Sofa King

Date: Tue, 21 Jun 2011 13:37:22 +0800
Subject: Sofa King


“Never invest in any idea you can’t illustrate with a crayon.”  - Peter Lynch

Halla Climate Control (0188800 KS) has performed well since our upgrade last week with the stock is up 9% since then. As the Hyundai-Kia juggernaut continues to grab market share globally and is now at over 10% in the US, Halla is a major part of their supply chain and is only just starting to re-rate. Latest forecasts for the Korean car makers are to shove Japan from its number 3 spot in the all important American market this month. Halla is trading at 8.4X, with 15% EPS growth and a 4% dividend yield. Our new TP is KRW 30,000 is 25% upside from today’s level. (Note attached). Please let me know if you would like to speak to the analyst, YK “Dr. Mobis” Yoon.



People keep complaining about unaffordable housing here and policy risk continues to rise with all manner of politicos now weighing in as if they have suddenly woken up to the fact that property prices in HK are three times that of New York. (And as nice as HK can be, it ain’t the Big Apple). Chief Executive, Donald Tsang, is likely to promote this issue with new measures in October during his Policy Address by firing up the Home Ownership SchemE (“HOSE” – the only ones getting hosed will be the rapacious HK developers. No tears here).


Introduced in the 70’s along with ABBA, the home ownership scheme was a policy of providing subsidized housing to get people out of shanty towns. These smaller units were sold at a 30-50% discount to private housing but the last project was completed in 2003. As Keith Yeung writes, average annual completion of HOS units was close to 15,000 each year from 1984 – 2003.

Compare this to the annual average completion of 22,450 private units in the 20 year period from 1991 – 2010 and you can see they can be up to 40% of the market. This is more bad news for local developers who by far get the bulk of their earnings from this segment. This combined with mounting mortgage rates, loftier LTVs and steeper stamp duties probably means all the OJ has been squeezed from this orange. Transactions in the mass-resi market have also collapsed, falling to an 8 month low over the weekend with just 15 properties changing hands – in a city with a population of 7 mn speculators!


Small cap analyst, Paul Snelgrove, initiates today on blue chip mid-cap VTech Holdings (303 HK) with a Reduce rating – the only Reduce on the street. We like this company but VTech is facing significant headwinds and is just too expensive at current levels. The share price of this dominant cordless phone and electronic learning product manufacturer has outperformed since they released disappointing results May 31st showing net margin contraction. Reasons for the recently strong share price are likely due to the company’s strong balance sheet (no debt and US$333 mn in cash) and dividend yield of 6.3%. Time to sell:

-          Rising costs (wages, materials, marketing) will pressure margins

-          RMB appreciation is a negative

-          Trading at 14.4X forward earnings – a premium to historic norms of 10-12X



Paul believes given the uncertain outlook for margins, VTech deserves to trade at 12X PE, giving us a target price of $80. VTech tends to be active around results and the quiet thereafter and is now close to most street target price forecasts. The next upcoming catalyst will be the July 13th ex-dividend date after which interest is likely to decline. Having several VTech products in our home (including a baby walker that shrieks at the startled toddler when they push certain buttons in an ‘orrible Cockney accent for some reason) I can attest to their quality and durability.

Their newest child product I find intriguing – the InnoTab. This is an iPad for children with a 5 inch screen encased in bomb-proof colorful plastic. For $80 you can give this to your little darlings and actually get your iPad – back. To be released in time for Christmas, I think it can be a hit. They are talking about charging $25 for software but whether that is possible with iPad apps costing around a buck or two, is another matter. Report attached.


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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