17 August 2016 China Market Strategy Hao Hong ，CFA [email protected] Shenzhen-Hong Kong Connect: A New Era for China’s Capital Anna Zhou Market and Capital Account [email protected] Karen Tan [email protected] Shenzhen-Hong Kong Stock Connect to be launched within 4 months. It is officially confirmed that Shenzhen-Hong Kong Stock Connect will be launched within 4 months. The joint announcement issued by SFC and CSRC abolished the aggregate quota, but set a daily quota same as that currently under SH-HK Connect. Meanwhile, the announcement clarified the scope of eligible shares under SH-HK Connect and Shenzhen-Hong Kong Connect, and included exchange-traded funds (ETF) as eligible securities under the mutual market access scheme. The abolition of aggregate quota shows the further opening of China’s capital account and the country’s confidence to integrate into the global market. Mutual stock market access benefits related sectors, such as brokerage. SH-HK Stock Connect was announced on April 10, 2014 by Premier Keqiang Li at the Boao Forum, and was officially launched within 6 months. On the same day, a joint announcement of CSRC and SFC was issued to introduce eligible shares, quotas and other details. We expect that the time spent preparing the Shenzhen-Hong Kong Stock Connect will be shorter, helped by the experience of SH-HK Stock Connect and the two-year smooth operation of trading and settlement system, while the preparation steps for the final launch will be similar. We tested the effect of SH-HK Connect news on the market by studying the relative return of the brokerage sector, which is most closely related to the mutual market access. As Figure 1 shows, 100 days before the official announcement, the Hong Kong brokerage sector outperformed HSI. The 30 days after the announcement was a profit-taking period, when the brokerage sector underperformed. As the official launch approached and more news and announcements regarding the SH-HK Connect were distributed, the brokerage sector outperformed significantly. Eventually, as the launch of SH-HK Connect was delayed, the brokerage sector oscillated substantially. Therefore, the news of mutual stock market access would indeed influence the performance of related sectors for at least some time. Overall, it is a good catalyst for those sectors. Details are within expectations. While profit taking can happen, the downside risk is less than the time when Shanghai- Hong Kong Connect was announced. Note that in 2014, the brokerage sector significantly outperformed the HSI during the 3 months before the SH-HK Connect was announced. Consequently, the pressure of profit taking was very large. One month before April 10, 2014, SHCOMP and HSI were still rising, pricing in the effect of stock connect. The SHCOMP rose 5%, while the HSI rose 4.7%. But in the 5, 10, 20 days after the announcement, the SHCOMP fell -1.5% - 1.7% - 5.1%, while the HSI fell -2.2% - 1.8% - 4.5%, respectively. However, this time, as shown in Figure 2, the brokerage sector started to outperform only 20 days before the announcement. This shows that expectations of Shenzhen-Hong Kong connect program have indeed been reflected in the price, but the pressure of profit taking is not as large as last time. The boost of Shenzhen-Hong Kong Connect program to A share market is limited. For most of the stocks included in the stock pool of the connect scheme, the majority of their turnover still come from outside this program. The volume of northbound trades is too small to push up share prices in Shanghai. Average daily quota usage of northbound trading is 583 million yuan, cumulatively accounting for nearly half of the annual aggregate quota. 758 million yuan of southbound daily quota is used on average, leaving only 20% of annual quota. From the fund flow perspective, net inflow dominates in the southbound trading as aggregate quota usage is steadily going up. The northbound transactions are more balanced as we have seen two-way fund flows after June 2015 (Chart III, IV). With annual aggregate quota being cancelled, the two connect schemes are more attractive to overseas institutional investors, especially for those with large AUM. But for this initial period, single-day limit is still valid. Moreover, the introduction of foreign institutional investors in the long run will lead to normalization of the A-share market’s valuation. The main concern for A share’s performance is its high valuation, but not a lack of liquidity at this point. Thus, the connect program will not fundamentally change the A share market immediately. Download our reports from Bloomberg: BOCM 〈enter 〉 China Market Strategy 17 August 2016 Focus chart 1 ：The news of Shanghai-Hong Kong Connect indeed influence the performance of related sectors, but there are profit-taking risk in the short period. 155 10/11 Connect HSI Index SHHK Indicator Program annouced 140 04/10 Connect Program to be delayed annouced to be launched 125 in 6 months 110 95 11/10 Connect 09/04 Agreement Program annouced 80 04/29 HKEX announced is made between to be launch in 7 stock pool of connect HK Clearing and program Days 65 China clearing 50 -99 -88 -77 -66 -55 -44 -33 -22 -11 0 11 22 33 44 55 66 77 88 99 110 121 132 143 154 165 176 187 198 209 220 Source: Wind, Bloomberg, Bank of Communications (Int’l) 0 is the official confirming date of SH-HK Connect, and 220 is the official launching date of SH-HK Connect Focus chart 2 ： Different from that before the announcement of Shanghai – Hong Kong Connect, the Brokerage sector outperformed HSI index in last 20 days. 103 HSI Index Indicator 101 99 97 95 93 91 89 SZHK connect announced to 87 be launched in 4 months 85 -99 -88 -77 -66 -55 -44 -33 -22 -11 0 Source: Wind, Bloomberg, Bank of Communications (Int’l) Download our reports from Bloomberg: BOCM 〈enter 〉 2 China Market Strategy 17 August 2016 Focus chart 3 ：Northbound aggregated usage and SHCOMP 。 5500 1800 4500 1400 3500 1000 2500 600 1500 200 SHCOMP (LHS) North bound aggregated usage (00 mn) 500 -200 11/2014 01/2015 03/2015 05/2015 07/2015 09/2015 11/2015 01/2016 03/2016 05/2016 07/2016 Source: Wind,Bloomberg, Bank of Communications (Int’l) Focus chart 4: Southbound aggregated usage and HIS. 30000 2500 25000 2000 20000 1500 15000 1000 10000 HSI (LHS) 500 5000 Sounth bound aggregated usage (00 mn) 0 0 11/2014 01/2015 03/2015 05/2015 07/2015 09/2015 11/2015 01/2016 03/2016 05/2016 07/2016 Source: Wind, Bloomberg, Bank of Communications (Int’l) Download our reports from Bloomberg: BOCM 〈enter 〉 3 China Market Strategy 17 August 2016 Focus chart 5 ： AH premium performance 230 Hang Seng AH premium index 200 170 140 110 80 01/2006 01/2007 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 01/2015 01/2016 Source: Wind, Bloomberg, Bank of Communications (Int’l) Download our reports from Bloomberg: BOCM 〈enter 〉 4 China Market Strategy 17 August 2016 Focus chart 6 (1) ： Shenzhen Hong Kong northbound stock pool target Mkt Cap (Mil Dividend Sales Bloomberg Ticker short_name Industry Grp TTM PE TTM PB ROE EPS Grth 1Y W TD % MTD % YTD % RMB) Yield Grth_1Y 1 000002 CH Equity CHINA VANKE CO-A Real Estate 291,645.8 16.7 3.0 19.3 2.6 33.6 14.7 21.0 60.9 12.9 2 000333 CH Equity MIDEA GROUP CO-A Consumer Durables & Apparel 181,470.8 13.6 3.4 27.4 2.8 (2.2) 20.1 4.8 0.5 29.6 3 300498 CH Equity GUANGDONG WENS-A Food Beverage & Tobacco 165,572.3 NA 6.5 NA 1.1 24.6 118.8 2.1 1.2 (0.1) 4 000001 CH Equity PING AN BANK-A Banks 163,462.3 7.2 1.0 14.0 1.3 16.0 8.2 0.2 3.5 (4.7) 5 002415 CH Equity HANGZHOU HIKVI-A Technology Hardware & Equipmen 158,010.8 24.9 8.2 36.2 1.8 46.8 24.8 1.2 0.2 12.9 6 002594 CH Equity BYD CO LTD -A Automobiles & Components 149,004.4 42.6 5.1 13.0 NA 40.2 522.2 1.1 1.0 (7.0) 7 002736 CH Equity GUOSEN SECURIT-A Diversified Financials 148,420.0 10.6 3.3 36.0 3.3 161.3 142.9 6.2 13.1 (8.4) 8 002027 CH Equity FOCUS MEDIA IN-A Technology Hardware & Equipmen 139,614.6 8.1 26.6 138.8 0.8 15.1 (5.5) 2.5 2.6 (24.9) 9 000858 CH Equity WULIANGYE YIBI-A Food Beverage & Tobacco 137,414.0 20.0 3.0 15.7 2.2 2.0 5.9 1.5 0.1 32.7 10 000776 CH Equity GF SECURITIES-A Diversified Financials 134,114.8 10.4 1.8 20.9 4.4 162.5 117.6 4.9 11.6 (6.7) 11 000166 CH Equity SHENWAN HONGYU-A Diversified Financials 132,574.2 10.9 2.6 29.7 1.7 139.3 105.0 4.1 7.0 (16.7) 12 001979 CH Equity CHINA MERCHANT-A Real Estate 132,393.6 19.0 2.7 NA 1.6 NA NA 3.3 9.3 (19.7) 13 002304 CH Equity JIANGSU YANGHE-A Food Beverage & Tobacco 108,503.1 19.4 4.3 23.6 2.5 9.3 18.9 (0.8) 0.7 5.0 14 000651 CH Equity GREE ELECTRIC-A Consumer Durables & Apparel 106,598.8 NA NA 26.5 7.8 (28.0) (11.7) NA NA NA 15 002024 CH Equity SUNING COMMERC-A Retailing 105,110.3 91.7 2.8 3.1 0.5 24.3 0.0 (0.1) 6.9 (16.1) 16 002252 CH Equity SHANGHAI RAAS -A Pharmaceuticals, Biotechnology 104,529.2 76.1 9.5 13.8 0.1 52.8 145.0 (0.2) 0.5 (4.7) 17 300104 CH Equity LESHI INTERNET-A Software & Services 94,645.0 148.5 21.7 16.1 0.1 91.1 55.0 4.4 1.3 (18.8) 18 000725 CH Equity BOE TECHNOLOGY-A Technology Hardware & Equipmen 84,278.2 112.7 1.1 1.0 0.4 31.7 (47.1) 1.7 3.9 (18.5) 19 002739 CH Equity WANDA CINEMA L-A Media 83,609.8 67.2 9.2 19.6 0.3 50.6 33.6 2.4 (0.2) (40.7) 20 000895 CH Equity HENAN SHUAN-A Food Beverage & Tobacco 82,191.6 18.6 4.6 25.7 5.0 (2.2) 5.3 2.9 1.4 22.0 21 300059 CH Equity EAST MONEY INF-A Software & Services 75,222.9 58.9 6.1 15.0 0.3 389.7 1,013.6 8.4 8.1 (26.9) 22 002673 CH Equity WESTERN SECURI-A Diversified Financials 74,194.4 71.9 6.2 8.9 0.8 206.7 161.8 6.2 8.8 (19.4) 23 000538 CH Equity YUNNAN BAIYAO-A