Grasping Certainties ---Investment Strategy of the Hua an Fund for the 4th Quarter of 2009 on the Stock Market
Major Conclusion and Investment Proposals The market will enter a period of more contradiction and difference in the 4th quarter. On the one hand, the vigorous economic recovery momentum provides further solid support to the basic foundations of market expansion; on the other hand, the change of capital supply and demand and possible adjustment of macro economic policies will restrain the rise of stock index. Under such circumstances, the two-way fluctuations of the market are very likely to intensify. The worries and concerns about the current economy and market focus is on the two core factors: the strength and sustainability of economic recovery, particularly the latter and the time and force of economic adjustment, and the consequent liquidity changes. These are closely related to the mid-term trend of the stock index. In our opinion, the above uncertainties will be gradually recognized and mitigated in the 4th quarter, and will be finally transformed into certainties. 2
Major Conclusion and Investment Proposals Market valuation is quite satisfactory, but the space for further rises is narrowed. Given the highly probable assertion that corporate profit growth is accelerating at a wide margin, we tend to predict that the big board has the energy to launch a new round of rises supported by the basic foundation of the Chinese economy. Market confidence is expected to improve in the fluctuations. Based on the judgment that the economic recovery has entered the medium and late stages, we recommend that the distribution of stock investment be focused on the mid and low-reach industries benefiting from the recovery on the demand side. With reference to the relative valuation comparison and certainty of performance growth, the key sectors recommended for stock investment are finance, building materials, machinery, automobiles, household appliances, foodstuffs, retail and pharmaceutical goods. Under the market background that features more frequent index fluctuations and less certain trends, it is recommended that more attention be paid to selecting stocks from low to high prices with the investment strategy to dynamically seize tactical investment opportunities. 3
Reaffirming the economic recovery and profit rebound Liquidity and confusion of policies The upturn still exists; the two-way fluctuation will accelerate Put the emphasis on the mid- and lower-reach industries and grasp tactical investment opportunities 4
On the Road to Recovery It is quite obvious that the economic recovery is accelerating, as the macro-economic statistics of the past eight months has shown. The GDP growth is driven by the expansion of domestic demand and the end of the burden of inventories and weak external demand. Judgment on the macro economic trends of the next half to one year: The actual quarterly GDP growth is 6, 7, 9 and 10%, the GDP growth of the whole year is about 8.5%, and it will be around 11% next year. 5
On the Road to Recovery The PMI index stands above 50 for seven consecutive months. The fast rebound of electricity generation exceeds expectations. 6 30 25 National Manufacturing industry PMI 65 20 60 15 10 5 55 50 0 45-5 40-10 -15 35 2009-07 2009-01 2008-07 2008-01 2007-07 2007-01 2006-07 2006-01 2005-07 2005-01 2004-07 2004-01 2003-07 2003-01 2002-07 2002-01 2001-07 2001-01 2009-07 2009-04 2009-01 2008-10 2008-07 2008-04 2008-01 2007-10 2007-07 2007-04 2007-01 2006-10 2006-07 2006-04 2006-01 2005-10 2005-07 2005-04 2005-01 Year-on-year growth of electricity generation (SA) Electricty generation output: year-on-year growth rate of current month Source:WIND,HuaAn Fund PMI
On the Road to Recovery The investment on fixed assets increases at a high growth rate. Growth Rate Year on Year Investment on Fixed Assets in Cities and Towns Current Month Accumulative since the beginning of year Source:WIND,HuaAn Fund 7
On the Road to Recovery Consumer confidence hit the bottom and rebounded. Actual demand is still high. Consumer Confidence Index Growth Rate of Total Retail Sales of consumer Goods this month Actual Consumption Growth Rate (%) this month Source:WIND,HuaAn Fund 8
