A Share Monthly Portfolio(2) Discussion of the May portfolio: mediocre industry selection and...

1

A-Share Monthly Portfolio

Jun 15, 2016

Investment Portfolio Report of June 2016 - Maintain a

steady and moderate style with a preference for small-cap

stocks

Rate of return. The rate of return on the portfolio of 10 golden stocks recommended by Galaxy

Securities in May 2016 was 0.3%, 0.11ppt lower than that of the CSI300 Index. From Jan to

May 2016, the cumulative return on the monthly portfolios of Galaxy Securities was -2.7%,

12.34ppt higher than that of the CSI300 Index. From Jan 2013 to end-May 2016, the monthly

cumulative return of golden stocks of Galaxy Securities was 331%, 305ppt higher than that of

the CSI300 Index and also significantly higher than the 196% rise in the ChiNext Index.

Outlook for June. Expectations are high for the FED to increase the interest rate, and a rise in

the US dollar index (USDX) may put pressure on the RMB exchange rate, but domestic factors

are still the dominant influence on the markets. The economic recovery trend is weakening, but

the policy focus is on reform because of the relatively stable economic environment. If supply-

side reform is strongly promoted, investor confidence will be enhanced even if there is a short-

term influence on the economic growth rate, as long as there is no systemic financial risk.

Monetary policy will focus on stability and on maintaining reasonable and sufficient liquidity,

though special care should be paid to fluctuation in the exchange rate and rising credit risk.

Whether Shenzhen-Hong Kong Stock Connect will be launched and A shares will be included

in the MSCI Index is an influencing factor in the market; high expectations of the inclusion have

led to recent gains in A share equities. At the market level, prices have remained within a very

narrow range for three consecutive weeks, indicating prudent investor sentiment and a possible

change in market direction after the severe decline in 2015, which may lead to fluctuation in the

stock index. Investment style should be moderate and stable, focusing on growth and cyclical

factors.

June portfolio (industries). The June portfolio includes 2 machinery and military industry

stocks, 1 petrochemical stock, 1 non-ferrous metal stock, 2 electronics stocks, 1 computer

stock, 1 electrical equipment and new energy stock, 1 light industrial manufacturing stock, and

1 social service stock.

June portfolio (companies): Changshan Textile (000158.CH), Chenming Paper (000488.CH),

DMEGC (002056.CH), Dinghan Technology (300011.CH), GTIG (002091.CH), HBP

(002554.CH), Huajin Chemical (000059.CH), Tibet Summit (600338.CH), Tri-Ring Group

(300408.CH) and UTS Travel (002707.CH).

Yang Huachao — Chief Analyst of Small-

and Mid-cap Stocks

(8621) 20252681

yanghuachao @chinastock.com.cn

Practicing Certificate No.: S0130512050003

Sun Jianbo — Doctor, Chief Strategy Ana-

lyst

(8610) 83571306

sunjianbo @chinastock.com.cn


Qin Xiaobin — Strategy Analyst Director

(8610)6656 8746

[email protected]


Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

Sources: China Galaxy Securities Research

Figure 1: Galaxy Securities June Investment Portfolio (Note: share prices are the closing prices on Jun 15, 2016)

Stock Code Stock Discription EPS (RMB) PE (X)

2014A 2015A 2016E 2017E 2014A 2015A 2016E 2017E

300408.CH Tri-Ring Group 0.38 0.51 0.64 0.80 44.2 32.9 26.2 21.0

002056.CH DMEGC 0.93 0.79 1.02 1.29 16.3 19.2 14.9 11.8

000158.CH Changshan Textile 0.02 0.20 0.30 0.41 660.5 66.1 44.0 32.2

300011.CH Dinghan Technology 0.32 0.48 0.65 0.90 73.0 48.6 35.9 25.9

002554.CH HBP 0.29 0.30 0.56 0.74 48.4 46.8 25.1 19.0

002707.CH UTS Travel 0.13 0.22 0.33 0.48 155.2 91.7 61.1 42.0

000488.CH Chenming Paper 0.26 0.53 1.02 1.37 29.8 14.6 7.6 5.7

000059.CH Huajin Chemical -0.94 0.21 0.93 1.00 - 41.5 9.4 8.7

002091.CH GTIG 0.38 0.44 0.55 0.67 42.1 36.4 29.1 23.9

600338.CH Tibet Summit 0.05 0.25 0.93 1.06 614.4 122.9 33.0 29.0

2

(1) The rate of return on the portfolio last month was 0.3%, 0.11ppt lower than the CSI300 Index.

The market saw a lot of fluctuation in May, with the stock index falling quickly in early May, recovering with-

in a narrow range, and ending with a sharp rise on the last day of May. All indexes saw minor fluctuations

during the month.

The portfolio just posted a fair performance in May, though it was influenced by the suspension of

Hengshun Zhongsheng and Conant. The rate of return on our portfolio was 0.3%, 0.11ppt lower than that

of the CSI300 Index. In the same period, the CSI300 Index rate of return was 0.41%, the SSE Composite

Index -0.74%, and the ChiNext Index 0.98%. DMEGC and ARTS performed well, while Hengshun

Zhongsheng and Conant were suspended.

I. Review of Previous Investment portfolio

Fig.2: Returns of the May Portfolio against the Market Indexes

Sources: China Galaxy Securities Research, WIND

Gains in the Galaxy portfolio

Stock rise Rise in the corresponding industry

Fig.3: May Stock Portfolio and the Gain/Loss in the Corresponding Industries

Sources: China Galaxy Securities Research, WIND

Comparison between stock portfolio and main market indices

(The dates referenced in the review part of this report are from May 1 to May 31, 2016)

Shenzhen Component

Index

ChiNext Index SME Board Index

CSI 300 Index SSE 50 Index Shanghai Composite

Index

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(2) Discussion of the May portfolio: mediocre industry selection and slightly good stock selection

Factor analysis. For absolute return, -74.8% was from industry allocation, while 174.8% was from stock selection.

For excess return, returns from stock selection were positive, while returns from industry allocation were negative.

Therefore, the industry selection was mediocre and stock selection was generally good, but the suspension influ-

enced the performance of the portfolio.

Company code

Company name Return % Return of indus-try allocation %

(Extraordinary) return of stock picks %

Extraordi-nary return of industry allocation %

Reason for stock pick Success/failure reason

600759.CH Geo-Jade Petroleum -1.89 -3.46 1.57 -3.87 Belt and Road potential; stra-

tegic bargain hunting of over-

seas oil and gas assets; to

become a middle-to-large oil

company.

Industry performance was poor;

the performance of the individual

stock was slightly better than the

industry.

300263.CH Longhua Energy-

saving -2.26 0.10 -2.36 -0.31 Management expects to im-

plement major restructuring;

growth potential triggered by

expansion in new material and

military equipment fields.

The industry performed poorly;

the stock was worse than the

industry.

000887.CH Anhui Zhongding -1.85 0.10 -1.95 -0.31 Market potential for environ-

mentally friendly UAV motors,

charging piles and automo-

Industry performance was poor; the stock was worse than the industry.

000488.CH Chenming Paper -0.96 -2.66 1.70 -3.06 High-quality leading company

which should benefit from

supply-side reform; rise in dual

major businesses to boost

earnings


the stock performed slightly better

than the industry.

000895.CH Shuanghui Develop-

ment 4.18 2.29 1.89 1.88 Vigorous development of new

products; expected increase in

slaughter rate.

Industry performance was rela-

tively fair; the individual stock

performed slightly better than the

industry.

603017.CH Arts Group 6.30 -3.45 9.75 -3.86 Comprehensive service pro-

vider for industrial parks, both

domestic and international.


the Company did better than the

industry.

