Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Earnings watch: Chinese earnings buffet with lithium and banks in focus
Peter Garnry
Chief Investment Strategist
Summary: The Q4 earnings season is still ongoing in China and next week many of China's largest banks will report earnings. Given the recent headwinds in the economy the banks will be particularly interesting to watch and especially also on the context of a weakening housing sector. Ganfeng Lithium, which is the most valuable stand-alone lithium miner in the world, is also reporting next week. Given the soaring prices on lithium and its importance for electric vehicles and the green transformation the lithium outlook from Ganfeng is a key watch. In today's equity update we also briefly touch on the debate of whether Chinese equities are cheap nor not.
Credit quality is still an issue and lithium constraints persist
While the Q1 earnings season is just two weeks away in the US, the Q4 earnings season is still ongoing in China. The list below shows the most important earnings releases with large Chinese banks and energy companies dominating the list.
Monday: Nongfu Spring, CITIC Securities
Tuesday: China Construction Bank, Bank of China, BYD, Kuaishou Technology, BOC Hong Kong, Great Wall Motor, Micron Technology, Lululemon Athletica, McCormick
Wednesday: Kweichow Moutai, ICBC, Agricultural Bank of China, CNOOC, COSCO, SD Holding, Haier Smart Home, China Vanke, Ganfeng Lithium, China Longyuan Power Group, BOE Technology, Paychex, BioNTech
Thursday: PetroChina, China Overseas Land & Investment, China Resources Land, CITIC Ltd., Walgreens Boots Alliance
Chinese banks are interesting to watch next week because of the ongoing headwinds in the economy from regional lockdowns over Covid-19, troubles among the real estate developers, and finally general weaker credit in the private sector. As the chart below shows, Chinese banks are consistently expanding their balance sheets faster than the increase in market capitalization suggesting the market is putting a lower and lower earnings power on those new assets, which is another way of showing that credit quality is deteriorating.
Outside banks we will keep a tight watch on Ganfeng Lithium, the most valuable stand-alone lithium miner in the world, which is part of our battery theme basket and a critical input for electric vehicles. Lithium prices have surged 615% since late 2020 and Tesla has hiked prices on its EV models twice the past month. Analysts expect Ganfeng Lithium to increase EPS by 554% y/y in Q4 and increase FY21 revenue to CNY 12bn up 119% y/y and another 136% y/y in FY22 with revenue reaching CNY 28.3bn. There are 13 sell-side analysts covering the stock and they have all a buy recommendation on the stock with consensus price target being 83% above previous closing price. The key risks to the lithium mining industry is new supply coming to the market pushing down prices again. Long-term growth in electric vehicles will keep demand strong if not some new battery technology overtakes lithium-ion batteries.
Chinese equities are not cheap
In many client conversations Chinese equities come up and the question is always whether we believe Chinese equities are cheap. Based on the difference in dividend yield of the MSCI China and MSCI World compared to recent history our answer is no. The counterargument, and the one used by some investment firms, is that Hang Seng is really cheap. But if we measure Hang Seng on its relative dividend yield it is also not outright cheap relative to global equities. Why use an antiquated metric such as dividend yield? It is our preferred measure on emerging markets because it measures actual cash flows leaving corporates going into investor accounts and thus cannot be manipulated.
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