Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Apr 22, 2015

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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 23-Apr APR P 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 Dur Goods New Ord 24-Apr MAR Markit US Serv PMI 27-Apr APR P SPCS Composite Apr FEB Source: Bloomberg GF events Date Event Location 22 Apr Jumei conf call - 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 Apr GF A-share strategist NDR Hong Kong Source: GF Securities (HK) A-Share Market OGSE: Rising oil prices to drive opportunities in equipment names We believe crude oil prices have bottomed and are likely to fluctuate upwards from now. Despite conservative market sentiment towards the sector, we highlight that oil prices are slowly picking up, and that OGSE listcos (esp. equipment names) typically have strong share price performance after oil prices rebound; offshore oil & gas mining typically recovers when oil prices rise above US$60/barrel. In addition, 2015 will be a key year for market-oriented reforms in the domestic oil and gas sector, which should also drive investment opportunities. Oil Shipping: China to strengthen VLCC fleet through SOE restructuring China is now the worlds biggest crude oil importer, but lacks a state-owned VLCC fleet of a comparable size. Now is an opportune time to consolidate the domestic VLCC industry as China s oil imports continue to increase with energy transportation and storage demand rising. In addition, the Chinese government, ship owners and oil companies all wish for China to have a large VLCC fleet. We believe China Merchants Energy Shipping ( CH) will likely become a key platform for VLCC fleet consolidation. New Energy Vehicles: Sector to be driven by both policy support and strong earnings this year We expect further policy support to drive sector development and make the sector more attractive to investors. In addition to this, strong earnings will now be a second driver of sector performance. We expect 2015 to be a year of rapid growth in the new energy vehicle sector. The construction of an increasing number of charging poles and stations will resolve the biggest bottleneck for the promotion of new energy vehicles in urban areas. Furthermore, government support for the industry chain will also lead to an increase in companies input. Kweichow Moutai ( CH): 1Q15 earnings beat; fundamentals recovering The company has successfully rebalanced its sales structure to focus on business and personal customers. With a more stable customer base, Moutai is likely to maintain stable sales growth on the back of domestic consumption upgrade and economic recovery. Moutai has continued to maintain its product prices by controlling supply so far this year. The fact that it has not increased its distributor numbers or lowered its ex-factory prices should help stabilize overall baijiu prices. In addition, SOE reform at the company is worth also watching. Hong Kong Market Daphne (210 HK, Underperform): Poor 1Q SSS; downgrade from Hold to Underperform 1Q15 SSS unexpectedly slumped to -15.9%, likely due to uncompetitive retail discounts. Although GM improved YoY in 1Q15 on a better sales mix, this was not enough to offset the impact of deleveraging. We cut our core profit forecasts for FY15/16 by 82%/86% on lower SSS and OP margin assumptions. We expect core profit to fall by 71% in FY15. We lower our TP from HK$2.48 to HK$2.00. We believe the 24% rise in share price since its FY14 results announcement is unjustified. We downgrade the stock from Hold to Underperform. 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 OGSE: Rising oil prices to drive opportunities in equipment names Oil prices bottoming out We believe crude oil prices have bottomed and are likely to fluctuate upwards from now given that: 1) the IEA has raised its forecast of 2015 global oil demand, while reductions in the US s drilling platforms have led to a decline in supply; 2) oil supply will be affected by wars in oil producing regions; 3) the development of unconventional energy, offshore energy and new energy all requires an environment of stable crude oil prices. We still see opportunities from sector in 2015 The market is fully aware that sector conditions have deteriorated and now has conservative expectations for OGSE companies capex and earnings in However, we highlight that oil prices are slowly picking up, and that OGSE listcos (esp. equipment names) typically have strong share price performance after oil prices rebound; offshore oil & gas mining typically recovers when oil prices rise above US$60/barrel. In addition, based on the recent moves by the two largest oil companies in China, we believe 2015 will be a key year for reforms aimed at strengthening the role of market forces in the domestic oil and gas sector, which should also drive investment opportunities. Sector top picks and investment highlights Ticker Company Highlights CH Kingdream Public Profitability enhanced by restructuring CH CIMC Land parcels in Qianhai zone potentially to be re-rated; company actively expanding into e-commerce space CH Offshore Oil Engineering Company actively participating in Silk Road development strategy CH Jereh Oilfield Services Company seeking higher market share as an industry leader CH Haimo Technologies Directly benefiting from rising oil prices by owning oil fields overseas Source: GF Securities (HK) Oil Shipping: China to strengthen VLCC fleet through SOE restructuring Government initiative on shipping sector reform Last year the State Council issued some statelevel guidelines on the health development of the shipping industry, and it was proposed at the fourth plenum of the 18th CPC central committee that China should strengthen its shipping industry through SOE reform and M&A so that its shipping industry can have a global market position that is comparable to that of its cargo owners. Development of large state-owned VLCC fleet now necessary A round of VLCC sector M&A and fleet expansion has started led by the national oil shipping companies of Iran and Saudi Arabia. It is worth noting that China is now the worlds biggest crude oil importer, with Sinopec ( CH) and PetroChina ( CH) combined responsible for nearly 40% of the global VLCC spot market, but lacks a state-owned VLCC fleet of a comparable size. Amid ongoing SOE reform, central SOEs in the oil shipping space are likely to consolidate the industry by restructuring their businesses. Now an opportune time for VLCC industry consolidation Now is an opportune time to consolidate the domestic VLCC industry as China s oil imports continue to increase with energy transportation and storage demand rising. In addition, the Chinese government (for national energy safety considerations), ship owners (aiming to enhance risk resistance, efficiency and profitability) and oil companies (seeking supply chain stability) all wish for China to have a large VLCC fleet. China Merchants Energy Shipping a potential platform for fleet consolidation We believe China Merchants Energy Shipping ( CH) will likely become a key platform for VLCC fleet consolidation given the size of its VLCC fleet (which is currently the largest in China), strong management capabilities in the oil shipping business and its close ties with Sinopec ( CH). New Energy Vehicles: Sector to be driven by both policy support and strong earnings this year A policy-driven sector Sector development has typically been subject to the government s policy stance with increasing policy support having resulted in sector share price strength. Going forward, Page 2

3 we expect further policy support to drive sector development and make the sector more attractive to investors. Earnings strength an additional driver of sector performance 1Q15 sector earnings significantly exceeded market expectations. In addition to policy support, strong earnings will now be a second driver of sector performance. We expect 2015 to be a year of rapid growth in the new energy vehicle sector. Charging facility construction to solve biggest bottleneck Going forward, charging station/pole development will be the key to sector development. The construction of an increasing number of charging poles and stations will resolve the biggest bottleneck for the promotion of new energy vehicles in urban areas. Furthermore, government support for the industry chain will also lead to an increase in companies input. Sector top picks The traditional auto industry chain consists of product development, auto part procurement, manufacturing and sales & services. In addition to these, the new energy vehicle industry chain also include key components (e.g. batteries, electric motors, electric control systems) and charging facilities. Our top picks are Kstar Science and Technology ( CH), Do-Fluoride Chemicals ( CH), Tinci Materials Technology ( CH), Cangzhou Mingzhu Plastic ( CH), Tianqi Lithium Industries ( CH), Luxiang ( CH), Ganfeng Lithium ( CH), Ningbo Yunsheng ( CH) and Jianghuai Automobile ( CH). Kweichow Moutai ( CH): 1Q15 earnings beat; fundamentals recovering 2014/1Q15 earnings review 2014 net profit rose 1.41% YoY to Rmb15.35bn, with EPS of Rmb13.44, on revenue of Rmb31.57bn (+2.11% YoY). GPM slid to 92.74%, while the expense ratio picked up 1.51pp YoY to 15.30%. 1Q15 revenue grew 15.55% YoY to Rmb8.76bn, while net profit rose 17.09% YoY to Rmb4.63bn with EPS of Rmb3.82, beating expectations. GPM was broadly flat YoY at 93.21%, while the expense ratio edged down 0.38pp YoY to 13.53%. Sales successfully restructured The company has successfully rebalanced its sales structure to focus on business and personal customers. With a more stable customer base, Moutai is likely to maintain stable sales growth on the back of domestic consumption upgrade and economic recovery. Supply controls to help stabilize overall baijiu prices Moutai has continued to maintain its product prices by controlling supply so far this year. In fact, the three main high-end baijiu makers have all adopted this same strategy. The fact that Moutai has not increased its distributor numbers or lowered its ex-factory prices should help stabilize overall baijiu prices. SOE reform worth watching The company put forward a preliminary SOE reform plan in Mar 2014 which included the issuance of an incentive stock option scheme, the spin-off of certain products and the introduction of strategic investors. Later in Jul, the company announced that it will formulate rules concerning incentive stock options for its management and core technological teams by the end of We remain positive on the company and forecast 2015/16/17 EPS of Rmb15.12/16.89/ Daphne (210 HK, Underperform): Poor 1Q SSS; downgrade from Hold to Underperform Downgrade from Hold to Underperform 1Q15 SSS unexpectedly slumped to -15.9% (vs a high single-digit decline in 2M15 and -8% in 4Q14). We believe the ~30% fall in Mar SSS could be a result of uncompetitive retail discounts following the launch of its 2015 spring products, and with continuing fierce competition from online channels and mass-market brands, we are concerned that the choice between big or small discounts will simply mean a trade-off between GM or SSS. Although GM improved YoY in 1Q15 on a better sales mix, we do not believe this was enough to offset the impact of de-leveraging. We cut our core profit forecasts for FY15/16 by 82%/86% on lower SSS and OP margin assumptions. Given de-leveraging and continued staff cost pressure, we expect core profit to fall by 71% in FY15. We lower our target price from HK$2.48 to HK$2.00, based on 0.63x FY15E P/B (previously 0.75x), which factors in a lower FY15E ROE (from 5.1% to 1%). We believe the 24% rise in share price since the company s FY14 results announcement is unjustified given disappointing 1Q15 operating data. Page 3

4 1Q15 SSS fell 15.9% Management attributed the poor 1Q15 SSS to continued fierce competition in the mass-market segment and erratic weather patterns. The SSS decline was mainly driven by volume as the company decided to uphold its discounting policy. We believe the moderate drop in ASP was a result of the company lowering its tag prices to compete with other mass-market brands, reflecting its lack of pricing power despite its leading market share. 1Q15 GM improved YoY, as expected by management, driven by an improved sales mix. We estimate a GM increment of 1-2pp, in line with management s GM guidance for FY15; however, this has not been enough to offset the impact of de-leveraging. Store number trend The number of stores for its core brands dropped by 14 to 6,388 in 1Q15 (still up 5% YoY) led by a net reduction of 38 franchised stores, but partly offset by a net increase of 24 directly-managed stores. Earnings cut We slash our FY15/16 core profit forecasts by 82%/86% on lower SSS (from 2%/3% to -5%/2%) and OP margin (from 3.5%/3.8% to 0.6%/0.6%) assumptions. The company will launch a new marketing campaign for the spring/summer season around mid-april. If SSS does not improve significantly in 2Q15, we expect the company to issue a profit warning for 1H15. Upside risks 1) Consolidation of the Taobao market as sellers on the platform may be taxed; 2) ASP increase led by improving brand equity. Downside risks 1) weaker-than-expected SSS. (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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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