Daily Quommentary: Bottomed Out?
Apr 06, 2001 - 07:50:57 HKT
QuamResearch
The U.S. markets rebounded strongly last night. The Dow rose 403 points, or 4.2%, to 9,918; the Nasdaq Composite gained 146 points, or 8.9% to 1,785; and the S&P 500 added 48 points, or 4.4% to 1,151. The local market is poised to open high today, giving a hope to investors that a strong rally from Wednesday's 12,064 is well ahead of us.
ADRs of locally listed shares followed suit: China's No. 1 and No. 2 mobile operators China Mobile (941) and Unicom (762) gained more than 10% to US$21.20 (equivalent to $33.07) and US$11.22 (equivalent to $8.75) from their respective Wednesday's close of $29.70 and $7.85. The ADRs of banking giant HSBC (5) added 4.7% to US$60.25 (equivalent to $94) from $89.75 and PCCW (8), the IT flagship of local billionaire-son Richard li, managed to regained 24 cents to US$3.64 ($2.84) from Wednesday's 12.5-cent decline.
While a short-term rebound has begun for both the local and the U.S. markets, we are still unconvinced that the U.S. markets have bottomed out with both the blue-chip DJIA and the broad-market barometer S&P 500 trading at prices around 20 times trailing 12-month average PE. However, the Hang Seng Index at 12,000 is valued at just 12 times prospective FY01 PE, or an earnings yield of more than 8% against the deposit saving rates of only 3.25%, one can believe that the local market either is very close to or has reached the bottom.
The reason for last night's rebound was quite ridiculous ¡V according to Reuters newswire, it was because the latest U.S. jobless claims data rising more than expected to 383,000, raising some hopes for more interest-rate cuts from the Federal Reserve. The market's response to the economic data seems contradictory to common sense: a worse-than-expected economic indicator should signal poorer future corporate earnings and therefore the market should be going down instead of the other way round. In a market crowded with panicked punters, however, it is the Newton's law of action and reaction that governs the short-term movements. When a ball falls from the 38th floor of the Exchange Square Tower One to the ground floor, it will definitely rebound as long as that there is air (liquidity) inside the ball (market).
Leading today's rebound will be China Mobile, which has lost more than 40% since late January to Wednesday's $29.70, HSBC (5) and Hutchison (13), both of which has lost over 25% from January to Wednesday's $89.75 and $78.25.
At $29.70, China Mobile, which is expected to earn $30 billion for FY01, is capitalized at $550 billion, representing a prospective of around 19 times. For a company with a potential annual growth rate of more than 20%, this is a reasonable price to buy. With the help of a full-year contribution from Credit Commercial de France (CCF), HSBC should be able to earn a net profit of $63 billion for the current year. At $89.75, the company is capitalized at $832 billion, representing a prospective PE of 13.2 times or an earnings yield of 7.5%, which is very attractive compared to the prevailing deposit rates of 3.25%. By traditional standard, Hutchison (13) is still fairly pricey in terms of its price-to-recurrent-earnings ratio of around 25 times. However, at $78.25, Hutchison is trading at only 1.2x its book value, the lowest price-to-book (P/B) ratio not seen in at least five years.
Other shares on the buy list are: Hang Seng (11) at $90 (FY01 PE: 15.5x, yield: 5.3%), Henderson Land (12) at $36.50 (FY01: PE 12x, yield: 4.2%), Hysan (14) at $10.45 (FY01 PE: 12x, yield: 4.2%), BEA (23) at $16.95 (FY01 PE: 10.5x, yield: 4.5%), Cathay (293) at $11.05 (FY01 PE: 8x; yield: 5.9%), SmarTone (315) at $8.40 (5.6% discount to book value, $3.6 billion or $6 cash per share). Hang Lung (10) at $6.65 (FY01 PE: 11x; yield: 8%), Wharf (4) at $17.90 (FY01 PE: 13x; yield: 5%) and Wheelock (20), the holding company of Wharf, at $6.10 (FY01 PE: 8x, yield: 2.5%), despite their less inspiring management, should also appeal to the value-oriented investors.
The Chinese counters have also dropped to levels that provided enough margins of safety. Among them, Unicom (762), which has just reported better-than-expected FY00 results, at $7.85 (FY01 PE: 20x), and Citic Pacific (267), the window company of Beijing Citic group, which broke a 52-week low on Wednesday to $19.85 before closing at $20.10 (FY01 PE: 11x, yield: 4.2%), are the most attractive. Cosco Pacific (1199), a cargo and port operator, at $4.425, is attractively valued at around 8 times FY01 PE with a prospective yield of 5%. Regular Quamsters know which H shares that we think are the most attractive, there is no need to repeat here.
A number of tech or industrial counters are worth noting here. Techtronic (669), Carry Wealth (643), China Rare Earth (769), all of which have recently reported excellent annual results, bucked the market Wednesday with gains ranging from 4.2% from 5.6%. At their respective current market prices, these counters are undervalued at low single-digit PE. ASM (522), which lost 65 cents to $11.95, Varitronix (710) at $5.70, and Automated System (771) at $2.70 should all have investment values at their currently depressed prices.
Tom.com (8001) and SUNeVision (8008), the big brothers of the GEM, the copycat off the Nasdaq, saw some respective buying interests from HSBC Securities and Honour Securities, the stock broking arm of SHKP (16), on Wednesday's afternoon trading session. The former gained 7.5 cents to $2.75 whereas the latter rose 10 cents to $2.10. The buyers might have foreseen the rebound in the tech-laden Nasdaq while Hong Kong was close for Ching Ming Festival.
Intelligent clients at both HSBC Securities and Honour Securities!
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