On the Road to Recovery Industrial added value represents a stable upturn trend. Growth Year on Year Industrial added value of industries above designated scale Year on Year Link Relative (quarter based) Link Relative Growth Rate Source:WIND,HuaAn Fund 9
Sustainability becomes the key No one disagrees on the fast economic recovery; the main dispute is concentrated on the sustainability of this round of economic recovery. Several key variants that will decide the sustainability of economic recovery : 1. Whether private investment can really start up, particularly investment in the real estate sector. 2. Whether exports could have better-than-expected performance. 3. Whether consumption can maintain the current high growth rate. 10
Real Estate: Upturn trend of investment remains unchanged Real estate development and investment and the new real estate development is not affected by the slowdown of sales, and continues to recover quickly. Year-on-Year Growth Rate Real Estate Development and Year-on-Year Growth Investment (Monthly) Real Estate Development and Investment (Accumulative since the beginning of the year Real Estate Development: Area of New development projects Monthly Accumulative since the beginning of the year Source:WIND,HuaAn Fund 11
Real Estate: The sustainability of demand is still uncertain The worries of the market are concentrated on the demand side: overpriced real estate restrains rigid demand; tight control over the purchase of a second house affects the demand for investment. The 4th quarter will become the key point of time for observing actual demand: after the supply is expanded once again, it is still uncertain whether transaction volume can rise simultaneously. 300 250 200 150 100-50 Building Area of Real Estate Projects Building Area of Real Estate Projects under Development in Shanghai under Development in Shenzhen 2007 2008 2009 2007 2008 2009 200 175 万平 10,000M 2 180 万平 10,000M 2 160 143 141 206 140 176 120 100 126 80 60 40 20 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source:WIND,HuaAn Fund 12
Exports: the most difficult period has passed Year-on-year, exports are still weak, however the link relative growth ratio is improving. The new export order index has risen to above 50 for four consecutive months. Link-relative growth of exports Year-on-Year Growth of Exports PMI: New Export Orders PMI: Import Source:WIND,HuaAn Fund 13
Exports: A happy surprise is likely to come It is estimated that exports will rebound after the 4th quarter, and will probably realize a two-digit positive growth rate in the next year, which can be attributed to the following facors: rising demand from developed economies like the US and European countries; the relative depreciation of RMB; and the base effect. US Japan EU RMB Source:WIND,HuaAn Fund 14
Updated Prediction of Major Economic Indicators 2009E 2010E Actual GDP(Accumulated) 8.5 11 Investment in rural and urban areas ( Accumulated ) 30 25 Retail sales in nominal terms (Accumulated) 15 15 Imports (Accumulated) -14 15 Exports (Accumulated) -17 10 Surplus ($100 Million)(Accumulated ) 2200 2500 Industrial Value-Added (Accumulated) 11 17 Industrial Profit (Accumulated) 10 30 RMB Deposit (Year-End) 29 20 M1(Year-End) 33 20 M2(Year-End) 26 20 Middle Rate(Year-End) 6.83 6.80 One-Year Deposit/Loan Interest Rate (Year End) 2.25/5.31 2.79/5.85 CPI(Average) -0.5 2.5 Source: HuaAn Fund 15
10-196 08-197 06-198 04-19 02-20 12-20 10-201 08-202 06-203 04-204 02-205 12-205 10-206 08-207 06-208 04-209 From economic recovery to profit rebound PPI is going to hit the bottom, which indicates that the process of corporate profit rebound will accelerate greatly. 15 10 5 0-5 -10 1996-10 PPI: Whole industrial products: year-on-year growth of this month 1997-10 1998-10 1999-10 2000-10 2001-10 2002-10 2003-10 2004-10 2005-10 Source:WIND,HuaAn Fund 2006-10 PPI: PPI: Whole industrial products: year-on-year growth of this month 2007-10 2008-10 200 200 150 150 100 100 50 50 0-50 -50-100 -100 1996-10 1997-08 1998-06 1999-04 2000-02 Gross profit growth of industrial 工业企业利润总额同比增长 enterprises year on year (%) (%) PPI 当月同比增长 ( 右轴 ) PPI Growth month on month 2000-12 2001-10 2002-08 2003-06 2004-04 2005-02 2005-12 2006-10 2007-08 2008-06 2009-04 12 12 10 10 8 6 4 2 0-2 -2-4 -4-6 -6-8 -8 16
