Yum Cha 飲茶 December 2, 2014 CHART OF THE DAY EXPECT MORE STIMULUS AS PMI DATA SHOWS WEAKER DEMAND INDICES Closing DoD% Hang Seng Index 23,367.5 (2.6) HSCEI 10,818.2 (2.9) Shanghai COMP 2,680.2 (0.1) Shenzhen COMP 1,412.6 (0.5) Gold 1,208.4 (0.3) BDIY 1,137.0 (1.4) Crude Oil, WTI(US$/BBL) 69.2 0.3 Crude Oil, BRENT(US$/BBL) 72.5 3.4 HIBOR, 3-M 0.4 - SHIBOR, 3-M 4.2 0.1 RMB/USD 6.2 0.1 DATA RELEASES DUE THIS WEEK Dec 02 Non-manufacturing PMI Dec 02 HSBC China Services PMI Dec 02 HSBC China Composite PMI Source: Bloomberg As expected, the purchasing managers indices (PMIs) reflect a further slowdown in China s economy in November, although there is some distortion from the shutdown of smokestack factories in provinces surrounding Beijing before and during the APEC summit. The HSBC PMI was at exactly 50, indicating no rise or fall, and the official PMI fell to 50.3, the lowest level for eight months. The question is whether the re-opening of the factories after the summit will stimulate a rebound, but this is questionable, as demand is slow, both domestically and in the export sector. Export orders, according to the official PMI, dropped sharply in November, while export orders measured by HSBC continued to expand, but at the slowest pace since June this year. A breakdown of the official PMI shows that large enterprises are most resilient, but the outlook for small and medium-sized enterprises has fallen sharply. Overall, it is not surprising that China s central bank has shifted its policy to a far more stimulatory posture, and that more easing is likely. Unemployment is a critical factor driving government policy, and the HSBC PMI reports a continuing decline in manufacturing employment during November. The weaker PMI data follows a series of indicators pointing to a deceleration in China s economy, and while it is important to note that this is in line with policy, i.e. a gradual slowdown to new normal, there is an implicit undertaking to maintain growth sufficient to absorb new entrants to the labour force, a growth pace estimated at 7.2% in GDP terms. The People s Bank of China (PBoC) is likely to be encouraged to use monetary policy to maintain this growth level, and some further fiscal spending can also be expected, especially as the winter and the lead-up to Lunar New Year on 19th February are not traditionally periods of strong industrial activity. TALKING POINTS STRATEGY We review the performance of Shanghai-Hong Kong Connect in the first two weeks. Northbound investors prefer financials and value stocks while southbound investors prefer companies with deep H-share discount and meaningful size as well as some well-known tech names. Due to the rally of the A-share market in the past two weeks, we see some big cap H- shares trading at a deep discount versus their historical average, which offer scope to catch up, such as New China Life [1336.HK], China Everbright Bank [6818.HK] and CITIC Bank [0998.HK]. For investors who can short A-shares, we believe it s a good opportunity to short PetroChina-A [601857.CH], as the share price was up 4.3% in the past two weeks while oil price has dropped sharply. 1
December 2, 2014 Northbound: Acceptable initial response for a new product. As of December 1, total net northbound quota used was RMB42.2bn. This is not bad, in our view, as the amount is already equivalent to 69% of the market cap of ishares A50 [2823.HK]. Preference of northbound investors: financials and value stocks. Based on the data released by the HKEX (Figure 1), the most preferred stocks of northbound investors are financials, such as Ping An Insurance [601318.CH], China Pacific Insurance [601601.CH] and ICBC [601398.CH]. Meanwhile, high-yield big caps such as SAIC Motor [600104.CH] and Daqin Railway [601006.CH] are also major targets for northbound investors. Southbound: Investors preference much more diverse. Total southbound trading volume (buy and sell) since inception was HK$8.2bn, an uninspiring start to the pilot programme. Although southbound investors actively traded stocks look much more diverse (Figure 2), it seems that they prefer stocks with deep H-share discount (>40%) and reasonable size in terms of market cap, such as Shanghai Petrochem [0338.HK], China Molybdenum [3993.HK] and Shanghai Electric [2727.HK]. They also bought some well-known tech names, including Tencent [0700.HK] and SMIC [0981.HK]. A-H spread widened after the launch of the Stock Connect. Due to the much stronger trading volume of the A-share market, especially after the unexpected rate cut last week, the H-share discount vs. Shanghai-listed counterparts widened from 16% (the last trading day before the launch of the Stock Connect) to 25.6% yesterday. We have seen some over-excitement in the A-share market. For instance, PetroChina-A [601857.CH] gained 4.3% in the past two months despite a sharp fall in the oil price while PetroChina-H [0857.HK] lost 7.4% in the corresponding period. Meanwhile, the A-H spread of the four major banks is less than 10% now, which leaves little room for arbitrage (Figure 3). Northbound investors began to take profit yesterday. Traded value from sell orders accounted for 39.5% of total northbound traded value yesterday, much higher than the average of 11.3% last week, which may suggest foreign investors began to take profit after an impressive A-share rally in the past two weeks. Trading ideas: New China Life Insurance [1336.HK]: H-share discount widened from 14.3% to 34.5% in the past two weeks, much wider than the average discount of 10% in the past few months. China Everbright Bank [6818.HK]: The H-share has maintained a price premium over its A-share in the past few months but it changed to a 21.85% discount yesterday, due to the rally of A-share banks last Friday. There should be scope for catch-up after such a drastic change in the A-H spread. Investors may also pay attention to CITIC Bank [0998.HK], which saw its H-share discount increase from 15% to 29.9% within two weeks. Long H-share Index ETF [2828.HK] or H-share futures and short ishares A50: As a result of the much more positive market sentiment in the A-share market, the H-share discount of big caps (Top 20 largest A-H dual listing companies in the Stock Connect universe) widened from 0.4% two weeks ago to 9.4% yesterday. For investors who believe the A-share market is running too fast, there is a long-short opportunity, in our view. For investors who can short A-shares, we believe it s a good opportunity to short PetroChina-A, as the share price was up 4.3% in the past two weeks despite a sharp drop in the crude oil price. 2
Figure 1: Northbound actively traded stocks Stock Code Company # of days in Top 10 most active traded stocks Total buy trade value (RMB)# Total sell trade value (RMB)# 601318 PING AN INSURANCE 11 4,116,676,927 693,639,077 600104 SAIC MOTOR 10 3,313,977,651 113,772,100 601006 DAQIN RAILWAY 9 4,672,035,659 209,459,914 600519 KWEICHOW MOUTAI 8 2,467,399,540 100,331,665 601601 CHINA PACIFIC INSURANCE 8 1,532,589,068 73,533,244 601398 INDUSTRIAL AND COMMERCIAL BANK OF CHINA 8 1,530,213,039 339,571,653 600030 CITIC SECURITIES 8 945,450,831 207,845,436 600036 CHINA MERCHANTS BANK 7 1,700,730,103 167,489,182 600000 SHANGHAI PUDONG DEVELOPMENT BANK 6 1,176,410,072 155,927,841 600585 ANHUI CONCH CEMENT 4 760,479,595 18,292,026 601628 CHINA LIFE INSURANCE 4 507,014,284 97,772,393 601939 CHINA CONSTRUCTION BANK 3 187,218,099 230,559,323 601288 AGRICULTURAL BANK OF CHINA 3 558,275,407 6,550,931 600887 INNER MONGOLIA YILI INDUSTRIAL 2 745,054,266 447,277 601888 CHINA INTERNATIONNAL TRAVEL SERVICE 2 178,900,948 62,106,548 600009 SHANGHAI INTERNATIONAL AIRPORT 2 152,411,145 2,978,756 600016 CHINA MINSHENG BANKING 2 308,757,224 98,623,138 601166 INDUSTRIAL BANK 2 435,157,920 62,553,842 600886 SDIC POWER HOLDINGS 1 166,318,827 0 600435 NORTH NAVIGATION CONTROL TECHNOLOGY 1 121,818,828 0 600690 QINGDAO HAIER 1 288,817,028 563,256 600066 ZHENGZHOU YUTONG BUS 1 206,029,384 158,850 601688 HUATAI SECURITIES 1 332,391,187 0 601328 BANK OF COMMUNICATIONS 1 118,505,362 55,505,747 #Only trade value in the days listed in Top 10 is counted. Sources: HKEX, CGIHK Research 3
Figure 2: Southbound actively traded stocks Stock Code Company # of days in Top 10 most active traded stocks Total buy trade value (HK$)# Total sell trade value (HK$)# 700 TENCENT 10 367,246,670 36,180,110 3993 CMOC 6 78,740,780 35,983,780 2727 SHANGHAI ELECTRIC GROUP CO. LTD. 6 61,654,400 37,518,740 981 SMIC 5 142,912,040 25,806,170 338 SHANGHAI PECHEM 5 83,095,720 13,706,860 2883 CHINA OILFIELD 4 57,765,560 9,622,480 6837 HAITONG SEC 4 36,868,440 37,154,232 3998 BOSIDENG 3 45,292,980 27,398,780 3389 HENGDELI 3 60,505,760 19,096,320 38 FIRST TRACTOR 3 25,683,380 22,885,660 1387 RENHE COMM 3 54,111,380 25,897,770 300 KUNMING MACHINE 3 25,288,400 14,293,780 1336 NCI 3 73,591,045 6,598,790 2008 PHOENIX TV 2 91,774,640 6,432,080 941 CHINA MOBILE 2 111,766,800 767,250 1299 AIA 2 96,085,890 176,100 2880 DALIAN PORT (PDA) CO. LTD. 2 17,930,600 11,118,140 861 DIGITAL CHINA 2 15,920,050 8,659,510 1117 CH MODERN D 2 22,166,480 8,927,080 883 CNOOC 2 11,320,940 17,647,360 2007 COUNTRY GARDEN 2 55,510,640 1,384,730 1171 YANZHOU COAL 2 18,949,180 9,818,240 6818 CEB BANK 2 35,719,330 14,567,320 3308 GOLDEN EAGLE 2 53,667,280 9,360 1919 CHINA COSCO 2 20,317,105 17,073,440 2009 BBMG 2 19,342,595 11,564,015 1398 ICBC 1 59,140,780 0 995 ANHUIEXPRESSWAY 1 24,845,580 258,740 670 CHINA EASTERN AIRLINES CORPORATION LTD. 1 10,190,200 4,358,920 3 HONG KONG AND CHINA GAS CO. LTD., THE 1 14,114,240 0 1 CHEUNG KONG (HOLDINGS) LTD. 1 13,071,200 137,400 934 SINOPEC KANTONS HOLDINGS LTD. 1 10,829,880 114,540 1066 WEIGAO GROUP 1 8,190,600 4,224,960 267 CITIC 1 7,772,660 51,320 336 HUABAO INTL 1 4,706,860 2,987,610 1072 DONGFANG ELEC 1 15,455,280 122,796 566 HANERGY TFP 1 12,416,000 1,107,180 1186 CHINA RAIL CONS 1 5,464,705 4,571,940 3333 EVERGRANDE 1 17,763,950 6,304,840 493 GOME 1 10,824,920 3,249,990 2899 ZIJIN MINING 1 11,917,040 7,082,020 1068 YURUN FOOD 1 4,370,980 7,810,010 998 CITIC BANK 1 16,061,860 4,264,110 1359 CHINA CINDA 1 18,659,260 372,170 1668 CHINASOUTHCITY 1 11,535,640 200,000 386 SINOPEC CORP 1 19,896,560 257,980 857 PETROCHINA 1 13,386,320 4,043,340 #Only trade value in the days listed in Top 10 is counted. Sources: HKEX, CGIHK Research 4
Figure 3: H-share discount relative to A-share (ranked by market cap) Company name Market cap (US$m) 14-Nov-14 1-Dec-14 Group A 601857 CH Equity 857 HK Equity PetroChina Co Ltd 235,538 (12.02) (21.90) 601398 CH Equity 1398 HK Equity Industrial & Commercial Bank of China Ltd 228,632 7.29 1.53 601939 CH Equity 939 HK Equity China Construction Bank Corp 184,041 4.97 (5.06) 601988 CH Equity 3988 HK Equity Bank of China Ltd 148,932 (1.11) (8.19) 601288 CH Equity 1288 HK Equity Agricultural Bank of China Ltd 148,197 7.31 1.32 600028 CH Equity 386 HK Equity China Petroleum & Chemical Corp 99,727 (3.67) (10.66) 601628 CH Equity 2628 HK Equity China Life Insurance Co Ltd 97,798 7.97 (6.58) 601318 CH Equity 2318 HK Equity Ping An Insurance Group Co of China Ltd 65,277 8.36 1.42 601328 CH Equity 3328 HK Equity Bank of Communications Co Ltd 62,614 2.83 (7.90) 601088 CH Equity 1088 HK Equity China Shenhua Energy Co Ltd 52,855 7.34 3.39 600036 CH Equity 3968 HK Equity China Merchants Bank Co Ltd 49,566 9.31 2.37 601998 CH Equity 998 HK Equity China CITIC Bank Corp Ltd 43,040 (15.00) (29.85) 600016 CH Equity 1988 HK Equity China Minsheng Banking Corp Ltd 38,830 (5.63) (8.93) 601601 CH Equity 2601 HK Equity China Pacific Insurance Group Co Ltd 35,276 9.58 5.53 600030 CH Equity 6030 HK Equity CITIC Securities Co Ltd 31,195 4.24 0.11 601818 CH Equity 6818 HK Equity China Everbright Bank Co Ltd 28,546 0.84 (21.85) 600837 CH Equity 6837 HK Equity Haitong Securities Co Ltd 22,595 (5.94) (13.87) 601336 CH Equity 1336 HK Equity New China Life Insurance Co Ltd 18,262 (14.26) (34.53) 601800 CH Equity 1800 HK Equity China Communications Construction Co Ltd 17,900 (11.96) (18.32) 601633 CH Equity 2333 HK Equity Great Wall Motor Co Ltd 16,717 (8.31) (15.87) Average (0.39) (9.39) Group B 601390 CH Equity 390 HK Equity China Railw ay Group Ltd 16,569 (4.61) (12.92) 601186 CH Equity 1186 HK Equity China Railw ay Construction Corp Ltd 16,377 (3.92) (19.98) 600585 CH Equity 914 HK Equity Anhui Conch Cement Co Ltd 15,972 11.22 13.38 600011 CH Equity 902 HK Equity Huaneng Pow er International Inc 15,866 7.70 6.53 601111 CH Equity 753 HK Equity Air China Ltd 12,009 (12.83) (23.20) 601727 CH Equity 2727 HK Equity Shanghai Electric Group Co Ltd 11,590 (39.30) (43.47) 601808 CH Equity 2883 HK Equity China Oilfield Services Ltd 11,368 (29.71) (41.25) 601898 CH Equity 1898 HK Equity China Coal Energy Co Ltd 10,800 (20.96) (31.71) 600115 CH Equity 670 HK Equity China Eastern Airlines Corp Ltd 10,041 (37.87) (46.77) 601991 CH Equity 991 HK Equity Datang International Pow er Generation Co Ltd 9,220 (19.90) (26.51) 600600 CH Equity 168 HK Equity Tsingtao Brew ery Co Ltd 8,970 10.73 9.09 601899 CH Equity 2899 HK Equity Zijin Mining Group Co Ltd 8,642 (34.41) (43.59) 601600 CH Equity 2600 HK Equity Aluminum Corp of China Ltd 8,497 (29.72) (41.28) 601618 CH Equity 1618 HK Equity Metallurgical Corp of China Ltd 8,354 (30.63) (42.60) 601919 CH Equity 1919 HK Equity China COSCO Holdings Co Ltd 8,018 (34.75) (46.32) 600196 CH Equity 2196 HK Equity Shanghai Fosun Pharmaceutical Group Co Ltd 7,808 6.85 5.87 601238 CH Equity 2238 HK Equity Guangzhou Automobile Group Co Ltd 7,698 (22.55) (31.71) 600362 CH Equity 358 HK Equity Jiangxi Copper Co Ltd 7,515 (22.80) (32.60) 600188 CH Equity 1171 HK Equity Yanzhou Coal Mining Co Ltd 7,216 (40.46) (54.92) 600027 CH Equity 1071 HK Equity Huadian Pow er International Corp Ltd 6,834 9.21 6.66 Average (16.93) (24.87) Group C 601607 CH Equity 2607 HK Equity Shanghai Pharmaceuticals Holding Co Ltd 6,577 0.55 (6.00) 600029 CH Equity 1055 HK Equity China Southern Airlines Co Ltd 6,454 (28.27) (37.21) 603993 CH Equity 3993 HK Equity China Molybdenum Co Ltd 6,400 (41.74) (58.85) 601992 CH Equity 2009 HK Equity BBMG Corp 6,301 (30.13) (43.93) 600688 CH Equity 338 HK Equity Sinopec Shanghai Petrochemical Co Ltd 5,787 (42.20) (53.49) 601866 CH Equity 2866 HK Equity China Shipping Container Lines Co Ltd 5,727 (40.78) (50.45) 600377 CH Equity 177 HK Equity Jiangsu Expressw ay Co Ltd 5,447 6.57 8.28 600332 CH Equity 874 HK Equity Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd 5,248 (17.66) (30.95) 600875 CH Equity 1072 HK Equity Dongfang Electric Corp Ltd 4,941 (26.13) (34.25) 601333 CH Equity 525 HK Equity Guangshen Railw ay Co Ltd 3,848 (19.46) (27.55) 600685 CH Equity 317 HK Equity Guangzhou Shipyard International Co Ltd 3,606 (29.13) (39.78) 600808 CH Equity 323 HK Equity Maanshan Iron & Steel Co Ltd 3,266 (36.45) (47.63) 600026 CH Equity 1138 HK Equity China Shipping Development Co Ltd 3,266 (32.46) (44.91) 601880 CH Equity 2880 HK Equity Dalian Port PDA Co Ltd 2,838 (37.99) (53.25) 601005 CH Equity 1053 HK Equity Chongqing Iron & Steel Co Ltd 2,167 (43.75) (57.51) 600548 CH Equity 548 HK Equity Shenzhen Expressw ay Co Ltd 2,038 (21.17) (36.15) 601588 CH Equity 588 HK Equity Beijing North Star Co Ltd 1,821 (39.63) (50.13) 600874 CH Equity 1065 HK Equity Tianjin Capital Environmental Protection Group Co Ltd 1,800 (38.96) (54.21) 601717 CH Equity 564 HK Equity Zhengzhou Coal Mining Machinery Group Co Ltd 1,740 (33.82) (42.99) 601107 CH Equity 107 HK Equity Sichuan Expressw ay Co Ltd 1,718 (28.05) (41.68) 600775 CH Equity 553 HK Equity Nanjing Panda Electronics Co Ltd 1,491 (39.99) (53.61) 601038 CH Equity 38 HK Equity First Tractor Co Ltd 1,398 (41.87) (60.66) 600012 CH Equity 995 HK Equity Anhui Expressw ay Co Ltd 1,375 (23.17) (25.92) 600806 CH Equity 300 HK Equity Shenji Group Kunming Machine Tool Co Ltd 563 (39.10) (60.11) 600860 CH Equity 187 HK Equity Beijing Jingcheng Machinery Electric Co Ltd 421 (45.24) (59.88) Average (30.80) (42.51) Note 1: Negative figures mean H-share is cheaper than A-share. Note 2: Three stocks are excluded from the calculation due to trading suspension, including CSR (1766.HK), Sinopec Yizheng (1033.HK) and Luoyang Glass (1108.HK). Sources: Bloomberg, CGIHK Research 5
Figure 4: Valuation of actively traded stocks Company Northbound Ticker Price (Local currency) Market cap (US$m) PER (x) PBR (x) Dividend yield (%) 2014E 2015E 2014E 2015E 2014E 2015E Ping An Insurance Group Co of China Ltd 601318 CH Equity 50.75 65,675 11.11 9.45 1.83 1.58 1.44 1.57 SAIC Motor Corp Ltd 600104 CH Equity 19.41 34,798 7.65 6.72 1.39 1.23 5.86 6.65 Daqin Railw ay Co Ltd 601006 CH Equity 9.47 22,892 9.44 8.37 1.66 1.51 5.35 6.17 Kw eichow Moutai Co Ltd 600519 CH Equity 160.06 29,722 11.58 10.57 3.40 2.88 3.00 3.68 China Pacific Insurance Group Co Ltd 601601 CH Equity 23.69 35,492 18.73 15.48 1.93 1.76 1.89 2.29 Industrial & Commercial Bank of China Ltd 601398 CH Equity 4.01 230,030 5.04 4.76 0.97 0.86 6.73 7.13 CITIC Securities Co Ltd 600030 CH Equity 17.52 31,387 25.17 21.50 2.04 1.91 1.32 1.51 China Merchants Bank Co Ltd 600036 CH Equity 12.11 49,869 5.18 4.70 1.00 0.86 5.21 5.62 Shanghai Pudong Development Bank 600000 CH Equity 12.16 36,882 4.89 4.42 0.95 0.82 5.61 6.19 Southbound Tencent Holdings Ltd 700 HK Equity 120.3 144,473 37.23 28.44 11.23 8.39 0.31 0.38 China Molybdenum Co Ltd 3993 HK Equity 4.77 6,401 11.47 12.91 1.46 1.37 3.91 3.70 Shanghai Electric Group Co Ltd 2727 HK Equity 4.43 11,592 18.59 17.48 1.36 1.29 1.91 2.02 Semiconductor Manufacturing International Corp 981 HK Equity 0.78 3,585 33.53 20.12 1.23 1.18 0.00 0.00 Sinopec Shanghai Petrochemical Co Ltd 338 HK Equity 2.35 5,788 28.24 14.91 1.11 1.05 1.34 1.61 China Oilfield Services Ltd 2883 HK Equity 12.94 11,369 6.15 6.26 1.06 0.94 4.73 4.73 Haitong Securities Co Ltd 6837 HK Equity 16.18 22,598 21.83 18.76 1.86 1.74 1.35 1.62 Sources: Bloomberg, CGIHK Research 6
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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888. 7