Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Nov 2, 2015

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 1398 ICBC CHINA MOBILE PETROCHINA CCB TENCENT BANK OF CHINA HSBC CHINA LIFE PING AN SINOPEC Econ data release China Data Date Period Prior Cons Caixin Services PMI 3-Nov OCT Caixin Composite PMI 3-Nov OCT Export Trade USD YoY 8-Nov OCT Import Trade USD YoY 8-Nov OCT Trade Balance 8-Nov OCT US Data Date Period Prior Cons Markit US Mfg PMI 2-Nov OCT F ISM Mfg PMI 2-Nov OCT Trade Balance 4-Nov SEP Markit US Serv PMI 4-Nov OCT F ISM Non-Mfg NMI 4-Nov OCT Initial Jobless Claims 5-Nov 31-Oct Cont Jobless Claims 5-Nov 24-Oct U-3 Unemployment 6-Nov OCT Source: Bloomberg A-Share Market Pharmaceutical: Abolishment of one child policy to benefit pediatric drug and equipment makers China has now completely abolished its one child policy. This came after the government allowed couples made up of at least one single child themselves to have a second child, a policy that has led to less than 1m of additional newborns annually compared to the estimated figure of more than 2m. We calculate that China will see 1.05m newborns this year following the latest policy change. We believe beneficiaries in the pharmaceutical sector include pediatric drug makers, baby care equipment manufacturers, reproductive health care providers and antenatal test providers. CPIC ( CH): 9M15 earnings review; 2016 premiums growth outlook positive 9M15 net profit growth exceeded expectations, while comprehensive income dropped due to substantial depreciation in available-for-sale financial assets. Life insurance business was mixed with the agency channel posting strong growth and the corporate channel weakening significantly. Overall, CPIC has effectively seized the opportunity to achieve high premiums growth amid declining interest rates, continued policy support and stock market corrections. The company has minimized the impact of stock volatility by lowering its exposure to equity investment, and we remain positive on its premiums growth in Hong Kong Market I.T (999 HK, Buy): 1HFY16 results suggest a turning point; initiate at Buy with TP of HK$2.90 I.T s impressive 33% YoY core net profit growth in 1HFY16 suggests a turning point as growth from China and Japan is now enough to drive the company s earnings growth even though the HK market remains weak. We forecast core net profit growth of 26%/19% in FY17/18 driven by earnings growth in China and Japan and a stabilization in HK on the back of a tighter network. We also expect China to become the company s largest market in terms of revenue by FY17. The current trough valuation suggests significant re-rating potential. Initiate at Buy with TP of HK$2.90. Technology Monthly (Nov 2015): Singles Day and Black Friday key indicators of consumer sentiment Investors will be keen to gauge consumer sentiment from sales momentum on Singles Day in China and Black Friday in the US on Nov 27. Lenovo is expected to report a record loss of US$798m for its Sep quarter results in the second week of Nov amid US$900m one-off restructuring charges. AAC Tech will report 3Q15 results in early Nov; we expect 3Q15 sales and net profit to increase by 30% YoY and 27% YoY, respectively. We recommend TCL Comm this month; its valuation is undemanding at 6.3x 2015E P/E and its dividend yield is attractive at 6.8%. 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 Pharmaceutical: Abolishment of one child policy to benefit pediatric drug and equipment makers One child policy completely ended following disappointment from 2014 policy relaxation China has now completely abolished its one child policy. This came after the government allowed couples made up of at least one single child themselves to have a second child, a policy that has led to less than 1m of additional newborns annually compared to the estimated figure of more than 2m. Pediatric drug, childcare equipment makers, reproductive healthcare to benefit We calculate that China will see 1.05m newborns this year following the latest policy change. We believe beneficiaries in the pharmaceutical sector include: 1) pediatric drug makers such as Jianmin Pharmaceutical ( CH), Anke Biotechnology ( CH), Changchun High & New Tech (000661CH), Jumpcan Pharmaceutical ( CH), Shanda Wit Scienc & Tech ( CH) and Sunflower Pharmaceuticals ( CH); 2) baby care equipment manufacturers such as David Medical Device ( CH); and 3) reproductive health care provider Topchoice Medical ( CH) and antenatal test providers Da An Gene ( CH) and DiAn Diagnostics ( CH). CPIC ( CH): 9M15 earnings review; 2016 premiums growth outlook positive Comprehensive income hurt by stock market crash 9M15 net profit growth of 67.8% YoY exceeded expectations likely due to considerable investment returns during 1H15 and strong premiums growth so far this year. That said, comprehensive income dropped 15.9% YoY due to substantial depreciation in available-for-sale financial assets; in particular, both net assets and comprehensive income came down from 1H15 reflecting the damage from the stock market crash in 3Q15. The company has adjusted its investment asset allocation accordingly, raising the proportion of cash and lowering that of equity and timed deposits. Agency channel life business posting strength The performance of the company s life insurance business was mixed with the agency channel posting strong growth and the corporate channel weakening significantly. 9M15 revenue from the agency channel already exceeded the 2014 fullyear figure. Overall, CPIC has effectively seized the opportunity to achieve high premiums growth amid declining interest rates, continued policy support and stock market corrections. P&C business should maintain steady premiums growth CPIC P&C recorded revenue growth of 0.2% YoY in 9M15. Given the strong likelihood of an across-the-board car insurance pricing reform in the near future, we believe CPIC will not come under much pressure trying to maintain stable premiums growth in this business. The company has minimized the impact of stock volatility by lowering its exposure to equity investment, and we remain positive on its premiums growth in I.T (999 HK, Buy): 1HFY16 results suggest a turning point; initiate at Buy with TP of HK$2.90 Initiate at Buy with TP of HK$2.90 I.T is a multi-brand apparel retailer, primarily selling in-house and international brands offering a variety of different clothing styles, mainly in Greater China and Japan. The company s impressive 33% YoY core net profit growth in 1HFY16 suggests a turning point as growth from China and Japan is now enough to drive the company s earnings growth even though the HK market remains weak. We forecast core net profit growth of 26%/19% in FY17/18 driven by earnings growth in China and Japan and a stabilization in HK on the back of a tighter network. China and Japan contributed 49% of revenue in 1HFY16 (vs HK s 47%). We also expect China to become the company s largest market in terms of revenue by FY17. The positive SSS in China and Japan (led by purchases by mainland visitors) suggests the company s reputation for fashion trendsetting is being increasingly recognized by Chinese consumers. The stock is currently trading at a trough valuation of 7.9x 1-yr forward P/E, suggesting significant re-rating potential (vs historical range of 8x-22x), if growth strategies can be well-executed. China the key growth driver Despite the softening of the economy, the company still achieved a respectable 5.9% SSSG in 1HFY16, with both staff and rental expenses ratios dropping YoY. Most of its self-operated stores are located in malls in first-tier cities with lease terms of between 3 and 10 years. Assuming a single-digit increase upon rental lease renewal, we believe 3-5% SSSG Page 2

3 should be enough to lower its rental expenses ratio. The company s self-operated store network only covered 19 cities in 1HFY16, implying substantial network expansion potential. We expect lowteen sales footage growth in FY By having more new stores for its high-margin in-house brands, we anticipate an increase in GM on a better sales mix going forward. Japanese market to benefit from strong growth in mainland visitors Driven by the depreciation of the yen and the relaxation of tourist visa requirements, the number of mainland visitors to Japan has been growing rapidly since Sep SSSG in Japan has also seen a similar trend, reaching 23% YoY in 1QFY16. Chinese shoppers now account for 40-50% of the company s sales in Japan. In addition, its business in Japan has strong operating leverage as there is minimal pressure on rental and staff costs. We expect the uptrend in mainland visitors to Japan to continue, driving growth in the market. HK market a challenge, but could stabilize in FY17 The company s 3.6% YoY decline in retail sales in 1HFY16 outperformed overall apparel retail sales in HK (-8% YoY). Sales footage fell 2% YoY in 1HFY16. We also forecast that sales footage will continue to decline YoY in FY16 (the first time since the company s listing in FY06) and FY17 as the HK retail market is expected to remain weak in FY17. The tighter retail network could help to stabilize the SSS trend in FY17 as we believe consumers that prefer trendy fashion have higher brand loyalty. Valuation The stock is currently trading at a trough valuation of 7.9x 1-yr forward P/E. The last time the stock traded near its P/E trough (8x 1-yr forward P/E) was between Dec 2013 and Feb 2014 when core net profit fell 26% YoY in FY14. There was then a re-rating as core net profit rebounded 5% YoY in FY15. Our TP of HK$2.90 is based on 11.3x FY16E P/E, in line with its historical average. In terms of its 1-yr forward P/B, the current valuation of 0.9x is also undemanding compared to its historical range 0.7x-4.1x. We also think its 0.9x historical P/B is unjustified as most apparel peers that trade below 1x P/B are loss-making. Risks 1) HK market SSS and GM miss expectation; 2) Changes in consumer fashion preferences. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Technology Monthly (Nov 2015): Singles Day and Black Friday key indicators of consumer sentiment Hang Seng Index rebounds after five consecutive months of declines The Hang Seng Index rebounded by 8.6% in Oct after five consecutive months of declines since May; it is now down 4.1% YTD. Shares in Tongda (698 HK, Buy), a Xiamen-based handset casings maker, rose 19% during the month, making it the best performer among stocks under our coverage. Tongda s 9M15 sales rose 31% YoY, underpinned by strong order momentum from its key customers including Huawei and Xiaomi. The stock is up 73% YTD. Truly (732 HK, Hold), a smartphone touch panel and display maker, was the worst performer, falling 6% during the month. The company issued a profit warning on Oct 6, saying it expects 9M15 earnings to decline by around 30% due to falling sales and margin contraction amid ASP erosion and weak customer demand. Lastly, our monthly stock pick for Oct, ChinaSoft (354 HK, Buy), rose 14% during the month, underpinned by its deepening cooperation with Huawei. Oct review China Mobile s (941 HK, NR) monthly net 4G subscriber additions softened in Sep to 18.4m, down from 20.5m in Aug. The company s 4G net additions figure remains a handy proxy for smartphone shipment momentum in China, in our opinion. Shipment data from Sunny Optical (2382 HK, Buy) and TCL Comm (2618 HK, Buy) remain healthy, with 9M15 shipment volume for their key products increasing 21% and 19% YoY, respectively. ASM Pacific (522 HK, Hold), a semiconductor equipment maker, issued a profit warning in early Oct and reported a 77% YoY decline in 3Q15 earnings as customers pushed back orders and equipment deliveries amid weak end-market demand for electronic products. Also in Oct, Apple (APPL, NR) reported better-thanexpected 3Q15 results. Nonetheless, we have seen little reactionary support for names in the Apple supply chain as the market is becoming cautious as Apple is likely to turn ex-growth (Apple guided for a sales growth range of 1%-4% YoY in the Dec quarter), given the high base effect following the overwhelming success of the iphone 6/6s, the first of which was launched in Sep last year. Nov preview Investors will be keen to gauge consumer sentiment from sales momentum on Singles Day (or ) in China (Alibaba recorded Singles Day sales of Rmb57.1bn, +58% YoY, in 2014) and Black Friday in the US on Nov 27. Lenovo (992 HK, NR) will report Sep quarter results in the second week of Nov. The company is expected to report a record loss of US$798m amid US$900m Page 3

4 one-off restructuring charges for the headcount reductions announced in Aug AAC Tech (2018 HK, Hold) will report 3Q15 results in early Nov; we expect 3Q15 sales and net profit to increase by 30% YoY and 27% YoY, respectively. Stock pick for the month This month, we recommend TCL Comm (2618 HK, Buy), a smartphone maker with an overseas-centric sales mix. Its valuation is undemanding at 6.3x 2015E P/E and its dividend yield is attractive at 6.8%, assuming a 43% dividend payout ratio for 2015 (2014: 44%). (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@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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