600312.CH Pinggao Electric -4.94 -3.04 -1.90 -3.45 Accelerated delivery of EHV

products; increased capacity

and sales of subsidiary’s

chargers and charging piles


the stock performed worse than

the industry.

002056.CH DMEGC 9.31 4.61 4.71 4.20 Driven by growth and cyclical

factors; good prospects in

photovoltaic and power battery

business; magnetic materials

business increasing steadily;

solar cell boom expected to


the stock’s performance was

better than the industry’s.

300208.CH Hengshun

Zhongsheng -7.96 0.18 -8.14 -0.23 Overseas industrial park expe-

rience provides a successful

model for the Belt and Road.


the shares were suspended; the

stock performed far worse than

the industry.

300061.CH Conant 3.07 3.11 -0.04 2.70 Created the Mainland’s lead-

ing consumer finance stock,

strategically upgrading its

traditional business; competi-

tive, profitable acquisition with

excellent growth potential.

The industry performed well, but

the Company’s shares were sus-

pended; the stock performance

was the same as the industry’s.


Figure 4: Review and attribution analysis on portfolio performance in last month

4

Composition of

total return 0.30 -0.22 0.52

Contribution to total

return 100% -74.8% 174.8%

Composition of

excess return -0.11 0.52 -0.63

Contribution to 100% -489.8% 589.8%

Dominated by the growth

cycle Industry selection was poor,

but good stock selection result-

ed in excess returns.

Company code

Company name Return % Return of indus-try allocation %

(Extraordinary) return of stock picks %

Extraordi-nary return of industry allocation %

Reason for stock pick Success/failure reason


Industries performing well in May included electronics, computers, food and beverage, household applianc-

es and finance. Industries with the steepest decline included coal, steel, tourism, trading and retail.

Hot themes performing well included sub-new stocks, rare-earth permanent magnets, Tesla, OLED and

sensors. Poorly performing industries included ST, steel structures, oil and gas, gold and jewellery, and

online travel.

As for individual stocks, 51 stocks achieved over 30% growth, a slight increase over that of last month;

most of these were sub-new stocks. There was not much activity in individual stocks.

5

Name Change Name Change

Sub-new stock 29.75 ST concept -7.64

Rare-earth perma-

nent magnets 23.63 Steel structure -7.46

Tesla 17.79 Guangdong, Hong Kong

and Macao FTA -6.49

OLED 16.36 Oil and gas reform -6.29

Sensors 13.41 Gold and jewellery -5.98

Cold-chain logistics 12.90 Online travel -5.80

Block chain 7.63 Silk Road -5.74

Lithium batteries 7.40 Shanghai local restructur-

ing -5.71

Touch screens 7.20 Changchun–Jilin–Tumen -5.56

Chip localization 6.46 Venture capital investment -5.49

Sources: WIND, China Galaxy Securities Research

Figure 6: The Best and the Worst 10 Concept Stocks in May

Figure 5: May 2016 Performance of All Industry Indexes (%)


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Code Name Change Industry Code Name Change Industry

000796.SZ CAISSA -38.8929 Catering and tour-

ism 000796.SZ CAISSA -38.8929 Catering and tour-

ism

600365.SH THGW -35.2787 Food and bever-

age 600365.SH THGW -35.2787 Food and bever-

age

601918.SH *ST SDIC XINJI -34.1794 Coal 601918.SH *ST SDIC XINJI -34.1794 Coal

300366.SZ TROY Information

Technology -33.3076 Communication 300366.SZ TROY Information

Technology -33.3076 Communication

002208.SZ HUCD -32.2780 Real estate 002208.SZ HUCD -32.2780 Real estate

002696.SZ Baiyang Aquatic -30.9171 Food and bever-

age 002696.SZ Baiyang Aquatic -30.9171 Food and bever-

age

300117.SZ Beijing Jayu -28.0151 Architecture 300117.SZ Beijing Jayu -28.0151 Architecture

000622.SZ *ST Hengli -27.6677 Automobiles 000622.SZ *ST Hengli -27.6677 Automobiles

300063.SZ Sky Dragon

Group -26.6097 Basic chemicals 300063.SZ Sky Dragon

Group -26.6097 Basic chemicals

600770.SH Jiangsu Zongyi -26.3285 Comprehensive 600770.SH Jiangsu Zongyi -26.3285 Comprehensive

000691.SZ ST Hainan Yatai -25.9683 Real estate 000691.SZ ST Hainan Yatai -25.9683 Real estate

600873.SH Meihua Group -24.7265 Food and bever-

age 600873.SH Meihua Group -24.7265 Food and bever-

age

600247.SH ST Seijo -24.4828 Trade and retail 600247.SH ST Seijo -24.4828 Trade and retail

600696.SH P2P Financial

Information Ser-

vice

-24.3787 Real estate 600696.SH P2P Financial

Information Ser-

vice

-24.3787 Real estate

600678.SH Sichuan Jinding

Group -24.1400 Building materials 600678.SH Sichuan Jinding

Group -24.1400 Building materials

002201.SZ Jiangsu Jiuding

New Material -23.7352 Building materials 002201.SZ Jiangsu Jiuding

New Material -23.7352 Building materials

000584.SZ UOLI -22.9665 Basic chemicals 000584.SZ UOLI -22.9665 Basic chemicals

000710.SZ Tianxing Instru-

ment -22.8243 Automobiles 000710.SZ Tianxing Instru-

ment -22.8243 Automobiles

000807.SZ Yunnan Alumini-um

-22.6010 Nonferrous metals 000807.SZ Yunnan Alumini-

um -22.6010 Nonferrous metals

600395.SH Guizhou Panjiang

Refined Coal -22.1416 Coal 600395.SH Guizhou Panjiang

Refined Coal -22.1416 Coal


Figure 7: The Best and Worst 20 Stocks in May and Related Industries

The best 20 stocks The worst 20 stocks

7

(3) The cumulative rate of return on the portfolio from January to May 2016 was -2.7%, with excess

return of 12.34PPT

From January to May 2016, the cumulative rate of return on the monthly portfolio of Galaxy Securities was -

2.7%, 12.34ppt higher than that of the CSI300 Index.

From January 2013 to May 2016, the monthly cumulative rate of return on the portfolio of Galaxy Securities

was 331%, higher than that of the ChiNext Index by 196%, and much higher than that of the other indexes –

significantly higher than CSI300 Index by 305ppt.

Cumulative return

of the portfolio


Figure 8: From January to May 2016, the Monthly Cumulative Rate of Return for the 10 Golden Stocks of Galaxy Securities was -2.7%


Figure 9: From January to May 2016, the Monthly Cumulative Rate of Excess Return for the 10 Golden Stocks of Galaxy Securities was

12.34ppt

HS 300 The Shanghai

Composite Index SSE 50 Index SZSE Component Index ChiNext Index

The portfolio’s cumulative rate of return in 2016 and the benchmarks %

SME Index

Monthly Return % Monthly Excess Return % Cumulative Excess Return %

Jan, 2016 Feb, 2016 Mar, 2016 Apr, 2016

Cumulative rate of return for the portfolio in 2016 and the benchmark

Cumulative rate Model portfolio SSE Composite Index SSE 50 Index SZSE Component Index SME Index ChiNext Index

8


Figure 11: From January 2013 to May 2016, the Cumulative Rate of Return for the 10 Golden Stocks of Galaxy Securities was 305ppt

Jan

, 20

13

Feb

, 20

13

Mar

, 20

13

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May

, 20

13

Jun

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Dec

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Feb

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Mar

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May

, 20

16

Monthly Return % Monthly Excess Return % Cumulative Excess Return %


Figure 10: From January 2013 to May 2016, the Cumulative Rate of Return for the 10 Golden Stocks of Galaxy Securities up to 331%

Cumulative return of the

portfolio

HS 300 The Shanghai

Composite Index

SSE 50 Index SZSE Component

Index ChiNext Index

The cumulative rate of return on the portfolio from Jan 2013 to the present and the benchmarks %

Small and Medium-Sized

Board Index

9

(1) June trend: possibility of greater fluctuation

Outlook for June. Expectations are high for the FED to increase the interest rate, and a rise in the US dollar index

may put pressure on the RMB exchange rate, but domestic factors are still the dominant influence on the markets.

The economic recovery trend is weakening, but the policy focus is on reform because of the relatively stable econom-

ic environment. If supply-side reform is strongly promoted, investor confidence will be enhanced even if there is a

short-term influence on the economic growth rate, as long as there is no systemic financial risk. Monetary policy will

focus on stability and on maintaining reasonable and sufficient liquidity, though special care should be paid to fluctua-

tion in the exchange rate and rising credit risk. Whether SZ-HK Stock Connect will be launched and A shares will be

included in the MSCI Index is an influencing factor in the market; high expectations of their inclusion have led to re-

cent gains in A share equities.

At the market level, prices have remained at a very narrow range for three consecutive weeks, indicating prudent

sentiment among investors and the possibility of a change in market orientation after the severe decline in 2015,

which may lead to fluctuation in the stock index.

In general, market volatility should increase in June, but the decline will be limited because of the relatively stable

economy. Modest expectations should limit upside potential.

1. The fundamentals: the rising trend is weakening

The stimulation effect of “stabilizing growth” in Q1 continued in May, but with a weakening trend. With relatively weak

exports and consumption, investment is the key to countering the quickening economic downturn. At the structural

level, infrastructure construction and real estate investment continue to be the main impetus, while private investment

in manufacturing has been further reduced. We expect to see a decline in infrastructure construction, and continued

pressure from leverage in the real estate and financial industries. Structural reform is the key to ensuring China’s

future economic development, and stabilizing growth is important for providing time for structural reform. It is ex-

pected that the macro economy will remain basically stable without sharp fluctuations in the near future.

Industrial growth slowed down and power generation saw negative growth. YoY growth industrial production in

April realized YoY growth of 6.0%, a decrease of 0.8ppt compared with March and slightly lower than the annual

growth rate in 2015. The PMI in May was 50.1%, with all sub-indexes declining. Power generation in April was

444.4bn KWH, down 7.0% MoM and down 1.7% YoY, for a decline of 5.7ppt.

Overall investment fell slightly but real estate investment remained stable. Investment slowed down slightly

from January to April , but real estate investment remained stable, which supported the growth rate of the macro

economy. Market clearing was slow, with the mining industry undergoing severe inventory reduction, and investment

in manufacturing keeps falling. Infrastructure construction is stable. The government is supporting the economy but

will not pull it up.

Consumption slowed down slightly, automobile sales and petroleum consumption fell. Total social retail sales

in May 2016 amounted to RMB2.46 trn, up 10.1% YoY. Petroleum consumption and automobiles sales declined in

April .

Exports retreated but trade surplus rose. In April, the export amount was US$172.8bn, a YoY decrease of 1.8%,

falling by 13.3ppt compared with the export growth rate in March . With the support of low base effect in April, exports

fell YoY, reflecting the relatively weak external demand in general. In April , there were US$127.2bn worth of imports,

for a YoY decrease of 10.9%, falling sharply by 3.3ppt compared with March . The trade surplus in April was

US$45.6bn, an increase of US$15.7bn compared with that of March , but the “export downturn and import decrease”

reflected a trade surplus driven by a weak economy.

Worry about the CPI rising weakens. In April , CPI growth met expectations, with vegetable prices falling back to

normal levels, while pork prices remained high. Vegetable price are expected to decline further in May, but pork pric-

es are expected to remain high. Prices of non-food fields, such as tourism and home services, are expected to rise

slightly because of the May Day Holiday. In May, CPI growth was about 2.5%, with an expected stable MoM situa-

tion.

II. Investment ideas for June 2016

10

Figure 12: Official PMI Rallied Slightly to above 50.1% Figure 13:Obvious Pickup in Industrial Value Added and Power Generation

Figure 14: Fixed Asset Investment Stabilizing


Figure 15: Sharp Decline in Private Investment

Figure 16: Obvious Fall in Imports/Exports in April


Figure 17: Growth in Retail Social Retail Sales Fell to 10.1% in April


Fixed assets invest-ment


Monthly value

Fixed assets investment: YoY



Total investment in fixed assets

Private investment in fixed assets

Import amount:

monthly change YoY

CPI:MoM

Export amount: monthly

change YoY

CPI:YoY Middle rate: USD/RMB

Spot rate: USD/RMB

USD/RMB: NDF: 12 months

Figure 18: CPI pressure relieved Figure 19: The RMB exchange rate against the US dollar weakened recently


Industrial added value: YoY

Output: power generation: YoY


Monthly: YoY

11

2. Liquidity: Interest rates relatively stable but RMB devaluation pressure rising

As for the exchange rate, along with an increase in the US dollar index, the RMB has responded to rising pressure recently by

devaluating slightly to about 6.58 RMB/US$. US Federal Reserve Chair Janet Yellen clearly pointed out “it may be proper to in-

crease the interest rate in the months ahead”, which has greatly increased expectations of an interest rate increase by the FED

in June or July. The futures market indicates that the probability of an interest rate increase in July exceeds 50%. This may stim-

ulate US dollar index to keep rising, possibly having a negative influence on the RMB exchange rate and domestic liquidity.

In terms of the interest rate market, interest rates have remained relatively stable in the short-term market, and the central bank

is maintaining relatively stable liquidity mainly by flexibly adjusting liquidity through the open market.

In terms of the secondary market, trading volume has remained at a low level because of prudent investor sentiment, and the

margin financing and securities lending balance has kept decreasing.

However, it should be noted that recently Shanghai-Hong Kong Stock Connect witnessed a net inflow for 11 consecutive days,

reflecting rising expectations of A shares being included in the MSCI index.

Figure 20: Relatively Stable Market Interest Rate


Figure 21: Continuous Margin Balance Drop


MFSL Balance

SSE Composite Index

12

3. Policy: supply-side reform the chief priority

Given the stable economy, the priority in macro policy is supply-side structural reform, even more important than stabilizing growth.

Many of the country’s economic problems cannot be solved unless vigorous efforts are focused on various reform measures.

In accordance with the tone set in the Central Economic Work Conference, supply-side structural reforms comprise deleveraging,

reducing capacity, reducing inventories, cost reduction and shoring up weaknesses. Currently, reducing capacity and deleveraging

are the highest priority, focusing on zombie companies. After intensive research by the central government, reducing capacity, com-

bined with state-owned enterprise reform, may become the priority. Deleveraging involves mainly the financial sector. The pressure

to reducing inventories has decreased since the positive turnaround in real estate sales.

With instability in both the internal and external environment, the current policy may prevent large fluctuations in the exchange rate

and reduce the risk of rising credit risk. Despite reduced CPI pressure, monetary policy is unlikely to be loosened initially; appropri-

ate fine adjustments are more likely.

Institutional improvement in capital markets continued, supporting the goal of developing open, transparent, long-term, sustainable,

healthy capital markets. The strengthened supervision and strong crackdown on excessive market speculation is favourable for

developing a reliable and compliant stock market culture and healthy investment in the long run. Normal M&A and reorganization

will continue and will be an important component in structural adjustment and state-owned enterprise reform. However, special at-

tention must be paid to preventing false reorganizations and the risk associated with them.

