A tale of two cities

Hong Kong looks like a cheaper market than Singapore, with higher profitability to boot. But it could be pricing in higher risks, especially from higher debt levels.
PHOTO: Reuters

The two cities see each other as rivals. Singapore markets itself as the gateway to Asia, notably Southeast Asia, while Hong Kong has benefited from its status as the gateway to China.

A comparison can be made of their two indices as well.

The investable Hong Kong market, as represented by its index, is about five-and- a-half times as big as the Singapore market.

Both have declined significantly since the beginning of the year, and even when compared to five years ago.

Sector-wise, the Hang Seng Index (HSI) is skewed towards financials, with almost half the index made up of banks and insurance companies. Singapore's Straits Times Index (STI), meanwhile, is about one-third banks.

A full tenth of the HSI is also dominated by a single Internet company - Tencent - while telco Singtel also takes up almost 12 per cent of the STI.

In terms of valuation, the HSI trades at a lower price-to-earnings multiple than the STI in absolute terms.

The HSI at nine times earnings is at the lower range of where it has traded in the last few years, of between nine and 11 times.

The STI, at 13 times earnings, is down from a peak of 16 times earlier this year, and trading roughly at where it has been for the last few years.

In terms of price-to-book ratios, however, both indices are trading at multi-year lows.

HSI companies seem to be valued more cheaply than STI companies when their cash flows are taken into account.

However, they also have significantly more debt relative to their net assets.

To sum up, Hong Kong looks like a cheaper market than Singapore, with higher profitability to boot.

However, the market could be pricing in higher risks, especially from higher debt levels.


This article was first published on Sept 28, 2015.
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