Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service
Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:
Noodles and drinks can be fashionable if consumers want it that way. Chinese consumers have had most of what they need, so we look into the discretionary side of consumer staples, i.e., what and how they want the beer and tea to be served. We think something new and/or chilled will help companies to put a stop on de-rating in 2015, and to prepare for the recovery ahead.
The myth: staples are no necessities?
YTD in 2014, Hong Kong-listed consumer staples under DB coverage and those we monitor underperformed the MSCI China by 20%. We think the de-rating is partly structural, including the reduction in corporate spending and diminishing channel advantage (as a result of the e-commerce boom); and partly company-specific due to weak product development capabilities and therefore absence of sustainable growth drivers.
Newness to connect with the ‘Post-90s’
We think the anti-extravagance campaign has driven a structural change in consumption, because consumers are now mostly paying out of their own pockets (instead of using pre-paid cards/coupons) for products they desire and from where they deem convenient (instead of whatever is available in designated locations). In addition, the ‘Post-90s’ shoppers have changed from traditional habits of consumption given a more global mindset, and are eager for continuous novelty in product and branding. Therefore we highlight UPC (220 HK; Hold) and Hengan (1044 HK, Buy) due to their proven track record in these areas. They either suffered or are suffering from price wars for different reasons, but we expect them to recover in 2015 with price wars ending/fading.
Putting ourselves into Chinese consumers’ refrigerator
Consumers in some parts of China still drink beer and milk at room temperature. We believe this will change, starting with pasteurised milk, as China’s expensive milk will accelerate consumer sophistication, and we believe the next thing they will ask for is freshness. Then we expect more fridge-pack beer and drinks, and chilled and frozen food. We think potential beneficiaries of this development include Mengniu (2319 HK, Buy), which aims to make chilled products one of its growth engines; and Tsingtao (168 HK, Hold), which has lagged behind in product mix improvement in 2014 – we expect the company to refocus on product upgrade and margin improvement in 2015.
Thanks to a subscriber for this note from the Hong Kong Stock Exchange which may be of interest to subscribers. Here is a section:
Under Shanghai-Hong Kong Stock Connect, The Stock Exchange of Hong Kong Limited (SEHK) and Shanghai Stock Exchange (SSE) will establish mutual order-routing connectivity and related technical infrastructure to enable investors in their respective markets to trade designated equity securities listed in the other’s market. Hong Kong Securities Clearing Company Limited (HKSCC) and China Securities Depository and Clearing Corporation Limited (ChinaClear) will be responsible for clearing, settlement and the provision of depository, nominee and other related services for the trades initiated by the investors in their respective markets. This brochure provides information for investors who want to use Shanghai-Hong Kong Stock Connect to trade equity securities listed on SSE.
This article from Bloomberg News may be of interest to subscribers. Here is a section:
The program allowing a net 23.5 billion yuan ($3.8 billion) of daily cross-border purchases will begin on Nov. 17, regulators said in a joint statement today after weeks of investor speculation on the start date. Benchmark indexes in Shanghai and Hong Kong climbed at least 0.8 percent, while Hong Kong Exchanges & Clearing Ltd. surged 4.6 percent. The yuan strengthened as the central bank raised its reference rate by the most since 2010.
The exchange link is one of China’s biggest steps toward opening up the capital account, increasing use of the yuan and turning Shanghai into an international financial center. It will give foreign investors greater access to Chinese companies tied to the nation’s consumer market, which President Xi Jinping is counting on to reduce the dependence of the world’s second- largest economy on exports and infrastructure spending.
“It’s good to see a date,” Mark Konyn, who helps oversee about $92 billion as the chief executive officer of Cathay Conning Asset Management in Hong Kong. “It’s a great innovation. We understand it’s only the first step.”
Shenzhen Link
A Shenzhen equivalent of the Shanghai-Hong Kong link will probably follow within two years, letting more foreign investors buy shares on China’s smaller exchange, according to Bank of America Corp. and Templeton Emerging Markets Group. Japan would also like be part of a trading link with China, the chief executive officer of Osaka Exchange Inc. said on Nov. 5.The Shanghai connect will expand access to Chinese shares from a limited number of institutions to anyone with a Hong Kong brokerage account. The $64 billion Qualified Foreign Institutional Investor program has allowed professional money managers to buy local securities since 2002, while a similar system using offshore yuan began in 2011.
Shanghai-listed equities are heading for the best annual gain since 2009, outpacing shares of mainland companies listed overseas amid speculation valuation discounts on domestic securities will narrow as China opens up. The Shanghai Composite Index has climbed 17 percent this year, versus a 1.9 percent drop in the Hang Seng China Enterprises Index of Hong Kong- listed shares
This article by William Mellor, Lulu Yilun Chen and Zijing Wu for Bloomberg may be of interest to subscribers. Here is a section:
And Alibaba is making money: Net profit tripled to $3.7 billion in the year ended on March 31. While net income fell 39 percent in the three months ended Sept. 30, in part as a result of the cost of integrating new businesses, revenue jumped 54 percent during the quarter -- beating analysts’ estimates.
“The growth potential of Internet companies in China is many multiples greater than in the U.S.,” says Shane Oliver, who helps manage $131 billion at AMP Capital Investors in Sydney. “Businesses which can take advantage of that, such as Alibaba, seem incredibly attractive.” In line with AMP policy, Oliver declined to say whether his firm bought the stock.
Ma isn’t the only billionaire tapping China’s Web-savvy consumers. Robin Li, 45, was China’s second-richest man as of Nov. 9, with a fortune of $17.2 billion, after founding search engine Baidu Inc. Ma Huateng, 43, who was worth $15.6 billion on that date, has expanded Tencent Holdings Ltd. into China’s top instant-messaging service.
Thanks to a subscriber for this interesting report from Deutsche Bank focusing on the Chinese insurance sector. Here is a section:
Contrary to popular belief, we believe Chinese life insurers should benefit from monetary easing at this point in the cycle. We note that our China economist now expects two interest rate cuts in 2015. We believe a lower rate environment could ease competitive pressure and allow room to lower liability costs, which should more than offset reinvestment pressure. We expect the sector to deliver robust EV and VNB growth in 2014-16, and see the current sector valuation as attractive, especially the major insurers’ A-shares, trading at 0.9-1.1x 2014E P/EV. We initiate coverage of the Chinese insurance A-shares, with Buy ratings on China Life, Ping An and CPIC, and a Hold on NCI.
Why are interest rate cuts positive?
There are three reasons why we believe potential interest rate cuts are positive for Chinese life insurers. Firstly, we believe insurers’ investment yields could be resilient, despite lower interest rates, thanks to the availability of higher yielding assets. We note that the listed insurers’ net investment yields of 4.8-5.1% in 1H14 are relatively low compared with the 6+% yields offered by new investments, such as preferred shares and other non-standard investments. Secondly, while asset duration is shorter than liability duration, we believe the sector’s liabilities could be re-priced faster than assets, due to the dominance of participating and universal life policies (~77-92% of reserves), which allow insurers flexibility in adjusting liability costs. Furthermore, we believe a lower interest rate environment could ease competitive pressure for the sector, and is positive for growth. Last but not least, an easing monetary situation should ease asset quality deterioration, which has been a key concern for investors.
Expect robust EV and VNB growth in 2014-16
We forecast robust EV and VNB growth for Chinese life insurers, with average EV growth of 23.7% and VNB growth of 18.3% in 2014, helped by strong investment markets. We forecast EV growth to be sustained at around 14.3%/13.9% in 2015/16, and VNB growth at 15.6%/14.6%, supported by stable market conditions and an increased focus on protection policies. As such, we see current sector valuations – at 0.9-1.1x 2014E P/EV for insurance A-shares, 0.9-1.3x for H-shares – as unjustified and yet to price in any recovery.
