Monday, October 6, 2008

Target Vs Reality


We shall travel back in time and take a look at how atrocious are some of the target prices set by the analysts from the investment banks. I have taken China Shenhua (coal mining) listed in Hong Kong as an example.

Just slightly 6 months ago in March, UBS gave a target price of HK$70, saying the firm will benefit from strong coal demand, planned asset injections from its parent firm, mine reserve expansion and possible overseas acquisitions.

HK$70!!!!!!!!!
This is something that will probably make or break the analyst's career considering Shenhua had a short listing history (IPO in 2005). Setting such a target price does not reflect well on the thought process of the analyst as well as his/her manager who signed off the report. Retail investors will do well if they can think of all the various scenarios that can go wrong before buying shares of a certain company. Try to be aware of the downside risks and the upside will take care of itself if the investment has a huge margin of safety.

In the same month, Citigroup assigned a "sell" rating with a target price of HK$33. "We fail to see value in Shenhua and think potential for further de-rating remains. ... Creeping costs, higher spending and stationary power tariffs continue to threaten margins".

For a matter of fact, Shenhua is trading at a price of HK$17.50 today.

1 comment:

SGDividends said...

Agree with you analyst actually should not set target prices. I guess they want to generate commissions or something especially for retail customers...thats how these analysts earn money!