Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Nov 7, 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 PETROCHINA CCB CHINA MOBILE HSBC PING AN BANK OF CHINA CHINA LIFE SINOPEC Source: Bloomberg A-Share Market A-Share Market Color: Market focusing on stocks with cheap valuations and high earnings visibility One of the mutual fund managers with a bullish view believes that the market will now focus on sectors with cheap valuations and high earnings visibility, and thinks it is a suitable strategy to select stocks from sectors with strong business conditions; they like baijiu, consumer electronics and manufacturing leaders. Another bullish fund manager prefers healthcare, consumer, insurance and import substitution. A PE fund manager with a neutral market view sees President Trump s visit to China and the upcoming Singles day online shopping spree as positives. Hong Kong Market Geely Auto (175 HK, Buy): Monthly Boyue sales hit 30,000 level, further growth expected Sales rose 30.1% YoY and 14.9% MoM in Oct, posting record monthly sales for the company. 10M17 sales are up 71.5% YoY. We expect the company to post stronger sales growth in 4Q17 and for fullyear sales to come in 8% beyond its target. SUV sales continue to rise, with the Boyue surpassing 30,000 monthly units; this should continue in Nov/Dec. We believe the company now has a balanced product portfolio, following a noticeable increase in SUV models this year. The company will launch five new models next year, two SUVs, two sedans and the company s first MPV. Maintain Buy. GAC Group (2238 HK, Buy): Strong sales growth for GAC Honda; SUVs to continue to drive sales GAC Honda sales rose 9.4% YoY and 2.6% MoM in Oct, representing a new sales high both this year and historically. GAC Honda has remained the major sales contributor for the company, accounting for 35% of total sales. We expect strong sales for Japanese brands to continue in 4Q17. Own brands posted a monthly decline, but should rebound driven by the Trumpchi GS8, which should be free of its capacity restrictions in 4Q17. GAC-FCA SUVs are also supporting sales. We are positive on the company s strong 57% SUV product mix. Maintain Buy. Modern Dental (3600 HK, Buy): Delivering on integration efforts Share in Modern Dental rose as much as 7% yesterday morning after gaining 15% last Friday. The company reported solid 9M17 revenue growth of 42% YoY; it has achieved 76% of our 2017 forecast. Revenue from Europe was up 11% YoY in 9M17, vs 7% in 1H17, driven by faster volume and ASP growth. Growth in ASP was also helped by a strong euro in 3Q17. The company remains positive on 2017 given the positive fundamental backdrop across the majority of its markets. We maintain our Accumulate rating and target price of HK$3.10. ENN Energy (2688 HK): Urban gas supply business growing steadily; company actively building presence in distributed gas supply business The company s selling and admin expense ratio declined 2.4pp YoY to 5.8% in 1H17. Its management team is being reformed to let each member oversee multiple business areas, while its cost control is highly effective. We forecast selling and admin expense ratio to be 6.5%, 5.7% and 5.1% in respectively, which should cause profit growth to outpace revenue growth. We forecast EPS of Rmb3.104, and 4.692, based on which the stock is trading at 15.7x, 12.7x and 10.4x. We remain positive on the company as it is likely to maintain relatively high gas sales volume growth and has several coal-to-gas substitution projects. China Property: Primary sales area continued to drop in first week of Nov According to Soufun data on 26 key cities in China, primary residential GFA sold dropped 7% WoW and 13% YoY in the first week of Nov, reaffirming our bearish stance on primary property market performance in 4Q17. We believe the Chinese property market has entered a new down-cycle, since Sept, due to the ongoing tightening policies and shrinking supply of property-related loans. We expect GFA sold to drop 10% YoY in 2018 and believe investors should take profit. We are more positive on landowners in the Guangdong-Hong Kong-Macau Bay Area, where we expect land prices to double over the next five years. 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 A-Share Market Color: Market focusing on stocks with cheap valuations and high earnings visibility * GFS sales talk to domestic institutional investors in China regularly to stay in touch with their hopes and fears, and to detect the slightest change in market sentiment. See below for what they are having on their minds. Voices of mutual fund managers Bullish view #1 Given the current macroeconomic and liquidity environment, we think the market is still focused on two key investment ideas: 1) cheaply valued sectors with high earnings visibility, and 2) scarce core assets with mid/long-term growth potential. As such, we think that going forward it is still a suitable strategy to select stocks from sectors with strong business conditions. More specifically, we are positive on baijiu, consumer electronics, and leading manufacturing companies which are seeing an improving competitive landscape. Bullish view #2 3Q17 economic data came in better than expected. We remain optimistic about upcoming A-share market performance, and will focus on the healthcare, consumer, insurance, import substitution sectors in the near future. Neutral view Our existing positions are mainly allocated in sectors with high earnings visibility, while newly added positions will be focused on cheaply valued sectors more specifically those which have relatively high earnings visibility next year but are trading at fair or relatively low valuations, such as emerging industries and traditional industries which are going through supply-side reform. Voice of private equity fund manager Neutral view President Trump s visit to China this week and the upcoming Singles Day online shopping spree will both be positive factors for the market. We expect the market to be turbulent this week and do not rule out the possibility of the SHCOMP rising above the 3,400 mark again. We remain positive on stocks driven by the Singles Day online shopping spree such as S.F. ( CH) and Suning Commerce ( CH). Blue-chip stocks which have risen to relatively high share price levels might be up for a technical correction at the moment. We believe stocks with cheap share prices which might catch up and tech names which have newly joined the blue-chip camp are worth watching. Investors should wait for stocks in their holdings to go up and should not chase high. Voice of GFS sales The A-share market suffered an across-the-board correction last week, with the ChiNext index falling the most. The SHCOMP closed 1.32% lower from the previous Friday close, and the SZCOMP and ChiNext index were down 2% and 3.34% respectively. The rotation between popular investment themes moved quickly last week with more stocks posting share price losses than gains; in particular, most of the stocks related to key investment themes demonstrated significant share price drops, while some blue-chip stocks also suffered small corrections. Talks about share price bubbles being formed among certain blue-chip stocks and expectations of the market investment rationale potentially changing are rising. In terms of liquidity flows, financial services and F&B are the two key sectors to see net fund inflows at present. In addition, institutional investors are becoming increasingly interested in China Southern Airlines ( CH) in view of the sector s earnings visibility and favorable policies. The 9M17 earnings season came to an end last week. A-share ex-financial companies reported revenue growth of 35.3% YoY, strengthening slightly from 1H17, while net profit growth decelerated slightly from 1H17 to 38.9%. It is worth noting that the A-share earnings structure has changed slightly: the contribution of midstream manufacturing sectors has expanded, that of financials and consumer discretionary has decreased, and resources remain stable. Companies that saw a Page 2

3 significant earnings growth acceleration in 9M17 were mostly upstream cyclical companies; this growth acceleration is unlikely to have continued into 4Q17, putting substantial pressure on quarterly earnings. Qihoo 360 (QIHU US) issued a major asset restructuring report last week. The significant valuation gap between the US and A-share markets means that the company s market cap is likely to grow by several times. The company might become the largest internet stock in the A-share market and a representative of quality internet sector assets. This would end the absence of a leading internet company in the A-share market and allow more investors to understand the direction of future development for internet and tech companies. Furthermore, as a large-cap internet giant, the return of the company from an overseas market will bring positive changes to the domestic market. Its listing in the A-share market would reflect that the domestic capital markets have become more open and tolerant, which would support secondary market performance. Investors that we have talked to are now looking for stocks with cheap valuations and visible, sustainable earnings, while high-end manufacturing and relevant leading companies are also key areas of interest for some investors. (This piece has been produced based on client feedback put together by the GFS A-share sales team, and does not represent the house view of our research team.) Geely Auto (175 HK, Buy): Monthly Boyue sales hit 30,000 level, further growth expected in 4Q17 Sales volume hits new monthly sales high Geely Auto sold 125,118 units in Oct, up 30.1% YoY and 14.9% MoM, posting record monthly sales for the company. 10M17 sales reached 952,226 units, up 71.5% YoY, completing 87% of its 1.1m units target for We expect the company to post stronger sales growth in 4Q17, and 1.197m unit sales in 2017, 8% beyond its sales target, meaning sales growth of ~56% YoY. SUV sales continue to rise with Boyue surpassing 30,000 monthly units SUVs have become an increasingly important sales pillar for the company, with 67,486 units sold in Oct, up 79.1% YoY and 19.5% MoM, a historical high for the segment. 10M17 saw the company s SUV model sales reach 456,103 units, up 1.97x YoY, and representing 47.9% of total sales as its contribution continues to grow (2016/1H17: 30.6%/44.7%). Among Geely Auto s SUV models, the Boyue model saw a considerable rise in sales during Sept, up 79.6% YoY and 14.5% MoM to 30,138 units. This is the first time the model has surpassed the 30,000-unit level, a sales figure monitored by the market as the company has increased capacity for the model to meet strong demand. We expect sales to remain above 30,000 units in Nov/Dec. As the model s 10M17 sales accounted for 47.6% of the company s SUV sales, further growth should support overall SUV sales. New Emgrand posts steady growth The company sold 27,033 New Emgrand units in Oct, up 8.1% YoY and 13.7% MoM. The model s 10M17 sales came in at 207,870 units, up 12.7% YoY. At 21.8% of total sales, the model s steady growth has been a strong support for the company s sales growth this year. 19,163 of the model s NEV versions were sold during 10M17, 9.2% of the model s total sales, following a steady ramp-up. We think the good sales trend for the NEV New Emgrand will give investors more confidence in the company s competence to develop NEV models. Maintain Buy We believe the company has a balanced product portfolio, following a noticeable increase in SUV models this year, while management plans to develop diversified models in the future to improve product mix, which should support its long-term development. The company will launch five new models next year, two SUVs, two sedans and the company s first MPV. We think this key product year will drive strong sales growth, even with a high comparable sales base. We maintain our Buy rating. (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 GAC Group (2238 HK, Buy): Strong sales growth for GAC Honda; SUVs to continue to drive sales GAC Honda records monthly sales high GAC Honda sold 68,867 passenger vehicle (PV) units in Oct, up 9.4% YoY and 2.6% MoM, representing a new sales high both this year and historically. The brand s 10M17 sales grew 14% YoY, on continual steady growth this year, to 571,839 units. GAC Honda has remained the major sales contributor for the company, accounting for 35% of total sales, meaning its steady growth should benefit overall company sales. We expect the strong sales growth at Japanese brands to continue in 4Q17, having risen most among JV brands in 9M17; this will be helped by its branding and product mix. Own brands posted monthly decline, but should rebound driven by the Trumpchi GS8 The company sold 45,452 own-brand units in Oct, up 14.3% YoY but down 1.6% from the sales high in Sept. 10M17 sales reached 421,672 units, up a considerable 41.8% YoY. Its own brands, mainly the Trumpchi series, were supported by SUV growth this year. The top-selling Trumpchi GS8 should see its capacity return to the normal level of 10,000 units in 4Q17, and we expect better growth from the model, which had been held back by capacity. GAC-FCA SUVs also supporting sales GAC-FCA sold 15,319 units in Oct, up 22.2% YoY but down 16.6% MoM, given the high sales base in Sept. 10M17 came in at 166,872 units, up 45.4% YoY, as its strong sales growth this year continued. In our view, the brand s product portfolio, which is mostly SUV models, should drive further growth in 4Q17, as SUV models should see a stronger ramp-up during the peak season. The company s branding should also stand it in good stead against the SUV competition. Maintain Buy We are positive on the company s strong 57% SUV product mix. We expect its top sellers, the Trumpchi GS4 and GS8 to see continued monthly sales growth in 4Q17 on the back of a solid market response. Strong sales for Japanese brands should also continue, and take market share away from Korean brands. We maintain our Buy rating. (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 ) Modern Dental (3600 HK, Buy): Delivering on integration efforts What s new? Share in Modern Dental rose as much as 7% yesterday morning after gaining 15% last Friday. The company reported solid 9M17 revenue, coming in at HK$1.6bn, up 42% YoY, vs 40% YoY in 1H17, and representing 76% of our 2017 forecast. We maintain our Accumulate rating and target price of HK$3.10, based on 16.5% FY18 EPS growth and 1.0x PEG, and implying 17% upside. Europe and Greater China performed better than expected in 3Q17 Revenue from Europe was up 11% YoY in 9M17, vs 7% in 1H17, driven by faster volume growth (+7% YoY vs +5% in 1H17) and ASP (+4% vs 2% in 1H17). Growth in ASP was also helped by a strong euro in 3Q17. Hong Kong and Macau have recovered (+7% YoY in 9M17 from low single digits) since 1Q17 volume decreased, driving 12% YoY growth in Greater China revenue. MicroDental contributed HK$120m revenue in 3Q17 vs 1H17 run-rate of HK$260m 3Q17 revenue growth for MicroDental (US dental lab) lagged behind 1H17 as the period included the summer months of July and Aug, but 4Q17 is expected to be stronger, with some seasonality in 2H17. The company is among the top 3 players in the US as a result of the MicroDental acquisition in Oct Positive 2017 outlook as long as Europe (and the euro) and China remain strong The company remains positive on 2017 given the positive fundamental backdrop across the majority of its markets compared with Growth is also expected to be boosted by new product launches and realizing potential from synergy, including cross-selling opportunities and operating leverage achieved via continued integration of targets acquired in (Natalie Chiu, Research Analyst, SFC CE No. AVH029, nataliechiu@gfgroup.com.hk ) Page 4

5 ENN Energy (2688 HK): Urban gas supply business growing steadily; company actively building presence in distributed gas supply business Full-year gas sales price spread to stay stable, with decline to narrow over next 2-3 years We expect the company to see a gas sales price spread of Rmb /m3 in full-year 2017, considering that the price spread decline in 1H17 was mainly driven by structural factors and that the pressure to offer price discounts to coal-to-gas substitution users has decreased now that the non-residential gate station price has been lowered. We expect the decline in the price spread to moderate in 2018 and 2019 to arrive at price spreads of Rmb0.63 and 0.61/m3 respectively. High gas sales volume growth sustainable, coal-to-gas substitution main growth driver The price of natural gas has now reached a level that gives the fuel a certain cost advantage. We expect the urban gas supply industry to maintain 15% growth over the next 3-5 years. We estimate that the company is likely to post gas sales volume growth of 26%, 22% and 19% in (excluding energy trade), with coal-to-gas substitution to contribute 40%, 32% and 24% of gas sales volume growth. Residential connections remain steady; connection business to grow mildly We expect the number of newly connected residential users to increase slightly during ; average connection fees should remain stable with residential, industrial and commercial user connection revenue to grow 3%, 5% and 5%. Cost control highly effective, selling & admin expense ratio down significantly The company s selling and admin expense ratio declined 2.4pp YoY to 5.8% in 1H17. Its management team is being reformed to let each member oversee multiple business areas, while its cost control is highly effective. We forecast selling and admin expense ratio to be 6.5%, 5.7% and 5.1% in respectively, which should cause profit growth to outpace revenue growth. Earnings forecasts We forecast EPS of Rmb3.104, and 4.692, based on which the stock is trading at 15.7x, 12.7x and 10.4x. We remain positive on the company as it is likely to maintain relatively high gas sales volume growth and has several coal-to-gas substitution projects. Key risks include disappointments from the execution of coal-to-gas substitution, and a further decline in the gas sales price spread. (Han Ling, Research Analyst, SFC CE No. ARI073, hanling@gf.com.cn ) China Property: Primary sales area continued to drop in first week of Nov What s new? According to Soufun data on 26 key cities in China, primary residential GFA sold dropped 7% WoW and 13% YoY in the first week of Nov, reaffirming our bearish stance on primary market performance in 4Q17. We believe the Chinese property market has entered a new downcycle, since Sept, due to the ongoing tightening policies and shrinking supply of property-related loans. Investors should take profit on most China property stocks A number of industry leaders disclosed their Oct contract sales figures. Sunac China s (1918 HK, NR) contract sales revenue rose 1.9x YoY to Rmb43.9bn; Country Garden (2007 HK, Hold) saw contract sales revenue rise 23% YoY and 19% MoM to Rmb56.6bn. Despite these strong sales figures, both companies share prices are down 21% compared with their 52-week highs. We expect GFA sold to drop 10% YoY in 2018, which will provide a challenge for China developers. Based on historical stock market data, once the down-cycle is confirmed by investors, most China property stocks drop on lower valuation multiples. Investors should take profit on most China property stocks. Stick to land owners in Guangdong-Hong Kong-Macau Bay Area Given the limited land supply and consistent influx of people/capital into the area, we forecast land prices will double (compared with 2017 levels) over the next five years. We interviewed two landowners in the area last week, Logan Property (3380 HK, NR) and China Aoyuan Property (3883 HK, NR). For , management from both companies are bullish on their earnings growth outlook and land bank appreciation potential in the Bay Area. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Page 5

6 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 6