Market Snapshot - gfgroup.com.hk › docs › gfgroup › securities › ... · 2010, after the global financial crisis (GFC), and is just slightly below its 13.7x post-GFC peak in

Market Snapshot

Aug 7, 2017 Equity Research | Investment Strategy

Aug Outlook – Interim results to set the tone for 2H17

Alex Fan, CFA SFC CE No. ADJ672 [email protected] +852 3719 1047 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Market uptrend remains intact The Hong Kong market finished July in strong form with

the HSI breaking through the 27,000 level for the first time since June 2015 on strong performance among blue chips, our favorite segment. Our preferred sectors, tech, auto and insurance, outperformed on a continued strong growth and re-rating outlook, while materials, coal and property stocks also rose sharply. We believe increasing southbound trading (Fig.10), a weakening US dollar (Fig.11), the sustained recovery in the global economy (Fig.12), and improved corporate earnings (Fig.13) have all contributed to the bull run YTD. The outlook should continue to be positive, assuming these factors remain in place. Short-term headwinds That said, from a short-term or technical point of view, we expect

some headwinds due to valuation and currency concerns. First, the HSI has risen for seven straight months since the beginning of the year, a phenomenon only seen three times in the last 20 years, in Apr 2003-Feb 2004 (11 straight months), June 2006-Jan 2007 (8 months) and Mar 2007-Oct 2007 (8 months), during which the index rose 61%, 27% and 60%, respectively. The HSI rose 24.2% in 7M17, already matching the magnitude seen in 2H06 (Fig.14). Second, while in absolute terms the HSI’s valuation is still far below that of many global markets, its current 13.1x 2017E P/E is above its mean +1SD (12.9x) during the period since 2010, after the global financial crisis (GFC), and is just slightly below its 13.7x post-GFC peak in May 2015, making the current valuation look stretched from a historical point of view (Fig.15 and 16). Any correction in US markets, which are already trading at historical high valuations, well exceeding the average seen after the GFC, could have a negative impact on the Hong Kong market. Lastly, a possible technical rebound in the US dollar. There has been a very strong inverse correlation between the US Dollar Index and the HSI since Donald Trump took office. The Hong Kong market has risen sharply almost every time the US Dollar Index fell sharply, meaning the HSI is likely to keep rising until the US dollar starts to appreciate again. However, after more than 9% depreciation this year, the US Dollar Index is down to a 3-year low, meaning it is vulnerable to a rebound. In fact, July’s strong non-farm payrolls and the Fed’s upcoming balance sheet reduction could lead to strengthening of the US dollar in the near term. The HK$/US$ exchange rate also weakened to 7.82 recently, the weakest level since 2007. Earnings: the trend maker or breaker The ultimate test of strength for this bull run will

be earnings. The rally has been mostly driven by a re-rating of the market, with the HSI’s 2017E P/E up from 11.2x at the beginning of the year to 13.1x, but EPS forecasts have only been upgraded by about 5% during the period; a continuation of the rally will therefore depend on further earnings forecast upgrades in 2H17. Among the 83 stocks in the HSI and HSCEI, 20 have announced interim results or interim profit alerts as of last Friday, most of which indicate strong earnings momentum. If there are no major negative earnings surprises this interim results season, we expect earnings growth expectations to provide strong support for the market. Hence, this interim results season is particularly important. We recommend sticking with stocks that can meet or beat earnings expectations even if their valuations are getting more expensive. We continue to favor tech, auto (strong earnings), insurance and financial intermediates (re-rating), as well as selected names in healthcare, consumer, and environmental protection. We also expect positive surprises in the copper and aluminum sectors given rising global commodity prices, supply-side reform and supply cuts due to environmental policies in China. Our watchlist continues to outperform In July, our watchlist portfolio recorded a 9.4%

positive return, outperforming the HSI and HSCEI. YTD, our portfolio has posted a 42.9% positive return. We keep the portfolio unchanged, consisting of Tencent (700 HK, NR), AAC Tech (2018 HK, NR), Tongda (698 HK, NR), Geely (175 HK, Buy), BCA (1114 HK, Buy), China Life (2628 HK, Buy), HKEx (388 HK, NR), CSPC Pharma (1093 HK, Buy), Wisdom Education (6068 HK, Buy) and BJE Water (371 HK, Buy).

Market performance

Source: Bloomberg

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HSI Index(left) HSCEI Index(right)

mailto:[email protected]

Aug 7, 2017

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Investment Strategy

Figure 1: Market performance (1-month)

Sources: Bloomberg, GF Securities (Hong Kong)

Figure 2: China indices performance (1-month)


Figure 3: Sector performance (1-month)


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ChiNext SZ Comp SZ S&M HS S Cap SH Comp HSCEI HS M Cap HS Index HS L Cap

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Figure 4: Watchlist performance (1-month)


Figure 5: Watchlist performance

Sources: Bloomberg, GF Securities (Hong Kong) Note: Portfolio is rebalanced to equal weight at the month end

Figure 6: Watchlist for Aug


Figure 7: Top picks commentary

Sources: GF Securities (Hong Kong)