Attention should be paid to SZ-HK Stock Connect and progress in including A shares in the MSCI index. If A shares are included in

the MSCI index, there will be a large number of new funds in the long run, but the influence on investor emotions will be bigger than

that on the capital inflows in the short term. The net inflow of Shanghai-Hong Kong Stock Connect for 11 consecutive days recently

indicates continued rising expectation of A shares being included in the MSCI index, and the realization that the inclusion may result

in the profit taking. SZ-HK Stock Connect, another important measure of the institutional improvement of Chinese capital market,

has important significance for expanding the opening up of and building strong capital markets.

4. Structural undervaluation

Generally speaking, the valuation of A shares is not high, but structural differentiation is huge.

The PER of the CSI300 Index is only 1/2 that of the S&P500 Index. In spite of the heavy weight of banking shares, measuring the

high level with the PER is reasonable because of the cyclical stocks in the economic bottom interval.

The PER of the ChiNext is 67x, roughly in the middle level since 2010. The low interest rate has raised the valuation level, and

some high-quality companies have considerable investment value . With more stringent execution of the delisting provision, some

companies with poor performance and in need of restructuring will face risks.

13

Figure 22: A Share Valuation Structure and International Comparison

Sector Name PE ratio (TTM) 5.25

PE 2015.6.12 PE 2015.8.25 PE 2012.12.4

CSI 300 Index 11.60 10.68 11.20 9.49

A-share in Shanghai Stock Exchange 13.79 12.50 13.32 10.21

All A-shares 19.21 17.08 17.87 11.94

SME market 49.53 45.02 48.49 24.02

ChiBext 67.68 67.04 75.90 28.53

SP500 Composition 22.86 19.81 19.12 15.50

Nasdaq Composite 20.61 17.94 17.54 16.82

Russell 2000 index 994.35 89.92 50.57 29.64


14

5. Market operation and investment decision-making

(1) Investment judgement: upward trend with continued turbulence

Outlook for June. Expectations are high for the FED to increase the interest rate, and a rise in the US dollar in-

dex may put pressure on the RMB exchange rate, but domestic factors are still the dominant influence on the

markets. The economic recovery trend is weakening, but the policy focus is on reform because of the relatively

stable economic environment. If supply-side reform is strongly promoted, investor confidence will be enhanced

even if there is a short-term influence on the economic growth rate, as long as there is no systemic financial risk.

Monetary policy will focus on stability and on maintaining reasonable and sufficient liquidity, though special care

should be paid to fluctuation in the exchange rate and rising credit risk. Whether SZ-HK Stock Connect will be

launched and A shares will be included in the MSCI Index is an influencing factor in the market; high expecta-

tions of the inclusion have led to recent gains in A shares equities.

At the market level, prices have remained within a very narrow range for three consecutive weeks, indicating

prudent investor sentiment and a possible change in market direction after the severe decline in 2015, which

may lead to fluctuation in the stock index.

In general, market volatility should increase in June, but any decline will be limited because of the relatively sta-

ble economy. Expectations should not be too high about a continued rise.

(2) Investment strategy and sector allocation: moderate and stable, focusing on small-cap growth stocks

For June, the investment style should be moderate and stable; stocks should be carefully chosen with a focus

on small-cap growth stocks.

High-quality growth stocks with relatively low valuation: e.g. TMT, machinery and military equipment, electrical

equipment and new energy.

Stable industries with low valuation: e.g. tourism, light industry and food, which are defensive in a downturn.

Industries benefiting from continued price rises: e.g. nonferrous metals, petroleum refining and agricultural culti-

vation.

Thematic opportunities: e.g. state-owned enterprise reform and Disney.

(3) Risk factors

a. Lower-than-expected economic performance.

b. Liquidity pressure, or credit risk exceeding expectations.

(II) Portfolio ideas in June

The June portfolio includes 2 machinery and military industry stocks, 1 petrochemical stock, 1 non-ferrous metal

stock, 2 electronics stocks, 1 computer stock, 1 electrical equipment and new energy stock, 1 light industrial

manufacturing stock, and 1 social service stock.

The companies in our June stock portfolio are Changshan Textile (000158.CH), Chenming Paper (000488.CH),

Dinghan Technology (300011.CH), DMEGC (002056.CH), GTIG (002091.CH), HBP (002554.CH), Huajin

Chemical (000059.CH), Tibet Summit (600338.CH), Tri-Ring Group (300408.CH), and UTS Travel (002707.CH).

15


Figure 23: Galaxy Securities June Investment Portfolio (Note: share prices are the closing prices on Jun 15, 2016)

Stock Code Stock Discription EPS (RMB) PE (X)

2014A 2015A 2016E 2017E 2014A 2015A 2016E 2017E

300408.CH Tri-Ring Group 0.38 0.51 0.64 0.80 44.2 32.9 26.2 21.0

002056.CH DMEGC 0.93 0.79 1.02 1.29 16.3 19.2 14.9 11.8

000158.CH Changshan Textile 0.02 0.20 0.30 0.41 660.5 66.1 44.0 32.2

300011.CH Dinghan Technology 0.32 0.48 0.65 0.90 73.0 48.6 35.9 25.9

002554.CH HBP 0.29 0.30 0.56 0.74 48.4 46.8 25.1 19.0

002707.CH UTS Travel 0.13 0.22 0.33 0.48 155.2 91.7 61.1 42.0

000488.CH Chenming Paper 0.26 0.53 1.02 1.37 29.8 14.6 7.6 5.7

000059.CH Huajin Chemical -0.94 0.21 0.93 1.00 - 41.5 9.4 8.7

002091.CH GTIG 0.38 0.44 0.55 0.67 42.1 36.4 29.1 23.9

600338.CH Tibet Summit 0.05 0.25 0.93 1.06 614.4 122.9 33.0 29.0

16

Content

Huajin Chemical (000059.CH): Currently in a boom cycle of oil refining and ethylene production, guaranteeing a substantial profit

growth .......................................................................................................................................................................................... 17

Changshan Textile (000158.CH): Entering a new stage with accelerated growth in its IT business ........................................... 19

Dinghan Technology (300011.CH): High-end rail transit equipment supplier; strategic global growth prospects ......................... 21

HBP (002554.CH): Plan to purchase a 40% interest in the Iraq business of Anton Oilfield Services; fast growth expected ...... 23

UTS Travel (002707.CH): Leading company in outbound travel; performance aided by Dragon Boat Festival and summer vaca-

tion ............................................................................................................................................................................................. 25

Chenming Paper (000488.CH): Leading high-quality company to benefit from supply-side reform; performance expectations from

rise in two major businesses ....................................................................................................................................................... 27

Tri-Ring Group (300408.CH): Growth stimulated by platform power and vertical integration, as well as explosion in zirconia outer

parts ........................................................................................................................................................................................... 29

GTIG (002091.CH): Industry leader benefiting from rise in electrolyte quantity and price ........................................................... 31

Tibet Summit (600338.CH): Resource stock with lowest valuation; excellent growth prospects ................................................ 33

DMEGC (002056.CH): Steady development in growth and industry cycle; emerging producer of magnetic materials and new

energy .......................................................................................................................................................................................... 35

17

Huajin Chemical (000059.CH): Currently in a boom cycle of oil refining and ethylene

production, guaranteeing a substantial profit growth

Driving factors, key assumptions and main predictions:

1. The over-supply of crude oil should improve in 2016, showing up mainly in 2H 2016, so the oil price in 2H 2016 should be higher

than that in 1H 2016. According to an IEA report, global oil demand in Q1 increased by 1.4m barrels/day, and the annual demand

increase is expected be 1.2m barrels/day; meanwhile OECD stocks, a major component of global crude oil stocks, fell by 1.1m in

March. We expect the global balance between supply and demand to be re-established in 2H 2016, though it may come earlier given

current global events. We think that attention should be paid to the oil price rise caused by reduced output and storage. We believe

the chance of a return to recent low prices is small and expect crude oil prices to reach US$60-70 per barrel in 2H 2016.

2. The refining and chemical industry is likely to see a strong turnaround in performance in 2016, which is reflected in the Q1 reports

of related refining and chemical companies. Benefited from the “floor price” for refined oil products set by the state, the refining and

chemical industry has resisted inventory losses, with good performance reflected in Q1 and Q2. Polyolefin, especially polyethylene, is

in the boom stage of the industry cycle, with the price equivalent to a crude oil price of US$80/barrel. Huajin Chemical has refining

capacity of over 6m tonnes/year, including over 0.5m tonnes/year of ethylene capacity, with large profit upside. If ethylene price

spread rise by RMB1,000/tonne, the Company’s EPS should improve by RMB0.23/share.

Main financial indicators 2014 2015 2016E 2017E 2018E

Operating income (RMB m) 43945.16 30909.32 32887.52 37925.88 42863.83

Operating income growth rate 5.74 -29.66 6.40 15.32 13.02

Net profit (RMB m) -1509.12 328.69 1485.27 1597.77 1609.95

Net profit growth rate -872.51 121.78 351.88 7.57 0.76

EPS (RMB) (DILUTED) -0.94 0.21 0.93 1.00 1.01

P/E - 41.5 9.4 8.7 8.6 Sources: Company data,China Galaxy Securities Research

Investment Rating:

Recommend

Wang Qiang: (8621)20252621 [email protected] No. of certificate to practice: S0130511080002

Qiu Xiaofeng: (8621) 20252676 [email protected] No. of certificate to practice: S0130511050001

How our views differ from the market’s

The over-supply of crude oil should improve in 2016, show-

ing up mainly in 2H 2016, so the oil price in 2H 2016 should

be higher than that in 1H 2016. We expect the global bal-

ance between supply and demand to be re-established in

2H 2016, though it may come earlier given current global

events. We expect crude oil prices to reach US$60-70 per

barrel in 2016.

The refining and chemical industry is likely to see a strong

turnaround in performance in 2016, which is reflected in the

Q1 reports of related refining and chemical companies. Ben-

efiting from the “floor price” for refined oil products set by the

state, the refining and chemical industry has resisted stock

losses, with good performance reflected in Q1 and Q2. Poly-

olefin, especially polyethylene, is in the boom stage of the

industry cycle, with the price equivalent to a crude oil price

of US$80/barrel.

Company valuation and investment recommendation

Provided that the average price of Brent oil from 2016

to 2018 is US$50, 57.5, and 65/barrel, respectively,

we expect net profit to be RMB1.485bn, 1.598bn and

1.61bn from 2016 to 2018, respectively, with corre-

sponding EPS of RMB0.93, 1.00 and 1.01. Therefore,

we give the stock a “Recommend” rating.

mailto:[email protected]

18

Catalyst for share price performance

International crude oil price tend to stabilize and re-

bound.

Ethylene enters the boom cycle.

Main risk factors

Falling and unstable oil prices.

Weak demand for bulk chemicals.

19

Changshan Textile (000158.CH): Entering a new stage with accelerated growth in

its IT business


1. Acquired Beiming Software as part of an overall business transformation. 1) As part of an overall business transformation,

the Company acquired Beiming Software, making Changshan Textile one of the largest domestic comprehensive IT solutions provid-

ers, with a fast growth rate. 2) Focusing on big data and cloud computing, the Company’s innovative business has excellent growth

prospects. 3) The Company intends to coordinate growth through further M&A. 4) The Company’s employee stock ownership incen-

tive scheme helps build employee quality and loyalty.

2. Rebound in textile business, good prospects for high-end consumer products. 1) The front-end business of the textile indus-

try chain is poor, but the Company’s high-end products are expected to become the new growth driver. 2) In its traditional business,

the Company has increased production, reduced costs, downsized staff and improved efficiency, resulting in improved profit. 3) The

Company plans to broaden its high-end clothing brand and improve product differentiation in its domestic textile business. 4) The

Company’s consumer products are distributed through brand-name companies, so the Company is engaged in the entire industry

chain.

3. Land resources have a big realizable cash value, external expansion will continue. 1) The Company’s real estate business

provides cash flow and strong capital support for the overall transformation. 2) Its global expansion effectively promotes the fast

growth of its comprehensive IT subsidiary. 3) Changshan Textile has rich M&A experience and strong resource-integration ability. 4)

The Company is expected to pursue global expansion, and further M&A will ensure continued growth.

Shen Haibing: (8621) 20252609 [email protected] No. of certificate to practice: S0130514060002

Sources: Company data, China Galaxy Securities Research

Investment Rating:

Recommend

Main financial indicators 2014A 2015A 2016E 2017E 2018E

Operating income (RMB m) 6568.52 8901.94 10,794 12,024 13,412

Operating income growth rate 12.14% 35.32% 21.25% 11.39% 11.55%

Net profit (RMB m) 24.28 249.37 377 523 695

Net profit growth rate 38.25% 926.87% 51.33% 38.51% 32.87%

EPS (RMB) (DILUTED) 0.02 0.20 0.30 0.41 0.55


The market focus is on sales of the Company’s real estate assets, but there are questions about whether and when they can be

converted to cash.

We think that the market is giving insufficient attention to the quality and prospects of its IT business. Changshan Textile is ex-

pected to become the largest domestic comprehensive IT solutions provider, focusing on big data. At the same time, with a light

burden from the traditional textile industry, the Company is targeting high-end consumer products, providing good prospects

thanks to its strength throughout the whole industry chain. In addition, the realizable cash value of its real estate assets is bigger

than market estimates, converting them to actual cash is not a major concern in our view, and the Company’s global expansion

will continue.


20


The performance of its core businesses of big data

and cloud computing could exceed expectations.

Its transformation in the traditional cotton textile indus-

try is successful.

Its global expansion continues.

Main risk factors

Competition intensifies in the IT business.

The transformation of its traditional textile business is worse

than expected.

The global expansion process is slower than expected.

Company valuation and investment recommendations

We are optimistic about the accelerated growth of the Company’s IT business and the transformation and upgrading of its

textile business. Its valuable real estate assets provide a favourable basis for continuing operations, and the Company’s

development has entered a new stage. We predict that from 2016 to 2018, EPS will be respectively RMB0.30, 0.41 and

0.55. In our initial coverage, we give it a “Recommend” rating.

21

Dinghan Technology (300011.CH): High-end rail transit equipment supplier;

strategic global growth prospects


1) In 2015, railway investment reached RMB823.8bn and is expected to remain at a high level until at least 2020, supported by the

Belt and Road and urban railway system construction. Increased demand for new lines has resulted in demand for high-speed

rail and motor train units for the foreseeable future. By 2020, the compound growth rate of the newly built mileage of China’s ur-

ban railway systems will exceed 20%.

2) Company breakthroughs are expected for both orders on hand and new product development, which guarantees continued fast

growth. With a strong order book, the Company’s signal power source business will keep growing in the future. Three major new

businesses, on-board dynamic safety monitoring systems, shielded gate systems and the vehicle auxiliary power supplies, have

started to make a contribution to the Company’s performance, and the new businesses are expected to see more breakthroughs

in the future. Products in the R&D stage now will support profit growth after 2016. The potential M&A of Dinghan Technology may

also improve the Company’s performance.

