Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. May 28, 2015

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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 TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons HSBC China Mfg PMI 31-May MAY F China Mfg PMI 31-May MAY China Non-Mfg PMI 31-May MAY HSBC China Serv PMI 2-Jun MAY HSBC Chi PMI Output 2-Jun MAY US Data Date Period Prior Cons Initial Jobless Claims 28-May 23-May Cont Jobless Claims 28-May 16-May Pending Home Sales 28-May APR GDP US QoQ 29-May 1Q S Markit US Mfg PMI 1-Jun MAY F ISM Mfg PMI 1-Jun MAY US Trade Balance 3-Jun APR Markit US Service PMI 3-Jun MAY F ISM Non-Mfg NMI 3-Jun MAY Source: Bloomberg GF events Date Event Location 28 May Sany Heavy Ind co. visit Beijing 28 May Jianghuai Auto investor meeting - 28 May Hengshun Vinegar co. visit Zhenjiang 29 May Eternal Asia investor meeting Shenzhen 29 May Fulin Precision investor meeting Mianyang Source: GF Securities (HK) A-Share Market Banking: Rmb internationalization to drive sector re-ratings We expect Rmb internationalization to boost overseas capital inflows which will drive A-share market strength, benefiting banking stocks. In addition, Rmb internationalization will also benefit banks by strengthening their motivation and capabilities to issue loans overseas, while broadening their debt financing channels. We remain optimistic on banking sector performance during the remainder of 2Q15 given continued monetary easing, capital inflows driven by Rmb internationalization, reduction of banking sector risks through local government debt swap and asset securitization, and ongoing financial reforms which will reshape the sector valuation paradigm. Securities: Recent underperformance similar to 1H14 pre-rally weakness The similarity of YTD sector underperformance to the pre-rally weakness in 1H14, coupled with the current IR down cycle, improving sector fundamentals and relatively cheap valuations, makes now an opportune time to buy securities stocks. Additionally, the negative impact of commission rate declines has been fully priced in and more than offset by strong market turnover. ST catalysts include the inclusion of A shares into the FTSE indexes and strong May operating data; MT catalysts include the inclusion of A shares into the MSCI and expectations of further IR/RRR cuts. Property: Strong transaction growth expected for May given policy support Primary area sold in first and second-tier cities tracked fell 7% and 3% WoW respectively last week as new project launches slowed. That said, positive YoY growth continued to be seen. Despite lower new launches, property inventories in major cities tracked rose further to a new high. Destocking property inventories by all means remains local governments main stance towards the property market at the moment with adjustments to policies for loans taken out from the housing provident fund remaining the main method through which to achieve this goal. Hong Kong Market Le Saunda (738 HK, Buy): Strong push on e-commerce, better earnings outlook; upgrade to Buy We upgrade LS from Hold to Buy given its better earnings outlook and re-rating potential due to its strong push on e-commerce business development. The company aims to have a mid-teen contribution from e-commerce revenue in FY16 (vs 10% in FY15). This is much higher than peers low to mid single-digit revenue contribution in the last financial year. We now forecast LS will post an 11% CAGR in core profit in FY16-17 (vs 4% previously). We raise our TP from HK$3.10 to HK$5.00, based on 13x FY16E P/E, still a 10% discount to peers. Shenzhen Investment (604 HK, Buy): Strong sales at the Tanglang City Project in Shenzhen Subscriptions at the company s newly launched Tanglang City Project (50% holding) have reached 42,000 sqm and Rmb1.6bn, with ASP of Rmb40k/sqm, meaning the sales target for the project in 2015 has already been reached. The first-batch of 464 residential units attracted over 1,500 buyers and was sold out quickly. The company is trading at 0.9x 2015E NBV, but given its premium land bank in Shenzhen (2m sqm) and the rapidly rising ASP in the city s property market, we think the company deserves a higher valuation of 1.0x-1.2x NBV. 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 Banking: Rmb internationalization to drive sector re-ratings Rmb internationalization speeding up China is following a three-step approach for the internationalization of the Rmb, seeking to make the Rmb a settlement currency first, then an investment currency and finally a reserve currency. Rapid progress has been made in the first two steps. It is estimated that 30% of China-related trade will be settled in Rmb in 2015, while data from SWIFT indicates that more than one-third of financial institutions across the world have used the Rmb in payments to recipients in mainland China and Hong Kong. In addition, the Rmb maintained its position as the world s fifth largest payment currency in Jan 2015 by taking a 2.06% share of the global payment market, as the currency has gained support from a growing list of overseas clearing networks. We expect this percentage to increase further going forward. Currency internationalization to drive banking share price growth Experience from the US and Japan suggests that a currency typically sees its value appreciate as it becomes more internationalized, thus attracting capital inflows from overseas and leading to prosperity of the domestic financial markets. We believe Rmb internationalization will have the same effect on the Chinese financial markets, with inflows of overseas capital to drive A-share market strength, benefiting banking stocks which account for the highest proportion of A-share market cap. Banking business upgrade on Rmb internationalization In addition, Rmb internationalization will also benefit banks by strengthening their motivation and capabilities to issue loans overseas, while broadening their debt financing channels as overseas Rmb deposits increase. Going forward, we believe joint-stock banks will also join state-owned banks in raising debt overseas with the geographical scope of debt issuance to expand beyond Hong Kong. Furthermore, debt financing vehicles used will become more diversified with more derivatives to emerge. Last but not least, banks intermediary business should benefit the most from Rmb internationalization with significant growth to be seen across settlement, clearing and underwriting businesses. Remain positive on rest of 2Q15 We remain optimistic on banking sector performance during the remainder of 2Q15 given continued monetary easing, capital inflows driven by Rmb internationalization, reduction of banking sector risks through local government debt swap and asset securitization, and ongoing financial reforms which will reshape the sector valuation paradigm. We recommend China Merchants Bank ( CH), China Minsheng Bank ( CH), Hua Xia Bank ( CH), BoCom ( CH) and Industrial Bank ( CH). Key risks include pressure on banks asset quality from slowing economic growth, and downward pressure on banks NIM from recent interest rate cuts and interest rate liberalization. Securities: Recent underperformance similar to 1H14 pre-rally weakness Now an opportune time to buy securities stocks We believe the YTD sector underperformance is similar to the pre-rally weakness seen in 1H14. This similarity, coupled with the current interest rate down cycle, improving sector fundamentals and relatively cheap valuations despite the bull market, makes now an opportune time to buy securities stocks. Sector fundamentals continuing to improve YTD sector operating conditions have been much stronger than last Dec (the best month of 2014) as stock market turnover, customer deposits and the margin financing balance continue to increase. In addition, 4M15 sector comprehensive income was already equivalent to 83% of the 2014 full-year amount; we expect high earnings growth to continue. Commission rate decline fully priced in and offset by strong turnover Customers have become less sensitive towards commission costs amid the current bull market, while the rising proportion of high-commission margin financing business has helped support overall commission levels. In addition, the substantial increase in market turnover has more than offset the negative impact of lower commission rates. Based on our earnings forecasts, large brokers are now trading at just around 20x 2015E P/E, leaving sufficient upside compared with the historical ceiling of 30x. Smaller firms to take the lead It has been a pattern over the past two years for smaller companies to demonstrate share price strength ahead of larger firms during sector rallies; we believe this pattern to be repeated in any upcoming sector strength. Short/mid-term catalysts Non-bank financial stock prices are set to rise as the overall bull market continues amid the interest rate down cycle. Among short-term sector catalysts are the inclusion of A shares into the FTSE indexes and brokers upcoming announcement of strong operating data for Page 2

3 May. In the medium term, we believe sector performance will be catalyzed by the inclusion of A shares into the MSCI and expectations of further IR/RRR cuts. Top picks We suggest accumulating stocks in the securities sector, and particularly like 1) stocks driven by internet finance development and SOE reform such as Golden Dragon Development ( CH), China Merchants Securities ( CH), Everbright Securities ( CH), Industrial Securities ( CH), Sinolink Securities ( CH), Soochow Securities ( CH) and Guoyuan Securities ( CH); 2) undervalued large brokerage firms such as CITIC Securities ( CH) and Haitong Securities ( CH); and 3) companies about to carry out refinancing plans such as Sealand Securities ( CH). Property: Strong transaction growth expected for May given policy support YoY growth remains positive despite WoW correction Primary area sold in first and second-tier cities tracked fell 7% and 3% WoW respectively last week as new project launches slowed. That said, positive YoY growth continued to be seen. Among the four first-tier cities, transactions in Beijing essentially remained flat WoW, while the other three cities suffered a decline with Shenzhen dropping as much as 30%. Changes in the second-tier cities were mixed with Suzhou rising 41% and Guiyang falling 34%. On a geographical breakdown, the Bohai Rim and YRD regions continued to see a WoW increase, while the PRD recorded a significant decline. Inventory up despite weakened new launches New project launches slowed last week. However, our index tracking property inventories in 15 large cities rose further to a new high, with both Beijing and Shanghai picking up. In addition, the sell-through rate for the 12 large cities tracked declined earlier last week before rebounding in the second half of the week. Housing provident fund remains key area of policy support Destocking property inventories by all means remains local governments main stance towards the property market at the moment with adjustments to policies for loans taken out from the housing provident fund remaining the main method through which to achieve this goal. Liquidity conditions have remained loose so far in May, while the local governments of some third/fourth-tier cities have further strengthened policy support