UBS lowered its target for the Hang Seng Index from 21,700 to 20,300, based on its recent downward revision of GDP forecasts for China and Hong Kong and profit forecasts after the corporate results.
The target price cut is based on a compound annual growth rate of 8% for earnings per share in the period of 2022 – 2024 and a P/E ratio of 9.5 times.
UBS also cut its base case target for the MSCI Hong Kong Index by 12% to 9,900. On a bottom-up basis, UBS expected MSCI Hong Kong Index constituents to achieve EPS growth of 6% this year and 14% next year. Against a backdrop of tight liquidity and slow economic growth, it continued to adopt a defensive strategy in Hong Kong, favouring dividend-yielding and travel-related stocks.
UBS forward P/E valuation of the MSCI Hong Kong Index for the next 12 months has lowered significantly from 14.2 times in December 2022 to 11.4 times, due to lower earnings growth expectations, intensifying macro concerns in China and rising interest rates in the US.
UBS added Cathay Pacific Airways to its most-preferred list of Hong Kong stocks in light of its recent strong free cash flow. CKH Holdings and SHK PPT were removed from the list due to lower-than-expected first-half earnings and dividend risk. UBS’s most-preferred list for Hong Kong stocks includes Cathay Pacific Airways, AIA, Samsonite, Sands China, Galaxy Entertainment, CKI Holdings and HKT-SS.
