Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 7, 2017

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT ICBC CHINA MOBILE PETROCHINA CCB HSBC BANK OF CHINA PING AN CHINA LIFE SINOPEC Source: Bloomberg GF events Date Event Location 6-7 July A-share NEV sector NDR Hong Kong July A-share coal analyst NDR Hong Kong 12 July BYD Pingshan factory visit Pingshan Source: GF Securities (Hong Kong) A-Share Market Airports: Overseas airports high valuations driven by revenue/profit stability and high dividends; indications for Chinese airports Overseas airports have traded at relatively high valuations of 25-30x P/E TTM over the past two years thanks to stable revenue & profits and high dividend payouts. The supply-driven airport market in China is experiencing rapid growth, with hub airports in first-tier cities demonstrating stronger revenue stability and risk resistance than their overseas peers. Improving non-flight business profitability can fully offset the negative impact of major capex projects on company earnings. Going forward, hub airports will achieve higher ROEs and offer better payouts by focusing more on first-tier and international flights. New Energy Vehicles: Consumer-orientation increasingly important as government shifts focus of support As the impact of subsidy frauds winds down and national subsidies were reduced earlier this year (meaning the era of universal government support for all NEV players is over), we see a new trend in the NEV industry. On the one hand, government policies are guiding a quickening shift of resources towards manufactures with greater competitive strengths. On the other, with the upcoming implementation of a new fuel consumption and NEV scoring system for automakers, innovative models with good value for money are set to gain market dominance. Maintain full-year sales forecast of 700,000 units. Hong Kong Market Consumer Discretionary: 2H17 sector outlook select names with re-rating potential driven by accelerating earnings growth and attractive valuations Jewelry: Given a high comparable base, we expect SSSG to moderate in 4Q17. That said, the rental reversion trend in the HK market remains favorable. Sportswear: We remain positive over the long term in view of favorable government policies and increasing participation in sports. Education: Private schools are expected to gain market share from public schools as rising middle-class income supports spending on quality education and as middle-class parents increasingly prefer more wellrounded education offered by private schools. We suggest a bottom-up approach with Wisdom Education and I.T our top picks. Pharmaceutical: Takeaways from the GF Life Sciences Investment Conference The GF Securities Life Sciences Investment Conference (GFIC2017) was held in Guangzhou on July 3-4, with nearly 100 listed Chinese life science companies in attendance. Investors focused on China joining the ICH, increased VC activity in 1H17 and upcoming opportunities in the life science/biotech space. It was noted that China VCs now significantly exceed US VCs in life sciences, that investors are demanding a China premium, and that the ICH inclusion was a vote of confidence for China, advancing conditions in the US and China pharmaceutical market. Demand for bioequivalence testing should be positive for CROs going forward. Geely Auto (175 HK, Buy): Encouraging MoM rebound in June, sales momentum maintained in 1H17 Given 1H17 sales strength, management raises full-year sales target by 10% to 1.1m units (implying +44% YoY vs. previous +31%); we think ~1.19m units (+56% YoY) is achievable. We are confident about 2H17 sales growth given new product cycle supported by upcoming Lynk&Co vehicles, new model launches and upgraded versions. We expect company earnings to grow at ~55% CAGR during We find the stock undervalued, trading at 11.5x 12M forward P/E, below 3Y historical average of 14x. Maintain Buy and TP of HK$20.88 based on 14x our 12M forward EPS, in line with 3Y historical P/E. 