S-shares face earnings downgrades

Published October 14, 2008
Businesstimes.com

MORE earnings downgrades on S-shares or Singapore-listed Chinese companies can be expected once analysts start pricing in the dampening impact from the worsening economic environment next year.

But this is unlikely to hurt S-share ratings, as valuations are already at such extreme low levels that it will trigger a 'buy' call under most valuation models.

'What people should concentrate on doing now is to adjust their expectations on 2009, regardless of which sector or businesses they are in and take management ideas with a pinch of salt,' DMG & Partners Securities analyst Heng Tong Jin told BT.

In view of uncertainties in the economy and Chinese government policies, PrimePartners research manager Lim Keng Soon said he expects overall earnings growth among S-shares to ease to 20 per cent, down from an earlier estimate of 30 per cent growth for 2008.

'But some S-chips are now trading at three times earnings forecast for FY08. Even if we assume a pessimistic scenario where margins are further pressured and corporate earnings decline by another 30 per cent, a price-earnings ratio of about four times for fiscal 2008 would still be undemanding,' Mr Lim added.

S-shares have taken a beating as investors worldwide dumped stocks and fled to safe haven assets. There was also the spillover poor sentiment from the sell-down in Chinese mainland markets and credibility issues arising from recent corporate scandals among S-share companies and China's tainted milk saga.

Chinese stock analysts believe that the Chinese government may use huge infrastructure spending to bolster the domestic economy, with its huge foreign reserves of some US$1.7 trillion to draw down on.

Last week, China cut its interest rates by 27 basis points and reduced reserve requirement ratios of banks by 50 basis points to bring down borrowing costs for banks and other businesses.

'While we believe that exports will slow down GDP growth in China next year, consumption, government spending and investment should still hold well to make sure that growth will hover around 9 per cent in 2009,' Mr Lim said. 'As such, we remain reasonably sanguine.'

China had earlier undergone 'supernormal' double-digit rates of expansion at a time when the G3 economies were experiencing a slowdown. Mr Heng, however, believes that one should no longer assume that China is operating on a different gear from the rest of the world given the current economic uncertainties.

'Investors probably have to weather another six to 12 months of downside but for those with a two years and above horizon, these are fantastic levels to enter,' he said.

The high-value chemical fibre space is worth looking at, Mr Heng added, pointing to stocks like Sino Techfibre and Li Heng.

Analysts also favour the agricultural sector as food security remains a concern. Stocks like China Farm Equipment, China Milk and China XLX Fertiliser could benefit, a recent DMG & Partners Securities report said.

Mr Lim of PrimePartners noted that Chinese shipbuilders with clear earnings visibility from large orderbooks such as Cosco and Yangzijiang, have also fallen to attractive levels, while input cost pressures have eased.

Beyond sectoral and financial factors, investors should also look out for companies with a credible management, good expansion plans and a viable business model, Mr Heng added.