. Bank of America Merrill Lynch upgraded it from neutral to buy, while cutting the target price from HK$98 to HK$96.
As for AIA, Cheung explains the insurer has a strong financial position, and it has got approval to do business in another two mainland cities recently, a sign of further promising development. Cheung reckons AIA will rebound significantly, suggesting buy in at about HK$73.
The group posted a 1.3-time increase in its first-half net profit at US$3.86 billion (HK$30.11 billion) last Friday.
Wong also says that AIA and Ping An Insurance (2318) are worth buying when their prices are relatively low, supported by the Greater Bay Area framework, their fundamentals stand out. Moreover, AIA is marginally better than Ping An Insurance, as AIA is a benchmark heavyweight and more relevant to the GBA concept.
Investors are advised to buy it at HK$70, while the target price of Ping An Insurance is at HK$80-HK$82, according to Wong.
In contrast, Ben Kwong Man-bun, executive director and head of research of KGI Securities, suggests trading AIA and China Tower (0788) in the range of HK$68 and HK$78, and HK$1.80 and HK$2 respectively, as they have relatively solid fundamentals.
Morgan Stanley set the target price of China Tower at HK$2.5 with a buying rating, saying the 5G network is expected to be a catalyst for the company, while Citi cut the target price from HK$2.05 to HK$2, staying with its neutral rating.
Kwong is not positive on the overall Hong Kong equity market outlook, as he believes it is hard to resolve external and internal problems in the near term.
Corporate profit growth will be affected, he explains, saying Tencent's advertising income was dragged down by the mainland economy, so he suggests speculating it in the short term at price between HK$330 and HK$360.