Friday, October 19, 2007

Report by OCBC on S-share

Interest in S-shares looks sustainable. Despite recording good gains this year and the slight sell-down in the past few days, the buying momentum in S-shares looks sustainable as most recovered yesterday from intra-day lows. Overall, the PrimePartners China Index hit a high of 317.96 on 1 Oct 2007 but over the course of the past few days, the index corrected and touched an intra-day low of 288.53 yesterday, before staging a strong rebound of 7.3% to close at 309.69. This seems to indicate underlying strength and interest in S-shares. As a recap, the approval of the third QDII fund in early October 2007 sparked a rally in S shares, which led to a 13.5% gain for the Prime Partners China Index on 1 October 2007. In addition, higher share prices and increased liquidity in S-shares have also seen these shares play catch up with their highly-valued peers in Shanghai, Shenzhen and Hong Kong.

Singapore is still cheaper than China and Hong Kong. The Shanghai A Share Index is trading at 55.4x historical earnings and 48.2x forward earnings while the Shenzhen A Share Index is trading at 73.8x historical earnings and 53.6x forward earnings. This is much higher than the valuations seen for the Hang Seng Index (HSI) and Straits Times Index (STI). The HSI is trading at 19.5x historical earnings and 20.9x forward earnings, while the STI remains the lowest valued at 14.8x historical earnings and 18.1x forward earnings.

Fishing for value among S-shares. While several S-shares have run up recently, there are still stocks that have yet to catch up with their peers. In this report, we have done a comparison of stocks within the same sector to identify the undervalued stocks vis-à-vis their Singapore-listed peers. From our findings AsiaPharm Group (BUY, fair value S$0.84), China Milk Products Group, Celestial Nutrifoods, China Sports International, Midsouth Holdings (BUY, fair value S$1.01), Fujian Zhenyun Plastics Industry and Reyoung Pharmaceutical Holdings appear to be trading at discounts to their peers.

Potential shift to other shares that are growing via the PRC market.While the market has been abuzz with interest in S-shares, there is another category of shares that are potentially interesting. These are not S-shares, but are positioned to grow their businesses via the PRC market. Amongst these, we continue to like Man Wah Holdings Ltd (BUY, fair value S$0.74), Karin Technology (BUY, S$0.44), Pacific Andes (BUY, S$0.965) and Tsit Wing International (BUY, S$0.305).

If US is to go into recession, Singapore shares will definitely be affected. US is still Singapore biggest consumer of Singapore’s goods. If US is to go into recession, Singapore stock market will definitely be affected to some extend. So what can investors do when US go into recession? Investors can consider buying S-shares. China domestic consumption is growing day by day and becoming less dependent on US. S-share here has shown good earning and valuation is still fairly attractive when compare against Hong Kong and China. My top pick s-share would be the property sector and have particularly interest on Sunshine Hlgs.

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