Embed Size (px)
Citation preview
Yum Cha 飲 茶 October 27, 2016
Source: Bloomberg
INDICES Closing DoD%
Hang Seng Index 23,325.4 (1.0)
HSCEI 9,698.9 (1.4)
Shanghai COMP 3,116.3 (0.5)
Shenzhen COMP 2,069.4 (0.4)
Gold 1,267.0 (0.5)
BDIY 802.0 (1.4)
Crude Oil, WTI(US$/BBL) 49.2 (1.6)
Crude Oil, BRENT(US$/BBL) 50.0 (1.6)
HIBOR, 3-M 0.6 1.1
SHIBOR, 3-M 2.8 0.1
RMB/USD 6.8 (0.1)
TALKING POINT - CLEAN ENERGY TO BENEFIT IF COAL PRICE STAYS HIGH
DATA RELEASES DUE THIS WEEK
We note that the share prices of coal stocks have failed to closely follow the recent coal price rally, probably because investors believe it may be just a short-term rally similar to that of a few years ago. However, if we compare the coal price in Australia with that in China, we believe the coal price rally in China this time is more sustainable, as it is a global phenomenon. Therefore, coal producers like China Coal (1898.HK) and Yanzhou Coal (1171.HK) are likely to catch up if there is no sharp correction in coal prices. Meanwhile, based on the coal price-power tariff link mechanism, the NDRC is likely to raise the coal-powered electricity tariff in January. A smaller price difference between the coal-power tariff and wind/solar-power tariff will enhance the com-petitiveness of renewable energy. In fact, a sharp rise in the coal price may also benefit gas utilities, as it makes natural gas relatively more attractive. We maintain our view that IPPs will be a major victim. Based on the tariff adjustment formula, if the coal price increases by more than RMB60/tonne, the portion exceeded RMB60/tonne will not enjoy 100% pass-through. There will be no pass-through for the portion exceeded RMB150/tonne. As a result, IPPs will inevitably suffer a margin squeeze.
SNIPPETS
BBMG [2009.HK; HK$2.91; BUY] - Because of the extremely low base in Q3 2015, BBMG’s Q3 2016 recurring net profit surged 10.6x year-on-year (YoY) to RMB398m. Revenue grew 18% YoY to RMB8.99bn. Although there is no revenue breakdown in the results announce-ment, we believe the strong recovery was driven mainly by higher cement prices, as revenue booking from the property development business is usually relatively low in Q1 and Q3. The overall gross margin improved from 19.7% in Q3 2015 to 22.4% in Q3 2016. We believe our full-year recurring net profit forecast of RMB3.09bn is achievable, implying 65% growth YoY. More details to follow after the conference call today (Oct 27, 4:15pm HK Time; Hong Kong: (852) 30186768; China: 8008700531/(86) 4006240406; Singapore: (65) 67135521; Conference ID: 4339565).
Source: Bloomberg
Analyst: Wong Chi-man, CFA
Data Source: Wind Info
Comprehensive Average Price Index: Bohai-Rim Steam Coal (Q5500K)Spot Price (FOB): Steam Coal: Australian Newcastle/Port Kembla(Right Axis)
31-12-14 30-06-15 31-12-15 30-06-1631-12-1430-06-14360
390
420
450
480
510
540
570
600 yuan/tonyuan/ton
56
60
64
68
72
76
80USD/tonUSD/ton
RESEARCH NOTES DC HOLDINGS [0861.HK; HK$6.74; HOLD] - DCITS’ [000555.CH] Q3 2016 results confirm our cautious view on DC Holdings (DCH) [0861.HK] since its near-term financial performance will be affected. The results of yesterday’s SGM vote indicates that the majority of shareholders are on the side of DC Holdings management, which may force GRG Banking Equipment (GRG) [002152.CH] to discuss with DCH management a solution to re-align the interests of all par-ties. Its holding in DCITS and increasing exposure to internet-based business still makes DCH looking interesting on a medium- to long-term basis. We maintain the view that (a) formal dis-cussions between DCH management and GRG and (b) DCH’s release of its future investment strategy would be re-rating catalysts for DCH shares.
1
DC Holdings [0861.HK]
DCITS’ [000555.CH] Q3 2016 results confirm our cautious view on DC Holdings (DCH) [0861.HK]
since its near-term financial performance will be affected. The results of yesterday’s SGM vote indi-
cates that the majority of shareholders are on the side of DC Holdings management, which may force
GRG Banking Equipment (GRG) [002152.CH] to discuss with DCH management a solution to re-align
the interests of all parties. Its holding in DCITS and increasing exposure to internet-based business still
makes DCH looking interesting on a medium- to long-term basis. We maintain the view that (a) formal
discussions between DCH management and GRG and (b) DCH’s release of its future investment strat-
egy would be re-rating catalysts for DCH shares. The recent share price weakness may indicate that
concerns about DCH’s weak 2016 results has been priced in. We maintain our HOLD rating with a new
target price of HK$6.51 (based on 23x 2017E PER). We will closely monitor GRG’s next steps. We
believe that further share price weakness may offer a good revisit opportunity, assuming GRG doesn't
reduce its stake in DCH aggressively on the open market. Although DCH is not one of our top picks for
the Shenzhen-Hong Kong Stock Connect theme, DCH should benefit, given its holding in DCITS and
well-recognized name among Mainland investors.
Investment Highlights
DCITS’ Q3 2016 results highlights. DCITS, DCH’s A-share-listed IT services arm, reported its
Q3 2016 results. Net profit was down 36% YoY to RMB43.9m from RMB68.9m in Q3 2015, main-ly due to margin compression. Turnover was up 15.4% YoY to RMB1,912.5m from RMB1,657.3m in Q3 2015. DCITS’ gross margin dropped 1.8ppt YoY to 17.7% in Q3 2016, and its net margin dropped from 4.2% in Q3 2015 to 2.3% in Q3 2016. The YoY decline in gross margin was due to (a) the dilution effect of its lower-margin systems-integration business, and (b) the Company’s strategy of gaining market share in IT services by cutting prices. DCITS also invested more in developing IT services solutions for import substitution, which also put pressure on near-term profitability. DCITS’ Q3 results were not really a surprise to the market, as DCH management released downbeat guidance during the interim results presentation in Aug 2016.
DCH’s resolution to issue 99,391,000 new shares to subscribers (some of whom are connected
persons of the Company) at HK$5.53 per share was passed at the SGM on 26 Oct 2016, with 67.3% of the votes cast in favour of the resolution. The total proceeds from the issuance of new shares is HK$549,632,230, which will be used to strengthen the capital base and financial posi-tion of the Company for future business development and investment. Out of the 99,391,000 new shares issued (a) Mr. Guo, the Chairman, will subscribe for 54,249,000 shares and (b) Mr. Lin, CEO, will subscribe for 904,000 shares. We believe that the issuance of new shares is intended to dilute GRG’s stake in DC Holdings. However, the result of SGM vote indicates that the majority of shareholders support DCH management, which may force GRG to discuss with DCH manage-ment a solution to re-align the interests of all parties. We believe that a consensus between DCH management and GRG would be a major share price catalyst.
Earnings adjustment. We revised downwards our earnings forecasts for 2016 and 2017. We
expect DCH to report a net loss of HK$212.6m in 2016, down from a net loss of HK$181.3m in 2016. We lowered our net profit forecast for 2017 from HK$374.7m to HK$360.9m after revising downwards our gross margin assumptions for DCITS. DCH shares have corrected recently, which in our view, reflects concerns about the Company. Although DCH is not one of our top picks for Shanghai-Hong Kong Stock Connect, the Company should benefit from fund flows from the Mainland, given its holding in DCITS and well-recognized name among Mainland investors. We will closely monitor GRG’s next steps. We believe that further share price weakness may offer a good revisit opportunity, assuming GRG doesn't reduce its stake in DCH aggressively on the open market.
Mark Po, CFA — Senior Analyst
(852) 3698-6318
Wong Chi Man, CFA — Head of Research
(852) 3698-6317
TMT Sector
Software
DCITS’ weak Q3 performance somewhat expected. Waiting for clarity.
HOLD
Close: HK$6.74 (Oct 26, 2016)
Target Price: HK$6.51 (-3.3%)
Share Price Performance
Market Cap US$1,022m
Shares Outstanding 1,274.3m
Auditor Ernst & Young
Free Float 48.5%
52W range HK$4.73-10.46
3M average daily T/O US$7.0m
Major Shareholding GRG Bank Equip-
ment (26.23%)
Allianz SE (7.84%)
Guo Wei (10.76%)
Legend Holdings
(4.79%)
October 27, 2016
Source: Bloomberg, CGIS Research, *: 2011-2016 data include the company’s continuing operations as well as discontinued hardware distribution
business; forecasts for 2017 only includes its continuing operations.
