Yum Cha 飲茶. February 12, 2018 TALKING POINT - WINNERS AND LOSERS OF LARGE CAP LAST WEEK RESEARCH NOTES. INDICES Closing DoD%

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index (3.1) HSCEI (3.9) Shanghai COMP (4.1) Shenzhen COMP (3.2) Gold (0.2) BDIY Crude Oil, WTI(US$/BBL) 59.2 (3.2) Crude Oil, BRENT(US$/BBL) 62.8 (3.1) HIBOR, 3-M SHIBOR, 3-M RMB/USD 6.3 (0.4) DATA RELEASES DUE THIS WEEK February Money Supply M2 YoY February New Yuan Loans CNY Source: Bloomberg February 12, 2018 TALKING POINT - WINNERS AND LOSERS OF LARGE CAP LAST WEEK dividend yield (%) Net debt/equity (%) Price Market cap 2018E PBR Change YTD Ticker Company name (HK$m) PER (x) PER (x) (x) 1 week performance 2007 HK Equity Country Garden Holdings Co Ltd , % -11.9% 960 HK Equity Longfor Properties Co Ltd , % 6.2% 813 HK Equity Shimao Property Holdings Ltd , % 14.1% 3333 HK Equity China Evergrande Group , % -21.3% 966 HK Equity China Taiping Insurance Holdings Co Ltd , % -6.1% 656 HK Equity Fosun International Ltd , % -10.2% 1088 HK Equity China Shenhua Energy Co Ltd , % 6.2% 2799 HK Equity China Huarong Asset Management Co Ltd , % -10.3% 857 HK Equity PetroChina Co Ltd ,713, % -1.3% 688 HK Equity China Overseas Land & Investment Ltd , % 4.8% Best 10 performance last week (large cap) dividend yield (%) Net debt/equity (%) Price Market cap 2018E PBR Change YTD Ticker Company name (HK$m) PER (x) PER (x) (x) 1 week performance 2319 HK Equity China Mengniu Dairy Co Ltd , (6.44) -4.3% 1.5% 494 HK Equity Li & Fung Ltd , % -12.6% 1128 HK Equity Wynn Macau Ltd , , % 4.2% 291 HK Equity China Resources Beer Holdings Co Ltd , % 1.4% 11 HK Equity Hang Seng Bank Ltd , (28.74) -3.9% -8.8% 23 HK Equity Bank of East Asia Ltd/The , (64.04) -3.8% -6.1% 607 HK Equity Fullshare Holdings Ltd ,249 n.a. n.a n.a. (5.55) -3.0% -2.5% 2382 HK Equity Sunny Optical Technology Group Co Ltd , (27.02) -2.9% 8.9% 293 HK Equity Cathay Pacific Airways Ltd ,150 n.a % 1.0% 2688 HK Equity ENN Energy Holdings Ltd , % 8.3% 2018 HK Equity AAC Technologies Holdings Inc , % 3.4% Sources: Bloomberg, CGIS Research Although it may be too early to judge whether the market has reached the bottom following the huge market volatility last week, we believe it s time to have an initial review of the performance of large caps last week. The table above shows the best and worst 10 large caps (based on Hang Seng Large Cap Index) last week in terms of share price performance. It s impressive to see AAC (2018.HK) was up 2.2% last week (HSI fell 9.5%) while Sunny Optical (2382.HK) also dropped merely 2.9%. The share price strength of these two handset component stocks may show that the bad news of the industry supply chain is largely reflected. Meanwhile, the solid performance of ENN Energy (2688.HK) also deserves to pay more attention. As an utility play, the earnings risk of the Company should be relatively small and its 2018E PER is trading at a 14% discount to China Gas (0384.HK). On the other hand, the share price of Shimao Property (0813.HK) may remain vulnerable in the near term. Following a correction of 18.3%, the Company was still up 14.1% YTD, which may remain a target for profit-taking in the near term. RESEARCH NOTES Analyst: Wong Chi-man, CFA TMT SECTOR UPDATE - Hua Hong management reiterated a positive view of the Company s outlook in 2018, but SMIC management highlighted that the outlook is challenging, given pricing pressure on 28nm products and faster-than-expected migration to higher technology nodes by downstream customers. We share the view that the market might lose confidence in SMIC, given the weaker guidance. But based on our understanding, the Chinese government is fully supportive of SMIC to avoid posting a net loss, as in some ways, SMIC plays a critical role in China s policy of building up its semiconductor supply chain. SMIC is likely to book turnover of 14nm FinFET products in late 2019, which is earlier than previously expected. As Hua Hong is unlikely to catch up in terms of technology and has been rerated substantially, we maintain the view that SMIC looks more interesting, since a) the valuation gap between Hua Hong (1.04x 2017 PBV) and SMIC (1.3x 2017 PBV) has narrowed, and b) shares of SMIC have retreated below the level when the Company issued new shares. 1

2 RESEARCH NOTES WEEKLY SHORT SELLING ANALYSIS Last Friday, the HKSFC released the aggregate short positions data for February 2. We analyzed which companies may be vulnerable to short-selling activity, based on the following three criteria: (i) the net change in short positions between January 26 and February 2; (ii) short positions as a percentage of free float; and (iii) the absolute amount of short positions. We must emphasize this is only an objective quantitative analysis based on official data; the analysis does NOT imply that we feel uncomfortable with the corporate governance or fundamentals of some companies. According to the results of our analysis, we believe Fantasia (1777.HK), Evergrande (3333.HK) and China Literature (0772.HK) require close monitoring, based on the latest short positions outstanding. On the other hand, we note that short positions in TCL Multimedia (1070.HK) have dropped significantly. CHINA CEMENT WEEKLY - Share prices of cement stocks dropped significantly last week due to very weak market sentiment. However, we have not seen any change in our investment thesis for this year, i.e. (i) supply discipline continues to improve, which will lead to a higher utilization rate, and (ii) the pricing power of large players has strengthened thanks to increasing market concentration. We believe the valuation of CNBM [3323.HK; BUY] is appealing at 0.63x 2018E PER and 7.1x 2018E PER. Meanwhile, the 2018E PBR of Conch Cement [0914.HK; BUY] was 1.77x after the correction, below its historical average of 1.87x, which makes it look attractive for investors with a longer investment horizon. 2

3 COMPANY / INDUSTRY NEWS TMT INDUSTRY UPDATE Hua Hong and SMIC: Key takeaways from Q results conference calls Analyst: Mark Po, CFA; Tel: (852) ; markpo@chinastock.com.hk February 12, 2018 Different direction of guidance from Hua Hong and SMIC. The two leading HK-listed semi-conductor foundries Hua Hong [1347.HK] and SMIC [0981.HK] reported their Q results and highlighted their outlook for Q Both companies results beat our expectations, but there is divergence in their guidance for Hua Hong management reiterated its positive outlook for the Company in 2018, but SMIC management highlighted that the outlook is challenging, given pricing pressure on 28nm products and faster-than-expected migration to higher technology nodes by downstream customers. Based on our understanding, the divergence is due to different technology nodes, product mix, capacity expansion schedule, and client mix. At this stage, 8 capacity is still tight, and it seems that 12 capacity and lower technology nodes are facing keen competition. Based on the current market environment, the lower technology node (Hua Hong) is facing less competition from global players, and this situation is likely to remain in Moreover, we would not be surprised to see SMIC s weaker-than-expected outlook drag down sentiment on the whole supply chain. Given the challenging environment, SMIC will exercise more discipline in CAPEX and R&D. Regrading downstream applications, SMIC will focus more on power management ICs, and SMIC will also use more specialty technologies, like NOR and CMOS image sensors, to improve the utilization rate. It seems that the foundries using lower technology nodes, such as Hua Hong (despite their smaller size), should continue to outperform SMIC in the near term, in terms of operating performance, given less competition. We share the view that the market might lose confidence in SMIC given the weak guidance related by management. But based on our understanding, the Chinese government is fully supportive of SMIC to avoid posting a net loss, as in some ways, SMIC plays a critical role in China s policy of building up its semiconductor supply chain. SMIC is likely to book turnover of 14nm FinFET products in late 2019, which is earlier than previously expected. SMIC [0981.HK]. SMIC s Q turnover was US$787.2m in 4Q 2017, up 2.3% QoQ, but down 3.4% YoY. It had a gross margin of 18.9% in Q4 2017, down from 23.0% in Q and 30.2% in Q SMIC achieved a net profit of US$47.7m in Q4 2017, higher than our expectation of US$20.8m. SMIC s higher-than-expected results were due mainly to: a) a higher contribution from JV partners, and b) lower-than-expected operating expenses. SMIC s 28nm products accounted for 11.3% of total turnover in Q (higher than the target of 10%), up from 8.8% in Q and 3.5% in Q SMIC guided a 7% to 9% QoQ increase in turnover in Q and a gross margin in the range of 25% to 27%. SMIC s turnover and gross margin guidance for Q were higher than we expected. But during the Q results conference call, SMIC management clarified that Q sales guidance included a one-off technology license sale of US$150m to the JV SMIC formed earlier (upgrading local industry). Excluding the impact of technology license sales, SMIC s Q sales are expected to drop 10-12% QoQ to US$ m due to seasonal patterns and weaker market demand. Given that the gross margin of technology licensing sales is 100%, then without the one-off, SMIC s gross profit margin percentage would be only in the teens, lower than our and market expectations. SMIC s operating expenses without subsidies are guided at $ m in Q Regarding the outlook for 2018, SMIC management guided that turnover (including one-off technology license sales) is expected to grow in the high-single digits YoY, in line with industry growth. But excluding the one-off technology license sales, SMIC s growth will be lower than industry average and previous guidance of 20% topline growth. The slower-than-expected turnover growth is partly due to pricing pressure, especially for 28nm products, a slowdown in demand from the smartphone segment, and less exposure to new applications, such as high performance computing. According to SMIC management, the Company has built up capacity, but due to pricing pressure, it is taking a cautious view on ramping up 28nm products further. Part of the 28nm capacity will be converted to 40nm or other platforms, such as NAND. It seems that SMIC has been focusing on 14nm FinFET development, which is critical to SMIC s development, as SMIC has revised its 14nm development plan. SMIC CEO Dr Liang mentioned that he is more confident in delivering a solution than when he joined SMIC. SMIC s risk production of 14nm FinFET is expected to be in 1H 2019, earlier than previous guidance of 2H SMIC is likely to book sales of 14nm FinFET production by the end of On 30 Jan 2018, SMIC announced that SMIC Holdings, SMIC Shanghai, China IC Fund and Shanghai IC Fund had entered into a JV agreement (SMIC South Project) to develop 14nm capacity, focusing on the high performance computing and lower power segment. The registered capital of SMIC South Project is US$3.5bn, with a total investment of US$5bn. The initial capacity of SMIC South Project is guided at 3.5k/wpm for R&D and will increase to 9k/wpm in the third stage. Due to keen competition, SMIC will exercise more discipline in CAPEX and product diversification. SMIC guided that in 2018, overall capacity growth will be only in low single digits. SMIC will change some capacity in Shenzhen to 8 fab to meet the strong demand from power-management applications. SMIC s capex for foundry operations was US$2.5bn, of which US$948m is for capacity expansion in the Beijing 8 fab and US$510.5m for expansion in the new Shenzhen 8 fab. Capex is guided at US$1.9bn in Despite the weaker-thanexpected Q performance, SMIC management still guided that the gross margin will get better sequentially in coming months. Hua Hong [1347.HK]. Hua Hong s Q turnover reached another high of US$216.9m in Q4 2017, an increase of 3.3% QoQ and 11.8 YoY. Hua Hong achieved a gross margin of 33.7% in Q4 2017, down 1.5ppt QoQ, but up 2.7ppt YoY. Hua Hong s net profit rose to US$41.5m, up 17.4% QoQ and 8.7% YoY. Hua Hong s Q results were higher than our expectation of US$39.4m. Hua Hong s better-than-expected results were due mainly to a higher share of profits from an associate. Hua Hong guided turnover of US$209m to $210m in Q1 2018, up 14% to 15% YoY and a gross margin of 30%. Hua Hong management guidance for turnover and gross margin in Q is lower than we expected (flat QoQ turnover and gross margin in Q vs. Q4 2017). According to Hua Hong management, the investment in 12 capacity is mainly due to: a) strong demand from customers and the development of platforms based on 12 capacity. The lower gross margin in Q is mainly due to seasonal factors and Hua Hong management expects the gross margin to go back to the 33-35% level in Q2-Q4. CAPEX is about US$100m, which will be used partly for capacity expansion in fab 3. Hua Hong management remains positive on the outlook for Hua Hong, and said 2018 will be a strong year for the Company. Growth in 2018 will be driven by price improvement and a better product mix. Hua Hong is expected to release further information on 12 capacity in Q Embedded non-volatile memory process technologies and power discrete products are the growth drivers for Hua Hong. 1

4 COMPANY / INDUSTRY NEWS TMT INDUSTRY UPDATE Hua Hong and SMIC: Key takeaways of Q results conference calls. Analyst: Mark Po, CFA; Tel: (852) ; markpo@chinastock.com.hk February 12, 2018 Our view: Some investors have expressed concern about the near-term financials of SMIC, and wondered whether SMIC s share price would react to weak quarterly results. We originally believed expectations have not been high regarding SMIC s results, since the Company s guidance for Q and Q was released in Nov We would not be surprised to see SMIC s weaker-than-expected outlook drag down sentiment on SMIC and the whole supply chain. We share the view that the market might lose confidence in SMIC, given the weak guidance from management. But based on our understanding, the Chinese government is fully supportive of SMIC to avoid posting a net loss, since in some ways, SMIC plays a critical in China s policy of building up its semiconductor supply chain. SMIC is likely to book turnover of 14nm FinFET products in late 2019, which is earlier than previously expected. As Hua Hong is unlikely to catch up in terms of technology and has been rerated substantially, we maintain the view that SMIC looks more interesting, since a) the valuation gap between Hua Hong (1.04x 2017 PBV) and SMIC (1.3x 2017 PBV) has narrowed, and b) shares of SMIC have retreated below the level when the Company issued new shares. 2

5 Strategy February 12, 2018 Short Selling Analysis for February 2 Last Friday, the HKSFC released the aggregate short positions data for February 2. We analyzed which companies may be vulnerable to short-selling activity, based on the following three criteria: (i) the net change in short positions between January 26 and February 2; (ii) short positions as a percentage of free float; and (iii) the absolute amount of short positions. We must emphasize this is only an objective quantitative analysis based on official data; the analysis does NOT imply that we feel uncomfortable with the corporate governance or fundamentals of some companies. According to the results of our analysis, we believe Fantasia (1777.HK), Evergrande (3333.HK) and China Literature (0772.HK) require close monitoring, based on the latest short positions outstanding. On the other hand, we note that short positions in TCL Multimedia (1070.HK) have dropped significantly. Short positions in Fantasia, Evergrande and China Literature increased significantly. As Figure 2 shows, short positions in Fantasia, Evergrande and China Literature rose 189%, 53% and 167%, respectively, during the week ended February 2. The outstanding short positions were equivalent to 4.89%, 15.11% and 3.05% of their free float. If market volatility remains high in the near term, the share prices of Fantasia and Evergrande may still be vulnerable, given their high net debt/equity (Fantasia: 87% at end-1h17; Evergrande: ~120% at end-). For China Literature, given its 2018E PER of 61x based on consensus forecasts, its share price may continue to come under pressure in the near term, as it is unlikely to be an early stage bottom-fishing target because of its high valuation. Significant decline in short positions in TCL Multimedia. Outstanding short positions in TCL Multimedia dropped 27.3% during the week ended February 2 (Figure 3). After the correction last week, the share price of the Company is near the level in November At current price, the stock may look interesting because of the ongoing group restructuring. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Recap: Source of data. The HKSFC releases the aggregate short positions in all eligible stocks every Friday with a delay of one week. The HKEx releases the data on short-selling activity on a daily basis (without a one-week delay), but investors do not know whether the short positions are covered or not later. Therefore, the usefulness of the HKSFC data is that it provides the outstanding short positions in each stock, and investors can trace the net change on a weekly basis. However, there are still some limitations, as this data set cannot cover short-selling activity using OTC derivative products. Three angles to analyzing the data. (i) The net change in short positions between January 26 and February 2; (ii) short positions as a percentage of free float; and (iii) the absolute amount of the short positions. 1

6 Figure 1: Review of ideas last week Ticker Company name Market cap PER 2018E PER Dividend Jan 26 Jan 19 PBR (x) (HK$m) (x) (x) yield (%) Change Short positions increased significantly during the week ended Jan HK Equity Q Technology Group Co Ltd 11, % 3380 HK Equity Logan Property Holdings Co Ltd 66, % 347 HK Equity Angang Steel Co Ltd 70, % Short positions dropped significantly during the week ended Jan HK Equity 3SBio Inc 39, % 1728 HK Equity China ZhengTong Auto Services Holdings Ltd 20, % 1548 HK Equity Genscript Biotech Corp 45, % Sources: Bloomberg, CGIS Research Figure 2: Top 50 short selling stocks (ranked by net change between January 26 and February 2, descending order) Ticker Company name reportable short positions on Feb 02 (shares) Sources: HKSFC, Bloomberg, CGIS Research reportable short positions on Feb 02 % of free float Change in short positions compared with Jan 26 Feb 02 Feb 09 Price change during the period Market cap (HK$m) PER (x) 2018E PER (x) PBR (x) Dividend yield (%) reportable short positions on Feb 02/ 3- month average daily turnover 6068 WISDOM EDU INTL 2,948,000 17,746, % Increase from nill % 10, YITAI COAL 598,000 7,618, % Increase from nill % 34, FORTUNE REIT 4,595,000 44,847, % Increase from nill % 17, JOY CITY PPT 10,398,000 13,517, % Increase from nill % 16, CHINAGOLDINTL 287,800 3,942, % Increase from nill % 5, n.a CEOVU 2,000,000 1,380, % Increase from nill % 5,159 n.a. n.a n.a CHONGQING M&E 254, , % Increase from nill % 2,690 n.a. n.a n.a POWERLONG 7,994,000 34,773, % 437% % 14, LEE'S PHARM 1,501,025 18,312, % 254% % 5, FANTASIA 51,676,500 73,897, % 189% % 6,742 n.a. n.a WELLING HOLDING 1,990,000 4,039, % 181% % 5,871 n.a. n.a n.a CHINA LIT 5,959, ,463, % 167% % 66, n.a DONGYUE GROUP 6,625,396 45,118, % 162% % 12, ROAD KING INFRA 841,000 13,422, % 129% % 9,786 n.a. n.a n.a YIHAI INTL 483,000 4,955, % 106% % 8, HEC PHARM 1,163,200 40,653, % 96% % 19, NWS HOLDINGS 1,828,268 27,716, % 95% % 54, CHINA OVS PPT 21,867,577 62,978, % 89% % 7, XINHUA WINSHARE 5,999,764 37,858, % 79% % 13,661 n.a. n.a. n.a. n.a SWIREPROPERTIES 12,744, ,920, % 68% % 151, HOPEWELL INFR 3,579,500 17,110, % 61% % 14, GEMDALE PPT 28,568,043 33,995, % 56% % 14, TONGRENTANGCM 755,000 9,331, % 54% % 9, n.a EVERGRANDE 258,344,200 6,678,197, % 53% % 279, CHOW SANG SANG 497,149 9,416, % 52% % 11, CHINA SCE PPT 12,323,000 53,112, % 49% % 13, WHARF REIC 5,047, ,856, % 46% % 152, n.a n.a ICBC 430,395,621 3,180,623, % 45% % 2,802, CHINA LESSO 6,244,000 36,277, % 44% % 15, BANK OF CHINA 522,963,418 2,437,009, % 41% % 1,471, LONGFOR PPT 12,881, ,346, % 41% % 123, WUXI BIO 5,343, ,440, % 41% % 57, n.a SINO OIL & GAS 154,755,000 10,059, % 40% % 959 n.a. n.a n.a QHD PORT 2,187,900 5,557, % 39% % 31, BEIJING AIRPORT 18,478, ,111, % 38% % 47, PSBC 323,654,694 1,683,004, % 38% % 363, HUABAO INTL 4,118,437 23,639, % 37% % 16, GIORDANO INT'L 12,664,970 50,026, % 37% % 6, REDCO PPT 5,611,820 19,080, % 36% % 10,406 n.a. n.a n.a CONSUN PHARMA 1,987,281 17,865, % 35% % 7, K. WAH INT'L 2,860,914 16,278, % 35% % 14, CHINA CRSC 7,237,022 43,422, % 35% % 50, COSCO SHIP ENGY 30,380, ,280, % 34% % 24, BJ CAPITAL LAND 6,619,651 33,760, % 34% % 12, CENTRAL CHINA 2,940,000 11,025, % 33% % 7, GREENLAND HK 10,165,341 44,117, % 32% % 9, YONGDA AUTO 14,870, ,583, % 32% % 15, JOHNSON ELEC H 1,422,751 46,381, % 30% % 25, SHOUGANG RES 36,981,000 88,384, % 30% % 9, TECHTRONIC IND 9,493, ,765, % 29% % 84,

7 Figure 3: Top 50 short selling stocks (ranked by net change between January 26 and February 2, ascending order) Ticker Company name reportable short positions on Feb 02 (shares) Sources: HKSFC, Bloomberg, CGIS Research reportable short positions on Feb 02 % of free float Change in short positions compared with Jan 26 Feb 02 Feb 09 Price change during the period Market cap (HK$m) PER (x) 2018E PER (x) PBR (x) Dividend yield (%) reportable short positions on Feb 02/ 3- month average daily turnover 530 GOLDIN FIN HOLD % % % 24,467 n.a. n.a n.a VSTECS % % % 5, DAOHE GLOBAL % % % 1,057 n.a. n.a n.a GOLD-FIN HLDG 1,764,000 4,939, % -77.4% % 10,160 n.a. n.a n.a TIMES PPT 2,045,791 19,516, % -68.0% % 14, SILVER GRANT 734,000 1,152, % -51.8% % 3,434 n.a. n.a n.a SH PHARMA 12,821, ,767, % -45.1% % 67, XIABUXIABU 365,000 5,883, % -39.6% % 14, CHINESE EST H 690,500 9,225, % -35.0% % 23,120 n.a. n.a n.a VITASOY INT'L 1,118,000 22,181, % -34.5% % 19, EB SECURITIES 766,400 7,817, % -30.5% % 68, STANCHART 4,872, ,294, % -27.5% % 283, TCL MULTIMEDIA 26,295,489 95,978, % -27.3% % 8, LISI GP HOLD 1,668,000 2,068, % -24.9% % 7,041 n.a. n.a n.a CIFI HOLD GP 34,335, ,037, % -24.8% % 41, HUAYI TENCENT 205,285,788 93,405, % -24.1% % 5,197 n.a. n.a n.a TIANGE 7,180,000 50,260, % -23.2% % 8, n.a RUSAL 5,130,000 30,472, % -22.0% % 83, BAIC MOTOR 16,442, ,038, % -21.7% % 80, DFZQ 3,482,715 29,707, % -21.6% % 108, XINYI GLASS 30,273, ,550, % -21.1% % 41, GUOTAI JUNAN I 142,751, ,566, % -20.7% % 17, YUZHOU PPT 15,111,640 85,985, % -20.5% % 19, SMI HOLDINGS 14,142,539 56,853, % -19.0% % 10, n.a CNOOC 105,540,570 1,336,143, % -18.9% % 498, HYSAN DEV 2,843, ,674, % -18.9% % 45, CHINA AOYUAN 13,520,000 91,395, % -18.1% % 14, HAITONG INT'L 148,409, ,412, % -17.2% % 25, SHUI ON LAND 95,539, ,759, % -17.0% % 20, VTECH HOLDINGS 1,283, ,950, % -16.5% % 26, CH OVS G OCEANS 97,411, ,116, % -16.1% % 12, SHIMAO PROPERTY 9,014, ,101, % -16.0% % 65, MAANSHAN IRON 89,551, ,831, % -15.9% % 36, R&F PROPERTIES 28,602, ,979, % -15.6% % 59, WYNN MACAU 39,311,923 1,057,490, % -15.1% % 134, CITIC 29,684, ,561, % -14.7% % 315, MINSHENG BANK 164,409,245 1,455,021, % -14.7% % 359, CHINA VANKE 20,855, ,060, % -14.2% % 422, SINOTRANS 23,103, ,817, % -14.2% % 25, MMG 42,952, ,447, % -13.9% % 37, CITIC SEC 103,627,649 2,103,641, % -13.8% % 250, JINCHUAN INTL 11,240,524 16,523, % -13.1% % 5,704 n.a. n.a. n.a. n.a CICC 22,665, ,224, % -13.1% % 58, HSBC HOLDINGS 17,119,245 1,432,880, % -11.9% % 1,595, SINO BIOPHARM 72,446,544 1,075,106, % -11.8% % 96, CHINASOUTHCITY 93,876, ,161, % -11.5% % 14, POLY PROPERTY 41,272, ,947, % -11.4% % 13, CHINA JINMAO 148,834, ,430, % -11.2% % 49, CHINA ORIENTAL 4,974,000 32,828, % -11.1% % 20, BG BLUE SKY 17,454,822 10,472, % -11.1% % 5, n.a

8 Figure 4: Top 50 short selling stocks (ranked by percentage of free float) Ticker Company name reportable short positions on Feb 02 (shares) Sources: HKSFC, Bloomberg, CGIS Research reportable short positions on Feb 02 % of free float Change in short positions compared with Jan 26 Feb 02 Feb 09 Price change during the period Market cap (HK$m) PER (x) 2018E PER (x) PBR (x) Dividend yield (%) reportable short positions on Feb 02/ 3- month average daily turnover 2318 PING AN 1,447,653, ,302,205, % 0.3% % 1,456, UNITED LAB 174,858,675 1,232,753, % 0.5% % 11, BYD COMPANY 123,733,141 8,989,212, % -2.2% % 188, CHALCO 617,168,426 3,301,851, % 2.7% % 67, SINOTRUK 107,149,000 1,092,919, % -0.8% % 24, GOME RETAIL 1,730,165,118 1,678,260, % 1.0% % 18, LENOVO GROUP 1,116,736,909 4,813,136, % 6.5% % 47, CNBM 374,966,874 3,217,215, % -0.7% % 35, PAX GLOBAL 112,988, ,706, % -0.8% % 3, GREATWALL MOTOR 481,181,623 4,503,859, % -0.2% % 118, SMIC 558,764,929 6,168,764, % 1.1% % 47, EVERGRANDE 258,344,200 6,678,197, % 52.8% % 279, BYD