Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Mar 12, 2014

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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 CHINA MOBILE ICBC CCB BANK OF CHINA HSBC TENCENT CHINA LIFE SINOPEC PING AN Econ data release US Data Date Period Prior Cons Initial Jobless Claims 12-Mar 7-Mar Cont Jobless Claims 12-Mar 28-Feb Source: Bloomberg GF events Date Event Location 12 Mar IGG post-result NDR Hong Kong 13 Mar Boyaa post-result NDR Hong Kong Mar GF A-Share Joint Marketing Hong Kong 24 Mar CMD post-result call - Source: GF Securities A-Share Market Information Technology: 2014 sector earnings preview Companies revenue growth accelerated and varied more significantly in 2014 compared with 2013, and we expect this trend to continue going forward. Net profit growth strengthened with sector NPM boosted by restructuring at a few companies while most of the other companies did not see any substantial profitability improvement. We believe sector M&A and consolidation will become more common going forward with external expansion to drive continued company growth. The average value of last year s M&A transactions was higher than 2013 due to an increase in sector valuations. Hong Kong Market Sunny Optical (2382 HK, Buy): Upbeat guidance for 2015 Sunny Optical s management has given upbeat guidance for growth in 2015, reinforcing market expectation of over 30% YoY earnings growth during the year. It also expects 20-30% YoY volume growth for its handset camera modules. We have raised our 2015 earnings forecast by 3% after revising up our sales estimates. Overall, we expect Sunny Optical to deliver 29% top-line growth and 33% YoY earnings growth during the year. We raise our target price from HK$15.05 to HK$15.69 (17% upside) and reiterate our Buy rating. Peak (1968 HK, Accumulate): FY14 results beat; strengthening running footwear segment a positive Peak reported 31% YoY net profit growth, 11% above consensus mainly due to a lower-thanexpected SG&A expenses ratio and effective tax rate. Overall revenue rose 9% YoY whereas revenue from overseas markets was up 23% YoY, driven by 133% sales growth in Europe. Management is aiming for 20% revenue growth from overseas market in FY15 by increasing the number of its distributors. In China, more emphasis will be placed on running footwear. We raise our FY15/16 net profit estimates by 10%/11% and lift our TP to HK$2.47. Country Garden (2007 HK, Hold): 2014 net profit in line with consensus 2014 revenue rose 35% YoY, and net profit was up 20% YoY, in line with consensus. GFA booked rose 32% YoY; gross margin declined 400bps YoY on a higher land cost. The company s focus on third and fourth-tier cities will be an overhang in 2015 given the oversupply of properties in those cities. Declining gross margin will be another concern. We see low earnings visibility for We believe the current valuation of 5.0x 2015 consensus earnings is fair, given the low visibility. We maintain our Hold rating and target price of HK$3.20. Xinyi Solar (968 HK): Lower net gearing following share placement; maintain Buy Xinyi Solar will raise HK$1.15bn via a top-up placement; net proceeds will be used to finance solar farm development in China and new solar glass production lines in Malaysia. The placement should mean lower long-term bank loans and net gearing. However, it is most likely priced in as the company s HK$4bn capex plan for 2015 was revealed back in Dec We raise our net profit forecasts, and raise our TP slightly to HK3.07. We see the rebound in solar glass ASP and the announcement of new solar farm investment as short-term catalysts, and suggest buying on dips. Boyaa (434 HK, Buy): 2014 results in line; takeaways from results teleconference Net profit surged 40% YoY in FY14, in line with consensus; revenue rose 39% YoY. 4Q14 revenue from overseas markets declined 18% YoY and 10% QoQ; revenue from the domestic market was the major growth driver, up 11% QoQ. Revenue from mobile games sustained strong growth of 56% YoY and 6% QoQ while web game revenue dropped 10% YoY and 8% QoQ in 4Q14. Management has not given any guidance for earnings growth in FY15. We believe growth in the domestic market will be partly offset by weakening performance in overseas markets. 