Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jan 19, 2016

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 1398 ICBC CHINA MOBILE PETROCHINA TENCENT CCB BANK OF CHINA HSBC CHINA LIFE PING AN SINOPEC Source: Bloomberg GF events Source: GF Securities (HK) A-Share Market Property: Destocking main target of policy easing; further relaxation seen towards year-end Property destocking was the focus of sector policy making in 2015: specific policy measures included the cancellation of outdated policy restrictions and the restoration of a market-driven sector adjustment mechanism. In addition, tax reductions and fiscal subsidies were also put in place accordingly. Mortgage lending policies remained loose during 2015 with an aim to facilitate the materialization of owner-occupier demand, particularly by lowering home purchasing barriers and costs. In addition, adjustments to policies for loans taken out from the housing provide fund was also a key policy highlight in F&B: Sector leaders highly defensive amid market weakness Leading F&B companies are highly defensive amid overall market weakness due to their low but stable growth and high dividend yield. We expect leading domestic F&B companies to maintain low but stable growth of 10%+ over the next 3-5 years, and believe the dividend yields offered by sector leaders are likely to rise to 3-5%. Separately, stocks whose share prices have dropped below their private placement prices or prices at which employee shares were purchased offer a margin of safety. Please see text for our stock picks. Hong Kong Market Chow Sang Sang (116 HK, Hold): SSS continued to outperform peers in 4Q15 Following our recent conference call with management, we expect CSS to continue to outperform CTF and LF in terms of SSS in 4Q15 thanks to its tighter retail network and product differentiation. We cut our FY15/16 core net profit forecasts by 9%/16% to factor in exchange losses due to Rmb depreciation as well as lower SSS assumptions, now forecasting a 14% YoY decline in core net profit in FY15 (vs -7% YoY in 1H15). We maintain our Hold rating, but lower our TP from HK$15.40 to HK$ Peak Sport (1968 HK, Buy): 4Q15 SSSG softening priced in; trading at 7% yield; maintain Buy Peak reported mid single-digit SSSG in 4Q15 and a total store number of 5,999 at the end of SSSG dropped slightly QoQ from high single-digit growth in 3Q15, mainly due to the easing of apparel sales growth in Nov & Dec given the warm weather in southern China, while momentum for running and basketball footwear continued. With Peak's share price down 8% YTD, we think the QoQ drop in SSSG is priced in. The company s key product categories, running and basketball, will benefit from increasing demand for functional products. Maintain Buy. Yuexiu REIT (405 HK, NR): Dividend yield of over 8%, solid defensive edge According to management, the company currently holds six investment properties in the Guangzhou CBD, with a lettable area of 440,000sqm and an annual dividend payout of 90%. It has stable rental income and a dividend yield of over 8%, providing a solid defensive edge. Its Grade-A office portfolio in Guangzhou may appreciate in the next three years, given limited supply in the city. The company has a historical ROE of around 7%. The stock is trading at 7.0x 2014E P/E and 0.7x 2014E P/B. It valuation is undemanding, in our view, given its stable rental income 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 Property: Destocking main target of policy easing; further relaxation seen towards year-end Sector policy: Property destocking the main focus Property destocking was the focus of sector policy making in 2015: specific policy measures included the cancellation of outdated policy restrictions and the restoration of a market-driven sector adjustment mechanism. In addition, tax reductions and fiscal subsidies were also put in place accordingly, which included the extension of the business tax exemption imposed by the central government, as well as deed tax reductions and fiscal subsidies offered by local governments. These measures have helped lower residents home purchasing costs to some extent, thus accelerating the destocking process. The central government reemphasized the importance of property destocking in Dec, driving expectations of further relaxation in sector policies. In particular, property destocking was listed for the first time as one of the five key tasks for this year at the recently closed central economic work conference. Proposals were made at the conference to boost housing demand by speeding up the urbanization of rural residents and to alleviate supply pressure by promoting property leasing and raising industry concentration. Mortgage lending policy: Mortgage policies remained loose throughout the year; further housing provident fund reform conducted towards year-end Mortgage lending policies remained loose during 2015 with an aim to facilitate the materialization of owner-occupier demand. The policies were particularly targeted to lower home purchasing barriers and costs. With regard to the former, the minimum down payment requirement for second homes was lowered to 40% on Mar 30, the definition of second homes for borrowing against the housing provident fund was relaxed on Aug 31, and the minimum down payment for bank mortgages in non-hpr cities was lowered to 25% on Sep 30. In relation to the reduction of home purchasing costs, the benchmark interest rates were cut a few times during the year, driving bank mortgage rates to new lows. In addition, adjustments to policies for loans taken out from the housing provide fund was also a key policy highlight in Loose mortgage lending policies continued into Dec, with the housing provident fund remaining the main channel for policy relaxation. More specifically, efforts are being made to expand the housing provide fund system to also include rural migrant workers and individual business owners. LT regulatory mechanisms: Development of LT mechanisms speeding up; monetization of subsidized housing pushing forward In pursuit of a relatively stable property market and policy environment over the mid/long-term, the current administration has built multi-layered long-term regulatory mechanisms encompassing unified property ownership registration, subsidized housing development, household registration reform and land reform. In particular, great progress was seen in property ownership registration and subsidized housing development during The monetization of subsidized housing was a key area of policy progress in Dec, as the issue was highlighted at the housing and urban-rural development work conference. At the local level, several local governments released statements indicating they will halt the development of subsidized housing or propose targets for the monetization of subsidized housing, which should facilitate property destocking. Key risks include weaker-than-expected execution of favorable sector policies, and changes in policy expectations driven by home price changes. F&B: Sector leaders highly defensive amid market weakness Leading F&B companies are highly defensive amid overall market weakness due to their low but stable growth and high dividend yield. We expect leading domestic F&B companies to maintain low but stable growth of 10%+ over the next 3-5 years, as per capita consumption of most F&B products is around or has exceeded international average levels, and as the considerable supply of overseas food products through the e-commerce channel makes it hard for the prices of domestic products to be raised. Page 2

3 F&B companies typically do not need to spend large sums on capex and they tend to have abundant cash on hand. We believe the dividend yields offered by sector leaders are likely to rise to 3-5%. The F&B sector is set to post substantial excess returns as the risk-free interest rate declines. Small/mid-cap companies that are transforming their businesses are mainly moving into the consumption service space. Stocks picks for defensiveness and business transformation Given the nature of F&B leaders as defensive plays with high earnings visibility and cheap valuations amid market weakness, we like Shunxin Agriculture ( CH), Yanghe Brewery ( CH) and Hengshun Vinegar ( CH). In addition, we are positive on Eternal Asia Supply Chain Management ( CH), Royal Group ( CH), Caissa Travel ( CH), Longlive Bio Technology ( CH), Baolingbao Biology ( CH) and Blackcow Food ( CH) given business transformation. Watch oversold stocks Separately, stocks whose share prices have dropped below their private placement prices or prices at which employee shares were purchased offer a margin of safety. We particularly like Jonjee Hi-Tech ( CH), Eternal Asia Supply Chain Management ( CH) and Qiaqia Food ( CH). Chow Sang Sang (116 HK, Hold): SSS continued to outperform peers in 4Q15 Maintain Hold but lower TP to HK$11.90 Following our recent conference call with management, we expect CSS to continue to outperform CTF (1929 HK, Underperform) and LF (590 HK, Hold) in terms of SSS in 4Q15 thanks to its tighter retail network and product differentiation. We cut our FY15/16 core net profit forecasts by 9%/16% to factor in exchange losses due to Rmb depreciation as well as lower SSS assumptions, now forecasting a 14% YoY decline in core net profit in FY15 (vs -7% YoY in 1H15), with 6% YoY SSS growth in China and a 10% YoY decline in SSS decline in HK & Macau. We lower our TP from HK$15.40 to HK$11.90, based on 9x FY15E P/E (previously 10.6x). SSS continued to outperform peers in 4Q15 Both the HK & Macau and China markets saw MoM improvements in 4Q15. We expect low single-digit SSSG in China and a mid-teen SSS decline in HK & Macau during the quarter. Jewelry sales at China s top-100 retailers fell ~4% YoY in 4Q15 and 3.5% YoY in We estimate CSS achieved 6% SSSG in China in FY15, indicating that the company is gaining market share. We believe its tighter retail network and product differentiation (e.g. own-brand fixed price Charme gold products and Infini Love Diamonds) are major reasons for its above-peer performance. Product mix We believe the outperformance of gem-set product SSS over gold products in 4Q15, especially in China which saw a successful marketing campaign for its own-brand Infini Love Diamond, could partly offset the increase in gold product sales mix in 3Q15, driven by the rush to buy gold. We expect the sales mix of gold products to have increased slightly YoY in 2H15. HK rental trend We expect rental reversion to remain positive in 2H15. Management has said that more leases of large street stores will expire in 2H16; we therefore anticipate greater rental savings in FY17. Store expansion in China Management expects net store openings in FY15. This is below our expectation as the revamping of department stores has led to the closure of certain stores. Management targets 40 net store openings in FY16. Gold product pricing mechanism changed After HK s Competition Ordinance came into effect on Dec , CSS simplified its gold product pricing mechanism by raising its gold asking price and eliminating the 2% commission fee on the gold price. According to management, since the change to its pricing mechanism, GM for gold products has remained stable and no swing in gold product sales has been observed. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Page 3

4 Peak Sport (1968 HK, Buy): 4Q15 SSSG softening priced in; trading at 7% yield; maintain Buy What s new? Peak reported mid single-digit SSSG in 4Q15 and a total store number of 5,999 at the end of SSSG down slightly QoQ SSSG dropped slightly QoQ from high single-digit growth in 3Q15. The softening was mainly due to the easing of apparel sales growth in Nov & Dec given the warm weather in southern China, while momentum for running and basketball footwear continued in 4Q15. The average retail discount increased slightly from 28% in 3Q15 to 29% in 4Q15, attributable to the bigger retail discounts applied to apparel products. Total store number at the end of 2015 fell slightly from 6,004 to 5,999, including the optimization of its store network by opening and closing around 400 stores this was in line with our expectation. Valuation undemanding Pou Sheng (3813 HK, NR) was the first sportswear company to report a softening sales growth trend in Dec on Jan 11. With Peak's share price down 8% YTD, we think the QoQ drop in SSSG is priced in. Its valuation is undemanding as the stock now trades at a 6.8% yield and 9.7x FY15E P/E. We remain positive on the sportswear sector given supportive government policies, increased health awareness and strong capital investment by corporates. Peak s key product categories, running and basketball (which contribute over 60% of footwear sales), will benefit from increasing demand for functional products. We maintain our Buy rating and TP of HK$2.60, based on 12.7x FY16E P/E (at +1sd). (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Yuexiu REIT (405 HK, NR): Dividend yield of over 8%, solid defensive edge Takeaways from recent meeting with management According to management, the company currently holds six investment properties in the Guangzhou CBD, with a lettable area of 440,000sqm and an annual dividend payout of 90%. Its properties include the White Horse Building (wholesale shopping center, 100% occupancy rate), Fortune Plaza (Grade-A office), City Development Plaza (Grade-A office), Victory Plaza (retail shopping center), Yuexiu Neo Metropolis (commercial complex project) and Guangzhou International Finance Center (commercial complex project). The company has stable rental income and a dividend yield of over 8%, providing a solid defensive edge. Its Grade-A office portfolio in Guangzhou may appreciate in the next three years, given limited supply in the city. The company has a historical ROE of around 7%. The stock is trading at 7.0x 2014E P/E and 0.7x 2014E P/B. It valuation is undemanding, in our view, given its stable rental income growth. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@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. 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 did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds 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 a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the 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 this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers 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 commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this 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 5