EVENT-DRIVEN_INVESTMENT_STRATEGY：2012_EARNINGS_PREANNOUNCEMENTS_ANALYSIS-2013-01-25.ppt

,portfolio & quant strategy,january 25, 2013,a-share market,research,chao wang sfc ce ref: asx315 qiusuo li jian liu ,event-driven investment strategy 2012 earnings preannouncements analysis investment highlights the a-share main boards recent round of annual results announcements signals the start of the 2012 earnings season. in this report, we will analyze 2012 results based on earnings preannouncements and preliminary earnings estimates of listed companies. 2012 earnings preannouncement analysis: the proportions of listed companies preannouncing good news and 50% earnings growth increased, suggesting the number of companies that record sequential earnings improvement amid economic recovery has been rising, raising good expectations for upcoming annual results announcements. significant sector divergence: 1) in healthcare, electronics, f watch thematic investment opportunities with nonferrous metals and agriculture in the medium/short term. a) industries that could post persistent earnings growth: among healthcare, electronics, f&b and nonferrous metals that have a good chance of reporting sequential earnings recovery, we suggest investors focus on healthcares medium-/long-term investment opportunities. b) cyclicals with sequential earnings rise: we like nonferrous metals in the medium/short term and believe it will perform well on the market rally and receive a boost from 2012 results. c) catch-up of laggards that were hurt by poor earnings forecasts: we prefer agriculture in the medium/short term. the agriculture sector did not significantly benefit from economic recovery and has been underperforming the market on poor earnings expectations. we believe some agricultural stocks, especially those benefiting from agricultural modernization, could catch up due to persistent underperformance and euphoric sentiment to be fueled by the upcoming npc & cppcc sessions. our stock selections based on cicc sector analysts forecasts are shown in the following figures. please read carefully the important disclosures at the end of this report,pe pb,(12, %),(%),(12, %),chg (%),pe pb,pe,pb,(12, %),chg,cicc research: january 25, 2013 favor nonferrous metal stocks with earnings recovery in the short/medium term,code,name,cicc rating,warning type,expected growth （12，%）,1w ytd,pchgchg (%),2011,p/e p/b 2012e 2013e 2011,short term (before the spring festival),600362.sh,jiangxi copper company limited,accum,(3.57) 13.24,12.85,16.41,14.55,2.14,000060.sz,shenzhen zhongjin lingnan nonfemet company limited,accum,(4.18),9.50,19.40,35.85,26.35,3.48,600497.sh yunnan chihong zinc&germanium co.,ltd.,accum,(2.25) 10.56,52.21,56.90,43.02,5.15,medium term (after the spring festival),600549.sh,xiamen tungsten co.,ltd,accum,(3.59) 33.64,26.37,44.02,29.44,7.82,600111.sh,inner mongolia baotou steel rare-earth(group) hi-tech co.,ltd accum,(2.63) 91.50,24.98,36.85,29.59,15.42,002340.sz,shenzhen green eco-manufacture hi-tech co.,ltd.,accum slight growth,30.00,(3.35) 25.43,58.28,44.09,29.37,3.25,source: wind, cicc research favor agricultural stocks that may catch up and benefit from the upcoming npc & cppcc sessions in the short/medium term,code,name,cicc rating,warning type,expected growth （12，%）,pchg (%) 1w ytd,2011,p/e p/b 2012e 2013e 2011,short and medium term（before npc and cppcc）,000998.sz,yuan longping high-tech agriculture co.,ltd,buy,4.62,30.97,69.95,37.26,32.16,8.69,002041.sz,shandong denghai seeds co.,ltd,buy,slight growth,30.00,3.52,(9.16) 39.23,35.08,28.36,8.06,source: wind, cicc research favor healthcare stocks with steady earnings growth in the medium/long term,code,name,cicc rating,warning type,expected growth （12，%）,pchg (%) 1w ytd,2011,p/e 2012e,2013e,p/b 2011,portfolio with sustainable earnings stability,600276.sh 000963.sz 600085.sh 600535.sh 000513.sz,jiangsu hengrui medicine co.,ltd. huadong medicine co.,ltd. beijing tongrentang co.,ltd tasly pharmaceutical group co., ltd. livzon pharmaceutical group inc.,buy buy accum accum accum,1.82 (2.11) 0.45 1.79 0.00,17.50 39.74 45.08 39.42 68.99,44.22 42.33 59.98 48.59 27.90,35.68 32.88 46.79 39.25 22.03,28.61 26.22 37.45 30.35 18.06,9.18 10.56 7.56 8.24 3.53,000538.sz yunnan baiyao group co., ltd.,accum,2.50,39.63,42.31,33.21,26.59,9.22,portfolio with sound business strategies,600521.sh 002422.sz 002262.sz 600587.sh 600557.sh,zhejiang huahai pharmaceutical co.,ltd sichuan kelun pharmaceutical