Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Apr 28, 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 PETROCHINA TENCENT CCB BANK OF CHINA HSBC SINOPEC PING AN CHINA LIFE Source: Bloomberg GF events Date Event Location 28 Apr Huitian New Materials co. visit Xiangyang 29 Apr Shenzhen property projects visit Shenzhen 29 Apr Xingfa Chemicals co. visit Yichang Source: GF Securities (HK) A-Share Market Power Equipment: Watch withdrawal of new energy vehicle subsidies and upcoming Beijing Auto Show There have been media reports that policies for the reduction/withdrawal of new energy vehicle subsidies are due to be issued shortly. Meanwhile, a number of car makers are expected to unveil new models of new energy vehicles at the upcoming Beijing Auto Show next week. We have a positive long-term outlook on the new energy vehicle industry given the introduction of supportive policies such as national standards for batteries, a vehicle fuel consumption penalty system and a new energy vehicle reward system. In addition, we expect business conditions in the charging pole market to remain strong this year. Ping An Insurance: 1Q16 earnings review; strong momentum in life insurance business; internet finance strengthening further This year s good start for the life insurance business continued into 1Q16. Ping An s life premiums rose 28.3% YoY to Rmb134.7bn, with NBV up 38.3% to Rmb13.1bn. Comprehensive income dropped significantly in 1Q16 despite steady revenue and net profit growth, which should be attributable to the considerable stock market volatility during 2H15 and 1Q16. The company s investment performance has deteriorated further so far this year due to continued weakness in the stock market. However, we believe insurers investment gains are likely to bottom out as the longterm upside in the stock market is expanding. Hong Kong Market Macro: FOMC not ruling out a Jun hike, but making no promises The Fed left interest rates unchanged at its Apr meeting, in line with expectations. The accompanying statement showed a return to a neutral tone, from the dovish tone in Mar. The FOMC did not give any hints on the timing of the next hike. Officials want to leave the door open for a Jun hike, but they do not want to make any promises, in our view. Investors only see a 21% chance of a Jun hike, but we believe this underestimates the Fed s intention to hike rates. Healthcare: Comment on State Council s healthcare reform tasks for 2016 The State Council has issued a formal notice on the main tasks for deepening medical and healthcare system reform in 2016, placing a higher priority on controlling drug sales growth while ensuring more efficient drug supply, procurement, prescription and consumption, which is consistent with previous policies on procurement and reimbursement reforms. A higher mix of government subsidies in overall healthcare costs will better incentivize public hospitals to reduce costs. Industry growth is expected to remain subdued in 1H16 as a result of ongoing sector reform. However, its impact is manageable for companies that possess products with great demand. Maple Leaf (1317 HK, NR): 1HFY16 results beat, more new school projects ahead Net profit rose 122% YoY in 1HFY16, significantly higher than the 60%+ guided in its positive profit alert. Adjusted net profit was up 70% YoY. Revenue increased by 27% YoY led by 19% growth in students and tuition fee increases for certain schools. The street is set to revise up earnings estimates. Deferred revenue was up 30% YoY, driven by 22% YoY growth in students in Mar and the tuition fee increase, suggesting high revenue growth momentum will continue in 2HFY16. The company will raise tuition fees further, and has more projects in the pipeline. 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 Power Equipment: Watch withdrawal of new energy vehicle subsidies and upcoming Beijing Auto Show Positive on new energy vehicle industry in long term There have been media reports that policies for the reduction/withdrawal of new energy vehicle subsidies are due to be issued shortly. Meanwhile, a number of car makers are expected to unveil new models of new energy vehicles at the upcoming Beijing Auto Show next week. We have a positive long-term outlook on the new energy vehicle industry given the introduction of supportive policies such as national standards for batteries, a vehicle fuel consumption penalty system and a new energy vehicle reward system. In particular, we are optimistic on the NCM lithium battery and hybrid power industries. We like Aucksun ( CH), EVE Energy ( CH), Easpring Material Technology ( CH), Tinci Materials Technology ( CH), Tianqi Lithium Industries ( CH), Cangzhou Mingzhu Plastic ( CH), Goldcup Electric Apparatus ( CH), Corun New Energy ( CH), Hongfa Technology ( CH) and Xinzhi Motor ( CH). Charging pole market to remain strong State Grid is due to release the results of its first batch of charging pole tender shortly. In addition, the Shanghai and Zhejiang local governments have announced plans to install a total of 210,000 charging poles by 2020, while State Grid will launch its second round of charging pole tender in the near term. We expect business conditions in the charging pole market to remain strong this year, and prefer charging pole suppliers such as Zhongheng Electric ( CH), Heshun Electric ( CH), Yin He Electronics ( CH) and Kstar Science and Technology ( CH), as well as charging facility operators Kstar Science and Technology ( CH) and Bashi Media ( CH). Policy support for energy storage The recently issued action plan for energy technology innovation lists 15 key tasks to be fulfilled during the given period, including innovation regarding energy storage technology, hydrogen fuel cells and the Internet of Energy. It is proposed that pilot projects for a series of mature energy storage technologies will be launched in Energy storage is one of the key areas on which we have a positive outlook in 2016, and it is likely to post considerable growth during the 13th FYP. Energy storage will mainly be utilized in microgrids, distributed power source systems and power grid load shedding. We like Narada Power Source ( CH), Sungrow Power Supply ( CH), Center Power Tech ( CH), Rainbow Fine Chemical ( CH) and Sacred Sun Power Sources ( CH). Establishment of electricity trading centers a move towards market-driven model In addition to Beijing and Guangdong, provincial electricity trading centers have also been set up in Liaoning, Jilin, eastern Inner Mongolia, Xinjiang, Qinghai, Ningxia and Jiangsu. These trading centers will facilitate electricity dispatch, price discovery, market competition and the consumption of electricity generated from new energy sources. We see the establishment of electricity trading centers as a move towards a more market-driven operating model amid ongoing power sector reform. Within this context, we are positive on comprehensive energy service suppliers such as Integrated Electronic Systems Lab ( CH), Sunrise Technology ( CH), FuLing Electric Power ( CH), Zhongheng Electric ( CH) and Xinlian Electronics ( CH), and suggest watching software and platform provider NARI Technology Development ( CH). Ping An Insurance: 1Q16 earnings review; strong momentum in life insurance business; internet finance strengthening further 1Q16 net profit grew 3.7% YoY to Rmb20.7bn, with EPS of Rmb1.16. BVPS picked up 4% from end-2015 to Rmb Meanwhile, comprehensive income dropped 41.8% YoY to Rmb9.5bn, equivalent to Rmb0.52 per share. Strong momentum in life insurance business This year s good start for the life insurance business continued into 1Q16. Ping An s life premiums rose 28.3% YoY to Rmb134.7bn, with NBV up 38.3% to Rmb13.1bn. Agency-channel premiums amounted to Rmb119.0bn, with premiums from agency-channel new policies rising 38.5% YoY to Rmb42.7bn. Ping An took the biggest share of the telephone life insurance market with premium income of Rmb3.9bn. Overall, the life insurance business segment contributed net profit of Rmb12.4bn. Investment gains declining Comprehensive income dropped significantly in 1Q16 despite steady revenue and net profit growth, which should be attributable to the considerable stock market volatility during 2H15 and 1Q16. 1Q16 investment gains fell 36.4% YoY to Rmb20.4bn. Based our analysis of fair value changes in the insurer s available-for-sale financial assets, the company had floating gains of just Rmb970m in 2015 despite strong performance across different business Page 2

3 segments, compared with the record high figure of Rmb37.3bn in The company s investment performance has deteriorated further so far this year due to continued weakness in the stock market. However, we believe insurers investment gains are likely to bottom out as the long-term upside in the stock market is expanding. Internet finance strengthening further Ping An s current strategy is to focus on further strengthening its internet business coverage. The number of active users on its various online platforms continued to rise in 1Q16. Registered users on the Lufax platform increased by 2.75m from the start of the year to 21.05m (active users 4.83m). 1Q16 trading volume on the platform totaled Rmb1.3trn, with Rmb305.5bn attributable to retail investors and Rmb995.4bn to institutional investors. In addition, the company s Ping An Good Doctor platform also grew substantially during 1Q16, with a cumulative number of 65m users serviced and its daily consultation volume breaking 250,000 enquiries. Macro: FOMC not ruling out a Jun hike, but making no promises Economic activity has slowed, but external risks have declined The Federal Reserve left its interest rate unchanged, in line with market expectations. In its statement, there were two main changes compared with the Mar meeting. First, the FOMC removed the line global economic and financial developments continue to pose risks and just said that they will closely monitor global developments. This removal is reasonable since China s data improved in Mar and US stock and commodity markets have continued to perform well in the last two months. Second, the FOMC downgraded its assessment of the domestic economy saying economic activity appears to have slowed and growth in household spending has moderated. This downgrade is also fair since recent data including retail sales, consumer confidence, home sales, manufacturing and durable goods have all underperformed. However, the FOMC reiterated that labor market conditions remain strong and real income is rising at a solid rate, allowing the Fed to maintain confidence in the domestic economy. Overall, we see the statement as a return to a neutral tone, from the dovish tone in Mar. Fed still in wait and see mode The FOMC did not give any hints on the timing of the next hike. Officials want to leave the door open for a Jun hike, but they do not want to make any promises, in our view. We guess that some committee members are considering a Jun hike, but that this will depend on several factors. First, they want to see the global economy and financial markets stabilize further. Second, they wish to see if slowing economic activity is transitory or a new trend. Third, they are looking for signals that inflation will rise in the coming months. According to Fed Funds Futures market, investors only see a 21% chance of a Jun hike. However, we believe this underestimates the Fed s intention to hike rates. Since the Mar meeting, the US dollar has weakened and oil prices have rebounded to a six-month-high. We believe US inflation may pick up in the second half of this year, and therefore maintain our view that the Fed will raise rates at the Jun meeting, if financial markets remain stable and economic data improve in coming weeks. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Frankie Wan, Research Analyst, SFC CE No. AVK969, frankiewan@gfgroup.com.hk ) Healthcare: Comment on State Council s healthcare reform tasks for 2016 What s new? The State Council has issued a formal notice on the main tasks for deepening medical and healthcare system reform in 2016 ( 深化医药卫生体制改革 2016 年重点工作任务 ). Some of the key highlights are as follows. A two-invoice system is to be implemented within the drug supply chain to limit the issuance of invoices to two layers of parties along the supply chain (from pharmaceutical companies to distributors, and from distributors to hospitals); The government healthcare subsidy for each rural/urban resident will be increased to Rmb420 per year from Rmb380 in 2015, while the penetration rate of the state medical insurance will remain above 95%; The number of pilot cities for hospital reform will be increased from 100 to 200 by the end of 2016; A multi-tiered medical care system is to be promoted in 70% of cities whereby patients will be allocated to different classes of hospitals and healthcare service institutions according to the level of seriousness of their illnesses; A target has been set for the penetration rate of family doctors in cities to reach 15% by the end of 2016 in order to divert patient flows; Page 3

4 The use of auxiliary drugs (such as antibiotics and TCM injections) will be restricted to control unreasonable medical expenses. Expense control and restructuring to remain the focus This latest document has placed a higher priority on controlling drug sales growth while ensuring more efficient drug supply, procurement, prescription and consumption, which is consistent with previous policies on procurement and reimbursement reforms. This is expected to further bring down hospitals revenue from drug sales, which currently accounts for 40%-50%. Increase in government subsidies a longer term goal While the government healthcare subsidy has increased in nominal terms, it is offset by an even greater increase in out-of-pocket payments, which represents ~30% of total healthcare expenditure and rose to Rmb870 in A higher mix of government subsidies in overall healthcare costs will better incentivize public hospitals to reduce costs. Industry outlook to improve later this year after conclusion of provincial tenders Industry growth is expected to remain subdued in 1H16 as a result of ongoing sector reform. However, its impact is manageable for companies that possess products with great demand. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Maple Leaf (1317 HK, NR): 1HFY16 results beat, more new school projects ahead Results beat Net profit rose 122% YoY in 1HFY16, significantly higher than the 60%+ guided in its positive profit alert. Adjusted net profit was up 70% YoY. Revenue increased by 27% YoY led by 19% growth in students and tuition fee increases for certain schools in Dalian, Wuhan, Chongqing and Zhenjiang. GM rose 5.9pp to 47.1%, boosted by the increase in tuition fee and utilization rate (from 58% to 59.9%) as well as depreciation of the Canadian dollar against the Rmb. Street to revise up earnings estimates Bloomberg consensus sees adjusted net profit of Rmb233m in FY16. This would mean 2H16 adjusted net profit comes in flat YoY. We expect a double-digit percentage earnings upgrade in FY16. Deferred revenue +30% YoY Deferred revenue was up 30% YoY in 1HFY16, driven by 18% YoY growth in students in Feb and the tuition fee increase, suggesting high revenue growth momentum will continue in 2HFY16. Further tuition fee increases in FY17 The company will raise tuition fees for Tianjin high school by 20%. The high school fee for Shanghai high school will rise from Rmb81,000/yr to Rmb100,000/yr in FY17 as the company cancels its preferential discounts. More projects in the pipeline New schools in Huai an, Yancheng and Dalian have been added to the project pipeline for FY Maximum capacity is expected to increase from 30,040 in FY16 to 44,290 in FY18, representing a CAGR of 21%. Valuation The stock is trading at 26x/22x FY16/17E P/E, lower than Virscend s (1565 HK, NR) 41x/31x FY16/17 P/E. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@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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