alibaba open sesame

2010-07-10T08:26:00.000-07:00

HKEX

2008-01-24T19:17:00.000-08:00

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.

China Mobile

2008-01-24T19:16:00.000-08:00

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.

Petrochina Fair value HK14.50

2008-01-24T19:15:00.000-08:00

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.

As The Dust Settle.

2008-01-24T18:15:00.000-08:00

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.

Bewarned

2007-10-16T00:07:00.001-07:00

The past track recordof post NCCP performances since 1977, HSI should decline in the first three months.

On average HSI lost 6.7% in the first month after NCCP, 9.8% in the second month and 8.9% in the third month.

Nevertheless the abundant liquidity coming into the market this time could help narrow downside risk. We expect the decline to be short lived and the correction to be shallow.

We suggest investors to seize this opportunity to buy H shares like CHALCO, PETROCHINA, SHENHUA & CNOOC

China Mobile- OSK target HK$157 by 2008E

2007-09-06T20:52:00.000-07:00

Impressive 1H07 result. China Mobile earlier announced a better-than-expected 25.7% yoy
increase in 1H07 net profit to RMB37,965 million, driven by strong top-line growth and qoq
EBITDA margin improvement. Subscribers gained 21.4% yoy to 332 million, raising China
Mobile’s market share to 68%, up 1% bps yoy. China Mobile managed to broaden its revenue
source by boosting the value added service revenue by 35.5%, thereby raising the share to
total revenue from 22.6% to 25.2%. Q207 EBITDA margin recovered to 55.1%, compared
with 52.4% and 46.4% in 1Q07 and 4Q06 respectively, attributable to economies.

Strong top-line growth to accelerate. China Mobile gained 5.596 million new subscribers in
July, up slightly from June’s figures and was 7.8% above the average of 1H07. We think this
momentum can sustain. Management also guided 2Q07EBITDA margin improvement can
sustain towards 2H07.of scale.

3G restructuring still not imminent. The timing of 3G related telecom restructuring has
been a concern to investor. However, we argue a swift industry reshuffle is not likely. Firstly,
3G licenses will not be issued until the national TD-SCDMA standard has been proven viable.
China Mobile’s parent Company is expected to complete the TD-SCDMA trial in eight cities
by Oct 07. Secondly, China Mobile has been reducing tariff through mechanisms like CPP.
There is less motivation for government to foster competition through industry restructuring.

No timetable for A-share listing. Management did not provide timetable for A-share listing,
but revealed at least part of the A-share IPO will come through sales of old shares. We argue
this is a reassuring message as secondary share sales should minimize share dilution effect.

2008 target price at HK$157. China Mobile has experienced re-rating since its trough in
2003 amid improving market share and profitability. Nevertheless, on technical ground, we
believe extension of QDII, direct liquidity train and A-share listing can push its forward FY08E
PER to 30X, driving our 2008E target price to HK157.

STEEL.

2007-09-03T00:05:00.000-07:00

Steel production continued to rise yoy in 1H07, rising23.93% to 270m tonnes.
Trade surplus widened. In 1H07, steel import dropped 7.62% while export
rocketed to 34m tonnes, up 97.7% yoy. Better net profit for whole sector yoy.
Due to firmer steel prices, sales increased 34.68% yoy and net profit
rose 108% yoy to Rmb80b in 1H07 for the whole sector. Most steel makers
posted 50%+ yoy net profit growth on their 1H07 results. .
Outlook. We see steel prices stablising for the rest of 2007 (Bao Steel cut 4Q07
steel prices by 5-8%) as capacity is curbed while export sales remain strong.
However, the slowing domestic demand, trade dispute and higher raw material
prices are risks faced by the sector.

Bernanke Dilemma /@/.,,*&%$#@????????

2007-09-03T00:00:00.000-07:00

Although it seems likely that Bernanke is making an effort to avoid a cut in the fed funds rate at or before the September meeting, the market may force his hand. First, continuing financial turmoil may make holding the line untenable. Second, a large number of stock market economists and strategists are screaming for a rate cut and the market is long way toward pricing it in. If so, the FOMC may have to cut if only to avoid a severe market collapse following the meeting. The problem is that if a rate cut is already priced in prior to the meeting, the result may still be greeted with disappointment.

In our view, no matter what the Fed does, a major growth slowdown or recession is already baked in the cake as a result of the severe housing decline. Even with today’s 2nd quarter GDP revision, annualized GDP growth has averaged only 2.0% over the last five quarters, and this was before the credit crisis snowballed. In addition 2nd quarter consumer spending was up only 1.3% annualized while employment growth has been tepid. We are therefore faced with a softening economy that can only deteriorate further in the second half. We believe that the stock market rally since the bottom is purely technical and that much more decline is ahead!

ShowHand in HONGKONG!

2007-08-27T20:48:00.000-07:00

Steady flow of retail money from China. Starting from tomorrow (29 Aug
07), mainland retail investors can start to buy Hong Kong-listed stocks. With
personal savings of US$2.2t in China, the size of retail money that may flow
into the Hong Kong is huge. Assuming 2-5% of the money can be channelled
into Hong Kong over the next 12 to 24 months, we are talking about an
amount of as high as US$100b. The impact on the Hong Kong stock market
will be profound and can be summarised as follows:
• Turnover of the market will rise significantly since mainland retail
investors are well-known for their trading-oriented strategy. This is
positive to Hong Kong Exchanges (388; BUY) and brokers that can deal
with those investors.
• Three groups of stocks (which are the likely targets of retail investors)
should perform well over the next 12 months.
o The first group is the China H shares that trade at a significant
discount to their China A-share counterparts. Our recommendations
include Datang Int’l (991), Chalco (260), Jiangxi Copper (358),
Chongqing Iron (1053), Sinopec (386), Jiada Kunji (300), ZTE (763)
and China Life (2628).
o The second group is those companies that will soon issue A shares.
Our recommendations include China Mobile (941), Zijin Mining
(2899), PetroChina (857), China Shenhua (1088), CNOOC (883),
Lenovo (992) and PICC (2328).
o The third group, which is probably less well-known than the first two
groups, is the penny stocks that have low share prices (such as
below HK$3). Chinese investors commonly believe that penny
stocks have high potential for backdoor listing, M&As, asset injections,
earnings surprises and spectacular returns given the high volatility.
Spectacular performance of A-share penny stocks. As the following
tables depict, penny stocks have delivered spectacular returns in the last 12
months even after the severe correction starting from June. In particular, in
the nine months from 22 Aug 06, stocks with share price below Rmb3
delivered a return of 309.7% compared with a return of 170.9% for stocks
with share price above Rmb5. Needless to say, a high return also means high
risk. In the recent correction starting Jun 07, penny stocks dropped
significantly from their recent highs, though they still posted better returns
than the stocks with high prices on a 12-month basis.

China Mobile

2007-08-16T23:12:00.000-07:00

1H07 results beat market consensus; net profit up 26% yoy
China Mobile (CMHK) delivered strong interim results. Revenue was up
21.6% yoy to Rmb332.4b. EBITDA increased 14.6% yoy to Rmb89.8b. Net
income increased 25.7% yoy to Rmb37.9b, beating market consensus of 19-
24%. We foresee the company will deliver promising year-end results.
Maintain BUY.
Strong income growth. Total revenue increased 21.6% yoy to Rmb332.4b,
in line with the new subscription growth rate in the past 12 months. In
addition to strong subscription growth, the company believes the strong
revenue growth is supported by an increase in the usage of both voice and
value-added services (VAS). According to CMHK, the 19% voice tariff
reduction actually induced a 20% increase in minutes of usage (MOU). For
VAS, total revenue increased 35.5% yoy due to increases in SMS usage
(+41.0% yoy), together with a significant increase in WAP traffic (+167.1%
yoy) and MMS usage (+77.5% yoy). With all these factors working together,
the company managed to maintain its ARPU at Rmb88 even though the
proportion of free-incoming call package subscribers increased to 60% from
50% in early this year.
Rural subscriber growth will remain strong. Management indicated that
around 50% of new mobile subscribers came from rural region. As the
current rural penetration rate is just around 18%, which is still low compared
with 40% for the country, increasing affordability of mobile services should
ensure the rural market would be an important new subscription contributor in
the future.
EBITDA margin recovered from 51.3% in 2H06 to 53.9% in 1H07. We
foresee room for improvement would be limited as the company might need
to spend even more on sales and marketing in order to maintain its strong net
subscription growth in 2H07.
Higher capex forecast. Management expects full-year capex to have a less
than 10% increase on top of the Rmb99.8b budget, as the company needs to
expand network capacity in order to cater to the increase in usage due to
strong subscription growth and continual increases in MOU. As a result, we
also slightly adjusted our capex forecast to Rmb108b in 2007 and Rmb100b
in 2008. This has a minor impact on our earnings forecasts.
No updates on 3G and A-share listing. According to Chairman Wang, the
company has not received any updates from the government regarding 3G
licensing matters. The company expects the TD-SCDMA network expansion
construction project to be completed by Oct 07, and will embark on trials after
receiving government notification. Regarding the A-share listing, Chairman
Wang reiterates his previous comment, that is, the company does not have a
schedule and it all depends on the government’s rules on red-chips’ return to
the A-share market.
Maintain BUY. Including a special dividend of 8.5 cents to compensate for
the effect on net income due to a change in depreciation policy, the company
has declared an interim dividend of HK$0.922/share. We believe the
company will maintain the 43% general dividend payout ratio in 2H07.
Together with another year-end special dividend, we expect the final dividend
to be HK$1.018/share. We believe the recent share price weakness due to
unstable market conditions and the re-weighting of HSI create a good
opportunity for patient investors to accumulate the stock at a reasonable price.
Reiterate our BUY recommendation with a target price of HK$107.60

Global Equities , hanging on a clift

2007-08-05T21:34:00.000-07:00

• Barely holding on. The MSCI World Equity Index (MWI) is holding just above its
major support trend line after pulling back during the global market rout in the past
fortnight. Weekly MACD and RSI indicators have already caved in, which is
worrying as this is usually an early warning sign of further weakness ahead for
global equity markets in the medium term.
• Critical week ahead. Before last Friday’s sell-off in US equity markets, we were
looking forward to a rebound of global equity markets. But we are not certain now.
If the US market continues to head down over the next few days, it could mean
more downside and volatility for global markets.
• 4-year trough cycle not completed yet. In addition, global stock markets have
not completed their 4-year trough cycle. This could happen in 3Q07 if the sharp
pullback over the past fortnight is any indication of the potential correction ahead
for global markets. The last trough was in Oct 02 when 19% was erased from the
MWI in two months.
• Watch S&P500 at 1,450 and 1,488. After hitting a peak of 1,555 in mid-Jul, the
S&P500 turned south rapidly and fell to 1,433 last Friday, a 7.8% decline. There is now very strong resistance at the 1,450 and 1,488 levels.
• Asia cannot shake off global jitters. Asia ex-Japan equity markets finally cracked
last week after holding out valiantly the week before. The MSCI Asia ex-Japan
Index (MAxJ) is currently trying to find some support at its 50-day SMA of 532 pts.
We believe this level may hold for now but is not sustainable in the medium term.
• Major uptrend is over? Based on our preferred wave count, the MAxJ could have
completed its major “Wave 3” bull run (which started in 1Q03) at 579pts in late Jul.
• Expect a protracted correction. The current correction is not expected to be like
the Feb sell-off which was completed in a fortnight. We believe that this correction
will last no less than 2-3 months if the downtrend is “fast and furious” while a
gradual decline could take 3-6 months, if not longer. A 23.6% of Wave 3’s rally
pegs the MAxJ’s retracement level at 480 while a 38.2% retracement points to 420.
These levels represent 17-27% declines from the Jul 07 top.

PBOC raise rates again!

2007-07-31T20:11:00.000-07:00

PBOC raises reserve ratio by 50bp
The People’s Bank of China (PBOC) raised the reserve requirement ratio by
50bp to 12% for commercial banks effective 15 August in a bid to curb loans
growth. This move is only ten days after the recent interest rate hike and
adjustment of interest income tax, showing that the government is concerned
about the potential economic overheating.
Implications. The impact of the reserve ratio hike on the economy could be
insignificant given the continued capital inflow as a result of fast
accumulating trade surplus. Also, there is not much room to raise reserve
ratio further this year as the ratio of excess reserve has been lowered to
2.87% in 1Q07 from 4% in 4Q06. In the coming months, PBOC may use
other instruments such as issuing special treasuries together with reserve
ratio hike to draw out excess liquidity.
The impact on the stock market will be limited given the abundant liquidity in
A-share market after the market has regained confidence recently.

Stunningly interim earnings!!

2007-07-31T19:57:00.000-07:00

Stunningly strong interim earnings. We could be seeing the fastest
earnings growth periods for China listed stocks since they came to Hong
Kong in 1993, driven largely by financials and commodity plays. (A rapid
expansion of financials’ earnings will hugely impact the H-share index as they
account for almost 43% of the weighting.)
So far, seven heavyweights in the H-share index have served notice that they
expect brilliant results next month. True, these notices of strong earnings are
based on China accounting standards which may differ from the International
Financial Reporting Standards (IFRS) used in Hong Kong. Except for Air
China and China Life Insurance, however, the difference between the A-and
H-share earnings of a company is often in the 5-10% range.
In general, A-share earnings are lower than the H-shares’ of the company
because of stricter China accounting standards. For example, in China,
deferred acquisition costs are expensed rather than amortised as in Hong
Kong’s standards, and trading securities are marked at cost until gains/losses
are realised, whereas in Hong Kong, they may be marked to market and
recorded in the P&L statement as unrealised gains/losses.

Four of the seven companies said their interim earnings based on China
accounting standards would shoot up by more than 100%. Among them, Air
China said it would surge by at least 2000%. Lest H-share investors get
carried away, do note that based on China accounting standards, it made
only Rmb45m in net profit in FY06, whereas it made Rmb458m based on
IFRS. Still, based on IFRS, Air China’s H-share interim net profit should at
least double – which is still no mean feat.

