Chinese equity markets made further gains in May, says the Greater China research team at UOB Kay Hian Research, but outperforming sectors were mostly defensive, such as consumer staples and healthcare. 

Although the technology, media and telecoms (TMT) sector regained some momentum in late May, the team prefers a defensive bias in June as the yield gap has narrowed, but macro uncertainties remain. 

UOB Kay Hian Research is recommending “add” on China Construction Bank (CCB) with a target price of RMB8.50 ($1.76), China Gas with a target price of HK$37.60 ($6.41), Kingboard Laminates with a target price of HK$27.00, with a target price of US$100.00 ($132.27), Link REIT with a target price of HK$85.10 and Sino Biopharm with a target price of HK$13.00.

The MSCI China Index and the Hang Seng Index made further gains in May up 0.5% and 1.5% respectively. Within the MSCI China universe, the top outperformers were healthcare, consumer staples and IT. Consumer discretionary and communication services were the two sectors that declined m-o-m.

Even with the rebound over the past two months, the MSCI China index is trading at 15.6 times 12-month forward price-to-earnings ratio (P/E) compared with a peak of 18.9 times in February. 

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While the valuation is not demanding compared with its historical range, the yield gap (over US 10-year treasuries) has declined to levels last seen at end-2017, notes UOB Kay Hian Research. “Despite the narrowing valuation gap, macro uncertainties remain, the impact of high commodity prices and power rationing.”

In addition, the team recommends taking profit on Ganfeng Lithium, “as we do not see further catalysts for upside in the near term”. 

It is also dropping Haidilao, Powerlong and Sany Heavy from its list. “These three names have not performed as expected. Haidilao’s recent data shows that the improvement in table-turn has been below expectations. As for Sany Heavy, it has been weighed down by concerns over raw material price increases, and the property sector is facing potential policy headwinds with talk of a property tax resurfacing.”

Instead of Alibaba, buy the US-listed JD instead, say the team. “JD is more defensive with a stable margin outlook and advantages in fast-moving consumer goods (FMCG) and logistics networks. We also see lower regulatory risk for JD as compared with Alibaba. Also, we are seeing slower user and gross merchandise value (GMV) growth for Alibaba as compared with JD which prompted us to shift towards the secondary player.”

China Construction Bank

On its current “buy” list is CCB with 0.70 times FY2021 and 0.65 times FY2022 price-to-book ratio (P/B). According to UOB Kay Hian Research analyst Eric Wang, the banking sector offers a high level of defensiveness and sustainable dividend yield. The banking sector’s risk-to-reward ratio remains underappreciated as the sector is trading at a four-year low P/B valuation (0.52 times), which analysts believe is a cheaper option.

“Among the big four State-owned enterprises of China (SOE) banks, we prefer CCB for its: a) improvement in loan growth, b) stable asset quality, c) superior capital management, and d) digitalisation plan,” writes the team at UOB Kay Hian Research. 

As at end-1QFY2021, CCB’s gross loans and advances to customers had increased 5.27% y-o-y. The fast growth in SME loans will ensure CCB meets the People's Bank of China’s requirement before end-2021. “Besides, CCB has better capital management ability than other banks, and its current capital reserve can support its growth in 2020-22 without the need for raising further capital.”

“Lastly, CCB is one of the six banks in the e-CNY (Digital Currency Electronic Payment) pilot scheme. Although it is still undergoing public testing, combined with the bank’s digitalisation plan, we believe it is a good segment to observe.”

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As at 11.29am, shares in CCB are trading RMB0.05 lower, or 0.73% down, at RMB6.78.

China Gas

UOB Kay Hian Research analysts Neo Chen and Sandra Huang write: “We believe the company’s share price is very attractive at only 12x forward 12-month P/E, much lower than peers’ above 16x. We think the market concerns over its cash flow condition have been reflected in the share price weakness in the past two months, while the coming full-year result in end-June 2021 might be a positive catalyst for the company to re-rate.”

As at 11.59am, shares in China Gas are trading 5 HK cents lower, or 0.17% down, at HK$29.00.

Kingboard Laminates

According to analyst Johnny Yum, Kingboard Laminates’ target price is based on 12x 2021F P/E, 1SD above its historical average one-year forward mean.

“Copper clad laminate (CCL) demand is in a super upcycle, driven by the shipment recovery of all electronic devices, as well as the growing penetration of electric vehicles (EV), autonomous driving, and 5G related investments and applications. These growth drivers will not only provide robust growth in the near term, but also a secular demand in the coming five to seven years given the significantly higher electronic components in Internet of Things devices in the 5G era,” writes Yum.

At the same time, the halted capacity expansion in 1H2020 amid the pandemic and the robust demand growth has led to a severe shortage in CCL’s upstream components, which led to spikes in the average selling prices (ASPs). 

“Kingboard Laminates as the largest CCL manufacturer globally will be best positioned to capture the robust demand growth, while its unique full vertically integrated supply chain will allow the company to enjoy significantly lower material costs and thus margin expansion compared with its peers,” he writes. 

As at 11.59am, shares in Kingboard Laminates are trading 12 HK cents higher, or 0.71% up, at HK$17.04.

On JD, analysts Julia Pan and Oong Chun Sung believe expects JD Retail’s growth momentum in 2021 to be similar to 2020’s (27% y-o-y growth) with long-term margins to remain stable due to economies of scale and improvement in online marketplace businesses (3P) sales. 

Management expects supermarket and healthcare categories to grow faster than the sales of electronics and home appliances. 

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In addition, JD Logistics has debuted on the HK Stock Exchange. The company is trading at 3x PS (price to sales, based on 2020 revenue) whereas SF Holdings’ 2020 PS is trading at 2x. The slight premium is justifiable due to: a) its earnings visibility via contribution from its parent, and b) multi-growth engine model from JD, such as new initiatives and FMCG,” say the analysts.

“Our target price is US$100.00, implying 34x 2022F PE against three-year recurring earnings per share (EPS) CAGR of 38% from 2022-2025.”

Shares in JD closed US$1.79 lower, or 2.29% down, at US$76.54 on June 2.


On Link REIT, the only REIT on UOB Kay Hian Research’s “buy” list, analyst Shaun Tan notes that delays in the air travel bubble arrangements could shift the focus back to domestic spending especially since the Hong Kong government’s HK$5,000 e-voucher support scheme is expected to be rolled out soon. 

“This could help spur spending at Link REIT’s malls and the e-vouchers are intended for small-ticket items. With rental reversions returning to positive territory this year and with the help of new rental contributions from newly acquired assets, DPU growth is more visible now for Link REIT, with a required return of 6.1% and terminal growth of 2.0%,” writes Tan.

As at 11.59am, units in Link REIT are trading 10 HK cents lower, or 0.13% down, at HK$74.65.

Sino Biopharm

Analysts Carol Dou and Sunny Chen note Sino Biopharm’s in-line revenue growth of 16.4% y-o-y in 1QFY2021, and stronger-than-expected adjusted net earnings growth of 134.7% y-o-y, mainly due to the significant earnings contribution of Covid-19 vaccine (CoronaVac) from Sinovac. CoronaVac is now being sold to 23 countries. 

“We believe the globalisation of Sinovac’s vaccine business will continue to generate substantial earnings contributions for Sino Biopharm in the next few years. We forecast the earnings contributions from Sinovac at RMB6.0 billion in 2021, RMB7.0 billion in 2022 and RMB8.0 billion in 2023,” write Dou and Chen. 

The company will have 13 products included in the new round of the group purchasing organisation (GPO) tender. As its current market share is very small and there are less than five competitors for most of these drugs, Sino Biopharm expects the GPO tender to bring market expansion opportunities. 

“We believe the fifth round of the GPO tender will have limited or positive impact on Sino Biopharm. Moreover, the savings on selling expenses for GPO drugs will lead to continued margin improvement. Its pipeline has also entered the harvest season. Its innovative product launches (such as Anlotinib’s new indications and combo therapies, PD-1 mAb, and Recombinant Coagulation Factor VIII for Injection etc) will support stronger earnings growth from 2021 onwards,” say the analysts. 

As at 11.59am, shares in Sino Biopharm are trading 3 HK cents higher, or 0.34% up, at HK$8.74.