Yum Cha 飲茶. August 4, TALKING POINT - TIME TO REVISIT SHANGHAI SOEs? RESEARCH NOTES

Transcription

1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 21,739.1 (1.8) HSCEI 8,978.3 (1.7) Shanghai COMP 2, Shenzhen COMP 1, Gold 1,358. (.4) BDIY 641. (.6) Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M 2.8 (.2) RMB/USD DATA RELEASES DUE THIS WEEK Aug 6 Foreign Reserves Source: Bloomberg TALKING POINT - TIME TO REVISIT SHANGHAI SOEs? Company name Price (HK$) Market cap (HK$m) PER (x) August 4, E PER 217E PER (x) (x) PBR (x) Dividend yield (%) 2727 HK Equity Shanghai Electric Group Co Ltd , HK Equity Shanghai Pharmaceuticals Holding Co Ltd , HK Equity Shanghai Industrial Holdings Ltd , HK Equity Shanghai Jin Jiang International Hotels Group Co Ltd , HK Equity Shanghai Industrial Urban Development Group Ltd , HK Equity Hua Hong Semiconductor Ltd , HK Equity Greenland Hong Kong Holdings Ltd , HK Equity Lianhua Supermarket Holdings Co Ltd ,56 n.a. n.a. n.a HK Equity Shanghai Prime Machinery Co Ltd , n.a. n.a HK Equity Rivera Holdings Ltd.465 1, n.a. n.a Sources: Bloomberg, CGIS Research It seems that the acceleration of state-owned enterprise (SOE) reform is not just at the central SOE level, but also at the local SOE level. In the past few days, speeches by some senior officials in Shanghai and news reports in the People s Daily suggested that SOE reform in Shanghai should move at a faster pace. Currently most of the corporate actions (e.g. trading suspensions) have been in the A-share market, so SOE reform in Shanghai is still not a hot topic in Hong Kong. If we see some similar cases in Hong Kong in the next few months, we believe investors are likely to revisit the potential of some Shanghai SOEs. If we look just at valuation, Shanghai Industrial (363.HK) and Shanghai Industrial Urban Development (563.HK) remain attractive from a PBR perspective, with a sizable market cap. Unfortunately, both companies are red chips, not H-share companies, so the local authorities may not make them a high priority for SOE reform because the procedures involved will be more complicated. Meanwhile, Shanghai Prime Machinery (2345.HK) is trading at.45x PBR and has been ignored by investors because of its unexciting power equipment component business. However, if Shanghai Electric Group, its parent company, is willing to inject new business into this platform, the outlook for Shanghai Prime Machinery may change significantly, given its small size. Analyst: Wong Chi-man, CFA RESEARCH NOTES NINE DRAGONS PAPER [2689.HK; HK$6.23; NOT RATED] - We had an update from Nine Dragons Paper (NDP) management regarding the outlook for the Company, industry trends and investor concerns. NDP management reiterated its positive tone on the outlook despite increasing macro uncertainties. Despite limited capacity growth, NDP s net profit growth in the next few years will be supported by better pricing, improvements in efficiency and a reduction in interest expenses. NDP s net profit per tonne is lower than Lee & Man Paper s. We believe that NDP will play catch up, given its share price underperformance, and the gap between the net profit per tonne of two Companies will narrow as NDP strives to improve profitability and strengthen its balance sheet. We estimate that NDP is trading at 9.2X FY17 PER, which is below its historical average and that of its listed peers. The share price correction provides a good re-visit opportunity.

