| 8 Sept price S$ | Target price S$ | Market cap (S$) | 2007 PE | 2008F PE | 2009F PE | 2007 ROE | |
| Beauty China | 0.535 | 0.83 | 190.7 | 5.7 | 5.0 | 4.3 | 28.9 |
| China Hongxing | 0.37 | 0.48 | 939.8 | 11.5 | 9.8 | 8.1 | 19.3 |
| Synear Food | 0.395 | 0.58 | 536.3 | 5.5 | 8.5 | 6.9 | 24.0 |
| China Farm | 0.33 | 0.48 | 75.1 | 5.2 | 4.3 | 3.3 | 30.1 |
| Li Heng Chemical | 0.495 | 0.73 | 892.5 | 4.0 | 4.0 | 3.3 | 92.1 |
SO S-CHIPS, once everyone’s darling, have fallen and fallen. Their brethren in China, the A-shares and H-shares, have done badly too.
With valuations as low as they are now, analysts are coming out with strong ‘buy’ calls. The latest is UOB Kayhian with its report today (Sept 9) titled: “S-CHIPS. Which Are The Safe Plays In A De-rating Environment?”
The broker traces the downturn and greater volatility of the S-chip index to the FSSTI, especially since Sept 07 when concern over the risk of China's economic slowdown was exponentially magnified by the global credit crunch.
In the past one year, the former has incurred more than double the losses chalked up by the latter.
“With the valuation for the entire market shifting downwards, S-chips are being valued at deeper discounts due to the greater macro uncertainties perceived. We have incorporated the higher equity risk premium borne by S-chips into our target prices with increased beta (and thus higher risk premium) assumptions,” said UOB Kayhian.
Its top five picks: Beauty China, China Hongxing Sports, Synear Food, China Farm Equipment, and Li Heng Chemical Fibre.
The first three of these are well-established consumer stocks and UOB Kayhian favours branded players given the ongoing robust consumption in China. Its comments on the five picks are:
Analyst Chew Boon Leong checks out a China Farm Equipment harvester. Photo by Pearl Peng
China Farm Equipment had a difficult time in 2Q08 when steel prices peaked but it did not suffer a severe margin contraction. We expect better margins and sales ahead as steel prices fall and the company's overseas business continues to grow. The government's supportive attitude towards the agricultural sectorwould also brighten its outlook.
Beauty China has maintained solid turnover growth since its listing. The growth is underpinned by new stores, new product launches and higher average selling prices. The company has managed to stabilise its gross margin at above 61% despite raw material price hikes. With the gradual ramp-up at its newmanufacturing plant and more production being shifted in-house, its profitability will likely continue to improve.
China Hongxing Sports will continue to deliver strong top-line growth and offer high earnings visibility on the back of the orders worth Rmb1.2 billion it cliched at its 13 August trade fair, which represents a 46.3% year-on-year increase. Overall gross margin is also likely to expand since orders for the company's apparel and accessories account for an unprecedented 47.2%. Hongxing's brand image has also improved significantly through its sponsorship of the Chinese women's 48kg Olympic weightlifting team, which won the first gold medal for China at the Beijing Olympics, and the North Korean Olympic team.
Synear Food has been reporting lower sales volume and smaller margins since 3Q07 as a result of the restriction on bulk sales and persistent raw material price hikes. We expect gross margin to pick up gradually as raw material price hikes are likely to ease in 2H08 and Synear continues to upgrade its productmix. Considering Synear's leadership in the frozen food industry, the great potential of its commercial business and its strong brand equity, its is still a high quality company.
A Li Heng factory.
Li Heng Chemical Fibre is less vulnerable to the falling demand in the textile industry due to its superior product quality and market position. As the industry leader with a 10% market share, the company is also likely to benefit from increased economies of scale and industry consolidation.
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