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1、30,30,0,(Banks),Kenny Lau,(Telecoms),(Utilities),Lefei Sun,Kevin Yin,16 October 2012Asia Pacific/ChinaEquity ResearchStrategyChina Market Strategy,Research AnalystsVincent Chan852 2101 6568vincent.chancredit-Peggy Chan,CFA,ECONOMICS AND STRATEGYThe worst is probably over,852 2101 6305peggy.chancredi
2、t-,Figure 1:If total demand bottoms,will GDP follow?Total Demand Y-Y%(3MMA),Nominal GDP Y-Y%,China Research Analyst TeamVincent Chan(Head of Research,Strategy)Peggy Chan(Strategy),605040,Total Demand,Jan03 to Sep08:,605040,Trina Chen(Basic materials)Wallace Cheung(Internet)Jinsong Du(Healthcare,Prop
3、erty),2010,Jan96 to Dec00:,2013-15E:14.8%,2010,David Hewitt(Energy),Nominal0Mar 91 Mar 93 Mar 95 Mar 97 Mar 99 Mar 01 Mar 03 Mar 05 Mar 07 Mar 09 Mar 11 Mar 13 Mar 15,Sanjay Jain*Total Demand=Exports+Fixed Asset Investment+Retail Sales.Source:CEICWe have updated our view on the China market and beli
4、eve that the worst is,(Small Caps)Colin McCallumEdwin Pang(Healthcare)Dong Tao(Economics)Arjan van Veen(Insurance)Davin Wu(Transportation)Song Yang(Construction Machinery)(Consumer),probably over and investors should add some beta to their portfolio:Long road to recovery,but economy may have bottome
5、d out.There aresigns that the economy may have bottomed outthis is reflected ininfrastructure investments,new housing starts,real retail sales,slow growth,manufacturing PMI and construction machinery sales.Exports andmanufacturing investment,however,could continue to decelerate.We stillbelieve that
6、the structural growth momentum in China is weaker,and thepace of recovery will not be strong.Valuations back to 2008 levels.In terms of both P/B and earnings yieldgap,both MSCI China and H shares are back to their 2008 trough levels.Investor sentiment on the market is also very bearish.Even if we as
7、sume noearnings growth for 2012-14,our DDM still suggests the HSCEIs fair valueat 12,00020%upside from here.Add some beta.We upgrade Banks,Materials and Transportation toOVERWEIGHT(OW),and cut our UNDERWEIGHT(UW)on capital goods.In contrast,we downgrade Consumer Staples and Tech(mainly Internet)to,U
8、NDERWEIGHT,although we stay OVERWEIGHT Consumer Discretionary.Still,our biggest OVERWEIGHTs are Insurance and Diversified Financials.Our top picks are CCB,Air China,Jiangxi Copper,Ping An and Shenhua.DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS.FOROTHER IMPOR
9、TANT DISCLOSURES,visit www.credit-researchdisclosures or call+1(877)291-2683.U.S.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
10、 of this report.Investorsshould consider this report as only a single factor in making their investment decision.,CREDIT SUISSE SECURITIES RESEARCH&ANALYTICS,BEYOND INFORMATIONClient-Driven Solutions,Insights,and Access,Mar99,Nov99,Jul00,Mar01,Nov01,Jul02,Mar03,Nov03,Jul04,Mar05,Nov05,Jul06,Mar07,No
11、v07,Jul08,Mar09,Nov09,Jul10,Mar11,Nov11,NewZealand,Malaysia,HongKong,Singapore,China,Japan,Philippines,Indonesia,Australia,Taiwan,India,Korea,14,-3.5%,2,16 October 2012Focus charts,Figure 2:Investment growth of key infrastructure sectorsY-Y%(3MMA)100806040200-20-40-60Jan 04 Jan 05 Jan 06 Jan 07 Jan
12、08 Jan 09 Jan 10 Jan 11 Jan 12,Figure 3:Construction machinery sales bottoming?Y-Y%(3MMA)200150100500-50-100Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12,Railway,Highway,Utility Management,Excavator,Truck Crane,Source:CEICFigure 4:Real retail sales may have bottomed,Source:Ch
13、ina Construction Machinery Association(CCMA)Figure 5:Lending attitude of banks improving,302520151050Jan 96 Jul 97 Jan 99 Jul 00 Jan 02 Jul 03 Jan 05 Jul 06 Jan 08 Jul 09 Jan 11 Jul 12,45434139373533312927,CN:5000 Entrepreneur Survey DI:Lending Attitude of Bank,16141210864,Nominal,Real,China GDP(%yo
14、y,RHS),Source:CEICFigure 6:Earnings yield gap of MSCI China121086420Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11,Source:CEICFigure 7:Net exposure change of APAC hedge fundsNet ex posure change(%)1.5%1.0%0.5%0.0%-0.5%-1.0%-1.5%-2.0%-2.5%-3.0%,MSCI China-earnings yield gap(%)S
15、ource:DataStream,Avg,+2SD,-2SD,Source:Credit Suisse,China Market Strategy,3,16 October 2012The worst is probably over,After almost two years of caution,we believe that most market concerns of a structurallyweaker growth for China are being discounted and the focus should now shift to thecyclical par
16、t of the equation,i.e.,whether the economy has bottomed out or is close tobottoming out,while the pace of recovery is a lesser concern.We have not changed ourfundamental view on China thoughwe expect the structural growth momentum to beweak and do not expect the pace of recovery to be strong.Signs o
17、f stabilisationThere are signs that the economy may have bottomed outthis is reflected in thefollowing:(1)growth momentum is picking up in infrastructure investments with fastergovernment approvals for new infrastructure projects;(2)new housing starts arebottoming out while property sales continue t
18、o be strong;(3)real retail sales growth isstabilising and anecdotal evidence suggests that recent holiday sales are not that weak;(4)loan growth is bottoming in a more relaxed monetary policy environment despite theloan structure not being optimal;(5)indicators of business sentiment,such as PMI andb
19、ank lending attitude,indicate that the macroeconomic environment could start to improve;and(6)construction machinery sales and power output are showing signs of bottoming out.However,there are two indicators which are still not very encouraging,and indeed couldfurther deteriorate:(1)exportsit seems
20、that the demand growth slowdown in thedeveloped world is only becoming more obvious from 3Q12 onwards;(2)manufacturinginvestmentwith a large amount of industrial capacity being built in the past few years,itis very likely that ROE will deteriorate in the next few years.Overall,we think that the over
21、all nominal demand growth(retail sales+exports+urbanFAI)to stay at around 15%in next one-two years,weaker than the 20%demand growthbetween 2004 and 2011,but better than around 10%in late 90s.Depressed valuations and sentimentVarious valuation and sentiment indicators imply that investors are rather
22、bearish on China,market valuations are now back to 2008 trough levels:(1)price-to-book of both MSCIChina and H share are now 1 standard deviation(SD)below the long-term average,and(2)taking into account the low interest rate environment,the earnings yield gap has risento almost 2 SD above the long-t
23、erm average.Based on our dividend discount model(DDM),even if we assume no earnings growth forthe next three years from 2012 to 2014,the fair value of the HSCEI will still be at 12,000,implying 20%potential upside.Using the same model,the current index level implies that2013 and 2014 earnings would
24、have to drop 10%-15%p.a.and we think this is unlikely.Adding some betaIn view of a stabilisation in the macroeconomy,we expect limited market downside and themarket should recover from here.We upgrade Banks,Materials and Transportation toOVERWEIGHT,and cut our UNDERWEIGHT on capital goods.In contras
25、t,we downgradeConsumer Staples and Technology(mainly Internet)to UNDERWEIGHTthe sector isover-owned and has outperformed significantly with stretched valuations.The entireConsumer sector is now a small UNDERWEIGHT and still,our biggest OVERWEIGHTsare Insurance and Diversified Financials.Our top pick
26、s are CCB,Air China,JiangxiCopper,Ping An and Shenhua.From page 19 onwards,we have sector views from our analysts in case of a stabilisationin the economy and a market recovery,and some of them have revised up their estimates.China Market Strategy,The key question is whetherthe economy has bottomedo
27、ut or close to bottoming outThe economy may havebottomed outOur concerns are aboutexports and industrialinvestmentsValuations are back to 2008trough levelsOur DDM suggests 20%upside even if we assumeno earnings growthUpgrade Banks,Materialsand Transportation toOverweight,7.0,5.1,6.0,6.9,4,16 October
28、 2012Figure 8:Price-to-book(P/B)of different China sectorsAverage,Current,(2003 till now)*,+1 SD*,-1 SD*,Peak,Trough,Consumer DiscretionaryAuto&ComponentsRetailingConsumer StaplesEnergyFinancialsBanksInsuranceReal EstateIndustrialsCapital GoodsTransportationInfo TechnologyMaterialsTelecom ServicesUt
29、ilitiesMSCI China,2.091.632.563.471.571.261.112.351.191.041.051.034.701.281.791.671.54,2.312.172.742.742.091.942.123.281.391.521.411.603.731.832.221.792.05,3.182.914.063.762.512.702.764.252.081.851.791.975.502.352.612.082.45,1.451.421.431.721.681.191.472.300.711.201.031.221.961.321.821.491.64,4.444.
30、495.384.565.245.824.538.126.454.514.015.249.015.727.223.345.33,1.040.910.970.241.200.441.072.080.410.860.750.811.380.741.651.271.22,*Average and SD of P/B is calculated by taking away data from the two highly volatile years of 2007 and2008.The peak and trough P/B includes both period.Source:MSCIFigu
31、re 9:Credit SuisseChina model portfolio,Weighting(%),CS P/E(x),ConsensusP/E(x),MSCI sector,CS MSCI vs MSCI 2012E 2013E 2012E 2013E Recommended stocks,Consumer Discretionary,1.9 17.3 13.9,13.0 10.8 New Oriental(3%),Belle(2%),China Lodging(1%),Shenzhou(1%),Consumer Staples,3.0,5.8,-2.8 19.4 12.7,25.0
32、21.3 China Modern Dairy(3%),EnergyFinancialsBanks,18.039.025.0,17.636.723.2,0.42.31.8,9.17.56.1,9.37.86.6,9.87.26.0,9.1 CNOOC(12%),Shenhua(6%)6.85.8 CCB(9%),ICBC(8%),China Merchants Bank(7%),Insurance&Div.Fin.,10.0,7.9,2.1 15.9 13.8,17.6 14.2 Ping An(5%),China Pacific(4%),Haitong(2%),Property,4.0,5.
33、5,-1.5,8.9,7.5,7.9,7.1 Vanke A(3%),CR Land(1%),Health Care,2.0,1.1,0.9 19.7 16.2,22.7 18.7 Mindray(1%),Sino Biopharm(1%),Industrials,5.0,6.2,-1.2 11.1,8.8,11.6,9.7,Transportation,3.0,2.2,0.8 12.9 11.0,20.9 12.9 Air China(3%),Capital Goods,2.0,4.1,-2.1,9.2,6.8,9.4,8.6 Lonking(2%),Information Technolo
34、gy,-0.9 17.4 13.0,24.1 19.0 Aisino(2%),Lenovo(2%),Tencent(1%),ZTE(1%),Materials,5.0,4.6,0.4,8.7 12.1,12.3,9.4 Baosteel(2%),Jiangxi Copper(2%),Shanshui Cement(1%),TelecomsUtilities,12.03.0,13.32.7,-1.3 11.2 10.90.3 14.5 11.8,12.3 11.6 China Mobile(12%)12.8 10.8 CR Power(2%),CR Gas(1%),MSCI ChinaConsu
35、mer sector*,100.018.0,100.018.9,0.0-0.9,9.517.9,9.413.7,9.921.3,9.117.5,*We define the Broader Consumer sector as:discretionaries,staples,healthcare and tech.Source:MSCI,Credit Suisse estimatesChina Market Strategy,years,5,16 October 2012Signs of stabilisation,After almost two years of caution,we th
36、ink concerns about a weaker structural growth ofChina are increasingly being discounted by the market,both A and H shares.At thecurrent level of the stock market,we believe that,increasingly,the focus should shift to thecyclical part of the equation,i.e.,whether the economy has bottomed out or is cl
37、ose tobottoming out,while the pace of recovery is a lesser concern.However,there is nochange in our fundamental view on Chinawe expect the growth momentum of thecountry and the profitability of its listed corporates will be structurally weaker over the nextfew years compared with the past.See“China
38、Market Strategy:The road to recovery,”published on 30 May 2012.So,do we see signs of stabilisation?Yes,we do.Among the five key demand variables:(1)it is clear that infrastructure investment is picking up nicely,despite the difficulty of localgovernment in sourcing financing for some of their projec
39、ts.We think that this strength willcontinue next year;(2)property investment growth will probably continue to decelerate fora few months,but given that there are signs of bottoming in the new housing starts data,we think that property investments will start picking up next year if property sales rem
40、ainresilient;(3)real retail sales have already showed signs of bottoming,and we expectnominal retail sales to stabilise and slightly accelerate into next year;(4)export growthshould continue to remain weak in next few quarters;and(5)due to excess capacity,industrial investment growth should continue
41、 to decelerate in the next one-two years.Webelieve that the overall nominal demand growth(retail sales+exports+urban FAI)willstay around 15%in next one-two years,weaker than the 20%demand growth between2004 and 2011,but better than around 10%in late 90s.Figure 10:Growth of various demand variables i
42、n China,Our fundamental viewremains unchanged;but anysigns of stabilisation?Overall nominal demandgrowth will stay lower ataround 15%in next one-two,2011,Y-Y%,NominalRetail SalesExports(Rmb adjusted)Urban Fixed Asset InvestmentInfrastructureReal EstateIndustrialServicesTotal Demand,Rmb bn18,13112,25
43、730,1939,1707,56811,7661,68960,581,%of total29.920.249.815.112.519.42.8100.0,04-0815.622.626.319.926.034.228.221.3,09-1017.06.427.529.426.726.432.118.2,1117.114.823.89.929.731.038.219.9,12E14.53.518.916.814.522.525.014.5,13-15E14.810.016.415.015.616.725.014.8,Jan-Aug1214.13.920.313.920.923.131.014.9
44、,Source:CEIC,Credit Suisse estimates(1)Infrastructure investment growth picking up,Since the middle of this year,infrastructure investment is clearly showing signs of growthmomentum picking up,with faster government approval of new infrastructure projects.Investments in sectors,such as the railways,
45、where construction activities were haltedfrom the second half of 2011(after the Wenzhou train accident)and financing largelydepends on the central government,have started to rebound very strongly.In contrast,thepick-up of investment in sectors such as highway and utility management(comprised abroad
46、range of small city-based infrastructure projects),financing of which is mainlycoming from local governments,is much more moderate,given that it is not easy for localgovernments to source financing from banks.Looking into 2013,with the new governmentcoming on board,the obstacles for the central gove
47、rnment to directly assist localgovernments in sourcing financing for their projects will be smaller.Therefore,we see avery good chance that infrastructure investment growth will continue to pick up in 1H 2013.China Market Strategy,Governments are approvingnew projects,InfrastructureInvestmentY-Y%(3M
48、MA),6,16 October 2012,Figure 11:Infrastructure InvestmentInfrastructure Inv estment(30%of Urban FAI)605040302010,Figure 12:Investment of key infrastructure sectorsY-Y%(3MMA)100806040200-20-40-60Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12,0Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
49、Jan-10 Jan-11 Jan-12Source:CEIC,Source:CEIC,Railway,Highway,Utility Management,(2)Property investments still slowing,but new housing starts bottomingProperty investment is still slowing,but with continued strength in property sales,we startto see signs of a bottoming in housing starts,and this,we be
50、lieve,will start to have apositive impact on property investment.Definitely,the continued improvement in housingstarts/property investments will have to rely on the strength of property sales.So,it is fairto say that the property market will go a long way in deciding the economic outlook nextyear.Ov
