Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Mar 5, 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 CHINA MOBILE ICBC CCB BANK OF CHINA HSBC TENCENT CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons Trade Balance 8-Mar FEB Export Trade YoY 8-Mar FEB Import Trade YoY 8-Mar FEB CPI 9-Mar FEB PPI 9-Mar FEB Ind Prod Growth YoY 11-Mar FEB FAI Growth 11-Mar FEB Retail Sales YTD 11-Mar FEB US Data Date Period Prior Cons Initial Jobless Claims 5-Mar 28-Feb Cont Jobless Claims 5-Mar 21-Feb Trade Balance 6-Mar JAN Unemployment Rate 6-Mar FEB Source: Bloomberg A-Share Market Banking: Annual results close; reform set to continue We expect reforms for the financial sector to be announced at the NPC and CPPPC meetings in order to encourage new development. There is little chance that 2014 earnings will beat expectations. The rate cut in 1Q15 will mean the declining net interest spread will slow sector performance. Company results will not have a significant impact on stock prices in the sector, which we expect to continue to fluctuate. Higher valuations will depend on further economic growth. Technology: Medical informatization via mobile medical and health management China is now seeing a high number of chronic disease cases, meaning high medical costs, long periods of illness for patients and a high level of demand for related products and services. The focus on these diseases creates opportunities for companies that specialize in this area. The condition is highly suitable for treatment via mobile medical devices. According to HIMSS research, mobile medical apps can play a significant role in diabetes monitoring, and can reduce medical expenses significantly. IPP: Electricity companies with high dividend payouts preferred The proportion of electricity companies with high dividends has remained high since However, dividend distribution has fluctuated due to earnings. In recent years, hydroelectricity companies and industry leaders have provided the highest dividend payouts. High distribution is driven by high share prices, high retained earnings and equity refinancing. There are also high absolute and relative return rates in the two weeks after ex-dividend date. We prefer companies with high distributions and high payout ratios. Hong Kong Market Vanke (2202 HK, Buy): Key takeaways from conference call GFA sold in Feb declined 24% YoY and contract sales declined 31% YoY; GFA sold in Jan-Feb declined 8% YoY and contract sales declined 21% YoY. The company expects its residential ASP in China to rise in 1H15, and sees low single-digit growth over the long term. Management is bullish on contract sales growth in 2015, but remain cautious on land acquisitions. It also expects 2015 gross margin to decline slightly YoY. We believe contract sales may decline YoY in March, something which could be an overhang for its share price. We suggest remaining on the sidelines before this data is available. Dairy: Latest Fonterra auction price hike softening We believe the Fonterra price could go up further in coming auctions. We prefer raw milk producers, YST and CMD, which will benefit from increasing prices for imported substitutes. They are also trading at valuation lows given investor concerns about the ASP decline despite both companies being likely to report strong earnings. We believe the worst is over and suggest investors closely monitor for when raw milk prices will start to rebound. Meanwhile, we maintain our target prices for YST of HK$1.03 and CMD of HK$2.75. GF events Date Event Location 3-5 Mar GF 2015 Industrial Internet Forum BJ, SH, SZ Source: GF Securities (HK) 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 Banking: Annual results close; reform set to continue Policy fundamentals expected to be stable during NPC/CPPPC We expect reforms for the financial sector to be announced at the NPC and CPPPC meetings in order to encourage new development. The banking sector benefits from flexible management of monitoring indicators such as the supervision of loan-to-deposit ratios, the promotion of the bad loan write-offs through securitization, and the growth of multiple business models in the sector. Annual result not likely to beat expectation; slowdown expected in 1Q15 There is little chance that 2014 earnings will beat expectations. The rate cut in 1Q15 will mean the declining net interest spread will slow sector performance. Stock price to continue to fluctuate Company results will not have a significant impact on stock prices in the sector, which we expect to continue to fluctuate. Higher valuations will depend on further economic growth. Technology: Medical informatization via mobile medical and health management Hospital information systems a key area Syncing mobile medical devices with hospital information systems (HIS) is necessary for proper diagnosis, accuracy and reliability of data, and the risk avoidance. However, offline hospital systems are still valuable sources of information for mobile medical devices and need to be linked to the HIS. Chronic disease management the main concern China is now seeing a high number of chronic disease cases, meaning high medical costs, long periods of illness for patients and a high level of demand for related products and services. The focus on these diseases creates opportunities for companies that specialize in this area. There is often similarity in the treatment of different types of chronic disease, while the low level of reliance on hospital environments and professional equipment for daily monitoring means it is feasible for a patient to manage their illness at home. The condition is therefore highly suitable for treatment via mobile medical devices. According to HIMSS research, mobile medical apps can play a significant role in diabetes monitoring, and can reduce medical expenses by US$3,300 per year for each patient. Insurance companies are the main source of funding for these apps, particularly in countries that use a commercial insurance system. Funding from insurance and pharmaceutical companies Sales channel costs take up a high proportion of revenue for drug companies as hospitals have firm control over prescription drug sales channels. Drug, medical device and equipment suppliers are therefore incentivized to fund mobile medical companies. Mobile treatment could reduce the frequency that patients visit hospitals, so insurance companies are also strongly incentivized to fund this area in order to save costs. IPP: Electricity companies with high dividend payouts preferred Strong dividend