ELECTRONIC 76,235,037 1,460,663, % -0.8% % 36, IGG 98,346, ,583, % 5.9% % 10, CHAOWEI POWER 85,311, ,253, % 1.5% % 5, WANT WANT CHINA 650,781,166 4,288,647, % 0.9% % 77, HKELECTRIC-SS 310,207,248 2,242,798, % -0.6% % 63, KINGDEE INT'L 252,803,187 1,306,992, % 4.5% % 13, MGM CHINA 96,365,202 2,293,491, % -4.6% % 80, TONGDA GROUP 421,760, ,474, % -3.0% % 10, ZTE 84,291,217 2,326,437, % 21.1% % 140, IMAX CHINA 12,822, ,867, % 2.7% % 6, ANGANG STEEL 107,602, ,322, % -2.5% % 59, HUTCHTEL HK 140,097, ,719, % 8.0% % 15, GREENTOWN CHINA 60,135, ,828, % -6.0% % 22, ALI PICTURES 1,166,117,812 1,224,423, % 0.9% % 24,451 n.a. n.a n.a O-NET TECH GP 37,095, ,006, % 4.0% % 3, SUNAC 177,562,865 6,401,141, % 6.2% % 120, ALI HEALTH 384,618,386 1,550,012, % 1.7% % 35,189 n.a. n.a n.a LUYE PHARMA 174,563,310 1,150,372, % 0.6% % 20, CMOC 300,092,896 1,797,556, % 7.8% % 155, GOLDWIND 52,534, ,341, % 1.6% % 60, ZOOMLION 121,878, ,697, % 4.3% % 37, FULLSHARE 678,451,661 2,455,995, % -0.8% % 69,249 n.a. n.a n.a CGN POWER 904,491,213 1,980,835, % 6.1% % 90, TRULY INT'L 127,808, ,248, % -3.7% % 6, SINGYES SOLAR 38,084, ,586, % 0.4% % 2, WEICHAI POWER 169,250,052 1,643,418, % 1.9% % 75, SMARTONE TELE 29,740, ,340, % 0.7% % 9, SUNART RETAIL 137,618,493 1,409,213, % -1.3% % 90, AVICHINA 167,106, ,820, % 1.3% % 21, CATHAY PAC AIR 52,088, ,022, % 1.1% % 48,150 n.a ASM PACIFIC 25,196,172 2,769,059, % 3.5% % 41, SH ELECTRIC 213,446, ,222, % 5.2% % 88, ESPRIT HOLDINGS 138,180, ,503, % 9.9% % 5, CHINA FOODS 55,793, ,797, % 6.3% % 10, SKYWORTHDIGITAL 144,582, ,063, % 3.1% % 9, BBMG 169,974, ,198, % 4.9% % 55, HAITONG INT'L 148,409, ,412, % -17.2% % 25, KUNLUN ENERGY 232,496,136 1,843,694, % -2.2% % 57,

9 Figure 5: Top 50 short selling stocks (ranked by absolute amount) Ticker Company name reportable short positions on Feb 02 (shares) Sources: HKSFC, Bloomberg, CGIS Research reportable short positions on Feb 02 % of free float Change in short positions compared with Jan 26 Feb 02 Feb 09 Price change during the period Market cap (HK$m) PER (x) 2018E PER (x) PBR (x) Dividend yield (%) reportable short positions on Feb 02/ 3- month average daily turnover 2318 PING AN 1,447,653, ,302,205, % 0.3% % 1,456, TENCENT 107,862,935 48,797,191, % 0.3% % 3,870, CCB 1,378,024,104 12,333,315, % 5.2% % 1,955, BYD COMPANY 123,733,141 8,989,212, % -2.2% % 188, HKEX 28,999,184 8,380,764, % 5.3% % 320, EVERGRANDE 258,344,200 6,678,197, % 52.8% % 279, COUNTRY GARDEN 384,795,400 6,449,170, % 6.4% % 285, SUNAC 177,562,865 6,401,141, % 6.2% % 120, SMIC 558,764,929 6,168,764, % 1.1% % 47, SUNNY OPTICAL 53,195,022 5,963,161, % -4.5% % 119, LENOVO GROUP 1,116,736,909 4,813,136, % 6.5% % 47, CM BANK 123,058,404 4,706,983, % -0.3% % 936, CPIC 115,533,137 4,655,985, % 4.7% % 392, GREATWALL MOTOR 481,181,623 4,503,859, % -0.2% % 118, WANT WANT CHINA 650,781,166 4,288,647, % 0.9% % 77, HK & CHINA GAS 252,115,255 3,892,659, % 4.6% % 206, GEELY AUTO 146,198,716 3,618,418, % 0.7% % 192, AIA 53,513,838 3,489,102, % 20.0% % 716, ENN ENERGY 57,622,460 3,431,417, % -3.2% % 65, CHALCO 617,168,426 3,301,851, % 2.7% % 67, SANDS CHINA LTD 72,422,914 3,230,061, % -11.1% % 335, CNBM 374,966,874 3,217,215, % -0.7% % 35, ICBC 430,395,621 3,180,623, % 45.2% % 2,802, HENGAN INT'L 41,139,009 3,140,963, % 5.5% % 87, AAC TECH 20,800,108 2,934,895, % 10.6% % 176, CHINA RES LAND 88,899,254 2,849,221, % -7.8% % 189, CHINA GAS HOLD 117,477,090 2,825,324, % 7.6% % 113, CKI HOLDINGS 40,208,504 2,782,428, % 1.3% % 171, ASM PACIFIC 25,196,172 2,769,059, % 3.5% % 41, MTR CORPORATION 62,148,192 2,746,950, % 6.5% % 245, CHINA MOBILE 33,551,396 2,714,307, % 9.5% % 1,527, CHINA UNICOM 230,101,364 2,678,379, % 1.9% % 313, BRILLIANCE CHI 130,182,358 2,603,647, % 10.6% % 94, FULLSHARE 678,451,661 2,455,995, % -0.8% % 69,249 n.a. n.a n.a BANK OF CHINA 522,963,418 2,437,009, % 41.5% % 1,471, ZTE 84,291,217 2,326,437, % 21.1% % 140, MGM CHINA 96,365,202 2,293,491, % -4.6% % 80, GALAXY ENT 33,183,077 2,269,722, % 15.0% % 271, CONCH CEMENT 50,629,227 2,263,126, % -9.3% % 202, HKELECTRIC-SS 310,207,248 2,242,798, % -0.6% % 63, CLP HOLDINGS 27,693,752 2,212,730, % -4.6% % 192, CHINA EB INT'L 183,089,828 2,200,739, % -7.0% % 50, CHINA LIFE 79,288,217 2,105,102, % 26.2% % 869, CITIC SEC 103,627,649 2,103,641, % -13.8% % 250, CRRC 268,285,603 2,063,116, % 4.4% % 343, CGN POWER 904,491,213 1,980,835, % 6.1% % 90, TINGYI 124,751,812 1,936,148, % 1.9% % 81, KUNLUN ENERGY 232,496,136 1,843,694, % -2.2% % 57, GAC GROUP 103,261,592 1,807,077, % -1.4% % 167, CMOC 300,092,896 1,797,556, % 7.8% % 155,