co., ltd. jiangsu nhwa pharmaceutical co.,ltd shinva medical instrument co.,ltd. jiangsu kanion pharmaceutical co.,ltd.,buy accum accum buy accum,growth slight growth slight growth,60.00 30.00 50.00,(2.62) 0.12 1.80 0.53 11.14,26.21 48.67 52.83 16.27 63.47,34.75 31.90 64.03 52.72 54.54,24.27 28.00 46.51 35.75 41.55,19.02 21.39 33.41 25.81 30.18,4.93 3.93 12.24 7.17 6.93,source: wind, cicc research please read carefully the important disclosures at the end of this report 2,cicc research: january 25, 2013,contents,analysis of 2012 earnings preannouncements 4,figures,favor nonferrous metal stocks with earnings recovery in the short/medium term .2 favor agricultural stocks that may catch up and benefit from the upcoming npc & cppcc sessions in the short/medium term .2 favor healthcare stocks with steady earnings growth in the medium/long term 2 figure 1: timing distribution of 2012 earnings preannouncements4 figure 2: proportions of listed companies releasing 2012 earnings preannouncements.4 figure 3: proportion of listed companies preannouncing 50% earnings growth and good news is recovering .5 figure 4: 2012 earnings preannouncements breakdown .5 figure 5: preannounced earnings growth movements for 2012 5 figure 6: sequential proportion change of companies preannouncing 50% earnings growth as a percentage of total sector constituents 3q12 to 2012.6 figure 7: sequential share movements of companies preannouncing 50% earnings decline as a percentage of total sector constituents from 3q12 to 2012 6 figure 8: infrastructure investments slowed modestly, but real estate investments rebounded in 4q12 7 figure 9: manufacturing investments slowed to a low level by historical norm 7 figure 10: 2012 earnings preannouncements by sector 7 figure 11: net profit growth of listed companies releasing preliminary earnings estimates.8 figure 12: favor healthcare stocks with steady earnings growth in the medium/long term.9 figure 13: favor nonferrous metal stocks with earnings recovery in the short/medium term9 figure 14: favor agricultural stocks that could catch up and benefit from the upcoming npc & cppcc sessions in the short/medium term .10,please read carefully the important disclosures at the end of this report,3,10-15,10-22,10-29,11-05,11-12,11-19,11-26,12-03,12-10,12-17,12-24,12-31,01-07,01-14,01-21,01-28,02-04,02-11,02-18,02-25,03-04,03-11,03-18,03-25,04-01,04-08,04-15,04-22,04-29,2005,cicc research: january 25, 2013 analysis of 2012 earnings preannouncements the a-share main boards recent round of annual results announcements signals the start of the 2012 earnings season. in this report, we will analyze the 2012 results of a-share listed companies based on their earnings preannouncements and preliminary earnings estimates. (i) earnings preannouncements analysis proportions of companies preannouncing good news and 50% earnings growth both increased a total of 1,143 a-share listed companies have released 2012 earnings preannouncements so far, with 313 on the main board (22.1% of constituents), 700 on the sme board (99.9%), and 130 on chinext (36.6%). all listed companies on the sme board had released 2012 earnings guidance by end-october 2012, and the second round of peak preannouncements started in mid-january 2013.,figure 1: time distribution of 2012 earnings preannouncements time distribution of earning pre-announcement,figure 2: proportions of listed companies releasing 2012 earnings preannouncements,1,800,2006 2007,120,%,main board,sme,chinext,1,600,2008,1,400,2009 2010 2011,100,89.1,100.0,96.3,95.9,98.1 98.2 99.9,1,200,2012,80,78.4,1,000,800 600,60 40,46.5,49.7,58.6,55.4,60.2,54.3,41.8,47.3,36.6,400,200,20,18.0,22.1,0 0,2005-12,2006-12,2007-12,2008-12,2009-12,2010-12,2011-12,2012-12,source: wind, cicc research,source: wind, cicc research based on earnings preannouncements now available (50% decline, first loss, continued loss, slight decline, slight growth, turning profitable, continued profit; 50% growth, and uncertainties), 654 companies released good news (slight growth, turning profitable, continued profit, and 50% growth), representing 57.72%, lower than 2011s 67.08%, but slightly higher than 3q12s 51.05%. the share of companies preannouncing 50% earnings growth was 16.50%, marking the second straight quarterly redound of this figure. we believe the number of companies achieving record sequential earnings improvement amid economic recovery has been rising, raising expectations for upcoming