Thanks to a subscriber for this report from Deutsche Bank focusing on Chinese property developers. Here is a section:
More favorable supply-side dynamics According to NBS, nationwide new home prices have fallen 4-6% since April, and sales have responded positively to such price cuts. On our analysis, overall residential inventory period (including properties under construction but with presale permits) has already peaked out and fallen to 16.5 months in Sep (down from a high of 21 months early 2014). As developers maintain price cuts and discounts, inventory period should continue to fall. Given significant falls in land sales (-26% YoY) and construction starts (-14% YoY) in 2014 YTD, new supply should fall further in 2H15, by then we see a return of pricing power.
Key concerns: margin pressure, corporate governance events, financing risks
Given more price cuts and slower decline in land prices than property prices, we see more downward margin pressure. And with on-going anti-corruption campaign of central government and recent corporate governance events for some Chinese developers, we see higher risk premiums and deeper valuation discounts to be applied to certain non-state-owned Chinese developers.
Our positive industry views are supported by the current cheap valuations of the China property stocks. Our top picks are those with: 1) favorable landbank vintage (i.e. management has good market expertise in timing market cycles); 2) the ability to obtain cheap financing; 3) good revenue diversification (like a sizeable and growing investment property portfolio); and/or 4) very attractive valuations.
This article by Kana Nishizawa and Darren Boey for Bloomberg may be of interest to subscribers. Here is a section:
HKEx is at the “completion stage” of preparation for the link, Li said in a conference call with reporters yesterday, declining to speculate on a timeframe for the start date.
“While the market will always appreciate advance notice, which we will strive to give, I’m not at this point stipulating any particular days,” Li said.
The Hang Seng Index (HSI) slid 0.7 percent at today’s close in Hong Kong. HKEx tumbled 4.7 percent, its biggest loss in six months, while brokerages First Shanghai Investments Ltd. and Shenyin Wanguo HK Ltd. each lost at least 8.8 percent. The Shanghai Composite Index declined 0.5 percent, its lowest closing level in a month.
Authorities said in April they may make further announcements on timing, yet they haven’t given any more details beyond their original statement that the link would start in about six months. Hong Kong’s Securities & Futures Commission declined to comment and the China Securities Regulatory Commission didn’t respond to a faxed request for comment.
Chinese regulators need to address whether foreign investors will pay capital gains taxes on mainland shares before the link can begin, Mark Mobius, who oversees about $40 billion as the executive chairman at Templeton Emerging Markets Group, said in an interview in Hong Kong.
Charles Li, Chief Executive Officer of Hong Kong Exchanges and Clearing Ltd.
“Unless they get all these issues straightened out and clarified, nobody is going to invest,” Mobius said.
This article by Stanley Lubman for the Wall Street Journal may be of interest to subscribers. Here is a section:
A key issue as the Party confronts flaws in the legal system — one that has risked getting lost in the swirl of opinions around the specifics of judicial reform — is the disconnect between local governments and the central government: Local mishandling of problems arising from illegal land expropriations, tolerance of environmental pollution and disregard of product safety problems have led to widespread discontent that undermines the party’s legitimacy. The question underlying the current reform effort is whether the mentality of local officials can be shaped to guide their adherence more closely to centrally promulgated laws and policies.
An article in the progressive journal Caixin recently commented on “bureaucratic lethargy [that] is especially evident in local government departments.” In addition to modifying central-local financial relations, changing the criteria for evaluating local government performance, and simplifying administration, the article identified “setting up a system that is based on the rule of law” as an important remedy.
That’s easier said than done, and many of the legal reforms proposed so far appear to skirt around the issue. What is needed is a more explicit commitment to strengthen the discipline required for the courts to enforce laws consistently and reasonably. More attention needs to be focused on how judges should interpret and follow legal rules, and on how they should exercise their discretion.
