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

Country Assessment
Regional Equity Strategy Q4 2007
Sector recommendation and stock picks for China (Cont’d)
SECTOR REMARKS STOCK SELECTION
Automobile
Overweight
The rising income level and spending will sustain robust car sales growth in 2007 (of over
23% in 2007) given the low penetration of passenger cars of c. 2% in China. The
introduction of 2008 Accord model by Denway should boost earnings growth prospects
next year. Recovering margins and strong demand for commercial vehicles should sustain
Dongfeng’s EPS growth at 20%+ in 2007-08. Trading at low teen PERs for 2008, both
stocks are attractive.
Dongfeng Motor (489)
Denway (203)
Property
Overweight
A well-located commercial site in Shanghai fetched record high price in an auction after
fierce competition amongst property developers. This indicates developers’ bullishness on
the commercial property market in Shanghai. In our view, yield compression and
favourable rental growth should support the capital value appreciation of quality
commercial properties in major cities of China. The residential market remains in good
shape, but policy risk remains an overhang.
Shimao Properties (813)
Guangzhou Investment
(123)
Pharmaceutical
and Healthcare
Overweight
China Consumer -
Food &
Beverages
Neutral
China Consumer -
Retail
Overweight
Shipping
Neutral
With the latest interim results of the sector, we believe the worst policy overhangs should
be behind us. This year, we will start to see sector earnings back on a normal growth
track. Some market leaders have also registered strong recovery growth with expanding
market share. With a stabilised policy environment and strong long-term underlying
demand for good pharmaceutical and healthcare products, we recommend investors to
return to this small but vigorous sector. Our picks for the sector include Sino
Biopharmaceutical, Mingyuan and Hua Han.
For most F&B players, 1H07 results showed solid growth in top line and decent margins.
But we are becoming more cautious towards 2H, as cost inflation pressure has started to
surface. With prices of some agricultural commodities (such as wheat) scaling to new
highs, F&B players’ margins are likely to be affected. We prefer players (e.g. Tingyi) with
ability to raise prices or those (e.g. China Mengniu) with strong ability in new product
development.
Retail sales in China have been building momentum; in July and August 2007, sales
jumped 16.4% and 17.1% respectively, and up 15.7% y-o-y for 8M07. The recently
announced corporate results across Chinese retailers have also reaffirmed such positive
consumption trend, while the inflationary environment in China could provide retail
operators with even better pricing power ahead. As overall sector valuation stays rich, we
prefer players that post attractive growth potentials yet offer relatively less demanding
entry levels.
Except for the dry bulk vessels, evidence of market recovery for containers and tankers
markets is not yet strong enough to change our cautious view on the shipping sector,
especially when the sector is trading at historical high cycle-peak valuation. With
increasing risks from the US economic slowdown and rising operating costs, we maintain
our cautiousness on the sector, aside from some stocks in special situation. For instance,
we believe marine services and related industries should benefit from the continuous
expansion of shipping fleets in China – BUY COSCO International and Singamas. We
also like China COSCO on the back of its mega asset injection potential.
Sino Biopharmaceutical
(1177)
China Mengniu (2319)
Walker Group (1386)
Beijing Jingkelong (8245)
COSCO International
(517)
China COSCO (1919)
69