Citigroup - China Equity Strategy: May FAI Growth Reaching a 5-Year High

What's new? - May FAI growth reached a very high level at 32.9%, the highest level seen in the past 5 years if we strip out the abnormal SARS impact in 2003/04. This together with the MoM improvement in electricity consumption (May electricity consumption down 2.58% vs. April's 3.63% decline), further supports our view that China is experiencing an unusually strong summer from a physical economic activities perspective.

What's behind this? - We believe the strong pick-up in economic momentum is mainly attributable to two factors: 1) the kick-off of government led projects after resolving funding issues; and 2) the pick-up in property construction.

Property sector fundamentally strong with construction activities accelerating - After seeing months of stronger-than-expected sales (for the first 5 months of 2009, residential commodity housing sales grew 49% YoY while volume grew 26.7%), we are seeing construction activities picking up. For the five months of Jan-May'09, total property investment reached RMB1.02 trillion, representing a YoY growth of 6.6%. This is a 1.9 percentage point pick-up compared to the growth momentum of 4.7% for the first four months of the year. Out of which, commodity property investment reached over RMB710bn, representing a YoY growth of 4.4%, also 1 percentage point higher than the first 4 months' momentum.

Strong loan growth to stay to ensure sustainability of current momentum - We believe that May lending could still exceed the April level (which was close to RMB600bn).
For the entire year of 2009, total new lending could still reach RMB8-9 trillion.

Stock Market Outlook - Ample liquidity continues to push asset prices up; Potential upward earnings revision most likely coming from the financial sector while industrial profitability lags; ROE deterioration should have bottomed for the near term; We still see further upside for the market.

Strategist's top picks in current environment - Baidu, CCB, CC Land, Citic Bank, Dongfeng Motor, Hidili, Hopson, ICBC, Tencent, Tianjin Port Development and Yanzhou Coal (see Pg. 2 for valuation summary and FAI growth chart).