A share market after MSCI inclusion

Transcription

1 A share market after MSCI inclusion Mar Li Chen Mar

2 1: A-share Inclusion in MSCI indexes MSCI will include 231 China large cap A shares in the MSCI Emerging Markets Index using a twostep inclusion process beginning June An Index Inclusion Factor (IIF) of 2.5% and 5% will be applied to the FIF-adjusted market capitalisation of China A shares in the pro-forma MSCI China Index in June and August, respectively. Current Aug 2018 (Inclusion factor=5%) Weight # of Securities Weight # of securities MSCI China A shares % 231 MSCI EM 846 1,077 A shares % 231 MSCI Asia ex-japan A shares % 231 2

3 2.1: Fund inflow into the A-share market We estimate $14.8 bn fund flow into the A-share market by August inclusion The most heavily weighted stocks in the provisional index Moutai, Ping An, China Merchant Bank, Industrial Bank, ICBC, etc. will receive the largest fund flows Table: Top 20 stocks receiving the largest fund flows Security Ticker Security Name Index weight Fund flow into the stock (bn RMB) 6M average daily turnover (bn RMB) Days to trade CH Equity KWEICHOW MOUTAI A 0.04% CH Equity PING AN INS A 0.03% CH Equity CHINA MERCH BK 0.03% CH Equity INDUSTRIAL BANK A 0.02% CH Equity ICBC A 0.02% CH Equity SHANGHAI PUDONG 0.02% CH Equity MIDEA GROUP CO A 0.01% CH Equity HANGZHOU HIKVIS A 0.01% CH Equity CHINA VANKE CO A 0.01% CH Equity CHINA STATE CON A 0.01% CH Equity BANK OF COMMU A 0.01% CH Equity CRRC CORP A 0.01% CH Equity WULIANGYE YIBIN A 0.01% CH Equity CHINA PACIFIC A 0.01% CH Equity CHINA MINSHENG A 0.01% CH Equity SAIC MOTOR CORP A 0.01% CH Equity AGRI BANK OF CN A 0.01% CH Equity CHINA YANGTZE 0.01% CH Equity BANK OF CHINA A 0.01% CH Equity PING AN BANK CO A 0.01%

4 2.2: Some stocks could benefit in the short term The stocks with a higher ratio of potential fund flow to average daily turnover may be shortterm beneficiaries, especially those stocks in which foreign investors hold very small number of positions. Table: Top 20 stocks with the highest fund flow/daily turnover Security Ticker Security Name Index weight Fund flow into the stock (bn RMB) 6M average daily turnover (bn RMB) Days to trade CH Equity OCEANWIDE HLDGS 0.00% CH Equity FOSHAN HAITIAN 0.00% CH Equity CHINA YANGTZE 0.01% CH Equity SHENWAN HONGY 0.00% CH Equity HUADIAN POWER 0.00% CH Equity SHENZHEN ENERGY 0.00% CH Equity ZHEJIANG ZHENENG 0.00% CH Equity SHANGHAI PUDONG 0.02% CH Equity JIANGSU BICON 0.00% CH Equity HUBEI ENERGY 0.00% CH Equity JOINTOWN PHARMA 0.00% CH Equity BANK OF BEIJING 0.01% CH Equity SHENERGY CO 0.00% CH Equity CHINA RAIL GRP 0.01% CH Equity HAINAN AIRLINES 0.00% CH Equity SHANGHAI LUJIAZ 0.00% CH Equity CHINA NATL NUCL 0.00% CH Equity HUANENG POWER 0.00% CH Equity CHINA MERCH BK 0.03% CH Equity ORIENTAL PEARL 0.00%

5 3.1: Overseas investments through QFII, RQFII and stock connect keep rising Stock connect, QFIIs and RQFIIs are three channels for foreign investors to buy A-share stocks Overseas investment in the A-share market was approximately Rmb448 bn as of 3Q 2017, constituting 1% of A-share s floating market cap 1.1% % % % 0.7% 0.6% 0.5% 0.4% % % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Overseas Investment (bn RMB) Overseas holdings % of A-share floating market cap 5

