Investment opportunities under SZ-HK Stock Connect

Transcription

1 ` Summary: will further relax restrictions for Chinese citizens on investing Hong Kong stocks and help narrow the valuation between Hong Kong and China stock markets. Coupled with the devaluation of RMB recently, it is a way to get rid of risk of RMB devaluation by investing Hong Kong stocks. The factors mentioned are expected to allure more capital inflow from Mainland China to Hong Kong stock market in the future. According to the data from HKEX, 794 constituent stocks of the SZSE Component Index and the SZSE Small/Mid Cap Innovation Index are expected to be eligible for Nouthbound trading while 96 newly-added Hong Kong stocks may be eligible for Southbound trading under SZ-HK Stock Connect. We observed that the Hong Kong stocks mentioned above outperformed the A-shares from 1 st Jan 2016 to 21 st Sep 2016 but their average dividend yield was higher than that of the A-shares. The eligible stocks under SH-HK Stock Connect with unique investment features are expected to be refocused by Chinese investors as more road shows will be conducted by listed companies ahead of the official launch of. October 4, 2016 Yue Xiu Securities Research (852) research@yxsh.hk We found that the price discount of H-shares against A-shares of A/H shares dual-listed in SZSE and HKEX had positive relationship with the 1-year return of such H-shares. Thus, investors are advised to pay attention on the ones with the largest price discount of mentioned H-shares. List of stock recommendations: Table 1: List of stock recommendations under Sector Stock picks Consumer Good 361 DEGREES (01361.HK), XTEP INT'L (01368.HK), LI NING (02331.HK), POU SHENG INT'L (03813.HK) IT KINGDEE INT'L (00268.HK), CHINASOFT INT'L (00354.HK) Health care PHOENIXHEALTH (01515.HK), SILVERMAN HL (01616.HK), UNI MEDICAL (02666.HK) Electric car and TIANNENG POWER (00819.HK), BYD COMPANY battery stocks (01211.HK) A/H shares ZHEJIANG SHIBAO(01057.HK), SHANDONG MOLONG (00568.HK), NE ELECTRIC(00042.HK) Brokerage HAITONG INT'L(00665.HK),BRIGHT SMART Companies (01428.HK), GUOTAI JUNAN I (01788.HK) Stock Exchange HKEX(00388.HK) Stocks that are eligible for trading under SH-HK Stock Connect High yield stocks TENCENT(00700.HK), CHINA MOBILE(00941.HK), GALAXY ENT(00027.HK), SANDS CHINA LTD (01928.HK), AIA (01299.HK), HSBC HOLDINGS (00005.HK) GIORDANO INT'L (00709.HK), CHINA LILANG (01234.HK) P.1

2 Content Background... 3 will implement this year. Hong Kong stocks outperformed A-shares since Milestones of... 4 Comparison between SH-HK and... 5 Structural difference between Shanghai, Shenzhen and Hong Kong stock markets... 6 Distribution of sectors... 6 Comparison of valuation and dividend yield between the three stock markets... 7 A/H Shares... 7 Key factors for Chinese citizens to invest HK stocks after the implementation of Hong Kong stocks generally have a lower valuation compared to A-shares The investment quota and eligible Hong Kong stocks for trading will be enlarged under SZ-HK Stock Connect Hong Kong stocks outperformed A-shares of China stock markets during the past one year and RMB devaluation allures more investment on Hong Kong stocks Other Factors Chinese measures for reformation of financial sectors may heat up the market sentiment Summary Investment opportunities under Constituent stocks of Hang Seng Composite SmallCap Index Results Return of different sectors in China and Hong Kong stock markets Some eligible stocks under SH-HK Stock Connect may be refocused H-shares of A/H shares dual-listed in SZSE and HKEX Stock Recommendation P. 2

3 Background will implement this year. Hong Kong stocks outperformed A-shares since The State Council of China finally approved the long awaited Shenzhen-Hong Kong Stock Connect ( ) on 16 th Aug According to the officer of China Securities Regulatory Commission (CSRC), will be officially launched in late November this year. Based on the successful implementation of Shanghai-Hong Kong Stock Connect ( SH-HK Stock Connect ), will further reinforce the interconnection between HK and China capital markets and increase investment choices for Hong Kong and Chinese investors. Under, the aggregate quota mechanism of SH-HK Stock Connect has been abolished but daily quota has been remained. Hong Kong stock market heated up after the announcement of approval on the SZ-HK Stock Connect with Hang Seng Index ( HSI ) and Hang Seng China Enterprise Index ( HSCEI ) outperforming the Chinese stock indexes. From 15 th Aug 2016 to 21 st Sep 2016, HSI aggregately increased 3.2%, in contrast with a 3.2% and 2.2% decline of Shanghai Composite Index ( SHCI ) and Shenzhen Component Index ( SZCI ) respectively. At the same time, the usage of Southbound trading under SH-HK Stock Connect increased significantly. On 9 th Sep 2016, fund inflow to Hong Kong stock market via Southbound trading under SH-HK Stock Connect reached to the highest level of RMB 6.089bn in this year. Graph 1 : HSI outperformed SHCI and SZCI since the announcement of approval on 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 15/8/ /8/ /8/2016 5/9/ /9/ /9/2016 恒生指数回报 HSI Return 上证指数回报 SHCI Return 深证成指回报 SZCI Return Data Sources:Bloomberg, Yue Xiu Securities Research compiled P. 3

