1、 This report has been prepared by UBS Securities Asia Limited.ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 64.UBS does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that coul
2、d affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.Global Research 1 March 2019 China Equity Strategy MSCIs decision to make foreign investors a larger force in A shares MSCI raises the China A-share inclusion fac
3、tor from 5%to 20%The MSCI today announced a three-step weight increase of China A-shares in its global indexes(Figure 1).The quadrupling of the inclusion factor and the addition of mid-caps and ChiNext shares suggest the pro-forma index weight of A shares in the MSCI EM will rise to 3.3%in November
4、2019(from 0.7%).We estimate these changes would lead to a US$67bn fund inflow to the A-share market this year.According to MSCI,the smooth running of Stock Connect and improvements in market accessibilityquadrupling of the Stock Connect daily limit and a visible reduction in trading suspensionsjusti
5、fy the inclusion factor increase.MSCI indicates that the weight of A-shares may further increase if China continues to promote the further opening and development of the market(e.g.permitting the listing of index futures and other derivatives on onshore and offshore exchanges).Foreign investors held
6、 6.7%of A shares in 2018;likely to rise further Peoples Bank of China(PBoC)data shows foreign investors held Rmb1.15trn of A shares as at end-2018,accounting for 2.4%/6.7%of the total/free-float market cap of the onshore equity market,up from 0.8%/2.3%in November 2015.Recent inflow has been strong,w
7、ith a record Rmb121bn via the northbound Stock Connect scheme YTD(Rmb294bn in 2018;Rmb199bn in 2017;Rmb60bn in 2016).Foreign investors as a group have surpassed insurers as the largest A-share holder,and with the help of the MSCI weight increase,are likely to rival domestic mutual funds soon.Althoug
8、h full inclusion may take years based on Korea and Taiwans experiences,we expect the largely retail-driven A-share market to become more institutionalised over time.Investor preferences:large,liquid stocks with higher ROE/earnings certainties At the sector level,foreign investors have shown a consis
9、tent preference for food&beverage(F&B)and consumer durables(Figure 10).Northbound fund flow at the individual stock level suggests foreign investors are attracted to large-cap and more liquid stocks.The 50 stocks with the highest northbound fund inflow have an average market cap of US$47,164m and da
10、ily turnover of US$122m over the past 12 months(US$4,669m and US$26m for all northbound stocks).As a group,they also have higher ROE and dividend yields,and lower PE.These 50 stocks show higher earnings certainty,although their average forward 12-month earnings growth is lower than that of the entir
11、e northbound space(Figure 15-23).This is consistent with our previous observation that foreign investors showed higher preference for market leaders with competitiveness and uniqueness.Our market views and A-share picks among MSCI China constituents The inclusion factor increase should trigger furth
12、er foreign fund inflow this year,and we believe consumer-related sectors and stocks with the characteristics we discuss above are likely to attract more foreign interest.Working with our sector analysts,we list our 12 most preferred MSCI China constituents(Figure 28).For the overall A-share market,w
13、e forecast 5.4%aggregate earnings growth in 2019E,a slowdown from 8.5%in 2018E but cushioned by policy stimulus and steady growth of banks.We maintain our year-end CSI 300 index target of 3,800,and are tactically Overweight banks,F&B,construction,railway equipment,renewable energy,nuclear power oper
14、ators,duty-free operators,and airports.Our views on the recent A-share market developments can be found in our 25 February 2019 and 26 February 2019 notes.Equity Strategy China Ting Gao Strategist S1460515090002 +86-213-866 8856 Lei Meng Strategist S1460517080001 +86-213-866 8939 Shanle Wu,PhD Analy
15、st +852-2971 7513 Cathy Fang,PhD Analyst S1460518100001 +86-213-866 8891 China Equity Strategy 1 March 2019 2 Contents MSCI adopts its proposal to raise the A-share inclusion factor from 5%to 20%this year.3 What do foreign investors like among A shares?.8 Potential for full inclusion:a lot more Chin
16、a stocks in MSCI EM and A-share institutionalisation.12 Our top picks and A-share market views.14 Company pages.16 China Construction Bank-A.17 Ping An Insurance(Group)-A.21 SAIC Motor.23 China Vanke.27 CRRC Corp-A.31 Jiangsu Hengrui Medicine.35 Inner Mongolia Yili Industrial.39 China International
17、Travel Service.43 Qingdao Haier.47 NARI Technology.51 Luzhou Laojiao.55 Hans Laser Technology Industry Group.59 Ting Gao Strategist S1460515090002 +86-213-866 8856 Lei Meng Strategist S1460517080001 +86-213-866 8939 Shanle Wu,PhD Analyst +852-2971 7513 Cathy Fang,PhD Analyst S1460518100001 +86-213-8
