Newsletter commentary Aug 2022

In August, A-shares were still dragged by real estate and credit data headwinds, and the overall market was relatively weak. In overseas, U.S stocks faced the end of the rebound brought about by the change of market expectations against a persistent high inflation. Inflation is still not low, showing a strong resilience, while the Fed will keep charging ahead to tamp down inflation, didn’t leave room for the market to continue to interpret itself, and the market re-trades the pressure of inflation.

We think that there are several things to be considered over the past month.

First and foremost, lately in A share, the trading was very active and significant capital flew into some small caps, which showed the hot capital has been chasing and creating a crowded spot, from one side given investors over-imagination, almost showed some exaggeration of the concept of invested track shares, it’s not a good sign.

Second, the whole chain of photovoltaic (PV) industry’s supply and demand has been changing, showing evidence from some industries that the mitigation of that bottleneck link might be imminent, some manufacturers have begun to take big order at a discounted price; the story of the increase in concentration in the past years may collapse, and the further concentration expected by the market might become decentralized. We note that there are still significant number of manufacturers pouring in, or enhancing their own industrial chain, and the current unit profitability is very attractive; nevertheless, we believe that the market has also underestimated the benefit brought by so many additional surprises to PV sector this year and overestimated the peak of medium-term demand. We all know that the energy revolution is happening, but the speed is unsustainable under current circumstances. For example, if the European electricity prices apply, many industries in Continental Europe will cease to exist, which is impossible to do the math here. Moreover, the increase in the supply capacity of this industry has continued to maintain so called “the speed of China”, which is not good for investments, especially after the demand is stimulated in the short-term and the supply increases.

Turning to new energy vehicles (EV) sectors’ main trading sentiment, it has gradually shifted from sales volume to intense competition within the industry and attention to single-vehicle profits. With the change in subsidies next year, the industry’s total profits will face a great pressure. It is very likely that everyone is too passive to please consumers and cannot extricate themselves. There are only few companies left that can maintain decent profits and complete self-accumulation to improve the industry structure.  

Moving to consumption sector was revisited by investors, due to the economic recover is slow but still recovering. Part of it is driven by the inflow of trading momentum, also part of it is the expectation that the epidemic prevention and control will improve in the coming future. Having said that the valuation of consumer companies is not overall attractive.  

The audit issue of China Concept Stocks has experienced a major turnaround after twists and turns. Some of them are just twists and turns, but the result is good, which has a great positive impact on the market. In fact, many Internet platform firms have shown strong profitability and competition barriers, and capital expansion is not aggressive anymore. The supply is improving.

In addition, the valuation of some sectors has already made investors feel slightly released, somehow reminding us of the similar case that the supply of gloves and masks during the epidemic panic period has been in short, now it turns to the normal level of supply, which also reflects the market’s desire for investment opportunities. Capitals are now abundant, and banks’ interest rate spreads are stressed with low possibility to be compensated by large amount. . In terms of policy side we also see that counter-cyclical policies continue to increase in a targeted manner based on new assessments. We remain a relatively positive view, due to the recovery of the services industry and consumption needs to become key drivers for economic improvement after overseas demand subsides, plus the overall epidemic prevention system is also being improved, such as new variant vaccines and drugs, as well as public health management.

Finally, there are signs of a decline in overseas demand, sea freight prices have fallen sharply, and panic orders in the early stage are also destocking. The pressure of QT(QuickTime) in U.S from September may be more fully manifested. At the same time, the impact of the colder weather may also be further manifested in the Continental European economy. Amid the environment is till complex, which needs to be accounted in investments. The positive perspective is that some companies still show strong operating capabilities in the face of headwinds, and other companies have taken advantage of the headwinds to improve their industry landscapes. Notable examples are in manufacturing sector. We work continuously to discover more opportunities from this sector.