Action:
After pricing in the optimistic expectation that CES will
realize IPO in 2H09 and its valuation will converge to
A-share comparables, with 0%~20% non-controlling
holding discount for CES, our valuation range for CEL is
HK$21.5~HK$25.09. We maintain our BUY rating on CEL.
Reasoning:
• The A-share market’s rally and booming turnover
largely support the earnings of CES. As a result, we
revise up CEL’s FY09 EPS to HK$1.01 after deducting
the HK$1.49 revaluation gain from CES in 09. Since
CSRC resumes IPO in June 09, CES’s IPO may be
realized in 2H09. If CES goes public, its valuation
discount to A-share comparables will be diminished.
• Given the A- and H-share markets’ rally in 1H09, the
HK$260mn AFS securities’ mark-to-market loss
recorded in 08 may be written back in 09, which limits
the earnings downside risk for HK business, but no
investment realized IPO in 1H09 means there is not
much surprise to be expected.
Valuation:
• For CES, we optimistically assign a 3.5x post money
P/B multiple (which implies no valuation discount for
its A-share comparables or 28x post money P/E
multiple).
• For HK business, we assign a 15x P/E multiple for HK
non-investment business, and mark-to-market value for
HK cash & securities.
Risks:
The correction of the A-share market will have a negative
effect on brokerage and proprietary trading of CES, hence
we lower the earnings and the valuation of CES. The deep
correction may cause the IPO of CES to fail to meet
expectations.