China Strategy:Trawling for value

H-Shares have visited book value for the fifth time in five years. These selldowns are always triggered by liquidity concerns in China and the index rallieson average by 20% once concerns dissipate. The rallies have been led bycyclicals and financials. In this report we highlight our top picks in each sectoracross the market. Domestic cyclicals are a particular favourite, includingproperty, retail, auto, cement and industrials. Defensive sectors such ashealthcare, consumer staples, telecom and utilities tend to lag. Top cyclical picksinclude CR Land, Belle, Vipshop, Great Wall, Conch Cement, GCL-Poly,China Shipping Development and CNOOC.

    Annual visit to book value.

    Each time liquidity concerns arise in China’s financial system, H shares tradebelow book. This has occurred once during each of the last five years and weare once again close to this key support level. On average, the index rallies 20%once liquidity concerns dissipate, with cyclicals and financials leading the way.

    We reiterate our 10,800-13,000pts target trading range for H shares.

    End of easing?Although forceful measures are being taken to inject liquidity into China’s stockmarket, a further broadening of policy measures appears unlikely now thatproperty prices are rising. The genesis of the current easing cycle was the 1H14slump in property market sales. Combined with lower levels of margin financingand damaged retail investor confidence, we expect it will be difficult for the Asharemarket to regain its earlier highs.

    Top picks.

    Cyclicals and financials have led previous rallies. Domestic cyclicals are aparticular favourite of ours, including property, retail, auto, cement andindustrials. Defensive sectors such as healthcare, consumer staples, telecomand utilities tend to lag. Top cyclical picks include CR Land, Belle, Anta,Vipshop, Great Wall, Conch Cement, GCL-Poly, Goldwind, CRRC, ChinaShipping Dev and CNOOC.