Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. May 21, 2015

Transcription

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 Ind Profit Mthly YoY 26-May APR US Data Date Period Prior Cons Initial Jobless Claims 21-May 16-May Cont Jobless Claims 21-May 9-May Markit US Mfg PMI 21-May MAY P Existing Homes Sales 21-May APR CPI Urban YoY 22-May APR Dur Goods New Ord 26-May APR SPCS Composite May MAR Markit US Serv PMI 26-May MAY P Source: Bloomberg GF events Source: GF Securities (HK) A-Share Market Investment Strategy: Takeaways from conference call on Made in China 2025 plan We highlight three key phrases as the most important messages from the Made in China 2025 plan issued by the State Council on Tuesday: 1) China, meaning domestic production and import substitution will remain the focus on investment in the coming few years; 2) intelligent manufacturing, meaning the integration of information technology and the manufacturing sector; 3) 2020, as not only long-term targets for 2025 have been set out but nearer-term targets for 2020 have also been provided, making the implementation of the plan more pressing and the investment theme more attractive. Machinery While still at an early stage of plan implementation, we prefer companies with prominent Industry 4.0 characteristics, reasonable valuations and the potential to enhance their earnings through M&A which will in turn bring their valuations down to safe levels. We believe the intelligent manufacturing investment theme will be at play throughout the entire year this year. Auto Based on our previous communications with industry experts who participated in formulating the plan, the key highlights of the plan regarding the auto sector are the importance of Chinese capital ownership, survival of domestic auto companies and overseas business expansion. We believe the plan will have an impact on the auto sector mainly by driving M&A and innovation. Military equipment We highlight investment opportunities from aviation & aerospace equipment, and the civilian use of military equipment technology. We continue to believe sector reform and equipment upgrade will remain in place as LT share price drivers. We also see upcoming catalysts from SOE reform, mixedownership reform, policies for the aircraft engine and general aviation industries, and geopolitical changes. F&B: Liquor e-commerce market to be worth more than Rmb100bn Traditional liquor sales channels are dwindling as government agencies have been replaced by mass consumers as the main consumer group of baijiu. In addition, unlike traditional liquor sales channels which are typically associated with a complex supply chain, overly high prices and lack of quality guarantee, e-commerce, with a simpler supply chain structure, caters for mass consumers needs for product diversity, cheap prices and good consumer experience, making it more in line with future liquor industry development. We estimate that e-commerce liquor retail sales will reach Rmb100bn annually in the future. Hong Kong Market Securities: Sector update Hautai listing, new measures to open up the sector Huatai Securities is set to issue 1.4 billion H-shares at an offer price range of HK$20.68 to HK$24.8 per share, over a 35% discount compared with its A-share closing price on May 19. The offering should allow the company to introduce some heavyweight shareholders and slightly reduce its financial leverage, which is currently approaching the upper limit allowed by the CSRC. Separately, the CSRC said recently that it would speed up the implementation of new opening measures for Hong Kong and Macao institutions, and research a further opening up of the securities industry. Kingsoft (3888 HK, Buy): 1Q15 results miss on lower-than-expected OPM 1Q15 revenue beat consensus by 3%. However, excluding share-based compensation, adjusted net profit came in down 23% QoQ and 40% YoY, mainly due to the company s all-in strategy for Cheetah s overseas expansion and cloud business. The company indicates that 2015 will be another year of proactive investment, a strategy which will further adversely impact operating margin in the remaining quarters this year given the rising revenue contribution from Cheetah. The company expects its operating margin to rebound in 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 Investment Strategy: Takeaways from conference call on Made in China 2025 plan Three key phrases from Made in China 2025 plan The State Council issued a Made in China 2025 plan on Tuesday, giving details of the designated strategic tasks, as well as key areas and projects of development. We highlight three key phrases as the most important messages from the document: 1) China, meaning domestic production and import substitution will remain the focus on investment in the coming few years; 2) intelligent manufacturing, meaning the integration of information technology and the manufacturing sector; 3) 2020, as not only long-term targets for 2025 have been set out but nearer-term targets for 2020 have also been provided in the document, making the implementation of the plan more pressing and the investment theme more attractive. Machinery We believe listed companies earnings growth will be driven by M&A in the near term as we are still at an early stage of plan implementation. At the moment, we prefer companies with prominent Industry 4.0 characteristics, reasonable valuations and the potential to enhance their earnings through M&A which will in turn bring their valuations down to safe levels. We believe the intelligent manufacturing investment theme will be at play throughout the entire year this year, and recommend Dongfang Precision & Tech ( CH), Yawei Machine Tool ( CH), Noblelift Equipment ( CH), Boshi Automation ( CH) and Chuanyi Automation ( CH). We also suggest watching opportunities from Hi-Tech Control System ( CH), Neway Valve Suzhou ( CH), Riland Industry ( CH), Jasic Technology ( CH), Ningbo Cixing ( CH), Sciyon Automation ( CH), ESTUN Automation ( CH), Siasun Robot & Automation ( CH) and J.S. Corrugating Machinery ( CH). Auto Based on our previous communications with industry experts who participated in formulating the plan, the key highlights of the plan in relation to the auto sector are the importance of Chinese capital ownership, survival of domestic auto companies and overseas business expansion. We believe the plan will have an impact on the auto sector mainly by driving M&A and innovation. In addition, we believe more detailed measures such as fiscal subsidies might be issued in the near term. We believe sector M&A will provide a strong catalyst for automakers share price growth (which has been the main factor dragging YTD sector performance), with the following stock picks: Automakers from the FAW and Dongfeng families; Other companies expected to undergo consolidation such as Beiqi Foton Motor ( CH), Jianghuai Automobile ( CH), Jiangling Motors ( CH), CNHTC Jinan Truck ( CH), Shanghai Diesel Engine ( CH) and Ankai Automobile ( CH); Automakers and auto part companies with cheap valuations such as Great Wall Motor ( CH), SAIC Motor ( CH), HUAYU Automotive Systems ( CH), Beiqi Foton Motor ( CH) and Chongqing Changan Automobile ( CH); Auto part companies with strong performance that are in line with the Made in China 2025 plan such as Fulin Precision Machining ( CH), Beijing WKW Automotive Parts ( CH), Tianrun Crankshaft ( CH), Yunnei Power ( CH) and Weifu High-Technology ( CH). Military equipment Based on statements in the plan, we highlight investment opportunities arising from the following three aspects: Application of military equipment technology and products for civilian use In particular, we suggest watching companies focused on military technologies that can be easily adopted for civilian use such as those related to helicopters and satellites. Aviation equipment Given the plan s emphasis on aircraft engine development, we suggest watching AVIC Aviation Engine ( CH) and AVIC Aero Engine Controls ( CH). In addition, we expect follow-up policies to be issued for the industrialization of various aviation technologies, and suggest watching drone and general aviation companies such as Zongshen Page 2

3 Power Machinery ( CH), China Aerospace Times Electronics ( CH), Sichuan Jiuzhou Electronic ( CH) and Wisesoft ( CH). Aerospace equipment We believe satellite infrastructure development is highly in line with the current Silk Road initiative, and that aerospace infrastructure and satellite application will be two key points to be included in the 13th FYP. We highlight China Spacesat ( CH), China Aerospace Times Electronics ( CH) and Space Appliance ( CH). We continue to believe that the two main factors supporting sector share prices, i.e. sector reform and equipment upgrade, will remain in place in the long term. We also see upcoming catalysts from SOE reform, mixed-ownership reform, policies for the aircraft engine and general aviation industries, and changes in the geopolitical situation. We maintain our recommendation for Space Appliance ( CH), China Aviation Optical-Electrical Tech ( CH), Wisesoft ( CH), China Spacesat ( CH). F&B: Liquor e-commerce market to be worth more than Rmb100bn E-commerce in line with future liquor sales development Traditional liquor sales channels are dwindling as government agencies have been replaced by mass consumers as the main consumer group of baijiu. In addition, unlike traditional liquor sales channels which are typically associated with a complex supply chain, overly high prices and lack of quality guarantee, e-commerce, with a simpler supply chain structure, caters for mass consumers needs for product diversity, cheap prices and good consumer experience, making it more in line with future liquor industry development. We estimate that e-commerce liquor retail sales will reach Rmb100bn annually in the future. Different forms of liquor e-commerce operations Apart from comprehensive e-commerce platforms such as Eternal Asia Supply Chain Management ( CH), JD.Com (JD US) and Tmall where liquor is available, vertical liquor e-commerce operations are also taking shape. Among these vertical players are online-only liquor e-commerce platforms Jiuxian and Yesmywine, as well as O2O operators 1919 and Zhongjiu model in line with upcoming trend We believe 1919 s supply chain management and O2O business model are more in line with the upcoming trend of liquor supply chain development compared with the traditional e-commerce model and physical liquor stores. In particular, 1919 s O2O model has significantly reduced logistics cost compared with traditional e-commerce. Its flexible supply chain management has avoided the issue of multiple price markups by distributors, has increased product diversity, and shifted from the traditional high inventory e-commerce model to one that only requires low inventory maintenance. In addition, its asset-light and standardized business expansion model is an advantage over physical liquor stores. Asset-light operations also means stronger cash flows than traditional online-only e-commerce operations. Top picks We are positive on vertical liquor e-commerce platforms represented by Qinghai Huzhu Barley Wine ( CH, which has acquired Zhongjiu), and like Eternal Asia Supply Chain Management ( CH) among comprehensive e-commerce platforms. Securities: Sector update Hautai listing, new measures to open up the sector Monthly securities sector data: 1) Market and brokerage: The CSI 300 index gave a return of 17.25% in April, while the accumulative return for the first four months was 34.41%. Average daily trading volume in mainland China amounted to Rmb910.2bn in 4M15, up 361% YoY. 2) Equity financing: Total equity financing in mainland China rose 26.63% YoY in 4M15. CITIC securities (6030 HK) was ranked first among listed securities firms. 