4 th Aug, 2016 Market Outlook Eric Yuen ericyuen@masonsec.com After a strong run in July, Hang Seng Index is presently trading at historical PER of 10.9x compared to 1-year, 3-year and 5-year average of 9.4x, 10.5x and 10.4x respectively according to statistics from Hang Seng Indexes Company Limited. Current valuation is fair by historical standard. In terms of capital flow, the Southbound Trading registered net outflow for first time since April 25 of $101mn on July 20 and $1.9bn in the last week of July showing that Mainland investors have started to take profit. The aggregate balance of Hong Kong s banking system reduced by HK$27.9bn in July, a decline for four straight months, reflecting no influx of funds into Hong Kong. In terms of news flow, we believe the PBOC is unlikely to cut interest rate or reserve requirement ratio in near term and upcoming interim results of Chinese companies may disappoint the market. We therefore take a neutral view on Hang Seng Index with a trading range of 21,300-22,800 in August but the risk is on the downside. Forecast a trading range of 21,300-22,800 for HSI but the risk is on the downside Overweight HK and China property stocks Most Chinese property stocks underperformed the HSCEI year-to-date due to concerns about renminbi depreciation and excess housing supply in the third and fourth-tier cities. In view of strong contracted sales and rising residential prices in the first half of 2016, some Chinese property developers are likely to deliver satisfactory interim earnings results leading to a re-rating. We recommend an overweight position on large Chinese property developers. Top picks are China Resources Land (1109), Country Garden (2007) and Shenzhen Investment (604). Valuation of Hong Kong property stocks, in terms of price-tobook ratio, is still cheap following a rebound in Hong Kong s residential prices in June and July. We maintain our overweight rating on this sector and raise target price of SHK Properties (16) from HK$110 to HK$118 based on P/B of 0.75x. We reiterate our view that the launch of the Shenzhen-HK Stock Connect will stimulate buying interest in small-caps especially those industries with good fundamentals such as paper, semiconductor and new energy. Our top favourites include Nine Dragons Paper (2689), Lee & Man Paper Manufacturing (2314), Xinyi Glass (868), Tongda Group (698), Hua Hong Semiconductor (1347), SMIC (981) and Huadian Fuxin Energy (816). Shenzhen-HK Stock Connect could be a catalyst for small-caps Remarks: Mason Securities Ltd ( Mason Securities ) is licensed by the Securities and Futures Commission to carry on Types 1, 4, and 6 regulated activities in Hong Kong. Mason Futures Ltd is licensed by the Securities and Futures Commission to carry on Type 2 regulated activity in Hong Kong. Bullion trading service is provided by Mason Bullion Ltd. Securities Futures Bullion
Market Review Loosening monetary policy worldwide boosted global equity prices Global stock market rallied in July as investors have expected major central banks to maintain a loosening monetary policy after UK s vote to leave the European Union. U.S Federal Reserve continued to keep interest rate unchanged in July s FOMC meeting. Japan decided to launch 28 trillion yen stimulus policy. S&P500, FTSE 100, DAX, CAC 40, Nikkei 225 and S&P/ASX 200 climbed 3.4%-6.8% last month. Most stock market indexes in Asia including Singapore, Thailand, South Korea, Taiwan, Indonesia and India registered a gain of 1.0%-5.5%. Shanghai Composite added 1.7%. Hang Seng Index surged 5.3%. Net inflow in southbound trading via Shanghai-HK Stock Connect reduced from HK$44.0 billion in June to HK$9.8 billion in July, and a net outflow of HK$1.9 billion was registered during the last week of July. China s GDP grew better-than-expected 6.7% yoy in 2Q16 fuelled by accelerating growth in retail sales and industrial production in June. However, net profits of China s state-owned enterprises, which are highly exposed to the old economies, declined 8.5% yoy in 1H16 due to lower profits from oil and petrochemical companies and losses from steel and non-ferrous metal industries. Growth in urban fixed assets investment slowed to 9.0% yoy in 1H16 (below 10% for the first time since 2000) although M2 money supply maintained a double-digit growth rate of 11.8% yoy in June 2016. Property prices maintained its uptrend with new home prices in major 100 cities advanced 12.4% yoy in June according to China Index Academy. Slowdown in China s fixed assets investment despite abundant money supply Local banking and property stocks led the rally in Hang Seng Index Gaming, local banking and property stocks led the rally of Hang Seng Index in July. Heavily weighted HSBC (5), Tencent (700) and China Mobile (941) grew 6%-8%. Sands China (1928) and Galaxy Entertainment (27) soared 12%-14% as Macau s gaming revenue cut only 4.5% yoy in July, the second smallest decline in past 24 months. Nine local property stocks in Hang Seng Index increased ranging from 6% for Swire Pacific (19) to 19% for SHK Properties (16) with an average gain of 11% thanks to a rebound in residential price in July. Three local banks including BOC Hong Kong (2388), Hang Seng Bank (11) and Bank of East Asia (23) rose an average 7%. Cathay Pacific (293) and Air China (753) went up 11%-12% amid a decline in oil price. China Merchants (144), MTR Corporation (66) and Lenovo (992) edged up by 10%-12%. HK utilities counters ended higher but underperformed the benchmark index. Consumption plays showed mixed performance. Belle Int l (1880) jumped 13%. Food & beverage companies like Tingyi (322), Want Want China (151) and China Mengniu Dairy (2319) shrank 4%-14%. HSCEI rose 2.8% in July led by automobile and cement producers. China s vehicle sales volume grew higher-than-expected 8.1% yoy in 1H16. Great Wall Motor (2333) and Dongfeng Motor (489) added 25% and 18% respectively, the most in HSCEI. China Vanke (2202) rebounded 15% after a loss of 13% in the previous month. Anhui Conch (914) and CNBM (3323) increased by 5%-9%. Eight Chinese banks and six Chinese insurers in HSCEI grew an average 3%. Ping An Insurance (2318), China Minsheng Banking (1998) and Bank of Communications (3328) surged 7%-8%. Railway and pharmaceutical stocks also moved in line with the HSCEI. Three largest oil companies including PetroChina (857), Sinopec (386) and CNOOC (883) slumped 1%-4% since NYMEX crude oil futures price fell 14% in July. CITIC Securities (6030), Huatai Securities (6886) and GF Securities (1776) slid 3%- 4% on expectation of poor interim earnings results. Oil and securities stocks tumbled
Gain (%) Monthly Research Corporate Recommendation Report Benchmark Index: HSI Index Report Date: 31/7/2016 Note: Assume short selling is executable, gains ignore transaction costs # of Recommendations: 62 # of Buys (B): 55 # of Holds (H): 0 # of Sells (S): 7 Hit Rate: 35.48% Recommendations Absolute Return: 2.16% Benchmark Absolute Return: 4.24% Difference (Accum.): -2.08% Difference (Relative): -2.06% Calculations: Accumulative Method (Accum.) Summation of return, with direction based on call recommendation Difference calculated as sum of absolute return between recommendations and benchmark index. Buy = +, Hold = Void, Sell = - Relative Benchmark Method (Relative) Summation of relative Difference, with direction based on call recommendation. Relative Difference calculated as relative gain between recommended stock and benchmark index Average Historical Performance vs Benchmark Difference (Relative) Hit Rate Jul-15-4.39% 37.50% Aug-15-1.88% 35.71% Sep-15 6.47% 64.29% Oct-15 0.76% 57.14% Nov-15 1.90% 63.64% Dec-15-0.18% 44.07% Jan-16-2.84% 45.76% Feb-16 1.12% 67.27% Mar-16 2.99% 64.15% Apr-16-0.73% 48.08% May-16-0.79% 46.43% Jun-16-1.74% 37.70% Jul-16-2.06% 35.48% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Avg Historical Performance vs Benchmark Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Difference (Relative)
Index Performance Summary for July 2016 Index % change in share price Jul 2016 Reasons Hang Seng Index (21,891) 5.3 HSCEI (8,958) 2.8 Global stock market rally after UK s vote to leave EU Sector Performance Summary for July 2016 Sectors Outperform Stocks Automobile Great Wall Motor (2333), Dongfeng Motor (489), BYD Company (1211) % chg in share price- Jul 2016 6-25, avg +17 Reasons Strong vehicle sales in 1H16 Gaming Sands China (1928), Galaxy Entertainment (27) 12-14, avg +13 Recovery in gaming revenue Airline Air China (753), Cathay Pacific (293) 11-12, avg +12 Falling crude oil price Transport MTR Corp (66) 12 High dividend yield HK properties Eight local property stocks in HSI 6-19, avg +11 Rebound in housing prices Port China Merchants (144) 10 Lower chance of US rate hike Cement Anhui Conch (914), CNBM (3323) 5-9, avg +7 Lower chance of US rate hike Global plays AIA Group (1299), Li & Fung (494), Lenovo (992), CK Hutchison (1), HSBC (5) 4-12, avg +7 Global stock market rally HK banks BOC HK (2388), HSB (11), BoEA (23) 5-10, avg +7 High dividend yield Telecom China Mobile (941), China Unicom (762), China Telecom (728) 3-10, avg +7 PRC properties China Overseas Land (688), Dalian Wanda (3699), China Resources Land (1109), China Vanke (2202) 3-15, avg +7 Internet Tencent (700) 6 In Line/Mixed Defensive stocks Strong property sales in 1H16 Coal China Shenhua (1088) 4 Coal price up 12% in July HK utilities CLP Holdings (2), HK & China Gas (3), Power Assets (6), CKI (1038) 2-7, avg +3 High dividend yield PRC banks Eight Chinese banks in HSCEI 1-8, avg +3 High dividend yield PRC insurers Six Chinese insurers in HSCEI 1 to 7, avg +3 Power Railway Huaneng Power (902), CGN Power (1816), China Longyuan (916), CR Power (836) China Railway Group (390), CRRC Corp (1766), China Communications Construction (1800) 3-7, avg +2 Defensive stocks 1-3, avg +2 Financials HKEx (388), China Cinda (1359) 2 Low stock market turnover Pharmaceutical Sinopharm (1099) 2 Underperform Consumption Oil Belle (1880), Hengan (1044), Tingyi (322), Want Want China (151), Tsingtao Brewery (168) China Mengniu Dairy (2319) Sinopec (386), PetroChina (857), Kunlun (135) CNOOC (883), China Oilfield Services (2883) 14 to 13, avg -2 8 to 2, avg -2 Low inflation capped top-line growth of food & beverage companies Falling crude oil price PRC securities Four securities stocks in HSCEI 4- to 1, avg -3 Poor interim earnings In
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