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 Information Technology: 2014 sector earnings preview Growth momentum varying further among companies 95 A-share listed IT companies had announced their 2014 earnings preview as of Mar 9. Based on these figures, the overall industry continued to grow last year as the revenue growth median of 24% YoY was 5pp higher than That said, 13 of the 95 companies posted a revenue decline, compared with just nine in the previous year. The average revenue growth range widened from 10-32% in 2013 to 10-36%, indicating greater differences in individual companies growth momentum. We expect sector revenue to continue to grow given the increasing adoption of information and internet technology; however the performance of individual companies will vary more significantly with weaker players eventually to be pushed out of the market. NPM improvement driven by restructuring at a few companies Sector net profit growth accelerated 14pp from 2013 to 32% YoY in The number of companies seeing negative net profit growth dropped from 29 to 17, while 13 companies achieved growth above 100%, compared with just nine in Companies average net profit growth falls in the range of 6-51%, compared with -10% to 34% in In addition, sector net profit margin rose 1.22pp YoY to 14%. It is worth noting that most companies did not see any substantial improvement in profitability, but a few companies such as New Century Information Technology ( CH) and TransInfo Technology ( CH) saw net profit margin pick up by more than 50% on the back of restructuring, and they were responsible for a 1.19pp increase in sector net profit margin. M&A value at new high on increased sector valuations At least 51 M&A were carried out in the sector during 2014 with a total value of Rmb16.1bn. The majority of these transactions were horizontal M&A through which companies expanded their existing business (e.g. Kingstar Winning Software ( CH)). A small number of companies sought to shift to other business fields through M&A (e.g. Hyron Software ( CH)). We believe sector M&A and consolidation will become more common going forward with external expansion to drive continued company growth. The average value of last year s M&A transactions of Rmb310m was higher than 2013 (62 transactions with total value of Rmb11bn) due to an increase in sector valuations. Sunny Optical (2382 HK, Buy): Upbeat guidance for 2015 What s new? Sunny Optical s management has given upbeat guidance for growth in 2015, reinforcing market expectation of over 30% YoY earnings growth during the year. Strong volume growth for core handset camera modules to continue in 2015 Sales in the company s core optoelectronic division, which accounted for 81% of sales, mainly of handset camera modules (HCM), grew 53% YoY in 2014, driven by robust volume growth of 42% YoY during the year. Management is upbeat on the outlook for 2015 and has given guidance for 20-30% YoY volume growth for HCMs this year, underpinned by demand from China s smartphone market. The company s top five customers are Huawei, Xiaomi, Lenovo, Oppo and Coolpad (2369 HK, Underperform). Huawei is its single largest customer, accounting for about 16% of group sales. We believe this target is achievable given the robust shipment growth targets at its key smartphone customers. Sunny s HCM shipments in Jan-Feb 2015 was strong (+68% YoY). We expect a moderate expansion of blended gross profit margin in 2015 The company s blended gross profit margin has been on a downtrend due to rapid change in sales mix since Sales of optoelectronic products accounted 81% of sales in 2014, up from 45% in Blended gross profit margin was on a downtrend as HCM products have a low-teen gross profit margin (11.5% in 2014), compared to 26.7% for optical components and 36.8% for optical instruments divisions. Nonetheless, we expect the downtrend to cease in 2014 as management has given guidance that 1) GPM for HCMs bottomed out in 2014, and; 2) GPM for optical components will continue to improve by over two percentage points in We expect a moderate increase in blended gross profit margin to 15.6% in 2015, up from 15.3% in We expect over 30% YoY earnings growth in 2015 We have raised our 2015 earnings forecast by 3% after revising up our sales estimates. Overall, we expect Sunny Optical to deliver 29% topline growth to Rmb10.9bn and 33% YoY earnings growth to Rmb753m in 2015 The stock is trading at 15.4x 2015E P/E. We raise our target price from HK$15.05 to HK$15.69 (17% upside), based on an unchanged 18x 2015 target P/E and our revised 2015 EPS estimates. We reiterate our Buy rating. Page 2

3 Key risks Slowdown in China s smartphone market; poor production yields for its in-house lens sets. (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) Peak (1968 HK, Accumulate): FY14 results beat; strengthening running footwear segment a positive Results beat expectation Peak reported 31% YoY growth in net profit to Rmb321m, 11% above consensus of Rmb289m and 15% above our estimate of Rmb280m, mainly due to a lower-thanexpected SG&A expenses ratio (+0.5 ppt YoY to 22.9%) and effective tax rate (-3.0 ppt YoY to 34.4%). Overseas market led the growth Revenue rose 9% YoY, in line with our estimate. Overseas market revenue rose 23% YoY, driven by 133% sales growth in Europe, notably in the Netherlands, France, Germany and Slovakia. Overseas markets contributed 23% of total revenue (+2.6 ppt YoY). China revenue climbed 5% YoY (vs +10% YoY in 2H14). By product, footwear sales rose 10% YoY led by better growth of basketball and running footwear (these categories contributed ~54% of footwear sales in FY14). Cash conversion cycle further improved in 2H14 Inventory turnover days were reduced by 7 days YoY to 74 days (vs 87 days in 1H14), and A/R turnover days decreased by 21 days to 114 days (vs 123 days in 1H14). The proportion of overdue A/R balance decreased YoY from 21% to 14%. Higher dividend payout Operating cash inflow came in at Rmb384m, representing 1.2x net profit. Net cash balance rose 7% YoY to Rmb2.7bn, supporting a higher payout ratio of 62.8% (vs 54.4% in FY13 on excluding special dividend basis). FY15 guidance 1) Revenue: Management is aiming for 20% revenue growth from overseas market by increasing its number of distributors from 60 to 80. In China, the company targets high singledigit revenue growth by enhancing store efficiency driven by encouraging distributors to have more self-operated stores and increasing the proportion of ERP system connected stores from 44% to 50%. 2) By product: More emphasis will be placed on running footwear, its largest product category in China in terms of market size. Peak plans to sponsor more domestic marathon competitions, will launch professional running footwear (including for marathons) and increase marketing campaigns from once to twice a year. 3) GM: Management targets a slight GM expansion by increasing its inhouse production ratio and reducing subsidies to distributors. 4) SG&A expenses: By assuming 10-15% revenue growth, management believes SG&A expenses ratio will be broadly stable compared to FY14. Maintain Accumulate; TP upped to HK$2.47 We raise our FY15/16 net profit estimates by 10%/11%, mainly to factor in lower assumptions for SG&A expenses ratio and effective tax rate. Our TP is lifted from HK$2.27 to HK$2.47, based on 11.2x FY15E P/E, still at its historical average. We believe the market should positively react to Peak s increasing focus on running footwear, which could better capture growth in China s performance sportswear segment. We expect the company to post above-peer EPS growth in FY15 (15% vs peer average of 9%) driven by growth in overseas and domestic markets. Its current valuation is undemanding at 0.8x FY15E P/B and 2.7x ex-net cash FY15E P/E. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Country Garden (2007 HK, Hold): 2014 net profit in line with consensus 2014 net profit up 20% YoY to Rmb10.2bn, in line with consensus 2014 revenue rose 35% YoY to Rmb84.55bn; GFA booked rose 32% YoY to 12m sqm; gross margin declined by 400bps YoY to 26% on a higher land cost; the company posted investment property revaluation gains of Rmb1.9bn; net profit rose 20% YoY to Rmb10.2bn; EPS rose 16% YoY to Rmb0.53, in line with consensus. Low earnings visibility The company s focus on third and fourth-tier cities will be an overhang in 2015 given the oversupply of properties in those cities. Declining gross margin will be another concern. We see low earnings visibility for Page 3

