KraneShares MSCI China Clean Technology Index ETF · AMEX:KGRN
KraneShares MSCI China Clean Technology Index ETF — KraneShares — Investor Presentation (September 2019)
45 slides from KraneShares MSCI China Clean Technology Index ETF's investor presentation, Sep 5, 2019
Slide 1: Deal or No Deal? Trade War Scenario Analysis and Economic Outlook
Deal or No Deal? Trade War Scenario Analysis and Economic Outlook Kevin Liu Brendan Ahern Executive Director Chief Investment Officer 1
Slide 2: Introduction to KraneShares
Introduction Introduction to KraneShares About KraneShares Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provides investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We str
Slide 3: About the Speakers
Introduction About the Speakers Kevin Liu Brendan Ahern Executive Director Chief Investment Officer Kevin Liu joined China International Capital Corporation (CICC) in 2011 Brendan Ahern joined KraneShares in June 2012 to head the firm’s and holds the title of Executive Director as a Strategist in th
Slide 4: For questions during the presentation please email
For questions during the presentation please email: info@kraneshares.com 4
Slide 5: Navigating the Secular Trends in China - 3Cs: Challenge, Change and Chance
Navigating the Secular Trends in China - ”3Cs”: Challenge, Change and Chance Kevin LIU, CFA Equity Strategist, Executive Director kevin.liu@cicc.com.cn SAC: S0080512030003 SFC CE Red: AVH867 September 2019
Slide 6: Part I: Current market and macro condition
Part I: Current market and macro condition
Slide 7: How China performed YTD? Still ranking the top globally
How China performed YTD? Still ranking the top globally 162% 30% Global Assets Performance YTD (in USD) 22.3% 20% 10% 0% -10% -20% Equity Fixed Income -30% FX Commodity Alternative -40% -50% Source: Bloomberg, Factset, CICC Research 7
Slide 8: Overall growth: largely stable despite high volatility for monthly path
Overall growth: largely stable despite high volatility for monthly path Growth of industrial value added % Real GDP growth % 30 16 Real GDP growth (YoY) VAI growth (YoY) VAI growth (QoQ annualized) Real GDP growth (QoQ annualized) 25 14 20 12 15 10 10 8 5 6.6 6 0 6.2 GDP growth target for 2019: 6%-6
Slide 9: Monetary: TSF picked up early this year, but moderated again since May
Monetary: TSF picked up early this year, but moderated again since May after BSB takeover YoY (%) Adjusted TSF & M2 New total social financing 36 Rmb trn 6 ABS & written-off loans Non-financial equity financing 32 Adjusted TSF growth* M2 growth Local government special bond financing Corporate bond
Slide 10: Property: more resilient than expected especially for tier-1 cities
Property: more resilient than expected especially for tier-1 cities, but inv’t growth may slow down in 2H % chg yoy Property floor space sold, 30 large & mid-sized cities 70 YoY (%) total floor space sold, 12mma 120 60 property investment new starts (sqmt), 100 Tier-1 Tier-2 Tier-3 12mma 50 real mon
Slide 11: Retail sales: non-housing related discretionary consumption also stayed resilient YTD
Retail sales: non-housing related discretionary consumption also stayed resilient YTD Source: CEIC, CICC Research 11
Slide 12: Auto: sales remain sluggish but improved sequentially
Auto: sales remain sluggish but improved sequentially Passenger car sales volume growth and tax rate cut YoY (%) 120 VAT tax Tax rate was rate was 100 raised to 7.5% cut down Purchase tax of by 3ppt to 80 passenger vehicles 13% since of 1.6L or below Purchase tax rate Apri 1, was reduced to 5% 60 re
Slide 13: Monetary: more room to bring down LPR, MLF, and risk-free rates
Monetary: there is more room and necessity to bring down LPR, MLF, and risk-free rates in China More yields are turning negative global wise, China-US yield spread continues to widen except US and China China 10yr yield US 10yr yield 1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr 15yr 20yr 30yr China-US U
Slide 14: Fiscal: deficit and local gov't bond issuance expanded
Fiscal: deficit and local gov’t bond issuance expanded to lend supports for moderate recovery in infrastructure inv’t Government revenue less expenditure Rmb bn Jan-July Net issuance of local government bonds Rmb bn 600 2500 Local government general bonds General public budget 400 Local government s
Slide 15: Growth forecast: China's real GDP expected to grow 6.2% in 2019
Growth forecast: China’s real GDP is expected to grow 6.2% YoY in 2019 and 6% YoY in 2020 % Real GDP YoY Nominal GDP YoY (RHS) % 9 11.7 12 11.4 11.3 11.2 10.1 10.3 9.6 10 8 9.1 8.2 8.0 7.8 7.8 7.9 8 7.2 7.3 7 6.7 7.0 6.1 6 6.0 6 4 7.0 7.0 6.9 6.8 6.7 6.7 6.7 6.8 6.9 6.9 6.8 6.8 6.8 6.7 6.5 6.4 6.4 6
Slide 16: RMB: this time is less of a shock; global easing offers cushion
RMB: this time is less of a shock; global easing also offers some cushion; but weaker RMB does weigh on global flows % Implied appreication/depreciation rate by CNY Overseas flows to HK is tightly correlated with RMB 2 NDF 8/11 Overseas flows to HK Equities (US$m) USD/CNY USD/CNY (Inverted, RHS) Ref
Slide 17: Where the market stands now? The phase of Hope
Where the market stands now? The phase of “Hope” Valuation rebounded first for the “hope” of future earnings recovery 2016/9/1=100 12m fwd EPS (RHS) MSCI China Index 12m fwd PE 170 Despair 9.3 Optimism 160 Hope 8.8 Optimism 150 Suspicion Hope 8.3 140 Despair 130 7.8 120 7.3 110 6.8 100 6.3 90 Suspic
Slide 18: Market consensus: consensus estimates are still in the downturn
Market consensus: the consensus estimates are still in the downturn (Rmb bn) CSI300 Non-financials earnings MSCI China Index EPS consensus estimates (Rmb) forecast consensus 1 1,400 1 7.0 110 2019 2019 1 6.5 100 1,200 2015 2018 1 90 6.0 1 2018 2014 1,000 80 2012 2016 2015 1 5.5 2013 2014 2017 70 0 2
Slide 19: Valuations: H-shares close to the troughs repeatedly tested
Valuations: H-shares: close to the troughs repeatedly tested after the financial crisis 26 (X) MSCI China forward 12-month P/E MSCI China (ex. A-share) -0.6 std.dev. below avg. MSCI China (ex. Financials & A-share ) -0.4 std.dev. below avg. MSCI China (ex. Tencent, ADRs & A-share) -0.9 std.dev. belo
Slide 20: Competitive advantage: equity looks more attractive vs. bond
Competitive advantage: equity looks more attractive vs. bond, 1 std. dev. above historical average CSI 300 dividend yield vs. China 10yr gov't yield 1.2 7,000 Div. yld. vs. 10yr bond yld. CSI 300 (RHS) 1.0 6,000 5,000 0.8 4,000 0.6 3,000 0.4 2,000 0.2 1,000 0.0 0 Feb-11 Feb-06 Jun-09 Jun-14 Feb-16 J
Slide 21: Competitive advantage: better risk-reward global wise
Competitive advantage: better risk-reward global wise 2019e P/E EPS Growth vs. PE, 2019e 2019e P/B ROE vs. PB, 2019e 4.5 Nasdaq India 20 4.0 S&P 500 18 3.5 S&P 500 DM 16 France Japan 3.0 ASEAN Europe South Africa India Asia Pacific 14 MSCI HK Germany Brazil 2.5 DM Korea EM BRICs Spain South Africa B
Slide 22: Part II: Challenges and policy responses
Part II: Challenges and policy responses
Slide 23: External: trade frictions might still pose external demand shocks
External: trade frictions might still pose external demand shocks in the near term % US imports from China 50 $50bn list $200bn list Other 40 30 20 10 0 -10 -20 -30 -40 2014 2015 2016 2017 2018 2019 Source: USTR, Wind, CICC Research 23
Slide 24: Sectors affected by tariffs more initially are mostly labor intensive
Sectors affected by tariffs more initially are mostly labor intensive Source: USTR, Wind, CICC Research 24
Slide 25: Existing tariffs may drag down China 2019 nominal GDP by 0.4ppt
Existing tariffs may drag down China 2019 nominal GDP by 0.4ppt in base case scenario Breakdown of China's industrial output Breakdown of China's industrial output: by sector Exports to US Supporting Supporting industries of exports to US industries of Exports to non-US Exports to exports to Support
Slide 26: A-shares' earnings growth could be 4.2ppt lower due to tariffs
A-shares’ earnings growth could thereby be 4.2ppt lower due to the tariffs in base case Impa ct on Impa ct on non ea rni ngs Impa ct on net fi na nci a l growth of non Scenario analysis on US-China Impa ct on Impa ct on GDP ma rgi n of non l i s tcos fi na nci a l trade friction export growth growth
Slide 27: Further escalation could also hurt US through higher cost and inflation
But further escalation could also hurt US by passing through higher cost and domestic inflation Breakdown of US tariffs on Chinese goods by products Toys 18 82 Footwear 7 45 47 Textiles 10 77 13 Electronics 41 17 41 Stone & glass 50 30 20 Machinery 51 13 36 Vegetable products 56 41 3 Plastics & rubb
Slide 28: Policy responses: boost domestic demand; open service accounts
Policy responses: 1) boost domestic demands (e.g. VAT & fee cut, auto, infrastructure inv’t); 2) to open service accounts Total tax and contribution rate (% of profit) US$bn US total trade deficit to China Brazil 65.1 China 64.9 100 US service surplus to China France 60.4 Belgium 57.7 Italy 53.1 50
Slide 29: Internal: the mystery of China's high leverage
Internal: the mystery of China’s “high leverage”: high savings + the inefficient financial system China: debt/GDP Deposits/GDP % 260 240 220 200 180 160 140 120 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Source
Slide 30: Global household and non-financial sector debt to GDP
40 60 20 80 50 0 0 120 100 140 100 200 250 350 400 150 300 (%) (%) Australia Japan 375 120 Canada HK 358 101 98 Korea France 311 87 UK Canada 302 US Greece 295 76 72 HK UK 279 Thailand Spain 260 69 66 Malaysia China 254 France Italy 253 Spain US 250 are in net cash 60 59 58 Japan Korea 238 Germany A
Slide 31: Policy responses: promote long-term investors
Policy responses: promote long-term investors (institutional & foreign); share of retail investors could be below 50% now A-share investor structure (% of total free-float market cap) 100% Individual investors Institutional investors 90% Foreign investors 80% National Team 53.8% 56.3% 70% 57.5% 57.5
Slide 32: Small-bank deleveraging and tighter regulation could weigh on TSF growth
But current small-bank deleveraging and tightening financial regulations could weigh on TSF growth Source: CEIC, Wind, CICC Research 32
Slide 33: Thank you! KraneShares
KraneShares’
Slide 34: Mainland Chinese equity market at a multi-year low discount to US equities
Mainland Chinese equity market is selling at a multi-year low discount to US equities Shanghai Composite Index P/E – S&P 500 Shanghai Composite Index P/B – S&P 500 Index P/E1 Index P/B2 40 4 35 30 3 25 2 20 15 1 10 5 0 0 -1 -5 -10 -2 -15 -3 6/1/2002 2/1/2003 6/1/2004 2/1/2005 6/1/2006 2/1/2007 6/1/2
Slide 35: Continuous foreign inflows via stock and bond connect
There have been continuous foreign inflows via stock and bond connect into Chinese domestic assets RMB bn Foreign Holdings of domestic Chinese assets: Equity Foreign Holdings: Bond 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Mar-16 Mar-18 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Mar-1
Slide 36: The Index Matters
The Index Matters MSCI is a trusted index provider for the largest global investment managers 1 As of June 30, 2018, as reported on September 30, 2018 by eVestment, Morningstar and Bloomberg, retrieved 6/30/2019. 2 Based on latest P&I AUM data and MSCI clients as of March 2018, retrieved 6/30/2019.
Slide 37: The China A-Share market is too big to ignore
The China A-Share market is too big to ignore Even though China is the world’s second largest economy and stock market, China A-Shares are still underrepresented in global capital markets. Top 5 Country Weights in MSCI All Country World Top 5 Country Weights in the MSCI All Country Index (Market cap
Slide 38: MSCI's Global Standard definition of China represents a small portion of the market
MSCI’s current Global Standard definition of China only represents a small portion of China’s total market The MSCI China Index was historically limited to Chinese companies listed on the Hong Kong Stock Exchange. Recently, MSCI expanded this definition to include US-listed Chinese companies. This d
Slide 39: MSCI's larger than expected China A-Share inclusion announcement
On February 28, 2019, MSCI made a larger than expected China A-Share inclusion announcement. MSCI will increase the inclusion factor of China A-Shares in their Global Standard Indexes from 5% to 20% in 2019. Currently, $1.8 trillion track the MSCI EM Index. Up to $300b are expected to be reallocated
Slide 40: China is the largest country in the MSCI Emerging Markets Index
China is the largest country in the MSCI Emerging Markets (EM) Index by weight and by number of securities % of MSCI EM Index - by Weight % of MSCI EM Index - by Number of Securities China, Other, 29% 32% Other, 31% China, 42% Brazil, 5% Brazil, 7% India, South 7% Korea, South 9% India, 9% Korea, 11
Slide 41: MSCI China A Index has distinct advantages over the CSI 300 Index
We believe that the MSCI China A Index has distinct advantages over the CSI 300 Index. • The CSI 300 Index, originally built for domestic Chinese investors, consists of the 300 largest China A-Share stocks ranked by market capitalization. • In comparison, the MSCI China A Index currently tracks 443
Slide 42: Conclusion: Potential Full Inclusion of China A-Shares
Potential Full Inclusion of China A-Shares Conclusion: Within the MSCI Emerging Markets Index • On June 1, 2018, MSCI commenced the multi-year process of including China A-Shares into their Global Standard China Indexes. Others 26.3 29.6 • This rebalance has triggered what may be one of the largest
Slide 43: Important legal disclosures
Important legal disclosures General Disclosures This document has been produced by China International Capital Corporation Hong Kong Securities Limited (CICCHKS). This document is based on information available to the public that we consider reliable, but CICCHKS and its associated company(ies)(coll
Slide 44: US Regulatory Disclosures
US Regulatory Disclosures Analyst Certification The analysts who prepared the research contained herein hereby certify pursuant to Regulation AC of the U.S. Securities and Exchange Commission (the "SEC") that: (i) the views expressed in this research report accurately reflect my personal views about
Slide 45: Index Definitions
Index Definitions: MSCI China Index: captures large and mid cap representation across China H shares, B shares, Red chips and P chips. MSCI All China Investable Market Index (IMI): captures large, mid and small cap representation across all China securities that are listed in China and Hong Kong, th