China - Market Strategy 04 (Aug 18 - Jan 23)

[winston]

China Strategy - Assessing the impact of power shortage

More provinces have implemented power cuts, impacting manufacturing production hubs provinces.

The power shortage is a result of a combination of strong power demand, power shortage, a subdued hydro power production and a campaign-style effort in meeting year-end energy intensity reduction, i.e., the “Dual Control” targets.

As the peak winter season for power consumption is approaching, senior government officials like Premier Li and Vice Premier Han have ensured sufficient electricity supply.

The NDRC announced key measures to address power shortage. As there will be time lag in increasing coal supply, we believe power rationing will persist in the next few months.

We believe an inflection point in policy fine tuning could be approaching, which should aim at preventing downside risks to growth, in light of power shortage and weakening of the latest official manufacturing Purchasing Manager Indices.

We will monitor key dates in October and November so as to gauge implementation and clarity on government stance, i.e., in mid-October when 3Q21 GDP will be announced, and in November when the Sixth Party Plenum will be held.

Over the past month, the onshore A-share CSI300 Index continued to outperform the offshore Chinese equities (i.e., MSCI China) and Hang Seng Index by more than 8ppt.

Given the significant relative outperformance, we are unwinding our relative preference to the onshore A-share market due to
i) potential profit taking and
ii) the power shortage will affect companies in both the onshore and offshore Chinese equities markets.

A prolonged power shortage could add further pressure on earnings downward revision.

We would monitor whether power shortage issue would be addressed or eased after the end-September evaluation.

Consensus is forecasting 16% y/y earnings growth for both MSCI China and CSI300 Index in 2022e and we believe the risks to earnings growth are skewed to the downside if power shortage persists longer-than-expected, triggering the knock-on effect from upstream to downstream sectors.

We maintain our cautious stance on industries with policy headwinds. We recommend investors to adopt a barbell strategy - for defensive quality plays that are align with policy priorities (which should hold up better as earnings downward revisions start to come under pressure), and HK financials (which can benefit from the higher interest rate environment and the Greater Bay Area Wealth Connect).

The current power shortage should support selective materials where supply tightness outweighs softening demand, such as aluminum, cement and steel.

It also reiterates our preference for the renewables, which we view carbon neutrality offers a multi-year investment theme.

Aside from the pure renewables plays, selected China Big Three Oil Majors should benefit from exposure to renewables and rising oil price, such as Sinopec.

Source: OCBC

[winston]

China Strategy - Assessing the impact of power shortage

More provinces have implemented power cuts, impacting manufacturing production hubs provinces.

The power shortage is a result of a combination of strong power demand, power shortage, a subdued hydro power production and a campaign-style effort in meeting year-end energy intensity reduction, i.e., the “Dual Control” targets.

As the peak winter season for power consumption is approaching, senior government officials like Premier Li and Vice Premier Han have ensured sufficient electricity supply.

The NDRC announced key measures to address power shortage. As there will be time lag in increasing coal supply, we believe power rationing will persist in the next few months.

We believe an inflection point in policy fine tuning could be approaching, which should aim at preventing downside risks to growth, in light of power shortage and weakening of the latest official manufacturing Purchasing Manager Indices.

We will monitor key dates in October and November so as to gauge implementation and clarity on government stance, i.e., in mid-October when 3Q21 GDP will be announced, and in November when the Sixth Party Plenum will be held.

Over the past month, the onshore A-share CSI300 Index continued to outperform the offshore Chinese equities (i.e., MSCI China) and Hang Seng Index by more than 8ppt.

Given the significant relative outperformance, we are unwinding our relative preference to the onshore A-share market due to
i) potential profit taking and
ii) the power shortage will affect companies in both the onshore and offshore Chinese equities markets.

A prolonged power shortage could add further pressure on earnings downward revision.

We would monitor whether power shortage issue would be addressed or eased after the end-September evaluation.

Consensus is forecasting 16% y/y earnings growth for both MSCI China and CSI300 Index in 2022e and we believe the risks to earnings growth are skewed to the downside if power shortage persists longer-than-expected, triggering the knock-on effect from upstream to downstream sectors.

We maintain our cautious stance on industries with policy headwinds. We recommend investors to adopt a barbell strategy - for defensive quality plays that are align with policy priorities (which should hold up better as earnings downward revisions start to come under pressure), and HK financials (which can benefit from the higher interest rate environment and the Greater Bay Area Wealth Connect).

The current power shortage should support selective materials where supply tightness outweighs softening demand, such as aluminum, cement and steel.

It also reiterates our preference for the renewables, which we view carbon neutrality offers a multi-year investment theme.

Aside from the pure renewables plays, selected China Big Three Oil Majors should benefit from exposure to renewables and rising oil price, such as Sinopec.

Source: OCBC

[winston]

China halfway through half of the cycle of correction: Fidelity

China has gone through half of the cycle of correction in the equity market and the regulatory cycle started from March 2021 is expected to end no later than one year, said financial service firm Fidelity.

Victoria Mio, director of Asian equities at the firm, said the valuation of mainland stocks is "very cheap" right now and they are safe to invest in, as she cited the current price-to-earnings ratio of the MSCI China index -- a gauge of the performance of mainland stocks -- at 20 times, which is slightly below the mean.

From the mid-term perspective, the polysilicon sector will be the largest winner of the net-zero target of carbon dioxide emission to be achieved in 2060, since it will enjoy the highest profit margin in the supply chain, said Mio.

Mio added that investors should look for Chinese companies that support sustainable energy, as those using traditional energy may suffer from increasing cost of production and significant margin squeeze in the long run.

Source: The Standard

https://www.thestandard.com.hk/breaking ... :-Fidelity

[winston]

China stocks are braced to break out this quarter as policymakers are poised to loosen policies amid property and power woes

The availability of bank credit may increase to attract homebuyers back to the property market, said Haitong Securities

The People’s Bank of China has several options in its policy tool kit to increase financial liquidity in the economy, said Citic Securities

by Zhang Shidong

Source: SCMP

https://www.scmp.com/business/markets/a ... e=homepage

[winston]

Back to consumption story

Downward pressure on production heightened.

Manufacturing investment remains the key driver.

The counter cyclical role of infrastructure investment was disrupted by the funding issue.

Consumption was the bright spot in September. The share of final consumption expenditure to China’s GDP growth increased further to 64.8% in the first three quarters.

The latest messages from PBoC press conference together with the full rollover of MLFs last Friday dialled back market expectation on imminent RRR cut.


The Chinese economy decelerated further to 4.9% yoy in the third quarter from 7.9% yoy in the second quarter.

The large part of deceleration was due to the base effect as China is the first major economy recovering from the pandemic in the second half of 2020.

On two-year average after adjusting for the pandemic effect, the Chinese economy grew by 4.9% yoy, down from 5.5% in the second quarter.

This 0.6% deceleration was mainly attributable to looming event risks including regulatory tightening, Evergrande debt crisis and recent power shortage.

Source: OCBC

[winston]

From BlackRock to JPMorgan, China stock funds bleed with mistimed optimism on tech rebound and regulations

Key China-focused vehicles managed by BlackRock, JPMorgan, Fidelity and E Fund Management reported steep losses in third quarter

Analysts have trimmed their price targets for Alibaba, Tencent and Meituan by up to 25 per cent since May, with most retaining their buy calls

by Zhang Shidong and Cheryl Heng

BlackRock, JPMorgan, Fidelity and E Fund Management, posted a 14 per cent to 20 per cent decline in their flagship equity funds from July to September.

More than US$460 million of market value in tech stocks in Hong Kong has been erased in regulatory crackdowns.

The MSCI China Index, tracking mostly offshore Chinese stocks, slumped 18 per cent last quarter, while the Hang Seng Tech Index in Hong Kong lost 25 per cent.

Source: SCMP

https://www.scmp.com/business/markets/a ... imism-tech

[winston]

China Strategy: Earnings disappointment overhang; focus on those with earnings certainty and policy

Chinese equities markets have been clouded by regulatory guidance, concerns of an Evergrande spillover and power rationing over the past few months.

While valuation has retrenched back to close to historical average level for MSCI China, we expect downward earnings revision will continue for both onshore and offshore Chinese equities and this has kept us to maintain a Neutral recommendation for the time being.

While further earnings downward revision is likely to be an overhang, we recommend investors to focus on those with earnings certainty and policy support.

In this note, we will focus on the 3Q21 earnings and provide an update on power rationing. In addition, we will also discuss the latest guideline on internet and platform companies, and the “re-opening” theme in HK.

Regulators have introduced various measures to ease the situation on power shortages and elevated commodity price levels and it is expected that power rationing pressure could ease in 4Q.

This would be negative for coal but positive on IPPs. The power shortage development reiterates our thesis that renewables is a multi-year investment theme.

The PBOC has recently announced a new financial instrument to support decarbonization, which may help lower the cost of financing for renewable energy operators and equipment makers, and therefore could improve project return profile and lifting equipment demand.