annual results announcements. please read carefully the important disclosures at the end of this report 4,2005-12,2006-12,2007-12,2008-12,2009-12,2010-12,2011-12,2012-12,-200,-80,-60),-60,-40),-40,-20),-20,0),20,40),40,60),-100,-80),60,100),100,120),120,150),-200,-100),0,20),150,200),=200,cicc research: january 25, 2013 figure 3: proportion of listed companies preannouncing 50% earnings growth and good news recovering,2h12,3q12,1h12,1q12,2h11,3q11,1h11,1q11,uncertain slight decline slight growth turning profitable initial losses continued losses-making continued profit-making decline growth preannouncing good news total,1.1% 15.2% 25.1% 4.6% 8.8% 1.6% 11.6% 15.5% 16.5% 57.7% 100.0%,0.5% 18.4% 26.8% 2.8% 10.0% 5.5% 7.9% 14.6% 13.6% 51.0% 100.0%,0.7% 16.4% 26.3% 3.6% 10.5% 6.8% 9.2% 13.6% 12.9% 52.0% 100.0%,0.0% 8.0% 22.0% 4.8% 14.5% 12.5% 3.3% 16.2% 18.7% 48.8% 100.0%,0.4% 11.1% 27.9% 4.8% 7.1% 2.6% 7.5% 11.7% 26.8% 67.1% 100.0%,0.4% 7.6% 24.7% 5.5% 4.5% 7.7% 9.8% 7.9% 31.9% 72.0% 100.0%,1.0% 6.1% 24.0% 5.2% 5.9% 9.4% 7.8% 6.8% 33.8% 70.8% 100.0%,0.0% 0.7% 1.7% 8.2% 10.9% 18.4% 0.0% 8.7% 51.2% 61.2% 100.0%,source: wind, cicc research that said, investors should note that: 1) although the number of companies preannouncing 50% earnings growth and other good news increased sequentially, the figure remained relatively low compared to the past eight years (figure 4). the companies preannouncing good news represented 57.72%, the second lowest figure in the past eight years (only higher than that in 2008), and the share of companies preannouncing 50% earnings growth has not exceeded 20% even after the two-quarter rebound, and sits at the lowest level since 2005, suggesting corporate earnings remained relatively weak in spite of some improvements.,figure 4: 2012 earnings preannouncements breakdown,figure 5: preannounced earnings growth movements for 2012,100 90,%,grow th continued,180 160,largest magnitude of net profit change 170,80 70 60,profit-making turning profitable slight grow th,140 120 100,93,113,82,124,100,50 40 30 20,uncertain slight decline continued,80 60 40 20,46,21,58,69,58,40,18,12,47,10 0 source: wind, cicc research,losses-making initial losses decline,0 source: wind, cicc research,the share of listed companies preannouncing 50% earnings declines also increased: this figure now stands at 15.5%, 2.9ppt and 3.6ppt higher than in 3q12 and 1h12, respectively. this indicates earnings of some listed companies are worsening in spite of the economic recovery. this is consistent with the cicc macro teams view: chinas recovery of growth momentum is not yet on a solid footing. we will analyze this situation thoroughly. significant sector divergence in order to find which sectors should benefit more from the economic recovery, and which remain sluggish, we compare sequential share movements of companies preannouncing 50% earnings growth/decline as a percentage of each sectors total constituents for 2012 with that for 3q12. as illustrated in figures 6 & 7, the industries diverged sharply. please read carefully the important disclosures at the end of this report 5,commercial,trade,chemical,industry,pharmaceutical,biotechnology,ferrousmetals,foodtourism,financial,services,complex,textile&,apparel,transportation,machinery&,equipment,realestate,information,equipment,information,services,mining,household,appliances,building,materials,delivery,device,utilities,light,manufacturing,non-ferrous,metals,agriculture,forestry,animal,electronic,food&,beverage,pharmaceutical,biotechnology,ferrousmetals,foodtourism,commercial,trade,chemical,industry,financial,services,complex,textile&,apparel,realestate,transportation,mining,information,equipment,light,manufacturing,non-ferrous,metals,information,services,electronic,delivery,device,utilities,machinery&,equipment,household,appliances,agriculture,forestry,animal,building,materials,cicc research: january 25, 2013 figure 6: sequential proportion change of companies preannouncing 50% earnings growth as a percentage of total sector constituents 3q12 to 2012,3.0% 2.0%,2.0%,2.4%,2.5%,1.0%,0.5%,0.5%,0.7%,0.8%,1.0%,1.0%,1.1%,0.1% 0.0%,-1.0% -2.0%,-1.5% -1.5% -1.3%,-1.1% -1.0%,-0.8%,-0.5% -0.5% -0.4%,-0.3% -0.3%,-3.0%,-4.0%,-3.3%,source: wind, cicc research in healthcare, electronics, f&b and nonferrous metals, the proportion of companies preannouncing 50% earnings growth increased, while that of companies preannouncing 50% earnings declines stayed flat or declined from 3q12 to 