1、 Disclosures&Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix,and with the Disclaimer,which forms part of it.Issuer of report:The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at:https:/ HSBCChinaConferen
2、ce201915-17May,ShenzhenRegister nowTHIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE PRC)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)The picture is becoming more mixed further upside limited Tweak end-2019e index targets:MSCI China 94,Hang Seng 31,000,HSCE
3、I 12,500,HSCCI 4,800 implying 2-10%upside Raise utilities to overweight;lower energy to neutral;remain overweight financials and industrials,underweight IT Still going,but slowing.In our last report,we pointed to the positive forces driving the rally in offshore Chinese equities,including earnings g
4、rowth,a more dovish US Fed,lower US bond yields,policy support in China,signs of optimism about Sino-US trade talks,and favourable FX movements(China Offshore Strategy:2019:A good start,for believers,18 February 2019).Some of these drivers are still at work the MSCI China Index is now up c20%y-t-d,v
5、ersus up 13%y-t-d through mid-February but we believe the picture has become more mixed.As a result,we tweak our end-2019e index targets MSCI China to 94 from 90,Hang Seng to 31,000 from 30,000,HSCEI to 12,500 from 12,000,and HSCCI to 4,800 from 4,600 which imply limited upside of 2-10%.What our new
6、 market sentiment tracker tells us.Its clear that the rally has been supported by very positive investor sentiment.Our new proprietary China offshore equity market sentiment tracker,released alongside this report,shows that MSCI China sentiment is now two standard deviations above the indexs histori
7、cal average.While sentiment is still on the rise,the pace at which it is increasing is slowing down.See China Offshore Strategy:Introducing our market sentiment tracker,4 April 2019.This suggests that,in line with our views,the rally may be running out of steam.New negatives:These include decelerati
8、ng earnings growth,sluggish southbound inflows from the Stock Connect schemes,and less attractive valuations.For MSCI China,the PE of 12.3x implies that a 12-month forward EPS growth of 13.4%has been priced in by the market,close to consensus estimates of 2019e EPS growth of 13.2%.MSCI China is also
9、 trading at a 12-month forward 1.6x PB,on a par with its 10-year average.Valuation levels of major indices of offshore Chinese equities are now less attractive than those of their A-share peers.Sector and stock preferences.We raise utilities to overweight(from neutral)given its defensive qualities a
10、nd visibility of earnings growth,lower energy to neutral on falling earnings expectations and increased valuations,remain overweight on financials and industrials,and underweight on IT(hardware and software).We highlight five stocks with growth visibility or reform momentum,all rated Buy:Alibaba,Ban
11、k of China,China Overseas Land&Investment(COLI),CRCC,and Everbright International.We also provide five names least preferred by HSBC sector analysts:Country Garden,CGN Power,ZTO Express,Geely Auto,and Pingduoduo.4 April 2019 China Investment Atlas(Issue 67)Equity Strategy China CHINA/HONG KONG INDEX
12、 TARGETS Index level*HSBC 2019e Upside HSBC implied 12m forward PE MSCI China 85 94 10%15.0 x HSCEI 11,547 12,500 8%7.8x HSCCI 4,708 4,800 2%10.6x Hang Seng 29,625 31,000 5%12.0 x *As of 2 April 2019 Source:MSCI,Refinitiv Datastream,HSBC estimates Bruce Pang*(庞溟庞溟)Equity Strategist,China and Hong Ko
13、ng The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6916 Anakin Tang*Associate *Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations 2Q19:Why we think the rally is close to the top Equity Strategy China 4 April 2019
14、 2 Drivers of rally y-t-d are softening Major offshore Chinese indices have risen 10-20%y-t-d.MSCI China is trading at 12.3x 12-month forward PE,having expanded by 8.7%y-t-d.The rally has been driven by positive news flow that includes the Feds dovish stance on rate hikes,lower US bond yields,signs
15、of optimism about Sino-US trade talks and more policy stimulus.We think the picture is now becoming more mixed.But before we look at what has changed,we first analyse the y-t-d performance of offshore Chinese equities by breaking down the market returns into three segments PE,earnings and FX movemen
16、ts.All three factors have had a positive impact on MSCI China Index y-t-d,unlike in 2018 when PEs fell and the exchange rate of RMB-HKD offset earnings growth.A 12-month forward EPS growth of 13.4%is now priced in,versus consensus estimate of 2019e EPS growth 13.2%Earnings are being downgraded.Despi
17、te this,sell-side analysts have set their 2018/2019/2020 EPS y-o-y growth forecasts at a respectable 10.6%/13.2%/14.6%for MSCI China and 6.5%/3.9%/8.4%for the Hang Seng Index.The Chinese governments policy stimulus and the strong domestic demand should ensure that earnings growth remains solid and s
18、ustainable,in our view.We think the consensus estimate of 2019 EPS growth of c13%for MSCI China is achievable,with internet,financials,property,healthcare,and consumer staple contributing the most.In a bearish scenario assuming further cuts of between 2%and 20%to 2019e consensus earnings estimates w
19、e find that earnings growth would still be c12%.And yet,a 12-month forward EPS growth of 13.4%for MSCI China has been priced in by the market.Market sentiment:improving,but at a slower pace We have constructed a China equity market sentiment tracker,using equally-weighted scores assigned to eight di
20、fferent indicators.Based on data going back to 2012,our sentiment tracker shows that MSCI China is now two standard deviations above the indexs historical average.Clearly,sentiment is very strong.This suggests that,in line with our views,further market upside is limited and the rally may be running
21、out of steam.We also feel that anything that might affect sentiment perhaps a negative data point or bad news on the US trade front could lead to a market correction.A mixed picture Negatives:Decelerating earnings growth,sentiment rising at a slower pace and sluggish southbound inflows Catalysts:Pol
22、icy support and easing,less concerns about a weak HKD,structural market changes and a rebound in fund flows We raise utilities to overweight;lower energy to neutral;remain overweight financials and industrials,underweight IT 3 Equity Strategy China 4 April 2019 Some of our eight indicators turnover,
23、buyback activity,short-selling,the difference between index futures and spot prices,and the lower volatility of index options are still positive.Others,however,are starting to move in the opposite direction.For example,the increase in the 20-day average put/call ratio the number of put options trade
24、d divided by the number of call options traded suggests investors are either speculating that the market will move lower or are hedging their portfolios in case of a sell-off.We think sell-side analysts could start to downgrade and Chinas country risk premium and equity volatility may rise(China Off
25、shore Strategy:Introducing our market sentiment tracker,4 April 2019).The market sentiment tracker:continues to improve y-t-d,yet at a slower pace Source:Bloomberg,HSBC Equity Strategy Valuation less attractive MSCI Chinas 12.3x 12-month forward PE is up 8.7%from the start of the year and 0.58 stand
26、ard deviations above its historical average since 2010.MSCI China is also trading at 1.6x 12-month forward PB,on a par with its 10-year average.Valuation levels of major indices of offshore Chinese equities are now less attractive than those of their A-share peers.Whats changed The end of US rate hi
27、ke cycle The Federal Open Market Committee has revised down the rate projections for 2019 and 2020 and has also announced an end to quantitative tightening in September.HSBC US economists have changed their federal funds forecast to no rate hike this year(from one 25bp hike previously),and maintaine
28、d their forecast for two 25bp cuts in 2020,one in September and another in December(FOMC Multi-Asset Reaction:The end of the hiking cycle,20 March 2019).US bond yield inversion US yield curves are inverting.On average,a US recession typically hits after 12 months(or more)from yield inversion.This pr
29、ovides two opposing forces on equities:concerns about lower US growth environment,and lower cost of equity for corporates as a positive.HSBC Asian strategists find that China tends to outperform Asia equities during periods of yield inversion.Upon the inversion of the 10-year and 3-month yields whic
30、h happened on 22 March 2019 history tells us that Asian equities rise an average of 3%in the following 12 months but then fall 9%in the 18 months after that(Flat or fizzy:Asian equities and yield inversion,26 March 2019).VAT cut to save tax by cRMB800bn Beijing has announced that it is cutting corpo
31、rate taxes and fees by cRMB2trn,which is approximately 2%of projected 2019 GDP.Its the most aggressive tax cut in a decade.Combined with ongoing credit easing,this should lift business investment in the coming quarters(Global Economics Q2 2019:Poised for slower growth,25 March 2019).0204060801001200
32、102030405060Jan-12Aug-12 Mar-13Oct-13 May-14 Dec-14Jul-15Feb-16 Sep-16Apr-17Nov-17Jun-18Jan-19Simple equal weighted indexAverage+/-1 STD-1 STDMSCI China(RHS)Sentiment being more bearishSentiment being more bullish Equity Strategy China 4 April 2019 4 From 1 April 2019,the value-added tax(VAT)that co
33、vers the manufacturing sector falls 3ppts to 13%;VAT for other sectors,including transportation and construction,would fall from 10%to 9%.HSBC China economists estimate the tax savings will reach cRMB800bn.This should support corporate earnings and cash flow and boost market sentiment together(2019
34、Two sessions(II):Implication of VAT cut,11 March 2019).What hasnt changed More policy support with better mix Fiscal policy,including but not limited to more tax cuts and infrastructure investment,will likely be reinforced to boost domestic demand.Steps are being taken to give privately-owned firms
35、easier access to financing.HSBC China economists believe that these measures will support private-sector investment and relocate capital to more efficient sectors(China Inside Out:This time is different,11 February 2019;China 2019 NPC Preview:Stability and supply-side reforms,1 March 2019).Favourabl
36、e FX movement HSBC FX strategists expect the RMB to be less volatile in 2019.They have also revised their end-2019 USD-RMB forecast to 6.75(from 6.95),factoring in recent developments(Emerging Markets FX Roadmap:It always pays to buy quality,27 March 2019;Asian FX Focus-2019 Outlook:No sweet sixteen
37、,10 January 2019).We find that a 5%appreciation in the RMB appears to lift China earnings by c2%,but we believe Asian markets would move much higher.(RMB and Asia Equity:How a stronger RMB impacts stock,27 February 2019).Structural changes accelerating for offshore markets Several changes in market
38、structure will help reshape the investment landscape for offshore Chinese equities.They include:1)The enhancement of the Hang Seng China Enterprises Index(HSCEI)should lead to a more representative China index with better fundamentals and,therefore,potential upward revision of the indexs valuation l
39、evel.2)MSCIs further inclusion of A-shares could lead to more funds being allocated to the MSCI China Index,which should be positive for both A-shares and offshore-listed Chinese equities.3)Listing rules reform in Hong Kong has led to an increasing proportion of new economy stocks and an increase in
40、 the number mega-IPOs in the pipeline.We also expect more listings so the Hang Seng Index can compete with the introduction of the Science-Technology Innovation Board Chinas NASDAQ in-the-making(The Science and Technology Innovation Board:Opening the door to the future a primer,4 March 2019).Looking
41、 for value in uncertain times We raise our end-2019e index targets based on the latest estimates for profit growth,dividend pay-outs and cost of equity as well as revision of constituents:MSCI China to 94 from 90;HSCEI to 12,500 from 12,000;HSCCI to 4,800 from 4,600;and Hang Seng Index to 31,000 fro
42、m 30,000.Our index targets imply upside of 2-10%.HSBC Qianhai Securities A-share strategists end-2019e index forecasts for A-shares imply 10-13%upside:SHCOMP at 3,500(from 3,100),CSI300 at 4,500(from 3,800),and SZ Component at 11,500(from 9,500),supported by lower cost of equity and moderate re-rati
43、ng despite downward earnings revision(A-share Investment Atlas:The bull is slowing,but theres still some upside left,4 April 2019,by Steven Sun).5 Equity Strategy China 4 April 2019 Main assumptions:End of US rate hike cycle in 2019,policy stimulus to ensure earnings growth remains around 12%for 201
44、9.Risks:escalating trade tensions,delays in the government rolling out market-friendly policies and reform initiatives,weaker-than-expected growth,and tighter liquidity.For sector allocation,we raise utilities to overweight(from neutral)given its defensiveness and visibility of earnings growth,lower
45、 energy to neutral on falling earnings expectations and increased valuations,remain overweight on financials and industrials and underweight on IT(hardware and software).Our Asian equity strategists are overweight China(Q2 2019:Skimming the froth off the top,26 March 2019).We identify three key inve
46、stment themes:1)government policy on supply-side reforms,financial reforms,industry reforms and SOE reform;2)policy support,especially pro-infrastructure investment and less tight property curbs;and 3)defensive qualities amid external uncertainties or stocks less exposed to trade tensions.These alig
47、n with the key themes related to the Two Sessions as well as the 2019 macro themes identified by HSBC China economists(2019 Two Sessions:Themes and potential beneficiaries,4 March 2019;China in 2019:Five key macro themes,22 November 2018).We highlight five bottom-up Buy-rated ideas for 2Q19:Alibaba,
48、Bank of China,COLI,China Railway Construction Corp and Everbright International,which are skewed towards old economy stocks.This also reflects our strategic view since 4Q17 to take some profits on new economy stocks and increase exposure to the old economy(China Investment Atlas(Issue 61)-4Q17:Time
49、to take a breather,29 September 2017).We also provide five names that are least preferred by HSBC analysts:Country Garden,CGN Power,ZTO Express,Geely Auto and Pingduoduo.Equity Strategy China 4 April 2019 6 Index targets Based on the latest estimates for profit growth,dividend pay-outs and cost of e
50、quity as well as revision of constituents,we raise our end-2019e index targets for Chinese equities:MSCI China to 94 from 90;HSCEI to 12,500 from 12,000;HSCCI to 4,800 from 4,600;and Hang Seng Index to 31,000 from 30,000.Our index targets imply 2-10%upside.HSBC Qianhai Securities A-share strategists
