Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Feb 23, 2017

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 16E 17E 16E 17E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT ICBC CHINA MOBILE PETROCHINA CCB HSBC BANK OF CHINA CHINA LIFE SINOPEC PING AN Source: Bloomberg GF events Date Event Location 28 Feb 2017 China healthcare sector outlook with industry expert Shenzhen 1 Mar Dah Chong Hong post-result Hong Kong NDR 23 Mar Q Tech post-result NDR Hong Kong Source: GF Securities (Hong Kong) A-Share Market Property: Developers financing channels significantly restricted following recent policy adjustments Sector financing policies have tightened since home purchase and mortgage lending restrictions were brought back in 4Q16, which we think will undoubtedly dim developers investment sentiment. The context for the issuance of these measures is that, since early 2016, large amounts of funds have come to developers hands and entered the land market through OBS channels, pushing land prices higher and increasing risks in the financial markets. We think that it will be difficult for developers to obtain equity or debt financing through CSRC-administered channels in the foreseeable future. Furthermore, most of the OBS financing channels are now under restriction, except for trusts and certain ABS projects. Steel: Beijing-Tianjin-Hebei integration to boost steel demand; supply to decrease on capacity cuts and environmental protection measures Urban transit development plans for the BTH region indicates that further transportation integration should drive regional building materials demand and infrastructure development. In addition, industrial relocation between Beijing, Tianjin and Hebei will further boost property development across the region. On the supply side, the region will remain the key arena for steel capacity removal in 2017, while the decrease in steel supply and the rise in steel prices resulting from environmentally driven production stoppages might considerably exceed market expectations, with regional market leaders to benefit most. Electronics: Consumer electronics leaders to benefit from iphone shipments and strength of domestic smartphone brands; passive components driven by downstream innovation We see considerable investment opportunities for leading A-share consumer electronics names with solid fundamentals in 2017, given that this year will be the tenth anniversary of the launch of the iphone and that Chinese smartphone makers are rising strongly. Meanwhile, with 2017 being a key year for consumer electronics innovation, the penetration of fast charging and wireless charging technology will increase rapidly, driving substantial growth in the demand of passive components such as capacitors and inductors. In addition, the development of car electronics and 5G mobile networks will also provide new growth momentum for passive components. Hong Kong Market Anta (2020 HK, under review): FY16 earnings 3% below our estimate; new JV with Kolon Sport; valuation looks rich FY16 net profit rose 17%, in line with consensus, but 3% below our estimate as revenue and GPM came in slightly lower than our expectation. We lower our FY17/18 net profit by 4%/2% to factor in lower GPM and higher A&P expenses ratio assumptions. Looking into FY17, we forecast revenue will grow by 21%, driven by high single-digit growth of Anta-brand offline sales, and 40-50% growth in the Fila/Anta-brand e-commerce segments. We continue to like Anta s multi-brand, diversified growth drivers and strong execution, but we think its current valuation is rich. 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: Developers financing channels significantly restricted following recent policy adjustments A much tougher financing environment for developers Sector financing policies have tightened since home purchase and mortgage lending restrictions were brought back in 4Q16. In particular, measures introduced by the CSRC and Asset Management Association of China (AMAC) last week put restrictions on developers access to funds through equity refinancing and private placement asset management products respectively. The context for the issuance of these measures is that, since early 2016, large amounts of funds have come to developers hands and entered the land market through off-balance-sheet channels (e.g. asset management products, property investment funds), pushing land prices higher and increasing risks in the financial markets. Based on our calculation, A-share listed property companies raised a total of Rmb249.8bn (-35% YoY) through various kinds of financing in 4Q16, with the average cost of interest-bearing liabilities up 0.55pp from the start of 2016 to 6.1%. Industry leaders will demonstrate greater advantages in terms of financing for M&A as industry concentration is rising at a faster pace. Overall, developers investment sentiment will undoubtedly dim as financing restrictions increase. CSRC-administered financing channels less accessible At least 33 A-share property companies had submitted their private placement applications to the CSRC for review before the new refinancing rules were announced on Feb 17, and thus they should not be affected by the new rules. In fact, the impact of the new refinancing rules might be smaller than that of home purchase and mortgage lending policy tightening. We think that it will be difficult for developers to obtain equity or debt financing through CSRC-administered channels in the foreseeable future. Most OBS financing channels also restricted Private placement asset management products have