Yum Cha 飲茶 INDICES Closing DoD% TALKING POINT - POTENTIAL RISKS OF STOCK-PLEDGED LENDING January 29, 2016 Hang Seng Index 19,195.8 0.8 HSCEI 8,028.6 0.9 Shanghai COMP 2,655.7 (2.9) Shenzhen COMP 1,629.1 (4.2) Gold 1,114.7 (0.06) BDIY 325.0 (3.6) Crude Oil, WTI(US$/BBL) 33.6 1.0 Crude Oil, BRENT(US$/BBL) 33.9 2.4 HIBOR, 3-M 0.7 (0.6) SHIBOR, 3-M 3.1 0.1 RMB/USD 6.6 (0.04) DATA RELEASES DUE THIS WEEK n.a. Source: Bloomberg Sources: WIND Info, CGIS Research Shanghai Composite has dropped 25% year-to-date and about 9% this week. Increasing number of major shareholders are facing financial pressure if they have pledged shares to borrow money from brokers. On Tuesday and Wednesday, six companies suspended trading as the share pledges of their major shareholders have reached the alert level. As such, these major shareholders are considering various options to solve the issue, e.g. providing more collaterals or margin deposits. There is no imminent risk at the moment if they can provide extra collateral. However, the potential risk is increasing if A-share market continues to fall. Based on face value of collateral, the top 3 active players in stock-pledged lending are Haitong Securities [6837.HK], CITIC Securities [6030.HK] and Guosen Securities. We would like to emphasize that high exposure does not necessarily imply high risk, as we have no information about loan-to-value ratio. RESEARCH NOTES Analysts: Wong Chi-man, CFA XINYI SOLAR [0968.HK; HK$2.49; UPGRADE TO BUY] - We upgrade Xinyi Solar (XYS) to BUY from HOLD. We believe the current valuation of 12x 2016E PER offers good entry opportunity, following a 21% share price correction YTD. We see XYS the best proxy to play the solar power sector growth story. Positive drivers will come from: (1) the potential increase in China s solar installation target for 2020E by the government; (2) XYS s fast growing solar glass capacity from currently 3,900t to 6,800t in 2017E; (3) weak oil price and more potential gas price reduction to help lower glass production cost; (4) the recent increase in renewable energy surcharge should speed up the tariff payment to solar farm operators, which help improve the cash flow of XYS in 2016E. SNIPPETS CHINA INSURANCE SECTOR - CIRC just released whole year data on premium for 2015. Total premium income reached RMB2,428.25bn, up 20.0% year-on-year (YoY), in line with market consensus and our expectation. The growth for life insurance and P&C insurance was 24.97% and 11.65% respectively. In future, we believe the high growth outlook remains intact as current penetration rate and density rate are still low in China and the awareness of insurance will increase. Besides, according to media, the new risk-oriented solvency system C- ROSS will be implemented in Q1, which will provide a sufficient protection of policyholders interests and improve insurers capital efficiency (as CIRC estimated that C-ROSS will totally unfreeze around RMB500bn and RMB50bn capital for life and P&C insurance companies which are mainly large players). We maintain our positive view on the sector. 1
January 29, 2016 Xinyi Solar [0968.HK] Growth story intact; Share price correction offers entry opportunity; Upgrade to BUY We upgrade Xinyi Solar (XYS) to BUY from HOLD. We believe the current valuation of 12x 2016E PER offers good entry opportunity, following a 21% share price correction YTD. We see XYS the best proxy to play the solar power sector growth story. Positive drivers will come from: (1) the potential increase in China s solar installation target for 2020E by the government; (2) XYS s fast growing solar glass capacity from currently 3,900t to 6,800t in 2017E; (3) weak oil price and more potential gas price reduction to help lower glass production cost; (4) the recent increase in renewable