Safe-haven stocks fall one by one

Business | Ivan Tong 23 Aug 2019

Since the first-half earnings season kicked off this month, we've seen one blue chip after another face heavy selling pressure after posting their results.

Even defensive stalwarts such as Link REIT (0823), MTR Corporation (0066) and the Hong Kong and China Gas (0003) - better known as Towngas - have not been spared, especially the last two utility stocks, whose shares had fallen even before their results were announced, not to mention their post-result performance.

Towngas plunged 5.26 percent on Wednesday, its biggest single-day decline since November 2008, and further fell by 3.58 percent to HK$15.62 yesterday, breaking the hearts of many retail investors.

Local investors are of the view that utility stocks have strong defensive capabilities, can outperform the broader market, and be the last to decline in a bear market. Because if utility shares fall, it indicates that even the most optimistic investors are selling - dragging the market to the bottom.

However, since Hong Kong's market is witnessing the unusual trend of utility stocks losing their aura, it does not indicate the bottom has been reached.

In addition, the economic outlook has deteriorated rapidly amid the chaos on the streets over the last two months.

Therefore, these utility stocks have no longer been defensive.

As an example, let's take Towngas, whose first-half net profit fell 18.8 percent. Firstly, the decline raised concerns that the company's growth has peaked. Meanwhile, its total volume of gas sales in Hong Kong in the first six months dropped by 2.4 percent year-on-year, due to lower sales in the restaurant industry and less hot water consumption amid higher temperatures in the city.

The problem is there's been a sharp decline in the number of foreign visitors and weaker local consumer sentiment in July and August, and this downward trend is expected to continue with no end in sight.

Investor fears are growing on whether the market will face a situation that tougher than the economic slump witnessed during the 2003 SARS epidemic.

It will be very difficult for Towngas to offset its first-half decline in its full-year results. For now, the only positive factor which supports its price is its best tradition of issuing one bonus share for every ten existing shares every year.

Analysts meanwhile are predicting that Hong Kong stocks will see their steepest earnings contraction since the 2008 global financial crisis, according to a Bloomberg report. Operating profits of blue-chip stocks are expected to fall 19.2 percent on average this year, suffering the double whammy of a continuous downward revision of share-earnings projections and the persisting anti-extradition bill protests.

This situation is grim.

The local equity market has slumped more than 3,000 points since the beginning of August, and smart investors would have noticed that the Tracker Fund of Hong Kong - an exchange-traded fund that tracks the performance of the Hang Seng Index - significantly underperformed compared to the Hang Seng China Enterprises Index Futures and Options - a benchmark that reflects the overall performance of mainland securities listed in Hong Kong.

The reason is obvious.

Hong Kong's business environment has worsened sharply and the recent rebound in local equities was in part due to the A-shares rally.

So Hong Kong might see a bigger correction following the rebound.

Shares of Henderson Land Development (0012) declined 3.22 percent yesterday after it reported a 50 percent drop in interim net profit. Local property stocks have fallen quite a bit recently and if the stock market is a leading indicator, then the property market could be in for a significant correction in the future.

Meanwhile, AIA's (1299) first-half results are due today, but investors are advised not to have high hopes as a breakthrough performance is not expected . AIA has been affected by the economic slowdown and tighter controls on capital outflows in the mainland, and it will be difficult for the insurer to break the current trend of the bubble bursting once results are released.

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