Yum Cha 飲茶 · 2015-09-01 · RMB/USD 6.4 (0.0) DATA RELEASES DUE THIS WEEK Aug 19 MNI August...

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Yum Cha 飲茶 August 19, 2015

Source: Bloomberg

INDICES Closing DoD%

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DATA RELEASES DUE THIS WEEK

Aug 19 MNI August Business Indicator

Aug 23 Caixin China PMI Mfg

RESEARCH NOTES CHINA LONGYUAN [0916.HK; HK$8.98; BUY] - Longyuan’s net profit in 1H15 jumped 62%

year-on-year (YoY) to RMB2,207m. Adjusting for one-off items (mainly equity investment

gains), core net profit came in at RMB2,167m (+50% YoY). The strong earnings growth was

driven by good control on overall operating expenses, reduction on coal consumption cost (-

15% YoY) as well as net finance expense (-11% YoY). We see potential upside to our earnings

estimates after the results. In additional to fast growing installation, we believe further easing

monetary policy will help drive down finance expense going forward. Reiterate BUY with un-

changed DCF-based TP of HK$11.00.

ZCSR [3898.HK; HK$54.2; BUY] Net income beats market expectation by ~15% and up

over 40% YoY in 1H15 due to improvement of GPM as a result of effective cost control.

Strong growth in urban rail segment offset decline in MUs segment. Management expects

MUs order delivery to pick up in 2H15 and retains a full year segment growth of 15-20%

YoY. We revise up our net income estimation with a target price from HK$ 74.80 to HK$

78.23. Mass production of IGBT and marine engineering businesses will be long term

growth drivers besides addressable market enlargement by order taking from CNR. Reit-

erate BUY.

O-NET [0877.HK; HK$1.95; NOT-RATED] - O-Net’s 1H15 net profit attributable to equity hold-

ers surged 2.3x to HK$25.9m, in line with previous profit alert. Reported revenue was up 30.1%

YoY to HK$520.5m in 1H15, mainly due to the organic growth in optical networking business,

diversification into automation and sensing business, new revenue source from coating service,

as well as the contribution from ITF Technologies Inc. Management expects strong operating

performance to continue in 2H15, due to its sustained launch and ensuing mass production of

new products that gradually contribute to the revenue growth. O-Net is one of HK-listed optical

component plays with a strong global presence. Current valuation of O-Net is higher than its HK

-listed telecommunications equipment makers & optical fiber peers, but is somewhat reasona-

ble considering its stronger growth in operating performance and strong R&D capability.

CHINA MEDICAL SYSTEM [0867.HK; HK$9.46; BUY] - Recent share price weakness should

mainly attribute to the uncertainties about the policy risk of distribution model and new product

prospects. The solid 1H15 performance should ease some concerns about the growth prospect

of CMS. We believe the company will expand with stable growth from core products and in-

creasing contribution from newly acquired products. We forecast 2014-2017E EPS CAGR of

28% for the company and we believe the current valuation of 17.1x 2015E EPS is undemanding

and therefore, maintain BUY with new target price of HK$14.40, reflecting a lower RMB:HK$

exchange rate assumption.

TUL [3933.HK; HK$4.58; BUY] - In spite of ASP pressure, intermediate products of TUL still

showed strong growth momentum and demand due to the exit of competitors. We expect this

momentum to continue with its upstream business. On the other hand, the promising insulin

business will continue to undergo rapid expansion with the expected completion of drug tender

in 2H15. 1H15 results is in line with our expectations and we maintain our 2014-2017E core

EPS CAGR forecast of 22.5%. The company is trading at 2016E PER of 8.9x. 1H15 perfor-

mance should improve sentiment towards the company and trigger a round of re-rating. We

maintain BUY on the company with target price (HK$7.25) unchanged.

CHINA LESSO [2128.HK; HK$5.80; BUY] - After delivering solid results in 2H14 and 1H15, we

believe China Lesso has laid a solid foundation for re-rating. Striking a balance between volume

and profitability, we expect the company to achieve mild double-digit earnings growth in 2015E

and 2016E. We understand that some investors have concerns about whether the good results

are sustainable in 2H15. Based on 1H15 results of some A-share listed peers, aggressive price

competition among larger players seems unlikely to happen, in our view. We raise our FY15E/

FY16E EPS by 11%/7% to reflect the better-than-expected pricing power. We reiterate our BUY

call and raise our target price from HK$8 to HK$8.1 based on 10x 2016E (Our new RMB:HK$

assumption for end-2016 is lowered from 1.25 to 1.18.).

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China Longyuan Power Group [0916.HK]

Longyuan’s net profit in 1H15 jumped 62% YoY to RMB2,207m. Adjusting for one-off items (mainly equity investment gains), core net profit came in at RMB2,167m (+50% YoY). The strong earnings growth was driven by good con-trol on overall operating expenses, reduction on coal consumption cost (-15% YoY) as well as net finance expense (-11% YoY). We see potential upside to our earnings estimates after the results. In additional to fast growing installation, we believe further easing monetary policy will help drive down finance expense going forward. Reiterate BUY with unchanged DCF-based TP of HK$11.00.

Revenue growth largely in line with expectation. Revenue increased by

13% YoY in 1H15, of which wind power revenue grew 20% YoY, versus a gross wind power generation growth of 22% YoY. Wind utilization increased by 4.7% YoY to 1,085 hours. On-grid tariff for wind power slightly increased by RMB0.005 to RMB0.588/kwh. Coal power revenue increased by 2% YoY, less than the gross coal power generation growth of 4% due to lower tariff.

Surprise on the cost side. EBIT increased by 23% YoY in 1H15, higher

than the revenue growth due to (1) operating leverage driven by increase in wind utilization hours, (2) good control on material cost and repair cost which up only 4% and 8% respectively, as well as (3) coal cost reduction (-15%). On the other hand, net finance cost dropped 11% YoY to RMB1.4bn, mainly due to: (1) higher finance income helped by gain on securities; (2) lower fi-nance expense due to lower interest rate and higher capitalized interest ex-pense.

Strong cash flow. Operating cash flow in 1H15 increased by 44% YoY to

RMB8,954m, more than covers investing cash flow of RMB7,289m.

Analyst meeting today at 4:15 p.m. (HK time). Venue: Harbour View Ball-

room, 4/F, Four Seasons Hotel.

Risks: (1) Further change in tariff; (2) capacity ramp-up risk; (3) rebound of

grid curtailment rate; (4) delay in power transmission line construction.

Wayne Fung, CFA —Analyst

(852) 3698-6319

[email protected]

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

[email protected]

Wind Power Sector Net profit +62% YoY in 1H15 better than expectation; Further

easing policy to drive finance cost reduction; Reiterate BUY

BUY (Unchanged)

Close: HK$8.98 (Aug 18, 2015)

Target Price: HK$11.00 (+22%)

Share Price Performance

Market Cap US$9,306m

Shares Outstanding 8,036.4m

Auditor KPMG

Free Float 35%

52W range HK$7.12-11.36

3M average daily T/O US$10m

Major Shareholding Guodian Group

(58.4%)

Aug 19, 2015

Key financials (RMB m) 2012 2013 2014 2015E 2016E

Revenue 17,288 19,123 18,207 20,430 22,386

Change (YoY) 7.0% 10.6% -4.8% 12.2% 9.6%

Other income 1,296 432 437 469 647

Adjusted EBIT 4,749 5,568 6,121 7,836 8,891

Change (YoY) 26.1% 17.2% 9.9% 28.0% 13.5%

Recurring net profit 1,788 2,404 2,633 3,368 4,124

Change (YoY) 5.6% 34.4% 9.5% 27.9% 22.5%

Recurring EPS 0.239 0.299 0.328 0.419 0.513

Change (YoY) 5.4% 25.1% 9.5% 27.9% 22.5%

PER (x) 30.5 23.7 21.8 17.3 14.1

Dividend yield 0.9% 0.7% 0.8% 1.0% 1.3%

PBR (x) 1.8 1.8 1.7 1.6 1.5

EV/EBITDA (x) 12.3 11.6 10.4 8.6 7.6

Net debt/equity 146.9% 144.4% 165.1% 162.0% 157.7%

Recurring ROE 6.5% 8.0% 8.2% 9.8% 10.9%

Sources: Company, CGIHK Research estimates

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Figure 1: Longyuan 1H15 results

Note: 1H14 figures here are not restated

Income Statement (RMB m) 1H13 1H14 1H15 YoY chg

Revenue by sector (ex. Service concession construction revenue) 9,155 8,966 10,160 13%

Wind power 5,119 5,610 6,713 20%

Coal power 3,764 2,999 3,056 2%

Others 405 500 739 48%

Intersegment revenue (134) (143) (348) 143%

Revenue by nature 9,654 8,987 10,541 17%

Sales of electricity 7,254 7,502 8,577 14%

Sales of steam 139 125 122 -2%

Service concession construction revenue 499 20 381 1762%

Sales of electricity equipment 26 40 107 165%

Sales of coal 1,520 1,141 1,120 -2%

Others 216 158 233 48%

Other net income 210 217 210 -3%

Government grants

CERs and VERs income 38 0 0 n/a

Others 176 192 201 5%

Rental income from investment ppt 3 3 3 25%

Net (loss)/income from investment ppt/disposal of PP&E (16) 1 0 -64%

Gain on disposal of associate/subsidary 5 0 0 n/a

Others 4 22 6 -75%

Operating expenses (4,205) (3,209) (3,644) 14%

Coal consumption (1,084) (893) (761) -15%

Coal sales costs (1,445) (1,077) (1,060) -1%

Service concession construction costs (499) (20) (381) 1762%

Personnel costs (445) (495) (548) 11%

Material costs (164) (180) (188) 4%

Repairs & maintenance (221) (190) (206) 8%

Administrative expenses (125) (115) (134) 17%

Others (220) (238) (366) 54%

EBITDA 5,659 5,995 7,107 19%

Adjusted EBITDA 5,449 5,778 6,897 19%

D&A (2,086) (2,406) (2,683) 11%

EBIT 3,573 3,588 4,424 23%

Adjusted EBIT 3,364 3,371 4,214 25%

Net finance expenses (1,307) (1,579) (1,409) -11%

Finance income 332 63 132 109%

Finance expenses (1,639) (1,642) (1,541) -6%

Share of profit/(loss) of JV and associates 23 167 224 34%

Pretax profit 2,290 2,176 3,238 49%

Income tax (362) (287) (363) 27%

After tax profit 1,927 1,890 2,875 52%

Minority interest (463) (524) (668) 28%

Net profit 1,464 1,365 2,207 62%

Recurring net profit 1,334 1,440 2,167 50%

Recurring EPS (RMB) 0.166 0.179 0.270 50%

EPS (RMB) 0.182 0.170 0.275 62%

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Figure 2: Key Assumptions


2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Wind power

Capacity installed (MW)

Consolidated 587 1,298 2,503 4,504 6,556 8,598 10,544 11,910 13,543 15,343 17,143

Change YoY - 121.3% 92.8% 79.9% 45.6% 31.1% 22.6% 13.0% 13.7% 13.3% 11.7%

Annual addition 712 1,205 2,001 2,053 2,042 1,945 1,366 1,633 1,800 1,800

Average 254 653 1,553 2,718 4,577 6,592 8,474 10,388 11,661 13,402 15,202

Change YoY - 157.0% 137.7% 75.1% 68.4% 44.0% 28.5% 22.6% 12.2% 14.9% 13.4%

Consolidated power generation (Gwh)

Gross 562 1,514 3,655 6,211 10,094 13,355 16,820 21,929 23,088 27,749 32,153

Change YoY - 169.5% 141.5% 69.9% 62.5% 32.3% 25.9% 30.4% 5.3% 20.2% 15.9%

Net 529 1,419 3,407 5,684 9,442 12,562 16,027 20,565 22,131 26,362 30,545

Change YoY - 168.0% 140.1% 66.8% 66.1% 33.0% 27.6% 28.3% 7.6% 19.1% 15.9%

Average utilization hours 2,211 2,317 2,354 2,268 2,217 2,026 1,985 2,111 1,980 2,071 2,115

Change YoY - 4.8% 1.6% -3.7% -2.2% -8.6% -2.0% 6.3% -6.2% 4.6% 2.1%

Weighted average on-grid tariff (Rmb/kwh, Incl-VAT) 0.672 0.598 0.561 0.567 0.572 0.578 0.582 0.583 0.585 0.586 0.583

Weighted average on-grid tariff (Rmb/kwh, ex-VAT) 0.574 0.511 0.480 0.485 0.489 0.494 0.498 0.498 0.500 0.501 0.498

