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A-Share Investment Strategy Summary

Core Content

The document outlines the investment strategy and implications of the new policies on A-share listings for innovative companies, particularly those in the new economy sector. It highlights the regulatory framework introduced by the China Securities Regulatory Commission (CSRC) in 2018, which includes the Chinese Depository Receipt (CDR) Issuance and Transaction Administrative Measures (Trial) and other related documents. These policies aim to enhance the A-share market's structure and connectivity with global capital markets.

Main Points

1. CDR Policy and New Economy Development

• The CDR policy is designed to support the growth of innovative companies in China.
• Key policy points include:
  • Incremental issuance measures: No existing shares will be sold upon CDR issuance, and CDRs will not be issued corresponding to existing shares.
  • No conversion between CDR and underlying securities: This prevents arbitrage and maintains the integrity of the market.
  • Amended IPO administrative measures: The new rules introduce an inquiry system for public offerings.
  • Specific standards for pilot enterprises: These standards ensure that only suitable companies are selected for CDR listings.

2. Impact on A-Share Market Structure

• The inclusion of innovative companies will improve the structure of China's capital market.
• This reform is aligned with the broader goal of supply-side structural reform and aims to demonstrate the financial services sector's support for the real economy.
• It is expected to drive economic transformation and enhance the quality of listed companies.

3. Market Liquidity Considerations

• The policies are structured to prevent liquidity issues in the A-share market.
• The financing for the traditional economy is being slowed to create space for innovative companies.
• Regulators will manage the number of pilot companies, the scale of fundraising, and the timing of issuance to maintain market stability.

4. Valuation Expectations

• Innovative companies listed in the A-share market are expected to have higher average valuations compared to other markets.
• This is due to the combination of domestic and overseas investor valuations, especially for companies that are already listed overseas and issue CDRs.
• In the short term, there may be a re-rating of CDRs, while overseas valuations will remain largely unaffected.

5. Risks and Challenges

• The offering size and progress of innovative company listings may not meet expectations, which could impact market performance.
• There may be a mismatch between the expected and actual impact of new economy companies on the A-share market.

Key Figures and Data

• Figure 1: US new economy sector (TMT) accounted for 28.8% of total market cap (as of 8 June 2016).
• Figure 2: A-share new economy sector (TMT) accounted for 12.9% of total market cap (as of 8 June 2016).
• Figure 3: The number of IPOs has slowed this year to control financing for the traditional economy and make room for new economy companies.
• Figure 4: Proceeds from A-share IPOs show the trend in fundraising activities.

Rating Definitions

Company Ratings

• Buy: Stock expected to outperform benchmark by more than 15%.
• Accumulate: Stock expected to outperform benchmark by more than 5% but not more than 15%.
• Hold: Expected stock relative performance ranges between -5% and 5%.
• Underperform: Stock expected to underperform benchmark by more than 5%.

Sector Ratings

• Positive: Sector expected to outperform benchmark by more than 10%.
• Neutral: Expected sector relative performance ranges between -10% and 10%.
• Cautious: Sector expected to underperform benchmark by more than 10%.

Disclaimer and Legal Information

• This report is for informational purposes only and does not constitute an offer to buy or sell securities.
• It is intended solely for use by clients of GF Securities (Hong Kong).
• The report may not be suitable for all investors and is not a substitute for professional advice.
• The views and opinions expressed are those of the analysts and may change without notice.
• GF Securities (Hong Kong) may have issued or will issue other communications with differing conclusions.

Analyst Certification

• The research analyst(s) certifies that the views expressed in the report accurately reflect their personal opinions.
• No part of their remuneration is directly or indirectly linked to the specific recommendations or views in the report.

Disclosure of Interests

• GF Securities (Hong Kong) and its affiliates do not hold any shares in the securities mentioned.
• There are no investment banking relationships with the companies discussed in the past 12 months.
• Analysts and their associates have no financial interests or positions in the securities mentioned.