China Merchants Port (144 HK) Trading Buy Last price: HK$22.05 Target price: HK$23.58/24.18 Protective stop: HK$20.

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1 MARKET NEWS HSI continued to break above points amid China s excellent foreign trade for January The HSI continued to rise after breaking above points last Friday (10 February), and it finally settled at points, up 49 points. The HSCEI gained 50 points to close at points. The market turnover continued to boom with the amount reached HK$ bn. There were 856 gainers and 716 losers. The General Administration of Customs announced the foreign trade data for January. In terms of $, exports rose 7.9% year-on-year, much better than the expected growth of 3.2%, and the prior was adjusted from -6.1% to -6.2%; imports rose 16.7% year-on-year, also higher than the expected growth of 10% and December s 3.1%. As the Lunar New Year was in January this year, rather than February last year, the seasonal factor may lead to earlier concentration of export activities, in turn distorting the data. Nevertheless, with reference to the analysis of domestic and overseas economic data, the economies of the, Europe and Japan have stabilized. In particular, the new president, Donald Trump, would soon give an announcement regarding tax cuts, which would open a way for the recovery of consumption market, in turn rising the demand on import products. Meanwhile, it is believed that the worst of China s economy has passed, and the domestic consumption is expected to recover gradually. However, the risk of a trade war between China and the would become an uncertain factor of China s export sector. Therefore, investors shall still have to wait and see whether China s foreign trade would continue to rally. Back to the Hong Kong stock market, the HSI hit a high at points and closed at points last Friday. It started to enter into the highly concentrated position of Bull contracts of CCBs. We maintain our view that, with the inflow of capital to the Hong Kong market, there may be a possibility that the index would move higher, forcing more CBBCs to be called. This round of uptrend was capital-driven, without corresponding improvement in fundamentals. Investors shall be aware that the market may retreat. At present, investors are chasing after laggard sectors. Waves of market speculation continued. Looking ahead, the focus would be on the inflation data to be released on Tuesday (14 February). WHAT S I N THE PACK Cement China Supply Curb A Key Catalyst In 2017 As a key sector impacted by the supply-side reform in 2017, we expect more government policy actions for the cement sector - eg phasing out of obsolete capacity, strict implementation of environmental protection standards, potential cancellation of 32.5 grade cement production and the continuation of the off-peak season production policy - to curb cement supply and thus underpin steady demand and supply dynamics. Maintain OVERWEIGHT. Stock picks: Conch and CR Cement. China Merchants Port (144 HK) Trading Buy Last price: HK$22.05 Target price: HK$23.58/24.18 Protective stop: HK$20.98 HTSC (6886 HK) Trading Buy Last price: HK$16.06 Target price: HK$17.00/17.68 Protective stop: HK$15.25 P R I C E C H A R T ( H a n g S e n g I n d e x ) KEY I NDICES Prev Close Chg YTD HSI Index 23, HI1 Index 23, HSCEI index 10, SHCOMP index 3, DJI index 20, SPX index 2, NKY index 19, DAX index 11, CAC index 4, Source: Bloomberg TOP VOLUME Stock Price (HK$) Chg Value ($m) TENCENT % HSBC HOLDINGS % CCB-H % BANK OF CHINA-H % ICBC-H % TOP GAI NERS Stock Price (HK$) Chg Value ($m) LAI SI ENTERPRIS % INTEL CORP % 0.0 ZHEJIANG PROS-H % 0.5 CISCO SYSTEMS % 0.07 MEIGU TECHNOLOGY % 4.95 TOP LOSERS Stock Price (HK$) Chg Value ($m) SANROC % AMGEN INC % 0.0 MICROSOFT CORP % 0.0 APPLIED MATERIAL % 0.0 STARBUCKS CORP % 0.0 STRATEGIST Hannah Li, CFA hannah.li@uobkayhian.com.hk w w w. u t r a d e. c o m. h k 1

