Newsletter commentary Feb 2022

The market was generally not volatile in February. SSEDI rose by 3% YTD with Coal sector substantially outperformed, up more than 10%. The PV industry rebounded in this period.

There are several factors that affect the market. First, inflation is not yet showing signs of easing, with expensive raw materials and high-cost sea freight. Oil price is also rising sharply. Second, China economy has marginally improved with decent latest PMI, favorite structure and more new orders. Third, the domestic policy environment is also beneficial to maintaining economic growth. The market is still pricing in pressure on valuations. The Ukraine event has added uncertainty, with both short-term inflation and medium to long-term economy unclear.

In terms of industry dynamics, thanks to the increasing appeal for independent and controllable energy, the demand for New Energy may accelerate, leading to fluctuation in market sentiment and performance between seasons. But in long-term, it is still accelerating the return to manufacturing. The New Energy Vehicles have already encountered challenges. The market value of the industry will face continuous pressure because the raw material price hike has not been transmitted smoothly to consumers and homogenized products will soon emerge. The internal profitability of the industry chain has improved from more than one year ago, thanks to unexpected growth of demand and the inability to keep up with the supply in the short term. But this will not last. The plight of property companies has not been alleviated fundamentally. Sales and investment will be hard to see meaningful improvement. The domestic “dynamic clearing” policy of epidemic prevention and control is effective under the current conditions, and the change of the policy to further support economic growth will be cautious.

The liquidity of the market didn’t show significant change. Fund sales were far worse than the same time last year. Under the relatively stable domestic economic environment, there are only bottom-up opportunities on individual stocks.