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A-Share Monthly Portfolio

July 6, 2017

Stay Cautious and Identify Quality Stocks —

Investment Portfolio for July 2017

Changes in CGS Top 10 Portfolio. For CGS Investment Portfolio in July, we added four new stocks including Luyang Energy-Saving Materials (002088.CH), Xiangtan Electric Manufacturing (600416.CH), Future Land Holdings (601155.CH) and CITIC Securities (600030.CH), and took away Focus Media (002027.CH), Huadian Power International (600027.CH), PingAn Insurance (601318.CH) and China Merchants Shekou (001979.CH).

June Performance. The CGS Top 10 Portfolio registered a return of 6.71% in June 2017, outperforming the CSI 300 Index by 1.73ppts. The excess return is mainly due to the better stock selection. The cumulative return of the CGS monthly portfolio from Jan 2013 to Mar 2017 was 431.16%.

July Outlook. External markets may remain an important factor affecting A-shares. We observed that the central banks are turning more hawkish: In addition to the rate hike, the Fed announced balance sheet reduction plans on June 15; the Bank of England was considering rate hikes and the ECB mentioned that the inflation is accelerating following the economic recovery. There seems to be a worldwide change in monetary stance. We expect the domestic economy to remain relatively stable in July, regulations on financial activities to further tighten and risk appetite to remain depressed. Monetary policy will remain prudent, and liquidity at the macro-level will likely be slightly tight. Fiscal policy and reforms will continue to have an impact. We expect a range bound trading pattern in the stock market. Investors should be aware of “black swan” events.

Stay cautious in July; Follow a Bottom-up Stock-picking Strategy. We are relatively cautious about investments in July and recommend a bottom-up strategy for stock picking. Our portfolio covers the following sectors: small & mid caps, food & beverages, power equipment, military/machinery, automotive, military & defence, property, pharmaceutical and brokerage.

July Stock Portfolio (in alphabetical order): CITIC Securities (600030.CH), Future Land Holdings (601155.CH), INVT Electric (002334.CH), Luyang Energy-Saving Materials (002088.CH), Luzhou Laojiao (000568.CH), Sun-Create Electronics (600990.CH), Xiangtan Electric Manufacturing (600416.CH), Yantai Jereh Oilfield Services (002353.CH), Yutong Bus (600066.CH) and ST Zhenxing Biopharmaceutical and Chemical (000403.CH).

Sources: China Galaxy Securities Research

Table: CGS July Investment Portfolio (closing prices on July 4, 2017)

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

This is a summary translation of the

Chinese report titled “相对谨慎精选个

股”contributed by the following:

Hong Liang — Strategy Analyst

(8610) 6656 8750

[email protected]

Practicing Certificate No.: S0130511010005

Stock

Code

Stock Discription EPS (RMB) PE (X)

2015A 2016A 2017E 2018E 2015A 2016A 2017E 2018E

002088.CH Luyang Energy-Saving Materials 0.16 0.3 0.43 0.55 76.2 40.6 28.3 22.2

000568.CH Luzhou Laojiao 1.05 1.37 1.8 2.24 45.6 34.9 26.6 21.4

002334.CH INVT Electric 0.21 0.09 0.23 0.3 35.6 83.0 32.5 24.9

002353.CH Yantai Jereh Oilfield Services 0.15 0.13 0.47 0.73 108.7 125.5 34.7 22.3

600066.CH Yutong Bus 1.6 1.83 1.94 2.19 13.7 12.0 11.3 10.0

600416.CH Xingtan Electric Manufacturing 0.07 0.17 0.28 0.43 194.6 80.1 48.6 31.7

600990.CH Anhui Sun-Create Electronics 0.84 0.95 1.55 1.88 104.1 73.1 64.6 39.6

601155.CH Future Land Holdings 0.81 1.34 1.86 2.45 22.4 13.5 9.8 7.4

000403.CH Zhenxing Biopharmaceutical 0.29 0.2 0.55 1.23 106.7 154.7 56.2 25.1

600030.CH CITIC Securities 1.71 0.86 1 1.19 9.8 19.5 16.7 14.1

2

Luyang Energy-Saving Materials (002088.CH): Beneficiary of Energy Conservations;

Industry Climate Remains Robust

Driving factors, key assumptions and main predictions:

1) Ceramic Fiber’s Industry Climate Continues to Improve. Technology upgrades in sectors such as metallurgy and petro-chemical drive up consumption of ceramic fiber products. Meanwhile, given the rising public awareness of energy conserva-tion, demand for energy conservation products, especially those related to buildings, shows a rapid growing trend. Ceramic fiber products are also penetrating into new markets including home appliances, PV power production and military & defence industries.

2) Cooperation with Unifrax Asia-Pacific Holding. Luyang had a smooth cooperation with Unifrax. The synergies in R&D and sales help to boost profitability.

3) Rockwool Products Benefit from Higher Fire Safety Standards. Given the higher fire safety standards and stricter envi-ronmental regulations, demand for rockwool products have been robust. Luyang, as a market leader, enjoys market share expansion. We expect the increases in sales and prices of rockwool products to continue.

4) Stable Expense Ratio. Luyang’s expense ratio has been showing a slight decline trend amid its sales expansion.

Sources: WIND, China Galaxy Securities Research

Investment Rating:

Overweight Wang Xuli:（8621）2025 2641 / [email protected] Practitioner Certificate No.: S0130512090003

How our views differ from the market’s

Ceramic Fibers: The market is concerned that the weaker investments in building constructions will affect demand for ceramic fibers. However, we believe the Company is a market leader and should benefit from stricter environmental regula-tions and the industry’s production capacity cut. In addition, the Company is expanding into new downstream markets and shifts its product mix towards high-end products. Its coopera-tion with Unifrax should create synergy and help to improve its profitability.

Rockwool: The market is worried about the slow promotion of the application of rockwool in building insulation. However, we believe the product should benefit from the country’s favoura-ble policies in energy conservation and environmental protec-tion. The Company is also exploring new markets and we be-lieve product penetration should improve gradually.

Company valuation and investment recommendations

We estimate 2017-19E EPS at RMB0.43/ RMB0.55/ RMB0.7,

corresponding to PER of 28x/ 22x/ 17x. We assign an

“OVERWEIGHT” rating to the counter.

Catalyst for share price performance

Ceramic fiber industry remains robust;

The country’s strict implementation of the policies relat-

ed to Grade-A non-flammable insulation building materi-als should boost demand.

Main risk factors

Slower-than-expected market promotion of ceramic fiber and

rockwool products;

Larger-than-expected increase in raw material prices.

Main financial indicators 2015A 2016E 2017E 2018E 2019E

Operating revenue (RMB m) 1,132.75 1,189.52 1,510.69 1,767.51 2,121.01

Growth rate of operating revenue +3.82% 5.01% 27.00% 17.00% 20.00%

Net profit (RMB m) 57.55 104.67 150.09 191.82 246.21

Growth rate of net profit -26.68% 81.89% 43.40% 27.80% 28.35%

Diluted EPS (RMB) 0.164 0.298 0.428 0.547 0.702

PE 76.2 40.6 28.3 22.2 17.4

3

Luzhou Laojiao (000568.CH): Reform to Show Effect; Clear Growth Outlook


1) In Q1 2017, the Company recorded an operating revenue of RMB2.67bn, up 20.3% YoY. Net profit attributable to parent company rose 34.5% YoY to RMB797m. The net profit outgrew the revenue by 14.2ppts. Thanks to the rapid growth in the sales of middle- and high-end products, its gross profit margin was up 12.9ppts YoY. Meanwhile, its notes receivables in-creased significantly, which should favour its cash flow conversion in the future.

2) High-end liquor sales grew rapidly and the streamlining of low-end products is close to the end. High-end baijiu products such as Moutai and Wuliangye have opened up the growth potential for its Guojiao brand. Middle- and high-end products like Jiaoling and Tequ, are expected to become major growth drivers after channel streamlining in 2016. The elimination of its middle- and low-end brands, including Touqu and Erqu, is close to the end.

3) The Company’s management initiated a deep reform in 2015. Both the sales volume and revenue began to improve in 2017. Its future development path is clear.


Investment Rating:

Recommend Zhou Ying:（8610）8357 1301 / [email protected] Practitioner Certificate No.: S0130511090001


The Company’s management initiated a deep reform in 2015. Both the sales volume and revenue began to improve in 2017. Its future development path is clear.

High-end liquor sales grew rapidly and the streamlining of low-end products is close to the end. High-end baijiu products such as Moutai and Wuliangye have opened up the growth potential for its Guojiao brand. Middle- and high-end products like Jiaol-ing and Tequ, are expected to become major growth drivers after channel streamlining in 2016. The elimination of its middle- and low-end brands, including Touqu and Erqu, is close to the end.

Notes receivables increased significantly, which should favour its cash flow conversion in the future.


