SHARE_MARKET：TAKING_A_BREATH_BEFORE_GOING_ON-2013-01-07.ppt

,strategy biweekly,january 6, 2013,h-share market,research,yuliang chang, cfa sfc ce ref: aoj055 danruo zou sfc ce ref: axq258 ,kevin liu sfc ce ref: avh867 ,taking a breath before going on,the hscei has rallied 22% since we suggested investors position for chinas economic recovery at end-september (see position for a recovery: 4q12 h-share strategy, september 23), and most recently it has risen sharply by 9% in the 4 weeks since our last h-share biweekly note now the sweet spot published on december 9 (figure 1). sector wise, flooding global fund inflows chased cheaply-valued macro-sensitive cyclicals first, and then moved decisively to financials since mid-november, which is the next space with relatively low valuations (figure 2); this pattern of market leadership is largely consistent with our recommendations to overweight domestic cyclicals and financials and underweight defensives. looking ahead, we expect the ongoing domestic economic recovery to extend in at least 1h13 and see more reform initiatives possible in 2h13, therefore we still see upside in h-shares in the medium-term (see more detailed analysis in our 2013 outlook piece 1h recovery this phenomenon is generally followed by an equity price correction in the past 4 years (figure 8). also in this note, we studied the case of b-to-h conversion and highlighted potential candidates that merit close attention in figure 17. see details in the section converting b-shares to h-shares: why, how and who else? on pages 46. please read carefully the important disclosures at the end of this report,apr-08,apr-09,apr-10,apr-11,apr-12,jul-08,jul-09,jul-10,jul-11,jan-08,jan-09,jan-10,jan-11,jan-12,jul-12,jan-13,oct-08,oct-09,oct-10,oct-11,oct-12,jun-05,jun-06,jun-07,jun-08,jun-09,jun-10,jun-11,dec-04,dec-05,dec-06,dec-07,dec-08,dec-09,dec-10,dec-11,jun-12,oct-12,apr-09,apr-10,apr-11,apr-12,jul-09,jul-10,jul-11,jan-09,jan-10,jan-11,jan-12,jul-12,jan-13,oct-09,oct-10,oct-11,dec-12,16,4,us,cicc research: january 6, 2013 charts we are watching,figure 1: h-shares rallied 22% since we suggested investors position for chinas recovery; it rose 9% in the 4 weeks since our report “now the sweet spot“,figure 2: the flooding global fund inflows chased cheaply-valued macro-sensitive cyclicals first, then moved decisively to financials since mid-nov,(index level) 13,000,hang seng china enterprise index (hscei),(rebased index) 140,cyclicals,defensives,financials,msci china,(us$bn) 20,12,000,position for a recovery: 4q12 strategy are you positioned for a,industrial profits,now the,130,market leadership rotated from cyclicals to financials,financials led cyclicals,financials +30%,11,000 10,000,enjoy the policy-driven rally,recovery? 12 questions over to,accelerate, more sweet spot to come in 4q12 1h recovery & 2h,incising hk equity fund flows,120 110,cyclicals led financials,moving along,mxcn +22% cyclicals +16%,12 8,fundamentals,reform: 2013 outlook,cumulative fund flows to hk,9,000,qe3 to help watch for fund re-rate flows and signs h-shares of recovery,will the green shoots thrive?,100,& china equities (rhs),defensives -7%,8,000,90,0,1-sep,16-sep,1-oct,16-oct,31-oct,15-nov,30-nov,15-dec,30-dec,5-sep 18-sep 1-oct,14-oct 27-oct 9-nov 22-nov 5-dec 18-dec 31-dec 13-jan,figure 3: h-share market appears technically stretched in the short term as the 14-day rsi reached an overbought level of 78 after recent sharp rally,figure 4: the still low absolute 12m fwd p/e of 10.3x is mainly due to financials; the non-financial 12m fwd p/e has reached 12.4x, almost at par to historical average,(index level),95% significance band,hscei index,rsi (14d),12m fwd p/e (x),msci china,mxcn ex. financials,mxcn ex. financials & energy,15,000,expectation,30,13,000 11,000 9,000,qe1(b):,on qe2,ltro2 ltro1,“qe4“ qe3,25 20,average valuations now msci china = 12.6x 10.3x mxcn ex. fin. = 12.7x vs. 12.4x mxcn ex. fin. & en. = 13.8x 13.4x,discount 18% 2% 3%,7,000 5,000,qe1(a): announce,expansion 14-day rsi,80,78,15,13.4x 12.4x,10,10.3x,3,000 1,000,20,5,figure 5: china manufacturing pmis continuous pickup since aug stalled in dec, as new orders plateaued while production and raw materials inventory fell,figure 6: the shrinking economic data surprises in us, europe and china suggest less fundamental support for further equity price rally in at least the near term,china pmi 2012 58 54,pmi,production,new orders new export orders raw materials dec manu. pmi flattened after 3 consecutive months of pick-up since aug. both production and raw materials fell,economic surprise index 200 positive surprise 100,eurozone,china,there are increasingly less macro data surprises in us, eurozone, and china,50 46,0 -100,negative surprise,-200 42,jan,feb,mar,apr,may,jun,jul,aug,sep,oct,nov,dec,source: bloomberg, ceic, factset, epfr, msci, i/b/e/s, cicc strategy research please read carefully the important disclosures at the end of this report 2,apr-09,apr-10,apr-11,apr-12,jul-09,jul-10,jul-11,jan-09,jan-10,jan-11,jan-12,jul-12,jan-13,oct-09,oct-10,oct-11,oct-12,oct-12,cicc research: january 6, 2013,figure 7: fed board members forecasted well above threshold (6.5%) unemployment ratio through 2014 and well below threshold (2.5%) inflation through 2015,figure 8: us equity has been going alongside gold since qe1; the recent falling gold and rising stock is generally followed by an equity correction since 2009,(%) 2.6 2.5,economic projections of fed board members, december 2012 us pce inflation us unemployment rate (rhs) feds threshold for rate hike,(%) 8.5,(index level) 1600 1400,qe1,s&p500,gold spot price (rhs) qe2 ltro,(us$ per oz) 2100 qe3 1900,2.2,7.5,1200,1700 1500,1.8,feds threshold for,6.5,1000,1300,rate hike,1100,1.4,5.5,800,900,1,central tendency of projections range of projections,4.5,600,correlation = 86%,700,2012,2013,2014,2015,2012,2013,2014,2015,figure 9: our economists forecast that the momentum of all major macro growth indicators including industrial production, fai, and retail sales would ease a bit in december, while cpi might pick up to 2.3%,china macro indicator (cicc forecast),jul-12 aug-12 sep-12,nov-12 dec-12e dec vs. nov release date,cpi ppi pmi,yoy yoy index,% % %,1.8 -2.9 50.1,2.0 -3.5 49.2,1.9 -3.6 49.8,1.7 -2.8 50.2,2.0 -2.2 50.6,2.3 -2.0 50.6, ,jan 11 jan 11 jan 1,gdp,yoy,%,7.4,7.7,jan 18,industrial production yoy,%,9.2,8.9,9.2,9.6,10.1,10.0,jan 18,retail sales fai export import trade surplus m2 new loans,yoy ytd yoy yoy yoy current yoy increment,% % % % us$bn % rmb bn,13.1 20.4 1 4.7 25.1 13.9 540,13.2 20.2 2.7 -2.6 26.5 13.5 703.9,14.2 20.5 9.9 2.4 27.6 14.8 623,14.5 20.7 11.6 2.4 32.0 14.1 505.2,14.9 20.7 2.9 0.0 19.6 13.9 522.9,14.8 20.3 4.0 3.0 18.7 13.5 550.0, ,jan 18 jan 18 jan 10-13 jan 10-13 jan 10-13 jan 10-15 jan 10-15,source: bloomberg, ceic, fed, cicc strategy research please read carefully the important disclosures at the end of this report 3,1,cicc research: january 6, 2013,converting b-shares to h-shares: why, how and who else?,why convert? b-shares are increasingly marginalized,the b-share market was created to attract foreign capital in support of chinas development during the early days of reform and opening up in the 1990s. however, as overseas financing channels gradually widened, especially the flourishing h-shares and red chips in hong kong since 1997, the b-share markets standing in raising foreign capital became dispensable, and its development has slowed significantly ever since. b-share ipos completely stalled after 2000 (figure 10) while no placements have been observed since 2004. the start of qfii in late 2002 further aggravated b-shares marginalization.,the lack of financing capability and their ambiguous positioning made b-shares ill-received among investors, as evidenced by their very light trading turnover and wide share price discounts to corresponding a-shares. by looking at the historical data, we find that the annualized velocity of all b-shares is substantially lower compared to a-shares (figure 11), while the average a/b premium since 2005 remains elevated at 112% (figure 12). given these circumstances, relisting in hong kong should be a good alternative to the current impasse, and we believe all eligible b-shares are seriously considering the option.,how it works? key procedures and timeline,the first b-to-h conversion, cimc (02039.hk), took roughly four months to complete after the official announcement of the conversion plan on august 15, 2012, and was finally was listed in the hong kong market on december 19, 2012 (figure 16). the key procedures for conversion include: 1) approval from the board of directors (august 14, 2012); 2) approval at an extraordinary general meeting (august 30, 2012, two-thirds of both the overall companys shareholders and