Market Snapshot. Market preview and portfolio update Adding defensives while keeping core growth stocks in a volatile market

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1 % Equity Research Investment Strategy Market Snapshot Market preview and portfolio update Adding defensives while keeping core growth stocks in a volatile market Alex Fan, CFA SFC CE No. ADJ672 alexfan@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Strategy in a volatile market The Hong Kong market suffered two consecutive months of losses with the HSI down almost 10% from its peak in Jan due to escalating concerns first about inflation and then about a trade war. We believe the strong headwind from uncertainties regarding inflation, trade and more generally unpredictable US government policies will continue to increase market volatility and put a cap on market upside, while stock market momentum is weakening as can be seen from uninspiring share price performance after a set of good 2017 corporate earnings, correction in the US market, and shrinking southbound fund inflow. Although we believe corporate earnings remain promising and trade dispute is likely to be solved through negotiations, it is prudent to adopt a more defensive strategy for the time being, at least before 1Q18 results are available. Although our recommended portfolio beat market benchmarks slightly in 1Q18, we have made some meaningful changes to our portfolio this month to reduce beta and to avoid exposure to trade disputes, while maintaining core holdings of growth stocks to take advantage of any market recovery under volatile market conditions. Our ten-stock recommended portfolio now consists of Tencent, Sunny Optical, Ping An, ABC, CCB, Geely Auto, CSPC Pharma, China TCM, China Mengniu, and Logan Property. Strong results failed to lift share prices 2017 results were mostly strong, beating or meeting market expectations. Of the 47 HSI constituent stocks having reported results in March, 20 beat, 24 were in line, and only three came in lower than expected. However, with few exceptions, share price performance was generally disappointing even with good results, as strong earnings have been priced in and investors chose to wait instead of chasing stocks before 1Q results announcements, given intensifying trade disputes and the US tech stock selloff. Trade dispute the biggest risk The US government announced on April 3 a list of about US$50bn worth of Chinese imports that will be subject to a tariff of up to 25% following the Section 301 trade investigation, while accepting public written comments until May 11. The 1,300 affected product lines include sectors in aerospace, information and communication technology, robotics, machinery, medicines, metal products, automobiles and vessels. Following the countermeasures to raise tariffs on a list of 128 products ranging from pork, wine, nuts and fruits to steel pipes worth about US$3bn in its US imports on Apr 2 in reaction to the earlier tariff hike by the US on steel and aluminum product imports, China s Ministry of Commerce announced on April 4 to levy a 25% reciprocal tariff on 106 US products worth about US$50bn which include soybean, cotton, tobacco, automobiles, chemicals and airplanes weighing tonnes (meaning small planes only). While the US government has said that it is open to negotiation with its Chinese counterpart, and that the stake is too high if no deal can be reached, the market is still likely to enter a period of uncertainties and high volatility this month. Watchlist and market performance (%) Watchlist HSCE Index HS Index Source: Bloomberg, GF Securities (Hong Kong) Pressure from US-led market correction continues Suffering from a series of incidents related to personal data misuse, self-driving car accidents, and accusations from the US President of Amazon s tax payment, the Nasdaq has corrected by almost 10% from its peak in March, following the peaking and correction in both the DJIA and S&P500 earlier. The Hong Kong market has a high correlation with the US market, and the HSI generally moves in line with the US market. Until the US market resumes a clear uptrend, the Hong Kong market is likely to face continued pressure in the near term. Southbound funds retreated as global market uncertainties increase; divergence seen between Shanghai and Shenzhen markets Southbound investors average daily turnover dropped 35% MoM to HK$15.8bn in March, compared with HK$24.2bn in Feb, representing 12.2% of total Hong Kong average daily turnover, down from 16.8% in Feb. Moreover, average daily net buying plunged 80% to HK$498m in March, down from HK$2,475m in Feb, indicating that southbound funds continued to retreat as global market experienced uncertainties on inflation and trade outlook. However, divergence was seen between the Shenzhen and Shanghai stock connects. While Shanghai southbound funds recorded average daily net selling (Continued on next page )

