Strong earnings growth should continue,
while risk appetite for equity is growing
􀀗 Shift in policy stance lowers the risk of
overheating and asset bubbles, hence
prolonging the cycle
􀀗 We introduce end-2010 targets: HSI
26,000, HSCEI 16,000, SHCOMP 3,500,
implying as much as 30% upside
Our macro analytical model suggests strong earnings
growth will continue for at least six months. This is driven
by both a demand recovery and improving profit margins, as
the V-shaped economic recovery continues and becomes
more broadly based (pages 3-5).
We continue to see strong risk appetite for Chinese
equities as better alternatives for cash, as the earnings
yield gap remains high in a low interest rate environment at
7-8% for Hong Kong market indices and more than 4% for
the A-share market (pages 6-7).
Policy stance has shifted to “structural adjustment” from
“ensuring growth”. The five key areas are industrial
revitalisation, regional development, developing a lowcarbon
economy, supporting SMEs, improving people’s
livelihood and spurring consumption growth. Although it
may increase market volatility in the short term, it’s good for
the economy and market in the long run because it lowers
the risk of overheating and asset bubbles (pages 8-10).
Liquidity should remain ample in both HK and A-share
markets, though pressure is building as the pace of
equity offerings picks up (pages 11-13).
We have set 2010 index targets (page 14) and increased
cyclical exposure in our China top-10 model portfolio by
adding Shanshui Cement, Air China, CNOOC, BOC, and
COLI. Staying in our top-10 are Tencent, Dongfang Electric,
Golden Eagle, ICBC, and Zhejiang Expressway.
Key risks to our call are: 1) equity offerings in the A-share
market, if unchecked, could pose a threat to market
performance; 2) USD strength due either to a “double-dip”
in the US economic recovery (flight to safety) or much
higher than expected growth (flight to value).