120207 interesting times - no 8 - raising china index target - quants ... per, discount rate, ddm

7/30/2019 120207 Interesting Times - No 8 - Raising China Index Target - QUANTs ... PER, Discount Rate, DDM

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DMG & Partners Securities Pte Ltd may hacorporate finance or its dealing activities; thiimportant disclosures at the end of this publ

DMG & Partners Research AsSTRATEGY

Craig IrvineChief Regional Strategist+65 6232 [email protected]

T

Ra

Ac

Figu

Sourc

Ra

We a(+10

over

e received compensation from the company covereis report is therefore classified as a non-independenication.

ASIA-PInve

a-Pacific

E INTERESTING TIMES

ising China Index Target

ion Summary

We are raising our HSCEI index target to 13,500 (fr

The change reflects our growing conviction that riskat least 150bps over the next 12 months.

Earnings have compounded at 19% over the last teassuming a 9.0% long term growth rate (as we do i

estimates) already discounts a significant earnings

Fair value is now much more sensitive to risk pricingrowth. Assuming a 2pps (from 9.0% to 7.0%) redugrowth implies just 6% lower fair value.

Our favorite sectors are banks, domestic infrastru

resource stocks.

re 1: Recommended Country Weightings, Regi

e: Bloomberg, OSK/DMG estimates

sing our Index Target for Chi

re raising our 12m index target for the HSCEI fr). We believe the China country risk premium will

he next twelve months. The risk premium has clim

February 7, 2012

d in this report for itst report. Please refer to

DMG Research

ACIFIC EQUITYtment Research

Private Circulation Only

No 8

m 12,300, up 10%).

pricing will pull back by

years. Hence,

our fair value

lowdown.

than to long termction in long term

ture and selected

nal Portfolio

a

m 12,300 to 13,500fall by at least 150bps

ed by over 400bps


2/7

since

prem

Fair

Our

wher

Chinoveror R

moresignif

Chin

Theesti

earniliquid

In th

refle

Chin

Figu

Extrem

Source

As wprem

redu

Co

the start of the Eurozone crisis, which we think is o

iums fall further, upside would be even greater.

Value: Our Approach

rimary fair value approach is based on the relations

P / E = (ROE g) / (ROE x (k g))

e:

g = long term growth ratek = cost of equity

presents a challenge here, because average earnthe last decade has been significantly higher thE. Our model breaks down at very high growth rat

conservative but still very strong long term groicantly below the recent averages, we believe this i

a Premium to Re-emerge

SCEI has historically traded at a material premiate, as shown in Figure 2 below. We attribute this

ngs growth, and to some periods of excessive optimity (2009).

second half of 2011, however, the HSCEI fell to a

ting extreme risk pricing conditions brought on by t

valuations have been affected more in this respect

e 2: HSCEI: Index Level v Fair Value

e outliers have been left off the fair value curves shows.

: Bloomberg, OSK/DMG estimates

e have written previously, we expect a fall in risk pium over the next 12 months. Specifically, we ex

tion by the end of 2012.

ponents of Our Fair Value Estimates

erdone. If risk

hip:

ings growth of 23%n the cost of equity

es. So we assume a

wth rate of 9.0%. Whileprudent.

um to our fair valueo extraordinarily high

ism (2007) and high

discount to fair value,

e Eurozone crisis.

than the rest of Asia.

remium to restore thepect at least of 150 bps


3/7

It is

to te

We cmore

ROE

Excebeenslightstill c

Figu

Source

orthwhile to break down the individual components

t for consistency and reasonableness.

onclude that xx of the key components of fair valuelikely to get better than worse.

ROE: Expect slight dip below 20%, but comfort

K: Country risk premium has expanded, exLTG: Fair value not very sensitive to slower LTEPS: Weakest short term link. Expect big dow

March potential buying opportunity?

: Stable and Comfortably Higher than Cost of Eq

pt during the global financial crisis, ROE for large caconsistently around 20% since 2005. Consensusly in the next two years to 18.0% in 2012E and 1omfortably above the cost of equity (around 15%).

e 3: HSCEI ROE and Cost of Equity

: Bloomberg, OSK / DMG estimates

of our fair value model

either stable or are

ably above k.

ect retracement.G assumption.nward revisions in

uity

p China stocks hasOE estimates dip

7.8% in 2013E but


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Cost

Thouin thifree rcrisis400b

Figu

Source

Lon

Estithe fcom

still siWe a

19%,

Figu

Source

Impl

of Equity (k): Lots of Room for Risk Premium t

gh the long term cost of equity for China has been rmeasure has increased significantly in the last two

ates were higher, but risk premiums were lower. N), the risk free rate is very low, but risk premium hasps, as shown in Figure 4 below. We think this spi

e 4: Country Risk Premium: China

: Bloomberg, OSK/DMG estimates

Term Growth (g): Our Assumption is Well Belo

ating the appropriate long term growth rate is probair value estimate for China. Earnings growth has aounded at 19% p.a. over the last decade. The tren

ignificantly above levels that are prudent to assume

ssume a LTG of 9.0%. This is less than half of the

and in line with GDP growth estimates for the forse

e 5: HSCEI EPS Growth, w/ Average and Trend

: Bloomberg

ed LTG and k: Greater Sensitivity to Cost of Eq

Fall

elatively stable, volatilityyears. Previously, riskw (since the Eurozonespiked up by overe is overdone.

w 10 Year History

bly the trickiest part oferaged 23% and hasis slowing slightly, but

for the long term.

last decades CAGR of

eable future.

