Amid US stock stabilized last Friday, as well as the lack of further tightening measures launched during weekend, HK stock market opened higher on Monday but the HSI was capped by previous day high resistance at 23,600 and the gain cannot be extended. A share reversed early weakness in the afternoon once boost HK stock market, but its momentum is short. Late selling pushed the HK stock market to erased most gain and finished the day 83 points lower at 23,238. H share index also lost 132 point while market turnover dropped to HK$75.9bn, reflecting investors cautious attitude. Commodity price soared which help to lift China commodity plays with CNOOC (0883.HK) rising 2.4%. On the other hand, with anticipated cancel of purchase subsidies in the coming years, Geely (0175.HK) lost 5.0%.

Hong Kong shares ended higher Tuesday, tracking a rebound in China shares despite a report the mainland's central bank may raise interest rates this weekend.

The blue-chip Hang Seng Index rose 190.46 points, or 0.8%, to 23,428.15 after trading between 23,101.81 and 23,475.29 during the session.

Market volume totaled HK$72.68 billion, down from HK$75.94 billion Monday.

Analysts said they expect the index to trade in a range of 23,000 to 24,400 points for the rest of the year as investors continue to focus on the state of the economic recovery in Europe and the U.S., as well as China's reaction to rising inflation.

'If there is a rate hike, it will clear the uncertainty. It will be good for the Hong Kong market,' said Louis Wong, research director at Philips Securities.

The Shanghai index fell as much as 1.7% in the morning after the state-run China Securities Journal reported China's central bank could raise interest rates this weekend ahead of the release of November economic data, which will include consumer price index figures.

China announced an interest rate hike, the first in nearly two years, two days before the release of September's inflation data.

But the benchmark Shanghai Composite Index ended up 0.7% at 2875.86 as metals firms rose following weakness in the U.S. dollar during Asian trading hours.

Analysts in Hong Kong said the report that another China rate increase was imminent was likely a relief for investors, who had been concerned about the timing of any such hike.

Citigroup wrote in a report it expects one rate hike of 25 basis points 'imminently' and total rate rises of 125 basis points by the end of 2011. The house added that China gross domestic product growth would likely remain strong at 9.2% in 2011 while inflation was 'not a major problem' -- good news for Chinese equities in 2011.

Blue chips China Construction Bank, which rose 1.3% to HK$7.06, and China Mobile, which rose 1.0% to HK$78.95, were the biggest contributors to the index's rise, accounting for a combined 37.78 points.

Wharf was the best-performing blue chip, rising 5.8% to HK$58.00 amid a rally in Hong Kong retail firms. A local fund manager said Hong Kong retail stocks 'have become a crowded trade' and that Wharf offers the same exposure but is 'safer' than its retail peers.

BROKERS TIP:----REALGOLD MINING

Event: Gold price reached record high as investors anticipate more quantitative easing policy to come.

Gold futures reached record high last night to US$1,429 per ounce as investors anticipate that the Fed may inject more cash into the market after the release of a disappointing unemployment figure last Friday. At the same time, the worsening European debt crisis also helped push up gold price as some investors are seeking gold assets as a safe haven.

Despite the strong performance of gold price, share price of Real Gold is still trading 7% below the peak of $15.74 on November 9. We believe the recent weakness in share price is a good buying opportunity for long-term investors given its cheap valuation and our bullish outlook on gold.

Real Gold announced a disappointing 3Q10 earnings result, which saw a qoq decline of 3% to RMB 189mn despite a 2% increase in realized gold price. The main shortfall was due to a lower than expected number of production days in August, which in turn affected company’s output and sales volume in 3Q10.

Despite a disappointment in production volume, both average ore grade and recovery rate of the two mines have been stable in 3Q10. Considering that production has returned to normal level in September and also both gold and copper prices are significantly higher in 4Q10 (quarter-to-date gold and copper prices are 10%-11% above their 3Q10 averages), we estimate that company’s earnings in 4Q10 will grow 37% qoq to RMB 258mn, implying a full year net profit of RMB 769mn (EPS RMB 0.92).

