A-Share Research Notes Summary

Transcription

1 A-Share Research Notes Summary November 21, 2014 (Note: This is selected translation from the Chinese version of A-share morning notes) (1) Household appliances: value stocks: choose high yield stocks; growth stocks: choose kitchen appliances; speculation depends on transformation (P.1) A-Share Market (2) Automobile: We continue to recommend stocks in auto service industry chains and Internet of Vehicles that enjoy high gross margin and are in early development phase. (P.2) (3) Agricultural reclamation system stocks encounter dual inflection points: land reform and state-owned enterprise (SOE) reform --- research report on reform of the agricultural reclamation system (P.4) Household appliances: value stocks: choose high yield stocks; growth stocks: choose kitchen appliances; speculation depends on transformation Since 2014, the investment style of the A-share market has suppressed the valuation of blue-chip stocks like house appliances. Looking into next year, we think: 1. Be optimistic about the industry demand. There s basic demand for home appliances, which are necessary, durable consumer goods. Additionally, the demand of home appliances as durable consumer goods is closely linked to the inelastic demand for real estate, so there is always basic demand for home appliances. In the meantime, the rising penetration of home appliances in the past ten years also boosted replacement demand, therefore the sales volume of the industry will not fall sharply. The factors supporting the medium- and long-term growth of home appliances are not pessimistic: 1) total population; 2) urbanization process; 3) smaller size of families; 4) increase in per capita disposable income. 2. The white goods sector has high industry concentration ratio and leading players have clear competitive advantages in the industry. Their market share is still increasing, and the industry structure is healthy. We are unlikely to see a vicious price war. Wong Chi Man Senior Analyst (852) cmwong@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk Investment highlights: The industry structure is stable and the market share is gradually concentrated in the hands of leading players. In particular, in the air conditioner industry, the three leading players: Gree ( SZ), Midea ( SZ) and Haier ( SH) have about 70% market share and their market share is still increasing. The market competition is benign and in order. Short-term promotions will not cause price wars. Product quality is the key means of competition of the three leading players. Products are becoming more sophisticated and the average unit price of the industry is rising steadily, which is a reflection of upgrading household consumption and also an inevitable result of industry concentration. Investors have concerns about the impact of price wars on the industry s profitability. Currently, Gree s promotions are mainly holiday promotions. Leading players are unlikely to initiate price wars recklessly when there is no expectation of high sales growth. A good 1

2 industry structure has protected the competitive landscape of the industry from deteriorating and ensured leading players can keep their high earnings level even when the price of bulk commodities is falling. 3. Consumption upgrade; products moving to high-end; average selling price rising. On the one hand, these factors help offset the impact of lackluster volume growth; on the other hand, these factors boosts the profitability. 4. Low valuation of home appliances stocks reflect investors expectation is not high. Leading players have sufficient cash, high dividend payout and a wide safety margin. Allocation value of leading players: The PE ratios of Gree, Midea and Haier are 6, 8 and 9x respectively. Gree s low PE has overly reflected pessimistic market expectation. With low PE and high stock dividend, there is still potential for re-rating. Midea s strategic adjustment has brought increase in its scale and sales, which still have potential to grow, so does its valuation level. After introducing KKR as a shareholder, Haier s organizational level is further opened. In October, Haier continued to buy back minority interests. Starting in 2015, it will begin to consolidate overseas assets. After the Shanghai-Hong Kong Stock Connect is put into operation, valuation is expected to get close to overseas home appliance blue chips. Pay attention to growth stocks with solid results: Robam ( SZ), Vatti ( SZ) and Supor ( SZ). The penetration rate and brand concentration of small home appliances in China are still very low, which have a large potential for growth. The current mainstream small appliance brands Robam, Vatti and Supor will be benefited. Transformation theme: TCL ( SZ) and Solareast ( SH). Hit by the Internet, traditional color TV companies are seeking transformation and reform. TCL has completed the business layout in upstream panels, and its multimedia business sector is actively exploring transformation. And it has established strategic cooperation with Cisco, striving to become a platform company of smart TVs and smart household goods. Solareast s traditional business - solar water heaters is saturated. Having set water purification as its future development direction, the company is carrying out relevant diversified development centering on air and water and sharing resources such as research and development and channels. It has nearly RMB3bn cash on hand. M&A will accelerate the development of the company s new business. Automobile: We continue to recommend stocks in auto service industry chains and Internet of Vehicles that enjoy high gross margin and are in early development phase. Market review: This week the whole auto sector rose 0.86%, of which the auto service sector had a relatively better performance, posted a gain of 1.88%, better than the CSI 300 Index. Our preferred stocks Jingu Wheel ( SZ) and Longji Group ( SZ) have risen 40% and 22% respectively since we recommended last week. In early November HSBC flash PMI fell to 50.0, the lowest in the last six month. However, the manufacturing PMI went up last month, indicating that China s manufacturing industry is stable in the short term but lacks driving forces for future growth. For the auto industry, seeking new future growth drivers is more urgent than expanding existing main business. This week we continue to highlight the prospect of automotive aftermarket and automotive e-commerce. The profitability of the whole automotive aftermarket can reach 40% to 50%, and some segments can even reach 100% to 200%. Though the data may be overestimated, it s undeniable that the automotive aftermarket has become the most dazzling gold mine in the whole auto industry chain. In developed countries, profits from 2

