Yum Cha 飲 茶 August 10, 2015

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 24,552.5 0.7

HSCEI 11,227.9 1.2

Shanghai COMP 3,744.2 2.3

Shenzhen COMP 2,177.2 3.0

Gold 1,092.4 (0.2)

BDIY 1,200.0 (0.1)

Crude Oil, WTI(US$/BBL) 43.6 (0.7)

Crude Oil, BRENT(US$/BBL) 48.3 (0.6)

HIBOR, 3-M 0.4 (0.2)

SHIBOR, 3-M 3.1 (0.3)

RMB/USD 6.2 -

DATA RELEASES DUE THIS WEEK

Aug 09/15 New Yuan Loans CNY

Aug 09/15 Aggregate Financing CNY

Aug 09/15 Money Supply M0 YoY

Aug 09/15 Money Supply M1 YoY

Aug 09/15 Money Supply M2 YoY

Aug 12 Retail Sales YoY

Aug 12 Retail Sales YTD YoY

Aug 12 Industrial Production YoY

Aug 12 Industrial Production YTD YoY

Aug 12 Fixed Assets Ex Rural YTD YoY

Aug 12 Bloomberg GDP Monthly Estimate YoY

Aug 13/18 Foreign Direct Investment YoY CNY

STRATEGY: SOE REFORM - Potential merger between China COSCO Group and China Ship-

ping Group is likely to fuel expectation on SOE reform again. We see other potential merger

candidates among central SOEs to enhance competiveness domestically and/or internationally:

(i) China Unicom [0762.HK] and China Telecom [0728.HK]; (ii) CNOOC [0883.HK] and Sinopec

[0386.HK] or Sinochem Group; (iii) Metallurgical Corporation of China [1618.HK; MCC]; and (iv)

Harbin Electric [1133.HK]. We believe it is time to revisit the opportunities in SOE reform for

thematic investment. For the companies we mention above, nearly all of them are trading below

book value after the sharp market correction in July, which may offer huge upside if there are

any signs of merger or restructuring.

TMT INDUSTRY UPDATE: SOE REFORM - Recent news flow regarding joint “Reform Coordi-

nation Unit” formed by China COSCO Group and China Shipping Group is expected to boost

sentiment on the other potential candidates of M&A within central SOEs. Recall that there was

market rumour suggesting that the telecom sector will have another round of consolidation. It is

also expected to boost sentiment on SOE reform plays. Among those potential candidates,

listed subsidiaries under China Electronics Corporation (CEC), one of the central SOEs concen-

trating on TMT sector, are likely to attract market attention. There are seven HK-listed subsidiar-

ies under CEC including: Irico Group [438.HK], Solomon Systech [2878.HK], TPV Technology

[903.HK], Nanjing Panda Electronics [553.HK], China Electronics Corporation Holdings [85.HK],

Hua Hong Semiconductor [1347.HK] and O-Net Communications.

XINYI SOLAR [0968.HK; HK$3.40; HOLD] - We joined the plant visit tour arranged by Xinyi

Solar (XYS) last week. Based on the management tone, we believe XYS will likely adopt more

aggressive pricing strategy on solar glass sales in order to gain market share from smaller play-

ers. Currently, XYS has 754MW of solar farm projects under construction. Management expects

the construction of most projects will be completed by October and the balance by year end.

CR CEMENT [1313.HK; HK$4.34; BUY] - CR Cement’s 1H15 pre-tax profit reported a 50%

decline year-on-year (YoY) to HK$1.39bn. Although it was lower than our forecast by about

10%, core operations were largely in line with our expectation as gross profit was only below

our projection by 3.7%. Major discrepancy came from a HK$144m loss from associates due to

weak cement price in Inner Mongolia. Overall, we believe the lacklustre 1H15 results are well

expected and investors are likely to focus more on the potential price rebound in late Q3, espe-

cially after the authorities’ additional measures to boost investment. We maintain a target price

of HK$5.11, based on 1.1x 2015E PBR (-1 standard deviation from six-year average). Maintain

BUY. We will review our financial projections after the analyst briefing today.

CHINA CEMENT WEEKLY - Average cement price (nationwide) was up 0.39% week-on-week

(WoW) to RMB253.83/tonne last week. Cement prices in part of Guangdong, Hunan, and Gui-

zhou were up RMB10~30/tonne. Regions of cement price recovery continued to expand as

more players chose to follow the trend upon price stabilization. Price recovery is expected in

Yangtze-River Delta, central and southern Zhejiang province in following weeks.

RESEARCH NOTES

SNIPPETS

CHINA GALAXY SECURITIES [6881.HK; HK$6.78; BUY] - On parent company level, the

company posted a net profit of RMB987m in July, down 30.9% month-on-month (MoM). It looks

quite impressive given that other major securities companies recorded >50% MoM profit decline

on average, thanks to the company’s relatively high exposure to fixed income investment. Year-

to-date, the company recorded a net profit of RMB6.38bn. The company still has a good chance

to achieve our full year forecast of RMB8.95bn, as it only requires a monthly profit of RMB514m

for the remaining five months. The counter is trading at 5.8x 2015E PER and 0.92x 2015E PBR.

Strategy

August 10, 2015

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Mark Po—Director

(852) 3698-6318

markpo@chinastock.com.hk

Wayne Fung—Vice President

(852) 3698-6319

waynefung@chinastock.com.hk

Steve Wong—Assistant Vice President

(852) 3698-6391

stevewong@chinastock.com.hk

Cyrus Ng—Assistant Vice President

(852) 3698-6275

cyrusng@chinastock.com.hk

Special thanks:

Nevin Ning, Tony Li, Sarah Hong

SOE Reform (Part II): Potential Mega M&A Potential merger between China COSCO and China Shipping triggered expectations on

SOE reform again. Trading suspension of CSCL [2866.HK], China Shipping Development

[1138.HK], China COSCO [1919.HK] and COSCO Shipping [600428.HK] fuelled speculation on

the latest mega mergers between central state-owned enterprises (SOEs), which may involve

China Shipping Group and China COSCO Group (Note: We do not rule out the possibility that

COSCO Pacific [1199.HK] and COSCO International [0517.HK] may also be suspended today.).

Following the mergers of (i) CSR Group and CNR Group; and (ii) China Power Investment Cor-

poration and State Nuclear Power Technology Corporation (SNPTC) early this year, we may see

more cases of mega M&A in the future.

Other potential cases. Based on the analysis of our A-share research team, we see some other

potential mega merger candidates to enhance competiveness domestically and/or international-

ly: (i) China Unicom [0762.HK] and China Telecom [0728.HK]; (ii) CNOOC [0883.HK] and Si-

nopec [0386.HK] or Sinochem Group; (iii) Metallurgical Corporation of China [1618.HK; MCC].

Meanwhile, some pairs, which have been denied before, may attract investors’ attention again,

such as (i) China State Shipbuilding Corporation and China Shipbuilding Industry Corporation

and (ii) CRG [0390.HK] and CRCC [1186.HK].

(i) China Unicom and China Telecom. China Mobile’s [0941.HK] market share in terms of mo-

bile subscribers declined from 74% in early 2009 to 62.2% in late 2013 as a result of industry

restructuring. However, China Mobile’s market share has rebounded recently to 63%, which

raised the concern about the re-emergence of a quasi-monopoly. The combined market share of

China Unicom and China Telecom is 37%. It will be much better than fighting against China Mo-

bile separately, with 22.3% market share of China Unicom and 14.7% market share of China

Telecom.

(ii) CNOOC and Sinopec or Sinochem. Our A-share research team believes any merger be-

tween PetroChina [0857.HK] and Sinopec is unhealthy and will not help improve competiveness

of the industry. It should make more sense to merge CNOOC with Sinopec or Sinochem which

will complement the former’s weakness in downstream business.

(iii) MCC with other major construction companies. In the list of central SOEs, there are

some big names such as CRG, CRCC, CCCC [1800.HK] and CSCEC, etc. At the same time,

there are also some relatively smaller ones, such as MCC. To avoid vicious competition domesti-

cally and internationally (especially for One Belt One Road projects), we may see MCC and oth-

er smaller construction companies to merge and reduce the number of players.

(iv) Harbin Electric [1133.HK]. Apart from the above ideas raised by our A-share team, we

believe Harbin Electric is also a potential candidate to be involved in M&A with other central

SOEs. The company is trading at 0.4x PBR and just released profit warning for 1H15. Merging

with other bigger power equipment companies may be one of the options in future.

Bubble elements largely squeezed out. We believe it’s time to revisit the opportunities in SOE

reform for thematic investment. For the companies we mention above, nearly all of them are

trading below book value after the sharp market correction in July, which may offer huge upside

if there are any signs of merger or restructuring. Meanwhile, we also updated the list of listed

companies in Hong Kong controlled by central SOEs for investors’ reference.

Figure 1: Central SOEs which may involve in merger

Sources: Bloomberg, CGIHK Research

Central SOE Listed companies in Hong Kong Ticker Stake (%)

Price

(HK$)

Market cap

(HK$m) PER (x)

2015E

PER (x)

2016E

PER (x) PBR (x)

Oil and gas

中国石油化工集团公司 China Petrochemical Corporation (SINOPEC) SINOPEC Engineering (Group) Co., Ltd. 2386 67.01 6.25 27,675 6.34 6.50 6.23 0.97

China Petroleum & Chemical Corporation 386 72.94 5.83 846,625 16.05 15.73 10.52 0.84

SINOPEC Oi l field Service Corporation 1033 72.01 2.42 130,919 74.84 36.58 13.65 1.33

SINOPEC Kantons Holdings Ltd. 934 60.33 4.42 10,989 17.23 11.51 8.88 1.09

SINOPEC Shanghai Petrochemical Co. Ltd. 338 50.56 3.12 80,032 n.a. 10.77 10.33 1.64

中国海洋石油总公司 China National Offshore Oi l Corporation (CNOOC) China Bluechemical Ltd. 3983 59.41 2.67 12,309 83.02 8.42 7.67 0.72

China Oi l field Services Ltd. 2883 50.52 9.47 91,402 4.82 11.26 9.05 0.77

CNOOC Ltd. 883 64.44 9.63 429,955 5.73 14.89 8.76 0.91

中国中化集团公司 Sinochem Group Far East Horizon Ltd. 3360 27.94 7.34 28,996 8.29 7.36 6.11 1.20

Sinofert Holdings Ltd. 297 52.65 1.40 9,834 34.40 15.36 11.33 0.59

Franshion Properties (China) Ltd. 817 63.52 2.48 26,465 4.29 6.87 6.15 0.68

Telecom

中国电信集团公司 China Telecom Global Limited (CTG) China Communications Services Corporation Ltd. 552 51.39 3.27 22,648 8.43 7.42 6.80 0.79

China Telecom Corportation Ltd. 728 70.89 4.27 345,581 15.55 13.91 12.58 0.96

中国联合网络通信集团有限公司 China United Network Communications Group Co. Ltd (China Unicom) China Unicom (Hong Kong) Limited 762 75.30 10.68 255,755 16.95 15.42 13.82 0.90

Construction

中国冶金科工集团有限公司 China Metal lurgica l Group Corporation (MCC) Metal lurgica l Corporation of China Ltd. 1618 64.18 2.74 152,616 10.82 8.13 6.97 0.89

Power equipment

哈尔滨电气集团公司 Harbin Electric Corporation Harbin Electric Company Limited 1133 50.93 4.54 6,251 8.84 79.07 n.a. 0.40

Figure 2A: Hong Kong listed companies controlled by central SOEs

No. Central SOE Listed companies in Hong Kong Ticker Stake (%)

Price

(HK$)

Market cap

(HK$m) PER (x)

2015E

PER (x)

2016E

PER (x) PBR (x)

1 中国核工业集团公司 China National Nuclear Corportation CNNC International Limited 2302 66.72 2.77 1,355 n.a. n.a . n.a . 1.71

2 中国核工业建设集团公司 China Nuclear Engineering Group Corporation (CNEC) China Nuclear Industry 23 International Corporation Ltd. 611 36.30 2.03 2,300 n.a. n.a . n.a . 5.49

3 中国航天科技集团公司 China Aerospace Science & Technology Corporation China Aerospace International Holdings Ltd. 31 39.07 1.39 4,288 10.52 n.a. n.a . 0.86

APT Satel l i te Holdings Ltd. 1045 54.57 7.07 6,594 12.98 10.88 7.68 1.64

China Energine International (Holdings) Ltd. 1185 60.64 0.77 3,364 33.78 n.a. n.a . 1.48

4 中国航天科工集团公司 China Aerospace Science & Industry Corporation (CASIC) n.a .

5 中国航空工业集团公司 Aviation Industry Corporation of China AviChina Industry & Technology Co. Ltd 2357 54.61 6.49 35,529 36.33 32.29 26.80 2.63

AVIC International Holdings Limited 161 71.43 6.12 7,137 8.61 n.a. n.a . 0.80

AVIC International Holdings (HK) Limited 232 34.34 1.14 6,292 197.30 n.a. n.a . 2.26

AVIC Joy Holdins (HK) Limited 260 29.81 0.42 2,467 n.a. n.a . n.a . 1.70

Nexteer Automotive Group Limited 1316 67.26 6.52 16,286 13.52 10.38 8.41 3.07

8 中国船舶工业集团公司 China State Shipbui lding Corporation CSSC Offshore & Marine Engineering (Group) 317 22.28 21.55 60,209 117.43 61.66 25.02 3.16

8 中国船舶重工集团公司 China Shipbui lding Industry Corporation n.a.

8 中国兵器工业集团公司 China North Industries Group Corporation AKM Industria l Company Limited 1639 36.46 1.13 1,116 23.89 n.a. n.a . 1.25

9 中国兵器装备集团公司 China South Industries Group Corporation CMA Logis tics 1292 25.40 8.80 1,426 5.15 n.a. n.a . 0.75

10 中国电子科技集团公司 China Electronics Technology Group Corp. (CETC) n.a .

11 中国石油天然气集团公司 China National Petroleum Corporation (CNPC) Petrochina Company Ltd 857 86.35 7.30 2,310,924 13.44 18.22 12.01 0.91

Kunlun Energy Company Limited 135 58.33 7.18 57,960 10.33 12.91 10.59 1.10

12 中国石油化工集团公司 China Petrochemica l Corporation (SINOPEC) SINOPEC Engineering (Group) Co., Ltd. 2386 67.01 6.25 27,675 6.34 6.50 6.23 0.97

China Petroleum & Chemica l Corporation 386 72.94 5.83 846,625 16.05 15.73 10.52 0.84

SINOPEC Oi l field Service Corporation 1033 72.01 2.42 130,919 74.84 36.58 13.65 1.33

SINOPEC Kantons Holdings Ltd. 934 60.33 4.42 10,989 17.23 11.51 8.88 1.09

SINOPEC Shanghai Petrochemica l Co. Ltd. 338 50.56 3.12 80,032 n.a. 10.77 10.33 1.64

13 中国海洋石油总公司 China National Offshore Oi l Corporation (CNOOC) China Bluechemica l Ltd. 3983 59.41 2.67 12,309 83.02 8.42 7.67 0.72

China Oi l field Services Ltd. 2883 50.52 9.47 91,402 4.82 11.26 9.05 0.77

CNOOC Ltd. 883 64.44 9.63 429,955 5.73 14.89 8.76 0.91

14 国家电网公司 State Grid Corporation of China (SGCC) n.a .

15 中国南方电网有限责任公司 China Southern Power Grid n.a .

