Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
CCS (552 HK) is our sector top pick, for its attractive valuation
and great long-term growth potential from the tower sharing
measure in China. We also like CITIC 1616 (1883 HK) , for its
steady earnings growth and low risk exposure. Comba (2342
HK) is our long-term sector pick, as we see sustainable earnings
growth for the next five years.
Consumer - F&B
Our analyst believes current valuation premiums for China F&B
are likely to remain. 1H09 F&B results were generally inline or
above expectations. Besides lower material costs, improvement
in product mix was also seen especially in market leaders.
Rebounds in raw material prices and fuel costs were noted but
their levels were still below that of last year, hence positive
margin impact should sustain into 2H09. Better earnings
visibility is also seen with resilient demand for most F&B
products. We recommend investors to focus on those with
lagging valuations such as China Yurun (1068 HK) and China
Mengniu (2319 HK).
Consumer - Retail
For retail in China market, sales expansion of most sectors has
been seen, indicating the Chinese retail environment continues
to recover. As fundamental improvement sets in, current
valuations of selective retailers could potentially consolidate to
remerge for better share price performance in the medium
term.
Retail sales in Hong Kong however, remains in the doldrums.
As improvement seen in the local stock and property markets
has yet to translate into real benefits for the economy. Given
lack of any clear catalyst, our preference remains on those with
better earnings visibilities such as Café de Coral (341 HK).
Toll Road Sector
The PRC toll road sector is becoming more promising given its high
correlation to the macro economy and in anticipation of a full-scale
economic recovery from 4Q09 onward. We like Sichuan Expressway
(107 HK) and Jiangsu Expressway (177 HK).
Telcos
Despite the tough challenges faced by China’s telcos in 2009,
such as rising competition, heavy capex and growing opex, as
well as the unfavourable economic conditions, we remain
positive on the sector’s long-term outlook, given the low
penetration of mobile and broadband users and potential
ARPU expansion. We see great re-rating potential, due to its
promising long-term growth outlook as well as industry
deregulation. We like China Mobile (941 HK) but we are not
positive on China Telecom (728 HK) and China Unicom (762
HK). Competition in the local Hong Kong telecom market has
subsided somewhat since mid-2008, partly due to the limited
room for further tariff cuts and clearer differentiated services
and customer positioning among telcos. Hutchtel (215 HK )
might continue to gain high-end market share while earnings
outlook for other telcos continue to look gloomy.
Oil
With possible USD technical rebound and renewed market
concern over the US recovery, we believe the near-term crude
price lacks fundamental catalyst to increase materially from
current level in 4Q09, especially given the weak recovery from
world’s oil demand in market. The government’s decision to
improve the domestic product oil price flexibility and the
relatively stable crude price level around US$70 should benefit
Sinopec (386 HK).
Pharmaceutical
The strong interim results and the possible IPO of Sinopharm at
high PE are the key catalysts for the market to re-rate the
pharmaceutical counters. Several major counters under our
coverage have already reached their historical high share price.
Given the promising growth outlook, attractive value, strong
balance sheet and favourable policy support, we believe the rerating
of the sector has just begun and has a long road ahead.
Our top picks are Sino Biopharmaceutical (1177 HK),
Guangzhou Pharmaceutical (874 HK) and China Shineway
(2877 HK).
Shipping
We expect the marine transportation sector rally upside should
be capped at the mid-cycle valuation level while looking for
possible second dips in the sector’s performance The high level
of iron ore inventory and possible cut of domestic steel output
may pressure freight rates in 2H09. We recommend to sell
overvalued dry bulk shipping companies, except for Pacific
Basin (2343 HK). For container shipping counters, any recovery
is unlikely to be sustainable given high level of idle vessels.
We maintain Sell on CSCL (2866 HK) , but recommend
investors to buy OOIL (316 HK) on weakness, given its
attractive hidden value from properties in China.
Fertilizer
The overall fertilizer sector has been stabilizing although
average selling prices remain weak. Certain fertilizer prices
might remain or decline from current level for the rest of the
year as stocking would have completed by 3Q. Weak methanol
prices are expected to recover gradually in 2H given rising
demand as alternative energy application. The positive
government policy to further boost the agriculture sector and
better develop rural areas should provide some support for
fertilizer demand. The current oversupply across different
fertilizer types is unlikely to improve significantly in the nearterm
but condition is expected to gradually improve.
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