Market Review We expect to see market consolidate at 19000-level this week.

The Hong Kong market gapped down in the opening last Friday following weak overseas markets. HSI dropped as much as 578-point at intraday but the loss narrowed and closed down 249 pts, or 1.3%, to 18951, coupled with a turnover of HK$65.7bn. The blue chip index lost 5% last week. Short-selling remained high at 12.2%. But the intraday rebound last Friday seemed to indicate short-term selling pressure is over, we think the HSI will consolidate at around 19000-level this week.

Friday’ decline was led by banks and property developers. According to data released by the statistics bureau, China’s home prices continued to soften. Home prices retreated in 46 out of 70 cities tracked by the government in April. The eastern city of Wenzhou led declines with a 12.3% YoY slump in values, while Beijing dropped 1% and Shanghai prices lost 1.3%. The Chinese property sector plummeted 2.3% with China Overseas Land (688.HK) slid 2.9% to HK$14.80, Guangzhou R&F Properties (2777.HK) sank 5.9% to HK$9.13. Affected by the same home price data and worry of a slowing economy, SHCOMP index fell 1.4% to 2344.

HSBC (5.HK) declined 3.1 percent to HK$63.75 after the bank showed no real excitement in its operation during an investors’presentation on Thursday.

Solar-related stocks fell after the US imposed tariffs of 31% - 250% on imports of Chinese solar products. The sector plunged 4.1% as a whole, GCL-Poly Energy (3800.HK) lost 7.7% to HK$1.66. The incident may triggered a trade war between the US and China.

The only sector which shone light last Friday was gold mining stocks, the sector jumped 3.2%, helped by the 2.2% rebound in gold price on the previous day.

Weakness in the US stocks continued with DJIA lost 73 pts, or 0.6%, to 12369, it was the 12th loss in 13 sessions. Facebook debuted last Friday opened at US$42.05, or 11% above its US$38 IPO, but the gain was quickly erased, the stock closed up 0.6% at US$38.23.

European stocks pared earlier losses but remained mostly lower, after Moody’s Investors downgraded a number of Spanish banks and Fitch Ratings cut Greece’s credit rating further into junk status.

Spanish central bank said that 8.37% of the loans held by banks, or Euro147.97bn, were more than three months overdue for repayment in March, up from 8.3% in February and the highest since September 1994. The total number of non-performing loans is now almost 10 times higher than the level reported in 2007.

The rapid deterioration of the loan books was one of reasons cited by Moody’s Investors for its downgrade of the credit ratings of a number of Spanish banks last week. Spanish borrowing costs also remained elevated, with the yield on 10-year bonds well above the 6% mark as nervous investors piled into haven bonds, pushing short-term German yields close to zero.

Focus of the Day

Shimao (813.HK)

Main points and analysis:

Contracted sales

The management expects 1H12 sales revenue to reach RMB18bn or more, equivalent to a lock-in ratio of 60% of its own target of RMB30.7bn. The lock-in ratio would be 55% if compared with our estimated target of RMB33bn, which should remain outstanding among peers. The 1H12 revenue would represent a 26% YoY growth.

It expects a monthly sales revenue of RMB3-4bn in both May and June, which has already accelerated from its own schedule.

The peak of new project launches will be in May and June, same as its original schedule. They are located in Chengdu, Xiamen, Suzhou, Shenyang, Taizhou, Wuxi, Hangzhou and Ningbo.

Regarding the price cut issue, it varied among different cities and regions. The decision would depend on both the trend of property markets and its own lock-in ratio in each district. Also, it may need to offer larger price discounts for larger units. Some cities in the Yangtze River Delta region are under pressure this year, while other cites like Chengdu and Fujian province have suffered less.

While we are concerned about whether the sales pace will slow down in 2H12, Shimao said 60% of its available-for-sale volume will be launched in 2H12. Therefore, the momentum would be maintained. Having said that, they admit they prefer offering less price cuts in 2H12 if the lock-in ratio can reach 60% by 1H12. This would cause a slow down in sales revenue on a monthly basis, but it should be regarded as a “happy problem”, in our view.

Financing and gearing

Shimao intends to lower its total loan amount to approx. RMB40bn by the end of this year (vs RMB42.6bn as at end-FY11). Shimao targets a net gearing ratio of 70% at the end of this year (or 75-80% according to our calculation). It would be better than our forecast.

The current interest rate for project loans from banks is 7-8%. The adjustment of credit rating and outlook does not have any significant effect on Shimao.