2 COMPANY NEWS Nine Dragons Paper (Holdings) Limited [2689.HK; HK$6.23; Not Rated] - Recent Pull-Back Offers Good Re-entry Opportunity. Outlook Remains Positive Market Cap: US$3,747m; Free Float: 32.6%; 3-month Average Daily Turnover: US$5.7m Analyst: Mark Po Auguest 4, 216 Company background. Nine Dragons Paper (NDP) manufactures and sells paperboard packaging products and unbleached kraft paper. We had an update from NDP management regarding the outlook for the Company, industry trends and investor concerns. NDP management reiterated its positive tone on the outlook despite increasing macro uncertainties. Their positive view is supported by an improving supply/demand dynamic, reduced gearing, improvements in operating efficiency and a recovery in coated duplex board paper. Management expects more outdated capacity to be closed down in other provinces in China given the government s policy of reducing overcapacity through supply-side reform. Management also shares the view that it is getting more difficult to install new paper production capacity because of more stringent environmental protection controls and tight market liquidity for small players. NDP will not add capacity until its net gearing returns to a lower level. The management target is to reduce NDP s net gearing ratio to 7-75% in FY17. The Company s developed production bases, such as Guangdong and Jiangsu, are expected to outperform due to higher efficiency and better demand/supply dynamics. The other production bases have underperformed in terms of net profit per tonne because of higher financing costs and lower efficiency. Management believes that the profitability of NDP s production bases, excluding Guangdong and Jiangsu, will continue to improve going forward. Despite concerns about an economic slowdown, management believes that demand for packaging paper will continue to grow in China, driven by consumption growth, especially for e-commercerelated activities. Given the similar pricing, packaging paper users are unlikely to use products offered by small papermakers, so the leading players such as NDP will continue to gain market share. Limited capital outlay in NDP has no major CAPEX plan for 216. Its CAPEX budget for FY16 and FY17 will remain low at RMB2.5bn and RMB2.bn, respectively. The Vietnam and Shenyang plants will commence production in Dec 216 and end-217, respectively. According to management, NDP is benefiting from tight financial market liquidity, as banks are unwilling to lend to smaller paper manufacturers to avoid potential bad debt. Given its improved financial position and limited capacity outlay, NDP will consider raising its dividend payout ratio. Net profit growth through cost controls. NDP has been raising the prices of its products since the beginning of 216. Management expects the Company to raise its ASP further during the peak season. Management still believes that there is upside for its profitability as the recovery of the industry is an ongoing process. There is concern about recent increases in raw material prices, especially those of waste paper and coal. Management believes that the recent uptick in waste paper prices is seasonal and expects it to normalize in late Q3 and Q The short-term contraction in profitability is not indicative of the long-term trend. The actual impact on profitability from the increase in raw material prices is not as significant as the market thinks, given the overall average of the costs. Management also highlighted that the current market demand growth [Nine Dragons Paper (Holdings) Limited] (HK$) Aug15 Oct15 Dec15 Feb16 Apr16 Jun16 Turnover (RHS) Price (LHS) Key Financials (in RMBm) FY14 FY15 FY16E 217E Revenue 24, , , ,235.4 Change (YoY %) Gross Profit 4, , ,692. 6,171. Gross Margin % Net Profit 1, , ,689.2 Net Margin % EPS (Basic) Change (YoY %) (9.2) (28.3) (53.4) 39.2 DPS $.8 $.76 $.99 $.128 ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) 9.34% 19.53% 12.58% 15.81% Capex (m) (2,656.2) (1,525.2) (2,5.) (2,.) Free cash flow per share Net Gearing (%) Source: Bloomberg, Company Data, CGIS Research (year-ended June 3) unlikely to support the sharp rise in waste paper prices. (HK$ million) No significant FX losses projected in FY17. RMB-denominated borrowings accounted for 41% of the Company s total debt in 1H FY16. RMB-denominated loans will account for 8% of total debt in Q Management believes RMB depreciation should have a limited impact on the Company s P&L in FY17. The effective interest cost of RMB s bank borrowings is less than 4%, which shows that Chinese banks are supportive of NDR. Our view. Despite limited capacity growth, NDP s net profit growth in the next few years will be supported by better pricing, improvements in efficiency and a reduction in interest expenses. NDP s net profit per tonne is lower than Lee & Man Paper s. We believe that NDP will play catch up, given its share price underperformance, and the gap between the net profit per tonne of two Companies will narrow as NDP strives to improve profitability and strengthen its balance sheet. We estimate that NDP is trading at 9.2X FY17 PER, which is below its historical average and that of its listed peers. The share price correction provides a good re-visit opportunity. Catalysts. FY16 results, paper price hike, more discipline on the supply side, and softening coal and waste paper prices

3 COMPANY / INDUSTRY NEWS Figure 1: Nine Dragons Paper s Sales Mix RMB m 4,. 35,. 3,. 25,. 2,. 15,. 1,. 5,. - Source: Company Data, CGIS Research Recycled Printing & Writing Paper Pulp Coated duplex board Medium Linerboard Figure 2: Nine Dragons Paper s Gross Margin Trend % 25% 2% 15% 1% 5% % Source: Company Data, CGIS Research Linerboard Medium Coated duplex board Pulp Recycled Printing & Writing Paper August 4, 216 Figure 3: Nine Dragons Paper s Net Gearing Ratio Trend % Source: WIND, CGIS Research

4 Figure 4: Peer Comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Price Market Cap 216F 217F 218F 216F 217F 218F F F F F Lcy US$m x x x x x x x x % % % % % % 2689 HK Nine Dragons Paper HK Lee & Man Paper HK Shandong Chenming Paper n.a. n.a. n.a. n.a. n.a. n.a..6 n.a. 6.6 n.a. 1.8 n.a. n.a. n.a. 22 HK China Sunshine Paper Hldgs n.a. n.a. n.a. n.a. n.a. n.a..5 n.a. 3.4 n.a..7 n.a. 2.6 n.a HK Youyuan International Holdin n.a. n.a. n.a. n.a. n.a. n.a..9 n.a. 9.5 n.a. 5.5 n.a. 1.8 n.a. 232 HK Hop Fung Group Holdings Ltd n.a. n.a. n.a. n.a. n.a. n.a..3 n.a. 2.4 n.a. 1.7 n.a. 5. n.a HK Overseas Chinese Town Asia n.a. n.a. n.a. n.a. n.a. n.a..5 n.a. 8.5 n.a. 1.2 n.a. 5.3 n.a HK Bracell Ltd n.a. n.a. n.a. n.a. n.a. n.a..7 n.a. 5.4 n.a. 3.9 n.a. 2.4 n.a HK Vinda International Holdings HK Hengan Intl Group Co Ltd Average CH Shandong Chenming Paper-A CH Shandong Sun Paper Industr-A n.a. n.a. n.a CH Shandong Bohui Paper Indu-A n.a. n.a. n.a. n.a. n.a. n.a. 1.1 n.a. 1. n.a..3 n.a. n.a. n.a. 638 CH Shandong Huatai Paper Co -A n.a. n.a. n.a. n.a. n.a. n.a..9 n.a. 1. n.a..4 n.a. n.a. n.a CH Yueyang Forest & Paper Co -A n.a. n.a. n.a. 1.3 n.a n.a. n.a. n.a. 613 CH Fujian Qingshan Paper Inds-A n.a. n.a. n.a. n.a. n.a. n.a. 6.2 n.a n.a n.a.. n.a CH Anhui Shanying Paper Ind-A n.a. n.a. n.a. n.a. n.a. n.a. 1.7 n.a. 3.5 n.a. 1.1 n.a. n.a. n.a. 267 CH Zhejiang Jingxing Paper -A n.a. n.a. n.a. n.a. n.a. n.a. 2.6 n.a..4 n.a. 3. n.a. n.a. n.a. 815 CH Mcc Meili Paper Industry C-A n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a. n.a. 13. n.a. n.a. n.a CH C&S Paper Co Ltd-A n.a. n.a. n.a n.a..3 Average TT Cheng Loong Corp n.a. n.a. n.a. n.a. n.a. n.a..6 n.a. 6.1 n.a. 1.2 n.a. n.a. n.a. IP US International Paper Co MWV US Westrock Mwv Llc n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a. n.a. STERV FH Stora Enso Oyj-R Shs n.a. n.a. 4.4 UPM1V FH Upm-Kymmene Oyj n.a. n.a JP Nippon Paper Industries Co L n.a. n.a JP Daio Paper Corp n.a. n.a. n.a. 1. n.a. 1. n.a. 2.2 n.a. n.a..9 Average Sources: Bloomberg, Company, CGIS Research estimates for covered stocks ; *:Nine Dragons Paper s financial year ended in June

5 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities (6881.hk) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 3 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >2% within 12 months in absolute terms share price will decrease by >2% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: