Yum Cha 飲茶. May 16, 2017 TALKING POINT - BETTER THAN EXPECTED OIL PRODUCTION CUT PROPOSAL RESEARCH NOTES. INDICES Closing DoD%

Transcription

1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index HSCEI 5.. Shanghai COMP 39.. Shenzhen COMP 7.. Gold 3.7. BDIY 99. (.) Crude Oil, WTI(US$/BBL).9. Crude Oil, BRENT(US$/BBL) 5..9 HIBOR, 3-M. (.7) SHIBOR, 3-M.. RMB/USD.9 (.9) DATA RELEASES DUE THIS WEEK May 7 China April property prices Source: Bloomberg May, 7 TALKING POINT - BETTER THAN EXPECTED OIL PRODUCTION CUT PROPOSAL //3 3// 3//5 3// PBR of PetroChina (57.HK) PBR of CNOOC (3.HK) //3 3// 3//5 3// PBR of Anton Oilfield (3337.HK) PBR of China Oilfield (3.HK) PBR of Hilong (3.HK) Sources: Bloomberg, CGIS Research Brent crude rose % last night to US$5. per barrel. The joint statement from the energy ministers of Saudi Arabia and Russia yesterday beat market expectations from two perspectives: (i) before the announcement, some investors had concerns about whether Russia would participate in the production cut again; and (ii) most people had expected the production cut to be extended by only six months, but the production cut is likely to be extended by nine months until March. The final decision will be made in late May during the official OPEC meeting. The announcement last night should help remove a major overhang in the near term. Both oil producers and oil services companies have been under pressure in the past few months without any major rebound. This positive news should support a larger rebound, especially for oil services names, which have higher share price sensitivity. Analyst: Wong Chi-man, CFA RESEARCH NOTES SEMICONDUCTOR UPDATE The two leading HK-listed semi-conductor foundries, Hua Hong [37.HK] and SMIC [9.HK], reported their Q 7 results and released Q 7 guidance last week. Both Companies reported solid Q 7 results, but there was a divergence between their comments on outlook. Hua Hong management reiterated its positive guidance for 7, while SMIC management highlighted a challenging near-term outlook. Both companies are expected to report top-line growth in Q 7. However, investors are focusing on more profitability in the near term. Hua Hong is expected to continue to outperform SMIC in the near term given its better-than-expected H 7 performance. We maintain the view that despite short-term volatility in profitability, they will be longterm beneficiaries of the Chinese government s policy of localizing the supply of high-end upstream electronic components. Except for Hua Hong, the guidance from listed foundries, including TSMC, UMC and Vanguard, indicates slower growth in the industry. After a series of downgrades, expectations for SMIC have been reset, and investors can treat this as a revisit opportunity.

2 SNIPPETS MSCI CHANGES MSCI announced changes in the constituent stocks for its index series today. The changes will be effective after market close on May 3. Major additions to the Global Standard Indices include Meitu (357.HK), Minth (5.HK) and Sichuan Pharma (.HK). Major deletions include Cathay Pacific (93.HK), Huishan Dairy (3.HK), Hengten Networks (3.HK) and Sinotrans (59.HK).

