Yum Cha 飲 茶 September 1, 2015 Source: Bloomberg INDICES Closing DoD% Hang Seng Index 21,670.6 0.3 HSCEI 9,741.4 (0.1) Shanghai COMP 3,206.0 (0.8) Shenzhen COMP 1,790.3 (3.1) Gold 1,134.8 (0.0) BDIY 903.0 (0.2) Crude Oil, WTI(US$/BBL) 47.7 (3.2) Crude Oil, BRENT(US$/BBL) 54.2 8.2 HIBOR, 3-M 0.4 1.7 SHIBOR, 3-M 3.1 0.1 RMB/USD 6.4 (0.2) DATA RELEASES DUE THIS WEEK Aug 24 Conference Board China July Leading Economic Index Aug 25 Westpac-MNI Consumer Senment Aug 27 Industrial Profits YoY Aug 27/31 Leading INdex RESEARCH NOTES CHINA HIGH SPEED [0658.HK; HK$5.33; BUY] - CHSTE highlighted several positives during the post-result meeting yesterday: (1) The shipment this year of 14-15GW is largely secured and revenue in 2H15 to further increase HoH; (2) Wind gear shipment growth is expected to continue over the next few years driven by strong export; (3) Debt reduction is on good track and might exceed RMB4bn for the full year; (4) Dividend payment is expected to resume with payout ratio potentially above the historical high. All these, coupled with the strong 1H15 earn- ings, reaffirm our bullish stance on CHSTE and we raise our 2015E/2016E earnings forecasts by 40%/38%. Our TP is raised from HK$8.75 to HK$10.80, based on 14x PER. Reiterate BUY. CRCC [1186.HK; HK$10.16; BUY] - Thanks to internal cost control, construction segment GPM was up 0.6ppt YoY to 6.7%, and overall GPM was up 0.7ppt YoY to 8.2% in 1H15. Profit- ability improvement offset the decline in properties segment. Going forward, we expect new contract flow momentum to recover in 2H15 after supportive measures such as specialized construction bonds for infrastructure investment, as well as interest rate cut from PBOC. Main- tain BUY, with new TP: HK$ 13.36. Growth drivers are profit margin improvement and overseas development. Short term catalyst will be progress of HSR export from China that may trigger re- rating on the Company. YOFC [6869.HK; HK$7.99; BUY] - In line with other telecom equipment suppliers, Yangtze Optical Fibre & Cable Joint Stock Limited Company reported a set of decent 1H2015 results. The lower than expected gross margin was due to higher contribution from lower margin on sales (procured from third parties) as the group is running at full capacity. Strong operating performance and increasing market attention are share price catalysts. Maintain BUY with a new target price of HK$11.55 based on 11.0x 2015E PER. Our target PER is in line with aver- age of HK listed peers. TALKING POINT - ONE MORE LOCAL BROKERAGE IS ACQUIRED Shareholding structure of Quam (0952.HK) after deal completion Stake Stake CMBCI 35.56% Suen Cho Hung Paul 2.81% New Hope 11.67% Lo Ki Yan Karen 1.21% United Energy 11.67% Alex Ko 0.72% Mind Power 11.67% China Alliance Properties 0.72% China P&I Services 5.82% CMBCI employees 0.62% Insight Multi-Strategy Funds 4.98% King Ace 0.66% Wu Di (a non-executive director of Minsheng Bank) 2.84% Others 6.24% Tise´Media Fund LP 2.81% CMBCI, a wholly owned subsidiary of Minsheng Bank [1988.HK] and other co-investors pro- posed to subscribe 23bn new shares of Quam [0952.HK] at HK$0.565 per share. CMBCI will own a 35.56% stake in Quam and control about 51% of voting rights. It is the latest example of a local brokerage acquired by a mainland-based financial institution. Since the new shares to be issued will be >90% of the enlarged issued capital, it makes traditional PER and PBR analy- sis not very meaningful. Once the new share issuance is completed, CMBCI will launch a gen- eral offer at HK$1.38 per share, which should provide downside protection as Quam’s share price before trading suspension was HK$1.41. On a fully diluted basis, market cap of Quam will suddenly expand to HK$35.2bn based on HK$1.41 per share. The transaction makes other local brokerages with a decent platform look interesting again. To develop overseas business (including Hong Kong) within a short period of time, we believe more China financial institu- tions will consider acquisition of an established platform in Hong Kong. For instance, First Shanghai [0227.HK] is trading at merely 0.49x PBR after the sharp market correction in last two weeks. Analyst: Wong Chi-man, CFA
Transcript
1
Yum Cha 飲 茶 September 1, 2015
Source: Bloomberg
INDICES Closing DoD%
Hang Seng Index 21,670.6 0.3
HSCEI 9,741.4 (0.1)
Shanghai COMP 3,206.0 (0.8)
Shenzhen COMP 1,790.3 (3.1)
Gold 1,134.8 (0.0)
BDIY 903.0 (0.2)
Crude Oil, WTI(US$/BBL) 47.7 (3.2)
Crude Oil, BRENT(US$/BBL) 54.2 8.2
HIBOR, 3-M 0.4 1.7
SHIBOR, 3-M 3.1 0.1
RMB/USD 6.4 (0.2)
DATA RELEASES DUE THIS WEEK
Aug 24 Conference Board China July Leading
Economic Index
Aug 25 Westpac-MNI Consumer Sentiment
Aug 27 Industrial Profits YoY
Aug 27/31 Leading INdex RESEARCH NOTES
CHINA HIGH SPEED [0658.HK; HK$5.33; BUY] - CHSTE highlighted several positives during
the post-result meeting yesterday: (1) The shipment this year of 14-15GW is largely secured
and revenue in 2H15 to further increase HoH; (2) Wind gear shipment growth is expected to
continue over the next few years driven by strong export; (3) Debt reduction is on good track
and might exceed RMB4bn for the full year; (4) Dividend payment is expected to resume with
payout ratio potentially above the historical high. All these, coupled with the strong 1H15 earn-
ings, reaffirm our bullish stance on CHSTE and we raise our 2015E/2016E earnings forecasts
by 40%/38%. Our TP is raised from HK$8.75 to HK$10.80, based on 14x PER. Reiterate BUY.
CRCC [1186.HK; HK$10.16; BUY] - Thanks to internal cost control, construction segment
GPM was up 0.6ppt YoY to 6.7%, and overall GPM was up 0.7ppt YoY to 8.2% in 1H15. Profit-
ability improvement offset the decline in properties segment. Going forward, we expect new
contract flow momentum to recover in 2H15 after supportive measures such as specialized
construction bonds for infrastructure investment, as well as interest rate cut from PBOC. Main-
tain BUY, with new TP: HK$ 13.36. Growth drivers are profit margin improvement and overseas
development. Short term catalyst will be progress of HSR export from China that may trigger re-
rating on the Company.
YOFC [6869.HK; HK$7.99; BUY] - In line with other telecom equipment suppliers, Yangtze
Optical Fibre & Cable Joint Stock Limited Company reported a set of decent 1H2015 results.
The lower than expected gross margin was due to higher contribution from lower margin on
sales (procured from third parties) as the group is running at full capacity. Strong operating
performance and increasing market attention are share price catalysts. Maintain BUY with a
new target price of HK$11.55 based on 11.0x 2015E PER. Our target PER is in line with aver-
age of HK listed peers.
TALKING POINT - ONE MORE LOCAL BROKERAGE IS ACQUIRED
Shareholding structure of Quam (0952.HK) after deal completion
Stake Stake
CMBCI 35.56% Suen Cho Hung Paul 2.81%
New Hope 11.67% Lo Ki Yan Karen 1.21%
United Energy 11.67% Alex Ko 0.72%
Mind Power 11.67% China Alliance Properties 0.72%
China P&I Services 5.82% CMBCI employees 0.62%
Insight Multi-Strategy Funds 4.98% King Ace 0.66%
Wu Di (a non-executive director of Minsheng Bank) 2.84% Others 6.24%
Tise ́Media Fund LP 2.81%
CMBCI, a wholly owned subsidiary of Minsheng Bank [1988.HK] and other co-investors pro-
posed to subscribe 23bn new shares of Quam [0952.HK] at HK$0.565 per share. CMBCI will
own a 35.56% stake in Quam and control about 51% of voting rights. It is the latest example of
a local brokerage acquired by a mainland-based financial institution. Since the new shares to
be issued will be >90% of the enlarged issued capital, it makes traditional PER and PBR analy-
sis not very meaningful. Once the new share issuance is completed, CMBCI will launch a gen-
eral offer at HK$1.38 per share, which should provide downside protection as Quam’s share
price before trading suspension was HK$1.41. On a fully diluted basis, market cap of Quam
will suddenly expand to HK$35.2bn based on HK$1.41 per share. The transaction makes other
local brokerages with a decent platform look interesting again. To develop overseas business
(including Hong Kong) within a short period of time, we believe more China financial institu-
tions will consider acquisition of an established platform in Hong Kong. For instance, First
Shanghai [0227.HK] is trading at merely 0.49x PBR after the sharp market correction in last
two weeks. Analyst: Wong Chi-man, CFA
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China High Speed Transmission Equipment [0658.HK]
CHSTE highlighted several positives during the post-result meeting yesterday: (1) The
shipment this year of 14-15GW is largely secured and revenue in 2H15 to further in-
crease HoH; (2) Wind gear shipment growth is expected to continue over the next few
years driven by strong export; (3) Debt reduction is on good track and might exceed
RMB4bn for the full year; (4) Dividend payment is expected to resume with payout
ratio potentially above the historical high. All these, coupled with the strong 1H15
earnings, reaffirm our bullish stance on CHSTE and we raise our 2015E/2016E earn-
ings forecasts by 40%/38%. Our TP is raised from HK$8.75 to HK$10.80, based on
14x PER (historical average, slightly lowered from 15x due to the change in moving
average). Reiterate BUY.
Shipment orders fully booked this year. CHSTE shipped ~7GW of wind gear-
box in 1H15 (+43% YoY) and management maintains its full year target of 14-
15GW. Gross margin of wind gear segment in 1H15 expanded 5.2ppt to 35%.
Given that CHSTE is currently running at full utilization, we believe gross margin
in 2H15E will stay at a high level similar to 1H15.
Overseas market the key focus over the next few years. Shipment to GE has
been strong this year and we expect the full year shipment to GE to grow 50%
YoY. Management plans to explore overseas market more aggressively and ex-
pect the revenue breakdown in three years will be 1/3 from domestic market, 1/3
from GE and the balance from other international customers. CHSTE expects
Vestas to contribute meaningful revenue starting 2016E.
Strong cash inflow this year. CHSTE repaid RMB2bn of debts in 1H15. Full
year repayment might exceed existing target of RMB4bn. Besides, CHSTE plans
to disposal its wind farm project (50MW) and some other non-wind power assets,
suggesting more sources of cash inflow in the foreseeable future.
Key risk factors: (1) Technology shift; (2) Policy risk; (3) Increase in raw materi-
al costs; (4) Further deterioration of non-wind business.
Margin improvement, 2H15 new contract flow to pick up. Main-
tain BUY
BUY (Unchanged)
Close: HK$ 10.16 (Aug 31, 2015)
Target Price: HK$13.36 (31.5%)
Share Price Performance
Market Cap US$27,468m
Shares Outstanding 12,338m
Auditor Ernst & Young
Free Float 35.15%
52W range HK$17.70-6.92
3M average daily T/O US$29m
Major Shareholding CRCCG (61.33%)
September 1, 2015
Thanks to internal cost control, construction segment GPM was up 0.6ppt YoY to 6.7%, and
overall GPM was up 0.7ppt YoY to 8.2% in 1H15. Profitability improvement offset the decline in
properties segment. Going forward, we expect new contract flow momentum to recover in 2H15
after supportive measures such as specialized construction bonds for infrastructure investment,
as well as interest rate cut from PBOC. Maintain BUY, with new TP: HK$ 13.36. Growth drivers
are profit margin improvement and overseas development. Short term catalyst will be progress
of HSR export from China that may trigger re-rating on the Company.
Profitability improvement thanks to effective cost control. For construction business
segment, although revenue edged up 2.5% YoY, segment pretax profit was up 22.6% YoY,
thanks to improvement on GPM. Segment GPM was up 0.6ppt YoY to 6.7% (excluding
business tax and surcharges). According to management, all major sub-segment recorded
profitability improvement in 1H15. Going forward, considering with lukewarm economy, we
expect cost of raw material, which accounted for 45-50% of total cost, to remain low, as well
as internal cost control continue to take effect in 2H15 and FY16. We expect sub-segment
GPM to be stable at current level.
Contract flow to recover in 2H15. Because of the introduction of PPP model, tender plac-
ing for municipal, and urban rail projects by local governments were slowed in 1H15 due to
a longer than expected time for studying feasibility of PPP model. New contract dropped 18% YoY in 1H15. According to management, contract flow momentum picked up since
July, and new contracts are expected to meet target for full year 2015. CRCC won four
tenders for four major new rail lines projects approved by NDRC last year with total consid-
eration of RMB60bn, according to management. We expect total new contract amount to up
~10% YoY in 2H15, such that full year new contract amount to meet the level in FY14.
Strong presale of properties segment. Properties contract sales of CRCC was up 38.4%
YoY to RMB14bn in 1H15. Total sold GFA was 1.5m sqm, which implied ASP of RMB
9,328/sqm up from RMB9,091/sqm in 1H14. CRCC was ranked 19 for top 100 China prop-
erties developer in terms of presales dollar amount in 1H15. Considering the relaxation of
regulation and control on properties sector, we expect the segment performance to turna-
round in 2H15.
Reiterate BUY on margin improvement. 1H15 results were largely in line with our expec-
tation. Although infrastructure investment will accelerate to support economy in 2H15, we
believe growth of infrastructure development in 13th FYP will be peak off comparing with
that in 12th FYP in domestic market. Going forward, growth drivers will be overseas devel-
opment under “One-Belt and One-Road” policy, and margin improvement under internal
cost control. We lower our earnings forecast for FY15-16E by 4.9%/8.5% because of the
adjustment of our contract delivery assumption. Our new TP: HK$ 13.36, representing 12x
FY15/16E PER, or a weighted average on current valuation of international players and
CRCC’s historical trading PER. Maintain BUY.
Risk factor: Overseas expansion and domestic infrastructure investment subject to govern-
ments’ policy; Lower liquidity with more BOT/BT/PPP projects in future.
Net income 12,605 11,987 (4.90) 15,185 13,893 (8.50)
Net margin (%) 1.94 2.02 0.08ppt 2.11 2.17 0.06ppt
EPS 0.919 0.874 (4.90) 1.107 1.013 (8.50)
Figure 3: Revenue breakdown for FY14 Figure 4: Revenue breakdown for 1H15
Sources: Company, CGIHK Research estimates Sources: Company, CGIHK Research estimates
13
Figure 5: PER band of the Company Figure 6: PBR band of the Company
Sources: Bloomberg, CGIHK Research estimates Sources: Bloomberg, CGIHK Research estimates
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YOFC [6869.HK]
In line with other telecom equipment suppliers, Yangtze Optical Fibre & Cable
Joint Stock Limited Company (YOFC) reported a set of decent 1H2015 results.
The lower than expected gross margin was due to higher contribution from lower
margin on sales (procured from third parties) as the group is running at full ca-
pacity. YOFC’s capacity expansion is on track and margin is likely to improve
given increasing in-house production. YOFC is one of the beneficiaries of 4G roll
out and continued investment in optical fiber based fixed line network in China.
YOFC will benefit from import substitution for fibre cables from the US, Japan and
Europe in the long term. We raise our net profit forecasts for YOFC for 2015,
2016 and 2017 by 6.0%, 7.7% and 6.1% respectively after a strong 1H 2015 re-
sult announcement. Strong operating performance and increasing market atten-
tion are share price catalysts. Maintain BUY with a new target price of HK$11.55
based on 11.0x 2015E PER. Our target PER is in line with average of HK listed
peers. The cut in target price is mainly due to lower PE multiple and new
RMB:HK assumptions.
1H2015 results highlight. YOFC’s 1H2015 net profit was RMB304.7m, up
44.7% YoY from RMB210.6m in 1H2014. The group’s 1H2015 turnover grew 15.7% YoY to RMB3,049.6m from RMB2,634.9m in 1H2014. Gross profit in-creased 12.0% YoY to RMB588.0m and gross margin contracted by 0.6ppt to 19.3%. The YoY decline in gross margin was partly due to higher contribution from low margin on sale (procured from other third parties) as the group is run-ning at full capacity. Turnover from domestic customers increased by approxi-
mately 14.7% YoY in 1H 2015, while turnover from overseas customers in-creased approximately 31.2% YoY in 2015.
Sales of optical fibre preforms and optical fibre segment was up 32.6% YoY to
RMB1,860.0m in 1H2015, which accounted for about 61% of total YOFC’s turno-ver in 1H 2015, up from 53% in 1H 2014 and 57% in 2014. China is a net import-er of optical fibre preforms and imports accounted for 44% of demand in China in 2013 and we maintain the view that YOFC will benefit from import substitution.
Due to 4G roll out and continued investment in optical fiber based fixed line net-
work in China, demand for optical fibre related products is expected to remain strong in 2015-2017. Management believes that the industry will grow at a CAGR of over 10% over the next 2-3 years.
YOFC’s capacity expansion is on track and it is expected that the group’s
gross margin will see improvement given in-house production.
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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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