29 September 2007
Fund QDII accelerating by Merill Lynch (27 Sept 2007)
Fund QDII accelerating, US$8bn quota already approved
Today, an US$4bn QDII fund run by China Fund Management opens for subscription. China Southern QDII Fund recently raised US$4bn. We believe that Jiashi Fund Management, China International Fund Management, Fortune SGAM Fund Management and Fortis Haitong Investment Management may launch their QDII funds within the next few weeks, each raising US$3-4bn.
Fund QDII should sell well in China
China Southern Fund saw US$6.5bn subscription in its first day, suggesting a very strong retail demand for such products. Recently, we saw banks in some areas implementing measures to cool down the property market, including raising down payment ratio for second hand property from 30% to 40%. In addition, the government may ask borrowers to pay 1.1x standard interest rate on mortgages for the second property they buy. This may divert some domestic liquidity from the property market to the stock market, including QDII funds, in our opinion.
Liquidity + sentiment to continue to drive HK market
We conservatively estimate that by 2008 year end US$48bn mainland liquidity may flow to the HK stock market or about US$3.3bn per month on average over the next fifteen months (Shift your paradigm, QDII is coming, China, 14 September 2007). This would represent about 7.4% of the current free float of HK listed China stocks or 3.4% of the current total free float of the entire HK equity market. Assuming 5.7x annual turn over rate for this liquidity (the same as the A share market), it could mean 10% of the daily turnover in the HK market or 14.6% of the daily turnover of the HK listed Chinese stocks. Unlike what happened to the B share market, we don't believe that foreign investors will leave town due to the importance of H shares and red chips in their regional portfolio. As a result, we believe the incremental liquidity should continue to drive performance. We would recommend investors focus on H/A discount stocks (Table 1) including Sinopec (SNPMF, HK$9.28, C-1-7), China COSCO (CICOF, HK$21.7, C-1-7) and North Star (BEIJF, HK$7.15, C-1-7); and stocks favored by mainland PMs including China Mobile (CHLKF, HK$121.1, not rated), Mengniu (CIADF, HK$33.45, C-1-7), Lenovo (LNVGF, HK$5.47, C-2-7) and BYD (BYDDF, HK$61.9, C-1-7).
S shares and NASDAQ China stocks may also benefit
The to be launched Jiashi QDII fund will focus on all overseas Chinese equities, including those listed in Singapore, US and other markets. Please refer to Table 2 for potential exposure by the QDII funds. We believe it's time to explore stocks in these markets including Synear (SYNRF, S$1.65, C-1-8), Yangzijiang (YSHLF, S$2.04, C-1-7) and Wuxi Pharma (WX ,US$29.85,C-1-9).
Fund QDII accelerating, US$8bn quota already approved
Today, an US$4bn QDII fund run by China Fund Management opens for subscription. China Southern QDII Fund recently raised US$4bn. We believe that Jiashi Fund Management, China International Fund Management, Fortune SGAM Fund Management and Fortis Haitong Investment Management may launch their QDII funds within the next few weeks, each raising US$3-4bn.
Fund QDII should sell well in China
China Southern Fund saw US$6.5bn subscription in its first day, suggesting a very strong retail demand for such products. Recently, we saw banks in some areas implementing measures to cool down the property market, including raising down payment ratio for second hand property from 30% to 40%. In addition, the government may ask borrowers to pay 1.1x standard interest rate on mortgages for the second property they buy. This may divert some domestic liquidity from the property market to the stock market, including QDII funds, in our opinion.
Liquidity + sentiment to continue to drive HK market
We conservatively estimate that by 2008 year end US$48bn mainland liquidity may flow to the HK stock market or about US$3.3bn per month on average over the next fifteen months (Shift your paradigm, QDII is coming, China, 14 September 2007). This would represent about 7.4% of the current free float of HK listed China stocks or 3.4% of the current total free float of the entire HK equity market. Assuming 5.7x annual turn over rate for this liquidity (the same as the A share market), it could mean 10% of the daily turnover in the HK market or 14.6% of the daily turnover of the HK listed Chinese stocks. Unlike what happened to the B share market, we don't believe that foreign investors will leave town due to the importance of H shares and red chips in their regional portfolio. As a result, we believe the incremental liquidity should continue to drive performance. We would recommend investors focus on H/A discount stocks (Table 1) including Sinopec (SNPMF, HK$9.28, C-1-7), China COSCO (CICOF, HK$21.7, C-1-7) and North Star (BEIJF, HK$7.15, C-1-7); and stocks favored by mainland PMs including China Mobile (CHLKF, HK$121.1, not rated), Mengniu (CIADF, HK$33.45, C-1-7), Lenovo (LNVGF, HK$5.47, C-2-7) and BYD (BYDDF, HK$61.9, C-1-7).
S shares and NASDAQ China stocks may also benefit
The to be launched Jiashi QDII fund will focus on all overseas Chinese equities, including those listed in Singapore, US and other markets. Please refer to Table 2 for potential exposure by the QDII funds. We believe it's time to explore stocks in these markets including Synear (SYNRF, S$1.65, C-1-8), Yangzijiang (YSHLF, S$2.04, C-1-7) and Wuxi Pharma (WX ,US$29.85,C-1-9).
