We are continuing our series of articles on the world’s major exchanges. Today, we are going to touch upon the Hong Kong Stock Exchange, or HKEx. The letters in the text stand for large numbers. T stands for trillions, B stands for billions, and M stands for millions. The $ sign stands for US dollars (not to be confused with Hong Kong dollars).
HKEx’s place in the global economy
HKEx is firmly within the world’s top ten by the total market capitalization (over $3T) and by the total number of listed companies (around 2,000). Its precise rank in the world rating fluctuates between 5 and 7, and its closest competitors with similar characteristics are the Shanghai Stock Exchange and the Euronext consortium (with the vast majority of its market cap coming from Euronext Paris, the Paris Bourse).
Despite Hong Kong and mainland China remain in political disagreement, they concurrently form a great economic tandem. Hong Kong forming a part of China even with a great deal of autonomy makes China the world’s second financial power, right after the USA. The total market cap of its largest stock exchanges — HKEx, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange numbers around $9T. This is much greater than the total market cap of any given European country’s stock exchanges and is comparable to the European Union’s total market cap (after the UK’s withdrawal from the EU).
HKEx lists companies both from Hong Kong itself and mainland China. Numbers-wise, they are represented nearly evenly: around 900 to 1,000 companies are listed on each side. Foreign companies from such countries as Malaysia, South Korea, Taiwan are much fewer in number — around 100. The biggest players on HKEx are the mainland giants with multi-billion market caps, like China Mobile or the Bank of China. What would matter to tourists, though, is the presence of such famous airline companies as Cathay Pacific and Air China on HKEx.
Russian President Dmitry Medvedev visiting HKEx in 2011
HKEx’s history and the Hang Seng Index
The Hong Kong Stock Exchange has a long and rich history. In 1842, Hong Kong became a de facto British colony, and was officially leased to Britain for 99 years in 1898. The Hong Kongers were eager to learn from the leading economic power of the day, and by 1866, a haphazard trade of securities had begun. Then, as a common case for most states, the securities trade got more regulated. In 1891, the Association of Stockbrokers was created in Hong Kong, that de facto also functioned as a stock exchange. It acquired its current name, the Hong Kong Stock Exchange, in 1914.
Hong Kong, like other «Asian tigers», experienced its most rapid economic growth during the 1960s and the 1970s. At that time, three other exchanges appeared in Hong Kong, but they were all eventually absorbed by HKEx. In the 1980s, around 200 companies were listed on HKEx, which was a decent figure by the standards of the region — but not those of the world.
HKEx became one of the world’s leading exchanges in the 1990s and the 2000s, thanks to the economic integration with China. Politically, Hong Kong rejoined China in 1997, but it began trading stocks with the mainland back in 1993. Currently, these shares form the bulk of the exchange’s market cap. HKEx’s stock index, Hang Seng, provides a good picture of the exchange’s financial history. It has been calculated since 1969 using a rather complicated formula, but in its simplified form it is proportional to the total market cap of HKEx’s 30-40 largest companies, which usually cover over a half of the exchange’s total market cap.
The Hang Seng index from 1969 to 2011
The graph shows how quickly the exchange grew in the 1970s through the 1990s (on average, the index doubled every 5 years), and how catastrophic the local drops were. The largest drop occurred in 1973 and 1974, when the index decreased by 10 times, only managing to recover its former positions in 1981. Smaller drops, with the index «only» halving, occurred in 1982, 1987, 1998, 2001-2002, and 2008. The graph only shows the index until 2011, but even now it is still around 24000. The historical record of 30000, achieved in 2007, has never been surpassed since, so unfortunately we have to admit that Hang Seng’s growth that lasted for many years has slowed down drastically.
What investors should keep in mind
The full list of companies listed on HKEx can be seen through the Stock Screener service at finance.google.com (pick «Hong Kong» in the first box, then «Hong Kong Stock Exchange» in the second). Let us see which companies hold the first place according to various criteria.
The first places by market cap are held by the Tencent Internet holding company (ticker symbol 0700, market cap $261B*), the Industrial and Commercial Bank of China (ticker symbol 1398, market cap $243B), and the China Mobile telecommunication company (ticker symbol 0941, market cap $231B).
The first place by 52-week price increase is held by the Yat Sing construction holding company (ticker symbol 3708, market cap $791M*, 52-week price increase 568%). However, this company should be treated with caution because its history on the stock exchange is rather short (only 1.5 years) and its enormous price/earnings (P/E) ratio of 529. The company is extremely overrated, and the odds of its prices plummeting are high.
The 5-year earnings increase gives one a deeper insight into the companies’ attractiveness to an investor. The first places by this criterion are held by the HC International Internet holding company (ticker symbol 2280, market cap $835M, P/E 127, 5-year earnings increase 209%), the Zhuguang Holdings Group real estate company (ticker symbol 1176, market cap $581M, P/E 5.9, 5-year earnings increase 158%), and the Dongpeng Holdings ceramic tiles producer (ticker symbol 3386, market cap $730M, P/E 7.7, 5-year earnings increase 151%). While the first company mentioned here seems to be greatly overrated, judging by its P/E ratio, the other two are underrated and may turn out to be a promising investment.
Technically, there are no expensive shares on HKEx. Currently, the most expensive shares belong to the Tencent company we have mentioned before — they cost $27 each. Most of other companies’ shares cost less than $10 each. However, the companies never sell just one share in a single transaction. Usually, one needs to buy at least a hundred or even a thousand shares. Still, even if we take this into account, Tencent’s shares are extremely popular — around 13M of them are sold each day. The most popular shares belong to the China Construction Bank (ticker symbol 0939, market cap $205B, P/E 6.1). The average daily trading volume for the company’s shares is 300M, with a paltry price of $0.81. As a result, the total cash turnover for them is even lower than for those of Tencent.
Asian markets are not as popular with online brokers as the European and American ones. However, many of them grant access to HKEx as one of the world’s largest stock exchanges. Obviously, the broker must provide direct market access, or DMA, to the exchange, rather than simply offering contracts for difference, or CFDs. EXANTE is one of the brokers that give DMA to HKEx.
During winter season, HKEx’s operates from 4:15 to 11:00 Moscow time (9:15 to 16:00 Hong Kong time). Online brokers’ commissions with HKEx are usually a percentage of the amount being traded, and are usually higher than with European stock exchanges. With EXANTE, the commission is 0.25% of the amount being traded, while the minimum commission is not applied at all.