a share monthly portfolio...1 a-share monthly portfolio may 7, 2018 larger fluctuations expected;...

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A-Share Monthly Portfolio

May 7, 2018

Larger Fluctuations Expected; Value Remains as the King — Investment Portfolio for May 2018

Highlights of the Month. For our Monthly Portfolio, we replaced Goldwind Science & Technology (002202.CH) and Tianqi Lithium (002466.CH) with China Yangtze Power (600900.CH) and NavInfo Co (002405.CH). For the Medium Term Portfolio, we included GCI Science & Technology (002544.CH) and Haitong Securities (600837.CH), and removed China Shipbuilding Industry Group Power (600482.CH) and Ping An Insurance Group (601318.CH). For the Long Term Portfolio, we added Haitong Securities (600837.CH) and took away Ping An Insurance (601318.CH).

Investment Portfolios: We establish three investment portfolios of different investment periods to cater for the various needs and risk preferences of investors.

May Stock Portfolio (in alphabetical order): Beijing New Building Materials (000786.CH), Changjiang Electronics Technology (600584.CH), China Yangtze Power (600900.CH), Jointown Pharmaceutical (600998.CH), Kweichow Moutai (600519.CH), NaviInfo Co (002405.CH), Poly Real Estate Group (600048.CH), Shaanxi Coal (601225.CH), SAIC Motor (600104.CH), Swellfun Co (600779.CH).

Medium Term (3-6 months) Stock Portfolio (in alphabetical order): Beijing New Building Materials (000786.CH), GCI Science & Technology (002544.CH), Haitong Securities (600837.CH), Holitech Technology (002217.CH), Kweichow Moutai (600519.CH), Nanjing King-Friend Biochemical Pharmaceutical (603707.CH), Poly Real Estate Group (600048.CH), Suzhou Keda Technology (603660.CH), Swellfun Co (600779.CH) and Zhejiang Huace Film & TV (300133.CH).

Long Term (12 months) Stock Portfolio (in alphabetical order): Beijing New Building Materials (000786.CH), Changchun High and New Technology (000661.CH), Guizhou Space Appliance (002025.CH), Haitong Securities (600837.CH), Kweichow Moutai (600519.CH), NavInfo Co (002405.CH), Poly Real Estate Group (600048.CH), Swellfun Co (600779.CH), Yantai Jereh Oilfield Services (002353.CH) and Zhengye Technology (300410.CH).

Sources: China Galaxy Securities Research

Table: CGS May Investment Portfolio (closing prices on May 3, 2018)

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

This is a summary translation of the

Chinese report titled “宽幅震荡不改价值

成长至上”contributed by the following:

Hong Liang — Strategy Analyst

(8610) 6656 8750

[email protected]

Practicing Certificate No.: S0130511010005

Stock

Code

Stock Discription EPS (RMB) PE (X)

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

000786.CH Beijing New Building Materials 0.63 0.79 1.31 1.75 37.0 29.5 17.8 13.3

600584.CH Changjiang Electronics Technology 0.05 0.10 0.28 0.81 416.6 208.3 74.4 25.7

600900.CH China Yangtze Power 0.83 0.94 1.01 1.05 19.3 17.0 15.8 15.2

600998.CH Jointown Pharmaceutical 0.422 0.532 0.82 0.83 44.3 35.2 22.8 22.5

600519.CH Kweichow Moutai 12.34 13.31 21.56 28.40 54.4 50.4 31.1 23.6

002405.CH NavInfo Co 0.19 0.15 0.22 0.31 136.7 173.2 118.1 83.8

600048.CH Poly Real Estate Group 1.04 1.05 1.23 1.43 12.5 12.4 10.6 9.1

601225.CH Shaanxi Coal -0.3 0.28 1.05 1.07 - 28.3 7.5 7.4

600104.CH SAIC Motor 2.55 2.74 3.12 3.50 13.0 12.1 10.6 9.5

600779.CH Swellfun Co 0.18 0.46 0.72 1.23 234.3 91.7 58.6 34.3

2

Table: CGS May Investment Portfolio (closing prices on May 3, 2018) Stock

Code

Stock Discription EPS (RMB) PE (X)

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

000661.CH Changchun High & New Tech 2.26 2.85 3.85 5.16 88.8 70.4 52.1 38.9

002544.CH GCI Science & Technology 0.21 0.33 0.35 0.46 84.9 54.0 50.9 38.8

002025.CH Guizhou Space Appliance 0.54 0.61 0.73 0.84 47.1 41.7 34.9 30.3

600837.CH Haitong Securities 1.48 0.70 0.74 0.81 7.9 16.7 15.8 14.4

002217.CH Holitech Technology 0.07 0.28 0.42 0.61 147.6 36.9 24.6 16.9

002353.CH Jereh Oilfield Services 0.15 0.13 0.07 0.39 106.9 123.4 229.1 41.1

603707.CH Nanjing King-Friend Biochemical 0.21 0.61 0.74 1.07 139.0 47.9 39.4 27.3

603660.CH Suzhou Keda Technology 0.6 0.86 1.08 1.45 61.4 42.8 35.7 25.4

300133.CH Zhejiang Huace Film & TV 0.47 0.27 0.36 0.44 23.7 41.3 31.0 25.3

300410.CH Zhengye Technology 0.20 0.37 1.068 1.566 138.3 74.7 25.9 17.7

3

China Yangtze Power (600900.CH): Quality Resources and Solid Cash -flow Position

Driving factors, key assumptions and main predictions:

1. High Dividend Guaranteed. China Yangtze Power (CYP) promised cash dividends of no less than RMB0.65 per share in 2016-2020 and no less than 70% of its net profits in 2021-2025. Its final dividend in 2016 exceeded the previous promised level.

2. The World’s Largest Listed Clean Energy Company; Global Leader in Hydropower. As of end-2016, CYP’s installed hydropower capacity reached 45.54m kW. By 2020, the Company will own 5 of the world’s largest 12 hydropower stations, with total installed capaci-ty of 71.74m kW, further strengthening its leading position in the global hydropower industry.

3. Quality Resources; Guaranteed Power Absorption; Perpetual Access to Resources. The Company’s power are mainly sold to the Yangtze River Delta and Pearl River Delta regions which have the most intense power load and highest electricity tariff. Therefore, there should not be any concern about its power absorption. In addition, a majority of its power stations are part of the country’s West-East Electricity Transfer project and it owns six exclusive channels to transmit power directly to Guangdong, Shanghai and Zhejiang. Mean-while, it is expected that the Company’s profitability would be enhanced following the completion of the depreciation provision of its core assets (e.g. Gezhouba Hydropower Plant).

4. China’s electricity market reform offers CYP a door to the power distribution business. The latest electricity market reforms offers a chance for the Company to tap the power distribution business. CYP will expand its core business during the 13th Five Year Plan Peri-od and extend its business reach to the downstream, covering power generation, trading, distribution and electricity retailing. The elec-tricity distribution and retailing business is expected to be a new earnings driver.

5. Beneficiary of China’s One Belt One Road Strategy. China Three Gorges Corporation has commenced international business in over 50 countries and regions in the world, including Pakistan, Lao and Brazil, over the past decade. It has recently become the largest share-holder of Energias de Portugal. CYP should benefit from China’s One Belt One Road Strategy and China Three Gorges Corporation’s “Go Global” strategy. The Company is targeting hydropower and nuclear power businesses in Russia, the U.K and Romania, suggesting a promising development outlook.

Sources: Company data, China Galaxy Securities Research

Investment Rating:

Recommend Zhou Ran: (8610) 6656 8494; [email protected] Practitioner Certificate No.：S0130514020001

How our views differ from the market’s

The market is concerned about CYP’s growth prospect. Consid-

ering its power generation, grid and distribution businesses, we believe the Company has a comprehensive layout along the business chain. Its nuclear, power distribution and overseas businesses could become new earnings drivers in the future.

The market is worried about its hydropower production given the

weaker water flows in H1. In fact, the water levels of Yangtze River has been rising following the heavy rainfalls in late June. We believe there could be a significant improvement in hydro-power generation in H2.

Company valuation and investment recommendations

We estimate its 2017-18E EPS at RMB1.01/ RMB1.05, corre-

sponding to PER of 16x/15x. Maintain RECOMMEND.

CYP is the world’s largest listed hydropower company with qual-

ity resources. Given the high fixed cost of hydropower business,

a mature company generally has better profitability and stronger

cash flow position. Meanwhile, the Company promised high

dividend payout. China’s reforms should bring about new oppor-

tunities as the Company expands its business layout into cover-

ing electricity distribution and retailing.

Main financial indicators 2015A 2016A 2017E 2018E

Operating revenue (RMB m) 47,435 48,939 50,124 51,240

Growth rate of operating revenue -9.88% 3.17% 2.42% 2.23%

Net profit (RMB m) 18,235 20,781 22,214 23,045

Growth rate of net profit -2.62% 13.96% 6.90% 3.74%

Diluted EPS (RMB) 0.83 0.94 1.01 1.05

PE 19.3 17.0 15.8 15.2

Catalyst for share price performance

Substantial increase in water flows;

Tariff aligns to thermal power.

Weaker water flows;

Weaker-than-expected power demand.

Main risk factors

4

Zhengye Technology (300410.CH): Beneficiary of the Robust 3C and Lithium-ion Bat-

tery Equipment; Growth Expected


1) Recovery in Global PCB Industry. The global printed circuit board (PCB) industry is undergoing a recovery. The rapid de-velopment of auto electronics and LED industries led to higher requirements for PCBs. New technologies generally feature intelligent, automated and eco-friendly production. Precision, density and thinness have become key elements in the devel-opment of PCB products,

2) Development of New Energy Vehicle to Boost Lithium-ion Equipment Demand. It is expected that the automated as-sembly product for Lithium-ion battery will become one of its earnings growth driver starting from next year. The Company has received its first order for tab laser welding equipment. Meanwhile, driven by smart phones and smart home appliances, the outlook of OLED industry has become more positive and we expect the Company’s OLED equipment production capaci-ty to commence operation starting from next year.

3) Expanding Capacity on Robust Downstream Demand. The Company invested RMB350m in H1 2017 to build a smart equipment industrial park in Dongguan which features automated fab. It will also consolidate its subsidiaries’ 3C equipment and materials. The industrial park is expected to commence production in July 2018, which should increase its capacity by 2-3 times. The new investment should help to boost its market share and impact.

4) Subsidiaries should Meet Earnings Target. The Company’s acquired subsidiaries should be able to meet their earnings target given their abundant orders. As the consolidation of subsidiaries began to show impact, the Company’s expense ratios dropped slightly and its net profit margin increased.

Sources: WIND, China Galaxy Securities Research

Investment Rating:

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


The Company is a technology enterprise with a central re-search institute. Its strong emphasis on research investments helps to drive product and technology upgrades and innova-tion. This also boosts its earnings growth.

The Company is transforming from a smart PCB inspection equipment and service provider to a comprehensive system solution provider of fully-automated equipment for the PCB, LED, LCD, lithium-ion battery, elevators and compressor seg-ments. The transformation is in line with the industry’s develop-ment trend and we see tremendous growth prospect.


We estimate its 2017-19E net profits attributable to the parent at

RMB210m, RMB310m and RMB460m, corresponding to respec-

tive EPS of RMB1.06, RMB1.57 and RMB2.32. This implies

2017E PER of 34x, 2018E PER of 23x and 2019E PER of 16x.

The over-40% net profit growth in the next three years suggests

visible growth ahead. We assign an “OVERWEIGHT” rating for the

counter.

Orders from large clients; revenue recognition following

order delivery;

Progress made in the M&A in smart manufacturing seg-

ments.

Main risk factors

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

Operating revenue (RMB m) 357.08 600.34 1,283.49 1,882.88 2,788.18

Growth rate of operating revenue 14.79% 68.12% 113.79% 46.70% 48.08%

Net profit (RMB m) 39.34 72.84 210.50 308.65 457.56

Growth rate of net profit 35.04% 85.14% 189.00% 46.63% 48.25%

Diluted EPS (RMB) 0.200 0.370 1.068 1.566 2.321

PE 138.3 74.7 25.9 17.7 11.9


Earnings of acquired companies below expectations;

Slower-than-expected progress in the construction of its smart

manufacturing industry park.

5

Zhejiang Huace Film & TV (300133.CH): Competitive Edge in Providing Content and

High Operating Leverage


1) Strong Competitiveness in Lead Content. Given the intensifying competitions in distribution channel, the Company’s im-

proving content and branding should further enhance its bargaining power and thus, boost its profitability.

2) Business Specialization. The Company will continue to focus on the production of quality dramas. Its rich content pipeline

allows it to explore new growth areas.

3) Industrialization Process. The Company has strong resource consolidation capability and capital position, which translate

into huge growth potential and risk resistance.

4) Maintain RECOMMEND. We expect the Company’s 2017 revenue to grow steadily with an EPS of RMB0.36. Its revenue

could expand further in 2018.


Investment Rating:

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


Solid Lead Content: Given the intensifying competition in distribution channel, new investments would focus more on lead content. Its rich pipeline of lead content should enhance its bargaining power and ensure a stable growth in earnings.

Industrialization: Its strong resources consolidation capability, industrialization and capital position should effectively enhance its production, earnings and risk resistance ability. With its solid content and branding, the Company has been expanding the monetization for its IP projects to improve profitability.


We estimate its 2017-19E EPS at RMB0.36, RMB0.44 and

RMB0.56, respectively, corresponding to PER of 33x, 26x and

21x. Maintain RECOMMEND.

Competition in the distribution channel further intensi-

fies;

Lower supply in film and TV content;

Stronger profitability of lead content.

Main risk factors


Operating revenue (RMB m) 2,657 4,445 5,458 6,746 8,140


Net profit (RMB m) 475 478 637 783 991


Diluted EPS (RMB) 0.47 0.27 0.36 0.44 0.56

PE 23.7 41.3 31.0 25.3 19.9


Slower-than-expected progress in film & TV production;

Slower-than-expected collection of accounts receivables;

Stricter regulations in the TV industry.

6

Kweichow Moutai (600519.CH): Bullish on Long-term Investment Value


1) Baijiu Industry: Another round of growth in 2017; Top players leading industry’s production growth; Production and sales Well-aligned; Robust personal and business consumption driving growth. On the demand front, given a mild increase in residents’ consumption, continuous consumption upgrades, growth in diversified consumption growth, both personal and business consumption has become a major driver for the baijiu industry. On the supply front, top baijiu players achieved effective brand building and quality enhancement, leading to a steady growth in production volume. With a well aligned production and sales platform, medium– and high-end baijiu products reported growth in both volume and ASP while low-end baijiu products had steady growth in production and sales. In addition, baijiu players seized opportunities from the new retail norm and expand into niche markets through the e-Commerce platform.

2) The Company’s leading product features long-standing culture and strong brand influence, and should play a lead-ing role in the industry’s recovery; Outstanding revenue and profit growth in 2017. The Company is a leader in Chi-na’s baijiu industry. Its leading product “Kweichow Moutai”, one of the three major distilled liquor in the world, as well as a baijiu brand integrating geographical label, organic food and National Intangible Cultural Heritage, has a strong brand influ-ence in both the domestic and overseas markets. In 2017, the Company produced 63,787.61 tonnes of moutai liquor and base liquors, of which moutai base liquors and base liquors accounting for 42,828.59 tonnes and 20,959.02 tonnes, respec-tively. Revenue grew 52.07% YoY to RMB 61.063bn and net profit attributable to the parent increased 62.0% YoY to RMB27.08bn. Basic EPS came in at RMB21.56. On a quarterly basis, revenue grew 35.7%, 36.4%, 116.0% and 31.3%, respectively to RMB13.91bn, RMB11.58bn, RMB18.99bn and RMB16.58bn, respectively, and net profits rose 25.2%, 31.0%, 138.4% and 66.8% YoY, rto RMB3.12bn, RMB5.13bn, RMB8.73bn and RMB7.10bn, respectively. Meanwhile, ad-vance from customers as of the end-2017 reached RMB14.43bn.

