Slipping from first place to No. 3, Bank of America Merrill Lynch’s Chen Luo acknowledges that his sector faces some challenges — primarily those that e-commerce and retail oversupply present. However, “some of the more negative aspects are already priced in,” he adds, “and selective investment opportunities exist in the space.” Luo identified several such openings in his coverage of Hong Kong–based Gome Electrical Appliances Holding, a retailer of household machine goods and consumer electronics. He upgraded Gome from sell to buy in September 2012, believing that “its fundamentals had bottomed out,” the analyst notes. Then in January, when the shares had rocketed an impressive 67.2 percent and outdistanced the sector by 34.2 percentage points, he lowered his rating to neutral, in part on valuation. Gome’s risk-reward proposition was less promising after the share price rally, Luo advised clients. But he pivoted again in late August, upgrading the stock to buy. It had plunged 32.1 percent since his downgrade, worse even than the sector’s decline of 10.8 percent, and he detected strong earnings momentum and judged the price once again attractive. By the end of October, the stock had surged 57.9 percent, to HK$1.20, besting the sector by 48.3 percentage points. — Katie Gilbert RUNNER(S)-UP Xiaopo Wei CLSA |
The 2013 All-China Research Team: Consumer/Discretionary, Third: Chen Luo