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Regional Morning Notes Summary

Core Content Overview

This document provides a comprehensive update on various sectors across different regions, including Shipping, Aviation, Infrastructure Construction, and Securities, with a focus on performance analysis, investment recommendations, and key assumptions. It also includes updates on specific companies and market catalysts.

Main Sectors and Key Points

Shipping - Regional

• 2013 Recap: Regional shipping companies faced weak market conditions, with most suffering losses. Only OOIL and PBS recorded profits due to defensive strategies and efficient operations.
• 2014 Outlook: The worst is expected to be over, with a more balanced dry bulk market and a more consolidated container market. However, the sector is still far from an upcycle.
• Investment Recommendation: Maintain MARKET WEIGHT.
• Key Companies:
  • OOIL (316 HK): Top pick due to excellent operating efficiency and favorable valuation (0.7x 2014F P/B).
  • CSCL (2866 HK): Average freight rate declined the least, due to high exposure to domestic shipping.
• Freight Rate Trends:
  • Transpacific rates declined by 7%.
  • Asia-Europe rates declined by 7%.
  • Domestic Asian rates increased by 6%.
• Capacity Expansion: NOL, OOIL, CSCL, and COSCON expanded capacity by 9.8%, 9.7%, 2.6%, and 8.6% respectively in 2013.

Aviation - China

• Sector Downgrade: Downgraded from OVERWEIGHT to UNDERWEIGHT due to yield pressure from high-speed rail (HSR) and rising operating costs.
• Key Recommendations:
  • BUY Cathay Pacific (293 HK).
  • SELL China Eastern Airlines (670 HK).
  • HOLD China Southern Airlines (1055 HK).
• Yield Pressure:
  • HSR ticket prices are at least 10% lower than those of airlines.
  • Domestic yields are under pressure from HSR and anti-graft measures.
  • Domestic traffic growth is expected to decline to 8–9% yoy in 2014.
• Cost Factors:
  • Operating costs are likely to rise due to a weaker renminbi.
  • Jet fuel, leasing, and financing costs are linked to USD.
• Key Statistics:
  • Air China has the highest yields and is the best-managed airline.
  • China Eastern has the highest gearing and cost base.
  • Cathay Pacific is best positioned to benefit from outbound traffic growth.

Infrastructure Construction - China

• Investment Target Raised: The railway investment target for 2014 was increased to Rmb720b, up from Rmb684b in 2013.
• New Projects:
  • Number of new projects increased from 44 to 48.
  • New lines to commence commercial operation will rise to 7,000km from 6,600km.
• Regional Focus:
  • Central and western China will account for 78% and 86% of total railway investment and new lines respectively.
• Investment Recommendation: Maintain OVERWEIGHT.
• Recommended Stocks: CRG (390 HK) and CRCC (1186 HK).

Securities

• Overhang from Commission War: Still present but likely to be compensated by growing interest income.
• Investment Recommendation: Maintain OVERWEIGHT.

Key Updates on Specific Companies

• Geely Auto (175 HK): Downgraded from HOLD to SELL due to 27% drop in March sales and rebound in channel inventory.
• KWG Property Holding (1813 HK): Entered the harvest stage, suggesting potential for growth.
• Chow Tai Fook (1929 HK): Downgraded to HOLD due to decelerating sales.
• DBS Group Holdings (DBS SP): BUY recommendation with a target of S$21.90, as net interest income is expected to drive growth.
• Bamrungrad Hospital (BH TB): BUY recommendation with a target of Bt115, as political unrest affected only 1Q14 performance, and net profit growth is expected at 12% yoy for 2014.

Key Assumptions

• Brent (US$/bbl): 110 (2013) → 110 (2014F)
• Aluminium (US$/mt): 1,886 (2013) → 1,713 (2014F)
• Copper (US$/mt): 7,354 (2013) → 6,850 (2014F)
• Gold (US$/ounce): 1,407 (2013) → 1,200 (2014F)
• Iron Ore (US$/mt): 135 (2013) → 120 (2014F)
• CPO (RM/mt): 2,657 (2013) → 858 (2014F)
• BDI: 1,061 (2013) → 1,219 (2014F)

Market Indices

Top Picks and Sells

BUY

• Cathay Pacific (293 HK): Target HK$18.90, trading at 0.88x 2014F P/B.
• DBS Group Holdings (DBS SP): Target S$21.90, with net interest income as a key growth driver.
• KWG Property Holding (1813 HK): Entering the harvest stage.
• CNBM (3323 HK): Target HK$9.82, with a potential 22.4% increase.
• ICBC (1398 HK): Target HK$5.90, with a potential 19.7% increase.
• Bank Mandiri (BMRI J): Target RM10,800, with a potential 5.4% increase.
• Gamuda (GAM MK): Target RM5.54, with a potential 23.7% increase.
• Pacific Radiance (PACRA SP): Target RM1.22, with a potential 11.4% increase.
• Bamrungrad Hospital (BH TB): Target Bt115, with a potential 12% net profit growth in 2014.

SELL

• China Eastern Airlines (670 HK): Downgraded from BUY to SELL due to high gearing, low sector length, and high cost base.
• China COSCO (1919 HK): SELL due to poor performance and high gearing.
• China Southern Airlines (1055 HK): Downgraded from BUY to HOLD.
• Chow Tai Fook (1929 HK): Downgraded to HOLD due to decelerating sales.

Corporate Events

• SPT Energy Corporate Roadshow: New York (8–10 Apr)
• Indonesia 2H14 Market Strategy: Kuala Lumpur (10–11 Apr)
• JM Corporation Corporate Roadshow: Taipei (9–10 Apr)
• China Fiber Optic Network Luncheon: Hong Kong (10 Apr)
• Palm Oil Dialogue Session: Kuala Lumpur (11 Apr)
• Malaysia Aica Corporate Roadshow: Singapore (11 Apr)
• Xingda International Corporate Roadshow & Luncheons: Taipei (16–17 Apr)

Analysts

• Lawrence Li: +86 21 54047225*813 | lawrenceli@uobkayhian.com
• Angela Zhou: +86 21 54047225*858 | angelazhou@uobkayhian.com
• K Ajith: 65-65906627 | ajith@uobkayhian.com
• Joshua Low: +65 6590 6616 | joshualow@uobkayhian.com

Conclusion

The report highlights the ongoing challenges in the shipping and aviation sectors, with expectations of gradual improvement in 2014. It also emphasizes the positive outlook for infrastructure construction, particularly in China. Investment recommendations are made based on valuation, earnings visibility, and sector performance, with a focus on long-term growth and risk management.