Asia/pacific morning meeting summary

M O R G A N S T A N L E Y R E S E A R C H
Companies Featured
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Asia/Pacific Morning
Meeting Summary
The Morning Call
Macau Gaming & Property / Positive bias remains
Mahindra & Mahindra (India) / Asset-rich Play on Rural Consumption, Remain OW
LG Display (S. Korea) / Data Points Stabilizing
Company/Industry Analysis
Pudong Development Bank (China) / Quick Comment: Share Placement Approved, In Line with Expectation
Tingyi (Cayman Islands) (China) / Limited Impact from Disposal of Subsidiaries and AIB Share Transfer
Texwinca Holdings Ltd. (Hong Kong) / Quick Comment: Acquires Additional 10% Equity Stake in the Retail
Yue Yuen Industrial (Hong Kong) / First Read on 3QF10 Results
Sun Pharmaceutical Industries (India) / Taxotere and Taro Drive Our Upgrade to OW, PT Rs2,305
China Clean Energy / Golden Sun: Revised Version …Likely Improving IRRs
Strategy/Economics Analysis
Economics / China Economics Chartbook : Goldilocks on Track
Stock Rating Changes - Upgrades
Stock Rating
Price Target
ModelWare Estimate
Ticker Company
Consensus*
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located
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M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
Stock Rating Changes - Downgrades
Estimates/Price Target Changes - Up
Estimates/Price Target Changes - Down
* First Call consensus estimate. For valuation methodology and risks associated with any price targets above, please email morganstanley.research@morganstanley.com with a request for valuation methodology and risks on a particular stock. Macau Gaming & Property: Positive bias remains
Macau Gaming & Property: Attractive
Praveen.Choudhary@morganstanley.com, Calvin.KH.Ho Raise our 2010 Macau revenue growth estimate to 52%; Retain Attractive industry view.
The secular theme of limited table supply over the next couple of years, limited impact from Singapore casinos and easier credit conditions should continue to drive meaningful EBITDA growth of 77%/14% for the industry in 2010/11e. We raise our 2010e EBITDA by 0–15% for the companies in our coverage, and lift our price target by 11% to 29%. SJM (0880.HK, HK$8.74, O) still our top pick; In our Asia Pacific Best Ideas List. We believe
SJM and MPEL (MPEL.O, US$5.24, O) could provide meaningful upside near term. Wynn (1128.HK, HK$13.52, O) could see potential value creation through the Cotai project. We rate Sands China (1928.HK, HK$13.36), and Melco (0200.HK, HK$4.03) Equal-weight and downgrade Galaxy (0027.HK, HK$6.87) to Equal-weight on valuation. (See our published report Near-term data points should remain positive. Our view is based on strong visitor numbers
during mid-autumn festival and Golden Week in October. Meanwhile, we cite some risks including, a significant rise in credit provided by casino operators and external funds that could evaporate at times of credit tightening or interest rate hikes. MAHM.BO, Mahindra & Mahindra (Rs694.15) /Asset-rich Play on Rural
Rating: Overweight
India Four-Wheelers: Commercial
Consumption, Remain OW
Vehicles: Cautious
Morgan Stanley India Company Private Limited Target: Rs800.00
Binay.Singh@morganstanley.com, Shreya.Gaunekar 52-Week Range: Rs744.70-423.50
Mkt. Cap(mn): Rs398,466
Rural Going Strong: With a favorable monsoon trend playing out and healthy government
ModelWare EPS: Rs50.29 (FY 3/'11),
projections with regard to food grain production, we believe the outlook for the rural economy is favorable. Given 70% of its portfolio has rural exposure, we believe that M&M is well placed to M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
benefit from strong semi-urban/rural consumption growth. Reiterate Overweight. Our call reflects improved business profitability outlook, which leads us to
raise our standalone earnings by 16%/15% in FY11 and FY12. We also highlight its pipeline of new launches, competitive strength across segments, and attractive valuation. Alphawise farmer’s survey supports our positive outlook on farm incomes: Our Alphawise
team conducted a survey among 500 farmers and the key takeaways with regard to M&M include: 1) Farmers expect higher farm incomes in F2011, implying healthy consumption trend; and 2) One-third of farmers point out that labor shortage is a key concern. We believe the current labor shortage could lead to increasing mechanization at farms, thereby benefiting M&M’s farm 034220.KS, LG Display (W37,600) /Data Points Stabilizing
