Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Dec 5, 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 HSBC BANK OF CHINA TENCENT SINOPEC CHINA LIFE INS PING AN INS Econ data release China Data Date Period Prior Cons China Trade Balance 8-Dec NOV China Exports YoY 8-Dec NOV China Imports YoY 8-Dec NOV China CPI YoY 10-Dec NOV China PPI YoY 10-Dec NOV Rmb New Loans 10-Dec NOV M0 10-Dec NOV M1 10-Dec NOV M2 10-Dec NOV Total Financing 10-Dec NOV US Data Date Period Prior Cons US Trade Balance 5-Dec OCT U-3 Unemployment 5-Dec NOV Cont Jobless Claims 11-Dec Initial Jobless Claims 11-Dec Source: Bloomberg GF events Date Event Location 5 Dec Great Wall Motor co. visit Baoding 5 Dec China Vanke Nov operations call - 10 Dec GF Chief Economist roadshow Hong Kong Source: GF Securities A-Share Market Coal: Thermal coal prices likely to rise further in Dec; year-end IPP coal contract talks key to watch Coal companies are showing strong wishes to keep thermal coal prices from falling during their annual coal contract talks with IPPs. We expect thermal coal prices to pick up steadily towards end Upcoming coking coal demand should be supported by the seasonal winter coal restocking, and we expect prices to remain stable in Dec. We do not see recent oil price drops as a significant negative for coal prices, and we remain positive on the sector given supply controls and expectations of a coal price rebound in the medium term. Auto: Positive effect of high emission vehicle phase-out to continue into 2015 The government s push for faster elimination of yellow-label vehicles will have a moderately positive impact on the auto sector. We believe the bus subsector will get a stronger boost from the phaseout than trucks, with light buses to benefit more than medium and large buses. The positive effect of the phase-out is being overestimated by some investors, while concerns about the negative impact of a decline in the number of vehicles scrapped next year are overdone. Jiangling Motors ( CH): Nov sales beat on light truck strength Nov sales volume grew 23.5% YoY on stronger-than-expected light truck sales. Jiangling is likely to maintain strong light truck sales as the National IV standard comes into force, and we expect the phase-out of high emission vehicles to have a continued, moderately positive effect on the light bus industry in 1H15. Improvements in overall light truck supply in 2015 should help boost Jiangling s market share while the launch of its SUV models in 2H15 should raise its growth upside. Jianghuai Automobile ( CH): S3 key driver of SUV strength Nov sales volume rose 8.0% YoY on strong SUV sales growth which was driven by strength of its S3 model. The large number of new PV models scheduled to be launched in 2015 are worth watching. The company is fully prepared for National IV implementation next year, and is likely to benefit from a resulting industry consolidation. We expect Jianghuai to see positive light truck revenue and profit margin growth next year with its new energy vehicle business to help boost its valuation. Hong Kong Market Healthcare: Take profit before upcoming drug price reform We expect the government to cancel price caps for most drugs, which will benefit low-price generic drug makers. It may also set a maximum drug related reimbursement in its medical coverage plan, reducing demand for high-price prescription drugs. China healthcare stocks are trading at 25.0x- 30.0x average 2014E P/E, which already factors in most positive factors. We are long-term bullish on leading innovative drug companies, however given the uncertainty surrounding upcoming drug price reform, we suggest investors take profit on healthcare stocks before the new drug price policy is issued. SOSC (1033 HK, NR): SOSC president under investigation Xue Wandong, president of Sinopec Oilfield Servicing Corporation, has been dismissed and is currently under investigation for corruption. The news should be a negative surprise to oilfield servicing plays. Corruption investigations are ongoing in China, but it is a surprise that the first non- CNPC person under investigation is the head of SOSC. CSRC approval for its restructuring may be delayed. The news should be negative for the shares once they resume trading. We also expect PetroKing to come under selling pressure, given the high portion of sales from Sinopec related servicing contracts. Continued on next page 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 Hong Kong Market (continued) KWG Property (1813 HK, NR): 11M14 presales up 25% YoY 11M14 presales came in at Rmb19bn, up 25% YoY, on the back of strong marketing and precise product positioning, meaning the company has achieved 89% of its full-year presales target. We believe a further interest rate cut is likely in 2015, something which should boost property transactions. With its focus on small residential units and real demand from mass-residential buyers, the company may benefit from a property market recovery, in our view. Consensus sees net profit growing 5%, 21% YoY in 2014/15. The stock is trading at an undemanding 4.1 x 2015E P/E. Page 2

3 Coal: Thermal coal prices likely to rise further in Dec; year-end IPP coal contract talks key to watch Nov recap The FOB price of 5,500 kcal/kg thermal coal at Qinhuangdao port picked up 3% from end-oct to Rmb515/tonne on Nov 28. Prices in Shanxi and Hebei mostly picked up except for certain types of coal; prices rose slightly across Inner Mongolia. In contrast, price declines were seen in mining areas in northwestern China, Sichuan and Chongqing with Shaanxi posting declines of Rmb3-20/tonne. The prices of most coking coal products strengthened in Shanxi; Guizhou, Hebei and Shandong saw increases of Rmb5-25/tonne, while Qinghai and Ningxia suffered a decrease of Rmb10/tonne. Dec outlook: thermal coal Thermal coal prices at ports and mining areas have remained stable recently. Although daily coal consumption at IPPs is rebounding slowing as the weather gets colder, downstream restocking demand has not strengthened significantly due to high coal inventories at IPPs. That said, coal companies are showing strong wishes to keep coal prices from falling during their annual coal contract talks with IPPs which started on Nov 28. As such we expect thermal coal prices to pick up steadily towards the end of the year. Dec outlook: coking coal Steel mills coking coal demand has slowly recovered to normal levels as they finish overhauls after the APEC meeting ended. Steel mills are not particularly enthusiastic about restocking coking coal as they are cautious about raw material prices due to a year-end funding shortage. That said, upcoming coking coal demand should be supported by the seasonal coal restocking in winter. We expect coking coal prices to remain stable in Dec. Oil price drops not a threat We do not see recent oil price drops as a significant negative for coal prices as the proportion of coal usage that is replaceable by the use of oil is relatively low and as the ratio of coal to oil prices remains at a historical low following declines of 30%, 43% and 39% in international oil prices, international coal prices and domestic coal prices over the past three years. Remain positive given supply control and price rebound expectations Market sentiment has improved following the recent IR cut with the market expecting a rate cut cycle and continued loose liquidity. We remain positive on the sector given supply controls and expectations of a coal price rebound in the medium term. We continue to recommend Lu'an Environmental Energy ( CH), Jizhong Energy Resources ( CH), Panjiang Refined Coal ( CH), Yang Quan Coal Industry ( CH) and China Shenhua Energy ( CH) given their earnings stability. Auto: Positive effect of high emission vehicle phase-out to continue into 2015 Phase-out of vehicles to have moderately positive impact A total of 3.98m yellow-label* and outdated vehicles^ were scrapped during 9M14, representing 66.3% of the annual target of 6m vehicles, broadly in line with the government s schedule. A target has been set in the 12th FYP plan to phase out 5.44m yellow-label vehicles during the FYP. Assuming that 20/40/40% of the target is fulfilled in 2013/14/15, a little more than 2m yellow-label vehicles should be scrapped this year. The government s push for faster elimination of yellow-label vehicles will have a moderately positive impact on the auto sector given that some of these vehicles are being phased out during the natural vehicle replacement cycle anyway. Buses to get a stronger boost The elimination of yellow-label vehicles will affect each auto subsector to different degrees depending on the regions where specific types of vehicles are used, the normal volume of vehicle replacement, vehicle users profitability and users sensitivity to higher vehicle purchasing costs. We believe the bus subsector will get a stronger boost than trucks, with light buses to benefit more than medium and large buses. Positive effect to continue into 2015 We point out that the positive effect of the phase-out is being overestimated by some investors. In contrast, some other investors indicate that overall sales volume growth has not been particularly strong this year despite the large number of vehicles scrapped and are therefore concerned that the sector will suffer significantly when the number of vehicles being phased out declines next year. We believe such concerns are overdone as 1) the phase-out this year has not led to a substantial decline in future potential vehicle demand, and 2) the number of yellow-label vehicles to be eliminated in 2015 will likely be comparable to this year. Top picks The phase-out of yellow-label vehicles is a key part of the auto sector energy efficiency investment theme. We recommend 1) Jiangling Motors ( CH) and Jianghuai Automobile Page 3

4 ( CH) as they are likely to benefit from improvements in light truck supply, 2) Weifu High- Technology ( CH) given high entry barriers, 3) Beiqi Foton Motor ( CH), Yunnei Power ( CH) and Shanghai Diesel Engine ( CH) given their strength in light-duty diesel engines, and 4) China Automotive Engineering Research Institute ( CH) given the positive prospects for its vehicle testing business. * Gasoline vehicles that fail to meet the National I emission standard and diesel vehicles that fail to meet the National III standard. ^ Vehicles that fail to meet the National IV emission standard. Jiangling Motors ( CH): Nov sales beat on light truck strength Nov sales beat Nov sales volume grew 23.5% YoY to 28,800 vehicles on stronger-than-expected light truck sales (up 67.9% YoY to 12,648 vehicles). The number of light buses sold picked up 12.4% YoY to 7,617, while pickup trucks fell 8.1% to 6,400. The company sold 2,101 SUVs (+4.17% YoY) during the month. Light trucks to remain strong Our channel checks indicate that the production of 9,000 newlyordered light trucks is yet to be scheduled. A total of 8,400 light trucks were sold to end consumers and 1,900 were exported by Jiangling in Nov; in addition its overall light truck inventory now stands at just 1.2x monthly sales. Jiangling is likely to maintain strong light truck sales in the foreseeable future as the National IV emission standard officially comes into force on Jan 1. Light buses to benefit from high emission vehicle phase-out The number of light buses sold to end users rose 11% YoY in Nov with inventory at a reasonable level of 1.3x monthly sales. The company has maintained a stable pricing strategy for this product line. We expect the phase-out of yellow-label high emission vehicles to have a continued, moderately positive effect on the light bus industry in 1H15. Pickup trucks to become more competitive next year Despite a YoY decline in the number of pickup trucks sold to auto dealers in Nov, the number eventually sold to end users increased 20% YoY to 6,600. Jiangling s pickup trucks are set to become increasingly competitive next year as its long wheel-base products come on line outlook positive The company has consistently attached great importance to product quality. Improvements in overall light truck supply in 2015 should help boost Jiangling s market share while the launch of its SUV models in 2H15 should raise its growth upside. We remain positive on the company and forecast 2014/15/16 EPS of Rmb2.41/3.16/4.28. Jianghuai Automobile ( CH): S3 key driver of SUV strength S3 key driver of SUV strength Nov sales volume rose 8.0% YoY to 42,900 vehicles on strong SUV sales growth which was driven by strength of its S3 model. Our channel checks suggest that the company is yet to schedule the production of more than 20,000 newly-ordered S3 vehicles. We estimate that its S3 production capacity will rise to 16,000-17,000 in Dec which is likely to increase further to 18,000 in Jan. In addition, the S3 will likely make positive earnings contribution once its accumulated sales volume exceeds 50,000. The large number of new passenger vehicle models scheduled to be launched by the company in 2015 such as the S5 (1.5T version), S20 and A20 are worth watching. Jianghuai Automobile Nov sales data Nov sales vol YoY 11M14 sales vol YoY Sedans 5, % 48, % MPV 5, % 67, % SUV 15, % 54, % Trucks 13, % 205, % Chassis 2, % 23, % Multifunctional % 5, % commercial vehicles Overall 42, % 404, % Sources: Company data, GF Securities Page 4

