Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Nov 14, 2017

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E 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 PETROCHINA CCB CHINA MOBILE HSBC PING AN BANK OF CHINA CHINA LIFE SINOPEC Source: Bloomberg A-Share Market A-Share Market Color: Industry leaders likely to maintain strength One of the mutual fund managers with a bullish market view indicates that they will focus on stocks with improving fundamentals and attractive valuations. A mutual fund manager with a neutral view believes the underlying market drivers have not changed and suggests sticking to current holdings in consumer and TMT stocks. A bullish PE fund manager thinks the recent strength in industry leading companies will continue into the next few quarters, while a fund manager for an insurance company also believes that large-cap industry leader will remain strong. Hong Kong Market Property: 2018 sector outlook declining contract sales ahead; limited catalysts Due to ongoing restrictive policies, rapidly-rising land prices and a cyclically high contract sales base figure in 2017 YTD, we expect most China developers to post declining contract sales in Most China developers EPS should grow 10-20% YoY during the year, given the solid contract sales growth and improving gross margins in , but with tightening policies and the likely deceleration in contract sales ahead, we see limited catalysts for the sector. We therefore prefer developers that are likely to beat consensus for sales and earnings in We also like land-owners in the Guangdong-Hong Kong-Macau Bay Area. China Gas (384 HK): Gas source diversification through LNG import MoU We estimate that China Gas is likely to see its annual gas sales volume reach 40bn m3 in 2022, of which gas imported from Delfin would account for 10%. The latest MoU signed with the latter represents a strategic business move by the company which will help diversify its sources of gas supply. In addition, securing long-term LNG supply in a timely manner will provide stable long-term guarantee for the company s core business development. We estimate FY2017/18-FY2019/20 EPS of HK$1.212, and 1.686, based on which the stock is trading at 20.4x, 16.8x and 14.7x. 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 A-Share Market Color: Industry leaders likely to maintain strength * GFS sales talk to domestic institutional investors in China regularly to stay in touch with their hopes and fears, and to detect the slightest change in market sentiment. See below for what they are having on their minds. Voices of mutual fund managers Bullish view #1 We believe some hiccups might be seen in the course of financial deleveraging in 4Q17, though the resulting market pressure should be less severe than previously as such deleveraging is now expected by the market. Meanwhile, it is worth noting that listed companies balance sheets have indeed become healthier than before. As such, we maintain our view that the stock market will continue to fluctuate upwards with structural investment opportunities. We highlight the importance of assessing stock valuations against their growth potential and historical valuations, and believe that the tendency of the market refocusing on fundamentals will continue to play out. We like new energy vehicles, car electronics, drug supply chain, customized furniture, securities and steel. Bullish view #2 We will focus on the pharmaceutical sector in 4Q17, while remaining positive on sectors with cheap valuations and stable cash flows such as financials, transportation, and F&B. Bullish view #3 Foreign investors market influence is increasing; these investors tend to have a longer investment horizon, are less sensitive to short-term price volatility, and are more interested in industry leading companies which are taking over market shares from their overseas competitors. Therefore, we highlight companies with significant room for market share growth or those which are likely to substitute their competitors in terms of technology and market positions. Neutral view The market has remained relatively strong, with share price strength seen across blue-chip consumer stocks, leading TMT names as well as small-cap/newly listed semiconductor players. We have not seen a reversal in the fundamental market drivers, while any risks might come from the fact that some stocks have risen to relatively high share price levels. We suggest investors sticking to their consumer and TMT holdings; any new positions should be built in stocks that are likely to take off from a low level. Voices of private equity fund managers Bullish view #1 We will focus on the following four areas this week: 1) Leading e-commerce names given the just ended Singles Day online shopping spree, such as S.F. Holding ( CH), Suning Commerce ( CH) and Midea Group ( CH). 2) Off-site trading account cancellation is likely to become allowed in an upcoming brokerage regulation consultation paper, benefiting East Money Information ( CH), Hithink Flush Information Network ( CH) and Hundsun Technologies ( CH). 3) A-share companies offering bonus issues or converting capital reserves into share capital in their annual financial reports tend to post share price strength around this time of year. We particularly highlight newly listed or blue-chip stocks which are also offering such bonus issues or share capital conversions. 4) As of end-sept, foreign ownership in A-share companies had exceeded Rmb1trn for the first time. Therefore, we suggest watching stocks which saw significant stake increases by QFII investors such as Shenzhen Airport ( CH), Toly Bread ( CH), Han's Laser Technology ( CH), Guangshen Railway ( CH) and Hengli Hydraulic ( CH). Bullish view #2 Industry leading companies mostly reported substantially stronger-than-expected earnings in 3Q17, a trend that we believe will likely continue over the next few quarters given sustainable earnings Page 2

3 growth momentum at these companies following recent industry reshuffles and a decline in industry leaders valuations as investors roll forward to 2018 earnings forecasts as valuation bases. We believe the share prices of these industry leaders will likely rise to new high levels soon rather than falling along with the market. Bullish view #3 We highlight oversold stocks supported by earnings strength. As larger-cap ChiNext stocks have picked up recently, we suggest watching oversold small caps supported by solid earnings fundamentals which should offer a more reasonable risk-return mix. Voice of an insurer Large-cap stocks have posted share price strength recently across traditional and tech sectors in both developed and emerging markets (except India). Excluding cyclical factors, we do not see any signs of this trend being reversed over the next two years based on industry fundamentals. In the short term, we suggest holding large-cap banking stocks given observable asset quality improvements. Voice of GFS sales Some of key characteristics of the A-share market last week include industry leaders continued strength, as well as accelerated share price growth in advanced manufacturing, leading consumer names and tech stocks. Meanwhile, northbound investors started to sell some of their holdings in blue-chip stocks. Some institutional investors have started to cash in their profits or switch positions between stocks, with absolute and relative return funds showing different behaviors. We think that investors should guard against the impact of other investors cashing in their profits as the year-end approaches, and believe that manufacturing, tech and environmental are likely to maintain strength next year given a structural increase in the market risk appetite. (This piece has been produced based on client feedback put together by the GFS A-share sales team, and does not represent the house view of our research team.) Property: 2018 sector outlook declining contract sales ahead; limited catalysts Sector view - Cautious - Accelerating industry consolidation Supported by their brand names, standardized operations and economies of scale, industry leaders have been expanding their market share and sales at the expense of smaller developers. - Restrictive policies to continue; declining contract sales ahead Due to ongoing restrictive policies, rapidly-rising land prices and a cyclically high contract sales base figure in 2017 YTD, we expect most China developers to post declining contract sales in Improving earnings growth visibility; limited share price catalysts Based on the solid contract sales growth and improving gross margins in , we expect most China developers EPS to grow 10%-20% YoY in However, given tightening policies and the likely deceleration in contract sales ahead, we see limited catalysts for the sector. Key themes Developers with premium land banks in the Guangdong-Hong Kong-Macau Bay Area to benefit from ongoing property price appreciation Property prices have been on the rise in major cities in Guangdong related to the Bay Area initiative. Given the outlook for economic growth and the expected inflow of capital and talent, we believe developers with sizable land banks in the area will benefit most from property price appreciation. We expect residential property prices in the region to double over the next 5-8 years. Valuation analysis Most developers are trading at the mid to upper end of their P/B ranges Given China developers improving gross margins and earnings growth visibility, most developers are trading at Page 3

4 the mid to upper end of their P/B ranges. With decelerating contract sales ahead in 2018, we see current valuations as relatively expensive, and suggest focusing on stock picking. Investment strategy We prefer developers likely to exceed sales and earnings consensus Given a lack of sectorwide share price catalysts, we prefer developers that are likely to exceed consensus expectations for sales and earnings in We also like land-owners in the Guangdong-Hong Kong-Macau Bay Area. Top picks Yuexiu Property (123 HK, Buy) The company is a major Guangzhou-based state-owned residential developer that has a premium land bank of 7.7m sqm GFA in the Guangdong-Hong Kong-Macau Bay Area. The stock is trading at 0.5x 2017E NBV, which we believe does not factor in the solid land price appreciation potential in the Bay Area. We maintain our Buy rating and target price of HK$2.60, equal to 1.0x 2017E NBV. Gemdale P&I (535 HK, Buy) The company s 10M17 contract sales revenue increased 1.3x YoY to Rmb36.4bn, and GFA sold rose 1.2x YoY to 2.0m sqm. We forecast earnings will grow at a CAGR of at least 50% in , whereas management expects revenue and earnings to double in We maintain our Buy rating and target price of HK$1.60, equal to 10x 2017E P/E. Risks Upside risks: 2018 contract sales beat our estimates. Downside risks: Ongoing property and land price bubbles in first- and major second-tier cities lead to business risks. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) China Gas (384 HK): Gas source diversification through LNG import MoU LNG import MoU with Delfin On Nov 9, the company signed a MoU regarding an LNG imports project with Delfin LNG which was accompanying President Trump on his visit to China. Delfin has plans to develop the first floating LNG plant in North America which is expected to be brought into operation in China Gas is planning to import 3m tonnes of LNG annually during the first 15 years of project operation. Gas source diversification and LT gas supply securitization We estimate that China Gas is likely to see its annual gas sales volume reach 40bn m3 in 2022, of which gas imported from Delfin would account for 10%. This latest MoU represents a strategic business move by the company which will help diversify its sources of gas supply. In addition, securing long-term LNG supply in a timely manner will provide stable long-term guarantee for the company s core business development. A leader in rural coal-to-gas substation; option exercise rule providing motivation We estimate that the company s new user connections will reach 3.7m during FY2017/18, with 1m of them being rural coal-to-gas substitution users which now offer a gross margin similar to urban user connections. We expect the company s overall gas sales price spread to remain stable with gas sales volume to grow 30% in FY2017/18 (5% driven by coal-to-gas substation in winter heat supply systems). It is worth noting that a condition for the options issued by the company in April 2014 to be exercised is for FY2017/18 net profit to come in no lower than HK$6bn; as such, both management and employees are sufficiently motivated to realize the net profit target. Earnings forecasts We estimate FY2017/18-FY2019/20 EPS of HK$1.212, and 1.686, based on which the stock is trading at 20.4x, 16.8x and 14.7x. Key risks include slower-than-expected progress in coal-to-gas substation, a natural gas supply shortage in winter, and subsidy payment issues. (Han Ling, Research Analyst, SFC CE No. ARI073, hanling@gf.com.cn ) 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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