Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Oct 28, 2016

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1 Equity Research Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 16E 17E 16E 17E 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 CHINA MOBILE ICBC PETROCHINA CCB HSBC BANK OF CHINA PING AN SINOPEC CHINA LIFE Source: Bloomberg A-Share Market Macro: Actual industrial profit growth essentially stable; restocking under way Despite the stronger industrial growth figure in Sept, actual industrial profit growth likely remained stable in Sept as industrial revenue growth eased slightly but profit margins continued to improve. Currently finished product restocking is happening on a larger scale while the inflationary cycle is still on track. Looking ahead, the implementation of expansionary fiscal policy, stable monetary policy, and economic restructuring will lead to the neutralization of policy making, and the cessation of liquidity easing will weigh on both the stock and bond markets. Property: Overview of property management industry As property asset volume growth has slowed substantially from the high levels previously seen, we highlight potential investment opportunities from the property operation, existing property trading service, property finance service and property renovation subsectors. We expect area under management to increase by 3.6bn over the next three years with annual management fee to reach Rmb780bn at the end of the period and rise to around Rmb1trn around Investors should pay more attention to earnings contribution per unit of managed area as a gauge of business performance. Hong Kong Market China securities: 9M16 data update Average daily trading volume dropped 29% YoY in 9M16, outstanding margin trading balance was down 3.5% YoY, and average comprehensive income and net profit decreased 53% and 48% YoY respectively. The upcoming SZ-HK stock connect could lead to a 10-11% rise in commission income for Chinese brokers operating in HK next year. There is also a chance that HK-listed small-caps will become more actively traded and the possibility of more active HK equity financing. Our top pick is GTJA Intl (1788 HK, Hold) given its consistent financial results. Ping An Insurance (2318 HK, Buy): Good 3Q16 results; maintain Buy 9M16 net profit rose 17.1% YoY and comprehensive income was up 44.8% YoY. Ping An Life s agency-channel FYP increased by 39.5% YoY and its NBV increased by a higher 48.1%. More importantly, the 48.1% NBV growth in 9M16 was faster than the 42.7% NBV growth seen in 1H16, showing that Ping An Life achieved strong growth without ceding any quality. Ping An P&C managed to maintain its combined ratio at around 94.9%, despite slow P&C premium growth. Ping An s internet finance business is also growing, with its user base up 13% QoQ in 3Q16. Maintain Buy. China Life (2628 HK, Buy): 9M16 results in line with profit warning; maintain Buy 9M16 net profit dropped 60% YoY as the company had forecasted in its profit warning, while shareholders comprehensive income improved from 1H16. Despite the profit drop, we remain positive on the company s long-term outlook as: 1) comprehensive income recovered YoY in 3Q16 on capital market stability; 2) company fundamentals were strong in 1H16, with solid NBV growth expected for full-year 2016; and 3) high-margin first-year premium growth should be supported by its expanding sales agent team, which is growing at a pace faster than peers. Maintain Buy. Anta (2020 HK, Buy): Strong 3Q16; upgrade to Buy Retail sell-through came in stronger than we had expected, especially the high-margin e-commerce and FILA segments. The company s new logistics center will also help it to gradually reduce the proportion of orders placed at trade fairs (six months ahead of season). This will reduce the operating risks of the trade fair model. We lift our FY16/17/18 net profit forecasts by 6%/12%/15% to factor in higher sales and margins assumptions. We raise our TP from HK$20.60 to HK$23.70 and upgrade the stock to Buy. 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 Hong Kong Market (continued) I.T (999 HK, Buy): Key takeaways from post-results NDR With significant expansion potential, China will remain the key growth driver in the medium-term. The company s China segment profit rose 5% YoY in 1HFY17. However, excluding the write-back for onerous provisions in 1HFY16, segment profit would have increased by 47% YoY. For its Japan subsidiary, the strong 28% revenue growth in 1HFY17 was driven by growth in inbound tourists and local consumption. Its e-shop is also performing well, contributing >10% of revenue. The HK market remains challenging the company will control retail discounts as well as operating costs and optimize its store network in the region. ASM Pacific (522 HK, Accumulate): Sales and earnings growth resuming amid industry recovery 3Q16 sales grew 30% YoY and net profit was up 224% YoY, coming in 13% ahead of expectations. This means ASM Pacific has ended four consecutive quarters of declines in earnings since 3Q15. Management has guided for mid-to-high single-digit sales growth in 2016, which would be largely in line with consensus. For 2017, management is "cautiously optimistic" on market demand. We maintain our Accumulate rating given the positive industry outlook in 2017, and raise our target price from HK$64.60 to HK$78.12, implying 10% upside. Page 2

3 Macro: Actual industrial profit growth essentially stable; restocking under way Actual industrial profit growth essentially stable in Sept Sept industrial profit of Rmb579.7bn (+8.4% MoM) was significantly higher than the monthly average of Rmb558.9bn over the past three months and the YTD monthly average of Rmb546.2bn. YoY growth of 7.7% was much lower than the 19.5% in Aug. However, the exceptionally high profit growth in Aug was mainly attributable to the low base in Aug 2015 (Rmb448.9bn) created by the stock market crash and Rmb depreciation while the comparable base for Sept actually jumped to Rmb536.9bn. In fact, industrial profit growth likely remained stable in Sept as industrial revenue growth eased slightly but profit margins continued to improve. Growth leaders auto, steel and power losing steam The auto, steel and power sectors have led other sectors recently in terms of profit growth, but their profit contribution weakened in Sept, respectively as a result of a higher base, rising raw material cost and narrowing profit margin. We think the slowdown in these three sectors reflects the issues currently facing downstream consumer durables, midstream industrial raw materials and upstream public utilities industries. Finished product restocking happening on larger scale Finished product inventory has risen for the third consecutive quarter. We believe that active restocking of finished products will take place on a larger scale now as companies expectations are shifting in view of rising upstream prices and improving downstream demand. Inflationary cycle still on track Based on past experience, the industrial profit cycle tends to move in parallel with the price growth cycle, with upstream, midstream and downstream companies profit growth correlated with changes in the PPIRM, PPI and CPI respectively. Narrowing industrial price deflation and consumer price inflation are the key themes running through this year, and currently this inflationary cycle is still at play. The YoY growth of the CRB Index strengthened further to 8.3% in Oct from 3.8% in Sept, signaling that the PPI and corporate earnings will continue to pick up. Overall, listed companies should post better results in 9M16 compared with 1H16, with full-year results to come in even stronger. Policy neutralization ahead The end-july Politburo meeting put the spotlight on implementing supply-side reform, steering liquidity supply into the real economy, and staying alert of an asset bubble. Various policy actions have been taken during 1H16 following these guidelines, with 1) accelerated overcapacity reduction in the steel and coal industries, 2) the standardization of wealth management products, bill financing business, universal life insurance sales and internet finance, and 3) recent property policy tightening, corresponding to each of the three aspects outlined above. Looking ahead, the implementation of expansionary fiscal policy, stable monetary policy, and economic restructuring will lead to the neutralization of policy making, and the cessation of liquidity easing will weigh on both the stock and bond markets. Property: Overview of property management industry Property asset growth stabilizing The property industry in China has grown substantially since the housing reform in 1998, and has become a pillar for the country s economic growth. As industry asset volume growth has slowed substantially from the high levels previously seen, we highlight potential investment opportunities from the property operation, existing property trading service, property finance service and property renovation subsectors. Size of property management market to reach Rmb1trn around 2020 As of end-2015, there was a total of 17.45bn sqm of property area under management across the country, with annual property management fee of ~Rmb650bn. We expect area under management to increase by 3.6bn over the next three years with annual management fee to reach Rmb780bn at the end of the period and rise to around Rmb1trn around Accelerated market share expansion by industry leaders The combined market share of the top hundred property management companies expanded by 8.92pp YoY to 28.42% in Meanwhile, the combined market share of the top ten players grew at CAGR of 38.5% during , which was 10.44pp higher than that of the top hundred companies. We believe industry concentration will increase at a quickening pace driven by the promotion of branded operating models and M&A. Watch earnings contribution per unit of managed area Gross and net margins cannot effectively reflect property management companies operating performance due to the different methods for Page 3

4 revenue recognition applied (lum-sum vs commission-based). As such, we think investors should pay more attention to earnings contribution per unit of managed area. Meanwhile, cost control can be achieved through unified business platform development and service outsourcing. Community O2O incorporates the sales of other goods and services into property management companies P&L by tapping into residents loyalty for their property management platforms. Relying on the large user base and users trust in their brands, property management companies are expanding their O2O coverage from low-value-added to high-value-added businesses. China securities: 9M16 data update Brokerages: Average daily trading volume in mainland China amounted to Rmb410.1bn in 9M16, down 29% YoY. Margin loan business: Outstanding margin trading balance in mainland China reached Rmb871.8bn in 9M16, down 3.5% YoY. Performance by company: Average comprehensive income and net profit decreased 53% and 48% YoY respectively. Our comments - The upcoming SZ-HK stock connect could lead to a 10-11% rise in commission income for Chinese brokers operating in HK next year, based on GTJA Intl s experience following the SH-HK stock connect. There is also a chance that HK-listed small-caps will become more actively traded and the possibility of more active HK equity financing. - For Chinese brokers operating in the mainland, companies like CITIC and Haitong will release their 3Q16 results soon. As they report their financial results on a monthly basis, we do not expect the 3Q16 results to have much of an impact on the market. - Our top pick is GTJA Intl (1788 HK, Hold) given its consistent financial results. The company may benefit from its parent company s proposed HK IPO, and it should be a long-term beneficiary of the upcoming SZ-HK stock connect. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Ping An Insurance (2318 HK, Buy): Good 3Q16 results; maintain Buy 9M16 results 9M16 EPS came in at Rmb3.17, and BVPS was Rmb Net profit attributable to shareholders totaled Rmb56.5bn, up 17.1% YoY, while comprehensive income was Rmb50.5bn, up 44.8% YoY. Solid growth life insurance segment NBV In 9M16, Ping An Life s agency-channel FYP increased by 39.5% YoY and its NBV increased by a higher 48.1%. More importantly, the 48.1% NBV growth in 9M16 was faster than the 42.7% NBV growth seen in 1H16. This shows that Ping An Life achieved strong growth without ceding any quality. We expect Ping An Life to report good NBV growth in fullyear We also think other life insurance companies (e.g. China Life (2628 HK, Accumulate), China Pacific (2601 HK, Accumulate), China Taiping (966 HK, Buy)) will achieve good NBV growth during the year. Good combined ratio in P&C insurance segment Despite the slow P&C premium growth (4.8% YoY) in 9M16, Ping An P&C managed to maintain its combined ratio at around 94.9%, similar to the 95.3% in 1H16. This shows that Ping An P&C is a strong competitor in China s P&C insurance market. Growing internet finance business Ping An s internet finance user base totaled 337m in 3Q16, up 13% QoQ. Among them, 202m are app users, up 10% QoQ. In particular, the Lufax brand name is becoming increasingly influential in China (active users up 80.4% and AUM up 55.8% compared with 2015). Maintain Buy Overall, Ping An posted strong 3Q16 results, not just in earnings growth but also in business quality. Based on this solid performance, we maintain our Buy rating. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Page 4