Rating: Overweight
S. Korea Hardware Components: In-Line
Morgan Stanley & Co. International plc, Seoul Branch Target: W48,000
Keon.Han@morganstanley.com, Young.Shin, Mike.Chung 52-Week Range: W48,100-28,100
Mkt. Cap(bn): W13,454
Reiterate Overweight. August QTD, LGD remained profitable at W220 bn operating profit. In
ModelWare EPS: W3,633 (FY 12/'10),
September, panel pricing deteriorated more sharply, thus likely driving monthly losses. But, we see almost no risk of 3Q operating profit dipping into loss territory. This soft landing in OPM, end market signals of improving inventory conditions and evidence of stronger panel order pick-up served as a catalyst for the stock to run up 16% during the past several weeks. September utilization rate up to 93%, a 3% MoM increase. Increased production stems from
some major Chinese TV makers signaling better inventory levels, thus willing to stock more TVs for the current long string of major holidays. In addition, the sharp rate of TV panel price decline has begun to taper. Despite this, LGD did make a tactical mistake of over-building LED related component inventory in 2Q10. Falling values of both LCD modules and components mean inventory devaluation and write-offs. This, in addition to our lower ASP assumption, leads us to lower 2010 earnings by 26% and 2011 by 10%. Sharp run-up in a short period could signal a stock is poised for a breather near term. We
think the next catalysts are confirmation that China inventory is clearing during the holiday season, panels prices stabilizing then rising by 1Q11, and panel orders strengthening on new 600000.SS, Pudong Development Bank (Rmb12.93) /Quick Comment: Share
Rating: Equal-weight
Target: Rmb16.17
Placement Approved, In Line with Expectation
China Banks: In-Line
Minyan.Liu@morganstanley.com, Katherine.Lei, Jocelyn.Yang 52-Week Range: Rmb18.91-12.87
Mkt. Cap(mn): Rmb114,175
All obstacles cleared. Pudong Bank posted on its website that the CSRC has approved its
ModelWare EPS: Rmb1.79 (FY 12/'10),
directional placement of up to 2.87bn new shares to China Mobile. With the last regulatory uncertainty lifted, we believe the placement will likely occur soon. Capital cloud lifted. A post-placement Tier 1 ratio of ~10.5% would enable Pudong to take on
more risk-weighted assets and improve profitability, and Pudong would be in a stronger capital position than other mid-sized peers. Although we estimate there would be 25% dilution to current shareholders and ROE would be down by c3%, we believe the positives on capital outweigh negatives due to dilution. However, this positive is largely in the price, in our view. New shares issued at 6% premium, a minor positive: According to the initial announcement in
M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
March, Pudong intended to issue 2,208mn new shares at Rmb18.03/share, and these conditions are subject to adjustments for dividend. Pudong announced a cash dividend of Rmb0.15 per share and a stock dividend of 3 shares for every 10 in June. Ex-rights, we estimate the company to place 2.87bn shares at Rmb13.75/share. Total proceeds should be roughly the same, but our estimate of the new issue price represents a 6% premium to the September 27 closing price. 0322.HK, Tingyi (Cayman Islands) (HK$21.50) /Limited Impact from Disposal of
Rating: Equal-weight
Target: HK$18.50
Subsidiaries and AIB Share Transfer
China Food, Bev. & Tobacco: Attractive
52-Week Range: HK$21.60-15.14
Mkt. Cap(mn): HK$120,335
Neutral on disposal of two raw material subsidiaries: Tingyi will sell its 40.8% stake in
ModelWare EPS: HK$0.58 (FY 12/'10),
Tingzheng (packaging materials) for US$84.4 mn, and a 51% stake in Ting Feng (modified potato starch & seasoning flavors) for US$13.9 mn to the major shareholders, the Wei family. Tingyi looks to focus on its major downstream products. The two companies would remain Tingyi’s suppliers; pricing would be market-driven and comparable to what other suppliers offer We see little impact on Tingyi from the two announcements. Disposing of two subsidiaries/
associates may increase our 2011 earnings estimate by ~4%. Asahi-Itochu Beverage’s 8% share transfer to Ting Hsin does not affect the listco. We maintain our Equal-weight rating on Financial impact: If the deal goes through in 1H11 as the company expects, we see ~4% upside
to our 2011 net profit forecast after considering the following: (+) Disposal gain of US$36.09 mn would boost our 2011 net profit by ~5.5% (after tax); and (-) Absence of profit contribution from the two (US$10mn in 2009) would decrease our 2011 net profit by ~1.5%. HONG KONG
0321.HK, Texwinca Holdings Ltd. (HK$9.39) /Quick Comment: Acquires
Rating: Equal-weight
Hong Kong Consumer: Attractive
Additional 10% Equity Stake in the Retail Business
Target: HK$7.80
Angela.Moh@morganstanley.com, Jessica.JJ.Wang 52-Week Range: HK$9.84-6.02
Mkt. Cap(mn): HK$12,560
Incremental earnings impact long term, but limited on F2011e. Texwinca announced that it
ModelWare EPS: HK$0.79 (FY 3/'11),
would acquire an additional 10% stake in Baleno (the retail business) from GML (5%) and WCL (5%), lifting its total interest to 64%. We are positive on the transaction. The retail business has been recovering since F2H10, with operating margin improving to 8% from low-to-mid single digits in previous years. We also believe profitability of the retail business will further improve, benefiting from prior initiatives on store rationalization. Consideration: The total consideration is HK$203.3mn: 1) cash consideration of HK$60.88mn;
and 2) new 16mn share (1.18% of enlarged O/S shares) placement at HK$8.9. The transaction implies a F10 P/E of 10x. The retail business recorded net profit after tax of HK$67mn and HK$205mn in F2009 and F2010, respectively. Latest operation update: In the textile business, YTD F2011, ASP has increased by 10%-plus,
mainly driven by the surge in cotton price. Management believes cost pressures can be fully passed onto customers given their strong bargaining power as a leading textile manufacturer. Capacity has expanded 15% YoY, while the utilization rate is stable at 93%. 0551.HK, Yue Yuen Industrial (HK$28.85) /First Read on 3QF10 Results
Rating: Overweight
Hong Kong Consumer: Attractive
Angela.Moh@morganstanley.com, Rob.Lin, Jessica.JJ.Wang 52-Week Range: HK$30.25-20.00
Mkt. Cap(mn): US$6,151
F3Q net profit down 7% YoY and 3.7% below our forecasts. Excluding the impairment loss of
ModelWare EPS: 0.26US$ (FY 9/'10),
interests in JCEs and the fair value change on the derivatives, F3Q net profit grew by 4% YoY to US$146mn, or 4% better than our estimate. While overall sales of US$1,547mn were in line, M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
gross margin was slightly below expectations but offset by lower-than-expected operating expense. For the first 11 months of F2010 the company reported total sales growth of 13.6% to US$5,263mn, tracking ahead of our full-year estimate. However, gross margin is still under pressure due to rising input costs and, as such, we leave our earnings forecasts unchanged. F3Q sales surged 22% to US$1,547mn, in line with our forecast. Strong sales growth was
driven by both manufacturing business and retail business. Manufacturing (YY ex PS) sales were up by 21%, mainly helped by volume growth of 22%. Retail sales up 25% YoY. This was mainly helped by consolidation of one of its associates,
Dongzhjie, that became effective July 2009. Excluding regional JCEs and associates, the company ended with 2,293 directly managed stores compared to 2,272 at end-F2Q10. SUN.BO, Sun Pharmaceutical Industries (Rs1,968.50) /Taxotere and Taro Drive
Rating: Overweight
India Pharmaceuticals: In-Line
Our Upgrade to OW, PT Rs2,305
Target: Rs2,305.00
Morgan Stanley India Company Private Limited 52-Week Range: Rs1,984.70-1,298.95
Sameer.Baisiwala@morganstanley.com, Saniel.Chandrawat Mkt. Cap(mn): Rs407,717
ModelWare EPS: Rs79.29 (FY 3/'11),
Strong business fundamentals, earnings momentum drive upgrade. We believe Taxotere
could be a significant and quality (long window of monetization) opportunity that Sun could monetize earlier than our/Street expectations. Recent Taro acquisition could support mid term growth for Sun as well. Our new price target of Rs2,305 implies 17% upside to CMP. What's new: US District Court has ruled in favour of Hospira and Apotex and invalidated two
Taxotere ($1.2 bn sales) patents (‘561 and ‘512) for obviousness, inequitable conduct and indefiniteness (though both were ruled to infringe). Given that Sun is also litigated on the same patents (and not on other two OB patents), potentially it could launch (subject to NDA approval) as early as November 14, (compound patent expires), within 30 months of its NDA filing. Importantly, only Sun and Hospira have tentative approval and only two additional players What’s not in the price. Taxotere upside, mid to longer term Taro synergy benefits and other
niche opportunities (Prandin, Azelastine nasal spray etc) do not appear to be priced in the stock.
