I Bank Stocks Recommendation Summary
Source: CS
Increases stake in SCW, a move to further consolidate
TP: HK$21.90 LP: HK$15.00
● CMHI announced the acquisition of SCW.s 25 mn public B shares, or 3.9% of SCW.s total share capital, at a price of HK$7.35 on 6 Feb and also released its another 4.1% B share holding in SCW. Based on the transaction, CMHI.s B shareholding in SCW has reached 8.0% of the total share capital. This, coupled with its indirect holding of 21.3%, has raised CMHI.s total stakes in SCW to 29.3%.
● The deal implies 8.3x our projected 2009 earnings for SCW, slightly below CMHI.s current P/E of 9.6x. Further, the purchase price of HK$7.35 is below our NAV estimate of HK$10.4 for SCW. We thus view the deal as value-accretive. We raise our 2009-10E earnings by 1% each and our NAV estimates to HK$21.9.
● We believe CMHI.s acquisition is more of a strategic move than a trading investment and the timing is good given that SCW trades well below our NAV estimate. CMHI.s presence and influence on
● As we have mentioned before, we believe the timing of the acquisition is good, given that most of the Chinese port assets are trading at their historical lows. We expect CMHI.s balance sheet and cash flows to support any soft acquisitions.
● The stock underperformed the MSCI China Index due to market concerns over China.s weak export outlook and CMHI.s high exposure to Shenzhen. Although we expect no near-term improvement in trade demand, we see signs of bottoming, such as a slight rebound in US ISM new order index and China.s export PMI index. In addition, SCW.s Chiwan Container Terminal saw container volumes improve MoM, albeit down double digits YoY.
● Trading at a historically low P/E and P/B, we believe most negatives are priced in and the downside should be limited. At the current valuations, we prefer CMHI to COSCO Pacific (1199.HK, HK$7.71, N, TP HK$7.90) due to the former.s higher earnings exposure to port versus the latter.s 50% earnings exposure to more cyclical container leasing and manufacturing businesses. We also believe management quality matters, especially in industry downturns.
Source: UBS
SMIC (0981.HK)--------------------------------------------------------------------------- Neutral
Turnaround still a long way off
TP: HK$0.30 LP: HK$0.25
Numbers are still poor SMIC’s Q408 net loss increased to US$
Momentum is improving On a monthly basis, SMIC indicated the worst month was December 2008 and its momentum is getting better. Utilisation rate in February might be 10% higher than that in January and might increase another 7-8% in March. Demand for
Do not expect too much on 65nm On long-term outlook, SMIC indicated its 65nm process will pick up after Q209 and might contribute more than 5% revenue. However, as a lesson from CHRT, doing 65nm process can not guarantee more profitability. We do not expect good returns from in the near term.
Valuation: raise price target from HK$0.15 to HK$0.30 We raise our price target from HK$0.15 to HK$0.30. Our price target is derived from 0.38x P/BV (was 0.2x P/BV). When we set our previous price target on 30 October 2008, SMIC was facing de-rating problems and we could not predict the bottom. Now we think the stock is bottoming and switch to a franchise-spread model and derive target P/BV at 0.38x.
Source: MS
SMIC (0981.HK)--------------------------------------------------------------------------- Neutral
Long-term Concerns Remain
TP: HK$0.18 LP: HK$0.25
Investment conclusion: SMIC’s 4Q08 earnings results reaffirmed our view that the downturn will be steeper than expected. More important, however, we believe SMIC may face secular issues even beyond the downcycle. We retain our Underweight rating (see our February 4, 2009 note, Resume with UW Rating, Viability of Business Beyond Downturn a Key Concern).
4Q08 revenue meet guidance, margins disappoint: Revenue declined 27.5% Q/Q in 4Q08 to US$272.5mn, slightly better than our forecast of US$261mn and in line with guidance. This compares to a 4Q drop of 24% for Chartered and 30% for TSMC, while UMC is yet to report. Gross margin dropped to -27% from 7% in the previous quarter due to low utilization.1Q09 guidance at low-end of industry: Guidance for 1Q09 is for a drop of 50%, with continued negative gross margin. This is in line with our current estimate for a 53% drop, with a gross margin of -100% in 1Q09. In comparison, TSMC guided for a 45-50% drop, while Chartered guided for a 32% drop in revenue for 1Q09. Similar to TSMC, SMIC indicated that it is already seeing order improvements month on month, and believes that the near-term bottom has already arrived.What’s next: SMIC stock has rallied recently due to the Datang investment that took place November 3, speculation on an additional investment, and the semiconductor sector rally worldwide. Given that the cash infusion changes very little fundamentally, the industry downturn is even worse than expected, and SMIC is losing competitiveness in leading edge, we believe the stock could trade back down to previous trough levels, therefore we maintain our Underweight rating.
