Yum Cha 飲茶. January 4, 2016 TALKING POINT - MILITARY SECTOR TO REMAIN A FOCUS IN 2016 RESEARCH NOTES

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 21, HSCEI 9, Shanghai COMP 3,539.2 (0.9) Shenzhen COMP 2,308.9 (1.8) Gold 1, BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M 3.1 (0.1) RMB/USD DATA RELEASES DUE THIS WEEK Jan 5 Caixin China PMI Services Jan 5 Caixin China PMI Composite Source: Bloomberg January 4, 2016 TALKING POINT - MILITARY SECTOR TO REMAIN A FOCUS IN 2016 Source: Bloomberg During the New Year Holiday, Xinhua News Agency released Opinions related to deepening the reform of national defence and the army. The document covers a wide range of areas such as the management system, command system, army formation, army structure, nurture of talents and governance system. The direction is very clear: modernization of the army. According to official media, the number of army groups will be reduced from 18 to 13. To improve their efficiency, increasing rate of mechanization is inevitable, in our view. Two Hong Kong-listed military plays, i.e. AviChina [2357.HK; 33x 2015E PER] and CSSC Offshore & Marine Engineering [0317.HK; loss in 2015E based on consensus] will continue to benefit from the military reform, although their valuations are not cheap. Analyst: Wong Chi-man, CFA RESEARCH NOTES STRATEGY - A-share premium widened to 39% at end-december 2015 from 28% in mid-october We believe the enlarged premium was driven by (i) A-share market is less affected by the RMB depreciation concern as the fund flow is still highly regulated; (ii) monetary easing benefited A-share market more directly; (iii) thin trading volume in late December in Hong Kong affected market efficiency. We see trading opportunities as trading volume and market efficiency is likely to improve after the holidays. We believe Huaneng Power [0902.HK], China Life [2628.HK], BBMG [2009.HK] and Sinopec [0386.HK] should look interesting. CHINA CEMENT WEEKLY - Average cement price (nationwide) dropped 0.7% week-on-week to RMB247.42/tonne last week. Prices in part of Guangdong, Anhui and Jiangxi were down RMB5-20/tonne after a short period of stabilization since the beginning of December. Cement demand remained weak during the year -end, and prices went down in a low profile way as cement producers tried to clear the inventories before national holidays. Future price and demand rise might occur once constructions begins after the Spring Festival. 1

2 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 COMPANY / INDUSTRY NEWS STRATEGY WIDENING H-SHARE DISCOUNT OFFERS TRADING OPPORTUNITIES Analyst: Wong Chi Man, CFA (Tel: (852) ); cmwong@chinastock.com.hk January 4, 2016 H-share discount widened in the past three months. Based on Hang Seng A-H premium index, A-share premium widened to 39% at end-december 2015 from 28% in mid-october We believe the enlarged premium was driven by (i) A-share market is less affected by the RMB depreciation concern as the fund flow is still highly regulated; (ii) monetary easing benefited A-share market more directly; (iii) thin trading volume in late December in Hong Kong affected market efficiency. Figure 1: A-share premium widened (i.e. larger H-share discount) Figure 2: Thin trading volume in Hong Kong in December (HK$m) 350, , , , , ,000 50,000 - Source: Bloomberg Sources: Bloomberg, CGIS Research Potential to narrow discount. We believe some stocks with better fundamentals should have potential to narrow the discount due to (i) improvement in trading volume and market efficiency after holidays; (ii) more news flow related to the launch of Shenzhen-Hong Kong Stock Connect, a key step to pave to way for MSCI to include A-share in its indices; and (iii) more news flow on 13th Five-year plan. In figure 3, we ranked the A-H dual listing stocks based on the magnitude of their H-share discount widened since mid-october. Huaneng Power [0902.HK], China Life [2628.HK], BBMG [2009.HK] and Sinopec [0386.HK] should look interesting, in our view. Huaneng Power [0902.HK]: As a result of concerns related to (i) weak power generation; (ii) potential risk of tariff cut and (iii) uncertainty caused by power reform, Huaneng Power s share price has remained weak in the past few months. H-share discount has widened by 18ppt since mid-october. However, as the share price has remained largely stable after the tariff cut in December, we believe the risks have been largely reflected. Its dividend yield of 9.3% for 2015E and 8.1% for 2016E is likely to attract investors when market sentiment improves. The company s PBR of 1.08x is close to a 4-year low. China Life [2628.HK]: The company s H-share discount has widened by 15ppt since mid-october. It is trading at 0.63x 2015E P/AV and 1x 2015E EV, both are overly bearish, In our view. Its surprising reserve charge in Q was the major reason for the relatively lacklustre share price performance but should be largely discounted in the current valuation. A stabilizing and recovering A-share market should help support the earnings and share price of the company. BBMG [2009.HK]: Although its cement and building materials logistics businesses are unlikely to be exciting, its property development and property investment business should remain stable thanks to their good location. We understand that investors may not like the company s conglomerate structure but a 52% discount to A-share price and a widened H-share discount by 12ppt since mid- October seems too pessimistic. It is trading at merely 0.67x PBR. Sinopec [0386.HK]: The weakness in upstream business should be partly offset by the upbeat downstream business, as the authorities have frozen oil product prices before the review of pricing mechanism is completed. It implies the downstream business will enjoy a better margin in the near term. H-share discount was widened by 10ppt since mid-october. Valuation is undemanding at 0.7x PBR. As there were signs of accelerating SOE reform in the past two months, any progress related to Sinopec s reform in downstream business should be share price catalyst. 2