payout history for industry leaders and hydroelectricity companies The proportion of electricity companies with high dividends has remained high since However, dividend distribution has fluctuated due to earnings. The ratio of companies that distributed dividends in cash reached 96% in 2012 and 92% in 2013, while the ratio of companies that distributed stocks converted from capital reserves (not from undistributed profits) reached 8% in 2012 and 15% in Most distributions were from hydroelectricity companies and industry leaders. In the past three years, companies with a good distribution record included Inner Mongolia Mengdian Huanneng Thermal Power ( CH), SDIC Power ( CH), Beijing Jingneng Power ( CH) and Sichuan Chuantou Energy ( CH). In the past three years, companies with the highest dividend yield, more than 4%, were GD Power Development ( CH), Inner Mongolia Mengdian Huanneng Thermal Power ( CH) and China Yangtze Power ( CH). In 2014, the dividend yield of Beijing Jingneng Power ( CH), Inner Mongolia Mengdian Huanneng Thermal Power ( CH), Huadian Power International ( CH) and Huaneng Power International ( CH) reached more than 6%. High distribution driven by high share prices, high retained earnings and equity refinancing Companies with high distributions have some things in common: 1) During the first year after IPO, the probability of high distribution in cash is higher. In the next year, companies are more likely to distribute bonus stocks. 2) Companies preferred high bonus stocks when the lock-up period for Page 2

3 equity refinancing for specific targets becomes due. 3) Dividends in cash are greatly impacted by undistributed profits and cash on hand. 4) Companies with high distributions generally have strong retained earnings (capital reserves and undistributed profits) and high share prices. High absolute and relative return rates during the two weeks after ex-dividend date 1)The return rate of companies with stock distributions is usually high, while the performance of companies with dividend in cash is modest. 2) The share prices of companies with high distributions in cash and stocks increase most during the two weeks after the ex-dividend date, with a rise of more than 5% in absolute and relative returns. 3) Companies with high distributions are also favored by the market from the date of dividend announcement released to the ex-dividend date. The absolute and relative return rates both exceed 2.5%. Companies with high distributions preferred We prefer companies with high distributions in stocks, including Guangxi Guidong Electric ( CH) and Hunan Chengdian Inernational ( CH). Their share prices are relatively high for the sector. Companies with high dividends are also good targets. Guizhou Qianyuan Power ( CH), Guangzhou Development Group ( CH) and Hunan Chendian International ( CH) have Rmb1.5 per share on hand and a lower debt to asset ratio. The probability of them distributing high dividends is higher due to lower financing pressure. In addition, companies with more than Rmb 1 per share on hand are more likely to distribute high dividend; these include Shenzhen Energy ( CH), Guangdong Electric Power ( CH), Guangdong Baolihua New Energy ( CH), Shanghai Electric Power ( CH), Shenergy ( CH) and SDIC Power ( CH). Vanke (2202 HK, Buy): Key takeaways from conference call What's new? GFA sold in Feb declined 24% YoY to 0.76m sqm, and contract sales declined 31% YoY to Rmb8.39bn. GFA sold in Jan-Feb declined 8% YoY to 2.7m sqm, and contract sales declined 21% YoY to Rmb31.6bn. Key takeaways from yesterday s conference call with management ASP for residential property in China is expected to rise in 1H15 given the current high level of inventory. Over the long term, the company expects low single-digit growth in ASP. Management is bullish on contract sales growth in 2015, but remain cautious on land acquisitions. It also expects 2015 gross margin to come in down slightly YoY. In March the company plans to launch projects for sale with a market value of Rmb10-15bn. Management believes the disappointing YoY contract sales in Jan-Feb was a result of the high base in the same months last year. Land prices in first-tier cities rose 40% YoY in 2014, boosting ASP. Awaiting March data We believe contract sales may see a YoY decline in March, something which could be an overhang for its share price. We suggest remaining on the sidelines before this data is available. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Dairy: Latest Fonterra auction price hike softening Fonterra auction price rose 1.1% on Mar WMP dropped slightly by -1% to US$3,241/tonne, while SMP rose by 5.9% to US$2,935/tonne. The price increase of SMP was mainly driven by reduced supply volume, which was 19.05% less than that in the previous auction. For WMP, trading volume decreased by just 1.64%. China raw milk price flat for two weeks The ASP drop also slowed down after a sharp decrease. We estimate that strong consumption demand during CNY was the main driving force. We need some time to see consolidation of a price bottom. The drought continues in NZ Due to the drought, low farm gate prices and declining supply in the off season, milk output in New Zealand has dropped sharply. John Wilson, Fonterra s chairman, said We would expect prices to continue to lift because NZ milk production is declining significantly (down 5-6% on a daily basis compared with last season). Decisions already made by many farmers to dry off cows and not to feed palm kernel meant autumn rains (from Mar to May) would not result in a meaningful milk production increase. According to a dairy report, during 2013, the biggest declines were seen in March, April and May, when milk production expressed in solids fell by 15.5%, 33% and 28%. Page 3

4 Our view We believe the Fonterra price could go up further in coming auctions. We prefer raw milk producers, YST (1431 HK, Hold) and CMD (1117 HK, Underperform), which will benefit from increasing prices for imported substitutes. They are also trading at valuation lows (CMD: 10.3x 14E P/E; YST: 7.3x 14E P/E) given investor concerns about the ASP decline despite both companies being likely to report strong earnings (CMD: up 94%, we estimate; YST: profit alert +90%). We believe the worst is over and suggest investors closely monitor for when raw milk prices will start to rebound. Meanwhile, we maintain our target prices for YST of HK$1.03 and CMD of HK$2.75. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, ) 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