Yum Cha 飲茶. January 22, 2018 RESEARCH NOTES

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index HSCEI Shanghai COMP Shenzhen COMP (0.1) Gold BDIY (1.2) Crude Oil, WTI(US$/BBL) 63.4 (0.9) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M 1.2 (0.2) SHIBOR, 3-M RMB/USD 6.4 (0.2) DATA RELEASES DUE THIS WEEK January 22 Industrial Profits Source: Bloomberg RESEARCH NOTES January 22, 2018 HONG KONG SECURITIES SECTOR - We raise our 2018E EPS for HKEx (0388.HK)/Haitong International (0665.HK; HTI)/GTJA International (1788.HK; GTJAI) by 12.1%/20.5%/15.8%. Our 2018E EPS for HKEx/HTI/GTJAI is 12.7%/32.2%/14.8% above market consensus, as we raise our 2018E average daily turnover (ADT) from HK$110bn to HK$135bn, driven by more southbound trading volume, the potential return of large cap ADRs to the Hong Kong market, and more TMT IPOs. We expect to see a structural increase in the trading volume of HKEx thanks to these factors and expect major brokerage players in Hong Kong, such as HTI and GTJAI, to also benefit. We reiterate our BUY ratings for HKEx, HTI and GTJAI. We lift our target prices of HKEx/HTI/GTJAI by 14.8%/12.1%/21.7%. Currently, our top pick is HTI due to its high earnings sensitivity in a strong market, driven by its trading and investment businesses. SOUTHBOUND TRADING ANALYSIS - The latest Stock Connect figures saw significant inflows into financial names, Agricultural Bank and ICBC in particular, although other stocks, including the smaller banks, HK Ex, and the brokerages also benefited. On the other hand, sell-offs were more apparent in hardware names (SMCI and AAC Acoustics) and basic material stocks (CNBM and Chalco). CHINA CEMENT WEEKLY - Since Q1 is a low season because of CNY, some provinces have already planned production suspension to avoid accumulation of inventory. For instance, cement companies in Jiangsu plan a suspension of 30 days during CNY. Zhejiang and Yunnan also plan production suspensions of 35 days and days, respectively, in Q We expect to see more provinces announce production suspension plans soon. If these plans are executed effectively, they should prevent a sharp fall in cement prices. WEEKLY SHORT SELLING ANALYSIS - Last Friday, the HKSFC released the aggregate short positions data for January 12. 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 January 5 and January 12; (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 Wharf Holdings (0004.HK) requires close monitoring, based on its latest short positions outstanding. On the other hand, we note that short positions in Genscript Bio (1548.HK), China Eastern Airlines (0670.HK) and Value Partners (0806.HK) have dropped significantly. 1

2 Industry Note Hong Kong Securities Sector Last Price TP Company Ticker Rating Wong Chi Man Head of Research (852) (HK$) (HK$) HKEx 388 HK BUY HTI 665 HK BUY GTJAI 1788 HK BUY Company PER PBR ROAA ROAE (x) (x) (%) (%) HKEx HTI GTJAI Sources: Company, CGIS Research Updated as of January 22, 2018 FY2018E January 22, 2018 A New Era for the Hong Kong Market; HTI and GTJAI Are Attractive Catch-up Plays We raise our 2018E EPS for HKEx (0388.HK)/Haitong International (0665.HK; HTI)/GTJA International (1788.HK; GTJAI) by 12.1%/20.5%/15.8%. Our 2018E EPS for HKEx/HTI/ GTJAI is 12.7%/32.2%/14.8% above market consensus, as we raise our 2018E average daily turnover (ADT) from HK$110bn to HK$135bn, driven by more southbound trading volume, the potential return of large cap ADRs to the Hong Kong market, and more TMT IPOs. We expect to see a structural increase in the trading volume of HKEx thanks to these factors and expect major brokerage players in Hong Kong, such as HTI and GTJAI, to also benefit. We reiterate our BUY ratings for HKEx, HTI and GTJAI. We lift our target prices of HKEx/ HTI/GTJAI by 14.8%/12.1%/21.7%. Currently, our top pick is HTI due to its high earnings sensitivity in a strong market, driven by its trading and investment businesses. Significant jump in southbound trading volume. In January 2018 (up to January 19), ADT reached HK$147.2bn, much higher than the ADT of HK$87.6bn in Southbound investors are one of the key drivers. Southbound daily trading volume jumped from HK$9.83bn in 2017 to HK$19.1bn in January Given that A-share prices are still higher than their H-share counterparts by 28%, based on Hang Seng AH Premium Index, we expect to see more southbound fund inflow due to the valuation advantage of the Hong Kong market. Potential return of large cap ADRs to offer huge upside. We raised this point in our HKEx report dated November 15, Based on speeches from government officials and HKEx CEO Charles Li in the past few weeks, we believe HKEx will be ready to allow companies with weighted voting rights (WVR) to be listed in Hong Kong in 2H18. This will pave the way for large cap ADRs to return to the Hong Kong market. Currently the 3-month average daily turnover of the top 10 Chinese ADRs is about HK$49bn. If about 25% of the trading volume returns to the Hong Kong market, this implies an increase in trading volume of HK$12bn. If these stocks are included in the Stock Connect universe in the future, the upside in trading volume will be even bigger. More TMT IPOs to help secondary trading. In our HKEx report dated November 15, 2017, we argued the old economy IPOs listed between 2011 and 2016 offered a limited contribution to secondary market trading volume. The situation has changed gradually since the listing of Meitu (1357.HK). This kind of TMT stock is much more welcomed by investors, and Meitu has still maintained average daily turnover of HK$300m-400m in recent months. According to press reports, there are still a lot of sizable TMT IPOs planning to list in Hong Kong, such as Xiaomi, Lufax and Tencent Music. It should not be a surprise for these companies to contribute HK$4bn-5bn in turnover per day post-ipo if they are successfully listed in Hong Kong. HTI and GTJAI to catch up. Although we still like HKEx for its attractive long-term growth potential, its valuation of 37.4x 2018E PER may look less attractive after a rally of 25% in the past two months. Last year, both HTI and GTJAI underperformed relative to HKEx, as some investors may have had concerns about risks in the margin financing business. However, we believe the risk has decreased in the strong market, and both companies have shifted their focus from small caps to large caps for the margin financing business. Therefore, we believe both companies are attractive catch-up plays to benefit from the increasing trading volume of the Hong Kong market. HTI, In particular, should enjoy higher earnings sensitivity in a strong market because of its higher exposure to the trading and investment businesses. 1

3 Valuation for target prices. We have a target price of HK$330.2 for HKEx, based on the Gordon Growth Model, implying 41.8x 2018E PER (cost of equity: 8.4%; mid-term ROE: 21.5%). Our target price for HTI is HK$6.9, based on the Gordon Growth Model, implying 1.34x 2018E PBR (cost of equity: 10.2%; mid-term ROE: 12%). Our target price for GTJAI is HK$3.70, based on the Gordon Growth Model, implying 2.74x 2018E PBR (cost of equity: 9.4%; mid-term ROE: 17%). Figure 1: Valuation table Company Ticker Rating Sources: Bloomberg, CGIS Research Price (Local currency) Market cap (US$m) PER (x) PBR (x) ROE (%) ROA (%) E 2018E E 2018E E 2018E E 2018E Haitong International 665 HK Equity BUY , GTJA International 1788 HK Equity BUY , HKEx 388 HK Equity BUY , Figure 2: Average daily turnover of the Hong Kong market HK$bn Hong Kong Stock Exchange Average Daily Turnover in the past 7 years YTD Year Sources: Bloomberg, CGIS Research Figure 3: Average daily turnover in the past 12 months (HK$bn) Hong Kong Stock Exchange Average Daily Turnover in the past 12 months Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 June 2017 July 2017 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dec YTD Sources: Bloomberg, CGIS Research 2

4 Figure 4: Trading volume of Top 10 most traded Chinese ADR companies Ticker Company name Current market cap (US$m) 3-month average daily turnover (HK$m) BABA US Equity Alibaba Group Holding Ltd 471,380 27,424.1 JD US Equity JD.com Inc 65,733 4,843.6 BIDU US Equity Baidu Inc 88,537 4,773.1 NTES US Equity NetEase Inc 42,373 3,843.3 CTRP US Equity Ctrip.com International Ltd 24,045 1,912.6 WB US Equity Weibo Corp 28,486 1,573.9 XNET US Equity Xunlei Ltd 1,091 1,314.8 TAL US Equity TAL Education Group 14,520 1,269.9 YY US Equity YY Inc 8,712 1,180.7 MOMO US Equity Momo Inc 5,639 1,143.1 Total 49,279.1 HKEx's 2017 ADT 87,644.2 Sources: Bloomberg, CGIS Research Figure 5: Potential TMT IPOs in 2018 Company Estimated fundraising size (US$m)* Xiaomi 10,000 Lufax 5,000 Tencent Music 1,000 Maoyan 1,000 iqiyi 1,000 Ping An Good Doctor 1,000 Douyu 400 Ant Financial - Inke - Kuaishou - *According to press reports. Sources: Press reports, CGIS Research Figure 6: Rolling forward PER range of HKEx /1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017 3/1/2018 Figure 7: Rolling forward EV/EBITDA range of HKEx /1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017 3/1/2018 Rolling forward PER Average PER+1 standard deviation Rolling forward average PER Average PER-1 standard deviation Rolling forward EV/EBITDA Average EV/EBITDA +1 standard deviation Rolling forward average EV/EBITDA Average EV/EBITDA -1 standard deviation Sources: Bloomberg, CGIS Research Sources: Bloomberg, CGIS Research 3

5 Figure 8: PBR range of HTI Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Rolling forward PBR Rolling forward average PBR Average PBR+1 standard deviation Average PBR-1 standard deviation Source: CGIS Research Figure 10: PBR range of GJTAI Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Figure 9: PER range of HTI Rolling forward PER Average PER+1 standard deviation Source: CGIS Research Figure 11: PER range of GJTAI Rolling forward average PER Average PER-1 standard deviation Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Rolling forward PBR Rolling forward average PBR Rolling forward PER Rolling forward average PER Average PBR+1 standard deviation Average PBR-1 standard deviation Average PER+1 standard deviation Average PER-1 standard deviation Source: CGIS Research Source: CGIS Research 4

6 Key financials (HKEx) P&Lsummary (HK$m) E 2018E Trading fees and trading tariff 5,469 4,428 4,833 6,140 Stock exchange listing fees 1,114 1,092 1,297 1,373 Cearing and settlement fees 3,118 2,358 2,831 3,874 Depository related fees Market data fees Other revenue ,074 Revenue 12,233 10,398 11,708 14,372 YoY 34% -15% 13% 23% Net investment income 1, ,497 1,754 Other income Revenue and other incom e 13,375 11,116 13,227 16,148 Staff costs (2,020) (2,035) (2,175) (2,260) IT expenses (517) (500) (445) (490) Premises expenses (294) (333) (350) (365) Marketing expenses (41) (54) (58) (62) Legal and professional fees (99) (106) (100) (120) Other operating expenses (396) (427) (440) (470) EBITDA 10,085 7,661 9,659 12,381 Depreciation& amortisation (684) (771) (757) (767) Operating profit 9,401 6,890 8,901 11,614 Finance costs (114) (82) (116) (90) Share of loss of JV (9) (9) (9) (9) Profit before tax 9,278 6,799 8,776 11,516 Tax (1,347) (1,058) (1,316) (1,750) Minorities (25) (28) (29) (30) Net Profit 7,956 5,769 7,489 9,795 YoY 54.0% -27.5% 29.8% 30.8% Balance Sheet summary (HK$m) E 2018E Cash 110, , , ,442 Financial assets 92,144 99,159 88, ,620 Accounts receivable 15,535 12,928 15,219 23,785 Current assets 218, , , ,847 Financial assets Goodwill 17,872 17,812 17,850 17,820 Fixed assets 1,560 1,499 1,450 1,430 Non-current assets 19,622 19,508 19,502 19,457 Financial liabilities 64,486 61,627 46,009 55,009 Margin deposits 115, , , ,000 Accounts payable 15,270 12,246 12,655 21,159 Clearing House Fund of Participants 7,474 8,656 10,062 10,510 Current liabilities 203, , , ,592 Borrowings 3,409 3,422 3,524 3,625 Deferred tax liabilities ,225 Non-current liabilities 4,255 4,246 4,569 4,983 Shareholders' Equity 29,816 32,266 36,298 41,552 Minorities Sources: Company, CGIS Research estimates 5

7 Key financials (HKEx) Cash Flow summary (HK$m) E 2018E Profit before tax 9,278 6,799 8,776 11,516 Depreciation& amortisation Net working capital adjustment (293) (321) (351) (1,112) Net cash from operations 8,321 6,164 8,324 9,877 Capex (710) (620) (746) (717) Others 290 (2,715) (2,198) (3,980) Net cash from investing (420) (3,335) (2,944) (4,697) Dividends paid (3,017) (3,329) (3,141) (4,408) Net cash from financing (3,224) (3,586) (3,459) (4,730) Free cash flow 7,611 5,544 7,578 9,160 Net cash/(debt) 9,335 5,864 7,683 8,032 Net Gearing n.a. n.a. n.a. n.a. Gross gearing 11% 11% 10% 9% Ratios E 2018E EBITDA margin 82% 74% 83% 86% Net margin 65% 55% 64% 68% ROAE 31% 19% 22% 25% ROAA 3.2% 2.4% 3.1% 3.8% PE (x) PB (x) EV/EBITDA Basic EPS (HKD) Diluted EPS (HKD) DPS (HKD) Dividend yield 2.0% 1.4% 1.8% 2.4% BVPS (HKD) 90% 90% 90% 90% Segment Income Contribution Cash 28% 26% 29% 30% Equity and financial derivatives 18% 20% 18% 17% Commodities 14% 15% 13% 11% Clearing 36% 35% 35% 37% Platform and infrastructure 4% 5% 5% 4% Key assumptions E 2018E ADT of equity products (HK$bn) ADT of DWs, CBBCs &warrants (HK$bn) Total Cash Segment ADT (HK$bn) ADT of northbound( bn) ADT of southbound(hk$bn) Southbound Contribution 3.2% 6.1% 11.2% 13.3% Number of newly listed (main board) Number of newly listed (GEM) ADT of DWs, CBBCs &warrants (HK$bn) ADnumber of derivative contracts 393, , , ,000 ADnumber of stock options contracts 374, , , ,000 ADvolume of metals contracts (LME) 670, , , ,000 Sources: Company, CGIS Research estimates 6

8 Key financials (Haitong International) Income Statement (HKD'000, except for per share amount) Year ended 31 December E 2018E Brokerage 556,518 1,031, , ,840 1,081,514 Margin financing 624,776 1,272,095 1,567,890 1,593,125 1,823,113 Corporate finance 396, , ,409 1,237,189 1,408,687 Asset management 123, , , , ,594 Leveraged and acquisition finance 421, , , , ,000 FICC, trading and market making 591,040 1,991,841 1,608,392 2,381,837 2,614,190 Revenue 2,713,291 5,805,514 5,350,817 6,975,518 8,107,098 Other income 20,512 9,791 6,899 20,000 6,000 Operating Expenses Staff costs 545, , ,234 1,005,741 1,177,000 Commission to accounts executives 240, , , , ,236 Depreciation 33,494 32,250 39,980 35,786 38,139 Other operating expenses 356, , , , ,000 Finance costs 375,475 1,036,569 1,395,816 1,602,368 1,697,944 Investments gains accounted for using the equity method 33,212 (53,522) (27,658) 200, ,000 Operating Profit 1,215,748 2,986,388 1,992,473 3,475,351 4,195,780 Income tax expense 197, , , , ,283 Non-controlling interests Net income 1,018,269 2,510,052 1,680,225 2,884,541 3,482,497 EPS (HK cents per share): Basic Diluted DPS (HKD) Dividend payout ratio 42% 37% 49% 45% 42% Dividend Yield 2.8% 4.2% 2.8% 4.4% 4.9% Revenue Breakdown(%) Brokerage 21% 18% 12% 11% 13% Margin financing 23% 22% 29% 23% 22% Corporate finance 15% 14% 17% 18% 17% Asset management 5% 3% 3% 4% 4% Leveraged and acquisition finance 16% 9% 8% 10% 10% FICC, Trading and market making 22% 34% 30% 34% 32% Growth Ratio YOY: Brokerage 21% 85% -37% 20% 39% Margin financing 83% 104% 23% 2% 14% Corporate finance 136% 112% 7% 37% 14% Asset management 34% 20% 19% 70% 11% Leveraged and acquisition finance 5% 24% -13% 53% 23% FICC, Trading and market making 222% 237% -19% 48% 10% Total Revenue 65% 114% -8% 30% 16% Operating profit 103% 146% -33% 74% 21% Net profit 92% 147% -33% 72% 21% EPS growth 27% 88% -49% 70% 23% Margins and Ratios: Adjusted Operating Margin* 58% 68% 54% 69% 70% Adjusted Net Margin** 49% 58% 45% 57% 58% Effective tax rate 16% 16% 16% 17% 17% Cost-to-income ratio 56% 47% 62% 53% 50% Staff cost-to-income ratio 20% 16% 15% 14% 15% Average daily turnover of HKEx (HK$ m) 69, ,630 66,280 87, ,000 Margin financing balance(hk$ m) 9,627 18,886 20,817 20,563 26,184 *Adjusted Operating Margin=Operating profit/(revenue-commission and interest expenses) **Adjusted Net Margin=Net profit/(revenue-commission and interest expenses) Source: Company Data, CGIS Research estimates 7

9 Key financials (Haitong International) Balance Sheet (HKD'000, except for per share amount) Year ended 31 December E 2018E Non-current assets 4,230,761 14,348,605 22,972,273 21,466,210 23,862,572 Financial assets designated at fair value through profit or loss - 5,705, Available-for-sale investments 471,083 6,253,682 17,846,297 16,000,000 17,700,000 Others 3,759,678 2,389,224 5,125,976 5,466,210 6,162,572 Current assets 43,929,212 77,570, ,532, ,878, ,097,425 Advances to customers in margin financing 9,619,965 18,879,155 20,817,335 20,485,535 26,105,948 Other loans and advances 1,819,200 3,550,880 8,083,096 10,150,000 10,950,000 Accounts receivable 4,495,624 3,820,611 5,113,753 7,673,070 8,917,808 Financial assets at fair value through profit or loss 9,962,803 18,257,597 25,252,697 26,600,000 30,100,000 Financial assets designated at fair value through profit or loss 2,485,154 6,154,656 16,742,585 18,930,000 22,930,000 Cash held on behalf of customers 11,668,936 18,265,360 20,186,813 24,080,364 37,473,975 Cash and cash equivalents 3,236,317 6,405,963 7,171,169 6,000,000 3,000,000 Others 641,213 2,236,173 5,165,527 6,959,795 7,619,695 Total assets 48,159,973 91,919, ,505, ,344, ,959,997 Non-current liabilities 6,994,275 14,939,548 14,790,690 13,774,531 13,804,531 Non-convertible bonds 4,580,804 9,937,201 9,973,074 9,960,000 9,990,000 Financial liabilities designated at fair value through profit or loss 620,000 4,225,698 18, Others 1,793, ,649 4,799,173 3,814,531 3,814,531 Current liabilities 32,569,196 56,150,666 94,265, ,663, ,415,348 Accounts payable 15,630,644 20,945,837 28,240,926 33,712,510 48,716,168 Financial liabilities at fair value through profit or loss 326, ,979 3,143,726 3,551,841 3,895,591 Financial liabilities designated at fair value through profit or loss 1,645,886 3,263,051 14,216,393 17,000,000 21,000,000 Loans and other borrowings 12,741,730 20,124,598 33,626,574 33,100,259 35,110,689 Repo 1,189,696 7,028,919 9,586,163 9,100,000 9,800,000 Others 1,035,168 3,830,282 (69,526,095) 7,199,191 10,892,901 Total liabilities 39,563,471 71,090, ,056, ,438, ,219,879 Capital and reserves 8,596,502 20,828,786 22,449,024 24,906,642 27,740,117 Share capital 218, , , , ,653 Reserves 8,039,480 20,088,197 21,488,448 23,723,967 26,475,140 Proposed final dividend 338, , , , ,324 Total equity 8,596,502 20,828,786 22,449,024 24,906,642 27,740,117 Finance Ratios: PER(x) PBR(x) Book value per share(hkd) ROAE 15.1% 17.1% 7.8% 12.2% 13.2% ROAA 2.6% 3.6% 1.5% 2.1% 2.2% Dupont Analysis: Brokerage 1.4% 1.5% 0.6% 0.6% 0.7% Margin financing 1.6% 1.8% 1.4% 1.2% 1.2% Corporate finance 1.0% 1.2% 0.8% 0.9% 0.9% Asset management 0.3% 0.2% 0.2% 0.2% 0.2% Leveraged and acquisition finance 1.1% 0.7% 0.4% 0.5% 0.5% FICC, trading and market making 1.5% 2.8% 1.4% 1.7% 1.7% Revenue 7.0% 8.3% 4.8% 5.1% 5.2% Operating Expenses -4.0% -4.0% -3.0% -2.7% -2.6% Operating Profit 3.1% 4.3% 1.8% 2.5% 2.7% Income tax expense -0.5% -0.7% -0.3% -0.4% -0.5% Net income 2.6% 3.6% 1.5% 2.1% 2.2% Leverage [Total assets/equity] Net leverage [(Total assets-accounts payable to clients)/total equity] ROAE 15.1% 17.1% 7.8% 12.2% 13.2% Source: Company Data, CGIS Research estimates 8

10 Key financials (GTJA International) Income Statement (HKD'000, except for per share amount) Year ended 31 December E 2018E Brokerage 501, , , , ,630 Loans and Financing 722,470 1,076,018 1,297,278 1,429,300 1,632,794 Corporate Finance 287, , , , ,533 Asset Management 46,387 53,092 28,487 35,000 42,000 Investment Holding & Market Making 98, , , , ,925 Revenue 1,656,582 2,276,608 2,519,187 3,250,138 3,930,883 Other income 4,459 1,899 2,608 2,500 2,500 Operating Expenses Staff costs 368, , , , ,000 Commission to accounts executives 68, ,530 55,117 80, ,462 Depreciation 23,643 28,664 34,695 40,000 40,000 Other operating expenses 170, , , , ,316 Finance costs 95, , , , ,313 Operating Profit 929,216 1,168,122 1,131,867 1,652,397 2,064,292 Income tax expense 127, , , , ,965 Non-controlling interests 2,124 1, Net income 799,791 1,013, ,139 1,387,213 1,743,527 EPS (HK cents): Basic Diluted DPS (HK cents): Dividend payout ratio 50% 50% 53% 50% 50% Dividend Yield 2.1% 2.4% 2.3% 3.1% 3.8% Revenue Breakdown(%) Brokerage 30% 32% 16% 19% 24% Loans and Financing 44% 47% 51% 44% 42% Corporate Finance 17% 12% 18% 22% 14% Asset Management 3% 2% 1% 1% 1% Investment Holding & Market Making 6% 6% 14% 14% 20% Growth Ratio YOY: Total Revenue 46% 37% 11% 29% 21% Brokerage 33% 44% -45% 58% 49% Loans and Financing 82% 49% 21% 10% 14% Corporate Finance 92% -2% 62% 54% -21% Asset Management 47% 14% -46% 23% 20% Investment Holding & Market Making -45% 49% 135% 34% 68% Operating profit 59% 38% 8% 41% 22% Net profit 49% 27% -4% 43% 26% EPS growth 33% 7% -5% 41% 25% Margins and Ratios: Adjusted Operating Margin* 62% 61% 55% 62% 64% Adjusted Net Margin** 54% 53% 47% 52% 54% Effective tax rate 14% 13% 14% 16% 16% Cost-to-income ratio 43% 47% 50% 48% 47% Staff cost-to-income ratio 22% 22% 21% 21% 20% Average daily turnover of HKEx (HK$ m) 69, ,630 66,280 87, ,000 Margin financing balance(hk$ m) 8,407 11,963 13,385 15,295 17,435 *Adjusted Operating Margin=Operating profit/(revenue-commission and interest expenses) **Adjusted Net Margin=Net profit/(revenue-commission and interest expenses) Source: Company Data, CGIS Research estimates 9

11 Key financials (GTJA International) Balance Sheet (HKD'000, except for per share amount) Year ended 31 December E 2018E Non-current assets 521, , , ,323 1,058,323 Property, plant and equipment 513, , , , ,000 Others 7, , , , ,323 Current assets 21,483,380 36,688,686 44,187,854 62,116,432 79,105,865 Loans and advances to customers 9,099,164 12,375,857 14,286,666 16,594,060 18,934,075 Accounts receivable 1,001,103 1,932,119 1,495,924 2,275,097 2,751,618 Financial assets at fair value through profit or loss 1,353,089 4,506,947 13,261,624 20,600,000 24,780,000 Cash held on behalf of customers 9,009,909 14,662,991 12,400,917 19,909,276 29,652,173 Cash and cash equivalents 889,286 2,408,666 1,964,398 2,000,000 2,200,000 Others 130, , , , ,000 Total assets 22,004,881 37,329,435 45,000,745 63,024,755 80,164,188 Non-current liabilities 1,023,208 3,112,269 2,133,262 10,436,341 9,785,142 Bank borrowings 990,000 3,090,000 2,100,000 10,383,464 9,721,149 Others 33,208 22,269 33,262 52,877 63,993 Current liabilities 13,916,459 26,581,909 32,333,649 41,573,530 58,450,423 Accounts payable 10,004,468 18,218,312 14,871,038 23,214,215 34,574,433 Bank borrowings 3,472,719 4,765,662 6,811,433 1,500,000 3,500,000 Debt securities in issue - 505,340 3,485,520 4,500,000 5,000,000 Others 439,272 3,092,595 7,165,658 12,359,315 15,375,990 Total liabilities 14,939,667 29,694,178 34,466,911 52,009,871 68,235,565 Capital and reserves Share capital and share premium 5,852,194 6,004,362 6,054,025 6,104,025 6,154,025 Retained profits 2,172,562 2,685,718 3,171,842 3,597,319 4,461,059 Proposed final dividend 292, , , , ,000 Other reserves (1,261,777) (1,340,811) (1,361,282) (1,341,460) (1,351,460) Total equity 7,055,413 7,623,564 8,175,198 8,679,884 9,593,624 Perperutal debt - - 2,346,685 2,325,000 2,325,000 Minority 9,801 11,693 11,951 10,000 10,000 Finance Ratios: PER(x) PBR(x) Book value per share(hkd) ROAE 14.5% 13.8% 12.3% 16.5% 19.1% ROAA 4.1% 3.4% 2.4% 2.6% 2.4% Dupont Analysis: Brokerage 2.6% 2.4% 1.0% 1.2% 1.3% Loans and Financing 3.7% 3.6% 3.2% 2.6% 2.3% Corporate Finance 1.5% 0.9% 1.1% 1.3% 0.8% Asset Management 0.2% 0.2% 0.1% 0.1% 0.1% Investment Holding & Market Making 0.5% 0.5% 0.8% 0.9% 1.1% Revenue 8.5% 7.7% 6.1% 6.0% 5.5% Operating Expenses 3.7% 3.7% 3.4% 3.0% 2.6% Operating Profit 4.8% 3.9% 2.7% 3.1% 2.9% Income tax expense 0.7% 0.5% 0.4% 0.5% 0.4% Net income 4.1% 3.4% 2.4% 2.6% 2.4% Leverage [Total assets/equity] Net leverage [(Total assets-accounts payable to clients)/total equity] ROAE 14.5% 13.8% 12.3% 16.5% 19.1% Source: Company Data, CGIS Research estimates 10

12 Strategy Notes 22 January 2018 Stock Connect New Developments in 2018 Analyst: Johnson Cheung Tel ) The latest Stock Connect figures saw significant inflows into financial names, Agricultural Bank and ICBC in particular, although other stocks, including the smaller banks, HK Ex, and the brokerages also benefited. On the other hand, sell-offs were more apparent in hardware names (SMCI and AAC Acoustics) and basic material stocks (CNBM and Chalco). Most Significant Stock Connect Trading Figure 1 lists companies by net value of Southbound purchases since January 12, using China Clearing s numbers. Topping the list was buying in Agricultural Bank of China, which saw more than HK$1.6bn in net inflow; this was followed by buying in ICBC. If anything, the buying in the banks represents an acceleration in strong inflows we have seen since the end of Other stocks which saw significant buying were other financial stocks, which accounted for 8 of the top 10 inflows. The non-financial names are China Jinmao and Tencent Holdings. There was also buying in Macau gaming stocks. Figure 1: Top 20 Net Inflows in Stock Connect last week Bbg Share Price Current Stock Net Buy Since(HK$m) Rank Name Code (HK$) Connect Hold 12/01/ /12/ /11/ AGRICULTURAL BANK OF CHINA-H 1288 hk % 1, , , IND & COMM BK OF CHINA-H 1398 hk % 1, , , CHINA JINMAO HOLDINGS GROUP 817 hk % CHINA MERCHANTS BANK-H 3968 hk % , , TENCENT HOLDINGS LTD 700 hk % , , PING AN INSURANCE GROUP CO-H 2318 hk % (1,052.8) (2,242.7) 7 HAITONG SECURITIES CO LTD-H 6837 hk % , HONG KONG EXCHANGES & CLEAR 388 hk % , , HSBC HOLDINGS PLC 5 hk % , , SUNAC CHINA HOLDINGS LTD 1918 hk % , CHINA MAPLE LEAF EDUCATIONAL 1317 hk % CHINA CITIC BANK CORP LTD-H 998 hk % , BEIJING CAPITAL INTL AIRPO-H 694 hk % MINTH GROUP LTD 425 hk % KWG PROPERTY HOLDING LTD 1813 hk % COUNTRY GARDEN HOLDINGS CO 2007 hk % (452.8) 17 HAIER ELECTRONICS GROUP CO 1169 hk % CHINA MINSHENG BANKING-H 1988 hk % KINGSOFT CORP LTD 3888 hk % GALAXY ENTERTAINMENT GROUP L 27 hk % HAITONG INTERNATIONAL SECURI 665 hk % (38.2) 22 MGM CHINA HOLDINGS LTD 2282 hk % GREAT WALL MOTOR COMPANY-H 2333 hk % , , BANK OF COMMUNICATIONS CO-H 3328 hk % (132.3) (39.2) 25 CHINA MENGNIU DAIRY CO 2319 hk % GUOTAI JUNAN INTERNATIONAL 1788 hk % CNOOC LTD 883 hk % CHINA INTERNATIONAL CAPITA-H 3908 hk % CHINA PACIFIC INSURANCE GR-H 2601 hk % (544.2) (237.9) 30 GUANGZHOU R&F PROPERTIES - H 2777 hk % Sources: Bloomberg, HK Exchanges, CGIS,