6 3.2: QFII and RQFII are open to licensed investors QFIIs and RQFIIs are open to licensed investors, allowing investors to invest in all the A-share stocks and participate in IPO subscriptions Ticker Name Ranked by market cap held by QFII (Rmb mn) SZ Han's Laser Technology Co., Ltd 1, SZ Huafon Microfibr Data as of 07-Feb SS SCSF 1, SZ Dadonghai Ticker Name Ranked by as % of total free-float stocks 3Q17 Changes 2Q17 3Q17 Changes 2Q SS BJ Bank 18,571.9 (452.3) 19, SS Dashenlin SS Kweichow Moutai Co., Ltd 13, , SS Bank of Nanjing 15.7 (0.2) SZ Bank of Ningbo 10, , SZ Bank of Ningbo 15.3 (0.0) SS Bank of Nanjing 10,028.7 (272.2) 10, SS BJ Bank 13.6 (0.0) SZ Midea Group Co Ltd 8, , SZ Innovation Medic SZ Wuliangye Yibin Co., Ltd 4,654.3 (74.9) 3, SZ Venustech SZ SZ SS SS SZ Hangzhou Hikvision Digital Technology Co., Ltd. Gree Electric Appliances Inc of Zhuhai Jiangsu Hengrui Medicine Co. Ltd Shanghai International Airport Co Jiangsu Yanghe Brewery Jointstock Co., Ltd 3,556.8 (470.4) 4, SS Toly Bread ,472.3 (165.0) 2, SS Chixia Dev , , , SZ Supor , , SZ Shenzhen Airport Co , , SZ BGI Genomics SS SAIC Motor Corp Ltd 2, , SS Shanghai International Airport 6.2 (0.0) SS Anhui Conch Cement Co. Ltd. 1, , SZ QUANJUDE 6.2 (0.0) SS China Intl Travel Service 1, SS SCSF SZ Supor 1,468.0 (104.0) 1, SZ Yuto Packaging SZ Hangzhou Robam Appliances Co Ltd 1, , SZ Hna-Caissa SZ Shenzhen Airport Co. 1, SZ BONC SS Qingdao Haier Co., Ltd. 1, , SZ YUNDA Corp. 4.4 (0.0) 4.4 6

7 3.3: Stock connect, a more flexible channel Compared with the traditional channels such as QFIIs and RQFIIs, stock connect is more flexible in that it allows all foreign investors to trade A-shares on a daily basis without a pre-approved quota. The capital mobility is higher through the Connect, because it sets no lock-in period or other restrictions, other than a daily quota limit. Currently, the investment made through the Connect has reached Rmb315 bn cumulatively. Table: Northbound investors' top 20 largest holdings Ticker Security Name Market Cap Held by northbound investors (bn RMB) As of floating market cap (%) SS Kweichow Moutai SZ Hikvision SZ Midea SS Ping An (A) SZ Gree SS Hengrui Medicine SS Yili SS Yangtze Power SS SHIA SS CMB (A) SS SAIC SS CITS SS QingDao Haier SZ Wuliangye SS FOUNDER SECURITI ORD A SZ Yanghe Brewery SS Fuyao Glass (A) 7 Data as of 07-Feb SS Haitian Flavouring SZ YNBY SS Yutong Bus

8 : It may 5-7 years for full inclusion of A-shares According to the inclusion history of Taiwan and Korea, it takes several years from initial inclusion to full inclusion: six years for Taiwan and nine years for South Korea, respectively. The timeline may be faster for A-share due to: (1) Capital market has made a progress of opening up; SAFE-approved QFII, RQFII quota keeps expanding at a steady pace Obstacles need to be addressed before full-inclusion Changes or improvement progress (1) 20% monthly repatriation limit for QFIIs Unchanged. (2) Trading suspension treatment (3) Pre-approval requirements by the local exchanges on launching financial products (i) The implementation of new trading suspension policies by local exchanges has brought the number of voluntary trading suspensions back to pre-crisis level. However, the number of trading suspensions in the China A-shares market remains by far the highest in the world. (ii) The CSRC has guided that suspension period for individual stocks should be less than 3 months. MSCI is in discussions with China exchanges in an effort to reach a resolution on the removal of pre-approval requirements on new and pre-existing financial products linked to China A shares. Table: SAFE-approved QFII quota Table: SAFE-approved RQFII quota MoM Chg (RHS, US $bn) QFII quota (US $bn) MoM Chg (RHS, US $bn) RQFII quota (US $bn) 8

