A-Share Research Notes Summary

Transcription

1 A-Share Research Notes Summary December 3, 2014 (Note: This is selected translation from the Chinese version of A-share morning notes) (1) A-shares enter the new normal : rebalancing of valuation and expectation (P.1) A-Share Market (2) Power industry: reforms lifted expectation; valuation looks attractive (P.3) (3) Communications: Continue to recommend China Unicom and Go High. (P.4) A-shares enter the new normal : rebalancing of valuation and expectation Since November 19, the Shanghai Stock Exchange (SSE) Composite Index rose from 2,450 to 2,777 in less than two weeks. In the meantime, the trading volume of A-shares hit a record high and also exceeded the historical high of the US market. Though this large-cap driven rally was well expected by many value investors, they did not expect it to happen so fast. The typical features of the rally are valuation rebalancing and expectation rebalancing. The basis for the rebalancing comes from the faith in reform. From the valuation perspective, traditional cyclical sectors represented by banking have remained undervalued since Their valuations are not only lower than the international peers but also much lower than their historical average. Take banking industry for example. Putting aside its risk expectations, most people think that it is reasonable if its valuation returns to around 8 PE. However, such a rally from 5 PE to 8 PE was inconceivable for many investors when they were experiencing a bear market in the past few years. The dancing of elephants in the last two weeks not only makes the impossible possible but also challenges the inertial belief of low valuation of traditional cyclical stocks in the past four years with strong market performance. The rebalancing of valuation is the direct driving force of the rally of large-cap stocks. Wong Chi Man Senior Analyst (852) cmwong@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk The basis of the rebalancing of valuation is the rebalancing of expectation. The reason why traditional cyclical industries were undervalued for a long time is because there are concerns about risk exposure of those industries. Take banking industry for example, the concern for its bad debt risk is the primary reason for its low valuation; as for the steel industry, the concern about its business prospects is the key reason for its share price weakness. However, with reforms being pushed forward in the last two years, the society has begun to believe that the risks in the Chinese economy are not that high. Take banking industry for example, though banks profits are suppressed by reforms, government regulations have further reduced the risk of bad debt exposure. Take traditional cyclical products for instance, the strong support of the government for projects like infrastructure, especially for projects that are currently being planned, can help prevent the economic growth in 2015 from sliding, forming a strong support for cyclical materials stocks. The rebalancing of valuation and rebalancing of expectation have taken A-shares to the new normal : Valuations of seriously undervalued industries will move toward to their historical average or the average level of international peers; for the traditional industries with relatively high risk expectation, with the transformation by new technology and the 1

2 policy support of the government, their risk factors are diminishing. To some extent, the new normal state of A-shares represents a correction of the growth stocks focused investment strategy in the last two years. The way to correct it is not to bring down growth stocks but to push up traditional cyclical stocks. The stocks leading the rally are non-bank financial stocks, which are boosted not only by the rebalancing of valuation and expectation, but also by the financial reform of China. Though A-shares have currently posted an impressive return and the SSE Composite Index is almost 2800, the rebalancing of valuation and expectation is not fully reflected. Currently the average valuation of banking stocks is around 6 PE. There is still growth potential in industries like real estate, coal, building materials, petrochemical, home appliance and automobile industries. The rebalancing process is expected to continue. A-shares are entering the new normal. But the transition to the new normal will not be a smooth process. After entering the new normal, comparison of valuation and business climate among different industries will enter into the field of strategy analysis again. The growth stock analysis approach that has been widely accepted in the past two years will no longer be dominant but become one of the many analysis methods. The entering of the new normal of A-shares also means that A-shares bid farewell to long depression and switched to the reform expectation track. Though the bull market has not yet arrived, the platform waiting for it is being persistently rising. We will stand on a new step waiting for the bull market. Index Performance since Nov 19 (%) PER PBR PER PBR Non-Bank Financials Banks Real Property Coal Computer Conglomerate Steel Construction Transportation Home Appliances Building Material IPP Textile & Clothing Retail

3 Index Performance since Nov 19 (%) PER PBR PER PBR Non-ferrous Metals Telecommunication Machinery Food & Beverage Media Light Industry Oil & Gas Chemical Automobile Power Equipment Electronic Device Pharmaceutical Catering & Tourism Agriculture, Forestry & Fishery Defense Industry Power industry: reforms lifted expectation; valuation looks attractive State-owned enterprise (SOE) reform, power sector reform and change in valuation system are the three main investment thesis of the power industry. (1) Valuation system. When risk-free rate is gradually falling, blue-chip companies with low PER, low PBR, high dividend yields and good free cash flow will attract investors attention again. (2) SOE reform. The surge of asset injections brought by asset securitization is expected to bring qualitative changes. The improvement of the SOE evaluation system can incentivize the companies to raise internal operating efficiency. Under the mixed ownership reform, industrial capital will re-price the power industry. (3) Power sector reform. The power sector reform will take a concrete step. The electricity sell side has opened up new markets and the entry value of power grid enterprises is revealed. Power generation enterprises are likely to enter the market of selling electricity in a large scale. The power generation side is where the competition of marginal costs happens. We are optimistic about the companies which are located in energy bases and have power supply points to supply power to other regions. 3

4 Recommended stocks: China Guodian ( SH), Huadian Power International ( SH), SDIC ( SH), China Yangtze Power ( SH), Dongfang Energy ( SZ), Wenergy ( SZ) and Guangdong Shaoneng ( SZ). Communications: Continue to recommend China Unicom and Go High. China Unicom ( SH) recently announced the launch of a new product called traffic bank. By downloading the app or logging into its website, users can deposit and give to others the remaining data traffic quota they have left every month. The currently available function of the traffic bank is: users can earn traffic coins by signing in everyday or downloading promotional games and apps at the Credits Wall ; users can exchange traffic quota with the traffic coins and can also give the traffic coins to others. However the deposit function of remaining traffic quota in the package bought by users is currently not available. China Unicom s traffic bank is the same in nature as the traffic manager previously launched by China Telecom. They both provide free traffic to users and then have Internet companies or businesses with advertising promotion demand to pay the bill. Based on the 260min free voice call provided by China Telecom Yixin 3.0 this week, we think that it is a beneficial exploration and attempt of China Unicom to accelerate the transformation from traditional voice services to data traffic operation with the impact of OTT services. As China Unicom has combined big data analysis of its users, we think it is very likely to perform precision marketing through the Credits Wall and thus establish a benign ecological chain linking up operators, users and businesses and create larger business value with its big data. In the meantime, with the upcoming LTE era, data traffic operation is undoubtedly an irresistible trend, which is beneficial to Go High ( SZ) that is engaged in data traffic package resale in the medium to long term. We continue to recommend China Unicom and Go High. For China Unicom, in the short term, pay attention to the elimination of the discount of A-shares brought by the mixed ownership reform, revaluation of assets and the Shanghai-Hong Kong Stock Connect program; in the medium to long term, pay attention to four aspects: the support of asymmetric regulatory policy, its competitive advantage in fixed-line broadband/lte integration business, its centralized decision-making/it business system to cope with the reform in mobile Internet business and the improvement in governance capability brought by mixed ownership. For Go High, we are optimistic about its two RMB100bn platforms. Platform 1 to pay attention to in the short and medium term: centering on phone fee recharging/in-the-process data traffic package operation and comprehensive card redemption; Platform 2 to pay attention to in the medium and long term: 19 Pay (with the third-party payment license) under Gaoyang Jiexun and nearly 500,000 network points under 19e which is also controlled by the senior management of Gaoyang Jiexun will have in-depth business cooperation in POS order receiving-clearing and marketing of virtual electronic goods. It is expected to build a larger RMB100bn platform. 4

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: