HK Exchanges (388) – BUY at HK$138. We have just revised down our 12-
month fair value to HK$179 (please refer to our separate note on HK
Exchanges), based on an estimated daily turnover of HK$116.9b for 2009
and a fair forward PE of 24x. It is worth noting that the SAR government
bought the shares at an average price of HK$158 last year. Given the large
government surplus and the high strategic value of the stock in the longer
term, we cannot rule out the possibility that the government will add to its
position on further weakness. We recommend investors to buy the stock if it
drops to HK$138 because at that level, the share price reflects an average
daily turnover of HK$70b in 2009, which is a very unlikely scenario. As the
DII scheme will be eventually launched, the average daily turnover is likely to
rise significantly. Thus, the stock offers very good upside for those who
believe in China’s long-term growth story.
Thursday, 24 January 2008
China Mobile
China Mobile (941) – This stock will be an outperformer as neither a US
recession nor China’s credit tightening will have a significant impact on
the company. Our worst-case DCF value is HK$139, which is 27.6%
above yesterday’s closing price. This scenario assumes there will be
severe competition in the mobile industry, which will result in much
slower subscriber growth and a continued downtrend in tariffs. For more
details, please refer to the separate note on China Mobile.
recession nor China’s credit tightening will have a significant impact on
the company. Our worst-case DCF value is HK$139, which is 27.6%
above yesterday’s closing price. This scenario assumes there will be
severe competition in the mobile industry, which will result in much
slower subscriber growth and a continued downtrend in tariffs. For more
details, please refer to the separate note on China Mobile.
Petrochina Fair value HK14.50
PetroChina (857) – PetroChina is not sensitive to oil price fluctuations
given its large downstream operation. So, what is a worst-case scenario?
In our view, the current situation – no price hikes for refined products – is
already the worst-case scenario as the government is not going to force
refiners to cut refined oil prices. At the current PE of 10x and a dividend
yield of 4%, we believe the stock already offers a very attractive value.
In our view, the stock should trade at a significant PE to international
peers because there will be an eventual refined oil price reform that
allows refiners to earn reasonable margins. Our DCF-based fair value,
which assumes a more normal refining margin from 2010 onwards,
stands at HK$18.5. If we assume refining margin will stay at the current
level (ie US$5 loss/bbl), the fair value is HK$14.5. For more details,
please refer to our separate note on PetroChina.
given its large downstream operation. So, what is a worst-case scenario?
In our view, the current situation – no price hikes for refined products – is
already the worst-case scenario as the government is not going to force
refiners to cut refined oil prices. At the current PE of 10x and a dividend
yield of 4%, we believe the stock already offers a very attractive value.
In our view, the stock should trade at a significant PE to international
peers because there will be an eventual refined oil price reform that
allows refiners to earn reasonable margins. Our DCF-based fair value,
which assumes a more normal refining margin from 2010 onwards,
stands at HK$18.5. If we assume refining margin will stay at the current
level (ie US$5 loss/bbl), the fair value is HK$14.5. For more details,
please refer to our separate note on PetroChina.
As The Dust Settle.
Strategy
Top four picks that offer value, stability and liquidity
As a result of fears over credit tightening in China, the US credit market
turmoil and a likely US recession, global stock markets have experienced
panic selling in the past two days. Despite the near-term uncertainties, we
believe that when the dust settles, investors will shift their focus back to
fundamental value. In this note, we highlight our top four large-capped picks
that offer value, stability, liquidity and medium-term upside potential. Our
picks include China Mobile, China Shenhua, Datang and PetroChina.
Meanwhile, HK Exchanges, a high-beta play, is interesting at this juncture as
the share price has already dropped below the SAR government’s average
purchase price.
Our base-case scenario. At this juncture, we have not changed our positive
view on China’s economy. We believe that despite an expected slowdown in
China’s exports to the US, China’s exports will still grow 18% in 2008 (vs 26%
in 2007) thanks to the strength in exports to emerging markets, which
accounted for 30% of total exports in the first nine months of 2007. Also, firm
domestic consumption and investment, which account for a total of 79% of
GDP, will be able to offset the slowdown in external demand. Should exports
drop much more than we expect, the government still has room to increase
spending and loosen monetary policy so as to offset the impact of weak
external demand. Thus, we believe China’s GDP will still grow at above 10%
in 2008 despite all the difficulties. The solid economic growth, the Rmb
appreciation and the tax unification should translate into fairly good corporate
earnings in 2008. This is the reason why we have a base-case target of
21,000 for the benchmark HSCEI.
What if we are wrong on our forecast? With the HSCEI closing at 11,911
yesterday, the market is telling us that the future situation will be much worse
than our base-case forecast. To give us the margin of safety, we have done
a scenario test that estimates the fair values of a group of large caps under
their respective worst-case scenarios. Based on this exercise, we have
selected four stocks with their worst-case fair values above their current
share prices. Additionally, given the current market turbulence, these stocks
have to offer earnings stability, shares liquidity and medium term upside.
Top four picks that offer value, stability and liquidity
As a result of fears over credit tightening in China, the US credit market
turmoil and a likely US recession, global stock markets have experienced
panic selling in the past two days. Despite the near-term uncertainties, we
believe that when the dust settles, investors will shift their focus back to
fundamental value. In this note, we highlight our top four large-capped picks
that offer value, stability, liquidity and medium-term upside potential. Our
picks include China Mobile, China Shenhua, Datang and PetroChina.
Meanwhile, HK Exchanges, a high-beta play, is interesting at this juncture as
the share price has already dropped below the SAR government’s average
purchase price.
Our base-case scenario. At this juncture, we have not changed our positive
view on China’s economy. We believe that despite an expected slowdown in
China’s exports to the US, China’s exports will still grow 18% in 2008 (vs 26%
in 2007) thanks to the strength in exports to emerging markets, which
accounted for 30% of total exports in the first nine months of 2007. Also, firm
domestic consumption and investment, which account for a total of 79% of
GDP, will be able to offset the slowdown in external demand. Should exports
drop much more than we expect, the government still has room to increase
spending and loosen monetary policy so as to offset the impact of weak
external demand. Thus, we believe China’s GDP will still grow at above 10%
in 2008 despite all the difficulties. The solid economic growth, the Rmb
appreciation and the tax unification should translate into fairly good corporate
earnings in 2008. This is the reason why we have a base-case target of
21,000 for the benchmark HSCEI.
What if we are wrong on our forecast? With the HSCEI closing at 11,911
yesterday, the market is telling us that the future situation will be much worse
than our base-case forecast. To give us the margin of safety, we have done
a scenario test that estimates the fair values of a group of large caps under
their respective worst-case scenarios. Based on this exercise, we have
selected four stocks with their worst-case fair values above their current
share prices. Additionally, given the current market turbulence, these stocks
have to offer earnings stability, shares liquidity and medium term upside.
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