Broker: OCBC Investment Research
Date of Report: 6 June 2025

Hong Kong and China Equities: Silver Linings Amid Market Volatility in 2025

US-China Trade Truce: A Temporary Lift for Market Sentiment

Following a recent agreement to roll back tariffs for a 90-day period, US-China geopolitical tensions have temporarily eased. This comes after a significant phone call between US President Trump and China President Xi, where both leaders committed to resuming rare earth trade and restoring visas for Chinese students. While this de-escalation is positive for near-term market sentiment, ongoing trade negotiations are expected to remain a pivotal swing factor throughout the second half of 2025.

The rollback in tariffs reduces the urgency for additional Chinese stimulus, allowing policymakers more flexibility in assessing economic conditions. These developments, alongside upbeat first-quarter results, undemanding valuations, and low institutional positioning, support a constructive outlook on Chinese equities.

Market Outlook and Hang Seng Index Targets

• Base Case Target: 25,400
• Bull Case Target: 26,900
• Bear Case Target: 20,100

Preference has shifted to offshore Chinese equities in the near term, supported by trade de-escalation and a potentially slower rollout of further stimulus. Key investment themes remain: quality yield stocks, leading internet and platform companies, and policy beneficiaries in domestic consumption and technology innovation.

Key Investment Themes for 2025

1. Quality Yield Stocks: Stability Amid Uncertainty

With lower interest rates and ongoing trade uncertainty, quality yield stocks are favored to cushion market volatility. The environment is supported by a drop in the Hong Kong Interbank Offered Rate (HIBOR) and low Chinese government bond yields, which fuels the search for yield, especially from Southbound insurance funds.

• China Telecom (728 HK): 26.9% potential upside, 5.4% dividend yield
• China Mobile (941 HK): 12.1% potential upside, 6.2% dividend yield
• Tingyi (322 HK): 37.9% potential upside, 6.2% dividend yield
• Uni-President China (220 HK): 16.3% potential upside, 5.2% dividend yield
• PetroChina (857 HK): 12.9% potential upside, 7.0% dividend yield
• China Construction Bank (939 HK): 9.6% potential upside, 5.9% dividend yield
• ICBC (1398 HK): 15.3% potential upside, 5.7% dividend yield
• HSBC Holdings (5 HK): 9.6% potential upside, 5.7% dividend yield
• Ping An (2318 HK): 36.3% potential upside, 6.3% dividend yield
• China Resources Gas (1193 HK): 76.9% potential upside, 4.9% dividend yield

2. Internet and Platform Leaders: Resilience and AI Growth

Chinese internet and platform companies—key proxies for the broader market—account for about one-third of index weight. Recent results highlight resilient gaming segments and growing beneficiaries from artificial intelligence (AI) applications. These stocks currently trade at a significant discount to global peers, offering attractive entry points.

• Tencent (700 HK):
  • 26.2% potential upside
  • Resilient games business and robust AI strategy
  • 1Q25 results show early benefits from AI enhancements
  • 1.0% dividend yield
• Alibaba (9988 HK):
  • 35.2% potential upside
  • Largest cloud hyperscaler in China with advanced generative AI capabilities
  • Proxy for AI infrastructure and adoption
  • 0.8% dividend yield
• Trip.com (9961 HK):
  • 35.7% potential upside
  • Beneficiary of a shift towards services and experience in domestic consumption
  • 0.2% dividend yield
  • Strong travel demand, expanding international platform

3. Policy Beneficiaries: Domestic Consumption and Technological Innovation

Stocks positioned to benefit from policy support for domestic consumption and tech innovation are favored, with a spotlight on Xiaomi.

• Xiaomi (1810 HK):
  • 22.2% potential upside
  • Expanding brand and NEV (new energy vehicle) momentum
  • Focus on “Human x Car x Home” ecosystem
  • Management guides for 30% YoY revenue growth and 40% YoY profit growth in FY2025
  • Smartphone shipment target: 175-180 million units (3-5% ASP increase, 12.0-12.5% gross margin)
  • EVs expected to enter overseas markets by 2027, with international business set to double in three years
  • Continued R&D in AI, chips, and smart manufacturing

Risks: Trade Tensions and Potential Chinese ADR Delisting

Despite the temporary truce, risks remain. The US has accused China of delaying rare earth export licenses, while China claims new US technology restrictions undermine the agreement. As the 90-day tariff pause nears its August expiry, the risk of re-escalation cannot be ignored.

Potential delisting of Chinese American Depositary Receipts (ADRs) is also a concern, as it remains a bargaining tool in ongoing trade disputes. This could have ramifications for US-China investment flows and the broader market framework.

Hong Kong Market: Revival in Primary and Secondary Activity

Hong Kong’s equity markets are experiencing a meaningful rebound in both IPO and secondary activity:

• About 30 IPOs raised HKD77 billion by May 2025, among the highest globally.
• Over 150 active listing applications as of May, driven by A-share blue-chip listings and ADR homecoming.
• Key upcoming listings expected from e-commerce, automation, NEVs, and AI sectors under Chapter 18C.
• 25 China ADRs with HK dual listings represent over USD200 billion in market cap and 5% of HKEX’s market cap.
• Secondary market average daily turnover (ADT) sustained at HKD230 billion year-to-date.
• Southbound net inflow surged 79% YoY YTD to USD85 billion, over 80% of 2024’s level.
• HKEX (388 HK): 8.6% potential upside, set to benefit from the capital markets revival.

HIBOR Decline: Implications for Banks, Property, and the HKD Peg

The sharp drop in 1-month HIBOR to 0.6-0.7% reflects a significant increase in liquidity, following HKMA intervention to defend the HKD peg. Aggregate balance now stands at HKD174 billion, up from HKD45 billion at end-April.

The peg to the USD, maintained within a 7.75-7.85 band since 1983, has resulted in a record divergence between HIBOR and US SOFR—over 300bps. Market participants are closely watching for any changes to this decades-old peg, as any move could have far-reaching consequences.

• Banks: Lower HIBOR puts pressure on net interest margins but could ease asset quality concerns and boost loan growth. HK international banks are preferred over domestic banks due to their smaller exposure to lower HIBOR impacts.
• Property: With residential yields averaging 3.5% (3.7% for smaller units), sustained lower HIBOR could support buying sentiment and positive carry.

Comprehensive Financial Summary: Key Stock Metrics

Conclusion: Navigating a Bumpy Yet Opportunity-Rich Market

Hong Kong and China equities present a compelling mix of near-term opportunities and structural challenges. The temporary US-China trade truce and revived capital market activity offer silver linings, but investors should remain vigilant as global economic and policy risks persist. By focusing on quality yield, internet and tech leaders, and policy beneficiaries, investors can position themselves to navigate volatility and capitalize on the region’s evolving growth landscape.