Friday, October 12, 2007

korean equity

korean equity

Friday, October 5, 2007



There are tentative signs of developed-economy slowdown outside the US. Those signs may not reflect the transmission of US weakness to the rest of the world; instead, growth may be slowing independently, due to tighter policy in other important economies. In other words, this may not be a matter of economic coupling, but the major developed economies may continue to be synchronized. A few thoughts:
First, I continue to believe that for investors (as distinct from economists), the coupling/decoupling debate is a sideshow: Regardless of the economic linkages, the recent correction has again demonstrated that markets remain highly coupled. As a result, if there is a US recession that leads to a bear market in US assets, then risk assets everywhere would suffer whether or not the economies prove to be coupled.
Second, while the evidence for now supports the view that the emerging economies have been able to decouple from slower US growth, the decoupling hurdle would be significantly higher if growth started to slow in Europe and Japan. In that scenario, the issue would be whether the emerging economies can decouple from a broad-based OECD slowdown.
Admittedly, the rest of the world has coped well so far with slower US growth. While overall OECD industrial production is growing at a moderate pace, production in the major emerging economies remains at cycle highs (Exhibit 1). More impressively, production has remained strong in the face of a material slowdown in US import demand (Exhibit 2). It's also notable that for the first time in 20 years, Asian exports have accelerated at a time when US manufacturing orders have slowed (Exhibit 3).


What's New: Coming weakness in US capital spending, and thus at some US capital goods producers, likely will reflect slower growth and tighter financial conditions. Despite those headwinds, strong global demand and a weaker dollar will continue to support the top and bottom line for many high- and low-tech companies.
Conclusions: US capital spending discipline has limited the growth in and sustained "pent-up" demand for US business investment in this expansion. The resulting lack of excess will limit the near-term downside risks and help avert a capex recession. And that discipline should pay off in 2009, when we expect the housing recession to end and the economy to re-accelerate.
Market Implications: Weakness in capital spending will intensify recession fears. But it may also revive the debate over US productivity, potential output, and inflation risks, making a sluggish US economy appear more stagflationary. That may be a recipe for a bearishly steeper yield curve and a challenge to risky assets. Nonetheless, these developments continue to favor outperformance at capital goods producers with high global exposure.
Risks: Even a mild capex downturn could knock half a percentage point off an already-weak prognosis for US growth. Investors may also worry that capital discipline has swung too far towards corporate anorexia, making the domestic portion of US businesses less attractive than their global peers. Relative to our anemic baseline forecasts, however, strong gains in US exports create upside risks to the US outlook.


Earnings growth estimates for 2007 have been reduced from last week's: Earnings growth estimates for 2007 for the MSCI Asia-Pacific Free ex-Japan index were at 14.9% YoY (vs. 15.3% last week), based on bottom-up IBES consensus estimates. Downward revisions were led by Taiwan (-1.8 ppts) and Korea (-1.1 ppts). By sector, Capital Goods and Consumer Durables & Apparel were cut by 4.4 ppts and 3.7 ppts, respectively. See pages 2-6 for details, Also see pages 11-20 for revision trends.
MSCI AC Asia Pacific ex Japan US$ Index increased by 25.3 index points (5.0%) last week. The leading movers are MSCI Australia and China, which contributed 8.4 and 6.7 index points, respectively. Over/Under Contributors: Based on the index weight, MSCI Australia should have contributed 7.2 index points and China, 4.2 index points out of the 25.3 regional index movements. They in fact contributed 8.4 and 6.7 index points, respectively, an over-contribution of 1.2 and 2.6, respectively, according to their index size. MSCI Korea, however, under-contributed by 1.9 index points. See page 8 for details.
Chart of the Week:MSCI China and India have the highest PBV in the region, at 4.2 and 4.1, respectively, for 2007E. At the industry group level, Household & Personal Products (9.2) and Commercial Services & Supplies (8.3) are the most expensive.

[GS] Subprime, 4 & loss severity: when bad news becomes good news

From fear and uncertainty to calming policy moves, more
disclosures and the start of loss recognition
We believe reactions to Citigroup’s and UBS’ 3Q07 disclosures, earnings
warnings and MTM losses on MBS, CDOs, CLOs, leveraged loans suggest
markets are progressing from fear/uncertainty to damage assessment and
loss recognition, helped along by the Fed’s earlier moves to inject liquidity
and cut rates to prevent markets seizures and the economy from derailing.

Eye of the storm, or at the cusp of recovery? Some reset risks, too
Four factors make us uneasy to fully embrace “at the cusp of recovery”
views and an outright positive stance on the entire sector: (1) US
subprime/property markets as sizable, long-tailed, slow-motion underlying
problems; (2) risk of far higher-than-expected loss severity on subprime
NPLs; (3) knock-on macro impacts of these and rising levels of mortgage
loans in negative equity; (4) some risk of 2008 revenue/earnings resets.

Meaningful but manageable collateral damage for some in Asia
Two large US/Euro banks/capital mkts players have initially taken sizable
10%-15% haircuts on senior AAA-rated high-grade CDOs and MBS, with
the risk of higher haircuts for Asia financials if holding lower-tranche
paper, or if underlying loss severity proves high as feared. Assuming 40%
impairment losses on disclosed sub-prime CDO/ MBS/SIV exposures, we
estimate losses as % of 2007E PPOP at 82% for CIFH, 77% for Shin Kong,
42% for Cathay Fin, 31% for BOC, 27% for DBS.

Path of least resistance still the best
We prefer franchise names in solid-growth markets with minimal CDO
exposures, particularly in the China, HK, India, Indonesia banking sectors.



In the global emerging markets strategy team we recommend taking some profits following exhilarating performance by MSCI EM over the last five weeks. We are reducing our equities overweight by 2% — going from 6% over benchmark to 4% over benchmark. We are raising our recommended cash weighting back to a level of 4% (just below our neutral level of 5%).
We think MSCI EM is starting to look technically overbought: It has risen by 23% since mid-August and is at a new all-time high. It is trading at an unusual distance of 19% above its 200-day moving average.
The fact that consensus has moved so quickly towards our core bull thesis of EM decoupling worries us. EM valuations are starting to become a concern, although earnings growth expectations remain firm. The MSCI EM trailing P/E (18.5 times) is now 12% above is 15-year average and at a 10% premium to MSCI World. Trailing price/book has also reached 3.0 times — it has been higher only three other times in the past 15 years. But the earnings cycle in EM remains strong, and some forward-looking valuation metrics are still below previous peaks.
Finally, we are also concerned that China A and H share valuations are at previous peak levels. Given that MSCI China is now the largest market in the MSCI EM index, we think any sharp sell-off in Chinese equities could cause investors to question growth momentum of the asset class as a whole, especially as China’s growth underpins our thesis of strong decoupling and commodity prices. But there are good reasons to think any impact would be temporary. We remind investors that not all equity bull markets end in bubbles and not all bubbles end in recessions. China’s bull market has deep underpinnings. Impact on economic growth in China from a fall in share prices could be less pronounced than anticipated.
Our core long-term bull thesis tells us to remain overweight EM equities. We have made two changes in our focus list: Adding Lonmin (£36.49) and MMK ($15.15) and removing Corporacion GEO (M$47.81) and Samsung (W573,000).

Coming weakness in US capital spending, and thus at some US capital goods producers, likely will reflect slower growth and tighter financial conditions. Despite those headwinds, strong global demand and a weaker dollar will continue to support the top and bottom line for many high- and low-tech companies.
Discipline should pay off in 2009. US capital spending discipline has limited the growth in and sustained “pent-up” demand for US business investment in this expansion. The resulting lack of excess will limit the near-term downside risks and help avert a capex recession. And that discipline should pay off in 2009, when we expect the housing recession to end and the economy to re-accelerate.

Weakness in capital spending will intensify recession fears. But it may also revive the debate over US productivity, potential output, and inflation risks, making a sluggish US economy appear more stagflationary. That may be a recipe for a bearishly steeper yield curve and a challenge to risky assets. Nonetheless, these developments continue to favor outperformance at capital goods producers with high global exposure.
Even a mild capex downturn could knock half a percentage point off an already-weak US growth prognosis. Investors may also worry that capital discipline has swung too far towards corporate anorexia, making the domestic portion of US businesses less attractive than their global peers. Relative to our anemic baseline forecasts, however, strong gains in US exports create upside risks to the US outlook.

An aggressive US Fed has five implications for Asia-Pacific equities: 1) liquidity conditions will become more positive; 2) the PBoC becomes key in containing regional overheating pressures — so far, it appears to be succeeding; 3) downside risks to US growth are more moderate, but we only foresee a U-shaped recovery; 4) Asia-Pacific currency appreciation is likely to accelerate; and 5) risk appetite is likely to rise. We conclude: Stay invested; stay domestic; focus on financials, property and consumer; and avoid exporters.
US liquidity fuel on Asian liquidity bonfire: The Fed is likely to become moderately accommodative. This will add to Asian liquidity conditions, which are already very positive.

The PBoC will be key to containing overheating pressures: Excluding food, inflation appears contained in China. Five rate rises and seven reserve requirement increases should help contain inflation expectations.
US growth – less downside risk, but U-shaped recovery: A pre-emptive Fed should reduce recession risks. But monetary policy is unlikely to induce a powerful recovery. We see a U-shaped US recovery.
Asian currency appreciation to accelerate: Cost of carry for Asian currencies should fall. Together with strong fundamentals, we see a stronger, 7–10% upside.

Rising global risk appetite: Risk appetite is only back to average levels. We see more upside.

Battery Plant Fire -ve for LCD/Memory

Investment Conclusion
The production stoppage at Matsushita Battery Industrial's Osaka plant will
likely have a negative impact on LCD IT panel prices and memory prices.
According to our analysis, MBI's Osaka plant makes up 14% of global lithium-
ion notebook battery demand, translating into about 4mn packs for the next
quarter. The production stoppage at the plant essentially will reduce global
notebook battery supply by at least 4mn units in 4Q07, or 14% of global
demand based on our calculations.

*  On decreased notebook shipment expectations, we think that LCD makers will
transition some of their notebook capacity into monitor panel lines. While
the transition takes place, we expect LCD notebook panel prices to drop first.
The additional monitor panel capacity should accelerate monitor panel ASPs
drop during the upcoming price-fall season from November 2007 to February
2008. For memory, we believe that the already weak DRAM market will be even
more negatively affected in the short term as 4Q NB shipments are likely to
be lower than expected. Nonetheless, we maintain our view on industry
fundamentals and continue to expect that 1Q08 will be the bottom for the
*  Essentially, the fire incident at Matsushita battery plant further
bolsters our pricing assumptions for the LCD industry. During the next price-
fall season, we expect monitor panel prices to drop by 25%, notebook panels
by 15% and TV panels by 5%.
*  According to our channel checks, MBI's largest customers are Toshiba and
Acer.  In terms of MBI's client breakdown,   Toshiba (3-Underweight, covered
by Steven Myers) accounts for 27% of MBI's total notebook battery shipments,
Acer (1-Overweight, covered by Alex Yang) 20%, and Dell (2-Equal weight,
covered by Harry E. Blount) 13%.  The lithium-ion battery market for
notebooks has been experiencing a serious shortage.  Considering some
notebook makers' high dependency on MBI, notebook panel shipments could take
a big hit going forward.
*  If we assume that NBPC production decreases by 13% as a result of the
battery plant fire, this would make up around 5% of total PC production in 4Q.
Under this scenario, this may impact 13% of DRAM used for NBPCs, or 5% of
DRAM for total PCs.  Taken as a whole, this may impact 3% of total DRAM for
the quarter.
*  The rechargeable battery industry has been experiencing a shortage
following a series of recalls due to safety issues.  The MBI fire incident
will likely further tighten the shortage situation in the notebook battery
market.  As a result, we expect ASPs of rechargeable notebook batteries to be
strong going forward.
*  We once again recommend investors accumulate LCD names in December 2007,
when most of the seasonal price declines would have taken place.  Our
expectation of very tight supply in 2008 remains intact.

Fire at Matsushita's battery plant, negative for IT panel prices
According to Bloomberg, Matsushita Battery Industrial (MBI) halted production
of lithium-ion batteries at a factory in Osaka after a fire broke out on
September 30. MBI has lithium-ion battery plants in Japan and China. MBI's
global production capacity is 23mn cells per month based on 3Q07 capacity,
and the Osaka plant's capacity is 18mn cells per month (11mn for cylindrical
battery cells and 7mn for prismatic batteries for handhelds). In terms of
notebook battery capacity, the Osaka plant accounts for 84% of MBI's total
battery production capacity. According to our analysis, MBI's Osaka plant
makes up 14% of global cylindrical lithium-ion notebook battery demand,
translating into about 4mn units for the next quarter. Our checks with
battery industry sources indicate that the line recovery will likely take at
least three months; it could take longer if the line test takes longer.

We believe that the production stoppage at MBI's Osaka plant will have a
somewhat negative impact on the overall IT sector, including the LCD industry
and memory chip industry for the rest of 2007. The rechargeable notebook
battery market has been suffering a shortage. As a result, we forecast this
fire accident could reduce global notebook supply by 14% or 4mn units,
assuming three months of line stoppage.

While the fire incident will likely have a negative impact on LCD panel and
DRAM prices, we expect ASPs of rechargeable notebook batteries to remain
strong going forward.

The notebook battery industry's supply has been very tight. As a result,
notebook makers who depend on MBI for batteries will likely face further
difficulties in securing battery supply. This should decrease overall
notebook unit shipments. According to our industry checks, MBI's top clients
are Toshiba and Acer.

With decreased notebook shipments, LCD panel makers should experience more
aggravated slow seasonality, further bolstering our aggressive assumption of
25% monitor panel ASP drop during the upcoming price-fall season (from
November 07 to February 08). LCD makers will likely reallocate some of their
notebook production capacity to monitor panels, as they expect notebook
shipments to decline on battery shortage. This should aggravate monitor panel
oversupply during the upcoming price falling season, and accelerate ASP

On the flip side, we expect ASPs for cylindrical lithium-ion batteries to be
stable and strong. As the battery industry was already experiencing a
distinct shortage on quality issues, we think that there is no direct
beneficiary as a result of the fire. However, tighter supply in the market
should increase or maintain overall notebook battery ASPs.

Impact to DRAM Further Short-Term Negative
If we assume that NBPC production decreases by 13% as a result of the battery
plant fire, this would make up around 5% of total PC production in 4Q. Under
this scenario, this may impact 13% of DRAM used for NBPCs, or 5% of DRAM for
total PCs. Taken as a whole, this may impact 3% of total DRAM for the quarter.

According to our Taiwanese analyst, Alex Yang, he expects NB ODMs to record
shipment growth of 5-10% QoQ in 4Q07, below the historical 15-25% growth due
to component makers' capacity limitations.

