20160624-招商证券_香港_-Hong_Kong_Equity_Investment_Strategy_2H16__Fireworks_Vanishing_Quickly_80页_4mb_4mb

Summary of Hong Kong Equity Investment Strategy 2H16

Core Views

• The Hong Kong market is expected to rebound and continue until the end of 3Q16, with potential risks in 4Q16.
• The rebound is anticipated due to improved sentiment following the Brexit event and the removal of overseas uncertainties such as Fed rate hikes.
• The Central Economic Work Conference may introduce financial reforms, and the Shenzhen-Hong Kong (SZ-HK) stock connect is on schedule, with potential additional quota for Shanghai-Hong Kong (SH-HK) stock connect.
• Stock performance will diverge, with TMT, auto, environmental protection, and consumer sectors showing structural opportunities.
• Macro data in May suggests economic stabilization after seasonality adjustments, with limited downside risks.

Key Investment Recommendations

1. Wind Power

• Industry Trend: Cautiously optimistic due to government support and policy improvements expected in 2017.
• Strategy: Prefer wind power operators with strong fundamentals and profitability. Focus on projects in Zone IV (Eastern and Southern China) that are less affected by tariff cuts.
• Stocks: Huaneng Renewables (958 HK), Longyuan (916 HK)

2. PV Industry

• Industry Trend: 2016E new PV installed capacity is expected to reach 20 GW.
• Strategy: Bullish on upstream market leaders. Xinyi Solar (968 HK) is highlighted for its strong demand for PV glass and higher profit contribution from solar farms.
• Stocks: Xinyi Solar (968 HK)

3. Consumer Discretionary

• Challenges: Growth of China's retail brands faces challenges from economic slowdown and online shopping.
• Strategy: Recommend stocks with short-term catalysts and strong long-term fundamentals. Xtep (1368 HK) and Anta (2020 HK) are highlighted due to their attractive valuations and potential for growth.
• Stocks: Xtep (1368 HK), Anta (2020 HK), Cosmo Lady (2298 HK)

4. Auto

• Sector Trend: 50% cut on car purchase tax will continue to boost the sector. SUVs are popular, and luxury cars are showing signs of recovery.
• Strategy: Focus on companies in production line upgrading cycles, especially those in the SUV segment. Recommend Geely (175 HK), Brilliance (1114 HK), Harmony Auto (3836 HK), Fuyao Glass (3606 HK), and Minth (425 HK).
• Stocks: Geely (175 HK), Brilliance (1114 HK), Harmony Auto (3836 HK), Fuyao Glass (3606 HK), Minth (425 HK)

5. Electronic Hardware

• Key Themes: Value-added components, Smart Car, VR/AR, and China Payment.
• Strategy: Prefer companies with major product/technology upgrades and strong client portfolios. AAC Tech (2018 HK), Sunny Optical (2382 HK), Tongda (698 HK), and PAX Global (327 HK) are highlighted.
• Stocks: AAC Tech (2018 HK), Sunny Optical (2382 HK), Tongda (698 HK), PAX Global (327 HK)

Domestic and Foreign Economy and Policy

• Brexit: Polls show rising support for EU withdrawal, but results may be uncertain. The impact on the EU is expected to be larger than on Britain due to budget implications and potential follow-up referendums in other EU members.
• Economic Outlook: China's GDP is expected to bottom in 1Q and stabilize from 2Q onwards. The OECD China leading indicator suggests gradual improvement.
• RMB Depreciation: Recent depreciation is due to exchange differences, not actual reserve loss. RMB loan growth has stabilized, with increased household and enterprise loans.
• Monetary Policy: PBOC's balance sheet has rebounded due to refinancing, and further monetary policies are still available.

Capital Flow and Market Structure

• Southbound Capital Flow: Additional quota for SH-HK stock connect is expected to be announced soon, with current quota likely to be used up in 70 trading days.
• Market Divergence: Market structure has not changed much, with small caps not sensitive to market performance.
• Sector Earnings and PE: Earnings and PE ratios have diverged, with TMT, auto, environment protection, and consumer sectors showing improvement.

Risk Factors

• Overseas Risks: S&P 500 has shown earnings decline in 6 consecutive quarters, with potential recession risk in 1-2 years.
• US Market Risks: Margin debt is at historical highs, and CAPE is approaching 2008 levels. Negative rate policies in Japan may accelerate bond market collapse and impact the US market.
• 4Q16 Risks: Potential risks from overseas markets may accumulate, especially if the US market experiences a downturn.

Investment Strategy in L-shaped Economic Growth

• Focus on companies with strong fundamentals and short-term catalysts.
• Emphasize long-term growth opportunities in sectors like wind power, PV, consumer discretionary, auto, and electronic hardware.
• Diversify across sectors and pay attention to both direct and indirect beneficiaries of the SZ-HK stock connect.

Selected Stocks for SZ-HK Stock Connect

Newly Included

• 777 HK - NETDRAGON WEBS
• 1381 HK - CANVEST ENV
• 895 HK - DONGJIANG ENV-H
• 182 HK - CONCORD NE
• 698 HK - TONGDA GROUP HLD
• 884 HK - CIFI HOLDINGS GR
• 354 HK - CHINASOFT
• 1829 HK - CHINA MACHINER-H
• 3393 HK - WASION GROUP
• 1368 HK - XTEP INTL
• 1361 HK - 361 DEGREES
• 3836 HK - CHINA HARMONY AU

Dual Included

• 1728 HK - CHINA ZHENGTONG
• 81 HK - CHINA OVERSEAS G
• 3969 HK - CHINA RAILWAY -H

Watch List

• Direct Beneficiaries:
  • 1112 HK - BIOTIME INTERNA
  • 1778 HK - COLOUR LIFE SERV
  • 570 HK - TRAD CHI MED
  • 1509 HK - HARMONICARE MEDI
  • 819 HK - TIANNENG POWER
  • 1415 HK - COWELL
  • 963 HK - BLOOMAGE BIOTE
• Indirect Beneficiaries:
  • 712 HK - COMTEC SOLAR
  • 2120 HK - WENZHOU KANGNI-H
  • 1011 HK - CHINA NT PHARMA
  • 1317 HK - MAPLELEAF EDU
  • 2006 HK - SHANGHAI JIN J-H
  • 3882 HK - SKY LIGHT HOLDIN

Conclusion

The Hong Kong market is expected to continue its rebound through 3Q16, driven by improved sentiment and structural opportunities in key sectors. The SZ-HK stock connect is anticipated to be announced in July, with additional quota likely to be allocated. Investment strategy should focus on sectors with strong fundamentals and potential for growth, including wind power, PV, consumer discretionary, auto, and electronic hardware. Risks from overseas markets, particularly the US and Japan, should be closely monitored.