Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 6, 2016

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1 Equity Research 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 PING AN CHINA LIFE Source: Bloomberg A-Share Market Construction: Positive on sector given government push for accelerated SOE reform At a meeting regarding SOE reform held on Monday, President Xi reemphasized the importance of accelerating SOE reform and strengthening the state-owned economy, which formed part of a series of urges recently voiced by officials at various levels for such reform to be sped up. We believe the progress of SOE reform in 2H16 might be faster than currently expected. Construction might be one of the sectors to encounter greater obstacles during reform and to take longer before the reform can come through, but some improvements have already been seen. Hong Kong Market Great Wall Motor (2333 HK, NR): 1H16 sales growth satisfactory on strength from Haval H6 The company s overall sales performance is now mainly driven by its SUV segment, particularly the Haval H6. The model is among top performers in China's SUV market with attractive tech design and cheap pricing. 1H16 sales growth was still satisfactory despite the high comparable base in 1H15 mainly as a result of the company's price cut strategy to promote sales amid fierce competition. However, profitability might remain a cause for concern if this strategy becomes even more aggressive. Kingsoft (3888 HK, Buy): Profit warning on non-cash investment impairment provision; limited downside risk; maintain Buy Kingsoft has issued a profit warning for its 1H16 results, and the shares have dropped over 10% in the last two days. We see this as an overreaction as the profit warning is mainly attributable to its non-cash investment impairment provision. While there is some uncertainty in its Cheetah business, Kingsoft s three other business lines are seeing good momentum in revenue growth and margin expansion. We expect 29% and 30% YoY growth in revenue and non-gaap net profit respectively in FY16. We lower our SOTP-based target price from HK$20.20 to HK$19.80, but maintain our Buy rating. Truly (732 HK, Accumulate): 1H16 sales up 2% YoY; up to 18% YoY sales increase set for 2H16 Jun sales rose 1% YoY. The sales recovery in 1H16 remained slow, with sales up 2.2% YoY. However, we expect the sales recovery to pick up in 2H16 on a ramp-up in sales of new products, continued growth in its automotive display business, and a low comparable base. 2H16 sales could rise 18% YoY, based on management guidance of 10% sales growth for The stock was the best performer under our coverage in 1H16, during which the share price rose 99%. We expect 15% YoY overall EPS growth in 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 Construction: Positive on sector given government push for accelerated SOE reform Government leaders/officials restressing SOE reform At a meeting regarding SOE reform held on Monday, President Xi reemphasized the importance of accelerating SOE reform and strengthening the state-owned economy, which formed part of a series of urges recently voiced by officials at various levels for such reform to be sped up. We believe the progress of SOE reform in 2H16 might be faster than currently expected. Sector changing for the better despite reform difficulties Construction is a large sector with an annual output worth Rmb18trn, and its complex industry structure has resulted in consistently low net profit margins. As such, it might be one of the sectors to encounter greater obstacles during reform and to take longer before the reform can come through. That said, some improvements have been seen as large central SOEs reported lower entertainment expenses and higher net profit margins in Local SOEs to be key players We believe local SOEs will likely become key participants of ongoing SOE reform given the visits paid by the SOE Reform Investigation Team to northeastern China towards the end of May and moves of reform recently made among local construction SOEs. We remain positive on listed construction firms. Key risks include continued slowdowns in overall investment growth and slower-than-expected progress in SOE reform. Great Wall Motor (2333 HK, NR): 1H16 sales growth satisfactory on strength from Haval H6 Sales contribution from the company s pickup segment continued to decline due to sluggish commercial demand amid the weak economy. The sales volume of pickups in 1H16 was similar to end-fy15 but was lower than peak levels seen in previous years. Neither the Haval H1 nor H2 did much to lift the company's overall SUV sales volume. We find the growth figures of the two models disappointing, considering that they make up nearly 25% of the company s total sales volume. In the absence of further marketing efforts, the two models are unlikely to post strong sales growth in 2H16. The Jun sales performance of the Haval H6 was a cause for concern as its MoM growth slowed again following the strength in May. That said, thanks to its strong sales figures during 1Q16, cumulative sales in 1H16 maintained sharp double-digit growth. We believe the sales strength of the Haval H6 will continue into 2H16 given the company s price cut strategy for the model, but this might be challenged by other competitive models in the market such as GAC s Trumpchi GS4 and SGMW s Baojun 560. The Haval H7 eased to a slow pace of growth in the second month of its launch after starting out with in-line sales volume in May. The model has failed to meet the strong sales performance expected by the market (monthly sales of up to 5,000 units in the short term). While the low-season effect is at play, the market will react negatively to the model s Jun sales growth. Further marketing will be needed to turn the model into the next positive growth contributor based on the company's current product portfolio. High-end models Haval H8 and H9 suffered high double-digit sales declines in 1H16, which should not have a substantially negative impact on the company as the two models now account for less than 5% of total sales volume. Meanwhile, their limited contribution reflects the failure of the company's strategy for high-end models so far. The company s overall sales performance is now mainly driven by its SUV segment, particularly the Haval H6. The model is among top performers in China's SUV market with attractive tech design and cheap pricing. 1H16 sales growth was still satisfactory despite the high comparable base in 1H15 mainly as a result of the company's price cut strategy to promote sales amid fierce competition. However, profitability might remain a cause for concern if this strategy becomes even more aggressive. Page 2

3 Great Wall Motor 1H16 sales overview Sales volume (units) Jun YoY % MoM % 1Q16 YoY % 2Q16 YoY % 1H16 YoY % As % of total sales volume Pickup Wingle 6, (15.5) 27,702 (2.4) 24, ,450 (0.5) 11.6 SUV Sedan Haval H1 3,504 (8.1) (33.0) 21, ,488 (10.4) 37, Haval H2 10, (19.1) 39,058 (6.4) 33,276 (6.0) 72,334 (6.3) 16.1 Haval H5 1,501 (18.9) (35.0) 5,715 (7.7) 6,319 (5.9) 12,034 (6.8) 2.7 Haval H6 37, , , , Haval H7 3, ,059-8, Haval H8 425 (69.0) (3.8) 2,197-1,495-3, Haval H ,346 (65.2) 2, ,142 (44.9) 1.1 Haval H8+H9 1,312 (39.2) ,543 (32.5) 4,291 (18.6) 8,834 (26.4) 2.0 SUV subtotal 57, (6.9) 192, , , Great Wall C30 1, (31.9) 10,092 (6.8) 5,567 (16.1) 15,659 (10.3) 3.5 Great Wall C , , Sedan subtotal 1,172 (45.0) (31.9) 13,366 (21.2) 5,717 (46.9) 19,083 (31.2) 4.3 Total 65, (8.4) 233, , , Exports 1,099 (50.8) (5.0) 3,167 (32.0) 4,132 (48.0) 7,299 (42.1) 1.6 Sources: Company data, GF Securities (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 ) Kingsoft (3888 HK, Buy): Profit warning on non-cash investment impairment provision; limited downside risk; maintain Buy What s new? Kingsoft has issued a profit warning for its 1H16 results, and the shares have dropped over 10% in the last two days. Sharp loss on investment impairment provision The company is expected to make a US$125m provision for impairment on its investment in two US-listed companies Xunlei (XNET US) and 21Vianet (VNET US), due to prolonged declines in their market values. Shares in Xunlei and 21Vianet are down 31% and 55% YTD respectively. OPM under pressure due to Cheetah s weakness in 1H16 Cheetah should see earnings deteriorate in 2Q16, compared to the previous quarter, due to the ongoing traffic purchase adjustment by its largest customer Facebook. We expect a non-gaap loss for Cheetah in 2Q16, caused by slowing revenue growth and rising investment in content development as well the establishment of a direct sales team. While the profitability of other business lines is improving, Kingsoft s overall non-gaap OPM is estimated to decline to 7.6% in 2Q16, from 14.6% in 1Q16. However, we think 2Q16 may be the near-term bottom for its quarterly results as the rising contribution from mobile games will support earnings from 3Q16. Meanwhile, WPS and cloud services should also see strong growth this year. Market has overreacted; limited downside risk We see the decline in the last two days as an overreaction as the profit warning is mainly attributable to its non-cash investment impairment provision. While there is some uncertainty in its Cheetah business, Kingsoft s three other business lines are seeing good momentum in revenue growth and margin expansion. For Cheetah, we expect 18% revenue growth and a 25% decline in non-gaap net profit in FY16. For Kingsoft overall, we expect 29% and 30% YoY growth in revenue and non-gaap net profit. We lower our SOTP-based target price from HK$20.20 to HK$19.80, based on 12x FY16E P/E for online games, 20x FY16E P/E for Cheetah (16% discount to its current market cap), 25x FY16E P/E for WPS, 6x FY16E P/S for its cloud business, investment in 21Vianet and net cash. Even if we do not take the cash value of HK$6 per share into consideration, the stock can still be valued at HK$13.80, suggesting limited downside from the current price. We maintain our Buy rating. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk ) Page 3

4 Truly (732 HK, Accumulate): 1H16 sales up 2% YoY; up to 18% YoY sales increase set for 2H16 What's new? Truly reported Jun sales figures after market close yesterday. Back-end loaded growth in 2016 Jun sales reached HK$1,852m (+1.0% YoY). The sales recovery in 1H16 remained slow (+2.2% YoY), with sales coming in at HK$9.7bn. However, we expect the YoY sales recovery to pick up in 2H16, underpinned by 1) a ramp-up in sales of new products (management expects sales of fingerprint modules to increase ten-fold in 2016, up from 2m units in 2015), 2) continued growth in its automotive display business, and 3) a low comparable base (sales in 3Q and Oct last year were quite poor). Sales in 2H16 could reach HK$11.7bn (+18% YoY), based on management guidance of 10% sales growth for Best performing stock in 1H16 The stock was the best performer under our coverage in 1H16, during which the share price rose 99%. Trading at low-teen forward P/E The stock is currently trading at 10.8x 2016E P/E based on market consensus EPS and 1.3x P/B. Overall, we expect 15% YoY EPS growth in 2016 (1Q16 EPS: +13% YoY). (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@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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