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Top 3 Hong Kong Analysts’ Calls
In the Spotlight | 29 August 2014
By:
    Bank of Communications (Target Price: HK$5.40) HOLD

  • We raise our net profit forecast for BOCOM by 8.1% for 2014 and 9.0% for 2015 to factor in higher NIM and lower loan growth and expense projections. We forecast its net profit to grow at a 3.4% CAGR during 2013-16. Key earnings drivers will be healthy net fees growth and slight improvement in cost-income ratio. Net fees have grown moderately. (+13.0% YoY in 1H14 vs. +24.4% YoY in 2013). The rise in bank card and management services fees was offset by a reduction in financial advisory and bancassurance fees. Cost-income ratio lowered to 35.4% in 1H14 (36.5% in 1H13). Total expenses grew 2.0% YoY in 2Q14, much slower than the revenue growth (+5.2% YoY).
  • NIM rebounded to 2.44% in 2Q14 (2.33% in 1Q14; 2.39% in 1H14 and 2.52% in 2013) mainly due to an increase in loan yield and lower costs from financial institutions. Loan growth is a modest 5.1% HoH in 1H14 (+3.7% QoQ in 2Q14; +1.3% QoQ in 1Q14 and +10.8% YoY in 2013). Key drivers included residential mortgages, credit card advances, discounted bills and overseas lending. Credit cost declined to 0.56% in 2Q14 (0.66% in 1Q14; 0.61% in 1H14 and 0.59% in 2013). BOCOM continued to reduce its lending to local government financing vehicles, property developers and heavily polluting, highly energy consuming and over-capacity industries.
  • Correspondingly, we raise the long-term ROE assumption from 11% to 12.5% in our Gordon Growth Model (GGM). We also raise our target price from HKD4.15 to HKD5.40 based on the fair Dec 2014 P/BV of 0.7x derived from the GGM. We upgrade our rating from SELL to HOLD given that BOCOM has shown some improvement in NIM, cost-income ratio and capital positions. Key risks to our call include economic prospects in Eastern China and the volatility in steel price (which will affect the quality of BOCOM’s steel trading loans).

By: Maybank Kim Eng Research

    China Resources Enterprise (Target Price: HKD19.40) SELL

  • Maintain SELL on upcoming 3-yr losses in Tesco and structurally struggling food retailing industry prospects. Our new TP of HKD 19.4 is at 30% discount to SOTP-derived NAV to avoid short-term Tesco’s earnings distortion. The food retailing industry has been assessed to be a struggling one. Beer volume in July was down 15%+ YoY due to poor weather; retail losses in weak regions (HK & N.E China) were to sustain in FY14 and rice distribution would only see profits in 3-4 years.
  • Management foresees a sustenance of near-term earnings drag as integration with Tesco China goes underway. Altogether, Tesco China has made a net loss of CNY778m/CNY2, 397m in 1HFY2/14 and FY2/13. Notably, its retail business made a net loss of CNY689m/CNY1,793m during the same period. By factoring in gradually narrowing losses for Tesco upon the first three years of consolidation in our base-case scenario, we forecast Tesco (retail only) to record a loss of CNY1.2b/608m/96m in FY14/15/16F as benchmarked to management’s three-year turnaround target. In consequence, we will cut our EPS est. by 10-27% for FY14-16F.
  • By: Maybank Kim Eng Research

    China Shengmu Organic Milk (Target Price: $2.79) ACCUMULATE

  • Shengmu announced its 2014 interim results that the revenue increased 96.2% yoy to RMB 906 million, mainly due to the rapid growth of 141% and 132% yoy in organic raw milk and liquid milk revenue respectively. Gross profit surged 165% yoy to RMB 444 million with gross profit margin up 12.7 percentage points to 49%. Profit attributable to owners for 1H surged 171% yoy to RMB 279 million. Earnings per share amounted as RMB 0.049.
  • We expect the growth to continue in the 2H since management mentioned that the sales of liquid milk obtained rapid growth in both price and volume after its listing in HKEx which many distributors reported out of stock, Shengmu and some other milk producers have predicted the average milk price to go up in the 2H and the company is actively switching its product mix to liquid milk which has the highest GPM. It has plans to double its proportion of revenue to 60-70% in the 3-5 years.
  • We are also quite confident in the company’s operations due to the strong background of its management. The management is confident at further expanding the business since the proportion of organic milk products in the whole dairy market is still low. They believe the ever-growing customers’ concerns of milk quality and health issues would drive up the future demand. Thus, we initiate a rating of “Accumulate” with target price HK$ 2.79, equivalent to 22x of 2014 forecasted EPS.
  • By: Philips Securities Group


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