Asia Pacific Equity Research 20 October 2010 Top Stories Notebook ODMs, Taiwan Buy Wistron (OW) before 3Q results, Quanta (OW) on dips (Alvin Kwock) While 4Q10 will likely be sub-seasonal at only 5% Q/Q growth, we believe 1Q11 could be strong with a Q/Q decline within 5% (better than the seasonal 12%). China strength should help in 1Q11 build, if not in 4Q10. As Y/Y growth is likely to trough in 4Q10, investors should be more long-focused with notebook PC names. Wintek Corporation (UW), Taiwan New UW with NT$39 PT, implying c.20% potential downside (Narci Chang) Our channel checks indicate that iPad shipments will start to slow in 4Q10 to clear inventories for the second-generation iPad, to be launched in 2Q11. Besides, we think large panel makers have begun to chip away at Apple’s orders and pose a significant threat to Wintek. We see this as an ideal time to take profit. Advanced Semiconductor Engineering (OW), Taiwan Still our preferred OSAT exposure; raise 3Q10 EPS estimate (Rick Hsu) Despite the gold and FX headwinds, we expect ASE to hold up better than its peers thanks to its fast Cu ramp-up. ASE’s 3Q10 sales beat guidance, and we raise 3Q10E EPS by 3% and expect the company to report strong earnings results – a likely near- term stock catalyst – on October 29. Our NT$32 price target stays unchanged. Ballarpur Industries Ltd (OW), India We initiate with Overweight and Rs50 price target; 43% upside (Princy Singh) BILT is trading at a 35%-40% discount to its global peers, which we expect to narrow due to its market leadership in India – the world’s fastest growing paper market, vertical integration, which should de-link the business from volatility in pulp prices and enhance its long-term margin profile, and steady improvement in ROE. Cement, Indonesia Indonesia Hard Hat – 3Q10 earnings preview: Risk on ASP and sales volume (Liliana Bambang) Indonesian cement stocks might underperform the market post-3Q10 results, due at October-end. We see risks to earnings from lower ASP increase and sales volume growth. But we stay OW on SMGR and INTP as we expect sales volume to recover in 4Q10. We would use any results-related weakness as a buying opportunity. Sunil Garg (852) 2800-8518 [email protected]Send me your feedback! AM perspective Adrian Mowat, Chief Equity Strategist Neutral on China Source: Bloomberg, 15 October 2010. Note: Chart shows performance of China A-share index. In comedy and strategy, timing is everything. The joke is on us, with China increasing interest rates by 25bp. If we had known, we would have delayed our upgrade. But China is a laggard market with building momentum. These are powerful characteristics in today's "bubble on, bubble off" markets. We downgraded China to UW on 17 September 2009; the return of MSCI China and EM since then is +11% and +21%, respectively. We have upgraded China to neutral. Please see China Chasing - Tactical upgrade of China to neutral, Mowat et al, 18 October 2010. Click below for the: J.P. Morgan Daily Valuations Daily Global Economic Briefing Link to Other FTMs page Link to Morgan Markets page See the end pages of each individual note for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Transcript
Asia Pacific Equity Research
20 October 2010
Top Stories
Notebook ODMs, Taiwan Buy Wistron (OW) before 3Q results, Quanta (OW) on dips (Alvin Kwock) While 4Q10 will likely be sub-seasonal at only 5% Q/Q growth, we believe 1Q11 could be strong with a Q/Q decline within 5% (better than the seasonal 12%). China strength should help in 1Q11 build, if not in 4Q10. As Y/Y growth is likely to trough in 4Q10, investors should be more long-focused with notebook PC names.
Wintek Corporation (UW), Taiwan New UW with NT$39 PT, implying c.20% potential downside (Narci Chang) Our channel checks indicate that iPad shipments will start to slow in 4Q10 to clear inventories for the second-generation iPad, to be launched in 2Q11. Besides, we think large panel makers have begun to chip away at Apple’s orders and pose a significant threat to Wintek. We see this as an ideal time to take profit.
Advanced Semiconductor Engineering (OW), Taiwan Still our preferred OSAT exposure; raise 3Q10 EPS estimate (Rick Hsu) Despite the gold and FX headwinds, we expect ASE to hold up better than its peers thanks to its fast Cu ramp-up. ASE’s 3Q10 sales beat guidance, and we raise 3Q10E EPS by 3% and expect the company to report strong earnings results – a likely near-term stock catalyst – on October 29. Our NT$32 price target stays unchanged.
Ballarpur Industries Ltd (OW), India We initiate with Overweight and Rs50 price target; 43% upside (Princy Singh) BILT is trading at a 35%-40% discount to its global peers, which we expect to narrow due to its market leadership in India – the world’s fastest growing paper market, vertical integration, which should de-link the business from volatility in pulp prices and enhance its long-term margin profile, and steady improvement in ROE.
Cement, Indonesia Indonesia Hard Hat – 3Q10 earnings preview: Risk on ASP and sales volume (Liliana Bambang) Indonesian cement stocks might underperform the market post-3Q10 results, due at October-end. We see risks to earnings from lower ASP increase and sales volume growth. But we stay OW on SMGR and INTP as we expect sales volume to recover in 4Q10. We would use any results-related weakness as a buying opportunity.
Sunil Garg (852) 2800-8518 [email protected] Send me your feedback! AM perspective Adrian Mowat, Chief Equity Strategist
Neutral on China
Source: Bloomberg, 15 October 2010. Note: Chart shows performance of China A-share index.
In comedy and strategy, timing is everything. The joke is on us, with China increasing interest rates by 25bp. If we had known, we would have delayed our upgrade. But China is a laggard market with building momentum. These are powerful characteristics in today's "bubble on, bubble off" markets. We downgraded China to UW on 17 September 2009; the return of MSCI China and EM since then is +11% and +21%, respectively. We have upgraded China to neutral. Please see China Chasing - Tactical upgrade of China to neutral, Mowat et al, 18 October 2010. Click below for the:
J.P. Morgan Daily Valuations Daily Global Economic Briefing
Link to Other FTMs page Link to Morgan Markets page
See the end pages of each individual note for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Recommendation and Forecast Changes Advanced Semiconductor Engineering (ASE)
(Overweight), Taiwan (Rick Hsu) Weather better through gold volatility
Ballarpur Industries Ltd. (Overweight), India (Princy
Singh) More than paper value
BYD (Neutral), China (Charles Guo) Outlook improving yet watch out for a very weak 3Q result
MindTree Ltd. (Underweight), India (Nishit Jasani) Services business sees strong revenue growth and weak margins; Backtracks on products strategy at high restructuring costs; Retain UW
Pantaloon Retail (India) Ltd (Overweight), India (Latika
Chopra, CFA) Time to shop
Robinson Department Store (Neutral), Thailand (Maria
Lapiz) Good story priced in, downgrade to Neutral
Wintek Corporation (Underweight), Taiwan (Narci
Chang) Reality check; we initiate with UW
Strategy
Market Strategy, Asia Pacific (Sunil Garg) Asia Pacific Financials Dashboards
Market Strategy, China (Frank Li) China Strategy: Equity implications of the first interest rate increase since Dec07
Market Strategy, China (Frank Li) Views from the Bund: China Equity Strategy and Economics
Economics
Economy, China (Qian Wang) China: PBoC raised rates 25bp, managing inflation expectations being the key concern
Economy, Hong Kong (Lu Jiang) Hong Kong: Unemployment rate stood at 4.2% in July – September period, labor market continued to improve
Results and Company Views
Bajaj Auto (Neutral), India (Aditya Makharia) 2QFY11 PAT at Rs.6.8B (+57% yoy) surprises on higher other income
Bursa Malaysia Bhd (Overweight), Malaysia (Harsh
Wardhan Modi) 3Q10 in-line, higher cash and derivative volumes to drive the stock - ALERT
Chinatrust Financial Holdings (Overweight),
Taiwan (Dexter Hsu) Former vice chairman sentenced to nine years in jail - ALERT
Daelim Industrial (Overweight), South Korea (Jinmook
Kim) Weak 3Q results on one-offs; take advantage of weakness
Banks, China (Samuel Chen) Banks: PBOC unexpectedly raises benchmark rates by 25bps, positive for banks
Cement, Asia Pacific (Pinakin Parekh, CFA) Cement: ACEM faces transport strike in HP; Post Diwali demand revival key for recent price increases to hold - ALERT
Oil & Gas, India (Brynjar Eirik Bustnes) Crude Reality: Indian fuel price deregulation - Working in parts, but significant moves likely only around mid 2011
Property, REITs, Singapore (Joy Wang) Singapore Property: Takeaways from China property tour with a Singapore Twist
