Recently, the number of confirmed and suspected cases of 2019-nCoV has increased rapidly, and asymptomatic carriers have increased the speed of disease spread and the difficulty of control, leading to widespread fear and even panic. The World Health Organization (WHO) on January 31 declared the coronavirus outbreak a "public health emergency of international concern" (PHEIC) and made seven recommendations including "not to unnecessarily restrict travel and trade to China". By far, the number of confirmed cases of 2019-nCoV has exceeded SARS, but the death rate is lower.

Impact on economy: Despite of short-term downward pressure, the stabilizing trend remains

From our perspectives, an epidemic curve usually has two peaks: the peak of new cases and the peak of cumulative infections. Thus the curve is divided into three stages. Now we are in the first stage, the climbing phase of the new cases. It is expected to end in February, depending on whether the flow of people back to the city will bring a second outbreak. The first stage tends to be the period of greatest uncertainty and panic. The economic impact of 2019-nCoV will continue into the second stage, with nominal GDP expected to decelerate by 1%.

During the SARS epidemic, GDP growth in 2003Q2 fell to 9.1% YoY, significantly lower than 10% YoY in 2003. The growth of consumption, industrial production and investment during the most severe epidemic period from March to May 2003 was at a significant low for the year, and the impacts varied.

The epidemic has the most obvious impact on consumption growth. In January 2003, the YoY growth rate of total retail sales of consumer goods was above 10%. In May 2003, the YoY growth rate of social sales fell to 4.3%, which was almost a cut. The YoY growth rate of industrial added value also fell from 19.8% in February 2003 to 13.5% in May 2003. Although the impact was weaker than that of consumption, the decline in growth rate was still relatively significant, while the impact on investment is relatively low. Although the growth rate of fixed asset investment declined slightly in the 2003Q2, it still maintained a rapid growth of more than 30% year-on-year, and real estate investment also showed a consistent trend.

But the epidemic has not significantly changed the trend of rapid economic growth. In 2003, China's economy was still in the stage of rapid growth. In 2003, the annual GDP growth rate reached 10%, the consumption growth rate still reached 9.1%, and the year-on-year growth rate of industrial added value reached 17%, both obviously higher than the level in 2002. From this point of view, the impact of SARS on the economy was more of an interlude, which did not fundamentally change the trend of maintaining high economic growth.

However, the epidemic has not significantly changed the trend of rapid economic growth. As China's economy was in the stage of rapid growth in 2003, the YoY GDP grew by 10%, consumption grew by 9.1%, and industrial added value grew by 17%, which were significantly higher than those of 2002. From this perspective, the impact of SARS on the economy was more of an interlude, which did not fundamentally change the trend of high-speed economic growth.

In the short term, the economic impact is expected to be great. The epidemic broke out during the Spring Festival, which is the traditional peak season for consumption. Tourism, transportation, hotels, film and television media and other industries have been greatly affected. Impacts on household appliances, automobiles, mobile phones, real estate, etc. will be temporary since demand will recover as the epidemic eases. Some medical supplies, food and daily necessities go into short supply, which may disrupt the CPI, but will not affect the trend. Online and virtual economic activity benefit, while consumption and technology sectors remain relatively active. At the same time, the closure of cities, the extension of the Chinese New Year holiday, and the further delay of the resumption of business operations in Beijing, Shanghai, Jiangsu, Zhejiang and Guangdong until February 9th have added to the downward pressure on the economy.

In the long run, the government is likely to respond with more expansionary counter-cyclical policies, and as the weather warms up and the epidemic ends, the battered industries will recover and may even strongly rebound. The economic structural transformation is also expected to boost owing to opening-up and SOE reform.

Impact on stock market: short-term pullback does not change long-term trends and provides investment opportunities

Historically, such emergencies have not changed the existing trends and structure of the stock market. The trend of increasing market risk appetite, household savings moving into stock market, overseas capital inflow, and gradual improvement of the basic system has not changed. Therefore, we believe that short-term adjustment provides an opportunity to invest. Looking ahead, easing monetary policies, the convening of the two sessions and the marginal improvement of epidemic data could all be catalysts for a market rebound. Investors have already priced in the epidemic. After nearly 8% decline in the Shanghai Composite Index on February 3rd, market rebounded strongly, pharmaceutical biology, media and computer industry leading the rise.

Specifically, in the sector of 5G and electronics, we focus on hardware technology companies that are at the core of the industrial chain, such as companies in the core position of 5G networking, 5G terminals and terminal supply chains. Taking mobile phones as an example, the epidemic mainly affected manufacturing or assembly bases in Guangdong, Jiangxi, Jiangsu, Zhejiang, Henan, Hunan, and Hubei. In the wake of the outbreak, the above regions issued notices of postponement of resumption of work, which will have an impact on production and supply in the first quarter of this year. However, we are more concerned about demand. In the beginning year of 5G, both domestic and overseas demand are growing, so the impact of short-term trade restrictions is limited, and the demand will gradually recover as the epidemic eases. In addition, the epidemic will encourage some companies to shift their supply chains overseas. In the game sector, we focus on Internet leading companies that have pricing power. During the Spring Festival, the daily flow of a leading game company has greatly increased, but the epidemic impact is relatively short-term. The core logic is that companies with core pricing power are likely to continuously improve their profits in the long run.

In the software field, we focus on To B software companies with strong customer loyalty. Affected by the epidemic, companies may suffer from capital investment decline caused by delaying resumption of work or trade restriction. However, in the medium and long term, online working may gain more popularity due to the epidemic and thus brings new opportunities to software industry.

In the sector of photovoltaics, demand for domestic and foreign installations will be affected by the delay in construction. Yet we maintain that the global demand will be 140-150GW in 2020 and it’s in an upward trend. Silicon wafers and glass are segments we are excited about.

In the sector of new energy vehicles, sales may go down by 5% due to the epidemics. However, suppressed sales in the first quarter will intensify the reversal in the second half of the year. Hopefully the new energy vehicle sales in China will grow 30% throughout the year. In the long term, vehicle companies' electrification planning and favorable policy are conducive to the electrification trend. The epidemic does not change the global trend of increasing the penetration of new energy vehicles. We focus on the opportunities of upstream resources and midstream battery segment.

As for military sector, whose demand comes from national defense, and purchasing power depends on the defense budget, it’s less affected by the epidemic. Historically, revenues of military industrial enterprises in first quarter accounted for only 13.5% of the year (in the past five years on average), which means that short-term shutdowns have limited impact on the industry. In the long run, key models in the future are expected to be installed faster. The military industry is currently one of the few sectors with a deterministic growth rate of about 20% in the next 2-3 years. After more than 4 years of adjustment in the military industry sector, the cost-effectiveness appears.

As a result, there are relatively certain investment opportunities in the core sectors of aviation equipment, such as main engine plants and engines. In addition, the expansion of new models drives the continuous improvement of the prosperity of the new material industry of military aircraft. High-end carbon composites, high-end titanium alloys and high temperature alloys are the main new materials for military aircraft.

The core components of the aviation equipment field, such as engine factories, have relatively certain investment opportunities. In addition, the heavy volume of new models drives the boom of the military aircraft new materials industry. Leading companies related to high-end carbon composite materials, high-end titanium alloys, and high-temperature alloys (the main military aircraft new materials) worth attention.

In the consumption sector, the epidemic has a large impact on optional consumption such as apparel, catering, tourism, and entertainment, but it has little impact on the demand for new retail and logistics. Companies with strong supply chains can cope with short-term demand fluctuations, but price limits, structural shortages, difficulty in resuming employees, and closure of foreign leasing businesses will still affect short-term performance. Similar to SARS in 2003, online retail and express delivery will benefit from a clear increase in demand. However, the current market share of e-commerce and logistics companies is not low. The problems of insufficient transportation capacity, manpower, and obstacles to land transportation during the Spring Festival are prominent. The increase in revenue cannot bring about significant profit improvement. In terms of household industry, despite of short-term demand decline and delay of resuming work, rigid demand remains, with more orders accumulated after the second quarter. C-end retail is more affected, while B-end impact may be shorter, and a pullback provides investment opportunity.

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