been highly popular since 2015, as they allow developers to transfer certain liabilities off their balance sheets via various financial manoeuvers. However, the newly issued AMAC document has imposed restrictions on the approval of private placement asset management plans invested in residential properties in 16 key cities, while funds from this type of investment plans are also restricted from being spent on land purchases or used to replenish property companies working capital. Most of the off-balance-sheet financing channels are now under restriction, except for trusts and certain ABS projects. Steel: Beijing-Tianjin-Hebei integration to boost steel demand; supply to decrease on capacity cuts and environmental protection measures Transportation system yet to be better integrated While a transportation network that radiates from Beijing has been developed with high-speed rail and highways as the arteries, the transportation system in the Beijing-Tianjin-Hebei (BTH) region still faces a number of issues including the significant pressure on Beijing as the regional transportation hub and the lack of HSR and urban rail transits in Hebei province. According to the NDRC s urban transit development plan for the region, 1,104km of new urban transit lines are targeted to be completed through 2020 with estimated investment of Rmb247bn, which should drive regional building materials demand and infrastructure development. Industrial integration also to drive regional steel demand In addition, industrial relocation between Beijing, Tianjin and Hebei will further boost property development across the region: going forward, Beijing will mainly act as a technological innovation center in the region, Tianjin a high-end manufacturer, and Hebei a destination for industrial activities being transferred out of the capital and a place where technological advancements from Beijing and Tianjin are further commercialized. Region to remain key arena for capacity reduction The BTH region was responsible for 26.1% of China s total crude steel output in 2016, which means the impact of ongoing capacity reduction is significantly felt by the region. A total of 17.92m tonnes of steel production capacity in the region was phased out during 2016, accounting for 22%-28% of total capacity reduced across the country. The region will remain the key arena for steel capacity removal in Environmentally driven production stoppages to benefit regional market leaders Furthermore, the BTH region has suffered from severe pollution with Hebei s PM2.5 density the highest among all provinces. We believe that in the long run, the implementation of tougher environmental policies will speed up the removal of outdated production capacity. In the near term, environmentally driven production stoppages have effectively led to a contraction in steel supply and a rise in steel prices in the BTH region, while cities with above-limit pollution levels during 2016 are required by the government to keep production below 50% of their capacity in the winter heat supply peak season Page 2

3 this year. The decrease in steel supply and the rise in steel prices resulting from environmentally driven production stoppages might considerably exceed market expectations, with regional market leaders to benefit most. We particularly like Hesteel ( CH) and Shougang ( CH). Electronics: Consumer electronics leaders to benefit from iphone shipments and strength of domestic smartphone brands; passive components driven by downstream innovation 2017 a year of opportunities for consumer electronics leaders We see considerable investment opportunities for leading A-share consumer electronics names with solid fundamentals in 2017, given that this year will be the tenth anniversary of the launch of the iphone and that Chinese smartphone makers are rising strongly. Those with a high business exposure to the Apple (AAPL US) supply chain are set to benefit from Apple s rising shipment volume, while expanding their product offering. Companies that have a smaller proportion of business attributable to Apple will seek to obtain more orders from the latter, while also benefiting from the upgrades of components used by Chinese smartphone makers. Consumer electronics stock picks Non-China-listed consumer electronics leaders have posted strong share price performance since the start of this year. We are upbeat on the growth upside of leading consumer electronics names in the A-share market, and particularly like Sunway Communication ( CH) and Everwin Precision Technology ( CH). We also like companies with a high proportion of revenue from Apple, ongoing component upgrades and an expanding market share, such as Desay Battery Tech ( CH), Sunwoda Electronic ( CH), Lens Technology ( CH), GoerTek ( CH) and Luxshare Precision Industry ( CH). Given that widespread component upgrade will lead to a corresponding upgrade in the respective production equipment, which should kick start a new capex investment cycle, we favor Han's Laser Technology ( CH). Downstream developments driving passive component demand The passive component industry is located in the mid to upstream of the electronics supply chain, and its development therefore is highly susceptible to changes in the downstream. Almost every major change in the downstream market in the past has led to growth in the passive component industry, which is on track to see new growth opportunities at present. With 2017 being a key year for consumer electronics innovation, the penetration of fast charging and wireless charging technology will increase rapidly, driving substantial growth in the demand of passive components such as capacitors and inductors. In addition, the development of car electronics and 5G mobile networks will also provide new growth momentum for passive components. We suggest watching Fenghua Advanced Technology ( CH), Sunlord Electronics ( CH), Aihua Group ( CH), Faratronic ( CH) and Torch Electron Technology ( CH). Anta (2020 HK, under review): FY16 earnings 3% below our estimate; new JV with Kolon Sport; valuation looks rich Rich valuation FY16 net profit rose 17% to Rmb2,386m, in line with consensus, but 3% below our estimate as revenue and GPM came in slightly lower than our expectation. We lower our FY17/18 net profit by 4%/2% to factor in lower GPM and higher A&P expenses ratio assumptions. Looking into FY17, we forecast revenue will grow by 21%, driven by high single-digit growth of Anta-brand offline sales, and 40-50% growth in the Fila/Anta-brand e-commerce segments. OP margin is estimated to drop by 0.4ppt to 23.6% due to increasing losses at Descente (full-year operation) and an increase in A&P expenses ratio (improved Klay Thompson endorsement package and likely renewal of COC sponsorship in 2017). We continue to like Anta s multi-brand, diversified growth drivers and strong execution, but we think its current valuation is rich. The stock is trading at 19x FY17E P/E, above its +1sd valuation of 18x. Anta s current P/E valuation is also close to Nike s 22x for FY18 (Y/E May), which we believe could be a P/E cap for Anta (Nike s P/E premium over Anta is now at the low-end over the past five years). Further, we estimate the Kolon JV may not provide any immediate meaningful earnings to the company in FY17, which may disappoint the market. Our target price and rating are under review. 4Q16 retail sales accelerated Retail sales growth of Anta branded products accelerated from lowteen in 3Q16 to high-teen in 4Q17 on improved consumer sentiment and a low base. Anta core brand offline segment/anta kids offline segment/anta-branded product e-commerce segment grew by high single-digit/30%+/50%+, respectively, in 4Q16. The Anta brand retail discount was 28% in Page 3

4 4Q16, stable compared to 4Q15. Non Anta-branded product (mainly Fila) retail sales jumped 50-60% in 4Q16 (vs 60-70% in 3Q16). 3Q17 trade fair results 3Q17 order book increased by a low single-digit, a slowdown from the mid single-digit growth in 2Q17. However, because the company raised the proportion of planned replenishment orders to 10% from <5% in 3Q16, we estimate like-for-like basis order growth could be around 10% if order replenishment work flow is executed smoothly. Forming a 50/50 JV with Kolon Kolon Sport is a leading mid to high-end Korean outdoor brand. Kolon Corporation ( KS) and Kolon Industries ( KS) will each hold 25% of the JV and inject Kolon Sport IP into the JV and grant exclusive licensing rights to use the trademark in the Greater China region. According to the company, the investment cost, not announced yet, is less than 5% of the company s NAV (Rmb9.9bn). Kolon Sport currently has more than 200 stores in China. The deal is pending approval from antitrust authorities, which could last for around three months. Currently, outdoor products are a relatively small category for the Anta brand in terms of sales. We think the JV could help the company to accelerate growth in this area. Outlook 1) Store expansion: (a) The number of stores for Anta and Anta kids increased by 4% to 8,860 in FY16, beating guidance of 8,500-8,600. In FY17, the company plans to grow the number to 9,000-9,100, led by Anta kids openings; (b) Fila network expansion pace also beat guidance of in FY16, reaching 802 stores (including Fila and Fila kids). For FY17, the target is set at 950-1,000. 2) The company plans to increase its Descente store number from 6 in FY16 to 60 in FY17, and further to ~200 stores in three years. Management aims to achieve breakeven in FY18. 3) FY17 guidance: (a) Anta and Anta kids offline revenue: high single-digit growth; (b) Fila and Fila kids revenue: 40-50% growth; (c) A&P expenses ratio: 12-14%; (4) M&A: We believe the company is still looking for targets in high-end niche segments such as yoga and tennis to implement its multibrand strategy. Results highlights Revenue rose 20% to Rmb13,346m, in line with consensus, attributable to 50%+ revenue growth in its Fila and e-commerce segments, 30%+ growth for Anta kids offline segment and a mid single-digit growth for the Anta core brand offline segment. Revenue for the Anta core brand offline/anta kids offline/fila/anta-branded e-commerce segment came in at highfifties/low-teen/20%/low-teen, respectively. GPM increased by 1.8ppt to 48.4%, better than the street estimate of 47.8% but slightly below our estimate of 48.9%. OP rose 19% but OP margin decreased by 0.2ppt to 24.0%, mainly due to dilution in its Fila business (its OP margin was up 5ppt to 22%) and start-up losses at Descente. Dividend payout (including special dividend) was kept at 70%. Cash position Operating cash flow rose 30% to Rmb2.5bn. Net cash balance increased by 17% to Rmb6.6bn. A/R turnover days increased by 6 days to 39 days, mainly due to increased FILA retail sales and advanced ordering from distributors due to the early CNY holiday. Quality of A/R remained solid as percentage of receivables overdue dropped from 3% to 1%. Inventory turnover rose 3 days to 61 days due to Fila s retail operation expansion. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@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. 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