4 Milestones of Graph 2: Milestones of 2 nd Nov 2014 SH-HK Stock Connect launched and the market started to pay attention to the mechanism of SZ-HK Stock Connect. 4 th Dec 2014 The <Project of facilitating the Shenzhen and Hong Kong's modern service indusrty cooperation zone of Shenzhen Qianhai > was offically delivered by the authority of Shenzhen Qianhai. Therefore, SZ-HK Stock Connect was offically included in the pilot program. 5 th Jan 2015 Prime minister Mr. Li Keqiang stressed that "there should be after SH-HK Stock Connect" during his inspection tour in Shenzhen. Feb 2015 President of Shenzhen Stock Exchange Mr. Wu Lijun visited Hong Kong and had discussions with related authorities and institutions to speed up the preparation works for. Mar 2016 Prime minister Li Keqiang pointed out "Launch timely" in his government work report. 16 th Aug 2016 State Council of China approved <'s implementation plan> during the State Council meeting. 16 th Nov 2016 is expected to launch. Data Sources:HKEX, Open information, Yue Xiu Securities Research Compiled P. 4

5 Comparison between SH-HK and According to the updated information, will no longer set the aggregate quota. Meanwhile, the authorities have abolished the aggregate quota of SH-HK Stock Connect but the daily quota would still be imposed on both SZ-HK and SH-HK Stock Connect programs. Under, Hong Kong and overseas investors could invest on constituent stocks of SZSE Component & SZSE Small/Mid Cap Innovation indexes with a market capitalization of at least RMB 6bn, and A-shares of the A/H shares dual-listed in SZSE and HKEX through the Northbound trading of. Meanwhile, Chinese investors would also have more investment choices of Hong Kong stocks. Apart from the existing eligible stocks under SH-HK Stock Connect, Chinese investors are allowed to invest on the constituent stocks of Hang Seng SmallCap Index ( HSSI ) with market capitalization of at least HKD 5bn and H-shares of the A/H shares dual-listed in SZSE and HKEX through the Southbound trading of. Table 2: Difference between SH-HK Stock Connect and Under SH-HK Stock Connect Under Announcement and launch time Implemented from 17 Nov 2014 Planned to launch in Nov 2016 Investment Access Aggregate Quota (RMB) Southbound Connect Hang Seng Composite LargeCap Index, Hang Seng Composite MidCap Index, H-shares of SSE-listed A/H shares Excluding: SZSH-listed A/H shares, REITS SH Northbound Connect SSH 108, SSH 380, A-shares of SSE-listed A/H shares Southbound Connect Eligible stocks under SH-HK Stock Connect, Hang Seng Composite SmallCap Index with a market capitalization of at least HKD 5bn, H-shares of SZSE-listed A/H shares SZ Northbound Connect Constituent stocks of SZSE Component & SZSE Small/Mid Cap Innovation indexes with a market capitalization of at least RMB 6bn, A-shares of SZSE-listed A/H shares SH Northbound Connect SSH 108, SSH 380, A-shares of SSE-listed A/H shares Excluding: REITS 250bn 300bn None None 300bn (abolished on 17 (abolished on 17 (abolished on 17 Aug 2016) Aug 2016) Aug 2016) 10.5bn 13.0bn 21.0bn 13.0bn 13.0bn Daily Quota (RMB) Eligibility RMB 500K None RMB 500K During the first stage, around 200 stocks in Shenzhen GEM board are only eligible for institutional investors Remarks ETFs will be included in the future Sources: Related official announcements, Yue Xiu Securities Research compiled None P. 5

6 Structural difference between Shanghai, Shenzhen and Hong Kong stock markets Distribution of sectors We have conducted researches on the stocks of Shenzhen Stock Exchange (SZSE), Shanghai Stock Exchange (SSE), and Hong Kong Main Board. The captioned listed companies were sorted according to the Global Industry Classification Standard (GICS) and divided by the number of such listed companies. After that, the following conclusions were made. TMT related stocks constitutes 19.0% of SZSE-listed A-shares and the proportion was much higher than 7% of SSE-listed A-shares and 10% of stocks listed in Hong Kong Main Board. As compared to the proportion of different sectors of SZSE and SSE, Hong Kong Main Board has fewer materials and industrials players but has more consumer goods, financials and real estate stocks. Graph 3: Distribution of different sectors listed in SZSE, SSE and Hong Kong Main Board Sources: Bloomberg, Yue Xiu Securities Research compiled P. 6

7 Comparison of valuation and dividend yield between the three stock markets On 21 st Sep 2016, based on the data from HKEX and SSE (Table 3), average P/E ratio of Hong Kong stocks was significantly lower than that of SSE-listed A-shares and SZSE-listed A-shares. Meanwhile, Hong Kong stocks generally have a higher dividend indicated yield than A-shares of Shanghai and Shenzhen stock markets in accordance to the data from Bloomberg. Table 3: Valuation of Hong Kong stocks, SSE-listed and SZSE-listed A-shares Stocks listed in Hong Kong Main Board SSE-listed A-shares SZSE-listed A-shares Average P/E(x) Sources: HKEX, SSE, Yue Xiu Securities Research compiled Table 4: Average dividend yield of Hong Kong stocks, SSE-listed and SZSE-listed A-shares Stocks listed in Hong Kong Main Board SSE-listed A-shares SZSE-listed A-shares Average P/E(x) 2.19% 0.52% 0.85% Sources: Bloomberg, Yue Xiu Securities Research compiled A/H Shares On 21 st Sep 2016, for the A/H shares dual-listed in China stock markets and Hong Kong Main Board, most of which implied a premium of A-shares to their corresponding H-shares. According to Graph 4, it is worth to note that the Hang Seng China AH Premium Index formed a downward trend for recent months before the announcement of approval on in August This may show investors speculation on narrowing the price difference between A- and H- shares of the A/H shares after the launch of. Graph 4: Hang Seng China AH Premium Index declined in recent months /9/ /11/ /1/ /3/ /5/ /7/2016 Sources: Bloomberg, Yue Xiu Securities Research compiled P. 7

8 Key factors for Chinese citizens to invest Hong Kong stocks after the implementation of 1. Hong Kong stocks generally have a lower valuation compared to A-shares According to the data from HKEX and SSE shown in Graph 5, on 21 st Sep 2016, the average P/E ratio of Hong Kong stocks was 11.04x while the average P/E ratios of SSE-listed and SZSE-listed A shares were 15.19x and 41.79x respectively. Based on the data above, it s concluded that the average valuation of Hong Kong stocks was significantly lower than that of SSE-listed and SZSE-listed A-shares. Graph 5. Average P/E ratio of Hong Kong stocks was lower than A-shares listed in Shanghai and Shenzhen stock exchanges Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Data Sources:Bloomberg,Yue Xiu Securities Research compiled 2. The investment quota and eligible Hong Kong stocks for trading will be enlarged under enlarged the choices of Hong Kong stocks eligible for investors from Mainland China. According to the official information, Southbound trading mechanism will include constituent stocks of Hang Seng Composite Small Cap Index ( HSSI ) with market capitalisation of not less than HKD 5.0bn under. Based on the above screening criteria, 81 constituent stocks of HSSI are expected to be eligible for Southbound trading under SZ-HK Stock Connect. (Refer to Table 5 for detailed information) In addition, the H-shares of A/H shares dual-listed in SZSE and HKEX Main Board will be also included in the eligible stock list under. On 21 st Sep 2016, there are 17 H-shares of the A/H shares which will be included in the eligible stock list for Southbound trading (some of them are also constituent stocks of HSSI). (Refer to Table 6 for detailed information) P. 8

9 Table 5: HSSI constituent stocks are expected to be eligible for Southbound trading under Sector Code Name P/E 1-year Return (%) Sector Code Name P/E 1-year Return (%) Consumer 1317.HK MAPLELEAF EDU % Real 1238.HK POWERLONG % Good 3813.HK POU SHENG INT'L % Estate 1030.HK FUTURE LAND % 2678.HK TEXHONG TEXTILE % 1628.HK YUZHOU PPT % 819.HK TIANNENG POWER % 563.HK SH IND URBAN % 256.HK CITYCHAMP % 1777.HK FANTASIA % 2331.HK LI NING % 163.HK EMPEROR INT'L % 547.HK DIGITAL DOMAIN % 1966.HK CHINA SCE PPT % 1070.HK TCL MULTIMEDIA % 35.HK FE CONSORT INTL % 198.HK SMI HOLDINGS % 81.HK CH OVS G OCEANS % 1886.HK HUIYUAN JUICE % 978.HK CHI MER LAND % 1828.HK DCH HOLDINGS % 1778.HK COLOUR LIFE % 709.HK GIORDANO INT'L % 1528.HK RS MACALLINE % 2255.HK HAICHANG HLDG % 337.HK GREENLAND HK % 3836.HK HARMONY AUTO % Health 419.HK HUAYI TENCENT % 3998.HK BOSIDENG % Care 1302.HK LIFETECH SCI % 1368.HK XTEP INT'L % 2005.HK SSY GROUP % 1361.HK 361 DEGREES % 1666.HK TONG REN TANG % 1448.HK FU SHOU YUAN % 1513.HK LIVZON PHARMA % 3818.HK CHINA DONGXIANG % 2666.HK UNI MEDICAL % 321.HK TEXWINCA HOLD % 3933.HK UNITED LAB % 1661.HK WISDOM SPORTS % 1515.HK PHOENIXHEALTH % 1234.HK CHINA LILANG % 775.HK CKLIFE SCIENCES % 1188.HK HYBRID KINETIC % 587.HK HUA HAN HEALTH % Materials 1636.HK CMRU % Telecom 1883.HK CITIC TELECOM % 546.HK FUFENG GROUP % 1310.HK HKBN % 976.HK CHIHO-TIANDE - 7.0% Utilities 855.HK CHINA WATER % 2168.HK YINGDE GASES % 1381.HK CANVEST ENV % 2233.HK WEST CHINA CEMENT % 579.HK JNCEC % 3788.HK CHINA HANKING % 816.HK HUADIAN FUXIN % IT 1980.HK TIANGE % 1811.HK CGN NEW ENERGY % 777.HK NETDRAGON % 735.HK C P NEW ENERGY % 451.HK GCL NEWENERGY % Industrials 729.HK FDG EVEHICLES % 698.HK TONGDA GROUP % 1052.HK YUEXIUTRANSPORT % 2369.HK COOLPAD GROUP % 658.HK C TRANSMISSION % 354.HK CHINASOFT INT'L % 598.HK SINOTRANS % 268.HK KINGDEE INT'L % 3382.HK TIANJINPORT DEV % 327.HK PAX GLOBAL % 2208.HK GOLDWIND % 3393.HK WASION GROUP % 368.HK SINOTRANS SHIP % 1236.HK NATIONAL AGRI % 1829.HK CMEC % Finance 1963.HK BCQ % 1685.HK BOER POWER % 378.HK FDG KINETIC % 1101.HK HUARONG ENERGY % Table 6: H-shares of A/H shares dual-listed in SZSE and Hong Kong Main Board under Sector Code Name P/E 1-year Return (%) Sector Code Name P/E 1-year Return (%) Energy 568.HK SHANDONG MOLONG % Health 719.HK SHANDONG XINHUA % Consumer 1057.HK ZHEJIANG SHIBAO % Care 1513.HK LIVZON PHARMA % Good 921.HK HISENSE KELON % Industrials 42.HK NE ELECTRIC % 1211.HK BYD COMPANY % 2338.HK WEICHAI POWER % Materials 1812.HK CHENMING PAPER % 895.HK DONGJIANG ENV % 347.HK ANGANG STEEL % 2208.HK GOLDWIND % IT 763.HK ZTE % 1157.HK ZOOMLION % Finance 1776.HK GF SEC % 2039.HK CIMC % Real Estate 2202.HK CHINA VANKE % P. 9