Key risks: a) worsening US sub-prime mortgage woes,
b) worsening Sino-US trade tension,
c) Bank of Japan’s decision to raise interest rates,
d) stronger-than-expected macro-economic tightening by China,
and
e) seasonal H-share correction from mid-August.

Investors should not allow the global equity rout triggered by the US’ subprime
woes to overshadow an interesting trend in H-share companies: a
period of rapid corporate earnings growth. Based on a spate of positive profit
warnings according to China accounting standards from listed Chinese state
companies matched by likely robust liquidity flows from the qualified
domestic institutional investors (QDII), we forecast a H-share rally extending
well into the best part of 2008, although it will be marked by bouts of
corrections amid greater volatility. We raise our 12-month H-share index
target to 16,330 points, offering a 25% upside. Buy insurance, energy, and
commodity stocks on weakness.

Stock picks
Our top picks and the reasons for our choices are:
• Zijin Mining (2899.HK). Strong earnings growth, A-share listing in
Shanghai, probably in September.
• Chalco (2600.HK). Rapid aluminum capacity growth, supported by
surprisingly strong prices, and strong management.
• PetroChina (857.HK). Great at discovering reserves, strong oil price, and
solid management. Overhang from fears of further sales by Warren
Buffet’s fund offers good buying opportunity
• China Life (2628.HK). Strong government support, robust rural business
expansion, priority allocation of Chinese IPOs to improve investment yield.
• Angang Steel (347.HK). Volume growth matched by strong technological
skills and cost control.
• CITIC Resources (1205.HK). Oil and commodity output upside surprises.

Why the China rally can sustained.

2007-06-03T23:27:00.000-07:00

- Trading account opened approaching 100 million!
- A shares on average trading @ P.E. 39x but with strong earning growth ranging from 50% to 140%
- Valuation are stretched but not in a bubble situation.
- Most importantly China has gone through many structural changes that should boast productivity & earnings, WTO, corporate Tax, banking reform & ESOS.
- Beijing is less worried about high valuations but is concerned about public little awareness of the risk, putting their life saving in the market. Only attempt to engineer a short & measured correction.
- Expecting more volatility.
- China market rally is very similar to Japan in the early 1980's till 1990 from 4,000 to 44,000!
- Crazy bull in China to be tamed by serious capital outflows into Hong Kong equity market and rising supply of new shares at home.
Impact of any sharp fall in Ashares on SAR will be shortlived as H-share valuations remain subdued. Use pullback to build positions.
- We conservatively estimate that about US$25b could flow through to HK equities within 12 months through QDII scheme. Key targets of fund inflows will be H-shares and red chips.
-H-share year-end target revised to 12,300 from 11,800 points, representing 18x 2007
earnings. Go for stocks benefiting from:
1. Greater fund flows under China’s wider QDII scheme
2. Potential listings of Hshares and red chips in Ashare market
3. Potential evolution into group listings and asset injections
4. Industry consolidation
5. Laggards

China Strategy June

2007-06-03T21:25:00.000-07:00

Investment Themes
We have identified five investment themes that can capitalise on the
upcoming rally in Hong Kong-listed China stocks in 2H07. They are:
• stocks will benefit from the fund flow from China. These will include
those H shares and B shares that trade at big discount to their A-shares.
Our picks include Chongqing Iron (48% discount to A-share), Jiangxi
Copper (46%), Datang (44%), Chalco (41%), Sinopec (35%) and China
Life Insurance (31%).
• stocks with asset injection/Group listing stories. They include China
Shenhua, CNOOC, China Shipping, First Tractor, Angang Steel and
Chalco.
• stocks planning A-share listing. They include China Mobile,
PetroChina, China Telecom, CNOOC and China Shenhua.
• stocks that benefit from resource-pricing reform. They include Chalco,
China Shenhua, Jiangxi Copper and China Coal Energy.
• laggards. They include PetroChina, China Life, Zijin Mining and Lingbao
Gold.

Delong again!

2007-05-29T00:11:00.000-07:00

• Ambitious plans afoot. We visited Delong last week following its 1Q07 results,
recent share consolidation and convertible bond issue. Management provided
updates on its capacity expansion as well as long-term goal of establishing itself
as a top-20 steel manufacturer in China by 2010. Armed with a war chest of
US$200m from its recent convertible bond issue, Delong is seeking acquisition
targets.
• New capacity on schedule. Delong’s available capacity was only 75% utilised in
1Q07 due to a month-long maintenance shutdown of its first production line. From
2Q07, Delong will have 2.4m mt of total capacity and an additional 0.6m mt by
4Q07. It aims to have 10m mt by 2010 via acquisitions and capacity upgrade.
• Industry consolidation favours Delong, as it is China’s second lowest-cost steel
producer with a production yield of 98.5%. Delong also leads by technical
efficiency and a superior product mix of higher-grade, wider-width and thinnergauge
products. Any consolidation would provide opportunities for Delong to
acquire inefficient plants at lower prices.
• Upgrade to Outperform from Neutral; target price increased to S$4.70. We
are upgrading our earnings forecasts by 15.6%, 46.4% and 133.8% for FY07-09 to
reflect Delong’s accelerated expansion. We upgrade the stock to Outperform with
a new target price of S$4.70 following our earnings upgrade (previously S$3.40,
adjusted for share consolidation). Our target represents a PEG of 0.25x over
FY07-10 and 11.3x CY08 P/E.

PetroChina

2007-05-28T19:42:00.000-07:00

DJ MARKET TALK: ML Keeps Buy On PetroChina; Outlook Improving2007-5-25 12:28:00 p.m. HKT, DJN

1217 [Dow Jones] STOCK CALL: Merrill Lynch says PetroChina''s (0857.HK) improving operational outlook justifies Buy rating, keeps HK$12.80 target. Notes 4 catalysts: fast reserve growth from onshore China, strong growth in natural gas sales, pricing reforms of domestic oil and gas, overseas output likely to double in 5 years. Based on target price, total potential return over 29% (including 3.8% dividend yield); "it is looking much more attractive." Stock off 2.3% at HK$9.98.-0-

China MILK

2007-05-28T19:35:00.000-07:00

China Milk's full-year profit up 41.1%
Strong sales growth in China Milk Products Group's three product segments pushed its net profit up 41.1 per cent for the year ended March 31, 2007. The group's bottom line increased from 268.2 million yuan (S$53.6 million) to 378.5 million yuan, translating to earnings per share of 0.51 yuan, up from 0.41. China Milk shares closed four cents up at $1.28 each yesterday. Full-year revenue went up by 47.1 per cent to 442.9 million yuan, with the sale of pedigree bull semen continuing to be the group's most significant core business. That rose by 48.1 per cent to 345.8 million yuan or 78.1 per cent of the group's total revenue. Sales of dairy cow embryos and raw milk, which contributed 8.2 per cent and 13.7 per cent of total revenue respectively, grew by 87.1 per cent to 36.3 million yuan and 26.3 per cent to 60.8 million yuan. The group attributed the good results to its expanded herd size and improved productivity.
As of March 31 this year, China Milk's herd size was 14,789 comprising Holsteins of Canadian, Australian and Chinese origin, compared with 8,275 a year ago. China Milk plans to expand its herd size by 6,000 by the end of this year by importing 3,000 mature Holsteins from Australia, known to have the highest milk yield after the Canadian breed, and the rest from Uruguay. The Holsteins from Australia are expected to arrive by October and from Uruguay by November. They will be able to produce milk immediately. China Milk said yesterday that it is close to signing a five-year agreement with one of China's largest dairy companies to process raw milk at its brand new dairy processing-plant in Daqing, Heilongjiang province, for making dairy products. These include yogurt drinks, UHT milk and milk beverages, and will be marketed under the dairy company's brand. Under the proposed agreement, the
group is expected to supply 350 tonnes of processed milk products daily - or 100,000 tonnes annually - starting from November. China Milk also plans to begin the production of gender-controlled semen and embryos by July. China Milk declared a final dividend of 0.05 yuan per share.