There is a trust loan with an outstanding amount of RMB2-3bn due this year. It intends to apply refinancing from banks or new trust loan for the settlement. Others Gross margin: It is widely expected gross margin had reached the peak in FY11, which was 38.4%. It is expected gross margin would reach approx. 36% in FY12.

Land acquisition: Each district is required to achieve 75% of its own sales target before it is allowed to acquire new land. Therefore, there will probably be no new land purchase in 1H12. Management believes there will be more inexpensive land available in 2H12.

Tencent (700.HK)

Tencent announced on 18 May that it would expand its existing 4 business units to 6 business groups, namely, Corporate Development Group (CDG), Interactive Entertainment Group (IEG), Mobile Internet Group (MIG), Online Media Group (OMG), Social Network Group (SNG) and Technology and Engineering Group (TEG). In addition, the company will set up Tencent E-Commerce Holding Company (ECC), a wholly-owned subsidiary, to focus on managing its eCommerce business. We believe the latest business restructure was triggered by (1) the determination to more effectively group its businesses; (2) the increasing difficulty in management amid the expansion of staff; and (3) contracting margins. Upon the completion of business restructure, Tencent’s operation would include games, mobile Internet, media, social network, search and eCommerce. QQ and WeChat will be the focuses while it develops the new businesses – mobile Internet and eCommerce. We believe the restructure will benefit its development in the mid-to long term due to the following reasons: (1) The integration of related business units leads to a more effective allocation of resources and streamline the workflow, which could help in cost cutting; (2) Develop new businesses such as mobile Internet and eCommerce amid rapid growth of other products; (3) The establishment of an independent company for eCommerce business could attract more capital and provide a brand new operation platform. There is also a chance for a potential listing of the independent unit. Maintain “LT-BUY” rating and TP of HK$252.

Brilliance China (1114.HK)

Event:

Brilliance China Chairman Wu Xiaoan revealed to the media that the BMW Brilliance joint venture sold 53,600 units of autos in the first 4 months of the year, up 47% YoY.

Comments:

1) The sales of BMWs grew 47% in 4M12 while the YoY growth of the sales of other luxury cars such as Benz and Audi were 15% and 41%, respectively. The better performance could be attributed to the launch of the new model, X1. Given the robust demand, we learned from some BMW 4S shops that the domestically-produced X1 is still undergoing price hikes, which, in our opinion, would persist till 2013. We project that the sales of BMW models would reach 150,000 units in 2012, representing a YoY growth of 39%.

2) The sales of the company’s commercial vehicles Brilliance Jinbei series fell 8% YoY to 5,600 units for the first four months of the year, dragging the company’s sales. Weaker investment activities were the main reason for the poor performance of the commercial vehicles. Improvement in railways and other infrastructure investment projects in 2H12 may boost the sales of Jinbei series against that of 1H12.

3) Buoyant demand for luxury models is still the major source of the company’s growth. We maintain “LT-Buy” for the counter with a TP of HK$9.5.

Coal Sector

Downstream industries showed an obvious sign of slower growth in Apr except the fertilizer industry. Specifically, national coal power generation dropped 0.36% YoY and 10.6% MoM in Apr. Since the prices of thermal coal in the international market were more competitive, coal imports soared 90.1% YoY in Apr and further growth is possible. China Coal Industry Association recently released the 1Q12 coal economic operation analysis, which showed that coal demand only grew 6.4% in 1Q12. We expect that the low season and the higher hydro-electricity output due to the large-scale rain weather in South China will curb coal demand in the short term. With the arrival of summer time and the stronger GDP growth in 3Q-4Q12, the downstream demand in 2H12 will improve slightly than that of 1H12. We maintain “Outperform” rating for the sector. We recommend “Buy” for Yanzhou Coal with a TP of HK$23.34, representing upside of 75.2%.

Cement Sector

Last week, the national cement market prices fell 0.24% as compared with the previous week. Regions that reported a price increase were Hangzhou and Haikou, ranging from RMB20-30/tonne. Regions that reported a price decrease were Beijing, Hebei, Shandong and Guangdong Pearl River Delta region, ranging from RMB10-20/tonne. Upon a significant price fall, most of the areas in Northeast China remained steady except a slightly higher price in some areas. Some enterprises in Hangzhou, Zhejiang announced price increases, but the actual effect is limited under the present circumstances. Prices in Northeast China remained high after the production suspension, but the recent price fall in Northern China may widen the price spread between the two places. Currently, prices in western Liaoning were affected, resulting in the downside risks in the prices in Northeast China. Prices in other regions remained stable.