Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Regional Equity Strategy Q4 2007
Country Assessment
Hong Kong / China
Investment amidst high inflation
HSI: 24,599 HSCEI 14,676
3 mths Target: 27,500 3 mths Target: 16,600
Expected Return 11.8% Expected Return 13.1%
12 mths Target 30,000 12 mths Target 18,300
Expected Return 22.0% Expected Return 24.7%
• We have upgraded 12-month targets for the Hang Seng Index (HSI) and HSCEI by 22% and 34%
respectively, due to (1) strong interim earnings growth of their component stocks, which has prompted
an upward revision in earnings forecasts for both 2007 and 2008 by c.10 percent, and (2) lower US
interest rates. We see room for further earnings improvement for many China stocks, underpinned by a
robust mainland economy and asset restructuring activities amongst the listed companies and their
respective parent groups.
• Liquidity in Hong Kong’s stock market is expected to surge in the coming six months as China
starts to drive excess liquidity offshore via QDII, individual investors, and financial intermediaries.
Enterprises are also urged to accelerate their overseas expansion plans to alleviate the pressure on
Renminbi (RMB) appreciation. We believe this liquidity will initially flow into Hong Kong, driving up
equity valuation. Stock prices may shoot above market expectation. Hence, it is too early for
investors to be pessimistic and take the sidelines. The excess liquidity will boost stock market
turnover, thus stock price of HK Exchange.
• Rocketing fixed-asset investment and wage growth as well as surging inflation and trade surplus
have been partly caused by the undervalued RMB. China, after resorting to implementing various
austerity measures, needs to accelerate appreciation of RMB and drive liquidity overseas to alleviate
overheating of the economy. Investors should focus on companies with large exposure to RMB assets,
and mainland economy. Property, financial, consumer/automobile, and machinery sectors in
China, remain our favourites. Property developers in Hong Kong will benefit from the liquidity inflow,
low unemployment rate and imported inflation. However, after the recent price surge, we are
concerned about the excessive valuation of selected counters. We have downgraded the Hong Kong
Property Sector to Neutral.
• China Construction Bank (939 HK, Buy), and ICBC (1398 HK, Buy) are good proxies to
China’s strong economic growth, while China Life (2628 HK) and Ping An Life (2318 HK) will gain
from China’s rising interest rate environment and insurance demand. Anticipated restructuring of the
telecom industry and introduction of 3G may enhance interest in the sector. China Mobile (941 HK,
Buy) and China Telecom (728 HK, Buy) should be winners of the major trends in the sector. Fast
rising wages will continue to drive consumption demand (especially for luxury goods, personalised
product and services), which should benefit Lee & Man (2314 HK, Buy), Denway Motor (203 HK,
Buy) and Dongfeng Motor (489 HK, Buy).
Index Close Chng -1 mth -3 mth -6 mth - 12 mth 52-Week
17-Sep-07 Net 1 m (%) (%) (%) (%) High Low
Hang Seng 24,599 4212 21 14 30 41 21,017 15,435
HS China Ent 14,676 3674 33 24 61 111 11,444 6,036
HS China Aff 4,954 1151 30 24 53 92 3,807 2,075
HS Mid Cap 5,083 938 23 10 19 41 4,691 3,010
HS Small Cap 3,086 497 19 12 29 40 2,741 2,077
Transactions:
YTD
Volume (bn shs) 13,076
Value (HK$bn) 12,164
Dr. Peter So · (852) 2820 4619 · peter_so@hk.dbsvickers.com
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Refer to important disclosures at the end of this report