Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 15E 16E 15E 16E HSI 0.2-1.0-8.0 10.5 10.5 9.8 8.9 HSCEI -0.3-2.9-12.5 9.3 7.6 6.4 5.9 MXCN -0.3-3.2-9.3 13.8 10.3 8.7 7.9 SHSZ300-2.1-3.8-17.8 12.4 12.3 11.0 9.8 SHCOMP -2.8-5.1-20.0 13.7 15.1 11.3 9.8 SZCOMP -3.6-5.7-21.9 23.2 22.6 20.8 17.0 INDU -0.2 0.7 1.6 12.6 10.6 14.7 13.3 SPX 0.1 0.5 0.7 13.8 12.0 15.5 13.8 CCMP 0.3-2.1-5.1 17.7 15.8 17.4 15.0 UKX -0.2-1.4-2.0 17.5 13.2 13.9 12.3 NKY 0.4 2.9-14.5 8.9 9.6 14.2 13.0 Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 941 CHINA MOBILE 85.6-0.29 55.2-0.85 1398 ICBC 4.0-0.50 - - 857 PETROCHINA 5.4-0.19 67.4-3.47 700 TENCENT 155.1 0.78 19.8-0.60 939 CCB 4.7-0.42 12.1-1.23 3988 BANK OF CHINA 3.0 0.00 9.6-1.73 5 HSBC 48.4 0.10 31.2-1.01 386 SINOPEC 5.2 0.39 66.0-1.83 2318 PING AN 34.5-0.29 - - 2628 CHINA LIFE 16.9-0.24 7.2-2.51 Source: Bloomberg GF events Date Event Location 1 Jun CSPC Pharm post-result meeting Hong Kong Source: GF Securities (HK) A-Share Market Non-Ferrous: 1Q16 earnings review; sector earnings improving Significant drop-offs in 1Q earnings were seen during 2011-2014, but the numbers have improved substantially in recent years. The prices of rare earths and tungsten have continued to rise recently on the back of state stock piling. We believe that the coordinated implementation of reserve building and crackdowns on illegal mining will lead to a contraction in supply, further supporting rare earth and tungsten prices. While global lithium carbonate supply is likely to pick up somewhat this year, we believe a supply shortage will continue to be seen. Construction: 2015/1Q16 earnings review; cash flows improving, orders rebound to be reflected in 1H16 earnings Sector revenue growth weakened further in 2015, but net profit margin edged up slightly on rises in gross profit margin (likely driven by lower commodity prices) and investment gains. As overall investment growth started to rebound in Oct 2015, we believe the recovery in sector orders will likely be reflected in company earnings starting from 1H16. The upcoming peak of PPP project construction is likely to push sector valuations higher given that PPP is a new destination of local government investment and that most listed construction firms are beneficiaries of PPP development. Hong Kong Market IMAX China (1970 HK, Accumulate): Leader in non-conventional theatre technology and beneficiary of strong box office growth in China; initiate at Accumulate with TP of HK$49.33 We are positive on the company s long-term growth outlook, mainly given: 1) its leadership in the non-conventional theatre technology field in China, 2) continued benefits of increasing box office in China, and 3) growth in the number of both theatres and films. We estimate that the company s box office, revenue and adjusted net profit will grow at CAGRs of 36%, 24% and 31% during 2016-2018. We initiate coverage of the company with an Accumulate rating and target price of HK$49.33 based on 36x 2016E P/E. Kingsoft (3888 HK, Buy): New funding values cloud business 5% higher at US$1.11bn On May 6, Kingsoft Cloud issued preferred shares to its parent company Kingsoft (further stake of 2.61%) and CM Investor (1.8% stake) for a combined US$48.9m, taking the business s valuation in the primary market to US$1.11bn, up 5% from its Series-C funding in Feb. The further increase in Kingsoft Cloud s valuation will give support to the street s valuation for Kingsoft. The funding values the cloud business 20% higher than in our SOTP model. Our SOTP-based TP of HK$24.90 implies 45% upside; reiterate Buy. 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
Non-Ferrous: 1Q16 earnings review; sector earnings improving Recent 1Q sector earnings improving from 2011-2014 1Q16 sector net profit came in at Rmb2.2bn (1Q15: Rmb1.4bn), or Rmb1.7bn if the substantial investment gains of Ningbo Yunsheng (600366 CH) is excluded. Significant drop-offs in 1Q earnings were seen during 2011-2014, but the numbers have improved substantially in recent years. Subsector earnings performance Among the various subsectors, lithium companies posted the strongest earnings performance in 1Q16 on the back of exponential growth in new energy vehicle demand, with YoY earnings growth of 13.5x. Aluminum companies achieved satisfactory results in capacity reduction, with earnings growing 19.2% YoY, while gold companies saw earnings pick up 12% on rising gold prices. In contrast, copper company earnings plunged 79.5% YoY, while rare earths and tungsten companies both reported losses. In addition, magnetic material manufacturers suffered a 68% earnings decline, with the subsector greatly in need of supply-side reform. Other sector indicators The total value of sector inventory stood at Rmb165.6bn at end-1q16, up Rmb5.5bn YoY, but down Rmb4.7bn when copper companies are excluded. The sector debt-toasset ratio edged down 0.7pp YoY to 57.7%, continuing a decline that started in 2014. Sector operating cash flow has continued to improve since 2013, rising by Rmb1.2bn YoY to Rmb1.4bn in 1Q16, whereas sector FAI has continued to decrease since 2013, shrinking by Rmb1.8bn YoY to Rmb8.8bn in 1Q16. Rare earths, tungsten and lithium worth watching The prices of rare earths and tungsten have continued to rise recently on the back of state stock piling. We believe that the coordinated implementation of reserve building and crackdowns on illegal mining will lead to a contraction in supply, further supporting rare earth and tungsten prices. While global lithium carbonate supply is likely to pick up somewhat this year, we believe a supply shortage will continue to be seen. Construction: 2015/1Q16 earnings review; cash flows improving, orders rebound to be reflected in 1H16 earnings NPM up on higher GPM and investment gains Sector revenue growth weakened further in 2015, but net profit margin edged up slightly on rises in gross profit margin (likely driven by lower commodity prices) and investment gains. In addition, sector cash flows improved significantly, with most companies attaching greater emphasis on improving their cash flows. As overall investment growth started to rebound in Oct 2015, we believe the recovery in sector orders will likely be reflected in company earnings starting from 1H16. 27 of the 33 A-share construction companies that have released an estimate of 1H16 earnings growth expect an improvement from 1Q16. PPP to drive sector valuations Companies from the decoration, landscaping and structural steel industries have quickened the pace of seeking business transformation and new drivers of earnings growth in view of the continued deterioration of traditional businesses. Meanwhile, the architectural design industry is likely to maintain relatively high earnings growth through M&A-driven expansion. Furthermore, the upcoming peak of PPP project construction is likely to push sector valuations higher given that PPP is a new destination of local government investment and that most listed construction firms are beneficiaries of PPP development. Watch list We remain positive on the construction sector, and suggest watching Jangho Group (601886 CH), Shanghai Construction (600170 CH), Ningbo Construction (601789 CH), Reclaim Construction (002586 CH), Long Yuan Construction (600491 CH) and Tunnel Engineering (600820 CH). IMAX China (1970 HK, Accumulate): Leader in non-conventional theatre technology and beneficiary of strong box office growth in China; initiate at Accumulate with TP of HK$49.33 Initiate at Accumulate We are positive on the company s long-term growth outlook, mainly given: 1) its leadership in the non-conventional theatre technology field in China, 2) continued benefits of increasing box office in China, and 3) growth in the number of both theatres and films. We estimate that the company s box office, revenue and adjusted net profit will grow at CAGRs of 36%, 24% and 31% during 2016-2018. We initiate coverage of the company with an Accumulate rating and target price of HK$49.33 based on 36x 2016E P/E. Page 2
Leader in non-conventional theatre technology in China IMAX China is the exclusive licensee of the IMAX brand and the only business platform for IMAX-format films in Greater China. It is by far the leader in non-conventional theatre technology with an over 80% share of the nonconventional theatre market in China. The competitiveness of the IMAX brand and its technology have enabled the company to profit from both the films and theatre businesses along the film industry chain. IMAX box office in China grew at a CAGR of 52% during 2013-2015, higher than the 36% figure for China s overall box office growth during the same period. Shifting towards more sustainable revenue