10 Return(%) Investment opportunities under 3. Hong Kong stocks outperformed A-shares of China stock markets during the past one year and RMB devaluation allures more investment on Hong Kong stocks According to table 7, Hong Kong stocks outperformed A-shares in recent months thanks to the speculation on the launch of and other catalysts. Table 7: HSI outperformed SHCI and SZCI since month return 3-month return YTD return 1-year return 3-year return HSI +3.2% +14.5% +8.0% +8.8% +0.7% SHCI -2.6% +5.1% -14.5% -4.1% +38.1% SZCI -2.7% +4.5% -16.4% +4.0% +24.8% Data Sources : Bloomberg, Yue Xiu Securities Research compiled Graph 6. From 21 st Sep 2015 to 21 st Sep 2016, HSI had a higher accumulated return than that of SHCI and SZCI 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% +8.8% +4.0% -4.1% -20.0% 21/9/ /11/ /1/ /3/ /5/ /7/ /9/2016 恒生指数回报上证指数回报深证成指回报 HSI return SH Comp return SZ Comp return Data Sources : Bloomberg, Yue Xiu Securities Research compiled RMB devalued around 2.60% against USD from 1 st Jan 2016 to 21 st Sep Due to the continuous downward pressure for China economy, RMB is expected to face increasing pressure on devaluation in coming years. Thus, there are more incentives for Mainland investors to increase their overseas asset allocation. P. 10

11 Return(%) Investment opportunities under In fact, USD is a well-recognised safe haven. Since HKD is currently pegged with USD, Mainland investors could get rid of the risk of RMB devaluation by increasing their investment on Hong Kong stocks. All in all, more Mainland investors are expected to invest in Hong Kong stocks for mid- to long- term investment through Southboard trading under. Graph 7: HSI yearly return amounted to 13.2% in term of RMB and significantly outperformed SHCI 20.0% 15.0% 10.0% +13.2% 5.0% 0.0% -5.0% -4.1% -10.0% -15.0% -20.0% 21/9/ /11/ /1/ /3/ /5/ /7/ /9/2016 恒生指数回报 HSI return(in ( 以人民币计算 term of RMB) ) 上证指数回报 Return of SH Comp Index Data Sources : Bloomberg, Yue Xiu Securities Research compiled P. 11