From economic recovery to profit rebound The profit of industrial enterprises dropped by 10.6% from January to August year-onyear, which substantially narrowed compared with the -22.9% from January to May. From June to August, the growth rate of the single quarter year-on year-realized positive growth for the first time since the 4th quarter of 2008, and a profit margin of the same period has risen to 6%, within the normal growth range. 80% 7.0% 60 60% 40% 20% 0% 6.0% 5.0% 4.0% 3.0% 2.0% 50 40 30 20 10 0-10 -20% 1.0% -20 当月销售利润率工业利润当月同比 -40% Industrial profit growth of current month year on year Sales profit margin of this month 收入增长率利润增长率 -30 0.0% 2009 February, 年 2 月 2009 2008 February, 年 2 月 2008 2007 February, 年 2 月 2007 2006 February, 年 2 月 2006 2005 February, 年 2 月 2005 2004 February, 年 2 月 2004 2003 February, 年 2 月 2003 2002 February, 年 2 月 2002 2001 February, 年 2 月 2001 2000 February, 年 2 月 2000 1999 February, 年 2 月 1999 1998 February, 年 2 月 1998 1997 February, 年 2 月 1997 1996 February 年 2 月 1996 Income growth rate Profit growth rate -40 09.8 09.2 08.8 08.2 07.8 07.2 06.8 06.2 05.8 05.2 04.8 04.2 03.8 03.2 02.8 02.2 01.8 Source: WIND,HuaAn Fund 17
From economic recovery to profit rebound It is estimated that the profit growth rate of industrial enterprises of the whole year will be close to 10%, and the growth rate of 2010 is expected to be 20%~30%. As a result of this trend, the accelerated rebound of profits of listed companies has become highly probable. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Total net profit growth rate year on year (%) Total profit growth of industries above designated scale year on year 100 90 80 70 60 50 40 30 20 10 0-10 -20-30 -40 2009-09 2009-03 2008-09 2008-03 2007-09 2007-03 2006-09 2006-03 2005-09 2005-03 2004-09 2004-03 2003-09 2003-03 Source:WIND,HuaAn Fund 18
Growth rate of net profits for 2009: 17%~ to 21% (conservative estimates) Estimated by two methods: Based on conservative method, the net profit of the whole year will be RMB950.0 billion, the growth rate year-on-year is 17%, under the assumption that the net profits of all enterprises listed on A-share market are the same for the first and second half of 2009; namely, the link relative growth is zero. In the first half of 2009, the ROE of all comparable enterprises listed on A- share market is 6.45%. If ROE remains unchanged in the second half of the year, the ROE of the whole year is 13%. The corresponding net profit is RMB980.0 billion, the growth rate year-on-year is 21%. 19
Profit expectation is still likely to be adjusted upward The unanimous expectation of net profit growth rates of 2009 in the recent period does not fall with the slowing down of the market demand; it still stays at above 20%. It is estimated that when the 3rd quarter statement is published, the possibility of further upward adjustment cannot be ruled out. Changes of Unanimous Expectation of Net Profit of Shanghai and Shenzhen 300 in the past year 25% Year-on-year growth of unanimous expected net profit of 2009 Shanghai- Shenzhen 300 Index 4000 20% 3500 3000 15% 2500 10% 2000 5% 1500 Oct-08 Nov-08 Dec-08 Feb-09 Apr-09 May-09 Jun-09 Aug-09 Sep-09 Source: Consensus Data,HuaAn Fund 20
Reaffirming economic recovery and profit rebound. Liquidity and confusion of policies. The upturn trend still exists, but the two-way fluctuations will accelerate. Put the emphasis on the middle and lower reach industries and grasp tactical investment opportunities. 21
Monetary environment relatively loose as a whole It is estimated that the total loans of this year and the next year will be RMB10.00 trillion yuan and RMB7.00 trillion yuan respectively, which is an adequate supply of loans to the real economy. The rise of money velocity will, to some extent, offset the slowdown of credit expansion. The relatively loose monetary policy will remain unchanged in the short-term. 20000 18000 16000 14000 12000 10000 8000 New-added RMB loans of current month (RMB100 Million) 30 25 20 15 China s money supply growth rate (%) 6000 4000 10 2000 0 5 2005-01 2005-04 2005-07 2005-10 2006-01 2006-04 2006-07 2007-01 2006-10 2007-04 2007-07 2007-10 2008-01 Source: WIND,HuaAn Fund 2008-04 2008-07 2008-10 2009-01 2009-04 2009-07 Financial Institutions: New-added RMB Loans: Value of current month 0 1996-01 1997-01 1998-01 1999-01 2000-01 2001-01 2002-01 M1:Year on year 2003-01 2004-01 M2:Yearon-Year 2005-01 2006-01 2007-01 2008-01 2009-01 22
