China Equity Strategy: 2018 outlook: Stay bullish for quality growth, G.A.R.P. investment themes

January 4, 20182018 outlookMichael Tong, CFA | (+852 ) 2203 6167 | michael.tong@db.comDeutscheBankdoesandseekstodobusinesswithcompaniescovered initsresearchreports. Thus,investorsshouldbeawarethat thefirmmay haveaconflictofinterestthatcouldaffecttheobjectivityofthisreport. Investorsshouldconsiderthisreportasonlya singlefactorinmakingtheir investmentdecision. DISCLOSURESAND ANALYSTCERTIFICATIONS ARELOCATEDINAPPENDIX1. MCI(P)083/04/2017.THE CONTENTMAYNOTBE DISTRIBUTEDINTHEPEOPLE’SREPUBLICOFCHINA(“THEPRC”)(EXCEPTINCOMPLIANCEWITHTHEAPPLICABLELAWSANDREGULATIONS OFPRC), EXCLUDINGSPECIALADMINISTRATIVE REGIONS OFHONGKONGANDMACAUMarkets ResearchJanuary 2018China Equity StrategyChief China Equity Strategist, Michael Tong(+852) 2203 6167 | michael.tong@db.com2018 outlook: Stay bullish for quality growth, G.A.R.P. investment themes Outline 1.2017 performance recap 2.Macro/liquidity outlook3.Market view, sector preference and stock picks4.Greening Environment5.Reforming SOEs6.Advancing manufacturing7.PremiumizingconsumptionDistributed on: 22/01/2018 16:32:26 GMT7T2se3r0Ot6kwoPa Markets ResearchDeutsche BankMichael Tong, CFA | (+852 ) 2203 6167 | michael.tong@db.com January, 201822/01/2018 15:47:281WeexpectMSCIChina/HSCEItoreach110/14,000 by end-18,in viewofa decent earnings outlook (MSCI ChinaEPS+17.0%/15.5%in 2018/19E)on secular andcyclicaldriversexpansionin multiples (narrowing the gapwithDM) ona reduced risk discount, andfavorableliquidityconditionsAlthoughGDPgrowthis likelytomoderate,theeconomy should demonstrate resilience and deliverbetter quality growth.Werecommend investorstofocus ontheG.A.R.Pinvestment themesfor2018, i.e.Greening(environment), Advancing (manufacturing), Reforming(SOE),and Premiumizing (consumption).WerecommendOWSoftware/Internet, Consumer Discretion, Insurance, Healthcare, andWater/Renewables, aswellas Banks/Brokers, andUWMaterials, Real Estate,CapitalGoods andtraditional defensives (Telecom/Staples).Wehighlight 20toppicksand2 stockscreens.Stay bullishfor quality growth, G.A.R.P. investment themes Markets ResearchDeutsche BankMichael Tong, CFA | (+852 ) 2203 6167 | michael.tong@db.com January, 2018Global equities performance in 2017 2Source: Deutsche Bank, FactSetMSCI China sector performance in 2017Source: Deutsche Bank, FactSetUSD price returnYTD59.8%52.1%45.5%38.7%36.8%35.0%34.3%30.9%29.9%26.3%23.8%23.7%22.4%22.1%22.0%21.8%21.0%20.8%19.5%13.6%2.9%0.3%-4.7%ChiNextRussiaSZCOMPSHCOMPUSS. AmericaBrazilJapanIndonesiaEuropeRed-chipsHSCEITaiwanS.E. AsiaCSI300SingaporeEMHSIIndiaAsia x. JPS. KoreaMSCI ChinaChina ADRs97% 92% 62% 61% 56% 52% 51% 42% 32% 27% 22% 21% 13% 12% 0% -1% -10%0%10%20%30%40%50%60%70%80%90%100%110%Recap of index performance in 2017 Markets ResearchDeutsche BankMichael Tong, CFA | (+852 ) 2203 6167 | michael.tong@db.com January, 2018MSCI China 2017 performance attribution analysis by sector3Source: Deutsche Bank, Bloomberg Financial LPNameP/E ratingEPS growthPerformanceConsumer Discretionary20.3%33.8%60.9%Consumer Staples 25.3%13.0%41.6%Energy -18.8%38.6%12.6%Financials6.9%20.8%29.1%Health Care29.8%21.5%57.7%Industrials -4.6%23.2%17.4%Information Technology 22.1%57.2%92.1%Materials-13.1%72.1%49.5%Real Estate 31.2%49.0%95.5%Telecommunication Services -10.8%11.1%-1.0%Utilities 6.5%14.2%21.6%MSCI China16.8%29.8%52.1% Markets ResearchDeutsche BankMichael Tong, CFA | (+852 ) 2203 6167 | michael.tong@db.com January, 2018Global index’s position in the historical range4Source: Bloomberg Finance LP, MSCI, Deutsche Bank Strategy Research0x10x20x30x40x12m fwd P/EHistorical range since 04±1 standard deviationCurrentYear beginning 2017MSCI China still below +1SD of historical average Markets ResearchDeutsche BankMichael Tong, CFA | (+852 ) 2203 6167 | michael.tong@db.com January, 2018A- share quarterly earnings growth at 24% in 3Q175Source: Bloomberg Finance LP, MSCI, Deutsche Bank Strategy Research1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17vs. 2Q1H17Consumer Discretionary100%16%11%37%36%22%16%11%19%Consumer Staples100%30%34%34%23%17%-5%26%6%Energy100%-134%-44%79%293%N/M55%130%299%Financials100%-4%-11%3%-5%4%6%8%5%Health Care100%18%12%26%20%15%21%46%15%Industrials100%6%-10%30%48%31%48%39%44%Information Technology100%81%24%53%-31%-3%29%19%12%Materials100%44%71%N/MN/M408%66%151%134%Telecommunication Services100%-66%-63%-53%-160%17%44%174%32%Utilities100%-6%-11%-15%-14%-39%-37%5%-38%A-share market100%-0.5%-6.2%19.5%25.9%21.6%14.9%23.8%18.0%ex. Financials100%7.5%1.4%49.1%72.0%54.8%27.0%43.8%38.4%ex. Financials & Energy100%18.4%9.1%47.7%64.8%31.7%24.6%38.9%27.8%CCyclicals100%6%0%67%91%81%37%49%54%DDefensives100%11%6%8%8%-2%-9%24%-7%FFinancials100%-4%-11%3%-5%4%6%8%5%A-share non-financialsSOE100%-7%-10%49%112%76%30%53%41%Private100%34%22%50%43%28%23%32%27%New Economy100%37%15%40%3%12%22%24%15%Old Economy100%1%-2%52%108%69%28%50%45%MMain100%0%-6%50%76%63%29%49%43%SSME100%35%35%51%82%36%29%34%50%GChiNext100%62%41%39%27%11%2%6%5%Upstream100%-149%2%N/MN/MN