While we believe that the output from two existing mines in Inner Mongolia will not have any significant growth going forward, the commencement of Yunnan’s Fuyuan Gold Mine in July 2011 and Jiangxi’s Daping Gold Mine in October 2011 will be the main source of capacity growth over the next two years. We estimate that the two mines combined will boost company’s gold output by 15% from 135koz in 2010 to 155koz in 2011. Production output will have another 37% increment in 2012 when the other two mines in Guangxi become operational.

Gold price has rose 29% year-to-date as investors are losing confidence in fiat money given that Fed has adopted a massive quantitative easing policy in order to stimulate the U.S. economy. We believe the policy will inevitably suppress the US dollar, which in turn is favorable to gold price. As such, we expect gold price to hover at high level in 2011. Our 2011 earnings forecast is based on a relatively conservative gold price assumption of US$1,320.

On the back of strong gold price and a 15% output growth, we estimate that Real Gold will achieve a net profit of RMB 987mn (EPS RMB 1.08) in 2011. Counter is now trading at 11.6x 2011 PER that we think is undemanding given company’s robust output growth and high ore grade of its mines.

We maintain our BUY rating on Real Gold with a 6-month target price of $18.50. This translates into valuation at 15x 2011 PER, which is still a 40% discount compared to valuation of Zhaojin Mining (1818).

BROKERS TIP :- ZHAOJIN GOLD MINING CO

Zhaojin reported a 76% yoy increase in 1H10 earnings, in line with market expectation.

Zhaojin reported net profit of RMB 572.1mn (EPS RMB 0.39) for 1H10, up 76% yoy. Company did not propose any interim dividend. The bottom line was largely in line with our expectation and also represents 52% of market’s full year earnings forecast. The significant boost of earnings was mainly due to an increase in both gold output and gold price as compared to same time last year.

Revenue surged 58% to RMB 1,675.9mn thanks to a 21% increase in volume of gold output from self-owned mines along with a 28% increase in average gold price to RMB 264 per gram. At the same time, integrated cost increased by 16% to RMB 103 per gram. Gross profit margin expanded by 6.8 percentage points to 61%.

Zhaojin did an impressive job in 1H10 by continuing to increase its gold resources via exploration of existing mines as well as acquisition, and has increased its gold resources by approximately 100,215kg (or up 30% from its end-09 figures). During the period, company has acquired gold resources in regions like Xinjiang, Gansu, Guangxi and Liaoning, which is in line with its strategy to expand into areas outside Zhaoyuan.

Company’s self-mined gold output in 1H10 represented around 46% of company’s full year production target. Yet, we believe this was due to slow production during Chinese New Year and are confident that company can achieve its full-year target, implying a 24% yoy growth in gold output this year.

Integrated cost was 7% above our expectation probably due to the higher costs of newly acquired gold mines. However, Zhaojin’s sales price of gold was also 4% higher than the average gold price at Shanghai Gold Exchange in 1H10, as company accurately captured the market trends of gold price during the period.

We maintain our 2010 and 2011 earnings forecast of RMB 1,173mn (EPS RMB 0.80) and RMB 1,415mn (EPS RMB 0.97) respectively, implying a growth of 56% in 2010 and 21% in 2011. Counter is trading at 17x 2011 PER that is not demanding compared to its historical average PER of 21x.

Reiterate BUY with unchanged 6-month target price of $20.90, representing a 19x 2011 PER. We believe gold price will further go up in September as we step into the traditional peak season for physical gold. Thus every correction of gold price this month is a good entry opportunity for Zhaojin.

Given market talks saying that China will adjust interest rate upward in this week as will the two days advance to release the major mainland economic data (now is scheduled on Saturday), investors concerned that Central government might launch new measures again to tighten the economy, selling pressure seen on A share and HK stock market. The HSI once fell below 23,000 and finished the day 336 points lower at 23,093. H share index also lost 186 point to 12,736. Market turnover was HK$77.7bn. China plays generally performed weak. Of which, international oil price retreated which depressed the oil stock. CNOOC (0883.HK) and PetroChina (0857.HK) fell 2.4% and 2.7% respectively. Besides, the concern of the cancellation of auto purchase subsidy continued to hurt auto sector with Brilliance China (1114.HK) lost 6.0%.