It's been a torrid time for transportation stocks in Hong Kong. There are rumblings, though, that private banks are advising clients to take heavy positions in the city's stocks, betting they will rally.
Perhaps no company has suffered more directly than the MTR Corp. (MTCPY) . Besides operating the subway, or Mass Transit Railway, it is also a major property developer, selling off the apartments above the stations that it builds, then operating the shopping malls below.
Protesters first targeted the system purely as a method of civil disobedience, keeping train doors open to cause mayhem at rush hour. But stations became direct targets after demonstrators blamed the company for delaying trains so that riot police could enter them and make arrests. The system also started closing early in what critics saw as a government-endorsed curfew, or a way of preventing protesters from returning home.
To be honest, stations were often forced to close, given the way turnstiles and ticket booths were torched, smashed or spray painted. Throwing debris onto the lines is another popular form of disruption.
The company has just put a dollar figure on the vandalization and decreased ridership it has experienced over the course of six months of protests. MTR says it will take a HK$1.6 billion (US$204 million) hit to earnings, thanks to damage, the drop in trips, and rent concessions to companies with stores in and around stations. Its shares, which are listed but still 75% owned by the financial secretary's office, have plummeted 20.7% since mid-July.
The stock has yet to show much sign of life. Amazingly, though, the company still expects to be in the black this year thanks to its real estate rental income and apartment sales, in the most expensive residential market in the world. Last year, it saw profits rise 7.1% to HK$11.3 billion (US$1.4 billion), so it can take this punch and still turn a profit.
Its shares are worth watching if the situation continues to improve in Hong Kong. There is a definite easing of tensions here since a pro-democracy landslide in district council elections on November 24. The police have also started to approve protest marches once again, which they had been banning again and again.
I suspect that's under orders from the top after the U.S. Congress passed the Human Rights and Democracy Act. One of the new law's stipulations for issuing sanctions against a Hong Kong official, which could freeze their U.S. assets and prevent their U.S. travel, is if they have curtailed human rights in Hong Kong. Freedom of assembly is one of those rights.
The Hang Seng benchmark index is also still in the black for the year, although only narrowly, with a 2.5% gain. It has had two heavy bouts of selling, first in May when the demonstrations got real, and then in July when they started to get violent.
It has also not recovered much. Yet. But bargain hunters are betting that it will. Many of the companies listed in Hong Kong generate the bulk of their revenues from China, so they would get an even bigger boost in the case of a trade deal with the United States eventually being agreed.
So there are a couple of reasons why investment banks are telling their clients, quietly, to get ready.
"This is the best buying opportunity that you've had since 2016," Mohammed Apabhai, the head of Asia Pacific trading strategies at Citi, told the Financial Times.
"Unless you believe this is the end of Hong Kong, and it's never coming back - and we don't - basically this means there's a very significant probability that the market can rally 40%."
The Hang Seng index skyrocketed 170% after the Asian financial crisis in 1997-98, albeit at a time the government bought a large chunk of the equity market to support it. After the SARS epidemic, which led into the dot.com bubble recession in early 2003, the Hong Kong market leaped back close to 70%.
Hong Kong stocks are cheap. The Hang Seng is currently trading at a price/earnings ratio of 10.5, at 26,500 points. It has consistently found support at the 26,000 level. The S&P 500 is double that, at 22.2. Japan's Topix sits at 14.9 times earnings.
Goldman Sachs has been advising its clients since last month to buy the MTR's shares. "We could expect a rather quick turnaround in its patronage trend," the bank writes in a client note. And indeed, the MTR is busier again already.
I've lived in New York City and in London, and I've got to say that the subway system here in Hong Kong is great. It's clean (unless vandalized!), simply designed, the carriages are new, and you rarely have to wait longer than five minutes for a train. The system carries around 5 million passengers per day, in a city of 7.4 million people. Ridership was down 27% in both October and November, compared with those months last year.
Hong Kong's flagship airline Cathay Pacific (CPCAY) would be another transport stock to watch if the territory's travails do continue to ease. It's off 24.9% since April.
Cathay messed up its hedging on fuel prices, which drove it to losses in 2016 and 2017. But it has gobbled up the city's competitor airlines, buying budget carrier Hong Kong Express from the troubled Chinese conglomerate HNA Group.
HNA has been having a fire sale of its assets after it came under scrutiny by Beijing of how it had funded an aggressive expansion plan. That forced it to offload Hong Kong Express for HK$4.93 billion to Cathay, a deal completed in July.
Now another HNA carrier, Hong Kong Airlines, is struggling to survive. The carrier, which offers cheaper fares than Cathay on routes mainly to North and Southeast Asia, has been slow in paying staff their salaries, and is being reviewed by the airline licensing authority, at risk of losing its license to fly.
HNA on Monday secured a HK$4.4 billion (US$562 million) loan from eight Chinese state-owned banks led by China Development Bank. But it's unclear how much of that money, if any, will go to the airline.
It's par for the course with mainland Chinese companies, which have very murky finances even if they're public and audited. Hong Kong Airlines staff were, however, suddenly paid their November pay this week. The CEO tells the South China Morning Post that he expects enough money to ensure the airline's operations throughout the holiday period to arrive "within one or two days."
It better come quick. The airline-licensing authority will make a decision tomorrow on whether or not it will ground the airline.
I'd hate to see Cathay lose another competitor. My ticket prices will go up. Besides buying up budget Hong Kong Express, Cathay also ate up Dragonair, now called Cathay Dragon, which had for years been its only competition based out of Hong Kong. Cathay bought a chunk of the carrier in 1990 but subsumed it entirely in 2006.
It's looking a lot like Cathay may feel as little competition as our subway operator, if it becomes the online line in town. In case of a substantial Hong Kong rally, MTR and Cathay would therefore be good to own.