Hong Kong: low base offers upside for local stocks  

Roll out the welcome mat. Monday’s full resumption of cross border travel between mainland China and Hong Kong is needed to revive the territory’s economy.

About 56mn people — eight times the population of Hong Kong — visited the city annually before the pandemic. The flow of visitors from mainland China, which had accounted for 80 per cent of that total, fell to just 91,000 people at the peak of the pandemic. Now Beijing is dropping all border restrictions between the city and the mainland for the first time in three years. Hong Kong will also scrap its vaccination requirements.

For Hong Kong, tourism is critical. Before the pandemic the sector contributed about 5 per cent of Hong Kong’s GDP and about 7 per cent of total employment. Mainland visitors also accounted for most Hong Kong property purchases, helping generate the taxes that are a pillar of city revenues. The closure of borders and imposition of quarantine requirements helps explain why Hong Kong’s economy contracted 3.5 per cent last year, the third decrease in four years.

From this week the prices of hotels, commercial rents, train and flight tickets should show the first hints of recovery. Yet some will benefit more than others. Reopening coincides with the city’s Hello Hong Kong campaign, involving a state giveaway of hundreds of thousands of free air tickets. These tickets, purchased in 2020 as part of a government aid package for local airlines including Cathay Pacific, could burden carriers which are yet to return to pre-pandemic flight capacity.

But MTR Corporation, which operates the Hong Kong side of the high-speed rail link between Hong Kong and the mainland should benefit from a surge in passengers and sales. Its other main source of profits is commercial rentals. High rents are justified by footfall and spending of mainland Chinese tourists. Other Hong Kong stocks reliant on a comeback of mainland shoppers include jewellers Chow Tai Fook and Luk Fook Holdings.

Expectations for profits are now low enough for Hong Kong companies to easily beat forecasts this year. As business activity picks up, so should share prices.

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