Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 4, 2016

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 941 CHINA MOBILE ICBC TENCENT PETROCHINA CCB BANK OF CHINA HSBC PING AN SINOPEC CHINA LIFE Source: Bloomberg A-Share Market E-Commerce: E-commerce service industry overview; leading players becoming even stronger E-commerce service providers core competitiveness lies in their control of warehousing facilities and supply chain management capabilities, as well as their ability to develop their own software systems. Overall, larger sized e-commerce service companies tend to have better business operations, higher customer loyalty, more contracts from new clients, and more resources to be put into the development of both their core and potential businesses which helps set up tougher barriers to competition. In contrast, smaller companies tend to rely heavily on a single client and have lower operational stability. Auto: PV sales growth accelerating; medium/heavy duty trucks maintaining strength Overall auto sales volume picked up 14.8% YoY in June, with passenger vehicles up 21.6% and commercial vehicles down 1.7%. Among passenger vehicles, SUVs and MPVs maintained relatively high growth of 41.1% and 38.3% YoY respectively; sedans grew 9.3% while minivans fell 11.1%. Among commercial vehicles, medium and heavy duty trucks rose 16.9% while light trucks were down 3.1%; the sales volume of medium and large buses went up 9.2% YoY. The gradual recovery in medium and heavy duty truck sales was in line with our expectation. Please see text for our stock picks. Hong Kong Market Geely Auto (175 HK, Accumulate): Strong new SUV sales in July July sales volume rose 64% YoY and Jan-July volume was up 16.8% YoY. YTD sales volume represents 55% of its target for this year, 3pp behind where the number of months suggests it should be; however, we expect strong sales in the 4Q16 peak season to push this year s sales beyond the company s target. Based on the current strong sales driven by SUVs and the positive outlook for sedan sales, we think the stock is undervalued, and maintain our Accumulate rating. CSPC Pharma (1093 HK, Buy): 1H16 earnings preview expectations high, possible consensus miss ahead We expect CSPC Pharma to deliver above-peer sales growth of 12.3% YoY in 2Q16, vs an industry average of 10.2% and consensus of 9.8%. 1Q16 sales grew 7.6% YoY; we expect 2Q16 growth to come in higher. CSPC Pharma s 1Q16 net profit rose 26.3% YoY, beating consensus by 6%. As expectation is already quite high, we do not see much chance of the company beating consensus (+27% YoY) again with its 2Q16 results. We maintain our Buy rating and expect the company to provide more color on its product pipeline. Yuexiu REIT (405 HK, Buy): 1H16 results in line; newly-acquired Yuexiu Tower driving growth 1H16 revenue rose 15% YoY, with an overall occupancy rate of 98%. Guangzhou IFC and the White Horse Building accounted for 56% and 22% of total revenue respectively. Yuexiu Tower was also a growth driver; we expect occupancy at the project to remain stable at 100% in 2016, and expect a revenue contribution of Rmb130m. We estimate a 2016 dividend yield of over 6%. Given the limited supply of Grade-A office space and high-end commercial properties in Guangzhou and Shanghai, we see solid appreciation potential for the company s premium investment properties going forward. Maintain Buy. 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 E-Commerce: E-commerce service industry overview; leading players becoming even stronger E-commerce service industry increasingly concentrated Large brands begin to recognize the importance of the e-commerce sales channel as e-commerce transactions continue to rise as a proportion of total retail sales (2015: 14%). E-commerce service providers are experiencing strengthening business conditions as a result. Their services are becoming increasingly sophisticated as the cost of acquiring e-commerce customer traffic increases, with market shares gravitating towards leading e-commerce solutions companies at a high speed. Supply chain management key to business success Based on our analysis of 16 e-commerce service firms listed in the US, the A-share market or the NEEQ board, it appears that industry leaders tend to record high revenue growth and become even stronger, while companies' core competitiveness lies in their control of warehousing facilities and supply chain management capabilities, as well as their ability to develop their own software systems. Larger players building higher barriers to competition Overall, larger sized e-commerce service companies tend to have better business operations, higher customer loyalty, more contracts from new clients, and more resources to be put into the development of both their core (supply chain, IT) and potential businesses (CRM, targeted marketing) which helps set up tougher barriers to competition. In contrast, smaller companies tend to rely heavily on