Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 15, 2016

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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 (%) 941 CHINA MOBILE ICBC TENCENT PETROCHINA CCB BANK OF CHINA HSBC SINOPEC PING AN CHINA LIFE Source: Bloomberg GF events Date Event Location 19 Jul Cogobuy NDR Shenzhen 21 Jul Lifetech Scientific co. visit Shenzhen 21 Jul CITIC Bank co. visit Beijing Source: GF Securities (HK) A-Share Market Electronics: 2H16 investment outlook; watch semiconductor and car electronics industries We believe the worst has passed for the semiconductor industry. Chinese semiconductor companies have caught up with and even surpassed some of their overseas peers and have made their way into the supply chains of leading global component manufacturers, thanks to strong government support and the shift of the location of global semiconductor production towards China. We are positive on Chinese electronics firms that are expanding their growth potential through both organic growth and external expansion amid the development of smart cars. Hong Kong Market 2H16 Tech Hardware Sector Outlook: Upstream component makers still offer growth outlook Demand for smartphones is slowing amid rising penetration in key markets; however rising industry adoption of new features such as dual cameras and fingerprint sensors will drive growth for upstream component makers. We expect to see an increase in new smartphone models offered with these features in the second half of this year, and believe they will become mainstream if Apple offers them in its upcoming iphone 7. We recommend waiting for a pull-back before accumulating upstream component makers, and suggest focusing on Q Tech and Tongda. 2H16 Internet/Media Sector Outlook: Mobile games industry moving into maturity; film industry to see continued boom Online games: The mobile games industry will move into a mature stage of development now given slowing mobile user growth, rising R&D and promotional costs, and a stabilized market structure. We suggest investors limiting their attention to the few mobile game developers that have a strong mobile game pipeline, popular IP resources and visible near-term growth. Media: Residents' rising purchasing power is driving the demand for high-end films such as those in the IMAX format. We favor platform companies which can fully benefit from domestic box office growth, including top cinema operators, and leading providers of movie contents and theater technology solutions. 2H16 Consumer Discretionary Sector Outlook: 2H outlook neutral; prefer names with high visibility and expanding margins We are long-term positive but near-term cautious on the sportswear sector. We see limited re-rating potential for Jewelry names given softening economic growth and the decline in mainland tourist arrivals as well as their weaker purchasing power. We prefer quality names with high visibility that are also seeing their margins expand. Our top picks are Maple Leaf, a quality international school operator whose asset-light approach is driving growth, and Goodbaby, whose margin expansion continues and whose share price correction presents a buying opportunity. Cogobuy (400 HK, Buy): 1H16 results preview solid results supported by strong GMV momentum We expect 54% YoY GMV growth in 1H16. We forecast non-gaap net profit will rise 28%, on top of 28% growth in revenue and a stable net margin. We expect a slight expansion in gross margin, but expect this to be offset by increased investment in the IngDan platform. Besides its strong growth outlook, the market s focus is now shifting to the company s IngDan platform, GMV from which is targeted to reach Rmb5bn in FY16, compared to Rmb1bn last year. Rapid IngDan development may lead to a re-rating for the company. 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 Electronics: 2H16 investment outlook; watch semiconductor and car electronics industries Semiconductors Car electronics and the application of semiconductors for industrial use are now the main drivers of the global semiconductor industry, with the Internet of Things and MEMS also providing new opportunities. We believe the worst has passed for the semiconductor industry. Chinese semiconductor companies have caught up with and even surpassed some of their overseas peers and have made their way into the supply chains of leading global component manufacturers, thanks to strong government support and the shift of the location of global semiconductor production towards China. We are positive on the domestic semiconductor industry, with the following companies on our watch list: Upstream equipment and materials: Sevenstar Electronics ( CH), Nata Opto-electronic Materia ( CH), Sinyang Semiconductor Materials ( CH), TA&A Ultra Clean Technology ( CH), Taiji Industry ( CH); Wafer testing (for value investment opportunities): Changjiang Electronics Tech ( CH), Huatian Technology ( CH); IoT and MEMS: Navtech ( CH), Datang Telecom Technology ( CH), Eastsoft Communication Technology ( CH), Sino-Microelectronics ( CH), Ingenic Semiconductor ( CH). Smart cars most noteworthy emerging field The era of the smart car has arrived as the smartphone market plateaus. Tesla is likely to become the Apple company in the smart car industry given its leadership in the next generation of computing platforms and mobile data devices. In addition, the direction of unmanned driving development is taking shape, while the emergence of smart cars has also led to breakthroughs in new forms of car fuel systems such as fuel cells. We are positive on Chinese electronics firms that are expanding their growth potential through both organic growth and external expansion amid the development of smart cars. We like Deren Electronic ( CH), Shuanglin Auto Parts ( CH), Soling Industrial ( CH), Faratronic ( CH) and Xingyu Automotive ( CH). OLDE driving new opportunities in consumer electronics After the smartphone market has stabilized, there are still new opportunities arising from the consumer electronics space. OLED technology, which meets new consumer electronics demands, is set to benefit from accelerations in both supply and demand growth. 2H16 Tech Hardware Sector Outlook: Upstream component makers still offer growth outlook Sector view - Neutral Cautious view due to slowing global smartphone demand Demand for smartphones is slowing amid rising penetration in key markets. Global smartphone shipments are expected to grow 3.1% to 1,483m units in 2016, down from 10.6% in 2015, according to IDC. No signs of a recovery in the PC market IDC expects global PC shipments to decline by 7.3% to 256m units in 2016 (the fifth consecutive year of decline after the market peaked at 363m units in 2011), as smartphones continue to replace PCs in satisfying the average consumer s digital needs. Upstream smartphone component makers to benefit from ramp-up in new features Despite the slowdown in the global smartphone market in 2016, rising industry adoption of new features such as dual cameras and fingerprint sensors will drive growth for upstream component makers, in our view. Key themes over next 3-6 months Ramp-up in smartphones with dual-cameras and fingerprint recognition In 2H16, we expect to see an increase in new smartphone models offered with dual cameras and fingerprint recognition. We believe dual cameras will become mainstream if Apple decides to offer them in the upcoming iphone 7, due to be launched in Sep. Page 2

3 Valuation analysis Valuation range of 3.8x-24.3x 2016E P/E Upstream smartphone component stocks Sunny Optical (2382 HK, Hold) and AAC Tech (2018 HK, Hold) are trading at 24.3x and 18.1x 2016E P/E, both fairly priced, in our opinion. On the other hand, PC-related stocks continue to trade at deepvalue levels. For example, Ju Teng (3336 HK, Buy), a notebook casing maker, is trading at 3.8x forward P/E. We also see limited downside risk for FIH Mobile (2018 HK, Accumulate), which is currently trading at cash value. Investment strategy Upstream component makers Underpinned by a ramp-up in new products, several upstream smartphone component makers will maintain decent earning growth in 2016, despite a slowdown in global smartphone shipments. Market favorites Sunny Optical and AAC Tech are well-owned by institutional investors, and are fairly priced at their current levels. We recommend waiting for a pull-back before accumulating these names, and suggest focusing on earnings recovery plays such as Q Tech (1478 HK, Buy) and other growth stocks like Tongda (698 HK, Buy), which are trading at more attractive valuations (both trading below 12x P/E). Top picks Q Tech (1478 HK, Buy) Q Tech is a 2016 earnings-recovery play, underpinned by the contribution from new products (e.g. fingerprint modules) and an improved product mix in its core CCM business. The stock is currently trading at 1.0x P/B and 11.2x 2016E P/E. Our target price of HK$1.98 is based on a 2016E target P/E of 12x, versus Sunny Optical (2382 HK, Hold), which is trading at 24.3x 2016E P/E. Tongda (698 HK, Buy) Tongda, a smartphone casings maker, is a growth stock at an attractive valuation. We expect the company to deliver strong sales growth and margin expansion in 2016, driven by increased adoption of metal casings among Chinese smartphone makers. The stock is currently trading at 8.7x 2016E P/E. Our target price of HK$2.04 (38% upside) is based on a 2016E target P/E of 12x. Risks Upside risks: Upside surprise on upcoming launch of the iphone 7 in Sep. Downside risks: Slower-than-expected growth in global smartphone shipments. (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) 2H16 Internet/Media Sector Outlook: Mobile games industry moving into maturity; film industry to see continued boom Sector view (Online games: Neutral; Media: Positive) Mobile games industry moving into maturity Revenue from the mobile games industry is expected to grow 18% this year, with its market share to exceed that of installed PC games. The mobile games industry will move into a mature stage of development now given slowing mobile user growth, rising R&D and promotional costs, and a stabilized market structure (with Tencent and NetEase combined taking an ~80% market share). PC game developers are speeding up the transformation of their popular PC game titles into mobile games. Meanwhile, leading mobile game providers are seeking to strengthen their competitiveness and business diversification through IPbased games, e-sports tournaments and AR/VR technology, which will further raise the industry entry barrier. Thriving film industry in China China s box office is expected to grow at a CAGR of 31% over the next two years and surpass the US to become the world's biggest box office market in There is upside in the per capita number of movies and movie screens in China. In addition, average perscreen box office posted a rebound in FY15, which might help improve theater operators profitability. Residents' rising purchasing power is driving the demand for high-end films such as those in the IMAX format. We expect IMAX theaters to penetrate the domestic market further over the next 3-5 years. Page 3

4 Key themes over next 3-6 months Online games: Overall growth of the mobile games industry; gross revenue performance of core mobile games by key developers, such as Kingsoft s JX mobile game (released early Jun) Media: Overall box office during holiday periods such as the summer vacation and the National Day holiday; box office performance of popular movie titles of the year Valuation analysis HK-listed online game companies are trading at an average of 12.5x FY16E P/E, in line with the historical average forward P/E for the past three years. In terms of FY16E P/E, the media sector is on average valued at 29x in the HK and 26x in the US markets respectively, higher than its historical average valuation for the past three years. Investment strategy Online games: be selective We suggest investors limiting their attention to the few mobile game developers with a strong mobile game pipeline, popular IP resources and visible near-term growth. Media: platform companies key beneficiaries We favor platform companies which can fully benefit from domestic box office growth, including top cinema operators, and leading providers of movie contents and theater technology solutions. Top picks Linekong (8267 HK, Accumulate): The company has a strong pipeline of IP-based mobile games, and is likely to post a strong earnings rebound this year. IMAX China (1970 HK, Accumulate): As a world-leading brand of high-end theater systems, the company will benefit from rapid box office growth in China by shifting to the revenue sharing model. Risks Upside risks: Consumer demand for entertainment services (including games and films) appears to be defensive amid an economic recession; restrictions on overseas movie imports might be relaxed further in Downside risks: Uncertainties surrounding the performance of individual mobile game products, rising user acquisition cost, low profitability from the e-sports business; lower-than-expected box office performance, crackdowns on box office frauds, a slowdown in new theater development. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk ) 2H16 Consumer Discretionary Sector Outlook: 2H outlook neutral; prefer names with high visibility and expanding margins Sector view - Neutral Sportswear: 1Q17 trade fair orders could weaken further as channel inventories may have risen over the past two quarters (4Q15 and 1Q16) due to the increased difference between order book growth and SSSG. Jewelry: The decline in sector earnings is expected to narrow. Negative factors: sales of luxury goods should slow as economic growth softens. Positive factors: the decline in HK street shop rental rates has begun to kick in. The rise in the gold price YoY which began in 2Q16 will help to slow the SSS decline. Ladies footwear: Negative factors include competition from online channels, the decline in foot traffic at department stores and consumers increasing preference for sporty shoes. Education: Quality international school operators are benefitting from the increasing popularity of studying abroad among Chinese students. The industry has high visibility compared to other discretionary categories such as apparel and footwear. Page 4

5 Key themes over the next 3-6 months Sportswear: Trade fair results and SSSG. Jewelry: SSSG and the gold price trend. Ladies footwear: SSSG trend. Education: The amendment of the Law for Promoting Private Education and the number of student enrollments at the end of Sept. Valuation analysis Sportswear: The sector is trading at 10.1x 1-yr forward P/E, lower than its historical average of 10.8x. We are long-term positive but near-term cautious. Jewelry: The sector is trading at 14.0x 1-yr forward P/E, near its historical average of 15.1x. We see limited re-rating potential given softening economic growth and the decline in mainland tourist arrivals as well as their weaker purchasing power. Ladies footwear: Belle is trading at 8.9x 1-yr forward P/E, which is towards the low-end of its historical range. Its valuation is fair, in our view. Education: Maple Leaf is trading at 27.9x 1-yr forward P/E, a historical high. Investment strategy Bottom-up approach We prefer quality names with high visibility that are also seeing their margins expand. Top picks Maple Leaf (1317 HK, Buy) Quality international school operator whose asset-light approach is driving growth. Goodbaby International (1086 HK, Buy) Margin expansion continues; overdone share price correction presents a buying opportunity. Risks Upside risks: Better-than-expected SSSG, trade fair results and number of student enrollments; reversal of the downward trend in mainland tourist arrivals; M&A; amendment of the Law for Promoting Private Education. Downside risks: Lower-than-expected SSSG, trade fair results and number of student enrollments; policy risks, keen competition, exchange rate risks. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Cogobuy (400 HK, Buy): 1H16 results preview solid results supported by strong GMV momentum Solid 1H16 results supported by strong GMV momentum We expect 54% YoY GMV growth in 1H16. By business segment, we expect direct sales to grow at a solid ~28% YoY, while marketplace and supply chain financing should post strong YoY growth of 99% and 176% respectively. We forecast non-gaap net profit will rise 28%, on top of 28% growth in revenue and a stable net margin. We expect a slight expansion in gross margin, but expect this to be offset by increased investment in the IngDan platform. Market expecting re-rating on IngDan platform growth Besides its strong growth outlook, the market s focus is now shifting to the company s IngDan platform the largest supply chain service platform for small start-ups in smart hardware. GMV from IngDan is targeted to reach Rmb5bn in FY16, compared to Rmb1bn last year. Rapid IngDan development may lead to a re-rating for the company. Valuation We expect full-year FY16 non-gaap net profit to rise 28% YoY to Rmb490m. The stock is currently trading at 30x FY16E P/E. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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, namely Good Baby International Holdings Limited (Stock Code: 1086) ( Good Baby International ) contained in this research report. GF Securities (Hong Kong) and/ or its affiliated or associated companies have acted as the Independent Financial Advisor of the Good Baby International 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 the company in the future. 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