Yum ha 飲茶...1 Yum ha 飲茶 March 21, 2016 Source: Bloomberg INDICES Closing DoD% Hang Seng...

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Yum Cha 飲茶 March 21, 2016

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 20,671.6 0.8

HSCEI 8,883.0 1,2

Shanghai COMP 2,955.2 1.7

Shenzhen COMP 1,837.2 3.7

Gold 1,255.3 (0.2)

BDIY 395.0 0.8

Crude Oil, WTI(US$/BBL) 39.4 (1.9)

Crude Oil, BRENT(US$/BBL) 41.2 (0.1)

HIBOR, 3-M 0.6 (0.1)

SHIBOR, 3-M 2.8 0.1

RMB/USD 6.5 (0.1)

RESEARCH NOTES

WASION GROUP [3393.HK; HK$4.40; BUY] - Wasion Group (Wasion) reported 2015 results in line with our expectation but better than feared. The Company’s balance sheet was strength-

ened with an operating cash inflow of over RMB700m in 2015. We maintain the view that Wa-

sion will resume top & bottom line growth in 2016 even if it is back-end loaded. Wasion’s share

price has fallen 46.5% over the past 3 months, which has unperformed the overall market, and

sentiment has reflected key concerns, such as a slow down in sales, a decline in margin

and the impact of foreign exchange movement. We believe that valuation of Wasion has

reached a more reasonable level and an improvement in sentiment will drive the Wasion share

price upward. Maintain BUY with a new target price of HK$5.95 (10x 2016E PER).

CHSTE [0658.HK; HK$5.76; HOLD] - CHSTE’s reported net profit increased 396% year-on-

year (YoY) to RMB1,033m, which is in line with the company’s earlier pre-announcement. Ad-

justing for one-off items, core net profit came in at RMB1,067m, up 141% YoY, which is within

our expectation. Revenue increased 21% YoY to RMB9.8bn, while the gross margin significant-

ly expanded 7.7ppt YoY to 32.5%. CHSTE proposed a dividend payment for the first time since

2010, with DPS of HK$0.23, implying ~31% payout ratio and 4% dividend yield based on the

latest share price. We will revisit our earnings forecast after getting more operating figures from

the analyst meeting today. We maintain our HOLD rating for now as we are concerned about

the slowdown in gearboxes sales in China starting this year.

CHINA LESSO [2128.HK; HK$5.13; BUY] - China Lesso reported recurring net profit of RMB915m, down 5% year-on-year (YoY) and lower than our forecast by 10.5%. The gross

margin in 2H15 was 24.7%, 1.5ppt below our projection, probably due to higher sales rebates to

support volume growth. We have lowered our 2016E recurring EPS by 10.5% after trimming our

gross margin forecast by 1.9ppt. We’ve lowered our target price from HK$6.10 to HK$5.60

based on 8.4x 2016E PER (6-year average, methodology unchanged). Downgrade from BUY to

HOLD with upside of 9.2%. Following a rebound of 35% in the past month, we expect the stock

to face profit-taking pressure as a result of unexciting 2H15 results.

GF SECURITIES [1776.HK; HK$16.72; BUY] - GF Securities’ (GFS) Q4 2015 net profit rose 42% year-on-year (YoY) to RMB2.8bn, which is in line with the company’s pre-announcement.

Overall performance stabilized compared with Q3, with net profit growing 42% quarter-on-

quarter (QoQ). Given that its operating results at the parent company level were better than

CITIC Securities [6030.HK] and Haitong Securities [6837.HK] in January and February 2016,

we reiterate GFS as our top pick in the sector. We maintain our BUY rating with a target price of

HK$20.30 based on the Gordon Growth Model (1.71x 2016E PBR; beta at 1.45, cost of equity

at 10.4%, medium-term ROE at 12.8%).

CRCB [3618.HK; HK$4.05; BUY] - Chongqing Rural Commercial Bank (CRCB) [3618.HK] reported a net profit of RMB7,223.3m for 2015, up 5.78% year-on year (YoY), in line with mar-

ket consensus and our expectation. Overall, the bank’s operations were very conservative.

CRCB did not increase its LDR to make higher interest margins, considering its LDR was just

59.11% at end-2014, much lower than sector average, and dropped to 57.12% at end-2015.

The NPL ratio increased to 0.98%, also much lower than the sector average, and the loan loss

provision rate increased to 4.11%, which provided a comfortable coverage ratio at 420.04%.

Considering investors’ concerns about the asset quality of banks, we conservatively switched

our valuation method from PBR to DDM (dividend discount model). Our target price of HK$5.17

implies 5.2% dividend yield and 0.8x 2016E PER. Maintain BUY.

CHINA CEMENT WEEKLY - Average cement price (nationwide) rose 0.2% week-on-week to RMB239.42/tonne last week. Cement prices in parts of Zhejiang, Shaanxi and Anhui were up

RMB10-20/tonne, while prices in Guangdong and Yunnan continued to declined. Market de-

mand continued to recover in late March, with average daily shipment volume returning to 70%-

80% in eastern China and south central China, mainly owing to increasing demand from infra-

structure and property development. However, infrastructure and rural development demand in

north China was still weak. Average shipment volume was only around 20%-60%. Average

inventory level (nation-wide) declined to 70.06%.

DATA RELEASES DUE THIS WEEK

03/21-25 MNI Consumer Sentiment

03/21-25 Bloomberg Mar. China Economic

Survey

03/21-25 China January Property Prices

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Wasion Group [3393.HK]

Wasion Group (Wasion) reported 2015 results in line with our expectations and better than feared.

The Company’s balance sheet was strengthened with an operating cash inflow of over RMB700m

in 2015. Its strong financial position should help the Company navigate through the challenging

macro environment. We maintain the view that Wasion will resume top and bottom line growth in

2016 even if it is back-end loaded. Its businesses such as brushless motors will make a more

meaningful contribution starting in 2016, and The “Internet of Energy” and power reform will create

growth potential for Wasion in the medium to long term. We cut our net profit forecasts by 1.7%

and 2.2% in 2016 and 2017, respectively, after post-results adjustments. Wasion’s share price has

fallen 46.5% over the past 3 months, underperforming the overall market, and sentiment reflects

key concerns, such as a slowdown in sales, a decline in margins and the impact of foreign ex-

change movements. We believe that the valuation of Wasion has reached a more reasonable level

and that improved sentiment will drive the Wasion share price upward. Maintain BUY with a new

target price of HK$5.95 (10x 2016E PER). The target price cut is due to a slight earnings cut .

Investment Highlights

2015 results highlights. Wasion’s 2015 net profit dropped 12% YoY to RMB424m, in line

with market expectations but higher than the pre-announced guidance of RMB400m. Wa-

sion’s turnover rose 6% YoY to RMB2,969m in 2015, driven mainly by a 37% YoY increase in

sales of ADO products. The Company’s gross margin was down 4ppt YoY to 30% in 2015,

partly due to the increasing contribution from other meter products and exports sales which

lower margins. To control credit risk, Wasion also cancelled or postponed projects with long

collection periods even if they offered high gross margins. Wasion’s accounts receivable

lengthened to 355 days in 2H 2015 owing to a change in payment methods by State Grid and

a drop in turnover. However, Wasion controlled its working capital well and reported operating

cash inflow of over RMB700m in 2015 despite slower receivables.

Resume growth in 2016. Wasion’s top and bottom lines are likely to resume growth in 2016,

supported by its order book of RMB2.4bn. The impact of shipment delays to the State Grid

will fade away in 2016. There will be no impact from foreign exchange losses or lower other

income in 2016. The Company’s gross margin will also stabilize in 2016. Management also

highlighted the fact that new businesses, such as brushless motors will make a top line contri-

bution in 2016. Management also see good potential in the water meter products, because of

the government’s policy of upgrading the country’s water supply infrastructure.

Long-term growth drivers are still there. We also maintain the view that development of

the Internet of Energy will create demand for high-end power distribution and transmission

equipment, both hardware and software. Power reform is another key development in the

State Grid and China Southern Grid, which will create upgrading demand for power distribu-

tion equipment and will be positive for industry players such as Wasion.

Downward earnings adjustment. We revised down our net profit forecasts for 2016 and

2017 by 1.7% and 2.2%, respectively due to post results adjustment. Mark Po, CFA — Senior Analyst

(852) 3698-6318

[email protected]

Wong Chi Man, CFA — Head of Research

(852) 3698-6317

[email protected]

Industrial 2015 results better than feared. Improvement in sentiment to drive share price up

BUY

Close: HK$4.40 (Mar 18, 2016)

TP: HK$5.95 (+35.2%)

Share Price Performance

Market Cap US$579m

Shares Outstanding 1,118m

Auditor Deloitte

Free Float 48.5%

52W range $3.14-$12.42

3M average daily T/O US$5.1m

Major Shareholding Chairman, Mr Ji Wei

(50.7%)

March 21, 2016

Source: Bloomberg, CGIS Research

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Turnover (RHS) Price (LHS)

Key Financials

(in RMBm)2013 2014 2015 2016E 2017E

Revenue 2,412.3 2,811.9 2,969.0 3,412.1 3,924.1

Change (yoy %) (1.6) 16.6 5.6 14.9 15.0

Gross Profit 846.8 962.7 896.2 1,042.6 1,215.4

Gross Margin % 35.1 34.2 30.2 30.6 31.0

Net Profit 401.1 482.4 423.5 517.6 582.6

Net Margin % 16.6 17.2 14.3 15.2 14.8

EPS (Basic) 0.43 0.51 0.42 0.50 0.57

Change (yoy %) 23.9 18.5 (17.0) 19.0 12.5

DPS $0.166 $0.194 $0.201 $0.241 $0.289

ROE (%) 14.7 15.8 11.5 12.5 13.7

Dividend Yield (%) 4.45 5.20 5.39 6.47 7.76

PER (x) 8.7 7.3 8.8 7.4 6.6

PBR (x) 1.2 1.1 0.9 0.9 0.9

FCF Yield (%) 9.81% -5.42% 13.28% 12.52% 15.80%

Capex (m) (80.0) (222.4) (425.0) (212.5) (207.4)

Free cash flow per share 0.2 (0.1) 0.3 0.3 0.4

Net Gearing (%) 2.6 13.0 Net cash Net cash 1.3

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Figure 1: Results highlights

Source: Company, CGIS Research

Figure 2: Key assumptions for Wasion


2015 Results Highlights (RMB m) 1H 2014 2H 2014 1H 2015 2H 2015

Revenue 1,367 1,445 1,603 1,366

Cost of sales and services (911) (938) (1,106) (967)

Gross profit 456 506 497 399

Other income and other gains and losses 46 51 61 66

Distribution and selling expenses (77) (90) (68) (69)

Administrative expenses (181) (138) (187) (201)

Finance costs (13) (16) (11) (15)

JV & Associates (1) (3) (2) (1)

Profit before tax 231 311 291 179

Income tax expense (25) (30) (38) (9)

MI (3) (1) 2 (0)

Profit for the period 206 280 252 170

Owners of the Company 203 280 254 170

Gross margin (%) 33.4 35.0 31.0 29.2

Operating margin (%) 17.8 22.6 18.8 14.2

Net Margin (%) 14.8 19.4 15.8 12.4

2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Turnover (RMBm)

Single-phase electronic power meters 265.4 284.0 471.2 762.1 1,239.2 1,067.2 1,152.6 1,043.8 1,093.5 1,113.7

Three-phase electronic power meters 460.7 471.5 486.4 795.2 697.9 705.8 678.7 712.6 769.6 808.1

Sale of data collection terminals 275.1 249.7 260.2 338.0 409.2 518.2 590.5 649.5 746.9 859.0

Others 58.3 73.1 113.0 73.4 106.0 121.1 79.8 136.6 204.8 307.3

ADO 0 0 0 0 0 0 310.4 426.6 597.3 836.2

YoY Change (%)

Single-phase electronic power meters 7.0 65.9 61.7 62.6 (13.9) 8.0 (9.4) 4.8 1.9

Three-phase electronic power meters 2.3 3.2 63.5 (12.2) 1.1 (3.8) 5.0 8.0 5.0

Sale of data collection terminals (9.2) 4.2 29.9 21.1 26.6 13.9 10.0 15.0 15.0

Others 25.3 54.6 (35.0) 44.3 14.3 (34.1) 71.0 50.0 50.0

ADO n.a. n.a. n.a. n.a. n.a. n.a. 37.5 40.0 40.0

Gross margin (%) 47.0 45.0 32.1 30.3 32.8 35.1 34.2 30.2 30.6 31.0

Single-phase electronic power meters 35.0 35.0 18.9 18.0 21.5 22.5 22.1 15.7 15.7 15.7

Three-phase electronic power meters 53.5 53.5 36.5 35.0 45.5 47.5 47.5 40.5 40.5 40.5

Sale of data collection terminals 51.0 51.0 45.0 44.0 44.5 43.9 43.9 40.9 40.9 40.9

Others 39.0 39.0 39.0 42.0 36.3 36.3 36.3 33.3 33.3 33.3

ADO 0 0 0 0 0 0 31.5 31.0 31.0 31.0

Net margin (%) 25.0 24.3 14.4 12.6 13.2 16.6 17.2 14.3 15.2 14.8

Cost (RMBm)

S,G&A (185.5) (182.2) (205.3) (291.4) (355.7) (356.1) (373.5) (381.5) (455.5) (521.0)

Financial Expenses (19.6) (14.3) (27.9) (53.8) (54.3) (32.7) (28.9) (25.4) (36.5) (45.4)

YoY Change (%)

S,G&A (1.8) 12.7 41.9 22.1 0.1 4.9 2.2 19.4 14.4

Financial Expenses (27.2) 95.5 92.8 0.9 (39.7) (11.8) (12.1) 43.7 24.5

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Figure 3: Earnings projection

Sources: Company, CGIS Research

Income Statement (RMBm) FY2013 FY2014 FY2015 FY2016F FY2017F Cash Flow Statement (RMBm) FY2013 FY2014 FY2015 FY2016F FY2017F

Revenue 2,412 2,812 2,969 3,412 3,924 Net Income 475 566 492 590 677

Growth yoy% (1.6%) 16.6% 5.6% 14.9% 15.0% Depreciation & Amort. 42 44 72 86 100

Gross Profit 847 963 896 1,043 1,215 Change in Working Capital (213) (512) 185 (151) (174)

Growth yoy% 5.3% 13.7% (6.9%) 16.3% 16.6% Cash from Ops. 303 98 749 526 603

Selling General & Admin Exp. (356) (373) (382) (456) (521) Capital Expenditure (80) (222) (425) (213) (207)

Others Operating Expenses/Items (16) (23) (23) 3 (17) Sale of Property, Plant, and Equipment - - - - -

Operating Income 475 566 492 590 677 Change in Investing Acitivities (117) (105) (160) (203) (245)

Growth yoy% n.a. n.a. n.a. n.a. n.a. Cash from Investing (197) (327) (585) (416) (452)

Interest Expense (32.7) (28.9) (25.4) (36.5) (45.4) Net increase in bank borrowings 53 188 126 131 151

Interest and Invest. Income 5.4 8.6 6.5 14.9 14.4

Income/(Loss) from Affiliates (7.4) (4.1) (3.1) 5.0 0 Issuance of Common Stock 5 45 794 0 0

Other Non-Operating Inc. (Exp.) 0 0 0 0 0 Common Dividends Paid (133) (158) (183) (206) (248)

Impairment of Goodwill - - - - - Special Dividend Paid - - - - -

Gain (Loss) On Sale Of Invest. - - - - - Other Financing Activities (62) (67) (59) (71) (87)

Gain (Loss) On Sale Of Assets - - - - - Cash from Financing (138) 7 678 (146) (183)

Income Tax Expense (39) (55) (48) (58) (66)

Minority Int. in Earnings 0 (4) 2 2 2 Net Change in Cash (32) (223) 841 (36) (32)

Net Income 401 482 424 518 583

Growth yoy% 24.2% 20.3% (12.2%) 22.2% 12.5%

Balance Sheet (RMBm) FY2013 FY2014 FY2015 FY2016F FY2017F Ratios FY2013 FY2014 FY2015 FY2016F FY2017F

ASSETS Profitability

Cash And Equivalents 553 327 1,172 1,136 1,104 Return on Assets % 8.9% 9.3% 6.6% 6.9% 7.2%

Receivables 1,718 2,405 2,808 3,227 3,711 Return on Capital % 13.2% 13.8% 10.1% 10.8% 11.8%

Inventory 307 335 334 384 442 Return on Equity % 14.7% 15.8% 11.5% 12.5% 13.7%

Other Current Assets 543 448 446 446 446

Total Current Assets 3,122 3,515 4,760 5,194 5,704 Margin Analysis

Net Property, Plant & Equipment 899 1,077 1,430 1,556 1,663 Gross Margin % 35.1% 34.2% 30.2% 30.6% 31.0%

Long-term Investments - - - - - SG&A Margin % 14.8% 13.3% 12.9% 13.4% 13.3%

Other Intangibles - - - - - EBIT Margin % 19.9% 20.4% 16.8% 17.7% 17.6%

Deferred Tax Assets, LT - - - - - EBITDA Margin % 21.6% 22.0% 19.2% 20.3% 20.2%

Other Long-Term Assets 721 1,026 1,033 1,033 1,033 Net Income Margin % 16.6% 17.2% 14.3% 15.2% 14.8%

Goodwill - - - - -

Accounts Receivable Long-Term - - - - - Asset Turnover

Total Long Term Assets 1,620 2,104 2,463 2,589 2,696 Total Asset Turnover 0.5x 0.5x 0.4x 0.4x 0.5x

Total Assets 4,741 5,619 7,223 7,782 8,400 Fixed Asset Turnover 1.5x 1.3x 1.2x 1.3x 1.5x

Accounts Receivable Turnover 1.5x 1.4x 1.1x 1.1x 1.1x

LIABILITIES & EQUITY Inventory Turnover 7.9x 8.4x 8.9x 8.9x 8.9x

Accounts Payable 1,182 1,486 2,134 2,452 2,820

Accrued Exp. - - - - - Liquidity

Short-term Borrowings 453 503 301 346 398 Current Ratio 0.9x 1.3x 1.0x 1.1x 1.3x

Curr. Port. of LT Debt - - - - - Quick Ratio 1.1x 1.3x 1.5x 1.5x 1.4x

Curr. Income Taxes Payable - - - - - Avg. Days Sales Out. 260.0 312.1 345.2 345.2 345.2

Unearned Revenue, Current - - - - - Avg. Days Inventory Out. 46.5 43.4 41.1 41.1 41.1

Other Current Liabilities 46 56 54 60 66 Avg. Days Payable Out. 255.5 263.3 318.7 353.2 355.2

Total Current Liabilities 1,681 2,045 2,489 2,858 3,283 Avg. Cash Conversion Cycle 152.8 185.3 141.8 142.1 142.4

Long-Term Debt 173 248 576 662 762 Net Debt to Equity 3% 13% Net cash Net cash 1%

Def. Tax Liability, Non-Curr. 14 20 18 20 22

Other Non-Current Liabilities 0 0 0 0 0 Growth Over Prior Year

Total Liabilities 1,868 2,312 3,084 3,540 4,067 Total Revenue (1.6%) 16.6% 5.6% 14.9% 15.0%

Common Stock 9 10 10 10 10 Net Income 24.2% 20.3% (12.2%) 22.2% 12.5%

Additional Paid In Capital - - - - - Payout Ratio % 38.5% 38.0% 47.4% 47.8% 51.0%

Retained Earnings 2,863 3,236 4,091 4,196 4,288

Treasury Stock

Comprehensive Inc. and Other - - - - -

Minority Interest 0.4 60.7 38.4 36.4 34.2

Total Equity 2,873 3,306 4,140 4,242 4,332

Total Liabilities And Equity 4,741 5,619 7,223 7,782 8,400

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Figure 4: Wasion’s PER trend

Sources: Bloomberg, CGIS Research estimates

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Figure 5: Peer comparison

Sources: Bloomberg, Company, CGIS Research estimates for covered stocks; Wasion: P/B, ROE, ROA and Dividend Yield for 2015 and 2016F

Ticker Company PE EV/EBITDA

Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F 2014 2015F 2014 2015F 2014 2015F 2014 2015F

Lcy US$m x x x x x x x x % % % % % %

3393 HK Wasion Group Holdings Ltd 4.40 579.0 8.8 7.4 6.6 6.3 5.4 4.9 1.1 1.0 11.7 13.2 6.6 6.9 5.4 6.51685 HK Boer Power Holdings Ltd 10.6 1053.2 10.9 8.6 6.9 8.1 6.3 5.0 3.0 2.7 22.1 25.5 13.4 14.3 4.0 4.61366 HK Jiangnan Group Ltd 1.4 715.0 5.9 5.2 4.5 6.6 5.8 5.1 1.0 1.0 22.7 18.3 6.9 7.8 4.6 4.11206 HK Technovator International Lt 4.1 416.1 3.5 9.0 7.3 7.4 5.4 3.7 1.7 1.2 21.2 39.7 7.8 21.3 0.0 0.02188 HK China Titans Energy Technolo 1.2 146.7 n.a. n.a. n.a. n.a. n.a. n.a. 2.1 n.a. -10.2 n.a. -5.9 n.a. 0.0 n.a.42 HK Northeast Electric Develop-H 2.4 267.9 n.a. n.a. n.a. n.a. n.a. n.a. 5.8 n.a. 2.2 n.a. 1.0 n.a. 0.0 n.a.2727 HK Shanghai Electric Grp Co L-H 3.6 15017.4 15.6 14.3 13.1 13.8 13.1 12.5 1.0 1.1 7.6 7.2 1.7 1.7 2.0 2.11072 HK Dongfang Electric Corp Ltd-H 6.69 3,674 25.8 19.3 15.1 11.7 9.9 8.8 0.6 0.6 6.9 2.5 0.8 0.3 1.6 0.61133 HK Harbin Electric Co Ltd-H 3.31 587.4 n.a. n.a. 24.2 n.a. n.a. n.a. 0.3 0.3 4.5 -0.7 0.9 -0.3 n.a. 0.5Average 12.3 11.3 11.8 9.5 8.1 7.0 2.0 1.1 9.6 15.4 3.3 7.5 1.7 2.0601222 CH Jiangsu Linyang Electronic-A 32.56 2044.9 24.2 17.7 14.2 18.9 11.6 8.4 3.9 2.8 14.8 13.5 10.7 9.3 0.0 1.1601567 CH Ningbo Sanxing Electric Co-A 13.77 2549.3 32.0 27.5 23.0 27.9 22.9 19.4 5.7 5.1 16.0 16.0 8.0 6.1 0.3 0.7002121 CH Shenzhen Clou Electronics-A 24.35 1790.7 44.8 26.0 17.5 n.a. n.a. n.a. 5.1 4.7 9.0 12.8 3.0 4.7 n.a. 0.0601877 CH Zhejiang Chint Electrics-A 19.53 3966.6 14.5 11.7 10.7 9.9 8.7 7.7 3.7 3.7 32.5 27.9 14.4 16.3 n.a. 3.9300349 CH Zhejiang Goldcard High-Tec-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 16.9 10.7 6.8 7.9 n.a. n.a.600406 CH Nari Technology Co Ltd-A 13.57 5091.2 34.4 24.1 19.0 33.4 21.8 17.1 4.7 4.3 19.4 12.5 6.9 6.6 n.a. 0.9600312 CH Henan Pinggao Electric Co-A 14.70 2582.8 15.5 12.8 11.7 11.9 9.6 8.0 2.7 2.3 15.2 15.8 7.6 9.0 n.a. 2.8000400 CH Xj Electric Co Ltd-A 13.81 2150.9 26.9 16.2 11.5 19.3 11.5 8.1 2.4 2.4 23.7 8.9 6.1 5.3 n.a. 0.6600089 CH Tbea Co Ltd-A 9.12 4571.7 14.6 12.0 9.9 11.4 10.0 8.6 1.4 1.4 9.7 10.0 3.1 3.5 n.a. 2.3Average 25.9 18.5 14.7 19.0 13.7 11.0 3.7 3.3 17.5 14.2 7.4 7.6 0.1 1.5902 HK Huaneng Power Intl Inc-H 7.12 17028.9 5.5 6.7 7.2 5.8 6.4 6.5 1.1 1.1 16.2 20.3 4.9 n.a. n.a. 8.9991 HK Datang Intl Power Gen Co-H 2.28 7566.3 6.7 7.1 5.8 9.1 9.3 9.0 0.6 0.6 4.0 8.1 0.6 n.a. 6.8 6.71071 HK Huadian Power Intl Corp-H 4.93 8074.2 5.0 5.9 6.4 5.6 5.8 5.8 1.1 0.9 21.8 21.0 3.7 n.a. 6.6 7.6836 HK China Resources Power Holdin 14.80 9170.4 5.2 6.0 6.5 5.4 5.8 5.9 1.0 0.9 13.6 17.2 4.6 n.a. 5.4 6.72380 HK China Power International 3.73 3536.2 5.6 6.9 7.3 6.8 7.1 7.0 0.8 0.9 13.7 16.9 4.5 n.a. 5.4 7.2Average 5.6 6.5 6.6 6.5 6.9 6.9 0.9 0.9 13.9 16.7 3.7 n.a. 6.0 7.4SIE GY Siemens Ag-Reg 92.14 88281.2 13.8 12.4 11.4 10.4 9.3 8.6 2.2 2.1 18.2 15.7 6.7 n.a. n.a. 3.9ALO FP Alstom 23.58 5823.0 29.1 16.0 13.3 19.6 19.5 18.1 2.0 1.2 11.1 4.6 -3.1 n.a. n.a. 1.0ABBN VX Abb Ltd-Reg 18.86 45066.6 17.5 15.5 14.7 10.0 9.1 8.7 2.9 3.1 14.8 15.3 4.5 n.a. n.a. 4.0AREVA FP Areva 4.17 1800.4 n.a. 3.6 23.2 12.4 9.3 7.6 n.a. n.a. n.a. 24.0 -6.9 n.a. n.a. 0.0ITRI US Itron Inc 40.56 1537.1 19.4 17.1 15.6 9.4 8.4 7.7 2.4 2.1 -3.0 11.1 1.5 0.5 0.0 n.a.SU FP Schneider Electric Se 56.31 37368.6 15.1 14.0 13.2 9.9 9.2 8.7 1.6 1.5 10.5 10.0 3.4 n.a. n.a. 3.7Average 19.0 13.1 15.2 12.0 10.8 9.9 2.2 2.0 10.3 13.4 1.0 0.5 0.0 2.5

P/B ROE ROA Div yield

7

China High Speed Transmission Equipment [0658.HK]

CHSTE’s reported net profit increased 396% YoY to RMB1,033m, which is in line with

the company’s earlier pre-announcement. Adjusting for one-off items, core net profit

came in at RMB1,067m, up 141% YoY, which is within our expectation. Revenue in-

creased 21% YoY to RMB9.8bn, while the gross margin significantly expanded 7.7ppt

YoY to 32.5%. CHSTE proposed a dividend payment for the first time since 2010, with

DPS of HK$0.23, implying ~31% payout ratio and 4% dividend yield based on the

latest share price. We will revisit our earnings forecast after getting more operating

figures from the analyst meeting today. We maintain our HOLD rating for now as we

are concerned about the slowdown in gearboxes sales in China starting this year.

2015 results highlights: Wind gearbox revenue increased 35% YoY to

RMB7.8bn, representing 79% of total revenue in 2015. Sales in the US jumped

71% YoY to RMB2bn (2H15: +95% YoY), suggesting strong shipments to GE.

The gross margin in 2H15 expanded 11ppt YoY to 35.1%, a record high for the

company, driven by margin improvement in the China market. Trade receivables

at end-2015 increased only 11% YoY, lower than the revenue increase.

Some operating cost items increased unexpectedly. We noted that distribu-

tion and selling expenses increased 46% YoY in 2H15 (1H15: +7% YoY), and

R&D expenses jumped 164% YoY in 2H15 (1H15: +6%). At the analyst meeting,

we need to find out whether this will become an on-going trend.

Significant improvement in the gearing ratio. CHSTE repaid a total of

RMB3.4bn in borrowings in 2015. This, coupled with the improvement in operat-

ing cash flow and limited capex, helped reduce the Company’s net debt/equity

ratio significantly to 13% at end-2015, from 61% in 2014.

Analyst meeting today at 9:30 a.m. (HKT). Venue: Salon 4, Level 3, JW Mar-

riott Hotel Hong Kong, Pacific Place, HK.

Upside risks: (1) stronger than expected shipment volume; (2) more one-off

gains in non-core business disposals. Downside risks: (1) more than expected

decline in new wind power installations; (2) policy risk; (3) further weakness in

non-wind business; (4) technology shifts

Wayne Fung, CFA—Analyst

(852) 3698-6319

[email protected]

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

[email protected]

Wind Power Sector 2015 earnings in line; Proposed dividend payment for the first

time since 2010

HOLD (Unchanged)

Close: HK$5.76 (March 18, 2016)

Target Price: HK$5.80 (+1%)

Share Price Performance

Market Cap US$1,215m

Shares Outstanding 1,635m

Auditor Deloitte

Free Float 63%

52W range HK$4.56-8.39

3M average daily T/O US$4m

Major Shareholding Fortune Apex

(28.01%)

Ji Changqun

(9.08%)

March 21, 2016

8

Figure 1: 2015 results highlights

Sources: Company, CGIS Research estimates

Figure 2: Revenue breakdown

Sources: Company, CGIS Research estimates

1H14 1H15 YoY chg 2H14 2H15 YoY change 2014 2015 YoY change

(RMB m)

Revenue

Wind gear transmission equipment 2,788 3,745 34% 3,014 4,059 35% 5,802 7,804 35%

Marine gear transmission equipment 174 146 -17% 176 265 50% 350 410 17%

Transmission equipment for high speed locomotives 70 82 17% 88 70 -20% 158 152 -4%

Gear transmission equipment for construction materials 175 135 -23% 153 127 -17% 328 262 -20%

Gear transmission equipment for bar rolling, wire rolling & plate-rolling mills 161 138 -14% 116 51 -56% 277 189 -32%

General purpose gear transmission equipment 29 30 1% 34 53 56% 63 82 30%

High-speed heavy-load gear transmission equipment 5 7 42% 10 6 -38% 15 13 -13%

Computer numerical controlled (CNC) equipment 84 74 -12% 142 68 -52% 225 142 -37%

Diesel engine products 80 63 -20% 72 64 -11% 152 128 -16%

Others 382 334 -13% 395 331 -16% 777 665 -14%

Total 3,947 4,751 20% 4,200 5,094 21% 8,147 9,846 21%

1H14 1H15 YoY chg 2H14 2H15 YoY chg 2014 2015 YoY chg

Revenue 3,947.5 4,751.5 20% 4,199.9 5,094.2 21% 8,147.3 9,845.7 21%

COGS (2,937.1) (3,343.1) 14% (3,190.0) (3,304.6) 4% (6,127.1) (6,647.7) 8%

Gross profit 1,010.4 1,408.4 39% 1,009.9 1,789.6 77% 2,020.2 3,198.0 58%

Other income/(expenses) -net 173.4 56.6 -67% 142.2 113.6 -20% 315.6 170.2 -46%

Distribution and selling exp (130.5) (139.1) 7% (173.7) (253.5) 46% (304.2) (392.6) 29%

Administrative exp (316.7) (292.4) -8% (363.1) (319.9) -12% (679.9) (612.3) -10%

Research and development cost (70.6) (74.5) 6% (96.9) (256.2) 164% (167.5) (330.7) 97%

EBIT 666.0 959.0 44% 518.4 1,073.7 107% 1,184.4 2,032.6 72%

D&A 337.8 332.6 -2% 387.0 321.5 -17% 724.8 654.0 -10%

EBITDA 1,003.8 1,291.5 29% 905.4 1,395.2 54% 1,909.2 2,686.7 41%

Other non recurring gain/(loss) -net (128.4) 32.5 n/a (31.5) (30.6) -3% (159.9) 1.8 -101%

Shares of results of Associates/JCE 6.4 (0.9) n/a 17.4 (43.1) n/a 23.8 (44.0) n/a

Finance costs (351.6) (317.5) -10% (390.0) (325.8) -16% (741.6) (643.3) -13%

Pretax profit 192.3 673.1 250% 114.3 674.1 490% 306.7 1,347.2 339%

Taxation (35.9) (163.9) 357% (95.1) (180.5) 90% (130.9) (344.3) 163%

After tax profit 156.5 509.2 225% 19.3 493.7 2464% 175.7 1,002.9 471%

Minority interests 19.1 15.0 -21% 13.7 15.2 11% 32.7 30.2 -8%

Net profit 175.5 524.2 199% 32.9 508.9 1445% 208.5 1,033.1 396%

EPS (RMB/shr) 0.107 0.321 199% 0.020 0.311 1445% 0.127 0.632 396%

Recurring net profit 321.7 513.8 60% 122.0 553.6 354% 443.7 1,067.4 141%

Recurring EPS (RMB) 0.197 0.314 60% 0.075 0.339 354% 0.271 0.653 141%

ppt chg ppt chg ppt chg

Gross margin 25.6% 29.6% 4.0 24.0% 35.1% 11.1 24.8% 32.5% 7.7

EBITDA margin 25.4% 27.2% 1.8 21.6% 27.4% 5.8 23.4% 27.3% 3.9

Pretax profit margin 4.9% 14.2% 9.3 2.7% 13.2% 10.5 3.8% 13.7% 9.9

9

China Lesso [2128.HK]

BUY

Close: HK$5.13 (March 18, 2016)

Target Price: HK$5.60 (+9.2%)

Price Performance


Shares Outstanding 3,110.3m

Auditor Ernst & Young

Free Float 31.6%

52W range HK$3.80-7.80


Major Shareholder Wong Luen Hei

(68.1%)

Sources: Company, Bloomberg

Wong Chi Man − Head of Research

(852) 3698 6317

[email protected]

Livy Lyu − Research Assistant

(852) 3698-6393

[email protected]


China Construction Sector

China Lesso reported recurring net profit of RMB915m, down 5% year-on-year (YoY) and lower

than our forecast by 10.5%. The gross margin in 2H15 was 24.7%, 1.5ppt below our projection,

probably due to higher sales rebates to support volume growth. We have lowered our 2016E

recurring EPS by 10.5% after trimming our gross margin forecast by 1.9ppt. We’ve lowered our

target price from HK$6.10 to HK$5.60 based on 8.4x 2016E PER (6-year average, methodology

unchanged). Downgrade from BUY to HOLD with upside of 9.2%. Following a rebound of 35% in

the past month, we expect the stock to face profit-taking pressure as a result of unexciting 2H15

results.


Weaker-than-expected gross margin in 2H15. As the Company’s gross margin reached a

post-IPO high of 27.1% in 1H15, we understand the Company was willing to offer more

sales rebates in 2H15 to support volume growth. Therefore, we expected a half-on-half

(HoH) decline in gross margin in 2H15, but the decline of 2.4ppt was higher than our projec-

tion of 0.9ppt. On a YoY basis, the 2H15 gross margin also dropped 1.5ppt. For plastic

pipes, sales volume grew 7.7% YoY in 2H15 to 849,700 tonnes, while revenue from pipes

dropped 4.7% YoY owing to an 11.6% drop in blended average selling prices as a result of

falling prices for PVC and other raw materials (see Figures 1 and 2 for results highlights).

Rebound in raw material prices should limit the risk of further revenue pressure. As

shown in Figures 4 to 6, prices of PVC, HDPE and PP have rebounded since January 2016,

which should reduce the risk of further revenue declines, based on the Company’s cost-plus

pricing model.

Reported net profit hit by FX losses. The Company’s 2H15 reported net profit fell 12%

YoY to RMB815m, largely due to RMB100m FX losses caused by RMB depreciation [Note:

97.5% of its total debt is in US$/HK$.]. However, this should not be a big surprise as the

Company had informed investors of the potential impact.

Rapid growth of e-commerce business. Lesso Mall, the Company’s online sales platform,

recorded revenue of RMB406m in 2H15, surging 89% HoH. However, the overall scale is

still relatively small, given the business accounted for only 4% of the Company’s revenue

and profitability is likely to remain low during the expansion phase.

Deteriorating accounts receivable a potential concern. The average age of receivables

rose from 30 days in 2014 to 34 in 2015, which does not look alarming at a first glance. But

we notice that receivables aged 7-12 months/1-2 years increased 90%/105% YoY to

RMB330m/RMB191m, respectively. Although the absolute amount represented only 3.4% of

total revenue in 2015, it remains to be seen whether the amount will continue to increase

given the uncertain economic outlook.

Analyst briefing today. 9:30am HK Time. Level 3, JW Marriott Hotel Hong Kong, Pacific

Place, 88 Queensway, Hong Kong.

