Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jun 10, 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 CCB BANK OF CHINA TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons Rmb New Loans 10-Jun MAY M0 10-Jun MAY M1 10-Jun MAY M2 10-Jun MAY Total Financing 10-Jun MAY Ind Prod Cum YoY 11-Jun MAY Ind Prod Mthly YoY 11-Jun MAY FAI Growth 11-Jun MAY Retail Sales Cum YoY 11-Jun MAY Retail Sales Mthly YoY 11-Jun MAY US Data Date Period Prior Cons Initial Jobless Claims 11-Jun 6-Jun Cont Jobless Claims 11-Jun 30-May Source: Bloomberg GF events Date Event Location 10 Jun Huiyuan Juice investor meeting Shanghai 11 Jun BoCom co. visit Shanghai 12 Jun Bank of Nanjing co. visit Nanjing Source: GF Securities (HK) A-Share Market Investment Strategy: Remain positive on SOE reform theme The Leading Group for the Comprehensive Deepening of Reform issued opinions on preventing the loss of state-owned assets last week, which we believe will in effect provide support to SOE listcos asset value. While we see SOE reform as a theme to be tracked in the mid/long-term, the large number of investment targets available means investors should focus on the leaders. In particular, we suggest watching trials for state-owned capital management companies, the consolidation of central SOEs in the auto industry, and SOE reform in Guangzhou. Land Market: Both supply and demand up MoM in May; market conditions strengthening Residential land parcels with planned GFA of 39.56m sqm (+22% MoM, -5% YoY) were sold in 300 large cities for Rmb65.8bn in May. This translates into an average price of Rmb1,662/sqm, representing a premium of 9% over auction opening prices, down 11pp from Apr. In addition, the residential land supply-to-demand ratio continued to decline in May, suggesting a recovering market. The transaction value and premium over auction opening prices in first-tier cities should rebound in Jun as several high-priced residential land parcels will be brought to market in these cities. Light Industry: Weakening lottery sales growth to speed up policy issuance Lottery sales growth slowed further in Apr, growing just 3.4% YoY, with welfare and sports lotteries growing 2.2% and 5.0% YoY respectively. We believe continued deceleration in lottery sales growth will likely lead to earlier issuance of new online lottery policies and that Jun will be a key time window for the policy stance to become clearer. In the sports industry, we believe investors will prefer companies which focus on a particular offline niche market, have considerable business experience and have few comparable peers as similar investment targets. Hong Kong Market Chow Tai Fook (1929 HK, Hold): FY15 results miss, more cost control in FY16; lower TP to HK$8.40 FY15 net profit fell 25% YoY, 7% below consensus on lower-than-expected revenue and higherthan-expected operating expenses. We cut our FY16/17 net profit forecasts by 16%/19% to reflect lower SSS and a higher SG&A expenses ratio. Though we see a challenging outlook due to the weak HK retail sector, we believe the worst of HK SSS is over as mainland visitor growth is stabilizing. CTF s above-peer China market profit contribution should also mitigate the impact on earnings from the challenging HK market. Maintain Hold, and lower TP from HK$9.40 to HK$8.40. Sunny Optical (2382 HK, Buy): May shipment a relief following Apr surprise drop Sunny Optical saw its handset camera module shipment pick up 7.8% YoY to 18.5m in May (+16.6% MoM), which was a relief to investors following the MoM decline in Apr shipment that triggered a share price correction of more than 15% over the next few trading days. The smartphone end-market in China has weakened since the start of 2Q15, and we expect to see mid-to-high-single-digit YoY shipment growth in 2Q15, compared with growth of 52% YoY in 1Q15. The stock is trading at 17x 2015E P/E. 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: Remain positive on SOE reform theme Investor interest and policy support strengthening We expect stocks driven by the SOE reform theme to continue to post strong performance in the short term as investors have become much more interested in the theme recently and as relevant policies have continued to be issued. The Leading Group for the Comprehensive Deepening of Reform issued opinions on preventing the loss of state-owned assets last week, which we believe will in effect provide support to SOE listcos asset value, benefiting the share price performance of these SOEs. Three ideas for stock selection While we see SOE reform as a theme to be tracked in the mid/long-term, the large number of investment targets available means investors should focus on the leaders. In particular, we suggest watching: 1) trials for state-owned capital management companies, especially one for the China Chengtong Group, 2) the consolidation of central SOEs in the auto industry, especially the consolidation of companies under the FAW and Dongfeng families, and 3) SOE reform in Guangzhou, which is leading the country in terms of both speed and the strength of reform, with Pearl River Piano ( CH), Zhujiang Brewery ( CH), Dong Fang Hotel ( CH), Guangri Stock ( CH) and Guangzhou Finance Holdings (which is yet to own any listing platforms) to be watched. Land Market: Both supply and demand up MoM in May; market conditions strengthening Market conditions strengthening The planned GFA of land parcels sold during 5M15 in 300 large cities dropped 38% YoY with transaction value down 44%, while residential land transactions came down by 45% both in terms of volume and value. Residential land parcels with planned GFA of 63.61m sqm (+42% MoM, -22% YoY) were offered to market in May, with 39.56m sqm (+22% MoM, -5% YoY) actually sold for Rmb65.8bn. This translates into an average price of Rmb1,662/sqm of planned GFA, representing a premium of 9% over auction opening prices on average, down 11pp from Apr. In addition, the residential land supply-to-demand ratio continued to decline in May, suggesting a recovering market. May land market data by city First-tier Land parcels brought to market during the month had total planned GFA of 4.72m sqm (+82% MoM, +39% YoY), with 2.86m sqm being residential land (+135% MoM, +104% YoY). Land parcels with planned GFA of 2.26m sqm were sold (+14% MoM, -35% YoY), of which 1.31m sqm was attributable to residential land (+10% MoM, +30% YoY). Total land sales value dropped 69% MoM and was down 73% YoY to Rmb7.2bn due to a decline in the quality of land offered to market during the month. That said, transaction value and the premium over auction opening prices should rebound in Jun as several high-priced residential land parcels will be brought to market in these cities. Second-tier Total planned GFA of land parcels offered to market in 35 second-tier cities during May rose 22% MoM and 10% YoY to 51.33m sqm, with 24.12m sqm attributable to residential land (+25% MoM, +2% YoY). Land parcels actually sold had planned GFA of 38.36m sqm (+31% MoM, flat YoY) with 17.80m sqm attributable to residential land (+33% MoM, +20% YoY). Land sales value picked up 59% YoY with the average premium over auction opening prices remaining stable with Apr. High-quality land parcels in key second-tier cities remained the focus of competition among property developers. Third/fourth-tier Land parcels with total planned GFA of 88.53m sqm (+36% MoM, -31% YoY) were offered to market in 246 lower-tier cities, with 51.91m sqm (+20% MoM, -48% YoY) actually sold at an average price of Rmb674/sqm of planned GFA. Light Industry: Weakening lottery sales growth to speed up policy issuance Lottery Lottery sales growth slowed further in Apr, growing just 3.4% YoY to Rmb32.6bn, with Rmb18.1bn from welfare lottery (+2.2% YoY) and Rmb14.5bn from sports lottery (+5.0%). We believe continued deceleration in lottery sales growth will likely lead to earlier issuance of new online lottery policies and that Jun will be a key time window for the policy stance to become clearer, and Page 2

3 suggest watching Hongbo ( CH), China Sports Industry ( CH), Zongyi ( CH) and 500.com (WBAI US). Sports We believe investors will prefer companies which focus on a particular offline niche market, have considerable business experience and have few comparable peers that can serve as similar investment targets. In this light, we suggest watching Ledman Optoelectronic ( CH), China Sports Industry ( CH) and Guirenniao ( CH). Packaging The prices of paper packaging raw materials remained stable last week, while plastic packaging material prices continued to decline. With the rapid development of the internet, innovation in packaging and printing technologies and changes in downstream customers demand, we believe leading companies with business presence nationwide will continue to benefit from these industry changes relying on their advantages in terms of technological strength, financing and innovation capabilities. Furniture MoM home price growth in 100 large cities tracked turned positive in May, pointing to a recovery along the property industry chain. As such we suggest watching leading players in the tailored furniture field which are sensitive to a property market recovery. Key risks include a drop in demand driven by a greater-than-expected economic slowdown, an overly fast increase in raw material prices, potential policy intervention during the development of a market-oriented sports industry, and sudden changes in online lottery policies. Chow Tai Fook (1929 HK, Hold): FY15 results miss, more cost control in FY16; lower TP to HK$8.40 FY15 results miss Net profit fell 25% YoY, 7% below Bloomberg consensus, mainly due to lowerthan-expected revenue and higher-than-expected operating expenses. Revenue dropped 17% YoY; GM widened by 2.4pp to 29.7%; OP margin narrowed by 1.3pp to 10.7% on a 3.4pp increase in SG&A expenses ratio. Effective tax rate fell unexpectedly by 1.8pp to 16.7% due to a one-off writeback of dividend withholding tax. China market profit contribution surpasses HK The 7% YoY decline in China jewelry segment EBIT was less than its 11% revenue decline (15% SSS decline). The company s China jewelry segment EBIT margin improved by 0.4pp to 10.5% led by a 2pp GM expansion on a better product mix. Given HK market profit fell 40% YoY, more than the 32% SSS decline in the region, China market profit contribution increased to 55% of total EBIT (vs 45% in FY14). FY16 outlook While the HK market is still weaker than China for the company, both markets saw the SSS decline narrow MoM in May. We believe 2HFY16 could be better than 1HFY16 due to the wealth effect from a buoyant China stock market and easing comps in the HK market. In order to control operating costs, the company plans to close two stores in HK, reduce advertising expenses and headcount per shop, and expects a 15-20% rental decrease upon shop lease renewals in HK. In China, CTF plans to add stores in FY16, less than previous guidance of 200 stores per year due to softening economic growth. Lower TP to HK$8.40 We cut our FY16/17 net profit forecasts by 16%/19% to reflect lower SSS and a higher SG&A expenses ratio. We expect net profit to rise by 3% YoY in FY16 with 2% revenue growth and a stable SG&A expenses ratio. Though we see a challenging outlook due to the weak HK retail sector, we believe the worst of HK SSS is behind CTF (-26% in 4QFY15) as mainland visitor growth is stabilizing. In addition, the fact that CTF has the highest China market profit contribution among peers should mitigate the impact of the challenging HK market on earnings. We maintain our Hold rating, and lower our TP from HK$9.40 to HK$8.40, based on 15x FY16E P/E, - 1SD from its average forward P/E of 17.6x. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Sunny Optical (2382 HK, Buy): May shipment a relief following Apr surprise drop What's new? Sunny Optical saw its handset camera module shipment pick up 7.8% YoY to 18.5m in May (+16.6% MoM). Page 3

4 A relief following Apr data surprise The MoM rebound in camera module shipment in May was a relief to investors. Just a month ago, the unexpected MoM decline in Apr shipment (released May 11) was a shock to the market and triggered a share price correction of more than 15% over the next few trading days. Slowdown of China s smartphone end-market As we highlighted in the Jun issue of our Technology Monthly, the smartphone end-market in China has weakened since the start of 2Q15. We expect to see mid-to-high-single-digit YoY shipment growth in 2Q15, compared with growth of 52% YoY in 1Q15. Valuation The stock is trading at 17x 2015E P/E. (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@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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