sghk monthly seminar · 2017. 7. 31. · geely auto 吉利汽车 (175 hk) capacity expansion sales...

SGHK Monthly Seminar July 2017

Prepared by Frank Yip

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Hong Kong market outlook

Overview and forecast

Stock Picks

a) Geely Auto 吉利汽车 (175 HK)

b) CSPC Pharmaceutical 石药集团 (1093 HK)

c) Chaowei Power 超威动力 (951 HK)

Overview

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Overview

Hang Seng Index had risen for 9

consecutive days, gaining about 1,400

points in total. Given the strong upward

momentum, the index punched through

the 26,000 level, notching a 2-year new

high.

In the US, political risks surrounding the

Trump Presidency re-emerged. Trumps

relatives were accused of colluding with

the Russians to influence last year’s

presidential elections.

Apart from the Fed, ECB and the Bank of

Canada have hinted at an end to

quantitative easing.

Source: Bloomberg

As of 21 July 2017

The HSI surged over 1000 points since July

Fed: Yellen’s more dovish tone

During the latest Congressional testimony, Fed chairwoman Janet Yellen, repeated

her view that the tightening labor market would drive up prices and wages.

However, she added that "There is...uncertainty about when -- and how much -- inflation

will respond to tightening resource utilization“, conveying a less hawkish tone

compared to her June statement.

For the balance sheet normalisation, Yellen said the process will be “slow, gradual

and predictable” and the Fed will aim to normalise it over the next 5 years.

The FOMC will meet again on 26 July.

Market Expectation

Probability for a 25bps interest rate rise in Dec 17 has dropped to 42.3%, compared

to 47.0% following the previous FOMC meeting.

Investors expect the balance sheet normalisation to kick off in Sep 17.

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Fed: One more hike in Dec

Probability of rate hike:

Fed Funds Futures

Calculated/ Meeting 26 July 20 Sep 1 Nov 13 Dec

18 April 23.9% 34..2% 35.2% 51.4%

4 May 25.1% 35.2% 36.2% 52.2%

15 June 3.9% 29.7% 29.5% 47.0%

21 July 0.0% 10.1% 10.8% 42.3%

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Source : Bloomberg

ECB: QE exit still on the cards

In line with market expectations, the ECB’s July meeting saw no change to its

policy rate (at 0.0%) and quantitative easing program.

Despite a robust economic recovery in the Euro zone, ECB President Draghi

insisted that a very substantial degree of monetary accommodation is still needed.

"The last thing the governing council wants is an unwanted tightening and for conditions

that may either slow down this process or even jeopardise it”.

Although there was no discussion about its QE exit plan during the meeting, Draghi

hinted that ECB will table it for discussion in autumn.

Next monetary policy meeting will be held on 7 Sep.

Market Expectation

Market expects an exit plan to be announced in Oct.

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BOE: Defers rate decision

BOE’s Deputy Governor, Ben Broadbent commented that BOE is not ready to raise

interest rates. Although he is still positive on the economy, business sentiment has

been affected by Brexit uncertainties. Previously, BOE governor Mark Carney had

said that he will vote for a rate increase if business investment rises.

In the June policy meeting, 3 out of 8 MPC members voted for a rate increase,

compared to only 1 member looking for a rate hike in the May meeting.

The UK jobs report showed that unemployment rate has fallen to 4.5%, a 42-year

low but wage increases lagged behind inflation.

Next monetary policy meeting will be held on 13 Aug.

Market Expectation

In the futures market, traders priced in a 50% chance of a rate rise in 2017.

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BOJ: QE continues

In line with market expectations, BOJ decided to maintain its overnight interest rate

at -0.1% and the 10-year bond yield capped at 0.0% in July.

The asset purchase program will continue at “more or less the current pace” of

JPY80tn a year, the bank deferred its inflation target date from “around fiscal 2018”

to “around fiscal 2019”.

Next policy meeting will be held on Sep 20.

Market Expectation

The July policy decision was within market expectations.

BOJ’s asset purchase plan will continue, till inflation rate hits its 2% target.

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China: Economic Data in June

Survey Actual Prior

Manufacturing PMI 51.0 51.7 51.2

Caixin Manufacturing PMI 49.8 50.4 49.6

Exports YoY – USD (RMB) 8.9%

(14.6%)

11.3%

(17.3%)

8.7%

(15.5%)

Imports YoY – USD (RMB) 14.5%

(22.3%)

17.2%

(23.1%)

14.8%

(22.1%)

CPI YoY 1.6% 1.5% 1.5%

PPI YoY 5.5% 5.5% 5.5%

Industrial Production YoY 6.5% 7.6% 6.5%

Retail Sales YoY 10.6% 11% 10.7%

Fixed Assets Ex Rural YTD YoY 8.5% 8.6% 8.6%

New Yuan Loans CNY 1300b 1540b 1110b

Money Supply M2 YoY 9.5% 9.4% 9.6%

Aggregate Financing CNY 1500b 1780b 1060b

Source: Bloomberg

China: Health check

2Q17 real GDP growth stood at 6.9% yoy, above market estimation of 6.8% yoy.

Fixed asset investment and industrial production in June grew 8.8% yoy and 7.6% yoy

respectively, both beating market consensus. The former was supported by stronger private FAI

and property investment. While a 13.1% yoy increased in automobile sector value-add

supported industrial activities.

Retail sales rose 11% yoy in June 17, on the back of property-related consumption and e-

commerce.

UOB Kay Hian’s Views

UOBKH revised up the 2017 real GDP growth forecast to 6.6%, following better real estate and

export activities.

Looking ahead, specialised capital equipment, pharmaceuticals and electronics & computers

are still expected to experience robust growth.

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CHINESE ECONOMIC ACTIVITY DATA

ECONOMIC FORECASTS

HSI: Short-term consolidation

In the past 9 trading days, the HSI index risen 1,400 points in total.

The HSI is now near the upper bollinger band which suggests that there would be close to 80%

chance of a correction.

While a short term consolidation is expected, the uptrend is likely to remain intact and the index

should test the 27,000 level in due course. The short term support level is at the 10day-MA

(~26327 point). But if the index falls more than 700 points and punches through the key support

levels at 25,800 and 26,000, a trend change is in order.

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Source: Bloomberg

Second Part

Industry

and

Stock Picks

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Inventory fell in May but still higher than alert threshold

Inventory fell to 1.58 months in May from April’s 1.92 months, still higher than the

alert threshold level of 1.50 months.

JV brands and imported cars inventory were kept close to or below the alert

threshold in May, while Chinese brands were at 1.92 months.

The drawdown of channel inventory was attributed to reduction in wholesale

shipments and retail price cut.

China Automobile Sector

INVENTORY LEVELS IN CHANNEL

WHOLESALE SHIPMENT VS RETAIL SALES OF PV

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Tough outlook for mass-market cars

Policymakers raised small car purchase

tax (engine size ≤ 1.6L) by 2.5ppt to 7.5%

in 2017. Tax concession expected to end

in 2018 and return to 10%.

This carried demand forward to 2016 as

consumers seek tax savings, which

exhausted demand there after.

Price war in SUV segment is intensifying,

increasing margin pressure, especially for

GWM and BAIC.


OEMS’WHOLESALE SHIPMENT (MAY 17)

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OEMs cut prices to clear inventory

Chang’an lowered manufacturer

suggested retail prices by 5-15% for all its

models. GWM increased its discount from

less than 3% in 1Q17 to 13-15% discount

for its best-selling SUV Haval H6. GAC’s

best selling SUV Trumpchi GS4 offered

nearly 10% discount, compared to less

than 3% in 2016. Geely offered 10-15%

discount for its sedan model, but not for

SUV.

Premium segment immune to policy

distortion

Did not benefit from tax cut on small cars

in 2016. Most luxury brands saw sales

increased 20-30% in 5M17.


OEMS’WHOLESALE SHIPMENT (MAY 17)

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Background:

The Group is principally engaged in the research, production,

marketing and sales of sedans and related automobile

components in the PRC.

Source: Bloomberg

Market Cap (HK$ bn) 157.27

Dividend yield (%) 1.2%

2017 Estimated PE (x) 16.4x

2017 Estimated PB (x) 4.4x

Target Price (HK$) 22.00

Current Share Price (HK$) 17.58

Geely Auto 吉利汽车 (175 HK)

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More than doubled in net profit in 1H17

Geely issued a positive profit alert with more than

100% yoy increase in net profit, implying

Rmb3.8b. Better than UOBKH and market

consensus of Rmb8.13b and Rmb7.98b for full

year of 2017.

Sales target upgrade from the management

The management revised up its 2017 sales target

to 1.1m units from 1.0m units. Geely recorded

sales of 530,637 units in 1H17.

UOBKH believes that the new target price remains

conservative given new model launches and

capacity addition.

1H17 SALES

MONTHLY SALES

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Capacity expansion

Sales of Boyue and Emgrand GS were limited by gearbox supplies. Monthly

maximum capacity of Boyue and Emgrand GS+GL were 20,000 units for each

model.

Geely plans to increase the maximum production level to 25,000 and 30,000 units

for Boyue and Emgrand GS+GL in Jul-Aug 17 and 30,000 and 40,000 units in Dec.

New SUV model launch

An A-Class SUV, Lynk & Co will debut in Nov 17. The management aims to sell

15,000 and 150,000 in 2017 and 2018 respectively.

The model is priced at Rmb160,000-200,000 and based on UOBKH’s channel check,

it has received a strong market response.

A total of 3 new models of Lynk & Co will be released in 2018-2019.

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New JV with parent company and Volvo

A JV will be formed by Geely, Zhejiang Geely (Geely’s parent company) and Volvo

Car to run the Lynk & Co brand.

Geely becomes the largest shareholder with 50% stake of the JV while Zhejiang

Geely and Volvo Car hold the remaining 50% jointly.

UOBKH model revision

Sales estimation for Lynk & Co has been revised to 15,000/150,000/200,000 units in

2017-19 respectively (Previous forecast: 0/50,000/100,000 units).

To reflect higher SUVs and Lynk & Co sales, assumption of average selling price

adjust to Rmb75,400, Rmb86,700 and Rmb89,500 for 2017-19 respectively (Previous

assumption: Rmb74,100/79,600/83,300).

Earnings forecast revised up to Rmb9.4/12.5/15b for 2017-2019.

Raise target price of HK$22.00, pegged to a 14x PE multiple.

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KEY FINANCIALS

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The performance of China healthcare sector lagged behind MSCI China. The P/E

premium between healthcare and MSCI shrunk from 43% in Jan-17 to 28% in Jul-17,

mainly due to slowdown in the industry’s topline growth and low visibility in drug

price regulation in 2017.

We are optimistic of a valuation recovery for the healthcare sector, triggered by

volume growth brought about by the 2017-version of the NRDL (医保目录) and

CFDA’s accelerated drug approval process.

China Healthcare Sector

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Jul14

Sep14

Nov14

Jan15

Mar15

May15

Jul15

Sep15

Nov15

Jan16

Mar16

May16

Jul16

Sep16

Nov16

Jan17

Mar17

May17

MXCI China P/E (x) China healthcare P/E (x)

Avg P/E = 17.9x

Avg P/E = 10.6x

28% 43%

99% 143%

12M forward P/E (x)

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Background:

The Group is principally engaged in the manufacture and sales of

pharmaceutical products. Key products are Vitamin C, NBP

injection and oncology drugs.

Source: Bloomberg

Market Cap (HK$b) 71.92






CSPC Pharmaceutical 石药集团 (1093 HK)

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Innovative drug manufacture CSPC has actively engaged in M&As since 2012,

and has transformed from bulk drugs to

innovative drugs manufacturer. In 2016, 39% of

revenue was contributed by innovative drugs.

NBP injection: strong market potential NBP is the first domestically-developed

cerebrovascular drug used to treat acute ischemic

stroke.

NBP injection is still in early stages of product life

cycle. NBP injection ranks 8th in terms of neuron

protection drugs market share, still behind

adjuvant drugs such as Cerebroside-kinin,

Ganglioside, Oxiracetam and Edaravone.

The Government is now restricting the use of

adjuvant drugs and has included NBP injection in

the 2017 National Reimbursement Drug List

(NRDL); both beneficial to CSPC.

UOB Kay Hian expects NBP injection sales would

grow over 30% yoy in 2018.


NBP INJECTION MAINTAINED STRONG

SALES GROWTH IN 1Q17

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Ramp up of oncology drugs

CSPC’s Jinyouli, a long-acting granulocyte colony-stimulating factor (G-CSF) faces

only one competitor, Xinruibai from Qilu Pharma.

Long-acting G-CSF accounts for about 80% of total sales of G-CSF products in the

developed world, compared to about 15% in 4Q16 in China.

Jinyouli was included in the NRDL, lowering patients’ burden and replacing short-

acting G-CSF.

UOBKH expect the segment to grow at 52.4%/52.9% yoy in 2017-18.


JINYOULO SALES GROWTH ACCELERATED

SIGNIFICALY IN 1Q17

MARKET SHARE OF LONG-ACTING G-CSF

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Vitamin C pricing remains strong

With higher environmental protection requirement, small drug manufacturers had

been forced to close, causing supply shortage.

Price of Vitamin C surged to Rmb57,200/tonnes in May 17, compared to

Rmb32,500/tonnes in Dec 16.

Given the high correlation between Vitamin C price and CSPC’s EBIT, UOBKH

expect a higher EBIT margin in 2Q17.

Management guided that new contracts with higher prices were signed in 1H17.


VITAMIN C PRICE SURGED STRONG CORRELATION BETWEEN

VITAMIN C EBIT AND PRICE

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1Q17 results

Revenue increased 16%

yoy, driven by innovative

drugs sales with 29.6%

surge yoy

Benefitting from better

product mix from

innovative drugs, gross

profit margin improved

3.5ppt to 57%


1Q17 RESULTS

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KEY FINANCIALS

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Lead price fall

Lead price peaked at Rmb21,900/tonnes at end-Nov 16.

Subsequently, it dropped to its current level of Rmb17,800/tonne.

UOBKH expects lead price would decline from 1H17 to 2H17 given excess LAB

capacity .

China Battery Sector

LEAD PRICE HAS PEAKED

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Lower lead price sparked a sell-off

Investors were concerned that the fall in lead price fall will lower ASP for lead-acid

battery (LAB), hence hurting margins.

Share price for Chaowei and Tianneng, the two leading LAB manufacturers, had

dropped 46% and 16% respectively from its peak at end-March.

UOBKH does not see a clear correlation between lead prices and profit margins of

Chaowei and Tianneng, except during a price war in 2013-2015.


SHARE PRICES VS LEAD PRICE NET MARGIN VS LEAD PRICE

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Lithium-ion battery sales was affected by EV market

Government has tightened electricity vehicle subsidy and lengthened subsidy

receivables from a few month in 2015 to over a year in 2016.

Thus EV manufacturers have delayed payment to battery suppliers, with time lag

from half a year to a year or even longer.

UOBKH expect lithium-ion battery business to contribute only 3% of their revenues

in 2017-19.


PROFIT OF CHINA BATTERY INDUSTRY

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Background:

The principal activities of the Company are manufacturing and

sales of lead-acid motive batteries and other related products.

Source: Bloomberg

Market Cap (HK$b) 5.12






Chaowei Power 超威动力 (951 HK)

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Lower lead price boosts margins

Contrary to market opinion, UOBKH expect lead price decline to be positive.

As the ASP drop would be more than offset by the cost reduction.


LEAD COST VS MARGINS

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Little inventory reserve

Chaowei only stocks up a week of lead inventories for raw material.

It had 43 days of product inventory at end-16.

80% of the lead is procured in the spot market and 1-2 week forward contracts are

used for the remaining 20%.

Limited exposure to lithium-ion battery

With only 1.5% revenue sourced from lithium-ion battery.

Decrease in account receivables risks from EV makers.


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Upgrade to BUY

UOBKH raised the earnings estimate

by 8-10% to Rmb699/791/859 for 2017-

19 respectively.

New target price of HK$5.8 implies 1.3x

2017F P/B, on par with the historical

average (Previous target price:

HK$5.20 )


CHAOWEI – P/B BAND

EARNINGS REVISIONS

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Q & A

sghk monthly seminar · 2017. 7. 31. · geely auto 吉利汽车 (175 hk) capacity expansion sales...

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