3) Dinghan Technology will engage in cross-border development to actively explore global opportunities. The future development

direction will focus on technologies currently undergoing R&D, such as high-end high-speed train equipment, big-power renewa-

ble storage energy control equipment, tramcar equipment and full electric vehicle equipment.

Wang Huajun: (8610) 66568477 [email protected] No. of certificate to practice: S0130513050002

Main financial indicators 2014A 2015A 2016E 2017E

Operating income (RMB m) 795.72 1,144.58 1,518 1,963

Operating income growth rate 76.14% 43.84% 33% 29%

Net profit (RMB m) 174.72 262.85 356 492

Net profit growth rate 206.83% 50.44% 35% 38%

EPS (RMB) (DILUTED) 0.32 0.48 0.65 0.90

P/E 73.0 48.6 35.9 25.9



Investment Rating:

Recommend

Profit. Dinghan Technology’s employee stock-ownership incentive should help the company achieve its expected growth in

net profit in 2016-2018 of at least 10%/20%/30%, respectively, compared with 2015, and revenue growth of at least

10%/20%/30%.

New technology. We think the cross-border development and potential M&A of Dinghan Technology will exceed market

expectations. The Company is developing high-end, high-speed train equipment, big-power renewable storage energy con-

trol equipment, tramcar equipment and full electric vehicle equipment. We also think the Company’s new products under

development have rich potential.

Global development. Dinghan Technology is actively exploring extending its global reach, including investment or M&A of

overseas companies with advanced technology. At the same time, the Company is developing its international image to im-

prove its competitiveness and attraction for future overseas cooperation.


22


Breakthrough in extended, cross-border and internationaliza-

tion development.

Motor train unit tendering exceeding expectations.

Stimulation from high-speed rail diplomacy.

Main risk factors

Industry setbacks because of major railway accidents.

Risk of railway investment decline.

Weaker-than-expected cross-border and global develop-

ment


EPS in 2014-2017 is expected to be RMB0.38/0.49/0.65/0.90, and PER 75x/50x/37x/27x, respectively. We maintain a

“Recommend” rating.

We expect positive results from the Company’s cross-border development plans and efforts to extend its global reach.

23

HBP (002554.CH): Plans to purchase a 40% interest in the Iraq business of Anton Oil-

field Services; fast growth expected


1) High profit growth expected in 2016-2017. Because of the conditions for exercising the stock ownership incentive, profit growth in

2016-2017 should be at least 40%/30%, respectively. Considering orders on hand and progress with projects under negotiation,

there is a good possibility that the Company’s profit in 2017 will exceed the requirements for unlocking the stock ownership incen-

tive.

2) Traditional oil and gas equipment EPC business. Overseas EPC orders ensure the continued growth of the Company’s oil and

gas equipment and engineering business. In 2015, the amount of new contracts exceeded RMB1.5bn, and there were many

newly bid projects. Because of the low oil price, global oil and gas companies have cut capital expenditure. HBP has an obvious

cost advantage, and the probability of winning bids is obviously improved because of the Company’s advantage in high quality

product cost performance.

3) Pipeline detection and maintenance business. Currently, demand in the domestic pipeline detection market is nearly RMB2bn a

year, and demand in the domestic pipeline maintenance market is even bigger. In addition, the technical threshold is high, as is

the gross margin. HBP’s subsidiary HBP Pipeline Technology Limited is oriented as a “pipeline hospital”, which provides pipeline

robots and related products and services. With the high gross margin, the products and services are expected to become the

new performance growth point for HBP.

4) Environmental protection business. HBP is planning to vigorously expand its petrochemical refining and general environmental

protection business. We think the environmental protection sector will make a great contribution to the Company’s performance in

2016.

5) Expanding business in Iraq and other high-quality markets together with Anton Oilfield Services Group. Acquiring a 40% stake in

the stake of the Iraq business of Anton Oilfield Services Group will promote quick growth in HBP’s performance. As HBP and

Anton complement each other strongly, there is big potential for deep cooperation between the two companies


Operating revenue (RMB m) 1,381.42 1,359.05 1,762 2,211

Growth rate of operating revenue 45.20% -1.62% 29.7% 25%

Net profit (RMB m) 155.72 161.50 301 394

Growth rate of net profit 51.22% 3.71% 86.4% 31%

EPS (RMB) (Diluted) 0.32 0.48 0.65 0.90

P/E 75 50 37 27

EPS (RMB) 0.29 0.30 0.56 0.74

P/E 48.4 46.8 25.1 19.0

Sources: Company data, China Galaxy Securities Research (the acquisition of 40% of the stake of the Iraq business of Anton Oilfield Services Group is not

considered; the data reflects the share price on May 26, 2016)

Investment Rating:

Recommend Wang Huajun: (8610) 66568477 wanshuajun@chinastock_com.cn No. of certificate to practice: S0130513050002


Profit: We expect the Company’s performance in 2016-2017 to exceed market expectations. The profit growth rate in 2016-2017

is expected to be 65% and 35%, respectively. RMB devaluation is favourable for improving HBP’s international competitiveness

and increasing its performance.

Oil and gas equipment business. We expect it to exceed market expectations. We expect HBP’s overseas business to make

up over half of its total business, and are optimistic about order expectations.

Environmental protection business. It is growing quickly.

Profit upside. The Company is well positioned to benefit from an oil price rally.

24


Oil prices keep rising.

There is a major breakthrough in overseas orders.

The environmental protection business exceeds expecta-

tions.

The Company’s pipeline detection and cleaning, as well

as other businesses, exceed expectations.

Main risk factors

The oil price falls sharply; the progress of overseas pro-

jects fails to meet expectations because of the local

political and military situation.

The progress of its environmental protection and pipe-

line business is worse than expected.

Exchange rate fluctuation risk.


Irrespective of the Anton acquisition, EPS is expected to be RMB0.29/0.30/0.56/0.74 in 2014-2017, respectively, with a corre-

sponding PER of 47x/46x/25x/19x.

With the acquisition, we predict that the pro forma EPS will be RMB0.29/0.30/0.66/0.86 in 2014-2017, respectively, with pro for-

ma PER 47x/46x/ 21x/16x.

HBP is a high-quality company with a small market value, low valuation, high growth and strong market expectations. We main-

tain our “Recommend” rating.

25

UTS Travel (002707.CH): Leading company in outbound travel; performance aided by

Dragon Boat Festival and summer vacation


1. Outbound travel is predicted to see a golden development period in the next 10-20 years; in spite of fluctuations resulting from

different factors, the growth prospects are highly attractive in general.

2. The future trend of outbound travel is from dispersion to concentration, and both UTS Travel and CAISSA may become industry

leaders. Our opinion is that in spite of differences in operation and decision making, the overall industry trend is from dispersion

to concentration, and enterprises in the industry need to expand organically or through M&A for further development. As out-

bound travel in the tourism industry is expected to see substantial growth, there are still many development opportunities.

3. UTS Travel focuses on overseas travel . Uzai focuses on its strategic online platform. Relying on its advantageous products and

brand recognition, UTS Travel is expected to maintain its strong position in the OTA market.

4. Travel and education, complemented by Internet finance. The common trend in the education market is to serve people of differ-

ent ages and get involved in the whole industry chain. The goal of UTS Travel is to promote the education sector and even devel-

op it into a second major business, based on the premise that outbound travel and international education can be complemen-

tary. At the same time, to improve service, the Company’s Internet finance platform can serve as the core, effectively connecting

all business sectors of the company stably and pragmatically.

