6 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 25,862.99-61.06-0.24 5.67 9.61 HSCI 3,517.68-4.15-0.12 5.46 8.59 HSCCI (Red Chips) 4,094.06 10.52 0.26 6.59 6.01 HSCEI (H-Shares) 10,597.05-69.38-0.65 6.76 4.19 Mkt T/O ($ Mn) 74,743.88-10,496.57-12.31-7.80-1.27 Oversea DJIA 21,184.04-22.25-0.10 0.84 1.10 NASDAQ 6,295.68-10.11-0.16 3.20 7.63 Shanghai SE Composite 3,091.66-13.88-0.45-0.37-4.40 Crude Oil Futures (US$) 47.57 0.17 0.36 2.92-10.58 Gold Futures (US$) 1,282.70 0.00 0.00 4.55 4.67 Baltic Dry Index 821.00-9.00-1.08-17.40-16.14 USD / Euro 1.1259 0.0006 0.05 2.99 6.44 Yen / USD 110.370-0.0900 0.08 2.37 3.33 Source: Bloomberg Market Outlook Eric Yuen - ericyuen@masonhk.com Hang Seng Index closed down 0.2% at 25,862. Market turnover decreased to $74.7 billion. Heavily weighted Tencent (700) surged 0.6%. AIA Group (1299) was flat. HSBC (5) and China Mobile (941) cut 0.2% and 0.4% respectively. Geely Automobile (175) and China Unicom (762) advanced 1.4%-1.6%. Consumption and local property stocks were mixed. Wharf (4) soared 1.8% whilst Hang Lung Properties (101) shrank 1.7%. China Mengniu Dairy (2319), Belle Int l (1880) and Hengan Int l (1044) climbed 0.5%- 0.6%. Want Want China (151) slid 1.4%. Gaming and local banking stocks underperformed the market. BOC Hong Kong (2388), Hang Seng Bank (11) and Bank of East Asia (23) cut 0.3%-1.1%. Gaming operators Galaxy Entertainment (27) and Sands China (1928) lost 0.8%-1.1%. HSCEI declined 0.7% led by financial stocks. China Merchants Bank (3968) increased 0.6%. Other securities, banking and insurance stocks in HSCEI dropped an average 0.9%, 1.0% and 1.4% respectively among which New China Life (1336) and ABC (1288) plunged 2.3%-2.4%. ICBC (1398), GF Securities (1776), China Life (2628), CPIC (2601) and PICC P&C (2328) tumbled 1.1%-1.6%. Railway stocks moved in line with HSCEI. China Shenhua (1088) jumped 2.7%, the most in HSCEI, amid speculation on restructuring with state-owned power companies. China Longyuan (916) rose 2.6%. Automobile manufacturers BYD Company (1211), Dongfeng Motor (489) and Great Wall Motor (2333) went up 1.9%-2.2%. 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 10,405.12 25,376.42 50-Day MA 10,323.40 24,745.93 9-Day RSI 64.25 76.46 We take a neutral view on Hang Seng Index this month with a trading range of 25,000-26,500.
Industry / Corporate News Eric Yuen - ericyuen@masonhk.com Remains undervalued with deep discount to NAV - Maintain Lai Sun Development (488) Maintain Risk Level: Low Time Horizon: Medium Attributable property development profit of $1.0bn in FY18 Continued accumulation of shares by the second largest shareholder Valuation remains unreasonably cheap at price-to-book ratio of 0.28x Lai Sun Development (488, LSD, $0.23) surged 4.6% since out latest update on 26 April 2017 and 62.0% since our initiate coverage report dated 26 July 2016 making it the best performing local property stock year-to-date. We believe the outperformance is attributed to (i) surging property prices in Hong Kong, (ii) accumulation of shares by a strategic investor, (iii) increased earnings visibility and (iv) deep discount to NAV. LSD is a small property company with heavy exposure to Hong Kong s office and commercial market. For the six months ended 31 January 2017, the company s underlying earnings (excluding property revaluation effect) cut 60% to $80mn due to absence of property development profit. Book value expanded by 3% hoh to $25.1bn (equivalent to $0.83 per share). Gross rental income, including contribution from joint venture projects, grew 4% yoy to $433mn. Completed rental properties are mainly office and commercial properties at Causeway Bay, Tsimshatsui and Central such as Cheung Sha Wan Plaza, Causeway Bay Plaza II, 50% stake in CCB Tower and 10% stake in AIA Central. Market value of completed rental properties is estimated at $22.7bn (equivalent to $0.75 per share). Financial position was solid with a low net debt-to-equity ratio of 18% as at 31 January 2017. The sale of an office site at Murray Road, Central, by the HKSAR in May at record price of $23.28bn or average price of approximately $50,000 per sq.ft. gross is likely to boost NAV of LSD because around 25% of the market value of company s investment properties are grade A offices in Central. Hong Kong s residential price grew 8% year-to-date and 22% in the past 12 months according to Centaline Property Agency. Taking advantage of rising residential prices in Hong Kong, the company commenced the presale of its two property projects namely ALTO Residences at Tseung Kwan O and 93 Pau Chung Street at Ma Tau Kok in October 2016. To date, around 82% of residential units in ALTO Residences and 85% of residential units in 93 Pau Chung Street have been presold for a consideration of approximately $4.0bn and $1.0bn respectively. Both projects will be completed in 1Q18. We expect the company to reap attributable pre-tax property development profit of $1.0bn from these two projects in FY18. Rental contribution from the commercial portion of these two projects together with the opening of the Hong Kong Ocean Park Marriott Hotel in 2018 will further enhance the company s recurrent income in FY19. Obviously, the company will benefit from the gradual recovery of the tourism industry since visitor arrivals to Hong Kong grew 3.2% yoy in 4M17 after a full year drop of 4.5% in 2016 and 2.5% in 2015. Unreasonably cheap valuation of LSD is shared by a strategic investor. Mr. Yu Cheuk Yi increased its shareholding in LSD from less than 5.0% right before 23 Jun 2016 to 8.1% as at 6 April 2017. He also owns 27.0% stake in Lai Sun Garment (191) which in turns holds 61.9% interest in LSD. We believe Mr. Yu will continue to accumulate shares in LSD in future as the stock is still trading at a deep discount to NAV. LSD has a strong recurrent income base and a low level of net debt. Underlying earnings are expected to reach $1.0bn (EPS $0.033) in FY18 and guaranteed by successful presale of ALTO Residences. Traded at a 72% discount to book value of $0.83 per share with an improvement in earnings quality and visibility, the counter is still undervalued in our view. We maintain our rating with an unchanged 6-month price target of $0.29 based on FY17 P/B of 0.35x.
Recent Recommendations Stock Pick Rating Recommendation Highlights Target Price CMEC (1829) Xinyi Glass (868) Yuzhou Properties (1628) Galaxy Entertainment (27) CPMC Holdings (906) Lee & Man Paper (2314) ANTA Sports (2020) Techtronic Industries (669) Hua Hong Semiconductor (1347) Sunny Optical (2382) Secured a railway project worth US$1.6bn in Argentina Maintain Recently signed a railway construction project in Argentina with a significant value of US$1.6bn Backlog increased by 18.2% in 2016 or equivalent to 5x the company's revenue in contracting business Abundant net cash of $3.43 per share with attractive dividend yield of 4.1%. Reiterate as float glass price has entered into a new round of up-cycle Float glass price has reached highest level since Nov 2013 despite wide-spreading property purchasing controls in China Management increasing stake could be viewed as a vote of confidence on business outlook Most undervalued medium sized property developer Initiate Gross margin stood at 36% in past three years versus industry average of below 30% Contracted sales grew 66% yoy in 2016 and 73% yoy in 4M17 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 $6.80 $8.17 $4.20 $50.90 $4.85 $7.40 $25.70 $43.0 $12.0 $71.3
Technical Ideas China Everbright Ltd (165, $18.60) TP: $20.5 Risk: Low Time Horizon: Short China Everbright Limited provides investment banking, commercial banking, corporate finance, and investment advisory services. The company also invests in properties and provides insurance, brokerage, secretarial, and money lending services. Counter surged 4.7% yesterday with exceptional turnover, surpassing the critical resistance of $18.0. MACD showed positive crossing, indicating a bullish trend ahead.. Short-term target at $20.5. Cut loss at $16.8. Consensus 2017 PER: 7.9x Consensus target price: $20.58 Source: Bloomberg, Mason Securities Hisense Kelon (921, $11.96) TP: $13.2 Risk: Medium Time Horizon: Short Hisense Kelon Electrical manufactures and sells refrigerators, air conditioners, freezers, and product components. Counter rose 6.2% yesterday with huge turnover, testing the critical resistance of $12.0. 9-day RSI showed uptrend above 50, indicating its momentum remains intact.. Short-term target at $13.2. Cut loss at $10.8. Consensus 2017 PER: 9.0x Consensus target price: $10.45 Source: Bloomberg, Mason Securities
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