2 SECTOR UPDATE Cement China Supply Curb A Key Catalyst In 2017 As a key sector impacted by the supply-side reform in 2017, we expect more government policy actions for the cement sector - eg phasing out of obsolete capacity, strict implementation of environmental protection standards, potential cancellation of 32.5 grade cement production and the continuation of the off-peak season production policy - to curb cement supply and thus underpin steady demand and supply dynamics. Maintain OVERWEIGHT. Stock picks: Conch and CR Cement. WHAT S NEW Central government authorities to launch nationwide supply and environmental checks in cement and glass sectors. Media reports highlight that five central government regulators will organise national inspections relating to obsolete capacity exits and the implementation of environmental protection. This is the first government action after its announcement early this year to add cement and aluminum sectors as the key targets under the supply-side reform in in addition to the steel and coal industries. The outdated capacities in the cement sector include production from vertical kilns, wet process kilns and small grinding machines (diameter below three meters). Meanwhile, the differential electricity pricing among cement companies must be taken based on energy consumption levels and off-peak season production should be implemented. Although leading cement players should meet production and environmental standards, some small cement plants or grinders may have to cut production and phase out outdated capacities. The supply curbs will further improve demand and supply dynamics and support cement price strength in the near term. Expect net capacity cut in cement sector this year against net increase in past two years. The China Cement Association s data indicates that China s clinker capacity increase by 25.6m tonnes in Despite a moderate supply cut of about 10m tonnes, there was still a net increase of 16m tons of clinker which added up to 1.83b tonnes of total clinker capacity in China last year. Looking ahead to 2017, we expect China to put more efforts into phasing out small cement plants and grinders. Individual provinces have proposed their cement supply cut plans for 2017, such as Xinjiang (-5m tonnes), Hebei (-1.1m tonnes) and Jiangsu (-0.9m tonnes). We estimate 40m tonnes of clinker capacity to be closed in 2017, and a net decrease of 25-30m tonnes of clinker supply - equivalent to 1-2% of China s existing clinker capacity. Xinjiang Province s ambitious infrastructure investment plan surprises market on the upside. The Xinjiang Provincial Government recently unveiled that its FAI will surge by 50% yoy to Rmb1.5t in 2017, including Rmb200b for road construction, Rmb35b for railways, Rmb14.4b for airports, Rmb36b for hydro projects, Rmb10b for IT networks and Rmb180b for Electrified Xinjiang projects. According to the local government s initial statistics, Xinjiang achieved a FAI of Rmb998b in 2016, lower than the Rmb1.07t in total FAI in The big jump in FAI in Xinjiang this year was partially due to the investment shortfall last year. That said, the aggressive FAI growth target does lift market sentiment on China s investment outlook, particularly on infrastructure investment growth in ANALYST Johnson Hu, CFA ext 809 johnsonhu@uobkayhian.com w w w. u t r a d e. c o m. h k 1

3 ESSENTIALS Apart from phasing out capacity, off-peak production policy is also critical to curbing the supply of basic materials. Since Nov 16, many provinces, particularly those in northern China region (such as Beijing, Inner Mongolia, Henan, Hebei, Shandong, Liaoning, Xinjiang etc), had implemented the off-peak production curbs during the winter season. In particular, Henan suspended cement production for all cement plants from 1 Nov Jan 17. We believe off peak production has served as a key catalyst to curb supply and drive up the prices for basic materials since 4Q16. This was a similar case for the steel sector last year. China s steel demand edged up by only 1-2% in 2016 while a large amount of steel capacity cuts totalling about 65m tonnes were made last year. This still suggests an oversupply situation in steel sector, illustrated by an industrial utilization rate of only 70%. Nonetheless, the administrative curbs with the off-peak production policy and capacity shutdowns as well as stricter environmental protection standards during the winter season acted as strong catalyst to push up steel prices. Off-peak production and low inventories to support cement price strength. Winter is normally the slow season for construction and cement demand and cement prices could face downward pressure. Nonetheless, China s cement prices have hovered at a high level of Rmb /tonne in the past couple of months. We believe the low cement inventories and implementation of the offpeak production policy will act as key drivers underpinning steady cement prices. Digital Cement s data shows that the current national average cement inventory to storage capacity ( 库容比 ) is at around 60%, which is the lowest in the past three years and far below the nearly 80% peak in mid-15. The potential construction pick-up in March and current low inventories could drive up cement prices moderately in individual regions in March-April. Long-awaited 32.5 grade cement cancellation likely to materialise in We expect the central government is likely to roll out the cement standard upgrade policy this year to reinforce the implementation of supply cuts in the cement sector. Xinjiang has announced the suspension of 32.5 grade cement production from 1 May 17 onwards. Due to: a) higher clinker content (up by 15-20%) with the upgrade of cement grade from 32.5 to 42.5, and b) with the 32.5 grade cement contributing around half of total cement production in China, the policy implementation could lift the clinker demand by up to 10%. Nonetheless, given that some downstream construction companies could add more composite materials in cement usage in order to maintain the same content of clinker, we conservatively estimate it could increase the annual clinker demand by 3-5%. Expect overall steady demand and supply dynamics in the cement market this year. In 2017, despite a potential property sales slowdown, we expect property new starts to only contract by 2% given nearly flat (-2% yoy) national land sales last year and low housing inventories in key cities. The property slowdown is likely to be offset by robust infrastructure investment which we estimate will achieve mid-teens growth this year on the back of the ramp-up of construction from PPP projects. We project China s cement output to be largely flat in 2017 while production could witness positive yoy growth in 1H17 due to a low base effect in 1H16. On the other hand, the potential 1-2% cement supply cuts could bring up the industrial utilisation rate from 75% in 2016 to 76% in More importantly, the implementation of the upgrade of cement production standards will drive up overall clinker demand which offers more upside potential from our estimates. ACTION Maintain OVERWEIGHT. Cement companies are trading at undemanding sector average of 0.94x current P/B, below the historical average of 1.2x P/B. We expect resilient cement demand, the government s supply cut efforts and cement price strength to sustain a continuous re-rating. Anhui Conch (914 HK, BUY) and CR Cement (1313 HK, BUY) are our top picks. We also expect a trading buy opportunity in CNBM due to more investment flows from southbound investors w w w. u t r a d e. c o m. h k 2

