德银-中国-宏观策略-2018中国政府工作报告解读-20180306-16页_599kb

Summary of the 2018 China Government Work Report Analysis

Core Content Overview

The 2018 China Government Work Report, delivered by Premier Li Keqiang, outlines key policy directions and investment themes for the Chinese economy. The report emphasizes quality growth, G.A.R.P. (Greening, Advancing, Reforming, Premiumizing) themes, and the transition from investment-driven to consumption-driven growth. The analysis by Michael Tong and Luka Zhu from Deutsche Bank highlights both macroeconomic targets and sector-specific implications for investors.

Main Themes and Key Points

1. Corporate Cost Reduction and Fiscal Policy

• The government proposed a Rmb1.1tr tax and non-tax burden reduction, which supports industrial profit growth.
• Top-down MSCI China EPS growth forecasts for 2018 and 2019 are 17.0% / 15.5%.
• This policy benefits the non-financial sectors but may adversely affect state-controlled sectors such as power and telecom.

2. Cultivating Emerging Industries and Upgrading Traditional Industries

• Innovation and digital transformation are emphasized, with big data, AI, Cloud, IoT, and NEV highlighted.
• The word "Internet" appears 12 times in the 2018 report, compared to 6 times in 2017.
• Internet+ model is expanded to government services and agriculture.
• Telecom sector faces cost-cutting measures, including reduction of data roaming charges and mobile internet service fees by at least 30%.

3. Promoting Consumption and Improving People's Wellbeing

• Personal income tax reform is highlighted, with a higher exemption threshold and more deductible items.
• Rural revitalization is a focus, including land reform and increased subsidies for basic health insurance.
• Lower import tariffs on goods like automobiles and daily necessities aim to stimulate domestic consumption.

4. Environmental Protection

• The environmental protection section is shortened but remains strategically important.
• It is included in the "three critical battles" alongside financial risk control and poverty alleviation.
• Key beneficiaries include Biomass/Hazard Waste, Natural Gas, Wind/Solar, and New Energy Vehicles.
• Emission reduction targets remain consistent with 2017, focusing on SOx/NOx and chemical oxygen/ammonia nitrogen.

5. Deepening Reforms in Fundamental and Key Areas

• SOE reform is emphasized, with a more prudent approach and no specific sectors highlighted.
• Mixed ownership reform is reiterated, with a focus on granting more decision-making power to SOEs.
• Real estate tax legislation is prudently advanced, though no timeline is given.
• Performance-based fiscal budget management is promoted, supporting PPP (Public-Private Partnership) initiatives.

6. Opening Up the Economy

• The financial sector is opened up to foreign capital, with same market entry standards for domestic and foreign institutions.
• This is part of China's efforts to avoid a trade war with the U.S. and promote foreign investment.
• Reinvestment tax deferrals are introduced to encourage foreign investment in China.

Key Investment Themes: G.A.R.P.

• Greening (Environment): Focus on anti-pollution and sustainable development, with key sectors like Biomass/Hazard Waste, Wind/Solar, and New Energy Vehicles.
• Advancing (Manufacturing): Made in China 2025 is a key driver, with intelligent manufacturing, 5G, IOT, AI, and ADAS expected to grow.
• Reforming (SOE): Continued emphasis on mixed ownership reform and operational efficiency, with a slower pace than previously anticipated.
• Premiumizing (Consumption): Education, Healthcare, and Insurance are highlighted as key areas for premium consumption.

Top-20 Picks for 2018

• The report recommends OW (Overweight) sectors with exposure to G.A.R.P. themes, including Software/Internet, Consumer Discretionary, Insurance, Healthcare, and Water/Renewables.
• UW (Underweight) sectors include Materials, Real Estate, Capital Goods, and traditional defensives.
• Top-20 stocks include:
  • Hollysys, Nexteer, Mengniu Diary, Brilliance, Ping An, Sino Biopharm, Tencent, CEG, BEW, Longyuan Power, China Moly, Universal Medical, SEG, China Unicom, Bank of China, Yum China, Alibaba, ABC, Citic, Zhuzhou CRRC.

Supporting Data

• Figure 1: Annual job creation target maintained at 11mn for 2018.
• Figure 2: Special municipal bonds quota increased to Rmb1350bn for 2018.
• Figure 3: Summary of key targets and figures from NPC reports.
• Figure 4: Word count analysis of the "Internet" in the government work report from 2015 to 2018.
• Figure 5: Valuation and financial metrics for the top-20 picks, including P/E, P/B, RoE, EPS Growth, and Dividend Yield.

Conclusion

The 2018 report signals a shift towards quality growth and long-term structural reforms, with a continued emphasis on innovation and consumption. The G.A.R.P. themes are expected to drive equity performance, and the report recommends specific sectors and stocks for investment. The government is adopting a more cautious approach in some areas, such as SOE reform and environmental policy, while accelerating efforts in emerging industries and consumption upgrades.