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Published by: bi11y on Oct 02, 2010
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In Singapore, this research report or research analyses may only be distributed to InstitutionalInvestors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act,Chapter 289 of Singapore.
“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd(“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising fromor in connection with this report.”www.dbsvickers.comRefer to important disclosures at the end of this reported- JS / sa- DC
Multi-baggers riding on China’slong-term structural changes
Changes in next ten years may be even more amazingthan in the past two decades
Key long-term winners: Alternative energy,Commodity, Consumption, Construction, Education,Equipment manufacturers, Financials, Healthcare, Hi-tech manufacturers, Housing, Leisure, Airlines andRailways
Short-term, Hang Seng Index will remain highlyvolatile and range bound (19,000-23,000). Stockvaluations are no longer cheap, whilst policy risks anduncertainty on the global macro front will continue tolimit material upside.
Astonishing changes.
China has evolved from a supplierof cheap manufacturing labour to a1.3bn strong marketdriven by a rising middle class, rapid urbanisation,resulting in rising demand for housing and autos etc.Major infrastructure projects, eg high-speed railways, areseen everywhere.
Sit tight, more to come.
China is becoming animportant consumer market for the rest of the world. It ismoving towards making the RMB an internationalcurrency. This will in turn create huge opportunities forHong Kong and Shanghai as its financial centres.Healthcare, environmental and alternative energy sectorswill continue to enjoy favourable policies in view of agingpopulation. Rising affluence will create demand for ahealthier environment, better education and more leisureoptions including air travel. As reflected in its strongmarket share on telecom equipment and high-speed trainsplus its success in the space industry, China will becomeincreasingly competitive on exports of hi-tech and high-value-added products. We believe China will remain amega construction site for at least another decade,meaning the commodity cycle uptrend remains intact.
Key long-term winners.
Air China (753), China HighSpeed Transmission (658), Brilliance (1114), MaanshanIron (323), China Merchant Bank (3968), Ping AnInsurance (2318), China Resource Land (1109), ChinaRailway Construction (1186), Golden Eagle (3308), Li Ning(2331), China Yurun (1068), Tingyi (322), BeijingEnterprise Water (371), China South Locomotive (1766),Comba (2342), Jiangsu Expressway (177).
HSI: 21,402
Derek Cheung· (852) 2971 1703 ·derek_cheung@hk.dbsvickers.com
Current-1 Mth %
Hang Seng Index
HS Large Cap
HS Mid Cap
HS Small Cap
HS China Aff
HS China Ent
Key IndicesMarket Key Data
(%)EPS Gth09E10F11F09E10F11F
HSI12.623. (Red)10.920. (H)25.327.617.
HSI17.414. (Red)19.716.414.8n.a.n.a.n.a.HSCEI (H)15.612.210.4n.a.n.a.n.a.
Source: Bloomberg, DBS Vickers Based on closing prices as at 7 Sep 2010 
9 September 2010
China / Hong Kong Market Focus
Market Focus China/HK Strategy update 
Page 2
Still a long way to go
Cautious six-month horizon
We continue to believe the market will remain highly volatileon account of its high valuations, and uncertainties on thedomestic policy and global economic fronts. Liquidity mayremain supportive on the back of quantitative easing in the USand speculation about relaxation in China’s tightening policies.RMB appreciation has been disappointing to many, whileexports to western countries are expected to slow goingforward. Impact from one-off events, low-base, restocking andfavourable policies etc, are dissipating. We maintain our19,000-23,000 Hang Seng Index trading range. Anybreakthrough from this range within the next six months willlikely be on the downside. We would view this as anopportunity to accumulate the following names at moreattractive valuations.For long-only funds, we like
China Construction Bank (939HK), China Merchant Bank (3968 HK), Franshion (817 HK),China Shenhua (1088 HK), China Yurun (1068 HK), ChinaMengniu (2319 HK), Galaxy (27 HK), New World DepartmentStores (825 HK), Cheung Kong (1 HK), Hutchison (13 HK), Link(823 HK), Bank of China Hong Kong (2388 HK), Dah SingFinancial (440 HK), Ping An Insurance (2318 HK), ChinaRailway Construction (1186 HK), China South Locomotive(1766 HK), China Merchant (144 HK), ASM Pacific (522 HK),Comba (2342 HK)
China Communication Services (552HK)
.For absolute return funds, we would avoid/short
BYD (1211HK), Dongfeng (489 HK), Brilliance (1114.HK), Alibaba (1688HK), COLI (688 HK),
Agile (3383 HK).
For longer term, wealso believe optimism towards airlines stocks, eg
China Eastern(670 HK)
Cathay Pacific (293 HK)
are excessive.
From teenager to adult (5-10 year multi-baggers)
By looking at the expected changes in China’s economicstructure in the coming decade, we believe a number ofsectors will experience exponential growth, offering significantprofit making opportunities for equity investors. Key winnerswill come from the following sectors:
Alternative energy
Equipment manufacturers
Financial – Hong Kong / Shanghai
Hi-tech manufacturers
Transportation – Airlines, Railway
China – Focus of next decade
Source: DBS Vickers 
Our preferred long-term winners
We have identified the potential biggest long-term winnersalthough some of the above-mentioned sectors do not offer alot of choices listed in Hong Kong.
Market FocusChina/HK Strategy update 
Page 3
Long-term top picks
SectorStock pickComments
AirlineAir China (753 HK)1. Relative to CX, obvious proxy for China's robust aviation growth2. Strongest exposure to international routes so less impacted by HSR (High-SpeedRailways)3. Premier brand and seasoned management team with sound execution track record 4.Partnership with CX (30% rather than CX's 18% in AC)AlternativeenergyChina High SpeedTransmission (658 HK)1.China’s largest wind turbine gearbox maker2.Key beneficiary to policy driven demand of wind turbines.AutomobileBrilliance China (1114)1. Strong product pipeline and new capacity expansion to cater to rising demand ofluxury cars in China. 2. May use China as the export base for certain products in the futurefurther expand the earnings stream. 3. Enhances minibus operation through technologycollaborationBasic MaterialsMaanshan Iron & Steel(323 HK)1. Key beneficiary from China's mega construction and investment.2. Increased capacity to flat steel products to contribute its growth and margins couplewith Chinese automobile industry's growth.3. Its rail wheel and rhim business to grow with high speed railway project in China aftercompletion of current facility upgrading.Chalco (2600 HK)1. Key beneficiary from China's consumption market, especially Automobile, homeappliance, drinking package.2. Active investment on natural resources in both of domestic and oversea market totrigger higher asset value following price increase in commodities.China BankChina Merchants Bank(3968 HK)1. Strong retail banking franchise in coastal areas2. Fastest growing bank with best internal capital generation given sector high ROE3. CMB has the least exposure to local government funding vehicle loansChina InsurancePing An Insurance(2318 HK)1. Number 2 player in both life and P&C insurance, skillfully managing premium growthand profitability2. High agent productivity and strong presence in affluent major cities.China PropertiesChina Resources Land(1109 HK)1. With strong support from its parent, China Resources Group, and SOE background, CRLhas better expansion power over its peers;2. With a large retail portfolio and strong retail management expertise, it will benefitfrom the rising consumption power in China.Construction &MaterialChina RailwayConstruction (1186 HK)1. Flat organisation structure allows greater flexibility in a highly competitive domesticmarket. 2. Wide overseas presence allows greater business potentials. 3. Proactivemanagement style to business transformation means company is moving ahead of pack.ConsumerDiscretionaryGolden Eagle (3308 HK)1. Strong regional play based in the affluent Jiangsu Province2. Sound fundamentals, attractive track record and high ROE of >28%3. Ownership of a large store portfolio to lock-up prime locationsLi Ning (2331 HK)1. Strong market leadership with improving brand differentiation2. Outstanding ROE of >40%3. Clear and consistent strategy to capture long term growthConsumer StaplesChina Yurun (1068 HK)1. Favourable government policy2. Beneficiary of industry consolidation3. Solid upstream growth aside, expect acceleration in downstream as capacity expandsTingyi (322 HK)1. Clear leader in noodle and tea beverage2. Continual improvement in efficiency and strong scale translate into better margin3. Spinoff of beverage business a possibility
 Source: DBS Vickers 

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