Australia Aristocrat Leisure Limited (A$) ALL AU Stuart Jackson, CFA OW 1848 1810 30-Oct-09 4.52 3.46 5.00 15-Sep-10 iiNet (A$) IIN AU Laurent Horrut OW 413 405 2-Aug-10 2.78 2.72 3.33 2-Aug-10 Intoll Group (A$) ITO AU Kirsty Mackay-Fisher, CFA OW 3381 3312 17-Apr-09 1.35 1.50 1.80 3-Feb-10 Westfield Group (A$) WDC AU Rob Stanton OW 28455 27875 27-Jan-10 12.91 12.33 13.96 18-Aug-10 China AAC Acoustic (HK$) 2018 HK Charles Guo OW 21122 2722 8-Sep-09 6.91 17.20 18.50 30-Aug-10 Air China (HK$) 753 HK Corrine Png OW 189991 24489 27-Aug-08 3.93 10.92 7.8 23-May-10 Bank of China 'H' (HK$) 3988 HK Sunil Garg OW 1100222 141813 4-Mar-09 2.16 4.60 5.4 27-Aug-10 Baoshan Iron & Steel – A (Rmb) 600019 CH Nathan M. Zibilich, CFA OW 132216 19870 12-Oct-10 7.11 7.55 10.00 12-Oct-10 Brilliance China Automotive (HK$) 1114 HK Frank Li OW 33360 4300 15-Oct-10 6.42 6.68 9.60 15-Oct-10 China Citic Bank - H Share (HK$) 998 HK Samuel Chen OW 262649 33854 23-Nov-09 6.73 5.68 7.70 30-Apr-10 China High Speed Transmission (HK$) 658 HK Boris Kan OW 23541 3034 6-May-10 18.42 17.12 24.30 6-May-10 China Merchants Bank Co., Ltd - A (HK$) 600036 CH Samuel Chen OW 350788 52718 29-Apr-10 13.82 15.49 20.60 14-Apr-10 China Unicom H Share (HK$) 762 HK Lucy Liu OW 273321 35230 2-Aug-10 10.22 11.60 13.20 2-Aug-10 Focus Media (US$) FMCN Dick Wei OW 3418 3418 3-Jun-10 15.44 23.87 28.00 29-Sep-10 Geely Automobile Holdings Ltd. 175 HK Frank Li OW 29064 3746 15-Oct-10 3.79 3.92 6.20 15-Oct-10 Industrial and Commercial Bank of China - A (Rmb) 601398 CH Samuel Chen OW 1612872 242391 30-Oct-09 4.95 4.63 6.1 27-Aug-10 Shenzhen Expressway H Share (HK$) 548 HK Karen Li, CFA OW 12858 1657 8-Sep-10 3.90 4.37 8.1 8-Sep-10 Zhejiang Expressway (HK$) 576 HK Karen Li, CFA OW 33833 4361 20-Apr-10 6.83 7.79 8.5 30-Aug-10 Hong Kong Cosco Pacific (HK$) 1199 HK Karen Li OW 31616 4075 26-Aug-08 10.64 11.66 15.30 8-Jul-10 HSBC Holdings plc (HK$) 5 HK Sunil Garg OW 1440461 185668 24-May-10 71.65 81.80 115.00 22-Apr-10 K Wah International Holdings (HK$) 173 HK Amy Luk, CFA OW 7652 986 13-Apr-10 2.98 3.00 3.8 25-Aug-10 India Apollo Hospitals Enterprise Ltd. (Rs) APHS IN Princy Singh OW 65443 1476 5-Oct-10 463.15 529.60 575.0 5-Oct-10 Dish TV (Rs) DITV IN Princy Singh OW 57861 1305 13-Sep-10 56.30 54.40 70.0 13-Sep-10 Japan Dainippon Screen Mfg. (¥) 7735 JT Hisashi Moriyama OW 119368 1463 22-Jun-10 478 470.00 720.00 11-Aug-10 FUJIFILM Holdings (¥) 4901 JT Hisashi Moriyama OW 1447128 17734 26-Jan-10 2,942 2812.00 4,500.00 28-May-10 Hitachi (¥) 6501 JT Yoshiharu Izumi OW 1576836 19323 29-Jul-09 293 349.00 590.00 23-Apr-10 Honda Motor (¥) 7267 JT Kohei Takahashi OW 5443343 66706 19-Jan-10 3,370 3005.00 3,300.00 30-Aug-10 Inpex Corporation (¥) 1605 JT Brynjar Eirik Bustnes OW 1634147 20026 1-Sep-10 389,000 447000.00 630,000.00 31-Aug-10 Philippines International Container Terminal Services, Inc. ICT PM Jeanette Yutan OW 77239 1780 8-Sep-10 35.2 39.90 44.00 8-Sep-10 Philippine Stock Exchange Inc (Php) PSE PM Harsh Wardhan Modi OW 12110 279 9-Oct-07 820 395.00 605.00 4-Oct-10 Singapore CapitaLand (S$) CAPL SP Christopher Gee OW 17305 13236 29-Sep-08 3.26 4.06 5.30 18-Jan-10 DBS Group (S$) DBS SP Harsh Wardhan Modi OW 33980 25991 8-Aug-08 14.36 14.72 18.00 1-Aug-10 Genting Singapore (S$) GENS SP Kenneth Fong OW 26179 20024 10-May-10 0.96 2.15 1.55 13-Aug-10 Noble Group Ltd (S$) NOBL SP Ajay Mirchandani OW 11677 8931 12-Nov-09 2.83 1.94 2.00 13-Aug-10 Olam International (S$) OLAM SP Ajay Mirchandani OW 6882 5264 2-Oct-08 1.80 3.24 3.70 10-Aug-09 Singapore Airlines (S$) SIA SP Corrine Png OW 19196 14683 23-May-10 14.60 16.04 17.00 2-Feb-10 Singapore Exchange (S$) SGX SP Harsh Wardhan Modi OW 10658 8152 22-Jul-09 7.62 9.95 9.7 4-Oct-10 Wilmar International Limited (S$) WIL SP Ying-Jian Chan OW 40215 30760 25-Jan-10 6.69 6.29 7.80 6-Oct-10 South Korea LG Chem Ltd (W) 051910 KS Samuel Lee, CFA OW 21604380 19057 14-Oct-10 327000 326000.00 430,000 14-Oct-10 LG Display (W) 034220 KS JJ Park OW 14473650 12767 15-Mar-10 35900.00 40450.00 55,000.00 16-Sep-10 LG Innotek (W) 011070 KS JJ Park OW 2565025 2263 23-Mar-10 115000.00 127500.00 240,000.00 15-Jul-10 Samsung SDI (W) 006400 KS JJ Park OW 6697076 5908 23-Jun-09 96100.00 147000.00 240,000.00 20-Jun-10 SK Energy Co Ltd (W) 096770 KS Brynjar Eirik Bustnes OW 13638670 12031 5-Oct-07 147,500 147500.00 165,000.00 13-Sep-10 Taiwan Quanta Computer Inc. (NT$) 2382 TT Alvin Kwock OW 196989 6382 13-Oct-10 48.05 51.40 62.00 13-Oct-10 Chinatrust Financial Holdings (NT$) 2891 TT Dexter Hsu OW 217809 7057 24-Aug-09 18.75 20.30 22.00 1-Sep-10 Chimei Innolux Corporation (NT$) 3481 TT JJ Park OW 316914 10268 10-Jan-10 54.1 39.40 63.00 10-Jan-10 First Financial Holding Co Ltd (NT$) 2892 TT Dexter Hsu OW 130832 4239 3-Sep-10 18.45 20.20 24.00 Aug-10 Pegatron Corp (NT$) 4938 TT Gokul Hariharan OW 85841 2781 24-Aug-10 40.15 37.55 52.00 24-Aug-10 Powertech Technology Inc (NT$) 6239 TT Cynthia Chou OW 65635 2127 2-Aug-10 101.5 93.20 130.00 2-Aug-10 E Ink Holdings Inc (NT$) 8069 TT JJ Park OW 54502 1766 4-Mar-10 63.6 50.70 85.00 28-Nov-09 Unimicron Technology Corp. (NT$) 3037 TT Christopher Ma OW 71954 2331 18-Apr-10 40.75 46.50 60.00 18-Apr-10 Thailand Banpu Public (Bt) BANPU TB Sukit Chawalitakul OW 202180 6761 15-Oct-10 724.00 744.00 902.00 15-Oct-10 PTT Public Company (Bt) PTT TB Sukit Chawalitakul OW 882203 29500 23-Mar-10 256.00 310.00 395.00 15-Sep-10
Source: Bloomberg, J.P. Morgan estimates. *Under applicable law and/or JPMorgan Chase & Co policy, all J.P. Morgan ratings and estimates for this company have been removed.
For details on the AFL methodology, please see the Asia Cash Equities page on mm.jpmorgan.com or contact your J.P. Morgan salesperson/the covering analyst.
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• China strength should help in 1Q11 build, if not 4Q10: While 4Q10 will likely be sub-seasonal at only 5% Q/Q growth (vs. 15% Q/Q growth on average since 2003), we believe 1Q11 could be strong with Q/Q decline within 5% (vs. seasonality at 12% decline). The recent Golden Week is usually a success and should induce brands to aggressively build for CNY, the effect of which we estimate is 2-3x bigger than Golden Week, given CNY is a much more important sell-through season. As Y/Y growth is likely to trough in 4Q10, investors should be more long-focused with notebook PC names, and we recommend to buy Wistron ahead of the strong 3Q results (to be announced this Fri), and buy Quanta on any dips.
• Quanta (OW): 4Q revenue may outgrow NB shipment: Quanta's 4Q10 notebook shipment growth should reach 10% Q/Q, thanks to new Apple Macbook and share gain at Acer/ Asus. More importantly, strong non-notebook growth (Apple iPod touch, Google/ Facebook servers) plus better customer mix (more Apple, less HP) is good for ASP and margins. However, RIMM Playbook may now get delayed from 4Q10 to 2Q11, due to a change of chipset solution from Marvell to TI, but we only model 2% revenue contribution from this product to begin with - so if the stock gets sold off on this news, we believe it could be a good entry opportunity.
• Wistron (OW): 3Q margin keeps trending up: After a impressive 2Q with OPM near 10-quarter high, we expect 3Q margins to trend up further slightly vs. our previous expectation of 20bps erosion, despite all the macro headwinds (NTD appreciation, ODM price erosion, etc). A rising corporate exposure helps, as this segment is more immune from EMS competition. Besides, Blackberry and TV margins are expanding, and this may sustain as customers start to delegate component procurement right, which leads to further room to cost down.
• Compal (UW): 2H10 marks onset of Netbook pains: After seeing 5% Q/Q notebook shipment decline in 3Q, we expect only flat 4Q shipment as Acer is de-emphasizing Netbook (all done by Compal), which means 2H10 is seeing an unprecedented 6% H/H shipment decline. We believe Netbook margin used to be higher than corporate average at Compal due to high volume per model, so Netbook weakness could hurt Compal margin as well.
• Initiating coverage with UW rating and Dec-11 PT of NT$39: Wintek’s share price has outperformed all its peers in the past three months, but we think the upside potential has now been fully captured in the price. Our channel checks indicate that Apple’s iPad shipments will start to slow in 4Q10 to clear inventories for the second-generation iPad to be launched in 2Q11. Besides, we think large panel makers, including AUO and CMI which have fully-fledged vertical integration capabilities, have begun to chip away at Apple’s orders and pose a significant threat to Wintek. We believe this is an ideal time to take profit in the shares.
• We expect Apple’s iPad shipments to take a breather, other tablets could emerge: We expect Wintek’s revenue growth momentum to slow in 4Q10, primarily due to reduced shipment orders from Apple. We also expect to see other tablet brands gather momentum in 4Q10 and 1Q11 until a new version of iPad is launched. Wintek has relatively smaller exposure to other major tablet PCs, as its revenue is heavily concentrated on Apple.
• Oversupply could become an issue in 2Q11: We believe aggressive capacity expansion by touch panel suppliers will create a significant supply/demand imbalance by 2Q11. More specifically, we expect 10-inch equivalent touch panel capacity will be twice that of demand next year, and three-inch equivalent capacity will be 125% of demand. We expect to see more price competition and margin erosion, peaking in 2Q-3Q11. This trend could coincide with a potential steep dip in Wintek’s FCF next year and a significant rise in gearing on the balance sheet.
• Our Dec-11 PT of NT$39 implies c.20% potential downside from current levels. Our price target is based on 13x 2011E earnings, which is close to the median of the industry comps’ forward P/Es. Of note, Wintek’s margins and ROE are at the lower range of touch panel makers, on our estimates. A key upside risk to our PT is demand growth exceeding our expectations.
ASE remains our preferred OSAT exposure since we believe it will weather better than peers through the gold price hike and FX volatility, thanks to its fast Cu ramp-up to mitigate impact from the two headwinds. Peers may feel more pinch from the gold impact due to wide gap from ASE on the gold-to-Cu transition, in our opinion. We continue to prefer ASE over SPIL, and reiterate our OW and NT$32 PT.
• 3Q10 sales beat guidance. As expected, ASE reported SAT sales growth of 7% Q/Q for 3Q10, comfortably beating guidance thanks to Cu and rush orders from handset space. Consolidated sales beat our previous estimate by 4% and topped consensus range, due to higher EMS sales. We raise 3Q10 EPS estimate by 3% and expect ASE to report strong earnings results on 29 October – a near-term stock catalyst.
• Less hit by gold but ... Though surging gold prices have raised margin concerns on OSAT names, we estimate only 1-2% drag in ASE’s 4Q10 EPS thanks to its fast ramp-up in Cu wirebonding to mitigate gold impact. Peers like SPIL may feel more pinch due to slow Cu transition.
• … impacted by FX. FX volatility looks to be affecting ASE’s profitability more than gold in 4Q10, when we expect SAT sales to grow 3-5% Q/Q in US$ terms, above seasonality, but flattish in NT$ terms after factoring in the 4% average NT$ appreciation. With our more conservative FX assumption, we trim FY11-12 EPS forecast by 1-2%.
• Reiterate OW, Jun-11 PT NT$32. Despite the gold and FX headwinds, we expect ASE to weather better than peers thus are comfortable with our OW. We still believe it’s too early to switch investment from ASE to SPIL. Our NT$32 PT is unchanged based on our ROE-adjusted P/BV of 2.1x. Risks to our PT are end-demand outlook, capex discipline, Cu catch-up from peers, and 3D IC packaging.
Shares O/S (mn) 657 Market cap (Rs mn) 23,131 Market cap ($ mn) 521 Price (Rs) 35.20 Date Of Price 19 Oct 10 Free float (%) 41.1% 3-mth trading value (Rs mn) 140.8 3-mth trading value ($ mn) 3.2 3-mth trading volume (mn) 4.2 BSE30 19,983 Exchange Rate 44.37 Fiscal Year End Jun
Source: Company data, Bloomberg, J.P. Morgan estimates.
• Initiate with Overweight, and Mar-11 PT of Rs50: Our PT implies 43% upside. BILT is trading at a 35%-40% discount to its global peers, which we expect to narrow on account of 1) its market leadership in India, the world’s fastest growing paper market, 2) ensuing vertical integration which will de-link the business from volatility in pulp prices and enhance its long-term margin profile, and 3) steady improvement in ROE over FY10-FY13E to global benchmark levels. We add the stock to our Asia Analyst Focus List.
• Dominant player in the Indian market: BILT has a 40% share of the market for wood-free coated paper and a 25% share for copier paper – high-end segments that are growing at 12%-15% per annum. BILT’s paper capacity expansion will allow it increase paper output from 0.78MM tons in FY10 to 1MM tons by FY13E to cater to the growing demand requirement. BILT’s leadership position, strong brand and wide distribution reach allow it to command a pricing premium of 5%-7% over imported paper.
• Backward integration to reduce cost structure: BILT is raising its pulp capacity from 462,000 tons to 752,000 tons by FY12E which will make it self-sufficient for its pulp requirements. Its pulp capacity expansion is backed by long-term concession rights for plantations in its Malaysian subsidiary. We estimate BILT’s blended cost of pulp production at US$400/ton vs the current global price of US$600/ton. We forecast an EPS CAGR of 24% over FY10-13, driven by higher volumes and cost savings.
• Value-unlocking from potential listing of subsidiary: BILT could list its Netherlands subsidiary on the LSE over the next few months. Private equity players had acquired a 20.5% stake in this subsidiary in 2008, valuing it at US$855MM. A potential listing would unlock value and allow BILT to reduce gearing, boding well for valuations and earnings, in our view.
• Price target, valuation, key risks: Our Mar-11 PT of Rs50 is based on 10x FY12E P/E, at a 15% discount to the global peer group. Key risks include a decline in paper prices, demand slowdown in India, delay in capacity expansion plans, and any adverse changes to regulations.
Asia Pacific Equity Research 19 October 2010
Indonesia Hard Hat
3Q10 earnings preview: Risk on ASP and sales volume
• Cement stocks might underperform market post 3Q10 results: We are wary that forthcoming 3Q results for the cement sector may stall upward earnings revisions in the near term because: (1) ASP increases have not come through as much as consensus builds in; and (2) threat to FY10F volume numbers as domestic sales volume growth in 3Q10 is only 3% y/y versus 6% y/y in 2Q10. 3Q10 sales volume growth is lower than consensus expectations of 6-8% y/y volume growth. Assuming a more benign price increase of 2-3% in 4Q10 versus 5% currently, we see downside risk in our FY10E-FY11E earning estimates of 4-6% for INTP and SMGR.
• 3Q10 earnings preview: we see risks to earnings from lower ASP increase and sales volume growth: INTP volumes up by 6% y/y and SMGR sales volume in 3Q10 is flat y/y versus our expectation of 7-8% y/y growth. We estimate INTP to book Rp751bn of earnings in 3Q10 (down by 12% q/q but up by 8% y/y). We estimate INTP’s 9M10 comprises of 68% of ours and consensus FY10F. We estimate SMGR to book Rp854bn of earnings in 3Q10, down by 4% y/y but up by 4% q/q. We estimate SMGR’s 9M10 earnings to comprise 67% of ours and consensus FY10F.
• Maintain OW as we expect sales volume recovery in 4Q10: We acknowledge the risk of underperformance for cement companies post 3Q10 earning results. However, we maintain our OW stance on SMGR and INTP, as we view that (1) overhang on ASP has been removed as anti-cartel committee found cement companies as not guilty; and (2) we expect recovery of sales volume in 4Q10, if indeed poor sales in 3Q10 is mainly due to robust rainfall in 3Q10, which should provide a better timing for price increase. SMGR and INTP will report earnings at end of October and we would use any results-related weakness as a buying opportunity.
• Key risks: (1) If sales volume growth in 4Q10 continues to be lower than expected (lower than 7-8% y/y); (2) No price increase in the next two quarters could prompt de-rating on cement stocks.
• Near-term pressure likely on the share price upon very weak 3Q results: As automobile accounts for 55% of the sales and 70% of the profit, the weaker than expected auto sales in 3Q should drag down 3Q profit. We revise down 3Q revenue by 13% to Rmb10.5bn and EPS by 33% to Rmb0.28, implying +2%/-47% YoY. The earning shortfall and the resultant consensus estimate cuts could drag down share price in the near-term.
• Yet the worst could be over; Oct. shows signs of auto sales pick-up: Auto sales during Golden Week had been strong for BYD, especially for G3 model - the F3 upgrade that had been much below expectation. We believe the improvement could be due to the enlisting of F3 & G3 in “energy-saving” list at end-Sept. (which qualifies for Rmb3,000 subsidy). With inventory level below 80K units by Sept (from the peak of 100K), monthly sales for Nov & Dec could stay at similar levels as Oct at 40+K units, comparing to 30+K per month in 3Q.
• Turnaround pace likely to be moderate as new model ramp-up and channel restructure could take time: BYD’s numerous new models clearly aim at moving into higher-end segment yet ramp-up would require BYD fixing its tarnished brand image after the recent quality complaints and dealer disputes. Competitive environment is fiercer as global brands get aggressive in BYD’s key segment of small car.
• New energy to see more favorable policies upon government’s next 5-year plan: With government’s strong support in new energy, the demand appetite for electric car / bus and energy storage station appears to be rising quickly. Nevertheless battery capacity constraint remains a key near-term obstacle for BYD to materialize such opportunities. Solar is likely to be the fastest growing segment for BYD in the next 12 months amid strong global demand.
• Negative news largely out yet rich valuation limits upside; We maintain Neutral: Many of recent issues were the outcome of last year’s hyper growth and should gradually subside as management takes step to resolve them. However valuations are rich at 28x/21x 2010/11 P/E thus limiting share price upside. We roll over SOTP-based TP to Jun-2011 at HK$51.5, which implies 25x/19x FY10/11 P/E.
• MindTree reported weak 2QFY11 with margins further from the sharp decline in 1QFY11: US$ revenues were up 7% Q/Q (up 10% in rupee terms). The revenue growth was driven by an 8% increase in volumes partly offset by 0.8% decline in realized pricing. EBIT margins declined ~100bp Q/Q (absolute EBIT declined 3% Q/Q) – this was driven by salary hikes (25% of workforce), investment in products business (US$3mn), partly offset by rupee depreciation and cost reductions. Net income/EPS declined 53% Q/Q. Notably, EBIT margins on IT-Services in this quarter stood at just 10.6%, significantly lower than the average of the mid-cap basket that we cover. MindTree’s margin performance in core IT-Services continues to disappoint.
