Dim Sum Express. A-Share Market. Equity Research. Oct 18, 2018

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1 Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 18E 19E 18E 19E 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 PETROCHINA CHINA MOBILE CCB PING AN HSBC BANK OF CHINA SINOPEC AIA Source: Bloomberg The Dim Sum Express presents the latest views from GF Securities A/H-share analysts. For the full-length versions of these reports or any enquiries, please contact your sales representative. A-Share Market [Pharmaceutical]: New vaccine launches picking up, watch the influenza vaccine demandsupply gap Category 2 vaccine industry ushering in a golden era, rapid increase in new product approvals to boost addressable market size Previously, the domestic vaccine market was stagnated, as several key vaccine categories have not entered the China market. As DTaP-Hib (2013), AC-Hib (2014), EV71 vaccine and 2-valent HPV vaccine (2016), 4-valent HPV vaccine and 13-valent pneumococcal conjugate vaccine (2017), 9-valent HPV vaccine, 5-valent oral rotavirus vaccine, the 4-valent influenza vaccine (2018) and other products have been approved, the current approval record shows that new vaccines ready to be marketed have increased significantly. China's category 2 vaccine market is expected to usher in a new expansion cycle. Influenza vaccine approval down ~50% YoY, with tight supply expected in 4Q18 According to National Institutes for Food and Drug Control, a total of 7.35m domestic influenza vaccines were approved in 1Q-3Q18, down nearly 50% YoY from 30m, indicating a large gap in supply and demand. We expect flu vaccines to be in short supply in 4Q18 when vaccination peaks in Nov. In addition, Hualan Biological Engineering s ( CH) 4-valent influenza vaccine was newly approved for marketing in Sept, totaling m vaccines approved YTD. While Changsheng Bio-technology ( CH) is being suspended from production, Hualan Biological will dominate the 4-valent influenza vaccine market this year. We suggest paying attention to the company. DTaP-IPV Hib returns to the China market, the 5-valvent oral rotavirus vaccine obtained approval for the first time In 4Q17, the approval for Sanofi s 5-in-1 (DTaP-IPV-Hib) vaccine was suspended due to a switch of adjuvants. The vaccine returned to the China market this Aug, and the approved volume in 3Q18 came in at 1.157m shots. In addition, Merck s 5-valent oral rotavirus vaccine was newly approved for marketing with a volume of 840k. We suggest watching the sole distributor of Merck s 5-valent oral rotavirus vaccine, Zhifei Biological Products ( CH). IPV vaccine has been included in the category 2 vaccine list on a pilot basis The amount of IPV vaccine approved for marketing in 1Q-3Q18 was m, which exceeded the 2017 annual amount of m. IPV vaccine was included in the national immunization program for the first time in May 2016 in the vaccination sequence of 1IPV+3OPV. On July 23, Shaanxi Provincial Public Resource Trading Center announced the Price Negotiation Results for Supplementary Category 2 Vaccines, in which Beijing Bio-Institute Biological s IPV vaccine was included in the price list. As drug companies ramp-up their production to provide more IPV vaccines, the Shaanxi provincial government will include this vaccine into the category 2 vaccines list to offer more supply and choices. Previously, IPV vaccine as category 1 vaccine s bidding price was Rmb35/shot, while its offer price for online procurement as category 2 IPV vaccine in Shaanxi is Rmb168/shot. The significant price hike is positive for relevant domestic manufacturers and companies with related drug pipelines. Ou Yafei, Research Analyst, SFC CE No. BFN410 oyf@gf.com.cn

2 [Securities]: Sept earnings up MoM on equity market rebound and accrued charges on quarterly earnings Sector review: 29 listed brokers net profit after deducting non-recurring items up 163.1% MoM, cumulative YoY growth down 26.8% Monthly company data show net profit totaled Rmb4.17bn, up 163.1% MoM while cumulative YoY growth was down 26.8%. Total revenue came in at Rmb13.57bn, up 67.9% MoM and cumulative YoY growth was down 16.1% (Minzu Securities Rmb900m dividend has been excluded for comparison). The increase in monthly results was mainly due to the recovery of the equity market and the accrued charges of quarterly earnings. Leading brokers in terms of Sept monthly net profit included: Huatai Securities ( CH) with Rmb690m (+211% MoM), CITIC Securities ( CH) at Rmb550 (+88% MoM), China Merchants Securities ( CH) with Rmb 390m (+32% MoM), and Haitong Securities (6837 HK) posting Rmb280m (+89% MoM). Brokers