A-Share Research Notes Summary

Transcription

1 A-Share Research Notes Summary January 26, 2015 (Note: This is selected translation from the Chinese version of A-share morning notes) (1) Strategy: Weekly report (P.1) A-Share Market (2) Real estate: range trading, but positive in first-tier cities. (P.2) (3) NFC ( SZ): Explosive growth in overseas engineering contracting business; a hidden champion of the One Belt and One Road Strategy (P.3) Strategy: Weekly report Last week stock indexes saw a huge fluctuation as the market was in search of a "new balance". Last Monday the market reacted strongly to the supervision storm with the Shanghai Stock Exchange (SSE) Composite Index saw a significant fall of 7.7%. While the storm had far more impact on market sentiment than reality, the Shanghai index rebounded on Tuesday to Thursday and fell again after hitting a record high on Friday. Defense, conglomerate and light industries led the rally, while bank, coal and non-bank industries led the fall. Financial stocks saw a slightly less rebound than other industries. We insist that the market situation in the recent two months is a valuation recovery, and it is unavoidable that the divergence of market views intensifies that leads to sentiment fluctuation as the market is in search of a balancing process. While the continued amplification of the A shares leverage effect would trigger the nerve of investors, the volatility has become a "new normal". Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Clear-out economy but future lies in service industry. In 2014, China's GDP increased 7.4%, down 0.3ppt from the 7.7% in Overall macro economy continues the moderate, slow clearing process. In December the added value of industries above the designated size rose 7.9% year-on-year (YoY), and the growth was up 0.7ppt from November, but was slower than the 8.3% annual growth. Despite the month on month improvement, the downtrend continued. The tertiary industry rose 8.1% throughout the year and its contribution rate to GDP growth further improved. We see future investment opportunities in the service industry, especially the outlook of leisure industry, with focus on the Disney concept. Restart reverse repo to inject liquidity. Last Thursday, the central bank restarted reverse repo of RMB50bn and deposited RMB50bn of treasury cash in commercial banks. The central bank overall had put RMB100bn into circulation last week as a way to slowly inject liquidity in the market. At the annual Davos forum this year, Premier Li Keqiang emphasized that China would continue to stick to its overall strategy and attach more importance to preadjustment and slight adjustment. Central Bank chief Zhou Xiaochun said the monetary policy would be maintained stable instead of pursuing excess liquidity in economy. Meanwhile, the annual GDP growth of 7.4% is acceptable, which weakened the expectation of cutting the reserve-requirement ratio (RRR) next month. Lower HSBC PMI but rebound in sight. In January the HSBC PMI initial value rose to 49.8%. Though it was still below 50%, which means a contraction in economy, the data was 1

2 not only better than expected but also higher than the 49.6% final value last month, marking the first rise since last October. Compared to the PMI of the National Bureau of Statistics, the samples of the HSBC PMI were mostly small- and medium-sized enterprises and export-oriented enterprises. We need to see more evidence to determine if the manufacturing industry as a whole is stabilized. The European Central Bank finally issued quantitative easing policy in an attempt to drive up asset prices. To deal with deflation and boost European economy, the European Central Bank decided last Thursday to purchase EUR60bn of national debt every month from March to next September, totaling EUR1.08trn. The European QE is expected to increase global liquidity and drive up asset prices in the euro zone or even global asset prices. Meanwhile, bulk commodities will be benefitted, and also, China, where it is stand to receive part of overflow liquidity flow. However, considering that the European Central Bank is not as influential as the Federal Reserve, and the strong expectation that the Fed will raise interest rate this year, the impact of the European QE on A-shares is hardly significant. Real estate: range trading, but positive in first-tier cities. Real estate market: Trading volume last week was up 1.1% from previous week and 5.9% year on year (YoY). Trading volume of the real estate market in the 36 cities we tracked was up 1.1% week on week (WoW) and 5.9% YoY, and it was 106.5% of the weekly average of Last week trading volume was basically the same as the previous week. Average weekly trading volume in the first three weeks this year dropped about 20% compared to that of last December. Considering that the first two months are often the slack season, alone with the easing of policies in 2H14 stimulated the market sentiment and used up some demand, the sales is highly likely to fall in Q It is expected to see consolidation in range bound trading throughout the year. In terms of first-, second- and third-tier cities, only first-tier cities saw a WoW rise of 21.5% last week, while trading volume in second- and third-tier cities fell 1.0% and 12.2% WoW respectively. On a YoY basis, trading volume in first-tier cities surged 62.4%, but second-tier cities fell 3.6%, while there was a 3.4% jump in third-tier cities. Last weekend, inventory available for sale in 11 major cities rose slightly; the inventory clearance cycle was 10.9 months, same as last week. Stock performance: Real estate sector outperformed the CSI 300 Index After underperforming the overall market for two consecutive weeks since the beginning of 2015, real estate sector jumped 3.05% last week, outperforming the -1.74% of the CSI 300 Index. Industry news: Ø Data issued by the National Bureau of Statistics on 20 January showed real estate investment in 2014 increased 10.5% YoY, of which investment in residential development increased 9.2% YoY, down 1.3ppt compared to January-November. That was the first single-digit growth in residential investment in recent years. In terms of growth, residential investment is gradually returning to rationality. Ø In a media interview, Greenland Group's chairman Zhang Yuliang said the listing plan of the entire group had passed the examination by the Ministry of Land and Resources in 2014 and now entered the ordinary examination and approval process by the China Securities Regulatory Commission (CSRC). "It will be completed in 1H15, if everything goes well." Speaking of its sales target of Greenland Group in 2015, Zhang Yuliang said "it may be RMB280bn this year". Greenland Group's tasks in 2015 include 2

3 carrying on the transformation of main business, upgrading Greenland financial industry and implementing Internet transformation. Company news: ØProfit alert from Worldunion ( SZ), SID ( SH), CRED ( SH) and China Enterprise ( SH) (we think that the company's provision for impairment of assets is mainly based on the principle of prudence, considering 1) firm support of its parent company SREG, 2) overall market environment in 2015 is expected to be better than that in 2014, especially in first-tier cities; as the company has many quality assets in Shanghai, room for improvement in its profitability as it is expected to recover the provision in the projects in Shanghai). Ying'an Partnership representing Vanke ( SZ)'s business partners continued to buy the company's shares, which accounted for 0.92% of the total company shares; Xinhu Zhongbao ( SH) joined Great Wisdom ( SH) to buy Xiangcai Seucrities; Overseas Chinese Town ( SZ) was suspended due to significant matters. Investment recommendation: Recommend We maintain the "Recommend" rating for the sector. We think 1) on policy, as long as the real estate investment remains depressed and economy dragging, real estate policies will remain loose and the possibility of easing home purchase restrictions in first-tier cities cannot be ruled out; 2) fundamentally sales in Q is likely to dip quarter on quarter (QoQ), while sales volume will consolidate and regional differentiation will intensify. We are bullish on the real estate market performance in first-tier cities; 3) after initial rapid growth, property stocks have reached our first target price. In the short term, we think the recovery in property stocks valuation has come to an end, while the growth in sales and the certainty of performance will present investment opportunities in the change of relative valuation. We recommend industry leader 1.) Vanke with steady sales growth and certainty in performance growth; 2.) CFLD ( SH) with excellent sales growth, unique models and clear growth potential; 3.) China C&D ( SH), which stands to benefit from from state-owned enterprise (SOE) reform with its resource advantage and 4.) tourism + real estate industry leader Overseas Chinese Town. NFC ( SZ): Explosive growth in overseas engineering contracting business; a hidden champion of the One Belt and One Road Strategy A government platform of the "going out strategy" in China's nonferrous industry, NFC stands to benefit from the "One Belt and One Road Strategy". Engineering orders the company signed in 2014 totaled RMB10bn (some orders are not announced), exceeding its historical stock orders by 46%. The company has entered the multiplication era in overseas engineering contracting business since 2014 with its revenue expected to reach RMB10bn in 2016 (gross profit: 15%, net profit: about 8%). The estimated value of the current business of the company is RMB23.6bn. Based on its current market capitalization, there is still a 78% growth potential. With our relatively conservative valuation method, we estimated the value of the company's engineering contracting, rare earth, lead and zinc, metallurgical machinery and trade business to be RMB10.4bn, RMB8.6bn, RMB3.4bn, RMB1.2bn and zero respectively. The RMB13.9bn estimated value of the company only reflects the estimated value of the above, but not the explosive growth in its engineering contracting business, which will be much higher than market expectation. Rebound of metal prices and the strong resource expansion expectation. The company's rare earth separation capacity is 3,000t, with the quota of 2,200t. Equity output of zinc concentrate is 40,000t, and 3

4 100,000t for electrolytic zinc. Restricted by mining and smelting, the price of zinc is expected to rise in view of short supply in The regulation and supervision of the rare earth industry as well as industry consolidation brought rare earth prices up, and expectations are high that the company is going to expand its rare earth and zinc and lead business. Incremental business value, upgrade to the "Recommend" rating. Benefitted from the "One Belt and One Road Strategy", the company's overseas engineering contracting business has entered into an explosive growth period since Assuming a slight improvement in profits of other business areas, revenue growth of the company in will be 10%, 17% and 19% 4

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