• 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.
Tuesday, 29 May 2007
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%.
Bubbleeeeeeer?
There have been concerns of an impending correction in the Chinese equity
market and potential contagion effect on the rest of Asia. Here are our comments
to address these issues and to clear up some misperceptions:
Some investors have voiced concerns over the booming China stock market and
are worried that this “bubble” is on the road to an impending correction, not unlike
a repeat of what we saw at the end of February this year. Warnings from
respected commentators, ranging from former US Federal Reserve chairman
Alan Greenspan to various Chinese government officials to Hong Kong
businessmen such as Cheung Kong chairman Li Ka-shing, have also magnified
these concerns.
Indeed, the China domestic Shanghai and Shenzhen composite indices,
comprising ‘A’ shares, are up 56% and 124% respectively year-to-date. On the
other hand, the Hang Seng China Enterprise index, comprising Hong Kong ‘H’
shares is up just 3% year-to-date. A clear distinction between these two
categories of shares needs to be made for a better understanding of the current
issues surrounding the China market. China ‘A’ shares are restricted largely to
domestic investors (with a total limit of only US$10bn amount currently available
for investment by selected Qualified Foreign Institutional Investors), while the ‘H’
shares are Chinese companies listed on the Hong Kong stock exchange and
available to international investors. China ‘A’ shares now trade at over 30x one
year forward PER while, ‘H’ shares are still trading at more reasonable valuations
of about 16x one year forward PER.
The much-touted “bubble” of the China stock market in our view, refers only to
the domestic ‘A’ share market, which has recently run up much faster than other
regional markets, and other China stocks listed overseas. This recent sharp
divergence between these ‘A’ shares and overseas listed China stocks is due to
unique local liquidity conditions in China and the closed nature of the ‘A’ share
market . Most of the estimated US$4 trillion plus savings is trapped in China and
they have been ploughed into the ‘A’ share market, driving up their valuations, as
the Chinese endeavour to earn higher returns than their low deposit rate.
Moreover, as foreigners have limited access to China ‘A’ shares, they are not
fungible with similar stocks listed in HK. Hence, this valuation premium has
persisted.
Fears of a correction should in fact be focused mainly on the ‘A’ share market,
not on China shares listed elsewhere. In terms of valuations, China stocks listed
on the Hong Kong ‘H’ share market are trading at a substantial discount (50+%)
to the ‘A’ shares. In addition, with the Chinese authorities’ policy to allow more
investments by Chinese banks and insurers overseas (QDII), H shares and
China stocks listed in other overseas markets will be the immediate beneficiaries
of the liquidity coming out of China. Nonetheless, we recognize that there may be
some contagion effect on the overseas-listed Chinese stocks on near-term
dampening in sentiments. But we view that any such correction will be short-term,
contained and should present a buying opportunity at the right market level.
We maintain our view that we will continue to see strong performance of the
China stocks this year. This is underpinned by strong economic growth, upward
revisions to earnings and strong liquidity. In addition, past studies have shown
that stock markets in the host country of the Olympics have done well in the one
year run-up to the Games. China has been enjoying more than 10% economic
growth in recent quarters. We believe at least high single-digit growth (close to
9%) is sustainable as it is coming from a low base. Per capita incomes in China
are rising rapidly, driven by urbanization. The continued strong trade surpluses
contributing to strong GDP growth are a reflection of the comparative advantage
that China has in manufacturing and the opening up of its economy. We view the
Chinese authorities’ moves to cool down the economy as positive as it is aimed
at preventing an over-heating of the economy and at maintaining sustainable
strong growth. This is important to create more jobs and maintain social stability
with rapid urbanization. They also want growth to proceed in an efficient manner,
being conscious of the impact on the environment.
market and potential contagion effect on the rest of Asia. Here are our comments
to address these issues and to clear up some misperceptions:
Some investors have voiced concerns over the booming China stock market and
are worried that this “bubble” is on the road to an impending correction, not unlike
a repeat of what we saw at the end of February this year. Warnings from
respected commentators, ranging from former US Federal Reserve chairman
Alan Greenspan to various Chinese government officials to Hong Kong
businessmen such as Cheung Kong chairman Li Ka-shing, have also magnified
these concerns.
Indeed, the China domestic Shanghai and Shenzhen composite indices,
comprising ‘A’ shares, are up 56% and 124% respectively year-to-date. On the
other hand, the Hang Seng China Enterprise index, comprising Hong Kong ‘H’
shares is up just 3% year-to-date. A clear distinction between these two
categories of shares needs to be made for a better understanding of the current
issues surrounding the China market. China ‘A’ shares are restricted largely to
domestic investors (with a total limit of only US$10bn amount currently available
for investment by selected Qualified Foreign Institutional Investors), while the ‘H’
shares are Chinese companies listed on the Hong Kong stock exchange and
available to international investors. China ‘A’ shares now trade at over 30x one
year forward PER while, ‘H’ shares are still trading at more reasonable valuations
of about 16x one year forward PER.
The much-touted “bubble” of the China stock market in our view, refers only to
the domestic ‘A’ share market, which has recently run up much faster than other
regional markets, and other China stocks listed overseas. This recent sharp
divergence between these ‘A’ shares and overseas listed China stocks is due to
unique local liquidity conditions in China and the closed nature of the ‘A’ share
market . Most of the estimated US$4 trillion plus savings is trapped in China and
they have been ploughed into the ‘A’ share market, driving up their valuations, as
the Chinese endeavour to earn higher returns than their low deposit rate.
Moreover, as foreigners have limited access to China ‘A’ shares, they are not
fungible with similar stocks listed in HK. Hence, this valuation premium has
persisted.
Fears of a correction should in fact be focused mainly on the ‘A’ share market,
not on China shares listed elsewhere. In terms of valuations, China stocks listed
on the Hong Kong ‘H’ share market are trading at a substantial discount (50+%)
to the ‘A’ shares. In addition, with the Chinese authorities’ policy to allow more
investments by Chinese banks and insurers overseas (QDII), H shares and
China stocks listed in other overseas markets will be the immediate beneficiaries
of the liquidity coming out of China. Nonetheless, we recognize that there may be
some contagion effect on the overseas-listed Chinese stocks on near-term
dampening in sentiments. But we view that any such correction will be short-term,
contained and should present a buying opportunity at the right market level.
We maintain our view that we will continue to see strong performance of the
China stocks this year. This is underpinned by strong economic growth, upward
revisions to earnings and strong liquidity. In addition, past studies have shown
that stock markets in the host country of the Olympics have done well in the one
year run-up to the Games. China has been enjoying more than 10% economic
growth in recent quarters. We believe at least high single-digit growth (close to
9%) is sustainable as it is coming from a low base. Per capita incomes in China
are rising rapidly, driven by urbanization. The continued strong trade surpluses
contributing to strong GDP growth are a reflection of the comparative advantage
that China has in manufacturing and the opening up of its economy. We view the
Chinese authorities’ moves to cool down the economy as positive as it is aimed
at preventing an over-heating of the economy and at maintaining sustainable
strong growth. This is important to create more jobs and maintain social stability
with rapid urbanization. They also want growth to proceed in an efficient manner,
being conscious of the impact on the environment.
Thursday, 24 May 2007
Delong Hldg
Delong to sell 1.53b yuan of convertible bonds
Patricia Kuo
Tuesday, May 22, 2007
Delong Holdings, which makes hot- rolled steel coils in China, plans to sell as much as 1.53 billion yuan (HK$1.56 billion) of convertible bonds, according to a term sheet sent to investors.
Singapore-listed Delong will let investors exchange the five-year zero- coupon debt for its shares at S$4.455 (HK$22.83) apiece, 35 percent more than the price at the lunch break Monday, the term sheet shows. Citigroup is managing the debt sale.
Delong's shares have more than doubled in the past 12 months as the benchmark Straits Times Index gained 41 percent. Trading in Delong's shares was suspended starting from the lunch break. The stock rose 1.9 percent to S$3.30 Monday morning in Singapore.
Including Beijing-based Delong's convertible bond sale, companies in the Asia-Pacific region have raised US$16.3 billion (HK$127.14 billion) this year from equity-linked debt sales, 23 percent more than the same period of 2006.
Delong plans to redeem any bonds not converted at maturity for between 112.53 percent and 118.22 percent of face value, equal to an annual yield of as much as 3.375 percent.
The company initially plans to sell 1.34 billion yuan of bonds and can sell an additional 191 million yuan.
Delong is selling the bonds less than a week after Noble Group, a Singapore- listed supplier of raw materials, priced US$200 million of debt convertible into its shares at a 65 percent premium, the highest conversion rate for an equity- linked deal in Asia. Citigroup and JPMorgan Chase managed the deal.
Delong's first-quarter profit more than doubled to S$34.6 million from S$15 million a year on higher product prices and production. The company expects demand for steel in China to grow at 10 percent annually in the next two years. BLOOMBERG
Patricia Kuo
Tuesday, May 22, 2007
Delong Holdings, which makes hot- rolled steel coils in China, plans to sell as much as 1.53 billion yuan (HK$1.56 billion) of convertible bonds, according to a term sheet sent to investors.
Singapore-listed Delong will let investors exchange the five-year zero- coupon debt for its shares at S$4.455 (HK$22.83) apiece, 35 percent more than the price at the lunch break Monday, the term sheet shows. Citigroup is managing the debt sale.
Delong's shares have more than doubled in the past 12 months as the benchmark Straits Times Index gained 41 percent. Trading in Delong's shares was suspended starting from the lunch break. The stock rose 1.9 percent to S$3.30 Monday morning in Singapore.
Including Beijing-based Delong's convertible bond sale, companies in the Asia-Pacific region have raised US$16.3 billion (HK$127.14 billion) this year from equity-linked debt sales, 23 percent more than the same period of 2006.
Delong plans to redeem any bonds not converted at maturity for between 112.53 percent and 118.22 percent of face value, equal to an annual yield of as much as 3.375 percent.
The company initially plans to sell 1.34 billion yuan of bonds and can sell an additional 191 million yuan.
Delong is selling the bonds less than a week after Noble Group, a Singapore- listed supplier of raw materials, priced US$200 million of debt convertible into its shares at a 65 percent premium, the highest conversion rate for an equity- linked deal in Asia. Citigroup and JPMorgan Chase managed the deal.
Delong's first-quarter profit more than doubled to S$34.6 million from S$15 million a year on higher product prices and production. The company expects demand for steel in China to grow at 10 percent annually in the next two years. BLOOMBERG
Wednesday, 23 May 2007
China Mobile
China Mobile Limited
(0941.HK / 941 HK)
Strong faces higher risks from M&A and
technology
■ With over 316 mn subscribers at the end of March 2007, China Mobile is a
super heavyweight in the Asian mobile market. From a .market opportunity.
perspective, we score China Mobile 4 out of a possible 5, given its relatively
low penetration rate (33% as at December 2006), the opportunity for
continued double-digit revenue growth, stable margins and higher scale.
■ Despite its size, we only score China Mobile 4 out of 5 for competitive
landscape. This is due mainly to our expectation that competition will grow
from the potential industry restructuring, which should see new entrants into
the market as well as 3G licensing. Further risk may arise from the need to
adopt the home-grown TD-SCDMA technology.
■ With competition relatively stable in the past two years, China Mobile has
enjoyed a revenue market share of 74%, an EBITDA margin of 54% and
ROIC advantages at 25%. Therefore, we give China Mobile a score of 5.
■ We expect China Mobile to still dominate in terms of subscriber and expect
its revenue market share to remain at a high 70% level. However, there is
risk of rising competition from 3G and potential M&A. Moreover, its mobile
tariff has also been declining as China Mobile has become more aggressive
in expanding into the rural market and via the introduction of calling party
pays and lower roaming fees. Therefore, we give China Mobile a score of 3
on this measure.
■ We expect China Mobile.s ROIC to decline gradually over time from a high
base. Therefore, we rate it 4 out of 5 on this measure.
■ China Mobile.s valuation is no longer attractive compared to its peers, in our
view. With the next leg of performance likely to be more macro driven, we
score it 2 out of 5 on this measure.
(0941.HK / 941 HK)
Strong faces higher risks from M&A and
technology
■ With over 316 mn subscribers at the end of March 2007, China Mobile is a
super heavyweight in the Asian mobile market. From a .market opportunity.
perspective, we score China Mobile 4 out of a possible 5, given its relatively
low penetration rate (33% as at December 2006), the opportunity for
continued double-digit revenue growth, stable margins and higher scale.
■ Despite its size, we only score China Mobile 4 out of 5 for competitive
landscape. This is due mainly to our expectation that competition will grow
from the potential industry restructuring, which should see new entrants into
the market as well as 3G licensing. Further risk may arise from the need to
adopt the home-grown TD-SCDMA technology.
■ With competition relatively stable in the past two years, China Mobile has
enjoyed a revenue market share of 74%, an EBITDA margin of 54% and
ROIC advantages at 25%. Therefore, we give China Mobile a score of 5.
■ We expect China Mobile to still dominate in terms of subscriber and expect
its revenue market share to remain at a high 70% level. However, there is
risk of rising competition from 3G and potential M&A. Moreover, its mobile
tariff has also been declining as China Mobile has become more aggressive
in expanding into the rural market and via the introduction of calling party
pays and lower roaming fees. Therefore, we give China Mobile a score of 3
on this measure.
■ We expect China Mobile.s ROIC to decline gradually over time from a high
base. Therefore, we rate it 4 out of 5 on this measure.
■ China Mobile.s valuation is no longer attractive compared to its peers, in our
view. With the next leg of performance likely to be more macro driven, we
score it 2 out of 5 on this measure.
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