Made in China:U/g ABC/BoCom/Kunlun/Towngas to Buy,D/g China Gas to Hold;Wind/Nuclear

We turned more positive on big Chinese banks after our recent trip to China, as we saw evidence of incremental improvements in asset quality and margin. The strict implementation of supply-side reforms is driving up the profitability of industrial SOEs, which were perceived as the most troubled areas. Property risks have moderated as consolidation momentum has picked up. This should relieve asset quality concerns for these two sectors (c.35% of total credit) and also be supportive for banks’ asset yields. As a result, we cut the NPL formation rate by 7bps/8bps to 0.6% in 2017/18 for big banks, and lift NIM assumptions by 4bps/9bps. We upgrade ABC-H and BoCom-H to Buy. (Hans Fan - 852 2203 6353) .

    Sustained volume recovery, policy clarity and positive read-across from the FY17 (Mar yearend) results from China Gas have boosted the gas utilities by 15-43% in the past month. We are now more positive about the outlook for volumes and margins in both near and medium term and therefore raise earnings for 2017-19E and lift TPs by 21-35%. At the same time, we do not expect many surprises from interim results and believe that any further rerating would require much stronger and more sustainable volume growth and additional policy catalysts. After the strong rally, we downgrade China Gas to Hold and recommend laggards including BEHL, Towngas, and Kunlun. (Hanyu Zhang - 852 2203 6207) .

    YTD, wind utilization has improved yoy, driven by a power demand recovery, better supply discipline and stronger dispatch efforts. However, wind stocks have underperformed HSCEI by 10-22%, mainly due to weak wind speeds and uncertainty in the green certificate policy. We view wind speed as a short-term volatility factor but we believe the long-lasting curtailment reduction trend will be intact. (Continue to next page)