Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 21, 2014

Transcription

1 Equity Research Dim Sum Express Alex Fan, CFA Head of Research SFC CE No. ADJ Albert Yip, CFA SFC CE No. ADT Felix Luo SFC CE No. AQF Joseph Ho, CFA SFC CE No. AFP Ryan Zhu SFC CE No. BDK Gao Yedong Editor SFC CE No. BAI GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong A-Share Market Environmental: Network centralization, clean energy and energy substitution three key trends in heating industry Annual coal consumption in the heating industry accounts for more than 20% of the national total, and we expect the industry to replace power generation as the main contributor to air pollution around Large-scale M&A and progress towards centralized heating will be seen going forward with leading companies to benefit from an expansion in heat supply areas and stronger earnings growth. In addition, biomass & natural gas heating and clean coal usage should also see substantial growth. Agriculture: Positive on livestock/poultry farming industry chain Hog prices picked up WoW last week but remained lower YoY; both chicken prices and farming earnings strengthened. We expect the hog supply-demand dynamics to continue to improve in the coming 2-3 quarters with farming earnings to increase. In addition, the poultry farming sector is set to benefit from declines in production capacity and rising hog prices. Leading feedstuff companies are also likely to see substantial sales improvements given the peak season in 2H14 and strengthening hog prices. Dongjiang Environmental ( CH): Cross-regional expansion accelerating The company has been named as the top candidate in the public tender for a hazardous waste treatment project in Jiangxi with investment of Rmb305m. The hazardous waste treatment market is entering a stage of high growth on strengthening environmental regulation and improving industry standards. We remain positive on the company as strong capacity growth will help it fully benefit from rapid sector growth. Furthermore, we expect it to continue to expand through cross-regional M&A and see strong earnings growth during Hong Kong Market Juteng (3336 HK, NR): 1H14 earnings weak; slow progress in smartphone casing business 1H14 earnings came in 6% below consensus; core earnings fell 21% YoY; 1H14 gross margin declined sharply HoH to 17.6% (2H13: 21.8%) on high development costs and low-yield rates from new products. 1H14 overall sales were flattish (+2% YoY) due to slow growth in global notebook shipments. Management has guided a 15% HoH (2% YoY) increase in 2H14 sales and 2-3pp HoH gross margin improvement in 2H14 driven by higher sales volume and capacity utilization during the peak season. Juteng is trading at a depressed valuation of 6.6x 2014E P/E and below book (0.86x 2014E P/B). Trinity (891 HK, NR): 1H14 results miss expectation Net profit plunged 47% YoY to HK$79m, 16% below consensus. Revenue dropped 6% YoY due to a SSS and store number decline in Greater China. SSS in China and Taiwan were still up on 2H13, but were partly offset by a softening in HK and Macau. SSS 3Q14-to-date has turned positive driven by clearance sales of off-season products. Management believes a 75-76% GM is sustainable given the significant drop in off-season inventory. We expect an earnings forecast cut from the street, which would imply a higher P/E valuation (currently 13.6x FY14E P/E). Ping An Insurance (2318 HK): Maintain Buy despite impairment losses in life insurance Net profit rose 19.2% YoY, with net assets up 13.0% HoH. Total comprehensive income was up 76.4% YoY on investment gains. The company has seen stable growth in 1H14, with growth of 18.5% YoY in individual first-year premiums, 16.7% YoY growth (in line) in total NBV, and the number of exclusive sales agents up 9.1% YoY on end It is currently trading at 2.0x 1H14 P/B, which we see as undervalued as this is close to its historical low. We maintain our Buy rating and TP of HK$90.00, representing 2.6x 2014E P/B or 17.1x 2014E P/E. Continued on next page

