China Market Snapshot

Transcription

1 5/5/214 6/5/214 7/5/214 8/5/214 9/5/214 1/5/214 11/5/214 12/5/214 1/5/215 2/5/215 3/5/215 4/5/215 5/5/215 Equity Research Strategy China Market Snapshot Positive (maintained) Quantifying the amount of water from the north Alex Fan, CFA SFC CE No. ADJ GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Rmb1.9trn available from the north Since the announcement of new measures to relax and expand investment channels for cross-border investment in Mar, the Hong Kong equity market has experienced an uptrend with rising daily turnover, however it is still far behind the performance of mainland markets. Investors are wondering how much and when money from the north will arrive in Hong Kong. In answering this question, we first take a look at the potential amount of funds available in each of the three existing and announced channels. QDII, the Shanghai-Hong Kong Stock Connect (SH-HK) and Mutual Recognition of Funds (MRF) together amount to Rmb1,18bn. In addition, we expect the Shenzhen-Hong Kong Stock Connect (SZ-HK) to have the same quota as that for Shanghai (Rmb25bn), and we estimate that the potential QDII2 scheme will have a quota of Rmb5bn, assuming 1% of total household deposits in China. Hence we believe there will be Rmb1.9trn available from the north in the medium term. Given the fact that existing QDII funds have largely invested, we expect a Rmb2bn new quota will be granted in the next 12 months, together with an unused Rmb155bn quota in SH-HK, and Rmb2bn subscription from MRF, we estimate Rmb1,255bn in new funds will be available from the north in the coming one year. Assuming 5% of the new QDII and QDII2 quota will be invested in Hong Kong equities, and 25% of MRF will invest in Hong Kong, of which 6% investing in equities, we estimate Rmb735bn will be available from the north to invest in Hong Kong equities in the coming one year, which is about 3% of Hong Kong stock market cap and 5 days of daily turnover. Given the lead time for all these new channels to be ready for investment, we believe more meaningful money will be available starting from 2H15. However, if HK$71.5bn fund inflow in last Apr could have caused a 19% increase in Hang Seng Index, Rmb735bn could probably result in a much stronger market upturn. Market performance HSI Index(left) HSCEI Index(right) Source: Bloomberg Last week s market plunge is not a reason for panic selling The Hong Kong market posted the biggest daily decline in a month last Thursday driven by investor concerns about the Chinese government s supportive policy for the stock market. However, judging from the fact that the A-share market has not experienced any meaningful pullback during this bull run, profit-taking pressure has been building up. We consider this pullback is an inevitable correction without hurting the overall uptrend over the longer run. Two-pronged strategy unchanged Given that A-share investors have more exposure to the small-to-mid cap and ChiNext board stocks during this rally, the increasing risk averse sentiment among investors on government policy changes could put some pressure on these sectors, which could result in sector rotation to lower valuation blue chip stocks, lifting their performance. As a result, we believe large cap H-shares in the financial sectors (insurance, securities and banking) could benefit from the possible sector rotation in the A-share market while remaining key beneficiary of monetary easing. In addition, consolidation in the small-to-mid cap and ChiNext board stocks could help to divert some of the mainland China funds to the Hong Kong market, thus benefiting the small-to-mid cap and high growth stocks. Hence, we keep our twopronged strategy on financials and high growth sectors unchanged. Watch list outperformed Meanwhile, the ten stocks on our watch list recorded an average return of 2.7% in May. The best performing stocks were Chinasoft and GTJAI, up 23.3% and 16.1% respectively, while BoCom and CMS s weaker performance dragged the portfolio down. The overall performance beat the HSI and HSCEI during the period. For this month, we have fine-tuned our watch list to include China Mengniu (2319 HK, Accumulate) given the prospect of margin improvement and its synergy with Danone. We have also included Le Saunda (738 HK, Buy) due to its rapidly growing e- commerce contribution and undemanding valuation. In addition, we have replaced Chinasoft with IGG (82 HK, Buy) after the strong run of the former and IGG s imminent transfer to the main board, M&A and lagging valuation compared with online gaming peers. To maintain ten stocks in the watch list, we have removed Kangda International and CMS given limited short-term catalysts.

2 Quantifying the amount of water from the north Channels are fully established that will facilitate cross-border investment needs The number of channels available for investment between Hong Kong and mainland China have continued to increase as a result of the ongoing process of Rmb internationalization and liberalization of the equity market. On top of the well-established QDII, QFII and RQFII schemes, starting from Nov 214, the launch of the Shanghai-Hong Kong Stock Connect (SH-HK) has once again marked a quantum leap in opening another door for cross-border investment. The longawaited approval of the Mutual Recognition of Funds (MRF) scheme announced on May 22 came just in time as investment demand continues to rise. While the market is waiting for the official announcement of the launch date of the Shenzhen-Hong Kong Stock Connect (SZ-HK), there have been news reports that the Chinese government is actively preparing the launch of QDII2, an individual scheme to allow qualified individual investors to invest in overseas markets, including Hong Kong. The doors are now widely open for funds in both the north and south. How much money will come from the north? Since the CSRC approved mutual fund investment through the SH-HK on Mar and the CIRC approved investment by insurance companies in Hong Kong GEM Board stocks on Mar , the Hong Kong market has moved into a new phase of market uptrend and has seen a significant jump in daily turnover. The Hang Seng Index and H-share Index have risen 16% and 18% respectively YTD, but are still way behind the uptrend in the A-share market. Investors have built in high expectations for the amount of money that will flow from the north, but so far the HKMA s intervention record only shows money inflow of HK$71.5bn since Apr, while daily turnover once exceeded HK$29bn but has declined significantly. Everyone is waiting for money from the north, but how much money will actually come to Hong Kong, and when? Rmb1.9trn available in our view In answering this question, we first take a look at the maximum amount. According to the latest available information, the latest approved QDII quota is US$89.993bn, equivalent to about Rmb558bn, most of which we believe has already invested. SH-HK has a southbound quota of Rmb25bn, of which Rmb155bn remains unused. The recently announced MRF has placed an Rmb3bn quota for southbound investment, a portion of which will be invested in Hong Kong stocks. Meanwhile, we expect the southbound quota for SZ-HK to also be Rmb25bn, similar to that for Shanghai, while the biggest unknown is the potential amount of funds coming from QDII2. Assuming 1% of total household deposits (~Rmb5trn) will subscribe for QDII2 status, the quota will be Rmb5bn. Adding all this together, total potential funds from the north amount to Rmb1,898bn, a sizeable amount when comparing with the HK$3,995bn (Rmb24,8bn) market cap of the Hong Kong stock market and average daily turnover of HK$174bn (Rmb139bn) since Apr. A more conservative estimate is Rmb735bn in the next year However, a more realistic assessment gives a slightly lower number. Given the fact that existing QDII has already been largely invested, we expect a new quota of Rmb2bn to be granted, however since MRF will only partially invest in Hong Kong, we conservatively estimate Rmb1,255bn in new funds will be available from the north in the coming one year. Assuming 5% of the new QDII and QDII2 quota will be invested in Hong Kong equities, and 25% of MRF will invest in Hong Kong of which 6% will be invested in equities, we estimate there will be Rmb735bn available from the north to invest in Hong Kong equities in the coming one year, which is about 3% of Hong Kong stock market cap and 5 days of daily turnover. Moreover, given the lead-time for all these new channels to be ready for investment, we believe more meaningful money will be available starting from 2H15. However, if the HK$71.5bn fund inflow in last Apr could have caused a 19% increase in the Hang Seng Index, Rmb735bn may result in a much stronger market upturn. Figure 1: Potential funds from the north Quota New funds in next 12M In HK Equity Scheme Rmb1m Assumptions Rmb1m Rmb1m Assumptions QDII 558 US$899.93m as of 28 Apr % in HK equity SH-HK Connect 25 Rmb155bn unused MRF 3 Initial quota % in HK market, of which 6% in equity SZ-HK Connect* 25 Same as SH-HK Connect 2 2 QDII2* 5 1% of Rmb5 trillion on household savings % in HK equity Sources: GF Securities (HK) estimates Page 2

