Retail Market Monitor (Hong Kong)

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1 Retail Market Monitor (Hong Kong) Market Commentary Look out for investment opportunities The market in general expected HSI to break through the 21,000 level and test this year s high but sentiment turned upside down in just one day. HSI plunged 1.8% yesterday despite a mild drop in Asian markets. European markets continued to fall last night with DAX plunging 3.3%, even more than Spain, because Germany s manufacturing PMI was only 46.3 in March, below market consensus of 49, and the pace of decline is the fastest since Jul 09. Exhibit: HSI Apart from economic conditions, political uncertainty will hinder efforts to resolve the euzo zone debt crisis. Dutch Prime Minister Mark Rutte offered to quit after failing to break a budget deadlock over additional cuts. Whether his successor will execute the austerity measures laid out by Germany and France is highly uncertain. Another political uncertainty is seen in France where Socialist challenger Francois Hollande may win the French presidential election. Investors major concern is Hollande s proposal to raise taxes on rich individuals and large corporations in order to finance more government spending. It is totally different from Germany s austerity measures. Germany and France have been trying to resolve the debt crisis by forcing other European countries to cut government spending, but now their potential conflict will increase uncertainty. Obviously the crisis is not over yet, and things are getting more complicated instead. But Hong Kong investors do not need to be too pessimistic for the time being. After the adjustment, the market will continue to rebound. Now investors should focus on potential investment opportunities such as local companies with well-established names. Compared with many industries in China, they are much less affected by the macro uncertainties. Last Close HK index Close Up/Down Hang Seng 20, Turnover (HK$b) China Enterprises 10, Hang Seng index Futures 20, 567 Discount 57 Major index Close Up/Down Shanghai Composite 2, Dow Jones 12, S&P 500 1, Major commodities US$ Up/Down WTI Crude Futures (bbl) Brent Crude Futures (bbl) Gold 100 Oz Futures (t oz.) 1, Copper Futures (lb) Key Events 24/4 Night US Apr consumer sentiment FOMC Forecasts 25/4 Night FOMC Meeting Announcement Chairman Press Conference Analyst Allen Wong allen.wong@uobkayhian.com.hk

2 From the Regional Morning Notes Dah Chong Hong Holdings Driving in the luxury lane Buy (Initiation) Dah Chong Hong Holdings (DCH) is a conglomerate, deriving 85% of its profit from the automobile distribution and dealing businesses. As at end-11, DCH had 65 car dealerships selling luxury and mid-range cars across southeastern China. We initiate coverage on DCH with a BUY rating based on the following: a) Tremendous potential of luxury car business in China. DCH is the largest dealer of Bentley in China. DCH also sells other luxury brands, including Ferrari/Maserati, Audi, Mercedes-Benz and Lexus. The luxury car business contributed over half of DCH s China auto earnings. Luxury car sales should continue to grow at above-industry rate in the coming years given the lower penetration rate in China. b) Fast-growing after-sales service. DCH s China automobile business derived only about one-third of profit from after-sales service (vs 70-80% in mature markets), implying tremendous upside potential. Growth momentum of the after-sales service business started to outpace car sales growth in We expect growth of after-sales service to partly offset the projected slowdown in car sales in 2012, amid a growing customer base. c) More sustainable development strategy. DCH differs from other Hong Kong-listed Chinese automobile dealers in that it generates steady cash flows and pays dividends to shareholders, while maintaining decent (albeit more moderate) earnings growth and a healthier debt level. This is because DCH managed to strike a balance between speed and quality of growth. We believe DCH s better growth quality would be appreciated by the market. Initiate with BUY and target price of HK$ We expect DCH s core net profit to grow 10% in 2012 and 16-18% in Our profit forecasts are 13-19% below consensus, due to more conservative automobile sales assumptions. Based on our EPS estimate, DCH trades at 11x 2012F PE and 0.6x PEG. We price DCH at 12x 2013F PE on a par with global peers, translating into a target price of HK$ The stock might remain weak in the near term due to earnings downgrades by analysts. We suggest accumulating on weakness as a long-term investment. Company Ticker Rec Target Price Last Close DCH Hldg. 1828HK BUY $11.00 $8.51

3 Technical Analysis China Dongxiang (3818): Downside could extend to HK$0.86 China Dongxiang has been trading in a rectangle between HK$1.21 and HK1.56 since late Nov 12 until the stock penetrated the support level at HK$1.21 to close in a long dark candlestick formation. As of yesterday, the stock continued to sink to end the day lower at HK$0.97, although at a slower pace. Nevertheless, as the MACD (a trend following momentum indicator) of China Dongxiang is below the neutral level, there is downside bias for the stock. We expect any intermittent corrective rebound will be limited by the downtrend resistance line and the previous bottom of the rectangle at HK$1.21. Meanwhile, unless the MACD climbs back above the zero line, we believe the downtrend will remain intact. As a matter of fact, based on the width of the rectangle, the stock could extend its downside to a possible bottom of HK$0.86. Rectangle And Downtrend Resistance And MACD Source: HKET Net Analyst Barole Shiu, CAIA, CMT barole.shiu@uobkayhian.com.hk

4 Market Recommendations Today s top pick in the market : Wonderful Sky (1260). Largest provider of financial PR services in Hong Kong The group expects net profit to surge in 2011 In the past, profits was mainly derived from providing listing-related services to IPO clients Due to the financial crisis, the primary market was very dull last year, but profits were supported by an increase in business from non-ipo clients and international road show clients More than 60% of IPO clients have signed long term contracts before listing to ensure future profits The group will benefit if Hong Kong s primary market gradually revives in 2H12 and the A-share market expands further Market recommendations : Today s Stock Pick In The Market TIcker Company No. of Recommendations Target Cut Loss 1260 Wonderful Sky Financial 3 $1.38 $1.03 Last trading day s recap : Last Trading Day s Recap Ticker Company No. of Recommendations Target Cut Loss Last trading day s return (%) Last trading day s HSI return (%) 902 Huaneng Power 2 $5.05 $ % -1.84% 861 Digital China 2 $18.00 $ % -1.84% Source: 13 major HK newspapers * Market Recommendations summarises stock picks from 13 major HK newspapers to offer comprehensive market views to our readers.

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