sharing model to tap China s box office growth The focus of the company s theatre business is shifting from the system sales model to the more sustainable revenue sharing model. The proportion of IMAX theatres that follow the revenue sharing arrangement increased from 42% in 2012 to 58% in 2015. Together with its films business, revenue contribution from IMAX box office sharing in China rose from 36% in 2012 to 57% in 2015. In addition, 73% of the company s 215 IMAX theatre backlog contracts (those which are contracted to be built but are yet to come online) as of end-2015 are subject to the revenue sharing arrangement. We believe this will push revenue contribution from the revenue sharing model higher going forward, so that the company can better tap the 38% IMAX box office CAGR expected to be seen in China over the next three years. Theatre network to expand further in coming years on high order volume The IMAX theatre network expanded at an accelerated pace in 2015, with 74 new contracts for the IMAX theatre system signed during the year, up from 40 in 2014. Total screen number increased by 73 to 307 in 2015, compared with increases of 45 in 2013 and 61 in 2014. As at the end of 2015, the company had 215 theatres in its backlog which were contracted but were yet to open for business, with most of them to be completed within the next 3-5 years. A solid order backlog and incoming new orders will provide momentum for the company s theatre network expansion over the next few years. We expect the number of IMAX screens to increase by 95, 75 and 65 to 402, 477 and 542 respectively in 2016/17/18. Overcoming box office growth bottleneck by increasing well-made domestic films Under the existing policies for film import quota and restricted periods, the introduction of well-made domestic films will help the company overcome the bottleneck for box office growth. Domestic films have been the main driver of box office growth in China over the past three years. In particular, the box office of domestic IMAX films surged 155% in 2015, with its share of overall IMAX box office rising from 15% in 2014 to 25%, representing substantial upside considering that domestic films account for 62% of overall box office. The number of domestic IMAX format films doubled from four in 2012 to eight films in 2015. The company intends to increase the proportion of domestic IMAX films by adding one to two extra domestic IMAX films in 2016, so as to tap the strong box office growth of domestic films. Key risks include the limited upside for IMAX screen penetration, restrictions on the number of overseas films allowed to be imported, and the expiry of share lock-up periods. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk +86 755 8826 3160) Kingsoft (3888 HK, Buy): New funding values cloud business 5% higher at US$1.11bn What s new? On May 6, Kingsoft Cloud issued preferred shares to its parent company Kingsoft (further stake of 2.61%) and CM Investor (1.8% stake) for a combined US$48.9m. Kingsoft Cloud valuation up 5% to US$1.11bn This round of funding takes the business s valuation in the primary market to US$1.11bn, up 5% from US$1.06bn in its Series-C funding on Feb 5, 2016. Valued at 9.6x P/S According to the related document, Kingsoft Cloud recorded a net loss of Rmb238m in FY15 (vs a loss of Rmb81m in FY14), and revenue of Rmb375 (up 183% YoY). We expect revenue to maintain strong growth momentum of around 100% YoY to Rmb750m this year. Net profit should remain stable, with a decline in the loss rate to 31%, from 63% in FY15. Kingsoft Cloud s valuation in this funding implies 9.6x 2016E P/S. Reiterate Buy The market typically favors a SOTP valuation for Kingsoft as it is comprised of four relatively independent business lines. The further increase in Kingsoft Cloud s valuation will give support to the street s valuation for Kingsoft. The funding values the cloud business 20% higher Page 3
than our in SOTP model. Kingsoft is currently trading at 17.6x 2016E P/E. Our SOTP-based target price of HK$24.90 implies 45% upside potential. We reiterate our Buy rating. (Ryan Zhu, Research Analyst, SFC CE No. BDK820, zhuran@gfgroup.com.hk +86 755 8826 3160) 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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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