Key points for selecting two major Hong Kong financial stocks | Jiu Li Sheng

A few days ago, I inadvertently read a report from a major bank, involving three major Hong Kong financial stocks. This comes at a time when the investment community both domestically and internationally has shifted from reset to reinflationary themes, all wanting to re-rate the Hong Kong capital market. As an international financial center, financial stocks have always been a core allocation for investors. The theme of the report is somewhat unique, so perhaps it can be shared to break down how to select stocks for the long term.

The Hong Kong Stock Exchange (388) and AIA (1299) have long been regarded as high-quality twin stocks, with a correlation coefficient of up to 90%. They benefit significantly from the influx of southbound capital, and the market tends to group them together. However, precisely because they appear too similar on the surface, it is easy to overlook the fundamental differences in their business models, growth curves, and risk attributes.

The Difficulty of Earnings Forecast Management is Obvious

2025 is expected to be the most eye-catching year for both stocks. AIA's new business value in the third quarter rose by 25% year-on-year, and the annual growth rate of new business value is expected to reach 18% to 21%, far exceeding the market's original expectation of 15.8%. However, this also creates a very high comparative base. The market expects AIA's new business value to continue to grow by 12.9% and 11.4% year-on-year in 2026 and 2027, respectively. This requirement is actually very difficult to achieve given the overall industry and macro environment. The market predicts that the annual compound growth of cross-border wealth management assets in Hong Kong from 2024 to 2029 will only be 6.3%. The average growth of long-term premium deposits in the local insurance industry over the past decade has only been 6.3%, while in mainland China it is about 9.2%. In other words, AIA must continue to significantly outperform the industry average growth in the next two to three years to meet the current consensus, which also implies a greater downside risk of earnings forecast downgrades and valuation contractions.

In contrast, the Hong Kong Stock Exchange has seen its average daily trading volume surge by over 90% this year, reaching a historical high. However, the market's growth expectations for 2026 and 2027 are unusually moderate, with a decline of 1.5% and an increase of 7.9%, respectively, providing a significant margin of safety. More importantly, the growth in trading volume is supported by clear structural factors: the proportion of southbound trading continues to rise, there are as many as 300 IPO applications in the queue, the mutual access mechanism is continuously expanding, and the turnover rate has significantly improved. These are not driven by short-term sentiment but are long-term trends resulting from institutional improvements. The difficulty of earnings forecast management for the two is clearly different.

The Impact of Southbound Capital is the Biggest Watershed

Southbound capital is indeed the biggest watershed. For the Hong Kong Stock Exchange, southbound capital brings a multiplier effect. As of the third quarter of 2025, northbound trading accounted for a quarter of the total trading volume, with net purchases soaring by 132% year-on-year to over HKD 11.6 trillion. The influx of capital enhances market liquidity, attracting international institutions and local retail investors to follow suit, which not only boosts valuations but also stimulates new listings and secondary market transactions, creating a strong positive cycle.

In contrast, AIA's growth in its Hong Kong business is indeed benefited by mainland customers (including new immigrants and visiting mainland tourists), but essentially, it is just selling a few more insurance policies, representing typical linear growth. It relies on the expansion of the number of agents and the improvement of per capita productivity, lacking the platform-level amplification effect that allows it to achieve leapfrog growth like the exchange

The Policy Moat of HKEX is Clearly Visible

As for the competitive landscape, the Hong Kong Exchanges and Clearing (HKEX), as the only securities exchange in Hong Kong, is also a high-speed railway for mainland enterprises to access the international capital market, not to mention the new outbound special classes. The policy moat is clearly visible. This year, the turnover rate surged to 150%, with 300 IPO applications queued, solidifying its position. Even if digital asset trading platforms rise in the future, the actual impact on Hong Kong and mainland exchanges will be far less than that on their American counterparts.

AIA, on the other hand, faces challenges from all sides: banks are aggressively attacking with their channel advantages, and mainland customers often open accounts at banks in Hong Kong, making it easy for them to be retained by a one-stop service. According to data from the Insurance Authority, AIA's market share in offshore business in Hong Kong dropped from 23.4% in 2016 to 18.6% in 2024, while HSBC Life and Bank of China Life took away 4.4 and 1.2 percentage points, respectively; when considering local business, the overall market share in Hong Kong fell by 4.4 percentage points, while FWD and Manulife rose by 2.2 and 4.6 percentage points, respectively. The more intense the competition, the weaker the pricing power, inevitably compressing profit margins in the long run.

The Gap in Product Innovation Space is Worth Noting

The gap in product innovation space is also worth noting (despite being in different markets). HKEX has been rapidly innovating in recent years, with the inclusion of REITs in the connectivity scheme, the number of southbound RMB counter products rapidly increasing to 225, asset management scale nearing HKD 5 trillion, and active expansion in fixed income and currency businesses, each step opening up new revenue sources, with enormous growth potential in the future.

AIA's growth still relies mainly on agent digitization, strengthening the health ecosystem, and geographical expansion. Its core protection and savings products have not made fundamental breakthroughs for many years, and it lacks significant advantages in new markets, making it difficult to significantly distance itself from its peers.

Regulatory Risks Present a Dominant Divide

Regulatory risks are an overwhelming divide. HKEX itself is the frontline regulator for listed companies in Hong Kong, maintaining close ties with regulatory bodies in Hong Kong, the mainland, and internationally, naturally holding an advantage when formulating rules, resulting in extremely low regulatory risks.

AIA, however, has been named by regulators multiple times due to mainland customers purchasing insurance across borders: in April 2024, the Insurance Authority and the Independent Commission Against Corruption investigated unlicensed policy sales, causing AIA's stock price to plummet 6% in a single day; in 2016, the mainland also restricted UnionPay from purchasing insurance to prevent capital outflow. By 2025, AIA seems increasingly reliant on independent financial advisors and brokerage channels, which have weaker control, leading to increased compliance risks, and any minor disturbance could again make it a market focus.

AIA's Future Buyback Expectations Have Significantly Decreased

Lastly, the most important aspect is shareholder returns. Although AIA has committed to using 75% of its net free surplus for progressive dividends and buybacks, as the return on equity declines, the scale of future buybacks is expected to decrease significantly. In contrast, HKEX has maintained a high dividend payout of 90% for many years, with a compound annual growth rate of dividends of 8 to 10% over the past five years, currently offering a dividend yield of about 2.5%. Additionally, the Hong Kong government holds nearly 6% of the shares, ensuring high dividend stability.

Finally, a comprehensive comparison of these two heavyweight blue-chip giants reveals that the report sent to clients was actually from another Hong Kong financial stock, HSBC (under its Global Securities), where among the 31 analysts tracked by Bloomberg, 30 recommended "buy," while only Huatai Securities gave AIA a "hold" rating (target price only HKD 80), while maintaining a "buy" rating for HKEX If you want to choose only one quality financial stock to hold long-term in Hong Kong or Greater China, HKEX can be considered a top choice.

JiuLiSheng

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