Dim Sum Express

A-Share Market

    Investment Strategy: Main board 9M14 earnings likely eased with ChiNext/SME strengthening slightly

    Weak macro data during 3Q14 means 9M14 main board earnings growth likely eased considerably from 1H14, while ChiNext and SME companies will likely post a slight acceleration based on 9M14 earnings reports or profit alerts available. We believe earnings growth at small-cap ChiNext companies has accelerated due to an increase in M&A over the past two years which has improved their financial status through the consolidation of newly acquired assets. Agriculture, media, electronics and IT saw earnings growth strengthen, while property, auto, home appliances and building materials deteriorated.

    Environmental: 9M14 earnings preview

    The 28 A-share environmental companies that have issued a 9M14 profit alert expect earnings growth of 27% YoY on average, much higher than the 9M13 figure of 7% YoY and also 4pp stronger than growth in 1H14. The improvement was mainly driven by M&A and new business development. The environmental sector has outperformed the ChiNext and SME Boards in terms of 1H14 and 9M14 earnings growth based on data released so far. We see water treatment and air pollution control as two important policy-driven investment themes at present.

    Steel: Prices to strengthen slightly this week

    Steel and raw material prices strengthened last week with dealer inventories declining. The supply-demand dynamics in the steel market have improved due to recent property policy relaxation, a slight sector demand recovery in the Oct peak season, and more positive policy expectations. In addition, steel production halts in Beijing and Hebei during the upcoming APEC meeting should help ease steel supply pressure in the near term. Steel prices will likely fluctuate and strengthen slightly this week with Oct prices likely to rebound on restocking by end users and dealers.

    Non-Ferrous: Rare earth prices drop on low season despite crackdowns; EV sales surge on tax break

    Base metal prices dropped across the board as the outbreak of Ebola triggered economic concerns. Recent US$ weakness constitutes a short-term positive for precious metal prices, but we expect the US$ to appreciate in the longer term. The prices of light and heavy rare earth oxides weakened last week as we move into the 4Q14 low season; however we expect prices to rebound after the recently launched regulatory crackdowns are finished when the peak season will also start. Declining rare earth prices during the low season are favorable for processing companies of high-end permanent magnets.

    Hong Kong Market

    China Securities Sector: Monthly data update 9M14 total comprehensive income and total net profit at 19 major Chinese securities companies increased 56% YoY and 43% YoY. We believe deregulation and marketization of the financial industry is having a profound impact on China’s securities industry. This has been seen in the industry in recent years: despite a continued decline in commission rates, overall profits have been growing driven by capital-based intermediary businesses. We are positive on the outlook for China’s securities industry and therefore maintain our Positive sector rating.