3) Consolidates Distribution Channel; Ensures Market Stability and Extends the Impact of its Brand Value. In 2017, the Board of Directors adopted a development approach of seeking progress through stability. It followed its “Ten Enterprise-Supporting Strategy” and implemented the “Nine Marketing Measures” to enhance production and quality, stabilize the mar-ket and encourage growth. Considering its brand, quality, cultural value, unique industry environment, highly recognized core competitiveness, its products should see certain supply shortage in this round of industry recovery. The Company's relatively strong pricing suggests its confidence in a long-term healthy development.


Investment Rating:

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


Quality players should outperform during industry recovery;

Given a robust market demand, the Company has a strong pricing power, which favours a long-term healthy development.


We estimate its 2018-19E EPS at RMB28.40 and RMB34.66,

corresponding to PER of 24x and 20x. Maintain

“RECOMMEND” rating.


Stronger revenue and net profit growth.

Main risk factors

Lower-than-expected sales;

Macro-economic and political factors.

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

Operating revenue (RMB m) 33,446.86 40,155.08 61,062.76 76,926.87 92,450.71


Net profit (RMB m) 15,503.09 16,718.36 27,079.36 35,671.64 43,544.37


Diluted EPS (RMB) 12.34 13.31 21.56 28.40 34.66

PE 54.4 50.4 31.1 23.6 19.4

7

Sichuan Swellfun (600779.CH): A Rapidly Growing Outperformer


1. Accelerated YoY growth in revenue and net profit since early 2016. Revenue in full-year 2016 grew 37.6% YoY to RMB1.18bn while net profit attributable to the parent jumped 155.5% YoY to RMB225m, representing an EPS of RMB0.46. The Company managed to extend its excellent performance to 2017.

2. Solid growth in full-year revenue and profit expected on strong low-season and robust peak-season performance. In 9M 2017, the Company achieved revenue of RMB1.47bn, up 85.2% YoY. Net profit attributable to the parent rose 63.2% YoY to RMB243m, repre-senting an EPS of RMB0.50. In terms of quarterly performance, the Company reported revenue of RMB399m, RMB442m and RMB631m in Q1, Q2 and Q3, respectively, up 32.8%, 129.7% and 108.9% YoY. Net profits attributable to the parent in the first 3 quarters were RMB92m, RMB22m and RMB129m, respectively, up 17.7%, 74.4% and 122.3% YoY. The rapid growth in Q1 and Q3 revenues were supported by the peak season. While Q2 is a traditional low season, the Company managed to achieve bright results for both Q2 and Q3 thanks to the advance purchases for the Mid-Autumn festival and National Day holiday. Its quarterly net profits attributable to the parent were also strong.

3. Focus on channel optimization for development. The Company has adjusted its channel model to a combination of provincial sole agencies and simplified distribution levels. In H1 2017, the Company continued to initiate innovative management concepts, enhance governance and optimize its distribution model. It increased the market construction in key provinces and strengthened the competitive-ness of its core shops, so as to achieve better marketing impacts.

4. Revitalizing the brand and cultivating the market. In 2016, the Company significantly increased its brand promotion and marketing efforts. Through appreciation activities, the Company has strengthened its brand recognition and reputation among consumers. In H1 2017, Swellfun reinforced its high-end market position and launched a strategic high-end item. It also worked with the Fortune magazine to promote its brand image. Its investment in marketing and brand building should support its sales in the next three years.


Operating income (RMB m) 364.87 854.87 1,176.37 2,013.12 2,906.75

Operating income growth rate -24.89% 134.29% 37.61% 71.13% 44.39%

Net profit (RMB m) -418 87.97 224.79 350.74 602.75

Net profit growth rate - - 129.08% 56.03% 71.85%

EPS (RMB) (diluted) - 0.18 0.46 0.72 1.23

PE - 234.3 91.7 58.6 34.3


Investment Rating:

Recommend

Channel optimization focus. Based on the integrated performance of the Company’s single-quarter earnings growth and strong sales of its main products, the channel optimization and adjustments have had a very positive ef-fect.

Brand revitalization and market cultivation. We believe that the Company’s market cultivation indicates new man-agement’s profound understanding of the consumer market and illustrates its business plan. This should support sales in the next three years.

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

We estimate EPS of RMB0.72/ RMB1.23 in 2017-18E, with a PER of 59x/ 35x, respectively. We maintain our Recom-mend rating.

How our views differ from the market’s Company valuation and investment recommendations


Further growth in revenue and net profit.

Main risk factors

Lower-than-expected results from channel optimization and promotion.

Macroeconomic factors.

8

SAIC Motor (600104.CH): A Value Play with Visible Earnings

Driving factors, key assumptions and main predictions: 1) Q1 Earnings Up 10.1%; Prominent Leading Player Advantage amid Weak Market. Owing to the phasing out of tax cuts for

small-engine vehicles, demand was relatively weak during the period. SAIC Motor reported auto sales growth of 10.1%, much higher than the estimated industry growth of 2-3% in Q1 2018.

2) SAIC-GM Sales Growth Accelerated; Proprietary Business Reported Strong Performance. Auto sales of SAIC-GM totalled 165,900 units in March, up 17.95 YoY or 4.8% MoM, suggesting that the Company has basically overcome the decline in the sales of Chevrolet branded vehicles. The new vehicle launches in H2 2018 is expected to further boost its sales. We believe SA-IC-GM should be able to maintain a double-digit growth in sales in 2018. SAIC’s proprietary vehicle, MG6, achieved sales of over 10,000 units for the first time in March 2018. Both SUV and sedans are key drivers for its SUV segment.

3) Launches of Key Auto Models to Boost Q2 Sales. SAIC launched two compact SUVs, Skoda Koroq and Baojun 530 in March and is planning to roll out Baojun 360 in May. The three new models are expected to boost its sales in Q2 2018.

4) SAIC Motor reported stable growth in full-year 2017 earnings with an EPS of RMB2.82. We expect its 2018 earnings to growth further. Maintain “RECOMMEND” rating.


Investment Rating:

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


We estimate its 2018-19E EPS at RMB3.23 and RMB3.50. Maintain

“RECOMMEND” rating.


Not to be too pessimistic on China-US trade conflicts:

the market is worried that the lower tariff for imported

cars would affect the product prices of JV companies in

China. We believe the market has over-reacted. Firstly,

it would take some time for the tariff cut to come into

effect. Secondly, JV cars have competitive edges in

prices, maintenance in terms of convenience, and cus-

tomer experience. Therefore, we do not see any real

threats from imported cars.


Q1 sales outgrew that of the industry average;

The launches of new key models to boost Q2 sales.

Main risk factors

Weaker-than-expected sales in newly-launched vehicles.

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

Operating revenue (RMB 100m) 6,704 7,564 8,706 3,010 3,850


Net profit (RMB 100m) 298 320 344 377.02 409.45


Diluted EPS (RMB) 2.55 2.74 2.96 3.23 3.50

PE 13.0 12.1 10.6 9.5 9.5

9

Poly Real Estate (600048.CH): Aggressive Land Bank Replenishment; Robust Sales;

Solid Earnings


1. Poly Real Estate’s (PRE) 10M17 sales and GFA sold increased 37.0% and 30.0% YoY to RMB237.9bn and 17.02m sqm, respectively. According to its Q3 2017 results, tier-1/2 cities accounted for 84.6% of its total sales in the first 3 quarters of the year. Despite the government active property curbs in tier-1/2 cities during the year, the Company maintained sales growth of over 30%, with a rapid expansion in market share. Meanwhile, new GFA started surged 141% YoY to 32m sqm in the first 10 months of the year, indicating a strong pipeline for future sales. Tier-1 and 2 cities represented 95% and 80% of the total land bank replenishment in 2016 and 10M2017.

2. In the first 3 quarters of the year, the Company’s revenue fell 13.3% YoY while operating profit and net profit rose 0.7% and 16.3% YoY, respectively. The operating profit growth was mainly affected by the VAT reform. The stronger net profit growth could be attributed to the higher gross profit margin and attributable interests in projects booked during the period. PRE’s gross profit margin in 9M17 expanded by 3ppts YoY to 24.7%. Minority interest as a percentage of net profit dropped 11ppts to 18.6%. The relatively steady land acquisition costs in 2017 offer certain support to the Company’s future profitability.

3. In October 2017, the first central SOE home leasing REIT, Zhonglian Qianhai Kaiyuan Poly Real Estate Rental Home No. 1

Asset Special Support Plan (中联前海开源-保利地产租赁住房一号资产支持专项计划) was approved with an issuance of no

more than RMB5bn. In addition to property development, the Company has been expanding into the property finance and community consumer services, which is in line with its “One Core, Two Wings” development strategy.

Sources: WIND,China Galaxy Securities Research

Investment Rating:

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


Property business: The Company’s land acquisitions in 9M17

has surpassed its full-year 2016 acquisition. Industry leaders shows substantial advantages in both capital and resources amid the government’s property curbs. Its abundant land bank would add further strength as the industry concentration in-creases. The Company’s land resources are mainly located in tier-1/2 cities. With diminishing impact from property curbs and lower base effect this year, the property market in tier-1/2 cities may stabilize and rebound in the nest year.

Emerging businesses: With the SSE’s approval of the first

central SOE home leasing REIT, the home rental market is expected to see rapid development. The Company is also actively expanding into the property finance and community consumer services.


We estimate its EPS in 2017-19E at RMB1.23, RMB1.43 and RMB1.65, representing PER of 9.7x, 8.4x and 7.2x, below its his-torical average. Maintain RECOMMEND.

We see re-rating opportunities as the Company develops its REIT, property finance and community consumer service businesses..


An undervalued industry leader with solid earnings; likely to

benefit from the market share gains;

Supportive policies to boost the development of its new

businesses.

Main risk factors

Regulatory policies are further tightened;

Slower-than-expected development in emerging businesses.




Net profit (RMB m) 12,348 12,422 14,598 16,972 19,581


Diluted EPS (RMB) 1.04 1.05 1.23 1.43 1.65

PE 12.5 12.4 10.6 9.1 7.9

10

Holitech Technology (002217.CH): Full-screen, Dual-cameras and FPC products to

Drive Earnings


1. The Company is mainly engaged in touch screen products and based on this, it has developed a vast range of new products including full-screen products, camera modules, glass covers, biometric identification modules, wireless charging and the FPC products.

2. The upgrade of touch display products to full-screen products is expected to boost revenue and gross profit margins.

3. The Company’s is expanding its capacity for camera modules. The commencement of new capacity and the application of dual-camera modules/ vehicle cameras should boost its average selling price and become a new growth driver.

4. The Company acquired Lanpei New Material Technology to extend into the supply end of wireless charging business. Ho-litech has clear advantages in the domestic wireless charging raw materials and receiver markets. It is also actively expand-ing to cover the emission aspect. It is expected that the raw materials business would boom in both the domestic and global market next year. Holitech aims to develop wireless charging modules and becomes a major supplier for the international mobile phone manufacturers.

5. Holitech is a leading player in the domestic flexible printed circuit (FPC) market. Its clients are all tier-one manufacturers in China. The Company would actively expand its client base to cover international companies.

6. The Company achieves a 100% self-sufficiency rate for its glass cover products. It has increased investments in 3D glasses with its monthly capacity targeted to reach 10k in 2018.

7. We estimate its 2017-19E net profit at RMB1.322bn, RMB1.895bn and RMB2.508bn, corresponding to EPS of RMB0.42, RMB0.61 and RMB0.80.


Investment Rating:

Recommend Fu Chuxiong:（8610）6656 8393 / [email protected] Practitioner Certificate No.: S0130515010001


The market is concerned about its growth visibility.

We believe Holitech has strong growth visibility as (i) the Com-

pany has been expanding into several business with strong potentials, including dual-camera modules, FPC products, biometric identification modules and wireless charging; (ii) the share of tier-1 clients have been increasing and it is exploring new opportunities with international players. The product up-grade has also enhanced its client mix. For instance, HOV currently accounts for 30% of its revenue, up from 18% last year. The share is expected to increase further to 50% in two years.


We estimate its 2017-19E net profit at RMB1.322bn, RMB1.895bn and RMB2.508bn, corresponding to EPS of RMB0.42, RMB0.61 and RMB0.80. This represents 2017E PER of 28x, 2018E PER of 20x and 2019E PER of 15x.

The Company is expected to see rapid earnings growth in the next two years given its strong growth potential. Considering its valua-tion upside, we assign “RECOMMEND” rating for the counter.


Faster-than-expected development in full-screen product,

wireless charging and FPC products businesses;

Breakthrough in client expansion;

M&A driven expansions.

Main risk factors

Slower-than-expected penetration of its innovative businesses;

Slower-than-expected market expansion.




Net profit (RMB m) 217.18 873.05 1,322.16 1,894.82 2,507.57


Diluted EPS (RMB) 0.07 0.28 0.42 0.61 0.80

PE 147.6 36.9 24.6 16.9 12.9

11

Jointown Pharmaceutical (600998.CH): Rapid Earnings Growth; Benefitting from

China’s Healthcare Reform


1. Jointown Pharmaceutical, alongside other drug distribution leaders, should benefit from the market share gains brought by the implementation of the “Two-Invoice” System. The system also enhances its operation structure as it has now switched its focus from the traditional distribution business to terminal sales which should help lift substantially its profitability. We believe the improvement in profitability could be extended to full-year 2018.

2. The core direction of the latest healthcare reform is to strengthen the healthcare services in grassroots medical institutions. Given its advantages in cost and operation efficiency, the Company should benefit from related policies. In addition, the high-er gross profits from distributions to rural medical institutions should also boost its profitability.

3. The major shareholder subscribed RMB2bn of new shares in private placement (56% of the total new shares) at RMB19.65 per share (a discount to the current share price) with a lock-up period of 3 years. The participation shows his confidence in the Company.

4. It is expected that the Company’s 2017E earnings would increase substantially, with EPS estimated at RMB0.82 (dilution effect from private placement included). The earnings may see further growth in 2018. Maintain “RECOMMEND” rating.


Investment Rating:

Recommend Li Pingzhu: (8610) 8357 4546 / [email protected] License No.:S0130515040001


The market is concerned about the slower earnings growth in

Q3. We believe the Company maintained a rapid growth in Q3. Its operating revenue and gross profits grew rapidly during the quarter. The operating profit expanded over 48%. The slower net profit growth was mainly due to the dilution effect of share incentive scheme and higher tax.

The market believed the Two-Invoice System would affect its

institutional sales. We believe the system enhances its opera-tion structure as it now includes institutional sales as distribu-tion, which should lift its profitability. We estimate its sales to hospitals, rural grassroots medical institutions and drug stores at below 30%, 25% and over 30%, respectively in Q3, all be-yond its overall revenue growth.

We believe the market has not fully priced in the benefits of the

healthcare reform which targets to strengthen the healthcare services in rural areas.


We estimate its 2017-19E net profit at RMB1.547bn, RMB1.561bn

and RMB1.968bn (impact of land compensation included), corre-sponding to EPS of RMB0.82, RMB0.83 and RMB1.05 (dilution effect of private placement included). This represents 2017E PER of 23x, 2018E PER of 22x and 2019E PER of 18x.


Market share gains as China implements the Two-Invoice

System;

Policies such as grading standards would promote the use

of drugs in rural markets;

Rapid development of medical machinery and consuma-

bles.

Main risk factors

Uncertainties of the healthcare reforms;

Financial risks brought by expansions.




Net profit (RMB m) 694.53 876.74 1,546.56 1,560.73 1,968.46


Diluted EPS (RMB) 0.422 0.532 0.82 0.83 1.05

PE 44.3 35.2 22.8 22.5 17.8

mailto:[email protected]

12

Changjiang Electronics Technology (600584.CH): To Benefit from Improvement in

Sector Sentiment


1) The Company has been actively expanding its market share through acquisitions during the industry’s low cycles. Following its acquisi-tion of STATS ChipPAC in 2016, the Company ranked third among all global players in terms of consolidated revenue as of end-2016. Its consolidation acquired assets have begun to show synergy. For instance, the consolidation of STATS ChipPAC allowed the Company to establish production bases in Singapore, South Korea and Jiangyin, with its businesses covering nearly all advanced packaging tech-nologies. In particular, its production plant in Singapore managed to reverse losses to profits in September 2017. The capacity expan-sion of the eWLB project has reached designated capacity. Its Shanghai production plant was moved to Jiangyin in Q3 2017. The flip chip (FC) packaging capacity has been consolidated with Changjiang Electronics’ advanced bumping technology for a one-stop service operation model. The acquisition entails huge earnings potentials.

2) National Integrated Circuit Industry Investment Fund (IC Fund) Increasing Investments in the Company. China’s National IC Fund provid-ed a funding of US$290m for the Company to acquire STAT ChipPAC in 2015, and subscribed for its privately-issued shares at a total consideration of RMB1.9bn in 2017. The National IC Fund will become its largest shareholder upon the completion of the share subscrip-tion, highlighting the Company’s strategic position in the packaging and testing segment. Meanwhile, the Company’s finance expense will decrease substantially after the private placement.

3) Changjiang Electronics, as a Segment Leader, should Benefit from the Sentiment Recovery in the Semiconductor Sector. The robust demand for storage devices has boosted sentiment of the semiconductor sector. Changjiang Electronics Technology, a leader in China’s packaging and testing market with comprehensive business layouts in specific market segments and advanced packaging technologies, should benefit from the improvement in industry climate.

4) Earnings Upside Expected. Excluding the impact of private placement, we estimate its 2017-19E net profits at RMB375m, RMB1.135bn and RMB1.61bn, corresponding to respective EPS of RMb0.28, RMB0.83 and RMB1.18. We assign a “RECOMMEND” rating for the counter.


Investment Rating:

Recommend Fu Chuxiong:（8610）6656 8393 / [email protected] Practitioner Certificate No.: S0130515010001


Excluding the impact of private placement, we estimate its 2017-19E

net profits at RMB375m, RMB1.104bn and RMB1.615bn and EPS at

RMB0.28, RMB0.81 and RMB1.19, corresponding to respective

PER of 71x, 25x and 17x. Assign “RECOMMEND” rating.


The market thinks the improvement of sector sentiment would be limited but we believe the recovery was driven mainly by the robust demand of storage device, which should remain intact in the next few years. Despite small capacity expansions in some storage devices, we expect the sector sentiment improvement to continue.

Some investors are skeptical about its earnings recovery story.

We believe its technologies have been aligned to the internation-

al level following the previous acquisitions. The orders from quali-

ty customers should ensure earnings and growth upside.


Operation efficiency of STAT ChipPac climbs back the industry

average level;

New orders from large customers;

Further market consolidation;

Market share gain from ASE Group.

Main risk factors

STAT ChipPac’s operation efficiency remains at low levels;

Weaker-than-expected sector sentiment.


Operating income (RMB 100m) 10,807 19,155 23,322 30,227 37,163

Operating income growth rate 68.1% 77.2% 21.75% 29.6% 22.9%

Net profit (RMB 100m) 52 106 375 1,104 1,615

Net profit growth rate -66.8% 104.5% 253.8% 194.4% 46.3%

EPS (RMB) (DILUTED) 0.05 0.10 0.28 0.81 1.19

P/E 416.6 208.3 74.4 25.7 17.5

13

Haitong Securities (600837.CH): 2017 Earnings Grew 7.15%; A Strong Player in All

Business Segments


1. Haitong Securities’ 2017 revenue rose 0.75% YOy to RMB28.22bn while net profit attributable to the parent increased 7.15% YoY to RMB8.62bn. The full-year 2017 earnings improved significantly from that of the previous year and outperformed the industry average.

2. Market Share Gains in Brokerage Business; Online Customer Services System Enhanced. The trading volume of stocks and funds reached RMB10.74trn in 2017, representing a market share of 4.68% (+0.21ppt YoY). As of end-2017, the number of active mobile end-users of “e-HaitongCai” were more than 19m, ranking among the top three in the industry.

3. The Company completed 31 IPO projects in 2017 with total underwriting amount of RMB13.81bn, up 44.56x YoY. Haitong also per-formed well in financial advisory services. Transaction amount for financial advisory business totaled RMB57.15bn, ranking the second in the industry.

4. Investment Gains Surged 73.8% YoY Thanks to Rallies in Blue Chips and Strong Direct Investment Business; Contributions and Revenue from Assets under Active Management Increased. In 2017, Haitong’s investment gains increased 73.8% YoY, which could be attributed to the outperformance of blue chips and larger contributions from direct investment business. In particular, the direct investment business reported revenue of RMB2.42bn, up 138.4% YoY. During the reporting period, the Company exited 16 projects and 5 of its invested companies completed IPOs. Asset under management reached RMB327.32bn in 2017, with asset under active manage-ment accounting for 51.35bn or 15.7% (+8.29ppts YoY) of the total. The net income of its asset under active management increased 49.4% YoY to RMB378m.

5. Stable Growth in Financial Leasing Business; Smooth Consolidation of Overseas Business. In 2017, Haitong UT’s revenue rose 30.415 YoY to RMB2.59bn. Revenue from overseas business increased 23.3% YoY to RMB4.87bn.

6. We project a stable earnings growth in 2018 and estimate its 2018E EPS at RMB0.81. Maintain “RECOMMEND”.

Sources: Company data,China Galaxy Securities Research

Investment Rating:

Recommend Wu Pingping：（8610）6656 8224 ：[email protected] Practitioner Certificate No.: S0130516020001


Haitong, as a comprehensive financial service platform, en-joys economies of scale and cross-selling potential for its businesses. Its direct investment and financial leasing busi-nesses are on track. Its overseas business also shows strong competitive advantages. China’s policy to support strong play-ers should bode well for the Company and it should be able to maintain its stable growth. In terms of valuation, the counter is currently trading below historical average and we see po-tential for valuation recovery.

Company valuation and investment recommendation

We estimate its 2018-20E EPS at RMB0.81, RMB0.91 and RMB1.02, corresponding to respective PER of 14x/ 13x and 11x. Maintain “RECOMMEND” rating.

Tougher-than-expected regulations; impact of volatile market. China’s policy to support strong players should lead to higher market concentration, which should bode well for the Company;

Valuation recovery expected as it is trading below histori-cal average.

Catalyst for share price performance Main risk factors


Operating revenue (RMB 100m) 280.12 282.22 310.25 347.46 389.16

Growth rate of operating revenue -26.45% 0.75% 9.93% 11.99% 12%

Net profit (RMB 100m) 80.43 86.18 93.07 104.24 116.75

Growth rate of net profit -49.22% 7.15% 8% 12% 12%

Diluted EPS (RMB) 0.70 0.74 0.81 0.91 1.02

PE 16.7 15.8 14.4 12.8 11.5

14

Beijing New Building Materials (000786.CH): 2017 Profitability Beat Estimates


1. Strong Growth in Revenue and Profits. In 2017, the Company’s operating revenue grew 37% to RMB11.16bn and net profit rose 61.4% YoY to RMB2.69bn. Net profit attributable to the shareholders of the Company surged 100.2% YoY to RMB2.34bn. EPS came in at RMB1.311.