5 Company prepared for emission standard upgrade Almost all of the 8,000 light trucks that Jianghuai sold domestically in Nov were compliant with the National IV emission standard. The company is fully prepared for the implementation of the new emission standard in 2015, and it is likely to benefit from a consolidation of the domestic light truck industry next year given its focus on quality control and business scale expansion. Light truck regulation favorable for long-term growth Strengthening light truck industry regulation has brought mid/long-term growth opportunities for market leaders. We expect Jianghuai to see positive revenue and profit margin growth in its light truck business next year with its new energy vehicle business to help boost its valuation. We remain positive on the company and forecast 2014/15/16 EPS of Rmb0.38/0.73/1.50 (excluding the diluting effect of its group listing). Healthcare: Take profit before upcoming drug price reform What's new? We held an event to discuss investment opportunities in China s healthcare sector (both A-share and H-share), with a top GF A-share analyst as our invited expert. Investors are concerned about upcoming drug price reform in China. Government to cancel drug price caps We expect the Chinese government to cancel price caps for most drugs, which will benefit low-price generic drug makers. In our view, the government will also set a maximum drug related reimbursement amount in its medical coverage plan, which will reduce demand for high-price prescription drugs. Take profit We advise taking profit on healthcare stocks given their expensive valuations. China healthcare stocks are trading at 25.0x-30.0x average 2014E P/E, which already factors in most positive factors, in our view. We are long-term bullish on leading innovative drug companies such as Sihuan Pharma (460 HK, Buy), CSPC Pharma (1093 HK, Buy) and Lee's Pharma (950 HK, Buy). However, given the uncertainty surrounding upcoming drug price reform, we suggest investors take profit on healthcare stocks before the new drug price policy is issued. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) SOSC (1033 HK, NR): SOSC president under investigation What s new? It has been reported by Reuters that Xue Wandong, president of Sinopec Oilfield Servicing Corporation, has been dismissed and is currently under investigation for corruption. SOSC was listed in HK through a reverse takeover of Yizheng Chemical Fiber earlier this year. Investigation a surprise The news should be a negative surprise to oilfield servicing plays. Corruption investigations are ongoing in China, but it is a surprise that the first non-cnpc person under investigation is the head of SOSC. Trading in SOSC s shares is already suspended as the company is awaiting final CSRC approval for its restructuring. We do not rule out the possibility that the investigation may delay the approval. Negative for share price The news should be negative for the shares once they resume trading. We also expect PetroKing (2178 HK, Hold) to come under selling pressure, given the high portion of sales from Sinopec related servicing contracts. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) KWG Property (1813 HK, NR): 11M14 presales up 25% YoY What s new? 11M14 presales came in at Rmb19bn, up 25% YoY, on the back of strong marketing and precise product positioning, meaning the company has achieved 89% of its full-year presales target of Rmb21bn (representing an increase of 25% YoY). Company may benefit from property market recovery Following the PBoC s 40bps cut to the 1- year benchmark loan rate to 5.6% and 25bps cut to the 1-year benchmark deposit rate to 2.75%, we believe a further interest rate cut is likely in 2015, something which should boost property transactions. With its focus on small residential units and real demand from mass-residential buyers, the company may benefit from a property market recovery, in our view. Page 5

6 Undemanding valuation According to Capital IQ, consensus sees net profit growing 5%, 21% YoY in 2014/15 respectively to RMB2.9bn; RMB3.5bn. The stock is trading at an undemanding 4.1 x 2015E P/E. As a strong mid-cap brand, we believe x P/E is more appropriate. The company was established in Guangzhou in 1995 and has built a balanced portfolio of small residential units ( sqm), villas, serviced apartments, Grade-A office buildings, five-star hotels and landmark commercial complex projects in tier 1/2 cities in China. It design team has cooperated with worldfamous architecture institutes, with a focus on premium quality and innovation. Guangzhou International Finance Place is one of its landmark projects, with an occupancy rate of 99% in 1H14. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Page 6

7 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. 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). 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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 7