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.
Monday, 27 August 2007
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.
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