Taxotere ANDA approval (and launch), resolution of CPD’s FDA issues, market share trends in the US (for Exelon, bupropion, Optivar, Effexor XR tabs etc) and new complex generic filings are SINGAPORE
China Clean Energy: Golden Sun: Revised Version …Likely Improving IRRs
China Clean Energy: In-Line
Sunil.Gupta@morganstanley.com, Sophie.Lu Overview. Following the Golden Sun program launch in mid 2009 and 642MW demonstration
project approval in November 2009, the Ministry of Finance and Ministry of Housing and Urban-Rural Development jointly released a revised version. Impact on our view. China’s central government has now coordinated with various ministries
and local governments, laying out a revised Golden Sun Program. The major change is that module/inverter/battery producers need to win the centralized bidding process to supply to Golden Sun projects. The bid pricing could be very competitive and thus project IRR could improve to 5% from low single digits. We forecast China demand of 840MW in F2011, contributed M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
mainly from various demonstration projects and local government support, as we do not see a national level of Feed-in Tariff to materialize near term. Key changes: 1) Module, inverter and storage battery suppliers now need to go through
centralized bidding program to supply products; 2) Upfront subsidy is 50% and 70% of key component investment cost (about 85% of total cost) for on-grid and off-grid projects; 3) Fixed subsidy of Rmb4/6/10 per Wp for on-grid system/BIPV/off-grid projects; 4) Larger size of installation (at least 10MW) with grid connection is encouraged. Economics/China Economics Chartbook: Goldilocks on Track
Qing.Wang@morganstanley.com, Ernest.Ho, Steven.Zhang August Economic Data: Better than expected. Despite intensifying supply-side adjustment to
shut energy-inefficient enterprises and measures against property speculation, August economic data were better than expected, with industrial production and fixed asset investment posting a modest rebound. Retails sales remained robust on improved consumer confidence and a relatively tight labor market. While CPI inflation hit a post-financial crisis high on the back of rising food prices, PPI inflation softened to its lowest reading this year. Implications for economic and policy outlook near term. The visible softening in policy tone
since July has already served to boost sentiment and confidence, which in our view, helps to explain the modest acceleration in bank lending and M2 growth, as well as the rebound in investment growth. We believe CPI inflation may have peaked in August and could edge down slowly for the rest of this year. Although industrial activity is likely to be further negatively impacted by intensified supply-side adjustment in September, we think 3Q could be the trough for the cycle in terms of sequential GDP growth (i.e., 8% QoQ, SAAR). We forecast a modest sequential reacceleration in growth in 4Q (10.6% QoQ, SAAR). We maintain our forecasts of the headline YoY GDP growth rates at 9.1% for both 3Q and 4Q. China’s potential economic growth rate set to slow: Potential growth is a function of labor,
capital, and total factor productivity. We expect the three factors to decelerate over the coming decade, making a sustainable level of GDP growth likely to be 8.0% per annum through 2020, in our view. The Chinese economy is now at an inflection point and after this point is crossed, if history is a guide, overall GDP growth tends to decelerate and inflation to accelerate. The economic structure tends to undergo profound transformation, with the three key ratios of the economy – consumption-GDP, service sector-GDP, and labor income-GDP – rising rapidly. However, as a continental economy with vast disparity among regions, China’s economic evolution is likely to be more gradual and over a more extended period than those of its East M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
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M O R G A N S T A N L E Y R E S E A R C H
September 29, 2010
Asia/Pacific Morning Meeting Summary
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