China’s A-share big caps will continue to outperform in 2018, say Credit Suisse analysts

Stocks in industry leaders on the mainland A-share market have surged by 57 per cent in the first 11 months this year, and this rally is likely to continue in 2018 as market consolidation goes on, said analysts at Credit Suisse.

“We have picked the biggest caps in each of the 28 industries categorised by data provider Wind for a study, and found that they rose by about 57 per cent on average year to day, largely outperforming the benchmark,” said Chen Li, Credit Suisse’s China strategist, in a forum in Shenzhen on Thursday.

“The rally is likely to continue into 2018, although I would prefer leaders in the segment markets rather than the big first-tier names in big industries,” he said, adding that as China continues to push for supply-side reform, which favours bigger industry players while forcing smaller ones out, the big caps will continue to enjoy a rising market share and better business returns.

The benchmark Shanghai Composite Index has this year gained around 8.6 per cent – by Friday’s close it was at 3371.7 – while industry leaders have been rising at a faster pace.

Kweichow Moutai, China’s biggest distiller, saw its share price rocket up to 639.2 yuan (US$96.4), up by 91 per cent from 334 yuan in 2016, becoming the most eye-catching blue chip in Shanghai this year.

Mutual funds’ weighting of ChiNext, the Shenzhen-based listing of smaller tech companies, has continued the fall since the beginning of this year due to low market risk appetite, tight market liquidity and ChiNext’s earnings growth slowing down, Gao Ting, the head of China Strategy at UBS wrote in a note on Thursday.

“During the third quarter, mutual fund investors in the A-share market have been outweighing in beverage, non-ferrous metals and electronics, followed by property developers, banks and insurers …

We continue to see upside potential for banks. We prefer large banks with adequate capital and low balance-sheet risk, which may benefit from a better non-performing loan ratio,” he said.

Compared with the A-share market, the Hong Kong equity market has been undergoing a bigger rally, with the benchmark Hang Seng Index rising by 30 per cent to 28603.6 by Friday’s close.

Caixin on Wednesday quoted a source close to the State Council as saying that Beijing was considering picking two companies for a pilot and making their non-tradeable shares free-floating, a move that will make the so-call H-share companies – incorporated on the mainland but listed on the offshore Hong Kong market – more liquid.

Analysts said this will have a limited impact on Hong Kong’s secondary market due to its size, and will largely boost the financing ability of the H-share companies.

Currently, there are 225 H-share companies on the main board. Some of these also have a listed unit on the mainland, making them “unlikely to sell shares in Hong Kong due to the significant A/H premium”, analysts with BofA Merrill Lynch wrote in a note on Friday.

“If all H shares were to become tradeable after the trial, we estimate that owners of less than US$122 billion worth of H shares may be tempted to sell at some point. Although this may put pressure on certain stocks, overall market impact should be limited given the relatively small scale. The move should add to the Hong Kong market’s attraction as an IPO destination for mainland companies,

thus a small positive for Hong Kong Exchanges and Clearing,” the note said.

A similar message has been sent out a few times, said Nicole Yuen, the head of North Asia equities at Credit Suisse, while “capital outflow would remain a key concern for regulators if they are really going to push it out”.

The full convertibility of pre-IPO shares allows founders or major shareholders of mainland companies to float their shares on the Hong Kong bourse, where non-Chinese investors can trade in them without being qualified investors on the Chinese mainland.

It would test the country’s management of capital flow, as the selling of shares on the offshore market will convert equities into offshore capital.

Credit Suisse’s Li, however, said selling of shares may not be the only option for major holders of H-share listed mainland companies, if they want to raise money.

“Making all the shares fully circulated will help the mainland companies borrow more money with lower rates from banks, by stake pledging – they do not have to sell the stake. It makes a huge difference in lending if the stake you pledge is liquid,” he added.