UBS advises waiting for a better entry point in February, but it notes that some investors who are light on China may have to accumulate now; hence, the house screens for stocks that “look relatively safe while outperforming if the market continues to rally in February.” It examines tier-2 index stocks in each sector for potential laggards, at the same time focusing on high-beta stocks that have solid fundamentals; its 10-stock basket for China laggards include Dongfang Electric (Hong Kong stock code 1072), Anta Sports (2020), GOME (0493), Hengdeli (3389), Kingboard Chemical (0148), GCL-Poly Energy (3800), BBMG (2009), Shougang Fushan Resources (0639), Evergrande (3333) and Air China (0753).
Chaoda Modern Agriculture (Hong Kong stock code 0682) chairman Kwok Ho and CFO Chan Chi Po denied that they had disclosed the placing price of $5 per share in relation to the placing offer of 200-250 mln shares to institutional investors at a telephone conference in June 2009; however, two of all six institutional investors who had joined the conference, also noted that Kwok and Chan had disclosed the related information. The hearing continues today. The case stated that George Stairs, fund manager of Fidelity, after being informed related news about the placing offer, sold 374,000 share of Chaoda Modern Agriculture at $5.3 per share and then acquired 630,000 shares of the company at $4.6 per share in the placing offer afterward. The behavior of Kwok Ho, Chan Chi Po and George Stairs in the placing transaction may be regarded as market misconduct.
In mid January Standard & Poor’s Ratings Services lowered its long-term corporate credit rating on Chaoda Modern Agriculture to ‘CCC’ from ‘B-’. At the same time, the agency lowered the Greater China credit scale rating on Chaoda to ‘cnCCC’ from ‘cnB’. It kept the ratings on CreditWatch with negative implications, where they were originally placed on October 4, 2011. “We lowered the rating on Chaoda by two notches to reflect our view that the payment acceleration of a convertible bond is imminent. The rating remains on CreditWatch to reflect our uncertainty over the strength of Chaoda’s liquidity and its ability to repay the convertible bond in a timely manner. In particular, a long delay in its annual results announcement has increased information risk.” said S&P. “In our opinion, investors in Chaoda’s US$200 million convertible bond due 2015 have a strong incentive to accelerate bond payment, and our rating assumption is that Chaoda will fully redeem the convertible bond.” it added. “However, we are unsure about the company’s ability to redeem the bond, given Chaoda still has not announced its annual results for the year ended June 30, 2011,” said S&P’s credit analyst Joe Poon. “Without the annual results, Standard & Poor’s has insufficient information over Chaoda’s current offshore cash balance and other potential sources of liquidity. We also believe Chaoda’s financial flexibility has declined significantly due to its share suspension and its current condition.” he added. The agency aims to review the CreditWatch status within a month, when it expects to receive more clarity about the convertible bond arrangements, the company’s liquidity situation, and the annual results. Without that information, S&P may lower the rating to ‘CC’ before March if it believes Chaoda is highly vulnerable to nonpayment of its debt obligations.
Trading of Chaoda Modern Agriculture has been suspended since September 27 last year.
Credit Suisse cuts China Telecom (ADR: CHA, Hong Kong stock code 0728) to Underperform from Neutral, and also lowers its target price to HK$4.15 from HK$4.82. It says the iPhone launch in 2Q12, which it believes has been driving China Telecom’s share price, will allow China Telecom to enjoy the Apple “halo” effect upon launch and each addition should be value-accretive, but subsidy charges will affect FY12 earnings. The house also expects China Telecom’s fixed-line capex to rise for the third straight year, to CNY54.5 billion in FY12 (a 32.9% capex-to-sales ratio). “We see this as a symptom of structural pressures which are unlikely to be relieved, namely the prospect of additional cable-based competition, and accompanying regulatory pressure.” The stock is down 3.8% to HK$4.34 (ADR $55.95).
Hutchison Whampoa’s (ADR: HUWHY.Pk, Hong Kong stock code 0013) is up 3.4% to HK$76.50, versus the HSI’s 0.2% decline. Hutchison 3G Austria (3 Austria), a subsidiary of Hutchison Whampoa, said it has today entered into a binding agreement to acquire 100% of Orange Austria from Mid Europa Partners (MEP) and France Telecom. The completion of these transactions, expected to take place mid-2012, remains subject to the approval by the relevant regulatory and anti-trust authorities. As part of the overall transaction certain frequencies, base station sites, the mobile phone operator Yesss! Telekommunikation GmbH (Yesss!) as well as certain intellectual property rights of Orange Austria will be sold to Telekom Austria Group (TA) immediately after the acquisition of Orange Austria. The net consideration payable by 3 Austria of EUR900 million for Orange Austria after the sale of Yesss! as well as other assets to TA and before synergies corresponds to a 2011E Enterprise Value to EBITDA multiple of 6.9x. 3 Austria believes it will be able to generate cost and capex synergies with a net present value of at least EUR500 million from the combination. 3 Austria has also agreed to pay an integration-related performance based consideration of up to EUR70 million to MEP two years post closing of the transaction.
Credit Suisse says given Hong Kong/China stocks have run up quite a lot in 2012 (HSI +12.4% year-to-date), a lot of investors are thinking of booking profit or short selling some of these stocks. It says that it runs two screens to highlight a few potential sell ideas. The first are top performers which consists of stocks over US$0.5 billion in market cap that CS covers with a Neutral or Underperform ratings. Among the list, stocks CS doesn’t like with significant downside to target prices are BYD Co. (Hong Kong stock code 1211), Zoomlion (1157), Lee & Man Paper (2314) and Hang Lung Properties (0101). The second list is stocks that may have potential negative earnings surprises; among the list, stocks that CS rates as Underperform are China Overseas Land (0688) and HKEx (0388).
Macquarie upgrades PICC (Hong Kong stock code 2328) to Outperform from Neutral and trims its target price to HK$13.00 from HK$13.30, as it thinks that PICC’s solid underwriting margins can continue into 2012, and its balance sheet repair is well underway, while its recent underperformance “leaves the stock compellingly cheap.” The house adds, PICC’s leverage to rising A-shares is high, and there is a short-term trading opportunity ahead of FY11 results. PICC is up 5.3% at HK$10.66.
