9 th June, 2017 Hang Seng Index Performance Index Performance Abs chg % Change Hong Kong Close 1-Day 1-Day 1-Mth 3-Mth Hang Seng Index 26,063.06 88.90 0.34 4.72 10.90 HSCI 3,549.64 16.24 0.46 4.62 9.86 HSCCI (Red Chips) 4,114.01 5.94 0.14 5.93 6.56 HSCEI (H-Shares) 10,649.90 38.44 0.36 5.14 5.49 Mkt T/O ($ Mn) 79,313.16-7,676.16-8.82 18.89 14.95 Oversea DJIA 21,182.53 8.84 0.04 0.99 1.55 NASDAQ 6,321.76 24.38 0.39 3.29 8.27 Shanghai SE Composite 3,150.33 10.01 0.32 2.27-2.06 Crude Oil Futures (US$) 45.43-0.21-0.46-0.98-7.81 Gold Futures (US$) 1,281.70 2.20 0.17 5.39 6.52 Baltic Dry Index 824.00 3.00 0.37-18.17-22.56 USD / Euro 1.1185-0.0027-0.24 2.65 5.72 Yen / USD 109.950-0.1500 0.14 3.85 4.38 Source: Bloomberg Market Outlook Eric Yuen - ericyuen@masonhk.com Hang Seng Index closed up 0.3% at 26,063. Market turnover decreased to $79.3 billion. Heavily weighted Tencent (700), HSBC (5) and AIA Group (1299) added 0.2%-0.3%. China Mobile (941) retreated 0.1%. Geely Automobile (175), Cathay Pacific (293) and AAC Technologies (2018) were top performers in Hang Seng Index, up 9.4%, 6.3% and 4.0% respectively. Gaming operator Galaxy Entertainment (27) and Sands China (1928) increased 2.7%-3.3%. Local banks moved in line with the benchmark index. Consumption and local property stocks were mixed. Swire Pacific (19) added 2.4% whilst New World Development (17) retreated 1.1%. China Mengniu Dairy (2319) rose 1.8% while Hengan Int l (1044) cut 0.7%. Oil stocks declined on falling crude oil price. PetroChina (857), Sinopec (386) and CNOOC (883) tumbled 0.4%-0.6%. Kunlun Energy (135) was the worst performing index stock, down 2.2%. HSCEI climbed 0.4% led by automobile, airline and insurance companies. Great Wall Motor (2333) and Dongfeng Motor (489) soared 1.6%-2.4%. Air China (753) went up 1.5%. Insurance and securities stocks in HSCEI grew an average 1.1% and 0.6% respectively among which China Life (2628), Ping An Insurance (2318) and New China Life (1336) advanced 1.9%-2.2%. Railway, power and banking stocks lacked clear direction. China Minsheng Banking (1988), CGN Power (1816) and China Railway Group (390) rose 0.3%-0.6%. Postal Savings Bank (1658), Huaneng Power (902) and Zhuzhou CRRC Times Electric (3898) slid 0.6%-1.0%. We take a neutral view on Hang Seng Index this month with a trading range of 25,000-26,500. HSCEI HSI 20-Day MA 10,481.56 25,554.02 50-Day MA 10,327.05 24,838.31 9-Day RSI 68.81 80.18 We take a neutral view on Hang Seng Index this month with a trading range of 25,000-26,500.
Industry / Corporate News Becky Yuen, CFA - ericyuen@masonhk.com Paper price hike and renminbi appreciation trend will continue to favor Nine Dragons Paper (2689). Reiterate Maintain Risk Level: High Time Horizon: Medium Expect paper price to go up further in coming months due to improved demand/supply dynamics Re-rating to continue as earnings will be less impacted by forex fluctuation in FY17 Counter is trading at 9.5x FY17 PER, not demanding in our view We suggested investors to revisit Nine Dragons Paper (2689, NDP, $9.92) first on April 10 and again on May 10. Our rationale behind the call was that we observed that paper mills have started initiating a new round of price hike in early-april after an aggressive cut in March. Since then, paper price of NDP has witnessed a surge of RMB50-195/t in last two months depending on the region and paper products. At the same time, the counter has surged 16.6% and 12.7% since April 10 and May 10 respectively, outperforming Hang Seng Index by 8.6% and 7.6% over the same period. While we believe paper price hike was the main reason behind NDP s rally in last two months, the recent strengthening of renminbi (RMB) was another price catalyst of paper counters in our view. As a note, renminbi has appreciated 1.4% since mid-may. Even though NDP has significantly lowered its forexdenominated debt in past few years (forex-denominated borrowings now only accounted for 31% of its total borrowing as at end-dec 2016 compared to 41% as at end-june 2016 and 72% as at end-dec 2015), a stronger renminbi serves as a positive factor to NDP s earnings in two ways: 1) lower procurement cost of imported waste paper and 2) lower interest expenses on forex debt. Hence, we stick with our positive stance on NDP, and believe the re-rating on the counter is not yet over. According to industry sources, more than 60 paper mills have proposed paper price hike that ranges between RMB50-450 per tonne in May alone, while a number of paper mills have already proposed another round of price hike between RMB50-300/t so far this month. Specifically, NDP is proposing another RMB50-250/t for its subsidiaries in Northeast, Eastern and Northern China regions. While the rally of paper price was first started in Shandong province as authorities are taking frequent environmental inspections in the region, we believe it has been spreading to other areas such as Tianjin, Jiangsu and Guangzhou in past one month, which exceeded our expectation. We believe this is helped by the improved sentiment of paper sector due to 1) the capacity expansion plan of many paper mills have been postponed following the sharp decline of paper price in March; 2) a number of paper mills have scheduled their maintenance plans starting April which effectively eased the oversupply situation during low season. In fact, NDP has just announced that one of its paper machines for kraft linerboard will be shut down for maintenance for a period of 50 days in June and July; and 3) Ministry of Environmental Protection requested that all paper mills without sewage discharge permit to be shut down by June 30. While current paper price is still standing around RMB365-500 (for linerboard) and RMB900 (for corrugated paper) below their February s peak respectively, we believe paper price will go up further in coming months amid the improved demand/supply situation due to abovementioned reasons. We maintain our full-year earnings forecast unchanged at RMB4,280mn (EPS RMB0.92), implying that net profit per tonne will be at RMB322. If excluding the forex impact, we estimate that the adjusted net profit will be up 54.8% yoy to RMB4,387mn (net profit per tonne at RMB330). We note that our current earnings forecast for FY17 has factored in a net dollar margin of RMB380 per tonne in 2HFY6/17 which is not aggressive as we estimate that NDP s net dollar margin may stand above RMB500 level in 3QFY17 (i.e. Jan Mar 2017) while paper price has already rebounded from March s bottom. Counter is now trading at 9.5x FY17 PER that we think is undemanding amid improving profitability and lowered forex risks. Reiterate with unchanged 6-month target price of $11.4, still based on 11x FY17 PER.
Recent Recommendations Stock Pick Rating Recommendation Highlights Target Price Galaxy Entertainment (27) CPMC Holdings (906) Lee & Man Paper (2314) ANTA Sports (2020) Techtronic Industries (669) Hua Hong Semiconductor (1347) Sunny Optical (2382) Lai Sun Development (488) AAC Technologies (2018) Luk Fook (590) Reiterate on Galaxy Entertainment (27) as Macau's gross gaming revenue shows no signs of slow down Macau's GGR in May remains intact despite the visitation of China's high-rank leader Improved junket liquidity and return of high-end patrons will support the robust VIP momentum Successful pilot program in mixed-ownership reform - CPMC Holdings (906) Rising gross margin and dividend payout after the completion of mixed-ownership reform Two acquisitions in March 2017 are likely to enhance production capacity in 2017/2018 Maintain on Lee & Man Paper (2314) as we expect to see more paper price hikes in coming months Maintain Negatives related to company's disappointing 2H16 results should have priced in Domestic paper price has entered another round of up-cycle following sharp retreat in March Capacity growth of both containerboard and tissue paper will be LMP's earnings driver in 2017 Ready for growth by acquisition - Maintain ANTA Sports (2020) Received CSRC approval for issue of corporate bonds making total funds of RMB13.6bn available for M&A Satisfactory first quarter operating data to ensure full year revenue growth at high teens Deserves a premium valuation given its leading market position and a promising industry outlook Reiterate on Techtronic Industries (669) as business outlook remains promising Home Depot's strong 1Q17 results and positive outlook bode well for TTI's business prospect Demand to be driven by solid US housing market and recovery of global infrastructure spending Continuous shift of product mix to industrial power tool market will drive gross margin expansion Weakness in share price offers a good buying opportunity - Maintain Hua Hong Semiconductor (1347) Expect 2Q17 revenue to grow 8% qoq with a better gross margin of 30%-31% Strong net cash of approx. $2.76 per share and steady dividend payout of 30% Reiterate on Sunny Optical (2382) as its fast ramp up of handset lens sets bodes well for gross margin enhancement 4M17 shipment for HLS, HCM and VLS showed a robust increase of 86%, 68% and 41% yoy Increased penetration rate of dual camera features bode well for company's ASP and gross margin A valuation premium is justified in view of an EPS CAGR of 48% from 2016-2018 Remains undervalued with deep discount to NAV - Maintain Lai Sun Development (488) Attributable property development profit of $1.0bn in FY18 Continued accumulation of shares by the second largest shareholder Valuation remains unreasonably cheap Maintain on AAC Technologies (2018) as concerns regarding short-selling report is overdone AAC's latest clarification announcement should largely ease investors' concerns Satisfactory 1Q17 earnings with earnings up 72% yoy and gross margin expanded 1.1ppts Valuation is undemanding given our estimates of 28% EPS CAGR from 2016-2018 Weakness in share price offers a good buying opportunity Maintain Luk Fook (590) Weak retail sales data in Hong Kong has been discounted in share price Same store sales of its retail shops in China grew 5% yoy in 4Q16 and 11% yoy in 1Q17 Aggressive expansion of China's retail network in 4Q16 is likely to boost earnings growth in FY18. $50.90 $4.85 $7.40 $25.70 $43.0 $12.0 $71.3 $0.29 $114.4 $31.5
Technical Ideas Dongfang Electric (1072, $7.16) TP: $7.88 Risk: Medium Time Horizon: Short Dongfang Electric manufactures and sells hydro and steam power generators and AC/DC electric motors. The company also provides repair, upgrade, maintenance, and other services for the products. Counter rose 5.4% yesterday, surpassing its critical resistance at $7.08 and SMA50, indicating the counter s further upside potential ahead.. Short-term target at $7.88. Cut loss at $6.53. Consensus 2017 PBR: 0.7x Consensus target price: $6.34 Source: Bloomberg, Mason Securities China Overseas Property (2669, $1.57) TP: $1.73 Risk: High Time Horizon: Short China Overseas Property operates as a property management firm. The company manages residential communities, commercial properties and government properties in Hong Kong and Macau. Counter surged 9.0% yesterday with huge turnover, surpassing its critical resistance at $1.56, indicating the counter s strong uptrend momentum ahead.. Short-term target at $1.73. Cut loss at $1.45. Consensus 2017 PER: 18.7x Consensus target price: $1.94 Source: Bloomberg, Mason Securities
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