28 April 2025 | 11:09AM HKT China: What do local clients think about the economy? Local marketing takeaways April 2025 Over the past week, we met with onshore clients in Beijing and Shanghai, including mutual funds, private equity firms, and asset managers from banks, brokers and insurance companies. Compared to two months ago (late February), local investors are more concerned about China's economic outlook, mainly due to the elevated US reciprocal tariffs and the uncertainty surrounding the Trump administ ...

Investment Rating - The report indicates a preference for short positions in CNY CFETS index and short SGDNEER basket, suggesting a bearish outlook on these currencies [3][4]. Core Insights - Asian economies show limited evidence of diversifying away from US assets, primarily due to low domestic yields and growth concerns [1][2]. - Malaysia, Singapore, China, and India exhibit signs of increased USD FX hedging and asset diversification, while Japan sees foreign inflows into its assets [1][2][28]. - The report highlights that Singapore and Hong Kong have the highest US asset holdings as a percentage of GDP, indicating significant room for diversification [5][6]. Summary by Sections Section 1: Diversification Potential - Singapore and Hong Kong lead in US asset holdings relative to GDP, followed by Taiwan, Japan, and Korea [5][6]. - China’s US asset holding is relatively low at 12% of GDP when accounting for indirect holdings [5][6]. Section 2: Willingness to Diversify - China is diversifying its reserves by increasing gold holdings, now at nearly 6% of total reserves, but has not sold US treasuries [11][13]. - Taiwan's central bank holds over 80% of its FX reserves in US treasuries, indicating confidence in these assets despite potential diversification [18][19]. - Korea's National Pension Service plans to increase international asset exposure to 60% by 2028, showing no intent to repatriate assets [25][26]. Section 3: Market Observations - Malaysia's government is guiding a shift towards domestic asset allocation, with EPF reducing overseas exposure [34][35]. - Singapore's large US asset holdings are supported by its status as a financial hub, with signs of month-end repatriation flows [38][39]. - India's central bank emphasizes gold accumulation for reserve diversification amid geopolitical uncertainties [47][48]. Section 4: Currency and Investment Trends - The report notes a shift in international investors' preferences from long-duration to short-duration US treasuries, contributing to a steepening of the UST curve [59][60]. - Malaysia's foreign currency deposit ratio has increased, indicating a trend towards domestic investments [55][57].

Investment Rating - The report raises the 2025 Southbound flow forecast from US$75 billion to US$110 billion, indicating a positive investment outlook for Southbound flows [4][39][41]. Core Insights - Southbound investors have shown strong net buying activity, with US$78 billion in net purchases year-to-date, representing 75% of the expected full-year inflows for 2024 [1][9]. - The performance of the Hong Kong market is increasingly correlated with Southbound flows, suggesting that these investors are gaining pricing power [2][11]. - The report identifies key drivers for Southbound inflows, including attractive H-share profiles, increased domestic institutional investment, and hedging demand against potential RMB depreciation [10][41]. Summary by Sections Southbound Flows and Market Impact - Southbound investors currently hold US$577 billion of HK-listed stocks, accounting for 13% of the market cap of eligible stocks, up from 10% a year ago [2][11]. - The turnover contribution from Southbound investors has increased from 17% in 2024 to 21% year-to-date [2][11]. - The report notes that the Southbound flows have become a significant influence on the Hong Kong market, with a notable increase in ownership and turnover [11][12]. Investor Composition - Both onshore retail and institutional investors are participating in Southbound trading, with institutional investors estimated to account for at least half of the Southbound ownership [3][25]. - Domestic mutual funds have raised their equity allocation to historical highs, contributing to the Southbound inflows [28][39]. Forecast and Drivers - The report forecasts that Southbound flows could reach US$110 billion in 2025, driven by factors such as the attractiveness of H-shares, increased dual-primary listings, and potential dividend tax exemptions for Southbound investors [4][39][43]. - The report highlights that the home-coming of US-listed Chinese companies could further boost Southbound buying, with Alibaba's dual-primary listing serving as a precedent [41][50]. Investment Opportunities - A refreshed Southbound Favorite Portfolio includes 50 companies identified for their scarcity value, valuation discounts, and high sensitivity to Southbound flows, expected to outperform if inflows remain strong [5][49]. - The report also screens for 33 ADRs eligible for HK dual-primary listing, which may benefit from Southbound buying post-inclusion [5][50].

Investment Rating - The report does not explicitly provide an investment rating for the industry or US equities Core Insights - Recent declines in US stocks, bonds, and the dollar have raised concerns about foreign investor selling, with an estimated $60 billion in US stocks sold since March 2025 [2][3] - Foreign investors held a record 18% ($17 trillion) of US equities at the start of 2025, indicating a significant potential for further selling [4][5] - Historical data shows that previous episodes of foreign selling have lasted an average of 11 months and accounted for approximately 0.6% of US equity market cap, translating to about $300 billion today [2][15] Summary by Sections Foreign Investor Activity - High-frequency fund flow data indicates that European investors have primarily driven the recent selling of US equities, while other regions have continued to buy [11][21] - The recent episode of foreign selling is shorter and shallower compared to historical averages, with only $63 billion sold over the last two months [15][21] Market Performance - Since early April 2025, the S&P 500 has declined by 4%, the trade-weighted US dollar has fallen by 3%, and the 30-year US Treasury yield has increased by 18 basis points [3][9] - In contrast to past episodes of foreign selling, where US stock prices generally continued to rise, the current situation has seen a decline in both stock prices and the dollar [16][21] Historical Context - The report highlights that in previous instances of foreign selling, the S&P 500 rose in 7 out of 10 episodes, while the dollar typically appreciated by an average of 5% [16][21] - The most recent significant foreign selling occurred from mid-2023 to early 2024, totaling $260 billion, which contrasts with the current estimated selling of $63 billion [15][21]

Investment Rating - The report does not explicitly provide an investment rating for the industry or specific companies. Core Insights - Chinese consumer sentiment towards US brands appears to be relatively stable despite geopolitical tensions and tariff hikes, with a notable lack of significant consumer-initiated boycott activity [1][8][21] - The analysis indicates that brand momentum and product cycles are more influential on market share shifts than tariff policies [1][21][33] - Most Chinese consumers prioritize quality-for-money products over brand origin, suggesting a pragmatic approach to spending [1][21] Summary by Sections Boycott-Related News and Consumer Sentiment - Current boycott-related news volume is significantly lower than during previous geopolitical tensions, indicating limited consumer-driven boycott intentions towards US brands in China [8][19] - Analysis of social media comments shows that only about 14% of comments express a negative stance towards US brands, while the majority remain neutral or supportive [21][23] Sales Performance and Market Share Dynamics - In the sportswear category, Nike's sales growth has not shown a noticeable decline compared to domestic brands, even after recent tariff announcements [24][25] - Apple's market share in the mobile phone sector has been consistently declining, attributed to increasing competition from domestic brands [26][27] - Tesla's market share in China has seen a decline, but the extent of this decline has not worsened significantly in recent months [28][29] Overview of Leading US Companies in China - The net favorability of US brands in China has not deteriorated year-to-date, suggesting that consumer perceptions remain relatively stable [31][32] - Factors such as supply chain profits generated in China and the shareholder structure of US brands are important considerations for Chinese consumers [33][36]

Investment Rating - The report maintains a "Buy" rating on Cell & Module and Film, while it has a "Sell" rating on Glass, Poly, Wafer, and Equipment [4]. Core Insights - The profitability of the solar industry is expected to face deterioration for Cell and Module, while Glass may see temporary improvement due to price hikes [6][14]. - The report highlights a significant decline in solar capital expenditure, projected at -55% year-over-year in 2025, alongside a lower capacity utilization rate averaging 59% from 2025 to 2030 [4]. - The report indicates that upstream pricing in China has started to lose momentum as the peak of rush installations is ending, while US module pricing has jumped due to a 90-day tariff exemption [19]. Summary by Sections Pricing Dynamics - As of April 17, 2025, month-to-date (MTD) spot prices for Poly/Wafer/Cell/Module/Glass/Film/Inverter in China showed average changes of -1%/-0.3%/-7%/+0.5%/+5%/+0%/+1%, while overseas module prices increased by 20% in the US [19]. - The report notes that inventory days across the value chain have improved to below 20 days, except for Poly at 40 days and Glass at 27 days, driven by strong domestic demand [13]. Production and Demand - Production volumes across the solar value chain are expected to recover significantly in April, with Poly/Wafer/Cell/Glass/Module projected to increase by +4%/+17%/+29%/+9%/+31% month-over-month [12]. - The report anticipates a decline in inventory levels across the value chain, with a lowered production-to-demand ratio at 94% in April compared to 104% in March [15]. Profitability Trends - The average cash gross profit margin (GPM) for Poly/Wafer/Cell/Module/Glass/Film in April showed changes of -0.3pp/+0.4pp/-11pp/-6pp/+3pp/+1pp, indicating a decline in profitability for Cell and Module [10]. - Monthly average cash profitability for the companies covered is expected to remain largely flat month-over-month in April, although it is better than the first quarter of 2025 [7].

Investment Rating - The report does not explicitly state an investment rating for the industry [2]. Core Insights - The report highlights that China achieved a growth target of "around 5%" in 2024, with 70% of this growth driven by exports and export-related manufacturing investment [7]. - For 2025, the report anticipates a decline in real GDP growth to 4.0%, influenced by elevated US tariffs on Chinese goods, which are expected to impose a 2.2 percentage point drag on GDP growth [10][20]. - The report expresses caution regarding medium- to long-term GDP growth in China due to challenges related to demographics, debt, and de-risking, although there are moderate upside risks from faster AI adoption [9]. Summary by Sections Economic Forecasts - The report provides a detailed forecast for China's GDP growth, projecting 5.0% for 2024 and 4.0% for 2025, with a further decline to 3.5% in 2026 [15]. - It notes that domestic demand is expected to contribute positively, with consumption growth projected at 5.3% in 2025 [11]. Tariff Impact - The report indicates that the effective US tariff rate on China has reached 107%, significantly affecting trade dynamics and economic growth [20]. - It emphasizes that the ongoing policy easing in China may not fully offset the negative impacts of these tariffs [12]. Policy Measures - The report outlines expected policy measures, including further monetary easing and fiscal stimulus, to support economic growth amid external pressures [31]. - It anticipates an increase in the augmented fiscal deficit to 14.5% of GDP in 2025, up from 10.4% in 2024 [33]. Sectoral Insights - The report discusses the property sector, noting that construction activity has sharply contracted compared to previous peaks, raising questions about the sustainability of any recovery [52][56]. - It also highlights that high-tech manufacturing has been a stable growth driver over the past decade, with expectations that these sectors will continue to outperform broader manufacturing [80][84].

Investment Rating - The report does not explicitly provide an investment rating for the industry but discusses the implications of tariffs on natural gas liquids (NGLs) and their flows, particularly ethane and propane, in the context of US-China trade relations [5][17]. Core Insights - US tariffs on China plastics and reciprocal tariffs from China threaten to disrupt global NGL flows, particularly affecting ethane and propane, which are key petrochemical feedstocks [2][5]. - China’s NGL imports from the US have surged from below 50 thousand barrels per day (kb/d) in 2019 to nearly 900 kb/d in 2024, with a significant dependency on US ethane and propane [2][13]. - The report anticipates a moderate decline in US ethane flows to China due to lower US production and reduced demand from China, which may lead to a decrease in Henry Hub prices [2][26]. - Propane flows are easier to redirect compared to ethane, but full substitution of US propane exports will be challenging, necessitating deeper price discounts to attract buyers [2][3]. Summary by Sections Tariff Implications - US tariffs on energy imports are currently exempt, but significant tariffs on plastics threaten NGL flows [5][6]. - The reciprocal 125% tariff imposed by China on US imports is expected to skew the tariff burden towards the US over time [2][31]. Ethane and Propane Market Dynamics - Ethane imports from the US are critical for China, accounting for 60% of US ethane exports, while propane accounts for one-third [17][20]. - Ethane's specialized shipping and processing infrastructure complicate redirection efforts, while propane can be redirected more easily [3][20]. - The report outlines potential adjustment mechanisms for both ethane and propane markets in response to tariffs, highlighting the challenges and likelihood of each mechanism [20][25]. Production and Pricing Outlook - The report predicts a decline in US ethane and propane production due to tariff impacts and market adjustments, with potential price declines for both commodities [26][57]. - US ethane prices have already dropped by 25% since early April, while propane prices have decreased by 20% following tariff announcements [57][58]. - The long-term outlook suggests that lower US NGL production may offset some tariff impacts on petrochemical demand in China [2][60].

Investment Rating - The report maintains a "Sell" rating for Huayou Cobalt with a revised target price of Rmb27.00, indicating a downside of 20.2% from the current price of Rmb33.82 [1][2]. Core Insights - Huayou Cobalt reported a net profit of Rmb4.2 billion for 2024, reflecting a 24% year-over-year increase, primarily driven by higher profits from nickel and lithium [1][20]. - The company is facing challenges in the ternary battery materials market, with market share declining to below 20% in Q1 2025 from 27% in 2024 and 32% in 2023, leading to lower shipments and margins [2][31]. - The earnings outlook remains cautious due to depressed prices for lithium, nickel, and cobalt, which are expected to cap earnings improvements [2][31]. Financial Summary - Revenue for 2024 is estimated at Rmb60.5 billion, down 8% from 2023, with a gross profit of Rmb10.1 billion, up 12% year-over-year [28]. - The earnings per share (EPS) for 2024 is reported at Rmb2.50, a 22% increase from the previous year [28]. - The company declared a cash dividend of Rmb0.50 per share, with a payout ratio of 23%, significantly lower than the 69% in 2023 [1][28]. Earnings Estimates - Recurring earnings estimates for 2025-2026 have been revised upward by 44-55% due to higher refined nickel sales volume and lower costs for lithium [2][31]. - The projected EPS for 2025 is Rmb1.89, down from the previous estimate of Rmb1.79, reflecting ongoing market challenges [2][28]. Market Dynamics - The ternary battery materials market is expected to continue facing pressure, with increased competition and declining unit profits anticipated [31]. - The report highlights that Huayou's earnings are likely to remain depressed in 2025 due to weak prices for nickel, cobalt, and lithium [31]. Valuation Analysis - A bottom-of-the-cycle valuation analysis suggests a theoretical valuation range of Rmb7.8 to Rmb14.1 per share for Huayou, compared to the current share price of Rmb33.8 [2][31]. - The report's sum-of-the-parts (SOTP) valuation methodology indicates a valuation of Rmb22.7 per share for the battery material business [26][32].

Investment Rating - The report does not explicitly provide an investment rating for the industry or specific companies. Core Insights - Overall demand trends in the data center industry are positive, with companies engaged in projects extending several years into the future [2][3] - Densification of compute and liquid cooling are key elements driving design engagements, with rack power expected to rise significantly [2] - The sustainability of current demand strength is debated, with a need for new AI applications to utilize future capacity [3] Company Summaries - **NVT**: Focuses on liquid cooling solutions, including air-to-liquid and liquid-to-liquid systems, with strong demand visibility for the next two years [6] - **CARR**: Plans to roll out a 1 MW cooling product by year-end, with data center revenue expected to double from $500 million to approximately $1 billion [7] - **Motivair Corp**: A leader in liquid cooling, with expansion plans beyond North America and strong demand, booking orders through 2029 [12][14] - **VRT**: Discussed its 2.3 MW liquid-to-liquid CDU, with strong interest driven by AI training needs [13] Industry Trends - The shift from general-purpose cloud to purpose-built AI infrastructure is evident, with a focus on high-density AI factories requiring full liquid cooling [8] - The trade-off between efficiency and flexibility is highlighted, as tighter chip clustering for AI reduces future data center flexibility [8] - New AI applications are necessary to utilize the significant capacity implied by NVDA's backlog [8]