Investor Presentation_ Biggest drag in China credit risk cycle bottomed in 2024

Summary of Key Points from the Conference Call Industry Overview - Industry: China Financials - Outlook: Attractive [3][5] Core Insights - Local Government Financing: The bottom of local government financing is expected to have occurred in the first half of 2024, with a more sustainable financing structure emerging that balances near-term and long-term risks [5][6] - Financial Clean-Up: The financial clean-up process is believed to be over 90% complete, having eliminated most financial risks since its initiation in 2016 [34][37] - Infrastructure Investments: There remains room for infrastructure investments, but they will be more balanced across regions and sectors, with total infrastructure investments projected at Rmb23 trillion in 2024 [17][18] - Debt Management: The shift from Local Government Financing Vehicles (LGFVs) to official local government bonds is expected to reduce financial uncertainty and improve market stability [26][29] Financial Metrics - Interest Burden: The net interest burden of the Chinese government is projected to decline to 2% of GDP in 2024, down from 2.3% in 2022, due to improved cash flows from infrastructure projects [24][30] - Credit Demand: Long-term credit demand is expected to stabilize between 5-6%, with total credit growth rationalizing to 7.5% in 2025 and further to 7% in 2026 [52][54] Market Re-Rating - Bank Valuations: A potential price-to-book (P/B) re-rating of 0.1x-0.2x for banks is anticipated, which could translate into a 30-40% upside in share prices over the next two years [61][64] - Insurance Sector: A shift in preference towards insurance stocks is expected, with companies like Ping An likely to outperform due to their healthy in-force business and attractive valuations [67][68] Regulatory Environment - Policy Adjustments: Policymakers have been addressing key risks annually since 2015, which has contributed to the current financial stability and growth model transition [41][37] - HKEx Upgrade: The Hong Kong Stock Exchange (HKEx) has been upgraded to Overweight due to lower risks and a more innovative growth model in China, with expectations for increased trading volume and IPO activity [75][76] Additional Insights - Infrastructure-Related Risks: The improvement in local government funding is expected to alleviate risks associated with LGFVs and peripheral sectors, enhancing credit quality in infrastructure-related manufacturing [45][47] - Market Sentiment: The transition from a property-driven to an innovation-driven growth model is anticipated to support market sentiment and trading volume in Hong Kong [77][78] This summary encapsulates the key points discussed in the conference call, highlighting the current state and future outlook of the China financial sector, particularly focusing on local government financing, infrastructure investments, and market re-rating potential.