Hong Kong Equity Strategy - 2009: Year of the Bull But We Back the Bears in 1H

Recent Rally Is History— We urge investors not to expect miracles in 2009 and instead suggest that they de-risk into Chinese New Year. HK’s economy will continue to slow rapidly in 1H given its heavy dependence on financial services. Earnings estimates remain too high, in our view, and we believe the bulls should be prepared to sit out a cold winter before thinking about coming out in 2H09.

1H09 HSI Target: Heading Towards 10,000 — We are not believers in a V-shaped recovery in HK, as currently implied by analyst forecasts. The HSI is now trading at an 09E P/E of 12.8x, in line with its long-term historical mean. Zero earnings growth would imply an end-09 target of 15,500, but we view the E part of the equation as too aggressive. Our trough P/E of 8.1x implies a 9,100 target.

Dividends: Investor Gold or Fool’s Gold? — With Hong Kong expected to yield ~4.6% in 2009, we take a detailed look at which names are at risk. The property sector appears most at risk, followed by Conglos and Banks.

Between a Rock and Property — We remain firmly negative on the outlook for HK’s property sector as valuations look stretched and hopes remain too high. IFRS accounting means firms will have to book mark-to-market losses in 2009.

Ranking: 1) Conglomerates, 2) Banks, 3) Utilities, 4) Property — We suggest clients switch from the property and expensive utility names to conglomerates. At ~0.7x 09E P/B, the major conglomerates are already factoring in trough valuations but have strong recurring cash flows due to the diversified nature of their businesses, and average 09E net gearing levels remain low at 38%.

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