3 Macro review Most US economic data released last week were positive Sales of newly-built homes rebounded and home prices climbed around 1% in April, indicating rising demand in the housing market as supply remains tight. Consumer confidence rebounded from a four-month low in May, showing a small improvement in the private consumption sector. Core durable goods improved for two consecutive months, which may indicate that the economy is starting to crawl out from its 1Q15 slump. Although 1Q15 GDP was revised downwards to -.7% due to the strong US dollar, bad weather and west coast labor strikes, we believe the Fed would conclude that the weakness was a result of transitory factors. After Janet Yellen s speech on May 22, investors are now more certain that the Fed will raise interest rates this year. In our view, if employment data continue to show a steady improvement in the following months, we expect the Fed to raise rates at the Sep FOMC meeting to symbolize the beginning of monetary policy normalization. However, a rate hike does not mean the end of the low interest rate period, in our view. The pace of normalization is likely to be gradual, and the accommodative environment should continue for a prolonged period. European debt crisis the hot topic in the euro area again Negotiations between Greece and its creditors are entering their final phase with mixed signals from both sides. There are two main sticking points: labor market reform and primary surplus amount. Without a deal to get more loans, the Greek government will run out of cash. It will be unable to repay a series of loans to the IMF in June, the first of which is due on June 6. Investors are concerned that Greece may default in June, possibly even triggering a Grexit. In our view, Greece and its creditors both want to raise the stakes in the negotiations. However, both sides will have to pay a heavy price if Greece finally defaults on its debts. We are cautiously optimistic that there will be a last-minute compromise deal. Forex market the focus last week As US data have improved and Greece is still struggling in debt negotiations, the US dollar resumed an upward climb, rising to a one-month high. The euro fell below 1.1 against dollar again, and the dollar rose to its highest level in 12 years against the Japanese yen. The continued strong dollar environment provides a good opportunity for carry trades. Since interest rates in the eurozone and Japan are extremely low, investors can borrow euros or yen at low cost, and convert the funds into dollars and buy assets including bonds and stocks for the equivalent amount. We expect this trend to continue for the foreseeable future, meaning bond and stock markets should perform well after the previous correction. In China, policymakers seem uncomfortable with too much excess liquidity in the financial system The PBoC drained more than Rmb1bn from the financial system by selling repos to targeted financial institutions last week. However, we do not see this as a change in policy direction. One important point is that the PBoC only sold repos to targeted banks, but not to the public. The reason behind this may be that some specific banks cannot resolve excess liquidity problems and want to allocate money by buying repos from the central bank. In fact, the PBoC just released its annual report last week in which it warned that the economy is still facing challenges, and that the price levels are expected to remain volatile at a low level. We have not seen any signs of a policy change the latest tightening action is a special case and we expect the PBoC to continue to ease monetary policy in the near future. Another RRR and interest rate cut are still likely in the near term. Renminbi internationalization took an important step last week The IMF declared that the Renminbi is no longer undervalued, making a significant change after more than a decade of criticism of China s tight control of its currency. The IMF said that the Renminbi has held its value after substantial appreciation over the past year. In a review in October, IMF board members will decide on whether the Renminbi should be added to the Special Drawing Right (SDR) basket, which is now made up of the US dollar, British pound, Japanese yen and euro. We believe there is a high possibility that the PBoC will further widen the trading band of the Renminbi exchange this year, and let the currency become free-floating within three years. If the Renminbi became a reserve currency, we would expect more foreign capital to move to China, which would be a big boost for the Chinese financial markets and economy. Market Pullback inevitable but no change to the uptrend The Hong Kong market posted its biggest daily decline in a month last Thursday driven by investor concerns about the Chinese government s supportive policy for the stock market, as the PBoC s first repo purchase this year, Central Huijin s reduction in its stake in banking stocks and upcoming mega IPO issuances were all perceived negatively by the market. As the market fell further, some investors became concerned that leveraged accounts would be forced to close leading to an escalation of the Page 3

4 market decline. However, judging from the fact that the A-share market has risen so much in this bull run, profit-taking pressure has been building up. We consider this pullback an inevitable correction without hurting the overall uptrend in the longer run. Market down; online gaming the star Overall, the HSI was down 2.5% and HSCEI was down 2.3% in May, compared with a 3.8% rise in Shanghai and 23.2% rise in the Shenzhen market. Small cap stocks outperformed with the HS Small Cap Index up 3.2% in May, compared with a 1.9% decline in the HS Mid Cap Index and a 3.2% decline in the HS Large Cap Index. By sector, online gaming surged most, up 33% MoM, followed by software stocks (up 12%), while healthcare, consumer, insurance and wind power recorded positive returns during the month. Meanwhile, solar stocks plummeted driven by the Hanergy (566HK, NR) and Yingli incidents. Two-pronged strategy unchanged Given that A-share investors have more exposure to the small-to-mid cap and ChiNext board stocks during this rally, the increasing risk averse sentiment among investors on government policy changes could put some pressure on these sectors, which could result in sector rotation to lower valuation blue chip stocks, lifting their performance. As a result, we believe large cap H-shares in the financial sectors (insurance, securities and banking) could benefit from the possible sector rotation in the A-share market while remaining key beneficiary of monetary easing. In addition, consolidation in the small-to-mid cap and ChiNext board stocks could help to divert some of the mainland China funds to the Hong Kong market, thus benefiting the small-to-mid cap and high growth stocks. Hence, we keep our two-pronged strategy on financials and high growth sectors unchanged. Watch list outperformed Meanwhile, the ten stocks on our watch list recorded an average return of 2.7% in May. The best performing stocks were Chinasoft and GTJAI, up 23.3% and 16.1% respectively, while BoCom and CMS s weaker performance dragged the portfolio down. The overall performance beat the HSI and HSCEI during the period. For this month, we have finetuned our watch list to include China Mengniu (2319 HK, Accumulate) given the prospect of margin improvement and its synergy with Danone. We have also included Le Saunda (738 HK, Buy) due to its rapidly growing e-commerce contribution and undemanding valuation. In addition, we have replaced Chinasoft with IGG (82 HK, Buy) after the strong run of the former and IGG s imminent transfer to the main board, M&A and lagging valuation compared with online gaming peers. To maintain ten stocks in the watch list, we have removed Kangda International and CMS given limited short-term catalysts. Figure 2: Watch list performance Price 3-Apr 29-May Stock Ticker Rating HK$ HK$ % ch Ping An 2318 HK Buy GTJAI 1788 HK Buy HKEx 388 HK NR BoCom 3328 HK NR TCL Comm 2618 HK Buy Kangda Int 6136 HK Buy Chinasoft 354 HK Buy Tencent 7 HK NR CMS 867 HK Buy SZ Inv 64 HK Buy Sim Avg 2.7 HS Index HSCE Index Sources: Bloomberg, GF Securities (HK) Page 4

5 Rail machinery Auto Oil Telecom Tech Coal Insurance Power HSI HSCEI Solar Healthcare Consumer disc Banks Securities Environmental Wind Property Consumer staples Online gaming Solar Telecom Auto Rail Machinery Oil Coal Power Property Technology HSCEI HSI Banks Securities Environmental Consumer disc Insurance Wind Consumer staples Healthcare Online gaming % % % Figure 3: Market performance (1-week) Figure 4: China indices performance (1-month) 3% 25% 2% 15% -1 1% -2 5% -3-4 % -5% HS Index HSCEI HS L Cap HS M Cap SHComp HS S Cap SZComp ChiNext SZ S&M Sources: Bloomberg, GF Securities (HK) Figure 5: Sector performance (1-week) Figure 6: Sector performance (1-month) Sources: Bloomberg, GF Securities (HK) Page 5

6 Rating Definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). 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The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-3/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 6