Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jan 9, 2015

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1 Equity Research 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 HSBC TENCENT CHINA LIFE INS SINOPEC PING AN INS Econ data release China Data Date Period Prior Cons Rmb New Loans 10-Jan DEC M0 10-Jan DEC M1 10-Jan DEC M2 10-Jan DEC Total Financing 10-Jan DEC China Trade Balance 13-Jan DEC China Exporst YoY 13-Jan DEC China Imports YoY 13-Jan DEC US Data Date Period Prior Cons U-3 Unemployment 9-Jan DEC Cont Jobless Claims 15-Jan Initial Jobless Claims 15-Jan Source: Bloomberg GF events Source: GF Securities A-Share Market Power Equipment: Wind power tariff cut smaller than expected; equipment manufacturers to benefit The NDRC s cut in the on-grid tariff for onshore wind power is smaller than previously expected. Wind power project IRR will decline by 1-2pp as a result of the cut, but investment sentiment in these projects should not be affected. We expect newly installed wind power capacity to grow 25% YoY to 25GW in 2015, with the pace of growth strengthening. Higher installed capacity growth will benefit wind power equipment manufacturers, with wind turbine leader Goldwind Science & Tech ( CH) the first to benefit. Technology: Panel price growth to remain strong in 1Q15 Panel prices have remained strong in early Jan. Panel demand has risen on robust global LCD TV shipment growth and the preference for large-screen TVs, while overall production capacity growth is easing. TV makers momentum to restock panels remains strong in the near term given their healthy panel inventory levels. In addition, global panel production capacity growth should be limited in 2015 as Taiwanese panel makers are cautious about expanding capacity. As such we expect strong panel price growth to continue in 1Q15. Great Wall Motor ( CH): High-end SUVs potential catalyst for earnings and valuation Dec sales were in line with our expectation. The company is likely to launch several high-end SUV models and several important facelift models in 2015 the new product cycle should help raise its growth upside. We believe the H1, H2, H6 and its pickup truck models will remain the company s main earnings contributors in In addition, its high-end SUV products are likely to provide a catalyst for both earnings and valuation growth if they turn out to be successful in the market. Hong Kong Market Peak Sport (1968 HK, Accumulate): Mid-teen order book growth continues in 3Q15; TP lowered to HK$2.27 Order book growth remained stable QoQ in 3Q15 despite a high base. Footwear and apparel recorded mid-teen growth and low-teen growth, respectively. Although this sales mix could have a slightly unfavorable impact on GM, we expect a slight GM improvement in FY15 given the fall in prices of raw materials such as rubber, cotton and polyester. We revise down our FY14/15/16 net profit estimates and lower from HK$2.70 to HK$2.27. We expect the company to post an above-peer EPS CAGR in FY15-16 driven by growth in overseas and domestic markets. CT Environmental (1363 HK; Buy): New operation agreement for hazardous waste project in Guangzhou CT Environmental has signed a 20-year agreement for the operational management and technical upgrade of a hazardous waste project in Guangzhou. We see the project as positive for CT, expecting it to enhance 2015/16 net profit by <3%. In addition, the company could further enlarge its market share in copper etching fluid treatment in Guangzhou as the proposed acquisition of the Lvyou hazardous waste treatment project also included this business. Given our forecast for a 62% YoY surge in 2014 net profit, we expect CT to issue a positive profit alert. We maintain our Buy rating and TP of HK$9.70. 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 Power Equipment: Wind power tariff cut smaller than expected; equipment manufacturers to benefit Wind power tariff cut smaller than expected The NDRC has lowered the on-grid tariff for onshore wind power in resource regions I, II and III by Rmb0.02/kWh to Rmb0.49, 0.52 and 0.56/kWh, while keeping that for region IV unchanged at Rmb0.61/kWh. The price cut will apply to onshore wind power projects approved after Jan 1, 2015 and those approved before this date but brought on line after Jan 1, According to a consultation paper issued earlier, the tariffs were to be cut by Rmb0.04 for the first three regions and Rmb0.02 for the fourth. The internal rate of return on wind power projects will decline by 1-2pp as a result of the tariff cut, but investment sentiment in these projects should not be affected. Installed capacity to grow faster Progress in some wind power projects will now accelerate as projects approved prior to 2015 can stick to the old tariff standards only if they are brought into operation before Jan 1, In addition, a renewable energy quota system is set to be introduced soon. As such we expect newly installed wind power capacity to grow 25% YoY to 25GW in 2015, with the pace of growth strengthening. Industry leader Goldwind to benefit first Higher installed capacity growth will benefit wind power equipment manufacturers, with wind turbine leader Goldwind Science & Tech ( CH) the first to benefit. The company is likely to see its market share expand further on the back of its highly competitive new turbine models, and the gross margin of its turbine business should continue to rise on an improving product structure and declining raw material prices. In addition, we also like Titan Wind Energy ( CH) and Jixin Wind Energy Technology ( CH). Technology: Panel price growth to remain strong in 1Q15 Panel prices remaining strong in early Jan The increase in the price of 32-inch TV panels seen since Mar 2014 has continued into early Jan, while the prices of other panel sizes are flat with late Dec. Robust panel demand vs. easing supply growth Global LCD TV shipments have grown significantly since mid-2014 as 1) consumers in North America replace their old-generation flat screen TVs with newer models, and those in India and other parts of the Asia-Pacific switch from CRT TVs to panel TVs; 2) leading TV makers such as Samsung have put up a price war in major global markets since end-3q14 in order to increase their market shares. Based on data from DisplaySearch, YoY global LCD TV shipment growth is likely to reach 7% in In addition, the average size of LCD TVs shipped during 2014 increased 1.5 inches YoY to 39 inches as consumers preference for large-screen TVs strengthens, which has driven strong panel demand growth. In contrast, overall panel production capacity growth decelerated in 2014 to an estimated 3.3%. A panel shortage has driven a rise in panel prices since March (esp. for 32-inch panels). Panel price growth to remain strong in 1Q15 TV makers momentum to restock panels remains strong in the near term given their healthy levels of panel inventory at five weeks. Samsung is showing a particularly strong demand for TV panels given expected high TV shipments in 1Q15. In addition, global panel production capacity growth should be limited in 2015 as Taiwanese panel makers are cautious about expanding capacity. As such we expect strong panel price growth to continue in 1Q15. That said, we might see some fluctuations following Chinese New Year if inventories are still high following this round of strong sales before the CNY holiday. We continue to recommend TCL Corporation ( CH) given the strong business performance of its subsidiary CSOT which is also its main earnings contributor. Great Wall Motor ( CH): High-end SUVs potential catalyst for earnings and valuation Dec sales in line The company sold a total of 77,000 vehicles in Dec (+24.1% YoY), broadly in line with our expectation. The number can be broken down to 61,000 SUVs (+47.9% YoY), 6,900 sedans (-46.2% YoY) and 8,900 pickup trucks (+13.7% YoY). Recently launched SUV models posting strength The sales volume of two recently launched SUV models, H1 and H2, came in at 7,000 and 12,000 in Dec, while 2,857 of the higher-end H9 were sold; all three figures represented a MoM increase. In addition, the H6 continued to lead the Page 2

3 SUV market with sales volume of 31,000 and it helped offset the negative impact of the significant drop in sedan sales on company earnings. New product cycle to raise growth upside The company brought three new SUV models to market during 2014, and we expect its H1 and H2 to maintain strong sales volume growth in The company is likely to launch several high-end SUV models such as the H8, COUPE C and H7 as well as several important facelift models in 2015 the new product cycle should help raise its growth upside. It is worth noting that Great Wall should see satisfactory sales volume growth in 9M15 given the relatively low YoY base. The company targets to sell 850,000 vehicles in 2015, translating into YoY growth of 16%, which is relatively conservative and in line with the company s consistent pursuit of high product quality and prudent business operations. High-end SUVs potential catalyst for earnings and valuation Great Wall s efforts to shift its business focus to the higher-end market are starting to yield results. We believe the H1, H2, H6 and its pickup truck models will remain the company s main earnings contributors in In addition, its high-end SUV products are likely to provide a catalyst for both earnings and valuation growth if they turn out to be successful in the market. We remain positive on the company and forecast 2014/15/16 EPS of Rmb2.55/3.85/4.71. Key risk factors include tougher-than-expected industry competition and disappointing SUV sales. Peak Sport (1968 HK, Accumulate): Mid-teen order book growth continues in 3Q15; TP lowered to HK$2.27 Mid-teen 3Q15 order book growth Growth remained stable QoQ despite a high base (high singledigit growth in 2Q14 and mid-teen growth in 3Q14). The company s footwear and apparel categories recorded mid-teen growth and low-teen growth, respectively. Although this sales mix could have a slightly unfavorable impact on GM (footwear GM was 36% in 1H14 vs 40% for apparel), we expect a slight GM improvement in FY15 given the fall in prices of raw materials such as rubber, cotton and polyester. Overall, growth continued to be driven by volume, while ASP for its footwear and apparel products saw low single-digit growth and a low single-digit decline, respectively. Sell-through rate softened QoQ in 4Q14 Low single-digit SSSG was maintained in 4Q14 compared to the previous quarter. However, sell-through rate is a better indicator of sales performance in China as store coverage for a SSSG calculation represents just 30% of total stores. Sell-through rate during the quarter was slightly below 70% (vs slightly above 70% in 3Q14) as sales performance weakened in Nov and Dec due to sluggish consumer sentiment and a later CNY holiday in That said, we expect ~9% revenue growth in FY14 (vs our previous estimate of 10%) given encouraging business development in overseas markets. Maintain Accumulate; TP lowered to HK$2.27 We revise down our FY14/15/16 net profit estimates by 4%/8%/13%, mainly to factor in lower assumptions for sales in China and OP margin. We cut our TP from HK$2.70 to HK$2.27 to keep it at its historical average of 11.2x FY15E P/E. We expect the company to post an above-peer EPS CAGR in FY15-16 (14% vs peer average of 10%) driven by growth in overseas and domestic markets. Its current valuation is undemanding at 2.7x ex-net cash FY15E P/E. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) CT Environmental (1363 HK; Buy): New operation agreement for hazardous waste project in Guangzhou What s new? CT Environmental signed a 20-year agreement with Menghui Technology (effective Jan ) for the operational management and technical upgrade of a hazardous waste project in Zengcheng District, Guangzhou. Rmb45m will be paid by CT to the vendor as a deposit, while another Rmb35m will be borne by CT for the project s technical upgrades. The project currently serves over 20 customers who are mainly engaged in the electronics or technology related industries located in Guangzhou and Dongguan. According to the announcement, the project is the largest copper etching fluid facility in Guangzhou in terms of its designed annual treatment capacity. Project could enhance 2015/16 net profit by <3% The project s designed copper etching fluid treatment capacity totals 40,000 cubic meters per year. There will be a guaranteed processing volume of not less than 35,000 cubic meters per year at Rmb750/cubic meter. As most of the direct Page 3

4 costs will be borne by the vendor, the largest expenses for this project will be labor costs and tax expenses. We estimate the project could enhance CT s 2015/16 net profit by <3%. Maintain Buy We see the project as positive for CT. Apart from the earnings enhancement, our understanding is that CT could further enlarge its market share in copper etching fluid treatment in Guangzhou as the proposed acquisition of Lvyou hazardous waste treatment project also included this business. Given our forecast for a 62% YoY surge in 2014 net profit, we expect CT to issue a positive profit alert. We believe this is a near term positive catalyst for CT. We maintain our Buy rating and TP of HK$9.70. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@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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