12 4. Other Factors Chinese measures for reformation of financial sectors may heat up the market sentiment China insurance funds were allowed to invest in more Hong Kong stocks China Insurance Regulatory Commission ( CIRC ) recently promulgated a series of new rules to relax restrictions on the investment of insurance proceeds. These new rules were believed to be the first batch of the 13 new rules in relation to the investment of insurance proceeds which have been intensively discussed by CIRC. It is expected that more rules regarding the investment of insurance proceeds will be issued by CIRC in the near future. According to the new rules, China insurance funds are allowed to invest in Hong Kong stocks of GEM board apart from stocks listed in Hong Kong Main Board. For enlarging investment choices of Hong Kong stocks for China insurance funds, this may boost the investment sentiment of Hong Kong stock market. Mainland-Hong Kong Mutual Recognition of Funds China Securities Regulatory Commission ( CSRC ) and Securities & Futures Commission of Hong Kong ( HK SFC ) released the Hong Kong Mutual Recognition of Funds (MRF) Interim Administrative Provisions (referred to as regulation) on 22 nd May 2015, with effect from 1 st Jul This is considered to have the same far-reaching impact on the development of the Hong Kong financial market as the implementation of SH-HK Stock Connect. According to the regulation, the authorised fund should have a fund size of over RMB 200mn and have been set up and operated for more than 1 year. Besides, these funds have to be registered and managed at local authorities. In addition, the scope of fund investment includes stocks, bonds, mixed asset funds, unlisted index funds and ETF. Graph 8: Timelines for Mainland-Hong Kong Mutual Recognition of Funds Jan 2013 HK SFC announced the Mainland- Hong Kong Mutual Recognition of Funds 22 nd May 2015 CSRC and HK SFC jointly released the <Hong Kong Mutual Recognition of Funds (MRF) Interim Administrative Provisions> 1 st Jul 2015 Mainland-HK Mutual Recognition of Funds was effective 18 th Dec 2015 CSRC and HK SFC approved first batch of 7 funds for cross-border sales to the puclic under the MRF scheme Data Sources: HKEX, Open information, Yue Xiu Securities Research compiled P. 12

13 5. Summary The up-coming is expected to further relax the restrictions for investors from Mainland China to invest Hong Kong stocks on the base of SH-HK Stock Connect. Coupled with the reduction of barriers for Mainland citizens to invest foreign markets including Hong Kong market triggered by continuous reformation of financial market in China, these are expected to drive up the performance of Hong Kong stock market as well as narrow the valuation between Hong Kong and Mainland stock markets. To conclude, the impact of is expected to be more far-reaching than SH-HK Stock Connect. P. 13

14 Investment opportunities under 1. Constituent stocks of Hang Seng Composite SmallCap Index We conducted a sectorial performance comparison between China A-shares and Hong Kong stocks which are eligible stocks for trading under the SH-HK Stock Connect and potentially for upcoming on 21 st Sep We grouped the stocks into different categories in accordance to the Global Industry Classification Standard ( GICS ) 1 for further analysis on the performance of different sectors. By comparing the different return 2 between the different sectors in the three stock markets, stocks potentially benefited from the launch of SZ-HK Stock Connect are selected. According to the most updated information in relation to the from HKEX and HK SFC, the criteria for the calculation on market capitalisation of constituent stocks of the relevant index for the purpose of determining its eligibility for trading under (which is subject to regulatory approval) are shown as below. Northbound Trading Each constituent stock of the SZSE Component Index and the SZSE Small/Mid Cap Innovation Index: The capitalisation of each constituent stock should be RMB 6bn or above; The average daily market capitalisation of the constituent stock in the 6 months prior to the periodic review of the relevant index; or If the stock is listed within the 6 months prior to the periodic review of the relevant index, its average daily market capitalisation in the period since it was listed. Besides, SZSE-listed stocks which are subsequently placed under risk alert (i.e. ST and *ST stocks) are excluded in the list. Southbound Trading Each constituent stock of the Hang Seng Composite SmallCap Index( HSSI ): The capitalisation of each constituent stock should be HKD 5bn or above; The average month-end market capitalisation of the constituent stock in the 12 months prior to the periodic review of the index; or If the stock is listed within the 12 months prior to the periodic review of the index, its average month-end market capitalisation in the period since it was listed. 1 We combined Consumer Discretionary and Consumer Durables into Consumer Good 2 We measured the return based on the change of market capitalisation P. 14

15 For the review period, HKEX pointed out that the determination of eligibility for securities to be traded under will be based on the latest index review of the respective indexes. Assuming the launch of to be before the end of 2016, the applicable 6-month period for calculating the market capitalization of a constituent stock of the SZSE Component Index or the SZSE Small/Mid Cap Innovation Index for Northbound Trading was from 1 st Nov 2015 to 30 th Apr 2016, both days inclusive. For Southbound Trading, the applicable 12-month period for calculating the market capitalisation of a constituent stock of the HSSI was from 1 st Jul 2015 to 30 th Jun 2016, both days inclusive. Based on the aforementioned methodology, 789 constituent stocks of SZSE-listed A-shares of the SZSE Component Index and the SZSE Small/Mid Cap Innovation Index as well as 5 A-shares of SZSE-listed A/H shares (not the constituent stocks of SZCI and SZSE Small/Mid Cap Innovation Index) may be eligible for the Northbound Trading under. Meanwhile, 81 constituent stocks of the Hang Seng Composite SmallCap Index and 15 H-shares of SZSE-listed A/H shares but not the constituent stocks of the HSSI may be eligible for the Southbound Trading under. Table 8: Statistics for stocks under the SH-HK Stock Connect and SZ-HK Stock Connect 3 SZSE-listed A-shares SSE-listed A-shares Stocks listed in HK Main Board Number of eligible stocks Historical P/E(x) Historical P/B(x) Average Dividend yield (%) month return -1.4% -1.5% +3.0% 3-month return +9.3% +13.2% +16.3% Year to date return % -3.7% +6.2% 1-year return +70.5% +32.5% +14.9% Data Sources : HKEX, Bloomberg, Yue Xiu Securities Research compiled We summarised the average valuation, dividend yield and return of the aforementioned stocks that are expected to be eligible for trading under the upcoming shown in Table 8. It is noted that the return of Hong Kong stocks from 1 st Jan 2016 to 21 st Sep 2016 generally outperformed the A-shares. Besides, the average P/E ratio and P/B ratio of Hong Kong stocks were lower than that of the A-shares but the average dividend yield of Hong Kong stocks was higher than that of the A-shares. 3 Sample period: 19 th Sep 2015 to 21 st Sep The year-to-date return period was from 1 st Jan 2016 to 21 st Sep 2016 P. 15

16 Results Return of different sectors in China and Hong Kong stock markets Table 9 : Return 5 for stocks that are eligible / potentially eligible for trading under the SH-HK Stock Connect and during the past 1 year 6 A-shares HK stocks Materials +70.9% +31.0% Information Technology +86.5% +26.6% Consumer Good +58.8% +20.6% Financials +35.5% +3.5% Real Estate +31.7% +24.2% Health Care +51.6% +8.7% Utilities +24.2% -8.9% Industrials +38.3% +10.1% Energy +12.1% -2.2% Telecommunication -3.9% +8.3% Data Sources:Bloomberg, Yue Xiu Securities Research compiled 5 We measured the return based on the change of market capitalisation 6 Data period: 21 st Sep st Sep 2016 P. 16

17 Table 10 : Historical P/E ratio and P/B ratio for stocks that are eligible / potentially eligible for trading under the SH-HK Stock Connect and the on 21 st Sep 2016 P/E ratio P/B ratio A shares HK stocks A shares HK stocks Materials Information Technology Consumer Good Financials Real Estate Health Care Utilities Industrials Energy Telecommunication Data Sources:Bloomberg, Yue Xiu Securities Research compiled We summarized the average change of market capitalisation of A-shares and Hong Kong stocks from 21 st Sep 2015 to 21 st Sep It s observed that the yearly performance of the A-shares outperformed Hong Kong stocks in the Information Technology, Health Care and Consumer Good sectors. From the valuation prospective, it is noted that the average P/E and P/B multiples of A-shares of most sectors (except Financials sector) were obviously higher than that of Hong Kong stocks. Therefore, we recommend investors to pay attention to the investment opportunities in Information Technology, Health Care and Consumer Good stocks listed in Hong Kong Main Board. P. 17

18 Graph 9: The average accumulated return of Information Technology stocks in China and Hong Kong stock markets from 21 st Sep 2015 to 21 st Sep % 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% 21/9/ /12/ /3/ /6/ /9/2016 Data Sources:Bloomberg, Yue Xiu Securities Research compiled Graph 10: The average accumulated return of Health Care stocks in China and Hong Kong stock markets from 21 st Sep 2015 to 21 st Sep % 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 21/9/ /12/ /3/ /6/ /9/2016 Data Sources:Bloomberg, Yue Xiu Securities Research compiled P. 18

19 Graph 11: The average accumulated return of Consumer Good stocks in China and Hong Kong stock markets from 21 st Sep 2015 to 21 st Sep % 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 21/9/ /12/ /3/ /6/ /9/2016 Data Sources:Bloomberg, Yue Xiu Securities Research compiled P. 19

20 Inflow/Outflow(RMB 100mn) Investment opportunities under 2. Some eligible stocks under SH-HK Stock Connect may be refocused On the other hand, investors in Mainland China are expected to refocus on Hong Kong stocks particularly for some stocks/sectors with unique investment features not found in China stock markets (i.e. Macau gaming sector, China telecom sector and Tencent (00700.HK)) thanks to intensive roadshow activities of the companies listed in Hong Kong Main Board before the launch of. In fact, the substantial increase in the Southbound trading daily quota used under SH-HK Stock Connect in recent months (shown in Graph 12) may reflect the increasing attention from Chinese investors on Hong Kong stocks. Graph 12: Southbound trading daily quota used under SH-HK Stock Connect increased substantially in recent months before and after the announcement of approval on SZ-HK Stock Connect (100) (200) Nov-2014 May-2015 Nov-2015 May-2016 * The accumulated Southbound trading daily quota used under SH-HK Stock Connect for Sep 2016 was solely based on the accumulated quota used for the trading days from 1 21 Sep 2016 Data Sources:Bloomberg, Yue Xiu Securities Research compiled P. 20

21 3. H-shares of A/H shares dual-listed in SZSE and HKEX We conducted researches on the relationship between 1-year return 7 and the price differences between the A- and H- shares of 17 A/H shares dual-listed in SZSE and HKEX. According to the result (Graph 13), there was positive relationship between the discount of H-shares against corresponding A-shares and their 1-year return. Referring to Table 11, 10 H-shares of the mentioned A/H shares with the largest discount of H-shares against their corresponding A-shares on 21 st Sep Besides, the average 1-year return of such H-shares amounted to 45.10% while the discount of H-shares against A-shares averagely narrowed by 11.37%. In particular, only 1 of the 10 H-shares reported negative return which still outperformed its corresponding A-share. We think that the ones with the largest price discount of H-shares against their corresponding A-shares of the A/H shares dual-listed in SZSE and HKEX may be further narrowed after the launch of. This is seen to be another investment opportunity and investors are expected to keep an eye on the captioned potential H-shares. Graph 13: The price discount of H-shares against their corresponding A-shares price of the A/H shares dual-listed in SZSE and HKEX showed a positive relationship to the 1-year return of the captioned H-shares 150% 1 year return (%) 100% 50% 0% Premium of H- shares Discount of H-shares -50% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% % Data Sources:Bloomberg, Yue Xiu Securities Research compiled 7 The return was based on the price change of the SZSE-listed A/H shares from 21 st Sep 2015 to 21 st Sep 2016 P. 21