3) Asset management: assets under management continued to grow. Huatai Securities (6886 HK), GF Securities (1776 HK), and CITIC Securities took the leading positions. 4) Innovative business: Outstanding margin trading balance in mainland China reached Rmb1,839.8bn, up 23.16% in 4M15. In terms of margin trading, GF Securities, China Merchants Securities ( CH), Huatai Securities, Haitong Securities (6837 HK) and CITIC Securities were the top players. HK listing for Huatai Securities Huatai Securities is about to issue 1.4 billion H-shares at an offer price range of HK$20.68 to HK$24.8 per share, over a 35% discount compared with its A-share closing price on May 19, and meaning it will raise from Rmb28.95bn to Rmb34.72bn. There are more than 20 potential cornerstone investors, 13 of which have agreed to subscribe a total of Page 3

4 US$1.9bn (equivalent to approximately HK$14.82bn). The offer price range represents a considerable discount, hence H-shares may perform well on the day of listing. Meanwhile, Huatai Securities is able to introduce some heavyweight shareholders and slightly reduce its financial leverage (currently approaching the upper limit allowed by the CSRC) through this offering. New opening measures for the securities sector Deng Ke, the CSRC spokesperson, said on May 15 that the CSRC would speed up the implementation of new opening measures for Hong Kong and Macao institutions, and research a further opening up of the securities industry based on schedule. At present, qualified foreign institutions are permitted to set up joint venture securities firms with domestic securities companies; however, foreign ownership cannot exceed 49%. The joint venture could gradually increase the scope of business, including: securities underwriting and sponsorship, foreign shares brokerage, bond brokerage and proprietary business. In addition, the CEPA supplementary agreement stated that Hong Kong and Macao financial institutions were allowed to each set up a joint venture securities firm with full license in Shanghai, Guangdong and Shenzhen, holding up to 51% ownership and with partners not limited to the mainland securities firms. We believe that accelerating the process of internationalization will help to stimulate domestic securities firms, transforming the traditional brokerage and investment banking business and promoting innovative businesses such as FICC and investment business overseas. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Kingsoft (3888 HK, Buy): 1Q15 results miss on lower-than-expected OPM Bottom line misses, top line beats Adjusted EPS of Rmb0.10 in 1Q15 was 18% lower than Bloomberg consensus of Rmb Revenue of Rmb1105m beat consensus by 3%. However, excluding share-based compensation, adjusted net profit came in down 23% QoQ and 40% YoY to Rmb155.4m, mainly due to the company s all-in strategy for Cheetah s overseas expansion and cloud business. Ongoing strength in Cheetah mobile and Cloud business The four business lines of online games, cheetah mobile, WPS and cloud services accounted for 29%, 58%, 5% and 8% of 1Q15 revenue respectively. On a QoQ basis, revenue from cheetah mobile and cloud increased by 11% and 40% respectively, while revenue from online games and WPS declined by 6% and 36% respectively. The strong momentum in mobile advertising services in both domestic and overseas markets has driven sustainable growth in cheetah revenue, of which 55% was from the mobile space in 1Q15. In its cloud business, Xiaomi remains the largest single client and continues to purchase more cloud services from Kingsoft cloud. Cloud revenue from its gaming business and other verticals also saw rapid development. Operating margin to narrow further on proactive investment for cheetah and cloud businesses Adjusted operating margin was 18% in 1Q15, down 5pp QoQ and 4pp YoY, mainly due to rising marketing and R&D costs related to the cheetah and cloud businesses. The company indicates that 2015 will be another year of proactive investment. They plan to trade off short term profits to capture the long-term growth opportunities through mobile transformation, globalization and cloud businesses. This strategy will further adversely impact operating margin in the remaining quarters this year given the rising revenue contribution from Cheetah. The company has given guidance for just single-digit operating margin for full year Expecting a profitability recovery in 2016 The company expects its operating margin to rebound in Through one year of heavy investment, the company targets to obtain 600m mobile users for its cheetah mobile products at the end of this year (up from 536m at end-1q15), which will rank the company in the top three mobile advertising companies globally. The company also expects to achieve breakeven in its cloud business in FY16, thanks to the economies of scale arising from rapid cloud revenue expansion. Kingsoft s shares have risen ~112% YTD. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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 GF Securities Co., Ltd. (the Company ) (Stock Code: 1776 HK) contained in this research report. GF Securities (Hong Kong) and/or its affiliated or associated companies have acted as Joint Sponsor, Joint Global Coordinator and Joint Bookrunner of the Company 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 the Company in the future. In this connection, investors shall be aware that conflict of interest may arise as the objectivity of GF Securities (Hong Kong) in this research report may be affected. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 5