Investment Daily Note

Market sentiment remains weak amid Europe’s ongoing debt crisis. Spanish government bond yields rose again, heightening concerns about the nation’s banking sector. In the U.S., the Philadelphia Fed Manufacturing Index was worse than expected for May, while jobless claims rose more than expected last week. The Dow dropped below the neckline if its double-top, worsening its trend, and closed at 12,442, down 156 points. The S&P 500 closed at 1,304, down 19 points. The NASDAQ declined significantly, closing at 2,813, down 60 points. Apple and Qualcomm each fell more than 3%.

Moody’s announced early this morning that it had downgraded credit ratings for 16 Spanish banks by 1-3 notches. EUR/USD slid to a four-month low of 1.2667, and is currently at 1.2690. New York crude futures slipped to a six-month low of US$92.56/bbl, down US$0.25. New York gold futures rebounded sharply to US$1,574.90/oz., up US$38.30. HSBC’s (5.HK, HK$65.80) London shares dropped another 2.7%, while its ADRs fell nearly 3% compared with yesterday’s Hong Kong close. Other major blue chip ADRs also declined, dragging down HSI ADRs by a 354 points and HSCEI ADRs by 166 points.

Hong Kong stocks opened higher yesterday but closed lower … the HSI rose along with external markets in early trade, but reversed its gains after midday to close at 19,200, down 58 points. The HSCEI closed at 9,700, down 41 points;. Market turnover was HK$60.3bn. HSBC (5.HK, HK$65.00) retreated 1% after its latest strategy presentation yesterday failed to inspire investors. The bank is maintaining its ROE and cost-efficiency targets. China’s State Council announced a further RMB6bn of purchase subsidies for vehicles with engines smaller than 1.6 liters; Great Wall Motor (2333.HK, HK$15.32) rose 5.8%. Tencent (700.HK, HK$225.00) opened lower but ended 2.5% higher after announcing a 2.8% yoy increase in 1Q net profit to RMB2.95bn. Link REIT (823.HK, HK$29.35) tumbled 4.4% on reports that it has been sold down by an institutional investor.

iShares A50 China’s (2823.HK, HK$10.72) premium to NAV has narrowed, suggesting it could track the A-share market more closely going forward. Ongoing capital-market reform a long-term driver for A-shares. Buy, targeting HK$12.00 in the medium/long term.

A-share market at just 10X FY12E P/E.

Premier Wen has called for measures to boost market confidence; supportive policies may soon be launched.

People’s Bank of China Governor Zhou Xiaochuan has said that the central bank will increase cooperation with various securities regulators, including the China Securities Regulatory Commission (CSRC), to further reform domestic capital markets and introduce new financial instruments. These could include two-way cross-border ETFs and expanding the QFII and RQFII quotas.

We believe such developments would be positive for mainland and Hong Kong financial markets, reflected in the Shanghai Composite’s 1.4% rally yesterday on reports that the central government might allow mainland professional investors to buy Hong Kong stocks directly. This is said to be a ‘gift’ for the 15th anniversary of the handover, with quota for the scheme reportedly as high as HK$400bn.

We recommend iShares A50 China (2823.HK, HK$10.72), which tracks China’s 50 biggest companies by market cap, to play this theme. The fund’s premium to NAV has narrowed to 3.7% from its peak of 13.5% in February 2012, which suggests its price movements could track the overall market more closely going forward.

Average daily turnover remains high, so there should be less risk of insufficient trading volume. This makes the fund a suitable pick to play A-share market volatility in the short term. In the long run, the Shanghai Composite looks good value at just 10X FY12E P/E on consensus numbers, more than 40% below its long-term average, with estimated earnings growth at 25% and 17% over the next two years. Technically, the fund has found support at HK$10.50. Buy, targeting HK$12.00 in the medium/long term.

Skyworth Digital (751.HK, HK$3.41) to benefit from purchase subsidies for energy-saving appliances. Product mix is also improving. Buy at HK$3.30, targeting HK$3.60, with stop-losses at HK$3.10.

China’s leading TV producer by sales volumes.

Increasing contribution from 3D-TV sets is increasing overall operating margin.

6.2X FY12E P/E, well below long-term average and peers.

Household-appliance stocks rose yesterday after the government launched of purchase subsidies for energy-saving appliances. Skyworth Digital (751.HK, HK$3.41) led the way with an 11.4% rise on heavy volume. We expect the uptrend to continue in the short term. The company should be a major beneficiary of the subsidy scheme, since it is China’s leading TV producer by sales volume, with 15.2% market share. The product mix is improving, with high-margin 3D-TV sets now contributing 41% of TV sales, helping to increase the overall operating profit margin.

Skyworth is up only 25% ytd, lagging TCL Multimedia’s (1070.HK, HK$4.20) 81% ytd gain. But its big gain yesterday compared with its TCL’s 4.6% slip suggests funds are shifting to Skyworth. The stock trades at 6.2X FY12E P/E on consensus numbers, more than 30% below its long-term average and well below TCL’s 8.3X. Buy at HK$3.30, targeting HK$3.60 in the short term, with stop-losses at HK$3.10.

(Full report is available at: http://www.shkdirect.com )