a single client and have lower operational stability. We particularly like Baozun (BZUN US), UCO (a subsidiary of Qingdao Kingking Applied Chemistry [ CH]) and Ruoyuchen ( NEEQ board). Auto: PV sales growth accelerating; medium/heavy duty trucks maintaining strength June sales data recap Overall auto sales volume picked up 14.8% YoY in June, with passenger vehicles up 21.6% and commercial vehicles down 1.7%. Among passenger vehicles, SUVs and MPVs maintained relatively high growth of 41.1% and 38.3% YoY respectively; sedans grew 9.3% while minivans fell 11.1%. Among commercial vehicles, medium and heavy duty trucks rose 16.9% while light trucks were down 3.1%; the sales volume of medium and large buses went up 9.2% YoY. The gradual recovery in medium and heavy duty truck sales was in line with our expectation, and was driven by: 1) strengthened policy support for economic growth which strongly affects heavy duty truck sales; 2) dump trucks (which have suffered from weakening investment growth) accounted for just 16% of overall commercial vehicle sales in 2015 and thus play an insignificant role in dragging overall vehicle sales; 3) the increase in vehicle purchasing costs resulting from the execution of the National IV emission standard has been absorbed; and 4) channel inventories of heavy duty trucks do not constitute a severe issue any more as dealers were cautious with inventory building in Our stock picks In our view, the end of a down cycle coupled with relatively cheap valuations typically point to a buying point for a cyclical sector. We are very upbeat on the share price performance of auto stocks in Some of the blue-chip auto stocks are trading at relatively low valuation levels which reflect overly pessimistic expectations that are unlikely to materialize, while declining interest rates, improving sector conditions and rising dividend yields are set to drive reratings in these stocks. With the sector s cyclical recovery in mind, we like the following stocks. In the heavy duty truck industry: CNHTC Jinan Truck ( CH), Weifu High-Technology ( CH) and Beiqi Foton Motor ( CH); Among other blue-chip auto making and auto part leaders: SAIC Motor ( CH), Great Wall Motor ( CH), Chongqing Changan Automobile ( CH), Jiangling Motors ( CH) and Huayu Automotive Systems ( CH); Among new energy vehicle names: Fulin Precision Machining ( CH), Beijing WKW Automotive Parts ( CH) and Jianghuai Automobile ( CH); Among smart car players: Wanliyang ( CH), Tuopu Group ( CH), VITI Electronic ( CH), Shuanglin Auto Parts ( CH), Dare Automotive Parts ( CH), Huayu Automotive Systems ( CH) and China Automotive Engineering Research Institute ( CH); Other auto part companies: Kunming Yunnei Power ( CH), Ningbo Huaxiang Electronic ( CH) and Beite Technology ( CH); Page 2

3 SOE reform as a key investment theme throughout 2016: FAWER Automotive Parts ( CH) and CNHTC Jinan Truck ( CH). Geely Auto (175 HK, Accumulate): Strong new SUV sales in July High double-digit sales volume growth in July Geely Auto announced its July sales figures after market close yesterday. The company sold 48,522 units during the month, up 64% YoY; Jan-July sales volume reached 328,859 units, up 16.8% YoY. YTD sales volume represents 55% of its target for this year, 3pp behind where the number of months suggests it should be; however, we expect strong sales in the 4Q16 peak season to push this year s sales beyond the company s target. SUVs seeing strong growth The company s new Boyue model has seen a strong ramp-up in sales in the first few months since its launch, hitting 10,000 units sold in July a high level of sales for a new domestic SUV, especially as the company s previous SUV models have never reached such levels. SUVs continue to make up a bigger portion of its product mix, a trend we expect to continue in 2H16. Steady growth for sedans Accounting for the majority of sales, the company s sedans saw steady growth during Jan-July. The company will launch a new A-grade sedan, most likely in late 3Q16, which should boost sedan sales growth. Strong sales indicate the stock is undervalued; maintain Accumulate The company is currently trading at a 1-y forward rate of 12.2x FY16E P/E, close to its historical average of 12.3x, but there is still space for this to rise to a higher band of +1sd. Based on the current strong sales driven by SUVs and the positive outlook for sedan sales, we think the stock is undervalued, and maintain our Accumulate rating. July sales breakdown (Units) Major models Jul sales vol YoY 7M16 sales vol YoY As % of total sales vol Comments SUV Sedan Geely Boyue (NL3) 10,128 n/a 29,339 n/a 8.9% Launched in Mar 2016, the model showed strong ramp-up during 7M16, with Jul sales breakding 10,000 units for the first time, a very encouraing sales figure for a newly launched SUV. It is the first SUV model to reach such a high monthly sales volume. Geely GS 6,728 n/a 14,128 n/a 4.3% This new SUV launched in May has started ramp-up, and its monthly sales growth is showing a similar trend to Geely Boyue. We are confident the model will present considerable growth in 3Q16. Subtotal of SUV 17, x 58, % 17.9% The SUV segment as a proportion of total sales reached a high double digit in 7M16. It has improved the company's overall product portfolio based on the popularity of SUV in China's domestic market. New Emgrand 14, % 117, % 35.7% According to our previous communications with management, they think New Emgrand would post limited growth in FY16 given the high base in FY15 and the upcoming A-grade new model. That said, the model has demonstrated higher-than-expected growth so far, and its sales volume should stay stable in 2H16 in our view. New Vision 8, % 76, % 23.2% The model grew the fastest among the company's sedan models and much stronger than the industry average. Its sales strength will continue into 3Q16 on its cheap prices as well as good design and tech specs which meet the needs of young family and consumer groups. GC9 3, % 28, x 8.6% As a B-grade sedan, the model's growth was steady during 7M16. Average monthly sales volume is expected to achieve higher growth towards the end of the year. LG-1 2,538 Subtotal of Sedan 30, % 270, % 82.1% Total 48, % 328, % Sources: Company data, GF Securities (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Page 3

4 CSPC Pharma (1093 HK, Buy): 1H16 earnings preview expectations high, possible consensus miss ahead 2Q16 revenue to come in higher QoQ We expect CSPC Pharma to deliver above-peer sales growth of 12.3% YoY in 2Q16, vs an industry average of 10.2% and consensus of 9.8%. The company has guided for 30%, 20%, 20% and 20% sales growth for its flagship products NBP, Oulaining, Xuanning and Duomeisu respectively in FY16. Assuming zero growth in its bulk drug business, this translates into about 12% YoY top line growth. 1Q16 sales grew 7.6% YoY to HK$3bn. We expect 2Q16 growth to come in higher, given 1) no new negative policies and the industry s gradual transition to a tighter regulatory landscape 2) no major tender delays during 2Q16, and as 3) most of its products are exclusive and subject to less pricing pressure. FY16 core earnings to be at the low end of guidance Based on EBIT, the company saw ongoing margin expansion during (12.4%/15.3%/19.0%) on a rising gross margin as the revenue contribution from higher-margin finished drugs increased from 61% in FY14 to 71% in 1Q16, although this was partly offset by higher selling and distribution expenses. Given the need to ramp up its hospital coverage, especially for oncology drugs, there is limited room to cut operating expenses and thus we expect earnings growth to be at the low end of its FY16 guidance of 20-30%. Expectations high, could miss consensus CSPC Pharma s 1Q16 net profit rose 26.3% YoY, beating consensus by 6%. As expectation is already quite high, we do not see much chance of the company beating consensus (+27% YoY) again with its 2Q16 results. We maintain our Buy rating on valuation grounds (20x FY16 P/E on 22% FY16-18E EPS CAGR) and expect the company to provide more color on its product pipeline. (Natalie Chiu, Research Analyst, SFC CE No. AVH029, nataliechiu@gfgroup.com.hk ) Yuexiu REIT (405 HK, Buy): 1H16 results in line; newly-acquired Yuexiu Tower driving growth What s new? 1H16 revenue rose 15% YoY to Rmb909m, with an overall occupancy rate of 98%. Guangzhou IFC and the White Horse Building accounted for 56% and 22% of total revenue respectively. Guangzhou IFC (1H16 revenue up 9.4% YoY to Rmb466m) and the newly-acquired Yuexiu Tower project in Shanghai (1H16 revenue of Rmb67m) were both revenue growth drivers. Interim distribution rose 12.6% YoY to Rmb385m. DPS rose 12% YoY to Rmb H16 results in line; Yuexiu Tower driving growth The company s 1H16 DPS was in line with our forecast. Its first Shanghai project, Yuexiu Tower (formerly known as Hongjia Tower), was acquired in 2015, is located in the Pudong district of the city, has a rental area of 46,026 sqm and a monthly average rental rate of Rmb243 per sqm (2015). We expect occupancy at the project to remain stable at 100% in 2016, and expect a revenue contribution of Rmb130m. Maintain Buy We estimate a 2016 dividend yield of over 6%, with stable recurring rental income and dividend distribution. Given the limited supply of Grade-A office space and high-end commercial properties in Guangzhou and Shanghai, we see solid appreciation potential for the company s premium investment properties going forward. We believe the company s rational valuation should be equal to its book value, given its recurring rental revenue. The stock is trading at a 20% discount to 2016E NBV (based on our estimate), clearly undervalued, in our view. We maintain our Buy rating and a target price of HK$5.90, equal to 1.0x 2016E NBV. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@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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