Zhitong Hong Kong Stock Analysis | Anxiety Returns at Month-End, New Heights of Competition Among Car Manufacturers

[Anatomy of the Market]

Generally, by the end of the month, the market tends to experience significant fluctuations, and this time is no exception. Yesterday's rise gave some hope, as leading financial stocks made a slight upward adjustment, but today there was no follow-through, with the Hang Seng Index opening lower and falling by 1.20%.

The current issue is that everyone is waiting for new stimuli. There are rumors that a major meeting will be held earlier, but it seems to be unfounded. There are also reports that the central government's fiscal deficit as a percentage of GDP may be raised to 4.0%-4.5% by 2025. The central government may issue an additional 2-3 trillion yuan in special government bonds for traditional infrastructure, people-related infrastructure (education, healthcare, elderly care), and livelihood areas. The scale of local special bonds may reach 4.5 trillion yuan, etc., but how it will all play out remains unknown; anything unverified cannot be counted. Market leaders are certainly hesitant to act rashly, and institutions are waiting.

As for whether the Federal Reserve will cut interest rates in December, the situation is also unclear. According to a report released by the U.S. Department of Commerce, the Federal Reserve's favorite inflation indicator, while meeting expectations, rebounded to 2.8% in October compared to September. This data supports the stance of Federal Reserve officials to adopt a more cautious approach to potential rate cuts. For our policies, we are in a relatively passive situation, lacking a good expectation, and policies are being constrained. Of course, the U.S. stock market is also struggling, with the seven major tech giants all declining. The only exception was Bitcoin futures, which briefly rebounded above $97,000, reportedly due to many South Korean investors joining the Bitcoin speculation, leading to a drop in the South Korean stock market.

The European Parliament voted to approve the new members of the European Commission, which will take office on December 1. European Central Bank official Isabel Schnabel warned that central banks should gradually implement accommodative monetary policies, as excessive easing could waste "precious policy space." Subsequently, the market reduced expectations for the European Central Bank to cut rates by the end of the year, which seems to echo the Federal Reserve.

Trade frictions continue to escalate, with the Biden administration expected to announce new export restrictions on China as early as this week. The Ministry of Commerce stated that if the U.S. insists on escalating controls, China will take necessary measures to firmly protect the legitimate rights and interests of Chinese enterprises. It is currently unknown what countermeasures will be taken, and whether it will be similar to previous actions, starting with agricultural products.

There are issues with the Russian ruble, which saw a sharp decline of over 8.5% against the dollar, falling below 110 rubles per dollar. Since last Thursday, the ruble has depreciated by more than 12% against the dollar. The main reasons are related to the U.S. Treasury's announcement last week of sanctions against Russian financial institutions and increased market concerns over the escalation of the Russia-Ukraine conflict. This is typical of Trump's style, wanting to resolve the Russia-Ukraine conflict but first making a strong statement. For us, it’s a mixed bag; Russia may seek to deepen cooperation with us, which is beneficial for imports but not for our exports. Additionally, sanctions against Russia are favorable for lowering international oil prices, and Europe is also following suit by not purchasing Russian oil. Therefore, the aviation sector has remained strong recently, which is the reason. Look at Air China (00753), China Eastern Airlines (00670), and China Southern Airlines (01055), all of which have been on an upward trajectory Hong Kong, as the forefront of China's economy, is quite sensitive to international situations, and any slight change can affect foreign investment. Local major brokerages in Hong Kong are facing tough times, with a comprehensive decline in brokerage, investment banking, proprietary trading, consulting, and other related businesses. Large Hong Kong brokerages are continuously laying off employees, while smaller brokerages are experiencing closures, suspensions, and halts in operations. According to data from the Hong Kong Stock Exchange, as of now, there are 75 participants in the exchange that have not opened, accounting for over 10% of the total. Last year, 27 brokerages closed down in the first half of the year, with a total of 32 closures for the entire year. As of November 25, 33 brokerages have directly ceased operations. In terms of investment banking, leading firm Morgan Stanley saw its fundraising amount in Hong Kong drop by two-thirds from 2021 to 2022, falling to HKD 94.9 billion, and then halving again to HKD 41 billion in 2023. As a top investment bank in Hong Kong, it had zero new stock sponsorships in the first three quarters of 2024. Overall, it is indeed a critical moment. Therefore, the urgent task for Hong Kong's development is to quickly integrate into the broader development landscape of the mainland. For example, new opportunities in the development of the Northern Metropolis in Hong Kong: a corporate cooperation promotional event is about to be launched. However, the market has not yet identified any related active products, and investors should closely monitor subsequent actions.

Recently, there has been much discussion in the market about the intense competition in the automotive industry. BYD (01211) has sparked heated discussions by requiring suppliers to reduce product prices by 10%. Li Yunfei, General Manager of the Brand and Public Relations Department of BYD Group, responded on his personal Weibo, stating, "Annual price negotiations with suppliers are a common practice in the automotive industry. We set price reduction targets for suppliers based on large-scale procurement, which is not a mandatory requirement; everyone can negotiate." The situation is tough, and a price war in the automotive sector may re-emerge in the first quarter of 2025, potentially even earlier than in previous years. Such actions are also a last resort; only extreme pricing can ensure survival. If leading automakers are feeling the pressure, others are even more affected. SAIC Maxus Automobile Co., Ltd. also sent a letter to its suppliers stating that with a large number of new cars being launched, the market supply-demand imbalance is unlikely to fundamentally improve in the short term, leading to a difficult price war. SAIC Maxus invites supplier partners to participate in major cost control projects to enhance survival capabilities under complex pressures, with a goal of reducing costs by 10%.

In fact, cost reduction is just one aspect of enhancing competitiveness and not the decisive factor. More importantly, it is about producing "explosive products" that the market recognizes for their high cost-performance ratio. For example, why is Geely Automobile (00175) so resilient? Today, it rose by 4.87%, with two recent catalysts: 1. The company will issue 22,500 shares on November 28, 2024, due to group employees exercising stock options under a plan adopted on April 28, 2023. 2. According to the latest equity disclosure information from the Stock Exchange, on November 26-27, 2024, Geely Automobile (00175) saw its executive director Li Shufu (Chairman) increase his holdings by 24.2 million shares at an average price of HKD 13.01-13.11 per share, involving approximately HKD 316 million. After the increase, Li Shufu's latest shareholding is 4,169,058,000 shares, with the shareholding ratio rising from 41.19% to 41.40%. It seems that increasing holdings is also quite important Compared to the brutal competition in the automotive industry, the competitive landscape in consumer electronics is much better, as it has already been consolidated, leaving a few major players relatively comfortable, such as Huawei, Xiaomi, and VIVO in China. Each can maintain its own market share, and suppliers are also relatively stable, just following along to benefit. Related supporting giants like Sunny Optical Technology (02382) and QiuTai Technology (01478) have seen good gains today.

The domestic consumption cycle continues to thrive, with Zhongxu Future (09890) rebounding strongly today after a day of adjustment yesterday, soaring by 12.5%. In fact, aside from gaming, the company's collaborations with Huawei and major cloud giants are also quite noteworthy, and the AI large model "X" smart marketing platform is a market hotspot. However, it will take time for performance to improve.

In other consumer sectors, as mentioned yesterday, Tehai International (09658) suddenly surged today, rising over 22%. The overseas expansion exceeded expectations, profitability improved, and the leadership change are all stimulating factors. Overall, the focus is on its growth potential, with a stable model that can generate profits, and the remaining task is to continue replicating this success.

Yesterday, it was mentioned to pay attention to restructuring stocks, and today, Red Star Macalline (01528) showed some unusual activity, rising by 2.59%. Continuous observation of subsequent news is warranted.

The results of the national medical insurance negotiations for 2024 were officially announced today, with 91 new drugs added to the national medical insurance drug list, of which 89 were included through negotiation/bidding. The success rate of negotiations for innovative drugs in this national negotiation exceeded 90%. Kangfang Biologics (09926) saw its Cadonilimab included in the new medical insurance directory, while Innovent Biologics (01801) had its PCSK9-targeted lipid-lowering drug Toricizumab listed. Additionally, the world's first IgA nephropathy targeted therapy drug Budesonide enteric-coated capsules from Yunding Xinyao-B (01952) was also selected. Stocks that performed well are mainly focused on taking profits.

【Sector Focus】

Hong Kong Chief Executive John Lee Ka-chiu stated on the 28th that the country has always cared for and supported Hong Kong. He thanked the central government for valuing and considering his proposals, continuously introducing various measures to benefit Hong Kong. In his policy address, Lee requested the central government to further deepen the arrangements for mainland residents to visit Hong Kong, including restoring the "one permit, multiple entries" from Shenzhen and expanding the pilot cities for the "one trip per week" individual tour. He expressed gratitude for the active research and accelerated promotion by relevant departments of the central government, believing that news will come soon. Various units of the SAR government will fully cooperate to promote personnel exchanges, injecting new momentum into tourism, catering, retail, and other industries.

These measures have been discussed for a long time and should be implemented quickly, which can provide a certain stimulus to Hong Kong's economy.

Main varieties include Da Jia Le Group (00341) and Sa Sa International (00178).

【Stock Picking】

Sunny Optical Technology (02382): New expectations brought by CEO change, core products have achieved mass production.

Recently, Sunny Optical Technology announced that Sun Yang resigned as CEO due to health reasons, and the position will be taken over by senior executive Wang Wenjie.

Comment: As an industry veteran, Wang Wenjie is expected to significantly promote the company's future development. Sunny Optical Technology, as one of the important suppliers of camera lenses for Huawei smartphones, will see a direct surge in lens orders driven by the hot sales of the Huawei Mate 70 series Profitability is expected to continue improving. The company has successfully obtained multiple project orders from automotive brand manufacturers through innovative products such as ADAS vehicle-mounted lenses with automatic heating functions. The company has further deepened its strategic cooperation with global VR clients, successfully achieving mass production of key projects. In addition, the company has become the preferred supplier for the next-generation perception and interaction modules of a globally renowned VR client. The continuous growth of the company's vehicle-mounted lenses reflects the determined trend of automotive intelligence, and the automotive business is gradually becoming an important source of performance contribution for the company. The revenue from the vehicle-mounted module business is expected to grow by 20%-30% year-on-year in 2024. In the emerging field of vehicle optics, the company added three mass production projects for laser radar within 2023, achieved mass production of PGU modules using digital light processing (DLP) technology, and obtained multiple project orders for high-pixel headlight products, among which the core product of million-pixel headlights has already achieved mass production. The company will secure orders for the Huawei P70 series, and module orders are expected to further improve. It is worth noting that Sunny Optical Technology has a strong cash reserve of over 10 billion yuan, which may lead to an active merger and acquisition strategy to further expand industry chain integration and increase investment in artificial intelligence.

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