Saturday, February 6, 2010

>Wall Street Goes Brain Dead On China, Again!


  • How China’s cash cow economy is raking in the dough ...
  • Five reasons its economy will continue to boom in 2010 ...
  • PLUS, FOUR recommendations to capitalize on China’s ongoing explosive growth ... and an important update on gold!

If you think China’s spectacularly growing economy is another bubble in the making ... or even that Google’s
current dispute with Beijing will take down the Middle Kingdom’s economy, think again. China’s economy is set to continue its near double-digit economic growth for years to come.

How Wall Street could get China wrong for so many years is beyond me. It’s almost as if no one with any brains on Wall Street ever steps foot in China, or, when they do, they have blindfolds on.

Not me. I head to China at least twice a year, with an open mind, and my list of contacts in tow.

Based on what I’ve seen, there’s no doubt in my mind that China’s economic growth is not only for real, but set to accelerate higher in 2010, and continue for the foreseeable future.

Let’s start by taking a detailed look at just some of the recent economic figures from China ...

Gross domestic product (GDP) expanded 8.9% in the third quarter in 2009 (accelerating from 7.9% in the second quarter and 6.1% in the first) ... and is expected to have jumped at least 10.9% in the fourth quarter.

This puts China’s full year 2009 growth at near 9%, a very impressive figure when you consider the rest of the world is in a deep recession.

Moreover, it now makes China ...

The world’s biggest exporter of manufactured goods, surpassing Germany.

And it puts China on track ...

To surpass the size of Japan’s economy this year and become the world’s second largest economy!

Virtually every detailed economic stat supports the big-picture growth figures ...

To read the full report: WALL STREET

>Déjà vu- No major surprises (MERRILL LYNCH)

In-line profit growth: Profit growth for the Sensex companies came at 14.6%, slightly above our expectations of 14.4%. EBITDA growth was robust at 31.6% vs. our estimate of 28.2%. The good news is that the pre-tax profits surprised marginally at 28.2% (MLe 26.9%). However, Market was disappointed on the lack of big surprises and fell by 6% in January. Moreover, growth is highly concentrated with the Autos and Energy sector accounting for two-thirds of the growth as they benefited from the low base of the previous year. Telecom and Realty companies continue to be a drag on the Sensex earnings.

Margins expansion continues: EBITDA Margins across most sectors witnessed improvement with margins of Sensex companies expanding by close to 180bps on a YoY basis. This is primarily led by Autos (740 bps), Cement (790 bps) and Metals (380 bps). However, we believe with the rise in input prices it would be difficult to maintain the expansion going forward.

Sensex EPS unchanged; FY10 EPS downgrade likely: Post interim results our Sensex EPS estimates have largely remained unchanged for both FY10 and FY11. We expect our FY10 EPS to see some downgrades (flat vs 3% currently) led by global commodities especially Tisco and ONGC.

To read the full report: INDIA STRATEGY


Strong order inflows: Thermax 3Q10 revenues were below estimates; however, the company announced strong order inflows improving future revenue visibility. The pickup in the manufacturing capex, especially for captive power projects, has resulted in higher than expected order inflow of INR15.5bn (up 79% yoy). Revenue declined by 6% yoy given lower execution which was impacted due to lower order backlog in FY09 and poor order inflow in 2HFY09. This resulted in lower net profit of INR565m (vs HSBCe INR666m, 15% lower).

Upgrade to N(V): Strong backlog and improved outlook
3QFY10 results a mixed bag; lower execution but strong order inflows (up 79% yoy) provide visibility for FY11-12 estimates
Robust order book leads to increase in our earning estimates by c6% for FY11-12e. Raise TP to INR645 (earlier INR400)
Upgrade to Neutral (V) from Underweight (V) given the improved outlook

Positive outlook: The higher than expected order inflows during the last two quarters (INR39.1bn) has resulted in 37% yoy growth in order backlog, and increased the book-to bill to 1.6x FY10e revenue (vs c1.0x at the start of 2Q10). This strong order backlog will drive future revenue growth for FY11-12e, we believe. We expect the growth driver for future order inflow will be a) power sector orders for captive power plant and utility boilers and b) water and waste treatment from municipal bodies. In terms of the long term, Thermax’s graduation to supercritical projects through joint ventures will be quite positive, in our view.

