Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Feb 5, 2014

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 CHINA MOBILE ICBC CCB BANK OF CHINA HSBC TENCENT CHINA LIFE INS SINOPEC PING AN INS Econ data release China Data Date Period Prior Cons Trade Balance 8-Feb JAN Export Trade 8-Feb JAN Import Trade 8-Feb JAN CPI 9-Feb JAN PPI 9-Feb JAN US Data Date Period Prior Cons Initial Jobless Claims 5-Feb 31-Jan Cont Jobless Claims 5-Feb 24-Jan Trade Balance 5-Feb DEC Unemployment Rate 6-Feb JAN Source: Bloomberg GF events Date Event Location 5 Feb Eastone Century Tech conf Guangzhou 5 Feb Internet Finance conf Guangzhou Source: GF Securities (HK) A-Share Market Banking: Reserve requirement cut The central bank restarted reverse repurchase in Jan, and continues with MLF to increase monetary injections into the market. Consistent with an increase in market funding, Shibor continues to decline and inter-bank liquidity is improving. However we believe that for the guarantee of payment demand, the central bank will continue to put more money into the market, and that there is still a chance that the central bank will cut the reserve requirement further. We suggest caution in investment on banking stocks. Arms: Limited impact from short-term catalysts, long-term logic remains Defense industry reforms will push integration among state-owned enterprises, increase securitization and promote cooperation between military and civilian elements. We expect to see an increase in reforms of scientific research following policy support. We believe increasing demand will be driven by guidance for a strengthened military force. The market will prefer certain growth and new topics or targets, and the sector could fluctuate substantially due to uncertainty. We believe the sustainable driving force will come from military reforms, policy support and rising defense budget. Small UAVs: Investment opportunities to emerge The small UAV industry is gaining attention among both entrepreneurs and investors, led by the China s industry leader Dajiang. Investment opportunities in this sector have not yet been fully explored. In the past 10 years, the price of small UAVs has dropped significantly, benefiting from MEMS inertial navigation systems and mature control algorithms. There is substantial room for development in the industry, and we expect aerial UAV makers to adopt GoPro s growth path. We expect another 2 to 3 mainstream players to emerge. Hong Kong Market Beijing Enterprises Water Group (371 HK, Buy): Long-term synergy from investment in solar farms BEWG s share price declined following the announcement that it will acquire a 35% stake in Jincai Holdings. After hearing management s rationale for the purchase during a conference call, we believe the market has overreacted. Their goal is to save energy costs at wastewater treatment plants via Jincai s solar projects at its plants; management expects a reduction in energy costs of up to 30%. We believe the fair value gains from the investment (JCH stock already up 280%) should cushion against JCH s execution risk. We maintain Buy rating. ChinaSoft Intl (354 HK, Buy): Cloud services driving growth momentum; maintain Buy ChinaSoft announced on Feb 2 that its cloud application RAE passed the third phase of official certification. RAE is the company s core PaaS platform product, focusing on enterprise-level SOA. We see cloud services as a strong growth driver over the next few years, underpinned by its leading product, strengthening cooperation with AliCloud and other internet giants, and favorable government support. We expect its revenue contribution to rise, and forecast an improvement in profitability on growth for its JointForce platform in the coming 2-3 years. Maintain Buy. 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: Reserve requirement cut PBoC restarts reverse repurchases; potential further RRR cut The central bank restarted reverse repurchase in Jan, and continues with MLF to increase monetary injections into the market. Consistent with an increase in market funding, Shibor continues to decline and inter-bank liquidity is improving. However we believe that for the guarantee of payment demand, the central bank will continue to put more money into the market, and that there is still a chance that the central bank will cut the reserve requirement further. Bank loans climbed steadily while deposits slowed in 2014 Bank loans increase by Rmb9.78trn in 2014, within the loan range set by the central bank. Particularly, loans denominated in Rmb grew by Rmb697.3bn, up by Rmb214.9bn. The moderate rate of increase in loans is with market expectation while the structure of loans is improving. We believe that the loan aggregate amount will remain on the upward trend at a slow rate; on the other hand, mortgage loans will rise gently due to the economic downturn while bill financing will see temporary growth. Remain cautious We suggest caution in investment on banking stocks, as deleveraging of offbalance items will continue, the anti-corruption campaign has started and quarterly results will decline in growth due to the cut in interest rate. We suggest watching the change in exchange rates and the possibility of a further cut in the requirement ratio. Our preferred names are SPD Bank ( CH), Huaxia Bank ( CH), China Merchants Bank ( CH), Bank of Beijing ( CH) and ICBC ( CH). Arms: Limited impact from short-term catalysts, long-term logic