Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 2, 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 HSBC China Serv PMI 2-Jul JUN HSBC China Comp PMI 2-Jul JUN CPI YoY 8-Jul JUN PPI YoY 8-Jul JUN US Data Date Period Prior Cons Initial Jobless Claims 2-Jul 27-Jun Cont Jobless Claims 2-Jul 20-Jun U-3 Unemployment 2-Jul JUN Markit US Serv PMI 6-Jul JUN F ISM Non-Mfg NMI 6-Jul JUN Trade Balance 7-Jul MAY Source: Bloomberg GF events Date Event Location 2-3 Jul 2H15 TMT strategy Shanghai Source: GF Securities (HK) A-Share Market Electronics: 2H15 investment strategy; positive on domestic semiconductor and car electronics players Mainland Chinese electronics companies are likely to outperform overseas peers in more subsectors going forward by tapping into its large domestic market and consolidating global resources. In particular, we are positive on opportunities in semiconductors and car electronics. Domestic semiconductor companies are set to speed up overseas M&A relying on government industrial funds and the capital markets so as to enhance their production capacity, technological strength and market shares. We expect leading consumer electronics component producers to achieve success in car electronics through external expansion. Hong Kong Market Non-Bank Financials: 2H15 sector outlook We are cautious towards securities stocks given sector uncertainties arising from the currently volatile A-share market. However, we are positive on the sector in the long term given the great potential of emerging businesses such as NEEQ market making and asset securitization. Reforms related to pensions offered by insurers, health insurance and participating insurance are positive for the sector in the long term as they will enhance life premiums income and improve sector service quality. We like China Taiping Insurance (966 HK, Buy). Property: 2H15 sector outlook The sector might benefit as the PBoC is likely to lower interest rates further in 2H15; however developers are showing low earnings visibility as their GPM continues to decline amid rising land prices. We expect residential GFA sold nationwide to pick up 5-10% YoY in 2015 with the four firsttier cities to see HoH home price growth of 10% in 2H15. We are positive on regional developers with high-quality land reserves located in first-tier cities, and recommend Shenzhen Investment (604 CH, Buy). Pharmaceutical: 2H15 sector outlook While benefiting from drug pricing liberalization and policy support for the medical service industry, companies will see GPM decline as a result of provincial drug procurement tendering. Drug pricing liberalization will benefit branded OTC Chinese patent drug makers such as Tong Ren Tang Chinese Medicine and companies with a high exposure to cheaply priced generic drugs such as CSPC Pharmaceutical. In addition, support for medical services run by private capital and the improvement of medical services are positive for industry leaders such as Fosun Pharmaceutical. Peak Sport (1968 HK, Buy): Share price correction overdone; upgrade to Buy Peak s shares have underperformed peers recently following its unexpected new share placement. Management has stated that the placement will boost the cash position of its HK subsidiary for the payment of overseas sponsorships and lead to withholding tax savings of up to 10% as they no longer need to remit cash from China to HK. We believe investors dislike the reason and the large dilution from the placement. However, we think the share price decline is overdone. We upgrade from Accumulate to Buy given its undemanding valuation, but also lower our TP from HK$2.94 to HK$2.37. 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 Electronics: 2H15 investment strategy; positive on domestic semiconductor and car electronics players Chinese firms on track to outperform overseas peers Mainland Chinese electronics companies have now caught up with or even surpassed their Taiwanese peers in several consumer electronics subsectors such as acoustics and touch screen control, and are likely to outperform overseas peers in other subsectors going forward by tapping into its large domestic market and consolidating global resources. In particular, we are positive on opportunities for Chinese companies in the fields of semiconductors and car electronics. Semiconductors Compound semiconductors will be a key beneficiary of policy support as it is used in national defense, information security and the development of green energy. We believe domestic semiconductor companies are set to speed up overseas M&A relying on government industrial funds and the capital markets so as to enhance their production capacity, technological strength and market shares. Car electronics China s car electronics market is currently worth Rmb400bn, compared with a global market size of US$200bn. The standardization and modularization of auto parts as well as the opening up of the auto industry chain will offer new opportunities for domestic companies. We expect leading consumer electronics component producers to achieve success in car electronics through external expansion. Top picks We like: 1) Deren Electronic ( CH), Luxshare Precision Industry ( CH) and Etern ( CH) given their prospects in the car electronics space; 2) Sanan Optoelectronics ( CH), Ingenic Semiconductor ( CH) and Huatian Technology ( CH) given policy support for the semiconductor industry; and 3) Everwin Precision Technology ( CH) and Everfine Photo-E-Info ( CH) in view of opportunities arising from Industry 4.0. Non-Bank Financials: 2H15 sector outlook Securities Sector outlook Positive factors for the securities industry in 2H15 include: 1) considerable growth across various business segments including brokerage, investment banking, capital intermediary and asset management; and 2) significant earnings growth at listed securities firms. That said, current A-share market volatility is a major negative factor. On the policy front, while repeatedly stressing the importance of strengthening regulation and controlling risks, the CSRC has removed certain restrictions that have limited margin financing & securities lending business growth. Short-term cautious, long-term positive We are cautious towards securities stocks given sector uncertainties arising from the currently volatile A-share market. However, we are positive on the sector in the long term given the great potential of emerging businesses such as NEEQ market making and asset securitization. Insurance Sector outlook The sector is set to benefit from the trial for tax deferred pension, tax discount for health insurance purchases, and the liberalization of the participating insurance market, while current A-share market volatility is a negative. Reforms related to pensions offered by insurers, health insurance and participating insurance are positive for the sector in the long term as they will enhance life premiums income and improve sector service quality. Top pick We like China Taiping Insurance (966 HK, Buy), which outperformed peers with life insurance NBV growth in 2014 as well as 5M15 life premiums growth. The stock is trading with an attractive valuation below historical average. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Property: 2H15 sector outlook The sector might benefit as the PBoC is likely to lower interest rates further in 2H15; however developers are showing low earnings visibility as their GPM continues to decline amid rising land prices. We expect residential GFA sold nationwide to pick up 5-10% YoY in 2015 with the four first- Page 2

3 tier cities to see HoH home price growth of 10% in 2H15. We are positive on regional developers with high-quality land reserves located in first-tier cities, and recommend Shenzhen Investment (604 CH, Buy). The company s 2m sqm premium land bank in Shenzhen s Luohu, Futian and Nanshan has great potential to appreciate in value. 5M15 subscription sales of Rmb7.2bn already locked in more than 65% of the 2015 full-year sales target. Our target price of HK$6.0 is based on 1.2x 2015E P/B. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Pharmaceutical: 2H15 sector outlook Sector outlook Positive factors for the sector in 2H15 include: 1) drug pricing liberalization which will benefit innovative pharmaceutical companies; and 2) policy support for the development of the medical service industry. Meanwhile, pharmaceutical companies will see their GPM come down on lower drug prices resulting from provincial drug procurement tendering, with their average earnings growth to drop below market expectation to 15-20%. Beneficiaries of favorable policies Drug pricing liberalization will benefit branded OTC Chinese patent drug makers such as Tong Ren Tang Chinese Medicine (8138 HK, NR) and companies with a high exposure to cheaply priced generic drugs such as CSPC Pharmaceutical (1093 HK, Buy). In addition, support for medical services run by private capital and the improvement of medical services are positive for industry leaders such as Fosun Pharmaceutical (2196 HK, NR). Stock pick We are positive on innovative pharmaceutical companies with high earnings growth visibility, and recommend CSPC Pharmaceutical (1093 HK, Buy). The company is seeing strong demand for its NBP which is a Class I New Drug for treating strokes. The company offers high earnings visibility with 1Q15 net profit rising 53% YoY to HK$400m. Our target price of HK$8.2 is equivalent to 30x 2015E P/E. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Peak Sport (1968 HK, Buy): Share price correction overdone; upgrade to Buy Upgrade from Accumulate to Buy Peak s share price has underperformed peers recently due to its unexpected new share placement (unexpected as it had a net cash balance of Rmb2.7bn). Management explained that the placement would boost the cash position of its HK subsidiary for the payment of overseas sponsorships and lead to withholding tax savings of up to 10% as they no longer need to remit cash from China to HK. We believe investors dislike the reason and the large dilution from the placement (12% on FY16 EPS). However, we think the share price decline is overdone. Our estimates, based on Peak s cash balance and market interest rates, show its FY14 interest income matches its cash position. The stock is now trading at just 8.6x 1-year forward P/E, close to its historical low of 7x. At a distressed 0.7x ex-net cash FY15E P/E, the valuation is unjustified, in our view, as we forecast the company will see an 11% CAGR in net profit in FY We upgrade our rating from Accumulate to Buy given its undemanding valuation, but also lower our TP from HK$2.94 to HK$2.37, based on 11x FY16E P/E, mainly due to EPS dilution from the placement. Potential catalyst: (1) major shareholder purchases shares when the placement deal is complete; (2) 2Q15 SSSG improves on 1Q15. The placement Peak issued 280m new raising net proceeds of HK$680m. After the placement, the percentage shareholding of the chairman and his family members was diluted from 68.5% to 60.4%. The company plans to use the proceeds to fund sponsorships and promotional activities to strengthen brand recognition globally and develop in overseas markets, where the company hopes to increase revenue contribution as a percentage of total revenue to 35-40% in 3-5 years (vs 23% in FY14). Why a placement? According to management, Peak uses its HK subsidiary to sign sponsorship agreements with NBA players, overseas national teams etc, and to make payments to them. Generally speaking, overseas parties prefer to sign agreements with the HK subsidiary rather than the China subsidiary because they are required to pay a 5% business tax for the latter option. Given most of Peak s cash balance is deposited in banks in China, remittance from China to HK is subject to a 5%/10% withholding tax and approval by SAFE. Management believes the placement could boost the cash position of the HK subsidiary and lead to withholding tax savings. We think investors Page 3

4 may dislike this reason as its peer, Anta, already remits cash from China to HK to pay NBA player sponsorship fees. FY14 interest income matches its cash position Based on the company s 2014 annual report and the PBoC s benchmark interest rates, we estimate Peak had bank interest income of Rmb56m in FY14, which matches its FY14 reported interest income of Rmb57m. Trading update Nike reported 22% order book growth last Friday for products scheduled for delivery from Jun to Nov 15 in the Greater China region (vs 23% growth from Mar to Jul 15, suggesting continued momentum in China s sportswear sector. Peak s SSSG in Apr and May improved compared with 1Q16. We believe its 2Q15 SSSG could improve QoQ. (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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