2 Hong Kong Market (continued) Kingsoft (3888 HK): 2Q14 earnings below consensus Headline earnings came in below consensus, mainly due to the sharp increase in share-based compensation. Revenue was up 51% YoY and 11% QoQ, in line with consensus. Management has guided that operating margin may decline to 10-20% in FY14, from 31% in FY13, as a result of its significant investment in development and promotions for its mobile games and mobile internet apps. Although 2Q14 revenue was in line with consensus, we believe the ongoing contraction in operating margin is likely to result in disappointing headline earnings in FY14. Central China Securities (1375 HK): 1H14 results in line; company undervalued Central China Securities saw 1H14 revenue rise 21.5% and net profit come in in-line, up 34% YoY (industry avg: 32%). Commission fee income dropped 6% YoY, in line with peers, while interest income from margin financing and securities lending rose 251% YoY, partly on a low base, but also in line with the industry trend. At the current 0.95x 2014E P/B we see the company as undervalued; we maintain our Buy rating and TP of HK$3.00, representing 1.1x 2014E P/B and a 15% discount to China Galaxy s (6881 HK) historical average P/B. Page 2

3 Environmental: Network centralization, clean energy and energy substitution three key trends in heating industry Heating to become the most polluting industry The heating industry burns more than 730m tonnes of coal annually, accounting for over 20% of nationwide coal usage. In addition, a large amount of production capacity in the industry is inefficient and highly polluting. We expect the heating industry to replace power generation as the main contributor to air pollution around We see centralized heating, clean energy and energy substitution as three key trends in the industry going forward. Centralized heating We believe smaller boilers will be removed going forward with urban heating networks to be integrated. In addition, small heat suppliers will likely be pushed out of the market as they typically fail to meet environmental requirements and have poor operations. As a result, large-scale M&A and progress towards centralized heating will be seen. Leading heating network companies will benefit from an expansion in the heat supply areas they cover and stronger earnings growth. We like Luenmei Holding ( CH), Dun'an Artificial Environment ( CH), Dalian Thermal Power ( CH) and Huitian Thermal Power ( CH). Energy substitution: biomass and natural gas heating Many key cities are accelerating the replacement of coal-fueled boilers and industrial boilers with heat supply equipment fueled by clean energy. There have been market concerns about the difficulties for the high prices of natural gas (main clean energy substitute) to be passed downstream. In contrast, biomass is a more economically viable substitute with its use also supported by the government. We are positive on leading biomass heating supplier Devotion Thermal Technology ( CH). Clean energy The market for clean coal usage is set to see substantial development this is particularly true given the continued increase in natural gas prices. Officials from the National Energy Administration have indicated that an action plan for clean coal development and usage has been drafted and submitted for the State Council s review. We are positive on Keda Clean Energy ( CH). Agriculture: Positive on livestock/poultry farming industry chain Hog prices rising WoW, down YoY Based on data from soozhu.com, the average ex-farm live hog price rose by Rmb0.28/kg WoW to Rmb14.83/kg last week (-5.6% YoY); the average price of piglets picked up Rmb0.31/kg WoW to Rmb25.45/kg (-26.5% YoY) while breeding sows fell by Rmb58/head WoW to Rmb1,521/head, representing a YoY decline of 14%. In addition, data from boyar.cn indicates that the gross profit for raising hogs is also lower YoY though picking up WoW. Chicken farming earnings improving The price of white-feathered chickens in Yantai rose 8.7% WoW to Rmb5.12/kg last week with the price of baby chicks in main breeding areas up 17% WoW to Rmb3.5/chick. White-feathered chicken hatcheries saw their earnings increase by Rmb0.2/chick WoW to Rmb1.3/chick last week, while overall chicken farming earnings rose by Rmb0.9/chicken to Rmb3.4/chicken. Feedstuff raw material prices mixed The spot price of corn strengthened 1.4% WoW and 10.1% YoY to Rmb2.685/tonne last week, while wheat rose 0.3% WoW and 2.5% YoY to Rmb2,510/tonne. This translates into a wheat-to-corn price ratio of The spot price of soybean meal fell 1.2% WoW and 8.2% YoY to Rmb3,666/tonne, while the price of fish meal at warehouses remained flat WoW at Rmb10,800/tonne (+3.9% YoY). Positive