- Looking ahead, China’s economy is poised to improve with the series of supportive monetary and fiscal policies that the central government have implemented in March/April this year.
- We think investors who are willing to look further out into the future, and not be shaken out by the heightened market volatility (driven mainly by chaotic US-China trade tensions), is primed to benefit from the attractive potential upside that China equity markets can offer.
- Even cheaper than China-A equity market (CSI300 Index), the undervalued China-H shares market is currently trading at one standard deviation below its ten-year average level.
- Combined with a resilient earnings growth outlook, China-H equity index (as measured by HSML100 Index) present an attractive upside potential of more than sixty percent by end-2021 and is currently the most attractive market under our coverage.
- We maintain our star rating of 4.5 stars “Very Attractive” for China-H market. Investors seeking an actively-managed solution can consider our recommended fund Fidelity China Focus A-USD.
China’s economy growth poised to remain resilient ahead
Chart 1: China’s PMIs rebounded in the last two months, July and August.
China Equities: A-shares and H-shares
Chart 2: Tencent and China’s Telcos are noticeably underrepresented in China-A share index.
China-H shares trade at a significant discount to China-A shares
Chart 3: H-shares have started to trade at a discount to their A-shares counterpart since late-2014.
Resilient Earnings Growth of HSML100 Index
Chart 4: HSML100 Index undergone drastic earnings revision since early last year.
Chart 5: Like China-A equities, we see resiliency in HSML100 index earnings driven by robust earnings outlook in its major sectors.
Undervalued China-H equity market present a highly attractive upside potential
Table 1: China-H present the highest upside potential for markets under our coverage.
|
HSML100 Index |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
|
12M Forward PE Ratio (X) |
8.8X |
8.7X |
8.0X |
7.3X |
|
Expected Earnings Growth YoY |
8% |
6% |
8% |
10% |
|
Earnings Per Share (EPS) |
860 |
910 |
985 |
1082 |
|
Projected Fair Price |
- |
- |
11,815 |
12,983 |
|
Potential Upside% from today |
- |
- |
49% |
64% |
Source: Bloomberg, iFAST compilation. Data as of Sep 2019.
Chart 6: Cheap valuation – HSML100 Index currently trades at a forward PE ratio below one standard deviation of its 10-year average level.
Chart 8: The stable earnings growth outlook for HSML100 Index will play critical role in uplifting the index price movement ahead.
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