We note that the DRAM market hit a peak in end-06, showing a downward trend
until the three-month rebound from May 07. After the short rebound, the DRAM
market began to show another decline from August. In light of the battery
plant fire, we believe that the already weak DRAM market will be even more
negatively affected in the short term as 4Q NB shipments are likely to be
lower-than-expected. Nonetheless, we maintain our view on industry
fundamentals and continue to expect that 1Q08 will be the bottom for the

Notebook supply decline to accelerate seasonal LCD price fall from November
According to our analysis, the fire incident will reduce global notebook
battery supply by 4mn units in 4Q07, or 14% of global demand. Currently, LCD
makers are enjoying very high margins in the notebook panel business. However,
we conclude that the decreased battery supply will likely negatively impact
notebook panel prices first, as panel makers reallocate their notebook
capacity to monitor production. The time it takes for panel makers to
transition a notebook line into a monitor line is about a month. During the
transition time, we expect notebook panel prices to decline. The next impact
will be on LCD monitor panels. We expect the additional monitor panel
production capacity should accelerate monitor panel ASP drop during the
price-fall season from November 2007 to February 2008.

Essentially, our ASP drop assumption during the upcoming price-fall season is
intact; a 25% drop for monitor panels, a 15% drop for notebook panels, and a
5% fall for TV panels. The fire incident at Matsushita battery plant further
supports our assumptions considering: 1) the plant caught fire on September
30, and 2) LCD makers would need to spend about one month transitioning some
of their notebook lines into monitor lines, early November is when the
additional monitor panel capacity would come into effect. Early November is
when we originally expected the seasonal price fall to begin. Overall, the
14% notebook supply decrease on the fire incident should translate into a 7-
8% monitor panel supply increase in 4Q07, as the average monitor panel size
is bigger than that of notebook panels.

We forecast the additional monitor panel capacity to drag monitor panel
prices by about 3%. If the fire broke out during a high demand season, there
would have been no material impact on overall panel prices. Unfortunately, we
think the monitor supply increase on the fire incident is taking place when
the LCD industry is on the verge of entering a price-fall season. We have not
modified our panel price estimates. We simply have become more confident on
our price cut assumptions.

We recommend investors accumulate LCD names in December 2007, when most of
the seasonal price declines would have taken place. Our expectation of 2008
exhibiting very tight supply is still intact.

We expect some notebook makers to face difficulties in securing batteries
According to our channel checks, MBI's customer base includes major global
notebook makers, such as Toshiba and Acer. In terms of MBI's client breakdown,
Toshiba accounts for 27% of MBI's total notebook battery shipments, Acer 20%,
and Dell 13%. The lithium-ion battery market for notebooks has been
experiencing a serious shortage. Considering some notebook makers' high
dependency on MBI, notebook panel shipments could take a big hit going

Acer, in particular, sources about 40% of its panel needs from Samsung
Electronics, 40% from LG.Philips LCD and 20% from AU Optronics (2-Equal
weight, covered by Naiwen Kerr). We think these panel suppliers should also
experience material notebook panel shipment declines as well.

Figure: MBI's Client Breakdown

Source: Lehman Brothers estimates

Strong notebook battery prices
The rechargeable battery industry has been experiencing a shortage following
a series of recalls due to safety issues. The MBI fire incident will likely
further tighten the shortage situation in the notebook battery market. As a
result, we expect ASPs of rechargeable notebook batteries to be strong going

[GS] Powertech Technology (6239.TW): Record high Sept. sales at NT$2.17bn, despite DRAM weakness

What's changed

Powertech (PTI) reported record high September sales of NT$2.17bn, up 4.3%
mom and up 39.1% yoy.  3Q2007 sales of NT$6.2bn, up 12% qoq, came in 2.6%
higher than GS estimate of NT$6.1bn.  We believe the main reason PTI
continues to outperform despite DRAM industry weakness is mainly a result of:
(1) testing time extension for 70nm technology products; (2) CAPEX
discipline leading to industry capacity shortage. 


PTI's capacity is currently running at 100% utilization due to incremental
demand resulting from 70nm technology migration from PTI's major customers,
such as Elpida, ProMOS and Rexchip.  As a result of memory back-end
discipline on capacity expansion, PTI was able to enjoy a slight ASP hike in
3Q and also to negotiate with customers for a flattish ASP settlement qoq in
4Q.  In addition, according to Bloomberg (Oct. 04, 2007), Elpida management
has publicly announced that it will reduce the numbers of chips sold into the
spot market.  This will also remove investors' concerns of a repetition of
2Q2007 earnings softness, when most of PTI's customers were dumping Ett/Utt
DRAM chips into the spot market resulting in a sharp reduction in testing
times.  On the back of strong demand, we would expect PTI revenues to grow in
4Q2007E by another 10% qoq.  We expect PTI to deliver its guidance of gross
margins of around 30%-32% for both 3Q and 4Q.  


We maintain our Neutral rating, but raise our 12-month target price to NT$157
(3.9x 2008E P/B), from NT$139.2, to reflect better earnings growth momentum,
and have raised our 2007E EPS by 17.7%, 2008E by 5.4% and 2009 by 8.7%. 

Key risks

Faster than expected DRAM pricing decline with more customers shifting to
Ett/Utt chips in the spot market. 

Empas - Met with the CEO of Empas

We sat down with the new CEO of SK Communications, Mr. Shin Cho the other night.  This was actually during SK Telecom's Analyst Day and we were lucky enough to be seated on the same table during dinner (we requested it obviously).  Mr. Cho, is currently heading SK Telecom's Internet & Media Group but once the merger is consummated between Empas and SK Coms on November 1, 2007, Mr. Cho will become the co-CEO of SK Coms along with Mr.
Park Sang Joon originally from SK Coms.  The current CEO of SK Coms, Mr Yu Hyun Oh, will re-join SK Telecom and head the US operations, both Helio and Cyworld of the US.

Main takeaways:

1) Mr. Cho will be in charge of strategy while Mr. Park will mostly oversee operations.
2) SK Coms decided to completely merge with Empas sooner than later because once the synergy is realized, Empas' value would have been too high for SK Coms to buy later.
3) Mr. Cho was very optimistic about Empas synergy with SK Coms (Cyworld and NateOn) and was confident that search ad market share would increase going forward.  Right now, users are led directly to Empas from Cyworld homepage, but once the merger completes, NateOn will also carry Empas'
search box along with all the minihompys.
4) Mr. Cho believed that SK Coms now has all the parts to succeed and grow.
Future acquisitions will only be targeted on key start-ups with break-through technologies.  Nothing major in acquisitions.
5) The CEO also confirmed that Etoos sales have hit an inflection point but he still believes there is much work left to do.
6) On Cyworld, Mr. Cho was a bit conservative and said that HappyClick is in still in early trial.  (However, our channel check confirmed that roughly 1.5m active users have signed up already.) Cyworld overseas is taking a bit more time than expected.
7) On mobile search market, Mr. Cho agreed with our view that there is tremendous opportunity for both Empas and, considering SK Telecom presence in Korean wireless market.
8) Mr Cho also pointed out that there are many ways SK Telecom can support SK Coms...  Did not get into much details here.

Our Two Cents:

We had no prior interaction with SK Coms management team before we met Mr.
Cho, so the meeting was actually a relief since we were done with the initiation report (sent to editing) and most of what Mr. Cho said more or less confirmed our views.  Here is the full PDF report.  Sorry for the delay.

UBS Semiconductor Research: H1 Oct PC DRAM ASPs to fall 20%

Memory Semis Update H1 Oct PC DRAM ASPs to fall 20%

* DRAM oversupply to continue to push down ASPs:
  * We expect H1 Oct DRAM ASPs to fall roughly 20% to US$32/1GB module.
  PC OEMs will likely take DRAM delivery in a 20%/80% split in H1 vs. H2
  Oct leaving more downside for H2 Oct ASPs. MU indicated that MB/PC
  growth has been slowing and that it intends to regain market share.

