CSI300 target up to 3,000, driven by 11% EPS and 5% valuation
We reiterate our positive stance on A-shares and raise our CSI300 2013
yearend target to 3,000 (prior 2,750), implying 16% potential upside,
despite possible higher volatility ahead and the 21% gains since our 2013
strategy outlook report dated Nov. 29, 2012. We expect earnings to play a
more important role ahead and the 16% implied return will be driven by
11% (prior 9%) EPS growth and another 5% P/E expansion to 11.2X (prior
10.7X), still well below the 13.6X average since the 2008 trough.
Macro, earnings, valuation, and liquidity still favorable to equities
Recent macro indicators (including PMIs, IPs and exports) have generally
trended positively, enhancing our more upbeat than consensus’ 2013E GDP
forecast (8.2% vs. 8.0%). Looking ahead, further improvement of GDP yoy
growth to 8.1%/8.2%/8.4% in 1Q-3Q 2013 should continue to translate into
incrementally more positive earnings surprises, particularly for selective
cyclical sectors. Still-reasonable mutual fund positions, a close-to-trough
level of retail accounts opening and QFIII/RQFII additions continue to
provide liquidity support. In the meantime, CPI concerns should not be
imminent given the mild macro recovery with persisting overcapacity.
Reaffirm pro-cyclical bias; U/G Capital Goods to replace Property
We continue to favor pro-cyclical sectors in 1H2013 on a macro recovery
and consumption players in 2H2013 given the approaching reform agenda.
We suggest a gradual shift from earlier-cyclical sectors to selective later
cyclical sectors in 1H2013, and we take profit on property (~30% alpha
since 2012), replaced with capital goods on potential fundamentals
improvement. We now overweight Capital Goods, Construction Materials
(Cement), Securities, Insurance, Media and F&B, and continue to
underweight Coal, Steel, and Chemicals due to weaker fundamentals.