While big questions swirl about China’s macro policy, some sectors are seeing the fundamentals shift in their favor. According to HSBC, gains are moving towards industrials, consumer discretionary and staples – and away from materials and energy. It is based on the firm’s analysis of nearly 1,700 mainland China-listed companies that have released earnings reviews for the first half of the year. One of the reasons for the change in profitability is the decline in producer prices and their widening gap with consumer prices in China, the report said. This means upstream businesses are making less money, while costs are falling for midstream and downstream companies. Breaking this down further, HSBC analysts looked for subsectors with low inventory levels and strong demand momentum. Their screen showed that the home appliance, media and software sectors are among those that fit the bill. The producer price index has fallen for nine consecutive months. The Consumer Price Index fell to 0% in June. That raised fears of inflation in China and a broader slowdown in the world’s second-largest economy. But the worst may be over soon. The big event over the next seven days is the expected gathering of Chinese leaders, known as the Politburo. “Everyone is looking forward. [meeting] in late July,” said Ding Wenjie, global investment strategist at China Asset Management Co., according to a CNBC translation of his Mandarin-language remarks. He pointed out that in addition to the decisions made at the meeting, other policy details could emerge after it ends. There is no announced date, but the Politburo signed two more Thursdays in July last year. Economic aid. A lengthy official document on Thursday and a subsequent press briefing on private, non talked about the importance of supporting the state-owned sector. Markets still await action. Confidence has been hit by regulatory tightening that suspended Ant Group’s IPO days before its listing, and forced Didi to suspend whether its Internet giants could register new companies after USPO registrations. In public markets, Ding said. Ant-affiliated Alibaba said in March it would split into six business units. Each of which may raise funds in an initial public offering. JD.com is also planning IPOs of its industrial and property units. Meanwhile, regulators have signaled closure by allowing Didi to resume new user registrations, and finally issuing a fine to Ant in July. Ding said policymakers otherwise have little room to act given the high level of debt in the economy. She expects overseas markets to be an area of ​​profit growth for Chinese companies, while domestic recovery needs only a little more time. China has only reopened for six months, he said, noting that consumption could improve as the economy grows. Already, summer has seen an increase in domestic travel. Goldman Sachs analysts said on Friday that domestic flights scheduled for July are expected to boost oil demand above 2019 levels. Looking ahead to earnings winners, UBS Securities China equity strategist Li Meng assumes “moderate but no aggressive policy stimulus” and likes sectors such as appliances, food and beverages, computer software and insurance. Meng expects the first quarter to be the low point for earnings this year, with a gradual improvement over the rest of the year, for earnings per share of 10% in the A-share CSI300 index for the full year. The CSI 300, which includes companies listed in Shanghai and Shenzhen, is down slightly for the year so far, while the Shanghai Composite is clinging to gains. When it comes to individual stocks, HSBC looked for names where their estimates exceeded the consensus. “We believe fundamentals (such as earnings and prices) will come back into focus and stocks whose results beat consensus estimates will benefit,” Steven Sun, head of research at HSBC Qianhai Securities, and a team said in a July 19 report. Topping the list is software company 360 Security, which doubles HSBC’s consensus revenue estimate for the year. Another software company Baosight also made the top 10, as did home appliance company Sanhua. All three stocks are in double digits for the year so far. But not all software stocks made the cut. Leading tech company iFlytek has compiled a list of 10 HSBC stocks where analyst estimates are well below consensus – meaning there’s a downside. All four stocks are listed in mainland China. The HSBC study looked only at names with a market cap of more than $10 billion and a three-month average daily trading volume of more than $10 million.
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Source by [CNBC News]
