Don't panic! The bottom of Chinese concept stocks may have arrived.

Hello everyone, here is the summary of this week's core information on Dolphin Research's portfolio strategy:

Last week, amid a global market decline, Chinese assets did not escape the downturn and experienced even larger declines. From the triggering factors, whether it is weak exports or a significant depreciation of the renminbi exchange rate, Dolphin Research believes that these factors are already in a marginal state that is difficult to worsen.
The decline in the renminbi exchange rate last week was mainly due to the strength of the US dollar. The underlying reason behind the strength of the US dollar is the weakness of local currencies in non-US regions caused by weak economic data. In contrast, the renminbi exchange rate index against a basket of currencies actually appreciated.
From a fundamental perspective, whether it is the bottoming out of export growth, the simultaneous MoM improvement of CPI and PPI, or the recovery of social retail data after the government bond issuance, coupled with the yet-to-be-reflected effects of relaxed real estate policies, the domestic economy has gradually transitioned from a policy bottom and is slowly moving towards a low economic state. It may not be easy for deflation expectations to turn into reality, and trades based on deflation expectations may gradually correct.
If prices continue to rise in the future and the deflationary expectations in trading during this period remain only as expectations without materializing, there is hope for a gradual recovery of Chinese assets.

The following is the detailed content:

I. Gradual Confirmation of the Bottom for Chinese Assets?

In last week's strategy weekly report, "US Unemployment Rate Rises, Hope for Chinese Assets Arises" (link: https://longportapp.com/topics/9617937?app_id=longbridge&channel=t9617937&invite-code=276530), Dolphin Research believed that Chinese assets were valued above the freezing point and had greater resilience for recovery under the easing of interest rates and substantial domestic policy support. However, the actual situation last week was a deep adjustment for Chinese assets.

The background of the correction in Chinese assets last week was the renewed decline in the renminbi exchange rate, which clearly fell below 7.3, as well as the continuous outflow of northbound funds. However, in reality, the decline in the renminbi exchange rate against the US dollar was mainly caused by the decline in other non-US currencies, and the renminbi exchange rate index against a basket of currencies actually appreciated.

The reason for the general decline in non-US currencies is that in the past week, including the bankruptcy declaration of a large local government in the UK, the economic data released by most countries has been rather disappointing.

And it's time to look at one of the most important economic data points in China in August - the prices of goods have quietly changed.

In August, both CPI and PPI prices in China showed a month-on-month increase. In terms of CPI, apart from the inflationary pressure caused by poultry and other food prices rebounding, housing and medical prices have also shown a marginal recovery, while transportation and communication prices have continued to rise due to increased fuel costs. However, the growth rate of education, culture, and entertainment prices has slowed down due to a slowdown in tourism-related price increases.

Currently, the prices of clothing and household appliances are still declining on a month-on-month basis, while PPI has stabilized. There are signs of a bottoming out and a rebound in domestic prices. It is not easy for deflation to transition from expected to actual transactions.

In addition, looking at the latest import and export data, US dollar-denominated exports in August fell by 8.8%, which is within expectations. Moreover, from the trend perspective, it is already in a recovery trend.

Furthermore, the most important thing is that the recently released social financing data (the effect of real estate stimulus has not yet been reflected) seems to indicate that the bottom of China's credit has already formed:

With the government's efforts in project implementation, social financing has finally shown a slight recovery, reaching a monthly increase of over 3 trillion yuan. However, RMB loans have not yet returned to a net increase state. Of course, the structure of RMB loans in August is still a long-standing issue, with a significant decrease in long-term loans and relatively weak long-term loans for individuals. However, considering the series of demand-side loosening policies recently introduced and the upcoming peak season for real estate sales, social financing data is expected to continue to rise.

In fact, from the above-mentioned price and social financing data, it can be seen that the deflation expectations that have been persistently traded in the market for some time may be difficult to materialize if prices continue to rise.

Looking at the current 10-year treasury bond yield hovering around the historical long-term bottom of 2.6% (the last time was during the global outbreak of the pandemic in April 2020, and before that was around 2016), compared with the current price of government bonds, it can be said that Chinese equity assets are highly cost-effective. Moreover, from the perspective of PE percentile, the entire Hang Seng Index is still at a historically low level over the past five years, indicating visible valuation attractiveness. Also, therefore, although Chinese concept assets performed poorly last week, Dolphin Research believes that the sell-off of Chinese assets based on the weakness of non-US currencies in the periphery is not reasonable. It still sees the resilience of Chinese concept assets during this period and believes that the crazy inflow of funds from the south in the past two weeks is reasonable.

2. Portfolio Returns

On August 28th, Alpha Dolphin's virtual portfolio returns declined by 2.1%, which is basically in line with the Hang Seng Technology Index, but significantly lower than the CSI 300 (-1.4%), MSCI China Index (-1.2%), and S&P 500 Index (-1.2%).

Since the start of the portfolio testing until last weekend, the absolute return of the portfolio is 24%, and the excess return compared to MSCI China is 42%. From the perspective of asset net value, Dolphin Research's initial virtual assets were $100 million, and currently it is $126 million.

3. Contribution of Individual Stocks' Profits and Losses

Last week, under the strong US dollar, global assets experienced a general decline. Among the companies covered by Dolphin Research, there are two types of assets with significant declines. One type is high-quality assets with reasonable valuations, such as Ctrip and Pinduoduo. The other type is small companies with growth potential, such as Beike, NIO, iQiyi, and Bilibili, which exhibit a typical "kill valuation" decline.

Specifically, the companies with the highest increase and decrease in stock prices are summarized by Dolphin Research as follows:

4. Portfolio Asset Allocation

After the portfolio was adjusted this week, it is allocated to 22 stocks, including 3 stocks with standard ratings and 19 stocks with low ratings. The rest are allocated to gold, US bonds, and US dollars.

As of last weekend, Alpha Dolphin's asset allocation and equity asset holding weights are as follows: