Yum Cha 飲茶. August 16, 2017 RESEARCH NOTES SNIPPETS

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index HSCEI Shanghai COMP Shenzhen COMP Gold BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M RMB/USD DATA RELEASES DUE THIS WEEK Aug FX Net Settlement Aug 17 China July Property Prices Source: Bloomberg RESEARCH NOTES August 16, 2017 SUNNY OPTICAL [2382.HK; HK$105.3; NOT RATED] - We expect a series of upgrades after Sunny Optical released its 1H 2017 results. We believe Sunny Optical will now be treated as a major beneficiary of the adoption of 3D-sensing features by the Android camp, and the increasing adoption of dual cameras, machine vision and ADAS. Despite its higher-than-industryaverage valuation, we might see a further re-rating of Sunny Optical given its exposure to several investment themes and its good shipment track record despite a soft industry environment. News flow regarding new product launches by major handset brands, new product development with 3D sensing and autopilot applications, and HoH improvement in profitability in 2H 2017 is expected to boost the share price of Sunny Optical (despite its trading at a much higher valuation). We believe Sunny Optical is a quality handset component supplier with growth potential in other areas, such as ADAS. TEXHONG TEXTILE [2678.HK; HK$8.80; BUY] - Texhong Textile Group (Texhong) reported 1H 2017 results that were in line with a previous positive profit alert. The YoY drop in gross margin in 1H 2017 may create concern for some investors, but the decline in profitability was not really a major surprise to us. As we discussed earlier, industry players such as Texhong have difficulty raising the ASP of to boost profitability, given the soft operating environment. Texhong s 1H 2017 results also support our view that 2017 will be a year for Texhong management to build a foundation for future growth. Despite concern about the margin trend, we still don t expect to see major volatility in Texhong s net profit going forward, given management s strategy of concentrating on niche products and downstream diversification. Texhong will have a fully vertically integrated jeanswear operation by the end of According to management, the garment operation is one of the long-term growth drivers of the Company, and Texhong will become one of the largest jeanswear manufacturers in the region. After the post-results earnings adjustment, Texhong is trading at 6.3x 2017 PER and 5.2x 2018 PER, which we don t think are excessive after the share price correction. We maintain the view that there is no immediate catalyst for Texhong, so the Company s shares may continue to come under pressure in the near term. However, we believe shares of Texhong will perform again once market expectations have been re-set. Given its solid operations, we maintain our BUY rating on Texhong, with a target price of HK$12.22 (based on 8.5x 2017E PER, lower than its historical average and the average of its HK-listed peers). SNIPPETS CHAMPION REIT [2778.HK; HK$5.85; NOT-RATED] The REIT reported a positive 1H2017 results yesterday. Strong positive rental reversion of Three Garden Road s office was reported during the period, as passing rent increased from HK$78.20/sqft to HK$84.65/sqft. Langham Place s shopping mall was also largely unaffected by the escalator accident. As a result, revenue grew 5.3% YoY to HK$1,318m, while net operating income (NOI) grew 7.0% YoY to HK$1,064m. As a result, DPU also increased 7.2% YoY to HK$0.1173, equivalent to a 4.01% annualized dividend yield. During the analyst briefing, management emphasized that no further details regarding the potential disposal of Langham Place office tower could be disclosed. However, they note that if the disposal is successful, they are unlikely to conduct a buyback because of the low public freefloat. Also, due to its iconic status and high price, they are unlikely to dispose Three Garden Road. According to HK REIT Code, 75% of the GAV of the REIT should be invested into real estate investments. However, given the difficulty of securing an investment, we don t expect Champion REIT could immediately acquire a new property after the disposal of Langham Place office tower. In this case, we expect Champion REIT is highly likely to propose a special dividend of at least HK$0.17/unit after the transaction, assuming the property could be sold at HK$20bn. Still, the NAV will still be HK$11.87/unit in this case, implying a ~50% NAV discount to the closing price of HK$5.85. (more on next page) 1

2 SNIPPETS Figure: Analysis of Champion REIT s NAV and Special Dividend Unit: HK$ million Three Garden Road Langham Place Total Office 40,963 (Sold at HK$20B) 40,963 Retail ,020 19,613 Car Park Miscellaneous Total 42,464 19,608 62,072 Other Assets 528 Cash 21,166 GAV 83,766 % of real estate investment after this transaction 74.10% % of real estate investment required under HK REIT Code 75.00% Special dividend to be distributed 1,003 No. of units (mil) 5,812 Special DPU (HK$) 0.17 NAV 68,996 NAV per unit (HK$) Source: CGIS Research Anta Sports Ltd (2020.HK; HK$27.45; NOT RATED) reported a net profit of RMB1,451m, up 28.5% YoY for 2017 H1. EPS was RMB0.56, up 24%YoY. The Company announced an interim DPS of HK$0.41 vs. HK$0.36 a year ago. Anta is now trading at 21x 2017 PER. While the Company beat expectations in 2017 H1, maintaining its earnings momentum may be a challenge. It remains to be seen whether Anta can supplement its organic growth by new acquisitions. Figure 1: Valuation of sportswear companies Bloomberg Mkt. Cap. Price PER (x) P/B(x) Rec. Dist. (%) Name Code (US$ mil) 8/14/2017 FY16 FY17E FY18E FY17E MTD QTD YTD BUY HOLD SELL ANTA SPORTS PRODUCTS LTD 2020 hk 9, LI NING CO LTD 2331 hk 1, (4) XTEP INTERNATIONAL HOLDINGS 1368 hk (6) DEGREES INTERNATIONAL 1361 hk (3) (7) MEDIAN Sources: Bloomberg, CGI Estimates 2

3 SNIPPETS Anta s revenues were up 19% to RMB7,323mn in 2017 H1. Its gross margin improved by to 25.9%. Thanks to economies of scale, Anta also benefited from lower A&P expenses and staff costs, and a growing e-commerce share, which we estimate accounted for 15% of revenues. All of these factors contributed to the increase in net margins. Apparel (53% of revenues) and footwear sales (44% of revenues) increased by the same magnitude, although there was a larger improvement in footwear s gross margin. While online sales grew substantially, Anta s sales network also expanded by 260 outlets to over 9,900 outlets. Anta aims to increase the number of stores by another 300 shops by the end of the year. The Company sees this as validation of its multi-brand strategy with ANTA as a functional sportswear brand, FILA as a high-end fashion sportswear brand, and DESCENTE as a high-performance sportswear brand. Sales of non-anta brands grew 50-60% YoY, while main-brand sales increased by 20-30%YoY in 2017 Q2. In part because of the issue of new shares earlier this year, the Company had over RMB10.5bn in cash at the end of June In contrast, its capital expenditure was minimal (only RMB283mn in 2017 H1). Management asserted that it would continue to seek acquisition opportunities, but it remained reticent on any potential targets. With a market cap of US$9.4bn, Anta is already larger than many international brands, such as Puma, Under Armour and ASICS. Figure 2: Market cap of international sportswear brands Bloomberg Mkt. Cap. Name Code (US$ mil) NIKE INC -CL B NKE us 96,793 ADIDAS AG ADS gr 47,351 PUMA SE PUM GR 6,380 SKECHERS USA INC-CL A SKX us 4,647 UNDER ARMOUR INC-CLASS A UAA us 7,762 ASICS CORP 7936 JP 3,173 YONEX CO LTD 7906 JP 755 Source: Bloomberg 3

4 COMPANY NEWS Sunny Optical Technology Group Co., Limited [2382.HK; HK$105.3; Not Rated] - Still looks good after a major re-rating. Market Cap: US$14,765m; Free Float: 64.5%; 3-months Average Daily Turnover: US$75.5m Analyst: Mark Po Auguest 16, 2017 The Company. Sunny Optical Technology Group Co., Limited (Sunny Optical) designs and manufactures optical and optical-related products. The Company s products include glass and plastic lenses, prisms, mobile phone camera modules, microscopes, surveying instruments, and other analytical instruments. Sunny Optical released strong 1H 2017 results. It reported a net profit of RMB1,159.2m in 1H2017, up 149.1% YoY, beating market consensus and previous guidance of a 120% YoY increase. The Company s turnover grew 69% YoY to RMB10,031.7m in 1H2017. Optoelectronic products (up 77.9% YoY) and optical components (up 46.8% YoY) were its growth drivers in 1H2017. The stronger-than-expected results, in our view, were due to higherthan-expected margin improvement. Sunny Optical reported a gross profit margin of 20.6% in 1H 2017, up 3.9ppt YoY and 1.2ppt HoH. The gross profit margins for optoelectronic products, optical components and optical instruments also reported YoY improvement in 1H Sunny Optical controlled OPEX well, and the operating margin also improved 3.9ppt to 12.4% in 1H Another positive surprise in Sunny Optical s 1H 2017 results was the partial bad debt provision written back. The Company reversed an RMB57m bad debt provision in 1H 2017 (about RMB141m was written off in 2016). During the results presentation, Sunny Optical management raised its guidance for shipment growth of different products in 2017: a) it raised the camera module growth rate to 20-25% YoY vs. the previous 15% to 20%; (b) it raised the vehicle lens growth rate to 35-40% YoY from previous guidance of 30-35%); (c) it expects the full-year growth rate in 2017 to be no lower than 37%; and (d) it expects handset lens sales to grow 45-50% YoY vs. previous guidance of 30-35%. Regarding the mix change for different products, Sunny Optical also released positive guidance. The portion of dual camera modules will remain at 20% of total camera modules, 10MP or above will account for 60-70% of total shipments, and the profitability of the camera module segment is expected to remain stable in 2H 2017 compared to 1H Strong growth in the auto lens segment was due to new customers, new models by customers and increasing adoption of auto lenses. The portion of 16MP and 20MP in handset lenses will continue to increase, which will boost the ASP and profitability of the handset lens segment. The full-year effective tax rate in 2017 is expected to come down from 17% in 1H 2017 to 13-14%. Sunny Optical will continue to increase its R&D expenses in 2H 2017 to gain market share and improve its gross profit margin. CAPEX for 2017 is RMB1.4bn to RMB1.8bn. According to previous guidance, the 60kk capacity expansion of the handset lens camera module will be completed before the end of this year. The capacity expansion (3kk) of vehicle lenses is complete. The growth areas in 2H 2017 for Sunny Optical will be 3D cameras, ADAS (especially for Level 3 and Level 4) and products for 18:9 displays. Products based on Molding on Board (MOB) / Molding on Chip (MOC) technologies accounted for only a small portion of shipments in 1H Management expects a major pick-up in shipments of MOB and MOC products in 2H 2017 vs. 1H MOB and MOC technologies have advantages such as: a) smaller module size; b) larger aperture module packaging, c) improved structure strength; and (d) lower manufacturing tolerances. Management reiterated that the Company has technology reserves in 3D sensing technologies, including hardware and algorithms. Sunny Optical is also cooperating with many customers to develop 3D sensing products. According to management, the combination of algorithms and hardware will increase the Company s gross margin. Regarding new business development, [Sunny Optical Technology Group Co., Limited ] (HK$) Aug16 Oct16 Dec16 Feb17 Apr17 Jun17 Key Financials (in RMB m) Turnover (RHS) Source: Bloomberg, Company Data, CGIS Research Price (LHS) (HK$ million) management mentioned that the new business unit developing applications based on microscope technology plus AI has made good progress and has secured orders from customers. Management doesn t see AAC s [2018.HK] developing lens capability as a threat. Sunny Optical sees only Largan as a leading player in the industry. Our view. We expect a series of upgrades after Sunny Optical released its 1H 2017 results. We believe Sunny Optical will now be treated as a major beneficiary of the adoption of 3D-sensing features by the Android camp, and the increasing adoption of dual cameras, machine vision and ADAS. Despite its higher-than-industry-average valuation, we might see a further re-rating of Sunny Optical given its exposure to several investment themes and its good shipment track record despite a soft industry environment. News flow regarding new product launches by major handset brands, new products development with 3D sensing and autopilot applications, and HoH improvement in profitability in 2H 2017 is expected to boost the share price of Sunny Optical (despite its trading at a much higher valuation). We believe Sunny Optical is a quality handset component supplier with growth potential in other areas, such as ADAS. Catalysts: Monthly shipment figures, new-product launches by Chinese brands such as Oppo, and new business development, such as 3D-sening & ADAS E 2018E Revenue 8, , , , ,976.5 Change (yoy %) Gross Profit 1, , , , ,215.6 Gross Margin % Net Profit , , ,568.0 Net Margin % EPS (Basic) DPS $0.962 $0.249 $0.323 $0.707 $0.991 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) 1.47% 1.23% 0.69% 1.16% 2.94% Capex (m) (470.5) (377.5) (978.6) (1,700.0) (1,000.0) Free cash flow per sha Net Gearing (%) Net Cash Net Cash Net Cash 0 4

5 Figure 1: Sunny Optical s turnover breakdown (RMBm) Figure 2: Sunny Optical s volume shipments breakdown RMB m 35,000.0 Optical components Optoelectronic products Optical instruments m units Optical components Optoelectronic products 30, , , , , , F 2018F Sources: Company Data, CGIS Research F 2018F Sources: Company Data, CGIS Research Figure 3: Sunny Optical s margin trend % 25.0 Gross margin (%) Net margin (%) F 2018F Sources: Company Data, CGIS Research 5

6 Texhong Textile Group [2678.HK] 1H 2017 results solid given softer-than-expected market environment. Texhong Textile Group (Texhong) reported 1H 2017 results that were in line with a previous positive profit alert. The YoY drop in gross margin in 1H 2017 may create concern for some investors, but the decline in profitability was not really a major surprise to us. As we discussed earlier, industry players such as Texhong have difficulty raising the ASP to boost profitability, given the soft operating environment. Texhong s 1H 2017 results also support our view that 2017 will be a year for Texhong management to build a foundation for future growth. Despite concern about the margin trend, we still don t expect to see major volatility in Texhong s net profit going forward, given management s strategy of concentrating on niche products and downstream diversification. Texhong will have a fully vertically integrated jeanswear operation by the end of According to management, the garment operation is one of the long-term growth drivers of the Company, and Texhong will become one of the largest jeanswear manufacturers in the region. After the post-results earnings adjustment, Texhong is trading at 6.3x 2017 PER and 5.2x 2018 PER, which we don t think are excessive after the share price correction. We maintain the view that there is no immediate catalyst for Texhong, so the Company s shares may continue to come under pressure in the near term. However, we believe shares of Texhong will perform again once market expectations have been re-set. Given its solid operations, we maintain our BUY rating on Texhong, with a target price of HK$12.22 (based on 8.5x 2017E PER, lower than its historical average and the average of its HK-listed peers). Investment Highlights 1H 2017 results highlights. Texhong s 1H 2017 net profit was RMB645m, up 41.2% YoY. Excluding the impact of the one-off gain on the acquisition of the jeanswear business, Texhong s net profit was RMB498m in 1H2017, up from RMB456.7m in 1H2016. The Company s turnover was RMB7,448.5m in 1H2017, up 27.9% YoY from RMB5,821.8m in 1H2016. Texhong s gross profit margin was 15.4% in 1H2017, down from 18.2% in 1H2016. Texhong declared an interim dividend of HK$0.24 in 1H2017, up from HK$0.18 in 1H2016. The Company s yarn sales volume increased 14.9% YoY to 300,000 tonnes. Its ASP of yarns also rose 9.7% YoY in 1H2017. Management explained that the YoY decline in gross margin in 1H2017 was mainly due: a) soft market demand for commodity-type products; b) the dilution impact from the lower-margin garment business; and c) higher cotton costs. Management also mentioned that market demand for niche / differentiated products remains strong. Texhong s cost of sales increased by 32.4% YoY in 2017, which was due to increases in production volume and raw material costs. Garment operation remains a growth driver. Texhong will have a fully vertically integrated denim jeans wear operation in 2017, with a denim fabric plant in Vietnam and a garment plant in Shangdong. The Cambodian plant will be integrated into the Vietnam plant. Annual production is about 20-25m pairs of jeans assuming 100% utilization. Texhong will become one of the largest jeanwear manufacturers in the region if it reaches full utilization. Developing into a more integrated textile supplier will make it easier for Texhong to absorb fluctuations in raw material costs and to improve blended profitability through savings in packaging and transportation. Based on our understanding, the garment operations will not drag down overall performance of the Company in But the gross profit margin of the garment manufacturing business is expected to improve gradually to 17-18%. Solid operations. The YoY drop gross margin in 1H 2017 may create concern for some investors. However, the decline in profitability is not really a major surprise to us. As we discussed before, industry players such as Texhong have difficulty raising the ASP to boost profitability given the soft operating environment. Texhong s 1H 2017 results support our view that 2017 will be a year for Texhong management to build a foundation for future growth. Despite concern about the margin trend, we still don t expect to see major volatility in Texhong s net profit going forward, given management s strategy of concentrating on niche products and downstream diversification. Key Financials (in RMB m) E 2018E Revenue 10, , , , ,451.2 Change (yoy %) Gross Profit 1, , , , ,127.0 Gross Margin % Net Profit , , ,380.2 Net Margin % EPS (Basic) Change (yoy %) (64.39) (2.84) DPS $0.103 $0.199 $0.391 $0.228 $0.450 ROE (%) Dividend Yield (%) PER (x) Mark Po, CFA Senior Analyst (852) markpo@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) China Textile Sector - Upstream BUY Close: HK$8.80 (Aug ) Target Price: HK$12.22 (+38.9%) Share Price Performance (HK$) Market Cap Shares Outstanding Auditor cmwong@chinastock.com.hk US$1,029m 915m Pricewaterhouse- Coopers Free Float 26.3% 52W range 3M average daily T/O Major Shareholder Auguest 16, Aug16 Oct16 Dec16 Feb17 Apr17 Jun17 Turnover (RHS) Sources: Bloomberg, CGIS Research Sources: Bloomberg, CGIS Research Price (LHS) (HK$ million) HK$ US$0.7m Mr Hong Tianzhu (62.2%) 0 PBR (x) FCF Yield (%) 6.66% 10.38% % 30.09% 14.06% Capex (m) (606.7) (1,106.4) (1,771.0) (671.0) (632.3) Free cash flow per share (0.8) Net Gearing (%) Sources: Company, CGIS Research estimates 6

7 Figure 1: Key Assumptions for Texhong F 2018F Turnover (RMB m) Stretchable Core-Spun Yarns 3, , , , , , , ,640.1 Other Yarns 2, , , , , , , ,251.6 Fabrics 1, , , , ,227.3 Garment ,332.3 Total 6, , , , , , , ,451.2 YoY Change (%) Stretchable Core-Spun Yarns Other Yarns (16.2) Fabrics 10.3 (14.9) (16.7) (14.5) Garment Total Gross margin (%) Stretchable Core-Spun Yarns Other Yarns Fabrics Garment Net margin (%) Cost (RMB m) Cost of Sales (6,317) (6,217) (6,645) (9,176) (8,669) (11,003) (13,449) (15,324) S,G&A (360.6) (430.2) (542.5) (679.8) (749.9) (1,043.4) (1,184.6) (1,365.4) Financial Expenses (85.7) (137.9) (128.8) (253.8) (431.5) (413.2) (305.5) (305.5) YoY Change (%) Cost of Sales (1.6) (5.5) R&D Financial Expenses 61.0 (6.6) (4.3) (26.1) 0 CAPEX (HKD m) , Net Gearing (%) Shipment (000 tonnes) Stretchable Core-Spun Yarns 114, , , , , , , ,126 Other Yarns 75,322 77,035 97, , , , , ,420 Fabrics Shipment YoY Change (%) Stretchable Core-Spun Yarns Other Yarns Fabrics 17 (6) (13) (15) ASP (RMB) Stretchable Core-Spun Yarns 32, , , , , , , ,728.2 Other Yarns 27, , , , , , , ,288.7 Fabrics ASP YoY Change (%) Stretchable Core-Spun Yarns (17.9) 0.2 (9.7) (5.8) 0.7 (0.5) 5.0 Other Yarns (18.1) 1.8 (11.6) (9.1) 3.6 (0.1) 5.0 Fabrics (5.5) (9.6) (3.9)

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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: