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.
Tuesday, 31 July 2007
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.
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