Thursday, 3 December, 2020
China Merchants Securities (HK) Co., Ltd. Strategy Report Hong Kong Equity Research
2021 Outlook: Road towards restoration Jessie Guo, PhD +852 3189 6121 [email protected] “Lives of great men all remind us, we can make our lives sublime. Let Edith Qian, CFA +852 3189 6752 us, then, be up and doing. With a heart for any fate, still achieving, still [email protected] pursuing; learn to labour and to wait”. Harrington Zhang, PhD - Henry Wadsworth Longfellow, A Psalm of Life +852 3189 6751 [email protected] Tommy Wong View on economic recovery +852 3189 6634 [email protected] The outbreak of COVID-19 sent global economic growth deep into negative Johnny Wong territory in 2020. Synchronised large-scale fiscal and monetary policies +852 3189 6357 prevented major economies from sliding into perennial recession. [email protected] According to the IMF, global GDP will contract by 4.4% in 2020 and rebound Yonghuo Liang +86 755 8290 4571 by 5.2% in 2021, but the pace of recovery will be uneven across countries. [email protected] We expect the US economy to have a relatively muted start next year, and Kevin Chen then followed by a brighter second half, while the Fed’s monetary policy will +852 3189 6125 remain abundantly accommodative throughout the entire 2021. [email protected] Felix Luo, PhD +852 3189 6288 We stay positive on China’s economic outlook, mainly driven by domestic [email protected] consumption and manufacturing investment. We expect a rather neutral Yiding Jiao, CFA fiscal and monetary policy stance. A Biden presidency will not +86 755 8290 8475 fundamentally alter the rivalry between China and the US, but more [email protected] flexibilities might be given to balance between political and commercial Leo Liu, CFA +852 3189 6117 interests. Biden’s coordinated approaches with allies imply that China will [email protected] face more sophisticated global landscape. This should force China to speed Hayden Zhang, CFA up technological upgrade and independence, and to focus on domestic +852 3189 6354 consumption and the quality and sustainability of economic growth. [email protected] Yun Wei +86 755 8373 2985 View on stock markets [email protected] We have been arguing since April that A shares and MSCI China Index Matt Ma should outperform other major markets. We are cautiously positive on their +852 3189 6394 [email protected] outlook mainly due to overall macro backdrop. However, the rally is Eric Siu expected to moderate; and a number of potential risks could even cause +852 3189 6395 meaningful corrections in near to medium term: 1). strong rally since April [email protected] has by and large factored in earnings recovery; the current valuations look Bryan Wang increasingly stretched. MSCI China Index trades at 16.7x forward P/E vs +852 3189 6711 [email protected] historical median of 12.5x. The next leg of performance will be driven more Crystal Li by earnings revision instead of further valuation expansion; 2). liquidity +852 3189 6122 inflow could moderate; 3). ADRs face headwinds of potential de-listing from [email protected] the US market; 4). uncertainties related to Biden’s China policy. Warren Dai, CFA +852 3189 6126 We expect Hang Seng Index, which is a laggard throughout the year, to [email protected] Clint Su deliver a better performance in 2021 with a range between 23,500 and +852 3189 6635 30,500 (equivalent to 11x to 14.5x forward P/E) due to the following [email protected] reasons: 1). travel restriction will be lifted in post-COVID era so that local Anbo Zhao economy has better chance to recover; 2). local financial and property +86 755 8285 2939 sectors take up heavy weights in the index. Pickup of business activities [email protected] should lead to re-rating of these sectors and local consumer names with Calvin Ng +852 3189 6176 suppressed valuations; 3). the secondary listing of ADRs will enhance the [email protected] weight of new economy stocks in benchmark indices and attract fund inflow; Steven Yang 4). secondary listed stocks might become eligible for southbound trading of +86 755 8323 5354 Stock Connect; 5). undemanding valuation. HSI trades at 12.8x forward P/E [email protected] vs historical median of 11.2x. Laurel Zhu +852 3189 6142 [email protected]
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Thursday, 3 December, 2020
Investment summary
View on global recovery
In its latest World Economic Outlook published in October, the IMF expects world GDP to contract by 4.4% in 2020 and rebound by 5.2% in 2021, implying that the output level in 2021 would be 0.6% higher than 2019. However the pace of recovery is likely to be uneven across countries. 1). For advanced economies, economic output will contract by 5.8% in 2020 and rebound by 3.9% in 2021, leaving the economy 2.1% below 2019 level. The US is expected to experience smaller contraction in 2020 as the lockdown measures implemented are much less draconian than European countries. Southern Europe are likely to suffer larger and longer-lasting recessions than Northern and Western Europe, as the former (Italy and Spain) are heavily reliant on tourism sectors and have smaller fiscal buffer due to higher debt levels. 2). China will be the only major economy in the world to see positive growth in 2020. The economy will record an accumulated growth of 10.3% over 2020 to 2021. For emerging market and developing economies excluding China, growth is projected to be -5.7% in 2020 and 5.0% in 2021. 3). The ASEAN-5 is the only major economy outside China expected to recover to above pre-pandemic level in 2021. India could experience a record economic contraction in 2020.
We believe the risk associated with economic recovery remains high. The strength of recovery ahead will be highly dependent on the pandemic infection rates and the roll-out of the vaccine, as well as continued support from governments and central banks. We expect more visible and certain economic recovery trajectory in 2H21 when the impact of pandemic gradually fades away.
Positive factors: 1). Compared with the outbreak in spring, governments, hospitals and healthcare professionals are now better prepared with drugs, equipment and know-hows to tackle outbreaks and treat patients. Death rates have been falling even as cases are rising. Step up of mass-scale testing and tracing program reduced the necessity of stringent lockdown. Social distancing measures introduced by governments are less draconian and more targeted, reducing unnecessary hindrance to the economy. 2). Progress made in vaccine development helped to lift confidence, but the timeline remains uncertain and large scale manufacturing and distribution of vaccine is critical. 3). Certain economic activities, especially industrial production and construction, see less interruption by the outbreak, while consumer spending are supported by preferential fiscal policies across countries.
Negative factors: 1). Excess liquidity could bring long-term issues. We believe policies will continue to play a crucial role in the next phase of recovery. Massive policy support by governments and central banks around the world have helped to restore confidence and prevent massive bankruptcy and layoff. High government debt level was inevitable to prevent a worse recession. However, previous crisis have taught us that tightening policies and withdrawing supports prematurely could deal another blow to the stagnant recovery. 2). Energy prices have stayed at trough levels for long, suggesting that global demand remains weak. 3). A number of major equity markets have reached record high albeit weak fundamentals, which implies asset-price inflation caused by abundant liquidity. A persistent loosening monetary policy could distort proper allocation of social resource. 4). It is noticeable that the gap between the rich and poor has widened.
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View on China economy
We are positive on China economic outlook. CMS house view holds that: 1). GDP growth rate could bounce back to 9.1% in 2021E, with consumption and manufacturing investment as major driver. Our forecast is above Bloomberg consensus estimate of 8.2%. Quarterly GDP forecast are 17.9%, 7.8%, 6.5% and 5.4% respectively and 2020-2021 CAGR growth is 5.5%; 2). CPI and PPI will rise 1.0% and 0.6% respectively with no significant inflation pressure; 3). property development will no longer be the major growth driver; 4). the overall policy tone for fiscal and monetary policy is likely to stay neutral, given the outlook of steady economic expansion and a shift of policy design from “counter- cyclical” to “cross-cyclical” (跨周期调控). The latter focuses more on dealing with longer-term issues and challenges faced by the economy which extend into more than one cycles; 5). RMB is likely to remain strong against USD. USDCNY could strengthen to 6.45 in mid-2021E, and 6.05 by the end of 2021E, as a result of US dollar index entering into long-term weakening cycle. PBOC recently signaled a higher tolerance for strong RMB.
Major downside risks could come from the following: 1). infrastructure investment falling short of expectation, due to constraints on local government’s fiscal resources; 2). property development investment no longer a driver due to new policies of “three red lines” to better regulate financing and leverage ratio. Since 2018, growth rate of property development investment has remained above overall fixed asset investment. In the first ten months of 2020, property market showed resilience with property development investment rising 6.3% yoy and property sales by value/area rising 5.8%/0.0% (strong growth of 21.8%/11.7% over August to October). After the introduction of “three red lines” in August, land area purchased by developers started to decelerate. CMS house view expects property development investment growth to decelerate to 3-5% yoy in 2021E (vs. 8% CAGR over 2016 to 2020E); 3). uncertainties related to the Biden Administration’s foreign policy.
View on stock markets
A shares and MSCI China Index. We have argued since April that A shares and MSCI China should outperform other major markets mainly because China’s economic recovery was on the right track. YTD, MSCI China and CSI 300 Index both registered performance of 24%. We are cautiously positive on their 2021 outlook, underpinned by China’s macro backdrop. However, we expect the strong rally in the past to moderate and potential risks could even bring meaningful corrections in near to medium term due to the following reasons: 1). the strong rally since April has partly factored in earnings outlook; the current valuation looks increasingly stretched. MSCI China index trades at 16.7x forward P/E vs historical median of 12.5x. Hence the next leg of performance will be driven more by earnings revision instead of further valuation expansion; 2). we expect monetary policy to remain accommodative but liquidity flow into equity market could moderate; 3). potential de-listing headwinds faced by ADRs; 4). uncertainties related to Biden’s China policy.
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Hong Kong market. The local economy has already got hit badly by political turmoil before the COVID-19 outbreak. The city becomes a fierce battlefield between the US and China following the enforcement of National Security Law. We have taken a cautious view on local Hong Kong stocks since early April and expect Hang Seng Index to stay range-bound between 23,000 to 26,000 in 2Q and 3Q, and then deliver a better performance in 4Q. Its performance so far has been in line with our expectation. Hang Seng Index registered gain of -6% YTD and 13% since 4Q. We expect HSI to enjoy a better performance in 2021 with a trend range between 23,500 and 30,500 (equivalent to 11x to 14.5x forward PE) due to the following reasons: 1). COVID-19 outbreak should be brought under control and the travel restriction is expected to be lifted; 2). financial and property sectors take up heavy index weights. Economic recovery should lead to re-rating of these sectors and local consumer names whose valuations have been suppressed; 3). the secondary listing of ADRs will enhance the weight of new economy stocks in benchmark indices and attract fund inflow; 4). secondary listed stocks might become eligible under southbound trading of Stock Connect; 5). the valuation is undemanding. HSI trades at 12.8x forward P/E vs historical median of 11.2x.
Sector preference. 1). we continue to prefer cyclical sectors such as construction and capital goods, cements, energy, and transportation, as well as consumer discretionary (especially off-line consumption, education and auto). 2). the momentum of healthcare will slow down in the post-COVID era. As a matter of fact, the whole sector has witnessed correction throughout 3Q and 4Q. We expect more aggressive sector rotation in 2021 and divergence amongst industry leaders and followers should accelerate; and leaders in biotech, CRO/CDMO are likely to remain attractive. 3). we are cautiously positive on Telecom due to potential re-rating driven by mobile ARPU increase and historically low valuation. However, potential liquidation by US investors (due to restrictions introduced by the Trump administration on shareholding in Chinese firms) could pose downside risks to certain telecom listcos with high percentage of US shareholdings. For Tech Hardware, we expect the solid fundamentals to continue amid rising real demand for 5G mobiles. Inventory pile-up will no longer be a driver in 2H21. However, we are concerned about potential risks of selling into strength during results season. 4). we stay cautiously positive on E-commerce and mobile gaming. A full recovery of offline consumption could squeeze out certain momentum. 5). we expect re-rating of utilities due to demand recovery. 6). we turn positive on insurance.
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Sector preferences
4Q20 2020 Sector preference Sector QTD perf YTD perf for 2021 Top picks
Auto 70.1% 170.2% Geely (175 HK), BYD Co (1211 HK) Cons. Durables 20.8% 43.1% Anta (2020 HK), Xtep (1368 HK)
Media & Entertainment 9.4% 32.2% Tencent (700 HK), Bilibili (BILI US) Cons. Services 1.1% 29.6% New Oriental Edu (EDU US), Haidilao (6862 HK)
Materials 17.4% 20.6% Anhui Conch (914 HK) Capital Goods 9.5% 1.8% Zoomlion (1157 HK), CRG (390 HK)
Transportation 9.8% -2.2% China South Air (1055 HK)
Insurance 17.6% -3.6% Ping An (2318 HK) Utilities 15.3% -4.2% Kunlun (135 HK), ENN (2688 HK)
Telecom -6.1% -29.4% China Mobile (941 HK), China Telecom (728 HK) E-commerce -0.6% 46.4% JD.com (JD US)
Health Care 3.2% 39.4% Innovent Bio (1801 HK), Beigene (BGNE US) Tech Hardw are 16.2% 39.1% AAC (2018 HK)
Cons. Staples 7.4% 38.4% - Banks 23.1% -7.8% PSBC (1658 HK)
Real Estate 3.0% -16.4% -
Energy 8.6% -30.0% - Div. Financials 6.2% 5.7% -
Sources: Bloomberg, CMS (HK) Research
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Table of Contents Global economy: recovery on the way but bumpy road ahead ...... 9 Massive policy support prevented worse outcome ...... 9 Faster-than-expected rebound but momentum slowing ...... 12 Vaccine within sight: the beginning of the end? ...... 16 Expect global economy to normalize in 2H21; recovery likely to be uneven across countries ...... 18 China economy: momentum for steady growth to maintain in 2021E ...... 21 Production-led recovery is becoming more broad-based and consumption-driven...... 21 Export witnessed strong growth concentrated in a few categories ...... 23 Service sector still depressed but shows upbeat signal ...... 24 Expect China economy to grow by 9% in 2021E driven by both consumption and manufacturing investment .. 27 14th FYP: the long-term blueprint to focus on domestic demand and tech independence ...... 30 Hong Kong economy: initial signs of bottoming out ...... 36 US economy: A muted start followed by a brighter second half in 2021E ...... 38 Cautiously optimistic about the recovery; expect a brighter 2H underpinned by vaccination ...... 38 Expect monetary policy to remain abundantly accommodative throughout the entire 2021 ...... 38 COVID-19 development and vaccine ...... 40 Consumption remains the cornerstone; yet service consumption likely lagging behind at least in 1H21 ...... 42 Expect equipment investment and business construction investment to recouple in 2H21 ...... 45 Labour market could takes years to fully recover ...... 46 Offshore China and US equity markets ...... 48 Performance and valuation ...... 48 Earnings expectations ...... 54 Liquidity flow ...... 55 Our view on markets and sector preferences ...... 59 Key risks and catalysts ...... 61 Sino-US relationship: less volatile but tension to remain ...... 61 Delisting risk for Chinese ADRs is looming ...... 62 Potential capital outflow ...... 63 CMS Top picks ...... 66 Investment Ratings ...... 118
Sector outlook Catering ...... 67 Sportswear ...... 70 Education ...... 73 Internet ...... 76 Utilities ...... 80 Telecom ...... 85 Auto & auto parts ...... 88 Airlines ...... 91 Construction materials ...... 94 Infra & construction machineries ...... 97 Hardware technology ...... 100 Pharmaceutical & healthcare ...... 103 Insurance ...... 106 Banking ...... 110 Brokerage ...... 114
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Table of Charts Figure 1: General government fiscal balance (% of GDP): deficit ratios to reach high levels in 2020-2022...... 10 Figure 2: General government gross debt (% of GDP) ...... 11 Figure 3: Total assets of major central banks ballooned since the pandemic ...... 12 Figure 4: Markit PMI by country: recovery on the way since June ...... 13 Figure 5: Daily new cases (7DMA): major European countries ...... 14 Figure 6: Daily new cases (7DMA): BRICS countries ex. China ...... 14 Figure 7: Daily new cases (7DMA): major Latin American countries ex. Brazil ...... 15 Figure 8: Major European countries: Government response stringency index (100 = most stringent) ...... 15 Figure 9: COVID-19 vaccine in phase 3 clinical trial stage ...... 17 Figure 10: World GDP growth projections: plunge to negative territory in 2020 and back to growth in 2021 ...... 19 Figure 11: World GDP projections (2019=100) ...... 20 Figure 12: Share of contribution to China’s GDP growth ...... 21 Figure 13: China value-added industrial production ...... 22 Figure 14: China retail sales ...... 22 Figure 15: China fixed asset investment ...... 22 Figure 16: China goods export and import ...... 22 Figure 17: China’s export growth was concentrated in a few categories in 3Q20...... 23 Figure 18: China’s export growth by major destinations ...... 23 Figure 19: China’s GDP growth by industry: tertiary industry bear the brunt of pandemic but is catching up ...... 24 Figure 20: Share of contribution to China’s GDP growth by industry: tertiary industry dropped ...... 25 Figure 21: Tertiary sector growth by sub-sector...... 25 Figure 22: China service sector production index ...... 26 Figure 23: China catering revenue ...... 26 Figure 24: China economic forecast ...... 28 Figure 25: Property development investment growth outperformed overall fixed asset investment ...... 28 Figure 26: Land area purchased by developers started to decelerate amid regulation ...... 29 Figure 27: Renminbi exchange rate strengthened since June ...... 29 Figure 28: China’s GDP by expenditure approach: consumption, investment and net export ...... 31 Figure 29: China’s GDP growth by expenditure approach ...... 32 Figure 30: China became an upper-middle income country in 2010, and aim to become a high-income country in 2025 ...... 32 Figure 31: World Bank country classifications by income level (2020) ...... 33 Figure 32: The long-term objectives through the year 2035 ...... 34 Figure 33: Major economic and social development targets for the 14th Five Year Plan (2021-2025) ...... 35 Figure 34: Hong Kong GDP growth ...... 37 Figure 35: Hong Kong retail sales ...... 37 Figure 36: Hong Kong visitor arrivals...... 37 Figure 37: Hong Kong unemployment rate ...... 37 Figure 38: Fed’s Balance Sheet ...... 39 Figure 39: Fed’s Treasury Purchases ...... 39 Figure 40: Fed 13 (3) Emergency Lending Facilities ...... 39 Figure 41: US M2 Growth ...... 39 Figure 42: US COVID-19 daily infections ...... 41 Figure 43: US COVID-19 deaths ...... 41 Figure 44: US COVID-19 hospitalisation rate ...... 41 Figure 45: US regional cases breakdown (cases per million residents, 7-day MA) ...... 41 Figure 46: US real GDP growth ...... 43 Figure 47: Real GDP level ...... 43 Figure 48: US goods and service consumption ...... 43 Figure 49: Consumer sentiment ...... 43 Figure 50: Personal income ...... 44 To access our research reports on the Bloomberg terminal, type NH CMS
Figure 51: Personal savings ...... 44 Figure 52: Nominal retail growth ...... 44 Figure 53: Levels are above pre-COVID trends now ...... 44 Figure 54: Durable goods orders ...... 45 Figure 55: Capital goods orders ...... 45 Figure 56: Construction spending ...... 46 Figure 57: NAHB index ...... 46 Figure 58: Non-farm Payroll is still at 2015 level ...... 47 Figure 59: Unemployment Rates ...... 47 Figure 60: Non-farm Payroll Change ...... 47 Figure 61: Temporary and Permanent layoffs ...... 47 Figure 62: Equity index performances in local currencies (ranked by YTD performance) ...... 49 Figure 63: Equity index performances in US dollar terms (ranked by YTD performance) ...... 49 Figure 64: YTD performances of major onshore and offshore China market indices ...... 50 Figure 65: Major indices YTD performance by valuation adjustment and earnings revision ...... 50 Figure 66: MSCI China sector performances (ranked by YTD performance) ...... 51 Figure 67: Performance: FAAMG vs S&P 500 ...... 52 Figure 68: Performance: ATMJ vs MSCI China ...... 52 Figure 69: Major indices current forward P/E vs. historical level ...... 53 Figure 70: Major indices current forward P/BV vs. historical level ...... 53 Figure 71: Earnings revision for major indices ...... 54 Figure 72: Hang Seng consensus EPS integer ...... 54 Figure 73: MSCI China consensus EPS integer ...... 54 Figure 74: CSI 300 consensus EPS integer ...... 55 Figure 75: S&P 500 consensus EPS integer ...... 55 Figure 76: Fund inflow to Asia EM ex. China since 2018 ...... 56 Figure 77: Southbound holding ...... 56 Figure 78: Southbound annual turnover ...... 57 Figure 79: Southbound annual inflow ...... 57 Figure 80: Southbound monthly turnover ...... 57 Figure 81: Southbound monthly inflow ...... 58 Figure 82: Sector preferences ...... 60 Figure 83: Commitments made by China: Additional purchases in 2020-2021 compared to 2017 ...... 61 Figure 84: Ten secondary listed stocks on HKEX under Chapter 19C of Main Board Listing Rules...... 62 Figure 85: Listed companies under BIS’ Entity LIst ...... 64 Figure 86: List of Chinese companies released by Department of Defence which it said supports China’s Military- Civil Fusion development strategy ...... 65 Figure 87: CMS top picks ...... 66
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Global economy: recovery on the way but bumpy road ahead
Massive policy support prevented worse outcome
Since the start of year, more than 63 million people have contracted COVID-19 around the world and more than 1.4 million lives have been lost. The global economy has been dragged into the most severe recession since the Great Depression in the 1930s. Governments responded to the pandemic-induced recession with a variety of fiscal measures, including direct cash transfer to affected firms and households, wage subsidies to maintain employment, expanded and enhanced unemployment insurance coverage, tax relief and deferrals, etc. As of September 11, 2020, aggregated fiscal measures in response to COVID-19 pandemic amounted to USD11.7tr globally, or around 12% of global GDP, according to the IMF. As a result, government deficit ratio will surge by 8.8pts to 12.7% in 2020. Government gross debt ratio will increase by 15.7pts to 98.7%, partly due to decline in GDP.
Central banks also reacted quickly by slashing interest rates, establishing special lending facilities and expanding asset purchase programmes. The size of balance sheet of major central banks (the Fed, the ECB and the Bank of Japan) has ballooned from USD14.3tr at the end of March to USD22.1tr now, representing a surge of 55%. In August, the Federal Reserve announced the largest changes to its monetary policy framework in decades, moving to a flexible average inflation targeting regime of 2% over time, and assessment of the shortfalls (instead of deviations) of employment from its maximum level. The fiscal stimulus packages introduced by the US government amounted to USD3tr. The European Union reached a historical EUR750bn pandemic recovery package-fund in July, including EUR390bn in grants and EUR360bn in loans. The agreement represents the first-ever issuance of common bonds using the EU’s own top credit rating and direct grant distribution to member states. These measures largely prevented widespread business closure and bankruptcies, as well as large-scale layoffs, and helped the economy to register a nascent recovery after the lockdowns were lifted. However, the side-effects of these policies, such as higher levels of debt, could take years to fade away.
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Figure 1: General government fiscal balance (% of GDP): deficit ratios to reach high levels in 2020-2022 Projections 2017 2018 2019 2020 2021 2022 World -3.0 -3.1 -3.9 -12.7 -7.6 -5.9 Advanced Economies -2.4 -2.7 -3.3 -14.4 -6.9 -4.6 United States -4.6 -5.8 -6.3 -18.7 -8.7 -6.5 Euro Area -1.0 -0.5 -0.6 -10.1 -5.0 -2.7 France -2.9 -2.3 -3.0 -10.8 -6.5 -5.3 Germany 1.4 1.8 1.5 -8.2 -3.2 0.6 Italy -2.4 -2.2 -1.6 -13.0 -6.2 -3.9 Spain -3.0 -2.5 -2.8 -14.1 -7.5 -5.8 Japan -3.1 -2.5 -3.3 -14.2 -6.4 -3.2 United Kingdom -2.5 -2.3 -2.2 -16.5 -9.2 -7.1 Canada -0.1 -0.4 -0.3 -19.9 -8.7 -5.4 Others 1.4 1.3 0.0 -6.8 -4.3 -2.5 Emerging Market and Middle-Income Economies -4.2 -3.8 -4.9 -10.7 -9.2 -8.1 Excluding MENAP Oil Producers -4.1 -4.0 -5.1 -10.7 -9.3 -8.3 Asia -4.0 -4.5 -6.1 -11.4 -11.0 -10.0 China -3.8 -4.7 -6.3 -11.9 -11.8 -10.9 India -6.4 -6.3 -8.2 -13.1 -10.9 -10.0 Europe -1.8 0.4 -0.7 -7.2 -4.5 -3.4 Russia -1.5 2.9 1.9 -5.3 -2.6 -1.0 Latin America -5.5 -5.2 -4.1 -11.1 -5.3 -4.2 Brazil -7.9 -7.2 -6.0 -16.8 -6.5 -5.6 Mexico -1.1 -2.2 -2.3 -5.8 -3.4 -2.6 MENAP -5.7 -2.9 -3.9 -9.7 -7.0 -5.3 Saudi Arabia -9.2 -5.9 -4.5 -10.6 -6.0 -4.0 South Africa -4.4 -4.1 -6.3 -14.0 -11.1 -7.9 Low-Income Developing Countries -3.6 -3.4 -4.0 -6.2 -5.1 -4.5 Nigeria -5.4 -4.3 -4.8 -6.7 -5.0 -5.1 Oil Producers -2.9 0.1 -0.6 -10.7 -5.7 -3.8
Sources: IMF, CMS (HK) Research
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Figure 2: General government gross debt (% of GDP) Projections 2017 2018 2019 2020 2021 2022 World 81.4 81.7 83.0 98.7 99.8 100.3 Advanced Economies 104.5 104.0 105.3 125.5 125.6 125.6 United States 105.7 106.9 108.7 131.2 133.6 134.5 Euro Area 87.6 85.7 84.0 101.1 100.0 98.4 France 98.3 98.1 98.1 118.7 118.6 120.0 Germany 65.0 61.6 59.5 73.3 72.2 68.5 Italy 134.1 134.8 134.8 161.8 158.3 156.6 Spain 98.6 97.6 95.5 123.0 121.3 120.4 Japan 234.5 236.6 238.0 266.2 264.0 263.0 United Kingdom 86.2 85.7 85.4 108.0 111.5 113.4 Canada 90.5 89.7 88.6 114.6 115.0 114.7 Emerging Market and Middle-Income Economies 48.1 50.1 52.6 62.2 65.0 67.5 Excluding MENAP Oil Producers 49.7 51.8 54.1 63.7 66.7 69.2 Asia 49.0 50.6 53.8 63.7 67.8 71.4 China 46.4 48.8 52.6 61.7 66.5 71.2 India 69.4 69.6 72.3 89.3 89.9 89.5 Europe 29.6 29.3 29.0 37.8 38.8 39.2 Russia 14.3 13.5 13.9 18.9 19.0 18.5 Latin America 62.3 69.7 70.8 81.6 81.0 80.9 Brazil 83.7 87.1 89.5 101.4 102.8 103.5 Mexico 54.0 53.6 53.7 65.5 65.6 65.4 MENAP 40.1 40.0 44.7 53.4 53.8 53.5 Saudi Arabia 17.2 19.0 22.8 33.4 34.3 34.1 South Africa 53.0 56.7 62.2 78.8 82.8 85.7 Low-Income Developing Countries 42.4 42.9 43.3 48.8 49.7 49.1 Nigeria 25.3 27.7 29.1 35.0 35.5 36.2 Oil Producers 42.3 44.2 45.6 57.6 58.0 58.0
Sources: IMF, CMS (HK) Research
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Figure 3: Total assets of major central banks ballooned since the pandemic
25 (USD tr) Fed ECB BoJ
20
15
10
5
0
Sources: Wind, CMS (HK) Research
Faster-than-expected rebound but momentum slowing
Rapid recovery achieved. Data suggests that major economies recovered at a faster pace than expected after re- openings since May and June, thanks to ramp-up of testing, improvement of treatment, and more importantly, massive policy supports from governments and central banks. Since July, both Markit manufacturing and services PMI were both back above 50 for major economies, including the US, the Eurozone and the UK. Strong rebound was recorded in 3Q20. The US economy grew by an annualized 33.1% qoq (equivalent to 7.4% qoq) in the third quarter, beating the consensus estimate of 32.0%. The Eurozone economy grew at 12.6% qoq in 3Q20, much higher than the consensus estimate of 9.4%. China leads most other major economies in post-COVID recovery.
Signs of slowdown is evident in recent economic data. Over the past two months, COVID-19 regained its foothold in major countries, especially in the US and Europe. Daily new infections were well above the peak levels registered during the previous wave. Hospitalization hit record levels, threatening to exhaust medical system resources. Red flags are appearing across high-frequency measures such as retail foot traffic. According to data from OpenTable, in- restaurant dining fell again in the US, Germany, the UK and Canada. Services PMI in the Eurozone and the UK dipped in November, after a new round of lockdown measures were adopted by governments.
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Policy-makers around the world are faced with an increasingly challenging task of balancing between health and economic concerns. After the infections soared again in September and October, governments in Europe implemented renewed lockdown measures to slow the spread of the virus, which has again cast a shadow on the path ahead. But the restrictions are generally less stringent than the first round in spring (Figure 8), as the governments are wary of the economic damage caused by lockdown measures. Schools, universities and some businesses are allowed to remain open. Nevertheless, the renewed restrictions are faced with growing pushback from the public, largely due to pandemic fatigue arising from social distancing measures and job loss from business shutdowns.
Figure 4: Markit PMI by country: recovery on the way since June Markit PMI 2019 2020 Manufacturing Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov United States 50.4 50.3 51.1 51.3 52.6 52.4 51.9 50.7 48.5 36.1 39.8 49.8 50.9 53.1 53.2 53.4 56.7 China 49.9 50.4 51.4 51.7 51.8 51.5 51.1 40.3 50.1 49.4 50.7 51.2 52.8 53.1 53.0 53.6 54.9 Eurozone 46.5 47.0 45.7 45.9 46.9 46.3 47.9 49.2 44.5 33.4 39.4 47.4 51.8 51.7 53.7 54.8 53.8 Germany 43.2 43.5 41.7 42.1 44.1 43.7 45.3 48.0 45.4 34.5 36.6 45.2 51.0 52.2 56.4 58.2 57.8 France 49.7 51.1 50.1 50.7 51.7 50.4 51.1 49.8 43.2 31.5 40.6 52.3 52.4 49.8 51.2 51.3 49.6 Italy 48.5 48.7 47.8 47.7 47.6 46.2 48.9 48.7 40.3 31.1 45.4 47.5 51.9 53.1 53.2 53.8 51.5 Spain 48.2 48.8 47.7 46.8 47.5 47.4 48.5 50.4 45.7 30.8 38.3 49.0 53.5 49.9 50.8 52.5 49.8 Netherlands 50.7 51.6 51.6 50.3 49.6 48.3 49.9 52.9 50.5 41.3 40.5 45.2 47.9 52.3 52.5 50.4 54.4 Japan 49.4 49.3 48.9 48.4 48.9 48.4 48.8 47.8 44.8 41.9 38.4 40.1 45.2 47.2 47.7 48.7 49.0 India 52.5 51.4 51.4 50.6 51.2 52.7 55.3 54.5 51.8 27.4 30.8 47.2 46.0 52.0 56.8 58.9 56.3 United Kingdom 48.0 47.4 48.3 49.6 48.9 47.5 50.0 51.7 47.8 32.6 40.7 50.1 53.3 55.2 54.1 53.7 55.6 Brazil 49.9 52.5 53.4 52.2 52.9 50.2 51.0 52.3 48.4 36.0 38.3 51.6 58.2 64.7 64.9 66.7 64.0 Canada 50.2 49.1 51.0 51.2 51.4 50.4 50.6 51.8 46.1 33.0 40.6 47.8 52.9 55.1 56.0 55.5 55.8 South Korea 47.3 49.0 48.0 48.4 49.4 50.1 49.8 48.7 44.2 41.6 41.3 43.4 46.9 48.5 49.8 51.2 52.9 Russia 49.3 49.1 46.3 47.2 45.6 47.5 47.9 48.2 47.5 31.3 36.2 49.4 48.4 51.1 48.9 46.9 46.3 Mexico 49.8 49.0 49.1 50.4 48.0 47.1 49.0 50.0 47.9 35.0 38.3 38.6 40.4 41.3 42.1 43.6 43.7 Indonesia 49.6 49.0 49.1 47.7 48.2 49.5 49.3 51.9 45.3 27.5 28.6 39.1 46.9 50.8 47.2 47.8 50.6
Services Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov United States 53.0 50.7 50.9 50.6 51.6 52.8 53.4 49.4 39.8 26.7 37.5 47.9 50.0 55.0 54.6 56.9 57.7 China 51.6 52.1 51.3 51.1 53.5 52.5 51.8 26.5 43.0 44.4 55.0 58.4 54.1 54.0 54.8 56.8 Eurozone 53.2 53.5 51.6 52.2 51.9 52.8 52.5 52.6 26.4 12.0 30.5 48.3 54.7 50.5 48.0 46.9 41.3 Germany 54.5 54.8 51.4 51.6 51.7 52.9 54.2 52.5 31.7 16.2 32.6 47.3 55.6 52.5 50.6 49.5 46.2 France 52.6 53.4 51.1 52.9 52.2 52.4 51.0 52.5 27.4 10.2 31.1 50.7 57.3 51.5 47.5 46.5 38.0 Italy 51.7 50.6 51.4 52.2 50.4 51.1 51.4 52.1 17.4 10.8 28.9 46.4 51.6 47.1 48.8 46.7 Spain 52.9 54.3 53.3 52.7 53.2 54.9 52.3 52.1 23.0 7.1 27.9 50.2 51.9 47.7 42.4 41.4 Japan 51.8 53.3 52.8 49.7 50.3 49.4 51.0 46.8 33.8 21.5 26.5 45.0 45.4 45.0 46.9 47.7 46.7 India 53.8 52.4 48.7 49.2 52.7 53.3 55.5 57.5 49.3 5.4 12.6 33.7 34.2 41.8 49.8 54.1 United Kingdom 51.4 50.6 49.5 50.0 49.3 50.0 53.9 53.2 34.5 13.4 29.0 47.1 56.5 58.8 56.1 51.4 45.8 Brazil 52.2 51.4 51.8 51.2 50.9 51.0 52.7 50.4 34.5 27.4 27.6 35.9 42.5 49.5 50.4 52.3 Sources: Bloomberg, CMS (HK) Research
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Figure 5: Daily new cases (7DMA): major European countries
60,000 Germany United Kingdom France Italy Spain 60,000
50,000 50,000
40,000 40,000
30,000 30,000
20,000 20,000
10,000 10,000
0 0
Sources: Wind, CMS (HK) Research
Figure 6: Daily new cases (7DMA): BRICS countries ex. China
100,000 India Russia South Africa Brazil 100,000
90,000 90,000
80,000 80,000
70,000 70,000
60,000 60,000
50,000 50,000
40,000 40,000
30,000 30,000
20,000 20,000
10,000 10,000
0 0
Sources: Wind, CMS (HK) Research
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Figure 7: Daily new cases (7DMA): major Latin American countries ex. Brazil
16,000 Argentina Colombia Mexico Peru 16,000
14,000 14,000
12,000 12,000
10,000 10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 0
Sources: Wind, CMS (HK) Research
Figure 8: Major European countries: Government response stringency index (100 = most stringent)
100 100 Germany United Kingdom France Italy Spain
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Sources: Oxford COVID-19 Government Response Tracker, CMS (HK) Research
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Vaccine within sight: the beginning of the end?
Vaccines could become available earlier than expected based on recently announced late-stage trial data. On November 9, Pfizer/BioNTech announced that their COVID-19 vaccine candidate achieved 90% efficacy in the first interim analysis from the phase 3 trial. On November 16, Moderna announced that its COVID-19 vaccine, mRNA 1273, was 94.5% effective based on interim data from late stage clinical trial. On November 23, AstraZeneca announced that its AZD1222 vaccine’s jointly developed with the University of Oxford Phase 3 trial in the UK and Brazil have shown an average efficacy rate of 70%. A handful of other vaccine candidates are in late-stage studies (Figure 9). We expect more interim data of late stage to arrive over the next few months. However, significant uncertainties remain regarding the production and distribution. For example, the Pfizer/BioNTech’s mRNA vaccine need to be stored and transported at minus 70C°, which poses significant challenge for widespread distribution, even in developed countries.
Vaccines will experience supply shortage and “Rich” nations benefit first and most. Oxfam estimated that nearly two thirds of the world’s population will not have a vaccine until at least 2022, even if all five leading vaccine candidates currently in phase 3 clinical trial succeed. The production capacity is far from sufficient for proper population coverage to achieve herd immunity in any country. “Rich” nations are first in line to get the vaccine. According to Oxfam, wealthy nations representing just 13% of worlds’ population have snapped up 51% of the promised doses of leading COVID- 19 vaccine candidates. On per-capita basis, the UK has built the largest and most diversified vaccine portfolio, having secured deals on several leading vaccine candidates, equivalent to five doses per head of population. The UK is followed by the US, Canada, Japan and the EU. This means advanced economies will benefit first from successful vaccines, while developing countries and low-income nations will not get access to sufficient vaccines next year.
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Figure 9: COVID-19 vaccine in phase 3 clinical trial stage Start Vaccine Company Platform Stage Description Location NCT# Date Approved for emergency use in CoronaVac Chinese program to vaccinate China, 1 Sinovac Inactivated P3 Jul-20 NCT04456595 (PiCoVacc) high-risk groups (eg. medical Brazil staff).
China approved the world's first Wuhan Institute of vero-cell-derived inactivated ChiCTR2000034780 2 Inactivated Vaccine Biological Products Inactivated P3 Jul-20 China COVID-19 vaccine for human ChiCTR2000039000 (Sinopharm) trials.
Beijing Institute of June- 3 BBIBP-CorV Biological Inactivated P3 20 See description for #2 above. China NCT04560881 Products(Sinopharm) (phII)
Enrolling 50,000+ individuals to Non- AZD1222(ChAdOx1- University of Oxford/ Jun- test its vaccine candidate, which 4 replicating P3 Global ISRCTN89951424 S) AstraZeneca 20 uses a non-replicating virus to viral vector deliver RNA into cells.
Uses viral vectots to deliver CanSino Bio/Beijing Non- Aug- antigens to express SARS-CoV- China, NCT04526990 5 Ad5-nCoV Institute of replicating P3 20 2 spike protein. Approved for UAE NCT04540419 Biotechnology viral vector limited use in Chinese military.
1 liquid and 1 powder version of adenovirus vector-based vaccine will be tested. The Institute sparked controversy in Non- May when its director stated Gamaleya Research Aug- Russia, NCT04530396 6 Sputnik-V replicating P3 that he and other researchers Institute 20 Belarus NCT04564716 viral vector had tried the vaccine on themselves before starting clinical trials. Russia approved vaccine before conducting P3 trial.
Delivers the SARS-CoV-2 spike Non- Sep- protein into cells using an 7 Ad26COVS1 Janssen replicating P3 Global NCT04505722 20 inactivated virus (Ad26) as the viral vector delivery vector.
Encodes the DNA of the spike protein antigen to stimulate an Protein Aug- immune response. The study Australia, NCT04611802 8 NVX-CoV2373 Novavax P3 subunit 20 will test the candidate with and EU 2020-004123-16 without the company's Matrix-M adjuvant.
First to dose a human in the US. Vaccine consists of a synthetic strand of mRNA designed to 9 mRNA-1273 Moderna RNA P3 Jul-20 USA NCT04470427 elicit an immune response to produce antibodies against SARS-CoV-2.
First COVID-19 vaccine trial in Germany, Pfizer, BioNTech, Germany. It will test 4 different 10 BNT162 RNA P3 Jul-20 USA, NCT04368728 Fosun Pharma candidates of different mRNA China formats and target antigens.
Sources: FDA, WHO, Company websites, Artis Ventures, CMS (HK) Research
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Expect global economy to normalize in 2H21; recovery likely to be uneven across countries
In its latest World Economic Outlook published in October, the IMF expects world GDP to contract by 4.4% in 2020 and rebound by 5.2% in 2021, implying that the output level in 2021 would be 0.6% higher than 2019. However the pace of recovery is likely to be uneven across countries. 1) For advanced economies, economic output will contract by 5.8% in 2020 and rebound by 3.9% in 2021, leaving the economy 2.1% below 2019 level (Figure 11). The US is expected to experience smaller contraction in 2020 as the lockdown measures implemented are much less draconian than European countries. Southern Europe are likely to suffer larger and longer-lasting recessions than Northern and Western Europe, as the former (Italy and Spain) are heavily reliant on tourism sectors and have smaller fiscal room due to their higher debt levels. 2) China will be the only major economy in the world to see positive growth in 2020. The economy will record an accumulated growth of 10.3% over 2020 to 2021. For emerging market and developing economies excluding China, growth is projected to be -5.7% in 2020 and 5.0% in 2021. 3) The ASEAN-5 is the only major economy outside China expected to recover to above pre-pandemic level in 2021. India’s economy is expected to experience a record contraction in 2020.
Looking ahead, the risk associated with economic recovery remains high. The strength of recovery ahead will be highly dependent on the pandemic infection rates and the roll-out of the vaccine, as well as continued support from governments and central banks. We expect more visible and certain economic recovery trajectory in 2H21 when the impact of pandemic gradually fades away.
Positive factors: 1) Compared with the outbreak in spring, governments, hospitals and healthcare professionals are now better prepared with drugs, equipment and know-hows to tackle outbreaks and treat patients. Death rates have been falling even as cases are rising. Step-up of mass-scale testing and tracing program reduced the necessity of stringent lockdown. Social distancing measures introduced by governments are less draconian and more targeted, reducing unnecessary hindrance to the economy. 2) Positive progress made in vaccine development helped to lift confidence, but the timeline remains highly uncertain and large scale manufacturing and distribution of vaccine is critical. 3) Certain economic activities, especially industrial production and construction, see less interruption by the outbreak, while consumer spending are supported by preferential fiscal policies across countries.
Negative factors: 1) Excess liquidity could bring long-term issues. We believe policies will continue to play a crucial role in the next phase of recovery, after the initial rebound. Massive policy support by governments and central banks around the world have helped to restore confidence and prevent massive bankruptcy and layoff. High government debt level was inevitable to prevent a worse recession. However, previous crisis have taught us that tightening policies and withdrawing supports prematurely could deal another blow to the stagnant recovery. 2) Energy prices have stayed at trough levels for long, suggesting that global demand remains weak. 3) A number of major equity markets have reached record high albeit weak fundamentals, which implies asset inflation caused by abundant liquidity. 4) It is noticeable that the gap between the rich and poor has widened.
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Figure 10: World GDP growth projections: plunge to negative territory in 2020 and back to growth in 2021 Projections
(yoy%) 2018 2019 2020 2021
World Output 3.5 2.8 -4.4 5.2
Advanced Economies 2.2 1.7 -5.8 3.9
United States 3.0 2.2 -4.3 3.1
Euro Area 1.8 1.3 -8.3 5.2
Germany 1.3 0.6 -6.0 4.2
France 1.8 1.5 -9.8 6.0
Italy 0.8 0.3 -10.6 5.2
Spain 2.4 2.0 -12.8 7.2
Japan 0.3 0.7 -5.3 2.3
United Kingdom 1.3 1.5 -9.8 5.9
Canada 2.0 1.7 -7.1 5.2
Other Advanced Economies 2.7 1.7 -3.8 3.6
Emerging Market and Developing Economies 4.5 3.7 -3.3 6.0
Emerging and Developing Asia 6.3 5.5 -1.7 8.0
China 6.7 6.1 1.9 8.2
India 6.1 4.2 -10.3 8.8
ASEAN-5 5.3 4.9 -3.4 6.2
Emerging and Developing Europe 3.3 2.1 -4.6 3.9
Russia 2.5 1.3 -4.1 2.8
Latin America and the Caribbean 1.1 0.0 -8.1 3.6
Brazil 1.3 1.1 -5.8 2.8
Mexico 2.2 -0.3 -9.0 3.5
Middle East and Central Asia 2.1 1.4 -4.1 3.0
Saudi Arabia 2.4 0.3 -5.4 3.1
Sub-Saharan Africa 3.3 3.2 -3.0 3.1
Nigeria 1.9 2.2 -4.3 1.7
South Africa 0.8 0.2 -8.0 3.0
Low-Income Developing Countries 5.1 5.3 -1.2 4.9 Sources: IMF, CMS (HK) Research
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Figure 11: World GDP projections (2019=100)
104 102 102.5 100 102
98 100.6 100 96
98 94 96.7 97.9
96 92 95.6 90 94 94.2 United States 88 Emerging Market and Developing Economies Japan 92 World Output 86 Euro Area United Kingdom Advanced Economies 90 84 2019 2020 2021 2019 2020 2021
105 115
110 100
105
95 100
95 90
China 90 ASEAN-5 Germany 85 Russia France 85 Italy Brazil Spain India 80 80 2019 2020 2021 2019 2020 2021
Sources: IMF, CMS (HK) Research
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China economy: momentum for steady growth to maintain in 2021E
Production-led recovery is becoming more broad-based and consumption-driven
Since the resumption of production and business in February, China has witnessed steady economic recovery. Industrial production returned to positive growth in April, and has been accelerating at solid pace thereafter. More recently, consumption demand also started to gather steam, with retail sales rising for the first time in August. Accumulated fixed asset investment rose 1.8% in October, led by property development investment, which is up by 6.3% on year-to-date basis. Export growth consistently beat consensus over July to October (7.2%, 9.5%, 9.9% and 11.4% yoy). Trade surplus rose 34% yoy in 3Q20, and net export contributed to 13% of real GDP growth in 3Q20. All three components of GDP, i.e. consumption, investment and net export, made positive contribution to 3Q GDP growth. China is on track to achieve positive growth in 2020, which is in stark contrast with most other nations struggling with virus outbreak and recessions.
Figure 12: Share of contribution to China’s GDP growth
Contribution to quarterly GDP growth (ppt)
6%
4%
2%
0%
-2%
-4%
-6%
Final consumption expenditures Gross capital formation Net exports of goods and services
Sources: Wind, CMS (HK) Research
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Figure 13: China value-added industrial production Figure 14: China retail sales
15% Industrial production (yoy%) 20% Retail sales (yoy%)
15% 10% 10%
5% 5%
0% 0% -5%
-5% -10%
-15% -10% -20%
-15% -25%
Sources: Wind, CMS (HK) Research Sources: Wind, CMS (HK) Research
Figure 15: China fixed asset investment Figure 16: China goods export and import
25% Total FAI (ytd, yoy%) 30% China export (in USD) (yoy%) Manufacturing China import (in USD) (yoy%) Infrastructure Property development 15% 20%
5% 10%
-5% 0%
-15% -10%
-25% -20%
-35% -30%
Sources: Wind, CMS (HK) Research Sources: Wind, CMS (HK) Research
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Export witnessed strong growth concentrated in a few categories
In 3Q20, electrical machinery and equipment, textile articles (mainly PPEs such as masks), machinery and mechanical appliances, furniture, bedding and mattresses rose by 10%, 192%, 14% and 26% yoy respectively, and together contributed to more than 90% of export growth (Figure 17). We see several reasons behind the better-than-expected export growth: 1) demand for personal protective equipment and healthcare equipment amid worldwide outbreak; 2) demand driven by home office, including personal computers; 3) robust real estate related needs, including furniture and home appliances, due to a low interest rate environment and longer time staying at home for social distancing; 4) relocation of production to China due to pandemic-related production and supply-chain disruption in other countries.
Figure 17: China’s export growth was concentrated in a few categories in 3Q20 3Q20 Category HS code Export growth (yoy%) Share of contribution to growth Electrical machinery and equipment 85 10.0% 30.6% Other textile articles 63 192.1% 25.1% Machinery and mechanical appliances 84 14.0% 24.9% furniture, bedding and mattresses 94 26.0% 11.1% Other categories 1.4% 8.3% Total export 8.8% 100.0% Sources: Wind, CMS (HK) Research
Figure 18: China’s export growth by major destinations
50% EU Japan Asean US UK
40%
30%
20%
10%
0%
-10%
-20%
Sources: Wind, CMS (HK) Research
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Service sector still depressed but shows upbeat signal
In 2Q and 3Q20, GDP growth of tertiary industry (1.9% and 4.3% yoy) was slower than that of secondary industry (4.7% and 6.0% yoy) (Figure 19). This hasn’t been the case over the past seven years, when tertiary industry consistently registered stronger growth than secondary industry. During the first three quarters, tertiary industry’s share of contribution to GDP growth was 30.5% (secondary industry: 49.2%), far below the average share of contribution of 60.5% registered over 2016 to 2019 (Figure 20).
Growth rates diverged among the sub-sectors of tertiary industry since the pandemic. Despite China’s relative strength in containing the disease, sporadic outbreaks took place periodically. Certain services sector activities are depressed due to regular prevention and control measures in place. Sectors requiring less personal interactions, such as IT & software and financial intermediation, remained robust with high single-digit to double digit growth. Transport, storage & post and wholesale & retail returned to positive growth in 2Q20, albeit at slower pace compared to pre- pandemic levels. However, growth rates of accommodation & catering services and leasing & commercial services remained in negative territory in 3Q20 (Figure 21). Nevertheless, recent data points to a more upbeat picture for service sector. Monthly retail sales data revealed that catering revenue returned to positive growth for the first time in October (Figure 23). Monthly service sector production index rose 7.4% yoy in October (September: 5.4%), almost back to pre-pandemic trajectory (Figure 22).
Figure 19: China’s GDP growth by industry: tertiary industry bear the brunt of pandemic but is catching up
20% GDP growth by industry (yoy%)
15%
10%
5%
0%
-5%
-10%
Primary industry Secondary industry Tertiary industry
Sources: Wind, CMS (HK) Research
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Figure 20: Share of contribution to China’s GDP growth by industry: tertiary industry dropped
70% Share of contribution to GDP growth (%)
60%
50%
40%
30%
20%
10%
0%
Primary Industry Secondary Industry Tertiary Industry
Sources: Wind, CMS (HK) Research
Figure 21: Tertiary sector growth by sub-sector
IT and Financial Real Estate Transport, Wholesale Accommodation Leasing and Others software intermediation storage and and retail and catering commercial post services service
1Q18 26.8 2.6 4.6 7.7 7.2 7.3 12.1 7.3 2Q18 28.9 5.2 4.0 8.1 7.1 7.0 11.4 7.0 3Q18 29.6 5.2 3.8 8.3 6.7 6.5 11.1 8.1 4Q18 26.2 6.2 1.8 8.8 5.9 6.1 9.4 7.9 1Q19 21.2 7.1 2.6 7.3 5.8 6.0 8.5 5.5 2Q19 20.1 7.6 2.5 7.3 6.0 6.4 7.5 5.7 3Q19 18.1 6.9 4.2 7.5 5.5 6.7 8.6 6.4 4Q19 15.6 7.0 2.5 6.3 5.4 6.2 9.9 6.0 1Q20 13.2 6.0 -6.1 -14.0 -17.8 -35.3 -9.4 -1.8 2Q20 15.7 7.2 4.1 1.7 1.2 -18.0 -8.0 -0.9 3Q20 18.8 7.9 6.3 3.9 3.1 -5.1 -6.9 2.3 Sources: Wind, CMS (HK) Research
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Figure 22: China service sector production index Figure 23: China catering revenue
10% 20%
8% 10% 6%
4% 0%
2% -10% 0%
-20% -2%
-4% -30%
-6%
-40% Retail sales (yoy%) -8% Catering Service sector production index (yoy%) Commodity retail -10% -50%
Sources: Wind, CMS (HK) Research Sources: Wind, CMS (HK) Research
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Expect China economy to grow by 9% in 2021E driven by both consumption and manufacturing investment
Looking ahead, CMS house view holds that: 1) GDP growth rate could bounce back to 9.1% in 2021E under base case, with consumption and manufacturing investment as major driver. Our forecast is above Bloomberg consensus estimate of 8.2%. The compound annual growth rates (CAGR) for 2020 and 2021 is hence 5.5%. Quarterly GDP forecast are 17.9%, 7.8%, 6.5% and 5.4% respectively; 2) CPI and PPI will rise 1.0% and 0.6% respectively with no significant inflation pressure; 3) property development will no longer be the major growth driver; 4) the overall policy tone for fiscal and monetary policy is likely to stay neutral, given the outlook of steady economic expansion and a shift of policy design from “counter-cyclical” to “cross-cyclical” (跨周期调控). The latter focuses more on dealing with longer- term issues and challenges faced by the economy which extend into more than one cycles; 5) RMB is likely to remain strong against USD. USDCNY could strengthen to 6.45 in mid-2021E, and 6.05 by the end of 2021E, as a result of US dollar index entering into long-term weakening cycle. PBOC recently signaled a higher tolerance for strong Renminbi, through a series of policy measures including expanding QDII quota, reducing foreign exchange reserve requirement ratio for forward sales and settlement to zero, and removal of counter-cyclical factor (based on CMS A-share Macro Team).
Major downside risks to economic growth could come from: 1) infrastructure investment falling short of expectation, due to constraints on local government’s fiscal resources; 2) property development investment no longer a driver due to new policies of “three red lines”1 to better regulate financing and leverage ratio. Since 2018, growth rate of property development investment has remained above overall fixed asset investment. In the first ten months of 2020, property market showed resilience with property development investment rising 6.3% compared to last year; property sales by value/area rising 5.8%/0.0% (strong growth of 21.8%/11.7% over August to October). After the introduction of “three red lines” in August, land area purchased by developers started to decelerate (Figure 26). Historically, land area purchased has been a leading indicator for property development investment. CMS house view expects property development investment growth to slow down to 3-5% yoy growth in 2021E (vs. 8% CAGR over 2016 to 2020E); 3) uncertainties related to foreign policies of the incoming Biden Administration.
1 In August 2020, in a bid to reduce excessive leverage in the real estate sector, regulators asked 12 major property developers to reduce their debt levels. Regulators highlighted “three red lines”, which refers to caps on three key leverage indicators including 1) liability to asset (excl. advance receipts) ratio < 70%, 2) net debt to equity ratio < 100%, and 3) cash to short-term debt ratio >100%. The developers will have three years to reduce borrowings and meet the targets. The rule will expand to cover the whole sector in 2021, according to Caixin. To access our research reports on the Bloomberg terminal, type NH CMS
Figure 24: China economic forecast 2020E 2021E 1QE 2QE 3QE 4QE Growth rate (yoy%) GDP 2.1 9.1 17.9 7.8 6.5 5.4 CPI 2.5 1.0 0.0 1.9 1.3 0.7 PPI -2.0 0.6 -0.6 1.6 0.8 0.5 Retail sales -1.2 13.5 25.8 11.2 9.4 7.8 Industrial production 2.4 10.5 23.6 7.9 6.8 5.6 Export 1.4 5.2 23.5 2.3 1.0 -0.4 Import 0.6 3.5 7.1 12.5 -1.2 -2.0 Fixed asset investment 2.1 7.3 24.0 11.8 9.8 7.3 M2 10.5 9.0 10.4 9.7 9.5 9.0 Renminbi loan balance 13.1 10.7 12.4 11.7 11.2 10.7 Period end value USDCNY 6.70 6.05 6.65 6.45 6.30 6.05 Sources: Wind, CMS A Share Research
Figure 25: Property development investment growth outperformed overall fixed asset investment
30%
20%
10%
0%
-10%
-20%
-30%
Total FAI (ytd, yoy%) Manufacturing Infrastructure Property development -40%
Sources: Wind, CMS (HK) Research
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Figure 26: Land area purchased by developers started to decelerate amid regulation
40% 20%
30% 15% 20%
10% 10%
0% 5% -10%
-20% 0%
-30% -5% -40% LHS: Land area purchased (yoy%, 3mma) RHS: Property investment (yoy%, 3mma) -50% -10%
Sources: Wind, CMS (HK) Research
Figure 27: Renminbi exchange rate strengthened since June
7.2 LHS: USDCNY RHS: CFETS RMB Index 90
92 7.0
94 6.8
96 6.6 98
6.4 100
6.2 102
6.0 104
Sources: Wind, CMS (HK) Research
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14th FYP: the long-term blueprint to focus on domestic demand and tech independence
On November 3, Xinhua News Agency issued the "Proposals of the Central Committee of the CPC on Formulating the 14th Five-Year Plan for National Economic and Social Development and Long Term Goals for 2035". Based on past experience, the full draft of the proposal should be circulated and approved by the NPC Standing Committee during the annual Two Sessions in March 2021. We expect the key policy document to lay solid foundation for China’s economic transformation in the era of increasingly complicated global geopolitical landscape.
Highlight the quality and sustainability of economic growth. Innovation and technology will be the key pillar of the future growth engine. We expect favorable government policies for key technology sectors, including internet and software, big data and cloud, AI, smart and advanced manufacturing, education and healthcare, and R&D services. Besides, renewable energy and environmental protection sectors may also benefit as environment remains a key commitment after China announced the goal of achieving “carbon neutrality” by 2060.
Focus on “Dual Circulation” for economic development with domestic consumption taking a bigger role. Over the past few months, top officials of Chinese central government have repeatedly emphasized the need to firmly implement the strategy of expanding domestic demand, establish a “dual circulation” development pattern in which domestic economic cycle plays a leading role, while international economic cycle remains its extension and supplement and strive to build self-developed industrial chains and supply chains which are controllable, safe and reliable. Under “dual circulation”, domestic consumption will play a more important role in driving economic growth. In 2019, the three components of China’s GDP, namely final consumption expenditures, gross capital formation and net exports of goods and services accounted for 55.4%, 43.1% and 1.5% of GDP respectively, and contributed 57.8%, 31.2% and 11.0% to GDP growth. However, the final consumption expenditures include consumptions by both residential households and governments. Household consumption accounts for 70% of total consumptions, and hence 38.8% of GDP. By comparison, personal consumption expenditures accounted for 67.8% of US GDP in 2019. We expect policy focus will stress improving the scale and quality of urbanization, reducing income inequality and enhancing the quality of public services. Meanwhile, by emphasizing “dual circulation”, it doesn’t mean Chinese economy is turning inward. Instead, reform and opening up will remain a key national strategy.
Enhance technological independence. Over the past few years, the US has been targeting the supply chain of Chinese high-tech firms. Potential partial decoupling in technology sector will pose threat to China’s long-run economic growth. Hence the 14th FYP proposal stated that China should stress the core position of innovation and enhance self-reliance. In 2019, China’s R&D intensity (R&D expenditure as percentage of GDP) was only 2.23%, a slight improvement compared to 2015 (2.1%), but still far below the levels of developed nations such as the US (2.83%) and Japan (3.26%). China still has a long way to go to achieve tech independence.
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Downplay numerical growth targets; aim to become high-income country. The Proposal did not explicitly suggest a growth target for the next five years. By comparison, the 13th Five-Year Plan laid out specific targets of “maintaining medium and high-speed economic growth” and “doubling the GDP and the income per capita of urban and rural residents by 2020 compared to 2010”. We expect the plan to downplay explicit numerical growth targets to enhance flexibility in policy making. While explaining the Proposal, President Xi Jinping said it is completely possible for China’s economy to reach the current high-income country standard by the end of the 14th Five-Year Plan period, and to double the GDP or income per capita by 2035. According to the World Bank, the world’s economies are assigned into four categories based on income level, i.e., low, lower-middle, upper-middle, and high income, based on GNI per capita in current USD. In 2019, China’s GNI per capita reached USD10,410, still 17% below the threshold of USD12,535 for the current high income countries. Our calculation shows that China’s GDP per capita needs to achieve 3.8% CAGR over the next five years to reach the goal, which roughly translates into average annual GDP growth of 4.2% after taking account of population growth. For GDP to double by 2035 compared to 2020, our calculation shows average annual GDP growth needs to reach around 4.7% over the next fifteen years. We believe the underlying targets are in line with China’s potential growth rate.
Figure 28: China’s GDP by expenditure approach: consumption, investment and net export
Share of GDP (%) 100%
90% Net exports of goods and services 80%
70% Final consumption expenditures: government 60%
50% Final consumption expenditures: resident 40%
30% Gross capital formation 20%
10%
0%
Sources: Wind, CMS (HK) Research
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Figure 29: China’s GDP growth by expenditure approach
Share of contribution to GDP growth (%) 100%
80% Final consumption 60% expenditures
40%
Gross capital 20% formation
0%
Net exports of -20% goods and services -40%
-60%
Sources: Wind, CMS (HK) Research
Figure 30: China became an upper-middle income country in 2010, and aim to become a high-income country in 2025
14,000 GNI per capita (USD)
12,000
10,000
8,000
Upper-middle 6,000 income
4,000 Lower-middle income
2,000 Low income
0 China
Sources: World Bank, CMS (HK) Research
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Figure 31: World Bank country classifications by income level (2020) Country Gross national income per capita (2019, USD, Atlas method and PPP) Classification Sw itzerland 85,500 Norw ay 82,500 United States 65,760 Qatar 63,410 Denmark 63,240 Ireland 62,210 Singapore 59,590 Sw eden 55,840 Australia 54,910 Netherlands 53,200 Austria 51,300 Hong Kong SAR, China 50,840 Finland 49,580 Germany 48,520 Belgium 47,350 Canada 46,370 United Arab Emirates 43,470 Israel 43,290 High income New Zealand 42,670 France 42,400 United Kingdom 42,370 Japan 41,690 Italy 34,460 Kuw ait 34,290 Korea, Rep. 33,720 Spain 30,390 Portugal 23,080 Saudi Arabia 22,850 Czech Republic 22,000 Puerto Rico 21,970 Greece 20,320 Slovak Republic 19,320 Hungary 16,140 Poland 15,200 Chile 15,010 Romania 12,630 Russian Federation 11,260 Argentina 11,200 Malaysia 11,200 China 10,410 Turkey 9,610 Mexico 9,430 Brazil 9,130 Upper-middle Kazakhstan 8,810 income Thailand 7,260 Peru 6,740 Colombia 6,510 Ecuador 6,080 South Africa 6,040 Iraq 5,740 Indonesia 4,050 Algeria 3,970 Philippines 3,850 Ukraine 3,370 Morocco 3,190 Egypt, Arab Rep. 2,690 Low er-middle Vietnam 2,540 income India 2,130 Nigeria 2,030 Bangladesh 1,940 Pakistan 1,530 Ethiopia 850 Uganda 780 Low income Congo, Dem. Rep. 520 Sources: World Bank, CMS (HK) Research
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Figure 32: The long-term objectives through the year 2035 1. China's economic and technological strength, and composite national strength will increase significantly. A new stride will be made in the growth of the economy and the per capita income of urban and rural residents. Making major breakthroughs in core technologies in key areas, China will become a global leader in innovation; 2. New industrialization, IT application, urbanization, and agricultural modernization will be basically achieved. China will finish building a modernized economy; 3. The modernization of China's system and capacity for governance will be basically achieved. The people's rights to participate and to develop as equals will be adequately protected. The rule of law for the country, the government, and society will be basically in place; 4. China will become a strong country in culture, education, talent, sports and health. The well-rounded development of all people and social etiquette and civility will be significantly enhanced. China's cultural soft power will grow much stronger; 5. Eco-friendly ways of work and life will be advanced to cover all areas of society. Carbon emission will steadily decline after reaching a peak, and there will be a fundamental improvement in the environment with the goal of building a Beautiful China basically reached; 6. The opening-up will reach a new stage with substantial growth of the country's strengths for participating in international economic cooperation and competition; 7. The per capita GDP will reach the level of moderately developed countries. The size of the middle-income group will be significantly expanded. Equitable access to basic public services will be ensured. Disparities in urban-rural development, in development between regions, and in living standards will be significantly reduced; 8. The implementation of the Peaceful China initiative will be promoted to a higher level. The modernization of national defense and the military will be basically achieved; 9. People will lead a better life, and more notable and substantial progress will be achieved in promoting well-rounded human development and achieving common prosperity for everyone. Sources: Xinhua, CMS (HK) Research
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Figure 33: Major economic and social development targets for the 14th Five Year Plan (2021-2025) 1. China will strive to make new strides in economic development during the period, aims to realize sustained and healthy economic development on the basis of a marked improvement in quality and efficiency, with growth potentials to be fully tapped. The domestic market will become stronger, the economic structure will be further improved, and the innovation capacity will be significantly strengthened. The industrial base will be upgraded, and the industrial chain will be further modernized. China will see more solid foundation for agriculture, and more balanced development between urban and rural areas and between different regions. The country will also make great progress in developing a modernized economy. 2. With new steps to be taken in reform and opening up, China will further improve its socialist market economy and basically complete the building of a high-standard market system. Market entities will show more vitality, and significant progress will be made in the reforms of the property right system and the market-based allocation of factors of production. With the fair competition system to be further improved, China will basically form the new institutions of a higher-level open economy. 3. China's social etiquette and civility shall be further enhanced, while the core socialist values shall be embraced by the people. A significant improvement is expected to be made in people's intellectual and moral integrity, cultural and scientific qualities, as well as physical and mental health. The systems of public cultural service and cultural industries will be further advanced, with rich cultural and intellectual activities organized for the public. The influence of the Chinese culture will be increased, and the Chinese nation's cohesiveness will be further strengthened. 4. China aims to make new progress in building an ecological civilization, optimize the development and protection of territorial space, and achieve notable results in green transformation of production and lifestyle. The country will allocate energy and resources more appropriately and raise utilization efficiency. It will continue reducing emissions of major pollutants and improving ecological environment, make ecological security shields more solid, and greatly improve urban and rural living environment. 5. The well-being of the people will reach a new level. China will achieve fuller and higher-quality employment, with personal income growth basically in step with economic growth, and marked improvements in distribution structure. The country will also see much more equitable access to basic public services. The education level of the entire population will be continuously improved, while the multi-tiered social security system and health system will be further enhanced. Efforts will also be made to consolidate achievements scored in the fight against poverty and fully promote the strategy of rural vitalization. 6. China will further enhance governance capacity, improve socialist democracy and the rule of law, and demonstrate social fairness and justice. The national administrative system will be perfected, the role of the government will be better played, and the administrative efficiency and credibility will be significantly strengthened. The country will step up the level of social governance, especially at the community level, continuously improve the systems and mechanisms to forestall and defuse major risks, greatly enhance the capability to respond to public emergencies and prevent natural disasters, strengthen security guarantee for development, and make major strides in the modernization of national defense and the armed forces. Sources: Xinhua, CMS (HK) Research
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Hong Kong economy: initial signs of bottoming out
Hong Kong’s local economy fell into recession in 2019 amid double blow from social unrest and Sino-US tension. In 2020, worldwide COVID-19 outbreak dragged the economy further into a lengthy winter. Quarter-on-quarter GDP growth (seasonally adjusted) registered negative growth for five consecutive quarters over 2Q19 to 2Q20. Retail sales growth remained in negative territory for 21 consecutive months since February 2019. Unemployment rate has seen steady deterioration since October 2019. Due to the travel restrictions implemented in the face of outbreak, business and leisure travelling has grind to a halt. This has left permanent scar on Hong Kong. The city, which was once considered a key regional aviation hub and boasted one of the world’s busiest international airport, witnessed shutdown of its flagship regional carrier Cathay Dragon and massive layoff at Cathay Pacific in October.
The 3Q GDP quarterly growth figure of 2.8% (-3.5% yoy) suggests initial signs of bottoming out. Unemployment rate remained steady at 6.4% in October vs. September. Slump in retail sales also narrowed since August, although largely due to base effect. The worst is likely to be over for Hong Kong economy. We expect a moderate recovery of the local economy in 2021. Easing of travel restrictions should boost consumption, which accounts for almost 68% of its GDP. However, a full recovery of the local economy and settlement of political issues might take years. We are concerned about a few risks: 1) although violent protests have largely been brought under control, political turmoil might drag on. Legislative Council election were postponed by one year and will be held in September 2021, potentially introducing political uncertainty to the city during the countdown toward the election; 2) approach of the incoming Biden administration.
In the longer term, we expect Hong Kong to better integrate into the Greater Bay Area. In the recently released "Proposals of the Central Committee of the CPC on Formulating the 14th Five-Year Plan for National Economic and Social Development and Long Term Goals for 2035", the central government stressed the importance of supporting Hong Kong and Macau to better integrate into the overall development of the nation, instead of formulating development strategies on their own. The proposals also specifically mentioned its support for the HKSAR to enhance its competitive advantages and build into an international centre of innovation and technology. We expect Hong Kong to develop new strategic growth drivers, apart from its traditional four pillar industries (financial services, trading and logistics, tourism, and producer and professional services).
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Figure 34: Hong Kong GDP growth Figure 35: Hong Kong retail sales
10% HK GDP growth (yoy%) 40% HK retail sales value (yoy%) HK GDP growth (qoq%, sa) 8% 30%
6% 20% 4% 10% 2% 0% 0% -10% -2%
-20% -4%
-6% -30%
-8% -40%
-10% -50%
Sources: Wind, CMS (HK) Research Sources: Wind, CMS (HK) Research
Figure 36: Hong Kong visitor arrivals Figure 37: Hong Kong unemployment rate
40% Visitor arrivals to HK (yoy%) 6.5% Hong Kong unemployment rate (%)
6.0% 20% 5.5% 0% 5.0%
-20% 4.5%
-40% 4.0%
3.5% -60% 3.0% -80% 2.5%
-100% 2.0%
Sources: Wind, CMS (HK) Research Sources: Wind, CMS (HK) Research
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US economy: A muted start followed by a brighter second half in 2021E Cautiously optimistic about the recovery; expect a brighter 2H underpinned by vaccination
The year of 2020 has witnessed the deepest economic recession in the United States since the Great Depression. Real GDP plummeted by an annualised 31.4% qoq in 2Q20, by far the largest single-quarter contraction since the record began. Although the subsequent rebound of an annualised 33.1% qoq in 3Q20 was also record-breaking, it still left the US economy 3.5% below the pre-pandemic level by the end of 3Q20.
Looking ahead, we believe the trajectory of US economic growth over the coming quarters is highly dependent on the development of COVID-19 and the timing of universal vaccination: 1). We now expect GDP to record a fairly moderate growth in 4Q20 and rise gradually through 1H21, as a result of both the renewed wave of COVID-19 and the waning effects of fiscal stimulus. Although Joe Biden has won the presidency, the substantial likelihood of the Republicans retaining the control of Senate – winning at least one of the two Georgia run-off elections in January – means the chance a new round of fiscal stimulus of USD2tn-plus is low. 2). We still expect Congress to pass a much smaller fiscal stimulus. Rebound in nonfarm payroll is expected to moderate further in 1Q21, mainly due to a slower recovery in aggregate demand. The decline in unemployment rate will also slow in the 1H21. 3). The second half of 2021 could see a clear take-off of economic growth, in anticipation that herd immunity can be achieved through vaccination towards the start of 2H21, which is now our baseline working assumption. Consumption is expected to increase meaningfully and rising business sentiment should facilitate investment decision. Therefore we expect a renewed pick- up of nonfarm payroll gain towards the end of 2021.
Expect monetary policy to remain abundantly accommodative throughout the entire 2021
The Federal Reserve will keep the funds rate at near zero for the entire 2021, we also expect the Fed’s large-scale asset purchases programme to be running at or above the current pace at least before 2H21. We now see the chance of the Fed ramping up its overall bond-buying scale has clearly increased in the last few weeks, thanks to the dashed probability of large fiscal stimulus and worsening third wave. We do not rule out the possibility that the Fed starts to slow down its asset purchases pace in 2H21 if vaccination has boosted the recovery significantly more than expected, but rates will stay near zero before 2024. Policy uncertainties clearly lie more towards the fiscal side.
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Figure 38: Fed’s Balance Sheet Figure 39: Fed’s Treasury Purchases
8 5,000 US Treasuries Securities (bn USD) (tr USD) Fed's Cumulative Holding of Treasuries Mortgage-Backed Securities 4,500 (since 4 March) 7 Federal Agency Debt Others Cumulative Increase in Treasury Public 4,000 Debts Outstanding (since 4 March) 6 3,500
5 3,000
4 2,500
2,000 3
1,500 2 1,000 1 500
0 0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
Figure 40: Fed 13 (3) Emergency Lending Facilities Figure 41: US M2 Growth
250 1,200 30 (bn USD) PPPLF MSLP MMLF CPFF LHS: M2 mom (bn USD, sa) CCF MLF TALF PDCF 1,000 RHS: M2 growth rate (mom, %) 25 200
800 20 150 600
15
400 100 10 200
50 5 0
0 -200 0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
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COVID-19 development and vaccine
As the outgoing President Trump has declared that he would not impose any further lockdown as long as he is in charge of the White House, the containment measures will now lie solely on states governors and municipal mayors. The recent Thanksgiving holiday was likely to see a temporary increase of transmission caused by surge in travelling and socialisation. However, as the transmission – symptom – testing process takes time to be reflected in infections numbers, we would expect a delay of uptick in the headline case numbers toward the early December.
The successes of Pfizer-BioNTech and Moderna vaccines’ phase 3 clinical trial and the efficacy rates they have shown have meaningfully changed economic outlook for next year – as the US has a large order with the two vaccines – but not for the near term. Issues remain regarding vaccination: first, it is still unknown whether the announced vaccines can actually prevent the virus from transmitting once an individual is vaccinated, or it can merely protect one individual from getting COVID-19; this could affect how effective a vaccine is in terms of reducing overall transmission and therefore alter people’s behaviour. Therefore, the uncertainties surrounding vaccine remain high.
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Figure 42: US COVID-19 daily infections Figure 43: US COVID-19 deaths
250,000 7 (000') Daily new cases Daily deaths Daily new cases (7DMA) Daily deaths (7DMA) 6 200,000
5
150,000 4
3 100,000
2
50,000 1
0 0
Sources: Wind, CMS (HK) Research Sources: Wind, CMS (HK) Research
Figure 45: US regional cases breakdown (cases per Figure 44: US COVID-19 hospitalisation rate million residents, 7-day MA)
1,000 Northeast 100,000 Current hospitalization Midwest 900 90,000 South 800 West 80,000
700 70,000
600 60,000
500 50,000
40,000 400
30,000 300
20,000 200
10,000 100
0 0
Sources: The COVID Tracking Project, CMS (HK) Research Sources: Wind, CMS (HK) Research
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Consumption remains the cornerstone; yet service consumption likely lagging behind at least in 1H21
The economic rebound in 3Q20 has sent personal consumption back to within 3.3% of the 4Q19 pre-pandemic level, but there is still a huge gap between the states of goods and service consumptions. As of October, goods consumption has surpassed its pre-COVID peak by 8.0%. In sharp contrast, service consumption is still 6.8% short of the previous peak. We expect this trend and divergence to continue before a vaccine can be accessible to a large part of the general public.
Prior to the completion of vaccination, we think there is still room for goods consumption to rise further, but the scope for such additional gain is relatively limited. The shift of consumption from services to goods seen during the pandemic has been enormous, but some of the goods consumption is now well above the pre-COVID levels, particularly for durable goods, and further gain will become harder. For instance, while COVID-19 has led commuters to be much more cautious about taking public transport and hence caused a surge in demand for autos, it would be hard to imagine consumers to purchase multiple cars in a short interval of few months.
Households’ personal income remained higher than the pre-COVID levels. Even if it keeps falling over the coming months after some of the unemployment-supporting facilities ended at year-end, elevated personal saving should help to offset the potential drag from declining personal income on consumption. In a nutshell, we expect consumption to remain as the major driver of economic growth in 2021.
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Figure 46: US real GDP growth Figure 47: Real GDP level
50 (%) Real GDP Growth 19.5 (tr USD) Real GDP Personal Consumption 40 Private Fixed Investment 19.0 Gov't Expenditures Total GDP only recovered around 30 18.5 2/3 of the COVID loss by 3Q20
20 18.0
10 17.5
0 17.0
-10 16.5
-20 16.0
-30 15.5
-40 15.0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
Figure 48: US goods and service consumption Figure 49: Consumer sentiment
110 Total Goods Services 160 University of Michigan Consumer Sentiment Index Conference Board Consumer Confidence Index
105 140
120 100 100
95 80
60 90
40
85 20
80 0
Note: Data has been rebased as January 2020 = 100 Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
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Figure 50: Personal income Figure 51: Personal savings
21,500 35 (bn USD, annualised rate) Personal Savings Rate (%) 21,000 30
20,500 25 20,000
19,500 20
19,000 15
18,500 10 18,000
5 17,500 Personal Income 17,000 0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
Figure 52: Nominal retail growth Figure 53: Levels are above pre-COVID trends now
20 600 (%) (bn USD) Retail Sales, sa Core Retail Sales (ex. Auto), sa 15 550 Retail Sales Control Group, sa
10 500
5 450
0 400
-5 350
-10 300
-15 Retail Sales, mom 250 Core Retail Sales (ex. Auto), mom Retail Sales Control Group, mom -20 200
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
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Expect equipment investment and business construction investment to recouple in 2H21
Business investment was a huge driver in the 3Q recovery, which was mainly boosted by an annualised 66.7% qoq surge in equipment investment. We now expected this to gain further in 4Q20. Looking ahead, given the initial rebound in goods consumption and extremely low level of inventory, capex in manufacturing industry is likely to remain robust. We expect service sector capex to only start recovering meaningfully in 2H21.
In sharp contrast to equipment investment, business structure investment and construction activity have not only been one of the most serious laggards since re-openings, but also declined further in 3Q20. We think as vaccines start to roll out early next year and profits continue to improve gradually, businesses should feel more confident about the future. However, given the hysteresis observed in this sector from previous business cycles, we reckon businesses will probably only start to increase construction investment towards 2H21.
Housing market has been one of the brightest spots in the ongoing recovery – boosted by ultra-low mortgage rates, demand for more spacious living condition due to the adoption of working from home, and the natural incentive to live in less populated area in order to avoid virus. In light of the extremely low level of both new and existing housing stocks, we believe the surging demand in housing market should support further construction activity and residential investment, which will continue to backstop private investment at least in 1H21.
Figure 54: Durable goods orders Figure 55: Capital goods orders
300 (bn USD) 140 (bn USD)
280 120 260
240 100 220
200 80
180
60 160
140 40 Durable goods orders Capital goods orders 120 Durable goods orders ex-transport Capital goods orders non-defence Durable goods orders ex-defence Capital goods orders non-defence ex-aircraft 100 20
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
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Figure 56: Construction spending Figure 57: NAHB index
800 (bn USD, saar) 90 NAHB Housing Market Index, sa 700
80 Thousands 600 70
60 500
50 400 40 300 30
200 20
100 Nonresidential Private Construction Spending 10 Residential Private Construction Spending - 0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
Labour market could takes years to fully recover
The unprecedented slump in payroll has so far been reversed by slightly more than a half. As of October, total nonfarm payroll has recovered 12mn of the 22mn job lost in March and April, leaving total employment 10mn below the pre- pandemic peak in February. Although it is always encouraging to see payroll bouncing back by more than a half, we would rather view the situation as still half of the glass empty than half of the glass filled. Looking ahead, job gains are likely to moderate meaningfully in 4Q20 and 1Q21 due to the ongoing third wave of COVID-19. The progress of vaccination should lift aggregate demand, and therefore boost job creation in 2H21.
Another concern is the recent rise in permanent job losses. As of October, there still remain 2.4mn unemployed people who are categorised as permanent job losers, and also a large proportion of the temporary job losses have already been refilled. Since permanent jobs are much less likely to be recovered quickly, this will undoubtedly slow job creation at some point. The good news is that scale of permanent job losses has been less severe compared with previous recessions – the peak was 6.8mn in the post-GFC recession – this implies a more modest scarring effect than originally feared. Overall, we do not expect unemployment rate to return to the pre-COVID low of 3.5% until 2022 at earliest.
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Figure 58: Non-farm Payroll is still at 2015 level Figure 59: Unemployment Rates
155 25 (mn) (%)
150 20
145 15
140
10 135
5 130 Unemployment Rate U-6 Unemployed, Marginally Attached, PT Employees on non-farm payrolls 125 0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
Figure 60: Non-farm Payroll Change Figure 61: Temporary and Permanent layoffs
5 20 (mn) (mn) Temporary Layoffs, sa 18 Permanent Job Losers, sa 0 16
14 -5 12
-10 10
8 -15 6
4 -20 Nonfarm Payrolls (mom) 3-month MA 2 6-month MA -25 0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
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Offshore China and US equity markets
Performance and valuation
Global market recovered rapidly and strongly from the pandemic-induced sell-off. From the February 19 peak to the March 23 trough, S&P 500 Index fell 34%, and then rallied 64% up till December 1. From the January 13 peak to the March 19 trough, MSCI China Index fell 23%, and then rallied 53% up till December 1.
Globally, the performances diverged across countries with North Asia being the best performers. Asia Pacific ex. Japan: YTD, MSCI China Index and CSI300 Index outperformed, both delivering returns of 24% in local currencies (25% and 31% respectively in US dollar terms). Apart from onshore and offshore China markets, Korea and Taiwan markets also registered robust returns of 20% and 16% (25% and 21% in US dollar terms). In contrast, ASEAN markets underperformed significantly, with Singapore, Thailand, Indonesia and the Philippines falling by 13%, 10%, 9% and 10% respectively (falling by 12%, 11%, 11% and 5% in US dollar terms). India rose by 8% in local currency (5% in US dollar terms). Emerging markets: YTD, emerging markets outperformed developed markets, largely due to China markets. Within emerging markets, Asian EM markets outperformed Brazil and Russia markets. Developed markets: YTD, US markets outperformed, delivering return of 13%. UK and Europe markets lagged, with -15% and -6% return respectively (-14% and 1% in US dollar terms). Japan market rose by 3% in local currency (7% in US dollar terms).
Performances also diverged among major China/HK market indices. While MSCI China and CSI 300 Index beat most major markets, Hang Seng Index lagged, declining by 6% YTD (falling 5% in US dollar terms). This is mainly attributable to the lower weight of “new economy” sectors and heavy weights of local Hong Kong property and financial names.
The performances have been largely driven by valuation expansion. For MSCI China Index, the consensus forward earnings integer was revised down 14% YTD, while forward P/E multiple expanded by 45%. For S&P 500 Index, the consensus forward earnings integer was revised down 22% YTD, while forward P/E multiple expanded by 45%.
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Figure 62: Equity index performances in local currencies (ranked by YTD performance) 1M 3M 6M YTD 12M MSCI China 3.6% 4.0% 29.0% 24.3% 34.0% CSI 300 7.9% 4.6% 27.6% 23.7% 32.3% Korea KOSPI 16.2% 12.1% 27.6% 19.9% 26.2% Taiwan TWSE 10.7% 9.3% 25.3% 15.7% 20.9% MSCI APJ 10.3% 9.2% 28.9% 13.9% 20.2% US S&P 500 12.0% 3.9% 19.9% 13.4% 16.6% New Zealand NZX 50 5.3% 7.9% 17.0% 10.8% 12.5% MSCI EM 10.9% 9.3% 28.6% 9.8% 17.7% India Sensex 12.7% 14.8% 34.1% 8.2% 9.5% Russia MOEX 17.0% 5.8% 14.5% 3.3% 7.2% Japan Topix 12.0% 9.4% 12.7% 2.7% 4.1% Canada TSX Composite 11.0% 3.9% 13.5% 1.4% 1.5% Malaysia KLCI 9.2% 5.3% 7.5% 0.8% 2.6% Australia ASX 200 11.2% 10.7% 13.2% -1.4% -3.8% Brazil IBOV 18.6% 9.0% 25.7% -3.7% 2.9% Hang Seng 10.2% 5.5% 11.9% -5.8% 0.8% Europe STOXX 14.5% 7.3% 10.6% -5.8% -3.8% Indonesia JCI 11.6% 7.8% 20.4% -9.1% -4.8% Thailand SET 18.9% 8.8% 5.1% -10.1% -10.7% Philippines PSEi 10.8% 20.9% 18.2% -10.3% -9.4% Singapore STI 16.1% 10.9% 10.3% -12.7% -11.9% UK FTSE 100 14.5% 8.9% 3.5% -15.3% -13.1% Sources: Bloomberg, CMS (HK); Data as of 1 Dec 2020
Figure 63: Equity index performances in US dollar terms (ranked by YTD performance) 1M 3M 6M YTD 12M CSI 300 9.9% 8.7% 38.4% 31.1% 41.6% Korea KOSPI 19.5% 20.1% 41.1% 25.3% 34.6% MSCI China 3.6% 4.0% 29.0% 24.9% 35.3% Taiwan TWSE 10.8% 12.6% 31.4% 21.3% 29.2% New Zealand NZX 50 12.6% 12.7% 33.5% 16.0% 23.7% MSCI APJ 10.3% 9.2% 28.9% 13.9% 20.2% US S&P 500 12.0% 3.9% 19.9% 13.4% 16.6% MSCI EM 10.9% 9.3% 28.6% 9.8% 17.7% Japan Topix 12.3% 11.2% 16.2% 7.2% 9.1% India Sensex 14.4% 14.1% 37.9% 4.9% 6.9% Australia ASX 200 16.6% 10.5% 22.9% 3.3% 4.8% Canada TSX Composite 14.4% 4.9% 19.3% 1.6% 4.2% Europe STOXX 18.4% 8.3% 19.7% 1.1% 5.2% Malaysia KLCI 11.1% 6.9% 13.6% 1.0% 5.0% Philippines PSEi 12.1% 22.3% 24.0% -5.1% -4.1% Hang Seng 10.2% 5.5% 11.9% -5.3% 1.8% Indonesia JCI 15.5% 12.0% 24.8% -10.8% -5.2% Thailand SET 22.5% 12.1% 9.9% -11.0% -10.8% Singapore STI 18.6% 12.7% 16.1% -12.3% -9.9% UK FTSE 100 18.7% 9.1% 11.5% -14.4% -9.8% Russia MOEX 22.7% 2.9% 4.7% -15.4% -9.0% Brazil IBOV 29.7% 10.8% 29.0% -26.4% -17.1% Sources: Bloomberg, CMS (HK); Data as of 1 Dec 2020
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Figure 64: YTD performances of major onshore and offshore China market indices
(31 Dec 2019 = 100) 140
MSCI China 130 CSI 300 Hang Seng 120
110
100
90
80
70
Sources: Bloomberg, CMS (HK) Research; Data as of 1 Dec 2020 CMS (A share team) estimates
Figure 65: Major indices YTD performance by valuation adjustment and earnings revision 200% YTD2020 EPS revision P/E expansion 150% Index performance
100%
50%
0%
-50%
-100%
Sources: Bloomberg, CMS (HK); Data as of 1 Dec 2020
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Sector performance witnessed huge dispersion. For MSCI China, Information Technology and Consumer Discretionary outperformed, with YTD gain of 54% and 51% respectively. By contrast, Energy, Real Estate and Financials lagged. Large tech stocks outperformed in both US and China markets. Despite their recent pullback, the combined market cap of FAAMG (Facebook, Apple, Amazon, Microsoft, Google) were up by 49% YTD, while that of ATMJ (Alibaba, Tencent, Meituan and JD.com) were up by 54%, significantly outperforming benchmark indices (S&P 500: 13%; MSCI China: 25%).
Figure 66: MSCI China sector performances (ranked by YTD performance) 1M 3M 6M YTD 12M
Information Technology 10.0% 5.7% 51.0% 53.6% 70.2% Consumer Discretionary -1.1% 2.5% 49.4% 50.9% 58.8% Health Care 1.4% -2.4% 18.9% 39.4% 45.8% Consumer Staples 6.2% -0.4% 28.6% 38.4% 44.7% Communication Services -1.0% 3.5% 25.9% 32.2% 45.8% Materials 16.2% 8.6% 34.3% 20.6% 36.7% Industrials 8.9% 2.4% 14.5% 4.3% 12.7% Diversified Financials 5.3% -3.4% 20.8% 2.1% 17.5% Utilities 11.3% 12.4% 4.3% -4.2% -2.2% Insurance 12.9% 8.6% 18.7% -6.9% -1.7% Banks 13.0% 12.8% 0.6% -9.9% -3.5% Real Estate 7.5% 0.0% 1.9% -16.2% -4.2% Energy 13.3% -2.4% -4.0% -30.0% -22.8%
MSCI China 3.6% 4.0% 29.0% 24.3% 34.0%
Sources: Bloomberg, MSCI, CMS (HK) Research; Data as of 1 Dec 2020 CMS (A share team) estimates
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Figure 67: Performance: FAAMG vs S&P 500 Figure 68: Performance: ATMJ vs MSCI China
170 31 Dec 2019=100 180 31 Dec 2019=100 ATMJ FAAMG 170 160 MSCI China Index S&P 500 Index 150 160 150 140 140 130 130 120 120 110 110 100 100 90 90 80 80
70 70
60 60
50 50
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research Note: FAAMG refers to the largest five tech stocks in the US Note: ATMJ refers to the largest four tech stocks in China (Facebook, Apple, Amazon, Microsoft and Google) (Alibaba, Tencent, Meituan and JD.com)
Valuations of S&P 500 and MSCI China look expensive; H shares’ valuation relatively undemanding. S&P 500 Index is now trading at 23.0x forward P/E, much higher than the historical median level (17.6x) of the past three years. MSCI China Index’s current valuation of 16.7x forward P/E is also higher than its historical median of 12.5x. Even if we use the earnings estimates for the next 12 to 24 months, which have taken into account next year’s profit growth, the valuations of S&P 500 and MSCI China indices are still high in historical context, suggesting an earnings recovery has more or less been priced in. In contrast, Hang Seng Index trades at 12.8x forward P/E, slightly higher than historical median of 11.2x.
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Figure 69: Major indices current forward P/E vs. historical level
40 (x) 3 yrs Range Median Current 35
30
25
20
15
10
5
0
Sources: Bloomberg, CMS (HK) Research; Data as of 1 Dec 2020 for current forward P/E CMS (A share team) estimates
Figure 70: Major indices current forward P/BV vs. historical level
4.0 (x) 3 yrs Range Median Current 3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Sources: Bloomberg, CMS (HK) Research; Data as of 1 Dec 2020 for current forward P/BV CMS (A share te
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Earnings expectations
Earnings are set to witness significant rebound in 2021E, driven by global economy recovery. For MSCI China and Hang Seng Index, consensus now forecasts revenue growth of 6.2%/-6.2% and earnings growth of 0.0%/-21.6% in 2020E, and revenue growth of 14.6%/11.7% and earnings growth of 20.8%/19.0% in 2021E. For S&P 500 Index, market now expects revenue growth of -2.0%/7.7% in 2020E/2021E, and earnings growth of -14.2%/21.9% in 2020E/2021E. Upward revision for earnings has already been taking place over the past few months after persistent downgrades in early 2020. Since end of September, MSCI China/Hang Seng Index EPS integers have been revised upwards by 3%/3% respectively for 2021E, while S&P 500 EPS integer saw upward revision of 3%.
Figure 71: Earnings revision for major indices MSCI China Hang Seng CSI 300 S&P 500 20E 21E 20E 21E 20E 21E 20E 21E
1Q20 -11.8% -9.7% -10.7% -8.3% -3.2% -2.7% -16.1% -10.5% 2Q20 -7.3% -4.2% -8.9% -3.2% -9.3% -6.2% -17.3% -9.2% 3Q20 0.6% 1.0% -12.3% -10.2% -3.6% -2.2% 5.4% 3.3% 4Q20 (QTD) 4.1% 3.2% 3.9% 2.5% -0.2% -0.1% 6.8% 2.6% Sources: Bloomberg, CMS (HK) Research; Data as of 1 Dec 2020 CMS (A share te
Figure 72: Hang Seng consensus EPS integer Figure 73: MSCI China consensus EPS integer
20E 20E 3,400 10.0 21E 21E 22E 9.5 3,200 22E 9.0 3,000 8.5 2,800 8.0 2,600 7.5 2,400 7.0 2,200 6.5
2,000 6.0
1,800 5.5
1,600 5.0
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
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Figure 74: CSI 300 consensus EPS integer Figure 75: S&P 500 consensus EPS integer
460 20E 240 20E 21E 21E 440 22E 220 22E 420 200 400
180 380
360 160
340 140 320 120 300
280 100
Sources: Bloomberg, CMS (HK) Research Sources: Bloomberg, CMS (HK) Research
Liquidity flow
A weaker US dollar should be positive for fund inflow to emerging Asian markets. US dollar index has weakened 10% from its peak level. Our previous study shows DXY displayed strong negative correlation with fund flow to emerging Asian markets.
Southbound inflow from domestic investors should continue to be a favourable factor. Turnover of southbound trading averaged HKD23.9bn on daily basis in the first eleven months of 2020, accounting for 18% of Hong Kong stock market. This is a further pickup compared to 2018 and 2019, during which southbound trading contributed to around 12% of total turnover. YTD, southbound inflow of HKD612bn was recorded, much higher than prior years (2017/2018/2019: HKD340bn/83bn/249bn). Currently, southbound holding takes up around 4.2% of total market cap of Hong Kong market, which implies huge room for further inflow.
Potential inclusion of secondary listed companies will trigger significant southbound inflow. Currently, secondary listed companies are still not eligible for the southbound trading. HKEX said in a statement in February 2020 that regulators and exchanges on both sides are discussing the matter. The potential inclusion would mean Mainland China based investors will have the chance to invest directly in these domestic tech and E-commerce giants for the first time. We expect the acceleration of secondary listing to raise hopes for Chinese regulators and exchanges to admit these firm’s shares into the Stock Connect schemes soon. As of November 30, data from CCASS shows that southbound investors held 4.2% of Tencent (700 HK), 6.4% of Meituan (3690 HK), and 10.1% of Xiaomi (1810 HK), the largest three tech stocks in Hong Kong currently eligible for Stock Connect. We expect domestic investors to snap up similar share of secondary listed stocks upon their inclusion.
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Figure 76: Fund inflow to Asia EM ex. China since 2018
10 (USD bn) 850
0 800
-10 750 -20 700 -30 650 -40 600 -50
-60 550
-70 500
LHS: Accu. fund flow to Asia EM ex.China since 2018 RHS: MXASJ Index
Sources: Bloomberg, CMS (HK) Research
Figure 77: Southbound holding
Southbound holding (% of total HK market cap) 4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
Sources: Wind, CCASS, CMS (HK) Research
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Figure 78: Southbound annual turnover Figure 79: Southbound annual inflow
30 20% 700 3.5
18% 600 3.0 25 16% 500 2.5 14% 20 12% 400 2.0
15 10% 300 611.9 1.5 23.9 8% 10 200 1.0 6% 339.9 246.0 249.3 12.7 100 0.5 10.8 4% 5 9.8 127.2 2% 82.7 3.4 3.7 0 0.0 0 0% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
LHS: Southbound turnover - daily avg (HKD bn) LHS: Southbound net inflow (HKD bn) RHS: As % of HK market LHS: Southbound net inflow - daily avg (HKD bn) Sources: Bloomberg, CMS (HK) Research; Data as of 30 Nov Sources: Bloomberg, CMS (HK) Research; Data as of 30 Nov 2020 2020
Figure 80: Southbound monthly turnover
40 25%
35 20% 30
25 15%
20
10% 15
10 5% 5
0 0%
LHS: Southbound turnover - daily avg (HKD bn) RHS: As % of HK market
Sources: Wind, CMS (HK) Research; Data as of 30 Nov 2020 C
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Figure 81: Southbound monthly inflow
160 1,800
140 1,600
120 1,400 100 1,200 80 1,000 60 800 40 600 20
0 400
(20) 200
(40) 0
RHS: Southbound monthly net inflow (HKD bn) RHS: Southbound accumulated inflow (HKD bn)
Sources: Wind, CMS (HK) Research; Data as of 30 November 2020
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Our view on markets and sector preferences
A shares and MSCI China Index. We have argued since April that A shares and MSCI China should outperform other major markets because: 1) China has successfully brought the COVID-19 outbreak under control, while most other major economies are constantly struggling with the outbreak; 2) China’s economy has shown steady growth since the lockdown was lifted, and the production-led recovery has become more broad-based and consumption-driven; export growth consistently beat expectations; service consumption also shows upbeat signal. Their performance so far have been in line with our expectations.
We remain positive on the outlook of A shares and MSCI China index and expect their continuous outperformance compared with other major markets but their rebound to moderate due to the following reasons: 1) as analysed in previous sections, China’s economic recovery is on the right trajectory and fiscal and monetary policies will remain accommodative. This will translate into rising consumption, expansion of Capex, earnings improvement of listed companies; and better confidence/momentum; 2) however, strong rally has partly factored in earnings outlook; the current valuation looks increasingly stretched. MSCI China Index currently trades at 16.7x forward P/E. Hence the next leg of performance will be driven more by earnings revision instead of further valuation expansion; 3) we expect monetary policy to remain accommodative but liquidity flow into the market could moderate; 4) potential de-listing headwinds faced by ADRs; 5) uncertainties related to Biden’s China policy.
Hong Kong market. The local economy has already got hit badly by political turmoil before the COVID-19 outbreak. The city becomes a fierce battlefield between the US and China following the enforcement of National Security Law. We have taken a cautious view on local Hong Kong stocks since early April and expect Hang Seng Index to stay range-bound between 23,000 to 26,000 in 2Q and 3Q, and then deliver a better performance in 4Q. Hang Seng Index’s performance so far has been in line with our expectation.
We expect Hang Seng Index to enjoy a better performance in 2021 with a trend range between 23,500 and 30,500 (equivalent to 11x to 14.5x forward P/E) due to the following reasons: 1) COVID-19 outbreak should be brought under control and the travel restriction is expected to be lifted; 2) financial and property sectors take up heavy weights in Hang Seng Index. Economic recovery should lead to re-rating of these sectors and local listed companies whose valuations have been suppressed; 3) a secondary listing of ADRs on HKEX will improve the weight of new economy stocks in benchmark indices and attract fund inflow; 4) secondary listed companies might become eligible for southbound trading of Stock Connect; 5) the valuation is undemanding. HSI trades at 12.8x forward P/E compared with historical average of 11.2x.
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Sector preference. 1) We continue to prefer cyclical sectors such as construction and capital goods, cements, energy, and transportation, as well as consumer discretionary (especially offline consumption, education and auto). 2) The momentum of healthcare will slow down in the post-COVID era. As a matter of fact, the whole sector has witnessed correction throughout 3Q and 4Q. We expect more aggressive sector rotation in 2021 and divergence amongst industry leaders and followers should accelerate; and leaders in biotech, CRO/CDMO are likely to remain attractive. 3) We are cautiously positive on Telecom due to potential re-rating driven by mobile ARPU increase and historically low valuation. However, potential liquidation by US investors (due to restrictions introduced by Trump administration on shareholding in Chinese firms) could pose downside risks to certain telecom listcos with high percentage of US shareholdings. For Tech Hardware, we expect the solid fundamentals to continue amid rising real demand for 5G mobiles. Inventory pile- up will no longer be a driver in 2H21. However, we are concerned about potential risks of selling into strength during results season. 4) We stay cautiously positive on E-commerce and mobile gaming. A full recovery of offline consumption could squeeze out certain momentum. 5) We expect re-rating of utilities due to demand recovery. 6) We turn positive on insurance.
Figure 82: Sector preferences
4Q20 2020 Sector preference Sector QTD perf YTD perf for 2021 Top picks
Auto 70.1% 170.2% Geely (175 HK), BYD Co (1211 HK) Cons. Durables 20.8% 43.1% Anta (2020 HK), Xtep (1368 HK)
Media & Entertainment 9.4% 32.2% Tencent (700 HK), Bilibili (BILI US) Cons. Services 1.1% 29.6% New Oriental Edu (EDU US), Haidilao (6862 HK)
Materials 17.4% 20.6% Anhui Conch (914 HK) Capital Goods 9.5% 1.8% Zoomlion (1157 HK), CRG (390 HK)
Transportation 9.8% -2.2% China South Air (1055 HK)
Insurance 17.6% -3.6% Ping An (2318 HK) Utilities 15.3% -4.2% Kunlun (135 HK), ENN (2688 HK)
Telecom -6.1% -29.4% China Mobile (941 HK), China Telecom (728 HK) E-commerce -0.6% 46.4% JD.com (JD US)
Health Care 3.2% 39.4% Innovent Bio (1801 HK), Beigene (BGNE US) Tech Hardw are 16.2% 39.1% AAC (2018 HK)
Cons. Staples 7.4% 38.4% - Banks 23.1% -7.8% PSBC (1658 HK)
Real Estate 3.0% -16.4% -
Energy 8.6% -30.0% - Div. Financials 6.2% 5.7% -
Sources: Bloomberg, CMS (HK) Research
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Key risks and catalysts
Sino-US relationship: less volatile but tension to remain
A Biden presidency won’t significantly alter the rivalry between China and the US. We expect Biden Administration to take a relatively more flexible approach towards China but the bilateral relationship will stay challenging. It is highly uncertain whether the Biden administration will reverse course on certain policies introduced by Trump administration. The most noticeable area is tariff, which is currently 25% on USD250bn of Chinese imports and 7.5% on USD110bn of Chinese imports. The purchasing commitment under the phase one trade deal signed in early 2020 will most likely remain in place. Secondly, we expect the Biden administration to carry on hardline approach toward political frictions relating to Xinjiang, Hong Kong and the South China Sea. Thirdly, curbing Chinese investment in US tech firms, and restricting US firms (and companies using US technology) from exporting sensitive technology to China is likely to continue but the magnitude and specific way of implementing such a stance could differ from the Trump Administration. We do not expect a complete decoupling of tech industries of the two countries.
Biden will take a more coordinated approach with US allies. We expect the US to adopt a collaborative approach under Biden presidency by stepping up diplomatic engagement with allies in Europe and Asia Pacific to put pressure on China. As president-elect, Biden has already reached out to allies in Europe and Asia-Pacific, soon after his victory, to discuss key challenges facing their bilateral relationships and has made commitments to strengthening their alliances. However, we see lower prospect of major collective action taken right after Biden takes the office, given the different policy priorities for these countries amid the pandemic and stagnant economic recovery. However, Biden might bring more predictability and stability to White House’s China policy, compared with Trump, who repeatedly changed his mind and made unexpected statements and threats through Twitter.
Figure 83: Commitments made by China: Additional purchases in 2020-2021 compared to 2017 (USD bn) Manufacturing Energy Services Agriculture Total
2020 32.9 18.5 12.8 12.5 76.7
2021 44.8 33.9 25.1 19.5 123.3
Total 77.7 52.4 37.9 32.0 200 Sources: USTR, CMS (HK) Research
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Delisting risk for Chinese ADRs is looming
Over the past year, the US government and politicians have taken a series of actions to limit US investment in Chinese companies. It remains uncertain whether the incoming Biden administration will continue to pursue a strategy to limit US investors’ portfolio flowing into Chinese companies. However, given the bipartisan consensus of containing China, the chance of completely reversing the previous bans and restrictive policies remains low.
According to Holding Foreign Companies Accountable Act passed by the US Senate on May 20, 2020, Chinese ADRs have to provide PCAOB with access to work papers of the principal audit firm in order to avoid being delisted from US exchanges. Since May, the Trump Administration has been stepping up pressure on these companies to meet regulatory requirements.
In the wake of looming delisting risks, secondary listing in Hong Kong is gaining traction. Alibaba’s (BABA US/9988 HK) secondary listing in late 2019 was a role model, followed by NetEase (NTES US/9999 HK) and JD.com (JD US/9618 HK) in June 2020. In addition to secondary listing, a few ADRs have recently received privatization offers. According to Caixin, HKEX is preparing to give green light to the transition of secondary listing to a primary listing status through two ways: 1) if the trading volume of the stock in Hong Kong market over the past 12 months continued to reach 55% of its global trading volume, the rules of HKEX requires it to turn Hong Kong into its primary listing venue. However, the threshold is out of reach for most stocks based on current data; 2) the company can apply to transfer its primary listing venue to Hong Kong after a certain period of secondary listing. The HKEX will provide a 12-month buffer period for the company to gradually comply with the regulatory requirements including information disclosure, corporate governance and corporate structure. The relevant rules are being drafted and yet to be released.
Figure 84: Ten secondary listed stocks on HKEX under Chapter 19C of Main Board Listing Rules Secondary Primary Company Sector IPO date Mkt cap Forward P/E ticker ticker (USD bn) 20E 21E 9988 HK BABA US ALIBABA GROUP Consumer Discretionary 26-Nov-19 722.0 35.5 26.9 9618 HK JD US JD.COM INC Consumer Discretionary 18-Jun-20 135.4 42.7 31.6 9999 HK NTES US NETEASE INC Communication Services 11-Jun-20 63.3 14.4 12.7 9901 HK EDU US NEW ORIENTAL EDUCATION Consumer Discretionary 9-Nov-20 27.9 n.a. 46.4 2057 HK ZTO US ZTO EXPRESS Industrials 29-Sep-20 24.2 32.3 25.3 9987 HK YUMC US YUM CHINA Consumer Discretionary 10-Sep-20 24.2 38.1 28.7 9698 HK GDS US GDS HOLDING Information Technology 2-Nov-20 17.0 n.a. 454.8 1179 HK HTHT US HUAZHU GROU Consumer Discretionary 22-Sep-20 15.9 n.a. 50.4 9688 HK ZLAB US ZAI LAB LTD Health Care 28-Sep-20 9.9 n.a. n.a. 9991 HK BZUN US BAOZUN INC Consumer Discretionary 29-Sep-20 3.1 16.1 11.5 Sources: HKEX, Bloomberg, CMS (HK) Research; Data as of 30 Nov 2020
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Potential capital outflow
Pension and endowment fund managers in the US are increasingly coming under political pressure to review their investments in China. In May 2020, the Federal Retirement Thrift Investment Board (FRTIB), an independent agency of the US government, decided to defer the transition of benchmark for I Fund, an international stock index fund under Thrift Savings Plan (TSP) (which is a retirement savings plan for Federal employees), from MSCI EAFE Index to MSCI ACWI ex USA IMI Index, as the latter includes Chinese companies. This event marks a significant shift in attitude toward investment in Chinese companies by US pension funds and saving plans for government employees amid political pressure. In another case which demonstrates how political pressure is shaping the investment landscape of public funds, in August 2020, the US State Department sent a letter to US universities, urging them to disclose and divest from Chinese holdings in their endowment funds.
Investment in Chinese SOEs and high-tech firms are being scrutinized. Political pressures will also weigh on investment in Chinese companies, especially those deemed by US politicians to pose national security threat. Since 2019, the Trump administration has increasingly stepped up effort to curb the growth of Chinese tech firms, by: 1) weaponizing the Entity List to target Chinese companies; 2) specifically targeting Chinese 5G equipment manufacturer Huawei; 3) banning transactions with or forcing spinoff of apps developed by Chinese companies (i.e., TikTok, Wechat) by resorting to executive power vested in the President. The Entity List issued by the Bureau of Industry and Security (BIS) currently includes more than 200 Chinese companies and organizations, covering Chinese players in the field of 5G, supercomputer, artificial intelligence, and surveillance equipment. Currently, several Chinese companies on the Entity List are constituents of MSCI indices, including Hikvision (002415 CH), Zhejiang Dahua (002236 CH) and AVIC Aircraft (000768 CH) (Figure 85). These stocks are also at risk of being excluded from benchmark indices.
Whether president-elect Joe Biden will loosen (partially) restrictions on investment in Chinese tech-companies remains uncertain; but outgoing President Trump clearly intended to make a final effort in stepping up sanctions on Chinese firms before he leaves the White House in January 2021. On November 12, 2020, Trump signed an executive order, prohibiting Americans from investing in a group of Chinese companies which it said directly support China’s military, intelligence and security apparatuses and aid in their development and modernization. It bans the purchase or investment in stocks, funds or other financial products that include the firms, effective from January 11. The order gives investors until November 2021 to divest these investments. The 31 companies, which were identified by Department of Defense in accordance with the statutory requirement of Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, include AVIC, China Mobile, CRCC and ChemChina, etc (Figure 86). As a result of the executive order, MSCI announced on November 20 that the index provider is seeking feedback from investors to see whether changes to existing indices is necessary, potentially resulting in the removal of these stocks from benchmark indices.
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Figure 85: Listed companies under BIS’ Entity LIst Ticker Company MSCI China Market cap Sector P/E (x) Date included in Index weight (USD mn) 2020E 2021E Entity List MSCI China constituents 002415 CH Hangzhou Hikvision Digital Tech 0.13% 64.3 Information Technology 31.3 25.5 Oct-19 1800 HK China Communications Construction Co 0.08% 16.4 Industrials 3.1 2.7 Aug-20 601989 CH China Shipbuilding Industry Co 0.03% 15.1 Industrials 90.8 79.3 Aug-20 002230 CH Iflytek Co Ltd 0.03% 13.0 Information Technology 77.8 59.7 Oct-19 601360 CH 360 Security Technology 0.02% 17.0 Information Technology 28.5 25.5 May-20 002236 CH Zhejiang Dahua Technology 0.02% 9.7 Information Technology 16.9 14.8 Oct-19 002456 CH OFILM Group Co Ltd 0.01% 6.3 Information Technology 31.9 23.4 Jul-20 601800 CH China Communications Construction Co 0.01% 16.4 Industrials 7.0 6.1 Aug-20 600498 CH Fiberhome Telecommunication Tech 0.01% 4.5 Information Technology 33.7 25.3 May-20 002268 CH Westone Information Industry 0.00% 2.5 Information Technology 68.0 50.3 Aug-20 Non-constituents 002465 CH Guangzhou Haige Communications Group n.a. 4.3 Information Technology 43.6 35.0 Aug-20 000521 CH Changhong Meiling n.a. 0.5 Consumer Discretionary 66.8 37.1 Jul-20 603680 CH KTK Group n.a. 1.4 Industrials 20.0 15.4 Jul-20 603133 CH Tanyuan Technology n.a. 0.4 Industrials 18.8 11.1 Jul-20 300188 CH Xiamen Meiya Pico Information n.a. 3.0 Information Technology 45.2 33.3 Oct-19 300367 CH Netposa Technologies n.a. 0.7 Information Technology n.a. n.a. May-20 Sources: Bureau of Industry and Security, Bloomberg, CMS (HK) Research Note: The companies in the Entity List might be the parent or affiliate of the listed companies.
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Figure 86: List of Chinese companies released by Department of Defence which it said supports China’s Military-Civil Fusion development strategy Company Name in Chinese
Aviation Industry Corporation of China (AVIC) 中国航空工业集团有限公司 China Aerospace Science and Technology Corporation (CASC) 中国航天科技集团有限公司 China Aerospace Science and Industry Corporation (CASIC) 中国航天科工集团公司 China Electronics Technology Group Corporation (CETC) 中国电子科技集团有限公司 China South Industries Group Corporation (CSGC) 中国兵器装备集团公司（中国南方工业集团公司） China Shipbuilding Industry Corporation (CSIC) 中国船舶重工集团有限公司 China State Shipbuilding Corporation (CSSC) 中国船舶工业集团有限公司 China North Industries Group Corporation (Norinco Group) 中国北方工业集团公司 Hangzhou Hikvision Digital Technology Co., Ltd (Hikvision) 杭州海康威视数字技术股份有限公司 Huawei 华为 Inspur Group 浪潮集团有限公司 Aero Engine Corporation of China 中国航空发动机集团有限公司 China Railway Construction Corporation (CRCC) 中国铁建股份有限公司 CRRC Corp. 中国中车集团 Panda Electronics Group 熊猫电子集团有限公司 Dawning Information Industry Co (Sugon) 中科曙光 China Mobile Communications Group 中国移动通信集团公司（中国移动） China General Nuclear Power Corp. 中国广东核电集团有限公司（中广核） China National Nuclear Corp. 中国核工业集团有限公司 China Telecommunications Corp. 中国电信集团有限公司 China Communications Construction Company (CCCC) 中国交通建设股份有限公司（中国交建） China Academy of Launch Vehicle Technology (CALT) 中国运载火箭技术研究院 China Spacesat 中国东方红卫星有限公司 China United Network Communications Group Co Ltd 中国联合网络通信集团有限公司（中国联通） China Electronics Corporation (CEC) 中国电子信息产业集团有限公司（中国电子） China National Chemical Engineering Group Co., Ltd. (CNCEC) 中国化学工程集团有限公司 China National Chemical Corporation (ChemChina) 中国化工集团公司 Sinochem Group Co Ltd 中国中化集团公司 China State Construction Group Co., Ltd. 中国建筑集团有限公司 China Three Gorges Corporation Limited 中国长江三峡集团公司 China Nuclear Engineering & Construction Corporation (CNECC) 中国核工业建设股份有限公司 Sources: Department of Defence, Bloomberg, CMS (HK) Research
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CMS Top picks
Figure 87: CMS top picks Ticker Company Mkt cap Current Target price P/E (x) Div yld Net debt to Sector price (%) equity (%)
(USD mn) (LC) (LC) 2020E 2021E 2020E 1H20A 700 HK Tencent 714,632 578.0 699.0 35.3 32.9 0.3% 9% Internet
BILI US Bilibili 21,131 60.8 63.0 n.a. n.a. 0.0% -37% Internet
3888 HK Kingsoft 6,915 39.1 49.0 38.5 29.6 0.3% -61% Software
JD US JD.COM 133,580 85.4 100.0 54.5 38.7 0.0% -46% E-commerce
2359 HK Wuxi Apptec 39,973 119.5 179.0 84.4 63.3 0.4% -7% Health Care
BGNE US BeiGene 22,413 246.5 345.0 n.a. n.a. 0.0% -72% Health Care
1801 HK Innovent Bio 9,658 53.5 80.0 n.a. n.a. 0.0% -25% Health Care
390 HK CRG 19,714 3.8 7.8 2.9 2.9 4.3% 58% Industrials
3311 HK CSCI 3,328 5.1 9.8 4.3 3.5 6.3% 50% Industrials
1157 HK Zoomlion 10,992 9.1 10.7 8.6 8.9 4.1% 33% Machinery
631 HK Sany Heavy 1,787 4.4 6.5 12.5 8.6 3.2% -16% Machinery
2688 HK ENN 15,042 103.4 124.0 16.7 13.9 2.1% 39% Utilities
135 HK Kunlun Energy 6,702 6.0 7.6 7.8 6.2 4.5% 21% Utilities
941 HK China Mobile 122,290 46.3 70.0 7.4 7.1 7.4% -31% Telecom
728 HK China Telecom 24,325 2.3 3.8 7.1 7.1 5.7% 27% Telecom
2018 HK AAC Tech 6,828 43.8 65.0 29.0 15.3 3.0% 17% Tech Hardware
1347 HK Hua Hong 6,508 39.0 37.0 86.6 45.7 0.3% -31% Semiconductors
EDU US New Oriental 27,321 161.8 209.0 52.5 46.5 0.0% -58% Education
1765 HK Hope Education 2,072 2.2 4.3 15.7 12.5 2.1% 6% Education
1055 HK China South Air 13,685 4.9 5.9 n.a. 19.9 0.0% 236% Transportation
914 HK Anhui Conch 42,666 50.2 68.5 20.3 30.4 4.9% -42% Materials
1211 HK BYD Co 70,921 187.6 340.0 87.9 67.1 0.1% 106% Auto
175 HK Geely Auto 27,413 21.7 30.0 22.1 15.7 1.3% -23% Auto
6862 HK Haidilao 35,209 51.5 66.5 207.9 44.1 0.1% 30% Catering
YUMC US Yum China 24,393 58.2 65.5 38.8 26.1 0.4% 18% Catering
2020 HK Anta 38,533 110.5 131.1 52.6 33.8 0.7% -13% Sportswear
1368 HK Xtep 1,098 3.4 4.0 14.2 8.9 4.2% -6% Sportswear
Sources: Bloomberg, CMS (HK) Research; Data as of 1 Dec 2020 tes
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Thursday, December 3, 2020
China Catering Sector Johnny WONG Bryan WANG 2021 Outlook: Steady growth ahead; Large operators +852 3189 6357 +852 3189 6711 to take more market share [email protected] [email protected]
■ Per capita spending in Chinese catering still lags other countries
■ Larger operators will continue to take market share in 2021 ■ Reiterate overweight OVERWEIGHT
Previous OVERWEIGHT
Reiterate overweight on China Catering Sector HSI (Dec. 2, 2020) 26,533 There is still ample room for growth in the Chinese catering industry as Chinese consumer spending on restaurants are low by world standards. The HSCEI (Dec. 2, 2020) 10,574 gap between China and the other countries should close as 1) China’s per capita income grows, 2) increasing restaurant penetration into lower tiered Sector Performance cities, 3) growing segment of younger consumers dining out more. Larger operators should gain market share due to their brand recognition, know-how (%) China Consumer Discretionary 80 and capital to expand their networks. MSCI China 60 40 20 Digitalization will drive sales and improve productivity 0 We expect the trend of industry digitalization will continue to help to capture (20) the younger consumers and drive repeat sales. Digitalization will involve accepting orders and payments online (mobile or via in-store self-service kiosks), which will reduce customer waiting times. Digital customer Source: Bloomberg; share price as of Dec. 2, 2020 relationship management systems will increase customer loyalty. Digitalization and automation will also increase worker productivity. Adjusted % 1m 6m 12m for purchasing power parity, in 2017, China’s revenue per worker was 46.2% Absolute return (0.5) 40.5 59.8 and 54.5% below that of the US and Japan respectively. We believe the gap Relative return (2.7) 15.7 26.4 can be closed via digitalization and automation.
Valuation and top picks The sector has rallied 53% YTD and trades at 1.6x sector median 1-year forward PEG (excl. Yum China). We reiterate our BUY rating on Haidilao International Holdings, with a target price of HKD66.5, implying a 26% upside. We expect Haidilao’s revenues to grow at a CAGR of 42.5% between FY19 and FY22E while net income to grow at a CAGR of 47.1%. The growth is primarily driven by an expected 129% increase in restaurant openings over the same time period. We reiterate our BUY rating on Yum China, with a target price of USD65.5 (or HKD507.4), implying a 16% (or 12% for HK listed stock) upside. We expect Yum China’s revenues to grow at a CAGR of 13.3% between FY19 and FY22E while net income to grow at a CAGR of 15.8%. The growth is primarily driven by an expected 31% increase in the number of restaurants over the same time period. Key catalysts: better-than-expected macroeconomic conditions; faster than expected build-out of restaurant networks. Key downside risk: a rebound in COVID-19 cases.
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Focus charts Figure 1: Catering industry size in China, breakdown Figure 2: The catering industry revenue growth turned
by operating model in China positive at 0.8% in Oct, for the first time in 2020
Catering industry revenue yoy (2020) (RMB bn) 8,000 0.1 6,614 0.8% 5,951 0 6,000 5,325 4,672 4,704 4,272 3,964 4,167 -0.1 3,580 4,000 3,231 -18.9% -2.9% 2,893 -11.0% -7.0% -0.2 -15.2% -31.1% 2,000 -21.0% -0.3 -23.9% -26.6% -29.6% -0.4 -44.3% -32.8% 0 -36.5% 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E -41.2% -43.1% -0.5 -46.8% yoy Aggregated yoy Non-chain Franchise Self Operated Chains
Sources: Frost & Sullivan, Yum China Prospectus, CMS (HK) Sources: NBS, CMS (HK)
Figure 3: Comparison on revenue YoY growth Figure 4: Number of stores growth comparison
Number of stores growth yoy Revenue growth yoy yoy yoy 80% 70.7% 70% 59.5% 64.8% 56.5% 70% 60% 55.1% 60% 50% 35.6% 36.2% 50% 40% 40% 30% 30% 20.5% 20% 11.7% 10.8% 10.7% 7.7% 9.4% 20% 11.8% 8.4% 10% 5.5% 5.6% 6.3% -0.4% 10% 2.4% 4.3% 0% 9.8% 8.3% 7.5% 3.5% 2015 2016 2017 2018 2019 0% 4.4% 4.0% -10% 0.7% Industry Haidilao Yum China 2015 2016 2017 2018 2019 Industry Haidilao Yum China
Sources: Frost & Sullivan, companies’ data, CMS (HK) Sources: Euromonitor, companies’ data, CMS (HK)
Figure 5: Monthly dining consumption comparison: Figure 6: Impact of COVID-19 on Asian consumers’
post-95 students vs. employed vs. pre-95 eating habits
RMB Monthly dining consumption Impact of COVID-19 on Asian consumers eating habits 3000 2,547 100% 86% 2,313 2500 80% 2000 1,617 60% 1500 37% 40% 927 24% 829 1000 696 685 15% 14% 606 570 20% 7% 413 419 465361 500 242 267 0% 0 Eating at home Take away food Food delivery Restaurants Chinese QSR Teashop Baker shop Total ordering
Same as before More often Post-95 students Post-95 employed Pre-95 Sources: iResearch, CMS (HK) Sources: Nielsen, CMS (HK) Note: QSR represents quick-service restaurants
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Mcap EPS Div CMS PEG Rating Price Upside (USD EV/EBITDA (x) PE (x) ROE (%) CAGR Yield PT (x) mn) (%) (%) 2020E 2021E 2020E 2021E 2021E 2020E 2021E 19-22E 2020E Catering - China Haidilao 6862 HK BUY 52.6 66.5 26.4% 35,963 49.6 21.4 213.3 44.9 0.9 10.4 42.0 47.1 0.1 Yum China YUMC US BUY 56.6 65.5 15.6% 23,743 16.0 14.2 30.4 26.1 3.1 16.3 14.4 11.8 0.4 Yum China 9987 HK BUY 451.6 507.4 12.4% 24,430 16.5 14.7 31.2 26.9 3.1 16.3 14.4 11.8 0.4 Yihai 1579 HK NEUTRAL 88.7 97.0 9.4% 11,972 52.6 38.3 76.7 56.1 1.6 35.1 37.4 35.8 0.4 Jiumaojiu 9922 HK NR 17.3 n.a. n.a. 3,244 64.2 21.4 n.a. 44.4 1.0 2.8 18.3 44.1 0.1 Xiabuxiabu 520 HK NR 17.2 n.a. n.a. 2,400 21.9 10.8 n.a. 30.6 0.9 1.2 19.5 30.0 0.3 Average 16,959 36.8 20.1 87.9 38.2 1.8 13.7 24.4 30.1 0.3 Catering – International McDonald’s MCD US NR 210.9 n.a. n.a. 157,114 22.8 18.4 34.0 25.3 10.6 (53.6) (74.6) 4.2 2.4 Starbucks SBUX US NR 98.9 n.a. n.a. 116,091 22.6 20.0 35.2 30.2 1.8 (44.9) (59.9) 68.8 1.8 Darden Restaurant DRI US NR 109.6 n.a. n.a. 14,274 18.9 14.6 26.4 17.9 0.4 19.6 28.0 n.a. 1.3 Domino's Pizza DPZ US NR 387.8 n.a. n.a. 15,280 24.4 22.7 31.2 29.9 2.0 (4.2) (1.8) 14.5 0.8 Average 75,690 22.2 18.9 31.7 25.8 3.7 (20.8) (27.1) 29.2 1.6 Dairy Yili 600887 NR 38.5 n.a. n.a. 35,723 20.9 17.7 32.3 27.6 2.7 25.7 27.4 12.1 2.0 Mengniu 2319CH HK NR 39.4 n.a. n.a. 20,059 23.9 16.4 38.3 25.4 2.1 10.8 14.8 14.2 0.5 H&H 1112 HK NR 32.0 n.a. n.a. 2,660 9.2 8.0 15.3 12.8 0.8 19.9 21.6 17.3 3.6 Feihe 6186 HK NR 18.2 n.a. n.a. 20,951 17.1 13.3 23.8 18.5 0.6 36.5 36.9 28.6 1.4 Average 19,848 17.8 13.9 27.4 21.1 1.6 23.2 25.2 18.0 1.9 Food Processing/Snacks Want Want China 151 HK NR 5.3 n.a. n.a. 8,502 7.9 7.6 13.5 13.0 2.4 26.6 26.6 8.4 6.4 Tingyi 322 HK NR 12.9 n.a. n.a. 9,389 6.0 6.0 15.8 15.7 1.9 19.6 19.1 8.6 5.7 Uni-President China 220 HK NR 7.0 n.a. n.a. 3,923 7.2 7.0 16.6 15.8 1.7 11.4 11.8 8.6 5.7 Dali Foods 3799 HK NR 4.8 n.a. n.a. 8,550 7.7 7.0 14.5 13.1 2.3 22.8 23.7 6.6 4.6 WH Group 288 HK NR 6.5 n.a. n.a. 12,380 5.8 5.2 9.2 8.1 3.7 14.3 15.3 3.7 5.8 Average 8,549 6.9 6.6 13.9 13.1 2.4 19.0 19.3 7.2 5.6 Beer China Resources 291 HK NR 61.6 n.a. n.a. 25,759 30.1 23.4 62.6 44.2 0.6 13.0 16.9 54.2 0.6 Tsingtao Brew-H 168 HK NR 76.6 n.a. n.a. 16,303 25.2 21.9 40.3 33.8 1.9 10.8 12.0 16.7 1.0 Budweiser 1876 HK NR 28.0 n.a. n.a. 47,750 29.0 21.3 72.1 43.4 8.4 6.3 10.2 9.7 0.5 Average 29,937 28.1 22.2 58.4 40.5 3.6 10.0 13.0 26.9 0.7 Sources: Bloomberg, Company data, CMS (HK) estimates Note: 1) the price is the closing price on Dec. 2, 2020; 2) the shareholder’s equity are negative for McDonald’s, Starbucks and Domino’s Pizza due to their share repurchases
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Thursday, December 3, 2020
China Sportswear Sector Johnny WONG Bryan WANG +852 3189 6357 +852 3189 6711 2021 Outlook: Market growing, large players growing [email protected] [email protected] even faster
■ More people exercising; blurring boundary between fashion and sportswear. Forecast 15% to 20% yoy industry growth in 2021 OVERWEIGHT
■ Large brands to increase market share; move towards DTC model Previous OVERWEIGHT ■ Maintain overweight HSI (Dec. 1, 2020) 26,568 Maintain overweight on China Sportswear Sector HSCEI (Dec. 1, 2020) 10,660 We forecast the sportswear market to grow by 15% yoy to 20% yoy in 2021 after a slight 5% yoy COVID-19 related decline in 2020. We further expect Sector Performance the 5 year CAGR to 2025 to be 14.6% to RMB593bn, driven by replacement demand from 1) existing consumers of sportswear (accounting for 6.6ppts) (%) China Consumer Discretionary and 2) expected 60mn new consumers of sportswear between 2020 and 80 Hang Seng Index 2025 (accounting for the remaining 8ppts). 60 40 20 COVID-19 negatively affected margin and inventory levels 0 (20) In general, industry revenues declined slightly by -1% yoy to -5% yoy in (40) 1H20. Larger declines were avoided as they quickly shifted sales to online. In general, margins were squeezed by lower revenues and higher provisions. The slow sales in 1H20 led to a build-up in system inventory, which should Source: Bloomberg; share price as of Dec. 1, 2020 lead to larger retail discounts in 2H20 and may lead to distributors limiting pre-orders of 1H21 deliveries. We do not see these headwinds past 1H21. % 1m 6m 12m Absolute return (0.9) 49.8 59.2 Relative return (11.1) 37.8 58.4
Move towards DTC and e-commerce improves LT margins While ANTA and NIKE have been more proactive in the move towards Direct-to-Customer (DTC), we see this as a LT trend. DTC offers better LT margins and allows for more cohesive online marketing strategies.
Valuation and top picks The sector has rallied 46% YTD and trades at a 1 year forward P/E of 37.9x and a PEG of 1.6x (market cap weighted). Given the sector’s solid fundamentals and improving macro backdrop and that sector companies have historically traded well over 1x PEG, we believe there should be re- rating opportunities for market leaders. We maintain BUY on ANTA (2020 HK) with a TP of HKD131.1 (18.7% upside); BUY on Xtep (1368 HK) with a TP of HKD4.0 (20.4% upside); NEUTRAL on Li Ning with a TP of HKD46.7 (7.4% upside). We derive our TPs by applying a 1.74x PEG (historical average of peer group) to the companies’ FY21E EPS. DCF analysis as a sanity checks suggests the above valuations are justifiable. Key catalysts: Hype of 2022 Beijing Winter Olympics lead to better sales. Key downside risks: a rebound in COVID-19 cases
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Focus charts Figure 2: The proportion of Chinese people who Figure 1: Sportswear market is expected to grow at a exercised regularly still lags behind that of other 10% CAGR during FY20-24E countries in 2017
(RMB bn) 80% 70% 600 543 504 70% 500 461 60% 413 50% 45% 400 365 40% 34% 317 30% 300 265 222 20% 190 10% 200 148 167 135 0% 100 China Average of US developed - countries
Sources: Euromonitor, CMS (HK) Note: The 2020 forecast does not factor in the impact of the COVID- Sources: iiMedia, CMS (HK) 19 epidemic
Figure 3: Top brand gaining market share Figure 4: R&D expense as a % of revenue
100% 3.5% 21% 17% 30% 26% 24% 80% 3.0% 5% 5% 6% 5% 6% 2.5% 60% 6% 6% 6% 7% 7% 16% 13% 15% 2.0% 40% 12% 12% 20% 19% 20% 1.5% 16% 17% 20% 1.0% 19% 21% 21% 22% 23% 0% 0.5% 2015 2016 2017 2018 2019 Nike Adidas Anta 0.0% Sketchers Li Ning Xtep 2015 2016 2017 2018 2019 361 New Balance Others Adidas Anta Li Ning Xtep
Sources: Euromonitor, CMS (HK) Sources: Nielsen, CMS (HK)
Figure 5: Sportswear is the most popular alternative Figure 6: Top 10 reasons for buying a specific product
outside of respondents’ categories - Sportswear % of Reasons Clothes Taobao respondents Sportswear Leisurewear Fast fashion category vs brand wear buyers buyers buyers Products' breathability 39% buyers buyers Value for money 39%
Leisurew ear 100 39 32 52 Matchability 28% Materials environmentally friendly/safe 27%
Sportswear 52 100 46 67 Trendiness of product 25% Loose and comfortable 25% Fast fashion 29 35 100 62 Stretchabilty 22% Can wear in multiple settings 22% Taobao brand 19 21 27 100 Good discount 21% Simple design 17% Sources: Tencent Data, CMS (HK) Sources: Tencent Data, CMS (HK)
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Valuation comparison
Mcap EPS Div CMS PEG Rating Price Upside (USD EV/EBITDA (x) PE (x) ROE (%) CAGR Yield PT (x) mn) (%) (%) 2020E 2021E 2020E 2021E 2021E 2020E 2021E 19-22E 2020E Sportswear - China Anta Sports 2020 HK BUY 110.5 131.1 18.7% 38,535 27.5 21.4 52.7 33.9 1.9 22.4 29.5 23.2 0.6 Xtep 1368 HK BUY 3.4 4.0 20.4% 1,098 5.7 4.4 14.3 9.1 5.2 7.0 10.7 6.3 4.3 Li Ning 2331 HK NEUTRAL 43.5 46.7 7.4% 13,951 33.7 22.9 60.2 43.3 2.3 20.2 24.1 26.8 0.4 China Dongxiang 3818 HK NR 0.9 n.a. n.a. 714 -0.6 -0.5 3.8 5.3 0.1 11.3 7.5 17.0 11.1 361 Degrees 1361 HK NR 1.0 n.a. n.a. 253 -1.7 -1.6 4.1 3.8 4.0 6.1 6.7 4.7 8.6 Average 10,910 12.9 9.3 27.0 19.1 1.4 13.4 15.7 15.6 5.0 Sportswear - International NIKE Inc NKE US NR 135.4 n.a. n.a. 212,617 34.5 28.1 46.8 36.7 1.3 50.7 61.9 38.5 0.8 Adidas AG ADS GR NR 272.3 n.a. n.a. 65,734 31.7 16.8 125.0 31.7 n.a. 7.3 22.3 2.0 0.8 Lululemon Athletica LULU US NR 377.5 n.a. n.a. 49,196 53.5 36.6 89.3 58.9 1.1 25.7 32.0 16.5 - Under Armor UA US NR 14.7 n.a. n.a. 7,060 n.a. 28.2 -34.2 97.9 n.a. (9.5) n.a. n.a. n.a. Average 83,652 39.9 27.4 56.7 56.3 1.2 18.5 38.7 19.0 0.5 OEM/ODM Shenzhou 2313 HK NR 132.3 n.a. n.a. 25,656 23.7 20.0 31.8 26.6 2.3 19.9 21.4 13.1 1.6 Yue Yuen 551 HK NR 16.5 n.a. n.a. 3,440 13.7 6.0 n.a. 13.8 n.a. (2.0) 6.6 5.2 1.4 Pacific Textile 1382 HK NR 5.2 n.a. n.a. 981 7.5 6.6 9.7 8.6 0.6 25.0 27.1 10.1 8.8 Regina Miracle 2199 HK NR 3.1 n.a. n.a. 485 9.6 7.3 31.3 12.0 0.1 4.0 10.1 17.0 0.8 Average 7,640 13.6 10.0 24.3 15.2 1.0 11.7 16.3 11.4 3.2 Distributors TOPSPORTS 6110 HK NR 11.8 n.a. n.a. 9,440 11.6 9.6 25.4 20.2 0.8 21.9 25.4 12.7 5.2 Pou Sheng 3813 HK NR 2.0 n.a. n.a. 1,368 6.0 3.8 22.7 8.2 0.6 5.1 12.7 18.6 0.6 Average 5,404 8.8 6.7 24.1 14.2 0.7 13.5 19.0 15.7 2.9 Casual wear China Lilang 1234 HK NR 5.3 n.a. n.a. 817 4.5 3.6 7.8 6.2 2.1 17.3 20.6 4.3 8.3 Cosmo Lady 2298 HK NR 1.3 n.a. n.a. 380 -39.0 11.2 31.8 15.9 n.a. (2.0) 6.2 n.a. - Giordano 709 HK NR 1.2 n.a. n.a. 248 -8.9 14.3 -8.7 15.3 n.a. (9.6) 3.3 (3.8) 4.1 Average 482 -14.5 9.7 10.3 12.5 2.1 1.9 10.0 0.3 4.1 Sources: Bloomberg, Company data, CMS (HK) estimates Note: 1) the stock price is the closing price as of Dec. 1, 2020; 2) the PEG ratio is based on the EPS CAGR with FY19 as base year, to remove the low base effect of FY20E due to COVID-19; 3) the PEG ratio for the global peers has been adjusted to the same calendar year.
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Thursday, December 3, 2020
Education Sector Tommy WONG Crystal LI 2021 Outlook: Growth is good, earnings/valuation matters +852 3189 6634 +852 3189 6122 ■ Tutoring sector favourable enrollment growth outlook, prefer offline [email protected] [email protected] to online as their growth rate delta crosses with offline accelerating ■ Higher education fundamental growth trajectory intact amid policy tailwinds; Multiple catalysts in play to drive robust outlook OVERWEIGHT ■ Top Picks: New Oriental (EDU US), Hope (1765 HK), Kepei (1890 HK) and Cathay Edu (1981 HK) Previous OVERWEIGHT
Tutoring: offline to go from recovery to accelerating growth HSI (Dec 1, 2020) 26,568 Overall tutoring market’s enrollment growth outlook remains very positive, HSCEI (Dec 1, 2020) 10,660 driven by students’ increasing academic pressure and parental anxiety. We reiterate our preferential view for offline: 1) Offline’s quick recovery thanks to good control on COVID-19 in Mainland China; 2) We expect offline’s low base Sector Performance in 2020 due to lockdown should drive impressive growth through 2021; 3) Education industry HSI index Market consolidation opportunity arising from mid and small players’ closure 60% due to tightened offline policy requirement since 2018 and financial distress during lockdown; 4) We expect leading companies’ to accelerate offline 30% expansion; 5) Online enrollment growth likely to be slower given high base in 2020. For online, although we still see growth to remain fast (around triple 0% digit) despite deceleration, the focus has moved to customer acquisition cost given intensifying competition from proliferation of players, leading to greater -30% earnings outlook uncertainty. We reiterate BUY on New Oriental with its robust offline expansion and potential recovery of overseas test prep business
(prevalence of vaccine will also play into that). We maintain neutral on TAL Source: Bloomberg; share price as of Dec 1, 2020 (TAL US), on concern of online segment valuation, c.40% of SOTP valuation. % 1m 6m 12m Higher education solid growth intact with supportive policy Absolute return 9.3 11.0 39.6 Higher education sector’s fundamentals remain firmly intact, thanks to policy Relative return 0.7 0.3 38.9 tailwinds like enrollment expansion driving gross enrollment rate. We anticipate: 1) Trend supportive enrollment expansion policies (e.g. vocational and upgrade program) as in 2019/20; 2) M&A to pick up in 2021 after the slowdown in 2020 due to lockdown; 3) Independent Colleges’ conversion to lift gross profit margin; 4) Potential unveiling of the “Final Draft” (民促法最终 稿), which we think should ease people’s concern on policy uncertainty. We maintain our belief that there should be no impact on higher education sector given their path as a “for-profit” organization. 2021 earnings drivers are: 1) Organic enrollment growth /tuition rate increase, continue to be aided by policy tailwind; 2) New Greenfield school (e.g. Hope) and campuses expansion (e.g. CEG (839 HK)’s Baiyun and Songtian campuses, Kepei’s Gaoyao and Harbin campus etc.) to support enrollment growth. We forecast our coverage’s FY21E average revenue to grow 37% yoy and core earnings to grow 44% yoy, driven by scale economics. We reiterate BUY on our covered names, with preference for Hope, Kepei and Cathay Edu. Overweight education sector We reiterate our positive stance on the education sector, our pecking order is offline tutoring > higher education > online tutoring > K-12 education. This view balances earnings growth speed, market opportunity, regulatory risk, and valuation. The sector rallied 27% YTD; trades at a 19x 1-yr forward P/E.
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Focus charts Figure 1: Tutoring coverage remain strong FY21/22E Figure 2: Tutoring coverage selling expenses increased
revenue growth significantly in recent quarters
FY21E revenue growth FY22E revenue growth RMB mn TAL NEW ORIENTAL GSX KOOLEARN 5,000 80%
4,000 60% 3,000
40% 75% 71% 2,000
51% 46% 20% 43% 34% 35% 1,000
13% 0% 0 TAL NEW GSX KOOLEARN 2019 2019 2019 2019 2020 2020 ORIENTAL Spring Summer Autumn Winter Spring Summer
Sources: Company data, CMS (HK) estimates; Note: Koolearn’s Sources: Company data, CMS (HK) estimates quarterly data are based on our estimates
Figure 3: Higher education coverage to have robust Figure 4: Higher education coverage FY21E core
FY21E revenue growth of 37% yoy earnings to grow 44% yoy driven by margin expansion
FY21E revenue growth Average 37% FY21E core earnings growth Average 44%
60% 70%
50% 60% 50% 40% 40% 30% 52% 52% 30% 59% 58% 42% 48% 20% 37% 20% 36% 32% 30% 10% 22% 15% 10% 0% 0% HOPE CATHAY KEPEI CEG NEW YUHUA NEW HOPE CATHAY KEPEI YUHUA CEG EDU HIGHER HIGHER EDU
Sources: Company data, CMS (HK) estimates Sources: Company data, CMS (HK) estimates
Figure 5: Key private education/vocational education regulation policy overview
Sources: Ministry of Education, State Council, CMS (HK)
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Valuation comparison
Company Bloomberg Curr. CMS Price CMS Upside Mkt cap P/S (x) P/E (x) PEG EV/EBITDA EPS CAGR ROE (%) Ticker Rating TP (%) (USD mn) (x) (x) (%) 2020E 2021E 2020E 2021E 2021E 2021E 2020-22E 2020E 2021E Higher Education CEG 839 HK HKD BUY 14.9 22.0 48 4,133 10.2 7.4 25.6 19.7 0.8 15.9 24.4 8.0 11.0 YUHUA 6169 HK HKD BUY 7.3 10.1 39 3,123 8.5 7.4 19.7 14.9 0.7 12.1 20.8 5.0 28.1 HOPE 1765 HK HKD BUY 2.2 4.3 94 2,072 8.7 5.7 25.0 15.8 0.4 8.8 38.1 8.9 14.4 KEPEI 1890 HK HKD BUY 6.0 8.7 45 1,562 11.1 7.8 17.9 13.2 0.5 10.9 27.7 18.3 21.7 CATHAY EDU 1981 HK HKD BUY 4.8 6.0 24 1,034 8.6 5.6 20.6 13.9 0.4 12.4 34.5 14.7 16.5 NEW HIGHER 2001 HK HKD BUY 5.0 7.2 44 1,023 5.2 4.3 16.3 10.3 0.3 8.6 34.3 15.9 22.8 EDVANTAGE 382 HK HKD NR 8.2 n.a. n.a. 1,071 8.8 7.1 24.2 18.0 0.6 13.2 30.6 16.9 18.7 JIAHONG 1935 HK HKD NR 3.8 n.a. n.a. 793 9.2 7.6 21.6 17.3 0.9 11.3 18.3 13.6 14.4 MINSHENG 1569 HK HKD NR 1.1 n.a. n.a. 609 3.4 3.0 11.4 7.8 0.3 4.7 28.6 8.4 11.3 XINHUA 2779 HK HKD NR 2.5 n.a. n.a. 508 6.8 5.6 10.4 8.8 0.5 5.7 16.2 11.1 11.5 K12 and pre-K TIANLI 1773 HK HKD NR 7.7 n.a. n.a. 2,064 11.1 7.8 36.5 26.1 0.7 18.8 37.8 13.7 17.0 HAILIANG HLG US USD NR 64.1 n.a. n.a. 1,653 7.3 5.8 29.3 22.5 0.3 12.0 88.0 20.2 21.1 MAPLELEAF 1317 HK HKD NR 2.3 n.a. n.a. 877 2.6 2.4 8.0 7.0 1.4 9.2 5.1 14.6 14.9 WISDOM 6068 HK HKD NR 3.8 n.a. n.a. 1,056 3.9 3.0 13.6 11.2 0.6 9.3 17.7 20.0 20.2 VIRSCEND 1565 HK HKD NR 2.1 n.a. n.a. 845 3.1 2.5 14.8 10.6 0.3 9.4 35.4 13.7 17.3 BRIGHT BEDU US USD NR 6.4 n.a. n.a. 764 1.5 1.2 31.2 12.2 0.3 8.0 46.8 8.7 13.4 SCHOLAR Tutoring NEW ORIENTAL EDU US USD BUY 161.8 209.0 29 27,321 7.6 6.8 55.3 48.5 1.6 38.2 31.3 21.1 20.6 TAL TAL US USD NEUTRAL 71.1 70.0 -2 42,689 13.0 9.8 149.3 209.3 2.7 177.0 76.6 -4.3 8.5 GSX GSX US USD NEUTRAL 64.4 63.0 -2 15,364 14.4 8.2 n.a. n.a. n.a. -129.2 n.a. -37.7 -24.8 KOOLEARN 1797 HK HKD NEUTRAL 32.3 25.0 -23 3,917 25.7 17.6 n.a. n.a. n.a. -26.5 n.a. -33.2 -57.1 OFFCN 002607 CH CNY NR 35.7 n.a. n.a. 33,454 17.1 12.7 87.0 63.3 1.8 49.5 35.4 49.5 49.7 EAST 667 HK HKD NR 17.3 n.a. n.a. 4,901 8.2 6.3 38.4 26.6 0.8 15.1 33.5 12.1 16.0 YOUDAO DAO US USD NR 28.5 n.a. n.a. 3,186 6.6 3.6 n.a. n.a. n.a. -12.5 n.a. 239.7 96.5 SCHOLAR 1769 HK HKD NR 16.2 n.a. n.a. 1,161 8.3 5.8 46.4 32.6 0.8 23.2 41.8 22.2 26.9 PUXIN NEW US USD NR 7.5 n.a. n.a. 655 n.a. n.a. n.a. n.a. n.a. n.a. 98.3 n.a. n.a. ONESMART ONE US USD NR 4.0 n.a. n.a. 649 1.2 0.9 n.a. 19.8 n.a. 10.9 n.a. -97.1 24.6 Average (higher education) 8.0 6.2 19.3 14.0 0.5 10.3 27.4 12.1 17.0 Average (K12 and pre-K) 4.9 3.8 22.2 14.9 0.6 11.1 38.5 15.1 17.3 Average (tutoring) 11.4 8.0 75.3 66.7 1.5 16.2 52.8 19.2 17.9 Average (all) 8.5 6.2 33.5 28.6 0.8 12.6 37.3 15.4 17.4 Sources: Company data, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Share price as of Dec 1, 2020
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China Internet 2021 Outlook: Looking for a fully digitalized post- Leo LIU, CFA Matt MA epidemic era +852 3189 6117 +852 3189 6194 [email protected] [email protected] ■ User time spent’s structure shift could start to slow down Calvin NG ■ Sector leaders should benefit from the new trends post-pandemic +852 3189 6176 [email protected] ■ Top picks: Tencent, JD & BABA; also prefer BILI, NTES & Kingsoft Monetization capability is more crucial going forward OVERWEIGHT
In 2020, China Internet’s user growth was stagnated, but user time spent has shot up during pandemic, which mainly benefited online games and Previous OVERWEIGHT entertainments. Meanwhile, sector leaders’ shares in user time spent also HSI (Dec. 1, 2020) 26,568 changed structurally. ByteDance and Kuaishou bagged the fastest growths in user time spent, keep taking shares from Tencent and Baidu, while BABA’s MSCI China (Dec. 1, 2020) 107 shares remained relatively stable. Going forward, online traffic should be Sector Performance difficult to increase significantly, while current time spent share structure should remain relatively stable, as Tencent gradually improves its WeChat (%) 120 KWEB US MSCI China eco-system and short content coverages to contend with short video 100 platforms. Thus, monetization capability is more crucial going forward. 80 Game: leaders should benefit from the major sector trends 60 40 China’s online gaming mkt accelerated to +20.1% yoy and reached 20 RMB208bn in 9m20, thanks to users’ increased time and money spent post- 0 pandemic. In 21E, we expect the mkt to further grow by 15%~20% yoy, but (20) should face a higher comp in 1H. Mobile games should grow faster than overall, while PC games should witness milder decline. Moreover, there are 4 major trends to drive industry forward: 1) eSports games’ growing popularity; Source: Bloomberg; share price as of Dec 1, 2020 2) Bargaining power’s shift to high quality CP and new distribution channels; % 1m 6m 12m 3) Improved IP operations to exploit deeper user values; and 4) Further Absolute return 2.9 36.0 60.6 Relative return exploration in overseas mkt. We believe industry leader Tencent would 0.9 8.6 26.5 capture all 4 trends, while NTES, BILI and Kingsoft could enjoy the industry bargaining power shift and IP value's full bloom. Ecommerce: new consumption habits were cultivated in LT Accumulated online retail sales of goods +16.0% yoy to RMB7.6tn in Oct. Though severely hammered in 1Q, eC quickly recovered afterwards thanks to release of pent-up demands and increased online penetration. In 21E, we expect eC sector to accelerate and receive 20%~ 25% yoy growths, with 1H growth facing lower comp. In the LT, we believe eC sector still has large room to grow, given: 1) eC’s highest ceiling among all verticals; 2) Offline consumption’s accelerated shift to online; and 3) eC leaders’ increasing penetration in offline operations. Moreover, 3 major trends are worthy of attention in 21E: 1) Competition in lower tier mkts will further escalate; 2) War on community group buy would be critical; and 3) eC live streaming by top KOL could soon reach its ceiling, but store live streaming should become the norm. We think BABA should further expand upward and downward on the industry value chain to gain shares, while Taobao Deal could better fulfill lower tier mkt’s demands. JD could capture the increased consumption on FMCG and fresh produces based on its supply chain advantages. Top picks Our top picks are Tencent (700 HK; BUY; TP HKD699), JD (JD US; BUY; TP USD100), and BABA (BABA US; BUY; TP USD359) for attractive valuation. We also favour BILI (BILI US; BUY; TP USD63), NTES (NTES US; BUY; TP USD121) and Kingsoft (3888 HK; BUY; TP HKD49) for their respective catalysts in 2021E. For MT and China Literature, we currently remain neutral.
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Thursday, December 3, 2020
Focus charts Figure 1: China’s mobile Internet user base Figure 2: Breakdown of time spent by Internet giants
Others % of time spent Kuaishou % of time spent China Mobile Internet MAUs (mn) yoy Alibaba % of time spent Baidu % of time spent Bytedance % of time spent Tencent % of time spent 1,200 5% 100.0% 20.0% 22.7% 19.2% 21.2% 4% 1,156 1,155 1,153 75.0% 4.5% 4.4% 7.2% 7.2% 1,136 10.5% 6.8% 10.3% 6.8% 1,150 1,138 1,139 1,131 1,133 3% 9.2% 9.1% 8.5% 8.5% 1,118 50.0% 12.0% 12.0% 15.3% 15.4% 1,106 2% 1,100 1,095 25.0% 1% 43.8% 45.0% 39.5% 40.9%
1,050 0% 0.0% Jun-19 Sep-19 Jun-20 Sep-20
Sources: QuestMobile, CMS (HK) Sources: QuestMobile, CMS (HK)
Figure 3: China’s online game market has experienced Figure 4: Monthly online retail sales showed accelerating decelerated growth in 2Q20 given normalized user growth in Apr-Jun time spent post-pandemic
China's online game market revenue (RMB bn) yoy Monthly online retail sales of goods (RMB bn) yoy (%) 80.0 73.2 40% 1,200 40% 66.3 68.5 56.4 57.6 59.2 58.5 60.0 53.6 55.9 30% 30% 800
40.0 20% 20%
400 20.0 10% 10%
0.0 0% - 0% 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20
Sources: CNG, CMS (HK) Sources: NBS, CMS (HK)
Figure 5: Online penetration rate increased as Figure 6: China’s online advertising market consumption continued to migrate from offline to online
China's online advertisement market (RMB bn) yoy 40% 200 30% 618 171 Double-11 Double-11 Promotion 20% 30% 618 promotion 139 618 promotion 150 137 promotion promotion 129 111 109 114 10% 89 20% 100 0%
-10% 10% 50 -20%
0% 0 -30%
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20E 4Q20E
Jul-19
Oct-18 Apr-18 Apr-20 Oct-20
Jun-20 Jun-18
Mar-19
Aug-18 Dec-18 Sep-19 Nov-19 Aug-20
May-19 Jan&Feb-20 Jan&Feb-18 Sources: NBS, CMS (HK) Sources: QuestMobile, CMS (HK)
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Valuation comparison
Mcap Bloomberg CMS CMS EV/EBITDA (x) P/E (x) PEG (x) P/Sales (x) ROE (%) CAGR 2020E-22E Company Ccy Price (USD Ticker Rating TP bn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E EPS EBITDA Platform Tencent 700 HK HKD BUY 578.0 699.0 714.7 26.7 21.8 38.6 31.9 1.9 1.5 10.2 8.0 25.4 21.6 20.7 20.5 Alibaba BABA US USD BUY 264.0 359.0 714.3 20.5 15.7 25.6 18.9 0.9 0.6 6.7 5.1 17.0 17.5 29.7 27.9 Meituan 3690 HK HKD NEUTRAL 289.2 273.0 219.5 n.a. 53.1 n.a. 81.8 1.9 0.6 12.5 7.8 7.6 12.5 n.a. n.a. Baidu BIDU US USD NR 140.3 n.a. 47.8 9.7 8.5 15.6 14.3 1.2 1.1 2.9 2.6 12.0 10.7 13.5 15.6 Alphabet GOOGL US USD NR 1,795.4 n.a. 1,215.4 17.3 14.2 32.0 26.2 1.5 1.3 8.3 6.8 17.3 17.7 20.9 17.8 Facebook FB US USD NR 286.6 n.a. 816.2 17.6 14.9 29.0 25.7 1.8 1.6 9.7 7.8 22.7 21.5 16.0 19.9 Naver 035420 KS KRW NR 285,500.0 n.a. 42.4 30.2 23.9 55.3 35.9 1.4 0.9 7.7 6.7 12.9 17.5 38.7 22.1 China Mean 19.0 24.8 26.6 36.7 1.4 1.0 8.1 5.9 15.5 15.6 21.3 21.3 Global Mean 21.7 17.7 38.8 29.3 1.6 1.3 8.5 7.1 17.6 18.9 25.2 19.9 Cloud Tencent 700 HK HKD BUY 578.0 699.0 714.7 26.7 21.8 38.6 31.9 1.9 1.5 10.2 8.0 25.4 21.6 20.7 20.5 Alibaba BABA US USD BUY 264.0 359.0 714.3 20.5 15.7 25.6 18.9 0.9 0.6 6.7 5.1 17.0 17.5 29.7 27.9 Kingsoft 3888 HK HKD BUY 39.1 49.0 6.9 17.8 14.2 38.5 30.1 1.7 1.3 8.3 6.9 6.9 5.6 22.5 22.1 Chinasoft 354 HK HKD BUY 8.1 7.0 2.9 14.2 12.0 19.6 16.8 1.3 1.1 1.4 1.2 13.5 14.0 15.2 16.1 Kingdee 268 HK HKD NR 26.8 n.a. 12.0 n.a. n.a. n.a. n.a. n.a. n.a. 22.6 18.3 n.a. 3.0 n.a. 39.0 Microsoft MSFT US USD NR 216.2 n.a. 1,634.7 21.7 19.3 32.1 29.2 2.5 2.3 10.3 9.3 39.5 38.1 12.8 14.2 Amazon AMZN US USD NR 3,220.1 n.a. 1,615.7 29.8 23.7 65.5 54.3 2.5 2.1 4.3 3.6 23.1 23.2 26.4 25.6 Alphabet GOOGL US USD NR 1,795.4 n.a. 1,215.4 17.3 14.2 32.0 26.2 1.5 1.3 8.3 6.8 17.3 17.7 20.9 17.8 Salesforce CRM US USD NR 241.4 n.a. 219.6 34.7 29.7 64.4 64.5 5.5 5.5 10.6 9.0 10.3 9.0 11.6 19.3 Oracle ORCL US USD NR 58.7 n.a. 176.9 10.4 10.2 14.1 13.0 1.8 1.6 4.4 4.3 n.a. n.a. 7.9 3.2 SAP SAP US USD NR 123.0 n.a. 151.1 15.6 15.1 20.1 20.7 n.a. n.a. 4.8 4.6 16.8 15.4 n.a. n.a. VMware VMW US USD NR 140.8 n.a. 59.2 15.1 13.1 21.4 20.0 7.0 6.5 5.9 5.1 77.6 35.6 3.1 5.8 Dropbox DBX US USD NR 20.2 n.a. 8.3 14.6 12.4 24.8 21.2 1.4 1.2 4.4 3.9 40.9 37.2 17.6 20.6 China Mean 19.8 15.9 30.6 24.4 1.4 1.2 9.8 7.9 15.7 12.3 22.0 25.1 Global Mean 19.9 17.2 34.3 31.1 3.2 2.9 6.6 5.8 32.2 25.2 14.4 15.2 Social Network & pan-entertainment Tencent 700 HK HKD BUY 578.0 699.0 714.7 26.7 21.8 38.6 31.9 1.9 1.5 10.2 8.0 25.4 21.6 20.7 20.5 Bilibili BILI US USD BUY 60.8 63.0 21.1 n.a. n.a. n.a. n.a. n.a. n.a. 11.7 8.0 n.a. n.a. n.a. n.a. China Literature 772 HK HKD NEUTRAL 57.4 45.0 7.5 n.a. 32.5 n.a. 33.6 1.0 0.3 6.8 5.0 n.a. 7.3 n.a. n.a. Tencent Music TME US USD NR 16.4 n.a. 27.5 35.8 26.5 37.0 29.6 1.4 1.1 6.2 5.1 9.6 11.2 25.8 32.9 iQiyi IQ US USD NR 22.6 n.a. 16.6 n.a. n.a. n.a. n.a. n.a. n.a. 3.6 3.2 n.a. n.a. n.a. n.a. Weibo WB US USD NR 41.8 n.a. 9.5 17.9 14.0 20.8 16.8 1.2 0.9 5.8 5.1 19.1 16.7 18.0 20.6 YY YY US USD NR 88.3 n.a. 7.2 11.5 9.9 21.5 17.2 0.7 0.6 1.9 1.6 10.5 5.6 31.0 28.5 Huya HUYA US USD NR 20.1 n.a. 4.7 20.5 13.0 25.1 19.3 0.8 0.6 2.8 2.3 11.6 14.7 31.7 48.3 Douyu DOYU US USD NR 12.5 n.a. 4.0 25.6 13.3 30.5 18.5 0.6 0.4 2.6 2.2 10.4 15.5 47.6 68.5 Momo MOMO US USD NR 13.6 n.a. 2.8 4.1 3.8 7.5 5.9 0.3 0.3 1.2 1.1 16.3 18.5 22.5 16.1 Babytree 1761 HK HKD NR 1.3 n.a. 0.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Facebook FB US USD NR 286.6 n.a. 816.2 17.6 14.9 29.0 25.7 1.8 1.6 9.7 7.8 22.7 21.5 16.0 19.9 Netflix NFLX US USD NR 504.6 n.a. 222.9 45.8 36.4 75.7 52.3 2.0 1.4 8.9 7.6 29.9 29.6 38.0 28.6 Snapchat SNAP US USD NR 44.5 n.a. 66.3 n.a. n.a. n.a. n.a. n.a. n.a. 27.1 19.0 n.a. n.a. n.a. n.a. Spotify SPOT US USD NR 285.0 n.a. 54.0 n.a. n.a. n.a. n.a. n.a. n.a. 5.7 4.7 n.a. n.a. n.a. n.a. Line 3938 JP JPY NR 5,370.0 n.a. 12.5 n.a. 47.4 n.a. n.a. n.a. n.a. 5.1 4.5 n.a. 1.9 n.a. n.a. China Mean 20.3 16.9 25.9 21.6 1.0 0.7 5.3 4.2 14.7 13.9 28.2 33.6 Global Mean 31.7 32.9 52.4 39.0 1.9 1.5 11.3 8.7 26.3 17.7 27.0 24.3
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Thursday, December 3, 2020
Utilities Sector Tommy WONG Eric SIU 2021 Outlook: Good year ahead +852 3189 6634 +852 3189 6395 ■ Gas: Growth to pick up pace, diversified drivers return to focus [email protected] [email protected] ■ Environment: Expect 14th FYP to reiterate support for environment protection / clean air, as players navigating through challenges. ■ Maintain positive stance for gas utilities OVERWEIGHT Gas: Growth intact in 2021 supported by strong recovery Winter heating demand will fuel gas consumption growth on the top of the Previous OVERWEIGHT strong recovery from the pandemic, we forecast the national gas consumption HSI (Dec. 1, 2020) 26,568 growth will reach 4% yoy in 2020E. With the expectation of full recovery in 2021, gas consumption growth will further increase to 9% yoy. As laying out HSCEI (Dec. 1, 2020) 10,660 th in the proposal of the 14 FYP and 2035 long-term goal, the central government strives to effectively control its carbon emission, capping its Sector Performance maximum level of carbon emission by 2030. We believe natural gas will play Utilities sector HSI a crucial role in assisting the transition from a coal-dominated energy society 20% to renewable energy society, with its better availability and reliability. 10% 0% -10% Start of PipeChina’s operation signals a key milestone -20% This September, China Oil & Gas Pipeline Network commenced operation -30% after major assets were transferred from the three national oil companies. This marks a key milestone and a step closer to market liberalisation. We expect it will bring a more sustainable and long-term development to the industry Source: Bloomberg; share price as of Dec 1, 2020 through: 1) speeding up infrastructure (pipelines/terminals/storage facilities) % 1m 6m 12m construction; 2) opening up facilities such as pipelines for third-party usages. Absolute return 7.4 (1.5) (10.4) As a result, we have seen increasing number of citygas operators investing in Relative return (2.8) (13.5) (11.1) LNG terminals and/or signing procurement contracts with overseas producers to better prepare themselves for such trend. Environment: Following a more sustainable growth Environmental protection will continue to be part of the important pieces accompanying the development of the economy. We expect the 14th FYP proposal to emphasize infrastructure development across several key environmental areas such as wastewater pipelines, municipal solid waste treatment and sorting and medical waste, etc. More importantly, we believe future development will be economically sustainable given the experience in recent years. Despite that power subsidies from central government are likely to fade out for WTE projects which commence in 2021 onwards, we believe it is a necessary transition for a healthier development between the balance of government subsidies and market-based operational efficiency.
Top picks Kunlun Energy (135 HK, BUY, TP: HKD7.6): Rapid M&A spurs gas sales growth. It trades at 6.6x FY21E P/E, 0.8x FY21E P/B and 4% dividend yield, valuation looks attractive. ENN Energy (2688 HK, BUY, TP: HKD124): Cost saving from its LNG import, solid gas sales growth and fast growing integrated energy. Valuation looks decent as it trades at 14.8x FY21E P/E with FY20E- FY22E EPS CAGR of 16.2%.China Gas (384 HK, BUY, TP: HKD36): Rural connection fee improves cash flow in FY21E and FY22E. It trades at 11.7x FY21E P/E, with FY20E-FY22E EPS CAGR of 13.2%.
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Focus charts – Natural gas
Figure 1: Gas consumption trend in China: Growth slowing to high single digit but remains persistent
bcm 400 2019-2022E CAGR: 7.0%
350 2015-2019 CAGR: 12.3% 300
250
200 376 348 307 320 150 280 237 100 193 206 50
0 2015 2016 2017 2018 2019 2020E 2021E 2022E Sources: NDRC,CMS (HK) estimates
Figure 2: Natural gas in energy usage mix in China has Figure 3: CNPC still dominates in domestic gas
ample room to catch up production Unconventi 100% onal gas, 90% 13.8% 27% 80% Others, 70% 58% 4.9% Coal 60% 33% CNOOC, 50% Crude oil 5.8% 40% Other non-fossil fuel CNPC, 30% 16% 19% Sinopec, Natural gas 16.9% 58.6% 20% 15% 10% 24% 8% 0% Global average China
Sources: British Petroleum, National Bureau Statistics, CMS (HK) Sources: Wind, CMS (HK)
Figure 5: Citygas operators’ share prices began to rally Figure 4: Global LNG price recovers as we head into in the past 1 month as boosted by better sentiment 4Q20 from winter heating demand USD/mmbtu Japan contract-based spot LNG import price Share price China Gas (-1% retun YTD) Henry Hub Spot ENN (+24% return YTD) are rebased UK NBP CR Gas (-9% return YTD) to 100 on 30 Henry Hub Future HSI (-6% return YTD) 1st Jan 2020 China ex-factory LNG price Kunlun Energy (-7% return YTD) 25 160
20 130 15 100 10 70 5 0 40
Sources: Bloomberg, CMS (HK) Sources: Bloomberg, CMS (HK)
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Focus charts – Environmental protection Figure 7: Incineration has become the mainstream Figure 8: Waste-to-energy capacity (by power
waste treatment method generation) soared from the past 2-3 years
MW Installed capacity yoy (right) Incineration Landfill Others 18,000 32% 31% 35% 16,000 100% 26% 30% 90% 14,000 80% 25% 70% 12,000 17% 60% 10,000 17% 20% 50% 60% 56% 8,000 15% 40% 50% 10% 10% 30% 42% 6,000 34% 37% 10% 20% 31% 4,000 10% 2,000 5% 0% 0 0%
Sources: MOHURD, CMS (HK) estimates Sources: BEIPA, CMS (HK) estimates
Figure 9: Guangdong crowned as the province with the Figure 10: Plenty of rooms to catch up for China’s most waste-to-energy capacity in 2019 (by power incineration treatment proportion generation) Anhui, Landfill Incineration Others 5.6% Jiangsu, 10.8% 100% 90% 80% Others, 70% Shandong, 60% 41.1% 11.7% 50% 40% 30% Zhejiang, 20% 14.5% 10% 0%
Guangdong , 16.3% Sources: Power.ofweek, CMS (HK) Sources: OECD, CMS (HK)
Figure 11: Environmental protection stocks trade at a downward PE multiples trend 12-month blended forward P/E Series1 CEI (257 HK) CEG (1257 HK) BEW (371 HK)
9 8 7 6 5 4 3 2 1 0
Sources: Bloomberg, CMS (HK)
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Valuation comparison – City gas operators
Company Bloomberg CMS Price CMS TP Upside Mcap P/B (x) P/E (x) EPS CAGR Dividend ROE (%) Net gearing Ticker Rating (%) (%) yield (x) (%) (HKD) (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020-22E 2020E 2020E 2021E 2020E China Gas 384 HK BUY 28.45 36.0 26.4 19,128 3.7 3.1 13.4 11.7 13.2 2.2 25.4 24.4 62.3 ENN Energy 2688 HK BUY 103.40 124.0 19.9 15,042 3.5 3.1 17.7 14.8 16.2 2.1 21.3 22.2 36.1 Kunlun Energy 135 HK BUY 6.00 7.6 26.7 6,701 0.9 0.8 8.3 6.6 17.8 4.2 10.9 12.6 20.2 CR Gas 1193 HK NEUTRAL 38.15 35.0 (8.3) 11,387 2.7 2.4 18.4 15.4 14.4 2.3 15.7 16.5 Net cash HK & China Gas 3 HK NR 11.84 n.a n.a 27,141 3.2 3.1 33.0 28.3 10.8 3.0 9.6 11.0 49.6 BEH 392 HK NR 25.90 n.a n.a 4,216 0.4 0.4 4.4 4.0 7.4 4.6 9.7 9.7 53.4 Towngas China 1083 HK NR 3.66 n.a n.a 1,402 0.5 0.5 7.6 6.8 11.4 4.2 7.2 7.6 n.a. Tian Lun Gas 1600 HK NR 6.80 n.a n.a 880 1.2 1.1 6.5 5.7 11.6 4.4 20.6 20.3 56.9
Average 2.0 1.8 13.7 11.7 12.8 3.4 15.1 15.5 46.4 Note: * 2020-2021E refers to fiscal years ended 31 Mar 2021-22E for China Gas Sources: Bloomberg, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Share price as of 1 Dec 2020
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Valuation comparison – Environmental Protection
Company Ticker CMS Price CMS TP Upside Mcap P/B (x) P/E (x) EPS CAGR PEG ROE (%) Net gearing Rating (%) (%) (x) (%) (HKD) (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020-22E 2020E 2020E 2021E 2020E BEW 371 HK BUY 3.14 3.70 17.8 4,059 0.9 0.9 7.0 6.1 10.9 0.6 14.1 14.7 118.2 China Everbright Intl 257 HK BUY 4.40 6.50 47.7 3,486 0.7 0.6 4.6 3.8 18.9 0.2 15.1 16.1 105.2 Canvest 1381 HK BUY 3.30 4.70 42.4 1,038 1.2 1.0 7.4 6.3 13.8 0.5 17.3 17.7 83.9 China Everbright Greentech 1257 HK BUY 3.18 6.20 95.0 847 0.5 0.4 3.8 3.0 25.5 0.1 15.2 15.8 84.3 Guangdong Investment 270 HK NR 12.88 n.a. n.a. 10,862 2.0 1.9 16.1 14.1 10.2 1.4 12.3 13.5 net cash Dynagreen 1330 HK NR 3.52 n.a. n.a. 1,308 1.1 0.9 7.3 5.9 22.6 0.3 16.9 17.5 n.a. China Water Affair 855 HK NR 6.53 n.a. n.a. 1,336 1.1 0.9 6.1 5.5 10.8 0.5 17.9 17.8 n.a. Dongjiang Environment 895 HK NR 5.53 n.a. n.a. 1,104 0.9 0.8 9.6 7.5 17.5 0.4 7.2 10.1 n.a. China Everbright Water 1857 HK NR 1.29 n.a. n.a. 476 0.4 0.4 4.1 3.5 13.3 0.3 10.0 10.7 n.a. SIIC Environment 807 HK NR 1.07 n.a. n.a. 359 0.3 0.2 3.8 3.4 10.6 0.3 7.0 7.5 n.a.
Average 0.9 0.8 7.0 5.9 15.4 0.4 13.3 14.1 97.9 Sources: Bloomberg, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Share price as of 1 Dec 2020
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Kevin CHEN Clint SU China Telecom Sector +852 3189 6125 +852 3189 6635 2021 Outlook: Darkest before dawn: re-rating ahead [email protected] [email protected] ■ Mobile ARPU is returning to positive growth, driven by rising 5G penetration and improving price environment
■ Sector valuation is at an historical-low; expect Telecom to re-rate on mobile ARPU recovery, sector rotations into value OVERWEIGHT ■ Top-picks: China Mobile (ARPU recovery, strong balance sheet); China Telecom (co-build/co-share capex savings) Previous OVERWEIGHT
Mobile ARPU arriving at an inflection point HSI (Dec. 1, 2020) 26,568 We are positive on Telecom sector for 2021, as we expect shares re-rating HSCEI (Dec. 1, 2020) 10,660 driven by mobile ARPU increase and sector rotation. After years of decline, the mobile ARPU have returned to positive growth for China Unicom and Sector Performance China Mobile. We believe the mobile ARPU trend is at an inflection point, (%) helped by: 1) 5G ARPU uplift (6-10% ARPU increase), 2) improved price Telecom Sector HSI Index environment (less competition and tariff reduction). 5G package user mix 15 10 reached 12%/19% at China Mobile/China Telecom by end-3Q20, and should 5 further propel mobile ARPU with rising 5G penetration in 2021. 0 -5 5G network rollout to continue, with capex discipline -10 -15 We expect a more moderate 5G network rollout cycle (vs. 4G), with capex -20 intensity peak at 25-27% (vs. 34% peak for 4G rollout). The 3 telcos are on -25 track to build 700k 5G base stations (BTS) in 2020, ahead of the original target of 600k+ with limited increase in 5G capex. The telcos managed spending through bid procurement and cost control measures. We expect Source: Bloomberg; share price as of Dec 1, 2020 1mn/1.1mn new 5G BTS installs in 2021/22 in China, with capex discipline % 1m 6m 12m to reduce pressure on telcos’ profitability. Absolute return (2.8) (12.7) (20.6) Relative return (11.4) (23.4) (21.1) Valuation at historical-low; Telecom re-rating ahead Telco valuation is currently at record low (1.1-1.8x forward EV/EBITDA, vs. ~3x historical), likely due to: 1) valuation contraction at the start of network rollout (rising capex for limited return), and 2) investor preference of Tech over Telecom (-0.8 inverse correlation). The US Executive Order (Nov 12th) banning investment in 31 Chinese companies further dampened investor sentiment. Looking into 2021, we believe Telecom sector is set for re-rate, driven by: 1) mobile ARPU recovery, 2) sector rotation to value stocks. We see limited downside risks at the current trough valuation. Top-picks China Mobile (941 HK, TP HKD70). We prefer CM given its recovering mobile ARPU, balance sheet strength, and low valuation. Its mobile ARPU has just returned to positive growth in 3Q20, with further upside as 5G user growth will likely accelerate in 2021. CM remains a top defensive stock amid market volatilities, given its unmatched financial position (zero debt). CM has only 5% US shareholder exposure, thus limited pressure in case of forced share selling by US Executive Order.
China Telecom (728 HK, TP HKD3.8). CT will likely benefit from 5G capex savings through co-build/co-share. CT also maintains: 1) the highest mobile service revenue growth driven by industry-leading subs growth; 2) rapid 5G user penetration uptake and SA commercialization. Valuation remains undemanding. Watch risks of forced share selling given its high (50%) ownership by US investors, which may result in better entry point on share price pull-back.
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Focus charts
Figure 1: China telcos mobile ARPUs Figure 2: China telcos mobile ARPU yoy
(RMB) CM CU CT CM CU CT 70 20% 65 15% 60 10% 55 5% 50 0% 45 -5% 40 -10% 35 -15% 30 -20%
Sources: Company data, CMS(HK); as of 3Q20 Sources: Company data, CMS(HK); as of 3Q20
Figure 3: 5G BTS installation forecast (base case) Figure 4: Telecom vs. Tech Hardware relative change
('000 units) HSTelecom (relative) MSCI CN Tech HW (relative) 1,400 2019-26 total = 6,700k 30% Corr = -0.85 1,200 1,120 1,150 20% 1,000 1,050 1,000 310 320 870 CT 10% 300 320 800 700 700 220 260 0% 210 CU 600 190 200 230 200 180 -10% 400 130 140 600 610 CM -20% 500 500 200 110 380 430 360 -30% - -40% Jan-18 Jul-18 Feb-19 Sep-19 Apr-20 Nov-20 Note: Change relative to Hang Seng Index Sources: Company data, CMS(HK) estimates Sources: Bloomberg, CMS (HK); as of Dec. 1, 2020
Figure 5: China Telecom Sector forward EV/EBITDA Figure 6: Chinese telcos forward EV/EBITDA
(x) Forward EV/EBITDA (x) CM CU CT 5.0 6.0 Early Early 4G 5G 4.5 5.0
4.0 + 1 Std. = 4.2x 4.0 3.5 Average = 3.7x 3.0 - 1 Std. = 3.2x 3.0 2.0 2.5 1.0 2.0 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Sources: Bloomberg, CMS (HK); as of Dec. 1, 2020 Sources: Bloomberg, CMS(HK); as of Dec. 1, 2020
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Valuation comparison
Company Ticker Curr CMS Price CMS Upside MCap P/E P/B EV/EBITDA ROE Div. Yield Net D/E Rating TP (%) (USD bn) (x) (x) (x) (%) (%) (%) (HKD) 2020E 2021E 2020E 2021E 2021E 2021E 2020E 2021E 2020E 2021E 2019 Telecom Operator China Mobile 941 HK HKD BUY 46.30 70.0 51 122.3 7.9 7.5 0.7 0.7 1.3 1.3 10 10 7.0 7.3 -38 China Telecom 728 HK HKD BUY 2.33 3.8 63 24.3 7.6 7.5 0.5 0.5 1.9 1.8 6 6 6.2 6.2 24 China Unicom 762 HK HKD BUY 4.65 7.0 51 18.4 10.0 9.2 0.4 0.4 1.2 1.1 4 4 4.0 4.4 0 HKT 6823 HK HKD NR 10.24 n.a. n.a. 10.0 15.7 14.8 2.1 2.1 9.4 8.9 13 14 6.9 7.1 106 PCCW 8 HK HKD NR 4.69 n.a. n.a. 4.7 126.8 48.4 2.8 3.3 7.4 7.0 2 7 6.9 7.0 297 Chunghwa Telecom 2412 TT TWD NR 109.00 n.a. n.a. 29.6 26.0 26.7 2.3 2.3 11.4 11.3 9 9 3.8 3.7 -7 Taiwan Mobile 3045 TT TWD NR 98.30 n.a. n.a. 12.1 24.5 26.4 4.3 4.4 12.7 12.3 17 16 4.8 4.4 59 SK Telecom 017670 KS KRW NR 236,500 n.a. n.a. 17.3 13.9 10.2 0.8 0.7 5.3 5.1 6 8 4.2 4.4 40 KT Corp 030200 KS KRW NR 24,250 n.a. n.a. 5.7 8.9 7.7 0.4 0.4 2.5 2.4 5 6 4.7 4.9 32 LG Uplus 032640 KS KRW NR 11,850 n.a. n.a. 4.7 7.2 7.9 0.7 0.7 3.3 3.1 10 8 3.6 3.8 72 NTT Docomo 9437 JP JPY NR 3,875 n.a. n.a. 120.0 20.3 20.0 2.3 2.3 8.5 8.5 12 11 2.9 3.2 -2 KDDI Corp 9433 JP JPY NR 2,999 n.a. n.a. 66.3 10.5 10.1 1.5 1.4 4.8 4.7 15 14 4.1 4.2 22 Verizon VZ US USD NR 60.58 n.a. n.a. 250.7 12.6 12.1 3.6 3.2 7.7 7.4 29 27 4.1 4.2 208 AT&T Inc T US USD NR 28.87 n.a. n.a. 205.7 9.1 9.0 1.1 1.1 6.8 6.7 12 12 7.2 7.3 87 T-Mobile US Inc TMUS US USD NR 133.73 n.a. n.a. 166.0 50.3 43.2 2.4 2.6 9.5 8.7 6 6 0.0 0.0 142 Vodafone Group VOD LN GBP NR 125.44 n.a. n.a. 45.2 22.1 17.5 0.6 0.6 8.6 8.5 3 4 6.1 6.2 87 Orange SA ORA FP EUR NR 10.63 n.a. n.a. 34.1 10.7 10.0 0.9 0.8 5.3 5.2 9 9 6.3 6.7 85 Telefonica SA TEF SM EUR NR 3.68 n.a. n.a. 23.7 10.8 8.7 1.3 1.2 5.4 5.3 12 14 9.7 8.8 197 Average 22.8 17.0 1.6 1.6 6.6 6.4 10 10 5.0 5.1 85 Telecom equipment China Tower 788 HK HKD BUY 1.23 1.8 46 27.9 30.7 22.4 1.0 1.0 4.6 4.2 3 4 1.8 2.4 49 ZTE 763 HK HKD NR 20.45 n.a. n.a. 22.6 17.4 13.3 2.0 1.8 20.0 16.0 13 14 1.5 2.0 14 China CommService 552 HK HKD NR 4.13 n.a. n.a. 3.7 7.8 6.8 0.7 0.6 1.1 1.0 8 9 4.4 4.9 -63 YOFC 6869 HK HKD NR 11.14 n.a. n.a. 2.3 10.2 8.9 0.8 0.7 15.5 13.6 8 8 2.7 3.0 -6 Comba 2342 HK HKD NR 2.64 n.a. n.a. 0.9 42.6 17.3 1.8 1.6 21.8 11.7 4 8 0.6 1.7 3 Average 21.8 13.7 1.2 1.1 12.6 9.3 7 9 2.2 2.8 0
Sources: Bloomberg, CMS (HK); Share price as of Dec. 1, 2020; Non-rated stocks are based on market consensus
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Auto & Auto Parts 2021 Outlook: a year for innovation Yonghuo LIANG Steven YANG ■Expect industry volume to grow 10% in 2021E, driven by organic growth +86 755 8290 4571 +86 755 8323 5354 and supportive policies [email protected] [email protected]
■NEV sees explosive growth, innovative domestic OEMs gain market share; robust growth to continue in premium car segment ■Top picks: BYD Company, Geely Auto and Great Wall Motors OVERWEIGHT
Industry enters a recovery cycle Previous OVERWEIGHT Expect the 3-year industry consolidation to end in 2021E with a 10% sales volume growth, and the growth rate to decelerate from 1H21 to 2H21. Maintain HSI (Dec. 1, 2020) 26,568 overweight. Drivers: 1) Organic: purchasing power of low to mid-end vehicle HSCEI (Dec. 1, 2020) 10,660 buyers restores as COVID-19 impact subsides; consumption upgrade; healthy inventory condition; low base effects. 2) Policy: favourable overall outlook due to the outsized shares of auto industry in employment and private consumption; Sector Performance rising vehicle registration quota in policy-controlled cities; promotion campaigns (%) in rural areas; replacement of National III vehicles. Auto & Auto parts HSI 40 NEV sees explosive growth, innovative leaders stand out 30 NEV industry enters a market-driven stage, and we expect volume to grow by 20 at least 40% in 2021E, with NEV penetration rate rising from 4.7% in 2019 to 10 20% in 2025E (sales vol. CAGR at 34%). 1) Demand: no. of NEVs purchased 0 by retail customers grows by 15%/22% in cities with/without registration quota -10 in 1Q-3Q20, implying an increased market acceptance. 2) Supply: OEMs to -20 increase their presence in NEV, with high, medium and low-end models filling -30 the market. 3) China brands: China OEMs to successively launch their own EV platforms and master core EV technologies. Following BYD Han, more Chinese models are expected to break the price ceiling of RMB200,000. 4) Market structure: far from saturation. In 2021E, Tesla will accelerate its localization, Source: Bloomberg; share price as of Dec 1, 2020 BYD to maintain high market share helped by its competitive product line, while % 1m 6m 12m the emerging big 4 (Nio, Li, XPeng, WM) are likely to see meaningful growth. Absolute return 13.7 39.9 27.4 Relative return 5) Auto parts: enlarged demand for light-weight and NEV components will give Relative return 3.5 27.9 26.6 leading suppliers an opportunity to raise ASP. Domestic giants and premium segment enjoy solid growth Market share of Japanese/German carmakers expanded by 2ppt/0.7ppt from Jan to Oct 2020, while Chinese OEMs’ share shrank by 1.8ppt. However, domestic giants with strong R&D capabilities gained market share by catching industry trends. We expect domestic leaders to narrow the gap with JV brands relying on strong model cycle and technological advance. From Jan to Oct 2020, premium car segment grew 15.5% yoy, implying a penetration rate of 14.5%, still much room for growth. We expect premium car to continue to outperform, driven by consumption upgrade story and policy loosening on car registration in certain cities. Recommend NEV and premium car industry chain 1) NEV: a) Among OEMs, BYD Company (1211 HK, BUY) is our top pick, given its whole value chain layout and newly launched EV/PHEV models; also pick Geely Auto (175 HK, BUY) for its new model cycle and late-mover advantage of its SEA platform; we like Great Wall Motors (2333 HK, BUY) due to its ORA brand’s accurate positioning and new SUV products. b) Auto parts sector, we recommend Minth group (425 HK, BUY) and Fuyao Glass (3606 HK, BUY) as they are well positioned to seize new opportunities and to maintain their leadership in industry transformation period. 2) Premium car: prefer Zhongsheng Group (881 HK, BUY) for its multiple advantages in brand mix/networks/management.
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Focus charts Figure 1: Auto monthly sales yoy growth Figure 2: Auto YTD sales yoy growth
mn Monthly sales yoy growth mn YTD sales yoy growth 3.5 32% 40 20% 22% 35 10% 2.8 11% 30 0% 0% -11% 2.1 25 -22% -10% 20 -32% 1.4 -20% -43% 15 -30% -54% 10 0.7 -65% 5 -40% -76% 0.0 -86% 0 -50%
Sources: CAAM, CMS (HK) Sources: CAAM, CMS (HK) Figure 3: Passenger cars monthly sales yoy growth Figure 4: Commercial cars monthly sales yoy growth
mn Monthly sales yoy growth k Monthly sales yoy growth 3.0 36% 600 80% 24% 60% 12% 2.4 480 0% 40% -12% 1.8 360 20% -24% 0% -36% 1.2 240 -48% -20%
-60% -40% 0.6 -72% 120 -60% -84% 0.0 -96% 0 -80%
Sources: CAAM, CMS (HK) Sources: CAAM, CMS (HK) Figure 5: Market share of passenger cars by country Figure 6: NEV monthly sales yoy growth
Chinese Japanese German American k Monthly sales yoy growth Korean French Others 250 480% 100%
200 360% 80%
60% 150 240%
40% 100 120%
20% 50 0%
0% - -120%
Sources: CAAM, CMS (HK) Sources: CAAM, CMS (HK) Note: October data has not been disclosed
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Valuation comparison
Net Div Company Ticker Pricing CMS Price CMS Upside Mcap P/E (x) P/B (x) PEG(x) ROE (%) gearing yld (%) (%) ccy Rating TP (%) (USDmn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2019 Auto maker
BYD Company 1211 HK HKD BUY 187.6 340.0 81% 70,391 87.8 67.1 7.1 6.4 0.4 3.6 6.9 7.4 0.1 0.1 105.5
GreatWall Motor 2333 HK HKD BUY 15.8 20.0 27% 31,903 26.1 15.0 2.1 1.9 5.9 0.2 8.2 13.0 2.0 3.4 -11.7
Geely Auto 175 HK HKD BUY 21.7 30.0 39% 27,205 22.2 15.7 2.6 2.7 -3.1 0.4 11.9 17.3 1.1 1.5 -31.6
Brilliance China 1114 HK HKD BUY 6.8 10.0 47% 4,398 4.2 3.7 0.8 0.7 1.2 0.3 18.8 18.2 6.4 1.7 -1.5
GAC Group 2238 HK HKD NR 8.3 n.a n.a 18,332 10.6 8.1 0.8 0.8 1.8 0.3 7.7 9.5 3.0 3.8 -19.6
Dong Feng Group 489 HK HKD NR 8.0 n.a n.a 8,835 6.2 4.8 0.4 0.4 -0.3 0.2 7.2 8.8 4.2 5.3 20.1
Sinotruck 3808 HK HKD NR 19.6 n.a n.a 6,928 8.6 8.3 1.5 1.3 0.1 2.5 18.3 16.4 4.4 4.5 -63.9 Mean* 13.0 9.3 1.4 1.3 0.9 0.6 12.0 13.9 3.5 3.4 -18.0
Auto dealer
Zhongsheng 881 HK HKD BUY 57.9 70.0 21% 16,884 23.0 17.9 4.5 3.7 2.1 0.6 19.8 20.9 0.9 1.2 68.5
Harmony Auto 3836 HK HKD NEUTRAL 4.2 3.6 -13% 837 9.4 8.5 0.7 0.6 0.9 0.8 7.3 7.6 2.1 2.4 15.6
ZhengTong Auto 1728 HK HKD NEUTRAL 1.1 1.0 -7% 373 -1.8 6.0 0.2 0.2 0.0 0.0 -11.5 3.5 0.0 3.7 67.0
MeiDong Auto 1268 HK HKD NR 30.7 n.a n.a 4,882 42.0 29.8 12.7 10.2 1.2 0.7 34.6 37.3 1.3 1.8 45.1
Yongda Auto 3669 HK HKD NR 13.7 n.a n.a 3,454 13.9 10.8 1.9 1.7 1.6 0.4 14.8 16.6 2.8 2.8 116.3
Grand Baoxin 1293 HK HKD NR 1.0 n.a n.a 378 5.0 4.0 0.3 0.3 -0.3 0.2 6.4 7.3 0.0 0.0 122.1 Mean 15.3 12.8 3.4 2.8 0.9 0.4 11.9 15.5 1.2 2.0 72.4
Auto parts
Weichai Power 2338 HK HKD BUY 16.6 22.0 33% 19,646 11.3 10.0 2.1 1.8 1.4 0.8 18.7 18.2 2.2 2.5 -63.9
Fuyao Glass 3606 HK HKD BUY 37.7 47.0 25% 14,489 29.8 21.4 3.6 3.3 -4.2 0.5 12.1 15.5 2.2 3.0 11.1
Minth Group 425 HK HKD BUY 37.1 45.0 21% 5,490 30.3 19.0 2.4 2.2 -1.0 0.3 8.2 11.9 1.3 2.1 60.4
Nexteer 1316 HK HKD NR 8.5 n.a n.a 2,741 24.7 12.3 1.5 1.3 -0.5 0.1 6.1 11.4 1.5 2.6 -12.6
Mean 24.0 15.7 2.4 2.2 -1.1 0.4 11.3 14.2 1.8 2.6 -1.2
Mean all* 16.6 12.2 2.4 2.1 0.4 0.5 11.8 14.6 2.2 2.7 20.1 Sources: Company data, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Price as of 1 Dec. 2020 *Note: Mean and Mean all do not include BYD Company
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Airlines Yun WEI 2021 Outlook: Focus on intl. market recovery progress +86 755 8373 2985 ■ The worst is over. Domestic market leads the world in recovery [email protected]
■ The reopening of intl. market will help bring forward inflection point; watch for vaccine progress
■ Optimistic on medium-term valuation recovery driven by improving fundamentals; prefer three major airlines OVERWEIGHT
Domestic market leads in recovery Previous OVERWEIGHT
China's airlines industry was hit hard by COVID-19. In 10M20, the three HSI (Dec. 1, 2020) 26,568 airlines’ ASK and RPK saw a yoy drop of 44.3%/52.0%, respectively, and the avg. load factor shrank by 14.4% yoy. It is the most serious crisis since SARS HSCEI (Dec. 1, 2020) 10,660 outbreak in 2003 and the financial crisis in 2008. Though the first to suffer from the pandemic, Chinese aviation industry was also the first to recover. Sector Performance From Feb. to June, China's domestic market began to recover gradually. Then (%) the recovery accelerated during the summer season; Sept./Oct. domestic 20 Airlines HSI Index passenger flows returned to their levels in the same period last year. Airlines 10 sector’s earnings deficit has greatly improved qoq in 3Q20. During winter and 0 spring seasons, which began at the end of October, scheduled weekly -10 domestic flights increased by 20% yoy. In terms of capacity and passenger -20 flow, China's domestic market is the frontrunner in global aviation recovery. -30 -40
Intl. market is key to profit inflection point
The recovery of airlines sector follows three stages: capacity improvement Source: Bigdata; share price as of Dec 1, 2020 passenger flow rebound, and regain in ticket price. Due to the pandemic, intl. markets remain closed, which has limited the scope for further improvement. % 1m 6m 12m This spare capacity has been partly switched to the domestic market, leading Absolute return 17.1 25.5 (6.0) to an oversupply, which puts pressure on domestic passenger load factors Relative return 7.8 15.7 (6.8) and ticket prices. Only when intl. markets reopen and the spare capacity is absorbed, will the domestic market recover any further. BioNTech & Pfizer and Moderna have recently announced positive news on vaccine developments, which, if successful, would significantly raise expectations for the reopening of the intl. market.
MT fundamentals repair drives valuation recovery We upgraded the sector to BUY in May and the avg. share price of the three major airlines has since risen 40%, beating HSI by 25ppt. We expect airlines fundamentals to improve significantly in 2021-22, prompting short and medium-term valuation to recovery: 1) The Chinese domestic market leads the world in recovery, a large-scale COVID outbreak in China is unlikely, and the fundamentals have improved significantly since 3Q; 2) Vaccination will facilitate the reopening of intl. market, promoting further recovery of domestic passenger load factor and ticket price; 3) Intl. oil prices to remain low and RMB to appreciate further. The avg. valuation of the three major airlines is 0.8x P/B, still at a historic low. Top picks: Air China (753 HK, TP HKD7.7, BUY): intl. market player, affected greatly by the pandemic and will benefit more from the reopening of intl. market than its peers; CSA (1055 HK, TP HKD5.90, BUY): domestic market player, the fastest to recover amongst the three airlines, optimistic about Co.’s Baiyun & Daxing dual hub operation. Risks: Vaccine progress and demand fall short of expectations; A major COVID outbreak in China; High oil prices and depreciation of RMB; Catalyst: Chunyun exceeds expectations; vaccination; intl. markets reopen.
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Focus charts Figure 1：Three major airlines ASK, RPK yoy growth and RPK-ASK difference 60% 15% RPK-ASK(RHS) ASK yoy RPK yoy 40% 10% 20% 5% 0%
-20% 0%
-40% -5% -60% -10% -80%
-100% -15% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sources: Company data, CMS (HK)
Figure 2：Domestic market recovery progress of the Figure 3：Airlines sector forward PB three major airlines ASK yoy RPK yoy PLF(RHS) 2.0 X 12m F P/B 20% 80%
0% 1.5 70% -20% +1SD
-40% Avg 60% 1.0 -60%
-80% 50% -1SD Mar Apr May Jun Jul Aug Sep Oct 0.5 2015 2016 2017 2018 2019 2020
Sources: Company data, CMS (HK) Sources: Bloomberg, company data, CMS (HK)
Figure 4：Brent oil price Figure 5：USD to RMB exchange rate 100 USD 2020 2019 2018 7.2 2020 2019 2018 2017 2016 2017 2016
80 7.0
60 6.8
40 6.6
20 6.4
0 6.2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Sources: Wind, CMS (HK) Sources: Wind, CMS (HK)
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Valuation comparison
Company Ticker CMS Price Upside Mcap EV/EBITDA (x) P/B (x) P/E (x) PEG (x) ROE (%) CAGR Net CMS Rating 20E-22E (%) gearing TP (%) (HKD) (HKD) (%) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E EPS EBITDA 2020E Airlines Air China 753 HK BUY 6.5 7.7 18.8 16,357 13.4 6.4 1.0 0.9 n.a. 17.9 n.a. n.a. -13.2 4.9 n.a. 47.4 40.1 CSA 1055 HK BUY 4.9 5.9 19.7 13,652 6.9 4.3 0.9 0.9 n.a. 19.7 n.a. n.a. -13.9 4.5 n.a. 30.7 98.3 CEA 670 HK BUY 3.6 4.6 28.5 11,109 6.6 4.4 0.9 0.8 n.a. 15.4 n.a. n.a. -16.5 5.2 n.a. 25.8 94.4 Average 9.0 5.1 0.9 0.9 n.a. 17.7 n.a. n.a. -14.5 4.9 n.a. 34.6 77.6 Sources: Company data, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Share price as of Dec 1, 2020
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Construction Materials Yiding JIAO,CFA FRM Yun WEI 2021 Outlook: Profitability depends on supply flexibility +86 755 8290 8475 +86 755 8373 2985 [email protected] [email protected] ■ Promising signs of high single digit in infra. FAI growth 2021E Anbo ZHAO ■ Cement: focus on regional differentiation and asset integration. The +86 755 8285 2939 strong gets stronger. Top picks CNBM (3323 HK) and Conch (914 HK) [email protected] ■ Steel: improved demand but inventory and capacity issues remain Positive on infra. FAI, new housing starts remain flat yoy In 19/20, the annual growth of the net issuance of government bonds – OVERWEIGHT including treasury bonds, local government special bonds, and LGFV bonds – was over 80%, but infra. FAI in 11M2020 only grew 3% yoy. The Previous OVERWEIGHT outperformance of excavator sales led us believe that construction activities HSI (Dec. 1, 2020) 26,568 have further to run, and infra. FAI will reach a high single digit growth in 2021E. In property sector, the areas of comm. housing sales and new housing starts in HSCEI (Dec. 1, 2020) 10,660
11M20 were flat and down 2.6% yoy, respectively. In 10M20, the planned supply of land area in 100 cities increased by 12% yoy, but the "Three Red Sector Performance Lines" policy announced since then had dragged the growth down to 3% as of (%) Nov. 22. We expect 2021E building completion to accelerate, but new housing 60 HSCIMT HSI index starts in 2021 to be flat or to grow slightly due to the limited incentive. For infra. 40 and property as a whole, the downstream demand for construction materials is 20 expected to grow by 5% in 2021E. 0 Cement: cross-region differentiation + asset restructuring, -20 the strong gets stronger -40 Since the 2016 supply-side structural reform, the cement industry has maintained its prosperity but the cyclicality feature has weakened. Cross-region differentiation has emerged and the strong gets stronger. In 10M20, cement Sources: Bigdata, share price as of Dec. 1, 2020 output grew 0.4% yoy (Oct: 9.6% mom). We expect infra. project starts and YE project ramp-ups to drive stock performance. % 1m 6m 12m 2021 outlook: 1) Infra. is a pillar of cement demand, but the demand from Absolute return 29.5 53.9 40.8 Relative return 20.2 44.2 40.0 property in 2H21E could be weak. We expect cement demand to remain high, annual growth to remain flat or slightly positive, and 1H21E is expected to grow faster than 2H21E. 2) Eastern China and Central & Southern China to continue outperforming. Cement demand in the two regions recovered rapidly from the pandemic, with strong sales in peak season and resilient price in off-season. Moreover, we saw abundant funds from local gov.; 3) Northwest and Northern regions may benefit from infra. and seasonal projects. Top pick: CNBM (3323 HK, TP: HKD13.9, BUY), as Co’s asset restructuring could raise profitability and open up valuation upside; Conch (914HK, TP: HKD68.5, BUY), a leader in Eastern and Southern China with steady profit. Steel: inventory & capacity issues remain In 11M20, rebar consumption has increased by 7.8% yoy, driven by YE rush demands. For rebar inventory, mom decline is significant but the current volume is still 2mn tons higher than that in last year. As of Nov. 21, rebar's unit profit was RMB728/ton, up 33% from the end of October, but still down 45% yoy. As the overall capacity utilization rate maintains at ~68% in 2020, the capacity potential remains ample in 2021E. The 2020 winter capacity restriction period is slightly longer than that in 2019 with more specific rules on such restrictions, but the cap is expected to 25% more generous than in 2019. We think the pro- cyclical revaluation remains to be seen.
