Asian stock investment ideas

US equities

In October, Asian-based automakers posted the biggest gain in market share of U.S. vehicle sales, rising 1.3 percentage points to 32.4% y-o-y. European-based automakers rose 0.5 percentage points to 7.4%, while U.S.-based automakers fell 1.8 percentage points to 60.2%.

The Big Three, GM (27.3% market share), Ford (20.2%), and Chrysler (12.7%) are still holding the top 3 positions, but Japanese carmakers are closing the gap, with Toyota, Honda, and Nissan having 11.6%, 7.7%, and 5.2% market share respectively.

We do not recommend U.S. carmakers due to weak sales. Although General Motors Corp. (GM, $42.78, CSFB: Restricted) and Ford Motor Co. (F, $13.20, CSFB: Neutral) offer attractive incentives for their vehicles, sales do not present some improvements, because customers consider these incentives as normal.

GM and Ford tried to reduce incentives in October, but sales declined accordingly. We believe this trend would continue for the short-term, as long as U.S. automakers release new
models.

With ISM Manufacturing and Factory Orders expected to rise, we would like to highlight our recommended U.S. manufacturers. ITT Industries Inc. (ITT, $65.92, CSFB: Neutral) produces pumps and systems to measure and control water and other fluids. It also has a significant exposure to U.S. defense spending, with about 30% of its sales to the U.S. Army in 2002.

Pentair Inc. (PNR, $43.60, CSFB: Not rated), a company producing electrical and electronic enclosures, professional tools, and water products, has an attractive valuation in our view. Dividend Discount Model gives a theoretical stock price of about $60. We rate this mid-cap as a Buy.

The small and mid cap sector generally continued performing well over the last week, with the S&P Midcap 600 up 1.32% and the S&P Smallc up 1.18, compared to 0.61% for the S&P 500 large cap index.

Among our recommendations in the segment UTStarcom Inc (UTSI, $37.88, CSFB: Outperform) rose sharply by 2.21% over the week and could get further support by a bullish report from CSFB, which initiated coverage on the company with an Outperform rating.

CSFB places emphasis on the points, which we see as key to our recommendation, namely being the leading equipment vendor for PAS (personal access system) technology to Chinese incumbents, but also becoming increasingly important vendor for DSL and eventually 3G technology, as well as UTSI's potential to leverage its expertise into markets in India and Latin America, where the order flow is expected to grow strongly.

CSFB in its valuation model is slightly more bullish than we are in ours, as the CSFB analyst sets his 12-months price target at USD 45, while we have ours at USD 39. Our price target reflects our general cautious view on growth expectations, but in this case in fact might prove too conservative, as the news flow coming from UTStarcom points towards solid revenue streams.

The mid cap software maker Macromedia Inc (MACR,$20.52, CSFB: Outperform) share price is continuing to recover from its over 34% drop after the company issued a lower than expected revenue guidance for the fiscal year 2004.

During the last quarter report the company management cut its revenue growth forecast to 5-10% from 10-20%, citing disappointing momentum on the release of a product upgrade.

Macromedia is aiming to add the professional developer community to its clientele, growing the market potential by 8.5 million customers from the currently 6.3 million creative professionals that MACR existing products serve. The company has introduced a new product suite for these enterprise users, called Royale, which should start contributing to the company bottom line by 2005.

Updates on revenue figures for Royale are the next potential catalyst for the stock. We believe that based on the revenue growth assumptions of 7.77% from analysts polled by IBES, the current share price still embeds value and should continue to rise towards USD 23 as sales for Royale start gaining track.

Asian equities

The Tai-ex closed at 5771.77 last Friday, -1%change from the previous week's close. Apart from the weakness in global equity markets last month, the Tai-ex suffered from further nervous trading last week as the market sold off stocks ahead of the passing of the controversial referendum bill by the Taiwan Legislature.

Going into this week, we expect the index to re-attempt to hold its ground at 5800. Resistance capped at 6000 in the near term. Taiwan passed a referendum law last Thursday that could potentially open the way for a public vote for constitutional changes and eventually, perhaps even an independence declaration.

The bill passed was a compromised version that allows the public to vote on constitutional amendments that do not seek to change the island's flag, name or political status. China has earlier vowed strong reaction had legislation passed giving public an unrestricted right to change the constitution.

Although the market responded positively on Friday on relief that the watered down version of the new referendum law may minimize potential strong reaction from China since it does not allow for an explicit referendum on sovereignty, it nevertheless focuses further attention on the upcoming elections, of which we expect continued debate on this topic to cause further volatility in the Taiwan market up to the elections in March next year.

For this week, the index looks likely to remain range-bound especially given President Chen's latest announcement that he intends to invoke the defensive clause in the new referendum law that allows the president to hold a referendum on the island's sovereignty when faced with an outside threat.

His plans to hold the referendum along-side the elections is a move likely to provoke China. For the near term, market participants are watching China Premier Wen's US trip 7-10 Dec to see if it yields any assurances for lessened cross-strait tensions. CSFB believes options available to China are limited.

Military exercises in the past have been counterproductive & political implications could go beyond Taiwan Strait during US election year. Despite the improving economic data, investors are likely to remain cautious pending further clarity as the election race has become too close to call, and President Chenwants to call a defensive referendum. Bottom line: expect further market volatility ahead.

For investors looking to take advantage of market volatility to trade on dips, we reiterate our positive view on Taiwan financials, with Cathay FHC (2882 TT) as our top pick.

On the back of regional market weakness and nervousness towards the TFT-LCD sector, our trading buy Novatek Microelectronics (3034 TT) has retraced to touch a low of 99 on 19 Nov 03 before recovering last week to close at 101.

No change to our view on Novatek as we see no change to the company's fundamentals. Maintain our target of 130 dollars, which gives an upside of +28.71% from Friday's close of 101 dollars.

South Korea


• Staying defensive in Korea

• No change to positive view on KT&G (033780 KS).

High dividend yield story, stable cash flow and improving average selling prices outlook remain intact.

The Kospi moved up 3.29% closing at 796.18 last week after suffering a sharp decline of -4.82% the previous week on the back of weakness in global equities and news of prosecutors investigating chaebols as the probe for campaign lush funds widened.

CSFB economists believes that President Roh's veto of the opposition GNP's bill for a special counsel to investigate the political funding scandal could trigger a constitutional crisis (if opposition wants to challenge the president).

As highlighted earlier, our view on Korea has been cautious in light of the sluggish consumption, near term political uncertainties and overhang from North Korea, although exports recovery has been a key positive factor.

With continued concerns over the domestic recovery, further political instability could be negative for investor confidence. Maintain our cautious stance.

With the year-end dividend ex-date period coming up, we see good support for dividend stocks such as KT&G (033780 KS), which we have recommended since early this year and seen a solid +33.3% profits.

We have the stock as a core holding in our recommendation list and believe its dividend yield story and stable cash-flows remain intact, despite tax issues and outstanding exchangeable bonds being overhang on stock price. The company has recently completed its share buyback of 3 million shares (which it intends to cancel) and has guided it will pay W1600 per share for this year's dividend, which translates into 9.7% dividend yield at our entry price, or 6.32% yield at Friday's closing price of W22150.

The company expects its market share to stabilize at around 75-76% by next year, and believes that the maximum tax hike is likely to come through at around 500 won per pack at around July 2004 earliest, with potential impact on sales volume expected to be not as significant (estimated -5%) as the previous hike, which impacted sales
volume at 7%.

Taiwan


• New referendum law passed in Taiwan last week focuses further attention on upcoming elections in March 04. Expect further market volatility ahead, with cross-straits tensions playing a major factor.


• Despite the improving economic data, investors are likely to remain cautious pending further clarity as the election race has become too close to call, and President Chen wants to call a defensive referendum.


• For the near term, market participants are watching China Premier Wen's US trip 7-10 Dec to see if it yields any assurances for lessened cross-strait tensions.