A Share Monthly Portfolio · Pick Smart in Market Consolidation — Investment Portfolio for August 2018 Highlights of the Month. For our Monthly Portfolio, we replaced hina Yantze

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A-Share Monthly Portfolio

10 August, 2018

Pick Smart in Market Consolidation — Investment Portfolio for August 2018

Highlights of the Month. For our Monthly Portfolio, we replaced China Yantze Power (600900.CH) and SAIC Motor (600104.CH) with Goldwind Science & Technology (002202.CH) and Guizhou Space Appliance (002025.CH). For the “Value-Play” Stock Portfolio, we added Gezhouba Group (600068.CH) and Gold Mantis Construction Decoration (002081.CH) and removed Perfect World (002624.CH) and Poly Real Estate Group (600048.CH). As for “Cash Cow” Stock Portfolio, we included Ping An Insurance (601318.CH) and China Yantze Power (600900.CH) and took away Guizhou Space Appliance (002025.CH) and Haitong Securities (600837.CH).

July Performance and August Outlook. In July, the Monthly Portfolio and “Cash-Cow” Portfolio reported gains of 1.94% and 2.46%, respectively, outperforming the CSI300 by 1.75ppts and 2.27ppts. The “Value-Play” Portfolio registered a loss of 1.61%, lagging behind the CSI300 by 1.8ppts. Looking into August, we believe there will be a rebound in the A-share market given the country’s fine-tuning of its policies and the diminishing impact of the Sino-US trade conflicts.

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

August Stock Portfolio (in alphabetical order): Beijing New Building Materials (000786.CH), Changjiang Electronics Technology (600584.CH), Goldwind Science & Technology (002202.CH), Guizhou Space Appliance (002025.CH), Kweichow Moutai (600519.CH), NavInfo Co (002405.CH), Poly Real Estate Group (600048.CH), Renhe Pharmacy (000650.CH), Shaanxi Coal (601225.CH), Swellfun Co (600779.CH).

“Value-Play” Stock Portfolio (3-6months, in alphabetical order): Beijing New Building Materials (000786.CH), Daqin Railway (601006.CH), GCI Science & Technology (002544.CH), Holitech Technology (002217.CH), Gezhouba Group (600068.CH), Gold Mantis Construction Decoration (002081.CH), Kweichow Moutai (600519.CH), Nanjing King-Friend Biochemical Pharmaceutical (603707.CH), Suzhou Keda Technology (603660.CH) and Swellfun Co (600779.CH).

“Cash Cow” Stock Portfolio (12 months, in alphabetical order): Beijing New Building Materials (000786.CH), Changchun High and New Technology (000661.CH), China Yantze Power (600900.CH), Kweichow Moutai (600519.CH), NavInfo Co (002405.CH), Ping An Insurance (601318.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 1: CGS August Investment Portfolio (closing prices on 8 August, 2018)

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

This is a summary translation of the

Chinese report titled “底部震荡优选个

股”contributed by the following:

Hong Liang — Strategy Analyst

(8610) 6656 8750

[email protected]

Practicing Certificate No.: S0130511010005

Stock

Code

Stock Description EPS (RMB) PE (X)

2016A 2017A 2018E 2019E 2016A 2017A 2018E 2019E

000786.CH Beijing New Building Materials 0.79 1.38 1.75 2.12 23.5 13.5 10.6 8.8

600584.CH Changjiang Electronics Technology 0.10 0.25 0.81 1.19 159.1 63.6 19.6 13.4

002202.CH Goldwind Science & Technology 0.84 0.86 1.1 1.29 15.1 14.7 11.5 9.8

002025.CH Guizhou Space Appliance 0.61 0.73 0.84 1.05 38.4 32.1 27.9 22.3

600519.CH Kweichow Moutai 13.31 21.56 28.40 34.66 50.8 31.4 23.8 19.5

002405.CH NavInfo Co 0.15 0.22 0.31 0.40 116.7 79.5 56.5 43.8

600048.CH Poly Real Estate Group 1.05 1.31 1.43 1.65 10.2 8.2 7.5 6.5

000650.CH Renhe Pharmacy 0.31 0.31 0.40 0.51 21.3 21.3 16.5 12.9

601225.CH Shaanxi Coal 0.28 1.04 1.07 1.16 26.4 7.1 6.9 6.4

600779.CH Swellfun Co 0.46 0.69 1.24 1.82 114.2 76.2 42.4 28.9

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Table 2: CGS Value-Play Stock Portfolio (closing prices on 8 August, 2018) Stock

Code


2016A 2017A 2018E 2019E 2016A 2017A 2018E 2019E


601006.CH Daqin Railway 0.48 0.89 0.82 0.87 18.5 10.0 10.8 10.2

002544.CH GCI Science & Technology 0.33 0.35 0.45 0.57 33.4 31.5 24.5 19.3

600068.CH Gezhouba Group 0.74 1.02 1.17 1.38 10.6 7.7 6.7 5.7

002081.CH Gold Mantis Construction

Decoration 0.64 0.73 0.88 1.05 15.6 13.7 11.4 9.5

002217.CH Holitech Technology 0.28 0.37 0.61 0.80 26.5 20.1 12.2 9.3


603707.CH Nanjing King-Friend Biochemical 0.61 0.74 1.07 1.49 35.5 29.2 20.2 14.5

603660.CH Suzhou Keda Technology 0.86 0.75 1.45 1.94 20.5 23.5 12.1 9.1

600779.CH Swellfun Co 0.46 0.69 1.24 1.82 114.2 76.2 42.4 28.9

Table 3: CGS Cash Cow Stock Portfolio (closing prices on 8 August, 2018) Stock

Code


2016A 2017A 2018E 2019E 2016A 2017A 2018E 2019E


000661.CH Changchun High & New Tech 2.85 3.85 5.16 6.71 69.9 51.8 38.6 29.7

600900.CH China Yangtze Power 0.94 1.01 10.3 1.06 17.3 16.1 1.6 15.3


002405.CH NavInfo Co 0.15 0.22 0.31 0.40 116.7 79.5 56.5 43.8

601318.CH Ping An Insurance 3.49 4.99 5.92 7.12 16.7 11.7 9.9 8.2

600048.CH Poly Real Estate Group 1.05 1.23 1.43 1.65 10.2 8.7 7.5 6.5

600779.CH Swellfun Co 0.46 0.69 1.32 1.98 114.2 76.2 39.8 26.5

002353.CH Yantai Jereh Oilfield Services 0.13 0.07 0.39 0.74 142.8 265.3 47.6 25.1

300410.CH Zhengye Technology 0.37 1.00 1.57 2.32 60.1 22.2 14.2 9.6



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 2018-19E EPS at RMB1.03 and RMB1.06, cor-

responding to PER of 16.4x and 15.9x. 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 2017A 2018E 2019E

Operating revenue (RMB m) 24,239 48,939 50,147 50,896 51,356

Growth rate of operating revenue -9.88% 101.90% 2.47% 1.49% 0.90%

Net profit (RMB m) 11,520 20,781 22,261 22,660 23,320

Growth rate of net profit -2.62% 80.39% 7.12% 1.79% 2.91%

Diluted EPS (RMB) 0.52 0.94 1.01 1.03 1.06

PE 31.2 17.3 16.1 1.6 15.3

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; Visible Growth


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 2018-19E net profits at RMB310m and RMB460m,

corresponding to respective EPS of RMB1.57 and RMB2.32. This

implies 2018E PER of 23x and 2019E PER of 16x. The over-40%

net profit growth in the next two 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


Operating revenue (RMB m) 357.08 600.34 1,265.37 1,882.88 2,788.18

Growth rate of operating revenue 14.79% 68.12% 110.77% 46.70% 48.08%

Net profit (RMB m) 39.34 72.84 200.01 308.65 457.56

Growth rate of net profit 35.04% 85.14% 174.61% 46.63% 48.25%

Diluted EPS (RMB) 0.200 0.370 1.00 1.566 2.321

PE 111.1 60.1 22.2 14.2 9.6


Earnings of acquired companies below expectations;

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

manufacturing industry park.

5

Goldwind Science & Technology (002202.CH): Strong Order Book Guarantees Earn-

ings Growth; Stricter Cost Control to Enhance Competitiveness


1) Leader in Wind Power Generation. Goldwind’s new wind power installation exceeded 5.2GW in China in 2017, and has been an industry leader for seven years in a row, with a domestic market share of 26.6%. The Company ranks third in the global market with market share of 11%.

2) Strong Order Book Guarantees Future Earnings. As of end-Q1 2018, the Company’s order on hand reached a record high of 17.4GW. In particular, incomplete orders increased 31.8% YoY to 10.4GW.

3) Vertical and Horizontal Integrations Bring Synergies and Contribute to Cost Control. The Company’s business scope current-ly covers the whole industrial chain. Through the production of high value-added parts including power generators and control sys-tems, the Company managed to reduce the costs of its core business with strong cost control capability.

4) Market Share Expansion Expected amid Industry’s Intensifying Competition. With China’s upcoming introduction of the bidding system for grid-connected projects, medium-stream and upstream players would be forced to reduce their costs following lower government subsidies, which is expected to intensify the current industry competition and eliminate weaker players. Given Gold-wind’s strong cost controls and high gross profit margin, the Company should have more room for profit squeeze and its market share may expand further.

5) Wind Farm Business a New Highlight for Company’s Development. Goldwind has been active expanding into the wind farm business with an aim to enhance its income structure and diversify profit growth drivers. In 2017, the business segment accounted for 13% of its total revenue. With a gross profit margin of 65.9%, the segment contributed to 28.3% of the Company’s gross profits. It is expected that the segment’s profit contribution would increase further in 2018.

Sources: WIND,China Galaxy Securities Research

Investment Rating:

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


Solid sector operational data in H1: Cumulative wind power

installation rose 25.3% YoY to 7.53GW; average utilization increased 16.2% to 1,143hrs; cumulative power generation grew 22.9%;

The wind power sector was oversold in Q2, due to: (i) weaker-

than-expected installation; (ii) sharp decline in wind power turbine prices; (iii) roll-out of new energy policies. Nonetheless, we believe the market has priced in all the negatives and ad-justed their expectations: (i) prices of wind power turbine have stabilised; (ii) wind power operators are mainly state-owned enterprises and destructive competitions are unlikely; (iii) “green energy certificates” would help to drive cash inflows.


The sector is transforming from subsidy reliant to grid parity. Play-ers with full-scope exposure are subject to intensifying competi-tion. Cost control would be a key to stay competitive

We estimate its 2018-19E EPS at RMB1.1 and RMB1.26, corre-sponding to respective PER of 13x and 11x. Maintain “RECOMMEND” rating.


Stronger-than-expected sector performance;

Wind turbine prices stabilizing;

Faster industry consolidation which would lead to market

share expansion.

Main risk factors

Weaker-than-expected new orders;

Substantial decline in wind turbine prices;

New policies to cut subsidies.



Growth rate of operating revenue 69.8% -12.2% -4.8% 30.6% 19.3%

Net profit (RMB m) 2,849 3,003 3,055 3,912 4,587


Diluted EPS (RMB) 0.80 0.84 0.86 1.1 1.29

PE 15.8 15.1 14.7 11.5 9.8

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 26x and 21x. Maintain

“RECOMMEND” rating.


Stronger revenue and net profit growth.

Main risk factors

Lower-than-expected sales;

Macro-economic and political factors.


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 54.8 50.8 31.4 23.8 19.5

7

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


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) Accelerated YoY growth in revenue and net profit since 2017. Revenue in full-year 2017 grew 74.1% YoY to RMB2.05bn while net profit attributable to the parent rose 49.2% YoY to RMB335m, representing an EPS of RMB0.69. The Company managed to extend its excellent performance to 2018. In Q1/ Q2 2018, the Company’s revenue increased 87.7% / 33.0% YoY to RMB748m/ RMB588m, and net profit attributable to the parent climbed 68.0%/404.0% YoY to RMB155m and RMB113m, respectively.

3) Focus on channel optimization for development. In 2017, the Company continued to initiate innovative management concepts, en-hance governance and optimize its distribution model. It increased the market construction in key provinces and strengthened the com-petitiveness 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 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) 854.87 1,176.37 2,048.38 2,981.62 4,049.94

Operating income growth rate 134.29% 37.61% 74.13% 45.56% 35.83%

Net profit (RMB m) 87.97 224.79 335.49 607.87 891.93

Net profit growth rate - 129.08% 49.25% 81.19% 46.73%

EPS (RMB) (diluted) 0.18 0.46 0.69 1.24 1.82

PE 291.9 114.2 76.2 42.4 28.9


Investment Rating:

Recommend

Channel optimization focus. Based on the integrated perfor-

mance of the Company’s earnings growth and strong sales of its main products, the channel optimization and adjustments have had a very positive effect.

Brand revitalization and market cultivation. We believe that

the Company’s market cultivation should support sales in the next three years.

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

We estimate EPS of RMB1.24/ RMB1.82 in 2018-19E, with a

PER of 43x/ 30x, respectively. We maintain our Recommend 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

Gezhouba Group (600068.CH): Renewable Business Shines; Solid Orders to Sup-

port Growth

Driving factors, key assumptions and main predictions: 1) Strong Renewable Business; Environmental Protection Business Shows Tremendous Potential. Through acquisitions, the

Company expanded into water utility, sewage treatment and solid waste businesses. Its environmental protection business seg-ment accounted for 25% of its full-year 2017 revenue, suggesting huge potential.

2) Solid Orders On Hand. Gezhouba’s new orders grew 5.83% YoY to RMB226bn in 2017. In-progress orders reached RMB543.4bn, which exceeded the full-year 2017 revenue by over 5x. Unstarted orders of RMB298.7bn represented 2.8x of the 2017 revenue. The solid orders pointed to visible earnings.

3) Valuation Recovery Possible Given Marginal Improvement in Credit and Liquidity. The counter is currently trading at 2018E PER of around 6.5x which is at the lower end of the historical range. With a marginal improvement in credit and liquidity, its valu-ation may recover going forward.

4) We project a stable growth in its 2018E earnings and estimate its EPS at RMB1.17. Earnings may grow further in 2019. Maintain “RECOMMEND” rating.


Investment Rating:

Recommend Hua Li:（8621）2025 2650 / [email protected] Practitioner Certificate No.: S0130516080004


We estimate its 2018-20E EPS at RMB1.17, RMB1.38 and

RMB1.60, corresponding to respective PER of7x, 6x and 5x. Main-tain “RECOMMEND” rating.


Construction Business: The market is concerned that the

Company might be affected by the slower FAI growth. Infra-

structure investment growth slowed down in H1 2018 follow-

ing more regulated PPP development and controls on fi-

nancing platforms. As the country gradually stabilizes its

leverage controls, it is expected that the FA growth could

increase going forward.

Environmental Protection Business: The market is wor-

ried about the profitability of this segment. We believe the

profitability would improve as the business gradually matures

after the initial investments.

Property Business: The Company expands into the high-

end property business. The segment is relatively healthy as

the Company pursues brand quality and refrains from con-

duct aggressive expansion.


Improvement in credit and monetary environment;

Faster FAI growth;

Better profitability in environmental protection business.

Main risk factors

Tighter monetary and credit policies;

Slower FAI growth.

Main financial indicators 2016A 2017A 2018E 2019E 2020E

Operating revenue (RMB 100m) 100,254.15 106,807.10 125,990.60 146,392.94 165,473.66


Net profit (RMB 100m) 3,395.31 4,683.60 5,399.16 6,347.01 7,36.41


Diluted EPS (RMB) 0.74 1.02 1.17 1.38 1.60

PE 10.6 7.7 6.7 5.7 4.9

9

Gold Mantis Construction Docoration (002081.CH): Public Construction Shows Stable

Growth; Home Decoration Segment to Boom


1) Home Decoration Segment Achieved Profits; Likely to Contribute to Future Earnings. The Company managed to achieve profits in its home decoration segment after two years of development. It currently owns 165 direct-sale stores na-tionwide. The business is expected to boost its future earnings.

2) Strong Order Books to Drive Growth. Gold Mantis’ incomplete orders reached RMB45.78bn in Q1 2018, which represent-ed 2.18x of the full-year 2017 revenue. Future earnings are secured with the execution of orders.

