A-Share Research Notes Summary

Transcription

1 A-Share Research Notes Summary December 9, 2014 (Note: This is selected translation from the Chinese version of A-share morning notes) A-Share Market (1) Nonferrous: Low valuation blue chips and state-owned enterprise (SOE) reform theme; recommend: Nanshan Aluminum, Liyuan Precision Manufacturing and Chalco (P.1) (2) Construction: For short-term blue chips, recommend CSCEC and CCCC; for growth stocks, recommend China Das and Pubang Landscape. (P.2) (3) CCCC (601800): A leading stock in One Belt and One Road Strategy ; CCCC s Five-role strategy (to develop into a world-renowned engineering contractor, a developer and operator of urban complexes, an unique real state company, a comprehensive infrastructure investor and a general contractor of heavy-duty marine equipment and harbour machinery manufacturing and system integration) to become an international engineering giant (P.3) Nonferrous: Low valuation blue chips and state-owned enterprise (SOE) reform theme; recommend: Nanshan Aluminum, Liyuan Precision Manufacturing and Chalco Last week the dollar rose sharply, while China s macro economy was sluggish. The trend of prices of basic metals was bullish overseas but bearish at home. In LME the prices nickel, copper, zinc and lead rose 3.23%, 1.57%, 0.99% and 0.49% respectively; while aluminum and tin prices dropped -1.1% and 0.25% respectively. In China, nickel price rose 2.16%, while the prices of copper, aluminum, lead, zinc and tin dropped 1%, 1.56%, 1.21%, 0.36% and 0.74% respectively. The gold price rebounded by 1-2%. The rare-earth prices rose between 1% and 5% from the bottom. We maintain our ranking of basic metals based on fundamental factors: zincaluminum-nickel-lead-copper-tin. With the progress made in the establishment of rareearth group of companies, the rare-earth prices rose from the bottom. We are bearish about precious metals in the medium to long-term. Wong Chi Man Senior Analyst (852) cmwong@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk (1) The interest rate cut has brought reconstruction of valuation methodology. The trend of stock prices has departed from the fundamental factors of metal prices. We strongly recommend low valuation blue chips with high profitability: Nanshan Aluminum( SH) and Liyuan Precision Manufacturing( SZ). Nanshan Aluminum s PBR is 0.94 and its PER in 2014 is 20. Liyuan Precision Manufacturing s PBR is 3 and its PER, 24. Moreover, its profit growth in the past five years is nearly 40%. (2) Large SOEs that have already dropped significantly and are expected to launch SOE reform: We recommend Chalco( SH), Western Mining( SH), Yunnan Copper ( SZ), Jiangxi Copper( SH) and China Tungsten High-tech( SZ). (3) As the rare-earth prices have rose again and the rise in the sector is relatively small, we suggest paying attention to China Minmetals Rare Earth( SZ), Rising Nonferrous Metals( SH) and Baogang Steel Rare-earth( SH). 1

2 (4) The military sector is active. Our preferred stocks are Fushun Special Steel( SH) and Boyun New Materials( SZ). Fushun Special Steel: The sales of its high temperature alloy are expected to increase significantly, which can improve its profitability greatly. Boyun New Materials: The market correction was significant. In 2015 there is an important catalyst: trial flight of C919. Moreover, its major shareholder has a rich project pipeline. It is expected to see asset injection in the tide of restructuring of research institutes. Yunhai Metals( SZ): It is expanding to the military field and the rate of capacity utilization of its engineering projects is increasing, which can boost its profits significantly. (5) For transformation stocks, we recommend Hongyu Materials( SZ) and FESE( SH). Hongyu Materials: (1) stock option incentive. Its top management have staked almost all of their money. We are optimistic about its long-term development; (2) the restrictions on large-scale non-tradable shares will expire in August 2015; (3) it has rich project pipeline. We are optimistic about its development through M&A; (4) there is a high probability that its main business will be improved next year; (5) its valuation is relatively low. FESE: (1) its acquisition plans have been approved and it is transforming into an expert of smart energy; (2) its e-commerce business is making breakthroughs; (3) its results have been gradually improved in the 3Q and 4Q. Construction: For short-term blue chips, recommend CSCEC and CCCC; for growth stocks, recommend China Das and Pubang Landscape. Large-cap blue chips have entered into the self-enhancement phase. For short-term strategy, we recommend blue chips in the construction sector. Our preferred stocks are CSCEC( SH) and CCCC( SH), and our other recommendations are CREC( SH), Power China( SH), Sinoma Int. ( SH) and CAMCE( SZ). Next are second-tier blue chips. Decoration and landscape companies are emerging and rising. Sector rotation is expected. We released an in-depth report on CCCC today (yesterday, we recommended in Weekly Views; today recommended in an in-depth report and WeChat). As a leading stock in the One Belt and One Road Strategy (Silk Road Economic Belt and 21st Century Maritime Silk Road), the company has the strongest and highest portion of overseas business. Revenue and profit contribution from overseas business is expected to exceed 40% and 60%, respectively. The EPS we forecast is the highest in the market and it is still expected to exceed the expectation. We continue to recommend CSCEC. It has risen 68% since we first recommended in the report on 27 May. Its current PER is only 5.3, which still has a 50% potential upside. Today CRCC( SH) proposed issuance of new shares. The significance is that the financing requirements for house-related companies are relaxed, which has confirmed our investment thesis from the PBR perspective. Only when the PBR is lifted to 1.1 can there be a chance to make private offerings, introduce strategic investment or adopt stock option incentive plans. In that sense, CRCC s trading suspension and proposed issuance of additional shares set a very good example. Other central construction SOEs are likely to follow the example. 2

3 Investment strategies for 2015: dig for gold in three main themes: low valuation blue chips/soe reform/emerging and growth. (1) Low valuation blue chips have entered into the virtuous circle of selfenhancement. Industrial capital is speeding up flowing into the market and is expected to help the sector get out of the second valuation troughs. We recommend CSCEC, CCCC, Sinoma Int., CNCEC, Power China, CREC and CRCC. (2) SOE reform, etc. are key thesis boosting the valuations of construction blue chips: there is low-valuation incremental assets injection opportunity in large group, small listco type SOEs; the introduction of strategic investment can improve the efficiency of incremental assets; stock option incentive plans can accelerate improvement in results; transformation+reform present a doublerise opportunity. We recommend Anhui Water Resources( SH), Lingguang Industrial( SH) and SETC( SH). (3) Emerging and growth and transformation: they are in line with the direction of China s economic transformation. Industry segments are growing. We recommend leading players in the segments that have a good industry landscape and relatively high barriers to entry and are suitable for M&A expansion. We recommend China Das( SZ), Yanhua Smartech( SZ), Shandong Sunway( SZ), China ECEC( SZ), JSTI( SZ), NORINCO International( SZ), CAMCE, Zhongguan A( SZ), Pubang Landscape( SZ), Gold Mantis( SZ), Grandland Decoration( SZ) and DYRS( SZ). CCCC (601800): A leading stock in One Belt and One Road Strategy ; CCCC s Five-role strategy (to develop into a world-renowned engineering contractor, a developer and operator of urban complexes, an unique real state company, a comprehensive infrastructure investor and a general contractor of heavy-duty marine equipment and harbour machinery manufacturing and system integration) to become an international engineering giant Investment recommendation: It is a global transport infrastructure giant and the largest international engineering contractor in China. The company is the largest harbour design and construction company in China, a leading road and bridge design and construction enterprise in China, the world s largest dredging company and harbour machinery manufacturer, a world-leading manufacturer of auxiliary vessels in marine engineering and a world s first-class maritime equipment design company. It ranked the 9th among the 2014 ENR225 international contractors (1st among Chinese enterprises), and the 11th among the 2014 ENR150 international design firms (1st among Chinese enterprises). China s infrastructure is growing. There is great potential in international engineering market. In the context of economic downturn in China, infrastructure investment is an important means to maintain steady growth. The total investment in infrastructure based on narrow sense is expected to grow 8.99%/5.78% in 2014/15, and that based on broad sense to grow 18%/15%. The sectors with a relatively fast growth are urban rail transit/civil aviation/municipal pipe network/railway/smart city/hospital/new energy. In 2015, the total operating revenues of the ENR250 and ENR150 international engineering contractors will reach US$700bn and US$80bn respectively. Chinese engineering companies have great potential to grow in scale. The gross output value of the global construction industry will increase to US$12.7trn by 2020 with a CAGR of 4.9%, of which the CAGR in the Asia-Pacific region will reach 7.7%. China, India, Russia, Brazil, Poland and the United States will become the major markets for the growth of the global construction industry. The One Belt and One Road Strategy will accelerate Chinese enterprises progress to go out. 3

4 The company has been benefited from the One Belt and One Road Strategy. Its overseas business saw robust growth, its infrastructure business grew steadily and its dredging/equipment manufacturing declined. Its infrastructure construction and design service orders grew steadily. In the first three quarters of 2014, the orders rose +8.91% and +13.2% YoY respectively; affected by the overall environment, its dredging and equipment manufacturing orders declined. In the first three quarters, the orders dropped % and -13.4% YoY respectively; its overseas business has increased yearly. In 2013 the revenue from overseas business accounted for 17.05% of its total revenue. In 1H14, new overseas business orders accounted for 24.64%. Including the business of ZPMC, we forecast that the ratio of its overseas business revenue will increase to 40% in three years and its profit ratio to 60%,and it will become the company with the largest overseas business ratio and the highest degree of internationalization among large central building SOEs in China. The SOE reform expectation and the company s innovation of business model and overseas expansion can help boost its valuation. (1) The expectation of a new round of interest rate cut by the central bank can help reduce financial expenses. It is expected to improve the EPS in 2014 by 4.9%. In the last two rounds of interest rate cut, the cumulative abnormal rates of return of H-shares were 35.68%/18.68% respectively. (2) After the Shanghai-Hong Kong Stock Connect program was approved and put into operation, from 10 April to 28 November, the premium rate of A/H-shares was up 33.98pct.(3) Though on the company level, SOE reform is still pending waiting for the issuance of top-level design, the quick rise in stock prices has provided opportunities for secondary sector spin-off, incentive scheme and mixed ownership. (4) The innovation in business model such as the Five-role strategy, the great efforts to develop investment business and comprehensive urban development can help boost sustainable growth. (5) The innovation in finance model such as issuing preference shares can help the company reduce debt-to-assets ratio and improve performance. Risks: macroeconomic fluctuations, decline in dredging market, etc. Earnings forecast and valuation. We forecast that the EPS of the company in 2014/15/16 are RMB0.85/0.98/1.08 respectively. We give the company a x PE in 2015 and a corresponding target price of RMB We maintain the Recommend rating. 4

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: