Low Debt Quality on Hong Kong Stocks (HKSE): 25 Years of Underperformance With a Cushion

We screened all HKSE-listed stocks for D/E < 0.5 and Piotroski F-Score of 7 or higher, then held the portfolio annually from 2000 to 2025. The result: 3.84% CAGR vs 1.64% for the Hang Seng Index. The strategy beat the local benchmark by 2.20% per year. Total return was 155.73% vs 50.55% for the Hang Seng. The other side: max drawdown of -35.04% vs Hang Seng's -40.45%, and a down capture of 86.84%. The portfolio provided meaningful downside protection while outperforming the local market over 25 years. Results are in HKD.

Contents

1. Method
2. The Signal
3. The Screen (SQL)
4. What We Found
5. 25 years. Outperformed local benchmark by 2.20% annually. Better drawdown protection.
6. Annual returns (July-to-July, HKD)
7. 2006: The China boom exception
8. 2001-2009: Strong relative performance
9. 2010 onward: Tracking local markets through volatility
10. 2024: Strong recovery
11. Backtest Methodology
12. Limitations
13. Takeaway
14. Part of a Series
15. Run This Screen Yourself

Data: FMP financial data warehouse, 2000–2025. Updated March 2026.

Method

Data source: Ceta Research (FMP financial data warehouse) Universe: HKSE, market cap > HKD 4B Period: 2000-2025 (25 years, 25 annual periods) Rebalancing: Annual (July), equal weight all qualifying Benchmark: Hang Seng Index Cash rule: Hold cash if fewer than 10 stocks qualify Data lag: 45-day point-in-time lag on financial statements (prevents look-ahead bias)

Annual returns are measured July-to-July, since the portfolio rebalances each July. The year label marks the start of each 12-month holding period. All returns are in HKD.

The Signal

Two filters. Both must pass.

Filter 1: Low Leverage

D/E < 0.5, measured from annual financial statements (FY data). Companies with debt-to-equity at or above 0.5 are excluded entirely, regardless of any other metric.

Filter 2: Piotroski F-Score >= 7

The F-Score aggregates nine binary signals across profitability, cash quality, and financial efficiency. Each signal scores 1 or 0. Stocks must score 7 or higher to qualify.

Score >= 7 of 9 means the company is improving across most dimensions simultaneously. Companies in financial distress or deteriorating fundamentals rarely score this high.

The combination selects companies that are both conservatively financed and operationally improving. The average qualifying universe in Hong Kong was 62 stocks per period, so this is a reasonably populated filter on the HKSE.

The Screen (SQL)

The live screen uses TTM proxies as a Piotroski approximation. Full Piotroski requires year-over-year FY comparisons, which this SQL doesn't compute. The TTM screen substitutes ROE, operating margin, and interest coverage as quality proxies. Use this to find candidates, not to replicate the exact backtest signal.

SELECT
    p.exchange,
    r.symbol,
    p.companyName,
    p.sector,
    ROUND(r.debtToEquityRatioTTM, 3) AS de_ratio,
    ROUND(k.returnOnEquityTTM * 100, 1) AS roe_pct,
    ROUND(r.operatingProfitMarginTTM * 100, 1) AS opm_pct,
    ROUND(r.interestCoverageRatioTTM, 1) AS interest_coverage,
    ROUND(k.freeCashFlowYieldTTM * 100, 2) AS fcf_yield_pct,
    ROUND(k.marketCap / 1e9, 2) AS mktcap_b
FROM financial_ratios_ttm r
JOIN key_metrics_ttm k ON r.symbol = k.symbol
JOIN profile p ON r.symbol = p.symbol
WHERE r.debtToEquityRatioTTM >= 0
  AND r.debtToEquityRatioTTM < 0.50
  AND k.returnOnEquityTTM > 0.08
  AND r.operatingProfitMarginTTM > 0.08
  AND r.interestCoverageRatioTTM > 5.0
  AND p.isActivelyTrading = true
  AND k.marketCap > 4000000000
  AND p.exchange IN ('HKSE')
ORDER BY de_ratio ASC
LIMIT 30

Run this query on Ceta Research

What We Found

25 years. Outperformed local benchmark by 2.20% annually. Better drawdown protection.

The portfolio was fully invested every year. 62 stocks on average at each rebalance. The win rate of 60% means it beat the Hang Seng in 15 of 25 annual periods. The up capture of 104.7% combined with down capture of 86.84% shows the strategy captured more of the market's gains while providing meaningful protection during sell-offs. Against the local benchmark, this is a favorable risk-return profile.

Annual returns (July-to-July, HKD)

2006: The China boom exception

The one year that distorts the picture is 2006. The portfolio returned +69.7% in HKD, beating the Hang Seng by a substantial margin. This wasn't purely the strategy finding alpha. It was Hong Kong equity markets getting swept up in the broader China growth wave. The Shanghai Composite was rising over 100% that same year. HKSE-listed Chinese-facing companies with low debt were well-positioned for that surge. While this year shows exceptional returns, the strategy's performance extends beyond this single commodity boom year.

2001-2009: Strong relative performance

The strategy's best case was the first decade. From 2001 through 2009, the portfolio consistently delivered strong performance relative to the Hang Seng. The 2001 result came from HK-listed companies being insulated from the dot-com bust. The 2003 surge (+39.7%) was post-SARS recovery in Asian markets. The 2008 protection was genuine: -11.1% while the Hang Seng fell harder, demonstrating the value of low-leverage quality during credit crises.

This period included the 2006 outlier, but even excluding it, the strategy showed consistent outperformance relative to Hong Kong's benchmark.

2010 onward: Tracking local markets through volatility

From 2010 to 2023, the strategy tracked Hong Kong's equity markets through a volatile period. The 2015 result (-23.4%) captures the year Hong Kong markets fell hard on China growth slowdown fears. The 2021 collapse (-26.4%) reflected Beijing's regulatory crackdown on tech platforms and property developers.

The D/E < 0.5 filter can't fully protect against macro and regulatory tail risks. HK-listed companies with low debt still fell when the political and economic backdrop deteriorated sharply. However, when compared to the Hang Seng's performance during this same period, the strategy's downside protection becomes more apparent.

2024: Strong recovery

The strategy returned +25.7% in 2024, delivering solid absolute returns. Expectations for a China stimulus recovery drove a partial rebound in HK-listed equities. Whether this persists is unknown, but it demonstrates the portfolio's ability to capture upside during recovery periods.

Backtest Methodology

Limitations

The 2006 outlier. A single year (+69.7%) contributes disproportionately to the total return figure. While the strategy outperforms even excluding this year, any interpretation of the Hong Kong results should consider 2006's exceptional impact.

Macro and geopolitical risk. The post-2019 deterioration in Hong Kong's economic and political environment created persistent headwinds that a quantitative screen can't anticipate or hedge. The 2019-2023 stretch was uniquely bad for HK equities broadly, and this strategy captured that downside.

Survivorship bias. Exchange membership uses current company profiles, not historical. Companies that were delisted during the backtest period may not be captured. This likely causes some upward bias in reported returns.

TTM screen vs backtest signal. The live SQL screen uses TTM financial ratios as a Piotroski proxy. The actual backtest computed Piotroski from FY year-over-year changes. A stock that passes the TTM screen may not have passed the backtest signal, and vice versa. Use the screen for candidate identification, not exact replication.

Takeaway

The Hong Kong backtest demonstrates that context matters when evaluating strategy performance. D/E < 0.5 plus Piotroski >= 7 finds real quality companies. Against the Hang Seng Index, those companies delivered 3.84% CAGR vs 1.64%, outperforming by 2.20% annually over 25 years, for a total return of 156% vs 51%.

The downside protection was meaningful. The portfolio's -35.04% max drawdown improved on the Hang Seng's -40.45%, and the down capture of 86.84% provided cushion during sell-offs. While the strategy couldn't fully protect against Hong Kong's political and economic headwinds in 2015 and 2021, it delivered better risk-adjusted returns than the local market.

Compared to US markets, Hong Kong's low-debt quality strategy underperformed. But for investors focused on Hong Kong equities, this approach provided alpha relative to the local benchmark while maintaining defensive characteristics.

Part of a Series

This post is part of our Low Debt Quality global exchange comparison. We ran the same strategy across 15 exchanges worldwide: - Low Debt Quality on US Stocks - 7.09% CAGR, -29.77% max drawdown, 82.83% down capture - Low Debt Quality on Indian Stocks (BSE + NSE) - 14.05% CAGR, +6.22% excess - Low Debt Quality on Canadian Stocks (TSX) - +1.33% excess - Low Debt Quality on Swedish Stocks - +1.14% excess - Low Debt Quality on Swiss Stocks - best Sharpe in the study (0.429) - Low Debt Quality on German Stocks (XETRA) - European result - Low Debt Quality on UK Stocks (LSE) - LSE results - Low Debt Quality on Japanese Stocks (JPX) - JPX results - Low Debt Quality on Taiwan Stocks - tech-heavy, 63.64% down capture - Low Debt Quality on Thailand Stocks (SET) - 66.82% down capture - Low Debt Quality on China Stocks - bubble-era returns - Low Debt Quality: Global Exchange Comparison - all 15 exchanges

Run This Screen Yourself

The TTM screen SQL above is runnable directly on Ceta Research. Query the FMP financial data warehouse and filter by your own criteria. No setup required.

The full backtest code (Python + DuckDB) is on GitHub.

Data: Ceta Research, FMP financial data warehouse. Returns in HKD. Annual rebalance July, equal weight, 2000-2025.