Market Snapshot. Further re-rating of low valuation sectors ahead; high growth sectors to recover. Equity Research Investment Strategy.

Transcription

1 Equity Research Market Snapshot Further re-rating of low valuation sectors ahead; high growth sectors to recover Alex Fan, CFA SFC CE No. ADJ GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Clear change in investment themes Since the beginning of the year, investors have been switching from high valuation/growth stocks to low valuation stocks with improving fundamentals. Property, banks, securities, coal, materials, oil and airlines have risen most, beating both the HSCEI and HSI, while high earnings growth sectors such as TMT, gaming, and autos have underperformed (Fig 1). This is in line with our view that low valuation sectors with improving fundamentals such as financials are set to be re-rated. In particular, enthusiasm in the property sector comes from strong contract sales and resilient property prices, while convincing signs of improving asset quality at banks come from China Merchants Bank s (3968 HK, NR) preliminary financial data, which showed an improvement in NPL from 1.87% in 2016 to 1.61% in 2017, while earnings grew 13.7% YoY, bidding farewell to single-digit earnings growth. Similar trend for southbound funds Up to Jan 26, among the most actively traded stocks in the Shanghai Hong Kong southbound connect, 6 out of 10 are banks (all are net buys), compared with only 3 in Dec Likewise, in the Shenzhen Hong Kong southbound connect, 2 of the top 10 actively traded stocks are banks (all are net buys), while there were no banks in the top 10 in Dec On the other hand, net sells are most noticeable among auto and insurance names through the Shanghai connect, while autos, insurance, smartphone tech and property are among the sectors seeing most net selling via the Shenzhen connect. (Fig 2 and 3.) Daily net buying has more than doubled to HK$3.3bn Southbound funds continue to rise, with average daily turnover (ADT) of southbound funds up 54% MoM to HK$20.1bn in Jan (up to Jan 26), accounting for 12.9% of Hong Kong total market turnover, up from 12.6% in Dec Average daily net buying surged 107% to HK$3.3bn. During this period, ADT on the Hong Kong market increased by 51% MoM to HK$156.9bn. (Fig 4.) Re-rating likely to continue Despite the strong rally YTD, we believe a further re-rating is possible for financials, especially banks, as their valuations are still far below the level seen in With the exception of China Merchants Bank and Ping An (2318 HK, NR), banks are generally trading 10-40% below their P/B multiples in 2015, insurance at a 15-40% discount, and securities at 50-60% cheaper than valuations in (Fig 5.) Laggards to catch up On the other hand, after the meaningful underperformance in the past few months, valuations of smartphone-related plays such as AAC Tech (2018 HK, NR) and Sunny Optical (2382 HK, Buy) and auto names such as Geely Auto (175 HK, Buy) and Brilliance China (1114 HK, Buy) have become much more reasonable and indeed attractive. We believe their valuations are bottoming out, and see a good chance of them catching up again in the coming months. Still optimistic Overall, we believe the market rally is far from over. Against the backdrop of a strong global economic recovery and overseas stock markets, we remain upbeat on the Hong Kong market, which will be driven by continued earnings growth and further reratings. That said, given the 4,930 points almost non-stop rally for the HSI (up 17.4%) since the previous low in early Dec (Dec 6), any external shocks or policy threats could trigger consolidation or corrections. However, we would treat these as buying opportunities. Risks Market unrest driven by geopolitical events and macro data; earnings disappointments.

2 Solar Wind Auto Railway equip Environmental Telecoms Consumer staples Power equip Power Ports Healthcare Consumer disc Software HSI Insurance MSCI China Macau gaming Shipping Tech HSCEI Oil Materials Airlines Coal Securities Banks Property % Figure 1: Sector performance YTD Figure 2: Most actively traded stocks through the Shanghai Connect (year to Jan 26) Stock Code Stock Buy Trades (HK$) Sell Trades (HK$) Turnover (HK$) Net Buying (HK$) 700 TENCENT 7,912,040,260 5,965,233,420 13,877,273,680 1,946,806, CCB 5,784,109,320 3,640,133,296 9,424,242,616 2,143,976, CITIC BANK 4,371,241,860 3,844,996,391 8,216,238, ,245, ICBC 5,705,558,300 2,062,152,198 7,767,710,498 3,643,406, SUNAC 3,987,496,600 3,689,285,040 7,676,781, ,211, NCI 3,402,273,910 3,761,731,787 7,164,005, ,457, PING AN 2,112,151,675 4,151,556,050 6,263,707,725-2,039,404, ABC 3,147,574,590 1,279,128,030 4,426,702,620 1,868,446, BANK OF CHINA 2,286,749,790 1,548,771,430 3,835,521, ,978,360 5 HSBC HOLDINGS 3,687,201,080 56,526,336 3,743,727,416 3,630,674, CPIC 1,618,238,000 1,914,237,830 3,532,475, ,999, GEELY AUTO 1,180,737,950 2,226,511,350 3,407,249,300-1,045,773, HKEX 2,350,258, ,356,251 3,110,614,671 1,589,902, SMIC 830,704,100 1,815,288,134 2,645,992, ,584, CM BANK 1,355,449,750 1,125,752,018 2,481,201, ,697, MINSHENG BANK 1,076,017,050 1,080,800,500 2,156,817,550-4,783, AIR CHINA 663,812, ,317,000 1,162,129, ,495, GREATWALL MOTOR 810,417, ,537,865 1,130,954, ,879, PETROCHINA 558,420, ,571, ,991, ,849,340 2

3 HK$m % Figure 3: Most actively traded stocks through the Shenzhen Connect (year to Jan 26) Stock Code Stock Buy Trades (HK$) Sell Trades (HK$) Turnover (HK$) Net Buying (HK$) 700 TENCENT 4,192,387,480 3,389,488,740 7,581,876, ,898, GENSCRIPT BIO 2,633,298,600 2,422,355,100 5,055,653, ,943, SUNAC 1,784,119,950 1,951,655,200 3,735,775, ,535, FUTURE LAND 1,757,659,760 1,028,691,260 2,786,351, ,968, ZTE 981,869,150 1,049,344,630 2,031,213,780-67,475, ICBC 1,150,223, ,471,140 1,784,694, ,751, CHINA VANKE 663,826, ,709,875 1,607,536, ,883, CCB 1,003,874, ,253,790 1,389,127, ,620, SMIC 700,496, ,841,500 1,280,338, ,655, NCI 456,938, ,049,375 1,145,987, ,111, PING AN 567,084, ,218,500 1,016,303, ,866, MEITU 507,212, ,077, ,290, ,135, GOLDWIND 429,535, ,138, ,673, ,396, YANZHOU COAL 439,281, ,257, ,539, ,023, CITIC BANK 475,511,460 99,159, ,671, ,351, ZIJIN MINING 284,652, ,336, ,989,300 44,315, HKEX 372,304,940 93,509, ,814, ,795, CHINA SOUTH AIR 242,752, ,905, ,657,900 82,846, GEELY AUTO 193,518, ,167, ,686,150-7,648, RONSHINECHINA 277,502, ,168, ,671, ,333,905 Figure 4: Southbound trading % of total turnover and net buying Net Southbound buying % T/O 3

4 Figure 5: Valuations Price P/B 2015 peak P/B Discount HK$ x x % ABC 1288 HK BOC 3988 HK BoCom 3328 HK CITICB 998 HK CCB 939 HK CMB 3968 HK ICBC 1398 HK Minsheng Bank 1988 HK China Life 2628 HK Ping An 2318 HK PICC P&C 2328 HK PICC 1339 HK CPIC 2601 HK China Taiping 966 HK NCL 1336 HK CITICS 6030 HK Haitong 6837 HK Huatai 6886 HK Sources: Bloomberg, GF Securities (Hong Kong) 4

5 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 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% 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 have compensation or mandate for investment banking services received within the preceding 12 months from one of the companies, namely Meitu, Inc. (Stock Code: 1357) ( MEITU ) contained in this research report. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the 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 /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: 5