20210803-招银国际-August_Monthly_Strategy_Buy_growth_stocks_with_little_policy_risk_12页_1mb

August Monthly Strategy Summary

Core Content

This August monthly strategy report focuses on the impact of Chinese regulatory policies on the Hong Kong and mainland Chinese stock markets, particularly the tech and internet sectors. It provides investment recommendations based on sector performance, policy risks, and valuation analysis.

Main Points

• Market Performance:
  The Hong Kong stock market experienced its worst selloff since March 2020, with the Hang Seng Index (HSI) and Hang Seng TECH Index (HSTECH) declining by 9.9% and 16.9% respectively in July. The Shanghai Composite Index (SHCOMP) also saw a decline, though less severe than in Hong Kong.

• Policy Impact:
  The selloff was triggered by regulatory tightening in key sectors like internet (anti-monopoly, cyber security) and education (after-school tuition). These policies have created uncertainty and increased pressure on growth stocks, particularly in the tech and internet space.

• Earnings Revisions:

  • HSI's 2021E and 2022E EPS have been revised up by 5.1% and 3.3% respectively, after adjusting for constituent changes.
  • HSTECH's 2021E and 2022E EPS have been revised down by 16.3% and 13.3% respectively, due to policy-related concerns.

• Valuation Analysis:

  • The HSI is not considered cheap in terms of forward P/E, standing at 12.5x and 11.1x for 2021E and 2022E, one standard deviation above the 10-year average.
  • The increased weighting of growth stocks in the HSI (from 20% in 2019 to 40% in 2021) justifies higher valuations but also highlights the ongoing risks associated with growth sectors.

• Technical Analysis:

  • The HSI and HSTECH have breached key support levels, including the 250-day moving average and the previous uptrend.
  • RSI indicators remain below 30, indicating oversold conditions, but no clear reversal has occurred yet.
  • MSCI China and SHCOMP have also shown downward breakouts, with technical rebounds failing to re-enter their respective channels.

• Investment Strategy:

  • Avoid Policy Risks: Investors should remain cautious and avoid chasing growth stocks until there is more clarity on regulatory policies.
  • Focus on Low Policy Risk Growth Sectors: The report recommends focusing on growth stocks with minimal regulatory exposure, such as NEV, new energy, and hardware sectors, which are supported by recent policy statements.
  • Selective Cyclical Stocks with Policy Support: Infrastructure and machinery stocks are highlighted as having potential for recovery due to increased policy support and a correction that has priced in many negatives.

Key Sectors and Stocks

New Energy Vehicles (NEV)

• Recommended Stocks:
  • BYD (1211 HK, BUY)
  • Li Auto (LI US, BUY)

New Energy

• Recommended Stocks:
  • Suntien Green Energy (956 HK, BUY)
  • Tian Lun Gas (1600 HK, BUY)
  • S.C. New Energy (300724 CH, BUY)
  • Zhejiang Jingsheng (300316 CH, BUY)

Hardware

• Recommended Stocks:
  • BYDE (285 HK, BUY)
  • Xiaomi (1810 HK, BUY)

Machinery

• Recommended Stocks:
  • Weichai (2338 HK, BUY)
  • Zoomlion (1157 HK, BUY)

Valuation & Performance Metrics

Policy and Economic Outlook

• Regulatory Uncertainty:
  Investors should wait for more clarity on China's regulatory policies and interim results of internet companies in August, as further guidance cuts and new investments could affect stock prices.

• Economic Indicators:

  • China's manufacturing PMI (official and Caixin) dropped to the lowest levels since early 2020, indicating a slowdown in economic activity.
  • Cyclical and value stocks are more sensitive to PMI changes than growth stocks.
  • The low-base effect from 2020 is fading, which may lead to slower YoY earnings growth in the second half of 2021.

• Commodity Price Controls:
  Beijing has emphasized monitoring commodity prices and may introduce more policies to stabilize them, which could affect upstream sectors like coal and steel.

• Property Sector Concerns:
  The Chinese property sector still faces policy tightening and liquidity issues.

• US Market Non-Confirmation:
  The US stock market, particularly the Dow Jones Industrial Average, has shown "non-confirmation" with the Transportation Average, indicating potential market pullbacks.

CMBIS Ratings

• BUY: Potential return of over 15% over next 12 months.
• HOLD: Potential return of +15% to -10% over next 12 months.
• SELL: Potential loss of over 10% over next 12 months.
• NOT RATED: Not rated by CMBIS.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark.
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark.
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark.

Analyst Certification & Disclosures

• The research analyst certifies that all views expressed accurately reflect personal opinions and that no compensation is directly related to the views in this report.
• The report is for informational purposes only and not an offer to buy or sell securities.
• CMBIS does not provide individually tailored investment advice and recommends consulting a professional financial advisor.
• The report may contain information that is subject to change without notice and may not reflect the views of CMBIS at the time of distribution.

Legal and Distribution Notes

• The report is distributed to clients of CMBIS or its affiliates and is not intended for general public distribution.
• In the United Kingdom, the report is only provided to persons falling within Article 19(5) or Article 49(2)(a) to (d) of the Financial Promotion Order.
• In the United States, the report is only for "major US institutional investors" and not for general public distribution.
• In Singapore, the report is distributed by CMBI (Singapore) Pte. Limited (CMBISG), an Exempt Financial Adviser, and is only for Accredited, Expert, or Institutional Investors.

Contact Information

Daniel So, CFA
Phone: (852) 3900 0857
Email: danielso@cmbi.com.hk