Despite major questions about China’s macro policies, the fundamentals of some industries are shifting in their favor. Profits are shifting from materials and energy to industrials, consumer discretionary and staples, HSBC said. That’s based on the firm’s analysis of about 1,700 listed companies in mainland China that have issued first-half profit forecasts. One reason for the profit shift, the report said, was lower producer prices in China and their widening gap with consumer prices. This means that the revenue of upstream enterprises decreases, while the cost of midstream and downstream enterprises decreases. HSBC analysts segmented further, looking for sub-sectors with low inventory levels and strong demand momentum. Their screening found that the home appliance, media and software industries all fit the bill. Producer prices have fallen for nine straight months. The consumer price index slowed to 0% in June. That has sparked fears of deflation in China and a broader downturn in the world’s second-largest economy. But the worst may soon be over. The big event for the next seven days is a gathering of Chinese leaders, the Politburo meeting. “Everyone is looking forward to the meeting at the end of July,” said Ding Wenjie, global capital investment strategist at China AMC, according to CNBC’s Chinese translation of his speech. She noted that in addition to decisions made at the meeting itself, other policy details may be released after the meeting. No date has been announced, but last July the Politburo meeting was held on the last Thursday of the month. Over the past two weeks, Beijing has begun to signal more economic support. A lengthy government document and subsequent news conference on Thursday spoke of the importance of helping the private, non-state sector. The market is still waiting for action. Ant Group suspended its initial public offering days before its listing due to tightening regulations and forced Didi to suspend new user registrations days after its U.S. IPO, denting market confidence. An important indicator to watch is whether Internet platform companies can list their subsidiaries on the public market, Ding said. Alibaba, an Ant subsidiary, said in March that it would split into six business units, each of which could raise money through an initial public offering. JD.com is also planning initial public offerings of its industrial and real estate units. Meanwhile, regulators signaled the shutdown by allowing Didi to resume new user registrations, and eventually fined Ant Financial in July. Given the high debt levels in the economy, policymakers have little room to act, Ding said. She expects that overseas markets will become areas where Chinese corporate profits will grow, while domestic recovery will just take a little longer. China has only been reopening for six months, she said, noting that consumption could improve as the economy grows. There has already been a surge in domestic travel this summer. Analysts at Goldman Sachs said on Friday that they expect implied oil demand on domestic scheduled flights to be above 2019 levels in July. Profit winner Looking ahead, UBS Securities China equity strategist Raymond believes that “policy stimulus is moderate but not radical”, and he is optimistic about industries such as home appliances, food and beverages, computer software and insurance. Mr. Meng predicts that the first quarter is the low point of this year’s earnings, and it will gradually improve in the second half of the year. The annual earnings per share of the A-share Shanghai and Shenzhen 300 Index will increase by 10%. The CSI 300 index, which includes companies listed in Shanghai and Shenzhen, has edged lower so far this year, while the Shanghai Composite has held on to gains. When it comes to individual stocks, HSBC looks for stocks whose forecasts top consensus. “We still believe that fundamentals such as earnings and valuations will come back into focus, and stocks with earnings that beat consensus expectations could benefit,” Steven Sun, head of research at HSBC Qianhai Securities, and his team said in a July 19 note. Topping the list is software company 360 Security, for which HSBC expects earnings to be twice the consensus estimate for this year. Another software company, Baosight Software, and home appliance company Sanhua also made it into the top ten. All three stocks are up double digits year-to-date. But not all software stocks made the list. Well-known technology company iFLYTEK entered HSBC’s 10-stock list, where analysts’ expectations were far below consensus estimates, meaning expectations were missed. All four stocks are listed in mainland China. HSBC’s research only looks at companies with a market cap of more than $10 billion and a three-month average daily trading volume of more than $10 million.
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