Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 18, 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 CHINA MOBILE ICBC CCB BANK OF CHINA TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons Caixin China Mfg PMI 20-Aug AUG P US Data Date Period Prior Cons CPI Urban YoY 19-Aug JUL Initial Jobless Claims 20-Aug 15-Aug Cont Jobless Claims 20-Aug 8-Aug Existing Homes Sales 20-Aug JUL Markit US Mfg PMI 21-Aug AUG P Source: Bloomberg GF events Date Event Location 18 Aug Feiyu Tech post-result NDR Hong Kong Aug Tibet-based listco visits Tibet 20 Aug Ourgame post-result NDR Shenzhen 20 Aug China Jushi post-result call - 20 Aug GF Financial Eng Annual Forum Dunhuang 21 Aug Tongda post-result meeting Hong Kong 24 Aug ChinaSoft post-result NDR Hong Kong 24 Aug YST post-result conf call Aug GF 2015 Autumn Investor Forum Hangzhou 28 Aug Kingdee post-result meeting Hong Kong 2 Sep Great Wall Motor site visit Baoding Source: GF Securities (HK) A-Share Market Macro: Rmb depreciation in the context of currency internationalization While many see the latest adjustments in the Rmb central parity formation mechanism as an attempt to boost exports, we are more inclined to see it within the context of Rmb internationalization and exchange rate liberalization. Amid capital outflow pressure, further expectations of Rmb depreciation would lead to a considerable payment deficit, which would be at odds with China s general goal of maintaining a balance in its international payments. Therefore, continued Rmb depreciation is unlikely. In addition, the PBoC will be fully capable of meeting the liquidity shortage caused by largescale capital outflows. Environmental: PPP still the shiniest sector theme; further policy support for environmental monitoring expected We continue to see PPP as the most important sector investment theme particularly given the reopening of equity refinancing. Sector leaders are positioned to benefit the most from high PPP project growth; small-cap environmental firms with efficient financing channels will have greater market cap growth momentum; local environmental SOEs might be driven by asset restructuring, management incentives and PPP projects amid ongoing SOE reform. We expect more policies regarding the environmental monitoring industry to be issued, while smart environmental protection will generate additional business volume. Non-Ferrous: Hazardous waste regulation to tighten following Tianjin blasts Continued growth in new energy vehicle demand should drive lithium battery demand, pushing lithium prices further higher. Rare earth prices are yet to bottom, and we view recent rumors of the six largest rare earth company groups in China being merged as groundless fabrication. We expect China to strengthen hazardous waste regulation following the blasts in Tianjin. A formal system for the recycling and detoxification of hazardous waste such as lead-acid batteries, circuit boards and non-ferrous slags is likely to be built in the near future, benefiting industry leaders. Hong Kong Market Ourgame (6899 HK, Buy): Key takeaways from post-results conference call; maintain Buy Ourgame reported solid 1H15 results yesterday, with net profit up 35% YoY, higher than Bloomberg consensus of 33% YoY growth for the full year and our estimate of 29% YoY growth for the first half. Mobile game sales remained strong despite an unfavorable change in charging policy at mobile carriers. The stock is trading at 14x 2015E P/E, which is undervalued given net profit is expected to grow at least 30% YoY this year, and given the clearer growth outlook in the short-medium term. We reiterate our Buy rating and target price of HK$9.01. 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 Macro: Rmb depreciation in the context of currency internationalization Market-based exchange rate a prerequisite for Rmb internationalization While many see the latest adjustments in the Rmb central parity formation mechanism as an attempt to boost exports, we are more inclined to see it within the context of Rmb internationalization and exchange rate liberalization. The newly adjusted mechanism will help correct the currency s pricing deviations and promote its exchange rate liberalization. In addition, this most recent push for market-driven exchange rate fixing can also be seen as a pursuit of the Rmb pricing power in view of the IMF s report in early Aug pointing out the significant difference in onshore and offshore Rmb exchange rates as well as the fact that the offshore Rmb market can be more conveniently used by international investors. Trade competitiveness remains strong In fact, substantial declines in commodity prices have driven China s general trade surplus significantly higher. While the shrinking volume of processing