Rewriting the Rules

Date: Wed, 27 Apr 2011 11:02:32 +0800
Subject: Rewriting the rules

 

“When I was a kid my parents moved a lot, but I always found them.” -Rodney Dangerfield

Commodities strategist, Henry Liu, writes in “The Melting Point” today that coal prices in China this year will not rise significantly and he remains neutral on that sector. His forecast for average thermal coal prices is RMB 800/ton vs. last year’s average of RMB 750.

Power consumption in Q1 surged 13.4% indicating an overheating economy and ever less energy efficiency. Spot prices have climbed in the last two weeks as we approach the summer peak season and there are some power shortages appearing in Jiangsu Province. But:

-        Imports of coal from Indonesia will recover Q2 as domestic and overseas prices converge

-        Domestic coal capacity, particularly after infrastructure investment in Shanxi and Inner Mongolia, is increasing

-        Beijing will not tolerate sharply higher prices

Part of the recent price rise is due to maintenance on the Daqin rail line to make it as good as new. See attached for more.

This view also supports our positive stance on the IPPs – again, my favorite Huaneng Power (902 HK) continues to thrive. After paying a 5% cash dividend last week the stock is up another 1.5% this morning. Stories of power shortages are a coal supply issue which we believe will be sorted with improved rail transportation and priority through trains (a “through train” you can actually believe in…). Rising demand means greater utilization at IPPs. Still more upside for HP, now with implied dividend yield of 6%.

$$$$$$

What to do about China Unicom (762 HK)? Eric Wen has been skeptical on this one and after upgrading it to a Hold, today he upgrades it to a Buy post Q1 results. Yes, we have been right about handset subsidies crushing the bottom line to rubble but they have surprised on ever expanding 3G ARPU and continue to successfully lure high-end clients away from China Mobile (941 HK).

These subscribers want to use their i-Phones on a 3G network and currently, with CM, they have to put up with 2G service for this phone. Apple continues to rewrite the global telecoms space.

 

And Apple’s influence is being directly felt in that renegade province and my erstwhile home, Taiwan. Tech head Roxy Wong, writes today he is maintaining his Reduce call on Compal (2324 TT) as they, like other notebook makers, are being KO-ed by tablets, specifically the i-Pad. I am not a tech geek although some of my best friends are. But I bought an i-Pad last summer and love it. I use it everyday and my young children love it too (Angry Birds, of course).

There is no way I will buy a notebook. Oh, people who don’t have one say, but when you travel you need a NB. Hell no, I don’t. If you can live without excel everything else can be done on the i-Pad. It is great for email, news, etc. Taiwanese notebook makers, normally the most nimble of manufacturers, have been S-L-O-W to figure this out and are paying the price now. By next year they will all be believers and cranking tablets out but guys, the horse has already bolted, the bird has flown.

$$$$$$$

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

Cheers.

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

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