China Stocks' Precarious Start to 2016 Brings Valuation Changes Analysts: Tim Craighead & Elaine Tung Jan 8, 2016

Transcription

1 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 1 of 13 China Stocks' Precarious Start to 2016 Brings Valuation Changes Analysts: Tim Craighead & Elaine Tung China's stock market has stayed volatile as 2016 begins, continuing the swings between elation and depression experienced last year. The plunge during the first four trading days erased almost 12% from the CSI 300 index, led by major reversals in the winners from late Valuation has slipped closer to the levels of the MSCI World. Many "new economy" sectors are trading below global norms when relatively lofty earnings growth expectations are considered. Hong Kong shares continue to lag. Key Points: * China's Stock Reversal Rattles Sectors as 4Q Leaders Fall Hard * China Small Caps in the Vanguard of Stock Performance, Valuation * Rout Brings China P/E Near Earth, Amid Higher Estimated Growth * Growth at a Reasonable Price More Evident After China Stock Rout * China Stocks in Hong Kong Are Ugly Stepchild Even With Makeover The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

2 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 2 of 13 China Yuan and Stock Drop; Causes and Consequences: BI Webinar Analysts: Tim Craighead & Tom Orlik The Chinese market's start to 2016 won't soon be forgotten. A 12% plunge over four days tripped new circuit breakers, leading to early closures on two days. Our webinar explores the dynamics behind the dramatic drop in China's mainland stock markets and currency. We look at the economic links between a weaker yuan and falling shares, and also examine performance, earnings growth expectations and valuations in the selloff's wake. Click the exhibit to register and listen. Economic and Market Considerations HTTP <GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

3 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 3 of 13 China's Stock Reversal Rattles Sectors as 4Q Leaders Fall Hard Analyst: Tim Craighead China's stock-volatility ripple effect reaches beyond its major indexes. The gyrations have sent some individual sectors swinging even more wildly. The technology and health-care sectors are among 2016's worst performers so far, both plummeting more than 13% in four days of trading. These groups had helped spearhead the 2H rebound that began in late August, when both advanced more than 27%. Tech, health-care and consumer stocks are at the forefront of China's economic rebalancing efforts. China Stocks' Reversals of Fortune avat <GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

4 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 4 of 13 China Small Caps in the Vanguard of Stock Performance, Valuation Analyst: Tim Craighead Chinese stocks that rocket highest tend to fall hardest. Such is the plight of small caps. Shanghai Composite stocks in the smallest market-cap decile are down an average 10% in the first four days of trading. This compares to a 5% decline for stocks in the largest market-cap decile. During last year's 2H rally the smaller stocks surged 64%, far outpacing the 26% gain for their largest peers. This pattern may continue as long as speculative individual investors drive China's markets. China's Market Cap Performance Reversal avat <GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

5 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 5 of 13 Rout Brings China P/E Near Earth, Amid Higher Estimated Growth Analyst: Tim Craighead China stock valuations have dropped towards global norms following 2016's inauspicious start, even with elevated earnings expectations. The median stock in the CSI 300 Index now trades at 20.7x forward consensus earnings, compared with 15.9x for the MSCI World. Underpinning these multiples, expected earnings growth is far higher in China, with median net income estimated to increase 18% in 2016 vs. 8% for the global benchmark. Year-end earnings results may prove these expectations to be optimistic. Can Higher Growth Underpin Higher Valuations? avat <GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

6 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 6 of 13 Growth at a Reasonable Price More Evident After China Stock Rout Analyst: Tim Craighead GARP investors comparing earnings growth to P/E multiples may find China's stock market more appealing after 2016's first four days. The P/E-to-growth, or PEG, ratio is now near or below 1.0 for several sectors for both largeand small-cap members of the CSI 300 Index. This is particularly true for "new economy" sectors at the forefront of China's economic rebalancing, such as health care, consumer products, communication and technology. Overall, China trades at a far lower PEG than the MSCI World. China P/E-to-Growth Ratios Trail World's avat <GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

7 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 7 of 13 China Stocks in Hong Kong Are Ugly Stepchild Even With Makeover Analyst: Tim Craighead The MSCI China Index remains relegated at an extreme discount to mainland China valuations, even after rebalancing. Adjustments were made in late-2015 to reflect the changing nature of China's economy. Consumer, technology and other "new economy" shares were a welcome addition to this globally-accessible index. Nonetheless, it trades at only 9.6x forward earnings, which is one of lowest PEs among regional indices globally. This may change when, and if, global investors regain confidence in China's economy. China Multiples Differ Widely, H.K. Lags G BI3 1665<GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

8 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 8 of 13 Dual-Listed China Stock Disconnect Unaffected by Market Rout Analyst: Tim Craighead The gulf between dual-listed China shares trading in Hong Kong versus mainland exchanges hasn't changed with this week's stock turbulence. The AH Premium Index is stubbornly at 139, denoting a 39% premium of mainland stocks over their H.K. counterparts on a market capitalization-weighted basis. More market reforms facilitating twoway investment flows may provide for better arbitrage over time. For now, the H.K. shares suffer from global concerns about China, while mainland shares move with speculators' whims. AH Premium Index Sustains Heights G BI3 3693<GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

9 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 9 of 13 Impotent China Policy Responses Raise Volatility, Ice Liquidity Analyst: Alex Gardner China's regulatory responses to plunging and volatile stocks seemed impotent again this week as a circuit breaker established after last year's market rout halted trading for two of 2016's first four trading days. Liquidity was chilled and the mechanism was shelved indefinitely. Measures taken last year including the suspension of IPOs, selling restrictions on major shareholders and tightening of automated trading laws, amid arrests and detentions of financiers, haven't stopped market volatility or share drops. Volatility, Falls Resistant to Chinese Policies G BI3 4413<GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

10 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 10 of 13 China's Stock Valuations Near Average for World's Major Markets Analysts: Tim Craighead & Elaine Tung Nov 30, 2015 China's market value equals 64% of its GDP, up from less than 50% at the August low. It's at 80% when Chinese stocks listed in Hong Kong and the U.S. are included. This removes most of the discount vs. other major markets that began to rebound after the summer collapse. The same is true for price-tosales and earnings ratios, with the Shanghai Composite trading at 1.2x forward sales estimates and a P/E of 13.4x. Higher growth forecasts underpin China's multiples, but negative revisions have reduced confidence. China Multiples in Line With Global Peers avat <GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

11 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 11 of 13 Can China Sustain Its Narrowing Market-Cap Discount vs. GDP? Analysts: Tim Craighead & Elaine Tung Nov 30, 2015 The bounce-back in China's market-cap-to-gdp ratio since the summer selloff is now raising questions about sustainability. Before the 5.5% plunge on Nov. 27, the equity market value was 68% of China's GDP. While off its August low, it's still down from the June peak of almost parity. China also remains at a discount to the aggregated global market, 0.84x vs. 1.4x for the U.S. That said, China has only reached this level in four other bull-market periods since 2005, two of which peaked near the current reading. China Valuation Bounces Off Average G BI3 1471<GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

12 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 12 of 13 Volatile Smaller China Stocks at Vanguard of Momentum Shifts Analysts: Tim Craighead & Elaine Tung Nov 4, 2015 China's stock market has been a roller coaster in 2015, and smallercap shares are in the first car. They led the climb earlier this year then bore the brunt of selling into early July. When the government acted with stabilization initiatives, it was the small caps that rallied. As global and Chinese growth concerns depressed share prices in August, small caps underperformed. October's reversal saw the group again in the lead, with the SSE 380 index up 15% for the month vs. 9.3% for the SSE 180. Small Caps Lead China's Rollercoaster Market G BI3 1800<GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned

13 Themes > Chapter: Growth and Value Consequences of China's Market Slump >> Exhibit 13 of 13 China Stock Indexes Sustain Lead Over Hong Kong Amid Volatility Analysts: Tim Craighead & Elaine Tung Dec 3, 2015 Whether a stock trades in Hong Kong or Shanghai has made a big difference in 2015, as mainland China shares outpaced those in the former British colony. Shanghai and Shenzhen indexes are up more than 55% since Sept. 1, 2014 vs. a 9% drop for the MSCI China. Shares on the mainland are also much more volatile, buffeted by individual investors' speculation, stimulus initiatives and state-support measures. Hong Kong stocks have been more linked to China's slowing economy and global fundamentals. Shanghai, Shenzhen Split From Hong Kong G BI3 1431<GO> The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and (the "Services") are owned and distributed by Bloomberg Finance L.P. ("BFLP") in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly owned