20160503-招商证券_香港_-Hong_Kong_Equity_Investment_Strategy_2Q_2H_2016_72页_4mb_4mb

Hong Kong Equity Investment Strategy 2Q&2H 2016 Summary

Core Views

• The rebound in the Hong Kong market is expected to extend into 3Q16, with the risk of a correction in 4Q16.
• The first phase of the rebound was driven by short covering, while the second phase is due to improving fundamentals.
• The third phase will be driven by increased risk appetite, focusing on structural and thematic investment opportunities.

Three Phases of the Rebound

Phase One: Short-Covering

• The net long position of USD dropped sharply in early 2016.
• The net short position of oil decreased.
• The repo of HK stocks increased at the beginning of 2016.
• Short sell ratio on the China A shares ETF dropped sharply from Jan 2016.

FX Rate Stability

• The gap between onshore and 1yr NDF RMB rate narrowed, indicating continuing rebound of HSCEI.
• The spread between USD and HKD returned to negative, supporting a strong HKD.

Foreign Investor Sentiment

• Bearish views on A shares eased, with increased confidence in the Chinese economy.
• Capital flows into emerging markets increased since Feb 2016.

Earnings and Fundamentals

• Earnings expectations showed sequential improvement since the beginning of April 2016.
• GDP growth may rebound in 2Q16, with IMF revising up China GDP forecasts.
• PMI continued to improve, with China PMI rising to 50.2 in March 2016 and Caixin PMI to 49.7.

Infrastructure and Property Investment

• Total new project investment increased by 40.4% YoY.
• FAI in manufacturing and property improved by 7.5% and 3.0% YoY, respectively.

Trade and Demand

• Trading surplus remained high, with export new order PMI rebounding in March 2016.
• Domestic demand has been recovering since 2H15.

Earnings Outlook

• Bearish views on 2016E earnings eased.
• No further cut in earnings forecast is expected to drag down stock prices.

CPI and PPI Gap

• The gap between CPI and PPI narrowed, indicating better industrial profitability.

Capital Flow Index

• The CMS capital flow index supports the continuation of the rebound.

Theme One: Shenzhen-HK Stock Connect

• The Shenzhen-HK Stock Connect may be announced before June 2016, benefiting small-mid cap stocks.
• Criteria for stock selection include market cap between HKD3-10bn, daily turnover over HKD3mn, and research coverage by at least 5 analysts with updates in the past 3 months.
• Focus on stocks with high earnings growth, scarcity, and significant valuation discount against A-shares.

Selected Stock List

Watch List

Theme Two: SOEs and Supply Side Reform

• Ten sorts of pilot reforms are accelerating in 2016, including board of directors power, market-based recruitment, professional manager system, salary distribution reform, state-owned capital investment, merging and reorganization, mixed ownership reform, and employee stock ownership.

Stock List for Central SOEs Reform

Theme Three: Privatization

• Undervalued HK listed stocks may seek privatization.
• Focus on stocks with concentrated ownership and low trading volume, but attractive asset quality.

Theme Four: New Economy Supply Chain

• New economies, such as in-car internet, VR, and Huawei supply chain, will be the next growth engine.

Risks for 4Q16

• Risks from overseas may lead to HK market correction, including:
  1. Decline of US market
  2. Negative interest rate going into dead end
  3. Window of next Fed rate hike appearing
  4. Accelerated exposure of credit risks
  5. Faster than expected CPI growth

Long-Term View

• The long-term view on HK is the connect of domestic capital to the world.