3 auto sales account for about 20% of the whole auto industry and that of car parts and components, about 20%. The other 60% is generated from the aftermarket such as services. While in the domestic auto market in China, the sales of services still accounts for a small proportion, which means the auto service market has great potential for growth. The concept of automotive e-commerce was pushed to the peak during the November 11 (Singles Day) Shopping Carnival. Several large auto companies posted strong sales performance by selling through the Internet sales channels (JD, Suning, Gome, Tmall, Autohome and Bitauto). What they need to do next is to make Internet auto sales a common practice. The relaxation of auto sales policy (register of car dealer authorization), more younger consumers of automobiles (and they have online shopping experiences) and the huge cost advantage of online car shopping are all factors boosting the upgrading of automotive e- commerce. In auto related industries, the strong sales of new energy vehicles has provided sufficient demand support to the lithium carbonate market. In addition to the seasonal shrink of lithium carbonate product output and the expected persistent rise in lithium carbonate price, the lithium carbonate market is expected to see a new round of rising. Individual stock recommendation: Jingu Wheel : It is a primary supplier of European and North American auto manufacturing joint ventures such as Volkswagen, Ford and GM. Currently steel wheels account for over 90% of its gross profit. With the IPO projects - 2m passenger car wheels and 1.5m truck wheels production capacity to commence operations by stages this year and product and customer upgrading, the company s steel wheel revenue and profit are expected to keep a rapid growth. Its subsidiary Hangzhou Golden Toowell Auto Parts Co. Ltd., stands out from other O2O companies with standardized wheel products as an entry point, which can help the company quickly expand the market. And the business has reached a meaningful scale. Its brand awareness and sales volume are expected to grow rapidly (it currently has about 200 offline shops and it aims to expand to 5,000 to 10,000 next year). The company has made breakthroughs in PES order (4 units). It is expected to obtain more orders in the future. It is expected to contribute a net profit of about RMB90m to 100m next year. Longji Group is actively seeking new business expansion while maintaining steady growth in traditional business. With rich experiences in after-sales accessories manufacturing and sales, the company has actively tapped into the automotive market, realizing further extension of traditional business. By becoming a shareholder of Cheyian.com, the company has linked auto parts manufacturers, auto parts dealers, auto quick service stores and consumers together. GAC Group ( SH) has announced 3+e development strategy, meaning the business strategy concerning three business sectors including self-developed, Japanese and European/North American cars and the new e-commerce strategy, to improve its core competitiveness comprehensively. The new IPO Guilin Fuda ( SH) is worth paying attention to. The company focuses on key auto parts such as forging crankshafts of motors. The fund raised is mainly used in its existing business. When the IPO project is completed and commence operation, the average annual sales revenue of the company will increase by about RMB2bn and net profit by about RMB360m, and the company s profitability will improve significantly. 3

4 Agricultural reclamation system stocks encounter dual inflection points: land reform and stateowned enterprise (SOE) reform --- research report on reform of the agricultural reclamation system Investment recommendation: 1. Acceleration of land circulation and SOE reform are on the way: the reform of the agricultural reclamation system will speed up. As the central government is promoting land reform, especially acceleration of land circulation, and SOE reform, the reform of the agricultural reclamation system will be further accelerated. 2. Facing dual inflection points operating efficiency improvement + asset consolidation Problems in the agricultural reclamation system, including: 1) government or institutional functions are not separated from enterprise management in a lot of enterprises; 2) land property rights are unclear, and the land circulation market is unhealthy; 3) there are a lot enterprise in the reclamation area but only a few are large agricultural enterprises; 4) the operating efficiency of enterprises is relatively low and management mechanism needs to be further improved to adopt to the market. 3. Acceleration of comprehensive, deepening reform in the agricultural reclamation system Since the beginning of the year, the ministries of the central government have surveyed the agricultural reclamation system. A comprehensive reform of the agricultural reclamation system is imminent. The reform roadmap may include: 1) further separating government or social functions from enterprise management; 2) clarify property rights, promote land circulation of state-owned farmlands, raise the scale of operations and improve land utilization efficiency; 3) promote integration of resources in and between reclamation areas and incubate large agricultural enterprises; 4) introduce strategic investors in mixed ownership and establish modern enterprise system to improve enterprise operating efficiency. 4. Investment thesis on reform of the agricultural reclamation system 1) Scarcity of land resources and re-valuation brought by land circulation. 2) Investment opportunity related to expectations on asset injection. 3) The improvement of operating efficiency will bring increase in value. 5. Investment ideas in the agricultural sector 1) Yasheng Group ( SH). 2) Beidahuang ( SH). 3) Dayu Conserving Water ( SZ). 4) Huilong ( SZ). 4

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