Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jan 26, 2015

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 14E 15E 14E 15E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK Local Daily ADR Daily ticker Company (HK$) (%) (US$) (%) 857 PETROCHINA ICBC CHINA MOBILE CCB BANK OF CHINA HSBC CHINA LIFE INS TENCENT SINOPEC PING AN INS Econ data release China Data Date Period Prior Cons Ind Profit Mthly YoY 27-Jan DEC Westpac MNI Ch CSI 28-Jan JAN Manufacturing PMI 1-Feb JAN Non-Manf PMI 1-Feb JAN US Data Date Period Prior Cons Dur Goods New Ord 27-Jan DEC SPCS Composite Jan NOV Markit US Serv PMI 27-Jan JAN P Initial Jobless Claims 29-Jan 24-Jan Cont Jobless Claims 29-Jan 17-Jan Pending Home Sales 29-Jan DEC Q GDP 30-Jan 4Q A Source: Bloomberg GF events Date Event Location 26 Jan Baoshan Iron & Steel inv conf Shenzhen 27 Jan Huijin Electromechanical conf Shanghai Source: GF Securities (HK) A-Share Market OGSE: Multiple signs indicating oil prices potentially bottoming We are seeing a number of signs indicating that oil prices might be bottoming. The drive to invest in high-cost forms of oil mining has been dampened by low oil prices, while leading oilfield service companies are cutting headcounts, something that they did when oil prices bottomed in previous down cycles. In addition, oil companies absorption cost level (now ~US$50/barrel) should provide strong support to oil prices. Political factors should also be taken into account as consistently low oil prices in the long term will add uncertainties to the international situation. Lao Feng Xiang ( CH): Outlook positive amid rising gold prices Risk-averse sentiment is likely to drive continued strength in gold prices amid global liquidity easing. 80% of Lao Feng Xiang s revenue comes from jewelry sales, of which 85% is attributable to gold products. Gold jewelry net profit CAGR of 50% during suggests the company s earnings are highly elastic with respect to gold price growth. We are positive on the company in the mid/long-term given it is a long-standing brand with a strong market position, a clear roadmap for business model reform and an effective staff incentive system. Xinhu Zhongbao ( CH): DZH platform to offer potential for customer flow monetization Following Shanghai DZH s acquisition of Xiangcai Securities, Xinhu Zhongbao will directly and indirectly hold a 13.14% stake in DZH. Xinhu Zhongbao s wide range of financial licenses in China should give it substantial room to monetize the customer flows on DZH and Xiangcai s internet finance platform. In addition, most of the cities where its saleable properties are concentrated have removed their HPRs and are seeing a strong recovery in property transactions. We expect the company s investment returns to exceed Rmb1.0bn in Hong Kong Market China Property Note: 2014 GFA sold down 7.6% YoY NBS data show investment in real estate rose 10.5% YoY in 2014, while investment in residential properties rose 9.2% YoY, accounting for 68% of total real estate investment. Experts we met in Shenzhen recently see a bleak future for most commercial property developers and operators given the increased proportion of online retail sales. They believe residential developers must shift to an asset-light business model, while execution will be key. Vanke is our top pick for 2015 given its massresidential focus, relatively clear earnings visibility, impressive contract sales in 2014, and strong execution in both up and down cycles. IGG (8002 HK, Buy): 4Q14 result preview; valuation undemanding, maintain Buy IGG is set to announce its 4Q14 results In early Mar. We expect revenue and net profit to grow 59% and 108% YoY, based on ongoing stable performance of its core games. We expect its new games to make a substantial revenue contribution in the next few months, and management has given guidance of a strong pipeline of around 20 new mobile games for FY15. We lower our 2015 earnings forecast by 6% to reflect increasing operating costs, and therefore lower our target price from HK$5.06 to HK$4.75, implying 11x FY15 P/E and 72% upside potential. Maintain Buy. Alex Fan, CFA, Head of Research, SFC CE No. ADJ672 alexfan@gfgroup.com.hk Gao Yedong, Editor, SFC CE No. BAI002 yedonggao@gfgroup.com.hk

2 OGSE: Multiple signs indicating oil prices potentially bottoming Signs of oil prices bottoming International oil prices have dropped by nearly 60% since mid-2014 with the share prices of major oilfield services and equipment companies plunging. However, we are now seeing a number of signs indicating that oil prices are in the process of bottoming. Removal of high-cost oil production capacity WBH Energy, the first shale oil company in the US, filed for bankruptcy in early Jan, while BHP Billiton has indicated that it will shut down 40% of its shale oil wells in the US by the end of this financial year. In addition, low oil prices are also dampening oil companies drive to develop other types of oilfields that require high mining cost. Extreme pessimism In early 2015, several international research agencies switched from the more conservative views that they had near end-2014 and lowered their 2015 average oil price forecasts, with some expecting oil prices to drop to as low as US$20/barrel. In addition, Schlumberger, the world s biggest oilfield technology and service company, has announced a plan to lay off ~7% of its staff, while Halliburton, the No.2 oilfield service firm, also intends to cut its headcount by 11%. It is worth noticing that Schlumberger also announced layoff plans when oil prices bottomed in 1997, 1999, 2002 and Support from absorption cost level We believe that once oil prices drop below oil companies absorption cost (a way of calculating production cost that includes F&D cost, administrative expense, amortization, depreciation, tax expense, etc.), these companies might cut production significantly, providing strong support to oil prices. During the 2008 financial crisis, international oil prices dropped from the peak of US$146/barrel and bottomed at around US$36. The absorption cost of oil production back then was around US$33, and the figure has now risen to US$50. Political factors Last but not least, disagreements among OPEC countries are escalating. As petroleum is an important source of fiscal income for many countries, consistently low oil prices in the long term will add uncertainties to the international situation. With Moody s having lowered its debt rating for Venezuela, which is due to repay foreign debt worth billions of US$ this year, a default by the country will be another signal of oil prices bottoming. Lao Feng Xiang ( CH): Outlook positive amid rising gold prices Global liquidity easing pushing gold prices higher The ECB has just started quantitative easing as expected, joining several other countries which have lowered their benchmark interest rates recently against the backdrop of continued weakness in commodity prices as well as the global economy. Risk-averse sentiment is likely to drive continued strength in international gold prices. The spot gold price at the Shanghai Gold Exchange at the close of Jan 22 was 14.3% higher than the recent low reached in early Nov Company earnings highly sensitive to gold price growth 80% of Lao Feng Xiang s revenue comes from jewelry sales, of which 85% is attributable to gold products. The company saw its gold jewelry sales revenue grow at a CAGR of 33.2% during the gold price up cycle, compared with a gold price CAGR of just 16% during the period. In addition, Lao Feng Xiang s specific wholesale model makes its earnings dependent on gold sales volume (rather than value) and the scale of gold price growth. Gold jewelry net profit CAGR of 50% during suggests that the company s earnings are highly elastic with respect to gold price growth. Positive on company We are positive on the company in the mid/long-term given it is a longstanding brand with a strong market position, a clear roadmap for business model reform and an effective staff incentive system. We are also upbeat about its efforts in building an internationalized brand through production structure and business model reforms relying on the capital market. The company expanded its business in the face of declining gold prices during , and further consolidated its leading market share, laying the foundation for strong earnings growth during a gold price up cycle. We maintain our 2014/15/16 EPS forecasts of Rmb1.79/2.22/2.85. Xinhu Zhongbao ( CH): DZH platform to offer potential for customer flow monetization DZH s acquisition of Xiangcai Securities Shanghai DZH ( CH) plans to acquire the 100% stake in Xiangcai Securities from the brokerage s multiple shareholders which include Xinhu Page 2

