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 This means 68% of the injected liquidity has been withdrawn.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.
