Weekly HK Market and Sector Views

Transcription

1 Equity Research Weekly HK Market and Sector Views Sector Weekly views Watchlist Analyst(s) Macro Investment strategy The trade war between China and the US is likely to continue for a long time until a winner emerges. However, due to the pressure from slowdowns in economic growth, a temporary or partial agreement between the countries could be reached during the G20 summit this week, when the leaders of the two countries meet. From the US s perspective, there are three main reasons for the willingness to cool the frictions. First, following the mid-term elections, it has become much more difficult for the Trump government to introduce large-scale tax cuts and other stimulus policies, and affected by a high base, economic growth could slow next year. Second, the trade war has had a negative impact on America s high-tech and automotive industries. In the short term, it will be difficult for a large number of companies to find alternative middleware manufacturers from other countries, and their new capacity will not meet demand. Third, an increase in tariffs for some commodities to 25% in 2019 would push up US CPI. From China s perspective, willingness to ease trade frictions is also on the rise. There are two main reasons for this. First, new growth momentum may not fully offset the pressure from the economic slowdown data have shown that domestic consumption and investment growth continue to decline. Second, with the escalation of the trade frictions, the effect of a "rush to export" by enterprises will fade, and downward pressure on exports will appear. Preliminary agreements could include a lowering of import tariffs, accelerating the opening up of financial markets and strengthening protection of intellectual property rights, while the US may postpone tariff increases and make concessions in tech export restrictions. Global stock markets fell last week, with the Chinese and US stocks leading the declines. Hong Kong stocks fared comparatively well, but the Hang Seng Index and Hang Seng China Enterprises Index still recorded declines of 0.98% and 1.84% respectively. The tech and consumer services sectors were relatively resilient, while energy sectors led the decline. Although US Treasury yields continued to decline last week, the US stock market still fell. The market is concerned that economic growth will enter a late cycle, and earnings are expected to come under downward pressure. Recent US industrial production, durable consumer goods orders, and auto sales growth data have indicated a slowdown, and there may be increased concern about future growth. In addition, there is still considerable uncertainty surrounding the G20 talks between China and the US, and market volatility has risen. The China Securities Regulatory Commission issued a new delisting policy and a system for the suspension and resumption of trading last week, which suppressed momentum in A-share performance and thus transaction activity declined. Amid the increase in uncertainty in external markets, investors began to re-examine the pressure of a fundamental slowdown; overall market sentiment is pessimistic. On the Stock Connect, there was a net outflow of funds both southbound and northbound last week, coming in at Rmb2.2bn and Rmb1.72bn respectively, showing that the liquidity situation has deteriorated. - Minggao Shen SFC CE No. ATQ771 minggaoshen@gfgroup.com.hk George Chen SFC CE No. BLG365 georgechen@gfgroup.com.hk Liao Ling SFC CE No. BNH159 liaoling@gf.com.cn

