Core Viewpoint - Despite the overall weaker performance of Hong Kong stocks compared to A-shares since the second quarter, the company remains optimistic about the current market trend in Hong Kong, asserting that the AH premium is not necessarily bound for "mean reversion" in the short term [1][4]. Market Dynamics - The influx of "new economy" companies from A-shares to Hong Kong is expected to enrich the distribution of listed companies in both markets, broadening the investment options for funds [1][4]. - The anticipated interest rate cuts by the Federal Reserve, along with the stabilization of the Hong Kong dollar, may alleviate the expectations of liquidity tightening in the Hong Kong market [1][4]. - There is still room for further allocation of southbound funds, which have significantly flowed into the market this year [1][4]. AH Premium Analysis - The continuous decline of the Hang Seng AH Premium Index since the beginning of the year has led some investors to use it as a timing indicator for the two markets. However, the company argues that using the AH premium index to represent the relative performance of the two markets may be misleading [2]. - The limited number of companies and market capitalization of AH-listed firms, which are primarily in cyclical and defensive sectors, contributes to this discrepancy [2]. - The historical average of the AH premium index has fluctuated between 120-130 since the launch of the Shanghai-Hong Kong Stock Connect, indicating that the current levels still have room for movement [2]. Liquidity Factors - The core determinant of the AH premium level is the liquidity difference between the two markets, with the Hong Kong market having a more developed short-selling mechanism and higher trading costs impacting investor returns [2]. - The increasing proportion of southbound funds is expected to compress the discount space of Hong Kong stocks, as institutional investors account for over 60% of trading volume [2]. Profitability and Dividend Yield - The relative growth rates of profits and changes in dividend yields between the two markets are crucial short-term factors influencing the AH premium [3]. - When the net profit improvement of Chinese companies listed in Hong Kong exceeds that of A-shares, the AH premium tends to converge [3]. - High dividend yields, particularly those exceeding 4%, are associated with a noticeable decline in the AH premium, as they help offset liquidity discounts [3].