Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 10, 2015

Transcription

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 HSBC TENCENT CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons Ind Prod Cum YoY 12-Aug JUL Ind Prod Mthly YoY 12-Aug JUL FAI Growth 12-Aug JUL Retail Sales YTD 12-Aug JUL Retail Sales Monthly 12-Aug JUL US Data Date Period Prior Cons Initial Jobless Claims 13-Aug 8-Aug Cont Jobless Claims 13-Aug 1-Aug Source: Bloomberg A-Share Market Investment Strategy: Highlight investment themes driven by policies, events or strong business conditions With regard to event and policy catalysts, we continue to like the military equipment and SOE reform themes, both of which are driven by strong short-term catalysts. In addition, the market is highly sensitive to changes in sector business conditions. We believe the current business strength in the agriculture sector will spill over both upstream and downstream, and are particularly positive on the cold chain industry. Apart from hog and cement prices, we believe current lithium price growth is most likely to be sustainable, followed by that in deformed steel bars. Property: Weekly transactions down on seasonality The significant WoW transaction decline last week was due to the current sector low season. However, the mild YoY increase seen in previous weeks has continued into early Aug. We believe the currently favorable policy environment will be sustainable, particularly as the PBoC has repeatedly indicated that it will stick to its monetary policy, supporting expectations for further liquidity easing in 2H15. While property transactions might continue to weaken sequentially in Aug due to the low season, a slight YoY increase should still be seen. Hong Kong Market Investment Strategy: Policy plays in favor again The HK market found support last week; however market turnover continues to decline amid uncertainty. Investors are again turning to policy support names. We continue to recommend a defensive stance in the short term given market uncertainty. Although consumer staples, telecoms and healthcare underperformed the market slightly last week, we retain our positive view on these sectors given this current market condition. Meanwhile, we remain positive on the tech sector given our expectation for more resilient earnings growth in the sector amid an overall macro slowdown environment. ChinaSoft (354 HK, Buy): Analysis of industry data; reiterate Buy Revenue in the Chinese software has slowed, but remains at a healthy level. The software services segment posted more stable growth than the software product segment in 1H15. It was also notable that overall profit improved in 2Q compared to 1Q. We see healthy growth for the domestic software services segment in the next 2-3 years and expect ChinaSoft to continue to outperform peers. We expect around 25% YoY growth in net profit in 1H15. The stock has seen a sharp correction recently. Reiterate Buy with TP of HK$5.32. GF events Date Event Location 12 Aug Linekong post-result meeting Hong Kong Aug Panjiang Ref Coal co. visit Guiyang Aug Tibet-based listco visits Tibet 20 Aug Ourgame post-result NDR Shenzhen 20 Aug GF Financial Eng Annual Forum Dunhuang 21 Aug Tongda post-result meeting Hong Kong 24 Aug ChinaSoft post-result NDR Hong Kong Aug GF 2015 Autumn Investor Forum Hangzhou 28 Aug Kingdee post-result meeting Hong Kong Source: GF Securities (HK) 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 Investment Strategy: Highlight investment themes driven by policies, events or strong business conditions Amid the current market enthusiasm about thematic investment, we prefer investment themes with visible policy, event or business condition catalysts. Event and policy-driven themes With regard to event and policy catalysts, we continue to like the military equipment and SOE reform themes, both of which are driven by strong short-term catalysts. In particular, the China-Russia joint naval exercise during Aug will be worth watching. Furthermore, a national level SOE reform plan is still expected to be rolled out soon with central SOE consolidation also an important trend; we highlight potential consolidations among central SOEs in the auto and non-ferrous sectors. Sector business conditions also a key factor The market is highly sensitive to sector business conditions as a share price driver at present. The agriculture sector has demonstrated strength on significant hog price growth, while cement share prices have picked up on low-season price hikes and expectations of policy stimulus. Lithium and deformed steel bar price growth to be sustainable After looking into industries where product price increases have been seen, we find that in most cases the improvements in supply-demand conditions have been driven by short-term factors while mid/long-term factors such as production capacity remain alarming. Apart from hog and cement price growth which have been mostly priced in, investors have also noticed the recent strength in lithium, viscose staple fibers and deformed steel bar prices. We believe current lithium price growth is most likely to be sustainable, followed by that in deformed steel bars. Watch cold chain amid agriculture strength We believe the current business strength in the agriculture sector will spill over both upstream and downstream. We are particularly positive on the cold chain industry, and suggest watching Dalian Refrigeration ( CH), Yantai Moon ( CH) and Hanbell Precise Machinery ( CH). Separately, we also highlight investment opportunities from the nuclear sector, though it remains unclear whether policy support for the sector might exceed current market expectation. Property: Weekly transactions down on seasonality Transactions down on seasonality Primary area sold in first-tier cities fell 13% WoW last week while second-tier cities tracked posted a drop of 16%, which we believe was due to the current sector low season. However, the mild YoY increase seen in previous weeks has continued into early Aug. On a geographical breakdown, substantial transaction decreases were seen across all three major regions, with the YRD dropping the most by 22% driven by the plunges in Suzhou and Hanghzou; all cities tracked in the PRD and Bohai Rim regions except for Shenzhen and Dalian suffered considerable WoW drops. Inventory index up despite reduced new launches While the pace of new project launches slowed significantly last week, our index tracking property inventories in the 15 large cities picked up significantly, although both Shanghai and Beijing posted a substantial inventory decline. The sell-through rate in the 12 large cities tracked came down considerably mainly due to the weekly transaction weakness. Favorable policy environment to continue Local governments continued to fine tune property policies last week. We believe the currently favorable policy environment will be sustainable, particularly as the PBoC has repeatedly indicated that it will stick to its monetary policy, supporting expectations for further liquidity easing in 2H15. The continuation of a loose policy environment should help maintain stable transactions. While property transactions might continue to weaken sequentially in Aug due to the low season, a slight YoY increase should still be seen. We continue to likely mainstream developers given potential excess returns driven by policy and fundamentals improvements, and also suggest watching SOE reform-related opportunities. Our top picks for the week are Vanke ( CH), Jiangsu Zhongnan Construction ( CH), Lushang Property ( CH), Metro Land ( CH), Jiabao Industry & Commerce ( CH) and Sundy Land Investment ( CH). Page 2

3 Investment Strategy: Policy plays in favor again Market finding support on weak turnover The Hong Kong market found some support last week amid speculation that the Chinese government is preparing more funding to support the market. Both the Shanghai and Shenzhen stock markets found support above the 200-day moving average, and 3,500 seems to be a strong psychological support level for the Shanghai Index so far. However, market turnover continues to decline given the uncertain market outlook and as investors await interim results from leading companies. Investors turning to policy support names Shipping, railway and cement were the main outperformers last week driven mainly by expectations of policy support. While the rising Baltic Index may have helped, the latest news about the establishment of a joint reform group between China COSCO and China Shipping groups raises speculation of SOE reform similar to that previously seen at CRRC Corp (1766 HK, NR). Meanwhile, railway and cement names were buoyed by policy support for infrastructure projects. Likewise, in the A-share market, Tibet-related and new energy vehicle infrastructure plays outperformed significantly. In terms of SOE reform, we believe DFM (489 HK, NR) may benefit from the potential restructuring between its parent Dongfeng Motor Group and First Auto Works, which swapped top management teams earlier this year. Banks and brokerages likely to face pressure Concerns about rising NPLs is likely to dampen any hopes of an improvement in asset quality among Chinese banks. There have been market rumors that outstanding NPLs in the banking sector rose 35.7% YoY to Rmb1.8trn and that the NPL ratio edged up 0.22 percentage points to 1.82% in 1H15. Meanwhile, Chinese brokerages reported weak preliminary results for July, mainly due to the deleveraging-driven decline in market turnover and margin financing balance, while the IPO suspension has also hurt their IB businesses. According to Wind, net profit at 18 A-share-listed brokerages declined 50% MoM in July, in contrast to earlier news saying that 1H15 earnings at 22 A-share brokerages surged 358% YoY. Strong results not sufficient to guarantee good share price performance post results Anta (2020 HK, Buy) kicked off results season for sportswear companies with strong results, leading to analyst upgrades, but profit-taking pressure emerged after short-term share price strength. Investors should be aware of the possibility of an anti-climax after the results announcements from Li Ning (2331 HK, NR), Peak (1968 HK, Buy) and 361 Degrees (1361 HK, NR) this week. In the tech sector, FIH Mobile (2038 HK, Hold), TCL Comm (2618 HK, Buy) and Tencent (700 HK, NR) will report interim results on Aug 12, followed by Lenovo (992 HK, NR), China Mobile (941 HK, NR) and Sunny Optical (2382 HK, Buy). Among these names, FIH Mobile and Sunny Optical could see profit taking pressure given the high expectations for their earnings. Under current market conditions, we believe earnings need to beat market expectation significantly in order to produce a sufficient alpha return. Market outlook We continue to recommend a defensive stance in the short term given market uncertainty. Although consumer staples, telecoms and healthcare underperformed the market slightly last week, we retain our positive view on these sectors given this current market condition. Meanwhile, we remain positive on the tech sector given our expectation for more resilient earnings growth in the sector amid an overall macro slowdown environment. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) ChinaSoft (354 HK, Buy): Analysis of industry data; reiterate Buy Sector growth has slowed, but is still healthy Revenue in the Chinese software sector rose by 17% YoY to Rmb2.02trn in 1H15, down on the 21% YoY growth in the same period last year. The figure means a CAGR of 26% during the last three years. The software sector cannot avoid the impact of the macro-economic slowdown in the short term, but we believe the 17% growth in 1H15 is still healthy compared to overall growth in the electronic information industry. We remain optimistic on the outlook for the software sector given its relatively low proportion (around 27% in FY14) of the overall electronic information industry and the ongoing policy support from the government. More stable growth in the software services segment The software services and software product segment accounted for 47% and 32% of overall software sector revenue in 1H15. The software services segment posted more stable growth of around 17%, compared to 15% growth in the software product segment. Page 3

4 Sector profitability improved in 2Q Profit margin declined slightly by 0.26% to 10.85% in 1H15. However, we see a slight improvement in profitability in 2Q15 compared to 1Q15. ChinaSoft to outperform peers ChinaSoft is a top-tier software service provider in China that has seen sustainable solid revenue growth over the past ten years. The domestic software services segment should see healthy growth in the next 2-3 years. We expect ChinaSoft to continue to outperform peers in the coming two years given: 1) its strong and deepening relationship with big clients including Huawei, Tencent, Alibaba and Microsoft; 2) its established position in emerging areas such as cloud computing, mobile internet, and internet financing; 3) its transformation into an IT service platform model with JointForce should enhance competitiveness and increase room for growth. Reiterate Buy with target price of HK$5.32 One probable catalyst is its acquisition of the remaining 40% stake in a joint venture from Huawei with the issuance of new shares the company is currently in final negotiations with Huawei. Once the deal is completed, the company will see deeper cooperation with Huawei, which will become its shareholder. We expect around 25% YoY growth in net profit in 1H15. The stock is currently valued at 17.6x 2015E P/E, following a sharp share price correction of 31% since the beginning of last month. We reiterate our Buy rating with a target price of HK$5.32. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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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