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Broker's take: Defence could be the new investment theme for 2017: HSBC

Friday, January 6, 2017 - 16:32

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ASIA'S rising spending on defence is expected to become a more visible investment theme this year and possibly over the next decade, HSBC Global Research said on Friday.

ASIA'S rising spending on defence is expected to become a more visible investment theme this year and possibly over the next decade, HSBC Global Research said on Friday.

In a report on its equity strategy for Asia, HSBC experts noted that Asia's defence spending has been rising and is poised to continue. They cited SIPRI (the Stockholm International Peace Research Institute) which has estimated that Asia's total defence spending has increased 75 per cent over the past decade, significantly faster than the 1 per cent growth across the Americas and Europe's 7 per cent rise over the same period. According to SIPRI, Asia spent US$192 billion more in 2015 on military expenditure than in 2005.

China's military budget, second only to the US, has risen at a compound annual growth rate (CAGR) of 14 per cent since 2006 and is seen expanding further. The same uptrend in spending is witnessed in India.

"The defence industry has some relative attractions for investors. It is dominated by high barriers to entry (including high research and development spending and government relationships), few competitors (as countries try to reduce their reliance on foreign suppliers), relatively visible and secure revenue streams, and a continuous product development roadmap,'' HSBC said.

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Among the companies that are well placed to benefit from these developments include Shanghai-listed China Shipbuilding Industry Co Ltd and Hong Kong-listed CSSC Offshore & Marine Engineering (COMEC). The two are part of China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC) - the two shipbuilding giants which dominate China's warship market.

China Aviation Optical, aka JONHON, is also well placed to benefit as it is a leading defence integrated connection solution provider in China.

Others include Haige Communication, China's leading provider of radio and satellite communications equipment and services; India's Larsen & Toubro as well as South Korea's Hanwha Techwin.

Looking ahead at the container shipping sector, HSBC said the dynamics for the sector have started to change over the past 18 months, with a series of consolidations and several bankruptcies.

"We now think the demand-supply situation can start to find a balance. This process could accelerate in 2017, allowing a balanced market by 2019-20,'' it said. In Asia, it prefers Hong Kong-listed SITC due to its focus on intra-Asia, which makes it relatively immune from weak inter-continental trade flows.

India's HDFC Bank tops HSBC's Asia's best-in-class companies. HSBC said despite weak loan demand in India, HDFC Bank's retail loan growth remains high, at more than 20 per cent as of November 2016. This is led by auto and personal loans, which are 40 per cent of all retail loans. In addition, its CASA franchise remains solid and asset quality is excellent, with a gross non-performing loan ratio of 1 per cent.

"Our analyst forecasts 20 per cent earnings CAGR over the next three years,'' HSBC concluded.

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