Date: Mon, 29 Aug 2011 11:06:39 +0800
Subject: Buying time
Stewardess: Can I get you anything to drink?
Clark Griswold: I guess I’ll have a Coke.
Stewardess: Do you want that in the can?
Clark Griswold: No. I’ll have it right here.
Big Ben’s baritone banalities on Friday accomplished what he intended: avoid a market meltdown. By not saying anything, really, but lengthening the next FOMC meeting by one day raises expectations that a supportive policy announcement will be forthcoming. I guess he needs the extra day to beat into submission the three main dissenters on the committee, two of whom (Plosser and Fisher) have been increasingly public with their unease regarding further easing. My sense is there will be an announcement that buys us more time. Failing that, markets will force an announcement which will do the same thing. I still like gold.
John Wadle upgrades Standard Chartered (2888 HK) to a Buy today. One of his main reasons for pushing old Stan is, “Hey, it’s NOT a European bank!” Other reasons include:
+ Confident that Stan can still achieve earnings of $5.5 bn 2012-13 and EPS of $2.29
+ Our stress test of 25 bps higher provisions shows a worst case of only a 10% hit to earnings
+ Stan is financially self-sufficient with core Tier 1 ratio of 11%
EPS growth next year at 9% may not be exciting – but at least we are forecasting growth. Trading at 9.4X PE and 1.5X tangible book with a 4% dividend yield, at current levels Stan is not expensive. John pegs his target price at $215, or 25% upside from here. Note attached.
Last week, commodities strategist, Henry Liu, wrote that steel supply is continuing to rise so prices will fall but he is still positive on iron ore and coking coal. Friday night it was reported the PBoC will move to expand the RRR base to include acceptance bills, letters of credit and guarantee drafts will have a “disproportional negative impact on the commodity market.” Steel and copper traders in China control a huge part in linking supply and demand with steel traders controlling up to half of that market.
They have been liquidating inventory as SME credit dries up but these latest measures will hit them hardest. Henry estimates at least 60% of Chinese steel traders and 50% of copper traders use these short term instruments to finance their business. Breaking the weakest link in the chain with these new measures is very bearish news for overall steel demand in China and Henry retains his bearish view on the sector. However, he now thinks this will also negatively impact iron ore and coking coal demand as well. Note attached.
Extending the RRR base to short term financial instruments will have the impact of 2-3 times the normal 50 bps RRR hikes, according to banks analyst Stanley Li. The PBoC’s main aim here is to clamp down on banks’ off-balance sheet financing, ie, “fee income.” Banks reporting fee income as a large part of earnings by doing off B/S wealth products, etc, are increasingly vulnerable to this crackdown, in my view.
We continue to like Lenovo (992 HK) and Roxy Wong reports some interesting Q & A with clients after taking them on a HK NDR last week.
Q: Will Lenovo buy HP’s PC business?
A: It all depends on price. We are aware that we would lose the US gov’t, a current customer of HP, if we were to buy their operations.
Q: Lenovo’s ex-China EM business is still not profitable. What is the strategy to turn it around?
A: The areas that are not profitable include E. Europe, Turkey, Brazil and LatAm. This is due to having less that 10% market share here. The company will invest to build channels and grow scale in these markets.
You can get our research by typing MASR <Go> on Bloomberg.
Derek Hillen, CAIA
Mirae Asset Securities: Risk is to the Upside