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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Upgrade China and Financials to OW,
Indonesia and Telecoms stay OW
�� Add: China Life, CCB, ZTE, Axis Bank,
TSMC and PT Telkom
�� Keep: Gome, Jardine Matheson, Sun
Hung Kai and Telstra
For full coverage of our Asia strategy views, please see Asia
Insights Quarterly: Change of Leadership (6 April).
Adding: China Life, an undervalued and low risk way to
play the high growth potential Chinese life insurance market.
CCB. Stable, liquid, low cost deposit base should lead to
NIM expansion as policy risks reduce.
ZTE is best positioned to take advantage of China’s desire
to be a technology leader as TD-LTE is promoted globally.
Axis Bank warrants a re-rating closer to private bank peers
as its profitability rises and loan book continues to grow.
TSMC will be the enabler of the secular shift to mobile
devices, a bigger market with more silicon per device.
PT Telkom management have the opportunity to unlock
deep value, either via dividends or tower spin outs.
Keeping: GOME as it closes valuation gap to peers, Sun
Hung Kai for strong commercial exposure and luxury
pipeline, Jardine Matheson has broad exposure to Pan-Asia
consumption, and Telstra – 10% yield is highest in our Asia
telco coverage.
Removing: CapitaLand, Hon Hai, KL Kepong, Largan
Precision, POSCO and Samsung Electronics
Methodology: The Asia Super Ten portfolio is constructed
as an equally weighted portfolio of 10 stocks with the
principal objective of reflecting the convictions of both our
strategists and our stock analysts.
Performance: As at 31 March 2011, since inception on 5
January 2010 the Asia Super Ten portfolio has delivered an
absolute performance in US dollar terms of 22.85% and a
relative outperformance of 2.93% against the MSCI All
Country Asia ex Japan Index.
Investment strategy
�� Despite inflation fears and foreign selling, Asian equities eked out
a small gain in Q1
�� Earnings growth has been decent, but unspectacular, valuations
are undemanding – and inflation close to peaking – so we see
continued modest gains over the next six to nine months
�� But leadership is likely to change as investors shift from export-led
markets, given jitters about sustainability of global growth, to
domestic-demand-led markets, where inflation is under control
Decent, but only steady
In the end, the first quarter turned out to be not as
bad as it might have been. A rally in the last two
weeks left Asia ex Japan up 1% for the quarter, with
a fairly narrow variation of country performance,
ranging from India (down 5%) to Indonesia (up 5%).
Considering that, at one point in mid-February,
Asian stocks were down 7% from the start of the
year (buffeted by worries about inflation and
outflows from emerging market funds, as well as
global risks such as rising oil prices and the
Japanese earthquake), that is a pretty creditable
performance. It demonstrates the resilience of
Asian markets, thanks to their attractive long-term
growth story.
We expect further steady progress over the next
couple of quarters. Analysts see earnings growing
14% this year (a forecast that has barely budged
over the past six months). Margins may be under
a little more pressure than analysts now appreciate
because of rising commodity prices, but doubledigit
earnings growth seems achievable. Valuations
remain undemanding even after the rally in late Q1:
forward PE for Asia ex Japan is 12.4x, somewhat
below its long-run average of 14.4x. We do not
expect a big rerating this year – although it could
happen if inflation risks fade, and investor flows
come back into emerging markets.
Our target of 13% upside for Asia ex Japan to
year-end is based on earnings growth of just a
little less than analysts forecast and the multiple
staying roughly flat. That is not a spectacular
return, but it is above the 7% we expect for the
MSCI All Country World Index (ACWI) and
allows us to take Asian equities up to overweight
in our global portfolio.
We do, though, expect a change of market
leadership. Investors have worried most about
inflation in Asia since late 2010, punishing for a
while those central banks perceived to be notably
behind the curve in raising rates (especially India
and Indonesia). We think these worries will now
fade – and indeed have started fading since mid-
March. Every central bank in Asia has now raised
rates (the Philippines was the last one on March
24). India has already raised rates by 200bp and
China by 75bp, in addition to implementing
quantitative tightening measures. While both will
need to do more, China, in particular, should see
inflation clearly peaking by early summer.
We think that investors’ concerns will shift,
rather, to global growth over the next few months.
High oil prices are starting to affect consumer
sentiment in the US and Europe. Global cyclical
indicators are all at elevated levels – the US
manufacturing ISM hit a 27-year high in February
– and are therefore likely to fall back a little.
Inflation is starting to surprise on the upside in
developed economies, too, and we think this will,
for example, lead the European Central Bank to
raise rates as soon as April.
All this suggests that investors will revert to a
preference for those Asian markets and sectors
that are led by domestic demand and have longterm
structural stories, and become more wary
markets especially sensitive to overseas demand
and the cycle.
Included here are the country and sector
overweights relevant to our stock selection. For
all other views please see Asia Insights Quarterly:
Change of Leadership.
China – Overweight (from neutral)
China is one of the few markets where slower is
good. Recent economic indicators all point to the
effectiveness of the tightening measures. Money
supply (M2) slowed to 15.7% y-o-y in February.
New lending also dropped 25% y-o-y between
January and February. All seem to suggest that the
Chinese government has managed to engineer a
soft landing. With inflation worries easing, we are
turning positive on China again.
2011 earnings growth expectation of 15% is in
line with Asia’s average, while valuation is at a
discount. We expect MSCI China to offer roughly
17% upside between now and the year-end.
Indonesia – stays Overweight
Domestic demand has remained strong and
companies have put capex plans back on track.
Wage increases, strong performance of the
agricultural sector – think crude palm oil and rice
– and healthy corporate and household balancesheets
support continued strong domestic demand,
even in the wake of rate increases.
Valuations for Indonesian equities stand at 13.1x,
which is still a small discount to Malaysia and the
Philippines markets. Earnings growth is forecast
to moderate from 22% this year to 16% next year,
which is only a touch above the 15% expected for
the whole region. It is quiet on the political front
too, especially compared with other Asean
countries such as Thailand. Domestic growth
could surprise on the upside.
Financials – overweight (from neutral)
Key themes: 1) risk of rate increases starting to
fall (China); 2) asset inflation and a bottom in
the provisioning cycle (Hong Kong, Korea);
3) low penetration of banking services in some
Asian countries (Indonesia, Chinese insurance).
Our key reason for being overweight financials is
that this sector is an excellent play on a recovery
in domestic growth, especially when inflation
risks start to decline and Asian countries are able
to gradually adopt pro-domestic growth policies.
Indeed, factors that have hampered the stock
performance of banks, in particular in China, are
falling away. Inflation is to peak soon, lessening
fears of interest rate increases, especially in
countries where central banks have been vigilant
(China) but less so where interest rates have only
recently been hiked (Indonesia, India).
Meanwhile, the risk of a hard landing in China is
falling as loan growth rates remain healthy, even
in the face of tighter system liquidity. The latter is
actually a positive for banks with low loan-todeposit
ratios (e.g. CCB, ICBC) that can now
demand better rates in the interbank market.
Meanwhile, capital raising plans have now been
announced, removing another big concern from
the market.
Chinese insurance stocks have been under
pressure. The major concern was that third-party
bancassurance could be squeezed by banks selling
their own insurance products. This, the argument
goes, undermines the business model of
companies such as China Life. This came at a
time when regulators were toughening their stance
on insurance mis-selling practices in China.
However, we believe that these changes in
bancassurance will be very gradual and are
already more than priced into current share prices,
which appear to suggest a severe decline in the
industry in the next decade.
In Hong Kong, developers (e.g. SHK) continue to
benefit from rising prices, which are likely to
continue until it is clear when and by how much
interest rates will be increased. Our property team
still sees another 10-15% increase in real estate
prices in Hong Kong in the next year.
Telecoms – stay overweight
Key themes: 1) yield; 2) government policies,
3) continued mobile market penetration.