2H2015 Recurring Net Profit Down 5% YoY; Downgrade to HOLD

March 21, 2016

Y/E Dec 31 2012 2013 2014 2015 2016E 2017E

Turnover (RMB m) 10,891 13,071 14,823 15,264 16,391 18,044

Recurring net profit (RMB m) 1,219 1,405 1,653 1,736 1,795 2,030

Net margin (%) 11.2 10.8 11.2 11.4 11.0 11.3

Recurring EPS (RMB) 0.40 0.46 0.53 0.56 0.58 0.65

% Change 2 14 16 5 3 13

PER (x) 10.4 8.9 7.6 7.6 7.7 7.1

PBR (x) 2.3 1.9 1.6 1.4 1.2 1.1

EV/EBITDA (x) 7.3 6.0 5.3 4.9 4.5 4.0

Source: Bloomberg

0

50

100

150

200

0

2

4

6

8

10

Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16

(HK$ million)(HK$)


10

Figure 1: 2H15 results highlights Figure 2: 2015 results highlights

Sources: Company, CGIS Research Sources: Company, CGIS Research

(RMB'000, except for per share amount)

Year ended 31 Dec 2H 2014 2H 2015 YoY change (%)

PVC pipes 4,821,458 4,618,389 (4.2)

Non-PVC pipes 2,785,958 2,627,094 (5.7)

Others 634,305 975,736 53.8

Revenue 8,241,721 8,221,219 (0.2)

COGS (6,084,006) (6,191,255) 1.8

Gross profit 2,157,715 2,029,964 (5.9)

Operating expenses (1,046,303) (923,291) (11.8)

Operating profit 1,111,412 1,106,673 (0.4)

Other income and gains 47,984 24,779 (48.4)

EBIT 1,159,396 1,131,452 (2.4)

Net f inance costs (36,038) (2,089) (94.2)

Profits from associates and JCEs 196 489 149.5

Non-recurrent items (37,983) (100,429) 164.4

Income before tax 1,085,571 1,029,423 (5.2)

Income tax expense (166,879) (213,302) 27.8

Minority interests 7,797 (949) n.a.

Net income 926,489 815,172 (12.0)

Recurring net income 964,472 915,601 (5.1)

EPS (RMB) 0.298 0.262 (12.0)

Recurring EPS (RMB) 0.310 0.294 (5.1)

DPS (HK$) 0.130 0.130 -

Sales volume (tonnes) 788,621 849,700 7.7

PVC 617,220 680,728 10.3

Non-PVC 171,401 168,972 (1.4)

ASP per tonne (RMB) 9,647 8,526 (11.6)

PVC 7,812 6,784 (13.1)

Non-PVC 16,254 15,548 (4.3)

Cost per tonne (RMB) 7,002 6,245 (10.8)

Gross profit per tonne (RMB) 2,645 2,281 (13.8)

Margins and Ratios:

Gross margin 26.2% 24.7%

Net margin 11.6% 11.1%

EBIT margin 14.1% 13.8%

EBITDA margin 16.9% 16.9%

Effective tax rate 15% 19%


Year ended 31 Dec 2014 2015 YoY change (%)

PVC pipes 8,819,261 8,825,281 0.1

Non-PVC pipes 4,913,966 4,777,125 (2.8)

Others 1,089,545 1,661,995 52.5

Revenue 14,822,772 15,264,401 3.0

COGS (11,022,038) (11,326,830) 2.8

Gross profit 3,800,734 3,937,571 3.6

Operating expenses (1,830,806) (1,792,089) (2.1)

Operating profit 1,969,928 2,145,482 8.9

Other income and gains 79,738 47,506 (40.4)

EBIT 2,049,666 2,192,988 7.0

Net f inance costs (103,923) (14,902) (85.7)

Profits from associates and JCEs 398 1,101 176.6

Non-recurrent items (99,348) (114,516) 15.3

Income before tax 1,846,793 2,064,671 11.8

Income tax expense (306,435) (446,221) 45.6

Minority interests 13,666 2,667 (80.5)

Net income 1,554,024 1,621,117 4.3

Recurring net income 1,653,372 1,735,633 5.0

EPS (RMB) 0.500 0.521 4.3

Recurring EPS (RMB) 0.532 0.558 5.0

DPS (HK$) 0.130 0.130 -

Sales volume (tonnes) 1,431,639 1,541,954 7.7

PVC 1,125,911 1,240,900 10.2

Non-PVC 305,728 301,054 (1.5)

ASP per tonne (RMB) 9,593 8,821 (8.0)

PVC 7,833 7,112 (9.2)

Non-PVC 16,073 15,868 (1.3)

Cost per tonne (RMB) 7,023 6,369 (9.3)

Gross profit per tonne (RMB) 2,570 2,452 (4.6)

Margins and Ratios:

Gross margin 25.6% 25.8%

Net margin 11.1% 11.4%

EBIT margin 13.8% 14.4%

EBITDA margin 16.8% 17.7%

Effective tax rate 16% 20%

11

Figure 3: Brent crude prices (US$/barrel)

Sources: WIND Info, CGIS Research

Figure 4: PVC prices (RMB/tonne)

Figure 5: HDPE prices (RMB/tonne)



Figure 6: PP prices (RMB/tonne)


Figure 7: Guidance prices issued by the China Plastics Piping Association (RMB/tonne)

Sources: China Plastics Piping Association, CGIS Research

Product type (English) Sep-14 25-Dec-14 Change % change 24-Mar-15 Change % change 14-Jul-15 Change % change 20-Oct-15 Change % change 17-Dec-15 Change % change

PVC pipes for water supply 10,800 10,500 (300) (2.78) 10,000 (500) (4.76) 10,500 500 5.00 9,800 (700) (6.67) 9,700 (100) (1.02)

PVC pipes for drainage 9,800 9,500 (300) (3.06) 9,000 (500) (5.26) 9,500 500 5.56 8,800 (700) (7.37) 8,700 (100) (1.14)

Underground PVC pipes for drainage 10,500 10,200 (300) (2.86) 9,700 (500) (4.90) 10,200 500 5.15 9,500 (700) (6.86) 9,400 (100) (1.05)

PE pipes for gas supply 18,700 17,700 (1,000) (5.35) 17,200 (500) (2.82) 17,000 (200) (1.16) 16,900 (100) (0.59) 16,700 (200) (1.18)

PE pipes for water supply 17,200 16,200 (1,000) (5.81) 15,700 (500) (3.09) 16,700 1,000 6.37 15,800 (900) (5.39) 15,500 (300) (1.90)

Underground PE pipes for drainage 17,100 15,500 (1,600) (9.36) 15,400 (100) (0.65) 16,400 1,000 6.49 15,600 (800) (4.88) 14,500 (1,100) (7.05)

PE pipe wall winding structure 18,100 16,500 (1,600) (8.84) 16,400 (100) (0.61) 17,400 1,000 6.10 16,600 (800) (4.60) 15,500 (1,100) (6.63)

Data Source: Wind Info

Spot Price: Crude Oil: UK Brent DTD

30-04-14 30-06-14 31-08-14 31-10-14 31-12-14 28-02-15 30-04-15 30-06-15 31-08-15 31-10-15 31-12-15 29-02-1630-04-14

30 30

40 40

50 50

60 60

70 70

80 80

90 90

100 100

110 110

USD/barrel USD/barrelUSD/barrel USD/barrel


Market Price (Mid): PVC (Ethylene Process): National Market Price (Mid): PVC (Calcium Carbide Process): National

30-04-14 30-06-14 31-08-14 31-10-14 31-12-14 28-02-15 30-04-15 30-06-15 31-08-15 31-10-15 31-12-15 29-02-1630-04-14

4800 4800

5100 5100

5400 5400

5700 5700

6000 6000

6300 6300

6600 6600

6900 6900yuan/ton yuan/tonyuan/ton yuan/ton


Market Price: HDPE (PetroChina Daqing Petrochemical 5000S): Guangdong Shunde

30-04-14 30-06-14 31-08-14 31-10-14 31-12-14 28-02-15 30-04-15 30-06-15 31-08-15 31-10-15 31-12-15 29-02-1630-04-14

8500 8500

9000 9000

9500 9500

10000 10000

10500 10500

11000 11000

11500 11500

12000 12000

yuan/ton yuan/tonyuan/ton yuan/ton


Closing Price: Spot Goods: PP Resin (Spot PP)

30-04-14 30-06-14 31-08-14 31-10-14 31-12-14 28-02-15 30-04-15 30-06-15 31-08-15 31-10-15 31-12-15 29-02-1630-04-14

5600 5600

6400 6400

7200 7200

8000 8000

8800 8800

9600 9600

10400 10400

11200 11200

yuan/ton yuan/tonyuan/ton yuan/ton

12

Key financials

China Lesso (02128.HK)

Income Statement


Year ended 31 Dec 1H 2H 1H 2H 1H 2H 2013 2014 2015 2016E 2017E

PVC pipes 3,997,803 4,821,458 4,206,892 4,618,389 4,158,749 5,115,906 8,048,970 8,819,261 8,825,281 9,274,655 10,143,318

Non-PVC pipes 2,128,008 2,785,958 2,150,031 2,627,094 2,219,333 2,883,306 4,166,130 4,913,966 4,777,125 5,102,638 5,507,760

Others 455,240 634,305 686,259 975,736 811,692 1,202,512 855,447 1,089,545 1,661,995 2,014,204 2,393,069

Revenue 6,581,051 8,241,721 7,043,182 8,221,219 7,189,774 9,201,723 13,070,547 14,822,772 15,264,401 16,391,497 18,044,147

COGS (4,938,032) (6,084,006) (5,135,575) (6,191,255) (5,308,946) (6,972,798) (9,804,979) (11,022,038) (11,326,830) (12,281,744) (13,488,071)

Gross profit 1,643,019 2,157,715 1,907,607 2,029,964 1,880,828 2,228,925 3,265,568 3,800,734 3,937,571 4,109,753 4,556,076

Operating expenses (784,503) (1,046,303) (868,798) (923,291) (884,342) (1,012,190) (1,502,919) (1,830,806) (1,792,089) (1,896,532) (2,059,279)

Operating profit 858,516 1,111,412 1,038,809 1,106,673 996,486 1,216,735 1,762,649 1,969,928 2,145,482 2,213,221 2,496,797

Other income and gains 31,754 47,984 22,727 24,779 21,569 27,605 88,399 79,738 47,506 49,174 54,132

EBIT 890,270 1,159,396 1,061,536 1,131,452 1,018,055 1,244,341 1,851,048 2,049,666 2,192,988 2,262,396 2,550,929

Net f inance costs (67,885) (36,038) (12,813) (2,089) (13,308) (5,913) (127,936) (103,923) (14,902) (19,221) (14,130)

Profits from associates and JCEs 202 196 612 489 650 530 390 398 1,101 1,180 1,280

Non-recurrent items (61,365) (37,983) (14,087) (100,429) - - 44,009 (99,348) (114,516) - -

Income before tax 761,222 1,085,571 1,035,248 1,029,423 1,005,397 1,238,958 1,767,511 1,846,793 2,064,671 2,244,355 2,538,080

Income tax expense (139,556) (166,879) (232,919) (213,302) (201,079) (247,792) (329,895) (306,435) (446,221) (448,871) (507,616)

Minority interests 5,869 7,797 3,616 (949) - - 11,645 13,666 2,667 - -

Net income 627,535 926,489 805,945 815,172 804,318 991,166 1,449,261 1,554,024 1,621,117 1,795,484 2,030,464

Recurring net income 688,900 964,472 820,032 915,601 804,318 991,166 1,405,252 1,653,372 1,735,633 1,795,484 2,030,464

EPS (RMB) 0.202 0.298 0.259 0.262 0.259 0.319 0.471 0.500 0.521 0.577 0.653

Recurring EPS (RMB) 0.221 0.310 0.264 0.294 0.259 0.319 0.457 0.532 0.558 0.577 0.653

DPS (HK$) - 0.130 - 0.130 - 0.133 0.120 0.130 0.130 0.133 0.144

Depreciation and amortization 203,992 235,788 242,007 259,108 314,100 352,400 360,338 439,780 501,115 666,501 783,413

EBITDA 1,094,464 1,395,380 1,304,155 1,391,049 1,332,805 1,597,271 2,211,776 2,489,844 2,695,204 2,930,076 3,335,622

Sales volume (tonnes) 643,018 788,621 692,254 849,700 739,778 904,173 1,272,631 1,431,639 1,541,954 1,643,950 1,732,000

PVC 508,691 617,220 560,172 680,728 591,822 714,296 1,003,362 1,125,911 1,240,900 1,306,118 1,376,074

Non-PVC 134,327 171,401 132,082 168,972 147,956 189,876 269,269 305,728 301,054 337,832 355,926

ASP per tonne (RMB) 9,527 9,647 9,183 8,526 8,622 8,847 9,598 9,593 8,821 8,746 9,036

PVC 7,859 7,812 7,510 6,784 7,027 7,162 8,022 7,833 7,112 7,101 7,371

Non-PVC 15,842 16,254 16,278 15,548 15,000 15,185 15,472 16,073 15,868 15,104 15,474

Cost per tonne (RMB) 7,049 7,002 6,521 6,245 6,189 6,508 7,124 7,023 6,369 6,365 6,547

Gross profit per tonne (RMB) 2,478 2,645 2,662 2,281 2,433 2,339 2,474 2,570 2,452 2,381 2,490

Growth Rates:

Revenue 16% 12% 7% 0% 2% 12% 20% 13% 3% 7% 10%

EBIT 1% 19% 19% -2% -4% 10% 18% 11% 7% 3% 13%

EBITDA 4% 20% 19% 0% 2% 15% 21% 13% 8% 9% 14%

Core net income 5% 29% 19% -5% -2% 8% 15% 18% 5% 3% 13%

Recurring EPS 3% 28% 19% -5% -2% 8% 14% 16% 5% 3% 13%

Margins and Ratios:

Gross margin 25.0% 26.2% 27.1% 24.7% 26.2% 24.2% 25.0% 25.6% 25.8% 25.1% 25.2%

Net margin 10.4% 11.6% 11.6% 11.1% 11.2% 10.8% 10.7% 11.1% 11.4% 11.0% 11.3%

EBIT margin 13.5% 14.1% 15.1% 13.8% 14.2% 13.5% 14.2% 13.8% 14.4% 13.8% 14.1%

EBITDA margin 16.6% 16.9% 18.5% 16.9% 18.5% 17.4% 16.9% 16.8% 17.7% 17.9% 18.5%

Effective tax rate 17% 15% 22% 19% 20% 20% 19% 16% 20% 20% 20%

Sources: Company data, CGIS Research estimates

2016E20152014

13

Key financials

Figure 8: Rolling Forward PER

Sources: Bloomberg, CGIS Research

Figure 9: Rolling Forward PBR


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China Lesso (02128.HK)

Balance Sheet Statement of Cash Flow

(RMB'000 , except for per share amount)

As at 31 Dec 2013 2014 2015 2016E 2017E Year ended 31 Dec 2013 2014 2015 2016E 2017E

Inventories 2,434,049 2,210,038 2,206,543 2,200,000 2,400,000 Profit before tax 1,767,511 1,846,793 2,064,671 2,244,355 2,538,080

Trade receivables 854,518 1,127,901 1,186,226 1,200,000 1,350,000 Depreciation & Amortization 360,338 439,780 494,435 630,001 744,913

Bills receivable 218,041 216,231 292,648 350,000 400,000 Change in w orking capital (480,951) 393,463 499,615 (66,486) (489,000)

Others 702,773 561,760 653,331 764,750 883,750 Others / adjustments (143,436) (43,590) (288,489) (734,970) (379,296)

Bank balances and cash 2,189,242 3,198,902 3,893,544 4,323,606 5,092,749 Net operating cash f low 1,503,462 2,636,446 2,770,232 2,072,899 2,414,696

Total current assets 6,398,623 7,314,832 8,232,292 8,838,356 10,126,499

Capex (1,161,586) (1,285,113) (1,660,000) (1,000,000) (1,000,000)

PPE, net 4,452,109 5,263,614 6,011,812 6,778,773 7,033,341 Others (558,605) (296,182) (70,800) (50,000) (50,000)

Prepaid lease payments 996,690 1,087,126 1,157,926 1,207,926 1,257,926 Net investing cash f low (1,720,191) (1,581,295) (1,730,800) (1,050,000) (1,050,000)

Others 450,285 853,956 1,247,093 1,248,273 1,249,553

Total non-current assets 5,899,084 7,204,696 8,416,831 9,234,972 9,540,820 Change in debt 504,749 378,088 60,906 (165,502) (100,000)

Dividends (291,809) (295,460) (318,373) (334,160) (406,093)

Total assets 12,297,707 14,519,528 16,649,123 18,073,328 19,667,319 Others (72,555) (98,654) (87,323) (93,175) (89,461)

Net f inancing cash f low 140,385 (16,026) (344,790) (592,837) (595,554)

Trade payables 861,416 973,387 1,681,582 1,700,000 1,700,000

Other payables 1,252,674 1,564,290 1,525,902 1,600,000 1,600,000 Increase / Decrease in cash 266,917 1,009,660 694,642 430,062 769,143

Bank and other borrow ings 1,080,092 1,158,729 1,065,502 900,000 800,000 Net cash/(debt) (497,874) 19,068 652,804 1,248,368 2,117,511

Others 103,638 113,440 104,562 134,661 152,285

Total current liabilities 3,297,820 3,809,846 4,377,548 4,334,661 4,252,285 Finance Ratios

Bank and other borrow ings 1,607,024 2,021,105 2,175,238 2,175,238 2,175,238 2013 2014 2015 2016E 2017E

Others 136,920 138,854 230,885 236,653 241,653 Valuation

Total non-current liabilities 1,743,944 2,159,959 2,406,123 2,411,891 2,416,891 PE(x) 9.7 8.3 8.3 8.4 7.8

EPS grow th (%) 14 16 5 3 13

Total liabilities 5,041,764 5,969,805 6,783,671 6,746,552 6,669,176 Yield (%) 2.1 2.3 2.3 2.4 2.6

PEG (x) 0.71 0.51 1.67 2.45 0.60

Shareholders' equity 7,239,738 8,545,459 9,770,885 11,232,209 12,903,576 EV/EBITDA (x) 6.6 5.9 5.4 5.0 4.4

Minority interests 16,205 4,264 94,567 94,567 94,567 PB(x) 2.1 1.8 1.6 1.3 1.2

Operational

Revenue grow th (%) 20 13 3 7 10

Gross margin (%) 25.0 25.6 25.8 25.1 25.2

Net profit margin (%) 10.7 11.1 11.4 11.0 11.3

Days receivables 29 30 34 34 33

Days payables 26 30 43 50 46

Days inventories 78 77 71 65 62

Current ratio (x) 1.9 1.9 1.9 2.0 2.4

Quick ratio (x) 1.0 1.2 1.2 1.4 1.6

Asset/Equity (x) 1.7 1.7 1.7 1.6 1.5

Net debt/equity (%) 7 Net cash Net cash Net cash Net cash

EBITDA interest coverage (x) 17.3 24.0 180.9 152.4 236.1

Core ROE (%) 21.2 20.9 19.0 17.1 16.8


14

GF Securities [1776.HK]

BUY

Close: HK$16.72 (March 18, 2016)

Target Price: HK$20.30 (+21%)

Price Performance


Shares Outstanding 7,621.0m

Auditor Deloitte

Free Float 54.0%

52W range HK$9.90-26.95


Major Shareholding Liaoning Cheng Da

(16.4%)

Sources: Company, Bloomberg

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]


China Securities Sector GF Securities’ (GFS) Q4 2015 net profit rose 42% year-on-year (YoY) to RMB2.8bn,

which is in line with the company’s pre-announcement. Overall performance stabi-

lized compared with Q3, with net profit growing 42% quarter-on-quarter (QoQ). Giv-

en that its operating results at the parent company level were better than CITIC Se-

curities [6030.HK] and Haitong Securities [6837.HK] in January and February 2016,

we reiterate GFS as our top pick in the sector. We maintain our BUY rating with a

target price of HK$20.30 based on the Gordon Growth Model (1.71x 2016E PBR;

beta at 1.45, cost of equity at 10.4%, medium-term ROE at 12.8%).


Net investment gains recovered from Q3. Thanks to a relatively stable market

environment in Q4 2015, GFS’ net investment gains (fair value adjustment included)

rose 29% QoQ to RMB2.1bn. The Company’s RMB13.9bn contribution to China

Securities Finance Corporation (CSFC) was recorded based on book value in the

available-for-sale financial assets category.

Smaller commission rate pressure in Q4. We estimate the Company’s net broker-

age commission rate in China was 0.0486% in Q4, down from 0.0494% in Q3. The

decline slowed down compared with the commission rate of 0.0527% in Q2. We

believe some low-end, price-sensitive investors left the market after the sharp mar-

ket correction in June, which helped alleviate pressure on the commission rate.

Asset management a bright spot. Driven by rapid expansion of assets under man-

agement (AUM), which surged 170% YoY to RMB531.9bn, we continued to see fast

revenue growth (107% YoY) in the Company’s asset management business in Q4.

As a result of lower revenue contribution from brokerage commissions and interest

income in 2016E, we forecast asset management will contribute 13.7% of total reve-

nue this year, up from 8.4% in 2015.

Weak trading volume in Q1 with potential to improve. Average daily turnover

(ADT) of the A-share market remained lacklustre at RMB516bn in the first 14 trading

days of March. However, trading turnover jumped to RMB817bn last Friday, partly

because of improving market sentiment in emerging markets following lower expec-

tations of a US rate hike in June. Our full-year ADT forecast of RMB635bn is still

achievable if the momentum continues.

Q4 Net Profit Grew 42% YoY; Net Investment Income Recovered QoQ

March 21, 2016

Y/E Dec 31 2013 2014 2015 2016E 2017E

Turnover (RMB m) 9,332 16,163 42,733 35,504 42,154

Recurring net profit (RMB m) 2,813 5,023 13,201 7,336 9,075

Adjusted net margin (%) 36 39 41 32 33

Recurring EPS (RMB) 0.48 0.85 1.73 0.96 1.19

% Change 28 79 104 (44) 24

PER (x) 27.9 15.5 8.0 15.1 12.8

PBR (x) 2.27 1.97 1.36 1.41 1.36

ROAA (%) 2.7 2.8 4.0 1.7 1.9

ROAE (%) 8.3 13.5 22.5 9.4 11.1

0

2000

4000

6000

8000

10000

12000

0

5

10

15

20

25

30

Apr15 Jun15 Aug15 Oct15 Dec15 Feb16

(HK$ million)(HK$)


Source: Bloomberg

15

Figure 1: GFS results highlights


Figure 2: Peer valuations


Y/E Dec (Rmb '000) 2014 Q1 2015 Q1 YoY change 2014 Q2 2015 Q2 YoY change 2014 Q3 2015 Q3 YoY change 2014 Q4 2015 Q4 YoY change

Brokerage 869,153 2,527,422 191% 652,250 5,552,305 751% 1,289,810 3,055,119 137% 2,242,244 2,586,586 15%

IBD 465,039 308,177 -34% 248,459 489,121 97% 495,053 356,923 -28% 533,756 958,329 80%

Asset Management 91,935 540,810 488% 79,228 892,880 1027% 346,838 904,864 161% 604,870 1,254,924 107%

Others 8,172 13,351 63% 11,325 76,595 576% 8,223 43,330 427% 30,155 24,263 -20%

Commission and fee income 1,434,298 3,389,761 136% 991,262 7,010,900 607% 2,139,923 4,360,236 104% 3,411,024 4,824,102 41%

Net interest income 231,225 632,722 174% 334,090 1,606,421 381% 369,057 575,201 56% 564,411 115,713 -79%

Net investment gains 561,202 1,823,255 225% 554,704 4,107,410 640% 722,571 2,518,972 249% 1,384,501 1,575,512 14%

Fair value adjustment 152,034 (202,934) n.a. 169,609 870,597 413% 181,571 (896,295) n.a. (149,091) 525,248 n.a.

FX change (15,375) (3,510) -77% (1,698) 290,291 n.a. 8,198 4,519 -45% (7,455) 3,374 n.a.

Others 2,070 9,759 372% 6,437 4,544 -29% 4,178 4,675 12% 9,064 6,353 -30%

Total revenue 2,365,453 5,649,053 139% 2,054,402 13,890,163 576% 3,425,498 6,567,308 92% 5,212,453 7,050,302 35%

Other income and gains (3,890) 1,938 n.a. 4,632 94,885 1949% 17,267 36,681 112% 77,357 (6,984) n.a.

