Dim Sum Express. A-Share Market. Equity Research. Nov 1, 2018

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 18E 19E 18E 19E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT ICBC PETROCHINA CCB CHINA MOBILE PING AN HSBC BANK OF CHINA SINOPEC AIA Source: Bloomberg The Dim Sum Express presents the latest views from GF Securities A/H-share analysts. For the full-length versions of these reports or any enquiries, please contact your sales representative. A-Share Market [Qingdao Haier ( CH)]: 3Q18 results in-line, overseas expansion and premiumization on course 3Q18 growth in-line amid resilient earnings Haier s 9M18 revenue was Rmb138.14bn (+12.8% YoY), net profit came in at Rmb6.13bn (+9.4% YoY), with NPM of 4.4% (-0.1pp YoY). 3Q18 revenue was Rmb47.58bn (+11.5% YoY), net profit came in at Rmb1.34bn (+10.1% YoY), with NPM of 2.8% (+0.0pp YoY). Domestic market: Product and brand structure upgrade continued, revenue growth outpaced sector average Revenue from the high-end Casa Di brand grew 49% YoY, which played a key role in the ASP improvement. On a segment basis, 9M18 revenue from refrigerators, washing machines, air conditioners, water heaters and kitchen appliances increased by 15.9% / 16.2% / 15.7% / 14.5% / 18.9% YoY respectively, but growth in 3Q18 slowed compared with 1H18. Retail sales share for the aforementioned segment increased by 4.0pp/3.9pp/0.5pp/1.3pp/~0.9pp, according to Zhongyikang data. Overseas markets: Stable in developed markets and strong growth in emerging markets 9M18 revenue from North America, South Asia, Europe, Latin America and Japan increased by 11.8% / 24% / 21% / 55% / 10% YoY, respectively. The South Asian market slowed compared with 1H18. Revenue from North America achieved rapid growth. Fisher & Paykel revenue also increased by 7% YoY in 9M18, and 3Q18 revenue rose by 12% YoY. Raw materials and exchange rate fluctuations still the negative factors, profitability stabilized by improving cost control Amid rising raw material costs and accounting adjustments for logistic expenses, the company's 9M18 GPM came in at 28.9%, down 1.0pp YoY. Actual GPM rose steadily if we exclude the accounting adjustments. The company's financial expense ratio decreased by 0.4pp thanks to recent exchange rate fluctuations. However, the positive impact has been offset by financial derivatives. Excluding the exchange rate factor, net profit after deducting non-recurring gains and losses reached Rmb5.522bn (+17.6% YoY). Sales and admin expense ratios for 9M18 reached 15.4% / 7.2% (YoY -1.2pp / +0.2pp). We remain optimistic about the global expansion of the company's own brands and new exploration into smart home solutions. The announced on September 28 that it will acquire Italian company Candy S.p.A. Candy is a veteran European home appliance maker with business across Europe, the Middle East, Asia and Latin America. After the completion of the acquisition, Haier's European market share will leap to the top five, and should strengthen its relatively weak European market position, in our view. Not taking this acquisition into account, we estimate 2018/19/20 net profit of Rmb7.59/8.32/9.41bn respectively, corresponding to EPS of Rmb1.19/1.31/1.48. The company is trading at 20.2x 2018E P/E. Maintain Buy. [SAIC ( CH)]: 3Q18 growth outpaced sector average, profitability improved 9M18 earnings up 12.3% YoY In 9M18, SAIC registered revenue of Rmb674.74bn, up 11.0% YoY. Net profit came in at Rmb27.67bn, up 12.3% YoY. Net profit after deducting non-recurring gains & losses was Rmb25.32bn, up 6.1% YoY. 3Q18 revenue came in at Rmb209.89bn, down 0.8% YoY, mainly due to the company's 1.2% sales decline during the quarter. Net profit reached Rmb8.69bn, up 0.1% YoY. The company s 9M18 NPM was 5.8%, up 0.2pp YoY, thanks to the 0.2pp YoY increase in GPM to 13.4%. (Continued on next page ) Ou Yafei, Research Analyst, SFC CE No. BFN410 oyf@gf.com.cn

2 A-Share Market (continued) Sales growth outpaced sector average; undemanding blue-chip amid sector-wide downturn According to the company s announcement and data from CAAM, SAIC sold 5.147m vehicles (+6.7% YoY) in 9M18, of which SAIC Volkswagen and SAIC-GM sold 1.517m vehicles (+3.0% YoY) and 1.434m vehicles respectively (+ 5.3% YoY). SAIC s own brand sales were 509,000 units (+40.9% YoY), thanks to increased sales of the Roewe i6, all-new MG 6, Ei5 and Roewe RX3. SGMW sales volume was 1.503m units, up 1.0% YoY. According to data from CAAM, PV sales in China increased by 0.6% YoY during 9M18, indicating that SAIC sales growth outpaced the sector. SAIC's is trading at about 8.5x P/E (TTM), undemanding compared with 11.2x for the A-share auto sector overall. SAIC has distributed dividends for CY2017, corresponding to dividend yield of 6.8%. Top-notch PV automaker with various catalysts As the most competitive domestic PV automaker, the company has many catalysts that may spur re-rating: 1) the increasing strength of its own brand model; 2) Steadily advancing in electrified auto, networking, smart car, and shared mobility. NEV: cooperation with CATL and Infineon in battery cells, battery systems and IGBT modules. Smart car: SAIC launched the Zebra system, and cooperate with tech leaders such as Mobileye and other companies to collaborate on developing technologies including autonomous driving, x-by-wire, electric control systems. Shared mobility and services: SAIC s initiatives in developing intelligent logistics, E-commerce for car and global shared mobility are fully under way. Investment advice The company is an undemanding blue-chip with high dividend payout. With stable growth of JV brand sales being the backbone of SAIC s earnings, while sales of its own brands to contribute incremental sales and earnings. In addition, the company actively promotes transformation and upgrading by extending its business through the value chain, which is expected to open up new growth space, in our view. We estimate SAIC's E year EPS of Rmb3.21, 3.38, and The company is trading at 8.4/8.0/7.5x E P/E, maintain Buy. [Yili Industrial Group ( CH)]: 3Q18 expenses remained high, earnings growth to accelerate in 4Q18 3Q18 net profit increased by 1.83% YoY, mainly due to rising costs and increased sales expenses The company's revenue in 9M18 increased by 16.88% YoY with 3Q18 revenue up 12.68% YoY; net profit increased by 2.24% YoY, slightly lower than Street expectations. Revenue growth mainly comes from stronger high-end product sales. Benefiting from growing demand from gift-giving in lower-tier cities, high-end product growth was significantly higher than overall growth. (1) According to grassroots research, revenue from Anmuxi in 9M18 maintained high growth, benefiting from product innovations (such as multi-flavors and highend PET bottles) and low-tier city sales growth. (2) High-end Jindian Milk gained higher sales in lower-tier cities. (3) Lactobacillus yogurt Changyi benefited for a low base and channel expansion. 9M18 GPM was 35.80%, -1.65pp from 3Q17 on rising costs. According to Wind, 3Q is the low-season for milk output. The raw milk price picked up 4-5% YoY, and yellow board paper prices increased 38.64% YoY. The company's 3Q18 net profit margin was 7.47%, down 0.88pp from 3Q17, mainly due to the decrease in GPM and the increase in sales expenditure ratio. Sales expenditure ratio was 24.15%, 2.21% higher than in 3Q17, given advertising costs for key products and employee compensation etc. 4Q18 earnings growth expected to accelerate QoQ At present, the company is in an effective cost period, and market share is constantly improving. According to company data, this stood at 36.95% in the liquid milk market in 3Q18, 2.7pp higher than in 3Q17. Its share of the cold liquid milk was 17.2%, 0.9pp higher than in 3Q17. It had a 6.2% share of the infant milk powder market, up 0.6pp YoY. In the long run, we expect the duopoly situation formed by Yili and Mengniu Dairy (2319 HK) to remain stable. In 4Q17, the company's revenue was Rmb15.587bn, up 7.96% YoY; net profit was Rmb1.064bn, down 16.37% YoY due to a low base. We expect 4Q18 revenue to accelerate QoQ, with full-year revenue growth of more than 15% and net profit growth of 6.50%. Earnings forecasts Our estimates for the company's 2018/19/20 revenue are Rmb79.238/91.035/ bn respectively, up 16.43%/14.89%/12.76% YoY, net profit of Rmb6.391/7.418/8.527bn, up 6.51%/16.07%/14.95% YoY, and EPS of Rmb1.05/Rmb1.22/Rmb1.40, based on P/E 20x/18x/15x. We maintain a Buy rating. Page 2

3 A-Share Market (continued) [Inspur Electronic Information Industry ( CH)]: Small market cap, business transformation to boost earnings Greater expenditures led to lower net profits after deducting non-recurring gains/losses, Q2 brand products revenue slowed down 1H18 revenue amounted to Rmb752m (+20.33% yoy); net profits stood at Rmb162m (+25.66% yoy); Q2 revenue and net profits grew 13.98% and 20.11%, in line with expectations. 1H18 net profits after deducting non-recurring gains/losses picked up 1.29%, as 1) more investment to branding, such as new product launch conference and celebrity endorsement;2) store renovations; 3) 2017 employee restricted stock incentive scheme, adding option amortization of Rmb11.15m. A number of brands revenue growth has been slowed down in Q2 compared with Q1: Jiuzi put efforts into e-commerce marketing in Q1, while the e-commerce growth slowed down in Q2; Anzheng Men styles which has turned to younger groups might take some time for customer to get used to; Feinachen supply chain issues led to short supply; most Mosake s channels closed down due to branding adjustment in last year; Annadou product position changes lowered revenue. Off-season procurement led to negative net operating cash flow 1H18 net operating cash flow down % yoy, as the company increased the early stocking for autumn and winter clothing and bought fabric during off-seasons for purchasing cost controls, which resulting in higher trade payables and procurement prepayments. Moreover, the inventory also increased and the turnover raised 30 days yoy. 2H18 revenue and net profits to rebound by quarter; giving optimistic full-year guidance Firstly, new openings are mainly scheduled in 2H18. Secondly, 2H18 is the peak-season for e-commerce, so we expect Jiuzi s e-commerce business will boom. Thirdly, Feinachen s supply chain has been optimized since July, which its revenue growth will pick up in 2H18.Fourthly, we expect to see off-season procurement benefits in 2H18. Lastly, product launch conferences are mainly in 1H18, therefore we believe branding costs will be lowered in 2H18. Earnings forecasts Our estimates over EPS of Rmb0.89/Rmb1.21/Rmb1.55, with the stock is currently trading at 2018 P/E 15x. We maintain a Buy rating Hong Kong and Other Markets [SJM Holdings (880 HK)]: 3Q slightly missed 3Q earnings missed slightly, market share of mass segment declined QoQ In 3Q18, the company's adjusted EBITDA was HK$919m (-5.5% MoM, +26.6% YoY), slightly lower than our expectation, which is mainly due to the market share decline of the company's mass segment in 3Q18. In 3Q18, the company s mass GGR decreased by 2.1% QoQ, while the sector's GGR up by 4.6% QoQ. Potential reasons for the decline in company's mass segment market share: 1. Ramp-up of MGM Cotai and Morpheus Hotel have intensified the competition in the mass segment. Further, there are more tourists in the summer, and they usually prefer the Cotai area, which is dominated by integrated casino resorts. However, SJM s main properties are located on the peninsula, so 3Q18 is a relatively off-season for the company. Grand Lisboa mass GGR dropped QoQ, and other self-operated casinos continued to deliver strong results Adjusted EBITDA of Grand Lisboa in 3Q18 was HK$496m (-7.1% MoM and +18.7%YoY). According to management's teleconference, GGR for mass and slot machine business of Grand Lisboa fell by 9% QoQ in 3Q18, which was the main reason for the QoQ decline in adjusted EBITDA. Other self-operated casinos saw a 6.2% QoQ increase in adjusted EBITDA in 3Q18, thanks to the ramp-up of Oceanus casino backed by the newly-open Oceanus Hotel. The adjusted EBITDA of SJM s satellite casinos dropped 21.0% QoQ in 3Q18, mainly because the satellite casino generated a one-off cost of HK$17.5m in 3Q18, resulting in a decrease in adjusted EBITDA margin. Revise down 18-20E EBITDA forecast by 3.2%/2.8%/1.9% As the company's 3Q18 earnings came in slightly lower than expected, we revised down our adjusted EBITDA forecast. The company's current market cap corresponds to 7.7x and 6.2x for 18/19E EV/EBITDA, respectively. However, we believe that the opening of the Hong Kong-Zhuhai-Macau Bridge will bring more round-trip tourists to the peninsula area, thus the company's 4Q results are likely to improve on a QoQ basis. Management still maintains the goal of completing the Grand Lisboa Palace at the end of Maintain Buy. Page 3

4 Hong Kong and Other Markets (continued) [H&H International (1112 HK)]: Growth bolstered by firm demand Stable top-line growth amid firm demand The company's 3Q18 revenue increased by 27.3% YoY to Rmb2155.9m, while revenue from infant formula increased by 17.9% to Rmb995.2m, revenue from probiotics increased by 15.4% YoY to Rmb212.1m, and revenue contribution of other infant products increased by 24.9% YoY to Rmb53.9m. The ANC business grew by 40.8% YoY to Rmb894.7m, and the revenue after FX adjustments increased by 48.7% YoY. For infant formula, revenue of Biostime and HT in 9M18 increased by 20.5% YoY and 202.4% YoY, respectively, and the growth was mainly from high-end and ultra-high-end products. Due to the lack of competition in the infant formula market caused by the registration regulations, we expect EBITDA margin of H&H to remain around 20%. For the ANC business, the proportion of China's sales in 9M18 increased to 37.1%. The company's Blue Hat product has entered dealers channel in September and is expected to contribute revenue and profit in 4Q18. Infant formula demand may be undermined by the decline in birth rate in the future, but so far we have not observed weakening demand for ANC. The new e-commerce law clarifies the legal status of cross-border e-commerce business. Although the details have not been disclosed, we believe that the company's sales in China will not be affected. Maintain EPS forecasts for E of Rmb1.96, 2.60 and 3.07 We think H&H s various business are carried out in an orderly manner. We maintain EPS forecast of Rmb1.96, 2.60 and The stock is trading at Rmb18.45, and 11.77x E P/E, maintain Buy. 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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