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1、,Ben Bei,February 22,2012China StrategyChina A-share strategy:What todo while awaiting a tailwindEquity Research,Liquidity improvement supports A-share reboundThe A-share market has rebounded by 8.2%ytd,supported by easingglobal macro risks and improving domestic liquidity conditions.We revisitand f
2、ine-tune our sector preferences and recommend a list of small-midcap growth stocks with appealing risk/reward profiles.,Hanfeng Wang,Ph.D,CFA+86(10)6627-3318 Beijing Gao Hua Securities Company LimitedHelen Zhu+852-2978-0048,Goldman Sachs(Asia)L.L.C.Upgrade IT&Electronic components/Shipping to neutra
3、l,The A-shares ytd sector performance has seen a reversal in 2H2011,withthe high-beta sectors leading this ytd move.Based on improving sectorfundamentals and less demanding valuations,we upgrade the IT&Electronic components and Shipping sectors from underweight to neutral.Overall,we maintain our pre
4、ference for a mixture of low valuationdomestic cyclicals(coal,securities)and consumption stocks(healthcare,auto,retailing,home appliances).We dislike telecom/utilities(unfavorable valuation),steel/chemical(weak sector fundamentals).,Timothy Moe,CFA+852-2978-1328 Goldman Sachs(Asia)L.L.C.+852-2978-12
5、20 Goldman Sachs(Asia)L.L.C.Chenjie Liu+86(10)6627-3324,Beijing Gao Hua Securities Company LimitedRecommend a list of small-mid cap growth stocksGiven market downside risk appears to have eased since 4Q2011,we lookfor growth opportunities within the small-mid caps segment,followingtheir underperform
6、ance in the past several months.We screen for a list ofsmall-mid cap growth stocks(Exhibit 13),mostly from consumer-relatedsectors.Their valuations have turned more supportive vs.several monthsago,while fundamentals still appear reasonably stable.We are less cautious towards small-mid caps,47,(X),SM
7、E Composite 12-m fPE/CSI100 12-m fPE(RHS)SME Composite fPE,(X),3.5,CSI100 fPE,4237,3.02.5,322.0271.5221.017,127,16.1X,0.50.0,2006-05,2006-11,2007-05,2007-11,2008-05,2008-11,2009-05,2009-11,2010-05,2010-11,2011-05,2011-11,Source:Wind,Gao Hua Securities Research,Goldman Sachs Global ECS ResearchGoldma
8、n Sachs does and seeks to do business with companies covered in its research reports.As a result,investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in making their invest
9、ment decision.For Reg AC certification and otherimportant disclosures,see the Disclosure Appendix,or go to Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.This report is intended fordistribution to GS institutional clients only.,The Goldm
10、an Sachs Group,Inc.,Global Investment Research,1),2),2,February 22,2012,China,Fine-tuning sector views,recommending a list of small-mid capgrowth stocksThe A-share market has rallied by 8.2%ytd supported by easing global macro risks andimproving domestic liquidity conditions.While we largely maintai
11、n our market views(seeLiquidity should be improved further(January 4),and Fund flow should turn graduallymore favorable(February 3),we adjust our sector preferences and recommend a list ofgrowth stocks based on recent fundamental developments and stock valuation changes.Key actions suggested are:Upg
12、rade the IT 2Q demandrebound likely smaller magnitude,February 14,2012)all rated underweight.Goldman Sachs Global Investment Research,1),2),3),1),2),3),3,February 22,2012,China,Upgrade IT ADI andMarvell earnings previews,February 21,2012).Sector valuation has come down to a more sustainable level vs
13、.several monthsago.The sector is currently trading at 15.7X 12m forward P/E,close to the historicaltrough level we saw in late 2008(Exhibit 3,Exhibit 6).Liquidity has been improving gradually,as suggested by the declining marketrates(yield on the commercial discount bills has declined to 5.8%from ar
14、ound 10%in4Q2011),which we think should help to alleviate the tight liquidity situation faced bymany small-mid cap tech companies.Despite these positive developments,we are not turning bullish towards the sector at themoment as our GS tech team thinks the slope of potential recovery is uncertain,alt
15、houghthey believe sector fundamentals are approaching a trough.Upgrade Shipping from underweight to neutralWe downgraded the sector in April 2011,but we now believe there are signs of a turn-around in the sector:Global macro risks appear to have eased during recent months,especially afterthe introdu
16、ction of the ECBs liquidity provision to the EU banks,and better thanexpected macro momentum globally since late last year as suggested by our GLI index(Exhibit 4)as well as the BDI index bouncing back from recent lows(Exhibit 5).In ourview,these signs suggest macro risks from the EUs debt woes and
17、weak DM growthare easing,at least temporarily,which should be supportive to the Shipping sectorone of the global cyclical sectors sensitive to changes in global macro momentum.Seemingly less risk of a hard landing scenario in China.This has been one ofthe major risks that have weighed on the shippin
18、g sector in 2H2011,but recent data(such as the January PMI data)suggest market concerns over Chinas hard landingmay have been overdone.Sector valuation is not demanding,in terms of P/B.Currently,the sector is tradingat 1.4X 2012E P/B,the lowest level since late 2008(Exhibit 8).That said,we are not t
19、urning bullish on the sector either,as the shipping sectors excesssupply remains an overhang,and our sector analysts continue to see increase in idling anddelays in newbuild deliveries(see Containership:Valuations reflect normalized returns,February 13).Goldman Sachs Global Investment Research,1),2)
20、,4,February 22,2012,China,Screening for a list of small-mid cap growth stocksSmall-mid caps have underperformed large caps(SME composite index vs.CSI300)byaround 10%since 4Q2011.We had been cautious towards small-mid caps in the A-sharemarket due to their relatively high valuation and consensus earn
21、ings downgrade risks,especially given the tight liquidity conditions then(see China:2012 A-share Outlook:Growth slower,policy friendlier,October 25,2011).However,given the easing in macrorisks(e.g.,ECBs liquidity provisions),less demanding valuations,and less tradable-share-reduction pressure in the
22、 coming several months(Exhibit 9),we think investors interestsin those small-mid caps with good fundamentals and undemanding valuations should rise.We turned less cautious towards the small-mid caps in our note on February 2(seeFund flow should gradually turn more favorable)as we see less downside r
23、isk after itssignificant underperformance since 4Q2011.We suggested bottom-up stock selectionwithin the small-mid caps segment.Valuations for small-mid caps have come down to a more sustainable levelvs.several months ago.The SME composite index is trading at 16.1X 12m forwardP/E(based on WIND consen
24、sus earnings),which is the lowest level since late 2008.Thevaluation premium over large caps(CSI100 index)has also shrank substantially since4Q2010 as the SME composite index(small caps)significantly underperformed theCSI100 index(large caps)(see cover exhibit).Earnings downgrade risks remain,but li
25、kely already largely priced in.WINDconsensus still expects 20%/37%earnings growth for the SME composite index in2011E/2012E,but we dont think the market has factored in such a high growthexpectation given that the SME valuation is only slightly above the historical troughlevel in late 2008.That said
