I’m Bad, I’m Nationwide

Date: Thu, 11 Nov 2010 12:12:31 +0800
Subject: I’m bad, I’m nationwide


I used to work in the fields picking avocados and smacking flies but now I work in an office here in Hong Kong picking stocks and smacking clients. Property expert, Keith Yeung, has initiated coverage on the Hong Kong office sector with an overweight weighting (we are neutral on the residential developers). We expect office rents to reach 2008 record levels which means another 25% appreciation for Central, 20% for Causeway Bay and 10% for Tsim Sha Tsui next year. Keith still likes the sector because:

  • Low supply – projected completion of 1.2 mn sq. ft. this year and only 1.1 mn 2011, vs. the average annual completion rate of 2.3 mn sq. ft. since 1989.
  • Low vacanies – the vacancy rate has been declining and is now just 3-4% on Hong Kong island
  • Low borrowing costs – commercial property mortgage rates are around 3%

We like Wharf (4 HK, Buy) and Hysan (14 HK, Buy) for the growth. However, there are rumors in the market Wharf will do a placement when the stock hits $60 and we are at $58 now. Swire (19 HK) and Hong Kong Land (HKL SP) are Holds as recent share price performance has fully reflected the above. Note attached.


I’m bad, I’m nationwide

Bigger than Facebook, with 800 mn plus users, the world’s third largest internet company announced Q3 results yesterday which were not great and have caused us to maintain our Buy rating but trim our forecasts and target price. Eric Wen now says Tencent (700 HK, Buy) is no longer his “top pick” for the sector – that award moves to

C-Trip (CTRP US, Buy).

What we got right:

Online gaming was strong with revenues up 19% q-q and 67% y-y. Games now account for 49% of total revenues and growing. We see Tencent growing game revenue another 44% next year but if in-house developed games disappoint they will have to rely on licensing outside games which will reduce margins. We are “hopeful” here as their web game Seven is a smash hit and will have a material impact on Q4 results.

What we got wrong:

Advertising growth continues to slow and they paid a higher tax rate than forecast. QQ users don’t want intrusive ads and the company has heeded their calls. Search revenues will have to pick up the slack.

The ongoing dispute with upstart Qihoo 360 is not yet resolved and Tencent’s strident reaction has cost the company client and regulator goodwill. Minister of Industry and Information Technology has weighed in criticizing both companies actions as, “immoral” and “irresponsible.” Tencent will have to show some contrition, possibly accept a lower rate of growth, and mend fences with its neighbors. Sounds rather like China itself. Note attached.


News headlines from Wakefield, Massachusetts caught my eye where the local high school track team decided to boost flagging moral and maybe get a few fans by printing a bunch of sweatshirts with the school name on the front. Nothing wrong with that, but then they decided to print “WTF” (“Wakefield Track & Field”) on the back promptly causing a huge controversy in the town.

It reminds me of the officer’s training school in the Air Force, “School for Higher Instructional Technique.” Another small town in the Midwest ran into a similar controversy with their Christian school which eventually had to change its name: Fulton Unity Christian Knights. Oh well, WTF.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA
Mirae Asset Securities: Risk is to the Upside

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