10 China Cement Weekly February 12, 2018 CNBM and Conch Cement Look Appealing after Deep Correction Last Week; Investment Thesis Still Intact China Cement Sector National average cement prices dropped about 1% last week. The average cement price (nationwide) decreased 1% week on week to RMB395/tonne last week. The regions with a decline of RMB20-40/tonne were mainly in Shanghai, Jiangsu, Fujian, Yunnan and Guizhou. As a result of the upcoming Chinese New Year holiday, construction project suspensions began, and cement demand decreased gradually. Therefore, cement prices continued to drop moderately. Meanwhile, cement supply will also decline in February, as cement plants in south China will begin the off-peak production suspension by stages. Therefore, it is necessarily to keep track of the resumption of production of cement plants after the CNY holiday. The average inventory level (nationwide) rebounded moderately to 58.94%. Coal prices fell slightly last week. The comprehensive average price index for Bohai- Rim Steam Coal (Q5500K) dropped by RMB1/tonne to RMB576/tonne last week. The index was down 2% on a year-on-year basis. Valuation looks attractive after the sharp correction. Share prices of cement stocks dropped significantly last week due to very weak market sentiment. However, we have not seen any change in our investment thesis for this year, i.e. (i) supply discipline continues to improve, which will lead to a higher utilization rate, and (ii) the pricing power of large players has strengthened thanks to increasing market concentration. We believe the valuation of CNBM [3323.HK; BUY] is appealing at 0.63x 2018E PER and 7.1x 2018E PER. Meanwhile, the 2018E PBR of Conch Cement [0914.HK; BUY] was 1.77x after the correction, below its historical average of 1.87x, which makes it look attractive for investors with a longer investment horizon. Cement stocks under coverage fell 16% on average last week. The share price performance of the sector was weak last week because of the sharp market correction. Best performer CR Cement [1313.HK; BUY] fell 12% week on week. CNBM, the weakest among our coverage stocks, fell 24% week on week, partly because of its high beta nature. (Due to the CNY holidays, the China Cement Weekly will resume on March 5, 2018.) Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Valuation Table PER (x) PBR (x) EV/EBITDA(x) Net debt/equity (%) Company Ticker Rating Price Market cap (US$m) E E E Conch Cement 914 HK Equity BUY , Net cash CNBM 3323 HK Equity BUY , BBMG 2009 HK Equity HOLD , CR Cement 1313 HK Equity BUY , Simple average Weighted average EPS Growth (%) E PEG(x) ROE (%) Dividend yield (%) Company Ticker 2018E CAGR (%) E E Conch Cement 914 HK Equity CNBM 3323 HK Equity CR Cement 1313 HK Equity BBMG 2009 HK Equity Simple average Weighted average Sources: Company, Bloomberg, CGIS Research estimates 1

11 Peer Comparison Market cap PER (x) PBR (x) EV/EBITDA(x) Company Ticker Rating Price (LC) (US$m) E E E Conch Cement 914 HK Equity BUY , CNBM 3323 HK Equity BUY , BBMG 2009 HK Equity HOLD , CR Cement 1313 HK Equity BUY , China National Materials 1893 HK Equity NR , Asia Cement 743 HK Equity NR West China Cement 2233 HK Equity NR Tianrui Cement 1252 HK Equity NR , n.a. n.a n.a. n.a n.a. n.a. Simple average Weighted average Sources: Bloomberg, CGIS Research 1-Year Relative Performance Sources: Bloomberg, CGIS Research yuan/ton yuan/ton Comprehensive Average Price Index: Bohai-Rim Steam Coal (Q5500K) Source: Wind 2

12 Figure 1: Regional Cement Price National Average (P.O. 42.5) North China Northeast China East China South Central China Southwest China Northwest China Sources: Digital Cement, CGIS Research 3

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