It has been a wild ride for stocks in Hong Kong so far in 2020. After gaining some ground early in the year, the Covid-19 pandemic struck and hit sentiment for stocks in the city.
Although there was a brief rally in the Hang Seng Index, political discontent over a national security bill put a dent in the market’s gains.
However, the new way of doing business in a post-coronavirus world means that certain companies will suffer in the “new normal”.
Beyond that, companies that derive the majority of their income from the city were feeling the effects of the anti-government protests last year. These types of challenges may take years to overcome, or may not be overcome at all.
So, here are five Hong Kong stocks that I think investors should avoid at all costs in 2020 and beyond.
MTR Corporation Limited (SEHK: 66), which is the sole operator of Hong Kong’s mass transit railway system, had a terrible 2019. Its recurrent profit was down 44.8% year-on-year in 2019 – mainly due to the impact of anti-government protests in Hong Kong and provisions for large, capital-intensive projects.
Furthermore, its underlying profit was down 6.2%. As I’ve written before, MTR is more of a real estate developer rather than an actual subway operator.
Add in the political risk associated with the company and it becomes even more unappealing. There’s also the lingering Covid-19 pandemic which will mean more people working remotely.
Combine all this together and you have a company that does not have a clear path to future growth.
2. Cathay Pacific
Warren Buffett once said that “we have no ability to forecast the economics of the airline industry”. That was back in 1989 but he admitted his mistake again earlier this year by selling out of his holdings in a group of US airlines.
The same logic could also be applied to Hong Kong carrier Cathay Pacific Airways Limited (SEHK: 293). Results and profits (or lack thereof) have been absolutely abysmal for Cathay.
The company’s annual profits for 2019 were HK$1.69 billion (US$218 million), down around 28% year-on-year from 2018. However, Cathay said it forecasts a huge loss for the first half of this year as Covid-19 ravaged international travel.
Like MTR, the company was also caught up in a political maelstrom during the anti-government protests in Hong Kong.
Additionally, with so much competition regionally, and a far from inspiring product offering, investors would do well to avoid its stock.
3. HSBC Holdings
Hong Kong- and Asia-focused bank HSBC Holdings plc (SEHK: 5) has had a year to forget. The big bank replaced its CEO John Flint with an “interim CEO” Noel Quinn in August 2019 before finally deciding to give the job to Quinn on a permanent basis in March of this year.
One of his first major acts as permanent CEO was to suspend HSBC’s dividend in early April. The company’s full-year 2019 earnings were poor as the bank delivered a return on tangible equity (ROTE) of just 8.4%, down from 8.6% in 2018.
Poor capital allocation and bloated costs mean the company is weighed down by inefficiencies. That’s certainly a red flag for any long-term investor.
4. Hongkong Land
Although not listed on the Hong Kong Stock Exchange, Hongkong Land Holdings Limited (SGX: H74) is a sizeable property landlord with a significant Central office portfolio.
As a subsidiary of Jardine Matheson Holdings Limited (SGX: J36), Hongkong Land has a long history of running commercial properties in Hong Kong.
Some of its landmark properties in Central are well-known. However, the company is suffering from falling rents in Central and the “deCentralisation” of office space in Hong Kong.
Effectively what this means is that large corporations realise there is no point paying a premium for office space in Central anymore. As a result, office space is migrating from Central to either Hong Kong Island East or Kowloon West.
The anti-government protests don’t help its business case either. With a poor track record over the past five years, the best days are behind this Hong Kong landlord.
5. Wharf REIC
One more major property landlord I would avoid is Wharf Real Estate Investment Company Limited (SEHK: 1997). Better known as Wharf REIC, the landlord owns multiple well-known properties in Hong Kong such as Harbour City and Times Square.
Unsurprisingly, the company was hit hard in the second half of 2019 as visitor arrivals from mainland China plunged. This hit the firm hard as its malls rely heavily on tourism.
The Covid-19 pandemic has added insult to injury for Wharf REIC as there appears to be no solid recovery in sight for visitor arrivals.
In addition, Wharf REIC also holds a sizeable net debt position of HK$42.6 billion. In an environment as uncertain as this, that doesn’t bode well for the future for shareholders.