22 Table 11: Change of price discount of H-shares against A-shares of A/H shares dual-listed in SZSE and HKEX in the past 1 year Premium/discount of H-shares over A-shares On 21 st Sep 2015 On 21 st Sep 2016 Change of price discount of H shares to A shares 1-Year return of H share (%) HK ZHEJIANG SHIBAO -82.6% -76.3% -6.3% +75.5% HK SHANDONG MOLONG -71.3% -71.4% +0.1% +29.0% HK NE ELECTRIC -70.3% -63.1% -7.1% +53.6% HK SHANDONG XINHUA -66.2% -60.2% -6.0% +19.8% HK CHENMING PAPER -59.7% -26.2% -33.5% % HK HISENSE KELON -56.4% -49.6% -6.8% +66.8% HK ZOOMLION -52.8% -44.0% -8.7% -2.6% HK BYD COMPANY -46.0% -18.8% -27.2% +45.3% HK DONGJIANG ENV -42.2% -39.9% -2.3% +12.1% HK ANGANG STEEL -40.8% -25.3% -15.5% +15.5% HK LIVZON PHARMA -38.5% -26.9% -11.6% +12.3% HK CIMC -38.1% -42.5% +4.5% -33.5% HK WEICHAI POWER -27.8% 2.2% -30.0% +34.7% HK GOLDWIND -21.8% -30.0% +8.2% -6.6% HK GF SEC -10.5% -10.4% -0.1% +13.9% HK ZTE -9.9% -31.4% +21.5% -35.2% HK CHINA VANKE 4.1% -29.8% +33.9% +20.4% Data Sources:Bloomberg, Yue Xiu Securities Research compiled 8 The return was based on the price change of the SZSE-listed A/H shares from 21 st Sep 2015 to 21 st Sep 2016 P. 22

23 Stock Recommendation List Table 12: Stock recommendation list Sector/Company Sub-Sector Stock Picks Consumer Good Sports retail POU SHENG INT'L(03813.HK) Sportswear 361 DEGREES(01361.HK) XTEP INT'L(01368.HK) LI NING(02331.HK) Information Software KINGDEE INT'L(00268.HK) Technology CHINASOFT INT'L(00354.HK) Health care PHOENIXHEALTH(01515.HK) SILVERMAN HL(01616.HK) UNI MEDICAL(02666.HK) Electric car and TIANNENG POWER(00819.HK) battery BYD COMPANY(01211.HK) A/H shares ZHEJIANG SHIBAO(01057.HK) SHANDONG MOLONG(00568.HK) NE ELECTRIC(00042.HK) Brokerage HAITONG INT'L(00665.HK) BRIGHT SMART(01428.HK) GUOTAI JUNAN I(01788.HK) Stock Exchange HKEX(00388.HK) Stocks that are eligible for trading under SH-HK Stock Connect TENCENT(00700.HK) China Telecom operators CHINA MOBILE(00941.HK) Macau gaming sector GALAXY ENT(00027.HK) SANDS CHINA LTD(01928.HK) International financial sector AIA(01299.HK) HSBC HOLDINGS(00005.HK) High yield stocks High yield constituent stocks in HSSI GIORDANO INT'L(00709.HK) CHINA LILANG(01234.HK) Data Source:Yue Xiu Securities Research compiled P. 23

24 Stock Recommendation Most of popular China sportswear manufacturers with well-recognised brands are listed in Hong Kong Main Board with valuation to be significantly lower than their peers listed in China exchanges. Based on an improving outlook for sportswear industry, investors are expected to eye on Li Ning (02331.HK), 361 (01361.HK), Xtep International (01368.HK) and Pou Sheng International (03813.HK). Actually, China investors are interested in TMT and healthcare related stocks. After the launch of, more mid- to small- cap TMT and healthcare related stocks are expected to be eligible for China investors. Therefore, investors are advised to eye on the stocks belonging to TMT sector with higher reputation, such as KingDee International (00268.HK) and ChinaSoft International (00354.HK). Meanwhile, Phoenix medical (01515.HK), Tong Ren Tang Technologies (01666.HK) and Global medical (02666.HK) are our top healthcare stock picks. Emerging industries have a larger weight in SZSE market. In particular, we eye on stocks related to electric car and lithium battery. Therefore, we think investors can look at investment opportunities of BYD (01211.HK), a SZSE-listed A/H shares, and Tianneng Power (00819.HK), a lithium battery producer. The price difference between A- and H- shares of A/H shares dual-listed in SZSE and HKEX will continue to narrow after the launch of. As at 21 Sep 2016, Zhejiang Shibao (01057.HK), Shandong Molong (00568.HK) and Northeast Electric (00042.HK) were the 3 stocks with largest price discount of their H-shares against corresponding A-shares of SZSE-listed A/H shares. Thus, such H-shares are expected to benefit from the gradual equilibrium process of the valuation of H- and A- shares after the launch of SZ-HK Stock Connect. Brokerage firms are expected to be the major beneficiaries after the implementation of SZ-HK Stock Connect. The launch of the program could boost performance and trading volume of Hong Kong market in a long term; which may increase brokers commission income and enhance their operational performance. On the other hand, further reforms of financial and capital markets in Mainland China may also bring a positive factor on the cross-border, brokerage, investment, and asset management related businesses. We see an increase in the valuation of such brokers ahead. Therefore, Haitong International (00655.HK), Yiu Choi securities (01428.HK) and GuoTai JunAn International (01788.HK) are advised to pay attention. HKEX (00388) is the only one listed stock exchange in Hong Kong and China stock markets and its operational performance is closely linked with Hong Kong stock market activities and performance of Hong Kong stocks. It is believed a further interconnection between Hong Kong and China stock markets may bring an improvement on HKEX s profitability. Besides, it is worth to notice that the dividend payout ratio of HKEX was around 90% for years. As a result, the investors holding HKEX s stocks could directly benefit from a more active Hong Kong stock market and HKEX is expected to outperform the market in the mid- to long-term. Eligible Hong Kong stocks under SH-HK Stock Connect with unique investment features not found in China stock market are expected to be refocused after the launch of SZ-HK Stock Connect. Based on the uniqueness, investors are advised to eye on TMT giant Tencent (00700.HK), Chinese telecom operators such as China Mobile (00941.HK), Macau casino operators such as Galaxy Ent (00027.HK) and Sand China (01928.HK) and international finance stocks such as AIA (01299.HK) and HSBC (00005.HK). P. 24

25 We think some investors may overweight stocks with high dividend yield for mid- to long-term investment after the launch of. The constituent stocks of the HSSI including Giordano Int l (00709.HK) and China Lilang (01234.HK) are advised to pay attention. Table 13: The constituent stocks of HSSI with dividend indicated yield 9 over 5% on 21 Sep 2016 in the potentially newly-added stocks under Code Name Dividend indicated yield HK YINGDE GASES 10.40% HK TEXWINCA HOLD 7.94% HK RS MACALLINE 7.34% HK CHINA LILANG 6.59% HK GIORDANO INT'L 6.44% HK YUZHOU PPT 6.41% HK EMPEROR INT'L 5.85% HK SINOTRANS SHIP 5.84% HK WASION GROUP 5.52% HK YUEXIUTRANSPORT 5.37% HK FE CONSORT INT L 5.19% HK CMEC 5.03% Data Sources:Bloomberg, Yue Xiu Securities Research compiled Based on the closing price on 30 Sep 2016, dividend indicated yield of Giordano Int l (00709.HK) and China Lilang (01234.HK) were approximately 6.70% and 6.80%. They maintained stable dividend payout ratio in last three fiscal years, and their dividend indicated yield stood above 6% in most of the trading days since Table 14: Dividend history of Giordano Int l (00709.HK) in last 3 fiscal years FY2013 FY2014 FY2015 Dividend Payout Ratio 93.9% 96.15% 99.63% Dividend per share HKD0.40 HKD0.25 HKD0.27 Data Sources:Bloomberg, Yue Xiu Securities Research compiled Table 15: Dividend history of China Lilang (01234.HK) in last 3 fiscal years FY2013 FY2014 FY2015 Dividend Payout Ratio 69.09% 69.42% 70.54% Dividend Dividend HKD0.28 HKD0.29 HKD0.30 per share Special Dividend HKD 0.10 HKD 0.11 HKD 0.13 Data Sources:Bloomberg, Yue Xiu Securities Research compiled 9 Dividend indicated yield did not count in the impact of special dividend P. 25

26 Company Declaration Yue Xiu Securities Company Limited ( YXSC ) is eligible for advising on securities (under the regulatory framework of SFC). YXSC confirmed the reliability of the source of data, reference and opinion. However, YXSC do not guarantee the accuracy and/or completeness of these data. The report only serves for reference purposes. The content and opinions expressed in this research report do not constitute as solicitation of buying or selling recommendations. YXSC will not be responsible for any loss resulting from the content of the research report. Clients should not solely rely on the report as the basis to judge and/or to make investment decisions. YXSC can issue report(s) that the content and investment opinion may contradict with this report. This report solely reflects different views, opinions and research methodologies of research analysts, which do not stand for the view of YXSC and its subsidiaries. Analyst Declaration We hereby confirmed that, all recommendations mentioned in the research report truly reflected analysts individual opinion toward any stocks and issuers, and the analysts remuneration in the past, at present and in the future do not associate with stock recommendations published in this report. Besides, analysts confirmed that they and their affiliated person/people (according to the relevant definition(s) in Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission),(1) did not dispose and/or trade aforementioned stocks within 30 days before the issuance of the recommendation, (2) do not work as top management of aforementioned companies listed in Hong Kong, and (3) do not hold any interest of aforementioned stocks or their related securities. P. 26