Golden Period of Liquidity is over Since the second half of this year, the scale of credit is far above historical average levels. However, from the perspective of increments, the period with the most abundant liquidity is over. MI is still seeing an upturn trend. M2 has shown signs of hitting the ceiling, which indicates a downturn trend of monetary gaps (nominal growth rate of M2-GDP). RMB Billion New-added Loans of Current Month Year-on-year M2 Growth Rate Year-on-year M2 Growth Rate Nominal GDP Growth Rate Average Level of Past 5 Years 2009 Source:WIND,HuaAn Fund 23
Diversion of household deposits still takes time The rise of M1/M2 from the bottom indicates that the trend of current deposits is still underway, however, the flow of deposits into the capital market is not as massive as expected. The expected inflation and decrease of actual interest rates are likely to be opportunities. 0.4 0.39 0.38 M1/M2 M1 Growth Year- on- Year M2 Growth Year-on-Year 31% 29% 27% 25% 23% 0.37 21% 0.36 19% 17% 0.35 15% 13% 0.34 11% 0.33 9% 7% 0.32 09.4 08.12 08.8 08.4 07.12 07.8 07.4 06.12 06.8 06.4 05.12 05.8 05.4 04.12 04.8 04.4 03.12 03.8 03.4 02.12 02.8 02.4 01.12 01.8 01.4 00.12 00.8 00.4 99.12 99.8 99.4 98.12 98.8 98.4 5% Actual Interest Rate: (Benchmark Interest rate of deposit) - CPI 1-year time deposit interest rate Data Source: Wind Information Source:WIND,HuaAn Fund 24
The pressure of short-term supply should not be neglected IPO: RMB106.0 billion has been raised. The total of raised capital for the whole year is expected to be RMB160.0 billion. Refinancing: additional plans will be RMB340.00 billion, the shares allotment plan will be RMB50.0 billion. Entrepreneurial Enterprise Market: it is estimated that the total financing of 149 enterprises will be RMB33.6 billion. The actual number is likely to exceed this. Potential pressure on the financing of bank stocks: to meet the requirement for a capital adequacy ratio of 10%, the financing of bank shares will stand between RMB50 and RMB80 billion. Possible international board. 4000 3000 2000 1000 0 Issued IPO Estimated IPO of whole year Plan for Additional IPO Plan for shares allotment Growth Enterprise Market Source:WIND,HuaAn Fund 25
The free circulation of restricted shares: Care about the underweight of small non-tradable shares The pressure of lifting restrictions on non-tradable shares mainly comes from stateowned shares, so the pressure can be neglected. By the end of 2009, the total of freed small non-tradable shares will exceed 98%. The pressure on the market is relatively limited, the proportion of underweight shares since this year is on the rise, so it is worth paying attention to. Time Month Lifting restrictions on circulation Large Nontradable shares (100 Million Shares) Small Nontradable shares Data Source: website of CSDCL Total Actual Underweight(100 million shares) Large Nontradable shares Small Nontradable shares Total Large Nontradable shares Underweight Proportion Small Nontradable shares 200807 21.68 3.66 25.34 2.93 5.56 8.49 13.5% 151.9% 33.5% 200808 210.37 5.1 215.47 0.94 3.87 4.8 0.4% 75.9% 2.2% 200809 9.05 1.58 10.62 1.47 3.05 4.53 16.2% 193.0% 42.7% 200810 79.44 10.61 90.65 1.42 2.62 4.04 1.8% 24.7% 4.5% 200811 47.7 6.14 53.85 2.5 4.44 6.94 5.2% 72.3% 12.9% 200812 110.01 16.02 126.03 3.63 4.6 8.23 3.3% 28.7% 6.5% 200901 54.42 26.06 80.48 3.03 2.68 5.7 5.6% 10.3% 7.1% 200902 107.39 30.44 137.83 4.55 5.64 10.19 4.2% 18.5% 7.4% 200903 106.52 20.67 127.19 5.28 5.56 10.84 5.0% 26.9% 8.5% 200904 153.37 18.32 171.69 4.11 6.05 10.16 2.7% 33.0% 5.9% 200905 227.77 18.83 246.6 4.85 5.69 10.54 2.1% 30.2% 4.3% 200906 111.13 15.54 126.67 6.52 5.88 12.4 5.9% 37.8% 9.8% 200907 77.26 6.09 83.35 7.29 6.34 13.63 9.4% 104.1% 16.4% 200908 108.92 2.3 111.21 4.5 2.57 7.07 4.1% 111.7% 6.4% Total 26
Capital entry into stock market slows down The willingness of new capital entry into the stock market correlates to the performance of the stock market. After the market adjustment in August, the number of new stock accounts has fallen once again. The issuance of funds is still sluggish after a slight rise. There is still a big gap compared with historical highs. 1800000 Number of new-added accounts of A-share 1200 Amount of monthly issue of new funds( 100 million)(stock+mixed+ break even) SEE Composite Index_ Right 7000 1600000 1400000 1200000 1000 800 6000 5000 1000000 800000 600000 400000 600 400 4000 3000 2000 200000 0 06-01 06-03 06-05 06-07 06-09 06-11 07-01 07-03 07-05 07-07 07-09 07-11 08-01 08-03 08-05 08-07 08-09 08-11 09-01 09-03 09-05 09-07 09-09 200 0 2006 2007 2008 2009 1000 0 Source: WIND,HuaAn Fund 27
Policy changes since the end of 2008 Meetings Time Tone of policy and core contents Executive Meeting of State Council November, 2008 Practice proactive fiscal policy and moderate easy money policy for tackling the global financial crisis Introduce ten measures for promoting economic growth, and 4-trillion stimulus package for investment Economic Work Conference of CPC Central Committee and State Council Polibureau Meeting of CPC Central Committee December, 2008 July, 2009 Keeping steady and fast economic development is the primary task of economic work in 2009 Work hard to ensure growth and set the expansion of domestic demand as the fundamental means for this purpose The economy is in the critical period of stabilization and recovery, the foundation is yet to be consolidated; Maintaining continuity and stability of macro economic policies and ensuring that continued growth be the primary task Executive Meeting of the State Council August, 2009 Pay more attention to industrial restructuring in ensuring growth; Resolutely curb the over-production capacity of some industries and repetitive construction 28
Policy: Natural Result of Transition from Ensuring Growth to Industrial Restructuring Regarding the policy, we not only listen to the words, but also pay attention to the facts. The most effective margin effect period of the stimulus policy has passed, the stimulus effect is starting to appear. There is no doubt that the 8% economic growth rate can be ensured. The focus of work has entered the period of improving economic growth quality and optimizing industrial structure. The foundation for stabilization and recovery is not yet consolidated, the withdrawal of stimulus policies should be a gradual process, and will experience ups and downs. The gaming between economic fundamentals and policy will always exist. Whether the uncertainties of policies (such as the time of stimulus policy withdrawal and force of policy diversion, etc) can be weakened and eliminated or not, the economic work conference of the CPC central committee and the State Council, which is to be held between the end of November and early December, may be a critical turning point for the economic stimulus package. 29
New stimulus policy will shift the focus to improving the people s livelihoods and promoting consumption The possibility of new stimulus policies in the future cannot be ruled out. However, the priority of the policy will be placed on improving people s livelihoods and stimulating consumption, for instance, Cut taxes and encourage consumers consumption Improve social security and regulate income distribution Support small and medium enterprises and encourage private investment Perfect the land-use rights transfer system and advance urbanization process 30
Reaffirming the economic recovery and profit rebound Liquidity and confusion of the policies The upturn trend still exists; the two-way fluctuation will accelerate Put the emphasis on the middle and lower reach industries and grasp tactical investment opportunities 31
Market valuation as a whole is still within the reasonable range The Shanghai-Shenzhen 300PE and PB are around the historical average levels, the valuation as a whole is reasonable 50 45 Shanghai-Shenzhen 300PE(TTM) Historical Average Value 8 7 Shanghai-Shenzhen 300PB Historical Average Value 40 6 35 30 25 20 15 5 4 3 2 10 2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01 2009-01 1 2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01 2009-01 Source:WIND,HuaAn Fund 32
