Valuation of current cyclical stocks: the difference lies in the long-term view. The valuation of Pb / PE respectively implies the market's expectations for future profitability (ROE) / growth (g). However, even if the operating data of listed companies / Industrial Enterprises above Designated Size released from January to February show that the performance toughness of cyclical stocks continues, the roe and ROIC of cyclical stocks will continue to break through the historical long-term trend, and the overall valuation of cyclical stocks is still at a historically low level. This actually reflects that the market is willing to price the improvement of short-term net asset profitability (ROE rise) (Pb rise), but is unwilling to make a real value estimation for the sustainability of net profit. Unstoppable inflation is an issue fully discussed in many of our previous reports. This report will focus on how to make a reasonable valuation of upstream resource products and establish a reasonable valuation space under this trend.
Comparison overseas: valuation gap caused by inflation / inflation expectation difference. Since the outbreak, the overseas upstream cycle sector has performed significantly better than China. On the one hand, the overseas inflation level is higher than that of China, which makes the profitability of upstream cyclical stocks higher than that of China: the Pb level of overseas upstream cyclical leading stocks has been higher than that of China, and is close to the level in 2007. Behind it is that their roe has reached a new high since 2006, which is higher than that of China. Nevertheless, the roe level of China's upstream cycle leading stocks is actually close to the level in 2007, but the Pb level has fallen below the level in 2017. On the other hand, the high expectation of overseas inflation makes the PE level of overseas cyclical stocks even higher than that in 2007 / 2011, which is significantly higher than that in China. It is noteworthy that even if the "sell at low PE" is established, the valuation of overseas coal, petroleum and petrochemical, copper, aluminum and iron ore has exceeded the "low PE" in the upward cycle of bulk commodities in 2017. The time behind this is basically related to the continuous upward trend of overseas short-term and long-term inflation expectations. The broad and irresistible upward trend of inflation has become the consensus of overseas investors, which is finally reflected in the rise of the valuation level of resource stocks. In contrast, China's inflation perception is not strong under the sluggish demand in the early stage. Nevertheless, the coal sector with more observable and concrete contradiction between supply and demand has begun to have a trend of rising valuation, which indicates the opportunity of a wider dimension of the upstream resource sector under the diffusion of inflation cognition.
Comparison between middle and lower reaches: the valuation has not reflected "inflation kills demand". Supply driven inflation will redistribute the profits of the industrial chain. If we believe that the stock market finally reflects the pricing of profit expectations, the degree of differentiation of valuation in the industrial chain will provide us with more thinking about valuation. In the stagflation period of the United States in the 1970s, the profits of the industrial chain continued to concentrate upstream: the profits of the upstream industry accounted for 38.2% at the highest level, and the market value accounted for 36.5% at the highest level. On the whole, the PE level in the upstream of the United States converged with that in the middle and lower reaches in 1970s, and even in 1977, the PE level in the upstream was higher than that in the middle and lower reaches. From the perspective of China, the current valuation difference between the upstream and the middle and lower reaches is far from the level of "stagflation like": the Pb valuation difference between them was the highest of 4.29 / - 0.3 / - 0.71 in 2007 / 2011 / 2018, and is only -1.71 at present; After the publication of the 2007 / 2011 / 2017 annual report, the PE valuation difference was -4.49 / - 9.80 / - 3.17 respectively, which is only -17.79 at present. If the end of inflation is that high prices "kill" downstream demand and are eventually eaten back, then the relative valuation and pricing of middle and downstream enterprises with concentrated growth stocks implies that they are still optimistic about future profit growth, and the pricing of current profit is far less than the supply side reform in 2017 and the stagflation like period in 2011. If investors price downstream correctly, it is still far away to "kill demand", and the profit sustainability of upstream enterprises will be further confirmed.
Real cycle: from Pb back to PE. The cycle still exists. In the cycle bull market in 2007, due to the great imagination of demand space and the gap between supply and demand, the commodity is under the logic of marginal demand pricing. PE is a reasonable valuation method for cycle stocks. After 2011, the overall overcapacity of upstream resources, and the marginal supply cost determines that the product price is more reasonable, so it is reasonable to use PB pricing. At present, the change of capital expenditure brought by "carbon neutralization" has reversed the capacity pattern of cyclical industries again, the price is determined by marginal demand again, and PE pricing is returning.
The valuation space of upstream cyclical stocks is [18%, 43%]. From the perspective of PE valuation, after considering the current sharp decline in macroeconomic growth and the sharp decline in the contribution of resource products caused by the change of economic structure, the PE level implied in the current volume and price expectation should correspond to 15.5 times of PE, and there is about 43% valuation space compared with the current actual PE level. If investors believe that the current stagflation is the same as that in the past decade, and there is no major pricing error in the middle and lower reaches of the sector, the corresponding uplift space of Pb should also be 31%. If investors only set prices and improve their profitability in the current period, there is also about 18% valuation space. Overall, the overall valuation space range of upstream cyclical stocks is [18%, 43%]. The real cycle has just begun.
Risk warning: measurement error; History does not represent the future; Inflation fell short of expectations.
