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Chinese companies, both private and majority-owned by the government, have long used Hong Kong as a listing destination given the city’s open capital markets and its vibrant and liquid stock market.
Examples of some of the major government-backed stocks include heavyweights such as China Mobile Limited (SEHK:941), Bank of China (SEHK: 3988), and China Construction Bank (SEHK: 939).
Each of these has enormous scale and offers an attractive dividend yield for investors. Due to a recent development, the three are also now even more attractive. Here’s why.
A word on state-owned enterprises
State-owned enterprises (SOEs) have wide moats and economies of scale. With the government’s approval, they have access to capital and connections that many private companies lack.
Yet while SOEs have a lot going for them, many haven’t been as great of an investment as leading privately-owned listed companies.
One reason is that they are often run by managers, appointed by the government, who tend to view bureaucracy favourably and didn’t rise up the company’s ranks based on meritocracy (like management at their private peers). Another is that SOEs can also prioritise the government’s interests over those of minority shareholders.
While, on the whole, they might not be as great of a long-term investment as leading private companies, investors can nevertheless look at the medium-term developments to see if opportunities exist. If China’s economy improves, many SOE stocks could see a rebound, for example.
One big development in China’s economy is that President Donald Trump has signalled that he wants the first phase of a trade deal to be complete by the end of the year. If the first phase of a trade deal is complete, China’s economy will benefit due to lower tariffs on its exports to the US.
Although the deal hasn’t been signed yet, many Chinese companies have benefitted due to the market’s anticipation. As a result of traders anticipating better macroeconomic conditions due to lower tariffs, the Chinese Renminbi has appreciated from a low of 7.17 to the US dollar on 2 September 2019 to around the 7 mark in November 2019. If conditions really improve, the RMB could potentially move closer to their pre-trade tension level of around 6.64 to the dollar.
A stronger RMB would be good news for Chinese companies because their mainland Chinese earnings would be worth more in Hong Kong dollar terms. Because Hong Kong pegs its currency to the US dollar, Chinese earnings will be higher and their payout ratios will be lower.
With higher earnings comes the potential for higher dividend per share (DPS) payouts. If the RMB moves closer to its pre-trade tension levels, many Mainland China stocks will be higher by as much as 8% on currency alone from their early September levels.
Among the large SOEs that will benefit from the appreciating RMB include China Mobile, Bank of China, and China Construction Bank.
China Mobile is China’s largest telecommunications operator by customer base and network. The telecom is rapidly building a 5G network across the country and management has introduced measures to cut costs and improve operating efficiency.
China Mobile pays roughly half of its earnings in the form of a dividend and the stock currently yields around 5.2%.
Bank of China
Bank of China is one of China’s “big four” banks. During the first three quarters of 2019, Bank of China realised a profit attributable to equity holders of RMB 159.57 billion (US$22.7 billion), a rise of 4.1% year-on-year.
The stock currently yields around 6.5%. If China’s economy improves due to the end of the trade tensions with the US, Bank of China’s loan book could improve too.
China Construction Bank
Like Bank of China, China Construction Bank is one of China’s “big four” banks. As its name suggests, China Construction Bank loans to many infrastructure sectors such as construction, oil, gas, and telecommunications.
China Construction Bank shares currently yield around 5.4%.
The appreciation of the RMB toward 7 is a favorable macro development for high-yielding Chinese companies in Hong Kong. If the RMB continues to appreciate, their dividend payouts could easily increase.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.