18、66 8891 China Equity Strategy 1 March 2019 3 MSCI adopts its proposal to raise the A-share inclusion factor from 5%to 20%this year MSCI just announced a further weight increase for A shares in its global indexes after a consultation launched last September(see report).The announcement includes(link)
19、:1)Stock Connect has proven to be a robust channel to access A-shares.The trading suspensions have been significantly reduced in recent months.2)On completion of this three-step implementation(Figure 1),there will be 253 Large and 168 Mid Cap China A shares,including 27 ChiNext shares,on a pro forma
20、 basis in the MSCI Emerging Markets Index,representing a weight of 3.3%in the pro forma index.3)MSCI welcomes the progress Chinese authorities have made thus far to improve the accessibility of the China A shares market and their plans to actively promote the further opening and development of that
21、market.MSCI encourages the rapid realization of that goal,including permitting the listing of index futures and other derivatives on onshore and offshore exchanges to help address international institutional investors growing needs for further risk management tools,as well as making further improvem
22、ents in the settlement cycle,trading holidays and omnibus account structures.These developments would be welcomed by investors ahead of any future weight increases of China A shares in the MSCI Indexes.Figure 1:MSCI announcements Source:MSCI Improved market access and the smooth running of Stock Con
23、nect are important factors The decision is made on the back of the smooth running of Stock Connect programmes and Chinas recent QFII/RQFII reform.The China Securities Regulatory Commission(CSRC)lifted the daily quotas for northbound and southbound trade by a factor of four to Rmb52bn and Rmb42bn,res
24、pectively,in May 2018.In January 2019,the regulator raised the total quota for QFII from US$150bn to US$300bn.Its draft rules also indicated plans to:1)consolidate QFII and RQFII into one scheme;and 2)allow investors to invest in more instruments including financial and commodity futures,options,and
25、 private investment funds.We think it is a natural step forward for MSCI to raise the inclusion factor,considering substantially improved market access.The inclusion factor choice is tied to foreign access and quota limits.According to MSCI,the A-share market cap MSCI will increase the index inclusi
26、on factor of all China A Large Cap shares in the MSCI Indexes from 5%to 10%and add ChiNext Large Cap shares with a 10%inclusion factor coinciding with the May 2019 Semi Annual Index Review May 2019 MSCI will increase the inclusion factor of all China A Large Cap shares in the MSCI Indexes from 10%to
27、 15%coinciding with the August 2019 Quarterly Index Review Aug 2019 MSCI will increase the inclusion factor of all China A Large Cap shares in the MSCI Indexes from 15%to 20%and add China A Mid Cap shares,including eligible ChiNext shares,with a 20%inclusion factor to the MSCI Indexes coinciding wit
28、h the November 2019 Semi-Annual Index Review Nov 2019 China Equity Strategy 1 March 2019 4 accessible to foreign investors equalled only around 5%of the foreign inclusion factor-adjusted market cap when it started considering including A shares in its global indexes for the first time in 2013.That w
29、as perhaps part of the reason why the initial inclusion factor was set at only 5%(see Why only 5%inclusion of A-shares?for details).Also helping the matter,according to MSCI,is that the number of trading suspensionsa serious concern for international investorshas declined in absolute terms and as a
30、percentage of the total number of A shares,under tighter regulatory rules.Figure 2:QFII and RQFII reform in 2019 DateDate RegulatorsRegulators QFII and RQFII reformQFII and RQFII reform Jun-18 PBoC and SAFE Restrictions on the outward flow of funds and the principal lock-in period shall be removed J
31、an-19 SAFE Total quota of QFII is raised from US$150bn to US$300bn Jan-19 CSRC Measures for the Administration of Domestic Securities and Futures Investment by QFII and RQFII(Consultation Paper)Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Secu
32、rities and Futures Investment by QFII and RQFII(Consultation Paper)Key changesKey changes Consolidating 2 schemes into 1 Foreign institutional investors will only need to make a one-time licence application.For institutions from countries that have not obtained the RQFII quota,funds can be raised in
33、 foreign currencies.Relaxing entry requirements Quantitative criteria cancelled,compliance requirements maintained;application materials are simplified and processing time is shortened.A qualified investor may invest in more instruments In addition to the current products,qualified investors can inv
34、est in:1)stocks admitted on the National Equities Exchange and Quotations(NEEQ,or the New Third Board)market;2)bond repurchases;3)private investment funds;4)financial futures;5)commodity futures;and 6)options,etc.Optimising the management of custodians 1)The management of QFII custodian qualificatio
35、n has been changed from approval-based to registration-based;and 2)restriction on the number of custodians engaged by a qualified investors is removed.Strengthening continuous supervision Source:PBoC,State Administration of Foreign Exchange(SAFE),CSRC China Equity Strategy 1 March 2019 5 Figure 3:On
36、going opening up of the A-share market Source:Wind,PBoC,SAFE,CSRC Figure 4:Share of trading suspensions has declined over the past few years Source:Wind The change could bring US$67bn to A shares in 2019E Once the 20%inclusion is implemented,the weighting of A shares in MSCI EM will rise to 3.3%(fro
37、m 0.7%).Based on the size of funds benchmarked to MSCI global indexes,we estimate the increase in the inclusion factor and addition of mid-caps and ChiNext stocks could lead to a US$67bn inflow to the A-share market(passive inflow of US$13bn+active inflow of US$54bn)this year.20022003200420052006200
38、7200820092010201120122013201420152016201720182019CSI300Introduction of QFII Introduction of RQFII SH-HK Stock Connect SZ-HK Stock Connect The announcement of MSCI A-share inclusion MSCI initial A-share inclusion with an inclusion factor of 5%The daily quota of Stock Connect was lifted by a factor of
39、 four Total QFII quota was raised from US$150bn to US$300bn;QFII/RQFII reform 0%2%4%6%8%10%12%14%16%20142015201620172018%of Susp.in all A-share listcos%of Susp.in all A-share float mktcap China Equity Strategy 1 March 2019 6 Figure 5:Potential inflow as a result of this years inclusion factor increa
40、se (US(US$bn)bn)A shares weight in A shares weight in benchmark indexesbenchmark indexes Passive inflow to Passive inflow to A sharesA shares Active inflow to Active inflow to A sharesA shares TotalTotal MSCI EMMSCI EM 3.30%8.7 36.9 47.5 MSCI ACWIMSCI ACWI 0.37%1.8 10.5 12.4 MSCI AsiaMSCI Asia 2.13%
41、0.5 6.5 7.0 TotalTotal 13.013.0 53.953.9 66.966.9 Source:MSCI,Thomson Reuters,UBS-S estimates Foreign investors a growing force in A shares We expect the big jump in the inclusion factor to lead to a greater presence of foreign investors in the China onshore market.Foreign participation has been inc
42、reasing significantly in recent years.According to the PBoC,foreign investors held Rmb1.15trn of A shares as at the end of 2018,accounting for 2.4%/6.7%of the total/free-float market cap of the onshore equity market.The size of foreign funds A-share holdings has exceeded that of insurance companies,
43、which as a group have been a significant institutional investor in the China A-share market.Taking into account our estimated inflow as a result of the higher inclusion factor,we think it is quite likely that foreign funds could soon rival domestic mutual funds in terms of assets under management(AU
44、M).Stock Connect northbound trade has attracted much attention from domestic investors lately.A total of Rmb121bn was recorded for just the first two months of this year(Rmb294bn in 2018;Rmb199bn in 2017;and Rmb60bn in 2016),which is an unprecedented amount in such a short period since the start of
45、the Stock Connect scheme.However we highlight that the pace of inflow fluctuates over time in response to domestic and international changes.An increase such as what happened in the past two months may not be sustainable.There were also signs of early positioning of foreign funds before MSCI A-share
46、 inclusion took effect in the past.Northbound inflow accelerated in May and August 2018,right before the inclusion factor took a step up(MSCI initially added A shares on 1 June 2018 with an inclusion factor of 2.5%,which was raised to 5%on 1 September 2018).Thus,we would not rule out the possibility
47、 that the strong northbound inflow YTD has been partly driven by early positioning.China Equity Strategy 1 March 2019 7 Figure 6:Foreign investors A-share holding Figure 7:A-share holding as%of free-float market cap Note:Above data as of end-2018.Source:PBoC,Wind Source:Wind,CSRC,China Insurance Reg
48、ulatory Commission(CIRC),National Social Security Fund(NSSF),UBS-S estimates Figure 8:Three-month moving average southbound and northbound daily net inflow Source:Wind,UBS estimates Figure 9:Monthly northbound inflow(Rmb 100m)Source:Wind 0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%0.00.20.40.60.81.01.21.4De
49、c-13Sep-14Jun-15Mar-16Dec-16Sep-17Jun-18Foreign investor holdings(Rmb trn)%of total mkt cap(%,RHS)%of total free-float mkt cap(%,RHS)Mass market retail investors 35.3%High-net-worth individuals 10.1%Mutual funds 10.4%Hedge funds 13.2%National Social Security Fund 5.5%Insurance companies 6.6%Foreigne
50、r investors 6.7%Others(national team,company directors,etc)12.2%(1.0)(0.5)-0.5 1.0 1.5 2.0 2.5 3.0 3.5Southbound:3mma daily net inflow(RMB bn)Northbound:3mma daily net inflow(RMB bn)(400)(200)0200400600800Nov-14Jan-15Mar-15May-15Jul-15Sep-15Nov-15Jan-16Mar-16May-16Jul-16Sep-16Nov-16Jan-17Mar-17May-1
