Morning Notes China/Hong Kong

Sector Outlook - China bank. Back to tightening?.

PBOC drained Rmb44.5bn of liquidity last week, the biggest drop in the past six months.

While macro policy is unlikely to change much before the November party meeting, we expecta slightly tighter stance towards year end given strong credit growth. The sector kicks off 3Qresults this weekend. NIM and NPL ratio should remain stable, though we see higher risk insmaller banks and prefer large ones. We rate BOC and CNCB BUY on likely NIM uptick andvaluation.

Sector Outlook - China insurance. Market-driven 3Q rebound.

Chinese insurers are set to report a sharp 3Q profit rebound on solid investment performance.

A shares did well in the quarter, up 10%, and impairment charge, a big drag in results lastyear, will be much smaller. China Life will revert from a loss. Life product mix has alsoimproved with better margins and NBV growth, though these metrics aren’t disclosedquarterly. P&C pricing discipline has also turned better but catastrophes will weigh onunderwriting. We continue to prefer Ping An in the sector on cross-selling benefits.

Citic Bank Corp Ltd (998 HK - BUY). Margin surprise.

As China banks approach 3Q reporting season, we expect CNCB to deliver positive surprisewith QoQ NIM expansion. Rising deposit cost might continue to pressurize margin but its solidcapital position could support interbank downsize and engineer NIM rebound. As 9M13 netprofit could add to 89% of full-year consensus/CL estimate, there are chances of upwardearnings revision. And risk of further BBVA sell-off is overstated in our view. After 21% run inthe last 3M, we expect decent 3Q numbers and relative value to support the tradingmomentum. Reiterate BUY.

Huaneng Power International Inc (902 HK - O-PF). Cheap coal trumps slow Sing.

Huaneng’s 3Q13 recurring profit was ahead of expectations. With Rmb586m in write-downs,net profit still grew 66% YoY to Rmb3.9b. Sector read-through is positive, with strong powerdemand growth and coal price declines showing through. Our preferred pick in the sector, CRPower, is trading on similar valuations to Huaneng’s 8.6x 14CL PE and 1.4x 14CL PB, but withbetter visibility and gearing. Huadian (likely beat) and Datang power (in-line) will report their3Q13 earnings on Oct 29th and 30th.

ZTE Corp (763 HK - SELL). 4G LTE illusion.

ZTE reported another set of weak 3Q numbers, prompting us to cut 2013 EPS by 10%. Itsrecent share price strength was driven by elevated expectations for 4G equipment sales.

Given China Mobile’s strong bargaining power, we are not convinced. ZTE’s smartphonescontinue to struggle amid fierce pricing competition in China. We keep 2014/15CT EPSestimates unchanged but raise our target price to HK$10.8 (vs 10.1 previously) by applying2015 earnings (vs 2014 previously). SELL.