Broker: OCBC Investment Research
Date of Report: 4 June 2025

China Strategy 2025: Quality Yield Stocks to Cushion Market Volatility

Introduction: Seeking Stability and Income Amid China Market Volatility

Quality yield stocks have emerged as a resilient investment theme in Chinese equities, providing a buffer against market turbulence caused by tariff disputes and geopolitical uncertainties. Despite a recent 90-day tariff rollback agreement between the US and China, prolonged negotiations and a persistent low-interest rate environment reinforce the importance of maintaining quality yield stocks as core portfolio holdings. The People’s Bank of China (PBoC) has maintained its commitment to a moderately loose monetary policy, recently executing a 10bps cut in the policy rate, a 0.5ppt reduction in the reserve requirement ratio (RRR), and a 10bps decrease in benchmark lending rates. With 10-year Chinese government bond (CGB) yields hovering around 1.6-1.7%, and Hong Kong’s 1-month HIBOR rebounding to 0.8%, the appetite for high-dividend equities remains robust.

Why Quality Yield Stocks Stand Out in 2025

• Low interest rates in both Hong Kong and Mainland China continue to drive demand for high-yielding equities.
• Chinese policymakers are actively encouraging long-term capital, such as state-owned insurers and mutual funds, to increase exposure to equities—especially those with sustainable dividends, strong cash flows, and solid balance sheets.
• Quality yield stocks are further favored due to their typically lower US revenue exposure, which minimizes risk from ongoing trade tensions.

Screening for Quality Yield: Methodology and Key Criteria

OCBC’s quality yield stock screen is rigorous:

• Market cap above USD 5 billion
• Net debt-to-equity ratio below 50%
• Dividend yield above 5.0%
• Stable or growing forecasted EPS and ROE over the next two years
• Stable or increasing free cash flow (for non-financials)
• Stable or rising dividend payout ratio
• Low exposure to US revenue

This ensures a focus on companies with robust fundamentals and a strong capacity for sustaining dividends even during economic stress.

Top Quality Yield Stocks: Comprehensive Analysis

Rising Southbound Ownership and Policy Tailwinds

Southbound fund flows are on the rise, particularly in high-yield stocks across banks, energy, telcos, and select consumer staples. Southbound ownership in these sectors ranges from 12.5% to 74.4%, with year-to-date increases of 0.9-6.5 percentage points. HK banks and utilities like HSBC and Power Assets have also seen rising Southbound stakes and offer attractive dividend yields of 5.7% and 5.5%, respectively.

China Financials: Big-6 SOE Banks and Insurance

The MSCI China Banks Index yields 5.6%, with the Big-6 state-owned banks offering a forward dividend yield of 5.8%—a significant 410bps spread over the 10Y CGB. Historically, H-shares of these banks have traded at a 440bps yield spread over the 10Y CGB.

• China Construction Bank (CCB, 939 HK): Stands out with a forward dividend yield of about 6% post-recapitalisation dilution. CCB’s recapitalisation is expected to cause only a 4% dilution, the lowest among its peers, supported by a CET1 ratio of 14.5%.
• ICBC (1398 HK): Also expected to have limited dilution on recapitalisation, maintaining a post-dilution yield near 5.8% and a strong CET1 ratio.
• Ping An (2318 HK): Offers a 6.3% 2025 dividend yield, a track record of stable DPS growth, and robust solvency capital. The company recently announced HKD11.8 billion in zero-coupon convertible bonds to support business growth, with an estimated dilution impact of only 1.2% upon full conversion.

China Consumer: Defensive Yield and Growth

Boosting domestic consumption remains a government priority. Leading dividend plays include:

• Ting Yi (322 HK): Offers a 6.4% 2025 dividend yield, stable free cash flows, and a total dividend payout ratio maintained around 100% for the past two years. Despite expected low-single-digit revenue decline in 1Q25, management targets double-digit earnings growth driven by margin expansion, cost tailwinds, and price hikes.
• Uni-President China (UPC, 220 HK): Delivers a 5.3% 2025 dividend yield, robust net cash position, and 32% YoY earnings growth in 1Q25. Strong beverage segment performance and expanding margins underpin continued confidence.

China Energy: Attractive Yields Amid Oil Price Volatility

China’s three oil majors provide high expected 2025 dividend yields (6.6-7.5%) but are susceptible to oil price swings, underperforming the MSCI China Index year-to-date.

• PetroChina (857 HK): The top pick among oil majors, with 1Q25 earnings up 2% YoY despite oil volatility, strong cost control, and expanding gas business margins. Operating cash flow remains solid, supporting dividends and potential share buybacks.

China Utilities: Power Assets and Gas Providers

• China Resources Gas (1193 HK): Shares have corrected by 28% YTD due to weak 2024 results. The company plans to buy back 3% of its shares, which is expected to be earnings accretive. Currently trading at 9.9x forward P/E and a 5.0% 2025 yield, fundamentals remain undemanding despite subdued gas sales and revenue growth in 2025.
• Power Assets Holdings (PAH, 6 HK): Outperformed the market QTD amid volatility, supported by a near-zero net gearing and a forward dividend yield of 5.6%. The current valuation (1.2x forward P/B) is slightly above historical average, and further catalysts include potential US rate cuts and interim results benefiting from a weak USD.

China Telecoms: Defensive Yield and Digital Growth Potential

Chinese telcos are favored both as yield plays and for their defensive characteristics, with steady demand even in economic downturns. They also offer upside from digitalisation and AI.

• China Telecom (728 HK): Holds the largest share of China’s cloud market among SOE telcos (20% in 2024). Outperformed the MSCI China Index by 4.6ppt YTD, with low market beta and robust EBITDA and earnings growth (+4.7% and +3.1% YoY, respectively). Free cash flow is forecasted to grow at a 12% CAGR through 2027.
• China Mobile (941 HK): Also outperformed YTD, showing resilient EBITDA (+3.5% YoY) and earnings growth (+3.5% YoY), with a projected FCF CAGR of 15% from 2024-2027.

Hong Kong Banks: Navigating Lower HIBOR with Attractive Yields

A declining HIBOR presents short-term NIM pressure, particularly with deposit rates already low. However, HK banks still offer attractive yields:

• HSBC Holdings (5 HK): The preferred HK international bank, with a 5.7% 2025 dividend yield. HSBC is less affected by HIBOR changes due to its diversified fee and loan growth outside HK/Mainland China. For every 100bps drop in HKD rates, HSBC’s 2025 operating income may fall by just 0.6%.
• Bank of China Hong Kong (BOCHK, 2388 HK): Shows resilient share price performance, driven by rising Southbound fund flows. BOCHK’s Southbound holdings have increased the most YTD among peers. Watch for interim dividend guidance and potential share buybacks.

Valuation Summary Table: Quality Yield Leaders

Conclusion: Yield, Quality, and Resilience for Uncertain Times

In a landscape marked by trade uncertainty and low interest rates, quality yield stocks—especially those with robust balance sheets and consistent cash flows—remain an essential component for portfolio stability and income generation. Investors should focus on companies with proven ability to sustain and grow dividends, low US revenue exposure, and strong fundamentals, as these are best positioned to weather ongoing market volatility and regulatory shifts in China and Hong Kong.