Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 16E 17E 16E 17E HSI 1.2 5.6 9.1-11.4 9.0 12.0 11.0 HSCEI 1.8 8.0 11.1-14.7 8.2 8.5 7.8 MXCN 1.1 7.1 11.3-15.5 12.9 12.6 11.1 SHSZ300-0.4 3.1 3.4 0.8 13.3 13.0 11.5 SHCOMP -0.2 3.5 3.5 12.0 12.5 13.6 12.1 SZCOMP -0.9 5.2-1.1 47.6 50.1 23.1 15.4 INDU 0.5 3.7 4.3 0.4 10.4 17.2 15.6 SPX 0.5 3.3 4.9 9.2 11.9 18.1 16.2 CCMP 0.6 4.4 8.1 42.4 16.8 22.0 18.9 UKX 0.5-0.3 2.2 123.5 7.6 14.8 13.8 NKY -0.2 1.6 1.5 10.7 8.6 18.6 17.2 Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT 206.6 1.87 26.7 1.83 1398 ICBC 5.1 2.82 26.5 2.03 941 CHINA MOBILE 87.5-0.46 56.5-0.55 857 PETROCHINA 6.1-0.65 78.7-0.63 939 CCB 6.3 5.03 16.2 4.79 5 HSBC 67.7 1.04 44.1 1.33 3988 BANK OF CHINA 4.0 3.93 12.8 3.73 2628 CHINA LIFE 24.5 0.20 - - 386 SINOPEC 6.1-0.49 78.8-0.86 2318 PING AN 42.4 0.59 81.2 2.01 Source: Bloomberg GF events Date Event Location 28 Feb 2017 China healthcare sector outlook with industry expert Shenzhen 23 Mar Q Tech post-result NDR Hong Kong Source: GF Securities (Hong Kong) A-Share Market Macro: Jan CPI/PPI review; 2017 nominal GDP growth likely to reach new high in recent years Contrary to popular belief, this year s earlier CNY actually had little impact on the strong CPI figure in Jan (+2.5% YoY), as food CPI came in at just 2.7% YoY given limited price growth in meat and vegetables amid the warm weather during the holiday. The increase in non-food CPI was partly driven by housing price growth and fuel price growth, neither of which was specifically associated with the CNY. We calculate that the CNY might be responsible for 0.2pp of the 2.5% consumer price growth recorded in Jan. OGSE: OPEC member output cut under way; global oil supply-demand likely to be in equilibrium in 2017 The three largest oil companies in China are estimated to have made capex of Rmb240bn during 2016, which was equivalent to just 57% of the peak level in 2014. However, conditions are now in place for the three oil companies capex to rebound as oil prices bottom out and as these companies strive to fulfil their medium-term output growth targets. We are quite optimistic about the duration and magnitude of continued improvements in the OGSE sector in 2017, in view of encouraging progress in output cuts by OPEC members and the fact that oil supply and demand are increasingly moving towards equilibrium. Online Lottery: Policy-driven investment opportunities might emerge in 2Q17 An inspection team will look into how effectively online lottery sales is being regulated in mid-feb, with the inspection results to be submitted to the MoF by the end of March. We believe that after this upcoming inspection, the regulators will take more proactive measures to boost healthy industry development. In addition, phone-based lottery sales are also likely to see new growth opportunities when a trial for smartphone-based lottery games in Jiangsu province expires at the end of April this year. We highlight potential investment opportunities driven by policy changes in 2Q17. Hong Kong Market Leasing: Jan financing data positive for the leasing sector Jan new Rmb loans came in lower than expectations on a substantial contraction in bill financing and loans to non-banking financial institutions. Excluding this, new loans would have reached a record high. The bearish bond market is one reason for Jan s strong financing data as companies are turning to other methods of financing as a result. With the rise in corporate financing needs and the squeeze in bond financing, the current corporate financing environment indicates an improving NIS for leasing companies. Possible further strengthened supervision of bank financing will also support the sector. Alex Fan, CFA, Head of Research, SFC CE No. ADJ672 alexfan@gfgroup.com.hk +852 3719 1047 Gao Yedong, Editor, SFC CE No. BAI002 yedonggao@gfgroup.com.hk +852 3719 1026
Macro: Jan CPI/PPI review; 2017 nominal GDP growth likely to reach new high in recent years Limited impact from CNY on Jan CPI Contrary to popular belief, this year s earlier CNY actually had little impact on the strong CPI figure in Jan (+2.5% YoY), as food CPI came in at just 2.7% YoY given limited price growth in meat and vegetables amid the warm weather during the holiday. The increase in non-food CPI was partly driven by housing price growth (+2.3% YoY, YoY growth accelerating for fifth consecutive month) and fuel price growth (as a result of fuel price adjustments in late Dec and early Jan), neither of which was specifically associated with the CNY. We calculate that the CNY might be responsible for 0.2pp of the 2.5% consumer price growth recorded in Jan. Meanwhile, food prices likely declined significantly after CNY as it is more difficult to store meat and vegetables in the warm weather. We expect the CPI reading to drop to 1.5-1.8% in Feb, before it rebounds from March onwards and moves within the 2.0-2.6% range during March-June. PPI likely to peak in Feb Oil price growth was one of the main reasons behind the strong PPI figure in Jan (+6.9% YoY). However, oil price growth might weaken noticeably after March as the low base effect fades. It is also worth noting that the oil price strength is spreading to the chemical and other downstream industries. The YoY reading of the CRB index, which we have used as a leading indicator of the PPI, eased from 14.1% in Jan to 12.7% in the first half of Feb. Assuming that the YoY CRB index reading peaked in Jan, the PPI might follow and peak in Feb, breaking 7% in Feb and then start to come down. 2017 nominal GDP growth to reach new high in recent years Assuming full-year CPI of ~2.3% and PPI of ~4.5%, the GDP deflator and nominal GDP growth in 2017 might represent new high levels in recent years, with nominal GDP growth reaching as high as 10-12%, compared with 8.2-8.5% in 2014, 7-7.5% in 2015 and 7-8% in 2016. Cautious on when domestic interest rates might peak Based on past experience, high nominal GDP growth will likely mean relatively high corporate earnings and interest rates. We believe corporate earnings growth might come in higher in early 2017 and then decline through the year (following the same trend as nominal GDP growth), while the support from internally-originated factors for interest rates is also likely to peak in 1Q17 with relatively high nominal GDP growth throughout the year to limit the downside to interest rates. Externally, domestic interest rates will also be driven by the interest spread between China and the US. We are cautious on when interest rates in China might peak when considering the China-US interest spread. OGSE: OPEC member output cut under way; global oil supply-demand likely to be in equilibrium in 2017 Oil price moving within a smaller range The Brent crude price fluctuated between US$53.2-55.9/barrel during Jan, compared with a range of US$51.6-55.0/barrel in Dec, making it the month with the least volatile price movements since May 2014. Satisfactory execution of output cut According to the EIA, the ten OPEC member countries that have entered the production cut agreement collectively reduced output by 900,000 barrels/day in Jan compared with output levels in Oct 2016, fulfilling 75% of their output reduction target. Meanwhile, in its latest short-term energy outlook the EIA also estimates that global oil supply and demand will be in a dynamic equilibrium during 2017, which would be the first time for an equilibrium to be seen since 2014. Drill activity recovering As of the end of Jan, the number of active oil drills across the globe increased by 146 units MoM to 1,918 units, marking the biggest monthly increase since Aug 2014. The number of active drills in the US has risen since May 2016 and reached 583 units in early Feb, but was equivalent to just 40% of the high level seen in 2H14. US oil inventory rebounding Oil inventory in the US has rebounded to the same level as the recent peak, increasing by 25m barrels from Jan 6 to 1,204m barrels on Feb 3, as drill activity continues to recover and as US oil companies increased oil imports amid concerns about potential tariff hikes. To some extent, high inventory helps to explain why oil prices have been range-bound within US$50-55/barrel. Chinese oil companies set to increase capex The three largest oil companies in China are estimated to have made capex of Rmb240bn during 2016, which was equivalent to just 57% of the peak level in 2014. As a result of reduced capex, domestic oil output decreased 5.5% YoY in 2016. Page 2
However, conditions are now in place for the three oil companies capex to rebound as oil prices bottom out and as these companies strive to fulfil their medium-term output growth targets. The median of China Oilfield Services (601808 CH) 2017 planned capex range of Rmb60-70bn represents 29.2% YoY growth from the estimated figure for 2016. Operating data improving at global OGSE companies 32 oilfield service companies worldwide reported combined revenue of US$28.3bn in 3Q16, with the revenue decline narrowing to -29.1% YoY, though the absolute amount of revenue represented just 45.6% of the 3Q14 figure. Positive on duration and magnitude of sector improvements We are quite optimistic about the duration and magnitude of continued improvements in the OGSE sector in 2017, in view of encouraging progress in output cuts by OPEC members and the fact that oil supply and demand are increasingly moving towards equilibrium. We like companies whose fundamentals are strengthening and which are actively developing overseas