Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jun 12, 2017

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT ICBC CHINA MOBILE CCB PETROCHINA HSBC BANK OF CHINA PING AN CHINA LIFE SINOPEC Source: Bloomberg GF events Date Event Location June GF A-share home appliance Hong Kong sector NDR Source: GF Securities (Hong Kong) A-Share Market Healthcare: Positive view on drug retail industry consolidation and concentration The size of the pharmacy/drug retail market in China grew from Rmb146.4bn in 2008 to Rmb311.5bn in 2015, representing a CAGR of 11.4%. However, the market is highly fragmented, with a chain operation rate of just 45.7%. Pharmacies are becoming an increasingly important channel for prescription drug sales, as it is now easier for them to become qualified outlets of drugs covered by the state medical insurance scheme. Meanwhile, industry entry barriers are substantially higher under latest industry standards. Overall, we are optimistic about investment opportunities associated with drug retail industry consolidation and concentration. Agriculture: Hog prices down on upcoming low season; we are positive on leading feedstuff names LT competitiveness We do not expect hog prices to be strong in the near term as the 3Q17 low season approaches. Current annual pig feed sales volume of ~80m tonnes compared with ~700m head of hogs brought out of farms to market every year indicates that the proportion of pigs fed by feedstuff bought from feedstuff companies is in fact very low, with most farmers making their own pig feed on the farm. Going forward, centralized large-scale farming businesses will represent a larger proportion of livestock farming in China, which should give a boost to sales volume at feedstuff companies. Hong Kong Market Macro: FOMC meeting in the spotlight this week The latest labor report showed that the job market slowed in May. However, we do not believe this will alter the Fed s decision to tighten. Average employment growth has been around 160k so far this year, in line with the Fed s definition of good employment growth. Also, the unemployment rate dropped to 4.3%. The Fed will no doubt announce a 25bps hike at the FOMC meeting on June However, we see three important points to note: officials assessment on the outlook for inflation, their interest rate projections, and details of balance sheet reduction. Rail: Overseas rail projects key catalysts for the rail equipment sector in 2H17 After the Jakarta to Bandung rail project was signed in April, focus has now shifted to the next two large high-speed rail projects, the Bangkok-Kuala Lumpur line and the Singapore-Kuala Lumpur line, set for 2H17. Japanese companies, who won two high-speed project in 2015, are expected to compete against their Chinese counterparts for the projects. However, we believe Chinese players now have a better chance of winning. CRSC and CRRC would be the major beneficiaries if the tender for the two projects goes to a Chinese company, and we see overseas market expansion as a catalyst for the rail equipment sector in 2H17. 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 Healthcare: Positive view on drug retail industry consolidation and concentration Rising securitization rate of pharmacy assets The size of the pharmacy/drug retail market in China grew from Rmb146.4bn in 2008 to Rmb311.5bn in 2015, representing a CAGR of 11.4%. However, the market is highly fragmented, with a chain operation rate of just 45.7%. Pharmacies are becoming an increasingly important channel for prescription drug sales, as it is now easier for them to become qualified outlets of drugs covered by the state medical insurance scheme. Meanwhile, industry entry barriers are substantially higher under latest industry standards. Pharmacy chain operation is now a key area of capital market investment, as Yixintang Pharma ( CH), Yifeng Pharmacy Chain ( CH) and Laobaixing Pharmacy Chain ( CH) became listed in and as China National Accord Medicines ( CH) finished the restructuring of GuoDa Drugstore in In turn, such capital market attention will drive drug retail industry consolidation, leading to higher industry concentration. Key company overview Store networks Each of the major pharmacy chains has a different sales network strategy. GuoDa has essentially achieved nationwide coverage, with presence in 68 large and medium cities across 18 provinces as well as the large revenue among peers. Laobaixing covers 16 economically developed provinces along the Beijing-Guangzhou and Shanghai-Kunming railways, while Yunanbased Yixintang focuses on Sichuan, Guangxi and surrounding provinces. Yifeng s stores are mainly located in seven provinces such as Hunan, Hubei and Guangdong; Dashenlin focuses on Guangdong and Guangxi. Per-store/person sales Laobaixing, GuoDa, Dashenlin, Yifeng and Yixintang reported per-store revenue of Rmb3.1m, 2.6m, 2.5m, 2.3m and 1.4m in 2016 respectively. Among them, Laobaxing has the highest proportion of flagship and large stores, while most of Yixintang s stores are community-based. Per sales person revenue at Laobaixing, Dashenlin, Yifeng and Yixintang came in at Rmb1,371.1/day, 1,176.8/day, /day and 866.2/day respectively in 2016; in particular, Laobaixing has the highest and fastest growing per person revenue. GuoDa to have advantage in prescription drug sales We highlight Laobaixing s regional leadership given its extensive store network and high per-store/person sales. Meanwhile, GuoDa will have an advantage in prescription drug sales given the support from its controlling shareholder Sinopharm Holding (1099 HK, NR). Overall, we are optimistic about investment opportunities associated with drug retail industry consolidation and concentration. Among the major players we like China National Accord Medicines ( CH) best, followed by Laobaixing Pharmacy Chain ( CH), Yifeng Pharmacy Chain ( CH) and Yixintang Pharma ( CH). Agriculture: Hog prices down on upcoming low season; we are positive on leading feedstuff names LT competitiveness Hog prices drop as low season approaches The average ex-farm price of lean meat hogs came in at Rmb6.44/kg at the end of May, down by Rmb4.1/kg YoY. Hog prices have continued to decline since Feb, and are now 35% lower than the peak in Farm hog inventory is just recovering slowly, while several factors including breeding efficiency (measured by pigs per sow per year), exfarm hog weight and hog imports are supporting marginal hog supply. We do not expect hog prices to be strong in the near term as the 3Q17 low season approaches. Amid the industry down cycle, we believe companies with stronger cost control will demonstrate better performance, and prefer Muyuan Foods ( CH) and Wens Foodstuff Group ( CH). Gross margin upside for industry leaders A high comparable base in May 2016 driven by expected rises in raw material prices dragged most feedstuff companies YoY sales growth in May However, we see upside to leading feedstuff companies gross margin going forward. In particular, one of the market leaders with a full product line is able to launch price wars specifically targeting competitors core products in many regional markets while maintaining overall profitability through its other products. This tactic can typically bring down smaller local competitors within 3-5 years time. In addition, this industry leader is a price maker in many markets, and it is likely to focus on boosting sales volume by compromising profit margin until its sales volume reaches a certain sizable level. Large-scale farming to offer new growth opportunities for feedstuff producers Currently the market is concerned that large-scale livestock farming might squeeze feedstuff producers growth Page 2

3 potential. However, we still see upside to feedstuff volume growth despite the popularization of large-scale farming. Current annual pig feed sales volume of ~80m tonnes compared with ~700m head of hogs brought out of farms to market every year indicates that the proportion of pigs fed by feedstuff bought from feedstuff companies is in fact very low, with most farmers making their own pig feed on the farm. Going forward, centralized large-scale farming businesses will represent a larger proportion of livestock farming in China, which should give a boost to sales volume at feedstuff companies. In fact, direct sales to large-scale farms are now offering new growth opportunities for feedstuff companies. We particularly like leading aqua feed producers, leading feedstuff companies in northeastern China and Jinxinnong Technology ( CH). Macro: FOMC meeting in the spotlight this week Three important points to watch at the June FOMC meeting The latest labor report showed that the job market slowed in May. However, we do not believe this will alter the Fed s decision to tighten. Average employment growth has been around 160k so far this year, in line with the Fed s definition of good employment growth. Also, the unemployment rate dropped to 4.3%, which is even lower than the Fed s official expectation for the natural rate of unemployment. Many Fed officials have therefore claimed that the US job market has already reached the maximum employment target. The Fed will no doubt announce a 25bps hike at the FOMC meeting on June However, we see three important points to note. First, officials assessment on the outlook for inflation. Given that PCE inflation has declined in the last two months, oil prices have dropped to their lowest level in six months, and salary growth has slowed, it is generally expected that the Fed will revise down its inflation outlook. Second, officials interest rate projections. According to the projections of 17 officials at the March meeting, the Fed sees two more rate hikes in 2017 and three in However, market participants generally expect the central bank to revise down interest rate expectations due to the lower inflation outlook. Third, details of balance sheet reduction. The May FOMC meeting minutes showed that nearly all officials agreed the Fed should begin reducing its securities holdings within this year. We believe it is likely to provide additional information, including the pace, timing, size and method of balance sheet normalization at the June meeting. ECB emphasizes no discussion on tapering The ECB kept its monetary policy unchanged last week. Before the meeting, some investors had expected the central bank to send a hawkish signal because of the improved economic outlook. In contrast, we judged that the ECB would maintain a dovish stance. There are two main changes in the statement. First, the ECB upgraded the economic outlook from risk tilted to the downside to broadly balanced, in line with our expectation. It is optimistic that the euro area can see a broad recovery, supported by improved investment, private consumption and exports. ECB members therefore also upgraded their GDP forecast for Second, the ECB revised down their inflation expectation from 1.7% to 1.5% in 2017, from 1.6% to 1.3% in 2018 and from 1.7% to 1.6% in 2019, saying this was mainly due to lower energy prices and as core inflation has not yet shown convincing signs of a pick-up. Since the ECB s only mandate is price stability, the central bank does not need to tighten policy. President Mario Draghi emphasized that there was not even discussion of tapering during the meeting. Overall, we believe the ECB is unlikely to act in 2017, since inflation continues to undershoot its target. We expect it to announce a gradual exit plan for the QE programme in the fourth quarter and believe it is likely to implement this in An interest rate hike would be later than the QE exit, and not likely earlier than 2H18. China s subdued inflation indicates PBoC unlikely to hike rates in 2017 For 2017, the Chinese government shifted its policy priority to financial deleveraging and containing asset bubbles. However, the latest inflation data show that the central bank is unlikely to tighten monetary policy significantly. PPI inflation dropped from 6.4% in April to 5.5% in May, mainly due to falling industrial commodity prices, especially steel and iron ore. The sharp fall in commodities will put pressure on manufacturers, so economic growth is likely to slow in the second quarter. The PBoC is therefore unlikely to tighten further to avoid a rapid slowdown in economic growth. In addition, CPI inflation edged up from 1.2% in April to 1.5% in May, as food prices rebounded slightly. However, inflation is still much lower than the government s target of around 3%. The subdued inflation also shows that the PBoC is unlikely to hike interest rates in Overall, we believe the PBoC will maintain its policy stance to cautiously tighten in 2017, and continue to adjust policy through open-market operations. (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 3

4 Rail: Overseas rail projects key catalysts for the rail equipment sector in 2H17 After the Jakarta to Bandung rail project was signed in April this year, focus has now shifted to the next two large high-speed rail projects, the Bangkok to Kuala Lumpur line and the Singapore to Kuala Lumpur line, set for 2H17. Both involve bigger investments than the Jakarta to Bandung project. Thailand to Malaysia high-speed rail line The project will connect the countries capitals, Bangkok and Kuala Lumpur, and have an operating length of 1,500km. Assuming capital expenditure of Rmb240m per km (similar cost to the Jakarta-Bandung project), investment value for the whole project may be as high as Rmb360bn. Singapore to Malaysia high-speed rail line The line will connect Kuala Lumpur with Singapore, and have an operating length of 350km. Total investment is expected to be around Rmb82.8bn (or US$12bn), with the line set to begin operation by The rail line will reduce travel time between Kuala Lumpur and Singapore from around 5-6 hours to 90 minutes. Japanese companies also competing for the projects Japanese companies are expected to compete against their Chinese counterparts for these projects. Japanese names won two highspeed rail orders in 2015: one project in India with a total investment of US$12bn and an operating length of 700km, and another between Bangkok and Chiang Mai in Thailand with total investment of US$120bn and an operating length of 700km. However, we believe Chinese players now have a better chance of winning the projects, for three main reasons: 1) more mature technology than before; 2) short construction periods; 3) lower construction costs. Catalysts for CRSC and CRRC in 2H17 CRRC (1766 HK, Buy) currently has the highest exposure to overseas markets, with a revenue contribution of 8.4% in CRSC (3969 HK, Accumulate) saw 2.4% of its revenue come from overseas markets during the year, while CRCCE (1786 HK, Buy) has insignificant exposure. Within the rail equipment sector, CRSC and CRRC would be the major beneficiaries if the tender for the two projects goes to a Chinese company. To recap, CRSC gained around Rmb1bn in orders from the Jakarta to Bandung project while CRRC saw Rmb2.5bn in orders. For the current two projects, we estimate CRSC could gain Rmb13.3bn in orders, which represents 23% of total new orders in 2016, while CRRC could see Rmb33.2bn in orders, representing 12% of its total new orders in Given that there are more key rail projects ahead, we estimate revenue from overseas markets could increase to 5% for CRSC and 15% for CRRC in We see overseas market expansion as a catalyst for the rail equipment sector in 2H17. (Dominic Chan, Research Analyst, SFC CE No. APP609, dominicchan@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 do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold 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 recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, 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 the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer 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 commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the 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