Total revenue and other income 2,361,563 5,650,991 139% 2,059,034 13,985,048 579% 3,442,765 6,603,989 92% 5,289,810 7,043,318 33%

Operating expenses (1,395,169) (2,275,055) 63% (1,116,686) (6,194,862) 455% (1,686,035) (3,998,493) 137% (2,643,853) (3,299,035) 25%

Business tax (124,685) (341,772) 174% (112,351) (739,287) 558% (197,465) (464,880) 135% (329,301) (382,104) 16%

Business and admin expenses (1,270,003) (1,937,316) 53% (1,003,857) (5,415,758) 439% (1,488,100) (3,533,166) 137% (2,164,301) (2,669,325) 23%

Asset impairment (47) 4,467 n.a. (44) (39,383) 90064% (36) (13) -65% (149,818) (247,172) 65%

Other operating expenses (434) (434) 0% (434) (434) 0% (434) (434) 0% (434) (434) 0%

Operating profit 966,394 3,375,936 249% 942,348 7,790,186 727% 1,756,731 2,605,497 48% 2,645,957 3,744,284 42%

Share of profits of associates 99,221 62,970 -37% 114,907 109,699 -5% 57,773 75,062 30% 65,265 42,081 -36%

Profit before tax 1,065,615 3,438,906 223% 1,057,255 7,899,885 647% 1,814,503 2,680,559 48% 2,711,221 3,786,365 40%

Taxation (238,762) (809,205) 239% (207,972) (1,891,838) 810% (413,676) (620,041) 50% (642,672) (872,274) 36%

Minority interest (616) (112,409) 18161% (530) (119,377) 22418% (35,196) (80,461) 129% (86,603) (99,092) 14%

Net Profit 826,237 2,517,293 205% 848,753 5,888,669 594% 1,365,631 1,980,057 45% 1,981,946 2,814,999 42%

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

China Galaxy Securities 6881 HK Equity NR 6.71 8,204 10.6 5.6 11.9 1.37 0.94 0.96 3.0 5.3 2.5

CITIC Securities 6030 HK Equity HOLD 17.14 30,628 15.3 8.5 16.0 1.50 1.28 1.29 2.3 3.5 1.9

Haitong Securities 6837 HK Equity BUY 12.64 22,956 12.4 7.6 14.3 1.40 1.11 1.13 2.5 3.9 2.1

GF Securities 1776 HK Equity BUY 16.72 17,672 15.5 8.0 15.1 1.97 1.36 1.41 1.5 5.8 2.0

Simple average 12.8 7.3 14.1 1.42 1.11 1.12 2.6 4.3 2.2

Weighted average 14.0 7.8 14.9 1.56 1.21 1.23 2.3 4.3 2.0

PER (x) PBR (x) Dividend yield (%)

2014 -2016E

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

China Galaxy Securities 6881 HK Equity 96.4 (50.1) (1.0) 13.9 21.9 8.2 2.9 3.7 1.6

CITIC Securities 6030 HK Equity 89.0 (44.1) 2.8 10.4 17.3 8.2 2.7 3.7 1.8

Haitong Securities 6837 HK Equity 70.9 (44.2) (2.4) 11.9 17.9 8.0 3.0 3.5 1.7

GF Securities 1776 HK Equity 104.1 (44.4) 6.5 13.5 22.5 9.4 2.8 4.0 1.7

Simple average 85.4 (46.1) (0.2) 12.1 19.0 8.1 2.9 3.6 1.7

Weighted average 87.9 (44.8) 1.7 11.9 19.1 8.4 2.8 3.7 1.7

EPS Growth (%) ROAE (%) ROAA (%)

16

Key financials GF Securities (01776.HK)

Income Statement


Year ended 31 Dec 2012 2013 2014 2015 2016E 2017E

Equities 2,396,000 3,439,400 4,949,900 13,803,088 7,660,195 7,982,824

Investment banking 1,027,100 308,100 1,552,300 1,441,856 1,483,430 1,707,679

Futures and options 297,000 279,300 230,500 320,170 300,000 320,000

Asset management 112,000 205,100 1,124,500 3,597,426 4,846,038 5,650,795

Others 169,400 167,500 360,100 883,900 1,149,070 1,488,836

Commission and fee income 4,001,500 4,399,400 8,217,300 20,046,440 15,438,733 17,150,134

Interest income 1,541,235 2,349,217 4,324,638 12,336,200 9,675,754 11,180,681

Net investment gains 1,688,087 2,525,131 3,604,956 10,396,215 10,339,144 13,752,741

Total revenue 7,230,822 9,273,748 16,146,894 42,778,855 35,453,632 42,083,555

Other income and gains 49,651 58,114 16,581 (46,040) 50,000 70,000

Total revenue and other income 7,280,473 9,331,862 16,163,475 42,732,815 35,503,632 42,153,555

Staff costs (2,435,257) (2,947,619) (4,345,926) (10,913,683) (9,682,697) (11,062,394)

Commission and fee expenses (150,259) (105,542) (240,813) (461,441) (324,213) (343,003)

Interest expenses (500,383) (1,378,567) (2,757,676) (8,942,914) (11,196,799) (13,459,476)

Others (1,883,882) (1,815,828) (2,507,650) (4,898,877) (4,750,208) (5,348,874)

Operating expenses (4,969,781) (6,247,556) (9,852,065) (25,216,915) (25,953,918) (30,213,747)

Operating profit 2,310,739 3,084,291 6,311,430 17,515,900 9,549,713 11,939,808

Non-recurrent items - - - - - -

Income before tax 2,685,219 3,477,313 6,648,595 17,805,712 10,003,343 12,438,801

Income tax expense (494,880) (664,747) (1,503,082) (4,193,359) (2,400,802) (2,985,312)

Minority interests 1,118 (65) (122,945) (411,339) (266,089) (378,140)

Net income 2,191,457 2,812,501 5,022,568 13,201,014 7,336,452 9,075,349

Recurring net income 2,191,457 2,812,501 5,022,568 13,201,014 7,336,452 9,075,349

EPS (RMB) 0.370 0.475 0.849 1.732 0.963 1.191

Recurring EPS (RMB) 0.370 0.475 0.849 1.732 0.963 1.191

DPS (RMB) 0.150 0.200 0.200 0.800 0.385 0.476

A-share average daily turnover 129,492,761 196,668,908 303,014,286 1,045,302,582 635,000,000 700,000,000

Brokerage market share of GFS (%) 4.0 4.0 4.3 4.7 4.9 5.1

Net commission rate of GFS (%) 0.091 0.086 0.070 0.051 0.043 0.038

Margin f inancing balance 5,183,000 19,945,100 64,356,200 66,951,690 66,648,423 81,137,030

Staff cost-to-income (%) 36.7 37.6 33.0 32.7 40.4 39.0

Cost-to-income (%) 65.1 60.7 52.1 47.4 60.2 57.9

Cost-to-income (ex-impairment) 60.8 59.2 50.9 46.6 59.3 57.2

Growth Rates:

Commission and fee income n.a. 10% 87% 144% -23% 11%

Interest income n.a. 52% 84% 185% -22% 16%

Net investment gains n.a. 50% 43% 188% -1% 33%

Total revenue and other income n.a. 28% 73% 164% -17% 19%

Operating profit n.a. 33% 105% 178% -45% 25%

Recurring net income n.a. 28% 79% 163% -44% 24%

Recurring EPS n.a. 28% 79% 104% -44% 24%

Margins and Ratios:

Adjusted operating margin 34.4% 38.8% 47.9% 52.6% 39.7% 42.0%

Adjusted net margin 33.3% 36.1% 39.1% 40.8% 31.8% 33.4%

Effective tax rate 18% 19% 23% 24% 24% 24%


17

Key financials GF Securities (01776.HK)

Balance Sheet Finance Ratios

(RMB'000 , except for per share amount)

As at 31 Dec 2012 2013 2014 2015 2016E 2017E 2012 2013 2014 2015 2016E 2017E

Financial assets 33,642,898 46,783,207 71,531,551 174,926,020 212,257,087 257,041,618 PER(x) 36.7 27.9 15.5 8.0 15.1 12.8

Advances to customers 5,246,504 20,490,654 64,695,844 68,969,706 68,648,423 83,137,030 EPS grow th (%) n.a. 28 79 104 44- 24

Others 9,394,574 10,652,117 30,234,496 42,709,314 34,576,494 39,966,183 Yield (%) 1.1 1.5 1.5 5.8 2.6 3.1

Cash held on behalf of customers 27,345,508 25,227,415 48,995,919 88,640,516 78,866,319 90,487,790 Payout ratio (%) 41 42 24 46 40 40

Bank balances and cash 9,033,278 6,146,696 18,203,433 17,609,937 18,380,981 17,030,401 PBR(x) 2.44 2.27 1.97 1.36 1.41 1.36

Total current assets 84,662,762 109,300,089 233,661,243 392,855,493 412,729,304 487,663,023 Total asset/equity (x) 2.7 3.4 5.8 5.3 5.4 5.9

Non-client asset/net asset (x) 1.7 2.5 4.1 3.8 4.1 4.5

PPE, net 991,741 1,043,274 1,287,461 1,579,745 1,424,172 1,482,957 ROAA (%) 2.63 2.72 2.81 4.01 1.71 1.90

Financial assets 1,508,728 3,634,831 2,747,766 20,184,887 20,903,681 21,703,681 ROAE (%) 6.79 8.3 13.5 22.5 9.4 11.1

Others 2,692,575 3,313,977 2,403,306 4,476,890 4,996,078 5,580,071

Total non-current assets 5,193,044 7,992,082 6,438,533 26,241,522 27,323,931 28,766,708 Revenue breakdown (%)

Equities 33.1 37.1 30.7 32.3 21.6 19.0

Total assets 89,855,806 117,292,171 240,099,776 419,097,015 440,053,235 516,429,731 Investment banking 14.2 3.3 9.6 3.4 4.2 4.1

Futures and options 4.1 3.0 1.4 0.7 0.8 0.8

Accounts payable to brokerage clinets 34,287,577 31,609,231 71,465,563 118,137,085 105,009,070 120,188,134 Asset management 1.5 2.2 7.0 8.4 13.7 13.4

Financial assets sold under repo 8,850,471 19,399,797 50,717,726 85,395,761 100,000,000 120,000,000 Others 2.3 1.8 2.2 2.1 3.2 3.5

Due to banks and other f inancial institutions 3,340,000 5,300,000 1,123,000 1,750,000 - - Commission and fee income 55.3 47.4 50.9 46.9 43.5 40.8

Others 10,333,437 14,202,625 42,223,828 57,975,624 59,970,135 69,648,659 Interest income 21.3 25.3 26.8 28.8 27.3 26.6

Total current liabilities 56,811,485 70,511,653 165,530,117 263,258,470 264,979,205 309,836,793 Net investment gains 23.3 27.2 22.3 24.3 29.2 32.7

Bank and other borrow ings - 11,979,740 26,030,664 72,270,186 90,000,000 115,000,000

Others 89,543 57,802 7,161,539 3,747,530 3,747,530 3,747,530

Total non-current liabilities 89,543 12,037,542 33,192,203 76,017,716 93,747,530 118,747,530

Total liabilities 56,901,028 82,549,195 198,722,320 339,276,186 358,726,735 428,584,323

Shareholders' equity 32,942,624 34,604,666 39,610,880 77,519,274 78,758,856 84,899,625

Minority interests 12,154 138,310 1,766,576 2,301,555 2,567,644 2,945,783

Book value per share (HK$) 6.84 7.37 8.50 12.31 11.88 12.25

Dupont analysis (as % of average total assets)

Equities n.a. 3.3% 2.8% 4.2% 1.8% 1.7%

Investment banking n.a. 0.3% 0.9% 0.4% 0.3% 0.4%

Futures and options n.a. 0.3% 0.1% 0.1% 0.1% 0.1%

Asset management n.a. 0.2% 0.6% 1.1% 1.1% 1.2%

Others n.a. 0.2% 0.2% 0.3% 0.3% 0.3%

Commission and fee income n.a. 4.2% 4.6% 6.1% 3.6% 3.6%

Interest income n.a. 2.3% 2.4% 3.7% 2.3% 2.3%

Net investment gains n.a. 2.4% 2.0% 3.2% 2.4% 2.9%

Other income and gains n.a. 0.1% 0.0% 0.0% 0.0% 0.0%

Total revenue and other income n.a. 9.0% 9.0% 13.0% 8.3% 8.8%

Operating expenses n.a. -6.0% -5.5% -7.7% -6.0% -6.3%

Operating profit n.a. 3.0% 3.5% 5.3% 2.2% 2.5%

Income tax expense n.a. -0.6% -0.8% -1.3% -0.6% -0.6%

Recurring net income (ROAA) n.a. 2.7% 2.9% 4.1% 1.8% 2.0%

Leverage (x) n.a. 3.1 4.8 5.6 5.5 5.8

Non-client asset/net asset (x) n.a. 2.5 4.1 3.8 4.1 4.5

ROAE n.a. 8.3% 13.5% 22.5% 9.4% 11.1%


18

China Banking

Louis Liu — Analyst

(852) 3698-6323

[email protected]

Wong Chi Man, CFA —Head of Research

(852) 3698-6317

[email protected]

China Banking Sector Chongqing Rural Commercial Bank [3618.HK] 2H15 results review: sol id balance sheet with a coverage rat io of 420%

Chongqing Rural Commercial Bank (CRCB) [3618.HK] reported a net profit of RMB7,223.3m for 2015,

up 5.78% year-on year (YoY), in line with market consensus and our expectation. Overall, the bank’s

operations were very conservative. CRCB did not increase its LDR to make higher interest margins,

considering its LDR was just 59.11% at end-2014, much lower than sector average, and dropped to

57.12% at end-2015. The NPL ratio increased to 0.98%, also much lower than the sector average,

and the loan loss provision rate increased to 4.11%, which provided a comfortable coverage ratio at

420.04%. Considering investors’ concerns about the asset quality of banks, we conservatively

switched our valuation method from PBR to DDM (dividend discount model). Our target price of

HK$5.17 implies 5.2% dividend yield and 0.8x 2016E PER. Maintain BUY.

Results highlights: CRCB recorded relatively higher growth in net interest income and net fee

and commission income. 2H15 net interest income increased 9.4% YoY to RMB10,395m. 2H15

net fee and commission income grew 20.7% YoY to RMB811m. However, as expenses on provi-

sions increased by >40% YoY, net profit growth was just 3% in 2H15. The Bank managed its

costs quite well, with its cost-to-income ratio dropping to 34.69% in 2015 from 35.74% in 2014.

