Hong Kong market snaps a five-session losing streak, with the HSI rising 1.5% to 21,840.37 and the H-share index up more, rebounding 2.56% to 10,535, forty minutes before the market closes on Friday. Goldman Sachs says that recent macro newsflow, including weaker data, property tightening, WMP regulations, anti-corruption, etc., “has led to a dramatic resetting of investor expectations for China’s cyclical outlook. As a result it cuts the H-share index’s target to 12,400 from 13,700, although “we think the cyclical challenges are priced in and still see mid-to high teen upside.” GS expects “heavy scrutiny” over April and 2Q13 data to see if past accommodative policy is finally filtering through to boost the economy. If confirmed, this could support a short-term relief bounce. “However, we see structural concerns building and a sustainable rally is contingent on reversal of these concerns via structural reforms/adjustments.”
Category Archive: April
BofA Merrill Lynch said Hong Kong’s equity market remains a laggard and the Hang Seng H-Share Index stalled at key resistance near 12,000 before beginning to trend lower. The risk is for a drop back to the 10,000-9,990 support, but given the failure at the upper end of year-long trading range, the H Shares could test as low as the July-Sept 2012 lows of 9,120-8,985, which is the lower end of the range, the research house noted. The short-term downtrend from early February is steep and it would take a break above 10,800-11,125 resistance to stabilize the Hang Seng H Share Index, BofAML added.
Zoomlion Heavy Industry (Hong Kong stock code 1157) plunges 9.52% to HK$7.51 due to its 1Q13 profit warning issued after Friday’s market close, tipping a 60%-80% on-year net profit decline to CNY417.8-CNY835.5 million (EPS CNY0.05-CNY0.11), citing slow economic recovery and low market demand for construction machinery.
Daiwa says that there was no mention of the level of 1Q13 sales, and it estimates quarterly sales fell by about 50% on-year to CNY5.8 billion, based on the extent of decline in net profit and assuming a moderate on-year fall in the gross profit margin (1Q12 GPM 32.1%). “Given the poor start to 2Q13, we believe it will be difficult for Zoomlion to meet its guidance of a 15% on-year increase in 2013 sales to CNY55 billion.” Daiwa cuts Zoomlion to Hold from Outperform, and target price to HK$8.24 vs HK$11.20.
BofA Merrill Lynch said Zoomlion’s profit warning for 1Q2013 was weak but in line with the house’s estimates and appears on track to meet BofAML’s FY2013 forecasts. The house estimated its top line fell 50% YoY in 1Q2013 as Zoomlion thoroughly cleared risky receivables and did not promote sales in 4Q2012-1Q2013. It estimated gross margin shrank by 2ppt YoY but up 7ppt QoQ due to much less repossessions than 4Q2012. BofAML maintained its FY2013-15 earnings largely unchanged, indicating NPAT down 23% YoY in 2Q2013 and a rebound in 2H2013. Weak 1Q2013 results will likely drag stock price down in the short term. The research house thinks a dip in share price represents a particularly attractive buying opportunity. BofAML maintained its “buy” call and HK$11 target price on the stock.
Barclays Research said Zoomlion’s profit warning is worse than the house’s estimate. The 60%-80% decline in 1Q2013 net profit further makes full-year target of sales growth of 15% appear challenging. For full-year 2013, Barclays expect net profit to grow slight by 5%. It estimated the reasons led to the weak 1Q2013 net profit probably include the y/y decline on sales from concrete machinery, and lower margins hurt by rising sales expenses, bad debt provisions and financial cost. The house plans to review its earnings estimates, but maintained its “overweight” rating and HK$11.85 target price on the stock.
Lenovo (Hong Kong Stock Code 0992) is off 5.64% at HK$6.69 on top of its 5.8% slump Thursday due to IDC/Gartner reports about weaker-than-expected global PC shipment in 1Q. The stock earlier slid to an intraday low of HK$6.68, the lowest level in five months. SHK Financial lowers Lenovo’s FY14 (ending March 2014) revenues forecast by 7% on a continued weak outlook for the PC industry, unlikely to be fully offset by hybrid PCs, tablets and smart phone growth in the short term. Still, it believes Thursday’s share-price decline of 6% is already “an overreaction” to weak industry figures. “Lenovo can continue to outperform the rest of the market on PC shipments given the addition of CCE in Brazil, its positive momentum in the North American market and exposure to emerging markets.” SHKF remains positive on the firm’s ability to deliver solid growth in smartphones and tablets as well as margin expansion to offset the weakness in PCs. It lowers Lenovo’s target price to HK$8.70 from HK$9.25 but recommends “accumulating on the short-term weakness.”
Goldman Sachs cut its target price for Lenovo Group to HK$7.6 from HK$8.4, and maintained its “neutral” call. The research house said Lenovo’s 1Q2013 PC shipment of 11.7m was below Goldman’s estimate of 12.1m. It said the incrementally weaker PC data points confirmed its concerns over Lenovo’s fundamentals. Goldman expects pricing pressure to intensify in the PC industry as companies will likely pursue more aggressive pricing to recover scale, and rising key component prices (such as DRAM, displays) could hurt OEMs’ margins. It added that the sustainability of Lenovo’s smartphone margins is highly uncertain given most of its volume is driven through its still loss-making operator distribution business.
Credit Suisse sees attractive entry point to Lenovo Group at current levels. It expects Lenovo to forgo share gains to protect its profit as PC demand remains soft, and this may lead to pre-tax income upside surprises this year. The research house believes 1Q2013 was a tough quarter for Lenovo. Over the last decade, its share price has retraced an average 9.5% due to fears over China’s seasonal slowdown. This year was no different. Its shares fell 21% from its peak on 1 March to 2011 April. But its shares rebounded dramatically in 2H over 1H by an average of 20%. Credit Suisse reduced its 4Q2013 March quarter sales by 2.4% to US$7.87bn, accounting for a mild PC shortfall, but raised EPS by 2.8% noting that Lenovo walked away from lower margin PC business to protect profit.
While quite a few analysts are recommending accumulate Lenovo shares on weakness, Citigroup cuts the stock straight to a non-consensus Sell from Buy, and target price to HK$6.50 vs HK$7.80, as it lowers its FY14/15 earnings by 16%/15%. It says that in past years, Lenovo has generated strong profits from China PC business (over 70% of its total operating profits) to fund new businesses that are now either making very slim margins (consumer PC) or are loss making (smartphone/tablets). “Moving forward, we believe Chinese consumers may also go through a secular trend of tablet migration.” As tablets start to encroach on PC demand, Citi believes profit contribution from China PC business for Lenovo will start to slow. “We are concerned Lenovo’s current business model would be unsustainable in FY2014 and that the margin expansion path could be disrupted.”
COSCO Pacific (Hong Kong stock code 1199) plunges 3% to HK$10.24. Morgan Stanley trimmed its target price for COSCO Pacific to HK$12.25 from HK$13.3, and downgraded the stock to “equal-weight” from “overweight”. The research house said the worst period is probably over. However, it still sees a lack of drivers for near-term re-rating despite low valuation. Morgan cut its earnings estimates 2013 and 2014 reflecting weak box demand for CIMC and a less positive outlook for container throughput growth. Specifically, it noted a pronounced slowdown in traffic momentum at Piraeus and GZ Nansha terminals, the pillars of COSCO’s terminal business in 2012. It now expects 2013 earnings to recover only 12% YoY, rather than 18% YoY.
Citigroup says that while it admits there are limited catalysts for the life insurance sector, “we see value emerging” after 12%-24% share price pullback. It says that the life insurers currently trade at close to their ex-growth values, and the valuation premium of China insurers over China banks is also near its historical trough. “In our view, Chinese life insurers are not ex-growth given gradual cyclical improvement and intact structural story.” As such, it sees recent pullbacks as buying opportunities for the life sector. Citi ups China Life (ADR: LFC, Hong Kong Stock Code 2628) to Buy from Neutral despite lowering its target price to HK$26.00 vs HK$28.30, as the stock has traded below its ex-growth value; it also like Ping An (2318) and mid-cap pure life plays. China Life is up 2.0% at HK$20.50 on top of Tuesday’s 4.4% rally.