13 Figure 2: Top 20 Net Selling in Stock Connect Positions last week Bbg Share Price Current Stock Net Buy Since (HK$m) Rank Name Code (HK$) Connect Hold 12/01/ /12/ /11/ SEMICONDUCTOR MANUFACTURING 981 hk % (531.1) (69.9) 1, AAC TECHNOLOGIES HOLDINGS IN 2018 hk % (372.2) (571.9) (17.1) 3 GEELY AUTOMOBILE HOLDINGS LT 175 hk % (316.0) (519.8) (1,331.1) 4 CHINA NATIONAL BUILDING MA-H 3323 hk % (245.7) (30.8) 5 CHINA ZHENGTONG AUTO SERVICE 1728 hk % (230.9) (115.3) (67.1) 6 CHINA RESOURCES BEER HOLDIN 291 hk % (211.4) (161.2) DALI FOODS GROUP CO LTD 3799 hk % (199.7) (259.9) (663.8) 8 BANK OF CHINA LTD-H 3988 hk % (183.8) (142.2) 9 CRRC CORP LTD - H 1766 hk % (180.6) FULLSHARE HOLDINGS LTD 607 hk % (148.1) ZIJIN MINING GROUP CO LTD-H 2899 hk % (143.3) , CHINA GALAXY SECURITIES CO-H 6881 hk % (140.6) (47.4) SHENZHOU INTERNATIONAL GROUP 2313 hk % (137.4) (178.0) AGILE GROUP HOLDINGS LTD 3383 hk % (124.0) (149.5) (236.0) 15 CHINA VANKE CO LTD-H 2202 hk % (117.9) (121.0) TSINGTAO BREWERY CO LTD-H 168 hk % (103.6) (11.9) (452.2) 17 PETROCHINA CO LTD-H 857 hk % (100.6) CHINA EVERBRIGHT INTL LTD 257 hk % (96.6) (124.3) (12.8) 19 ANTA SPORTS PRODUCTS LTD 2020 hk % (95.8) CHINA SHENHUA ENERGY CO-H 1088 hk % (82.0) BAIC MOTOR CORP LTD-H 1958 hk % (63.3) (80.7) 22 TRULY INTERNATIONAL HOLDINGS 732 hk % (60.5) (26.7) (2.8) 23 SINO BIOPHARMACEUTICAL 1177 hk % (57.6) (132.8) (66.6) 24 HEALTH AND HAPPINESS H&H INT 1112 hk % (56.9) CHINA PETROLEUM & CHEMICAL-H 386 hk % (54.4) SHANGRI-LA ASIA LTD 69 hk % (49.5) (165.4) (320.0) 27 SHIMAO PROPERTY HOLDINGS LTD 813 hk % (49.3) XINYI SOLAR HOLDINGS LTD 968 hk % (46.3) CHONGQING RURAL COMMERCIAL-H 3618 hk % (44.4) (71.5) (83.3) 30 ALUMINUM CORP OF CHINA LTD-H 2600 hk % (44.3) (8.6) (73.7) Sources: Bloomberg, HK Exchanges, CGIS, Tech names which saw the greatest net selling were SMCI and AAC Technologies, followed by Geely and CNBM. We also saw a reduction in a variety of auto and property stocks. Trading as a % of Market Cap Figure 3 lists the companies which saw the most aggressive buying by Stock Connect investors, based on market capitalisation week on week. Highest on the list is China Jinmao, which had a placement of new shares and an announcement that its management had increased their holdings during this period. Among the large caps, the largest incremental increase was in Agricultural Bank of China. Stock Connect investors bought 1.2% of the Company during this time. The stocks which saw the most aggressive sell-off were CNBM, SMCI and Zijin.

14 Figure 3: Top 20 Net Additions in Stock Connect Positions last Week Bbg Share Price Current Stock Net Buying since (% of Market Cap) Rank Name Code (HK$) Connect Holding 12/01/ /12/ /11/ CHINA JINMAO HOLDINGS GROUP 817 HK % 2.0% 1.8% 1.7% 2 CHINA MAPLE LEAF EDUCATIONAL 1317 HK % 1.8% 2.4% 2.9% 3 DONGFANG ELECTRIC CORP LTD-H 1072 HK % 1.6% 2.7% 3.9% 4 AGRICULTURAL BANK OF CHINA-H 1288 HK % 1.2% 1.9% 2.2% 5 BEIJING CAPITAL INTL AIRPO-H 694 HK % 1.2% 1.4% 1.3% 6 BEIJING NORTH STAR CO LTD-H 588 HK % 0.9% 2.7% 3.2% 7 ZHAOJIN MINING INDUSTRY - H 1818 HK % 0.9% 1.2% 1.5% 8 CHINA OVERSEAS GRAND OCEANS 81 HK % 0.9% 0.6% 0.9% 9 HAITONG SECURITIES CO LTD-H 6837 HK % 0.8% 1.6% 3.2% 10 GUOTAI JUNAN INTERNATIONAL 1788 HK % 0.7% 1.4% 1.6% 11 HISENSE KELON ELEC HLD-H 921 HK % 0.7% 1.4% 2.2% 12 KWG PROPERTY HOLDING LTD 1813 HK % 0.7% 1.2% 1.4% 13 GUANGZHOU R&F PROPERTIES - H 2777 HK % 0.7% 1.7% 1.6% 14 HAITONG INTERNATIONAL SECURI 665 HK % 0.6% 0.4% -0.1% 15 DONGJIANG ENVIRONMENTAL-H 895 HK % 0.6% 0.9% 1.6% 16 GREAT WALL MOTOR COMPANY-H 2333 HK % 0.6% 4.2% 6.6% 17 CHINA INTERNATIONAL CAPITA-H 3908 HK % 0.6% 0.9% 1.6% 18 CHINA TRADITIONAL CHINESE ME 570 HK % 0.5% 0.6% 0.6% 19 HUADIAN POWER INTL CORP-H 1071 HK % 0.5% 1.1% 1.8% 20 RED STAR MACALLINE GROUP C-H 1528 HK % 0.5% 0.6% 0.9% Sources: Bloomberg, HK Exchanges, CGIS, Figure 4: Top 20 Net Reductions in Stock Connect positions last week Bbg Share Price Current Stock Net Selling since (% of Market Cap) Rank Name Code (HK$) Connect Holding 12/01/ /12/ /11/ CHINA ZHENGTONG AUTO SERVICE 1728 hk % -5.7% -5.0% -4.9% 2 CHINA NATIONAL BUILDING MA-H 3323 hk % -1.1% 0.7% -0.2% 3 SEMICONDUCTOR MANUFACTURING 981 hk % -1.0% -0.1% 1.3% 4 ZIJIN MINING GROUP CO LTD-H 2899 hk % -0.8% 4.4% 6.5% 5 TRULY INTERNATIONAL HOLDINGS 732 hk % -0.7% -0.3% 0.0% 6 CHINA GALAXY SECURITIES CO-H 6881 hk % -0.6% -0.2% 0.2% 7 CRRC CORP LTD - H 1766 hk % -0.5% 0.6% 1.2% 8 GUANGZHOU BAIYUNSHAN PHARM-H 874 hk % -0.5% -1.4% -2.1% 9 ZHENGZHOU COAL MINING MACH-H 564 hk % -0.5% -0.8% -0.6% 10 MAANSHAN IRON & STEEL-H 323 hk % -0.5% 0.1% -0.7% 11 SINOPEC OILFIELD SERVICE -H 1033 hk % -0.4% -0.5% -0.3% 12 GUANGSHEN RAILWAY CO LTD-H 525 hk % -0.4% -0.6% -0.1% 13 TSINGTAO BREWERY CO LTD-H 168 hk % -0.3% 0.0% -1.5% 14 CHONGQING IRON & STEEL CO-H 1053 hk % -0.3% -0.9% -1.3% 15 CHINA SHINEWAY PHARMACEUTICA 2877 hk 8 3.0% -0.3% -0.4% -0.7% 16 CHINA FOODS LTD 506 hk % -0.3% -0.3% 0.0% 17 BAIC MOTOR CORP LTD-H 1958 hk % -0.3% 0.6% -0.3% 18 CHONGQING RURAL COMMERCIAL-H 3618 hk % -0.3% -0.4% -0.5% 19 CHINA VANKE CO LTD-H 2202 hk % -0.2% -0.2% 0.7% 20 AAC TECHNOLOGIES HOLDINGS IN 2018 hk % -0.2% -0.4% 0.0% Sources: Bloomberg, HK Exchanges, CGIS, Stock Connect still skewed towards the large caps in January As Figure 5 shows, from a longer-term perspective, the weighting of Stock Connect positions is still heavily skewed towards HSBC, CCB, Tencent, and ICBC. HSBC s position is due mainly to the 10% holding by Ping An Insurance Group. Stock Connect ownership in the other three mega-caps is roughly comparable. Further down the list is Sunac China, and then mainly companies in the China financial sector and the auto sector. Aside from HSBC, the largest non-mainland companies are HK Exchange and AAC Technologies.