markets, such as Jereh Oilfield Services (002353 CH), China Oil HBP Science & Technology (002554 CH), Offshore Oil Engineering (600583 CH), Tong Oil Tools (300164 CH) and Douson Drilling & Production Equipment (603800 CH). Online Lottery: Policy-driven investment opportunities might emerge in 2Q17 Inspection team to look into online lottery irregularities The Ministry of Finance, Ministry of Civil Affairs and the General Administration of Sport have jointly issued a notice recently, stating that unauthorized online lottery sales remain in practice in some areas although crackdowns launched in Feb 2016 have achieved certain effects. An inspection team consisting of officials from the three government bodies will look into how effectively online lottery sales is being regulated starting from mid-feb, with the inspection results to be submitted to the MoF by the end of March. Watch investment opportunities in 2Q17 This is the fourth major industry regulatory document issued since online lottery sales were suspended in March 2015. We believe that after this upcoming inspection, the regulators will take more proactive measures to boost healthy industry development. In addition, phone-based lottery sales are also likely to see new growth opportunities when a trial for smartphone-based lottery games in Jiangsu province expires at the end of April this year. We highlight potential investment opportunities driven by policy changes in 2Q17. Our stock picks We reiterate that SOEs and internet companies with high user traffic which have legitimate operations demonstrate significant advantages in the online lottery sales business. With regard to phone-based lottery sales, companies with long-term relationships with provincial lottery administration centers and a large reserve of lottery games will benefit most. We suggest watching Peoplecn (603000 CH), Hongbo (002229 CH), Telling Telecom Holding (000829 CH) and 500.com (WBAI US). Leasing: Jan financing data positive for the leasing sector Strong Jan financing data Jan new Rmb loans came in at Rmb2.03trn, lower than market expectation of Rmb2.3-2.4trn, mainly due to a substantial contraction in bill financing and loans to non-banking financial institutions following the PBoC s guidance. Excluding the Rmb452bn decline in outstanding bills and the Rmb280bn decline in outstanding loans to non-banking financial institutions, actual new loans would have reached a record high of Rmb2.7trn. Total financing also increased to a new high of Rmb3.74trn during the month. Higher-than-expected total financing was supported by new off-balance-sheet (OBS) financing, which also reached a record high of Rmb1.24trn. Bearish bond market forces companies to choose other financing channels As an inflection point potentially emerges in global liquidity supply, interest rates in China s bond market have been on the rise since Nov and a large number of corporate bonds issuances have been canceled as a result in the last two months. Jan net corporate bond financing decreased to Rmb-53.9bn, and has been in negative territory for two consecutive months. The bearish bond market is one reason for Jan s strong financing data as companies are turning to other methods of financing as a result. Strong corporate financing needs Corporate financing demand has increased substantially along with the continued recovery in PPI. Jan new corporate loans came in at Rmb1.56trn, of which Rmb1.52trn was for MLT loans. Excluding the negative impact of bill financing, the figure would Page 3
have been even higher. As bill financing has been shifted off balance sheets as a result of the PBoC s guidance, new undiscounted bank acceptance bills came in at Rmb613.1bn, accounting for nearly 50% of Jan OBS financing. It is worth noting that the increase in new undiscounted bank acceptance bills in OBS financing is greater than the decline in bill financing, also an indication of a significant recovery in corporate financing demand. Investment With the rise in corporate financing needs and the squeeze in bond financing, the current corporate financing environment indicates an improving NIS for leasing companies. We expect corporate financing demand to continue to recover in the first half. In addition, possible further strengthened supervision of bank financing will also support the leasing sector. We are positive on leasing companies in the first half and maintain our Accumulate ratings on Far East Horizon (3360 HK) and China Aircraft Leasing (1848 HK), and our Buy rating on BOC Aviation (2588 HK). (Wang Wen, Research Analyst, SFC CE No. BGL298, wangwen@gfgroup.com.hk +86 755 8826 1286) Page 4
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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