26、,we are not turning bullish on the entire small-mid cap segment,as wethink uncertainties(such as how the demand will evolve going forward)for the propertyand FAI-related small-mid caps sectors still remain.Given the non-consumer relatedsectors relatively high weighting in the SME composite index(aro
27、und 47%,Exhibit 11),webelieve their performance may continue to weigh on the overall performance of the SMEindex.We suggest focusing on those stocks/sectors with relatively stable growth andundemanding valuations,most of which are from the consumer-related sectors(healthcare,consumer discretionary,I
28、T&electronic components,etc).Historically,consumer-related sectors have generally delivered higher and less volatile average earnings growthof 30.4%vs.19.4%for non-consumer related ones(during year 2005-2010,see Exhibit 10).The valuation of consumer-related sectors has come down to around 18X 12-m f
29、orward P/E(Exhibit 12)vs.historical average of 24X,due to the sell-off in small-mid caps in 4Q2011,which we think is not demanding against the backdrop of historical average earningsgrowth of around 30%(implying PEG of only 0.6).Note that our preference for consumer-related growth stocks is consiste
30、nt with our overallsector preference for a mixture of consumption and low valuation domestic cylicals(coaland securities),even though our favored consumption sectors generally have a relativelyhigher weighting in small-mid caps and our preferred cyclical sectors tend to have a lowrepresentation in s
31、mall-mid caps(Exhibit 11).Screening for medium-long term outperformance candidates.Given that small-midcap stocks differ significantly in terms of corporate governance,industry position,growthpotential and valuation,we suggest using bottom-up stock selection to identify potentialmedium-long term out
32、performance candidates.We re-run our small-mid cap screen for a list of our preferred A-share small-mid caps usingthe following criteria(Exhibit 13):Goldman Sachs Global Investment Research,1),2),3),4),5),10.1,8.9,6.9,6.0,5.2,4.7,5,February 22,2012,ChinaCovered by our GS/Gao Hua A-share sector analy
33、sts;A leader within its own sub-sector and a market cap of between Rmb5 bn-Rmb35 bn.Has a positive rating from our sector analyst;Earnings CAGR for the next two years expected to be higher than the earnings growthwe expect for large cap CSI300 index(above 20%,based on GS/GH estimates);Valuation less
34、 than 30X 2012E P/E(based on GS/GH estimates),which we think isgenerally the high-end of the acceptable valuation range for growth stocks for local A-share investors.Results of our screen include a number of stocks from consumer discretionary(Huayu Auto,CITS,BesTV New Media,Jinjiang Hotel,Huangshan
35、Tourism),healthcare(WH Humanwell,Yuyue)and IT-related sectors(Fiberhome,BJ Ultrapower),which are mostly of theconsumer related theme.The above list of stocks has underperformed the CSI300 by 8.4 ppt since 4Q2011(Exhibit14).According to our sector analysts estimates,these stocks could see average ear
36、ningsgrowth of 35%in 2012E,while currently trading at 21X 2012E P/E(Exhibit 13).Exhibit 1:A-share sector performance ytd:A reversal of the sector performance in 2H2011CSI300 Return by sector(2012YTD)%,Non-ferrous metal&OthersSecurities&OthersTransportation InfratructureCapital GoodsCoalConstruction
37、Materials&OthersChemicalConstruction&Other Industrial ServicesMediaTextile&ApparelSHSZ300Auto&partsConsumer DurablesSteelInsuranceIT&equipment/componentsShipping&Other transportationAirlinesBanksPropertyOil,gas&petrochemicalRetailingHotel&tourism&OthersHealth CareUtilitiesFood&beverageTelecom,-5.5,1
38、.1,5.85.25.25.14.13.2,8.88.38.18.17.97.67.4,12.110.810.610.110.1,19.9,-10,-5,0,5,10,15,20,25,Source:Wind,Gao Hua Securities ResearchGoldman Sachs Global Investment Research,(K8equivalentwafers,000),1Q01,2Q01,3Q01,4Q01,1Q02,2Q02,3Q02,4Q02,1Q03,2Q03,3Q03,4Q03,1Q04,2Q04,3Q04,4Q04,1Q05,2Q05,3Q05,4Q05,1Q