Change in estimates and valuation: We reduce our FY10 estimate by 1% to incorporate lower than expected 3Q result. However, due to higher than expected order backlog (up 37% yoy), we increase our FY11 and FY12 earnings estimates by c6%, resulting in a 25% profit CAGR for FY10-12e (vs 20% earlier).We now use a target multiple of 18x FY12e (vs earlier 13.6x FY11e), c10% discount to our BHEL multiple. The increase in PE multiple is primarily due to the increase in relative valuation for BHEL and other peers in the sector. Based on this, our new target price is INR645 (earlier INR400), providing c3% upside from current levels, including expected dividends. Hence, we upgrade our rating to N(V) from UW(V). Our increase in target price is due to increase in estimates, rollover to FY12e multiple and higher target multiple due to increase in overall sector valuation. Though positive on the longer term, we are neutral primarily due to valuation, as the current stock price provides limited upside.

To read the full report: THERMAX INDIA


3QFY10 results below estimates: Revenues were up 58.3% YoY at Rs7.7b (v/s our est. of Rs7b) and PAT was up 29.4% YoY at Rs1.7b (v/s our est. of Rs2.1b). EBITDA margins declined by a sharp 25.9pp to 24% v/s 49.9% a year earlier and 58.4% in 2QFY10. The management explained that this was driven by cost revisions undertaken for old projects, where they had earlier charged cost on the POCM method at a lower rate, but had to revise it as construction costs has increased.

Execution scale up during 3QFY10 impressive: Unitech, which constructed ~35msf of residential projects since its inception, launched ~24.4msf in the first nine months of FY10 and plans to launch a total of ~30msf in FY10, leading to concerns about its ability to carry out its plan. However, despite a challenging outlook, the company has scaled up and the progress of execution is impressive. Construction has begun at almost 53% of the recently launched projects, and pre-construction and site development activity are underway at another 30%.

Leverage decline: Total reduction in gross debt until 9MFY10 has been Rs28.5b. Unitech has ~Rs6b payable to mutual funds. Gross debt decreased 7% YoY to Rs62b and net debt was down 6% YoY at Rs56b. Leverage fell to ~0.55x v/s ~0.59x in 2QFY10.

Valuation and view: We have rolled our NAV one year forward to FY12, resulting in an NAV of Rs106/share. The stock trades at 1.5x FY12E BV of Rs46/share and ~28% discount to its NAV of Rs106/share. We believe re-rating of the stock will continue to remain contingent on 1) continued visible progress on the execution side, 2) further clarity on the Mumbai market potential, and 3) ability to monetize non-strategic assets.

To read the full report: UNITECH


Tata Steel‘s standalone 3QFY10 adjusted PAT grew 98% YoY to Rs11.8b (v/s est. of Rs11.5b). Reported PAT of Rs11.9b included Rs1.7b of gain on the sale of investments (accounted in other income) and Rs1.5b of net loss primarily due to a swap of CARS (accounted in other expenditure).

Net sales increased 12% QoQ to Rs63.8b due to a 10% sales tonnage increase to 1.6mt and a 2.5% increase in realizations to Rs36,534/ton. Sales tonnage during December jumped exceptionally due to strong apparent demand at the end of destocking. Revenues from the steel segment grew 31% YoY to Rs58.3b. Revenues of ferro alloys (FAMD) increased 39% to Rs5.2b.

EBITDA increased 20% QoQ to Rs23.1b (v/s est. of Rs23b). EBIT of FAMD grew 59% QoQ (down 21% YoY) to Rs1.1b. EBITDA per ton of saleable steel increased by Rs1,061 QoQ to Rs13,725/ton due to an increase in realization and expected decline of raw material costs due to lower coking coal costs. However, staff costs were sequentially higher by Rs1.3b.

Tata Steel India is expected to see 10% volume growth in FY11 due to a ramp up of existing capacity. FY12 volume growth will be driven by brownfield expansion to 10mtpa. Corus’ operations are expected to turn around due to a reduction in coking coal costs and buoyancy in steel prices. The Teesside plant’s future remains uncertain due to political pressure. Corus has announced a price increase of GBP60/ton on long products.

To read the full report: TISCO