PBOC raises reserve ratio by 50bp
The People’s Bank of China (PBOC) raised the reserve requirement ratio by
50bp to 12% for commercial banks effective 15 August in a bid to curb loans
growth. This move is only ten days after the recent interest rate hike and
adjustment of interest income tax, showing that the government is concerned
about the potential economic overheating.
Implications. The impact of the reserve ratio hike on the economy could be
insignificant given the continued capital inflow as a result of fast
accumulating trade surplus. Also, there is not much room to raise reserve
ratio further this year as the ratio of excess reserve has been lowered to
2.87% in 1Q07 from 4% in 4Q06. In the coming months, PBOC may use
other instruments such as issuing special treasuries together with reserve
ratio hike to draw out excess liquidity.
The impact on the stock market will be limited given the abundant liquidity in
A-share market after the market has regained confidence recently.
Tuesday 31 July 2007
Stunningly interim earnings!!
Stunningly strong interim earnings. We could be seeing the fastest
earnings growth periods for China listed stocks since they came to Hong
Kong in 1993, driven largely by financials and commodity plays. (A rapid
expansion of financials’ earnings will hugely impact the H-share index as they
account for almost 43% of the weighting.)
So far, seven heavyweights in the H-share index have served notice that they
expect brilliant results next month. True, these notices of strong earnings are
based on China accounting standards which may differ from the International
Financial Reporting Standards (IFRS) used in Hong Kong. Except for Air
China and China Life Insurance, however, the difference between the A-and
H-share earnings of a company is often in the 5-10% range.
In general, A-share earnings are lower than the H-shares’ of the company
because of stricter China accounting standards. For example, in China,
deferred acquisition costs are expensed rather than amortised as in Hong
Kong’s standards, and trading securities are marked at cost until gains/losses
are realised, whereas in Hong Kong, they may be marked to market and
recorded in the P&L statement as unrealised gains/losses.
Four of the seven companies said their interim earnings based on China
accounting standards would shoot up by more than 100%. Among them, Air
China said it would surge by at least 2000%. Lest H-share investors get
carried away, do note that based on China accounting standards, it made
only Rmb45m in net profit in FY06, whereas it made Rmb458m based on
IFRS. Still, based on IFRS, Air China’s H-share interim net profit should at
least double – which is still no mean feat.
Key risks: a) worsening US sub-prime mortgage woes,
b) worsening Sino-US trade tension,
c) Bank of Japan’s decision to raise interest rates,
d) stronger-than-expected macro-economic tightening by China,
and
e) seasonal H-share correction from mid-August.
Investors should not allow the global equity rout triggered by the US’ subprime
woes to overshadow an interesting trend in H-share companies: a
period of rapid corporate earnings growth. Based on a spate of positive profit
warnings according to China accounting standards from listed Chinese state
companies matched by likely robust liquidity flows from the qualified
domestic institutional investors (QDII), we forecast a H-share rally extending
well into the best part of 2008, although it will be marked by bouts of
corrections amid greater volatility. We raise our 12-month H-share index
target to 16,330 points, offering a 25% upside. Buy insurance, energy, and
commodity stocks on weakness.
Stock picks
Our top picks and the reasons for our choices are:
• Zijin Mining (2899.HK). Strong earnings growth, A-share listing in
Shanghai, probably in September.
• Chalco (2600.HK). Rapid aluminum capacity growth, supported by
surprisingly strong prices, and strong management.
• PetroChina (857.HK). Great at discovering reserves, strong oil price, and
solid management. Overhang from fears of further sales by Warren
Buffet’s fund offers good buying opportunity
• China Life (2628.HK). Strong government support, robust rural business
expansion, priority allocation of Chinese IPOs to improve investment yield.
• Angang Steel (347.HK). Volume growth matched by strong technological
skills and cost control.
• CITIC Resources (1205.HK). Oil and commodity output upside surprises.
earnings growth periods for China listed stocks since they came to Hong
Kong in 1993, driven largely by financials and commodity plays. (A rapid
expansion of financials’ earnings will hugely impact the H-share index as they
account for almost 43% of the weighting.)
So far, seven heavyweights in the H-share index have served notice that they
expect brilliant results next month. True, these notices of strong earnings are
based on China accounting standards which may differ from the International
Financial Reporting Standards (IFRS) used in Hong Kong. Except for Air
China and China Life Insurance, however, the difference between the A-and
H-share earnings of a company is often in the 5-10% range.
In general, A-share earnings are lower than the H-shares’ of the company
because of stricter China accounting standards. For example, in China,
deferred acquisition costs are expensed rather than amortised as in Hong
Kong’s standards, and trading securities are marked at cost until gains/losses
are realised, whereas in Hong Kong, they may be marked to market and
recorded in the P&L statement as unrealised gains/losses.
Four of the seven companies said their interim earnings based on China
accounting standards would shoot up by more than 100%. Among them, Air
China said it would surge by at least 2000%. Lest H-share investors get
carried away, do note that based on China accounting standards, it made
only Rmb45m in net profit in FY06, whereas it made Rmb458m based on
IFRS. Still, based on IFRS, Air China’s H-share interim net profit should at
least double – which is still no mean feat.
Key risks: a) worsening US sub-prime mortgage woes,
b) worsening Sino-US trade tension,
c) Bank of Japan’s decision to raise interest rates,
d) stronger-than-expected macro-economic tightening by China,
and
e) seasonal H-share correction from mid-August.
Investors should not allow the global equity rout triggered by the US’ subprime
woes to overshadow an interesting trend in H-share companies: a
period of rapid corporate earnings growth. Based on a spate of positive profit
warnings according to China accounting standards from listed Chinese state
companies matched by likely robust liquidity flows from the qualified
domestic institutional investors (QDII), we forecast a H-share rally extending
well into the best part of 2008, although it will be marked by bouts of
corrections amid greater volatility. We raise our 12-month H-share index
target to 16,330 points, offering a 25% upside. Buy insurance, energy, and
commodity stocks on weakness.
Stock picks
Our top picks and the reasons for our choices are:
• Zijin Mining (2899.HK). Strong earnings growth, A-share listing in
Shanghai, probably in September.
• Chalco (2600.HK). Rapid aluminum capacity growth, supported by
surprisingly strong prices, and strong management.
• PetroChina (857.HK). Great at discovering reserves, strong oil price, and
solid management. Overhang from fears of further sales by Warren
Buffet’s fund offers good buying opportunity
• China Life (2628.HK). Strong government support, robust rural business
expansion, priority allocation of Chinese IPOs to improve investment yield.
• Angang Steel (347.HK). Volume growth matched by strong technological
skills and cost control.
• CITIC Resources (1205.HK). Oil and commodity output upside surprises.
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