Dim Sum Express. A-Share Market. Hong Kong Market. Other Markets. Equity Research. Oct 12, 2015

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 1398 ICBC CHINA MOBILE PETROCHINA CCB TENCENT BANK OF CHINA HSBC CHINA LIFE PING AN SINOPEC Econ data release China Data Date Period Prior Cons Trade Balance 13-Oct SEP Export Trade USD YoY 13-Oct SEP Import Trade USD YoY 13-Oct SEP CPI YoY 13-Oct SEP PPI YoY 13-Oct SEP Ind Prod Growth Cum 18-Oct SEP Ind Prod Grwth Mthly 18-Oct SEP FAI Cum YoY 18-Oct SEP Retail Sales Cum YoY 18-Oct SEP Retail Sales Mthly YoY 18-Oct SEP GDP Cum YoY 18-Oct 3Q GDP QoQ 18-Oct 3Q GDP Quarterly YoY 18-Oct 3Q US Data Date Period Prior Cons CPI Urban YoY 15-Oct SEP Initial Jobless Claims 15-Oct 8-Oct Cont Jobless Claims 15-Oct 1-Oct Source: Bloomberg GF events Date Event Location 19 Oct Peak Sport investor luncheon Hong Kong Source: GF Securities (HK) A-Share Market Investment Strategy: Review of recently recommended investment themes While the performance of the economic stabilization theme has fallen short of our expectation, we believe efforts to support economic growth is still underway at a slow pace, and we highlight water works as the key investment theme for this week. We expect to see some activity in the SOE reform theme when key catalysts are unveiled towards the end of this year. The 13 th FYP is another major mid-term investment theme. However, we have not yet spotted any interesting ideas comparable to the previously issued plan for developing seven strategic emerging industries. Non-Ferrous: Lithium industry to continue to benefit from policy support Last Friday, the State Council issued some guidelines on the development of charging facilities for electric vehicles, calling for charging infrastructure that can cater the needs of 5m electric vehicles by The guidelines will effectively promote charging facility development and drive new energy vehicle industry growth, leading to a significant increase in lithium battery and raw materials demand. The demand for lithium carbonate as a key material for battery production will have considerable upward momentum. Robust growth in the new energy vehicle market will continue to drive upstream lithium mining as well as lithium smelting activities. Hong Kong Market Technology: Global PC shipments still contracting Gartner data show that global PC shipments contracted 7.7% YoY in 3Q15, which is marginally better than the 9.5% YoY decline the previous quarter. Lenovo continued to outperform the market in 3Q15 with a 4.0% YoY decline in shipments, and its market share exceeded 20% for the first time. Acer was the clear loser, with a 19.9% YoY decline in shipments, slipping to the no. 5 position. Lenovo s shares are down 31% YTD and are currently trading at 10.1x FY16/17E earnings. Great Wall Motor (2333 HK, NR): Steady sales growth, but product portfolio a concern Vehicles sold for GWM rose 3.1% YoY in Sep, taking Jan-Sep sales volume growth to 15.4% YoY. The Haval SUV series continued to see strong sales, rising 33.4% during the month. Among the Haval series, sales volume for the H6 rose 12.2% MoM, while disappointing sales for its higher-end SUV models have led to market concerns about the company s product portfolio strategy, with the series neither bringing much in the way of sales to drive profitability nor becoming another top growth contributor. Other Markets Macro: Fed still in wait-and-see mode The Fed released the minutes of its Sep FOMC meeting last week, showing division between the officials and making the decision to not raise rates a close call. The members agreed that it would be appropriate to wait for more information to confirm that the US outlook had not deteriorated significantly. We believe the Fed still has a strong intention to start the normalization process in If upcoming employment data rebound and show continued improvements in the labor market, we expect the Fed to hike rates at the Dec meeting. 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: Review of recently recommended investment themes Investors cautious about new energy vehicles and Disneyland investment themes We highlighted four investment themes in late Aug, namely new energy vehicles, the Shanghai Disneyland Park, economic stabilization measures and SOE reform. The first two ideas have driven substantial share price growth in related stocks, and institutional investors are now cautious about them given their relatively high share prices. Still positive on Disneyland theme We remain positive on the new energy vehicles and Disneyland investment themes in the medium term. In particular, some key information regarding the Disneyland theme will be released this month, and we continue to like leading companies such as Shanghai Dragon ( CH) and Jinjiang International Hotels Development ( CH), while also highlighting Haers Vacuum Containers ( CH) and China CYTS Tours ( CH) which are less noticed by the market. SOE reform unlikely to show activity until year-end While the performance of the economic stabilization theme has fallen short of our expectation, we believe efforts to support economic growth is still underway at a slow pace, and we highlight water works as the key investment theme for this week. SOE reform is still worth watching in the medium term, though any catalysts are unlikely to be seen until detailed reform measures, the second batch of central SOE reform pilots and an exemplary reform case can be introduced. We expect to see some activity in this investment theme when key catalysts are unveiled towards the end of this year. 13 th FYP yet to offer anything interesting Some more realistic reform plans regarding the oil & gas, farmland reclamation and power industry are expected to be carried out in the near term. In addition, the 13th FYP is another major mid-term investment theme, and we have issued a report on carbon emission pertaining to this topic. However, we have not yet spotted any interesting ideas comparable to the previously issued plan for developing seven strategic emerging industries. Non-Ferrous: Lithium industry to continue to benefit from policy support State Council guidelines to spur new energy vehicle industry growth Last Friday, the State Council issued some guidelines on the development of charging facilities for electric vehicles, calling for charging infrastructure that can cater the needs of 5m electric vehicles by There were around 30,000 electric vehicle charging poles in China as of the end of 2014, compared with a new energy vehicle ownership number of more than 120,000. In addition, over 100,000 new energy vehicles were sold during 8M15, meaning total vehicle ownership is likely to double from the end figure very soon. The issuance of the guidelines will effectively promote charging facility development and drive new energy vehicle industry growth, leading to a significant increase in lithium battery and raw materials demand. New energy vehicle ownership to grow 50% annually We estimate that the production of each pure electric vehicle requires 30-60kg of lithium carbonate. Assuming that new energy vehicle ownership will reach 400,000 by the end of this year, the ownership figure is set to grow 50% annually in the coming few years based on the targets set out in the guidelines. The demand for lithium carbonate as a key material for battery production will have considerable upward momentum. In fact, the price of lithium carbonate has continued to rise so far this year. Robust growth in the new energy vehicle market will continue to drive upstream lithium mining as well as lithium smelting activities, benefiting Tianqi Lithium Industries ( CH), Youngy ( CH), Zhonghe ( CH) and Ganfeng Lithium ( CH). Technology: Global PC shipments still contracting What s new? Gartner released 3Q15 global PC shipment data estimates on Oct 8. When was the last time you replaced your laptop or PC? The PC market has suffered with smartphones and tablets rapidly replacing PCs/laptops in satisfying the daily digital needs of consumers. As a result, the PC replacement cycle has lengthened and the PC market has been in contraction since was a slightly better year as the termination of support by Microsoft for its 13-year old Windows XP system (on Apr 8, 2014) triggered a corporate replacement cycle. In 2015, PC shipments dipped again. In 3Q15, Gartner data show that global PC shipments contracted 7.7% YoY, which is marginally better than the 9.5% YoY decline in the previous quarter. Page 2

3 Winners and losers. Lenovo (992 HK, NR) continued to outperform the market in 3Q15 with a 4.0% YoY decline in shipments, and its market share exceeded 20% for the first time. Acer (2353 TT, NR) was the clear loser, with a 19.9% YoY decline in shipments during the quarter, slipping to the no. 5 position (Apple replaced Acer to become the no. 4 PC maker). Will Lenovo continue to gain market share? Amid the dwindling PC market, Lenovo has been relying on market share gain to maintain growth, with which they have fared pretty well so far. Lenovo overtook HP (HPQ, NR) to become the global no. 1 PC maker back in 2Q13 with a market share of about 16.7%. It then took Lenovo about two and a half years to reach a 20% market share. Lenovo has set a medium-term market share target of 30%; the market is likely to scrutinize its progress closely. A reasonable interpretation of "medium-term" is a five-year horizon, in our opinion. Valuation The stock is down 31% YTD and is currently trading at 10.1x FY16/17E earnings (FYE Mar 31, 2017) based on Bloomberg consensus (Lenovo will be in the red for FY15/16, i.e. FYE Mar 31, 2016, due to one-off restructuring charges of about US$900m for headcount reduction and other cuts in overheads announced in Aug 2015). (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) Great Wall Motor (2333 HK, NR): Steady sales growth, but product portfolio a concern Total sales maintained steady growth GWM sold 65,601 vehicles in Sep, up 3.1% YoY; Jan-Sep sales volume reached 586,655 units, up 15.4% YoY. 3Q15 was tough for sales in the domestic market with the company seeing a decline of 11.9% QoQ on weak demand; however sales during the quarter grew 6.3% YoY. Haval SUV series continues to see strong sales The Haval series continued to see strong growth in Sep, selling at 52,081 units, up 33.4% YoY. Although the Haval series saw a decrease in 3Q15, down 7.2% QoQ, Jan-Sep sales volume was 449,400 units, up 63.9% YoY. Exports rebounded in Sep The company s exports have remained low this year, but rebounded by 22.8% MoM in Sep to 2,878 units, up 7.6% YoY. However overall, its exports have continued to drop in Jan-Sep, down 49.4% YoY, mainly due to unstable economies in the company s major export markets, such as Russia. Key H6 model hits new sales high in 3Q15 Among the Haval series, sales volume for the H6 rose 12.2% MoM to 30,528 units despite the weak sales season during the quarter. The proportion of H6 to total sales volume increased to 43.1%, making it the main contributor of sales volume and growth. As the star product in the domestic SUV sector, we expect sales volume for the model to continue to rebound during 4Q15, with monthly average sales volume reaching around 310,000 units. High-end SUV series still ramping up slowly While sales of the Haval series have risen steadily overall, its high-end SUVs, the H8 and H9, have not received a good market response so far, with their ramp-up missing expectations. The H8, newly launched in Apr this year, sold 1,086 units in Sep; its Apr-Sep sales volume was 5,872 units, meaning it has had a monthly average sales volume under 1,000 units this year. Its proportion to total sales is around just 1.0% so far. The H9 s contribution has also been disappointing, with Jan-Sep sales volume reaching 11,310 units, approximately 1.9% of total sales. Its proportion to total sales volume continued to shrink this year, and we don t expect it to rebound much in 4Q15. The high-end SUV models have led to market concerns about the company s product portfolio strategy, with the series neither bringing much in the way of sales to drive profitability nor becoming another top growth contributor. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Deng Chongjing, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Macro: Fed still in wait-and-see mode Fed still in wait-and-see mode The Fed released the minutes of its Sep FOMC meeting last week, showing division between the officials and making the decision to not raise rates a close call. Officials agreed that labor market conditions had improved considerably since earlier in the year, with the unemployment rate falling to a level quite close to their estimates for the longer-run normal Page 3

4 rate. Many members said that the improvement in labor market conditions had met or would soon meet the criteria for beginning policy normalization. However, there are two main reasons why they decided to keep rates at zero. First, several members saw a risk that the additional downward pressure on inflation from lower oil prices and a higher exchange value for the dollar could persist. Second, some members indicated that recent global economic and financial developments had put some limitations on the economic outlook and placed further downward pressure on inflation. As a result, the Fed agreed that it would be appropriate to wait for more information to confirm that the US outlook had not deteriorated significantly. However, there have been some positive signs of improvement on these two factors in the past three weeks. First, the oil price has rebounded significantly from its low, with crude oil touching US$50/barrel last week, the highest level in ten weeks. Second, market volatility declined substantially as the emerging market crisis eases. We believe the Fed still has a strong intention to start the normalization process in If upcoming employment data rebound and show continued improvements in the labor market, we expect the Fed to hike rates at the Dec meeting. ECB flags heightened downside risks for inflation The ECB also released the account of its Sep monetary policy meeting. The minutes suggest that compared to Jul, there was broad agreement among the governing council members about the downside risks posed to the euro area recovery and inflation from worsening global conditions, especially developments in China. In fact, German exports and factory orders fell unexpectedly in Aug in a sign that Europe s largest economy is vulnerable to weaker growth in China and other emerging markets. Besides the weak exports, the governing council members also underlined that investment had remained very subdued in the wake of the crisis. We agree that the euro area is now out of its crisis, but that a full recovery is still a long way off. We therefore believe that inflation is likely to remain at around zero in the short term, and miss the ECB s target of 2% for some time. The prospect of deflation will increase pressure on the ECB to extend or even enlarge the QE program. We believe it will make an announcement on this before the end of year. TPP puts pressure on China to accelerate reform Last week, the US, Japan and ten other countries concluded negotiations on the Trans-Pacific Partnership (TPP). It is the most important trade deal negotiated in over 20 years, but it does not include China. If approved, the agreement will set new terms on nearly US$28trn in trade and business investment between the parties. The TPP does not include China because it has high bars for labor and environmental standards, IP protection and fair play by SOEs, exactly the areas in which China is lacking. Undoubtedly, small countries like Vietnam and New Zealand will benefit from the agreement because tariffs will be eliminated in many areas. Therefore, the TPP will pull those countries economically closer to the US and Japan, and that may hurt the competiveness of China s companies. However, in the long run, the TPP may put pressure on China to accelerate its reform. It may also incentivize China to move faster on the development of the Shanghai Free Trade Zone, and speed up reform to increase efficiency and remain competitive. In fact, Chinese spokesmen have indicated that, although they were not ready to meet the demanding requirements of a potential TPP agreement today, they might be ready and willing to join in a few years. The TPP is therefore not only a big challenge for China, but also an opportunity for China to step up its reform process. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Frankie Wan, Research Analyst, SFC CE No. AVK969, frankiewan@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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The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 5