Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...

Regional Small/Mid Cap Strategy Q2 2008
Country Assessment
OUTLOOK
For Q2 2008, small/mid-cap companies may not be able
to attract significant investment interest yet. We
continue to prefer domestic consumer counters and
avoid exporters. Given an uncertain external
environment, domestic counters that are relatively
shielded from external risks would be favoured. Our
recommended stock picks for Q2 2008 can be broadly
categorised as follows:
1) Chinese domestic consumption plays.
Despite austerity measures to rein in some over-heated
sectors, overall domestic consumption in China is
expected to remain robust. Retail sales growth is still
strong in the high teens. We believe companies that are
in general retail will remain more defensive than others.
In addition, improving living standards and the Chinese
Government’s directive to boost domestic consumption
should continue to support growth in the sector.
2) Companies with strong financial position and
stable recurrent cashflows
During periods of tight credit and heightened volatility,
companies with strong balance sheets are more likely to
be able to weather the storm whilst retaining their ability
to expand and acquire opportunistically. These are times
when financially weak competitors can be scooped up at
firesale prices. In a generally risk averse environment
where safety is first and cash is king, cheap valuations
and strong visible cashflows should be favored due to
their downside protection.
3) Policy supported industries.
Premier Wen Jiabao highlighted several industries that
would receive government support in his speech at the
China National People’s Congress meeting. Amongst
them, we are especially interested in the Agriculture,
Pharmaceutical and Environemental Protection
segments.
i) Agriculture sector. Initiative to raise farmers’
income and improve overall infrastructure in rural
areas will be the main directive. The government has
pledged to spend RMb565b on this sector.
ii)
Pharmaceutical sector. An aging population
coupled with rising demand for better
pharmaceuticals and health care services will create
opportunites for industry players.
iii) Environmental sector. There are already directives
in place that stress the importance of environmental
protection and energy conservation. Companies that
are either involved in the replacement of obsolete
and polluting technologies and equipment, or the
treatment of polluted resources will benefit.
Under other market conditions, the above-mentioned
industries could be interesting. But we find extra
investment appeal in these sectors in the current
unstable market situation that is fueled by (i) the credit
crisis gripping the global economy, and (ii) China’s
austerity measures for other sectors.
PE Ratio: HS Small Cap Index vs HSI
30
25
20
15
10
5
x
Jul-04
Sep-04
Dec-04
Feb-05
May-05
Jul-05
Oct-05
Jan-06
Mar-06
Jun-06
Aug-06
Nov-06
Jan-07
Apr-07
Jul-07
Sep-07
Dec-07
Feb-08
Source: Datastream
Hang Seng HK Small Cap (LHS)
Hang Seng Index (RHS)
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