Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Dec 17, 2014

Transcription

1 Equity Research 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 ICBC CHINA MOBILE CCB HSBC BANK OF CHINA TENCENT CHINA LIFE INS SINOPEC PING AN INS Econ data release US Data Date Period Prior Cons US CPI Urban YoY 17-Dec NOV Initial Jobless Claims 18-Dec 13-Dec Cont Jobless Claims 18-Dec 6-Dec Markit US Serv PMI 18-Dec DEC P Existing Homes Sales 22-Dec NOV Dur Goods New Ord 23-Dec NOV GDP QoQ 23-Dec 3Q T Source: Bloomberg GF events Date Event Location 23 Dec BoCom co. visit Shanghai Source: GF Securities A-Share Market Auto: 2015 investment strategy; sector to maintain stable demand growth We expect the auto sector to maintain stable demand growth in 2015 as any policies that significantly stimulate or limit sector growth are unlikely to be issued in 2015 amid an overall pro-growth environment and as sector operations are stable. We expect PV market growth to remain low and prices to decline with proprietary domestic brands to face fierce competition. The commercial vehicle space will mainly be driven by replacement demand with upside in vehicle prices. Building Materials: 2015 investment strategy; sector view now more upbeat The building materials sector has entered a mature stage of development with slower growth. That said, market leaders valuations have fallen below international fair valuations, and their pricing power is strengthening with profitability rising. Property investment growth is likely to bottom out in 2015 while infrastructure investment is set to maintain strong growth. This, coupled with easing sector supply growth and declining fossil fuel prices, should lead to a rebound in sector profitability. Non-Ferrous: 2015 investment strategy; watch nickel and zinc, rare earths needing formal regulatory rules We continue to highlight nickel and zinc given significant drops in supply. Gold prices will mainly fluctuate around its cost of production with continued price strength unlikely. We do not see any investment opportunities in the rare earth space until some formal regulatory rules are put in place, with downstream demand to remain the key driver of prices in the near term. We are positive on companies with barriers for competitor entry in terms of processing techniques and high growth visibility among their downstream customers. Hong Kong Market Kangda Int'l (6136 HK, NR): Upgrade and expansion phase in Henan announced Kangda has signed an agreement with the Jiaozuo City local government allowing it to upgrade and expand capacity at its Jiaozuo City Industrial Park Wanfang Wastewater Treatment Plant. Total investment amounts to Rmb197m. The company recently revealed plans for three projects with total capacity of 125kt/day that it hopes to finalize soon we believe by the end of the year. Kangda s share price has since rebounded, and coupled with the expectation of new supportive policies being announced by the end of the month, we believe there is more room for a re-rating. Ourgame (6899 HK, NR): Exclusive rights gained for WPT brand in a number of Asian countries The company has announced a license agreement giving it exclusive rights to the WPT brand in a number of Asian countries (including China, Indonesia, Korea and Vietnam), and non-exclusive rights in Japan from 2015 to The agreement demonstrates its strong capability and brand in the organization of offline poker events. We expect Ourgame to host more WPT poker tournaments in overseas markets and believe its overseas expansion will be a strong growth catalyst. We believe its current valuation is undemanding given its rapid and visible growth outlook. 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 Auto: 2015 investment strategy; sector to maintain stable demand growth We expect the auto sector to maintain stable demand growth in 2015 given the following two reasons. Policy stimulus or restrictions unlikely We believe any policies that significantly stimulate or limit sector growth are unlikely to be issued in 2015 amid an overall pro-growth environment. We suggest watching policies related to energy saving & emission reduction as well as SOE reform, such as policies for the auto dismantling market and fuel consumption tax adjustments. Sector operations stable Strong sector growth is unlikely to be seen going forward due to energy safety pressure; that said, relatively low per-capita car ownership and the role of the sector as a pillar for economic growth mean that drops in demand seen during are unlikely to be repeated amid a stable policy environment. Subsector outlook In the passenger vehicle space, the SUV and MPV subsectors will be key to watch. We expect PV market growth to remain low and prices to decline with proprietary domestic brands to face fierce competition. The commercial vehicle space will mainly be driven by replacement demand as the investment peak in China has ended. In addition, given substantial oil price declines, manufacturers of domestic commercial vehicle brands will shift their focus from sales volume growth to profitability, with upside in vehicle prices. We highlight the following investment ideas. SOE reform A series of policies for central SOE reform might be rolled out in 2H15. We like China Automotive Engineering Research Institute ( CH). Companies attaching great importance to improving product strength Companies whose products are entering a stage of strong growth will benefit from significant improvements in sales volume and profit margins, driving earnings and valuation strength. As such we recommend CNHTC Jinan Truck ( CH), Great Wall Motor ( CH), Jiangling Motors ( CH) and Jianghuai Automobile ( CH). National IV, car electronics, new energy vehicles, light weight auto Companies driven by these investment themes include Yunnei Power ( CH), Beiqi Foton Motor ( CH), Shanghai Diesel Engine ( CH), Jianghuai Automobile ( CH), Beijing WKW Automotive Parts ( CH) and Weifu High-Technology ( CH). M&A and change in business models Companies expected to conduct M&A might not only benefit from a change in valuation methodology due to the introduction of shareholders which are operating in the same industry, but could also conduct reverse takeovers. We suggest watching Ankai Automobile ( CH) and Tianrun Crankshaft ( CH). Aftermarket services We like the auto dismantling space given the mature business model. In addition, we see substantial room for future growth in the auto maintenance space with market growth to take off after a feasible business model is established. Relevant policy issuance will be a key catalyst. Building Materials: 2015 investment strategy; sector view now more upbeat Pessimism unwarranted The building materials sector has entered a mature stage of development with slower growth. That said, we have also seen some positive signs since the start of 3Q14: 1) market leaders valuations became in line with international levels in 2H12, and fell below international fair valuations in 2-3Q14, meaning expectations of medium-term demand peaking have been priced in; 2) judging from conditions in the 3Q14 low season, leading companies pricing power is strengthening with their profitability rising. More positive indicators In addition, property investment growth is likely to bottom out in 2015 as property sales have continued to recover since Oct, while infrastructure investment is set to maintain strong growth given the policy tone at the latest central economic work conference. This, coupled with easing sector supply growth and declining fossil fuel prices, should lead to a rebound in sector profitability. Page 2

3 More upbeat on sector Our sector view has become more bullish given the pricing in of negative expectations, expectedly rebounding earnings in 2015 and the strong likelihood of further monetary easing. We highlight the following ideas for stock selection. Companies with weak earnings but considerable regional market space which are driven by catalysts for better supply-demand dynamics in 2015, or those with strong regional pricing power and profitability but low valuations such as Tianshan Cement ( CH) and Jidong Cement ( CH); also watch for short-term opportunities from Anhui Conch ( CH) and Huaxin Cement ( CH). Companies focusing on core business development with considerable competitiveness and great business expansion potential such as Oriental Yuhong Waterproof Technology ( CH) and Changhai Composite Materials ( CH). Companies set to see fundamentals improve on SOE reform or a shift in their core business model such as Fangxing Science & Tech ( CH), Luoyang Glass ( CH), China Fiberglass ( CH), Beijing New Building Materials ( CH), Ruitai Materials Technology ( CH), Jianfeng Group ( CH), Jidong Cement ( CH), Yatai ( CH), BBMG ( CH), Lionhead Cement ( CH), Sanxia New Building Materials ( CH), Longquan Pipeline Engineering ( CH), Academy of Building Research ( CH), Avic Sanxin ( CG) and Feilihua Quartz Glass ( CH). Non-Ferrous: 2015 investment strategy; watch nickel and zinc, rare earths needing formal regulatory rules Base/precious metals Economic growth in China, which is a key driver of base metal demand, has eased with no new drivers in sight. New capacity added during better sector conditions is slowly coming on line, but overall capacity remains relatively low. Monetary policy in China is likely to remain loose despite tapering in the US. We continue to highlight nickel and zinc given significant drops in supply. Investment demand for precious metals is weakening as the US economy recovers. As such gold prices will mainly fluctuate around its cost of production with continued price strength unlikely. Rare earth prices showed some short-lived strength in Aug on reports of state reserve building before dropping again in 4Q14. The prices of most types of rare earths have declined due to sluggish downstream demand except for those related to the permanent magnet industry chain. Recent regulatory crackdowns on illegal mining activities, reserve building and industry consolidation have failed to effectively limit rare earth supply. We believe this has been due to the absence of a set of formal regulatory rules for rare metals, making it difficult to establish any longterm regulatory mechanisms. We do not see any investment opportunities in the rare earth space until such rules are put in place, with downstream demand to remain the key driver of prices in the near term. Watch opportunities in processing space The growth potentials of various downstream industries differ significantly amid the current economic environment of slowing growth and ongoing restructuring. We are optimistic that substantial growth in the arms, nuclear power, high-speed rail, resource recycling and light weight auto industries will offer great opportunities for raw material suppliers. In particular, we are positive on companies with barriers for competitor entry in terms of processing techniques and high growth visibility among their downstream customers. Kangda Int'l (6136 HK, NR): Upgrade and expansion phase in Henan announced What s new? Kangda has signed an agreement with the Jiaozuo City local government that includes: 1) upgrading 25kt/day capacity from 1B to 1A standard in phase 1, and; 2) building phase 2 with 25kt/day capacity in its Jiaozuo City Industrial Park Wanfang Wastewater Treatment Plant. Total investment amounts to Rmb197m. Positive for Kangda On Dec 8, the company revealed plans for three projects with total capacity of 125kt/day that it hopes to finalize soon. We believe Kangda still hopes to finalize all these three projects by the end of the year. We expect the company to recognize construction revenue for both upgrade and expansion work in 2015, which is estimated to be ~10% of 2015 revenue. Page 3

4 More room for re-rating Kangda s share price has rebounded since the company revealed the three possible new projects. Coupled with the expectation of new supportive policies being announced by the end of the month, we believe there is more room for a re-rating. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) Ourgame (6899 HK, NR): Exclusive rights gained for WPT brand in a number of Asian countries What s new? The company has announced a license agreement with Peerless Media Ltd, the owner of the World Poker Tour brand, which will give the company exclusive rights to the WPT brand in a number of Asian countries (including China, Indonesia, Korea and Vietnam), and nonexclusive rights in Japan from 2015 to The company will be licensed for all practical WPT purposes in these markets, including the organization of WPT-branded poker tournaments, live streaming, and the operation of WPT-branded online games as well as distribution of WPT related television programs. Tournaments and overseas expansion a strong growth catalyst This agreement gives Ourgame has received high recognition from the world-class poker tour leader WPT. It also demonstrates the company s strong capability and brand in the organization of offline poker events. Ourgame successfully hosted three WPT National China tournaments in , which was an important part of the company s integrated online/offline promotion model. Benefiting from this partnership with WPT, we expect Ourgame to host more WPT poker tournaments in overseas markets and believe its overseas expansion will be a strong growth catalyst. Valuation undemanding We believe its current valuation of around 10x FY15E P/E is undemanding given its rapid and visible growth outlook, which is mainly driven by unique online/offline promotion model and strong overseas expansion momentum. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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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