Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jun 7, 2016

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 941 CHINA MOBILE ICBC TENCENT PETROCHINA CCB BANK OF CHINA HSBC SINOPEC CORP-H PING AN CHINA LIFE Source: Bloomberg A-Share Market Property: Residential property leasing market to see opportunities on policy support According to recently issued government opinions regarding the development of the residential property leasing market, tenants will be allowed to pay rent using money from their housing provident fund accounts, while non-local tenants will be entitled to local compulsory education and public medical care services. The document also provides measures to stimulate the three major types of rental property supply, i.e. public rental housing built and managed by local governments, properties built and let by developers, and privately-owned properties let through property agencies. We believe this policy document will be positive for the residential property leasing market in China. Hong Kong Market DC Holdings (861 HK, Hold): Market concern to rise on property acquisition and share placement; downgrade to Hold Last Friday, the company announced its plan to acquire commercial property in Beijing (previously rented area), and pay for this via a share issuance of around 150m shares, making the property seller its largest shareholder. Management expects to benefit from this in a number of ways. However, we expect market concern to rise going forward. We see more downside risk given the uncertainty in its asset-light business strategy, EPS dilution and shareholding structure. We downgrade the stock from Buy to Hold and suggest investors be cautious for the time being. Le Saunda (738 HK, Hold): Very weak 1QFY17 SSS dropped further in 1QFY17, driven by a 19% volume decline. E-commerce sales slumped 35% YoY due to a high base and more conservative online spending. Total store number decreased from 896 at the end of FY16 to 872 in 1QFY17 due to the closure of 16 franchised stores in China and eight self-owned stores. We maintain our forecast of 1% store growth in FY17, driven by an increase in CNE O2O and Linea Rosa stores. We believe the stock s undemanding valuation should cushion against share price downside. Maintain Hold and TP of HK$1.76. GAC Group (2238, NR): May/5M16 sales data review; strong rebound in self-owned brand sales growth May sales volume grew 20.3% YoY, with 5M16 sales up 29.1% YoY. GAC s self-owned brand has grown strongly so far this year. Its growth has mainly come from its SUV segment, especially the Trumpchi GS4 which has become a very competitive model in China. According to the self-owned brand unit s management during our visit last month, they will replicate the success model of Trumpchi GS4 regarding product, marketing and pricing strategies to further enhance the company s sales growth. We are positive on GAC Group's sales volume growth this year, given steady growth of its JV brands and the rebound in its self-owned brand. Geely Auto (175 HK, Accumulate): Sales steady with new SUVs supporting its portfolio Total sales volume rose 19.4% YoY (2.8% MoM) during May. Domestic sales grew 29.2% YoY while exports were down 60.9% YoY. The company s Jan-May sales volume was up 6.8% YoY. Xindihao sales remained stable in 2Q16, while Jan-May volume was down 1% YoY on a high base. Management expects sales to be affected by the new A-grade sedan, due to be launched later this year. We believe sales of the Geely GS, its latest SUV model, could overtake the NL3 on increased SUV marketing, and we expect further SUV launches this year to push the segment s growth further. 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 Property: Residential property leasing market to see opportunities on policy support Policy support for tenants The State Council s general office has recently issued a document containing opinions regarding the development of the residential property leasing market, offering a number of supportive measures. According to the document, tenants are allowed to pay rent using money from their housing provident fund accounts, while non-local tenants will be entitled to local compulsory education and public medical care services. Meanwhile, landlords are prohibited from terminating a lease, raising rent or embezzling lease deposits without the tenant s consent. Currently, less than 1% of the 170m rural migrant workers in China (2015 data) own a home in their location of work, with 37% of them renting a property. In addition, non-local college graduates (7m in 2014) mostly stay in a rented property during the three years following their graduation. The document also provides measures to stimulate the three major types of rental property supply: Public rental housing built and managed by local governments The monetization of public rental housing will be promoted, while private investment will be introduced to enhance the operation of public rental housing that has already been built. Properties built and let by developers Various measures have been proposed to lower the land/project acquisition costs and operating costs for these companies; furthermore, developers are also encouraged to mobilize their liquidity by using a variety of financial instruments. Privately-owned properties let through property agencies A favorable VAT rate will be applied to property agencies acting as the agent for leasing residential properties. Policy beneficiaries We believe this policy document will be positive for the residential property leasing market in China, with Vanke ( CH) and Wanli New Energy ( CH) the main beneficiaries. Separately, we like China World Trade Center ( CH) and Jiabao Industry & Commerce ( CH) as the introduction of REITs is expected to speed up. DC Holdings (861 HK, Hold): Market concern to rise on property acquisition and share placement; downgrade to Hold What s new? The company hosted an investor teleconference yesterday to talk about its planned property acquisition and share placement. Summary of the transaction Last Friday, the company announced its plan to acquire 12,621 sqm of commercial property in the Zhongguancun area of Beijing, which the company has rented, along with its subsidiary DCITS, for operational use for the past ten years. The total consideration of Rmb630m will be paid via issuance of around 150m shares. The issue price of HK$5 per share represents discounts of 17% and 5% to the average closing prices for the last 5 and 20 consecutive full trading days. After the full allotment of the shares (likely before the end of the year), the seller of the property will become its single largest shareholder with a 12% shareholding, higher than the CEO s 5.8%. How management expects to benefit Management believes the company will benefit from this transaction given: Appreciation potential of the target property due to its central location and scarcity. Savings of rental costs for the whole group. Annual rental income from the property were Rmb25m and Rmb30m during FY14/15. Reasonable issue price for the shares. The company explained that the difference between the price discounts to the average closing prices for last 5 and 20 consecutive full trading days (17% vs 5.8%) was the result of share price fluctuation during the negotiation progress. The latter discount is relatively reasonable. The new major shareholder will not take a seat on the board, thus the company s business operations will not be affected. Taking action against a takeover by GRG Banking We believe the transaction should be seen as a way of preventing a takeover by GRG Banking, which has bought around 11% of its shares in the stock market without prior consultation with management over the past three months. After the transaction, GRG Banking s shareholding will be diluted to 9.75%, from the current 11%. The Page 2

3 shareholding structure will become more centralized as the property seller should be on management s side. Market concern to rise We see an increase in market concern about: 1) its business direction as the property acquisition deviates from its previous asset-light business strategy; 2) possible EPS dilution following the share issuance; 3) more selling pressure from existing substantial shareholders that were impaired by the share dilution, possibly including GRG Banking (11% stake currently), SAIF Partners (5.4% stake), and Legend Holdings (3396 HK, NR) (5.15% stake). Downgrade to Hold We expect 64% and 16% YoY growth in net profit and adj. net profit in FY16, respectively, excluding foreign exchange losses. Currently trading at HK$6.10, the stock is partly fairly valued at 19x FY16E P/E. We see more downside risk going forward given the uncertainty in its asset-light business strategy, EPS dilution and shareholding structure. We downgrade our rating from Buy to Hold and suggest investors be cautious for the time being. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk ) Le Saunda (738 HK, Hold): Very weak 1QFY17 Very Weak 1QFY17 SSS dropped further to -15.4% in 1QFY17, from -13.8% in 4QFY16. The decline was driven by a 19% volume decline. ASP rose 4% on less retail discounts as the company wanted to hold up its GM. By market, China and HK saw 15% and 18% SSS declines, respectively. E-commerce sales slumped 35% YoY due to a high base (+69% in 1QFY16) and more conservative online spending. Store number Total store number decreased from 896 at the end of FY16 to 872 in 1QFY17 due to the closure of 16 franchised stores in China and eight self-owned stores. Compared to 1QFY16, total store number dropped 1%, while the number of self-owned stores increased by 2%. The QoQ drop in store number is seasonal as retailers usually close non-performing stores after CNY. We maintain our forecast of 1% store growth in FY17, driven by an increase in CNE O2O and Linea Rosa stores. Maintain Hold The stock is trading at 11x FY17E P/E (or 4x ex-net cash) and 0.8x FY17E P/B. We believe this undemanding valuation should cushion against share price downside. We maintain our TP of HK$1.76, based on 0.8x FY17E P/B as net cash now accounts for 57% of the company s market capitalization. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) GAC Group (2238, NR): May/5M16 sales data review; strong rebound in self-owned brand sales growth What s new? May sales volume grew 20.3% YoY, with 5M16 sales up 29.1% YoY. Steady growth support from JV brands Guangqi Hongda (May sales volume: +2.1% YoY, 5M16: +14.1% YoY), GAC Toyota (May: +4.7%, 5M16: +11.8%) and GAC Fiat Chrysler (May +6.2x, 5M16: +2.2x) were the three main JVs that contributed the most to help stabilize overall sales volume. Considerable sales growth contribution from self-owned brand Guangzhou Automobile Group Motor, the Group s self-owned brand business unit, saw its sales continue to grow sharply, up 1.1x in May and 1.3x in 5M16, which was exceptionally strong with good positioning in terms of product mix and marketing. PVs increase significantly, CVs decline Based on the Group s May sales figures, 5M16 PV sales volume picked up 33.5% YoY. On a further breakdown, SUVs strengthened the most by 1.4x YoY, while sedans were down 3% YoY and MPVs were down 12.6% YoY. CV sales volume decreased 86.1% YoY during 5M16, with trucks (-65.4% YoY) and pickups (-98.5% YoY) declining the most, while passenger CVs rebounded 1.2x YoY. Rebound in GAC self-owned brand to help boost sales growth GAC s self-owned brand has grown strongly so far this year. Its growth has mainly come from its SUV segment, especially the Trumpchi GS4 which has become a very competitive model in China with leading sales growth in the market driven by its fashionable design, improved vehicle craftsmanship and tech specs. Page 3

4 Coupled with its reasonable pricing of Rmb100, ,000, this has made the model a strong competitor to GWM s Haval H6 in the domestic market, putting it among the top three of China s self-owned brand SUVs in terms of sales volume. According to Guangzhou Automobile Group Motor s management during our visit last month, they will replicate the success model of Trumpchi GS4 regarding product, marketing and pricing strategies to further enhance the company s sales growth. We are positive on GAC Group's sales volume growth this year, given steady growth of its JV brands and the rebound in its self-owned brand. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Geely Auto (175 HK, Accumulate): Sales steady with new SUVs supporting its portfolio May sales volume grows steadily Total sales volume reached 454,850 during May, up 19.4% YoY and 2.8% MoM; domestic sales grew 29.2% YoY to 44,220 units while exports were down 60.9% YoY to 1,630 units. The company s Jan-May sales volume amounted to 233,763 units, up 6.8% YoY, of which domestic sales accounted for 224,095 units, up 10.5% YoY. Sales of the Xindihao model remained stable in 2Q16, while Jan-May volume was down 1% YoY, partly due to a high base. Management expects sales to be affected by the new A-grade sedan due to be launched later this year. SUV segment rising gradually SUV sales have expanded with three models supporting the segment overall volume reached 27,823 units during Jan-May, 11.9% of the company s total (8.6% in 1Q16; 11.8% in FY15). Geely GS is the company s latest SUV model, which has seen decent monthly sales so far. The model is aimed at younger customers, with appropriate design and pricing. We believe sales of the model could overtake the NL3 model, particularly given the company s increased SUV marketing. We expect further SUV launches this year to push the segment s growth further. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@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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