4 who are keen on low-valuation stocks, less sensitive to corporate debt levels and are more focused on company sales scales. Nonetheless, we are still slightly concern about CNBN s high gearing and interest cost in the longer term. Raise Conch and CNBM target prices. We revise up our target price for Anhui Conch from HK$26.90 to HK$31.50, which is based on 1.9x current P/B, in line with its historical average valuation. We also raise our target price for CNBM from HK$4.30 to HK$6.00 which is pegged to 0.5x current P/B, at a valuation discount compared with its average 0.9x current P/B in the past five years. w w w. u t r a d e. c o m. h k 3

5 TRADERS CORNER China Merchants Port (144 HK) Trading Buy Last price: HK$22.05 Target price: HK$23.58/24.18 Protective stop: HK$20.98 China Merchants Port penetrated the 0.62x retracement level last Friday to close at HK$22.05 in a tall white candlestick and on strong volume two days in a row. As ROC is approaching its extended horizontal resistance line and the MACD histogram has turned positive again, the stock is inclined to test the 1x retracement level at HK$ If the stock goes beyond this resistance and ensuing momentum accelerates, the stock could challenge the 52-week high of HK$ Approximate time frame on average: 1 month HTSC (6886 HK) Trading Buy Last price: HK$16.06 Target price: HK$17.00/17.68 Protective stop: HK$15.25 HTSC ended last Friday higher at HK$16.06 on strong volume. Given the HTSC expanding its histogram positive values and the ROC testing its Nov 16 high, we expect the stock to test the psychological barrier of HK$17.00 If this key resistance is broken, the stock will then test the earlier downside gap top at HK$ Approximate time frame on average: 1 month Source: HKETNet ANALYST Barole Shiu, CAIA CMT barole.shiu@uobkayhian.com.hk w w w. u t r a d e. c o m. h k 4

6 FOC NEWS Market News On Friday (10 February), the balance of Northbound Trading of Shanghai-Hong Kong Stock Connect was RMB billion, accounted for about 91.41% of the daily quota of RMB 13 billion. The balance of Southbound Trading was RMB billion, accounted for about 75.60% of the daily quota of RMB 10.5 billion. The balance of Northbound Trading of Shenzhen-Hong Kong Stock Connect was RMB billion, accounted for about 95.07% of the daily quota of RMB 13 billion. The balance of Southbound Trading was RMB billion, accounted for about 95.20% of the daily quota of RMB 10.5 billion. PBOC News The People's Bank of China (PBOC) did not conduct any reverse repos in the open market on Friday, the sixth day without making any reverse repos. The matured reverse repos for last Friday amounted to RMB 80 billion. The net withdrawal for last Friday was RMB 80 billion. The net withdrawal for last week was RMB 625 billion. Industry News The infrastructure sector rallied last Friday. China Communication Construction (1800 HK, HK$ 10.18) rose 1.9%; China Railway Construction (1186 HK, HK$ 11.26) rose 1.8%; MCC (1618 HK, HK$ 2.96) rose 1.4%; China Railway (390 HK, HK$ 6.95) rose 0.3%. Shipping stocks were sought after last Thursday and Friday. Sinotrans Shipping (368 HK, HK$ 1.74) rose 4.8%; Cosco Shipping Holdings (1919 HK, HK$ 3.41) rose 3%; Cosco Shipping Development (2866 HK, HK$ 1.80) rose 2.9%. Stock Results Manulife (945 HK, HK$ ) announced the result for the year ended 31 December During the period, net revenue rose 34% yearly to CAD2.929 billion; core earnings grew 17% yearly to CAD4.021 billion. The stock rose 0.5% last Friday. Stock News FIH (2038 HK, HK$ 2.86) issued a profit warning, predicting a consolidated net profit for the year ended 31 December 2016 to range from around $135 million to $145 million, down 37% to 41% yearly. The stock rose 8.3% last Friday. China Railway Construction (1186 HK, HK$ 11.26) announced that the Company recently won the bid for the PPP Project of Urban Rail Transit Line 2 (Phase I) in Hohhot. The total investment of the project amounts to approximately RMB billion with a construction period of 55 months. The stock rose 1.8% last Friday. Orange Sky (1132 HK, HK$ 0.78) announced that it agreed to sell 92.59% indirect stakes in Orange Sky Golden Harvest Cinemas (China) to an independent third party Nan Hai Corp. (680 HK, HK$ 0.255) at an initial consideration of RMB3.286 billion. Gains from disposal are expected to be about HK$2.3 billion. Orange Sky rose 13% and Nan Hai rose 4.1%. United Company Rusal (486 HK, HK$ 4.15) has noted recent media reports which suggest that the Company is considering a secondary public offering of its shares, in which the Company could offer 20% of its shares in London. The Company wishes to clarify that, the board of directors of the Company has not considered or discussed any such secondary public offering of shares in London as suggested by the Media Reports. The stock fell 2.8% last Friday. E C O N O M I C C A L E N D A R Feb 14 (Tue) Event Period Survey Prior CH CPI YoY Jan 2.3% 2.1% CH PPI YoY Jan 6.5% 5.5% EC GDP SA YoY 4Q % NFIB Small Business Optimism PPI Final Demand MoM Feb 15 (Wed) MBA Mortgage Applications Empire Manufacturing Jan Jan 0.2% 0.3% Feb Feb CPI MoM Jan 0.3% 0.3^ Retail Sales Advance MoM Industrial Production MoM Capacity Utilization Feb 16 (Thu) Jan 0.1% 0.6% Jan 0% 0.8% Jan 75.4% 75.5% Housing Starts Jan 1221k 1226k Feb 17 (Fri) Initial Jobless Claims Philadelphia Fed Business Outlook Feb Feb Leading Index Jan 0.5% 0.5% Feb 20 (Mon) EC Consumer Confidence Feb 21 (Tue) EC Markit Eurozone Composite PMI Markit Manufacturing PMI Markit Services PMI Markit Composite PMI Feb 22 (Wed) Feb Feb Feb Feb Feb EC CPI YoY Jan % MBA Mortgage Applications Existing Home Sales Source: Bloomberg (HK Time), UOBKayHian Feb Jan 5.55m 5.49m According to market report, Noster Capital, which holds 0.4% equity of Tsui Wah (1314 HK, HK$ 1.37), issued a letter to minority shareholders of Tsui Wah Group, opposing the property purchase, and recommending instead that the Company use its funds for share buybacks. Tsui Wah announced last month that it planned to buy w w w. u t r a d e. c o m. h k 5

7 the whole Tsui Wah Group Centre for HK$255 million. The stock remained unchanged last Friday. Stock Data R&F Properties (2777 HK, HK$ 10.68) announced that the Group s contracted sales for the month of January 2017 amounted to approximately RMB3.71 billion with 275,800 sq.m. of GFA. Compared with same period last year, contracted sales increased 12% and GFA decreased 3%. The stock fell 2% last Friday. China Overseas (688 HK, HK$ 24.15) announced that contracted sales amounted to HK$ billion in January, up 40.9% yearly; and contracted sales area was million sq.m., up 13.1% yearly. The stock fell 1.4% last Friday. Longfor Properties (960 HK, HK$ 12.04) announced that in January 2017, the Group recorded contracted sales of RMB12.04 billion, representing yearly growth of 186%, with contracted sales in terms of GFA amounting to 864,000 sq.m..the stock fell 2.4% last Friday.. w w w. u t r a d e. c o m. h k 6

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