3 Zhongbao through cash payment as well as a rights issue. Following the transaction, Xinhu Zhongbao will directly and indirectly hold a 13.14% stake in DZH. Substantial room for customer flow monetization Shanghai DZH, whose customer base is leading peers, is seeking to develop itself first into an online brokerage and ultimately into an internet financial platform through its cooperation with Xiangcai Securities. Xinhu Zhongbao has accumulated a wide range of financial service licenses in China and is actively planning for the acquisition of overseas business resources. This should give it substantial room to monetize the customer flows on DZH and Xiangcai s platform. Strong recovery in property business segment Xinhu has an abundant land reserve. In addition, most of the cities where its saleable properties are concentrated (e.g. Hangzhou, Wenzhou, Nantong, Shenyang) have completely removed their home purchase restrictions, and are seeing a strong recovery in property transactions on the back of the PBoC s relaxed mortgage lending rules and the latest interest rate cut. Overall, the company is in a healthy financial position as the ~Rmb5.4bn raised from its recent rights issue has significantly improved its cash flow and net gearing ratio. Outlook positive Xinhu s net asset value now stands at Rmb18.4bn, with its property business strength, the latest IR cut and the ongoing property transaction recovery likely to help boost its RNAV. In addition, the scale of its internet finance business should grow rapidly when its financial license resources are linked to DZH and Xiangcai s business platform. We expect the company s investment returns to exceed Rmb1.0bn in DZH is likely to become the fourth largest internet player in China following Baidu, Alibaba and Tencent given its internet finance development. We remain positive on Xinhu Zhongbao and forecast 2014/15 EPS of Rmb0.20/0.24. China Property Note: 2014 GFA sold down 7.6% YoY 2014 GFA sold down 7.6% YoY NBS data show investment in real estate rose 10.5% YoY to Rmb9.5trn in 2014; investment in residential properties rose 9.2% YoY to Rmb6.4trn, accounting for 68% of total real estate investment. Residential GFA new-starts declined 14% YoY to 1.25bn sqm. Land purchases declined 14% YoY to 334m sqm. Total GFA sold declined 7.6% YoY to 1.2bn sqm, and residential GFA sold declined 9.1% YoY. Year-end GFA inventory came in at 622m sqm. Key takeaways from meetings with industry experts We met with property experts in Shenzhen last week. Key takeaways: Bleak future ahead for most commercial property developers and operators, given the increased proportion of online retail sales. Online players are expected to outperform due to their significant price advantages, relatively low operating costs and 24-hour service. Residential developers must shift to asset-light business model China s rising land costs and aging population will make it hard for developers to benefit from land bank appreciation going forward. Most developers should explore a more asset-light business model, such as JVs, associates, or recurring fee-based models. Execution ability will be key The experts we spoke with believe execution ability will be key given China s mature residential property market and oversupply in the commercial property market. SOE industry leaders such as Vanke (2202 HK, Buy) and COLI (688 HK, Buy) have significant advantages in terms of brand name, financing costs, management, product quality and execution ability. Vanke (2202 HK, Buy) is our top pick Most China property stocks are trading at single-digit 2014E P/E multiples on poor earnings visibility. Vanke is our top pick for 2015 given its mass-residential focus, relatively clear earnings visibility, impressive contract sales in 2014, and strong execution in both up and down cycles. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) IGG (8002 HK, Buy): 4Q14 result preview; valuation undemanding, maintain Buy Page 3

4 4Q14 results preview IGG is set to announce its 4Q14 results In early Mar. We expect revenue and net profit to grow 59% and 108% YoY to US$58.4m and US$19.9m respectively, based on ongoing stable performance of its core games Castle Clash and Clash of Lords II. Stable performance of core games Castle Clash remains IGG s major revenue contributor, which we expect to account for 58% of 4Q14 revenue. We believe revenue from Castle Clash to pick up 13% QoQ from US$30m in 3Q14 to US$34m in 4Q14, mainly due to seasonality and the holiday effect. We expect Clash of Lords II to maintain its growth with revenue surging from US$9m in 3Q14 to US$12 in 4Q14 (21% of total revenue). Speeding up new game launches The company launched four new mobile games in 4Q14, including Deck Hero (English version), Gods Rush, Clash of Gangs and Clash of Mafias (traditional Chinese version). Having received a favorable reception from global players, we expect these new games to make a substantial revenue contribution in the next few months. Meanwhile, management has given guidance of a strong pipeline including around 20 new mobile games set to be launched in FY15. This more diversified game portfolio for FY15 should ease concern surrounding single game concentration. Overseas-centric revenue mix IGG focuses on overseas markets, with 40%, 29% and 25% of its revenue coming from North America, Asia and Europe respectively in 1H14. We believe this favorable global presence will help the company to seize profitable opportunities across a broader spectrum of the gaming market and fend off regional operating risks. China contributed less than 5% of its global revenue in 1H14 due to the weaker-than-expected performance of Castle Clash on Tencent s WeChat platform. That said, the cooperation with Tencent should also pave the way for IGG s future development in China. Maintain Buy; valuation undemanding at 4x ex-cash 2015E P/E We lower our 2015 earnings forecast by 6% to reflect increasing operating cost related to new games and the promotion of Link, an instant messaging app with 3m users at end As a result, we lower our target price from HK$5.06 to HK$4.75, implying 11x FY15 P/E and 72% upside potential. Following the 70% correction over the last year, the company is now trading at an undemanding 6.4x FY15E P/E, a 46% discount to the sector average of 11.9x. Excluding an estimated cash value of HK$1.12 per share as at end-2014, IGG s core business is valued at just 4x ex-cash 2015E P/E. We maintain our Buy rating given its undemanding valuation, the stable performance of its core games, and the accelerated launch of new games. Key risks Delays to new game launches; intensifying competition. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk ) Page 4

5 Rating Definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 5