Excerpts from analyst reports...
UOB: ICBC, ABC, CCB top PRC bank picks
UOB Kay Hian said its “top picks” among Hong Kong-listed Chinese lenders are ICBC (HK: 1398), Agricultural Bank of China (HK: 1288) and China Construction Bank (HK: 939).
The People’s Bank of China (PBOC), the country’s central bank, announced that new loans in July were Rmb492.6 bln, below market expectations of Rmb550b. New deposits declined by Rmb668.7 bln, pushing the loan-deposit ratio (LDR) up to 66.9%.
“The sector continues to trade near historical lows with an average 2011F P/B of 1.27x for the banks under our coverage. While share prices will likely remain turbulent in the near term, we see the sector offering strong value at current levels and expect strong returns for patient investors.
“The key near-term catalyst will be 1H11 results. Our top picks in the sector continue to be Industrial & Commercial Bank of China (ICBC), Agricultural Bank of China (ABC) and China Construction Bank (CCB),” UOB said.
The brokerage added that the most eye-catching aspect of July numbers was the large drop in deposits.
“However, we are not surprised by this trend as July has always been a weak month for deposit growth. Furthermore, the large surge in deposit growth in June due to end-of-quarter window dressing also contributed to the decline in July.”
It said that many banks were very aggressive in attracting short-term deposits with high yielding wealth-management products as at end-June.
“These short-term deposits naturally flowed out of bank deposits once these short-term wealth-management products matured. We expect a gradual recovery of new deposits in August before another growth spurt in September.”
Sector catalysts include easing inflationary pressure and further clarification on the new risk-weighting calculations.
Risks include a hard landing and persistent inflation as well as ongoing worries over the US and European sovereign debt crises.
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UOB: TSINGTAO BREWERY kept HOLD
UOB Kay Hian said it is maintaining its HOLD call on Tsingtao Brewery (HK: 168) due in part to “looming margin pressure.”
Meanwhile, net profit rose 21.6% yoy to Rmb990 mln in 1H11, in line UOB Kay Hian’s forecast and slightly below market expectations.
But net profit growth has slowed from 40.0% yoy in 1Q11 to 9.5% yoy in 2Q11.
Revenue surged 21.4% in 1H11 and sales volume increased 20.6% yoy to 37.5m hundred litres (hl). Principal brands’ sales volume surged 23.0% to 20.3m hl. Meanwhile, industry output only rose 11.4% yoy, which implied that Tsingtao’s sales volume growth outpaced the industry significantly.
Sales volume of principal brands accounted for 54.1% of total sales volume in 1H11 (1H10: 53.0%).
“Gross margin dropped 1.5% in 1H11 due to rising barley prices. Although Tsingtao raised its ASP for premium products by 5% in 1Q11, it cannot fully offset rising raw material costs," UOB said.
In 2Q11, gross margin dropped 3.1ppt y-o-y from 33.5% in 2Q10.
Selling expenses rose 11.3% y-o-y, accounting for 19.4% of total sales in 1Q11 (1Q10: 21.4%).
“This was due to more promotional activities for its high-end products and new products.”
UOB has a HK$51.45 target price on Tsingtao with an upside potential of 6.2%.
Tsingtao’s major shareholders include Asahi Breweries (41.24%) and Fashu Chen (13.99%).
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UOB: AIR CHINA kept HOLD
UOB Kay Hian said it is maintaining its HOLD call on Air China (HK: 753) with a target price of 8.80 hkd, representing an upside potential of 10.1%.
Beijing-based Air China, the country’s flagship carrier, flies to more than 80 domestic destinations and over 40 international and regional destinations.
Major shareholders include China National Aviation (50.2%) and Cathay Pacific Airways (18.8%).
“Impact of HSR (high-speed rail) is inconclusive going by July operating stats. The Beijing to Shanghai high-speed rail (HSR) commenced operation on 29 June and thus July domestic operating statistics provide the first indication of the impact of HSR.
“Evidence thus far is inconclusive as domestic traffic grew at 4.7% y-o-y, the slowest increase ytd, but m-o-m traffic grew 10.7%,” UOB said.
Domestic passenger numbers grew by just 0.8% y-o-y, but 9.4% m-o-m.
“While typically y-o-y comparisons have greater validity, m-o-m comparisons would be equally valid, given that the commencement of the much-awaited HSR was a landmark event. The m-o-m increase does not suggest any significant diversion away from the air route.
“Air China similarly did not indicate that traffic was impacted by HSR. The relatively low y-o-y growth could be explained by a higher base due to the Shanghai World Expo during the period in 2010.”
UOB said the market should be relieved that HSR has not had a drastic impact.
“The number lends some credibility to Air China's own guidance that the HSR will have a minimal 2-3% impact on its route network as less than 10% of revenue is generated from domestic routes under 800km, while those under 1,000km are in regions which have minimal impact from HSR links.”
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