Dim Sum Express. A-Share Market. Equity Research. Jun 27, 2018

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Equity Research Dim Sum Express Key index performance Chg (%) EPS (%) P/E Market 1D 1M YTD 18E 19E 18E 19E HSI -0.3-5.6-3.5 40.7 10.5 11.4 10.3 HSCEI -0.8-7.7-5.0 21.4 10.3 7.6 6.9 MXCN -0.6-5.5-1.7 54.4 15.8 12.6 10.9 SHSZ300-0.8-7.5-12.4 34.5 15.2 11.9 10.3 SHCOMP -0.5-9.4-14.0 37.9 13.6 11.3 10.0 SZCOMP 0.6-11.8-16.0 74.0 22.2 17.7 14.4 INDU 0.1-1.9-1.8 40.6 8.7 15.9 14.7 SPX 0.2 0.1 1.8 46.2 10.0 17.1 15.5 CCMP 0.4 1.7 9.5 82.1 15.4 22.8 19.8 UKX 0.4-2.5-1.9 168.9 6.5 13.7 12.8 NKY -0.4-0.8-2.2 62.0 14.4 16.2 14.1 Hong Kong ADRs HK ticker Company Local (HK$) Daily (%) ADR (US$) Daily (%) 700 TENCENT 386.0-0.72 49.0 0.35 1398 ICBC 5.9-0.84 15.0 0.13 939 CCB 7.3-0.14 18.6 0.54 857 PETROCHINA 5.7-0.52 73.6 1.73 5 HSBC 73.5-0.34 47.5 0.72 941 CHINA MOBILE 69.5 1.24 44.6 1.94 2318 PING AN 73.4-1.48 36.3-3.00 3988 BANK OF CHINA 3.9-0.26 6.6-0.30 386 SINOPEC 6.9-1.00 30.3-0.43 1299 AIA 67.7 0.67 8.6 0.82 Source: Bloomberg A-Share Market China Pulse Check: Building Materials Supply conditions remain key; promising cement industry conditions in southern regions likely to continue throughout the year Demand from infrastructure has deteriorated significantly, and we will need to monitor changes in policies closely. Demand from the property sector remained promising. As overall demand remains stable, any surprises in the sector will mainly come from supply. Cement supply is likely to decline this year given rotational production stoppages, production suspensions due to environmental protection measures, and coordinated production stoppages. We expect cement prices to be stronger compared with traditional low seasons in June-Aug, and we believe the high cement price level will remain towards the end of the year, which will drive continued higher-than-expected earnings for cement companies in the south. 2H18 A-Share Securities Sector Outlook: Industry leaders to be the first to benefit from gradual market opening-up Several listed securities names have started to trade below their book value mainly due to sluggish market conditions and asset quality concerns about capital intermediary businesses. In our view, while the sector lacks share price momentum due to depressed fundamentals, current concerns about the margin financing & securities lending and stock pledge financing businesses are overdone. Investors may stick to a wait-and-see stance amid a risk averse sentiment in the short term, but we think the securities sector has become quite attractive now. Our bear, base and bull case analyses see 2018 sector ROE at 5.2%, 5.7% and 6.7%. Ou Yafei, Research Analyst, SFC CE No. BFN410 oyf@gf.com.cn +86 20 8757 3009 Gao Yedong, Editor, SFC CE No. BAI002 yedonggao@gfgroup.com.hk +852 3719 1026

China Pulse Check: Building Materials Supply conditions remain key; promising cement industry conditions in southern regions likely to continue throughout the year Demand from the property sector remained strong while demand from infrastructure has been relatively low 5M18 national investment in property development grew 10.2% YoY, down 0.1pp from 4M18, and up 1.4pp from 5M17. National new starts floor space rose 10.8% YoY, up 3.5pp from Jan-April and up 1.3pp from 5M17. Both investment and new starts floor space remained high. Floor space of commercial buildings sold grew 2.9% YoY, up 1.6pp from Jan-April, indicating resilient sales. Based on sales figures and new starts, property inventory remained low, and new starts should be sustainable. 5M18 national FAI grew 9.4% YoY, down 3.0pp from Jan-April, a relatively low level compared with data since 2009. Infrastructure investment in May grew 2.26% YoY, a low level. Monthly growth in Feb, March and April 2018 was 16.1%, 10.6% and 11.3% respectively. Deleveraging had a significant impact on infrastructure investment and we will closely watch any policy adjustments. With supply contractions, demand and supply conditions in the cement industry remained tight and prices saw volatility; peak season business conditions for glass were less promising, and visibility was weaker than in the cement industry Production growth in cement and glass saw narrow fluctuations. 5M18 national cement production reached 800m tonnes, down 0.8% YoY (4M18 cumulative growth was -1.9%). 5M18 cumulative flat glass production was 340m weight cases, down 1.3% YoY (4M18 cumulative growth was -1.5%). The weak fluctuations in production were mainly due to supply: since the second half of March, the cement capacity storage ratio has decreased sharply, and was low in absolute terms. Meanwhile, cement prices grew higher than expected in the peak season in the first half of the year and continued to fluctuate at a high level. As for industry demand and supply conditions, benefiting from previous production shifts and coordinated production stoppages, industry supply remained tight, while overall demand was relatively stable. The capacity storage ratio, which reflects the relation between industry demand and supply remained low in absolute terms, and prices are likely to increase when the peak season begins. The phenomenon of supply contractions and stable demand is likely to continue this year. High-frequency data from the glass industry showed discrepancies. Compared with previous years, glass inventory remained low in 1Q and rebounded in 2Q, while glass prices were stronger than in the traditional low season in 1Q, with increasing price levels. However, glass prices have declined since April, the traditional peak season, reversing the growth gained in the previous period. The difference between the glass and cement price trend is mainly due to supply. In the short term, given the suspension of nine production lines in the Shahe region due to environmental protection measures in Nov 2017, the supply contraction has been higher than expected in the short-term, which led to a decline in inventory and price hikes. In the medium term, the supply-demand structure in the glass industry should be weaker than in the cement industry, and supply will be less restrained than in the cement industry (e.g. the glass industry has more new capacity additions than the cement industry, and the cement industry has a policy of regular production shifts, while the glass industry lacks similar restrictive policies). Price hikes were therefore more a result of short-term factors. As the industry will likely see stable demand and limited restrictions in supply this year (less visibility than cement), we will closely follow changes in supply. Cement industry still promising in southern regions, while the downturn in northern regions has recovered slightly Based on 5M cumulative data, cement production in the south is significantly better than in the north. Meanwhile, cement production in the southwest outperformed that in the south-central region, and growth momentum was maintained in the southwest region. Cement production declined in the east, and dropped sharply in northern regions. However, monthly production growth turned positive in May (3.09%) in the central-north region, and the decline in production in May in the northeast, central-north and northwest regions narrowed compared with April. Overall, the cement industry is seeing stable demand and declining supply, resulting in a relatively tight supply-demand balance. As for specific regions, cement demand in the south was better than in the north, and the contraction in supply in the south was more moderate compared with northern regions. Cement saw stronger prices and volume in the south, while cement volume in northern regions was lower. Rotational production stoppages and relatively weaker economic conditions in the north led to a transfer of the cement business to the south. Investment recommendation Demand from infrastructure has deteriorated significantly and is at a historically low level, and we will need to monitor changes in policies closely. Demand from the property sector remained promising, given resilient property sales, low inventory levels, and continued property investment and property new starts. As overall demand remains stable, any surprises in the sector will mainly come from supply. Based on the high-frequency data that we track, cement supply is likely to decline this year given rotational production stoppages, production Page 2

suspensions due to environmental protection measures, and coordinated production stoppages. Coupled with stable demand, the cement capacity storage ratio remained at a historically low level, while the cement price fluctuated at a high level. In addition, as the traditional low season in June approached, the cement capacity storage ratio remained low. Given tougher production restrictions due to environmental concerns, we expect cement prices to be stronger compared with traditional low seasons in June-Aug. We believe the high cement price level will remain towards the end of the year, which will drive continued higher-than-expected earnings for cement companies in the south. We expect a share price rebound for cement companies in the south, including Conch Cement (600585 CH) and Huaxin Cement (600801 CH). We also recommend Pacific Quartz (603688 CH) and Shandong Pharmaceutical Glass (600529 CH) which benefit from visible sector demand and product upgrades. In the medium term, we like growth stocks Skshu Paint (603737 CH) and D&O Home Collection (002798 CH). Moreover, from a medium/long-term perspective, we like blue chips China Jushi (600176 CH) and Beijing New Building Materials (000786 CH) given their competitive advantages and the good industry landscape. Risks: A further downturn in the economy, volatility in macroeconomic policies such as currency and property policies, new capacity additions beating expectations, rapid growth in raw material costs, quicker-than-expected changes in the energy consumption structure, and company management and operational risks. 2H18 A-Share Securities Sector Outlook: Industry leaders to be the first to benefit from gradual market opening-up Market opening up at quickening speed, regulators encouraging industry leaders to become stronger Since the start of 2018, as various supportive policies are implemented, China s financial industry is opening up at a quickening pace. Against such a backdrop, sector policies are tilting towards innovation at certain industry players with a bid to improve industry leaders operational capabilities, risk control and competitive strength. Regulators are guiding the industry towards phasing out weaker players, with market-oriented competition increasing in each business segment. Meanwhile, with the new rules for stock-pledge repos and OTC options and the launch of CDR pilots, the competitive advantages of leading players have been further consolidated. Progressive opening-up not to jeopardize leaders positions, industry concentration continues to rise Opening-up to enrich product mix, leaders the first to benefit Drawing on the experience from Japan and Taiwan, a progressive opening-up of financial markets will increase the number of foreign JVs. The industry chain will thus become more complete with the entry of foreign securities firms with for example the development of derivatives and cross-border brokerage businesses, which will help connect domestic and more mature international markets. That said, core businesses will still be concentrated at local companies, and their market positions are even harder to break in the mid/long term. Increasing number of intuitional investors to benefit leaders China A shares are now included in the MSCI universe. Based on the case of Taiwan, in the mid/long term, the overall investor structure will be further improved with a rise in the proportion of institutional investors as a result of a rising weighting of MSCI inclusion supported by capital flow liberalization. Leading securities companies with capital strength, a strong investment banking business, and early presence in international businesses have the foundation for maintaining leadership in the institutional business and their relevant business offerings will continue to diversify. Industry concentration to continue to increase, earnings performance increasingly divergent In recent years, sector revenue and profit have been increasingly concentrated at leading companies. CR5 and CR10 in terms of revenue have picked up since 2012, growing from 32.2% in 2012 to 44.3% in 2017 and from 51.8% to 63.8% respectively. Similarly, the concentration of net profit has stabilized and rebounded since 2016, with CR5 and CR10 reaching 42.3% and 62.2% in 2017 respectively. Leading securities companies with a balanced business structure and comprehensive competitiveness have shown higher earnings stability, while regional securities firms with a higher exposure to the brokerage business with a traditional business model are facing greater downward pressure in terms of earnings performance. Business Outlook: Traditional businesses to be under pressure, innovative businesses moving forward with small steps 1) The brokerage business remains an area of competition with little overall incremental growth, with the institutional business showing a rising level of Page 3

concentration. 2) The overall investment banking business is shrinking, and within the context of supporting the financing by new economy companies, this business segment is becoming increasingly divergent. 3) Asset management is going through a reduction of channel businesses and an elimination of product embedding; we believe the overall business structure will be improved, with the overall business scale to decrease. 4) Capital intermediary: As the new rules for stock pledge repos will further enhance risk control, the business scale will shrink with adjustments to the business structure. 5) OTC options: Innovative businesses are moving forward with small steps, with market leaders to maintain strength. 2018 earnings to declining slightly, ROE expected to be 5.7% Our bear, base and bull case analyses see 2018 sector ROE at 5.2%, 5.7% and 6.7%, and net profit at Rmb100.3bn, Rmb109.3bn and Rmb129.3bn, representing YoY changes of -11.3%, -3.3% and +14.4%. Investment highlights: Market overreacting to risk concerns, watch leader re-ratings Several listed securities names have started to trade below their book value mainly due to sluggish market conditions and asset quality concerns about capital intermediary businesses. In our view, while the sector lacks share price momentum due to depressed fundamentals, current concerns about the margin financing & securities lending and stock pledge financing businesses are overdone. Investors may stick to a wait-and-see stance amid a risk averse sentiment in the short term, but we think the securities sector has become quite attractive now. Risks Regulations further tightening; deleveraging efforts strengthening causing liquidity to tighten, thus driving market turnover to decrease further; a depressed bond market leading to lower-thanexpected fixed-income investment returns. Page 4

Rating Definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. 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GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk Page 5