5. I removed this because it applies to any company. It doesn’t tell investors anything interesting about UTS.

Investment Rating:

Recommend Zhou Ying: (8610) 66568301 [email protected] No. of certificate to practice: S0130511090001


Profit. UTS Travel has strong growth potential, with an ex-

pected compound growth rate of above 45% in 2015-2017.

Trend. The future trend in outbound travel is from disper-

sion to concentration, and both UTS Travel and CAISSA

may become industry leaders. With substantial industry

growth potential, there are many opportunities, but compa-

nies in the industry need to expand organically or through

M&A for further development.

UTS Travel focuses on overseas travel, and is expected to

maintain its strong position in the OTA market.


Operating income (RMB m) 42.17 83.7 120.47 156.83

Operating income growth rate 40.32% 98.49% 43.93% 30.18%

Net profit (RMB m) 1.09 1.87 2.76 4.01

Net profit growth rate 24.32% 71.69% 47.35% 45.45%

EPS (RMB) (DILUTED) 0.13 0.22 0.33 0.48

P/E 155.2 91.7 61.1 42.0



EPS is expected to be RMB0.22/0.33/0.48 in 2015-

2017, respectively. We maintain our “Recommend” rat-

ing.

26

Catalyst for share price performance (monthly)

The Dragon Boat Festival and summer vacation are ex-

pected to promote both long- and short-distance travel. As

one of the leading companies of outbound travel, UTS

Travel is expected to benefit.

Main risk factors

Bad weather, natural disasters, large-scale infectious

disease outbreaks.

27

Chenming Paper (000488.CH): Leading high-quality company to benefit from supply-

side reform; strong performance expectations from rise in two major businesses


1. Finance lease business. This business is expected to grow quickly. The current finance lease balance is about RMB30bn and the

annual average balance is expected to reach RMB30bn. Chenming Paper is expected to conduct its finance lease business through

other channels and lay a foundation for 2017 of continued increase in turnover.

2. Papermaking business. The Company is benefiting from the combination of a decline in raw material prices and product price rises.

The Company focuses on forestry and pulp and paper integration and controlling upstream costs. A private placement of RMB3.7bn

was used for a bleached sulphate chemical wood pulp project with annual output of 400,000 tonnes, further optimizing upstream

costs.

3. Supply-side reform in the industry. As companies will be closed in succession if their capacity and environmental protection stand-

ards are not up to standard, the leading high-quality companies will benefit, resulting in less competition.


Operating income (RMB m) 19,101.68 20,241.91 20,241.91 21,678.00

Operating income growth rate -6.31% 5.97% 7.09% 5.48%

Net profit (RMB m) 505.20 1,021.22 1,977.79 2,648.32

Net profit growth rate -28.91% 115.73% 93.67% 33.90%

EPS (RMB) (DILUTED) 0.26 0.53 1.02 1.37

P/E 29.8 14.6 7.6 5.7



Investment Rating:

Recommend

Profit: The Company’s performance should exceed

market expectations in 2016, with a profit growth rate

approaching 100%.

Finance lease business. This business is on a solid

upward trend and is expanding quickly, accompanied

by strong risk controls and adequate follow-up of fi-

nancing projects. At end-2016, the finance lease bal-

ance should exceed RMB30bn, and the average annu-

al balance should be RMB30bn, contributing

RMB1.2bn in profits.

Industry reform. Supply-side reform will promote the

papermaking business of the leading companies,

which should see steady and rising development, re-

duced costs and rising prices going forward.

Ma Li :(8610)66568489 [email protected] No. of certificate to practice: S0130511020012


Investment recommendation. We expect EPS of

RMB1.02/1.37 in 2016-2017, respectively. In the light of the

current price of RMB8.25, the RMB1.936bn of general capi-

tal plus RMB5.2bn of targeted additional issuance ap-

proaches RMB15.6bn in market value, with a PER of 8x/6x,

respectively. We maintain our “Recommend” rating.

Valuation. We estimate a 10-15x interval for the papermak-

ing business and a valuation of 12x PER for the whole com-

pany along with an increase in the contribution of the fi-

nance lease business.

28


New environmental protection policies will intensify the

closing of small and medium-sized papermaking compa-

nies, reducing competition.

The performance of diversified financial services exceeds

expectations.

Raw material prices fall.

Main risk factors

Default risk of finance lease business; business expan-

sion fails to meet expectations.

Other risks such as a rise in raw material prices or de-

cline in product prices.

29

Tri-Ring Group (300408.CH): Growth stimulated by platform power and vertical

integration, as well as explosion in zirconia outer parts


1. It is predicted that with the accelerated construction of base stations, and photo-communication and data centres, ceramic insert

cores and sleeves will maintain 10-15% sales growth in the next two years. Tri-Ring Group’s leading position gives it an advantage in

benefiting from the industry boom.

2. Zirconia outer parts, used in fingerprint-recognition technology and mobile phone rear covers, are expected to be an important

source of profits in the next two years. The preliminary estimation is that the annual market potential of fingerprint-recognition cover

plates made of zirconia is more than RMB1.5bn. Even calculated according to 10-15% low-penetration rate, the market size of weara-

ble equipment and mobile phone rear covers exceeds RMB30bn. With the immediate market explosion and high concentration of

suppliers, Tri-Ring Group is the most important company in the field.

3. Tri-Ring Group was one of the earliest domestic companies doing business in the field of ceramic outer parts of mobile phones and

a premier global manufacturer in the field of consumer electronics for outer parts made of zirconia. The long procedures and highly

vertical integration of the business (material allocation, raw ceramic forming, high-temperature sintering and equipment manufacturing

technology) form the core competitiveness of the Tri-Ring Group.

4. The advanced product line of PKG ceramic package bases is competitive, and the successful experience with optical insert cores

will be applied to future production.

Main financial indicators 2015A 2016E 2017E 2018E

Operating revenue (RMB1m) 2489.22 3351.62 4224.10 5047.91

Growth rate of operating revenue 0.13 0.35 0.26 0.20

Net profit (RMB1m) 873.64 1100.65 1386.64 1654.08

Growth rate of net profit 0.35 0.26 0.26 0.19

EPS (RMB) 0.51 0.64 0.80 0.96

P/E 32.9 26.2 21.0 17.5


Investment Rating:

Recommend

Wangli: (8610) 8357 4039: [email protected] Practicing Certificate No.: S0130512090


Conservative estimates of the EPS in 2015-2017 are

RMB0.51/0.64/0.80, respectively. Given the net profit margin

and strong platform power of Tri-Ring Group, along with the

potential RMB10bn annual market for zirconia outer parts

and RMB100bn annual market for fuel cells, we think that the

valuation should take into account the consumer electronics

and new energy industries, resulting in 45x PER and a

“Recommend” investment rating.


We are firmly optimistic about the explosion of fin-

gerprint cover plates made of zirconia and the

ceramization trend of mobile phone accessories. Tri-

Ring Group is a clear leader in the field.

We are also firmly optimistic about solid oxide fuel

cells becoming an important option. Tri-Ring Group

will enter the field of new energy fuel cells as a lead-

er, becoming a major manufacturer of core parts of

fuel cells.

30


Large mobile phone manufacturers start to adopt mobile

phone rear covers made of zirconia on a large scale.

Zirconia fingerprint-recognition technology booms.

Fuel cells obtain a policy boost.

Main risk factors

Reverse in the current booming market for ceramic in-

sert cores and sleeves.

The promotion of zirconia outer parts fails to meet ex-

pectations.