Line

ity


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Interof eq

TheCRPimpli

LTGsignif

We tpricinonly

to 18

Figure 6: Fair Value Sensitivity to LTG a

Source: Bloomberg, OSK/DMG estimates

stingly, our fair value estimate is now far moreuity than to the LTG assumption.

arket is currently implying a long term growth rateof around 13.5%. As shown in the Figure 6 below,s a significantly higher change to fair value than m

rate. This is at least partly due to the LTG assumptiicantly below current EPS growth rates for the mark

ink this represents a degree of downside proteg (already near an all time high), 200bps slower streduce fair value by 6%, while a 100bps reduction in

% upside.

nd CRP

LongTe

CRP 5.0% 7.

10.5% 14,690 16,9

11.5% 12,942 14,3

12.5% 11,566 12,3

13.5% 10,454 10,9

14.5% 9,538 9,75

15.5% 8,769 8,81

ensitive to the cost

f around 9.0% and aassuming a lower CRPving assuming a lower

on already beinget.

tion. At constant riskctural growth wouldrisk pricing translates

rmGrowthRate

% 9.0% 11.0%

71 21,932 41,018

21 16,953 23,962

87 13,816 16,924

13 11,659 13,082

3 10,085 10,661

6 8,885 8,997


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See important disclosures at the end of this publication 6

See important disclosures at the end of this publication

DMG Research

Table 1: Recommended Weightings, Asia (ex Japan)

Source: Bloomberg, OSK / DMG estimates

Table 2: Market Valuation Ratios

P/B Yield FCF Yld

6-Feb-12 2011 2012 2011 2011 2012 2011 2011 2012 2013

China 18.0% 17.8% 1.7 9.6 8.6 2.8% 3.6% 12.2% 12.5%

Hong Kong 16.9% 16.9% 1.5 9.4 10.5 3.3% 5.3% -10.7% 12.0%

Indonesia 28.8% 28.3% 2.9 17.6 13.5 2.0% 1.5% 30.7% 17.3%

Malaysia 22.7% 25.5% 2.3 16.9 14.3 3.4% -2.8% 17.7% 10.6%

Singapore 0.9% 3.2% 1.4 8.6 13.7 3.7% 3.8% -37.4% 11.9%Thailand 22.6% 23.4% 2.1 14.2 11.6 3.9% 7.5% 23.2% 13.5%

Philippines 19.1% 20.1% 2.7 17.3 14.7 3.0% 6.1% 17.8% 12.4%

India 24.2% 23.7% 2.8 16.1 15.7 1.5% 1.7% 2.7% 14.3%

Taiwan 15.7% 15.3% 1.7 17.6 13.9 4.3% 3.6% 26.6% 19.5%

Korea 15.2% 15.2% 1.2 19.9 9.6 0.8% 2.5% 108.8% 16.3%

USA 28.4% 31.9% 2.2 14.0 12.8 2.0% 8.1% 9.0% 12.7%

Europe 14.0% 14.3% 1.2 12.2 9.6 4.7% 3.7% 28.0% 10.1%

Source: Bloomberg, OSK/DMG estimates

ROE PE EPS Growth

Regional Rec Over/

Index Level Target Upside Wgt Wgt Under PPS

China (26.9 / 34.9) HSCEI 11,565 13,500 16.7% 26.9% 34.9% 30% 8.0

Hong Kong (19 / 17) HSI (adj)* 20,710 16,250 -21.5% 19.0% 17.0% -11% (2.0)

Korea (14.2 / 12.2) KOSPI 1,973 1,700 -13.8% 14.2% 12.2% -14% (2.0)

Taiwan (10.2 / 6.2) TWSE 7,688 5,000 -35.0% 10.2% 6.2% -39% (4.0)

India (8.7 / 8.7) SENSEX 17,707 16,000 -9.6% 8.7% 8.7% 0% -

Indonesia (5.6 / 8.6) JCI 3,975 4,450 11.9% 5.6% 8.6% 54% 3.0

Singapore (5.6 / 3.6) STI 2,940 3,022 2.8% 5.6% 3.6% -36% (2.0)

Thailand (4.1 / 3.1) SET 1,094 1,000 -8.6% 4.1% 3.1% -24% (1.0)

Malaysia (3.9 / 3.9) KLCI 1,539 1,466 -4.7% 3.9% 3.9% 0% -

Philippines (1.7 / 1.7) PCOMP 4,816 4,200 -12.8% 1.7% 1.7% 0% -

* Excluding HSCEI stocks 100% 100% -


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See important disclosures at the end of this publication 7

See important disclosures at the end of this publication

DMG Research

DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

DISCLAIMERS

This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific

investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluateparticular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation toany securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warrantynor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subjectto change without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities.

DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK InvestmentBank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is aMember of the Singapore Exchange Securities Trading Limited.

DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in thesecurities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporationswhose securities are covered in the report.

As of the day before 7 February 2012, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, donot have proprietary positions in the subject companies, except for:

a) Nilb) Nil

As of the day before 7 February 2012, none of the analysts who covered the stock in this report has an interest in the subject companies coveredin this report, except for:

Analyst Companya) Nilb) Nil

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120207 interesting times - no 8 - raising china index target - quants ... per, discount rate, ddm

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