2010 Jewels - A good sheen

Extracts of a report by OSK Research

OSK Research said 2010 proved to be a decent year for its Small Cap Jewels although their performance was eclipsed by the liquidity-infused rally, which benefited the bigger caps, particularly from 2H2010.

Of the 50 stocks profiled in our handbook, half posted absolute returns in excess of 20%, with 49% outperforming the FBM Small Cap and FBM KLCI indices.

While the smaller caps are expected to bask in the glory their larger cap peers in 2011, investors should not ignore names with good longer term potential that are trading at attractive valuations.

We like small caps in the construction, property, oil & gas and consumer sectors as beneficiaries of the ETP, elections and earnings themes.

Our current top small cap buy ideas are Kimlun (TP: RM2.34), Plentiude (TP: RM2.78) and CI Holdings (TP: RM4.37).

A fair play. In 2010, we attempted to balance the risks and rewards when selecting the stocks to be included in our OSK Jewels handbook given the anticipated market volatility.

We were comforted in that our selection garnered a hit rate of 74% (defined as stocks with positive returns).

Although this was below the 92% achieved in our 2009 edition – arguably the best year in terms of overall performance for this publication since inception – more than half (52%) of our picks actually outperformed the FBM KLCI (64% in 2009 edition).

The major winners were from the consumer and construction sectors, which dominated the upper quartile in terms of ranked returns. The performance of our top 10 picks was mixed, with 8 of the 10 companies eking out positive returns.

CI Holdings was the star performer (among our Top 5 picks) as its share price more than doubled in 2010. The other notable winners in the 2010 edition (in no particular order) were Sunway Holdings, Mamee, Zhulian, Delloyd, HELP and Handal.

Aside from HELP, the other five stocks were featured for the first time in the handbook. Investors who bought into our top 5 picks would have chalked up an average return of 30% in 2010, a respectable gain and trumping the performance of both the FBM KLCI and FBM Small Cap indices.

More than mere gems. The devoted followers of our handbook would know that two particular companies, QL Resources and KPJ Healthcare, continued to be heavily promoted with the latter being among the top 10 stocks in the 2010 edition.

The commendable gains they notched up in 2009 extended into 2010 as more investors warmed up to their strong longer-term prospects and better coverage by the investment community.

Both stocks were first included in our 2005 and 2006 editions, with their market capitalisation soaring above RM2bn from under RM500m when they were first selected as our jewels.

These two companies continue to be our choice picks for exposure to the consumer and healthcare sectors.

Every dog has its day. While we strove to pick winners within the 18 sectors profiled in the book, there was no guarantee that our stock picks would not disappoint.

There were two disappointments last year, the first being Hai-O, a multi level marketing company which saw its share price nosedive after it dished out an earnings surprise in 2Q10.

The other was Notion VTec, one of the few technology companies well liked for its exposure to the hard drive industry.

In the case of Hai-O, more stringent recruitment policies imposed by the authorities affected the growth of its agency force, resulting in the poor earnings while Notion VTec’s operations were impacted by issues affecting its 2.5” base plate designs.

Subsequent to the findings, we took the unpopular decision to downgrade both the stocks to sells.

In retrospect, it would not have been possible for us to predict the outcomes (the entire market was wrong) as both companies had fairly decent track records and were leaders in their respective industry segments.

Hai-O was for a long time a preferred pick of OSK with a near-flawless record of consistently outperforming OSK and street estimates.

The other stocks that saw their share prices fall were hit by a combination of sector-wide de-rating, poor demand outlook and stock specific challenges.

Small caps to bask in the glory of their larger peers in 2011. While we expect the bigger cap companies to naturally be the winners of the liquidity infused rally, there remain investment opportunities within the small cap space as indirect and cheaper proxies which present good alpha strategies for investors.

The selection of stocks to be included in the 2011 edition will be guided by our broader themes of Earnings, Elections and Easing (3Es), which form the basis of our 2011 investment strategy.

That said, the overall selection process will continue to be based on our qualitative and quantitative benchmarks of good fundamental and operational standing.

The key sectors that encapsulate these themes are construction, oil and gas, property and consumer.

We had earlier included a teaser in our January monthly strategy report issued on 2 Jan entitled: “Of Black Swans and Hidden Jewels”, in which we highlighted some new small cap names that could potentially be included in the 2011 edition.

Construction and oil & gas remain key themes: Kimlun our top pick With the economic transformation program (ETP) shifting to higher gear, we continue to see more goodies going the way of the local construction players.

The Government recently announced 19 more entry point projects (EPP) valued at RM67bn, adding to the list of 18 projects announced earlier.

The most ambitious of the projects unveiled to date is the RM36bn KL Mass Rapid Transit (MRT) development, for which Gamuda has been the appointed the project delivery partner (PDP).

While bigger cap contractors are natural beneficiaries of large scale infrastructure projects, small cap contractors with good execution track records and that have relevant expertise are also winners as they will also benefit from sub-contract works under the private finance initiatives (PFIs).

Our top pick for small cap construction exposure is Kimlun (BUY, TP: RM2.34). We favour Sarawak construction players such as Naim (BUY, TP: RM5.10) and Hock Seng Lee (BUY, TP: RM2.32) which will be buoyed by the impending state election to be held by July.

The oil and gas sector, which saw a paucity of contracts over the last two years, is also seeing a resurgence of interest due to new investments by major oil majors, which will indirectly benefit the likes of service providers, platform fabricators and ancillary vessel operators.

Our preferred exposure for the small cap oil and gas space remain Alam (BUY, TP: RM1.50), Petra Energy(BUY, TP:RM2.16) and Coastal (BUY, TP: RM4.41).

Consumer names still figure prominently: CI Holdings our top pick

The consumer sector was featured most prominently in our handbook given that the sector had been relatively defensive in the face of the downturn in 2009 and performed well for most part of 2010 on the back of the improving consumer sentiment. With the strong spending propensity of Malaysians supported by the wealth effect from an rising stock market, the retailers generally performed better in 2010 on the back of a steady expansion in their toplines.

The food companies, on the other hand, have generally benefited from a stronger Ringgit and various cost-down initiatives, with indications of a better showing in FY11. For 2011, we see the Government’s indirect efforts to promote consumption spending via the abolishment of import duties on goods announced during Budget 2011 being one of the indirect sweeteners for the sector.

As the impact of reduced subsidies on flour and sugar has proven to be insignificant for most food companies under our coverage, we also see F&B companies faring reasonably well this year.

The increasing number of consumer companies undertaking corporate proposals such as bonus issues, share splits (Padini, QL Resources) suggests that their managements are positive on the outlook of the economy and see further value creation from such exercises. This should boost sentiment in the sector.

Our top pick consumer food and beverage (F&B) exposure remains CI Holdings (BUY, TP: RM4.37) as there is room for the F&B segment in Malaysia to expand further.

The other top pick within our small cap consumer universe is Bonia, as the company will benefit from stronger consumption spending and earnings accretion from the previous acquisition of Jeco.

Property sector in the spotlight: Plenitude our top pick The property sector is back in the limelight, thanks to a flurry of positive news of late, in particular the mergers of UEM Land-Sunrise, MRCB-IJM Land (later aborted) and Sunway-SunCity, which will create key property groups with sizeable market capitalization, and the strong market liquidity fuelling appetite for mid to high end landed properties.

We see the strong demand for landed properties to continue in 2011, thus bolstering the earnings of developers. While the larger cap players typically benefit first from the sector- wide rerating due to their exposure to good and strategic landbank, we think it is only a matter of time when the smaller property outfits catch up due to their cheaper valuations. We see good value in a few small cap property stocks such as

Plenitude (BUY, TP: RM2.78) and Bandar Raya Developments (BUY, TP: RM3.00), which stand to benefit from the current upcycle in the sector.

2011全球財經大預言

全球經濟經歷了2008至2009年的全球金融海嘯，2010年至2011年仍餘波蕩漾。

2010年的雙底衰退隨美國去年杪祭出次輪量化寬鬆，暫時消解了疑慮。2010庚寅金虎年無法解開的困局，會否於寓意“動如脫兔”的2011辛卯兔年，有了新的動向與格局？

國際貨幣基金組織（IMF）最近預測，全球實質經濟體經濟成長，由原有的4.2%調高至4.4%，2012年保持4.5%。
該組織也預測，新興經濟體的經濟成長，超越受經濟衰退、債信危機打擊的美國與歐洲。

新興經濟體成長以中國、印度馬首是瞻，但成長路上並不平順，隨著食品、原產品價格暴漲，高通膨是兩個新經濟體政府的一大挑戰。

在開展經濟成長的旅程中，如何制定適當策略壓服高通膨，則是新興經濟體後院的事；這後院一旦失火，經濟成長的前門，亦將殃及池魚，甚至生靈塗炭，不可不慎！

預言：人民幣推升亞幣？ 祈求：財源滾滾人讚好
若中國真被通膨章魚纏得無法脫身，可能順水推舟讓人民幣升值，一方面更合了美國胃口；儘管人民幣升值對中國出口企業構成壓力，但也降低進口商品價格，特別是以美元計價的一些原料。

若到達此種程度，鄰近的亞洲貨幣，包括大馬的馬幣可能受帶動，而跟著升值。

預言：美股牛熊角力？ 祈求：百尺竿頭節節高
市場目前的共識很明確－美國經濟可望持續回穩，股市會有好的一年；公債則因為恐懼因素消失，變得較有風險；“風險資產”像是股票和商品，可望在中國及新興市場帶動下，持續有所成長。

