DuPont ROE Hong Kong: Quality at -1.15% CAGR, But -2.43% vs Hang Seng (2000-2025)

Hong Kong is the hardest market in our dataset. Quality ROE returned -1.15% annually from 2000 to 2025 on HKSE. Negative absolute returns. But the Hang Seng itself returned only 1.28% over the same period, so the excess return is -2.43%. You're not getting crushed relative to the local market. You're getting crushed alongside it.

Contents

1. Method
2. What is DuPont Analysis?
3. The Screen
4. What We Found
5. Negative absolute returns across the board. The local benchmark wasn't much better.
6. Why the quality filter fails in Hong Kong
7. Backtest Methodology
8. Limitations
9. Takeaway
10. Part of a Series
11. References

The comparison to our original benchmark matters here. Against SPY at 7.30%, the apparent gap was -9.43%. Against the Hang Seng at 1.28%, it's -2.43%. Neither is a success, but the story changes significantly when you use a local benchmark. Hong Kong's quality stock universe reflects Hong Kong's macro: property cycles, China political risk, a 2019-2023 period of sustained contraction. The DuPont filter didn't fix any of that.

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

Method

DuPont components were computed from raw annual financial statements. The screening SQL uses TTM data for live analysis, but the backtest uses fiscal year data with a 45-day filing lag.

What is DuPont Analysis?

ROE measures profit per dollar of equity. Two companies with identical 20% ROE can have entirely different risk profiles underneath.

DuPont breaks ROE into three components:

ROE = Net Profit Margin x Asset Turnover x Equity Multiplier

• Net Profit Margin (Net Income / Revenue): Profitability per unit of revenue.
• Asset Turnover (Revenue / Total Assets): How efficiently assets generate sales.
• Equity Multiplier (Total Assets / Shareholders' Equity): Leverage. Higher means more debt-funded assets.

Hong Kong's corporate structure creates a specific DuPont problem. Many high-ROE HKSE companies are property developers. Filtering for low leverage (equity multiplier < 3.0) removes most developers from the quality screen. What remains is a residual portfolio that's heavy in consumer brands, REITs with modest leverage, and conglomerate subsidiaries. That residual didn't generate returns.

The Screen

-- DuPont ROE Quality Screen: Hong Kong (HKSE)
-- Margin-driven quality: high ROE from profitability, not leverage

SELECT
    k.symbol,
    p.companyName,
    p.sector,
    k.returnOnEquityTTM * 100 AS roe_pct,
    f.netProfitMarginTTM * 100 AS net_margin_pct,
    f.assetTurnoverTTM,
    (1 + f.debtToEquityRatioTTM) AS equity_multiplier,
    p.marketCap / 1e9 AS market_cap_b_hkd
FROM key_metrics_ttm k
JOIN financial_ratios_ttm f ON k.symbol = f.symbol
JOIN profile p ON k.symbol = p.symbol
WHERE p.exchange = 'HKSE'
  AND k.returnOnEquityTTM > 0.15
  AND (1 + f.debtToEquityRatioTTM) < 3.0
  AND f.netProfitMarginTTM > 0.08
  AND p.marketCap > 3900000000
  AND p.sector NOT IN ('Financial Services', 'Utilities')
  AND p.isActivelyTrading = true
  AND p.isFund = false
  AND p.isEtf = false
  AND p.isActivelyTrading = true
QUALIFY ROW_NUMBER() OVER (PARTITION BY p.companyName
                           ORDER BY p.averageVolume DESC) = 1
ORDER BY f.netProfitMarginTTM DESC
LIMIT 30

The screen surfaces consumer staples, selected healthcare companies, and non-leveraged conglomerate subsidiaries. The leverage filter removes Hong Kong's large-cap property sector almost entirely. What qualifies tends to be smaller and less liquid.

What We Found

Negative absolute returns across the board. The local benchmark wasn't much better.

The most interesting result is leverage-driven. At 2.45% CAGR, it's the only portfolio that cleared the Hang Seng by a meaningful margin (+1.17%). Leverage-driven Hong Kong companies, concentrated in property and capital-intensive businesses, were what actually worked in this market. Filtering them out via the quality constraint hurt returns.

The margin-to-leverage spread is -2.6%. Leverage wins in Hong Kong. The Quality ROE filter, designed to identify durable profitability, excluded the leveraged property cycle that drove Hong Kong equity returns over this period.

Quality ROE at -1.15% trails the Hang Seng by 2.43%. The down capture was 109.5% against the Hang Seng, meaning the portfolio fell more than the benchmark in down years. Win rate was 36%. This is not a strategy that worked in Hong Kong.

The universe averaged 69 qualifying stocks. That's sufficient depth for a signal to show up. The absence of positive returns isn't a small-sample problem. Hong Kong's quality filter genuinely underperformed the local market.

Why the quality filter fails in Hong Kong

Property sector exclusion. The low-leverage constraint (equity multiplier < 3.0) removes most of Hong Kong's high-profile property developers. Sun Hung Kai, Henderson Land, and similar names carry significant leverage. They were a major driver of Hang Seng returns in several periods. Excluding them via the quality filter removes the sector that actually worked.

China exposure without China's growth. Many HKSE-listed consumer and industrial companies have substantial mainland China operations but trade at Hong Kong valuations. From 2019-2023, political risk and regulatory uncertainty created persistent discount to fair value. Quality fundamentals didn't protect against re-rating risk.

Small residual universe. After removing property, financials, utilities, and high-leverage companies, the qualifying universe is thin and skews toward businesses that weren't driving HKSE returns. You're left holding what the market didn't want.

Backtest Methodology

Limitations

Property sector is the dominant factor. HKSE returns are heavily influenced by property cycles. Any strategy that systematically excludes property developers via a leverage filter is making a significant sector bet against the market's primary return driver. The quality filter here is effectively "avoid property," and that bet lost over 25 years.

Political and regulatory risk. The 2019-2023 period saw substantial political disruption, regulatory uncertainty around China-linked businesses, and extended equity market weakness. These macro events affected all HKSE stocks but hit consumer and industrial names (which the quality filter over-weights) particularly hard.

Currency effects. The HKD/USD peg means currency is not a significant source of noise in the USD comparison, but it also means Hong Kong has no independent monetary policy. This contributed to the sensitivity to US rate cycles and China credit cycles.

Negative absolute returns. A strategy returning -1.15% annually destroys capital in real terms. This isn't a "trail the benchmark" story. It's a "lose money" story, primarily because the Hang Seng itself barely generated positive returns and the quality screen underperformed even that low bar.

Down capture above 100%. A 109.5% down capture against the Hang Seng means the portfolio fell more than the benchmark in down markets. This is the opposite of the defensive characteristics quality screens typically deliver.

Takeaway

Hong Kong is the one major market where DuPont Quality ROE fails on both absolute and relative terms. The -1.15% CAGR reflects a strategy that excluded the property sector (via the leverage filter) during decades when property was Hong Kong's dominant wealth creator. Against the Hang Seng at 1.28%, the -2.43% excess return is disappointing but less catastrophic than comparing against SPY.

The honest read: DuPont quality screening doesn't work in Hong Kong. The leverage filter removes exactly the companies that drove returns. Leverage-driven ROE at 2.45% was the only portfolio that outperformed the Hang Seng. If you're investing in Hong Kong equities, a DuPont quality screen is likely to hurt rather than help.

This doesn't mean the DuPont framework is wrong. It means Hong Kong's return structure, dominated by a leveraged property cycle and significant policy risk, isn't compatible with a screen designed for markets where margin-driven competitive advantage compounds over time.

Part of a Series

This analysis is part of our DuPont ROE global exchange comparison: - DuPont ROE on US Stocks -- full methodology - DuPont ROE on German Stocks -- +1.77% excess vs DAX - DuPont ROE: Global Comparison -- all 13 exchanges

References

• Soliman, M.T. (2008). "The Use of DuPont Analysis by Market Participants." The Accounting Review, 83(3), 823-853.
• Fairfield, P.M. and Yohn, T.L. (2001). "Using Asset Turnover and Profit Margin to Forecast Changes in Profitability." Review of Accounting Studies, 6(4), 371-385.
• Lui, Y.H. and Mole, D. (1998). "The Use of Fundamental and Technical Analyses by Foreign Exchange Dealers: Hong Kong Evidence." Journal of International Money and Finance, 17(3), 535-545.

Data: Ceta Research (FMP financial data warehouse), 2000-2025. Annual April rebalance, equal weight, 0.1-0.5% transaction costs (size-tiered). Past performance is not indicative of future results.

Past performance does not guarantee future results. This is educational content, not investment advice.