Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Sep 30, 2014

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 14E 15E 14E 15E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK Local Daily ADR Daily ticker Company (HK$) (%) (US$) (%) 941 CHINA MOBILE PETROCHINA CO-H ICBC-H HSBC HLDGS PLC CHINA CONST BA-H TENCENT BANK OF CHINA-H SINOPEC CORP-H CNOOC LTD CHINA LIFE INS-H Econ data release China Data Date Period Prior Cons China Mfg PMI 30-Sep SEP China Non-Mfg PMI 2-Oct SEP HSBC China Serv PMI 7-Oct SEP HSBC Ch PMI - Output 7-Oct SEP US Data Date Period Prior Cons SPCS 20 YoY 30-Sep JUL Markit US Mfg PMI 1-Oct SEP F ISM Mfg PMI 1-Oct SEP Cont Jobless Claims 2-Oct 20-Sep Initial Jobless Claims 2-Oct 27-Sep US Trade Balance 3-Oct AUG U-3 Unemployment 3-Oct SEP Markit US Serv PMI 3-Oct SEP F ISM Non-Mfg NMI 3-Oct SEP Source: Bloomberg GF events Source: GF Securities A-Share Market Investment Strategy: More optimistic on market given depreciation policy We have become more optimistic on the market given the latest policy for accelerated depreciation of companies fixed assets which addresses the two factors that have driven our previous caution, namely deceleration in property & manufacturing investments and company cash flow issues given the pressure from growing intercorporate debt. We continue to recommend sectors that are minimally affected by the macro economic cycle and have seen substantial earnings improvements so far this year with limited share price growth such as marine engineering, environmental protection (water treatment), pharmaceutical, non-bank financials and rail equipment. Environmental: Clean coal usage industry to take off on policy support We expect the heating industry to replace the power industry as the main contributor to air pollution in the near future. In particular, clean coal usage will be the key measure for reducing pollution from the heating industry as the use of coal cannot be fully replaced by its key substitutes, namely natural gas and biomass fuel. It is reported that a plan for clean coal usage will be issued in the near future, and we expect industry growth to gather pace as the relevant policy stance becomes clear. Alibaba: First transaction after IPO targets O2O development Alibaba s subsidiary has purchased 15% stake in Shiji Info Technology as the internet giant seeks O2O development. Going forward, Alibaba will enhance its strength in online travel and restaurant services by connecting its existing business platforms to Shiji s hotel, restaurant and payment systems, building an O2O-based advertising platform. We believe usable funds from Alibaba s IPO will be spent on supply chain, business internationalization and mobile commerce development, and that this should lead to strong growth at the company s business partners in the related fields. Hong Kong Market Sihuan Pharmaceutical (460 HK): CCV drug development to drive growth; upgrade to Hold We now expect anti-corruption issues to have a limited impact on profitability following our latest communication with management. We expect Tylerdipine Hydrochloride, for which the company has recently received clinical trial approval, to be a significant driver for the company s future development in the CCV drug market. We increase our 2014/15 earnings forecasts by 8%/12%, and expect net profit to grow at a CAGR of 23% in The stock is trading at a fair 1.0x PEG. We upgrade the stock from Underperform to Hold, and raise our target price from HK$3.50 to HK$6.00, equal to 1.0x PEG. E-House China (NYSE: EJ, NR): Key takeaways from conference call E-House is a leading Chinese real estate services company with a diverse range of services, strong brand recognition and a broad geographic presence. In July, the company launched a range of new products and services, including its real estate financial services platform, Fang Jin Suo, its O2O mobile community services app, Shi Hui, and its home price ratings website and mobile app, Fangjiadp. However, we believe it will be challenging for the company to shift to an e-business model given its previous commissions-based brokerage model. The company lacks earnings visibility and we have a neutral view on future share price performance. Continued on next page 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 Investment Strategy: More optimistic on market given depreciation policy Data improvements weaker than peak-season levels Last week s industry data demonstrated improvements that were weaker than what is typically seen in the peak season. In particular, area sold in 30 large cities during Sep 1-26 rebounded 9% MoM with YTD area sold dropping 16.7% YoY (8M14: -17% YoY). Cement prices have risen over the past three weeks but at a relatively slow pace. YoY power generation growth in early and mid-sep strengthened from Aug but was still weak. In addition, coal prices have essentially stabilized over the past month. It is worth noting that declines in both the spot and futures prices of steel have accelerated likely driven by further deceleration in property investment growth and weaker steel demand from the auto industry. 9M14 data forecasts Based on these changes, we believe Sep industrial production growth should pick up from Aug though unlikely to exceed 8% YoY; overall property area sold during 9M14 is likely to decline 8% YoY, compared with a drop of 8.3% in 8M14; in addition, A-share ex-financial companies should see earnings growth ease from 6.8% YoY in 1H14 to 5.8% YoY in 9M14. Overall economic fundamentals remain relatively weak and are unlikely to improve significantly in the near term. That said, no further deterioration has been seen either since the start of Sep. More optimistic on market given depreciation policy We have become more optimistic on the market given the latest policy for accelerated depreciation of companies fixed assets which addresses the two factors that have driven our previous caution, namely deceleration in property & manufacturing investments and company cash flow issues given the pressure from growing intercorporate debt. Although this policy issuance alone might not serve to resolve all the existing issues with the economy and company operations, it has strengthened our confidence in the government s capability for effectively tackling other issues. Remain positive on marine engineering, environmental, pharma, non-bank and rail equipment The depreciation policy, while boosting manufacturing investment as well as company cash flows, will lead to slower company earnings growth in the coming two years. In addition, the valuations of many theme-driven and growth sectors are now very high and investors are reluctant to shift to traditional cyclical stocks due to deteriorating fundamentals. As such we continue to recommend sectors that are minimally affected by the macro economic cycle and have seen substantial earnings improvements so far this year with limited share price growth such as marine engineering, environmental protection (water treatment), pharmaceutical, non-bank financials and rail equipment. Environmental: Clean coal usage industry to take off on policy support Heating industry to become main target for air pollution control The heating industry accounts for more than 20% of national coal consumption with most of its production capacity inefficient and highly polluting. We expect the heating industry to replace the power industry as the main contributor to air pollution in the near future. In addition, environmental requirements for the heating industry are likely to be strengthened significantly going forward given that those for thermal power generation have been raised. Clean coal usage key way to reduce pollution Pollution reduction in the heating industry can be achieved mainly by reducing coal consumption and using coal in a cleaner fashion. Key substitutes for coal include natural gas and biomass fuel. However, coal cannot be fully replaced by natural gas due to the limited supply and high prices of natural gas, while biomass heating has continued to account for just a small proportion of overall energy consumption in the industry. As such clean coal usage will become the key measure for reducing pollution from the heating industry. Clean coal usage to take off on policy support It is reported that a plan for clean coal usage will be issued in the near future, and we expect industry growth to gather pace as the relevant policy stance becomes clear. It is worth noting that Yili Energy ( CH), Keda Clean Energy ( CH) and Tian Di Science & Technology ( CH) have accelerated the development of clean coal usage projects in recent years. Alibaba: First transaction after IPO targets O2O development First transaction after IPO targets O2O development Alibaba s subsidiary Taobao (China) Software has purchased 15% stake in Shiji Info Technology ( CH) for Rmb2.81bn, which was the first investment made by the internet giant following its recent IPO. Alibaba has built a PC- Page 2

3 based online advertising platform focusing on actual goods, domestic users and domestic brands over the past 15 years; going forward, it is set to develop into an international advertising platform using multiple channels (PC, mobile phone, TV) which is targeted at a global user base and provides both goods and services. O2O advertising platform based on Shiji connection Shiji Info Technology represents a 90% share of the market for five-star hotels information management systems in mainland China. Its restaurant information management system is used by more than 10,000 restaurants, and its CHINAonline business is linked to more than 20 key hotel booking channels and 10,000 hotels both in China and abroad. In addition, its payment systems have been adopted by the big five banks in China. Going forward, Alibaba will enhance its strength in online travel and restaurant services by connecting its existing business platforms to Shiji s hotel, restaurant and payment systems, building an O2O-based advertising platform. Investment opportunities at Alibaba s business partners We believe the funds raised from Alibaba s IPO which are available for use (~US$11.5bn) will be spent on supply chain, business internationalization and mobile commerce development. This should lead to strong growth at the company s business partners in the related fields. In particular, given Alibaba s mobile commerce development, players with data, user and merchant resources are all likely to become partners with Alibaba. Sihuan Pharmaceutical (460 HK): CCV drug development to drive growth; upgrade to Hold Clinical trials approval for Category 1.1 drug The company has received clinical trial approval for Tylerdipine Hydrochloride, a Category 1.1 drug, from the Chinese Food and Drug Administration. Patent applications for this innovative drug have been submitted in China, the United States, Japan and Europe. This is the sixth Category 1 drug for which the company has received clinical trial approval. Bullish on the drug s market potential The new drug is an antihypertensive drug that works through dual inhibition of L/T-type calcium channels. Calcium channel blockers are the most prescribed antihypertensive drugs in Asia. They effectively lower blood pressure, provide additional organ protection, and significantly reduce the incidence of peripheral edema when compared with L-type calcium channel blockers. Anti-hypertensive drug market to continue to expand According to World Health Statistics 2012 published by the World Health Organization, one-third of the world s adults suffers from hypertension, and China has more than 200 million people with the condition. The incidence of hypertension will continue to grow along with a rapidly aging population and urbanization. According IMS Health data, China s antihypertensive drug market had reached Rmb30.96bn by end-2013, with calcium channel blockers accounting for 20% of the market. We expect the anti-hypertensive drug market to continue to expand. 1H14 results review The company lowered the prices of its major products during 1H14 in order to drive sales volume in target hospitals. Revenue declined 14% YoY to Rmb2.0bn; gross margin remained flat at 80%; other gains came in at Rmb226m (mainly government grants). Following distribution channel adjustments, distribution costs declined 44% YoY to Rmb694m. Given its other gains and the sharp decrease in distribution costs, net profit rose 34% YoY to Rmb830m. An interim DPS of Rmb0.013 was announced. Increase earnings forecasts, upgrade to Hold Our previous Underperform rating was a result of anti-corruption issues, but we now expect these to have a limited impact on profitability following our latest communication with management. We expect Tylerdipine Hydrochloride to be a significant driver for the company s future development in the CCV drug market. We increase our 2014/15 earnings forecasts by 8%/12% to Rmb1.7bn/Rmb2.1bn respectively, and expect net profit to grow at a CAGR of 23% in The stock is trading at a fair 1.0x PEG. We upgrade the stock from Underperform to Hold, and raise our target price from HK$3.50 to HK$6.00, equal to 1.0x PEG. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Page 3

4 E-House China (NYSE: EJ, NR): Key takeaways from conference call Company profile E-House is a leading Chinese real estate services company with a diverse range of services, strong brand recognition and a broad geographic presence. It offers primary sales agency services, online real estate services, real estate information and consulting services, real estate advertising services, real estate promotional event services, secondary real estate brokerage services and real estate investment fund management services, and has been listed on the New York Stock Exchange since August New products and services launched In July 2014, the company launched a range of new products and services, including its real estate financial services platform, Fang Jin Suo, its O2O mobile community services app, Shi Hui, and its home price ratings website and mobile app, Fangjiadp. Leju has completed upgrades to its mobile e-commerce platform 2.0 and expanded its strategic alliances with secondary brokerage firms. The company has successfully set up five independent yet synergistic platforms: online services, brokerage services, information and consulting services, financial services and community value-added services. The rapid increase in scale and revenue of its e-commerce business led to a 2Q14 gross margin improvement (YoY). Management expects 2014 revenue to rise ~25% YoY The company has operations in more than 250 cities in China through its online services and direct operations in over 70 cities. Management is still exploring the profit model of a community service platform, and maintains its FY14 revenue guidance range of US$ m, which represents a YoY increase of 24% to 27%. The company has also launched its financial services platform. Our view: the company lacks clear earnings visibility The stock is trading at 11.0x 2014E P/E, and consensus sees EPS growing 34% YoY in We believe the company is shifting focus in its operation strategy and organizational structure, while there is no clear or executable business plan for its community services business. We believe it will be challenging for the company to shift to an e-business model given its previous commissions-based brokerage model. The company lacks earnings visibility and we have a neutral view on future share price performance. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Page 4

5 Hong Kong Equity 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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