Although it was still higher than the sector average, the downward trend was still impressive, as it

was 37.70% in 2012. Tier 1 CAR and CAR dropped to 9.88% and 11.51% from 10.12% and

12.45%, respectively, but were still sufficient considering the required minimums are 8.5% for

Tier 1 CAR and 10.5% for CAR.

NIM narrowed because of interest rate liberalization and assets reallocation, NPL in-

creased but were sufficiently covered, and risks were under control: In line with the trend of

the whole sector, the Bank’s net interest margin narrowed to 3.20%, from 3.37% in 2014. One of

the key reasons was the impact of interest rate liberalization. However, it was also affected by

the Bank’s conservative strategy. In 2015, unlike most of its peers, CRCB had loan growth

(10.29%) lower than deposits growth, which drove the LDR lower. However, the amount of debt

securities investment jumped by 31% YoY driven mainly by the increase in debt instruments

issued by financial institutions. The amount of these types of debt instruments soared from

RMB26,903m to RMB111,643m. Although the return was lower than that of lending, the quality

was higher, the debt instruments had a fixed interest rate, and they were non-callable before

maturity, which was excellent considering the current continuous downtrend in interest rates.

Also, as we mentioned earlier, the bank’s loan loss provision rate increased to 4.11%, so the

credit risks were sufficiently covered considering the coverage ratio was 420.04% (much higher

than the sector average of 181%). In addition, the economy in Chongqing is better than the na-

tional average. GDP growth in Chongqing has been above the national average since 2008, and

it even showed a slight rebound in 2015. Further evidence that the Bank has risks under control

is the Bank’s lending quality, as the NPL ratio of loans to the manufacturing industry decreased

in 2015 from 1.25% to 0.94%.

Conservative new target price of HK$5.17 based on DDM; Maintain BUY: We understand

that investors have doubts about the asset quality of banks, which has made the traditional PBR

valuation ineffective. Therefore, we switched to the more conservative DDM model, which looks

only at the dividends to be received by investors. Our DDM-based target price is HK$5.17, equiv-

alent to 5.2% dividend yield and 0.8x 2016E PBR. The upside is still 27.7%.

BUY

Close: HK$ 4.05 (Mar 18, 2016)

Target Price: HK$5.17 (+27.7%)

Price Performance


Shares Outstanding 9,300 m

Auditor Deloitte Touche

Free Float (H-share) 27%

52W range HK$3.44—7.03


Major Shareholder

Chongqing Yufu

Assets Management

6.77%

Chongqing City Con-

struction Investment

Group 6.68%

Figure 1: Key Financials


Mar 21, 2016

Key Financials 2013 2014 2015 2016E 2017E

Net interest income (RMB thousand) 15,703,193 18,348,716 20,166,479 22,036,485 23,622,018

- Change (%) 19.94% 16.85% 9.91% 9.27% 7.20%

Non interest income (RMB thousand) 612,288 1,453,721 1,722,513 1,894,423 2,114,798

- Change (%) 9.12% 137.42% 18.49% 9.98% 11.63%

Net Profit (RMB thousand) 5,991,048 6,828,456 7,223,298 7,334,304 7,499,343

- Change (%) 11.42% 13.98% 5.78% 1.54% 2.25%

NPL ratio (%) 0.80% 0.78% 0.98% 1.09% 1.23%

Net Interest Margins (%) 3.41% 3.37% 3.20% 3.10% 3.00%

PER (x) 5.7 5.0 4.6 4.6 4.5

PBR (x) 1.0 0.9 0.8 0.7 0.6

ROE (%) 16.3% 17.1% 15.8% 14.2% 12.7%

ROA (%) 1.3% 1.2% 1.1% 1.0% 0.9%

DY (%) 5.3% 6.0% 6.5% 6.6% 6.3%

19

Figure 2: 2H15 Results Highlights


(Unit: Thousands of RMB) 2014 2H 2015 1H 2015 2H HoH Growth YoY Growth

Income statement

Interest income 17,155,574 17,565,895 17,633,304 0.4% 2.8%

Interest expense -7,657,525 -7,794,361 -7,238,359 -7.1% -5.5%

Net interest income 9,498,049 9,771,534 10,394,945 6.4% 9.4%

Fee and commission income 718,375 717,168 858,313 19.7% 19.5%

Fee and commission expense -46,566 -33,113 -47,424 43.2% 1.8%

Net fee and commission income 671,809 684,055 810,889 18.5% 20.7%

Net trading gain/loss 34,190 4,017 15,742 291.9% -54.0%

Other operating income, net 117,449 68,264 139,546 104.4% 18.8%

Operating income 10,321,497 10,527,870 11,361,122 7.9% 10.1%

Operating expenses -4,607,559 -4,147,048 -4,918,595 18.6% 6.8%

Impairment losses on assets -1,376,932 -1,240,715 -1,995,265 60.8% 44.9%

Operating Profit 4,337,006 5,140,107 4,447,262 -13.5% 2.5%

Income tax expense -1,125,540 -1,221,073 -1,138,449 -6.8% 1.1%

Net profit 3,211,466 3,919,034 3,308,813 -15.6% 3.0%

Attributed to Shareholders 3,237,511 3,887,520 3,335,778 -14.2% 3.0%

20

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

GDP (RMBm) Growth in Chongqing(%)

Growth for overall China (%)

Figure 3: Chongqing vs Overall China: GDP


Figure 4: DDM Valuation


Key DDM assumptions

Risk Free Rate 2.25%

Equity Market Premium 6.00%

Beta 1.05

Cost of Equity 8.55%

2016E 2017E 2018E 2019E 2020E

DPS RMB 0.24 0.24 0.24 0.25 0.25

DPS-Discounted RMB 0.22 0.20 0.19 0.18 0.17

Exchange Rate HKD/RMB 1.12 1.06 1.06 1.06 1.06

Value of Dividends through 2020 (HKD) 1.04

Terminal Value at 2% Terminal Growth Rate (HKD) 4.14

Value Per Share (HKD) 5.17

21

Figure 5: Income Statement & Balance Sheet


(Unit: Thousands of RMB) 2013 2014 2015 2016E 2017E (Unit: Thousands of RMB) 2013 2014 2015 2016E 2017E

Income statement Balance sheet

Interest income 27,179,811 33,094,794 35,199,199 39,775,095 42,957,102 Assets:

Interest expense -11,476,618 -14,746,078 -15,032,720 -17,738,610 -19,335,084 Cash and deposits with central banks 68,782,134 79,334,179 78,500,278 80,855,286 83,280,945

Net interest income 15,703,193 18,348,716 20,166,479 22,036,485 23,622,018

Due from banks and non-bank financial

institutions 119,541,142 158,866,897 153,314,388 160,980,107 169,029,113

Fee and commission income 739,079 1,143,313 1,575,481 1,733,029 1,906,332 Loans and advances to customers 198,150,565 233,520,181 257,540,907 284,167,279 311,708,357

Fee and commission expense -59,399 -73,668 -80,537 -108,725 -125,034 Financial investments 105,984,172 134,726,067 213,385,156 273,133,000 300,446,300

Net fee and commission income 679,680 1,069,645 1,494,944 1,624,304 1,781,298 Property and equipment 3,574,211 4,352,912 5,211,197 4,950,637 4,703,105

Net trading gain/loss -197,640 239,990 19,759 20,747 21,784 Deferred tax assets 1,866,903 2,150,823 2,553,886 3,320,052 3,652,057

Other operating income, net 130,248 144,086 207,810 249,372 311,715 Other assets 4,546,845 5,937,931 6,299,423 7,622,302 9,146,762

Operating income 16,315,481 19,802,437 21,888,992 23,930,908 25,736,816 Total assets 502,445,972 618,888,990 716,805,235 815,028,663 881,966,639

Operating expenses (7,217,748) (8,395,378) (9,065,643) (9,749,205) (10,041,681)

Impairment losses on assets (1,181,279) (2,297,229) (3,235,980) (4,303,853) (5,595,009)

Liabilities

Due to central banks 185,000 6,776,000 5,719,040 6,290,944 6,920,038

Profit before tax 7,916,454 9,109,830 9,587,369 9,877,850 10,100,125 Financial liabilities 1,040,239 500,000 - - -

Income tax expense (1,901,605) (2,296,772) (2,359,522) (2,469,462) (2,525,031)

Due to banks and non-bank financial

institutions 103,585,523 142,302,543 144,756,826 172,864,696 183,831,893

Net profit 6,014,849 6,813,058 7,227,847 7,408,387 7,575,094 Due to customers 347,883,413 409,719,844 470,228,193 526,655,576 568,788,022

Attributed to Shareholders 5,991,048 6,828,456 7,223,298 7,334,304 7,499,343 Deferred tax liabilities 980,797 772,109 923,596 951,304 979,843

Earnings per share (in RMB) 0.64 0.72 0.78 0.79 0.80 Bonds payable 2,300,000 5,000,000 34,846,762 38,331,438 42,164,582

Other liabilities 9,581,695 10,970,085 12,041,467 14,086,018 15,690,729

Total liabilities 465,556,667 576,040,581 668,517,436 759,179,976 818,375,108

(%) 2013 2014 2015 2016E 2017E

Key Ratios Equity:

P/B: 1.0 0.9 0.8 0.7 0.6 Share capital 9,300,000 9,300,000 9,300,000 9,300,000 9,300,000

P/E: 5.7 5.0 4.6 4.6 4.5 Reserves and retained profits 26,951,448 32,125,950 37,462,793 44,871,180 52,446,274

Loan-to-deposit Ratio: 59.0% 59.1% 57.1% 56.4% 57.3% Non-controlling interests 637,857 1,422,459 1,525,006 1,677,507 1,845,257

Net interest income growth: 19.94% 16.85% 9.91% 9.27% 7.20% Total equity 36,889,305 42,848,409 48,287,799 55,848,687 63,591,531

Non interest income growth: 9.12% 137.42% 18.49% 9.98% 11.63% Total liabilities and equity 502,445,972 618,888,990 716,805,235 815,028,663 881,966,639

Profit Growth: 11.42% 13.98% 5.78% 1.54% 2.25%

NPL Ratios: 0.80% 0.78% 0.98% 1.09% 1.23% BPS (in RMB) 3.9 4.5 5.0 5.8 6.6

Interest Margin: 3.41% 3.37% 3.20% 3.10% 3.00%

22

China Cement Weekly

March 21, 2016

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

Livy Lyu—Research Assistant

(852) 3698-6393

[email protected]

Cement Prices Continued to Rebound in Eastern China；

BBMG Still Our Preferred Pick

Mild recovery in cement prices continued. Average cement prices (nationwide) rose

0.2% week-on-week to RMB239.42/tonne last week. Cement prices in parts of Zhejiang,

Shaanxi and Anhui were up RMB10-20/tonne, while prices in Guangdong and Yunnan

continued to decline. Market demand continued to recover in late March, with average daily

shipment volume returning to 70%-80% in eastern China and south central China, mainly

owing to increasing demand from infrastructure and property development. However,

infrastructure and rural development demand in northern China was still weak. Average

shipment volume was only around 20%-60%. Average inventory levels (nationwide)

declined to 70.06%.

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

for Bohai-Rim Steam Coal (Q5500K) increased RMB1/tonne to RMB389/tonne in the past

week. The index was 19.3% lower on a year-on-year (YoY) basis.

Optimistic investors vs. conservative management. CR Cement [1313.HK HOLD],

West China Cement [2233.HK], TCCI [1136.HK], and Tianrui Cement[1252.HK] announced

their 2015 annual results last week. TCCI and WCC recorded a net loss of HK$249m and

RMB309m respectively. CR cement and Tianrui still posted a profit, though declining 76%

YoY and 45% YoY respectively. Management of CR Cement, WCC and Tianrui all

presented a conservative tone for 2016 sales volume targets (largely flat YoY) during the

analyst meetings, but we found that investors in the meetings were comparatively optimistic

because of the upbeat property and FAI data. Given the limited visibility of a cement price

rebound, we maintain our view that BBMG [2009.HK; BUY] is a safer bet. If the rebound in

cement prices is relatively short-lived, the property business still offer a huge buffer for

earnings thanks to favourable government policy.

Cement stocks under coverage up 7.7% on average.Thanks to improvement in market

sentiment late last week, all cement stocks under our coverage performed well. Best

performer BBMG climbed 11.1% to HK$5.40. CNBM [3323.HK; SELL] was the weakest

among our coverage stocks, but it still rose 3.4%.

China Cement Sector

Sources: Company, Bloomberg, CGIS 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 HOLD 19.68 13,121 7.0 13.4 15.4 1.22 1.15 1.10 4.7 7.1 7.1 9

CNBM 3323 HK Equity SELL 3.96 2,741 3.0 21.1 19.7 0.42 0.42 0.41 7.3 10.1 10.7 249

BBMG 2009 HK Equity BUY 5.40 6,359 9.4 9.8 6.8 0.59 0.58 0.55 8.2 8.3 6.6 65

CR Cement 1313 HK Equity HOLD 2.47 2,069 3.4 7.2 12.7 0.52 0.56 0.55 3.9 7.3 7.5 56

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 9.4 134

Simple average 13.7 18.7 17.9 0.87 0.85 0.82 6.9 8.6 8.3 103

Weighted average 10.8 15.8 15.6 0.97 0.94 0.90 6.3 8.0 7.6 63

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 (45.4) (8.3) (29.2) (0.5) 18.2 18.0 8.8 2.4 4.5 2.7

CNBM 3323 HK Equity (85.2) 12.4 (59.2) (0.4) 17.5 14.4 2.0 5.3 5.5 1.0

CR Cement 1313 HK Equity (52.2) (43.3) (47.9) (0.1) 14.1 16.2 7.5 4.6 7.5 3.5

BBMG 2009 HK Equity 1.3 46.6 21.8 0.4 6.8 6.1 8.4 1.7 1.4 1.7

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 (34.2) 5.8 (19.7) 0.4 12.1 11.7 6.2 2.8 3.9 1.9

Weighted average (33.3) 7.1 (17.1) 0.1 13.7 13.3 7.5 2.4 3.7 2.2

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

23

1-Year Relative Performance

Sources: Capital IQ, CGIS Research

Peer Comparison


Market cap

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

Anhui Conch 914 HK Equity HOLD 19.68 13,121 7.5 14.4 16.5 1.31 1.24 1.18 5.0 7.5 7.5

CNBM 3323 HK Equity SELL 3.96 2,741 3.1 21.8 20.4 0.44 0.43 0.43 7.4 10.1 10.8

BBMG 2009 HK Equity BUY 5.4 6,359 9.4 9.8 6.8 0.65 0.58 0.55 8.5 8.3 6.6

CR Cement 1313 HK Equity HOLD 2.47 2,069 3.8 7.9 12.0 0.57 0.61 0.59 4.1 7.6 7.3

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 1.49 944 5.0 - - 0.30 0.36 - 4.1 42.5 15.4

China National Materials 1893 HK Equity NR 1.51 691 7.7 10.4 10.3 0.31 0.32 0.30 6.3 7.5 7.3

Asia Cement 743 HK Equity NR 1.65 331 - - - 0.23 - 0.23 3.9 - 9.5

West China Cement 2233 HK Equity NR 1.62 1,126 - 28.2 12.6 1.25 1.26 1.20 9.7 8.5 6.3

Tianrui Cement 1252 HK Equity NR 1.95 600 12.5 - - 0.52 - - 12.6 - -

Simple average 9.5 13.5 11.3 0.72 0.63 0.60 7.2 10.2 8.0

Weighted average 10.3 15.7 14.9 0.99 0.93 0.88 6.7 9.1 7.8

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

24

Figure 1: Regional Cement Price

Sources: Digital Cement, CGIS Research

25

Figure 2: Cement Prices in Major Cities (1)


26



27



28



29

Figure 6: Cement Prices (Mid-March) (RMB/Tonne)


30

Figure 7: Cement Inventory Level (%)


31

Figure 8: Clinker Capacity Breakdown by Region (2015)

Note: The largest regional exposure of each company is highlighted in yellow.

Sources: Digital Cement, China Cement Association, CGIS Research

Anhui Conch CNBM CR Cement Shanshui BBMG TCCI Asia Cement WCC Sinoma Group Jidong Huaxin

0914.HK 3323.HK 1313.HK 0691.HK 2009.HK 1136.HK 0743.HK 2233.HK 000401.CH 600801.CH

East China

Anhui 36.7% 5.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.8% 0.0% 0.0%

Fujian 0.0% 0.5% 11.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Jiangsu 1.9% 5.8% 0.0% 0.0% 0.0% 8.7% 0.0% 0.0% 5.8% 0.0% 0.0%

Jiangxi 3.8% 4.6% 0.0% 0.0% 0.0% 0.0% 42.0% 0.0% 3.5% 0.0% 0.0%

Shandong 0.8% 14.2% 0.0% 51.7% 0.0% 0.0% 0.0% 0.0% 0.0% 3.2% 0.0%

Zhejiang 1.6% 11.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Shanghai 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total 44.8% 41.6% 11.6% 51.7% 0.0% 8.7% 42.0% 0.0% 22.2% 3.2% 0.0%

South Central China

Guangdong 7.5% 0.0% 24.5% 0.0% 0.0% 26.6% 0.0% 0.0% 4.7% 0.0% 3.5%

Guangxi 8.2% 2.0% 41.7% 0.0% 0.0% 16.4% 0.0% 0.0% 0.0% 0.0% 0.0%

Hainan 0.0% 0.0% 5.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Hunan 10.7% 7.3% 0.0% 0.0% 0.0% 5.9% 0.0% 0.0% 5.8% 2.2% 16.4%

Hubei 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 25.1% 0.0% 0.0% 0.0% 55.9%

Henan 0.0% 5.6% 0.0% 2.6% 4.8% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5%

Total 26.4% 14.9% 71.6% 2.6% 4.8% 48.9% 25.1% 0.0% 10.5% 2.2% 79.4%

North China

Beijing 0.0% 0.0% 0.0% 0.0% 12.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Tianjin 0.0% 0.0% 0.0% 0.0% 4.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Hebei 0.0% 0.9% 0.0% 0.0% 64.4% 0.0% 0.0% 0.0% 0.0% 39.7% 0.0%

Shanxi 0.0% 0.8% 7.7% 14.2% 11.6% 0.0% 0.0% 0.0% 0.0% 10.2% 0.0%

Inner Mongolia 0.0% 3.3% 0.0% 9.0% 0.0% 0.0% 0.0% 0.0% 7.0% 10.3% 0.0%

Total 0.0% 5.0% 7.7% 23.1% 92.9% 0.0% 0.0% 0.0% 7.0% 60.3% 0.0%

Northeast China

Heilongjiang 0.0% 4.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Jilin 0.0% 2.1% 0.0% 2.1% 2.4% 0.0% 0.0% 0.0% 0.0% 5.6% 0.0%

Liaoning 0.0% 0.8% 0.0% 17.8% 0.0% 3.4% 0.0% 0.0% 0.0% 2.9% 0.0%

Total 0.0% 7.1% 0.0% 19.9% 2.4% 3.4% 0.0% 0.0% 0.0% 8.5% 0.0%

Southwest China

Chongqing 3.2% 3.3% 0.0% 0.0% 0.0% 6.8% 0.0% 0.0% 0.0% 7.3% 3.5%

Sichuan 4.4% 12.6% 0.0% 0.0% 0.0% 10.2% 32.9% 0.0% 0.0% 0.0% 5.9%

Guizhou 9.6% 8.8% 2.6% 0.0% 0.0% 12.5% 0.0% 5.5% 0.0% 0.0% 0.0%

Yunnan 3.0% 6.6% 6.5% 0.0% 0.0% 9.5% 0.0% 0.0% 0.0% 0.0% 7.7%

Tibet 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5%

Total 20.2% 31.3% 9.0% 0.0% 0.0% 39.1% 32.9% 5.5% 0.0% 7.3% 20.6%

Northwest China

Gansu 3.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.3% 0.0% 0.0%

Shaanxi 5.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 78.7% 2.3% 18.5% 0.0%

Qinghai 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4.7% 0.0% 0.0%

Ningxia 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.2% 0.0% 0.0%

Xinjiang 0.4% 0.0% 0.0% 2.6% 0.0% 0.0% 0.0% 15.8% 38.8% 0.0% 0.0%

Total 8.7% 0.0% 0.0% 2.6% 0.0% 0.0% 0.0% 94.5% 60.4% 18.5% 0.0%

Grand Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

32

Figure 9: Market Share in Terms of Clinker Capacity (2015)

Note: Market leader in each province is highlighted in yellow. Market leader is each region in highlighted in red.

Sources: Digital Cement, China Cement Association, CGIS Research

2015 Anhui Conch CNBM CR Cement Shanshui BBMG TCCI Asia Cement WCC Sinoma Group Jidong Huaxin

0914.HK 3323.HK 1313.HK 0691.HK 2009.HK 1136.HK 0743.HK 2233.HK 000401.CH 600801.CH

East China

Anhui 53.0% 11.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.3% 0.0% 0.0%

Fujian 0.0% 3.1% 13.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Jiangsu 5.6% 26.5% 0.0% 0.0% 0.0% 5.9% 0.0% 0.0% 5.8% 0.0% 0.0%

Jiangxi 12.3% 23.0% 0.0% 0.0% 0.0% 0.0% 14.8% 0.0% 3.8% 0.0% 0.0%

Shandong 1.3% 35.4% 0.0% 25.3% 0.0% 0.0% 0.0% 0.0% 0.0% 1.8% 0.0%

Zhejiang 5.1% 56.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Shanghai 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total 17.7% 25.4% 1.4% 6.2% 0.0% 0.8% 1.8% 0.0% 3.0% 0.4% 0.0%

South Central China

Guangdong 16.2% 0.0% 16.2% 0.0% 0.0% 13.3% 0.0% 0.0% 3.4% 0.0% 1.7%

Guangxi 22.0% 8.5% 34.4% 0.0% 0.0% 10.2% 0.0% 0.0% 0.0% 0.0% 0.0%

Hainan 0.0% 0.0% 23.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Hunan 26.4% 27.8% 0.0% 0.0% 0.0% 3.4% 0.0% 0.0% 4.9% 2.0% 9.2%

Hubei 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 8.5% 0.0% 0.0% 0.0% 39.4%

Henan 0.0% 15.9% 0.0% 1.5% 1.5% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5%

Total 12.1% 10.6% 10.1% 0.4% 0.4% 5.2% 1.2% 0.0% 1.6% 0.4% 8.2%

North China

Beijing 0.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Tianjin 0.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Hebei 0.0% 2.8% 0.0% 0.0% 20.7% 0.0% 0.0% 0.0% 0.0% 27.3% 0.0%

Shanxi 0.0% 3.7% 7.3% 13.3% 6.0% 0.0% 0.0% 0.0% 0.0% 11.3% 0.0%

Inner Mongolia 0.0% 14.3% 0.0% 7.5% 0.0% 0.0% 0.0% 0.0% 6.6% 10.2% 0.0%

Total 0.0% 6.3% 1.9% 5.7% 12.6% 0.0% 0.0% 0.0% 1.9% 17.4% 0.0%

Northeast China

Heilongjiang 0.0% 57.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Jilin 0.0% 23.5% 0.0% 4.6% 2.9% 0.0% 0.0% 0.0% 0.0% 14.3% 0.0%

Liaoning 0.0% 4.7% 0.0% 19.9% 0.0% 2.9% 0.0% 0.0% 0.0% 3.8% 0.0%

Total 0.0% 21.0% 0.0% 11.6% 0.8% 1.5% 0.0% 0.0% 0.0% 5.8% 0.0%

Southwest China

Chongqing 11.2% 18.0% 0.0% 0.0% 0.0% 5.6% 0.0% 0.0% 0.0% 9.2% 2.8%

Sichuan 7.4% 33.3% 0.0% 0.0% 0.0% 4.0% 6.1% 0.0% 0.0% 0.0% 2.3%

Guizhou 21.8% 31.0% 1.8% 0.0% 0.0% 6.6% 0.0% 1.1% 0.0% 0.0% 0.0%

Yunnan 6.3% 21.2% 4.1% 0.0% 0.0% 4.6% 0.0% 0.0% 0.0% 0.0% 3.6%

Tibet 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 45.5%

Total 11.2% 26.8% 1.5% 0.0% 0.0% 5.0% 2.0% 0.3% 0.0% 1.4% 2.6%

Northwest China

Gansu 14.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.7% 0.0% 0.0%

Shaanxi 16.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 22.8% 2.5% 20.7% 0.0%

Qinghai 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 20.4% 0.0% 0.0%

Ningxia 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 41.9% 0.0% 0.0%

Xinjiang 1.0% 0.0% 0.0% 1.9% 0.0% 0.0% 0.0% 3.6% 32.2% 0.0% 0.0%

Total 7.8% 0.0% 0.0% 0.7% 0.0% 0.0% 0.0% 7.8% 18.3% 5.9% 0.0%

Grand Total 10.6% 16.5% 3.3% 3.2% 1.8% 2.5% 1.2% 1.0% 3.6% 3.8% 2.4%

33

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

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

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

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