0
100
200
300
400
500
600
0
2
4
6
8
10
12
Oct15 Dec15 Feb16 Apr16 Jun16 Aug16
(HK$ million)(HK$)
Turnover (RHS) Price (LHS)
Source: Bloomberg.
Source: Bloomberg, Company data Key Financials (in HKDm) 2013* 2014* 2015* 2016E* 2017E*
Revenue 52,264.5 12,156.2 10,630.7 12,032.8 13,947.6
Change (YoY %) (28.9) (76.7) (12.5) 13.2 15.9
Gross Profit 3,378.6 1,851.8 2,216.0 2,398.9 2,900.4
Gross Margin % 6.5 15.2 20.8 19.9 20.8
Net Profit 84.1 701.1 661.7 268.3 360.9
Net Margin % 0.2 5.8 6.2 2.2 2.6
EPS (Basic) 1.22 0.29 0.60 0.23 0.28
Change (YoY %) (3.5) (76.3) 109.5 (62.7) 25.8
DPS $0.178 $0.192 $0.000 $0.000 $0.057
ROE (%) 1.1 8.6 7.6 3.8 6.9
Dividend Yield (%) 2.64 2.85 - - 0.84
PER (x) adjusted for special dividend declared in 2016 8.2 34.5 16.5 29.9 23.8
PBR (x) adjusted for special dividend declared in 2016 1.4 1.3 1.2 1.7 1.6
FCF Yield (%) 5.00% 19.00% 35.39% -10.18% 3.09%
Capex (m) (139.9) (167.5) (200.0) (500.0) (300.0)
Free cash flow per share 0.5 1.9 3.6 (0.7) 0.2
Net Gearing (%) 28.3 47.0 35.9 101.9 105.5
2
Figure 1: Key assumptions for DCH
Source: Company, CGIS Research
2011 2012 2013 2014 2015 2016F 2017F
Turnover (HKD m)
Distribution 38,032.4 37,656.8 26,254.1 n.a n.a n.a. n.a.
Supply chain 1,147.2 1,211.0 1,064.6 3,959.5 2,080.1 2,061.7 2,427.2
Systems 23,248.1 25,618.5 17,638.4 n.a. n.a. n.a. n.a.
IT services 7,891.6 9,013.1 7,306.7 8,135.8 8,156.5 9,432.3 10,775.2
Internet finance 0 0 0 60.9 328.1 426.5 554.5
Smart City Operation 0 0 0 0 66.0 112.2 190.7
Total 70,319.4 73,499.4 52,263.8 12,156.2 10,630.7 12,032.8 13,947.6
YoY Change (%)
Distribution (1.0) (30.3) n.a. n.a. n.a. n.a.
Supply chain 5.6 (12.1) 271.9 (47.5) (0.9) 17.7
Systems 10.2 (31.1) n.a. n.a. n.a. n.a.
IT services 14.2 (18.9) 11.3 0.3 15.6 14.2
Internet finance n.a. n.a. n.a. n.a. 30.0 30.0
Smart City Operation n.a. n.a. n.a. n.a. 70.0 70.0
Total 4.5 (28.9) (76.7) (12.5) 13.2 15.9
Gross margin (%) 7.5 7.3 6.5 15.2 20.8 19.9 20.8
Distribution 4.5 3.3 2.0 3.0 n.a. n.a. n.a.
Supply chain 18.9 20.3 17.3 8.4 16.6 16.6 16.6
Systems 8.9 9.5 9.4 9.5 n.a. n.a. n.a.
IT services 16.4 15.4 11.0 18.0 20.2 19.1 20.1
Internet finance 0 0 0 96.2 62.2 60.0 60.0
Smart City Operation 0 0 0 0 30.0 30.0 30.0
Net margin (%) 1.6 1.9 0.2 5.8 6.2 2.2 2.6
Cost (HKD m)
Cost of Sales (46,878.5) (68,128) (48,886) (10,304) (8,415) (9,634) (11,047)
S,G&A (2,755.2) (4,079.2) (3,214.3) (1,478.9) (1,890.0) (2,464.2) (2,338.9)
Financial Expenses (335.4) (293.2) (178.7) (60.8) (73.7) (253.1) (188.9)
YoY Change (%)
Cost of Sales 45.3 (28.2) (78.9) n.a. 14.5 14.7
R&D 48.1 (21.2) (54.0) n.a. 30.4 (5.1)
Financial Expenses (12.6) (39.0) (66.0) n.a. 243.5 (25.4)
CAPEX (HKD m) 230.1 619.8 139.9 167.5 200.0 500.0 300.0
Net Gearing (%) 16.5 28.3 47.0 35.9 Net Cash Net Cash
Turnover breakdown of DCITS (DC's IT Services segment) (HKD m) 7,713.4 6,559.0 6,923.4 7,150.3 8,103.4 9,257.1
System integration 5,209.7 3,789.2 3,789.2 3,599.7 3,959.7 4,355.7
Technology consultation 1,594.0 1,704.1 1,806.3 1,950.8 2,145.9 2,360.5
Software development 494.7 566.5 708.2 885.2 1,106.5 1,383.1
Financial IT 415.1 469.4 399.0 379.0 398.0 417.9
Agricultural informatization 0 29.8 220.7 335.5 493.2 739.8
Turnover breakdown of Supply Chain Management (HKD m)
E-commerce 1,920.0 953.9 667.8 701.1
Logistic 671.0 851.6 1,064.5 1,330.6
Maintanence 1,368.5 274.6 329.5 395.4
3
Figure 2: Earnings projection
Sources: Company, CGIS Research*: 2011-2016 data include the company’s continuing operations as well as discontinuing hardware distribution
business ; forecasts for 17 only includes its continuing operations.
Income Statement (HKDm) FY2013* FY2014* FY2015* FY2016F* FY2017F* Cash Flow Statement (RMBm) FY2013* FY2014* FY2015* FY2016F* FY2017F*
Revenue 52,265 12,156 10,631 12,033 13,948 Net Income 1,036 556 681 90 730
Growth yoy% (28.9%) (76.7%) (12.5%) 13.2% 15.9% Depreciation & Amort. 124 158 172 205 225
Gross Profit 3,379 1,852 2,216 2,399 2,900 Change in Working Capital (476) 1,529 3,302 (612) (390)
Growth yoy% (37.1%) (45.2%) 19.7% 8.3% 20.9% Cash from Ops. 684 2,243 4,154 (317) 565
Selling General & Admin Exp. (3,214) (1,479) (1,890) (2,464) (2,339) Capital Expenditure (140) (167) (200) (500) (300)
Others Operating Expenses/Items 0 0 0 0 0 Sale of Property, Plant, and Equipment - - - - -
Operating Income 164 373 326 (65) 562 Change in Investing Acitivities (733) (3,524) (2,959) 3,204 (1,120)
Growth yoy% n.a. 127.0% (12.6%) (120.0%) (959.8%) Cash from Investing (873) (3,691) (3,159) 2,704 (1,420)
Interest Expense (178.7) (60.8) (73.7) (253.1) (188.9) Net increase in bank borrowings 19 293 0 0 0
Interest and Invest. Income 0 0 0 0 0
Income/(Loss) from Affiliates 853.1 288.0 418.6 181.2 197.0 Issuance of Common Stock 2 0 0 550 0
Other Non-Operating Inc. (Exp.) 0 392.2 462.2 559.6 0 Common Dividends Paid (415) (190) (210) (4,078) 0
Impairment of Goodwill - - - - - Special Dividend Paid - - - - -
Gain (Loss) On Sale Of Invest. - - - - - Other Financing Activities 221 1,999 (1,911) 1,280 528
Gain (Loss) On Sale Of Assets - - - - - Cash from Financing (173) 2,102 (2,121) (2,249) 528
Income Tax Expense (171) (90) (207) (59) (81)
Minority Int. in Earnings 547 (201) (264) (95) (128) Net Change in Cash (362) 654 (1,126) 138 (328)
Net Income 1,214 701 662 268 361
Growth yoy% (93.9%) 733.6% (5.6%) n.a. 34.5%
Balance Sheet (RMBm) FY2013* FY2014* FY2015* FY2016F* FY2017F* Ratios FY2013* FY2014* FY2015* FY2016F* FY2017F*
ASSETS Profitability
Cash And Equivalents 3,894 4,120 3,379 2,967 3,189 Return on Assets % 0.3% 2.2% 1.9% 0.9% 1.6%
Receivables 15,113 13,285 5,284 6,352 7,362 Return on Capital % (5.0%) 3.1% 2.0% 2.4% 2.6%
Inventory 5,636 6,175 812 920 1,066 Return on Equity % 1.1% 8.6% 7.6% 3.8% 6.9%
Other Current Assets 809 1,595 19,576 524 551
Total Current Assets 25,451 25,175 29,052 10,762 12,168 Margin Analysis
Net Property, Plant & Equipment 1,505 1,322 793 1,088 1,163 Gross Margin % 6.5% 15.2% 20.8% 19.9% 20.8%
Long-term Investments - - - - - SG&A Margin % 6.2% 12.2% 17.8% 20.5% 16.8%
Other Intangibles - - - - - EBIT Margin % 0.3% 3.1% 3.1% (0.5%) 4.0%
Deferred Tax Assets, LT - - - - - EBITDA Margin % 0.6% 4.4% 4.7% 1.2% 5.6%
Other Long-Term Assets 3,143 7,210 7,748 9,006 9,585 Net Income Margin % 0.2% 5.8% 6.2% 2.2% 2.6%
Goodwill - - - - -
Accounts Receivable Long-Term - - - - - Asset Turnover
Total Long Term Assets 4,649 8,532 8,541 10,094 10,748 Total Asset Turnover 1.7x 0.4x 0.3x 0.6x 0.6x
Total Assets 30,100 33,708 37,593 20,856 22,916 Fixed Asset Turnover 11.2x 1.4x 1.2x 1.2x 1.3x
Accounts Receivable Turnover 3.5x 0.9x 1.1x 2.1x 2.0x
LIABILITIES & EQUITY Inventory Turnover 9.3x 2.0x 13.1x 13.1x 13.1x
Accounts Payable 14,592 14,323 4,261 4,823 5,590
Accrued Exp. - - - - - Liquidity
Short-term Borrowings 3,719 7,060 4,335 4,907 5,687 Current Ratio 1.4x 1.4x 1.2x 1.2x 1.1x
Curr. Port. of LT Debt - - - - - Quick Ratio 0.9x 0.8x 0.6x 0.3x 0.8x
Curr. Income Taxes Payable - - - - - Avg. Days Sales Out. 105.5 398.9 181.4 192.7 192.7
Unearned Revenue, Current - - - - - Avg. Days Inventory Out. 39.4 185.4 27.9 27.9 27.9
Other Current Liabilities 384 359 15,279 93 102 Avg. Days Payable Out. 106.4 512.1 403.0 172.1 172.0
Total Current Liabilities 18,695 21,742 23,874 9,822 11,379 Avg. Cash Conversion Cycle 45.7 187.6 70.4 81.2 81.6
Long-Term Debt 2,358 1,102 2,233 3,237 3,242 Net Debt to Equity 28% 47% 36% 102% 105%
Def. Tax Liability, Non-Curr. 0 0 85 93 103
Other Non-Current Liabilities 0 0 0 0 0 Growth Over Prior Year
Total Liabilities 21,054 22,844 26,192 13,152 14,724 Total Revenue (28.9%) (76.7%) (12.5%) 13.2% 15.9%
Common Stock 109 109 110 127 127 Net Income (93.9%) 733.6% (5.6%) (59.4%) 34.5%
Additional Paid In Capital - - - - - Payout Ratio % 14.6% 66.7% 0.0% 0.0% 20.0%
Retained Earnings 7,617 8,491 8,763 4,954 5,315
Treasury Stock
Comprehensive Inc. and Other - - - - -
Minority Interest 1,320.5 2,263.8 2,527.9 2,622.4 2,750.0
Total Equity 9,046 10,864 11,401 7,704 8,192
Total Liabilities And Equity 30,100 33,708 37,593 20,856 22,916
4
Disclaimer
This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited (“Galaxy International Securities”) and/or its group companies to any registration or licensing requirement within such jurisdiction.
This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness.
This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past perfor-mance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regard-ing future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision.
Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries (“China Galaxy International”), directors, officers, agents and employees (“the Relevant Parties”).
All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy Interna-tional and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer.
Disclosure of Interests
China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies)’ market capitalization.
One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) men-tioned in this report.
China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transac-tions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto.
China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or invest-ment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report.
Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies).
Analyst Certification
The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report.
Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies cov-ered in this report.
Explanation on Equity Ratings
Copyright Reserved
No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.
China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459
Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.
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 :
