Have H~Shares Bottomed Out？

AnalystWANGYISACNo.S05705z0050001wangy012893ghtsc.comSFC No. BMO373+(86) 21 2897 2228 Huatai Research 13 August 2024 | China (Mainland) Weekly H-shares should havebottomed out on four positive factors H-shares saw increases amid volatility last week, supported by four factors: 1) theHSl short-solling ratio quickly fell from 20% to 13% later in the week, aiding thepharmaceutical companies drove the sector to lead gains; 3) the reversal ofeased, reducing external market impact on H-shares; 4) the RMB exchange raterose, helping stabilize the A/H-share premium. These internal and external factorsimproved the liquidity of H-shares, leading to narrowed net outflows of active/passive foreign capital and increased net inflows of southbound capital. Lookingahead, considering that H-share valuations may have been propped up aroundmid-April (see our report On the Underpinning Position of H-Shares Amid RecentCorrections published on 30 July 2024), we expect some defensive attributes inthe short term. For allocation, we recommend focusing on sectors sensitive todomestic demand and USD liquidity, and moderately investing in interestrate-sensitive pharmaceutical stocks or Internet stocks with strong earnings. "Greater consumption"saw many disclosures and positive earningsAs of 9 August, the market cap of companies involved in the Hong Kong Stock14% of the total. Accordling to the disclosed samples and meso business climate,Connect which had released 1H24 profit alerts and interim results accounted forwe believe the rebound in H-share eamings growth since end-2022 had continuedthrough 1H24, with notable divergence: 1) sectors where >20% of companies havereleased 1H24 profit alerts and interim results (with notably improved eamings)were mainly "greater consumption* sectors (phamaceuticals/consumer services:30/24%: leeding earnings growth may have been driven by [eaders'better-than-expected earnings); 2) eamings of midstream materials came underpressure in 1H24, potentially due to reduced sales volume/prices of cement andecommerce, and yoy growth in time spent/active user count for Meituan hasbounced back since 2H23; 4) since 2Q24, H-share pharmaceutical’consumerservice sectors have seen leading numbers of'sharpest upward earningsrevisions. Ongoingsummertravelboom recently: on 30 July, the Politburo meeting prioritized 'expanding domesticdemand,' and made fresh statements on service consumption/trade-ins; the Stateconsumption to release consumption potential. The summer travel boom haspersisted recently, but with price cuts in exchange for sales volume expansion, andwe believe whether momentum of the domestic demand rally can continuedomestic/ cross-border routes in July rose c 6/70% yoy: 2) according to Beaconremains to be seen: 1) according to Umetrip.com, air passenger throughput ofPro, as of 10 August, the total box office during June-August exceeded RMB9bnplatforms, during the summer vacation, the average price of domestic air ticketsand accommodation fell 6-8% yoy, while that of international air tickets dropped26.3% yoy. Two factors eased temporarily The reversal of USD/JPY carry trades and'recession trading' in the US putpressure'on US stocks at the start oflast week, sending the VIX to a historical highand narrowing net outlows of active/passive foreign capital, Since mid-last week,the aforementioned two factors have eased: 1) the latest economic/ermploymentdata eased concerns of a US recession; as of 3 August, initial claims forunemployment insurance in the US for the week (230,0D0) totaled less than theBloomberg consensus (240,000). the steepest decline in the past 11 months, andincreases in orders and employment drove the US services PMI in July to exceedexpectations; 2) last Thursday, the BOJ said that *it will not raise its policy interest Eyes on sectors sensitive to domestic demand and USD liquidity Despile eased pressure cn 'recession trading' in the Us and the reversal ofUSD/JPY carry trades, a reversal of 'recession trading' may sill rest on USeconomic data-induced revisions to recession expectations (referring to theand leveraged capital brought about by robust earnings of core US stocks, Focussituation in 4Q18), as well as marginal improvements in carry trade-related capitalon NVIDIA's earnings and the Jackson Hole Economic Symposium at end-AugustRMB exchange rate, A/H-share premiurn, and Fed policy, we believe H-shareas well as US non-farm payrolls data in early September. From the perspectives ofvaluations rmay have been propped up in mid-April (soe our report On theUnderpinninig Position of H-Shiares Amid Recenf Correcfions publishod on 30 July2024), boding well for sorne defensive attributes in the short term, Focus oninterest rate-sensitive pharmaceutical stocks or Internctslockswith strongearnings. Risks: slower domestic economic recovery than we expect; the Fed's taperingexceeding our expectations. Disclaimers Analyst Certification the subject securities or issuers; and no part of