Please refer to page 14 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures . CHINA Inside Market & Sector Performance (HK stocks) 2 Market & Sector Performance (China stocks) 3 Activity data watch 4 Policy outlook 5 Commodities space 6 Property market 7 Liquidity watch 8 Exchange rate 9 Industrial indicators 10 China in a snapshot 11 Macquarie China Macro Products 13 Data review and preview Date Indicator Actual MacQ Cons. Prev. Review 27-Apr Industrial profits, % yoy 11.1 -- -- 4.8 1-May NBS PMI 50.1 50.6 50.2 50.2 Preview 8-May Exports, %yoy -- -4.0 1.3 11.5 8-May Imports, %yoy -- -6.0 -4.0 -7.6 8-May Trade bal., US$ bn -- 36 36 30 Source: Bloomberg, Macquarie Research, May 2016 2 May 2016 Macquarie Capital Limited Macro Monday Improved earnings outlook amid higher risk premium Investors cautious on macro uncertainties: Last week H-shares fell 2% while A-shares dipped 0.7%. Market sentiment turned more cautious as shown by lower daily turnover (Fig 6 & 12). Last week the oil price hit fresh new highs for this year while the dollar fell to a 15-month low. But commodity prices retreated in Shanghai as investors realized the prices had entered “bubble” territory. Meanwhile, bond yields and credit spread continued to rise. Earnings outlook has improved: While the financial sector saw worsened earnings growth in 1Q16 due to the drag from brokers and insurance, the earnings outlook for the rest of the market has improved notably. As the high- frequency proxy for listcos, earnings growth for industrial companies (reported by the NBS) jumped to 7.4% yoy in 1Q16 after six disappointing quarters with little or negative growth. The main drivers behind the pick-up are the rebounding property sector and the narrowed PPI deflation. Looking ahead, we expect property investment to grow 7% this year (vs. 1% in 2015) and our commodity team expects oil prices to rise above $50 in 2H16. If both are correct, corporate earnings would see a large upswing this year despite lower headline GDP growth (Thoughts on earnings cycle: A new start?). …but with higher risk premium: Despite the improved earnings outlook, risk premium has also edged up due to the recent turbulence in China’s bond market. Currently, China’s bond market is under multiple headwinds including neutralizing monetary policy, higher credit risks even from SOEs and rising inflation expectation. In the past, the turmoil in the bond market could cause stock prices to slump, such as in Aug 2011 and June 2013. Therefore, investors now prefer to take a wait-and-see stance. Will another “credit crunch” like June 2013 happen again? We think the chance is low, given all the short-term liquidity tools developed by the PBoC since then. However, credit spread was indeed ridiculously low earlier this year because of abundant liquidity and poor risk pricing. As investors realize it, some short- term pains are inevitable. PMI weaker than expected but still upbeat: Yesterday, the NBS manufacturing PMI came in at 50.1 (consensus: 50.3). That said, by looking into details, we reckon that the recovery still continues. “Finished goods inventory” dropped to 45.5, suggesting that demand remains strong and potential restocking lies ahead. “New orders”, albeit moderating to 51.0 (last month: 51.4), remains as the second highest since Oct 2014. Overall, headline growth including industrial production and trade could turn lower in April, mainly because the strong readings in March were boosted by base effect. But growth momentum remained robust while the PPI deflation would ease further (See April data preview: Fighting with deflation). Two thematic reports on RMB and capital flows: At the beginning of this year, China’s currency and capital outflows were the primary concerns globally for investors. However, such concerns have eased a lot lately. These are the first-order macro questions globally but are not well understood by the street. For those interested in these topics, this Feb we published a thematic report on the RMB (RMB: The inescapable dilemma). Last week, we published another thematic study on China’s capital flows, Dissecting China’s capital outflows in 2015, which aims to debunk the numerous myths on this issue.
14
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Please refer to page 14 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
CHINA
Inside
Market & Sector Performance
(HK stocks) 2
Market & Sector Performance
(China stocks) 3
Activity data watch 4
Policy outlook 5
Commodities space 6
Property market 7
Liquidity watch 8
Exchange rate 9
Industrial indicators 10
China in a snapshot 11
Macquarie China Macro Products 13
Data review and preview
Date Indicator Actual MacQ Cons. Prev. Review 27-Apr Industrial profits,
Source: CEIC, Macquarie Research, May 2016 Source: Wind, Macquarie Research, May 2016
Fig 41 Credit bond yields Fig 42 China vs US 10y Treasury yields
Source: Wind, Macquarie Research, May 2016 Source: Wind, Macquarie Research, May 2016
4.5
3.6
0.40.0
0.4 0.2 0.0
6.4
4.4
0.5
-0.9
1.2
0.30.8
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Total Loans Off-balance sheet
lending
FX purchase
Bond financing
Equity financing
Local govt debt
issuance
RMB, tn
Jan-Mar 2015 Jan-Mar 2016
Liquidity supply
1
3
5
7
9
11
Feb-0
7
Jul-
07
Dec
-07
May
-08
Oct-
08
Mar-
09
Au
g-0
9
Jan
-10
Jun
-10
Nov
-10
Apr-
11
Se
p-1
1
Feb-1
2
Jul-
12
Dec
-12
May
-13
Oct-
13
Mar-
14
Au
g-1
4
Jan
-15
Jun
-15
Nov
-15
Apr-
16
7-day repo rate 3m Shibor%
2.3
3.3
4.3
5.3
6.3
Ap
r-1
2
Jun
-12
Au
g-1
2
Oc
t-1
2
Dec
-12
Feb-1
3
Ap
r-1
3
Jun
-13
Au
g-1
3
Oc
t-1
3
Dec
-13
Feb-1
4
Ap
r-1
4
Jun
-14
Au
g-1
4
Oc
t-1
4
Dec
-14
Fe
b-1
5
Ap
r-1
5
Jun
-15
Au
g-1
5
Oc
t-1
5
Dec
-15
Feb-1
6
Ap
r-1
6
Expected annualized return of bank WMP: 3m
Annualized yield of Yu'E Bao
% pa
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Ap
r-1
1
Ju
l-1
1
Oc
t-1
1
Ja
n-1
2
Ap
r-1
2
Jul-1
2
Oc
t-1
2
Jan-1
3
Ap
r-1
3
Jul-1
3
Oc
t-1
3
Jan-1
4
Ap
r-1
4
Jul-1
4
Oc
t-1
4
Ja
n-1
5
Ap
r-1
5
Jul-1
5
Oc
t-1
5
Jan-1
6
Ap
r-1
6
Yield spread (RHS)
5y corporate bond (AA)
5y policy bank bond yield
% bp
1.8
2.8
3.8
4.8
5.8
6.8
7.8
Apr-
12
Jul-12
Oct-
12
Ja
n-1
3
Apr-
13
Jul-13
Oct-
13
Jan
-14
Apr-
14
Ju
l-14
Oct-
14
Jan
-15
Apr-
15
Jul-15
Oct-
15
Jan
-16
Apr-
16
1y AA corporate bond
1y LGFV bond
1y Railway bond
%
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
4.3
4.5
4.7
Oc
t/12
Dec
/12
Feb/1
3
Apr/
13
Jun/1
3
Aug/1
3
Oc
t/13
Dec
/13
Fe
b/1
4
Apr/
14
Jun/1
4
Aug/1
4
Oc
t/14
De
c/1
4
Feb/1
5
Apr/
15
Ju
n/1
5
Au
g/1
5
Oc
t/1
5
Dec
/15
Feb/1
6
Apr/
16
China 10y treasury yield
US 10y treasury yield (RHS)
% %
Macquarie Wealth Management Macro Monday
2 May 2016 9
Exchange rate
Fig 43 RMB weakened slightly last week Fig 44 CNY vs CNH
Source: Wind, Macquarie Research, May 2016 Source: Wind, Macquarie Research, May 2016
Fig 45 The dollar index Fig 46 CFETS RMB index
Source: Bloomberg, Macquarie Research, May 2016 *Staff estimate using the currency basket published by CFETS. Source: Wind, Macquarie Research, May 2016
Fig 47 Major currencies against USD Fig 48 FX reserves increased in March
Source: Bloomberg, Macquarie Research, May 2016 Source: CEIC, Macquarie Research, May 2016
5.95
6.05
6.15
6.25
6.35
6.45
6.55
6.65
De
c-1
3
Fe
b-1
4
Ap
r-1
4
Ju
n-1
4
Au
g-1
4
Oc
t-1
4
De
c-1
4
Fe
b-1
5
Ap
r-1
5
Ju
n-1
5
Au
g-1
5
Oc
t-1
5
De
c-1
5
Fe
b-1
6
Ap
r-1
6
Fixing Spot
USD/CNY
6.49
6.59
6.0
6.1
6.2
6.3
6.4
6.5
6.6
6.7
De
c-1
3
Fe
b-1
4
Ap
r-1
4
Ju
n-1
4
Au
g-1
4
Oc
t-1
4
De
c-1
4
Fe
b-1
5
Ap
r-1
5
Ju
n-1
5
Au
g-1
5
Oc
t-1
5
De
c-1
5
Fe
b-1
6
Ap
r-1
6
Onshore CNY
Offshore CNH
USD/CNY
75
80
85
90
95
100
105
Ju
n-1
4
Ju
l-14
Au
g-1
4
Se
p-1
4
Oct-
14
No
v-1
4
De
c-1
4
Ja
n-1
5
Fe
b-1
5
Ma
r-1
5
Apr-
15
Ma
y-1
5
Ju
n-1
5
Ju
l-15
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6
Ma
r-1
6
Apr-
16
DXY Index
93.1
88
90
92
94
96
98
100
102
104
106
Jun
-14
Jul-
14
Au
g-1
4
Se
p-1
4
Oct-
14
Nov-1
4
Dec-1
4
Jan
-15
Feb-1
5
Mar-
15
Apr-
15
May-1
5
Jun
-15
Jul-
15
Au
g-1
5
Se
p-1
5
Oct-
15
Nov-1
5
Dec-1
5
Jan
-16
Feb-1
6
Mar-
16
Apr-
16
CFETS RMB index*
Dec 14 = 100
97.3
70
75
80
85
90
95
100
105
Ju
l-1
4
Au
g-1
4
Se
p-1
4
Oc
t-1
4
No
v-1
4
De
c-1
4
Ja
n-1
5
Fe
b-1
5
Ma
r-1
5
Ap
r-1
5
Ma
y-1
5
Ju
n-1
5
Ju
l-1
5
Au
g-1
5
Se
p-1
5
Oc
t-1
5
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6
Ma
r-1
6
Ap
r-1
6
RMB EURO JPY JPMorgan EM Currency index
1 Jul 2014 = 100 Currency value against USD
Appreciation
-71
18
-37
-17
-43
-94
-43
11
-87
-108 -99
-29
10
-120
-90
-60
-30
0
30
Ma
r-15
Ap
r-15
Ma
y-1
5
Ju
n-1
5
Ju
l-15
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6
Ma
r-16
Change in FX reserves
US$ bn
Macquarie Wealth Management Macro Monday
2 May 2016 10
Industrial indicators
Fig 49 Industrial earnings surged 11% in March Fig 50 Excavator sales rebounded in March
Source: CEIC, Macquarie Research, May 2016 Source: Wind, Macquarie Research, May 2016
Fig 51 Railway freight fell 6% in March Fig 52 Container throughput rebounded 5.1% in March
Source: Wind, Macquarie Research, May 2016 Source: Wind, Macquarie Research, May 2016
Fig 53 Power consumption jumped 5.6% in March Fig 54 Auto sales grew 10% in March
Source: Wind, Macquarie Research, May 2016 Source: Wind, Macquarie Research, May 2016
-10
-5
0
5
10
15
20
25
30
35
Sep
-11
Dec
-11
Mar-
12
Jun-1
2
Sep
-12
Dec
-12
Mar-
13
Jun-1
3
Sep
-13
Dec
-13
Mar-
14
Jun-1
4
Sep
-14
Dec
-14
Mar-
15
Jun-1
5
Sep
-15
Dec
-15
Mar-
16
Industrial profits
%, yoy
11.1%
-50
-30
-10
10
30
50
70
90
110
130
150
Mar-
09
Sep-0
9
Ma
r-1
0
Sep-1
0
Mar-
11
Sep-1
1
Ma
r-1
2
Sep-1
2
Mar-
13
Sep-1
3
Mar-
14
Se
p-1
4
Mar-
15
Sep-1
5
Mar-
16
Excavator sales
% yoy
19%
-20
-15
-10
-5
0
5
10
15
20
25
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Ma
r-1
1
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Ma
r-1
6
Railway freight
% yoy
-6%
-20
-10
0
10
20
30
40
Mar-
09
Oc
t-0
9
May-1
0
Dec-1
0
Jul-1
1
Feb
-12
Sep
-12
Ap
r-1
3
Nov
-13
Jun-1
4
Jan-1
5
Aug
-15
Mar-
16
Container throughput
% yoy
5.1%
-10
-5
0
5
10
15
20
25
30
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Power consumption
% yoy
5.6%
-20
0
20
40
60
80
100
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Passenger vehicle sales
% yoy
10%
Macquarie Wealth Management Macro Monday
2 May 2016 11
China in a snapshot
Fig 55 GDP composition
Growth: GDP growth slowed to 6.7% YoY in 1Q16.
Demographics: China’s working-age (15–64) population
has peaked and is set to decline, which will weigh on
China’s long-term potential growth rate.
Economic structure: Service sectors’ share in GDP
surpassed 50% in 2015.
China’s leverage: Public sector leverage has been rising
rapidly.
Source: CEIC, Macquarie Research, May 2016
Fig 56 GDP growth: YoY vs QoQ Fig 57 Working-age population has peaked
Source: CEIC, Macquarie Research, May 2016 Source: UN, Macquarie Research, May 2016
Fig 58 Service sectors gaining weight in the economy Fig 59 China’s debt breakdown
Source: CEIC, Macquarie Research, May 2016 Source: CEIC, Macquarie Research, May 2016
8.4 8.39.1
10.0 10.111.3
12.7
14.2
9.6
9.210.6
9.5
7.7 7.7 7.3 6.9
-4
-2
0
2
4
6
8
10
12
14
16
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Consumption
Investment
Net exports
Real GDP
pp
9.5
9.2
8.9
8.1
7.67.4
7.97.8
7.5
7.9
7.67.4
7.4
7.17.2
7.07.06.9
6.86.76.76.76.7
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
GDP, yoy
GDP, qoq - RHS
% yoy %F'cast
40
45
50
55
60
65
70
75
80
0
200
400
600
800
1000
1200
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
working age population (15-64) % of total population (RHS)
Macquarie China Macro Products 1. Regular data comments:
Monthly data preview: April data preview: Fighting with deflation, 29 Apr 2016
IP/FAI/Property: 1Q16 data: A sweet spot for now, 15 Apr 2016
Money/Credit: Strong credit, weak exports, stable RMB, 16 Feb 2016
Trade data: Eight takeaways from Nov trade and FX reserve data, 8 Dec 2015
Inflation: August inflation: CPI inflation at 12-month high and PPI deflation at 71-month low, 10 Sep 2015
NBS PMI: What PMI data can and cannot tell us, 1 Sep 2015
2. Ad hoc comments:
Dissecting China’s capital outflows in 2015, 28 Apr 2016
Thoughts on earnings cycle: A new start?, 27 Apr 2016
Debt/equity swap: What can we learn from the past?, 8 Apr 2016
What are the channels of China’s capital outflows?, 24 Mar 2016
The implication of FOMC on RMB, 17 Mar 2016
An unexpected RRR cut for easing liquidity conditions and boosting growth, 29 Feb 2016
RMB: The inescapable dilemma, 5 Feb 2016
China in 2015: Huge divergence, 29 Jan 2016
What’s behind the sharp drop in FX reserves and the recent RMB depreciation? 7 Jan 2016
Update on capital flows: Huge outflows in 3Q15, but reversed in Oct, 19 Nov 2015
Takeaways from the 13th 5-year Plan, 4 Nov 2015
The PBoC cuts interest rate, RRR and liberalized deposit rate all at once, 23 Oct 2015
US marketing feedback: 9 Q&A on China, 8 Oct 2015
Myths and Realities: 7 Q&As on RMB, 11 Sep 2015
Aug FX reserves number indicates capital outflows are manageable, 7 Sep 2015
The PBoC cut interest rate and RRR for financial and economic stability, 25 Aug 2015
3. Thematic Research
China 2016 Outlook, 14 Dec 2015
(Annual outlook for 2016)
China Liquidity Series (II) - Why China needs to cut RRR 20 times in the next five years?, 16 Mar 2015
(A primer on China’s monetary policy transition)
China Liquidity Series (I) - A guide to RMB and the PBoC, 17 Jul 2014
(A primer on how to understand RMB, liquidity and monetary policy in China)
A U-shaped recovery: Outlook for the remainder of this year, 7 Aug 2015
(Taking stock of economic development in 1H15 and update macro outlook for 2H15)
Mini-cycle, China style: Lessons from the near past, 28 May 2014
(A study on the stop-go mini-cycle, the most important macro pattern in China and a major market mover)
Understanding “stimulus,” 16 Apr 2014
(An early attempt in quantifying mini-stimulus measures)
4. Macro Monday
Property and commodities outperform stocks and bonds, 25 Apr 2016
The consensus for 2016 GDP set to be revised up, 18 Apr 2016
Debating debt/equity swap, 11 Apr 2016
A macro sweet spot, 4 Apr 2016
Macquarie Wealth Management Macro Monday
2 May 2016 14
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 March 2016
AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients)
Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients)
Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients)
Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.