energy surcharge should speed up the tariff payment to solar farm operators, which help improve the cash flow of XYS in 2016E. Solar Power Sector BUY (Upgrade from HOLD) Close: HK$2.49 (Jan 28, 2016) Target Price: HK$3.00 (+20%) Share Price Performance Upside on solar installation target in 13 th FYP. China added 15GW of new installation in 2015. According to the consultation paper Solar power development in 13 th FYP released by NEA, the cumulative installation target as of end- 2020E will be 150GW (comprising 80GW of utility scale projects and 70GW of DG projects). This implies 20GW+ of annual new installation between 2016E and 2020E, suggesting more growth potential for solar components makers. We fine-tuned our 2015E/2016E EPS forecasts by -11%/-14%, mainly due to lower earnings from solar farm construction delay and dilution from share placement. Given that XYS already preannounced that the net profit in 2015 would be increased by 125-155% YoY (i.e. HK$1,109-1,257m), we do not expect any negative surprise in the result announcement in March. As of end-2015, the solar farm capacity was 610MW and we are modelling 1GW of new installation in 2016E. Our new TP is revised down to HK$3.00 from HK$3.26, as we rolled over the target valuation to 2016E PER, based on 14.4x PER (10% discount to historical average of 16x to reflect the potential fund raising activities due to the increasing capex on solar farm business). Key Financials (HK$ m) 2013 2014 2015E 2016E 2017E Revenue 1,968 2,410 4,605 4,950 6,019 Change (YoY) 28.3% 22.5% 91.1% 7.5% 21.6% EBIT 369 577 1,430 1,678 2,150 Change (YoY) 158.2% 56.4% 147.9% 17.3% 28.1% Core net profit 304 493 1,185 1,407 1,764 Change (YoY) 153.5% 62.3% 140.3% 18.8% 25.3% Core EPS (HK$) 0.073 0.084 0.182 0.209 0.261 Change (YoY) 113.9% 14.8% 115.6% 14.8% 25.3% ROE 18% 18% 22% 16% 17% Net debt/equity Net cash 23% 8% 47% 39% PER (core earnings) (x) 34.0 29.6 13.7 11.9 9.5 Dividend yield 1.0% 1.7% 1.8% 2.1% 2.6% PBR (x) 6.1 4.6 2.2 1.8 1.5 EV/EBITDA (x) 33.9 23.7 9.4 6.6 5.3 Sources: Company, CGIS Research estimates Market Cap Wayne Fung, CFA Analyst (852) 3698-6319 waynefung@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) 3698-6317 cmwong@chinastock.com.hk US$2,157m Shares Outstanding 6,749m Auditor PWC Free Float 33% 52W range 3M average daily T/O Major Shareholding HK$2.01-3.97 US$8m Management (32.43%) Xinyi Glass (26.36%) 2
Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Figure 1: China solar power installation additions Figure 2: China solar power cumulative installation 25,000 20,000 15,000 10,000 5,000 0 160 500 2,500 3,198 10,951 10,600 15,000 20,000 20,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 300 800 3,300 6,498 28,049 17,449 43,049 63,049 83,049 103,049 123,049 143,049 China solar installation annual addition (MW) China solar installation (cumulative) (MW) Sources: EPIA, NEA, CGIS Research estimates Sources: EPIA, NEA, CGIS Research estimates Figure 3: XYS PER band HKD 4.5 4.0 3.5 3.0 2.5 2.0 19x 17x 15x 13x 11x 1.5 1.0 0.5 0.0 Sources: Bloomberg, CGIS Research estimates 3
Earnings projection (HK$ m) 2013 2014 2015E 2016E 2017E (HK$ m) 2013 2014 2015E 2016E 2017E Income statement Cash flow statement Revenue 1,968 2,410 4,605 4,950 6,019 Operating activities Solar glass 1,968 2,379 3,246 3,496 4,095 Pretax profit 370 572 1,432 1,701 2,131 Solar power generation 0 31 474 1,041 1,771 D&A 100 94 258 738 838 Solar EPC 0 0 885 413 153 Share of associates/jce/jv 0 0 (46) (140) (162) Cost of sales (1,375) (1,649) (2,917) (2,949) (3,437) Finance costs 0 7 61 141 212 Solar glass (1,375) (1,644) (2,090) (2,261) (2,687) Interest income (2) (2) (17) (25) (31) Solar power generation 0 (4) (166) (364) (620) Change in working capital 224 117 (39) (120) (182) Solar EPC 0 0 (661) (325) (130) Income