In the near term, banks should benefit from reforms designed to contain risks and a related re-rating, even as they lose from a narrowing of NIMs caused by further interest rate liberalization. Insurers and security companies should benefit from interest rate liberalization and capital market reform.
Rebalancing will benefit healthcare, travel, logistics, e-commerce and internet services, clean energy, whereas commodity and mining, and property companies may initially see less positive growth. Selective SOEs should benefit from asset restructuring opportunities and improved management incentives, especially as more upstream companies are pushed into mixed-ownership or cooperation with private companies.
As policy privileges/protection are removed however, inefficient domestic (including foreign) companies will face greater competition, especially in sectors like automobiles, commodities/raw materials, and high-end consumer goods manufacturing.
We see reforms as positive for both H and A-shares in 2015, helping to drive a valuation re-rating of H-shares and helping A-share big caps outperform small caps again. In the H-share space, we like Ping An Insurance for its high exposure to trust loans and leading position in asset securitization, Everbright In’t, Huaneng Renewable as price and fiscal reform beneficiaries, and Huadian, China Merchants as preferred SOE reform plays.
In the A-Share space, we prefer Sinopec (600028.SH) for progress already made in their upstream-downstream operational integration; Daqin Railway (601006.SH) for its below-market coal tariff levels and cost/efficiency advantages, and Yili (600887.SH) and SAIC Motor (600104.SH) for their effective realignment of senior employee and shareholder incentives.