In view of the Sino-US trade war and the perceived weakness in China’s economy, there is an ongoing trend of fair values being trimmed by analysts.
In a recent report issued by OCBC Securities, the research house trimmed the fair value of 4 stocks with Sino Biopharmaceutical facing the most severe cut.
- KWG Group Holdings Limited (1813 HK):
In its report, the analyst feels that the outlook is positive but management leans more towards the conservative. While the sales target of Rmb 65 billion for FY18 could be achieved, the report painted a bullish picture by target a 38% year-on-year revenue growth to Rmb 90 billion in FY19.
In addition, the selective loosening of property cooling measure on a city-by-city basis augurs well for KWG. With a sizeable landbank in Guangzhou and willingness by the Chinese government to allow larger mortgages, the analyst expects these factors to positively impact the operations despite cooling measures remaining in the near term.
The report also cited a dip in gearing from 77.3% in 1H18 to the 70%-75% range at the end of FY18 to be favourable despite an increase in interest cost.
On the flip side, the analyst warned that the depreciating Rmb versus the USD and the volatility in the markets could dampen sentiments. The fair value has been dropped from H$12.50 to HK$10.52 based on the earnings multiple of 5.5X.
- Agile Group Holdings (3383 HK):
Agile Group is expected to miss its full-year 2018 sales target of Rmb 110 billion although it could still hit Rmb 110-120 billion in FY19. The Hainan Island developer is diversifying into other regions and this could put pressure on margins. In addition, its focus on Zhongshan where recent land tenders have been lacklustre, have seen Agile more cautious in replenishing landbank.
Its gearing remains on the high side at around 90% but the negatives have been largely discounted. The analyst expects headwind to taper off after some time while selective loosening of property cooling measures has been supporting the share prices of developers in general.
At FY19F P/E of 5.5x, its fair value has been cut from HK$17.00 to HK$12.86.
- Shangri-La Asia (69 HK):
Expectations of the hotel group has been revised owing to signs that revenue per room (RedPAR) is slowing down as a result of trade war uncertainties as well as weakness in the Rmb.
As China remains an important market for the company with Shangri-La’s mainland Chinese hotel assets contributing 49% of the group’s hotel EBITDA and 31% of the group’s EBITDA across all segments in FY18, weakness in the key market led the analyst to downgrade expectations.
As a result, Shangri-La Asia’s target price based on a sum-of-the-parts valuation method has been slashed to HK$16.40 from HK$20.00. However, it was highlighted that institutional investors have started to notice value in this counter but warned that it is a volatile stock while a BUY call remains.
- Sino Biopharmaceutical (1177 HK):
The report cites the company operating in a challenging environment whereby new policy changes have impacted its operations. Reflective of this, the MSCI China Health Care index fell from 174.69 on 13 Dec 2018 to as low as 151.74 on 27 Dec 2018, a decline of 13.1% over 10 trading sessions. As a result of this, the index has shed a total of 27.1% from the start of the year.
In addition, the earnings outlook has deteriorated due to lack of visibility on which products will be on the affected list and the potential impact on longer term sales and profits from these products.
Sino Biopharmaceutical posted a nine-month net earnings of Rmb2.2 billion, up 22%, while revenue rose 37% to Rmb15.7 billion. As sales of new products accounted for about 18.1% of its revenue margins could be compressed owing to changes in its operating environment.
The analyst pared its valuations down to 18x, reflecting the cut of the MSCI China Health Care index from 31x to 19x, giving Sino Biopharmaceutical a price target of HK5.45.