Europeans keen to invest in HK small to mid-caps

Corporate governance is their key consideration and guess what company tops their list.

In a research note, CIMB noted that its analysts have met with over 30 European investors last week and discovered a high level of interest overall in HK/China small/mid-caps as investors look to increase exposure
in a space that seems to have been overlooked relative to other regions.

"We received mixed views for our contrarian call on the luxury retail sector as disappointing Golden Week
sales cause investors to wonder if there are more than just cyclical reasons for the slowdown and if the
timing of the recovery could be delayed beyond 4Q. Meanwhile, a number of investors believes this is
the right time to invest in the sector as negatives seem to have been priced in," CIMB analyst Larry Cho said.

According to Cho, the baby/children product segment appears to have the most aligned interest. Stella, it said was regarded as the company with the best corporate governance while Sitoy received a high level of new interest
although it is less well-known. 

Here's more from Cho:

Despite the weak Golden Week sales, we still expect growth to bottom in late-4Q on the back of the waning of
high base comparisons, wealth effects (from property) and signs of inflexion in both gold and diamond
prices. The baby/children product segment should continue to outperform as it tends to be regarded
as a structural growth sector with limited links to the general macro environment.

Stella’s strong corporate governance image should value the stock at a premium over its peers while new interest in our luxury outsourcing theme should be most positive for Sitoy Holdings.

We believe a cycle inflexion is the key catalyst for the luxury sector in the next six months and contrarian
investors should be significantly rewarded for buying in at close to the cyclical trough.