The polarization of evaluation of industries is still distinct 33 As of September 25, 2009, the finance and chemical industries are the only two industries whose expected PE was lower than the market valuation as a whole. Unanimous Expected 行业一致预期 PE of Industries PE( (Weighing 总市值加权 of Total ) Market Value) 80 70 60 50 40 30 20 10 0 nonferrous metal Industry 有色金属 Electronic Components 电子元器件 Comprehensive Services 综合 餐饮旅游 Catering and Tourism Traffic and Communication 交通运输 Agriculture, Forest, Live 农林牧渔 Stock and and Fishery 信息服务 Information Services 食品饮料 Food and Drink Information Equipment 信息设备 ferrous 黑色金属 metal Pharmaceutical and Biology 医药生物 Commerce and 商业贸易 Trade Light 轻工制造 Industry and Manufacturing Mechanical 机械设备 Equipment Real Estate 房地产 Public Utilities 公用事业 Textile and Apparel 纺织服装 Traffic and Transport Equipment 交运设备 家用电器 Household Appliances 建筑建材 Architect Design 采掘 Excavation Shanghai-Shenzhen 300 Index 沪深 300 成份 化工 Chemical Industry Financial Services 金融服务 Source: Consensus Data, HuaAn Fund
After elimination, PE is still lower than the historical average level After eliminating finance, petroleum, petrochemical industries, the market static PE increased from 31.4 times before elimination to 45.5 times, still lower than historical average level of 46.4. Source:WIND,As of September 25, 2009 34
Comparison of International valuation If it is measured by static PE, A-share is no longer the most expensive capital market, however, the PB is still ranking high compared with the global market. Russian RTS Index 14.0 International PE Comparison Russian RTS Index International PB Comparison French CAC40 14.6 Korean KOSPI Index S&P 500 Index 19.8 NIKKEI 225 Indian SENSEX Index 20.1 French CAC40 Brazilian St.Paul Hang Seng Indexes SSE Composite Index Korean KOSPI Index German DAX30 20.8 22.5 31.4 36.6 45.2 German DAX30 FTSE100 Brazilian St.Paul HANG SENG INDEX S&P 500 Index SSE Composite Index FTSE100 85.3 Indian SENSEX Index 0 20 40 60 80 100 0 1 2 3 4 Source:Bloomberg,HuaAn Fund,As of September 25, 2009 35
A/H Share premium is at quite a low level A/H share premium has dropped to around 16%, far blow the historical average level of 32%. 250 230 210 190 170 150 130 110 90 70 Hang Seng AH Share Premium Index Average Value 50 06-01 06-07 07-01 07-07 08-01 08-07 09-01 09-07 Source:Bloomberg,HuaAn Fund,As of September 25, 2009 36
Stock Assets remains attractive Comparison of expected yield based on the large category of assets shows that A-share is still attractive compared to other assets. 5% 4.95% 4% 3% 3.18% 3.53% 3.00% 2.25% 2% 1% 0% Dynamic E/P of A-Share Market Static E/P of A- Share Market The ten-year bond yields Real Estate Rent Yield One-Year Time Deposit Interest Rate Source:HuaAn Fund,As of September 25, 2009 37
The mood of investors is relatively moderate Average daily turnover and closed fund discount rates and other indicators fluctuate around the average historical levels, which shows the short-term wait-and-see attitude. Turnover Rate 4wma Average Value Discount Rate of Closed Fund Historical Average value Source:WIND,HuaAn Fund 38
Market style slightly prefers the big board The stocks of the middle and small board have been on the rise for two months; relative to the big board, the probability of further extra premiums is declining. However, in the short-term, there are no obvious signs supporting the reversion of market style. 80 TTM PE of Growth Enterprise Market TTM PE of SSE Composite Index 50 PE of SSE Index 50/PE of Growth Enterprise Market (Right) 0.9 70 60 0.8 50 0.7 40 30 0.6 20 10 0.5 0 0.4 05-01 05-04 05-07 05-10 06-01 06-04 06-07 06-10 07-01 07-04 07-07 07-10 08-01 08-04 08-07 08-10 09-01 09-04 09-07 Source:WIND,HuaAn Fund 39
Summary of Market Judgment Positive factors: the economic recovery has entered into the period of consolidation and affirmation. With the accelerated recovery of corporate profits, the performance has become the core driving force in replacement of liquidity. Negative factors: the golden period of liquidity has gone, the negative changes have taken place in the short-term market supply and demand, the policy diversion is a matter of time, so uncertainties are increasing. The value level is reasonable as a whole. Stock assets are still attractive. As the peak period of liquidity has passed, the expansion of evaluation will rely more on the realization of profits, so the appreciation extent is limited. Based on the certainty of fast recovery of profits, it is expected that the stock market of the 4th quarter is likely to have a round of rise supported by economic fundamentals. The gradual rise in weight of the big board amidst fluctuations is still a highly probably event in spite of existing interference from policy and capital supply and demand, which leads to the larger two-way fluctuations on the capital market. 40
Reasonable Interval of Shanghai-Shenzhen 300 Based on the assumption that the dynamic PE of 2009 is 18-22 times, the reasonable interval of Shanghai-Shenzhen is 2600-3400 points 沪深 Shenzhen 300 指数 300 假定 P E 水平 Shanghai- Assume PE Level Index Predicted 预测 Growth 2009 年净利润增速 Rate of Net Profit of 2009 0% 5% 10% 15% 20% 25% 30% 12 1499 1574 1649 1724 1799 1874 1948 14 1749 1836 1924 2011 2098 2186 2273 16 1998 2098 2198 2298 2398 2498 2598 18 2248 2361 2473 2585 2698 2810 2923 20 2498 2623 2748 2873 2998 3123 3247 22 2748 2885 3023 3160 3297 3435 3572 24 2998 3148 3297 3447 3597 3747 3897 26 3247 3410 3572 3735 3897 4059 4222 28 3497 3672 3847 4022 4197 4372 4546 Source: HuaAn Fund 41
Reaffirming the economic recovery and profit rebound Liquidity and confusion of the policies The upturn trend still exists; the two-way fluctuation will accelerate. Put the emphasis on the middle and lower reach industries and grasp tactical investment opportunities. 42
Industry Selection and Configuration From the high to low-reach industries: Emphasis should be placed on the lower-reach industries, grasp two investment directions and three investment clues. From the low to high-reach industries: Based on the industry profit growth rate and comparison of evaluations of industries, attention shall be paid to the industries of finance, building materials, machinery, automobiles, household appliances, retail and pharmaceutical goods. 43
Selection of Industries from high to low The economic recovery has entered into the latter period. Attention shall be paid to the industries benefiting on the demand side. Two Directions : Benefits from economic recovery and investment-driven demand. Benefits from policy transition to industrial restructuring Three Clues: Domestic demand orientation Export recovery Low-carbon economy 44
Comparison of Profit Growth Rates of Industries It is unanimously expected that profit growth rates of industries in 2009 show that profit growth rates of public utilities, chemicals, building materials, traffic and transport equipment industries take the leading position. 600% 500% 400% 300% 200% 45 100% 0% Information Service 信息服务 Ferrous Metal 黑色金属 Traffic and Transport 交通运输 Comprehensive Services Light Industry Manufacturing Excavation 综合 轻工制造 采掘 Commerce and Trade 商业贸易 Textile and Apparel 纺织服装 Pharmaceutical and Biology Financial Services Household Appliances Nonferrous Metal 医药生物 金融服务 家用电器 有色金属 Mechanical Equipment Information Equipment 机械设备 信息设备 Food and Drink 食品饮料 Agricultural, Forest, husbandry and Fishery Real Estate 农林牧渔 房地产 Traffic and Transport Equipment 交运设备 Building Materials 建筑建材 Chemical 化工 Public Utilities 公用事业 -100% Source:Consensus Data, HuaAn Fund, as of September 25, 2009
Comparison of Evaluation of Industries Historical PE evaluations of the industries: except for a few industries like nonferrous, steel, traffic and transport, the PE values of most industries are below average historical levels. The over underestimated industries include agriculture, building materials, food, pharmaceuticals and finance. 70 60 50 40 30 20 10 0 Agricultural, Forest, Husbandry and Fishery Excavation Chemical Ferrous metal Non-Ferrous metal Building Materials Machinery Equipment Traffic and Transport Equipment Information Equipment Household Appliances Food and Drink Textile and Apparel Light Industry Manufacturing Pharmaceutical and Biology Public Utilities Traffic and Transport Real Estate Financial Services Commerce and Trade Information Services Source:WIND,HuaAn Fund, As of September 25, 2009 46
Comparison of Evaluation of Industries Historical PB evaluations of the industries: except for the evaluation of the pharmaceutical industry, the evaluations of almost all the industries are below the average historical levels, the over/underestimated industries include building materials, food, real estate, finance, commerce and trade. 14 12 10 8 6 4 2 0 47 Agricultural, Forest, Husbandry and Fishery 农林牧渔 采掘 Excavation 化工 Chemical Ferrous metal 黑色金属 Non-Ferrous metal 有色金属 Building Materials 建筑建材 机械设备 Machinery Equipment Traffic and Transport Equipment 交运设备 信息设备 Information Equipment Household Appliances 家用电器 Food and Drink 食品饮料 Textile and Apparel 纺织服装 Light Industry Manufacturing 轻工制造 Pharmaceutical and Biology 医药生物 公用事业 Public Utilities 交通运输 Traffic and Transport 房地产 Real Estate 金融服务 Financial Services Commerce and Trade 商业贸易 Information Services 信息服务 Source:WIND,HuaAn Fund,As of September 25, 2009
