Hong Kong / China Pair Trade Weekly DBS Group Research . Equity 12 January 2010 Seven Pair Ideas HSI: 22,412 Pairs for the week ANALYST New Pair Derek Cheung· (852) 2971 1703 · • Long - Shimao Property (813 HK); [email protected] Short - Sino-Ocean Land (3377 HK) Alice Hui, CFA · (852) 2971 1960 · Maintain [email protected] • Long - Denway Motors (203 HK); Carol Wu · (852) 2863 8841· [email protected] Short - Geely Automobile (175 HK) • Long - Dah Sing Financial (440 HK); Danielle Wang · (852) 2820 4915· danielle_wang @hk.dbsvickers.com Short - Wing Hang (302 HK) • Long - Hang Lung Group (10 HK); Dennis Lam · (852) 2971 1922· [email protected] Short - Hang Lung Properties (101 HK) Gideon Lo, CFA · (852) 2863 8880 · • Long - Sinopec (386 HK); [email protected] Short - CNOOC (883 HK) Jasmine Lai · (852) 2971 1926 · • Long - China Telecom (728 HK); [email protected] Short - China Unicom (762 HK) Jeff Yau CFA· (852) 2820 4912 · • Long - Shenzhen Expressway (548 HK); [email protected] Short - Hopewell Highway Infrastruct (737 HK) Mavis Hui · (852) 2863 8879 · [email protected] Patricia Yeung · (852) 2863 8908 · [email protected] Prices used as of 11 January 2010 Patrick Xu (65) 6398 7957 [email protected] Paul Yong CFA +86 21 6888 3372 [email protected] Rachel Miu · (852) 2863 8843· [email protected] Steven Liu, CFA (852) 2971 1780 [email protected] Titus Wu · (86 21) 6888 3360 · [email protected] In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report sa- GL Hong Kong / China Pair Trade Weekly Automobile Long - Denway Motors (203 HK; HK$4.79) Short - Geely Automobile (175 HK; HK$4.09) Share price of Geely is under some selling pressure as market took profits after the announcement of parent's acquisition of Volvo. We expect some more downward pressure on Geely and maintain our pair trade position. Source: Bloomberg ANALYST: Rachel Miu · (852) 2863 8843 · [email protected] Page 2 Hong Kong / China Pair Trade Weekly Banking Long - Dah Sing Financial (440 HK; HK$43.25) Short - Wing Hang (302 HK; HK$74) We continue to recommend investors to LONG Dah Sing and SHORT Wing Hang, despite the former already outperformed the latter by 0.3% over the past two weeks. M&A will continue to be an ongoing theme for small/mid-sized banks in Hong Kong. As M&A plays, the valuation gap between Dah Sing and Wing Hang is still wide. Dah Sing is only trading at 0.98x 2010 P/B and it is not only a cheaper entry to M&A theme in Hong Kong but is also the cheapest bank in Asia. Trading at 1.72x 2010 P/B, the market already paid decent M&A premium for Wing Hang. Source: Bloomberg ANALYST: Jasmine Lai · (852) 2971 1926 · [email protected] Page 3 Hong Kong / China Pair Trade Weekly China Property Long - Shimao Property (813 HK; HK$14.3) Short - Sino-Ocean Land (3377 HK; HK$7.3) Share price of Shimao Property underperformed Sino Ocean Land slightly by 4% over the past 3 months. It is now trading at 11XFY10 P/E and 37% discount to NAV while Sino Ocean Land trades at 12XFY10 P/E and 18% discount to NAV. Going forward, we expect Shimao to outperform Sino Ocean Land due to its more attractive valuations and its larger exposure in tier II and III cities which shall be less affected by recent tightening policy. With around 50% sales contribution from Beijing, Sino Ocean is expected to be affected by the new credit policy, which required banks to apply 40% down payment rule to 2nd homebuyers including both upgraders and investors. As upgrade demand accounts for more than 50% of total demand in Beijing, the new credit policy is anticipated to affect sales volume of Sino Ocean Land in Beijing. As first-time homebuyers still accounts for majority of transactions in tier II and III cities, we expect Shimao property to be less affected by the new credit policy. Moreover, Cosco International's potential reduction of its holding on Sino Ocean Land is likely to cap the share price upside for Sino Ocean Land in the near term. Cosco International now has less than 20% shares of Sino Ocean Land after Sino Ocean's share placement to China Life. As it can't book profit from Sino Ocean Land any more, it has more incentives to reduce its holdings on Sino Ocean Land. While Cosco International may not reduce its holding immediately, its long-term plan to divest its real estate business will affect share price performance of Sino Ocean Land in the near term. Source: Bloomberg