Stock tactics

PUBLISHED : Monday, 07 May, 2012, 12:00am
UPDATED : Monday, 07 May, 2012, 12:00am


Hong Kong equities are perking up. The Hang Seng Index is up 14 per cent since the year started. New listings are making a cautious return. Now just may be the time to dip a toe back into shares.

In the spirit of punting on a plausibly resurgent market, Money Post surveyed local analysts to see what they are recommending. Each was asked about his or her top pick and why. The analysts made their picks for many different reasons, but mainly they think these stocks can make you money.

Great Wall Motor (2333)

Analyst: Scott Laprise, CLSA

Laprise likes Great Wall vehicles so much, he owns one. The Beijing-based analyst drives a Sing SUV made by the mainland carmaker.

His story on why this stock is great is refreshingly simple. He expects mainland consumers will buy more SUVs, and he thinks that Great Wall SUVs offer the best value on the mainland.

Breaking that argument down, he thinks that the SUV market will grow as drivers' tastes in the mainland market diversifies away from the safe but dull choice of a sedan. This is most drivers' first vehicle, and China is a nation of new drivers. Some 91.5 per cent of vehicles in the mainland are sedans, Laprise says. 'People buy what they learned to drive in driving school.'

But he expects this will change. As people buy their second and third vehicles, they will become more adventurous.

'As the average age [of mainland consumers] picks up, they will look for alternatives,' says Laprise, referring to SUVs.

He expects growth in SUV sales will lead drivers to Great Wall, a firm he describes as the biggest SUV player in China.

Great Wall's SUVs are cheaper than others' and offer the best value. Competitors such as BYD and Geely offer similar vehicles in that price bracket, but at a lower quality, in Laprise's opinion. 'In terms of value for money, it's about the best car you can buy in China,' he contends.

An entry-level Great Wall SUV (the Hover H6) sells for about 90,000 yuan (HK$110,000). The model has a two-month waiting list, according to CLSA.

Laprise attributes the firm's low costs to the fact that Great Wall makes about half of its own parts, which he says is cheaper than outsourcing.

So, the Great Wall story is simple: that of a cheap, popular product that is tapping into booming local demand.

Its first-quarter results showed a 25.5 per cent year-on-year rise in revenue, a 25 per cent rise in earnings, and an 18.2 per cent increase in vehicle production. This is a typical performance for the firm, and it came despite an overall slowdown in vehicle sales on the mainland.

Great Wall makes other vehicles, such as sedans and pickups. But its growth story is mostly about its SUVs.

'Maybe the SUV segment will not perform, but Great Wall will outperform in the SUV segment,' says Laprise. 'I can't think of any time when they have not performed.'

Great Wall snapshot

Does what: carmaker

Market capitalisation: HK$56.5 billion

Year-to-date share price rise: 45.6 pc

Price-to-earnings ratio*: 11

CLSA target price: HK$14.31

Current share price: HK$16.52

Galaxy Entertainment (27)

Analyst: Charlene Liu, Nomura

Galaxy Entertainment has been such a strong stock - it has climbed more than 4,000 per cent over the past four years - the only question is whether there is still much upside left in the price.

Liu thinks there is. The firm consistently beats expectations. It opened a massive casino resort, Galaxy Macau, which has surpassed analyst expectations in terms of visitors and revenue.

'Galaxy Macau has opened very strongly and barely cannibalised its business at its existing property, the StarWorld,' says Liu.

There are a lot of nuances to the Macau casino industry, such as an operator's ability to draw in high-rolling gamblers (known as VIPs, who invariably arrive via junkets from the mainland). Galaxy does OK in the VIP segment, but it does very well in another aspect of the business: building enormous properties on the expectation that it can fill every single room.

Now the firm is building phase two of Galaxy Macau, which will add 1,300 rooms at a cost of HK$16 billion.

The company is cash rich which means it can fund much of the construction without excessive reliance on debt, which is always dangerous in a downturn.

Liu has not factored in Galaxy's expansion into her share price target, but she expects growth and a re-rating upward of the Galaxy stock is a distinct near-term possibility.

Galaxy Entertainment snapshot

Does what: casino operator

Market capitalisation: HK$99.7 billion

Year-to-date share price rise: 67.5 pc

Price-to-earnings ratio*: 32.9

Nomura target price: HK$29

Current share price: HK$23.85

Baidu (BIDU on Nasdaq)

Analyst: Wendy Huang, RBS is the dominant search portal on the mainland - the local equivalent of Google and Huang's top pick.

The firm has extraordinarily high growth even for the heady numbers seen in the mainland internet market. For its most recent quarterly results, the firm registered year-on-year revenue gains of 83 per cent, and an earnings increase of 77 per cent.

Huang likes Baidu because it is focused on China's search advertising market, which is booming. Advertisers are getting more comfortable with paying Baidu to highlight firms in search results. As this market matures and companies see search-engine marketing as a normal part of their advertising, Baidu will reap easy growth.

She says Baidu's advertising base has grown 50 per cent in two years. She projects the company will register annual earnings gains of more than 30 per cent.

Huang sees absolute growth for the stock, but also relative gains. The stock was hammered in 2008 because of reports by mainland broadcaster CCTV that the firm had allowed fraudulent marketing on its site. CCTV reported that medical merchants using the portal were not licensed to sell medicine.

'This incident showed the firm expanded too fast, and it went out of control,' Huang says. 'How can you manage the firm when the company is going through such fast growth? You have to balance the quality of service with the rate of revenue growth.'

