A-Share Research Notes Summary

Transcription

1 A-Share Research Notes Summary November 25, 2014 (Note: This is selected translation from the Chinese version of A-share morning notes) (1) Strategy: Interest rate cut to boost market sentiment; rebound does not represent a great bull market (P.1) A-Share Market (2) Steel and nonferrous metal: For stocks benefiting from the interest rate cut, pay attention to Hangzhou Iron & Steel ( SH), Yunhai Metals ( SZ) and China Tungsten High-tech ( SZ).(P.2) (3) Home appliance industry: interest rate cut to have limited direct influence on earnings improvement but it will help re-rating directly (P.3) Strategy: Interest rate cut to boost market sentiment; rebound does not represent a great bull market 1. Interest rates in China is on downward trend We ve been proving the downward trend of interest rates in China. Our two main theses are as follows: Firstly, China s economy is currently in a downward spiral, especially for those traditional capital-intensive industries. In particular, since the implementation of the RMB 4trn stimulus program, the cost of debt has been staying high. In the short term, interest rate cut is an inevitable choice to cope with the economic downturn. Secondly, China s economy is in the transition from high saving mode to high consumption mode. During the transition, changing residents propensity to save is the key to for the effective allocation of social production resources. Once people reduce their savings and increase consumption, especially consumption on services, social resources could be transferred from accumulation industries to consumer and service industries. 2. Lower interest rates can lift the valuation range of the market. Wong Chi Man Senior Analyst (852) cmwong@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk Firstly, lower interest rates are favourable for raising valuation level. According to the perpetuity discount formula NPV=DIV1/(r-g), where DIV1 is the annuity of the year, r is interest rate and g is growth rate, if we assume the future dividend of listco willremain unchanged, then the present value will go up when the interest rates go down. Secondly, sectors with high gearing will benefit from lower interest rate as they can enjoy lower borrowing costs. Since the implementation of the RMB 4trn stimulus program, the debt of China s capital-intensive industries have increased further and the interest cost has been staying high. When the these industries are in the up-cycle, it is not difficult for companies to renew their debt, and the financial pressure is relatively low. But when these industries are in the down-cycle, the interest rate sensitivity will become higher and their financial risks will increase. The current interest rate cut and any potential interest rate cut in the future can help relief financial pressure and reduce financial cost for high gearing industries. 3. The interest rate cut does not indicate the beginning of a bull market. The market clearing will continue in 2015 and deploy investment based on the theme of reform. 1

2 Based on the track record, there is no strong correlation between monetary easing and a stock market rally. We observed that the recent big rallies in Europe, US and Japan stock markets after the quantitative easing were synchronous with rebound after plunging. Those rebounds do not represent the beginning of great bull market. The performances of A-shares have been weak since The recent interest rate cut may slightly lift the valuation range of the stock market. But it is not the beginning of a great bull market. A great bull market requires a meaningful recovery of economy. Currently the supply-side policies have indeed encouraged innovation strongly, but capital-intensive industries are still the mainstream of China s economy and they are still in the downturn. The industries need to further reduce their capacity. Therefore, our view for 2015 is still continued clearing and invest based on reform policy. The reform follows the idea of supply-side theorists, which is to first ease the control over sectors and then promote innovations of technological progress, mainly including: (1) the major development of non-bank financial sectors represented by interest rate liberalization and deepening of financial reform; (2) import substitution and export upgrading of the equipment manufacturing industry and the large-scale upgrading of China s competitive sectors represented by high-speed rail and nuclear power sectors; (3) the application of new technologies represented by mobile Internet services and intelligent services is improving China s service industry standard across the board ; (4) major leisure industries represented by sports and media are rising amid the transition of China to high consumption mode; (5) taking the opportunity of the new third board, the blanket policies which encourage financial institutions to serve the real economy and urge capital to serve enterprise upgrading haskicked off, and this will bring numerous new investment opportunities to investors. Steel and nonferrous metal: For stocks benefiting from the interest rate cut, pay attention to Hangzhou Iron & Steel ( SH), Yunhai Metals ( SZ) and China Tungsten High-tech ( SZ). Last Friday, the People s Bank of China announced that it would lower the RMB benchmark lending and deposit interest rates of financial institutions starting from 22 November, The one-year benchmark lending rate of financial institutions was lowered by 0.4ppt to 5.6%, and the one-year benchmark deposit interest rate was lowered by 0.25ppt to 2.75%. We believe the interest rate cut can benefit steel stocks from three dimensions: 1) lowering the interest rate of funds for steel companies and industrial traders directly; 2) improving the sales and construction progress of the downstream real estate industry and indirectly boosting the demand of steel industry; 3) further improving market sentiment, supporting the idea of thematic investment and boosting valuation. Additionally, we believe that the interest rate cut will have a major influence on the profitability of industrial traders. According to basis thesis, interest rate cut will lead to marginal improvement on the financial cost of enterprises with lending rate much higher than the benchmark rate; and interest rate cut will also have greater impact on profitability of enterprises with a high interest-bearing debt ratio and enhance the elasticity of their performances. According to our statistics, the average annualized cost of capital(interest expenditure/interest-bearing debt) of the 40 enterprises in the trade company and industrial product dealer sector of WIND is up to 16.21% and the average interest-bearing debt ratio (interest-bearing assets/total assets) is up to 30.05%. In the sector, the annualized cost of capital of 14 industrial traders is higher than the benchmark lending rate of 5.6% after the interest rate cut, and 5 enterprises even have an interest-bearing debt ratio higher than the sector average of 30.05%. Therefore, the interest rate cut will lead to marginal improvement on nearly 1/3 of the enterprises in the sector and help reduce their financial costs. Moreover, it will exert a major influence on the performance of 1/8 of the enterprises in the sector and improve their profitability significantly. 2