We forecast that the Company's EPS in 2017-19E will be

RMB1.80/2.24/2.78. We maintain RECOMMEND.

Catalyst for share price performance (MONTHLY)

Among food & beverages, first-line baijiu blue chips with

better visibility in fundamentals have clear comparative advantage; high-end baijiu have a better outlook in both sales volume and pricing. The future performance of Moutai is expected to support and drive the performance of first-line baijiu players.

High dividend payout.

Main risk factors

Downturn in the macro-economy; food safety issues; and

worse-than-expected sales.

Main financial indicators 2015A 2016A 2017E 2018E 2019E

Operating revenue (RMB m) 69 83.04 102.20 123.71 145.94

Growth rate of operating revenue 28.89% 20.34% 23.07% 21.05% 17.97%

Net profit (RMB m) 14.73 19.28 25.20 31.47 38.99

Growth rate of net profit 30.89% 34.54% 30.71% 24.88% 23.92%

Diluted EPS (RMB) 1.05 1.37 1.80 2.24 2.78

PE 45.6 34.9 26.6 21.4 17.2

4

Jereh Oilfield Services Group (002353.CH): Principle Fracking Equipment Business

Remains Stable; Overseas EPC Business to See Breakthroughs


1) Leading Private Fracking Equipment Company in China Expected to See Stable Business in 2017: As the Company is

mainly engaged in the production and sales of fracking equipment and accessories, it is very sensitive to international oil

prices and the change in the capex of global oil and gas companies. With oil prices gradually bottoming out, we expect the

Company's main business of fracking equipment and accessories will gradually improve and it will beef up efforts in over-

seas market expansion.

2) Overseas EPC Business Expansion to become an Integrated Oil & Gas Exploration Solution Provider: Eyeing on the

US$100bn global oil and gas EPC market, the Company is currently actively expanding its overseas EPC business, with a

focus on the Middle Asia, Middle East, Africa and South America markets. It is currently working on a number of projects and

we expect it to gain more orders in the future. We think the Company will benefit from the low production costs and financing

advantages in China. Through expanding its EPC business and oilfield technical services, the Company could an integrated

solution provider for oil and gas exploration.


Investment Rating:

Recommend He Zean:（86755）2391 3136 / [email protected] Practitioner Certificate No.: S0130516080005


Profitability: The Company’s 2017-18E earnings could beat

market expectations. Its fracking equipment business should remain stable. The development of shale gas in the North America should bring growth potential. Overseas EPC busi-ness should begin to contribute.

Overseas EPC Business to Beat: We expect rapid growth in its

overseas EPC orders in 2017-18E and should contribute more earnings.


We forecast earnings in 2017-18E at RMB450m and RMB700m,

and EPS of RMB0.47 and RMB 0.73, corresponding to PER of 34x and 22x.

The Company's main business of fracking equipment is stable and

its EPC business is expected to grow rapidly. Besides, the Com-pany is expected to gain investment returns through the disposal of oil and gas assets in its oil and gas development business in North America. We see upside for its earnings. Maintain RECOM-MEND.


Surge in oil prices; major breakthroughs in fracking equip-

ment orders;

Overseas EPC orders and development exceed expecta-

tions.

Main risk factors

Sharp decline in international crude prices: less-than-expected

bid winning of overseas EPC projects;

Slower-than-expected EPC project progress; weaker-than-

expected fracking equipment demand.

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

Operating revenue (RMB m) 4,461 2,827 2,834 4,102 6,245

Growth rate of operating revenue 20.55% -36.63% 0.26% 45% 52%

Net profit (RMB m) 1,200 145 121 450 702

Growth rate of net profit 21.8% -87.9% -16.7% 272% 56%

Diluted EPS (RMB) 1.25 0.15 0.13 0.47 0.73

PE 13.0 108.7 125.5 34.7 22.3

5

Invt Electric (002334.CH): Inflection point arrives as businesses enter the har-

vest period


1. Variable frequency transformers: We expect the revenue of the variable frequency transformer business in 2017-19E to grow

30%, 15% and 15%, and gross margins to be 43%, 42% and 41%, respectively. The solid growth can be attributed to the follow-

ing: (i) Based on the previous guiding indicators, such as PMI, and the production volume of machine tools and packaging equip-

ment, the industrial automation market has picked up MoM since Q3 2016. Demand for variable frequency transformers should

also improve, as they are a key product in industrial automation. (ii) The Company has launched specialized variable frequency

transformers for air compressors and construction lifts. It is also upgrading its general-purpose variable frequency transformer

products. With improved sales ability, its market share is expected to increase.

