Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jul 28, 2015

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$) (%) (US$) (%) 857 PETROCHINA ICBC CHINA MOBILE CCB BANK OF CHINA TENCENT HSBC CHINA LIFE SINOPEC PING AN Econ data release China Data Date Period Prior Cons Westpac MNI Con Sen 28-Jul JUL Manufacturing PMI 31-Jul JUL Non-Mfg PMI 31-Jul JUL Caixin Mfg PMI 2-Aug JUL F US Data Date Period Prior Cons S&P/CS Comp Jul MAY Markit US Serv PMI 28-Jul JUL P Pending Home Sales 29-Jul JUN Initial Jobless Claims 30-Jul 25-Jul Cont Jobless Claims 30-Jul 18-Jul Q GDP QoQ 30-Jul 2Q A Markit Mfg PMI 3-Aug JUL F ISM Mfg PMI 3-Aug JUL Source: Bloomberg GF events Source: GF Securities (HK) A-Share Market Auto: Commercial vehicle sales volume growth turns positive Overall auto sales volume fell 2.3% YoY in Jun. SUV and MPV sales volume remained strong, while sedans and mini buses posted YoY declines. Among commercial vehicles, the sales volume of medium and heavy duty trucks dropped in Jun, whereas light trucks picked up YoY, which was the main factor that led overall commercial vehicle sales volume growth to turn positive. Amid stable sector fundamentals and cheap relative valuations, the Made in China 2025 plan will speed up sector M&A and boost sector valuations. Construction: Three sector investment ideas 13 of the 34 listcos that had issued a 1H15 profit alert by Jul 22 expect negative earnings growth, suggesting considerable downward pressure on the sector. The construction design industry is showing considerable vitality against sector weakness, with the PPP model greatly strengthening companies bargaining power. We see home decoration as an ideal entry point for private-sector firms seeking business transformation, and highlight the business advantage of decoration companies. SOEs overseas project contracting is set to benefit from the Silk Road initiative, SOE reform and asset restructuring. Environmental: Watch companies in Beijing-Tianjin-Hebei pending Winter Olympics announcement The location of the 2022 Winter Olympics will be announced on Jul 31. Joint candidates Beijing and Zhangjiakou have been criticized by overseas media for their environmental problems, particularly the heavy smog in the region. Therefore, the selection of the two cities as the hosts of the games would mean stronger environmental investment in the Beijing-Tianjin-Hebei and surrounding areas, which should effectively boost order and earnings growth for environmental companies operating in that region over the next five years. Hong Kong Market Technology: Nowhere to hide... in a down market Stocks in the hardware sector fell 1-15% yesterday amid the correction in the broader market. Software and online gaming stocks were down 9-19%. We believe high P/E stocks with "fishy" business fundamentals/investment stories and poor earnings momentum are most vulnerable, such as Coolpad which fell 15%. Low P/E stocks are most defensive, such as TCL Comm (-1% yesterday) whose investment story remains sound. We suggest waiting for re-entry points for Tongda and TCL Comm. China Vanke (2202 HK, Buy): Foresea Life Insurance increases stake in Vanke-A to 10% Shenzhen-based Foresea Life Insurance has purchased another 5% of China Vanke s A-shares, increasing its stake to 10%. It has now invested over Rmb14bn this month for 1.1bn Vanke A-shares, indicating strong confidence in Vanke s sales and earnings growth. The company is now the second largest shareholder in Vanke (China Resources Co is the controlling shareholder with a stake of around 17%). Foresea Life could decide to compete to become the controlling shareholder in the future. Vanke is currently trading at an undemanding 8.9x 2015E P/E. 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 Auto: Commercial vehicle sales volume growth turns positive Jun auto sales volume down 2.3% YoY Overall auto sales volume fell 2.3% YoY in Jun, with sedans, SUVs and MPVs down 1.8% and commercial vehicles up 3.5%. The number of sedans, SUVs and MPVs registered for a license plate during May declined 2.8% YoY and represented 89.9% of the volume sold to auto dealers. It is worth noting that fourth-tier cities were the main contributor to license plate registration growth in May. Sector underperforming The auto sector dropped 10.1% during Jun, underperforming the CSI 300 by 2.5pp, with the P/E and P/B valuations of both the auto making and auto part sectors lower than May. Sales breakdown by vehicle type On a breakdown of passenger vehicle sales volume, growth in SUVs and MPVs remained strong at 37.7% and 36.0% YoY, while sedans (-14.9%) and mini buses (-23.3%) posted YoY declines. Among commercial vehicles, the sales volume of medium and heavy duty trucks dropped 20.6% YoY in Jun, whereas light trucks picked up 13.0%, which was the main factor that led overall commercial vehicle sales volume growth to turn positive. While the sales volume of medium and large buses fell 6.9% YoY, that of the most profitable models rose 15.6%, helping to stabilize bus companies earnings. Raw material costs Our index for auto sector raw material prices fell 18.9% YoY in Jun to a new low since 2007, with that for sedans and heavy duty trucks down 18.6% and 19.0% respectively. In addition, based on data from the 21 provinces we track, the natural gas to diesel price ratio came down significantly to 68.7% in Jun with 12 of the provinces tracked posting a ratio above 70%. Investment highlights Amid stable sector fundamentals and cheap relative valuations, the Made in China 2025 plan will speed up sector M&A and boost sector valuations. We highlight the following investment ideas: Listcos from the FAW and Dongfeng families; Other companies expected to be consolidated such as Jianghuai Automobile ( CH), CNHTC Jinan Truck ( CH), Beiqi Foton Motor ( CH) and Shanghai Diesel Engine ( CH); Automakers and auto part companies with cheap valuations such as Great Wall Motor ( CH), SAIC Motor ( CH), HUAYU Automotive Systems ( CH), Beiqi Foton Motor ( CH), Chongqing Changan Automobile ( CH) and Jiangling Motors ( CH); Quality auto part names in line with the Made in China 2025 plan such as Fulin Precision Machining ( CH), Beijing WKW Automotive Parts ( CH), Tianrun Crankshaft ( CH), Yunnei Power ( CH) and Weifu High-Technology ( CH). Auto R&D and service providers such as China Automotive Engineering Research Institute ( CH). Risks include slower-than-expected economic growth, deterioration in sector conditions, and weaker-than-expected policy implementation. Construction: Three sector investment ideas Infrastructure investment growth rebounding Continued declines in manufacturing and property investment growth are being offset by steadily rising infrastructure investment growth. In particular, investments in water works and transportation projects are likely to be used as the most important vehicles for maintaining stable economic growth. Meanwhile, property investment growth is likely to improve in the near future given the strengthening recovery in property sales volume but is unlikely to return to the high levels previously seen. Sector under pressure 13 of the 34 listcos that had issued a 1H15 profit alert as of Jul 22 expect negative earnings growth, suggesting considerable downward pressure on the sector. In addition, the significant drop in domestic orders received by construction firms is also weighing on 2H15 revenue growth. We highlight the following three investment ideas for the sector: Constriction design The construction design industry is showing considerable vitality against sector weakness, with market leaders such as JSTI ( CH) and Industrial Park Design & Page 2

3 Research Institute ( CH) expanding rapidly by making use of the capital markets. Furthermore, the promotion of the PPP model is greatly strengthening the bargaining power of design companies. Business transformation We remain optimistic on private-sector firms business transformation, particularly transformation towards areas closer to the end-consumer. We see home decoration as an ideal market entry point, and highlight the business advantage of decoration companies such as Gold Mantis ( CH), Yasha Decoration ( CH), Grandland Decoration ( CH), Hongtao Decoration ( CH), Dong Yi Ri Sheng Home Decoration ( CH) and Ruihe Construction Decoration ( CH). In addition, Palm Landscape Architecture ( CH) is seeking to shift its business focus towards ecological city operations with its Changsha Xunlong River project likely to become a model project for urbanization. Construction SOEs Among large construction SOEs businesses, overseas project contracting has a distinct counter-cyclical feature and is set to benefit from the Silk Road initiative, SOE reform as well as asset restructuring. We like Sinoma International Engineering ( CH), China CAMC Engineering ( CH) and Norinco International ( CH). Environmental: Watch companies in Beijing-Tianjin-Hebei pending Winter Olympics announcement Winter Olympics to boost environmental investment in Beijing-Tianjin-Hebei The location of the 2022 Winter Olympics will be announced on Jul 31. Joint candidates Beijing and Zhangjiakou have been criticized by overseas media for their environmental problems, particularly the heavy smog in the region. Therefore, the selection of the two cities as the hosts of the games would mean stronger environmental investment in the Beijing-Tianjin-Hebei and surrounding areas, which should effectively boost order and earnings growth for environmental companies operating in that region over the next five years. Based on companies business structure and earnings sensitivity, we prefer Sailhero Environmental Protection High-Tech ( CH), SDL Technology ( CH) and Bohai Water Industry ( CH) as investment targets for this theme. Sector outperformed during recent market recovery The GF Environmental Index had risen 25.89% (as of the end of last week) since the broader market rebounded on Jul 8, outperforming the market by 21.70pp. Sector share price growth during this round of recovery was the fourth highest among major sectors, just behind military equipment, agriculture and textiles & apparel. In particular, the water treatment, air treatment and biomass subsectors which had suffered relatively severe corrections posted stronger rebounds of 35.41%, 29.83% and 29.54%. 12 companies were suspended from trading as of last Friday. Our top picks for the week are Devotion Thermal Tech ( CH), GeoEnviron Engineering & Technology ( CH), Beijing Originwater Technology ( CH), Chifeng Jilong Gold Mining ( CH) and Sound Environmental Resources ( CH). Key risks include continued profitability declines amid vicious price competition, slower-thanexpected EPC project settlement, and low capacity utilization due to delays in the allocation of subsidies. Technology: Nowhere to hide... in a down market What's new? Stocks in the hardware sector fell 1-15% yesterday amid the correction in the broader market. Stocks in the software and online gaming sectors were down 9-19%. Who's more vulnerable? High P/E stocks, with "fishy" business fundamentals/investment stories and poor earnings momentum, such as Coolpad (2369 HK, Underperform) which fell 15%. The stock is trading at 14x 2015E P/E. The company has said that its smartphone profitability is worsening due to competition on prices, but has also stated that, at some point, it will be able to generate software/services revenue with LeTV (A-shares limit down yesterday) and Qihoo 360 it is currently unable to give a specific timeframe for when it can achieve this revenue. 5M15 net profit fell by over 40% YoY, according to the company. Who's more defensive? Low P/E stocks with decent earnings growth. TCL Comm (2618 HK, Buy) fell 1%. The company s investment story remains sound (gaining market share from Samsung and Nokia in the low-to-mid end global smartphone market). The stock is trading at 5.9x 2015E P/E Page 3

4 Recommendation Wait for re-entry points for Tongda (698 HK, Buy) and TCL Comm (2618 HK, Buy). (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, ) China Vanke (2202 HK, Buy): Foresea Life Insurance increases stake in Vanke-A to 10% What's new? On Jul , Shenzhen-based Foresea Life Insurance purchased another 5% of China Vanke s A-shares ( CH), increasing its stake to 10%. It has now invested over Rmb14bn this month for 1.1bn Vanke A-shares, indicating strong confidence in Vanke s sales and earnings growth. The company is now the second largest shareholder in Vanke (China Resources Co is the controlling shareholder with a stake of around 17%). Foresea Life could decide to compete to become the controlling shareholder in the future. Maintain Buy Vanke s 1H15 contract sales rose 9% YoY to Rmb109.9bn and the company saw GFA sold of 9m sqm, up 9.9% YoY. Management previously announced that it would invest Rmb10bn to buy back no more than 6.6% of its A-shares, demonstrating a bullish stance. We are bullish on the company s sales growth momentum given accelerating transaction volume in China. Vanke is currently trading at 8.9x 2015E P/E, undemanding in our view. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@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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