amid considerable inventory pressure. Overall, the sentiment of both buyers and sellers has improved on multiple policy catalysts and the sector peak season. We believe medium and large cities are very likely to post new home transaction growth of 25% YoY in May. We prefer China Merchants Property ( CH), Zhongnan Construction ( CH), Oceanwide Holdings ( CH), Citychamp Dartong ( CH) and Lushang Property ( CH). Le Saunda (738 HK, Buy): Strong push on e-commerce, better earnings outlook; upgrade to Buy Upgrade to Buy We upgrade LS from Hold to Buy given its better earnings outlook and re-rating potential due to its strong push on e-commerce business development. The company aims to have a mid-teen contribution from e-commerce revenue in FY16 (vs 10% in FY15). This is much higher than peers low to mid single-digit revenue contribution in the last financial year. After our upward earnings revision, we forecast LS will post an 11% CAGR in core profit in FY16-17 (vs 4% previously). We raise our TP from HK$3.10 to HK$5.00, based on 13x FY16E P/E (9.5x FY16E P/E previously), which is still a 10% discount to peers. Potential catalyst: In-depth co-operation with third party e-commerce platforms. Strong FY15 results Core profit jumped 21% YoY to HK$225m, 9% above our estimate. The earnings surprise was mainly due to a lower-than-expected SG&A expense ratio (54.5% vs our estimate of 55.6%). Revenue increased 3% YoY driven by 7.5% SSSG but partly offset by a 3% store decline. GM was stable at 67.2% (vs 67.1% in FY14). OP margin widened by 1.7pp YoY to 14.4%, primarily led by 286% growth in government incentives and a 0.9pp decrease in rental expenses ratio. The company announced the issuance of one bonus share for every ten existing shares. E-commerce the key growth driver E-commerce revenue surged ~190% YoY to reach 10% of revenue in FY15 (vs 3% of revenue in FY14). The e-commerce business has two divisions: the transformation of the CNE brand into an O2O brand, and online business for the Le Saunda brand. In FY15, the company closed 57 CNE offline stores and opened eight new CNE O2O stores. The business was profitable with OP margin estimated at mid-teens. In FY16, the company plans to add Page 3

4 open 30 CNE O2O stores and speed up the development of Le Saunda MEN s online business. The company is also looking for more in-depth co-operation with e-commerce platforms. Management targets an e-commerce revenue proportion as a percentage of total revenue to reach mid-teens in FY16. Accelerating store expansion Since the establishment of Linea Rosa in FY12, the brand has been profitable with its sales per store the highest among the company s brand portfolio. The company plans to accelerate Linea Rosa s network expansion in FY16 by adding another 50 stores (52 stores in FY15). For the Le Saunda brand, the company also aims to open 30 new stores mainly in secondtier cities. The company s store expansion has been more prudent than peers over the last four financial years. It also has less stores for its core brands compared to its peers major brands of similar positioning. We do not expect the accelerated expansion to increase the risk of cannibalization. 1Q16 trading update SSS has been recovering in Apr and May from a very weak Mar (~10% decline) due to the late CNY in Feb. We estimate SSS could be flat to slightly negative in 1Q16. Management expects better SSS in 2H16 through the launching of new products. Earnings upgrade We raise our FY16/17 core profit estimates by 18%/23% mainly to reflect a lower SG&A expenses ratio and higher revenue assumptions. In FY16, we expect the company to deliver 11% core profit growth driven by 60% growth in e-commerce revenue and 8% revenue growth (at 3% SSSG) from physical stores. Downside risks The company fails to meet its e-commerce growth target; new store performance below expectation. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Shenzhen Investment (604 HK, Buy): Strong sales at the Tanglang City Project in Shenzhen What's new? Tanglang City Project, a Shenzhen property complex project jointly developed by Shenzhen Investment (50% holding) and Shenzhen Metro Group was launched last weekend. Subscriptions reached 42,000 sqm and Rmb1.6bn, with ASP of Rmb40k/sqm, meaning the sales target for the project in 2015 has already been reached. This project is located in Nanshan District, with total GFA of 260k sqm, including residential, apartments, a hotel, office space and a shopping mall. Maintain Buy The first-batch of 464 residential units attracted over 1,500 buyers and was sold out quickly. We believe demand for residential property in Shenzhen is booming. The company is trading at 0.9x 2015E NBV, but given its premium land bank in Shenzhen (2m sqm) and the rapidly rising ASP in the city s property market, we think the company deserves a higher valuation of 1.0x- 1.2x NBV. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@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 have compensation or mandate for investment banking services received within the preceding 12 months from one of the companies China Minsheng Banking Corp., Ltd. (Stock Code: 1988 HK) contained in this research report. GF Securities (Hong Kong) and/or its affiliated or associated companies have acted as Independent Financial Advisor of China Minsheng Banking Corp., Ltd. (Stock Code: 1988 HK) within the preceding 12 months. GF Securities (Hong Kong) and/or its affiliated or associated companies may receive compensation or mandate for investment banking services from China Minsheng Banking Corp., Ltd. (Stock Code: 1988 HK) in the future. 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