Source: GS
SMIC (0981.HK)--------------------------------------------------------------------------- Neutral
Below expectations: Outlook continues to deteriorate
TP: HK$0.20 LP: HK$0.25
What surprised us
1) SMIC reported 4Q08 rev and ADS EPS of $272.5mn and -$0.33, vs. our estimates of $269.6mn and - $0.25, due to gross margin deterioration. 2) SMIC guided 1Q09 rev of $136mn, down 50% qoq, below our estimate of $203mn and mostly due to PC weakness. 3) SMIC expects sales to trough in 1Q because monthly sales should bottom in January and utilization to increase 10% and 7% mom in February and March, respectively. 4) 2008 capex was $665mn, below guidance of $790mn. 2009 capex guidance is $190mn, below our estimate of $200mn.
What to do with the stock
We expect most foundries to report trough earnings in 1Q09, but margin structure should differ significantly. We expect SMIC to set a record for the sector with its potential -130% operating margin in 1Q09. We expect SMIC’s profitability to continue to deteriorate. We expect SMIC’s investments in TD, 65nm, and 45nm should lose more money than previous investments. We adjust 2009E-2010E rev and EPS by -23%/-18% and - 32%/-46%, respectively, and introduce 2011E estimates. We maintain our Sell rating and 12-m TP of HK$0.2 ($1.3 for ADR) based on 0.2X 2009E P/B. Risks include direct financial and business support by Chinese government.
Source: CS
SMIC (981.HK)------------------------------------------------------------------------------------- Maintain NEUTRAL
Bouncing off the basemen
TP: HK$0.20 LP: HK$0.25
● SMIC.s 4Q revenue was down 28% QoQ to US$
● 1Q revenue was guided down 50% QoQ. Opex was guided up due to lower R&D subsidy, a sharp contrast given the expected revenue decline and aggressive cost cutting efforts by peers. The only positive was bookings and wafer starts look to improve through April off extremely depressed orders in December, though it remains extremely far away from profitability.
● SMIC cut capex for 2009 ~72% YoY to US$190 mn, minimising cash burn. Based on this, the company should survive the downturn but come out with a lower chance to catch up on 45nm given minimal capex investment.
● We lower 2009 revenues by 35% and net income from -US$256 mn to -US$606 mn. We maintain our NEUTRAL rating and target price of HK$0.20, reflecting 0.2x P/B. SMIC currently trades at 0.3x P/B.
Source: CS
Ming An Holdings (1389.HK)------------------------------------------------------------ Maintain OUTPERFORM
FY08 profit warning
TP: HK$1.30 LP: HK$0.83
● Ming An issued a profit warning stating it expected to report loss in FY08 due to equity market declines coupled with heightened operating costs as the group invested in
● We are not changing our forecast of a FY08 loss of HK$162 mn.
● Within this forecast, we have allowed for an admin expense ratio of 45.6%, higher than the 40% achieved in FY07 as network expansion was accelerated during 2008, such that 2009 targets for provincial branch numbers have already been met.
● Our investment income forecast is HK$117 mn. Within this, we have allowed for HK$100 mn in capital losses from the equity portfolio and we have reversed the HK$129 mn property revaluation gain recognised in 1H08 given the weakening property market.
● Ming An is a small-cap P&C insurer with a solid balance sheet and a strong growth outlook. The investment case continues to rely on an improvement in operating returns as franchise investment winds down. We expect signs of improvement in 2009. Maintain OUTPERFORM. Our HK$1.30 target price implies 1x P/B.
Source: GS
Aluminum Corporation of
TP: HK$5.60 LP: HK$4.08
Source of opportunity
(1) Our first read of activity post Chinese New Year (CNY) is positive. Construction steel price started breaking out this week up 3.2% wow, biggest wow move since May 2008 when property construction was still strong, indicating a potential kick start of infrastructure spending and a stabilization of housing construction decline. (2) We believe risk/reward for Chalco is turning positive due to low aluminum prices (breakeven), trough valuation, shares lagged sector on the ytd surge by 11% while demand is leveraged to construction and power infrastructure. We add Chalco (H) to Buy and Conviction Buy (from Neutral).
Catalyst
(1) Aluminum price barely breakeven and just up 16% from 4Q08 low, after falling by 49% from 1H08 high. (2) Aluminum is geared toward activity with 38% construction and 16% power transmission demand exposure, both part of government’s stimulus plan. (3) The industry’s and Chalco’s earnings are close to breakeven, potential “sweet spot” on the delta theme when earnings start picking up. For Rmb1,000/t aluminum price move, Chalco earnings could be up Rmb3bn. We raise our ’09 earnings to Rmb2.55bn from near breakeven after we raise our price by 7% to Rmb13,000 (incl. VAT) vs current spot of Rmb12,160. (4). Optionality from potential parent overseas acquisitions.