15 Figure 5: Top 30 Stock Connect Positions by value on 12th January 2018 Bbg Share Price Value of China Connect Holding (HK$bn) Rank Name Code (HK$) current 12/01/ /12/ /11/ HSBC HOLDINGS PLC 5 hk CHINA CONSTRUCTION BANK-H 939 hk TENCENT HOLDINGS LTD 700 hk IND & COMM BK OF CHINA-H 1398 hk SUNAC CHINA HOLDINGS LTD 1918 hk CHINA MERCHANTS BANK-H 3968 hk NEW CHINA LIFE INSURANCE C-H 1336 hk PING AN INSURANCE GROUP CO-H 2318 hk CHINA CITIC BANK CORP LTD-H 998 hk BANK OF CHINA LTD-H 3988 hk GEELY AUTOMOBILE HOLDINGS LT 175 hk FULLSHARE HOLDINGS LTD 607 hk AGRICULTURAL BANK OF CHINA-H 1288 hk CHINA TAIPING INSURANCE HOLD 966 hk CHINA PACIFIC INSURANCE GR-H 2601 hk GREAT WALL MOTOR COMPANY-H 2333 hk SEMICONDUCTOR MANUFACTURING 981 hk GUANGZHOU AUTOMOBILE GROUP-H2238 hk FOSUN INTERNATIONAL LTD 656 hk CSPC PHARMACEUTICAL GROUP LT 1093 hk HONG KONG EXCHANGES & CLEAR 388 hk AAC TECHNOLOGIES HOLDINGS IN 2018 hk CHINA SHENHUA ENERGY CO-H 1088 hk CHINA OVERSEAS LAND & INVEST 688 hk CHINA EVERGRANDE GROUP 3333 hk PICC PROPERTY & CASUALTY-H 2328 hk CHINA MINSHENG BANKING-H 1988 hk CHINA HONGQIAO GROUP LTD 1378 hk CHINA SOUTHERN AIRLINES CO-H 1055 hk BANK OF COMMUNICATIONS CO-H 3328 hk Sources: Bloomberg, HK Exchanges, CGIS, 5.2 Figure 6 lists the companies with the highest concentration of Stock Connect ownership. At the top of the list has long been Digital China, with a significant 44% of the company cornered by Mainland investors, including corporates. Second on the list is Great Wall Motor, and we see Stock Connect ownership continuing to increase. Other companies in which Stock Connect ownership remains high are those trading with a steep A-H premium.

16 Figure 6: Top 30 Companies with the Highest Level of Stock Connect Ownership Bbg Share Price Current stock Previous levels (% of Market Cap) Rank Name Code (HK$) Connect Holding 12/01/ /12/ /11/ DIGITAL CHINA HOLDINGS LTD 861 hk % 44.06% 43.11% 42.04% 2 GREAT WALL MOTOR COMPANY-H 2333 hk % 34.29% 30.66% 28.29% 3 NEW CHINA LIFE INSURANCE C-H 1336 hk % 34.73% 34.55% 33.97% 4 XINJIANG GOLDWIND SCI&TEC-H 2208 hk % 33.79% 31.84% 27.37% 5 NANJING PANDA ELECTRONICS-H 553 hk % 30.90% 30.76% 30.71% 6 TECH PRO TECHNOLOGY DEVELOPM3823 hk % 30.17% 30.17% 30.17% 7 SHANDONG XINHUA PHARMACEUT-H 719 hk % 29.50% 29.12% 28.26% 8 DONGFANG ELECTRIC CORP LTD-H 1072 hk % 25.08% 24.03% 22.81% 9 ZIJIN MINING GROUP CO LTD-H 2899 hk % 27.36% 22.24% 20.06% 10 HUADIAN POWER INTL CORP-H 1071 hk % 25.27% 24.64% 24.00% 11 LUOYANG GLASS COMPANY LTD-H 1108 hk % 25.40% 24.50% 23.64% 12 DFZQ-H 3958 hk % 25.41% 24.93% 24.60% 13 SUNAC CHINA HOLDINGS LTD 1918 hk % 25.05% 24.79% 24.61% 14 SICHUAN EXPRESSWAY CO-H 107 hk % 25.04% 25.04% 24.63% 15 SHANGHAI ELECTRIC GRP CO L-H 2727 hk % 24.52% 24.17% 22.29% 16 ZHENGZHOU COAL MINING MACH-H 564 hk % 24.56% 24.96% 24.73% 17 DALIAN PORT (PDA) CO LTD-H 2880 hk % 23.99% 23.94% 23.96% 18 GUANGZHOU BAIYUNSHAN PHARM-H 874 hk % 24.12% 25.02% 25.70% 19 GUANGZHOU AUTOMOBILE GROUP-H2238 hk % 23.13% 23.12% 22.43% 20 FULLSHARE HOLDINGS LTD 607 hk % 23.38% 22.65% 22.22% 21 BEIJING NORTH STAR CO LTD-H 588 hk % 20.63% 18.85% 18.34% 22 CHINA CITIC BANK CORP LTD-H 998 hk % 20.40% 20.40% 19.40% 23 DONGJIANG ENVIRONMENTAL-H 895 hk % 20.06% 19.72% 19.05% 24 BEIJING JINGCHENG MACHINER-H 187 hk % 20.41% 20.61% 20.71% 25 YANZHOU COAL MINING CO-H 1171 hk % 20.07% 14.60% 9.16% 26 CHINA SOUTHERN AIRLINES CO-H 1055 hk % 20.13% 21.00% 20.91% 27 SEMICONDUCTOR MANUFACTURING 981 hk % 19.15% 18.32% 16.92% 28 TRULY INTERNATIONAL HOLDINGS 732 hk % 18.72% 18.36% 18.09% 29 CHINA MOLYBDENUM CO LTD-H 3993 hk % 17.35% 16.92% 17.60% 30 SHANGHAI FOSUN PHARMACEUTI-H 2196 hk % 17.71% 17.79% Sources: Bloomberg, HK Exchanges, CGIS, 16.31%

17 China Cement Weekly January 22, 2018 Price Weakness Continues before CNY; Production Suspension Plans to Maintain Supply-Demand Balance China Cement Sector National cement prices continued to drop last week. The average cement price (nationwide) decreased 1.5% week on week to RMB406/tonne last week. The regions with a decline of RMB30-80/tonne were mainly high cement price regions, including east and central China. In certain regions in Guizhou, Yunnan and Sichuan, cement prices increased by RMB20-30/tonne. Demand weakened compared with the previous week due to lower demand in rural areas. Demand from real estate and key construction projects remained strong due to tight construction schedules, while construction of some smaller projects began gradual suspensions before Chinese New Year. In regions apart from Guangdong and Guangxi, cement shipments started to decline to about 80% to 90% of normal production. As CNY is approaching, cement demand will continue to fall gradually, and cement prices are likely to maintain a moderate downtrend. The average inventory level (nationwide) rebounded slightly to 53.88%. Coal prices were stable last week. The comprehensive average price index for Bohai- Rim Steam Coal (Q5500K) remained at RMB578/tonne last week. The index was down 2.2% on a year-on-year basis. Planned production suspension to maintain demand-supply balance. Since Q1 is a low season because of CNY, some provinces have already planned production suspension to avoid accumulation of inventory. For instance, cement companies in Jiangsu plan a suspension of 30 days during CNY. Zhejiang and Yunnan also plan production suspensions of 35 days and days, respectively, in Q We expect to see more provinces announce production suspension plans soon. If these plans are executed effectively, they should prevent a sharp fall in cement prices. Cement stocks under coverage increased 0.8% on average. Following the correction in the previous week, the overall performance was relatively stable last week. Best performer Conch Cement [0914.HK; BUY] rose 4.1% week on week. BBMG [2009.HK; HOLD], the weakest among our coverage stocks, fell 1.3% week on week. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Valuation Table PER (x) PBR (x) EV/EBITDA(x) Net debt/equity (%) Company Ticker Rating Price (HK$) Market cap (US$m) E 2018E E 2018E E 2018E 2017E Conch Cement 914 HK Equity BUY , Net cash CNBM 3323 HK Equity BUY , BBMG 2009 HK Equity HOLD , CR Cement 1313 HK Equity BUY , Simple average Weighted average EPS Growth (%) E PEG(x) ROE (%) Dividend yield (%) Company Ticker 2017E 2018E CAGR (%) 2017E E 2018E E 2018E Conch Cement 914 HK Equity CNBM 3323 HK Equity CR Cement 1313 HK Equity BBMG 2009 HK Equity Simple average Weighted average Sources: Company, Bloomberg, CGIS Research estimates 1

18 Peer Comparison Market cap PER (x) PBR (x) EV/EBITDA(x) Company Ticker Rating Price (LC) (US$m) E 2018E E 2018E E 2018E Conch Cement 914 HK Equity BUY , CNBM 3323 HK Equity BUY , BBMG 2009 HK Equity HOLD , CR Cement 1313 HK Equity BUY , China National Materials 1893 HK Equity NR , Asia Cement 743 HK Equity NR West China Cement 2233 HK Equity NR Tianrui Cement 1252 HK Equity NR , n.a. n.a n.a. n.a n.a. n.a. Simple average Weighted average Sources: Bloomberg, CGIS Research 1-Year Relative Performance Sources: Bloomberg, CGIS Research 2

19 Figure 1: Regional Cement Price National Average (P.O. 42.5) North China Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Northeast China East China Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec South Central China Southwest China Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Northwest China Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: Digital Cement, CGIS Research 3

20 Strategy January 22, 2018 Short Selling Analysis for January 12 Last Friday, the HKSFC released the aggregate short positions data for January 12. 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 January 5 and January 12; (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 Wharf Holdings (0004.HK) requires close monitoring, based on its latest short positions outstanding. On the other hand, we note that short positions in Genscript Bio (1548.HK), China Eastern Airlines (0670.HK) and Value Partners (0806.HK) have dropped significantly. Short positions in Wharf Holdings increased significantly. As Figure 2 shows, short positions in Wharf Holdings rose 21% during the week ended January 12. The outstanding short positions were equivalent to 3.6% of its free float. The share price of the Company rose by 26% in early January because of speculation on its privatization potential. The significant rally within a short period of time may be what attracted short sellers. Meanwhile, we ve also seen a sharp increase in short positions in TCL Multimedia (1070.HK) and Zhengtong Auto (1728.HK). We believe the increase is mainly because of TCL Multimedia s proposed rights issue and Zhengtong s share placement. Significant decline in short positions in Genscript, China Eastern Airlines and Value Partners. Outstanding short positions in Genscript, China Eastern Airlines and Value Partners dropped 26%, 17.4% and 16%, respectively, during the week ended January 12 (Figure 3). We believe some investors began to close their short positions in Genscript after the share price dropped >15% from the peak level early this year. Regarding China Eastern Airlines, the strength of the RMB may have been the trigger for some investors deciding to cut their short positions, in our view. As for Value Partners, we believe the drop in short positions is mainly related to the release of a positive profit alert. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk 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 short-selling 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 January 5 and January 19; (ii) short positions as a percentage of free float; and (iii) the absolute amount of the short positions. 1