tax paid (44) (79) (198) (204) (234) Gross profit 592 761 1,688 2,001 2,582 Others 5 (1) 0 0 0 Solar glass 592 735 1,156 1,236 1,408 Operating cash flow 654 709 1,451 2,092 2,571 Solar power generation 0 27 308 676 1,151 Solar EPC 0 0 224 89 24 Investing activities Other income 63 87 103 103 85 Capex on PP&E (240) (2,322) (4,000) (6,000) (2,000) Other gain/(loss), net 0 (13) 62 0 0 Purchase of land use right 0 0 0 0 0 S&D expenses (124) (98) (170) (168) (205) Investment in associates/jce/jv 0 0 (450) (450) 0 Administrative expenses (162) (160) (253) (257) (313) Dividend received from associates/jce/jv 0 0 37 112 130 EBIT 369 577 1,430 1,678 2,150 Interest received 2 2 17 25 31 D&A 100 94 258 738 838 Others 113 (9) 0 0 0 EBITDA 468 671 1,688 2,416 2,988 Investing cash flow (125) (2,328) (4,397) (6,313) (1,839) Share of associates/jce/jv 0 0 46 140 162 Net finance income/(expenses) 2 (5) (44) (116) (181) Financing activities Pretax profit 370 572 1,432 1,701 2,131 Proceed from equity 0 778 3,259 750 0 Income tax (67) (79) (198) (204) (234) Proceed from/(repayment of) borrowings 0 1,300 1,565 3,700 1,000 After tax profit 304 493 1,234 1,497 1,896 Dividends paid 0 (200) (146) (296) (352) MI 0 0 (49) (90) (133) Finance costs 0 (6) (61) (141) (212) Net profit 304 493 1,185 1,407 1,764 Advance from related parties (292) 0 0 0 0 Core net profit 304 493 1,185 1,407 1,764 Others (13) 0 0 0 0 EPS (HK$) 0.07 0.08 0.18 0.21 0.26 Financing cash flow (305) 1,872 4,617 4,012 436 Core EPS (HK$) 0.07 0.08 0.18 0.21 0.26 Net change in cash 224 252 1,671 (209) 1,168 (HK$ m) 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E Balance sheet Valuation Non-current assets PER (recurring earnings) (x) 34.0 29.6 13.7 11.9 9.5 PP&E 1,368 3,685 7,431 12,696 13,862 Dividend yield 1.0% 1.7% 1.8% 2.1% 2.6% Land use right 189 180 176 173 169 PBR (x) 6.1 4.6 2.2 1.8 1.5 Investment in associate/jv 0 0 459 937 970 EV/EBITDA (x) 33.9 23.7 9.4 6.6 5.3 Others 55 296 296 296 296 Growth rate Total non-current assets 1,612 4,162 8,363 14,103 15,297 Revenue 28% 22% 91% 7% 22% EBIT 158% 56% 148% 17% 28% Current assets EBITDA 85% 43% 151% 43% 24% Inventories 91 299 420 340 546 Recurring net profit 153% 62% 140% 19% 25% Trade and other receivables 499 733 1,286 884 1,755 Recurring EPS 114% 15% 116% 15% 25% Cash 279 543 2,214 2,005 3,174 Operating ratios Others 206 28 28 28 28 Gross margin 30% 32% 37% 40% 43% Total current assets 1,075 1,602 3,948 3,256 5,502 EBIT margin 19% 24% 31% 34% 36% EBITDA margin 24% 28% 37% 49% 50% Total assets 2,687 5,764 12,311 17,359 20,799 Recurring net margin 15% 20% 26% 28% 29% Asset turnover 0.72 0.57 0.51 0.33 0.32 Current liabilities Adjusted ROE 18% 18% 22% 16% 17% Trade and other payables 350 1,121 1,756 1,153 2,048 Adjusted ROA 11% 12% 13% 9% 9% Short term bank borrowings 0 143 575 1,275 1,775 Interest coverage n/a 132.1 38.3 20.8 16.5 Others 17 28 28 28 28 Net debt/equity Net cash 23% 8% 47% 39% Total current liabilities 367 1,291 2,359 2,456 3,851 Current ratio 2.93 1.24 1.67 1.33 1.43 Quick ratio 2.17 0.82 0.74 0.51 0.60 Non Current Liabilities Days inventories 41 43 45 47 47 Deferred tax liabilities 10 10 10 10 10 Days receivables 95 93 80 80 80 Long term bank borrowings 0 1,157 2,289 5,289 5,789 Days payables 72 163 180 180 170 Others 0 0 0 0 0 Total non-current Liabilities 10 1,167 2,299 5,299 5,799 Equity Share capital 1,908 2,460 2,460 2,460 2,460 Retained earnings 403 846 5,144 7,005 8,417 2,310 3,306 7,604 9,465 10,877 MI 0 0 49 139 272 Total equity 2,310 3,306 7,653 9,604 11,149 Total equity and liabilities 2,687 5,764 12,311 17,359 20,799 BVPS (HK$) 0.41 0.54 1.13 1.40 1.61 Sources: Company, CGIS Research estimates 4
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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888. 5