Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Apr 20, 2015

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 14E 15E 14E 15E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK Local Daily ADR Daily ticker Company (HK$) (%) (US$) (%) 857 PETROCHINA ICBC CHINA MOBILE CCB BANK OF CHINA TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons HSBC China Mfg PMI 22-Apr APR P China Ind Enterprises 26-Apr MAR US Data Date Period Prior Cons Existing Homes Sales 22-Apr MAR Initial Jobless Claims 23-Apr 18-Apr Cont Jobless Claims 23-Apr 11-Apr Markit US Mfg PMI 23-Apr APR P Durable Goods 24-Apr MAR Source: Bloomberg GF events Date Event Location 20 Apr CMGE co. visit Shenzhen 20 Apr Tian Ge Interactive conf call - 21 Apr idreamsky Tech co.visit Shenzhen 22 Apr IGG investor meeting Shenzhen 22 Apr Feiyu Tech investor meeting Shenzhen 23 Apr Boyaa Interactive co. visit Shenzhen 23 Apr BAIOO Family investor meeting Shenzhen Source: GF Securities (HK) A-Share Market Non-Bank Financials: Sector strength not to be impeded by short-term regulatory setbacks Following the latest RRR cut, further IR cuts are expected in the near term. In addition, the implementation of a deposit insurance system will also speed up the transfer of funds from deposit accounts to the stock market. Despite CSRC measures announced over the weekend aimed at limiting leverage, the strong demand for leverage means that investors will then resort to other channels, particularly those further out of the CSRC s reach. Overall, we believe the current market strength will continue, and that the non-bank financial sector will remain strong. Construction: RRR cut a direct positive for sector The latest RRR cut will directly benefit the sector. In addition to enlarging the size of the industry market by boosting investment, it will also help construction companies raise the efficiency of fund use and lower costs. Given considerable downward pressure on the economy and ongoing economic restructuring, we believe any policy stimulus will inevitably involve supportive measures for investment and the construction space. As such areas related to the Silk Road development strategy and domestic infrastructure development will be among the few industries that can see sustainable strength. Auto: Made in China 2025 to be a key sector driver We believe the implementation of the Made in China 2025 plan will target domestic companies (as opposed to JVs or foreign-owned firms) with R&D innovation as the key and sector M&A as the main way to achieve the plan s objectives. Some potential sector policy measures we anticipate include accelerated M&A, subsidies for innovation and permission for higher foreign ownership in JVs. We have become more optimistic on the sector, and believe that Made in China 2025 will push sector valuations higher, bringing sector-wide investment opportunities. Property: Current transaction recovery sustainable We highlight rebounding new project launches and recent policy relaxation as the two main factors driving the strength in Mar property transactions. The positivity from policy easing will continue to drive demand, which, coupled with further new launch growth, will lead to a faster transaction recovery. We believe the current transaction recovery will be sustainable. The valuations of mainstream developers relative to the property sector have dropped back to levels seen before last year s IR cut, and we expect them to rebound in the near term. Highsun Group ( CH): Innovative mobile payment product marks beginning of internet finance development The company has recently launched an innovative mobile payment product Kuaifu360. We believe the large amount of transaction data accumulated during the process of achieving the various targets set for this product will provide a good foundation for the company to monetize on its supply chain finance business in the future. Kuaifu360 marks the company s first step in internet finance development. We expect Highsun to push forward its strategy for the integrated development of commerce, entertainment, internet and finance businesses at a faster pace from this point on. Hong Kong Market Anton Oilfield Services (3337 HK, Underperform): Weak recovery in 1Q15; maintain Underperform Anton saw a weak recovery in orders in 1Q15, and during Friday s conference call management stated that 1H15 still looks tough, but that they may see better order flow in 3Q15. Management made no changes to its guidance for flattish revenue and a turnaround in bottom line this year. However, we believe order flow visibility remains low and still do not see a recovery anytime soon. We believe the recent rebound in share price is unjustified, seeing Anton as a poor proxy for a crude price rebound. Reiterate Underperform. Continued on next page 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 Hong Kong Market (continued) ChinaSoft Intl (354 HK, Buy): Comments on CEO s stake sale and noteholder conversion ChinaSoft s CEO and major shareholder sold 1.59% of his stake, and EJF Sidecar converted its entire convertible note holding into 58m ordinary shares at HK$2.16/share, giving it a stake of around 2.7%. Management indicated that the CEO reduced his stake as a way of alleviating his own personal debt he still holds a 14.07% stake. We see selling pressure in the short term but believe the outlook for the company remains intact given its strong momentum in emerging businesses, cooperation with IT giants, and the potential for re-rating on the JointForce platform. Page 2

3 Non-Bank Financials: Sector strength not to be impeded by short-term regulatory setbacks Fund flows to stock market to continue Given the 1Q15 GDP deflator of -1.2% which reflects serious deflationary pressure, the RRR cut announced over the weekend was a timely policy response, with further IR cuts expected to be issued in the near term and lower returns from deposits. In addition, the implementation of a deposit insurance system will also speed up the transfer of funds from deposit accounts to the stock market. Leverage regulation to trigger spill-out to other channels More than 80% of A-share turnover is currently attributable to retail investors, while most of the larger trading accounts opened since end-2014 have been owned by participants in the property industry chain such as developers and high-interest lenders. These investors tend to use leverage relatively often, which will add to market volatility. Measures issued by the CSRC over the weekend were mainly aimed at limiting leverage. We believe these measures will remain in place as long as a rapidly rising bull market continues. However, the strong demand for leverage means that investors will then resort to other channels, particularly those further out of the CSRC s reach such as the internet, trust companies and banks. Sector share prices to remain strong Overall, we believe the current market strength which has been driven by fund flows to the stock market and the use of leverage will continue, and that the non-bank financial sector will remain strong with securities firms brokerage and prop trading businesses benefiting from rising market turnover & stock indices and insurers from strengthening returns on investment and insurance products. Construction: RRR cut a direct positive for sector The PBoC has lowered the RRR by 1pp following the release of poor economic data from 1Q15. We believe this is particularly important for boosting investment and construction activities, directly benefiting the sector. In addition to enlarging the size of the industry market by boosting investment, the RRR cut will also help construction companies raise the efficiency of fund use and lower costs. Given considerable downward pressure on the economy and ongoing economic restructuring, we believe any policy stimulus will inevitably involve supportive measures for investment and the construction space. As such areas related to the Silk Road development strategy and domestic infrastructure development will be among the few industries that can see sustainable strength. We expect excess returns from the sector in Auto: Made in China 2025 to be a key sector driver Made in China 2025 aimed for manufacturing upgrade over next ten years As a top-level development plan for the next ten years, the Made in China 2025 plan is intended to shift the focus of China s manufacturing sector towards higher value-add products, to improve sector & product structures and expand the presence of Chinese-made products in the global market. How Made in China 2025 will benefit auto industry With regard to the auto industry, we believe plan implementation will target domestic companies (as opposed to JVs or foreign-owned firms) with R&D innovation as the key and sector M&A as the main way to achieve the plan s objectives. Some potential sector policy measures that we anticipate include: Strengthened and accelerated sector M&A of a scale possibly similar to the CSR/CNR merger; Establishment of a specialized fund to encourage innovation with subsidies and rewards; Establishment of large research institutes to strengthen integration between production, training and research; Efforts to force domestic companies to strengthen R&D by raising the upper limit for foreign ownership in JVs; Improvements in the average oil consumption monitoring system. Sector view and top picks We have become more optimistic on the sector, and believe that Made in China 2025 will push sector valuations higher, bringing sector-wide investment opportunities. We like the following companies: Page 3

4 Whole-vehicle companies Great Wall Motor ( CH), Jianghuai Automobile ( CH), Jiangling Motors ( CH), CNHTC Jinan Truck ( CH), Chongqing Changan Automobile ( CH), Beiqi Foton Motor ( CH), SAIC Motor ( CH); Auto part makers Beijing WKW Automotive Parts ( CH), Fulin Precision Machining ( CH), Tianrun Crankshaft ( CH), China Automotive Engineering Research Institute ( CH), Kunming Yunnei Power ( CH), Shanghai Diesel Engine ( CH), Pacific Precision Forging ( CH); R&D and other services China Automotive Engineering Research Institute ( CH). Property: Current transaction recovery sustainable Mar transaction strength driven by increased new launches and policy easing Our index tracking property transactions in 44 large cities picked up 74% MoM and 8% YoY in Mar, with the index for residential transactions in 39 large cities rising 84% MoM and 11% YoY. We highlight rebounding new project launches and recent policy relaxation as the two main factors driving the strength. We believe the positivity from policy easing will continue to drive demand, which, coupled with further increases in new launches, will lead to a faster transaction recovery in the near future. Mar market highlights by city A MoM transaction increase was seen across different tiers of cities; however YoY performance varied, with first-tier declining 2.4% and second/third-tier picking up 8%/17.2%. Changes in property prices were also mixed: first-tier cities posted a rebound, while second and third-tier cities continued to decline MoM. Inventories in first-tier cities edged down slightly but remained at a high level, while other cities demonstrated a MoM decline for first time after four months of increases. Mainstream developers to see re-ratings We believe the current transaction recovery will be sustainable. In particular, the valuations of mainstream developers relative to the property sector have dropped back to levels seen before last year s IR cut, and we expect them to rebound in the near term. We believe mainstream developers will benefit from rising industry concentration and recommend China Merchants Property Dev ( CH), Poly Real Estate ( CH), China Vanke ( CH, 2202 HK) and Jinfeng Investment ( CH). Other top picks In addition, we also like growth stocks which are leaders in regional markets such as Zhongnan Construction ( CH), Yango Group ( CH), Thaihot Group ( CH) and Beijing Capital Development ( CH). Our other top picks are companies with abundant resources such as Xinhu Zhongbao ( CH) and Oceanwide Holdings ( CH). Highsun Group ( CH): Innovative mobile payment product marks beginning of internet finance development Innovative mobile payment product launched The company has recently launched an innovative mobile payment product Kuaifu360, which consists of an order management system, a mobile pointof-sale system and a bank card settlement system. This product addresses various issues in relation to the placing of orders and payment upon delivery, helping raise fund flow efficiency in logistics businesses. Good foundation for transaction data monetization The company has set a series of targets for the development of Kuaifu360 over the next three years: 1) covering more than 20k small and medium wholesalers, and connecting more than 200 logistics, courier and O2O operators by the end of this year, 2) raising its total number of machines installed to 60k, 150k and 300k by the end of 2015, 2016 and 2017, with transaction value to reach Rmb100bn, 200bn and 500bn respectively. We believe the large amount of transaction data accumulated during the process of achieving these targets will provide a good foundation for the company to monetize on its supply chain finance business in the future. Implementation of integrated business strategy to gather pace Kuaifu360 is the first innovative mobile payment product the company has brought to market since its acquisition of Shanglian Payment, and it marks the company s first step in internet finance development. We expect Highsun to push forward its strategy for the integrated development of commerce, entertainment, internet and finance businesses at a faster pace from this point on. We remain positive on the company and forecast 2014/15/16 EPS of Rmb0.43/0.52/0.64. Page 4

5 Anton Oilfield Services (3337 HK, Underperform): Weak recovery in 1Q15; maintain Underperform Weak recovery in 1Q15 Anton has announced its 1Q15 operating data. Due to the cancellation and delay of orders from both domestic and overseas upstream customers, Anton cut its 4Q14 backlog by Rmb185m (domestic backlog cut by Rmb102m, overseas backlog cut by Rmb83m). New orders obtained during 1Q15 reached Rmb471m (domestic/overseas new orders: Rmb279m/Rmb192m), down 61% YoY but up 3% QoQ. With the original 4Q14 backlog lowered, end-1q15 backlog is down 9% YoY but up 3% QoQ to Rmb1.76bn, implying revenue for the quarter of Rmb231m (-14% YoY). Order flow and industry trend not convincing enough for a turnaround in 2015 During today s conference call, management stated that 1H15 still looks tough and that they may see better order flow in 3Q15, although there is still risk of order cut backs. Management made no changes to its guidance for flattish revenue and a turnaround in bottom line this year. However, given the weak 1Q15 data, we believe order flow visibility remains low and still do not see a recovery anytime soon. Still expecting a net loss in 2015/16 We leave our earnings forecasts of Rmb-272m/-264m for 2015/2016 unchanged given: 1) the slow recovery in order flow expected in 1H15; 2) segmental EBITDA margins of 29.4%/28.2% in 2015/16, as we expect Anton to face intense competition amid an industry low cycle; 3) the mild impact from a reduction in opex. Rebound in share price unjustified; reiterate Underperform Despite its weak fundamentals, Anton s shares surged >50% after its results announcement, mainly driven by increased expectation for a bottoming out in the crude price. We reiterate our view that Anton is a poor proxy for the rebound in the crude price given its weak profitability and the weak order flow in China due to opex control at SOEs. Trading at 2.0x/ /16E P/B with expected losses in 2015/16, we still believe its valuation is unjustified. We maintain our target price of HK$0.81 (based on 0.8x 2015E P/B) and our Underperform rating, which we believe reflects the risk of an industry downturn as well as possible equity financing given its high net gearing. We suggest investors switch to Hilong (1623 HK; Accumulate) for short term trading. Upside risks 1) Strong rebound in the crude oil price; 2) recovery in Anton s major servicing regions in China, e.g. Ordos; 3) strong growth in revenue from Iraq and other overseas markets. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) ChinaSoft Intl (354 HK, Buy): Comments on CEO s stake sale and noteholder conversion What s new? Chen Yuhong, ChinaSoft s CEO and major shareholder sold 1.59% of his stake in the market on Apr 13. In addition, EJF Sidecar converted its entire holding of the company s convertible notes (Rmb100m) into 58m ordinary shares at HK$2.16/share on Apr 16, giving it a stake of around 2.7%. Takeaways from management conference call Management indicated that the CEO reduced his stake as a way of alleviating his own personal debt, which arose from his acquisition of a ~6% stake in the company in 2014 at HK$2.27/share. After the sale, Mr Chen still holds a 14.07% stake in the company. Separately, following the conversion of the notes held by EJF Sidecar, there remains around Rmb94m in convertibles notes held by other holders, with an interest rate of 4.25%. Outlook remains intact We expect the stock to come under selling pressure in the short term on the back of the stake sale and conversion. However, we believe the outlook for the company remains intact given its strong momentum in emerging businesses such as cloud computing and internet financing, its strategic cooperation with IT giants, and the potential for re-rating on the JointForce platform. Meanwhile, the convertible note conversion should help to improve profitability thanks to lower financial costs. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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. 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