Conviction Buy List (A-shr)

Transcription

1 Company Research China August 8, 2012 Conviction Buy List (A-shr) Guosen s A-share research team covers nearly 30 sectors, providing a comprehensive coverage of the Chinese equity market. Each week, we will share with you our top BUY ideas, which will be accompanied by a summary of each individual story supporting our fundamental investment cases. Conviction Buy list China A-Shares Sector Ticker Company Insurance Ping An Insurance Disclosure EPS (RMB) PE (x) date of BVPS report (RMB) PB Price PEG 11A 12E 13E 11A 12E 13E (x) 12/7/27 (x) 2012/3/ Brokerage CITIC Securities 2012/3/ Property Overseas 2012/2/ Chinese Town Electricity supply& Public utility Beijing Originwater Technology 2012/6/ Food & Beverage Shanxi Fen Wine 2011/4/ Healthcare Tasly Pharmaceutical 2012/3/ Source: Guosen Securities Economic Research Institute Non-banks financials We suggest paying close attention to insurance names. 1. The four new insurance policies launched by the CIRC since July 19 will help to further expand the investment channels of insurance companies. Coupled with the increase in bond supply, insurance companies are expected to achieve satisfactory ROI despite the current interest rate cutting cycle. We expect these new insurance policies and Solvency II regulations will become two indispensable parts of China s insurance regulatory and development system to ensure the safety of insurance assets. Sales Contact Dan Weil Global Head of Institutional Sales and Trading Managing Director dan.weil@guosen.com.hk Chris Berney Managing Director chris.berney@guosen.com.hk Roger Chiman Managing Director roger.chiman@guosen.com.hk Andrew Collier Director andrew.collier@guosen.com.hk Joe Chan Director joe.chan@guosen.com.hk Cancy Kong Vice President cancy.kong@guosen.com.hk Gary Wong Associate gary.wong@guosen.com.hk Ma Ning Associate ma.ning@guosen.com.hk 2. The deferred-tax policy on pension funds is expected to be implemented this year. 3. Assuming the new business value of insurance companies records zero growth, and the discount rate is 10%, these companies are expected to see their new business multiples rise to at least 10x. As for China Pacific Insurance and New China Life, whose new business value are expected to grow in 2012, their new business multiple should be no less than 15x. Therefore, we maintain our Buy rating on Ping An Insurance and China Pacific Insurance, and Cautious Buy rating on China Life Insurance and New China Life. For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1 Bespoke translation by Guosen Securities strictly for use by its clients only.

2 We suggest paying close attention to brokerage names. 1. The development prospect for brokerages will mainly depend on two factors, including the launch of new products and business models, and the breakthrough made in terms of structure, personnel, businesses and products. 2. Average daily trading volume in the A-share market reached RMB85.7billion last week, while the year-to-date average daily turnover was RMB142 billion. Assuming the average daily trading volume throughout the year is RMB160 billion, the median of the fluctuation range of the SHCOMP is 2,200, and the prevailing commission rate, employees remuneration and other expenses within the sector decline by 5%, 15% and 10% y-o-y respectively, we expect the industry s average PE and PB to be 27.04x and 2.17x respectively, implying 6.51% ROE for Our stock picks include CITIC Securities ( SH), Haitong Securities ( SH) and Southwest Securities ( SH). We suggest buying CITIC Securities and Haitong Securities, given their stable financial condition, sufficient balance sheet strength and strong innovative capability. We have also added Southwest Securities to our watch list as we believe the company, under the leadership of the new management team, could become a dark horse seizing new opportunities brought by the ongoing financial market reform. Our top picks Ping An Insurance ( CH) 1. The stock is oversold. The latest price implies a new business multiple and P/EV ratio of 4.2x and 1.25x for 2012, and 1.3x and 1.07x for 2013 respectively. 2. Two problems that have long weighed on the company s share price, including refinancing pressure and the employee share scheme, were resolved. The company is expected to issue RMB26 billion in convertible bonds in 3Q, and it has successfully issued RMB9 billion in subordinate bonds. Strategic investors have fully taken over the company s employee shares. 3. We expect its interim net profit to beat peers and deliver positive growth. Yet, we estimate its growth of new personal insurance policies for Jan-Jul 2012 would be -25%, despite positive single-month growth in July. A breakthrough in terms of its marketing and sales model is needed for the personal insurance business to turn around. 4. Risks: The equity and bond markets could continue to slump. CITIC Securities (600030) 1. CITIC is well positioned to take a lead in developing new businesses, given its strong risk management, adequate balance sheet strength and broad business channels. 2. CITIC enjoys obvious competitive advantages in terms of the brokerage business. 3. The company maintains sound control of risks from its proprietary trading business. Guosen Securities (HK) 2

