20151218-招商证券-Hong_Kong_Equity_Investment_Strategy_2016_Sailing_Against_Current_61页_3mb_3mb

Hong Kong Equity Investment Strategy 2016 Summary

Core Views

• Stagnation Brewing Breakthrough: The Hong Kong stock market is expected to remain range-bound and fluctuating in the short run due to several systematic risks.

  • China is likely to remain in a down cycle for some time.
  • Uncertainty around the pace and extent of future Fed rate hikes and balance sheet changes.
  • Strong RMB depreciation expectations affecting the valuation of HK-listed Chinese companies.
  • Persistent capital outflows hinder the progress of capital projects and block southbound capital.
  • Debt default risks may increase due to capacity downsizing and deleveraging.
  • International relations and black swan events could still impact the market.

• Phoenix Rebirth via Reform: Structural opportunities may emerge from reforms in 2Q16.

  • The launch of the strategic emerging industries board, along with Shenzhen-HK Stock Connect and QDII2, is expected to improve sentiment and liquidity.
  • SOE reforms may accelerate after the “13th Five-Year Plan” and “Two Sessions” in March.
  • Supply-side reforms are anticipated to speed up capacity downsizing and deleveraging, with PPI bottoming out.
  • Strengthening fiscal policies could stimulate structural investment opportunities.

Investment Themes and Asset Allocations

• Key Investment Themes:

  • SOE Reform
  • Capital Market Reform & Opening Up
  • “13th Five-Year Plan” Begins

• Recommended Overweight Industries:

  • TMT (Technology, Media, Telecommunications)
  • Insurance
  • Pharmaceuticals
  • Environmental Protection
  • New Energy
  • Consumer Staples
  • Property
  • Automobiles

• Recommended Sectors with Trading Opportunities:

  • Banks
  • Brokers
  • Petrochemicals
  • Gaming
  • Ports
  • Cement

Market Performance and Valuation

• HK Market Performance in 2015:

  • The Hang Seng Index (HSI) outperformed the Hang Seng China Enterprises Index (HSCEI) in 2015.
  • Asset volatility increased due to diverging monetary policies.
  • The SH-HK Stock Connect did not significantly reduce the A-H premium.
  • The delay of SZ-HK Stock Connect ended the short-lived outperformance of small caps.

• Valuation Trends:

  • HSI is expected to hover between 18000-25000.
  • HSCEI is expected to hover between 8000-12000.
  • Valuations are far from the historical periods.
  • The HSI P/E and P/B are lower than the historical average, while the HSCEI P/E and P/B are still relatively low.

• New Economies Outperforming:

  • New economies, such as IT and healthcare, have shown better performance compared to the overall market.
  • The Hang Seng IT Hardware Index (HSITHI) and Hang Seng Software & Services Index (HSSSI) have seen significant growth in 2016.

Market Position and Strategic Value

• HK Market Not Marginalized:

  • Despite the challenges, the HK market still holds long-term strategic investment value.
  • The market's return over the past half-century was among the best.
  • The average daily turnover value in 2015 was higher than in 2000, indicating continued activity.
  • The total amount of fund raised in 2015 was nearly the same as in 2014.
  • The number of IPOs in 2015 was higher than the average from 1991.

• HK Market Compared to Peers:

  • The HK market is more active in terms of turnover compared to its size.
  • The market's liquidity is still bottoming, according to the CMS liquidity index.

• Global Context:

  • The Asia-Pacific financial markets have grown rapidly, while the European market has shrunk.
  • The Fed's rate hikes and balance sheet changes have a significant impact on the HK market.

Key Opportunities

• SOE Reform Opportunities:

  • SOEs play a major role in the HK market, with significant market weights in various sectors.
  • SOEs with higher ROE and NPM may be more attractive.
  • SOEs with lower efficiency and NP may face challenges.
  • Early deployment and portfolio investment are recommended for SOE reform.

• Recommended SOE Stocks:

  • 688 HK - China Overseas: Buy, Target Price HK$30.00

    • EPS: 3.5 (2015E), 3.9 (2016E)
    • P/E: 7.8 (2015E), 7.1 (2016E)
    • Market Cap: HK$256,868 million
    • ROE: 22.8%
    • NPM: 23.3%
    • Debt Ratio: 61.0%
    • Comment: Leading property developer with adequate land reserve
    • Analyst: John SO

  • 1336 HK - New China Life: Buy, Target Price HK$34.15

    • EPS: 3.4 (2015E), 4.3 (2016E)
    • P/E: 8.2 (2015E), 6.4 (2016E)
    • Market Cap: HK$154,151 million
    • ROE: 14.6%
    • NPM: 4.5%
    • Debt Ratio: 61.0%
    • Comment: Strong insurance company
    • Analyst: John SO

Conclusion

• The HK market is expected to remain volatile in the short run due to various systematic risks.
• Structural opportunities may arise from reforms, particularly in SOE, capital market, and the “13th Five-Year Plan.”
• New economies such as TMT, healthcare, and alternative energy are recommended for overweight positions.
• SOE reform is a key theme with potential investment opportunities, especially for companies with strong fundamentals.
• The HK market remains a strategic investment destination despite the challenges, with continued liquidity and activity.