Introduction

The launch time of Shenzhen-Hong Kong Stock Connect is approaching and how the market will be affected by this launch? How can investors make money? How can investors make money? In this regard, we will issue serial reports of "Investment Opportunities of Shenzhen-Hong Kong Stock Connect". This report will focus on the main points concerning the investment in Shenzhen-Hong Kong Stock Connect, and presents special introductions and guidelines about mainland market of Northbound Shenzhen Trading Link.

When will Shenzhen-Hong Kong Stock Connect be officially launched?

On August 16, Premier Li Keqiang made it clear at the executive meeting of State Council that "the State Council has approved the Implementation Program of Shenzhen-Hong Kong Stock Connect".

On the same day, the China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission signed the Joint Announcement about Shenzhen-Hong Kong Stock Connect, indicating that the preparations for the launch of Shenzhen-Hong Kong Stock Connect kicked off. Given that the existing Shanghai-Hong Kong Stock Connect has been launched for more than one year, it only takes 3 to 4 months for Shenzhen-Hong Kong Stock Connect from approval to final implementation. And it is in all likelihood that Shenzhen-Hong Kong Stock Connect will be launched before the end of 2016.

What are the thresholds of including listed companies into Shenzhen-Hong Kong Stock Connect?

For the northbound market, the scope of eligible shares of Northbound Shenzhen Trading Link under Shenzhen-Hong Kong Stock Connect are constituents of the Shenzhen Component Index and Shenzhen Small/Mid Cap Innovation Index with a market value of RMB6 billion and above, as well as the stocks of Shenzhen-listed companies with both A and H shares.

For the southbound market, the scope of eligible shares of Southbound Hong Kong Trading Link are all the constituents of the Hang Seng Composite Large Cap Index and Hang Seng Composite Madcap Index, constituents of Hang Seng Composite Small Cap Index with a market value of HKD5 billion and shares of all companies listed on SEHK.

What are the differences between Shenzhen-Hong Kong Stock and Shanghai-Hong Kong Stock Connect?

1) The scope of eligible shares will be broader. There are 881 shares eligible to be traded through the Northbound Shenzhen Trading Link under Shenzhen-Hong Kong Stock Connect, more than the 568 shares eligible to be traded through the Northbound Shanghai Trading Link under Shanghai-Hong Kong Stock Connect. There are 417 shares eligible to be traded through the Southbound Hong Kong Trading Link under Shenzhen-Hong Kong Stock Connect, 99 shares more than those eligible to be traded through the Southbound Hong Kong Trading Link under Shanghai-Hong Kong Stock Connect.

2) Compared with the aggregate quotas of RMB300 billion/RMB250 billion of Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect will not set aggregate quota, but the daily quotas of RMB13 billion/RMB10.5 billion will be maintained. However, in view that Northbound Trading Link uses less than half of the aggregate quota, we believe this measure is little significance to Northbound Shenzhen Trading Link, but will facilitate the inflow of funds to Hong Kong stocks and benefits Southbound Hong Kong Trading Link.

Comparison of Stock Markets in Shenzhen and Hong Kong

Investors: A-share market is dominated by individual investors. Nearly 50% of the account market value and balance is less than RMB100,000 on A-share market with more frequent trading and better stock liquidity. By contrast, Hong Kong stock market is dominated by institutional investors, especially by overseas investors. Except some major stocks, the daily trading of small and medium-sized stocks is not heavy with poor liquidity.

Investment preferences/appetites: The investment preferences/appetites of individual investors and institutional investors are completely different, which also builds a platform for some stocks with medium and small market value on the Shenzhen Stock Exchange, whose prospects are bright but with greater risk. This also provides a source of funding for a number of conceptual growth stocks, especially small-cap stocks.

Valuation system: Compared with HKEx, the average market value of listed companies on Shenzhen Stock Exchange is small, but the proportion of emerging industries is high and the valuation is obviously high, where the average P/E ratio of GEM is 73 times. Additionally, cross-market sale is forbidden on both Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, and cross-market arbitrage cannot be conducted.

Among the 881 shares under Northbound Shenzhen Trading Link, the market value of the top ten stocks accounted for 9.7% of the total market value, and that of the top twenty stocks represented 16% of the total market value. As is shown below, in case of ranking according to the proportion of overall market value of industry, the top five industries of Northbound Shenzhen Trading Link are bio-medicine, computers, electronics, media and real estate. Nevertheless, in case of ranking according to average market value, the top five industries of Northbound Shenzhen Trading Link are banking and finance, real estate, food and beverage, household appliances and national defense and military industry. The companies of emerging industry on Northbound Shenzhen Trading Link are featured by "small size and large number".

What are the beneficiaries of launching Shenzhen-Hong Kong Stock Connect?

Firstly, Northbound Shenzhen Trading Link expands the channels for overseas funds to invest in domestic A shares, and provides the corresponding investment objectives for active funds characterized by proactive styles.

Secondly, in respect of short-term expectations, the southbound funds will be greater than the northbound funds, which will significantly benefit the local securities companies and bourses of the Hong Kong market.

Secondly, in respect of short-term expectations, the southbound funds will be greater than the northbound funds, which will significantly benefit the local securities companies and bourses of the Hong Kong market. Although the characteristics of Shenzhen stock market considerably differ from those of the Shanghai stock market, we can get a rough idea of Shenzhen-Hong Kong Stock Connect. The diagram below sets out the (potential) leading stocks in all industries on Shenzhen-Hong Kong Stock Connect for investors` reference.

Click Here for PDF format...