trade has exacerbated concerns about the country s export strength, the processing trade surplus has remained stable. In fact, the surpluses that China sees with its major trade partners have not decreased substantially. As such, China continues to see a stable trade environment. Continued Rmb depreciation unlikely China s relatively strict capital account restrictions mean that volatility in its balance of international payments comes mainly from changes in forex asset and liability allocations, with Rmb exchange rate expectations the key driver of such changes. Amid capital outflow pressure, further expectations of Rmb depreciation would lead to a considerable deficit in China s balance of payments, which would be at odds with the country s general goal of maintaining a balance in its international payments. Therefore, continued Rmb depreciation is unlikely. PBoC to meet liquidity shortage in the case of capital outflows Controlled depreciation of the Rmb will only give a limited boost to Chinese exports, and is therefore unlikely to reverse the current economic weakness. Given the goal to maintain a balance in international payments, the PBoC will be fully capable of meeting the liquidity shortage caused by large-scale capital outflows. In addition, domestic monetary easing is likely to exceed current market expectation now that the amount of banks excess reserves have come down to a normal level. Environmental: PPP still the shiniest sector theme; further policy support for environmental monitoring expected Environmental companies seeking to boost financing capabilities CDB Innovation Capital will become the third largest shareholder of Beijing Originwater Technology ( CH) by purchasing a 10.84% stake in the company with Rmb5.4bn. This came after the controlling stake in Sound Environmental Resources ( CH) was transferred to Tsinghua-affiliated entities earlier this year. In addition, more than 20 listed environmental companies have set up various industry investment funds jointly with industry fund companies or other financial institutions in recent months. PPP still the shiniest sector theme As the PPP model poses higher requirements for environmental companies financing capabilities, compatibility with government agencies and overall solution offering capabilities, we believe these firms are set to seek equity and financing cooperation with other institutions. We continue to see the PPP model as the most important investment theme in the environmental sector particularly given the reopening of equity refinancing in the domestic stock market. Sector leaders are positioned to benefit the most from high PPP project growth relying on their strong financing capabilities, extensive networks and substantial project experience. In this sense, we like Beijing Originwater Technology ( CH) and Sound Environmental Resources ( CH). Small-cap environmental firms will see the opportunity to achieve significant business growth by taking large PPP projects. In particular, those with access to efficient financing channels will have greater market cap growth momentum. We prefer Combustion Control Technology ( CH), Tianjin Motimo Membrane Technology ( CH), Safbon Water Service ( CH) and Guozhen Environmental Protection Technology ( CH). Local environmental SOEs might be assigned with the function of utilities sector financing (previously assumed by local government financing platforms), with growth to be driven by asset Page 2

3 restructuring, management incentives and PPP projects amid ongoing SOE reform. We like Jiangnan Water ( CH) and Zhongyuan Environment-Protection ( CH). More policies for environmental monitoring expected The State Council issued an ecological monitoring network development plan last week, targeting to finish the preliminary development of a comprehensive monitoring network by We expect more policies regarding the environmental monitoring industry to be issued, with entry barriers to be raised and market leaders competitiveness to be strengthened. In addition, the adoption of smart environmental protection will generate additional business volume in relation to data services and emission trading. We suggest watching SDL Technology ( CH) and Focused Photonics ( CH). Non-Ferrous: Hazardous waste regulation to tighten following Tianjin blasts Base metals Domestic metal prices are likely to continue to rebound on the back of Rmb depreciation. Private-sector metal companies in eastern Inner Mongolia, where there is an abundance of high-quality and profitable metal resources, have become particularly attractive following recent share price corrections. We like Sitong New Metal Material ( CH), Yuguang Gold & Lead ( CH), Minfa Aluminium ( CH), Tibet Summit Industry ( CH) and Zhongjin Lingnan Nonfemet ( CH). Precious metals Domestic previous metal prices have rebounded significantly due to recent Rmb depreciation. We expect international gold prices to pick up further after an interest rate hike in the US, with gold prices in China to outperform international prices. We prefer stocks with cheap valuations and strong growth potential such as Gangtai Holding ( CH) and Chifeng Jilong Gold Mining ( CH). Minor metals Continued growth in new energy vehicle demand should drive lithium battery demand, pushing lithium prices further higher. We suggest watching Tianqi Lithium Industries ( CH), Zhonghe ( CH), Luxiang ( CH) and Ganfeng Lithium ( CH). Separately, rare earth prices are yet to bottom, and we view recent rumors of the six largest rare earth company groups in China being merged as groundless fabrication. New materials We expect China to strengthen hazardous waste regulation following the blasts in Tianjin. A formal system for the recycling and detoxification of hazardous waste such as lead-acid batteries, circuit boards and non-ferrous slags is likely to be built in the near future, benefiting industry leaders such as Chifeng Jilong Gold Mining ( CH) and Yuguang Gold & Lead ( CH). Ourgame (6899 HK, Buy): Key takeaways from post-results conference call; maintain Buy What s new? Ourgame reported solid 1H15 results yesterday, with non-ifrs adjusted net profit up 35% YoY to Rmb84m, higher than Bloomberg consensus of 33% YoY growth for the full year and our estimate of 29% YoY growth for the first half. The company hosted a conference call after market close. Mobile games to recover to sequential growth Mobile game sales remained strong, posting 112% YoY growth in 2Q15, on top of a significant 450% YoY growth in 1Q15. On a QoQ basis, mobile revenue dropped 16% to Rmb80m in 2Q15 on the back of challenges in this segment resulting from the unfavorable change in the charging policy at mobile carriers at the end of 1Q15 (mobile carriers are an important distribution channel for mobile game operators). According to management, the unfavorable impact from mobile carriers on the company has been fully removed in 3Q15, thanks to a series of effective measures taken since May. The company s mobile game business should recover to sequential growth going forward and is likely to achieve a new high for revenue in 3Q15, according to management. Further improvement in paying ratio Besides ongoing expansion in its user base with mobile MAU up 37% YoY to 19.5m in 1H15, mobile paying ratio also significantly improved to 7.4% in 1H15, from 2.9% in 1H14. Management has indicated further upside of 2 to 3pp in mobile paying ratio in the near future. Mind sports ecosystem on the right track The company has made significant breakthroughs in developing its mind sports ecosystem in 1H15, including the signing of a 10-year contract with the Page 3

4 Board and Card Games Administrative Center of the General Administration of Sport (BCGA) and the acquisition of WPT worldwide. Further offline tournaments with prominent brands such as WPT Dragon Series (the eighth), China Chess and Cards Competition-Beijing, WPT National China 2015, WPT National Korea, and Mahjong International League Championship (the first) are already in its plan for 2H15. We believe its integrated online & offline mind sports strategy is on the right track, given: 1) increased online traffic drawn from the online qualification phases of these influential events; 2) integration of WPT s capabilities will fuel Ourgame s overseas expansion and further enhance its competitiveness in global markets; 3) the first wave of products and services from the cooperation with BCGA will be launched in 2H15 more profitable opportunities related to this cooperation will emerge gradually; 4) monetization of its content and broadcast business will be introduced in 2H15. Management indicated that separate revenue contribution from its non-gaming business and overseas markets should be seen early next year. Maintain Buy We continue to favor Ourgame in light of: 1) 1H15 results meeting our expectation despite the unfavorable change in charging policy at mobile carriers; 2) mind sports eco-system strategy being on the right track; 3) clearer growth visibility for the coming 2-3 years with some nongaming businesses set to deliver growth. The stock is trading at 14x 2015E P/E, which is undervalued given net profit is expected to grow at least 30% YoY this year, and given the clearer growth outlook in the short-medium term. We reiterate our Buy rating and target price of HK$9.01, implying 30x 2015E P/E and 107% upside potential. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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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