Market Significantly Undervalues Southbound Flows, Goldman Sachs Asserts HKEX Underrated

Goldman Sachs argues that, despite Hong Kong Exchanges and Clearing Limited (HKEX) lagging major indices over the past month, investors have overlooked the profound impact of southbound capital on equity turnover. In a September 18 research note, the firm’s equity analysts acknowledge that HKEX underperformed partly due to conservative guidance on second-half 2025

investment income. Yet they emphasize that daily cash-equity trading volumes—HKEX’s primary earnings driver—are surging at an unprecedented pace, propelled chiefly by southbound inflows.
In response to this structural trend, Goldman Sachs has raised its earnings-per-share forecasts for HKEX across fiscal years 2025 through 2027 and maintained a “Buy” recommendation. The target price has been lifted by 4%, from HKD 524 to HKD 544, reflecting the view that the current share valuation fails to reflect the strength of trading activity.

Goldman Sachs highlights southbound flows as a transformative force in the Hong Kong market. Average daily turnover in September has reached HKD 318 billion, up from HKD 279 billion in August and well above the year-to-date average of HKD 254 billion. These gains are overwhelmingly driven by southbound investors, whose net purchases, turnover contribution, and overall participation have all hit new highs.

The bank estimates that southbound volumes account for 30%–40% of year-on-year growth in total market turnover, and that these funds now comprise roughly 25% of aggregate trading. Moreover, southbound participation has underpinned approximately 50% of the year-on-year expansion in market capitalization, with turnover rates for both these flows and the broader market setting record levels.

Some market participants question whether this southbound-led momentum can be sustained beyond the euphoria of 2020–2021. However, Goldman Sachs contends that the trend is neither short-lived nor purely speculative. Instead, it reflects long-term drivers—mainland investors’ ongoing push to diversify assets internationally, Hong Kong’s irreplaceable pool of listed companies, and the market’s attractive relative valuations, including elevated dividend yields.

Buoyed by confidence in the sustained rise of southbound inflows and robust turnover data, Goldman Sachs has upgraded its HKEX financial model. The EPS forecast for 2025 increases from HKD 12.63 to HKD 12.97, for 2026 from HKD 13.05 to HKD 13.61, and for 2027 from HKD 13.96 to HKD 14.45.

The firm also refreshed its valuation using a three-stage dividend discount model anchored by a 40 times price-to-earnings assumption for 2026. This methodology yields a 12-month target price of HKD 544, 4% above the prior outlook.

To reinforce its bullish stance, Goldman Sachs presents two supporting analyses. A historical P/E comparison shows that HKEX’s forward multiple trades slightly below the mid-cycle median, despite robust earnings prospects. Meanwhile, a 20-year regression of turnover against share price suggests that, given current trading volumes, HKEX’s theoretical valuation should be near HKD 590—highlighting a significant upside gap.

In sum, Goldman Sachs concludes that the market has failed to incorporate the structural gains from southbound capital. As these flows continue to intensify, HKEX’s pivotal role as a marketplace facilitator will grow increasingly valuable, and its currently depressed share price offers a strategic investment opportunity.