39、06,2Q06,3Q06,4Q06,1Q07,2Q07,3Q07,4Q07,1Q08,2Q08,3Q08,4Q08,1Q09,2Q09,3Q09,4Q09,1Q10,2Q10,3Q10,4Q10,1Q11,2Q11,3Q11,4Q11E,1Q12E,2Q12E,3Q12E,4Q12E,6,February 22,2012Exhibit 2:Our GS tech team believes the fundamentalsfor IT hardware could be reaching a bottom,ChinaExhibit 3:The IT&equip/components secto
40、rs valuationhas come down to a more sustainable level,in our view,5,6005,200,80,(X),IT&equipment/componentsRelative valuation to CSI300 Index(RHS),(X),3.5,4,8004,4004,000,7060,3.0,3,6003,2002,8002,400,We expectshipment torebound inMarch,504030,15.7X,2.52.0,2,000,1,6001,200800,2010,1.5,400,0,1.0,07-0
41、1,08-01,09-01,10-01,11-01,12-01,Source:Gao Hua Securities Research,Goldman Sachs Global ECS ResearchExhibit 4:GS GLI(momentum)index suggests the globalmacro momentum continues to improve,Source:Wind,Gao Hua Securities Research,Goldman Sachs Global ECSResearchExhibit 5:BDI index is bouncing back from
42、 the recenthistorical low,102,(%),(%),2.0,4,500,Baltic Dry Index,1011009998,1.51.00.50.0-0.5,4,0003,5003,0002,5002,000,9796,OECD leading indicator_EUROOECD leading indicator_USOECD leading indicator_JapanGLI(Momentum,RHS),-1.0-1.5-2.0,1,5001,000500,952004-01,2006-01,2008-01,2010-01,-2.52012-01,02010
43、-01,2010-07,2011-01,2011-07,2012-01,Source:Wind,Gao Hua Securities Research,Goldman Sachs Global ECSResearchGoldman Sachs Global Investment Research,Source:Wind,Gao Hua Securities Research,Goldman Sachs Global ECSResearch,7,February 22,2012Exhibit 6:WIND consensus earnings for IT&electroniccomponent
44、s seems to have stabilized,ChinaExhibit 7:WIND consensus earnings for shipping sectorhave been cut substantially since mid-2011,IT sector earnings forecast based on Wind consensus for 2009IT sector earnings forecast based on Wind consensus for 2010IT sector earnings forecast based on Wind consensus
45、for 2011IT sector earnings forecast based on Wind consensus for 2012,Rmb bn4035,Shipping sectorShipping sectorShipping sectorShipping sector,earningsearningsearningsearnings,forecastforecastforecastforecast,basedbasedbasedbased,onononon,WindWindWindWind,consensus forconsensus forconsensus forconsens
46、us for,2009201020112012,201816,Rmb bn,302520,141512,10864,1050-5,2,Jan-09,Jul-09,Jan-10,Jul-10,Jan-11,Jul-11,Jan-12,0,Jan-09,Jul-09,Jan-10,Jul-10,Jan-11,Jul-11,Jan-12,Source:Wind,Gao Hua Securities Research,Source:Wind,Gao Hua Securities Research,Exhibit 8:Shipping sector is trading at 1.4X 2012E P/
47、B,the lowest level since late 2008,8,(X),Shipping&Other transportation 12-m forward PB,(X),2.0,Relative valuation to CSI300 Index(RHS)71.861.65,4,1.4,31.2,2,(1.4X),1.01,0,0.8,Jan-04,Jan-05,Jan-06,Jan-07,Jan-08,Jan-09,Jan-10,Jan-11,Jan-12,Source:Wind,Gao Hua Securities ResearchGoldman Sachs Global In
48、vestment Research,Jan-11,Feb-11,Mar-11,Apr-11,May-11,Jun-11,Jul-11,Aug-11,Sep-11,Oct-11,Nov-11,Dec-11,Jan-12,Feb-12,Mar-12,Apr-12,May-12,Jun-12,Jul-12,Aug-12,Sep-12,Oct-12,Nov-12,Dec-12,60,50,2.3,100,52.7,8,February 22,2012Exhibit 9:Value of shares becoming tradable should beless in SME and GEM than
49、 in the past several months,ChinaExhibit 10:Small-mid caps:Consumer-related sectorsdelivered higher and less volatile earnings growth,300,(RMB bn),Share value turning floatable ex SME&GEMA-share value turning floatable in SME&GEM,(%),SME_Consumer related_earning growthSME_ex.Consumer related_earning
50、 growth,2504020030,150100,2010,050-10,0,-20,2006,2007,2008,2009,2010,3Q2011,2011E*,*Based on WIND consensus,Source:Wind,Gao Hua Securities Research,Goldman Sachs Global ECSResearchExhibit 11:Non-consumer related sectors as shown bythe unhighlighted sectors account for around 47%of theSME indexs weig
