Hong Kong shares inch higher, China coal slumps as earnings disappoint

Mon Apr 29, 2013 5:47am BST

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* HSI +0.1 pct, H-shares -0.6 pct

* China coal sector dives after quarterly earnings disappoint

* Esprit soars after UBS upgrade raises turnaround hopes

* China shut for 3-day Labor Day holiday

By Clement Tan and Yimou Lee

HONG KONG, April 29 (Reuters) - Hong Kong's Hang Seng Index edged higher on Monday as strength in retailer Esprit Holdings offset weakness in Chinese commodities counters after disappointing corporate earnings doused recovery hopes.

But there were emerging signs of a differentiation within these cyclical sectors, particularly with the leading players in the coal, steel and cement sectors that are seen controlling costs more effectively.

The Hang Seng Index ended a choppy morning session up 0.1 percent at 22,568.2 points. The China Enterprises Index of the leading Chinese listings in Hong Kong shed 0.6 percent.

Mainland China is shut for a three-day Labour Day holiday and will resume trading on Thursday. Hong Kong markets will also be closed on Wednesday for the same holiday.

Esprit Holdings jumped 4 percent to its highest in almost three months, thanks to an upgrade from "neutral" to "buy" by UBS analysts, who believe its turnaround prospects have improved following more focused execution.

Shares of the Europe-focused retailer are down almost 3 percent on the year after ending up 16 percent in 2012. This compares to the 0.4 percent decline on the Hang Seng Index in 2013 and a 23 percent rise in 2012.

Coal mining plays fell, however, after China Shenhua Energy posted a 1.2 percent decline in quarterly net profit, following a 38 percent decline recorded by China Coal Energy .

China Shenhua was down 0.7 percent, while China Coal tumbled 5.9 percent and looked headed for its worst daily showing in 11 months, hit further by a series of broker price target reductions.

"Some of the coal companies managed to disappoint reduced earnings expectations and coal prices are still weak, so we're likely to see more share price weakness from here," said Jackson Wong, Tanrich Securities' vice-president for equity sales.

Goldman Sachs said Shenhua's diversified asset class will continue to help mitigate the impact from coal price weakness. Goldman believes coal prices will stay weak through 2015 and combine with inflation to squeeze the margins of Chinese coal companies.

JP Morgan analysts cut their target on China Coal from HK$9 to HK$8, citing its rising gearing ratios as a near-term concern after quarterly results showed the company was unable to maintain stringent cost controls as it did the previous two quarters.

The Chinese steel sector did not fare much better.

Despite posting results that hinted at signs of a turnaround, Angang Steel shed 2.4 percent after the China's steel industry body warned its members on Saturday to rein in expectations for the remainder of the year.

An anticipated increase in demand would not be enough to justify big rises in production in coming months, China Iron and Steel Association (CISA) officials said, adding that the government was looking for new ways to restructure the sector, which was still facing massive problems.

Official data on Saturday showed industrial profits rising 5.3 percent in March from a year ago, compared with the 17.2 percent increase for the first two months. On the quarter, industrial profits rose 12.1 percent.

STRENGTH IN PATCHES

As the China coal sector slumped, investors continued to rotate into Chinese power producers on hopes that lower coal prices will expand margins. Huaneng Power jumped 3.2 percent to its highest since November 2007.

Stocks of Chinese property developers also rose as disappointing quarterly earnings for cyclical counters raised hopes that Beijing will not clamp down harshly on increases in home prices.

China Resources Land and China Overseas Land each climbed 0.9 percent, extending a recent recovery ahead of the release of China's official purchasing managers index data for April on May 1.

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