Yum Cha 飲茶. June 4, 2015 RESEARCH NOTES SNIPPETS

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1 Yum Cha 飲茶 June 4, 215 INDICES Closing DoD% Hang Seng Index 27, HSCEI 14,114.9 (.6) Shanghai COMP 4,91. (.) Shenzhen COMP 3, Gold 1, BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) 63.8 (2.6) HIBOR, 3-M.4.3 SHIBOR, 3-M RMB/USD 6.2 (.) DATA RELEASES DUE THIS WEEK Jun 8 Trade Balance Jun 8 Exports YoY Jun 8 Imports YoY Jun 8 Exports YoY CNY Jun 8 Imports YoY CNY Jun 8 Trade Balance CNY Source: Bloomberg RESEARCH NOTES SMI CORPORATION [198.HK; HK$.94; NOT-RATED] - After a restructuring in 29, SMI Corporation Limited (SMI) operates an integrated business model covering film production, film marketing, theater circuits, theater operation, integrated retailing and marketing. SMI holds 22.9% stake in SMI Culture Group Holdings (SMI Culture) [2366.HK]. Fueled by rapid growth in the number of theaters, seats and screens, SMI has demonstrated strong box office and profit earning capability. In addition, as there are currently few HK-listed companies covering film business in China, we consider SMI a proxy to the rapid growth of the film industry in China. Cooperation with Baidu shows that group s operation offers strategic value to internet giant. After recent share price rally, shares of SMI and SMI Culture might remain volatile given a weak market sentiment. Any share price weakness provides opportunities for a re-visit. JIANGNAN GROUP [1366.HK; HK$2.39; NOT-RATED] - Jiangnan Group (JNG) is a leading power cable makers based in Jiangsu. State Grid Corporation of China is the largest end-customer accounted for 34% of sale revenue in FY14. Thanks to infrastructure and power sector investment, JNG maintains double digit net income growth for five consecutive years. Management targets to grow earnings by 2-3% YoY in FY15E. The Company is looking for new M&A opportunities for vertical integration, as well as developing O2O business model. The counter is trading at 7.8x FY15E PER, which is discounted to its A-share peers such as Far East Smart (6869 CH, 74x FY15E PER). We believe the current valuation is attractive given its stable earnings growth with M&A opportunity. SNIPPETS GUOTAI JUNAN SECURITIES GOT CSRC APPROVAL FOR A-SHARE LISTING - The brokerage is likely to be the largest A-share IPO this year with a fund raising size of more than RMB3bn. As one of the Top 1 securities companies in China, its share price performance post-ipo is likely to affect the performance of the peers. A- share IPO valuation is implicitly capped at 23x historical PER now therefore we believe Guotai Junan s A-share IPO should perform well because large brokers are trading at >3x historical PER in A-share market. A better market sentiment to A- share-listed brokers may help support the valuation of H-share-listed Chinese brokers as well.

