Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jan 8, 2015

Transcription

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 HSBC TENCENT CHINA LIFE INS SINOPEC PING AN INS Econ data release China Data Date Period Prior Cons China CPI YoY 8-Jan DEC China PPI YoY 8-Jan DEC Rmb New Loans 10-Jan DEC M0 10-Jan DEC M1 10-Jan DEC M2 10-Jan DEC Total Financing 10-Jan DEC China Exports YoY 13-Jan DEC China Imports YoY 13-Jan DEC China Trade Balance 13-Jan DEC US Data Date Period Prior Cons Initial Jobless Claims 8-Jan 3-Jan Cont Jobless Claims 8-Jan 27-Dec U-3 Unemployment 9-Jan DEC Source: Bloomberg GF events A-Share Market Steel: Sector earnings to improve MoM in Jan The low season effect in the steel market will become more prominent in the near term. We expect steel and iron ore prices to decline by up to 2% and 5% in Jan with sector earnings to strengthen MoM. Downstream steel demand might improve substantially in 2015 on further policy loosening and Silk Road development. In addition, the reduction in sector production capacity is likely to accelerate further. Sector supply-demand dynamics should continue to improve as a result with earnings to rebound at a faster pace. Coal: SOE reform a key sector investment theme in 2015 SOE reform will be a key sector theme in 2015, and we suggest watching companies already included in local SOE reform pilots and provinces yet to announce such a pilot. Ongoing reforms focus on strengthening the role of market forces in capital operation through the establishment of state-owned capital investment companies and the development of a mixed ownership system. They also focus on making corporate management more market-driven through asset injections & restructuring, the introduction of incentive stock options and the disposal of loss-making assets. Media: Watch mobile marketing and the use of mobile internet in traditional industries In 2015 we suggest looking for investment opportunities in relation to mobile marketing, business model upgrade and the reshaping of traditional industries by using the mobile internet. In particular, we believe mobile marketing is in a stage of development very similar to that of mobile gaming in 4Q12 when the sector first took off. We expect the share price performance of mobile marketing stocks to be the strongest during 4Q14-3Q15. In addition, using the mobile internet will speed up the marketization process and raise business efficiency for traditional industries. Hong Kong Market China Vanke (2202 HK, Buy): 2014 contract sales up 26% YoY; raise TP to HK$24.80 Dec contract sales rose 32% MoM, while GFA sold rose 42% MoM contract sales came in up 26% YoY and GFA sold increased 21% YoY. Despite improving contract sales and further easing policies, management is cautious on China property market performance in It expects gross margin to decline during the year on rising land costs and a relatively stable ASP. However, it expects net profit margin to remain stable thanks to the increasing profit contribution from investment gains. The stock is trading at an undemanding 9.1x 2015E P/E. We maintain our Buy rating and raise our TP from HK$20.60 to HK$ NetDragon (777 HK): US$52.5m Series A funding for its online education subsidiary NetDragon announced Series A funding of US$52.5m for its online education subsidiary, valuing it at US$477.5m (HK$3.7bn). Its share price rose around 8% yesterday. Proceeds will mainly be used for product development of its online education platform. We believe the company should accelerate development in its online education business given its abundant cash resources and synergies with strategic investors. The subsidiary s high valuation reflects investors recognition of its strategic layout for an online education ecosystem. However, its current focus is mainly on improvement of products and brand awareness, as well as user acquisition, rather than monetization. Source: GF Securities 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 Steel: Sector earnings to improve MoM in Jan Nov daily output down on APEC meeting Daily average crude steel and steel product output dropped significantly in Nov, while steel exports rose 94.39% YoY to a new high of 9.72m tonnes. Changes in downstream demand were mixed during the month. Both steel and iron ore prices declining The prices of most steel products declined substantially during Dec. The low season effect in the steel market will become more prominent in the near term as downstream industrial activities continue to weaken due to the cold weather. That said, the price of domestic iron ore fell 12.05% in Dec with imported iron ore down 6.00%; the upside of steel sector earnings is likely to increase on declining iron ore prices. Steel/iron