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

Regional Small/Mid Cap Strategy Q2 2008
Country Assessment
the top performing asset classes in 2007, China-related
stocks was a prime target for profit taking amidst the
bearish sentiment prevailing during the quarter.
Amid a meltdown in global equity markets, our
defensive strategy to focus on companies in the
Consumer Goods sector with strong branding and
pricing power to pass higher costs to customers was also
not so defensive after all. Overall, this sector eased 21%
Q-o-Q on a price performance basis. However, the
Healthcare and Consumer Services sectors were more
resilient, down 15% and 8% respectively.
Among the 20 worst performing small-mid cap stocks in
our coverage, slightly more than half were S-chips. Most
of them were hit by margin pressure as a result of rising
raw material costs. Thus, stocks to avoid would be
Luzhou Bio-Chem and China Dairy. Luzhou would be
affected by high corn prices and the negative impact of
the snowstorm. China Dairy is faced with a challenging
environment where raw milk prices are high and
competition is intense. Non-S-chips to avoid include
Advance SCT and Ellipsiz - both companies issued
profit warnings recently.
However, stocks like Ezra and China Sports are worth
looking at. Ezra’s net earnings (pre-exceptional) is
expected to rise strongly by 70% and 76% in FY08 and
FY09 respectively and valuations are very attractive now.
China Sports is also trading at attractive PEs of 6.9x
(FY08F) and 5.2x (FY09). Balance sheet is also strong
with net cash at over 20 Scts per share.
Turnover volume for FSTS more than doubled just after
the CNY holidays to hit a high of 554m and accounted
for about 25% of the total volume traded. However,
interest soon waned as investors turned cautious. On the
whole, turnover volume for small cap stocks accounted
for about 15-20% of total volume traded since Jan 08.
FS STI vs FS Small Cap
FS STI
2,350
2,300
2,250
2,200
2,150
2,100
2,050
2,000
1,950
1,900
Jan-08 Feb-08 Mar-08
Source: Bloomberg, DBS Vickers
FTSE Volume Traded (mil shares)
3,000
2,500
2,000
1,500
1,000
500
m
h
FS STI
Source: Bloomberg, DBS Vickers
FTSE Small Cap
Jan-08 Feb-08 Mar-08
Total Volume (LHS)
FTSE Small Cap Vol vs Tot Vol % (LHS)
FTSE Sm all Cap
600
580
560
540
520
500
480
460
440
420
400
30%
25%
20%
15%
10%
5%
0%
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