Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI -0.1 6.4-5.7 11.4 3.6 9.8 9.5 HSCEI -0.3 8.9-7.9 9.2-1.2 6.5 6.5 MXCN -0.1 8.2-5.6 13.8 4.1 8.9 8.6 SHSZ300-0.7 4.4-13.5 12.1-11.0 - SHCOMP -0.6 3.3-15.3 12.2-11.4 - SZCOMP -0.3 0.2-18.5 15.8-20.3 - INDU -0.2 7.0 0.9 11.7 10.1 14.4 13.1 SPX -0.1 6.7 0.3 13.5 12.0 15.3 13.6 CCMP 0.3 7.1-3.7 17.8 16.7 17.3 14.9 UKX 0.1 3.9-0.8 17.7 12.9 14.1 12.5 NKY 0.2 6.4-10.2 14.8 8.2 15.4 14.2 Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 1398 ICBC 4.3-0.23 29.1 2.36 941 CHINA MOBILE 83.8-0.71 54.4-0.38 857 PETROCHINA 5.3 0.19 68.5-1.01 700 TENCENT 159.5 0.89 20.6 1.03 939 CCB 4.9-0.60 12.7-0.90 3988 BANK OF CHINA 3.2 0.00 10.2-1.07 5 HSBC 50.0-0.60 32.0-1.69 2628 CHINA LIFE 19.5 1.14 7.8 1.83 2318 PING AN 37.4-0.13 - - 386 SINOPEC 4.8-0.21 62.2-0.94 Source: Bloomberg GF events Date Event Location 23 Mar Nexteer post-result NDR - 24 Mar Tongda post-result NDR Hong Kong 24 Mar Cogobuy post-result NDR Hong Kong 24 Mar China VAST NDR conf call - 29 Mar Q Tech post-result NDR Hong Kong 30 Mar Minth Group post-result NDR - 31 Mar Ourgame post-result NDR Shenzhen 5 Apr Digital China post-result NDR Hong Kong 7 Apr Harmony Auto post-result NDR Hong Kong 11 Apr Goodbaby post-result NDR Shanghai 13 Apr BYD post-result NDR Shenzhen Source: GF Securities (HK) A-Share Market Power Equipment: Energy storage industry to take off with technological breakthroughs for secondary EV battery uses The government has attached an unprecedented level of importance to energy storage. Expectations for the secondary uses of old electric car batteries are rising as the new energy vehicle industry continues to grow. Relevant technologies have also been in place to address the bottlenecks for such secondary battery uses. This should significantly lower the cost of electrochemical power storage stations and promote their application. We estimate that by 2020 the commercial value of businesses related to secondary EV battery uses will be around Rmb400bn. Hong Kong Market ChinaSoft (354 HK, Buy): High growth visibility and safety margin; reiterate Buy We raise our earnings forecasts for FY16/17 by 5%/14%, now expecting 32% and 53% YoY growth in net profit and core net profit in FY16 on the back of its high growth visibility, supported by strategic partnerships with top clients and consolidation of the acquired joint venture this year. The stock is currently trading at 14x 2016E P/E, undemanding given its expected EPS CAGR of 33% during FY15-18E. We reiterate our Buy rating and raise our target price to HK$4.07 (previously HK$3.89). Kingsoft (3888 HK, Buy): FY15 results in line; continued strong topline and OPM expansion in 4Q15 Kingsoft s 2015 net profit declined 52% YoY, beating street consensus; excluding share-based compensation, adjusted net profit declined by 37% YoY, in line with consensus. Revenue grew by 69% YoY. The company sustained its strong growth momentum in revenue in 4Q15, rising 66% YoY or 18% QoQ. In addition, the sequential improvement in operating margin indicates that the company is seeing profitability recover. We expect continued margin expansion in FY16. We maintain our Buy rating. Cogobuy (400 HK, Accumulate): FY15 results in line with consensus; maintain Buy FY15 net profit rose 45% YoY, coming in slightly higher than consensus. Total GMV grew 66% YoY, driven by the increased number of both blue-chip and SME clients, as well as strengthening monetization of the IngDan platform. The company also saw margin expansion, mainly due to the increased revenue contribution from its high-margin third party marketplace and supply chain finance businesses. We expect the company to sustain its strong growth momentum in FY16, and maintain our positive view on the stock. 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
