S-Shares or S-Chips - Strength from within

Some improvements in scorecard. Post 1Q results, we reviewed and adjusted our scorecards for S-Share companies. 8 companies showed higher scores, with substantial improvements from Yanlord and China Sports (both of which have been upgraded to BUYs, from HOLDs), whilst 5 companies had lower scores, and the other 4 have the same scores vs 4Q08.

team believes China is well on track to achieve 7.5% GDP growth this year, driven by its fiscal stimulus package and growth in fixed asset investments (which is helped by loose monetary policy), with domestic consumption remaining steady. Against this backdrop, our top picks are Midas (BUY, TP S$0.82) and Epure (BUY, TP S$0.64), both of which should benefit from the government’s spending on infrastructure. We also like Yanlord (BUY, TP S$2.78) and China Fish (BUY, TP S$1.39) as proxies for China’s continued steady domestic consumption spending.

Although the sequential trend for exports seems to be bottoming with some improvement, exports for the whole of 2009 is expected to fall 5% yoy, compared to 17% growth in 2008. Hence, we remain cautious on export-dependent companies like China Sky (Fully Valued, TP S$0.14). Meanwhile, we believe shipyards are facing a prolonged industry down-cycle and that current mid-cycle valuations assigned to Cosco (Fully Valued, TP S$0.85) and Yangzijiang (Fully Valued, TP S$0.68) are overly optimistic. We also cease coverage on Celestial as the outcome and timeline of negotiations with bondholders is uncertain.

Despite rebounding from lows, since Mar, on market recovery and the absence of negative news-flows, we believe jitters could return to haunt S-shares in the event of another bout of scandal(s).

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