3 4. It has a strong balance sheet with RMB77.4 billion on paper available for investment by the end of 1Q. 5. Its 2012 P/B is expected to be 1.57x, lower than the industry average of 2.17x. 6. CITIC s acquisition of CLSA represents it is moving in a right strategic direction but the deal is expensive. 7. Risks: the pace of innovation may be slower than expected amid sluggish market sentiment. Property 1. Our expectation that outperformance by the property sector will narrow with the surge in home sales has proven to be correct. Outperformance by the sector shrank significantly to 3.2% in May, and plunged in early August. 2. Although we had expected it will be more difficult for investors to bet on the government s attitude to home price hikes in 2H than in 1H and we believed property names will underperform in 2H as compared to 1H, the 15.73% decline of the sector since June was still more significant than we had expected. We had underestimated the central government s tolerance to the economic slowdown and overestimated its tolerance to the surge in home prices. 3. As the economic slowdown continues, the property sector will still enjoy outperformance before the improvement in fundamentals of the property market boosts other related sectors along the value chain and increases local fiscal revenue. We do not suggest significantly offloading property stocks for the time being. We expect housing starts will bottom in September, but the trend will not be confirmed until November. As a result, the outperformance of the property market will last until at least November. 4. We believe the sector s valuation may rebound after policies to maintain tight property restrictions are implemented, and it may gain absolute returns due to the increase in both home prices and sales volume. We believe the government s determination to maintain tight property restrictions and the inspection teams sent to check on property curbs may act as hedges against further loosening in monetary policies. We expect August will see fewer surges in property sales than July. Under such a scenario, the policy easing may not necessarily dampen investment in the property market, as the outperformance of the sector always deviates from fundamentals. 5. We suggest institutional investors that are already overweight on the sector to maintain their positions. We suggest paying attention to property stocks that will rebound after being oversold, such as Gemdale Corporation ( SH), Jiangsu Zhongnan Construction ( SZ), Jinke Property ( SZ), Beijing Capital Development ( SH), Beijing Huaye Realestate ( SH), Hubei Fuxing ( SZ), Shenzhen Worldunion Properties ( SZ), and Yunnan Metropolitan Real Estate ( SH). We also suggest paying attention to stocks that have been consistently strong, such as Overseas Chinese Town ( SZ), China Fortune ( SH), China Vanke ( CH), China Merchants Property ( SZ) and Nanjing Chixia Development ( SH). Guosen Securities (HK) 3

4 Overseas Chinese Town ( CH) 1. As a central government-backed enterprise and given its business model of tourism + culture + property, Overseas Chinese Town is on track to benefit directly from favourable policies regarding tourism, culture and property. Combined with low land acquisition costs (for over 6.2 million square metres of land reserves for tourism projects and 2.45 million square metres of land reserves for property projects) and strong profitability, the company will become the biggest beneficiary of an anticipated increase in property upgrade demand, in our view. 2. The company s sales are expected to reach RMB15.2 billion in 2H 2012, and amount to over RMB22 billion for the full year, representing a y-o-y growth of 35%. 3. The number of visitors to the company s theme parks has increased by 5% y-o-y. 4. We conservatively expect the company s EPS to reach RMB0.52, RMB0.63 and RMB0.78 respectively over , with a RNAVPS of RMB8.7. Power & environmental protection Overall view: we advise adding positions in the power sector on any dips in stock prices, as the thermal power generation companies are set to enjoy better earnings in 3Q. The environmental protection sector is advancing better than in the base period and investors need to control risks. Coal-fired power plants: despite the economic slowdown, coal-fired power plants are more certain to post the biggest profitability improvement of the sector in 3Q, and are worth investing in. We believe coal prices are unlikely to rebound significantly as inventory of power plants is large and demand from downstream companies remains depressed. The sector s relative PB is 0.95x, slightly higher than the historic average of 0.85x. Our top picks include power plants that are located in coastal areas, especially Guangdong Province, or that are highly sensitive to coal price, such as Guangdong Electric Power ( SZ), Huaneng Power International ( SH), Huadian Power International ( SH) and Shanghai Electric Power ( SH). Hydroelectric power plants: We pay close attention to Yangtze Power ( SH), which will benefit from the remarkable increase in the water inflow to the Yangtze River basin this summer as compared to previous years. The sector s relative PB is 1.03x, which is close to the average of 1.01x. Environmental protection: the sector is advancing better than last year. We are firstly positive on the waste incineration sub-sector, which is supported by policies, and then the sewage treatment sub-sector. Stock picks include Sound Environmental Resources ( SZ), Originwater Technology ( CH) and Anhui Shengyun Machinery ( SZ). But the approaching interim earnings season may pose risk to valuation levels for this sector, as growth may be lower than expected. The sector s relative P/E ratio is 2.58x, above the historic average of 2.34x. Water supply sector: we are bullish about Wuhan Sanzhen Industry ( SH), which is expected to raise water tariffs and receive capital injection. Interim results of most water supply companies met expectations. The sector s relative PE ratio is 1.68x, which is close to the historic average of 1.69x. Guosen Securities (HK) 4

5 Gas supply sector: as a beneficiary when the Second West-East Gas Pipeline is put into operation, Shenzhen Gas ( SH) is expected to see an explosive growth in profit for In addition, it will grow steadily in the coming four to five years with the increase in gas supply and the recovery in investments from projects outside the city. The company is a good choice for long-term investment. Our top pick Beijing Originwater Technology ( CH): 1. The company s joint venture business model allows its membrane manufacturing equipment business to avoid keen competition while accelerating capital turnover. Besides, the company can recover investment ahead of schedule through membrane sales and projects. 2. Its project in Kunming city is behind schedule, but overall its expansion in other provinces, Hebei province in particular, is faring well. 3. We estimate fair value to be RMB30 per share. Risks include suspension of project construction and cash-flow strain due to a slow recovery of investments. Food & beverage 1. Fundamental analysis: the business climate of the Chinese liquor industry has weakened under the economic slowdown, with the retail prices of high-end white-spirit products falling 30% compared to a year earlier. Although sales of mid-level white-spirit products increased, we see no significant growth in the long term. Growth of consumer staples sales are also expected to slow. 2. Valuation: the P/E of leading Chinese liquor producers range from 13x to 16x. The P/E of food producers is around 20x and the PEG is far from 1x. The PE ratio in relative valuation has rebounded to 2.2x recently, but it s still far from the high level of 3x earlier. 3. Strategic analysis: food & beverage stocks accounted for 11% of the equity allocation of funds by the end of 2Q 2012, slightly lower than that by the end of 1Q. Institutions may turn to consumer-driven stocks in 3Q if the property market continues to be pressured by policies. If China continues to release lacklustre economic data, we expect the food & beverage sector will continue to outperform the broad market in the short term. However, if economic data improves, the outperformance of food & beverage stocks versus the broad market will accordingly approach an inflection point, in our opinion. 4. Outlook for the short term: first-tier Chinese liquor stocks fell last week, led by Kweichow Moutai, which is roughly in line with our forecast that their share prices would peak before the interim results announcements. We expect food and beverage stocks to continue to outperform as the government tightens property policies. We expect the sector as a whole has seen significant slowdown in interim earnings growth, as forecasts for increases in interim results have eased to some extent. The sector still enjoys obvious advantages over the overall A-share market. Guosen Securities (HK) 5

6 Our top pick Shanxi Xinghuacun Fen Wine ( SH): The company s revenue growth and net profit growth exceeded 50% in 2Q. Its P/E ratio for 2012 is 24x, and it may be oversold for the short term. Pharmaceuticals Industry overview 1. The SFDA released the Regulations for Strengthening the Supervision and Management on Pharmaceutical Excipients on August 2, stating that it will establish the database of pharmaceutical excipients and the system for disclosure of violations. Besides, the Regulations on the Clinical Use of Antibacterial Medications, which took effect on August 1, will curb the overuse of antibacterial medications in clinical practices. On August 4, Guangzhou Municipal Human Resources and Social Security Bureau said that it will continue to implement the existing residential medical insurance policy in the new year starting from September 2012, and the insured will continue to pay premiums based on the current standard, while the government will bear a major share of responsibility for the shortfalls of the city s medical insurance funds. 2. The upper limit of retail selling price of drugs for tumour and blood disease may be adjusted in 3Q. The expectation of price cuts has existed since the CPC and CPPCC session in 2012, but how much the reductions would be is an uncertainty. We point out again that the price cuts are normal adjustments and will not have a significant impact on the trend of the sector. 3. As of now, most major companies that have released interim reports or previews are in line with our expectations. We maintain the view that the sector as a whole has undergone a period of low profit growth in 1H 2012, but estimate the divergence of interim results among the listed pharmaceutical companies has intensified. 4. The valuation of the pharmaceutical sector has fallen slightly after a two-week correction, but it s still at a relatively high level. Valuations continued to rebound from May to early July. The bio-pharmaceutical sector rebounded by over 5% last week. Due to continued correction in the previous months, the PE for 2012 of the pharmaceuticals sector has reached 24x (ttm) under an absolute valuation method, which is at a relative premium rate of 138% compared with the CSI Investment advice: The recent rebound was largely due to a pick-up in valuation levels. Currently the absolute valuation of the pharmaceutical sector is at a reasonable level while the relative valuation is high, and the sector has accumulated decent absolute and excess returns. Therefore the sector will face technical and valuation level-related pressure in the short term. During the interim earnings season, investors are well-advised to hold high-quality stocks whose earnings growth prospect is more certain, and pay attention to the medium-term gains which may be generated from changes in valuation in 2H. Guosen Securities (HK) 6

7 Tianjin Tasly Pharmaceutical ( CH) The company s core businesses are expected to enjoy robust growth in 2012, and it s suitable for investors that adhere to both aggressive and defensive investment strategies. We apply a Buy rating on Tianjin Tasly Pharm, and expect profit from core businesses enjoyed y-o-y growth of 42% in 1H Guosen Securities (HK) 7

8 Information Disclosures Stock ratings, sector ratings and related definitions Stock Ratings: Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 20% or more over the next six months. Cautious Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 10% or more but less than 20% over the next six months. Neutral: Indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 10% over the next six months. Reduce: Indicates that the analyst expects the stock to underperform the Benchmark by 10% or more over the next six months. Sector Ratings: Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 10% or more over the next six months. Cautious Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 5% or more but less than 10% over the next six months. Neutral: Indicates that the analyst expects the sector to either outperform or underperform the Benchmark by less than 5% over the next six months. Reduce: Indicates that the analyst expects the sector to underperform the Benchmark by 5% or more over the next six months Disclaimers This report is based on public data. Guosen does not warrant the accuracy and completeness of the information contained herein. This report is published solely for reference purposes and shall in no way be construed as a solicitation or an offer to buy or sell securities or related financial instruments stated herein. Guosen and its employees do not accept responsibility for any direct or indirect losses arising from the use of this report. Guosen or its affiliates may hold or trade securities issued by the companies mentioned in this report, and provide or seek to provide investment banking services for these companies. All rights of this report are reserved by Guosen. Without the prior written consent of Guosen, no one may copy, reproduce or publish part or whole of this report. Guosen Securities (HK) 8