Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 13, 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 BANK OF CHINA CCB TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons Ind Prod Cum YoY 14-Jul JUN Ind Prod Mthly YoY 14-Jul JUN FAI Cum YoY 14-Jul JUN Retail Sales Cum YoY 14-Jul JUN Retail Sales Mthly YoY 14-Jul JUN China GDP Cum YoY 14-Jul 2Q China GDP QoQ 14-Jul 2Q China GDP YoY 14-Jul 2Q US Data Date Period Prior Cons Initial Jobless Claims 16-Jul 11-Jul Cont Jobless Claims 16-Jul 4-Jul CPI Urban YoY 17-Jul JUN Source: Bloomberg A-Share Market Investment Strategy: Stock picks following recent market plunge We highlight the investment value in the A-share market following the recent share price plunge, and expect the market to stabilize and rebound in 3Q15 on an environment of weak economic growth, low inflation and loose liquidity. That said, having now learned a lesson about market risks, investors are likely to be less enthusiastic about companies with high valuations that are not supported by comparably strong earnings and focus more on industry leading companies with growth upside and attractive valuations. See text for our stock picks. Property: Major cities Jun transaction review; sector recovery to continue into 3Q15 Different tiers of cities all posted significant YoY transaction growth in Jun, with first, second and third-tier cities rising 54%, 46% and 60%. First-tier cities led with home price growth of 2.49% MoM. We expect the loose policy environment to continue in 3Q15 as the economy is yet to stabilize and an across-the-board home price increase is unlikely due to high property inventories. That said, MoM transaction improvements are likely to decelerate due to the low season, though YoY growth should continue to strengthen. Environmental: Watch PPP contract signing peak in 3Q15 21 A-share environmental companies had released a 1H15 profit alert by the end of last week, with the solid waste treatment, environmental monitoring and biomass subsectors posting stronger earnings growth of 20-60%, 15-75% and % respectively, while the energy conservation subsector suffered relatively large earnings declines with growth ranging between -300% and +10%. We expect to see a peak of contract signing in 3Q15, which should drive opportunities in companies related to the PPP investment theme. We suggest watching industry leaders and SOEs that act as local environmental protection platforms. Hong Kong Market Investment Strategy: Time to cherry pick After a series of unprecedented rescue policy measures by various authorities in the mainland, the Hong Kong market has stabilized after a week of high volatility. For investors that missed the minirally in Apr, investment opportunities have re-emerged. On top of our two-pronged strategy which we still adhere to, we believe investors can take a look at stocks that have fallen more than the market (H-share in particular), say a >15% decline over the last month, but with decent earnings growth and reasonable/attractive valuations. GF events 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 Investment Strategy: Stock picks following recent market plunge We highlight the investment value in the A-share market following the recent share price plunge, and expect the market to stabilize and rebound in 3Q15 on an environment of weak economic growth, low inflation and loose liquidity. That said, having now learned a lesson about market risks, investors are likely to be less enthusiastic about companies with high valuations that are not supported by comparably strong earnings and focus more on industry leading companies with growth upside and attractive valuations. We have come up with a list of oversold stocks based on the eight criteria below: Degree of share price correction Earnings growth potential Valuation Cash position Selling pressure Industry leadership Management confidence Sector analyst s view Oversold stocks ranking at the top of our list Ticker Company CH Yango Group CH Sichuan Jiuzhou Electronic CH Xiamen Xiangyu CH Gold Mantis Construction Decoration CH Midea Group CH Shinva Medical Instrument CH Bank of Nanjing CH Universal Scientific Industrial CH MLS CH Yifan Xinfu Pharmaceutical CH Lao Feng Xiang CH Offshore Oil Engineering CH Changzhou Tiansheng New Materials CH Shandong Hualu Hengsheng Chemical CH NETAC TECHNOLOGY CH CIMC CH RAAS Blood Products CH Shanghai Oriental Pearl Media CH DASHANG Source: GF Securities Property: Major cities Jun transaction review; sector recovery to continue into 3Q15 Market recovery strengthening Our index tracking property transactions in 44 large cities picked up 4.0% MoM and 50% YoY in Jun, while the residential transaction index rose 2.7% MoM and 64% YoY. Strong property transaction growth was attributable to continued policy support. Liquidity was boosted further in Jun by the removal of the LTD ratio requirement and the PBoC s IR/RRR cuts towards the end of the month. In addition, local governments continued to adjust policies for loans taken out from the housing provident fund. 3Q15 outlook Looking into 3Q15, we expect the loose policy environment to continue as the economy is yet to stabilize and an across-the-board home price increase is unlikely due to high property inventories. That said, MoM transaction improvements are likely to decelerate due to the low season, though YoY growth should continue to strengthen. Jun transactions by city Different tiers of cities all posted significant YoY transaction growth in Jun, with first, second and third-tier cities rising 54%, 46% and 60% YoY respectively. In particular, Page 2

3 YoY growth in second-tier cities accelerated from just 21% in May to 46% in Jun. First-tier cities led with home price growth of 2.49% MoM, while second and third-tier cities edged up 0.09% and 0.06% respectively. Inventories in first-tier cities came down slightly on continued sales strength though remaining high; other cities continued to see inventory pressure due to the large amount of new launches. Prefer mainstream developers The property market recovery strengthened further in Jun with YoY transaction growth accelerating and the average transaction price improving further MoM. We expect both property sales volume and prices to rise further in 3Q15 on the continuation of favorable policies. The relative valuations of mainstream property companies have dropped to historically low levels, and they are strongly expected to see re-ratings on recovering sector fundamentals coupled with opportunities arising from increasing industry concentration. We particularly like industry leaders China Vanke ( CH) and Poly Real Estate ( CH), and also favor Jiangsu Zhongnan Construction ( CH) and Citychamp Dartong ( CH) given expected business transformation, as well as Lushang Property ( CH), Metro Land ( CH) and Dalong Weiye Real Estate ( CH) on SOE reform. Environmental: Watch PPP contract signing peak in 3Q15 1H15 profit alerts 21 A-share environmental companies had released a 1H15 profit alert by the end of last week, with the solid waste treatment, environmental monitoring and biomass subsectors posting stronger earnings growth of 20-60%, 15-75% and % respectively, while the energy conservation subsector suffered relatively large earnings declines with growth ranging between - 300% and +10%. In particular, Chant Group ( CH) and Sanju Environmental Protection & New Materials ( CH) have put the upper limit of their forecasted growth range above 100%, whereas Longyuan Power Technology ( CH) and East New Energy Development ( CH) expect to see an earnings decline. PPP plays to be driven by contract signing peak in 3Q15 We expect to see a peak of contract signing in 3Q15, which should drive opportunities in companies related to the PPP investment theme. We suggest watching industry leaders and SOEs that act as local environmental protection platforms: 1) leading private-sector firms with PPP innovation frameworks in place such as Beijing Originwater Technology ( CH), GeoEnviron Engineering & Technology ( CH) and Sound Environmental Resources ( CH); 2) key cities environmental protection platforms that are benefiting from SOE reform such as Zhongyuan Environment-Protection ( CH), Jiangnan Water ( CH) and Longyuan Power Technology ( CH); 3) small caps with high share price elasticity such as Guozhen Environmental Protection Technology ( CH), Safbon Water Service ( CH) and CEC Environmental Protection ( CH). Mid-term and oversold plays We have recently established a comprehensive model to evaluate environmental companies based on their growth potential, valuations, earnings track records, magnitude of recent share price corrections and safety margins represented by current share prices. Based on our analysis, we have a positive mid-term outlook on Grandblue Environment ( CH), SPC Environment Protection Tech ( CH), Devotion Thermal Technology ( CH), GeoEnviron Engineering & Technology ( CH), Beijing Originwater Technology ( CH) and Chifeng Jilong Gold Mining ( CH); and we highlight Longyuan Power Technology ( CH), East New Energy Development ( CH), Bohai Water Industry ( CH) and Xiangtan Electrochemical Science ( CH) as oversold stocks. Investment Strategy: Time to cherry pick Time to reconsider investment opportunities After a series of unprecedented rescue policy measures by various authorities in the mainland, the Hong Kong market has stabilized after a week of high volatility (3,000 index point fluctuation in a week) driven by the A-share market. In terms of index level, it is now back to its end-mar/early-apr level (HSI ~25,000, HSCEI ~ 12,000). For investors that missed the mini-rally in Apr, investment opportunities have re-emerged. What has changed? After the de-leveraging-driven decline in the Shanghai A-share market, the leveraging situation has changed completely. According to Wind, the balance of margin financing has declined by more than 30% from its peak, while the amount of unofficial margin financing should have fallen even more. Investors and speculators have paid a heavy price in their leveraging experience which should lower the risk of over-leveraging in the future, paving the way for a truly slow bull situation. Moreover, investors are likely to become more selective when choosing which Page 3

4 stocks to invest in, and may prefer those with stronger financial performance and/or market dominance, rather than one-way direction chasing thematic stories. Besides, given the strong government intervention, SOE reform stories may be losing some color. Last but not least, some pricy sectors have become more reasonably priced after falling 40-50%. What has not changed? There is no doubt that policy easing to support the real economy will continue given the likely weak 2Q GDP and the latest stock market turmoil which could result in a weakening in the wealth effect and consumer sentiment. Hence, we believe further monetary easing including RRR and interest rate cuts are highly likely in the next two quarters, especially given the Greece-induced euro-zone problem and the US Fed s cautious stance on an interest rate hike. These factors should continue to bode well for financial sectors, especially banks, insurance and securities, in our view. Besides, the weakening stock market should not have hurt the growth potential of high growth sectors such as TMT, new energy, and environmental protection. Market outlook During this market turmoil, many stocks have been sold regardless of their fundamentals. On top of our two-pronged strategy (financials to benefit from monetary policy plus reasonably priced high growth sectors) which we still adhere to, we believe investors can take a look at stocks that have fallen more than the market (H-share in particular), say a >15% decline over the last month, but with decent earnings growth and reasonable/attractive valuations. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Frankie Wan, Research Analyst, SFC CE No. AVK969, frankiewan@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. 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 did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (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. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. 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 5