The western artificial island, top, the eastern artificial island, center, and the Hong Kong Link Road section of the Hong Kong-Zhuhai-Macau Bridge stand offshore at dusk in Hong Kong, China. (Photographer: Justin Chin/Bloomberg)

Hong Kong Has a Haven From Trade-War Jolts

(Bloomberg Opinion) -- The plunge in Hong Kong stocks this week triggered by the renewed U.S.-China trade conflict was the latest jolt for a market that’s veered wildly between bear and bull territory in the past two years. Investors seeking a haven from the volatility have few places to turn: one may be stocks tied to the Greater Bay Area.

China’s plan to knit together nine mainland cities with Hong Kong and Macau into a cohesive economic powerhouse has generated optimism and suspicion. Critics have attacked the project as hot air. Worse, some have seen it as simply another tactic by the Chinese government to undermine the greater political freedom enjoyed by the former colonies.

The Greater Bay Area is more than a renaming exercise. The region is already one of the fastest-growing in China, with 69 million people and combined GDP of about $1.5 trillion. At current projected growth rates, it will soon surpass the New York metro area in economic size. By geography, it’s three times the size of the San Francisco Bay Area.

The project envisages using “smart-city” technology to keep businesses and citizens connected, and to meet international demand for manufacturing, trade, tourism, and other services.

The Chinese government is enacting measures to support the area’s growth. The Ministry of Finance recently announced new tax incentives and subsidies to entice foreign professionals to work in the tech sector. Supporters believe that, in addition to stimulating the Chinese economy overall, the Greater Bay Area will be especially beneficial to Hong Kong millennials who have had difficulty finding affordable housing and high-paying jobs in the city.

The level of official backing for the Greater Bay Area is offering opportunities to companies and investors. For example, real estate developers such as Logan Property Holdings Co. and Times China Holdings Ltd. focus primarily on development and investment in the region.

Logan has a market cap of more than $8 billion and generated $6.7 billion of revenue in 2018. Sales are forecast to jump 37 percent this year and a further 27 percent in 2020, according to consensus estimates compiled by Bloomberg. With an estimated price-book ratio of 1.7 for fiscal 2019 and a price-earnings multiple of less than 6, Logan’s valuation is undemanding. The stock had gained 21 percent this year as of Friday’s close.

Times China’s stock has surged 59 percent over the same period. Trading at close to its estimated fiscal 2019 book value and at a multiple of 4.3 times forecast earnings, the company is predicted to increase sales by about 25 percent annually in the next two years.

Shenzhen International Holdings Ltd. is another stock worthy of consideration. The conglomerate focuses on construction, logistics, and toll roads in the bay area. At a prospective price-book ratio of 1.1 and a multiple to forecast 2019 earnings of 9.2, the company offers more stable growth, with earnings estimated to grow about 10 percent in the next two years. The shares have gained less than 10 percent this year.

All these companies are trading at considerably cheaper levels than the Hang Seng Index. Hong Kong’s benchmark gauge was on an estimated price-earnings ratio of about 11 as of Friday’s close, in line with its three-year average. The market may have a rocky path over the next 12 months, given the uncertainty over U.S.-China trade relations, according to equity analyst Dennis Lam at UBS Global Wealth Management. Volatility typically increases during the later stages of an economic cycle, and current implied volatility remains close to the lowest level seen in 2018, Lam points out.

Time will tell whether the Greater Bay Area initiative is more symbolic than pragmatic. Either way, companies exposed to the region are already seeing a positive impact on their businesses.

(Ronald W. Chan and his firm, Chartwell Capital, do not hold positions in the companies he writes about for Bloomberg Opinion.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ronald W. Chan is the founder and CIO of Chartwell Capital in Hong Kong. He is the author of “The Value Investors” and “Behind the Berkshire Hathaway Curtain.”

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