2 COMPANY NEWS SMI Corporation Limited [198.HK; HK$.94 Not Rated] - A leading theater operators in China s blooming movie industry. Market Cap: US$1,377m; Free Float: 3.5%; 3-months Average Daily Turnover: US$9.3m Analyst: Mark Po The Company. After a restructuring in 29, SMI Corporation Limited (SMI) operates an integrated business model covering film production, film [SMI Corporation Limited] marketing, theater circuits, theater operation, integrated retailing and (HK$) marketing. SMI holds 22.9% stake in SMI Culture Group Holdings (SMI 1.2 Culture) [2366.HK]. As of 31 Dec 214, SMI operates 9 theaters in China. It is planning to reach 15 movie theaters by end of 215. In addition, it provides VIP rooms for private parties and offers contents including sport games, variety entertainments, concerts, and operas etc. to attract a wider range of audience. Theater operation counted for 88.8% of total turnover in 214, up 23.9% YoY. SMI also operates retailing and marketing business. Its retail counters Xingmeihui sell movie related products and premium gifts. In addition, SMI offers more than 2 types of advertising and marketing options including pre-show advertising, field advertising (posters, lobby signage, seat back advertising, LED screens, etc), new media advertising, commercial, and marketing events, etc. In-theater counter sales and online shopping counted for 11.1% of total turnover in 214, up 289% YoY. There was no turnover booked from investments in film production and distribution in 214 vs HK$163.2m in 213. SMI Culture is a media services provider which produces TV programs, marketing, and public services in China. SMI Culture is a platform for SMI to develop the film production and distribution business. On average, the movie investment has provided return on investment of no less than 1% and the TV series investments has yielded 1% return. On average, SMI will have 2-4% of its total investment on movies and 3-6% of its total investments on TV series. The group has demonstrated strong growth in its movie theater operation through network expansion. The number of theaters operated by SMI grew from 3 to 9 in In , the number of screens grew from 26 to 7. The top three theater operators accounted for 32% market share (in terms of box office receipt) in 214. The largest player is Wanda Cinema Line [2739.CH] with a 14.2% market share in 214. Wanda Cinema Line mainly expands its network based on self-owned properties. The other listed theater operators including CJ CGV (Korea), Orange Sky Golden (Hong Kong) [1132.HK], Huayi Brothers (China) and Bona [BONA US]. SMI has entered into an overall cooperation agreement with Baidu Online Network Technology (Beijing) Company Limited (Baidu) for initial launch of SMI Baidu Cobranded Card (Co-branded Card) under its business model of Online top-up, offline purchase. Through its model of online platform top-up and offline consumption, it targets to reach 2,, members with 5,, of them being the first batch of registered members. Each Co-branded Card has a top-up value of RMB2 and a recharge subsidy of RMB36. Such card can be used in all movie theatres under SMI and SMI community stores. Ultimate target of launching Co-branded card is to connect customers, O2O platform and movie theatres closely together in order to provide a high-quality viewing experience for the customers as well as to create a brand new business model. A growing market. China s box office income grew at a CAGR of 29.7% in China is now a major market in global film industry. The historical trend and recent growth data both indicate that China s film industry is in a period of prosperity. SMI also plans to offer more advertising and marketing spaces including Jun14 Aug14 Oct14 Dec14 Feb15 Apr15 Turnover (RHS) Price (LHS) Key Financials (in HK$ m) Source: Bloomberg, Company Data. June 4, 215 (HK$ million) E 216E Revenue 1, ,68.6 2,543. 3,72. Gross Profit n.a. n.a. Gross Margin % Net Profit Net Margin % EPS (Basic) ROE (%) Dividend Yield (%) PER (x) PBR (x) n.a. n.a. outdoor advertising display and lobby signage and to build 5 mega LED displays per annum to broaden income sources. Apart from its operation of theaters, SMI plans to improve retail business through expansion and collaboration. SMI plans to remodel existing movie theaters to include Xingmeihui counters and to improve sales per square meter. SIM aims to open a total of 1, stores in three years time. Second, SMI targets to form strategic collaboration with popular retail brands to further solidify Xingmeihui and offline retail platforms. Third, the company plans to enhance the Group s presence in e-commerce industry. Leading theater operator in China s blooming movie industry. Fueled by rapid growth in the number of theaters, seats and screens, SMI has demonstrated strong box office and profit earning capability. In addition, as there are currently few HK-listed companies covering film business in China, we consider SMI a proxy to the rapid growth of the film industry in China. Cooperation with Baidu shows that group s operation offers strategic value to internet giant. After recent share price rally, shares of SMI and SMI Culture might remain volatile given a weak market sentiment. Any share price weakness provides opportunities for a re-visit. Catalyst: Further co-operation with Baidu, strong box-office figures, M&A and release of films by SMI Culture

3 Figure 1: China film production industry landscape Figure 2: China s Box office in Huayi Brothers Artists Agencies New Pictures RMB bn 18 Box office of domestic movies Box office of imported movies Galloping Horse Media Producers China Film Group Corporation Enlight Media Group Distributors Polybona Films 9 6 Cinema Companies SMI Corporation Huaxia Film 3 Cinemas Source: CGIH Figure 3: SMI theater expansion Figure 4: SMI s revenue from theater operation HK$ mn 1,5 1,24 1, , F Figure 5: SMI s business model Figure 6: Location of SMI s theater

4 Figure 7: SMI s theater split No. of theaters in 2nd and 3rd tier cities No. of theaters in 1st tier cities FY9 FY1 FY11 FY12 FY13 FY14 Figure 8: Non-theater related business Source: Company Data Figure 9: Peer Comparisons Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Price Market Cap 215F 216F 217F 215F 216F 217F F F F F Lcy US$m x x x x x x x x % % % % % % 198 HK SMI Holdings Group n.a. n.a. n.a. n.a. 2.9 n.a HK SMI Culture Group Holdings n.a. n.a. n.a. n.a. n.a. n.a..8 n.a. n.a. n.a n.a.. n.a. 16 HK Alibaba Pictures Group Ltd n.a. n.a. n.a. n.a. n.a. n.a. 9.9 n.a n.a n.a.. n.a HK Orange Sky Golden Harvest En n.a. n.a. n.a. n.a. n.a. n.a. 1.2 n.a. 6.8 n.a. 2.6 n.a.. n.a. 326 HK China Star Entertainment Ltd n.a. n.a. n.a. n.a. n.a. n.a..8 n.a. 5.8 n.a. 6.9 n.a.. n.a. 878 HK China 3D Digital Entertainme n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -1. n.a. n.a. n.a.. n.a. 13 HK 21 Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a. 6.7 n.a n.a n.a.. n.a. Average CH Wanda Cinema Line Co Ltd-A n.a. n.a. n.a CH Huayi Brothers Media Corp-A n.a CH Zhejiang Huace Film & Tv-A CH Beijing Enlight Media Co L-A CH Beijing Hualubaina Film & -A CH Shanghai New Culture Media-A n.a CH Great Wall Movie And Tele-A n.a. n.a. n.a. n.a n.a CH Guangdong Alpha Animation-A Average BONA US Bona Film Group Ltd-Spon Adr KS Cj Cgv Co Ltd n.a..4 MAJOR TB Major Cineplex Group Pcl n.a. 3.7 AHD AU Amalgamated Holdings Ltd Average Source: Bloomberg

5 COMPANY NEWS Jiangnan Group Limited [1366.HK; HK$2.39; Not Rated] Stable organic growth with M&A opportunity Market Cap: US$1,127m; Free Float: 53.9%; 3-months Average Daily Turnover: US$5.9m Analyst: Steve Wong, , June 4, 215 Leading power cable maker in China. Jiangnan Group (JNG) is a leading power cable makers based in Jiangsu with market share estimated at 3% in terms of sales volume in 214. Thanks to a diversified customer base with expansion via M&A, JNG maintains double digit net income growth for five consecutive years. State Grid Corporation of China is the largest end-customer accounted for 34% of sale revenue in FY14 according to management. JGN also supplies cables to industrial and infrastructure players, such as Sinopec (386 HK), CRG (39 HK), as well as property developers, such as Evergrande (3333 HK) and Wanda (3699 HK). Benefit from infrastructure investment growth. According to NDRC, fixed-asset investment for infrastructure was up 2.3% YoY in 4M 215, which offsetted slow growth in power-grid sector investment during the period. In order to build UHV grid in China for effective energy transmission for long-distance, as well as intra-city power network construction, we expect growth momentum on power grid construction to pick up in 2H15. Management expects demand for power cable to stay strong in coming years, and targets a 2-3% YoY growth in revenue for FY15E. Management hints that Q1 revenue to be up ~15% and backlog as at April was RMB3bn. Including the inorganic growth from the two newly acquired cable makers in April 215. We believe the earnings growth target in FY15 is achievable. GPM increase thanks to change of product-mix. GPM increased from 13.3% in FY9 to 15.6% in FY14, thanks to a change of productmix with more contributions from high-margin products after acquiring Jiangsu Zhongmei Cable (JZC) in 213, as well as higher contribution from extra-high voltage (EHV) cables. GPM of rubber cables (a major product of JZC) was 22.2% and that of EHV cables was ~3% in FY14, according to management. Both were higher than the Company s average GPM at 15.6%. Looking forward, with accelerating investment on new energy and power grid which consumes more high-margin cable, we expect GPM to stay high in FY15-16E. Unique industry feature different from ordinary processing industry. According to management, customers are willing to pay for stable profit margin to JNG on top of raw material price plus processing fee. This is the main reason for JNG to maintain stable margin for each single product and immunizes from fluctuation of copper and aluminum price which accounted for 8% of cost of sale. Average margin of peers is staying flat at 14-17%, similar to that of JNG. We believe it is because of the special pricing method of cable manufacturing industry which is different from other processing industries. New business opportunities: EPC and O2O. JNG is looking for new M&A opportunities for vertical integration. After discussing with management, we believe one possible target is an EPC company with power facility construction license, as well as overseas business network. The earnings size of the target is RMB2m-3m of net income. Another business development is to develop O2O business [Jiangnan Group Limited] (HK$) Jun-214 Sep-214 Dec-214 Mar-215 Jun-215 Turnover (RHS) Source: Bloomberg, Company Data, CGIHK Research Price (LHS) (HK$m) Financial summary FY11 FY12 FY13 FY14 FY15E Revenue (RMBm) 4,93 5,356 6,477 8,155 1,674 Growth (% YoY) Gross profit (RMBm) , 1,271 1,693 GPM (%) Net Income (RMBm) Net margin (%) EPS (RMB) Growth (% YoY) (5.52) PER (x) PBR (x) Yield (%) ROAE (%) Net gearing (%) Net cash 22. model. JNG has ~4 salespersons with ~3 points of sale (POS), of which ~11 POS are authorized to run retail stores for JNG s product. The Company will cooperate with an O2O platform for developing on-line business. According to management, size of accessible retail market of wire and cable is estimated at RMB1bn. All these will be mid-to-long term growth drivers for JNG. Trading at undemanding PER. Assume profit margin maintained stable in FY15, net income is estimated at ~RMB83m, which translates into 7.8x FY15E PER. It is discounted to its A-share peers, such as Far East Smart (6869 CH, 74x FY15E PER). Given earnings growth of 3% with new business opportunities, we believe the current valuation is attractive. Risk factor. Price fluctuations of copper; High concentration on customer; Investment in the power and infrastructure industry subject to Government policies

6 Figure 1: Revenue breakdown by customer base in FY14 Figure 2: Revenue breakdown by product type in FY14 Sources: Company, CGIHK Research estimates Figure 3: Growth on fixed-assets investment in 1-4M 215 Sources: Company, CGIHK Research estimates Figure 4: Revenue breakdown by geography in FY14 Properties development Non-power infrastructure Manufacturing Power infrastructure Power gird investment (2) (1) (% YoY) Sources: Wind, NDRC, CGIHK Research Sources: Company data Figure 5: Gross profit margin comparison GPM (%) FY11 FY12 FY13 FY14 JNG FAR EAST SMART-A QINGDAO HANHE-A Sources: Company data, Bloomberg, CGIHK Research

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