30-Jun 31-Jul

Stock Ticker Rating HK$ HK$ % ch

Tencent 700 HK NR 279.20 313.40 12.2

AAC Tech 2018 HK NR 97.60 105.10 7.7

Tongda 698 HK NR 2.33 2.27 -2.6

Geely Auto 175 HK Buy 16.84 18.06 7.2

Brilliance China 1114 HK Buy 14.22 19.78 39.1

China Life 2628 HK Buy 23.85 24.75 3.8

HKEx 388 HK NR 201.8 222.80 10.4

CSPC Pharm 1093 HK Buy 11.40 12.18 6.8

Wisdom Education 6068 HK Buy 2.71 2.78 2.6

BJE Water 371 HK Buy 6.06 6.49 7.1

Sim Avg 9.4

Wt Avg 10.7

HS Index 25764 27323 6.1

HSCE Index 10365 10827 4.5

Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17

Monthly

Watchlist 9.5 15.7 1.0 1.3 -6.5 8.2 5.5 6.2 6.0 -3.8 5.7 9.4

HS Index 5.0 12.0 -1.6 -0.6 -3.5 6.2 1.6 1.7 2.1 4.2 0.4 6.1

HSCE Index 6.5 10.0 -0.2 2.9 -4.5 4.4 5.0 -0.2 -0.5 3.7 -2.2 4.5

YTD

Watchlist 3.2 19.5 20.6 22.2 14.2 8.2 14.1 21.1 28.4 23.6 30.6 42.9

HS Index 4.8 6.3 4.7 4.0 0.4 6.2 7.9 9.6 11.9 16.6 17.1 24.2

HSCE Index -1.2 -0.8 -1.1 1.8 -2.8 4.4 9.6 9.3 8.8 12.8 10.3 15.2

Since 2015

Watchlist 11.2 28.7 30.0 31.6 23.1 33.1 40.4 49.1 58.1 52.1 60.7 75.9

HS Index -2.7 -1.3 -2.8 -3.5 -6.8 -1.0 0.6 2.1 4.3 8.7 9.1 15.8

HSCE Index -20.4 -20.1 -20.2 -17.9 -21.6 -18.2 -14.1 -14.3 -14.7 -11.5 -13.5 -9.7

Stock Ticker Rating Price (HK$) 17E P/E (x) 18E EPS YoY (%)

Tencent 700 HK NR 313.40 43.0 30.3

AAC Tech 2018 HK NR 105.10 20.8 21.5

Tongda 698 HK NR 2.27 10.3 23.1

Geely Auto 175 HK Buy 18.06 16.6 28.5

Brilliance China 1114 HK Buy 19.78 17.7 33.5

China Life 2628 HK Buy 24.75 23.1 20.1

HKEx 388 HK NR 222.80 39.4 10.7

CSPC Pharm 1093 HK Buy 12.18 26.9 24.7

Wisdom Education 6068 HK Buy 2.78 19.8 31.4

BJE Water 371 HK Buy 6.49 14.1 23.7

Company Ticker Highlights

Tencent 700 HK Proxy to the internet sector, strong growth in multiple sectors and through acquisitions

AAC Tech 2018 HK Apple proxy; fundamentals unchanged despite impact of short sell report

Tongda 698 HK Strong smartphone casings business with rising exposure to Apple

Geely Auto 175 HK Full-year contribution from new launches in 2016; GPM to improve on economies of scale

Brilliance China 1114 HK Strong sales recovery expected with the launch of new 5 Series in June and encouraging sales of the 3-series and X1

China Life 2628 HK 1Q17 regular FYP up 17% YoY, renewal premiums up 52% YoY; strong agent team increased by 52% YoY in 2016

HKEx 388 HK Direct beneficiary of increasing connection between Hong Kong and China

CSPC Pharm 1093 HK Volume driven growth from new NDRL implementation while innovative drugs maintain strong growth

Wisdom Education 6068 HK Strong academic record with stronger-than-peers expansion plan

BJE Water 371 HK Robust capacity growth from rich project pipeline; new investment fund model to capture booming PPP market

Aug 7, 2017

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Investment Strategy

Figure 8: Market and southbound turnover

Sources: HKEx, GF Securities (Hong Kong)

Figure 9: Average daily southbound buying and selling (HK$ m)


Figure 10: Average daily southbound net buying (HK$ m)


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Total Market T/O Southbound T/O

611 748 1163 477 1061

7572

3055 2412 1976 1265 960 843 1064 1437 1773 1311 1358 1102 18523230

1691 2583

5824

2073 2731 3361 2889 4948 4792 4347 5011 4745 5693

149 275 373309

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23871945 2251

1162726 883 733 619 836

697 1044 994575

788

12031549

2137

1777 1857

21011685

2917 34863098

3126 40524138

1.0% 1.1%1.6%

1.1%1.8%

6.2% 3.5%3.0% 3.4%

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11.2%11.6%

Avg Daily Buy Trades Avg Daily Sell Trades Proportion of market ADT

462 473

790

168

502

2772

668467

-275

103234

-40

331

818937

614

314108

1277

2442

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1034

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1260 1204

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1306 1249

1885

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Figure 11: US dollar index vs HSI


Figure 12: Major economies continue to see growth


Figure 13: Earnings forecast upgrades


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HSI Index DXY Curncy (right)

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US EU Japan China

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Forecasted EPS

HSI (left) HSCEI (right)

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Investment Strategy

Figure 14: HSI has rallied for seven straight months this year


Figure 15: HSI and P/E


Figure 16: HSCEI and P/E


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Apr 03 - Feb 04 Mar 07 - Oct 07

Jun 06 - Jan 07

Jan 17 - present

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HSI Forecast P/E (x) (RHS)

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HSCEI Forecast P/E (x) (RHS)

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Investment Strategy

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.

Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report.

Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright © GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. © GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk

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Market Snapshot - gfgroup.com.hk › docs › gfgroup › securities › ... · 2010, after the global financial crisis (GFC), and is just slightly below its 13.7x post-GFC peak in