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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Emerging Leaders
Steal this stock
Asia-Ex Small Caps still 36% above trough
Asia-Ex Small Caps are now down 25% YTD, 15% of which occurred in
September. While we are reeling, it is important to note that the MSCI Asia-Ex
Small Cap P/BV is still 36% above the 2008 trough. Much as we would like to,
we cannot say the worst is in the price. As such, we continue to try to position
our top picks with a defensive strategy (page 2). We are focussed on
reasonably-priced domestic consumption plays (staples, healthcare, etc) with
high earnings growth visibility. We are avoiding exporters and industrials. In line
with our Quant team’s findings, we have a strong bias towards high dividend
yield, with 7 that yield over 4%.
HK/China stands out as the underperformer
MSCI China Small Caps are down 37% YTD and MSCI HK Small Caps are
down 28% YTD – 19% of which has occurred in September. These are the two
worst performing small cap indices in the region. HK/China are now the region’s
cheapest small caps and the only indices now trading below book value (0.9x).
India and Thailand are the priciest at 1.4x. While Indonesia stands out as a
market where many small caps still trade above 20x PER, last week’s sharp selloff
serves as a reminder that Jakarta is unlikely to prove a safe-haven if global
market conditions further deteriorate.
The market is being selective; indices tell only part of story
The MSCI Small Cap indices look bad YTD, but they hide the large spreads
between a number of small caps that are actually performing reasonably well
and an equally large number of small caps that have fallen 50% or more YTD.
The outperformers primarily consist of conservative consumption plays (jewellery,
staples etc). However, any small cap with a whiff of a problem (downgrades in
forecasts, inherent cyclicality, corporate governance concerns or simply low
coverage from the street) has been swiftly and severely punished. The concern
has to be that outperformers to date that still boast high valuations may be next
in line for a de-rating and so we are reluctant to chase outperformance without
more compelling reasons such as yield or high earnings visibility.
Is there an afterlife?
We won’t comment on the fate of our souls, but we will say with confidence that
many companies in the China small cap sector will still be in business in five
years’ time. This is a bolder proposition than it appears as we identify 31
companies that we cover that have an Enterprise Value that is less than 5x
average trailing Operating Cash Flow (2009-2011) (page 6). We also identify 9
that are trading at or below previous trough P/BV (page 7). We also highlight 10
China plays that we have recently visited where very poor YTD price
performance seems at odds with upbeat management guidance.
Many of these stocks, we believe, are a literal steal at these prices. However,
we are not confident enough in the macro outlook to include these bargain
basement plays in our top picks. But for bolder souls than ourselves, they should
be a guide of where to hunt for deep value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Emerging Leaders
Steal this stock
Asia-Ex Small Caps still 36% above trough
Asia-Ex Small Caps are now down 25% YTD, 15% of which occurred in
September. While we are reeling, it is important to note that the MSCI Asia-Ex
Small Cap P/BV is still 36% above the 2008 trough. Much as we would like to,
we cannot say the worst is in the price. As such, we continue to try to position
our top picks with a defensive strategy (page 2). We are focussed on
reasonably-priced domestic consumption plays (staples, healthcare, etc) with
high earnings growth visibility. We are avoiding exporters and industrials. In line
with our Quant team’s findings, we have a strong bias towards high dividend
yield, with 7 that yield over 4%.
HK/China stands out as the underperformer
MSCI China Small Caps are down 37% YTD and MSCI HK Small Caps are
down 28% YTD – 19% of which has occurred in September. These are the two
worst performing small cap indices in the region. HK/China are now the region’s
cheapest small caps and the only indices now trading below book value (0.9x).
India and Thailand are the priciest at 1.4x. While Indonesia stands out as a
market where many small caps still trade above 20x PER, last week’s sharp selloff
serves as a reminder that Jakarta is unlikely to prove a safe-haven if global
market conditions further deteriorate.
The market is being selective; indices tell only part of story
The MSCI Small Cap indices look bad YTD, but they hide the large spreads
between a number of small caps that are actually performing reasonably well
and an equally large number of small caps that have fallen 50% or more YTD.
The outperformers primarily consist of conservative consumption plays (jewellery,
staples etc). However, any small cap with a whiff of a problem (downgrades in
forecasts, inherent cyclicality, corporate governance concerns or simply low
coverage from the street) has been swiftly and severely punished. The concern
has to be that outperformers to date that still boast high valuations may be next
in line for a de-rating and so we are reluctant to chase outperformance without
more compelling reasons such as yield or high earnings visibility.
Is there an afterlife?
We won’t comment on the fate of our souls, but we will say with confidence that
many companies in the China small cap sector will still be in business in five
years’ time. This is a bolder proposition than it appears as we identify 31
companies that we cover that have an Enterprise Value that is less than 5x
average trailing Operating Cash Flow (2009-2011) (page 6). We also identify 9
that are trading at or below previous trough P/BV (page 7). We also highlight 10
China plays that we have recently visited where very poor YTD price
performance seems at odds with upbeat management guidance.
Many of these stocks, we believe, are a literal steal at these prices. However,
we are not confident enough in the macro outlook to include these bargain
basement plays in our top picks. But for bolder souls than ourselves, they should
be a guide of where to hunt for deep value.
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