Valuation
Chalco (H) is trading at 62% ’09 EV/replacement vs. trough of 60% and mid cycle 100%; we raise target EV/RPC to 80% and 12-m TP to HK$5.6 from 65% trough/ previous TP of HK$4.2. We upgrade Chalco (A) to Neutral from Sell. Chalco (A)’s new
Key risks Global macro downturn; strong liquidity/macro pickups.
Source: GS
Cheung Kong Infrastructure (1038.HK)---------------------------------------------------------------------- Neutral
TP: HK$32.50 LP: HK$29.00
What's changed
On Feb. 5, CKI announced that it will sell its three power plants in
Implications
We see two rationales for this deal: (1) proceeds from the sale would more than double CKI’s cash balance to HK$10.3bn, better equipping itself for more sizeable potential acquisitions. It still targets infrastructure assets in developed markets (e.g. UK, NZ), as they generally offer more predictable returns, and are easier to secure bank borrowings for in the current environment; (2) the disposal gain would help smooth CKI’s earnings this year, which would be dragged down by a decline in profit at HKE and the depreciation of the A$/GBP. Based on our earnings estimate of HK$710mn for power plants, the sale price of HK$5.68bn would imply 8.0X 2009E P/E. Since CKI is trading at 13.8X 2009E P/E pre-acquisition, the deal would be earnings dilutive.
Valuation
We revise up our FY09E earnings estimates on CKI by 24% after factoring in the disposal gain but lower our FY10E estimates by 7.9% in the absence of any earnings contribution from the power plants. We revise down our NAV-based 12-month target price to HK$32.5 (from HK$33.6) to account for the fact that the sale price is below our estimated NAV for these projects. On the other hand, with more cash on hand, if CKI were to leverage its balance sheet to 40% net debt-to-equity to acquire projects generating 15% equity IRR, we estimate potential upside of HK$4.1 to our FY09E NAV (vs. HK$3.0 previously).
Key risks
Currency risk: every 10% depreciation in A$/GBP cuts CKI’s NAV by 3%.
Source: MS
CCCC (1800.HK)---------------------------------------------------------------------------- Equal Weight
Growth to Slow Down Amid Waterway Capex Cut
TP: HK$8.10 LP: HK$8.87
Investment conclusion: We downgrade CCCC from OW to EW and cut out TP by 8% from HK$8.8 to HK$8.1, factoring in our 6.6-22% 09/10 earnings cut. While china stimulus theme mostly priced in, we highlight growing slowdown risk in CCCC’s waterway infrastructure in 09/10 given its high correlation with global trade momentum. We expect new sign contracts growth to slow down from 13.6% in 08 to 4.9% in 09, among which high margin port related contracts to decline by 2.4% YoY. We now estimate CCCC to deliver 15% and 6% earnings growth respectively for 09 and 10. Trading at 15 PE and 1.8 PB, we view CCCC fairly valued.
Get hurt amid global trade slowdown: CCCC has 65.5% revenue and 87% GP exposure to port related expansion capex (including construction, design, dredging and machinery). We believe global economic downcycle and trade slowdown will no doubt lead to port expansion delay beyond 2010.
New business leads to mix deterioration: CCCC’s adding focus to on-shore business including railway and highway, though correct in LT diversification, could lead to near term mix deterioration and margin dilution. As a new player in railway construction, it is likely to suffer lower margin vs. traditional ports construction.Valuation fully priced for
Source: UBS
Bank of
Compelling risk-reward profile
TP: HK$3.35 LP: HK$2.18
BOC is our most-favored large-cap China bank Today we pick BOC-H to replace CCB-H as our most favored large-cap China bank for three reasons: 1) continuous economic stimulus measures and strong sector credit growth boost investors’ risk appetite and hence forward-looking factors become major share price drivers; 2) previous concerns are likely to ease as restricted shares largely sold and its US$ bond market value is likely to stabilize; and 3) its deep valuation discount to both China and regional peers.
Valuation discount likely to narrow As the only
Valuation: Buy rating with 12-month PT HK$3.35 We rate BOC Buy and derive a HK$3.35 12-month price target based on 1.45x our 2009 BV estimate, assuming 13.2% LT RoE, 12.2% COE and 5% growth rate.
Source: GS
CNNM (3323.HK)---------------------------------------------------- Buy
Placement done: overhanging concern removed
TP: HK$10.90 LP: HK$9.02
An over
Balance sheet strengthened We calculate the net proceeds of the placement to be over HK$2bn. The net gearing of CNBM could be lowered to at least around 130% on our estimation, compared with 203% as of H108. We believe, with the strengthened balance sheet post placement, CNBM potentially could do more acquisitions in the future.
Limited EPS dilution Although the new shares issued accounts for about 12% of CNBM’s current total number of shares, we believe the EPS dilution would be no more than 5% due to the interest cost savings. On our estimation, the placement could help CNBM to save over Rmb
Cheap valuation provide further upside potential CNBM is trading at only USD53/t 09E EV/capacity, over 30% discount to Conch- H. Meanwhile, whether or when CNBM would do a placement to lower its gearing has been a concern hanging over its share price. As a result, we believe now the placement has been executed, there could be potential upside to CNBM’s share price.
I Bank Sectors Recommendation Summary
Source: GS
Expansion of insurance coverage favorable for pharma sector
We think the government’s recently announced initiative to provide basic universal medical care by 2010 will be a key driver of pharma industry revenue growth in
We highlight three themes for stock picking
We remain positive on the sector’s long-term prospects and we like all three companies’ long-term potential. However, we are generally less optimistic than Wind consensus on the 2009 earnings outlook for the onshore pharma sector, as we see little possibility of upside surprises due to a dry product pipeline and lack of nearterm catalysts. We think onshore healthcare stocks are trading at the upper range of their historical valuations, as ongoing support from the government has increased the appeal of the sector since 2007. In this report, we highlight three themes that underpin our stock-picking strategy for the sector: 1) choose companies focused on cancer, cardio, diabetes and hepatitis treatments; 2) look for in-house sales and marketing, as we believe this remains a key determinant of growth; and 3) watch for potential product inclusion in the drug reimbursement list, which we think is a major near-term catalyst.
Initiate on Hengrui (Sell), Kehua (Sell) and SL (Neutral)
Hengrui (600276.SS) is a leader in
Risks
Regulatory risk, worse-than-expected macro slowdown in
Source: GS
First read on construction post CNY positive, rebar breaking out
Construction steel price started breaking out in the first week after Chinese New Year (CNY), up 3.2% wow, biggest wow move since May 2008 when property construction was still strong, indicating a potential kick start of infrastructure spending and a stabilization of housing construction decline.
Prefer construction steel, upgrade Magang (H) to Buy
(1). Best upside leverage to construction with 55% volume exposure. (2). Catalyst #1: Construction steel price lagged flat due to winter seasonal slow with rebar up 10% vs. hot rolled up 26% since Nov lows. -- Catalyst #2: Construction steel restocking is only halfway and could go up further. Current inventory is about 11% below post-2008 CNY peak. -- Catalyst #3: Dominance in heavy duty train wheel allows leverage to railway capex, a subsector of infrastructure where we expect government spending to be up 100% yoy in 2009 to Rmb700 bn as part of Rmb4 trn stimulus plan. Magang’s rail division generates Rmb800mn profit, or 1/3 of ’09 profit, per our estimate. (3). We raise our ’09 long steel ASP by 5% to current spot level, resulting in ‘09/10 earnings upgrade of 58%/ 49% to Rmb2.2 bn (+9% yoy)/ Rmb2.7 bn (+25% yoy). (4). Our 12-m TP for H-share is raised to HK$4 from HK$1.2 as we move from trough EV/replacement cost (EV/RPC) of 55% to mid cycle of 90%, potential 38% upside.
Pair Trade with Angang on global mananufacturing theme
(1). Angang’s volume is about 94% flat which is global in nature. (2). Three danger signs emerging for flat steel prices -- Sign #1: More imports coming after a 26% price rise to US$612/t, incl. VAT.
Source: MS
Investment Conclusions: We revise down our earnings on our economist’s lower GDP forecasts and updates following recent company visits. CM remains our sector top pick as we believe (1) asymmetric regulation is unlikely in 1H09; (2) CM’s earnings will be most resilient to macro slowdown; and (3) an announcement of increased ’09 dividend payout at FY08 or 1H09 results is possible, given the company’s objective of maintaining steady DPS growth for shareholders. We continue to think CU offers the greatest upside in the long run, but we see near-term earnings pressure due to restructuring hurdles, macro slowdown and
2009 Key Sector Events and Share Price Drivers: We also highlight the key events and share price drivers expected throughout the year. Key events include (1) pressure from macro slowdown, especially in 1H09; (2)
Earnings and PT revisions. We lowered our ‘08/’09 net profit estimates by 0.7%/6.0% for CM, 12.0%/18.6% for CU, and 25.5%/3.5% for CT, respectively. Our new target prices are HK$85.0 for CM (vs 80.0 before), HK$11.5 for CU (vs HK$13.5) and HK$3.0 for CT (unchanged).
We are now below consensus for all three telcos. Our new ’09 net profit forecasts are 11.1%, 16.8% and 36.5% below consensus for CM, CU and CT, respectively. The differences arise from our more conservative view on the macro environment and more aggressive TD and CDMA assumptions, but also support our relative preference for CM in the sector. ent write-offs in the past.