Dim Sum Express. Hong Kong Market. Equity Research. Dec 7, 2017

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1 Equity Research Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT ICBC CCB PETROCHINA CHINA MOBILE HSBC PING AN BANK OF CHINA CHINA LIFE SINOPEC Source: Bloomberg Hong Kong Market Investment Strategy: Winners and losers of the US tax bill In Hong Kong and China, we believe the US tax bill will have a positive impact on export-oriented companies, transportation firms, companies with meaningful income from the US, and producers of commodities such as aluminum and copper, given increasing US demand. On the other hand, we have seen sector rotation in the US with investors snapping up financials and consumer names, which should benefit more from the tax bill, and selling of tech stocks, which should benefit less and have higher valuations. This will likely put pressure on TMT stocks in Hong Kong. We believe the Hong Kong market outlook remains promising. Investment Strategy: Market likely to remain weak before the year-end, but fundamentals remain strong Although yesterday s market decline was sharper than expected, there is still downside risk as the imminent US tax reform approval and the surge in the HK HIBOR rate will have a negative impact on the HK market. If the market correction is due to political and geopolitical risk, it is likely to be temporary in nature, and given the better fundamentals now than during previous corrections, we would expect a smaller market correction of up to 10% from the peak (but a bigger correction for top performers), and would consider this an opportunity to buy at lower levels. Geely Auto (175 HK, Buy): Nov monthly sales hit new sales high Geely s sales rose 37.9% YoY and 12.9% MoM during Nov, hitting another record high on peak season strength and higher demand for the company s SUV models. SUV sales were up 95.7% YoY and 14.3% MoM, and accounted for 49% of total sales during 11M17, a proportion that has risen continually this year. The company s sedan segment also maintained steady growth will be a key year for the company, with five new launches under the Geely brand and contribution from Lynk & Co. We think the company s sales will remain strong in Pharmaceutical: First BE test products approved by the CFDA, positive for CSPC Pharma Sino Biopharma announced yesterday its registration approval of Tenofovir Disoproxil Fumarate for treatment of HBV, the first generic drug to complete bioequivalence studies. We see this as positive for leading domestic companies such as CSPC Pharma as the government has been advancing bioequivalence studies for domestic generics. CSPC Pharma has three generics pending approval in the near term. The company s stock was down yesterday without any change in growth in fundamentals. We continue to expect the sector to outperform in early 2018, and favor large pharmas, TCM names and CRO players. Construction Machinery: Nov excavator sales volume beats expectations; maintain Buy on Lonking Excavator unit sales rose 107.4% YoY during Nov, exceeding expectations and also up on Oct. 11M17 sales were up 99.2% YoY. We expect the sales recovery to continue in 2018, mainly driven by FAI and the replacement cycle. Although Lonking has not announced its Nov sales volume yet, we believe its sales growth will continue to outperform peers. We believe the strong Nov excavator sales volume should help to ease market concerns that led to its recent weak stock performance. We maintain our Buy rating and TP of HK$4.30. 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: Winners and losers of the US tax bill US market cheers on tax reform US tax reform is switching into high gear after the Senate s approval over the weekend. The Senate and the House will need to come up with a compromise in the next few weeks in order to have the bill approved before the year-end. Regardless of the exact makeup of the final version, the centerpiece of the reform will be the cut in corporate tax from 35% to 20%, allowing companies to repatriate foreign profits at a lower rate, as well as the lowering of personal tax rates and increased tax allowance. Impact on imports and FDI According to the GF A-share team, the tax bill will enhance US GDP by %, and consumer spending growth will increase from 2.7% to %, hence an increase in the US s demand for goods and services domestically as well as from overseas markets. Using Reagan s tax cuts in 1980s as an example, the US trade deficit grew from US$25bn to US$150bn, while US FDI as a percentage of global FDI increased from 30% to over 40%. Nevertheless, the impact is not clear in terms of its enhancement of corporate production efficiency based on the tax cuts during Potential winners In Hong Kong and China, we believe the US tax bill will have a positive impact on export-oriented companies, transportation firms such as those in shipping, companies with meaningful income from the US, and producers of commodities such as aluminum and copper, given increasing US demand. For H-share exposure, we believe Lenovo, Li & Fung, COSCO Shipping, Man Wah, Techtronic, VTech, Samsonite, WH Group, Nexteer, Jiangxi Copper and Chalco should benefit over the long term. Potential losers On the other hand, we have seen sector rotation in the US with investors snapping up financials and consumer names, which should benefit more from the tax bill, and selling of tech stocks, which should benefit less and have higher valuations, as can be seen from the divergence between the Dow Jones and Nasdaq recently. This will likely put pressure on TMT stocks in Hong Kong given the valuation drag. Moreover, Hong Kong would also be affected if there were a largescale fund retreat back to the US. Hong Kong market outlook remains promising That said, there are still uncertainties in the final outcome of the tax bill, and the impact on individual stocks will take a long time to materialize. Moreover, according to the Congressional Budget Office, the Senate bill will add a US$917bn deficit by fiscal 2022 and increase further to US$1,446bn by fiscal 2027, indicating potential significant financing pressure in the next decade. The tax bill is just one consideration when choosing stocks, and we think company fundamentals remain key. We believe the negative impact on the Hong Kong market will be temporary. Once the tax bill is approved, overseas investors may refocus on the better earnings growth and lower valuations of the Hong Kong market, as the Hong Kong market outlook next year is supported by both earnings growth and valuation upgrades, in our view. Risks Slower-than-expected execution of the tax bill. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) Investment Strategy: Market likely to remain weak before the year-end, but fundamentals remain strong Downside risks continue Although yesterday s market decline was sharper than expected, there is still downside risk as we highlighted previously that the imminent US tax reform approval and the surge in the HK HIBOR rate will have a negative impact on the HK market, particularly as there is less than one month to go until the year end, which increases profit taking pressure, in particular for stocks with significant share price performance YTD. The increase in geopolitical risk concerning the Korean peninsula as well as in the Middle East (due to the US Embassy in Israel being moved to Jerusalem) will also add oil to the fire. Buying opportunities ahead As stated in our 4Q17 Outlook Report, the HK market has suffered four major corrections over the last eight years, with the market falling 12-36% triggered by a variety of reasons. In 2011, the market crash was due to the Eurozone debt crisis. In 2013, it was dragged down by China s liquidity crisis. In 2015, the market plunged due to Chinese stock market turbulence. In 2016, the correction was a result of uncertainties surrounding Donald Trump s policies (down 12%, the least of the four declines). If the latest market correction is due to political and geopolitical risk, it is likely to be temporary in nature, and given the better fundamentals now than during the Page 2

3 previous cycles, we would expect a smaller market correction of up to 10% from the peak (but a bigger correction for top performers), and would consider this an opportunity to buy at lower levels. Balanced portfolio preferable We continue to recommend a more balanced portfolio, with exposure to high growth sectors (TMT, auto), sectors with re-rating potential (insurance, banks, financial intermediates), and policy-driven sectors (healthcare, environmental, education). (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) Geely Auto (175 HK, Buy): Nov monthly sales hit new sales high New monthly sales high in Nov Geely Auto sold 141,265 vehicles in Nov, up 37.9% YoY and 12.9% MoM. Sales during the month hit another record high, following the previous high seen in Oct, on peak season strength during 4Q and higher demand for the company s SUV models. 11M17 sales grew 66.3% YoY to 1.09m units, reaching 99% of its sales target of 1.1 m units for SUVs post strong growth The company sold 77,156 SUVs during Nov (the new Vision S1 model contributed 1,716 units), up 95.7% YoY and 14.3% MoM. 11M17 SUV sales came in at 533,259 units, up 1.8x YoY, accounting for 49% of total sales, a proportion which has risen continually this year. Boyue model sales remained strong at 30,884 units, up 67.8% YoY and 2.5% MoM, on increased capacity for the model; its 11M17 sales grew by a strong 1.7x YoY and we estimate model sales will remain above 30,000 units next month the model is the company s biggest selling SUV. The Emgrand GS hit a new sales high with 17,487 units sold. The model, which is targeted at younger buyers has seen sales grow steadily this year, accounting for 12% of total sales during 11M17, making it an increasingly important contributor to sales. The Vision X3, launched in Aug, has seen sales rise quickly, hitting 10,102 units in Nov, up 44.2% MoM. Sedan segment maintains steady growth 27,148 New Emgrand units were sold in Nov, up 0.4% MoM but down 5.9% YoY. However, 11M17 sales are up a steady 10.2% YoY. Sales of the NEV version of the model have risen, with 3,119 units sold in Nov, 12% of the model s total sales. In 11M17, NEV versions accounted for 9.5% of total New Emgrand sales, vs 7.4% last year. We expect this ramp-up to give the company a further edge in NEV development in The New Vision saw a considerable monthly rebound to 16,103 units in Nov, up 39.2% MoM, which we believe was strongly supported by the purchase tax policy for vehicles of up to 1.6L, and we expect higher sales in Dec. Maintain Buy, TP of HK$ will be a key year for the company, with five new launches under the Geely brand (two SUVs, two sedans and one MPV), as well as contribution from Lynk & Co, which just launched its 01 SUV model last week. We believe the company s strong sales this year were supported by rising demand for its SUVs and steady growth in its sedan segment. Given its balanced product portfolio, we think the company s sales will remain strong in The stock is currently trading at 11.4x our 2018 earnings estimate, undervalued in our view. We maintain our Buy rating on the stock and maintain our target price of HK$33.29, based on 15x 2018E P/E, 1SD above its three-year historical average of 12x. (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Pharmaceutical: First BE test products approved by the CFDA, positive for CSPC Pharma What s new? Sino Biopharma (1177 HK, NR) announced yesterday its registration approval of Tenofovir Disoproxil Fumarate for treatment of HBV. It is the first generic drug that has completed bioequivalence studies, according to the Consistency of Quality and Efficacy Evaluation for Generic Drugs. We believe this is positive for leading domestic companies such as CSPC Pharma as the government has been advancing bioequivalence studies for domestic generics. CSPC Pharma (1093 HK, Accumulate) has three generics pending approval in the near term As we highlighted in our review of the company s 3Q17 results, paclitaxel, metformin tablets and ciprodelgrel are expected to receive registration approval by end-2017; the first two are expected to generate a combined Rmb700m-1.2bn in sales in As of 1H17, there were around 19 products undergoing bioequivalence studies or clinical trials, including seven Class-1 new drugs. Their strategy is to file for ANDA approval and achieve a quicker time to market. Page 3

4 CSPC Pharma shares down 5% yesterday without any change in growth in fundamentals; maintain Accumulate and TP of HK$16.10 Although the latest IMS data showed hospital sales growth decelerated to 2.8% YoY in 9M17, from 19.7% a year ago, we expect hospital sales to demonstrate back-ended growth as MOHRSS requires all provinces to complete the NDRL update before Jan We continue to expect the sector to outperform in early 2018, and favor large pharmas, TCM names and CRO players. (Natalie Chiu, Research Analyst, SFC CE No. AVH029, nataliechiu@gfgroup.com.hk ) Construction Machinery: Nov excavator sales volume beats expectations; maintain Buy on Lonking Better-than-expected excavator Nov sales volume According to the China Construction Machinery Association (CCMA), 13,822 excavators were sold in China during Nov, up 107.4% YoY and better than market expectation of 10,000 units. Nov sales volume was also much higher than Oct s 10,541 units. Total excavator sales volume during 11M17 reached 126,298 units, up 99.2% YoY. We expect this to reach 140,000 units in Strong sales driven by replacement demand As stated in our 2018 outlook report, sales in the construction machinery industry are recovering, a trend we expect to continue in 2018, mainly driven by FAI and the replacement cycle. Reiterate Buy on Lonking Although Lonking (3339 HK) has not announced its Nov sales volume yet, we believe its sales growth will continue to outperform peers. Lonking s recent weak stock performance was mainly due to concerns about Nov sales volume in China, particularly for heavy duty trucks, for which weak sales figures were announced a few days ago. We believe the strong Nov excavator sales volume should help to ease market concerns. The stock is currently trading as 9.6x 2018E P/E; we maintain our Buy rating and target price of HK$4.30. (Dominic Chan, Research Analyst, SFC CE No. APP609, dominicchan@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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