20220106-招银国际-January_Strategy_Report_HK_stocks_to_re-rate_from_distressed_levels_10页_1mb

January Strategy Report Summary

Core Content

This January Strategy Report highlights the potential for re-rating in the Hong Kong stock market, driven by attractive valuations, supportive Chinese policies, and a rebound in economic indicators such as the PMI. The report also provides sector-specific recommendations and technical analysis to guide investment decisions.

Key Information

• HK Stock Market Valuations: The Hang Seng Index (HSI) is currently at distressed levels, with a P/B ratio of 0.97x, close to historical crisis troughs. The adjusted FY21E P/E of the HSI (excluding newly added high-growth constituents) is at 9.0x, the lowest in a decade.
• A-H Premium: The A-H premium Index has reached a decade high of 147, indicating that A-shares are trading at a 47% premium over H-shares. Historically, this has signaled a mean reversion, with H-shares outperforming A-shares in the following 3-6 months.
• Southbound Trading: Southbound net buying has resumed after five weeks of consecutive net inflows, indicating renewed interest from Mainland investors. However, the report notes that the flow is moderate, and onshore fund issuance remains weak.
• Policy Support: China's Central Economic Work Conference (CEWC) in December 2021 emphasized economic stability, signaling a shift from regulatory tightening to growth-supporting measures. The PBOC is expected to implement RRR cuts and interest rate reductions in early 2022.
• PMI Rebound: China's manufacturing PMI has rebounded to expansion territory, which historically correlates with a rebound in the HSI.

Main Viewpoints

1. Re-rating Potential for HK Stocks

• The HK stock market is undervalued, with P/B and P/E ratios at decade lows.
• The wide discount to A-shares is attracting Mainland investors.
• Historical data suggests that when the A-H premium is high (>30%), H-shares tend to outperform A-shares in the next 3-6 months.

2. Policy Support as a Catalyst

• The CEWC and PBOC's Q4 meeting signaled a shift towards growth-stabilizing policies.
• Counter-cyclical measures, such as RRR cuts and interest rate reductions, are expected in 1H 2022.
• The government is likely to implement more pro-growth initiatives, which could drive a re-rating of HK stocks.

3. Sector Preferences

• Internet Sector: May re-rate moderately as regulatory headwinds have been largely priced in, and fundamentals are expected to improve in Q2 2022. Preferred sub-sectors include games and consumer internet.
• Construction Machinery & Materials: Likely to benefit from increased infrastructure spending in 2022, supported by stronger local government bond issuance.
• Consumer Discretionary: Cautious due to weak consumer sentiment, negative wealth effects, and high valuations.
• New Energy: May face short-term profit-taking after strong gains in 2021, but long-term growth prospects remain intact.

Technical Analysis

• HSI Uptrend: The HSI touched its long-term uptrend from 2008 in late 2021 and rebounded, suggesting the end of the bear market.
• RSI Divergence: The HSI and MSCI China are showing RSI divergence on a weekly chart, indicating a potential bottoming signal and a shift in relative performance.
• RRG Analysis: The Hang Seng Composite Index's Relative Rotation Graph (RRG) shows a shift towards growth sectors, particularly Info Tech, over value sectors.

Key Figures and Data

Conclusion

The HK stock market is at a critical juncture, with valuations at decade lows and a potential for re-rating due to supportive policies and improved economic indicators. The report recommends focusing on growth sectors like Internet and Construction Machinery & Materials while being cautious about Consumer Discretionary and New Energy due to weak fundamentals and potential profit-taking.

Sector Recommendations

• Internet Sector: Moderate re-rating expected in Q2 2022. Preferred stocks: NetEase (NTES US / 9999 HK), Tencent (700 HK), Meituan (3690 HK).
• Construction Machinery & Materials: Expected to benefit from increased infrastructure spending. Focus on demand for construction equipment and cement.
• Consumer Discretionary: Cautious due to weak consumer sentiment and high valuations. Especially cautious on catering stocks.
• New Energy: May face short-term profit-taking, but long-term growth is supported by Carbon Peak and Carbon Neutrality policies. Wait for better entry points.

Disclosures & Ratings

• CMBIS Ratings:

  • BUY: Potential return of over 15% in 12 months.
  • HOLD: Potential return of +15% to -10%.
  • SELL: Potential loss of over 10%.
  • NOT RATED: Not rated by CMBIS.

• Industry Ratings:

  • OUTPERFORM: Expected to outperform the market benchmark.
  • MARKET-PERFORM: Expected to perform in-line with the benchmark.
  • UNDERPERFORM: Expected to underperform the benchmark.

Legal & Distribution Notes

• This report is intended for distribution to clients of CMBIS and its affiliates.
• It is not an offer to buy or sell securities.
• CMBIS may have investment banking relationships with the companies mentioned.
• The report may not be reproduced, reprinted, sold, or distributed without prior written consent.
• Different regulations apply to recipients in the UK, US, and Singapore.