Early Bird

A-Share Strategy 9-August-2015

XFA Premium News
2015-08-11 11:29

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[Today’s Guide]
○Grasp the state-owned asset reform opportunity
○Insurance funds steps up buying second-line blue-chips due to easing policies
○Shenzhen building Qianhai-Shekou new free-trade urban zone in all-out efforts
○Threshold of photovoltaic products to be raised year by year, advantages of leading photovoltaic firms to show up
 
[XFA View]
Grasp the state-owned asset reform opportunity
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Along with the suspension of all shipping companies of ‘China Shen Yun’ series, the state-owned enterprise reform expectation has promptly emerged again, which proves the estimation of the XFA about ‘the state-owned enterprise reform may become a new hotspot after A-share market stabilization’ on July 19. According to the analysis based on the latest information known by the writer including the related implementation guidance, the specification and strength of the state-owned asset and enterprises reform in this round will far surpass those before, intending to reorganize and reinforce the foundational status of the state-owned enterprises in China’s economic operation, and stimulate the whole economy. The merging and reorganization of the state-owned listed companies triggered by the reform will possibly become one of the most popular investment themes in the second half year, and the investors could overall grasp the state-owned enterprise reform opportunity.
 
Firstly, based on the frequent declarations by the senior management recently, the purpose of the reform is to motivate the vigor and competitiveness of the state-owned assets and enterprises through the market-oriented reform in the existing systems and mechanisms, and drive the growth of the real economy, so as to truly implement the principles of ‘beneficial for maintenance and appreciation of the state-owned capital value, improvement in the state-owned economic competitiveness, and expansion in the state-owned capital function’ proposed by Xi Jinping, the General Secretary of the Central Committee of the Communist Party of China.
 
Secondly, in order to avoid the chaotic phenomena in previous reforms such as benefit tunneling and the state-owned assets loss, the management, control and leadership should be emphasized and reinforced while the policies and resource support the state-owned assets and enterprises, which means that the state-owned enterprise reform must its own way, cannot be Westernized or even lost away, and the reform must make the state-owned enterprise larger and stronger. It is known that related authorities repeatedly revise the top-level design proposal for the state-owned enterprise reform based on the experience and lessons of the previous reforms so that to improve and optimize the final proposal. Meanwhile, the capital market will possibly be the important operating platform during this state-owned asset reform in order to maintain the open and clear of the procedures.
 
Based on the considerations above, large-scale institutions including China International Capital Corporation Limited and China Science & Merchants Investment Management Group have quietly prepared the state-owned enterprise reform fund of over 10 billion yuan in order to take a share of the spoils during this reform. The institutions in the interview believe that it cannot be eliminated that the state-owned asset reform will firstly make breakthroughs in the traditional fields of steel and nonferrous metals, and the traditional foundation industries currently bear the pressure of capacity surplus and fierce competition with insufficient capital and difficulty in operation, the related state-owned assets and enterprises will possibly become stronger after the reform through the capital platform to further reinforce their leading roles.
 
 
[Institutions’ Movement]
Insurance funds steps up buying second-line blue-chips due to easing policies
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Research conducted by XFA shows that recently, insurance funds are quickening the step to buying second-line blue-chips through secondary market acquisition and the reason for this is that the bailout policy for insurance market has eased the limit on insurance funds’ investment in a single blue-chip stock, from the previous 5 percent to the current 10 percent, which is an enlargement of the insurance companies’ room for buying.
 
It’s learned that many second-line premium blue-chip stocks of companies in the resources, real estate and consumption sectors have been selected by insurance funds into their stock pools. These insurance funds have the intention to buy them to the stipulated limit. The motivation of insurance funds falls into two categories: the first is purely value investment in some high-quality stocks that have been seriously undervalued, and the second is strategic long-term investment in preparation for future consolidation and back-door listing. The second-line blue-chip stocks that are worth drawing most attention are those which have been bought by small-to-medium insurance companies at a percentage lower than 5 and which have relatively low price earnings ratio.
 
 
Funds show signs of flowing into bonds and fixed-income instruments market
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XFA learned after interviewing several trust companies that due to the influence of substantial A-share market adjustment and declining investors’ risk preference, trust products are sold like hot cakes with some are even in short supply. General index of China’s bond has obviously risen since the beginning of July and the financing scale of the primary market of bonds has also substantially risen since June. Enterprise bonds and corporate bonds have been issued faster and the fundraising scale is climbing up rapidly. Many bond fund managers that have been interviewed said that in the second half of this year, much more funds will come back to the bonds market. It’s also learned that after the recent restart of the supervision for primary offering of refinancing, the initial public offering supervision is also expected to restart in mid-August.
                
 
[Hot Spot Investigation]
Shenzhen building Qianhai-Shekou new free-trade urban zone in all-out efforts
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XFA’s field survey of Guangdong free trade zone shows that Qianhai, Shenzhen City, which has been taking the lead in financial innovation of China, is stepping up building the infrastructure of the free trade zone recently. The great work to build a brand-new free trade urban zone is formally rolled out.
 
The construction work started on Aug. 1 covers road transportation, rail transit, water environment, landscape engineering, underground room, major industrial platform, and mixed-use building complex. With member of the municipal standing committee of Shenzhen and director of the administrative committee of the free trade zone as the general commander, the construction battle is striving to “substantially” renew and elevate the image of Qianhai-Shekou free trade urban zone and centered on this, “fundamentally” change the appearance of Qianhai in one or two years.
 
Under the supervision of Shenzhen municipal government, various projects of the whole district has been under construction successively at present. Among them, the channel project for non-overhead high voltage wires, which is called as “No. one project” of Qianhai infrastructure construction, has completed 50 percent of the annual investment plan. Construction of shopping mall in Qianhai free trade zone has been started. Qianhai innovation commercial center will form its image in late Sep. Qianhai International Wine Exchange Center has finished major structure construction and strives to conduct operation by the end of this year. Chaoren wharf project will start construction in late Aug. and will be completed and put into operation by the end of the year. Cruise ship project in Prince Bay also strives to finish major structure construction before year-end, laying solid foundation for the operation of cruise home-port in Prince Bay at the end of 2016.
 
 
[XFA Viewpoint]
Threshold of photovoltaic products to be raised year by year, advantages of leading photovoltaic firms to show up
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It was reported by XFA that the National Energy Administration intends to yearly raise the standard and threshold of photovoltaic products from this year so as to promote survival of the fittest. It will carry out “pioneer” plan which requires projects to adopt advanced technology products. At present, the first batch of approved projects of this plan has been released. Insiders believe that advantages of the leading enterprises will show up gradually with the help of this policy. In addition, reduction in photovoltaic on-grid price, which insiders are concerned about, may not occur in 2015 and 2016. Because by convention, the authority will issue document on cutting electricity price in the middle of the year and implement it in the next year; however, there is no news about price adjustment at present.
 
XFA learned from the interim reports of some listed companies that several photovoltaic enterprises saw significant year-on-year growth in net profit from Jan. to June and will enjoy prominent development in the latter half of the year. The rapid development in Chinese photovoltaic market is one of the major reasons for the good performance of these firms.
 
In the first half of the year, Risen Energy Co., Ltd. (300118.SZ) witnessed drastic surge in operating revenue of its leading product solar components and achieved 103 million yuan of net profit, up by about 374 percent from a year earlier, due to the consolidated financial statements with Jiangsu Siweike New Material Co., Ltd. In the restricted stock incentive plan previously released by the company, the 2015 performance assessment goal is the net profit after deduction to be no less than 250 million yuan. In addition, the company quickens extension in downstream industries and plans to invest in project of photovoltaic power station via private placement.    
 
Sungrow Power Supply Co., Ltd. (300274.SZ) ranks among the top in terms of the market shares in photovoltaic inverter products. In the first half of this year, the company witnessed its net profit rise more than 70 percent on a year-on-year basis. Institutions predict that as China will see massive installed capacity this year, more inverter products will be produced than expected in the second half. In addition, the revenue of the company’s system integration business in photovoltaic power station surged by 267 percent year on year in the first half, and its gross margin also expanded. The business has become a key growth point of the company.
 
 
[Editor’s Thoughts]
Wisdom comes from calmness
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Although the stock market seems to recover from the previous crash temporarily, we should not forget the lessons it taught to us. Looking back, when the stock market was above 5,000 points, industrial capitals reduced over 600 billion stocks holding and many stocks saw their valuations centupled. More importantly, the market was awash with over 2 trillion leveraged funds. And the management resolved to eliminate off-market margin financing. Despite the bearish trend of valuation, capital and confidence, investors, fascinated by wealth stories, were reluctant to leave the market.
 
At the moment, investors should calm down to humbly and carefully read the market. First of all, the market which just revived from the crash will certainly regress. For example, in a flagship business department in Shenzhen, there are more than 50 stock investors with over ten million investments. Nearly 80 percent of them were forced to close positions and will not come back in a short time. Secondly, the previous P/E ratio of over 150 times in the ChiNext Board was a bubble at its peak. After the crash, the valuation bubble can hardly expand. So the market still has a long way to go to return to the fundamentals. This week, Beijing Kunlun Tech Co., Ltd. (300418.SZ) launched a 30-for-10 conversion of capital surplus into shares, the highest conversion in history, yet its stocks plummeted almost by the 10-percent daily limit for two straight trading days.
 
Investors should wait patiently and give an accurate shot until there are all bullish signals, unless you are really familiar with the underlying stocks with reasonable valuation. It might be the best strategy for conservative investors. Particularly, as the market is still under administrative control, dramatic rises and falls are inevitable. Speculation, once with wrong rhythm, will render investors in a passive position.
 
 
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