Comparison of Evaluation of Industries The comparison based on PB/ROE shows that the industries with relative evaluation advantages mainly include finance, food and drinks, ferrous metals and household appliances 25% 20% Commerce and Trade Traffic and Transport Financial Services Food and Drink Machinery Equipment 15% 10% 5% Traffic and Transport Equipment Chemical Ferrous metal Household Appliances Real Estate Public Utilities Light Industry Manufacturing Building Materials Excavation Textile and Apparel Information Pharmaceutical and Biology Services Information Equipment Agricultural, Forest, Husbandry and Fishery Complex Non-Ferrous metal 0% 1 2 3 4 5 6 7 Source:HuaAn Fund,As of September 25, 2009 48
Proposals for Investment in the 4th quarter Based on the preliminary conclusion drawn from high to the low and the opposite, it is recommended that investment should be concentrated on the manufacturing sector in the middle reach and the consumption service sector on the lower reach. Close attention should be paid to theme opportunities like exports and the low-carbon economy. It is recommended that investments can be made in the industries of finance, building materials, machinery, automobiles, household appliances, foodstuffs, retail and pharmaceutical goods. Considering the status quo of the market and with more frequent fluctuations and uncertain trends, it is recommended that the stocks should be selected from low to high in the investment strategy, the fullband operation should be strengthened, and tactical investment opportunities should be seized dynamically. 49
Disclaimer Declaration This research report (the Report for short) is prepared by HuaAn Fund Management Co., Ltd (the Company for short), the fund managers of the Company are likely to use this Report when managing the investment portfolios of their clients. The Company will selectively distribute the Report to their clients (including potential clients) only for reference purposes, and the Report shall not be deemed as any suggestion for buying or selling any stock mentioned herein, and it is not prepared for the specific investment objective, financial position or special needs of any particular recipient. The securities or markets referred in the Report are probably not open to investors of all types. The information carried in the Report comes from reliable channels in the opinions of the Company, however, the Company does not provide any direct or implicit declaration or warrant for its correctness or integrity, this Report is not used as the complete statement or summary of relevant securities or markets. Any expressed opinion is likely to be changed and will not be advised separately. The Report should not be used by the recipient for replacing his independent judgment. The Company, its relevant agencies, employees and/or agents bear no liability for any loss of any person resulting from the use of the part or the whole of the Report, or any loss arising from that. 50
Disclaimer Declaration The analysts, strategists and research assistants assigned for preparing the Report confirm that they have clearly expressed their opinions on the securities referred to in the Report and, to their best knowledge, they and the stakeholders of their properties have no stake in these securities, their compensations depend on a number of factors, including the research quality, internal and client feedback and the whole income of the Company, but the expression of some specific investment proposal in the Report does not serve as the exchange condition for their compensations. The copyright and relevant intellectual property rights of the Repot are owned by the Company, and the Company reserves all the rights for them. With prior written consent of the Company, no one should distribute, reproduce or publish the Report or any part of it, and should not delete or revise any part of the Report in defiance of the genuine purpose of the Report. 51