[Hong Kong/China]

Asia Strategy Structural shift in Hong Kong/China sectors

Mirae Asset Securities (HK) Ltd. Mirae Asset Co., Ltd. Joe Liew [email protected] Assisted by Jay (Jaeil) Lee [email protected]

COVID-19 to affect economies Economic recovery to take longer than initially expected and markets for the rest of 2020  Despite some success in bringing the first wave of COVID-19 under control, we worry that countries around the world remain vulnerable to new waves of infections. To be sure, the first wave has yielded valuable lessons that should help to mitigate the economic impact of subsequent waves.  Nevertheless, the recovery is likely to be more drawn out than many initially imagined. Even cities that enforced strict social distancing measures at the start of the crisis, including Beijing, , Melbourne, and Hong Kong, have begun to see new outbreaks in recent weeks.

Structural shift: Inclusion of tech More Internet stocks likely to be included in HSI during upcoming review names to help HSI performance  With regard to the pandemic’s impact on investing, the structural changes unfolding in consumption and work patterns have focused investor attention/fund inflows on the work- from-home theme (internet stocks being the most obvious example), and we expect this to continue. A key data point will be 2Q results to be released next month. Back-to-work stocks (e.g., the travel industry) will take longer to return to pre-pandemic levels. Note that even if a vaccine is found by year-end, it will take some time to roll it out on a large scale.  The HSI's next review in mid-August is likely to result in the inclusion of more Chinese internet stocks—most notably the tech giants Alibaba, Meituan, and Xiaomi. We expect the index to perform better in 2H20, driven by such stocks. In our view, the Chinese internet story is particularly compelling because it encompasses all facets of the new stay-at-home reality: everything from e-commerce and food delivery to gaming and video conferencing. Against this backdrop, companies that lack a coherent cloud computing strategy will need to develop one, and small businesses will need to open online storefronts. We recommend Global X China Cloud Computing ETF (2826 HK) for those seeking a proxy on this theme.

Key risk Deteriorating China-US relations may affect bilateral trade, future investments, and corporate earnings  The US passed the Hong Kong Autonomy Act, which provides for sanctions against individuals/entities deemed responsible for China’s recent actions in Hong Kong, as well as the financial institutions where they . Meanwhile, the US forced the closure of the Chinese consulate in Houston, and China retaliated in kind by ordering the closure of the US consulate in Chengdu. The worsening relations between the world’s two largest economies could negatively affect long-term earnings projections and market sentiment. HSI and CSI 300: 12-month performance

30,000 HSI (HK$, L) CSI 300 (CNY, R) 5,000

28,000 4,500

26,000 4,000 24,000

3,500 22,000

20,000 3,000 Jul-19 Oct-19 Jan-20 Apr-20

Source: Bloomberg

Analysts who prepared this report are registered as research analysts in Hong Kong or Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. July 27, 2020 Asia Strategy

1. HSI and CSI 300 likely to appreciate gradually over the rest of the year

 The review of HSI component stocks in mid-August will likely lead to the inclusion of more tech stocks. We think this will have an important role in driving further upside for the index.  We expect Chinese stocks to gradually appreciate as the economy continues to recover from the impact of COVID-19. From the standpoint of policy makers, we think a gradual rise in stock prices is preferable to a sharp increase. Thus, rather than a repeat of the rally seen over the past month, we think a trajectory mirroring the steady return to economic growth is more likely.  Chinese policy makers’ latest actions/statements indicate their concern about the danger of market overheating. Compared to the US, Japan, and Europe, China has been more restrained in terms of easing/interest rate cuts, thus providing less fuel to the fire of liquidity-driven rallies.

Figure 1. 1Y government bond yields: China vs. the US Figure 2. 3Y government bond yields: China vs. the US

5 1Y China gov't bond yield (%) 1Y US gov't bond yield (%) 5 3Y China gov't bond yield (%) 3Y US gov't bond yield (%)

4 4

3 3

2 2

1 1

0 0 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18

Source: Bloomberg Source: Bloomberg

 As economic recovery projections continue to be pushed further into the future, the idea that corporate earnings will fully recover in 2021 deserves skepticism. We believe a V-shaped global economic recovery is highly unlikely.

Figure 3. HSI: Consensus earnings growth Figure 4. CSI 300: Consensus earnings growth

30 HSI EPS growth estimates (%) 20 CSI 300 EPS growth estimates (%) 16.9 24.9 25 15 20 18.1 10.1 10 7.8 7.4 15

10 5 5.7 4.9 0.0 5 0 0 -5 -5 -10 -10

-15 -14.0 -15 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

Source: Bloomberg Source: Bloomberg

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2. Certain sectors likely to outperform on the back of structural growth

 We believe the pandemic has accelerated the structural shift in value away from the old economy and into the new one. In the coming years, this new story should manifest as structural changes in the valuations of growth and value stocks. This is already beginning to play out: investors are increasingly willing to pay a premium for growth stocks in preference to stocks that will merely return to the pre-pandemic status quo.  Certain large-cap sectors will continue to face headwinds. will likely be weighed down by provisions for non-performing loans for some time, while companies linked to travel (e.g., airlines) are unlikely to fully recover in 2021, in our view. The worst performers in the HSI YTD are real estate, energy, and banks.  Healthcare is playing a crucial role, and stocks in this space will continue to garner attention. For e-commerce (i.e., internet plays), structural growth should continue.  The HSI is due for a review in mid-August. We believe tech stocks exemplifying the new economy—most notably Alibaba, Meituan, and Xiaomi—are likely to be included. We also believe Hong Kong will continue to see new listings in the internet and healthcare/biotech sectors, which should support investor sentiment and liquidity.

Table 1. Performance of HSI constituents Ticker Name YTD (%) as of Jul. 23 Ticker Name YTD (%) as of Jul. 23 HSI Hong Kong Hang Seng Index -8.9 1398 HK ICBC-H -16.1 388 HK Hong Kong Exchanges & Clearing 44.5 2007 HK Country Garden Holdings -16.5 700 HK Tencent Holdings 43.9 83 HK Sino Land -16.9 1177 HK Sino Biopharmaceutical 43.8 11 HK Hang Seng Bank -18.1 669 HK Techtronic Industries 33.2 151 HK Want Want China Holdings -18.4 1044 HK Hengan International Group 24.1 688 HK China Overseas Land & Investment -18.5 101 HK Hang Lung Properties 13.0 2313 HK Shenzhou International Group -19.3 2319 HK China Mengniu Dairy 11.7 16 HK Sun Hung Kai Properties -20.4 175 HK Geely Automobile Holdings 4.8 1113 HK CK Asset Holdings Ltd. -20.7 1093 HK CSPC Pharmaceutical Group 4.1 12 HK Henderson Land Development -21.0 2382 HK Sunny Optical 0.9 3 HK Hong Kong & China Gas -21.4 939 HK China Construction Bank-H -5.7 386 HK China Petroleum & Chemical-H -21.6 2318 HK Ping An Insurance-H -6.0 2018 HK AAC Technologies Holdings -22.1 288 HK WH Group -6.8 6 HK Power Assets Holdings -22.5 1088 HK China Shenhua Energy-H -8.4 1928 HK Sands China Ltd. -25.0 27 HK Galaxy Entertainment Group -9.2 267 HK CITIC -25.6 2628 HK China Life Insurance-H -10.4 823 HK Link REIT -26.3 2 HK CLP Holdings -10.4 857 HK PetroChina-H -27.0 1299 HK AIA Group -10.9 1038 HK CK Infrastructure Holdings -27.2 1109 HK China Resources Land -10.9 883 HK CNOOC -29.2 17 HK New World Development -11.5 1 HK CK Hutchison Holdings -29.5 3988 HK Bank of China-H -12.4 1997 HK Wharf Real Estate Investment -33.2 2388 HK BOC Hong Kong Holdings -13.6 762 HK China Unicom Hong Kong -36.7 66 HK MTR Corp. -14.1 5 HK HSBC Holdings -39.9 3328 HK Bank of Communications-H -15.4 19 HK Swire Pacific -43.9 941 HK China Mobile -16.0 Source: Bloomberg

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3. S&P 500 to be well-bid; key risk is deteriorating US-China relations

 Despite mounting COVID-19 cases in the US and the potential reinstatement of lockdown measures, still-abundant liquidity should keep markets well-bid. We do not necessarily expect the S&P 500 to rally, but would be very surprised at a significant decline from current levels.  As benefits approved in March are set to expire at the end of the month, the US government is looking to pass another round of stimulus in the coming week. This should be received positively by the market.  S&P 500 earnings yield: 4.2% (far higher than the 10-year US bond yield of 0.6%).  With the US presidential election fast approaching (Nov. 3), we expect the current administration to try its best to keep financial markets stable and engineer a quick economic recovery.  The key risk is the administration’s increasingly antagonistic posture toward China. Secretary of State Mike Pompeo, in a Jul. 23 speech, said the Chinese Communist Party had “designs for hegemony” and expressed a need to “triumph over this new tyranny,” adding that China’s promises were empty. China-US tensions have the ability to keep markets volatile.

Figure 5. S&P 500 P/E vs. 10Y US government bond yield

S&P 500 P/E (x, L) 10Y US gov't bond yield (%, R) 25 4

20 3

15 2 10

1 5

0 0 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18

Source: Bloomberg

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Appendix 1

Important disclosures and disclaimers Hong Kong and Korea

Analyst certification The research analysts who prepared this report (the “Analysts”) are registered with either (1) the Korea Financial Investment Association and are subject to Korean securities regulations, or (2) the Securities & Futures Commission of Hong Kong. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and Mirae Asset Securities (HK) Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo and Mirae Asset Securities (HK) Ltd, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, , proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo or Mirae Asset Securities (HK) Ltd, except as otherwise stated herein.

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Mirae Asset Securities (HK) Limited disclaimer: This publication and the contents hereof are intended for information purposes only and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Mirae Asset Securities (HK) Limited nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute or are to be construed as an offer or solicitation of an offer to buy or sell any of the securities, or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Mirae Asset Securities (HK) Limited, and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

As of the publication of this report, the analyst Joe Liew holds personal positions in Tencent Holdings (1,600 shares) and Meituan Dianping (5,300 shares).

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