2. Power: We forecast that the overall income growth of its power business in 2017-19E will be 30% and that the gross margins will

be 40%, 39% and 39%, respectively. The main reasons are as follows: (i) The Company's power subsidiary is a leader in modu-

lar uninterruptible power supply (UPS); it can ride on the growth of the UPS market and the penetration of modular UPS. (ii) Man-

agement has guaranteed net profits in 2016-2018E of RMB33.8m, RMB44m and RMB57m, respectively.

3. Electric vehicle motor controllers: We forecast income growth of its electric vehicle motor controller business of 180%, 100%

and 50% in 2017-19E, with respective gross margins of 38%, 36% and 36%.

4. Servo drives, integrated elevator controllers, PLC, motorized spindles and other products: We forecast income from these

businesses in the next three years of RMB250m, RMB260m and RMB280m, with the gross margin maintained at 40%.


Operation revenue (RMB m) 1,083 1,324 1,772 2,339 2,953

Growth rate of operation revenue 2% 22% 34% 32% 26%

Net profit (RMB m) 149 68 171 233 313

Growth rate of net profit -8% -54% 152% 36% 34%

Diluted EPS (RMB) 0.21 0.09 0.23 0.30 0.41

P/E 35.6 83.0 32.5 24.9 18.2 Sources: Company data, China Galaxy Securities Research

Investment Rating:

Recommend Zhang Ling：（8610）6656 8643：[email protected] Certificate No.：S0130514020003


The market believes the Company’s earnings are unlikely to grow rapidly because of poor cost control. We believe (i) the higher-

than-peers expense ratio was dragged mainly by its new business in servo drives, PLC and rail transport. The costs and profits

of its variable frequency transformer business in fact, stood at industry average levels; (ii) the increased expenses in 2016 were

mainly due to higher wages, stock incentive expenses and an increase in fixed-asset depreciation. In 2017, the Company’s ex-

penses should remain flat YoY on lower stock incentive expenses and flat wages and fixed asset depreciation, and its net profit

margin should improve with higher revenue.

6


We see larger upside for the Company’s 2017 earnings given net profit margin expansion and the pick-up in downstream

demand. The maturing of its new businesses, such as new energy vehicles and rail transport, also offers upside for its valua-

tion. We forecast EPS of RMB0.23 and RMB0.30 in 2017E and 2018E, corresponding to PER of 32x and 25x. We maintain

our Recommend rating.


Obtain the first order for its rail transit traction sys-

tem.

Obtain big clients in the new energy vehicle motor

controller business.

Earnings beat.

Main risk factors

The Company’s expense ratio continues to rise.

Faster-than-expected growth in accounts receivables.

7

Xiangtan Electric Manufacturing (600416.CH): Integrated Power System to Be the Next

Growth Driver


1) Military Goods Business to Accelerate; Integrated Power System to be an Important Growth Driver in the next Few Years. Xiangtan Electric Manufacturing reorganized its businesses into three platforms, military/ defence, renewable energy and automotive industries. The Company has identified the military/ defence platform as its strategic development focus.

2) The Company raised RMB2.5bn in Sept 2016 to invest mainly in the R&D of warships’ integrated power systems. Assuming that the new projects to commence production in 2018 and reach its designated production capacity in 2019, we expect the Company to deliver faster growth in the next three years with substantial improvement in profits. Contribution from military/ defence business should also increase sharply.

3) Xiangtan Electric Manufacturing announced in late 2016 that it planned to establish a military equipment company in the form of mixed-ownership, in which Xiangtan will own a 51% interest. The plan was approved by the State Administration of Sci-ence, Technology and Industry for National Defence in April 2017. Through consolidating its production capacity in military goods and establishing a leading management model, the Company should be able to accelerate its transformation into a military company and ride on the robust industry development.

4) As the only listed platform of Xingtan Electric Manufacturing Group which is among Hunan’s First Batch Companies of SOE Reform Pilot Program, the Company should benefit from its parent’s mixed-ownership reform and asset securitization plans.

5) We estimate its 2017-19E net profits at RMB264m, RMB406m and RMB537m, corresponding to respective EPS of RMB0.28, RMB0.43 and RMB0.57.

Sources: WIND,China Galaxy Securities Research

Investment Rating:

Recommend Ju Houlin:（8610) 6656 8946 : [email protected] License No.: S0130511010007


The market is doubtful about the growth potential and timeframe of the company’s integrated electric propulsion sys-tem. Earnings growth is rather uncertain.

However, we believe the company’s leading products have strong advantages in the domestic market and have a solid position in the industrial chain. It should be one of the major beneficiaries in the market in the future. Meanwhile, China’s naval technologies will continue to see rapid development, implying huge demand for product volume and technology upgrades. Therefore, we are optimistic towards the growth of the company’s leading products.

We believe the establishment of military equipment company will be a major growth driver and milestone for its military busi-ness. The military company indicates that Xiangtan has initiat-ed its SOE reform and we believe its military business will see faster development going forward.


We forecast the company's net profits in 2017-19E will be RMB264m, RMB406m and RMB537m, respectively, correspond-ing to EPS of RMB0.28, RMB0.43 and RMB57. PER for 2017E-19E are 49x, 32x and 24x, respectively.

Maintain “RECOMMEND” given its strong growth

visibility and industry advantages.


Breakthroughs made in military goods business

Progress made in Hunan's and the company's SOE reform.

Main risk factors

Uncertainties in the growth of the company's wind power busi-

ness.

Main financial indicators 2015A 2016 2017E 2018E 2019E

Operating revenue (RMB m) 9,500.41 10,948.53 11,500.40 12,699.00 13,919.00


Net profit (RMB m) 64.48 138.78 264.32 405.89 536.87


Diluted EPS (RMB) 0.07 0.17 0.28 0.43 0.57

PE 194.6 80.1 48.6 31.7 23.9

8

Future Land Holdings (601155.CH): Quality Large Cap with Strong Fundamentals


1) Future Land achieved sales of RMB65.1bn in 2016, up 104% YoY. According to data from CRIC, the Company ranked 15th among all Chinese developers in terms of total sales, an improvement of 6 positions compared to that in 2015. Sales in 5M17 grew 96% YoY to RMB41.2bn and GFA sold rose 41% YoY to 2.97m sqm. The sales in the first five months of the year represented 48% of its full-year target. The Company mainly conducts businesses in non-tier 1 cities in Yangtze River Delta, Bohai Rim, and central and western China. Thanks to the rapid deinventory process in tier-3/4 cities as well as the spill over from tier 1 cities, the Company has been reporting strong sales over the past two years, which should guarantee certain earnings in the future.

2) The Company reported revenue of RMB28bn and net profit of RMB3bn in 2016, up 19% and 64% YoY, respectively. The strong growth was mainly due to better gross margins and a decline in minority losses. In Q1 2017, its revenue jumped 78% YoY to RMB2bn with net profit reversing from losses last year to RMB42m. The stock is currently trading at a relatively low 2017E PER of less than 10x.

3) Future Land’s business is driven by both residential and commercial projects. 11 of its Injoy plazas have begun operations and around 35 Injoy projects are currently in progress. Meanwhile, the Company issued China’s first REIT product for com-mercial conglomerate for its Qingpu Injoy Plaza in 2016, kicking off the securitization process of its commercial properties.

Sources: WIND,China Galaxy Securities Research

Investment Rating:

Recommend Chen Zhixu:（8621）2025 2646 / [email protected] Practitioner Certificate No.: S0130516090001


While the government tightened its property curbing measures

starting from Q4 2016, we believe inventory clearance remains the key theme in tier-3/4 cities. Therefore, we are more opti-mistic towards the performance of tier-3/4 cities in 2017. Since the Company mainly operates its property business in Yangtze River Delta and Bohai Rim regions, it should benefit from the relatively loose property measures and spill over from tier-1 cities.

Given tighter property measures and market liquidity, industry

leaders with large business scale and strong capital positions should enjoy more M&A opportunities and we expect higher industry concentration in the future.


We estimate the company's EPS in 2017-19E at RMB1.86/ RMB2.45/ RMB3.13 and the respective PER at 9.8x/ 7.4x/ 5.8x. Maintain RECOMMEND.


Quality large cap with strong fundamentals and low valua-

tion;

Faster M&A;

Favourable policies.

Main risk factors

Regulatory policies are further tightened;

Weaker-than-expected sales in tier-3/4 cities;

Slower-than-expected development in commercial projects


Operating revenue (RMB m) 23,569 27,969 36,444 46,028 59,837


Net profit (RMB m) 1,836 3,019 4,191 5,523 7,061


Diluted EPS (RMB) 0.81 1.34 1.86 2.45 3.13

PE 22.4 13.5 9.8 7.4 5.8

9

Sun-Create Electronics (600990.CH): Expanding through organic and inor-

ganic growth; a safe play with huge upside potential


1. Sun-Create Electronics is principally engaged in air-traffic control radar, meteorological radar and other radar-related product busi-

nesses, as well as in Smart City and power supply products. Its radar products in particular have seen continuous growth, and its civil-

ian goods business is expanding quickly.

2. The Company reported strong revenue growth in 2016, but profit growth was lacklustre. We expect faster profit growth in 2017.

3. The acquisition of assets from its major shareholder and related financing activities are progressing smoothly, with transactions

expected in the near future. Upon completion, the acquisition will largely improve the Company’s earnings and enrich its radar product

line, benefiting the sustainable development of the Company.

4. If the assets acquisition and financing activities are completed in 2017, the Company should see a significant increase in profit to

over RMB200m.

Sources: Company data, China Galaxy Securities Research

Investment Rating:

Recommend Ju Houlin: (8610) 66568946 : [email protected] License No.: S0130511010007


If the Company completes its assets acquisition in 2017, we

forecast EPS of RMB1.55/ RMB1.88/ RMB2.26 in 2017-

2019E, with respective PER of 40x/ 32x/ 27x. We give it a

RECOMMEND rating.


We believe that the Company has reached the fast-

growth stage and has good prospects.

The Company has remarkable advantages in terms

of stability and growth potential among key military-

related companies.

The Company’s capital operations are developing

smoothly, providing plenty of room for future devel-

opment.


Smooth progress in asset acquisition.

Main risk factors

Lower-than-expected growth in consumer product sales.

Main financial indicators 2016A 2017E 2018E 2019E 2015A

Operating income (RMB m) 3,046.14 4,112.29 5,140.36 6,425.45 2,498.14

Operating income growth rate 21.94% 35.00% 25.00% 25.00% 48.30%

Net profit (RMB m) 129.49 246.91 299.62 359.54 115.3

Net profit growth rate 12.28% 90.72% 21.35% 20.00% 43.83%

Diluted EPS (RMB) 0.95 1.55 1.88 2.26 0.84

P/E 64.6 39.6 32.7 27.2 73.1

10

CITIC Securities (600030.CH): Solid Leading Position; Expected Improvement in In-

terim Results


1. CITIC Securities has a solid leading position in the brokerage sector, with a balanced development in various businesses. In Q1

2017, the Company achieved revenue of RMB8.6bn, up 13.4% YoY. Net profit attributable to the parent jumped 40.2% YoY to

RMB2.3bn. The results continued to lead the industry. In addition, its profitability improved substantially on a yearly basis. Its bro-

kerage business had a market share of 5.78% as of end-May 2017, ranking the second in the industry. The outstanding balance

of its margin financing business reached RMB56.6bn, the highest in the industry. As for investment banking business, there are

currently 115 companies in the IPO pipeline, the fourth in the industry. For asset management, the average monthly AUM and

average monthly actively managed AUM reached RMB1,866.9bn and RMB630.6bn in Q1 2017, topping the industry. We believe

the Company’s earnings will continue to improve with the balanced development of its businesses.

2. We expect the Company to report significant improvements in its interim earnings for 2017, which should help its valuation recov-

ery.

3. The counter is currently trading at a historical low of 1.4x PBR. The low valuation represents high safety margin and offers both

defensive and rebound opportunities.

4. The marginal relaxation in regulations and the MSCI’s inclusion of A shares favour a re-rating of non-bank financials.

5. We expect CITIC Securities to achieve earnings growth in 2017. We estimate its EPS at RMB1.00. Maintain “RECOMMEND”.


Operating income (RMB m) 56013.44 38001.92 41980.00 47128.00 53831.00

Operating income growth rate 91.84% -32.16% 10.47% 12.26% 14.22%

Net profit (RMB m) 19799.79 10365.17 12052.00 14342.00 16270.00

Net profit growth rate 74.64% -47.65% 16.28% 19.00% 13.45%

EPS (RMB) (DILUTED) 1.71 0.86 1.00 1.19 1.35

P/E 9.8 19.5 16.7 14.1 12.4

Sources: Company data,China Galaxy Securities Research

Investment Rating:

Recommend Wu Pingping：（8610）66568224 ：[email protected] Practitioner Certificate No.: S0130516020001


The oscillating market and the tight regulations impose

certain pressure on brokers. However, we believe CITIC

Securities should be able to maintain a stable growth giv-

en the balanced development of its various businesses.

Company valuation and investment recommendation

We estimate 2017-19E EPS at RMB1.00/ RMB1.19/

RMB1.35, respectively, corresponding to PER of

16.7x/ 14.1x/ 12.4x. Maintain Recommend.

Main risk factors

The market volatility could have an adverse impact on its

businesses;

Slower-than-expected business transformation.

Company valuation and investment recommendation

Significant improvement expected in interim results,

which should help its valuation recovery.

The marginal relaxation in regulations and the MSCI’s

inclusion of A shares favour non-bank financials.

11

ST Zhenxing Biopharmceutical and Chemical (000403.CH): Undervalued leader

of the fast-growing blood-products industry


1. Booming blood-products industry amid shortage of plasma. At the global level, the blood-products industry outgrew the

pharmaceutical industry, with a CAGR of 9% over 2008-14 (compared to a CAGR of 5% for the global pharmaceutical industry).

Government statistics show that China’s plasma collection was less than 6,000 tonnes in 2015, while overall demand was

~13,000 tonnes. Although companies are speeding up the construction of plasma-collection stations, the demand-supply gap is

likely to remain for the foreseeable future. The blood-products industry is a direct beneficiary of the lifting of price controls in

2015.

2. Rapid expansion of Guangdong Shuanglin’s plasma stations; plasma’s market value seriously underestimated. The

Company’s core asset, Guangdong Shuanglin, currently owns 13 plasma stations, and has applied for several other stations and

sub-stations. Plasma collection is expected to reach 310 tonnes, 400 tonnes and 520 tonnes in 2016-18, respectively. The mar-

ket value of its plasma currently stands at RMB32.53m/tonne, much lower than that of Hualan Biological Engineering

(RMB45.5m/tonne), Boya Bio-pharmaceutical (RMB93.22m/tonne) and Shanghai RAAS (RMB129.51m/tonne).

3. Five blood products under development expected to boost profitability. Currently, the Company has six products in produc-

tion and five products under development (blood coagulation factor VIII, human fibrinogen, human prothrombin complex, human

fibrin sealant and human coagulation factor IX). With the approval of production of its new products and improved capacity utiliza-

tion in its new production plants, we believe its per-tonne profitability from plasma should gradually increase. We estimate the per

-tonne net profit of its plasma could reach RMB550,000, 600,000 and 650,000, respectively, in 2016-18.

4. Debt restructuring on track; risks limited. The core debt of the Company, including RMB387m (principal and interest) payable

to Cinda Assets Management, will be repaid from proceeds raised through a private placement. Upon completion of the private

placement, the takeover risk of Guangdong Shuanglin (in which it holds a 100% stake) will be eliminated. The move will also

pave the way for the disposal of its stake in Zhenxing Electric. While the Company’s stake in Guangdong Shuanglin may be auc-

tioned, since it has not met the terms of the Debt Restructuring Contract and the private placement has not yet been implement-

ed, we believe the risk is minimal as the listed company has full repayment capability, given its strong profitability and cash flow.

Meanwhile, its major shareholder is restructuring its debt and has made some progress this year.



Investment Rating:

Recommend

The Company has the fastest expansion in plasma-collection stations among blood-products companies. It also has the largest

potential in plasma-collection capacity.

Debt disputes and counteractions are being handled in an orderly manner, but the Company’s share price has been underper-

forming its peers YTD.

Li Pingzhu: (8610) 83574546 : [email protected] License No.:S0130515040001

Main financial indicators 2016A 2017E 2018E 2015A 2019E

Operating income (RMB m) 567.44 752.46 978.19 500.27 1,271.65

Operating income growth rate 13.43% 30.00% 30.00% 2.20% 30.00%

Net profit (RMB m) 53.9 150.38 335.32 77.56 546.57

Net profit growth rate -30.51% 179.00% 122.98% -36.69% 63.00%

Diluted EPS (RMB) 0.2 0.55 1.230 0.285 2.00

P/E 106.7 154.7 56.2 25.1 15.5

mailto:[email protected]

12


We estimate EPS of RMB0.74/ RMB1.23 in 2017-18E, respectively, with PER of 56x/ 25x.

We believe that the per-tonne market value of its plasma is seriously underestimated. We are optimistic about its blood-

products line expansion, the opening of its new plasma-collection stations, and the gradual increase in the per-tonne profita-

bility of its plasma. Therefore, we rate it Recommend.


Approval of new plasma collection stations.

Completion of debt restructuring.

Disposal of its power plant business.

Cancellation of ST title.

Main risk factors

Slower-than-expected expansion in plasma-collection

stations.

Slower-than-expected debt-restructuring progress.

13

Yutong Bus (600066.CH): New Energy Business Bottomed Out; Bus Leader’s

Growth Back on Track

Driving factors, key assumptions and main predictions: 1) A leader in the domestic bus sector, Yutong’s business covers highway passenger transportation, tourist buses, public transport,

private coaches, school buses and special-purpose buses. As a leading player in the bus sector, its main products are medium and large buses and the annual growth of its operating income has kept at 15% or above for years, with a gross profit margin of over 20%. During the 13th Five-year Plan period, the Company will seize the development opportunities of new energy vehicles. The sales ratio of its new energy buses is expected to surpass 30%.

2) The new energy industry had been at a low ebb in 2016. With the announcement of the directory of subsidized new energy vehi-cles and the implementation of national and local subsidy policies, the new energy bus market will gradually return to the stable growth state and we expect a slight sales growth in 2017. Currently, the number of buses in China is about 600,000 units and the penetration is relatively low. The industry is expected to maintain a growth of about 5% over the next two years.

3) Lower subsidies, higher technology thresholds and the change in subsidy payment in 2017 all point to higher requirements on bus manufactures’ technology and capital position, and we expect market leaders to benefit. Yutong's products account for 22% and 32% respectively in the first two batches of new energy buses eligible for subsidization as announced in the directories of subsidized new energy vehicles in 2017, which are the highest in the market. We forecast its sales in 2H17 will continue to in-crease.

4) As a leading player in the bus sector, the Company has clear scale advantage and strong cost control and bargaining ability. The impact of lower subsidies could be largely offset by better margins achieved by lower upstream costs and higher downstream pricing.

5) Owing to the lower subsidies, Yutong’s sales dropped substantially in Q1 2017, with both income and revenue declined during the period. However, we believe the sales should have bottomed out in Q1and the sales of new energy buses should stabilize in 2017. The higher operation barriers can help the Company further increase its market share. With lower costs of batteries, elec-tric engines and electric control in the long term, the company is expected to offset the impact of lower subsidies and achieve an accelerated growth in profit.


Investment Rating:

Recommend He Zean:（86755）2391 3136 / [email protected] Practitioner Certificate No.: S0130516080005


We forecast the company's net profit attributable to the parent in

2017-18E will be RMB2.84bn and RMB3.69bn, corresponding to diluted EPS of RMB0.52 and RMB0.66. PER stand at 17.96x and 14.03x.

We give it a RECOMMEND rating.


The market thinks that the Company's profitability will be

affected by lower subsidies. However, we think Yutong, as

an industry leader with strong bargaining and cost manage-

ment ability, can eliminate the impact and keep its profita-

bility stable through various means.


Better-than-expected sales;

Accelerated recovery of sales in the new energy industry.

Main risk factors

Weaker-than-expected sales in the new energy industry;

Lower-than-expected earnings per vehicle amid a tightening of

subsidy policies.

Main financial indicators 2015A 2016A 2017E 2018E

Operating income (RMB m) 312.11 358.50 372 415

Operating income growth rate 21.31% 14.7% 3.77% 11.56%

Net profit (RMB m) 35.35 40.44 43 48.50

Net profit growth rate 35.31% 14.38% 6.33% 12.79%

EPS (RMB) (DILUTED) 1.6 1.83 1.94 2.19

P/E 13.7 12.0 11.3 10.0

14

Disclaimer and Risk Statement

This document (including any information attached) is presented by China Galaxy International Securities (Hong Kong) Co., Ltd. (“Galaxy International Securities”), one of the subsidiaries of the China Galaxy International Financial Holdings Limited (“China Galaxy International”), to the institutional clients and it does not aim at or intend to violate any laws and regulations of any re-gions, countries, cities or other jurisdiction.

Notwithstanding this document is issued by the research team of China Galaxy Securities Co., Ltd. (6881.HK; 601881.CH) a direct and/or indirect holding company of the group of companies under China Galaxy International, being information sources be-lieved to be reliable, no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or com-pleteness. All information, opinions, estimates and/or ratings contained in this document are for the sole purpose of general reference and subject to change without notice and shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. The analysis herein does not take into account the particular investment objec-tives, financial situation or risk tolerance level of any particular clients and does not constitute a personal investment recom-mendation to anyone. The prices of securities may move up or down, and past performance should not be regarded as an indica-tion of future performance. The recipient of this document 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.

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