Emerging Markets Cheat Sheet (May 23, 2011)
Strengths
- Traffic for CCR, one of the largest toll road operators in Brazil, grew 9 percent year-over-year in the first quarter. The company was able to maintain a healthy earnings before interest, taxes, depreciation and amortization (EBITDA) margin of 63.4 percent.
- Chile’s GDP in the first quarter grew by 9.8 percent year-over-year, underpinned by the growth of exports (up 9.5 percent) and construction (up 11 percent). Agricultural exports fared especially well, rising in excess of 30 percent
- Colombia’s industrial production grew by 5.2 percent in March versus the estimate of 2.7 percent.
- Retail continues to do well in China. Demand for gold jewelry gained 21 percent in the first three months from a year ago, to 142.9 metric tons.
- Singapore raised its GDP growth forecast for 2011 to 5-7 percent from an earlier estimate of 4-6 percent.
- China’s National Development and Reform Commission (NDRC) plans to raise on-grid electricity prices by 0.02 yuan per kilowatt hour in Jiangxi, Hunan and Guizhou provinces to help local power generators. There is a shortage in power supply across China.
- China’s April new home prices rose modestly from a year earlier in 67 of the 70 cities monitored by the National Bureau of Statistics, a government agency. Due to declining house sales in major cities in China, the government may not issue further restrictive policies on the housing market.
Weaknesses
- Stocks of industrials and materials sectors are underperforming their Hang Seng Composite Index (HSCI) peers due to investors’ concern that China may slow down its economic growth.
- Construction machine sales are down slightly between 1.2 percent to 2.9 percent for bulldozers and loaders, respectively.
- The initial public offering (IPO) of BGZ bank in Poland did not go as well as the government had hoped for. The state treasury was able to get 22 percent of originally planned proceeds despite reducing the price to Zl 60, from a previously announced range of Zl 66-90. We believe that weak recent profitability of BGZ and the abundance of banks on the Warsaw Stock Exchange were some of the reasons behind lack of interest from investors.
- The net profit of OTP, the largest bank in Hungary, in the first quarter fell by 12 percent year-over-year due to the impact of a special banking tax that will stay in effect for another two years as the country is repairing its finances. Excluding the tax, the profit of OTP would have risen by 4 percent.
Opportunities
- We expect big interest in the IPO of Yandex, the largest Russian home-grown search engine company, that will be listed on NASDAQ and will further broaden the opportunities in Russia for investors beyond the traditional resources plays.
- According to numerous press reports in Mexico, ICA, the infrastructure-oriented company, is likely to sell its 54 percent stake in OMA, the smallest airport group. The proceeds (around $450 million) would be used for funding some core infrastructure projects.
- Mainland China listed banks have had robust earnings growth at 33 percent as reported in their first quarter announcements, primarily due to faster growth of interest-earning assets (6.5 percent quarter-over-quarter) and expanding interest spread or net interest margin (NIM). Sector NIM rose six basis points to 2.51 percent in the first quarter on a quarter-over-quarter basis. CITIC Securities International is forecasting second quarter sector earnings to remain high, rising 5 percent over the first quarter. In addition to the two drivers, growing interest-earning assets and NIM, CITIC believes the sector is undervalued by the market.
Threats
- Although April economic statistics have shown the Chinese economy is landing to a target level of activities, a soft landing is still not guaranteed due to inflation uncertainty. The market is currently guessing when the People’s Bank of China will reverse its monetary policy direction.