China Energy

2007-05-28T19:20:00.000-07:00

.Zhangjiagang Phase 2 expansion brought forward by six months. CEGY
announced that Phase 2 expansion at its Zhangjiagang facility (involving 700,000
tonnes of additional capacity) should be completed at end-2008, six months ahead
of the original schedule of 1H09. We estimate this would increase its FY09
turnover by 42%.
• Capacity to be lifted four-fold by 2010. CEGY also announced plans to build
two new DME plants in Ningbo and Tianjin, with capacity for 1m tonnes each. We
expect construction to commence in 2009. When ready at end-2010, annual
capacity for DME should increase by four-fold to 4.6m tonnes. Fuelled by the
aggressive expansion, we project a 5-year revenue CAGR of 91% for FY06-11.
• Raised EPS forecasts by 1-25% for FY07-09. We have factored in higher sales
from the full-year impact of accelerated expansion in FY08 and FY09. We have
also assumed different DME prices for the respective regions, as we think the
price differential is too big to justify a single average DME price.
• Target price lifted to S$1.94 from S$1.75. We have increased our DCF valuation
from S$2.48 to S$2.78, after incorporating our earnings upgrade but also a higher
WACC of 14%. We have used a higher beta of 1.2 (up from 1.0) to reflect risks
from the lack of an execution track record and China Energy’s short operating
history. Our new target price is S$1.94, still based on a 30% discount to DCF
valuation. This translates into 16x CY08 P/E, which we believe is undemanding
given its attractive 3-year EPS CAGR of 82% and projected ROEs of 26-50%Zhangjiagang Phase 2 expansion brought forward by six months. CEGY
announced that Phase 2 expansion at its Zhangjiagang facility (involving 700,000
tonnes of additional capacity) should be completed at end-2008, six months ahead
of the original schedule of 1H09. We estimate this would increase its FY09
turnover by 42%.
• Capacity to be lifted four-fold by 2010. CEGY also announced plans to build
two new DME plants in Ningbo and Tianjin, with capacity for 1m tonnes each. We
expect construction to commence in 2009. When ready at end-2010, annual
capacity for DME should increase by four-fold to 4.6m tonnes. Fuelled by the
aggressive expansion, we project a 5-year revenue CAGR of 91% for FY06-11.
• Raised EPS forecasts by 1-25% for FY07-09. We have factored in higher sales
from the full-year impact of accelerated expansion in FY08 and FY09. We have
also assumed different DME prices for the respective regions, as we think the
price differential is too big to justify a single average DME price.
• Target price lifted to S$1.94 from S$1.75. We have increased our DCF valuation
from S$2.48 to S$2.78, after incorporating our earnings upgrade but also a higher
WACC of 14%. We have used a higher beta of 1.2 (up from 1.0) to reflect risks
from the lack of an execution track record and China Energy’s short operating
history. Our new target price is S$1.94, still based on a 30% discount to DCF
valuation. This translates into 16x CY08 P/E, which we believe is undemanding
given its attractive 3-year EPS CAGR of 82% and projected ROEs of 26-50%

Speedy expansion Capacity expansion in Zhangjiagang brought forward by six months. Phase 2 expansion (700,000 tonnes p.a.) at the Zhangjiagang facility is expected to be completed at end-2008, six months ahead of the original schedule of 1H09. With the
earlier-than-expected expansion, DME’s estimated output for FY08-09 could rise by
44% and 22% respectively. We estimate that full-year contributions from the
additional capacity would increase its FY09 turnover by 42%Five-year plan in place, capacity to be lifted four-fold by 2010. CEGY also
announced plans to build two new DME plants in Ningbo and Tianjin, with capacity for
1m tonnes each. Based on a unit investment cost of Rmb1,350/tonne, we estimate
that each plant would cost about Rmb1.4bn. We note that the Chinese government
has raised the minimum project size for new DME projects to 1m tonnes p.a. Hence,
we expect CEGY’s potential expansion in new regions to involve projects of a similar
scale.
Construction for the plants will be carried out in two phases over FY09-10, with a
similar timeline as the Zhangjiagang facility. We project 300,000 tonnes p.a. from
each plant by end-2009 (assuming no material impact in FY09), and the remaining
700,000 tonnes p.a. 12 months later. When ready at end-2010, annual capacity for
DME should increase by four-fold from 0.9m tonnes in FY07 to 4.6m tonnes in FY10.
Fuelled by the aggressive expansion, we project a 5-year revenue CAGR of 91% for
FY06-11.
Rapid capacity expansion to tap lucrative Guangdong market. We understand
that LPG prices are generally Rmb600-1,000/tonne higher in Guangdong than in
Shandong. Priced at a 5% discount to local LPG prices, DME therefore fetches
Rmb4,600/tonne in Guangdong vs. Rmb3,800/tonne in Shandong. Given the
premium in selling prices, management is upbeat on Guangdong’s prospects and
plans to ramp up its Guangzhou capacity as quickly as possible.
Phase 1 construction (200,000 tonnes p.a.) at Jiutai Guangzhou has been completed
and is undergoing trial runs. As planned, CEGY expects to acquire Jiutai Guangzhou
from Jiutai Energy for about Rmb220m in Jun 07. We believe Phase 2 construction
should commence immediately after the acquisition and could take about 16 months.
Phase 2 will add 1m tonnes of annual capacity, 11% more than the 0.9m tonnes p.a.
announced during the IPO. Using a conservative ASP assumption of Rmb4,550/tonne
and capacity utilisation rates of 75-87% for FY07-09, we expect the Guangzhou
facility to account for 34% of total turnover in FY08, rising to 49% in FY09.Could turn to debt-financing. CEGY had net cash of Rmb954m as at end-Mar 07,
which would not be sufficient to pay for the Rmb1bn capex and working capital
required for the construction of Phase 2 in Zhangjiagang and the additional 100,000
tonnes of capacity in Guangzhou. CEGY plans to raise about Rmb1.5bn in 2H07,
likely in the form of debt, to support its expansion.Expect a modest 2Q but sterling 2H07. According to industry indicative data,
current methanol prices of Rmb1,760/tonne are 27% below the levels in 1Q07 and
our earlier expectation of Rmb 2,000/tonne. We expect the lower-than-expected
methanol prices to dent methanol sales in 2Q07. However, CEGY should turn from a
net seller to a net buyer of methanol when its new DME capacity comes on stream in
2H07. Soft methanol prices (key raw material) bode well for CEGY as they would
ease the margin pressure on DME.
Methanol prices likely to remain soft in FY07. The recent decline in methanol
prices could be largely attributed to an influx of new methanol producers attracted by the rapid escalation in methanol prices in 2H06. China, for example, went from a net
importer of 300,000 tonnes of methanol in 3Q06 to a net exporter of 200,000 tonnes
in 1Q07. This reflects the huge incentive for Chinese producers to export amid the
high prices. Going forward, we expect the forced exit of smaller methanol plants from
reduced selling prices. As such, we expect methanol prices to hover at Rmb1,800-
2,000/tonne, still high relative to historical norms.
Centralised procurement base in Singapore for possible entry into international
markets. Additionally, CEGY announced plans to set up a centralised procurement
and marketing centre in Singapore, which would place CEGY in a better position to
secure bulk discounts for methanol imports from the Middle East, particularly Saudi
Arabia. We believe that extending its presence outside China could be the first step in opening up its access to international markets and promoting DME as an alternative
fuel.manage the volatility in methanol prices is crucial for the sustainability of its margins.
In addition, we note the company’s short operating history and possible execution
risks involved in its massive expansion over the next five years.

Valuation and recommendation

Raised EPS forecasts by 1-25% for FY07-09. We are assuming different DME
prices for each of CEGY’s plants (Shandong, Guangzhou and Zhangjiagang), as we
now think that the Rmb600-1,000/tonne price differential is too large to justify the use of an average DME price (Shandong price, which we used previously). Our projected
88% yoy EPS growth for FY08 is underpinned by the full-year impact of Phase 1
expansion at Guangzhou and Zhangjiagang. FY09 projected EPS growth of 124%
yoy should be fuelled by the full-year impact of Phase 2 capacity expansion and
larger contributions from higher-margin sales in Guangzhou.
Target price lifted to S$1.94, still based on a 30% discount to DCF valuation. Our
DCF valuation has climbed from S$2.48 to S$2.78 following our earnings upgrade,
albeit tempered by a higher WACC of 14%. We have used a beta of 1.2 (previously
1.0) to reflect higher risks but potentially higher returns in the DME business. Our new target price of S$1.94 translates into 16x CY08 P/E, which we believe is
undemanding given its attractive 3-year EPS CAGR of 82% and projected ROEs of
26-50%.

Bubbleeeeeeer?

2007-05-28T03:48:00.000-07:00

There have been concerns of an impending correction in the Chinese equity
market and potential contagion effect on the rest of Asia. Here are our comments
to address these issues and to clear up some misperceptions:
Some investors have voiced concerns over the booming China stock market and
are worried that this “bubble” is on the road to an impending correction, not unlike
a repeat of what we saw at the end of February this year. Warnings from
respected commentators, ranging from former US Federal Reserve chairman
Alan Greenspan to various Chinese government officials to Hong Kong
businessmen such as Cheung Kong chairman Li Ka-shing, have also magnified
these concerns.
Indeed, the China domestic Shanghai and Shenzhen composite indices,
comprising ‘A’ shares, are up 56% and 124% respectively year-to-date. On the
other hand, the Hang Seng China Enterprise index, comprising Hong Kong ‘H’
shares is up just 3% year-to-date. A clear distinction between these two
categories of shares needs to be made for a better understanding of the current
issues surrounding the China market. China ‘A’ shares are restricted largely to
domestic investors (with a total limit of only US$10bn amount currently available
for investment by selected Qualified Foreign Institutional Investors), while the ‘H’
shares are Chinese companies listed on the Hong Kong stock exchange and
available to international investors. China ‘A’ shares now trade at over 30x one
year forward PER while, ‘H’ shares are still trading at more reasonable valuations
of about 16x one year forward PER.
The much-touted “bubble” of the China stock market in our view, refers only to
the domestic ‘A’ share market, which has recently run up much faster than other
regional markets, and other China stocks listed overseas. This recent sharp
divergence between these ‘A’ shares and overseas listed China stocks is due to
unique local liquidity conditions in China and the closed nature of the ‘A’ share
market . Most of the estimated US$4 trillion plus savings is trapped in China and
they have been ploughed into the ‘A’ share market, driving up their valuations, as
the Chinese endeavour to earn higher returns than their low deposit rate.
Moreover, as foreigners have limited access to China ‘A’ shares, they are not
fungible with similar stocks listed in HK. Hence, this valuation premium has
persisted.
Fears of a correction should in fact be focused mainly on the ‘A’ share market,
not on China shares listed elsewhere. In terms of valuations, China stocks listed
on the Hong Kong ‘H’ share market are trading at a substantial discount (50+%)
to the ‘A’ shares. In addition, with the Chinese authorities’ policy to allow more
investments by Chinese banks and insurers overseas (QDII), H shares and
China stocks listed in other overseas markets will be the immediate beneficiaries
of the liquidity coming out of China. Nonetheless, we recognize that there may be
some contagion effect on the overseas-listed Chinese stocks on near-term
dampening in sentiments. But we view that any such correction will be short-term,
contained and should present a buying opportunity at the right market level.
We maintain our view that we will continue to see strong performance of the
China stocks this year. This is underpinned by strong economic growth, upward
revisions to earnings and strong liquidity. In addition, past studies have shown
that stock markets in the host country of the Olympics have done well in the one
year run-up to the Games. China has been enjoying more than 10% economic
growth in recent quarters. We believe at least high single-digit growth (close to
9%) is sustainable as it is coming from a low base. Per capita incomes in China
are rising rapidly, driven by urbanization. The continued strong trade surpluses
contributing to strong GDP growth are a reflection of the comparative advantage
that China has in manufacturing and the opening up of its economy. We view the
Chinese authorities’ moves to cool down the economy as positive as it is aimed
at preventing an over-heating of the economy and at maintaining sustainable
strong growth. This is important to create more jobs and maintain social stability
with rapid urbanization. They also want growth to proceed in an efficient manner,
being conscious of the impact on the environment.

Delong Hldg

2007-05-24T02:03:00.000-07:00

Delong to sell 1.53b yuan of convertible bonds

Patricia Kuo

Tuesday, May 22, 2007

Delong Holdings, which makes hot- rolled steel coils in China, plans to sell as much as 1.53 billion yuan (HK$1.56 billion) of convertible bonds, according to a term sheet sent to investors.
Singapore-listed Delong will let investors exchange the five-year zero- coupon debt for its shares at S$4.455 (HK$22.83) apiece, 35 percent more than the price at the lunch break Monday, the term sheet shows. Citigroup is managing the debt sale.

Delong's shares have more than doubled in the past 12 months as the benchmark Straits Times Index gained 41 percent. Trading in Delong's shares was suspended starting from the lunch break. The stock rose 1.9 percent to S$3.30 Monday morning in Singapore.

Including Beijing-based Delong's convertible bond sale, companies in the Asia-Pacific region have raised US$16.3 billion (HK$127.14 billion) this year from equity-linked debt sales, 23 percent more than the same period of 2006.

Delong plans to redeem any bonds not converted at maturity for between 112.53 percent and 118.22 percent of face value, equal to an annual yield of as much as 3.375 percent.

The company initially plans to sell 1.34 billion yuan of bonds and can sell an additional 191 million yuan.

Delong is selling the bonds less than a week after Noble Group, a Singapore- listed supplier of raw materials, priced US$200 million of debt convertible into its shares at a 65 percent premium, the highest conversion rate for an equity- linked deal in Asia. Citigroup and JPMorgan Chase managed the deal.

Delong's first-quarter profit more than doubled to S$34.6 million from S$15 million a year on higher product prices and production. The company expects demand for steel in China to grow at 10 percent annually in the next two years. BLOOMBERG

China Mobile

2007-05-23T23:55:00.000-07:00

China Mobile Limited
(0941.HK / 941 HK)
Strong faces higher risks from M&A and
technology
■ With over 316 mn subscribers at the end of March 2007, China Mobile is a
super heavyweight in the Asian mobile market. From a .market opportunity.
perspective, we score China Mobile 4 out of a possible 5, given its relatively
low penetration rate (33% as at December 2006), the opportunity for
continued double-digit revenue growth, stable margins and higher scale.
■ Despite its size, we only score China Mobile 4 out of 5 for competitive
landscape. This is due mainly to our expectation that competition will grow
from the potential industry restructuring, which should see new entrants into
the market as well as 3G licensing. Further risk may arise from the need to
adopt the home-grown TD-SCDMA technology.
■ With competition relatively stable in the past two years, China Mobile has
enjoyed a revenue market share of 74%, an EBITDA margin of 54% and
ROIC advantages at 25%. Therefore, we give China Mobile a score of 5.
■ We expect China Mobile to still dominate in terms of subscriber and expect
its revenue market share to remain at a high 70% level. However, there is
risk of rising competition from 3G and potential M&A. Moreover, its mobile
tariff has also been declining as China Mobile has become more aggressive
in expanding into the rural market and via the introduction of calling party
pays and lower roaming fees. Therefore, we give China Mobile a score of 3
on this measure.
■ We expect China Mobile.s ROIC to decline gradually over time from a high
base. Therefore, we rate it 4 out of 5 on this measure.
■ China Mobile.s valuation is no longer attractive compared to its peers, in our
view. With the next leg of performance likely to be more macro driven, we
score it 2 out of 5 on this measure.

China Unicom

2007-05-23T23:53:00.000-07:00

China Unicom
(0762.HK / 762 HK)
Smaller size, but potential M&A provides
attractive upside
■ With their abundant growth and a low penetration level, we rate the Chinese
mobile operators with a score of 4 out of a possible 5.
■ There is a greater chance of an industry restructuring and 3G licensing. This
should see new entrants entering the mobile market. On account of this, we
rate Unicom 3 out of 5 on the competitive landscape measure.
■ Whilst Unicom.s focus on profitability is starting to bear fruit, juggling and
allocating limited resources between the two networks will remain
challenging, in our view. We also do not believe that Unicom will be able to
challenge China Mobile.s position or defend its market share against new
entrants. Thus, we give it a lower score of 3 on this category.
■ The mobile tariff has also been declining from aggressive tariff cuts by China
Mobile. The introduction of calling party pays and lower roaming fees should
lower mobile pricing further. This also led Unicom to follow suit. Therefore,
we rate Unicom 2 out of 5 on this measure.
■ Although we expect to see continual improvement in Unicom.s earnings and
ROIC profile, the speed of the turnaround is harder to predict. Therefore, we
rate Unicom 2 on this measure.
■ Unicom is trading at a lower EV/EBITDA multiple than China Mobile and the
regional average. However, EBITDA does not capture the very high capex
that its parent has invested (or its low returns on capital). On a P/E basis,
Unicom is more expensive than China Mobile and the region. Hence, we
give it a low score of 2 out of 5. That said, we believe that its share price
performance should benefit from a potential break-up scenario.

China Telecom Sector

2007-05-23T19:21:00.000-07:00

1) Penetration levels and remaining industry growth
As of 31 December 2006, China had over 460 mn mobile subscribers, and the rate is
growing at around 20% CAGR (FY03-06). The national mobile penetration rate in China is estimated at 33%. We believe that there is still plenty of growth opportunity and forecast mobile penetration to double by 2016 (i.e., 66%). Our forecast could also be accelerated by the introduction of new entrants into the market via 3G licensing or industry restructuring that will allow the fixed-line operators to enter into the mobile business. In addition, there also seem to be promising growth from the rural market in which penetration is estimated at only 12% to 13%.
According to China Mobile.s management, there is huge demand for the mobile service in the rural market. With an estimated population of around 745 mn (including rural towns and villages) by the National Bureau of Statistics of China (NBS), the rural market already accounts for 50% of its newly net additions. Apart from falling costs in mobile service, the rural market in China is also experiencing rapid economic development with double digit GDP growth and strong per capita growth in annual net income of rural households. For example, in 2005, the net income per capita for rural residents reached about RMB3,200 and assuming that the average rural households is 3.77 persons per family (per NBS), this translate to net income of about RMB12,000. Therefore, we believe that strong mobile growth is well protected by a strong economy.

Delay in 3G licensing and industry restructuring has helped China Mobile extend its lead. We forecast China Mobile.s net additional subscribers to remain strong in FY07 at 54 mn(or average of 4.5 mn per month) compared to 53.2 mn last year. Moreover, we believe that more production of low-cost handsets similar to Motorola.s (MOT, $18.52,
OUTPERFORM, TP $24.00, MW) Motofone at around US$30 is a definite advantage to help operators expand into the rural market.
That said, we note that our current forecast of 4.5 mn per month for China Mobile is
slightly below the January-to-March average of 4.96 mn per month. The main difference is caused by our expectation of an increase in competition from China Unicom as it improves growth at both the GSM and CDMA businesses. This is also evidenced by the 1Q07 net additions improvement at 20.4% QoQ to 4.5 mn (or average of 1.51 mn per month).

In fact, a main reason why China Mobile has been posting record breaking monthly net
additions is the relatively low competition from China Unicom and the PAS operators. Until recently, China Unicom management has focused on improving profitability by avoiding heavy CDMA handset subsidies. In addition, ever since the reshuffling of CEOs in late 2004, the fixed-line operators have decided to stop competing for market share by cutting back on PAS promotions as well as capex. The rationale is to preserve capital in favour for 3G licensing that has been delayed, as well as waiting for the decision on industry restructuring, which should allow them to acquire a mobile network.
Therefore, we maintain the view that China Mobile.s monthly net additions market share of over 75% is not sustainable. We expect downside risks could come from; 1) a rejuvenated China Unicom, which is focusing on restoring subscriber growth following success in improving profitability, 2) the adoption of TD-SCDMA technology by China Mobile(0941.HK, HK$74.65, N, TP HK$88.00), which could slow down net additions and
decrease its high-end subscriber base and 3) potential asymmetric regulation, which is granted to the fixed-line operators to speed them into mobile business as well as to restore competition in the mobile market.