ore prices to decline by up to 2/5% in Jan Supply-demand conditions will likely deteriorate in Jan due to weaker downstream activities and a slight MoM increase in crude steel output in Dec. Steel inventories at key steel companies have picked up substantially, while dealer inventories have continued to decrease as dealers are unwilling to make purchases. As such we expect steel mills to offer bigger discounts on their products going forward. In addition, the recent removal of the export rebate for boron steel might hurt Chinese steel exports in the short term. We expect steel prices to decline by up to 2% and iron ore prices to drop by up to 5% in Jan with sector earnings to strengthen MoM. Earnings to rebound at faster pace Long product earnings deteriorated in Dec, while steel plates improved. Overall, further policy easing can be expected as the downward pressure on the economy increases, with investments in infrastructure construction and high-end equipment manufacturing likely to pick up further. Coupled with ongoing Silk Road development (which should drive steel exports), substantial improvements in downstream steel demand are possible in In addition, the reduction in sector production capacity is likely to accelerate further on stricter environment requirements and steady progress in SOE reform. Sector supply-demand dynamics should continue to improve as a result with earnings to rebound at a faster pace. We remain positive on the sector with Baoshan Iron & Steel ( CH), Angang Steel ( CH), Hebei Iron and Steel ( CH) and Maanshan Iron & Steel ( CH) our top picks. Coal: SOE reform a key sector investment theme in 2015 Watch reform pilot companies and provinces yet to announce pilots As we have previously pointed out, SOE reform will be a key theme for the sector in In particular, we suggest watching companies already included in local SOE reform pilots such as Panjiang Refined Coal ( CH), SDIC Xinji Energy ( CH) and Pingdingshan Tianan Coal Mining ( CH), as well as provinces that are yet to announce such a pilot (e.g. Shanxi, Shandong). Yet-to-beannounced pilots might benefit Yangquan Coal Industry ( CH), Xishan Coal and Electricity Power ( CH), Lu'an Environmental Energy ( CH) and Yanzhou Coal Mining ( CH). New round of SOE reform kicked off Central SOEs, local SOEs and private-sector companies account for 55.5%, 36.7% and 7.8% of the total market cap of coal listcos. In addition, sector gross margin has dropped to the lowest in 15 years due to sharp declines in coal prices. After SASAC launched the central SOE reform pilot which includes six companies, individual provinces have also issued their respective SOE reform plans. In particular, reforms in Henan, Hebei, Guizhou and Shanxi are more relevant to the coal sector. Developmental directions of ongoing SOE reforms Ongoing coal SOE reforms focus on strengthening the role of market forces in the operation of company capital through the establishment of state-owned capital investment companies and the development of a mixed ownership system. In addition, these reforms also focus on making corporate management more market-driven through asset injections & restructuring, the introduction of incentive stock options and the disposal of loss-making assets. Top picks We remain positive on the sector and like Yangquan Coal Industry ( CH), Panjiang Refined Coal ( CH), Xishan Coal and Electricity Power( CH) and China Shenhua Energy ( CH) best, while also highlighting SDIC Xinji Energy ( CH), Yanzhou Coal Mining ( CH), Pingdingshan Tianan Coal Mining ( CH), Jizhong Energy Resources ( CH), Lu'an Environmental Energy ( CH) as beneficiaries of SOE reforms. Page 2

3 Media: Watch mobile marketing and the use of mobile internet in traditional industries Mobile marketing the next key subsector to watch In 2015 we suggest looking for investment opportunities in relation to mobile marketing, business model upgrade and the reshaping of traditional industries by using the mobile internet. In particular, we believe mobile marketing is in a stage of development which is very similar to what was seen for mobile gaming in 4Q12 when the sector first took off. Leading mobile game companies saw their market cap increase significantly during 4Q12-3Q13 amid sector share price strength. We believe the same strategy of buying leading companies will apply to mobile marketing during 4Q14-3Q15 when we expect sector share price performance to be the strongest. Mobile internet reshaping traditional industries The use of the mobile internet will speed up the marketization process and raise business efficiency for traditional industries. New forms of businesses such as online education, mobile healthcare, mobile O2O, online travel and online reading