• Abandons investment in Products business – restructuring costs to push out margin recovery to FY12: Management intends to convert the Kyocera Wireless (India) acquisition (now MindTree Wireless) into a services company. This would cost the company US$12-14m in restructuring costs (people separation costs and certain contract-related costs), in addition to the US$4.5m already invested in the products business so far in 1HFY11. This is significantly higher than the original investment plan of US$10-12m and moreover, without any significant returns. This pushes out margin recovery expectations from 4QFY11 to 1Q/2QFY12. Moreover, we think this clouds confidence in the company strategy as uncertainty on further such ventures cannot be preempted.
• FY11/12 estimates cut sharply primarily from margin declines: We keep our FY11/12 revenue estimates unchanged – as we had not included any revenues from products business and better performance in services business is offset by rupee appreciation. We reduce our FY11 EBIT/EPS estimates by 42%/18% (assuming no restructuring costs in FY12).
• Valuation: We set a Mar-11 PT of Rs415 (previously Rs500) based on a one-year forward P/E of 11x – decline in PT is largely due to lower estimates in FY12. The exit from products business corroborates our consistent thesis that foray in an unrelated business is both difficult and requires significant investments. Upside risks to our PT include lower restructuring costs and potential monetization of products IP. We reiterate our UW rating on the stock.
Reuters: MINT.BO, Bloomberg: MTCL IN
Rs in millions FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E 52-Week range Rs 462-747
• Looking good. We reiterate our OW on Pantaloon Retail with a new Dec’11 TP of Rs565. With healthy sales growth trends, focused expansion approach, cost containment focus and alleviating funding concerns, we believe Pantaloon is well positioned to register revenue and earnings CAGR of 21% and 38% over FY10-13E for its core retail operations. It is on course to operate c20mn sq ft by FY13 and we believe this unique scale advantage will provide significant competitive advantages over its peers. We think it is best placed to exploit opportunities arising from growing urban consumption and consumer shift towards modern retail.
• Reduced funding risks, FCF to trend up. We expect the significant improvement witnessed in working capital during FY10 to sustain and drive further operating cash flow growth for core retail over FY10-13E. Gearing levels have moderated to under 1x post recent equity infusion for core retail operations. Potential divestment of investments in financial services business (FCH and Insurance) over next 6-12 months will further support stock performance, in our view.
• Execution is key in the near term, competition is a medium/long term challenge. PRIL’s ability to sustain working capital improvement and cost competitiveness will have to stand up to investor scrutiny in the near term. While competitive activity remains fairly benign at the moment, emerging domestic retailers and potential competition from global majors are medium/longer term challenges.
• Recent underperformance provides good entry opportunity. PRIL’s stock has underperformed Sensex by 10% over past three months and we think current valuation of 24x FY12E core retail earnings is reasonable considering secular growth prospects for organized retail. We believe robust SSS growth trends, improving profitability for home retail business, potential unlocking of value in subsidiaries and further improvement in free cash flows will be key drivers of stock performance from here.
Reuters: PART.BO, Bloomberg: PF IN Rs in millions, year end June
Source: Bloomberg, Company reports and J.P. Morgan estimates. Please note FY10 financials are not comparable to FY11. Financials for FY11 include lifestyle and home retailing businesses.
For pro-forma core retail financials please refer to Table 10 inside
Shares O/S (mn) 1,111 Market cap (Bt mn) 23,768 Market cap ($ mn) 797 Price (Bt) 21.40 Date Of Price 18 Oct 10 Free float (%) 26.1% 3mth Avg daily volume 1,894,889.00 3M - Average daily Value (Bt mn) 39.67 Average 3m Daily Turnover ($ mn) 1.33 SET 984 Exchange Rate 29.83 Fiscal Year End Dec
Source: Company data, Bloomberg, J.P. Morgan estimates.
Store expansion
Add Total
FY10E 1 23 FY11E 3 23 FY12E 4 30
Source: J.P. Morgan estimates, Company data.
• Downgrade to Neutral: We continue to like ROBINS and believe that the brand will emerge as the key player in Thailand's department store segment with nationwide footprint. However, the share price has moved significantly and now reflects the potential benefit from faster expansion, in our view. We downgrade the stock to Neutral with a new price target of Bt20 (previous Bt15) - DDM based rolled over to Dec-11. We maintain the 15% liquidity discount in setting our PT to reflect low stock liquidity. Pre- discount, we estimate ROBINS is worth Bt23.7 up from Bt18.4.
• Earnings upgrade: Expansion plan has been revised up from aiming to reach a 30 store network in 2013 to 35 stores by 2014. On the revised timeline, we project 33 stores by 2013. The faster store network increases our net profit projection for FY11/12 by 4%/1%, a relatively small increment in the early years as it takes about 2-3 years for the store to reach optimal sales level. In the beginning, profit contribution would come mainly from higher rental and other income.
• Slowing net profit growth outlook: Post high profit year of 2010E, we estimate ROBINS' net profit growth to average at ~14%, implying nearly ~1x PEG. The deceleration in growth could start to manifest in 3Q10E where we expect net profit to reach Bt234mn, up 18%Y/Y but slower than the 172% and 31% growth seen in 1Q10 and 2Q10, respectively. In 1Q10, net profit was boosted by extra income from repayment of debt written off during the 1997 crisis & lower tax rate; in 2Q10, it was boosted by low tax rate, 16% vs the statutory 30%. The low tax rate emanates from the winding down of dormant companies.
• Risk to our rating/price target: Upside risk is high liquidity flow into the stock market which could result in ROBINS trading higher. Downside risk is if the new stores under-perform in terms of cash generation and undercut dividends: our base case DPR is 50%.
LATEST: Yield curve continues to flatten. Short term rates spiked in China and India, and long term rates slumped in Indonesia and Philippines. Credit spread narrows, particularly in China, India and Indonesia. Loan volume generally solid, but weak in Australia, Korea, and Thailand. Liquidity is stable (money supply) and leverage remains low (credit multiplier and LDR).
OUTLOOK: (1) Loan growth may moderate but remains at high levels, and LDR to rise, in sync with GDP recovery. (2) Flat yield curve and narrow credit spreads are downside risks to NIM. (3) Low interest rates to continue.
Updated as of 12 October 2010 Note: 3m rate is 3-month interbank rate 10y Yld is 10-year government bond yield Cr Mtpr: Credit multiplier, loan growth to nominal GDP growth LDR is loans to deposits ratio. Note for China and Hong Kong, local currency is shown. Cr Spread: Credit spread of JACN series EY/BY is MSCI financial earnings yield to bond yield IVG is Implied value of growth based on MSCI financials
Asia Pacific Equity Research 19 October 2010
China Strategy
Equity implications of the first interest rate increase since Dec07
• PBoC raised interest rates by 25bp: Both the benchmark one-year lending and deposit rates will be raised by 25bp to 5.56% and 2.50%, respectively, starting October 20, marking the first interest rate rise since December 2007. While today’s announcement is largely in line with our economists’ forecast of a 27bp rate increase in 4Q this year, this could be treated as a surprise to the market as the consensus has tilted towards the prospect of no rate rise before the end of this year, especially following the Governor of PBoC, Mr. Zhou Xiaochuan’s recent reiteration of no interest rise in China for the rest of the year.
• The rate increase is a positive signal for China’s equity market performance: We agree with our economics team that today’s rate rise is more of a symbolic move by the central bank to correct the negative real deposit rate in China and thus manage inflation expectations, rather than a signal by the Chinese policymakers to switch to a tightening monetary policy. Notably, we take the view that the earlier-than-expected rate rise suggests that top authorities have probably seen more hard evidence of an underlying economic recovery in China , which supports our view that China’s economic growth has bottomed out and is set for strong recovery from here. As such, the rate rise could actually represent a positive signal for China’s equity market performance. We maintain our view that China equities have bottomed out, and offer good upside from here, because: (1) economic growth appears to have bottomed out, with China’s real GDP growth, on a sequential basis, likely having bottomed out at 7.2% Q/Q in 2Q10; (2) the liquidity situation is improving, with the latest September M2 figure showing the sequential trend rising further at 16.8%3m/3m saar after bottoming out at 13.5% in July; and (3) the consensus earnings forecast for MSCI China has reversed the downward trend, with FY10 and FY11 consensus earnings estimates for MSCI China revised up by 0.9% and 3.2%, respectively, in September.
• We recommend that clients buy stocks in sectors that stand to benefit from China’s most sticky growth trends, in the next Five-Year Plan: (1) consumer; (2) banks; (3) insurance; (4) China commodities, such as cement, demand for which is mainly driven by China’s local demand rather than by global demand; (5) service industries, such as education, IT outsourcing, and healthcare; (6) economic housing beneficiaries, such as BBMG; (7) heavy machinery, such as coal mining machinery; (8) nuclear power equipment, natural gas, and water treatment; (9) telecom equipment; (10) Hong Kong Exchanges & Clearing and selected brokers, which could benefit from Rmb liberalization reform. We maintain our negative view on exporters, ports, toll roads, telcos, and utilities.
‘Views from the Bund’ is a monthly publication that gives clients a value-added view on China macro, strategy, and industry insights. • Key investment theme: We maintain our view that China’s equity
market has bottomed out. Based on 17.38x trailing P/E, a 10% premium to its long-term average trailing P/E of 15.8x (since 2000), and our MSCI China FY10 and FY11 EPS growth forecasts of 27.4% and 15.2%, respectively, we expect MSCI China to rise by 19% and 38% from the current level to reach 81 and 94 by end-FY10 and end-FY11, respectively. We identified eight sticky trends facing China on the eve of the release of China’s 12th Five-Year Plan: (1) the consumption boom on the back of the government’s policies to raise people’s income, and to increase spending on social safety network; (2) the urbanization drive; (3) the development of western and central China; (4) the acceleration in the service industry’s growth; (5) the aging population; (6) water and energy conservation and emission reduction; (7) the upgrade of China’s manufacturing industries, and the building of seven strategic new industries; and (8) Rmb liberalization reform.
• What is changing: We expect MSCI China to rise by 38% to 94 by end-FY11.
• China model portfolio adjustment: We recommend buying stocks in sectors that should benefit from the above eight sticky trends, which are: (1) consumer; (2) banks; (3) insurance; (4) commodities, such as cement, the demand for which is mainly driven by local demand rather than by global demand; (5) service industries, such as education, IT outsourcing, and healthcare; (6) economic housing beneficiaries, such as BBMG; (7) heavy machinery, such as coal mining machinery; (8) nuclear power equipment, natural gas, and water treatment; (9) telecom equipment; and (10) Hong Kong Exchanges and select brokers, which could benefit from Rmb liberalization reform, and quality B-shares trading at a sharp discount to A-shares to benefit from the potential merger between the A- and B-share markets with the deepening of Rmb liberalization reform. We are negative on exporters, ports, toll roads, telcos, and utilities. Lastly, we upgrade property, and global bulk commodities, such as aluminum, from underweight to neutral, and upgrade energy from underweight to overweight in our model portfolio.
• Results above estimates on higher other income: Bajaj Auto reported 2Q PAT at Rs.6.8B (+57% yoy) - which was +7% above estimates - the variance was driven by higher other income.
• While the company reported unit sales growth at 46% yoy, an improvement in realizations at +3% yoy led to revenues coming at Rs.43.4B (+50% yoy). The company has gained market share over the quarter, which now stands at 33.8%, given robust growth in both domestic and exports segment.
• EBITDA margins at 20.7% declined -140bp yoy but were higher +70 bp qoq. Margins declined yoy due to higher material expenses (+450bp yoy) – this was partially offset by lower other expenditure (-200bp yoy) given rising volumes. Margins improved sequentially though driven by lower staff expenses and lower raw material cost ratio (-50bp qoq).
• Other Income came in at Rs.837m, which surprised positively. The company currently has cash and investments of Rs.48B on its books. Depreciation provision actually declined -11% yoy to Rs.300m. Further, tax rates were lower at 28.2% (-220bp yoy) given higher production at Uttarkhand.
• We will revert with further details post the conference call tomorrow at 9.30am IST – dial in nos are +91 22 3065 0143. We will look for management guidance on the following: a) Export revenue outlook – given that the INR has appreciated considerably against the USD, we will await clarifications on the companies’ hedging policy b) Outlook on competition in the domestic segment c) Margin outlook over 2HFY11E The stock currently trades at 16.7x FY12E.
• Our target price implies a P/E of 14x FY12E, which is inline with our earlier methodology. We will be revising our estimates post the conference tomorrow to adjust for the higher volumes over 2QFY11. A key downside risk to our TP is a greater-than-expected build-up in competitive pressures, while a key upside risk is a higher-than-anticipated industry growth rate.
• Bursa announced 3Q10 profits of M$27.7mn, in-line with M$26.5mn as per our model, based on M$1,319mn of ADT for the quarter. The rare variability in Bursa results stems either from costs, derivatives or margin changes. This quarter there were none as we have already factored in higher costs. We do not expect any impact to the stock price on back of these results as the key earnings driver, Daily Turnover, can be tracked on a real-time basis and the results are in line with volumes.
• We expect 3% upside from current levels for Bursa based on dynamic EPS and PE. We use 42.9x PE, which is 1SD above historical dynamic PE, where the stock is trading as of now. Dynamic PE band chart is on page 2. The chart below shows that both 10 day moving average (DMA) and 20 DMA on Bursa volumes are higher than 30DMA, which underscores our belief that Bursa will continue to trade at current valuations, if not higher, and higher volumes will lead to higher dynamic EPS.
• Moreover, the CPO prices and volatility have moved up from mid-year lows, both charts on page 2. This increase should lead to higher derivative volumes, further aiding the earnings growth. Maintain OW.
Figure 2: Bursa Volumes - Solid Momentum
VALMK Index
Source: Bloomberg.
Asia Pacific Equity Research 19 October 2010
Chinatrust Financial Holdings
Overweight 2891.TW, 2891 TT
Former vice chairman sentenced to nine years in jail - ALERT
• Court ruling. Jeffrey Koo Jr., former vice chairman of Chinatrust Financial, was sentenced to nine years in jail by the court earlier Monday as the court found him guilty of violating the Securities and Exchange Act and the Banking Law in relation to transactions of structured notes linked to Mega Financial Holding Co. (source: Central News Agency). His lawyer expressed regret over the ruling and said Koo would definitely appeal the case.
• Limited impact on the company. Chinatrust Financial said to the media that, as Koo now held no post at the company, the litigation was his personal affair, and the ruling would have no impact on the company's operations. Jeffrey Koo Jr. resigned as the vice chairman in November 2006 and the company is now run by a group of professional managers.
• But the ownership could be at risk. Chinatrust has been seeking strategic partners and its shareholder structure has been fragmented. The court ruling could make it more difficult for the Koo Family to run the company directly.
Asia Pacific Equity Research 20 October 2010
Daelim Industrial
Overweight 000210.KS, 000210 KS
Weak 3Q results on one-offs; take advantage of weakness
J.P. Morgan Securities (Far East) Ltd, Seoul Branch
50,000
70,000
90,000
W
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Price Performance
000210.KS share price (W)KOSPI (rebased)
YTD 1m 3m 12m
Abs 6.6% 11.5% 29.9% 17.0%
Rel -2.9% 10.2% 22.7% 4.4%
• Weak 3Q results on one-offs: Sales fell 4%YoY to W1.4T while OP rose 25%YoY to W71B, in line with our estimates. However, OP fell 34% short of the consensus estimate mainly due to weaker revenue in the domestic market after the 24 days of heavy rain in 3Q. Meanwhile, RP jumped 42% YoY to W91B, reflecting the solid contribution from petrochemical affiliates.
• Q&A focused on domestic risk: 1) how much downside in 2011 guidance; 2) how much more bad-debt expenses ahead, including provisioning; and 3) the unsold unit trend and PF loan guarantee trend.
• No changes in our forecasts, but consensus estimates may shrink: We keep our forecasts unchanged. However, we expect consensus (on OP in particular) to decrease estimates, following the weaker-than-expected results in 3Q. We see over 10% downside risk to the company’s sales (W7.1T) and OP (W426B) guidance for 2010. However, its RP is likely to exceed its guidance by over 17% on strong petrochemical earnings.
• Take advantage of weakness: We recommend that investors not miss the inflection point of Daelim’s valuation re-rating on one-off earnings for three reasons. First, its changed strategy in overseas should bring 2.2x higher new orders for the next three years. Second, this should lead to an average 21% top-line and 26% OP growth until 2012 (the second-highest in our construction universe after Samsung Engineering). Third, we expect its conventional valuation discount over peers to decrease as it catches up with peers’ overseas business scale (W7-8T of new orders/year).
• One of our top picks: Daelim Industrial is one of our top picks in Korea construction. We prefer construction companies that are likely to upgrade their client base in terms of 1) quality (Samsung Engineering) and 2) quantity (Daelim Industrial). Our Mar-11 price target of W124,000 is based on 1) W3.3T of operating value (6.2x EBITDA); 2) W1.3T of non-core assets (1.1x P/B on YNCC); 3) W314B of total net debt (off-balance sheet of W420B).
• GSPL led consortium wins Mallavaram - Bhilwara bid: GSPL (52%) in a consortium with IOC (26%), BPCL (11%) and HPCL (11%) has been awarded the 1,600km Mallavaram - Bhilwara pipeline which will provide connectivity from East - Coast fields to North Central India per media reports (DNA).
• PNGRB likely to announce winners for other pipeline bids: PNGRB had invited bids for three cross country pipelines including the Surat-Paradeep, Mallavaram- Bhilwara and Mehsana – Bhatinda. We expect the winner for the Mehsana-Bhatinda bid will be announced this week.
• Financial details awaited: The company is likely to provide details regarding the bid tariff and pipeline capacities, post the announcement of the Mehsana-Bhatinda bid. GSPL had bid for three new cross country pipelines to be set up under the aegis of the PNGRB regime. Under the new regulatory regime, GSPL and other entities bid for the networks with weighting given to the highness of the volumes committed and the lowness of the tariff offered.
• Pointer to future growth potential: While we believe it is too early to build in any optionality for these bids, with no constraint on capital structure, we believe the PNGRB ROCE formulation provides for sustainable ROEs of 20-25% based on a judicious use of leverage. This would lead to a significant value creation on the book value of investments for the winning bidders for these pipelines. The projects are likely to take 3-4 years to build out and for now sources of gas are unclear. However, winning this bid does provide a pointer on future growth potential for the GSPL network outside the state of Gujarat.
Source: Company data, Bloomberg, J.P. Morgan estimates.
• In-line 2Q FY11: HDFC Bank reported net profit of Rs9.1B, up 33% y/y, in line with our and consensus estimates, in spite of a Rs0.5B treasury loss. Strong loan growth of 38% y/y was the big surprise.
• Loan growth surprises: Loan growth of 38% was higher than expected. Even excluding one-off wholesale loans, growth of 32% was a positive surprise with ~7% q/q growth. Loan growth has been broad-based with strong growth in auto and working capital loans.
• Margins in line with expectations: Margins did moderate marginally to 4.2% (4.3% in 1Q11). CASA improved to 50.6% (from 49.2% in 1Q11) and management is not seeing any significant CASA migration currently. LDR at 80% and high CASA currently should restrict any material margin accretion from here, but management is confident of maintaining margins at 4.0-4.2% in spite of higher share of corporate and secured retail lending.
• Asset quality robust: Asset quality continues to be robust with Gross NPAs flat at ~1.2%. Credit costs remain at <120bp given the improving delinquency trend for retail assets, confirming the common feedback from most managements on improving retail asset quality. Credit costs have normalized from >200bp to ~120bp and could be a positive surprise as we have factored in credit costs of 140bp.
• Maintain Overweight: We maintain our positive stance on HDFC Bank as we believe it offers high credit growth with earnings resilience as margins should be protected in a rising-rate environment. Also, it is one of the biggest beneficiaries of the significant improvement in retail asset quality. Key risks to our rating and price target include higher-than-expected deliquencies from retail assets.
Asia Pacific Equity Research 19 October 2010
Huaneng Power Int'l - H
Overweight 0902.HK, 902 HK
Another solid quarter; Turning cautious on fuel cost rebound
Shares O/S (mn) 3,055 Market cap (Rmb mn) 12,824 Market cap ($ mn) 1,930 Price (HK$) 4.90 Date Of Price 19 Oct 10 Free float (%) 100.0% 3mth Avg daily volume 20,805,380.00 3M - Average daily Value (HK$ mn) 98.63 Average 3m Daily Turnover ($ mn) 12.71 H-SHARE 18,895 Exchange Rate 7.76 Fiscal Year End Dec
Source: Company data, Bloomberg, J.P. Morgan estimates.
• Solid Q3 Results; upside risk to our earnings estimate: Huaneng reported a set of solid Q3 results: based on PRC GAAP, net profit was Rmb1,120mn, down 48% YoY, but up 4% QoQ. Net margin for the period was 4.0%, compared to 3.9% & 4.4% in Q1 & Q2, respectively. Accumulated net profit for 1-3Q is Rmb3,146mn, equivalent to 85% of our full year estimate. Should coal prices remain stable in the rest of the year, we see upside risk to our full year earning estimate.
• Rebound in unit fuel cost; Turning cautious on fuel cost outlook: Although QHD spot price had been steadily falling in 3Q10, Huaneng’s unit fuel cost was Rmb246/MWh, up 3% QoQ. As the winter peak demand season approaches, we expect resilient spot coal price in Q4. Our channel checks with IPPs also suggest there is sign of a coal price rebound in October. Power plant coal inventory days steadily edged up to 21 days, and we see low risk of severe coal supply shortage in Q4.
• A+H share placement is pending approval: Huaneng's net gearing was 242%, relatively low amongst peers. Huaneng is planning an A+H private placement with total capital raise of ~Rmb10bn. After factoring the placement, which is expected to complete by the end of 2010, we estimate its net gearing will drop to 226%. We have already factored in a 27bps interest rate hike happening in 4Q2010, thus see limited impact to our forecast numbers from the 25bps interest rate hike.
• OW & DCF-derived PT of HK$5.4: Despite the solid quarterly result, we believe the rebound in unit fuel cost is a negative surprise to the market. Key –ve risks include fuel cost increase & power demand slowdown. Huaneng will host a post result conference call on Oct 20, 2010 (4:30pm, dial-in: 852-3005-2050, PIN: 320106#).
Asia Pacific Equity Research 19 October 2010
IGB Corporation
Overweight IGBS.KL, IGB MK
Prospects for higher dividends & unlocking of asset value?
Shares O/S (mn) 1,490 Market cap (M$ mn) 2,921 Market cap ($ mn) 943 Price (M$) 1.96 Date Of Price 19 Oct 10 Free float (%) 3mth Avg daily volume 943,237.00 3M - Average daily Value (M$ mn) 1.69 Average 3m Daily Turnover ($ mn) 0.55 FBMKLCI 1,489 Exchange Rate 3.10 Fiscal Year End Dec
Source: Company data, Bloomberg, J.P. Morgan estimates.
• Prospects for increased dividends. With capex commitments for 'The Gardens’ expansion over and strong finances (FY10E net gearing: 7%), IGB is mulling over the prospect of higher dividends. Total capex budget for the next two years is M$300-350MM for expansion of Mid Valley Phase 3 (0.65MM sqft of retail and office space), and a new Cititel hotel in Penang. FCF hence is estimated at M$170-220MM pa over FY10-12E, translating to FCF yield of 5.8-7.5% vs our forecast net dividend yield of 2.2% (30-40% pay-out).
• Growth drivers. Property investment and hotels will continue to be the major contributor, with property development at no more than 10% of profits. Since Jan-10, retail sales Y/Y have risen 5% at the Mid Valley mall, but a stronger 15% for the newer Gardens mall due to the low base and economic slowdown last year. Rentals are now at M$10.30psf for Mid Valley mall (+5% Y/Y), and M$9.70psf for Gardens mall (+4% Y/Y), but the mid term target is to price Gardens 15-20% higher given its premium status. We expect improving occupancies for its newer Gardens office towers currently at 79% (vs 90-100% for its more established retail/office assets) and Gardens hotels at 54% currently (vs 80-90% for the Boulevard and Cititel). Its new 0.65MM sqft of commercial space under the Phase 3 expansion is expected to contribute from mid-2013.
• Potential mid-term catalyst. Plans for a REIT seem unlikely for now though IGB may consider injecting its newer Gardens assets as they mature into listed Kris Assets. This could also unlock value as we saw in 2004/05 when IGB injected Mid-Valley mall into Kris at market value (vs at book on its balance sheet) for cash and shares in Kris, which resulted in a gain of over M$800MM.
• Maintain OW. IGB shares have started to play catch up, outperforming 6% the past month. Its steady outlook and 1x P/B (non-revalued) should provide support, while efforts to raise dividends or unlock value could see the shares re-rate, in our view. IGB trades at a 39% discount to RNAV vs the regional Asian average of 26% for property investors. However, IJM Land remains our top property pick.
Asia Pacific Equity Research 19 October 2010
KASIKORNBANK
Overweight KBANf.BK, KBANK TB
3Q10 meets expectations; positive NIM and credit costs
• KBANK’s 3Q10 PPOP meets our expectation. The bank’s NP is 6% higher than our forecast due to 1) lower-than-expected credit cost and 2) investment gain.
• KBANK’s NP at Bt5.1 billion +7% Q/Q and 37% Y/Y (JPMe at Bt4.8 bn). KBANK's PPOP at Bt9.45 billion +5% Q/Q and 23% Y/Y (in-line with our expectation).
• KBANK reported Q/Q loan growth at 2.6% (Y/Y 13.7%) driving YTD growth to 6.4%, leaving 3.4% for 4Q10 to meet our FY10 target at 10% which we believe achievable. Loan growth driver, according to the bank, remains working capital.
• NIM expanded by 9bp Q/Q to 3.87% (highest since 4Q08) given stable funding cost but higher asset yield (overall yield +10bp Q/Q, loan yield +8bp, interbank +18bp) due to interest rate hikes.
• Non-NII continued to grow impressively +4.6% Q/Q and 28.0% Y/Y. There was all around improvement. KBANK also recorded Bt259 mn gain from investment (from bond investment, we believe). Opex was up 2% Q/Q and 25% Y/Y. Cost/income ratio improved to 52.6% from 53.4% in the prior quarter. Cost related to K-Transformation is expected to be booked more in 4Q10.
• Asset quality remains in good shape with NPL ratio being maintained at 3.0% (or Bt31 bn, -4% Q/Q). Coverage ratio increased to 115% from 109% in 2Q10. Credit cost was only 62bp in this quarter, declined from 69bp in the prior quarter and 97bp in 3Q09.
• We maintain OW on KBANK with Dec10 PT at Bt135 based on DDM approach with 18.3% ROE, 12.4% COE, and 8.0% growth. Key risks to PT are 1) fiercer-than-expected competition in SME which is the largest portion of KBANK's loanbook; 2) higher-than-expected opex from K-Transformation; 3) lower-than-expected earnings from the incremental stake acquired in MGTH.
Shares O/S (mn) 66 Market Cap (W mn) 21,935,701 Market Cap ($ mn) 19,602 Price (W) 331,000 Date Of Price 18 Oct 10 Free float (%) 68.0% 3-mth trading value (W bn) 110.52 3-mth trading value ($ mn) 98.76 3-mth trading volume (mn) 0.69 KOSPI 1,857 Exchange Rate 1,119.03 Fiscal Year End Dec
Source: Company data, Bloomberg, J.P. Morgan estimates.
• No surprises in 3Q: LGC reported 3Q results today with OP at W799b and NP at W599b, both in line with consensus numbers but ahead of our recent estimates. This set of numbers was a drop of 6-7% from 2Q (a record quarter) but fared better than Honam, where OP dropped 24% Q/Q. Revenues at both Petrochemicals and I&E were flat, which meant there was some margin pressure in 3Q. We believe the recent weakness in LGC share price has already reflected lower Q/Q results.
• Petrochemicals: Despite general prices sliding in July/August, revenue was flat, which meant volumes were likely up Q/Q. Revenue mix was similar in 3Q as well. LGC continued to see tightness in Synthetic rubber, while ABS/EP margins improved due to seasonal demand. Margin pressure was most prevalent in the Ethylene/PE division due to falling Ethylene prices. The company expects 4Q to be similar to 3Q.
• I&E: Revenue was flat Q/Q but OP dropped by 23% due to generally weaker demand in the IT industry. In particular, LGC cited weaker earnings due to decreased utilization rate of customers and increased raw material cost stemming from a strong JPY. During the quarter, LGC announced Ford and Renault as new HEV RB partners and Southern California Edison for ESS RB. In 4Q, LGC will focus on market share growth at key customers and new RB sales for tablet PC. RB sales will also increase due to launch of GM Chevy Volt and Sonata HEV.
• We remain OW with a Dec-11 PT of W430,000, based on SOTP of its existing business, HEV/EV RB and LCD Glass. Petrochem OP was 15% ahead of our expectations, which shows how resilient this business is at LGC despite falling Ethylene prices. At the same time, lower Q/Q drop in profit vs. pure commodity plays such as Honam highlights the advantages of a diversified product portfolio. We continue to prefer LGC in Korea due to its recent underperformance and long-term growth story.
P/BV Average +1 std dev -1 stde dev +2 std dev -2 std dev
NOL Price to Book (rolling 12m forward) Current P/BV = 1.17x
Source: Bloomberg, Company reports, J.P. Morgan
estimates.
• Results better than expected: NOL kicked off the sector’s reporting season with a stellar net profit of US$282MM in 3Q10 (ending 17 Sep), up 183% q/q vs. losses of US$139MM a year ago as it benefited from the full impact of revised transpacific contract rates and peak season surcharges. The results were boosted by US$7.6MM F/X loss, US$2.5MM write-back of doubtful/bad debt, and US$0.5MM disposal gains. Excluding one-offs, 3Q10 recurring profit was c.US$271MM, +161% q/q and much better than its US$141MM loss in 3Q09. This was mainly driven by a 60% revenue rebound in its liner business (88% of Group revenue in 9M10), which turned around with a core EBIT of US$301MM (and EBIT margin of 14.0%) vs. US$101MM (with EBIT margin of 5.4%) in 2Q10 and US$130MM loss in 3Q09. Logistics (which constituted 12% of Group revenue in 9M10) EBIT rose 50% q/q and 6% y/y to US$18MM. 9M10 net profit was US$283MM (vs. a US$530MM loss last year) and amounts to 98% of consensus full-year forecast, implying upside risk to market estimates as we do not expect NOL to turn loss-making in 4Q10 even as spot market freight rates trend lower.
• 3Q highlights: Group revenue rose 55% y/y, 15% q/q. Container shipping revenue rose 14% q/q, boosted by the 12% q/q rise in average freight rates as volumes barely rose (+1%). Intra-Asia/Middle East, Americas and Asia-Europe average revenue/FEU rose 18% (mainly due to higher rates on intra-Asia long-haul trade), 9% and 6% q/q. On a y/y basis, container shipping revenue rose 60%, driven by the 41% increase in average revenue per FEU to US$3,120 and 12% volume growth. Asia-Europe, Americas, intra-Asia revenue/FEU rose 51%, 37%, 31% y/y. Asset utilization improved with load factor up 4ppts y/y and 3ppts q/q to 97%. Compared to pre-downturn levels in 3Q08, both shipping volumes and average revenue per FEU were already 5% higher but bunker fuel prices were also 35% lower. Cost per FEU rose c.12% y/y and 4% q/q, which is a concern.
• Improving B/S: Sep-10 net debt-equity fell 4ppts q/q to 22%. June-10 BV/shr rose 11% q/q to US$1.17 (but only 7% higher in SGD at S$1.56/shr due to the weaker USD). NOL has 22 new vessel commitments (both owned and chartered) - 12 to be delivered in 2012 and 10 in 2013 & beyond. Total capital commitment is c.US$2.0B while its total operating lease commitments until 2014 amount to c.US$3.0B (c.77% for vessels).
• Still highly leveraged to the transpac trade: 9M10 container shipping revenue breakdown by region: Americas 53% (vs. 56% in 9M09), Asia-Europe 23% (20%), intra-Asia/Middle East 23% (24%). 9M10 trade imbalance weakened slightly y/y. For every 10 full FEU container boxes going head-haul, 6 full FEU boxes return for the back-haul on transpacific routes (from 7 in 2009), 8 on Asia-Europe routes (unchanged vs. 2009 but higher than 7 in 2008), 10 on transatlantic routes (unchanged vs. 2008-9).
• Operating outlook: Management said little about the operating outlook except that they expect NOL to remain profitable for the full year, will focus on cost containment and that the impact of rising fuel prices is mitigated by the pass-through to customers via surcharges and hedging.
• Acquisition of Cardiac Science: Opto Circuits has announced that it has signed an agreement to acquire all outstanding common stock of US based medical equipment manufacturer Cardiac Science Corporation (CSCX US) for US$2.3 per share, implying a total cash outlay of USD54MM. According to Opto management, deal could entail outgoings of up to US$85MM.
• Cardiac Science manufactures and markets diagnostic and therapeutic cardiology devices that include automated external defibrillators ( AED), electrocardiograph devices (ECG/ EKG), cardiac stress treadmills and systems, diagnostic workstations, Holter monitoring systems, hospital defibrillators, vital signs monitors, cardiac rehabilitation telemetry systems, and cardiology data management systems. The company had revenues of US$156.8MM, EBITDA loss of US$33.9MM and net loss of US$76.9MM in 2009.
• Our View: This acquisition fits well into the strategy of Opto Circuits to enhance its product portfolio of medical devices and leverage its global distribution reach to scale up sales of these products. However, in our view Opto will need to quickly reduce costs (we see some scope of cost reduction from general overheads and distribution) and turnaround the company back to profits or its near term profits could be at significant risk. (Cardiac Science’s 2009 reported net loss, if repeated in 2010 would completely wipe out our profit estimates for FY11E for Opto Circuits).
• Potential risks from USFDA warning letter: USFDA had issued a warning letter to the company in Feb 2010 that its voluntary field corrective action for AED devices was inadequate and resulted in Cardiac Science having to replace 24,000 AEDs in the US market. In a press release, Cardiac Science has estimated a cost of US$10-15MM for this product replacement exercise. In our view, if USFDA finds any other insufficiencies, it may result in a much higher cost for any further potential product recalls.
• We have not yet incorporated the Cardiac Science acquisition into our estimates, pending more details from the management on potential to turn around its earnings and perceived risks from any further USFDA action. We will be seeking more details from the Opto Circuits management on the roadmap for a turnaround in Cardiac Science, before incorporating any changes to our estimates.
Asia Pacific Equity Research 19 October 2010
TMB Bank Public Company Limited
Neutral TMB.BK, TMB TB
3Q10 meets expectations; overall performance still lagged peers
• TMB’s 3Q10 NP was above our expectation on low credit cost. The bank’s PPOP was in-line with our expectation. Good NIM recovery but weak non-NII.
• TMB recorded its NP at Bt777 mn for 3Q10 +48% Y/Y but -12% Q/Q (Q/Q decline was due to last quarter’s gain on buy back of hybrid tier 1 securities).
• YTD loan growth remains very weak -3.7% despite this quarter’s recovery +1.3% Q/Q (-2.4% Y/Y). There is downside risk to our full-year forecast at 6%. However, NIM expanded well by 14bp Q/Q to 2.39% given the higher yield on interbank and investment assets following interest rate hikes. Loan spread however remains flat Q/Q (unlike KBANK whose loan spread was up by 8bp Q/Q).
• Non-NII was up 8% Q/Q and Y/Y but from a low base. The results were still weaker than our expectation. Opex was flat Q/Q resulting in better cost/income ratio at 72.8% vs 77.3% in 2Q10 and 86.4% in 3Q09.
• Credit cost was lower at 36bp vs 53bp in 2Q10. At time of writing this note, the NPL and coverage data have not yet released.
• Overall, we see the results as not exciting. ROE remains at stressed level 6% in 3Q10 despite no corporate income tax being paid (still having tax loss carried forward).
• We maintain Neutral on the stock with Dec11 PT at Bt1.1 based on DDM approach with 11.7% ROE, 13.1% COE, and 6.0% growth. Our PT (Jun-11, DDM-derived) of Bt1.1 implies a P/BV of 0.91x and P/E of 13.2x (FY11E). Key downside risks to PT are credit quality deterioration and higher-than-expected operating costs. Upside risk is potential M&A.
TMB Bank results summary (Bloomberg: TMB.BK; Reuters: TMB TB) Earnings revision and valuation
Bt millions (per sh. data in Bt) 3Q10 3Q09 % Y/Y 2Q10 % Q/Q 2010E 2011E
Loans 355,489 364,344 -2% 350,912 1% Old EPS (Bt) 0.08 0.08 Net interest margin 2.39% 2.31% 2.25% New EPS (Bt) 0.08 0.08 Non-interest income 1,302 1,206 8% 1,205 8% % change 0.0% 0.0% Pre-provision operating profit 1,186 583 104% 938 27% P/E (x) 30.0 29.2 Net profit 777 526 48% 886 -12% ROE (%) 7.3 7.1 NPL ratio 0.0% 13.3% 10.3% P/B (x) 2.1 2.0 Credit cost (basis points, annualized) 36 (14) 53 Dec 11 fair value 1.1
• Polaris reported 2Q FY11 results with 7% Q/Q revenue growth (6% in US$ terms). EBITDA margin recovered by 220bp Q/Q, helped by volume growth, currency movements and normalization of wage hikes. Absolute EBITDA was up 26% Q/Q to Rs606m. Net profit was up 3% Q/Q due to lower foreign exchange gains compared to 1QFY11.
• BFSI traction and product traction continue to be strong: Polaris reported 17 intellect wins during the quarter, as improving macro environment has translated into increased number of deal wins/closures with the pipeline remaining strong. As a result, the traction in product segment continued (product revenues contributed to ~23% of revenues, same as 1QFY11). We still believe that BFSI ramp-up is an industry trend, even as M&A integration projects are being supplemented by additional discretionary work to improve customer experience through areas like analytics and mobility.
• FY11 EPS guidance maintained: Polaris management has maintained its EPS guidance of Rs20.2-Rs20.6 (growth of 31-33% Y/Y) for FY11, despite the sharp rupee appreciation over the last month. However, management did indicate that sustained rupee appreciation could pose a challenge to margin maintenance. We note that Polaris is reasonably protected by its hedge positions of US$50m at an average rate of Rs48.33/$ for the rest of FY11 and US$74m at an average rate of Rs48.31/$ for FY12.
• Estimate changes: We are keeping our FY11/12 estimates largely unchanged as the strong revenue traction is likely to be offset by the sharp rupee appreciation in the recent weeks. We estimate FY10-12 revenue CAGR of 15% and EPS CAGR of 21%.
• We remain OW and keep our Mar-11 PT at Rs235, which is based on a 10x forward P/E, a 15-20% discount to other mid-caps in the sector due to its high sector focus. Polaris remains one of the best leveraged stocks in Indian IT to the financial sector IT spending recovery, in our view. Risks to our view and PT include high client concentration, deterioration in the global financial services sector, and sustained rupee appreciation.
• 25bps hike in both lending and time-deposit rates. PBOC announced an unexpected 25bp hike in both 1-year lending and time deposit rates effective tomorrow. This marks a new rising rate cycle in the coming years. Demand deposit rate remains unchanged at 36bps. For the first time, to align with global practice, rate hikes are in 25bps, instead of a figure at multiples of 9.
• Signal for strong economy. In our view, the rate decision reflects the central government's affirmation of the healthy economic growth outlook. Our meeting with regulators and banks in Beijing recently confirms strong industrial production and strong corporate loan demand. Recently, in a regular site-visit to the Southern provinces, the regulators were surprised by the strong underlying housing demand and consumption. It’s becoming clear to most policy makers that economic growth in the coming quarters may gain momentum rather than soften. On the other hand, potentially, the rate hike also hints that inflation pressure still exists.
