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1 Analyst: Wong Chi Man, CFA Tel: (852) ) Mark Po, CFA Tel: (852) ) Our A-share strategist, Sun Jianbo held a conference call yesterday on A-share strategy in October. The key points are summarized below: The positive impact of mini stimulus to weaken in Q4. The A-share market rally in Q3 was largely driven by the mini stimulus and relaxation on home purchase restrictions. As the authorities also loosened the definition of first-time home buyers to allow easier access to mortgage loans, our strategist believes it s difficult to see further policy stimulus in Q4. In addition, these policies can only stabilize the situation but cannot change the fact that the property market has reached the peak of the cycle. Expectations on reforms to support the market in October. As the positive impact of the mini stimulus is likely to weaken, expectations on the 4th plenary session, to be held between October 20 and 23, will be the major factor to support the market. However, the euphoria may be short-lived as it will take time to see the effect of reform measures. Therefore our strategist described October as the time for harvest in autumn. Opportunities in three areas. Although our strategist has a conservative view on the overall market, he reiterated that there are investment opportunities in a few areas: (i) New technology: new energy vehicles, robots and intelligent home solutions. He believes new technology products with low market penetration are likely to enjoy better profitability while high penetration products like smartphones are facing tough competition; (ii) Healthcare/consumer plays with strong brands: For the healthcare sector, our strategist prefers companies with strong capability in innovation, and not only strength in distribution channels. Regarding consumer plays, he prefers companies with good distribution channels and strong brands. Product nature is not a key factor. (iii) Mixed ownership reform: In fact, all listed companies are in the form of mixed ownership. Therefore the key point of the reform this time is about a change in management structure, i.e. senior management of a company should not be government officials but professional managers. Quality of management will play a much bigger role to determine future business development. In particular, our strategist prefers companies with management buyout (MBO) potential. The stocks below and on the following pages provide some ideas on how to execute our strategist s views. The first section is focused on A shares, followed by HK-listed China shares. For the A-share universe, the 10 model portfolio stocks recommended by our A-share team include: (a) New technology: (1) Wolong Electric [ CH]: The company's products include electric machines for industrial uses, and micro motors for home electric appliances, motorcycles, and mini vehicles. It is entering into the market of electric machines for new energy vehicles. (2) NBTM New Materials [ CH]: It designs, manufactures and markets powder metallurgical products. It is trying to enter the components market for new energy vehicles. (3) Dr Peng Telcom & Media [ CH]: It is a telecommunications value-adding service provider. The company also develops security monitoring software and constructs campus computer networking system. It is entering into the intelligent home solutions market. (4) Shenzhen Jieshun Science And Technology [ CH]: It develops, produces and sells access control and management equipments and security system solutions. Main products include parking management systems, access control systems, channel gate management system, barrier, folding doors, security booths, etc. Leveraging on its existing business, the company is transforming into a smart city solutions provider. 1

2 (b) Health care/consumer plays with strong brands (5) Beijing Toread Outdoor Products [ CH]: It designs, manufactures, and retails camping and outdoor equipment. The company is the largest market player in China. (6) Henan Huaying Agricultural [ CH]: The company produces smoked duck breast and duck meat products. It is the largest vertically integrated player in the sector in China. (7) Hunan Hansen Pharmaceutical [ CH]: The company develops, produces and sells gastroenterologic, bone-healing, cardiovascular, and cerebrovascular Chinese medicine. (c) National defence (8) Weihai Guangtai Airport Equipment [ CH]: The largest manufacturer of ground equipment for airports in China. (d) Others (9) Beijing Gehua CATV Network [ CH]: The company builds, manages, and maintains cable TV networks in Beijing. It also provides advertising and information services. (10) Meidu Holding [ CH]: It manages and operates the Baohua Haijing Hotel in Hainan as well as develops and manages properties. It is entering the shale gas and oil business in the US. 10 model portfolio stocks for October Company Ticker Price (Local currency) Market cap (US$m) PER (x) PBR (x) Dividend yield (%) E 2015E E 2015E E 2015E New technology Wolong Electric Group Co Ltd CH Equity , NBTM New Materials Group Co Ltd CH Equity n.a. n.a. Dr Peng Telcom & Media Group Co Ltd CH Equity , Shenzhen Jieshun Science And Technology Industry Co Ltd CH Equity , Health care/consumer plays with strong brands Beijing Toread Outdoor Products Co Ltd CH Equity , Henan Huaying Agricultural Development Co Ltd CH Equity n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a. Hunan Hansen Pharmaceutical Co Ltd CH Equity n.a. n.a. 1.3 n.a. n.a. National defence Weihai Guangtai Airport Equipment Co Ltd CH Equity Others Meidu Holding Co Ltd CH Equity 6.5 2, Beijing Gehua CATV Netw ork Co Ltd CH Equity , Sources: Bloomberg, China Galaxy Securities Research 2

3 We listed the Hong Kong-listed stocks which have exposure to the sectors which fit the themes highlighted by our A-share strategist. (a) Electric Vehicles: (1) BYD [1211.HK] : The group is a leading player in electric vehicle segment. The market is speculating that BYDE (285 HK) will provide electronic components for BYD s electric vehicle. (2) Wasion Group [3393.HK] and China Titans Energy [2188.HK]: China Titans Energy is the only HK-listed equipment maker which secured orders from State Grid for providing charging equipment. The roll-out of the charging equipment network is positive for China Titans Energy. Wasion Group will benefit from upgrading of power grid. (3) Coslight [1043.HK], Tianneng [0819.HK] and Chaowei [0951.HK] are battery plays for electric vehicles. (b) New technology: (1) ZTE [0763.HK]: The group launched a pilot wireless- charging project for electric buses with Dongfeng. The group is also in discussion with other electric vehicle makers for promoting its wireless charging technology. (2) Comba Telecom [2342.HK]: China Mobile [0941.HK] will announce tender results for its small-cell procurement small cells will be a major growth driver for Comba as the group is a leading supplier of small cells in China. (c) Robot: (1) Nanjing Panda [0553.HK]: Management of the group highlighted that the group will put resources into development of robot technology. Nanjing Panda is also a beneficiary of asset restructuring within the CEC Group. (d) Intelligent home solution: (1) Lung Cheong [0348.HK]: Haier Group is the only Chinese home appliance maker with certification from Apple. We believe Lung Cheong will be a flagship for Haier s launch of new and innovative products. The group may benefit from increasing popularity of intelligent home solutions. Increasing involvement by Haier Group is a major catalyst to Lung Cheong. (e) Healthcare: (1) Microport (853.HK): Although the company s earnings are likely to be uninspiring this year due to the need to restructure its newly acquired orthopaedic product business, it is likely to recover in 2015 once the restructuring is largely completed. Long-term prospects of the company remain positive on the back of its wide range of medical device product line. 3

4 Hong Kong-listed stocks which fit the themes highlighted by our A-share strategist Sources: Bloomberg, CGIHK Research 4

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