31

GTIG (002091.CH): Industry leader benefiting from rise in electrolyte quantity

and price


1. Electrolyte business. GTIG's manufactures high-end electrolyte products, and the Company’s major clients are first-class lithium

battery companies, both domestic and international, including LG Chem, Sony, Panasonic, ATL, BYD, Tianjin Lishen and Coslight

Group. Currently, GTIG has 10,000 tonnes of electrolyte capacity, ranking at the top of the industry in production and sales. We think

that as the leading company in the industry, GTIG will benefit significantly from the expected rise in both quantity and price of electro-

lytes in the future. In terms of quantity, as electrolyte use in power batteries (1.2-1.7 g) is largely higher than that in consumer batter-

ies (0.4 g), the growth of the electrolyte industry will be faster than that of the lithium battery industry because of the continuous explo-

sion of sales of new energy vehicles (NEVs). In terms of price, the shortage of the raw material lithium hexafluorophate restricts the

supply of electrolytes and increases their cost. As the continued tight demand and supply will gradually affect electrolytes, the electro-

lyte price will start rising gradually in 2016. We predict that the growth rate will be respectively 30%, 30% and 10% from 2016 to 2018,

with a gross profit margin of 37%.

2. Trading business. The foreign trading business of GTIG involves mainly textiles, toys and related electro-mechanical products,

mainly for Europe, the US, Japan and other developed countries. The Company is committed to implementation of the whole supply

chain strategy. It has transformed from “trader” to “supplier” in the business model after years of development and is now focusing on

being a high-quality “supplier”. Currently, the American economy has recovered, and growth prospects in Europe and Japan are im-

proving with the support of loose fiscal and monetary policy. Since the first interest rate increase by the FED, the purchasing power of

US dollar has gradually increased, which is favourable for GTIG’s export business. We predict that GTIG’s growth rate will be 20%,

10% and 10% from 2016 to 2018, respectively, with a gross profit margin of 14% each year. We project the growth rate of the domes-

tic and import trade business will be 15% a year from 2016 to 2018, with a gross profit margin of 6% each year.


Operating income (RMB m) 6061 7293 8685 9804

Operating income growth rate 8% 20% 19% 13%

Net profit (RMB m) 219 253 313 383

Net profit growth rate 21% 17% 24% 23%

EPS (RMB) (diluted) 0.38 0.44 0.55 0.67

P/E 42.1 36.4 29.1 23.9



Investment Rating:

Recommend

Although the market thinks that the development potential is limited because of slow decision making under the state ownership

system, we note that GTIG has entered the initial stage of the first stock option from March 2015 to March 2016. When the issue

of management incentives is resolved, GTIG is expected to enter a fast development period.

Zhang Ling : (8621) 66568643 [email protected] No. of certificate to practice : S013051402000


32


The overall listing of GTIG is approved by CSRC.

The price of electrolytes rises quickly.

The production and sales of NEVs maintain fast growth.

Main risk factors

The official listing of GTIG is not successful.

The mark-up for electrolytes is lower than expected.

Demand for electrolytes is weak because of lower-then-

expected production and sales of NEVs.


GTIG is a leading domestic electrolyte manufacturer with high-end product positioning, mainly supplying first-class lithium bat-

tery companies at home and abroad. GTIG will benefit from the rise in both the quantity and price of electrolytes. Along with the

appreciation of US dollar, the Company’s export business should maintain fast development. We expect the EPS of GTIG to be

RMB0.55 in 2016 and RMB0.67 in 2017, We give the Company a “Recommend” rating.

33

Tibet Summit (600338.CH): Resource stock with lowest valuation; excellent

growth prospects


1. The zinc industry is the best subdivided industry among the base metals industries. Due to the shutdown of mines and other fac-

tors, there will be a zinc shortage of about 1.5m tonnes, which is reflected in the zinc processing charge, which has decreased from

RMB5,500/tonne at end-2015 to about RMB4,800/tonne. With the certainty of a zinc shortage, there is also a high certainty of the zinc

price rising.

2. Tibet Summit owns a monomer lead and zinc mine in Tajikistan, which ranks among the top 10 such mines in the world and has

more than 6m tonnes of lead and zinc reserves. Last year, production of lead and zinc ores was about 80,000 tonnes, and this is ex-

pected to reach 140,000 tonnes in 2016, rising 75% YoY. With its low production cost, it is predicted that the profit will approach

RMB800m in 2016, with corresponding PER of 22x, earning the lowest valuation in the resources industry. Production is expected to

keep growing in 2017.

3. With its strong expansion plans, Tibet Summit is expected to become a major player in China’s nonferrous industry. We are opti-

mistic about the Company’s long-term growth.


Operating income (RMB m) 1,542 1,491 2,820 3,046

Operating income growth rate -175% -3884% 8908% 800%

Net profit (RMB m) 9 160 610 693

Net profit growth rate -59 -40 281 14

EPS (RMB) (diluted) 0.05 0.25 0.93 1.06

P/E 614.4 122.9 33.0 29.0



Investment Rating:

Recommend

With lead and zinc prices touching bottom, the valuation of Ti-

bet Summit was as low as only 22x.

The actual reserves of lead and zinc may be more than 6m

tonnes.

The main reasons for the Company’s low-cost production are

the high content of copper and silver in its by-products, the low

depreciation and amortization by using engineering machinery

left by Russians, and low worker salaries compared with those

in China.

Excellent growth prospects.

Liu Wenping: (8610) 66568477: [email protected] Practicing Certificate No.: S0130514110


We expect the profit of Tibet Summit to be respective-

ly RMB800m and RMB1bn in 2016 and 2017, with a

corresponding PER of 22x and 17x. Given the Compa-

ny’s abundant resource reserves, we give it a

“Recommend” rating.

34


Rising lead and zinc prices.

Gradual realization of the Company’s performance;

Outward expansion.

Main risk factors

Sharp decline in lead and zinc prices.

Overseas political risks.

35

DMEGC (002056.CH): Steady development in growth and industry cycle; emerg-

ing producer of magnetic materials and new energy


1) There is no other technology that can replace ferrite in the short term in the field of shielding materials.

2) After experiencing a big reshuffle in the last two years, the solar cell industry is undergoing a recovery and is expected to remain

at a high level for the next 1-2 years.

3) We are optimistic about DMEGC’s business in the photovoltaic and power battery fields. With its steadily growing business in

magnetic materials, we expect EPS in 2016-2018 to be RMB1.02/1.29/1.61, with an estimated PER of 25x in 2016. We give the

Company a “Recommend” rating.

Main financial indicators 2015A 2016E 2017E 2018E

Operating income (RMB million) 3,958 5,015 6,246 7,531

Growth rate of operating revenue 7.9% 26.7% 24.5% 20.6%

Net profit (RMB million) 323 418 530 661

Net profit growth rate -15.2% 29.2% 26.8% 24.9%

EPS (RMB) (DILUTED) 0.79 1.02 1.29 1.61

P/E 19.2 14.9 11.8 9.4


Investment Rating:

Recommend Wang Li :(8610) 83574039

[email protected] No. of certificate to practice : S0130515070001


The market thinks the company operations are stable but lack

elasticity; we like DMEGC’s position in terms of company

growth and industry cycle, with upside in both potential profit

and valuation on the basis of secured earnings, which includes

a safety pad.


We expect EPS in 2016-2018 of RMB1.02/1.29/1.61,

respectively, with a PER ratio of 27x in 2016. We give

the Company a “Recommend” rating.


Expansion in the fields of power batteries and magnetic

materials.

Rise in the prices of magnetic materials.

Ternary power batteries obtain client approval or break-

through.

Main risk factors

Slowdown in the booming solar energy industry.

Reshuffle in the power battery industry.


36

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :

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