外文报告：CCBIS-Out of their gloom and darkness the eyes of the blind will see-120927

China/Hong Kong
Strategy



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Strategy Update
27 September 2012
Out of their gloom and darkness the eyes of the blind will see
We advise investors to get over their “gloom and darkness” and
see the profits that can be had by careful stock picking ahead of
what are sure to be disappointing 3Q12 corporate earnings in
October and November this year. Our pessimism towards the
overall domestic market is based on trends we have identified in
the latest statistics on industrial performance. We articulate the
implications of these trends for five major sectors within the
Chinese economy and pick winners and losers within each sector.
Our channel checks suggest investors are holding their breath in
anticipation of new policies bound to come out of the
18th People’s Congress slated for mid-to-late October. In the
interim, sentiment may get a positive jolt from the release of
China’s PMI on 1 October 2012, which we expect will have
recovered from 49.2 last August to 50.0 in September 2012.
The slide in China’s industrial profits in January-August 2012
(down 6.2% YoY) began to accelerate back in July. During the
same January-August period, manufacturers of mid-to-
downstream products suffered earnings declines, margin pressure
and weak demand. Upstream producers/service providers fared
somewhat better. Ahead of 3Q12 results, we expect:
 Food product manufacturing and power stocks
(including “A” shares) to show improvement in light of better
earnings and lower input prices, particularly coal.
January-August 2012 earnings for China’s power and
thermal energy sector rose 36.5% YoY. China Resources
Power (836 HK, Not Rated) and Huaneng Power (902 HK,
Not Rated) should benefit as a result.
 Certain upstream mining (e.g. gold) stocks, notably Zijin
Mining (2899 HK, Outperform), to attract market interest as
3Q12 results improve from 1H12 levels due to recovering
product prices.
 Ferrous metal processing companies to lag the market.
Earnings disappointment and over-capacity problems will
hit Maanshan Iron (323 HK, Not Rated) and Angang Steel
(347 HK, Not Rated) particularly hard.
 Mid-stream product manufacturers (e.g. chemicals) like
Shanghai Petrochemical (338 HK, Not Rated) to be buffeted
by weak demand and falling profits.
 High-end auto companies and exporters to outpace
mid-price car makers. High-end product manufacturers
like Brilliance China (1114 HK, Outperform), or exporters,
like Great Wall Motor (2333 HK, Outperform), are likely to
outperform mid-price car makers like Dongfeng Group
(489 HK, Neutral). Overall, we find earnings growth for
China’s auto sector encouraging.
China industrial profit in January-August and
January-July 2012
Profit (YoY % change)
Industry Jan-Aug Jan-Jul Remarks on profit trends
Overall (3.1) (2.7) Further weakening in
August from level in July
Number of industries with
YoY profit growth
24 25

Number of industries with
YoY profit decline
16 15

Non-staple foodstuffs 16.2 16.6 Relatively stable with good
YoY growth
Automobile production 10.8 10.2 Strengthening, except for
Japanese car makers
Electrical machinery 1.4 1.0 Strengthening
Power and thermal energy 36.5 29.3 Strengthening, good for IPPs
Oil and gas (3.5) (2.1) Weakening
Chemical (20.2) (21.3) Weak but stabilizing at a
lower level, partly due to
lower oil prices
Ferrous metals (67.4) (60.8) Very weak despite lower
input costs
General equipment (2.0) (0.9) Still weak
Computer/telecom
equipment
(2.9) (1.6) Deteriorating despite back-
to-school sales. Lower ASP
a possible reason
Source: CCBIS








Dr. Peter So
(852) 2532 6786
peterso@http://wendang.chazidian.com

Rocky Zhang
(852) 2533 2411
rockyzhang@http://wendang.chazidian.com

Stephanie Tong
(852) 2844 3602
stephanietong@http://wendang.chazidian.com