2. Gross Profit Margin to Improve Further as the Company Transfers Upstream Costs to Customers. Thanks to price hikes, the Company’s profitability improved significantly during the period. Blended gross profit margin expanded 3.05ppts to 37.23%. On a quarterly basis, the gross profit margins in Q1, Q2, Q3 and Q4 were 27.7%, 33.3%, 37.8% and 45.7%, respectively. Mean-while, the Company’s expense ratio improved further during the period. Distribution expense ratio, administrative expense ratio and finance expense ratio dropped 0.47ppt, 1.17ppts and 0.21ppt, respectively to 3.08%, 6.94% and 0.84%. As a result, net profit margin improved 3.12ppts to 21.09%.

3. Capacity Expansion Enhanced on Short Payback Period and Huge Demand. The investment of its plasterboard production line features a relatively short payback period, indicating good economic efficiency. The Company plans to expand its plaster-board capacity to 3 billion sq.m. to tap the opportunities brought by the country’s One Belt One Road strategy. We expect further capacity expansion in the future.

Sources: Company data,China Galaxy Securities Research

Investment Rating:

Recommend Hao Feifei：（8610）66568843 ：[email protected] Practitioner Certificate No.: S0130511060002


Income: The market is concerned about its long-term growth and

short-term earnings given the property curbing measures and

rising raw materials and energy costs. We believe the change in

the property market structure will not affect demand growth. The

property market comprising new houses, secondary homes and

rental houses will continue to grow, which will ensure a stable

demand growth and support the Company’s business.

Costs: The market is worried that the surging commodities and

energy prices would pose significant impact on the Company’s

gross profit margins and earnings. We believe the increase in

costs would have limited impact given its strong capability to

transfer costs and the relatively low price sensitivity of its custom-

ers.


We estimate 2018-19E EPS at RMB1.75/ RMB2.12, respec-

tively, corresponding to PER of 14x/ 11x. Maintain RECOM-

MEND.

Significant increase in costs;

Sluggish new home and secondary home market.

Substantial declines in costs;

Breakthrough in overseas projects.




Growth rate of operating revenue -8.97% 8.01% 36.88% 15.97% 22.05%

Net profit (RMB m) 896.88 1,171.07 2,343.90 3,130.75 2,730.55

Growth rate of net profit -18.87% 30.57% 100.00% 33.63% 37.93%

Diluted EPS (RMB) 0.63 0.79 1.31 1.75 2.12

PE 37.0 29.5 17.8 13.3 11.0

15

Shaanxi Coal Industry (601225.CH): Coal Leader in Western China Enjoying Quality

Coal, Low Costs and Asset Injection Potential


1) Shaanxi Coal has quality coal resources, with 12 of its operating coal mining rated as first-class in China. The Company cur-rently owns 13 coal wells under its consolidated financial statement, with a total production capacity of 87m tonnes and at-tributable capacity of RMB58.27m tonnes. Six of which are recognized by China National Coal Association as coal wells with advanced capacity (74 in total in China).

2) The improvement in railway freight capacity should help to effectively reduce its transportation costs. Shaanxi Coal suffered from the high cost and limited capacity of railway freight transport. The cost should be reduced substantially as the railway system of Shaanxi province improves. The better transportation would help to boost coal sales.

3) Shaanxi Coal and Chemical Industry Group’s comprehensive business units guarantees Shaanxi Coal’s sales. Shaanxi Coal is the only coal production platform of the Group and Shaanxi Coal and Chemical Industry Group is a major customer of Shaanxi Coal. The Company is likely to benefit from the resources consolidation in Shaanxi Province. It should also benefit from the Group’s higher coal demand for its new coal chemical project and power plants.

4) We estimate Shaanxi Coal’s 2017-19E net profit attributable to the shareholders at RMB10.43bn, RMB10.74bn and RMB11.61bn, translating into EPS of RMB1.05, RMB1.07 and RMB1.16. Maintain RECOMMEND rating. Our target price of RMB15.7 represents 2018E PER of 15x.


Investment Rating:

Recommend Pan Wei:（8610) 6656 8212; [email protected] License No.: S0130511070002


The market doubts the development of coal mining in Western China given the high transportation cost and limited freight capacity. We believe the freight transportation in Shaanxi would improve significantly, which would help its coal sales.

The market is concerned about the industry’s intense competi-tion. We believe the country’s environmental protection measures and efforts to enhance safe production should change the market landscape. The Company’s competitive-ness should gradually increase.

SOE reform leads to expectations for asset injections. Shaanxi Coal is the only listed platform of Shaanxi Coal and Chemical Group. Considering the relatively low concentration in the coal industry in Shaanxi province, it is expected that there will be consolidation of resources in the future.


We estimate its 2017-19E EPS at RMB1.05, RMB1.07 and RMB1.16, corresponding to PER of 9.4x, 9.2x and 8.5x. Maintain RECOMMEND rating.


Operation commencement of Inner Mongolia-Jiangxi Rail-

way and Shenwei Coal Slurry project;

Thermal coal prices continue to climb;

Major shareholder considering to inject coal chemical and

power assets into the Company.

A substantial decline in coal prices;

Weaker than expected earnings.

Main risk factors



Growth rate of operating revenue -20.99% 1.91% 53.7% 5.00% 7.63%

Net profit (RMB m) -2,988.54 2,754.89 10,449.40 10,744.81 11,608.27

Growth rate of net profit -414.09% 192.18% 279.41% 2.82% 8.04%

Diluted EPS (RMB) -0.3 0.28 1.05 1.07 1.16

PE - 28.3 7.5 7.4 6.8

16

Nanjing King-Friend Biochemical Pharmaceutical (603707.CH): A Leading Ex-

porter of Heparin and Preparations with Huge Potential


1. Heparin API Business to Maintain Rapid Growth. The Company has secured the world’s largest heparin buyer - Sanofi - as customer. In addition, we expect it to benefit from the price hike of heparin API: Firstly, the prices of heparin API have dropped by approx. 70% during 2010--2016; secondly, we expect supply for heparin crude products would remain tight as some upstream heparin crude manufacturers were forced to exit the market on increasing environmental standards; thirdly, we expect restocking process to take place given the low inventory of downstream preparations manufacturers; and fourthly, demand for heparin have been growing. It should be noted that the hog slaughter volume did not increase in China, with the slaughter rate staying at around 30%.

2. Positive about the Expansion of its Preparation Exports. (i) Preparations are in shortage in the US market; entry barrier for preparations is high; (ii) The Company has established a complete distribution network and operations in the US market, with three of its preparation production lines obtaining certificates from the FDA and one FDA certified R&D Centre; (iii) It is expected that its Enoxaparin products will be launched in the US and European markets in late 2018, which should significantly boost its earnings; (iv) the Company seeks volume growth from generic drugs and profit growth from special drugs.

3. Low Molecular Weight Heparin (LMWH) Preparation Business to Expand Rapidly in China. (i) We see tremendous market expansion potential given the relatively low penetration of LMWH in China and the possible expansion in indications; (ii) LMWH products can be distributed through academic channels; (iii) the Company’s LMWH products have won tenders in around 25 provinces in China and it has established a management and service platform for the products; (iv) Pfizer, Sanofi and GSK cur-rently dominate in Dalteparin, Enoxaparin and Nadroparin, taking up 70%, 80% and 70% of the respective market share. This suggests a huge potential for import substitutions.

4. The Company announced restrictive share incentive scheme with strict unlocking conditions, suggesting the management’s confi-dence on its development outlook.