2012. healthcare, electronics and f&b continued to benefit from chinas economic restructuring, changes in demographic structure, and the economic recovery, while nonferrous metals was mainly helped by broad-based price growth in 4q12. figure 7: sequential share movements of companies preannouncing 50% earnings decline as a percentage of total sector constituents from 3q12 to 2012 4.0%,3.0%,2.0%,2.1%,2.8%,2.0% 1.0%,0.0%,0.1%,0.2%,0.5%,0.8%,1.0%,1.2%,1.4%,0.0%,-1.0% -2.0%,-2.0%,-1.7%,-1.3%,-1.0% -1.0%,-0.6% -0.6%,-0.4% -0.2% -0.2%,-3.0% -3.0% -4.0% source: wind, cicc research agriculture, commercial trade and textiles and edible oil is suffering from declining international oilseeds prices and soft demand. as the 4q12 economic recovery was mainly driven by investment and domestic consumption, the earnings of commercial trade and textiles & apparel also declined broadly. please read carefully the important disclosures at the end of this report 6,chemical,industry,comprehensive,ferrousmetals,financial,services,delivery,equipment,transportation,machineryand,equipment,non-ferrous,metals,electronic,textileand,apparel,building,materials,information,equipment,commercial,trade,foodtourism,realestate,medicaland,biological,information,services,mining,household,appliances,utilities,light,manufacturing,animal,husbandryand,foodand,beverage,%,1,cicc research: january 25, 2013,figure 8: infrastructure investments slowed modestly, but real estate investments rebounded in 4q12,figure 9: manufacturing investments slowed to a low level by historical norm,real estate investment,infrastructure investment,yoy, %,manufacturing investment,yoy, % 45,60 40 50 35 40 30,30 20 10 0,25 20 15 10,2007,2008,2009,2010,2011,2012,2007,2008,2009,2010,2011,2012,source: wind, cicc research,source: wind, cicc research, construction, building materials and machinery saw a structural divergence due to discrepancies in policy support and property investment exposure. the share of companies preannouncing 50% earnings growth increased and that of companies preannouncing 50% earnings declines also expanded. this structural divergence mainly reflects that growth was primarily driven by the earlier acceleration in government-led infrastructure investment and later recovery of real estate investment1. the companies which can directly benefit from government-led infrastructure investment and the recovery of real estate investments posted earnings growth, while the earnings of others remained sluggish. as shown in figures 8 & 9, infrastructure investment slowed in 4q12, but yoy growth of manufacturing investment declined throughout 2012. financial services had a lower share of companies preannouncing 50% earnings growth/declines mainly due to the fact that earnings of securities firms have not recovered: figure 10 shows that f&b and healthcare have much more companies preannouncing 50% earnings growth than preannouncing 50% earnings declines, in line with our previous analysis. the financial services industry has the lowest share of companies preannouncing 50% earnings growth/declines, mainly because banks can hardly grow at 50% given their high bases, and securities firms face huge challenges amid the continued market sluggishness and suspension of ipo. figure 10: 2012 earnings preannouncements by sector,250 200 150 100 50 0,pre-increasing number,pre-decreasing number,proportion of pre-increasing（rhs）,100 90 80 70 60 50 40 30 20 10 0,source: wind, cicc research macroeconomy weekly #224: china economy makes soft landing, january 21, 2013 (peng wensheng, lin tun, zhao yang) please read carefully the important disclosures at the end of this report 7,cicc research: january 25, 2013 (ii) analysis of preliminary earnings estimates according to the existing rules of the shanghai and shenzhen stock exchanges, companies on the sme board are required to release earnings preannouncements, and those on the main board and chinext should do so if any of the following situations occur: 1) making losses; 2) 50% earnings increase/decline yoy (eps rmb0.05); or 3) turning profitable. however, the listed companies should release preliminary earnings estimates only when their earnings results are leaked ahead of schedule or their stock/derivative prices have unusual movements due to earnings rumors. therefore, much fewer listed companies are releasing preliminary earnings estimates than issuing earnings preannouncements. figure 11: net profit growth of listed companies rel