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 Airports: Overseas airports high valuations driven by revenue/profit stability and high dividends; indications for Chinese airports Investors are currently debating whether Chinese airport names can reach the high valuation levels of major airports overseas. Based on our analysis, overseas airport companies have been trading at 25-30x P/E TTM over the past two years thanks to the following factors. Revenue stability Overseas hub airports are highly resistant to risks relying on their well-developed route networks. Even if unexpected incidents such as terrorist attacks tend to lead to revenue fluctuations, these companies typically show strong resilience in the following year. In addition, a relatively high proportion of steady non-flight revenue has also helped to stabilize overall revenue. Profit stability As the market for flights between major overseas cities is highly mature, the construction and expansion of overseas hub airports were completed some time ago with market demand highly stable. The absence of any major capex plans over the coming decade means limited cost pressure. Long-term shareholder returns As major overseas airport companies have stable and strong revenue but no significant capex projects, they can typically offer payout ratios of 80-90%. In particular, Sydney Airport (SYD AU) is able to offer effective payout ratios of above 200% thanks to extremely strong cash flows. This is highly attractive to investors given substantial interest rate drops and even negative interest rates in Europe and Australia in the last two years. Looking at Chinese airports from these three perspectives: Growth at major airports in China are supply-driven at present, with insufficient supply often restricting market growth despite strong demand. As such, the domestic airport market is currently going through a stage of rapid growth with major airports in Beijing, Shanghai, Guangzhou and Shenzhen demonstrating stronger revenue stability and risk resistance than their overseas peers. Rapid market growth has resulted in periodic capacity shortage at domestic airports, leading to substantial capex over the past decade and over the next five years, as well as corresponding periodic changes in company financials. That said, improving non-flight business profitability can typically even out these periodic changes and fully offset the negative impact of major capex projects on company earnings. Over the mid/long-term, hub airports in Beijing, Shanghai, Guangzhou and Shenzhen will become increasingly important, with airport clusters to be formed surrounding them diverting non-first-tier flights to nearby city airports. By focusing more on flights between first-tier cities and international flights, these hub airports will see their ROE pick up quickly with dividend payouts to increase over the long term. We are long-term positive on Shanghai International Airport ( CH) and Baiyun International Airport ( CH). New Energy Vehicles: Consumer-orientation increasingly important as government shifts focus of support New industry trend As the impact of subsidy frauds winds down and national subsidies were reduced earlier this year (meaning the era of universal government support for all NEV players is over), we see a new trend in the NEV industry. On the one hand, government policies are guiding a quickening shift of resources towards manufactures with greater competitive strengths. On the other, with the upcoming implementation of a new fuel consumption and NEV scoring system for automakers, innovative models with good value for money are set to gain market dominance. Downstream A recovery in NEV output has taken shape, as June output grew by more than 14% MoM to 53,000 units. We expect industry volume growth to strengthen in 2H17 given the upcoming peak season. In addition, a series of value-for-money models launched recently have confirmed our previous judgment that automakers are stimulating car purchases through product innovation and improvement. We think the domestic NEV market is moving into a virtuous cycle between product innovation and volume growth, and maintain our full-year sales volume forecast of 700,000 units. Upstream resources industries related to NEV production have maintained strong business conditions thanks to continued vehicle sales growth downstream and the delay in resources production capacity expansion. In the long term, a gradual increase in lithium carbonate supply should match downstream vehicle demand growth and is likely to support lithium prices to remain Page 2

3 stable at a high level. Meanwhile, a decrease in the proportion of cobalt cost in the total battery production cost (thanks to the increased use of nickel) should enlarge the metal s price upside. Midstream The shift of the industry focus towards consumer-oriented vehicle models have posed new demands for NEV battery manufacturers in terms of product innovation and capacity growth. The top four players in this field, BYD ( CH), CATL, Optimum and Guoxuan High-Tech ( CH), accounted for a combined market share of 62.5% in 2016; these companies are positioned to become even stronger and are benefiting from brand premiums. Leading tri-element battery and materials companies are actively partnering with downstream PV companies or battery companies to strengthen their foothold on the industry chain and to provide guarantee for their production expansion. Out stock picks are Tianqi Lithium Industries ( CH), Ganfeng Lithium ( CH), Huayou Cobalt ( CH), China Molybdenum Luoyang ( CH), Guoxuan High-Tech ( CH) and Senior Technology ( CH). Consumer Discretionary: 2H17 sector outlook select names with rerating potential driven by accelerating earnings growth and attractive valuations Sector view Neutral Jewelry: Given a high comparable base, we expect SSSG to moderate in 4Q17. That said, the rental reversion trend in the HK market remains favorable. Sportswear: We remain positive over the long term in view of favorable government policies and increasing participation in sports. Order book growth peaked in 1Q-2Q16 and then normalized. Education: Private schools are expected to gain market share from public schools as rising middle-class income supports spending on quality education and as middle-class parents increasingly prefer more well-rounded education offered by private schools. Key themes Jewelry: Gold price, SSSG, sales mix of high-margin gem-set products. Sportswear: SSSG, trade fair results, retail discounts, sales mix of functional products. Education: Number of student enrollment, M&A. Valuation analysis Jewelry: The sector is trading at 16.7x one-year forward P/E, above its five-year historical average of 14.5x. As we expect sector SSSG to moderate in 4Q17, we think sector valuation rerating is unlikely, if it does not see de-rating at all. Sportswear: The sector is trading at 14.4x one-year forward P/E, above its five-year historical average of 12.0x. We find this valuation to be fair. Education: Maple Leaf is trading at 17.5x FY18 P/E, above its historical average of 14.4x. Wisdom Education is trading at 15.5x FY18 P/E, below sector average of 16.5x FY18 P/E. Investment strategy Bottom-up approach We prefer companies with re-rating potential driven by accelerating earnings growth and attractive valuations. Top picks Wisdom Education (6068 HK, Buy) Competitor Tung Wah School has recently raised its 2017/2018 school year tuition and boarding fees to 16%-21% above those at Dongguan Guangming School. This should provide upside potential to Dongguan Guangming s tuition fee level. We think consensus FY19 estimates are overly conservative. Going forward, the company will mainly focus on expansion in Guangdong to benefit from the Guangdong-HK-Macau Greater Bay Area initiative. I.T (999 HK, Buy) We expect a re-rating driven by better visibility and accelerated earnings growth in FY18, thanks to loss stabilization in the HK market and continued growth momentum in the China and Japan markets. Page 3

4 Risks Upside risks: Better-than-expected SSSG and trade fair results, M&A, a gold price rally, decent growth in mainland tourist arrivals, better-than-expected student enrollment numbers. Downside risks: Lower-than-expected SSSG and trade fair results, a gold price slump, notable decline in mainland tourist arrivals, policy risks, teacher cost pressure and fierce competition. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Pharmaceutical: Takeaways from the GF Life Sciences Investment Conference What s new? The GF Securities Life Sciences Investment Conference (GFIC2017) was held in Guangzhou on July 3-4, with nearly 100 listed Chinese life science companies in attendance with a total market cap exceeding US$900bn. Investors focused on China joining the ICH, increased VC activity in 1H17 and upcoming opportunities in the life science/biotech space. China VCs now significantly exceed US VCs in life sciences In 2015, about US$10bn was raised in the VC market for life sciences in China, from outside of China, with US$2bn invested. In 2016, US$15bn was raised by VCs in China and US$5bn invested. In 1H17, almost US$20bn of VC funds went to life sciences in China, and over US$15bn was invested. During H17, the amount invested tripled over the previous year. China premium demanded by investors Given that demand for China assets is exceeding supply and the difficulty of navigating the Chinese market, VC investors now look for an investment premium in anticipation of upgrading products and bringing them closer to international standards. However, the Chinese government still underspends on healthcare, which accounts