Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Feb 7, 2017

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 16E 17E 16E 17E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT CHINA MOBILE ICBC PETROCHINA CCB HSBC BANK OF CHINA SINOPEC CHINA LIFE PING AN Source: Bloomberg GF events Date Event Location 9 Feb KBL investor luncheon Hong Kong Source: GF Securities (Hong Kong) A-Share Market Investment Strategy: FY16 and 1Q17 A-share earnings preview; prefer sectors with low institutional holdings and accelerating earnings growth Sectors where more than 60% of companies have issued an FY16 profit alert and which saw FY16 earnings growth strengthen from both FY15 and 9M16 are mostly related to three investment themes: a rise in industrial product prices, infrastructure, and electronics. However, institutional investors already have relatively high positions in most of these sectors, such as chemical raw materials, landscaping, electronic manufacturing and semiconductors. As such, we suggest watching sectors which still have relatively low institutional holdings and which have not yet demonstrated excess returns over the CSI Samllcap 500 Index over the past three months, such as coal, tourism, media, decoration and medical equipment. Retail: CNY sales review; signs of consumption upgrade observed in both online and offline spaces Retailers and restaurants across the country recorded total sales of Rmb840bn during the Chinese New Year Golden Week (Jan 27-Feb 2), representing YoY growth of 11.4% which was 0.2pp higher than the pace of growth one year ago. Sales performance of different product categories during the holiday reflected noticeable signs of ongoing consumption upgrade. We reiterate our optimism on the sector in 2017 given the cheap valuations of retail names, their improving earnings, ongoing mixed-ownership reform and the integration of online and offline operations. Tourism: CNY tourism data review; tourist number growth moderates, mixed performance for overseas destinations The tourism sector have underperformed in terms of share price growth despite stable earnings performance since the start of 2016 driven by both organic growth and external M&A. Sector business conditions are likely to remain strong in 2017 in view of the weakening effect of unfavorable factors (e.g. bad weather, visa restrictions, terrorism), as well as ongoing consumption upgrade and policy support in China. We are positive on a rebound in tourist volume, a recovery in overseas travels, trips to nearby provinces and a share price bottoming-out for the hotel industry in Hong Kong Market Geely Auto (175 HK, under review): Strong Jan sales, but SUV sales need a boost Geely s Jan sales were up 70.8% YoY but down 5.2% MoM. The sharp YoY growth was mostly due to the low comparable base in Jan 2016, which did not benefit from the sales of models launched later in the year. New models launched in 2016 accounted for 49.6% of Jan sales volume. Overall, Jan sales were encouraging. SUV sales growth slowed during the month, mainly due to inadequate production capacity. The company will need to remedy this to boost SUV sales further. Sedan sales growth was steady. Maple Leaf (1317 HK, Buy): Establishing a foothold in southern China with acquisition of K- 12 school in Hainan; maintain Buy Maple Leaf (ML) has entered into agreements to acquire a 47.5% equity stake in Hainan National Science Park Experimental School, a K-12 boarding school in Haikou City, Hainan, for Rmb77.9m, which will be paid via the issuance of 18.6m new ML shares at HK$4.732/share. Including the 4.9% stake that the company previously conditionally agreed to acquire, ML will hold a 52.4% stake. We estimate a -0.1% impact on FY18 EPS. However, we do not believe the acquisition was expensive. The acquisition could also instantly help ML establish a presence in Hainan and Southern China. Maintain Buy. 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 Investment Strategy: FY16 and 1Q17 A-share earnings preview; prefer sectors with low institutional holdings and accelerating earnings growth Earnings growth to have accelerated less in 4Q16 As many main board companies are yet to issue a profit alert for 2016, we have looked at industrial profit growth in order to gauge the trend of A-share ex-financial earnings. While full-year industrial profit growth of 8.5% strengthened from 9M16 (8.4%), the monthly YoY growth figure slowed significantly from 14.5% in Nov to 2.3% in Dec. In light of this, we expect A-share ex-financial earnings growth to have accelerated further in 4Q16, though the extent of growth acceleration should be smaller than before, with full-year growth likely to come in at 16%, compared with 2.4%, 0.8% and 13% in 3M16, 6M16 and 9M16. 