2 of HK$391m in March, Shenzhen southbound funds recorded HK$889m average daily net buying during the month. Of the top ten active stocks via the Shanghai stock connect in March, seven experienced net selling, while eight of the top ten active stocks via the Shenzhen stock connect recorded net buying, indicating that Shenzhen southbound funds were much more aggressive than Shanghai funds during this period of weak market conditions. Market outlook and portfolio recommendation Although we believe corporate earnings remain promising, and that trade dispute is likely to be solved through negotiations to avoid a large-scale trade war, short-term headwinds from uncertainties regarding inflation, trade and US government policies, signs of US market weakness, and declining southbound inflow warrant a defensive strategy in the coming month before 1Q18 results are available. We believe stocks with a more defensive earnings stream which are driven by domestic consumption and are beneficiaries of the interest rate upcycle will provide the necessary downside protection. Therefore, we recommend adding pharmaceuticals/healthcare, consumer discretionary and staples, and banks into our portfolio. Meanwhile, to provide upside protection after the dust has settled with regard to market uncertainties, we suggest maintaining core holdings of key growth stocks given the volatile market environment. As such, we rebalance our recommended portfolio with the following changes: We remove AAC Tech (2018 HK, NR) given its high exposure to the US market and the lack of surprises in Apple s (AAPL US) iphone sales this year; HKEx (388 HK, NR) given weaker-thanexpected market turnover and increasing competition from the Chinese stock markets given the CSRC s approval of CDRs to attract the listing of tech stocks on the A-share market; Yongda Auto (3669 HK, Buy) given last year s high base meaning high growth is unlikely to be repeated and the potential negative impact on high-net-worth classes due to trade issues; CNOOC (883 HK, NR) on reduced oil price upside at the current high level given competition from US shale oil and potential challenges in global trade; and Wisdom Education (6068 HK, Buy) given limited catalysts in the near term vs. more systematic risk. In turn, we add Sunny Optical (2382 HK, Buy) to maintain a similar exposure to the smartphone business with much less risk from trade disputes; CCB (939 HK, NR) as its stable operating results in 4Q17 are likely to continue and in order to maintain a similar exposure to financials; Logan Property (3380 HK, NR) given a promising outlook from its presence in the Greater Bay Area; China Mengniu (2319 HK, NR) given its great business turnaround and strengths in terms of its new product launch and margin protection; and China TCM (570 HK, Buy) which demonstrates strong earnings sustainability and with which also to capture more upside from the healthcare/pharma sector. Meanwhile, we maintain our core positions in Tencent (700 HK, NR) to capture the long-term upside in the internet business; Ping An (2018 HK, NR) on its strong insurance business and spin-off potentials of new businesses; Geely Auto (175 HK, Buy) given its strong pipeline of both Geely and Lynk & Co brand models; and CSPC Pharma (1093 HK, Accumulate) to gain exposure to the longterm growth sector through a quality stock. We maintain our position in ABC (1288 HK, NR) given its strengths in both NIM and NPL improvement and to benefit from potential sector re-rating. In summary, our ten-stock recommended portfolio now consists of Tencent, Sunny Optical, Ping An, ABC, CCB, Geely Auto, CSPC Pharma, China TCM, China Mengniu, and Logan Property. Portfolio return Our model portfolio recorded a -3.0% return in March driven by the global selloff, compared with -3.1% for the HSCEI, -2.4% for the HSI and -3.0% for MSCI China, but was helped by the outperformance of CSPC Pharma, ABC and CNOOC. YTD 2018, our portfolio has risen 3.7%, compared with 2.5% for the HSCEI, 0.6% for the HSI and 2.2% for MSCI China. Risks Faster-than-expected interest rate hikes; slower-than-expected earnings growth; trade war. 2

3 Stock pick updates Ping An (2318 HK, NR): Ping An reported 20% YoY growth in life insurance gross premiums to Rmb146.9bn in Jan-Feb, and 18% YoY growth in P&C gross premiums to Rmb42.1bn, slowing from 33% and 21% YoY growth in full-year 2017, due to the structural changes in insurance products to align with government policies for promoting protection-type and long-term plans results beat market expectation, with net profit growing 43% YoY to Rmb89.1bn and full-year dividend rising 100% YoY. NBV of life insurance grew 33% YoY and EV rose 38% YoY. Number of sales agents grew 25% YoY to 1.386m while productivity increased 7.1% YoY. However, net investment yield was 5.8%, down 0.2pp YoY due to lower interest rates of debt-related investments. In its FinTech and health-tech businesses, Lufax Holding became profitable for the first time; Ping An Good Doctor has filed an application with HKEx for an IPO, while OneConnect and Ping An Healthcare Technology both raised funds. HKEx (388 HK, NR): After one month of public consultation, HKEx is expected to finalize its proposal to add three new chapters to the Main Board Listing Rules, targeting to permit the listing of biotech issuers that cannot meet the financial eligibility tests of the Main Board, weighted voting right (WVR) structures, and secondary listing for Greater China and international companies in Hong Kong. However, it is likely to face competition from the Chinese stock markets, as the State Council has recently approved the CSRC s proposal to allow companies in tech and strategic emerging industries such as internet, big data and cloud computing to seek A-share IPOs or issue CDRs in the A-share market. CSPC Pharma (1093 HK, Accumulate): 2017 results beat market expectations, with net profit growing 34% YoY to Rmb2,770m. Management targets for leading innovative products to achieve HK$10bn in revenue, vs. HK$6.6bn in FY17 or 51% YoY growth. The bullish guidance is driven by: 1) NBP which is expected to achieve higher penetration at hospitals and in provincial bids; 2) Xuanning and Oulaining which are expected to see growth acceleration, and 3) new and existing oncology drugs to expand indications. Geely Auto (175 HK, Buy): Geely reported 38% YoY growth in unit sales to 265,332 in Jan-Feb, representing 17% of the company s full-year target of 1.58m units. In particular, 10,185 units of Lynk & Co 01 were sold during 2M18, a good start for a new brand results beat market expectation and were higher than its profit alert, with net profit jumping 108% YoY to Rmb10,633m, and an increased payout ratio of 24.3% (vs. 20.6% in 2016). GPM increased from 18.3% to 19.4%, driven by both volume and ASP growth. Geely plans to significantly increase the proportion of new energy vehicles in its sales volume makeup this year to capture the rising popularity of new energy vehicles and as a way of adhering to the government s auto policy. With improving economies in its major export markets, the company expects reasonable recovery in its export business this year. ABC (1288 HK, NR): Net profit grew 4.9% YoY to Rmb192.9bn, NIM edged up from 2.25% in 2016 to 2.28% in 2017, cost-to-income ratio improved from 34.59% to 32.96%, NPL dropped from 2.37% to 1.81%. ABC earlier announced to place of no more than Rmb1bn A shares to improve its Common Equity Tier-1 ratio by 0.8% which will also help to improve its capacity for business development. AAC Tech (2018 HK, NR): Net profit grew 32% YoY to Rmb5,325m on 36% YoY growth in revenue as GPM edged down 0.2pp. Haptic and RF/mechanical sales exceeded its traditional acoustics segment, contributing 50% of total revenue, up 51% YoY, and is expected to have further penetration into the Android market. Meanwhile, acoustic segment revenue also grew strongly at 20% YoY. In optics, its wafer-level glass (WLG) production capacity has increased to 20m units a month recently, and it is ready for new opportunities in 3D sensing and imaging designs. Management continues to guide revenue growth target of 25% YoY this year, while disclosing for 3