3) Equity Transfer Deal may Add Incentive. The Company plans to transfer 30% of its stake in Gold Mantis (Suzhou) E-Commerce to eight senior management at a consideration of RMB45.3m. The deal may bring more incentive for the man-agement.

4) We expect its 2018E revenue to increase on a yearly basis with an EPS of RMB0.88. Earnings may grow further in 2019. Maintain “RECOMMEND” rating.


Investment Rating:

Recommend Hua Li:（8621）2025 2650 / [email protected] Practitioner Certificate No.: S0130516080004


Public Construction Business: The market is concerned

about the stagnant development of the business. Given the rising industry concentration, we believe the Company’s busi-ness could maintain a steady growth as it expands its business through offline shops.

Home Decoration Business: The market is worried that the

growth of GFA sold would remain low. We believe the Compa-ny’s B2B segment would outgrow the industry average amid rising concentration in the property industry. The offline and online business models should boost the B2C business.

Design Business: The Company adopts standard procedures

for designs. With the help of technologies such as VR, cloud design software, the Company resolves the issue of long de-sign and quotation periods, and enjoys a leading advantage.


We estimate its 2018-20E EPS at RMB0.88, RMB1.05 and RMB1.23, corresponding to respective PER of 12x, 10x and 9x. Maintain “RECOMMEND” rating.


Public construction business to benefit from rising industry con-

centration in the property sector;

Shop expansion of home decoration business to boost earn-

ings;

Equity transfer deal adds incentive.

Main risk factors

Slower growth in property sales;

Slower growth in property investments.



Growth rate of operating revenue 5.07 7.12 18.08 16.97 14.22

Net profit (RMB m) ,683.39 1,918.50 2,320.46 2,782.51 3,251.28

Growth rate of net profit 5.06 13.97 20.95 19.91 16.85

Diluted EPS (RMB) 0.64 0.73 0.88 1.05 1.23

PE 15.6 13.7 11.4 9.5 8.1

10

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.


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 2018-19E at RMB1.43 and RMB1.65, representing PER of 8.4x and 7.2x, below its historical 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

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 10.3 10.2 8.2 7.5 6.5

11

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 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 2018-19E net profit at RMB1.895bn and RMB2.508bn, corresponding to EPS of 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 2018-19E net profit at RMB1.895bn and RMB2.508bn, corresponding to EPS of RMB0.61 and RMB0.80. This represents 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.


Operating revenue (RMB m) 4,953.17 11,844.85 15,110 27,235.08 36,845.92


Net profit (RMB m) 217.18 873.05 1,165 1,894.82 2,507.57


Diluted EPS (RMB) 0.07 0.28 0.37 0.61 0.80

PE 106.1 26.5 20.1 12.2 9.3

12

Renhe Pharmacy (000650.CH): Cluster Branding Strategy for Major Products;

Strong Distribution Channel to Boost Sales


1) Revenue Improving since Q2 2017; Expense Ratio Reasonably Controlled. We are positive about Renhe Pharmacy’s earnings outlook: (i) Strong 2017 earnings and rapid earning growth in Q1 2018. In 2017, the Company achieved revenue, net profit attributa-ble to the parent and recurring net profit of RMB3.84bn, RMB380m and RMB366m, representing YoY growth of 7.8%, 2.1% and 7.5%, respectively. In Q1 2018, revenue rose 26.0% YoY to RMB1.04bn while net profit attributable to the parent increased 34.1% YoY to RMB106m; (ii) Selling and administrative expense ratios remained at stable levels. In 2017, the Company reported a selling ex-pense ratio of 16.1% , up 2.43ppts YoY. Administrative expense ratio expanded by 0.9ppt YoY to 7.9%. We believe the Company should be able to extend its rapid growth into 2018.

2) Solid Growth Foundation with Extensive Distribution Network, Proprietary Product Brands and Improving Gross Profit Mar-gin for Drug Products. We believe the Company’s strong earnings growth was supported by the following: (i) Solid and diversified distribution channel with stong product controls. Renhe Pharmacy adheres to its two development strategies – build up branding for its products and diversify distribution channels. The Company has established a solid distribution network across 30 provinces, cities and autonomous regions in China. Its OEM business model also helps enhance its production distribution. It provides incentive for drug retail-ers by slightly lifting product prices, which would in turn boost the sales of its products; (ii) Cluster branding for major products to en-hance sales and gross profit margin. The Company believes in brand building and it has established several branded product series for its major products, including “Fuyanjie” Series (妇炎洁), which are feminine hygiene wash products, Renhe Kelik Compound (仁和可立克) and “You Kadan” Series (优卡丹) for flu and coughs, as well as the “Shanliang” series (闪亮) for eyecare. These product series have together made a cluster brand for Renhe. According to the 2017 annual report, the Company’s major products had higher contribu-tions to its revenue. Major products accounted for 85.5% of its drug revenue and 12.6% of its healthcare product revenue. Since its pro-prietary products feature higher gross profit margin, the larger contribution also drove up its overall gross profit margin by 3.14ppts to 35.63% in 2017.

3) Investing More in R&D and Conducting Conformance Evaluation of its Generic Drugs. Renhe Pharmacy emphasizes innovation and has been a leader in technology through acquisition of and cooperation with various research institutes. Currently, six of its subsidi-aries have been identified as “high and new technology enterprises”. The Company has 233 research staff, accounting for 3.35% of its total staff. Its investments in R&D have been maintained at around RMB27m over the past two years, representing 0.7% of its total reve-nue. In 2017, the Company initiated 156 projects and launched 28 new products. It also started conformance evaluation for 6 generic drugs including Amlodipine Besylate Tablets. It is initiating several product projects.


Investment Rating:

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


Earnings improved quarter by quarter and expense ratios were

well controlled, with free cashflow higher than its net profit.

Established cluster branding for proprietary products which

helped to boost sales and gross profit margin.

Diversified and solid distribution channels.


We estimate its 2018-20E EPS at RMB0.40, RMB0.51 and

RMB0.62, corresponding to respective PER of 16x, 13x and 11x. The counter is undervalued in terms of its earnings growth. In addition, its cash flow generated from operating activities was stronger than its net profit. Based on these, we assign “RECOMMEND” rating.


Rapid earnings growth;

Increasing brand influence;

Sales incentive for retailers to boost revenue growth.

Main risk factors

Weaker-than-expected marketing of its branded products;

Intensifying competitions.




Net profit (RMB m) 372.38 380.23 495.49 628.35 768.31


Diluted EPS (RMB) 0.30 0.31 0.40 0.51 0.62

PE 22.0 21.3 16.5 12.9 10.6

mailto:[email protected]

13

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 2018-19E net profits at RMB1.135bn and RMB1.61bn, corresponding to respective EPS of 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 2018-19E

net profits at RMB1.104bn and RMB1.615bn and EPS at RMB0.81

and RMB1.19, corresponding to respective PER of 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 23,855 30,227 37,163

Operating income growth rate 68.1% 77.2% 24.54% 29.6% 22.9%

Net profit (RMB 100m) 52 106 73.53 1,104 1,615

Net profit growth rate -66.8% 104.5% 123.26% 194.4% 46.3%

EPS (RMB) (DILUTED) 0.05 0.10 0.25 0.81 1.19

P/E 318.2 159.1 63.6 19.6 13.4

14

Ping An Insurance (601318.CH): Premium Growth Improves; NBV Outgrows Peers


1. Q1 2018 Results In-line. Net profit attributable to the parent increased 11.5% YoY to RMB25.7bn in Q1 2018. Operating profit attributable to the parent rose 17.7% YoY to RMB28.2bn. Basic EPS increased 11.6% YoY to RMB1.44, in line with expectations. The Company proposed a special dividend of RMB3.656bn, or RMB0.2 per share.

2. The premium of its life and health insurance business increased 24.9% YoY to RMB230.585bn. New Business Value (NBV) of the business reached RMB19.897bn, representing a NBV rate of 30.2%. The premium of its property insurance business rose 17.8% YoY to RMB63.217bn and the combined ratio reached 95.9%, which is better than the industry average. The premium and NBV contributions of long-term protection products in Q1 increased slightly on a yearly basis and we expect the contributions to increase further in Q2. Ping An adopts the “product+” strategy to upgrade its existing products. In addition to its upgraded Ping

An Fu (平安福), the insurer launched Kid’s Ping An Fu (少兒平安福), a long-term care product and two long-term protection-oriented products this year. In terms of product strategy, it aims to enhance the value added services and strengthen its technolo-gy investments.

3. Transforming into a Fintech. Ping An Insurance is among the first to explore the financial technology in China. Through the development of a technology-driven business model and building an “open platform and open market”, the Company has estab-lished various financial technology platforms such as Lufrax, Ping An Good Doctor and OneConnect. Meanwhile, three of its technology units have completed financing through private placements. Ping An Good Doctor raised US$400m in late 2017 by completing its pre0IPO financing, and filed an IPO application with the HKEx; Ping An Healthcare Technology and OneConnect raised US$1,150m and US$650m in early 2018, respectively, by completing their first rounds of financing. Given its unique ad-vantages in financial strength, technology, talent, and scenarios and data, the Company should be able to create new earnings drivers.

4. We project a stable growth in 2018 earnings with EPS estimated at RMB5.92 Maintain “RECOMMEND”.

Sources: Company data,China Galaxy Securities Research

Investment Rating:

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


The regulatory authorities published No.19 Document urging insurers to conduct life insurance product reviews, which post-ed certain pressure to the sector performance. The reviews have been completed and the listed insurers should have finished their product reforms. The impact is relatively limited. Ping An Insurance is a an industry leader with strong reform and product development capability. Its rich product pipeline also brings unique advantage to the Company amid tighter regulations.

Company valuation and investment recommendation

We estimate its 2018-20E EPS at RMB5.92, RMB7.12 and RMB8.71, corresponding to respective PER of 10.3x, 8.5x and 7.0x. Maintain “RECOMMEND” rating.

Tougher-than-expected regulations; weaker-than-expected premium improvement.

Monthly premium continued to improve in June; recovery in new product sales;

Innovative business model supported by financial tech-nologies may provide re-rating opportunity;

Reasonable valuation and high safety margin.

Catalyst for share price performance Main risk factors


Operating revenue (RMB 100m) 7,124.53 8,908.82 10,254.19 11,832.18 13,252.04

Growth rate of operating revenue 14.91% 25.04% 15.10% 15.39% 12%

Net profit (RMB 100m) 623.94 890.88 1,051.37 1,261.64 1,539.20

Growth rate of net profit 15.11% 42.78% 18.01% 20.00% 22%

Diluted EPS (RMB) 3.49 4.99 5.92 7.12 8.71

PE 16.7 11.7 9.9 8.2 6.7

15

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.





Net profit (RMB m) 896.88 1,171.07 2,354 2,161.85 2,730.55


Diluted EPS (RMB) 0.63 0.79 1.38 1.75 2.12

PE 29.5 23.5 14.2 10.6 8.8

16

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 2018-19E net profit attributable to the shareholders at RMB10.74bn and RMB11.61bn, translat-ing into EPS of 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 2018-19E EPS at RMB1.07 and RMB1.16, corre-sponding to PER of 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




Net profit (RMB m) -2,988.54 2,754.89 15,725 10,744.81 11,608.27


Diluted EPS (RMB) -0.3 0.28 1.044 1.07 1.16

PE - 26.4 7.1 6.9 6.4

17

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 35.5 29.2 20.2 14.5 10.2


18

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 offer price of RMB30.1 in the private placement in 2017 represented a 54% 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 RMB257m, RMB324m and RMB388m, 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) 190.58 201.73 257.42 324.14 388.15


Diluted EPS (RMB) 0.33 0.35 0.45 0.57 0.68

PE 33.4 31.5 24.5 19.3 16.2

19

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 26.01 28.09 27.64

Net profit (RMB m) 120.28 174.67 270.0 362.58 485.69

Growth rate of net profit 125.18 45.22 55.05 40.48 33.96

Diluted EPS (RMB) 0.6 0.86 0.75 1.45 1.94

PE 29.3 20.5 23.5 12.1 9.1

20

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 RMB5.16, 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 69.9 51.8 38.6 29.7 23.3


21

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 RMB0.31 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 92.1 116.7 79.5 56.5 43.8

22

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, RMB1.05 and RMB1.26 in 2018-

2020E, with respective PER of 30x, 24x and 20x. We give it

a RECOMMEND 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) 261.1 311.3 361.2 451.5 541.8


Diluted EPS (RMB) 0.61 0.73 0.84 1.05 1.26

PE 38.4 32.1 27.9 22.3 18.6


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 2018-20E net profit attributable to the parent at RMB361m, RMB452m and RMB542m, respectively, corresponding to

EPS of RMB0.84, RMB1.05 and RMB1.26.

23

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 68 370 710 818

Growth rate of net profit -16.7% -43.82%. 281.4%. 91.9% 15.2%

Diluted EPS (RMB) 0.13 0.07 0.39 0.74 0.85

PE 142.8 265.3 47.6 25.1 18.6

Main risk factors Catalyst for share price performance

24

Daqin Railway (601006.CH) – Transportation Structural Adjustments to Bring Opportu-

nities for Rail Freights


1) Rail Freight Industry a Key Focus of China’s Carbon Emission Cut in Transportation System; Rail Freight Has an Edge over Road Freight in terms of Eco-friendliness. The energy consumption and carbon emission of China’s freight industry continue to grow at a fast pace, with the industry’s energy consumption accounting for 75% of the country’s trans-portation system, of which 71% came from road freights and 5% from rail freights. The energy consumption per unit turnover of rail freight represents only one-seventh of that of road transports. Therefore, railway is a cleaner and more low-carbon way of transportation as compared to roads.

2) Government Departments Join Hands to Promote Structural Emission Cut in Transportation System; Beijing-Tianjin-Hebei Megacity’s “Road-to-Rail” Freight Policy Starts to Show Effect. Since April 2017, the Ministry of Ecology and Environment and Ministry of Transport have announced policies and measures to promote the adjustment in the country’s transportation system. According to official data, the coal delivered through railways at Bohai-rim ports increased 19% YoY to 620m tonnes in 2017. The freight turnover in road transport at Hebei, Shanxi and Inner Mongolia declined by 1.9%, 0.1% and 2.1% YoY in Q1 2018.

3) Daqin Railway Has a Cost Advantage over Road Transports. The freight cost through Daqin Railway is 8.04% lower than that of road transports. In addition, freight companies have been granted larger pricing power since 2015. The floating pricing mechanism also provides more flexibility to rail freight rates.

4) We expect the Company’s revenue to maintain a rapid YoY growth in 2018 and assign a “RECOMMEND” rating for the counter.


Investment Rating:

Recommend Liu Lancheng:（8610）8357 1383 / [email protected] Practitioner Certificate No.: S0130517100001


Freight Business: Volatile Freight Demand: We believe the

structural adjustment of China’s transportation system would accelerate the shift of road freight to rail freight and Daqin Rail-way should be a direct beneficiary. Its freight transport volume is expected to increase steadily.

Passenger Business: Unexciting Passenger Service Busi-

ness: The Company continues to enrich and enhance its pas-senger service products to meet customer demands and cope with the adjustments in operations. It has recently launched two customized trains to expand its services to popular desti-nations including Chengdu, Chongqing and Qingdao. It has also acquired new MUs to expand its capacity.


We estimate its 2018-19E EPS at RMB0.82 and RMB0.87, corre-

sponding to respective PER of 11x and 10x. Assign “RECOMMEND” rating.

China introduces more policies to adjust its transportation

structure;

Relatively steady freight rates.

Weaker-than-expected policy execution;

Lower freight demand.



Growth rate of operating revenue -2.67% -15.05% 24.68% 23.00% 3.90%

Net profit (RMB m) 12,654.89 7,077.55 13,036.21 11,904.40 12,678.06

Growth rate of net profit -10.81% -44.07% 84.19% -8.68% 6.50%

Diluted EPS (RMB) 0.851 0.482 0.894 0.816 0.869

PE 10.4 18.5 10.0 10.8 10.2

Main risk factors Catalyst for share price performance

25

Disclaimer

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

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

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

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A Share Monthly Portfolio · Pick Smart in Market Consolidation — Investment Portfolio for August 2018 Highlights of the Month. For our Monthly Portfolio, we replaced hina Yantze