Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. May 27, 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 Mfg PMI 31-May MAY F China Mfg PMI 31-May MAY China Non-Mfg PMI 31-May MAY HSBC China Serv PMI 2-Jun MAY HSBC China Comp PMI 2-Jun MAY US Data Date Period Prior Cons Initial Jobless Claims 28-May 23-May Cont Jobless Claims 28-May 16-May Pending Home Sales 28-May APR Q GDP 29-May 1Q S Markit US Mfg PMI 1-Jun MAY F ISM Mfg PMI 1-Jun MAY Source: Bloomberg GF events Date Event Location May Sany Heavy Ind co. visit Beijing 27 May Do-Fluoride investor meeting Jiaozuo 28 May Jianghuai Auto investor meeting - 28 May Hengshun Vinegar co. visit Zhenjiang 29 May Eternal Asia investor meeting Shenzhen 29 May Fulin Precision investor meeting Mianyang Source: GF Securities (HK) A-Share Market Auto: PV sales growth easing, decline in commercial vehicles narrowing Overall auto sales volume slid 0.5% YoY in Apr, with the number of sedans, MPVs & SUVs sold rising 5.5% YoY and commercial vehicles sold dropping 17.6% YoY. In addition to the natural gas to diesel price ratio, we highlight local government policies and potential gas usage subsidies as key factors that might affect auto demand going forward. Amid stable sector fundamentals and cheap relative valuations, we believe accelerated sector M&A driven by the Made in China 2025 plan will lead to sector re-ratings. Marine Engineering: Valuations relatively low among sectors covered by Made in China 2025 Among the ten key areas supported by the recently issued Made in China 2025 plan, marine engineering is less noticed by the market at present, and we expect leading companies to demonstrate share price strength on favorable market conditions, company efforts and government support. We expect oil prices to climb further to ~US$80/barrel on supply-demand rebalancing, moving in a range which oil & gas mining is most sensitive to. We have a positive outlook on Chinese equipment exports given currently low oil prices, policy support and funding support. Hong Kong Market Insurance: Remain positive on the China life insurance sector The State Council has this month decided to carry out a pilot of a personal income tax deductible policy for commercial health insurance, which we calculate will lead to added premium income of Rmb bn for the insurance industry, assuming 10-30% participation in health insurance. This year, the Shanghai municipal government formally issued an implementation scheme to carry out a pilot pension program within the Shanghai FTA. We recommend China Taiping, which we believe is still undervalued. Belle (1880 HK, Buy): FY15 results beat FY15 net profit rose 8% YoY to Rmb4,764m, 6% and 4% above consensus and our estimate, respectively, mainly due to a better-than-expected EBIT margin, especially in its sportswear and apparel segment. Footwear segment revenue +3% YoY led by 7% store growth but partly offset by 4% SSS decline. Strong profit growth in sportswear and apparel was fueled by 25% revenue growth and 2.2pp EBIT margin expansion to 7.1%. Average inventory turnover days fell from 156 days in FY14 to 139 days in FY15. CSPC Pharma (1093 HK, Buy): 1Q15 net profit up 53% YoY; maintain Buy 1Q15 revenue rose 8% YoY; gross margin was up 680bps YoY to 44.5% on increased sales of innovative drugs; net profit rose 53% YoY. Finished Drugs achieved revenue of HK$1.86bn and operating profit of HK$468m. Antibiotics achieved revenue of HK$469m and operating profit of HK$61.5m; its Vitamin C segment achieved revenue of HK$289m and an operating loss of HK$24m. We believe the company has delivered solid results again thanks to its effective management incentive program. Maintain Buy and TP of HK$8.20. Ourgame (6899 HK, Buy): 1Q15 adjusted net profit +34% YoY, in line with our expectation 1Q15 revenue rose 77% YoY and adjusted NP climbed 34% YoY. In the long run, we favor the company s mind sports ecosystem strategy, which will provide the company with much higher growth room. We expect the company to see an earnings CAGR of around 37% during FY14-17, mainly driven by strong momentum in mobile games, overseas expansion and the rising contribution from non-gaming businesses embedded in the mind-sports eco-system. Following the 244% rise in share price YTD, the stock is currently trading at 29x FY15E P/E. 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 Auto: PV sales growth easing, decline in commercial vehicles narrowing Mar/Apr data recap Overall auto sales volume slid 0.5% YoY to 2.00m vehicles in Apr, with the number of sedans, MPVs & SUVs sold rising 5.5% YoY to 1.56m and commercial vehicles sold dropping 17.6% YoY to 326,000. The number of sedans, MPVs & SUVs registered for the acquisition of a license plate increased 12.5% YoY to 1.28m vehicles in Mar, with license registration as a proportion of sales volume to auto dealers reaching 80.7%. Among vehicles licensed during 1Q15, German brands accounted for 20.4%, declining the most from 2014 by 3.6pp, while domestic brands represented 31.4%, up 5.4pp from Apr share price performance The auto sector rose 33.8% during Apr, outperforming the CSI 300 by 0.8pp, with the valuations of the auto-making and auto part sectors both up from Mar levels. Apr sales volume breakdown On a breakdown of passenger vehicle sales volume, SUVs and MPVs posted YoY growth of 47.7% and 48.5%, while sedans were down 9.6% YoY; minibus sales volume fell 8.8% YoY. Among commercial vehicles sold, the sales volume of medium & heavy duty trucks dropped 33.2% YoY, while that of light trucks fell 14.9%. Medium & large bus sales volume came down 16.5% YoY. Key sector indices Our index tracking auto-making raw material costs declined 13.6% YoY in Apr though rising 1.9% MoM. The sub-indices for sedans and heavy duty trucks fell 12.7% and 11.2% YoY respectively. The natural gas to diesel price ratio for the 21provinces we track stood at 76.3% in Apr, with 16 of the provinces recording a ratio above 70%. In addition to this ratio, we highlight local government policies and potential gas usage subsidies as key factors that might affect auto demand going forward. Top picks Amid stable sector fundamentals and cheap relative valuations, we believe accelerated sector M&A driven by the Made in China 2025 plan will lead to sector re-ratings. We highlight the following stocks: Listcos from the FAW and Dongfeng families; Other companies expected to be consolidated such as Beiqi Foton Motor ( CH), Jianghuai Automobile ( CH), CNHTC Jinan Truck ( CH) and Shanghai Diesel Engine ( CH); Automakers and auto part companies with cheap valuations such as Great Wall Motor ( CH), SAIC Motor ( CH), HUAYU Automotive Systems ( CH), Beiqi Foton Motor ( CH), Chongqing Changan Automobile ( CH) and Jiangling Motors ( CH); Auto part companies with strong performance that are in line with the Made in China 2025 plan such as Fulin Precision Machining ( CH), Beijing WKW Automotive Parts ( CH), Tianrun Crankshaft ( CH), Yunnei Power ( CH) and Weifu High-Technology ( CH). Auto R&D and service providers such as China Automotive Engineering Research Institute ( CH). Risks include slower-than-expected economic growth, deterioration in sector conditions, and weaker-than-expected policy implementation. Marine Engineering: Valuations relatively low among sectors covered by Made in China 2025 Marine engineering a less noticed area under Made in China 2025 Among the ten key areas supported by the recently issued Made in China 2025 plan, marine engineering is less noticed by the market at present compared with high-end CNC machine tools and industrial robots, advanced rail equipment, and aviation & aerospace equipment. We expect leading marine engineering companies to demonstrate share price strength going forward on the back of favorable market conditions, company efforts and government support. Oil prices to pick up further As a key indicator of offshore oil & gas mining activities, oil prices have rebounded from US$45/barrel to US$60/barrel YTD. We expect oil prices to climb further to around US$80/barrel in the foreseeable future on supply-demand rebalancing, moving in a range which oil & gas mining is most sensitive to. Page 2

