Market view: the market is overall gloomy in April, but it is normal that the bad news is the majority in the bottom area until the inflection point. At current, we need to look more at the future and the structure
Domestic aspects
The most notable event is the COVID outbreak in Shanghai, which is still at a high level but already starting to decrease, and the trend of the COVID spreading to other big cities, including Beijing, Guangzhou, Zhengzhou, the Yangtze River Delta, and Jilin Province, where community transmission is/was occurring to varying degrees, and extremely stringent epidemic prevention measures have been carried out. At least for now, the country is still prioritizing epidemic prevention over economic development in Q2 and even early Q3. The domestic economy should be very poor in the short term as people's activity and confidence both drop to freezing levels. Regardless of how the statistics are presented, the perceived data from the business and resident perspectives should be even worse. This is evident in property sales and tourism dropping more than 50% y/y in April, and other services including both online and offline have been hit severely in the short term. The most critical question now is when the epidemic will pass and when life will return to normal. Our current judgment is that due to China's firm "zero" policy and the strong propagation ability of the virus, even if the economy is to recover, it will probably not happen overnight, but will require constant iterations between control and release. The economic vitality, especially in consumption and service industries, will take a long time to recover, probably longer than the recovery after the rapid zeroing out in 2020. In the short term, the economy may have to rely more on encouraging investment and propping up real estate to reach the 5.5% target, but it is not 100% sure that it will be achieved. Of course, the recovery would be much faster should there be a shift in China's policy on epidemic prevention, and while no adjustment is in sight for the time being, the epidemic disruption is just a disturbance in the longer term, a litmus test for corporate competitiveness, and one that does not affect the value of quality companies.
In addition, the Politburo meeting reiterated the efforts to achieve the 5.5% GDP growth target this year and took measures to support the economy. The current economic situation is critical and there is no doubt about the country's intention to stabilize the economy. The current difficulties mainly lie in the too many policy objectives proposed in the meeting, some of which are even contradictory. The most typical one is that epidemic prevention is currently prioritized over the economy, thus short-term target constrains the strength of economic support. However, in general, we believe that the leadership still has a relatively clear understanding of the current economic situation, and the support for the economy, the support for reasonable demand for real estate, and the attitude toward unbundling the Internet companies are still progressive according to the meetings so far.
International aspects
The Russia-Ukraine conflict that started at the end of February is gradually entering a tepid tug-of-war phase, the biggest impact on the global economy and the world financial system has already passed, unless a further escalating accident occurs (e.g., nuclear war). For now, China's balanced stance strategy has been clearly expressed to the West, so there is no risk of lopsided support for Russia. In the future, the risk of collateral sanctions is also expected to diminish over time. However, some long-term capital may be concerned about the future US-China relationship and depart China, which may take a longer time to return.
The Fed raised interest rates for the second time by 50bp on May 4th, showing the determination of the US to fight against inflation. The 10-year Treasury yield has now breached 3%, showing that the market has priced in quite sufficient expectations of the rate hike. The concerns about inflation and rate rise are expected to weaken gradually as the U.S. economic momentum goes down (GDP decreased at an annual rate of 1.4% in the first quarter of 2022).
Industry
Many companies reported Q1 earnings recently. The areas we are focusing on are:
Property management and vocational education are basically in line with expectations, but there are also some problems such as growth in receivables, inappropriate investments, increased capex, and a slight decline in profit margin. The expected growth rate may be appropriately adjusted downwards in the future, but property management can still maintain a growth rate of more than 30% (head companies have higher growth), and vocational education has an endogenous growth of more than 15%. In addition, the factors affecting growth need to be considered separately, the temporary ones (such as boom factors) will improve in the future as the macro bottoms out. Finally, the expected returns remain very attractive considering the current valuations that are overly undervalued.
US stocks diverged significantly. Notably, the epidemic beneficiary stocks (mainly in e-commerce, streaming, advertising, etc.) generally underperformed or even significantly underperformed expectations, such as AMZN, NFLX, SHOP, FB, etc. It is mainly due to the behavioral changes of people after the epidemic, reducing their remote demand and virtual life demand while increasing their offline experience and travel demand in the post-epidemic era (e.g., Reopen-related travel companies, which generally performed well). In addition, enterprise demand remains very strong, especially in areas that combine the megatrends of digitization and intelligence, where the most typical example is cloud computing that serves medium and large enterprises.
Investment Ideas & Market Outlook
Hong Kong stocks: still too undervalued, maintain a bullish view
As an offshore market, Hong Kong is susceptible to greater volatility due to various factors. But the companies we invested in are all Chinese companies with valuations below historical averages and are significantly undervalued even in a global view, making them the most attractive investments at present.
US stocks:
Despite the recently increasing macro disturbances, U.S. stocks have better corporate governance and are full of innovation-driven structural growth opportunities with reasonable valuations.
Several main directions we are currently focusing on:
Investment opportunities in overseas cloud computing.
Structural growth opportunities in semiconductors.
Investment opportunities in services (service platforms) under overseas Reopen.
Domestic service industries, such as property management, higher vocational education, and other investment opportunities that have long-term growth but are seriously undervalued.
The potential investment opportunities that blockchain may become a new infrastructure.
Other directions are still being explored and we will be happy to include those that meet our criteria.
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