Yum Cha 飲茶. October 29, 2018 TALKING POINT - BBMG: NEAR THE BOTTOM? RESEARCH NOTES. INDICES Closing DoD%

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1 Yum Cha 飲茶 October 29, 2018 INDICES Closing DoD% Hang Seng Index (1.1) HSCEI (1.2) Shanghai COMP (0.2) Shenzhen COMP (0.2) Gold BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M RMB/USD 6.9 (0.1) TALKING POINT - BBMG: NEAR THE BOTTOM? BBMG Corporation (SEHK:2009) - Forward P/BV 1.40x 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x DATA RELEASES DUE THIS WEEK October 30 Non-manufacturing PMI October 30 Manufacturing PMI Source: Bloomberg Source: Capital IQ As one of the best performing sectors YTD, the cement sector continued to face profit-taking pressure last week. Conch Cement (0914.HK), CNBM (3323.HK) and CR Cement (1313.HK) recorded a correction of >10% last week. However, BBMG (2009.HK) remained flat last week amid the market correction. As the stock has dropped 41.6% YTD, much worse than other cement stocks because of its direct exposure to the property development business, we believe the stock deserves a revisit by investors, as its latest PBR of about 0.4x is even lower than the level recorded in January 2016 during the circuit breaker incident. Given recent news flow about a moderate relaxation in policies in the property sector, BBMG may have decent room to rebound from a very low valuation, in our view. Analyst: Wong Chi-man, CFA RESEARCH NOTES STRATEGY - The authorities announced a revision in Company Law last Friday, which allows much greater flexibility for share buybacks. In the past, China-registered companies were required to get approval at an extraordinary general meeting (EGM) before conducting a share buyback. Under the revised Company Law, companies are allowed to get approval for a share buyback at an EGM or board meeting approval (two-thirds majority) based on the articles of association if the share buyback is a necessary step to protect the value of a listed company and shareholders interest. This implies that the time to get the approval will be much shorter without having to go through an EGM. Companies will be able to react much faster during a sharp market correction. The revised law will not only benefit A-share companies, but also H- share companies with a strong balance sheet, such as Conch Cement (0914.HK) and GZ Auto (2238.HK). YOFC [6869.HK; HK$20.95; BUY] - Yangtze Optical Fibre & Cable Joint Stock Limited Company (YOFC) reported its Q results. Turnover and net profit grew 5% YoY and 16% YoY, respectively. The slowdown in YoY growth was due to a high base in Q and more balanced supply/demand dynamics. We expect YOFC to remain the leader in the global optical fibre market and one of the major beneficiaries of 5G development We revised downwards our net profit forecasts for YOFC for 2018 and 2019, given lower ASP and volume assumptions. After the share price correction, we maintain our BUY rating with a new target price of HK$32.15, based on 13x PER, which is a discount to YOFC s A-share-listed peers. The downward revision is due to a lower PE multiple (cut from 15x to 13x) and the downward revision in net profit forecasts. 1

2 RESEARCH NOTES CHINA CEMENT WEEKLY - The average cement price (nationwide) increased 1% to RMB423/tonne from the price in the previous week. There was an increase in cement prices of RMB20-50/tonne in Jiangsu, Zhejiang, Jiangxi, Anhui and Sichuan. In late October, cement demand continued to increase steadily, and inventory levels in most regions remained low. As a result, cement and clinker prices continued to climb, especially clinker prices in the Yangtze River Delta region, which were near the highest price in the past year. Cement and clinker prices are expected to maintain a moderate uptrend in the near future. The average inventory level (nationwide) declined slightly from 49.9% to 49.8% week on week. WEEKLY SHORT SELLING ANALYSIS - We resume our weekly short-selling analysis, as the data release schedule has returned to normal. Last Friday, the HKSFC released the aggregate short positions data for October 19. We analyzed which companies may be vulnerable to short-selling activity, based on the following three criteria: (i) the net change in short positions between October 12 and October 19; (ii) short positions as a percentage of free float; and (iii) the absolute amount of short positions. We must emphasize this is only an objective quantitative analysis based on official data; the analysis does NOT imply that we feel uncomfortable with the corporate governance or fundamentals of some companies. According to the results of our analysis, we believe CR Cement (1313.HK) requires close monitoring, based on the latest short positions outstanding. On the other hand, we note a sizable decline in short positions in Shanghai Pharm (2607.HK). SNIPPETS MIDEA [ CH; BUY] - Midea and Little Swan ( CH) are expected to resume trading on Monday, Oct 29th. Both names have been suspended from trading since September 10th due to Midea's planned acquisition of the remaining 47% stake of Little Swan that Midea does not already own. After announcing the planned acquisition last week, Midea received a letter of inquiry from the Shenzhen Exchange regarding the particulars of the transaction. On Oct. 28th, Midea issued a reply to the Shenzhen Exchange, detailing the necessity of the transaction, its reasonable valuation and other details. We remain uncertain as to when the transaction is expected to close, but expect both names to resume trading in the interim. As explained in our previous note, Little Swan was already consolidated into Midea's financial statements, and we expect limited financial impact once Little Swan is fully consolidated. Midea will issue 342m shares for the stock acquisition. Midea will pay a 10% premium on Little Swan's outstanding A shares, and a 30% premium on Little Swan's outstanding B shares. Without factoring in any synergies, the transaction is slightly dilutive. By our estimate, Midea's 2018 EPS will fall from RMB3.17 per share to RMB3.13 per share, or ~1%. The transaction will provide Midea with better control over Little Swan's branding, marketing and sales distribution. We maintain our BUY rating on Midea. 2

3 October 29, 2018 A-SHARE: NEW RULES TO ALLOW MUCH GREATER FLEXIBILITY FOR SHARE BUYBACKS Analysts: Wong Chi-man, CFA (Tel: (852) ); Mark Lau (Tel: (852) ); Summary. The authorities announced a revision in Company Law last Friday, which allows much greater flexibility for share buybacks. In the past, China-registered companies were required to get approval at an extraordinary general meeting (EGM) before conducting a share buyback. Under the revised Company Law, companies are allowed to get approval for a share buyback at an EGM or board meeting approval (two-thirds majority) based on the articles of association if the share buyback is a necessary step to protect the value of a listed company and shareholders interest. This implies that the time to get the approval will be much shorter without having to go through an EGM. Companies will be able to react much faster during a sharp market correction. The revised law will not only benefit A-share companies, but also H-share companies with a strong balance sheet, such as Conch Cement (0914.HK) and GZ Auto (2238.HK). Two more criteria are allowed for a share buyback. Before the revision last Friday, Company Law in China allowed a company to buy back its own shares under these four criteria: (i) for reduction of registered share capital; (ii) for a merger with other entities that own the company's shares; (iii) for a staff share incentive scheme; and (iv) for shareholders who object to a merger or split of the company and ask the company to buy back the shares they own. After the revision, two more criteria are allowed for a share buyback: (v) buying back shares for issuing shares to holders of convertible bonds; and (vi) a necessary step to protect the value of a listed company and shareholders interest. Much faster process to launch a share buyback. In the past, for criteria (i), (ii) and (iii), companies had to get the approval at an EGM before launching a share buyback. Given the much longer process, share buybacks were much less common for A-share and H-share companies in the past compared with companies registered in Hong Kong and overseas. Under the revised law, getting approval at an EGM is still a necessary requirement for criteria (i) and (ii). However, for criteria (iii), (v) and (vi), companies are allow to get approval for a share buyback through an EGM or board meeting (two-thirds majority) based on the articles of association. Without having to go through an EGM, it will be much faster for China-registered companies to launch share buybacks to protect the value of a listed company and shareholders interest. Introduction of the concept of treasury stock. Under the revised law, companies are allowed to keep the shares bought back based under criteria (iii), (v) and (vi) for three years before selling them back to the market or cancelling them. The companies can keep not more than 10% of the issued shares. This will encourage more companies to buy back, in our view, as the new measures largely reduce concern about a lower free float, since there is no pressure to cancel the shares permanently within a short period of time. However, it remains to be seen whether H-share companies will benefit, as there is no treasury stock concept in the Hong Kong market. Potential beneficiaries. We note that at least 10 A-share companies (Figure 1) announced their intention to launch a share buyback plan yesterday. In particular, half of them clearly stated that they are considering a share buyback because of the revised Company Law. As the A-share market is highly news driven, we believe these companies are likely to draw investors attention in the near term. Meanwhile, we believe H-share companies with a strong balance sheet, such as Conch Cement and GZ Auto, may also consider launching share buyback plans under the revised law. Both companies are in net cash position and are trading at mid single-digit PER. Figure 1: A-share companies that yesterday announced their intention to launch share buyback plans Company Ticker Industry Price Market cap (RMB Proposed scale of Max. repurchase EGM approval (RMB) m) buyback (RMB m) price (RMB) required? Hengli Petrochemical Co., Ltd. SHSE: Commodity Chemicals Yes Humanw ell Healthcare (Group) Co.,Ltd. SHSE: Pharmaceuticals n.a. To be confirmed Meisheng Cultural & Creative Corp., Ltd. SZSE: Apparel, Accessories and Luxury Goods Yes Changjiang & Jinggong Steel Building (Group) Co., Ltd SHSE: Construction and Engineering To be confirmed Talkw eb Information System Co.,Ltd. SZSE: Interactive Home Entertainment Yes Anhui Huilong Agricultural Means of Production Co., Ltd. SZSE: Fertilizers and Agricultural Chemicals Yes Zhejiang Guangsha Co., Ltd. SHSE: Diversified Real Estate Activities To be confirmed Chengdu Yunda Technology Co., Ltd. SZSE: Electronic Equipment and Instruments Yes Jiangsu JIXIN Wind Energy Technology Co., Ltd. SHSE: Heavy Electrical Equipment To be confirmed Hefei Metalforming Intelligent Manufacturing Co., Ltd. SHSE: Industrial Machinery To be confirmed Sources: Capital IQ, CGIS Research 1

4 October 29, 2018 Yangtze Optical Fibre & Cable Joint Stock Limited Company (YOFC) reported its Q results. Turnover and net profit grew 5% YoY and 16% YoY, respectively. The slowdown in YoY growth was due to a high base in Q and more balanced supply/demand dynamics. We expect YOFC to remain the leader in the global optical fibre market and a major beneficiary of 5G development. We believe that as a leading player with an integrated business model, YOFC will outperform its peers. We revised downwards our net profit forecasts for YOFC for 2018 and 2019, given lower ASP and volume assumptions. After the share price correction, YOFC (Hshare) is trading at a discount to its HK and A-share-listed peers, at an average 13.6x 2018 PER, despite its leading global position. We maintain our BUY rating with a new target price of HK$32.15 (previous: HK$40.60), based on 13x PER, which is a discount to YOFC s A- share-listed peers. The downward revision is due to the lower PE multiple (cut from 15x to 13x) used and the downward revision in net profit forecasts. The target price for YOFC ( CH) is RMB47.5, based on a 25% premium for YOFC-H (Hang Seng Connect China AH Premium Index). We have a HOLD rating on YOFC-A. Investment Highlights Q results highlights. YOFC s Q turnover was approximately RMB2,892.6m, up 5% YoY from RMB2,792.6m in Q YOFC s growth slowed down from 21% YoY in 1H 2018 to 5% YoY in Q The Company s Q net profit was RMB428.5m, up 16% YoY from RMB369.6m in Q YOFC s gross profit margin increased to 28.7% in Q3 2018, up from 28.2% in 1H 2018 and 26.7% in Q The slowdown in YoY top-line growth in Q3 2018, in our view, was due to: a) a high base in Q3 2017, and b) more balanced supply/demand dynamics. The further increase in gross profit margin, in our view, was mainly due to changes in the sales structure. YOFC booked higher administrative expenses in Q than in Q and Q3 2017, which we believe was partly due to A- share IPO-related costs. Outlook not as bad as suggested after the share price correction. YOFC s slowdown in YoY turnover in Q may trigger concern about the outlook for the industry and YOFC. We believe that demand for optical fibre will remain solid in 2018 and 2019, given continuous investment by telecom operators, especially for FTTH and 5G. As a leading player, YOFC should achieve satisfactory growth through market share gains and better profitability. China Mobile recently re-launched tenders for optical fibre cable box connectors, and the tender for optical fibre cable is expected to kick-off by the end of 2018, which the market is likely to treat as catalyst for the optical fibre supply chain. From a long-term perspective, YOFC s growth will be supported by new product development, such as ULL optical fibre, which is expected to be used for upgrading the main trunk of the optical fibre network of Chinese telecom operators. We believe that the outlook for YOFC is not as bad as suggested by the Company s share price correction in the past several months. Downward earnings adjustment. We revised downwards our 2018 and 2019 net profit forecasts by 8.5% and 7.9%, respectively. We cut our turnover forecasts by 8.1% and 9.8%, assuming lower volume and ASP growth. Our blended gross margin assumptions are up by 0.44% and 0.66% for 2018 and 2019, because of an expected higher contribution from preform products. YOFC is trading at an undemanding valuation compared to its HKand A-share-listed peers. We cut our target price for YOFC, given the lower target PER used and the downward revision in our net profit forecasts. BUY (H-share)/HOLD (A-Share) Close: HK$20.95 (Oct 26, 2018) TP (H) : HK$32.15 (+53.4%) TP (A) : RMB40.18 (+7.4%) Share Price Performance 50 Turnover (RHS) Price (LHS) Source: Bloomberg. Market Cap US$3,127m Shares Outstanding 757.9m Auditor KPMG Free Float 43.8% 52W range HK$ M average daily T/O US$12.9m Major Shareholding Draka (23.7%) China Huaxin (23.7%) Source: Bloomberg, Company data Mark Po, CFA Senior Analyst Key Financials E (in RMBm) Revenue 6, , , , ,454.8 Change (YoY %) Gross Profit 1, , , , ,487.8 Gross Margin % Net Profit , , ,882.6 Net Margin % EPS (Basic) Change (YoY %) DPS $0.174 $0.255 $0.000 $0.755 $0.497 ROE (%) Dividend Yield (%) PER (x) (852) markpo@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk PBR (x) FCF Yield (%) 4.90% 10.05% 11.74% 6.34% 7.03% Capex (m) (112.4) (278.5) (161.5) (920.0) (1,058.0) Free cash flow per share Net Gearing (%) Net Cash Net Cash Net Cash Source: Bloomberg, CGIS Research, 1

5 Figure 1: Key assumptions for YOFC F 2019F Turnover (RMBm) Optical fibre preforms and fibres 2, , , , , , ,721.2 Optical fibre cables 1, , , , , , ,003.4 Other products and services Total 4, , , , , , ,312.3 YoY Change (%) Optical fibre preforms and fibres Optical fibre cables Other products and services (9.9) Total Gross margin (%) Optical fibre preforms and fibres Optical fibre cables Other products and services Net margin (%) ASP Optical fibre preforms (RMB/tonne) 1, , , ,194.4 Optical fibres (RMB/fkm) Optical fibre cables (RMB/fkm) YoY Change (%) ASP Optical fibre preforms (7.9) Optical fibres (6.7) Optical fibre cables (1.3) (5.1) Volume Optical fibre preforms (tonne) , , , , , ,930.7 Optical fibres (fkm) 29, , , , , , ,811.2 Optical fibre cables (fkm) 15, , , , , , ,732.7 YoY Change (%) Volume Optical fibre preforms Optical fibres Optical fibre cables Cost (HKDm) S,G&A (548.6) (565.4) (714.4) (861.7) (1,273.0) (1,477.2) (1,517.0) Financial Expenses (68.0) (78.0) (81.3) (99.2) (156.4) (112.2) (78.2) YoY Change (%) S,G&A Financial Expenses (28.2) (30.3) Source: Company, CGIS Research 2

6 Figure 2: Earnings projection Income Statement (RMBm) FY2015 FY2016 FY2017 FY2018F FY2019F Cash Flow Statement (RMBm) FY2015 FY2016 FY2017 FY2018F FY2019F Revenue 6,731 8,111 10,366 11,559 12,455 Net Income ,465 1,747 1,985 Growth yoy% 18.6% 20.5% 27.8% 11.5% 7.7% Depreciation & Amort Gross Profit 1,304 1,645 2,725 3,211 3,488 Change in Working Capital (188) (156) (116) Growth yoy% 19.9% 26.1% 65.7% 17.8% 8.6% Cash from Ops ,307 1,738 1,826 2,174 Selling General & Admin Exp. (714) (862) (1,273) (1,477) (1,517) Capital Expenditure (112) (278) (161) (920) (1,058) Others Operating Expenses/Items 76 (35) (118) Sale of Property, Plant, and Equipment Operating Income ,334 1,771 2,012 Change in Investing Acitivities (421) (1,107) (381) (278) (146) Growth yoy% n.a. 12.4% 78.3% 32.7% 13.7% Cash from Investing (533) (1,385) (542) (1,198) (1,204) Interest Expense (156.4) (112.2) (78.2) (82.8) (86.2) Net increase in bank borrowings (134) (776) (774) Interest and Invest. Income Income/(Loss) from Affiliates Issuance of Common Stock ,024 0 Other Non-Operating Inc. (Exp.) Common Dividends Paid (106) (119) (233) (379) (193) Impairment of Goodwill Special Dividend Paid Gain (Loss) On Sale Of Invest Other Financing Activities (56) 522 (12) (226) (249) Gain (Loss) On Sale Of Assets Cash from Financing (62) (373) (1,019) 1,478 (399) Income Tax Expense (74) (100) (212) (250) (286) Minority Int. in Earnings Net Change in Cash 10 (452) 176 2, Net Income ,268 1,664 1,883 Growth yoy% 22.4% 25.6% 76.9% 31.2% 13.1% Balance Sheet (RMBm) FY2015 FY2016 FY2017 FY2018F FY2019F Ratios FY2015 FY2016 FY2017 FY2018F FY2019F ASSETS Sources: Company, CGIS Research Profitability Cash And Equivalents 2,047 1,628 1,800 3,905 4,477 Return on Assets % 8.1% 9.1% 14.6% 15.4% 14.2% Receivables 2,296 2,169 2,522 2,812 3,030 Return on Capital % 11.4% 12.1% 19.5% 20.1% 17.5% Inventory Return on Equity % 17.9% 18.5% 27.0% 24.5% 20.7% Other Current Assets Total Current Assets 5,028 4,622 5,229 7,719 8,579 Margin Analysis Net Property, Plant & Equipment 982 1,321 1,922 2,607 3,360 Gross Margin % 19.4% 20.3% 26.3% 27.8% 28.0% Long-term Investments SG&A Margin % 10.6% 10.6% 12.3% 12.8% 12.2% Other Intangibles EBIT Margin % 10.5% 9.9% 13.2% 15.5% 16.3% Deferred Tax Assets, LT EBITDA Margin % 12.3% 11.5% 14.9% 17.5% 18.8% Other Long-Term Assets 1,572 2,224 2,017 2,111 2,209 Net Income Margin % 8.5% 8.8% 12.2% 14.4% 15.1% Goodwill Accounts Receivable Long-Term Asset Turnover Total Long Term Assets 2,554 3,545 3,939 4,718 5,569 Total Asset Turnover 0.9x 1.0x 1.1x 0.9x 0.9x Total Assets 7,583 8,166 9,168 12,437 14,148 Fixed Asset Turnover 2.6x 2.3x 2.6x 2.5x 2.2x Accounts Receivable Turnover 3.2x 3.6x 4.4x 4.3x 4.3x LIABILITIES & EQUITY Inventory Turnover 9.9x 11.7x 12.9x 12.9x 12.9x Accounts Payable 1,320 1,377 1,938 2,161 2,328 Accrued Exp Liquidity Short-term Borrowings 1, Current Ratio 1.7x 1.8x 1.8x 2.5x 2.6x Curr. Port. of LT Debt Quick Ratio 1.4x 1.3x 1.2x 1.9x 2.0x Curr. Income Taxes Payable Avg. Days Sales Out Unearned Revenue, Current Avg. Days Inventory Out Other Current Liabilities Avg. Days Payable Out Total Current Liabilities 2,977 2,636 2,948 3,112 3,331 Avg. Cash Conversion Cycle Long-Term Debt Net Debt to Equity 11% 3% Def. Tax Liability, Non-Curr Other Non-Current Liabilities Growth Over Prior Year Total Liabilities 3,851 3,743 3,682 3,868 4,111 Total Revenue 18.6% 20.5% 27.8% 11.5% 7.7% Common Stock Net Income 22.4% 25.6% 76.9% 31.2% 13.1% Additional Paid In Capital Payout Ratio % 14.6% 17.4% 0.0% 30.9% 20.0% Retained Earnings 2,893 3,484 4,556 7,597 9,103 Treasury Stock Comprehensive Inc. and Other Minority Interest Total Equity 3,732 4,424 5,486 8,569 10,036 Total Liabilities And Equity 7,583 8,166 9,168 12,437 14,148 3

7 China Cement Weekly October 29, 2018 Faster Cement Production Volume Growth in Sept in Most Regions; Uptrend in Cement Prices Continued The average cement price (nationwide) increased 1% to RMB423/tonne from the price in the previous week. There was an increase in cement prices of RMB20-50/tonne in Jiangsu, Zhejiang, Jiangxi, Anhui and Sichuan. In late October, cement demand continued to increase steadily, and inventory levels in most regions remained low. As a result, cement and clinker prices continued to climb, especially clinker prices in the Yangtze River Delta region, which were near the highest price in the past year. Cement and clinker prices are expected to maintain a moderate uptrend in the near future. The average inventory level (nationwide) declined slightly from 49.9% to 49.8% week on week. Coal prices remained flat last week. The comprehensive average price index for Bohai-Rim Steam Coal (Q5500K) remained at RMB571/tonne last week. The index decreased 1.9% on a year-on-year (YoY) basis. Cement production volume grew faster in most regions. Cement production volume by region in September was released last week. It is encouraging to see faster growth in most regions. For instance, cement production volume grew 9.23% YoY in east China last month, much higher than the growth rate of 1.84% for 9M2018. Production volume in southwest China also increased 11.67% YoY in September, higher than the growth rate of 7.16% in 9M2018. Although production volume still fell 1.21% YoY last month in north China, it was an improvement compared with the decline of 9.15% YoY in 9M2018. The situation was similar in northwest China, which saw a 4.7% YoY drop in production volume last month, but was still better than the fall of 10.51% in 9M2018. However, production volume in Guangdong dropped 4.7% YoY in September, mainly because of the typhoon. Cement stocks under coverage fell 9.73% on average last week. The share price performance of the sector was weak last week, following the overall market. Best performer BBMG [2009.HK; BUY] stayed flat last week. CNBM [3323.HK; BUY], the weakest among our coverage stocks, fell 14.92% week on week. Wong Chi Man Head of Research Valuation Table (852) cmwong@chinastock.com.hk Mark Lau Research Analyst (852) marklau@chinastock.com.hk Sources: Company, Bloomberg, CGIS Research estimates 1

8 Peer Comparison Sources: Bloomberg, CGIS Research 1-Year Relative Performance Sources: Bloomberg, CGIS Research 2

9 Figure 1: Regional Cement Price Sources: Digital Cement, CGIS Research 3

10 Strategy October 29, 2018 We resume our weekly short-selling analysis, as the data release schedule has returned to normal. Last Friday, the HKSFC released the aggregate short positions data for October 19. We analyzed which companies may be vulnerable to short-selling activity, based on the following three criteria: (i) the net change in short positions between October 12 and October 19; (ii) short positions as a percentage of free float; and (iii) the absolute amount of short positions. We must emphasize this is only an objective quantitative analysis based on official data; the analysis does NOT imply that we feel uncomfortable with the corporate governance or fundamentals of some companies. According to the results of our analysis, we believe CR Cement (1313.HK) requires close monitoring, based on the latest short positions outstanding. On the other hand, we note a sizable decline in short positions in Shanghai Pharm (2607.HK). CR Cement: As Figure 1 shows, short positions in CR Cement jumped 22.3% during the week ended October 19. The outstanding short positions were equivalent to 3.7% of its free float. The 5-day moving average short-selling amount during the week ended October 26 was HK$66.65m, rising from HK$37.73m during the week ended October 19. The stock was still up 43.3% YTD after the recent share price correction. Shanghai Pharm: As Figure 2 shows, short positions in Shanghai Pharma fell 18.9% during the week ended October 19. The outstanding short positions were equivalent to 1.6% of its free float. The 5-day moving average short-selling amount during the week ended October 26 was HK$1.36m, dropping from HK$3.5m during the week ended October 19. Recap: Source of data. The HKSFC releases the aggregate short positions in all eligible stocks every Friday, with a delay of one week. The HKEx releases the data on shortselling activity on a daily basis (without a one-week delay), but investors do not know whether the short positions are covered or not later. Therefore, the usefulness of the HKSFC data is that it provides the outstanding short positions in each stock, and investors can trace the net change on a weekly basis. However, there are still some limitations, as this data set cannot cover short-selling activity using OTC derivative products. Three angles to analyzing the data. (i) The net change in short positions between October 12 and October 19; (ii) short positions as a percentage of free float; and (iii) the absolute amount of the short positions. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Mark Lau Research Analyst (852) marklau@chinastock.com.hk 1

11 Figure 1: Top 50 short selling stocks (ranked by net change between October 12 and October 19, descending order) Ticker Company name short short positions positions on Oct on 19 (shares) Sources: HKSFC, Bloomberg, CGIS Research % of free float Change in short positions compared with Oct 26 Price change during the period Market cap (HK$m) PER (x) 2019E PER (x) PBR (x) Dividend yield (%) short positions on / 3- month average daily turnover 440 DAH SING 70,400 3,287, % n.a % 13, MEIDONG AUTO 538,000 1,802, % n.a % 3, SPRINGLAND 759,000 1,168, % n.a % 3, DYNAM JAPAN 178,200 1,683, % n.a % 7, n.a ZHAOBANGJI PPT 664,000 6,640, % 159.4% % 12,328 n.a. n.a n.a HKICIM GROUP 2,275,407 4,459, % 142.2% % 8,073 n.a. n.a n.a CHINA MERCHANTS 82, , % 141.2% % 1,363 n.a. n.a n.a HOPSON DEV HOLD 2,844,002 17,149, % 110.6% % 13, LIFESTYLE INT'L 2,375,415 33,825, % 95.6% % 20, CALC 432,000 3,546, % 88.6% % 5, LANGHAM-SS 1,076,000 3,012, % 79.3% % 5, PICC GROUP 171,230, ,826, % 78.1% % 140, VSTECS 1,474,000 5,792, % 72.2% % 5, KERRY LOG NET 914,532 11,431, % 68.3% % 21, MINMETALS LAND 1,949,159 2,319, % 55.9% % 4,016 n.a. n.a n.a MASON GP HOLD 59,730,345 8,362, % 54.7% % 6,470 n.a. n.a n.a MAANSHAN IRON 128,248, ,880, % 45.2% % 36, CHINA SCE PPT 7,586,673 20,408, % 44.9% % 10, FE CONSORT INTL 2,930,832 10,521, % 44.3% % 8, C C LAND 6,132,000 11,589, % 43.2% % 7,221 n.a. n.a n.a CITYCHAMP 6,882,000 11,217, % 42.5% % 7,137 n.a. n.a n.a HOPEWELL HOLD 1,207,918 29,533, % 41.6% % 21, CS HEALTH 5,694,000 4,042, % 37.9% % 2,007 n.a. n.a n.a SIICENVIRONMENT 3,954,200 6,722, % 33.9% % 3, n.a CHINA SUNTIEN 4,005,000 7,889, % 33.5% % 6, NEW WORLD DEV 112,658,863 1,126,588, % 32.5% % 101, CHINA SHENHUA 38,619, ,474, % 31.4% % 441, CHINA RES POWER 13,150, ,848, % 28.1% % 61, XIABUXIABU 24,095, ,547, % 27.9% % 10, QHD PORT 955,000 1,613, % 27.2% % 17, KASEN 2,184,000 7,010, % 26.8% % 4,630 n.a. n.a n.a TECHTRONIC IND 17,363, ,403, % 26.6% % 24, GUORUI PPT 9,425,268 18,473, % 26.4% % 15,361 n.a. n.a n.a PRADA 11,376, ,828, % 25.3% % 147, YIHAI INTL 27,758, ,876, % 24.4% % 10, CHINAGRANDPHARM 4,252,788 17,351, % 24.1% % 15, n.a JINGRUI HLDGS 6,903,000 14,496, % 22.8% % 2,881 n.a. n.a n.a CHINA ORIENTAL 6,936,000 42,378, % 22.7% % 22, CHINARES CEMENT 69,462, ,816, % 22.3% % 49, CSPC PHARMA 85,260,256 1,393,152, % 21.8% % 101, DONGFENG GROUP 33,962, ,905, % 21.8% % 62, TRAD CHI MED 44,754, ,774, % 21.6% % 24, SA SA INT'L 35,005, ,117, % 21.1% % 9, HAOHAI BIOTEC 28,700 1,348, % 20.6% % 7, CHINA BLUECHEM 10,590,800 30,077, % 20.0% % 12, HSBC HOLDINGS 133,602,024 8,530,489, % 19.9% % 1,205, CHINA RES BEER 57,269,407 1,606,406, % 19.7% % 88, H&H INTL HLDG 6,556, ,177, % 19.3% % 25, WH GROUP 157,342, ,321, % 19.3% % 84, TCL MULTIMEDIA 5,872,399 19,320, % 19.1% % 7,

12 Figure 2: Top 50 short selling stocks (ranked by net change between October 12 and October 19, ascending order) Ticker Company name short short positions positions on Oct on 19 (shares) Sources: HKSFC, Bloomberg, CGIS Research % of free float Change in short positions compared with Oct 26 Price change during the period Market cap (HK$m) PER (x) 2019E PER (x) PBR (x) Dividend yield (%) short positions on / 3- month average daily turnover 1308 SITC % % % 16, MINSHENG EDU % % % 5, SHENGYE CAPITAL % % % 5,438 n.a. n.a n.a HAECO 99,600 7,116, % -68.9% % 11,901 n.a. n.a n.a GUANGDONG INV 7,319, ,297, % -55.8% % 89, HEC PHARM 862,000 26,808, % -49.6% % 13, GAPACK 505,000 2,469, % -41.3% % 6,792 n.a. n.a n.a TIANJINPORT DEV 1,292,000 1,020, % -38.2% % 4,926 n.a. n.a n.a CHOW TAI FOOK 4,480,000 30,329, % -32.2% % 67, NEW HIGHER EDU 10,902,009 43,717, % -30.6% % 5, UCD 1,283,000 3,284, % -28.8% % 3, JINJIANG HOTELS 5,482,000 10,196, % -28.7% % 10, CMS 6,337,000 58,110, % -28.6% % 21, KINGSTON FIN 8,158,000 14,847, % -28.5% % 24,370 n.a. n.a n.a JIANGSU EXPRESS 4,697,561 45,331, % -27.4% % 51, RS MACALLINE 2,557,213 16,775, % -27.3% % 40, SHINEWAY PHARM 964,451 9,914, % -24.9% % 8, CHINA LESSO 4,286,411 17,788, % -24.7% % 13, CHINA AEROSPACE 6,200,000 3,224, % -23.4% % 1,635 n.a. n.a n.a EB SECURITIES 1,654,800 10,143, % -23.1% % 46, HKT-SS 12,415, ,326, % -22.6% % 80, LONKING 8,829,400 16,952, % -22.5% % 7, TONGRENTANGCM 319,000 4,657, % -21.2% % 11, CC SECURITIES 16,328,583 27,758, % -20.9% % 16, CGN NEW ENERGY 1,658,000 1,707, % -19.8% % 4, LONGFOR PPT 10,344, ,893, % -19.2% % 108, SH PHARMA 12,955, ,987, % -18.9% % 56, CN MINSHENG FIN 27,565,743 7,167, % -18.8% % 7,116 n.a. n.a n.a QINGDAO PORT 3,829,000 18,302, % -18.5% % 27, XINHUA WINSHARE 5,427,764 26,107, % -18.2% % 10,043 n.a. n.a n.a CONCORD NE 26,090,494 7,827, % -18.0% % 2, TK GROUP HLDG 480,000 1,958, % -17.8% % 3, SHANGHAI FUDAN 291,425 2,369, % -17.5% % 5,472 n.a. n.a n.a SWIREPROPERTIES 6,442, ,949, % -17.2% % 158, NAGACORP 2,216,000 16,265, % -16.8% % 31, KAISA GROUP 29,732,947 57,681, % -15.8% % 11, n.a LIVZON PHARMA 1,471,109 33,909, % -14.8% % 20, MODERN LAND 1,468,000 1,526, % -14.7% % 2, NEXTEER 14,636, ,531, % -14.2% % 25, PACIFICTEXTILES 10,777,830 83,743, % -14.0% % 11, BAIC MOTOR 52,375, ,642, % -14.0% % 32, JINCHUAN INTL 33,323,000 23,992, % -13.2% % 8,449 n.a. n.a n.a BE CLEAN ENERGY 192,571,446 19,064, % -13.2% % 6, n.a SINO BIOPHARM 175,003,194 1,169,021, % -13.0% % 86, HUADIAN POWER 56,116, ,758, % -12.8% % 39, COFCO MEAT 7,421,426 8,089, % -12.8% % 4,214 n.a SMARTONE TELE 8,530,776 89,402, % -12.4% % 11, CITIC TELECOM 2,433,259 5,937, % -12.4% % 8, C-MER EYE 2,582,000 9,191, % -12.4% % 3,354 n.a. n.a. n.a. n.a WISDOM EDU INTL 12,112,480 37,306, % -12.0% % 6,

13 Figure 3: Top 50 short selling stocks (ranked by percentage of free float) Ticker Company name short short positions positions on Oct on 19 (shares) Sources: HKSFC, Bloomberg, CGIS Research % of free float Change in short positions compared with Oct 26 Price change during the period Market cap (HK$m) PER (x) 2019E PER (x) PBR (x) Dividend yield (%) short positions on / 3- month average daily turnover 3808 SINOTRUK 187,433,000 2,474,115, % -2.0% % 30, UNITED LAB 166,957,872 1,001,747, % -3.1% % 8, PING AN 1,243,624,759 92,090,413, % -0.3% % 1,355, GREATWALL MOTOR 660,117,943 3,003,536, % 5.0% % 55, ZHENGTONGAUTO 206,912, ,410, % 2.9% % 9, BYD COMPANY 139,297,426 6,839,503, % -0.7% % 146, EVERGRANDE 320,157,956 6,345,530, % 3.3% % 251, FULLSHARE 988,457,545 3,064,218, % 0.0% % 60,766 n.a. n.a n.a ANGANG STEEL 156,489,328 1,071,951, % 2.3% % 47, GOME RETAIL 1,642,162,779 1,231,622, % -1.6% % 16,599 n.a ZHONGSHENG HLDG 75,782,613 1,144,317, % -2.9% % 34, BYD ELECTRONIC 86,050, ,055, % -1.4% % 19, CHINA LIT 21,854, ,502, % -2.9% % 37, CONCH CEMENT 152,501,562 6,534,691, % 2.7% % 192, CAR INC 71,666, ,014, % 2.5% % 13, XINYI SOLAR 348,861, ,915, % -0.7% % 18, SMIC 498,466,534 3,329,756, % 0.3% % 30, MGM CHINA 98,004,850 1,223,100, % 5.3% % 42, BRILLIANCE CHI 357,477,877 2,466,597, % 6.5% % 32, CHINA STATE CON 176,718,179 1,307,714, % -2.4% % 28, COFCO PACKAGING 56,530, ,502, % 0.8% % 3, YOFC 19,178, ,918, % -1.0% % 24, MINTH GROUP 78,411,642 2,077,908, % 1.6% % 29, LUYE PHARMA 195,038,797 1,174,133, % -2.9% % 18, WANT WANT CHINA 547,186,590 3,129,907, % 0.2% % 69, CTEG 160,573, ,853, % 3.1% % 2, GREENTOWN SER 56,086, ,203, % 3.4% % 15, SUNART RETAIL 165,124,948 1,567,035, % 2.5% % 85, WEICHAI POWER 208,884,515 1,708,675, % -6.3% % 68, KINGSOFT 80,735, ,537, % 5.9% % 14, GCL-POLY ENERGY 1,277,825, ,188, % 2.0% % 8, KINGDEE INT'L 245,389,494 1,671,102, % -4.6% % 20, KUNLUN ENERGY 331,904,290 2,910,800, % 1.2% % 72, BJ ENT WATER 502,052,501 2,033,312, % 1.3% % 36, LENOVO GROUP 661,685,970 3,394,449, % 3.3% % 59, BBMG 214,217, ,278, % -1.1% % 35, LI & FUNG 517,989, ,322, % 5.6% % 12, GUOTAI JUNAN I 274,141, ,608, % -4.0% % 10, ZHOU HEI YA 67,855, ,030, % -10.7% % 9, ALI PICTURES 1,230,725,445 1,304,568, % -1.0% % 26,508 n.a. n.a n.a AAC TECH 60,836,628 3,936,129, % -3.3% % 68, ZA ONLINE 35,232, ,799, % -3.3% % 38,142 n.a. n.a CGS 404,735,042 1,343,720, % 2.7% % 64, CMOC 335,597, ,318, % -6.6% % 87, SHENZHEN INVEST 245,713, ,112, % -0.8% % 17, WUXI BIO 36,593,668 2,331,016, % 8.7% % 68, ESPRIT HOLDINGS 137,322, ,391, % -2.1% % 3,454 n.a. n.a Q TECH 30,009, ,239, % 2.3% % 4, CHINA HUARONG 561,062, ,929, % 1.8% % 51, ZHAOJIN MINING 95,932, ,854, % 0.8% % 22,

14 Figure 4: Top 50 short selling stocks (ranked by absolute amount) Ticker Company name short short positions positions on Oct on 19 (shares) Sources: HKSFC, Bloomberg, CGIS Research % of free float Change in short positions compared with Oct 26 Price change during the period Market cap (HK$m) PER (x) 2019E PER (x) PBR (x) Dividend yield (%) short positions on / 3- month average daily turnover 2318 PING AN 1,243,624,759 92,090,413, % -0.3% % 1,355, TENCENT 76,036,765 21,442,367, % -4.9% % 2,475, AIA 139,646,377 8,699,969, % 9.5% % 717, HSBC HOLDINGS 133,602,024 8,530,489, % 19.9% % 1,205, BYD COMPANY 139,297,426 6,839,503, % -0.7% % 146, CONCH CEMENT 152,501,562 6,534,691, % 2.7% % 192, CHINA MOBILE 81,767,695 6,365,615, % -2.2% % 1,495, EVERGRANDE 320,157,956 6,345,530, % 3.3% % 251, HKEX 25,758,494 5,383,525, % 11.1% % 261, PSBC 1,069,778,277 4,942,375, % 0.4% % 376, SUNAC 195,658,739 4,040,352, % -6.3% % 92, AAC TECH 60,836,628 3,936,129, % -3.3% % 68, SANDS CHINA LTD 110,783,757 3,744,490, % 0.9% % 245, GALAXY ENT 81,899,097 3,734,598, % 4.8% % 182, HENGAN INT'L 58,802,728 3,710,452, % -0.2% % 78, SUNNY OPTICAL 42,009,616 3,514,104, % 9.6% % 70, MEITUAN-W 63,156,500 3,473,607, % 1.1% % 289,702 n.a. n.a. n.a. n.a. n.a. 992 LENOVO GROUP 661,685,970 3,394,449, % 3.3% % 59, CM BANK 112,322,439 3,330,360, % 0.0% % 825, SMIC 498,466,534 3,329,756, % 0.3% % 30, CPIC 112,986,776 3,242,720, % 0.7% % 337, WANT WANT CHINA 547,186,590 3,129,907, % 0.2% % 69, HK & CHINA GAS 207,734,292 3,120,169, % 3.8% % 228, FULLSHARE 988,457,545 3,064,218, % 0.0% % 60,766 n.a. n.a n.a GREATWALL MOTOR 660,117,943 3,003,536, % 5.0% % 55, KUNLUN ENERGY 331,904,290 2,910,800, % 1.2% % 72, COUNTRY GARDEN 344,050,109 2,831,532, % 6.9% % 180, CCB 417,598,101 2,589,108, % 2.3% % 1,562, SINOTRUK 187,433,000 2,474,115, % -2.0% % 30, BRILLIANCE CHI 357,477,877 2,466,597, % 6.5% % 32, WUXI BIO 36,593,668 2,331,016, % 8.7% % 68, HANG SENG BANK 11,471,239 2,305,719, % 8.1% % 362, XIAOMI-W 185,617,100 2,279,377, % -1.3% % 277, n.a LINK REIT 29,865,627 2,184,670, % 10.2% % 153, CLP HOLDINGS 24,649,035 2,183,904, % 2.1% % 215, CNOOC 150,490,442 2,118,905, % -0.9% % 598, MINTH GROUP 78,411,642 2,077,908, % 1.6% % 29, SHK PPT 19,817,499 2,049,129, % 1.5% % 297, BJ ENT WATER 502,052,501 2,033,312, % 1.3% % 36, GEELY AUTO 142,147,355 1,992,905, % -3.2% % 125, CHINA GAS HOLD 85,275,308 1,957,068, % -0.4% % 123, WEICHAI POWER 208,884,515 1,708,675, % -6.3% % 68, BOC HONG KONG 50,648,502 1,696,724, % 13.3% % 331, CHINA OVERSEAS 72,014,967 1,688,750, % 5.0% % 262, KINGDEE INT'L 245,389,494 1,671,102, % -4.6% % 20, SWIRE PACIFIC A 19,715,511 1,644,273, % 2.2% % 112, SINOPEC CORP 249,859,717 1,624,088, % -4.2% % 838, CHINA RES BEER 57,269,407 1,606,406, % 19.7% % 88, MTR CORPORATION 41,125,092 1,599,766, % 2.5% % 233, SUNART RETAIL 165,124,948 1,567,035, % 2.5% % 85,

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