9 October 2018 Hang Seng Index Performance Major Market Indicators % Change Hong Kong Close 1-Day 1-Mth 6-Mth 12-Mth Hang Seng Index 26,202.57-1.4% -2.9% -13.3% -7.5% HSCEI (H-Shares) 10,393.29-1.3% -1.6% -13.9% -8.7% Mkt T/O ($ Mn) 96,587.63 25.7% -12.6% -2.1% -6.2% Oversea DJIA 26,486.78 0.2% 2.2% 10.5% 16.4% NASDAQ 7,735.95-0.7% -2.1% 11.3% 17.6% Shanghai SE Composite 2,716.51-3.7% 0.5% -13.4% -19.5% Shenzhen Component 8,060.83-4.1% -3.1% -24.3% -28.4% Commodities and FX Crude Oil Futures (US$) 74.34 0.1% 9.7% 17.2% 49.9% Gold Futures (US$) 1,194.30 0.5% -0.1% -10.9% -7.1% Baltic Dry Index 1,536.00-1.2% 3.1% 61.3% 8.9% USD / Euro 1.15 0.1% -0.9% -6.7% -2.2% Yen / USD 113.02-0.1% -1.7% -5.4% -0.3% CNH / USD 6.92 0.1% -0.8% -9.0% -4.6% Source: Bloomberg Market Overview Hang Seng Index closed down 1.4% at 26,202. HSCEI declined 1.3%. Heavily weighted Tencent (700), HSBC (5) and AIA Group (1299) cut 2.0%, 0.6% and 0.3% respectively. Consumption, gaming, pharmaceutical, oil, technology, airline and PRC property stocks underperformed the market. Ten largest Chinese property developers dropped an average 4.2% among which Country Garden (2007), China Evergrande (3333) and Sunac China (1918) cut 6.0%-6.7%. Galaxy Entertainment (27) and Sands China (1928) decreased 6.6% and 3.9% respectively. Sunny Optical (2382) and AAC Technologies (2018) lost 6.3% and 2.1% respectively. Want Want China (151), Mengniu Dairy (2319) and Shenzhou (2313) tumbled 3.7%-3.9%. CSPC Pharmaceutical (1093) and Sino Biopharmaceutical (1177) slid 3.1%-3.8%. Air China (753) decreased 3.0%. Sinopec (386), CNOOC (883) and PetroChina (857) retreated 4.5%, 2.8% and 1.8% respectively. HK banking & property, PRC banking & insurance, telecom and automobile stocks lacked clear direction. Wharf REIC (1997) climbed 1.5% whilst Link REIT (823) slumped 1.6%. ABC (1288) and Bank of Communications (332) advanced 0.8%-0.9% while CCB (939) cut 1.7%. Seven insurance stocks in HSCEI dropped an average 1.4% among which Ping An Insurance (2318) and New China Life (1336) plunged 2.3% and 1.8% respectively. China Mobile (941) added 0.6% while China Unicom (762) shrank 1.0%. Great Wall Motor (2333) surged 2.7% while Geely Automobile (175) lost 1.7%. We take a neutral view on Hang Seng Index this month with a trading range of 26,000-28,000. We take a neutral view on Hang Seng Index this month with a trading range of 26,000-28,000
Market in Focus CRG MKT Cap ($Bn) 67.2 Bloomberg Ticker 1193 HK Equity 52-week High/Low ($) 23.85-38.95 Rating BUY Free Float (%) 36.0% Target Price $38.40 3M Avg Turnover ($, Mn) 193.4 China Resources Gas (1193): Focus on the LT trend, Good entry point for LT investors, Maintain BUY Since our BUY commentary dated September 19, China Resources Gas (1193, $30.20, CRG ) has dropped 15.3% compared with a loss of 3.3% for Hang Seng Index over the same period. We believe the weakness in share price was mainly due to concerns about city connection fee cut of Chinese downstream gas sector recently which normally contributes 40-55% to total operating profit. However, we believe the market over-reacts the news under the current weak market sentiments because: 1) Chongqing government is going to cancel residential initial installation fee for natural gas which is just a part of the total connection fee; 2) The intention of the installation fee is to subsidy downstream gas operator to run less profitable residential business and expand their investment so as to uplift the penetration rate of gas usage, while the penetration rate of gas usage in Chongqing is as high as 70%, much higher than other regions. We do not believe the other regions will follow the same policy and the recent share price weakness offers a buying opportunity. As a recap, CRG reported better-than-expected interim results on 24 Aug, revenue surged 34.8% yoy to $23,847mn. Revenue from (i) gas sales, (ii) gas connection and (iii) other segments including gas station and design and construction services grew approximately 44.9%, 5.7% and 16.9% yoy to $18,182mn, $3,342mn and $2,322mn respectively accounting for 76.2%, 14.0% and 9.7% of total revenue. Total gas sales volume grew 22.9% to 12,375mn m3, better than our expectations. Residential, industrial and commercial users gas sales volume grew 13.8%, 29.8% and 27.2%. Overall gross profit amounted to $6,742mn, up 18.3% yoy. CRG s dollar margin of gas sales dropped to RMB0.62/m3 from RMB 0.64/m3 in 1H17, but improved hoh from RMB 0.52/m3 in 2H17. Segment profit amounted to $4,871mn in 1H18, the abovementioned three sectors grew approximately 54.6%, 11.3% and 36.2% respectively to $2,605mn, $1,728mn and 538mn. Fig1: 1 Year Share Price Source: Bloomberg, Mason Securities We continue to take a long-term positive view on the CRG given the industry s long-term and stable growth. According to Bloomberg estimates, the company s earnings are expected to reach $4.52bn in 2018 and $5.07bn in 2019, up approximately 21.9% and 12.3% respectively. EPS is expected to reach $2.05 in 2018 and $2.30 in 2019. Traded at 2018 P/E of 14.7x and 2019 P/E 13.1x, we believe the valuation of CRG is attractive to long-term investors. We maintain our BUY rating on CRG with 12-month target price of $38.4. Our target PE multiple is based on 2019 P/E of 16.7x or equivalent to average forward P/E of 16.7x from 2011 to 2018.