remains Reforms and upgrades the long-term driver Defense industry reforms will push integration among state-owned enterprises, increase securitization and promote cooperation between military and civilian elements. We expect to see an increase in reforms of scientific research following policy support. Based on stock price elasticity driven by cooperation, we prefer companies under the CETC, CACS and CASIC, such as Sun Create ( CH), Glaruntech ( CH), Chinagci ( CH), Space China ( CH), Aerospace Power ( CH) and Aerospace Hi-Tech ( CH). Increasing demand driven by guidance for a strengthened military force Restructuring and policy support will stimulate innovation in the sector and upgrades to equipment. The focus is information and technology in the navy and air force. We prefer equipment vendors and service providers, such as AVIC Helicopter ( CH), Avic Aircraft ( CH), China Shipbuilding Industry ( CH), China Avic Electronics ( CH), China Aviation Optical Electrical Technology ( CH), AVIC Electromechanical System ( CH). Short term factors will have limited impact In the past month, sector catalysts included the outline of national security strategy released by the government and pension reforms at state institutions. However, these are not a strong and stable driver of sector performance. We estimate catalysts will be reduced if no substantial progress has been achieved in reforms. The market will prefer certain growth and new topics or targets. The military sector could fluctuate substantially due to uncertainty. We believe the sustainable driving force will come from military reforms, policy support and rising defense budget. Our preferred names are Sichuan Jiuzhou Electric ( CH), AVIC Electromechanical Systems ( CH) and AVIC Helicopter ( CH). Small UAVs: Investment opportunities to emerge Investment opportunities to emerge amid boom in small UAV industry The small UAV industry is gaining attention among both entrepreneurs and investors, led by the industry leader Dajiang. Investment opportunities in this sector have not yet been fully explored. Sector development on MEMS technology and mature algorithms; US$10bn market expected In the past 10 years, the price of small UAVs has dropped significantly, benefiting from MEMS inertial navigation systems and mature control algorithms. Both domestic and overseas markets set off a wave of multi-rotor commercialization. China's DJI (Dajiang Innovation), American 3D Robotics, and France's Parrot become the market leaders. This industry shown a big development room along with expansion of small UAV applications from minority entertainment applications to aerial photography, mapping, search, rescue and even logistics field. We expect the Small UAV market size in China to exceed US$10bn in next 5-10 years. Some international giants such as Google and Facebook has already started proactive layout in this field. Page 2

3 Domestic player leading the industry with low cost and first mover advantage in technology Though international giants has stepped into Small UAV area, domestic player Dajiang Innovation remains the global leader, which has recorded nearly 100 times growth in revenue during past three years and takes up 70% of global market share currently. We attribute its success to low cost in hardware and first move advantage in software in China. First, the hardware barrier of Small UAV is not very high. Chinese maker s product may have higher cost performance than foreign makers underpinned by an integrated electronic industry chain. Secondly, we believe the real barrier is in software, including flight control, PTZ, image transmission. With an early start in relevant software design, domestic players finally dominate global small UAV market. Duplicating GoPro s success, new force expected to come to the fore Aerial UAV can be said to be a "flying camera", broadly similar to GoPro. Therefore, we believe that aerial UAV makers will follow GoPro's development path. Not just being a hardware vendor, they will also have their own online video social networks and develop into new media. Seeing Dajiang as a "flying GoPro", we believe there may be another 2 to 3 mainstream players arising in this industry with more competitors entering this new blue ocean, referring to the development experience of GoPro. Domestic company Zero Tech is expected to outperform peers with deep technical accumulation. Meanwhile, we suggest investors pay attention to Pennefather Technology, which is involved in the UAV industry through its cooperation with Zero Tech. Beijing Enterprises Water Group (371 HK, Buy): Long-term synergy from investment in solar farms Market overreacts to proposed investment BEWG s share price lost 3% following the announcement that it will acquire a 35% stake in Jincai Holdings (JCH; 1250 HK, NR) for ~HK$1.4bn. After hearing management explain the rationale behind the purchase during a conference call, we believe the market has overreacted. BEWG currently has no plan to invest in other businesses. We reiterate our Buy rating. BEWG investing in solar farms via JCH Together with its top management, BEWG plans to invest in solar farms through the purchase of a combined 47% stake in JCH. JCH revealed its plan to develop: 1) 25 grid-connected solar power plants with aggregate installed capacity of 450MW, 500MW and 550MW in 2015, 2016 and 2017 respectively; 2) distributed solar power plants with aggregate installed capacity of 50MW, 100MW and 50MW in 2015, 2016 and We estimate capex of Rmb3.7bn, Rmb4.9bn and Rmb5.3bn in 2015, 2016 and 2017 respectively, with approximately 30% funded by the group s internal resources and the remaining 70% by bank loans. Ultimate goal is to save energy costs at wastewater treatment plants During the conference call held on Feb 3, BEWG s management revealed their plan to lower electricity costs via investment in distributed generation solar farms. Aside from the current project pipeline, JCH could potentially build 800-1,000MW of new distributed generation PV projects at BEWG s water treatment plants. Management expects a reduction in energy costs of up to 30%. The cost saving will come through receiving rental income from JCH for installing solar panels at BEWG s site, while BEWG will pay tariffs to JCH. Given an estimated ~HK$5bn cash position at the end of 2015, we believe the HK$1.4bn investment in JCH should have a minimal impact on BEWG s balance sheet. Management also believes it can continue to raise leverage to ~100% net gearing without the need for equity financing in Significant fair value gains from JCH investment offer cushion against execution risk We believe the conference call helped to alleviate investor concerns on: 1) BEWG s possible diversification into the solar business; 2) the lack of synergy between these solar projects and wastewater treatment. Although it may take a few years for BEWG to fully see the benefits of the electricity cost saving, JCH s share price has already surged 280% since the investment, based on JCH s Feb 4 closing price of HK$3.00 (BEWG s subscription price: HK$0.79/share). We believe the fair value gains from the investment should cushion against JCH s execution risk. We maintain our Buy rating. Downside risks 1) slower-than-expected M&A progress; 2) lower-than-expected tariff growth in next the two years; 3) slower ramp-up in green field or newly acquired projects; 4) potential share placements lower gearing. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) Page 3

4 ChinaSoft Intl (354 HK, Buy): Cloud services driving growth momentum; maintain Buy What s new? ChinaSoft announced on Feb 2 that its cloud application RAE (RCloud Application Engine) has passed the third phase of assessment by the Ministry of Telecommunications Research Institute, gaining trusted cloud services certification. Leading PaaS (Platform-as-a-service) product 50 cloud service products entered the third phase of certification, 64% of which passed. We believe this high level of certification will help cloud service providers to build trust among users. RAE is ChinaSoft s core PaaS platform product, focusing on enterprise-level SOA (Service-Oriented Architecture) solutions. The platform has been successfully adopted into AliCloud s government cloud projects in Lishui, Hangzhou and Guizhou, and also into other cloud projects. AliCloud currently has signed framework agreements with seven provinces, with ChinaSoft as its only PaaS product provider. Going forward, we believe the company will see more opportunities with its leading PaaS product, helped along AliCloud s business expansion and a rise in demand for public cloud services. Favorable policies support for cloud computing The State Council issued a document on promoting development and innovation in cloud computing technology on Jan 30, The document sets a target of forming a sound cloud service industry chain by 2017 and popularizing usage of cloud computing by 2020, supported by preferential taxation, government procurement, and investment and financing policies. We therefore expect a rise in government purchases of cloud IT products, which should lead to a boom across the whole cloud services market in China over the next few years. Promotion of JointForce platform JointForce, launched in Dec 2014, is expected to improve the company s operating efficiency. Results of internal tests carried out in 2H14 met expectations, with a 39% increase in per staff execution and an 8pp improvement in gross margin. As the company has put more effort into promotion following the official launch, JointForce has seen increasing popularity with the number of registered engineers rising from 7,000 in mid-nov of 2014 to 20,000 at the end of Jan, 50% of which are external. The number of outsourcing projects on this platform also surged from 700 to 2,000 during the same period. Maintain Buy and raise TP to HK$3.26 We see cloud services as a strong growth driver for the company over the next few years, underpinned by its leading product, strengthening cooperation with AliCloud and other internet giants, and favorable government support. We expect revenue contribution from cloud services to rise to 6/10/12% in FY14/15/16 from 3% in FY13. Meanwhile, profitability may improve on the back of deepening use of the JointForce platform in the coming 2-3 years. The stock is currently trading at 11.1x FY15E P/E, a 38% discount to the sector average of 17.8x. We maintain our Buy rating and raise our target price from HK$2.86 to HK$3.26, based on a FY15E P/E of 15x, up from previous 13x, given its strong growth momentum in cloud services and strong progress in JointForce promotion. Risks Key risks include rising labor costs, pressure on operating cash and lower-than-expected performance of the JointForce platform. (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. 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