greater china daily

Wednesday , 30 June 2021

1 Refer to last page for important disclosures.

G r e a t e r C h i n a D a i l y

PLEASE CLICK ON THE PAGE NUMBER TO MOVE TO THE RELEVANT PAGE.

KEY HIGHLIGHTS Strategy

Market Strategy Page 2 2H21 – Stocks for uncertain times.

Sector

Coal Page 4 Market to be regulated; to cool down in 2H21.

Shariah Gems Virtual Conference

Link REIT (823 HK/BUY/HK$75.95/Target: HK$85.10) Page 6

Emerging stronger due to market recovery with newly-acquired assets.

Midea Group (000333 CH/NOT RATED/Rmb71.46) Page 9

Strategic transformation into a well-rounded technological group.

Shenzhen Mindray Bio-Medical Electronics 2

(300760 CH/BUY/Rmb477.84/Target: Rmb530.00)

Well prepared for sustainable long-term growth.

Small/Mid Cap Highlights

Chinasoft International (354 HK/NOT RATED/HK$14.08) Page 15

Mid Cap: IR meeting takeaways after HarmonyOS update.

TRADERS’ CORNER Page 18

Zhongsheng (881 HK): Trading Buy Range: HK$65.60-65.65

Country Garden Services (6098 HK): Trading Buy Range: HK$85.35-85.40

UOBKH EVENTS

Date Corporate/Stock Code Event 09 Jul BYD (1211 HK) Conference Call (10:00am HKT)

CORPORATE AND MACRO CALENDAR Date Corporate/Stock Code Event 8-10 Jul Longyuan (916 HK) July Power Generation Country/Region Economic Indicator 30 Jun China Weekly PV retail and wholesale data release 30 Jun China Banking sector data by PBOC Jun & Jul China 1H21 results profit alert for most upstream material companies

including coal, steel, copper, EV battery material companies 01 Jul China Macau Gaming June GGR 01 Jul China Caixin China PMI Mfg 05 Jul China Caixin China PMI Composite 06 Jul China Caixin China PMI Services 07 Jul China Foreign Reserves 09 Jul China CPI YoY 09 Jul China PPI YoY 09-12 Jul China Monthly Construction Machinery sales data 09-15 Jul China Money Supply YoY 10-15 Jul China FDI YTD Yoy CNY 13 Jul China Trade Balance CNY 13 Jul China Import YoY CNY 13 Jul China Export YoY CNY 15 Jul China GDP YTD YoY, YoY 15 Jul China Retail Sales YoY, YTD 15 Jul China Fixed Assets Ex Rural YTD YoY 15 Jul China Industrial Production YoY, YTD YoY

KEY INDICES Prev Close 1D % 1W % 1M % YTD % DJIA 34292.3 0.0 1.0 (0.7) 12.0 S&P 500 4291.8 0.0 1.1 2.1 14.3 FTSE 100 7087.6 0.2 (0.0) 0.9 9.7 AS30 7565.5 (0.1) (0.4) 2.1 10.4 CSI 300 5190.5 (1.2) 1.3 (2.6) (0.4) FSSTI 3089.5 (1.2) (0.6) (2.4) 8.6 HSCEI 10757.3 (1.0) 2.7 (1.2) 0.2 HSI 28994.1 (0.9) 2.4 (0.5) 6.5 JCI 5949.1 0.2 (2.3) 0.0 (0.5) KLCI 1548.3 0.2 (1.6) (2.2) (4.8) KOSPI 3286.7 (0.5) 0.7 2.6 14.4 Nikkei 225 28812.6 (0.8) (0.2) (0.2) 5.0 SET 1591.4 0.8 (0.5) (0.1) 9.8 TWSE 17598.2 0.0 3.1 3.1 19.5 BDI 3418 2.8 9.6 31.7 150.2 CPO (RM/mt) 3705 0.4 3.8 (11.1) (2.2) Brent Crude (US$/bbl)

75 0.1 (0.1) 7.4 44.3

Source: Bloomberg

TOP VOLUME Company Price Chg Volume

(HK$) (%) ('000) SINOPEC CORP-H 3.95 (4.6) 221,856 CNOOC 8.83 (2.9) 132,343 GEELY AUTOMOBILE 25.30 (0.8) 81,986 SINO BIOPHARM 7.72 (0.4) 77,184 XINYI SOLAR HLDS 17.30 5.7 69,822

TOP GAINERS Company Price Chg Volume

(HK$) (%) ('000) HAIDILAO INTERNA 40.65 8.7 35,083 XINYI SOLAR HLDS 17.30 5.7 69,822 COUNTRY GARDEN S 85.20 3.8 12,098 NETEASE INC 173.10 3.7 4,460 HENGAN INTL 54.40 2.6 3,605

TOP LOSERS Company Price Chg Volume

(HK$) (%) ('000) CHINA CINDA-H 1.49 (6.9) 38,691 CHINA GAS HOLDIN 23.90 (5.5) 24,457 CHINA REINSURA-H 0.78 (4.9) 25,497 SINOPEC CORP-H 3.95 (4.6) 221,856 CHINA RESOURCES 4.78 (3.8) 3,191

KEY ASSUMPTIONS GDP (% yoy) 2020 2021F 2022F US (3.5) 6.8 2.8 Euro Zone (6.6) 4.4 4.7 Japan (4.7) 2.5 2.2 Singapore (5.4) 5.5 3.5 Malaysia (5.6) 4.0 5.5 Thailand (6.1) 1.5 3.5 Indonesia (2.1) 3.8 5.0 Hong Kong (6.1) 4.1 3.0 China 2.3 7.6 5.5 CPO (RM/mt) 2,685 3,000 2,600 Brent (Average) (US$/bbl) 43.21 64.62 62.91 Source: Bloomberg, UOB ETR, UOB Kay Hian




STRATEGY – CHINA

Market Strategy 2H21 – Stocks For Uncertain Times

We expect a challenging investment environment in 2H21 due to cost pressures, component shortages, slowing growth, funding issues and implications of a forthcoming Fed taper. This should lead to a pullback of at least 10% in 3Q21. So for now we have our major OVERWEIGHTS in consumer staples, financials, healthcare and utilities and look to raise allocation to growth sectors after the expected pullback. Our year-end target for MSCI China stays at 117pt.

Growth to slow. Our full-year GDP growth forecast stays at 8.2% yoy as a falling credit impulse, component shortages and high raw material costs weigh on industrial activities. For 2022, we forecast real GDP growth to slow to 5.3% yoy, on continuation of a prudent policy stance and weaker fixed asset investment growth due to increasing investments in technology rather than traditional roads and bridges. On the renminbi, we expect the US$/Rmb rate to hit 6.30 by end-22. Limited appreciation is expected as the US taper would likely have begun by then.

Risk of near-term pullback. Given these challenges, the consensus EPS forecast should see further cuts in 2H21. The 2021 and 2022 EPS estimates have fallen to $6.39 and $7.48 respectively and are at the lowest recorded ytd. The biggest EPS cut has been in consumer discretionary − only four sectors managed to have the EPS lifted, ie energy, industrials, IT and utilities. Our dividend discount model (DDM) for the MSCI China Index has a fair value of 95.33pt, pointing to more than 10% downside in the near term. Investors should gain greater clarity over the Fed’s taper plans by mid-3Q21 (Jackson Hole meetings) and with US President Joe Biden’s stimulus plan pushing ahead, we are keeping our year-end index target at 117pt.

Sector allocation. We expect cyclicals to underperform in early-2H21, and would only recommend rotating into growth sectors (electric vehicles (EV) and technology, media and telecoms (TMT)) upon a market pullback. These are sectors which we still like on a medium-term outlook. As for now, we will have our major OVERWEIGHTS on consumer staples, financials, healthcare and utilities, which are relatively defensive. We have lowered consumer discretionary to MARKET WEIGHT due to the relatively demanding valuations for sportswear and automobile OEMs, while the property sector stays as an UNDERWEIGHT due to policy headwinds.

Stock picks. We recommend focusing on defensive plays or companies with strong cash flows, ie CCB, China Education Group, China Longyuan, Ever Sunshine, Innovent and Sino Biopharm. We continue to like beneficiaries of the economic reopening (Link REIT and Trip.com), mass market consumption (CR Beer, Jiumaojiu and Wuliangye) and robust or improving industry outlook (Estun Automation, Kingboard Laminates and ZTE).

Click here for Blue Top dated 29 Jun 21

ANALYST(S)

Tham Mun Hon, CFA +852 2236 6799 [email protected]

Greater China Research Team [email protected]

https://research.uobkayhian.com/content_download.jsp?id=63186&h=ea70baf624affef1b67543c7c5949929




STOCK RECOMMENDATIONS Bloomberg

Current Target

---------- PE ---------- Dividend Yield

Ticker Company Sector Price Price Upside 2021F 2022F 2021F

(lcy) (lcy) (%) (x) (x) (%)

BUYs 839 HK China Education Group CD 17.62 22.00 24.9 20.8 17.5 2.1 TCOM US Trip.com CD 37.73 52.00 37.8 70.2 22.5 0.0 291 HK CR Beer CS 72.85 80.80 10.9 63.3 47.3 0.6 9922 HK Jiumaojiu CS 30.75 35.10 14.1 82.7 54.4 0.4 000858 CH Wuliangye CS 306.31 342.00 11.7 48.2 40.5 1.0 939 HK CCB FN 6.16 8.50 38.0 0.5** 0.5** 6.5 1801 HK Innovent HC 93.30 122.80 31.6 14.7** 15.8** 0.0 1177 HK Sino Biopharmaceutical HC 7.75 13.00 67.7 34.3 28.6 2.5 002747 CH Estun Automation IN 37.98 44.60 17.4 119.4 77.8 0.0 1888 HK Kingboard Laminates IN 17.86 27.00 51.2 8.1 8.0 5.6 763 HK ZTE IT 23.55 29.10 23.6 14.9 11.1 0.7 1995 HK Ever Sunshine RL 19.88 23.30 12.2 43.2 31.0 0.0 823 HK Link REIT RL 77.85 85.10 9.3 27.1* 25.8* 4.0 916 HK China Longyuan UT 13.10 15.30 16.6 14.3 11.9 1.0

Note: Prices as of 28 Jun 21 * FY21 and FY22 ** Using P/B instead of PE CM – Communication Services, CD - Consumer Discretionary, CS - Consumer Staples, EN - Energy, FN - Financials, HC – Healthcare, IN – Industrials, IT – Information Technology, MA – Materials, RL – Real Estate, UT – Utilities Source: Bloomberg, UOB Kay Hian

STOCK TO BUY ON PULLBACK Bloomberg

Current Target

---------- PE ---------- Dividend Yield

Ticker Company Sector Price Price Upside 2021F 2022F 2021F

(lcy) (lcy) (%) (x) (x) (%)

BUYs 1211 HK BYD CD 234.80 250.00 6.5 120.5 72.7 0.1 JD US JD.com CD 78.23 100.00 27.8 55.0 35.6 0.0 3690 HK Meituan Dianping CD 328.60 365.00 11.1 9.0** 6.6** 0.0 700 HK Tencent CM 595.50 789.00 32.5 33.4 26.9 0.3 300750 CH CATL IN 493.90 600.00 21.5 146.2 101.9 0.1 1478 HK Q Technology IT 15.30 17.90 17.0 16.4 11.7 0.4 300073 CH Beijing Easpring Material

Technology MA 58.45 73.00 24.9 45.5 31.2 0.5

1772 HK Ganfeng Lithium MA 112.50 140.00 24.4 56.1 39.5 0.5 2899 HK Zijin Mining MA 10.50 15.00 42.9 19.9 13.4 2.4

Note: Prices as of 28 Jun 21 * FY21 and FY22 ** Using P/B instead of PE CM – Communication Services, CD - Consumer Discretionary, CS - Consumer Staples, EN - Energy, FN - Financials, HC – Healthcare, IN – Industrials, IT – Information Technology, MA – Materials, RL – Real Estate, UT – Utilities Source: Bloomberg, UOB Kay Hian




SECTOR UPDATE

Coal – China Coal Market To Be Regulated; To Cool Down In 2H21

The NDRC expects coal prices to trend downwards starting Jul 21 with increasing supply. Besides, the potential release of coal reserves and rising power generation from hydro and solar sources are expected to ease coal supplies in the peak demand season. We think domestic coal prices peaked in 1H21 with regulators stepping in. Thus, we are cautious on the performance of coal stocks in 2H21. Maintain MARKET WEIGHT but with lower target prices.

WHAT’S NEW

NDRC vows to increase coal supply to cool down prices. The National Development and Reform Commission (NDRC) recently said coal prices would be on a downtrend starting Jul 21 with rising coal production and imports. Domestic coal mines were urged to boost production, while the authorities speeded up approvals of new modern coal mines. NDRC said that the release of strategic thermal coal reserves played an important role in stabilising market supply, and that it would continue to release supplies if needed. Also, it planned to further expand its thermal coal reserve capacity to 200m tonnes nationwide, with a 100m-tonne capacity expected to be achieved by the year end.

Low risk of power supply interruption in summer. According to the NDRC, current independent power producers (IPPs) coal supply is sufficient for daily operations and inventory days remain stable at around 20 days. Some 80% of IPPs have also signed mid- to long-term coal supply agreements with suppliers, which should guarantee consistent coal supply and shield them from coal price fluctuations. The authorities will closely monitor IPPs’ inventory level and assist in coordinating coal supply/transport arrangements if needed. Besides, we expect the higher contributions from hydropower and solar energy in the summer season to gradually ease the burden on coal-fired power plants.

Coal prices decline after policy guidance. Domestic thermal coal/coking coal futures declined 5%/3% to Rmb810/1,999/tonne on 28 Jun 21 after the NDRC’s announcement. Asfor the domestic coal inventory, we have yet to see a meaningful recovery in Qinhuangdao (QHD) port inventory. It declined 5% last week to 4.61m tonnes (-3% yoy) due to the restocking demand from power plants ahead of the Communist Party of China’s 100th anniversary.

China’s 5M21 coal imports -25% yoy; raw coal production +8.8% yoy. China’s coal imports as of end-May 21 totalled 111.2m tonnes, 25% lower yoy. This was mainly due to heavy rainfall in Indonesia, and as import restrictions on Australian coal had also yet to be lifted. Two major contributors, Indonesia and Russia, have each contributed 61%/18% of coal imports ytd. 5M21 domestic raw coal production was 1,621m tonnes. The yoy increase has moderated from 2M21’s 25.0% to 5M21’s 8.8%. Domestic production should continue to improve with the resumption of mining activities previously halted for safety inspections.

MARKET WEIGHT (Maintained) SECTOR PICKS Company Rec Share Price Target Price

China Shenhua BUY 17.12 20.00

Source: UOB Kay Hian

ANALYST (S)

Sandra Huang Jie Qiong +8621 54047225 ext.804 [email protected]

Ziv Ang Sze Champ +603 2147 1826 [email protected]

PEER COMPARISON Company Ticker Rec Price @ Target Upside/ (Downside) Market ------------ PE ---------- ----------- P/B ----------- ------ EV/EBITDA ----- ROE

29 Jun 21 Price to TP Cap 2021F 2022F 2021F 2022F 2021F 2022F 2021F (HK$) (HK$) (%) (HKD m) (x) (x) (x) (x) (x) (x) (%)

China Shenhua 1088 HK BUY 17.12 20.00 16.8 443,419.6 6.5 6.1 0.8 0.7 3.8 3.6 11.9 Yanzhou Coal 1171 HK HOLD 10.10 10.00 -1.0 72,035.6 4.2 4.5 0.6 0.6 7.2 6.1 15.7 China Coal 1898 HK HOLD 4.49 4.75 5.8 96,885.1 5.7 6.4 0.5 0.4 5.4 5.6 8.4

Source: Bloomberg, UOB Kay Hian




ACTION

Domestic coal prices peaked with regulators stepping in. Without new policy guidance on a supply increase, we think the tightness in the coal market will likely continue in 2H21 on resilient demand. To ease the cost hike pressure for downstream sectors, the government has clearly repeated its intention to cool down commodity prices. Coal, as a domestic market-driven commodity, is likely to be regulated in 2H21 through: a) increasing domestic supply by easing production curbs and encouraging new capacity ramp-up; b) loosening import restrictions and encouraging more imports from Mongolia and Russia, and c) increasing generation from hydropower/solar sources during the rainy season in 3Q21. We think domestic prices may have peaked in 1H21, and looking ahead, we may see coal prices decline gradually in 3Q21. Our coal price forecast for 2021 (QHD5500kcal) is Rmb650, reflecting a 14.5%yoy growth, but a 30.0% hoh decline in 2H21.

Maintain MARKET WEIGHT, but with lower target prices. The coal names under our coverage have rebounded 20-100% ytd in a strong coal market in 1H21 with their forward 12-month P/B recovering to - 0.5SD below the historical mean (from -1SD). We are cautious on coal stocks in 2H21 as coal prices are regulated and heading downwards. We maintain our earnings forecasts as we have incorporated downside risks into our coal price forecasts. However, we trim the target prices of the coal stocks under our coverage on lower valuation multiples.

China Coal’s (1898HK) target price is set at HK$4.75 (lower from HK$5.70) which is derived from 0.5x 2021F P/B (previously 0.6x 2021F P/B); downgrade from BUY to HOLD. Yanzhou Coal’s (1711HK) target price is cut to HK$10.00 (from HK$11.17), which is derived from 0.6x 2021F P/B (previously 0.7x 2021F P/B); maintain HOLD. China Shenhua’s (1088 HK) target price is lowered to HK$20.00 (from HK$22.00), which is derived from 0.9x 2021F P/B (previously 1.0x 2021F PB); maintain BUY.

SPOT COAL PRICES: DOMESTIC VS AUSTRALIAN DOMESTIC COAL FUTURES

45

65

85

105

125

145

450

550

650

750

850

950

1,050

Jan-

19

Mar

-19

May

-19

Jul-1

9

Sep-

19

Nov

-19

Jan-

20

Mar

-20

May

-20

Jul-2

0

Sep-

20

Nov

-20

Jan-

21

Mar

-21

May

-21

(Rmb/tonne) QHD 5500Australia Newcastle 6000Kcal (RHS)

(US$/tonne)

1000

1200

1400

1600

1800

2000

2200

450

550

650

750

850

950

Jan-

19

Mar

-19

May

-19

Jul-1

9

Sep-

19

Nov

-19

Jan-

20

Mar

-20

May

-20

Jul-2

0

Sep-

20

Nov

-20

Jan-

21

Mar

-21

May

-21

(Rmb/tonne) Thermal coal futuresCoking coal futures(RHS)

(Rmb/tonne)

Source: Wind Source: Wind

QHD PORT INVENTORY CHINA’S MONTHLY COAL IMPORT VOLUME

2

3

4

5

6

7

8

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2018 2019 2020 2021

(m tonnes)

-150

-100

-50

0

50

100

0

20

40

60

Jan

19Fe

b 19

Mar

19

Apr 1

9M

ay 1

9Ju

n 19

Jul 1

9Au

g 19

Sep

19O

ct 1

9N

ov 1

9D

ec 1

9Ja

n 20

Feb

20M

ar 2

0Ap

r 20

May

20

Jun

20Ju

l 20

Aug

20Se

p 20

Oct

20

Nov

20

Dec

20

Jan

21Fe

b 21

Mar

21

Apr 2

1M

ay 2

1

China Monthly Coal Import yoy Chg (RHS)

(m tonnes) (%)

Source: Wind Source: CEIC




SHARIAH GEMS VIRTUAL CONFERENCE BUY

(Maintained)

Share Price HK$75.95

Target Price HK$85.10

Upside +12.0%

COMPANY DESCRIPTION Link REIT is the first REIT in Hong Kong and currently the largest in Asia in terms of market capitalisation. Spanning Hong Kong, Beijing, Shanghai, Shenzhen, Guangzhou, Sydney and London, its portfolio comprises mostlyretail and office properties.

STOCK DATA GICS sector Real Estate

Bloomberg ticker: 823 HK

Shares issued (m): 2,081.9

Market cap (HK$m): 158,117.5

Market cap (US$m): 20,367.6

3-mth avg daily t'over (US$m): 50.0

Price Performance (%) 52-week high/low HK$78.25/HK$58.20

1mth 3mth 6mth 1yr YTD

1.5 7.7 7.1 19.3 7.6

Major Shareholders %

BlackRock Inc 9.01

FY22 NAV/Share (HK$) 76.19

FY22 Net Debt/Share (HK$) 18.94

PRICE CHART

80

90

100

110

120

130

50

55

60

65

70

75

80

(%)(lcy) LINK REIT LINK REIT/HSI INDEX

0

10

20

30

Jun 20 Aug 20 Oct 20 Dec 20 Feb 21 Apr 21 Jun 21

Volume (m)

Source: Bloomberg

ANALYST(S) Shaun Tan +852 2236 6798 [email protected]

Ziv Ang Sze Champ +603 2147 1826 [email protected]

Link REIT (823 HK)

Emerging Stronger Due To Market Recovery With Newly-acquired Assets

Management opines rental reversions could be significantly more positive in 2022 while the government e-voucher support scheme could boost tenant sales in 2H21. Management views WFH as temporary and still sees opportunities for investments in office assets. Meanwhile, investments in logistics and industrial assets have been considered but appear unattractive. Maintain BUY. Target price: HK$85.10.

WHAT’S NEW

More post-results takeaways from our meeting with management. We obtained an update from Link REIT’s management after the recent FY21 results release.

More optimistic on Hong Kong retail performance next year. Management said that while the rental reversion for the Hong Kong retail portfolio had turned positive in 1Q21, the positive figure could be modest due to the high base – the rent leases that are expiring commenced in 2018 when the retail market was in a much better situation (before the 2019 social unrest and COVID-19). Retail rents would then be expected to increase more significantly starting 2022 and 2023.

Government’s e-voucher support scheme could boost tenant sales. Tenant sales in Apr-May 21 are still about 85-90% vs pre-COVID-19 levels. The government’s e-voucher support scheme is expected to help boost Link REIT’s tenants’ sales in 2H21, especially tenants in general retail, convenience stores, F&B and supermarkets (and hopefully fresh markets if they start adopting e-payment technology).

Management views WFH as temporary and still sees opportunities in the office sub segment. Management said work-from-home (WFH) arrangements may be temporary as many of its tenants are back in office. Link REIT’s anchor tenants in Hong Kong are 75% back in office; while anchor tenants in Sydney were mostly back in office before the recent new wave of COVID-19 infections. Management still sees opportunities in the office sub segment, although it may be challenging to get the right price for the right assets.

Re-iterates Vision 2025 guidance of high-single-digit growth p.a. While management re-iterated its guidance of high-single-digit growth for its assets under management under its Vision 2025 target, it mentioned that its portfolio sub segment allocations under the target are just a guideline and should good M&A opportunities arise, it will not be limited by these guidelines.

KEY FINANCIALS Year to 31 Mar (HK$m) 2020 2021 2022F 2023F 2024F

Net turnover 10,718 10,744 11,650 12,198 12,809 EBITDA 7,879 7,901 8,457 8,903 9,380 Operating profit 7,804 7,810 8,358 8,800 9,272 Net profit (rep./act.) (17,122) 1,185 6,036 6,337 6,714 Net profit (adj.) 5,674 5,720 5,978 6,277 6,652 EPU (HK$ cent) 275.7 274.8 287.0 301.2 319.1 DPU (HK$ cent) 287.2 290.0 308.0 311.8 326.6 PE (x) 27.5 27.6 26.5 25.2 23.8 P/B (x) 1.0 1.0 1.0 1.0 1.0 DPU Yld (%) 3.8 3.8 4.1 4.1 4.3 Net margin (%) (159.7) 11.0 51.8 52.0 52.4 Net debt/(cash) to equity (%) 16.7 22.7 24.9 24.8 24.5 Interest cover (x) 17.6 12.3 9.8 9.6 10.0 ROE (%) n.a. 0.7 3.8 4.0 4.2 Consensus DPU (HK$ cent) n.a. n.a. 309.9 316.2 327.8 UOBKH/Consensus (x) - - 0.99 0.99 1.00 Source: Link REIT, Bloomberg, UOB Kay Hian




Investments in logistics and industrial assets have been considered. Management has considered investing in logistics and industrial assets, but finds that return on investment is not attractive given the surge in prices for such assets.

Optimistic on returns from recent Guangzhou mall acquisition. The initial yield for the recent acquisition of Guangzhou mall, Happy Valley Shopping Mall, is about 4.0%. Management believes the asset is undermanaged and under rented and sees short-term upside from optimising the tenant mix, long-term upside from asset enhancement initiatives (AEI) with expectations of double-digit ROI on its capex plans.

Special dividend of HK$0.14/share will be paid in FY22 but not beyond. Management will stick to its plan of paying HK$0.14/unit per year for three years ending FY22. Beyond that, there are no concrete plans for more special dividends or buybacks as there may be good investment opportunities in the market for Link REIT to deploy capital.

VALUATION/RECOMMENDATION

We maintain our BUY recommendation and a target price of HK$85.10, based on a dividend discount model with a required return of 6.1% and a terminal growth of 2.0%. Link REIT currently trades at a FY22 yield of 4.0% with a 2.5% spread to the 10-year treasury yield (vs historical average spread of 1.6%).

LINK REIT DIVIDEND YIELD SPREAD VS 10-YEAR TREASURY YIELD


SHARE PRICE CATALYST

Announcement of new accretive acquisition(s); further relaxation in social distancing measures.

VISION 2025 PORTFOLIO ALLOCATION GUIDANCE BASED ON AUM

Source: Link REIT




PROFIT & LOSS

BALANCE SHEET

Year to 31 Mar (HK$m) 2021 2022F 2023F 2024F Year to 31 Mar (HK$m) 2021 2022F 2023F 2024F

Net turnover 10,744.0 11,650.1 12,198.0 12,809.0 Fixed assets 1,301.0 1,439.3 1,584.1 1,736.1

EBITDA 7,901.0 8,457.0 8,903.1 9,380.5 Other LT assets 202,426.0 205,926.0 205,926.0 205,926.0

Deprec. & amort. 91.0 98.7 103.3 108.5 Cash/ST investment 2,530.0 1,689.2 4,316.4 6,133.3

EBIT 7,810.0 8,358.3 8,799.8 9,272.0 Other current assets 3,628.0 3,728.8 3,789.7 3,857.7

Net interest income/(expense) (644.0) (861.5) (929.7) (937.4) Total assets 209,885.0 212,783.3 215,616.2 217,653.1

Pre-tax profit 7,166.0 7,496.8 7,870.1 8,334.6 ST debt 3,248.0 3,748.0 4,248.0 4,748.0

Tax (1,092.0) (1,402.9) (1,472.8) (1,559.6) Other current liabilities 5,268.0 5,630.0 5,849.0 6,093.1

Minorities 433.0 (57.8) (60.0) (61.4) LT debt 35,388.0 37,388.0 39,388.0 40,388.0

Net profit 1,185.0 6,036.1 6,337.3 6,713.7 Other LT liabilities 7,206.0 7,206.0 7,206.0 7,206.0

Net profit (adj.) 5,720.0 5,978.3 6,277.4 6,652.3 Shareholders' equity 158,720.0 158,698.4 158,752.5 158,983.8

Minority interest (27.0) 30.8 90.7 152.1

Total liabilities & equity 209,885.0 212,783.3 215,616.2 217,653.1

CASH FLOW KEY METRICS

Year to 31 Mar (HK$m) 2021 2022F 2023F 2024F Year to 31 Mar (%) 2021 2022F 2023F 2024F

Operating 4,879.5 7,464.1 7,760.1 8,164.2 Profitability

Pre-tax profit 1,844.0 7,583.4 7,961.0 8,430.1 EBITDA margin 73.5 72.6 73.0 73.2

Tax (1,092.0) (1,402.9) (1,472.8) (1,559.6) Pre-tax margin 66.7 64.3 64.5 65.1

Deprec. & amort. 91.0 98.7 103.3 108.5 Net margin 11.0 51.8 52.0 52.4

Working capital changes (2,029.0) 261.3 158.0 176.2 ROA 0.6 2.9 3.0 3.1

Non-cash items 5,421.5 62.3 80.9 71.6 ROE 0.7 3.8 4.0 4.2

Other operating cashflows 644.0 861.5 929.7 937.4

Investing (7,589.1) (3,701.0) (224.1) (199.2) Growth

Capex (growth) (218.5) (237.0) (248.1) (260.5) Turnover 0.2 8.4 4.7 5.0

Investments (8,073.0) (3,500.0) 0.0 0.0 EBITDA 0.3 7.0 5.3 5.4

Proceeds from sale of assets 0.0 0.0 0.0 0.0 Pre-tax profit (2.6) 4.6 5.0 5.9

Others 702.4 35.9 24.0 61.3 Net profit n.a. 409.4 5.0 5.9

Financing (2,993.3) (4,603.9) (4,908.8) (6,148.0) Net profit (adj.) 0.8 4.5 5.0 6.0

Distribution to unitholders (5,920.0) (6,206.5) (6,455.1) (6,649.3) EPU (0.3) 4.5 5.0 5.9

Proceeds from borrowings 4,038.0 2,500.0 2,500.0 1,500.0

Loan repayment 0.0 0.0 0.0 0.0 Leverage

Others/interest paid (1,111.3) (897.4) (953.7) (998.7) Debt to total capital 19.6 20.6 21.6 22.1

Net cash inflow (outflow) (5,703.0) (840.8) 2,627.2 1,816.9 Debt to equity 24.3 25.9 27.5 28.4

Beginning cash & cash equivalent 7,877.6 2,530.0 1,689.2 4,316.4 Net debt/(cash) to equity 22.7 24.9 24.8 24.5

Changes due to forex impact 355.4 0.0 0.0 0.0 Interest cover (x) 12.3 9.8 9.6 10.0

Ending cash & cash equivalent 2,530.0 1,689.2 4,316.4 6,133.3




SHARIAH GEMS VIRTUAL CONFERENCE NOT RATED

Share Price Rmb71.46 Target Price n.a. Upside n.a.

COMPANY DESCRIPTION Midea Group was established in 1968. After 53 years of development, Midea Group has become a technology group with five main business areas, which are the smart home business group, electromechanical business group, HVAC & building technology division, robotics & automation division and digital innovation business.

STOCK DATA GICS sector Consumer Discretionary

Bloomberg ticker: 000333 CH


Market cap (HK$m): 503,447.1



Price Performance (%) 52-week high/low Rmb107.11/Rmb59.79


(13.4) (12.3) (24.9) 19.2 (27.4)


Midea Holding Company Limited 30.78

Hong Kong Securities Clearing Co Ltd 15.23

China Securities Finance Corp Ltd 2.81

FY21 NAV/Share (Rmb) 18.60

FY21 Net Cash/Share (Rmb) 6.65

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(%)(lcy) MIDEA GROUP CO LTD-A MIDEA GROUP CO LTD-A/SIAS A Index

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ANALYST(S) Shen Zhifeng +8621 5404 7225 ext.811 [email protected]

Ng Jo Yee +603 2147 1984 [email protected]

Midea Group (000333 CH)

Strategic Transformation Into A Well-rounded Technological Group

From a traditional home appliance company, Midea has transformed itself into a leading technological group with various business arms. The conference call sheds light on Midea’s strategic approach in response to soaring commodity prices and the global chip shortage. Other key topics discussed include the demand outlook for 2H21, KUKA’s latest business update and Midea’s journey tapping into the high-end market.

WHAT’S NEW

Strategic transformation. Midea Group (Midea) is a leading technological group with multi-category, multi-business and vertical integration around core technology. Midea has redefined its business into five divisions recently. Under its core product category, residential air conditioners (RAC) took up a large share of nearly 36% and over 33% in both online and offline channels respectively. Sales for RAC compressors grew 6% yoy against industry trends, maintaining its global market dominance with a lion share of 40% in 2020. Meanwhile, its refrigerator and freezer compressors accounted for about 17% of global sales. Midea will boost its heating ventilation and air conditioner (HVAC) and business division in collaboration with over 50 strategic partners in the Top 100 real estate companies in China. The remaining two business divisions include its robotic and automation division (includes KUKA) as well as its digital innovation business, which comprises all new businesses such as intelligent supply chain and industrial Internet.

Slowdown in demand for the past few months. Midea attributes the slowdown in domestic demand for home appliances to three key reasons. First, the industry including Midea has been raising product prices since 3Q20 due to the soaring upstream costs in copper and steel. Second, unlike previous years, Midea did not offer huge rebates during the “618” shopping festival. Lastly, there was a milder RAC sales growth when compared historically due to the cooler summer this year.

During the “618” festival, Midea recorded about Rmb16b of revenue in total, representing about 20-25% yoy growth, of which, RACs, refrigerators and laundry machines outperformed the rest. Management concluded the sales decline in May 21 was due to: a) a high base in May 20, and b) postponement of the air conditioner peak season due to the cooler summer.

Demand outlook for 2H21. Domestically, Midea assured that the demand is not forgone due to the inelastic demand for RACs. Overseas sales growth will normalise after the high base last year; the high base was attributed by the pandemic-induced shutdown of factories overseas that had in turn spurred the company’s OEM orders in 2H20.

KEY FINANCIALS Year to 31 Dec (Rmbm) 2017 2018 2019 2020

Net turnover 241,918.9 261,819.6 279,380.5 285,709.7 EBITDA 24,250.2 25,948.8 30,823.6 25,129.4 Operating profit 17,975.2 21,551.8 26,223.8 25,129.4 Net profit (rep./act.) 17,283.7 20,230.8 24,211.2 27,223.0 Net profit (adj.) 17,283.7 20,230.8 24,211.2 27,223.0 EPS (Fen) 263.4 303.6 347.3 387.2 PE (x) 27.1 23.5 20.6 18.5 P/B (x) 6.4 5.7 4.9 4.3 EV/EBITDA (x) 20.3 19.7 15.0 18.5 Dividend yield (%) 1.7 1.8 2.2 2.2 Net margin (%) 7.1 7.7 8.7 9.5 Net debt/(cash) to equity (%) (17.2) 6.1 (23.5) (24.2) Interest cover (x) n.a. n.a. n.a. n.a. ROE (%) 25.6 25.8 26.2 24.8

Source: Midea, Bloomberg, UOB Kay Hian




Margin squeeze unavoidable amid soaring commodity prices. There were industry-wide price hikes in home appliance products to offset commodity cost pressures. In response to the cost pressures and to ensure a stabilised net profit, Midea: a) optimised products with higher gross profit margin in their product mix, b) hedged 10% of commodity prices, and c) required all divisions to control SG&A expenses. On a positive note, Midea expects commodity prices to peak soon and gradually ease in the coming months as China is now putting emphasis on stabilising commodity prices.

Room for further penetration in RAC market. China sold about 80m-90m RAC in 2020 and Midea expects RAC sales to gradually approach saturation in the next 3-5 years to about 120m. For overseas sales, Midea places emphasis on emerging markets (ie South America and ASEAN) and is in the midst of exploring more offline stores in these markets. There’s no sales target set for its RAC business.

Latest update on KUKA. KUKA recorded a net loss of €100m in 2020 largely attributed to the pandemic-induced demand slowdown overseas as Europe and America contributed about 70-80% of revenue. As of end-May 21, KUKA’s EBIT has turned positive to €32m from -€55m in 5M20. Given the recovery from the pandemic in the US and Europe, Midea expects KUKA to generate €60m in 2021.

Little impact from chip supply shortage as: a) home appliances require less sophisticated chips compared with automobiles and 3C products, and b) economies of scale allowed the company to secure agreements with suppliers on negotiated prices and volumes.

Continues to push for premiumisation. Launched in 2018, company’s high-end brand COLMO recorded total revenue of Rmb100m in 2019 and revenue further grew to about Rmb1b in 2020. As of end May 21, retail revenue hit Rmb1.2b and Midea guided retail revenue of about Rmb3b in 2021. In terms of product mix, Midea will focus on high-end brands for the next 2-3 years. Its strategy to promote COLMO includes: a) reserving a COLMO display area in Midea stores, and b) offering more discounts as it has a higher gross profit margin than Midea products.

Defensive play with constant dividend payouts. Midea has paid cash dividends totalling nearly Rmb58b since listing. The company has also launched share repurchase plans for three consecutive years since 2019 and those shares are used for equity incentive schemes purposes. At present, Midea has seven stock options incentive schemes, four restrictive incentive schemes, six global partner store ownership schemes and three business partner stock ownership schemes.

Strong focus on R&D. Midea has had the most patents industry-wide for five consecutive years, with 2,890 invention patents in China and 570 patents abroad in 2020. The company has two domestic R&D arms in Foshan and Shanghai and four core overseas R&D centres in the US, Germany, Japan and Italy (Milan). By forming a global R&D network, company can easily gain advantage in terms of scale.

EARNINGS REVISION/RISK

The stock currently trades at 17.1x 2021F PE and 14.9x 2022F PE.

SHARE PRICE PERFORMANCE & VALUATION (BLOOMBERG CONSENSUS)

Company Last Price

(lcy) Mkt Cap

(US$) 2021 PE 2022 PE 2021

EV/EBITDA 2022

EV/EBITDA Week-to-Date

Return (%) 1 Month

Return (%) ytd

Return (%) 1 Year Return Midea Group Co-A 71.46 77,916 17.1 14.9 14.4 12.5 -2.3 -11.7 -25.9 21.6 Hangzhou Robam-A 45.63 6,702 22.5 19.8 17.4 15.5 0.9 4.0 13.2 51.0 Haier Smart H-H 27.1 35,647 16.8 13.8 12.0 10.0 -4.2 -17.0 -3.6 N.M Gree Electric-A 51.17 47,641 12.2 10.5 6.8 6.1 -2.0 -10.2 -17.4 -8.0 Haier Smart H-A 25.86 35,647 19.1 15.8 12.4 10.4 -2.6 -15.7 -11.5 47.3





PROFIT & LOSS

Year to 31 Dec (Rmbm) 2017 2018 2019 2020

Net turnover 241,918.9 261,819.6 279,380.5 285,709.7

EBITDA 24,250.2 25,948.8 30,823.6 25,129.4

Deprec. & amort. 6,274.9 4,397.0 4,599.8 4,493.2

EBIT 17,975.2 21,551.8 26,223.8 25,129.4

Total other non-operating income 1,872.7 1,862.1 614.8 1,533.6

Associate contributions 1,830.2 907.3 164.1 2,362.5

Net interest income/(expense) 176.6 1,451.9 2,926.4 2,638.0

Pre-tax profit 21,854.8 25,773.1 29,929.1 31,663.5

Tax (3,243.6) (4,122.6) (4,652.0) (4,157.0)

Minorities (1,327.5) (1,419.6) (1,065.9) (283.6)

Preferred dividends 0.0 0.0 0.0 0.0

Net profit 17,283.7 20,230.8 24,211.2 27,223.0

Net profit (adj.) 17,283.7 20,230.8 24,211.2 27,223.0

BALANCE SHEET Year to 31 Dec (Rmbm) 2017 2018 2019 2020

Fixed assets 23,480.3 22,437.2 21,664.7 23,716.5

Other LT assets 54,815.9 58,574.5 63,808.0 95,010.8

Cash/ST investment 48,274.2 27,888.3 70,916.8 81,210.5

Other current assets 121,536.5 154,801.2 145,565.9 160,444.8

Total assets 248,106.9 263,701.1 301,955.4 360,382.6

ST debt 2,584.1 870.4 5,701.8 9,943.9

Other current liabilities 116,507.8 129,360.7 138,616.6 174,206.6

LT debt 32,986.3 32,091.4 41,298.4 42,827.3

Other LT liabilities 13,103.5 8,924.1 8,842.5 9,167.7

Shareholders' equity 73,737.4 83,072.1 101,669.2 117,516.3

Minority interest 9,187.7 9,382.4 5,826.9 6,720.8


CASH FLOW

Year to 31 Dec (Rmbm) 2012 2013F 2014F 2015F

Operating 24,442.6 27,861.1 38,590.4 29,557.1

Pre-tax profit 21,854.8 25,773.1 29,929.1 31,663.5

Tax (3,243.6) (4,122.6) (4,652.0) (4,157.0)

Deprec. & amort. 6,274.9 4,397.0 4,599.8 0.0

Associates (310.0) (349.3) (506.2) (402.5)

Working capital changes 2,815.4 1,282.0 11,800.3 1,574.3

Other operating cashflows (2,948.9) 881.0 (2,580.6) 878.8

Investing (12,979.4) (35,148.8) 7,431.4 (18,123.8)

Capex (growth) (3,218.4) (5,611.9) (3,451.9) (4,656.6)

Investments (11,202.1) (29,701.1) 10,757.8 (13,740.7)

Others 1,441.1 164.1 125.4 273.5

Financing 19,651.6 (13,387.2) (3,273.6) (756.3)

Dividend payments (6,465.7) (7,900.8) (8,561.6) (11,131.5)

Issue of shares 1,668.2 2,713.4 2,897.9 2,657.5

Proceeds from borrowings 26,095.6 (854.2) 8,473.8 43,737.6

Others/interest paid (1,646.5) (7,345.5) (6,083.7) (36,019.9)

Net cash inflow (outflow) 31,114.9 (20,674.9) 42,748.2 10,677.1

Beginning cash & cash equivalent 17,196.1 48,274.2 27,888.3 70,916.8

Changes due to forex impact (36.7) 289.0 280.4 (383.4)


KEY METRICS Year to 31 Dec (%) 2017 2018 2019 2020

Profitability EBITDA margin 10.0 9.9 11.0 8.8

Pre-tax margin 9.0 9.8 10.7 11.1

Net margin 7.1 7.7 8.7 9.5

ROA 8.3 7.9 8.6 8.2

ROE 25.6 25.8 26.2 24.8

Growth Turnover 51.3 8.2 6.7 2.3

EBITDA 29.5 7.0 18.8 (18.5)

Pre-tax profit 15.5 17.9 16.1 5.8

Net profit 17.7 17.1 19.7 12.4

Net profit (adj.) 17.7 17.1 19.7 12.4

EPS 15.9 15.3 14.4 11.5

Leverage Debt to total capital 42.9 35.7 43.7 42.5

Debt to equity 48.2 39.7 46.2 44.9

Net debt/(cash) to equity (17.2) 6.1 (23.5) (24.2)

Interest cover (x) n.a. n.a. n.a. n.a.




SHARIAH GEMS VIRTUAL CONFERENCE BUY (Maintained)

Share Price Rmb477.84

Target Price Rmb530.00

Upside +10.9%

COMPANY DESCRIPTION Mindray a leading medical devices producer.

STOCK DATA GICS sector Health Care

Bloomberg ticker: 300760 SZ


Market cap (Rmbm): 580,905.9



Price Performance (%) 52-week high/low Rmb495.00/Rmb290.58


(1.4) 21.7 19.0 58.3 12.2


Mr LI XiTing 30.7

Mr Xu Hang 27.6

FY21 NAV/Share (Rmb) 23.23

FY21 Net Cash/Share (Rmb) 15.42

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(%)(lcy)SHENZHE N MINDRAY B IO-M EDIC-A

SHENZHE N MINDRAY B IO-M EDIC-A/SIB SB Index

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ANALYST(S)

Carol Dou +853 2236 6749 [email protected]

Sunny Chen +852 2826 4857 [email protected]

Shenzhen Mindray Bio-Medical Electronics (300760 CH)

Well Prepared For Sustainable Long-term Growth

Mindray had a strong 2Q21 supported by new hospital construction programmes in China and continued business expansion in overseas markets. Aiming to become a global giant in the medtech industry, Mindray has nurtured various emerging product lines to boost growth. Its revenue guidance of over 20% CAGR for 2021-23 remains unchanged. Maintain BUY. Target price: Rmb530.00.

WHAT’S NEW

Here are the key takeaways from Shenzhen Mindray Bio-Medical Electronics’ (Mindray) meeting with investors at the Shariah Gems Virtual Conference.

STOCK IMPACT

Steady and strong business expansion in 1H21. Mindray has seen steady and strong business expansion in both overseas and domestic markets in 1H21. The domestic demand was mainly driven by new hospital construction programmes as both the central and local governments have put in effort to enhance the domestic public healthcare infrastructure. Mindray expects the new hospital construction programme to bring in over Rmb10b in market opportunities in the next few years, which will support the stable growth of the company in the years ahead. Moreover, its overseas business expansion will be resilient as overseas high-end hospital customers recognise the superior product and service quality of Mindray, which will lead to increasing purchase orders.

Expects revenue to expand steadily at over 20% yoy in 2021. Management expects its key segments, eg in-vitro diagnosis (IVD) and medical imaging systems, previously negatively impacted by the pandemic, to recover significantly and deliver robust revenue growth in 2021. However, the revenue of the life information & support segment may see relatively slow growth as: a) the global pandemic is gradually brought under control, and b) there was a significantly high base in 2020. Mindray’s overseas business expanded 41.2% yoy and its China business grew 16.5% yoy in 2020. The company expects its China business to experience stronger revenue expansion as the non-pandemic-related VID and medical imaging segments regain momentum in 2021, but may grow at a slower pace overseas given the high base in 2020. The overall revenue growth guidance remained at over 20% yoy in 2021.

KEY FINANCIALS Year to 31 Dec (Rmbm) 2019 2020 2021F 2022F 2023F Net turnover 16,556 21,026 25,615 31,026 37,661 EBITDA 4,844 7,245 9,086 10,882 13,267 Operating profit 4,596 6,954 8,725 10,404 12,615 Net profit (rep./act.) 4,681 6,658 8,264 9,815 11,793 Net profit (adj.) 4,681 6,658 8,264 9,815 11,793 EPS (Fen) 385.0 547.6 679.8 807.3 970.1 PE (x) 124.1 87.3 70.3 59.2 49.3 P/B (x) 31.2 25.0 20.6 17.0 14.1 EV/EBITDA (x) 116.1 77.6 61.9 51.7 42.4 Dividend yield (%) 0.3 0.5 0.6 0.7 0.8 Net margin (%) 28.3 31.7 32.3 31.6 31.3 Net debt/(cash) to equity (%) (75.8) (67.5) (66.4) (63.9) (60.7) Interest cover (x) n.a. n.a. n.a. n.a. n.a. ROE (%) 27.7 31.8 32.1 31.5 31.3 Consensus net profit - - 8,088 9,881 12,170 UOBKH/Consensus (x) - - 1.02 0.99 0.97 Source: Mindray, Bloomberg, UOB Kay Hian




Gross margin may decrease slightly due to lower product prices and depreciation of US$ in 2021. The gross margin improved from 64.5% in 1Q20 to 65.0% in 1Q21. According to management, this was mainly due to stable prices of medical devices and robust sales of high-margin products (such as reagents), which led to an improved product mix. However, the company expects to experience slight pressure on product prices in 2021. Moreover, depreciation of US$ may also put pressure on the gross profit margin.

Benefitting from public healthcare budget expansion in the global market. Efforts and budgets devoted by governments in China and around the world towards public healthcare capacity expansion have been increasing. This will support steady revenue growth for Mindray in the mid- to long term. Besides enhancing its brand name in global healthcare markets, COVID-19 helped Mindray quickly penetrate over 700 high-end hospitals in overseas markets (including about 100 in the Eurozone). Management expects to expand its overseas headcount and become increasingly localised as public healthcare service capacity is likely to benefit from governments’ budget plans. This will provide new opportunities for Mindray to expand its overseas market share.

Emerging product lines to become key growth driver in the longer term. Mindray has recently nurtured various new product lines (ie, minimally invasive products, and vet products). These emerging segments are expected to deliver robust expansion of over 100% yoy in 2021 and become new growth drivers in the next five years. The Group Purchasing Organisation (centralised procurement programme) may cut prices for orthopaedics, ie joint products, but will offer great market share expansion opportunities for Mindray, which has a limited market presence now.

Well prepared for sustainable long-term growth. With 30 years’ dedicated service to the medical device market, Mindray has focused on the three pillar product lines, ie patient monitors and life support, IVD and medical imaging systems. The company has experienced robust expansion over the past 30 years and is now ranked third in patient monitors and anaesthesia, and fifth in defibrillators and sixth in ultrasound systems in the global market. It experienced strong revenue and earnings with CAGR of 25.2% and 27.7% respectively in 2013-20. Growing into a new era of medical device market, Mindray is well prepared with enriched product offerings. It is confident of conquering challenges to achieve its goal of long-term sustainable growth and become a giant in the global medtech market.

RISKS

Intensifying competition.

Policy risks, eg, healthcare reform-related policy changes.

VALUATION/RECOMMENDATION

Maintain BUY with a target price of Rmb530.00, based on 79x 2021F PE, or 3.4x PEG. Mindray has a proven track record with revenue and net profit CAGR of 19.9% and 50.6% in 2015-19 respectively. We believe the company will further improve its margins and generate a strong net profit CAGR of 25.9% for 2019-21. Its superior growth potential and well-established global market position justify a valuation premium comparable with global peers’ (trading at about 3.2x PEG).


Steady and strong revenue and earnings growth in 2Q21.

Expecting a strong net profit CAGR of 21% for 2020-23

Benefitting from public healthcare budget expansion in the global market.




PROFIT & LOSS BALANCE SHEET

Year to 31 Dec (Rmbm) 2020 2021F 2022F 2023F Year to 31 Dec (Rmbm) 2020 2021F 2022F 2023F

Net turnover 21,025.8 25,614.6 31,026.1 37,661.0 Fixed assets 4,129.0 5,371.3 7,319.7 10,106.8

EBITDA 7,245.5 9,085.6 10,881.9 13,266.9 Other LT assets 7,545.9 7,545.9 7,545.9 7,545.9

Deprec. & amort. 291.9 360.3 477.7 652.2 Cash/ST investment 15,722.5 18,751.1 21,806.9 25,009.7

EBIT 6,953.6 8,725.2 10,404.2 12,614.7 Other current assets 5,909.0 6,874.5 8,140.9 9,696.1

Total other non-operating income 423.4 446.7 500.0 500.0 Total assets 33,306.4 38,542.8 44,813.5 52,358.6

Net interest income/(expense) 61.4 61.4 61.4 61.4 ST debt 0.0 0.0 0.0 0.0

Pre-tax profit 7,438.4 9,233.3 10,965.6 13,176.1 Other current liabilities 8,236.2 8,511.8 8,890.8 9,356.6

Tax (778.8) (966.8) (1,148.1) (1,379.6) LT debt 0.0 0.0 0.0 0.0

Minorities (1.9) (2.4) (2.8) (3.4) Other LT liabilities 1,779.8 1,779.8 1,779.8 1,779.8

Net profit 6,657.7 8,264.2 9,814.6 11,793.1 Shareholders' equity 23,277.6 28,236.1 34,124.9 41,200.8

Net profit (adj.) 6,657.7 8,264.2 9,814.6 11,793.1 Minority interest 12.8 15.1 18.0 21.4


CASH FLOW KEY METRICS

Year to 31 Dec (Rmbm) 2020 2021F 2022F 2023F Year to 31 Dec (%) 2020 2021F 2022F 2023F

Operating 8,870.1 7,936.9 9,407.8 11,359.4 Profitability

Pre-tax profit 7,438.4 9,233.3 10,965.6 13,176.1 EBITDA margin 34.5 35.5 35.1 35.2

Tax (778.8) (966.8) (1,148.1) (1,379.6) Pre-tax margin 35.4 36.0 35.3 35.0

Deprec. & amort. 291.9 360.3 477.7 652.2 Net margin 31.7 32.3 31.6 31.3

Working capital changes (1,440.7) (690.0) (887.4) (1,089.4) ROA 22.6 23.0 23.5 24.3

Other operating cashflows 3,359.3 0.0 0.0 0.0 ROE 31.8 32.1 31.5 31.3

Investing (5,191.1) (1,602.7) (2,426.2) (3,439.3)

Capex (growth) (700.3) (1,602.7) (2,426.2) (3,439.3) Growth

Investments (6.5) 0.0 0.0 0.0 Turnover 27.0 21.8 21.1 21.4

Proceeds from sale of assets 0.0 0.0 0.0 0.0 EBITDA 49.6 25.4 19.8 21.9

Others (4,484.3) 0.0 0.0 0.0 Pre-tax profit 38.6 24.1 18.8 20.2

Financing (1,853.1) (3,305.7) (3,925.9) (4,717.3) Net profit 42.2 24.1 18.8 20.2

Dividend payments (3,039.2) (3,305.7) (3,925.9) (4,717.3) Net profit (adj.) 42.2 24.1 18.8 20.2

Issue of shares 0.0 0.0 0.0 0.0 EPS 42.2 24.1 18.8 20.2

Proceeds from borrowings 0.0 0.0 0.0 0.0

Loan repayment n.a. n.a. n.a. n.a. Leverage

Others/interest paid 1,186.1 0.0 0.0 0.0 Debt to total capital 0.0 0.0 0.0 0.0

Net cash inflow (outflow) 1,825.9 3,028.6 3,055.8 3,202.8 Debt to equity 0.0 0.0 0.0 0.0

Beginning cash & cash equivalent 14,094.1 15,722.5 18,751.1 21,806.9 Net debt/(cash) to equity (67.5) (66.4) (63.9) (60.7)

Changes due to forex impact (197.5) 0.0 0.0 0.0 Interest cover (x) n.a. n.a. n.a. n.a.





SMALL/MID CAP HIGHLIGHTS NOT-RATED

Share Price HK$14.08

COMPANY DESCRIPTION Chinasoft International Limited develops and provides solutions in China to government authorities and its IT (Information Technology) service providers. The company also provides IT consulting and training services, IT outsourcing services and standalone software products.

STOCK DATA GICS sector IT Services

Bloomberg ticker: 354 HK

Shares issued (m): 2,905

Market cap (HK$m): 40,912



Price Performance (%) 52-week high/low HK$14.74/HK$4.17


40.9 87.3 73.3 231.3 63.3


HSBC International Trustee Limited 15.93%

Chen Yuhong 12.99%

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CHINASOFT INTERNATIONAL LTD/HSI INDEX

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ANALYST(S)

Jason Wong +852 2236 6793 [email protected]

Chinasoft International (354 HK)

Mid Cap: IR Meeting Takeaways After HarmonyOS Update

We spoke to Chinasoft International’s Head of IR recently and discussed the company’s latest business developments. As a key software supplier of Huawei, the group is a main beneficiary of the HarmonyOS outsourcing business. Chinasoft targets 30% CAGR for revenue and net profit over 2020-23, driven by: a) solid growth from Huawei; b) increasing contribution from other key clients; and c) accelerated Cloud services demand.

WHAT’S NEW

HarmonyOS debuts on smartphones. Huawei launched HarmonyOS 2.0 on 2 June, which supports multi-devices such as smartphones, tablets, wearables and computers in this latest version update. The launch is a milestone for Huawei as this is the first time that it is implementing its own operating system on its smartphones. This allows Huawei to go up against iOS and Android since the US has blacklisted Huawei. Up to 300m devices are expected to run on HarmonyOS by the end of this year, with penetration rate already showing strong momentum with over 10m downloads within a week of its launch.

Key software partner of Huawei. Chinasoft International (CSI) is Huawei’s largest IT outsourcing partner, accounting for 50-60% of Huawei’s IT outsourcing budget. The group is a key beneficiary of Huawei’s huge investment in R&D for HarmonyOS as CSI is involved in the entire development process. CSI expects revenue from the HarmonyOS project to increase from single-digit contribution to 30-40% in the future, contributed by: a) HarmonyOS outsourcing developing and testing business, b) app approval process outsourcing business, c) helping apply HarmonyOS to different products (such as home appliances and cars), and d) Huawei HiLink app store business.

Guidance update. CSI targets to double its top-line and bottom-line in 2023 to Rmb30b and Rmb2b respectively, implying 30% CAGR from 2020 to 2023. New business (Cloud & Smart businesses) would become the key growth driver with 57% CAGR for the next three years and contribute 40% of total revenue, supporting by the expanding Huawei Cloud business and gaining cloud outsourcing business from other new key customers (HSBC, PingAn, Tencent and Alibaba).

KEY FINANCIALS Year to 31 Dec (Rmbm) 2016 2017 2018 2019 2020

Net turnover 6,783.4 9,243.7 10,585.0 12,041.9 14,101.2 EBITDA 678.4 790.7 976.5 1,052.5 1,128.5 Operating profit 534.1 613.1 784.8 749.4 799.3 Net profit (rep./act.) 442.1 565.6 715.8 754.9 954.9 Net profit (adj.) 427.0 566.0 722.0 798.4 989.6 EPS (cent) 0.20 0.24 0.30 0.31 0.38 PE (x) 77.0 60.2 47.6 45.1 35.6 P/B (x) 7.9 6.5 5.6 5.2 3.9 EV/EBITDA (x) 50.4 43.0 34.9 32.6 28.7 Dividend yield (n.a.) 0.1 0.1 0.2 0.2 0.2 Net margin (%) 6.5 6.1 6.8 6.3 6.8 Net debt/(cash) to equity (%) 1.5 -2.4 0.2 3.4 -18.9 Interest cover (x) 7.8 8.5 9.2 7.7 14.9 ROE (%) 10.2 10.8 11.9 11.6 10.9 Source: CNE, Bloomberg, UOB Kay Hian




STOCK IMPACT

Solid results with proven track record. Since listing on the HK mainboard in 2008, CSI has reported positive revenue growth for 12 consecutive years with 24.8% CAGR from 2008 to 2020. In its latest 2020 results, net profit increased 25.3% yoy to Rmb948.1m, driven by rapid growth in its cloud intelligence business as well as steady contribution from core customers (Huawei and HSBC). Human resources can be one of CSI’s operating metrics as it reflects order demand for IT services. As at end-20, total number of employees rose 23.7% yoy to 75,956, of which 95.5% are technical personnel. The group expects to have around 85,000 employees in 1H21.

Relationship with Huawei. CSI started their IT outsourcing business for Huawei in 2009 and has now become a top-tier supplier. In 2020, revenue from Huawei was Rmb8.05b, accounting for 57% of CSI’s total revenue. CSI placed first among all of Huawei’s outsourced R&D suppliers in terms of delivery for six consecutive years, and is CSI’s key differentiating competitive advantage over its peers. Huawei is accelerating software R&D expansion to develop its own software ecosystem, including HarmonyOS, Cloud services, and AI platform. CSI is believed to take advantage to growth with their largest client and also with the increasing IT services demand in China.

More potential new key clients. Developing long-term partnership with key accounts (KA) is CSI’s main strategy. The FFW (For KA, From KA, With KA) development strategy aims to allow CSI to become a strategic partner of KAs in the final stage. Besides Huawei, revenues from HSBC and Ping An are targeted to reach US$100m scale in the near future, while revenue from Baidu, Alibaba and Tencent are targeted to increase 40-60% in 2021.

Margin improvement driven by new business. CSI reported a gross profit margin of 29.2% in 2020, down 0.6ppt yoy due to the COVID-19 impact. CSI expects a margin recovery trend to start in 2021, with gross profit margin to be lifted up by: a) traditional IT services upgrades; b) increased contribution from the high-margin Cloud business (over 30%); and c) operational efficiency improvement.

VALUATION

CSI is currently trading at 26.3x 2021F PE after the recent stock price increase, which is 2SD above its mean forward PE according to Bloomberg consensus. That said, the stock is still much lower than software peers’ average of 86.9x forward PE and stands at around 1x PEG.


For CSI’s valuation, market now is focusing on: a) accelerated HarmonyOS penetration rate; b) strong interim results in August; c) software supportive policy released by China’s government.

CSI’S REVENUE PERFORMANCE

Source: CSI, UOB Kay Hian

CSI’S HUMAN RESOUCES REBOUND IN 2020

Source: CSI, UOB Kay Hian

CSI FORWARD PE


PEER COMPARISON Company Ticker Rec Price @ Market ---------- PE -------- ----------P/B ------- ----EV/EBITDA--- Net

28 Jun 21 Cap 2021F 2022F 2021F 2022F 2021F 2022F ROE Gearing (lcy) (US$m) (x) (x) (%) (%) (%) (%) (%) (%)

Chinasoft International 354 HK n.a 13.80 5,147 26.3 21.1 3.4 2.9 19.6 15.9 13.0 -18.9 Kingdee International 268 HK n.a 28.55 12,716 n.a n.a 10.8 10.9 481.2 257.8 -2.7 -60.1 Kingsoft Corp Ltd 3888 HK n.a 47.55 8,379 53.5 33.6 2.1 2.0 17.4 14.2 3.9 -55.1 Digital China Holdings Ltd 861 HK n.a 5.20 1,117 n.a n.a n.a n.a n.a n.a 6.7 2.3 Hengten Networks Group 136 HK n.a 6.37 7,551 n.a n.a -57.9 -30.3 15.0 6.8 -1,072 -87.3 Jiangsu Hoperun Soft 300339 CH n.a 44.40 4,539 n.a n.a n.a n.a n.a n.a 5.9 4.9 Navinfo Co Ltd-A 002405 CH n.a 15.15 4,436 95.3 65.3 3.4 3.2 51.1 37.1 3.6 -17.0 Client Service 300663 CH n.a 40.61 1,621 184.6 145.0 15.0 10.8 115.9 84.9 8.1 26.9 China National Software 600536 CH n.a 59.00 3,746 74.7 48.0 11.6 10.3 73.8 43.4 15.5 -49.3 Beijing Jetsen Tech 300182 CH n.a 5.08 1,679 n.a n.a n.a n.a n.a n.a -18.0 22.9 Average 86.9 62.6 -1.7 1.4 110.6 65.7 4.1 -23.1





PROFIT & LOSS Year to 31 Dec (Rmbm) 2017 2018 2019 2020

Net turnover 9,243.7 10,585.0 12,041.9 14,101.2

EBITDA 790.7 976.5 1,052.5 1,128.5

Deprec. & amort. 177.5 191.7 303.0 329.2

EBIT 613.1 784.8 749.4 799.3

Associate contributions 19.8 12.2 -0.3 -24.4

Net interest income/(expense) -93.3 -105.8 -137.2 -75.9

Pre-tax profit 632.8 760.5 799.0 1,034.8

Tax -71.5 -44.3 -42.3 -86.7

Minorities 4.3 -0.4 -1.8 6.8

Net profit 565.6 715.8 754.9 954.9

Net profit (adj.) 566.0 722.0 798.4 989.6

BALANCE SHEET Year to 31 Dec (Rmbm) 2017 2018 2019 2020

Fixed assets 890.4 874.6 1,081.1 1,191.8

Other LT assets 1,412.3 1,388.9 1,466.0 1,501.1

Cash/ST investment 1,785.3 2,646.4 2,525.7 3,786.8

Other current assets 4,663.5 5,578.3 5,672.6 6,607.3

Total assets 8,751.5 10,488.2 10,745.4 13,087.0

ST debt 706.2 1,937.4 1,694.7 543.9

Other current liabilities 1,845.8 1,788.3 1,455.0 2,174.4

LT debt 953.6 719.9 1,051.4 1,581.3

Other LT liabilities 15.9 11.1 10.3 10.9

Shareholders' equity 5,230.0 6,031.5 6,533.9 8,776.4

Minority interest 64.2 64.5 66.3 23.3


CASH FLOW Year to 31 Dec (Rmbm) 2017 2018 2019 2020

Operating 332.1 161.2 754.5 1,152.5

Pre-tax profit 632.8 760.5 799.0 1,034.8

Tax -48.0 -81.9 -83.8 -83.2

Deprec. & amort. 177.5 191.7 303.0 329.2

Associates -19.8 -12.2 0.3 24.4

Working capital changes -687.5 -894.3 -515.9 -533.1

Non-cash items 7.3 -5.1 -9.2 -23.0

Other operating cashflows 277.1 197.5 251.8 380.3

Investing -234.4 -166.8 -224.2 -191.7

Capex (growth) -160.1 -150.5 -104.7 -159.3

Investments 0.0 0.0 -87.1 -54.9

Proceeds from sale of assets 0.4 5.2 1.7 4.5

Others -74.7 -21.5 -34.1 18.1

Financing 432.4 853.0 -649.6 361.8

Dividend payments 0.0 -36.9 -48.1 -51.8

Issue of shares 161.2 32.2 -394.3 472.6

Proceeds from borrowings 350.1 983.7 0.0 51.5

Loan repayment 0.0 0.0 -66.3 0.0

Others/interest paid -78.9 -126.1 -140.9 -110.5

Net cash inflow (outflow) 530.1 847.4 -119.4 1,322.7

Beginning cash & cash equivalent 1,299.0 1,785.3 2,646.4 2,525.7

Changes due to forex impact -43.7 -13.7 -1.3 61.6


KEY METRICS

Year to 31 Dec (%) 2017 2018 2019 2020

Profitability

EBITDA margin 8.6 9.2 8.7 8.0

Pre-tax margin 6.8 7.2 6.6 7.3

Net margin 6.1 6.8 6.3 6.8

ROA 6.5 6.8 7.0 7.3

ROE 10.8 11.9 11.6 10.9

Growth

Turnover 36.3 14.5 13.8 17.1

EBITDA 16.5 23.5 7.8 7.2

Pre-tax profit 20.6 20.2 5.1 29.5

Net profit 27.9 26.6 5.5 26.5

Net profit (adj.) 32.6 27.6 10.6 23.9

EPS 16.0 25.2 3.9 23.3

Leverage

Debt to total capital 24.1 30.6 29.6 19.5

Debt to equity 31.7 44.1 42.0 24.2

Net debt/(cash) to equity -2.4 0.2 3.4 -18.9

Interest cover (x) 8.5 9.2 7.7 14.9




TRADERS’ CORNER

Chart by Metastock

Chart by Metastock

Zhongsheng (881 HK) Trading Buy Range: HK$ 65.60-65.65

Last price: HK$64.95

Target price: HK$69.15 / HK$72.70

Protective stop: Breaks below HK$60.60

Technical View:

After we recommended investors to buy Zhongsheng at the end of Apr 21, its share price reached our second upside target (HK$67.50) on 1 Jun 21. After a period of consolidation, the stock is turning up from the lower boundary of a bullish channel and has just broken above its horizontal resistance at HK$63.00 and the declining 20-day (red line) moving average. Also, the stock is supported by the rising 50-day (green line) moving average, which confirms its positive view. The daily RSI stands firmly above its 40% (lower boundary of bullish zone) and is turning up, confirming the share price is in a bullish trend. The MACD is turning up and the histogram is narrow and upward, we expect the MACD is likely to cross above its signal line in coming sessions.

Stockholders are recommended to continue holding the stock and move the upward targets to HK$69.15 or even HK$72.70, while the trailing stop could move up to HK$60.60 in order to secure profits. Alternatively, investors could consider making an entry at HK$65.60-65.65. They can use the same upside targets and stop-loss to control risk if they are currently not holding the stock, or have taken profit previously.

Average time frame: Around 2 weeks.

**For the previous comments, please refer to the stock highlights and technical comments issued on 29 Apr 21.**

Country Garden Services (6098 HK) Trading Buy Range: HK$85.35-85.40

Last price: HK$85.20

Target price: HK$89.00/HK$92.50

Protective stop: Breaks below HK$80.95

Stock highlights:

The operating performance of Country Garden Services has been better than market expectations this year. It has won more than 400 new third-party projects which are expected to contribute RMB1 billion in management revenue. Its management also pointed out earlier that the targets for this year are gross floor area under management of 90 million square metres and revenue growth of 50%. The group expects that the revenue will reach the target of RMB100 billion by 2025. It has also formulated other plans such as achieving more mergers and acquisitions and participating in pre-IPO investments. Technical View:

The stock has just broken above the upper boundary of a range pattern (HK$72.35 – HK$83.95) with a larger candle on Tuesday. The rising 20-day (red line) moving average is above the 50-day (green line) one and is playing a supporting role. The daily RSI stands firmly above its 40% (lower boundary of bullish zone) and has broken above a bearish trendline (formed since Mar 2021). The MACD is above its signal line and 0-level, while the MACD histogram is broadening upward.

Average time frame: Around 2 weeks.

ANALYST(S)

Joyce Chan, CMT, CFTe +852 2236 6716 [email protected]




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