9 4.2: Full inclusion in A-share might be faster than in Korea, Taiwan (2) RMB stabilisation enhanced investor interest in the A-share market Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 USD/CNY 9

10 4.3: Forecasted A-share inclusion timeline Table: Taiwan, Korea inclusion timeline Jan-92 Sep-96 Aug-98 Korea 20% 50% 100% Sep-96 May-00 Nov-00 Dec-01 Taiwan 50% 65% 80% 100% Table: Estimated A-share inclusion timeline China 5% 20% 30% 50% 80% 100% Weight in EM index 0.8% 3.2% 4.8% 8.0% 12.8% 16.0% Estimated fund flow (bn USD)

11 4.4: Larger fund flow into A-share expected after full inclusion Although MSCI inclusion may have a limited funds flow impact initially, after using a 100% inclusion factor, the weight of A-share stocks in the MSCI EM index will become 16%, which implies US$300 bn funds inflow to A-shares. Figure: Approximate weight in each index after future full inclusion 11

12 5: Sectors in A-share with lower valuation, higher ROE, and more large-cap quality stocks There are more quality companies of over 5bn market cap in consumers, TMT and healthcare in the A-share market than Hong Kong market. In the longer term, as the A-share market becomes more open and investible, international investors' allocation will keep growing. Active investors may seek growth and performance in these sectors. It has been proven that in these three sectors have been favourites of overseas investors (by way of QFII/RQFII and Connect) over the past years. Many of the quality stocks are very competitive compared with their global peers. Table: Sectors with lower P/E in A than H Sectors with lower PE A share PE H share PE Restaurants & tourism Household appliances Textile & garments Food & beverages Agriculture & fishing Banks 8 9 Information technology Table: Sectors with higher ROE in A than H Sectors with higher ROE A share ROE H share ROE Non-ferrous metal Steel Basic chemical Construction Power equipment National defense Home appliance Food & beverages Banking Transporation Media

13 5.1 Crowded or not? Table: Top ten companies held by northbound investors Security Ticker Security Name Market cap held by northbound investors (bn RMB) As of floating A Share market cap (%) SS Kweichow Moutai Co., Ltd SZ Hangzhou Hikvision Digital Technology Co., Ltd SZ Midea Group Co Ltd SS Jiangsu Hengrui Medicine Co. Ltd SS Ping An SS Gree Electric Appliances Inc of Zhuhai SS China Yangtze Power Co Ltd SS Shanghai International Airport Co SS Inner Mongolia Yili Industrial Group SS SAIC Motor Corp Ltd Source: Wind, data as of 20-Mar

14 5.2 Crowded or not? Consumer Table: China saving growth vs China income growth 40% 30% 20% 10% 0% Big four banks personal savings growth YoY Residents' disposable income growth YoY Table: Tier 3 cities housing prices vs consumer sectors revenue growth Department stores revenue growth YoY (% LHS) Dairy revenue growth YoY (% LHS) Tourism revenue growth YoY (% LHS) Tier 3 cities housing price YoY (% RHS) Source: Wind, data as of 20-Mar

15 5.3 Crowded or not? Consumer Table: No. of trains run during New Year No. of trains during New Year Table: No. of passengers peak day (million person) Year Date 7th day of CNY 6th day of CNY 7th day of CNY 7th day of CNY 17th day of CNY No. of passenger (mn) Source: Wind, data as of 20-Mar

16 5.4 Crowded or not? Healthcare Table: Hengrui PE band Hengrui TTM PE Hengrui TTM PE three years' average Source: Wind, data as of 20-Mar