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China/HK retail access day.
CLSA held a China/HK retail company access today for investors. With 1 exception,
the message was one of slowing growth and caution. October post Golden week
has seen a sharp deceleration in sales growth and most are warning of slower
growth to come in 2009. Importantly for PRC discretionary consumption, all
pointed to much slower wage growth for their staff in 2009. Without the high real
wage growth of recent years, PRC consumption looks set to slow more sharply
than previously expected in 2009.
China Unicom (762 HK – U-PF. 3Q – Not looking good.
3Q disappointed with earnings down 5.9% YoY excluding one-off and CDMA.
Revenue growth was only 1% YoY with Ebitda margin under pressure dropping 5pp
to 41%. Share price could see pressure especially after recent rally.
New report (823 HK – Initiate with BUY). Safety net.
Link operates 180 malls and carparks in Hong Kong. Management is driving aboveaverage
rental growth via aggressive asset-enhancement initiatives and effective
tenant-mix strategies. The Reit targets the low-end retail segment with no
exposure to residential and office properties (reflected by a very low 0.4x beta),
making it a safe play in volatile markets. After factoring in sharply slower revenue
growth in FY09, our HK$19.60 target price still implies 65% upside.
Café de Coral (341 HK – Initiate with BUY).
CDC offers the perfect recipe as Hong Kong slows. Its low-end restaurant chain,
the largest in Hong Kong, has proven to be robust during the downturn of 97-98
(stock outperformed HSI by 73%), with the added benefit now of: 1) experience;
2) a doubling of economies of scale since; and 3) a far stronger cash rich balance
sheet that will allow the group to accelerate its expansion as others are bunkering
down. We value CDC by a blended approach with reference to peer, historical and
DCF valuations, the latter best reflecting its cash generative power. Initiate
coverage with a target price of HK$15.00 implying a target PER of 14.8x. BUY,
25% upside.
I.T. (999 HK – Downgrade to SELL). Rising risks
I.T.’s interim net profit was down by 66% YoY due to materially larger than
expected option expense and a HK$10m hedging loss (due to normal hedging
activities in our view). We have made hefty cuts to earnings and downgrade the
stock to SELL.
Sector outlook – Rail contractors: 3Q unexciting.
We view 3Q08 results by both railway contractors as unexciting. In particular, CRC
showed margin weakness for the quarter vs. 1H08. CRG’s margin on the other
hand held up vs. 1H08. New orders for both remained very robust. We found forex
loss at CRG larger than expected and expect more forex loss for both in 4Q. Op
cashflow remained in negative territory though working cap has improved in 3Q.
We downgraded earnings for both on forex loss and lowered TPs accordingly.
Valuations at 13-16x 09CL PE are not attractive. Maintain U-PF for both.
Shougang Intl (697 HK – Initiate with BUY). Not only ship plate.
Shougang, a 3mt mill, is a beneficiary of the short supply in premium heavy plate
steel used in ship building at least into 2010. But half of their production is for
other high quality plates for infrastructure such as bridge building and pipelines.
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