A-Share Research Notes Summary

Transcription

1 A-Share Research Notes Summary November 27, 2014 (Note: This is selected translation from the Chinese version of A-share morning notes) A-Share Market (1) Real estate: Optimistic about the effect of the interest rate cut on property stocks in the short term; strongly recommend stocks with high sales elasticity and high debt ratio. (P.1) (2) Automobile: The growth of the aftermarket and smart vehicle sector is more certain. For individual stocks, we recommend Grand Orient ( SH), Beijing WKW ( SZ), SAIC Motor ( SH), Huayu Auto ( SH) and Xingyu Lighting ( SH). (P.2) Real estate: Optimistic about the effect of the interest rate cut on property stocks in the short term; strongly recommend stocks with high sales elasticity and high debt ratio. (1) The interest rate cut will further boost sales volume and benefit the real estate sector significantly in the short term. First, interest rate cut gives a positive psychological signal to demand for home purchase and brings down mortgage rate and home purchase costs, both good for real estate sales. Since 1998 there have been two major interest rate cut cycles in China, which show interest rate cut can boost the real estate market significantly. Wong Chi Man Senior Analyst (852) cmwong@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk Currently as the sales volume is becoming stable at the moment, the interest rate cut is expected to bring down mortgage rate and development loan costs and help boost the market during the year-end period. Take a 20-year RMB1m mortgage for example. After the interest rate cut, buyers can save about RMB200 a month. On the one hand, interest rate cut can really reduce the repayment pressure of buyers and can thus turn some potential demand into effective demand; on the other hand, interest rate cut can stimulate buyers' expectations and thus encourage some buyers with a wait-and-see attitude and money on hand and other potential buyers to enter the market earlier, which can improve the sales. It's worth noting that the improvement of the sales will depend on regions: first-tier cities and some second-tier cities are expected to see clear improvement in sales while some secondtier cities, third- and fourth-tier cities with high inventory and low demand are expected to see little improvement in sales. Compared to the last two interest rate cut cycles, the real estate market has seen some significant changes. The inventory of the real estate market has hit record highs again and again while housing prices kept climbing. The static inventory clearance cycle of the 12 large cities we've been tracking climbed to 11.2 months in October 2014 from 7.6 months in June Of 18 major cities, the static inventory clearance cycle of over a half of them is over 12 months, including Hangzhou, Wenzhou, Qingdao, Guangzhou, Shenzhen, Fuzhou, Xiamen, Dongguan, Nanchang and Hohhot. Therefore, due to the differences in regional development, population mobility and consumption pattern, third- and fourth-tier cities and some second-tier cities have high inventory yet weak demand. We think that the interest rate cut will not improve the sales in those cities much. While in first-tier cities and some second-tier cities which have scarce land resources and high house demand elasticity, the interest rate cut is expected to bring significant improvement in property sales. 1

2 (2) In the medium to long term, there is still downward pressure on the real estate market. We think that the original purpose of the interest rate cut is to reduce risk-free interest rates and reduce the financing costs of enterprises, which echoes the Ten measures on reducing high corporate financing costs ( Ten measures ), and it is not intended to simulate the real estate market directly. The asymmetric interest rate cut has further reduced the interest spreads of deposit and loan of banks and is not much of an incentive for banks to offer discounts on mortgage; nor will it bring fundamental improvement to the risk preference of the real estate industry. In addition to the increasing inventory, the real estate market is likely to have downward pressure in the medium to long term. (3) Stocks with expectations on improvement in sales and debt indicators will benefit first. Looking back on the last two interest rate cut cycles, we think that interest rate cuts have a positive impact on real estate stocks. Based on the performance of real estate stocks after interest rate cuts in the past, the sector outperformed the overall market by about 8% in the window period of interest rate cuts. In terms of sustainability, the trend of the real estate sector is closely linked to the trend of the fundamental factors of the real estate market. (4) Investment recommendations In terms of fundamental factors, we expect the mortgage loan interest rate and development loan costs to fall further as the sales volume is becoming stable at the moment, which can help boost the sales of the real estate market during the year-end period; however the improvement of sales will depend on regions, and only firsttier cities and some second-tier cities with strong demand support are expected to see marked improvement in sales while some second-tier cities, third- and fourth-tier cities with high inventory and low demand are expected to see little improvement in sales. In the long run, the real estate market will continue to face downward pressure. For the real estate sector, we think that the interest rate cut has a positive impact. Based on the performance of real estate stocks after interest rate cuts in the past, the sector outperformed the overall market by about 8% in the window period of interest rate cuts. In terms of sustainability, the trend of the real estate sector is closely linked to the trend of the fundamental factors of the real estate market. To judge the continuity of excess return, it is necessary to observe the continuity of the recovery of the fundamental factors of the real estate market. For individual stocks, we suggest picking stocks from two dimensions: good sales elasticity and high net debt ratio. We are optimistic about high gearing companies with comparative advantages in first tier cities. We recommend the domestic real estate leader Poly ( SH) which target customers with inelastic demand and CFLD ( SH) with unique models; additionally, we also recommend Shoukai ( SH) and China Enterprise ( SH) which have relatively more land bank in first-tier cities. Automobile: The growth of the aftermarket and smart vehicle sector is more certain. For individual stocks, we recommend Grand Orient ( SH), Beijing WKW ( SZ), SAIC Motor ( SH), Huayu Auto ( SH) and Xingyu Lighting ( SH). This week the trend of the auto sector is similar to the overall market trend, posting a gain of 2.82%. The car maker segment saw a bigger increase (3.27%), and the auto parts and auto service segments were up 2.53% and 1.86%, respectively. Overall blue chips had a better gain. We think that there are a lot of opportunities in the auto sector, of which the aftermarket and the smart vehicle and Internet of Vehicles fields have greater potential for growth. On the one hand, the trend of moving the auto sector to the Internet is becoming clearer; on the other hand, the electronicization rate of the auto sector is increasing. 2

