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DBS Group Research Summary: Equity Focus for the Rest of 2016

Core Content

DBS Group Research outlines three key investment themes for the remainder of 2016, focusing on Shenzhen-Hong Kong Connect plays, Fed rate hike beneficiaries, and companies with upward earnings revisions or turnaround potential. The report highlights the positive market sentiment and potential for upside, emphasizing the importance of these themes in the context of improving valuations, earnings recovery, and macroeconomic conditions.

Main Investment Themes

1. Shenzhen-Hong Kong Connect Plays

• Catalysts: The Shenzhen-Hong Kong Connect is expected to drive capital inflows into A-shares, with potential for A-share recovery and MSCI inclusion review.
• Focus Areas: Non-bank financials and select Hong Kong small-cap stocks.
• Key Picks:
  • Li Ning (2331.HK): A notable China brand with potential for earnings turnaround.
  • Kingdee (268.HK): A laggard with upward earnings revision potential.
  • Xinjiang Goldwind (2208.HK): Replaced China Everbright Int'l as the environmental pick.
  • Value Partners (806.HK): Benefits from A-share inflows due to its A-share holdings.
  • Guotai Junan (1788.HK) and Haitong Int'l (665.HK): Hong Kong brokers with mainland ties.
• Potential Impact: The connect is expected to bring in more liquidity, especially for small-cap stocks.

2. Fed Rate Hike Beneficiaries

• Catalysts: Increased Fed rate hike expectations post-Brexit, with a 36% probability of hikes in September and 60% before year-end.
• Focus Areas: Global and Hong Kong banks, Southbound Connect stocks, and exporters.
• Key Picks:
  • HSBC (5.HK): A major Fed rate hike beneficiary due to net interest margin benefits.
  • Standard Chartered Bank (2888.HK), BOCHK (2388.HK), DSBG (2356.HK), and Hang Seng Bank (11.HK): Global and Hong Kong banks.
  • CCB (939.HK), ICBC (1398.HK), Ping An (2318.HK), Tencent (700.HK), and Sunac (1918.HK): Popular Southbound Connect stocks.
  • Exporters and Tech Companies: Such as Techtronics (669.HK), Shenzhen (2313.HK), Man Wah Holdings (1999.HK), Pacific Textiles (1382.HK), AAC Tech (2018.HK), and Minth (425.HK).
• Potential Impact: Rate hikes are expected to boost returns for banks and benefit exporters due to CNY depreciation.

3. Earnings Recovery and Positive Revision Plays

• Catalysts: Upbeat first-half 2016 earnings and improved market confidence for 2017.
• Focus Areas: Laggard stocks with potential for earnings turnaround, particularly in non-bank financials, environmental, and Macau gaming sectors.
• Key Picks:
  • Li Ning (2331.HK): Showed positive earnings momentum.
  • Value Partners (806.HK): Benefiting from A-share inflows.
  • Kingdee (268.HK): Potential for earnings turnaround.
  • Nine Dragons Paper (2689.HK): Highlighted as a turnaround play.
  • CR Cement (1313.HK): Showing improvement in earnings.
• Recommendation: Switch from sectors like REITs, HK property, tollroads, and HK telecom, which have outperformed but may lag in a recovery.

Key Sector Adjustments

• Upgraded Sectors:
  • Chinese banks: From Neutral to Overweight.
  • Healthcare: From Underweight to Neutral.
• Downgraded Sector:
  • HK telecom: From Neutral to Underweight due to disappointing earnings and lack of appeal in a risk-averse environment.

Top Picks

Market Outlook

• Positive Outlook: Hong Kong and China equities extended their summer rally in August, driven by upbeat earnings and Shenzhen Connect hype.
• Valuation and Fund Flow: Low valuations and potential fund flows from risk aversion reversal are seen as positive factors.
• Earnings Recovery: Confident in 2017 earnings recovery, even with a pedestrian macro outlook, due to low 2016 base.

Key Charts and Data

• Real Benchmark Interest Rates: Showed negative rates post-2015, supporting asset prices.
• PE Bands of CSI300 Index: Suggest a favorable risk-reward for equities over fixed income.
• CNY Depreciation: Expected to resume with a hawkish Fed, impacting exporters.
• Southbound Connect Activity: Highlighted CCB, ICBC, HSBC, Tencent, and Ping An as most active.
• REITs and Property: Caution advised due to potential pressure from rate hikes and housing supply increases.

Conclusion

DBS Group Research recommends investors to focus on the three themes outlined, emphasizing the potential for upside in the A-share market, benefits from Fed rate hikes, and earnings recovery plays. The report provides detailed insights into the sectors and stocks that are likely to perform well, along with a cautionary note on certain areas like HK REITs and property.