Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Oct 27, 2015

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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 (%) 1398 ICBC CHINA MOBILE PETROCHINA CCB TENCENT BANK OF CHINA HSBC CHINA LIFE PING AN SINOPEC Econ data release China Data Date Period Prior Cons Westpac MNI Con Sen 27-Oct OCT Manufacturing PMI 31-Oct OCT Non-Mfg PMI 31-Oct OCT Caixin Mfg PMI 1-Nov OCT US Data Date Period Prior Cons Dur Goods New Ord 27-Oct SEP S&P/CS Comp Oct AUG Markit Serv PMI 27-Oct OCT P Q GDP QoQ 29-Oct 3Q A Initial Jobless Claims 29-Oct 24-Oct Cont Jobless Claims 29-Oct 17-Oct Pending Home Sales 29-Oct SEP Markit Mfg PMI 2-Nov OCT F ISM Mfg PMI 2-Nov OCT Source: Bloomberg A-Share Market Investment Strategy: Beautiful China, agricultural modernization and Merkel s visit as weekly investment themes Beautiful China has gained increased market attention as it is included among the top ten tasks for the 13th FYP. We believe that environmental protection lies at the heart of Beautiful China, with carbon emission & trading, pollution treatment and environmental monitoring particularly worth watching. In addition, new energy, landscaping, forestry and tourism are also associated with the initiative. One event catalyst for the week is German Chancellor Angela Merkel s upcoming visit to China, which might give rise to investment opportunities in stocks driven by the Made in China 2025 theme. Investment Strategy: Internet of Energy to be a key topic of 13th FYP We believe a market for the Internet of Energy (which would be worth trillions of Rmb) will emerge in the near future, and that it will be a key topic in the upcoming 13th FYP. In particular, energy storage might be one of the issues lying at the core of the Internet of Energy. The Internet of Energy will also push forward reforms in relation to the production, transmission and consumption of energy. In particular, we expect business conditions in the renewable energy, ultra-high-voltage power transmission and power distribution grid industries to pick up. Hong Kong Market Brilliance China Auto (1114 HK, Buy): Valuation at historical low with strong growth expected in sales and profit Brilliance-BMW has maintained stable sales despite a subdued car market in China and the lack of new model launches, which reflects its strong brand recognition in the domestic luxury car market. We expect Brilliance-BMW s sales volume growth to be supported by continued growth for the Brilliance-BMW 5-series and the strong rebound in the X1, as well as the upcoming sector peak season in 4Q15. The company s valuation is at a historical low and we see significant share price upside. We initiate coverage with a Buy rating and 12-month TP of HK$ China City Railway Transportation Tech (1522 HK, Buy): Extra momentum from potential asset injections; Beijing subway development a positive Revenue fell 49.5% YoY in 1H15 mainly due to a significant drop in revenue from the application solutions and relevant hardware business segment. However, net profit rose 25.4% YoY during the period thanks to the income contribution from the leasing of high-gpm civil communication assets. We expect CCRTT s net profit to rise 32% YoY in 2015, and see a CAGR of 24% in The company has signed several strategic cooperation frameworks this year, and we expect to see more asset injections in the near future. Maintain Buy and raise TP from HK$1.82 to HK$2.70. ChinaSoft (354 HK, Buy): Issuance of new shares to Huawei and convertible bonds to Huarong We believe the company should see long-term benefits from Huawei s strategic shareholding. The final agreement eases market concern about the possible cancellation of the deal. The new share subscription price of HK$2.80 represents a 14% discount to latest closing price. Given the undemanding valuation for the target joint venture, we believe the discount is reasonable. Huawei s strategic shareholding is a strong positive for the company going forward. We expect the company to see 48% YoY growth in net profit in FY15. Continued on next page 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 Hong Kong Market (continued) Belle (1880 HK, Hold): 1HFY16 results beat Net profit rose 4% YoY to Rmb2,158m, 9% above Bloomberg estimates, mainly due to better-thanexpected GM and EBIT margin in its sportswear segment. Operating cash flow jumped by an impressive 25% YoY. Footwear segment EBIT fell 13% YoY. Revenue in the segment decreased 5%, led by an 8% SSS decline but partly offset by 2% store growth. Sportswear segment EBIT surged 64% YoY. Segment revenue rose 16%, driven by ~10% SSSG (ASP growth >5%) and 8% store growth. Le Saunda (738 HK, Hold): 1HFY16 results in line Net profit fell 29% YoY, in line with the 30% decline suggested by the company s profit warning issued on Sep 8. Core net profit dropped just 19% YoY. Retail revenue increased 1% YoY led by 32% revenue growth in its e-commerce business but was offset by a 4.2% SSS decline. GM dropped slightly on increasing promotional activities aimed at clearing inventory. OP margin narrowed 2.5pp to 10.9% mainly due to an increase in frontline staff expenses and advertising expenses. Page 2

