Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 8, 2017

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT ICBC CHINA MOBILE CCB PETROCHINA HSBC BANK OF CHINA PING AN CHINA LIFE SINOPEC Source: Bloomberg A-Share Market Construction: Leading players maintaining strength amid control of local government debt While sector business conditions recovered in 1H17 amid stronger investment growth compared with 2016, investors should watch the risk of weakening infrastructure investment growth in 2H17. Recent policy documents and meetings reflect a tendency towards tougher control over local government debt. As such, more investment projects are likely to follow the PPP model going forward as local governments are no longer allowed to raise financing in the name of purchasing external services. Leading construction firms are able to take projects of better quality and provide a higher level of guarantee for project execution. Environmental: Government inspections to continue; opportunities from clean heat supply renovations and cyclical industry production restrictions Looking into 3Q17 and 4Q17, we believe an increasing number of provinces will face major environmental inspections. Considering that the clean heat supply space (e.g. coal-to-gas renovation, concentrated heat supply) benefits from ongoing environmental inspections, supply-side reform and government support for life facility development, and that relevant renovations need to be completed before the heat supply season begins around end-oct, we expect to see a peak in clean heat supply renovations in the Jingjinji region and surrounding areas. Hong Kong Market Investment Strategy: Aug Outlook Interim results to set the tone for 2H17 The Hong Kong market finished July in strong form with the HSI breaking through 27,000 for the first time since June 2015 on strong performance among blue chips, our favorite segment. Increasing southbound trading, a weakening US dollar, the sustained global recovery, and improved corporate earnings have all contributed to the bull run YTD. The outlook should continue to be positive, assuming these factors remain in place. However, we expect some headwinds on valuation and currency concerns. The ultimate test of strength for this bull run will be upcoming earnings, which will set the tone for the second half. China Property: Primary area sold declined across most cities in July Given ongoing monetary tightening and a relatively high base in 1H17, the declining transaction figures in July (CREIS data) were in line with our previous estimates. In our view, the long-term trends of increasing market concentration and rising land prices driven by shrinking supply in China s property sector remain unchanged. Government-encouraged rental housing market development might slow developers asset turnover. Given that rental housing generally has a much longer payback cycle compared with the residential property sales business, rental housing development might hurt developers profit margins and ROE over the next 3-5 years. Geely Auto (175 HK, Buy): July sees steady monthly sales growth Geely Auto s sales rose 87.8% YoY and 2.6% MoM in July; 7M17 sales were up 89.1% YoY. Monthly exports surpassed 1,000 units for the first time during July this year, but overall 7M17 export numbers remain low at just 0.8% of total sales. The company will remain focused on the domestic market this year. SUVs continued to post strong growth and sedan sales rebounded from the trough in May- June. The increased sales contribution from SUVs and its balanced portfolio of sedans should help to boost volume growth, while management s decision not to adjust pricing aggressively should foster steady profit growth. 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 Construction: Leading players maintaining strength amid control of local government debt 2017 FAI growth likely to be higher than 2016 Monthly FAI growth strengthened from 7.83% YoY in May to 8.77% in June, ending a trend of growth deceleration since the start of the year. Based on provincial government work reports and economic development plans, we estimate full-year investment growth of 7.91%-9.33%, with a strong likelihood of it exceeding the 8.1% pace in Private sector investment rebounding on PPP Infrastructure investment growth also went up from 13.11% in May to 17.3% YoY in June, reversing the deceleration since the start of the year and beating expectations, likely due to quicker acquisition of funds for FAI. Growth in funds for FAI turned positive for the first time this year to 1.4% YoY in June. We believe infrastructure investment growth might slow in 2H17 as NDRC project approvals decreased significantly in April and May. Thanks to the implementation of PPP projects, private sector investment growth continued to strengthen in 1H16, while local government-led investment growth weakened. Leader remaining strong, industry concentration rising It is noticeable that leading players in the sector are maintaining their strength with the promotion of the PPP and master contracting models, which is a particularly evident trend when looking at new order volumes. The industry CR6 has continued to rise since Amid a tightening financing environment, construction companies are indeed facing considerable funding pressure, with the industry debt ratio above 50% and most major shareholders having a stock pledge ratio above 50%. PPP increasingly important amid control over local government debt Both the MoF s No.87 document and the recently held national financial work conference reflected a tendency towards tougher control over local government debt. As such, more investment projects are likely to follow the PPP model going forward as local government-led investment projects might be affected by this regulatory stance. This also means PPP projects are now required to become increasingly standardized. Leading construction firms are able to take projects of better quality and provide a higher level of guarantee for project execution. Our stock picks While sector business conditions recovered in 1H17 amid stronger investment growth compared with 2016, investors should watch the risk of weakening infrastructure investment growth in 2H17. We expect an increasing number of PPP projects to be issued going forward as local governments are no longer allowed to raise financing in the name of purchasing external services. We remain positive on the construction sector, and prefer blue-chip central SOEs such as China State Construction Engineering Corporation ( CH) and Gezhouba Group ( CH), leading local SOEs such as Shandong Hi-Speed Road and Bridge ( CH) and Tunnel Engineering ( CH), and leading private sector firms such as Techand Ecology & Environment ( CH), Beijing Orient Landscape & Environment ( CH), JSTI Group ( CH) and China Design Group ( CH). Environmental: Government inspections to continue; opportunities from clean heat supply renovations and cyclical industry production restrictions Opportunities from clean heat supply renovations in Jingjinji Looking into 3Q17 and 4Q17, we believe an increasing number of provinces will face major environmental inspections. Production restrictions and rotational production arrangements are being planned for or carried out at heavy industry companies such as those in the steel, cement, papermaking and dyeing industries. As a result, we suggest watching the capacity contraction in cyclical industries amid supply-side reform. Furthermore, considering that the clean heat supply space (e.g. coal-to-gas renovation, concentrated heat supply) benefits from ongoing environmental inspections, supply-side reform and government support for life facility development, and that relevant renovations need to be completed before the heat supply season begins around end-oct, we expect to see a peak in clean heat supply renovations in the Jingjinji region and surrounding areas. We suggest watching Luenmei Quantum ( CH), Bestsun Energy ( CH), Devotion Thermal Tech ( CH) and Jinhong Energy Investment ( CH). Jingjinji to remain focus of pollution control The third batch of environmental inspection teams deployed by the central government are presenting their findings to seven recently inspected provinces including Tianjin and Shanxi, with a focus on the practice of pursuing economic development at the expense of the environment, as well as government incompetency. The fourth round of such inspections will be conducted in eight other provinces in Aug. We believe tough environmental inspections will be continued in the foreseeable future. Meanwhile, Vice Premier Page 2

3 Zhang Gaoli recently spoke at a meeting on air pollution control in the Jingjinji region, saying that Beijing, Tianjin and 26 key cities in Hebei province will remain the focus of environmental work in 2H17. Further inspections will be launched, focusing on the progress of facility renovations for clean heat supply such as coal-to-gas renovations. We like Luenmei Quantum ( CH), Devotion Thermal Tech ( CH), Jinhong Energy Investment ( CH), Tus-Sound Environmental Resources ( CH) and Sanju EP& New Materials ( CH). Investment Strategy: Aug Outlook Interim results to set the tone for 2H17 Market uptrend remains intact The Hong Kong market finished July in strong form with the HSI breaking through the 27,000 level for the first time since June 2015 on strong performance among blue chips, our favorite segment. Our preferred sectors, tech, auto and insurance, outperformed on a continued strong growth and re-rating outlook, while materials, coal and property stocks also rose sharply. We believe increasing southbound trading (Fig.10), a weakening US dollar (Fig.11), the sustained recovery in the global economy (Fig.12), and improved corporate earnings (Fig.13) have all contributed to the bull run YTD. The outlook should continue to be positive, assuming these factors remain in place. Short-term headwinds That said, from a short-term or technical point of view, we expect some headwinds due to valuation and currency concerns. First, the HSI has risen for seven straight months since the beginning of the year, a phenomenon only seen three times in the last 20 years, in Apr 2003-Feb 2004 (11 straight months), June 2006-Jan 2007 (8 months) and Mar 2007-Oct 2007 (8 months), during which the index rose 61%, 27% and 60%, respectively. The HSI rose 24.2% in 7M17, already matching the magnitude seen in 2H06 (Fig.14). Second, while in absolute terms the HSI s valuation is still far below that of many global markets, its current 13.1x 2017E P/E is above its mean +1SD (12.9x) during the period since 2010, after the global financial crisis (GFC), and is just slightly below its 13.7x post-gfc peak in May 2015, making the current valuation look stretched from a historical point of view (Fig.15 and 16). Any correction in US markets, which are already trading at historical high valuations, well exceeding the average seen after the GFC, could have a negative impact on the Hong Kong market. Lastly, a possible technical rebound in the US dollar. There has been a very strong inverse correlation between the US Dollar Index and the HSI since Donald Trump took office. The Hong Kong market has risen sharply almost every time the US Dollar Index fell sharply, meaning the HSI is likely to keep rising until the US dollar starts to appreciate again. However, after more than 9% depreciation this year, the US Dollar Index is down to a 3-year low, meaning it is vulnerable to a rebound. In fact, July s strong non-farm payrolls and the Fed s upcoming balance sheet reduction could lead to strengthening of the US dollar in the near term. The HK$/US$ exchange rate also weakened to 7.82 recently, the weakest level since Earnings: the trend maker or breaker The ultimate test of strength for this bull run will be earnings. The rally has been mostly driven by a re-rating of the market, with the HSI s 2017E P/E up from 11.2x at the beginning of the year to 13.1x, but EPS forecasts have only been upgraded by about 5% during the period; a continuation of the rally will therefore depend on further earnings forecast upgrades in 2H17. Among the 83 stocks in the HSI and HSCEI, 20 have announced interim results or interim profit alerts as of last Friday, most of which indicate strong earnings momentum. If there are no major negative earnings surprises this interim results season, we expect earnings growth expectations to provide strong support for the market. Hence, this interim results season is particularly important. We recommend sticking with stocks that can meet or beat earnings expectations even if their valuations are getting more expensive. We continue to favor tech, auto (strong earnings), insurance and financial intermediates (re-rating), as well as selected names in healthcare, consumer, and environmental protection. We also expect positive surprises in the copper and aluminum sectors given rising global commodity prices, supply-side reform and supply cuts due to environmental policies in China. Our watchlist continues to outperform In July, our watchlist portfolio recorded a 9.4% positive return, outperforming the HSI and HSCEI. YTD, our portfolio has posted a 42.9% positive return. We keep the portfolio unchanged, consisting of Tencent (700 HK, NR), AAC Tech (2018 HK, NR), Tongda (698 HK, NR), Geely (175 HK, Buy), BCA (1114 HK, Buy), China Life (2628 HK, Buy), HKEx (388 HK, NR), CSPC Pharma (1093 HK, Buy), Wisdom Education (6068 HK, Buy) and BJE Water (371 HK, Buy). (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) Page 3

4 China Property: Primary area sold declined across most cities in July Primary property area sold declined across most cities in July According to the latest data from CREIS, primary property area sold in July declined across most of the 30 key cities surveyed in China. First-tier cities saw declines of 17% MoM and 46% YoY; second-tier cities fell 4% MoM and 23% YoY, while third-tier cities suffered drops of 18% MoM and 16% YoY. In YoY terms, primary area sold in Fuzhou, Beijing and Guangzhou dropped 60%, 55% and 53% respectively in July. In MoM terms, Xi an, Guangzhou and Shantou recorded declines of 39%, 32% and 31% respectively. Declining residential property transaction volume in 2H17; land prices likely to rise further Given ongoing monetary tightening and a relatively high base in 1H17, the declining transaction figures in July were in line with our previous estimates. According to China NBS, total residential GFA sold increased 13.5% YoY to 648m sqm in 1H17. We expect this figure to fall 10% HoH to 583m sqm in 2H17, with the full-year figure to drop 10% YoY to 1.2bn sqm. According to NBS data, the average land price picked up 27% YoY to Rmb4,231/sqm in 1H17. In our view, the long-term trends of increasing market concentration and rising land prices driven by shrinking supply in China s property sector remain unchanged. Stick to industry leaders and undervalued first-tier city developers Given increasingly fierce competition and tightening regulations, we expect most small private developers to be pushed out of the market over the next five to ten years. We are bullish on underperforming industry leaders such as COLI (688 HK, Buy) and CR Land (1109 HK, Buy), as well as undervalued first-tier city players such as Gemdale P&I (535 HK, Buy) and Yuexiu Property (123 HK, Buy). Key risks: 1) Third- and fourth-tier cities were the main growth drivers for China s property market during 1H17. Given tightening monetary supply, a relatively high sales base in 2016 and 1H17, and the lack of consistent owner-occupier housing demand, the Chinese property market is likely to move into a new down-cycle in ) The Chinese central government is encouraging a higher proportion of rental housing supply in key cities with net population inflows, which might slow developers asset turnover and increase their capital allocation to the rental housing business. Given that rental housing generally has a much longer payback cycle compared with the residential property sales business, the newly issued policies for rental housing might hurt developers profit margins and ROE over the next 3-5 years, in our view. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Geely Auto (175 HK, Buy): July sees steady monthly sales growth July sales see steady monthly growth Geely Auto s sales rose 87.8% YoY and 2.6% MoM in July to 91,104 units as the industry enters the 3Q low season. 7M17 sales reached 621,732 units, up 89.1% YoY on continued strong YoY growth. Monthly exports surpassed 1,000 units for the first time during July this year, but overall 7M17 export numbers remain low at just 0.8% of total sales. The company will remain focused on the domestic market this year. SUVs hit record sales high The company s SUV models continued to post strong growth, with 46,629 units sold in July (including the crossover Emgrand GS), a record high for the company, up 1.6x YoY and 1% MoM. The segment s 7M17 sales came in at 289,559 units, up 1.6x YoY, and representing an improved 47% of the company s total sales. This growth was mostly driven by the Boyue model, which saw sales rise 1.2% YoY and 2.8% MoM to 21,872 units. According to management, monthly capacity for the model will be gradually increased in 2H17 from the current ~20,000 units to 30,000. This increase and the good market response the model received in 1H17 bode well for sales. The Emgrand GS model continued to see strong sales growth, rising 91.2% YoY and 3.5% MoM during July, following 24% MoM growth in June, to 12,863 units, the highest level since its launch in May last year. Management also plans to increase capacity for the model, depending on demand; we therefore expect a continued good contribution from the model in 3Q17. Sedan sales rebounded in July The company sold 44,475 sedans in July, up 45.4% YoY and 4.4% MoM, rebounding from the trough seen in May-June. Its top-selling New Emgrand (including NEV versions) saw sales rise 15.8% YoY and 13.2% MoM to 18,383 units, following consecutive declines during 2Q17, an encouraging sign for the model. Management expects the New Emgrand to see Page 4

5 better growth in 2H17 given the upcoming peak season and increased marketing. New Emgrand sales rose by a steady 13.9% YoY to 129,795 units in 7M17, and could see higher growth towards the year-end as it will continue to benefit from its auto purchase tax status. Maintain Buy and TP of HK$20.88 Geely Auto s increased sales contribution from SUVs and its balanced portfolio of sedans should help to boost volume growth, while management s decision not to adjust pricing aggressively should foster steady profit growth. We also think the upcoming Lynk & Co model launches should push the company towards a more high-end position in terms of branding. We maintain our Buy rating and target price of HK$20.88, based on 14x 12-month EPS, in line with its historical P/E level. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Page 5

6 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 do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold 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 recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, 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 the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer 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 commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the 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 6