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Focus charts Figure 2: Comm. Housing sales vs new housing starts, Figure 1: Infra. FAI & gov. bonds net issuance growth limited rebound 80% 200% 30% Commercial housing sales (ytd, yoy) New housing starts (ytd, yoy) 20% 60% 150% 10% 40% 100% 0%
20% 50% -10% -20% 0% 0% -30% -20% -50% Infra. FAI -40% -40% Government bonds (right axis) -100% -50% Jan-05 Jan-09 Dec-12 Nov-16 Oct-20 Feb-18 Sep-18 Mar-19 Sep-19 Mar-20 Oct-20 Sources: Wind, CMS (HK) *government bonds include treasury Sources: Wind, CMS (HK) bonds, special local government bonds, and LGFV bonds
Figure 3: Cement output, infra FAI, and new housing Figure 4: H-share cement stocks forward P/B, attractive
starts comparison valuation 80% X Cement output (ytd, yoy) 1.5 12m F P/B Infra. FAI (ytd, yoy) 60% New housing starts (ytd, yoy) 40% 1.3 +1SD 20% 1.0 0% Avg -20% 0.8 -1SD -40%
-60% 0.5 2015 2016 2017 2018 2019 2020
Sources: Wind, CMS (HK) Sources: Wind, CMS (HK) estimates
Figure 5: Rebar inventory comparison, still at a high Figure 6: Estimated rebar profit comparison, rebound yet
level yoy to reach previous highs 1,600 10,000 tons 2,450 RMB/ton 2017 2018 2019 2020 2017 2018 2019 2020
1,250 1,900
900 1,350
550 800
200 250 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: Wind, CMS (HK) Sources: Wind, CMS (HK)
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Valuation comparison
Company Ticker CMS Price Upside Mcap EV/EBITDA (x) P/B (x) P/E (x) PEG (x) ROE (%) CAGR Net CMS Rating 20E-22E (%) gearing TP (%) (HKD) (HKD) (%) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E EPS EBITDA 2020E Steel Angang 347 HK NEUTRAL 3.3 3.1 -6.9 4,475 8.3 8.3 0.5 0.5 24.1 22.8 n.a. n.a. 2.1 2.2 -0.4 -0.6 25.0 Maanshan 323 HK NEUTRAL 2.4 2.4 0.4 3,087 7.4 7.4 0.6 0.6 13.1 13.4 n.a. n.a. 4.4 4.3 -2.5 1.2 17.0 Average 7.8 7.8 0.5 0.5 18.6 18.1 n.a. n.a. 3.2 3.2 -1.5 0.3 21.0 Cement Conch 914 HK BUY 50.2 68.5 36.5 42,564 5.3 5.4 1.4 1.2 6.4 6.5 0.7 0.7 21.8 18.7 -3.7 -2.9 net cash CNBM 3323 HK BUY 10.4 13.9 33.7 11,316 4.5 4.5 0.8 0.8 6.4 6.3 0.3 0.3 11.8 11.0 0.1 -0.3 94.4 Average 4.9 4.9 1.1 1.0 6.4 6.4 0.5 0.5 16.8 14.8 -1.8 -1.6 94.4 Sources: Company data, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Share price as of Dec 1, 2020
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Infra. & Construction Machineries Yiding JIAO, CFA FRM Anbo ZHAO 2021 Outlook: industry landscape to improve further +86 755 8290 8475 +86 755 8285 2939 ■ Promising signs of high single digit growth in infra. FAI 2021E [email protected] [email protected] ■ Infra: improving fundamentals with attractive valuation. Top picks: China Railway (390 HK) and CSCI (3311 HK) ■ Construction machineries: positive on late-infra-cycle equipment OVERWEIGHT Optimistic on infra. investment in 2021E as data shows At the macro level, our analyses on the incremental change of government Previous OVERWEIGHT bonds – include treasury bonds, local gov. special bonds, LGFV bonds – and HSI (Dec. 1, 2020) 26,568 on infra. investments data post-2000 have both shown that every strong gov. stimulus will be followed by a rapid increase in infra. FAI in the following 2-3 HSCEI (Dec. 1, 2020) 10,660 yrs. The yoy net increase of government bond issuance in 19/20 was over 80%, but infra. FAI in 2020 was under pressure due to the COVID-19. Sector Performance At the industry level, 1) excavator sales – a good indicator for construction (%) starts, has continuously beat market expectations in 2H20, also indicating a 20 Infra. Index HSI Index strong revenue recognition ahead in 2021E; 2) consumption of rebar steel is 10 rebounding in Nov., so a strong demand is also expected in 2021E. Therefore, 0 we expect infra. FAI to achieve a high single digit growth in the coming year. -10 -20 Infra. sector’s fundamentals improving -30 Infrastructure is one of the sectors that have enjoyed the fastest growth post- COVID this year. The avg. 3Q20 revenue growth of large infra. firms reached 24.8% yoy. Given the rapid increase in rebar consumption in Nov., we expect Sources: Bigdata, share price as of Dec. 1,2020 these infra. firms to continue to record a high rev. growth in 4Q20E. The new % 1m 6m 12m orders of large infra. firms increased by 28.3% yoy in 3Q20. We believe the Absolute return 0.5 (7.7) (25.5) continued supportive government policy will help maintain a double-digit Relative return (8.9) (17.5) (26.4) growth in new infra. orders in the upcoming year. In addition, the net inflow of
OCF in 3Q20 increased by RMB6bn for large infra. firms, and is expected to improve further in 2021E with the pandemic subsiding. Large infra. firms now trade at historical lows, at 2.4x forward P/E, compared with 3.7x in early 2020. We are positive on companies that have higher proportion of municipal projects at hands and with improving mgmt. efficiency. Top picks: China Railway (390 HK, TP: HKD7.8, BUY) and CSCI (3311 HK, TP: HKD9.8, BUY). Catalysts: sector rotation as the pandemic subsiding; acceleration of infra. FAI. Construction machinery: promising late-cycle equipment outlook + accelerating overseas market expansion As of Oct, China’s excavator sales recorded over 50% yoy growth for the 7th consecutive month, beating expectations. With the moderate progress of construction projects, we expect the main focus of machinery sales is to shift to late-infra-cycle products line. Zoomlion, with its high concentration in late- cycle products, saw a 90% yoy growth in domestic sales in 3Q20, the fastest among peers. The overseas excavator sales in Oct also increased by 59% yoy despite the pandemic. We believe Chinese manufacturers have increased their market share and brand recognition thanks to their continued operation during the pandemic, and are expected to enjoy a first-mover advantage in the subsequent recovery period. Top pick: Zoomlion (1157 HK, TP: HKD10.7, BUY) with its high proportion of late-cycle equipment. Catalysts: high growth of core products and rapid breakthroughs in emerging sub-sectors such as earthmoving, aerial working platforms, and agricultural machinery.
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Focus charts Figure 2: Rebar consumption trends; rising rapidly in Figure 1: Infra. FAI & gov. bonds net issuance growth Nov 2020 80% 200% 500 10,000 tons
60% 150% 400
40% 100% 300 20% 50% 200 2017 0% 0% 2018 Infra. FAI 100 2019 -20% -50% Government bonds (right axis) 2020 -40% -100% 0 Jan-05 Jan-09 Dec-12 Nov-16 Oct-20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: Wind, CMS (HK) *government bonds include treasury Sources: Wind, CMS (HK) bonds, local government special bonds, and LGFV bonds
Figure 3: Construction machineries mo. sales yoy Figure 4: Infra. orders yoy from large infra. enterprises 100% 50% 80% Excavator Loader Truck crane 40% 60% 30% 40% 20% 20% 10% 0%
-20% 0%
-40% -10%
-60% -20% Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Sep-20 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 Sources: Wind, CMS (HK) Sources: Wind, CMS (HK)
Figure 5: China Railway forward P/E, at historical low Figure 6: Zoomlion forward P/E 9.0 HKD 11.0 HKD 8.5x 12.0x 10.0x 8.0x
Stock price Stock price 7.0x 7.0 9.0 6.0x
5.5x 7.0 5.0 4.0x
4.0x 5.0 3.0
2.5x
3.0 1.0 Dec-13 Apr-15 Sep-16 Feb-18 Jul-19 Nov-20 Jan-16 Dec-16 Dec-17 Dec-18 Nov-19 Nov-20 Sources: Wind, CMS (HK) estimates Sources: Wind, CMS (HK) estimates
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Valuation comparison
Company Ticker CMS Price Upside Mcap EV/EBITDA (x) P/B (x) P/E (x) PEG (x) ROE (%) CAGR Net CMS Rating 20E-22E (%) gearing TP (%) (HKD) (HKD) (%) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E EPS EBITDA 2020E Large infra Ch. Railway 390 HK BUY 3.8 7.8 103.1 19,661 5.2 5.1 0.3 0.3 2.9 2.9 0.1 0.1 11.4 10.7 5.3 5.0 56.1 CRCC 1186 HK BUY 5.2 12.1 132.7 16,522 4.4 4.0 0.2 0.2 2.6 2.3 0.1 0.1 8.1 8.0 7.5 8.9 1.4 CCCC 1800 HK NEUTRAL 4.1 4.6 13.0 16,523 7.9 7.5 0.2 0.2 2.9 2.6 1.7 1.5 6.7 7.0 10.1 5.5 87.8 Average 5.9 5.5 0.2 0.2 2.8 2.6 0.7 0.6 8.7 8.6 7.6 6.5 48.4 Mid-sized infra CSCI 3311 HK BUY 5.1 9.8 91.8 3,328 5.3 4.5 0.5 0.4 4.3 3.5 0.3 0.2 10.9 12.2 18.3 14.4 11.7 Average 5.3 4.5 0.5 0.4 4.3 3.5 0.3 0.2 10.9 12.2 18.3 14.4 11.7 Construction machineries Zoomlion 1157 HK BUY 9.1 10.7 17.5 10,964 10.8 9.4 1.3 1.0 8.6 8.9 0.1 0.1 14.7 13.6 4.3 13.2 19.6 Lonking 3339 HK NEUTRAL 2.4 2.5 2.9 1,342 4.4 5.0 0.9 0.8 5.4 6.0 0.3 0.3 16.6 13.9 -4.6 -7.2 net cash Average 7.6 7.2 1.1 0.9 7.0 7.4 0.2 0.2 15.6 13.8 -0.1 3.0 19.6 Sources: Company data, CMS (HK) estimates; Non-rated stocks’ forecasts are based on Bloomberg consensus; Share price as of Dec. 1, 2020
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Kevin CHEN Clint SU Hardware Technology +852 3189 6125 +852 3189 6635 2021 Outlook: Strong momentum into early 2021 [email protected] [email protected] ■ Tech Hardware sector rallied on strong fundamentals and market sentiment, strong momentum likely to continue into early-2021
■ Sector valuation demanding; watch risks of inventory correction
and sector rotation into non-Tech ■ Top-pick: Hua Hong (semiconductor localization, supply shortage); NEUTRAL AAC (Optic progress, lowered expectations) Previous NEUTRAL
Solid Tech Hardware demand into early-2021 HSI (Dec. 1, 2020) 26,568 We expect strong Tech Hardware momentum to continue into early-2021, supported by solid fundamentals. We have been positive for Tech sector in HSCEI (Dec. 1, 2020) 10,660 4Q20, particularly for Semiconductor, driven by: 1) improved demand (PC, servers), 2) components restocking: Huawei (before Sep 15), followed by Sector Performance OPPO/vivo/Xiaomi. Supply disruptions in 2020 also led to industry-wide (%) Hardware Technology HSI Index component accumulation, contributing to a shortage that could persist into 150 1Q21. We watch actual sell-through next Feb-Apr (1H Android refresh) for indication of component inventory adjustment. 100 50 Smartphones to regain growth on improving macro, 5G We expect the smartphone market could return to 10% unit growth in 2021 0 (vs. -7% in 2020), driven by economic recovery and 5G upgrades. Huawei -50 fell into decline (157mn in 9M20, -15% yoy) due to US supply restrictions, likely to benefit Apple/Samsung (for higher-end) and Xiaomi/Oppo/vivo (for mid/lower-end). We believe the competitive landscape can shift again from Source: Bigdata; share price as of Dec 1, 2020 the recent Honor spin-off (60-70mn annual shipments) and future changes % 1m 6m 12m in Huawei restrictions. We expect Xiaomi to gain smartphone share further, Absolute return 11.9 89.8 116.5 given its price-competitive handsets and strong momentum in Europe. Relative return 3.3 79.1 116.0
Tech valuation demanding, watch for sector rotation Tech Hardware sector outperformed in 2020 (MSCI China Tech Hardware Index rose 39% YTD, vs. HSI -6%, as of Dec. 1), boosted by: 1) work-from- home demand, and 2) investors preferring growth over value stocks. We still expect strong sector momentum to carry into at least early part of 2021, as we have yet to see meaningful change in demand. Looking into 2021, we caution the sector’s demanding valuation (now 23x forward P/E) and possible sector rotation. We watch catalysts for sector de-rating, include: 1) weaker-than-expected demand and inventory correction, 2) sector rotation to non-Tech after COVID-19 vaccine release. Top-picks Hua Hong (1347 HK, BUY). HH is well positioned to structurally benefit from China’s semis localization initiatives. We also expect robust demand for power ICs in coming years, driven by development of 5G and electric vehicles (2-5x content increase). 8” capacity tightness may persist through 2021. Positive share catalysts also include a possible STAR Board listing. We expect HH revenue growth with margin expansion 2020-22.
AAC (2018 HK, BUY). We stay positive on AAC despite its slower-than- expected recovery. Optics progress continued, attracting investment from Xiaomi and OPPO for its future potentials. WLG launch in 2Q21 could be a key share catalyst. AAC’s share at its key US customer has stabilized, and likely to benefit from any iPhone upside. Market expectations have come down. AAC is among the cheaper Tech Hardware names (16x 2021E P/E), with attractive risk/ reward.
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Focus charts Figure 1: Global smartphone shipment Figure 2: China smartphone shipment (mn units) Global total yoy (mn units) China total yoy 500 30% 50 20%
400 20% 40 0%
300 10% 30 -20%
200 0% 20 -40%
100 -10% 10 -60%
0 -20% 0 -80%
Sources: IDC, CMS (HK); as of 3Q20 Sources: CAICT, CMS(HK); as of Oct 2020
Figure 3: Huawei global smartphone shipment Figure 4: Xiaomi global smartphone shipment (mn units) Huawei yoy (mn units) Xiaomi yoy 70 80% 60 160%
60 60% 50 120% 50 40% 40 80% 40 20% 30 40% 30 0% 20 0% 20 -20%
10 -40% 10 -40%
0 -60% 0 -80%
Sources: IDC, CMS (HK); as of 3Q20 Sources: IDC, CMS (HK); as of 3Q20
Figure 5: MSCI China Tech Hardware Index vs. HSI Figure 6: MSCI China Tech Hardware Index fwd P/E
Hang Seng Index MSCI China Tech HW 28 Forward P/E 50% MSCI China Tech HW YTD +39% 40% 24 30% 20 20% + 1 std = 19x 10% 16 Average = 15x 0% 12 - 1 std = 12x -10% 8 -20% Hang Seng Index YTD -6% -30% 4 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Nov-20
Sources: Bloomberg, CMS (HK); as of Dec. 1, 2020 Sources: Bloomberg, CMS(HK); as of Dec. 1, 2020
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Valuation comparison
Company Ticker Curr CMS Price CMS Upside MCap P/E P/B EV/EBITDA ROE Div. Yield Net D/E Rating TP (%) (USD bn) (x) (x) (x) (%) (%) (%) (HKD) 2020E 2021E 2020E 2021E 2021E 2021E 2020E 2021E 2020E 2021E 2019 Semiconductor Hua Hong 1347 HK HKD BUY 38.95 37.0 -5 6.5 87.3 47.8 2.7 2.6 29.6 17.8 3 6 0.0 0.1 -15 SMIC 981 HK HKD NEUTRAL 21.50 21.0 -2 33.3 35.0 70.0 1.5 1.4 14.7 14.9 5 2 0.0 0.0 14 ASM Pacific 522 HK HKD NR 94.15 n.a. n.a. 5.0 40.1 20.6 3.2 3.0 18.3 11.9 8 14 1.7 2.7 21 Average 54.2 46.1 2.5 2.3 20.9 14.9 5 7 0.6 0.9 7 Hardware Tech AAC Tech 2018 HK HKD BUY 43.80 65.0 48 6.8 30.6 15.7 2.3 2.0 11.0 7.7 8 13 1.3 2.6 15 Xiaomi Group 1810 HK HKD BUY 26.15 32.0 22 81.4 42.4 32.3 5.9 4.9 27.2 25.7 15 16 0.0 0.0 -10 Sunny Optical 2382 HK HKD BUY 152.00 160.0 5 21.5 32.6 26.0 9.2 7.2 21.8 17.7 32 31 0.8 1.0 26 PAX Global 327 HK HKD BUY 6.53 5.2 -20 0.9 9.7 8.7 1.4 1.2 4.3 3.9 15 15 2.1 2.6 -68 Lenovo 992 HK HKD NR 5.58 n.a. n.a. 8.6 9.8 9.2 1.9 1.7 4.2 4.1 24 22 5.3 5.9 42 BYD Elec 285 HK HKD NR 39.35 n.a. n.a. 11.4 13.3 15.4 3.4 2.9 8.8 10.0 27 18 0.9 0.7 -4 FIT Hon Teng 6088 HK HKD NR 2.61 n.a. n.a. 2.3 14.3 10.1 1.0 1.0 6.4 5.2 8 9 2.1 2.3 4 Q Tech 1478 HK HKD NR 10.12 n.a. n.a. 1.5 13.5 11.3 2.9 2.4 9.6 8.0 23 22 1.5 1.9 34 FIH Mobile 2038 HK HKD NR 0.83 n.a. n.a. 0.9 n.a. 12.6 n.a. n.a. n.a. 0.8 -6 3 0.0 0.0 -48 Tongda 698 HK HKD NR 0.51 n.a. n.a. 0.4 10.4 7.0 0.5 0.5 7.8 6.3 5 6 2.0 2.4 46 Cowell 1415 HK HKD NR 4.77 n.a. n.a. 0.5 8.7 7.1 2.1 1.9 4.1 3.4 21 30 14.0 7.7 -41 Average 15.9 14.1 3.0 2.6 10.5 8.4 15 17 2.7 2.5 0 Telecom equipment China Tower 788 HK HKD BUY 1.23 1.8 46 27.9 30.7 22.4 1.0 1.0 4.6 4.2 3 4 1.8 2.4 49 ZTE 763 HK HKD NR 20.45 n.a. n.a. 22.6 17.4 13.3 2.0 1.8 20.0 16.0 13 14 1.5 2.0 14 China CommService 552 HK HKD NR 4.13 n.a. n.a. 3.7 7.8 6.8 0.7 0.6 1.1 1.0 8 9 4.4 4.9 -63 YOFC 6869 HK HKD NR 11.14 n.a. n.a. 2.3 10.2 8.9 0.8 0.7 15.5 13.6 8 8 2.7 3.0 -6 Comba 2342 HK HKD NR 2.64 n.a. n.a. 0.9 42.6 17.3 1.8 1.6 21.8 11.7 4 8 0.6 1.7 3 Average 21.8 13.7 1.2 1.1 12.6 9.3 7 9 2.2 2.8 0 Sources: Bloomberg, CMS (HK); Share price as of Dec. 1, 2020; Non-rated stocks are based on market consensus
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Thursday, December 3, 2020
China Pharmaceutical & Healthcare Hayden ZHANG, CFA Warren DAI, CFA +852 3189 6354 +852 3189 6126
2021 Outlook: Staying on the course of innovation [email protected] [email protected]
■ Innovation players continue the rides on policy tailwinds in 2021E, while GPO worries will extend to a broader territories ■ As effective vaccines/treatments edging to market, we expect most NEUTRAL of the healthcare names will be on the road to recovery in 2021E Previous NEUTRAL ■ We are neutral on the sector but prefer companies with innovation HSI (Dec. 1, 2020) 26,568 proposition and clear catalysts
Innovation: still good compass to sail through 2021E HSCEI (Dec. 1, 2020) 10,660 We believe govt. will stay encouraging innovation across healthcare industry, Sector Performance from novel drug development to internet+ healthcare services. We thus believe broad CRO/CDMO names should continue to ride on the waves of Pharmaceutical & Healthcare HSI Index growth backed by ongoing innovation trends. Meanwhile, we think leading 50% Biotech names are still worth chasing in 2021E, given manageable NRDL 40% 30% risk, rich pipeline catalysts and BD potentials. These positive catalysts should 20% continue to unlock and maximise their pipeline value. We also like their global 10% 0% strategies which add backstop to growing domestic competitions. In addition, -10% govt. tends to gradually ease regulations on Internet+ Health industry, which -20% may benefit the major players to monetize the LT growth opportunities. We -30% expect more detailed measures rolling out in 2021E, which are the major catalysts to watch. Source: Bloomberg; share price as of Dec. 1, 2020 Avoid sectors with ongoing GPO headwind Pharmaceutical will continue to suffer from slow growth in 2021E, given % 1m 6m 12m ongoing generic GPO pressures. We expect GPO coverage will expand to Absolute return 1.7 23.8 41.6 Relative return injections and insulin biosimilar products next year, further weighing on the (7.3) 15.1 44.4 sector growth outlook. Medical device companies’ risk/reward profile looks unfavourable despite recent broad correction due to the start of medical device GPOs. The latest GPO squeezed coronary stents market down to RMB1bn (vs. RMB12bn prior to GPO) and GPOs for orthopaedics products is on the road. We expect they will face same growth challenge as pharmaceuticals experienced back to end-2018, where generic GPO initiated. In addition, we flagged the potential impacts from new DRGs/DIP policy initiatives in 2021E, which govt. might toughen its stance in cost containment. Top picks 1). Innovent (1801 HK, BUY, TP: HKD80) should continue deliver multiple R&D catalysts in 2021E, and we like its leading position in PD-1/L1 space and brighter global potential backed by expanded Eli lily collaboration. 2). BeiGene (BGNE US, BUY, TP: USD345) should be catalysed by multiple milestones over 2021E, including upcoming NRDL negotiation for its key products. We continue to favour Co.’s rich late-stage pipeline, strong execution and proven BD capability. 3). Wuxi Apptec (2359 HK, BUY, TP: HKD179.0) should sustain resilient 28% earnings CAGR over 2020E-22E, thanks to its well-built platform and rising overseas demand amid COVID-19 pandemic. We think Co. is well-capitalized for pursuing M&A opportunities ahead.
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Focus charts Figure 1: Sector performance driven by policy cycles Figure 2: Sector’s relative valuation to MSCI CH 200% (x) MSCI CH HC Rel P/E ttm (RHS) 4.0 150% 3.5 Cur Rel 3.0 PER = 2.8x 100% 2.5 2.0 50% 1.5 1.0 0% Avg Rel 0.5 PER = 2.1x
-50% 0.0
CSI 800 HC Index MSCI CH HC Index Sources: Bloomberg, Wind Source: Bloomberg
Figure 3: Novel drugs approved in China and the U.S. Figure 4: Over 50% avg. price cut in previous GPOs in last decade 70 China approved novel drugs 59 Avg. Price Cut 60 56 0% FDA approved novel drugs 50 -10% 50 45 46 -20% 42 -30% 39 41 40 -40% -50% 29 30 27 27 27 27 -60% 30 24 26 24 25 -52% -53% -53% 22 21 22 -70% -59% 18 20 -80% 14 -90% 9 10 6 7 -100% -90% 4+7 cities 4+7 2nd batch 3nd batch Medical 0 GPO national of of device (Dec 2018) roll-out GPO GPO GPO GPO (Jan 2020)(Aug 2020)(Nov 2020) (Sep 2019) Sources: GBI, Yaozhi Source: NHSA
Figure 5: China financing activities heat map by Figure 6: Stock performance: YTD2020 vs. 2019 healthcare sectors over 2016-11M20 2016 2017 2018 2019 11M20 70 3Y Ann. Industry USD No of USD No of USD No of No of No of USD bn USD bn Ttl. Return bn deals bn deals bn deals deals deals 60 (%) CRO/CDM Internet O healthcare Novel drugs 0.4 17 0.6 23 1.2 23 13.4 190 16.8 137 50 Online & AI diagnostics 1.1 98 0.9 86 0.9 44 2.8 113 1.6 57 40 Medical Biotechs devices Healthcare ecommerce 0.3 24 0.4 25 0.6 19 2.0 6 0.5 5 30
Molecular diagnostics 0.6 120 1.0 109 0.6 72 2.6 75 4.3 55 20 Pharmace utical 10 Medical consumables 0.1 26 0.1 23 0.1 18 1.4 52 1.6 22 Healthcare YTD Ttl. Return (%) 0 operators Healthcare services 0.2 19 0.2 19 0.3 18 0.8 22 1.5 25 (50) TCM0 50 100 150 (10) CRO/CMO 0.3 17 0.1 20 0.3 18 2.1 21 1.3 34 Distribution (20) Imaging devices 0.1 32 0.6 36 0.1 19 0.3 28 0.3 18 (30) Sources: PharmCube, JingData, vcbeat.top Source: Bloomberg
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Valuation comparison
Name Ticker CMS Curr. Price CMS Upside Mkt Cap P/E (x) P/B (x) P/S (x) PEG (x) ROE (%) Div Yld (%) Rating TP (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2020E 2021E 2020E INNOVENT 1801 HK BUY HKD 53.5 80.0 50% 9,658 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. BEIGENE BGNE US BUY USD 255.7 345.0 35% 23,250 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. WUAPPTEC 2359 HK BUY HKD 119.5 179.0 50% 39,972 88.6 70.3 9.9 9.0 21.6 16.9 3.8 12.8 13.4 0.4 ALIBABA HEALTH 241 HK BUY HKD 22.2 25.2 14% 38,525 n.a. n.a. 48.4 40.2 52.6 27.9 8.4 4.9 6.7 n.a. HANSOH 3692 HK BUY HKD 36.6 39.3 8% 27,906 73.2 52.1 10.3 8.6 22.4 22.2 3.3 19.7 14.1 0.4 CSPC 1093 HK BUY HKD 7.4 11.6 57% 11,445 18.1 14.8 4.5 3.8 3.6 3.1 1.2 19.9 20.1 2.1 SINO BIOPHARM 1177 HK NEUTRAL HKD 6.9 8.4 22% 16,739 47.1 37.8 4.0 3.8 4.8 5.0 5.6 8.7 7.8 0.8 SH PHARM 2607 HK BUY HKD 13.3 19.8 49% 7,488 7.6 6.7 0.7 0.6 0.3 0.3 0.6 9.8 9.8 4.2 CR MEDCIAL 3320 HK BUY HKD 4.3 6.5 51% 3,493 7.8 7.0 0.4 0.3 0.1 0.1 1.1 8.2 8.3 2.5 JINXIN FERTILITY 1951 HK BUY HKD 14.0 UR n.a. 4,387 66.6 41.6 4.0 3.8 18.5 19.9 2.4 5.4 5.7 0.3 SSY GROUP 2005 HK BUY HKD 4.9 6.8 39% 1,924 17.7 12.0 2.4 2.0 3.2 3.5 2.7 24.6 16.1 2.2 CTCM 570 HK BUY HKD 3.7 8.3 125% 2,397 7.5 5.8 0.9 0.8 1.2 1.0 0.3 10.2 11.6 3.3 LUYE 2186 HK BUY HKD 4.7 6.8 46% 1,949 9.1 8.0 1.3 1.1 2.1 2.1 3.0 15.9 12.2 1.8 VENUS MEDTECH 2500 HK BUY HKD 74.9 UR n.a. 4,087 n.a. n.a. 8.7 7.8 121.9 81.2 n.a. -21.8 -0.5 n.a. INNOCARE 9969 HK BUY HKD 12.9 17.9 39% 2,145 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 109.6 n.a. n.a. CSTONE 2616 HK BUY HKD 9.9 21.8 121% 1,490 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. GM UNIVERSAL 2666 HK BUY HKD 6.0 9.2 54% 1,326 4.7 4.1 0.7 0.6 1.4 1.1 0.3 14.3 15.3 6.3 CONSUN 1681 HK BUY HKD 3.1 7.7 148% 334 4.9 46.0 1.0 0.9 1.3 1.3 0.3 3.8 22.0 6.0 CR Phoenix 1515 HK BUY HKD 5.8 6.8 18% 963 21.5 13.7 1.1 1.1 3.2 3.9 0.3 6.9 5.2 1.6 Weighted average 27.7 23.5 5.8 5.2 15.1 11.1 2.3 15.1 11.6 2.3 Sources: Company data, CMS (HK) estimates; Share price as of Dec. 1, 2020
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China Insurance Sector Felix LUO, PhD Laurel ZHU +852 3189 6288 +852 3189 6142 2021 Outlook: Long-term potential intact, Sales [email protected] [email protected]
growth expected to recover ■ Weak sales performance due to COVID-19; LT potential is intact ■ Sales growth expected to recover in 2021 OVERWEIGHT ■ Maintain overweight Sector’s long-term potential is intact Previous NEUTRAL COVID-19 had a lasting negative impact on life policy sales in 3Q20. HSI (Dec. 1, 2020) 26,568 However, life sector’s LT potential remains intact: 1) Life insurance density and penetration in China both are significantly lower than HSCEI (Dec. 1, 2020) 10,660 developed countries (Fig. 1-2), indicating room for LT growth. 2) In China, individuals still carry heavy health expenditure burdens, 36% from Sector Performance household out-of-pocket payment, while not being insured enough (Fig. 20 3). Insurance awareness in the general public has increased after the (%) Insurance HSI Index COVID-19. 10 0 Sales growth expected to recover in 2021 -10 Growth of life new policy sales is expected to accelerate in 2021, given: -20 1) A more active new year pre-sales across the sector. Although new year -30 pre-sales do not help much in generating new biz value, it may help expand biz scales and stabilize agent team. 2) A recovery in per-capita disposable income may support insurance demand in 2021, especially for Source: Bigdata, share price as of Dec. 1, 2020 protection insurance products. Historical data shows that urban residents' disposable income growth and GDP growth rate are synchronous % 1m 6m 12m indicators. Currently market expects a speedy recovery in GDP growth Absolute return 17.3 15.1 (2.1) Relative return 7.0 3.1 (3.0) for 2021, which may positively impact on growth of per-capita disposable income and life policy sales (Fig. 4). 3) For some life players, such as Ping An, 2021E NBV growth might benefit from 2020’s low base. Government bond yield a near term positive An upward trend of govt. bond yield may improve the credibility of life insurers’ investment yield assumptions, alleviate investors’ concern on the declining 750D-MA line, and drive valuation re-rating of life insurance stocks. Growth of aggregate social financing broadly shared similar trend with deferred China’s 10Y govt. bond yield (the yield is deferred for 3-4 months, except for the period of severe outbreaks of COVID-19). Per latest data, the growth of aggregate social financing accelerated from Apr. to Oct., suggesting the yield is likely to remain an overall upward trend in near term (Fig. 5). Critical illness table 2020 China Association of Actuaries released the “Critical illness table of China’s life insurance industry (2020)". Under the new definition of critical illness (2020), the original 25 critical illness categories were expanded to 28 severe critical illness categories and 3 mild critical illness categories, and certain stages of thyroid cancer are moved from severe critical illnesses to mild critical illnesses. The overall impact on biz is expected to be limited as the actual pricing models still need to take into account other factors such as interest and expense rates, risk incidence rate, protection coverage, and supply and demand. Top pick The sector is trading at ~1.5x 21E P/B. Maintain sector’s overweight rating on undemanding valuation. Top pick is Ping An (2318 HK, BUY): Maintain buy, TP is HKD117.0 (~1.3x 21E P/EV or ~2.3x 21E P/B). Key catalysts: a good capital market, better-than-expected NBV growth; Key downside risks: an adverse capital market, lower-than-expected NBV growth.
