Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Dec 8, 2014

Transcription

1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 14E 15E 14E 15E HSI HSCEI MXCN SHSZ SHCOMP SZCOMP INDU SPX CCMP UKX NKY Hong Kong ADRs HK Local Daily ADR Daily ticker Company (HK$) (%) (US$) (%) 857 PETROCHINA ICBC CHINA MOBILE CCB HSBC BANK OF CHINA TENCENT SINOPEC CHINA LIFE INS PING AN INS Econ data release China Data Date Period Prior Cons China Trade Balance 8-Dec NOV China Exports YoY 8-Dec NOV China Imports YoY 8-Dec NOV China CPI YoY 9-Dec NOV China PPI YoY 9-Dec NOV Rmb New Loans 10-Dec NOV M0 10-Dec NOV M1 10-Dec NOV M2 10-Dec NOV Total Financing 10-Dec NOV Ind Prod Cum YoY 12-Dec NOV Ind Prod Monthly YoY 12-Dec NOV FAI Cum YoY 12-Dec NOV Retail Sales Cum YoY 12-Dec NOV Retail Sales Mthly YoY 12-Dec NOV FDI Growth 14-Dec NOV US Data Date Period Prior Cons Initial Jobless Claims 11-Dec 6-Dec Cont Jobless Claims 11-Dec 29-Nov Source: Bloomberg A-Share Market Securities: Listed brokers likely to see 2014 earnings double YoY 18 of the 19 A-share listed securities firms collectively reported 11M14 recurring comprehensive income growth of 91% YoY. We expect full-year earnings to more than double given the low YoY base for Dec. Large securities names are trading at 18-22x 2015E P/E, which represents considerable upside compared with the historical sector valuation ceiling of 30x. Both domestic and overseas investor funds have flowed into the stock market at a faster pace. We expect sector share prices to strengthen further on improving earnings and valuations. Transportation: Dec sector view We expect to see valuation re-ratings in the airline sector towards year-end as investors gauge air ticket prices in 1Q15. Shipping sector earnings likely improved substantially QoQ in 4Q14 on declining oil prices with sector profit likely to turn positive. Container shipping demand is strengthening on overseas economic improvements and domestic opening up policies, while VLCC shipping prices are likely to beat expectations in 4Q14 and 1Q15. FTZ development is likely to gather pace going forward, and we suggest watching listed port companies in Guangdong, Tianjin and Fujian. Coal: Further share price strength supported by fundamentals We reiterate that further sector share price growth is supported by fundamentals as production controls and import restrictions likely to strengthen further in 2015, coal prices are likely to pick up further in Jan, and sector supply-demand dynamics are likely to improve on drop-offs in supply. We maintain our recommendation for China Shenhua Energy ( CH), Lu'an Environmental Energy ( CH), Jizhong Energy Resources ( CH), Panjiang Refined Coal ( CH) and Yang Quan Coal Industry ( CH). Hong Kong Market Consun Pharma (1681 HK, Buy): China s oral kidney drug market leader; initiate at Buy We estimate the oral modern Chinese medicine market related to kidney treatment is worth about Rmb2.0bn. It is estimated that this niche market will grow at a CAGR of 17% in The company s key drug, Uremic Clearance Granule, accounted for 60-70% of revenue in 1H14, and has a 25% market share. We estimate gross margin will remain stable in 2015 and net earnings will grow at a CAGR of 25% in The stock is trading at 19.0x 2015E P/E, which does not fully factor in uremic clearance granule s growth potential. We initiate at Buy with a target price of HK$7.50 (25.0x 2015E P/E). Kangda (6136 HK, NR): Weak performance unjustified Kangda s share price dropped ~9% on Friday, and other environmental names dropped 3-7%. Kangda confirmed there has been no change in fundamentals; we believe this is a result of a fund flow out of HK-listed environmental plays as investors are more interested in participating in the A- share market. We reiterate our positive view on the HK-listed environmental sector, given the Rmb2trn water treatment plan and third-party treatment policies set to be announced soon. Trading at 13x 2015E P/E (based on Bloomberg consensus), Kangda s valuation is undemanding compared to its peers average of 17x. GF events Date Event Location 8 Dec Industrial automation conf call - 8 Dec Chinese Super Leauge reform call - 9 Dec Sanpower Group co. visit - 10 Dec GF Chief Economist roadshow Hong Kong 11 Dec Yonyou Software co. visit - 11 Dec Central Emporium co. visit - Source: GF Securities 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 Securities: Listed brokers likely to see 2014 earnings double YoY 11M14 net profit up 71% YoY 18 of the 19 A-share listed securities firms had released their Nov operating data as of last Friday. They collectively reported 11M14 comprehensive income growth of 91% YoY (excl. non-recurring items) with net profit rising 71% YoY on stronger stock market turnover, stock & debt market indices, equity financing and margin trading & securities lending. The top five brokerages seeing the highest comprehensive income growth were The Pacific Securities ( CH, +866%), Soochow Securities ( CH, +242%), Guoyuan Securities ( CH, +214%), Northeast Securities ( CH, +182%) and GF Securities ( CH, +133%). Nov recurring comprehensive income was up 26% YoY. We expect full-year earnings to more than double given the low YoY base for Dec. Valuations stable on strong earnings Sector 2014E P/E remains stable with the 2013 level despite YTD share price growth of 101% as 2014 earnings growth is likely to come in at 100%. The key factor that has weighed on sector valuations since the start of this year concerns about a sharp decline in brokerage commission rates will weaken in the near term as some brokers actually saw commission rate pick up QoQ in 3Q14 and as investors become less sensitive to commission rate changes amid a strong stock market. In addition, we will not see any commission rate data released between now and Apr when annual earnings will be announced. Large securities names are trading at 18-22x 2015E P/E (excl. share dilution effect), which represents considerable upside compared with the historical sector valuation ceiling of 30x. Continued fund inflows Domestic investor funds have flowed into the stock market at a faster pace as funds in A-share stock trading accounts surged from Rmb540bn at the start of Jun to Rmb990bn at end-nov, while the balance of margin trading & securities lending jumped from Rmb410bn to Rmb830bn. In addition, during the first week after the SH-HK Stock Connect was launched net purchases of Shanghai stocks (Rmb23.6bn) significantly exceeded southbound flows (Rmb2.9bn), reflecting continued inflow of overseas funds into the A-share market. Top picks We expect sector share prices to strengthen further on improving earnings and valuations. Our top picks are as follows. Small caps driven by the internet brokerage and SOE reform themes: Golden Dragon Development ( CH), Soochow Securities ( CH), Guoyuan Securities ( CH); Medium and large brokers with cheap valuations: Haitong Securities ( CH), CITIC Securities ( CH), Changjiang Securities ( CH); Securities firms with additional share issuance: Western Securities ( CH), Sinolink Securities ( CH), Huatai Securities ( CH), Everbright Securities ( CH). Transportation: Dec sector view Airlines We expect to see valuation re-ratings in the airline sector towards year-end as investors gauge air ticket prices in 1Q15. In particular, the prices of international flights are very likely to strengthen on US visa policy relaxation and recoveries in the Japanese and European markets. Domestic flight prices might improve further if the three largest airlines successfully implement capacity controls. We see further upside in airline stocks and recommend Air China ( CH), China Eastern Airlines ( CH) and China Southern Airlines ( CH). Airports Sector operations have been stable. We continue to see theme-based opportunities from Shanghai International Airport ( CH) and Xiamen International Airport ( CH) and highlight their low valuations. Shipping Sector earnings likely improved substantially QoQ in 4Q14 on declining oil prices with sector profit (incl. non-recurring items) likely to turn positive. We calculate that the earnings of China Shipping Development ( CH), CSCL ( CH) and China COSCO ( CH) should be the most sensitive to oil price drops. Container shipping demand is strengthening on a strongerthan-expected recovery in the US economy and stabilization of the euro crisis; in addition container shipping conditions are also improving as China further promotes its opening up to the world with various policies. We suggest watching CSCL ( CH) and China COSCO ( CH). VLCC shipping prices are likely to beat expectations in 4Q14 and 1Q15 as 1) 4Q is the typical peak season for oil shipping, 2) Chinese charterers might purchase more oil given lower prices, and 3) capacity might decline further with some oil tankers now used for storing oil. We see China Page 2

3 Merchants Energy Shipping ( CH) and China Shipping Development ( CH) as the biggest beneficiaries. Ports President Xi Jinping has indicated that experience gained from the trial of the Shanghai free trade zone should be spread to other parts of the country. FTZ development is likely to gather pace going forward. We suggest watching listed port companies in Guangdong, Tianjin and Fujian (which are most likely to obtain FTZ approval) such as Ningbo Port ( CH) given cheap valuation and Yan Tian Port ( CH) given good asset quality. We particularly like Ningbo Port ( CH) as it will benefit from development of the Asia-Pacific FTZ and Maritime Silk Road. Toll roads YoY sector revenue growth has turned positive with earnings also improving QoQ. In addition, companies have sufficient cash on their books and are driven by expected SOE reform and M&A. We like Ganyue Expressway ( CH), Xiandai Investment ( CH) and Chutian Expressway ( CH). Coal: Further share price strength supported by fundamentals Further share price strength supported by fundamentals Sector share prices have strengthened significantly recently on improving liquidity and expectations for coal price increases. We reiterate that further share price growth is supported by fundamentals as: The government has been committed to helping coal companies out of their current difficulties since Aug with production controls and import restrictions likely to strengthen further in Coal prices are likely to pick up further in Jan. Thermal and coking coal prices in mining areas should rise further on higher port prices. That said, port coal prices are likely to decline after Chinese New Year due to high inventories at IPPs. We do not expect coal demand to pick up next year or even further into the future with improvements in sector supply-demand dynamics likely to be driven by drop-offs in supply. Top picks We recommend China Shenhua Energy ( CH). Its share price has growth by just 20% over the past 60 days, which is the smallest share price increase among peers. Valuation is cheap at less than 10x 2014E P/E. Our other top picks are Lu'an Environmental Energy ( CH) as it is likely to see a re-rating, and Jizhong Energy Resources ( CH) given it is the most cheaply valued coking coal company and a beneficiary of the Beijing-Tianjin-Hebei integrated development. We also like Panjiang Refined Coal ( CH) and Yang Quan Coal Industry ( CH). In addition, we suggest watching China Coal Energy ( CH), Pingdingshan Tianan Coal Mining ( CH), Xishan Coal and Electricity Power ( CH) and Haohua Energy Resource ( CH). Consun Pharma (1681 HK, Buy): China s oral kidney drug market leader; initiate at Buy China s oral kidney drug market to grow at CAGR of 17% in There are currently no drugs that cure kidney failure, but some that slow the deterioration process. We estimate the oral modern Chinese medicine market related to kidney treatment is worth about Rmb2.0bn. Based on a report from CFDA s Southern Medicine Economic Research Institute, this niche market is estimated to grow at a CAGR of 17% in Leader in oral kidney drug market The company manufactures uremic clearance granule, a Class 2 TCM used to treat kidney failure. We estimate this drug accounted for 60-70% of revenue in 1H14, and has a 25% market share for drugs of this kind in China. It has also been listed on China s National List of Essential Medicines. We expect the drug s market share to expand over the next decade, driving consistent earnings growth for the company. Solid sales network in China The company has a sales network covering 30 provinces in China. It also has 175 third party distributors and 580 sub-distributors, covering 26,000 hospitals. Strong 1H14 results; sustainable earnings growth ahead In 1H14, boosted by strong revenue growth in the kidney drug segment and a stable gross margin of 78%, the company s net profit rose Page 3

4 54% YoY to Rmb91m. Given share dilution, we expect EPS to decline 4% YoY in We estimate gross margin will remain stable in 2015 and net earnings will grow at a CAGR of 25% in Valuation undemanding; initiate at Buy As a leader in China s oral kidney drug market, the stock is trading at 19.0x 2015E P/E, which does not fully factor in uremic clearance granule s growth potential, in our view. We believe 25.0x P/E (1.0x PEG) is more appropriate. We initiate our coverage with a Buy rating and a target price of HK$7.50, equal to 25.0x 2015E P/E. Risk factors 1) The company s future earnings hinge upon the sales performance of uremic clearance granule; 2) the company s sales are reliant on third party distributors, which may incur earnings volatility. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) Kangda (6136 HK, NR): Weak performance unjustified What s new? Kangda s share price dropped ~9% on Friday. Other environmental names like Sound Global (967 HK, NR), Dynagreen (1330 HK, NR), BJE Water (371 HK, NR) also dropped. Share price drop on fund outflow We reached out to Chris Cheng, Kangda s IR, who confirmed there has been no change in fundamentals which could have caused such a drastic correction. We believe this is a result of a fund flow out of HK-listed environmental plays as investors are more interested in participating in the A-share market. We reiterate our positive view on the HK-listed environmental sector, given the Rmb2trn water treatment plan and third-party treatment policies set to be announced soon. However, even with the policies announced, we believe it may take around 1-2 weeks for those investors to return to the HK market. In the short term, we believe only long term investors will be willing to invest in environmental sector. Valuation undemanding Trading at 13x 2015E P/E (based on Bloomberg consensus), Kangda s valuation is undemanding compared to its peers average of 17x. We suggest accumulating the shares now, but only if the shares can be held for at least two months. (Wallace Cheng, Research Analyst, SFC CE No. AKX251, wallacecheng@gfgroup.com.hk ) Page 4

5 Hong Kong Equity 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. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 5