3 Positive outlook for equipment exports On May 20 at the opening ceremony of a Chinese equipment manufacturing exhibition in Brazil, Premier Li Keqiang is said to have expressed his appreciation and encouragement for the equipment presented by China Merchants Group. In addition, there have been media reports that Petrobras has entered into agreements with several Chinese banks for the financing of US$10bn in total, with US$3bn coming from an agreement with ICBC Financial Leasing regarding the leasing of marine engineering equipment. China received new orders for marine engineering equipment worth a total of US$14.76bn in 2014, representing the largest global market share of 35.2%. We have a positive outlook on the exports of Chinese marine engineering equipment given currently low oil prices, policy support from the government and funding support from financial institutions. Top picks We particularly like companies which are benefiting from strengthening Chinese equipment exports, have accumulated substantial project experience and are seeing increasing business competitiveness, such as CIMC ( CH) and Offshore Oil Engineering ( CH). Insurance: Remain positive on the China life insurance sector Beneficiary of rising A-share market The CSI 300 index rose 14.64% and 25.88% in 1Q15 and 2Q15 respectively. We expect insurance players to post strong financial results if the booming market continues. Tax deduction on commercial health insurance a positive The State Council has this month decided to carry out a pilot of a personal income tax deductible policy for commercial health insurance. Individuals can deduct maximum annual average expenses of Rmb2,400 to purchase commercial health insurance prior to personal income tax. We estimate the number of taxpayers was around 58 million nationwide in Under the assumption of 10%-30% participation in health insurance, the added premium income will reach Rmb bn for the insurance industry, which accounts for 8.8%-26.3% of total health insurance market volume in This will support the future growth of the commercial insurance industry. Plan for tax-deferred pension insurance This year, the Shanghai municipal government formally issued an implementation scheme to carry out a pilot pension program within the Shanghai FTA. In the US and Japan, the development of life insurance greatly benefited from such supporting insurance policies. Under the 401K, IRAs and other related bills, the proportion of the tax deferred insurance premiums of total life insurance premiums rose from 17% in 1975 to 49% in In Japan, tax deferred insurance premiums remained at a high growth rate of over 20% for 20 years after the tax reform. Recommend China Taiping (966 HK, Buy) While maintaining stable profit margin in the life insurance business, China Taiping s life insurance new business value grew 37% YoY in 2014, higher than all its peers. Its life insurance GWP increased by 25% YoY in the first four months in 2015, also higher than all peers. It is currently trading at 1.93x 2015E P/B, according to Bloomberg consensus. We believe China Taiping is still undervalued and maintain our Buy rating. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Belle (1880 HK, Buy): FY15 results beat FY15 results beat Net profit rose 8% YoY to Rmb4,764m, 6% and 4% above Bloomberg consensus and our estimate, respectively, mainly due to a better-than-expected EBIT margin (15.5% vs our estimate of 15.2%), especially in its sportswear and apparel segment (7.1% vs our estimate of 6.5%). Full-year payout ratio (excluding a special interim dividend) was as expected at 60.2%. Footwear segment EBIT flat Footwear segment revenue +3% YoY led by 7% store growth but partly offset by 4% SSS decline. GM was largely stable at 68.5% (vs 68.8% in FY14) due to stable costs for manufacturing and procurement as well as in promotion. Despite a SSS decline during the period, EBIT margin dropped just 0.7pp to 22.1%, reflecting the company s flexible cost structure. Sportswear and apparel segment EBIT surged 71% The strong profit growth was fueled by 25% revenue growth (~11% SSSG and 9% store growth) and 2.2pp EBIT margin expansion to 7.1%. GM widened by 2.8pp to 42.6% driven by less discounting, more subsidies from brand names and a higher sales mix of new collections. Thanks to rapid network expansion and improvements in operation, Baroque achieved breakeven in China in 2014 for the first time since the set-up of the Page 3

4 JV in The segment s EBIT proportion as a percentage of the company s EBIT rose to 19% (vs 12% in FY14). Footwear inventory level remained healthy Average inventory turnover days fell from 156 days in FY14 to 139 days in FY15. While inventory turnover days for the footwear segment kept at 190 days, inventory turnover days for the sportswear and apparel segment dropped from 129 days to 100 days. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) CSPC Pharma (1093 HK, Buy): 1Q15 net profit up 53% YoY; maintain Buy What s new? 1Q15 revenue rose 8% YoY to HK$2.8bn; gross margin rose by 680bps YoY to 44.5% on increased sales of innovative drugs (up 37% YoY to HK$857m); net profit rose by 53% YoY to HK$400m supported by gross margin expansion; diluted EPS increased 53% YoY to HK$ Finished Drugs achieved revenue of HK$1.86bn and operating profit of HK$468m. Antibiotics achieved revenue of HK$469m and operating profit of HK$61.5m; its Vitamin C segment achieved revenue of HK$289m and an operating loss of HK$24m. Maintain Buy We believe the company has delivered solid results again thanks to its effective management incentive program. The stock is trading at 0.9x PEG, undemanding in our view. We maintain our Buy rating and keep our target price at HK$8.20, equal to 1.0x PEG. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Ourgame (6899 HK, Buy): 1Q15 adjusted net profit +34% YoY, in line with our expectation What s new? Ourgame released its 1Q15 results (in line with our expectation), and held an analyst teleconference after market close on Tues afternoon. 1Q15 adjusted net profit +34% YoY 1Q15 revenue totaled Rmb164m, up 77% YoY and 18% QoQ. Adjusted net profit was Rmb40m, up 34% YoY and 6% QoQ. Gross margin came in at 50.1% in 1Q15, down 16pp YoY and 12pp QoQ, mainly attributable to rising channel costs for its mobile game business. Mobile games in the fast lane Benefiting from continuous efforts in product development, channel optimization and new product launches, the company has seen strong performance in its mobile game business. Mobile games posted 450% YoY and 92% QoQ revenue growth to Rmb95m, accounting for 58% of total 1Q15 revenue, compared to 19% in 1Q14 and 36% in 4Q14. Its PC game business was soft with 9% YoY and 13% QoQ decline in revenue. Thanks to the cooperation with popular mobile device makers such as Xiaomi, Huawei and OPPO, the company further enlarged its mobile user base with mobile MAU increasing by 52% YoY and 24% QoQ to 21.4m. Mobile paying users surged from 0.26m in 1Q14 to 1.5m in 1Q15 with a significant improvement in paying ratio from 1.8% to 7.1% during the period. The mobile version of Texas Hold em, released at the end of last year, started to generate substantial revenue, around Rmb10m in 1Q15. The company indicates mobile paying ratio should see further upside to 8-10% in the next one year. We expect sustainable strong momentum in mobile games underpinned by rapid expansion of its user base and further improvements to monetization efficiency in the next few quarters. Continued progress on mind-sports ecosystem and overseas expansion The company is on track to build out its mind sports eco-system. The third phase of the China Chess and Cards Competition was successfully held in Shanghai in Jan, which attracted 650,000 online entries, and 1,500 contestants for the finals, and was broadcasted in five provincial television channels and 13 internet video sites. Following the acquisition of the exclusive licensing of 15 Asian countries and regions from WPT (World Poker Tour) in Dec 2014, the company announced the schedule of the first overseas WPT event at Jeju Island, Korea in Mar. According to management, the company has already hired new senior management personnel specializing in offline event promotion and video content creation, which will further quicken its progress in executing the overall strategy. With the help of WPT events to be held in regions across Asia, the company plans to duplicate the mature online & offline business model in overseas markets. The English version of Texas Hold em will be launched in June. Management guided that it expects to see overseas revenue contribution as early as 4Q15. Page 4

5 Our view In the long run, we favor the company s mind sports ecosystem strategy, which will provide the company with much higher growth room. We expect the company to see an earnings CAGR of around 37% during FY14-17, mainly driven by strong momentum in mobile games, overseas expansion and the rising contribution from non-gaming businesses embedded in the mindsports eco-system. Following the 244% rise in share price YTD, the stock is currently trading at 29x FY15E P/E. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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. 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