雖然絕大多數機構看好兔年美股仍持續飆升，但至少有兩家投資公司警告，美股今年來到高點後，可能自此滑落，步入熊市。

Ned Davis Research投資團隊，預期在今年上半年，標普500指數就可望回到2007年的歷史高點1565.15。不過他們也預期，來到年中的高點時，可能造成利率上升，10年期公債利率有機會到達4%或更高，提昇投資者的樂觀情緒。
他們認為，站上高點，也代表自2009年3月以來的牛市循環走到底，開始新的熊市。要是如此，這次的牛市歷時長達9季。自1900年以來，共34個牛市，只有10個到達9季或更長。

同樣持“終極熊市”看法的，還有United-ICAP首席技術分析師金莫曼（Walter Zimmermann）。他警告，一旦崩跌，多樣化的投資策略也保護不了投資者的損失，就像前次金融風暴。理由就在，這些資產投資漲跌密切相關。

預言：法引爆新歐債危機？ 祈求：時來運轉福滿門
很多人認為法國與德國一樣是歐盟強國，但法國的財政赤字狀況比意大利更嚴重，而且失業率高、經濟增速緩慢。專家指出，法國相當抗拒改革，任何一丁點工時延長、延後退休或是公共福利調整，都會引發大規模抗議。因此，若要細數哪一國會步上愛爾蘭、希臘、葡萄牙以及西班牙的債務危機後塵，非法國莫屬。

預言：全球6月轉運？ 祈求：扭轉乾坤財運到
美國通膨升溫，聯儲局未來半年內加息的可能性大增，第二輪量化寬鬆政策將在6月到期，那將是一個重要的時間轉折點。

經濟學家預測，如果量化寬鬆政策的累積效應不斷得到體現，經濟真正步入復甦階段，聯儲局可能會突然啟動加息進程，一旦如此，將促使全球資本迅速回流美國，美元將會迅速出現強勁反彈。

謝國忠指出，美國財政刺激的目的顯而易見，就是想讓奧巴馬能在2012年連任。他分析，要令奧巴馬得以連任，就需要有3個條件：新興經濟體繼續通膨，維持了美國的出口；歐洲的主權債務危機支撐了美元的價值，抵銷聯儲局的量化寬鬆；原油價格不會飆升，以減少美國刺激政策的效果。

預言：美元人為貶值？ 祈求：財源廣進鴻圖展
疲弱的美元也是美國拯救經濟的手段之一，今年聯儲局可能也讓美元逐步貶值，以反映美國的高通膨，及短期利率大大低於通膨率，也即負實際利率。如果聯儲局能在將5%的負實際利率保持10年，美國的負債可減少40%，會回到歷史平均的水平上。

多數分析師預測，聯儲局不會在美國經濟轉強之前提高利率。按照這個邏輯，因受制於美國經濟疲軟以及無力吸引資本的低利率，美元可能復甦無望。不過，雖然利率較低，但美國經濟仍將持續疲弱，可能影響美元走勢。

預言：商品續比天高？ 祈求：金兔增產慶豐收
“吃飯皇帝大”，但兔年基於全球氣候異常，到處天災人禍，世人吃飯與溫飽問題，因為食品、原產品價格節節走高，潛在打擊一些國家的經濟成長，並可能會造成社會動亂的根源。

IMF提出警訊，高企的大宗商品和食品價格可能危害發展中國家的宏觀經濟穩定，並引發社會和政治局勢緊張。專家預測，不管全球經濟如何轉變，也不管金融形勢如何轉化，短期內農產品、糧油的牛市格局似乎難以撼動。

全球氣候的異常變化將把所有農產品價格推至歷史高位。厄爾尼諾才剛過去，拉尼娜接踵而至，在澳洲小麥產區遭受水患的同時，南美阿根廷的大豆產區卻飽受熱浪襲擊，德國《油世界》因此估計其減產規模將達20%以上。

專家指出，中國、印度等新興國家強大的市場需求將會使供需長期處於緊張狀態，兔年全球農產品庫存和庫存消費比將會進一步走低，農產品價格未來仍將受到成本推動、災害天氣、消費增長、流動性支撐四大因素的整體發力而居高不下。

儘管一些國家如中國、印度政府，努力管控價格，但對類似管控可能對某些產品短期價格產生影響，但長時間而言，仍難以產生根本性的作用。

預言：全球面臨高通膨？ 祈求：和氣生財萬事好
中國去年第四季國內生產總值（GDP）成長高於預期，升至9.8%，2010整年的成長則增加10.3%，一舉超越日本，成為世界第二經濟大國。

不過，中國的經濟過熱也引發嚴重通膨：12月消費價格指數（CPI）4.6%、生產價格指數（PPI）5.9%，顯示控制物價措施效果仍然有限，通膨壓力依舊居高不下。

類似中國的通膨情況，皆在在蔓延至全球其他地區。

通膨使全民購買力降低，“收入與分配受扭曲，加上好些國家沒有社會保障系統，或者涵蓋有限，尤使城市低收入戶最為脆弱。

一窮二白式的“發窮惡”，會藉各種方式爆發出來，中國乃至其他發展中國家發生的抗議與搶購只是端倪，這會是全球社會未來的亂源。

星洲日報／財經‧2011.02.02