on livestock/poultry farming industry chain We expect the hog supply-demand dynamics to continue to improve in the coming 2-3 quarters with farming earnings to strengthen. In addition, we are positive on the poultry farming sector as it is set to benefit from declines in production capacity and rising hog prices. Leading feedstuff companies such as Dabeinong Technology ( CH) and Tangrenshen ( CH) are likely to see substantial sales improvements given the peak season for feedstuff demand in 2H14 and strengthening hog prices. Furthermore, the pig vaccine market is highly sensitive to hog price changes, which should benefit Tecon Animal Husbandry Bio-Technology ( CH) and Jinyu Group ( CH). Our top picks are Muyuan Foodstuff ( CH), Chuying Agro-Pastoral ( CH), Dabeinong Technology ( CH), Jinyu Group ( CH), Sunner Development ( CH), Dahuanong Animal Health ( CH) and Ringpu Bio-Technology ( CH). Page 3

4 Dongjiang Environmental ( CH): Cross-regional expansion accelerating Edge in tender for Jiangxi project indicates strong expansion capability The company has been named as the top candidate in the public tender for a hazardous waste treatment project in Jiangxi. The project will be run following the build-operate-transfer model with planned annual capacity of 81,000 tonnes; it will require investment of Rmb305m and will be built in two years time. Demand for hazardous waste treatment growing strongly The company has moved into the hazardous waste treatment markets in Fujian, Xinjiang and Jiangxi over the past year through M&A and tendering for projects. This means its technical strength and cross-regional M&A capability are increasingly recognized by the market. We point out that tenders similar to this project are adopted in many provinces, meaning demand for the service is growing at an accelerating pace. Capacity utilization to pick up We continue to believe that the hazardous waste treatment market is entering a stage of high growth on strengthening environmental regulation and improving industry standards. In particular, we expect Dongjiang to see capacity utilization rise significantly as it brings several hazardous waste treatment projects online in the coming 1-2 years. Strong earnings growth expected during We remain positive on the company as strong capacity growth will help it fully benefit from substantial sector growth going forward. Furthermore, we expect it to continue to expand through cross-regional M&A and see strong earnings growth during Our 2014/15/16 EPS forecasts are Rmb0.74/1.19/1.81. Juteng (3336 HK, NR): 1H14 earnings weak; slow progress in smartphone casing business What s new? Juteng (3336 HK, NR) held a 1H14 results conference call yesterday. The company is the world's largest notebook casing maker with a global market share of ~30% and it is entering the smartphone casing market. 1H14 earnings miss; margin narrows 1H14 earnings of HK$311m was 6% lower than consensus of HK$331m. Core earnings fell 21% YoY to HK$247m this is calculated by adjusting for one-off exceptional items of HK$64m in government subsidies this year and HK$51m in withholding tax last year. 1H14 gross margin declined sharply HoH to 17.6% (2H13: 21.8%) on high development costs and low-yield rates from new products (e.g. tablet casings). Flattish NB casing sales; slow progress in smartphone casing business Notebook casings accounted for 80% of overall sales in 1H14, followed by tablet casings (10%) and smartphone casings (5%). 1H14 overall sales were flattish (up 2% YoY) due to slow growth in global notebook shipments. Smartphone casing revenue was small on weak shipment momentum at its two customers (i.e. Motorola and Asustek; note that Juteng is supplying casings for the Moto X model). 2H14 guidance: Higher sales, stronger margins 2H is typically the industry peak season. Management has guided a 15% HoH (or 2% YoY) increase in 2H14 sales and 2-3pp HoH gross margin improvement in 2H14 driven by higher sales volume and capacity utilization during the peak season. However, 2H14 GPM is unlikely to exceed the 2H13 peak of 21.8%. Management expects tablet casings to contribute ~20% of overall sales in 2H14, up from 10% in 1H14, while the contribution from smartphone casings will remain stable at 5%. Valuation: Single-digit P/E, below book value Juteng is trading at a depressed valuation of 6.6x 2014E P/E and below book (0.86x 2014E P/B). The stock has also underperformed the market with its share price up just 3% YTD. In addition, balance sheet is stretched with end-jun net gearing of 49%. (Analyst: Joseph Ho, josephho@gfgroup.com.hk) Trinity (891 HK, NR): 1H14 results miss expectation 1H14 net profit below expectation Net profit plunged 47% YoY to HK$79m, 16% below consensus. Revenue dropped 6% YoY due to a 3.4% SSS decline and 6% decrease in stores in the Greater China region. GM rose 3.9ppt to 79.3% on a HK$40m inventory provision write-back. Excluding this, Page 4

5 GM would have dropped 0.3ppt to 76.1%. OP margin shrank 0.9ppt to 10.4% as the SG&A expenses ratio increased by 5.5ppt to 71.2% on sales deleveraging as well as an increase in wages for staff at stores in China. In addition, Trinity booked an exchange loss of HK$41m due to RMB depreciation (vs HK$25m gain in 1H13). Inventory level Inventory turnover days increased by 143 days YoY to 495 days in 1H14 (vs 373 days in FY13). 120 days of this came from the early receipt of 2014 Fall/Winter merchandise and an inventory provision write-back due to a change in accounting estimates. The unprecedented clearance sale (80% retail discount) held in July at the Sogo store in Hong Kong s Causeway Bay was well-received and profitable. With more off-season product clearance activities set for 2H14, the company targets clearing all old products from before the 2013 season by the end of The HK$40m write-back of inventory was booked as the provision made previously for off-season products was too prudent. SSS improved slightly HoH in 1H14 and turned positive 3Q14-to-date on clearance sales The improvement was driven by the China market (-6% in 1H14 vs -12% in 2H13) and Taiwan (+3% in 1H14 vs flat in 2H13), but partly offset by a softening in HK and Macau (flat in 1H14 vs +8% in 2H13). SSS 3Q14-to-date has turned positive driven by clearance sales of off-season products. That said, we believe the SSS trend seen since Sept, reflecting sales of 2014 Fall/Winter products, is more indicative of the future trend. Outlook 1) Management believes a 75-76% GM (excluding inventory provision write-downs/writebacks) is sustainable as off-season inventories have dropped significantly; 2) less store closures expected in 2H14 in Greater China; 3) New staff with international experience expected to improve operations such as the merchandising division; 4) the company is set to make investments in omnichannel and digital platforms, and; 5) will review or initiate cost control measures. Valuation The stock is trading at 13.6x FY14E P/E (based on Bloomberg estimates). We expect an earnings forecast cut from the street, which would imply a higher P/E valuation. (Analyst: Albert Yip, albertyip@gfgroup.com.hk) Ping An Insurance (2318 HK): Maintain Buy despite impairment losses in life insurance 1H14 results Net profit rose 19.2% YoY to Rmb21.4bn, with net assets up 13.0% HoH. Total comprehensive income was up 76.4% YoY on investment gains. Stable growth in 1H14 The company has seen stable growth in 1H14, with growth of 18.5% YoY in individual FYP (first-year premiums), 16.7% YoY growth (in line) in total NBV (new business value), 9.1% YoY growth in the number of exclusive sales agents compared to end Life insurance: new business margin for individual FYP sustained; positive 1) Overall new business margin came down slightly in 1H14 due to strong sales of single-premium products in 1Q. However, this was offset by solid FYP growth from its agency channel. In particular, individual FYP rose 18.5% YoY, and individual FYP margin remained stable at 39-40%. We see this as a positive sign that overall FYP margin will stabilize for full year 2014 as insurers are being forced to focus on protection products in 2H14. 2) Net profit in its life insurance segment was hampered by impairment losses of Rmb7.6bn, however this is not a significant concern given the substantial increase in total comprehensive income. P&C insurance: combined ratio stabilized; positive The overall combined ratio in its P&C segment stabilized at 94.4% in 1H14, compared with 95.5% in 1H13. As Ping An s P&C Insurance had a market share of 18.0% in 1H14, this is also a very positive sign for the entire China P&C insurance sector - the underwriting cycle may have bottomed recently. This should also be positive for PICC (2328 HK) which will release 1H14 results this weekend. Investment assets: more fixed income investments At end-1h14, 85% of total investment assets were in fixed income, compared with 82.2% at end Only 8.8% of total assets were equity investments, compared with 9.8% at end Ping An Insurance undervalued The company is currently trading at 2.0x 1H14 P/B, which we see as undervalued as this is close to its historical low. Page 5

6 Maintain Buy and TP of HK$ ) Solid individual FYP growth in life insurance segment; 2) Stabilized combined ratio in its P&C segment (which should also be positive for PICC (2328 HK)); 3) We believe Ping An is undervalued. Our estimated NBV per share is Rmb2.58 for FY14, compared with Rmb2.29 in FY13, representing growth of 13% YoY. We maintain our Buy rating and TP of HK$90.00, representing 2.6x 2014E P/B or 17.1x 2014E P/E. (Analyst: Felix Luo, Kingsoft (3888 HK): 2Q14 earnings below consensus 2Q14 earnings below consensus Headline earnings of Rmb118m came in below consensus of Rmb155m, mainly due to the sharp increase in share-based compensation, up from Rmb19m in 2Q13 to Rmb57m in 2Q14. Revenue was up 51% YoY and 11% QoQ to Rmb751m, in line with consensus. Its three segments, online games, Cheetah Mobile and office software saw revenue rise by 14%, 146% and 9% YoY, leading to a shift in its revenue mix from 55:29:16 in 2Q13 to 41:47:12 in 2Q14. Operating margin contracts further Operating margin dropped sharply from 32.1% in 2Q13 to 19.2% in 1Q14, and further to 16.5% in 2Q14, mainly due to increase in R&D and sales & marketing expenses, as well as the rise in share-based compensation. Operating margin before share-based compensation costs came in at 24% in 2Q14, down 12ppt YoY but up 2ppt QoQ. Management has guided that operating margin may decline to 10-20% in FY14, from 31% in FY13, as a result of its significant investment in development and promotions for its mobile games and mobile internet apps. Sustainable growth in Cheetah Mobile and online gaming Cheetah Mobile revenue rose 21% QoQ to Rmb354m in 2Q14, mainly on growing user traffic in its online platforms and the initial monetization of Clean Master. Cheetah Mobile s mobile MAU reached 284m by end-june 2014, up 28% QoQ and 255% YoY, mainly on Clean Master s strong overseas expansion. Online game revenue came in at Rmb308m, up 4% QoQ, principally driven by steady growth for JX Online III. The company plans to launch four mobile games in 2H14, but it has not given guidance on mobile game revenue for the next two years. Slowdown in WPS business 2Q14 revenue growth for its office software and other businesses came in at 9% YoY, much lower than the 37% YoY in 1Q14, due to the impact of the government procurement cycle. Valuation The stock is currently trading at 31x FY14E P/E (based on consensus estimates). Although 2Q14 revenue was in line with consensus, we believe the ongoing contraction in operating margin is likely to result in disappointing headline earnings in FY14. (Analysts: Ryan Zhu, zhuran@gfgroup.com.hk) Central China Securities (1375 HK): 1H14 results in line; company undervalued Central China Securities saw 1H14 revenue rise 21.5% and net profit come in in-line, up 34% YoY (industry avg: 32%). Commission fee income dropped 6% YoY, in line with peers, while interest income from margin financing and securities lending rose 251% YoY, partly on a low base, but also in line with the industry trend. At the current 0.95x 2014E P/B we see the company as undervalued; we maintain our Buy rating and TP of HK$3.00, representing 1.1x 2014E P/B and a 15% discount to China Galaxy s (6881 HK) historical average P/B. (Analyst: Felix Luo, felixluo@gfgroup.com.hk) Page 6

7 Hong Kong Equity 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 Central China Securities Company Limited (stock code: 1375 HK) contained in this research report. GF Securities (Hong Kong) and/or its affiliated or associated companies have acted as joint bookrunner and joint lead manager of this company 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. In this connection, investors shall aware that conflict of interest may arise as the objectivity of GF Securities (Hong Kong) in this research report may be affected. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. 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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 7