3 COMPANY / INDUSTRY NEWS May, 7 TMT INDUSTRY UPDATE Hua Hong and SMIC: Key takeaways of Q 7 results conference calls. Analyst: Mark Po, CFA; Tel: (5) 39 3; markpo@chinastock.com.hk A tale of two worlds. The two leading HK-listed semi-conductor foundries, Hua Hong [37.HK] and SMIC [9.HK], reported their Q 7 results and released Q 7 guidance last week. Both Companies reported solid Q 7 results, but there was a divergence between their comments on the outlook. Hua Hong management reiterated its positive guidance for 7, while SMIC management highlighted a challenging near-term outlook. Both companies are expected to report top-line growth in Q 7. However, investors are focusing on more profitability in the near term. Hua Hong is expected to continue to outperform SMIC in the near term, given its better-than-expected H 7 performance. We maintain the view that despite short-term volatility in profitability, they will be long-term beneficiaries of the Chinese government s policy of localizing the supply of high-end upstream electronic components. Except for Hua Hong, the guidance from listed foundries, including TSMC, UMC and Vanguard, indicates slower growth in the industry. After a series of downgrades, expectations for SMIC have been reset, and investors can treat this as a revisit opportunity. SMIC [9.HK]. SMIC s Q 7 turnover was US$793.m, a drop of.7% QoQ from US$.m in Q and up 5.% YoY from US$3.3m in Q. Net profit was US$9.m, compared to US$m in Q and US$.m in Q. The Company s Q 7 net profit was below market expectations of US$7m. SMIC s Q 7 gross profit was US$.m in Q 7, compared to US$.m in Q and US$53.m in Q. Its gross margin was 7.% in Q 7, compared to 3.% in Q and.% in Q. By application, products for the communication sector were 5.% of total turnover in Q 7, up from.% in Q. The consumer segment accounted for 37.% of total turnover in Q 7 vs. 3% in Q. The computer segment accounted for.% of total turnover in Q 7, up from.3% in Q. By technology, nm products accounted for 5% of total turnover in Q 7, up from 3.5% in Q, and SMIC continues to work with customers on nm new tape outs for diverse applications. The Company s /5nm products accounted for % of total turnover in Q 7, down from 3.% in Q, mainly due to customers migration to nm and the soft Chinese handset market. The Company also released guidance for Q 7, which expects net profit to be in the range of US$m to US$m given a 3-% QoQ drop in turnover and lower gross margin (ranging from 5% to 7%) vs. 7.% in Q 7. According to the announcement, the weak Q 7 results were due to (a) customer changes in market positioning, (b) seasonal inventory adjustments, and (c) overall muted handset market growth in China. Regarding the 7 outlook, SMIC now sees its % YoY top-line growth target as extremely challenging, but management still believes that it is possible to deliver double-digit YoY growth in 7. The downward revision in guidance for 7 is mainly due to the weak Android supply chain. There is no clarity on the outlook in H 7. SMIC is trying to diversify its product portfolio, including diversifying into more mobile and consumer chips based on nm and filling the legacy capacity with new products. SMIC is now engaging with new customers in the LED driver area. The Company also has new customers in the image processes area. SMIC management sees steady growth in business for smartcards, NOR flash business, PCD business and auto CIS business. Management guided a gross profit margin in the mid-% for 7 and an EBIDA margin in the high 3s%. SMIC s OPEX to sales ratio is guided in the low %, excluding R&D expenses. Management guided that SMIC will remain at profitable in Q-Q 7. SMIC has three new products for nm, one for consumer, followed by one for wireless and one for consumer. SMIC management expects nm products to make a high single digit top-line contribution by the end of 7, up from 5% in Q 7. SMIC has seen small volume for its first version of high-k metal gates in, but will ramp up nm high-k metal gate production in Q3 7. Management guides for nm risk production in 9. The Company s utilization rate is expected to be the range of mid to high % in Q 7, down from 9.% in Q 7. SMIC management also highlighted that IoT is one of the growth areas for SMIC, as one of the Company s domestic customers reported shipments of bn IoT-related chips recently, for which SMIC is the major supplier. During the conference call, SMIC management also pointed out that shared bicycle services is one application for such IoT chips. SMIC expects the volume to increase exponentially and is excited to be part of the trend. Hua Hong [37.HK]. Hua Hong released its Q 7 results. Revenue was US$3.m in Q 7, down 5.% QoQ from Q, but up.% YoY over Q. Its gross margin was 9.7%,.3 ppts lower than in Q and.5 ppt higher than in Q. Both Hua Hong s turnover and gross margin in Q 7 were higher than our expectation of US$m and 9.%. Hua Hong reported a net profit of US$3.m, down.% from Q, up 5.% over Q, and higher than our expectation of US$5.9m. Hua Hong reported a YoY increase in ASP, given a better mix, as the Company reported high shipments of products for smart cards and super junction IGBTs and smaller shipments of general MOSFETs. Hua Hong also released positive guidance for Q 7, which also beat market expectations. Management expects approximately % revenue growth and a gross margin between 3% and 3%. Due to strong demand, the Company s growth is constrained by capacity, and management is trying hard to increase output. The Company will also introduce new technology to achieve a higher ASP, boosting top-line growth. According to management, the Company is firing on all cylinders at this point, in particular for smart cards, MCUs, and discrete, analog and power management chips. Regarding smart card ICs, several of its key customers have migrated to the Company s 9nm technology for production. Given its niche market positioning, Hua Hong is less affected by the soft handset market. Management also highlighted that there is little overlap between the Company and its peers, including TSMC, UMC and Vanguard. In terms of geography, Hau Hong see strong demand for MCUs in Asia and even the US. Most of the new smart card projects will come into production in Q 7. Despite limited capacity expansion, Hua Hong, in our view, is able to achieve growth through a) capacity growth, as there is some room in fab 3 and some space can be released in fab ; b) better product mix to boost ASPs and gross margins; and c) M&A opportunities in China and overseas. Our view: The market reacted negatively to SMIC s Q 7 results and guidance cut for 7. SMIC s shares have been under pressure and are likely to remain volatile in the near term, given earnings and rating downgrades It may take time for the market to rebuild confidence in SMIC given concern about its profitability. However, high CAPEX is required to narrow the technology gap between SMIC and its peers. We believe that SMIC management will tighten control of costs to remain financially sound to get through this challenging period. Expectations for SMIC have been reset and confirmation of a recovery in the Company s profitability will trigger share price movement. We reiterate the view that HK-listed IC foundries such as ASMC, Hua Hong and SMIC will benefit from import substitution in the long run, given policy support by the Chinese government. New applications such as NB-IoT and IoT are expected to create growth opportunities for Chinese foundries, including Hua Hong and SMIC. We maintain the view that Hua Hong s valuation looks attractive, given its high profitability and unique market position. Its current valuation of.9x 7 PBV is undemanding, and further share price weakness will provide a re-visit opportunity for investors. Hua Hong is in a strong financial position to fund potential M&A.

4 COMPANY / INDUSTRY NEWS Figure : SMIC s earnings summary Key Financials (in USD m) Sources: Bloomberg, Company Data, CGIS Research 5 7E E Revenue,97.,3.,9. 3,37.9 3,7.7 Change (yoy %) (.) Gross Profit ,99.7 Gross Margin % Net Profit Net Margin % EPS (Basic) DPS $. $. $. $. $. ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) -.5% -.5% -.7% -.3%.% Capex (m) (977.5) (,9.) (,3.) (,.) (3.) Free cash flow per sha (.) (.) (.) (.). Net Gearing (%) (HK$) May Jul Sep Nov Jan7 Mar7 Turnover (RHS) Price (LHS) (HK$ million) Figure : Hua Hong s earnings summary Key Financials (in USD m) Sources: Bloomberg, Company Data, CGIS Research 5 7E E Revenue Change (yoy %) 3.7 (.) Gross Profit Gross Margin % Net Profit Net Margin % EPS (Basic) DPS $. $.35 $.37 $.3 $. ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%).59%.%.3%.5%.7% Capex (m) Free cash flow per sha..... Net Gearing (%).5 Net Cash Net Cash Net Cash Net Cash (HK$) May Jul Sep Nov Jan7 Mar7 Turnover (RHS) Price (LHS) (HK$ million) 7 5 3

5 Oct- Jan-5 Apr-5 Aug-5 Nov-5 Feb- May- Sep- Dec- Mar-7 Oct-9 Feb- May- Aug- Nov- Mar- Jun- Sep- Dec- Apr- Jul- Oct- Jan-3 May-3 Aug-3 Nov-3 Mar- Jun- Sep- Dec- Apr-5 Jul-5 Oct-5 Jan- May- Aug- Nov- Feb-7 COMPANY / INDUSTRY NEWS Figure 3: SMIC s PBV HKD.7x.x.x.7x.x Sources: Bloomberg, CGIS Research Figure : Hua Hong s PBV HKD.x.9x.x.x.5x Sources: Bloomberg, CGIS Research 3

6 COMPANY / INDUSTRY NEWS Figure 5: Peer comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Share Price Performance 3M M M Price Market Cap 7F F 9F 7F F 9F 7F 7F 7F 7F M YTD Lcy US$m x x x x x x x x % % % % % % % % % % % HK listed names 7 HK Solomon Systech (Intl) Ltd.37 n.a. n.a. n.a. n.a. n.a. n.a.. n.a. -. n.a. -5. n.a.. n.a HK Semiconductor Manufacturing. 5, 5.9. n.a HK Advanced Semiconductor Man-H.79 5 n.a. n.a. n.a. n.a. n.a. n.a.. n.a. 3. n.a.. n.a.. n.a HK Hua Hong Semiconductor Ltd.3,5. 9. n.a HK Asm Pacific Technology., n.a n.a.. n.a HK Aac Technologies Holdings In 9.75, n.a n.a.. n.a HK Sunny Optical Tech.3 9, HK Cowell E Holdings Inc HK Q Technology Group Co Ltd HK Truly International Holdings.79, HK Varitronix International Ltd. 397 n.a. n.a. n.a. n.a. n.a. n.a.. n.a. n.a. n.a.. n.a. 7. n.a HK Tcl Display Technology Holdi HK O-Net Technologies Group Ltd n.a HK Yeebo International Hldgs 3.75 n.a. n.a. n.a. n.a. n.a. n.a.. n.a.. n.a. 7. n.a..3 n.a HK Ten Pao Group Holdings Ltd n.a n.a HK Ju Teng International Hldgs HK Byd Electronic Intl Co Ltd 3.5 3, HK Tongda Group Holdings Ltd.7, Average A share listed names 333 CH Lens Technology Co Ltd-A 33., CH Shenzhen Sunway Communicat-A 3.7 5, n.a CH Chaozhou Three-Circle Grou-A.9 5, n.a n.a CH Shenzhen Everwin Precision-A 7. 3, n.a CH Shenzhen O-Film Tech Co-A., n.a CH Goertek Inc -A. 7, n.a CH Zhejiang Crystal-Optech -A.9, n.a. n.a. n.a..7 n.a n.a CH Janus Dongguan Precision-A.7, n.a.. 9. n.a n.a. n.a. n.a CH Luxshare Precision Industr-A 9., n.a CH Sunwoda Electronic Co Ltd-A.7, n.a CH Boe Technology Group Co Lt-A 3. 9, n.a CH Sunwoda Electronic Co Ltd-A.7, n.a CH Shenzhen Huiding Technolog-A 93.5, n.a. -.9 CH Han'S Laser Technology In-A 3.5, n.a Average Taiwan listed names 33 TT Taiwan Semiconductor Manufac. 77, n.a TT United Microelectronics Corp.5 5, n.a TT Novatek Microelectronics Cor., n.a TT Vanguard International Semi 55. 3, n.a TT Advanced Semiconductor Engr 37.3, n.a TT Realtek Semiconductor Corp., n.a TT Egis Technology Inc n.a TT Win Semiconductors Corp 3., n.a TT Advanced Ceramic X Corp n.a...9 n.a n.a TT Casetek Holdings Ltd n.a TT Catcher Technology Co Ltd 33.5, n.a TT Largan Precision Co Ltd 9., n.a TT Tpk Holding Co Ltd 7.5, n.a TT Chroma Ate Inc 95., n.a TT Hon Hai Precision Industry. 59, n.a n.a.. n.a TT Mediatek Inc.5, n.a n.a. 5.5 n.a Average n.a Korean listed names 57 KS Lg Electronics Inc., n.a KS Lg Innotek Co Ltd 33., n.a KS Samsung Electro-Mechanics Co 7. 5, n.a KS Samsung Electronics Co Ltd 35., n.a KS Sk Hynix Inc 55. 3, n.a KS Partron Co Ltd n.a Average n.a US & Europe listed names LITE US Lumentum Holdings Inc 53. 3, OLED US Universal Display Corp. 5, FNSR US Finisar Corporation.3, n.a STM FP Stmicroelectronics Nv 5. 5, SOI FP S.O.I.T.E.C.., n.a n.a. n.a VIAV US Viavi Solutions Inc., n.a n.a AMS SW Ams Ag , n.a. n.a Average HSI Index Hang Seng Index HSCEI Index Hang Seng China Ent Indx SHCOMP Index Shanghai Se Composite MXCN Index Msci China Sources: Bloomberg, CGIS Research

7 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities Co., Ltd. (.HK;.CH) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: () all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and () no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) () have dealt in or traded in the securities covered in this research report within 3 calendar days prior to the date of issue of this report; () will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and () have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >% within months in absolute terms share price will decrease by >% within 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.AXM59 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 3 Queen s Road Central, Sheung Wan, Hong Kong. General line: