1

Yum Cha 飲 茶 February 20, 2017

INDICES Closing DoD%

Hang Seng Index 24033.7 (0.3)

HSCEI 10360.1 (0.9)

Shanghai COMP 3202.1 (0.9)

Shenzhen COMP 1945.1 (0.7)

Gold 1235.0 (0.3)

BDIY 741.0 4.4

Crude Oil, WTI(US$/BBL) 53.4 0.1

Crude Oil, BRENT(US$/BBL) 55.8 0.3

HIBOR, 3-M 0.9 (0.8)

SHIBOR, 3-M 4.3 0.1

RMB/USD 6.9 0.2

TALKING POINT - DEPARTMENT STORES: WHO IS THE NEXT TARGET?

Following the proposed privatization of Intime Retail (1833.HK) in early January, there were

news reports last Friday about potential cooperation between Sun Art Retail (6808.HK) and

some partners, which may include Alibaba, Tencent (0700.HK) and Suning. The share price of

Sun Art Retail jumped 6.5% last Friday before trading suspension. Although Sun Art Retail an-

nounced that the discussion involves only Suning, with Tencent and Alibaba not included at the

moment, the news flow may draw investors’ attention to the department store sector again.

Based on the table above, it seems that the potential partners are more likely to approach larger

players. This makes sense, in our view, as there is not much synergy to be generated if the

sales network of the potential targets is too small. Therefore, we believe investors should focus

more on the larger-cap players.

DATA RELEASES DUE THIS WEEK

Feb 22 China January Property Prices

Feb 22 Conference Board China January

Source: Bloomberg

RESEARCH NOTES

GUOTAI JUNAN INTERNATIONAL [1788.HK; HK$2.77; BUY] - GTJAI’s 2016 net profit

(HK$969m, down 4.3% year on year (YoY)) is lower than our forecast by 10% and also below

market consensus, mainly because of a HK$106m net impairment charge largely related to its

margin financing business. However, we believe this risk should be smaller this year because

(i) the Hang Seng Index has already risen by 9.2% year to date (YTD); and (ii) the Company will

gradually shift its focus to large-cap stocks. We believe the more positive outlook in 2017 (34%

EPS growth) is much more important, and we raise our 2017E/2018E EPS by 9.2%/8%, driven

by a more optimistic view on brokerage, investment banking and investment gains. We reiterate

our BUY call and lift our Gordon Growth Model-based target price from HK$2.92 (2.28x PBR) to

HK$3.20 (2.51x PBR) after raising our estimated mid-term ROE from 15% to 16%. Any correc-

tion caused by the weak 2H16 results should offer a good entry point.

HAITONG INTERNATIONAL [0665.HK; HK$4.81; BUY] - Although the year to date (YTD)

average daily turnover (ADT) of the Hong Kong equity market stands at HK$66.7bn, we have

seen a big improvement in February, with ADT of HK$81.2bn up to last Friday. We raise our

2017E ADT from HK$72bn to HK$78bn, assuming the Hang Seng Index will reach 25,000 at

year-end and trading velocity of 0.73x. Meanwhile, the Chinese authorities’ tightening of re-

strictions for financing through share placements in the A-share market should also provide

upside to the investment banking business. Overall, we raise our 2017E/2018E EPS by

8.4%/9.3% and lift our target price from HK$5.09 (1.15x PBR) to HK$5.56, based on 1.24x

2017E PBR (adjusting the mid-term ROE from 11% to 11.5%, leaving other assumptions of the

Gordon Growth Model unchanged). Trading at 1.07x 2017E PBR, the valuation still looks unde-

manding after a rally of 12% in the past two weeks. Reiterate BUY.

CHINA CEMENT WEEKLY - The average cement price (nationwide) went down 0.21% week

on week to RMB311.92/tonne last week. Cement prices in parts of Anhui and Jiangxi were

down RMB10-20/tonne. At the same time, prices in parts of Hunan and Hubei were up RMB10-

20/tonne, as regional demand started to pick up after the Lantern Festival. Clinker prices along

the Yangtze River were also up RMB20/tonne.

Sources: Capital IQ, CGIS Research

Analyst: Wong Chi-man, CFA

Company namePrice

(HK$)

Market

cap

(HK$m)

PER (x)2016E PER

(x)

2017E PER

(x)PBR (x)

Historical

dividend

yield (%)

6808 HK Equity Sun Art Retail 8.70 82,995 29.59 29.72 28.06 4.60 2.20

1833 HK Equity Intime Retail 9.64 26,209 14.20 23.31 21.74 1.69 2.67

3308 HK Equity Golden Eagle 11.66 19,027 17.27 22.04 19.90 3.28 2.78

848 HK Equity Maoye International 0.84 4,061 27.50 n.a. n.a. 0.51 0.00

1700 HK Equity Springland International 1.37 3,077 5.93 8.17 7.90 0.57 7.46

2136 HK Equity Lifestyle China 1.86 3,029 9.93 n.a. n.a. 1.55 0.00

3368 HK Equity Parkson Retail 1.02 2,649 Loss Loss Loss 0.49 1.15

825 HK Equity New World Department Store 1.19 1,990 39.67 n.a. n.a. 0.34 0.00

2

SNIPPETS

A-SHARE MARKET - Last Friday after market close, CSRC announced major rule changes related to private placement:

(i) new shares to be issued should not be bigger than the 20% of the share capital before the placement; (2) share place-

ments are not allowed if it is less than 18 months from the last fundraising, including IPOs, rights issues, public placements

and private placements (CBs and preference shares not included); (3) clarified the restrictions on pricing date, which large-

ly removes the possibility of pricing the placements at a deep discount. Overall, the rule changes are aiming at companies

which issue new shares frequently. The tighter rules may also affect the fundraising activities of some “shell” companies.

Meanwhile, Hong Kong-based investment banks may benefit because of the “18 months” requirement as some A-H dual

listing companies may consider fundraising in Hong Kong. However, the actual benefit may be difficult to gauge at the

moment as it remains to be seen how many companies will switch to CB financing based on the new rules.

3

Guotai Junan International Holdings Ltd [1788.HK]

GTJAI’s 2016 net profit (HK$969m, down 4.3% year on year (YoY)) is lower than our forecast

by 10% and also below market consensus, mainly because of a HK$106m net impairment

charge largely related to its margin financing business. However, we believe this risk should

be smaller this year because (i) the Hang Seng Index has already risen by 9.2% year to date

(YTD); and (ii) the Company will gradually shift its focus to large-cap stocks. We believe the

more positive outlook in 2017 (34% EPS growth) is much more important, and we raise our

2017E/2018E EPS by 9.2%/8%, driven by a more optimistic view on brokerage, investment

banking and investment gains. We reiterate our BUY call and lift our Gordon Growth Model-

based target price from HK$2.92 (2.28x PBR) to HK$3.20 (2.51x PBR) after raising our esti-

mated mid-term ROE from 15% to 16%. Any correction caused by the weak 2H16 results

should offer a good entry point.

Investment Highlights

Large impairment charge likely to be a one-off event. GTJAI recorded a HK$106m net

impairment charge in 2016, largely related to its margin-financing business. We believe

this was mainly because of the huge share price volatility of some small caps in 2H16.

However, the risk should be much smaller this year, in our view, for three reasons: (i) in

the past six years, GTJAI has never made an impairment charge >HK$10m, so 2016 was

a special case affected by the huge volatility of some small caps; (ii) the Hang Seng In-

dex has already risen by 9.2% YTD, so we may see some potential write-backs this year;

(iii) on the back of more favourable market sentiment, the Company will shift its loan mix

to focus more on large caps.

Weak brokerage business in 2016 but likely to improve this year. GTJAI’s brokerage

revenue dropped 45.4% YoY to HK$393m, larger than the 38% decline in Hong Kong

market’s trading volume in 2016. Management explained that with 71% brokerage com-

mission from individual investors, its market share is more sensitive to the ups and downs

of market sentiment. If the positive sentiment in Feb 2017 is sustained, we expect the

brokerage business to perform much better this year. Although tighter capital controls

may affect the brokerage business, management believes the impact can be partly offset

by stronger demand for margin financing.

Investment banking business should continue to perform well this year. Revenue

from corporate finance and advisory services reported impressive revenue growth of

62.3% in 2016 to HK$457m. The main driver was the debt capital markets (DCM) busi-

ness, which saw revenue jump 2.94x to HK$250m. The Company participated in 47 debt-

issue exercises in Hong Kong in 2016, much better than the 19 deals in 2015. In 2017,

we expect the investment banking business to remain strong, as the H-share IPO of Guo-

tai Junan Securities (>US$2bn fundraising target, according to press reports) should

boost the revenue of its equity-financing business this year. (more on next page)

Positive 2017 Outlook Much More Important Than Weak 2H16 Results

February 20, 2017

BUY

Close: HK$2.77 (Feb 17, 2017)

Target Price: HK$3.20 (+15.5%)

Price Performance

Market Cap US$2,487m

Shares Outstanding 6,968m

Auditor Ernst& Young

Free Float 33.78%

52W range HK$1.93-3.31

3M average daily T/O US$8.3m

Major Shareholder Guotai Junan Holdings

(65.1%)

Sources: Company, Bloomberg

Livy Lyu—Research Analyst

(852) 3698 6393

livylyu@chinastock.com.hk

Wong Chi-man—Head of Research

(852) 3698 6317

cmwong@chinastock.com.hk

China Securities Sector

Source: Bloomberg

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100

200

300

400

500

600

0

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3

4

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Year ended 31 December 2014 2015 2016E 2017E 2018E

Revenue(HK$ m) 1,657 2,277 2,519 3,047 3,475

Net income(HK$ m) 800 1,014 969 1,318 1,488

Adjusted Net Margin 54% 53% 47% 54% 54%

EPS (HK cents per share): 13.9 14.9 14.1 18.9 21.2

YOY Change 33% 7% -5% 34% 12%

PER(x) 19.91 18.63 19.67 14.65 13.09

PBR(x) 2.65 2.49 2.36 2.20 2.04

ROAE 14.5% 13.8% 12.3% 15.5% 16.1%

ROAA 4.1% 3.4% 2.4% 2.6% 2.5%

Source: Company Data, CGIS Research estimates

4

Strong growth in investment income from a low base. Revenue from investment holding and market

making rose 135% to HK$344m last year. In particular, thanks to more effort in developing the structured

product business, revenue from this segment surged 238% to HK$116m. Management emphasized that

in the structured product business, it serves mainly as a channel through back-to-back arrangements

without bearing any investment risk itself. Although the Company has not specified a target this year, it

still sees strong demand from net high worth investors for structured products.

Key assumption changes. (1) We revise upwards our 2017E brokerage revenue forecast by 9.4% after

lifting our 2017E average daily turnover (ADT) from HK$72bn to HK$78bn, based on a more positive view

of the Hang Seng Index. We assume the Hang Seng Index will reach 25,000 at the end of year and our

new ADT assumption implies trading velocity of 0.73x, up from 0.66x in 2016, but still far below 1.05x in

2015. (2) Despite more favourable market sentiment, we raise our loans and financing income only slight-

ly because a gradual shift in the loan mix to big caps will lead to a lower interest rate in the near term, but

it should reduce overall risk in the medium term. (3) We raise our 2017E corporate finance revenue by

32% because of the strong DCM performance in 2016 and the potential benefit of more H-share place-

ments after the Chinese authorities tightened the restrictions for financing through share placements in

the A-share market. (4) We have a higher forecast for investment income because of more positive mar-

ket sentiment.

Figure 1: Changes in revenue forecasts

2017E 2017E Change YoY Change

Revenue breakdown Old New

Brokerage 451,044 493,393 9.4% 25.5%

Loans and Financing 1,399,976 1,448,970 3.5% 11.7%

Corporate Finance 421,737 555,903 31.8% 21.7%

Asset Management 43,559 45,000 3.3% 58.0%

Investment Holding & Market Making 460,600 504,201 9.5% 46.7%

Sources: CGIS Research estimates

HK$ 000' 2015 2016 Change

Brokerage 719,945 393,000 -45.4%

Loans and Financing 1,076,018 1,297,278 20.6%

Corporate Finance 281,447 456,649 62.3%

Asset Management 53,092 28,487 -46.3%

Investment Holding & Market Making 146,106 343,773 135.3%

Revenue 2,276,608 2,519,187 10.7%

Other income 1,899 2,608 37.3%

Staff costs 505,649 526,657 4.2%

Commission to AE 118,530 55,117 -53.5%

Other commission expenses 34,563 65,951 90.8%

Performance fee expenses 5,622 - -100.0%

Depreciation 28,664 34,695 21.0%

Writeback/impairment on loans to customers 173 105,830 61073.4%

Writeback/impairment charge on accounts receivable 5,335 42 -99.2%

Other operating expenses 162,287 208,100 28.2%

Operating Profit 1,417,684 1,525,403 7.6%

Finance costs 249,562 393,536 57.7%

Profit before tax 1,168,122 1,131,867 -3.1%

Income tax epsense 152,689 162,520 6.4%

Recurring net income 1,013,416 969,863 -4.3%

Recorded net income 1,013,541 969,139 -4.4%

Figure 2: 2016 results highlights

Sources: CGIS Research estimates

5

Key financials Income Statement

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016 2017E 2018E

Brokerage 501,646 719,945 393,000 493,393 546,077

Loans and Financing 722,470 1,076,018 1,297,278 1,448,970 1,642,726

Corporate Finance 287,825 281,447 456,649 555,903 597,283

Asset Management 46,387 53,092 28,487 45,000 54,000

Investment Holding & Market Making 98,254 146,106 343,773 504,201 635,400

Revenue 1,656,582 2,276,608 2,519,187 3,047,467 3,475,487

Other income 4,459 1,899 2,608 2,500 2,500

Operating Expenses

Staff costs 368,622 505,649 526,657 592,000 663,000

Commission to accounts executives 68,477 118,530 55,117 74,009 81,912

Depreciation 23,643 28,664 34,695 35,000 35,000

Other operating expenses 170,421 207,980 379,923 283,560 321,162

Finance costs 95,162 249,562 393,536 532,349 645,313

Operating Profit 929,216 1,168,122 1,131,867 1,533,049 1,731,601

Income tax expense 127,301 152,689 162,520 214,627 242,424

Non-controlling interests 2,124 1,892 208 800 800

Net income 799,791 1,013,541 969,139 1,317,622 1,488,377

EPS (HK cents):

Basic 13.9 14.9 14.1 18.9 21.2

Diluted 13.7 14.6 13.9 18.6 20.9

DPS (HK cents): 7.0 7.5 7.5 9.8 11.0

Dividend payout ratio 50% 50% 53% 52% 52%

Dividend Yield 2.4% 2.7% 2.7% 3.5% 4.0%

Revenue Breakdown(%)

Brokerage 30% 32% 16% 16% 16%

Loans and Financing 44% 47% 51% 48% 47%

Corporate Finance 17% 12% 18% 18% 17%

Asset Management 3% 2% 1% 1% 2%

Investment Holding & Market Making 6% 6% 14% 17% 18%

Growth Ratio YOY:

Total Revenue 46% 37% 11% 21% 14%

Brokerage 33% 44% -45% 26% 11%

Loans and Financing 82% 49% 21% 12% 13%

Corporate Finance 92% -2% 62% 22% 7%

Asset Management 47% 14% -46% 58% 20%

Investment Holding & Market Making -45% 49% 135% 47% 26%

Operating profit 59% 38% 8% 35% 15%

Net profit 49% 27% -4% 36% 13%

EPS growth 33% 7% -5% 34% 12%

Margins and Ratios:

Adjusted Operating Margin* 62% 61% 55% 63% 63%

Adjusted Net Margin** 54% 53% 47% 54% 54%

Effective tax rate 14% 13% 14% 14% 14%

Cost-to-income ratio 43% 47% 50% 49% 49%

Staff cost-to-income ratio 22% 22% 21% 19% 19%

Average daily turnover of HKEx (HK$ m) 69,456 105,630 66,280 78,000 83,000

Margin financing balance(HK$ m) 8,407 11,963 13,385 16,485 18,008

*Adjusted Operating Margin=Operating profit/(Revenue-commission and interest expenses)

**Adjusted Net Margin=Net profit/(Revenue-commission and interest expenses)Source: Company Data, CGIS Research estimates

6

Key financials Balance Sheet

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016 2017E 2018E

Non-current assets 521,501 640,749 812,891 908,323 1,058,323

Property, plant and equipment 513,503 512,166 493,559 500,000 500,000

Others 7,998 128,583 319,332 408,323 558,323

Current assets 21,483,380 36,688,686 44,187,854 55,001,533 60,778,491

Loans and advances to customers 9,099,164 12,375,857 14,286,666 17,784,092 19,507,055

Accounts receivable 1,001,103 1,932,119 1,495,924 2,133,227 2,432,841

Financial assets at fair value through profit or loss 1,353,089 4,506,947 13,261,624 16,100,000 19,280,000

Cash held on behalf of customers 9,009,909 14,662,991 12,400,917 15,788,572 17,474,474

Cash and cash equivalents 889,286 2,408,666 1,964,398 2,457,642 1,296,122

Others 130,829 802,106 778,325 738,000 788,000

Total assets 22,004,881 37,329,435 45,000,745 55,909,856 61,836,814

Non-current liabilities 1,023,208 3,112,269 2,133,262 3,542,925 4,548,485

Bank borrowings 990,000 3,090,000 2,100,000 3,500,000 4,500,000

Others 33,208 22,269 33,262 42,925 48,485

Current liabilities 13,916,459 26,581,909 32,333,649 41,153,862 45,327,964

Accounts payable 10,004,468 18,218,312 14,871,038 18,409,474 20,375,237

Bank borrowings 3,472,719 4,765,662 6,811,433 9,500,000 10,000,000

Debt securities in issue - 505,340 3,485,520 4,500,000 5,000,000

Others 439,272 3,092,595 7,165,658 8,744,388 9,952,727

Total liabilities 14,939,667 29,694,178 34,466,911 44,696,788 49,876,449

Capital and reserves

Share capital and share premium 5,852,194 6,004,362 6,054,025 6,104,025 6,154,025

Retained profits 2,172,562 2,685,718 3,171,842 3,795,503 4,502,801

Proposed final dividend 292,434 274,295 310,613 320,000 320,000

Other reserves (1,261,777) (1,340,811) (1,361,282) (1,341,460) (1,351,460)

Total equity 7,055,413 7,623,564 8,175,198 8,878,068 9,625,366

Perperutal debt - - 2,346,685 2,325,000 2,325,000

Minority 9,801 11,693 11,951 10,000 10,000

Finance Ratios:

PER(x) 19.91 18.63 19.67 14.65 13.09

PBR(x) 2.65 2.49 2.36 2.20 2.04

Book value per share(HKD) 1.0 1.1 1.2 1.3 1.4

ROAE 14.5% 13.8% 12.3% 15.5% 16.1%

ROAA 4.1% 3.4% 2.4% 2.6% 2.5%

Dupont Analysis:

Brokerage 2.6% 2.4% 1.0% 1.0% 0.9%

Loans and Financing 3.7% 3.6% 3.2% 2.9% 2.8%

Corporate Finance 1.5% 0.9% 1.1% 1.1% 1.0%

Asset Management 0.2% 0.2% 0.1% 0.1% 0.1%

Investment Holding & Market Making 0.5% 0.5% 0.8% 1.0% 1.1%

Revenue 8.5% 7.7% 6.1% 6.0% 5.9%

Operating Expenses 3.7% 3.7% 3.4% 3.0% 3.0%

Operating Profit 4.8% 3.9% 2.7% 3.0% 2.9%

Income tax expense 0.7% 0.5% 0.4% 0.4% 0.4%

Net income 4.1% 3.4% 2.4% 2.6% 2.5%

Leverage [Total assets/equity] 3.12 4.90 5.50 6.30 6.42

Net leverage [(Total assets-Accounts payable to clients)/Total equity] 1.83 2.90 3.96 4.41 4.50

ROAE 14.5% 13.8% 12.3% 15.5% 16.1%

Source: Company Data, CGIS Research estimates

7

Figure 3: Six-year PER Band

Figure 4: Six-year PBR Band

Sources: CGIS Research estimates

Sources: CGIS Research estimates

0

5

10

15

20

25

30

35

40

45

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PER Rolling forward average PER

Average PER+1 standard deviation Average PER-1 standard deviation

0

1

2

3

4

5

6

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PBR Rolling forward average PBR

Average PBR+1 standard deviation Average PBR-1 standard deviation

8

Although the year to date (YTD) average daily turnover (ADT) of the Hong Kong equity mar-

ket stands at HK$66.7bn, we have seen a big improvement in February, with ADT of

HK$81.2bn up to last Friday. We raise our 2017E ADT from HK$72bn to HK$78bn, assum-

ing the Hang Seng Index will reach 25,000 at year-end and trading velocity of 0.73x. Mean-

while, the Chinese authorities’ tightening of restrictions for financing through share place-

ments in the A-share market should also provide upside to the investment banking business.

Overall, we raise our 2017E/2018E EPS by 8.4%/9.3% and lift our target price from HK$5.09

(1.15x PBR) to HK$5.56, based on 1.24x 2017E PBR (adjusting the mid-term ROE from

11% to 11.5%, leaving other assumptions of the Gordon Growth Model unchanged). Trading

at 1.07x 2017E PBR, the valuation still looks undemanding after a rally of 12% in the past

two weeks. Reiterate BUY.

Investment Highlights

Much more active trading volume in February. The YTD ADT is HK$66.7bn,

largely in line with the full-year ADT in 2016. But we have seen much stronger

trading activity in February, with ADT this month (up to last Friday) jumping to

HK$81.2bn. As investors have changed to a more positive view on banks and in-

surance, two of the largest sectors in Hang Seng Index, we raise our 2017E ADT

from HK$72bn to HK$78bn, assuming the Hang Seng Index will reach 25,000 at

year-end and trading velocity of 0.73x (improved from 0.66x in 2016). This is not a

very aggressive assumption, in our view, compared with the trading velocity of

1.05x in 2015. Therefore, we revise upwards our 2017E brokerage revenue by

about 8% to HK$674m.

Potential upside in investment banking business. Last Friday, the Chinese

authorities released tighter restrictions on financing through share placements in

the A-share market. We don’t rule out the possibility that some A-H dual listing

companies may consider fundraising in Hong Kong if they cannot secure approval

in the A-share market. Currently, we lift our 2017E corporate finance revenue fore-

cast by 8.3%, and we may see further upside if more A-H dual listing companies

decide to raise funds in Hong Kong.

Potential downside for 2016E earnings should not be a big concern. We also

revise upwards our 2017E FICC, trading and market-making revenue by 7.7% to

reflect more favourable market conditions. However, based on the 2016 results of

Guotai Junan International (1788.HK), we may see downside risk in 2016E net

profit because of a higher impairment charge for the margin-financing business.

However, this should not be a big concern if the market environment remains posi-

tive for a longer period, which may allow some write-back this year.

Profit Forecast Raised Based on More Favourable Market Environment

February 20, 2017

BUY

Close: HK$4.81 (Feb 17, 2017)

Target Price: HK$5.56 (+15.6%)

Sources: Company, Bloomberg

Livy Lyu—Research Analyst

(852) 3698 6393

livylyu@chinastock.com.hk

Wong Chi-man—Head of Research

(852) 3698 6317

cmwong@chinastock.com.hk

China Securities Sector

Source: Bloomberg

Haitong International [0665.HK]

Share Price Performance

Market Cap US$3,307m

Shares Outstanding 5,336m

Auditor Deloitte

Free Float 35.8%

52W range HK$3.56-5.75

3M average daily T/O US$9.47m

Major Shareholding Haitong Securities

(60.9%)

0

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200

300

400

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3

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6

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Year ended 31 December 2014 2015 2016E 2017E 2018E

Revenue(HK$ m) 2,713 5,806 5,065 5,911 6,618

Net income(HK$ m) 1,018 2,510 1,803 2,386 2,809

Adjusted Net Margin 49% 58% 51% 55% 57%

Adjusted EPS (HK cents per share): 32.3 60.7 34.0 44.8 52.7

YOY Change 27% 88% -44% 32% 18%

PER(x) 12.85 7.73 14.16 10.74 9.13

PBR(x) 1.83 1.22 1.18 1.07 0.98

ROAE 15.1% 17.1% 8.5% 10.4% 11.2%

ROAA 2.6% 3.6% 1.8% 2.2% 2.5%

Source: Company Data, CGIS Research estimates

9

Key financials Income Statement

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016E 2017E 2018E

Brokerage 556,518 1,031,158 558,451 673,685 746,659

Margin financing 624,776 1,272,095 1,625,677 1,818,867 2,014,988

Corporate finance 396,294 841,652 686,651 838,621 1,004,977

Asset management 123,457 148,463 135,111 145,622 157,184

Leveraged and acquisition finance 421,206 520,305 705,660 812,500 877,500

FICC, trading and market making 591,040 1,991,841 1,353,778 1,621,800 1,816,860

Revenue 2,713,291 5,805,514 5,065,327 5,911,095 6,618,167

Other income 20,512 9,791 6,000 6,000 6,000

Operating Expenses

Staff costs 545,281 913,361 781,414 860,400 960,750

Commission to accounts executives 240,031 408,285 240,134 282,948 313,597

Depreciation 33,494 32,250 35,406 35,786 34,639

Other operating expenses 356,986 384,930 650,000 600,000 650,000

Finance costs 375,475 1,036,569 1,277,675 1,317,056 1,341,445

Investments gains accounted for using the equity method 33,212 (53,522) 60,000 20,000 20,000

Operating Profit 1,215,748 2,986,388 2,146,699 2,840,905 3,343,737

Income tax expense 197,479 476,336 343,472 454,545 534,998

Non-controlling interests - - - - -

Net income 1,018,269 2,510,052 1,803,227 2,386,360 2,808,739

EPS (HK cents per share):

Basic 37.4 62.2 34.0 44.8 52.7

Diluted 32.3 60.7 34.0 44.8 52.7

DPS (HKD) 0.16 0.23 0.14 0.16 0.17

Dividend payout ratio 42% 37% 40% 35% 33%

Dividend Yield 3.3% 4.8% 2.8% 3.3% 3.6%

Revenue Breakdown(%)

Brokerage 21% 18% 11% 11% 11%

Margin financing 23% 22% 32% 31% 30%

Corporate finance 15% 14% 14% 14% 15%

Asset management 5% 3% 3% 2% 2%

Leveraged and acquisition finance 16% 9% 14% 14% 13%

FICC, Trading and market making 22% 34% 27% 27% 27%

Growth Ratio YOY:

Brokerage 21% 85% -46% 21% 11%

Margin financing 83% 104% 28% 12% 11%

Corporate finance 136% 112% -18% 22% 20%

Asset management 34% 20% -9% 8% 8%

Leveraged and acquisition finance 5% 24% 36% 15% 8%

FICC, Trading and market making 222% 237% -32% 20% 12%

Total Revenue 65% 114% -13% 17% 12%

Operating profit 103% 146% -28% 32% 18%

Net profit 92% 147% -28% 32% 18%

EPS growth 27% 88% -44% 32% 18%

Margins and Ratios:

Adjusted Operating Margin* 58% 68% 61% 66% 67%

Adjusted Net Margin** 49% 58% 51% 55% 57%

Effective tax rate 16% 16% 16% 16% 16%

Cost-to-income ratio 56% 47% 58% 52% 49%

Staff cost-to-income ratio 20% 16% 15% 15% 15%

Average daily turnover of HKEx (HK$ m) 69,456 105,630 66,280 78,000 83,000

Margin financing balance(HK$ m) 9,627 18,886 21,756 23,716 26,659

*Adjusted Operating Margin=Operating profit/(Revenue-commission and interest expenses)

**Adjusted Net Margin=Net profit/(Revenue-commission and interest expenses)Source: Company Data, CGIS Research estimates

10

Key financials Balance Sheet

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016E 2017E 2018E

Non-current assets 4,230,761 14,348,605 22,592,496 19,706,210 20,596,072

Financial assets designated at fair value through profit or loss - 5,705,699 3,500,000 - -

Available-for-sale investments 471,083 6,253,682 14,580,000 15,000,000 15,700,000

Others 3,759,678 2,389,224 4,512,496 4,706,210 4,896,072

Current assets 43,929,212 77,570,395 86,204,106 90,799,950 96,896,401

Advances to customers in margin financing 9,619,965 18,879,155 21,679,800 23,638,884 26,580,804

Other loans and advances 1,819,200 3,550,880 5,200,000 5,700,000 6,200,000

Accounts receivable 4,495,624 3,820,611 6,078,393 6,502,204 7,279,984

Financial assets at fair value through profit or loss 9,962,803 18,257,597 19,000,000 19,600,000 21,100,000

Financial assets designated at fair value through profit or loss 2,485,154 6,154,656 7,930,000 7,630,000 8,230,000

Cash held on behalf of customers 11,668,936 18,265,360 13,562,479 14,217,840 15,779,960

Cash and cash equivalents 3,236,317 6,405,963 6,822,860 6,948,549 4,568,336

Others 641,213 2,236,173 5,930,574 6,562,473 7,157,316

Total assets 48,159,973 91,919,000 108,796,602 110,506,161 117,492,472

Non-current liabilities 6,994,275 14,939,548 16,676,691 13,842,000 13,842,000

Non-convertible bonds 4,580,804 9,937,201 9,937,201 9,950,000 9,950,000

Financial liabilities designated at fair value through profit or loss 620,000 4,225,698 2,225,698 - -

Others 1,793,471 776,649 4,513,792 3,892,000 3,892,000

Current liabilities 32,569,196 56,150,666 70,309,449 72,791,850 77,387,036

Accounts payable 15,630,644 20,945,837 16,953,098 18,483,192 20,513,948

Financial liabilities at fair value through profit or loss 326,072 957,979 3,276,841 3,551,841 3,895,591

Financial liabilities designated at fair value through profit or loss 1,645,886 3,263,051 5,774,302 5,000,000 6,000,000

Loans and other borrowings 13,931,426 27,153,517 40,020,000 41,000,000 42,100,000

Others 1,035,168 3,830,282 4,285,208 4,756,817 4,877,497

Total liabilities 39,563,471 71,090,214 86,986,140 86,633,850 91,229,036

Capital and reserves 8,596,502 20,828,786 21,810,462 23,872,310 26,263,437

Share capital 218,440 528,992 532,125 532,125 532,125

Reserves 8,039,480 20,088,197 20,953,825 22,922,572 25,267,870

Proposed final dividend 338,582 211,597 324,512 417,613 463,442

Total equity 8,596,502 20,828,786 21,810,462 23,872,310 26,263,437

Finance Ratios:

PER(x) 12.85 7.73 14.16 10.74 9.13

PBR(x) 1.83 1.22 1.18 1.07 0.98

Book value per share(HKD) 2.6 3.9 4.1 4.5 4.9

ROAE 15.1% 17.1% 8.5% 10.4% 11.2%

ROAA 2.6% 3.6% 1.8% 2.2% 2.5%

Dupont Analysis:

Brokerage 1.4% 1.5% 0.6% 0.6% 0.7%

Margin financing 1.6% 1.8% 1.6% 1.7% 1.8%

Corporate finance 1.0% 1.2% 0.7% 0.8% 0.9%

Asset management 0.3% 0.2% 0.1% 0.1% 0.1%

Leveraged and acquisition finance 1.1% 0.7% 0.7% 0.7% 0.8%

FICC, trading and market making 1.5% 2.8% 1.3% 1.5% 1.6%

Revenue 7.0% 8.3% 5.0% 5.4% 5.8%

Operating Expenses -4.0% -4.0% -3.0% -2.8% -2.9%

Operating Profit 3.1% 4.3% 2.1% 2.6% 2.9%

Income tax expense -0.5% -0.7% -0.3% -0.4% -0.5%

Net income 2.6% 3.6% 1.8% 2.2% 2.5%

Leverage [Total assets/equity] 5.74 4.76 4.71 4.80 4.55

Net leverage [(Total assets-Accounts payable to clients)/Total equity] 3.96 3.47 4.18 3.91 3.75

ROAE 15.1% 17.1% 8.5% 10.4% 11.2%

Source: Company Data, CGIS Research estimates

11

Figure 1: Six-year PER Band

Figure 2: Six-year PBR Band

Sources: Bloomberg, CGIS Research

Sources: Bloomberg, CGIS Research

Sources: Bloomberg, CGIS Research

Figure 3: Trading velocity of HK equity market

0

10

20

30

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PER Rolling forward average PER

Average PER+1 standard deviation Average PER-1 standard deviation

0

0.5

1

1.5

2

2.5

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PBR Rolling forward average PBRAverage PBR+1 standard deviation Average PBR-1 standard deviation

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Trading velocity (annualized 20-day moving average turnover/total Hong Kong market cap)

12

China Cement Weekly

February 20, 2017

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Livy Lyu—Research Assistant

(852) 3698-6393

livylyu@chinastock.com.hk

Gradual Pick-up in Cement Demand Post-CNY; Environmental

Inspections Unlikely to Affect Operations of BBMG Decline in cement prices narrowed last week. The average cement price (nationwide)

went down 0.21% week on week to RMB311.92/tonne last week. Cement prices in parts of

Anhui and Jiangxi were down RMB10-20/tonne. At the same time, prices in parts of Hunan

and Hubei were up RMB10-20/tonne, as regional demand started to pick up after the

Lantern Festival. Clinker prices along the Yangtze River were also up RMB20/tonne.

National daily shipment volume of lower-grade bagged cement reached 50%-80% of the

normal level. Comparatively, that of bulk cement recovered to only 30%-40%, as only a

few major projects resumed/commenced construction during the past two weeks. Average

inventory level (nationwide) climbed slightly to 60.94%。

Coal prices continued to decline moderately. The comprehensive average price index

for Bohai-Rim Steam Coal (Q5500K) went down RMB1/tonne to RMB587/tonne last week.

The index was still up 54% on a year-on-year (YoY) basis, though.

Environmental inspections to have limited impact on BBMG. Between Feb 15 and

Mar 13, inspection teams sent by the authorities will check on the implementation of air

pollution prevention measures in various regions, especially the Beijing-Tianjin-Hebei area.

We believe the impact on the production of BBMG [2009.HK; BUY] should be small. First

of all, it is still winter season between mid-February and mid-March in north China, so the

cement production volume is usually small. In addition, cement production is largely

suspended or cut substantially between late February and early March in North China

because of the National People’s Congress (NPC) and the Chinese People’s Political

Consultative Conference (CPPCC) meetings in Beijing. Therefore, we don’t expect the

inspection to have much impact on the operations of BBMG.

Cement stocks under coverage down 2.1% on average last week. Following a rally of

nearly 30% year to date (YTD), we saw some profit taking in the cement sector last week.

CNBM [3323.HK; SELL] was the weakest, losing 4.9% after a rally of about 40% YTD.

The best performer was BBMG, which was down only 0.6%.

China Cement Sector

Sources: Company, Bloomberg, CGIS Research estimates

Valuation Table

Net debt/equity (%)

Company Ticker Rating Price (HK$) Market cap (US$m) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2017E

Anhui Conch 914 HK Equity HOLD 26.45 16,230 19.1 13.8 11.6 1.65 1.59 1.51 9.9 7.6 6.4 (8)

CNBM 3323 HK Equity SELL 5.01 3,468 36.3 14.7 10.2 0.53 0.55 0.55 10.3 10.3 9.4 208

BBMG 2009 HK Equity BUY 3.28 6,623 12.6 8.6 7.5 0.62 0.61 0.58 9.2 9.1 7.9 54

CR Cement 1313 HK Equity BUY 3.73 3,124 11.9 14.6 10.9 0.92 0.88 0.83 9.5 7.7 6.6 67

Simple average 20.0 12.9 10.1 0.93 0.91 0.87 9.7 8.6 7.6 81

Weighted average 18.9 12.8 10.5 1.21 1.17 1.11 9.8 8.2 7.1 40

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

2015 -2017E PEG(x)

Company Ticker 2016E 2017E CAGR (%) 2017E 2015 2016E 2017E 2015 2016E 2017E

Anhui Conch 914 HK Equity 45.3 25.3 34.9 0.3 8.93 12.01 13.66 2.0 2.2 2.6

CNBM 3323 HK Equity 160.4 50.7 98.1 0.1 1.49 3.78 5.49 0.9 0.8 1.5

CR Cement 1313 HK Equity (18.9) 34.0 4.3 1.8 7.51 6.14 7.84 2.1 1.6 2.1

BBMG 2009 HK Equity 54.4 20.2 36.3 0.3 5.41 7.33 8.20 1.6 1.4 1.5

Simple average 60.3 32.6 43.4 0.6 5.84 7.32 8.80 1.7 1.5 1.9

Weighted average 54.1 28.1 39.4 0.4 7.11 9.37 10.85 1.8 1.8 2.1

EPS Growth (%) ROE (%) Dividend yield (%)

13

1-Year Relative Performance

Sources: Capital IQ, CGIS Research

Peer Comparison

Sources: Bloomberg, CGIS Research

Data Source: Wind Info

Comprehensive Average Price Index: Bohai-Rim Steam Coal (Q5500K)

31-12-10 31-12-11 31-12-12 31-12-13 31-12-14 31-12-15 31-12-1631-12-10350 350

420 420

490 490

560 560

630 630

700 700

770 770

840 840

yuan/ton yuan/tonyuan/ton yuan/ton

Market cap

Company Ticker Rating Price (LC) (US$m) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E

Anhui Conch 914 HK Equity HOLD 26.45 16,230 19.1 13.8 11.6 1.65 1.59 1.51 9.9 7.6 6.4

CNBM 3323 HK Equity SELL 5.01 3,468 36.3 14.7 10.2 0.53 0.55 0.55 10.3 10.3 9.4

BBMG 2009 HK Equity BUY 3.28 6,623 12.6 8.6 7.5 0.62 0.61 0.58 9.2 9.1 7.9

CR Cement 1313 HK Equity BUY 3.73 3,124 11.9 14.6 10.9 0.92 0.88 0.83 9.5 7.7 6.6

TCC International 1136 HK Equity NR 1.89 1,198 - 236.3 38.6 0.49 0.48 0.47 9.8 11.5 10.2

China National Materials 1893 HK Equity NR 2.35 1,076 11.8 8.6 6.9 0.47 0.47 0.42 6.0 5.4 4.9

Asia Cement 743 HK Equity NR 2.22 446 - 21.8 12.3 0.34 0.33 0.32 7.2 8.2 7.4

West China Cement 2233 HK Equity NR 1.01 702 - 52.6 15.4 0.85 0.84 0.81 9.8 7.5 5.6

Tianrui Cement 1252 HK Equity NR 2.00 616 18.1 n.a. n.a. 0.56 n.a. n.a. 8.3 n.a. n.a.

Simple average 6.0 46.4 14.2 0.54 0.72 0.69 8.2 8.4 7.3

Weighted average 17.3 21.4 11.3 1.13 1.08 1.03 9.6 8.1 7.0

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

14

Figure 1: Regional Cement Price

Sources: Digital Cement, CGIS Research

220

270

320

370

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

National Average (P.O. 42.5)

2013 2014 2015 2016 2017

200

250

300

350

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

North China

2013 2014 2015 2016 2017

250

300

350

400

450

500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Northeast China

2013 2014 2015 2016 2017

200

250

300

350

400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

East China

2013 2014 2015 2016 2017

200

240

280

320

360

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440

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

South Central China

2013 2014 2015 2016 2017

200

240

280

320

360

400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Southwest China

2013 2014 2015 2016 2017

200

220

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280

300

320

340

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Northwest China

2013 2014 2015 2016 2017

15

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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 :