KGI 凯基：二季度中国市场策略

04.03 April 3, 2007 75页

KGI：China market strategy 2Q 07

Accelerating earnings growth likely to reverse

􀅜 We don’t think the strong rally will continue into 2Q07 for two reasons. First, growing
investor concerns about the introduction of cool-down policies if the market continues
to soar. And second, the unsustainability of accelerating corporate earnings growth
since 2Q06. For the most part, the earnings surge looks like a one-off phenomenon and
may well reverse in 2Q07. We attribute exponential earnings growth throughout 2006 to:
(1) the relatively low comparison base in 2005 due to the poor performance of cyclical
industries, especially in 2H05; and (2) more accurate reporting of profitability following
share structure reform. We expect neither of these factors to persist beyond 2Q07.
􀅜 The A-share market is among the most expensive in the world. We disagree with the
prevailing market view that the market’s high premium can be explained by expected
asset injection. We don’t see asset injection as happening across the board, and note that
EPS growth in 2007 due to asset injection may not reach the heights the market expects.
􀅜 However, we believe the A-share market’s high valuation may be justified on a
long-term basis. As long as the pace of renminbi appreciation is controlled, China’s
trade surplus is likely to continue soaring, implying strong demand for stocks.
Meanwhile, new share supply is small relative to excess liquidity. Although the amount
of unlocked, previously non-tradable shares looks daunting, we believe only a small
portion will actually be sold. This is because the government owns approximately 53%
of the market. Without government policies to cool down the market or its sell off of
holdings, the market’s high valuation is likely to persist, if not rise even further.
􃞕 Our top picks for 2Q07 comprise eight A-shares: Guangdong Goworld (000823.SZ),
DMEGC Magnetics (002056.SZ), Wuhan Steel (600005.SS), Huaneng Power
(600011.SS), China Shipping (600026.SS), China Merchants Bank (600036.SS), Conch
Cement (600585.SS) and China Yangtze Power (600900.SS).