THURSDAY, March 28, 2024
nationthailand

One year on, it is time to bargain hunt for Chinese stocks

One year on, it is time to bargain hunt for Chinese stocks

Thanawat Patchimkul Head of Research, DBS Vickers Securities (Thailand)

It has been almost a year since the Shanghai A-share market saw a dramatic collapse from its peak 
The current level of the index is around 2,900-3,000 points, 40 per cent down from its peak. In fact, the index has gradually recovered from its low of 2,655 in January this year. We believe the market has bottomed out, but the recovery will be gradual. 
We believe long-term investors should consider accumulating certain value stocks to capture most of the upside of the potential A-share market recovery. The market valuation is undemanding. The CSI 300 Index, which comprises 300 large-cap stocks on the Shanghai and Shenzhen stock exchanges, will be trading on 11 times PE (price-to-earnings) next year. The Hang Seng Index will then be trading at 10.4 times.
The easing of market regulation is on its way. After several futile measures to revive the stock markets, China appointed a new chief for the China Securities Regulatory Commission (CSRC) in February. The key agenda is to revamp market regulations to nudge them a step closer to international standards as well as accommodate overseas investors. 
MSCI said the plan for the inclusion of A-shares in the MSCI Emerging Market Index was still on the table, with the stipulation of certain conditions for the CSRC in easing the foreign-investment quota, capital-mobility restrictions, and the beneficial ownership of investments. The tentative initial step for inclusion will take place in June 2017. 
DBS recommends “buy” on China Everbright Limited (CEL), a state-owned asset-management company listed on the Hong Kong stock exchange. We believe China Everbright is the super-beneficiary of an A-share recovery. 
In our research study, the hidden value of its investment in China Everbright Bank (CEB) and China Everbright Securities (CES) will be unlocked, as CEL plans to divest its stakes to its parent company. The investment value in both CEB and CES is currently worth around $31 billion Hong Kong dollars, significantly higher than its own market cap of HK$27 billion. 
In 2015, CEL reported EPS (earnings per share) growth of 102 per cent. We advise investors to evaluate the related risks and investment merits that were outlined in DBS Group Research’s report on China Everbright Limited, dated April 20.
Tisco Securities
 
After clawing back all of its early April losses, the Stock Exchange of Thailand traded in a narrow range over last week although it dipped below |the 1,400-points support level last Thursday after the Bank of Japan failed to announce new stimulus measures. 
We expect the consolidation trend to continue, given that trading this week will only take place today and tomorrow because of another spate|of public holidays. Downside risk should be cushioned by continuing|foreign fund inflows amid delays in| US interest-rate increases, stronger crude-oil prices, a clearer timetable on mega-projects and an improved exports outlook (exports continued to grow in March for the second straight month).
Sentiment could also be lifted by better-than-expected first-quarter results from SCC (Siam Cement). Its net profit jumped 23 per cent year on year and 19 per cent quarter on quarter to Bt13.6 billion, driven by improving petrochemical-product spreads and a major turnaround in its cement and building-materials business. |At current levels, the stock offers 18-per-cent upside to our target price of Bt570.
Meanwhile after 18 months of being correctly cautious on big-cap banks, our bank analyst has upgraded the sector leaders, SCB (Siam Commercial Bank) and KBANK (Kasikornbank), from “hold” to “buy”. She now prefers big banks rather than smaller banks on signs of NPL (non-performing loan) stabilisation and more compelling valuations. With SCB currently trading at 1.3 times 2016E P/BV (estimated price to book value) and KBANK at 1.2x, we believe that valuations are very attractive relative to mid-term ROE (return on equity) expectations of 14-15 per cent.
Two other stocks we like are TASCO (Tipco Asphalt) and AAV (Asia Aviation). The former should benefit this year from a 24-per-cent increase in the government road budget and tax incentives (effective tax rate to fall |to 10 per cent from 20 per cent last year).
We view AAV as a good play on strong Chinese tourist growth. Besides high passenger growth, route expansion and cheap fuel, the airline is benefiting from the pilot shortage and other problems plaguing its primary domestic competitor, Nok Air. With 21 of Nok’s routes also serviced by AAV, our analyst believes the latter is well positioned to capture passengers affected by Nok’s flight delays and cancellations. 
Note, however, that her top airline pick remains BA (Bangkok Airways) because of its virtual monopoly on the Bangkok-Samui route and yield-management focus.
 
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