Rally in US markets may push Asian stocks higher

After a week of intense macro economic data and sovereign bailout talk, we focus this afternoon’s Asian note on a few corporate stories which may have gone under the radar.

Asian casino battle heats up
This morning we commented on Echo Entertainment as it went into a trading halt pending a capital raising. It has been subject to a corporate governance saga since substantial shareholder and listed peer Crown sought to shake up the board.

The resignation of the Chairman last week has prompted Crown to pull back a request to call a shareholder vote. It seems both parties are now working on more friendly terms. Echo is interesting to watch because it has attracted Malaysia’s KT Lim, enough to prompt him to take a 4.9% interest in that group. That prompts questions as to whether Genting – which boasts its larger casino in Singapore – could be interested.

Echo is a microcosm of that greater race across the Asia Pacific region to jump into businesses that have exposure to the emerging Chinese middle class. Echo is perhaps more leveraged to the emerging VIP market and its recent property redevelopments means it is well placed to sit in diversified group outside of existing Macau exposures.

Other businesses that fit into this category include the regional banks – ANZ, DBS, CIMB for example. ANZ’s Asia Investor road show last week contained some very interesting points as to the geographical representation of each regional bank, within their own respective markets. Definitely worth a look by going onto ANZ’s website and searching the stock exchange filings.

Li Ning gets slam dunked
Many listed companies across the region are now officially in a confession period. Trading companies with leverage to rising Chinese consumption isn’t always a one way ticket to profitability. The latest to catch our eye is Hong Kong listed Li Ning – a private equity backed Chinese sportswear brand. It is also, unofficially, dubbed the Chinese Nike.

It expects a substantial decline in its profit for 2012 due to weaker sales and higher marketing costs. That was enough to send stocks to a six year low. Li Ning’s elevated marketing costs come as it seeks a sponsorship deal with the Chinese Basketball Association through to the 2016/17 season. The move aims to pitch into the rise of basketball in China.

Li Ning’s profit woes are compounding problems for the Hang Seng Consumables Goods Index, it last traded around 0.9% lower. Other losers during the session, perhaps guilty by association, include apparel group Daphne International down 4%, Chow tai Fook down 3% and Luk Fook Holdings down by more than 2.5% at the time of writing.

Telstra’s mobile market share
Australian telco giant Telstra has enjoyed a steady run in share price despite the global turmoil. Its main competition at home in the mobile space is Singapore Telecommunication’s Optus business and Vodafone. Telstra should be watched closely.

It might come as a surprise that we point this out. Sure, it’s unlikely to raise capital but it shouldn’t be completely ruled out. Gearing was last at 55% so it doesn’t exactly have low gearing. Many have taken the National Broadband Network (NBN) deal as a guarantee and that all will be fine, but it does have vulnerabilities, is prone to timing and takes into account various assumptions which might not pan out. It doesn’t come as one big cheque.

Earnings risk is real for Telstra. Its short term growth has been driven by its mobile business, largely at the expense of its peers. Its other areas aren’t growing. The 28 cents per share dividend is based on 100% payout, so if earnings were to come under pressure there will be a downgrade to the dividend.

Competitors Optus and Vodafone are not sitting idle. Optus for example is working on rolling out its 4G network. Vodafone has a lot of lost ground to make up but is digging its heels in, recently cutting large discretionary marketing commitments to reinvest into its own network.

The flood of customers which came to Telstra in the first half of this financial year could easily flow back to competitors over the next few years, making mobile earnings growth less likely and putting pressure on the whole group. Telstra added almost one million mobile customers in the first half of 2012 financial year but total group revenue added just 1%. With net debt of around $14bn – around a third of the current market capitalisation – it’s definitely one to watch.