Power Equipment: Energy storage industry to take off with technological breakthroughs for secondary EV battery uses Greater-than-before attention to energy storage The government has attached an unprecedented level of importance to energy storage, by identifying energy storage and distributed energy supply as strategic emerging industries and by including energy storage and distributed energy supply among the 100 key projects for the 13th FYP. In particular, the development of modern energy storage and transmission networks has been proposed in the 13th FYP. With the issuance of relevant detailed rules, the development of micro-grids (which involve the use of energy storage technology) is likely to be supported by subsidies and favorable policies. In addition, amid ongoing power sector reform, power storage will be incorporated as part of a more market-driven power system. Improvements expected in policies for secondary battery uses Unlike some other countries, China currently does not offer any subsidies for the development of energy storage. Meanwhile, expectations for the secondary uses of old electric car batteries are rising as the new energy vehicle industry continues to grow. Relevant technologies have also been in place to address the bottlenecks for such secondary battery uses. This should significantly lower the cost of electrochemical power storage stations and promote their application. Stock picks We estimate that by 2020 the commercial value of businesses related to secondary EV battery uses will be around Rmb400bn. We suggest watching the following companies. Leading energy storage players Narada Power Source (300068 CH) and Sacred Sun Power Sources (002580 CH); Leaders in carrying out small pilot projects Clou Electronics (002121 CH), Sungrow Power Supply (300274 CH) and NARI Technology Development (600406 CH); Company which is already engaged in EV battery maintenance projects Center Power Tech (002733 CH); Leaders in the field of micro-grid control Sifang Automation (601126 CH) and NARI Technology Development (600406 CH); Leading energy storage and inverter supplier Sungrow Power Supply (300274 CH); Company which has established presence along the entire new energy vehicle industry chain and has a large amount of energy storage station projects BYD (002594 CH). ChinaSoft (354 HK, Buy): High growth visibility and safety margin; reiterate Buy Continued solid FY15 results ChinaSoft posted strong net profit growth of 40% YoY to Rmb280m in FY15, in line with street consensus of Rmb277m. Revenue came in at Rmb5,129m, up 16% YoY. Gross margin dropped 0.8pp to 29.7%, mainly due to the rising contribution from its Huawei business (which has a lower gross margin). Excluding one-off items, core EBIT and net profit rose 26% and 32% YoY to Rmb467m and Rmb251m respectively. The company has sustained solid revenue growth for 13 years with a CAGR of 33% during FY03-15 and for four years in core net profit with a CAGR of 22% during FY11-15. High growth visibility supported by strategic partnership with top clients The company s top five clients, including Huawei, Microsoft and HSBC, accounted for 53% of total revenue in FY15, up from 46% in FY14. Both Huawei and Microsoft are strategic shareholders with stakes of around 4%. The company guided for at least 20% revenue growth in FY16, underpinned by the strong momentum from its strengthening cooperation with top clients, especially Huawei and HSBC. Revenue from Huawei grew 46% YoY to Rmb1,950m in FY15, accounting for 37% of total revenue, up from 30% in FY14. Going forward, the company sees encouraging growth opportunities from Huawei in its higher-end outsourcing services and enterprise solutions businesses, both in the domestic and overseas markets. ChinaSoft will begin to expand its business with Huawei, providing both outsourcing services and project-based services to global clients. We see room for growth over the long term for ChinaSoft as the size of the market brought by Huawei to third parties is estimated to reach US$3bn in the next five years, and ChinaSoft is Huawei s key overseas partner. Ongoing improvement in operating cash flow and margin Operating cash flow came in at Rmb260m in FY15, a significant improvement from Rmb75m in FY14 and a net outflow of Rmb61m in FY13, thanks to enhanced management of accounts receivable collection. Core EBIT margin continued to climb to 9.11% in FY15, from 8.13%/8.37% in FY13/14. Opex-to-revenue ratio declined Page 2
from 23.1%/21.4% in FY13/14 to 19.5% in FY15, thanks to its stable partnership with large customers. We expect operating cash flow and core EBIT margin to continue to improve given its emphasis on management efficiency and enhancing industry competition. Re-rating potential from JointForce The company has set substantial targets for the JointForce platform including 100,000 registered engineers (80,000 as of end-fy15), Rmb600m bidding issuance (Rmb100m in FY15), and Rmb300m submitted bidding. We believe JF s valuation will rise significantly as these targets are met. High growth visibility and safety margin; reiterate Buy We raise our earnings forecasts for FY16/17 by 5%/14% to Rmb370m and Rmb505m, now expecting 32% and 53% YoY growth in net profit and core net profit in FY16 on the back of its high growth visibility, supported by strategic partnerships with top clients and consolidation of the acquired joint venture this year (booked in Feb). The stock is currently trading at 14x 2016E P/E, undemanding given its expected EPS CAGR of 33% during FY15-18E. We reiterate our Buy rating and raise our target price to HK$4.07 (previous HK$3.89), based on an historical average 1-year forward P/E of 20x. Risks Key risks include rising labor costs, pressure on operating cash and lower-than-expected performance for the JointForce platform. Kingsoft (3888 HK, Buy): FY15 results in line; continued strong topline and OPM expansion in 4Q15 FY15 results in line Kingsoft s 2015 net profit declined 52% YoY to Rmb369m, beating street consensus of Rmb318m. Excluding share-based compensation costs, adjusted net profit declined by 37% YoY to Rmb552m, in line with consensus of Rmb569m. Revenue grew by 69% YoY to Rmb5,676m. Adjusted operating profit grew 26% YoY to Rmb898m while adj. operating margin was down 5.5pp to 15.8%. Continued strong topline growth across all major business lines in 4Q15 The company sustained its strong growth momentum in revenue, which rose 66% YoY or 18% QoQ in 4Q15 to Rmb1,778m. All major business lines, including Cheetah Mobile (62%), online games (23%), and office software & others (15%) all posted solid sequential growth of 25%, 13% and 19% QoQ respectively during the quarter. Operating margin expansion Adjusted operating margin before share-based compensation was 20% in 4Q15, up 7.2pp QoQ but down 3.2pp YoY. The sequential improvement indicates that the company is seeing profitability recover. We expect continued margin expansion in FY16. Maintain Buy We remain positive on Kingsoft given its continued robust revenue growth in 4Q15, and the ongoing OPM expansion during 2016. The stock is currently trading at 20x 2016E P/E. More comment to follow today s analyst briefing. Cogobuy (400 HK, Accumulate): FY15 results in line with consensus; maintain Buy FY15 results in line Cogobuy posted robust 45% YoY growth in FY15 non-gaap net profit to Rmb386m, slightly higher than street consensus of Rmb375m. Total GMV grew 66% YoY to Rmb13.9bn, supported by respective 37%, 139% and 456% YoY growth in its direct sales (67.5% of total GMV), marketplace (21.7%) and supply chain finance (10.8%) segments. The strong GMV growth was mainly driven by the increased number of both blue-chip and SME clients, as well as strengthening monetization of the IngDan platform. Blue-chip and SME businesses contributed 41% and 59% of direct sales GMV, and saw stable 10% and strong 65% YoY growth respectively in FY15. Margin expansion Non-GAAP net margin rose 0.2pp to 4.1% in FY15, on top of the 0.3pp improvement in gross margin and 0.2pp improvement in non-gaap operating margin, mainly due to the increased revenue contribution from its high-margin third party marketplace (100% gross margin) and supply chain finance businesses. Page 3
Maintain positive view We expect the company to sustain its strong growth momentum in FY16. Trading at HK$10.56, the stock is valued at 22x 2016E P/E and 0.5x PEG. We maintain our positive view on this stock. More comment to follow after today s analyst briefing. 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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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. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk Page 5