Credit Suisse - Asian Equity Strategy

Asian Equity Strategy: Any Cheap Cyclicals Left?– The biggest discounts are in Indonesian coal and palm oil, drybulk shippers

Sakthi Siva / Research Analyst / 65 6212 3027 / sakthi.siva@credit-suisse.com
Kin Nang Chik / Research Analyst / 852 2101 7482 / kinnang.chik@credit-suisse.com
We last updated valuations on cyclicals on 23 April. But with cyclicals continuing to run (materials now +57%, oils +52%, tech +42% from their 27 October lows) and with eight of the nine global leading indicators that we watch bottoming, we once again look at where the biggest discounts are in cyclicals.

On our P/B versus ROE valuation model, the biggest discounts are in Indonesian coal and palm oil, drybulk shippers, regional steels and Chinese oils.

With Indonesian coal, the discount is currently 194% versus 270% at the low. The 194% discount is based on a trailing ROE of 37%. If the discount goes to zero, the implied ROE is 16%. The second biggest discount is in the drybulk shippers at 108%. This compares with 170% in November 2008. The third biggest discount is in Indonesian palm oil at 95%. This is followed by regional steels on 49% and Chinese oil on 44%.

We do note that these sectors look favourable versus Chinese metals, trading at a 64% premium (trailing ROE 5.7%, implied ROE 13%).

Asian Equity Strategy: Consensus EPS Revision Flat in April – Versus downgrades of 10-15% from November to February

Sakthi Siva / Research Analyst / 65 6212 3027 / sakthi.siva@credit-suisse.com
Kin Nang Chik / Research Analyst / 852 2101 7482 / kinnang.chik@credit-suisse.com
We have been highlighting that this rally could be the “real” one as it is the first rally associated with a bottoming in global leading indicators (eight of the nine on our leading indicator checklist, see our report of 4 May) and also the first one associated with a slowing in the rate of consensus EPS downgrades.

While we had already highlighted the slowing in the rate of downgrades in March and early April, the final data for April has been even more encouraging with 2009E consensus EPS being revised by just -0.1%.

Three countries were associated with upgrades to 2009E consensus EPS in April – Taiwan (+17.6%), Korea (+2.8%) and Indonesia (+0.1%).

While Taiwan, Korea and Indonesia were associated with upgrades in April, virtually all other countries and sectors were associated with a slowing in the rate of consensus EPS downgrades.

Asian Equity Strategy: Net Foreign Buying – April - the biggest month since December 2005

Sakthi Siva / Research Analyst / 65 6212 3027 / sakthi.siva@credit-suisse.com
Kin Nang Chik / Research Analyst / 852 2101 7482 / kinnang.chik@credit-suisse.com
In addition to the bottoming in global leading indicators (now eight of the nine appear to have bottomed) and a slowing in the rate of consensus EPS downgrades (April just -0.1%), we believed this rally could have more legs as most investors appeared to be not well positioned for it.

This was particularly as the whole of March was associated with net foreign buying of just US$529 mn.

However, net foreign buying has surged in April to US$8.2bn. This is the biggest month for net foreign buying since we saw US$8.8 bn in December 2005. See Figure 2 below.