德银-中国-投资策略-3季度首读，业绩，估值，盈利和流动性评论-20171025-Deutsche_Bank-China_Strategy_Spotlight：3Q_first_read，performance，valuation，earnings_and_liquidity_reviews_35页_2mb

3Q First Read: Performance, Valuation, Earnings and Liquidity Reviews

Core Content Summary

3Q GDP and Earnings Overview

• The 3Q GDP growth in China reached 6.8% year-on-year (yoy), matching expectations.
• Zhiwei Zhang, Chief China Economist, revised his forecast to 6.6% for 4Q and 6.8% for the full year.
• 3Q earnings season is ongoing, with over 300 A-shares reporting results.
• Earnings growth in 3Q was 59% yoy, outperforming the 45% yoy growth in 2Q.
• Cyclical sectors (steel, chemical, paper) showed the strongest earnings performance.

Market Performance

• HSCEI gained 3.8%, outperforming MSCI China (+2.5%), CSI300 (+2.6%), and EM (+1.3%).
• Environmental, insurance, banks, and select defenses were key performers.
• Real estate, transportation, and telecom posted losses.
• MSCI China trades at a 12% discount to its historical average in terms of P/B, while its P/E is at historical average.

Macro and Earnings Data

• Macro data for 3Q was largely in line with expectations.
• PMI reached a multi-year high at 52.4, driven by strong new orders at 54.8.
• Industrial profits grew 22% yoy in 8M17.
• Credit growth and TSF balance growth remained strong, with 14.8% yoy for TSF and 17.4% yoy for corporate medium-to-long-term loans.
• Property investment improved by 0.2ppt to 8.1% yoy.
• MSCI China 2017E EPS remained largely unchanged, with materials and real estate seeing notable upgrades.

Liquidity and Sentiment

• HK equities' ADT averaged HKD93bn in October, slightly lower than the previous month but still strong compared to the YTD average.
• Connect inflows continued both ways, and volatility subsided.
• A-share sentiment was stable, with onshore rates and credit spreads moderating.
• CNY and CNH slightly depreciated against USD, but A-share margin balance and buying activities improved.

Sector Preference and Weightings

Overweight Sectors

• Financials: Strong earnings growth, less asset quality concern, and attractive valuation.
• Internet: Strong secular growth trend.
• Consumer Services (education): Benefit from strong demand for high-quality education resources.
• Metals and Mining (steel, non-ferrous): Most geared to cyclical recovery and beneficiaries of supply-side reform.
• Water/IPPs: Strong structural growth with booming PPP orders and FY18 turnaround on tariff hikes.

Underweight Sectors

• Telecom: Weak earnings growth and highly defensive.
• Coal: Policy intervention risk on price control.
• Airlines: Fuel cost pressure and tough competition.
• Traditional Retailing: Losing ground to new channels.
• Consumer Staples: Mediocre topline growth and divergence in new products.

Market-Weighted Sectors

• Oil, autos, real estate, capital goods, transportation, internet retailing, hardware and semiconductors, healthcare, and gas/renewables are recommended as market-weighted.

Key Earnings Upgrades and Downgrades

• Wanhua Chemicals (600309 CH): Earnings increased by 161% yoy due to robust MDI spread surge and healthy petrochemical & functional materials performance.
• Anhui Conch Cement-H (914 HK): Earnings rose by 8.0% yoy with higher cement/clinker ASP assumption.
• China Oilfield Services (384 HK): FY1 earnings improved by 23.7%, and FY2 by 23.7%.
• China Gas Holdings (3380 HK): FY1 earnings increased by 6.6%, and FY2 by 5.7%.
• Country Garden Holdings (2007 HK): FY1 earnings rose by 7.8%, and FY2 by 7.6%.
• Merchants Securities-H (6099 HK): FY1 earnings increased by 8.5%, and FY2 by 7.9%.
• Byd (1211 HK): FY1 earnings grew by 13.5%, and FY2 by 11.1%.
• China Travel (Hk) (308 HK): FY1 earnings increased by 11.0%, and FY2 by 9.3%.
• Shangri-La Asia (69 HK): FY1 earnings grew by 11.6%, and FY2 by 7.7%.
• Cnbm (3323 HK): FY17E earnings increased by 36.0%, and FY18E by 27.4%.
• Sinoma (1893 HK): FY17E earnings increased by 10.3%, and FY18E by 8.4%.
• China Eastern Airlines (2009 HK): FY17E earnings increased by 10.3%, and FY18E by 21.3%.

Risks

• Tighter-than-expected monetary policy
• Harsher-than-expected property tightening
• Disorderly deleveraging as China tightens shadow credit
• Sharper-than-expected RMB depreciation

Analysts

• Michael Tong, CFA – Research Analyst
• Joseph Huo – Strategist
• Luka Zhu – Research Analyst

Conclusion

The 3Q earnings season shows strong performance across the A-share market, with notable growth in cyclical sectors. Despite macroeconomic stability, the market remains attractive due to its valuation discount compared to historical averages and global peers. Sector preferences suggest overweighting in financials, internet, consumer services, metals and mining, and water/IPPs, while underweighting telecom, coal, airlines, traditional retailing, and consumer staples. Key risks include tighter monetary policy, property tightening, deleveraging, and RMB depreciation.