* Waiting for marginal DRAM players to push back capex:
  * We expect ASPs to reach  marginal  player’s leading edge fab cash
  cost  in Q408 at around US$1.30/512Mb. DRAM makers are coming off 4
  strong years of profit and may resist capex cuts at early stages of
  cash cost resulting in more ASP downside. We believe Elpida and Hynix
  planned reduced supply to the spot market alone may not have a
  meaningful impact on ASP trend in Q4.

* H2 Sept NAND SLC/MLC ASPs fell 5/15% from H1 Sept:
  * More successful ramp of 50nm and card maker reluctance to build
  inventory has helped push NAND contract ASPs down. We continue to
  expect seasonal demand slowdown towards the end of Q4 as Hynix and SEC
  ramp new capacity and improve yields.

* Maintain caution on memory semiconductor sector:
  * We rate more diversified NAND makers SEC and Hynix Neutral and more
  pure DRAM makers Powerchip, ProMOS, NTC, and Inotera Sell. We believe
  SEC and Hynix should benefit from relatively better NAND profitability
  and lower cost structure from more successful sub 70nm DRAM migration.

NCsoft (036570.KS) Sell: Take profit on full valuation; Downgrading to Sell

Downside risk #1: Mixed outlook for Tabula Rasa
Previews to date for Tabula Rasa have been mixed, with a recent preview from citing lack of “addictive” game play as a potential weakness for the game.
We believe the recently announced two-week delay in commercialization of TR is largely
attributable to the company attempting to better address the game-play issue prior to
game launch. We believe addictive game-play is a critical success factor for any MMOs
and see the recent development as a potential risk to the game’s success.
We currently forecast W57bn in 2008 revenues, compared to W53bn for Guild Wars in 2006.
We believe Guild Wars is a good reference point for Tabula Rasa due to similarities in
“instanced MMO game play” and thus cater to a similar gaming audience; we believe the
difference in profit model (subscription base for TR, box sale for GW) should be irrelevant
in the first year of TR’s launch.

Downside risk #2: L1 and L2 revenues may disappoint
As we’ve highlighted in our recent comment on September 18 (“3Q07 likely difficult for L1
& L2 revenue; PC café regulation marginal”), recent discussion with company suggests
that L1 revenues are likely to be slightly down qoq despite stronger seasonality as
management indicates that account base has stabilized but not recovered.
While L2 may have seen an increase in accounts following the launch of its expansion
Kamael, we believe 3Q is unlikely to see a boost in revenues as we suspect the increase in
accounts has largely drawn a pool of users attracted to the 100 hrs of free play.
We regard L1 and L2 as cash cow games that offers some anchor and stability in earnings
that justifies NCsoft’s higher valuation multiple than more volatile and faddish casual
game stocks. Worse-than-expected declining revenues in L1 and L2 could, over time, be a
factor for investors to start ascribing NCsoft with a lower multiple.

Downside risk #3: knock-on delays to other smaller titles
Recent delays in delivery of Aion and TR have arisen from development issues with game
play rather than bugs. While we acknowledge delays in game production is common, we
believe there is an increased risk factor that we should attribute to game development
management, since the success-critical game play issues are arising so close to
commercialization. Thus, we believe there is possibility that the problems with game
development management could bleed into production of smaller/later game titles. We
have also trialed the company’s smaller titles such as Dungeon Runner and believe
monetization may be less robust than previously expected. We have thus taken down our
casual and other game revenues from a combined W44bn to W18bn for 2008, a 5.6%
reduction in total 2008 revenue forecast.

NCsoft is trading at 22X forward EPS, which we believe fully values the business outlook
for 2008. We see the potential for either multiple contraction and/or downward revision in
earnings estimates around 3Q earnings should 1) L1/L2 revenues disappoint and/or 2) TR appears to be less successful than expected. We note global online game peers are trading
at an average of 20.2X forward earnings.

We believe there is also liquidity driven risk for NCsoft, should a disappointment in growth
outlook lead to a sharp and rapid decline in share price as investors scramble to exit the
stock. We recall that poor 1Q06 results and downward revisions to full year guidance led to
a 36% share price correction over one month in May of 2006, which we believe was fueled
by an initial share price correction that prompted more selling as investors tried to exit

China Life - Stil the one

Following our recent decision to upgrade our valuation assumptions for Ping
An (2318 HK, HK$103.10, Neutral, TP: HK$95), we have applied consistent
inputs into our China Life valuation, lifting our target price to HK$50, from our
previous HK$41.50 price target.

Sector due to consolidate: Share prices in the China insurance sector have
increased by between 70% and 90% since 1H07 results were reported in mid-
August and have doubled since our China report, The Rising Tide, was
published at the start of June. With valuations at especially-stretched levels,
we believe the insurers are due to consolidate and we have downgraded the
sector weighting to Neutral (from Overweight).
China Life offers best value: Within a Neutral sector weight, China Life
offers the best exposure, in our opinion. Using actuarial valuations, we believe
China Life is 15–20% cheaper than Ping An while its exposure to a reversal of
equity markets (the key risk for the sector) is estimated to be equal or lower
than its peers, in terms of earnings and value.
Catalysts for relative performance: We believe confirmation that VNB
growth trends remain strong and deployment of surplus capital will be the key
drivers of relative performance for China Life. In particular, we believe fears
about weakening premium growth in monthly disclosures are overdone. The
softer premium trends reflect a one-off period of adjustment where renewal
premiums are weak due to a maturing product and Hongxin premium payment
plans. New business volume remains solid, and business mix continues to
improve, paving the way for VNB growth above 20% for 2007, in our opinion.

Earnings revision
No change.

Price catalyst
12-month price target: HK$50.00 based on an Appraisal value methodology.
Catalyst: Near term, QDII and QDRI reforms. Long-term, higher investment
returns, strong earnings and value growth and deployment of surplus capital.

Action and recommendation
Given the run-up in sector share prices, we recommend a pragmatic
approach: retain weightings, but look to take some risk off the table. While we
worry about valuations, the growth credentials of the sector remain extremely
strong in terms of both organic expansion and M&A.
We retain an Outperform recommendation with 10% upside to our HK$50
target price. China Life remains our top pick in the China insurance sector.

JPMorgan - Bank of China; Korea Investment Holdings; Mirae Asset Securities; Banking Sector; Macquarie Bank

China: Bank of China
Operating improvement in mainland may offset subprime loss; we upgrade the H-share to Neutral
We upgrade BOC-H to Neutral, in light of the widened valuation gap with its peers and potential narrower A-H valuation gap going forward. We believe market concerns on subprime woes have retreated, although have not been entirely dismissed.

South Korea: Korea Investment Holdings (Overweight)
Negatives are priced in; we reiterate OW—SOTP valuation included
We view recent share price weakness as a good buying opportunity: Since June-07 KIH’s share price has underperformed the KOSPI and Korea securities index by 21% and 28% respectively. We believe the underperformance is largely due to: (1) KIH’s weakening mutual fund sales growth; and (2) lack of share price catalysts from non-operational drivers such as M&A of regional banks and life insurers. We believe the above negatives are fully priced into the stock and the recent weakness provides a good buying opportunity.

South Korea: Mirae Asset Securities (Overweight)
We remove the stock from AFL, but remain Overweight
We remove Mirae Asset Securities (MAS) from our Asia Analysts’ Focus List (AFL): As MAS’s share price has soared to our previous price target, we remove the stock from our AFL. The stock has outperformed KOSPI by 25% over the past month.

Australia: Banking Sector
Labour Unlikely To Budge Four Pillars
In recent times BOQ CEO David Liddy (refer First To Market March 20), WBC CEO David Morgan (refer Reuters September 12) and ANZ CEO John McFarlane (refer Dow Jones September 11) have all called for an end to the existing “4 Pillars” prohibition on mergers between Australia’s 4 major banks. We believe any expectation of accelerating M&A activity is overdone and continually speculated upon by banks given their respective interests.

Australia: Macquarie Bank (Overweight)
MBL Model Holding Up
Perceptions that prevailing credit market conditions provide a fundamental challenge to the MBL business model are being addressed by some recent transactions. Specifically: 1. While MBL acknowledge that velocity of capital has slowed, deals are still being done. MBL have recently been announced as the highest bidder for a S$2bn (A$1.5bn) land parcel at Marina View in Singapore, and have lodged a Summary Of Proposed Investment for a US$1bn Macquarie India Infrastructure Opportunities Fund. Media reports also indicate that MBL are currently assessing a KRW20tr (A$24bn) project to develop a business district in central Seoul, South Korea (Reuters 21 Sept), and are sounding out interest for a A$20bn takeover of BXB in conjunction with AIO (AFR 26 Sept).

Australia: National Australia Bank (Underweight)
Senior Executive Changes Open Path For Succession
Yesterday, NAB announced several changes to key management positions: (i) Michael Ullmer, current CFO, has been appointed Deputy CEO, (ii) Mark Joiner, current General Manager Development and New Business, has been appointed CFO, (iii) George Frazis, current General Manager Business and Private Banking, will replace Mark Joiner as General Manager Development and New Business.



To get bearish equities requires earning downgrades. As I've discussed before, I think we have an earnings bubble, not a PE bubble, and what will pop an earnings bubble is growth and earnings downgrades. The question is: how big do the downgrades have to be?
That's a pertinent question because, historically, equity markets have coped well with downgrades. In fact, the past 25 years has seen persistent earning downgrades with persistent equity gains. Exhibit 1 shows 3-month revisions to the one year-ahead consensus forecasts for S&P500 earnings per share and S&P performance.
Consensus forecasts have an astounding history of being wrong. Exhibit 5 (on page 2) shows the full history of IBES consensus EPS forecasts for the S&P500, with the initial forecast for each year set to 100. Forecasts were downgraded without exception every year up until 2005. Remarkably, the consensus forecasts were initially upgraded only twice, in 1990 and 2001, both of which proved to be recession years.
In that context, the recent history of upgrades is exceptional: 2005, 2006 and, it seems, 2007 were the first 3 years ever to see sustained upgrades. Why analysts turned from perennial optimists to perennial pessimists is unclear. It may be embarrassment, or the Spitzer blow-torch - or it may simply be that the cycle has been unexpectedly strong. Certainly, the link between revision to year-ahead forecasts and cycle indicators, such as the ISM index, has remained intact (Exhibit 2).
This raises one question, however: while investors may have been able to cope with downgrades when downgrades were the norm, will they be more sensitive to downgrades after four years of persistent upgrades? I don't have a strong view on this - I only flag it as an issue that will need to be tested.


China - Sep Money Supply (Oct 9-16) & Sep Actual FDI (Oct 11-17): We expect that money supply (M2) growth in September may have slowed to below 18%YoY from 18.1% in August, reflecting a series of monetary tightening measures taken by the PBOC, including RRR hike and interest rate hike. A below 18% growth should contribute to managing inflationary expectations, as it would be representing a decline in money supply growth in two consecutive months. Looking ahead and based on our reading of the PBOC Monetary Policy Committee 3Q policy statement, we expect further rate hikes, faster appreciation of the Renminbi, and tighter credit in the remainder of the year. Actual FDI inflows in September may have been stable at about US$5 bn. With the economy awash with liquidity, policy implementation in practice has been biased against attracting capital inflows.
India - Aug Industrial Production (Oct 12): Industrial production growth reached 7.1% in July 2007 as compared with 9% in June 2007. Early indicators (two and four wheeler sales) point to 8-9% IP growth in August.
Indonesia - Monetary Policy (Oct 8): Depreciation pressures on the currency have stabilized post the US Fed's 50bps cut. Portfolio flows have normalized and the stock market has rebounded. However, inflationary pressures still remain firm. With the Central Bank having executed on the bulk of its monetary loosening, we believe it is likely to adopt a cautious wait-and-see approach and keep rates on hold for the time being. Further rate cuts would depend on continued recovery in risk-taking appetite, which would have an appreciation effect on the currency and in turn, exchange-rate pass-through to inflation.

G7: Any Gunpowder Behind the G7? In our view, the G7 is unlikely to make any meaningful changes to its statement at its upcoming meeting (19 Oct). Following the escalated rhetoric from European officials, we expect this may come as a disappointment and reinforce the recent trend of USD weakness.
USD: US Stagflation, Global De-Coupling and the Dollar. We don’t believe the US will fall into a recession, or that, when the US economy reasserts itself, inflation will be a risk for the global economy. We challenge the increasingly popular view that the US could fall into a recession and experience inflation. The dollar will likely stay on its back foot for a while, but investors should remember that the dollar is undervalued and ready to appreciate once the economy regains traction.
JPY: Japan Post Is Another Structural Headwind for JPY. The Japan Post privatisation programme will, we believe, have meaningful effects on the financial markets and JPY in coming years. The Yucho Bank and Kampo, two of Japan Post’s key entities, will likely sell JGBs. Kampo will likely raise its exposure to foreign securities and buy more equities. This will form another structural headwind for the JPY.
IDR: The Bad News Behind the Rally. The IDR may be rallying against the USD, but an inflation surprise has taken root in Indonesia. The policy response that Bank Indonesia (BI) now chooses will determine whether the IDR rally will be sustained or not.
ZAR: Beware of Politics. We maintain our cautious stance on the rand due to likely increasing political risk, still-lingering external imbalances and potentially little support provided by the expected SARB rate hike.

Monday, October 1, 2007

Absolute Intelligence: Mooncake Madness


* STOP PRESS: Today was CLSA’s best-ever volume day by a country mile. Granted, part of it may be ‘forum effect’ but a lot of funds are also being reallocated from US/Europe to Asia. Also, today is the first day since this rally really started on August 17th that we saw real sector country rotation from leaders to laggards. Up to now, HK/China/India had been a very concentrated bull market – a bit too concentrated for some appetites. Small and mid-caps remain out of favour, but we are seeing big buy flow into the likes of Sony, Samsung Electronics, TSMC, FIH, Shinhan Financial, Infosys, and Nintendo. We think this diversification into other sectors and countries is a very healthy technical development for Asian markets. Despite all our positive anecdotal stories below on HK property, the reality is the HSP index is sitting on an RSI of 68, is +38% since Aug 17, and we still have over a month until the next FOMC (86% chance of 25bp cut and 14% chance of none). An HSP back-and-fill consolidation at 30-32,000 would be timely and healthy – already been hitting resistance at 32k for the past few days.

* Meanwhile, more worldly concerns were on the minds of local HK property realtors yesterday. Having dim sum with my wife & son yesterday late morning (gotta beat the rush), my wife received a call on her mobile. Then another. Then another. And another. We turned her phone off after that. Overall 50 calls and messages were left on her phone from HK property realtors and end-users/buyers/sellers. My wife & I have been active in the HK soho flat market, buying / fixing up / and then selling or letting to newly arrived bankers / lawyers / accountants / teachers. It appears that the 50bp Fed cut and subsequent 25bp cut by HK banks have stimulated animal spirits. WE THINK THIS STORY HAS ONLY JUST STARTED. * WHY THE HIBOR MARKET IS STILL TIGHT: Since mid-August, the Libor-US Treasury spread has been easing (as commented by Chris Wood), when markets took off and Fed Fund Futures started pricing in a 50bp cut on 18-Sep. However, Hibor rates have not moved down in line with Libor and US treasuries. Meanwhile, the HKD has been strengthening on robust economic growth and cutting prime and deposit rates only 25bps, less than the Fed's 50bps. AI has two theories regarding this: 1) since HK only cut 25bps, it should have attracted global funds for higher HKD yields. This explains the stronger HKD, but not the tight money market conditions, 2) Large Hedge Funds have been borrowing heavily in the HKD money markets as a HKD CARRY TRADE.

* HK HOTELS AS AN INTERESTING SECONDARY ASSET PLAY: Looking into this as these have in past cycles been good inflation plays (see our technical analyst Laurence Balanco’s views on hotel plays attached). Mandarin & Shangri-La lead in performance.

* DULL H-SHARE PERFORMANCE POST-A-SHARE IPOS: With PetroChina gaining approval to list A-shares and CCB (939 HK) listing on Shanghai today, we’ve taken another look at the potential impact on the listed H-shares in the run-up and after a mainland public offer. We first wrote about this in the 21 June edition of AI and observed that while the H-shares do outperform pre- the A-listing they underperform post the IPO. Next up for mainland listing is COSL (expected date 28 Sept) and then Shenhua Energy (9 Oct). We would suggest taking profits on these H-shares just before or on the A-share IPO date.

* BUY THE OLD LADY: On Wednesday, we heard our Alan Chen calling on HFs to buy SEC (005930 KS). There were few responses until today. Alan cited cheap valuations, potential for DRAM bottoming, strength in NAND and 4Q tech seasonality. Of course, today, in one of the biggest turnover day for CLSA, SEC was one of the top net buys on our pad. SEC was up 4.5% and fellow tech laggard Hynix (000660 KS) was up 6%. Further, Hynix today reported that it has stopped selling DRAM through the spot market and is planning to sell only to long-term customers. Hynix pointed out that there is demand from personal computer makers.

* RISK LOVE RETURNS: No matter how one measures the degree of risk appetite present in the financial markets, the appetite appears to have come back to the financial markets in most of the major asset classes. The exhibit below shows the typical “carry trade” cross (AUDJPY, inverted), along with the VIX index, and the European Crossover credit spreads, all showing very similar optimistic dynamics.

* FAST-MONEY BULLETS: regional property, plantations, rubber, SET hidden breakout, FIH

UBS Semiconductor Research: Early DRAM ASP peak raises concern for 2008 (downgrade SEC, Hynix, ProMOs, Powerchip, Inotera, and Nanya Tech)

* Tough DRAM market to continue: ASPs at cash cost; consensus EPS risk:

  * DRAM ASPs could be near bottoming (again), but we do not expect
  profitable ASPs for most DRAM makers until 2008. We think consensus
  EPS estimates are still too high. We now forecast 45%/32% 2007/08 YoY
  DRAM ASP declines. We expect strong Q4 NAND demand, but remain
  concerned over accelerating supply.

* NAND market strong but approaching seasonal demand peak:
  * Despite a slew of positive high-density, NAND-based product
  announcements from Apple, Sandisk, Nokia and others, we continue to
  expect NAND supply growth to overwhelm demand growth in late Q407,
  pushing ASPs down 25% in Q407 and a further 27% in Q108. NAND card
  makers have begun adjusting inventory.

* Proprietary supply demand models point to more near-term risk:
  * Using proprietary UBS models, we lower our 2008 DRAM/NAND ASP
  estimates 2.1%/15% and now expect 7%/2% 2008 DRAM/NAND YoY revenue
  growth. We forecast DRAM makers to expand capacity into H107, despite
  likely increasing losses due, in part, to several years of
  profitability and rising capex.

* NAND makers still likely to fare better than DRAM makers in H207:
  * NAND makers are enjoying improved profits on stable ASPs and
  declining costs, but DRAM makers’ profits could continue to suffer
  into H108. We downgrade our ratings for Hynix and Samsung Electronics
  from Buy to Neutral, and downgrade DRAM makers Powerchip and ProMOS
  Technologies from Buy to Sell, and Nanya Tech and Inotera Memories
  from Neutral to Sell.

JPMorgan Morning Bird's Eye View


  • Stocks were little changed Thursday as investors weighed mixed economic data and prepared to close out the third quarter. Stocks spent most of the day in positive territory, despite a report of another slump in housing sales. Sales of single-family homes decreased by 8.3% last month to a seasonally adjusted annual rate of 795,000, the Commerce Department said. That was below expectations and was the lowest level since June 2000. Data released on Tuesday showed existing-home sales fell 4.3% to a seasonally adjusted annual rate of 5.50 million in August, the lowest level in five years.
  • GM -3.1% after its sharp rise the previous day.
  • Palm Inc +6.3% after the company released a smart phone.
    And More...


  • European shares advanced Thursday, paced by gains in construction companies & airlines, though BMW weakened after revealing a new strategy. FTSE +0.83%, CAC +0.75%, DAX +0.64%, IBEX +0.47%, MIB -0.03%, DJ€50 +0.56%
  • Saint-Gobain +5.2% after French investment company Wendel said late Wednesday that it has built a 6% stake in the company. Lafarge +1.8% ACS +4.1%
  • BMW -1.1% benefited early in the session from a broker upgrade to buy, which said it expects to see significant change as BMW's management take action on costs. In the afternoon, however it revealed a new strategy for the next decade. BMW said its strategy to 2020 will focus on improving profitability and the brand's reputation for premium products, as well as safeguarding its independence.
    And More...


  • Crude oil futures extended prior session gains, surging over 3% on renewed concerns that tropical storms might spell damage for oil installations in the Gulf of Mexico and geopolitical fears linked to the heightened tensions between the U.S. and Iran. The ability of crude oil futures to rally in the face of an unexpected build in U.S. inventories is an important indicator that crude could be poised to make new records.
  • Gold futures closed higher Thursday, getting a boost from a rally in crude-oil prices, as traders digested a mixed bag of economic reports, including a seven year plunge in new home sales.
  • On the LME, prices were broadly higher with lead and nickel the only exceptions. Lead equalled its record $3,520 a tonne amid concerns over tight supplies approaching winter when demand from battery manufacturers rises. Profit-taking subsequently dragged lead 1% lower to $3,420 a tonne.
    And More...

Malaysia Essentials - Macquarie Research Equities

Top stories

Zelan (ZELN MK, RM6.25, OP, TP: RM7.00) – Receives letter of intent for new job, poised for positive news flow?