We believe the latest SAMR’s guidelines on internet and platform classifications could be an overhang for the sector given a lack of implementation details. It could potentially cap the upside of sector valuation multiple from a substantial re-rating in the near-term, but we believe it is unlikely to affect current valuation multiples into 3Q21 earnings announcement.

We maintain our view that the road to recovery for the sector is likely to be a long and bumpy one. Within the sector, Baidu is one of the preferred picks and could benefit from potential opening up of content by other platforms and providers for Baidu search.

The HKSAR government is placing top priority on border re-opening with Guangdong province and hence, would be supportive to the “re-opening” theme.

While the initial phase will be subject to a limited quota, it will form an expectation of sequential increase in visitor arrival, benefitting the retail sector, retail landlords and other companies and sectors where Mainland visitors are a major driver to their business (such as insurance). We prefer AIA and Wharf REIC.

Source: OCBC

[winston]

JPM Optimistic on CN Stocks' 2022 Outlook, Forecasts 'New Heroes' to Emerge from NEV, Renewables

JPMorgan expressed an optimistic view for the outlook of the Chinese equity market next year, remarking that the Chinese equities have generally underperformed the emerging markets and markets in the Asia-Pacific region YTD.

The MSCI China index dropped 19% YTD and may see further decline as the market continued to observe the potential impact of the Omicron variant of COVID-19, the broker added.

JPMorgan stated that the general market consensus predicted the revenue growth of the Chinese stocks to accelerate from 3% YoY in 2020 to 24% and 13% in 2021 and 2022, respectively, and their NPM to expand from 5.9% in 2020, to 6.7% and 7.3% in 2021 and 2022, respectively.

The broker contended that China's structural reform is accompanied with distinct sector impacts and that the investors are advised to avoid the "old heroes" such as property developers.

The Chinese government has been introducing regulatory measures on "internet +" and new economy shares, in hope to cultivate "new heroes" (such as NEV, renewable energies, advanced manufacture, technology and digitalization, etc.), and forge a new driving engine for economic growth.

JPMorgan advised Overweight for industrials, IT, renewables, and consumer discretionary; Neutral for energies and raw materials and Underweight for staples, communications services, and healthcare.

Source: AAStocks Financial News

[winston]

China Strategy: ADR delisting risk should be manageable; watch out for policy tone at the CEWC

Over the past month, MSCI China (-3.3%) has underperformed CSI300 (+4.9%) by 8ppt. Despite the relative outperformance, we maintain our relative preference to A-shares as it has
i) limited exposure to internet and platform sectors,
ii) more industries to benefit from policy tailwinds and
iii) lower correlation with other equity markets.

The November credit data, together with the comment at the December Politburo meeting and the reserve requirement rate cut announced last week, signaling that a policy inflection towards countercyclical easing is in the making.

The Central Economic Work Conference (CEWC) will be held next week. While it does not announce any quantitative targets, it sets the policy stance for next year and growth targets to be endorsed at the National People’s Congress (NPC) in March next year. We will watch out if more policy measures could be unveiled between the CEWC and the NPC.

While further earnings downward revision is likely to persist, we advocate investors to adopt a barbell strategy, and prefer:-
i) companies and sectors with policy support to drive growth and
ii) those with strong cash flow and dividend support.

While the road to recovery for internet and platform companies remains a long and bumpy one, there could be a window of trading opportunity before the next quarterly results announcement, where a reality check will shed light whether earnings downward revision will stabilize or not.

With a stable dividend payout ratio and a relatively high dividend yield, a trading opportunity for Chinese banks is approaching towards 4Q21 results announcement.

For investors focusing on long-term structural growth, we reiterate our preference to renewables and new energy vehicles sectors. While we believe domestic consumption would be a key beneficiary from “Common Prosperity”, the Covid-19 outbreaks and the “Covid-zero” strategy have weighed on consumer sentiment.

Source: OCBC

[winston]

JPMAM: CN Policy Easing Helps 1H22 Econ Growth; Shall Pick Themes with Long-term Potential

Chaoping Zhu, Global Market Strategist at J.P. Morgan Asset Management (JPMAM), found China's shift to accommodative policies, conducive to solid economic growth driver in 1H22.

Beijing is expected to set a full-year economic growth target of 5-6% at the March 2022 National People's Congress.

This could boost market sentiment and support stock market valuations.

Cyclical names will likely outperform in short run given continuous output price hike.

Investors should take heed of market landscape impact from long-term reform goals such as common prosperity, deleveraging and carbon neutrality.

Zhu suggested being selective and inclined to themes with long-term potentials like tech self-sufficiency, renewable energy and consumption.

Source: AAStocks Financial News