Investing in China H-Shares for Dividend Income

Touzibozhu
China H-Shares China Stocks Dividend Investing

Rethinking my investment strategy - China H-shares for sustainable dividend income

The Covid-19 pandemic has wreaked havoc on the global economy and is expected to have a long-lasting impact on all our daily lives. The economic damage caused by the health crisis means that many of us can no longer take our job security for granted. The looming job insecurity will be a big factor in any long term financial planning. In addition, the ultra low interest rate policies adopted by the global central banks to stimulate the world economy is now beginning to stoke the flames of inflation which threatens to erode the purchasing power of cash holdings.

The profound changes brought about by the Coronavirus outbreak has made me rethink my investment strategy with a renewed focus on building a portfolio of dividend stocks which will provide a sustainable stream of income with a reasonable prospect of capital gains.

Ideally the total return of the investment must beat the long term average inflation rate by a comfortable margin. This is required not only to preserve the purchasing power of the investment but also to provide an attractive real return on investment.

In my quest for feasible investment candidates, I have found that some of the large cap China H-shares hold the promise of providing sustainable income in the form of dividends at attractive yields and inexpensive valuations.

What are China H-Shares?

According to Investopedia, China H-shares are shares of mainland China companies which are publicly listed and traded on the Hong Kong stock exchange. These companies operate their business on the mainland according to the laws of the People’s Republic of China even though their shares are listed on the Hong Kong stock exchange.

It is not uncommon for many of these same companies to also have shares listed and traded on the Shanghai Stock Exchange or the Shenzen Stock Exchange. The shares which are traded on the mainland stock exchanges are called A-shares and are denominated in Renminbi while their H-shares counterparts are quoted in Hong Kong dollars. Due to the difference in liquidity, A-Shares of the same company usually trade at a premium to the H-shares.

What are the characteristics of good dividend stocks?

At the risk of oversimplification, the following is a list of characteristics of good dividend stocks:

  • Good long term dividend track record
  • Good dividend yield (above the average yield of Hang Seng Index constituents)
  • Sustainable payout ratio
  • Inexpensive valuation. A good dividend stock with inexpensive valuation will minimize the risk of capital impairment and increase the probability of capital gains.

With the above in mind, the investment landscape of the H-share universe is scoured to provide the following interesting group of candidates.

China’s four giant state-owned commercial banks

The four large state-owned commercial banks, namely the Industrial and Commercial Bank of China (ICBC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC) and the Bank of China (BOC). These four banks are amongst the largest commercial banks in the world in terms of assets.

Some of the characteristics which make these giant Chinese banks attractive as dividend stocks are:

  • All 4 banks have above average dividend yields (as of market close on 30th July 2021), ranging from 7.16% to 8.69% compared to the average yield of HSI constituents of 3.74%.
  • The dividend payout ratios are conservative and sustainable levels of around 31-32%.
  • All 4 banks have excellent track records of uninterrupted dividend payments over the last 10 years.
  • The PE ratios are very inexpensive, ranging from 3.68 to 4.29.
  • The PBV ratios range from 0.327 to 0.489, which are considered to be good bargains.

China’s largest telecommunication companies - casualties of Trump’s trade war with China.

This group of companies consist of China’s largest telecom companies, i.e. China Mobile, China Telecom and China Unicom which had their ADRs delisted from the NYSE due to Trump’s executive order. The uncertainties surrounding this development caused the H-shares to sell off at the beginning of the year.

While the shares of China Mobile and China Unicom are currently hovering near the lower end of their 52 week trading range, the share price of China Telecom has since recouped a substantial portion of the losses. This is mainly due to the approval of its A-share listing on the Shanghai Stock Exchange and the company’s plan increase its dividend payout ratio to 70% within 3 years after its A-share listing.

If the recent development surrounding China Telecom is any indication,then one can easily imagine that the price of China Mobile will also trend higher as its IPO on the Shanghai Stock Exchange approaches. There is also the prospect of China Mobile increasing its dividend payout over the next few years, similar to China Telecom.

China Mobile, which is the world’s largest mobile network operator by subscriber base, has the following characteristics which make it attractive as a dividend income stock:

  • Dividend yield of 6.88% (as of market close on 30th July 2021) as compared to the average yield of HSI constituents of 3.74%.
  • Outstanding track record of uninterrupted dividend payments since 2003.
  • Dividend payout ratio of 52% is considered sustainable.
  • PE ratio of 7.62 is considered inexpensive.
  • The PBV ratio of 0.715 is attractive. It is expected to list on the Shanghai Stock Exchange at a minimum PBV ratio of 1.0.

In summary, the H-shares of the Industrial and Commercial Bank of China (ICBC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), the Bank of China (BOC) and China Mobile are found to be suitable candidates for dividend income portfolios, providing attractive dividend yields at sustainable payout ratios while trading at inexpensive valuations.