Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
Sector recommendation and stock picks for Hong Kong
SECTOR REMARKS STOCK SELECTION
Property
Neutral
Banking and Finance
Positive
Telecom
Neutral
Industrial
Neutral
Consumer
Neutral
Housing market further heated up in 3Q09, with luxury projects in the spotlight. The
release of The HarbourSide, The Cullinan and The Masterpiece drew significant buying
interest. Local investors and speculators have been returning to the market, boosting
the prices and take-up rate. Residential price has risen 26.9% YTD, surpassing the levels
just before the collapse of Lehman Brothers. Following the strong rally, We expect the
housing market to be relatively stable in 4Q09. Having sold substantial number of
primary units, developers should return to expansion mode soon. Given the
government’s tight land supply policy, we favour MTRC which boasts a huge
development land bank in Hong Kong. Office rents remain on the downtrend given lack
of new demand but the decline has been moderating. On the other hand, capital values
rebounded on strong market liquidity. Valuation wise, property investors are largely
fairly priced.
Hong Kong banks are still on a secular uptrend despite the rallies YTD. Most Hong Kong
banks guided a more optimistic outlook for the 2H09 and 2010. They see strong loan
pipelines in 2H09, especially relating to their China operation. An expected slowdown in
loan growth among Chinese banks in 2H09 offers opportunities for Hong Kong and
foreign banks to re-gain their market shares in China. All of them also believe the worst
is over in terms of NPLs and provision charge, and they expect resilient asset quality
going forward, thanks to rising property price and stabilization in the global and China
economy. After some MTM write-backs, we expect more write-backs on securities in
2H09 on the back of continued improvement in capital market sentiment. Most banks
also believe NIM has bottomed and we believe some mild rate hikes in the US sometime
next year should help improve Hong Kong banks’ NIM going forward.
Competition in the local Hong Kong telecom market has subsided somewhat since mid-
2008, which was partly due to the limited room for further tariff cuts and clearer
differentiated services and customer positioning among telcos. In companies, Hutchtel
HK gained high-end market share helped by the iPhone. On the other hand, Smartone
suffered a big decline in earnings as its international roaming revenue was hit hard by
the economic recession. Looking ahead, we believe Hutchtel might continue to gain
high-end users market share, while earnings outlook for other telcos would continue to
be gloomy.
Bottomed in December 08 / January 09, US retail sales have shown a gradual uptrend.
The latest retail sales as at Aug showed as strong as 2.7% gain, above market
expectation. Stripping out autos, sales were up 1.1%, much stronger than market
estimate of 0.4%. We believe such retail sales trend is encouraging, though it is still far
from a V-shaped recovery. We, thus, suggest investors to cherry pick industry leaders
who should be the first to enjoy the rebound. We like Yue Yuen, which is the largest
OEM athletic shoes manufacturer. In addition, it has underperformed HSI by 14.5% in
the past 1 month.
Despite the improving export outlook, we believe those manufacturers that serve the
domestic market will remain strong on continual buoyant domestic demand for
transport equipments from the government. China South Locomotive & Rolling Stock
should benefit from the accelerated railway development program by the Ministry of
Railway and high demand for technically advanced train vehicles following the
construction of new high-speed train tracks. Listing of China Northern on the Shanghai
A-share market should be positive on the valuation of China South Locomotive.
The improvement seen in the local stock and property markets has obviously failed to
translate into real benefits for the economy as yet. For the year till July, HK retail sales
recorded 4.6% decline. Discretionary spending such as on apparels, motor vehicles and
electrical goods remained relatively sluggish. Discounting and promotions continued to
be the norm though the magnitude appeared to be less severe than that in early this
year. Retailers, however, are still far from being out of the doldrums and unless a
consistent recovery in sales can be noted, their performance should likely continue to
lag. Given lack of any clear catalyst, our preference remains on those with better
earnings visibilities such as Café de Coral.
MTRC (66)
BOC HK (2388)
Dah Sing Financial (440)
Hutchtel HK (215)
Yue Yuen (551)
China South Locomotive & Rolling
Stock (1766)
Café de Coral (341)
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