INCREASINGLY, MARKET STRATEGISTS are turning positive on the Chinese markets, which have been in decline for much of the year. A month ago, Sean Darby, chief equity strategist at Nomura Securities said he is bullish on China because monetary indicators seems to be moving in the favour of the equity investor.

This happens when M1 growth is running faster than the monetary base and when M1 is growing faster than real industrial production, a measure of excess liquidity. The Shanghai Composite is now up 8.8% from its Jul 5 low of 2,363 although it is still down 21% year-to-date.

 

If the Chinese market has indeed seen its low, what stocks could benefit? One which stands out is Chinese government-linked shipbuilder Cosco Corporation. Th S-chip has gained 31.7% year-to-date, ending at $1.62 today. Yesterday, Cosco announced it had secured a turnkey EPC (engineering, procurement and construction) contract worth more than US$500 million ($687 million) from Chinese customer Dalian Deepwater Development to build deepwater drillship DP3. Delivery is expected in 3Q12.

 

Rohan Suppiah, analyst at Kim Eng Research, writes in a report that this contract was possible because of available financing in China. The drillship, when built, will be one of the most advanced in the market. The drillship features a separate production “moon‐pool” and its variable deck‐load capacity, deck space and cargo storage capacity will also be the highest for any drillship ever built. It will have a storage capacity for one million barrels of crude too.

 

While some analysts are concerned about Cosco’s ability to complete the vessel, earlier this year, the S-chip successfully delivered a state-of-the-art driller to Sevan Marine, prompting a repeat order from the Norwegian company. With the latest contract from Dalian, Cosco’s year-to-date wins total US$1.55 billion. In April, DBS Group Research estimated contract wins of US$1.65 billion for the full year.

 

Suppiah of Kim Eng has upgraded Cosco’s earnings for FY11 by 11% to $267.2 million, and for FY12 by 5% to $285.9 million. He says Cosco currently trades at 13.5 times FY11F PER, below the sector average at around 16 times. “Cosco has seen the worst from the last downturn, and is set to resume its growth trajectory over the next two years. Our new target price is $2.10, based on growth price‐to‐book valuation of 4.2 times,” Suppiah writes.

 

Meanwhile, Credit Suisse reminded investors that the announcements of the winners of Petrobras’ ongoing tender for 28 deepwater rigs are expected in the next two to three quarters. The Swiss investment bank believes Singapore yards could win a sizeable 45% of total orders, with Keppel Corp and Sembcorp Marine winning US$5.95 billion and US$3.5 billion worth of orders respectively. The completed rigs are to be delivered by 2017.

 

In other news, Qualcomm, the single largest customer of STATS ChipPAC, surged 8.2% after its sales and profit performance in 2Q10 topped estimates and raised its guidance for 2010 on the back of better than expected demand as well as pricing. A local broker points out that customers now prefer smartphones to traditional mobile phones. STATS ChipPAC, a Temasek subsidiary, bears watching as its share price could start to outperform.

 

The Straits Times Index gained 0.6% to 2,973.47 at the close. The gauge increased 0.5% this week, its third weekly advance. Nineteen stocks rose on the 30-member gauge, while eight fell.

 

The STI is stuck in a range in the near term. Although it remains above the key 2,900 support, it may be unable to break above 3,000 soon. But with medium- and long-term indicators strengthening, a breakout should be just a matter of time.

 

Individual stocks are likely to outperform. For instance, stocks which had suffered from their China connection such as CapitaLand and Yanlord Land Group appear poised for breakouts, as does Cosco.