3 We recommend continuing to pay attention to the auto aftermarket (auto services, second-hand car finance, finance lease, auto insurance, auto repairs, etc.) Currently the revenue of the auto aftermarket of auto sales & service providers in China accounts for only 8% of their total revenue, way lower than the 40% in developed countries. Therefore, the auto aftermarket in China has a great potential for growth for a long time. Jingu Wheel ( SZ), Longji Group ( SZ) and Grand Orient we previously recommended all posted strong performance. For stocks in this sector, we think it still has a great potential for persistent growth; however, the accumulative gain in the short term is relatively high and return is relatively large, which may add certain pressure to the continuous upward trend of stock prices. But the market segment has great opportunities. Investors may buy stocks in the market segment when there is any price correction. Individual stocks: Grand Orient: It has a good background. With Juneyao on its back, the company is the only listed platform of Juneyao. There is high expectation on asset injection. Besides Juneyao Airlines which plans to go public, Juneyao also has quality resources like Juneyao Dairy, Juneyao Property, Juneyao Culture (own the right to sell F1 related goods), Shanghai World Foreign Language Middle School, Hangzhou Shanghai World Foreign Language Primary School. Asset securitization is very likely to happen. In the meantime, Grand Orient is the largest dealer of new and second-hand vehicles in Wuxi, owns Orient Auto City with a complete industry chain and occupies over 60% market share of the new and second-hand vehicle trading market in Wuxi. Moreover, its upscale car resources such as Porsche, Land Rover, BMW and Mercedes-Benz in Wuxi, Nantong and surrounding areas have entered into growth stage; it has quality business model expansion opportunities in the second-hand vehicle trading and after-sales service market and has the potential to link up the industry chain; it has established a cooperative relationship with the leading online second-hand vehicle dealer Cheyipai.com. In 2013 its revenue was more than RMB10m. With the two large auto trading platforms, it has linked up the chain between new and second-hand vehicles and it has growth potential in markets like replacement, e-commerce, auto disassembly and auto finance. It has equity investments with book value of about RMB400m in Bank of Jiangsu, JSBC and Guolian Trust. It also has a 1.9% stake in microfinance companies; in addition to the equity it has just invested in Huarui Bank, the fair value of its equity investment is estimated to be about RMB800m. 70% of the company's revenue is from auto business. Comparing its valuation with Jingu Wheel and Longji Group, its market capitalization of RMB4.5bn and 21x PER enjoy a clear valuation advantage. In the meantime, besides aftermarket, smart vehicles are also a relatively certain development direction in the future. On the one hand, the incubation of the electronic industry chain is basically completed; on the other hand, the car parc continues to grow. The "Internet of Vehicles" is expected to see explosive opportunities in the whole industry chain. Investors may pay attention to Shenglu Communications ( SZ) and China CASC ( SZ). The automotive electronics products from Ningbo Fuerda which Beijing WKW (002662) has acquired have been shipped to FAW Audi A6/Q5. Beijing WKW's other products include lighting system, passive keyless entry system, tire pressure monitoring system, seat heating controllers and folding rearview mirror control modules and so on. It has entered into the supply chain of domestic auto brands in China. As a low valuation company transforming into an auto electronic enterprise, it is worth pay attention. The "Internet of Vehicles" stock Shenglu Communications has acquired Shenzhen Hezheng Electronics, showing a great potential for growth. China CASC, etc. is also worth monitoring. Xingyu Lighting's complete set of LED back lights were used in hot car models such as Toyota Corolla and Levin in June, which contributed RMB40m to the company's revenue in a single month, and the gross profit margin was over 25%; its biggest customer FAW-Volkswagen recently have good sales, and its products have been adopted in Audi A3; its LED headlamps are expected to be used in Nissan's 2015 new models and its profit is expected to grow quarter by quarter. The company has good performance. 3

4 Additionally, we suggest paying attention to the decline in risk-free interest rates brought by the interest rate cut which has raised the valuation level of companies with high dividends, such as SAIC Motor, JMC ( SZ) and Huayu Auto. 4

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: