China Comm Cons (1800 HK) Trading Buy Last price: HK$10.18 Target price: HK$10.50/ Protective stop: HK$9.88. O-Net Tech (877 HK)

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1 MARKET NEWS P R I C E C H A R T ( H a n g S e n g I n d e x ) Bad news dragged HSI to fall in the end After falling for the past two days, the HSI once rose 270 points yesterday (22 June). However, it pared its gains and fell 20 points to settle at points. The HSCEI gained 9 points to close at points. The market turnover amounted to bn with 761 gainers and 804 losers. Dragged down by two weighted negative news in the afternoon, the HSI fell yesterday (22 June). There were rumours saying that several banks have received orders to sell their Wanda bonds, therefore, a number of related bonds plunged sharply, Shenzhenlisted Wanda Cinema slid nearly 10%, and applied for suspension afterwards. Another piece of news was related to the China Banking Regulatory Commission (CBRC). The CBRC has required several banks to review the credit and debt financing risk analysis of enterprises such as Wanda, HNA Group, Fosun and Zhejiang Rossoneri Sport Investment. A number of Hong Kong-listed related stocks, such as, HNA Holding and Fosun International, fell nearly 6%. The enterprises under investigation have been actively carrying out overseas merger and acquisition in recent years, and thus it is believed that the purpose of the campaign is to prevent financial risks. Yesterday, the HSI once broke above the 10-day MA (~25779 points) and the 20-day MA (~25803 points). However, with the spreading of the news, the HSI pared its gains and dropped 20 points. Technically, the index is expected to trade in a range. WHAT S I N THE PACK Paper China Containerboard Prices Rising Again Share prices of Nine Dragons Paper and Lee & Man Paper have rebounded by 20% from their troughs from early-april till now, in tandem with the rebound in containerboard prices after the seasonal correction in March. We remain positive on the paper sector, given strong demand and tight supply resulting from more stringent environmental regulations. Near-term catalyst will be paper price hikes in the next few months. Maintain OVERWEIGHT. Top pick: NDP. China Comm Cons (1800 HK) Trading Buy Last price: HK$10.18 Target price: HK$10.50/ Protective stop: HK$9.88 O-Net Tech (877 HK) Trading Buy Last price: HK$4.42 Target price: HK$4.83/ 5.00 Protective stop: HK$4.00 KEY I NDICES Prev Close Chg YTD HSI Index 25, HI1 Index 25, HSCEI index 10, SHCOMP index 3, DJI index 21, SPX index 2, NKY index 20, DAX index 12, CAC index Source: Bloomberg 5, TOP VOLUME Stock Price (HK$) Chg Value ($m) TENCENT % PING AN % CCB-H % TRACKER FUND HK % ICBC-H % TOP GAI NERS Stock Price (HK$) Chg Value ($m) MUNSUN CAPITAL % 50.3 JINHUI HLDGS CO % 2.4 CISCO SYSTEMS % 0.0 ON REAL % KING FORCE % 4.13 TOP LOSERS Stock Price (HK$) Chg Value ($m) AMGEN INC % 0.0 MICROSOFT CORP % 0.0 APPLIED MATERIAL % 0.0 INTEL CORP % 0.0 STARBUCKS CORP % 0.0 ANALYST Frank Yip frank.yip@uobkayhian.com.hk w w w. u t r a d e. c o m. h k 1

2 SECTOR UPDATE Paper China Containerboard Prices Rising Again Share prices of Nine Dragons Paper and Lee & Man Paper have rebounded by 20% from their troughs from early-april till now, in tandem with the rebound in containerboard prices after the seasonal correction in March. We remain positive on the paper sector, given strong demand and tight supply resulting from more stringent environmental regulations. Near-term catalyst will be paper price hikes in the next few months. Maintain OVERWEIGHT. Top pick: NDP. WHAT S NEW Paper prices rebounding. Containerboard paper prices in China have rebounded 6-8% from their recent trough in Mar 17, but still 7-15% below their peak in Feb 17. April-June is the low season for paper demand, but containerboard prices held up well in 2Q17. Going into 3Q17, we are seeing another round of price rally. Last week, 25 containerboard makers across China announced product price hikes of 3-4%, including big players like Nine Dragons Paper (NDP). Most of these 25 plants are in eastern coastal regions (Tianjin, Shandong, Jiangsu, Zhejiang and Fujian), while some are in inland provinces in the north and southwest. Containerboard prices in China will likely go up further in the relatively high season in Jul-Oct 17, given stronger demand. Containerboard demand in China picking up. Demand growth for containerboard in China should have accelerated from 1.8% in 2015 to 3-4% in We expect demand growth to rise further to 4-5% (3m tonnes) p.a. in 2017 and over the next few years, outpacing expected annual capacity growth of 3% (2.3m-2.4m tonnes). This year, demand for containerboard in China is driven by the sustained buoyant growth in the ecommerce market and the recovery of exports. Booming e-commerce boosting containerboard demand. Demand for containerboard in China is increasingly driven by e-commerce. We estimate the e-commerce industry in China consumed 7m tonnes of containerboard in 2016, representing 11% of the country s total demand vs merely 2% in Based on a >30% CAGR in China s e-commerce market, we expect the e-commerce industry s demand for containerboard to more than double from 7m tonnes in 2016 to 16m tonnes 2019 (23% of total demand). Export recovery also spurring containerboard demand. Apart from e- commerce, other segments of domestic consumption (conventional retail businesses, logistics) and exports (for packaging of exported goods produced in China) jointly accounted for 89% of China s demand for containerboard in This year, China s exports have started to recover, driven by increasing orders from the modestly recovering developed countries. This is spurring demand for containerboard in China. Capacity growth capped by tight environmental regulations. We expect containerboard capacity in China to grow 3% p.a. (or 2m-3m tonnes), based on gross capacity addition of 4m-5m tonnes p.a. and the closure of small plants. Note that China saw a shortage of containerboard in 2016 when 4.7m tonnes in new capacity were added, as the capacity reduction from the closure of small plants overwhelmed capacity addition from new plants. Now, only the largest players, eg NDP, that have obtained government authorisation, would be allowed to add production lines, given tight environmental regulations. Meanwhile, small plants are being closed gradually. We do not expect over-capacity in the next couple of years. Raw material cost hike not a concern. Driven by strong demand from containerboard manufacturers, OCC price in China rebounded from the recent trough of $260/tonne in Apr 17 to $295/tonne now. But the cost increase from the OCC price hike would be offset by the rebound in containerboard prices and the drop in coal prices. Thermal coal prices in China dropped 15% from the peak in Nov 16 to Rmb577/tonne now. ANALYST(S) Ken Lee ken.lee@uobkayhian.com.hk Sophie Yu sophie.yu@uobkayhian.com.hk w w w. u t r a d e. c o m. h k 1

3 ACTION Nine Dragons Paper (BUY/Target: HK$14.00). As China s largest containerboard manufacturer, NDP is set to benefit from the industry consolidation. NDP is more geared to tapping on the containerboard price rebound, given its higher operating leverage. Lee & Man Paper (BUY/Target: HK$8.00). We like LMP, the second-largest containerboard manufacturer, because it is well positioned to benefit from the industry consolidation. It is also expanding into the higher-margin tissue paper business. ASSUMPTION CHANGES Maintain ASP assumptions We keep our FY17-19 ASP assumptions for NDP at Rmb3,165/tonne, Rmb3,694/tonne and Rmb3,768/tonne respectively. Meanwhile, we keep our containerboard ASP assumptions for LMP at HK$4,030/tonne for each year. Maintain net profit per tonne assumptions. We keep our FY17-19 unit net profit assumptions for NDP at Rmb326/tonne, Rmb342/tonne and Rmb374/tonne respectively. Management is confident NDP will attain net profit of Rmb /tonne in FY18. We maintain unit net profit assumptions for LMP at HK$604/tonne, HK$621/tone and HK$681/tonne respectively. Maintain earnings estimates. We keep our FY17-19 core net profit forecasts for NDP at Rmb4,395m (EPS: Rmb0.94), Rmb4,847m (EPS: Rmb1.04) and Rmb5,507m (EPS: Rmb1.18), implying yoy growth of 55%, 10% and 14% respectively. We maintain our core net profit forecasts for LMP at HK$3,566m (EPS: HK$0.79), HK$3,910m (EPS: HK$0.86) and HK$4,494m (EPS: HK$0.99) respectively, implying yoy growth of 26%, 10% and 15% respectively. RISKS Larger-than-expected renminbi depreciation. If the renminbi depreciates by over 5%, both companies earnings would be lower than our forecasts. NDP would incur higherthan- expected forex losses for its foreign-currency debt. We are assuming forex losses of Rmb260m and Rmb120m for NDP in FY17-18, representing 8% and 3% of core net profit respectively. But NDP is cutting its foreign-currency debt, and thus we do not expect any forex losses in FY19. w w w. u t r a d e. c o m. h k 2

4 TRADERS CORNER China Comm Cons (1800 HK) Trading Buy Last price: HK$10.18 Target price: HK$10.50/ Protective stop: HK$9.88 China Communications Construction fell to HK$10.00 in June. Yesterday, the stock rose 3% in a white candlestick and settled at HK$10.18, with an intraday high of HK$ It once moved above the 20-day MA (HK$10.20). Although it failed to close at above the 20-day MA, its turnover increased, indicating stronger buying. The MACD has crossed above its signal line on Wednesday (21 June), and the bullish gap further expanded yesterday, showing stronger upward momentum. If the stock continues to rise, the initial resistance would be at HK$10.50, which is near the 100-day MA (HK$10.49) and the low of May. If it breaks above HK$10.50, the next target would be HK$11.00 with key resistance at HK$ If the stock moves below the low of HK$9.88 on 15 June, the downtrend is expected to accelerate. Approximate time frame on average: 1 month O-Net Tech (877 HK) Source: HKETNet Trading Buy Last price: HK$4.42 Target price: HK$4.83/ 5.00 Protective stop: HK$4.00 Yesterday, O-Net Technologies jumped 16% in a long white candlestick to settle at HK$4.42. The stock dropped from the high of HK$7.55 on 24 March and did not move back to above the 20-day MA since then. Yesterday, it broke above the 20-day MA (HK$4.21) in a white candlestick on increasing turnover. Therefore, the stock is expected to rebound. Regarding the STC, the %K has crossed above the %D, and the MACD has crossed above its signal line yesterday. Both indicators show that the upward momentum has appeared. Nevertheless, as the stock has surged too rapidly, investors may buy at HK$ , with the initial target at the 50-day MA (HK$4.83). Upon penetrating this level, the stock may head towards HK$5.00 with initial support at HK$4.00 and key support at the low of HK$3.79 on 21 June. Approximate time frame on average: 1 month STRATEGIST Hannah Li, CFA hannah.li@uobkayhian.com.hk w w w. u t r a d e. c o m. h k 3

5 FOC NEWS Market News On Thursday (22 June), the balance of Northbound Trading of Shanghai-Hong Kong Stock Connect was RMB billion, accounted for about 96.23% of the daily quota of RMB 13 billion. The balance of Southbound Trading was RMB billion, accounted for about 85.12% of the daily quota of RMB 10.5 billion. The balance of Northbound Trading of Shenzhen-Hong Kong Stock Connect was RMB billion, accounted for about 90.15% of the daily quota of RMB 13 billion. The balance of Southbound Trading was RMB billion, accounted for about 94.61% of the daily quota of RMB 10.5 billion. PBOC News The People s Bank of China conducted RMB 20 billion of 7-day reverse repos at the interest rate of 2.45% yesterday. The amount of matured reverse repos for yesterday totalled RMB 100 billion, therefore, there was a net return of RMB 80 billion. Industry News China's NDRC released a notice to stop charging certain fees from independent power producers (IPPs), allow IPPs to lift the benchmark on-grid tariff from coalfired plants from 1 July. CR Power (836 HK, HK$ 15.26) rose 4.8%; Huaneng Power (902 HK, HK$5.48) rose 1.2%; Huadian Power (1071 HK, HK$3.58) rose 1.7%; Datang Power (991 HK, HK$2.66) rose 1.5%; China Power (2380 HK, HK$2.83) rose 1.1%. Stock Results China Gas Holding (384 HK, HK$14.20) announced the result for the fiscal year ended 31 March During the period, net profit soared 82.5% yearly to RMB$4.148 billion; Final dividend amounted to HK$20 cents. During the period, turnover rose 8.5% yearly to RMB$ billion; gross profit rose 16.1% yearly to RMB$8.377 billion. Gross margin rose 1.7 ppt to 26.2%. The stock rose 9.2% yesterday. Fairwood Holding (52 HK, HK$33.40) announced the results for the year ended 31 March. Net profit added 2.2% yearly to HK$205 million. Final dividend of HK58 cents and special dividend of HK50 cents was declared. Total revenue amounted to HK$2.581 billion, up6.3%. Same-store sales increased by approximately 4%. Profit from core operations, before the net gain on disposal of non-current assets held for sale from last year, recorded an increase of 8.6%. The stock fell 3.6% yesterday. Stock News The Lands Department announced that the tender for a residential site at Kwun Chui Road, Tuen Mun, was awarded to Shum King Company Limited, which is a JV of Road King Infrastructure (1098 HK, HK$ 10.44)) and Shenzhen Investment (604 HK, HK$3.49), at a premium of HK$3.169 billion. The transaction price was over 21.8% higher than the upper limit of the market forecast. The site area is 131,400 sq. ft, with a gross floor area of 472,900 sq. ft. Road King Infrastructure rose 3.4%, and Shenzhen Investment fell 2.2%. E C O N O M I C C A L E N D A R June 23 (Fri) EC EC Event Period Survey Prior Markit Eurozone Manufacturing PMI Markit Eurozone Composite PMI Markit Manufacturing PMI Markit Composite PMI Jun Jun Jun Jun New Home Sales May 600k 569k June 26 (Mon) Durable Goods Orders Chicago Fed Nat Activity Index Cap Goods Orders Nondef Ex Air June 27 (Tue) Conf. Board Consumer Confidence Richmond Fed Manufact. Index June 28 (Wed) EC M3 Money Supply YoY MBA Mortgage Applications Wholesale Inventories MoM June 29 (Thu) EC Consumer Confidence GDP Annualized QoQ May % May May % Jun Jun -- 1 May % Jun May % Jun Q % Core PCE QoQ 1Q % CH Personal Consumption Initial Jobless Claims BoP Current Account Balance Source: Bloomberg (HK Time), UOBKayHian 1Q % Jun Q -- $19b Shanghai Electric (2727 HK, HK$3.85) received a notice from the China Securities Regulatory Commission that the vetting of the transactions in relation to the proposed assets acquisition by issuance of shares and the proposed issuance and placing of A shares will soon be carried out in the working meeting of the Listed Companies Merger and Reorganisation Vetting Committee of the CSRC.. The trading in the A shares has been suspended as from yesterday. The H shares rose 4.9% yesterday. Road King Infrastructure (1098 HK, HK$10.44) disclosed further details on the proposed spin-off and separate listing of a highway business, RKE International Holdings Limited, on the Main Board of the Stock Exchange. The total number of RKE shares to be offered under the global offering is expected to be 419 million w w w. u t r a d e. c o m. h k 4

6 RKE shares and 481 million RKE shares, representing approximately 27% and 31% respectively of the total number of RKE shares in issue immediately following completion of the global offering. The Offer Price is currently expected to be not less than HK$4.00 per RKE Share and not more than HK$5.50 per RKE Share. The stock rose 3.4% yesterday. AAC Technology (2018 HK, HK$96.55) announced that the Company, through the Stock Exchange, repurchased 500,000 shares on 21 June at prices of HK $ per share at a total consideration of HK$ million. The stock rose 0.4% yesterday. Suchuang Gas (1430 HK, HK$2.91) announced that it entered into a partnership agreement with China Railway (390 HK, HK$6.12) for cooperation in areas such as the development and utilisation of clean energy, environmental protection and energy conservation, intelligence of urban buildings and centralised heating and cooling. Suchuang Gas rose 8.2% and China Railway rose 0.8% yesterday. GAC Group (2238 HK, HK$13.86) and Huawei entered into a strategic cooperation agreement, pursuant which, both parties would cooperate in areas such as corporate management, cloud computing, large data, car networking, smart driving, new energy and international business development. The stock fell 0.9% yesterday. Trading in the shares of China Household (692 HK, HK$0.51) has been suspended from yesterday. Blazing Research released a report and held a bearish view on the stock. The stock was initiated at "Strong Sell". It is reported that the China Banking Regulatory Commission has required reviewing the corporate credit and debt financing risks of enterprises such as Wanda, Fosun and HNA. Yesterday, Fosun International (656 HK, HK$11.74) fell 5.8%; Fosun Pharma (2196 HK, HK$29.40) fell 5.9%; HNA Holding (521 HK, HK$0.31) fell 6.1%. Stock Data China EB International (257 HK, HK$ 9.66) has recently signed investment agreements for Huidong Waste-to-energy Project Phase II in Guangdong Province and Baoying Waste-to-energy Project in Jiangsu Province, commanding a total investment of approximately RMB644 million. The stock rose 1.9% yesterday. IPO News UTS Marketing (6113 HK) has started IPO from yesterday (22 June). The offer price ranges from HK$1.2 to HK$1.4 per share. The entry fee is about HK$2, w w w. u t r a d e. c o m. h k 5

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