4Q16 likely the peak of current earnings improvement cycle 1Q A-share ex-financial earnings tend to represent a QoQ decline from the 4Q of the previous year due to the impact of the Chinese New Year holiday. In particular, 1Q17 earnings are very unlikely to exceed those recorded in 4Q16 due to the exceptionally high base in 1Q16. We expect A-share ex-financial earnings growth to come down from 16% in FY16 to 0-5% in 1Q17, making 4Q16 the peak of the current earning up cycle. Decreased 1Q17 ChiNext earnings growth to remain high at 35% ChiNext companies have finished the issuance of 2016 profit alerts. Excluding Wens Foodstuff ( CH), cumulative ChiNext earnings growth likely strengthened from 34.6% in 9M16 to 38.8% in FY16, which would be the highest pace of growth since the establishment of the trading board. Based on past experience, ChiNext board earnings growth typically demonstrates a 30-40pp drop from 4Q to 1Q of the next year. In our bear case scenario, a 40pp QoQ growth deceleration would still bring earnings growth of around 35% in 1Q17. 50:50 contribution from external expansion and organic growth to ChiNext earnings growth In order to asses to what extent the ChiNext board s strong earnings growth in 2016 was driven by external expansion, we have analyzed the 491 companies that became listed on the ChiNext board after 2016 by categorizing them into two groups: 1) 438 companies which have conducted M&A since their listing, whose combined profit totaled Rmb69.9bn in 2016 representing YoY growth of 40%, and 2) 53 companies that have not been involved in any M&A since listing, whose combined profit increased 22.9% to Rmb4.9bn. We estimate that external expansion and organic growth each made a ~50% contribution to the strong earnings growth achieved by ChiNext companies in Smaller-cap companies now the main participants in M&A Prior to 2016, companies representing the top 50% of ChiNext board market cap (i.e. larger-cap companies) posted much stronger earnings growth than companies representing the bottom 50% of market cap. This situation reversed in 2016, as smaller-cap companies replaced larger-cap companies as the main participants in M&A. In 2015, companies representing the top 50% of ChiNext board market cap conducted M&A deals worth a total of Rmb122.5bn, compared with Rmb91.8bn for the smaller-cap names on the trading board; these amounts changed to Rmb75.6bn vs Rmb127.6bn in Performance by sector Sectors where more than 60% of companies have issued an FY16 profit alert and which saw FY16 earnings growth strengthen from both FY15 and 9M16 are mostly related to three investment themes: a rise in industrial product prices (coal, chemical raw materials, chemical products), infrastructure (landscaping, decoration) and electronics (other electronic products, electronic manufacturing, semiconductors). However, institutional investors already have relatively high positions in most of these sectors, such as chemical raw materials, landscaping, electronic manufacturing and semiconductors. As such, we suggest watching sectors which still have relatively low institutional holdings and which have not yet demonstrated excess returns over the CSI Samllcap 500 Index over the past three months, such as coal, tourism, media, decoration and medical equipment. Retail: CNY sales review; signs of consumption upgrade observed in both online and offline spaces Inflation-adjusted growth flat with previous year Retailers and restaurants across the country recorded total sales of Rmb840bn during the Chinese New Year Golden Week (Jan 27-Feb 2), representing YoY growth of 11.4% which was 0.2pp higher than the pace of growth one year ago. The pace of growth was broadly flat with last year when inflation adjustments are made. On a breakdown by city, first-tier cities saw growth strengthen to 10.2% (+1.5pp), second-tier cities eased by 0.6pp to 8.5%, and sales growth in third-tier cities accelerated by 2.1pp to 12.1%. Page 2

3 Sales performance reflecting consumption upgrade It is worth noting that sales growth recorded by restaurants across the country during the holiday strengthened substantially by 6.09pp to 16.19%. In addition, box office revenue during the golden week grew 9.89% YoY to a new high of Rmb3.3bn amid rising consumer spending on entertainment services. Sales performance during the holiday also reflected noticeable signs of ongoing consumption upgrade, as the proportion of spending on apparel decreased while that on food and cosmetics increased. Online holiday shopping trends In the online shopping space, during Alibaba s (BABA US, NR) Nianhuo Shopping Spree (nianhuo: goods traditionally important for the CNY) on Jan 9-11, more than 380m items were sold with the daily average transaction value rising 42% YoY. The sales performance of different product categories also showed the trend of consumption upgrade: the proportion of spending on apparel declined while that on food, cosmetics, maternity & baby goods and tourism picked up substantially; in addition, cars, building materials and furniture also became popular products during the pre-cny shopping spree. Last but not least, online spending by rural residents prior to the CNY became more diversified and more focused on quality products. Reiterate optimism on sector We think that retail sales during the CNY holiday represented a good start to the year, with the continuation of a moderate recovery in sales growth, clear signs of consumption upgrade and stronger online-offline integration. We reiterate our optimism on the sector in 2017 given the cheap valuations of retail names, their improving earnings, ongoing mixedownership reform and the integration of online and offline operations. We like Inzone Group ( CH), Bailian Group ( CH), Lao Feng Xiang ( CH), Yonghui Superstores ( CH), Wuhan Department Store ( CH), NanJi E Commerce ( CH) and Qingdao Kingking Applied Chemistry ( CH). Tourism: CNY tourism data review; tourist number growth moderates, mixed performance for overseas destinations Growth in domestic trips moderated slightly During the Chinese New Year Golden Week, tourist attractions across the country received a total of 344m tourists, up 13.8% YoY (vs +15.6% one year ago), and achieved tourism revenue of Rmb423.3bn (+15.9% YoY). Overseas travels through individual visits increasingly popular Around 6.15m Chinese residents traveled to overseas destinations during the holiday, up by nearly 7% YoY, with the number of people going overseas in tourist groups increasing 2.5% YoY to 374,000. Overseas travels, especially individual visits (as opposed to joining tourist groups), have become increasingly popular among Chinese residents. Among short-distance overseas destinations, tourist number growth for Japan, Korea and Thailand slowed while other southeast Asian countries posted significant growth. Among long-distance destinations, travels to Europe likely recovered, while those to Australia demonstrated strong growth. Lastly, travels to Hong Kong and Macau showed noticeable signs of a recovery, while the number of Chinese tourists to Taiwan during the CNY holiday dropped considerably due to a deteriorating political environment sector view positive The tourism sector have underperformed in terms of share price growth despite stable earnings performance since the start of 2016 driven by both organic growth and external M&A. Sector business conditions are likely to remain strong in 2017 in view of the weakening effect of unfavorable factors (e.g. bad weather, visa restrictions, terrorism), as well as ongoing consumption upgrade and policy support in China. We are positive on a rebound in tourist volume, a recovery in overseas travels, trips to nearby provinces and a share price bottoming-out for the hotel industry in Out stock picks are China CYTS Tours ( CH), China Int'l Travel Service ( CH), Songcheng Performance Development ( CH), Huangshan Tourism Development ( CH), LiJiang YuLong Tourism ( CH), Guilin Tourism ( CH), UTour Group ( CH), Caissa Travel ( CH) and Jinjiang Int'l Hotels Development ( CH). Geely Auto (175 HK, under review): Strong Jan sales, but SUV sales need a boost Strong YoY sales growth in Jan Geely s Jan sales came in at 102,653 units, up 70.8% YoY but down 5.2% MoM. The sharp YoY growth was mostly due to the low comparable base in Jan 2016, which did not benefit from the sales of models launched later in the year. New models launched in 2016 accounted for 49.6% of Jan sales volume. Overall, Jan sales were encouraging, with 10.3% Page 3

4 of the company s target of 1m units sold, 23.2% ahead of the average monthly target. This is particularly noteworthy considering that the CNY holiday reduced both working days for the company and consumers willingness to make purchases. Upgraded SUV portfolio continues to boost growth Geely sold 10,226 Vision SUVs during Jan, down 2.9% MoM, and 10,333 Emgrand GS units, up 1.1% MoM. Monthly sales of both these new models have remained above 10k units since 4Q16, indicating a positive consumer response. Geely sold 20,147 Boyue units, down 1% MoM, the first month with a drop in sales volume since the model s launch. We believe the slowdown in sales growth during the month was mainly due to inadequate production capacity for the models, as seen by the relatively long waiting periods to get the vehicles to consumers. The company will need to increase production efficiency and adjust working shifts in addition to expanding capacity in order to boost SUV sales further. Sedan sales steady The company sold 26,314 New Emgrand units (including 178 hybrid EVs) during Jan, up 16.9% YoY but down 7.8% MoM. The trend is a reflection of the model s rising recognition by consumers, and sales of the model (25.6% of overall sales) should support growth we believe the MoM decline reflects the adjustment to the purchase tax policy for small-engine vehicles. Following its decline since 4Q16, sales of the New Vision model rose 0.5% YoY and 22.3% MoM to 14,716 units in Jan, indicating a possibly more stable sales trend in 1Q17. Rating and TP under review The stock is trading at 11.9x one-year forward P/E, slightly above its historical average P/E of 11.6x, we believe due to its sales volume and earnings outlook. (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 ) Maple Leaf (1317 HK, Buy): Establishing a foothold in southern China with acquisition of K-12 school in Hainan; maintain Buy What s new? Maple Leaf (ML) has entered into agreements to acquire a 47.5% equity stake in Hainan National Science Park Experimental School, a K-12 boarding school in Haikou City, Hainan, from two vendors (Hainan National Science Park Educational Management and Haikou Baifuyuan Trading Co) for Rmb77.9m, which will be paid via the issuance of 18.6m new ML shares at HK$4.732/share. Including the 4.9% stake that the company previously conditionally agreed to acquire (for Rmb7.5m in cash) from the largest shareholder, Haiguo Investment Industry on Nov 16, 2016, ML will hold a 52.4% stake and Haiguo Investment will hold the remaining interest upon completion, subject to due diligence being conducted by ML. The Hainan school is a private, for non-profit school. Just as with its previous acquisition of Jingzhou school, ML will change the Hainan school into an international school and rename it, phase out the existing high school and run a BC curriculum high school in the future. The school currently has 3,200 students and an average tuition fee of about Rmb16,000/year. We expect some students to quit in the new school year, especially those who do not plan to study overseas in the future, but ML should attract new students planning to study overseas. Tuition fees are also expected to be increased in the future, as the current level is far below ML's usual fees. Attractive acquisition cost The Hainan school generated Rmb10.5m in net profit after tax in Assuming the same amount of profit for the new school and taking into account the issuance of the new shares, we estimate a -0.1% impact on FY18 EPS. However, we do not believe the acquisition was expensive as: 1) The historical P/E for the Hainan school is 15.6x, below ML s FY16 P/E of 17.6x; 2) The historical P/B for the Hainan school is 1.9x, below ML s FY16 P/B of 2.7x. As the school property is self-owned, we think the actual P/B acquisition cost could be lower. The acquisition could also instantly help ML establish a presence in Hainan and Southern China. New shares consideration a positive As the two vendors are domestic school operators, the consideration being settled in new shares is a signal that even industry players believe ML s share price has upside potential. This also allows ML to save its cash for other possible M&As. Maintain Buy We maintain our Buy rating and target price of HK$6.00, still based on 17.5x FY18E P/E, at 0.9x PEG on a 19.4% EPS CAGR during FY (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@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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