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A-Share Strategy 2015-04-20

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2015-04-20 22:54

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[Today’s Guide]
○Second FTZs may officially establish next week
○Targeted measures to dominate loosening monetary policies in future
○Social capitals flow into insurance assets
○4G industrial chain to expect high growth again
 
 [Authoritative Voice]
Second FTZs may officially establish on April 21
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It is learnt from various authoritative channels that the second batch of free trade zones (FTZs) will be officially established in the following week. It is said that the overall plan on the establishment of Guangdong and Fujian FTZs and the plan on deepening the reform of China (Shanghai) Pilot Free Trade Zone have been approved by the State Council and will be released soon. The preparation of a unified negative list for 2015 has been completed and issued to the four FTZs.
It is reported that the Nansha New District of the Guangdong FTZ will be officially established on April 21. It will also announce various key projects on the same day. Hengqin and other zones will be established on April 23. The Fujian FTZ is also planned to be established on April 21. The Tianjin FTZ will hold the establishment ceremony at the Dongjiang bonded area next week. The central government required that all FTZs will be established on the same day and the second batch of FTZs and the expanded area of the China (Shanghai) Pilot Free Trade Zone may officially establish on the same day. It is also reported that the State Council Information Office will hold a press conference on April 20 and officials from the Ministry of Commerce and relevant officials from the four FTZs will answer questions from the press.
 
 
 [XFA View]
Oriented and targeted measures to dominate loosening monetary policies in future
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Government officials have been visiting different places to collect feedbacks from various parties and study the effects of previous macro regulations. Chinese Premier Li Keqiang emphasized that financial regulation should serve the overall economic and social development and new moves should be made under the new normal during a visit to the Industrial and Commercial Bank of China Limited (01398.HK; 601398.SH) and the China Development Bank. The central bank cut its bank reserve requirement ratio by 1 percentage point on April 19 and will implement targeted RRR cuts at the same time. It can be regarded as a result of the visits and response to Premier Li’s remarks.
As a matter of fact, the central bank has cut the yield on seven-day reverse repos on five occasions with a total of 50 percentage points since March. During the past week, although a new round of capitals transfer into the new IPOs kicked off, the overall capital interest rate remained stable with slight decrease. After the introduction of quantity-based and price-based instruments, the monetary policies in the following periods are likely to be further loosened after considering the actual needs for maintaining economic growth and structural adjustments. It is also expected to deepen targeted regulation and introduce more targeted financial measures. Oriented and targeted policies will be the mainstream.
The performance of monetary policies in the following period can be analyzed in the following three aspects. Firstly, the RRR will be adjusted based on the funds outstanding for foreign exchange. As a result of the limited funds outstanding for foreign exchange, the supply of monetary base is insufficient. The increasing pressure on financing scale and the decline in M2 growth and monetary multiplier add the chances for further RRR cuts. Secondly, it will prudently cut the interest rate based on the private financing costs. Actual operations show that the cut of interest rate will be more efficient than cutting the interest rates of real economies. The latest statistics of the central bank show that the financing cost of enterprises was 6.83 percent in the end of March, representing a decline of 12 percentage points from the end of last year and a drop of 50 percentage points from the corresponding period of last year. It shows that the two interest rate cuts are effective. Thirdly, the decision-maker has been emphasizing “strengthening targeted regulation on the basis of range-based regulation”. In order to maintain the economic growth with higher quality, the targeted regulation will be the mainstream.
In can be inferred that despite the increasingly obvious trend on loosening monetary policies, indiscriminate policies like frequent interest rate and RRR cuts are unlikely to be reintroduced. Macro regulatory authorities prefer medium-term lending facilities (MLF) and pledged supplementary lending (PSL) in guiding banks to provide instruments with low costs to real economic sectors in line with state policies. The central bank announced on April 10 that it would release the operation details on such new monetary policies and instruments as MLF and SLF monthly to improve their transparency. It shows that such instruments have been piloted and implemented and the results have been recognized.
 
 
 [Hotspot Investigation]
Social capitals flow into insurance assets
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The plans of Ma Yun, Shi Yuzhu, Dong Wenbiao and other capital gurus on the development of insurance have surfaced, which boosted the valuation of the insurance sector. As a matter of fact, XFA’s surveys show that more low-profile and mysterious capitals are flowing into the insurance sector. Investors are advised to understand their thought in investing in the insurance sector to seek opportunities.
 
◆ Benefits of industry policies bring more targets to social capitals
The unprecedented benefits of industry policies are the key driver for the capital flow into the insurance sector. It is fully demonstrated in the following aspects. Firstly, the market access is relaxed. The shareholding limit of single shareholders for Chinese insurance companies has been raised from 20 percent to 51 percent, which will benefit social capitals in controlling the actual operation. Secondly, it has shown signals that insurance companies will share the financial pressure of the government on the elderly care. The introduction of preferential tax policies to boost insurance demand, the insurance rate is expected to surge. Thirdly, the opening of investment channels will bring more targets to the operation of social capitals.
 
◆ Social capitals strive to be “Warren Buffett’s Chinese apprentice”
Insurance companies are generally regarded as the financial sector with the lowest threshold. It is thoroughly open and quick in financing with the lowest financing cost. Social capitals are learning from Warren Buffett in mastering the actual controlling righty and actual operation of insurance companies to attract low-cost social capitals through financial leverage ratios, so that the assets will continue to increase like snowballs. Besides Liu Yiqian, Xiao Jianhua and GuoGuangchang, the new members of “Warren Buffett’s Chinese apprentice” include Zhang Jun, Yu Yong and certain mysterious persons.
 
◆ Operation routine of “consolidation plus backdoor listing”
Social capitals flowing the insurance sector have extensive experiences in operation in the capital market. There are one or more listed companies actually controlled by them. Their major operation routine in the operation of insurance assets is “consolidation plus backdoor listing”, which can immediately boost the stock price of the company. Meanwhile, it can provide long-term financing export and meet the financing and return demands of insurance companies in different stages.
 
◆Attentions to the operation of four tycoons
Firstly, Xiao Jianhua who directly or indirectly controls Tianan Property Insurance Co., Ltd., Tianan Life Insurance Co., Ltd., Huaxia Life Insurance Co., Ltd. Though the plan of capital increase in Tianan Property InsurancebyInner Mongolia Xishui Strong Year Co.,Ltd. (600291.SH) failed, the intentionto integrate insurance resources through Xishui Strong Year becomes clear. After the application material is improved and the three-month limit expires, the plan might be further pushed.
Secondly, Zheng Yonggang, the actual controller of Ningbo Shanshan Co.,Ltd. (600884.SH), China-Kinwa High Technology Co.,Ltd. (600110.SH) and Zhejiang IDC Fluid Control Co.,Ltd. (002468.SZ), controls several insurance companies including Zhongrong Life Isurance Co.,Ltd., Dragon Life Insurance Co., Ltd., etc. and will integrate the insurance business under his control and merge it into its listed companies.
Thirdly, words spread that Funde Insurance Group (originally named as Sino Life Insurance Co., Ltd.), underthe control ofZhang Jun who is involved in real estate, capital and insurance, has planned to achieve back-door listing. For the listed companies directly or indirectly participated by Zhang and the listed companies frequently acquired by Sino Life Insurancethrough secondary market acquisition to the five percent limit in recent two years, they are worthy of attentions.
 
Fourthly, Yu Yong, an emerging mysterious businessman, owns China Molybdenum Co. Ltd. (603993.SH; 03993.HK). Information shows that Cathay Fortune Corp., represented by Yu Yong, is trying to get insurance, bank and securities license. Its application of acquiring one insurance company has been submitted to authorities and is expected to be approved recently.
 
 
 [XFA Viewpoint]
Government promotes investment in information infrastructure, 4G industrial chain to expect high growth again
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As China’s economic level gradually enhances, the Internet flow sees exponential amplification and constantly challenges the infrastructure of communication. In the forum on economic trend hosted by Chinese Premier Li Keqiang on April 14, Li mentioned the topics including“increasing investment in information infrastructure construction and improvingnetwork bandwidth”, “decreasing network expenses”, etc. for lots of times and required relevant departments to carry them out. According to statistics, the capital expenditure of the top three operators in China will reach 407.5 billion yuan in 2015, indicating a year-on-year growth of 9 percent; the budget for investment in 4G reaches 153.2 billion yuan, indicating a large year-on-year growth of 22 percent. XFA learns that under the circumstance that China Tieta Co., Ltd., jointly founded by China Mobile Limited, China United Network Communications Group Co.,Ltd. (China Unicom) and China Telecom Group Company, lacks of funds, China Mobile might launch the invitation for bidsfor 4G base station in the second quarter, while China Unicomand China Telecom might also acceleratethe construction. The 4G industrial chain might expect high growth again.
Sunwave Communications Co., Ltd. (002115.SZ) is a leading company in domestic network optimization industry and provides domestic and foreign operators with professional wireless network optimization coverage products and solutions, etc. The company is actively expanding to the informatization of industrial application in areas including real way, broadcasting and TV, judiciary, public security, etc. As operators see periodical development and the wireless network optimizationof China Mobile enters large-scale promotion, the network optimizationbusiness of the company will see years of great prosperity.
Wuhan Fingu Electronic Technology Co., Ltd. (002194.SZ)is an advantageous enterprise in domestic radio frequency equipment and will benefit from the construction of 4G base station. The income of various products of the company including duplexer, filter, combiner, channel sub-divider, etc. all sees large surge and drives the company's gross profit rate to increase steadily. As the company actively goes abroad to participate in the construction of overseas communication infrastructure and the exploration of radar, automation projects, etc., its competitiveness and market share might further go uptrend.
 
 
[Information Radar]
Brilliant Elevator to hold press conference for environmental protection products on April 23
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Shenyang Brilliant Elevator Co., Ltd. (002689.SZ) will hold press conference to introduce electric-type dust collector product on April 23. The product, developed and produced by Shenyang Yuanda Environmental Engineering Co., Ltd. which is going to be acquired by Brilliant Elevator, applies the dust removal principle of “chargingdust collection + bag surface filtration” and can effectively remove and control the discharge of PM2.5. Li Keqiang inspected Shenyang Yuanda Technology Park in March of last year and carefully understood the environmental protection equipment of the company.
Brilliant Elevator launched private placement scheme in the end of last year planning to acquire 100 percent equities of Yuanda Environmental Engineering. The scheme has been accepted by China Securities Regulatory Commission at present.
 
 [Editor's Thought]
High leverage: the true risk
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The measures adopted by the regulator in the weekend to warn market risks were interpreted as that the government tries to cool down the stock market and caused great concerns and even high tension, but the following clarification shows that the regulator, just like investors, cherishes current bullish market a lot too. Over leverage and the resulting excessive local speculationis what the market needs to be most alert to.
Rumors were going earlier that the regulator will warn risks. XFA reminded investors about the risk on April 12 in the title of “quality bullish market is desired by all participants”. Actually, the rapid surge of stock index is just surface factor. What causes the concern of the industry and regulator is that this round of market is obviously pushed by capital. Some capital is highly levered through various tools and products including the financing business in capital market or civil leverage financing, which further enlarge and accelerate the surge of the market.
It should be admitted that there is no ground for blaming investors for resorting to leverage or other financial derivatives to enlarge investment and improve investment return and this is usually supported by the regulator. However, if investors ignore their own bearing capacity or experience, the result achieved will just opposite to what they wish. Over leverage is always a “double-edged sword”. The “rapid surge” today might be the cause of “sharp drop” tomorrow and it will not be ignored by the regulator.
 
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