We remain overweight as these cash-rich telecoms
companies continue to offer attractive dividend
yields. This also comes with the possibility that
some cash-rich telecoms operators might instead
opt to use their cash for acquisitions or ventures
into new markets, rather than to pay dividends.
One area of growth is China’s recent technology
policy shift towards pushing TD-LTE as a global
standard, ZTE should benefit from this trend.
Elsewhere, growth in Asian telecoms is either
in countries where mobile penetration is low
but rising (e.g. Indonesia, India) or where
potential demand for smartphones is increasing
(e.g. Hong Kong, Korea, Taiwan), which drives
ARPU higher.
Axis Bank (AXSB IN)
�� Near-term catalysts: macro concerns abating – liquidity eases,
rates plateau
�� Offers growth + profitability at attractive value vs peers
�� OW. Target price of INR1,900 (based on 12-month forward PE of
9x and 2.6x PB) offers 36% potential return
Axis Bank’s higher than industry loan book
growth, stable margins and flattening credit costs
will help improve profitability. However, despite
high RoE (19%) and RoA (1.6%), comparable
with private bank peers, the stock is still trading at
~30% discount to private bank peers on PE and a
22% discount on PB. We believe the stock
warrants a re-rating closer to its private bank
peers given its rising profitability.
Key catalysts to look for are improving asset
quality as investors’ macro concerns abate, and
stable margins despite rising deposit costs due to
the bank’s strong deposit franchise.
Valuation: We value AXSB using a weighted
average combination of EPM (75%), PE (15%),
and PB (10%) methodologies, in line with the
rising credit cycle where PE multiples rerate faster
than PB and hence deserve a higher weighting
than PB and DCF-based values. The PE and PB
multiples we use are 12-month forward multiples
based on trading ranges for the stock over
historical upcycles.
Our EPM value is INR860. Our PE and PB
values, based on FY13 estimates, are INR2,138
(PE multiple 18.9x) and INR1,551 (PB multiple
2.6x). Our target price is INR1,900, which implies
36% potential return, including dividends.
Risks: Slower than expected loan growth,
margins and higher credit costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Upgrade China and Financials to OW,
Indonesia and Telecoms stay OW
�� Add: China Life, CCB, ZTE, Axis Bank,
TSMC and PT Telkom
�� Keep: Gome, Jardine Matheson, Sun
Hung Kai and Telstra
For full coverage of our Asia strategy views, please see Asia
Insights Quarterly: Change of Leadership (6 April).
Adding: China Life, an undervalued and low risk way to
play the high growth potential Chinese life insurance market.
CCB. Stable, liquid, low cost deposit base should lead to
NIM expansion as policy risks reduce.
ZTE is best positioned to take advantage of China’s desire
to be a technology leader as TD-LTE is promoted globally.
Axis Bank warrants a re-rating closer to private bank peers
as its profitability rises and loan book continues to grow.
TSMC will be the enabler of the secular shift to mobile
devices, a bigger market with more silicon per device.
PT Telkom management have the opportunity to unlock
deep value, either via dividends or tower spin outs.
Keeping: GOME as it closes valuation gap to peers, Sun
Hung Kai for strong commercial exposure and luxury
pipeline, Jardine Matheson has broad exposure to Pan-Asia
consumption, and Telstra – 10% yield is highest in our Asia
telco coverage.
Removing: CapitaLand, Hon Hai, KL Kepong, Largan
Precision, POSCO and Samsung Electronics
Methodology: The Asia Super Ten portfolio is constructed
as an equally weighted portfolio of 10 stocks with the
principal objective of reflecting the convictions of both our
strategists and our stock analysts.
Performance: As at 31 March 2011, since inception on 5
January 2010 the Asia Super Ten portfolio has delivered an
absolute performance in US dollar terms of 22.85% and a
relative outperformance of 2.93% against the MSCI All
Country Asia ex Japan Index.
Investment strategy
�� Despite inflation fears and foreign selling, Asian equities eked out
a small gain in Q1
�� Earnings growth has been decent, but unspectacular, valuations
are undemanding – and inflation close to peaking – so we see
continued modest gains over the next six to nine months
�� But leadership is likely to change as investors shift from export-led
markets, given jitters about sustainability of global growth, to
domestic-demand-led markets, where inflation is under control
Decent, but only steady
In the end, the first quarter turned out to be not as
bad as it might have been. A rally in the last two
weeks left Asia ex Japan up 1% for the quarter, with
a fairly narrow variation of country performance,
ranging from India (down 5%) to Indonesia (up 5%).
Considering that, at one point in mid-February,
Asian stocks were down 7% from the start of the
year (buffeted by worries about inflation and
outflows from emerging market funds, as well as
global risks such as rising oil prices and the
Japanese earthquake), that is a pretty creditable
performance. It demonstrates the resilience of
Asian markets, thanks to their attractive long-term
growth story.
We expect further steady progress over the next
couple of quarters. Analysts see earnings growing
14% this year (a forecast that has barely budged
over the past six months). Margins may be under
a little more pressure than analysts now appreciate
because of rising commodity prices, but doubledigit
earnings growth seems achievable. Valuations
remain undemanding even after the rally in late Q1:
forward PE for Asia ex Japan is 12.4x, somewhat
below its long-run average of 14.4x. We do not
expect a big rerating this year – although it could
happen if inflation risks fade, and investor flows
come back into emerging markets.
Our target of 13% upside for Asia ex Japan to
year-end is based on earnings growth of just a
little less than analysts forecast and the multiple
staying roughly flat. That is not a spectacular
return, but it is above the 7% we expect for the
MSCI All Country World Index (ACWI) and
allows us to take Asian equities up to overweight
in our global portfolio.
We do, though, expect a change of market
leadership. Investors have worried most about
inflation in Asia since late 2010, punishing for a
while those central banks perceived to be notably
behind the curve in raising rates (especially India
and Indonesia). We think these worries will now
fade – and indeed have started fading since mid-
March. Every central bank in Asia has now raised
rates (the Philippines was the last one on March
24). India has already raised rates by 200bp and
China by 75bp, in addition to implementing
quantitative tightening measures. While both will
need to do more, China, in particular, should see
inflation clearly peaking by early summer.
We think that investors’ concerns will shift,
rather, to global growth over the next few months.
High oil prices are starting to affect consumer
sentiment in the US and Europe. Global cyclical
indicators are all at elevated levels – the US
manufacturing ISM hit a 27-year high in February
– and are therefore likely to fall back a little.
Inflation is starting to surprise on the upside in
developed economies, too, and we think this will,
for example, lead the European Central Bank to
raise rates as soon as April.
All this suggests that investors will revert to a
preference for those Asian markets and sectors
that are led by domestic demand and have longterm
structural stories, and become more wary
markets especially sensitive to overseas demand
and the cycle.
Included here are the country and sector
overweights relevant to our stock selection. For
all other views please see Asia Insights Quarterly:
Change of Leadership.
China – Overweight (from neutral)
China is one of the few markets where slower is
good. Recent economic indicators all point to the
effectiveness of the tightening measures. Money
supply (M2) slowed to 15.7% y-o-y in February.
New lending also dropped 25% y-o-y between
January and February. All seem to suggest that the
Chinese government has managed to engineer a
soft landing. With inflation worries easing, we are
turning positive on China again.
2011 earnings growth expectation of 15% is in
line with Asia’s average, while valuation is at a
discount. We expect MSCI China to offer roughly
17% upside between now and the year-end.
Indonesia – stays Overweight
Domestic demand has remained strong and
companies have put capex plans back on track.
Wage increases, strong performance of the
agricultural sector – think crude palm oil and rice
– and healthy corporate and household balancesheets
support continued strong domestic demand,
even in the wake of rate increases.
Valuations for Indonesian equities stand at 13.1x,
which is still a small discount to Malaysia and the
Philippines markets. Earnings growth is forecast
to moderate from 22% this year to 16% next year,
which is only a touch above the 15% expected for
the whole region. It is quiet on the political front
too, especially compared with other Asean
countries such as Thailand. Domestic growth
could surprise on the upside.
Financials – overweight (from neutral)
Key themes: 1) risk of rate increases starting to
fall (China); 2) asset inflation and a bottom in
the provisioning cycle (Hong Kong, Korea);
3) low penetration of banking services in some
Asian countries (Indonesia, Chinese insurance).
Our key reason for being overweight financials is
that this sector is an excellent play on a recovery
in domestic growth, especially when inflation
risks start to decline and Asian countries are able
to gradually adopt pro-domestic growth policies.
Indeed, factors that have hampered the stock
performance of banks, in particular in China, are
falling away. Inflation is to peak soon, lessening
fears of interest rate increases, especially in
countries where central banks have been vigilant
(China) but less so where interest rates have only
recently been hiked (Indonesia, India).
Meanwhile, the risk of a hard landing in China is
falling as loan growth rates remain healthy, even
in the face of tighter system liquidity. The latter is
actually a positive for banks with low loan-todeposit
ratios (e.g. CCB, ICBC) that can now
demand better rates in the interbank market.
Meanwhile, capital raising plans have now been
announced, removing another big concern from
the market.
Chinese insurance stocks have been under
pressure. The major concern was that third-party
bancassurance could be squeezed by banks selling
their own insurance products. This, the argument
goes, undermines the business model of
companies such as China Life. This came at a
time when regulators were toughening their stance
on insurance mis-selling practices in China.
However, we believe that these changes in
bancassurance will be very gradual and are
already more than priced into current share prices,
which appear to suggest a severe decline in the
industry in the next decade.
In Hong Kong, developers (e.g. SHK) continue to
benefit from rising prices, which are likely to
continue until it is clear when and by how much
interest rates will be increased. Our property team
still sees another 10-15% increase in real estate
prices in Hong Kong in the next year.
Telecoms – stay overweight
Key themes: 1) yield; 2) government policies,
3) continued mobile market penetration.
We remain overweight as these cash-rich telecoms
companies continue to offer attractive dividend
yields. This also comes with the possibility that
some cash-rich telecoms operators might instead
opt to use their cash for acquisitions or ventures
into new markets, rather than to pay dividends.
One area of growth is China’s recent technology
policy shift towards pushing TD-LTE as a global
standard, ZTE should benefit from this trend.
Elsewhere, growth in Asian telecoms is either
in countries where mobile penetration is low
but rising (e.g. Indonesia, India) or where
potential demand for smartphones is increasing
(e.g. Hong Kong, Korea, Taiwan), which drives
ARPU higher.
Axis Bank (AXSB IN)
�� Near-term catalysts: macro concerns abating – liquidity eases,
rates plateau
�� Offers growth + profitability at attractive value vs peers
�� OW. Target price of INR1,900 (based on 12-month forward PE of
9x and 2.6x PB) offers 36% potential return
Axis Bank’s higher than industry loan book
growth, stable margins and flattening credit costs
will help improve profitability. However, despite
high RoE (19%) and RoA (1.6%), comparable
with private bank peers, the stock is still trading at
~30% discount to private bank peers on PE and a
22% discount on PB. We believe the stock
warrants a re-rating closer to its private bank
peers given its rising profitability.
Key catalysts to look for are improving asset
quality as investors’ macro concerns abate, and
stable margins despite rising deposit costs due to
the bank’s strong deposit franchise.
Valuation: We value AXSB using a weighted
average combination of EPM (75%), PE (15%),
and PB (10%) methodologies, in line with the
rising credit cycle where PE multiples rerate faster
than PB and hence deserve a higher weighting
than PB and DCF-based values. The PE and PB
multiples we use are 12-month forward multiples
based on trading ranges for the stock over
historical upcycles.
Our EPM value is INR860. Our PE and PB
values, based on FY13 estimates, are INR2,138
(PE multiple 18.9x) and INR1,551 (PB multiple
2.6x). Our target price is INR1,900, which implies
36% potential return, including dividends.
Risks: Slower than expected loan growth,
margins and higher credit costs.
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