20160504-招商证券_香港_-Hong_Kong_Equity_Investment_Strategy_2Q_2H_2016_72页_2mb

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

Core Views

• The rebound in the Hong Kong market is expected to continue into 3Q16, with the fourth quarter (4Q16) at risk due to external factors.
• The first phase of the rebound was driven by short covering, while the second phase is supported by improving fundamentals and revised earnings expectations.
• The third phase will be driven by increased risk appetite, leading to structural and thematic investment opportunities.

Key Drivers of the Rebound

• Short Covering: The rebound since February 12, 2016, was primarily due to short covering, with the index and high beta stocks seeing rapid gains.
• Fundamental Improvement: Early April macroeconomic data showed improvement, particularly in property and infrastructure investment, boosting investor confidence and capital inflows.
• FX Stability: The RMB and HKD exchange rates stabilized, reducing FX losses for companies and improving industrial profitability.
• Capital Flow: Capital flowed back into the Hong Kong market, especially from overseas investors, as they regained confidence in the Chinese economy.

Risks to Watch

• Potential risks include a decline in the US market, the end of negative interest rates, the possibility of a Fed rate hike, and accelerated credit risks.
• Faster-than-expected CPI growth could also impact the market.

Themes and Opportunities

Theme One: Shenzhen-HK Stock Connect

• The Shenzhen-HK Stock Connect is expected to be announced before June 2016, providing a catalyst for small and mid-cap stocks.
• PE Comparison: Shenzhen stocks, especially small-mid caps, have lower PE compared to Hong Kong small caps, indicating potential value.
• Stock Selection Criteria:
  • Market cap between HKD3-10bn
  • Average daily turnover over HKD3mn
  • At least 5 analysts' coverage and updated research in the last 3 months
  • At least one of the following: high earnings growth (>30%), scarcity, or significant valuation discount against A-shares
• Selected Stocks:
  • 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 (COSMO LADY CHINA)
  • 1345 HK (PIONEER PHARM)
• Watch List:
  • 1112 HK (BIOSTIME 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)
  • 1448 HK (FU SHOU YUAN INT)
  • 2298 HK (COSMO LADY CHINA)
  • 1345 HK (PIONEER PHARM)
  • 2202 HK (CHINA VANKE-H)
  • 1206 HK (SKY LIGHT HOLDIN)
  • 360 HK (TECHNOVATOR)

Theme Two: SOEs and Supply Side Reform

• The government is accelerating reforms in ten key areas, including board of directors powers, market-based recruitment, and mixed ownership.
• These reforms aim to improve efficiency and reduce overcapacity in state-owned enterprises (SOEs).
• Stock List for Central SOEs Reform:
  • 606 HK (CHINA AGRI-INDUS)
  • 506 HK (CHINA FOODS LTD)
  • 906 HK (CPMC HOLDINGS)
  • 207 HK (JOY CITY PPT)
  • 2319 HK (MENGNIU DAIRY)
  • 1230 HK (YASHILI INTL)
  • 1117 HK (CHINA MODERN DAI)
  • 3323 HK (CHINA NATL BDG-H)
  • 969 HK (HUA LIEN INTL)
  • 2228 HK (CECEP COSTIN NEW)
  • 2299 HK (BILLION IND HLDG)
  • 8128 HK (C G SOURCE ENGY)
  • 1099 HK (SINOPHARM-H)
  • 570 HK (TRAD CHI MED)
• Expected Second Pilot Scheme:
  • 217 HK (CHINA CHENGTONG)
  • 553 HK (NANJING PANDA-H)
  • 85 HK (CHINA ELECTRONIC)
  • 903 HK (TPV TECHNOLOGY)
  • 2878 HK (SOLOMON SYSTECH)
  • 438 HK (IRICO GROUP NEW)
  • 297 HK (SINOFERT HOLDING)
  • 817 HK (CHINA JINMAO HOL)
  • 3311 HK (CHINA STATE CONS)
  • 830 HK (FAR EAST GLOBAL)
  • 1258 HK (CHINA NONFERROUS)
  • 347 HK (ANGANG STEEL-H)
  • 1618 HK (METALLURGICAL-H)
  • 3668 HK (CHINALCO MINING)

Theme Three: Privatization

• Undervalued Hong Kong-listed stocks may seek privatization, especially those with concentrated ownership and low trading volume.
• Focus on stocks with attractive asset quality and potential for improvement.

Theme Four: New Economy Supply Chain

• Emerging sectors such as in-car internet, VR, and Huawei supply chain are expected to be the next growth engines.
• These sectors are likely to benefit from structural changes and increased investment.

Market Outlook

• The Hong Kong market may experience a correction in 4Q16 due to external risks.
• The long-term view is that the market will connect domestic capital with the global economy, enhancing its role in the international financial system.