Margin surprise. Aggregated net profits of Chinese companies in 1H09
rose 52% from 2H08, despite turnover dropping 8%, mainly due to net
margin rising from 2.6% to 5.4%. If 2H09 profits can be maintained at 1H09
levels, we should see double-digit earnings growth for China in 2009.
■
Improving ‘terms-of-trade’. Prices of downstream products dropping much
less than upstream products, during this round of economic downturn (a rare
phenomenon in the last few years), is one of the key reasons for the
improving margin of Chinese companies. A more rational pricing policy for
regulated products is another reason.
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Raising EPS forecasts and index targets. We raise our 2009 EPS growth
forecasts for MSCI China and HSCEI from 5% to 10% and 15%, respectively.
Consequently, MSCI and HSCEI’s 12-month targets are revised upwards to
61 and 14,000, respectively, implying 0% and 13% upside from the current
levels. Minor changes were made in the model portfolio to add some beta
and more exposure to the export sector.