• Support for further margin expansion: The announcement fully dismissed the fear for asymmetric hikes and is consistent with our view that modest negative real deposit rates do not justify asymmetric rate hikes. Given that demand deposits that accounted for nearly 50% of system deposits are not going to be repriced, basic banking spread would widen, driving NIM higher. Meanwhile, given that Chinese banks are typically more asset sensitive, NIMs may increase even faster in the near term due to the gap in loan repricing and time deposit repricing. We believe this will be evident in 1Q11E NIM trend.
• More comfort on asset quality by CBRC. While the CBRC might not issue explicit positive statements, it's getting less vocal on this issue as the central government is now confident that LGFV loans risks are well under control and the banking sector is expected to remain strong. The government is focusing on the next steps, namely structurally solving LGFV financing needs in a more sustainable approach, which is a positive for the asset quality outlook on LGFV. Investors should not be misguided by media reports of breakdown of LGFV loans by risks. CBRC admits many of these loans are low risk loans by local transportation bureaus for transportation and expressway projects that have explicit fiscal budget support, which simply was not recognized as “legally valid” (due to Budgeting Law constraint). We are also comforted by the fact that the risk of a material LGFV-specific general provisioning for the sector in 4Q10 is low. Even if LLR to Loans could be announced (a small chance though), enough grace period will be allowed to avoid material earnings impact.
• OW China banks in 4Q. We remain positive on the sector in view of 1) more assured earnings outlook for 2011, partly on rising NIM. 2) strong economy which will help alleviate asset quality concern. 3) expected Rmb appreciation on rising rates which makes H-shares even cheaper. We however still think some A-share banks may offer better upside over the next 12M.
Asia Pacific Equity Research 19 October 2010
Cement
ACEM faces transport strike in HP; Post Diwali demand revival key for recent price increases to hold - ALERT
• ACEM impacted by transporter's strike in HP: Ambuja in an exchange filing has indicated that production/dispatches have been impacted in the plants in the Northern India state of HP since Oct7th. The plants impacted are the 1.6MT grinding and 4MT clinker capacity plants at Suli and Rauri. As of now we believe only ACEM has been impacted so far and relate to demands for hike in transportation fees. In recent times, HP has seen large capacity additions by ACEM, and JPA. We estimate total cement capacity in HP at 8MT as of August 2010. In the event the strike continues for longer, we believe the positives of the strike could be likely the much needed 'supply tightness' and higher prices in Northern India
• AP prices finally seeing push back: Our recent cement dealer checks in AP pointed to companies now facing difficulty, in increasing prices further as demand slowed over the last 2 weeks and there is push back from customers. Dealer checks indicate that supply discipline has been the key driver for the recent cement prices increase and hence the sustainability of the current cement price increase in AP is basically dependent on the continued 'supply discipline'. Cement prices in parts of AP have increased by Rs100/bag (~60%) from end August-10. Current prices in parts of AP at ~Rs250/bag are among the highest in India. Prices in pockets of nearby state of Karnataka have increased to Rs270-280/bag. We believe the very sharp price increases in most markets of South India have come on the back of the price increases in AP. Given the large excess capacities in South India, we are not confident of such large price increases sustaining (South based cement equities have underperformed the larger pan India companies, in the recent equity rally seen in cement).
• Prices broadly flat in most markets- All eyes on Post Diwali demand revival: Cement dealers indicate broadly flat pricing in most other regions (there has been some modest increase in some pockets of North/West India). Demand is expected to remain subdued till early November given the Diwali festival. For the recent price increases to hold, combined with supply discipline, demand revival post the Diwali festival would be a key variable.
• Earnings season- One of the worst in recent history: We maintain our view that the upcoming earnings season for the Sept quarter is likely to be one of the worst in recent history given the sharp correction in cement prices and volumes, but continued high costs. The first company to report so far, Heidelberg Cement (HEIM IN, Not Rated) reported q/q decline of 30% for sales, 74% for EBITDA and 89% for PAT and y/y decline for 75/90% for EBITDA/PAT respectively. HEIM operations are in the relatively better markets of Central India. EBITDA margins stood at 6.8% in the Sept quarter (the largest price declines were seen in South/West India).
Asia Pacific Equity Research 19 October 2010
Crude Reality
Indian fuel price deregulation - Working in parts, but significant moves likely only around mid 2011
Indian fuel price deregulation – Working in parts, but significant moves likely only around mid 2011- Pradeep Mirchandani, CFAAC, India
Indian downstream companies adjusted petrol prices upwards by Rs0.7/ltr (1.3%) over the weekend in continuation with the partial deregulation on auto fuel prices announced in June. However, diesel prices continue to be capped. We estimate diesel prices need be hiked by 8% to stem subsidies. Recent media reports (ET, BS) cite the Finance Secretary as stating that it would not be prudent to deregulate diesel given current high levels of inflation (Sep inflation printed at 8.6%). Our economics team projects inflation to ease only in 1QCY11, by when the political calendar will likely hamper fuel reforms. We expect political pushback to hold back any significant action on diesel deregulation till after the West Bengal Elections (Apr-May 2011).
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We went to Beijing and Tianjin last week and visited a number of projects by Singapore-listed developers. While there are few sectoral themes, we highlight in this note some company-specific takeaways and potential impact on our estimates.
• CapitaMalls Asia: The operating performance of the malls we visited is in line with our expectation, with double-digit SSS growth and healthy traffic. While competition in Beijing is intense on the back of the supply pipeline, management indicated a positive rental outlook for the malls. Management also reiterated its target to invest between S$800,000 and $1B worth of capital in the three key markets by year-end.
• CapitaRetail China Trust: Our mall visit to Xizhimen confirmed the bottoming-out of its operating trend in 2Q10 and we believe that a rental growth of 3-5% should be achievable going forward. We, however, also noticed a slightly delay in the opening of 2,400sqm of space that connects Xizhimen to the MRT station. Should the delay continue, we expect a 1.4% negative DPU impact to our FY11 estimate.
• Keppel Land: We were pleasantly surprised by our visit to Tianjin Eco-City. The entire Eco-city project is ahead of schedule and the residential portion developed by Keppel Land is ready for launch upon the approval of the sales license. If the Tianjin Eco-City project is well executed, we could see an uplift to our Keppel Land RNAV estimate of as much as S$0.48/share, based on a 15-year DCF valuation.
• Yanlord Land Group: Phase 1 of Yanlord Riverside Plaza has largely been sold and will be recognized in 4Q10 earnings. The pre-leasing of Yanlord Riverside Plaza mall has also reached 70%, an indication of the group’s execution capabilities extending into the commercial property segment.
• Our stock calls: We reiterate our Overweight rating on CapitaMalls Asia and Yanlord. Both stocks are trading at attractive valuations, in our view, and will continue to see positive share price catalysts towards year-end.
Valuation for selected Singapore developers with China exposures
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Important Disclosures
• Market Maker: JPMS makes a market in the stock of Shanda Interactive Entertainment Ltd, SPIL (Siliconware Precision Industries).
• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for 7 Days Group Holdings Ltd., BBMG Corp, BYD, CapitaMalls Asia, Hitachi (6501), Honda Motor (7267), Huabao International Holdings Limited, Inpex Corporation, Maoye International Holdings Ltd., Neptune Orient Lines (NOL), Semen Gresik (Persero) Tbk, Wintek Corporation, Wistron Corporation, Yanlord Land Group Limited within the past 12 months.
• Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Bajaj Auto: Bijay Kumar. The following analysts (and/or their associates or household members) own a long position in the shares of CapitaRetail China Trust: Adrian Mowat. The following analysts (and/or their associates or household members) own a long position in the shares of HDFC Bank: Bijay Kumar.
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Inc. is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service. Samsung Engineering is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service. Samsung SDI is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service. Semen Gresik (Persero) Tbk is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Shanda Interactive Entertainment Ltd is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. SK Energy Co Ltd is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service and non-securities-related services. SPIL (Siliconware Precision Industries) is or was in the past 12 months a client of JPM. TMB Bank Public Company Limited is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Wintek Corporation is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Wistron Corporation is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Xtep International Holdings Limited is or was in the past 12 months a client of JPM. Yanlord Land Group Limited is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services.
• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services from 7 Days Group Holdings Ltd., BBMG Corp, BYD, CapitaMalls Asia, Geely Automobile Holdings Ltd., Hitachi (6501), Honda Motor (7267), Huabao International Holdings Limited, Inpex Corporation, LG Display, Maoye International Holdings Ltd., Neptune Orient Lines (NOL), Semen Gresik (Persero) Tbk, Shanda Interactive Entertainment Ltd, TMB Bank Public Company Limited, Wintek Corporation, Wistron Corporation, Yanlord Land Group Limited.
• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from 7 Days Group Holdings Ltd., BBMG Corp, BYD, CapitaMalls Asia, Geely Automobile Holdings Ltd., Hitachi (6501), Honda Motor (7267), Huabao International Holdings Limited, Inpex Corporation, LG Display, Maoye International Holdings Ltd., Neptune Orient Lines (NOL), Semen Gresik (Persero) Tbk, Shanda Interactive Entertainment Ltd, TMB Bank Public Company Limited, Wintek Corporation, Wistron Corporation, Yanlord Land Group Limited.
• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other than investment banking from Chinatrust Financial Holdings, Compal Electronics, Inc., Daelim Industrial, FUJIFILM Holdings (4901), HDFC Bank, Hitachi (6501), Honda Motor (7267), Hong Kong Exchanges & Clearing, Indocement, Inpex Corporation, KASIKORNBANK, LG Display, Neptune Orient Lines (NOL), Quanta Computer Inc., Samsung Engineering, Samsung SDI, SK Energy Co Ltd, TMB Bank Public Company Limited, Wistron Corporation. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from Bursa Malaysia Bhd, Chinatrust Financial Holdings, Compal Electronics, Inc., FUJIFILM Holdings (4901), HDFC Bank, Hitachi (6501), Home Inns & Hotels Management Inc., Honda Motor (7267), Hong Kong Exchanges & Clearing, Inpex Corporation, KASIKORNBANK, LG Chem Ltd, LG Display, Neptune Orient Lines (NOL), Quanta Computer Inc., Shanda Interactive Entertainment Ltd, SK Energy Co Ltd, TMB Bank Public Company Limited, Wistron Corporation.
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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Other Disclosures
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“Other Disclosures” last revised September 1, 2010.
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