3 Investment Strategy: Beautiful China, agricultural modernization and Merkel s visit as weekly investment themes Beautiful China has gained increased market attention as it is included among the top ten tasks for the 13th FYP, the first time for the initiative to be included as a prioritized task in an FYP. We believe that environmental protection lies at the heart of Beautiful China, with carbon emission & trading, pollution treatment and environmental monitoring particularly worth watching. In addition, new energy, landscaping, forestry and tourism are also associated with the initiative. Some of the relevant companies are listed below: Carbon emission & trading CPI Yuanda Environmental Protection ( CH), Kaimeite Gases ( CH), Sinoma Energy Conservation ( CH), Huaguang Boiler ( CH); Pollution treatment Yonker Environmental Protection ( CH), GeoEnviron Engineering & Technology ( CH), Tianbao Heavy Industry ( CH), Fuchunjiang Environmental Thermoelectric ( CH); Environmental monitoring Sailhero Environmental Protection High-Tech ( CH), Focused Photonics ( CH), SDL Technology ( CH). Separately, agricultural modernization has also been kept as one of the top ten tasks. We highlight Intelligent Agriculture Technology ( CH), Xinan Chemical Industrial ( CH), Huifeng Agrochemical ( CH) and Dabeinong Technology ( CH) as related stocks. Merkel s China visit One event catalyst for the week is German Chancellor Angela Merkel s upcoming visit to China. Made in China 2025 and Industry 4.0 in Germany are closely connected to each other, and this visit is likely to lead to better integration of the two movements, giving rise to investment opportunities in stocks driven by the Made in China 2025 theme. Investment Strategy: Internet of Energy to be a key topic of 13th FYP Energy storage focal point of Internet of Energy We believe a market for the Internet of Energy (which would be worth trillions of Rmb) will emerge in the near future, and that it will be a key topic in the upcoming 13th FYP. In particular, energy storage might be one of the issues lying at the core of the Internet of Energy. The energy storage industry is likely to post strong growth, while policy support for it should also continue to strengthen. Based on overseas experience, we expect subsidies for the industry to be introduced in the near future, which should resolve the key issue of overly high costs currently plaguing the industry. Reforms in energy supply and consumption The Internet of Energy will push forward reforms in relation to the production, transmission and consumption of energy, reshaping the entire energy supply and consumption ecology. In particular, we expect business conditions in the renewable energy, ultra-high-voltage power transmission and power distribution grid industries to pick up. Watch list energy storage Given that energy storage must be developed in conjunction with the electricity supply system, we believe companies with some business foundations in distributed power generation and smart grids will have a first-mover advantage. In light of this, we suggest watching Clou Electronics ( CH), Narada Power Source ( CH), Sungrow Power Supply ( CH), Sacred Sun Power Sources ( CH) and Dynavolt Power Technology ( CH). Watch list energy informatization As for energy informatization development, we believe companies with a solid footing in the power sector and some knowledge of ICT technology will be in an advantageous position. We suggest watching Integrated Electronics Systems Lab ( CH) and Kehua Hengsheng ( CH). Brilliance China Auto (1114 HK, Buy): Valuation at historical low with strong growth expected in sales and profit Brilliance-BMW sales volume to pick up in 4Q15, new model launches to boost sales The sales volume of Brilliance-BMW slid 0.2% YoY to 139,746 units in 1H15, while the 9M15 figure was up 0.7% YoY to 211,620 units. Brilliance-BMW has maintained stable sales performance despite a subdued car market in China and the lack of new model launches, which reflects its strong brand recognition in the domestic luxury car market. We expect the sales volume growth of Brilliance- Page 3

4 BMW to be supported by continued growth in the Brilliance-BMW series 5 and the strong rebound in the X1, as well as the upcoming sector peak season in 4Q15. Our conservative estimate puts full-year sales volume at 285,282 units, representing YoY growth of 2.4%. We expect to see satisfactory sales volume growth of 8% YoY in 4Q15 as the JV brand started to pick up QoQ in 3Q15, the sector peak season is arriving and preferential tax policy for the purchases of small-displacement vehicles has been introduced. We forecast full-year earnings from the JV of Rmb4.2bn, with the YoY decline narrowing to 24.4% (vs % in 1H15). The Brilliance-BMW 2 series is scheduled to be launched towards the end of 4Q15, which we expect will achieve annual sales volume 15,000 and 20,000 units in 2016 and In addition, the company will also launch upgraded editions of the X1 and 3 series in 2Q16 and 4Q16, and those for the 5 series in 2017, which should give a boost to the brand s overall sales volume. We expect the JV to see annual sales volume of 320, ,000 units in 2016 and 2017, with YoY growth of 11.3% and 