Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 5, 2014

Transcription

1 Equity Research Dim Sum Express Alex Fan, CFA Head of Research SFC CE No. ADJ Ryan Zhu Research Analyst SFC CE No. BDK Joseph Ho, CFA Research Analyst SFC CE No. AFP Gao Yedong Editor SFC CE No. BAI GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong A-Share Market Property: Developers with large land bank in Sichuan to see ST strength on subsidy The subsidy for banks issuing first-home mortgages in Sichuan is in line with our expectation, and should help lower mortgage rates. In addition, it might also trigger expectations for similar moves in other provinces. The property and land markets in Chengdu are weak as residential area sold in Jun dropped 65% MoM and 48% YoY while 7M14 residential land sales fell 16% YoY. We see short-term investment opportunities from property companies that have a large land bank in Sichuan, and expect the property sector to offer excess returns on MoM home price declines, policy fine-tuning and improving mortgage lending conditions. Rare Earths: Crackdowns on illegal mining key factor for market conditions Based on media reports of ongoing rare earth state reserve building, the premiums of the reserve purchase prices over the current market prices fell short of expectation. Furthermore, lawful rare earth companies will be hurt significantly if the government fails to rein in illegal mining activities and push through industry consolidation. Overall rare earth inventory will decline significantly and the per-tonne gross margin for medium & heavy rare earths will increase following reserve building. We expect the government to launch a new round of crackdowns on illegal mining in the near term, and we see the possibility of another state reserve building later this year. Marine Engineering: Multiple factors driving sector growth Despite volatility in global marine engineering equipment orders, domestic equipment manufacturers have seen growth strengthen with market shares rising. Master contractors such as CIMC Raffles are turning profitable, and financial institutions such as ICBC Financial Leasing have strengthened support for the sector through substantial investments. In addition, government-driven oil drilling activities remain strong, while domestic equipment manufacturers have gained increasing recognition from customers. We remain positive on the sector given government initiatives to strengthen offshore economic development and the fact that the focus of the global marine engineering industry is shifting towards China. Hong Kong Market Online Gaming: Sustainable high growth in mobile games Online gaming names have seen substantial share price corrections in recent months on concerns about poor 1H14 results, disappointing news on core games and corporate management concerns. However, we remain positive on the sector, seeing buying opportunities as the industry s long-term growth outlook remains intact, driven by overseas expansion and an increase in the number of online gamers with the shift from PC to mobile platforms. We see mobile games as the future growth driver given the boom in smartphones and 3G/4G penetration. We initiate our coverage of Boyaa (Buy, $11.20), IGG (Buy, $6.58), NetDragon (Hold, $15.00) and Forgame (Hold, $17.10).

2 Property: Developers with large land bank in Sichuan to see ST strength on subsidy Sichuan mortgage subsidy a positive signal The Sichuan government has announced that it will subsidize banks that issue mortgages to first-home buyers with interest rates not exceeding the benchmark rate during Jul-Dec 2014 at 3% of the loan amount. This policy is in line with our previous expectation. Our recent channel checks indicate that first-home mortgage rates in Chengdu mostly stand at 1.1x of the benchmark and we expect this subsidy to help lower mortgage rates. In addition, it might also trigger expectations for similar moves in other provinces. Property/land sales weak in Chengdu Residential area sold in Sichuan during 1H14 declined 1.75% YoY, slightly better than the national average figure. However, the property market in Chengdu appears pessimistic, as residential area sold in Jun represented drops of 65% MoM and 48% YoY with the months of inventory rising to ten months. The city s land market was also weak, with 7M14 residential land sales dropping 16% YoY. Positive on developers with large land reserves in Sichuan We see short-term investment opportunities from property companies that have a large land bank in Sichuan such as BRC and Jinke Property ( CH). 63% of BRC s 9.26m sqm land reserve is located in Sichuan (5.79m sqm), while Jinke s land reserve of 2.11m sqm in Sichuan accounts for 8% of its overall land reserve. In addition, Poly Real Estate ( CH) also has a land bank of nearly 7m sqm located in the province. Expectations for sector recovery to be seen sooner Mortgage loans and property sales typically grow at similar paces based on historical patterns. As such we believe expectations for a recovery in property transactions will be seen sooner than previously expected. Furthermore, the recovery in sector fundamentals should accelerate if similar subsidies are introduced in other provinces. We expect the property sector to offer excess returns on MoM home price declines, policy fine-tuning and improving mortgage lending conditions. Our top picks are China Vanke ( CH), Poly Real Estate ( CH), Citychamp Dartong ( CH), Yango Group ( CH), Zhongnan Construction ( CH) and Thaihot Group ( CH). Rare Earths: Crackdowns on illegal mining key factor for market conditions Reserve purchase prices lower than expected There have been media reports that rare earth state reserve building is underway, detailing the prices and amount of rare earths to be purchased as reserves and a timetable for the purchases. Overall, the premiums of the reserve purchase prices over the current market prices are smaller than we previously expected. Assuming that dysprosium and terbium oxides are purchased at 30% above the current market prices, the total value of this round of reserve building would amount to Rmb8.4bn, which would be Rmb1.3bn higher than the market price level. Regulations key factor driving market conditions Lawful rare earth companies will be hurt significantly if the government fails to rein in illegal mining activities and push through industry consolidation. Following the short-lived success of regulatory crackdowns in 2013, illegal mining activities have risen again this year. We estimate that 50,000 tonnes of rare earths are produced illegally every year, compared with legal output of just 17,900 tonnes. As such changes in the market supply-demand dynamics and rare earth prices will remain dependent on the strength of industry regulation. Medium/heavy rare earths key beneficiaries Overall rare earth inventory will decline significantly on the back of reserve building. The reserve purchase prices of light rare earths are close to market price levels (just Rmb1,000/tonne above market prices), while an 11% premium is seen for medium & heavy rare earths. We believe the per-tonne gross margin for medium & heavy rare earths will increase from Rmb29,200/tonne to Rmb58,300/tonne following state reserve building. Company earnings to be enhanced Based on stable ore prices and current smelting quotas, Baotou Steel Rare-Earth ( CH), Minmetals Rare Earth ( CH), Rising Nonferrous Metals Share ( CH), Xiamen Tungsten ( CH), Ganzhou Rare Earth and Shenghe Resources ( CH) should see their net profit increase by Rmb50m, 83.52m, 64.02m, 72.75m, 29.1m and 5.5m, translating into EPS enhancements of Rmb0.02, 0.09, 0.26, 0.11, 0.01 and Page 2

3 Another round of reserve building possible later this year We expect the government to launch a new round of crackdowns on illegal mining in the near term given pressure from the WTO ruling against China regarding its rare earth export restrictions earlier this year, though the strength of these crackdowns is yet to be confirmed. In addition, we see the possibility of another state reserve building later this year. Given that this round of reserve building will bring greater benefits for heavy rare earths, we prefer Minmetals Rare Earth ( CH), followed by Rising Nonferrous Metals ( CH), Xiamen Tungsten ( CH), Shenghe Resources ( CH) and Baotou Steel Rare-Earth ( CH). Details of rare earth reserve building compared with expected figures Actual Rare earth oxide Reserve amount (tonne) Reserve purchase price (Rmb'000/tonne) Market price (Rmb'000/tonne) Premium Value of reserve Market value Value difference Praseodymium oxide % Neodymium oxide % Praseodymium neodymium oxide 4, % 1, , Dysprosium oxide 1,200 1, , % 2, , Terbium oxide 500 3,575 2, % 1, , Europium oxide 500 3,550 2, % 1,775 1, Yttrium oxide 2, % Erbium oxide % Lutecium oxide 90 7,700 7, % Total 10,090 8, ,052 1,337.8 Expected Reserve amount (tonnes of rare earth oxides) Sources: China Securities Journal, Ruidow, Baiinfo, GF Securities Reserve purchase price (Rmb'000/tonne) Market price (Rmb'000/tonne) Premium Value of reserve Market value Value difference Rare earth element Praseodymium Neodymium 5, % 2,000 1, Europium 500 5, % 2,500 1,450 1,050 Terbium 300 4, % 1, Dysprosium 2,000 2, % 4,600 2,870 1,730 Lutecium , % 1, Erbium % Total 8,220 11,614 7,665 3,949 Marine Engineering: Multiple factors driving sector growth Land rig leader moving into marine engineering Honghua Group (196 HK) has received the orders for its TIGER III and IV offshore drilling modules (worth US$56m) from Shanghai Shipyard. This came after Honghua s fulfilment of orders placed in Mar 2012 for its TIGER I and II drilling modules last year (collectively worth more than Rmb300m). As a leading land rig manufacturer, Honghua has expanded into the offshore drilling equipment space by overcoming a number of technical difficulties, with its TIGER drilling modules gaining recognition from the American Bureau of Shipping. In addition, the company has also conducted substantial preparatory work for the development of self-elevating drilling rigs which has attracted considerable client interest. Multiple drivers at play Despite volatility in global marine engineering equipment orders, domestic equipment manufacturers have seen business growth strengthen with their market shares rising further. It is worth noting that master contractors such as CIMC Raffles are turning profitable, and that financial institutions such as ICBC Financial Leasing have strengthened their support for the marine engineering sector through substantial investments. In addition, government-driven oil drilling activities remain strong, while domestic equipment manufacturers have gained increasing recognition from master contractors and end customers. Positive on sector We remain positive on the marine engineering sector given government initiatives to strengthen offshore economic development and the fact that the focus of the global marine engineering industry is shifting towards China. We like master contractors such as China International Marine Container ( CH), Rainbow Heavy Industries ( CH), China State Shipbuilding ( CH), Offshore Oil Engineering ( CH) and Zhenhua Port Machinery ( CH) given rapid business growth and significant earnings upside. We are also positive on key equipment manufacturers such as Honghua Group (196 HK) and TSC Group (206 HK). Page 3

4 Online Gaming: Sustainable high growth in mobile games Buying opportunities ahead following share price corrections Online gaming names have seen substantial share price corrections in the last four months. The four HK-listed names under our coverage (Boyaa, IGG, NetDragon, Forgame) have posted an average drop of 41.4%, mainly due to concerns about poor upcoming 1H14 results (particularly for Forgame), disappointing news on core games and corporate management concerns. However, we remain positive on the sector, seeing buying opportunities following these corrections as the industry s long-term growth outlook remains intact, driven by overseas expansion and an increase in the number of online gamers as online games expand from PC to mobile platforms. Focus on mobile games We see mobile games as the future growth driver for the sector given the boom in smartphones and 3G/4G penetration, and the increase in time spent playing mobile games. We expect the number of smartphone gamers to rise 61% YoY in 2014 and grow at a CAGR of 19.2% during Long-term growth will also be driven by the convenience of gaming on mobile devices and the better experience afforded by the 3G/4G network. Opportunities in overseas markets Revenue from Chinese online games in overseas markets came in at US$18.2bn in 2013, up 219% YoY. We are confident that domestic online game developers will be able to take advantage of the broad and rapidly growing opportunities in overseas market in the coming two years. Our top picks We initiate our coverage of IGG (8002 HK, Buy) and Boyaa (434 HK, Buy) with a positive view on both. We believe IGG, supported by Tencent, will benefit from domestic market expansion as well as its rapidly growing mobile game business in overseas markets. We expect Boyaa to maintain its strong growth over the next 2-3 years, driven by an increase in the number of paying users for its mobile games and its strong overseas expansion momentum. How we differ? We forecast above-consensus earnings for Boyaa in as we believe the street currently under-estimates the company s growth potential in overseas markets and the upside from its existing mobile games in the domestic market. We are bearish on Forgame and expect consensus for its FY14-16 earnings to decline. This is an extract from a report due to be released today. Please contact us for the full report. (Analysts: Ryan Zhu, zhuran@gfgroup.com.hk; Joseph Ho, josephho@gfgroup.com.hk) Page 4

5 Hong Kong Equity 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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