2 nd Aug, 2017 Market Outlook Eric Yuen ericyuen@masonhk.com GDP growth in U.S. and eurozone improved in 2Q17 compared with the previous quarter. GDP growth in China stood at 6.9% yoy in both 1Q17 and 2Q17 versus the government s full year target of 6.5%. The recovery in global economy with lowerthan-expected inflation supported an uptrend in global equity prices while the weakening U.S. dollar and continuous capital inflow from China provided extra catalysts for Hong Kong stocks. Current valuation of Hang Seng Index is no longer undervalued by historical standard as the index is currently trading at a forward P/E of 13.2x versus 10-year average forward P/E of 12.5x. However, we believe the downside risk may be limited in near term because corporate earnings results to be released this month are likely to beat market expectations. The recent increase in stock market turnover is also technically positive. We expect Hang Seng Index to test 28,000 in August led by H shares. Expect Hang Seng Index to test 28,000 in August led by H shares Overweight Chinese banks with ICBC and CCB as top picks China Merchants Bank (3968) reported higher-than-expected earnings growth of 11.4% in the first half of 2017 with non-performing loan ration decreasing from 1.87% by end-2016 to 1.71% in June 2017. We believe other Chinese banks will also announce better than expected interim results. Four largest Chinese banks are currently trading at forward P/E of 5.5x to 6.1x, forward P/B of 0.70x to 0.82x and forward dividend yield of 4.9%-5.5%. Valuation looks attractive taking into account a better-than-expected GDP growth this year. After a strong rally in insurance stocks in August, we recommend short-term investors to overweight Chinese banks with ICBC (1398) and CCB (939) as our top picks. We reiterate our view that the inclusion of A-shares into MSCI indices, successful launch of Bond-Connect programme in Hong Kong, easing depreciation pressure on the renminbi and higher-than-expected GDP growth are likely to stimulate capital inflow into China s stock markets. On the other hand, the performance of A- shares continues to lag behind major stock markets worldwide. Current valuation of Shanghai Composite at a forward P/E of 14.5x is similar to its 10-year average forward P/E of 14.7x and definitely inexpensive. We maintain our BUY recommendation on A-shares ETFs such as CSOP FTSE China A50 ETF (2822) and China AMC CSI 300 Index ETF (3188). Maintain BUY on A- shares ETFs
Market Review Weak U.S. dollar and continuous capital inflow from China boosted Hang Seng Index U.S. equity markets reached record highs in July thanks to good corporate earnings and easing concerns about U.S. rate hikes for the rest of the year. S&P 500 and Nasdaq climbed 1.9% and 3.4% respectively. Major market indexes in Europe and Japan declined amid strong euro and Japanese yen. DAX, CAC 40 and Nikkei 225 tumbled 1.7%, 0.5% and 0.5% respectively. U.S. dollar index fell 2.9% in July and 9.1% in the first seven months of the year. Shanghai Composite advanced 2.5% fueled by a 3.5% gain in SSE50. Hang Seng Index surged 6.1% in July and 24.2% in the first seven months of the year making it one of the best performing stock markets worldwide. Weak U.S. dollar and continuous capital inflow from China were catalysts. In July, Mainland investors made a net purchase of $32.7bn in Hong Kong equities via Shanghai and Shenzhen Stock Connects compared to $15.2bn in the previous month. The average daily market turnover in Hong Kong increased to $84.5bn in July, the highest in 23 months. China s GDP increased by 6.9% yoy in 2Q17 that exceeded market consensus. Growth in retail sales value, industrial production and exports accelerated from 10.0%, 6.8% and 8.2% yoy in 1Q17 to 10.4%, 6.9% and 8.5% yoy in 1H17 respectively. Corporate earnings also saw a significant improvement. According to government statistics, net profits of China s industrial companies and state-owned enterprises surged 22.0% and 24.3% yoy in 1H17 respectively. Solid economic growth in 1H17 provided room for China to adopt a tightening monetary policy to curb housing bubble. Thus, M2 money supply growth decelerated to 9.4% yoy in June, the lowest since at least 1996. China saw significant improvement in corporate earnings Tencent, AIA and HSBC led the market rally Hang Seng Index advanced 6.1% in July led by large caps. Heavily weighted Tencent (700), HSBC (5) and AIA Group (1299) surged 12.2%, 8.0% and 7.9% respectively on strong earnings results. AIA Group (1299) recorded a 42% growth in value of new business in 1H FY17. HSBC (5) determined to buyback US$2.0bn shares before the year-end. Kunlun Energy (135) was the best performing index stock, up 17.7%. China Merchants Port (144) soared 13.4% amid a recovery in foreign trade. HKEx (388) jumped 10.4% along with a sharp increase in stock market turnover. Eight largest Chinese property developers grew 8% to 55% with an average gain of 22%. China Overseas Land (688), the second best performing index stock, added 16.0%. Hong Kong utilities like Power Assets (6) and CK Infrastructure (1038) climbed 11.1%-12.3% as the former declared a special dividend and the latter proposed acquisition of Ista at EUR4.5bn. Gaming, local banking and property stocks posted moderate gains but underperformed the Hang Seng Index. Consumption and telecom stocks were mixed. China Mobile (941) rose 1.1% while China Unicom (762) lost 2.2%. HSCEI climbed 4.5% in July. Six insurance counters in HSCEI grew an average gain of 12.9% among which New China Life (1336) and Ping An Insurance (2318) jumped 28.8% and 13.9% respectively. China Cinda (1359) increased 17.3%. China Shenhua (1088) and Anhui Conch (914) rose 12.0% and 6.4% respectively on strong interim earnings. Chinese banking, oil and automobile stocks moved in line with HSCEI among which ICBC (1398) and China Merchants Bank (3968) soared 9.1%-9.4%. Railway, power and securities stocks in HSCEI lacked clear direction. Sinopharm (1099) cut 5.7%. Air China (753) was the worst performing HSCEI stock, down 12.3% due to a rebound in crude oil price. Insurance stocks substantially outperformed HSCEI
Gain (%) Monthly Summary of Stock Recommendations Benchmark Index: HSI Index Report Date: 31/7/2017 Note: Assume short-selling is executable, gains ignore transaction costs # of Recommendations: 58 Calculations: # of Buys (B): 52 Accumulative Method (Accum.) # of Holds (H): 4 Summation of return, with direction based on call recommendation # of Sells (S): 2 Difference calculated as sum of absolute return between recommendations and Hit Rate: 57.41% benchmark index. Buy = +, Hold = Void, Sell = - Recommendations Absolute Return: 12.84% Relative Benchmark Method (Relative) Benchmark Absolute Return: 5.41% Summation of relative Difference, with direction based on call recommendation. Difference (Accum.): 7.43% Relative Difference calculated as relative gain between recommended stock and Difference (Relative): 6.99% benchmark index Average Historical Performance vs Benchmark Difference (Relative) Hit Rate Jul-16-2.06% 35.48% Aug-16 1.83% 55.74% Sep-16 2.11% 58.33% Oct-16 0.73% 56.90% Nov-16 2.99% 52.54% Dec-16 3.54% 61.40% Jan-17 4.18% 63.16% Feb-17 3.15% 66.67% Mar-17 0.21% 56.36% Apr-17-0.13% 45.61% May-17-0.40% 47.46% Jun-17 6.62% 65.52% Jul-17 6.99% 57.41% 8.0% Avg Historical Performance vs Benchmark 6.0% 4.0% 2.0% 0.0% -2.0% Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17-4.0% -6.0% Difference (Relative)
Index and Sector Performance Summary for Jul 2017 Index % change in share price Jul 2017 Hang Seng Index (27,324) 6.1 HSCEI (10,827) 4.5 Strong rallies in heavily weighted HSI stocks Sectors Stocks % chg in share Reasons price- Jul 2017 Outperform PRC properties Eight largest Chinese property developers 8-55, avg +22 Faster industry consolidation PRC financial China Cinda (1359) 17 PRC insurers Six Chinese insurers in HSCEI 4-29, avg +13 Rising China s stock markets Port China Merchants Port (144) 13 Higher than expected foreign trade in China Coal China Shenhua (1088) 12 Positive profit alert Internet Tencent (700) 12 Global tech stocks rally Miscellaneous HKEx (388), AIA Group (1299), HSBC (5), Strong quarterly earnings for HSBC 8-10, avg +9 ACC Technologies (2018) and AIA Group Cement Anhui Conch (914) 6 Positive profit alert In Line/Mixed PRC banks Nine Chinese banks in HSCEI 1-9, avg +6 Higher than expected 2Q GDP growth in China HK utilities CLP Holdings (2), HK & China Gas (3), MTR Corp (66), Power Assets (6), CKI (1038) 1-12, avg +6 Increase in US interest rates Oil Kunlun Energy (135), CNOOC (883), PetroChina (857), Sinopec (386) 1-18, avg +6 Rebound in crude oil price Automobile BYD Company (1211), Dongfeng Motor (489), Great Wall Motor (2333), Geely Auto (175) 2-7, avg +4 Strong auto sales for Geely Underperform HK properties Nine local property stocks in HSI 0-7, avg +4 Record high housing price HK banks HSB (11), BOC HK (2388), BoEA (23) 0-4, avg +2 Gaming Sands China (1928), Galaxy Entertainment (27) 1-2, avg +2 Fully valued Miscellaneous CK Hutchison (1), CITIC Limited (267), Lenovo (992), Cathay Pacific (293) 1-5, avg +2 Consumption Hengan Int l (1044), Want Want China (151), China Mengniu Dairy (2319) -1 to +3, avg +1 Railway China Railway Construction (1186), CCCC (1800), China Railway Group (390), CRRC Corp (1766), Zhuzhou CRRC Times Electric (3898) -3 to +4, avg +1 PRC securities Five securities stocks in HSCEI -2 to +9, avg +1 Strong growth in new contracts value of railway contractors Telecom Three largest Chinese telecom stocks -2 to +1, avg -0 Pressure to cut fees Power CGN Power (1816), China Longyuan (916), CR Power (836), Huaneng Power (902) -3 to +2, avg -1 Profit warning for CR Power Pharmaceutical Sinopharm (1099) 6 Airline Air China (753) 12 Rebound in crude oil price In Line/M
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