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The market has seriously underestimated southbound funds. Goldman Sachs: The Hong Kong Stock Exchange is undervalued
Goldman Sachs believes that although the share prices of the Hong Kong Stock Exchange have underperformed major indices over the past month, the market has seriously underestimated the structural boosting effect of southbound funds on the trading volume of Hong Kong stocks.
On September 18th, the Chasing Wind Trading Desk reported that the Goldman Sachs stock research team released a research report indicating that the share prices of the Hong Kong Stock Exchange have underperformed the broader market in the past month. The main reason is that the management has given a relatively pessimistic guidance on investment returns in the second half of 2025.
On the other hand, however, as the most crucial driver of the Hong Kong Stock Exchange's profitability, the average daily trading volume of cash stocks is growing at an unprecedented rate, with southbound funds being the main driver.
Goldman Sachs thus raised its earnings per share (EPS) forecast for the Hong Kong Stock Exchange from 2025 to 2027. At the same time, we maintain the "buy" rating on the Hong Kong Stock Exchange, raise the target price by 4% from HK $524 to HK $544, and believe that the current share price is significantly undervalued relative to the level of trading activity.
Southbound funds: A neglected core growth engine
The report indicates that southbound funds are influencing the Hong Kong market in an unprecedented manner.
Data shows that the average daily trading volume from September to now has reached as high as 318 billion Hong Kong dollars, far exceeding 279 billion Hong Kong dollars in August and 254 billion Hong Kong dollars since the beginning of the year.
The most crucial driving force behind this is precisely the southbound funds that have been continuously setting new highs. Whether it is the net purchase scale, the average daily trading volume, or the contribution to the total trading volume of Hong Kong stocks, southbound funds have demonstrated strong vitality.
Goldman Sachs estimates that in the year-on-year growth of the total trading volume of the Hong Kong stock market, the contribution of southbound funds was as high as 30% to 40%. The proportion of its trading volume to the total trading volume of Hong Kong stocks has also climbed to an astonishing level of approximately 25%.
More importantly, southbound funds have driven the market value of Hong Kong stocks to achieve a year-on-year growth of approximately 50%, and both the turnover rate of southbound funds and the overall market have reached historical peaks.
However, the market seems to be more skeptical about the current increase in trading volume driven by southbound funds than during the bull market of 2020-2021, worrying about its sustainability.
However, Goldman Sachs emphasized that based on the asset diversification needs of mainland investors, the unique scarcity of the Hong Kong stock market, and the significant valuation discount (higher dividend yields), the inflow and increased participation of southbound funds will be a structural long-term trend rather than a short-term speculative behavior.
Goldman Sachs raised its earnings forecast and valuation
It is precisely based on confidence in the structural growth of southbound funds and the recent strong trading volume data that Goldman Sachs has comprehensively upgraded its financial model for the Hong Kong Stock Exchange.
Goldman Sachs has raised its earnings per share (EPS) forecast for the Hong Kong Stock Exchange in the fiscal years 2025-2027 by 3% to 4%. Specifically,
Earnings per share forecast for 2025: Raised from HK $12.63 to HK $12.97.
Earnings per share forecast for 2026: Raised from HK $13.05 to HK $13.61.
Earnings per share forecast for 2027: Raised from HK $13.96 to HK $14.45.
On the basis of raising its profit forecast, Goldman Sachs has also reassessed the target price of the Hong Kong Stock Exchange.
The report stated that by adopting a three-stage dividend discount model (DDM) and maintaining the forecast P/E ratio for 2026 at 40 times, the target price for the Hong Kong Stock Exchange over the next 12 months was set at HK $544, an increase of 4% from the previous HK $524.
Goldman Sachs also provided two valuation perspectives to support its "buy" view:
Historical valuation comparison: Currently, the share price of the Hong Kong Stock Exchange corresponds to its forward price-earnings ratio, which is slightly lower than the median level of the historical cycle, but its profit growth prospects remain strong.
Volume-share price regression model: A 20-year data regression model shows that at the current level of trading activity, the share price of the Hong Kong Stock Exchange should theoretically be around HK $590, which implies that there is huge room for recovery in the current share price.
In conclusion, Goldman Sachs believes that the market's pricing of the Hong Kong Stock Exchange's share prices has not fully reflected the structural growth dividends brought by southbound funds.
As southbound funds continue to exert their strength, the core value of the Hong Kong Stock Exchange as a "water seller" will become increasingly prominent. Its undervalued share price offers investors a strategic opportunity that cannot be ignored.
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