19 th October, 2017 Hang Seng Index Performance Major Market Indicators % Change Hong Kong Close 1-Day 1-Mth 6-Mth 12-Mth Hang Seng Index 28,711.76 0.05 2.35 20.51 23.20 HSCEI (H-Shares) 11,621.95 0.46 4.46 16.41 20.54 Mkt T/O ($ Mn) 87,581.20 4.41-21.77 24.07 46.21 Oversea DJIA 23,157.60 0.70 3.52 13.49 27.22 NASDAQ 6,624.22 0.01 2.52 12.98 26.26 Shanghai SE Composite 3,381.79 0.29 0.74 6.66 9.63 Shenzhen Component 11,282.75 0.07 1.79 9.03 4.88 Commodities and FX Crude Oil Futures (US$) 52.11 0.13 5.32 3.31 0.99 Gold Futures (US$) 1,282.00-0.08-1.89-0.11 0.95 Baltic Dry Index 1,552.00 1.90 9.68 21.44 77.98 USD / Euro 1.1796 0.08-1.49 10.14 7.55 Yen / USD 112.9700-0.09-1.08-3.64-8.59 CNH / USD 6.6179 0.01-0.41 4.03 1.86 Source: Bloomberg Market Overview Hang Seng Index closed up 0.1% at 28,711. Market turnover increased to $87.6 billion. Heavily weighted AIA Group (1299) surged 0.5%. China Mobile (941), Tencent (700) and HSBC (5) were little changed. Cathay Pacific (293) and CK Hutchison (1) advanced 1.3%- 1.6%. Ten largest Chinese property developers grew an average 2.3% among which Sunac China (1918) jumped 6.9%. Local banks were little changed. Consumption and local property stocks were mixed. WH Group (288) rose 0.6% but Want Want China (151) shrank 1.5%. CK Asset (1113) and Wharf (4) climbed 1.6% and 0.9% respectively. New World Development (17) cut 1.0%. Oil and gaming stocks ended lower. Sinopec (386) and Kunlun Energy (135) lost 0.7% and 1.5% respectively. Sands China (1928) and Galaxy Entertainment (27) plunged 0.2%-0.3%. AAC Technologies (2018) was the worst performing index stock, down 4.2%. We expect Chinese financial stocks to outperform the market in near term. HSCEI advanced 0.5% led by insurance and cement stocks. Anhui Conch (914) soared 3.4% making it the second best performing HSCEI stock. Six insurance counters in HSCEI grew an average 2.7% among which New China Life (1336) increased 4.5%. Power, automobile, railway, banking and securities stocks lacked clear direction. Postal Savings Bank (1658) and China Merchants Bank (3968) went up 0.5%-0.6%. CCB (939) and GF Securities (1776) decreased 0.7%-0.9%. Dongfeng Motor (489), China Longyuan (916) and CRRC Corporation (1766) rose 0.8%-1.1%. Great Wall Motor (2333), Huaneng Power (902) and China Railway Group (390) tumbled 0.4%-0.9%. Zhuzhou CRRC Times Electric (3898) slumped 3.2%, the most in HSCEI. We expect Chinese financial stocks to outperform the market in near term.
Market in Focus A leading global apparel manufacturer Crystal International (2232) Founded in 1970, Crystal International (2232) is a global leader in the apparel manufacturing industry with a diversified product portfolio under their differentiated value-add driven co-creation business model. According to Euromonitor, the company ranked 1st by production volume and 2nd by production value in the global apparel manufacturing industry in 2016, with a global market share of approx. 0.4% and 0.3% respectively. As of 2016, 7 of the top 10 global leading brand apparel companies are the company s customers. It was reported that the company would kick off the IPO from Oct 23 to 26 by issuing 509.3mn shares at an indicative offering price of $7.3 -$8.8 per share to raise a maximum of $4.5bn. 90% of the shares for offering will be allocated for international placing with the remaining shar es available for public offering. Fast Retailing (6288) and L Brands (the owner of Victoria s Secret) will be cornerstone investors for this IPO and committed to subscribe US$20mn and US$10mn shares. According to its submitted prospectus, the company has appoi nted Morgan Stanley and HSBC as joint sponsors for the IPO. Crystal International derives its revenue from the manufacturing of different types of apparels. As at 1H2017, the company pr imarily offers lifestyle wear (39.4% of total revenue), denim wear (25.4% of total revenue), intimate wear (18.3%), sweaters (6.7%), sportswear and outdoor apparel (9.6%) and others (0.6%). Particularly, the company enjoyed a leading position among denim jeans manufacturer s in the Asia apparel manufacturing industry and ranked No.1 in terms of production volume and value in this category in 2016, as well as strong competitiveness in lifestyle wear, ranking No. 2 and No. 3 in terms of production volume and value in 2016. As at October 201 7, the company served more than 30 customers covering over 50 brands, with key customers include Fast Retailing (Uniqlo), H&M, Marks & Spencer, Gap, Levi s, L Brands (Victoria s Secret, PINK) and the like. The company currently holds 20 self -operating manufacturing facilities spanning across five countries, 6 of which are located in China, 4 in Vietnam, 4 in Cambodia, 4 in Bangladesh and 2 in Sri Lanka, with a total annualized designed capacity around 350 million pieces and utilization rate of 92.1% in 1H2017. The company relies greatly on its Co-creation Business Model to develop their competitiveness and differentiate themselves from the rest of its competitors in the fragmented global apparel manufacturing industry. Leveraging on the company s extensive experience and its consistent track record of devoting resources on research and development to enhance their knowledge into global fashion trends, market direction and insight into product needs of their customers, the company offers their customers services at various stages of the production cycle and take a more proactive role as compared to its peers and gains extensive understanding of their customers products. In brief, the company initiate product ideas for the customers as well as transform customer concepts into product designs, utili zing the company s extensive and well-developed information and analysis of fashion trends, market directions and the company s expertise over the apparel manufacturing chain, effectively getting involved in an earlier stage of the customer s product devel opment as compared to other apparel manufacturers and thereby shorten the overall product delivery times to their customers. On the other hand, leveraging on the company s large scale of production capacity, the company offers critical efficiencies to thei r customers, such as large scale global procurement power to directly reduce material cost through bulk purchases and choice of multi-country manufacturing platforms to allow for optimization of import-export duty or trade policies, effectively optimizes the overall cost of products for their customers. For the year ended 31 December 2016, the company s revenue and net profit reached US$1.76bn (+4.4% yoy) and US$123.7mn (+81.1 % yoy) respectively. Gross margin improved from 17.3% to 20.2% and net margin expanded from 4.0% to 7.0%, primarily led by 1) 21.0% subcontracting cost reduction driven by an increase in the company s in-house production; and 2) 4.0% cut in selling and distribution expenses as a result of decreased headcount in the UK. For the first half of 2017, revenue surged 23.8% yoy to US$1.03bn while net profit increased by 31.4% yoy to US$69.2mn thanks to further improvement in gross margin and net margin to 19.9% and 6.7% respective ly. Based on the indicative offering price, the counter will be valued at a forward P/E of approximately 14x that looks unattractive in a highly competitive industry in our view.
Technical Ideas Sanjiang Chemicals (2198, $3.40) Stock Rating: Target Price: $3.74 Company Description: China Sanjiang Fine Chemicals manufactures and supplies consumer chemicals and their ingredients. The company's main product is ethylene oxide and AEO surfactants which are the core components for household cleansing and cosmetic products. Commentary: Counter rose 10.4% yesterday with an exceptionally high trading volume and reached its 52-week high, indicating the counter s strong uptrend momentum ahead. Recommendation:. Target at $3.74. Cut loss at $3.20. Company Statistics Last Closing Price $3.40 Consensus 2017 P/E 6.2x Consensus Target Price $4.40 Huadian Fuxin (816, $2.05) Stock Rating: Target Price: $2.26 Company Description: Huadian Fuxin Energy is engaged in electricity production & sales, power facilities construction, electricity technology development and renewable energy generation projects development. Commentary: Counter rose 4.1% yesterday with large turnover and reached its 52-week high, indicating the counter s strong uptrend momentum ahead. Recommendation:. Target at $2.26. Cut loss at $1.95. Company Statistics Last Closing Price $2.05 Consensus 2017 P/E 7.4x Consensus Target Price $2.16
Recent Recommendations Date of Issue Stock Pick Recommendation Highlights Rating (TP) A strong growth in new contracts improves earnings prospects Maintain CCCC (1800) 28/08/2017 CCCC (1800) Growth in new contracts value accelerated from 12.4% yoy in 2016 to 52.0% yoy in 1H17 Overseas expansion will be key earnings growth driver Undemanding valuation at 2017 PER of 7.5x Reiterate on AAC Technologies (2018) amid company s growth potential in optics business AAC Technologies Faster than expected capacity expansion of optical lens is a positive surprise 29/08/2017 (2018) Acoustic growth is sustainable in 2018 as adoption rate of high-end speaker box with waterproof and stereo sound feature continues to surge in android camp Valuation is undemanding given our estimates of 34% EPS CAGR from 2016-2018 Better-than-expected 2017 interim results Maintain Zhengtong Auto (1728) Zhengtong Auto Better-than-expected interim results reaffirms our positive stance and demonstrates strong earnings 30/08/2017 (1728) momentum ahead Innovative expansion model shall enable Zhengtong to expand more rapidly at a much less burdensome way compared to traditional M&A Reiterate on Lee & Man Paper (2314) on its robust interim results Interim earnings beat estimates, with net dollar margin of containerboard and tissue paper both Lee & Man Paper 31/08/2017 reached record high (2314) Environmental inspection in China see no signs of slow down, favouring the demand/supply dynamics in 2H17 More paper price upside in 2H17 amid peak season, which will be a positive share price catalyst Interim results indicated better-than-expected performance from BBA Maintain Brilliance China (1114) BBA's strong performance in 1H2017 reaffirms our view that the JV serves as a key beneficiary of the fast Brilliance China 12/09/2017 growing luxury PV in China; (1114) BBA's strong model cycle ahead should support the JV's operational performance in the future; and Proposed cooperation with Renault in forming a JV on Brilliance's minibus and Light Commercial Vehicle (LCV) segment may potentially cause a turnaround for the currently loss-making business. Weakness in share price offers a good buying opportunity Singamas (716) 09/10/2017 Singamas (716) Share price has experienced a 15% drop from its intra-day high of $2.05 on September 21 With 2017 P/B of 1.0x and EPS growth of 50% in 2018, valuation of Singamas is undervalued in our view Substantial land appreciation gains from Qianhai properties CIMC (2039) 11/10/2017 CIMC (2039) Estimated land appreciation gain from Qianhai properties is RMB12bn or equivalent to $4.77 per share Strong recovery in container manufacturing business Largely expected monthly sales volume results Maintain SELL Great Wall Motor (2333) Monthly sales volume were largely in-line with our expectations 12/10/2017 GWM (2333) Earnings outlook remain challenging on fierce competition and slowdown in Chinese PV market Launch of CAFC and NEV scoring system to weight on GWM s medium term earnings outlook given its lack of presence in the NEV segment New World Dev Valuation remains cheap with a deep discount to book value Maintain New World Development (17) 13/10/2017 Sizeable reserve of farmland pending for conversion into residential use (17) Share buyback is a positive signal 17/10/2017 Angang (347) Flat steel prices are likely to stay high in 2H17 amid production halt in Hebei Maintain Angang (347) Ongoing improvement in demand and supply dynamics should bode well for steel price trend in 2H17 Issued a positive profit alert that earnings for 9M17 will surge 236% yoy to RMB3,285mn. ($12.0) ($155.7) ($9.98) ($10.9) ($24.0) ($2.05) ($18.0) SELL ($8.82) ($14.0) (8.35)
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