Dim Sum Express. A-Share Market. Hong Kong Market. Equity Research. Aug 4, 2014

Transcription

1 Equity Research Dim Sum Express Alex Fan, CFA Head of Research SFC CE No. ADJ Dennis Yao Research Analyst SFC CE No. ALK Gao Yedong Editor SFC CE No. BAI GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong A-Share Market Auto: Supercharger sector to grow substantially on push for energy consumption cuts The penetration of superchargers has begun to rise significantly on policies for reducing energy consumption. The fact that superchargers can reduce energy consumption and emission at a low cost is favorable for both consumers and carmakers. We expect turbochargers to be most commonly used in vehicles with a small displacement going forward, and estimate that supercharger demand in China will exceed 10m units in 2015, worth nearly Rmb20bn. The top five players in the domestic market represent a combined market share of around 70%, with Shanghai Diesel Engine ( CH) most likely to benefit from the use of superchargers in passenger vehicles. Arms: Sector reform and military force development two key themes The arms sector outperformed the broader market in Jul, with companies producing equipment for the army particularly strong. Equipment suppliers whose businesses are in line with the push for equipment modernization and national defense informatization are set to benefit the most from efforts to build a stronger military force. We suggest watching companies that will meet with fewer obstacles in terms of asset consolidation during upcoming corporate reforms and those taking the lead in incentive mechanism reforms. Going forward, we expect to see further policy support for general aviation development, the Beidou navigation system, aircraft engine technology development, and military supplies R&D. Dalian East New Energy ( CH): New energy key area for business expansion Revenue dropped 49% YoY in 1H14 with net profit falling 13.3% YoY due to a decrease in revenue from the company s residual heat power generation business, while its newly established natural gas business is yet to make any contribution to earnings. We maintain the view that the company s residual heat power generation business is improving. The board of the company has called for business expansion focusing on energy conservation, clean energy and new energy. We believe the company still has sufficient funds for business expansion and M&A given its Rmb400m of cash on hand and a debt-to-asset ratio of less than 12%. We remain positive on the stock. Hong Kong Market Investment Strategy: The trend is your friend Although the market has run ahead of economic fundamentals (prices of cement, steel and coal are still firmly on the downtrend), we believe short term market performance is more likely to be influenced by investor sentiment, which is improving. More importantly, past experience indicates that current fund inflows should continue for about three months. We expect the market rebound to continue until early October, even if we see short term profit taking. To take advantage of this, we suggest a bell-shaped strategy, increasing allocation to the old economy such as financials and property. However we also remain positive on the new economy and high growth stocks. COLI (688 HK): 1H14 results review 1H14 results beat estimates on higher-than-expected revenue growth. We believe COLI will benefit from ongoing industry consolidation given its strong brand name, industry-leading position and execution. Asset injections from its parent group could be a long-term catalyst. However, its declining gross margin is an overhang. We expect net profit to grow at a CAGR of 11% in The stock is currently trading at 8.3x 14E P/E, which we see as undemanding. We maintain our Buy rating and target price of HK$30.50 (11.0x 14E P/E).

