2009 Hong Kong and China Equities Market Outlook 21 Jan. 2009
Trawling in a Tsunami
Fiscal measures and economic reform will take time to work, and the recovery
will be mild. High volatility will likely persist in 2009, a generally frustrating
backdrop for those seeking quick returns.
Hong Kong-listed blue chips and large caps will generally offer unattractive
returns in 2009, while small and mid-cap stocks should outperform. The main
index components are banking, telecom and commodities stocks. Bank
earnings growth is likely to have peaked, structural changes to the telecom
sector mean severe competition ahead, and materials, commodities and energy
earnings usually only start to benefit between the midpoint and the end of a
recovery. Avoid these sectors for now.
Before the U.S. entered recession, job growth was anemic. With
unemployment now surging and without a new bubble to invest in, a U.S.
recovery will likely be shallow and have to come from economic reform and
fiscal measures. This will take much longer to have an effect than the
bubble-driven recoveries of the past.
Hong Kong is expected to see a 3% decline in GDP, led by slowdowns in pillar
industries – finance, property and exports – the first two of which account for
more than half the economy and are both highly reliant on monetary
expansion.
China’s drive up the value chain is on hold – improving technology and raising
productivity under the current economic backdrop will only exacerbate her
rising unemployment. Instead, the government is focusing on supporting
mainstream industries and preserving jobs. Monetary expansion and
fiscal-stimulus policies are likely to help GDP to grow by 5%, lower than the
target set by China’s authorities.
Stock Strategy
Depressed stock prices everywhere can be seen as ‘creative destruction,’ and a
good opportunity to pick up stocks. Look for companies: 1) at the forefront of
an economic recovery; 2) that feed off the value chain of large, transforming
industries; 3) have strong core competencies, and 4) have dominant brand
names.
The main transforming industries in China are agriculture, infrastructure,
aviation, telecom and autos. We would avoid these large sectors but instead,
buy companies that feed from these sectors, particularly companies with strong
core competencies.
Buy China consumer-staple producers and their value chains, and China
property developers to position for an economic recovery – these are at the
forefront to benefit from an increase in consumer confidence and discretionary
spending.
Buy on dips those China companies with dominant household or food brands.
These tend to have some pricing power to help maintain profit margins, see
lots of repeat business, and have dominant market shares that are difficult to
chip away. If backed by strong management, marketing and distribution
systems, they can leverage their name recognition by extending to other
products and capturing new markets.
Avoid China banks. Non-performing-loan ratios will rise, interest margins will
fall and the sector is at the forefront of providing monetary stimulus – not a
good position in a downturn. Any bond-funded recapitalization in future would
not only depress earnings, but would dilute minority shareholders’ interests.
Contents
Trawling in a tsunami ....................................................................................................................................................... 3
Investment Themes ...........................................................................................................................................................9
2009 stock picks – best buys ...........................................................................................................................................13
2009 stock picks – buy on dips .......................................................................................................................................17
2009 stock picks –micro-cap buys....................................................................................................................................18
Appendix 1: Company backgrounds, key investment positives and negatives and financial data
Chaoda Modern (682.HK) ........................................................................................................................................19
China Green (904.HK) ............................................................................................................................................26
China Yurun (1068.HK)............................................................................................................................................32
Heng Tai (197.HK) .................................................................................................................................................38
KWG Property (1813.HK) ......................................................................................................................................43
Sino-Ocean Land (3377.HK) ..................................................................................................................................49
Shimao (813.HK) ....................................................................................................................................................55
Minth Group (425.HK) ...........................................................................................................................................61
Xinyi Glass (868.HK) .............................................................................................................................................66
BYD (1211.HK) ......................................................................................................................................................72
Meadville Holdings (3313.HK) ...............................................................................................................................78
Centron (1155.HK) .................................................................................................................................................83
Mingyuan Medicare (233.HK) ................................................................................................................................88
Solargiga (757.HK) .................................................................................................................................................93
China Automation Group (569.HK) ........................................................................................................................98
HAECO (44.HK) ..................................................................................................................................................103
Sinopec (386.HK) .................................................................................................................................................109
Shenhua (1088.HK) ..............................................................................................................................................114
Huabao (336.HK) ..................................................................................................................................................119
Ju Teng (3336.HK) ................................................................................................................................................125
Kingboard Laminates (1888.HK) ..........................................................................................................................131
Ecogreen (2341.HK) .............................................................................................................................................136
Kingdee International (268.HK) ............................................................................................................................142
Hengan (1044.HK) ................................................................................................................................................146
Want Want (151.HK) ............................................................................................................................................151
Xinjiang Xinxin Mining Industry (3833.HK)..........................................................................................................158
Yorkey Optical (2788.HK) ....................................................................................................................................163
Appendix 2: Sector Overviews .......................................................................................................................................167
Appendix 3: Summary of sector price catalysts ..............................................................................................................188
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