Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Sep 25, 2017

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1 Equity Research 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 CCB PETROCHINA CHINA MOBILE HSBC BANK OF CHINA PING AN CHINA LIFE SINOPEC Source: Bloomberg GF events Date Event Location 25 Sep GTJA Intl NDR Hong Kong 26 Sep Lonking co. visit Shanghai 27 Sep CR Pharma NDR Hong Kong 27 Sep CRRC co. visit Beijing 27 Sep CRSC co. visit Beijing Source: GF Securities (Hong Kong) A-Share Market Investment Strategy: Upstream base station equipment makers to be first to benefit from 5G network commercialization The timetable for 5G network commercialization is likely to be moved ahead given accelerating technological advancement in the backdrop of a highly promising IoT market. Based on the path of 4G network industrialization, license issuance will significantly boost the penetration of the new network technology, and upstream base station equipment manufacturers are likely to be the first to benefit from business opportunities resulting from the new technology. Watch main equipment providers, base station antennas, radio frequency generators and optical communication. Hong Kong Market Macro: China s rating downgrade just a delayed move We see S&P s downgrade of China last week merely as a delayed move, as the other two main ratings agencies have already downgraded China citing the same reasons. Also, the Chinese government has tried hard to reduce credit growth in the past few years, and has said that controlling financial risks is its most important policy target for 2017; many indicators show that financial risks have eased. We expect the downgrade to have a limited impact on financial markets. Looking forward, we believe strong economic growth and an improvement in fiscal performance will support China s rating. China Property: Take profit on most China property stocks given several negative catalysts Logan Property s shares dropped significantly on Friday following rumors of a share placement, which the company denied. Driven by the news, shares across the sector decline between 2-5%. We recommend taking profit on most China property stocks given several negative share price catalysts. Primary residential property GFA sold dropped 3% WoW and 12% YoY in the second week of Sept, affirming our previous bearish stance. We believe primary property sales area will drop 10% YoY in 4Q17, which would be below market expectation. With many private developers hoping to list before the end of the year, we could also see a dilution in future EPS and lower expectations for earnings. CRRC (1766 HK, Accumulate): Appointment of new President slightly positive for both CRRC and CRRC TE CRRC announced that Sun Yongcai was appointed as President of the company on Sept 22, replacing Xi Guohua who resigned back in July. Mr Sun served as Vice President from June 2015 until May this year and Executive Director since then. We see the appointment as slightly positive for CRRC and CRRC TE as it should ease investor concern regarding the position s vacancy. There will also be a new team formed to discuss business overlap between subsidiaries. We maintain our Accumulate ratings for both CRRC and CRRC TE. 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: Upstream base station equipment makers to be first to benefit from 5G network commercialization 5G commercialization likely to happen earlier than planned The second-round testing results for China s 5G network technology will be released at the upcoming 26th PT Expo China to be held on Sept We believe the timetable for 5G network commercialization (originally targeted for 2020) is likely to be moved ahead given accelerating technological advancement in the backdrop of a highly promising market for the Internet of Things. 4G network popularization as reference Based on the path of 4G network industrialization, license issuance will significantly boost the penetration of the new network technology, and upstream base station equipment manufacturers are likely to be the first to benefit from business opportunities resulting from the new technology. Subfield and stock watch list As such, we suggest focusing on main equipment providers, base station antennas, radio frequency generators and optical communication. We are the most upbeat about main equipment providers which promote the formulation of 5G technology standards, benefit from the rapid increase in base station numbers and have presence in SDN/NFV, such as ZTE ( CH) and Datang Telecom Technology ( CH). The popularization of large-scale antenna arrays will benefit base station antenna manufacturers such as Tongyu Communication ( CH) and Shenglu Telecommunication Tech ( CH). Given that radio frequency generator makers will benefit from full-spectrum access, we highlight Sunway Communication ( CH) and Wuhan Fingu Electronic Technology ( CH). As small base stations will have strong demand for optical fibers, optical transmission networks and optical modules, we suggest watching companies along the optical communication industry chain, such as Fiberhome Telecommunication Tech ( CH) and Accelink Technologies ( CH). Macro: China s rating downgrade just a delayed move China s rating downgrade just a delayed move S&P lowered China's credit rating by one notch from AA- to A+ last week, the country s first downgrade since S&P said the main reason for the downgrade was that China s prolonged period of strong credit growth had increased economic and financial risks. However, the downgrade is just a delayed move, in our view. First, the other two main ratings agencies already downgraded China for the same reasons. Fitch and Moody s lowered their ratings for China in 2013 and May 2017, respectively. S&P s downgrade therefore just makes the three ratings agencies gradings consistent. Second, China s government has tried hard to reduce credit growth in the past few years. As the government has said, controlling financial risks is its most important policy target for Many indicators show that financial risks have eased. For example, M2 growth dropped to 8.9% in Aug 2017, the lowest rate of growth since the data was recorded in We therefore see the S&P s change as a delayed move, and expect it to have a limited impact on financial markets. Looking forward, we believe strong economic growth and an improvement in fiscal performance will support China s rating. We expect the rating to be stable at the current A+ level, do not expect it to be downgraded for the next few years. 12 Fed officials expect a hike in 4Q17, only 4 expect no hike At the Sept FOMC meeting, the Federal Reserve announced that it will start its balance sheet normalization program in Oct. The pace of reduction in assets will gradually increase, starting with just US$10bn a month, and reaching US$50bn a month after one year. If the plan lasts for 3-4 years, the balance sheet will decrease from US$4.5trn to US$2.4-3trn, a normal level according to New York Fed s William Dudley. The latest interest rate projection was also updated, with its forecast for the next two years maintained. The median of FOMC members rate forecasts for 2017 remains unchanged at 1.375%, equivalent to one more rate hike in the fourth quarter. 12 of the 16 members believe there should be one more hike, which means 75% of officials are confident that the Fed will hike once after three months. For 2018, the median rate forecast remains unchanged at 2.125%, equivalent to three rate hikes in During the press conference, Fed Chair Janet Yellen said that the decline in inflation this year was a bit of mystery, showing that officials see the low inflation factors as transitory. The central bank is therefore on course to raise interest rates going forward. Page 2

