瑞信-中国-股票策略-中国A股策略：权重增加、信贷宽松和合理估值是驱动A股上涨的三个理由-2019.3.5-22页.pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse 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 could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.5 March 2019Asia Pacific/Hong KongEquity ResearchStrategy China A-share Market Strategy STRATEGYResearch AnalystsVincent Chan852 2101 6568vincent.chancredit-Shirui Ouyang852 2101 6583shirui.ouyangcredit-Three factors to drive A-share up:MSCI weight increase,credit easing and reasonable valuationFigure 1:Overseas investment out of A-sharefree-float market cap rose from 5.2%to 6.7%in 2018-200 400 600 800 1,000 1,200 1,4000.2%1.2%2.2%3.2%4.2%5.2%6.2%7.2%Q1 2014Q4 2014Q3 2015Q2 2016Q1 2017Q4 2017Q3 2018Overseas Investment(bn RMB)Overseas holdings%of A-share free-float market capSource:Company data,PBoC,Credit Suisse researchDomestic opening rewarded with international recognition.The Tech Board,a major reform initiative,will be launched this year with new IPO rules.Final rules published on 1 March include:(1)from approval-based to registration-based IPO;(2)relaxed profit requirement;and(3)removal of 23x P/E ceiling on IPO pricing.On the same day,MSCI announced raising the A-share inclusion factor from 5%to 20%,with additions of mid-cap and ChiNext names.We expect US$50 bn inflow into the A-share market in 2019;China A would comprise 11.3%in MSCI China by November.Credit easing benefits real economy and revives stock market liquidity;valuation reasonable.(1)Credit conditions have started to improve since January.Further improvement of credit condition will gradually show an impact on overall economy,and also corporate earnings growth,although not likely until 2H19.(2)Abundant stock market liquidity,with northbound investment accelerated and the turnover-to-market-cap ratio recovered from historical low.(3)rising probability of a China-US trade agreement;and(4)valuation of A-share is still cheap with CSI300 trading at 11.7x 12M forward P/E,vs 10-year average of 13.6x.Index target and model portfolio.We revise up our index targets for SHCOMP/CSI300 from 2900/3800 to 3200/4100.Our biggest overweight sectors are Financials,Capital goods and Information technology,which we believe will benefit from a more relaxed credit environment and a vibrant stock market.Our A-share top picks are Huayu,Sunway,FII,Ping An,Nari,Hengli.5 March 2019China A-share Market Strategy2Focus charts and tableFigure 2:QFII quota grantedFigure 3:RQFII quota granted-0.50.00.51.01.52.02.53.00204060801001202013-012013-052013-092014-012014-052014-092015-012015-052015-092016-012016-052016-092017-012017-052017-092018-012018-052018-092019-01MoM Chg(RHS,US$bn)QFII quota(US$bn)-5.00.05.010.015.020.025.030.035.040.0-30701702703704705706702011-122012-052012-102013-032013-082014-012014-062014-112015-042015-092016-022016-072016-122017-052017-102018-032018-082019-01MoM Chg(RHS,US$bn)RQFII quota(US$bn)Source:Company data,Credit Suisse estimates,Wind.Source:Company data,Credit Suisse estimates,Wind.Figure 4:Top 15 large cap buy by trade value,benefiting from MSCI A-share weight increase TickerNameGICS SectorValue to Trade(USD mn)MayAugNovTotal600519 C1KWEICHOW MOUTAI Consumer Staples624.4652.4642.61919.4601318 C1PING AN Financials529.2515.9508.21554600036 C1CHINA MERCH BK Financials449.4446.6439.61335.6300498 C2WENS FOODSTUFF Consumer Staples246.4115.5113.4476601166 C1INDUSTRIAL BANK Financials246.4263.9259.7770600000 C1SHANGHAI PUDONG Financials234.5232.4228.9695.1002415 C2HANGZHOU HIKVIS Information Technology225.4210.7207.2643.3000333 C2MIDEA GROUP CO Consumer Discretionary218.4212.1208.6638.4601398 C1ICBC Financials212.8207.2204.4625.1601288 C1AGRI BANK OF CN Financials193.2189186.2568.4000858 C2WULIANGYE YIBIN Consumer Staples185.5193.9191.1569.8000002 C2CHINA VANKE CO Real Estate184.8182.7179.9547.4601668 C1CHINA STATE CON Industrials177.8172.2169.4519.4601328 C1BANK OF COMMU Financials172.2170.1167.3509.6600276 C1JIANGSU HENGRUI Health Care168.7174.3171.5515.2Source:Company data,Credit Suisse estimates,the BLOOMBERG PROFESSIONAL serviceFigure 5:Credit spread started to decline since January 0100200300400Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Industrial debt AAAIndustrial debt AA+Industrial debt AASource:Company data,Credit Suisse estimates,Wind.5 March 2019China A-share Market Strategy3Three factors to drive A-share up:MSCI weight increase,credit easing and reasonable valuationDomestic opening rewarded with international recognitionCSRC has launched reform policies in the last two years facilitating foreign capital inflow into the market,including reducing the constraint on foreign ownership of domestic brokers and easing on foreign capital inflow/outflow as well as investment products allowed in the QFII and RQFII scheme.The new Tech Board,a major reform initiative,will be launched this year with new IPO rules.Final rules published on 1 March include:(1)moving to registration-based IPO system from approval-based;(2)relaxation of stringent profit requirement;and(3)removal of 23x P/E window guidance at IPO pricing.Coincidentally,on the same day,MSCI announced raising the A-share inclusion factor from 5%to 20%in three steps,with additions of mid-cap and ChiNext names.An inflow of US$50 bn is estimated into the A-share market in 2019 in the next nine months.The pro forma index weight of China A will become 3.8%and 11.3%in MSCI China.The decision acknowledges Chinas progress in its capital market reform and opening up,and illustrates overseas investors growing interest in A-share allocation.Credit easing benefits real economy and revives stock market liquidity;valuation reasonable Since 2H 2018,the government has changed its tone from“de-leveraging”to“stabilise-leveraging”.Credit spreads of industrial debt started to decline since January.If credit relaxation persists,we expect a better domestic economy outlook in 2H and therefore corporate earnings growth.Meanwhile,if an agreement is reached between the US and China,the immediate threat of US-China“trade-war”should be removed.Industrial investment and consumer confidence will soon recover.There is abundant liquidity in the stock market since early January,with(1)northbound flow accelerating from the beginning of 2019;(2)margin financing balance,mainly contributed by retail investors,recovering since 1 February,after a whole year of decline in 2018;(3)the turnover-to-market cap recovering from the trough.At the same time,despite the recent rally,A-share is still cheap with CSI300 trading at 11.7x 12M forward P/E versus 10-year average of 13.6x.Index target and model portfolioWith more abundant liquidity and improving stock market sentiment,we upgrade our index targets for SHCOMP/CSI300 from 2900/3800 to 3200/4100.We cut weightings of Moutai and Hikvision by 1%each,as these names have been overcrowded.We also take out PetroChina due to demanding valuation and uncertain oil price outlook.We include Sunway in the model and raise Ping Ans weight.Our biggest overweights are Financials,Capital goods and Information technology.A more vibrant A-share market will likely benefit insurance and diversified financials,while capital goods sector should benefit from the more abundant credit environment and governments push for infrastructure projects.IT will benefit from a US-China deal.Our A-share top picks are Huayu,Sunway,FII,Ping An,Nari,Hengli.Huayu is a proxy for rebounding auto sales and potential auto stimulus policy.Sunway is a proxy for 5G roll-out.FII could benefit from an improving China-US relationship.NARI is a proxy for rising power transmission and distribution capex,as well as accelerating UHV investment.Hengli is a proxy for the import substitution of hydraulic pumps and valves in excavators producing in China.Finally,with the A-share market an important component of Ping Ans investment portfolio,it is an indirect beneficiary of a stronger A-share market.5 March 2019China A-share Market Strategy4Domestic opening rewarded with international recognitionThe China securities regulatory commission(CSRC)has made it clear that it will further open up the capital market to the outside world in 2019,accelerate the construction of a comprehensive investment bank with international competitiveness,optimise the Shanghai-Shenzhen-Hong Kong stock connect mechanism,and orderly expand the opening range of specific futures products.We have indeed seen reforms and opening-up measures coming up in the past two years and the pace is expediting.Capital Market Opening up is expediting Since April 2018,foreign brokers,funds,insurances have been allowed to own up to 51%share in domestic joint-ventures.All restrictions will likely be removed in three years.Financial institutions could submit applications to CSRC to set up majority-ownership entities in China then.This easing will introduce competition to local financial institutions and bring new dynamics to the business space.In 2018,regulators removed the requirement for capital withdrawal of less than 20%for QFII funds,removed lockup periods for investment principal,and allowed investors to hedge currency risk onshore.In January 2019,China amended QFII and RQFII rules by combining these two inbound investment schemes,while broadening their investment scope to include derivatives,bond repurchases and private funds.According to CSRC,the new rules were aimed at“promoting high-quality opening of Chinas capital markets and introducing more long-term overseas capital.The total QFII quota increased from US$150 billion to US$300 billion.Figure 6:QFII quota grantedFigure 7:RFQII quota granted-0.50.00.51.01.52.02.53.00204060801001202013-012013-052013-092014-012014-052014-092015-012015-052015-092016-012016-052016-092017-012017-052017-092018-012018-052018-092019-01MoM Chg(RHS,US$bn)QFII quota(US$bn)-5.00.05.010.015.020.025.030.035.040.0-30701702703704705706702011-122012-052012-102013-032013-082014-012014-062014-112015-042015-092016-022016-072016-122017-052017-102018-032018-082019-01MoM Chg(RHS,US$bn)RQFII quota(US$bn)Source:Company data,Credit Suisse estimates,Wind.Source:Company data,Credit Suisse estimates,Wind.In Aug 2018,CSRC announced new measures to allow foreign nationals who work in China to open A-share accounts and reap the benefits of the share incentive programs of listed Chinese companies.5 March 2019China A-share Market Strategy5Figure 8:Overseas investment out of A-share free-float market cap rose from 5.2%to 6.7%in 2018-200 400 600 800 1,000 1,200 1,4000.2%1.2%2.2%3.2%4.2%5.2%6.2%7.2%Q1 2014Q4 2014Q3 2015Q2 2016Q1 2017Q4 2017Q3 2018Overseas Investment(bn RMB)Overseas holdings%of A-share free-float market capSource:Company data,Credit Suisse estimates,PBoC,Wind.As of end-2018,foreign investment in the A-share market has accumulated to Rmb1.2 tn,doubling its size from 2016,and constituting 7%of A-shares free-float market cap.IPO reformthe launch of Tech Board CSRC and SSE published a series of official documents outlining the final listing rules for the Shanghai tech board on 1 March.The rules highlighted an array of innovative arrangements to underpin the nations stock market reforms.The key breakthroughs are:(1)Registration-based IPO instead of approval-basedChina had moved from the merit-based system to approval-based system earlier,and for the first time launched a registration-based system in the tech board,which has long been used by the US,HK,etc.(2)Stringent requirement on profit has been relaxed Companies with negative earnings can also file for an IPO on the board.The Shanghai Stock Exchange will be in charge of the IPO approvals.The IPO approval time is estimated to be six-to-nine months.(3)Removal of 23x P/E window guidance for IPO pricingCompanies,when filing for IPO in A-share,have to follow the window guidance that P/E of stocks at the IPO cannot exceed 23x P/E,thus,creating arbitrage opportunities for price hitting upper-limits(10%+)in 6-10 days in a row.When removing the cap,more efficient and reasonable pricing can be provided in the first place.Serves as a trial;may apply to other boards in the futureThe tech board serves as a trial for more market-oriented listing and trading approaches.To further benchmark more mature and advanced capital markets in the world,China will probably expand the trial rules from the Tech Board to other boards in the A-share market in the future.5 March 2019China A-share Market Strategy6Figure 9:Draft rules of Tech Innovation Board IPO scheme Registration-based IPO(currently approval-based);Pre-approval by Shanghai Exchange requires 6-9 months,CSRC completes registration within 20 days after approvalFinancial threshold1.Estimated market cap no less than 1bn RMB,1)positive net profit in recent two years,accumulative net profit 50mn RMB;or 2)positive net profit in past one year,revenue no less than 100mn RMB.2.Estimated market cap no less than 1.5bn RMB,revenue in past one year no less than 200mn RMB,and three year combined R&D/revenue no less than 15%.3.Estimated market cap no less than 2bn RMB,revenue in past one year no less than 300mn RMB,and net cash flow generated from operating activities in the past three years no less than 100mn RMB.4.Estimated market cap no less than 3bn RMB,revenue in the past year no less than 300mn RMB.5.Estimated market cap no less than 4bn RMB,main business/products obtained approval from the state departments,have significant market potential,milestones achieved and received funding from well-known investment institutions;Healthcare/Biotech companies have at least one phase II drug;other potentially eligible enterprises need to have clear technology advantageIPO pricing1.Cancel direct pricing and use market-based inquiry pricing;2.Eliminate 23X P/E window guidance Weighted voting rightsSupport VIE,but market cap requirement for VIE is higher than normal enterprises(10bn RMB)Up/Down limit1.Intraday 20%+/-(10%+/-for A-share);2.No limit in the first five days since listingInvestor thresholdA 500 thousand rmb stock account minimum balance requirement and at least 24 months history of securities trading.Investors with less than 500 thousand rmb balance can invest through mutual funds.Delisting schemeCriteria:1.Negative net profit attributing to parent company;2.Negative net assets.Forced delisting if financials fail to meet in two years,STed in the first year.Source:Company data,Credit Suisse estimates,CSRC,SSEAdding more tech names to A-share investment universeThe board aims at facilitating the listing of high-tech innovative enterprises,some of which might not be able to satisfy the existing listing criteria.A-share now has a significantly lower proportion of tech companies compared with the Hong