The HSI rebounds 0.7% at 19,393.75, after having fallen in nine out of the past ten sessions (total loss 9.6%), as Europe, especially Greece, remains the focal point of caution and depresses investors’ bargain-hunting interest. Still, taking a longer-term view, Morgan Stanley says valuations of China equities are low, with the H-share index for example on 7.5X trailing P/E; it adds that China’s monetary and fiscal policy is easing, “at first gradually but we now expect with more vigour.” The house tips the HSI’s and H-share index’s end-2012 targets at 23,600 and 13,400 respectively.
China auto stocks are rising, led by Great Wall Motor’s (Hong Kong stock code 2333) 7.2% rally to HK$15.52, while Geely Auto (0175) and Dongfeng Motor (0489) are also rising more than 3.0%, boosted by the State Council’s announcement of a new batch of subsidies to promote the consumption of energy-efficient home appliances and autos, with CNY6.0 billion being allotted to fuel-efficient vehicles with engines below 1.6L. “It’s a minor positive for the auto sector and local brands should benefit the most,” says Macquarie; it also believes that it is a clear signal of the government’s commitment to shift domestic demand towards more personal consumption and away from fixed asset investment. Macquarie adds that its top sector pick is Guangzhou Auto (2238.HK), which is trading on 7X FY12 P/E and 0.97X P/B, providing a good entry point for long-term investors. GAC is up 2.4% at HK$6.41.
Chinese equities are beginning to enter a new bull market despite macroeconomic uncertainties, says Morgan Stanley. The investment bank writes in a recent note that the bear market, as defined by the performance of the Shanghai Composite, ended on January 5, 2012 after 884 days, with the index down 38% from the peak. “Average bull market lasts 414 days for 245% return,” it says, adding that Chinese equities are now 130 days into this bullish phase with returns of 11% so far. From the fundamentals perspective, Morgan Stanley cites stronger consumption-related sectors and stabilizing real estate as some of the factors underlying a new bull market. With an average price-to-earnings ratio at 11.4 times, the A-share market in Shanghai looks cheap in terms of valuation, it says.
AIA (Hong Kong stock code 1299) is down 1.14% at HK$26.10 and is the worst-performing blue chip in percentage terms, affected by a Reuters report that American International Group (AIG) will sell its remaining stake in AIA after the lock-up period expires in early September, which may act as a medium-term overhang on AIA shares. AIG sold about $6 billion worth of AIA shares in March this year, leaving it with a stake of 18.6%, which is worth HK$59 billion based on AIA’s Wednesday close. Despite such overhang, AIA’s core insurance business is strong, hence lending fundamental support, so a likely scenario is that the stock will be rangebound in the medium term. In the past three months, AIA had largely stayed in a roughly HK$25-HK$30 trading band, which may continue to hold..
China Unicom (ADR: CHU, Hong Kong code 0762) hit 13-month low at HK$11.70 and ended the morning session down 6.05% at HK$11.80 (ADR US$15.18). It launched a 3G prepaid plan with RMB20 minimum monthly spending yesterday.
Bank of America Merrill Lynch cut Unicom’s FY12 3G ARPU estimate by 4.7% to RMB90, and also cut its subsidy estimate by 22% from RMB12.1bn to 9.4bn. The house said CU has reduced its commissions to 3rd party channels and reduced tariff discount from 50% to 40% on tariff subsidized contracts, and canceled all subsidies on RMB46 monthly plan, and the stock is trading at 4.5x/3.6x FY12/13E EV/EBITDA, 17%/29% discount to GEM peers. The house said potential catalysts are 3G net adds MoM growth from May; and better 2Q/3Q earnings. It keeps its Buy rating and target at HK$19.
CIMB downgrades Hong Kong container shipping sector to Neutral from Trading Buy, as the proposed May tariff hike failed to materialise amid the current economic downtown that weighs on international trade. “Although carriers are still pushing for more rate increase, customers are beginning to resist and capacity is returning in a weak demand environment,” the house says, noting that share prices of container shipping stocks could remain a downward bias in the next two months. The house downgrades China Container Shipping Lines (Hong Kong stock code 2866) to Trading Sell from Trading Buy, with a new target of HK$1.85 vs HK$3.40 previously. It also downgrades Orient Overseas (0316) to Neutral from Trading Buy, with a new target price HK$44.20.
