Broker: CGS International
Date of Report: July 24, 2025
Favorable Liquidity and Fund Rotation Set to Power Hong Kong Market Momentum in 2025
Introduction: Robust Liquidity Conditions Support Market Uptrend
Hong Kong’s equity market is riding a wave of favorable liquidity conditions, setting the stage for continued momentum through 2025. Southbound inflows remain a cornerstone of market liquidity, while signs of renewed interest from passive funds and a persistent low-rate environment further underpin the market’s strength.
Southbound Inflows: The Key Driver of Hong Kong Market Liquidity
– Average daily net inflows via Stock Connect surged to HK\$4.1bn in July 2025 (up to July 23), marking a significant rise from HK\$2.4bn in May and HK\$4.0bn in June. – Year-to-date cumulative net southbound inflows have reached HK\$796.1bn, nearly matching the full-year figure for 2024 of HK\$807.9bn. – Southbound trading activity accelerated, with daily turnover hitting HK\$140.2bn in July, compared to HK\$94.5bn in May and HK\$120.8bn in June. This is just shy of the February 2025 record of HK\$145.8bn. – The contribution of southbound trading to overall market turnover hit an all-time high of 55.5% in July 2025.
Passive funds are showing renewed interest, with major US-listed China-centric ETFs (e.g., KWEB) recording net inflows last week amid easing US-China trade tensions.
Liquidity Outlook: Low-Rate Environment Remains Supportive
– Despite the Hong Kong Monetary Authority (HKMA) initiating liquidity withdrawals in late June, Hibor remains low. – The aggregate balance, a measure of banking system liquidity, soared to HK\$174.1bn in early May (from HK\$45.1bn at end-April) after HKMA’s injection, before falling to HK\$86.4bn by July 23. This means 68% of the injected liquidity has been withdrawn. – 1-month Hibor has only slightly increased, from 0.59% at end-May to 0.90% currently, keeping the HKD-USD interest rate gap elevated at ~340 basis points. – This large differential incentivizes carry trades, which keeps the HKD near the weak end of its trading band, and may require the HKMA to drain more liquidity in the future. – Historically, persistent interest rate gaps have lasted for extended periods, suggesting the low-rate environment could persist and continue supporting equities.
Sector Divergence and Opportunities for Fund Rotation
– The Hang Seng Index has rebounded to its March 2025 peak, while the Hang Seng TECH Index is still 5.9% below its March high. – Sector divergence is notable: Biotech has outperformed, while Retailing (Alibaba, JD.com, Meituan) and Consumer Services (catering, education) have underperformed. – Investors are concerned about weak household consumption and fierce competition in e-commerce platforms. – Amid ample liquidity, policy catalysts and a search for laggards could drive significant fund rotation.
Top Sector and Stock Picks for 2025: Detailed Analysis
Catering and Smartphone Supply Chain
- Yum China (Add, Target Price: HK\$459.0, Current Price: HK\$383.2) – Attractive among catering names.
- BYD Electronics (Add, TP: HK\$46.8, CP: HK\$33.6) and AAC Tech (Add, TP: HK\$63.0, CP: HK\$39.3) – Both are favored within the smartphone supply chain.
“Anti-Involution” Regulatory Beneficiaries
- Alibaba (Add, TP: HK\$153.0, CP: HK\$120.9)
- Meituan (Add, TP: HK\$161.0, CP: HK\$133.2)
- XPeng (Add, TP: HK\$123.8, CP: HK\$74.1)
Regulatory measures supporting food delivery, instant delivery, and the new energy vehicle sector are expected to drive significant upside for these names.
Insurance and “Soft Tech” Valuation Upside
– Even within outperforming sectors, insurance and “soft tech” (games, short videos, music streaming, AI applications) are seen as undervalued and offer near-term upside.
High Conviction Stock List: 2025 Targets and Financials
| Ticker | Company | Sector | Recommendation | Target Price | Current Price | Upside | 2025F EPS Growth | 2026F EPS Growth | 2025F P/E | 2026F P/E | 2025F P/BV | 2025F Div Yield |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 700 HK | Tencent Holdings | Communication Services | Add | HK\$654.0 | HK\$552.0 | 18% | 16% | 9% | 19.1 | 17.5 | 3.5 | 1% |
| 9626 HK | Bilibili Inc | Communication Services | Add | HK\$233.0 | HK\$197.5 | 18% | N/A | 72% | 41.7 | 24.2 | 4.9 | 0% |
| 9961 HK | Trip.com | Consumer Discretionary | Add | HK\$588.0 | HK\$504.0 | 17% | 2% | 15% | 16.8 | 14.6 | 1.8 | 0% |
| 1211 HK | BYD Co | Auto | Add | HK\$150.3 | HK\$133.4 | 13% | -57% | 22% | 20.4 | 16.7 | 5.2 | 2% |
| 9868 HK | XPeng | Auto | Add | HK\$123.8 | HK\$74.1 | 67% | N/A | N/A | N/A | 48.9 | 4.3 | 0% |
| 1810 HK | Xiaomi | Tech Hardware | Add | HK\$77.0 | HK\$58.4 | 32% | 68% | 29% | 32.6 | 25.3 | 5.8 | 0% |
| 300750 CH | CATL | Capital Goods | Add | Rmb382.0 | Rmb287.0 | 33% | 19% | 24% | 19.6 | 15.8 | 4.5 | 2% |
| 1299 HK | AIA Group | Insurance | Add | HK\$103.0 | HK\$71.3 | 45% | 7% | 13% | 13.4 | 11.8 | 2.1 | 3% |
| 2378 HK | Prudential | Insurance | Add | HK\$142.0 | HK\$98.1 | 45% | -1% | 22% | 11.9 | 9.7 | 1.6 | 2% |
| 3968 HK | China Merchants Bank | Banks | Add | HK\$53.0 | HK\$53.0 | 0% | 2% | 4% | 8.5 | 8.2 | 1.2 | 4% |
| 388 HK | HKEX | Financial Services | Add | HK\$520.0 | HK\$439.8 | 18% | 15% | 8% | 36.9 | 34.0 | 9.6 | 2% |
| 6160 HK | BeOne (BeiGene) | Health Care | Add | HK\$197.7 | HK\$180.9 | 9% | N/A | 176% | 107.0 | 38.7 | 7.7 | 0% |
| 9606 HK | Duality Bio | Health Care | Add | HK\$365.8 | HK\$317.4 | 15% | N/A | N/A | N/A | N/A | 11.7 | 0% |
Biotech Sector: Remain Positive Despite Strong YTD Performance
– Investors are advised to retain exposure to large-cap biotech names with breakeven prospects in FY25-26, such as BeOne (BeiGene), and those with catalysts from 2H25 out-licensing deals.
Sector Performance Snapshot
– Year-to-date, biotech, materials, and IT have led gains within MSCI China, while retailing and consumer services have lagged. – Since the March 2025 high, biotech and materials remain strong, while retailing and consumer services continue to underperform.
Conclusion: Positioning for Opportunity Amid Supportive Conditions
The Hong Kong market is set to benefit from sustained liquidity, robust southbound inflows, a supportive low-rate environment, and ongoing fund rotation. Investors should focus on laggards poised for recovery and high-conviction names across catering, tech, fintech, insurance, and biotech sectors to maximize upside potential as market dynamics shift in the second half of 2025.