have come into being as a result. Traditional companies have seen their growth potential significantly enhanced by finding a way to combine their own businesses with the mobile internet. Jan-Feb view and top picks We see three main stages of development in the mobile internet space with each focusing on mobile gaming ( ), mobile marketing ( ) and mobile O2O development (2015 onwards). As such we are positive on companies involved in mobile marketing and mobile O2O in Currently our favorite top picks are Kaiser ( CH), Guangdong Advertising ( CH) and Songliao Automobile ( CH). In addition, we are also positive on business model upgrades relying on the internet and internationalization by leading companies in the film, TV & animation space such as Huayi Brothers Media ( CH), Enlight Media ( CH), Huace Film and TV ( CH) and Alpha Animation and Culture ( CH). Among online education names, we like Kingsun Science & Tech ( CH) and Qtone Education ( CH). China Vanke (2202 HK, Buy): 2014 contract sales up 26% YoY; raise TP to HK$ contract sales up 26% YoY Dec contract sales rose 32% MoM to Rmb25bn, while GFA sold rose 42% MoM to 2.07 sqm contract sales came in at Rmb215bn, up 26% YoY, and GFA sold totaled 18m sqm, up 21% YoY. So far this year, the company s sales have been one of the best among China property players. We believe the company has strong execution across all types of market cycle. Acquisition of two new projects in Dec 2014 The Company acquired two new property projects: 1) Shenzhen Metro Hongshuwan Project, located in Shenzhen Bay, with GFA of 0.4m sqm, and; 2) Land Lot S3 in Xiacun, Zhuhai, with GFA of 72,000 sqm. Issuance of Rmb1.8bn medium-term note in Nov 2014 The notes have a 3-year maturity, due Dec , and an annual coupon of 4.7%. They will be circulated in the China interbank market. Management expects gross margin to decline in 2015 Despite improving contract sales and further easing policies, management is cautious on China property market performance in It expects gross margin to decline during the year on rising land costs and a relatively stable ASP. However, it expects net profit margin to remain stable thanks to the increasing profit contribution from investment gains. Clear earnings visibility Given its mass-residential focus, fast asset turnover, proven execution and industry-leading management team, we see clear earnings visibility for We maintain our previous earnings estimates, expecting net earnings to grow 4%/15% YoY to Rmb15.8bn/Rmb18.2bn in 2014/15 respectively. Maintain Buy; raise target price to HK$24.80 The stock is trading at an undemanding 9.1x 2015E P/E. As the market leader in the cyclical property development industry, we believe 12.0x P/E is more appropriate, given its strong contract sales performance and a more favorable policy environment. We maintain our Buy rating and raise our target price from HK$20.60 to HK$24.80, equal to 12.0x 2015E P/E. Future earnings catalysts include gross margin expansion and a sharp rise in GFA sold. Risks Declining gross margin may lead to lower-than-expected net earnings in 2014/15. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Page 3

4 NetDragon (777 HK): US$52.5m Series A funding for its online education subsidiary What s new? NetDragon announced Series A funding of US$52.5m for its online education subsidiary. Main investors include IDG, Vertex Venture and Alpha Animation (a Shenzhen-listed animation producer). Its share price rose by around 8% yesterday, and we had a conference call with management. Education business valued at US$477.5m The round of funding values its education subsidiary at US$477.5m (HK$3.7bn), after which NetDragon, IDG, Vertex Venture and Alpha Animation will hold 78.0%, 5.0%, 2.3% and 1.4% in the subsidiary respectively. The proceeds will mainly be used for product development of its online education platform. The company may cooperate with Alpha Animation in this business. NetDragon launched a testing version of its student Pad in 2H14 and plans to launch the product formally in 3Q15. Our comments We believe the company should accelerate development in its online education business given its abundant cash resources and synergies with strategic investors. The high valuation of its education subsidiary reflects investors recognition of NetDragon s strategic layout for an online education ecosystem. However, its current focus is mainly on improvement of products and brand awareness, as well as user acquisition, rather than monetization. The stock is currently trading at 15.8x FY15E P/E and 8.4x FY15E ex-cash P/E. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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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