A-Share Research Notes Summary
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- Amy Wilcox
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1 A-Share Research Notes Summary January 7, 2015 (Note: This is selected translation from the Chinese version of A-share morning notes) (1) Railway reform intensified ; Brilliant future for capital platform (P.1) A-Share Market (2) Automobile: Pay attention to SINOTRUK, JMC, SAIC Motor, Huayu Auto,smart vehicle play and after-sales market play (P.2) Railway reform intensified ; Brilliant future for capital platform 1. Event Since the Ministry of Railway was reorganized into China Railway Corporation in 2013, it has launched a series of market-oriented reform measures represented by freight organization reform committee. With increasing calls for state-owned enterprise (SOE) reform in all industries, expectations are high for further railway reform. 2. Our analysis and judgment: 2.1. Railway reform is deepened Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk China Railway Corporation launched freight organization reform since mid So far it has established several regional freight centers. It was made clear that the incremental income from the freight reform should all be given to local railway bureaus. Thereafter, China Railway Corporation has changed the bidding of freight trains to public tender, formulating the Measures for Management of Railway Development Fund, cancelling several railway items requiring administrative approval, abolishing transport account opening management. In addition, it launched new services including goods consolidation and assembly express trains, fast freight, special high-speed rails for tourism and highspeed rail express delivery, and carried out land assets appraisal for potential development. By the end of 2014, it deregulated the rail rate control over four competitive services. The intensifying market-oriented reform in railway transport will support the railway industry for a relatively fast development and pave the way for revaluing the potential of the railway transport industry for additional income Capital platform has a brilliant future Since China CRT was listed in 1998, three railway transport listcos (China CRT ( SH), GSRC ( SH) and Daqin Railway ( SH)) had conducted only three refinancing exercises. Net direct financing amount of the three companies (including IPO) was RMB42.076bn, while the accumulative cash dividends were RMB43.97, which indicated the financing platform was not fully utilized. With the improvement of high-speed rail network and the deepening market-oriented railway reform, profitability of railway assets is expected to improve gradually, so is the earnings expectation of new projects, creating favorable conditions for the capital platform for financing. 1
2 2.3. Reform unlocks the development potential of listcos The reform will unlock the development potential of listed railway companies in multiple dimensions: the marketization trend of freight rates will improve and stabilize the profitability of the companies; the deepening of the freight organization reform will optimize the business structure of the companies and enhance the proportion of high-margin products; the diversified operation including land development will exploit the potential of assets for additional income. The reform of investment and financing mechanisms and the improvement of supporting systems will make it easier for the companies to participate in stock assets management and thus optimize financial leverage and improve return on net assets. 3. Investment recommendation: Maintain recommendations The railway reform has entered into a critical stage. We are optimistic about the huge development potential of the industry. We maintain our recommendations of Daqin Railway (601006), GSRC (601333) and China CRT (600125). 4. Risks The lower than expected progress and intensity of the market-oriented railway reform Automobile: Pay attention to SINOTRUK, JMC, SAIC Motor, Huayu Auto,smart vehicle play and after-sales market play The overall market kicked off this year with a nice start. The auto sector also had a good start, thanks to the relatively low valuation and a clear beneficiary of SOE reform.since the beginning of the year, auto stock index rose 8.22% to a record high. Passenger cars, finished vehicles and commercial vehicles rose 12%, 10.4% and 8.1% respectively. Among finished vehicle companies, Chang'an Auto ( SZ), JMC ( SZ), Huayu Auto ( SH), Zhongtong Bus ( SZ), SAIC Motor ( SH) and FAW Car ( SZ) all surged over 10%, most of which were "low valuation" stocks and "SOE reform" themed. On valuation basis, the average PER of individual stocks in the auto sector was 17 last year, slightly higher than than the low valuation sectors such as bank and home appliances. This year the auto sector s PER average will be 12, slightly higher than that of the bank, real estate and home appliances sectors. Meanwhile, auto sector will also be benefitted from multiple favorable factors such as increase in household disposable income, highway mileage, falling oil prices and interest rate. We think that a better year for auto market sales, especially finished vehicle and auto parts companies. Overall, we maintain our views last week and recommended investors to pay attention to the opportunities brought by the infrastructure construction in the One Belt and One Road Strategy (Silk Road Economic Belt and 21st Century Maritime Silk Road), with focus on commercial vehicle companies with potential SOE reform. China's auto industry under the economic "new normal": 1. Infrastructure construction, as an important prerequisite for the One Belt and One Road Strategy, will be the first to receive financial and priority support. Trucks, as necessary capital goods for infrastructure construction, will be the first to benefit. For short-term, we suggest paying attention to listed truck companies. 2
3 2. Factors like increasing highway mileage and the falling oil prices will boost the sales of finished vehicles. 3. The overall auto industry will change the ecological model of "willful riches", with the new opportunity presented to the car dealer. With the 137m retain market and the 500bn worth of maintenance and repair, we forecast that there will be many opportunities in the after-sales market. 4. In the finished vehicle market, manufacturers are actively cooperating with Internet companies for exploring new business opportunities. On the one hand, output volume will be guaranteed while on the other hand, the new business models will open up new room for profits among integrated vehicle companies. On individual stocks, we think: In this round of SOE reform, many listed state-owned auto companies will be benefitted. The top six auto groups in China are all SOEs, representing a high proportion by SOE in a competitive industry that is characterized by insufficient growth, poor profitability or governance, over-reliance on policies and lack of core competitiveness self-owned brands. FAW Group, Dongfeng Motor ( SH), Chang'an Motor, BAW, GAC Group ( SH), and JAC ( SH) will all benefit from the SOE reform. For individual stocks, SINOTRUK ( SZ), JMC, SAIC Motor, Huayu Auto and FAW Car are worth watching. SINOTRUK In 2015, the company's new products and profitability will see a fundamental reversal. Its heavy truck sales is among the top three but its market capitalization is below RMB9bn. The company is the largest heavy truck maker most benefiting from the "One Belt and One Road Strategy". The change of controlling shareholder from State-owned Assets Supervision and Administration Commission of Shandong Provincial Government to Jinan People's Government has not only streamlined administration with power delegation but also provided a larger space for SINOTRUK in its SOE reform. JMC The compound annual growth rate of the company sales in the last decade was about 16.5%, of which the accumulative sales of its light trucks and SUVs increased 26.11% and % year-on-year (YoY) respectively. With a conservative financial accounting policy, JMC not only controls financial leverage but also insists on treating R&D expenditures incurred in the current period. Its prudent approach enabled JMC with an excellent debt paying ability. Its liquidity ratio and quick ratio in the interim report in 2014 were 1.45 and 1.25 respectively. In 2015, the company will benefit from: 1. favorable policies in the light truck field ( Action Plan for Energy Conservation and Emission Reduction and Low-carbon Development), which will see market share gains 2. the localization of the new middle and high-end model Everest SUV; 3. the establishment of new bases with capacity expansion; and 4. SOE reform. SAIC Motor According to the production and sales bulletin released by the company yesterday, the accumulative sales volume of finished vehicles in 2014 was m, a YOY increase of over 10%, making it the domestic market leader for the 10th straight year. The company has talent advantages with a huge auto consumer group, and top leading auto brands in the industry, although its valuation only came at 9. 3
4 Benefiting from the consumption upgrading in the auto industry and the general rising trend of the revenue per vehicle, the company has been able to grow steadily, which provides solid support for the long-term dividend increase. Shanghai Buick's SUV model Envision, launched in October 2014, will be the main profit growth driver of the company in In the meantime, the company will also benefit from SOE reform, the Shanghai-Hong Kong Stock Connect program and the Internet of Cars concept. Huayu Auto China's passenger car market has sufficient room to grow with relatively strong continuity. The intensive product upgrading in the next two to three years by its clients SVW/General Motors/Ford will boost the sales of the companies under Huayu Auto. The accelerated localization process of Jaguar/Land Rover, Volvo, Mercedes-Benz, BMW and Jeep will present new opportunities for Huayu, a supplier of auxiliary products of European and North American car series. The cooperation with Visteon Corporation and Johnson Controls has opened up the opportunities for its internationalization YAPP, which Haayu has a stake, is expected to realize its assets through a pending listing. The two acquisitions in 2014 provides growth in the company with a great potential upside. As Shanghai is one of the first cities to implement the state-owned assets reform, the successful reform as seen in its major shareholder SAIC Motor indicates that the company will probably put more efforts in mixed ownership reform and management incentive in the next two years. The reform will have a positive impact on the company's performance, efficiency and strategy. FAW Car The main investment thesis for FAW is on SOE reform expectations and its higher than industry level performance. As the date on which FAW Car has promised to eliminate horizontal competition draws near (the deadline should be April 5, 2015), the management structure will become more flexible. The potential listing of the parent group may rise, thanks to the bull market. In terms of fundamental factors, FAW operation performance is higher than the industry average. Its accumulative production and sales in November rose 25% and 19% YoY respectively. In particular, both the production and sales of its SUVs increased by over 100%. Smart vehicles and after-sales market will also become the future breakthroughs in the auto market as both have growth potential with high certainty. 4
5 Disclaimer This research report is not directed at, or intended for distribution to or use 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 China Galaxy International Securities (Hong Kong) Co., Limited, 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 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. 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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 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line:
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