2 Sector Weekly views Watchlist Analyst(s) Investment strategy In terms of investment strategy, medium term risk factors for Hong Kong stocks have not yet been fully alleviated, and we recommend maintaining a relatively cautious view. In the short term, the stabilization of the Hong Kong stock market will depends on the further issuance of positive Chinese domestic policies, from which some consumer and tech stocks would benefit. Furthermore, we believe investors should continue allocation in insurance, Hong Kong local stocks, consumer services, and the textiles & apparel sectors. Gaming: Gaming stocks traded sideway last week as market sentiment stabilized. From 3Q18 results, we saw some softening in the premium mass business at a few casinos. However, this was at high-end casinos, whose premium mass customers could overlap with their VIP segments. We expect Nov GGR to grow by a low single digit YoY, similar to Oct. Galaxy Entertainment (27 HK) Sands China (1928 HK) Hu Xiangyu SFC CE No. BNG229 huxiangyu@gf.com.cn The market now expects gaming sector EBITDA to grow by 8% in We see limited downside risk to consensus earnings estimates, and we expect gaming stocks to trade higher on rising valuation multiples as we approach the year-end. Consumer Property management: Country Garden Services: The company s landbank and Country Garden's (2007 HK) landbank are ahead of the sector average, giving the company's property management services and non-owner value-added services high growth potential and strong earnings visibility, in our view. Country Garden Services has a clear community service business model, due to its small scale and still robust development. Country Garden Services (6098 HK) Liu Qiao SFC CE No. BLO687 liuqiao@gf.com.cn Consumer discretionary: The negative impacts of the trade war, renminbi depreciation and stock market declines on consumer sentiment have emerged since Sept, and average tourist spending among mainland tourists has declined. SaSa s (175 HK) management stated that SSSG in Oct and Nov slowed further compared with Sept. We expect these negative factors to persist in the short term, and offset the positive impacts brought about by the rise in mainland tourist arrivals. As such, we maintain our cautious view on the Hong Kong retail sector. Chow Tai Fook (1929 HK) Kiara Cao SFC CE No. BHN783 kiaracao@gfgroup.com.hk Due to the recent cautious market sentiment and renminbi depreciation, the retail sector s valuation has fallen to an attractive level. We believe the potential negative impacts of the macroeconomic uncertainties have already been reflected in Chow Tai Fook s stock price, making its valuation attractive. Despite the weak retail sentiment in Hong Kong, in the long term, we believe that CTF's multi-brand and mainland-focused strategy will allow it to continue outperforming its peers, as it can better catch fragmented demand and cater to customers with varied spending power. Auto Automakers: Average daily retail/wholesale sales in the second week on Nov dropped 23%/24% YoY to 52k/57k units respectively, according to CPCA data. We attribute the weak fundamentals to the booming housing market and decreasing monetized resettlement subsidies for shantytown residents in third/fourth-tier cities, which has undermined their purchasing power and willingness to buy autos. The State Council issued a notice on stimulating peoples spending power. Key sections related to the auto sector: 1) Used-cars: the policy of restricting inter-provincial used car sales should be completely eliminated. 2) NEVs: the notice promotes the implementation of purchase tax exemptions, purchase subsidies and other fiscal and tax incentives. 3) Development of smart autos. 4) Auto services: the notice encourages the development of motorsport races, strengthened construction of parking lots in urban areas and new energy vehicle charging facilities. We think the aforementioned policies should enhance sector sentiment, but auto sales in 4Q18 are likely to face headwinds if no actual policy stimulus is enforced. We maintain our long-term positive stance on the China auto sector, and recommend looking for entry points for leading domestic automakers. Geely Auto (175 HK) Chongjing Deng SFC CE No. BEY953 dengchongjing@gf.com.cn

3 On Nov 14, MIIT released a program to select key enterprises related to AI, of which AI-connected car manufacturing is a focus; we expect the program to promote the integration of AI tech and car manufacturing over the long term, enhancing R&D and upgrades in the auto sector. Geely Auto remains our top pick. The company has been successful in launching top-selling models in various niche segments. On Nov 15, Geely Auto achieved an agreement with Great Wall Motor (2333 HK), which should benefit the further development of the brand in the sector. The company's October sales came in at 129k units, up 3.1% YoY/3.7% MoM; 10M18 sales reached 1.27m units, up 33% YoY, meaning it has completed 80% of its full-year sales target of 1.58m units. Although sales growth slowed in October amid market sales pressure and a high comparative base in October 2017, the company s market share increased to 7.4% in 10M18. With competition in the PV space to gain market share in first-tier cities, we expect refined and competitive models to gain share from models which only emphasize a large size and low pricing, and believe this will become a new area of sales growth focus. The company has launched new models since May this year, including the Lynk 02, Lynk 01 PHEV, Lynk 03, Borui GE, Binyue sedan and Binrui SUV, which should increase both sales volume and ASP, in our view. The company's overseas expansion is on track. Proton has started to produce the overseas versions of the Boyue in Malaysia, Boyue is ready for sale in Belarus, and Lynk & Co will be begin production in Volvo s Europe factory from We expect Geely to deliver strong full-year sales growth, underpinned by its solid new product line-up, while margins should improve on greater economies of scale, thus we see stronger full-year earnings for Auto dealers: The October auto dealer inventory alert index was 66.9%, up 8pp MoM/17pp YoY. The uncertain macro outlook has distorted consumer demand more than expected and led to both pricing and inventory pressure. The retail market continued to see divergence in sales performance across different segments, with luxury brands retail sales rising 7.4% YoY in October (8 major premium brands up 6.3% YoY), which is beyond the market average, while the pace slowed, meaning sales pressure has extended to luxury segment. We expect auto dealers to continue to face pressure in 4Q18. In September, the government released policies to promote consumption, among which stimulus policies related to used cars, NEVs and the tax subsidy are expected to benefit the auto sector. Given the Sino-US trade dispute, supply-demand dynamics for premium autos remain imbalanced as consumers are still hesitant to make purchase decisions. We note that some OEMs such as BMW and Daimler have undertaken a series of measures such as controlling supply, and prescribing a threshold for retail discounts or distributing additional subsidies, in an effort to restore dealers new car sales margins and confidence. In October, luxury brand discounts were around 13-14%, with Mercedes Benz and Audi discounts stabilizing in October, and BMW s narrowing 1%. We like Zhongsheng Holding. Among the three major luxury brands sold by the company, only Mercedes Benz imports models from the US we estimate 27% of Mercedes Benz imports to China are from the US, which is low compared to our 51% estimate for BMW, meaning it will be less affected by the Sino-US tensions. We estimate imports account for just 4.9% of the company s total luxury brand sales. 1H18 revenue came in at Rmb42.73bn, up 23.8% YoY on the back of 23.8% YoY sales growth to 182,000 units. The company's gross profit grew 24.7% YoY to Rmb4.76bn while gross margin was down 0.3pp to 9.7%. Net profit surged 35.5% YoY to Rmb1.84bn. We note that among the major luxury brands, Mercedes Benz s retail prices have risen steadily since July, and both BMW and Audi have stopped expanding their discounts since August, while Lexus has maintained strong demand for models such as the ES. We estimate the increased tariff on US imports will result in higher purchase costs for related SUV models such as the BMW X5/X6 and Mercedes Benz GLS/GLE, but the incremental cost is split between dealers and OEMs at the moment, thus the price hike should be no more than 5% of the original MSRP. With the 2H18 debut of the LWB A- Class sedan and GLC-L SUV, Zhongsheng's new car sales and aftersales gross margin should rebound alongside the upcoming sales peak season in 4Q18 and the ramp-up in newly acquired dealerships. Zhongsheng Holding (881 HK) Chongjing Deng SFC CE No. BEY953 dengchongjing@gf.com.cn

4 Financials HK financial names adjusted along with the HSI last week. Key driving factors still include: progress in the China-US trade dispute, the 10Y US Treasury yield, downward pressure on Chinese economic growth and investor concerns about debt and currency risks in other regions. Amid continuous slowdowns in social financing, Chinese policies will continue to mitigate credit risk at private enterprises in the short term. This should be help to ease the pessimistic market sentiment and may boost the share prices of financial names with low valuations, helped by progress in the Shanghai-London Stock Connect, the establishment of a Sci-Tech Innovation Board and further opening of the financial market. However, in the medium term, the Sino-US trade dispute and uncertainties about whether policies can improve investment returns in the real economy and enhance market competition will suppress financial names on an ongoing basis. - Wang Wen SFC CE No. BGL298 wangwen@gf.com.cn Healthcare The government initiated trial procurement of 31 drugs. The tender covers 11 cities including Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Cengdu and Xi'an. Only original drugs and generic drugs that have passed equivalence evaluations are qualified for the tender. The date for the bidding is December 16, and the procurement cycle will last 12 months. On Nov 21, the Shanghai government released supplementary documents related to the tender. Drugs that failed to win tenders are also required to lower prices. We think this practice could be copied by the other ten cities. There was little detail in the tender document about execution, such as how to force doctors to prescribe the drugs that have won the tenders. We see uncertainty in the effect of its execution. In addition, the majority of generic drugs have not passed equivalence evaluation. Thus, we think it will take time for such tenders to be implemented nationwide. Sino Biopharmaceutical (1177 HK) 3SBio (1530 HK) SSY Group (2005 HK) Weigao Group (1066 HK) Ou Yafei SFC CE No. BFN410 oyf@gf.com.cn Hardware: 4Q18 tech demand appears weak across the board, except for commercial PCs, mainly due to Chinese smartphone inventory adjustments and iphone Xr order cuts. For the iphone supply chain, we see negative YoY builds for new models in 2H18 and believe Apple's declining hardware margin will put pressure on most suppliers. Moreover, the US-China trade tensions might lead some suppliers to move their manufacturing capacity out of China, which would put further pressure on margins. We remain very selective, and our long plays are still leading optical names such as Sunny Optical. Sunny Optical (2382 HK) Jeff Pu SFC CE No. BNO719 jeffpu@gfgroup.com.hk TMT Internet: Consumer internet traffic volume and user numbers have been decreasing gradually, and the industrial internet will be the direction of growth over the next ten years. Still a fledgling space in China, the industry will bring areas such as cloud computing, big data, convenient payments and other functions into traditional industries and improve their operational efficiency. Regulatory approval of game licenses remains suspended, creating uncertainty for Tencent. Vice Premier Liu He expressed his confidence in the market. We suggest paying attention to policies for the games industry, particularly any positive signals. Tencent (700 HK) China Literature (772 HK) IGG (799 HK) Yang Linlin SFC CE No. BNC117 yll@gf.com.cn

5 Rating Definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Sector ratings Buy Stock expected to outperform benchmark by more than 15% Positive Sector expected to outperform benchmark by more than 10% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Neutral Expected sector relative performance ranges between -10% and 10% Hold Expected stock relative performance ranges between -5% and 5% Cautious Sector expected to underperform benchmark by more than 10% Underperform Stock expected to underperform benchmark by more than 5% 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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