1. China Mobile: A low penetration rate, increases in disposable income, falling tariffs and increasing network effect indicate strong subscriber growth over the medium-term.
2. China Resources Power: We like China Resources Power for its production efficiency, proven track record in controlling cost and experienced and performance oriented management team. Longer term earnings growth could be secured by its coal mine investment. Should electricity tariffs be allowed to increase, there will be further earnings upside.
3. BoC: Bank of China is our preferred H-share bank in the sector. The banks NIM is least exposed to narrowing Rmb lending spreads as it has the smallest domestic exposure. It also offers the highest dividend yields in the sector. We also expect the bank to re-rate when concerns over its US$ investments ebb.
SELLs
1. Parkson Group: Parkson’s 3Q08 results missed our expectation. Given the gloomier outlook for economic growth and dull prospects for the export-oriented industries in China, we expect Parkson to face lower sales growth and bigger margin pressure ahead.
2. Hang Seng Bank: GDP contraction in Hong Kong will put pressure on Hang Seng Bank's credit costs while lowering loan and fee income demand. We project an 18% earnings decline for Hang Seng Bank in FY09 earnings, higher than for other Hong Kong banks given the larger NIM impact and higher reliance on wealth management fees. The bank had significantly outperformed peers in 2008 and commands a premium for its defensiveness. We expect the premium to narrow as the market recovers.
3. Angang Steel: Steel prices in China are unlikely to stage a recovery in the next six months as it will take time for the massive investment push by the government to come through. We should see more provision for losses in 4Q08 as the Chinese composite steel price index in Oct was 22% below the average for 3Q08, we think its now a good time to sell.
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