6.3% respectively. Lowered production costs through continued import substitution efforts and reduced subsidies as a result of improved relationships with auto dealers should both substantially enhance the JV s profitability. We expect the JV s EBT to reach Rmb5.2bn in 2016 (+24% YoY) and Rmb6.0bn in Self-owned brand sales volume to decline YoY, rebounds expected in The sales volume of BCA s minibuses dropped 20.7% YoY to 37,170 units in 8M15, mainly due to continued domestic economic weakness, sluggish demand for small commercial vehicles and a decline in the competitiveness of company s minibuses as a result of the models being relatively old. The rampup of Huasong 7, an MPV model newly launched at end-mar this year, fell short of the company s expectation with just 139 units sold during 8M15. We expect full-year self-owned brand sales volume to fall 21.9% YoY to 60,660 units, and we estimate that the company will record annual sales volume of ~64,000 units for its self-owned brand in 2016 and 2017, of which MPV will account for units. The earnings of its self-owned brand business should improve slightly but will remain in the red, with annual losses of Rmb m in the coming two years, close to the 2014 level. Valuation at historical low with great share price upside We have based our valuation of the company on its sales and earnings growth potential. Our 12M target price of HK$14.1 is based on 10.9x FY16E P/E. 1-year forward P/E is currently at a historically low level of around 7.8x. As we expect the company to post a net profit CAGR of 17.4% during , we believe it is undervalued at the moment and have a Buy rating on the stock. Downside risks include continued weakness in the domestic car market, and disappointing sales performance of the Brilliance-BMW series. (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 ) China City Railway Transportation Tech (1522 HK, Buy): Extra momentum from potential asset injections; Beijing subway development a positive Maintain Buy, TP raised to HK$2.7 We expect CCRTT s net profit to rise 32% YoY to HK$54m in 2015, with a CAGR of 24%. We maintain our Buy rating, and raise our target price from HK$1.82 to HK$2.7, representing 40x 2016E P/E and 2.7x 2016E P/B. Our 2016 EPS estimate could rise to HK$0.095 if potential subway operation business is included into calculation, in which case the valuation represented by our target price would drop to 28x 2016E P/E, in line with CCRTT s average P/E level over the past two years. Share price catalysts include: 1) asset injections, 2) the company s entry into the subway operation business, and 3) the completion of a planned share placement to BII (Beijing Infrastructure Investment Co., Ltd., an SOE in China). Net profit up 25% in 1H15 Revenue fell 49.5% YoY to HK$292m in 1H15 mainly due to a significant drop in revenue from the application solutions and relevant hardware business segment. That said, net profit rose 25.4% YoY to HK$25m in the first half thanks to the income contribution from the leasing of high-gpm civil communication assets which had not yet been acquired from BII in 1H14. Beijing subway system to maintain strong growth before 2020 According to the 12th FYP, Beijing s city rail mileage is expected to reach 660km in 2015, a target we believe the municipal government still intends to fulfill. This target represents a 25% YoY increase from the 527km figure Page 4

5 at the end of In addition, the mileage of city rail transport in Beijing is expected to reach 1,050km by 2020, representing a CAGR of around 10% during Stable income from civil communication assets CCRTT acquired the civil communication transmission systems and relevant income rights of 85 underground stations from BII in Sep 2014, as well as the civil communication assets of another 49 stations in 1H15. Currently only 2G and 3G businesses are operated on these assets, and we believe the provision of 4G business will start to make income contribution in the near future. Strategic cooperation frameworks signed in 2015 CCRTT has entered into several cooperation agreements so far this year, including two five-year strategic cooperation agreements respectively with Beijing Urban Construction Design & Development Group (BJUCD) and China Construction Communications Engineering Group (CCCEG). In addition, CCRTT also plans to form a JV with Beijing MTR Operation through which to set foot in the subway operation business. Potential asset injections BII is currently CCRTT s biggest shareholder with a 33.94% stake. In Apr this year, CCRTT entered into an MOU with BII regarding a planned placement to the latter, with a few preconditions yet to be fulfilled including the establishment of a JV with Beijing MTR Operation. BII will hold 55% stake if placement was completed. Given that CCRTT is BII s only HKlisted platform, we expect to see more asset injections into the listco in the near future. Key risks include slower-than-expected asset injections, and delays in Beijing s city rail system development. (Dominic Chan, Research Analyst, SFC CE No. APP609, dominicchan@gfgroup.com.hk ) ChinaSoft (354 HK, Buy): Issuance of new shares to Huawei and convertible bonds to Huarong What s new? 1) ChinaSoft issued a three-year US$70m convertible bond to Huarong International Asset Management on Oct 26 with an annual interest rate of 4.5%. The conversion price per share is HK$3.53, 8% above the latest closing price of HK$ ) ChinaSoft and Huawei entered into final agreement on Oct 26 that ChinaSoft will issue new shares to acquire Huawei s remaining 40% stake in the joint venture, which is mainly engaged in providing outsourcing services to Huawei. Huawei becoming ChinaSoft s second largest shareholder After this deal, Huawei will hold a 3.97% stake in ChinaSoft, with a lock-up period of two years. Huawei will become its second largest shareholder, after its CEO Chen Yuhong s 11.87% (diluted from 12.36%). 14% discount to latest closing price The purchase price of HK$2.80 is a14% discount to yesterday s closing price. Acquisition with 4.5x FY14 P/E and 1.6x P/B Total consideration for the 40% remaining interest in the joint venture is HK$238.3m, implying 4.5x FY14 P/E and 1.6x P/B (the Joint venture recorded Rmb109.8m in net profit in FY14 and Rmb308m in net assets as of end- FY14). Strengthened connection with Huawei We believe the company should see long-term benefits from Huawei s strategic shareholding, which will help the company to strengthen its strategic cooperation with Huawei. Huawei is the company s single largest customer in the outsourcing services business, which contributed around 30% of total revenue in FY14. The company is also seeking further cooperation with Huawei in the professional services business. Undemanding valuation for the target joint venture The company offered an undemanding 4.5x FY14 P/E and 1.6x FY14 P/B for the target joint venture. Subscription price in a reasonable range The new share subscription price of HK$2.80 represents a 14% discount to latest closing price. Given the undemanding valuation for the target joint venture, we believe the discount is reasonable. Earnings set to rise After the acquisition of the remaining interest in the target joint venture, the company should consolidate all profit generated by the joint venture, which will increase its bottom line in We expect the company to see 48% YoY growth in net profit to Rmb295m in FY15, driven by solid topline growth and an increase in earnings contribution from the acquired joint venture. Page 5

6 Maintain Buy The final agreement eases market concern about the possible cancellation of the deal. Huawei s strategic shareholding is a strong positive for the company going forward. The stock is now trading at 19x FY15 P/E and 16x FY16 P/E. We maintain our Buy rating and target price of HK$4.23. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk ) Belle (1880 HK, Hold): 1HFY16 results beat 1HFY16 results beat Net profit rose 4% YoY to Rmb2,158m, 9% above Bloomberg estimates, mainly due to better-than-expected GM and EBIT margin in its sportswear segment. Operating cash flow jumped by an impressive 25% YoY to Rmb3.1 bn. Payout ratio was 61% (1HFY15 payout ratio excluding special dividend was also 61%). Footwear segment EBIT fell 13% YoY Footwear segment revenue decreased 5%, led by an 8% SSS decline but partly offset by 2% store growth. GM increased slightly from 67.7% to 68.3% due to fewer promotional activities by channel operators. EBIT margin dropped 1.7pp to 19.3% due to operating deleverage. Inventory turnover days rose YoY from 220 days to 248 days. Sportswear segment EBIT surged 64% YoY Sportswear segment revenue rose 16%, driven by ~10% SSSG (ASP growth >5%) and 8% store growth. GM widened by 2.8pp to 44.7% on less discounting due to tight inventory (87 days vs 106 days in 1HFY15). EBIT margin rose from 7.4% to 10.5% on GM expansion and positive operating leverage. Management believes this profit margin level is relatively high and likely temporary in nature. More details to follow after the analyst briefing this morning. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Le Saunda (738 HK, Hold): 1HFY16 results in line 1HFY16 results in line Net profit fell 29% YoY to Rmb55m, in line with the 30% decline suggested by the company s profit warning issued on Sep 8. Core net profit dropped just 19% YoY to Rmb60m. Net cash balance at end-1hfy16 was up 5% to Rmb545m compared to the end of FY15. Payout ratio increased YoY from 53% to 59%. Results highlights Retail revenue increased 1% YoY led by 32% revenue growth in its e- commerce business (which contributed 12% of revenue) but was offset by a 4.2% SSS decline. GM dropped slightly by 0.5pp YoY to 66.4% on increasing promotional activities aimed at clearing inventory. OP declined 18% YoY. OP margin narrowed 2.5pp to 10.9% mainly due to an increase in frontline staff expenses and advertising expenses (A&P expenses ratio +1.6pp to 3.8%). Inventory turnover days for finished goods rose YoY from 241 days to 258 days, mainly due to an increased focus on e-commerce and earlier delivery of next season s products. 85% of finished goods had a stock age of less than 1 year (vs 83% in 1HFY15). More details to follow after the analyst briefing this morning. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Page 6

7 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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