Yum Cha 飲茶. June 27, 2016 TALKING POINT - STOCKS WITH HIGHER EARNINGS VISIBILITY RESEARCH NOTES

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 20,259.1 (2.9) HSCEI 8,530.1 (2.9) Shanghai COMP 2,854.3 (1.3) Shenzhen COMP 1,900.6 (0.8) Gold 1, BDIY Crude Oil, WTI(US$/BBL) 47.2 (1.0) Crude Oil, BRENT(US$/BBL) 48.0 (0.8) HIBOR, 3-M SHIBOR, 3-M RMB/USD DATA RELEASES DUE THIS WEEK Jun 27 Leading Index Jun 28 Westpac-MNI Consumer Sentiment Jun 29 Swift Global Payments CNY Jun 29 BoP Current Account Balance Jun 30 Manufacturing PMI Jun 30 Non-manufacturing PMI Jun 30 Caixin China PMI Mfg Source: Bloomberg TALKING POINT - STOCKS WITH HIGHER EARNINGS VISIBILITY June 27, 2016 Company name Price Market cap 2016E 2017E Dividend Rating PER (x) PBR (x) (HK$) (HK$m) PER (x) PER (x) yield (%) 958 HK Equity Huaneng Renew ables Corp Ltd ,542 BUY HK Equity China Longyuan Pow er Group Corp Ltd ,701 BUY HK Equity Xinyi Solar Holdings Ltd ,179 BUY HK Equity China Water Affairs Group Ltd ,277 BUY HK Equity CSPC Pharmaceutical Group Ltd ,540 BUY HK Equity China Medical System Holdings Ltd ,957 BUY HK Equity China State Construction International ,163 BUY HK Equity China Maple Leaf Educational Systems Ltd ,015 BUY HK Equity PCCW Ltd ,143 NR HK Equity LINK REIT ,036 NR The surprising win of the Leave camp in the Brexit referendum last Friday led to huge market volatility. As the future of the European Union remains highly uncertain in the near term, we have prepared a list of stocks under our coverage with higher earnings visibility for investors reference. The list includes stocks for the renewables, water utilities, pharmaceuticals, construction and education sectors. We also include two stocks without any track record of cutting regular DPS in the past five years. PCCW (0008.HK) is offering >5% dividend yield, and LINK REIT (0823.HK) is offering >4% yield. Both stocks have been largely range-bound recently because of concerns about the US rate hike. However, the market turmoil last week should largely lower the possibility of a rate hike in Q3, and investors are likely to revisit yield plays in a volatile market, in our view. In addition, both companies collect most of their revenue in HKD, which is free from the risk of RMB depreciation. RESEARCH NOTES Sources: Bloomberg, CGIS Research Analyst: Wong Chi-man, CFA SHUN TAK [0242.HK; HK$2.40; NOT RATED]- We believe the Company s core earnings in 2016 and 2017 will be unexciting because of limited revenue booking from its property business and the lower indirect dividend from SJM (0880.HK). However, there will be a substantial jump in profit in 2018 with revenue booking from Macau Nova City Phase 5 (we estimate potential attributable pre-tax profit to Shun Tak is about HK$6.5bn (89% of its current market cap)) and the one-off pre-tax profit of HK$1.3bn from the transaction with the Abu Dhabi Investment Authority (ADIA). With a net cash position of HK$3.48bn (47.6% of total market cap) and a PBR of 0.28x (Note: NAV per share is about HK$10 based on street estimates), the Company is clearly undervalued on an absolute basis and its historical trading range. Given the lacklustre earnings outlook in 2016 and 2017, further cooperation with the ADIA or other reputable partners in investment projects will be the key to drawing more attention from investors and triggering a re-rating. CHINA CEMENT WEEKLY Last week the average cement price (nationwide) declined 0.45% week-on-week to RMB /tonne. Cement prices in part of east China dropped RMB10-20/tonne, owing to weaker execution of production limits in the Yangtze River Delta region. Market demand was still weak in mid-june, led by multi-factors such as rainfall, national college/high school entrance exams (suspension of some construction works to reduce noise levels) and the peak of the harvest season. Daily shipment volume was around 50%-70% in most areas, except in Guangdong and Guangxi, where it was around 80%. Average inventory level (nationwide) was still at 70.56%.

2 June 27, 2016 Company background. Shun Tak Holdings, which was listed on the main board in 1973, is a conglomerate with businesses including property, transportation, hospitality and investment. Most of its revenue comes from Macau and Hong Kong. The Ho family controls the Company with a combined 58.2% stake. Recap of the transaction with the Abu Dhabi Investment Authority (ADIA). Last Wednesday, Shun Tak announced that it will sell a 50% stake in the Nova City Phase 5 shopping centre (under development) to the ADIA for a total consideration of HK$3.2bn. It is located in Taipa, Macau and has a GFA of 655,000 sq. ft. Shun Tak will collect net proceeds of about HK$3bn and book a pre-tax profit of HK$1.3bn (17.8% of its market cap). Potential for more cooperation with the ADIA. In our discussion with Shun Tak, we learned that one of the goals of the Nova City Phase 5 shopping centre deal with the ADIA was to form a strategic partner relationship. It was not a one-off transaction for short-term capital gains. The Company sees the potential to work with the ADIA because of the latter s investment experience in a wide range of sectors and regions. However, no details have been provided yet. No decision on a special dividend. Since the payment from the ADIA will be settled by installments, with the last payment expected to be settled in Q4 2018, the Company has not made a decision on the payment of a special dividend. The pre-tax disposal gain of about HK$1.3bn will be booked when the deal is fully completed. Property profit to see strong recovery in The Company s revenue from its property business dropped 85% year-on-year (YoY) to HK$869m in 2015 because of very limited booking of property sales. It expects the revenue booking this year to remain relatively low as sales are expected to come mainly from the Chung Hom Kok Collection, a relatively small luxury residential project with a salable GFA of about 26,000 sq.ft (five houses in total). It plans to sell two units this year; we understand the market price of nearby houses is about HK$50,000-80,000/sq. ft. Property revenue should pick up mildly in 2017 from sales of about 100 units of Nova City Phase 4 (ASP about HK$11,500/sq. ft with average unit size of >1,000 sq.ft. In 2018, revenue booking is likely to be much stronger thanks to Nova City Phase 5 (under development) with a GFA of 2.3m sq. ft. The ASP of nearby projects is about HK$8,000/sq. ft. now. This implies the total revenue of the project may reach about HK$18bn (71% of which is attributable to Shun Tak). We estimate potential attributable pre-tax profit to Shun Tak is about HK$6.5bn (89% of its current market cap). SHUN TAK (0242.HK; NOT-RATED) (HK$) Jun15 Aug15 Oct15 Dec15 Feb16 Apr16 Jun16 Turnover (RHS) Price (LHS) Market Cap: US$941m; Free Float: 37.3% Source: Bloomberg Other promising projects but time required to realize value. Shun Tak owns a 24% stake in Beijing Tongzhou Integrated Development (residential, office and serviced apartments) Phase 1 (GFA: 334,000 m 2 ) and a 19.35% stake in Phase 2 (GFA: 300,000 m 2 ). The projects, which are expected to be completed in 2018, will benefit from the authorities decision to pick Tongzhou to share some of the functions of the Beijing municipal government. According to press reports, the ASP for residential housing in Tongzhou reached RMB35,000/m 2 in May. Another key project is the 70%- owned Hengqin Integrated Development (office, serviced apartments, hotel, commercial) (GFA: 131,000 m 2 ) near Macau. The expected completion date is About 75% of the GFA will be reserved for leasing. In the medium term, the Company intends to increase its revenue contribution from rental income. (more on next page) (HK$ million) HK$ E 2017E Revenue (m) 9,151 4,116 4,762 5,034 COGS (m) (4,670) (1,495) n.a. n.a. Gross profit (m) 4,482 2,621 n.a. n.a. Gross margin (%) n.a. n.a. EBIT (m) 3, ,315 1,899 Net profit (m) 4, Net margin (%) Core net profit 2, EPS ROE (%) Dividend yield (%) PER (x) PBR (x)

3 Transportation business to remain resilient thanks to low oil prices. Although TurboJET s flagship Hong Kong-Macau ferry routes reported a 2% decline in total passenger throughput (14m) last year, adjusted segment profit still grew 218% YoY to HK$321m as a result of lower fuel costs. As oil prices remain at a relatively low level this year, we expect the transportation business to continue to report earnings growth in 2016, despite lower passenger numbers. Outlook for hospitality business to remain challenging but limited impact on overall performance. The weakness of the Macau tourism industry has adversely affected the Company s hotel business. The occupancy rate for the Mandarin Oriental, Macau remains at a relatively low level. The Hong Kong SkyCity Marriott Hotel also faced some pressure on room rates, but was still able to keep its occupancy rate over 80%. Any further impact on the Company s financial performance should be limited, as this segment accounted for only 4.7% of the total adjusted segment profit in Investment segment to remain unexciting because of the indirect link with SJM (0880.HK). Shun Tak owns an effective interest in STDM of about 11.5%, which in turn has a 54.13% stake in SJM. The performance of this segment largely reflects the dividend paid by SJM in the previous financial year. As the dividend declared by SJM in 2015 dropped about 70% YoY, it will inevitably affect the dividend to be collected by Shun Tak this year. Unexciting core earnings before 2018 but deeply undervalued; more corporate action will be the key to triggering a rerating. We believe the Company s core earnings in 2016 and 2017 will remain unexciting because of limited revenue booking from its property business and the lower indirect dividend from SJM. However, there will be a substantial jump in profit in 2018 with revenue booking from Macau Nova City Phase 5 and the one-off pre-tax profit of HK$1.3bn from the transaction with the ADIA. With a net cash position of HK$3.48bn (47.6% of total market cap) and a PBR of 0.28x (Note: NAV per share is about HK$10 based on street estimates), the Company is clearly undervalued on an absolute basis and its historical trading range. Given the lackluster earnings outlook in 2016 and 2017, further cooperation with the ADIA or other reputable partners in investment projects will be the key to drawing more attention from investors and triggering a re-rating. Figure 1: PBR of Shun Tak 0.277x Sources: Capital IQ, CGIS Research

4 Figure 2: 2015 results highlights Y/E Dec 31 (HK$'000) YoY change Revenues Turnover 9,538,561 4,405, % Property 5,909, , % Transportation 2,437,768 2,406, % Hospitality 772, , % Investment 418, , % Other Income 257, , % Total Revenues 9,795,759 4,695, % Expenses Cost of Inventories Sold and Services Provided (4,669,794) (1,494,894) -68.0% Staff Cost (1,234,493) (1,288,973) 4.4% Other Operating Costs (528,003) (636,183) 20.5% Other Gain/(Loss), Net 22,713 23, % Depreciation and Amortization (155,387) (153,820) -1.0% Fair Value Changes on Investment Properties 941, , % Share of Results of Associates 50,801 (43,753) % Share of Results of Joint Ventures 1,581, , % Finance Costs (135,408) (170,089) 25.6% Earnings before Taxes 5,668,832 1,311, % Taxes and Other Expenses Provision for Income Tax (404,999) (138,371) -65.8% Minority Interest (After Tax) (810,924) (428,297) -47.2% Net Income (Loss) 4,452, , % Core net profit 2,577, , % Adjusted segment profit Property 2,809, , % Transportation 101, , % Hospitality 93,000 56, % Investment 385, , % Supplementary Info (HK$) Basic EPS - Continuing Operations % Diluted EPS - Continuing Operations % Sources: Company, CGIS Research

5 Figure 3a: Schedule of major properties Sources: Company, CGIS Research

6 Figure 3b: Schedule of major properties Sources: Company, CGIS Research

7 Figure 3c: Schedule of major properties Sources: Company, CGIS Research

8 Figure 3d: Schedule of major properties Sources: Company, CGIS Research

9 China Cement Weekly June 27, 2016 Rainfall and Harvest Season Continued to Cap Cement Price Upside; Asia Cement Intends to Increase Stake in Shanshui Cement China Cement Sector Cement prices down 0.45% week-on-week as result of continuing rainfall. Last week the average cement price (nationwide) declined 0.45% week-on-week to RMB /tonne. Cement prices in part of east China dropped RMB10-20/tonne, owing to weaker execution of production limits in the Yangtze River Delta region. Market demand was still weak in mid-june, led by multi-factors such as rainfall, national college/high school entrance exams (suspension of some construction works to reduce noise levels) and the peak of the harvest season. Daily shipment volume was around 50%-70% in most areas, except in Guangdong and Guangxi, where it was around 80%. Average inventory level (nationwide) was still at 70.56%. Coal prices stable since early June. The comprehensive average price index for Bohai-Rim Steam Coal (Q5500K) remained at RMB400/tonne last week. The index was 4.0% lower on a year-on-year basis. Asia Cement still intends to increase its stake in Shanshui Cement. The board of directors of China Shanshui Cement [0691.HK] approved a proposal to restore the public float earlier this month, involving an open offer on the basis of four new shares for each existing share, in combination with a placement of new/existing shares to raise about HK$4bn to settle the outstanding debt of the Company, including any outstanding amount for the 2020 Notes. In addition to its major shareholder Tianrui (International) Holding Company s indication of interest in underwriting the rights issue, Asia Cement [1102.TT] revealed its intention this week to increase its stake once trading resumes. As the application for the construction of new clinker production lines has been suspended in China, acquisition is the only way to expand a company s cement business, according to the chairman of Asia Cement. Management of Shanshui Cement intends to resume trading three months from now, according to press reports. Cement stocks under coverage down 0.5% on average. Overall market performance was volatile last week amid concerns of Brexit. Best performer CR Cement [1313.HK; HOLD] was up 1.7%. BBMG[2009.HK;BUY] was the weakest among our coverage stocks, falling 2.1%. Valuation Table Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Livy Lyu Research Assistant (852) livylyu@chinastock.com.hk Sources: Company, Bloomberg, CGIS Research estimates PER (x) PBR (x) EV/EBITDA(x) Net debt/equity (%) Company Ticker Rating Price (HK$) Market cap (US$m) E 2017E E 2017E E 2017E 2016E Anhui Conch 914 HK Equity BUY , CNBM 3323 HK Equity HOLD , BBMG 2009 HK Equity BUY , CR Cement 1313 HK Equity HOLD , Simple average Weighted average EPS Growth (%) E PEG(x) ROE (%) Dividend yield (%) Company Ticker 2016E 2017E CAGR (%) 2016E E 2017E E 2017E Anhui Conch 914 HK Equity CNBM 3323 HK Equity CR Cement 1313 HK Equity (28.0) (0.1) (15.2) (0.5) BBMG 2009 HK Equity Simple average Weighted average

10 Peer Comparison Market cap PER (x) PBR (x) EV/EBITDA(x) Company Ticker Rating Price (LC) (US$m) E 2017E E 2017E E 2017E Anhui Conch 914 HK Equity BUY , CNBM 3323 HK Equity HOLD , BBMG 2009 HK Equity BUY , CR Cement 1313 HK Equity HOLD , TCC International 1136 HK Equity NR China National Materials 1893 HK Equity NR Asia Cement 743 HK Equity NR West China Cement 2233 HK Equity NR , Tianrui Cement 1252 HK Equity NR n.a. n.a n.a. n.a n.a. n.a. Simple average Weighted average Sources: Bloomberg, CGIS Research 1-Year Relative Performance Sources: Capital IQ, CGIS Research

11 Figure 1: Regional Cement Price Sources: Digital Cement, CGIS Research

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