China: 2H10 Earnings Likely Mixed

- Earnings trend – "2H10 corporate earnings will likely face conflicting forces, moderating growth and persistent though benign inflation. We expect overall earnings growth to slow in the second half of the year alongside growth normalization."
- Earning surprises – "Price inflation and policy calibration could bring earnings surprises in related sectors. We expect CPI to stay above 3% in the 2H10 thanks to higher food prices and money velocity. Policy tightening in the property and energy sectors could also generate favorable earnings expectations for large listed companies."
- Sector outlook – "There is no clear evidence suggesting that valuations are converging across sectors. Economic and policy changes in the second half of the year would still favor high valuation plays. In our view, insurance and consumer staples are likely to see positive earnings surprises and will
outperform in 2H10."
- Top picks – "Ping An (2318.HK; HK$69.40; 1L) and Mengniu Diary (2319.HK; HK$23.05; 1L) may outperform in light of 2H10 earnings and economy outlook. Ping An posted a stronger 1H10 results and should be able to deliver strong operating momentum this year due to improving life business mix and P&C turnaround. For Mengniu Dairy, earnings momentum may start to pick up in 2H10 on 1) stabilizing raw milk cost, which management saw pull back somewhat since July, 2) improving product mix as Mengniu is shifting to higher value-added products, we recommend to buy on recent weakness."


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