Early Bird

A-Share Strategy 27-July-2015

XFA Premium News
2015-07-28 09:24

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[Today’s Guide]
○No need to be oversensitive about policy exit
○Insurance funds predict “tank shock” of market
○Well-known private funds claim there are still opportunities in H2
○Beijing Dynamic Power may accelerate the shareholding-increasing plan
 
[XFA View]
No need to be oversensitive about policy exit
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Future exit of the unconventional bailout measures becomes “heart disease” of A-share market right after liquidity crisis eased. Although it is inevitable for the policy orientation to change from unconventional to conventional, no matter the previous bailout or the future exit is a political and economic choice after deliberation but not what the market image as “easy come easy go”. The exit is a progressive and long-term process. The market will not be a mess after the bailout is phased out; instead, it will enter a new normal.
 
First of all, the unconventional measures will be phased out finally, but the exit of policy bailout is always a progressive and long-term process without exception according to the historical experience of various capital markets, because one of the premises for the emergent measures to exit is that the problem the measures tried to bail out will not break out again. Hence, the exit will give consideration to recovery situation of market order and efficiency and fluctuation in stock indices, and it should not be regarded as a market slump in disorder again.
 
Secondly, the market normal will be different before and after the bailout measures. The main reason for this quick plummet beyond expectation is the irrational capital leverage. After the market is back on track, the moderate leverage and financial innovation will not be put off easily by a slight risk. It is believed that various market participants will learn lessons from it and further strengthen supervision and risk control to prevent market crisis resulted from the disordered leverage and innovation. The A-share market will be different when it is back to normal again. 
 
It should be clarified that what the policy bails out is not the misestimated market. The lesson of A shares turning from surging to slumping during January and June is that the over-excited market situation is not only bad for itself to serve the real economy and brings difficulty to macro-policy due to risk accumulating and relieving. Therefore, the ultimate goal of policy bailout is to maintain and develop the capital market which is stable and serves the real economy. Stock valuation will be finally up to the fundamentals and major trend of economic and social development, while the mainstream market investment strategy is to seek subjects which are with low uncertainty and clear growth expectation.
 
[Institutions’ Movement]
Insurance funds predict “tank shock” of market
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Managers of insurance funds including Taikang Life Insurance expressed when interviewed that since the hypernormal bailout efforts made by multiple ministries and commissions, A shares have rebounded continuously for more than two weeks and are approaching the front area of intensive transaction which is between 4,200 points and 4,300 points. Plus the possible profit-taking of bottom chips at short-term rebound, A shares is expected to enter a “tank shock” and so staged operation may be a flexible strategy in the near future. In light of the high-level meeting is going to be convened soon to keynote the future macro control measures, stock index might see limited fall.
 
In addition, with regard to the issue of withdrawal of national bailout forces, the interviewed insurance funds are quite calm about that. They think that withdrawal of the series of bailout measures is inevitable because they are just for addressing crisis, but they believe that the authority will take market situation and tolerant capacity into consideration so investors do not need to worry.
 
Well-known private funds claim opportunities in H2
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The latest survey conducted in Shenzhen by XFA shows that some large famous private funds with leading performance hold that the major institutional participants on the market now have very low positions so they are very unlikely to continue reducing holding. What’s more, since in the coming six months, listed companies and major shareholders can only increase but not reduce shareholding, the trading opportunities now are more than risks, if from a semi-yearly median view. The major places where shareholding increase exists are listed companies, reorganized large-scale state-owned enterprises and a certain prosperous industry that far exceeds market expectation.
 
Suning Commerce Group Co., Ltd. (002024.SZ) is a foregoer, transiting to internet retail from traditional retail, who accelerated the expansion of M-commerce last year. The Suning Commerce got back to rapid growth track after the second half year of 2014, and greatly improved the efficiency through making store online in the internet and function integration of sale, experience, service in a single store. The company even makes comprehensive arrangement for multi-class business such as consumer finance, supply chain finance, and etc., and internet retail ecosphere gradually forms.
 
[Industry Observation]
Strictest self-inspection of pharmaceutical enterprises begins, and leading companies will see in good developing opportunity
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State Food and Drug Administration released ‘Notice of State Food and Drug Administration on Examination and Approval Work for Self-inspection of Drug Clinical Trial Data (No. 117, 2015)’ on July 22. This self-inspection is regarded as ‘the strictest requirement of data examination and approval in the history’. According to insiders, it is a landmark event to reinforce industrial specification, which will possibly enhance sound development of the industry in a long term, and at the same time, also mean that China’s drug registration, examination and approval system will be issued, and accelerate new drugs’ coming into the market.
 