4 Maintain Hold The stock is trading 5.0x 2015E P/E, based on Bloomberg consensus. We believe this valuation is fair, given low earnings visibility. We maintain our Hold rating and target price of HK$3.20. (Dennis Yao, Research Analyst, SFC CE No. ALK994, ) Xinyi Solar (968 HK): Lower net gearing following share placement; maintain Buy Top-up placement to raise HK$1.15bn Xinyi Solar (XYS) announced that it will raise HK$1.15bn via a top-up placement. Major shareholder Xinyi Glass (XYG, 868 HK, NR) has sold 500m existing XYS shares (7.6% of enlarged capital) to no less than six investors at HK$2.30/share, representing an 8% discount to yesterday s closing price of HK$2.50/share. There is a 90-day lock-up period for XYG. Net proceeds from the placement will be used to finance solar farm development in China and new production lines for solar glass in Malaysia. Lower gearing and financial expenses We see the placement as positive for XYS. We have lowered our estimate for long-term bank loans by HK$1bn in 2015/16/17 following the placement, and now expect net gearing to drop from 106% to 59% this year. As a result, financial expenses will drop by 24%/19%/17% in 2015/16/17. Meanwhile, the 7.6% EPS dilution should have a limited impact given our expectation for 115% YoY net profit growth in In addition, investors have most likely already priced in this round of equity financing as its HK$4bn capex plan for 2015 was revealed back in Dec EPS CAGR of 44% in We raise our net profit forecasts by 4.2%/3.3%/2.7% for 2015/16/17 to factor in lower long-term loan and financial expenses. We expect continued EPS growth, forecasting a 44% CAGR in on an expansion in solar glass production and rapid growth in the contribution from its solar farm segment. Buy on dips After fine-tuning our DCF model, we raise our target price slightly from HK$3.05 to HK3.07, and maintain our Buy rating. XYS has had a good start to the year with share performance +17% YTD. We see the rebound in solar glass ASP and the announcement of new solar farm investment as short-term catalysts; however, share price performance could be hampered by the recent correction in the HK market. We suggest buying on dips. It is also worth noting that XYS s management increased their stake by ~50m shares last year at prices between HK$2.10 and HK$2.70 following the share placement in July After setting an upbeat tone for 2015, we do not rule out the possibility that management will again increase their stake at reasonable prices. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) Boyaa (434 HK, Buy): 2014 results in line; takeaways from results teleconference What s new? Boyaa reported its 2014 results and held a teleconference after market close yesterday. Adjusted net profit surged 40% YoY to Rmb306m in FY14, in line with consensus. Revenue came in at Rmb945m, up 39% YoY. Quarterly revenue growth slowdown 4Q14 revenue was flat QoQ at Rmb244m. QoQ revenue growth continued to slow compared to 15% in 4Q13 and 3% in 3Q14, mainly due to weakening performance in overseas markets. Revenue from overseas markets declined 18% YoY and 10% QoQ to Rmb113m in 4Q14 (46% of revenue). The domestic market was the major growth driver with revenue up 11% QoQ to Rmb131m (54% of revenue) in 4Q14. Revenue from mobile games sustained strong growth of 56% YoY and 6% QoQ while web game revenue dropped 10% YoY and 8% QoQ in 4Q14. Mobile games and web games accounted for 62% and 38% in 4Q14. Single game concentration remains high The company s Texas Hold em Series remains the major revenue contributor, accounting for 73% of 4Q14 revenue (86% in 4Q13). Revenue growth for Texas Hold em Series came in at just 3.4% YoY in 4Q14. Gross margin contraction 4Q14 gross margin continued to decline by 3pp QoQ to 56.7%. Full year gross margin declined 1pp to 60% in FY14. The margin contraction was mainly due to channel reconstruction and higher channel costs for mobile games. Management guided for stable gross margin of around 60% in FY15. Page 4

5 Starting to promote offline events The company is becoming increasingly aware of the importance of offline events. It plans to hold two WCP competitions in FY15. We believe offline events should be an efficient way of promoting online games and improving brand awareness. However, compared to Ourgame, the leader in this area, Boyaa remains at an early stage of building an influential brand in offline events organization. Ourgame s share price has seen a 36% rebound YTD (versus 7% YTD for Boyaa). Rating under review Management has not given any guidance for earnings growth in FY15. We believe growth in the domestic market will be partly offset by weakening performance in overseas markets. The popularity of its offline events is still unclear given its lack of experience, platform resources and support from world-class poker organizations. The stock is currently trading at 11x FY15 P/E. Our rating is under review. (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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