Nov - SGHK monthly seminar - UOB-Kay Hian · SGHK Monthly Seminar Nov 2016 Speaker: Shu Chee Wee Prepared by Frank Yip Technical analysis by Barole Shiu

SGHK Monthly SeminarNov 2016

Speaker: Shu Chee Wee

Prepared by Frank YipTechnical analysis by Barole Shiu

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Overview Hong Kong market outlook

Overview and forecast Stock Picks

a) China Overseas Land 中國海外 (688 HK)b) Ping An 中國平安 (2318 HK)c) Mengniu Dairy 蒙牛乳業 (2319 HK)

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Overview Equity market underwent a volatile and

surprising month in November Risk-off model had dominated investors

before the US presidential election but itsharply reversed after Donald Trump won

Four major indexes in US soared to its all time high on the back of optimism on Donald Trump’s fiscal policies

Jump in USD and US yields both extracted capital back to UScausing MSCI Emerging Market Index to slid by 6.4%

HSI

HSCEI

Source: Bloomberg

As of 25 Nov 16

Fed: Imminent Interest Rate Move Yellen said in the Joint Economic Committee “At our meeting earlier this

month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives”

The Fed Chair also cited dangers of holding the fed fund rate atcurrent level for too long that would result the Fed speed up the tightening policy in the future

Market Expectation Investors believe Donald Trump is going to cut corporate tax rates and

increase infrastructure spending which push inflation rate higher to the Fed’s target

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Fed: Inevitable in rate raise in Dec Probability of rate hike:Futures: Fed Funds

Calculated/ Meeting 21 Sep 2 Nov 14 Dec

24 Jun 0% 1.9% 15.3%

28 Jul 28.0% 29.5% 44.9%

22 Aug 22.0% 28.7% 51.1%

22 Sep N/A 19.3% 58.6%

18 Oct N/A 17.1% 62.6%

8 Nov N/A N/A 84.0%

24 Nov N/A N/A 98.0%

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BOE: Nov Minute All Monetary Policy Committees decided to maintain the BOE’s

benchmark interest rate at 0.25% and QE purchase targets at up to £10 billion for corporate bonds and £435 billion for U.K. government bonds

The BOE said there will be no interest rate reduction in this year The committee will meet on 15 Dec to decide any change on interest

rate

Market Expectation No interest rate cut in this year Watch for the development of Brexit after a ruling from court that the

government only can trigger the Article 50 process for Brexit with Parliament's involvement

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ECB: Possible for QE extension According to last meeting minutes, policy makers said the

uncertainties in the region still overhanging. The economy was seen developing along the ECB's forecasts but inflation and wage growth remained subdued

In the last week, Mario Draghi and Yves Mersch, the ECB board member both proposed the ECB €1.7 trillion bond purchase program will extend beyond due in March

Next policy meeting will be conducted on 8 Dec

Market Expectation Most economists expect a six-month extension for the QE

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Uncertainty: Italy Referendum Matteo Renzi, the Italian prime minister lead the referendum to decide

whether to overhaul the national constitution to reform the country’s lawmaking process

In the worst case scenario, the PM steps down followed by the failure of referendum. The “Five Star Movement ”, an opposition party who suggest to leave the EU may take control the parliament, a second black swan in this year

Breakup of the EU is likely once Italy decides to leave who is the first country using Euro to quit

Latest poll showed, vote for against is leading around 5-8% to “Yes”. The vote will start on 4 December

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BOJ: First yield-curve control The BOJ launched its first fixed-rate bond buying to counter the surge

of Japanese yields after Donald Trump’s victory in 17 Nov The central bank offered unlimited two-year bonds at a yield of

negative 0.09% and unlimited five-year bonds at a yield of negative 0.04%

Next interest rate decision meeting schedules on 20 Dec

Market Expectation The central bank signalled the market that its qualitative and

quantitative easing is strong enough to keep borrowing costs low

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China: Economic Data in OctSurvey Actual Prior

Manufacturing PMI 50.3 51.2 50.4

Caixin Manufacturing PMI 50.1 51.2 50.1

Exports YoY – USD (RMB) -6%(-0.8%) -7.3%(-3.2%) -10%(-5.6%)

Imports YoY – USD (RMB) -1%(5.0%) -1.4%(3.2%) -1.9%(2.2%)

CPI YoY 2.1% 2.1% 1.9%

PPI YoY 0.9% 1.2% 0.1%

Industrial Production YoY 6.2% 6.1% 6.1%

Retail Sales YoY 10.7% 10% 10.7%

Fixed Assets Ex Rural YTD YoY 8.2% 8.3% 8.2%

New Yuan Loans CNY 672b 651.3b 1220b

Money Supply M2 YoY 11.4% 11.6% 11.5%

Source: Bloomberg

China: Oct Economic Activities

Fixed asset investment improved slightly, supported by infrastructure and property investment but the private FAI remained weak

Industrial production growth remained flat where steel sector saw a higher yearly decline, being a major loser. Growth in automobile was slowing down in Oct to 17.9% from 22.5% in last month but pharmaceuticals and electrical equipment sectors improved to 11.3% and 9.3% respectively

Retail sales growth slid to 10% short of expectation 10.7%

UOB Kay Hian Expectation The economy would rely on government leading infrastructure

investment No interest rate or RRR cut in 1H17 and we expect headwinds given

tightening controls on property market and the Fed rate rise Positive on upstream sectors and infrastructure contractors; Caution

on property market;

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HSI: range trading is expected

Constraint by strong USD and US yields, along with the depreciation of RMB, the upward momentum of HK stock market was week.

The HSI is expected to trade within 22000 – 23000 points, with initial support is at 21957 points.

Sector rotation was seen with China infrastructure, China base metals, China insurer, China cement sectors.

Uncertainty: Italy referendum; Positive: SZHK Stock Connect

Source: Bloomberg

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Second Part

Industry Introduction and

Stock Pick

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China Property Sector China property market has shown more signs of cooling down

following a series of targeted measures

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Home sales in 30 cities that UOBKHmonitors rebounded weekly but it still fell 30% on yearly basis

Average selling price of 70 cities in Oct reported 1% mom growth which is lower than 1.8% and 1.2% in Sep and Aug after administrative measures implemented

China Property Sector

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Cities with soft tightening policies will likely upgrade their existing rules and cities with high inventory and moderate ASP growth will see a supportive measuresa) Chengdu (ASP YTD Growth: 4.6%, Inventory Turnover: 11x)• Require property companies to pay off land premiums that

premium rates exceed 60% within 3 months• One home unit allowance in the two over-heated regions for locals

and non-locals• Increasing the downpayment for the public reserve fund loanb) Harbin (ASP YTD Growth: 3.1%, Inventory Turnover: 24x)• Cutting the downpayment requirement for the public fund reserve

loan• Implementing the deed tax rate and value-added tax discount in

the city


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Higher degree of market consolidation is expected. Under the market downturn, larger developer would acquire those small-mid cap players to expand market share

Thus larger players would outperform given its diversified land bank portfolio and less affected by onshore bond issuance


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Given more and more “land king” appears, cooperation between developers allow them to share risks and capex. JV would become necessary due to Requirement for land capital and payment period have become

higher amid the tightening environment Insurance companies and wealth management products are

prohibited to be involved in land acquisitions


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UOBKH expects home prices to remain curbed in core cities with ASP hikes, and tightening measures will be implemented once any rebound in home prices

Valuation: China property is trading at 7.4x 2017PE or a 41.6% discount to RNAV, close to 1 standard deviation below the mean UOBKH prefers developers with decent fundamentals and healthy gearing


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Background: The Group is principally engaged in property development and

investment, real estate agency and management, and treasury operations

Source: Bloomberg

Market Cap (HK$ bn) 247.06

Dividend yield (%) 3.4%

2016 Estimated PE (x) 6.9x

2016 Estimated PB (x) 1.0x

Target Price (HK$) 30.22

Current Share Price (HK$) 22.55

China Overseas Land 中國海外 (688 HK)

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Unexpected management resignationChairman and CEO Hao Jianmin resigned as chairman, non-executive director and CEO of the company because of realignment of work dutiesShort term negative impact on share price Negative impact on disposal of low-tier cities projects (Yangzhou, Huizhou and Weifang) to subsidiary COGO (81HK) is manageable13.7% of COLI’s total land portfolioGPM will grow by 0.2/0.4/0.6ppt in 2016-18 repsectively (GPM for those projects are <20%)Core earnings will decline by 0.8%/3.0%/5.2% in 2016-18


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COLI achieved HK$196b in contracted sales in 10 months, lock-in 93.3% of revised full-year target.

Approximate HK$7.1b of subscribed sales will be booked in comingmonths

Ended in 1H16, COLI’s land bank reached 36.5m sqm (34.3m sqm on an attributable basis). After including CITIC’s land, it increases to 68.1m sqm (57.8m sqm on attributable basis)

Balance sheet remained resilient with a net cash position and maintain a good balance between scale and leverage


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Last price: HK$22.55 Target Price: HK$23.00/24.50 Protective Stop: HK$21.58

Trading Buy COL completely refilled the earlier

downside gap last week. The stock continued to close higher yesterday at HK$22.55 on six-month average daily volume

As the ROC is trending towards its centreline and the WLPR is riding along its uptrend extended from the extremely oversold zone, we expect the stock to first test the Middle Bollinger Band at HK$23.00

If this resistance is penetrated, the stock should continue to test the one-month high of HK$24.50, which coincides with the Upper Bollinger BandSource: ETNET


Approximate time frame on average: 1 month

China Insurance SectorHigh growth in Life insurance and positive to P&C insurance Life premiums growth remained strong in 1H16 as China Life, Ping An

and CPIC reported growth of 25%, 32.7% and 31.7% yoy respectively (Industry life growth of 49.3%)

Due to auto pricing reform and VAT reform, the P&C segment grew at a slow pace. Ping An P&C, CPIC P&C and PICC P&C reported premiums growth of only 2.9%, 1.9% and 10.7% yoy respectively

But UOBKH believes the auto pricing reform is likely positive to claim ratio, policyholders are less likely to make small claims in order to maintain higher discounts at renewal

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China Insurance SectorUnder-penetrated commercial pension market National pension makes up the majority of pension assets in China,

representing 5.7% of China’s GDP in 2014. It still lagged behind the developed markets

In 2015, national pension revenue grew only 11.7% yoy vs pension expense growth of 17.7% yoy. It suggested occupational and private pension to play bigger roles in the coming years

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China Insurance SectorInsurers target on online insurance Premium incomes distributed by internet insurance companies were

up 69x to Rmb223b in 2015, accounting for 9.2% of industry premiums in 2015 vs only 0.2% or Rmb3b in 2011

The number of “internet + insurance” companies grew from 28 in 2011 to over 100 in 2015

Online life premiums jumped 142x from 2011, compared to 35x P&C premiums

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Background: The principal activities of the Group comprise the provision of a wide

range of financial products and services with a focus on the three core businesses namely, insurance, banking and investment

Source: Bloomberg







Ping An 中國平安 (2318 HK)

Ping An Insurance 1H16 net profit up 17.7% yoy to Rmb40.8b beat the market prediction due to lower-than-expected life reserve expense

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1H16 Results Best life insurance operator in the market (35% of earnings)

First-year premiums growth was strong at 41.9% yoy, thanks to the growing number of agents (+20.2% hoh) and improving agency productivity (+4.9% yoy)

Reported a 32.3% yoy increase in gross life premiums in 1H16, outperforming the growth of China Life and CPIC at 25% and 31.7%respectively

P&C insurance (15% of earnings) P&C premiums inched up by 2.9% yoy in 1H16, since increase in

automobile premiums was dragged by non-automobile’s fall Better than CPIC (1.9%), but lagged behind PICC (10.7%) Deteriorating in combined ratio to 95.3% from 93.6% in 1H15

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Banking (25% of earnings) Net profits from Ping An Bank up 7.1% yoy to RMB12.1b, benefit from

17.9% growth in fee income Sequential improvement in NPL ratio, flat at 1.56% in 2Q16

Key catalyst Spin-off potential with following businesses:

Lufax, a public online financing platform Ping An Securities Ping An Doctor, an online medical service portal

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Last price: HK$43.35 Target Price: HK$48.00 Protective Stop: HK$41.02

Trading buy Ping An Insurance edged up higher

yesterday on very strong volume within the rising wedge formation.

Given that the MACD is turning north from its centreline after multi-weeks of consolidation and the RSI is heading towards the upper bound of its trading channel, any downside will be limited to the lower bound of the rising wedge.

The stock is inclined to test the upper bound of the rising wedge at HK$18.00, which coincides with the congestion area back in July 2015.

Source: ETNETApproximate time frame on average: 1 month


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Steady growth in domestic dairy market China’s liquid milk consumption per person was only at around

17.3kg/year, which is not only much lower than advanced countries’50-110 kg/year (US: 73.9kg, UK 105kg, Australia: 110kg/year) but also behind the average consumption of 31kg/year in Japan and 33.5kg/year in Korea

China’s urbanization trend and personal income growth should underpin a steady growth of milk consumption in longer run

Increasing health awareness re-formulate people consumption habit to more healthy and nutritional foods

China Dairy Sector

Background: The principal activities of the Group are manufacturing and distribution

of quality dairy products including liquid milk products (such as UHT milk, milk beverages and yogurt), ice cream, milk formula and other dairy products (such as cheese) in China.

Source: Bloomberg







Mengniu Dairy 蒙牛乳業 (2319 HK)

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1H16 Results Expected weak earnings because of China Modern Dairy’s net loss

(with 25.4% stake) Unexpected revenue growth driven by overall improvement in UHT

milk and high-end products Sales volume increased by about 4% Product mix upgrade drove up ASP by 1-2%

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Recovery in dairy consumption China’s dairy production accelerated from 4.9% growth in 2015 to 7.5%

yoy growth in 10M16, according to National Statistics Bureau’s data UOBKH believes that Chinese

consumption preference has switched to higher nutritional products such as milk given higher awareness on personal health

Mengniu remains the largest market share in liquid milk in 1H16 with 27.4% (27.1% in 1H15) based on Nielsen data

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Strong pricing power protects margins New Zealand whole milk powder prices surged over 60% from early-

July to US$3,423/ton on 15 Nov 16 UOBKH estimated the import milk prices are about the same level at

China’s domestic average raw milk price of Rmb3.45/kg Historically, Mengniu’s gross margin only slipped by 1ppt in 2010 but

expanded by 4ppt in 2013 while the raw milk price jumped by 20% in 2010 and 25% in 2013

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Products mix upgrade UHT yogurt product delivered robust 70% sales growth in 1H16 and a

higher growth momentum is expected given new flavour UHT yogurt launched

Premium Deluxe UHT milk is estimated to maintain double-digit sales growth in 2016

Vertical integration strengthens quality control and brand recognition Acquired a upstream producer China Modern Dairy in 2013 Accessed downstream milk formula business by acquiring a 51%

stake in Yashili Strategic cooperation with Danone

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Last price: HK$16.38 Target Price: HK$17.50/18.00 Protective Stop: HK$15.57

Source: ETNET

Buy on weakness Mengniu breached the 52-week high of

HK$16.32 to end yesterday at HK$16.38 after recording an intraday high of HK$16.82 on very strong volume, but in a shooting star candlestick formation. A pullback often appears after a 52-week high is breached and the emergence of a shooting star.

Nevertheless, with the bullish DMI and MACD above its signal line and MACD positive histogram, the stock is likely to test the Upper Bound of the upward parallel channel near HK$17.50 after a brief pullback

If this resistance is broken, second resistance will be situated at the psychological barrier of HK$18.00Approximate time frame on average: 1 month


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Q&AThe EndThanks

Documents

Nov - SGHK monthly seminar - UOB-Kay Hian · SGHK Monthly Seminar Nov 2016 Speaker: Shu Chee Wee Prepared by Frank Yip Technical analysis by Barole Shiu