As known, the self-inspections are autonomously declared by enterprises themselves, and more items for self-inspection, more beneficial to the enterprises. There is a hope for the enterprises to have green channel for new drug approval, if their self-inspections have been passed by the authorities. In addition, massive unqualified enterprises and drug categories will be retreated from examination and approval after severe regulation of the industry. Benchmarking enterprises in fields of China’s drug research and development and its CRO (Contract Research Organization, CRO), such as Zhejiang Huahai Pharmaceutical Co., Ltd. (600521.SH), Jiangsu Hengrui Medicine Co., Ltd. (600276.SH),,Tigermed Consulting Ltd. (300347.SZ) and etc., possibly will have more development space.
 
[Information Radar]
Beijing Dynamic Power may accelerate the shareholding-increasing plan
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In the stock price stabilization scheme released on July 13, Beijing Dynamic Power Co., Ltd (600405.SH) (DPC) indicated that part of the board directors, board of supervisors and senior management personnel would select the timings to increase the shareholding in DPC in next six months. According to market expectation, the DPC will possibly initial related plans, and employee stock ownership plan and so on may be released.
 
Moreover, due to recovery of traditional businesses, the DPC’s performance this year will gradually improve. The DPC is a leading enterprise in the fields of communication power supply and energy performance contracting, and its performance will possibly improve towards stabilization based on the rapid growth rate of 4G investment and construction, and continue strength of China’s policies on energy conservation and environment protection. Additionally, the DPC reinforces the intensity to expand the overseas markets, such as USA, Southeast Asia and so on, and businesses of electrical machine energy saving and cogeneration are in smooth progress.
 
Productivity continues to release, Fulin Precision Machining embraces new growth engine
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As its major investment projects via initial public offering or refinancing have gradually achieved the design capacity and market demands are strong, Mianyang Fulin Precision Machining Co., Ltd. (300432.SZ) will embrace new engine for performance growth brought by continuously released productivity. It is predicted that the annual net profit of the company will increase by 20 to 60 percent year on year. Previously, the company predicted that its performance in the first half year would expand 20 to 40 percent on year-on-year basis.
 
In terms of projects, Fulin Precision Machining’s “project with an annual output of 15 million hydraulic tappets has achieved 90 percent of the designed capacity. The project has delivered about 7 million hydraulic tappets in the first half and is expected to deliver 14 million throughout the year. The first phase of “project with an output of 1.8 million variable valve timing (VVT) systems” in the first half has achieved the design capacity of 800,000 VVT systems. The second phase, with a design capacity of 1 million VVT systems, is under construction. The project is planned to reach its target by the end of next year. Previously, the company’s annual productivity of VVT was about 200,000. Currently, about 50 to 60 percent vehicles need VVT systems. The productivity expansion meets the explosion of market demands just in time. In addition, the company’s “project with an annual output of 2 million precision parts for automotive powertrain” is likely to achieve 90 percent design capacity by the end of this year.
 
[Editor’s Thought]
It’s time to explore value investment
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As the SSE Composite Index came close to 4,200 points where many shares were traded, and the rumor spreads that the bailout measures will be withdrawn, investors became fragile again.
 
As we’ve mentioned before, this round of bailout measures has intended to save the liquidity and pricing function of the market, but not the free-falling stock index. A case in point is that during the bear run in 2008, despite the SSE Composite Index plunging 70%, the decision makers did not intervene as there was no systemic risk and market failure. Therefore, if unconventional measures will be withdrawn, it suggests that the above-mentioned objective has been rapidly and effectively achieved, and the market has been out of the non-rational crisis. Reasonable investors should be pleased to see this. It is not realistic to expect emergency measures to last long and regard them as a guarantee for the rise of stock index.
 
Actually, rather than worry about how and how fast these measures will exit, investors should reflect on the lessons that the stock market crash has taught to them. Investors should participate in the market in a more rational and cautious manner in the future. Over the past month, A-share market has suffered a non-normal failure, which has overthrown all the theories and techniques of value investment. It is time to return and restart to explore the market. Currently, despite its low valuation, A-share market has significant structural characteristics. Excluding the constituent stocks of Hushen 300 Index, the average P/E ratio of the other over 2,400 companies exceeds 85 times. No matter comparing A-share market’s valuation with other stock markets or with its previous level, it cannot be taken as the only criterion whether the market is low or high evaluated. However, after through the dramatic rise and fall, re-mentioning of value investment will surely resonate with more investors.
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