Conviction Buy List (A-shr)

Transcription

1 Company Research China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON July 16, 2012 July 18, 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 Disclosure EPS (RMB) PE (x) date of BVPS PB Price PEG report 11A 12E 13E 11A 12E 13E (RMB) (x) 12/7/13 (x) Insurance Ping An Insurance 2012/3/ Brokerage CITIC Securities 2012/3/ Property Overseas Chinese Town 2012/2/ Transport Shanghai International Airport 2012/2/ Electricity Beijing 2012/6/ supply& Public utility Originwater Technology Food Inner Mongolia Yili 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 13 new insurance policies to be released soon 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 new business value of insurance companies to record 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 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, business and product. 2. Average daily trading volume in the A-share market reached RMB126.5 billion over last week, while the year-to-date average daily turnover was RMB147.1 billion. Assuming the average daily trading volume throughout the year is RMB160 billion, the median of the fluctuation range of the SHCOMP is 2,300, 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 27.08x and 2.18x respectively, implying 6.61% 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 1.4x for 2012, and 1.3x and 1.1x 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 s plan to issue RMB26 billion in convertible bonds has won regulatory approval, 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 1H 2012 would be -27%. 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. 4. Its 2012 P/B is expected to be 1.60x, lower than the industry average of 2.18x. 5. Risks: the pace of innovation may be slower than expected amid sluggish market sentiment. Guosen Securities (HK) 2

3 Property The stabilising property sales are conducive to boosting investor confidence. The decline in property investment, new housing starts and land sales shows signs of deepening, which may in turn prompt the easing of curbs on the property market. Improvement in liquidity, favourable policies and the government s tolerance to a mild rise in property prices could provide more catalysts going forward. We believe China has entered into an interest rate cutting cycle, after the PBoC announced the first rate cut in over three years on June 7. Property names are now suitable for investors that adhere to both aggressive and defensive investment strategies. We maintain our Buy rating on the property sector. Our top picks include Overseas Chinese Town ( SZ), China Fortune Land Development ( SH), China Vanke ( SZ), Gemdale Corporation ( SH). 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 Transportation Outlook: we have complied interim earnings previews for the transportation sector. 1. Railway stocks: we forecast the interim EPS of Daqin Railway ( SH) and Guangshen Railway ( SH) to be RMB0.42 and RMB0.1 respectively, representing 1% and -21% y-o-y changes. China Railway Tielong Container Logistics ( SH) estimates its interim EPS would have declined by 14.5% y-o-y to RMB0.18, which is higher than our previous forecast of RMB Aviation stocks: we estimate the interim EPS of Air China ( CH), China Eastern Airlines ( CH) and China Southern Airlines ( CH) to be RMB0.05, RMB0.03 and RMB0.01 respectively. 3. Shipping operators: in 2Q, the container shipping industry suffered further losses, while the performance of oil tanker operators was divergent. Meanwhile, dry bulk Guosen Securities (HK) 3

4 cargo shipping along China s coastal line continued to be loss-making and the slump in the transportation by specialized ships was persistent. 4. Airport operators: we forecast the interim EPS of Shanghai International Airport ( SH), Xiamen International Airport ( SH) and Shenzhen Airport ( SZ) grew moderately to RMB0.38, RMB0.57 and RMB0.22 respectively. 5. Tollway operators: we forecast the interim EPS of Jiangsu Expressway ( SH), Jiangxi Ganyue Expressway ( SH), Anhui Wantong Technology ( SZ), Shenzhen Expressway ( SH) and Shandong Expressway ( SH) to be RMB0.25, RMB0.27, RMB0.25, RMB0.19 and RMB0.17, representing y-o-y change of -1%, -5%, -8%, 17% and 31% respectively. The airline industry: We upgraded our rating on the airline sector as well as the ratings on Air China ( CH), China Southern Airlines ( CH) and China Eastern Airlines ( CH) to Buy on May Valuation: we believe airline names are trading at a 20% to 30% discount to their intrinsic value, and their valuations have been on an uptrend. 2. Results: there is a small chance the airlines will see their results further worsen going forward, as the y-o-y decline in profits might be bottoming out, in our view. 3. Supply & demand: demand growth for air travel is unlikely to continue to slow down going forward, and supply growth is expected to fall starting from 3Q. Our top pick Shanghai International Airport ( CH) We forecast the company s profit to achieve a CAGR of over 20% over the next three years. As expansion of the airport is unlikely, this indicates relatively stable returns on investment in the long run. At the same time, possible asset injection and increase in airport charges are expected to boost the company s results. 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 the 3 rd quarter. The environmental protection sector is likely to confront retreating valuation levels and investors need to control risks. Environmental protection sector: considering macro-economic conditions, policy support and valuations, we are firstly positive on the waste incineration sub-sector and then sewage treatment sub-sector. Stock picks include Sound Environmental Resources ( SZ) 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 earnings from equipment for water conservancy projects grew at by 30% (vs. market expectation of 60%) and those from solid waste treatment saw merely Guosen Securities (HK) 4

5 30% growth (as against an expected 50%). Earnings from other segments also posted disappointing growth rates, with less than 20% increase for air pollution treatment and environmental monitoring, missing market expectations of 40%-50%, and 30%. The sector s relative P/E ratio stands at 2.68x, higher than the historic average of 2.34x. Our top pick 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. Projects located outside Yunnan have begun to generate profit. Leveraging its capital strength, the company is expected to replicate its success in Guangdong and Hebei provinces. 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. 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 run. Growth of consumer staples sales are also expected to slow. 2. Valuation: the P/E of leading Chinese liquor makers range between 13x and 16x. The P/E ratios of food makers are around 20x and the PEGs are far from Strategic analysis: On average, food and beverages stocks accounted for 12% of the equity allocation of funds in 1Q 2012, and we estimate that the ratio would have exceeded 13% at the end of June. 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 improve, the outperformance of food & beverage stocks vs. the broad market will accordingly approach an inflection point, in our opinion. 4. Outlook for the short term: The rally of 1 st -tier Chinese liquor makers is coming to an end and we forecast their stock prices would spike and fall before the interim results announcements. Equity allocation to this sector is already high, and we advise investors to look at non-liquor makers like Inner Mongolia Yili Industrial ( SH) as we estimate their valuation level would be adjusted upwards. Overall, the food and beverage stocks are expected to generate excess returns before China s economic data show signs of an upturn. Guosen Securities (HK) 5

6 Our top pick Inner Mongolia Yili ( CH): We believe that the tainted milk powder scandal and the proposed share issue might have a limited impact on the company s interim results. Pharmaceuticals Industry overview 1. Latest policy: (1) To offset the loss of mark-ups in medicine sales at public hospitals, Shenzhen and Beijing authorities permitted the hikes of prescription fees and pharmaceutical service fees, the majority of which would be bankrolled by public medical insurance. If the scraping of mark-ups in medicine sales is introduced nationwide in the future and the lost revenue is supplemented ultimately by drawing on public healthcare insurance, China s medical insurance would be stretched financially and more curbs would be introduced to rein in spending on medicine. (2) The upper limit of retail selling price of drugs for tumour and blood disease may be adjusted in the 3 rd quarter. The expectation of price cuts has been existent since the CPC and CPPCC session in 2012, but how much the slash would be is an uncertainty. 2. The rebound of pharmaceuticals has continued, and in July so far pharmaceuticals have achieved both absolute and relative returns and seen their valuation level improve. This year, Jan-April saw the correction of pharmaceuticals and May-June saw their rebound. China s pharmaceutical index has advanced 3.33% since the start of July, outperforming the CSI 300 index by 3.77% and achieved a 14.6% positive return since its May correction, 21.28% higher than the CSI 300 index. By absolute valuation method, the pharmaceutical sector trades at 25.62x 2012P/E (ttm) and at a relative premium rate of 148%, up from 136% at the end of last month. 3. Investment advice: During the interim earnings season, investors are well-advised to hold stocks whose earnings growth is more certain. As our interim results previews for 54 pharmaceutical companies show, the earnings of this sector as a whole have not improved. The recent rebound was largely due to a pickup in valuation level. A growing number of pharmaceutical companies will release interim earnings in the following 2 months, and we forecast inevitable and wide divergence of results among them. Only those with certain growth prospects would be supported by improved fundamentals of this sector and see their valuation level rise. 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) 6

7 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) 7