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

Regional Equity Strategy Q4 2007
Country Assessment
Sector recommendation and stock picks for China
SECTOR REMARKS STOCK SELECTION
Banking
Overweight
Commodities
Neutral
Oil & Gas
Overweight
Telecom
Neutral
After the rallies in 3Q07 (due to strong 1H07 results), Chinese banks still offer 9-19% gains
in 12 months, but upside in the short-term may not be significant. The Central Government
is likely to step up austerity measures amid rising inflation. Nonetheless, given the current
inflationary pressure has been driven mainly by high food prices, the Government will not
rely only on tightening monetary policies but also on administrative measures to control
food prices and divert excess liquidity. The three interest rate hikes in May 2007, July 2007
and August 2007 were less positive than before, given hikes in time deposit rates are of a
lower magnitude than those of lending rates. However, this will be mitigated by
strengthened asset-liability management. Further relaxation of QDII quota and so-called “HK
Stock Direct Train” will also benefit share prices of H-share banks. This, coupled with reduction
in corporate tax rate, under-penetration in consumer banking & wealth management,
continued growth in corporate banking and regulatory relaxation for more fee income,
should bode well for the long-term fundamentals.
We view the sound economic growth momentum in Asia Pacific (led by China, which
remains as the single, strongest market in consumption of commodities) should underpin
commodity prices to a certain extent. Besides, rises in investment, fuelled by expectations of
weak USD and higher crude prices, should support prices of precious metals such as gold in
4Q07. Moreover, ongoing industry consolidation along with the Government’s intention to
form several globally competitive enterprises should warrant a sustainable growth story in
those leading companies. Though valuations do not seem cheap across the board, selected
segments such as coal and gold are likely to continue their outperformance. Our top pick
for the sector is Chalco with 12-month target at HK$27.00.
In view of the persistent strong crude price, we believe upstream E&P oil companies such as
PetroChina and CNOOC will continue to outperform in the coming quarter. While Sinopec
remains as our long-term pick in the sector, its short-term performance will lack lustre with
the possible enlarged loss from refineries in 4Q07 amid the tightly controlled product oil
price in China. However, we believe this dominant downstream player will eventually catch
up, as crude price is believed to soften after the hurricane season, especially amid the
increasing risk of economic slowdown in the US in the next 6-12 months. Instead of betting
on the volatile short-term crude price trend, we prefer PetroChina in 4Q07 in view of its
relatively balanced upstream and downstream operations than closest peers as well as
potential technical support from its imminent A-share listing in October.
For 4Q07, uncertainties on industry restructuring and 3G licensing will continue to cloud
the telecom sector. Although we see the chance of issuing 3G licenses in 4Q is still slim, we
believe speculations will continue, possibly resulting in choppy share prices in fixed-line
operators and China Unicom. In this regard, we prefer China Mobile, given its strong
1H07 results and the least amount of uncertainties regarding restructuring and 3G
licensing. Though speculations have also caused significant fluctuations in the equipment
sector, we believe the continued recovery will command re-rating for this sector. We still
favour Comba, given its outstanding 1H07 results, attractive valuation and promising
growth outlook.
ICBC (1398)
CHALCO (2600)
PetroChina (857)
China Mobile (941)
Comba (2342)
China Telecom (728)
68