Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Jun 5, 2017

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 17E 18E 17E 18E 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 ICBC CHINA MOBILE CCB PETROCHINA HSBC BANK OF CHINA PING AN CHINA LIFE SINOPEC Source: Bloomberg GF events Date Event Location June GF A-share home appliance Hong Kong sector NDR Source: GF Securities (Hong Kong) A-Share Market Power Equipment/New Energy: NEV volume growth to strengthen in peak season We expect NEV volume growth to accelerate further in June-July as the 2H peak season arrives. We maintain our estimate of 700,000 units for full-year NEV output and sales this year, with grade A00 PVs and logistics vehicles to be the main growth drivers. With ongoing power industry reform and the relaxation of restrictions on new distribution grid construction, distribution grids for industrial parks with a high and stable power consumption demand will become a focal point of investment. As private-sector companies become more involved in distribution grid construction, traditional equipment manufacturers will diversify their business relying on their technological advantages, and participate in distribution grid construction by way of finance leasing and project master contracting. Hong Kong Market HK Retail Sector Monthly: April retail sales below consensus but maintain positive growth Retail sales rose 0.1% YoY in April, below consensus of +2.8%. Growth is down from +3.1% in March as mainland visitor arrivals growth softened from +10% to +2%, auto sales fell 14% in April, and local consumption weakened as outbound tourism surged due to the shift in the Easter holiday. Excluding auto sales, April retail sales rose 0.7% YoY (vs +2.5% YoY in March). Although growth in April was not as strong as March, we do not view this negatively as growth still remained positive. We think the recovery in HK retail sales will continue in 2Q17 and 3Q17. Wisdom Education (6068 HK, Buy): Encouraging student admission target for the 2017/18 school-year The company targets to grow its student number from 31,788 in Sept 2016 to 40,000 in Sept 2017 by adding 3,200 new students through M&A and 5,000 new students organically. We believe student enrolment in Sept 2017 could exceed this 40,000 target one of the company s schools in Dongguan recently said it has 14 candidates competing for each place. The stock is trading at 16.5x FY18E P/E, still undemanding in our view. We maintain our Buy rating and TP of HK$3.32. Guangzhou Automobile Group (2238 HK, Buy): Own-brands sales rise MoM, while JVs post declines Overall sales rose 22.2% YoY during May, but were down 2.5% MoM. Jan-May sales are up 33.2% YoY, continuing its considerable growth since 1Q17. GAMC, which produces the company s ownbrand models, saw sales rise 52.1% YoY and 5.9% MoM in May, after a decline in April. We expect GAC-Honda to continue to provide strong sales support for the group given the increased market share of Japanese brands taken from Korean brands during the quarter. A production bottleneck remains a concern for GAC-Toyota. Strong SUV sales are set to continue, despite gearbox supply issues. Maintain Buy and TP of HK$ 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 Power Equipment/New Energy: NEV volume growth to strengthen in peak season New energy vehicles The MIIT issued the fifth catalogue of new energy vehicle models to be promoted in 2017, which includes a total of 309 models from 92 auto companies. Among these models are 264 pure EVs, 42 plugin hybrids and 3 fuel cell vehicles. NEV output amounted to 82,000 units in 4M17, of which 75,000 were passenger vehicles (+25.2% YoY). NEV output and sales improved significantly in May compared to April as the impact of the unexpected extension of the purchase tax discount fades. We expect industry volume growth to accelerate further in June-July as the 2H peak season arrives. We maintain our estimate of 700,000 units for full-year NEV output and sales this year, with grade A00 PVs and logistics vehicles to be the main growth drivers. We like Tianqi Lithium Industries ( CH), Huayou Cobalt ( CH), Nuode Investment ( CH), Guoxuan High-Tech ( CH), Hongfa Technology ( CH), Senior Technology Material ( CH) and Founder Motor ( CH). Wind/solar power The amount of wind and solar power consumed by power grids in areas covered by State Grid rose 24% and 77% YoY in 4M17, with the curtailment rates down 7.2pp and 5.3pp respectively from one year ago. The gradual resolution of curtailment issues will help improve power plant developers cash flows and support long-term wind and solar industry development. We remain positive on Goldwind Science & Tech ( CH) and Funeng ( CH). Power distribution grids Per capita electricity consumption of 4,281 kwh in China in 2016 represented just 1/3-1/2 of the amount in developed countries, which offers substantial room for growth. In addition, power distribution grids in China are yet to become more developed. With ongoing power industry reform and the relaxation of restrictions on new distribution grid construction, distribution grids for industrial parks with a high and stable power consumption demand will become a focal point of investment. As private-sector companies become more involved in distribution grid construction, traditional equipment manufacturers will diversify their business relying on their technological advantages, and participate in distribution grid construction by way of finance leasing and project master contracting. We prefer XJ Electric ( CH), NARI Technology Development ( CH), Wiscom System ( CH) and Ligong Environment & Energy Tech ( CH). HK Retail Sector Monthly: April retail sales below consensus but maintain positive growth April retail sales below consensus Retail sales rose 0.1% YoY in April (ASP +0.2% YoY), below consensus of +2.8%. Growth is down from +3.1% in March as: 1) mainland visitor arrivals growth softened from +10% to +2%; 2) auto sales fell 14% in April (vs +16% in March) after a rush to buy electric cars before the reduction of the waiver on first registration tax in March; 3) local consumption weakened as outbound tourism surged in April due to the shift of the Easter holiday from late March in 2016 to April in Excluding auto sales, April retail sales rose 0.7% YoY (vs +2.5% YoY in March). Although growth in April was not as strong as March, we do not view this negatively as growth still remained positive. Cosmetics the strongest category By category, comparing April with March, consumer durable goods saw the biggest weakening in sales growth (from -1% in March to -13% in April), followed by jewelry (from +8% to -1%). On the other hand, department store sales posted the biggest improvement (from +1% to +3%), followed by cosmetics (from +4% to +5%). Apparel sales growth remained at +2%. Mainland visitor arrivals growth continues Mainland visitor arrivals increased by 2% YoY in April. The number of visitors staying overnight rose 3% YoY, faster than the 1% growth in same-day visitors. Sector share prices underperformed in May Shares across the sector fell 2% in April (vs the HSI s 4% increase). The three jewelry retailers under our coverage dropped 1-8% as HK jewelry sales growth slowed in April. On the other hand, Sa Sa (178 HK, NR) was the best performer, advancing 12%. Outlook Most HKRMA members expect positive sales growth in May. With the majority of members seeing a gradual improvement in sales, the HKRMA has raised its 2017 HK retail sales forecast from a 2-3% decline to flat-to-slight growth. We expect the Korea travel ban to continue to prop up HK's mainland visitor arrivals, and we see the wealth effect from the stock and property markets as positive for consumer sentiment. Given the low base, we therefore think the recovery in HK retail Page 2

3 sales will continue in 2Q17 and 3Q17. However, declining purchasing power among mainland tourists and the strong US dollar remain challenges. We expect an earnings recovery for retailers that have good growth in China/overseas markets and a stabilizing HK business. We maintain our Buy ratings on I.T (999 HK) and Chow Sang Sang (116 HK), Accumulate rating for Luk Fook (590 HK), and Hold rating for Chow Tai Fook (1929 HK). (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Wisdom Education (6068 HK, Buy): Encouraging student admission target for the 2017/18 school-year Encouraging student numbers for the new school year The company targets to grow its student number from 31,788 in Sept 2016 to 40,000 in Sept 2017 by adding 3,200 new students through M&A and 5,000 new students organically. We believe student enrolment in Sept 2017 could exceed this 40,000 target: 1) According to Dongguan Guangzheng School s official WeChat account, the school recently interviewed 12,760 candidates for 900 Secondary One places for the 2017/18 school year, meaning there are 14 candidates competing for each place; 2) We expect the student number increase targeted through M&A to rise further during the 2017/18 school year, from the current 3,200. Likely to change its high schools to not-for-profit in FY18 The tax details of for-profit schools have not yet been released by local governments. If these are not released before Sept 2017, a likely scenario in our view, the company will change its high schools to not-for-profit schools, which are not subject to corporate income tax. When the tax details of for-profit schools are announced, the company plans to change its high schools to for-profit schools as it can set tuition fees at its discretion, despite being subject to a 25% corporate income tax rate. We maintain our effective tax rate estimate of 15.5% for FY18. Maintain Buy The stock is trading at 16.5x FY18E P/E, still undemanding in our view. Our target price of HK$3.32 represents 19.5x FY18E P/E and is based on 1.0x PEG (assuming a 19.5% FY17-19 EPS CAGR). (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Guangzhou Automobile Group (2238 HK, Buy): Own-brands sales rise MoM, while JVs post declines Good overall sales trend maintained in May, but down on a MoM basis Guangzhou Automobile Group (GAC) sold 165,505 vehicles in May, up 22.2% YoY but down 2.5% MoM (165,321 units were passenger vehicles and 184 were commercial vehicles). Jan-May sales reached 792,457 units, up 33.2% YoY, continuing its considerable growth since 1Q17. Its Japanese JVs sold 99,302 units in May, up 4.6% YoY but down 5.8% from its peak in April. GAC-FCA sold 20,115 units during the month, up a significant 1.1x. GAMC, which produces the company s own-brand models, sold 44,148 units during May, up 52.1% YoY, and up 5.9% MoM from the decline seen in April. Monthly sales decline for Japanese JVs GAC-Honda sold 57,784 units in May, up 10.4% YoY but down 4% MoM from its sales peak in March-April. Monthly average sales during 2Q17 have so far been higher than in 1Q17, meaning growth should continue in 2Q17. Jan-May saw the JV reach sales of 262,230 units, up 17.1%, accounting for 33% of the group s overall sales. We expect the JV to continue to provide strong sales support for the group given the increased market share of Japanese brands taken from Korean brands during the quarter. GAC-Toyota saw a weaker trend, with 33,318 units sold in May, down 14.2% YoY and 5.4% MoM, whereas its Jan-May sales remained in positive territory at 4.2% YoY. The production bottleneck is still the main concern for the brand, in our view. However, we still think the Yaris series could be a strong sales pillar for the company. Strong SUV sales to continue, despite MoM drop The group sold 96,591 SUVs in May, down from the March-April peak of close to 100,000 units (sales breakdown by model not yet released). We still expect SUVs to be the strongest market segment this year, and we believe the company s current product mix can compete among its rivals, with 58% of all its PVs being SUVs. The company announced that it will adjust production of the Trumpchi GS8 during May-Sept due to gearbox supply issues, which will hinder the model s growth; although this could free up more capacity for the Page 3

4 Trumpchi GS4, the company s top-selling SUV. We think this strategy could still be helpful to boost overall SUV growth for the company. Maintain Buy and TP of HK$15.00 We reiterate our Buy rating on the stock given the company s strong sales trend this year and the expected rise in profitability. The stock is currently trading at E P/E, below its historical average of 10x and undervalued, in our view. We maintain our Buy rating and target price of HK$15.00, based on 10x FY17E P/E, in line with its 3-year average. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Chongjing Deng, Research Analyst, SFC CE No. BEY953, dengchongjing@gfgroup.com.hk ) Page 4

5 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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