that witnessed significant changes in cumulative net profit in 3Q18 were CITIC Securities (Rmb5800m, 0.4% YoY), Dongxing Securities ( CH) (Rmb730m, -15.7% YoY), Huatai Securities (Rmb4000m, -19.6% YoY), Haitong Securities (4210m, -20.1% YoY), China Merchants Securities (Rmb2940m,-20.7% YoY). Market: Turnover cooled, stock and bond investment recovering Brokerage: In Sept, total turnover for A and H-shares was Rmb4.9trn, down 24.6% MoM; average daily stockfund transaction volume was Rmb260.20bn, down 8.7% MoM. Proprietary: Sept CSI 300, ChiNext, and CSI Aggregate Bond Index were down by 3.1%, -1.7% and 0.2%, respectively, better than in August. Investment banking: equity financing in Sept was Rmb48.93bn, down 54.3% MoM and cumulative YoY growth stands at -11.0%. Intermediary: At the end of Sept, the balance of margin financing and securities lending was Rmb822.72bn, down 4.5% MoM and 16.5% YoY. Investment highlights: New M&A policy expected to stimulate the market, leaders earnings still showing resilience Short-term: The policy environment is recovering and leading brokers still have resilience and historically low valuations. Currently, CITIC Securities and Huatai Securities 2018 P/Bs are 1.13x and 1.07x. Mid/long-term: 1) The first retirement fund has been approved, and we suggest watching long-term capital; 2) convergence in the industry should accelerating, leaders will compete for institutional clients, and a first-mover advantage is playing out in the derivatives market. Our stock picks: Huatai Securities ( CH), CITIC Securities ( CH) and CICC (3908 HK). Page 2

3 [Leisure Services]: Sector remained strong during the peak season, entrance fees down Market review: Sector index down 7.8% in Sept, hotel and overall sector ended positive The leisure services sector dropped 7.8% in Sept, underperforming the SCI by 3.4pp. The scenic spot sector and restaurant sector slumped significantly, with P/E (TTM) down from 40x at the beginning of the year to 20x. Market data track: Aug hotel operating data recovered; moderate passenger growth during National Holiday Domestic tours: Aug scenic spot sector recovered, several spots cut entrance fares In Aug, tourist arrivals to Huangshan reached m, up 15.2% YoY; in Changbaishan this was down 3.2% (8M18 up 5.5%); Sanya s tourist arrival increased by 11.3% (8M18 up 8.3%). Entrance fare cuts were implemented, with major spots down by 10-20%. Scenic spots in Yunnan and Guilin witnessed greater cuts. Outbound travel: Lower outbound travel growth; HK, Macau, Korea recovered, Japan and Thailand slowed In Sept, the number of passengers on international routes was 5.028m, up 11% YoY. Cumulative passenger traffic from Jan to Sept was m, up 15.2% YoY. In Aug, Japanese passenger flow increased by 4.9%, while Korean rose 41%, Thai decreased 12%, Vietnam's was up 44% in Sept, and Hong Kong, Macau and Taiwan picked up 22%/25%/3% in Aug. Hotels: Aug operating data rebounded, decline in occupancy rate narrowed RevPAR at key hotels was down 1.2% in Aug, lower than July s 3.1%. Jinjiang Hotel RevPAR increased by 6.1% YoY. RevPAR growth rebounded compared with May/June/July (+5.5% YoY/+5.4% YoY/4.0% YoY), occupancy rate fell 2.5pp, and average room rate was up 9.2%. According to STR data, domestic hotel demand increased by 5.4% in Aug, and supply increased by 3.5%. Demand in Aug rebounded and supply growth remained stable. Passenger traffic growth for domestic routes in Sept was 7.6%, which was a significant decline from previous months (growth in July/Aug was 10.2%/11.8%). Tourism: Sector remains strong, pay attention to DSF and hotels Since mid-july, the leisure services sector has fallen about 20% from its peak. However, based on recent data, the tourism industry is still strong, especially subsector leaders still seeing a positive earnings recovery trend. At present, leading companies PEG have fallen to the , indicating prominent investment value. Duty-free: Steady growth for Sanya DSF during the National Holiday With policy tailwinds, a consumption recovery and an improvement in gross margin, we expect steady earnings growth at China International Travel ( CH). Its stock price is down 15% from its peak, with the stock currently trading at P/E 26x. We expect greater earnings growth in the hotel sector driven more by leading hotels optimization than macroeconomic growth. Jinjiang International Hotels Development ( CH) and BTG Hotels Group ( CH) are down more than 40% since end-july, indicating significant re-rating potential. We like: 1) leaders in the duty-free and scenic spot sector with good visibility in the medium/long-term: China International Travel ( CH) and Songcheng Performance Development ( CH). 2) Hotel leaders that have suffered corrections but have a clear growth path: Jinjiang International Hotels Development ( CH) and BTG Hotels Group ( CH). 3) Leaders with cheap valuations: China CYTS Tours ( CH) and UTour Group ( CH). Page 3

