Weekly views from GF Securities’ macro research team【20211004】
Author：GF Securities' Macro Research Team
Low-valuation sectors to fend off short-term fluctuations
The sell-off in the H-share market was due to the brewing debt crisis in the property sector. We suggest allocating in low-valuation sectors with good sentiment amidst the fluctuations in the short term. The sell-off in the H-share market was due to the concerns over credit supply triggered by the brewing debt crisis in the property sector. Compared with the Lehman incident, we believe the two vary in terms of leverage risk and the two governments' rescue capabilities. Therefore, a spread of risks is unlikely, but how much tolerance the government has remains to be seen. Meanwhile, the future trend of cyclicals will be determined by supply-demand dynamics. We suggest watching the gradual retreat of production restrictions, the developments in the China Evergrande incident and policies to stabilize growth. We suggest allocating in low-valuation sectors with good sentiment amidst the fluctuations: (1) Wind power/construction/securities benefitting from stable domestic demand growth; (2) The aluminum and cement sectors which are seeing a supply-demand gap; (3) New energy (lithium battery materials) and solar energy (silicon materials) industry chains.
Dai Kang, Zheng Kai - Sept 22, 2021
Dual controls, operating rate and the macro economy
Local governments stepped up their controls over energy consumption and energy intensity (“dual controls”) in September for highly polluting and energy-intensive sectors, which should impact industrial data and prices; risks related to supply-demand mismatch should remain in place in 4Q21. Local governments have stepped up their dual controls recently for highly polluting and energy-intensive sectors. As a result, production volume of crude steel, coke, non-ferrous metals and cement declined substantially YoY in August. The lowering operating rate and coal consumption for power generation in September suggest the impact of energy consumption restrictions on highly polluting and energy-intensive sectors has been amplified. More industries may be affected in the short term amid the power restrictions. Supply constraints have led to a decline in industrial goods production, which became a drag on industrial data. It also triggered industrial goods price hikes. However, the lower demand amid the economic slowdown should offset the impact of the short-term short supply. Policies to constrain supply will take into account controls over energy consumption and intensity as well as economic growth. Therefore, policies to constrain and secure supply should co-exist. It is worth noting that fiscal spending will speed up in 2H21, which, together with the upcoming peak season for electricity and coal consumption, could lead to risks related to a supply-demand mismatch in 4Q21.
Guo Lei, He Xiaoshu - Sept 24, 2021
Waiting for an inflection point in upstream profit contribution
Retreat in profit growth can be explained by decline in production volume and profit margins. We suggest watching for an inflection point in upstream profit contribution and macroeconomic factors. Profit growth at industrial firms slowed in August, a result of a faster decline in industrial production and weaker support from profit margins. The retreat in profit growth can be explained by looking at three factors: volume, price, and profit margins. YoY growth in industrial value-added slowed amid COVID cases in some regions and energy controls. Meanwhile, revenue appeared stable, partly due to a continued rise in PPI. However, profit growth in manufacturing diminished on upstream price hikes. Industries that saw improvements in profit growth include (1) those hindered by upstream supply, (2) those benefitting from the pandemic, and (3) the textiles & apparel industry chain. We have seen passive restocking at industrial companies. Passive restocking corresponds to stagflation and active destocking indicates a recession. We suggest watching for an inflection point in upstream profit contribution, and marginal changes in major macroeconomic factors including inflation, COVID-19 and exports. As profit growth has slowed after peaking at the start of the year, and production expansions should be restricted by the controls over energy use, companies' leverage ratios may continue to decline, but this will be determined by profit resilience within the year.
Guo Lei, Wang Dan - Sept 29, 2021
Takeaways from the PBoC’s 3Q21 meeting
The PBoC indicated a more cautious view on the economy. We did not expect a drastic policy turn but simply anticipatory fine tuning. Politburo meetings should provide more guidance. The People's Bank of China’s (PBoC) indicated a more cautious view on the economy at its quarterly meeting, which emphasized the importance of serving the real economy and stabilizing credit growth. To this end, the central bank proposed three methods: (1) using the newly-allocated relending quota to increase lending to micro, small and individually-owned businesses; (2) encouraging banks to replenish capital; (3) lowering actual lending rates. In addition, the statement related to carbon emissions tools gave more details, which indicates that they may be rolled out soon. Meanwhile, the central bank added that “we should strengthen coordination among fiscal, industrial and regulation policies”. We expect the central bank to expand liquidity supply appropriately in 4Q21 to accommodate an increase in government bond issuance and the impacts of reducing energy consumption intensity and quantity. Moreover, the central bank is paying extra attention to property-related risks. We do not rule out the possibility of financial policy fine tuning, but the principle of “homes being for living in and not for speculation” remains essential. Overall, the PBoC reiterated the policy framework stated at its previous meetings. The Politburo meetings in late October and early December should provide more guidance.
Guo Lei, Zhong Linnan - Sept 28, 2021
This report has been prepared by GF Securities Co. Ltd or its affiliates. GF Securities Co. Ltd and its affiliates are referred to as “GF Securities” hereinafter. According to the laws, regulations and regulatory requirements in different countries and regions, this report is distributed by the subsidiaries/operating bodies of GF Securities with relevant lawful and compliant operation qualifications in these countries and regions.
GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) is licensed by the Securities and Futures Commission of Hong Kong to conduct Type 4 Regulated Activity “Advising on Securities”. It is regulated by the Securities and Futures Commission of Hong Kong, and is responsible for the distribution of this report in Hong Kong.
GF Securities Co. Ltd is qualified to conduct securities advisory business as approved by the Chinese Securities Regulatory Commission. It is regulated by the Chinese Securities Regulatory Commission, and is responsible for the distribution of this report in China (except Hong Kong, Macau and Taiwan).
GF Securities Co. Ltd and its affiliates may be seeking or building business relationships with companies mentioned in this report. Therefore, investors should consider the impact on the independence of this report by GF Securities Co. Ltd and its affiliates due to potential conflicts of interests. Investors should not make any investment decisions based solely on the contents of this report.The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.The remuneration for the production of this report by research staff is determined based on various factors including the quality of research, client review and workload, and it is also affected by factors including GF Securities’ overall revenue, part of which is generated from GF Securities’ investment banking business.This report is distributed solely to clients or designated institutions authorized by GF Securities, and is not distributed publicly. It can only be used by the targeted recipients who have the obligation to maintain confidentiality. GF Securities does not view any persons who have received or read this report through other means as its clients.This report is distributed to a certain client based on the conclusion that this client is deemed to be able to assess investment risks independently, execute investment decisions independently and assume corresponding risks independently.The contents of this report is for reference only. Information contained or opinions expressed in this report does not constitute an offer or inquiry. Customers should not substitute their independent judgment with this report or make decisions based on this report.This report is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities. The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities as to their accuracy and completeness of the information contained in the research report. GF Securities accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions.GF Securities may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities or its affiliates or respective directors, officers, analysts and employees related to research report business may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report.This Research report may contain and/or describe/present factual historical information on prices of Futures contracts (the “information”). Please note that this information is solely for the purpose of forming part of the argument/grounds/evidence in our research methodology/analysis to support our conclusion on our view of the relevant industry/company mentioned. It does not, by any means (express or implied) to be associated with or constituted as SFC Type 5 Regulated Activity (Advising on futures contracts).
GF Securities (Hong Kong) does not have any investment banking relationship with the companies mentioned in this research report in the past 12 months.
Without the prior written consent obtained from GF Securities, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated.