Investment Summary
The highly anticipated National People’s Congress (NPC) standing committee meeting will be held from 4-8 November. Over the past few weeks, various press conferences have been held to highlight stimulus directions. The fiscal support directions announced so far aim to support the economy by addressing and containing two major risks: local government debt and the real estate market.
The media has widely reported that the NPC standing committee may announce a CNY10 trillion fiscal package, including CNY6 trillion government bonds to address local government debt resolution over three years and CNY4 trillion local government special bonds (LGSB) to purchase idle land and for housing inventory destocking over the next five years. Additionally, reports suggest that CNY1 trillion special central government bonds (CGB) could be issued for state-owned (SOE) banks’ recapitalisation.
Details are yet to be confirmed, and the market eagerly awaits post-NPC standing committee announcements. Other elements to look for include the time horizon, implementation of local government debt resolution, and whether the resolution will involve new debt addition or mainly debt swap. The market’s expectations have been building up over the past month, making it challenging to exceed expectations massively. One potential surprise could be a focus on domestic consumption, which was not emphasized in the Ministry of Finance (MOF) press conference. Moreover, if Trump wins the US presidential election, China could step up fiscal stimulus measures to counteract the anticipated 60% universal tariff on Chinese products. The Central Economic Work Conference (CEWC) in December will be crucial to assess the potential impact and set the policy tone for the next year.
Market Valuations and Fundamentals
Valuations of Hong Kong (HK) and China equities markets have “normalized.” The MSCI China Index, CSI300 Index, and Hang Seng Index (HSI) pulled back 5.9%, 3.2%, and 3.9% in October, respectively. These indexes have gained 9.6%, 16.1%, and 7.9% respectively since the announcement of the policy trio on 24 September. Valuation of major market indices have more or less recovered to historical average levels since 2014, with MSCI China, CSI300, and HSI trading at 9.9x, 12.5x, and 9.2x forward price-to-earnings (P/E).
As the market focuses back on fundamentals, assessing the potential impact of fiscal stimulus and the US presidential election, market volatility is expected to remain high. The economy seems to be responding to policy support, with the latest October National Bureau of Statistics (NBS) and Caixin manufacturing purchasing manager’s index (PMI) coming in better-than-expected, rising 0.3ppt and 1.0ppt month-on-month (MoM) to 50.1 and 50.3 respectively. Both manufacturing PMIs suggest constructive signals about industrial production in the near-term.
We reiterate our barbell strategy, focusing on large-cap, index-heavy internet and platform companies, market leaders that posted better-than-expected results, and quality yield stocks to cushion market volatility. For income-oriented investors, the periodic relative underperformance of quality yield stocks offers opportunities to accumulate.
Company Analysis
Around 80% of all China-listed universe has reported quarterly results so far, with 3Q24 earnings increasing 3% year-on-year (YoY). All A-shares reported 3Q24 results with earnings growth picking up to +5% YoY (vs -1% YoY in 2Q24), largely driven by financials, electronics, and machinery. A-share non-financials earnings dropped 9% YoY in 3Q24 (vs -7% YoY in 2Q24). With policy support, we believe 3Q24 earnings are likely to mark the earnings trough.
Although not all HK and China companies in the offshore market report quarterly results, certain market leaders posted earnings that beat market expectations. Below is a detailed analysis of each company:
BYD Co Ltd-H (1211 HK)
BYD Co Ltd-H has demonstrated strong performance with a forward P/E ratio of 19.8x for 2024 and 15.7x for 2025. The company’s Price/Book ratios stand at 4.4x for 2024 and 3.6x for 2025. Dividend yields are expected to be 1.4% for 2024 and 1.6% for 2025, with a return on equity (ROE) of 23.3% and 23.9% for the respective years.
China Construction Bank-H (939 HK)
China Construction Bank-H is trading at a forward P/E ratio of 4.3x for 2024 and 4.2x for 2025. Its Price/Book ratios are 0.4x for both years. Dividend yields are anticipated to be 7.0% for 2024 and 7.1% for 2025, with an ROE of 10.2% and 10.0% respectively.
CNOOC Ltd (883 HK)
CNOOC Ltd has a forward P/E ratio of 5.5x for 2024 and 5.3x for 2025. The company’s Price/Book ratios are 1.1x for 2024 and 1.0x for 2025. Dividend yields are projected to be 7.6% for 2024 and 7.7% for 2025, with an ROE of 20.3% and 18.7% respectively.
Industrial & Commercial Bank of China-H (1398 HK)
Industrial & Commercial Bank of China-H is trading at a forward P/E ratio of 4.5x for 2024 and 4.4x for 2025. Its Price/Book ratios are 0.4x for both years. Dividend yields are expected to be 7.1% for both 2024 and 2025, with an ROE of 9.9% for 2024 and 9.3% for 2025.
PetroChina Co Ltd-H (857 HK)
PetroChina Co Ltd-H has a forward P/E ratio of 5.9x for 2024 and 6.0x for 2025. The company’s Price/Book ratios are 0.6x for both years. Dividend yields are anticipated to be 7.9% for 2024 and 7.5% for 2025, with an ROE of 10.7% and 10.2% respectively.
Ping An Insurance Group Co-H (2318 HK)
Ping An Insurance Group Co-H is trading at a forward P/E ratio of 5.8x for 2024 and 5.5x for 2025. Its Price/Book ratios are 0.8x for 2024 and 0.7x for 2025. Dividend yields are expected to be 5.6% for 2024 and 5.9% for 2025, with an ROE of 14.4% and 13.8% respectively.
Hong Kong Exchanges & Clearing (388 HK)
Hong Kong Exchanges & Clearing is trading at a forward P/E ratio of 30.9x for 2024 and 29.3x for 2025. The company’s Price/Book ratios are 7.5x for 2024 and 7.3x for 2025. Dividend yields are anticipated to be 2.9% for 2024 and 3.0% for 2025, with an ROE of 24.2% and 24.8% respectively.
HSBC Holdings Plc (5 HK)
HSBC Holdings Plc has a forward P/E ratio of 7.1x for 2024 and 7.2x for 2025. The company’s Price/Book ratios are 1.0x for 2024 and 0.9x for 2025. Dividend yields are expected to be 8.8% for 2024 and 6.9% for 2025, with an ROE of 13.9% and 12.7% respectively.
Standard Chartered Plc (2888 HK)
Standard Chartered Plc is trading at a forward P/E ratio of 7.5x for 2024 and 6.6x for 2025. Its Price/Book ratios are 0.6x for both years. Dividend yields are projected to be 2.7% for 2024 and 3.2% for 2025, with an ROE of 8.9% for both years.
Conclusion
With the upcoming NPC session, the market is poised for potential changes and significant fiscal stimulus announcements. The varying performances and outlooks of key companies like BYD, China Construction Bank, CNOOC, Industrial & Commercial Bank of China, PetroChina, Ping An Insurance, Hong Kong Exchanges & Clearing, HSBC, and Standard Chartered will be closely monitored. It’s a crucial time for investors to stay informed and strategically position their portfolios in anticipation of these developments.