In any case, the event continues to weigh on Baidu's share price, which means there is value in the firm relative to other China internet stocks. For example, the Hong Kong-listed portal Tencent is up 58 per cent this year to date, while Baidu slightly lags the wider market with a 15 per cent rise in the same time frame. (Baidu is still expensive; it trades at price-to-earnings ratio of 39 times.)

Huang cautions, however, that Baidu is volatile and that its performance record is imperfect. The company recently abandoned its e-commerce arm, and that its online video service (a kind of Chinese YouTube) does not turn a profit.

Furthermore, the stock is volatile. Investors tend to dump Baidu at any hint of a performance over governance misstep.

'The share price has been going through a roller coaster. It is sensitive to any miss on performance,' says Huang. 'But it is still our top pick for the internet space.'

Baidu snapshot

Does what: internet search

Market capitalisation: US$46.5 billion

Year-to-date share price rise: 14 pc

Price-to-earnings ratio*: 39

RBS target price: US$215

Current share price: US$133

China Life Insurance (2628)

Analyst: Irene Chow, Credit Suisse

Chow recommends China Life largely on the view that things can only get better for the beleaguered insurer. In the second half of last year, the firm's net profit dropped 66 per cent year on year. Its share price dropped 40 per cent last year overall.

The declines were linked to an overall slump for mainland stocks and bonds. The company sells insurance policies and savings plans. Customers' policy payments to the firm are reinvested in yuan stocks and bonds. The greater its investment returns, the greater its profit.

The dynamic, of course, also works in reverse. Market declines can result in big reversals in income.

Chow projects a rebound in prices for mainland securities this year as regulators act to restore confidence in the market, and expects this will be reflected in a much improved share price for China Life.

'The poor performance of mainland stocks and bonds hurt them in 2011. It was a bad market. We see that reversing in 2012,' says Chow.

Because China Life had to make provisions for expected market losses this year, Chow expects the provisions will be unwound as the general market bounces back. This means that paper losses on the way down will be transformed into paper profits on the way up.

The insurer in any case reflects in amplified fashion the general swings in prices for mainland securities. If you believe mainland markets will recover this year, as Chow does, then China Life is a great bet on that recovery.

'This is a turnaround story from a very difficult 2011,' she says.

China Life snapshot

Does what: life insurance

Market capitalisation: HK$652.3 billion

Year-to-date share price rise: 12 pc

Price-to-earnings ratio*: 19.44

Credit Suisse target price: HK$24.60

Current share price: HK$21.50

Sany Heavy (600031, Shanghai)

Analyst: Alexious Lee, CLSA

It's easy to overlook the concrete-pump makers. But Sany Heavy is a bread-and-butter industrial stock at the core of the mainland industrial economy, and it has seen stellar growth alongside the gains of the wider economy. The construction equipment maker is low concept and high growth, which is a good combination for investors. The firm has grown at an annualised rate of 50 per cent since its establishment in 1994. Even during 2008, when global markets and economies were imploding, the firm still registered a 50 per cent rise in income.

Lee in particular applauds Sany Heavy's rise in excavation-equipment (earthmovers). It now controls 16 per cent of the mainland market in terms of excavator sales.

He says the firm excels at execution, particularly in customising units according to client requests. 'The firm is aggressive in the way it develops products and upgrades models. The management is young and gung-ho,' says Lee.

Sany Heavy is building factories and distribution centres in Indonesia and Brazil. It is becoming a global brand.

The company will also be a direct beneficiary if the mainland government embarks on another infrastructure spending programme this year, as many are expecting a stimulus measure.

Sany Heavy snapshot

Does what: construction equipment maker

Market capitalisation: 112.3 billion yuan

Year-to-date share price rise: 18 pc

Price-to-earnings ratio*: 12.7

CLSA target price: 20.01 yuan

Current share price: 14.8 yuan

China National Building Material (3323)

Analyst: Jiong Shao, Macquarie

First and foremost China National Building Material is a cement maker. The stock rises and falls on the volumes of concrete poured on the mainland. Cement usage in itself is a very direct and primary measure of mainland economic activity, particularly of growth in infrastructure and housing.

Cement is also very cyclical sector in that periods of high demand squeeze supply and create price spikes. The cycle works in reverse, and cement prices collapse during the downturns.

The trick, then, for buying such stocks is to catch them while they are cheap during the down markets, and ride them during the ensuing upturn. Shao thinks CNBM is at just such an inflection point.

He expects mainland officials will roll out stimulus measures in the second half, part of which will involve fresh government spending on infrastructure and a loosening of restrictive policies aimed at the property sector. The outcome he expects will be a lot of concrete pouring, which is already translating into stabilising cement prices.

The firm's upside will be amplified by the fact that cement prices have been weak, depressing the firm's share price. Macquarie says the firm is selling cement at prices that are about 18 per cent below the average of last year. The firm's share price dropped by more than one-third in the past year.

There is a geographic twist to the discussion. The company is strong in the northern and western parts of China, where there is less supply, and the firm has more pricing power than other cement firms.

'Cement firms have the same business model. The only difference is where they are located,' says Shao.

CNBM snapshot

Does what: cement making, mainly

Market capitalisation: HK$53.5 billion

Year-to-date share price rise: 12.4 pc

Price-to-earnings ratio*: 5.4

Macquarie target price: HK$14

Current share price: HK$9.92

*P/E ratios based on historical earnings