ANALYST: Carol Wu · (852) 2863 8841 · carol_wu @hk.dbsvickers.com Page 4 Hong Kong / China Pair Trade Weekly HK Property Long - Hang Lung Group (10 HK; HK$39.6) Short - Hang Lung Properties (101 HK; HK$30.75) Hang Lung Group outperformed Hang Lung Properties by 1% last week. Meanwhile, Hang Lung Group is trading at 25% discount to our appraised current NAV of HK$52.9 based on market value of Hang Lung Properties. This lies at the low end of its trading range. Maintain Long Hang Lung Group, Short Hang Lung Properties. Source: Bloomberg ANALYST: Jeff Yau CFA· (852) 2820 4912 ·[email protected] Page 5 Hong Kong / China Pair Trade Weekly Oil Long - Sinopec (386 HK; HK$6.75) Short - CNOOC (883 HK; HK$13.24) Sinopec underperformed CNOOC last week, as the recent crude price rally has revived the concern over domestic refining margin and overshadow the sentiment over Sinopec. However, Sinopec is trading at only 7x 2010 PE, which is very compelling, especially compared to CNOOC's about 13x PE. Moreover, Sinopec is expected to receive some overseas E&P assets injection from parent in 1Q10, which could be a near-term catalyst for share price. In this regard, we keep this pair trade idea for three- months perspective. Source: Bloomberg ANALYST: Gideon Lo, CFA · (852) 2863 8880 · [email protected] Page 6 Hong Kong / China Pair Trade Weekly Telecom Services Long - China Telecom (728 HK; HK$3.52) Short - China Unicom (762 HK; HK$10.1) China Telecom outperformed China Unicom by 9.7% last week, making our pair trade of Long China Telecom and Short China Unicom profitable. Though there might be some profit taking from China Telecom and some rebound in China Unicom’s prices, we believe the re-rating on China Telecom will continue, while China Unicom might continue to come under pressure from the recent news about the former China Netcom CEO’s accounting scandal. Hence, we would like to maintain our pair trade of Long China Telecom and Short China Unicom. Source: Bloomberg ANALYST: Steven Liu, CFA (852) 2971 1780 · [email protected] Page 7 Hong Kong / China Pair Trade Weekly Toll Road Long - Shenzhen Expressway (548 HK; HK$4) Short - Hopewell Highway Infrastruct (737 HK; HK$5.01) We are still of the view that Shezhen Expressway's valuations have not fully reflected the expected rebound of its earnings going forward. We, therefore, keep recommending a long position on Shenzhen Expressway, with an expected upside of > 20%. The counter is now trading at only 10x FY10 P/E, still the cheapest among the peers, which is inconsistent with its earnings prospects. We expect its earnings to recover at the fastest pace among the peers, thanks to its exposure to export-related cargo transport and its high gearing. Although HHI saw its toll revenue recover in Dec 2009 as well, we think its valuations have fairly factored in its earnings growth, and its share price has little upside. We, hence, maintain recommending a short position on HHI. Source: Bloomberg ANALYST: Paul Yong CFA +86 21 6888 3372 · [email protected] Patrick Xu +65 6398 7957 · [email protected] Page 8 Hong Kong / China Pair Trade Weekly Publications Date Company Title Pages Target Recom Analyst 05-Jan-10 China Catering Sector Bon appétit 39 - - Titus Wu, Alice Hui 06-Jan-10 China Everbright Intl The first waste-to-energy in Pearl HK$5.13 (Prev. BUY Patricia Yeung River Delta HK$4.26) 12-Jan-10 China Everbright Intl Two new projects in Xinyi HK$5.13 BUY Patricia Yeung 11-Jan-10 China Mengniu Reaching new highs 5 HK$29.5 (Prev. BUY Alice Hui HK$24.2) 08-Jan-10 China Overseas Back to strong players 11 HK$21.1 (Prev. BUY Carol Wu, HK$21) Danielle Wang 11-Jan-10 China Properties 2010 sale volume likely cut for new 7- -Carol Wu, credit policy Danielle Wang 12-Jan-10 China Shineway Time to catch up 5 HK$19.8 (Prev. BUY Gideon Lo HK$15.9) 05-Jan-10 Cosco International Valuation gap will narrow 6 HK$5.14 (Prev. BUY Gideon Lo HK$5.09) 08-Jan-10 Dongfeng Motor Benefits from slow overseas 7 HK$14 (Prev. BUY Rachel Miu Group markets HK$11.4) 06-Jan-10 HK & Shanghai Hotels Further improvement expected 6 HK$13.12 (Prev. BUY (Upgrade Ken Chen HK$9.8) from Hold) 08-Jan-10 Mingyuan Medicare New foray will enrich product 5HK$1.55 (Prev. HOLD Gideon Lo pipeline HK$1.1) 12-Jan-10 Sa Sa Strong 4Q09 sales on a low base HK$5.96 BUY Mavis Hui 11-Jan-10 Shui On Land 2010 may see earnings surprises 7 HK$6.69 (Prev.