KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

KGI DAILY TRADING IDEAS – 26 May 2021

In The Spotlight: Hang Seng Index | In The Spotlight: Iron Ore | Singapore Trading Ideas | Hong Kong Trading Ideas | Market Movers 

IN THE SPOTLIGHT: Hang Seng Index

Change is in the air

The Hang Seng Index (HSI) will be undergoing changes that will see the weighting of financial firms and state-owned enterprises reduced, while increasing exposure to China’s growing technology companies. There are around US$38bn of funds that follow the Hang Seng group of indexes, according to data compiled by Bloomberg. 

Three new additions to make 58 companies in the index by 7 June 2021. On 7 June, HSI will add three companies to bring the total to 58 in the index. In an interesting turn of events, Xinyi Solar Holdings (968 HK) will be added, together with BYD Co (1211 HK) and Country Garden Services Holdings (6098 HK). 

Xinyi Solar was a surprise given its smaller market capitalisation, and basically highlights the new direction for the HSI. Constituents will be based on industry groups, regardless of market capitalisation, and will be selected from financials, information technology, consumer discretionary and staples, property and construction, telecommunications and utilities, energy, materials, industrials and conglomerates, and finally healthcare. 

Biggest beneficiaries in our view. Meituan (3690 HK) and Alibaba (9988 HK), will see the biggest increase in weighting. Meituan’s weight will increase from around 4.3% to around 7.7%, while Alibaba’s will rise from 5.6% to around 7.3%. The maximum cap of 8% for each stock in the index, down from 10% previously for primary listing and 5% for secondary listings, means that Tencent’s (700 HK) weight will drop from 9.4% to 8.0%, and AIA (1299 HK) from 10.2% to 8.0%. 

In a nutshell, Meituan, Alibaba, Country Garden Services and BYD will see inflows of between HK$1.6bn to HK5.8bn for each company based on their weightings. Xinyi Solar, given its smaller market size, should have inflows of around HK$0.8bn. There should be around HK$2-4bn of outflows from Tencent and AIA but we think this will not impact their share price in a big way given their sizes. 

Stocks to trade


^ Back To Top

IN THE SPOTLIGHT: Iron Ore

Too hot to handle

Potential regulations on the way. On Sunday, key Chinese government agencies (the NDRC, the Industry Ministry, the State-owned Assets Regulator, the State Administration of Market Regulation, and the China Securities Regulatory Commission) held talks with major domestic commodity companies and urged them not to drive up prices. The authorities not only paid attention to the overheated commodities rally, but also realised that the movement behind the rapid rise in prices was driven by speculation. With potential regulations to be launched, the iron ore market is expected to cool down temporarily.

However, has the market peaked? Probably not. As we mentioned in our previous write-up, credit conditions and supply-demand dynamics are the major factors driving the bull market. The current credit cycle peaked in October 2020, but we believe inventory build-up is only halfway to the peak as historical track record shows an inverse correlation between the two cycles: credit cycle’s peak is inventory build-up cycle’s bottom, and vice versa.

China’s iron ore import displays a strong seasonality. Generally, there are three to four high seasons of import, and each period is between three to four months. The last surge in import was in March, hence, we believe the next buying spree will be due in June or July. Moreover, we think the current inventory level is still healthy compared to historical levels. With a consistent increase in consumption of iron ore driven by economic recovery, inventory levels are likely to gradually decline until iron ore price edges down to a reasonable level. 

From a technical perspective, iron ore price has pulled back to the level at the end of April, wiping out the month-to-date gains. In addition, the current price sits at a Fibonacci support level (61.8%). We believe iron ore will stabilize at the current level provided no aggressive cooling measures are announced by the Chinese government. 

Products to trade: Iron Ore Futures

China credit impulse and total iron ore inventory level

Red line: Total iron ore inventory in China

White line: China credit impulse YoY change

Total iron ore import to China as of 17th May
Total iron ore inventory in China as of 14th May

Iron ore price performance

^ Back To Top

SINGAPORE

The SG market is closed today for a public holiday (Vesak Day). Trading resumes on Thursday, 27 May.

^ Back To Top


HONG KONG

Hua Hong Semiconductor Ltd (1347 HK): Positive sentiment resumes  

  • Buy Entry – 40 Target – 45 Stop Loss – 37.5
  • Hua Hong Semiconductor Ltd is an investment holding company engaged in production and sales of semiconductor wafers. The company produces 200mm and 300mm-wafers. Its products are applied in general microcontroller (MCU), Type-C interface chips, image stabilization chips, touch control chips, and smart meter controller chips. The products also serve the Internet of Things (IoT), new energy vehicles, artificial intelligence and other markets.
  • Previously, the company announced a good set of 1Q21 results. Revenue reached an all-time high of US$304.8mn with a 50.3% YoY growth and 8.8% QoQ growth. GPM was 23.7%, 2.6ppts above 1Q20 but 2.1ppts below 4Q20. Net profit attributable to shareholders of the parent company grew by 63% YoY but dropped by 24.1% QoQ to US$33.1mn. Management guided revenue in 2Q21 to be US$335mn, and GPM to be in the range of 23% to 25%. 
  • The temporary downturn of the semiconductor sector due to the chip shortage is about to end, in our view. The PHLX Semiconductor Sector ETF (SOXX US) has bottomed out since mid-May, implying that the market has factored in the headwinds and started to look forward to improvements in 2H21. The positive sentiment is expected to eventually make its way to Hong Kong related counters. 
  • Consensus estimates peg the 12-month target price at HK$50.83, implying a 26% upside potential. EPS is forecasted to grow at 62%/23%/20% for FY2021/22/23F, which would bring forward P/Es down to 45x/36x/30x FY2021/22/23F. 
1347 HK (Source: Bloomberg)

Ping An Insurance (Group) Company of China, Ltd. (2318 HK): Finance counters are in favor now

  • Re-iterate Buy Entry – 81 Target – 90 Stop Loss – 77
  • Ping An Insurance (Group) Company of China, Ltd. is a personal financial services provider. The Company provides insurance, banking, investment, and Internet finance products and services. The Company operates its businesses through four segments. The Insurance segment provides life insurance and property insurance, including term, whole-life, endowment, annuity, automobile and health insurance. The Banking segment is engaged in loan and intermediary businesses with corporate customers and retail business. The Assets management segment is engaged in security, trust and other assets management businesses, including investment, brokerage, trading and asset management services. The Internet Financing segment is engaged in the provision of Internet finance products and services.
  • Accumulated gross premium income periodic comparison: 
(RMB bn)YTD April 2021YTD April 2020YoY change
Life insurance and health insurance 215.0224.7-4.3% 
Property &Casualty Insurance87.696.5-9.2%
Total302.6321.2-5.8%
  • Key financial and operating update as of 1Q21:
1Q211Q20YoY change
Basic operating earnings per share (in RMB)2.212.038.9%
Net profit attributable to shareholders of the parent company (RMB bn)27.226.14.5%
Life & Health New Business Value (in RMB mn)19.016.515.4%
Retail customers (mn)220.6218.41.0%
Internet users (mn)611.3598.2.2%

Updated market consensus of the estimated growth of net profit in FY21 and FY22 are 7.0% and 14.5% respectively, which translates to 7.8x and 6.8x forward PE. The current PE is 8.1x. The estimated respective dividend yield in FY21 and FY22 is 3.6% and 4.1% respectively. Bloomberg consensus average 12-month target price is HK$112.65.

2318 HK (Source: Bloomberg)

^ Back To Top


Market Movers

Hong Kong

  • China International Capital Corp Ltd (3908 HK), CSC Financial Co., Ltd. (6066 HK) Finance sector jumped as Shanghai announced plans to establish itself as an asset management hub. FTSE Russell global index will include China International Capital A shares in June. 
  • Chinasoft International Limited (354 HK), Kingdee International Software Group Co. (268 HK) Software sector jumped as the US tech sector recovered. Huawei announced that it will launch HamonyOS for smartphones on June 2. Huawei is the biggest customer of the software outsourcing business of Chinasoft International. 
  • Kuaishou Technology (1024 HK) The company announced 1Q21 results. Revenue grew by 36.6% YoY to RMB17bn. Gross profit jumped by 64.1% YoY to RMB7bn. However, losses expanded by 89.5% YoY to RMB57bn. Average MAUs grew by 5% YoY to 519.8mn. Total e-commerce GMV jumped by 219.8% YoY to RMB118.6bn

^ Back To Top

Trading Dashboard


Subscribe Now

Related Posts:

Leave a Reply

Your email address will not be published. Required fields are marked *