Dim Sum Express. A-Share Market. Hong Kong Market. Other Markets. Equity Research. Nov 24, 2014

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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$) (%) (US$) (%) 941 CHINA MOBILE PETROCHINA ICBC HSBC CCB TENCENT BANK OF CHINA SINOPEC CHINA LIFE INS CNOOC Econ data release China Data Date Period Prior Cons Ind Profit Mthly YoY 27-Nov OCT US Data Date Period Prior Cons Markit US Serv PMI 24-Nov NOV P GDP QoQ 25-Nov 3Q S SPCS Composite Nov SEP Initial Jobless Claims 26-Nov 22-Nov Cont Jobless Claims 26-Nov 15-Nov Pending Home Sales 26-Nov OCT Dur Goods New Ord 26-Nov OCT Source: Bloomberg GF events Date Event Location 24 Nov Huitian New Materials co. visit Shanghai 25 Nov WKW Auto Parts investor conf Shanghai Nov Ourgame NDR Shenzhen Nov A-share strategist marketing Hong Kong Source: GF Securities A-Share Market Information Technology: Policy support for technology companies participating in medical insurance payout control The State Council issued some guidelines promoting commercial health insurance development last week, encouraging information sharing and the creation of health insurance information systems. We see this as a clear statement of policy support for information technology suppliers in the field of state medical insurance payout control. Separately, Searainbow Holding s cooperation with General Reinsurance in product R&D should help improve the quality of local health insurance products. In addition, further progress in the medical insurance payout control segment will raise the growth upside for relevant technological companies. Tech-Bank ( CH): Improvements in hog farming conditions to boost earnings In addition to its traditional business strength in specialized fish feed, the company has now established another major business segment of live hog farming after acquiring AgFeed s operations. The company is set to fully benefit from strengthening hog farming business conditions in 2015, which should boost its earnings. In addition, several new products should drive vaccine business growth. We have become more optimistic on the company and forecast 2014/15/16 EPS of Rmb0.20/0.83/1.16. Hong Kong Market ASM Pacific (522 HK, NR): Growth rate to moderate in 2015 ASM Pacific s 9M14 sales grew 33% YoY, underpinned by robust capex spending by customers as well as the first-time consolidation of DEK. 4Q14 revenue is set to decline QoQ as the industry goes through the low season, but management expects sales growth of over 30% YoY. They have not, however, offered any concrete guidance for We expect YoY sales growth to moderate in 2015 given the high base in 2014 and modest industry growth forecasts Gartner, an IT industry research firm, currently projects 14.9% YoY sales growth in the global assembly and packaging equipment market for Kangda (6136 HK, NR): Second phase of expansion project announced in Tianjin Kangda announced the signing of a 30kt/day BOT project in Tianjin, the second phase of its Ninghe wastewater treatment project, with total investment of Rmb2,463/ton, higher than company s average construction cost of Rmb1,800/ton. The project will focus on industrial water treatment, meaning the higher construction cost is justified. We expect construction to start next year before operation begins in late 2016/early 2017, and see little impact on 2015/16 earnings. The company is on track to achieve its capacity expansion target of around 3mt/day by Its valuation is still undemanding. We are positive on Kangda given its medium-term growth outlook. Other Markets Jumei International (JMEI US, NR): Profitability to rebound following business conversion We expect the company s overall gross margin to rebound going forward as the proportion of its selfowned and exclusive brands picks up and as its cross-border online shopping business grows. The company has provided guidance for full-year earnings to grow 40-50%. Stricter control of product quality and the establishment of an anti-counterfeiting system might limit business growth in the short term but should raise industry barriers in the long term and help strengthen the company s brand awareness and customer loyalty. 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 Information Technology: Policy support for technology companies participating in medical insurance payout control Policy support for tech companies working in medical insurance payout control The State Council issued some guidelines promoting commercial health insurance development last week. Among other things, the government calls for a larger supply of commercial health insurance and a significant increase in medical expenses covered by these insurance policies as a proportion of overall healthcare spending. In addition, commercial insurance providers are required to improve services related to the review, reimbursement, settlement and payment of medical expenses, while information sharing between the commercial health insurance and the state medical insurance systems as well as that between different medical institutions information systems is encouraged. Commercial insurance providers are also encouraged to create multi-functional, efficient and independent national or regional health insurance information systems so as to strengthen health data analysis and intelligent business processing by using big data technology and the internet. We see this as a clear statement of policy support for information technology suppliers in the field of state medical insurance payout control. Searainbow leading in medical insurance payout control business Separately, Searainbow Holding ( CH) has entered cooperation agreements with General Reinsurance from Germany and China Life Reinsurance. Searainbow will provide the results of industry studies such as population group medical spending and illness statistics for General Reinsurance which will be used for product innovation and insurance pricing. Similar cooperation in product R&D should help improve the quality of local health insurance products. In addition, further progress in the medical insurance payout control segment will raise the growth upside for companies such as Searainbow Holding ( CH), Wonders Information ( CH) and Kingstar Winning Software ( CH). Tech-Bank ( CH): Improvements in hog farming conditions to boost earnings In addition to its traditional business strength in specialized fish feed, the company has now established another major business segment of live hog farming after acquiring AgFeed s operations. Hog farming Farming efficiency at AgFeed has been improving since Tech-Bank s acquisition. Production capacity in the hog farming industry has declined substantially since the start of this year with the company set to fully benefit from strengthening industry business conditions in Tech- Bank focuses on biobreeding and its strategic acquisition of a stake in Choice Genetics has given it a technological advantage. Bioproducts and feedstuff Subsidiary Chengdu Tecbond is leading domestic peers with its technical strength, and it is about to see continued input in recent years to pay off. Separately, Tech- Bank s key profit-generating specialized fish feed business has a production capacity of 1m tonnes, and it also possesses significant technical strength in this field. More positive on company Expected significant improvements in Tech-Bank s hog farming business in 2015 should boost its earnings while several new products should drive vaccine business growth. We have become more optimistic on the company and forecast 2014/15/16 EPS of Rmb0.20/0.83/1.16. ASM Pacific (522 HK, NR): Growth rate to moderate in 2015 What s new? We visited ASM Pacific for a business update. Its share price has risen 23.5% YTD, outperforming the Hang Seng Index, which rose 0.2% in the same period. The stock is trading at 16.2x 2015E P/E (Bloomberg consensus). Leading player in semiconductor packaging equipment market Headquartered in Hong Kong, ASM Pacific is the world s leading manufacturer of semiconductor assembly and packaging equipment by revenue. Its key products include 1) back-end IC packaging equipment (die bonders, wire bonders, lead frames), and 2) SMT (surface mount technology) equipment. This equipment is used by IC packaging companies to produce ICs (integrated circuits) and EMS (electronic manufacturing services) companies to produce electronics components for various products Page 2

3 including automobiles, smartphones, LED lighting (general lighting and billboards), CMOS sensors. Back-end equipment and SMT equipment accounted for 57% and 43% of the group s pre-tax profit in 3Q14, respectively. Targeting to become global leader in SMT equipment by 2016 ASM Pacific is the world s second largest SMT equipment maker, with a global market share of about 19%. Management targets to overtake Panasonic (the world s largest player) by 2016 by expanding its product offering at a different price range. The company recently announced a new SMT equipment series targeting the mid-end mainstream market, and expects product sales to commence in Separately, management is working to raise profitability for SMT equipment by using more in-house components. Management targets to achieve 40% gross profit margin for its SMT equipment business over time, up from 33.5% in 3Q14. 4Q14 and 2015 business outlook ASM Pacific has seen strong sales so far this year. 9M14 sales grew 33% YoY to US$1.4bn, underpinned by robust capex spending by customers as well as the first-time consolidation of DEK, a newly acquired company in the SMT screen printer business since 3Q14. 4Q14 revenue is set to decline on a sequential basis as the industry goes through the low season, but management expects sales growth of over 30% on a YoY basis. They have not, however, offered any concrete guidance for We expect YoY sales growth to moderate in 2015 given the high base in 2014 and modest industry growth forecasts. For instance, Gartner, an IT industry research firm, currently projects 14.9% YoY sales growth in the global assembly and packaging equipment market for Key risks Japanese rivals are set to regain pricing competitiveness amid a weakening Yen. Slowdown in underlying demand in the automobile, smartphone and LED lighting industries. (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) Kangda (6136 HK, NR): Second phase of expansion project announced in Tianjin New project signing Kangda announced the signing of a 30kt/day BOT project in Tianjin, the second phase of its Ninghe wastewater treatment project. Total investment is Rmb73.9m, or Rmb2,463/ton, higher than company s average construction cost of Rmb1,800/ton. Higher project construction cost justified During our update with management, they stated that the project will focus on industrial water treatment, meaning the higher construction cost is justified. We expect construction to start next year before operation begins in late 2016/early This is the fourth new project/m&a announced since IPO. Kangda s installed capacity now amounts to 2.34mt/day. We see little impact on 2015/16 earnings as we expect an increase in 2015/16 revenue of just 2-3%, stemming from the construction of the project. Valuation still undemanding We believe Kangda is on track to achieve its capacity expansion target of around 3mt/day by Trading at 15x 2015E P/E and 0.4x 2015E PEG (based on Bloomberg consensus), its valuation is still undemanding. We are positive on Kangda given its medium-term growth outlook. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) Jumei International (JMEI US, NR): Profitability to rebound following business conversion GM to rebound following conversion of cosmetics business into self-owned operations 3Q14 net GMV rose 31.4% YoY to US$273m with 57% coming from the mobile internet channel. Active user number and overall order volume grew 23.8% and 14.1% YoY respectively. Operating revenue picked up 28% YoY to US$158m in 3Q14, while gross margin fell 4pp YoY to 21.9% due to its previous fake goods scandal and the conversion of its third-party-merchant-based cosmetics business into self-owned operations. We expect overall gross margin to rebound going forward as the proportion of its self-owned and exclusive brands picks up and as its cross-border online shopping business grows. 3Q14 non-gaap net profit came in at US$21m (+87% YoY), and the company has provided guidance for full-year earnings to grow 40-50%. Page 3

4 Anti-counterfeiting efforts to pay off in long term The company has been committed to improving its cosmetics e-commerce service standards and establishing an anti-counterfeiting system. It is planning to reorganize its previous open-platform cosmetics business into three subcategories, i.e. flagship stores, specialized counters and cross-border e-commerce. A total of 102 brands had joined Jumei s anti-counterfeiting alliance by end-sep. In addition, the company s IT expense ratio rose 0.8pp YoY to 2.2% in 3Q14 as it strengthened R&D, and its first self-built logistics center which is located in Tianjin is likely to come on line next year (which should enhance its overall supply chain efficiency). We believe Jumei is shifting the focus of its development from merely business expansion to good-quality expansion. Stricter control of product quality and the establishment of an anti-counterfeiting system might limit business growth in the short term but should raise industry barriers in the long term and help strengthen the company s brand awareness and customer loyalty. Company to become new product promotion platform We expect Jumei to grow into the best platform in China for the promotion of new cosmetics products relying on its large user base and the efficiency of the internet. That said, we have lowered our estimate of GMV CAGR to 47% and non-gaap net profit forecasts to US$82/129/217m given the short-term negative impact of cosmetics business conversion. Page 4

5 Hong Kong Equity 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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