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

Regional Equity Strategy Q4 2007
Country Assessment
Property (Shimao Property (813 HK, Buy), Guangzhou Investment (123 HK, Buy) and
R & F Properties (2777 HK, Buy)) and financial stocks (ICBC (1398 HK, Buy) and China
Construction Bank (939 HK, Buy)) will remain as our favourite picks, which should benefit
from the serious negative real interest rate environment in China. The recent interest rate
hike of 27 basis points in mid-September should benefit the banks (by widening margins)
and the insurance companies in China.
Some consumer stocks (e.g. Li Ning (2331 HK,Buy) , Beijing Jingkelong (8245 HK, Buy),
China Mengniu (2319 HK, Buy), Dongfeng Motor (489 HK, Buy), Denway (203 HK,
Buy), Walker Group (1386 HK, Buy)) will benefit from rising spending power in China,
while pricing power for those with strong brands and distribution networks (esp. those in
household facility, tobacco/liquor, medical, appliances etc.) will emerge as CPI growth rate
exceeded PPI.
Telecom sector – two development scenarios
Our telecom analyst also believes it is a good opportunity to accumulate telco stocks,
especially China Mobile (941 HK, Buy) and China Telecom (728 HK, Buy).
Going into 4Q, we believe China’s telecom industry will continue to be clouded by rumours
and speculations on industry restructuring and 3G licensing. Although restructuring of the
industry should precede the issuance of 3G licenses in our view, there are market voices of
possible restructuring of the telco sector in 4Q.
The Government’s focus would continue to be on the commercial trials of home-grown TD-
SCDMA 3G technology. In view of the Government’s determination, as seen over the years,
to develop a Chinese 3G technology, the success of TD-SCDMA trials would be crucial for
the Government to move further towards 3G licensing.
On the other hand, there have been market rumours of a possible industry restructuring
(which would favour more balanced competition) for some years. However, there has been
no timetable or official announcements on these issues; we believe there is not much time
remaining for the Government to decide, in view of the growing pressure from telecom
operators, other upstream and downstream players as well as the increasing need for realignment
of the industry.
4Q or early 2008 might be latest time for industry restructuring
As the industry structure will be crucial in determining the form and timing of 3G licensing,
we believe industry restructuring, if any, would precede 3G licensing (given the
complications of industry-wide restructuring) by c. 3-6 months, in our view. In this regard,
4Q or early 2008 might be the latest time slots for the Government to decide whether to
restructure.
TD-SCDMA trials networks in 10 cities are expected to be finished in October. Hence the
trials, with a few months of user-level tests, can be finished by year-end, which would
signal some degree of maturity for the issuance of 3G licenses;
The 2008 Olympics is another catalyst for 3G licensing, as the Government had
previously vowed to launch 3G services for the Games;
The longer it delays, the more complicated for an industry-wide restructuring, as
telecom operators have gradually become differentiated in management styles and
strategies, making it more difficult to see business synergies after restructuring;
If the industry restructuring does not materialise by 1H08, the Government might waive
restructuring in the foreseeable future.
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