3 COMPANY / INDUSTRY NEWS STRATEGY WIDENING H-SHARE DISCOUNT OFFERS TRADING OPPORTUNITIES (Con t) Analyst: Wong Chi Man, CFA (Tel: (852) ); cmwong@chinastock.com.hk Figure 3: A-H discount for dual listing companies Ticker (H) Ticker (A) Company name Sources: Bloomberg, CGIS Research Last price (HK$) H-share discount (31 Dec 2015) H-share discount (15 Oct 2015) H-share discount w idened (ppt) 1336 HK Equity C1 Equity New China Life Insurance Co Ltd % -26.2% 21.0% 163, % 1.2% 1800 HK Equity C1 Equity China Communications Construction Co Ltd % -31.9% 18.0% 223, % 3.4% 902 HK Equity C1 Equity Huaneng Pow er International Inc % -17.4% 17.6% 140, % 8.1% 2628 HK Equity C1 Equity China Life Insurance Co Ltd % -9.9% 15.1% 890, % 2.5% 548 HK Equity C1 Equity Shenzhen Expressw ay Co Ltd % -26.3% 14.5% 21, % 3.7% 358 HK Equity C1 Equity Jiangxi Copper Co Ltd % -37.5% 13.0% 51, % 2.1% 2009 HK Equity C1 Equity BBMG Corp % -40.0% 12.3% 52, % 1.4% 2601 HK Equity C1 Equity China Pacific Insurance Group Co Ltd % 4.5% 10.9% 305, % 2.3% 386 HK Equity C1 Equity China Petroleum & Chemical Corp % -9.7% 10.3% 685, % 4.6% 1071 HK Equity C1 Equity Huadian Pow er International Corp Ltd % -26.9% 10.1% 74, % 6.5% 317 HK Equity C1 Equity CSSC Offshore and Marine Engineering % -56.5% 10.0% 48, n.a % 0.4% 6030 HK Equity C1 Equity CITIC Securities Co Ltd % -11.6% 9.0% 268, % 2.9% 914 HK Equity C1 Equity Anhui Conch Cement Co Ltd % 11.9% 8.5% 108, % 2.8% 857 HK Equity C1 Equity PetroChina Co Ltd % -40.2% 8.3% 1,721, % 2.9% 939 HK Equity C1 Equity China Construction Bank Corp % -14.1% 8.0% 1,342, % 6.8% 753 HK Equity C1 Equity Air China Ltd % -32.0% 7.7% 115, % 2.4% 2883 HK Equity C1 Equity China Oilfield Services Ltd % -56.1% 7.4% 66, % 2.4% 107 HK Equity C1 Equity Sichuan Expressw ay Co Ltd % -53.6% 7.1% 17, % 3.2% 1988 HK Equity C1 Equity China Minsheng Banking Corp Ltd % -25.6% 6.9% 393, % 3.3% 1186 HK Equity C1 Equity China Railw ay Construction Corp Ltd % -32.8% 6.8% 205, % 1.9% 1088 HK Equity C1 Equity China Shenhua Energy Co Ltd % -24.4% 6.7% 336, % 4.4% 390 HK Equity C1 Equity China Railw ay Group Ltd % -48.0% 6.3% 267, % 1.8% 2318 HK Equity C1 Equity Ping An Insurance Group Co of China Ltd % 7.5% 6.3% 785, % 1.4% 998 HK Equity C1 Equity China CITIC Bank Corp Ltd % -35.0% 6.1% 349, % 5.8% 1072 HK Equity C1 Equity Dongfang Electric Corp Ltd % -45.4% 5.6% 35, % 0.8% 2607 HK Equity C1 Equity Shanghai Pharmaceuticals Holding Co Ltd % -23.1% 5.5% 58, % 2.3% 991 HK Equity C1 Equity Datang International Pow er Generation Co Ltd % -55.7% 5.4% 69, % 7.3% 3968 HK Equity C1 Equity China Merchants Bank Co Ltd % -8.8% 5.0% 527, % 4.6% 38 HK Equity C1 Equity First Tractor Co Ltd % -64.5% 5.0% 11, % 1.9% 2727 HK Equity C1 Equity Shanghai Electric Group Co Ltd % -64.9% 4.9% 147, % 1.9% 3988 HK Equity C1 Equity Bank of China Ltd % -22.2% 4.7% 1,298, % 6.4% 1398 HK Equity C1 Equity Industrial & Commercial Bank of China Ltd % -8.9% 4.5% 1,880, % 6.6% 1898 HK Equity C1 Equity China Coal Energy Co Ltd % -54.5% 3.8% 78,295 n.a. n.a. n.a % 0.2% 2899 HK Equity C1 Equity Zijin Mining Group Co Ltd % -47.5% 3.6% 78, % 3.8% 3328 HK Equity C1 Equity Bank of Communications Co Ltd % -24.8% 3.3% 492, % 5.7% 187 HK Equity C1 Equity Beijing Jingcheng Machinery Electric Co Ltd % -66.7% 3.2% 5,420 n.a. n.a. n.a n.a. n.a. n.a HK Equity C1 Equity China Shipping Container Lines Co Ltd % -70.8% 3.2% 74, n.a % 0.4% 995 HK Equity C1 Equity Anhui Expressw ay Co Ltd % -55.4% 2.8% 21, % 4.5% 2238 HK Equity C1 Equity Guangzhou Automobile Group Co Ltd % -71.5% 2.5% 129, % 3.7% 588 HK Equity C1 Equity Beijing North Star Co Ltd % -57.3% 2.2% 18, % 3.2% 3993 HK Equity C1 Equity China Molybdenum Co Ltd % -70.6% 1.8% 74, % 1.8% 6886 HK Equity C1 Equity Huatai Securities Co Ltd % -20.5% 1.8% 159, % 2.4% 1919 HK Equity C1 Equity China COSCO Holdings Co Ltd % -65.2% 1.7% 91, n.a % 0.2% 1171 HK Equity C1 Equity Yanzhou Coal Mining Co Ltd % -65.9% 1.6% 40, n.a. n.a % 0.1% 2333 HK Equity C1 Equity Great Wall Motor Co Ltd % -34.9% 1.6% 114, % 4.4% 874 HK Equity C1 Equity Guangzhou Baiyunshan Pharmaceutical % -37.0% 1.5% 43, % 1.4% 6837 HK Equity C1 Equity Haitong Securities Co Ltd % -25.3% 1.3% 199, % 2.9% 1053 HK Equity C1 Equity Chongqing Iron & Steel Co Ltd % -68.2% 0.9% 15,955 n.a. n.a. n.a n.a. n.a. n.a HK Equity C1 Equity Luoyang Glass Co Ltd % -86.3% 0.2% 11,442 n.a. n.a. n.a. n.a. n.a. n.a. n.a HK Equity C1 Equity Aluminum Corp of China Ltd % -56.1% 0.1% 75,161 n.a. n.a. n.a % 0.0% 670 HK Equity C1 Equity China Eastern Airlines Corp Ltd % -50.9% 0.0% 97, % 0.9% 2196 HK Equity C1 Equity Shanghai Fosun Pharmaceutical Group Co Ltd % -18.8% 0.0% 62, % 1.7% 300 HK Equity C1 Equity Shenji Group Kunming Machine Tool Co Ltd % -72.8% -0.2% 7,575 n.a. n.a. n.a n.a. n.a. n.a HK Equity C1 Equity Sinopec Oilfield Service Corp % -79.2% -0.3% 121, n.a % 0.9% 1055 HK Equity C1 Equity China Southern Airlines Co Ltd % -41.2% -0.3% 88, % 2.4% 1288 HK Equity C1 Equity Agricultural Bank of China Ltd % -17.1% -0.3% 1,231, % 6.7% 564 HK Equity C1 Equity Zhengzhou Coal Mining Machinery % -60.1% -0.6% 13,243 n.a % 1.1% 6818 HK Equity C1 Equity China Everbright Bank Co Ltd % -25.3% -0.6% 227, % 6.0% 323 HK Equity C1 Equity Maanshan Iron & Steel Co Ltd % -56.6% -1.2% 25,317 n.a. n.a. n.a % 0.0% 3606 HK Equity C1 Equity Fuyao Glass Industry Group Co Ltd % 2.3% -2.0% 45, % 4.4% 553 HK Equity C1 Equity Nanjing Panda Electronics Co Ltd % -68.4% -2.1% 17, n.a. n.a n.a. n.a. n.a HK Equity C1 Equity CRRC Corp Ltd % -39.3% -2.5% 393, % 1.7% 1618 HK Equity C1 Equity Metallurgical Corp of China Ltd % -69.9% -2.9% 123, % 3.2% 168 HK Equity C1 Equity Tsingtao Brew ery Co Ltd % -13.6% -3.3% 50, % 1.4% 1065 HK Equity C1 Equity Tianjin Capital Environmental Protection % -55.9% -4.4% 15, % 1.7% 338 HK Equity C1 Equity Sinopec Shanghai Petrochemical Co Ltd % -64.8% -5.2% 67, % 3.7% 177 HK Equity C1 Equity Jiangsu Expressw ay Co Ltd % -4.3% -5.6% 52, % 5.1% 1138 HK Equity C1 Equity China Shipping Development Co Ltd % -59.4% -6.6% 36, % 1.7% 525 HK Equity C1 Equity Guangshen Railw ay Co Ltd % -41.2% -6.7% 39, % 2.4% 2880 HK Equity C1 Equity Dalian Port PDA Co Ltd % -62.1% -19.0% 28, % 1.0% Market cap (HK$m) PER (x) 2015E PER (x) 2016E PER (x) PBR (x) 2015E PBR (x) 2015E dividend yield 2016E dividend yield 3

4 China Cement Weekly January 4, 2016 China Cement Sector Q Results Likely to Remain Unexciting; Waiting for Demand Improvement Post-CNY Cement prices continued to decline last week, down 20.4% YoY. Average cement price (nationwide) dropped 0.7% week-on-week to RMB247.42/tonne last week. Prices in part of Guangdong, Anhui and Jiangxi were down RMB5-20/tonne after a short period of stabilization since the beginning of December. Cement demand remained weak during the year-end, and prices went down in a low profile way as cement producers tried to clear the inventories before national holidays. Future price and demand rise may occur once constructions begin after the Spring Festival. Average inventory level (nation-wide) climbed slightly to 75.61% last week. Coal prices stabilized in December but dropped 29.1% YoY. Comprehensive average price index for Bohai-Rim Steam Coal (Q5500K) stabilized at around RMB 372/tonne last month. The index dropped from RMB525/tonne since December 2014, down 29.1% year-on -year (YoY) basis. Q results to be unexciting; waiting for improvement post-cny. Although cement prices rebounded in October 2015 following the seasonality, the rebound was weaker than expected and lost momentum in November and December. Although no less than RMB600bn of specialized construction bonds were issued between August and November, we understand that some new projects will not commence construction before Lunar New Year. As such, it will take a longer time to see the impact of policy stimulus. Based on the cement price trend in Q4 2015, we believe the earnings of most players in the quarter are unlikely to be much better than that in Q3. Given that the inventory level is still high in general, we do not expect to see strong cement prices before Lunar New Year. Cement stocks under coverage suffered a deep plunge in the past year.stock price declined 16.2% on average, except Shanshui Cement [691.HK;SELL], which rose 69.1% in the first few months before trading suspension for insufficient free float of below 25%. Best performer BBMG [2009.HK;BUY] rose 3.9% during December, but still dropped 18.8% for the entire year. CR Cement [1313.HK;BUY] was the weakest among our coverage stocks in 2015, down 52.6%. CNBM [3323.HK; HOLD] suffered most in the past month with a 10.6% decline, and down 50.7% last year. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Livy Lyu Research Assistant (852) livylyu@chinastock.com.hk Valuation Table Sources: Company, Bloomberg, CGIS Research estimates PER (x) PBR (x) EV/EBITDA(x) Net debt/equity (%) Company Ticker Rating Price (HK$) Market cap (US$m) E 2016E E 2016E E 2016E 2015E Anhui Conch 914 HK Equity BUY , CNBM 3323 HK Equity HOLD , BBMG 2009 HK Equity BUY , CR Cement 1313 HK Equity BUY , Shanshui Cement 691 HK Equity SELL , Simple average Weighted average EPS Growth (%) E PEG(x) ROE (%) Dividend yield (%) Company Ticker 2015E 2016E CAGR (%) 2015E E 2016E E 2016E Anhui Conch 914 HK Equity (41.3) 4.5 (21.7) (0.7) CNBM 3323 HK Equity (69.8) (21.7) (0.5) CR Cement 1313 HK Equity (42.1) (3.0) (25.0) (0.2) BBMG 2009 HK Equity Shanshui Cement 691 HK Equity Simple average (28.3) 34.5 (6.1)

5 Peer Comparison Market cap PER (x) PBR (x) EV/EBITDA(x) Company Ticker Rating Price (LC) (US$m) E 2016E E 2016E E 2016E Anhui Conch 914 HK Equity BUY , CNBM 3323 HK Equity HOLD , BBMG 2009 HK Equity BUY 4.8 7, CR Cement 1313 HK Equity BUY , Shanshui Cement 691 HK Equity SELL , TCC International 1136 HK Equity NR China National Materials 1893 HK Equity NR Asia Cement 743 HK Equity NR West China Cement 2233 HK Equity NR 1.6 1, Tianrui Cement 1252 HK Equity NR n.a. n.a n.a. n.a. 7.0 n.a. n.a. Simple average Weighted average Sources: Bloomberg, CGI Research 1-Year Relative Performance Sources: Capital IQ, CGIS Research 5

6 Figure 1: Regional Cement Price Sources: Digital Cement, CGIS Research 6

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