China Market Snapshot

　　Market review Driven by investment policy relaxation and expectation of increasing fund flows from mainland Chinese investors, the Hong Kong market recorded the best monthly performance of the past few years in April. The HSI and HSCEI rose 13% and 17% respectively, tracking the path of the Shanghai Composite, which rose 18%. Small caps outperformed, with the HS Small Cap Index surging 28% during the month, compared with 21% for the Mid Cap and 13% for the Large Cap indices. The railway equipment, online gaming, software and securities sectors surged most, followed by auto dealers and oil services.

　　A-share bull market and monetary policy to support financials We believe a policy driven A-share bull market is firmly in place, with monetary and fiscal stimulus driving liquidity from the banking and property sectors to the stock market, helping to reduce corporate leverage and ensuring the healthy stock market needed for the implementation of SOE reform. Despite the A-share index having already more than doubled over the past year, we do not see any signs of an end to this bull market given the lack of negative factors such as policy reversion, over-supply of new shares or capital outflows to the real economy. Profit in the securities sector grew 241% YoY in 1Q15, driven by brokerage business, proprietary trading and margin financing, while the four leading insurers reported 53-183% YoY profit growth during the quarter driven by premium growth and investment returns. With earnings set to remain strong, we expect both sectors to continue to outperform the market. Meanwhile, we believe the banking sector should continue to see re-ratings driven by asset securitization, interest rate and IRR cuts, and a more stable property market, despite a further slowdown in earnings growth.

　　High growth stocks remain attractive 1Q15 revenue and profit growth (excluding non-recurring) for the ChiNext board rose 31.3% and 21.6% YoY, according to our calculation, compared to 28.4% and 18.9% respectively in 2014, indicating strong fundamentals for the board’s high growth companies. Given the valuation differentials with comparable A-shares, we believe high growth and thematic stocks in the TMT, software, environmental, renewable energy and healthcare sectors in the Hong Kong market remain attractive despite a good run YTD.

　　Watch list: Ping An (2318 HK, Buy) - premium growth and investment return; GTJA International (1788 HK, Buy) and HKEx (388 HK, NR) - beneficiaries of the Stock Connect; BoCom (3328 HK, NR) - re-rating and mixed ownership trial; TCL Comm (2618 HK, Buy) - strong handset growth; Kangda International (6136 HK, Buy) - increasing capacity and rising tariff; Chinasoft (354 HK, Buy) - strengthening cooperation with IT giants; Tencent (700 HK, NR) - rising advertising revenue and new businesses; CMS (867 HK, Buy) - XinHoShu’s annual sales likely to exceed Rmb1bn in three years, and; Shenzhen Investment (604 HK, Buy) - beneficiary of rising ASP and land prices.

　　Risks Policy changes and regulatory intervention could create volatility.