00:00JP Morgan, Chief China Equity Strategist, Wendy Liu is with us.
00:04What a run for the HSI, right?
00:05I mean, when you take a look at CATL, I mean, it ended the day higher by 16%.
00:11Today's pharmaceutical IPO debut also up by massive 20%.
00:17It does seem like China is back, especially when it comes to Hs.
00:21I would 100% agree.
00:23I think China had this down cycle, as you said, House Linda, from 21 to early 24.
00:30Earnings have come back, and particularly in some of the key sectors where we see very strong growth.
00:36Not for the overall economy, which is sort of stable, and there are also problem areas,
00:42but the new growth areas have been quite impressive.
00:46And so it just shows when people can buy quality companies in size, there is demand.
00:54How much more upside?
00:55When you take a look at earnings, they seem pretty encouraging.
01:01Where are valuations?
01:03What can we expect by the end of the year?
01:05Okay.
01:06So our forecast on MSCI China is that the bullish case will get to 89 on the ring gain.
01:16And right now it's mid-70s, so there's a double-digit upside.
01:19I think the arrival of that kind of outlook or that kind of outcome is going to have to be something getting completed on U.S.-China trade negotiations.
01:31And so this geopolitical uncertainty is clear.
01:35Now, on the single stocks, I think there will be much better upside because each year is a place that is quite straightforward.
01:43The market will reward companies that can grow EPS, and you can have a little bit of margin or expansion that helps,
01:53and multiples would expand along with that.
01:56So we look out for which sectors can produce the best earnings, and communications is one,
02:03internet, media, discretionary is one, and healthcare actually produce better growth than those two.
02:10But in the aggregate, the index, MSCI China, is only forecasting about 8.3% EPS growth year-over-year for 25.
02:19So it's a very large deceleration vis-a-vis 14 in 23 and 16 in 24.
02:29So I think the consensus might need to come up with that estimate because AI, efficiency, cost reduction would help us to get to a higher number.
02:40Valuation, as you said, is fair vis-a-vis 10-year historical average.
02:44So it's an upside on both.
02:45Yeah, but I'm just wondering how much of that AI play has already played out.
02:49You take a look at Asia as a whole.
02:51Tech has led the rally.
02:53The same story for China and Hong Kong as well.
02:56How much of that has already been played out, and how much of it is based on fundamentals?
03:00How much of it is based on sentiment?
03:03That's a very good question.
03:04I think the AI rally clearly initially focused on hardware.
03:10Then it went to the periphery, the edge, right?
03:14And then a few other things like software and et cetera.
03:17So what I think their sustainability is the vertical place that are using AI to enhance their current businesses.
03:28And where they're pure AI place, we've seen a lot of expansion in the multiples.
03:35And that's almost so PE because sometimes there's no E, but it's PS, right?
03:39And so we did a study back in 2023 on what is the maximum PS.
03:47It seems to be 25 times for very big companies, you know, at the peak of the secular growth.
03:54Yeah, 25 times.
03:56Interesting when you see the gap between H and A.
04:00In fact, the gap is the biggest since 2008.
04:03What will it take for AI to play catch-up?
04:08It's going to take quite a bit.
04:09I think AI, if we look at CSI 300's value.
04:13Value outperformed growth from 21 to September of 24.
04:18Now it's growth.
04:19And if I look at the earnings growth, last two years, eight years, CSI 300, no growth.
04:25Okay?
04:26And then we've got an aggregate about 30% growth, just under 30% growth for MSCI China.
04:32So it is clear that we get better preference for MSCI China.
04:37And also the equities in the Hong Kong market, they're discounted according to the U.S. 10-year yield.
04:44A share discounted to the China 10-year yield.
04:49So for the Chinese money to buy age, they get better valuation.
04:55So I think this is going to stay for a little bit.
04:58What are the other themes?
04:59We talk about tech, you like internet, healthcare, perhaps one area we should be looking at?
05:05Yeah, healthcare, I mean, what recent transactions have shown is that the biotech or the innovative drug ecosystem in China is cost competitive.
05:15So in an environment where U.S. pharmaceuticals are thinking about maybe lowering some of the drug costs, right?
05:24And that competitiveness is going to be able to help, be quite helpful and tap into that growth opportunity.
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