Securities Daily Insights20080611

Poly Real Estate (600048): Comment on sales in

May

Summary: In May, sales areas of Poly Real Estate (600048) reached 236,400 square meters with a subscription amount of RMB 1.945 bln. Sales areas from January to May reached 885,600 square meters with a subscription amount of RMB 6.646 bln, up 44.04% y-o-y and 23.9% y-o-y respectively.

Our view:

z Sales of Poly Real Estate in May are lower than our expectation. Sales volume from January to May is only 27% of the company's yearly plan for 08. The average sales price in May is about RMB 8,228 and that from January to May is RMB 7,506, lower than the same period of 07 of RMB 8, 724 but higher than 07 average sales price of RMB 8,537. By the end of May 08, the settlement amounts of the company had reached RMB 18.28 bln, as high as 247% of 07 settlement income.

z The RMB 4.3 bln company bonds issued by Poly were approved by China Securities Regulatory Commission, which will provide important capital support for company's future rapid development and enhance its capital strength.

z We predict Poly's 08 EPS to be 1.2 yuan and P/E ratio ×13.3. Considering its leading position in the industry and strong certainties for future performance growth, we grant BUY rating.

Buy Add Hold Sell ( Maintain )

Share Price（10th Jun） 15.94Yuan

Total share/A share（M） 2452.34/1051.88

07EPS/08EPS 0.65/1.20yuan Country/Area China Sector Real Estate

Perfect entry point (for insurance) emerges as shares dropped

Summary: on June 10, Ping An, CPIC and China Life fell 8.12%, 9.59% and 7.88% respectively. Ping An closed at RMB50.13, CPIC 21.50 and 27.47.

Our view: 1. Oversold. Current prices imply 15X NBM for Ping An, 19X China Life, and 38X CPIC (compared with 15X NBM for European peers before subprime crisis). Given the strong growing prospects of China insurance sector and leading players, we believe insurance counters have been oversold and present very opportunities. 2. Over reaction. The RRR hike by the central bank is actually favorable for insurers, given the support for bond yield and investment returns. Despite the economic uncertainties, both macro economy and enterprise earnings are heading for better prospects, providing no reason for the selling panic. 3. H-share performance actually gives strong support for A-share, rather than a drag.

RRR hiked again

Event:

z The central bank decides to raise the required reserve ratio (RRR) on RMB deposits of financial institutions by 1%. Half of the raised amount is to be paid on June 15th and June 25th respectively. Financial institutions in the earthquake-hit area are exempted from the hike temporarily.

Our view:

z The 5th hike this year, well within expectation, aims to sterilize the liquidity from trade surplus and to implement the tight monetary policy. We expect a relatively large size of trade surplus in May. Besides, the amount of funds to mature in the open market in June reaches 487 bln yuan. Therefore, in our view, the central bank may prefer quantitative tools to carry out the tight monetary policy in 2008.

z With RRR reaching 17.5%, liquidity in commercial banks will be immediately squeezed, who may resort to reducing the size of loans or the weight of other assets, such as bonds, in investment.

z Impact of the RRR hike on economic growth is limited because liquidity in the banking system as a whole is rather ample given the inflow of capital and rapid growth of residents' savings. Loan quota control, rather than RRR hike, can restrain loan expansion in a meaningful way.

z In our view, in withdrawing liquidity, the central bank will take as main measures "window guidance" for commercial banks, open market operation and more RRR hikes in the near term. In implementing the tight monetary policies, a tradeoff between inflation and economic growth, equity market and inflow of hot money has to be considered. Therefore, we believe the central bank will be cautious in using the interest rate tool in macro control.

z As for policies, in addition to withdrawing liquidity and controlling loan quota, the most possible option for the central bank is to accelerate RMB appreciation to ease inflationary pressure, adopt "loose fiscal policies" to boost domestic demand and expansionary fiscal policies to cushion the impact of the tight monetary policy so as to prevent possible economic "slump".