Valuation fluctuates or is regular, forming an invisible corridor. The aftermath of credit risk disturbances in the early July period was not exhausted. Peripheral interest rate cuts compounded the weakening of performance expectations in semi-annual reports. The average market parity fell to a minimum of 73.26, which is only in the 1.90% quantile compared to the level since 2017. In terms of valuation, the 100 yuan premium rate in the bond conversion market fluctuated downward, and reached 17.01% on the 25th, reaching a new low during the year, dragged down by underlying stock disturbances. Reviewing the 100 yuan premium rate level in the market since 2017. Historically, the distribution of the 100 yuan premium rate has been in the form of “more in the middle and fewer at the ends”. It has the characteristics of a certain normal distribution, forming an “invisible corridor” of valuation.

There may be an opportunity after the average returns and falls more than once. Construct a “valuation repair index”, using μ±2σ as the upper and lower limit of the invisible corridor, considering the percentage position of the 100 yuan premium rate within the range. For a more intuitive explanation, the repair index when the 100 yuan premium rate is at μ-2σ is set to 100%, that is, the lower premium rate corresponds to a higher valuation repair index: repair index = (μ+2 sigma - 100 yuan premium rate)/(4σ). When the “valuation repair index” is at a high point, especially after it exceeds 100%, it can be assumed that the upward correction momentum of the market is strong, and future positive returns are more likely; conversely, the “valuation repair index” approaches zero. It can be assumed that the valuation has strong resistance to breaking through upward, and the market tends to reduce the valuation and turn negative in the future.

How effective is backtesting after triggering the threshold several times in history? The 2019Q1 stock market bottomed out and rebounded ahead of time. The valuation repair index showed a high degree of fluctuation with the yield of the China Securities Exchange Convertible Index over the next 70 days; the 2022 “inverted N” type resonates with the repair index. Judging from the overall performance from April to August, the “valuation repair index” still reflects the trend of future strategies well — the range index continues to recover.

The bond conversion market in July was suppressed by multiple factors, compounded by weak expectations in the future market. The recovery index rose to a historic high of 139.55%, which may reflect the recent shift in the market from neutral expectations in the early period to “excessive pessimism,” and that future debt-conversion valuations may have momentum for recovery. However, it should be noted that recently, the bond conversion market has undergone major changes in terms of both supply and demand and option pricing. The debt conversion valuation has entered a period of wide fluctuation from the mid-term dimension, and the repair momentum generated by the rapid decline in short-term valuations still needs to be comprehensively considered from the fundamentals of debt conversion/equity and future market macroeconomic expectations.

Valuation outlook: The recovery momentum is savings. The key variables are expected to improve the weak performance of the July bond conversion market due to stock turbulence, and valuation fluctuation and compression. Looking forward to August bond conversion valuations expected to continue to fluctuate at a low level, and the key variables are still awaiting breakthroughs in key variables:

(1) There is still resistance for equity to break through upward. Focus on half-year performance factors. Internally, it may be in the “weak expectations” and “weak reality” stage. The more important variable in August is the semi-annual results disclosure of the next securities α performance. The valuation repair of original shares is expected to drive equity valuation restoration in the bond-conversion market, mainly focusing on the option value moving closer to the real value, or driving a structural recovery in debt conversion.

(2) The valuation of pure debt entered a negative range, and the previous period pulled back or came to an end. As early debt conversion continues to recover, debt-conversion valuations are close to historically low levels. From the perspective of valuation and absolute prices, the debt-conversion market has reached a phased bottom. Low-price debt conversion has already entered an overfalling range during the extreme compression of debt valuations. Subsequent repairs have come from a return in option values. As peripheral disturbances gradually ease, the low rebound momentum continues to save.

Market review: The original stock market was under pressure in July, and the bond conversion market fell sharply. Structurally, various sectors are under pressure to varying degrees, and banks in the debt conversion industry are relatively resistant to falling. Valuation fluctuations in the bond conversion market in July converged with fluctuations in the underlying stock market, mainly dragged down by weak equity market performance. Furthermore, credit risk disturbances in the bond conversion itself also continued until July, and the pure bond premium rate was also compressed.

Supply and demand situation: The supply of new vouchers increased month-on-month, and demand still needs to be repaired. On the supply side, bond issuance in July heated up compared to the Q2 off-season. The total scale was 3.777 billion yuan, which continued to grow compared to June. On the demand side, the majority of holders improved, and the overall scale is still declining. By market, the total amount of convertible bonds held by the Shanghai Stock Exchange decreased, while the Shenzhen Stock Exchange increased from June to June.

We adjusted the “Huachuang Convertible Bonds” focus portfolio for August as follows: Liqun, Chun 23, Youcai, Huisheng, Zhang Gu, Blue Sky, Funeng, Southern Bank, Chengyin, and Heavy Bank.

Risk warning:

Debt conversion valuations have been compressed, domestic economic recovery falls short of expectations, policy implementation falls short of expectations, peripheral market disturbances, etc.