Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 23, 2015

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 14E 15E 14E 15E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK Local Daily ADR Daily ticker Company (HK$) (%) (US$) (%) 857 PETROCHINA ICBC CHINA MOBILE BANK OF CHINA CCB TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons HSBC China Mfg PMI 23-Jul JUL P Ind Profit Mthly YoY 26-Jul JUN US Data Date Period Prior Cons Initial Jobless Claims 23-Jul 18-Jul Cont Jobless Claims 23-Jul 11-Jul Markit US Mfg PMI 24-Jul JUL P Dur Goods New Ord 27-Jul JUN S&P/CS Comp Jul MAY Markit US Serv PMI 28-Jul JUL P Pending Home Sales 29-Jul JUN Source: Bloomberg A-Share Market Investment Strategy: Domestic investment funds 2Q15 equity exposure review The equity exposure of actively-managed, equity-heavy funds declined significantly from a historical high of 85.5% in 1Q15 to 80.3% in 2Q15, while exposure to bonds declined for the fifth consecutive quarter, sliding 0.3pp from 1Q15 to 3.7%. Exposure to stocks on the main board and CSI 300 constituents dropped to new lows, while that to the SME and ChiNext boards rose to new highs. Overall, these investment funds were most exposed to the IT, pharmaceutical and media sectors, while the most significant position increases during 2Q15 were seen in pharmaceutical, airlines, machinery, chemical, power equipment and F&B. Satellite: Development of space-based information systems accelerating The satellite manufacturing industry is likely to maintain strong growth during the 13th FYP period on the back of policy support, with market growth to mainly come from in-orbit satellite number growth, satellite replacement and international business expansion. Meanwhile, the focus of the domestic satellite industry is shifting towards the satellite application space, with the rapid increase in in-orbit satellite numbers providing the foundation for industry development. We highlight the Beidou navigation system, commercial remote sensing market, and satellite communications market. CIMC ( CH): H-share placement a big step forward in mixed ownership reform The company announced overnight that its H-share placement plan has been approved by the CSRC. The management team s subscription will further improve the company s shareholding structure and better align the interests of its management team with those of its shareholders. Replacement and new demand should drive CIMC s container sales volume to new highs, and its profit margins should pick up as capacity utilization increases. We estimate that the company will turn in net profit similar to levels reached in 2007 and 2011 this year followed by even stronger profits in the coming few years. Hong Kong Market Technology: Apple Jun quarter results fail to beat expectations Apple posted net profit of US$10.7bn (+39% YoY), versus Bloomberg consensus of US$10.8bn. Given the strong demand for the large-screen iphone6/6+ launched in Sep last year, Apple will face headwinds from a high-base effect as it tries to maintain strong YoY growth in 2H15. 3Q15 YoY sales growth should moderate, according to company guidance, and Bloomberg consensus sees 4Q15 sales growth decelerating further to a single-digit level of 3% YoY growth. We expect growth in the Apple supply chain to follow the same pattern and decelerate in 2H15. GF events Date Event Location 23 Jul A-share listco institutional Shenzhen investor 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 Dim Sum Express Investment Strategy: Domestic investment funds 2Q15 equity exposure review Using 2Q15 data available, we have based our analysis on the top ten stock holdings (typically accounting for ~50% of investment funds total equity holdings market cap) by actively-managed, equity-heavy funds. The equity exposure of these investment funds declined significantly from a historical high of 85.5% in 1Q15 to 80.3% in 2Q15, while exposure to bonds declined for the fifth consecutive quarter, sliding 0.3pp from 1Q15 to 3.7%. Equity/bond exposure of active equity-heavy funds (2Q15) Active equity-heavy funds asset allocation (2Q15 vs. 1Q15) % % Inner circle: 2Q Outer circle: 1Q15 Equity Bonds Cash Others Equity 股票 债券 Bonds (RHS) 85.5 Exposure to stocks on the main board and CSI 300 constituents dropped to new lows, while that to the SME and ChiNext boards rose to new highs. Changes in exposure to different trading boards/groups of stocks Among main board stocks, these investment funds mainly increased their holdings of airlines and chemical stocks, while reducing positions in financials, property and auto names. Among SME and ChiNext stocks, they mainly raised holdings of consumer, machinery and electronics stocks, while lowering positions in media and IT firms. Changes in sector exposure Overall, these investment funds were most exposed to the IT, pharmaceutical and media sectors, while the most significant position increases during 2Q15 were seen in pharmaceutical, airlines, machinery, chemical, power equipment and F&B. 1Q15 2Q15 Main Board 51% 45% CSI % 31% SME 26% 29% ChiNext 23% 26% 1Q15 2Q15 1Q15 2Q15 Main board SME/ChiNext Airlines 0.3% 1.6% Consumer staples 12.0% 17.0% Chemical 3.5% 4.7% Pharma 10.1% 14.4% Banking 4.9% 3.6% F&B 1.0% 4.0% Non-bank 6.8% 2.8% Machinery 1.9% 4.6% Securities 1.5% 0.3% Electronics 0.8% 3.4% Insurance 5.0% 2.3% Media 8.3% 6.4% Property 6.2% 4.5% IT 19.2% 17.3% Auto 4.8% 3.4% Page 2

