26 October 2018 Hang Seng Index Performance Major Market Indicators % Change Hong Kong Close 1-Day 1-Mth 6-Mth 12-Mth Hang Seng Index 24,994.46-1.0% -10.1% -16.7% -11.4% HSCEI (H-Shares) 10,176.56-0.5% -7.4% -14.8% -11.1% Mkt T/O ($ Mn) 106,079.56 16.3% 53.0% 8.2% 36.3% Oversea DJIA 24,984.55 1.6% -5.3% 2.7% 6.8% NASDAQ 7,318.34 3.0% -8.4% 2.8% 11.6% Shanghai SE Composite 2,603.80 0.0% -7.2% -15.3% -23.6% Shenzhen Component 7,529.41-0.2% -10.6% -26.8% -34.3% Commodities and FX Crude Oil Futures (US$) 66.76-0.8% -6.7% -2.1% 26.8% Gold Futures (US$) 1,234.40 0.2% 3.3% -6.3% -2.8% Baltic Dry Index 1,546.00-2.0% 2.9% 12.4% -0.6% USD / Euro 1.14 0.0% -3.2% -6.2% -2.7% Yen / USD 112.32 0.2% 0.5% -2.8% 1.3% CNH / USD 6.957 0.0% -1.1% -9.2% -4.5% Source: Bloomberg Market Overview Hang Seng Index closed down 1.0% at 24,994. HSCEI dropped 0.5%. Heavily weighted Tencent (700), AIA Group (1299) and HSBC (5) cut 2.5%, 2.2% and 0.9% respectively. HK banking, gaming, technology, oil, airline and cement stocks underperformed the market. Sunny Optical (2382) and AAC Technologies (2018) slid 7.5%-7.7%. BOC Hong Kong (2388) and Hang Seng Bank (11) shrank 2.0%-2.3%. Sands China (1928) and Galaxy Entertainment (27) tumbled 4.4% and 1.4% respectively. Three largest oil companies fell 1.6%-2.9%. Air China (753) and Anhui Conch Cement (914) decreased 2.1%-2.5%. Securities, pharmaceutical and PRC property stocks ended higher and outperformed the market. Five securities stocks in HSCEI grew an average 4.2% among which China Galaxy Securities (6881) jumped 6.2%. China Vanke (2202) retreated 0.4% but the remaining nine of ten largest Chinese property developers all increased with an average gain of 3.0% among which Longfor Properties (960) and Sunac China (1918) soared 5.7%-6.0%. Sinopharm (1099), Sino Biopharmaceutical (1177) and CSPC Pharmaceutical (1093) added 1.0%-2.6%. Consumption, telecom, power, automobile, insurance, HK property and PRC banking lacked clear direction. WH Group (288) climbed 1.9% while Want Want China (151) shrank 2.6%. Sino Land (83) increased 0.7% while CK Asset (1113) slumped 1.8%. Bank of Communications (3328) added 1.3% while ABC (1288) decreased 2.6%. PICC P&C (2328) and Zhongan Online (6060) advanced 2.0%-3.1% while New China Life (1336) cut 0.9%. Great Wall Motor (2333) surged 2.0% while Geely Automobile (175) plunged 1.0%. We expect Hang Seng Index to have a technical support at 24,000. We expect Hang Seng Index to have a technical support at 24,000.
Market in Focus Hua Hong Semiconductor MKT Cap ($Bn) 13.5 Bloomberg Ticker 1347 HK Equity 52-week High/Low ($) 12.12-30.6 Rating BUY Free Float (%) 38.1% Target Price $16.00 3M Avg Turnover ($, Mn) 166.6 Long term growth prospects remain promising Maintain BUY Hua Hong Semiconductor (1347) Since our BUY recommendation dated October 4, the share price of Hua Hong Semiconductor (1347, HHS, $12.98) has dropped 23.5% compared to a loss of 7.7% for Hang Seng Index over the same period. We believe the underperformance is mainly driven by a slowdown in the global semiconductor industry. According to IHS Markit, revenue growth for global semiconductor market is expected to slow from 15.8% in 2018 to 4.4% in 2019 and 4.3% in 2020. However, we maintain our bullish view on HHS because the company relies on the fast-growing domestic market which is highly promoted by the PRC government. In January 2018, the company announced a share placement of 242.4mn new shares with China Integrated Circuit Industry Investment Fund (CICIIF) at $12.90 per share to raise US$400mn. CICIIF, a national fund established to promote the semiconductor industry in China, will own 18.9% stake in HHS after completion of the share placement. HHS intends to apply the net proceeds to finance its capital injection into a JV project that will be 51%, 29% and 20% held by HHS, CICCIIF and Wuxi Entity respectively. The JV company plans to invest US$2.5bn to build a new foundry with a monthly production capacity of 40,000 12-inch wafers by 2022. Rapid development in China relating to cloud computation, IoT, big data, wisdom city and 5G telecommunication applications and technologies are expected to boost demand for semiconductor products in long term. According to our estimation, the JV project will increase HHS s production capacity by around 50% and significantly improve its earnings prospects. HHS reported strong financial results for 2Q18. Revenue increased 9.4% qoq and 16.1% yoy to record high of US$230mn thanks to a 9.2% yoy growth in sales volume to 501,000 wafers and 6.3% yoy increase in ASP. Revenue from China contributed 58.6% of total revenue. Capacity utilization rate increased to 101.5% from 99.4% in 2Q17. Gross margin improved to 33.6% from 33.2% in 2Q17 due to increased shipments, higher ASP and better utilization. Both revenue and gross margin were better than management guidance. Net profit surged 14.2% qoq and 33.3% yoy to US$45.8mn. Fig1: 1 Year Share Price Source: Bloomberg, Mason Securities 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. Our earnings forecast for 2018 is US$173mn representing an increase of 19.2% yoy but 2018 EPS growth will be only 14.1% due to dilution from the proposed share placement with CICIIF. Traded at 2018 P/E of 10.4x and 2018 P/B of 1.0x, current valuation of HHS looks attractive to long term investors. We therefore maintain our BUY rating on HHS with an unchanged 6-month price target of $16.0 based on 2018 P/B of 1.2x.
Technical Ideas Stock Code Rating / Last Closing Price Our TP / Bloomberg TP Cut Loss MKT Cap ($Bn) / Free Float Turnover / 30D Avg ($Mn) Turnover vs 5D & 30D Avg Forward PER / PBR Net Debt (Cash) / Equity Zhaojin Mining 1818 HK Equity BUY $7.08 $7.79 $6.93 $6.73 22.8 100.0% 67 23 146% 292% 29.5X 1.39X 66% Technical Indicator SMA10 6.87 RSI (14) 73.7 SMA20 6.46 BB (Upper) 7.35 SMA100 6.22 BB (Lower) 5.57 Stock Code Rating / Last Closing Price Our TP / Bloomberg TP Cut Loss China Galaxy Securities 6881 HK Equity BUY $3.92 $4.31 $4.35 $3.72 MKT Cap ($Bn) / Free Float Turnover / 30D Avg ($Mn) Turnover vs 5D & 30D Avg Forward PER / PBR Net Debt (Cash) / Equity 66.5 100.0% 177 69 107% 256% 10.9X 0.51X 17% Technical Indicator SMA10 3.50 RSI (14) 63.2 SMA20 3.55 BB (Upper) 3.90 SMA100 3.94 BB (Lower) 3.20 Source: Bloomberg, Mason Securities
Recent Recommendations Date of Issue Stock Pick Recommendation Highlights Rating (TP) 12/10/2018 Anta Sports (2020) 15/10/2018 Kunlun Energy s (135) 16/10/2018 A-Living Services (3319) 18/10/2018 ENN Energy (2688) Valuation looks attractive to long-term investors - Maintain BUY Anta Sports (2020) We believe the potential earnings dilution effect has been fully discounted in share price We believe current valuation of Anta Sports is still attractive to long term investors Benefit from sustainable LNG consumption growth in China, recommend BUY Kunlun Energy (135) We expect LNG imports will reach approximately 13% CAGR from 2018 to 2025 in China Kunlun Energy s LNG terminals and LNG processing business will benefit from the sustainable LNG import growth given its leading position in LNG industry Attractive valuation after a 35% drop in share price Maintain BUY on A-Living Services (3319) We believe the underperformance is partially due to worries about an increase in employee benefit expenses after a strict enforcement of China s social security taxs in 2019 The negative impact on 2019 s earnings should be fully discounted in share price in our view ENN Energy (2688) : Recent share price weakness offers a long-term buying opportunity; BUY Management guided a +20% yoy volume growth on natural gas sold and high-single-digit new connection growth for the next 2-3 years. Management also expect the core net profit growth in 2018 to reach +18% Valuation of ENN is still reasonable long term investors BUY ($42.0) BUY ($10.70) BUY ($14.30) BUY ($79.4) 19/10/2018 China Overseas Property Attractive valuation after a 33% drop in share price Maintain BUY China Overseas Property (2669) The underperformance is partially due to worries about an increase in employee benefit expenses after a strict enforcement of China s social security taxs in 2019 BUY ($2.60) (2669) As at 30 June 2018, COPH owned net cash of $2.20bn or equivalent to $0.67 per share that should enable it to continue its strategy of expansion through acquisition 22/10/2018 China Oilfield Services (2883) 23/10/2018 CEG (839) 24/10/2018 CRG (1193) 25/10/2018 Luk Fook (590) Recent share price weakness offers a buying opportunity Maintain Buy on China Oilfield Services (2883) for short term trading purpose We expect the international crude oil spot price to maintain at a relatively high level which incentivize the oil explorer to increase their capex Current valuation of COSL is attractive because the P/B ratio historically ranged between 1x and 2x during the CNOOC s capex upcycle Major beneficiary from proposed personal income tax reduction Upgrade China Education Group (839) to BUY The proposed personal income tax reduction will be effective on 1st January 2019 and is likely to benefit CES which is a leading provider of private higher education service in China CES is also less affected by the Draft Amendments on the Implementation Rules for the Law for Promoting Private Education issued in August CRG (1193): Focus on long-term trend, Good entry point for long-term investors, Maintain BUY We maintain our long-term positive views on China gas market and expect the gas consumption in China to nearly triple by 2030 Recent share price weakness offers a buying opportunity for long term investor BUY Luk Fook (590) ahead of strong interim results We believe the outperformance was mainly driven by satisfactory same store sales growth for 2Q FY19 and anticipation of strong interim earnings to be released in late November We anticipate a strong interim earnings to be released in late November BUY ($9.20) BUY ($12.1) BUY ($38.4) BUY ($30.5)
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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