After nearly three years of Covid-19 restrictions halting business and tourist activity, the Hong Kong Special Administrative Region Government announced last Thursday that normal travel between Hong Kong and China will be resumed in phases starting January 8.
Crossings will initially be limited by quota to 60,000 people in each direction (for a total of 120,000), via seven (7) land, sea, and air border crossings. However, this is expected to boost investor sentiment in the region. Two experts from Value Partners Group and from Chartwell Capital analyze how the reopening will affect the markets.
“We are very encouraged to see the re-opening of China and Hong Kong’s shared border after such a long time. Currently, there is a quota of 60k people per day, which is actually quite tight relative to the pre-Covid levels. Indeed, in 2019 daily cross-border visitor traffic ranged between 100k and 200k, so the current quota is equivalent to around 30–50% of “normal” capacity.
The adoption rate has been significant. Within 14 hours of the opening of the appointment system, there had already been c.290k appointments made, indicating that there is a very strong demand for travel. Our analysis shows that during Chinese New Year, which is two weeks from now, there is a 260% year-on-year growth in “outbound” travel for the Mainland Chinese. Hong Kong is one of the top 10 destinations.
Given the high demand, we believe that the quota will be increased quite quickly, provided that the Covid-situation in Hong Kong remains steady. Our expectation is that this will be the case, given that the level of ‘immunity’ amongst the Hong Kong population is high due to the City’s vaccination programme and the previous rates of infection.
From an investment standpoint, we are bullish on the consumption/retail sector in the Hong Kong market, both in terms of discretionary and staples, as we expect rising visitors traffic will bring strong growth in revenues. While some of these stocks have already rallied on the news, there is likely to be further upside as consensus has yet to reflect this positive development. Overall, we are overweight in selective high-quality names in the sector and well positioned to benefit from a retail recovery”.
David Townsend, Managing Director of EMEA Business at Value Partners Group.
“The border reopening announcement between Hong Kong and Mainland China was made late last month, and since then many stocks have rebounded nicely. For example, some property companies that have a large proportion of their portfolio in shopping malls and rental assets surged by 10-15 percent. At the same time, retailers such as jewellery companies and healthcare-related companies with beauty clinics also posted nice gains, rising over 20 percent. In my view, some stocks have gone ahead of themselves and are now pricing in a base or bull case scenario. As sentiment remains strong, there is no point to sell down right away, but be watchful of any pullbacks.
With the opening up of China, business activities will become robust again, leading to stronger domestic consumption in the coming months. There are still laggards in the market such as the manufacturing, utility, and infrastructure companies, so the overall market still provides ample opportunities for those who didn’t catch the recent rally”.
Ronald Chan, Founder and Chief Investment Officer at Chartwell Capital, the independent, Hong Kong based investment firm.