4 the first time that it is planning to target the non-mobile market in five years time in the areas of auto electronics, auto pilot and smart audio system. Tencent (700 HK, NR): Net profit surged 74% YoY to Rmb71.5bn in 2017, with strengths seen in VAS, online advertising, and payment related and cloud services. However, VAS business revenue declined 5% QoQ on a high base. Meanwhile, major shareholder Naspers cut its shareholding by 2% to 31.17%, and committed that no more selling will be conducted over the next three years. Yongda Auto (3669 HK, Buy): 2017 net profit picked up 77% YoY to Rmb1,510m, in line with dealer peers. New vehicle sales grew 17% YoY to Rmb43,392m, accounting for 84% of total revenue, with segment GPM increasing from 3.10% to 3.66% on a better supply-demand balance with automakers and customers. While securing and further developing its core luxury brands, the company plans to explore opportunities in other brands, especially new energy vehicles. Quarter to date sales were satisfactory, according to management at its results briefing, and management remains upbeat on the outlook on all business fronts. CNOOC (883 HK, NR): Net profit for 2017 jumped 37.7x to Rmb24.6bn on the back of recovering oil prices, as realized oil price rose from US$41.40/bbl to US$52.65/bbl. Unit cost of production further declined to US$32.54/bbl from US$34.67/bbl, while oil and gas reserve increased from 8.1 years to 10.3 years. Management targets mild growth in output, rising from 470.2m boe in 2017 to around 500m boe in CCB (939 HK, NR): Net profit rose 5% YoY to Rmb242.2bn, with NIM edging up 5 bps to 2.21%, NPL edited down 1 bp to 1.49%, cost-to-income ratio dropped from 27.51% to 27.15%, with Common Equity Tier-1 ratio up 25 bps to 13.09%. Sunny Optical (2382 HK, Buy): 2017 net profit jumped 128% YoY to Rmb2.9bn on 53% YoY increase in revenue as a result of strong volume growth in handset camera modules, handset lens sets and vehicle lens sets, as well as a rise in ASP through a better product mix. GPM increased from 18.3% to 21.5% on a better margin mix and high volume. China TCM (570 HK, Buy): Net profit grew 21% YoY to Rmb1,170m on 28% YoY increase in revenue. It is the largest concentrated TCM granules manufacturer in China with a market share of 49%. In 2017, this segment accounted for 66% of the company s revenue, and is expected to remain the key growth driver for the company over the coming few years. The company has announced its strategic alliance with Ping An Life Insurance, which will hold a 12% stake in the company upon completion of the deal at a consideration of HK$2,675m. Future cooperation in terms of customer sharing and advanced technology in the TCM industry is expected. China Mengniu (2319 HK, NR): Net profit came in at Rmb2,017m, turning around from a Rmb751m loss in 2016 as its core business improved significantly and the loss from Yashili narrowed significantly in 2H17. Revenue picked up 12% YoY and operating margin edged up from 2.8% to 5.6% on a better GPM and stringent cost control. Management is confident about achieving lowdouble-digit revenue growth in 2018 on a strong pipeline of new products and the promotional effect from the 2018 Russian World Cup. Logan Property (3380 HK, NR): Net profit picked up 45% YoY to Rmb7bn on 35% YoY increase in revenue. Contract sales increased 51% YoY, laying a good foundation for revenue growth over the next two years. The company has great exposure to the Greater Bay Area, and anticipate 50% annual growth in contract sales over the next two years, 65% of which will be in the Greater Bay Area. 4

5 Overall market performance The Hong Kong market fell for two consecutive months, in line with global markets, with the HSI down 2.4% in March, better than Shanghai but worse than the Shenzhen market. Figure 1: Global Index Performance (March) Figure 2: Global Index Performance (YTD) Index performance The HSCEI outperformed the HSI slightly in March, driven by financials. Small caps performed better than mid and large caps, as investors sold larger caps in a down market. Figure 3: Key index comparison Figure 4: Hang Seng Composite Index performance 5

6 Industry performance Property outperformed on strong contract sales, wind power edged up on policy support, while pharma/healthcare was supported by strong results and policy tailwind. Figure 5: Industry share price performance (March) Figure 6: Industry share price performance (YTD) Overall market valuation The P/E valuation fell back to the early-2017 level and is no longer rich compared with Figure 7: HSI forward P/E Figure 8: HSI P/B (trailing) 6

7 Industry valuation Tech stocks valuations have fallen a lot but are still at significant premium over other sectors driven by their strong earnings outlook. Figure 9: Industry P/E (trailing 12M) Figure 10: Industry P/B (trailing) HSI valuation comparison The Hong Kong market s valuation remains low compared to global markets as the HSI fell along with global indices. Figure 11: Global indices P/E (trailing 12M) Figure 12: Global indices P/B (trailing) 7

8 Market sentiment Average daily market turnover dropped 9% MoM despite the low base in Feb created by the Chinese New Year holidays which fell in Feb this year, as macro policy uncertainties weighed on investors appetite to trade, while market volatility jumped again as trade war concerns heated up. Figure 13: HSI daily turnover (HK$ m) Figure 14: HSI Volatility Index Interest rates The HIBOR surged towards 1% level given a higher US Fed funds rate and the quarter-end tight liquidity effect, but has cooled off slightly in early April. Figure 15: HK composite interest rate vs. Federal funds target rate Figure 16: HIBOR 8

9 Stock Connect Small-cap stocks in the stock connect outperformed as large and mid-cap suffered more from the global sell-off. Figure 17: Hong Kong Stock Connect Index performance Figure 18: YTD index performance Southbound net buying only increased HK$10.4bn in March, the slowest inflow since Aug 2017, with cumulative net buying increasing to HK$841bn since the launch of the stock connect scheme. The A-H-share premium hardly changed and remained high at 27% in March, indicating H shares relative attractiveness. Figure 19: Accumulative southbound net buying (HK$ m) Figure 20: Hang Seng China AH Premium Index 9

10 Average daily southbound trading dropped 35% MoM to HK$15.8bn in March, accounting for 12.2% of total Hong Kong market turnover, down from 16.8% in Feb. Average daily net buying was only HK$498m in March, down 80% MoM, as southbound funds retreated on global uncertainties. Moreover, divergence was seen between the Shanghai and Shenzhen markets. While Shanghai southbound trading recorded average daily net selling of HK391m in March, Shenzhen recorded net buying of HK$889m, indicating different risk appetites between these two markets. Figure 21: Southbound buying and selling (HK$ m) Figure 22: Average daily net buying (in HK$ m) 10

11 The difference between southbound and northbound turnover remained at 12% in March, as the A- share market continued to attract more northbound fund inflows than southbound fund inflows to the Hong Kong market given the upcoming inclusion of A shares into MSCI indices. Figure 23: Southbound turnover as a percentage of northbound turnover Shanghai Stock Connect Among the top-ten trading stocks, seven recorded net selling and three net buying. Figure 24: Top 10 monthly active trading stocks through Shanghai Stock Connect Rank Stock Code Stock Buy Trades (HK$ m) Sell Trades (HK$ m) Turnover (HK$ m) Net Buying (HK$ m) TENCENT 18, , , PING AN 5, , , CCB 2, , , SUNAC 3, , , ICBC 1, , , GEELY AUTO 3, , , AAC TECH 1, , , COUNTRY GARDEN 1, , , HKEX 1, , , SUNNY OPTICAL 1, , , Shenzhen Stock Connect Among the top-ten trading stocks, two recorded net selling and eight net buying. Figure 25: Top 10 monthly active trading stocks through Shenzhen Stock Connect Rank Stock Code Stock Buy Trades (HK$ m) Sell Trades (HK$ m) Turnover (HK$ m) Net Buying (HK$ m) TENCENT 8, , , GENSCRIPT BIO 3, , , GOLDWIND 1, , , KINGDEE INT'L 1, , , SUNAC 1, , , CPIC 1, , PING AN 1, , ZTE 1, , , COUNTRY GARDEN , HKEX 1, ,

12 A-share performance The Shanghai and Shenzhen markets were down 2.8% and up 2.3%, respectively, in March, as investors were betting on small-to-mid caps and growth enterprise trading boards driven by policy incentives and concerns on global markets which affected large-cap cyclical stocks. Pharma, information technology and defense were among the best performing sectors, while steel, mining and banking underperformed last month. Figure 26 : Shanghai Composite Index Figure 27 : CSI 300 Index Sources: Bloomberg, GF Securities (Hong Kong) Figure 28: SW sector performance (YTD %) Figure 29: SW sector performance (Last month %) 12

13 Sector data Macau gaming revenue jumped 22% in March after seasonal weakness in Feb, driven by a strong Renminbi and strong purchasing power among Chinese visitors. Auto sales growth continued to slow due to a high base, warranting the focus on individual stock picks as opposed to the entire sector. Insurance premiums disappointed in the absence of a strong Jan due to structural product changes. Contract sales in the property market continued to slow. Figure 30: Macau gaming revenue (MOP m) Figure 31: Auto monthly sales volume Sources: Bloomberg, GF Securities (Hong Kong) Figure 32: Accumulative insurance premiums (Rmb bn) Figure 33: Shanghai Stock Exchange monthly turnover (Rmb m) Figure 34: Property sales area growth rate (YoY %) Figure 35: Pharma manufacturing output growth (YoY %) 13

14 China macro data The PMI continued to show positive signs despite some divergence between the official and Caixin figures. Industrial profits grew 16.1% YoY in Jan-Feb, 5.3% higher than Dec, as profitability improved with cost cuts. CPI rose steadily while PPI dipped slightly. Figure 36: Industrial profits (YoY %) Figure 37: Manufacturing PMI vs. Caixin manufacturing PMI Figure 38: Retail sales, industrial value added and FAI Figure 39: CPI vs. PPI 14

15 US macro data Manufacturing PMI remained in the expansionary territory. Consumer sentiment remained at a high level. The labor market was strong while core inflation continued to show signs of picking up. Figure 40: PCE core inflation (YoY %) Figure 41: ISM Manufacturing Index Sources: Bloomberg, GF Securities (Hong Kong) Figure 42: University of Michigan Consumer Sentiment Index Figure 43: Non-farm payroll and unemployment rate Sources: Bloomberg, GF Securities (Hong Kong) 15

16 Commodities Copper remained at a three-year high while the cement price was at a five-year high, indicating strength in construction and industrial consumption. The coking coal price continued to rebound while the steel price picked up after the CNY. Oil is reaching its resistance level while gold is range bound. Figure 44: China cement price index Figure 45: Coal price Figure 46: US oil price (USD/barrel) Figure 47: Gold price (USD/oz) Sources: Bloomberg, GF Securities (Hong Kong) Figure 48: Composite steel price index (Year 1994=100) Figure 49: Shanghai aluminum price AL0 (Rmb/tonne) 16

17 Figure 50: Corrugated Fiberboard Price (Rmb/tonne) Figure 51: LME copper 3 month rolling forward (USD) Model portfolio performance and updates Our ten-stock watchlist portfolio recorded a -3.0% monthly return in March driven by the global sell-off, compared with-2.4% for the HSI, -3.1% for the HSCEI, and -3.0% for MSCI China, but was lifted by the outperformance of CSPC Pharma, ABC and CNOOC. Figure 52: Watchlist performance (1-month) 28-Feb 31-Mar Stock Ticker Rating HK$ HK$ % ch Tencent 700 HK NR AAC Tech 2018 HK NR ABC 1288 HK NR Ping An 2318 HK NR HKEx 388 HK NR Geely Auto 175 HK Buy China Yongda 3669 HK Buy CSPC Pharma 1093 HK Accumulate CNOOC 883 HK NR Wisdom Education 6068 HK Buy Sim Avg -3.0 Wt Avg -3.3 HS Index HSCE Index

18 Watchlist portfolio has risen 3.7% YTD, compared with 0.6% for the his, 2.5% for the HSCEI, and 2.2% for MSCI China. Figure 53: Watchlist performance Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan Feb Mar Monthly Watchlist HS Index HSCE Index YTD Watchlist HS Index HSCE Index Since 2015 Watchlist HS Index HSCE Index Note: Portfolio rebalanced to equal weight each month end In view of volatile market conditions and increasing headwind from trade and US policies, we have increased our defensiveness while maintaining our core growth stocks. We have removed AAC Tech, HKEx, CNOOC, Yongda Auto and Wisdom Education, and replaced them with Sunny Optical, CCB, China TCM, Logan Property and China Mengniu. Figure 54: Watchlist for April Stock Ticker Rating Price (HK$) 2017E P/E (x) 2018E EPS YoY (%) Tencent 700 HK NR Sunny Optical 2382 HK Buy ABC 1288 HK NR CCB 939 HK NR Ping An 2318 HK NR Geely Auto 175 HK Buy China Mengniu 2319 HK NR CSPC Pharma 1093 HK Accumulate China TCM 570 HK Buy Logan Property 3380 HK NR Sources: Bloomberg, GF Securities (Hong Kong) Figure 55: Top picks commentary Company Ticker Highlights Tencent 700 HK Proxy for the internet sector, strong growth in multiple sectors and through acquisitions Sunny Optical 2382 HK Leading position in compact camera modules, lens sets for mobile devices and automotive lenses ABC 1288 HK Highest NIM and greatest improvement in NPL in 2017 among big-4 banks CCB 939 HK Among highest NIM and lowest NPL; highest common equity tier-1 capital ratio among big-4 banks Ping An 2318 HK Leading channel agent productivity, multi-growth drivers in financial and fintech businesses Geely Auto 175 HK Strong product pipeline; NEVs ready; upside from Lynk & Co China Mengniu 2319 HK Strong execution to turn around business with improving sales and profit margins likely to continue CSPC Pharma 1093 HK Volume-driven growth from new NDRL implementation; innovative drugs maintaining strong growth China TCM 570 HK Leading player in concentrated TCM granules market with high growth expected; alliance with Ping An provides busines upside Logan Property 3380 HK Anticipate strong contract sales over the next two years in Greater Bay Area Sources: GF Securities (Hong Kong) 18

19 Figure 56: Portfolio history Jan Feb Mar Apr Tencent (700 HK) Tencent (700 HK) Tencent (700 HK) Tencent (700 HK) AAC Tech (2018 HK) AAC Tech (2018 HK) AAC Tech (2018 HK) Sunny Optical (2382 HK) ABC (1288 HK) ABC (1288 HK) ABC (1288 HK) ABC (1288 HK) Ping An (2318 HK) Ping An (2318 HK) Ping An (2318 HK) CCB (939 HK) HKEx (388 HK) HKEx (388 HK) HKEx (388 HK) Ping An (2318 HK) Geely Auto (175 HK) Geely Auto (175 HK) Geely Auto (175 HK) Geely Auto (175 HK) Brilliance China (1114 HK) Yongda Auto (3669 HK) Yongda Auto (3669 HK) China Mengniu (2319 HK) CSPC Pharma (1093 HK) CSPC Pharma (1093 HK) CSPC Pharma (1093 HK) CSPC Pharma (1093 HK) BJE Water (371 HK) CNOOC (883 HK) CNOOC (883 HK) China TCM (570 HK) Wisdom Education (6068 HK) Wisdom Education (6068 HK) Wisdom Education (6068 HK) Logan Property (3380 HK) Sources: GF Securities (Hong Kong) 19

20 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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