  • Zelan reported 1H FY08 net profit of RM87.3m (+61% YoY). This includes a gain of RM32m from the sale of 12m IJM Corp shares in May 2007 and a one-off accounting gain of RM10m.
  • The company declared an interim dividend of RM0.025/share and a special tax-exempt dividend of RM0.05/share.
  • Excluding the one-offs, the 1H FY08 result was below our expectations. This is due mainly to the later-than-expected commencement of works to its Shuqaiq 2 power & water desalination project in Saudi Arabia and Rembang power plant project in Indonesia. However, it is more of a timing issue as work has already started on both projects (in June and May 2007 respectively).
  • Zelan, via a 70:30 joint venture, has also received a letter of intent for the construction of Meena Plaza, a mixed development project in Abu Dhabi, worth RM864m.
  • While there is a risk that FY08 net profit could be lower than expected, we continue to believe that newsflow in the next 12 months should be positive for Zelan. The company intends to submit tenders for various jobs worth as much as RM7.5bn in the next six months.
  • We reiterate our Outperform rating on Zelan. We believe the company is well positioned to benefit from capex spending on energy in Asia. The International Energy Agency estimates that to meet their electricity demand, India, Indonesia and the Middle East need to spend about US$26bn pa over the next 25 years on power plant projects.  (Gerald Sheah)

Telekom Malaysia (T MK, RM9.70, OP, TP: RM11.20) – RM15.2bn broadband project

  • Telekom Malaysia has been awarded the RM15.2bn High Speed Broadband (HSBB) services project to be rolled out under a public-private partnership (PPP) with the government. The government is expected to foot a third of the bill, ie RM5bn. The project is expected to be spread over ten years and the aim is for broadband penetration in Malaysia to hit at least 50% of households or 2.2m by 2010. Currently broadband penetration in Malaysia is estimated at 13%.
  • We view this development positively for TM and maintain our Outperform recommendation on TM. At the very least, this move will subsidise a third of TM's broadband network rollout and contribute to the longer term profitability of TM's fixed line business. Elsewhere, we see continued stability in TM's fixed line businesses as well as strength in foreign mobile operations as providing upside catalysts for earnings and valuations. (Prem Jearajasingam)

[GS] Pan-Asia Strategy: Stance-at-a-Glance (Oct Issue) -- Climbing the wall of worry: Gearing up for a strong 4Q

Climbing the wall of worry: Gearing up for a strong 4Q. The start of a Fed easing cycle, coupled with cautious investor positioning, points to further strength for Asian equity markets in 4Q. Within Asia ex-Japan, we prefer China, India, Singapore and Hong Kong, and we remain more cautious on Taiwan and Korea. Interim earnings results may provide a catalyst for Japan to catch up. Across the region, we emphasize growth stocks.

  • Pan-Asia outlook: Further gains ahead. Despite the risk of a near-term pullback in Asia ex-Japan markets given the swift rebound from their August lows, our strategic case remains positive given conservative investor positioning and benefits from a more accommodative Fed. Japan continues to lag the region, but forthcoming earnings results may support a rebound in 4Q. Within Asia ex-Japan, we are overweight industrials, energy, mining, telcos and steel. For Japan, we highlight areas exposed to Asian growth and stocks with potential for positive earnings surprises.
  • Things to watch: earnings, Chinese policies and US macro. Catalysts include 3Q earnings results, China’s 17th National Party Congress, US and EU macro data.
  • Performance: Strong gains. In September, our buy list advanced 9.5% and our funding list rose 2.4% resulting in a positive spread of 708 bp in local currency terms. Ytd, our buy basket has outperformed our funding basket by 27.8 pp.
  • Our Oct buy list: Matsushita Electric Industrial (6752 JP, B), Suruga Bank (8358 JP, B), Hitachi Construction Machinery (6305 JP, B), Murata Mfg. (6981 JP, B*), China Resources Power (836 HK, B*), Angang Steel (H) (347 HK, B*), New Oriental Education & Technology Group Inc. (ADS) (EDU US, B*), Sun Hung Kai Properties (16 HK, B*), U-Ming Marine (2606 TT, B*), Keppel Corp (KEP SP, B), Reliance Industries (RIL IN, B*), LG Chem (051910 KS, B*)
  • Our Oct funding list: Casio Computer (6952 JP, N), Advantest (6857 JP, N), Japan Airlines (9205 JP, N), Sumitomo Bakelite (4203 JP, S), Bank of China (H) (3988 HK, N), iShares FTSE/Xinhua 25 (FXI UN, NC), Netease (NTES US, N), Henderson Land (12 HK, N), Mega Financial Holdings (2886 TT, N), Singapore Press Holdings (SPH SP, S), Honam Petrochemical (011170 KS, S)

Oct STAAG picks (new additions bolded)

Buy list                        Funding list           
6752 JP Matsushita Electric Industrial  vs      6952 JP Casio Computer 
8358 JP Suruga Bank             6857 JP Advantest      
6305 JP Hitachi Construction Machinery          9205 JP Japan Airlines 
6981 JP Murata Mfg.     4203 JP Sumitomo Bakelite      
836 HK  China Resources Power   3988 HK Bank of China (H)      
347 HK  Angang Steel (H)        vs      FXI UN  iShares FTSE/Xinhua 25 
EDU US  New Oriental Education & Technology     vs      NTES US Netease
16 HK   Sun Hung Kai Properties vs      12 HK   Henderson Land 
2606 TT U-Ming Marine   vs      2886 TT Mega Financial Holdings
KEP SP  Keppel Corp             SPH SP  Singapore Press Holdings       
RIL IN  Reliance Industries                            
051910 KS       LG Chem vs      011170 KS       Honam Petrochemical   

Singapore Exchange — Reining in the bull

(SGX SP, S$13.20, Underperform, TP: S$11.10)


  • We downgrade Singapore Exchange (SGX) from Outperform to Underperform, with a revised target price of S$11.10 (previously S$10.90). We believe that the sharp run-up in the share price has surpassed our fundamental view of earnings.


  • Revised average daily turnover value by 2% to S$2.1bn. In the wake of the recent cut of 50bp in the US Fed funds rate, turnover value has surged to S$2.6bn per day, which we do not think is sustainable. Moreover, we think that market uncertainty could prevail, and we estimate that trading activity could remain pretty flat for the rest of the financial year. Nonetheless, we have raised our turnover value assumption by 3% to S$2.1bn for FY6/08 and reduced it by 7% to S$2.0bn for FY6/09.
  • Positive view of derivatives is unchanged. We maintain our positive view that the derivatives market is ramping up existing products and launching new ones (Mini Asian Index futures contracts, single stock derivatives, Japan ETF based on TOPIX and a product suite from the revamped Straits Times Indices). Therefore, we have raised our daily volume assumption from 0.161m contracts per day to 0.164m for FY6/08.
  • M&A event priced-in. We believe that the recent run-up in the share price reflects a potential M&A event. Although we cannot rule out such a possibility, we believe that any potential suitor will need to bring synergies to enhance SGX and Singapore as a financial service centre. However, at this moment, there does not appear to be one. 

China Macro Strategy - Mortgage policies tightened

PBOC and CBRC jointly announced overnight a set of regulations tightening lending policies for home buyers and developers. The highlights are: (1) min mortgage down payment ratio will be raised to 40% from 30% for second homes; (2) min mortgage rates will be increased by 10% from benchmark lending rates (e.g., for 5-10yr mortgage rates, it's raised by 78bps to 8.61% from 7.83%) for second homes; (3) down payment ratios and mortgage rates should be raised further for borrowers buying more than two homes; (4) borrower's monthly mortgage payment should not exceed 50% of the monthly income;
(5) for commercial properties, min down payment ratio is raised to 50% from 40%, and min lending rates are also raised by 10% from benchmark rates; (6) banks are not allowed to offer mortgage loans to buy units in projects that have not yet completed superstructure (e.g., ceilings of the buildings); (7) technical arrangements (database/information sharing etc) are made to ensure second home buyers can be effectively identified by banks (even if a family has borrowed from other banks before); (8) banks are not allowed to issue loans to developers that stock up land bank.

Among these, items (1), (2), (3), (5), (7) are broadly in line with our expectations. Item (6) should be a surprise to the market; it will likely delay sales and increase working capital costs of many developers especially those in second-tier cities. Items (4) and (8) also suggest that the government is more determined to address property inflation and associated credit risks than what the market has expected. We think overall the policy package is a bit more aggressive than market expectations. This policy set, together with possible further measures such as pilot program of a property tax and tighter mortgage quotas, should continue to pose short-term downside risks to share prices of developers.

Deutsche Bank - Equity Research

Best of Asean - Spoilt for choice

Asean insights – Country weighting changes

Today we issue the first edition of The Best of Asean - a new product that looks at where to find value in some of Asia's highest growth countries.

Our regional strategy team changed its country weightings last week. Country allocations are harder as we are spoilt for choice. Our internal debates have been around whether we should be positioned in countries that are genuinely booming already but where valuations are rising (Malaysia, Singapore, Hong Kong, China, Philippines) or those that are just starting to join the party and where valuations remain compelling (Taiwan, Korea, Indonesia). We favour the second group and also stick with Singapore because of the opportunities in the banking sector. Hence we have Indonesia and Singapore within Asean as overweights in our regional model portfolio.

ASEAN focus – Malaysia, Thailand and Phil banks

In Malaysia, we believe the changes in the recent 2008 Budget to the tax and savings policies are highly positive for the economy. Stocks that could raise dividends include Digi, Public Bank, B Toto, BAT and Gamuda.

History suggests that the Thai market usually rallies ahead of a general election, with positive returns over three months for the SET prior to seven of the past eight general elections. Financials (banks, fincos and property) and the traditional high beta sectors are best placed we believe.

Our recent work on the Philippine banking sector examines what impact higher NPLs and lower coverage ratios could theoretically have on book values. We essentially derive an adjusted book value for the Philippine banks. On adjusted book value alone, the cheapest banks are CHIB, Security Bank, and BDO.

Asean ideas of the week – Switch out of IOI Corp (IOI MK, RM$5.90, Neutral, target price RM 6.00) into London Sumatra (LSIP IJ, Rp6,900, O/P, target price Rp8,500). We also like the soft commodity theme and revised our target prices for Olam (OLAM SP, S$3.14, O/P, target price S$3.57).

Asean top ideas – Our top two country picks in ASEAN are given below. The rest of our country picks are on pages 2 and 3.

Source: Bloomberg, Macquarie Research, September 2007

NCsoft (Neutral) - Hoping to start from a clean slate

Hoping to start from a clean slate


  • We paid a company visit to NCsoft.


  • Short-term focus will be on Tabula Rasa. NCsoft plans to launch Tabula Rasa on 17 October in the US and Europe. So far, reviews were mixed. Positive reviews were focused on the differentiated experience the game offers, while the main negative indicated was the game was less addictive. The level of success of this highly-anticipated MMORPG will likely determine the strength of NCsoft shares ahead of 3Q07 results in early November.
  • Korean operations recovering. Lineage I is recovering from piracy server issues and Lineage II remains stable with a new update. However, our checks indicate that the financial impact may be limited as Lineage I user metrics remain below previous highs and Lineage II promotional activity was high.
  • Overseas operations mixed. The success of Guild Wars and the stable City of Heroes/City of Villans (CoH/CoV) franchise suggest that operations in the US and Europe are in line with expectations. However, operations in Taiwan and China remain disappointing due to extreme competition.
  • Downside risk to 3Q07 estimates. We expect 3Q07 results to be better QoQ, due to seasonality and the launch of the Guild Wars expansion pack in August. However, we believe the improvements may not be as significant as the market expects, as the piracy server issue still seems to be weighing down on results, while the free-trial promotion event of Lineage II following the recent update is not expected to have a huge benefit to the top line.

Earnings revision

  • No change.

Price catalyst

  • 12-month price target: Won80,000 based on a PER methodology.
  • Catalyst: Shares may stay range-bound for the time being until more concrete data points from new titles emerge.

Action and recommendation

  • NCsoft shares have gone up 51% year to date, outperforming the KOSPI by 15%. The shares have also rebounded from a recent correction ahead of Tabula Rasa’s launch on 17 October and the short-term direction of shares will likely be determined by the launch’s level of success. Therefore even though the longer-term growth outlook remains in question (2009E adjusted EPS may decline 4% YoY), and 3Q07 results are at risk of falling below expectations, taking profit at this time may be premature, in our view.



Asia Events - CPI (Korea, Taiwan & Indonesia), Trade (Korea, Indonesia & Malaysia) & RBA Rate Decision: With rising food and oil prices, we expect the September CPI to have edged up in Korea (2.5%Y), Taiwan (2.0%Y) and Thailand (1.6%Y), while Indonesia's CPI is forecast to have remained steady. Korea's export & IP growth are expected to have moderated from high levels. The central Banks in Australia & the Philippines are expected to keep rates unchanged. See page 2 for details
Asia Earnings - A Quiet Week: Consensus EPS growth expectations for AP ex-Japan in 2007 and 2008 are 15.3%Y (vs. 15.2% last week) and 11.0%Y (vs.11.3% last week), respectively. Asia was trading on 17.7x 07 and 15.9x 08 consensus earnings estimates. See page 2 for details.
International Economic Events: US ISM, Non-Farm Payrolls, ECB Rate Decision & Tankan Survey: US non-farm payrolls are forecast to have rebounded by 125k, while we expect a dip in the ISM to 52.5. The ECB is expected to leave rates unchanged. See page 3 for details.
International Earnings - A Quiet Week: Consensus EPS growth expectations for the S&P 500 are 8.3%Y in 2007 and 11.8%Y in 2008. The S&P 500 was trading on 16.0x 07 and 14.4x 08 consensus estimates. See page 3 for details.
Market Performance - Asia Outperforms: Global equity markets rallied last week, with Japan up 3.1% and the US & Europe both up 0.8%. AP ex-Japan rose a sharp 3.7%, led by China (7.3%) and Taiwan (+4.9%). US 10-year bond yields declined by 14 bps. Most Asian currencies extended the rally against the US dollar, led by the Aussie dollar (+1.9%). Among commodities, the WTI oil price dipped (-0.5%) from a record high, while copper (+3.7%) and aluminum (+1.2%) rallied. See pages 4-8 for details


Take your pick: equity markets are either behaving as if the worst is over for credit and housing problems or they remain convinced that the Fed can offset whatever bad news may unfold. The end result is the same: the consensus remains solid that the US will soft-land and that rates will head lower - which is seen as a marvelous combination for equity assets, not just in the US but globally.
This phony war can last a little longer, in my view. Until there are casualties - and, in an economic sense, that means sustained job losses - investors will remain confident in a Fed-engineered soft-landing. While ever that remains the case, equity markets are likely to continue to follow the recent pattern: 'soft growth = Fed cuts = equities rally'.
However, the view that the worst is over is dead wrong in my opinion. Certainly, the residential construction recession has been evident for some time, but even so it seems set to run well into next year, based on our US team's forecast. But the bigger issue - the important issue for investors - has always been the extent of the knock-on to consumer spending, and then the labour market. I expect the knock-on to come through several routes:
First, the household sector continues to draw substantial equity from its dwelling wealth - equivalent to 3⅓% of household income over the year to the June quarter. There is a close relationship between home equity extraction and the change in housing wealth, so it seem likely that extraction will fall in coming quarters (Exhibit 1).
Second, as is well known, the mortgage reset wave is yet to crest. Exhibit 2 is from colleague Janaki Rao, showing estimated resets.
Third, potential borrowers have to cope with a material tightening in financial conditions. One gauge of that tightening is the rise in mortgage rates. Despite the Fed’s rate cut, mortgage rates are now at or near cycle highs (Exhibit 3).