Covering coverage can reap big gains
Investors could reap handsome gains by simply tracking the coverage universe of the international research and brokerage houses, looking for thinly-covered stocks and unfamiliar names that suddenly appear on the watch list of big houses.
Chitaly Holdings leapt 35.84 per cent to an all-time high of $3.60 yesterday after Merrill Lynch initiated coverage on the furniture designer and maker on Wednesday with a 'buy' recommendation and a much higher 12-months price target of $6, representing 12 times next year's per-share earnings.
The stock had gained 51 per cent since the start of the year and more than tripled in the past 12 months.
'We believe Chitaly is one of the most promising small or micro consumer companies regionally based on its high returning business model and positioning within the fast-growing furniture industry in China,' Jeanine Angell and Henry Ho of Merrill Lynch wrote in the report issued on Wednesday.
They expect Chitaly to post net earnings growth of 64 per cent for last year, 35 per cent for this and 25 per cent for next, citing increased demand from China's middle class for Chitaly's modern furniture as well as the company's expanding franchisee network from 600 outlets now to 1,000 by next year.
Last year Chitaly drew attention from institutional investors such as Value Partners and Baring Asset Management, eyeing the growing furniture market in China.
However, some are not too optimistic. One fund manager doubts whether the shares are worth that much. 'I don't understand the story. This is even more puzzling than Jinhui,' the fund manager said.
Jinhui Holdings rose more than 60 per cent to $35 in two days after Cazenove initiated coverage on the dry-bulk carrier with a buy recommendation and a $64 target price.
The brokerage said Jinhui's exposure to dry-bulk shipping, which has seen freight rates soar in the past six months because of huge mainland demand, easily warranted the valuation.
'I can understand Jinhui. The transportation and logistics industry is a really hot topic. But furniture industry in China. I really have doubts,' the fund manager said.
Another play worth noting is Culturecom Holdings, a software and publishing firm.
Market watchers said the stock had soared after Morgan Stanley issued a research note on the firm two weeks ago while some attributed the gain to a rumour IBM might take a stake in the company. It rose 13.55 per cent to 67 cents yesterday.