b-shareholders in cimcs case); 3) administrative authorization from the csrc (november 20, 2012); and 4) approval from the hkex for listing (november 28, 2012) (figure 13). the key requirements for a company to be eligible for listing in hong kong involve,criteria including financials, length of operation, public float as well as the spread of shareholders1.,it is also worth noting that a relatively concentrated shareholding structure, especially when controlled by related parties (e.g. china merchants investment and cocso container industries collectively control 47.4% of cimcs overall shares and 57.8% of its b-shares, figure 14), has paved the way for cimc to accomplish the very first b-to-h conversion. for vanke-b (200002.sz), which is currently suspended for trading and has been widely talked as preparing for conversion to h-shares, its shareholding structure is quite diversified as the top three shareholders only control 17% per the latest disclosure. as one of the most liquid and mostly publicly-owned b-shares, vanke-bs potential conversion would clearly set a good example for other b-shares to follow suit.,who else? benefits and potential candidates,given hong kongs status as an important international financial hub, a conversion to h-shares would grant a company much wider exposure to global investors, and therefore potentially better trading liquidity, higher valuation multiples and shrinking discount relative to a-shares. taking cimc (02039.hk) as an example, on its first day of listing in hong kong on december 19, 2012, it delivered 30% one-off revaluation upon opening (hk$12.6) and concluded the day at hk$11.22 which is a 16% gain vs. its final b-share closing of hk$9.7 (figure 15). as of january 4, 2013, cimcs a/h price premium has turned into a 1.2% discount thanks to the sharp rally of its h-shares alongside the strength of the overall h-share market. the turnover has also increased remarkably, as the average daily turnover of cimcs h-share has more than doubled since listing compared to that of its b-share after the announcement of conversion.,another potential benefit is the access to global capital. although cimc has made a commitment not to finance in the hong kong market through rights issue (targeting existing shareholders) before domestic investors can directly invest in the overseas market due to chinas capital controls, the possibility for cimc to finance through additional share offerings to new investors cannot be ruled out. notably, the equity financing for domestic property companies is still restricted by the csrc. therefore, vanke-b might not be able to issue new shares even after the b-to-h conversion until such restrictions are relaxed.,.hk/eng/listing/listreq_pro/listreq/equities.htm,please read carefully the important disclosures at the end of this report,4,apr-08,apr-09,apr-10,apr-11,apr-12,jul-08,jul-09,jul-10,jul-11,jan-08,jan-09,jan-10,jan-11,jan-12,jul-12,jan-13,oct-08,oct-09,oct-10,oct-11,jul-05,jul-06,jul-07,jul-08,jul-09,jul-10,jul-11,jan-05,jan-06,jan-07,jan-08,jan-09,jan-10,jan-11,jan-12,jul-12,jan-13,aug-12,aug-12,jun-12,jun-12,jul-12,jul-12,sep-12,may-12,may-12,may-12,sep-12,oct-12,oct-12,oct-12,nov-12,nov-12,dec-12,dec-12,oct-12,0%,12,13,12,11,8,9,8,cicc research: january 6, 2013 lastly, we screen out 32 potential b-to-h candidates that merit close attention in figure 17, based on the following criteria: 1) hkex listing requirements; 2) at least 30% shareholding by the top three holders; 3) sizeable companies with total market cap above us$1bn, or with average daily turnover greater than us$0.5m. we suggest investors focus on fundamentally sound b-share companies that are currently trading at deep discounts (50%) to corresponding a-shares, such as changan-b (200625.sz), lao fen xiang-b (900905.sh), and anhui gujing distillery-b (200596.sz), etc.,figure 10: the development of the b-share market slowed down remarkably since 1997, and ipos stalled after 2000,figure 11: as the b-share market is gradually marginalized, its liquidity conditions turned lukewarm with substantially lower velocity compared to a-shares,25,# of ipo,ipo fund raised (rhs),(rmb bn) 5,(4-week rolling annualized velocity) 400%,b-shares,a-shares,20 15 10 5 0,4 3 2 1 0,300% 200% 100% 0%,average since 2008 = 189% average since 2008 = 94%,1992,1993,1994,1995,1996,1997,1998,1999,2000,figure 12: b-shares have been trading at a huge discount (112% on average) relative to a-shares,figure 13: key procedures for b-shares to be converted to h-shares (using cimc as an example),(a/b premium, (a-b)/b) 180%,average of all b-shares,cimc,approval of board of directors and,announcement of the plan 150%,120%,average since 2005 = 112%,extraordinary general meeting,2/3 of both overall shareholders and b- share holders,90%,70%,authorization from,60% 30%,average since 2005 = 62%,announcement of b-to-h plan,csrc approval of hkex,select key criteria: 1) meet one of the 3 financial tests: profit, mktcap/revenue, mktcap/ revenue/cashflow,2) length of operating: 3 years 3) public float: 25%,delisting of b- shares & list in hk,4) shareholder: at least 300 holders,figure 14: a relatively concentrated shareholding structure ensured that the conversion plan would get approval at the extraordinary general meeting,figure 15: cimc benefited from the conversion by advancing 16% upon listing and the discount to its a-share vanished as of jan 4, 2012,sasac, the actual controller,(hk$) 16,200039 ch (b) trading suspension,2039 hk (h),000039 ch (a, rhs),(rmb) 16 15,14,14,cosco container industries,long honour investment,china merchants (cimc) investment,aug 15, 2012 announcement of b-to-h plan,dec 19, 2012 h-share listed 11.2,5.7%, b-share,0.95%,25.5%,10,9.7,+16%,10,16.2%, a-share,b-share cimc 54% b-share,b-share,nov 30, 2012 b-share delisted,46% a-share source: bloomberg, wind, hkex, company announcements, cicc strategy research please read carefully the important disclosures at the end of this report 5,extraordinary general,meeting approved the,conversion,dec 14, 2012,by hkex,exchange,dec 19, 2012,of b-shares,cicc research: january 6, 2013 figure 16: the timeline of cimcs b-to-h conversion nov 20, 2012,jul 16, 2012 the company started to suspend trading due to “a significant event“,aug 14, 2012 oct 24, 2012 board of directors meeting notice of acceptance approved the conversion from csrc aug 15, 2012 oct 31, 2012 announcements of the acceptance letter conversion plan aug 30, 2012 from hkex,approval of csrc nov 22, 2012 hearing by hkex listing committee nov 28, 2012 conditional approval delisted from shenzhen nov 29, 2012 last trading day listed in hkex,jul 2012,aug 2012,sep 2012,oct 2012,nov 2012,dec 2012,source: company announcements, cicc strategy research figure 17: screen of potential b-to-h conversion candidates,ticker,name,chinese name,a-share,total b-shr b-shr 3m mktcap cap advt (us$m) (us$m) (us$m),b price a/b p/e (loc) premium 13e,p/b roe % of largest % of top 3 13e 13e (%) shareholder shareholders,meeting hkex listing requirements?,200869 900950 200024 200550 900932 900947 200625 900933 900936 900905 200596 200539 200513 900949 200581 200771 900911 200022 200488 900920 900925 900934 900923 200152 200028 900908 900912 200053 900909 900945 900940 200530,ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch,yantai changyu-b jiangsu future-b china merchant-b jiangling moto-b shang lujiazui-b shanghai zhenh-b chongqing chan-b huaxin cement-b inner mongolia-b lao fen xiang-b anhui gujingd-b guangdong elec-b livzon pharmac-b zhejiang south-b weifu high tec-b hangzhou steam-b shang jinq exp-b shenz chiwan w-b shandong chen-b shanghai diese-b shanghai mecha-b sh jinjiang in-b shang friend s-b shandong airline china national-b shang chlor-b shang waigao-b shenz chiwan p-b double coin-b hainan airline-b greattown hold-b dalian refrig-b,张裕 b 新城 b股 招商局 b 江铃 b 陆家 b股 振华 b股 长安 b 华新 b股 鄂资 b股 老凤祥 b 古井贡 b 粤电力 b 丽珠 b 东电 b股 苏威孚 b 杭汽轮 b 金桥 b股 深赤湾 b 晨鸣 b 上柴 b股 机电 b股 锦江 b股 友谊 b股 山航 b 一致 b 氯碱 b股 外高 b股 深基地 b 双钱 b股 海航 b股 大名城 b 大冷 b,000869 ch n/a 000024 ch 000550 ch 600663 ch 600320 ch 000625 ch 600801 ch 600295 ch 600612 ch 000596 ch 000539 ch 000513 ch n/a 000581 ch n/a 600639 ch 000022 ch 000488 ch 600841 ch 600835 ch 600754 ch 600827 ch n/a 000028 ch 600618 ch 600648 ch n/a 600623 ch 600221 ch 600094 ch 000530 ch,4,927 1,364 8,213 2,319 3,254 2,104 4,469 1,964 1,303 1,517 2,466 2,417 1,409 1,154 3,202 1,048 1,202 1,003 1,143 1,152 1,265 1,218 2,350 551 1,477 1,161 1,416 339 1,017 4,088 1,572 331,1,504 1,364 1,247 823 663 589 546 527 439 418 416 412 409 396 385 381 254 254 245 232 228 227 220 193 192 187 164 164 140 116 89 74,3.07 2.15 2.56 0.31 0.70 0.60 2.14 0.58 0.66 1.44 1.70 1.12 0.87 0.76 1.01 1.57 0.61 0.15 0.70 0.60 0.28 0.34 0.48 1.32 0.87 0.35 0.32 0.76 0.23 0.11 0.46 0.51,50.25 0.86 28.5