for just 5% of GDP vs the world average of 10%. Given government budget pressure, the product development cycle tends to be short and focused on me-too generics. ICH a vote of confidence for China, advancing conditions in the US and China pharmaceutical market It takes about two years to obtain Investigational New Drug (IND) approval vs three months in the US. Regulatory convergence will close this gap. CROs the biggest beneficiaries As there are 298 generics that need to pass bioequivalence (BE) testing by 2018, contract research organizations (CROs) such as Wuxi Biologics (2269 HK, NR) are currently set to be the biggest winners. There are about 400 CROs in China and about 1/4 are licensed to perform clinical trials. But each CRO can only perform 2-3 BE tests for pharma companies due to safety concerns. (Natalie Chiu, Research Analyst, SFC CE No. AVH029, nataliechiu@gfgroup.com.hk ) Geely Auto (175 HK, Buy): Encouraging MoM rebound in June, sales momentum maintained in 1H17 June sales rebounded noticeably; company raises sales target given 1H17 strength Geely Auto maintained a strong sales trend by selling 88,773 vehicles in June, up 90.6% YoY. The company saw encouraging MoM growth of 16% after five consecutive months of declines at an average pace of -6.5% MoM during 5M17. 1H17 sales amounted to 530,627 units, with sharp sales growth of 89.3% YoY mainly contributed by new models launched in Given that monthly average sales YTD are now 6.1% above the company s original target, and that 2H17 sales are likely to come in stronger on the back of new model launches and the peak sales season in 4Q17, management revises upwards its sales target for 2017 by 10% from 1m to 1.1m units, implying fullyear sales growth of 44% YoY vs. the previous 31%. However, as 1H sales accounted for ~44% of full-year sales on average during , we think our estimated sales volume of ~1.19m units should be achievable, which implies 56% YoY growth. Boyue and Vision SUVs hitting new sales high The company s SUV segment continued to grow sharply with 46,174 units sold in June, up 2.6x YoY and 17.5% MoM; 1H17 SUV sales reached 242,930 units, up ~5x YoY, maintaining strong sales growth. The two major SUV models, the Boyue and Vision SUVs, both hit a new sales high in June. The Boyue sold 21,282 units in June, with 1H17 sales up 5.5x YoY to 124,432 units, representing 51% of the company s total SUV sales. We are confident on the model s sales growth and expect its upgraded version in 3Q17 to continue to drive Page 4

5 overall sales. The Vision SUV jumped 32% MoM to 10,621 units in June after an average monthly decline of 6.6% in 5M17; average monthly sales in 1H17 were 16% higher than that in 2H16, meaning a steady ramp-up of the model. We expect the model to see more significant growth with an upgraded version to be launched in 4Q17. 2Q17 sedan sales down QoQ, but 1H17 growth remained steady The company s sedan sales fell 21.5% QoQ in 2Q17 following the quarterly sales decline in 1Q17, which was mainly due to the rush to buy cars in 4Q17 driven by the expected expiry of a purchase tax discount. Expectations among customers of an upgraded version of the New Emgrand to be launched in July also impacted the growth of the company s major sedan model, which decreased 31.4% QoQ in 2Q17 (gasoline version) following positive growth in 1Q17. That said, the model saw a 10.9% MoM rebound in June to 15,762 units thanks to the company s destocking efforts. We believe the model should see stronger sales growth in 2H17 given the upcoming upgraded version. Compared with 1H16, sedan sales in 1H17 grew steadily by 20% YoY to 287,697 units, mainly driven by the 13.6% YoY growth in the New Emgrand (including NEV version) and increased contribution from the Emgrand GL and upgraded New Vision (launched in 2H16). Reiterate Buy and TP of HK$20.88 We are confident about the company s sales growth ahead in 2H17 on the back of a new product cycle supported by upcoming Lynk&Co vehicles, new model launches and upgraded versions. We expect company earnings to grow at a CAGR of ~55% during The stock is trading at 11.5x 12-month forward P/E, below its historical average of 14x over the past three years. We think the stock is undervalued. We maintain our Buy rating on the stock and target price of HK$20.88 based on 14x our 12-month forward EPS, in line with its threeyear historical P/E. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Page 5

6 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. 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