Hong Kong: Celestial Research Daily Report

Market Outlook

Hong Kong market might continue to fluctuate today. Last Friday, Hong Kong stocks posted mixed performance to end the last trading day of the first quarter. The benchmark Hang Seng Index opened by 229 points lower in light of the bribery scandal of Sun Hung Kai Properties (00016.HK) and further declined to its day-low at 2,374 points afterwards. The Hang Seng Index eventually closed at 20,555.58 points, plummeting by 0.26%. The China Enterprises closed at 10,640.16 points, up 1.02%. Market turnover increased to 736.83 billion. In summary of last quarter’s performance, the Hang Seng Index surged by 2121.19 points or 11.51%, while the China Enterprises index soared by 703.68 points or 7.08% in total. For European markets, the Euro zone finance ministers reached an agreement to raise the bailout funds to 700 billion and enlarged the total size of Euro zone financial firewall up to 8,000 billion, which sent the three major European stock indices up. UK FTSE 100 Index closed at 5,854.89 points, up 0.16%. Germany’s DAX Index closed at 6,946.83 points, up 1.04%. France’s CAC 40 Index closed at 3,423.81 points, up 1.26%. However, U.S. stock markets posted mixed performance last Friday. The March edition of the University of Michigan Consumer Sentiment Index increased to reach its seven-consecutive month record high at 76.2, higher than market expectation of 74.7, as well as a new high since February of 2011. Investors therefore reflected its optimism on the U.S. retail market having a sustained recovery. The Dow Jones Industrial Average Index closed at 13,212.04 points, up 0.5%. Standard & Poor’s 500 Index closed at 1,408.47 points, up 0.37%. Yet, Nasdaq Index closed at 3,091.57 points, down 0.12%. Hong Kong ADRs generally rose last Friday, which hints a higher opening of Hong Kong markets this morning. The strong performance of HSCEI index last Friday, indicated that investors gradually stepped out the haze of the private enterprises’ selling-off activities. Following the strong external market performance, along with the better-than-expected China’s official March PMI, Hong Kong stocks are expected to rebound and challenge its 250-day moving average today. Looking ahead, the mainland stock markets will close by three days of holidays starting from today. For Hong Kong and the external markets, investors might stay sideline before the long Easter holiday, which hinted that Hong Kong stocks might trade within a narrow range with thin trading volume this week.

Sector Update

Consolidation within China’s cement industry might speed up this year. According to some mainland reports, an official of the National Development and Reform Commission, Liu Ming-ru, stated that China will impose strict controls over investments on new cement production capacity this year. He predicts that elimination of inefficient capacity will be completed by the end of 2012. During the past few years, cement industry’s production capacity grew exponentially. Since 2010, the problem of over-capacity has started to shows signs of alert. As the progress to eliminate inefficient capacity was far from satisfactory, cement prices in certain regions such as the Eastern China region has continue to plummet during the beginning of this year. Fortunately, as stated in a recently released 12th Five-Year Plan of cement industry, the production concentration will be substantially improved as more mergers and acquisitions are encouraged. Coupled with Liu’s recent remark on keeping stringent controls over new capacity investments, the medium to long-term development outlook of the cement industry looks positive. Investors are advised to keep an eye on the leading cement enterprises.

Stock Pick

China Foods (00506.HK)’s net profit increased by 51%. China Foods announced its annual report last week. For the year ended 31 December 2011, its revenue increased by 40.4% to HKD28.011 billion. Net profit increased by 51% to HKD646 million. During the quoted period, its sales volume for beverage products, kitchen products and confectionary products rose by 17.3%, 28.9% and 19.1%, while wine products decreased by 2.1%. Overall gross profit margin fell to 23.8% from 25.5% a year ago. However, as a whole, we believe its defects do not outweigh the merits. In terms of valuation, its 2011 PER is around 32x, which is quite reasonable. Technically, its RSI is currently around 60 points with other technical indicators still at positive levels. We believe there’s still room for upward adjustments in short run. Therefore, a HOLD rating is given.

Daily Review

- Hong Kong market posted mixed performance last Friday. The Hang Seng Index decreased by 53.81 points or 0.26% to 20,555.58 points. The China Enterprises Index hiked by 107.18 points or 1.02% to 10,640.16 points. Market turnover increased to HKD73.683 billion.

- U.S. jobless claims dropped but failed to meet market expectation. Coupled with an alert by S&P that Greece might restructure its debt again, the European and U.S. stocks retreated overnight. Hong Kong market significantly opened lower in the morning but rebounded amid a strong A-shares performance. Although the loss was narrowed, the benchmark still closed down slightly with market turnover shrinking dramatically.

- Bank stocks posted mixed performance. With the boost from a robust financial result of ICBC (01398.HK) and BOC (03988.HK), bank stocks rallied. ICBC (01398.HK) and BOC (03988.HK) both rose by 1.62%. CCB (00939.HK) and ABC (01288.HK) surged by 0.5% and 1.84% respectively. For international financial stocks, HSBC Holdings (00005.HK) and Standard Chartered (02888.HK) soared by 1.08% and 1.02% respectively.

- Chinese property posted mixed performance. Nanhai Corp (00680.HK) plunged by 3.45%. Evergrande (03333.HK) dropped by 0.72% while China Overseas (00688.HK) gained by 0.68%. SHK PPT (00016.HK)’s chairmen, Kwok brothers, were arrested as they were suspected to involve in a corruption case. The news dragged down local property stocks. SHK PPT (00016.HK) led the decline by 13.14%. Sino Land (00083.HK) and New World DEV (00017.HK) dived by 3.58% and 2.41% respectively.

- Food sector rebounded. U-presid China (00220.HK) led the rally by 5%. Want Want China (00151.HK), Four Seas (00374.HK) and China Food (00506.HK) hiked by 2.12%, 2% and 0.4% respectively.

- Water sector rallied. Water Property (02349.HK) led the rise by 14.8%. China Water (00855.HK), Sound Global (00967.HK) and InterChina Hold (00202.HK) rose by 4.69%, 2.16% and 1.02% respectively.

- For active stocks, Gayety Holdings (08179.HK) released positive financial result, but still suffered selling pressure and significantly tumbled by 52.4% to HKD0.12.

+1 mabs