CSFB瑞士信贷第一波士顿--投资策略报告（pdf40）

CSFB瑞士信贷第一波士顿--投资策略报告（pdf40）英文版！

 Life after the rebound
No more than a bear market rebound. The current rebound of China stocks is normal in a
bear market environment. Indeed, a similar rebound happened in the last downcycle. The key
is fixed-asset investment growth: Completing unfinished projects will help to maintain strong
growth in 2004, but a ‘project gap’ would bring down growth significantly in 2005, in our view.
Earnings outlook and valuation. Consensus EPS estimates have not yet been downgraded,
but this does not mean that they will not be in 2005. Widespread margin decline in downstream
sectors in China reveals that the current situation is unsustainable. With the overall China market
somehow ‘fairly-valued’, earnings upgrade/downgrades will drive the market ahead.
Government policy/reform update. In the next few months, all eyes will be on whether the
Chinese government will raise its interest rate or allow its currency to appreciate – which,
despite all the talk, one should only believe when it happens. More concrete reform actions are
being seen in other areas, such as the new VAT reform in northeast China and the attempt to
deal with the ‘non-tradable’ share reform in the A-share market.
Investment strategy and model portfolio. We remain OVERWEIGHT industrials, information
technology and telecommunication services, and UNDERWEIGHT energy, materials (zero
weighting) and utilities. Regarding changes, we have raised our weighting in consumer staples
from Market Weight to OVERWEIGHT and in financials from Underweight to MARKET WEIGHT.
We have downgraded the consumer discretionary sector from Overweight to MARKET WEIGHT.
Figure 1: High PB ratio for cyclical than non-cyclical stocks?!
Focus charts and tables
Life after the rebound
In this report, we outline our strategy for the China market in 4Q04, looking at the key
issues affecting the market, and re-assess our model portfolio.

No more than a bear market rebound
The recent rebound of China stocks, driven largely by a rebound in commodity prices,
and a perceived relaxation in macroeconomic tightening, is very normal. In the last cycle
in the mid-1990s, such flip-flop volatility was seen in response to government policies
and the direction of economic growth: the key issues are where are we in the cycle and
what is the dominant trend? In our view, the peak has been reached and excesses are
being unwound. The desire to finish projects on hand is a key reason to keep
investment growth high this year, but developers will be much more careful with regards
to starting new projects and their bankers will be more careful in granting the finance.
Earnings outlook and valuation
The fact that earnings downgrades have not yet happened does not mean that they will
not happen. Margin squeeze in downstream sectors became widespread in 1H04, and
this is expected to challenge the sustainability of the current condition of high upstream
product prices, without runaway inflation and trade deficit problems in China. A decline
in upstream product prices is likely to trigger a major earnings downgrade of China
stocks. In our view, this will be the key determining factor in the market’s performance,
as the overall China market could be said to be fairly valued – any change in earnings
estimate direction would change this conclusion.
Government policy/reform update
Whether the government will raise interest rates or appreciate the RMB exchange rate
will still be the market’s top policy focus, and it remains to be seen whether the
government has the determination to take this action. Raising interest rates or
appreciating the RMB exchange rate would have the effect of raising the cost of capital
– which, in turn, would drag down long-term economic growth, as well as reduce the
importance of investment as a growth driver. With regards to other reforms, the
government has moved ahead in reforming the VAT system in North-East China, as well
as proposing to adopt a separate voting system for major issues in the A-share market,
which, in our opinion, is a necessarily prelude for ‘non-tradable’ share reform.
Investment strategy and model portfolio
With or without a change in the RMB exchange rate, we maintain a defensive and
consumption-oriented bias in creating our model portfolio, particularly when some
commodity stocks’ valuations are very stretched now. Indeed, an appreciating RMB
would hurt commodities, as their RMB-denominated price would decline if the US-dollardenominated
price remains steady. In contrast, an appreciating RMB would benefit
those companies with large domestic sales (with prices not internationalised) but with a
high forex-denominated cost structure. We remain OVERWEIGHT industrials, IT and
telecommunication services, and UNDERWEIGHT energy, materials and utilities.
Regarding changes, we have raised our weighting in consumer staples from Market
Weight to OVERWEIGHT and in financials from Underweight to MARKET WEIGHT.
We have downgraded the consumer discretionary sector from Overweight to
MARKET WEIGHT.
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