Yum Cha 飲茶. November 7, 2017 RESEARCH NOTES SNIPPETS. INDICES Closing DoD%

Transcription

1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 28,596.8 (0.0) HSCEI 11,524.6 (0.7) Shanghai COMP 3, Shenzhen COMP 1, Gold 1, BDIY 1,476.0 (0.4) Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M RMB/USD 6.6 (0.1) DATA RELEASES DUE THIS WEEK Nov 7 Foreign Reserves Nov 8 Imports YoY Nov 8 Exports YoY Nov 8 Trade Balance Nov 8-18 Foreign Direct Investment YoY Nov 9 CPI YoY Nov 9 PPI YoY Nov Money Supply M2 YoY Nov New Yuan Loans CNY Nov Aggregate Financing CNY Source: Bloomberg RESEARCH NOTES November 7, 2017 YIXIN GROUP [2858.HK; NOT RATED] - Yixin Group is the largest online automobile retail transaction platform in China, measured by the volume and value of automobile retail transactions in As the Company is focusing on the fast-growing used automobile market in China, its adjusted net profit is expected to grow 500% in 2017E and >80% in 2018E, based on market estimates. Currently, its parent company, Bitauto (BITA.US) is trading at 22.5x 2018E PER, with a PEG of 0.65x. If we assume Yixin can reach x PEG post-ipo based on 2018E earnings, the Company has the potential to trade at x 2018E PER, implying 20-57% upside from the high-end of the pricing range (HK$7.7). TMT SECTOR UPDATE - Based on our discussion with investors in Beijing, the hardware segment remains the major focus in the TMT industry. In this segment, the semiconductor supply chain is the most discussed area. Regarding handset components, investors are focusing mainly on two leaders: AAC Technologies (AAC) [2018.HK] and Sunny Optical [2382.HK]. There are also questions about Truly [0732.HK], which is more related to OLED displays. It seems investors also share the view that the smartphone market is maturing, given slower growth, and that specification upgrades and the adoption of new technologies are the trend. Non-hardware TMT is not as hot as hardware regarding investor response. But we believe that non-hardware TMT will be the market focus, given industry news flow and upcoming IPOs. We reiterated our view that IT Services will benefit from a better macro environment and increasing IT spending in new areas such as cloud services. We also highlighted that AI will remain an investment theme in 2018 and that machine vision, especially facial recognition, will lead, as industry news flow suggests that both Face ++ and SeneTime, which are leaders in facial recognition, are seeking IPOs. We maintain the view that Meitu [1357.HK] may be treated as an AI name. SNIPPETS AAC Technologies (AAC) [2018.HK, HK$153.7, NOT-RATED] shares performed well yesterday, in our view, due to: a) easing concerns about its results after Apple s strong Q4 FY17 results and Q1 FY18 guidance last week, and b) news flow on Huawei s protentional adoption of AAC s hybrid lens solution. We maintain the view that smartphone market is maturing, given slower growth. Specification upgrades and the adoption of new technologies are the trend. Apple remains the trend setter, given its advantage in sourcing key components. Regarding specific components, substrate grade PCBs, OLED and 3D sensing module/hybrid lens solution remain the trends in Instead of focusing on plastic lenses, AAC aims to become a leader in the hybrid plastic and glass lens segment, taking advantage of its integrated R&D process (plastic lens, glass lens and VCM). AAC has developed its own proprietary technology and equipment for producing wafer level glass lenses from Kaleido, in which AAC invested in There is a market rumour that Huawei is likely to adopt AAC s hybrid lens solution for a non mainstream model for trial purposes. The potential adoption of AAC s hybrid lens by Huawei may clear up market concern about AAC s development of the optics business. The market is likely to focus more on this as a re-rating catalyst for AAC. The valuation gap between AAC and Sunny Optical [2382.HK] may narrow, given AAC s breakthrough in the lens segment. 1

2 COMPANY NEWS November 7, 2017 YIXIN GROUP [2858.HK; NOT RATED] TO BENEFIT FROM THE FAST GROWTH OF CHINA S USED AUTOMOBILE MARKET Analyst: Wong Chi Man, CFA (cmwong@chinastock.com.hk; Tel: ) Summary. Yixin Group is the largest online automobile retail transaction platform in China, measured by the volume and value of automobile retail transactions in As the Company is focusing on the fast-growing used automobile market in China, its adjusted net profit is expected to grow 500% in 2017E and >80% in 2018E, based on market estimates. Currently, its parent company, Bitauto (BITA.US) is trading at 22.5x 2018E PER, with a PEG of 0.65x. If we assume Yixin can reach x PEG post-ipo based on 2018E earnings, the Company has the potential to trade at x 2018E PER, implying 20 57% upside from the high-end of the pricing range (HK$7.7). Company background. Established in 2014, Yixin Group is a subsidiary of Bitauto and is the largest online automobile retail transaction platform in China, measured by the volume and the value of automobile retail transactions in 2016, with a market share of >18%. In 2016, it facilitated over 190,000 automobile retail transactions, with the aggregate value of the underlying automobiles reaching over RMB18bn. After the IPO, Bitauto, Tencent (0700.HK), JD and Baidu will own 43.9%, 20.9%, 10.9% and 3.02% of the shares, respectively. Key information about the IPO. (i) Offer price: HK$ ; (ii) Size of the offering: 878.7m new shares (14% of the enlarged share capital); (iii) Fundraising size: gross proceeds of HK$6.77bn, assuming the IPO is priced at the high end; (iv) Hong Kong IPO dates: November 6 to 9; (v) Trading start date: November 16; (vii) Joint sponsors: Citi and Credit Suisse. Rapid growth of China s used automobile market from a low base. The value of China s automobile retail transactions grew from RMB2.2tn in 2012 to RMB3.8tn in 2016, representing a CAGR of 14.9%. The value is expected to increase from RMB3.8tn in 2016 to RMB5.2tn in 2021, representing a CAGR of 6.5%, according to Frost and Sullivan. The value of used automobile retail transactions in China increased from RMB191.4bn in 2012 to RMB509.6bn in 2016, representing a CAGR of 27.7%. In 2016, China s volume of used automobile retail transactions contributed only 24.6% of the volume of overall automobile retail transactions, which is much lower than the contribution rate in the United States (68.2%). Therefore, in 2021, the volume of used automobile retail transactions is expected to reach 14.6m (32% of the total), representing a CAGR of 13.5% from Benefiting from focusing on the used automobile market. In 2014, the Company offered only advertising and subscription services and had a small revenue base. However, it quickly entered the selfoperated financing business to provide financing to consumers with its own financing lease products, focusing on the fast-growing used automobile market. Revenue from this segment surged from RMB65m in 2015 to RMB1.2bn in 1H17. Following the rapid growth of the selfoperated financing business, it established a transaction platform business (online and offline), including (i) facilitation and value-added services, which earn service fees from consumers or auto dealers that have completed transactions through its platform; (ii) loan facilitation services, whereby the Company primarily earns service fees from consumer borrowers or banks that have extended auto loans to consumers; and (iii) value-added services, where Yixin primarily generates revenues from auto dealers for sales of vehicle telematics systems. Revenue from the transaction platform business jumped from RMB58m in 1H16 to RMB321m in 1H17. Still a small player in the overall market. Yixin is the largest online automobile retail transaction platform in China, measured by the volume and value of automobile retail transactions in 2016, with a market share of >18%. However, it accounted for only a respective 0.6% and 0.5% of China s overall automobile retail transactions market in terms of volume and value in 2016, as the online market is still very small. This suggests that Yixin still has a lot of room to gain market share in the offline market. Auto finance is still very underdeveloped in China. China s consumer auto finance penetration rate was only 30.5% in 2016, far below the level of 82.0% in the US. The penetration rate is expected to reach 58.4% in 2021, according to Frost and Sullivan. This implies the growth outlook of Yixin s self-operated financing business remains very upbeat in the coming years. Competitive edge. With the largest online automobile retail transaction platform in China, the Company has a large customer database compared with its peers. Its sophisticated proprietary algorithms developed by its data analytics team, comprising over 380 data specialists, serve as a critical foundation for the business and lead to more efficient sales and marketing results, a faster and higher success rate of transactions, and better credit risk management. As of June 30, 2017, the Company s 30+ days, 90+ days and 180+ days past due ratio were only 0.89%, 0.51% and 0.23%, respectively. With the financial support of shareholders such as Tencent, JD and Baidu, Yixin s total finance receivables surged from RMB2.86bn at end-2015 to RMB19.6bn at end-1h17. Earnings distorted by non-cash items. On a reported basis, the Company reported a huge loss of RMB6.1bn in 1H17, which includes a fair value loss of convertible redeemable preferred shares. After adjusting this item and non-cash expenses, adjusted net profit was RMB261m, up 684% YoY. Meanwhile, its average yield of net finance receivables increased from 7.3% in 2015 to 13% in 1H17. Its average cost of the interest-bearing liabilities was 5.5% in 1H17, up from 4.3% in Valuation. Based on the high end of the offer price (HK$7.7), Yixin is valued at 67.5x, 36.1x and 19.5x for 2017E, 2018E and 2019E, respectively, according to market estimates quoted by the press. Currently, Bitauto, its parent company, is trading at 30.3x, 22.5x and 15.5x for the corresponding period. We believe it is reasonable for the parent company to trade at a lower valuation because (i) the parent s business (ex-yixin) focuses on the new automobile market, which reported a lower growth rate than that of the used automobile market, and (ii) a holding company discount. Based on 2018E PER, the parent is trading at 0.65x PEG. If we conservatively assume x PEG for Yixin, its valuation may reach x 2018E PER, suggesting potential upside of 20 57%. Risks: (1) A limited track record in a relatively new industry (established in 2014); (2) uncertainty regarding the reliability of the asset quality because of its short operating history; (3) potential competition from other players (Ping An, Meili Finance (also invested in by JD), Youxin, etc.); (4) interest rate risk, which may hurt its net interest margin; (5) regulatory risk for a fast-growing industry; and (6) execution risk of developing a new business.

3 Figure 1: Results highlights RMB' H2016 1H2017 YoY change Transaction platform business 47, , ,152 58, , % Self-operated financing business - 65,461 1,275, ,414 1,230, % Revenue 47, ,275 1,487, ,811 1,551, % Cost of revenues (6,976) (39,998) (752,888) (232,681) (657,546) 182.6% Gross profit 41, , , , , % Selling and marketing expenses (27,723) (150,699) (360,098) (132,818) (345,652) 160.2% Administrative expenses (5,310) (20,558) (225,330) (36,711) (182,617) 397.4% R&D expenses (8,686) (16,112) (71,351) (14,043) (72,423) 415.7% Other gains and (losses) (911) 19,439 17,411 11,462 4, % Operating (loss)/profit (1,616) 63,347 95,641 51, , % Finance income 787 5,283 15,755 1,071 14, % Finance expenses - (12,210) (29,250) (5,389) (15,605) 189.6% Fair value loss of convertible redeemable preferred shares - (53,452) (1,428,141) (16,789) (6,300,470) % (Loss)/Profit before tax (829) 2,968 (1,345,995) 29,913 (6,003,149) n.a. Income tax 894 (31,174) (58,343) (30,560) (101,910) 233.5% Minority interest - - 3,005-5,684 n.a. Net profit 65 (28,206) (1,401,333) (647) (6,099,375) % Adjusted operating profit 2,099 94, ,622 68, , % Adjusted net profit 3,780 65,603 99,665 33, , % Gross margin 85.5% 85.3% 49.4% 49.0% 57.6% Adjusted operating margin 4.4% 34.8% 10.1% 15.0% 22.6% Adjusted net margin 7.9% 24.2% 6.7% 7.3% 16.8% Figure 2: Balance sheet highlights RMB'000 (Y/E Dec) H2017 Current assets 240,353 3,081,502 10,559,715 12,634,477 Current liabilities 96,252 1,117,624 10,034,675 14,177,931 Net current assets/(liabilities) 144,101 1,963, ,040 (1,543,454) Total equity 149, ,359 (1,384,475) (7,631,811) Convertible redeemable preferred shares - 2,588,232 8,071,817 17,516,756 Total finance receivables - 2,861,480 14,363,866 19,678,414 Total borrowings ,319,427 17,000,901 Figure 3: Use of proceeds HK$1,806m HK$602m To implement sales and marketing initiatives to support the geographical expansion of its auto dealer cooperative network, including the expansion of its sales and marketing team To further enhance research and technology capabilities including the recruitment of engineers and data specialists and further investment in our IT systems and data analytics capabilities To strengthen capital resources to support the ongoing growth of its self-operated financing business To selectively pursue acquisitions of or investments in assets and businesses which are complementary to its business and are in line with its growth strategies Working capital

4 COMPANY / INDUSTRY NEWS TMT INDUSTRY UPDATE Key takeaways from marketing of the TMT (hardware and non-hardware) industry. Analyst: Mark Po, CFA; Tel: (852) ; markpo@chinastock.com.hk November 7, 2017 Hardware remains the focus. Based on our discussion with investors in Beijing, the hardware segment remains the major focus in the TMT industry. In this segment, the semiconductor supply chain is the most discussed area. This is not a surprise, given the strong share price performance of the HK-listed foundries, such as Hua Hong [1347.HK] and SMIC [0981.HK]. Investors are focusing more on SMIC, especially the impact of Mr Liang Mong Song joining as Co-chairman on advanced node development, and the competitive landscape in the global foundry industry. We reiterated the view that with Mr Liang Mong Song taking charge of SMIC s R&D department, SMIC has a high chance of making a major breakthrough in the 14nm/10nm FinFET process. Mobile processors with AI features (refer to our previous industry update on 06 Oct 2017) are manufactured using the 10nm FinFET process. A breakthrough in 14nm/10nm FinFET will narrow the gap between SIMC and its peers. The production value of the global foundry industry is expected to reach US$74.66bn in 2022 (CAGR of 6%), driven mainly by the smartphone industry, IoT, AR/VR, automobile electronics and high performance PC products. By 2022, the world's top four foundry houses, TSMC, Globalfoundries, UMC and SMIC, will have combined production capacity of m 8-inch equivalent wafers a year, representing a CAGR of 7.1% in We maintain the view that SMIC can deliver growth both organically from industry growth and from market share gains from its peers, such as UMC and Glboalfoundries. SMIC also has exposure to packaging through JECT, which may help it gain market share. SMIC seems to be lagging behind the leading global players regarding EUV development. However, EUV development requires huge CAPEX and expertise, and in our view, it is not a bad idea for SMIC not to release its plan on EUV development. Overall, given their uniqueness, the HK-listed listed foundries have been re-rated recently, as they are not trading at the higher end of their historical PBV range SMIC s 1.4x PBV vs. the highest of 1.7x since 2009 and Hua Hong s 1.1x, which is the highest level since listing. We suggest clients broaden their radar screen from foundries to IC design names (CE Huada [0085.HK], Solomon Systech [2878.HK] and Shanghai Fudan [1385.HK], materials (AVIC Int l [0161.HK] s Shannan Circuits) and equipment (ASMPT [0522.HK]. ASMPT is another much-discussed name, given its leading position in the packaging segment and its uniqueness. We highlighted that ASMPT is a major laggard in the HK-listed semiconductor sector, which may be due to offloading by ASMI, a major shareholder. This impact is expected to fade, and shares of ASMPT are expected to be supported by its share buy-back program. ASMPT is a global leader in packaging equipment, and we suspect that ASMPT might look interesting to Chinese companies as an M&A target, as ASMI has reduced its stake in ASMPT to 25%. We share the view that the market has concerns about the growth outlook for ASMPT, but we believe that the growth of new applications such as auto electronics and new packaging methods such as fan-out packaging should provide growth opportunities for ASMPT. The leaders remain the focus for handset components. Regarding handset components, investors are focusing mainly on two leaders: AAC Technologies (AAC) [2018.HK] and Sunny Optical [2382.HK]. There are also questions about Truly [0732.HK], which is more related to OLED displays. It seems investors also share the view that the smartphone market is maturing, given slower growth, and that specification upgrades and the adoption of new technologies are the trend. We maintain the view that Apple remains the trend setter, given its advantage in sourcing key components, such as OLED displays and 3D sensing modules, and that the Chinese brands are unlikely to catch up in the near term. Regarding specific components, we highlighted that substrate grade PCBs, OLED and 3D sensing module/hybrid lens solution remain the trends in We still suggest investors stick with leading high-end component manufacturers, such as AAC and Sunny Optical, due to a) their more stable performance, b) smartphone specification upgrades, and c) their strong R&D capability. However, some investors didn t realize the potential of hybrid lens solution and are focusing more on 3D sensing and 6p with higher mega pixels/7p plastic lens development. We believe that AAC s potential breakthrough in hybrid lens solutions will be a major re-rating catalyst. The supply of OLED displays for handsets is expected to remain tight in 2018, as we haven t seen a major capacity ramp-up by non-korean suppliers despite the tight supply of critical equipment. However, the market is expected to chase names related to OLED, such as Truly, BOE Varitronix [0710.HK], Yeebo [0259.HK] and Solomon Systech. We also have questions on Tongda [0698.HK], given its share price underperformance and exposure to Apple. However, we highlighted that unless there is a major re-rating catalyst, shares of Tongda are unlikely to catch up. Non-hardware TMT is not as hot as hardware regarding investor response. But we believe that non-hardware TMT will be the market focus, given industry news flow and upcoming IPOs. We reiterated our view that IT Services will benefit from a better macro environment and increasing IT spending in new areas such as cloud services. Among investors, Kingdee [0268.HK] is preferred, given its exposure to cloud services and a clearer strategy. DC Holdings [0861.HK] is more controversial, as investors have concerns regarding: a) the relationship between management and GRG Banking Equipment, and b) corporate strategy. We share the view that the relationship between management and GRG Banking Equipment doesn t really affect DC Holdings operations and that DC Holdings has a clear roadmap though it will take time for new business to make a meaningful contribution. We also believe that DCITS will benefit from a better macro environment and increasing IT spending. We believe that shares of DC Holdings will catch up once concerns fade. We also received an enquiry on ChinaSoft [0354.HK], a leading IT services provider. Interest in other IT services names seems to be low at this stage. The share price performance of game developers may be capped by concerns about their Q3 results and growth outlook. The market is waiting for their Q3 results to evaluate the potential impact of a growth slowdown in the Game Developer and Social Networking segment. We maintain the view that Kingsoft [3888.HK] may look interesting, given its exposure to cloud computing and the spin-off of WPS (a potential beneficiary of localization of applications for office use). We also believe that IGG [0799.HK] looks interesting, since concern about competition from its peers seems to be overdone. We also believe that sentiment on Online-entertainment, E-commerce and Media will be boosted by upcoming IPOs, such as China Literature [0772.HK] and Yixing [2858.HK]. The IPOs of sizable non-hardware TMT names and the back-door listing of 360 Technology will attract market attention to the segment, so we believe that the market focus may broaden from hardware TMT to non-hardware TMT. We also highlighted that AI will remain an investment theme in There are several major categories of AI applications: a) machine vision, such as facial recognition; b) natural language processing (NLP) technologies, which are commonly used in smart speakers; and c) other AI technologies, such as roboadvisors and algorithm trading. We believe that machine vision, especially facial recognition, will lead, as industry news flow suggests that both Face ++ and SeneTime, which are leaders in facial recognition, are seeking IPOs. We maintain the view that Meitu [1357.HK] may be treated as an AI name. 1

5 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities Co., Ltd. (6881.HK; CH) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 20/F, Wing On Centre, 111 Connaught Road Central, Sheung Wan, Hong Kong. General line: