Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jun 22, 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 Markit China Mfg 22-Jun JUN P Westpac MNI Con Sen 23-Jun JUN China Ind Ent T 27-Jun MAY US Data Date Period Prior Cons Existing Homes Sales 22-Jun MAY Dur Goods New Ord 23-Jun MAY Markit US Mfg PMI 23-Jun JUN P Q GDP QoQ 24-Jun 1Q T Initial Jobless Claims 25-Jun 20-Jun Cont Jobless Claims 25-Jun 13-Jun Markit US Serv PMI 25-Jun JUN P Source: Bloomberg A-Share Market Non-Bank Financials: Fundamentals still solid with re-rating potential Despite the ST negativity of regulatory measures on sector performance, MT outlook remains positive given improving sector fundamentals. Domestic brokerages are seeing strong earnings growth and are trading at safe valuations. Large securities firms are trading at just 17-20x 2015E P/E, leaving considerable upside compared with the 30x historical peak. Domestic insurance companies got off to a good start this year in terms of premiums growth, with investment returns also improving in 1Q15. We expect the four main listed insurers to see net asset growth of 19-26% this year. F&B: 2H15 investment strategy Three investment ideas for 2H15: 1) Amid a consumer goods oversupply, F&B e-commerce is set to reform traditional sales channels, with O2O commerce to be the most important operating model. 2) SOE reform should significantly improve company earnings, with a focus on mixed ownership reform, the introduction of strategic investors and incentive share schemes. 3) Third is the re-ratings of stocks with high earnings visibility and low investment risks as consumer stocks tend to have strong share price performance towards the later stage of a bull market. Hong Kong Market Investment Strategy: Hong Kong market showing resilience as A-shares plummet Investors got some relief as the Fed indicated a slow process in its normalization of interest rates and as its first rate hike is likely to be in September at the earliest. We believe this provides a window for the PBoC to further its monetary policy easing measures over the next two quarters given the subdued economic growth so far this year, and hence we believe policy direction will continue to favor the stock market in 2H with an interest rate and RRR cut highly likely. Peak (1968 HK, Accumulate): Mid-teen order book growth driven by running and basketball products Order book saw mid-teen growth for the seventh successive quarter, continuing to be driven by volume. We think Peak s increased focus on running footwear could better capture growth in China s performance sportswear segment. We expect the company to post above-peer EPS growth in FY15 (15% vs peer average of 11%) driven by growth in both overseas and domestic markets. We raise our TP to HK$2.94 as we roll forward our valuation basis to 12x FY16E P/E. Its current valuation is undemanding at 5x ex-net cash FY16E P/E. GF events Date Event Location 23 Jun IGG NDR Shenzhen 23 Jun GF 2H15 strategy - macro Conf call 24 Jun GF 2H15 strategy - financials Conf call 2-3 Jul GF 2H15 strategy - TMT Shanghai Source: GF Securities (HK) 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 Non-Bank Financials: Fundamentals still solid with re-rating potential Regulatory measures mitigating market fluctuations Recent regulatory measures have focused on mitigating market fluctuations by managing both the demand and supply of stocks. On the one hand, the regulation of financing both within the exchange and OTC has been maintained so as to control the demand of stocks, while on the other hand stock supply is being boosted by increasing the number of IPO issuances, supporting large-amount financing projects and pushing forward the Shenzhen-HK Stock Connect. Sector conditions similar to mid-2014 Despite the short-term negative effect of these measures on sector performance, the mid-term share price outlook remains positive particularly given improving sector fundamentals. We believe current sector conditions are very similar to those seen around mid-2014 when share prices were stagnant despite solid fundamentals; the sector is likely to see re-ratings in the near term. Fundamentals securities Domestic securities firms are seeing strong earnings growth and are trading at safe valuations. Listed brokerages posted 5M15 comprehensive income and net profit that were equivalent to 1.14x and 1.24x of the 2014 full-year figures. In addition, the current interest rate down cycle has made various securities assets such as stocks more attractive, with sector earnings likely to grow strongly on improvements across the brokerage, prop trading, asset management and margin financing businesses. Large securities firms are trading at just 17-20x 2015E P/E, leaving considerable upside compared with the 30x historical peak. Fundamentals insurance Domestic insurance companies got off to a good start this year in terms of premiums growth, with investment returns also improving in 1Q15. We expect the four main listed insurers to see net asset growth of 19-26% this year. The sector is trading at of 1.7x P/EV, compared with a historical implied P/EV range of x since Catalysts Guotai Junan Securities ( CH) upcoming listing is likely to drive investment opportunities across the securities sector. It is worth noting that brokerages customer deposits have grown six-fold YoY to Rmb3.9trn; fund flows into the stock market have significantly exceeded levels seen during the bull market in 2H14. Top picks The non-bank financial sector has underperformed the CSI 300 YTD and is showing potential for re-ratings. In addition, based on historical patterns, we believe newly listed companies and small-cap companies driven by certain investment themes are likely to take the lead in showing strong share price strength with cheaply-valued companies to follow. We like Ping An Insurance ( CH), AVIC Capital Holdings ( CH), China Merchants Securities ( CH), Sinolink Securities ( CH), Soochow Securities ( CH), Everbright Securities ( CH) and New China Life Insurance ( CH). Key risks include tougher regulation, relaxation of brokerage license issuance and changes in the investment environment. F&B: 2H15 investment strategy We highlight the following three investment ideas for 2H15: F&B e-commerce Amid a consumer goods oversupply, F&B e-commerce is set to reform inefficient, traditional sales channels which consist of multiple layers of distributors, with O2O commerce to be the most important operating model. In this regard, we like Eternal Asia Supply Chain Management ( CH), Qinghai Huzhu Barley Wine ( CH), Sanquan Food ( CH) and BY- Health ( CH). SOE reform should significantly improve company earnings. Based on reform plans already made public, the reform of F&B SOEs mainly focuses on mixed ownership reform, the introduction of strategic investors and incentive share schemes for management members and employees. Among various F&B SOEs expected to carry out reforms, we prefer Shenzhen Shenbao Industrial ( CH), Hengshun Vinegar ( CH), Jonjee Hi-Tech ( CH) and GuYueLongShan Shaoxing Wine ( CH). Re-ratings of stocks with high earnings visibility and low investment risks The F&B sector posted the poorest share price growth among major sectors during 2014, while coming in as the third worst underperformer based on YTD share price growth as of Jun 18. Consumer stocks tend to have strong share price performance towards the later stage of a bull market. Among stocks likely Page 2

3 to see re-ratings, we are particularly positive on Yili Industrial ( CH) and Changyu Pioneer Wine ( CH). Opportunities by subsector: Baijiu We believe the share price correction in baijiu stocks over the past three years will have come to an end in 1H15. In fact, sector revenue and profit already turned positive in 1Q15, indicating strong momentum for a recovery. We are particularly positive on Qinghai Huzhu Barley Wine ( CH) in 2H15. We remain upbeat about seasoning product names given the support from improving fundamentals and SOE reform coupled with rising expectations of sector M&A in 2H15. Dairy products Industry leaders are growing at a much faster pace than industry average with industry concentration picking up. We like Yili Industrial ( CH) and Bright Dairy & Food ( CH) given their internationalization strategies. Soft drinks Sector growth is stabilizing. We are positive on Baiyunshan Pharmaceutical ( CH) given expected SOE reform. Beer The sector is growing slowly with intense competition. SOE reform at leading players Tsingtao Brewery ( CH) and Yanjing Brewery ( CH) might be worth watching. Meat products The sector is growing steadily at a slow pace, but we look forward to QoQ improvements in Shuanghui Investment & Development s ( CH) earnings. Wine The sector is recovering and we like industry leader Changyu Pioneer Wine ( CH). Key risks include the outbreak of food safety incidents, and weaker consumption amid a greaterthan-expected economic downturn. Investment Strategy: Hong Kong market showing resilience as A-shares plummet PBoC can buy some more time as Fed is reluctant to hurt the market and economy in its interest rate normalization process Investors got some relief as the Fed indicated a slow process in its normalization of interest rates and as its first rate hike is likely to be in September at the earliest. We believe this provides a window for the PBoC to further its monetary policy easing measures over the next two quarters given the subdued economic growth so far this year, and hence we believe policy direction will continue to favor the stock market in 2H with an interest rate and RRR cut highly likely. Risk management and stock supply measures on the A-share market will also continue to act as dampeners. Hong Kong market starting to show resilience as A-share market corrects In fact, given the limited rise in the Hong Kong market YTD, which is in line with European and Japanese markets, its current valuation is well supported and hence is more defensive than the much more volatile A- share market. Indeed, in the short term, non H-share Hong Kong stocks may outperform given the US interest rate outlook and their lower correlation with the A-share market. Shenzhen market decline may not hurt Hong Kong tech/internet stocks Online gaming, consumer staples, solar and tech outperformed last week, while railway, securities, auto, coal and insurance led the market decline. The latest decline in mainland markets, in particular the Shenzhen and ChiNext markets, should not be seen too negatively, as we believe some of the funds originally active in these markets will find the Hong Kong market attractive. Given the likely announcement of the official launch date for the Shenzhen Hong Kong Stock Connect in the next couple of months, we believe mid-to-small cap stocks will get a boost, after consolidating for some time since early April. Watch list outperformed during the market decline Of our stock picks, BoCom (3328 HK, NR) and Ping An (2318 HK, Buy) led the decline, down 6.4% and 6.3% respectively, but was helped by low valuation stocks such as TCL Comm (2618 HK, Buy) and Le Saunda (738 HK, Buy). Overall performance of the portfolio was down 1.8% last week, better than the HSI and HSCEI. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) Page 3

4 Peak (1968 HK, Accumulate): Mid-teen order book growth driven by running and basketball products 1Q16 sales fair results Peak is the first sportswear company to release its 1Q16 sales fair results. Overall, order book saw mid-teen growth for the seventh successive quarter, continuing to be driven by volume. Footwear order book value recorded high-twenties growth on mid single-digit ASP growth, driven by growth in basketball and running products. Apparel only saw mid single-digit order book growth while ASP fell at a high single-digit. Given a cost-plus model, we do not expect the ASP decline to affect GM. Maintain Accumulate; raise TP to HK$2.94 We think Peak s increased focus on running footwear could better capture growth in China s performance sportswear segment (basketball and running contributed 55% of footwear sales volume in FY14). We expect the company to post above-peer EPS growth in FY15 (15% vs peer average of 11%) driven by growth in both overseas and domestic markets. We raise our TP to HK$2.94 as we roll forward our valuation basis to 12x FY16E P/E. Its current valuation is undemanding at 5x ex-net cash FY16E P/E. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@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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