Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Apr 24, 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 China Mfg PMI 30-Apr APR China Non-Mfg PMI 30-Apr APR US Data Date Period Prior Cons Dur Goods New Ord 24-Apr MAR Markit US Serv PMI 27-Apr APR P SPCS Composite Apr FEB GDP QoQ 29-Apr 1Q A Pending Home Sales 29-Apr MAR Initial Jobless Claims 30-Apr Cont Jobless Claims 30-Apr Source: Bloomberg GF events Date Event Location 24 Apr GF A-share strategist NDR Hong Kong Apr Ningbo property market survey Ningbo 7 May Q-Tech NDR Hong Kong Source: GF Securities (HK) A-Share Market Information Technology: Import substitution a key trend as government strengthens information security The Chinese government has issued a number of laws and regulations regarding information security over the past year, speeding up the development of relevant domestic infrastructure and the substitution of imported products. We expect to see higher-level policy issuance and import substitution in a wider scope of industries this year. Among the three key trends that we see, we believe leading companies achieving faster growth by carrying out import substitution and companies boosting their upside by cooperating with other companies along the industry chain are more likely to materialize. Sany Heavy Industry ( CH): Company internationalization to speed up on Silk Road development Earnings weakness in 2014 continued into 1Q15 due to this year s relatively late CNY. However, we expect sector demand to recover from 2Q15 onwards given the government s push for stronger infrastructure development through the promotion of PPP projects. The structure of Sany s business presence is highly in line with the geographical layout of the Silk Road strategy, meaning the company will benefit considerably. We are also positive on the company given its active participation in the finance industry and its emphasis on smart manufacturing development. Lu Zhou Lao Jiao ( CH): 1Q15 earnings slightly miss; full-year recovery expected 1Q15 earnings came in slightly below expectations. That said, the low comparable base in 2H14 means that 3-4Q15 will be the main driver of this year s earnings growth. Given a healthy inventory level at present and a recovery in demand following a price cut, we expect National Cellar 1573 to maintain strong full-year sales growth this year. Destocking of tequ liquor went smoothly in 1Q15, and we expect the sales volume of the company s mid-end products to continue to strengthen going forward. Hong Kong Market Shenzhen Investment (604 HK, Buy): Impressive project sales recovery; raise TP to HK$5.10 Contract sales at UpperHills, a high-end residential project in Shenzhen, rose 50% QoQ in 1Q15. The project is the only high-end luxury residential property complex in the CBD of Futian District in Shenzhen. Another Shenzhen-based project, Tanglang City, will be launched in May. We expect the company to benefit most from a rising property ASP in Shenzhen, where it has 70% of its properties. Given the rapidly rising property prices in the city and the company s better-than-expected contract sales, we raise our TP from HK$4.10 to HK$5.10. Great Wall Motor (2333 HK, NR): GWM and VW cooperation unlikely It has been reported that Great Wall Motor and Volkswagen are negotiating cooperation in vehicle production, which would be focused on low-priced models. We believe cooperation is unlikely as VW has already partnered with FAW and SAIC. GWM is shifting its production focus towards higher-end vehicles, meaning budget vehicles are not in line with management strategy so it is unlikely to want the technology on offer from VW. GWM has seen strong performance in both sales volume and profit in 1Q15. TCL Comm (2618 HK, Buy): 1Q15 results miss expectations 1Q15 net profit of HK$185m was 17% below Bloomberg consensus of HK$224m (GF estimate: HK$193m). Management has highlighted that 1Q is the typical low season, and reiterated its fullyear target of 30% sales growth. We support this argument for the moment given that 4Q14 earnings was twice the 1Q14 amount. The stock has risen 30% YTD, and it might come under some shortterm pressure today as a result of the 1Q15 earnings disappointment. However, we believe its valuation is undemanding under current market conditions, and suggest buying on dips. 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) Biostime (1112 HK, NR): Positive on Mama 100 platform monetization The number of Mama 100 members picked up 16.6% YoY and 22.4% YTD to a new high at end- Mar. We have a positive view on the company. We believe external investors, which the company is actively seeking, will probably require a spin-off listing of Mama 100 in the future. Based on Biostime s track record, its management has been innovative with strong execution power, and its sales force is competitive among domestic competitors. We are upbeat about its monetization of the Mama 100 platform. Kingdee (268 HK, Buy): Positive on the cooperation with Amazon Kingdee announced that it has entered into a global strategic cooperation agreement with Amazon (Amazon Web Services) in its cloud ERP business. This should allow Kingdee to expand its cloud ERP business to large e-commerce customers and share in the rapid development of cross-border e-commerce. It will also obtain strong support from Amazon in infrastructure services and product development. We see strong re-rating potential for Kingdee, and forecast a solid net profit CAGR of 30% in FY Maintain Buy. ChinaSoft (354 HK, Buy): Stake sale by Hony Capital a good opportunity to accumulate ChinaSoft announced that its major Shareholder, Hony Capital, has sold all of its 17.9% stake. We do not expect the sale to impact investor confidence in ChinaSoft given the reasonable discount (10.07%) and high subscription rate (2.2x over subscribed). In addition, the placement means the CEO finally becomes the largest shareholder, an improvement to its shareholder structure. The stock is trading at 23x FY15E P/E, still very attractive compared to over 50x FY15E P/E for its A-share peers Neusoft and Taiji Computer. Page 2

3 Information Technology: Import substitution a key trend as government strengthens information security Government emphasis on information security driving import substitution The Chinese government has issued a number of laws and regulations regarding information security over the past year, speeding up the development of relevant domestic infrastructure and the substitution of imported products with Chinese-made ones. We expect more policy measures and detailed rules to be introduced by even higher-level government agencies this year. It is worth noting that the banking sector currently has one of the most detailed and practicable plans in terms of information security development, and we believe the import substitution of IT products will be carried out in a wider scope of industries this year. Going forward, we see three key trends regarding import substitution in the field of information technology. First, industry leading companies will take the lead in pushing import substitution in specific subsectors, and will see faster growth as industry consolidation continues and as the government offers stronger policy support. Such industry leaders include Westone Information ( CH), Venustech ( CH), Langchao Electronic Information ( CH) and Tongtech ( CH). Second, effective cooperation between companies along the industry chain, such as that between Dell and China Electronics Corporation, will help raise companies growth upside. Lastly, the introduction of overseas technologies in areas where China is relatively weak will help improve domestic companies profitability. An example is IBM s cooperation with Chinese players in terms of hardware development. We believe the first two forms of development might receive greater support from the government and offer more promising prospects. Top picks We favor market leaders with a well-defined position on the industry chain such as Westone Information ( CH), Tongtech ( CH), Langchao Electronic Information ( CH), Dawning Information ( CH), Venustech ( CH) and NSFocus Information Technology ( CH). We also like companies with strong innovation capabilities and the ability to improve their business models through cooperation with domestic and overseas players, such as GBase, China National Software & Service ( CH) and isoft Infrastructure Software which is subordinate to the China Electronics Technology Group. Sany Heavy Industry ( CH): Company internationalization to speed up on Silk Road development Sector demand to pick up from 2Q15 1Q15 revenue dropped 37.8% YoY to Rmb6.28bn (2014: % YoY) with net profit plunging 96.18% YoY to Rmb31.57m (2014: % YoY). Earnings weakness in 2014 continued into 1Q15 as a result of this year s relatively late CNY which led to later-than-usual project resumption. That said, we expect sector demand to recover from 2Q15 onwards given the government s push for stronger infrastructure development through the promotion of PPP projects. Silk Road strategy driving internationalization Experience from overseas peers suggests that major opportunities for the construction machinery sector typically come from exports. As such, the current Silk Road initiative should accelerate the internationalization process of the domestic construction machinery industry. In particular, the structure of Sany s business presence is highly in line with the geographical layout of the Silk Road strategy, meaning the company will benefit considerably from the initiative. Company actively seeking business diversification & upgrade In addition, we are also positive on the company given its active participation in the finance industry in an attempt to find new growth drivers as well as the high level of attention it has attached to smart manufacturing development. We have a positive outlook on the company and forecast 2015/16/17 EPS of Rmb0.13/0.19/0.31. Page 3

4 Lu Zhou Lao Jiao ( CH): 1Q15 earnings slightly miss; full-year recovery expected 1Q15 earnings slightly miss expectations The company reported net profit of Rmb540m (+9.59% YoY) in 1Q15 on revenue of Rmb1.9bn (+21.99% YoY), with EPS of Rmb0.39 slightly below expectations. The low comparable base in 2H14 means that 3-4Q15 will be the main driver of this year s earnings growth. The company s GPM picked up 0.77pp YoY to 57.32% in 1Q15, while its expense ratio also rose 3.69pp YoY. National Cellar 1573 to maintain strong sales growth We estimate that tonnes of National Cellar 1573 were sold in 2014, bringing in Rmb m of revenue. After lowering its product prices last year, the company has focused on clearing out inventories and has maintained relatively low supply to distributors. Given a healthy inventory level at present and a recovery in demand following the price cut, we expect National Cellar 1573 to maintain strong full-year sales growth, with its sales volume potentially reaching 2,000 tonnes this year. Mid-end liquor destocking smoothly under way The company saw significant inventory pressure for its vintage and tequ liquor last year. That said, destocking of tequ liquor went smoothly in 1Q15, and we expect the sales volume of the company s mid-end products to continue to strengthen going forward. We remain positive on the company and forecast 2015/16/17 EPS of Rmb 1.32/1.52/1.72. Shenzhen Investment (604 HK, Buy): Impressive project sales recovery; raise TP to HK$5.10 What's new? According to the company, UpperHills, a high-end residential project in Shenzhen, booked contract sales of over Rmb330m in 1Q15, up 50% QoQ. From March to April 19, 2015, over 60 units were subscribed, with a subscription amount of Rmb1.0bn. UpperHills is the only high-end luxury residential property complex in the CBD of Futian District in Shenzhen. Another project being launched in May The company has a total saleable properties value of Rmb28bn for 2015, 70% of which is in Shenzhen. Another Shenzhen-based project, Tanglang City, will be launched in May, with total GFA of 0.26m sqm. In the first batch, 50k sqm will be launched for sale, with unit areas ranging from 85 sqm to 140 sqm. Maintain Buy We expect the company to benefit most from a rising property ASP in Shenzhen, given its 2m sqm premium land bank in the city. We upgraded the stock from Hold to Buy on Mar 30, 2015, with a new target price of HK$4.10. The share price risen 53% since then and is now approaching our target price. Given the fast-rising property ASP in Shenzhen and its better-thanexpected contract sales performance, we raise our target price from HK$4.10 (equal to 0.8x 2015E NBV) to HK$5.10 (equal to 1.0x 2015E NBV). (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Great Wall Motor (2333 HK, NR): GWM and VW cooperation unlikely What s new? It has been reported that Great Wall Motor and Volkswagen are negotiating cooperation in vehicle production, which would be focused on low-priced models. Part of the negotiations is the equity stake that VW would take in GWM. The stock was up 9% at one point yesterday, mainly on the back of this news. Chance of cooperation very low According to NDRC guidelines, a foreign auto company can cooperate with no more than two domestic auto manufacturers to produce vehicles of the same segment in China. We believe VW is therefore unlikely to cooperate with GWM for PV production as it has already partnered with FAW and SAIC to produce JV-branded PVs. However, when a foreign company with a Chinese partner acquires a Chinese auto company, the acquired company does not come under this regulation. But even under this scenario, GWM is still unlikely to be acquired by VW with its Chinese partners as GWM is 56% owned by its chairman, Wei Jianjun, who wishes to develop GWM into a world-class auto company. As VW wishes to produce budget vehicles for emerging markets, it may go ahead with an acquisition through a different Chinese manufacturer that can provide a cost advantage. Budget vehicle development not the focus for GWM The company is shifting its production focus towards higher-end vehicles, meaning budget vehicles are not in line with management strategy so Page 4

5 it is unlikely to want the technology on offer from VW. This news has stemmed from the two companies communications and site visits earlier this year. VW wanted to learn about cost control from GWM for its development in emerging markets while GWM wanted to gain corporate experience. Satisfactory 1Q15 sales and revenue growth GWM has seen strong performance in both sales volume and profit in 1Q15. The company has posted six consecutive months of steady YoY sales volume growth, up 14.1% YoY on average since 3Q14. In particular, GWM s SUVs have seen average monthly growth of 49.0% YoY. The 1Q15 results put the company 3.9% ahead of where it should be to meet its annual sales target of 850,000 units. Net profit for this year so far are looking good on the back of this sales growth. (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 ) TCL Comm (2618 HK, Buy): 1Q15 results miss expectations What's new? TCL Comm reported 1Q15 net profit of HK$185m (+5% YoY), which was 17% below Bloomberg consensus of HK$224m (GF estimate: HK$193m). No need to panic; management reiterates 2015 sales target 1Q15 sales grew 21% YoY, driven by both volume growth (1Q15 handset shipment up 16% YoY to 15.8m units) and ASP improvement (1Q15 ASP up 4% YoY to US$54.3). Management has highlighted that 1Q is the typical low season, and reiterated its full-year target of 30% sales growth. We support this argument for the moment given that 4Q14 earnings was twice the 1Q14 amount. Margin stable Despite a lower sales volume in the low-season quarter, 1Q15 gross profit margin remained largely stable on a QoQ basis, standing at 19.1%, compared with 19.2% in 4Q14. Valuation undemanding, buy on dips The stock has risen 30% YTD, and it might come under some short-term pressure today as a result of the 1Q15 earnings disappointment. However, we believe its valuation is undemanding under current market conditions. The stock is trading at 8.6x 2015E P/E based on Bloomberg consensus. We suggest buying on dips. (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) Biostime (1112 HK, NR): Positive on Mama 100 platform monetization What s new? The number of Mama 100 members picked up 16.6% YoY and 22.4% YTD to a new high of 2,240,337 at end-mar. In addition, sales channel expansion has accelerated as the number of the company s retail outlets increased 70.2% YoY to 37,983. We recently had a conference call with the company regarding the monetization of its Mama100 platform. Below are our key takeaways. A plan to separate the platform from Biostime in terms of operations, personnel and equity ownership is being considered. Biostime s current e-commerce model is highly reliant on its members, and is not as open as other online-shopping platforms as the company seeks to boost the sales of its own products. As a result, major infant formula competitors are not willing to sell their products on this platform. We believe the planned separation is mainly aimed at solving the potential conflicts between Biostime and competitors, and making it an open and independent online platform. External financing expected to finish within this year A-round financing will be conducted among the company s employees, with B-round targeting external investors. The company s current strategy is to strengthen its GMV, increase its revenue and achieve operating income, which is crucial for external financing and future development. Offline business expansion should provide logistics and distribution support for its O2O development, although revenue per offline outlet is declining. Given substantial logistic investments by main e-commerce players such as Jingdong, Suning and Jumei, Biostime is likely to continue its offline expansion. Page 5

6 Competition limited Given the smaller size of its competitors, Biostime is confident in its future development with its large client base, interaction with its members and professional experience in branding. Our view We have a positive view on the company. We believe external investors, which the company is actively seeking, will probably require a spin-off listing of Mama 100 in the future. Based on Biostime s track record, its management has been innovative with strong execution power, and its sales force is strong among domestic competitors. We are upbeat about its monetization of the Mama 100 platform. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Yang Ke, Research Analyst, SFC CE No. BEZ121, yangke@gfgroup.com.hk ) Kingdee (268 HK, Buy): Positive on the cooperation with Amazon What s new? Kingdee announced that it has entered into a global strategic cooperation agreement with Amazon (Amazon Web Services) in its cloud ERP business. Amazon (AWS) is the world s leading cloud service provider, focusing on PaaS (platform as a service) products, including cloudbased storage, networking, and databases. The company and Amazon AWS will cooperate in ERP cloud service business transformation, product development, automated operation and maintenance, international market services, personnel development, and other areas. Through its association with the global services of Amazon (AWS), Kingdee could help Chinese companies expand their cross-border e-commerce business. Strong positive for Kingdee Benefiting from the cooperation, Kingdee could: 1) expand its cloud ERP business to large e-commerce customers and share in the rapid development of cross-border e-commerce business; 2) obtain strong support from Amazon (AWS) in infrastructure services and product development; 3) gain a prominent advocate of Kingdee s cloud ERP service capabilities. Maintain Buy We are positive on Kingdee given the strong re-rating potential from its rapidly growing cloud services business, heathy growth in its traditional ERP business as well as the benefits from the likely disposal of the Beijing software park. We expect a solid CAGR of 30% in its non-gaap net profit during FY Stripping out its property items (with a 40% discount) and net cash, its core ERP business is valued at 23x FY15E P/E. We believe this current valuation is very attractive, compared to its A-share listed peer Yonyou ( CH). (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk ) ChinaSoft (354 HK, Buy): Stake sale by Hony Capital a good opportunity to accumulate What s new? ChinaSoft announced that its major Shareholder, Hony Capital, has sold all of its 17.9% stake. The company sold the shares at HK$3.93 per share, a 10.07% discount to Wednesday s closing price of HK$4.37. The buyers were large insurance funds, mutual funds, and global asset managers, many from mainland China. Following the placement, the CEO, Chen Yuhong, is now the company s largest shareholder. The placement was said to be 2.2x over subscribed. Good opportunity to accumulate Hony Capital became ChinaSoft s biggest shareholder in We do not expect the sale to impact investor confidence in ChinaSoft given the reasonable discount and high subscription rate. In addition, the placement means the CEO finally becomes the largest shareholder, an improvement to its shareholder structure. We expect the company to benefit from its strengthening cooperation with IT giants including Huawei, Tencent, AliCloud, China Mobile and Microsoft. It is also well positioned in emerging businesses such as cloud computing, mobile internet and internet finance. It has seen encouraging progress in the promotion of its JointForce platform, which may mean further re-rating potential. The stock is trading at 23x FY15E P/E, still very attractive compared to over 50x FY15E P/E for its A-share peers Neusoft ( CH) and Taiji computer ( CH). (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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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