3 We expect a Dec hike but see three main uncertainties Looking ahead, we expect the balance sheet normalization program to run according to the Fed s plan. In addition, we change our base, now expecting a 25bps rate hike at the Dec FOMC meeting, due to the hawkish stance during the Sept meeting. However, we see three main uncertainties. First, core inflation is at the lowest level in two years. If inflation remains subdued, the Fed will not be able to justify a rate hike in Dec. Second, we see the strong market sentiment as a key factor supporting a Dec hike. If there is a deeper correction in the stock markets in the next three months, the Fed may not make a move in Dec. Third, US political risks may resurface in Dec. We believe Congress will enter negotiations in Dec, and that the risk of a government shutdown and debt default will resurface. This is sure to have a significant impact on the Fed s rate hike decision. (Alex Fan, CFA, Head of Research, SFC CE No. ADJ672, alexfan@gfgroup.com.hk ) (Frankie Wan, Research Analyst, SFC CE No. AVK969, frankiewan@gfgroup.com.hk ) China Property: Take profit on most China property stocks given several negative catalysts What s new? Logan Property s (3380 HK, NR) shares dropped significantly on Friday following rumors of a share placement, which the company denied. Driven by the news, shares across the sector decline between 2-5%. We recommend taking profit on most China property stocks given several negative share price catalysts. Disappointing property sales in Sept; market may enter a new down-cycle by end-2017 According to Soufun data on 27 key cities in China, primary residential property GFA sold dropped 3% WoW and 12% YoY in the second week of Sept, affirming our previous bearish stance on primary property market performance during the month. We do not expect a Golden September for China s property market. We expect primary GFA sold to drop 10% YoY to 140 sqm in Sept due to restrictions on residential mortgages in first and second-tier cities. On the back of the ongoing tightening policies, we think China s property market may enter a new down-cycle by the end of Potential share placements may dilute future EPS Most small/mid-cap China property stocks have reached their 52-week highs, trading at over 1.0x 2017E P/B. With many private developers hoping to list before the end of the year, we could see a dilution in future EPS and lower expectations for earnings. Rising mortgage rates and tightening housing loans Chinese banks have increased mortgage rates for first-home buyers in most first and second-tier cities in the past several months. Given tightening housing loans and rising mortgage interest rates, we believe primary property sales area will drop 10% YoY in 4Q17, which would be below market expectation. Take profit on most China property stocks Our future stock recommendation will be based on the following two scenarios: Scenario 1: China s NBS will release primary property sales figures for Sept in mid-oct. If sales rise YoY or drop 0-10% YoY, it will surpass or be in line with market expectation. In this scenario, we would continue to recommend selective buying of regional property names with relatively cheap valuations and likely positive earnings surprises in 2018, such as Gemdale P&I (535 HK, Buy) and Yuexiu Property (123 HK, Buy). Scenario 2: A drop in primary property sales of more than 20% YoY would be much bigger than market expectation, implying the start of our forecasted down-cycle. (Dennis Yao, Research Analyst, SFC CE No. ALK994, dennisyao@gfgroup.com.hk ) CRRC (1766 HK, Accumulate): Appointment of new President slightly positive for both CRRC and CRRC TE What s new? CRRC announced that Sun Yongcai was appointed as President of the company on Sept 22, replacing Xi Guohua who resigned back in July. Mr Sun served as Vice President from June 2015 until May this year and Executive Director since then. He was also Vice President of China CNR (6199 HK, NR) from Dec 2010 to May Slightly positive for CRRC and CRRC TE We see the appointment as slightly positive for CRRC and CRRC TE (3898 HK, Accumulate) for three reasons: 1) the appointment should ease investor concern regarding the position s vacancy. 2) There is overlap in the businesses of some of CRRC s Page 3

4 subsidiaries, such as in freight wagons and the rapid transit segment, but following Mr Sun s appointment, the company plans to form a team to discuss specific plans to solve the issue of intragroup competition. 3) CRRC TE did not previously provide train-borne electric systems to CNR, and CNR merged with CSR to form CRRC. CRRC TE only has a 50% market share for China Standard EMU related orders. An acceleration in consolidation could help CRRC TE to solve intragroup competition. Maintain Accumulate CRRC and CRRC TE are currently trading as 13.5x 2017E P/E and 14.5x 2017E P/E respectively. We maintain our Accumulate ratings for both companies, and will provide further updates after our site visit on Sept 27, (Dominic Chan, Research Analyst, SFC CE No. APP609, dominicchan@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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