3 Top ten sectors most exposed to (2Q15) Top ten sectors where positions increased most (2Q15) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 17.3% 14.4% 6.4% 4.7% 4.6% 4.5% 4.5% 4.2% 4.0% 3.7% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 4.3% 2.3% 1.9% 1.2% 1.2% 1.1% 0.9% 0.9% 0.7% 0.4% Note: Figures indicate by how much exposures to these sectors were increased during the quarter. Exposure to individual stocks became more distributed in 2Q15, with the top ten most held stocks accounting for just 10.6% of the funds overall investment assets, down from 21.2% in 4Q14. Top ten most held stocks 4Q14 1Q15 2Q15 Company Ticker Exposure Company Ticker Exposure Company Ticker Exposure QoQ chg Ping An Insurance % Ping An Insurance % Ping An Insurance % -1.87% Poly Real Estate % Industrial Bank % Wonders Information % -0.08% China Vanke % Hundsun Technologies % Hundsun Technologies % -0.57% Industrial Bank % Kingstar Winning Software % Industrial Bank % -1.35% SPDB % East Money Information % East Money Information % -0.35% China Merchants Property % Gold Mantis % China Merchants Property % 0.06% China Minsheng Bank % Changan Auto % Eternal Asia % 0.65% CPIC % Wonders Information % China Merchants Bank % 0.22% Yili Industrial % Kingdom Technology % Yili Industrial % -0.26% Changan Auto % Yili Industrial % Spring Airlines % 0.15% Total 21.20% Total 17.43% Total 10.62% Satellite: Development of space-based information systems accelerating Stable growth in global satellite industry The global satellite industry demonstrated steady growth during In particular, communications satellites and military surveillance satellites represent the biggest proportion of the satellite manufacturing industry, while the satellite application industry, which mainly consists of ground equipment manufacturing and satellite services, account for ~90% of the entire satellite industry. The US is the leader in the global satellite industry, followed by Russia and Europe; China has comprehensive satellite R&D capabilities but is yet to improve the performance and reliability of its products. Space-based information systems serving both military and civilian purposes As the outer space is not subject to territorial boundary restrictions, satellite technology is the main vehicle through which major military powers in the world fight for their presence in the space. In fact, the development of a space-based information system based on satellites has become a key factor in modern warfare. The US is again leading the way in this area, while China is likely to see substantial development given its yet-to-be-improved systems. In addition, a space-based information system can also be used for civilian purposes through, for example, data collecting systems targeting industrial users. Satellite manufacturing industry to see strong growth on demand and policy support The satellite manufacturing industry is likely to maintain strong growth during the 13th FYP period on the back of policy support, with market growth to mainly come from in-orbit satellite number growth, satellite replacement and international business expansion. High entry barriers means the competition landscape of the satellite manufacturing market is unlikely to be changed. Page 3

4 Satellite navigation, remote sensing and communications to see strong growth Meanwhile, the focus of the domestic satellite industry is shifting towards the satellite application space, with the rapid increase in in-orbit satellite numbers providing the foundation for industry development. In terms of satellite navigation, the Beidou navigation system is seeing continued business strength in the military space, with breakthroughs likely to be made in its industrial applications; the domestic commercial remote sensing market is being developed; in the satellite communications space, the ground equipment manufacturing industry is expected to be the first to see substantial development driven by major projects. Top picks and risks Among satellite manufacturing firms, we like China Spacesat ( CH) and China Aerospace Times Electronics ( CH); with regard to satellite application, we suggest watching China Spacesat ( CH), Hwa Create ( CH) and CORPRO Technology ( CH). Key risks include policy risks, satellite R&D uncertainties, and potential failures of in-orbit satellites. CIMC ( CH): H-share placement a big step forward in mixed ownership reform Placement approved The company announced overnight that it has got the CSRC s go-ahead to issue 286m new H shares under a placement. Its management team, the COSCO Group and Hony Capital will subscribe for the placement at HK$13.48 per share. Management subscription to improve shareholding structure Its strong management team and market-driven mechanism have been the key pillars supporting company growth over the years. The management team s subscription for 143m new H shares with Rmb1.9bn will further improve the company s shareholding structure and better align the interests of its management team with those of its shareholders. Profit margin to pick up on strong demand Given the year lifespan of containers, the sales peak during is likely to drive strong replacement demand from 2014 onwards. Coupled with new container demand, this should drive overall container sales volume to new highs. As a result, the company should see its profit margins pick up as capacity utilization increases. CIMC s container sales volume grew 24.5% YoY in 2014, and has maintained healthy growth so far this year against negative growth in most other machinery products. We estimate that the company will turn in net profit similar to levels reached in 2007 and 2011 this year followed by even stronger profits in the coming few years. Different stages of business transformation The focus of the company s business transformation is put on: 1) logistics and finance business development in the short term; 2) the conversion of land use for other purposes and development of businesses in other industries in the medium term; and 3) development of the Internet of Things in the long term. Key risks include container demand volatility triggered by global economic conditions, uncertainties surrounding the profitmaking model for innovative businesses such as e-commerce, and uncertainties in the company s Qianhai project. Technology: Apple Jun quarter results fail to beat expectations What's new? Apple s Jun quarter results failed to beat high market expectations, leading to a share price fall of over 6% in extended after-hours trading. Jun quarter results highlights Apple posted net profit of US$10.7bn (+39% YoY), versus Bloomberg consensus of US$10.8bn. Group sales grew by 33% to US$49.6bn. Sales in China more than doubled in the quarter and were the key growth driver. China has been the second largest market for Apple for two consecutive quarters, accounting for 27% of sales in 2Q15 (calendar year). Apple shipped 47.5m iphones (+35% YoY) during the quarter. ASP remains at an enviable US$660, largely stable on a QoQ basis and up 18% YoY. Sep quarter sales guidance: US$49bn-51bn (up 16%-21% YoY). 2H15 shipment and sales growth to decelerate on high base Given the strong demand for the large-screen iphone6/6+ launched in Sep last year, Apple will face headwinds from a high-base effect as it tries to maintain strong YoY growth in 2H15. 3Q15 YoY sales growth should moderate, Page 4

5 according to company guidance, and Bloomberg consensus sees 4Q15 sales growth decelerating further to a single-digit level of 3% YoY growth. Supply chain to follow the same pattern We expect growth in the Apple supply chain to follow the same pattern and decelerate in 2H15. We estimate AAC Tech (2018 HK, Hold) will report 1H15 net profit of Rmb1.2bn (+25% YoY), and we forecast 2H15 net profit will rise 13% YoY to Rmb1.5bn (+13% YoY). Cowell (1415 HK, NR) guided for an increase in 1H15 net profit of over 175% YoY. Earnings growth will slow in 2H15, with Bloomberg consensus seeing 2015 full year net profit of US$76.3m (+43% YoY). (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) Page 5

6 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. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies have compensation or mandate for investment banking services received within the preceding 12 months from one of the companies China Minsheng Banking Corp., Ltd. (Stock Code: 1988 HK) contained in this research report. GF Securities (Hong Kong) and/or its affiliated or associated companies have acted as Independent Financial Advisor of China Minsheng Banking Corp., Ltd. (Stock Code: 1988 HK) within the preceding 12 months. GF Securities (Hong Kong) and/or its affiliated or associated companies may receive compensation or mandate for investment banking services from China Minsheng Banking Corp., Ltd. (Stock Code: 1988 HK) in the future. 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