Saturday, 10 July 2010
Thursday, 24 January 2008
HKEX
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.
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
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.
Tuesday, 16 October 2007
Bewarned
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
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
Thursday, 6 September 2007
China Mobile- OSK target HK$157 by 2008E
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.
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$157. China Mobile has experienced re-rating since its trough in
2003 amid improving market share and profitability. Nevertheless, on technical ground, we
believe extension of QDII, direct liquidity train and A-share listing can push its forward FY08E
PER to 30X, driving our 2008E target price to HK157.
Monday, 3 September 2007
STEEL.
Steel production continued to rise yoy in 1H07, rising23.93% to 270m tonnes.
Trade surplus widened. In 1H07, steel import dropped 7.62% while export
rocketed to 34m tonnes, up 97.7% yoy. Better net profit for whole sector yoy.
Due to firmer steel prices, sales increased 34.68% yoy and net profit
rose 108% yoy to Rmb80b in 1H07 for the whole sector. Most steel makers
posted 50%+ yoy net profit growth on their 1H07 results. .
Outlook. We see steel prices stablising for the rest of 2007 (Bao Steel cut 4Q07
steel prices by 5-8%) as capacity is curbed while export sales remain strong.
However, the slowing domestic demand, trade dispute and higher raw material
prices are risks faced by the sector.
Trade surplus widened. In 1H07, steel import dropped 7.62% while export
rocketed to 34m tonnes, up 97.7% yoy. Better net profit for whole sector yoy.
Due to firmer steel prices, sales increased 34.68% yoy and net profit
rose 108% yoy to Rmb80b in 1H07 for the whole sector. Most steel makers
posted 50%+ yoy net profit growth on their 1H07 results. .
Outlook. We see steel prices stablising for the rest of 2007 (Bao Steel cut 4Q07
steel prices by 5-8%) as capacity is curbed while export sales remain strong.
However, the slowing domestic demand, trade dispute and higher raw material
prices are risks faced by the sector.
Bernanke Dilemma /@/.,,*&%$#@????????
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!
Monday, 27 August 2007
ShowHand in HONGKONG!
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.
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.
Thursday, 16 August 2007
China Mobile
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
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
Sunday, 5 August 2007
Global Equities , hanging on a clift
• 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.
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.
Tuesday, 31 July 2007
PBOC raise rates again!
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.
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!!
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.
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.
Sunday, 3 June 2007
Why the China rally can sustained.
- 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
- 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
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.
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.
Tuesday, 29 May 2007
Delong again!
• 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.
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.
Monday, 28 May 2007
PetroChina
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-
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
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.
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
.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%.
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%.
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