Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia ex-Japan Strategy
Upgrading China to Market-weight
Passing the point of maximum uncertainty
We upgrade China to Market-weight from Underweight in the Asia ex-Japan
context, as Tuesday’s PBoC rate-hike gets us close enough to the end of
China’s late tightening cycle to mitigate a key policy overhang. Last week’s
conclusion of a decent FY2010 results season for Hong Kong-listed China
stocks also removes a (potential) drag, with aggregate results in fact having
modestly beaten expectations and overall margins having held firm.
We effect the closing of our 2.5ppt China Underweight (vs. its 25.0% weighting
in the MSCI Asia ex-Japan benchmark) by i) trimming our Korea Overweight by
half – ie, to 1.5ppt vs. our previous 3ppt Overweight relative to Korea’s 20.3%
benchmark weighting – following the KOSPI’s strong 16% US$-denominated
rally since March 15; and ii) increasing our Hong Kong Underweight to 2.0ppt
from 1.0ppt previously (vs. its 11.3% weighting in the MSCI Asia ex-Japan
benchmark). The latter reflects a) Hong Kong’s high valuations (15.9x PER,
Asia’s highest); b) consensus Overweight positioning; and c) rising concerns
over Fed intentions as US jobs- and price data firm.
Policy now ahead of the curve; results dodged a bullet
Growing evidence suggests China’s aggressive tightening (four interest rate
hikes since October 2010 and substantially reduced credit availability) has
gotten policy “ahead of the curve” on inflation: Broad money growth (M2) has
slowed below the 16% full-year target (from nearly 20% at end-2010); the
Ministry of Agriculture’s daily wholesale food price index is down 5.3% from its
February 4 peak; property transactions fell 30% MoM in March; and recent PMI
indices have softened and/or underperformed seasonality. Indeed, offshore
non-deliverable Chinese interest rate forward swaps reduced tightening
expectations by more than 60bp through March (Fig 1).
Hong Kong-listed China stocks’ just-concluded FY2010 results season was
better than expectations: Overall 2H10 EPS for 176 China companies under
Macquarie coverage beat consensus by 6.8% (4.1% for ex-Financials), with
individual “beats” (ie, by 5% or more) outnumbering “misses” 40% to 23%. And
despite our concerns over margin erosion, ex-Financials’ overall 2H10
Operating Margin met expectations for 12.0%, after 11.6% in 1H10 (Fig 2).
…but contain your enthusiasm
A short-term (3-4 month) period of improved absolute and relative performance
for China stocks now looks possible – particularly as benchmarked institutional
investors appear to remain Underweight China and may need to increase
weightings. Yet we keep our expectations conservative, as i) monetary policy is
unlikely yet to substantially loosen in the near-medium term, and ii) the
dampening impact on real activity from China’s tightening to-date has yet to
fully flow through, leaving room for negative data surprises.
Moreover, iii) beyond a near-term relief period, we remain concerned over
secular margin risks as China proceeds with structural reform – including wage
increases, higher energy prices, and financial liberalization that may increase
longer-term capital costs (among other factors). From their H-shares’ roughly
11.0x forward PER, we would look for expansion only to roughly 12.5x and
would be profit-takers ahead of their roughly 13x long-term average.
We currently see China’s deepest capturable large-cap value among the
Financial stocks (Banks and Property – Figs 4-5), sectors that also account for
some of the strongest recent consensus 2011 EPS upgrades
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia ex-Japan Strategy
Upgrading China to Market-weight
Passing the point of maximum uncertainty
We upgrade China to Market-weight from Underweight in the Asia ex-Japan
context, as Tuesday’s PBoC rate-hike gets us close enough to the end of
China’s late tightening cycle to mitigate a key policy overhang. Last week’s
conclusion of a decent FY2010 results season for Hong Kong-listed China
stocks also removes a (potential) drag, with aggregate results in fact having
modestly beaten expectations and overall margins having held firm.
We effect the closing of our 2.5ppt China Underweight (vs. its 25.0% weighting
in the MSCI Asia ex-Japan benchmark) by i) trimming our Korea Overweight by
half – ie, to 1.5ppt vs. our previous 3ppt Overweight relative to Korea’s 20.3%
benchmark weighting – following the KOSPI’s strong 16% US$-denominated
rally since March 15; and ii) increasing our Hong Kong Underweight to 2.0ppt
from 1.0ppt previously (vs. its 11.3% weighting in the MSCI Asia ex-Japan
benchmark). The latter reflects a) Hong Kong’s high valuations (15.9x PER,
Asia’s highest); b) consensus Overweight positioning; and c) rising concerns
over Fed intentions as US jobs- and price data firm.
Policy now ahead of the curve; results dodged a bullet
Growing evidence suggests China’s aggressive tightening (four interest rate
hikes since October 2010 and substantially reduced credit availability) has
gotten policy “ahead of the curve” on inflation: Broad money growth (M2) has
slowed below the 16% full-year target (from nearly 20% at end-2010); the
Ministry of Agriculture’s daily wholesale food price index is down 5.3% from its
February 4 peak; property transactions fell 30% MoM in March; and recent PMI
indices have softened and/or underperformed seasonality. Indeed, offshore
non-deliverable Chinese interest rate forward swaps reduced tightening
expectations by more than 60bp through March (Fig 1).
Hong Kong-listed China stocks’ just-concluded FY2010 results season was
better than expectations: Overall 2H10 EPS for 176 China companies under
Macquarie coverage beat consensus by 6.8% (4.1% for ex-Financials), with
individual “beats” (ie, by 5% or more) outnumbering “misses” 40% to 23%. And
despite our concerns over margin erosion, ex-Financials’ overall 2H10
Operating Margin met expectations for 12.0%, after 11.6% in 1H10 (Fig 2).
…but contain your enthusiasm
A short-term (3-4 month) period of improved absolute and relative performance
for China stocks now looks possible – particularly as benchmarked institutional
investors appear to remain Underweight China and may need to increase
weightings. Yet we keep our expectations conservative, as i) monetary policy is
unlikely yet to substantially loosen in the near-medium term, and ii) the
dampening impact on real activity from China’s tightening to-date has yet to
fully flow through, leaving room for negative data surprises.
Moreover, iii) beyond a near-term relief period, we remain concerned over
secular margin risks as China proceeds with structural reform – including wage
increases, higher energy prices, and financial liberalization that may increase
longer-term capital costs (among other factors). From their H-shares’ roughly
11.0x forward PER, we would look for expansion only to roughly 12.5x and
would be profit-takers ahead of their roughly 13x long-term average.
We currently see China’s deepest capturable large-cap value among the
Financial stocks (Banks and Property – Figs 4-5), sectors that also account for
some of the strongest recent consensus 2011 EPS upgrades
No comments:
Post a Comment