Investment Rating:

Recommend Li Pingzhu: (8610) 8357 4546; [email protected] License No.:S0130515040001


We see huge development potential for its preparation ex-ports: the Company has three preparation production lines obtaining certificates from the FDA and one FDA certified R&D centre; Enoxaparin products likely to be launched in the US and European markets in late 2018; Expected to obtain approvals for 5 ANDA, each of which could generate annual profits of around US$2m.

The Company is a leader in the domestic heparin API market.


We estimate its 2018-20E net profit attributable to the parent at RMB453m, RMB633m and RMB896m, corre-sponding EPS of RMB1.07, RMB1.49 and RMB2.12. This represents 2018E PER of 30x, 2019E PER of 20x and 2020E PER of 16x.

The Company is a leading exporter of heparin and prepa-rations with huge potential. We believe its earnings would maintain rapid growth.

Foreign exchange risk;

Weaker-than-expected price hike of heparin APIs;

Slower-than-expected R&D progress.

A long-term relationship with Sanofi established;

Obtained approval for the launch of its Enoxaparin prod-

ucts in the US and Europe;

A faster development in the export of its preparations.



Operating revenue (RMB m) 581.91 1,112.73 1,618.46 2,260.63 3,201.20


Net profit (RMB m) 257.24 314.22 453.17 632.98 896.34


Diluted EPS (RMB) 0.61 0.74 1.07 1.49 2.12

PE 47.9 39.4 27.3 19.6 13.8


17

GCI Science & Technology (002544.CH): Earnings Growth to Continue; Telecom Plat-

form to Benefit from CETC’s Asset Securitization


Drivers:

1) With China’s military reforms approaching completion, it is expected that the military goods industry would see a substantial im-provement in industry sentiment.

2) The Company’s communication network design business should benefit from the three major telecom operators’ faster 5G construc-tion.

3) President Xi Jinping emphasized the importance of Internet security at the recent Cybersecurity and Informatization Work Confer-ence. The country will strengthen the civil-military integration in online communications. The subsidiaries of China Electronics Tech-nology Group Corporation (CETC), should benefit from the country’s increasing urge for proprietary technologies with its research institute for advanced communication technologies.

4) The private placement in 2017 represented a 38% premium to the current share price, suggesting a relatively high safety margin.

Key Assumptions:

1) 5G commercialization process on track: tests to be conducted in major cities in 2018; pilot commercial use in 2019; and offic ial com-mercial use in 2020.

2) The sales of military goods in the next three years likely to benefit from the country’s 13th Five Year Plan. Orders for mili tary goods would increase substantially after the military reform.

3) With the implementation of reforms in research institutes and asset securitization, the subsidiaries of CETC is likely to undergo fur-ther asset securitization.

Main Predictions:

We estimate its 2018-20E net profit attributable to the parent at RMB264m, RMB311m and RMB362m, respectively, corresponding to

EPS of RMB0.46, RMB0.54 and MRB0.63.


Investment Rating:

Recommend Li Liang:（8610）6656 8330 ; [email protected] Practitioner Certificate No.: S0130515090001


The market thinks that the Company’s growth would be limited. We believe its military goods business would enjoy a faster growth in 2018 and its network design business would have a substantial expansion. The Company should see huge devel-opment potential with further asset securitization of the subsidi-aries of CETC.


We estimate its 2018-20E EPS at RMB0.46, RMB0.54 and RMB0.63, corresponding to PER of 38x, 32x and 28x. We assign a RECOMMEND rating.


Market expansion in civilian goods business;

The implementation of asset securitization.

Main risk factors

Slower-than-expected internal consolidation;

Slower-than-expected expansion in civilian goods business.




Net profit (RMB m) 190.58 201.73 264.42 311.43 362.15


Diluted EPS (RMB) 0.33 0.35 0.46 0.54 0.63

PE 54.0 50.9 38.8 33.0 28.3

18

Suzhou Keda Technology (603660.CH): Benefitting from Growing Market De-

mand; Expanding into the Overseas Markets


1. Foreign Competitors Exiting the Market. Thanks to the country’s domestic preferential policies, foreign players are losing the

market share in the video conferencing industry and many are exiting the market. Against such a backdrop, it is believed that the

Company will continue to gain more market share in the industry.

2. Several Growth Drivers. We note four growth drivers in the video conferencing industry, namely: (i) technology upgrading from

standard definition to high definition resolution; (ii) government and corporates changing meeting formats; (iii) application of video

conference penetrating to lower-level government organizations; and (iv) new demand from education and medical sectors. The

expansion of the video conferencing market also implies a better prospect for the Company.

3. Promising Outlook of Cloud Conferencing. As remote conference becomes more popular, it is expected that small and medi-

um enterprises’ demand for cloud conferencing would gradually increase. The Company has invested in Movision video Confer-

encing Solution since 2011. Its current cooperation with New Oriental should set as a demonstration and help to enlarge the

cloud conferencing market. The Company may gain a market leading position in the future.

4. We estimate its 2017 earnings to grow steadily on a yearly basis, with EPS projected at RMB1.03. Its 2018 earnings could see

further growth. Maintain “RECOMMEND”.


Investment Rating:

Recommend Qian Jinyu: (8621) 2025 2621 ; [email protected]


Overseas Video Surveillance: The market is worried about the relatively low market share of domestic players and their overseas competitiveness. In fact, the prices are comparative-ly higher in the overseas market and the Company’s products are competitive.

Backend Control of Video Surveillance: Industry leader Hikvision’s entering of the market may impose negative im-pact on the Company. We believe the Company’s specialised solutions enjoy strong customer stickiness.

Business promotion: The Company has been actively ex-panding its business presence and promoting its products. Its overseas business expansion could be a new growth driver.


We estimate its 2017-19E EPS at RMB1.03, RMB1.45, RMB1.94, respectively, corresponding to PER of 38.1x, 27.1x and 20.3x. Maintain “RECOMMEND” rating.

Intensified competition in online video market;

Slower-than-expected progress in overseas business expan-sion.

Further market share expansion in video conferencing in-dustry;

Demand for cloud conferencing increases;

Overseas business expansion drives earnings and profits.




Growth rate of operating revenue 24.76 18.55 26..24 27.95 27.64

Net profit (RMB m) 120.28 174.67 270.70 362.58 485.69

Growth rate of net profit 125.18 45.22 54.97 33.94 33.96

Diluted EPS (RMB) 0.6 0.86 1.08 1.45 1.94

PE 61.4 42.8 35.7 25.4 19.0

19

Changchun High & New Technology (000661.CH): Rapid Growing Biological

Drug Leader


1. Growth Hormones to Maintain Strong Growth. We expect the Company’s growth hormone products to maintain strong growth based on the following: (i) huge market potential: Growth hormone is the only drug for primordial dwarfism. There are currently over 7m cases of primordial dwarfism in China, but the treatment rate is less than 2%, suggesting a tremendous market potential. We estimate the market size at over RMB11bn; (ii) most of the growth hormones are prescribed outside the public hospital system and will not affect the drug sales percentage; (iii) the market share of its injection products remains solid; (iv) its long-term dosages to complete phase IV clinical trial as scheduled, further reinforcing its market leading position; (v) building a sales team and establishing a complete consultation system for children’s physical growth to expand market coverage.

2. Recombinant Human FSH Products Fill the Domestic Gap, Bringing Opportunities of Import Substitution. The assisted reproductive market should expand with the higher infertility rate and the implementation of two-child policy in China. The domes-tic market is currently dominated by products of Merck Serono which took up approx. 70% of the domestic market share. The Company obtained approval for sale of its generic recombinant human FSH products in May 2015 and it has won tenders in 17 provinces and cities in China, including Fujian, Jiangsu and Inner Mongolia at prices below imported products. While it may be difficult at the early stage, we are positive about its outlook given its price competitiveness as a generic drug. The Company may be able to duplicate the success of its growth hormone products in import substitutions and gain more share in the domestic mar-ket.

3. Vaccine Business to Improve. (i) Varicella Vaccines Expanding into the Overseas Market. The Company reported beating results for its varicella vaccines business in 2017, thanks to higher prices and shipments. Its expansion into the international mar-kets also helped to boost sales volume; (ii) Rabies Vaccine with Validity Period of 18 Months Becoming More Mature; Turn-around Expected in 2018. The approval process accelerated in Q3 and Q4 2017 and we expect a gradual market recovery go-ing forward. The business is likely to achieve a turnaround in 2018; (iii) its nasal spray flu vaccine completed the Phase III clinical trial as expected. A successful launch of the product could fill the current market gap; (iv) the Company is currently investing in the pneumococcal polysaccharide vaccine, hoping to tap the domestic market in this area.


Investment Rating:

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


Based on the pathogenesis, consultation and treatment of primordial dwarfism, we explained that growth hormone is the only drug for this disease.

Following a detailed research in assisted reproductive treat-ments, we demonstrated that FSH is the major drug used in assisted reproductive treatments.


We estimate its 2018-20E EPS at RMB5.76, RMB6.71 and RMB8.55, corresponding to PER of 34x, 26x and 21x.

The Company is a biological drug leader in China. Its genetic engineering drug could maintain solid growth.

Slower-than-expected progress in the Phase IV clinical trial

of its long-term growth hormone product;

Weaker-than-expected progress in new product promotions;

Safety issues of its vaccines and policy risks.

Completion of the Phase IV clinical trial of its long-term

growth hormone product;

Faster import substitution of its recombinant human FSH

products.





Net profit (RMB m) 484.85 655.44 877.38 1,140.90 1,454.32


Diluted EPS (RMB) 2.85 3.85 5.16 6.71 8.55

PE 70.4 52.1 38.9 29.9 23.5


20

NavInfo Co (002405.CH): Strategic Positioning in High Definition Map Industry;

ADAS and Auto Chips to Be the Next Drivers


1. Rare Play as the Only Mapping Services Leader Listed in the A-share Market. The map industry has a high entry barrier, and NavIn-

fo is a leader in the industry as it is one of the top two players in in-dash car navigation system and mobile map viewing and navigation in

China. In addition to the steady development of the traditional electronic navigation business, its advanced driver-assistance systems

(ADAS) and chip businesses are expected to be the next earnings drivers.

2. High Definition Map Expert to Ride on the Autonomous Driving Boom. China has been announcing key supportive policies for the

development of Artificial Intelligence (AI). Autonomous driving, a major segment of AI, has been the centre of attention. Smart driving is

likely to achieve breakthroughs in commercialization in 2018-2020. Since high definition map is a prerequisite for self-driving, we believe

the development of autonomous driving would bring more opportunities for high definition map companies. NavInfo launched its high-

definition map technology in late 2016 and has been aligning its map products with the needs of automakers.

3. Acquisition of AutoChips Brings Synergy; Huge Potential from Auto Chips Business. AutoChips is an absolute leader in China’s

onboard vehicle electronic market. Its high performance smart chips have gained 70% of the domestic market share. Given the competi-

tiveness of its core technologies, the Company brings synergy to NavInfo following the acquisition. AutoChips targets to launch new

products in three areas, namely AMP, MCU and TPMS, and expands into the in-dash market. Given the relatively high entry barrier, the

current auto chips industry is dominated by exports, and there should be huge potential for import substitutions.


Investment Rating:

Recommend Qian Jinyu:（8621）2025 2621 ; [email protected] Practitioner Certificate No.: S0130517110002


There is an increasing demand for import substitution of chips and the government encourages domestic players to develop proprietary technologies. AutoChips enjoys first-mover ad-vantage as it has already obtained key technologies in auto chips. It is the first auto electronic company in China with large customers. It should benefit from the import substitution of auto chips in the future.

High definition maps are essential for the development of autonomous driving. NavInfo’s rich resources makes it the largest beneficiary in the industry. The Company is the strong-est player with comprehensive business layout in the connect-ed car industry. It can also fill the current gap in China’s au-tonomous driving development.


We estimate its 2018-19E EPS at RMB0.34 and RMB0.4, respectively, corresponding to PER of 86x and 68x. Main-tain “RECOMMEND” rating.

Slower-than-expected progress in automated driving and AI development.

Slower-than-expected growth in new businesses.

More supporting policies for AI and autonomous driving;

Further cooperation and M&A expansions;

Launch of new high definition maps and ADAS chips;

Earnings growth beat expectations.





Net profit (RMB m) 130.16 156.57 265.20 403.33 507.41

Growth rate of net profit 10.77% 20.29% 69.38 52.09 25.80

Diluted EPS (RMB) 0.19 0.15 0.22 0.31 0.40

PE 136.7 173.2 118.1 83.8 65.0

21

Guizhou Space Appliance (002025.CH): Steady Business Growth; Civilian

Goods to Be New Growth Driver


Investment Rating:

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


We forecast EPS of RMB0.84 and RMB1.05 in 2018-2019E,

with respective PER of 25x/ 20x. We give it a RECOM-

MEND rating.


We believe that the Company has reached the fast-

growth stage and has good prospects.

The Company has remarkable advantages in terms

of stability and growth potential among key military-

related companies.

The Company’s capital operations are developing

smoothly, providing plenty of room for future devel-

opment.

Market expansion in civilian goods business. Lower-than-expected growth in consumer product sales.





Net profit (RMB m) 233.3 261.1 311.3 361.2 451.5


Diluted EPS (RMB) 0.54 0.61 0.73 0.84 1.05

PE 47.1 41.7 34.9 30.3 24.2


Drivers:

1) Orders for military goods to increase substantially after the military reform;

2) The monetization of 5G applications;

3) Asset securitization of major shareholders.

Key Assumptions:

1) With the steady growth in military equipment demand, the Company’s traditional military business is expected to grow 10-15%;

2) Given a huge development potential of the micromotor and optical communication sectors, the Company’s related businesses

should see faster growth. Based on its 2017 business operation outlook, we estimate its motor business and optical communica-

tion business to have a CAGR of 25% and 50% over the next three years;

3) Major shareholders owns various quality assets. It is possible that quality assets from the 10th Institute of China Aerospace Sci-

ence & Industry Corporation will be injected into the Company.

Main Predictions:

We estimate its 2018-19E net profit attributable to the parent at RMB361m and RMB452m, respectively, corresponding to EPS of

RMB0.84 and RMB1.05.

22

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

Remains Stable; Overseas EPC Business to See Breakthroughs


1) Leading Private Fracking Equipment Company in China; Business Recovered in 2017: As the Company is mainly en-

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

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

main business of fracking equipment and accessories will gradually improve and it will beef up efforts in overseas market

expansion.

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

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

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

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

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

integrated solution provider for oil and gas exploration.


Investment Rating:

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


Profitability: The Company’s 2018-19E earnings could beat

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

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

overseas EPC orders in 2018-19E and should contribute more earnings.


We forecast 2018-20E EPS at RMB0.39, RMB0.74 and RMB0.85,

corresponding to PER of 41x, 22x and 19x.

The Company's main business of fracking equipment has under-

gone a recovery and its EPC business is expected to grow rapidly. Besides, the Company is expected to gain investment returns through the disposal of oil and gas assets in its oil and gas devel-opment business in North America. We see upside for its earn-ings. Maintain RECOMMEND.

Surge in oil prices; major breakthroughs in fracking equip-

ment orders;

Overseas EPC orders and development exceed expecta-

tions.

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

bid winning of overseas EPC projects;

Slower-than-expected progress in environmental protection

projects.




Net profit (RMB m) 121 -43.8 370 710 818

Growth rate of net profit -16.7% n.a. n.a. 91.9% 15.2%

Diluted EPS (RMB) 0.13 n.a. 0.39 0.74 0.85

PE 123.4 229.1 41.1 21.7 18.9

Main risk factors Catalyst for share price performance

23

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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 :

a share monthly portfolio...1 a-share monthly portfolio may 7, 2018 larger fluctuations expected;...

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