3 Investors may pay attention to companies with two highs : high annualized cost of capital and high interestbearing debt ratio, such as SMTC B Stock ( SH), Meidu Energy ( SH), *ST Chengcheng ( SH), SMTC ( SH) and Boyuan Investment ( SH). Among the stocks covered by Galaxy s steel and nonferrous metal research team regarding stocks benefiting from the interest rate cut, we recommend investors to pay attention to Hangzhou Iron & Steel (with an annualized capital cost ratio of 5.98% and an interest-bearing debt ratio of 34.93%), Yunhai Metals (with an annualized capital cost ratio of 6.14% and an interest-bearing debt ratio of 43.74%) and China Tungsten High-tech (with an annualized capital cost ratio of 5.66% and an interest-bearing debt ratio of 5.66%). Home appliance industry: interest rate cut to have limited direct influence on earnings improvement but it will help re-rating directly The main purpose of the asymmetric interest cut is to reduce social financing costs. The debt-to-assets ratio of the whole home appliance industry is about 60%, while its interest-bearing debt ratio is lower than other industries. The reason for that is because home appliance manufacturers, especially leading players, though having a relatively high financial leverage (Gree s debt-to-assets ratio is 74%), have relatively less interestbearing debts, its liabilities are mostly payables (leading players have great bargaining power and enjoy relatively long credit period in downstream and upstream channels). We can see that the interest-bearing debt ratio of mainstream home appliance companies is relatively low, so the interest rate cut will not save a lot of finance costs for those companies and have limited direct contributions to the bottom line. Before that, what investors were most concerned about the home appliance sector was the depressed property sales, which caused the valuation of the home appliances sector to continue to fall. The current valuation has fully reflected the pessimistic expectations of the market. The interest rate cut, which is to reduce social financial costs, is good for real estate credit. The reduction in real estate development and mortgage financing costs is good for releasing the inelastic demand for real estate. The inelastic demand for real estate has more direct boost to the demand for home appliances, compared to real estate for investment purpose, and is especially positive to leading kitchen appliance companies with brands and with close relations with real estate: Robam ( SZ), Vatti ( SZ), etc. We believe that certain inelastic demand for house appliances as necessity, durable consumer goods will always exist. The easing of real estate policies and the reduction in financing costs can help stabilize the demand for home appliances. In the meantime, the reduction in financing costs is good for the stock market as well as home appliance companies, especially leading players. The valuation of the sector is expected to recover. In the sector, black goods companies with a relatively high interest-bearing debt ratio such as TCL ( SZ), Konka ( SZ) and Changhong ( SH) have greater sensitivity to rate cut. They are expected to have a better performance in the short term. Investment recommendation: Maintain recommend Since 2014, the investment style of the A-share market has suppressed the valuation of blue-chip stocks like home appliances. Looking into next year: 3

4 1. Be optimistic about the industry demand. There s basic demand for home appliances, which are necessity, durable consumer goods. In the meantime, the rising penetration of home appliances in the past ten years also boosted replacement demand therefore the sales volume of the industry will not fall sharply. 2. The white goods sector has high industry concentration ratio and leading players have clear competitive advantages in the industry. Their market share is still increasing, and the industry structure is healthy. We are unlikely to see a vicious price war. A good industry structure has protected the competitive landscape of the industry from deteriorating and ensured leading players can keep their high earnings level even when the price of bulk commodities is falling. 3. Consumption upgrade; products moving to high-end; average selling price rising. On the one hand, these factors help offset the impact of lackluster volume growth; on the other hand, these factors boosts the profitability. 4. Low valuation of home appliances stocks reflect investors expectation is not high. Leading players have sufficient cash, high dividend payout and a wide safety margin. We suggest paying attention to: The interest rate cut is good for color TV companies with a great performance elasticity: TCL, Konka, etc.; Allocation value of leading players: Gree ( SZ), Midea ( SZ) and Haier ( SH) ; Pay attention to growth stocks with solid results: Robam, Vatti and Supor ( SZ). 4

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