4 [King's Luck Brewery ( CH)]: Proposed take-over of Jingzhi Liquor will benefit long-term expansion outside its home province What s new? On October 14, the company agreed to acquire a 34%-49% stake in Shandong Jingzhi Liquor, and a senior management team has hired an intermediary for due diligence to actively proceed with the acquisition. King s Luck Brewery can support Jingzhi in terms of branding, marketing, management, staff and capital. Jingzhi is positioned in the low/mid-end sesame-flavored liquor segment, while King s Luck Brewery is in mid/high-end strong-flavored liquor, so they should complement each other. Taking over Jingzhi is in line with King s Luck Brewery s 2+5+N regional expansion plan, which could alleviate local obstacles in Shandong. Meanwhile, it is likely to benefit from Jingzhi s channels to expand its market and become more influential. The take-over plan is based on long-run initiatives, and synergy will be more significant in the long-run. Strong growth for the Guoyuan series, likely to boost earnings further There is a strong consumption upgrade in Jiangsu province, and the Guoyuan series, positioned as a semi-high-end product, should benefit. According to Jiuyejia news, the company raised the factory price for some Guoyuan products on Oct 1, so end-market price, retail price and group-purchase price should rise 4%-8%. Benefiting from the consumption upgrades and the price hikes, the Guoyuan series is likely to maintain its growth momentum. Since 2018, the company has continued to expand its county market, and tried to expand coverage in south Jiangsu and central Jiangsu. Outside of the province, the company is cooperating with dealers in Hunan and Hebei dealers. Forecasting 30.6% earnings growth in 2018; maintain Buy We expect revenue in 2018/19/20 of Rmb3757m/Rmb4715m/Rmb5895m, up 27.0% /25.5%/25.0% YoY, and net profit of Rmb1170m/Rmb1510m/Rmb1938m, up 30.6%/29.0%/28.4% YoY; EPS of Rmb0.93/Rmb1.20/Rmb1.55, with the stock is trading at P/Es of 20x/16x/12x. We maintain our Buy rating. [Weihua ( CH)]: Lithium salt production capacity rising gradually, promoting the merger with Aoyinuo Mining 3Q18 earnings up 576% YoY The company's 3Q18 revenue totaled Rmb1.925bn, up 31% YoY; net profit came in at Rmb125m, up 576% YoY; EPS was Rmb0.2336share, up 520% YoY. The company is expected to achieve a full-year net profit of Rmb180m-193m, up 585%-635% YoY. Earnings rising In 2018, net profit in 1Q/2Q/3Q was Rmb4.11m, 53.4m and 67.56m respectively. Profit growth continued to rise as: 1) sales prices of the company's MDF increased (average price was Rmb1402/m3 in 2017, and increased to Rmb1583/m3 in 1H18), sales volume rose, and gross profit margin was up further. 2) Zhiyuan Lithium s lithium salt capacity gradually increased, and output continued to rise. 3) Higher government subsidies. Merger with Aoyinuo Lithium would secure lithium supply The company's wholly-owned subsidiary Zhiyuan Lithium s planned capacity is 40k tonnes of lithium salt per year. The first phase of 13k tonnes was put into operation at the end of March, and the remaining 27k tonnes is expected to be built by the end of In order to guarantee the supply of lithium resources, the company is actively promoted the acquisition of Aoyinuo Mining. It has obtained approval from Sichuan Provincial Environmental Protection Department and passed the review of the geological environment protection and land reclamation program of the Provincial Department of Land and Resources. Shengtun Group is also actively proceeding with mining warrants. The company's inventory in 3Q18 was Rmb978m, mainly from its purchases of spodumene ore and lithium concentrate. In the future, with the release of lithium salt capacity, the company's earnings are expected to improve further. Earnings forecasts Our 2018/19/20 EPS estimates are Rmb0.35/Rmb0.69/Rmb0.96, with P/Es of 26x/13x/9x. Given new production capacity, expectations for capacity to be put into operation and demand are higher; we maintain our Buy rating. 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. 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 do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold 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 recommendation for investment in, any securities. 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