CITIC Securities: Right signal awaits verification, dividend strategy takes precedence

Key points:

Firstly, the domestic economy operated steadily in the first quarter, with the manufacturing PMI returning to the expansion zone in March, reaching 50.8. It is expected that the year-on-year GDP growth rate in the first quarter will reach 5.2%; while the real estate policy is releasing demand at a fast pace, and it is expected that core city housing prices will stabilize in the second quarter. Additionally, attention should be paid to capital market reforms and the implementation of state-owned enterprise market value assessments.

Secondly, the transmission of macroeconomic prosperity to corporate profits still needs continuous verification through financial reports. A-share profits continue the trend of mild recovery at the bottom, with the highlight of the 2023 annual report being the increase in dividends. Among the 900+ listed companies that have disclosed dividend plans, about 2/3 have increased their dividend payout ratio compared to last year. The focus of the 2024 first quarter report is expected to be on demand recovery and technological innovation.

Lastly, the macro monetary environment in April remained stable, with no interest rate meetings by the Federal Reserve. The expectation for the first interest rate cut in June did not fluctuate much, and the disturbance caused by the first interest rate hike by the Japanese yen has eased. With the expectation of steady fundamental repair, the pressure of RMB depreciation is also expected to ease. It is also expected that domestic long-term interest rates will remain low in the second quarter, and dividend assets will still have strong attractiveness.

Signals on the right side enter the verification period, and it is expected that the economy will operate steadily in the first quarter, with gradual implementation of capital market reforms

1) The domestic economy is operating steadily, with the manufacturing PMI returning to expansion, and the year-on-year GDP growth rate in the first quarter is expected to reach 5.2%. Firstly, high-frequency data in March shows some improvement in the domestic real estate and infrastructure sectors, with the economy moving from cold to hot in various areas towards relative balance. The production side is relatively stronger, with the manufacturing PMI rising from 49.1 to 50.8 in March, returning to the expansion zone. Secondly, this March, economic year-on-year readings in consumption, exports, real estate demand, and other areas face pressure from a high base, coupled with seasonal pressure on fixed asset investment, leading to a slight decrease in some economic readings in March. Finally, combining the good start data from January to February, it is expected that the year-on-year GDP growth rate in the first quarter of this year will reach 5.2%, presenting a pattern of rising first and then stabilizing for the whole year. The second quarter growth rate is expected to rebound under the low base effect, and the third and fourth quarters are expected to achieve stable growth under the policy efforts such as special bonds, special national bonds, and equipment upgrades.

2) The real estate policy is releasing demand at a fast pace, and core city housing prices are expected to stabilize in the second quarter. The current real estate development industry is still operating at the bottom and remains one of the main structural pressures on the macro economy. According to data from the Shell Research Institute, in February this year, second-hand housing prices in 50 sample cities fell by 0.3% month-on-month. However, high-frequency data and leading indicators show that the policy of relaxing restrictions in cities like Shenzhen and Shanghai has had a positive impact on the market, with an increase in house viewings in Shenzhen and improving short-term market expectations among brokers, leading to some improvement in the second-hand housing market in some cities. The real estate team of CITIC Securities Research Department believes that overall, there is no long-term basis for a significant increase in housing prices, but there is still significant room for a decline in medium-term mortgage rates. In the future, there is still a possibility of further relaxation of restrictions in core cities, and the policy of releasing demand at a fast pace will continue; it is expected that the fundamentals of core city development industry will stabilize in the second quarter, with housing prices following the path of stabilizing after second-hand houses before new houses. Under the policy of releasing demand at a fast pace, the momentum of marginal recovery in the market will become more and more evident 3) Policy steadily advancing, short-term focus on capital market reform landing. It is expected that the political bureau meeting scheduled to be held at the end of April will re-evaluate the economic situation since the beginning of the year and the previously determined economic work direction. Policies are expected to maintain strength and focus on key issues facing the current economic recovery. In terms of industrial policies, it is recommended to focus on the implementation of industrial planning related to new quality productivity, focusing on the construction of new factors and related supporting areas; in terms of expanding domestic demand, the introduction of regulations on equipment renewal and trade-in for consumer goods is expected to effectively boost demand. On the capital market front, policies may be implemented in the short, medium, and long term to strengthen the investment return of listed companies through multiple measures. It is expected that encouraging and supporting listed companies to repurchase shares or optimizing policies in the next step will be a key focus. Component companies and companies trading below net asset value may be the entry points for policy reinforcement. On March 15th, the China Securities Regulatory Commission (CSRC) issued four "two strong and two strict" policy documents, involving issues such as issuance and listing access, listed company supervision, and institutional supervision. It is recommended to pay attention to the subsequent capital market reforms and the landing of state-owned enterprise market value assessments.

A-share profits moderately recovering, focus of annual reports on dividend increases Highlights of first quarter reports on demand recovery and innovation cycle

1) A-share profits continue to moderately recover from the bottom, with the effects of dividend policies beginning to show. Due to slow price recovery, there is still a gap between macro data and micro feelings, and investors are more concerned about whether macro data exceeding expectations can be reflected in corporate profit levels. As of March 30, 2024, approximately 80% of listed companies have disclosed their 2023 annual reports or performance forecasts under the A-share caliber. Based on overall calculations, the year-on-year growth rates of net profits for all A-shares in 2023 and the fourth quarter of 2023 are +0.3% and +13% respectively. Among them, the year-on-year growth rates for non-financial real estate and transportation are -3.4% and +33% respectively, continuing the bottoming out trend seen in the third quarter. Looking ahead to the first quarter of 2024, profit growth is expected to remain relatively stable due to price effects. On the other hand, among the 900+ listed companies that have disclosed their 2023 dividend proposals, about two-thirds have increased their dividend payout ratios compared to last year, indicating enhanced willingness of companies to distribute dividends, with the effects of policy encouragement becoming apparent. Under a neutral assumption, it is expected that the dividend yields of the CSI 300 and CSI 500 indices will increase from 2.4% and 1.8% to 3.4% and 2.2% respectively.

2) Demand recovery and technological innovation may become highlights of first quarter reports. In terms of profit structure for the 2023 annual reports, strong cyclical sectors such as breeding, chemicals, non-ferrous metals, and coal all saw significant year-on-year declines in net profits for the full year and the fourth quarter of 2023, consistent with the trend of the Producer Price Index (PPI). In addition, the overall profits of the electronics, pharmaceutical, and defense industries were under pressure in 2023. The highlights of the profit structure are still in the consumption represented by the travel chain and the manufacturing represented by the export chain. Looking ahead to the first quarter of 2024, it is expected that the differentiation of upstream resource products will be more significant, with companies in sectors such as copper, aluminum, and oil and gas that have seen significant price increases in the first quarter of 2024 having some support for performance, while the black series will continue to face dual pressures of price and demand feedback. The technology sector has been delivering performance quarter by quarter since the mid-year of 2023, especially benefiting from the performance of leading companies in the new infrastructure sector. It is expected to become an important structural growth point for A-shares starting from the first quarter reports

Stable Macro Monetary Environment Makes Dividend Assets More Attractive

1) The pressure of RMB depreciation is expected to ease, with domestic long-term interest rates remaining low, making dividend assets more attractive. Firstly, the sticky issue of core inflation in the United States remains unresolved. Powell stated on March 29th that the latest PCE inflation report met expectations, and with no interest rate meeting in April, it is expected that the fluctuation of the US dollar interest rate cut expectations will be minimal, and the US dollar index will remain high. Secondly, the moderate recovery of economic fundamentals provides support for the RMB exchange rate, but it is difficult to drive a significant rebound. Considering recent net inflows in the financial account, as well as the strong stance of the central bank's exchange rate stability policy, the probability of the exchange rate breaking through previous highs is low, and the depreciation pressure is expected to gradually ease. Furthermore, in terms of domestic liquidity, taking into account factors such as government bond supply, market duration preferences, growth in cash, foreign exchange deposits, general deposits, and other assumptions, the FICC team of CITIC Securities believes that there is basically no liquidity gap in April. With pressure on interest rate differentials, the possibility of a decline in bank deposit rates is higher. It is expected that the 10-year government bond yield will range between 2.2% and 2.35% in the second quarter, making dividend assets more attractive for allocation.

2) The overall center of A-shares is moving up, with the characteristics of active fund pricing remaining unchanged. Firstly, active funds are still in the process of increasing positions. As of the week ending March 22nd, the positions of active private equity funds had risen to around 67%, leaving room for further position increases compared to historical average levels. Secondly, with the rebound of actively managed equity funds' net asset values, redemption rates have increased after the holiday. The median return of actively managed equity funds had recovered to around 0 by the week of March 15th, but had slightly retreated to -2.3% by March 29th. According to research data from CITIC Securities channels, the net redemption rate of actively managed equity funds within the sample range was 1.3% in the week of March 15th, which is considered relatively high since 2022. Furthermore, data from PEP8.com shows that the excess replenishment of index-enhanced products is still slow, with a cumulative excess return of Shanghai and Shenzhen 300, CSI 500, and CSI 1000 index enhancement strategies still lagging behind the pre-Chinese New Year highs by 1.3, 5.1, and 7.3 percentage points respectively, indicating potential increased redemption pressure for quantitative private equity products across quarters. Lastly, in the past two weeks, the net inflows of northbound funds were -7.8 billion yuan and 5.4 billion yuan respectively, a significant slowdown compared to the average weekly net inflow of 16 billion yuan in the four weeks after the Chinese New Year.

Signals on the Right Await Verification, Dividend Strategies More Advantageous

We believe that in April, signals on the right will enter a verification period. It is expected that the first quarter will see stable economic performance, gradual implementation of capital market reforms, but the transmission of macroeconomic prosperity to corporate profits still needs continuous validation through financial reports. With overall stable macro liquidity, A-shares are expected to maintain an upward trend in valuation, with active fund pricing and the advantageous feature of a barbell structure. Under the strong guidance of policies, realization of financial report disclosures, and maintenance of low interest rates, dividend strategies within the barbell structure will be more advantageous in April. In terms of specific selection, it is recommended to focus on dividend assets with stable cash return characteristics, avoiding excessive impact from operational fluctuations. Based on this, attention should be paid to the improvement of dividend payout ratios of central SOEs and governance enhancement. It is recommended to continue focusing on hydropower, a stable free cash flow return asset, and globally priced commodities (copper, Oil, property insurance with stable premium growth, banks with still attractive dividend yield expectations and benefiting from debt-to-equity swaps, and home appliances benefiting from the policy of replacing old with new. On the other end of the barbell structure, themes of new quality productivity catalyzed by policies are still worth actively participating in, with a focus on themes such as domestic computing power, autonomous driving, and low-altitude economy.

Authors: Qin Peijing, Qiu Xiang, Yang Fan, Yu Xiang, Li Shihao, Yang Jiaji, Lian Yixi, Cui Rong; Source: CITIC Securities Research; Original Title: "Strategic Focus | Right Signals Await Verification, Dividend Strategies More Advantageous"