Strategy Prospects for Export Chain Trade

ArnslyslWANGYISACNo.S05705z005n001wangy012893ghtsc.comSFC No. BMO373+(86) 21 2897 2228 Huatai Research 13 August 2024 | China (Mainland) Themes Our core views: export chain to stay resillent, upside to weaken terms of onvironment and fundamentals. 1) The win rate of the export chain is100% amid an increased manufacturing PMI overseas, with excess returnsaveraging 8%. The high point of excess returns has usually led that offundamentals by 0-2 months (efficiency of transmission from domestic/externaldemand to exports impacts excess retums upside). 2) History shows the externalupcycle has usually lasted c 20 months, so we estimate the latest upcycle shouldthe strength of transmission from extemal demand to China's exports in 2H24 maylast until c 1Q25; however, given the three attributes for this upcycle, we believeand the status quo of consumers/producers in developed markets (DMs). webelieve actual external demand may be resilient but lack upside. 4) For 2H24, aswe see the base for allocation in booming varieties should rise, and 1H24 resultsgrowth for the export chain to slow from a high lovol, We suggest investors pivotfrom sector β to company α for the export chain, and pick names in consumerelectronics, shipbuilding, and textile chains based on industry prosperity andmutual fund positions in 2Q24. Export-chain excess returns usually ahead of external demand upcycle annual CSI800 in terms of share of oversess revenue (excluding the impact ofCSI 800 equsl-weight index during the four rounds of overseas manufacturing PMIaverage/median excess retums of c 8/8%: 2) The high point of export-chain2019-2021 when there emerged a lag on a-backed rlies of electronics), For timing.based inflection points in overseas manufacturing PMil, upside has varied greatiyamong the four rounds of excess retumns, which we attribute to: 1) changes inretums; 2) transmission efficiency (external demand → exports). External demand cycle: experlence and three attributes of this roundWe use OECD G20 Composite Leading Indicators (CLI) and US manufacturingPMI as proxies of the external demand cycle. We find the time span of upcycles forround of extemal demand upcycle may last until 1Q25. Meanwhile, we see threethe two indicators has been similar at c 20 months, and thus estimate the currenthave loosened in 2024 ytd, adding in the Fed's potential rate cuts, we expectpreventive restocking' in 1H24 and stll high actual inventories in DMs, we seepressure on continuity and elasticity of restocking- 3) Pressure: with inventorynormalization in DMs and a weak demand rally amid high interest rates, DMs'robust recovery of China's exports in 1H24 the gap between import growth andconsumption growth in Europe/US tumed positive after 1Q24. Overall, we estimatethe upside in China's export cycle could soften in 2H24, with actual overseasHex se pueep External demand may be resilient, but with insufficient upside Overall, we foresee overseas manufacturing PMl may be resilient in 3Q24: 1) theexports yoy by five months, with the latest reading in April 2024 stll on the rise.could lose momentum. We observe the status quo of consumers'producers inDMs.1)Consumers:actual household income in the USpre-pandemic level, boosting US stocks and home prices. Different income groupsis above thehave seen wealth increase, while low-income groups become more vulnerable, butpotential risks of relaxation of labor market and US stock declines. Improvementsin the Euro Health Consumer Index indicate potential resilience of consumption inthe zone, 2) Producers: despite improvernents in downstream demand in the USsuggesting lukewarm momentum of endogenous capex growth, in our view. Exportchaintoshowsignsofmarginalslowdownpartly In our view, 1) some. sectors with robust exports since 3Q23 may see a highbase-induced slowdown in 2H24., Taking household appliances for example, onJune data, the slowdown in fridges & washing machines export yoy in 2024 ytdpotentially resilient extermal demand on leading indicators, growth in exports ofvarious categories may slow down to varying degrees; 2) in 1H24, the sharp rise inshipping cost rnay have delayed delivery and receipt, thereby denting revenue.Besides, as forex gains accounted for c 3% of export-chain profit in 1H23, withnarrow-range fluctuations in the RMB in 1H24, the decline in forex gains on a highbase may have adversely impacted profit; and 3) external demand has improvedaccording to 1H24 profit alerts of companics engaged in typical exports. However,still robust revenue/profit growth, Given some enterprises mentioned in their profitsome enterprises have seen a marginal slowdown in export sales growth despitealerts that the downstream demand ramp-up overseas may have slowed down in2Q24, we expect restocking to decelerate in 2H24. Risks: disappointing continuity and upside of improvement in external demand;disappointing pace of relaxation of global financial conditions; weak upside inrecovery of domestic demand than we e