2 Auto: Supercharger sector to grow substantially on push for energy consumption cuts Superchargers to be used mainly in small-displacement vehicles The penetration rate of superchargers has begun to rise significantly on policies for reducing energy consumption. In addition, the recent listing of Kangyue Technology ( CH) is likely to substantially enhance market attention to the supercharger sector. The use of superchargers is a mature technology for reducing energy consumption, and the penetration rate of turbochargers in Europe was close to 60% in The fact that superchargers can reduce energy consumption and emission at a low cost is favorable for both consumers and carmakers. 16% of the new passenger vehicle models launched in 2010 were installed with a turbocharger; the proportion rose to 40% in In particular, we expect turbochargers to be most commonly used in vehicles with a displacement of L going forward. Supercharger market to be worth Rmb20bn in 2015 The penetration rate of turbochargers in China stood at 8% in It is worth noting that superchargers for passenger vehicles have a larger target market with higher entry barriers, while the penetration of superchargers for commercial vehicles is also rising on the back of strengthening light truck regulations. Based on sedan, SUV and MPV data we track, the penetration of superchargers among these vehicles rose by 7.5pp from Jan 2012 to 16.8% in Dec We believe this marks the beginning of strong growth in supercharger penetration. We estimate that supercharger demand in China will exceed 10m units in 2015, which would be worth nearly Rmb20bn. Shanghai Diesel Engine to benefit most from PV superchargers growth Turbocharger companies worldwide mostly operate as independent component suppliers. The top five players in the domestic market, namely Honeywell, BorgWarner, Cummins, Hunan Tyen Machinery ( CH) and Kangyue Technology ( CH), represent a combined market share of around 70%. Hunan Tyen Machinery and Kangyue Technology focus on producing superchargers used in commercial vehicles, while Shanghai MHI Turbocharger, a subsidiary of Shanghai Diesel Engine ( CH), is most likely to benefit from the use of superchargers in passenger vehicles with BMW and Great Wall Motor ( CH) as its two largest clients. We are positive on Shanghai Diesel Engine ( CH), Weifu High-Technology ( CH), Hunan Tyen Machinery ( CH) and Kangyue Technology ( CH). Arms: Sector reform and military force development two key themes The arms sector outperformed the broader market in Jul, with companies producing equipment for the army particularly strong. Military force development Equipment suppliers whose businesses are in line with the push for equipment modernization and national defense informatization are set to benefit the most from efforts to build a stronger military force, such as Aero-Engine ( CH), China Avic Electronics ( CH), Haige Communications ( CH) and Chengfei Integration Technology ( CH). Corporate system reform We believe the following companies will meet with fewer obstacles in terms of asset consolidation during upcoming corporate reforms: Beifang Chuangye ( CH), North Electro-Optic ( CH), China State Shipbuilding ( CH), Fengfan ( CH), AVIC Electromechanical Systems ( CH), Chengfa Aero Science &Technology ( CH), Aerospace Times Electronics ( CH), Space Appliance ( CH) and Aerosun Corporation ( CH). Incentive mechanism reform In addition, we believe Aviation Industry Corporation of China, China Shipbuilding Industry Corporation, China Electronics Corporation and local SOEs are likely to take the lead in reforming their incentive mechanisms. More policy support ahead Going forward, we expect the government to further promote the development of general aviation with the issuance of more policies regarding air control planning and infrastructure construction. In addition, policy support for using the Beidou navigation system in government vehicles will likely strengthen. Special projects might be introduced to develop key aircraft engine technology, while reforms in the permission for military supplies R&D and supplies pricing should also be strengthened. Page 2

3 Sector reform and military force development two key themes We continue to see sector reform and the development of a stronger military force as the two key themes driving the arms sector throughout this year. Our top picks for Aug are China Aviation Optical-Electrical Technology ( CH), Space Appliance ( CH), Haige Communications ( CH), Haite High- Tech ( CH), Aero-Engine ( CH) and Glarun Technology ( CH). Dalian East New Energy ( CH): New energy key area for business expansion 1H14 earnings weaken Revenue dropped 49% YoY to Rmb112m in 1H14. Net profit fell 13.3% YoY to Rmb10.68m with EPS of Rmb0.09. The significant revenue decline was due to a decrease in revenue from the company s residual heat power generation business, while its newly established natural gas business is yet to make any contribution to earnings. Earnings weaken due to unbooked revenue Revenue from the residual heat power generation segment dropped as 1H14 revenue from the complete-set equipment business has not been booked (while Rmb96m was booked in 1H13). Another business under this segment, construction business, saw gross margin rise to a new high in recent years (25.5%), though its revenue slid 6.7% YoY to Rmb96m. Overall, we maintain the view that the company s residual heat power generation business is improving. Sufficient funding for business expansion The board of the company has called for business expansion focusing on energy conservation, clean energy and new energy. In particular, the Dalian Jitong gas project which is likely to come online this year should be an important driver of 2015 earnings growth. Furthermore, the company has stopped investing in the Hainan Yaxi project and has conducted further reviews of development in the new energy space. We believe the company still has sufficient funds for business expansion and M&A given its Rmb400m of cash on hand and a debt-to-asset ratio of less than 12% (excl. advance receipts). We remain positive on the stock and forecast 2014/15/16 EPS of Rmb0.47/0.63/0.81. Investment Strategy: The trend is your friend Surprise to the upside The Hang Seng Index jumped 6.7% in July to approach the 25,000 resistance level for the first time since November 2010, while the H-share Index rose 7.7% during the month. Blue chips and the old economy led the rise, with property, securities, insurance and materials climbing the most, and the new economy lagging behind or even declining. Daily market turnover surged to HK$100bn last Wednesday compared with an average of HK$60.5bn over the last 12 months. Multiple factors at play The latest uptrend is the result of a combination of factors: 1) the government s stance on monetary easing and its emphasis on relieving financing costs for financial institutions and companies; 2) almost half of the cities with home purchase restrictions have carried out relaxation to varying extents, indicating the government s intention to revive the property market; 3) expectations ahead of the Shanghai-Hong Kong Stock Connect the Shanghai Stock Exchange is actively preparing for the launch; 4) macro data including PMI and company profits have shown signs of improvement, and perhaps the most important factor; 5) surging fund flows over the past three weeks are a strong indication of interest from overseas investors in the Hong Kong market. Follow the money As it will be some time before the impact of policies becomes clear and 3Q results are not yet known, market performance is more likely to be influenced by investor sentiment, which is improving. More importantly, past experience indicates that fund flows should continue for about three months the last four major fund inflows since 2008 have led to an average uptick of 43% during the period. Given the positive factors driving the stock market since the beginning of July, which are unlikely to reverse in the near term, and the high correlation between stock market performance and money inflows, we expect the market rebound to continue until early October, even if we see short term profit taking. Bell-shaped strategy To take advantage of this potential market rebound, we believe investors should adopt a bell-shape investment style. We suggest increasing allocation to the old economy such as financials (banks, insurance, securities) and property, which are likely to benefit directly form a policy-driven market and whose valuations remain low, even after the latest rally. However, we also remain positive on the new economy and high growth stocks with reasonable valuations. In addition, thematic names set to benefit from the Shanghai-Hong Kong Stock Connect and the Page 3

4 global recovery should not be overlooked. Such stocks include Ping An (2318 HK), CCB (939 HK), CITIC Securities (6030 HK), COLI (688 HK), Tencent (700 HK), Li & Fung (494 HK), and HKEx (388 HK). Using the 24% rebound in the market in the most recent round of fund inflows in 4Q12 as a reference, the Hang Seng Index could potentially rise to 28,700. This is an extract from a report due to be released today. Please contact us for the full report. (Analyst: Alex Fan, alexfan@gfgroup.com.hk) COLI (688 HK): 1H14 results review Net profit up 18% YoY to HK$13bn, 8% above consensus Revenue rose 54% YoY to HK$49.6bn, with mainland China property development accounting for 97%. Gross margin was 33.6%, 270bps lower than in 1H13. Operating profit rose 43% YoY to HK$18.8 bn. Net profit rose 18% YoY to HK$13bn; EPS rose was also up 18% YoY to HK$1.59. The company announced a DPS of HK$0.20. Its major JV, COGO (81 HK), contributed profit of HK$410m, 8% higher than consensus. Contract sales down 8.8% YoY to HK$73bn Management is satisfied with its first-half pre-sales performance in the relatively tough China property market. In 1H14, 28 projects with total GFA of 4.95m sqm was completed. The company acquired 10 land parcels, with total GFA of 0.85m sqm and a land premium of HK$31bn (42.5% of total contract sales revenue). The company has completed over two-thirds of its annual land replenishment target. Its land acquisition budget in 1H14 was quire conservative, in our view. Management expects transaction volume and prices to improve in China Management believes liquidity in the China property sector is likely to improve in the near future, but expects a tougher operating environment for small to medium developers. Industry consolidation is underway, and management is confident about its full-year results. Maintain Buy and target price of HK$ H14 results beat estimates on higher-than-expected revenue growth. We believe COLI will benefit from ongoing industry consolidation given its strong brand name, industry-leading position and execution. Asset injections from its parent group could be a long-term catalyst. However, its declining gross margin is an overhang. We expect net profit to grow at a CAGR of 11% in The stock is currently trading at 8.3x 14E P/E, which we see as undemanding. We maintain our Buy rating and target price of HK$30.50 (11.0x 14E P/E). (Analyst: Dennis Yao, dennisyao@gfgroup.com.hk) Page 4

5 Hong Kong Equity 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 did not have any investment banking relationships with the companies mentioned in this research report in the past 12 months. (3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds 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 a recommendation for investing in, any securities. This research report is intended solely for use by the clients of GF Securities (Hong Kong). The securities mentioned in this research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of this research report to any persons in any jurisdictions that the circulation or distribution of such research report is unlawful. The information contained in this research report has been compiled or arrived at from publically available sources believed to be reliable in good faith, and no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for any losses arising from the use of the materials presented in this research report, unless otherwise required by applicable laws or regulations. Please be aware of the fact that investments involve risks and that the prices of securities may fluctuate and therefore returns may vary. Past results do not guarantee future performance. Any recommendations contained in this research report do not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. This report is not to be taken in substitution for the exercise of judgment by the respective recipients of this report. Where necessary, the recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this research report. The points of view, opinions and analytical methods adopted in this research report are solely expressed by the analyst(s) but not GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in this research report are the current opinions of the analyst(s) as of the date appearing on this material and are subject to changes at any time without notice. The salespersons, dealers or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentaries and dealing strategies either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have investment decisions which are contrary to the opinions expressed in this research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in the securities mentioned in this research report. The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 5