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

Regional Small/Mid Cap Strategy Q2 2008
Country Assessment
PE Gap: HS Small Cap Index vs HSI
4
2
0
(2)
(4)
(6)
(8)
Jul-04
Oct-04
Jan-05
May-05
Aug-05
Source: Datastream
STOCK PICKS
Dec-05
Mar-06
Jun-06
Oct-06
Jan-07
May-07
Aug-07
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Mar-08
We believe domestic consumption and defensive
counters will outpeform in Q2 2008 amid the current
volatile environment.
For domestic consumption plays, we favour Beijing
Jinkelong. Meanwhile, Sino Biopharm is set to be one of
the main beneficaires of policies intended to improve
China’s healthcare system. ZTE and Fortune REIT are our
defensive picks.
BJKL operates a number of supermarkets , department
stores and wholesale outlets in Beijing , China. The
Company continues to improve its margins from better
operating effciciency, improving economies of scale, as
well as the development of its higher margin in-house
brand. The Company will continue to expand via
organic growth both in the Greater Beijing area and the
surrounding region as well as strategic M&As. The
nature of BJKL’s business is relatively defensive, yet the
positive impact from a favourable consumer
environment in the Greater Beijing area and the
Olympics will offer good upside. At FY08PE of 10.2x,
0.3x PEG, 6.1% and 67% discount to our target price of
HK$11.86, we recommend BUY.
Sino Biopharmaceutical. The company is a leader in
China’s hepatitis and cardiovascular drug market. It has
produced a series of best-selling drugs, has strong R&D
capabilities, and a promising drug pipeline. Riding on
this, Sino Biopharm should be able to deliver 20-30% y-
o-y organic growth. The company also has a strong
balance sheet that could be helpful in the acquisition of
smaller companies in light of the current monetary
environment. Trading at only 11.3x 2008 PE (or ex-cash
PE of 7-8x) and offering over 5% dividend yield, Sino
Biopharmeceuticals is attractive for a long-term
investment.
ZTE is a leading provider of optical transmission
communications equipment and handsets. Due to its
size, ZTE is able to realize good economies of scale to
provide cost competitive products, and enjoy pricing
advantages due to its strong R&D capabilities. As a
market leader, ZTE should also benefit from the
imminent telecom restructuring in China. The rollout of
the TD-SCDMA network will boost industry capex. ZTE
has also performed well in the export segment, and is
fast becoming a prominent global telecom equipment
vendor in India and Africa. Trading at only c.16x PE, its
valuation is undemanding versus global peers.
Fortune REIT owns 11 suburban malls. Fortune REIT is
more widely exposed to categories such as food and
beverage and supermarkets, and as such, should be
relatively more resilient to the US-led global economic
slowdown. In addition to the more defensive exposure,
Fortune REIT has also completed a successful asset
enhancement exercise at Waldorf Garden with enhanced
rates, and will continue to improve other existing
properties. We believe the relatively defensive nature of
Fortune REIT will be favored in Q2. At a DDM-based
target price of HK$6.83 and a return target of 34%, we
have a BUY on Fortune REIT.
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