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cted given the depressed share price. We expect strong momentum to resume in 2H10 and 2011, driven by 1) resumption of equipment procurement by Chinese operators, such as Rmb5bn PTN project by China Mobile and nationwide CDMA network expansion by China Telecom; 2) global demand surge in optical network amid fast rising broadband applications; 3) likely accelerating growth in China 3G handset amid maturing of 3G networks, 4) Indian government could loosen restriction on equipment import in 2H, and 5) network upgrade upon rollout of “triple convergence network” in China. Earnings / TP revisions: We cut FY10/11 EPS by 6% to reflect weak 1H10 and higher OPEX assumptions in 2011. Valuation is attractive at 20x/16x FY10/11E P/E, compared to historical range of 15-29x forward P/E. We roll over TP to June-11 at $35 (from $31.7 adjusted for bonus shares) based on 22x FY11 P/E (historical mean). Key risks are 1) unexpected spending slowdown in overseas especially in emerging markets; 2) further delay by Indian government in lifting import bans; and 3) elevated competition from global peers.
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Economics Hong Kong, 2Q GDP expanded 6.5%oya, in line with our expectation Lu Jiang, (852) 2800-7053 Hong Kong’s 2Q GDP expanded at a solid pace of 5.7%q/q, saar, following a revised gain of 8.7%q/q, saar in 4Q09 (previously 10.0%q/q, saar). This leaves the rate of over-year-ago real GDP growth at 6.5% (JP Morgan: 6.4%, Consensus: 6.3%), which is in line with our expectation. In seasonally-adjusted terms, private consumption expanded significantly, posted a solid growth of 6.1%q/q, saar compared to 2.4%q/q, saar in 1Q. Export/import sectors moderated from the strong growth in 1Q, mainly driven by the slowdown in exports of service (+3.2%q/q, saar in 2Q vs. +29.6%q/q, saar in 1Q). Going forward, our global economic team expects that the consumer demand would decelerate worldwide, as evident by the recent softening growth momentum observed among Hong Kong’s two major trading partners US and mainland China, it is likely that Hong Kong’s export sector would carry on with a moderating growth trend into 2H10. Though the Rmb trade settlement is expected to be beneficiary for Hong Kong’s financial and trade-related services in the long-run, the scheme is likely to have limited impact on existing trade flows or trigger more service opportunities for the commercial banks in the near term given the size of Rmb deposit base is still low. On the domestic front, rising uncertainties towards the external environment could potentially affect household sentiment therefore impact private consumption. However, the tourism inflows still remained strong thanks to tourists from mainland China. HKTB expects the positive trend to maintain a steady growth, and further increase by 20 – 25% in 2H10, and this
should provide some favorable conditions for Hong Kong’s retail business in the later half of this year. In all, given the robust growth momentum in first half of the year, the government has revised up the 2010 growth forecast to 5-6% (previous forecast: 4-5%). Our growth forecast stands at 6.8%oya for 2010. Further details on 2Q10 economic activities: ? Total export of goods rose by 19.5%oya and 14.6%q/q, saar in 2Q, following by a 20.7%oya, and 36.2%q/q, saar gain in 1Q, which was consistent with the recent moderation in trade sector in recent months. Export of financial and business services was affected by the European sovereign debt problem and led exports of services grew by only 3.2%q/q, saar in 2Q compared to the strong expansion of 29.8%q/q, saar in 1Q. On the domestic front, private consumption picked up and posted a growth rate of 4.6%oya and 6.1%q/q, saar in 2Q, likely due to the rather soft figure in 1Q (2.4%q/q, saar). Government consumption increased by 4.1%q/q, saar following an expansion of 4.9%q/q, saar in 1Q. Since the labor market performance was rather mixed (seasonally-adjusted unemployment rate rose back to 4.6% in 2Q), we expect the positive outlook on tourism inflows to provide some cushions for the consumption sector going forward. In addition, overall investment spending remained firm, increasing by 15.2%oya on top of a growth of 8.2%oya in 1Q. Looking by sectors, machinery and equipment acquisition surged by 16.2%oya with a greater contribution from the private sector component. Expenditures on buildings and construction increased by 11.4%oya in 2Q. Public sector works continued to grow rapidly while private sector construction activity remained slack. Meanwhile, inventory stocking which contributed notably to the growth in investment since 3Q09 has seen some moderation in 2Q.
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Results and Company Views China, PCD Stores Ltd (PCD) (Not Covered) Company visit note Elsa Yang, (852) 2800-8523 PCD operates and manages a total of 16 upscale department stores and one premium outlet mall in Beijing and seven other provinces in the PRC with a total GFA of 368k sqm. The stores are operated under the PCD and SCITECH brands. PCD is the sister company of Ports Design (589.HK, OW), China’s leading luxury womenswear retailer. Both listed companies are controlled by the Chan Family. ? High-end market focused retailer. PCD targets the upmarket segment, leveraging on retailing expertise as well as established relationships with wellknown brands gained through the Ports business in the PRC. The entire chain (including 3 to-be-injected stores in Guizhou) recorded >16% SSS growth till May 2010, in line with other high-end retailers’ performances. Early mover in premium outlet mall business. PCD has tapped into the emerging and fast-growing outlet mall business by managing the parenctcoowned Beijing Scitech Premium Outlet Mall (OM) since Jul09. It will also open another three outlet malls in Xiamen, Hangzhou and Shengyang in 2010/2011. Acquisition-led growth model. PCD expands its department store network through acquisitions including buying established department stores from third parties as well as asset injections from parentco. The parentco has one remaining asset, the aformentioned Beijing OM, announced available for injection: PCD also actively seeks to acquire existing deparment stores with strong customer traffic in prime locations. It has a proven track record of integrating and upgrading acquired stores. Announced project pipeline will add over 330 sqm GFA by 2012, nearly tripling the current directly-operating area of 193k sqm. Based on the industry practise, a new store takes at least 3 years to make meaningful earnings contribution. Pipeline includes 1) integrating 3 managed stores in Guizhou (c.56k sqm) from parentco by Q3 2010, 2) acquiring Beijing Scitech Premium Outlet Mall (c.44k sqm) from parentco in 2011; 3) opening 3 aforementioned outlet malls (>150k sqm) in 2010/2011; 4) converting Xi'an managed store (>60k sqm) into a directly-operated store in 2012. Note after the managed stores’ acquisitons, the associated management fees and rental income will also cancel out from the revenue. PCD has underperformed HSI by 16% year to date. Based on Bloomberg consensus, PCD trades at 25x 2010E P/E and 19x 2011E P/E.
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NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK. Hong Kong, Air China (Overweight) July Traffic Monitor - ALERT Corrine Png, (65) 6882-1514
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Passenger traffic growth accelerated in July, up 24% y/y vs. its 20% y/y growth ytd and rose 9% m/m (adjusted for the longer month in July versus June). Traffic on HK/Macau/Taiwan routes surged 55% y/y (driven by strong crossstraits travel demand), while domestic and international traffic rose 22% y/y and 26% y/y, respectively. Compared to the pre-downturn levels in July-07, international traffic was 9% higher, while domestic and regional traffic were already up by 44% and 39%, as domestic demand recovered earlier while regional traffic is being boosted by the liberalizing ChinaTaiwan direct flights. Overall, July 2010 passenger traffic has already exceeded June 2007 levels by 29%. Passenger load factors continue to improve: System-wide passenger load factor (PLF) rose 5ppts y/y and 3ppts m/m to 83%, as strong demand outstripped Air China's 17% y/y increase in capacity. Domestic and international routes had passenger load factors averaging 83% (+5ppts y/y) and 84% (+5ppts), respectively, while regional flights were 81% full, +6ppts y/y and 8ppts m/m. During the month, Air China added four new aircraft (including two B737-800s, one A321 and one business jet under custody). Cargo demand growth decelerated but still outstripped its 16% y/y capacity increase: Cargo traffic rose 23% y/y vs. its 38% y/y growth ytd. However, Air China’s cargo traffic fell 2% m/m (adjusting for the shorter month in July vs. June). International cargo traffic growth decelerated to 28% y/y, slowing from its 46% y/y growth rate ytd but still a strong result. Domestic and regional cargo traffic improved 7% and 4% y/y, respectively. Notably, regional traffic declined 8% m/m. Compared to pre-downturn levels in July, 2007; cargo traffic was already 15% higher. System-wide cargo load factor (CLF) rose 3ppts y/y to 59% — domestic 40% (unchanged y/y), international 68% (+4ppts) and regional 44% (+3ppts). Air China purchased 305,000 tons of jet fuel at an average blended price of RMB5,626/ton in July, +11% y/y: Specifically, its average jet fuel purchase price at international airports was RMB4,972/ton (+13% y/y), while its average jet fuel purchase price at the top six Chinese airports was RMB5,288/ton (+11% y/y). Overall, Air China’s average jet fuel purchase price for domestic flights rose 11% y/y to RMB6,042/ton. Separately, Shenzhen Airlines purchased 10 A320s (list price: US$814MM) to be delivered in 2012-2013. The Big 3 Chinese carriers’ passenger traffic growth accelerated in July (+35% y/y) vs. their ytd y/y growth of 29% and up 12% m/m. On a m/m basis, CEA posted the strongest growth in passenger traffic (+14%) vs. CSA and Air China’s 13% and 9% increase. Passenger load factors remained high, at 83% for CEA and Air China and 81% for CSA, above their ytd averages. CSA added the most capacity on a m/m basis, +10% in July, followed by CEA and Air China's 9% and 5% increase. The 3 Chinese carriers’ cargo traffic growth decelerated in July, up 52% y/y vs. ytd y/y growth of 67% and was flat m/m. CSA’s cargo traffic rose 15% m/m while Air China and CEA reported 2% and 9% declines.
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Hong Kong, China Southern Airlines (Neutral) July Traffic Monitor - ALERT Corrine Png, (65) 6882-1514 ? Passenger traffic growth accelerated in July, up 24% y/y vs the YTD y/y growth of 22% y/y. On m/m basis (adjusted for the longer month in July) passenger traffic rose 13%. Regional (HK, Macau, Taiwan) routes had the strongest traffic growth, up 69% y/y and 25% m/m while international routes grew by 55% y/y. Compared to the pre-downturn levels in July-07, China Southern’s passenger traffic was already 34% higher as domestic traffic (which accounts for 86% of CSA’s total traffic) recovered earlier while regional traffic is being boosted by the liberalizing China-Taiwan direct flights. System-wide passenger load factor rose 6ppts y/y and 2ppts m/m to 81% as demand growth outstripped its 15% y/y and 10% m/m capacity increase. This was mainly boosted by a 10ppts y/y rise in PLF on international routes to 78%. PLF on domestic and regional routes rose to 82% (+6ppts y/y) and 81% (+7ppts) respectively. On m/m basis, CSA's system-wide PLF rose 2ppt y/y. YTD system-wide PLF for CSA was 78%, +4ppts y/y. July’s PLF was already 5ppt higher than the load factor in July-07 (pre-downturn). Cargo traffic growth remained strong, up 88% y/y and 15% m/m compared to its ytd y/y run rate of 91%. International cargo traffic surged 189% y/y while domestic and regional routes reported a 20% and 92% y/y rise in traffic respectively. Compared to the pre-downturn levels in July-07, CSA’s cargo traffic was already 71% higher. Cargo load factor improved 9ppts y/y and 1ppt m/m to 48% as strong demand outstripped the 53% y/y and 13% m/m injection in capacity. Recent developments: 1) CSA launched a Guangzhou-Amsterdam B777- 200F freighter service on July 24 and plans to launch another Shanghai (Pudong)-Los Angeles B777-200 freighter service on August 28 (source: ATW). 2) CSA inked a deal with International Aero Engines to pu jWww Lenderhomemortgage Lender Home Mortgage Szh Topmenu Tozsdei Kereskedok Kereskedo Cegek Lender Home Mortgage China/Hong Kong Daily Views 摩根大通b u v v Lender Home Mortgage Investment Lender Home Mortgage rWww Lenderhomemortgage Lender Home Mortgage Szh Topmenu Tozsdei Kereskedok Kereskedo Cegek Lender Home Mortgage China/Hong Kong Daily Views 摩根大通d Lender Home Mortgage s s Payday q Lender Home Mortgage Lender Home Mortgage