5 China Life (2628 HK, Buy): 9M16 results in line with profit warning; maintain Buy 9M16 results in line with profit warning 9M16 EPS came in at Rmb0.47, with BVPS of Rmb Shareholders profit fell 60% YoY to Rmb13.5bn, while shareholders comprehensive income was a negative Rmb1.5bn in 9M16, recovering from the negative Rmb7.5bn in 1H16. The company s 9M16 results are in line with its earlier profit warning which stated that 9M16 net profit might drop by 60% YoY. Maintain Buy Despite the 60% YoY profit drop in 9M16, we remain positive on the company s longterm outlook. First, the company s 3Q16 comprehensive income (a positive Rmb6.0bn) represented a recovery from 3Q15 (a negative Rmb20.0bn), mainly due to relative capital market stability during the quarter. Second, company fundamentals were strong in 1H16, with NBV growth of 50% YoY and agency-channel FYP growth of 65% YoY, while stable growth was also seen in gross written premium in 3Q16. We expect solid NBV growth for full-year Third, the company s sales agent team expanded quickly during 1H16, with its agent headcount increase of 32% HoH outperforming all HK-listed peers. The growing number of exclusive agents will support growth in the company s high-margin first-year premiums going forward. We maintain our Buy rating for the company. (Felix Luo, Research Analyst, SFC CE No. AQF573, felixluo@gfgroup.com.hk ) Anta (2020 HK, Buy): Strong 3Q16; upgrade to Buy Upgrade to Buy Retail sell-through came in stronger than we had expected, especially the highmargin e-commerce (30%+ OPM) and FILA segments (20%+ OPM with good operating leverage). The company s new logistics center will also help it to gradually reduce the proportion of orders placed at trade fairs (six months ahead of season). This will reduce the operating risks of the trade fair model. We lift our FY16/17/18 net profit forecasts by 6%/12%/15% to factor in higher sales and margins assumptions. We raise our TP from HK$20.60 to HK$23.70, based on 17.5x FY17E P/E (at +1sd). We like Anta s diversified growth drivers from various segments and its market share expansion underpinned by strong execution and rising brand equity. Anta branded retail sell-through accelerated Anta branded products (Anta core brand and Anta kids) retail (online and offline) sell-through accelerated to low-teens in 3Q16 from high single-digit in 2Q16, driven by 50%+ e-commerce growth, followed by 30%+ growth in Anta kids and mid singledigit growth for the Anta core brand. Retail discount dropped 1pp YoY. FILA very strong in 3Q16 For the first time, Anta disclosed retail sell-through for non-anta branded products (FILA, Descente and NBA), which soared 60-70%. Growth was mainly driven by FILA s 50-60% growth (vs 40%+ in 1H16) thanks to improving brand recognition and improved store efficiency. 2Q17 trade fair results Order book value increased by a mid single-digit, the same as in 1Q17. Growth was driven by footwear products, which saw double-digit volume growth but a slight drop in ASP (greater mix of running footwear priced at Rmb ). Apparel product growth was flat in terms of both volume and ASP. Raise proportion of orders through replenishment to lower risk Due to improving supply chain capability (phase one and two of its logistics center will commence operation in 2Q17 and 2018, respectively), the company wants to gradually increase the proportion of replenishment orders from mid single-digit in 2Q17 to 10-15% in 3-4Q17. This will lower the proportion of orders placed at trade fair. Supported by the logistics center, delivery time from Jinjiang to stores will come down from one month to two weeks. This will lower the operating risks of the trade fair model by shortening lead times and avoiding shocks from unfavorable economic environments or weather. (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) I.T (999 HK, Buy): Key takeaways from post-results NDR Significant expansion potential in China China will remain the key growth driver in the mediumterm. The company s directly-operated stores (395 stores in 1HFY17) now cover 22 cities, with around 60%/40% of its store area in first-tier cities/the other 18 cities. Currently, its franchisees cover another 20+ cities (75 stores in 1HFY17) including certain affluent coastal cities such as Page 5

6 Ningbo, Zhenjiang, Xiamen, Jiaxing etc. For example, the sales performance of franchised stores in Chengdu was stronger than management had expected, so the company ended the franchise co-operation this year and opened directly-operated stores. Also, it was observed that consumers have begun to be aware of personalization in picking apparel since two years ago. This rising trend should be positive for the company s trend-setting fashion business. Good operating leverage in China The company s China segment profit rose 5% YoY in 1HFY17. However, excluding the HK$23m write-back for onerous provisions in 1HFY16, segment profit would have increased by 47% YoY. This represents a 1.2pp increase in profit margin to 5.1% at a 5% SSSG despite GM narrowing 0.6pp. Why is the Japan subsidiary s growth so strong? The strong 28% revenue growth, in local currency, in 1HFY17 was driven by growth in inbound tourists and local consumption. A Bathing Ape stores are seen as a must go place to visit in Japan. The company developed a sub-brand AAPE two years ago and it has been well-received by HK consumers. The company therefore plans to open one AAPE store in Japan this year. In the US, the company will also open its second store in LA (the first was in New York) as A Bathing Ape has been gaining traction. Sales from stores outside of Japan are also an income source to the company. Lastly, the e-shop has been performing well and contributes >10% of revenue. HK market still challenging Opex ratio in the HK market increased by 4.6pp to 67.8% in 1HFY17 given 1) shop rental costs increased on renewal as most stores are located in shopping malls, 2) salary increases, and 3) operating deleverage. The 3% store area reduction YoY in 1HFY17 improved sales efficiency slightly as retail revenue only dropped 2%. Management believes it is difficult to say when the recovery will come, but it will control retail discounts as well as operating costs and optimize its store network (2-4% YoY drop in store area in FY17). (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) ASM Pacific (522 HK, Accumulate): Sales and earnings growth resuming amid industry recovery What s new? Integrated circuit (IC) packaging equipment maker ASM Pacific's 3Q16 net profit beat market expectations by about 13%. The shares have rallied by over 20% since we upgraded our rating on Aug 1. We maintain our Accumulate rating and raise our target price given the positive outlook for the industry in Ending four consecutive quarters of YoY earnings declines 3Q16 sales grew 30% YoY to HK$4.2bn and net profit reached HK$584m (+224% YoY), 13% ahead of Bloomberg consensus of HK$516m. This means ASM Pacific has ended four consecutive quarters of declines in earnings since 3Q15 (this time last year, the company issued a profit warning for 3Q15, during which net profit fell 77% YoY amid the industry down-cycle in demand for back-end semiconductor packaging equipment). Moderate margin improvement in 3Q16 Blended gross profit margin (GPM) rose moderately on a QoQ basis to 39.4% in 3Q16, up from 39.1% in 2Q16 (and up substantially from 33.9% in the same period last year). GPM for back-end equipment, which accounted for 53% of group sales in 3Q16, rose 1.2pp on a QoQ basis to a record high of 45.1%, underpinned by improved economies of scale. Management has guided that blended GPM will decline on a QoQ basis in 4Q16 due to a decline in sales during the traditional industry low season. Upbeat business outlook Management has guided for mid-to-high single-digit sales growth in 2016, which would be largely in line with current Bloomberg consensus of 8% YoY growth (9M16 sales grew 7% YoY). For 2017, management is "cautiously optimistic" on market demand, citing rising demand for camera image sensors, discreet ICs and LEDs. The upcoming iphone 8 replacement in 2017 (expected to be launched in Sept 2017) will also drive upstream IC packaging companies to invest in back-end equipment to handle the surge in demand, in our opinion. The company s comments are broadly in line with SEMI, a semiconductor industry research firm, that expects global demand for semiconductor assembly and packaging equipment to recover in 2017 (with a 4% rebound in sales), compared with declines of 18% and 5% in 2015 and 2016 respectively. Raise target price, maintain Accumulate We upgraded the stock to Accumulate in Aug (up from Hold) and the share price has since rallied by over 20%. We maintain our Accumulate rating given the positive industry outlook in 2017, and raise our target price to HK$78.12 (up from HK$64.60), Page 6

7 based on a new 2017 P/E target multiple of 22x (up from 19x) our 2017 EPS estimate (during the last industry upcycle in 2014, the stock traded at 16-23x forward P/E). Our new target price offers 10% upside from the current level. Risks Key downside risks include 1) weaker-than-expected industry demand in 2017, and; 2) sudden and sharp weakening of the Japanese yen vs the US dollar, which would render ASM Pacific s products less price competitive vis-à-vis its Japanese rivals. (Joseph Ho, CFA, Research Analyst, SFC CE No. AFP308, josephho@gfgroup.com.hk ) Page 7

8 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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