Citi Lowers HSI Target to 29,600 Points, Prefers A-Shares with High-tech Content

Citi's China equity strategist, Liu Xianda, pointed out that the main reason for lowering the Hang Seng Index target was the revision downward of the expected earnings per share growth of the Hang Seng Index for the year 2027 by 0.4 percentage points to 11.9%, corresponding to a year-end target reduction of about 1.3% to 29,600 points, and a target for the first half of 2027 at 30,500 points. At the same time, the bank significantly raised its year-end target for the CSI 300 from 5,100 points to 5,600 points, with a target for the first half of 2027 at 5,700 points.

Citi clearly stated a preference for A-shares over H-shares, with the core basis being the significant difference in technology sector weights. The technology sector accounts for 15.7% of the CSI 300, far higher than the Hang Seng Index's 3.7%, and the bank is optimistic about the technology sector in the second half of the year, believing that strong capital expenditures will drive significant earnings growth. Liu Xianda expects the CSI 300 to outperform the Hang Seng Index in the second half of 2026, but as more A-share technology companies apply to list in Hong Kong, the gap between the two is expected to narrow over the next 12 months.

In terms of sector allocation, Citi upgraded the insurance sector from "neutral" to "overweight," citing improved stock market returns and the continued migration of bank deposits to insurance products. The financial sector's weight increased by 1.6% to 12.1%, mainly benefiting from an abundant pipeline of Hong Kong IPOs and high trading volumes in major markets, with a more positive outlook for securities firms. The technology sector maintains an "overweight" rating, with the MSCI China weighting increased by 1.5% to 12%, with semiconductor and communication equipment sub-sectors seen as the most direct beneficiaries of capital expenditures. The internet sector's weight was reduced by 5.3% to 36.5% due to slowing earnings growth, but the low valuation supports the bank's decision to maintain an "overweight" rating.

The preferred buy list for H-shares includes Tencent, AIA, Heng Rui Medicine, Minmetals Resources, Ctrip Group, CICC, Lantiq Technology, and ASMPT. Liu Xianda specifically pointed out that the bank replaced two hardware companies with Lantiq Technology and ASMPT, as semiconductors are the most favored technology sub-sector at present; at the same time, Minmetals Resources replaced Zijin Mining, believing the former has more upside potential after underperforming recently. The preferred sell list includes Huaneng Power International, China Resources Power, Huizhou Bank, BYD Electronics, SJM Holdings, Quanta Services Holdings, and China Resources Medical.

In response to the recent regulatory actions by mainland China to rectify the cross-border operations of overseas securities firms, Liu Xianda stated that this move was not sudden, as related policy provisions have existed for the past five years and are now entering the formal execution stage. The policy principles remain unchanged and do not affect the bank's positive judgment on the securities sector.