GF Securities analysis shows that recent AH premium performance and A-share/H-share movements have displayed completely opposite trends. While major A-share indices have outperformed H-share indices, the AH premium rate index has hit new lows since 2020. The firm believes that although A-share index gains exceeded those of H-shares, southbound capital and foreign investors, driven by asset allocation needs, have been continuously bottom-fishing quality Hong Kong assets, particularly H-shares, during A-share rallies. Since August, 84% of H-shares have outperformed their A-share counterparts. The historical AH premium rate floor of 125% (2014-2023) may no longer exist, as the current 125% floor has disappeared.
GF Securities' main viewpoints are as follows:
Recent AH premium performance and A-share/H-share movements show completely opposite trends. On one hand, A-share indices have outperformed H-share indices; on the other hand, the AH premium rate index has hit new lows since 2020 (H-shares outperforming A-shares). Why does this contradictory phenomenon exist?
Starting from a classic investment strategy: After the Stock Connect launch, the AH premium rate may have indeed maintained a 125% floor from 2014-2023. (1) Due to the 20% dividend tax on Hong Kong stock investments, while A-shares held for over one year are tax-exempt, the reasonable AH premium rate was 125% [100%/(1-20%)]. (2) Investing in H-shares through QDII incurs only 10% dividend tax, but QDII faces foreign exchange quota limitations and is typically used for US stock purchases, with Stock Connect used for Hong Kong stock purchases. (3) Before Stock Connect opened, the average AH premium rate from 2006-2014 was 115.8%, close to 111% (Hong Kong securities accounts investing in H-shares pay only 10% dividend tax [100%/(1-10%)]). After Stock Connect opened, H-share trading volume surged, Stock Connect became the primary method for H-share trading, and AH premium rates rose above 125%. (4) Past Stock Connect participants, mainly mutual funds and individual investors, had no 12-month dividend tax exemption rule when investing in H-shares through Stock Connect. Corporate investors (insurance funds) that qualified for the exemption had limited Hong Kong stock investments historically, only increasing allocations in recent years under interest rate spread pressure. The AH premium rate began declining significantly in 2024.
However, with continued southbound and foreign capital purchases of quality Hong Kong assets, the firm believes the current 125% AH premium floor no longer exists. Three main reasons:
1. Under asset shortage and interest rate spread pressure, insurance funds have increased H-share investments, with 23 insurance fund stake-building activities in H-shares year-to-date. Insurance funds holding H-shares through Stock Connect for 12 months are exempt from corporate income tax on dividends, similar to A-shares, potentially lowering AH premium rates. High-dividend stocks show virtually no high premium rates as confirmation.
2. Recent mainland high-end manufacturing/technology/innovative pharmaceutical companies' Hong Kong listing wave enables foreign investors to access Chinese assets through H-share purchases, potentially further reducing AH premium rates. CATL and Hengrui Medicine show persistent AH inversions, while Midea Group's premium rate began inverting this week.
3. Hong Kong Securities and Futures Commission Chairman Tim Lui suggested during the Two Sessions to reduce dividend tax levels for Stock Connect. Future policies may eliminate dividend taxes for mainland individuals and investment funds purchasing H-shares through Stock Connect.
4. Therefore, while A-share index gains exceeded H-shares, southbound and foreign capital, driven by asset allocation needs, continue bottom-fishing quality Hong Kong assets, particularly H-shares, during A-share rallies. Since August, 84% of H-shares have outperformed their A-share counterparts.
Risk warnings: Geopolitical risks, overseas inflation risks, etc.