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Focus Charts Figure 1: Life insurance penetration: premiums as a % Figure 2: Life insurance density: premiums per capita of GDP in 2019 in USD in 2019
10 % 4,500 USD 9 7.99 4,000 8 3,383 6.69 3,500 7 5.98 3,000 2,691 6 2,413 2,500 5 1,915 2,000 4 3.07 2.92 1,421 2.64 1,500 1,222 3 2.30 827 2 1.52 1,000 1 500 230 0 0
Sources: Swiss Re, CMS (HK) Sources: Swiss Re, CMS (HK)
Figure 4: Growth of per-capita disposable income of Figure 3: Structure of health expenditure (2017) urban residents and growth of GDP
11.1% 12.5% 16.0% 15.00 4.5% 3.1% 36.1% 5.2% 10.00 7.2% 5.00
84.4% 84.4% 78.8% 0.00 56.7% -5.00
-10.00 China United States of Germany United Kingdom America Household out-of-pocket payment Voluntary health care payment schemes Average estimated GDP yoy growth (%) Government schemes and compulsory contributory health care financing schemes yoy growth of YTD per-capita disposable income of urban residents (%) yoy growth of YTD nominal GDP (%) Sources: WHO, CMS (HK) Sources: Wind, CMS (HK)
Figure 5: China’s growth of aggregate social financing Figure 6: Forward P/EV of Ping An and 10Y government bond yield
6.0
5.0 P/EV
4.0
3.0
2.0
1.0
0.0
Sources: Wind, CMS (HK); Note: A few inconsistencies between the Sources: Wind, Company data, CMS (HK) estimates red and yellow lines are caused by the adj. of Jan. data (due to the absence of aggregate financing growth in Jan.)
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Valuation comparison
Company Ticker Rating Price TP Mkt Cap P/EV (x) P/E (x) P/B (x) ROE (%) Dividend Yield (%) Local ccy (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E HK Listed Peers Ping An 2318 HK BUY 94.3 117.0 245,243 1.2 1.0 11.5 10.0 2.1 1.9 18.5 19.1 2.6 3.0 China Life 2628 HK BUY 18.0 23.5 154,130 0.4 0.4 8.4 7.6 1.1 1.0 13.0 13.4 4.3 4.7 China Pacific 2601 HK BUY 30.9 32.5 52,734 0.6 0.5 10.9 9.5 1.3 1.2 12.8 13.1 4.4 5.0 New China Life 1336 HK BUY 33.6 39.7 24,266 0.4 0.3 7.0 6.3 1.0 0.9 15.2 15.0 4.5 4.9 China Taiping * 966 HK NR 14.8 n.a. 6,899 n.a. n.a. 8.0 6.2 0.6 0.6 8.8 10.3 1.7 2.4 PICC Group * 1339 HK NR 2.6 n.a. 41,281 n.a. n.a. 4.9 4.7 0.5 0.4 10.0 9.8 5.3 5.7 PICC P&C * 2328 HK NR 6.5 n.a. 18,794 n.a. n.a. 5.8 5.4 0.7 0.6 12.1 12.2 7.0 7.5 China Re * 1508 HK NR 0.9 n.a. 4,730 n.a. n.a. 5.3 4.7 0.3 0.3 7.3 7.8 9.1 10.2 ZA Online * 6060 HK NR 37.7 n.a. 7,129 n.a. n.a. n.a. n.a. 3.0 2.9 3.5 5.3 0.0 0.0 AIA * 1299 HK NR 88.2 n.a. 137,833 n.a. n.a. 25.7 20.2 2.2 2.1 9.1 10.9 1.5 1.6 Arithmetic Average 0.6 0.6 9.7 8.3 1.3 1.2 11.0 11.7 4.0 4.5 Weighted Average 0.8 0.7 12.7 10.7 1.6 1.5 13.9 14.6 3.2 3.6
China A-share Listed Peers * Ping An 601318 CH NR 93.4 n.a. 245,243 n.a. n.a. 13.2 11.0 2.3 2.0 17.2 19.0 2.3 2.7 China Life 601628 CH NR 43.1 n.a. 154,130 n.a. n.a. 23.9 21.5 2.8 2.5 11.7 11.9 1.5 1.6 China Pacific 601601 CH NR 39.9 n.a. 52,734 n.a. n.a. 14.3 12.3 1.8 1.7 13.2 14.0 3.0 3.3 New China Life 601336 CH NR 62.2 n.a. 24,266 n.a. n.a. 14.7 12.8 2.1 1.8 14.4 14.5 1.9 2.1 PICC Group 601319 CH NR 7.1 n.a. 41,281 n.a. n.a. 15.0 13.6 1.5 1.4 11.5 11.3 1.7 1.8 Arithmetic Average 16.2 14.2 2.1 1.9 13.6 14.2 2.1 2.3 Weighted Average 16.7 14.5 2.3 2.0 14.6 15.6 2.1 2.3
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Company Ticker Rating Price TP Mkt Cap P/EV (x) P/E (x) P/B (x) ROE (%) Dividend Yield (%) Local ccy (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E Global Peers * CHINA LIFE 2823 TT NR 22.3 n.a. 3,683 n.a. n.a. 7.3 7.6 0.7 0.6 10.5 9.0 2.8 2.8 GREAT-WEST LIFEC GWO CN NR 30.5 n.a. 21,869 n.a. n.a. 11.0 9.8 1.3 1.3 12.6 13.3 5.7 5.9 MUENCHENER RUE-R MUV2 GR NR 241.9 n.a. 40,753 n.a. n.a. 24.2 12.3 1.1 1.1 4.7 9.6 4.1 4.3 HANNOVER RUECK S HNR1 GR NR 142.9 n.a. 20,763 n.a. n.a. 19.8 13.3 1.6 1.5 8.0 12.0 3.2 3.9 CNP ASSURANCES CNP FP NR 13.8 n.a. 11,432 n.a. n.a. 7.5 6.9 0.5 0.5 6.8 7.2 6.7 6.9 METLIFE INC MET US NR 46.9 n.a. 42,217 n.a. n.a. 8.3 7.5 0.6 0.6 10.9 11.3 3.9 4.1 PRUDENTIAL PLC PRU LN NR 1,220.5 n.a. 42,744 n.a. n.a. 12.2 9.9 2.1 1.8 12.5 13.8 1.4 1.5 AFLAC INC AFL US NR 44.7 n.a. 31,399 n.a. n.a. 9.1 9.2 1.0 0.9 12.3 10.5 2.5 2.9 MANULIFE FIN MFC CN NR 22.2 n.a. 33,300 n.a. n.a. 8.2 7.1 0.9 0.8 10.3 11.2 5.0 5.2 ALLIANZ SE-VINK ALV GR NR 199.8 n.a. 99,367 n.a. n.a. 12.2 10.1 1.1 1.1 9.0 10.7 4.8 5.0 SAMSUNG LIFE INS 032830 KS NR 72,500.0 n.a. 13,255 n.a. n.a. 12.1 11.9 0.4 0.3 3.0 3.0 3.5 3.8 AEGON NV AGN NA NR 3.2 n.a. 8,105 n.a. n.a. 7.4 5.9 0.3 0.3 4.1 4.8 4.6 5.0 AXA SA CS FP NR 19.8 n.a. 57,962 n.a. n.a. 10.5 7.3 0.7 0.7 6.5 9.2 6.9 7.5 DAI-ICHI LIFE 8750 JP NR 1,687.5 n.a. 19,581 n.a. n.a. 18.5 9.8 0.5 0.5 3.0 5.0 3.6 3.6 Average 12.0 9.2 0.9 0.8 8.2 9.3 4.2 4.5
Sources: Company data, Bloomberg, CMS (HK) estimates; Note: Price as of Dec. 1, 2020; Note: * Forecast based on Bloomberg consensus
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China Banking Sector Felix LUO, PhD Laurel ZHU 2021 Outlook: Asset quality risks still exist +852 3189 6288 +852 3189 6142 [email protected] [email protected] ■ Asset quality and NIM concerns might linger on
■ Sector’s valuation is undemanding
■ Top pick: PSBC (1658 HK) Sector’s performance marginally improved NEUTRAL China’s mega banks’ balance of non-performing loans (NPLs) and NPL ratios Previous NEUTRAL generally increased at end-3Q. NPL ratios were relatively stable for banks focusing more on personal loans. Under the pressure of LPR cuts, banks HSI (Dec. 1, 2020) 26,568 strengthened cost control on liabilities, evidenced by the decreased percentage of structured deposits in total deposits. NIM appeared to have HSCEI (Dec. 1, 2020) 10,660 stabilized on a quarterly basis in 3Q20.
Asset quality concerns might linger on in longer term Sector Performance However, we expect that asset quality concerns of banking sector may persist 20 (%) Bank HSI Index in 2021: 1) Historically, the adj. Loan Demand Climate Index somehow shared 10 similar cyclical pattern with mega banks’ average NPL formation ratio (Fig. 1). The index showed a moving range from approximately -16.2% to 10.2%. The 0 index has reached 9.6% at end-1H20 and declined in the third quarter. -10 Assuming its historic range continues to be valid, such index would tend to -20 decline rather than to increase in foreseeable future (except for 1Q21 due to low base from 1Q20), which may indicate increased pressure on mega banks’ average NPL formation ratio; 2) The deferment of loan principal and interest Source: Bigdata, share price as of Dec. 1, 2020 repayment may introduce additional uncertainties to banks’ asset quality. % 1m 6m 12m NIMs may stabilize in ST but still under pressure in LT Absolute return 15.3 10.4 (0.0) NIM pressure was alleviated in 3Q20 on a quarterly base, partly due to Relative return 5.1 (1.5) (0.9) strengthened cost control. Per latest PBOC data, weighted average loan rate slightly rose to 5.12% in 3Q20 (historical data show that weighted average loan rate led mega banks’ average NIM by 1 to 2 quarters, Fig. 3), which suggests stabilizing NIMs in the short term for mega banks. However, look forward to 2021, PBOC’s monetary policy report stated that “continue to unleash the potential of reforms to promote lower loan interest rates, and comprehensive measures to promote a reduction in financing costs”, indicating that the pressure on the asset side and NIMs still exists. Valuation undemanding China’s banking sector is currently trading at ~0.49x 21E P/B ratio. The forward P/B ratios of mega banks have reached historical extremes (between 2014 and present), indicating investment value for LT investors. In terms of dividend yield, for leading banks (e.g. ICBC (1398 HK)), the yield and its spread over 10Y govt. bond yield is ~22% and ~45% below the record high in 2016, respectively. Note that market could revise down expected dividend if banks’ profits deteriorate. In conclusion, value plays are within sight for mega banks. Top picks Maintain neutral rating for the banking sector on potential asset quality and NIM concerns. Our top pick is PSBC (1658 HK, BUY): the Company might suffer less from the deferred repayment arrangement and the Company is more likely to keep NIM under control. TP is HKD 5.20, equal to ~0.70x 21E P/B. Key catalysts: better-than-expected asset quality, NIM expansion; key downside risks: worse- than-expected asset quality, NIM pressure, dividends decline.
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Figure 1: Adjusted loan demand climate index and Figure 2: Percentages of demand deposits in total Negative average NPL formation ratio of major banks deposits of subsectors
15 -0.3% 70%
10 -0.5% 60% 5 -0.8% 0 50% -1.0% -5 40% -1.3% -10
-15 -1.5% 30%
Big 4 Adjusted Loan Demand Climate Index (%) Large commercial banks Negative average NPL formation ratio of major banks (right axis) Small to medium-sized commercial banks
Sources: Wind, Company data, CMS (HK); Note: Adjusted loan demand climate index equals to yoy change of loan demand climate Sources: Wind, CMS (HK) index; For demonstration purpose, the blue line is the negative average NPL formation ratio of major banks
Figure 3: Weighted average loan rates and large Figure 4: Growth rates of M2, Aggregate Financing, banks’ aggregate NIM RMB Loan, and Nominal GDP
8.5 3.0 18.0 % % % 15.0 7.5 5.12 2.5 13.7 12.0 12.9 6.5 2.0 10.5 9.0 5.5 1.5 6.0 4.5 3.0 1.0 3.5 1.39 0.0 0.5 2.5 -3.0 1.5 0.0 -6.0
7-Day OMO rate M2: yoy growth MLF rate Aggregate Financing Balance: yoy growth Weighted average lending rate: 6 months deferred* Cumulative Nominal GDP growth: yoy growth 1Y LPR NIM: large commercial banks** (right axis) RMB Loan Balance: yoy growth
Sources: Wind, CMS (HK); *: Weighted average lending rate is shown deferred for 6 months in this graph for demonstration purpose; **: data Sources: Wind, CMS (HK); Note: All yoy figures released by PBOC
points prior to 2017 are of sector’s aggregate NIM as large banks’ since January 2017 are on a comparable basis aggregate NIM was not available until 2017
Figure 5: P/B valuation of PSBC Figure 6: Dividend yield of PSBC
1.0 8%
P/B 7% 0.9 6% 0.8 5%
0.7 4% 3% 0.6 2% 0.5 1%
0.4 0%
Dividend yield 10Y Government Bond yield Spread
Sources: Wind, Company data, CMS (HK) estimates Sources: Wind, Company data, CMS (HK) estimates
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Company Ticker Rating Price TP Mkt Cap P/E P/B ROE (%) Dividend Yield (%) Local ccy (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E HK Listed Peers Postal Savings Bank of China 1658 HK BUY 4.64 5.20 65,631 6.4 5.6 0.7 0.6 11.0 11.6 4.9 5.6 Industrial and Commercial Bank of China 1398 HK NEUTRAL 5.10 5.05 281,944 5.8 5.5 0.6 0.6 11.2 11.0 5.3 5.6 Agricultural Bank of China 1288 HK NEUTRAL 3.02 3.05 175,266 5.0 4.7 0.5 0.5 10.5 10.3 6.1 6.5 Bank of Communications 3328 HK NEUTRAL 4.33 4.40 48,374 4.2 4.0 0.4 0.4 9.8 9.8 7.5 7.9 China Construction Bank * 939 HK NR 6.2 n.a. 202,935 5.4 5.1 0.6 0.5 11.2 10.9 5.6 6.0 Bank of China * 3988 HK NR 2.8 n.a. 137,417 4.1 4.0 0.4 0.4 9.5 9.2 7.7 7.9 China CITIC Bank * 998 HK NR 3.5 n.a. 34,666 3.5 3.3 0.3 0.3 9.2 9.0 7.2 7.7 China Minsheng Bank * 1988 HK NR 4.4 n.a. 33,999 3.4 3.2 0.3 0.3 10.4 10.2 7.7 8.4 China Everbright Bank * 6818 HK NR 3.2 n.a. 32,101 4.4 4.0 0.4 0.4 9.7 9.9 7.0 7.6 Arithmetic Average 4.7 4.4 0.5 0.4 10.3 10.2 6.6 7.0 Weighted Average 5.1 4.8 0.5 0.5 10.6 10.5 6.1 6.5 China A-share Listed Peers * Industrial and Commercial Bank of China 601398 CH NR 5.5 n.a. 281,940 6.8 6.4 0.7 0.7 11.1 10.8 4.5 4.7 Agricultural Bank of China 601288 CH NR 3.4 n.a. 175,263 6.0 5.7 0.6 0.6 10.8 10.5 5.1 5.3 Bank of Communications 601328 CH NR 4.8 n.a. 48,374 5.2 4.9 0.5 0.4 9.6 9.4 5.9 6.2 Postal Savings Bank of China 601658 CH NR 5.3 n.a. 65,630 7.6 7.0 0.8 0.8 10.9 11.0 4.0 4.4 China Construction Bank 601939 CH NR 7.3 n.a. 202,932 7.3 7.0 0.8 0.7 11.3 10.9 4.1 4.3 Bank of China 601988 CH NR 3.4 n.a. 137,415 5.8 5.5 0.6 0.5 9.7 9.6 5.4 5.5 China CITIC Bank 601998 CH NR 5.4 n.a. 34,665 6.1 5.7 0.5 0.5 9.5 9.3 4.1 4.4 China Minsheng Bank 600016 CH NR 5.4 n.a. 33,999 4.9 4.4 0.5 0.4 10.4 10.3 5.5 5.9 Industrial Bank 601166 CH NR 21.6 n.a. 68,275 7.2 6.6 0.8 0.8 11.9 11.9 3.4 3.7 China Everbright Bank 601818 CH NR 4.4 n.a. 32,100 6.8 6.1 0.7 0.6 9.9 10.1 4.5 4.9 Shanghai Pudong Development Bank 600000 CH NR 10.3 n.a. 46,000 5.5 5.2 0.6 0.5 10.3 10.0 4.6 4.8 Ping An Bank 000001 CH NR 20.1 n.a. 59,201 14.1 12.3 1.3 1.2 9.3 9.8 1.0 1.2 Huaxia Bank 600015 CH NR 6.7 n.a. 15,639 4.9 4.7 0.5 0.4 9.3 9.0 3.9 4.0 Bank of Beijing 601169 CH NR 5.0 n.a. 16,117 5.5 5.3 0.5 0.5 9.6 9.4 5.2 5.6 Bank of Shanghai 601229 CH NR 8.2 n.a. 17,790 5.9 5.3 0.7 0.6 11.0 11.3 5.2 5.7 Bank of Ningbo 002142 CH NR 37.4 n.a. 34,207 14.8 12.6 2.1 1.9 15.0 15.2 1.4 1.6 Arithmetic Average 7.1 6.6 0.8 0.7 10.6 10.5 4.2 4.5 Weighted Average 7.0 6.6 0.7 0.7 10.8 10.6 4.4 4.6
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Company Ticker Rating Price TP Mkt Cap P/E P/B ROE (%) Dividend Yield (%) Local ccy (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E Global Peers * HSBC HSBA LN NR 406.1 n.a. 111,021 20.9 12.9 0.7 0.6 2.5 4.2 1.8 4.7 Standard Chartered STAN LN NR 476.9 n.a. 20,203 16.0 10.3 0.4 0.4 2.1 3.9 1.2 3.0 Barclays BARC LN NR 143.2 n.a. 33,371 18.6 9.9 0.4 0.4 2.4 4.4 1.2 3.6 Hang Seng Bank 11 HK NR 133.3 n.a. 33,047 14.8 14.2 1.5 1.4 10.1 10.6 3.9 4.5 Bank of East Asia 23 HK NR 16.8 n.a. 6,306 20.9 13.2 0.5 0.5 2.3 3.5 2.2 3.8 BOC Hong Kong 2388 HK NR 24.8 n.a. 33,414 9.5 9.3 0.9 0.8 9.5 9.4 4.7 5.3 Bank of America BAC US NR 28.7 n.a. 248,191 16.5 13.6 1.0 1.0 6.2 7.0 2.5 2.7 J.P. Morgan Chase & Co. JPM US NR 119.7 n.a. 364,992 16.0 13.1 1.5 1.4 9.6 11.1 3.0 3.1 Wells Fargo WFC US NR 28.1 n.a. 116,014 60.2 13.8 0.7 0.7 1.3 4.9 4.3 2.0 Deutsche Bank DBK GR NR 9.5 n.a. 23,628 n.a. 23.8 0.4 0.4 (0.8) 0.8 0.0 0.5 BNP Paribas BNP FP NR 44.2 n.a. 66,645 9.1 9.3 0.5 0.5 6.1 5.4 5.3 5.2 Average 20.2 13.0 0.8 0.7 4.7 5.9 2.7 3.5 Sources: Company data, Bloomberg, CMS (HK) estimates; Prices are as of Dec.1, 2020; Note: * Forecast is based on Bloomberg consensus
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China Brokerage Sector Felix LUO, PhD Laurel ZHU 2021 Outlook: Lack of monetary policy catalyst in ST +852 3189 6288 +852 3189 6142 [email protected] [email protected] ■ Market reform deepening; competition among peers remains fierce ■ Lack of monetary policy catalyst in the short term ■ Maintain neutral Capital market reform deepening; Fierce competition across NEUTRAL the sector The capital market reform is deepening and advancing. The Financial Stability Previous NEUTRAL and Development Commission emphasized on "enhancing centralized capital market, fully implementing the registration-based IPO system, establishing a HSI (Dec. 1, 2020) 26,568 normalized delisting mechanism, increasing the proportion of direct financing, HSCEI (Dec. 1, 2020) 10,660 and promoting two-way financial opening", and the CSRC stated that "the registration-based IPO system for the whole market is under study". In LT, these measures will establish a well-regulated, fair, transparent and open Sector Performance capital market. However, competition is still fierce across the sector as the 20 (%) Broker HSI Index concentration remained sluggish in recent years (Fig. 5). The contribution of 10 revenue and NP from top 10 brokers stood at 60.3% and 63.4%. This may suggest that the competitive advantage in scale effect of top-tier brokers has 0 declined. Top-tier brokers may need more efficient cost mgmt. and -10 differentiated services. -20 Lack of monetary policy catalyst in the short term We studied the price performance of HK-listed China’s brokers since 2012. To be consistent, we deem a subsequent loosening policy as a new round if Source: Bigdata, share price as of Dec. 1, 2020 it took place two calendar months later. Per our research (refer to Sep. 2019 % 1m 6m 12m report), the sector outperformed HSI at the early stage of every round of Absolute return 15.3 10.4 (0.0) monetary policy loosening (≤ 44 trading days) since 2012. However, the Relative return 5.1 (1.5) (0.9) performance may decline at later stage. Given that monetary policy returned to normalcy lately, sector may lack monetary policy catalysts in the ST. Increasing uncertainty as securitization ratio rose; trading opportunity may exist Historical data shows that price performance of Chinese brokerage sector is highly correlated with market performance (Fig. 3). As of end-Oct, the securitization over GDP ratio of the Mainland market was ~73%, relatively high in history, which may partly attribute to the policy of ‘increasing proportion of direct financing and strengthening of the capital market's support for the development of new economies’. We do not estimate the trend of the stock market and the securitization ratio, but historically when such ratio exceeds ~70%, market uncertainty may also rise. In some periods, the market encountered some resistance (Fig. 4), and in some periods the market soared and then retreated in the ST (3Q07 and 2Q15). There will be trading opportunities for brokerage stocks in the latter case. Maintain sector’s rating as neutral; Buy rating for HTSC on undemanding valuation The sector is trading at ~0.83x 21E P/B ratio. Maintain neutral for sector on intense competition and lack of monetary policy catalyst in ST. HTSC (6886 HK): the Co. is trading at 0.75x 21E P/B ratio, which is close to its historic low valuation 0.67x, buy rating for HTSC on undemanding valuation and TP at HKD15.0, equivalent to ~0.89x 21E P/B. Key catalysts: better-than-expected macroeconomic conditions, and a good capital market; key downside risks: an economic downturn, an adverse capital market.
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Figure 1: A-share market turnover Figure 2: YTD Amt. of A-share IPO
300,000 600% 450 400 63.3% 500% 350 400% 200,000 300 300% 250
200% 200 100,000 150 100% 100 0% 50 0 -100% 0
Cumulative turnover (RMB bn) YTD Amt. of A-share IPO (RMB bn) Cumulative avg. daily turnover -yoy (%) YTD Amt. of IPO in STAR board (RMB bn)
Sources: Wind, CMS (HK) Sources: Wind, CMS (HK)
Figure 3: Similar trend of brokerage sector’s share Figure 4: Securitization ratio in Mainland market price performance and market
40.0% 140% 10,000 30.0% 8,000 20.0% 105% 10.0% 6,000 0.0% 70% -10.0% 4,000
-20.0% 35% 2,000 -30.0%
-40.0% 0% 0
Brokerage sector’s share price performance * Securitization ratio in Mainland market Market performance ** CSI 300 Index (right axis)
Sources: Wind, CMS (HK); Note: *Sector’s performance is measured Sources: Wind, CMS (HK); Note: Securitization ratio in Mainland by the weighted average return of H shares of major domestic Market = monthly total market value of the Mainland market / annual brokerages; **The market performance is measured by the GDP, excluding market value of Chinese companies listed in Hong performance of the HSI and the CSI 300 Index, each accounting for Kong and overseas 50%
Figure 5: Contribution of Top 10 brokers’ revenue and Figure 6: HTSC P/B Valuation net profits
80.0% 2.0 P/B 75.0% 1.6 70.0%
65.0% 1.2 63.4% 60.0% 60.3% 0.8 55.0%
50.0% 0.4
Top 10's NP as % of total* Top 10's revenue as % of total*
Sources: Wind, CMS (HK); Note: * as % of 47 listed Chinese brokers Sources: Wind, Company data, CMS (HK) estimates
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Valuation comparison
Company Ticker Rating Price TP Mkt Cap P/E (x) P/B (x) ROE (%) Div Yld (%) Local ccy (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E HK Listed Peers Huatai Securities 6886 HK BUY 12.6 15.0 24,971 8.7 8.0 0.8 0.7 9.4 9.7 3.8 4.1 China International Capital Corp 3908 HK NEUTRAL 18.8 19.7 34,879 11.5 10.5 1.2 1.1 11.4 11.0 1.7 1.9 CITIC Securities * 6030 HK NR 18.1 n.a. 56,086 11.9 10.4 1.1 1.0 9.5 10.1 3.9 4.4 Guotai Junan Securities * 2611 HK NR 11.5 n.a. 24,130 8.4 7.4 0.7 0.6 7.8 8.4 4.6 5.2 Haitong Securities * 6837 HK NR 7.0 n.a. 23,327 6.7 5.9 0.5 0.5 7.8 8.2 4.5 5.2 GF Securities * 1776 HK NR 11.4 n.a. 18,205 8.4 7.9 0.8 0.7 9.2 9.2 4.1 4.4 Shenwan Hongyuan Group * 6806 HK NR 2.4 n.a. 19,781 7.0 6.4 0.5 0.5 8.7 8.5 4.9 5.3 CSC Financial * 6066 HK NR 11.2 n.a. 45,241 9.0 8.2 1.2 1.1 14.4 13.4 3.8 3.9 China Galaxy Securities * 6881 HK NR 5.2 n.a. 15,403 6.8 6.5 0.6 0.5 8.8 8.9 4.5 4.6 Orient Securities * 3958 HK NR 5.6 n.a. 11,551 10.0 9.1 0.6 0.6 6.4 6.9 4.1 4.3 Arithmetic Average 8.8 8.0 0.8 0.7 9.3 9.4 4.0 4.4 Weighted Average 9.4 8.4 0.9 0.8 10.0 10.0 3.8 4.2 China A-share Listed Peers * Huatai Securities 601688 CH NR 19.8 n.a. 24,971 15.0 13.2 1.4 1.2 9.6 10.1 2.2 2.5 China International Capital Corp 601995 CH NR 68.0 n.a. 34,879 48.6 40.7 5.2 4.6 11.0 12.3 n.a. n.a. CITIC Securities 600030 CH NR 31.3 n.a. 56,085 23.9 20.7 2.2 2.1 9.8 10.9 1.9 2.2 Guotai Junan Securities 601211 CH NR 19.3 n.a. 24,130 16.1 13.9 1.3 1.2 7.7 8.3 2.4 2.8 Haitong Securities 600837 CH NR 13.8 n.a. 23,327 15.4 13.4 1.2 1.1 7.8 8.4 2.1 2.3 GF Securities 000776 CH NR 17.4 n.a. 18,205 14.3 13.3 1.4 1.3 9.8 10.1 2.3 2.4 Shenwan Hongyuan Group 000166 CH NR 5.5 n.a. 19,781 19.2 18.5 1.5 1.4 8.3 8.0 1.7 1.7 CSC Financial 601066 CH NR 44.7 n.a. 45,241 40.2 36.0 5.4 4.8 14.5 14.0 0.9 0.8 China Galaxy Securities 601881 CH NR 13.2 n.a. 15,403 20.7 19.2 1.8 1.7 8.8 9.0 1.4 1.6 Orient Securities 600958 CH NR 11.9 n.a. 11,551 26.1 23.2 1.5 1.4 6.2 6.8 1.8 2.0 Sinolink Securities 600109 CH NR 18.7 n.a. 8,587 30.4 27.3 2.5 2.4 8.9 9.0 0.9 0.8 Guoyuan Securities 000728 CH NR 9.2 n.a. 6,082 30.0 26.5 1.4 1.3 4.4 5.1 n.a. n.a. Industrial Securities 601377 CH NR 9.3 n.a. 9,456 20.5 18.7 1.7 1.6 9.0 9.1 1.5 1.6 Changjiang Securities 000783 CH NR 9.0 n.a. 7,564 24.8 21.4 1.7 1.6 7.2 7.6 1.6 1.4 Arithmetic Average 24.7 21.8 2.1 2.0 8.8 9.2 1.7 1.8 Weighted Average 26.4 23.2 2.6 2.4 9.8 10.3 1.5 1.6
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Company Ticker Rating Price TP Mkt Cap P/E (x) P/B (x) ROE (%) Div Yld (%)
Local ccy (HKD) (USD mn) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E Global Peers * The Goldman Sachs Group, Inc. GS US NR 232.1 n.a. 83,240 10.4 9.6 1.0 0.9 9.1 10.2 2.2 2.2 Morgan Stanley MS US NR 63.3 n.a. 114,486 11.0 12.3 1.2 1.2 11.4 9.6 2.2 2.3 Citigroup Inc C US NR 55.5 n.a. 115,486 13.4 9.2 0.7 0.6 4.9 6.4 3.7 3.8 Bank of America Corp BAC US NR 28.7 n.a. 248,191 16.5 13.6 1.0 1.0 6.2 7.0 2.5 2.7 Credit Suisse Group AG CSGN SW NR 11.6 n.a. 31,672 8.9 8.5 0.6 0.6 7.4 6.9 2.5 2.7 UBS Group AG UBSG SW NR 13.0 n.a. 55,788 9.6 10.7 0.9 0.8 10.1 7.3 3.0 3.1 Barclays PLC BARC LN NR 143.2 n.a. 33,369 18.6 9.9 0.4 0.4 2.4 4.4 1.2 3.6 Nomura Holdings Inc 8604 JP NR 547.4 n.a. 17,326 6.1 5.9 0.6 0.6 9.4 11.3 4.1 5.1 Macquarie Group Ltd MQG AU NR 140.2 n.a. 36,748 16.9 22.7 2.4 2.3 15.2 10.7 3.9 2.5 Average 12.4 11.4 1.0 0.9 8.5 8.2 2.8 3.1
Sources: Company data, Bloomberg, CMS (HK) estimates; Prices are as of Dec. 1, 2020; Note: * Forecast is based on Bloomberg consensus
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Investment Ratings
Industry Rating Definition OVERWEIGHT Expect sector to outperform the market over the next 12 months NEUTRAL Expect sector to perform in-line with the market over the next 12 months UNDERWEIGHT Expect sector to underperform the market over the next 12 months
Company Rating Definition BUY Expect stock to generate 10%+ return over the next 12 months NEUTRAL Expect stock to generate +10% to -10% over the next 12 months SELL Expect stock to generate loss of 10%+ over the next 12 months
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