Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
Sector recommendation and stock picks for China (Cont’d)
SECTOR REMARKS STOCK SELECTION
Oil & Gas
Positive
Pharmaceutical and
Healthcare
Positive
Technology
Power
Positive
Positive
We continue to recommend investors to switch their investment focus from the upstream plays,
Petrochina and CNOOC, to the downstream play, Sinopec in 4Q09. In view of the revival of
market concern over the US recovery, we believe the near-term crude price lacks fundamental
support to increase materially from current level in 4Q09, especially given the weak recovery from
world’s oil demand in market. Sinopec remains our top pick in the sector, in view of its attractive
mid-cycle valuation but at up-cycle earnings level in 2009-10. Given the recent positive
government’s decision to improve the domestic product oil price flexibility and the relatively stable
crude price level around US$70, we believe it is the most favourable condition for Sinopec to
maintain high refining margin in 2009.
As expected, 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. For those major counters under
our coverage, we identified several have already reached their share prices to historical highest
level, such as Sino Biopharmaceutical, China Shineway and China Pharmaceutical. However, given
their promising growth outlook, attractive value, strong balance sheet and favourable policy
support, we believe the re-rating of the sector has just begun and has a long road ahead.
Indeed, the pharmaceutical industry has shown that its growth is resilient to any unpredictable
economic risk ahead. In the sector, our top picks are Sino Biopharmaceutical, Guangzhou
Pharmaceutical and China Shineway.
1H 2009 results have generally revealed a more sustained recovery of demand, as it is clear that
the bounce back is more than mere restocking of inventories. As expected, we have seen marked
improvement in 2Q QoQ growth figures as well as improved optimism in 2H guidance. In terms of
earnings, we are starting to see the cost savings measure executed earlier in the year to have more
significant impact. The recovery of demand has also improved profitability of underutilized
capacities. The results and guidance from industry players have mostly pointed to a resilient
consumer market, whilst corporate customers are still mostly in defensive mode. We believe this is
likely to change, as the recent stability in the business environment will likely spur the relaxing of
some corporate spending. Stock valuations have continued to improve in general in 3Q, reflecting
the increased optimism in the sector.
For exposure in this sector, we continue to like AAC Acoustics (2018 HK), which should enjoy
market share gains in major customers such as Nokia as well as ASP and margin improvements
from volume shipments of new platforms. Despite recent pullbacks, we also like ASM Pacific (522
HK) for its strong market position, strong balance sheet and its ability to benefit from the
improved business environment.
A more volatile market should benefit Chinese IPPs because they offer resilient domestic earnings.
Improving earnings outlook for IPPs is evident in the stronger 1H09 results and we continue to
expect sustainable growth ahead with stronger demand and stable coal price. CR Power and
Huaneng remain our picks for their relatively higher leverage to a demand recovery and still
attractive valuations. We also upgraded Datang to Buy recently as the sell-down provides an
excellent opportunity to accumulate.
Sinopec (386)
Sino
Biopharmaceutical
(1177 )
Guangzhou
Pharmaceutical
(874 )
ASM Pacific (522)
AAC Acoustics
(2018)
CR Power (836)
Huaneng (902)
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