Technical Ideas Stock Code Rating / Last Closing Price Our TP / Bloomberg TP Cut Loss CNOOC 883 HK Equity BUY $14.40 $15.84 $16.21 $13.68 MKT Cap ($Bn) / Free Float Turnover / 30D Avg ($Mn) Turnover vs 5D & 30D Avg Forward PER / PBR Net Debt (Cash) / Equity 642.9 35.6% 2,379 875 147% 272% 10.2X 1.4X 8% Technical Indicator SMA10 14.94 RSI (14) 55.9 SMA20 14.59 BB (Upper) 15.78 SMA100 13.38 BB (Lower) 13.40 Stock Code Rating / Last Closing Price Our TP / Bloomberg TP Cut Loss HKT Trust & HKT 6823 HK Equity BUY $10.58 $11.64 $12.02 $10.05 MKT Cap ($Bn) / Free Float Turnover / 30D Avg ($Mn) Turnover vs 5D & 30D Avg Forward PER / PBR Net Debt (Cash) / Equity 80.1 44.9% 168 72 213% 235% 16X 2.07X 91% Technical Indicator SMA10 10.63 RSI (14) 47.2 SMA20 10.40 BB (Upper) 11.06 SMA100 10.20 BB (Lower) 9.74 Source: Bloomberg, Mason Securities
Recent Recommendations Date of Issue Stock Pick Recommendation Highlights Rating (TP) China Oriental Group (581): Re-rating on sustainable profitability, Maintain BUY 21/9/2018 COG (581) 24/9/2018 CSCI (3311) 26/9/2018 ENN Energy (2688) 27/9/2018 Galaxy Entertainment (27) 28/9/2018 China Oilfield Services (2883) 2/10/2018 CCCC (1800) 3/10/2018 CEG (1257) 4/10/2018 HHS (1347) 5/10/2018 China Gas (384) 8/10/2018 Luk Fook (590) We believe COG is one of the best companies and most efficient steel producers in China in terms of profitability or execution capability We expect an upward revision on COG earnings consensus in 2018 and 2019 after its strong interim results China s infrastructure investment is likely to increase in 4Q18 Maintain BUY CSCI (3311) Chinese government will substantially increase infrastructure spending in the fourth quarter that will certainly benefit CSCI Taking into account its good track record, we believe full year new contracts value for 2018 is likely to exceed management s target ENN Energy (2688) : 1H18 core profit beat, maintain our LT bullish view on China gas operator; BUY We continue to take a positive view on China gas consumption market We believe the valuation of ENN is still reasonable long term investors Current valuation is cheap by historical average - Maintain BUY Galaxy Entertainment (27) We believe the opening of the Hong Kong-Zhuhai-Macau Bridge in the fourth quarter of 2018 will improve earnings outlook for gamings stocks in the medium-to-long term We maintain our bullish view on the gaming sector and believe any share price correction is a good buying opportunity for long-term investors Capture CNOOC s capex upcycle: BUY China Oilfield Services (2883) for short term trading purpose Capital flows into sectors which benefit from the investment theme of stagflation in China, such as oil related players COSL is a good proxy to capture the upcycle of CNOOC s capex in coming years China s infrastructure investments is likely to increase in 4Q18 Maintain BUY CCCC (1800) We believe the Chinese government will substantially increase infrastructure spending in the fourth quarter that will certainly benefit CCCC Traded at 2018 PER of 5.5x compared to 5-year average forward PER of 6.3x, CCCC is undervalued in our view China Everbright Greentech (1257): Expect EPS CAGR growth to reach +20% in next 3 years, reiterate BUY We believe the relatively low gearing provides CEG sufficient rooms for future expansion We remain our bullish views on CEG given on promising industry growth, its strong project pipeline and supports from China Everbright International (257) Long term growth prospects remain promising Upgrade Hua Hong Semiconductor (1347) to BUY We believe the underperformance is sentiment driven rather than any change in the fundamentals HHS expects revenue to grow 3%-4% qoq in 3Q18 with a gross margin of 32%-33%. Based on this management guidance, we estimate the company s net profit to reach US$44.6mn in 3Q18, down 2.6% qoq and up 26.1% yoy China Gas Holdings (384): Concerns overdone, recommend BUY Market over-reacts news of connection fee cut under current weak market sentiments China Gas should be less impacted by any such connection fee cut given its larger portion of rural household connections and the recent share price weakness offers a buying opportunity SSSG for HK & Macau market will remain strong in 2Q FY19 - Maintain BUY Luk Fook (590) Weakness in share price was mainly due to concerns about a slowdown in consumption and Renminbi depreciation that may eventually affect sales performance YoY growth rate of China s retail sales value of gold, silver and jewellery goods accelerated from 6.8% in the April-June period to 8.2% in July to 14.1% in August BUY ($9.50) BUY ($10.0) BUY ($83.0) BUY ($59.3) BUY ($9.20) BUY ($9.20) BUY ($8.60) BUY ($20.0) BUY ($30.4) BUY ($32.5)
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HOLD Based on a current 12-month view of total shareholder return, we expect the return to range between +10% to -10%. SELL Based on a current 12-month view of total shareholder return we expect a negative return of over 10%. Research Team Contact Research Team, Mason Securities Limited, Portion 1, 12/F, The Center, 99 Queen s Road Central, Hong Kong Tel: (+852) 2218 2818 Email: research@masonhk.com