Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Dec 1, 2015

Transcription

1 Equity Research Dim Sum Express Econ data release China Data Date Period Prior Cons China Mfg PMI 1-Dec NOV China Non-Mfg PMI 1-Dec NOV Caixin China Mfg PMI 1-Dec NOV Caixin China Serv PMI 3-Dec NOV Caixin Chi PMI Output 3-Dec NOV China Export YoY 8-Dec NOV China Import YoY 8-Dec NOV China Trade Balance 8-Dec NOV US Data Date Period Prior Cons Markit US Mfg PMI 1-Dec NOV F ISM Mfg PMI 1-Dec NOV Dur Goods New Ord 3-Dec OCT F Initial Jobless Claims 3-Dec 28-Nov Cont Jobless Claims 3-Dec 21-Nov Markit US Serv PMI 3-Dec NOV F ISM Non-Mfg NMI 3-Dec NOV US Trade Balance 4-Dec OCT U-3 Unemployment 4-Dec NOV Source: Bloomberg GF events Source: GF Securities (HK) A-Share Market Investment Strategy: Watch investment theme surrounding expected rises in agricultural product prices A-share market movements have normalized recently following continued share price increases over the past three months, with recent changes in market talks likely reflecting a decline in investors risk appetite. Based on past experience, investment themes with high visibility, such as short-term business conditions visibility driven by rising product prices, tend to post stronger share price growth during declining market risk appetite. As such, we continue to highlight expected rises in hog, chicken and sugar prices driven by positive supply-demand dynamics. Property: YoY transaction growth slowed in Nov; accelerated YoY growth possible in 1Q16 Both the strength and scope of sector policy loosening have increased, and we expect further policy easing to be issued given the government s overall stance to support investment. New home sales in the 64 large cities we track during Nov 1-27 grew 12.6% YoY, slowing from 13.2% YoY for Oct, in line with market expectations. We believe that the implementation of various favorable policies across different cities should help boost property transactions over the next three months, leading to accelerated YoY growth in 1Q16 despite the current market expectation of a deceleration. Hong Kong Market Retail: HK Retail sales rebound in Oct; Christmas sales likely to be weak HK retail sales dropped 3.0% YoY in Oct, above consensus of -5.0%, and better than Sep (-6.3%). ASP continued to fall, partly due to the sustained purchasing power decline among mainland visitors. We believe the rebound in retail sales in Oct was driven by new smartphone launches and a low base. Mainland visitor numbers declined 4.2% YoY in Oct, similar to the 4.7% YoY decline in Sep; however, the second half of Oct was weaker than the first half. According to the HKRMA, most member companies expect a drop in sales during the Christmas holiday. Linekong Interactive (8267 HK, Accumulate): Visible earnings growth ahead, following the transition phase of 2015; initiate at Accumulate We see a strong rebound ahead in 2016 for this leading developer and publisher of midcore and hardcore mobile games in China, expecting revenue and adjusted net profit to rise by 35% and 71% YoY respectively, mainly driven by accelerating launches of new games, synergy with premium IP resources, and margin expansion on its strategic shift towards self-developed games. We initiate our coverage at Accumulate as we believe the earnings decline in 2015 has already been priced in, and as we see visible earnings growth in We set a TP of HK$5.32. 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 Investment Strategy: Watch investment theme surrounding expected rises in agricultural product prices Risk appetite declining A-share market movements have normalized recently following continued share price increases over the past three months, with the key words of market talks changing from the previous return of the strong bull to slow bull and then to the most recent moderate declines in share prices. These talks might also reflect that investors risk appetite has continued to decline, and we will now be more cautious when identifying investment themes. Rising agricultural product prices a highly visible theme The agricultural drone investment theme that we recently recommended was well received among investors with Xinan Chemical Industrial ( CH) having generated significant excess returns. Based on past experience, investment themes with high visibility, such as short-term business conditions visibility driven by rising product prices, tend to post stronger share price growth during declining market risk appetite. As such, we continue to highlight expected rises in hog, chicken and sugar prices driven by positive supply-demand dynamics. Hog prices In the medium term, continued declines in breeding sow inventories are likely to support hog price growth, while low corn prices will help boost hog farming profit margins. In the short term, low inventories of live hogs and the approaching hog consumption peak season should both push hog prices higher. Overall, amid a likely rise in hog prices, we suggest watching Zhengbang Technology ( CH), Muyuan Foodstuff ( CH) and Chuying Agro-Pastoral ( CH). Chicken prices As the number of grandparent flocks imported YTD was much smaller than the previous two years and as it typically takes a 14-week cycle for grandparent flocks to lead all the way to chickens actually sold to consumers, we expect chicken prices to start to pick up around mid-year next year. Furthermore, similar to hog farming, low corn prices will also enlarge poultry farming profit margins, and the peak season for chicken consumption is also arriving shortly. That said, investors should watch out for the risk of an avian flu outbreak. An inflection point in chicken prices is yet to emerge but should be seen shortly, which would be preceded by share price strength in related companies such as Sunner Development ( CH) and Yisheng Livestock & Poultry Breeding ( CH). Sugar prices Over the long term, the movement of sugar prices follows a cyclical alternation between three years of increases and three years of declines. Domestic sugar prices have embarked on a new up cycle now after producers continued to reduce output amid previous sugar price declines. In addition to output, weather conditions, state reserve building and import policy changes are the three key factors driving sugar prices in the near term. Among these three factors, weather conditions represents the highest level of uncertainty, making it the most important driver of short-term sugar prices in our view. The National Climate Center expects this year s extremely strong El Nino phenomenon to last until the spring of As such, we continue to highlight the possibility of El Nino strengthening expectations of positive sugar price growth, and suggest watching Nanning Sugar Industry ( CH). Property: YoY transaction growth slowed in Nov; accelerated YoY growth possible in 1Q16 WoW decline in first-tier cities vs. mixed changes in second-tier cities Primary area sold in first-tier cities slid 1% WoW last week and was down 6% YoY, while second-tier cities tracked posted increases of 3% WoW and 14% YoY. WoW declines were seen across first-tier cities except for Beijing (+2%). Changes in the second-tier cities were mixed with Ningbo rising the most by 56% and Dalian dropping the most by 52%. On a regional basis, the Bohai Rim (-9% WoW), YRD (+6%) and PRD (+0.1%) posted mixed WoW changes in property transactions. New launches up further New project launches picked up further last week following the strong rebound in the previous week. Our index for property inventories in 15 large cities remained stable with Shanghai coming down for the third consecutive week and Beijing first declining before rebounding in the second half of the week. The sell-through rate in the 12 cities we track continued to climb slowly. Further policy easing likely Both the strength and scope of sector policy loosening have increased, and we expect further policy easing to be issued given the government s overall stance to support investment: polices for the monetization of subsidized housing might be introduced, the down payment requirement for first-home purchases is likely to be lowered further, and restrictions for Page 2

3 loans taken out from the housing provident fund might be relaxed further; in addition, tax policies related to home sales might be adjusted as well, particularly regarding the definition of ordinary housing. Positive YoY growth possible in 1Q16 New home sales in the 64 large cities we track during Nov 1-27 grew 12.6% YoY, slowing from 13.2% YoY for Oct, in line with market expectations. We believe that the implementation of various favorable policies across different cities should help boost property transactions over the next three months, leading to accelerated YoY growth in 1Q16 despite the current market expectation of a deceleration. Our top picks for the week are Jiabao Industry & Commerce ( CH), Risesun Real Estate Development ( CH), Haide Industry ( CH), Guangdong Mingzhu Group ( CH) and Metro Land ( CH). Retail: HK Retail sales rebound in Oct; Christmas sales likely to be weak Oct retail sales rebounded HK retail sales dropped 3.0% YoY in Oct, above consensus of -5.0%, and better than Sep (-6.3%). ASP continued to fall 4.1% YoY in Oct (vs -3.4% in Sep), partly due to the sustained purchasing power decline among mainland visitors. Volume growth rebounded to 1.2% YoY (vs -3.1% in Sep). We believe the rebound in retail sales in Oct was driven by new smartphone launches and a low base. Consumer durable goods saw the strongest MoM improvement (from - 5.7% in Sep to +6.1% in Oct), followed by apparel (from -11.6% in Sep to -5.1% in Oct), department stores (from -5.1% in Sep to -2.2% in Oct) and jewelry (from -22.9% in Sep to -17% in Oct). On the other hand, cosmetic sales fell from -0.6% in Sep to -2.4% in Oct. Excluding food and jewelry, HK retail sales growth would be flat (vs -5.4% in Sep). Mainland visitor arrivals downtrend continued Mainland visitor numbers declined 4.2% YoY in Oct, similar to the 4.7% YoY decline in Sep. However, the second half of Oct was weaker than the first half, with mainland visitor arrivals dropping just 3.7% YoY from Oct Sector has underperformed over past month Shares across the sector have fallen 5% over the last month, weaker than the HSI s 3% drop. Stelux (84 HK, NR) led the decline, slumping 29%, as the company reported a loss in its 1HFY16 results. Chow Tai Fook (1929 HK, Underperform) and Luk Fook (590 HK, Hold) fell 9% and 12%, respectively, as both companies reported net profit declines of ~40% in their 1HFY16 results. Outlook According to the HKRMA, most member companies expect a drop in sales during the Christmas holiday. We still see a challenging outlook for the HK retail sector in the medium to long term given China s potential cut in import tariffs and consumption tax to reduce the retail price gap with overseas markets, as well as the increase in the number of domestic duty-free shopping destinations. The opening of the Shenzhen Qianhai Global Goods Shopping Center in Dec this year and Shanghai Disneyland in the spring of 2016 could be negative catalysts for the HK retail sector. Furthermore, the full impact of the policy change in Shenzhen residents HK visas from multipleentry to one-visit-one-week will be felt in Apr We maintain our Buy rating on I.T (999 HK), Underperform rating on Chow Tai Fook (1929 HK) and Hold ratings on Luk Fook (590 HK) and Chow Sang Sang (116 HK). (Albert Yip, CFA, Research Analyst, SFC CE No. ADT599, albertyip@gfgroup.com.hk ) Linekong Interactive (8267 HK, Accumulate): Visible earnings growth ahead, following the transition phase of 2015; initiate at Accumulate Initiate at Accumulate with TP of HK$5.32 We initiate our coverage of Linekong with an Accumulate rating as we believe the earnings decline this year has already been priced in given the ~50% drop in share price YTD, and as we see visible earnings growth in Our target price of HK$5.32 is based on adjusted EPS of Rmb0.29 and 15x FY16E P/E, slightly higher than the sector average of 14.3x. Proven capability in midcore and hardcore games Benefiting from the rich experience accumulated in the client-based and web-based games era, the company has proven itself again in the development and operation of midcore and hardcore mobile games. In the last two years, the company has released six high-quality mobile games, five of which have achieved peak monthly gross billings of more than Rmb30m. Compared to casual games, midcore and hardcore mobile games have the advantage of higher gross billings, longer lifespans and higher entry barriers for Page 3

4 developers. As a leading player in the development of these games, we believe the company should benefit from the industry trend towards further market concentration in midcore and hardcore games. Potential rapid growth on strong new game pipeline and premium IP resources The company has a rather busy pipeline, with 11 new mobile games set to be launched over the next 12 months, four of which are supported by high-quality IP rights (intellectual property for comics, movies and TV series). The successful launch of two IP-supported games this year One Hundred Thousand Bad Jokes and The Legend of Zhenhuan demonstrates the company s capability in choosing and transforming IP rights. We see increased synergy ahead between games and related TV series, with two upcoming IP-supported titles set to have their games and TV series released at around the same time in the coming two months. The company should see rapid growth driven by accelerating launches of new high-quality games and efficient leverage of its premium IP rights. Margin expansion with more emphasis on self-developed games Given the margin contraction that resulted from excessive reliance on licensed games (GPM: 30-35%) in the first three quarters of 2015, the company has decided to shift its focus towards self-developed games (GPM: 45-50%). Of the 11 new games in the pipeline, seven are self-developed while only four are licensed games (including two casual games). We expect the revenue contribution from self-developed games to rise and thus drive a gross margin expansion from 39.2% in FY15 to 42.3% in FY16. Visible earnings growth ahead, following the transition phase of 2015 We expect revenue and adjusted net profit to decline by 18% and 62% YoY respectively in 2015 as a result of the temporary product shortage and margin contraction. In 2016, we see a strong rebound, expecting revenue and adjusted net profit to rise by 35% and 71% YoY respectively, mainly driven by accelerating launches of new games, the synergy with premium IP resources, and margin expansion on its strategic shift towards self-developed games. Key risks include delays in new game releases and intensifying market competition. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@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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