16 中国华能集团公司 China Huaneng Group Huaneng Power International , Inc. 902 50.01 9.50 177,766 10.01 7.88 8.07 1.56

Huaneng Renewables Corporation Ltd. 958 56.90 3.12 30,351 20.15 13.89 11.06 1.51

17 中国大唐集团公司 China Datang Corporation China Datang Corporation Renewable Power Co., Ltd. 1798 65.61 1.06 7,710 n.a. 19.75 12.87 0.69

Datang International Power Generation Co. Ltd. 991 34.71 3.27 92,068 19.73 8.34 6.68 0.79

18 中国华电集团公司 China Huadian Corporation Huadian Power International Corporation Ltd. 1071 53.25 7.22 86,573 7.78 7.81 7.83 1.61

Huadian Fuxin Energy Corporation Ltd. 816 62.76 3.19 26,821 11.08 8.69 7.02 1.43

19 中国国电集团公司 China Guodian Corporation China Longyuan Power Group Corporation Ltd. 916 58.44 8.71 69,997 21.92 15.14 13.02 1.70

Guodian Technology & Environment Group Corporation 1296 78.40 0.84 5,094 n.a. 10.35 10.35 0.44

20 中国电力投资集团公司 China Power Investment Corporation China Power International Development Ltd. 2380 58.95 5.50 40,211 10.51 9.40 9.64 1.39

China Power New Energy Development Co. Ltd. 735 28.16 0.51 6,052 17.27 9.97 6.59 0.62

21 中国长江三峡集团公司 China Three Gorges Corporation China Power New Energy Development Co. Ltd. 735 27.20 0.51 6,052 17.27 9.97 6.59 0.62

22 神华集团有限责任公司 Shenhua Group China Shenhua Energy Co. Ltd 1088 73.01 14.96 415,657 7.28 9.17 8.88 0.80

23 中国电信集团公司 China Telecom Global Limited (CTG) China Communications Services Corporation Ltd. 552 51.39 3.27 22,648 8.43 7.42 6.80 0.79

China Telecom Corportation Ltd. 728 70.89 4.27 345,581 15.55 13.91 12.58 0.96

24 中国联合网络通信集团有限公司 China United Network Communications Group Co. Ltd (China Unicom) China Unicom (Hong Kong) Limited 762 75.30 10.68 255,755 16.95 15.42 13.82 0.90

25 中国移动通信集团公司 China Mobi le Communications Corporation (CMCC) China Mobi le Ltd. 941 72.85 100.90 2,065,930 14.99 15.05 14.13 1.93

26 中国电子信息产业集团有限公司 China Elctronics Corporation (CEC) IRICO Group Electronics Co. Ltd. 438 71.74 0.56 1,250 n.a. n.a . n.a . n.a .

Solomon Systech (International ) Ltd. 2878 28.61 0.36 877 n.a. n.a . n.a . 0.98

TPV Technology Ltd. 903 37.05 1.39 3,260 10.33 n.a. n.a . 0.26

Nanjing Panda Electronics Company Limited 553 38.70 6.30 16,689 30.10 n.a. n.a . 1.45

China Electronics Corporation Holdings Company Limited 85 59.42 2.64 5,359 27.19 n.a. n.a . 4.98

Hua Hong Semiconductor Limited 1347 33.89 8.03 8,302 9.42 10.26 9.09 0.73

28 中国第一汽车集团公司 China FAW Group Corporation n.a.

28 东风汽车公司 Dongfeng Motor Corporation Dongfeng Motor Group Co. Ltd. 489 66.86 9.43 81,250 5.07 5.32 4.89 0.88

29 中国第一重型机械集团公司 China Fi rs t Heavy Industries (CFHI) n.a .

30 中国机械工业集团有限公司 China National Machinery Industry Corporation (SINOMACH) China Machinery Engineering Corporation 1829 77.99 6.53 26,941 10.37 10.24 8.63 1.66

Firs t Tractor Company Limited 38 44.57 5.55 12,352 26.40 19.59 17.57 0.93

32 哈尔滨电气集团公司 Harbin Electric Corporation Harbin Electric Company Limited 1133 50.93 4.54 6,251 8.84 79.07 n.a. 0.40

32 中国东方电气集团有限公司 China Dongfang Electric Corporation (DEC) Dongfang Electric Corporation Limited 1072 41.34 10.18 46,191 12.76 17.61 13.87 0.84

33 鞍钢集团公司 Anshan Iron and Steel Group Corporation (Ansteel ) Angans Steel Company Limited 347 67.29 4.30 52,187 26.80 43.06 19.03 0.52

34 宝钢集团有限公司 Baosteel Group Corporation n.a.

Sources: Bloomberg, CGIHK Research

Figure 2B: Hong Kong listed companies controlled by central SOEs

Sources: Bloomberg, CGIHK Research

No. Central SOE Listed companies in Hong Kong Ticker Stake (%)

Price

(HK$)

Market cap

(HK$m) PER (x)

2015E

PER (x)

2016E

PER (x) PBR (x)

35 武汉钢铁（集团）公司 Wuhan Iron and Steel (Group) Corporation (WISCO) n.a.

36 中国铝业公司 Alumninum Corporation of China (Chinalco) Aluminum Corporation of China Limited - 2600 38.56 2.75 100,466 n.a. n.a . n.a . 1.05

China Aluminum International Engineering Corporation 2068 85.00 2.34 6,232 6.86 n.a. n.a . 0.74

Chinalco Mining Corporation International 3668 84.63 0.8 9,454 n.a. n.a . n.a . 1.74

37 中国远洋运输（集团）总公司 China Ocean Shipping (Group) Company (COSCO) China COSCO Holdings Co. Ltd. 1919 52.01 4.94 123,611 111.66 65.96 39.98 1.66

COSCO Paci fic Limited 1199 44.04 10.20 30,000 13.15 11.54 10.70 0.82

COSCO International Holdings Limited 517 64.28 4.46 6,837 18.82 19.65 18.06 0.88

38 中国海运（集团）总公司 China Shipping (Group) Company China Shipping Conta iner Lines Co. Ltd. 2866 45.89 3.11 98,115 27.08 35.59 21.48 1.17

China Shipping Development Co. Ltd. 1138 41.27 5.49 44,961 48.38 16.85 13.25 0.70

39 中国航空集团公司 China National Aviation Holding Company (CNAH) Air China Ltd. 753 53.37 8.41 159,764 21.70 9.25 8.96 1.63

40 中国东方航空集团公司 China Eastern Air Holding Company (CEAH) China Eastern Airl ines Corporation Ltd. 670 64.36 6.41 148,534 19.08 9.86 8.96 2.17

41 中国南方航空集团公司 China Southern Air Holding Company (CSAH) China Southern Airl ines Company Limited 1055 53.72 7.89 130,327 35.37 9.71 8.48 1.74

42 中国中化集团公司 Sinochem Group Far East Horizon Ltd. 3360 27.94 7.34 28,996 8.29 7.36 6.11 1.20

Sinofert Holdings Ltd. 297 52.65 1.40 9,834 34.40 15.36 11.33 0.59

Franshion Properties (China) Ltd. 817 63.52 2.48 26,465 4.29 6.87 6.15 0.68

43 中粮集团有限公司 China National Cereals , Oi l s and Foodstuffs Corporation (COFCO) China Agri -Industries Holdings Ltd. 606 58.00 3.40 17,850 n.a. 18.18 11.41 0.64

CPMC Holdings Ltd. 906 60.15 4.30 4,290 10.05 9.02 8.24 0.83

China Goods Limited 506 74.10 3.70 10,350 n.a. 37.76 24.34 1.76

China Mengniu Dairy Company Limited 2319 31.52 33.40 65,507 22.11 18.87 16.00 2.44

Yashi l i International Holdings Ltd. 1230 68.05 2.15 10,203 24.60 26.91 20.26 1.93

Joy Ci ty Property Limited 207 67.03 1.38 19,639 7.18 61.42 15.57 0.48

44 中国五矿集团公司 China Minmetals Corporation MMG Ltd. 1208 73.69 2.00 10,580 13.15 n.a. 6.97 0.81

Minmetals Land Ltd. 230 62.00 0.86 2,876 6.76 4.78 3.31 0.36

45 中国通用技术（集团）控股有限责任公司 China Genera l Technology (Group) Holding Co., Ltd (Genertec) n.a .

46 中国建筑工程总公司 China State Construction Engineering Corporation (CSCEC) China Overseas Land & Investment Ltd. 688 53.18 24.20 238,626 7.15 7.68 6.69 1.48

Far East Global Group Limited 830 74.06 1.25 2,694 46.73 n.a. n.a . 2.33

China State Construction International Holdings Limited 3311 58.22 12.00 48,161 13.52 11.06 9.09 2.43

China Overseas Grand Oceans Group Ltd. 81 37.98 3.11 7,098 5.60 3.71 3.05 0.58

47 中国储备粮管理总公司 China Gra in Reserves Corporation n.a.

48 国家开发投资公司 State Development & Investment Corporation (SDIC) Hua Lien International 969 50.20 0.46 997 n.a. n.a . n.a . 1.57

49 招商局集团有限公司 China Merchants Group China Merchants Land Limited 978 74.35 1.63 7,996 16.85 8.82 5.44 1.39

China Merchants China Direct Investments Ltd. 133 27.59 13.70 2,087 1.81 n.a. n.a . 0.42

China Merchants Holdings (International ) 144 73.94 28.15 72,822 17.60 15.35 13.79 1.07

China International Marine Conta iners (Group) Co., Ltd. 2039 25.44 16.96 62,409 14.61 13.67 11.62 1.63

--CIMC Enric Holdings Limited 3899 70.52 4.85 9,384 7.34 7.63 6.88 1.24

United Photovolta ics Group Limited 686 25.47 0.87 4,125 5.65 10.74 8.70 2.08

50 华润（集团）有限公司 China Resources (Holdings) Company Limited (CR) China Resources Enterprise, Ltd. 291 50.91 24.80 60,342 n.a. 116.43 61.54 1.23

China Resources Land Ltd. 1109 61.23 21.20 146,936 8.40 9.70 8.41 1.28

China Resources Gas Group Limited 1193 63.95 23.90 53,154 20.96 17.93 15.43 3.31

China Resources Cement Holdings Limited 1313 73.35 4.34 28,353 6.74 8.30 7.75 1.00

China Resources Power Holdings Co. Ltd. 836 63.06 20.15 96,709 10.37 7.74 7.65 1.37

51 中国港中旅集团公司 China National Travel Service (HK) Group Corporation (HKCTS) China Travel International Investment Hong Kong Ltd. 308 57.42 2.96 16,609 9.57 14.80 14.23 1.07

52 国家核电技术有限公司 State Nuclear Power Technology Corporation (SNPTC) n.a .

53 中国商用飞机有限责任公司 Commercia l Ai rcraft Corporation of China, Ltd. (COMAC) n.a.

54 中国节能环保集团公司 China Energy Conservation and Environmental Protection Group CECEP COSTIN New Materia ls Group Ltd. 2228 67.72 4.28 3,323 9.99 9.27 7.97 1.66

Bi l l ion Industria l Holdings Ltd. 2299 65.60 4.50 9,838 37.41 n.a. n.a . 1.52

China Ground Source Energy Ltd. 8128 29.27 0.38 1,093 n.a. n.a . n.a . n.a .

55 中国国际工程咨询公司 China International Engineering Consulting Corporation (CIECC) n.a .

56 中国诚通控股集团有限公司 China Chengtong Holdings Group Ltd. China Chengtong Development Group Ltd. 217 61.55 1.04 6,041 n.a. n.a . n.a . 2.71

57 中国中煤能源集团公司 China National Coal Group Corporation (ChinaCoal ) China Coal Energy Co. Ltd. 1898 57.36 3.70 112,997 251.25 n.a. 494.04 0.45

58 中国煤炭科工集团有限公司 China Coal Technology & Engineering Group (CCTEG) n.a.

59 机械科学研究总院 China Academy of Machinery Science & Technology (CAM) n.a.

60 中国中钢集团公司 Sinosteel Corporation n.a.

61 中国冶金科工集团有限公司 China Metal lurgica l Group Corporation (MCC) Metal lurgica l Corporation of China Ltd. 1618 64.18 2.74 152,616 10.82 8.13 6.97 0.89

62 中国钢研科技集团公司 China Iron & Steel Research Insti tute Group (CISRI) n.a .

63 中国化工集团公司 China National Chemica l Corporation (ChemChina) n.a .

64 中国化学工程集团公司 China National Chemica l Engineering Group Corporation (CNCEC) n.a .

65 中国轻工集团公司 China SinoLight Corporation n.a.

66 中国工艺（集团）公司 China National Arts & Crafts (Group) Corporation n.a.

67 中国盐业总公司 China National Sa l t Industry Corporation n.a.

68 中国恒天集团公司 China Hi -Tech Group Corporation (CHTC) CHTC Fong's Industries Company Limited 641 55.80 1.66 1,831 15.53 n.a. n.a . 1.42

Jingwei Texti le Machinery Co. Ltd. 350 33.83 10.78 12,344 11.17 n.a. n.a . 1.09

69 中国中材集团公司 China National Materia ls Group Corporation Ltd. (SINOMA) China National Materia ls Company Limited 1893 41.84 1.90 6,786 10.72 10.64 9.51 0.39

70 中国建筑材料集团有限公司 China National Bui lding Materia ls Group Corporation (CNBM) China National Bui lding Materia l Co. Ltd 3323 44.11 6.42 34,662 4.65 5.91 5.32 0.68

Luoyang Glass Co. Ltd. - Domestic Shares 1108 31.80 5.07 8,212 126.91 n.a. n.a . 41.11

71 中国有色矿业集团有限公司 China Nonferrous Metal Mining (Group) Co., Ltd (CNMC) China Nonferrous Mining Corporation Ltd. 1258 74.52 1.80 6,280 5.52 n.a. n.a . 0.88

661 80.63 0.19 3,364 n.a. n.a . n.a . 0.74

72 北京有色金属研究总院 General Research Insti tute for Nonferrous Metals (GRINM) n.a.

73 北京矿冶研究总院 Bei jing Genera l Research Insti tute of Mining & Metal lurgy (BGRIMM) n.a.

74 中国国际技术智力合作公司 China Internation Intel lectech Corporation (CIIC) n.a .

75 中国建筑科学研究院 China Academy of Bui lding Research (CABR) n.a .

76 中国北方机车车辆工业集团公司 China CNR Corporation Limited CRRC Corporation Limited 1766 27.01 10.28 486,114 21.11 17.02 14.60 2.81

77 中国南车集团公司 CSR Corporation Limited CRRC Corporation Limited 1766 28.91 10.28 486,114 21.11 17.02 14.60 2.81

Zhuzhou CSR Times Electric Co., Ltd. 3898 52.73 55.05 64,710 21.64 19.40 16.80 4.72

78 中国铁路通信信号集团公司 China Rai lway Signal & Communication Co., Ltd (CRSC) China Rai lway Signal 3969 75.00 6.32 12,166 17.46 n.a. n.a . 3.04

79 中国铁路工程总公司 China Rai lway Group Limited China Rai lway Group Limited 390 56.10 7.54 343,497 12.41 11.15 10.00 1.35

80 中国铁道建筑总公司 China Rai lway Construction Corporation (CRCC) China Rai lway Construction Corporation Limited 1186 61.33 11.46 264,339 10.03 9.28 8.52 1.25

81 中国交通建设集团有限公司 China Communications Construction Company Ltd. Greentown China Holdings Ltd. 3900 24.29 7.56 16,346 6.31 4.21 3.95 0.55

China Communications Construction Co. Ltd. 1800 63.83 10.88 265,807 10.11 9.25 8.24 1.21

82 中国普天信息产业集团公司 China Potevio Co., Ltd Chengdu Putian Telecommunications Cable Co. Ltd. 1202 60.00 1.27 508 n.a. n.a . n.a . 0.42

83 电信科学技术研究院 Datang Telecom Technology & Industry Group n.a.

84 中国农业发展集团总公司 China National Agricul tura l Development Group Co., Ltd (CNADC) n.a.

85 中国中纺集团公司 Chinatex Corporation Fountain Set (Holdings) Ltd. 420 36.00 1.01 1,217 13.41 n.a. n.a . 0.38

86 中国外运长航集团有限公司 Sinotrans&CSC Holdins Co., Ltd Sinotrans Ltd. 598 53.44 4.64 21,374 14.30 11.20 9.99 1.28

Sinotrans Shipping Limited. 368 68.10 1.79 7,146 461.80 230.91 38.49 0.43

87 中国中丝集团公司 China Si lk Corporation (CSC) n.a .

88 中国林业集团公司 China Forestry Group Corporation (CFGC) n.a .