Change YoY - -11.0% -6.2% 1.1% 0.8% 1.0% 0.8% 0.1% 0.3% 0.2% -0.5%

Coal power

Capacity installed (MW)

Consolidated 2,425 2,425 1,875 1,875 1,875 1,875 1,875 1,875 1,875 1,875 1,875

Change YoY - 0.0% -22.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Average 2,425 2,425 2,103 1,875 1,875 1,875 1,875 1,875 1,875 1,875 1,875

Change YoY - 0.0% -13.3% -10.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Consolidated power generation (Gwh)

Gross 12,809 12,442 12,670 10,910 11,353 11,749 11,231 11,064 9,641 10,313 10,313

Change YoY - -2.9% 1.8% -13.9% 4.1% 3.5% -4.4% -1.5% -12.9% 7.0% 0.0%

Net 11,980 11,638 11,863 10,207 10,670 10,672 10,497 10,330 8,966 9,591 9,591

Change YoY - -2.9% 1.9% -14.0% 4.5% 0.0% -1.6% -1.6% -13.2% 7.0% 0.0%

Average Utilization hours 5,282 5,131 6,024 5,819 6,055 6,266 5,990 5,901 5,142 5,500 5,500

Change YoY - -2.9% 17.4% -3.4% 4.1% 3.5% -4.4% -1.5% -12.9% 7.0% 0.0%

Weighted average on-grid tariff (Rmb/kwh, Incl-VAT) 0.371 0.369 0.403 0.421 0.423 0.433 0.452 0.448 0.439 0.425 0.410

Weighted average on-grid tariff (Rmb/kwh, ex-VAT) 0.317 0.315 0.345 0.360 0.362 0.370 0.386 0.383 0.375 0.363 0.350

Change YoY - -0.6% 9.3% 4.4% 0.5% 2.4% 4.4% -0.9% -2.0% -3.2% -3.5%

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Figure 3: Longyuan income statement projection

Note: Adjusted EBITDA and adjusted EBIT exclude "other net income"

Net interest coverage = EBITDA/net finance expenses


Income Statement (RMB m) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Revenue by sector (ex. Service concession construction revenue) 6,354 8,861 12,762 15,366 16,770 18,456 17,980 20,430 22,386

Wind power 1,638 2,754 4,620 6,212 7,981 10,272 11,133 13,205 15,218

Coal power 4,373 5,873 7,714 8,625 8,052 7,525 6,156 6,281 6,158

Others 455 563 695 740 1,007 1,099 1,196 1,464 1,530

Intersegment revenue (112) (329) (267) (210) (270) (441) (505) (520) (520)

Revenue by nature 8,555 9,744 14,213 16,159 17,288 19,123 18,207 20,430 22,386

Sales of electricity 5,752 6,467 8,544 10,270 12,404 14,686 14,913 17,313 19,259

Sales of steam 121 230 311 319 274 252 227 226 218

Service concession construction revenue 2,200 883 1,450 793 519 667 228 0 0

Sales of electricity equipment 264 128 262 289 232 106 130 130 130

Sales of coal 0 1,648 3,276 4,109 3,395 3,010 2,388 2,388 2,388

Others 218 388 369 378 464 402 322 373 390

Other net income 390 574 986 1,271 1,296 432 437 469 647

Government grants

CERs and VERs income 118 210 392 727 742 54 0 0 0

Others 208 327 362 400 402 346 383 459 636

Rental income from investment ppt 25 22 18 15 11 9 9 10 11

Net (loss)/income from investment ppt/disposal of PP&E 21 4 (3) 112 8 6 (4) 0 0

Gain on disposal of associate/subsidary 0 0 187 0 0 5 29 0 0

Others 19 10 29 17 133 12 21 0 0

Operating expenses (6,441) (5,869) (8,882) (9,549) (8,842) (9,163) (7,085) (6,962) (7,161)

Coal consumption (3,128) (2,290) (2,737) (2,877) (2,627) (2,226) (1,741) (1,608) (1,518)

Coal sales costs 0 (1,553) (3,046) (3,897) (3,197) (2,860) (2,247) (2,269) (2,269)

Service concession construction costs (2,200) (883) (1,450) (793) (519) (667) (228) 0 0

Personnel costs (384) (540) (662) (769) (925) (1,115) (1,225) (1,282) (1,457)

Material costs (295) (150) (278) (328) (479) (398) (344) (486) (446)

Repairs & maintenance (87) (108) (184) (254) (305) (521) (450) (507) (589)

Administrative expenses (107) (148) (219) (294) (402) (396) (378) (358) (390)

Others (240) (197) (305) (338) (390) (980) (474) (453) (493)

EBITDA 2,504 4,449 6,317 7,882 9,742 10,391 11,559 13,937 15,872

Adjusted EBITDA 2,113 3,875 5,331 6,610 8,446 9,959 11,122 13,468 15,225

D&A (1,083) (1,590) (2,236) (2,845) (3,697) (4,391) (5,001) (5,632) (6,334)

EBIT 1,421 2,858 4,081 5,036 6,045 6,000 6,559 8,305 9,538

Adjusted EBIT 1,031 2,285 3,095 3,765 4,749 5,568 6,121 7,836 8,891

Net finance expenses (857) (1,020) (1,098) (1,487) (2,518) (2,531) (2,951) (3,861) (4,176)

Finance income 146 51 79 400 143 540 198 119 52

Finance expenses (1,003) (1,071) (1,177) (1,887) (2,660) (3,071) (3,149) (3,980) (4,228)

Share of profit/(loss) of JV and associates 53 105 228 60 140 60 454 612 632

Pretax profit 616 1,944 3,211 3,609 3,667 3,529 4,062 5,056 5,994

Income tax (2) (296) (441) (305) (342) (561) (510) (683) (839)

After tax profit 614 1,647 2,770 3,304 3,325 2,968 3,551 4,374 5,155

Minority interest (276) (753) (751) (667) (732) (919) (993) (1,006) (1,031)

Net profit 337 894 2,019 2,638 2,593 2,049 2,558 3,368 4,124

Recurring net profit 199 679 1,461 1,693 1,788 2,404 2,633 3,368 4,124

Exceptional gain/(loss) 139 215 558 945 805 (354) (75) 0 0

Recurring EPS (RMB) 0.04 0.13 0.20 0.23 0.24 0.30 0.33 0.42 0.51

EPS (RMB) 0.07 0.17 0.27 0.35 0.35 0.26 0.32 0.42 0.51

DPS (RMB) 0.00 0.00 0.05 0.07 0.07 0.05 0.06 0.08 0.09

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Figure 4: Longyuan growth rate and margins


Growth rates (YoY) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Revenue by sector (ex. Service concession construction revenue) 30.0% 39.5% 44.0% 20.4% 9.1% 10.1% -2.6% 13.6% 9.6%

Wind power 125.4% 68.1% 67.8% 34.4% 28.5% 28.7% 8.4% 18.6% 15.2%

Coal power 8.8% 34.3% 31.3% 11.8% -6.6% -6.5% -18.2% 2.0% -2.0%

Others 92.7% 23.7% 23.4% 6.5% 36.0% 9.2% 8.9% 22.4% 4.5%

Intersegment revenue 22.7% 193.0% -19.0% -21.2% 28.4% 63.3% 14.6% 3.0% 0.0%

Revenue by nature 22.9% 13.9% 45.9% 13.7% 7.0% 10.6% -4.8% 12.2% 9.6%

Sales of electricity 30.4% 12.4% 32.1% 20.2% 20.8% 18.4% 1.5% 16.1% 11.2%

Sales of steam 33.3% 91.1% 35.0% 2.6% -14.3% -7.7% -10.2% -0.1% -3.5%

Service concession construction revenue 6.1% -59.9% 64.3% -45.3% n/a n/a n/a n/a n/a

Sales of electricity equipment 162.0% -51.5% 104.5% 10.5% -19.8% -54.5% 23.1% 0.0% 0.0%

Sales of coal n/a n/a 98.8% 25.4% -17.4% -11.4% -20.7% 0.0% 0.0%

Others -23.8% 78.1% -4.8% 2.4% 22.8% -13.4% -20.0% 15.8% 4.8%

EBITDA 32.0% 77.7% 42.0% 24.8% 23.6% 6.7% 11.2% 20.6% 13.9%

Adjusted EBITDA 22.3% 83.3% 37.6% 24.0% 27.8% 17.9% 11.7% 21.1% 13.0%

EBIT 47.0% 155.6% 187.3% 76.2% 48.1% 19.1% 8.5% 38.4% 45.4%

Adjusted EBIT 8.5% 121.7% 35.5% 21.6% 26.1% 17.2% 9.9% 28.0% 13.5%

Pretax profit -20.3% 215.5% 65.2% 12.4% 1.6% -3.8% 15.1% 24.5% 18.5%

After tax profit -13.8% 168.3% 68.2% 19.3% 0.6% -10.7% 19.7% 23.1% 17.9%

Net profit 56.9% 165.0% 125.8% 30.7% -1.7% -21.0% 24.8% 31.7% 22.5%

Recurring net profit -7.7% 242.1% 115.1% 15.9% 5.6% 34.4% 9.5% 27.9% 22.5%

EPS n/a 157.9% 55.4% 30.7% -1.9% -26.4% 24.8% 31.7% 22.5%

Recurring EPS n/a 232.9% 48.0% 15.9% 5.4% 25.1% 9.5% 27.9% 22.5%

Margins 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

EBITDA margin 39.4% 50.2% 49.5% 51.3% 58.1% 56.3% 64.3% 68.2% 70.9%

Adjusted EBITDA margin 33.3% 43.7% 41.8% 43.0% 50.4% 54.0% 61.9% 65.9% 68.0%

EBIT margin 22.4% 32.3% 32.0% 32.8% 36.0% 32.5% 36.5% 40.7% 42.6%

Adjusted EBIT margin 16.2% 25.8% 24.3% 24.5% 28.3% 30.2% 34.0% 38.4% 39.7%

Pretax profit margin 9.7% 21.9% 25.2% 23.5% 21.9% 19.1% 22.6% 24.7% 26.8%

After tax profit margin 9.7% 18.6% 21.7% 21.5% 19.8% 16.1% 19.8% 21.4% 23.0%

Net margin 5.3% 10.1% 15.8% 17.2% 15.5% 11.1% 14.2% 16.5% 18.4%

Recurring net margin 3.1% 7.7% 11.4% 11.0% 10.7% 13.0% 14.6% 16.5% 18.4%

Net Interest coverage 2.9 4.4 5.8 5.3 3.9 4.1 3.9 3.6 3.8

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Figure 5: Longyuan balance sheet projection


Balance Sheet (RMB m) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Non current assets

PP&E 24,290 37,305 50,642 64,967 73,352 79,594 88,307 97,132 105,685

Investment properties 172 133 101 98 76 20 5 5 5

Lease prepayments payments 557 741 876 1,215 1,417 1,657 1,873 1,873 1,873

Intangible assets 5,083 6,086 7,661 8,163 8,322 8,684 8,530 8,101 7,673

Goodwill 0 0 12 12 12 12 12 12 12

Investment in associates and JV 527 799 1,315 1,554 2,127 2,297 3,602 4,215 4,847

Other assets 350 2,319 3,459 4,962 4,553 4,482 6,282 6,507 6,408

Deferred tax assets 190 205 206 181 194 162 155 155 155

31,169 47,587 64,271 81,151 90,054 96,908 108,765 117,999 126,657

Current assets

Inventories 279 333 632 926 816 753 1,017 700 1,066

Trade and bill receivables 1,241 2,181 3,474 5,430 7,998 6,708 6,411 6,463 7,030

Prepayments and other current assets 1,805 853 1,502 2,899 3,155 2,365 4,072 4,072 4,072

Restricted deposits 500 492 245 32 232 725 440 440 440

Cash 1,055 16,503 4,089 3,708 5,138 2,715 2,389 2,365 1,110

Others 1 5 419 478 448 500 425 425 425

4,880 20,367 10,362 13,473 17,786 13,766 14,753 14,463 14,142

Total assets 36,049 67,954 74,634 94,624 107,840 110,674 123,518 132,463 140,800

Current liabilities

Borrowings 4,686 17,087 17,200 19,078 26,170 24,680 36,070 37,670 40,270

Trade and bill payable 2,729 1,943 1,515 1,597 1,261 2,142 1,021 1,535 1,133

Obligations under finance lease 0 0 0 0 0 0 0 0 0

Other payables 1,918 4,521 6,004 9,004 8,525 9,753 9,039 8,703 9,021

Others 80 140 196 158 119 101 118 118 118

9,413 23,692 24,915 29,836 36,075 36,676 46,248 48,027 50,542

Non current liabilities

Borrowings 17,345 16,219 19,975 31,828 32,482 32,961 33,762 37,162 38,562

Deferred income 2,145 2,268 2,225 1,993 1,903 1,876 1,790 1,662 1,535

Others 73 95 104 642 958 1,120 868 868 868

19,564 18,582 22,304 34,462 35,343 35,957 36,421 39,693 40,965

Equity

Paid in capital 3,163 7,464 7,464 7,464 8,036 8,036 8,036 8,036 8,036

Reserves 712 14,436 15,810 18,444 21,393 22,872 25,021 27,909 31,426

Attributable to equity owner 3,875 21,900 23,275 25,909 29,429 30,908 33,057 35,945 39,463

Minority interests 3,198 3,780 4,139 4,417 6,992 7,132 7,792 8,798 9,829

7,073 25,680 27,414 30,325 36,422 38,040 40,849 44,743 49,292

Total equity and liabilities 36,049 67,954 74,634 94,624 107,840 110,674 123,518 132,463 140,800

BVPS (RMB) - 2.93 3.12 3.47 3.94 3.85 4.11 4.47 4.91

8

Figure 6: Longyuan cash flow projection and key ratios


Cash Flow Statement (RMB m) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Pretax profit 616 1,944 3,211 3,609 3,667 3,529 4,062 5,056 5,994

Income tax (45) (236) (340) (371) (471) (566) (522) (683) (839)

D&A 1,083 1,590 2,236 2,845 3,697 4,391 5,001 5,632 6,334

Interest expense 932 1,024 1,088 1,677 2,551 2,810 2,971 3,980 4,228

Interest income (37) (33) (58) (110) (60) (60) (84) (119) (52)

Share of profit / (loss) of JV and associates (53) (105) (228) (60) (140) (60) (454) (612) (632)

Dividend income (47) (16) (1) (62) (46) (56) (55) 0 0

Change in working capital 360 (83) (1,813) (1,633) (2,370) 3,085 1,976 316 (1,046)

Others 30 1 (74) (272) 169 538 (26) 0 0

Operating cash flow 2,840 4,085 4,021 5,624 6,998 13,611 12,868 13,570 13,986

Purchase/(disposal) of PP&E and intangible assets (11,578) (16,121) (17,770) (13,048) (13,392) (10,275) (18,206) (13,860) (14,040)

Acquisition of subsidiaries/disposal of subsidiaries 0 8 (65) (493) (847) (197) (24) 0 0

Investment in/(disposal of) financial assets, JV & associates (253) (340) (138) (578) (912) (175) (867) 0 0

Dividend received 96 30 45 161 91 218 67 0 0

Interest received 48 32 58 124 87 86 105 119 52

Others 602 1,235 170 (199) 855 45 (1,921) 0 0

Investing cash flow (11,086) (15,156) (17,700) (14,034) (14,117) (10,299) (20,848) (13,741) (13,988)

Net proceeds from issuance of shares 0 17,022 0 0 2,295 0 0 0 0

Capital contribution - equity owner 1,500 492 126 72 30 41 186 0 0

Capital contribution - minority interest 451 0 0 0 0 0 0 0 0

Proceeds from /(repayment of) borrowings 7,922 10,952 3,677 10,506 8,067 (1,272) 12,028 5,000 4,000

Proceeds from senior perpetual securities 0 0 0 0 2,476 0 0 0 0

Interest paid (1,119) (1,567) (1,319) (2,094) (3,025) (3,251) (3,376) (4,374) (4,647)

Dividend paid to equity owner 0 0 (632) (403) (515) (512) (382) (480) (606)

Others (310) (325) (539) (444) (472) (668) (801) 0 0

Financing cash flow 8,444 26,575 1,313 7,637 8,856 (5,662) 7,655 146 (1,253)

Net change in cash 198 15,505 (12,365) (773) 1,736 (2,350) (326) (24) (1,255)

Valuation

PER (recurring) (x) 200.1 59.8 39.7 32.7 30.5 23.7 21.8 17.3 14.1

Dividend yield 0.0% 0.0% 0.7% 0.9% 0.9% 0.7% 0.8% 1.0% 1.3%

PBR (x) - 2.7 2.5 2.1 1.8 1.8 1.7 1.6 1.5

EV/EBITDA (x) 48.0 27.0 19.0 15.2 12.3 11.6 10.4 8.6 7.6

Ratios

Net margin 5.3% 10.1% 15.8% 17.2% 15.5% 11.1% 14.2% 16.5% 18.4%

ROE 5.9% 5.3% 6.5% 6.9% 6.5% 8.0% 8.2% 9.8% 10.9%

ROA 0.7% 1.3% 2.0% 2.0% 1.8% 2.2% 2.2% 2.6% 3.0%

Net debt / Equity 297% 65% 121% 156% 147% 144% 165% 162% 158%

Current ratio 0.52 0.86 0.42 0.45 0.49 0.38 0.32 0.30 0.28

9

ZCSR [3898.HK]

Steve Wong

(852) 3698-6391

[email protected]

Wong Chi Man - Head of Research

(852) 3698-6317

[email protected]

Capital Goods Solid 1H15 results beat market expectation, reiterate BUY

BUY (Unchanged)

Close: HK$ 54.20 (Aug 18, 2015)

Target Price: HK$78.23 (44.3%)

Share Price Performance


Shares Outstanding 1,176m

Auditor Ernst & Young

Free Float 48.06%

52W range HK$75.00-26.10

3M average daily T/O US$27m

Major Shareholding CRRC [1766 HK]

(51.94%)

August 19, 2015

Net income beats market expectation by ~15% and up over 40% YoY in 1H15 due to im-

provement of GPM as a result of effective cost control. Strong growth in urban rail segment

offset decline in MUs segment. Management expects MUs order delivery to pick up in

2H15 and retains a full year segment growth of 15-20% YoY. We revise up our net income

projection with a target price from HK$ 74.80 to HK$ 78.23. Mass production of IGBT and

marine engineering businesses will be long term growth drivers besides addressable mar-

ket enlargement by order taking from CNR. Reiterate BUY.

1H Results beat expectation. Revenue was up 10.5% YoY to RMB 5.7bn, in line

with our expectation. The revenue growth was mainly due to strong order delivery for

subway products, which was up 66.1% YoY to RMB 837m in 1H15. Order delivery for

MUs product declined by 15% YoY in 1H15, but is expected to pick up in 2H15. Man-

agement retains full year expectation of 15-20% YoY growth in FY15. Net income was

up 42.4% YoY to RMB1.2bn, beating market and our expectation by ~15%, thanks to

improvement of GPM. GPM was up 3.7ppt YoY to 39.2% in 1H15.

Profitability improvement. ZCSR’s GPM trended up from 33.2% in FY12 to 39.2% in

1H15. Management attributed to: 1) improvement of production technology; 2) stream-

lining internal cost structure; and 3) economies of scales lowing unit fixed cost. Con-

sidering these structural changes of production capability, we believe unit production

cost to be sustained in future. Nevertheless, management hints that improvement of

ZCSR’s profitability may trigger price cut to customers. A drop in ASP will drag down

profit margin in 2H15, and we estimate full year GPM will be back to the level in FY14.

Reiterating smooth process of getting order from CNR. Management reiterates

process of getting order from CNR to be smooth. ZCSR has started developing prod-

ucts for CNR. Considering that development of new products takes one to two years,

ZCSR will likely to get the first locomotive/MUs order from CNR in 2016. We expect

the assets consolidation under CRRC Group to speed up upon completion of merger

of CNR Group and CSR Group in early August.

Reiterate BUY. The solid 1H results coming from profitability improvement reflects strong

execution capability of the company. We revise up our FY15-16E net income forecasts by

12.7% and 8.4% because of GPM improvement. We retain our BUY rating on ZCSR and

raise our target price from HK$ 74.80 to HK$ 78.23, representing 25x of FY15/16E PER, or

the upper ceiling of historical PER band. Our earnings projection is yet to reflect potential

earnings growth on mass production of IGBT (one of key component on rolling stock electri-

cal system) and marine engineering businesses segment from acquisition of SDM complet-

ed in Q2 2015.

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Turnover (RHS) Price (LHS)


FY ended Dec 31 FY12A FY13A FY14A FY15E FY16E

Revenue (RMBm) 7,186 8,781 12,576 15,405 18,232

Net Income (RMBm) 1,224 1,467 2,395 2,927 3,305

EPS (RMB) 1.129 1.332 2.038 2.491 2.813

Growth (% YoY) 18.03 52.98 22.22 12.90

P/E (x) 34.47 22.53 18.44 16.33

BVPS (RMB) 5.705 7.673 9.354 11.445 13.760

P/B (x) 5.99 4.91 4.01 3.34

DPS(RMB) 0.350 0.373 0.400 0.498 0.563

Yield (%) 0.81 0.87 1.08 1.22

ROAE (%) 21.29 19.30 23.94 23.95 22.32

Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash

10

Figure 1: 1H15 financial data breakdown

Sources: Company data, CGIHK Research estimates

Figure 2: Major changes of our forecast

Sources: CGIHK Research estimates

Finanancial summary 1H14 2H14 FY14 1H15 2H15E FY15E 1H15 FY15E

(% YoY) (% YoY)

Operating revenue (RMBm) 5,180 7,496 12,676 5,723 9,810 15,533 10.48 22.54

Locomotives electrical systems 716 2,988 3,704 841 2,892 3,733 17.46 0.78

EMUs electrical systems 2,830 1,929 4,759 2,418 3,064 5,482 (14.56) 15.19

Metro electrical systems 504 704 1,208 837 907 1,744 66.07 44.36

Other train-borne systems 739 984 1,723 984 695 1,679 33.15 (2.57)

Electric components and others 391 891 1,282 643 2,253 2,896 64.45 125.90

Business taxes & surcharges (RMBm) 30 70 100 37 92 129 23.33 28.93

Revenue (RMBm) 5,150 7,426 12,576 5,686 9,719 15,405 10.41 22.49

Less: Operating cost (RMBm) 3,324 4,552 7,876 3,460 6,155 9,615 4.09 22.08

Gross Profit (RMBm) 1,826 2,874 4,700 2,226 3,564 5,790 21.91 23.19

GPM (%) 35.46 38.70 37.37 39.15 36.67 37.59 3.69ppt 0.21ppt

Selling cost (RMBm) 275 606 881 243 835 1,078 (11.64) 22.40

Administrative cost (RMBm) 494 855 1,349 679 967 1,646 37.45 22.04

SG&A (RMB mn) 769 1,461 2,230 922 1,803 2,725 19.90 22.18

SG&A-to-revenue (%) 14.93 19.67 17.73 16.22 18.55 17.69 1.28ppt -0.05ppt

Net profit (RMBm) 857 1,538 2,395 1,220 1,707 2,927 42.36 22.22

Net profit margin (%) 16.64 20.71 19.04 21.46 17.57 19.00 4.82ppt -0.04ppt

Total debt (RMBm) 60 42 984 1,032 1,540.00 2,356.19

Total cash and equivalents (RMBm) 2,729 2,680 3,930 3,001 44.01 11.98

Net debt (cash) (RMBm) (2,669) (2,638) (2,946) (1,969) 10.38 (25.35)

Total equity (RMBm) 9,656 11,171 11,926 13,638 23.51 22.09

Net gearing (%) (27.64) (23.61) (24.70) (14.44) N/A N/A

(RMBm) FY15E FY16E

Old New Change (%) Old New Change (%)

Operating revenue 15,675 15,533 (0.90) 18,546 18,385 (0.87)

Train-borne electrical systems 11,100 10,959 (1.27) 13,088 12,927 (1.23)

Other rolling stock components 1,679 1,679 - 1,944 1,944 -

Others 2,896 2,896 - 3,513 3,513 -

Less: business tax 130 129 (0.90) 154 153 (0.87)

Revenue 15,545 15,405 (0.90) 18,392 18,232 (0.87)

Gross profit 5,421 5,790 6.80 6,360 6,659 4.71

GPM (%) 34.58 37.27 2.69ppt 34.29 36.22 1.93ppt

Net income 2,598 2,927 12.66 3,049 3,305 8.37

Net margin (%) 16.58 18.84 2.27ppt 16.44 17.98 1.53ppt

EPS 2.211 2.491 12.66 2.595 2.813 8.37

11

Figure 3: Financial statements

Sources: CGIHK Research estimates

Consolidated income statement of ZCSR Consolidated balance sheet of ZCSR

FY Ended Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E As of Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E

Operating revenue 7,249 8,856 12,676 15,533 18,385 Current assets 7,203 10,813 14,166 16,507 20,575

Train-borne electrical systems 4,741 6,177 9,671 10,959 12,927 Cash and equivalent 2,319 3,136 2,680 3,001 5,481

Other rolling stock components 1,589 1,674 1,723 1,679 1,944 Trade and bill receivables 3,628 4,908 5,998 7,028 8,379

Others 919 1,005 1,282 2,896 3,513 Inventories 1,110 1,428 2,207 3,061 3,280

Other current assets 146 1,341 3,281 3,417 3,434

Less: business tax 63 75 100 129 153

Revenue 7,186 8,781 12,576 15,405 18,232 Non-current assets 2,454 2,586 2,759 4,403 4,636

PP&E 1,701 1,830 1,883 2,950 3,025

Less: COGS 4,803 5,695 7,876 9,615 11,573 Land use right 160 173 201 203 205

Gross profit 2,383 3,086 4,700 5,790 6,659 Total intangible assets 111 74 81 543 546

Long term investments 255 233 237 261 287

Less: SG&A 1,197 1,503 2,230 2,725 3,202 Other non-current assets 227 276 357 446 573

Add: Other income (loss) 131 81 191 280 309

Operating profit 1,317 1,664 2,661 3,346 3,767 Total assets 9,657 13,399 16,925 20,911 25,211

Add: Net fin income (cost) 9 27 43 (29) (20) Current liabilities 3,033 3,821 4,987 5,556 6,992

Add: JV, associate & others 78 13 51 50 55 Trade and bill payables 1,988 2,679 3,431 3,945 4,933

Pre-tax profit 1,404 1,704 2,755 3,367 3,801 Receipts in advance 292 388 588 509 889

Short term borrowings 41 31 4 82 91

Less: Income tax 179 238 363 438 494 Other current liabilities 712 723 964 1,020 1,079

Total net profit 1,225 1,466 2,392 2,929 3,307

Non-current liabilities 305 428 767 1,716 1,850

Less: Minority interests 1 (1) (3) 2 2 Long-term borrowings 28 52 37 949 1,044

Net income 1,224 1,467 2,395 2,927 3,305 Other non-current liabilities 277 376 730 767 806

EPS (RMB) 1.129 1.332 2.038 2.491 2.813

DPS (RMB) 0.350 0.373 0.400 0.498 0.563 Total liabilities 3,338 4,249 5,754 7,272 8,842

EBIT 1,395 1,677 2,712 3,395 3,821 Minority interests 135 134 180 190 201

EBITDA 1,542 1,837 2,980 3,708 4,132 Shareholders' equity 6,184 9,016 10,991 13,448 16,168

BVPS (RMB) 5.705 7.673 9.354 11.445 13.760

Consolidated cash flow statement of ZCSR Key ratios of ZCSR

FY ended Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E FY ended Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E

Profit before tax 1,404 1,704 2,755 3,367 3,801 Sales mixed (%)

Depreciation and amortization 147 160 271 313 310 Train-borne electrical systems 65.40 69.75 76.29 70.55 70.31

Changes in working capital (21) (867) (957) (1,483) (253) Other rolling stock components 21.92 18.90 13.59 10.81 10.58

Financial cost 16 3 3 57 63 Others 12.68 11.35 10.11 18.64 19.11

Income tax paid (129) (513) (502) (451) (509)

Others (170) 239 487 153 35 Profit & loss ratios (%)

CF Operating 1,247 726 2,057 1,955 3,448 Gross margin 33.16 35.14 37.37 37.59 36.52

Net profit margin 17.03 16.71 19.04 19.00 18.13

CAPEX (382) (293) (335) (2,086) (390) Effective tax rate 12.75 13.97 13.18 13.00 13.00

Increase in investment (807) (1,101) (4,500) (24) (26)

Others 1,205 67 2,707 - - Growth (%)

CF Investing 16 (1,327) (2,128) (2,110) (416) Revenue 1.51 22.20 43.22 22.49 18.36

Gross profit (3.91) 29.50 52.30 23.19 15.01

Capital injection 10 1,776 52 - - EBIT (0.92) 20.22 61.72 25.20 12.54

Net debt financing (632) 28 (38) 991 103 EBITDA (0.06) 19.13 62.22 24.43 11.43

Dividend & interest paid (397) (382) (412) (467) (587) Net profit 3.38 19.85 63.26 22.22 12.90

Others - - - (47) (68)

CF Financing (1,019) 1,422 (398) 476 (552) Balance sheet ratios

Current ratio (x) 2.37 2.83 2.84 2.97 2.94

Net change in cash 244 821 (469) 321 2,480 Quick ratio (x) 2.01 2.46 2.40 2.42 2.47

Cash at the beginning 2,158 2,319 3,136 2,680 3,001 Cash ratio (x) 0.76 0.82 0.54 0.54 0.78

Time deposit & FX effect (83) (4) 13 - - Trade & bill receivables days 147 178 159 155 155

Cash at the end 2,319 3,136 2,680 3,001 5,481 Trade & bill payables days 127 150 142 140 140

Inventory turnover days 106 81 84 100 100

Total debt / equity ratio (%) 1.09 0.91 0.37 7.56 6.93

Net debt / equity ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash

Returns (%)

ROAE 21.29 19.30 23.94 23.95 22.32

ROAA 13.38 12.72 15.78 15.48 14.34

Payout ratio 31.05 28.02 19.62 20.00 20.00

12

Figure 4: Rolling forward PER and PER band of ZCSR Figure 5: Rolling forward PBR and PBR band of ZCSR

Sources: Bloomberg, CGIHK Research estimates Sources: Bloomberg, CGIHK Research estimates

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Sources: Company, CGIHK Research

13

COMPANY NEWS

Analyst: Mark Po

O-net Communications (Group) Limited [877.HK; HK$1.95; Not Rated] -

Strong 1H15 results attributable to diversification strategy and sustained product offerings launch

Market Cap: US$184.0m; Free Float: 31.87%; 3-months Average Daily Turnover: US$0.5m

The Company. O-Net Communications (Group) Limited (O-Net) is one of

the leading high-tech enterprises in China engages in optical networking,

business related to electronic cigarettes, coating services and machine

vision solutions. O-Net is among the top five global leading supplier for

Passive Optical Component (POC), with a 7.5% market share in 2014.

Total market size for POC was estimated to be US$1.35bn in 2013. It is the

No.1 global supplier for Free space optical isolators, with a 41% market

share, and No.3 global supplier for WDM (Wavelength Division

Multiplexing) and No.4 global supplier for EDFA (Erbium-Doped Fiber

Amplifier).

O-Net’s 1H15 net profit attributable to equity holders surged 2.3x to

HK$25.9m, in line with previous profit alert. Reported revenue was up

30.1% YoY to HK$520.5m in 1H15, mainly due to the organic growth in

optical networking business, diversification into automation and sensing

business, new revenue source from coating service, as well as the

contribution from ITF Technologies Inc.. Management expects strong

operating performance to continue in 2H15, due to its sustained launch and

ensuing mass production of new products that gradually contribute to

revenue growth.

The group continued to re-position its strategic focus from a sole telecom

passive component supplier to a high technology leader providing

advanced products and solutions for cloud data center, broadband and

wireless access markets. It has successfully launched an integrated

Coherent Receiver (100GbE active product) for telecommunications, and

the Active Optical Cable (AOC) and QSFP+BIDI (two 40GbE active

products) for data communication markets to target at leading supplier in

cloud data center market, while its effort in innovative WiFi solution provider

strengthens competitiveness in hyper-scale access market. Overall optical

networking business (including revenue from ITF) achieved solid revenue

growth of 15.5% YoY, with gross margin improving from 33.4% in 1H14 to

33.7% in 1H15. According to management, the telecommunications market

will continue to be driven by 100GbE demand while data centers continued

to be bright spot, 40GbE product is expected to also achieve good growth

in data-communication market.

O-Net is riding on ITF’s platform to successfully tap into industrial laser

business, as ITF is a leading supplier of material processing in fiber laser

market. Through acquisition, O-Net has entered the industrial laser

business to offer ultra-reliable fiber-optic components, such as fiber Bragg

grating and high-power fused components for fiber lasers markets. The

group’s new revenue source from this industrial laser business amounted to

HK$29.3m with 55.7% gross margin in 1H15. According to the group, as

fiber laser offers flexibility for operation at several wavelengths and allows

access to multiple markets-ranging from materials processing and laser

marking to sensor applications and laser spectroscopy, as well as medical

applications, 3D printing and digital projections, the fiber lasers market

therefore is experiencing the fastest growth rate among all other currently

available laser technologies. In addition, coating services business also

started to bear fruits. By leveraging its optical coating and processing

platform, O-Net generated new revenue source of HK$25.2m from its

coating services business in 1H15.

With positive market response for automation solutions to E-cigarettes, the

group’s revenue from automation and sensing business surged by 43.8%

August 19, 2015

Source: Bloomberg, Company Data, CGIHK

[O-Net Communications (Group) Limited]

YoY to HK$19.3m. China’s automation industry is estimated to be

worth ~US$100bn, while 2014-2019 CAGR for in domestic machine

vision and sensors market is estimated to be ~17.7%, especially

under the new national industry directive of “Made-in-China 2025”.

As one of the earliest providers of Industry 4.0 components, the

group already launched a series of machine vision and fiber sensing

products to seize this opportunities.

Regarding the issue of Canada government’s intervention on the

acquisition of ITF Technologies Inc., management has already made

formal discussion with local government to facilitate the progress and

is in active negotiation towards a possible solution. Market concerns

will be relieved once the issue gets resolved.

Our view. O-Net is one of HK-listed optical component plays with a

strong global presence. Current valuation of O-Net is higher than its

HK-listed telecommunications equipment makers & optical fiber

peers, but is somewhat reasonable considering its stronger growth in

operating performance and strong R&D capability.

Catalyst. Accelerated qualification for new products from major

customers, increased spending of Internet giants for data center,

increasing policy support on industry, increasing IR activities.

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Aug14 Oct14 Dec14 Feb15 Apr15 Jun15

(HK$ million)(HK$)


Key Financials

(in HKD m)2011 2012 2013 2014

Rev enue 669.4 727.4 661.5 831.3

Gross Prof it 299.8 300.4 211.8 288.9

Gross Margin % 44.8 41.3 32.0 34.8

Net Prof it 133.4 97.8 13.4 43.3

Net Margin % 19.9 13.4 2.0 5.2

EPS (Basic) 0.16 0.13 0.02 0.06

ROE (%) 10.2 7.1 1.0 3.2

Div idend Yield (%) 1.54 1.54 - -

PER (x) 12.19 15.00 97.50 32.50

PBR (x) 1.14 1.06 1.03 1.04

Capex (m) (160.3) (246.2) (145.9) (135.6)

Free cash f low (m) (19.2) (81.1) (115.2) (135.1)

Net cash/(net debt) (mn) 781.4 629.8 436.1 170.9

14

Figure 2: Peer comparison

Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks

Ticker Company

Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F 2014 2015F 2014 2015F 2014 2015F 2014 2015F

Lcy US$m x x x x x x x x % % % % % %

6869 HK YOFC 8.38 691 7.9 6.8 6.1 6.1 5.4 5.0 1.6 1.6 25.5 20.6 8.0 8.0 2.4 3.2

2342 HK Comba Telecom Systems 1.77 422 11.2 9.5 4.6 4.8 4.4 3.4 0.9 0.8 -6.4 8.8 1.5 2.9 1.2 2.5

552 HK China Communications Service 3.28 2,930 7.7 7.0 6.2 3.3 3.1 2.7 0.8 0.8 10.6 10.2 4.3 4.7 3.4 3.9

763 HK ZTE Corp-H 16.68 11,813 15.7 13.5 12.3 15.1 13.6 12.8 2.3 1.8 6.2 12.8 2.5 2.6 1.2 1.6

6168 HK China U-Ton Holdings Ltd 1.17 265 17.2 13.8 11.6 n.a. n.a. n.a. 3.8 2.6 24.7 16.2 13.0 8.6 0.0 1.0

3777 HK China Fiber Optic Netw ork Sy 1.57 434 5.1 4.4 3.9 3.1 2.7 2.4 0.9 0.8 18.9 16.5 10.4 10.6 0.0 3.1

877 HK O-Net Communications Group 1.95 184 15.0 11.5 8.5 n.a. n.a. n.a. 1.0 n.a. 1.0 6.3 2.8 n.a. 0.0 n.a.

1300 HK Trigiant Group Ltd 1.73 349 4.4 4.0 4.8 5.6 5.2 4.9 1.0 0.8 25.0 18.1 11.2 11.9 7.8 7.4

941 HK China Mobile Ltd 100.20 264,579 15.4 14.4 13.4 5.1 4.8 4.5 2.0 1.8 16.1 12.8 8.9 8.4 2.8 2.8

762 HK China Unicom Hong Kong Ltd 10.46 32,303 15.7 14.1 13.0 3.3 3.1 3.0 0.9 0.9 4.9 6.5 2.2 2.6 2.3 2.4

728 HK China Telecom Corp Ltd-H 4.23 44,149 14.6 12.9 11.7 3.7 3.5 3.3 1.0 0.9 6.5 6.5 3.2 3.7 2.2 2.3

1883 HK Citic Telecom International 3.50 1,525 14.9 14.0 13.2 9.3 8.9 8.6 1.8 1.7 22.2 11.5 4.3 5.0 3.2 3.4

Average 12.1 10.5 9.1 5.9 5.5 5.1 1.5 1.3 12.9 12.2 6.0 6.3 2.2 3.0

000063 CH Zte Corp-A 19.33 11,813 22.5 18.9 16.1 14.3 12.6 11.8 3.2 2.6 6.2 12.5 2.5 3.3 0.9 1.0

600804 CH Dr Peng Telcom & Media Gr-A 24.27 5,285 43.8 32.7 23.3 11.6 9.4 8.3 6.5 6.2 10.0 13.8 4.5 4.1 n.a. 0.8

300134 CH Shenzhen Tat Fook Technolo-A 22.95 2,413 32.8 28.0 n.a. 19.0 17.0 n.a. 5.8 n.a. 2.6 n.a. 16.6 n.a. 2.1 0.8

600198 CH Datang Telecom Tech Co-A 29.09 4,014 36.4 29.1 n.a. n.a. n.a. n.a. 6.6 7.4 7.0 16.7 1.4 n.a. 0.0 n.a.

600498 CH Fiberhome Telecom Tech Co-A 24.53 4,017 33.6 27.5 20.8 29.9 25.2 n.a. 3.9 3.4 9.5 10.6 3.6 4.9 n.a. 0.9

002396 CH Fujian Star-Net Communicat-A 23.82 1,962 37.4 31.6 23.2 n.a. n.a. n.a. 5.9 4.9 12.4 18.2 6.8 10.3 n.a. 0.9

002281 CH Accelink Technologies Co -A 42.78 1,404 39.0 29.5 21.5 19.9 16.1 n.a. 3.7 3.5 10.4 9.3 4.6 5.8 1.2 0.5

600487 CH Hengtong Optic-Electric Co-A 34.27 2,218 29.6 24.1 18.8 20.9 19.4 n.a. 3.4 3.1 11.3 11.0 3.0 3.9 n.a. 0.9

002491 CH Tongding Interconnection I-A 13.43 2,534 32.8 28.2 34.9 38.3 33.2 29.0 6.7 6.1 12.4 11.6 3.7 6.0 0.2 0.6

600522 CH Jiangsu Zhongtian Technolo-A 23.40 3,158 26.1 21.7 18.5 15.0 12.5 12.6 2.5 2.5 10.8 10.1 5.8 6.9 n.a. 0.7

000070 CH Shenzhen Sdg Info Co Ltd-A 24.73 1,048 73.8 56.2 48.5 30.3 24.0 21.0 6.2 6.5 6.6 8.7 2.4 1.9 n.a. 0.2

300299 CH Fuchun Communications Co L-A 23.92 1,464 83.9 63.8 49.3 n.a. n.a. n.a. 16.0 17.2 2.9 23.9 2.9 16.3 0.3 0.4

Average 37.5 29.9 25.1 22.5 19.0 16.5 4.9 4.6 8.5 12.2 4.8 5.2 0.6 0.7

PRY IM Prysmian Spa 21.78 5,197 18.2 15.1 13.1 9.4 8.5 7.9 3.9 3.7 13.2 20.1 2.0 3.9 n.a. 2.1

JNPR US Juniper Netw orks Inc 28.32 10,887 14.7 13.3 12.4 8.1 8.0 7.7 2.6 2.6 6.2 15.1 -4.6 7.7 1.1 1.4

4063 JP Shin-Etsu Chemical Co Ltd 7438.00 25,830 21.8 19.7 18.2 8.1 7.3 6.8 1.6 1.5 7.0 7.2 5.8 7.2 n.a. 1.4

5803 JP Fujikura Ltd 686.00 1,989 13.7 12.1 11.2 7.1 6.8 6.6 0.9 0.9 1.7 7.3 2.4 3.7 n.a. 1.2

MSI US Motorola Solutions Inc 65.27 13,496 19.6 17.0 15.8 10.8 9.9 10.5 7.4 27.9 31.7 30.7 5.4 7.0 2.1 2.1

CSCO US Cisco Systems Inc 28.83 146,601 12.6 11.9 11.0 6.6 6.5 6.3 2.5 2.3 18.1 17.6 8.2 9.7 2.8 2.9

ALU FP Alcatel-Lucent 3.24 10,058 18.3 12.2 10.5 6.6 5.7 5.1 3.7 3.5 -53.5 18.0 0.6 3.6 n.a. 0.0

ERICB SS Ericsson Lm-B Shs 89.45 34,426 17.2 14.0 12.7 8.6 7.2 6.8 2.1 2.0 8.7 10.4 3.8 4.9 n.a. 4.0

NOK1V FH Nokia Oyj 6.42 25,903 21.6 19.0 17.0 9.6 8.1 7.2 2.5 2.6 -8.5 14.8 17.3 8.3 n.a. 2.5

Average 17.0 14.4 13.1 8.2 7.5 7.2 3.1 5.6 2.7 15.6 3.5 6.2 2.0 1.9

PE EV/EBITDA P/B ROE ROA Div yield

Figure 1: 1H15 Results highlights

Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks

1H15 Results Highlights (HKD m) 1H15 1H14 YoY change

Optical networking business 447 387 15.5%

Automation and sensing business 19 13 44.0%

Industrial applications business 55 0.1 75609.7%

Total Turnover 521 400 30.1%

Cost of sales and services (345) (266) 30.0%

Gross profit 175 135 30.3%

Other income and other gains and losses 9 10 -14.3%

Distribution and selling expenses (23) (20) 15.4%

Administrative expenses (63) (55) 15.5%

R&D expenses (66) (56) 18.1%

Others

Finance costs

Share of profits of joint ventures (1) (2)

Share of profits of associates (2) (3)

Profit before tax 28 9 204.6%

Income tax expense (2) (2) 57.1%

Net profit 26 8 233.4%

Gross margin (%) 33.7 33.6 0.1 ppt

Net margin (%) 5.0 1.9 3.0 ppt

15

Figure 3: Domestic optical network business supply chain

Sources: Bloomberg, CGIHK Research

Operators

Construction

Optical Fiber Cable

Optical Fiber Preform

Optical System

Optical Component

IT Services

China Telecom [728.HK]China Mobile [941.HK]China Unicom [762.HK]

Digital China [861.HK]

CCS [552.HK]China U-Ton [6168.HK]

Trigiant [1300.HK]Zhongtian Tech [600522.CH]Hengtong Photoelectric [600487.CH]

ZTE [763.HK]Huawei [Unlisted]Alcatel-Lucent [ALU.US]Fiberhome [600498.CH]

YOFC [6869.HK]Shin-Etsu Chemical Co Ltd[4063.JP]Corning [GLW.US]Sumitomo Electric Industries [5802.JP]Fujikura [5803.JP]

O-Net [877.HK]JDSU[6869.HK]Finisar [FNSR.US]Accelink [002281.CH]

16

China Medical System [867.HK]

BUY

Close: HK$9.46 (Aug 18, 2015)

Target Price: HK$14.40(+52.2%)

Price Performance


Shares Outstanding 2,487m

Auditor Deloitte

Free Float 49.0%

52W range HK$8.40-15.54

3M average daily T/O US$9.4m

Major Shareholding Lam Kong (46.4%)

Sources: Company, Bloomberg

Cyrus Ng, CFA—Analyst

(852) 3698-6275

[email protected]


(852) 3698-6317

[email protected]


China Healthcare Sector Recent share price weakness should mainly due to the uncertainties about the policy risk of

distribution model and new product prospects. The solid 1H15 performance should ease some

concerns about the growth prospect of CMS. We believe the company can maintain its expan-

sion with stable growth from core products and increasing contribution from newly acquired

products. We forecast 2014-2017E EPS CAGR of 28% for the company and we believe the

current valuation of 17.1x 2015E EPS is undemanding and therefore, maintain BUY with new

target price of HK$14.40(previous: HK$15.20), reflecting a lower RMB:HK$ exchange rate

assumption.

Investment Highlights

Revenue growth driven by academic promotion model: As stated in our initiation

report, we believe the academic promotion model will be the future trend for drugs promo-

tion in China and this business segment of CMS delivered strong revenue growth of

29.5% year-on-year (YoY) in 1H15. The strong growth of academic promotion model

compensated the stagnant growth of agency model and resulted in a 22.7% YoY total

revenue growth in 1H15.

Slow down of core products expected, in our view: One market concern was about

the slow down of growth of core products. In 1H15, revenue of seven core products grew

21.4% YoY, falling from 37.7% of 2014. In our view, core products are relatively mature

products and we do not expect a strong growth momentum from these products due to

their high base. The growth of major products is indeed in line with our annual forecast of

23.2%. We believe the future growth of CMS will be driven by (1) stable and relatively

slower growth of core products, and (2) strong ramp up of newly acquired products.

Immediate contribution from newly acquired products: Since the end of 2014, CMS

acquired seven products and has launched four products in 1H15. With only four months

of contribution, these four products recorded a revenue of RMB85.5m. With the launch of

the other three new products in 2H15, we believe these seven new products can reach

our annual revenue forecast of RMB300m. According to management, NuoDiKang, Hiru-

doid and Combizym are other high potential products and will become an important

growth driver for the company.

Balance sheet to return normal level in 2H15: Inventory turnover days and accounts

receivable turnover days increased from 57 days and 55 days of 1H14 to 78 days and 76

days respectively. Management explained this was due to the inventories related to ac-

quiring new products and distribution model accounting treatment change for XiDaKang.

They expected the level would return to normal level in 2H15.

1H Briefing takeaways: Maintain BUY with solid growth prospect

August 19, 2015

Y/E Dec 31 2013 2014 2015E 2016E 2017E

Turnover (RMB m) 2,249 2,945 3,910 4,825 5,837

Core net profit (RMB m) 646 833 1,075 1,318 1,618

Core net margin (%) 28.7 28.3 27.5 27.3 27.7

Core EPS (RMB) 0.27 0.34 0.44 0.53 0.65

% Change 22.0 28.9 26.2 21.7 22.8

PER (x) 28.3 22.0 17.4 14.3 11.6

PBR (x) 5.8 4.7 3.5 3.0 2.6

ROE (%) 19.7 20.9 19.9 21.1 22.2

EV/EBITDA (x) 25.7 20.0 14.5 11.7 9.4

17

No major M&A coming for new products: The company has acquired sev-

en immediately marketable products since the 2H14. Management expected

the future focus would be on adjusting marketing strategy in ramping up these

new products. They expected no further acquisition of new products in the

next one to two years.

1H15 net profit grew 20.0% YoY: 1H15 revenue grew 22.7% YoY to

RMB1,676m. Gross margin improved from 53.9% to 57.1% while net margin

dropped slightly from 30.1% to 29.5% due to the increased selling expenses

and finance expenses ratio. Net profit grew 20.0% YoY to RMB495m.

Figure 1: 1H15 results highlight

Source: Company

Figure 2: Revenue break down of major products

Source: Company

1H14 1H15 YoY Change

RMBm RMBm

Revenue 1,366.7 1,676.4 22.7%

COGS (629.8) (718.5) 14.1%

Gross profit 736.9 957.9 30.0%

Other gain and losses 31.8 30.0 -5.4%

Selling expenses (249.7) (352.4) 41.1%

Admin expenses (71.0) (93.0) 30.9%

Finance costs (4.6) (14.7) 219.1%

Share results of associates 0.1 5.0 5223.4%

Profit before tax 443.4 532.9 20.2%

Tax (33.4) (39.0) 16.9%

Profit for the period 410.0 493.9 20.5%

MI 2.7 1.2 -57.2%

Net profit 412.7 495.0 20.0%

Gross margin 53.9% 57.1% +3.2ppt

Selling expesnes ratio -18.3% -21.0% -2.7ppt

Admin expenses ratio -5.2% -5.5% -0.3ppt

Finance cost ratio -0.3% -0.9% -0.6ppt

Net margin 30.2% 29.5% -0.7ppt


RMBm RMBm

Deanxit 384.6 451.1 17.3%

Ursofalk 266.8 318.8 19.5%

XinHuoSu 170.9 218.9 28.1%

Salofalk 69.5 86.6 24.7%

Bioflor 54.2 78.1 44.0%

Stulln Eye-drops 60.6 70.1 15.7%

GanFuLe 25.8 29.8 15.4%

Core products under academic model 1032.5 1253.4 21.4%

DanShenTong - 46.2 N/A

NuoDiKang - 22.7 N/A

Hirudoid - 11.9 N/A

Combizym - 4.6 N/A

New products - 85.4 N/A

ShaDuoLiKa 204.5 160.4 -21.5%

YiNuoShu 69.0 80.7 17.0%

XiDaKang 16.0 68.7 329.7%

YinLianQingGanKeLi 2.0 1.9 -6.3%

Core products under agency model 291.4 311.7 7.0%

18

Figure 3: Rolling forward PER of CMS

Source: Company, CGIHK Research

Figure 4: Peers’ valuation

Source: Bloomberg, CGIHK Research

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

8/2012 2/2013 8/2013 2/2014 8/2014 2/2015

HK$

19.5X

22.8X

26.1X

16.3X

13.0X

Company name Ticker Price (HK$) Market cap (HK$m) 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F

CMS 867 9.46 23,529 21.6 17.4 14.0 5.2 3.7 3.2 22.9 23.0 23.4 20.5 15.5 12.1

Fosun Pharm-H 2196 22.40 67,101 19.4 19.0 16.1 2.5 2.3 2.1 13.5 12.3 13.6 34.7 29.7 24.5

Sino Biopharm 1177 8.95 44,226 32.2 24.7 21.0 6.4 5.1 4.2 21.0 22.8 22.2 17.8 13.8 11.2

CSPC 1093 7.38 43,601 33.7 25.5 20.3 5.2 4.5 4.0 16.3 19.6 21.3 20.4 15.2 12.2

Liv zon-H 1513 40.00 22,030 23.7 20.3 16.5 3.4 3.0 2.6 15.9 14.9 15.7 21.7 17.7 14.3

Luy e 2186 7.82 25,971 35.8 24.6 19.7 3.9 3.5 3.0 17.5 15.2 16.0 24.2 18.0 14.5

Shanghai Fudan-H 1349 7.58 6,996 52.1 41.7 32.0 8.8 7.3 5.9 20.3 19.6 21.1 33.8 28.3 20.8

Lee's Pharm 950 12.30 7,215 35.7 28.8 22.0 7.2 6.0 5.0 21.4 23.9 24.8 N/A N/A N/A

Pionees Pharm 1345 4.30 5,733 15.5 13.6 10.8 3.7 3.4 2.9 24.5 26.1 29.4 13.0 12.2 10.0

Dawnray s 2348 7.34 5,904 23.7 17.5 13.5 4.1 3.4 2.9 15.2 16.3 18.1 15.9 11.9 8.6

Consun 1681 6.00 6,000 22.8 18.3 14.8 3.4 3.1 2.6 15.9 17.7 19.4 N/A 11.3 8.3

Simple average 28.7 22.9 18.2 4.9 4.1 3.5 18.6 19.2 20.5 22.5 17.4 13.6

Weighted average 27.6 22.3 18.2 4.5 3.8 3.2 17.5 17.9 18.8 23.2 18.9 15.3

PER(x) PBR(x) ROE(%) EV/EBITDA (x)

19

Key financials

Source: Company data, CGIHK Research estimates

Balance Sheet

As at Dec 31

(RMBm)

Cash & cash equiv alents 488 244 1,329 1,782 2,340

Inv entories 167 189 252 314 371

Accounts receiv able 859 876 1,153 1,414 1,693

Others 449 236 300 351 386

Current assets 1,963 1,546 3,034 3,861 4,789

Property , plant and equipment 218 254 373 504 664

Intangible assets 244 441 527 626 750

Others 1,493 2,665 2,679 2,697 2,720

Non-current assets 1,955 3,360 3,579 3,827 4,135

Total assets 3,918 4,905 6,613 7,688 8,924

Accounts pay able 245 253 413 522 630

ST borrowings 314 484 625 744 823

Others 32 52 52 52 52

Current liabilities 591 789 1,089 1,318 1,505

Long-term debts 0 0 0 0 0

Others 50 126 129 131 138

Long-term liabilities 50 126 129 131 138

Total liabilities 641 914 1,218 1,449 1,642

Shareholders' equity 3,264 3,991 5,370 6,208 7,241

Minority interests 13 0 25 32 40

Total equity 3,277 3,991 5,395 6,240 7,282

2013A 2014A 2015F 2016F 2017F

Profit and Loss

Year as of Dec 31

(RMBm)

Direct model 1,620 2,230 3,083 3,788 4,560

Agency model 534 635 731 842 963

Others 96 80 96 195 314

Revenue 2,249 2,945 3,910 4,825 5,837

Cost of goods sold (1,023) (1,291) (1,714) (2,169) (2,615)

Gross profit 1,226 1,655 2,196 2,656 3,222

Other gains / (losses) 49 240 36 48 61

Marketing expenses (468) (631) (856) (1,024) (1,259)

Admin expenses (146) (152) (221) (274) (320)

Operating profit 662 1,112 1,156 1,406 1,704

Net interest income / (expense) 23 18 7 18 38

JV, associate and others 1 (1) 15 20 25

Pretax income 685 1,130 1,177 1,444 1,767

Income taxes (50) (87) (98) (120) (139)

Non-controlling interests 1 3 (5) (7) (9)

Net profit 636 1,046 1,075 1,318 1,618

Non-recurring items (10) 213 0 0 0

Core net profit 646 833 1,075 1,318 1,618

EBIT 672 899 1,156 1,406 1,704

EBITDA 709 942 1,240 1,504 1,824

EPS (RMB) 0.263 0.433 0.435 0.530 0.651

Core EPS (RMB) 0.268 0.345 0.435 0.530 0.651

DPS (RMB) 0.104 0.137 0.174 0.211 0.259

2014A 2015F 2016F 2017F2013A

Cash Flow

Year ended Dec 31

(RMBm)

Prof it bef ore tax 685 1,130 1,177 1,444 1,767

Depr & amortization 37 42 84 98 120

Change in working cap. (327) (34) (179) (214) (228)

Income tax paid (53) (67) (95) (118) (132)

Others (6) (230) (20) (37) (61)

Operating cash flow 335 840 967 1,174 1,464

Capex (137) (288) (270) (328) (404)

Change in other assets (38) (648) (29) (2) 39

Investment cash flow (175) (936) (299) (330) (365)

Net change in debt (93) 170 141 119 79

Others (251) (320) 279 (510) (620)

Financing cash flow (345) (150) 420 (391) (541)

Net change in cash (185) (246) 1,088 453 558

2013A 2014A 2015F 2016F 2017F

Key Ratios

Year to Dec 31 2013A 2014A 2015F 2016F 2017F

Growth (% YoY)

Sales 28.1 31.0 32.7 23.4 21.0

EBIT 18.4 34.0 27.6 21.6 21.1

EBITDA 18.0 33.1 30.8 21.2 21.2

Core net prof it 22.0 28.9 29.0 22.6 22.8

Core EPS 22.0 28.9 26.2 21.7 22.8

Profitability (%)

Gross margin 54.5 56.2 56.2 55.0 55.2

EBIT margin 29.9 30.6 29.4 29.0 29.0

EBITDA margin 31.5 32.1 31.6 31.0 31.1

Core net prof it margin 28.7 28.3 27.5 27.3 27.7

ROA 16.5 17.0 16.3 17.1 18.1

ROE 19.7 20.9 19.9 21.1 22.2

Balance sheet ratios

Current ratio (X) 3.3 2.0 2.8 2.9 3.2

Quick ratio (X) 1.7 0.6 1.5 1.7 1.9

Cash ratio (X) 0.9 0.3 1.3 1.4 1.6

Trade & bill receiv ables day s 116.7 107.5 94.7 97.1 97.1

Trade & bill pay able day s 71.7 70.3 70.8 78.7 80.4

Inv entory turnov er day s 47.0 50.4 47.0 47.6 47.9

Total debt to equity ratio (%) 9.6 12.1 11.6 12.0 11.4

Net debt / (cash) to equity (%) (19.1) 0.8 (18.1) (21.9) (25.9)

20

The United Laboratories [3933.HK]

BUY

Close: HK$4.58 (Aug 18, 2015)

Target Price: HK$7.25 (+58.3%)

Price Performance

Market Cap US$960.8m


Auditor Deloitte

Free Float 33.8%

52W range HK$3.09-6.56


Major Shareholding Ms Ning Kwai Chun

(73.3%)


Cyrus Ng, CFA—Analyst

(852) 3698-6275

[email protected]


(852) 3698-6317

[email protected]


China Healthcare Sector In spite of ASP pressure, intermediate products of TUL still showed strong growth momen-

tum and demand due to the exit of competitors. We expect this momentum to continue with

its upstream business. On the other hand, the promising insulin business will continue to

undergo rapid expansion with the expected completion of drug tender in 2H15. 1H15 re-

sults is in line with our expectations and we maintain our 2014-2017E core EPS CAGR

forecast of 22.5%. The company is trading at 2016E PER of 8.9x. 1H15 performance

should improve sentiment towards the company and trigger a round of re-rating. We main-

tain BUY on the company with target price unchanged.

Investment Highl ights

Growth momentum of intermediate products to continue: Manufacturing capacity

utilization rate of 6-APA increased from 73% in 2014 to 85% in 1H15. As a result, rev-

enue from intermediate products surged 93.4% year-on-year (YoY) to HK$963m.

Management explains the surge in demand was mainly due to exit of smaller competi-

tors because of (1) increasing environmental protection standard, and (2) low ASP

level. The company is the dominant market player in 6-APA with 70-80% market share

and it has a cost advantage over competitors. Management expects growth momen-

tum of intermediate products to continue in 2H15.

Target insulin revenue to grow over 80% YoY: 1H15 insulin revenue surged 70.5%

YoY to HK$121.8m. Management targets annual revenue to reach HK$400m in 2015,

representing a YoY growth of 84.5%. Management explains the relatively slow growth

in 1H15 was due to seasonal factor and lower than expected drug tender progress.

For third generation insulin product, Insulin Glargine Injection, the company said its

facility had passed on-site inspection and is waiting for production approval. Under

normal situation, the approval should be ready within 3-4 months, and in other words,

the company is on track to launch the product in Q4 2015.

Bulk medicine ASP reached trough level: 1H15 Bulk medicine gross margin drop

was mainly due to the increase in raw material cost and drop in ASP. The manage-

ment expects the ASP has already reached the trough level. RMB depreciation should

help boost demand of export products. Management expects slight revenue growth

from bulk medicine in 2H15.

1H Briefing Takeaways: Growth momentum to continue, maintain BUY

August 19, 2015

Y/E Dec 31 2013 2014 2015E 2016E 2017E

Turnover (HK$ m) 7,648 8,030 8,874 9,623 10,375

Core net profit (HK$ m) 402 545 667 833 1,002

Core net margin (%) 5.3 6.8 7.5 8.7 9.7

Core EPS (HK$) 0.25 0.34 0.41 0.51 0.62

% Change 253.1 35.6 22.3 24.9 20.4

PER (x) 18.5 13.7 11.2 8.9 7.4

PBR (x) 1.1 1.1 1.0 0.9 0.8

ROE(%) 6.2 7.8 8.7 9.8 10.6

EV/EBITDA (x) 9.3 6.4 6.3 5.2 4.3

21

Improving debt level: With no major capacity expansion plan, net gearing

ratio of TUL continued to improve, dropping from 72.3% by the end of 2014 to

62.1% by the end of June 2015. We expect net gearing ratio will continue to

improve and reduce the finance cost as a result.

1H15 adjusted core net profit dropped 8.3% YoY: 1H15 revenue grew

9.8% YoY to HK$4,062m. Gross margin dropped from 41.6% to 40.3% due

mainly to 5-7% YoY ASP drop of major intermediate and bulk medicine prod-

ucts. Core net margin also dropped 1.5ppt YoY to 7.7%. Core net profit

dropped 8.3% YoY to HK$310.8m, reaching 46.6% of our annual estimates.

Figure 1: 1H15 results highlight

Source: Company, CGIHK Research


HK$m HK$m

Revenue 3,701.2 4,062.4 9.8%

COGS (2,160.3) (2,424.3) 12.2%

Gross profit 1,541.0 1,638.1 6.3%

Other income 467.9 55.2 -88.2%

Other gains and losses (15.8) 63.1 -500.7%

Selling expenses (627.8) (661.1) 5.3%

Admin expenses (292.2) (370.1) 26.6%

R&D expenses (62.8) (34.0) -45.9%

Other expenses (14.9) (42.2) 184.4%

Impairment changes and fair value changes (40.5) (210.3) 419.5%

Finance costs (164.5) (179.3) 9.0%

Profit before tax 790.4 259.4 -67.2%

Tax (80.5) 20.9 -126.0%

Net profit 709.9 280.3 -60.5%

Deduct: Non-core items 370.9 (30.5)

Core net profit 339.0 310.8 -8.3%

Gross margin 41.6% 40.3% -1.3ppt

Selling expesnes ratio -17.0% -16.3% +0.7ppt

Admin expenses ratio -7.9% -9.1% -1.2ppt

R&D expenses ratio -1.7% -0.8% +0.9ppt

Finance cost ratio -4.4% -4.4% -

Core net margin 9.2% 7.7% -1.5ppt

22

Figure 2: Rolling forward PER band


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

8/2012 2/2013 8/2013 2/2014 8/2014 2/2015

HK$

9.6X

19.0X

15.9X

12.7X

6.5X

Company name Ticker Price (HK$) Market cap (HK$m) 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F

TUL 3933 4.58 7,451 11.3 11.8 10.3 1.0 1.0 0.9 13.3 8.7 9.1 6.4 5.1 4.4

Fosun Pharm-H 2196 22.40 67,070 19.4 19.0 16.1 2.5 2.3 2.1 13.5 12.3 13.6 34.7 29.7 24.5

CSPC 1093 7.38 43,601 33.7 25.5 20.3 5.2 4.5 4.0 16.3 19.6 21.3 20.4 15.2 12.2

Liv zon-H 1513 40.00 22,021 23.7 20.3 16.5 3.5 3.0 2.7 15.9 14.9 15.7 21.7 17.7 14.3

Luy e 2186 7.82 25,971 35.8 24.6 19.7 4.0 3.5 3.0 17.5 15.2 16.0 24.2 18.1 14.5

Hua Han 587 1.08 7,962 17.1 12.9 10.3 1.1 0.9 0.9 6.8 7.8 9.3 N/A N/A N/A

Shanghai Fudan-H 1349 7.58 6,996 52.1 41.7 32.1 8.8 7.3 5.9 20.3 19.6 21.1 33.9 28.3 20.8

Lijun 2005 2.19 6,501 11.1 10.6 8.7 2.0 1.9 1.6 18.6 19.2 20.9 N/A 8.1 6.8

Lee''s Pharm 950 12.30 7,215 35.7 28.8 22.0 7.2 6.0 5.0 21.4 23.9 24.8 N/A N/A N/A

Dawnray s 2348 7.34 5,904 23.7 17.6 13.5 4.1 3.4 2.9 15.2 16.3 18.1 15.9 11.9 8.6

Consun 1681 6.00 6,000 22.8 18.3 14.8 3.4 3.1 2.6 15.9 17.7 19.4 N/A 11.3 8.3

Simple average 26.0 21.0 16.7 3.9 3.4 2.9 15.9 15.9 17.2 22.5 16.1 12.7

Weighted average 26.2 21.5 17.5 3.7 3.2 2.8 15.4 15.3 16.6 22.8 19.0 15.4

EV/EBITDA (x)PER(x) PBR(x) ROE(%)

Figure 3: Peers’ valuation


23

Key financials

Note: the non-operating items and income taxes in 2013 and 2014 was due to the reclassification income of the factory land in Sichuan

Source: Company data, CGIHK Research estimates

24

China Lesso [2128.HK]

BUY

Close: HK$5.80 (August 18, 2015)

Target Price: HK$8.10 (+39.7%)

Price Performance



Auditor Ernst & Young

Free Float 31.6%

52W range HK$3.41-7.80


Major Shareholding Wong Luen Hei

(68.1%)


Wong Chi Man--Head of Research

(852) 3698 6317

[email protected]

Nevin Ning—Analyst

(852) 3698-6321

[email protected]


China Construction Sector

After delivering solid results in 2H14 and 1H15, we believe China Lesso has laid a solid foun-

dation for re-rating. Striking a balance between volume and profitability, we expect the compa-

ny to achieve mild double-digit earnings growth in 2015E and 2016E. We understand that

some investors have concerns about whether the good results are sustainable in 2H15. Based

on 1H15 results of some A-share listed peers, aggressive price competition among larger

players seems unlikely to happen, in our view. We raise our FY15E/FY16E EPS by 11%/7% to

reflect the better-than-expected pricing power. We reiterate our BUY call and raise our target

price from HK$8 to HK$8.1 based on 10x 2016E (Our new RMB:HK$ assumption for end-

2016 is lowered from 1.25 to 1.18.).

Investment Highlights

Investors’ concerns about 2H15 outlook may be overdone. Although the company

delivered impressive recurring profit growth of 19% in 1H15 through margin expansion,

thanks to its pricing power, investors expressed their concerns in yesterday’s analyst

briefing about the risk of price competition due to lacklustre economic outlook. Manage-

ment maintained their style without offering clear margin guidance. We believe the

chance to see severe price competition in 2H15 is small due to: (i) some A-share listed

peers also delivered decent results in 1H15 (Figure 6) therefore they should not have

very strong incentive to launch a price war; (ii) the authorities have become much more

pro-active to boost infrastructure spending since July and the latest example is the pro-

posed issue of specialized construction bonds. Stronger demand should reduce incentive

to cut product prices; (iii) China Plastics Piping Association raised guidance prices slightly

in July (Figure 5), which shows the market landscape is healthier than other sectors like

cement and steel.

Manageable FX risk. Management expects the FX risk is manageable if RMB deprecia-

tion is relatively mild. Given that RMB loan (~5% of its loan balance) interest rate may be

>6% while its HK$/US$ loan interest rate is only >2%, the latter is still relatively more cost

effective. In addition, most of the FX loss due to currency translation of its HK$/US$ loan

will go to the balance sheet directly without hitting P&L, according to management.

Striking balance between volume and profitability. Based on our impression during

the analyst briefing, we believe the company will try to maintain a high single-digit volume

growth instead of chasing double-digit growth to protect margins. As the company’s utili-

zation rate is still rising (from 69.9% in 1H14 to 71% in 1H15), there is room for gross

margin improvement if capacity expansion is managed prudently.

Lesso Mall recorded slim profit in July. Regarding its newly established e-commerce

platform, Lesso Mall, the business recorded a tiny profit in July. Management aims to

achieve >RMB500m revenue (~3.2% of total revenue) for the full year (1H15: RMB215m).

Gross margin in 1H15 was slightly above 1%. (more on next page)

1H15 Briefing Takeaways; Laid Foundation for Re-rating

August 19, 2015

Y/E Dec 31 2011 2012 2013 2014 2015E 2016E

Turnover (RMB m) 10,143 10,891 13,071 14,823 15,867 17,885

Recurring net profit (RMB m) 1,184 1,219 1,405 1,653 1,884 2,137

Net margin (%) 12 11 11 11 12 12

Recurring EPS (RMB) 0.39 0.40 0.46 0.53 0.61 0.69

% Change 4 2 14 16 14 13

PER (x) 12.2 11.7 10.1 8.6 7.9 7.2

PBR (x) 3.0 2.5 2.1 1.7 1.5 1.3

EV/EBITDA (x) 8.6 8.1 6.7 6.0 5.1 4.4

0

50

100

150

200

0

2

4

6

8

10

Aug14 Oct14 Dec14 Feb15 Apr15 Jun15 Aug15

(HK$ million)(HK$)


25

Account receivables risk under control. The company’s trade and bills receivables balance

rose 100% from end-2014 to RMB346m at end-1H15. It has been collecting the receivables of

this category since July and management does not expect to see high bad debt risk. In addi-

tion, top five customers only accounted for 4.25% of total revenue in 1H15. A diversified cus-

tomer base should also mitigate bad debt risk.

Tax rate to stay at about 20%. China Lesso’s effective tax rate increased from 17% in 1H14

to 22.2% in 1H15 due to differences in the timing of booking taxes. On a full-year basis, man-

agement expects

1H15 Results Highlights

Year ended 31 Dec 1H2014 1H2015 YoY Change

PVC pipes 3,997,803 4,206,892 5.2%

Non-PVC pipes 2,128,008 2,150,031 1.0%

Others 455,240 686,259 50.7%

Revenue 6,581,051 7,043,182 7.0%

COGS (4,938,032) (5,135,575) 4.0%

Gross profit 1,643,019 1,907,607 16.1%

Operating expenses (784,503) (868,798) 10.7%

Operating profit 858,516 1,038,809 21.0%

Other income and gains 31,754 22,727 -28.4%

EBIT 890,270 1,061,536 19.2%

Net f inance costs (67,885) (12,813) -81.1%

Profits from associates and JCEs 202 612 203.0%

Non-recurrent items (61,365) (14,087) -77.0%

Income before tax 761,222 1,035,248 36.0%

Income tax expense (139,556) (232,919) 66.9%

Minority interests 5,869 3,616 -38.4%

Net income 627,535 805,945 28.4%

Recurring net income 688,900 820,032 19.0%

EPS (RMB) 0.202 0.259 28.4%

Recurring EPS (RMB) 0.221 0.264 19.0%

DPS (HK$) - -

Sales volume (tonnes) 643,018 692,254 7.7%

PVC 508,691 560,172 10.1%

Non-PVC 134,327 132,082 -1.7%

ASP per tonne (RMB) 9,527 9,183 -3.6%

PVC 7,859 7,510 -4.4%

Non-PVC 15,842 16,278 2.8%

Cost per tonne (RMB) 7,049 6,521 -7.5%

Gross profit per tonne (RMB) 2,478 2,662 7.4%

Margins and Ratios:

Gross margin 25.0% 27.1%

Net margin 10.4% 11.6%

EBIT margin 13.5% 15.1%

EBITDA margin 16.6% 18.5%

Effective tax rate 17% 22%

Sources: Company data, CGIHK Research

26

Figure 1: Brent crude prices (US$/barrel)

Sources: WIND Info, CGIHK Research

Figure 2: PVC prices (RMB/tonne)

Figure 3: HDPE prices (RMB/tonne)



Figure 4: PP prices (RMB/tonne)


Figure 5: Guidance prices issued by China Plastics Piping Association (RMB/tonne)

Sources: China Plastics Piping Association, CGIHK Research

Figure 6: Peer comparison

Sources: Companies, CGIHK Research

D ata S ource: W ind Info

S pot P rice: C rude O il: U K B rent D TD

30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13

50 50

60 60

70 70

80 80

90 90

100 100

110 110

120 120USD/barrel USD/barrelUSD/barrel USD/barrel


M arket P rice (M id): P VC (E thylene P rocess): N ational M arket P rice (M id): P VC (C alcium C arbide P rocess): N ational

30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13

5100 5100

5400 5400

5700 5700

6000 6000

6300 6300

6600 6600

6900 6900

yuan/ton yuan/tonyuan/ton yuan/ton


M arket P rice: H D P E (P etroC hina D aqing P etrochem ical 5000S ): G uangdong S hunde

30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13

9200 9200

9600 9600

10000 10000

10400 10400

10800 10800

11200 11200

11600 11600

12000 12000



C losing P rice: S pot G oods: P P R esin (S pot P P )

30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13

7800 7800

8400 8400

9000 9000

9600 9600

10200 10200

10800 10800

11400 11400


Product type (Chinese) Product type (English) Sep-14 25-Dec-14 Change % change 24-Mar-15 Change % change 14-Jul-15 Change % change Accumulative change (%)

给水用硬聚氯乙烯（PVC-U）管材 PVC pipes for water supply 10,800 10,500 (300) (2.78) 10,000 (500) (4.76) 10,500 500 4.76 (2.78)

排水用PVC-U管材 PVC pipes for drainage 9,800 9,500 (300) (3.06) 9,000 (500) (5.26) 9,500 500 5.26 (3.06)

埋地排水用PVC-U双壁波纹管材 Underground PVC pipes for drainage 10,500 10,200 (300) (2.86) 9,700 (500) (4.90) 10,200 500 4.90 (2.86)

燃气用埋地聚乙烯（PE）管材 PE pipes for gas supply 18,700 17,700 (1,000) (5.35) 17,200 (500) (2.82) 17,000 (200) (1.18) (9.09)

给水用PE管材 PE pipes for water supply 17,200 16,200 (1,000) (5.81) 15,700 (500) (3.09) 16,700 1,000 5.99 (2.91)

埋地排水用PE双壁波纹管材 Underground PE pipes for drainage 17,100 15,500 (1,600) (9.36) 15,400 (100) (0.65) 16,400 1,000 6.10 (4.09)

PE缠绕结构壁管材 PE pipe wall winding structure 18,100 16,500 (1,600) (8.84) 16,400 (100) (0.61) 17,400 1,000 5.75 (3.87)

1H15 Revenue growth Sales volume growth Net profit growth Gross margin Operating margin Net margin

Zhejiang Weixing New Building Materials 002372.CH 9.1% n.a. 16.0% 43.0% 19.4% 17.1%

Yonggao 002641.CH 3.6% n.a. 22.3% 29.6% 9.9% 7.9%

New choice Pipe 300198.CH

Goody Science & Technology 002694.CH

China Lesso 2128.HK 7.0% 7.7% 19.0% 27.1% 15.1% 11.6%

To be released

To be released

27

Key financials

China Lesso (02128.HK)

Income Statement

(RMB'000, except for per share amount)

Year ended 31 Dec 1H 2H 1H 2H 1H (A) 2H 2012 2013 2014 2015E 2016E

PVC pipes 3,528,040 4,520,930 3,997,803 4,821,458 4,206,892 5,025,765 6,845,360 8,048,970 8,819,261 9,232,657 10,061,213

Non-PVC pipes 1,848,951 2,317,179 2,128,008 2,785,958 2,150,031 3,018,448 3,603,020 4,166,130 4,913,966 5,168,479 6,081,892

Others 315,232 540,215 455,240 634,305 686,259 780,000 442,983 855,447 1,089,545 1,466,259 1,741,448

Revenue 5,692,223 7,378,324 6,581,051 8,241,721 7,043,182 8,824,213 10,891,363 13,070,547 14,822,772 15,867,395 17,884,553

COGS (4,200,369) (5,604,610) (4,938,032) (6,084,006) (5,135,575) (6,424,733) (8,242,055) (9,804,979) (11,022,038) (11,560,308) (13,095,942)

Gross profit 1,491,854 1,773,714 1,643,019 2,157,715 1,907,607 2,399,480 2,649,308 3,265,568 3,800,734 4,307,087 4,788,611

Operating expenses (654,672) (848,247) (784,503) (1,046,303) (868,798) (1,120,675) (1,136,887) (1,502,919) (1,830,806) (1,989,473) (2,201,964)

Operating profit 837,182 925,467 858,516 1,111,412 1,038,809 1,278,805 1,512,421 1,762,649 1,969,928 2,317,614 2,586,647

Other income and gains 41,793 46,606 31,754 47,984 22,727 39,709 62,677 88,399 79,738 62,436 99,447

EBIT 878,975 972,073 890,270 1,159,396 1,061,536 1,318,514 1,575,098 1,851,048 2,049,666 2,380,050 2,686,094

Net f inance costs (63,160) (64,776) (67,885) (36,038) (12,813) (21,205) (112,103) (127,936) (103,923) (34,018) (14,910)

Profits from associates and JCEs 214 176 202 196 612 210 315 390 398 822 440

Non-recurrent items 24,309 19,700 (61,365) (37,983) (14,087) - 18,969 44,009 (99,348) (14,087) -

Income before tax 840,338 927,173 761,222 1,085,571 1,035,248 1,297,519 1,482,279 1,767,511 1,846,793 2,332,767 2,671,624

Income tax expense (162,681) (167,214) (139,556) (166,879) (232,919) (233,553) (251,008) (329,895) (306,435) (466,472) (534,325)

Minority interests 5,077 6,568 5,869 7,797 3,616 - 7,051 11,645 13,666 3,616 -

Net income 682,734 766,527 627,535 926,489 805,945 1,063,966 1,238,322 1,449,261 1,554,024 1,869,911 2,137,299

Recurring net income 658,425 746,827 688,900 964,472 820,032 1,063,966 1,219,353 1,405,252 1,653,372 1,883,998 2,137,299

EPS (RMB) 0.222 0.249 0.202 0.298 0.259 0.342 0.408 0.471 0.500 0.601 0.687

Recurring EPS (RMB) 0.214 0.243 0.221 0.310 0.264 0.342 0.402 0.457 0.532 0.606 0.687

DPS (HK$) - 0.120 - 0.130 - 0.145 0.120 0.120 0.130 0.145 0.162

Depreciation and amortization 173,769 186,569 203,992 235,788 242,007 317,889 252,574 360,338 439,780 559,896 664,071

EBITDA 1,052,958 1,158,818 1,094,464 1,395,380 1,304,155 1,636,613 1,827,987 2,211,776 2,489,844 2,940,768 3,350,605

Sales volume (tonnes) 556,374 716,257 643,018 788,621 692,254 863,046 1,085,415 1,272,631 1,431,639 1,555,300 1,706,400

PVC 439,248 564,114 508,691 617,220 560,172 673,176 855,777 1,003,362 1,125,911 1,233,348 1,330,992

Non-PVC 117,126 152,143 134,327 171,401 132,082 189,870 229,638 269,269 305,728 321,952 375,408

ASP per tonne (RMB) 9,664 9,547 9,527 9,647 9,183 9,321 9,626 9,598 9,593 9,259 9,460

PVC 8,032 8,014 7,859 7,812 7,510 7,466 7,999 8,022 7,833 7,486 7,559

Non-PVC 15,786 15,230 15,842 16,254 16,278 15,897 15,690 15,472 16,073 16,054 16,201

Cost per tonne (RMB) 7,067 7,168 7,049 7,002 6,521 6,635 7,278 7,124 7,023 6,585 6,767

Gross profit per tonne (RMB) 2,597 2,378 2,478 2,645 2,662 2,685 2,348 2,474 2,570 2,674 2,694

Growth Rates:

Revenue 18% 22% 16% 12% 7% 7% 7% 20% 13% 7% 13%

EBIT 15% 20% 1% 19% 19% 14% 1% 18% 11% 16% 13%

EBITDA 20% 22% 4% 20% 19% 17% 5% 21% 13% 18% 14%

Core net income 13% 17% 5% 29% 19% 10% 3% 15% 18% 14% 13%

Recurring EPS 12% 15% 3% 28% 19% 10% 2% 14% 16% 14% 13%

Margins and Ratios:

Gross margin 26.2% 24.0% 25.0% 26.2% 27.1% 27.2% 24.3% 25.0% 25.6% 27.1% 26.8%

Net margin 11.5% 10.0% 10.4% 11.6% 11.6% 12.1% 11.1% 10.7% 11.1% 11.9% 12.0%

EBIT margin 15.4% 13.2% 13.5% 14.1% 15.1% 14.9% 14.5% 14.2% 13.8% 15.0% 15.0%

EBITDA margin 18.5% 15.7% 16.6% 16.9% 18.5% 18.5% 16.8% 16.9% 16.8% 18.5% 18.7%

Effective tax rate 20% 18% 17% 15% 22% 18% 17% 19% 16% 20% 20%


2015E20142013

28

Key financials

Figure 6: Rolling Forward PER


Figure 7: Rolling Forward PBR


China Lesso (02128.HK)

Balance Sheet Statement of Cash Flow

(RMB'000 , except for per share amount)

As at 31 Dec 2012 2013 2014 2015E 2016E Year ended 31 Dec 2012 2013 2014 2015E 2016E

Inventories 1,766,133 2,434,049 2,210,038 2,500,000 2,800,000 Profit before tax 1,482,279 1,767,511 1,846,793 2,332,767 2,671,624

Trade receivables 779,354 854,518 1,127,901 1,300,000 1,500,000 Depreciation & Amortization 252,574 360,338 439,780 518,896 614,071

Bills receivable 243,265 218,041 216,231 230,000 230,000 Change in w orking capital (301,856) (480,951) 393,463 (586,221) (394,000)

Others 401,826 702,773 561,760 834,474 928,474 Others / adjustments (152,553) (143,436) (43,590) 191,116 (448,314)

Bank balances and cash 1,922,325 2,189,242 3,198,902 3,940,793 4,775,551 Net operating cash f low 1,280,444 1,503,462 2,636,446 2,456,558 2,443,381

Total current assets 5,112,903 6,398,623 7,314,832 8,805,267 10,234,025

Capex (1,067,866) (1,161,586) (1,285,113) (1,000,000) (1,000,000)

PPE, net 3,288,261 4,452,109 5,263,614 5,750,149 6,128,624 Others (866,081) (558,605) (296,182) (50,000) (50,000)

Prepaid lease payments 954,279 996,690 1,087,126 1,137,126 1,187,126 Net investing cash f low (1,933,947) (1,720,191) (1,581,295) (1,050,000) (1,050,000)

Others 427,343 450,285 853,956 326,150 377,590

Total non-current assets 4,669,883 5,899,084 7,204,696 7,213,425 7,693,340 Change in debt 552,775 504,749 378,088 (258,729) (100,000)

Dividends (293,834) (291,809) (295,460) (318,373) (373,982)

Total assets 9,782,786 12,297,707 14,519,528 16,018,692 17,927,365 Others (133,033) (72,555) (98,654) (87,566) (84,641)

Net f inancing cash f low 125,908 140,385 (16,026) (664,667) (558,623)

Trade payables 512,054 861,416 973,387 1,050,000 1,150,000

Other payables 832,388 1,252,674 1,564,290 1,650,000 1,750,000 Increase / Decrease in cash (194,316) 266,917 1,009,660 741,891 834,758

Bank and other borrow ings 595,799 1,080,092 1,158,729 900,000 800,000 Net cash/(debt) (302,257) (497,874) 19,068 1,019,688 1,954,446

Others 98,635 103,638 113,440 139,942 160,297

Total current liabilities 2,038,876 3,297,820 3,809,846 3,739,942 3,860,297 Finance Ratios

Bank and other borrow ings 1,628,783 1,607,024 2,021,105 2,021,105 2,021,105 2012 2013 2014 2015E 2016E

Others 87,209 136,920 138,854 160,000 185,000 Valuation

Total non-current liabilities 1,715,992 1,743,944 2,159,959 2,181,105 2,206,105 PE(x) 11.7 10.1 8.6 7.9 7.2

EPS grow th (%) 2 14 16 14 13

Total liabilities 3,754,868 5,041,764 5,969,805 5,921,047 6,066,402 Yield (%) 2.1 2.1 2.2 2.5 2.8

PEG (x) 5.64 0.74 0.53 0.57 0.53

Shareholders' equity 6,010,033 7,239,738 8,545,459 10,096,997 11,860,314 EV/EBITDA (x) 8.1 6.7 6.0 5.1 4.4

Minority interests 17,885 16,205 4,264 648 648 PB(x) 2.5 2.1 1.7 1.5 1.3

Operational

Revenue grow th (%) 7 20 13 7 12

Gross margin (%) 24.3 25.0 25.6 27.1 26.4

Net profit margin (%) 11.1 10.7 11.1 11.9 11.6

Days receivables 30 29 30 33 33

Days payables 16 26 30 32 31

Days inventories 68 78 77 74 74

Current ratio (x) 2.5 1.9 1.9 2.4 2.7

Quick ratio (x) 1.4 1.0 1.2 1.5 1.7

Asset/Equity (x) 1.6 1.7 1.7 1.6 1.5

Net debt/equity (%) 5 7 Net cash Net cash Net cash

EBITDA interest coverage (x) 16.3 17.3 24.0 86.4 224.7

Core ROE (%) 22.2 21.2 20.9 20.2 19.5


0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2

Jun

-10

Sep

-10

De

c-1

0

Ma

r-1

1

Jun

-11

Sep

-11

De

c-1

1

Ma

r-1

2

Jun

-12

Sep

-12

De

c-1

2

Ma

r-1

3

Jun

-13

Sep

-13

De

c-1

3

Ma

r-1

4

Jun

-14

Sep

-14

De

c-1

4

Ma

r-1

5

Jun

-15

Rolling forward PBR (x) Average

+1 Standard deviation -1 Standard deviation

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

Sep

-14

Dec

-14

Mar

-15

Jun

-15

Rolling forward PER (x) Average

+1 Standard deviation -1 Standard deviation

29

Disclaimer

This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited (“Galaxy International Securities”) and/or its group companies to any registration or licensing requirement within such jurisdiction.

This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness.

This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past perfor-mance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regard-ing future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision.

Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries (“China Galaxy International”), directors, officers, agents and employees (“the Relevant Parties”).

All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy Interna-tional and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer.

Disclosure of Interests

China Galaxy Securities (6881.hk) is the direct and/or indirect holding company of the group of companies under China Galaxy International.

China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies)’ market capitalization.

One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) men-tioned in this report.

China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transac-tions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto.

China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or invest-ment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report.

Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies).

Analyst Certification

The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report.

Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies cov-ered in this report.

Explanation on Equity Ratings

Copyright Reserved

No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.

China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

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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Yum Cha 飲 茶 · 2015-09-01 · RMB/USD 6.4 (0.0) DATA RELEASES DUE THIS WEEK Aug 19 MNI August...

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Yum Cha 飲茶 · 2015-09-01 · RMB/USD 6.4 (0.0) DATA RELEASES DUE THIS WEEK Aug 19 MNI August...