2) Competitive landscape
The Chinese telecom sector has gone through a period of intensive competition during
2001-04, driven by rapid capacity expansion and the need to create growth, even though at the expense of long-term returns, to compete for funds in the capital markets. Although such competition was value-destroying, there was no mechanism to discourage management from continuing in that direction. This is until the government decided to clamp down on unhealthy competition in the market. On this front, we believe that the change in the competitive landscape has mostly been driven by the State Asset Supervisory and Administration Commission (SASAC).
The SASAC was set up in 2002 after the new administration took over from the formerpremier, Jiang Zemin. The objective of setting up the SASAC is for the government to play an active role as the largest financial shareholder of large-scale state-owned enterprises(SOE), in order to .protect and increase the value of such SOEs.. All large-scale and strategic SOEs, including all major telcos, now report directly to the SASAC.
Managements are also evaluated by the SASAC on the basis of profitability, return, growth and efficiency, rather than merely adding on subscribers.
This has been a significant positive change as the telecoms operators had previously
reported directly to the Ministry of Information Industry (MII) whose main objective was to increase the industry.s size (i.e., penetration) and look after consumers. interests, rather than protect the operators. profitability. The SASAC was probably the first government body to examine the financial performance of all telcos in detail, both individually and collectively. Therefore, its observations prompted the awareness of excessive competition at the most senior government level, which led to a rethinking of what industry structure would be sustainable and how management could be led to behave rationally.
In hindsight, it seemed that the telecoms sector has received high priority at the SASAC.
We believe the major drivers are that: 1) the sector.s returns are falling, 2) the sector is considered large and highly strategic and, 3) the government has been actively studying the issue of 3G licences and the appropriate structure. Thus, the potential industry restructuring and the issue of 3G licences are likely the most important triggers for the government to be taking over the driver.s seat for the sector. It is because 3G build-out will easily require investment of hundreds of billions of dollars and presents the opportunity to nurture the telecom equipment sector to compete at a global level by developing its owned 3G technology (i.e., TD-SCDMA).
In addition to the SASAC, we believe the other highly influential administrative body in the government involved in managing the telecoms sector is the National Development and Reform Commission (NDRC). The NDRC.s role is to formulate industrial policies for key sectors of China, including industry structure and policies supporting implementation of reform. Driven by the SASAC and NDRC, the Chinese government has started actively managing the telecom sector by introducing Document 204 (introduced in July 2004) that states out strict guidelines and approval process for tariffs promotions and CEO reshuffling (November 2004) that aimed to rationalise competitive behaviour in the industry.
The competitive landscape soon improved following the CEO reshuffling especially at thefixed line side. China Telecom and China Netcom shifted their focus and began cutting back PAS promotions and investments. For example, China Telecom.s annual capex has fallen by RMB24.6 bn or 24% from RMB61.6 bn in 2003 to its current budget of RMB47 bn in 2007, and with an emphasis on broadband, value-added services and IPTV services expansion as opposed to PAS. As a result, its total fixed-line net additions have also declined by 54% to 12.9 mn in FY06 compared to 28 mn in FY03 (based on 20 operating provinces).
At the same time, China Unicom began focusing on enhancing profitability at its GSM and CDMA divisions by avoiding aggressive handset subsidies, especially at the CDMA front.
Due to this, total CDMA net additions declined from 12.3 mn in FY03 to just 3.8 mn in
FY06. This combination of less aggressive fixed-line operators and a profitability focused Unicom meant that China Mobile was left unchallenged to reap in the rapid growth of the Chinese mobile market. China Mobile had also extended its gain by increasing capex to gold-plate its GSM network and introduced tariffs promotion to attack the rural market.
This allowed the company to post record breaking monthly net additions and we believe
that management is being more aggressive to build its subscriber base in preparation for 3G mobile business.

Having built an incredible subscriber base of over 316 mn as of 1Q07, and with over 65% market share, it is hard to imagine that China Mobile.s dominant position will be seriously challenged. However, we believe that it also does not mean that things will remain smooth for China Mobile as was the case in for the past two years. In particular, there is growing expectation that an industry restructuring and 3G licensing is approaching. This should see new entrants including the two incumbent fixed-line operators to come in and grab a slice of the fast-growing mobile market. We also believe that China Mobile.s longer-term risk has risen significantly from the likelihood of having to build out TD-SCDMA. This could trigger a lose of its high-end customers that may see better service on other 3G standards, or be attracted by the triple play services offered by the fixed-line operators.
Due to this, we score China Mobile 4 out of 5 and China Unicom 3 out of 5 on the
competitive landscape measure.

3) Scale advantages
China Mobile dominates in this category and this is no surprise given that it had an earlier start to build and improve its network and to develop a strong brand name. On the other hand, its rival, China Unicom was given the task to operate with two networks. We believe the building of the GSM network as well as trying to allocate resources between the GSM and CDMA businesses have hindered its growth. In addition, we believe that China Unicom.s market position was also squeezed in the middle as China Mobile became more aggressive in attacking both the high- and low-end market segments. Also the two fixedline operators have been aggressive in the past in fending off mobile substitution through offering heavy subsidies on PAS services. Thus, it is not surprising to see that Unicom has the lowest EBITDA margin and ROIC amongst the four listed telcos.
As China Mobile is clearly leading the pack, we score it a 5. For China Unicom, although its earnings is recovering from a focus on profitability as opposed to growth, juggling and allocating limited resources between the two networks will remain difficult. Also, we expect Unicom to be more directly affected by the introduction of new entrants following the industry restructuring and the awarding of 3G licenses expected in late 2007 or early 2008.
Therefore, we give it a lower score of 3 in this category.

4) Competitive structure
As previously explained, the competitive landscape of the Chinese mobile market has
been subdued recently, due to the anticipation of 3G licensing and potential industry
restructuring. As a result, China Unicom, China Telecom and China Netcom have all been focusing more on cost control to enhance profitability and preserve capital. This has allowed China Mobile to extend its market share.
In terms of pricing differentiation, China Unicom.s tariffs packages have always been at a slight discount to China Mobile (as approved by the regulator) as it tries to narrow the market share gap with China Mobile. However, this was not effective as tariff was largely determined by provincial managers and that made monitoring the counter offers by China Mobile.s provincial manager difficult. This situation has improved with the introduction of Doc 204 from the SASAC which required all tariffs reduction and promotional packages to firstly be approved by central management and then to seek approvals from the relevant regulatory bodies before launching into the market.

5) Revenue growth and ROIC development
We expect double digit growth in mobile industry revenue over the next two years as
China Mobile and China Unicom continue to enjoy strong subscriber growth with a
relatively benign competitive landscape. That said, the rapid expansion into the rural market or lower end subscribers is expected to pressure mobile ARPU. While pricing elasticity and continued growth in data revenue should offset some impact, the evidence so far (4Q06 and 1Q07) suggests that ARPU is still trending downwards. This together with the introduction of calling party pays package and a reduction in domestic tariffs as encouraged by the regulator, is expected to continue to place pressure on revenue per minute. For example, sina.com has recently reported that the MII will cease approval of new tariff plans that are not based on calling party pays. Moreover, operators are not allowed to adjust outgoing call rates to compensate for the free incoming call rates. Also, the MII plans to reduce the domestic mobile roaming tariff cap currently at RMB0.80 for pre-paid and RMB 0.60 for post-paid.

We expect China Mobile to still dominate in terms of subscriber numbers and expect its revenue market share to remain at the high 70% level. However, the risk is that if 3G and potential industry restructuring is accelerated it would enable more competition into the market. On the other hand, we expect to see continual improvement in China Unicom earnings and ROIC profile, but the speed of the turnaround is harder to predict. Therefore, we score China Mobile with a mark of 4 and China Unicom with 2.

6) Valuation
Our order of preference within the Chinese Telecoms sector, based on DCF models
incorporating 3G scenarios, is China Netcom, China Telecom, China Unicom and China
Mobile. Our bullish view on the fixed-line operators and China Unicom is driven by our view that the chance of a potential industry restructuring has increased substantially and could happen in 3Q07 followed by 3G licensing expected in 4Q07 or early 2008.

7) Score summary
As expected, China Mobile scores the highest in terms of growth, scale and competitive position. Versus China Unicom, which trades at more expensive P/E multiples and a lower cash flow yield, we do not believe that China Mobile.s advantages are fully captured in the valuation differential.
Thus, China Mobile scores much better than Unicom, with a score of 30 versus a score of 24 for Unicom. However, we believe China Mobile.s near term share price performance is more likely to be influenced by other factors such as its involvement in the home grown TD-SCDMA technology and news flow over increase in competition should M&A occur.
Although China Unicom does not score as well based on the metrics of scale and
competitive advantage, we believe that its share price performance will continue to
outperform that of China Mobile in the near term from increasing news flow relating to a potential break up. Indeed, within the Chinese telecom sector, our top pick is China Netcom followed by China Telecom, China Unicom and China Mobile. Our bullish view on the fixed-line operator is based on the belief that they should benefit the most from the higher chance of M&A that is expected to happen in 3Q07 followed by 3G licensing in 4Q07 or early 2008. Finally, the fixed-line operator also trades at attractive valuations.

China Strategy

2007-05-22T20:51:00.000-07:00

Red chips which are constituents of Hang Seng Index and with net
income larger than Rmb1b or HK$1.02m

Ticker Short Name Net Income (HK$m) Market Cap (HK$m)
941 CHINA MOBILE 64,343 1,482,635
883 CNOOC LTD 30,139 326,264
762 CHINA UNICOM 3,637 145,652
906 CHINA NETCOM 12,630 138,010
144 CHINA MERCHANT 2,540 83,231
291 CHINA RES ENT 2,776 66,344
1199 COSCO PAC LTD 2,261 45,902

Look out for A-share targets among H shares

The HK Economic Times quoted China media reports saying that China
Securities Regulatory Commission (CSRC) is urging 6 major state enterprises listed in HK to go home to sell A shares. In fact, the reports, without naming sources, say CSRC will submit a proposal to the State Council next month to help speed up the return of these giant state enterprises to the domestic stock markets.

The six companies being targeted by the CSRC are PetroChina (857.HK),CNOOC (883.HK), China Shenhua Energy (1088.HK), China Mobile (941.HK),China Construction Bank (939.HK), and China Telecom
(728.HK). All of these companies are relatively cash-rich and are not necessarily in a hurry to do A-share sales. But some - such as PetroChina,CNOOC, China Shenhua, China Mobile and China Telecom - may still be keen to raise funds back home because of rising capex and acquisition funding needs.

With the bubble in the A-share market ballooning by the day despite several rounds of reserve ratio and interest rate hikes, CSRC would like to bring back more big and better-run state companies to increase the supply of A-shares and, hopefully, prick the bubble gradually and thus forestalling a massive share price collapse.

Beijing has repeatedly warned retail investors about the rising risks of investing - but the warnings have fallen on deaf ears.

We do note that the share price of companies planning A-share sales tend to go up quite sharply in the months leading to the A-share sales, as the table below shows. Except for BoCom (3328.HK) whose share price was flat, the share price of recent returnees to China has tended to rise from 15% for Ping An to 65% for China Life. We are talking about the H-share prices three months before A-share IPO. The H-share price is one key factor the returnees take into account when they set the A-share IPO price. However, their share prices are often flat on the day of the A-share IPOs, no matter how well the A-share does on its debut In the table below, we tabulate a list of companies likely to sell A shares within 12 months. It will probably be longer for red chips, as the rules and regulations governing their return to China have not yet been released.

Chinese state companies qualified to sell A shares

Code H-share Code Red chip
857 PetroChina 883 CNOOC
1898 China Coal Energy 941 China Mobile
1088 China Shenhua Energy 906 China Netcom
2883 China Oilfield Services 966 China Insurance Intl
1919 Cosco Hldgs 144 China Merchants Hldgs
2328 PICC 2380 China Power Intl
728 China Telecom 688 China Overseas Land
598 Sinotrans 203 Denway Motors
2899 Zijin Mining 297 Sinofert
939 China Construction Bank

China Gas

2007-05-22T20:11:00.000-07:00

China Gas (384) will form a tie-up with Oman Oil to import gas to mainland. The new venture will import liquefied natural gas and liquefied petroleum gas from Oman and other middle-east countries to China. Oman Oil raised its stake in the company to 7.66% from 7.22% by buying 13.65 million shares at HK$1.76.

China Eastern Airline

2007-05-22T19:55:00.000-07:00

· SIA is in final negotiation to buy between 15% and 25% stake in China Eastern Airlines (670) for US$600 million to US$1 billion. The purchase was said to be either at market price or at the most limited premium. It was earlier reported that the airline will offer 2.05 billion new H shares to SIA and 1.27 billion new H-shares to the parent company in order to maintain 51% interest in the company.

Let the market adjust itself

2007-05-22T19:48:00.000-07:00

As concerns mounted over a possible correction in mainland equities, which roared to another high Tuesday, senior officials said the market should adjust itself, allaying fears of direct intervention in the markets to temper undiminished investor enthusiasm for chasing gains. Fan Gang, People's Bank of China monetary policy committee member, who also heads the National Economy Research Institute, believes the government will not put forward measures to intervene in the stock market, the state-run Securities Times reported Tuesday. The three-pronged monetary tightening move by the PBOC last Friday was focused on curbing excess liquidity and money supply, Fan was reported as saying in Shanghai Monday. The market has matured and so has the government. People should be realistic and respect market patterns, he said, adding the market should be able to deal with its own risks. Fan's comments echoed the views of Shang Fulin, chairman of the China Securities Regulatory Commission, who indicated the regulator would like to see the market mechanism adjust to any imbalance. Speculative activities in the share market are not as widespread as media has reported, Shang was quoted by mainland media as saying last week. Although the number of stock-trading accounts exceeded 90 million, only about 30 million are active, he said in a speech about capital markets. But the CSRC will speed up listing new shares of enterprises, and attract overseas-listed mainland companies to float shares in the A-share market, correcting the imbalance between demand and supply of shares, he said.