89 中国医药集团总公司 China National Pharmaceutica l Group Corporation (Sinopharm) Sinopharm Group Co. Ltd. - Domestic Shares 1099 56.89 30.10 83,290 21.72 18.30 15.18 2.44

China Traditional Chinese Medicine Co. Limited 570 40.10 5.79 24,816 28.45 21.57 15.26 3.69

Figure 2C: Hong Kong listed companies controlled by central SOEs

Sources: Bloomberg, CGIHK Research

No. Central SOE Listed companies in Hong Kong Ticker Stake (%)

Price

(HK$)

Market cap

(HK$m) PER (x)

2015E

PER (x)

2016E

PER (x) PBR (x)

90 中国国旅集团有限公司 CITS Group Corporation n.a.

91 中国保利集团公司 China Poly Group Corporation Poly (Hong Kong) Investments Ltd. 119 47.40 2.91 10,655 11.42 10.66 8.66 0.36

Poly Culture Group Corporation Ltd. 3636 63.69 21.10 5,197 10.12 10.98 9.94 2.41

92 珠海振戎公司 Zhuhai Zhen Rong Company n.a.

93 中国建筑设计研究院 China Construction Technology Consulting Co. Ltd n.a.

94 中国冶金地质总局 China Metal lurgica l Geology Bureau n.a.

95 中国煤炭地质总局 China National Adminis tration of Coal Geology (CNACG) n.a.

96 新兴际华集团有限公司 Xinxing Cathay International Group n.a.

97 中国民航信息集团公司 China TravelSky Holding Company TravelSky Technology Ltd. 696 29.29 9.58 28,033 13.52 14.76 13.46 2.18

98 中国航空油料集团公司 China National Aviation Fuel (CNAF) n.a.

99 中国航空器材集团公司 China Aviation Suppl ies Holding Company (CAS) n.a.

100 中国电力建设集团有限公司 Power Construction Corporation of China (POWERCHINA) n.a.

101 中国能源建设集团有限公司 China Energy Engineering Group Co., Ltd (Energy China) n.a.

102 中国黄金集团公司 China National Gold Group Corporation China Gold International Resources Corp. Ltd. 2099 39.30 10.72 4,250 12.32 n.a. n.a. 0.38

103 中国储备棉管理总公司 China National Cotton Reserves Corporation (CNCRC) n.a.

104 中国广核集团有限公司 China General Nuclear Power Corporation (CGN) CGN Mining Co. Ltd. 1164 64.17 0.58 2,689 527.27 n.a. n.a. 1.79

CGN Meiya Power Holdings Co., Ltd 1811 72.29 2.49 10,684 5.38 11.90 10.04 1.94

CGN Power Co., Ltd. - 1816 64.20 3.65 165,888 17.20 20.89 17.41 2.62

105 中国华录集团有限公司 China Hualu Group Co., Ltd n.a.

106 上海贝尔股份有限公司 Alcatel -Lucent Shanghai Bel l n.a .

107 武汉邮电科学研究院 FiberHome Technologies Group n.a.

108 华侨城集团公司 Overseas Chinese Town Enterprises Co. (OCT) Overseas Chinese Town (As ia) Holdings Limited 3366 66.93 3.70 2,414 6.03 n.a. n.a. 0.64

109 南光（集团）有限公司 Nam Kwong (Group) Company Limited n.a.

110 中国西电集团公司 China XD Group Corporation n.a.

111 中国铁路物资（集团）总公司 China Rai lway Materia ls Commercia l Corporation (CRM) n.a.

112 中国国新控股有限责任公司 China Reform Holdings Corporation Ltd. Yangtze Optica l Fibre and Cable Joint Stock Ltd. Co. 6869 28.12 8.96 5,730 7.55 8.16 7.05 1.63

113 中国铁路总公司 China Rai lway Guangshen Rai lway Co. Ltd 525 37.12 3.97 47,032 34.17 24.28 19.16 0.84

COMPANY / INDUSTRY NEWS

Analyst: Mark Po, CFA (markpo@chinastock.com.hk; Tel: (852) 3698 6318)

TMT INDUSTRY UPDATE – IDEAS ON SOE REFORM

Recent news flow regarding joint “Reform Coordination Unit” formed by China COSCO Group and China Shipping

Group is expected to boost sentiment on the other potential candidates of M&A within centrally owned SOEs. Recall that

there was market rumour suggesting that the telecom sector will have another round of consolidation, with China Tele-

com [728.HK] merging with China Unicom [762.HK] and China Mobile [941.HK] will acquire radio broadcasting network.

China Unicom [762.HK] (75.3% stake) is the only HK-listed controlling subsidiary under Unicom Group, while China

Comservice (CCS) [552.HK] (51.39%) and China Telecom [728.HK] (70.89%) are both HK-listed controlling subsidiar-

ies under China Telecom Group. CCS is the leading telecommunications infrastructure service provider for the above

three mainland operators. It also endeavors to expand into smart cities solutions and city pipelines engineering.

The news flow is also expected to boost sentiment on SOE reform plays. Among those potential candidates, listed sub-

sidiaries under China Electronics Corporation (CEC), one of the centrally-owned SOEs concentrating on TMT sector,

are likely to attract market attention. There are seven HK-listed subsidiaries under CEC including: Irico Group [438.HK]

(71.74% stakes in company’s total shares), Solomon Systech [2878.HK] (28.61%), TPV Technology [903.HK] (37.05%),

Nanjing Panda Electronics [553.HK] (19.25%), China Electronics Corporation Holdings [85.HK] (59.42%), Hua Hong

Semiconductor [1347.HK] (33.89%) and O-Net Communications [877.HK] (32.17%).

Irico Group [438.HK] – Irico has three major business divisions: a.) solar PV glass manufacturing, b.) TFT-LCD glass

substrate manufacturing and c.) materials manufacturing (lithium battery anode materials business). After a series of

restructuring, asset disposal and provisions to improve asset quality in 2014, Irico will concentrate on solar glass manu-

facturing and solar power generation. Disposal of a 13.5% stake in Irico Display Devices [600707.CH] will free up capital

for future expansion and strengthening balance sheet.

Solomon System [2878.HK] – LCD display IC design house, providing IC products and system solutions that enable

display applications for smartphones, smart TVs and other smart devices including consumer electronic products, porta-

ble devices, industrial appliances and green energy applications.

TPV Technology [903.HK] – LCD monitor and LCD TV manufacturing.

Hua Hong Semiconductor [1347.HK] – the world’s 2nd largest pure 8-inches foundry, focused on R&D and manufac-

turing of semiconductors on 200mm wafers for specialty applications.

Nanjing Panda Electronics - H [553.HK] – one of the “Made in China 2015” plays, Nanjing Panda is also promoted by

our A-share team given it has exposure to military sector. It is now expanding business portfolio to the robot manufactur-

ing by announcing to invest in and establish Shanghai Panda Robot Technology Company Limited in Shanghai Zhang-

jiang Hi-Tech Park during Jun 2015. It will be a wholly-owned subsidiary of the group principally engaged in R&D of ro-

bots and equipment of intelligent manufacturing system.

China Electronics Corporation Holdings (CECH) [85.HK] – Specialized in integrated circuits chips design, develop-

ment and sales in China, CECH also operates and manages several electronic information technology industrial parks.

Huada Electronics, CECH’s wholly-owned subsidiary specialized in IC chips design and sale (leading domestic smart

card and SIM card chip player), entered into agreement on June 26th to acquire total of 91% stake in Shanghai Huahong

Integrated Circuit Co., Ltd (strength in IC bank cards technology and public transport cards). CECH served as major

platform of IC chips under CEC group and mainly focused on overseas M&A.

O-Net Communications [877.HK] – One of the top five global leading supplier for Passive Optical Component with a

7.5% market share in 2014.

August 10, 2015

Xinyi Solar [0968.HK]

We joined the plant visit tour arranged by Xinyi Solar (XYS) last week. We visited XYS’s

solar glass production lines in Wuhu and two solar farm projects nearby, and discussed

with the key management team members including Wesley Lee (CEO), Daniel Chu (FC)

and Jason Lau (CFO of Xinyi Glass), about their latest business development. Key takea-

ways:

Achieving economies of scale after the commencement of new production

lines. The two new solar glass production lines (Daily capacity: 900t x2) that put into

operation in 2H14 are highly automatic. Compared with the previous production lines

(500t scale), capacity of 900t is ~15% better in terms of cost effectiveness, due to

better economies of scale. XYS targets to further streamline the production process

in order to lift production yield rate. Currently, for the industry as a whole, the yield

rate of PV raw glass is between 50% and 80%, while that of PV processed glass is

90-95%, according to management’s estimates. We believe XYS is currently achiev-

ing high end of the range.

Double glass design to drive higher volume growth. XYS is actively promoting

the use of double glass design to module manufacturers (Double glass design means

replacing polymer backsheet by semi-tempered glass as back cover). While the use

of double glass design will increase solar farm capex by 8%, it will help enhance

efficiency of ~10% as the use of double glass will offer better reliability and durability

of the module. To XYS, modules with double glass design will drive more sales of

solar glass. Based on our understanding, back cover glass is the float glass pro-

duced by Xinyi Glass [0868 HK, Not rated] but XYS is able to enjoy part of the prof-

it.

Target to gain market share in 2H15. Based on the management tone, we believe

XYS will likely adopt more aggressive pricing strategy on solar glass sales in order to

gain market share from smaller players. Management expects solar glass pricing to

stabilize in 2016.

Solar farm construction on track. Currently, XYS has 754MW of solar farm pro-

jects under construction. Management expects the construction of most projects will

be completed by October and the balance by year end. Currently, XYS is able to

achieve average unit capex is ~RMB6/watt (below industry average).

The development plan of Xinyi Energy. XYS will inject all solar farm projects into

Xinyi Energy in future. XYS targets to introduce investors to Xinyi Energy (yieldco) in

2H15 with an estimated stake of ~40%. The valuation will be based on the market

price of solar farms by the time (which we estimate at RMB8-9/watt). In other words,

XYS is expected to capture disposal gains as XYS’s cost is around RMB6/watt as

mentioned above. The next step will be a spin off for separate listing, but manage-

ment expects it will not happen until mid-2017, due to regulatory requirement.

Maintain HOLD and TP of HK$3.26. We continue to like XYS’s strong management exe-

cution and clear roadmap to unlock values of solar farm projects through yieldco. Howev-

er, we believe the current valuation of 17x 2015E PER has largely priced in most posi-

tives. We see risk of margin contraction in 2H15 due to price competition.

Wayne Fung, CFA —Analyst

(852) 3698-6319

waynefung@chinastock.com.hk

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Solar Power Sector Takeaways from site visit tour

HOLD (Unchanged)

Close: HK$3.40 (Aug 7, 2015)

Target Price: HK$3.26 (-4%)

Share Price Performance

Market Cap US$2,886m

Shares Outstanding 6,580m

Auditor PWC

Free Float 33%

52W range HK$1.97-3.97

3M average daily T/O US$11.9m

Major Shareholding Management

(32.97%)

Xinyi Glass (27.22%)

August 10, 2015

Figure 1: XYS solar farm project in Sanshan district in Wuhu, Anhui (100MW)

Sources: CGIHK Research

Figure 2: Solar greenhouse demonstrative project

Sources: CGIHK Research

Figure 3: XYS solar farm project in Fanchang County (Phase one: 40MW, under construction)

Sources: CGIHK Research

Figure 4: XYS self owned dock (for the transportation of raw materials

and end products

Sources: CGIHK Research

Figure 5: XYS PER band

Sources: Bloomberg, CGIHK Research estimates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

HKD

22x

19x

16x

13x

10x

Downside risks: (1) Cyclical nature of solar glass segment; (2) policy risk; (3) unex-

pected energy cost hike; (4) rising gearing ratio.

Upside risk: (1) strong rebound of solar glass pricing; (2) Higher than expected valua-

tion of solar farms disposal.

Figure 6: Earnings projection

Sources: Company, CGIHK Research estimates

(HK$ m) 2012 2013 2014 2015E 2016E (HK$ m) 2012 2013 2014 2015E 2016E

Income statement Cash flow statement

Revenue 1,533 1,968 2,410 4,517 5,121 Operating activities

Solar glass 1,533 1,968 2,379 3,088 3,394 Pretax profit 144 370 572 1,534 1,854

Solar power generation 0 0 31 495 855 D&A 110 100 94 258 578

Solar EPC 0 0 0 934 872 Share of associates/JCE/JV 0 0 0 (46) (140)

Cost of sales (1,269) (1,375) (1,649) (2,847) (3,130) Finance costs 0 0 7 61 128

Solar glass (1,269) (1,375) (1,644) (1,976) (2,146) Interest income (1) (2) (2) (4) (3)

Solar power generation 0 0 (4) (173) (299) Change in working capital (110) 224 117 (52) (37)

Solar EPC 0 0 0 (698) (685) Income tax paid (61) (44) (79) (212) (260)

Gross profit 264 592 761 1,670 1,990 Others 4 5 (1) 0 0

Solar glass 264 592 735 1,112 1,248 Operating cash flow 87 654 709 1,538 2,121

Solar power generation 0 0 27 322 556

Solar EPC 0 0 0 237 187 Investing activities

Other income 40 63 87 103 103 Capex on PP&E (348) (240) (2,322) (4,000) (4,000)

Other gain/(loss), net 2 0 (13) 187 187 Purchase of land use right 0 0 0 0 0

S&D expenses (72) (124) (98) (167) (174) Investment in associates/JCE/JV 0 0 0 (450) (450)

Administrative expenses (93) (162) (160) (248) (266) Dividend received from associates/JCE/JV 0 0 0 37 112

EBIT 143 369 577 1,544 1,840 Interest received 1 2 2 4 3

D&A 110 100 94 258 578 Others 38 113 (9) 0 0

EBITDA 253 468 671 1,803 2,418 Investing cash flow (309) (125) (2,328) (4,409) (4,336)

Share of associates/JCE/JV 0 0 0 46 140

Net finance income/(expenses) 1 2 (5) (56) (125) Financing activities

Pretax profit 144 370 572 1,534 1,854 Proceed from equity 0 0 778 1,136 0

Income tax (24) (67) (79) (212) (260) Proceed from/(repayment of) borrowings 0 0 1,300 1,565 2,800

After tax profit 120 304 493 1,322 1,594 Dividends paid 0 0 (200) (146) (331)

MI 0 0 0 0 0 Finance costs 0 0 (6) (61) (128)

Net profit 120 304 493 1,322 1,594 Advance from related parties 242 (292) 0 0 0

Core net profit 120 304 493 1,322 1,594 Others 2 (13) 0 0 0

EPS (HK$) 0.03 0.07 0.08 0.20 0.24 Financing cash flow 244 (305) 1,872 2,493 2,342

Core EPS (HK$) 0.03 0.07 0.08 0.20 0.24

Net change in cash 22 224 252 (377) 127

(HK$ m) 2012 2013 2014 2015E 2016E 2012 2013 2014 2015E 2016E

Balance sheet Valuation

Non-current assets PER (recurring earnings) (x) - 46.4 40.4 16.7 14.0

PP&E 1,655 1,368 3,685 7,431 10,856 Dividend yield - 0.7% 1.2% 1.5% 1.8%

Land use right 188 189 180 176 173 PBR (x) - 8.4 6.3 4.0 3.3

Investment in associate/JV 0 0 0 459 937 EV/EBITDA (x) - 45.7 31.9 11.9 8.9

Others 22 55 296 296 296 Growth rate

Total non-current assets 1,865 1,612 4,162 8,363 12,263 Revenue 24% 28% 22% 87% 13%

EBIT -63% 158% 56% 168% 19%

Current assets EBITDA -42% 85% 43% 169% 34%

Inventories 217 91 299 403 403 Recurring net profit -63% 153% 62% 168% 21%

Trade and other receivables 521 499 733 1,248 997 Recurring EPS -63% 114% 15% 142% 19%

Cash 54 279 543 166 293 Operating ratios

Others 138 206 28 28 28 Gross margin 17% 30% 32% 37% 39%

Total current assets 931 1,075 1,602 1,844 1,721 EBIT margin 9% 19% 24% 34% 36%

EBITDA margin 16% 24% 28% 40% 47%

Total assets 2,796 2,687 5,764 10,206 13,984 Recurring net margin 8% 15% 20% 29% 31%

Asset turnover 0.54 0.72 0.57 0.57 0.42

Current liabilities Adjusted ROE 12% 18% 18% 30% 26%

Trade and other payables 190 350 1,121 1,687 1,400 Adjusted ROA 4% 11% 12% 17% 13%

Short term bank borrowings 0 0 143 575 1,275 Interest coverage n/a n/a 132.1 31.9 19.3

Others 1,512 17 28 28 28 Net debt/equity 137% Net cash 23% 48% 78%

Total current liabilities 1,701 367 1,291 2,290 2,703 Current ratio 0.55 2.93 1.24 0.81 0.64

Quick ratio 0.52 2.17 0.82 0.73 0.53

Non Current Liabilities Days inventories 91 41 43 45 47

Deferred tax liabilities 4 10 10 10 10 Days receivables 113 95 93 80 80

Long term bank borrowings 0 0 1,157 2,289 4,389 Days payables 82 72 163 180 180

Others 25 0 0 0 0

Total non-current Liabilities 29 10 1,167 2,299 4,399

Equity

Share capital 921 1,908 2,460 2,460 2,460

Retained earnings 144 403 846 3,158 4,422

1,065 2,310 3,306 5,618 6,882

MI 0 0 0 0 0

Total equity 1,065 2,310 3,306 5,618 6,882

Total equity and liabilities 2,796 2,687 5,764 10,206 13,984

BVPS (HK$) - 0.41 0.54 0.85 1.05

China Resources Cement [1313.HK]

BUY

Close: HK$4.34 (August 7, 2015)

Target Price: HK$5.11 (18%)

Price Performance

Market Cap US$3,658m

Shares Outstanding 6,532.9m

Auditor Deloitte

Free Float 26.6%

52W range HK$3.63-5.83

3M average daily T/O US$5.06m

Major Shareholder China Resources

Holdings (73.0%)

Sources: Company, Bloomberg

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Nevin Ning—Analyst

(852) 3698-6321

nevinning@chinastock.com.hk

China Cement Sector

Sources: Company, CGIHK Research

CR Cement’s 1H15 pre-tax profit reported a 50% decline year-on-year (YoY) to

HK$1.39bn. Although it was lower than our forecast by about 10%, core operations were

largely in line with our expectation as gross profit was only below our projection by 3.7%.

Major discrepancy came from a HK$144m loss from associates due to weak cement

price in Inner Mongolia. Overall, we believe the lacklustre 1H15 results are well expected

and investors are likely to focus more on the potential price rebound in late Q3, especially

after the authorities’ additional measures to boost investment. We maintain a target price

of HK$5.11, based on 1.1x 2015E PBR (-1 standard deviation from six-year average).

Maintain BUY. We will review our financial projections after the analyst briefing today.

Investment Highlights

1H15 pretax profit fell 50% YoY due to 16% decline in ASP. CR cement’s

1H15 total revenue dropped by 11.6% YoY to HK$13.4bn, blended ASP

(cement and clinker) declined by 16.4% YoY to HK$291/tonne, while 1H15

sales volume mildly grew 8% YoY to 37.5m tonnes. 1H15 gross profit per tonne

was HK$71.2, implying a YoY decrease of 40.4%. Reported net profit only fell

25.6% YoY to HK$1.53bn, thanks to a reversal of overprovided tax expenses

(HK$499m) in the past.

Tight cost control amid challenging environment. 1H15 results were

unexciting but we were pleased to see a stringent cost control of the compa-

ny. Cost per tonne (cement and clinker) dropped 3.8% YoY to HK$219.9. Fi-

nance cost fell 18.8% YoY while operating expenses rose merely 1.1%.

Trough valuation with a focus on potential cement price rebound. Given

the weak cement price in 1H15 is well understood by investors, the unexciting

1H15 results should not be surprising. As the company’s 2015E PBR of 0.93x is

close to 6-year low, we believe investors will focus on potential rebound in ce-

ment prices in Q3, including the price hike in Guangdong last week.

Analyst briefing today. 10:15am HK Time (Monday). 50/F, China Re-

sources Building, 26 Harbour Road, Wanchai, Hong Kong. We will revise

our earnings forecasts after the briefing.

Weak 1H Results As Expected; Peak Season Rebound to be The Key

August 10, 2015

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

Turnover (HK$m) 25,345 29,341 32,669 32,009 33,852

Recurring net profit (HK$m) 2,329 3,265 4,297 3,203 3,315

Net margin (%) 9 11 13 10 10

Recurring EPS (HK$) 0.36 0.50 0.66 0.49 0.51

% Change (39) 40 31 (25) 4

PER (x) 12.1 8.7 6.6 8.9 8.6

PBR (x) 1.3 1.1 1.0 0.9 0.9

EV/EBITDA 8.8 7.0 5.6 6.8 6.4

0

100

200

300

400

0

2

4

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Aug14 Oct14 Dec14 Feb15 Apr15 Jun15 Aug15

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Figure 3: Cement Prices in Guangdong (RMB/tonne)

Sources: Digital Cement, CGIHK Research

Figure 4: Cement Prices in Guangxi (RMB/tonne)

Sources: Digital Cement, CGIHK Research

Figure 1: 1H15 results highlights

Y/E Dec (HK$ '000)

1H14 1H15

YoY

change

(%)

Turnover 15,161,022 13,404,208 -11.6

Gross Profit 4,831,250 3,353,549 -30.6

Margin 31.9% 25.0%

Operating expenses (1,722,174) (1,741,438) 1.1

Operating profit 3,109,076 1,612,111 -48.1

Other income and gains 151,309 139,665 -7.7

EBIT 3,260,385 1,751,776 -46.3

Finance costs (349,528) (283,959) -18.8

Finance income 17,704 37,356 111.0

Share of profits of associates (40,906) (144,037) n.a.

Share of profits of JCEs 46,061 17,486 -62.0

Exceptional items (145,575) 8,920 n.a.

Profit before tax 2,788,141 1,387,542 -50.2

Taxation (753,725) 102,311 -113.6

Minority interest 21,551 40,370 n.a.

Net Profit 2,055,967 1,530,223 -25.6

Adjusted net profit 2,201,542 1,521,303 -30.9

EPS (basic) HK$ 0.31 0.23 -25.6

EPS (recurring) HK$ 0.34 0.23 -30.9

DPS (HK$) 0.070 0.06 -14.3

Total cement and clinker vol ('000 tonnes) 34,704 37,470 8.0

ASP (HK$) 348 291 -16.4

GP per tonne (HK$) 119.5 71.2 -40.4

COGS per tonne (HK$) 228.6 219.9 -3.8

Figure 2: Q2 2015 results highlights Y/E Dec (HK$ '000) Q2 2014 Q2 2015 YoY Change (%)

Turnover 8,363,895 7,201,782 -13.9

Cost of sales (5,694,659) (5,454,814) -4.2

Gross Profit 2,669,236 1,746,968 -34.6

Margin 31.9% 24.3%

Operating expenses (941,181) (930,384) -1.1

Selling and distribution costs (475,998) (445,852) -6.3

Administrative expenses (465,183) (484,532) 4.2

Operating profit 1,728,055 816,584 -52.7

Other income and gains 88,329 52,905 -40.1

EBIT 1,816,384 869,489 -52.1

Finance costs (155,431) (128,773) -17.2

Share of profits of associates 30,346 (38,604) n.a.

Share of profits of JCEs 30,355 717 -97.6

Exceptional items (12,975) 66,912 n.a.

Profit before tax 1,726,383 807,097 -53.2

Taxation (441,861) 49,984 n.a.

Minority interest 3,757 12,841 241.8

Net Profit 1,288,279 869,922 -32.5

Adjusted net profit 1,301,254 803,010 -38.3

Total cement + clinker vol ('000 tonnes) 19,464 21,080 8.3

Total cement + clinker revenue (HK$'000) 6,550,853 5,830,555 -11.0

ASP (HK$) 337 277 -17.8

Blended gross profit per tonne (HK$) 116 64 -44.9

Concrete vol. ('000 m3) 4,357 3,171 -27.2

Concrete ASP (HK$) 416 432 3.9

Concrete gross profit per m3 (HK$) 96 126 31.9

Guangdong

Cement vol. ('000 tonnes) 7,254 7,724 6.5

ASP (HK$) 372 302 -19.0

Revenue 2,700,024 2,329,257 -13.7

Guangxi

Cement vol. ('000 tonnes) 5,022 5,714 13.8

ASP (HK$) 312 284 -8.9

Revenue 1,565,074 1,621,602 3.6

Fujian

Cement vol. ('000 tonnes) 2,107 1,964 -6.8

ASP (HK$) 329 263 -20.0

Revenue 692,285 516,032 -25.5

Hainan

Cement vol. ('000 tonnes) 1,417 1,364 -3.7

ASP (HK$) 444 310 -30.2

Revenue 629,252 423,056 -32.8

Shanxi

Cement vol. ('000 tonnes) 1,328 1,147 -13.6

ASP (HK$) 220 179 -18.7

Revenue 291,759 204,746 -29.8

Yunnan

Cement vol. ('000 tonnes) 916 1,351 47.5

ASP (HK$) 311 263 -15.6

Revenue 285,257 355,191 24.5

Guizhou

Cement vol. ('000 tonnes) 501

ASP (HK$) 202

Revenue 101,174

Sources: Company, CGIHK Research

Figure 5: CR Cement Rolling Forward PER Range

Sources: Bloomberg, CGIHK Research

Figure 6: CR Cement Rolling Forward PBR Range

Sources: Bloomberg, CGIHK Research

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China Cement Weekly

August 10, 2015

Nevin Ning—Analyst

(852) 3698-6321

nevinning@chinastock.com.hk

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Cement prices up 0.39% last week. Average cement price (nationwide) was up 0.39%

week-on-week (WoW) to RMB253.83/tonne last week. Cement prices in part of Guangdong,

Hunan, and Guizhou were up RMB10~30/tonne. Regions of cement price recovery

continued to expand as more players chose to follow the trend upon price stabilization.

Price recovery is expected in Yangtze-River Delta, central and southern Zhejiang province

in following weeks. Average inventory level (nation-wide) declined to 77.96% last week.

Coal prices down slightly last week. Comprehensive average price index for Bohai-Rim

Steam Coal (Q5500K) was down RMB4/tonne last week to RMB412/tonne. The index was

14.5% lower on year-on-year (YoY) basis.

Cement price hike expanded into Pearl-Diver Delta region last week. Pearl River Delta

region, including Guangdong province, appeared to lag relatively behind in this early round

of cement price recovery as leading players still kept cutting prices before last week,

according to Digital Cement. However, as cement price recovery continued to expand in

various regions, Pearl-River Delta region began to jump on the bandwagon, mainly due to

better weather conditions and recent improvement in downstream demand that lifted daily

shipment of major cement companies there to nearly 90% of normal level. Meanwhile, as

the region suffered a lot from sustained price cut in 1H15 which directly affected profitability

of regional players, consensus started to reach among major players in attempt to lift

cement price through coordination and self-discipline. It is expected that this early round of

price recovery will continue if improvement in downstream demand continues to absorb

piled-up inventory of regional players. According to Digital Cement, inventory levels there

varied from 50% to 70% for local players, which provided sufficient room for further upside

in cement price recovery as long as daily shipment would remain at currently level. Major

players with meaningful market share in the region, including CR Cement [1313.HK; BUY],

Anhui Conch [914.HK; BUY] and TCCI [1136.HK; NR], are expected to benefit from

continued price recovery in Pearl-Diver Delta region.

Cement stocks under our coverage up 10.6% last week. News flow regarding

specialized construction bonds issuance triggered the momentum. Best performer was

BBMG [2009.HK; BUY] , up 14.1%. CR Cement [914.HK; BUY] was the weakest one, also

up 7.4%.

China Cement Sector

Sources: Company, Bloomberg, CGIHK Research estimates

Valuation Table

Net debt/equity (%)

Company Ticker Rating Price (HK$) Market cap (US$m) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2015E

Anhui Conch 914 HK Equity BUY 26.85 17,981 10.2 13.8 12.9 1.7 1.6 1.5 6.4 7.6 6.9 6

CNBM 3323 HK Equity BUY 6.42 4,444 5.0 5.2 4.6 0.7 0.6 0.5 7.2 7.7 7.4 224

BBMG 2009 HK Equity BUY 6.79 7,059 13.2 11.0 8.7 0.8 0.8 0.7 8.1 7.8 6.7 41

CR Cement 1313 HK Equity BUY 4.34 3,635 6.6 8.9 8.6 1.0 0.9 0.9 5.6 6.8 6.4 53

Shanshui Cement 691 HK Equity SELL 6.29 2,725 45.9 42.2 34.7 1.6 1.5 1.5 10.6 10.3 9.4 134

Simple average 16.2 16.2 13.9 1.2 1.1 1.0 7.6 8.1 7.4 92

Weighted average 12.5 13.9 12.3 1.3 1.2 1.1 7.1 7.8 7.1 54

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

2014 -2016E PEG(x)

Company Ticker 2015E 2016E CAGR (%) 2015E 2014 2015E 2016E 2014 2015E 2016E

Anhui Conch 914 HK Equity (24.8) 7.0 (10.3) (1.3) 18.0 12.0 11.8 3.1 2.4 2.3

CNBM 3323 HK Equity (5.7) 12.6 3.0 1.7 14.4 12.1 12.3 3.3 2.9 3.3

CR Cement 1313 HK Equity (25.5) 3.5 (12.2) (0.7) 16.2 10.9 10.5 3.9 2.8 2.9

BBMG 2009 HK Equity 21.4 26.4 23.8 0.5 6.8 7.3 8.6 1.2 1.1 1.4

Shanshui Cement 691 HK Equity 10.4 21.8 15.9 2.6 3.7 3.7 4.4 - 0.5 0.6

Simple average (4.8) 14.3 4.1 0.5 11.8 9.2 9.5 2.3 1.9 2.1

Weighted average (10.7) 12.3 (0.1) (0.2) 14.1 10.3 10.5 2.6 2.1 2.2

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

Cement Price Rebound Expanded into Pearl River Delta Region;

Sustainability of Price Hike to be The Key

1-Year Relative Performance

Sources: Capital IQ, CGIHK Research

Peer Comparison

Sources: Bloomberg, CGIHK Research

Market cap

Company Ticker Rating Price (LC) (US$m) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Anhui Conch 914 HK Equity BUY 26.85 17,981 10.2 13.8 12.9 1.73 1.59 1.46 6.4 7.6 6.9

CNBM 3323 HK Equity BUY 6.42 4,444 5.0 5.2 4.6 0.67 0.61 0.55 7.2 7.7 7.4

BBMG 2009 HK Equity BUY 6.79 7,059 13.2 11.0 8.7 0.82 0.78 0.72 8.1 7.8 6.7

CR Cement 1313 HK Equity BUY 4.34 3,635 6.6 8.9 8.6 1.01 0.93 0.86 5.6 6.8 6.4

Shanshui Cement 691 HK Equity SELL 6.29 2,725 45.9 42.2 34.7 1.58 1.52 1.47 10.6 10.3 9.4

TCC International 1136 HK Equity NR 1.97 1,249 3.5 5.1 5.1 0.38 0.37 0.34 4.5 5.7 5.8

China National Materials 1893 HK Equity NR 1.9 870 10.7 10.6 9.5 0.39 0.38 0.36 6.2 6.7 6.4

Asia Cement 743 HK Equity NR 3.21 645 9.7 6.6 5.0 0.42 0.41 0.39 4.8 8.4 6.2

West China Cement 2233 HK Equity NR 1.46 1,015 146.2 16.5 9.4 1.06 0.94 0.90 8.5 8.0 6.2

Tianrui Cement 1252 HK Equity NR 1.95 600 6.5 n.a. n.a. 0.50 n.a. n.a. 6.7 n.a. n.a.

Simple average 25.7 13.3 10.9 0.86 0.84 0.78 6.9 7.7 6.8

Weighted average 15.4 13.3 11.6 1.25 1.15 1.07 7.0 7.6 6.9

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

Figure 1: Regional Cement Price

Sources: Digital Cement, CGIHK Research

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :