The market has seriously underestimated southbound funds. Goldman Sachs: HKEX is undervalued.
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Goldman Sachs believes that although the stock price of HKEX has underperformed major indices in the past month, the market has severely underestimated the structural boost that southbound funds give to Hong Kong stock trading volume.
According to the Chasewind Trading Desk news on September 18, the Goldman Sachs equity research team released a report pointing out that HKEX shares have underperformed the market in the past month, mainly because management gave a rather pessimistic outlook on investment income for the second half of 2025.
On the other hand, as the most critical profit driver for HKEX, the average daily trading volume of cash equities is growing at an unprecedented rate, with southbound funds as the main driver.
Therefore, Goldman Sachs has raised HKEX's earnings per share (EPS) forecasts for 2025-2027. At the same time, it maintains a "Buy" rating on HKEX, and lifts the target price from HK$524 up 4% to HK$544, believing the current share price is significantly undervalued relative to trading activity levels.
Southbound Funds: The Overlooked Core Growth Engine
The report points out that southbound funds are impacting the Hong Kong market in an unprecedented way.
Data shows that the average daily turnover since September has reached HK$318 billion, far surpassing HK$279 billion in August and HK$254 billion year to date.
The core driving force behind this is none other than southbound funds continuously reaching new highs. Whether it is net buying scale, average daily trading volume, or contribution to the total turnover of Hong Kong stocks, southbound funds are showing strong vitality.
Goldman Sachs estimates that in the year-on-year growth of the total trading volume of Hong Kong stocks, southbound funds account for as much as 30% to 40% of the contribution. Their trading volume now accounts for about 25% of the total Hong Kong stock turnover, an astonishing level.
More importantly, southbound funds have driven approximately 50% year-on-year growth in Hong Kong stock market cap, and turnover rates for both southbound funds and the overall market have reached historic highs.
However, the market seems more skeptical about the sustainability of this round of turnover increase driven by southbound funds than it was during the bull market of 2020-2021.
However, Goldman Sachs emphasizes that based on mainland investors’ needs for diversified asset allocation, the unique and scarce targets in the Hong Kong stock market, and significant valuation discounts (higher dividend yields), the inflow and participation of southbound funds will be a structurally long-term trend, not a short-term speculative move.
Goldman Sachs Raises Earnings Forecasts and Valuations
Based on confidence in the structural growth of southbound funds and recent strong trading volume data, Goldman Sachs has comprehensively raised its financial model for HKEX.
Goldman Sachs has raised its per-share earnings (EPS) forecasts for HKEX in fiscal years 2025-2027 by 3% to 4%. Specifically:
2025 EPS Forecast: Raised from HK$12.63 to HK$12.97.2026 EPS Forecast: Raised from HK$13.05 to HK$13.61.2027 EPS Forecast: Raised from HK$13.96 to HK$14.45.
On the basis of raising earnings forecasts, Goldman Sachs has also re-evaluated the target price for HKEX.
The report states that using a three-stage dividend discount model (DDM), and maintaining the 2026 forecast P/E ratio at 40 times, HKEX’s 12-month target price is HK$544, up 4% from the previous HK$524.
Goldman Sachs also provides two valuation perspectives to support its "Buy" view:
Historical Valuation Comparison: The current share price of HKEX corresponds to its forward P/E ratio, which is slightly below the historical cycle median level, but its earnings growth outlook remains strong.Trading Volume-Share Price Regression Model: A regression model using 20 years of data shows that at the current level of trading activity, HKEX’s share price should theoretically be around HK$590, suggesting significant potential for price recovery.
In summary, Goldman Sachs believes that the market pricing of HKEX shares has not fully reflected the structural growth dividend brought by southbound funds.
As southbound funds continue to play a strong role, HKEX’s core value as a “water seller” will become increasingly prominent, and its undervalued price provides investors with a strategic opportunity not to be ignored.
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