1

Yum Cha 飲 茶 November 14, 2017

RESEARCH NOTES

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 29,182.2 0.2

HSCEI 11,684.5 (0.5)

Shanghai COMP 3,447.8 0.4

Shenzhen COMP 2,045.2 0.3

Gold 1,278.4 0.2

BDIY 1,464.0 (1.1)

Crude Oil, WTI(US$/BBL) 56.8 0.0

Crude Oil, BRENT(US$/BBL) 63.2 (0.6)

HIBOR, 3-M 1.0 0.4

SHIBOR, 3-M 4.5 0.9

RMB/USD 6.6 (0.0)

DATA RELEASES DUE THIS WEEK

Nov 17 China October Property Prices

TECHNOLOGY HARDWARE INDUSTRY UPDATE - In general, we continue to see

divergence in the share price performance of the HK-listed technology hardware

names with a) bigger caps outperforming small-mid caps, and b) hot sectors vs.

lagging sectors. Those with exposure to high-growth areas, such as optical

communications and semi-conductors (AI related), outperformed the sector, and the

HSI and MSCI on a one-month basis. Recent data points from Taiwan-listed

technology names may suggest that growth in the sector continued in Oct 2017 vs.

Sep 2017, and it seems that iPhone X is one of the growth drivers. Sector wide,

materials & equipment, foundries, casings, lenses, ODMs, components, optical

communications, distribution and terminals saw higher top-line YoY growth in Oct

2017 vs. Sep 2017. Apple-related companies reported faster turnover growth in Oct

2017 vs. Sep2017, which suggests that camera modules, 3D sensing, casings and

displays are major beneficiaries of the official launch of iPhone X. Apple still has first-

mover advantage over the Android camp. Regarding specific components, we still

believe that camera modules/lenses, displays and PCBs (flexible & substrate grade)

look more interesting, since the market is talking about next stage of development,

such as hybrid lens solutions, 3D sensing and flexible OLEDs. The Chinese IC supply

chain, especially HK-listed foundries, was re-rated in past month, given news flow,

government support, and the fact that semi-conductors are a key segment in the

development of new technologies such as AI and cloud computing.

RED STAR MACALLINE [1528.HK; HK$9.58; NOT-RATED] - Red Star Macalline

(RSM) is the largest operator of Home Improvement and Furnishings shopping mall

chains in China, with a 214-mall network across the nation. Its self-owned malls,

which are located in Tier 1 and 2 cities, account for 32% of its malls, but 68% of its

revenue. The Company has underperformed its peers YTD and is now trading at

10.5x PER and 5% yield. We believe the Company’s property backing (at 0.68x book

value) and the upcoming A-share listing may provide upside for the share price.

KAISA [1638.HK; HK$4.59; NOT RATED] - Last week we met with Kaisa

management, who shared some updates with us. They stated that the operation crisis

and debt issues had been addressed and that all debt had been disclosed at

~RMB100bn (gearing ratio 300%), i.e. no more hidden debt. Therefore management

can now focus on operations and the future development of the Company. The

Company owns a decent and sizable landbank in the GMH (Guangdong Macau &

Hong Kong) area, and it started to get back on track after the resumption of trading.

Its valuation looks undemanding at 6.5x 2017E PER (assuming RMB28.5bn revenue

booking for the whole year and a not-aggressive 13% core profit margin for a China

property developer). The valuation is near the low end of the range compared to its

peers of similar scale. We see the potential to narrow the valuation gap, but it will take

time to rebuild investor confidence after a trading suspension of two years.

2

SNIPPETS

China Glass Makers. According to industry news flow, about 10 float glass production lines in the Shahe region will be shut

down, as they failed to comply with emission standards. The 10 production lines account for about 2.8% of total production

lines in China and 4.3% of total operating production lines. The production capacity shut down in the Shahe region is just

the start of the whole process. More capacity is expected to be shut down on a nationwide basis. The float glass price in

China has continued to move up; the average float glass price rose to RMB1,572.2/tonnes yesterday, a YTD high. We had

discussions with the management of both China Glass [3300.HK] and Xinyi Glass [0868.HK] last night, and they share our

view that both Companies are the beneficiaries of capacity shutdown. Apart from the China market, both China Glass and

Xinyi Glass will continue to expand their global footprint by establishing more production bases in overseas markets. The

news flow confirms our view that the float glass industry in China will see more favourable supply/demand dynamics. We

have a BUY rating on Xinyi Glass, with a target price of HK$10.13. We also suspect that CNBM Group will utilize China

Glass as a platform to consolidate glass operations under CNBM Group. Given its volatile earnings record and low trading

liquidity, it will take time for the market to build confidence in CGH, but increasing marketing activity by China Glass’ senior

management may attract market interest. We suggest investors put China Glass on their radar screen.

800.0

900.0

1000.0

1100.0

1200.0

1300.0

1400.0

1500.0

1600.0

01/14 06/14 11/14 04/15 09/15 02/16 07/16 12/16 05/17

RMB/tonne

170.0

180.0

190.0

200.0

210.0

220.0

230.0

240.0

250.0

260.0

02/12 09/12 04/13 11/13 06/14 01/15 08/15 03/16 10/16 05/17

Average float glass price in China No. of operating float glass production lines in China

Source: WIND, Bloomberg, CGIS Research Source: WIND, Bloomberg, CGIS Research

1

COMPANY / INDUSTRY NEWS

Analyst: Mark Po, CFA; Tel: (852) 3698 6318; markpo@chinastock.com.hk

TECHNOLOGY HARDWARE INDUSTRY UPDATE – Oct 2017 data suggests iPhone X is the growth driver. Growth of IC

and optical communications continue.

Growth rate held up in Oct 2017. In general, we continue to see divergence in the share price performance of the HK-listed technology hardware names with a) bigger caps outperforming small-mid caps, and b) hot sectors vs. lagging sectors. Those with exposure to high-growth areas, such as optical communications and semi-conductors (AI related), outperformed the sector, and the HSI and MSCI on a one-month basis. Because of positive messages from Apple and Oct 2017 shipment figures released by Taiwanese listed peers, those with exposure to several components such as a) OLED (Truly [0732.HK], Varitronix [0710.HK] and Solomon Systech [2878.HK]), b) hybrid lenses/3D sensing (AAC [2018.HK and Sunny Optical [2382.HK]), and c) flexible PCBs, also did well recently, outperforming other handset component names. Recent data points from Taiwan-listed tech-nology names may suggest that growth in the sector continued in Oct 2017 vs. Sep 2017, and it seems that iPhone X is one of the growth drivers. The Taiwan-listed technology names (materials & equipment, wafers, semiconductors, IC design, LEDs, TFT-LCDs, packaging & testing, lenses, DRAMs, ODMs, optical components & casings, networking, PCBs, auto electronics, terminals and distribution) reported their Oct 2017 turnover, and we note that overall top-line growth in Oct 2017 was sustainable in Oct 2017 vs. Sep 2017. Sector wide, materials & equipment, foundries, casings, lenses, ODMs, components, optical communications, distribution and terminals saw higher top-line YoY growth in Oct 2017 vs. Sep 2017. Even though we didn’t see a pick-up in the growth rate in other sectors, like IC design, wafers, PCBs and packaging & testing, in Oct 2017 vs. Sep 2017, they didn’t decelerate further. Apple-related companies, like TSMC, Win Semi, Catcher, Merry, Largan, TPK and Foxconn Technology, reported faster turnover growth in Oct 2017 vs. Sep2017, which suggests that camera modules, 3D sensing, casings and displays are major beneficiaries of the official launch of iPhone X. Recent news flow confirms our view that the market is still somewhat confident about iPhone X sales (even with the shift to 2018 instead of Q4 2017), as Apple still has first-mover advantage over the Android camp. We still suggest that investors hold a medium- to long-term view of the Apple supply chain, as it will take time for Android to catch up with Apple. Regarding specific components, we still believe that camera mod-ules/lenses, displays and PCBs (flexible & substrate grade) look more interesting, since the market is talking about next stage of development, such as hybrid lens solutions, 3D sensing and flexible OLEDs. The Chinese IC supply chain, especially HK-listed foundries, was re-rated in past month, given news flow, government support, and the fact that semi-conductors are a key segment in the development of new technologies such as AI and cloud computing.

Regarding the PC side, Acer reported YoY turnover growth in Oct 2017 vs. negative growth in Sep and positive YoY growth in Aug and Jul 2017, but Asustek reported negative YoY turnover growth in Oct 2017 vs. positive growth in Sep 2017 and negative in Apr-Aug 2017. So far the news flow (including MSI and Gigabyte) in our view, still suggests that the PC industry continues to perform well despite concerns about the growth outlook. In the Hong Kong market, messages from both Sunny Optical [2382.HK] and Q-Tech [1478.HK] indicate that the growth outlook can vary for different players in the same industry. Sunny Optical released its Oct 2017 shipment figures, which showed a pick-up in growth of shipments of camera mod-ules, which increased 5.3% MoM and 11.9% YoY to about 29.5m units (Sep 2017: 16.7% MoM decline and 6.5% YoY growth). It seems that Sunny Optical is benefitting from the release of flagship models by major customers such as Huawei. QTech’s total Oct 2017 camera module shipments rose 2.5% MoM and dropped 24.9% YoY to 15.1m units. In the camera module segment, 8MP and below rose 29.5% MoM and dropped 50.8% YoY to about 7m units in Oct 2017, and 13MP and above dropped 13.2% MoM and increased 38.6% YoY to about 8.1m units. It seems that Q-Tech’s Oct 2017 product mix is not as favourable as that in Sep 2017, as lower-end products (8MP and below) should offer lower margins than the higher-end products. We would like to highlight that NewMax’s shipment figures remained weak in Oct 2017, which is a concern to us. To a certain extent, we still maintain our cautious view of QTech. AAC [2018.HK] released its Q3 2017 results, which also cleared up market concerns.

Handsets. We saw divergence in the share price performance of HK-listed handset component suppliers, given: a) increasing attention to certain sub-segments, such as OLED displays and hybrid lens solutions, and b) the release of results and shipment figures by leading names such as AAC, Sun-ny Optical and Q-Tech. Hybrid lens solutions names and OLED display names, such as AAC [2018.HK], Sunny Optical, Truly [0732.HK] and Varitronix [0710.HK], outperformed. Apart from Apple’s results and guidance, the Oct 2017 turnover figures of Apple suppliers (TSMC, Catcher, TPK, GIS, Flex-ium, Merry, Largan and WINS) remained on the positive side, which boosted sentiment on Apple-related names that have exposure to casings, lenses, 3D sensing, PCBs and acoustics. We saw a major re-rating of AAC and Sunny Optical, given their exposure to the optics segment and compa-ny-specific reasons: e.g. a) AAC’s WLG maybe a disruptive development for the industry, and b) Sunny Optical’s partnership with ams and its inclu-sion in the HSI boosted sentiment. Apart from exposure to OLED, we may see re-rating potential for Truly. Industry news flow suggests that Oppo and Xiaomi will adopt 3D-sensing solutions for models to be launched in 2018, as well as solutions that are being developed by Himax & Qualcomm and sensor modules being produced by Truly. At this stage, we can’t verify the news. But if Truly is selected as a supplier of 3D sensing modules, in our view, it will change market sentiment on Truly significantly, as the market used to treat Truly as a laggard in new technology development. At this stage, we haven’t seen Q-Tech’s strategy and roadmap on lens development and 3D sensing. Investors might switch from Q-Tech if the Company lags behind in new technology development. We are somewhat positive on names like Cowell [1415.HK] and FIT Hon Teng [6088.HK] even though they don’t have exposure to high-growth areas. Their current valuation and share price partly reflects market concerns. They may catch up if market sentiment stabilizes. We still suggest investors take a long-term view. We would like to highlight that Apple had a major product upgrade in 2017, and even if shipment volume is flat (which we don’t think will happen, as iPhone’s huge installed base should support volume growth), the component sup-pliers will benefit from an ASP increase. Apple is likely to have an advantage in key component supply, such as OLED displays and 3D sensing mod-ules, and the Chinese brands are unlikely to catch up in the near term.

PCs. PCB and gaming notebook suppliers, including MSI and Gigabyte, reported faster monthly YoY sales growth in Oct 2017 vs. Sep 2017. Acer

also picked up in monthly YoY sales in Oct 2017 vs. Sep 2017.ODMs, on average, continued to report solid monthly turnover figures in Oct 2017. The

PC supply chain shouldn’t offer any major downside surprises. HK-listed PC-related names, such as Lenovo [0992.HK], didn’t generate major positive

news flow with their results, but any improvement in sentiment may boost Lenovo’s share price performance. However, at this stage, we can’t find a

major re-rating catalyst for Ju Teng [3336.HK] which is expected to continue to underperform.

November 14, 2017

2

COMPANY / INDUSTRY NEWS

Analyst: Mark Po, CFA; Tel: (852) 3698 6318; markpo@chinastock.com.hk

TECHNOLOGY HARDWARE INDUSTRY UPDATE – Sep 2017 data suggests the impact of the new iPhone launch has

peaked in the near term. IC and optical communications outperform.

Semiconductors. The semiconductor supply chain in Taiwan, including IC design, wafer manufacturing and foundries, reported healthy MoM turnover

growth in Oct 2017. Foundries in particular reported faster YoY growth in Oct 2017. Vanguard’s weaker performance in Oct 2017 may have been due

to its high exposure to the display sector. The semiconductor supply chain was the most discussed segment in the hardware sector last month; the

supply chain outperformed the whole hardware sector on a one-month basis. The market has re-rated the HK-listed foundries, such as Hua Hong

[1347.HK] and SMIC [0981.HK], focusing especially on the latter, since after the recruitment of industry experts, SMIC has a high chance of making a

major breakthrough in the 14nm/10nm FinFET process. Mobile processors with AI features (refer to our previous industry update on 06 Oct 2017) are

manufactured using the 10nm FinFET process. A breakthrough in 14nm/10nm FinFET will narrow the gap between SIMC and its peers. We maintain

the view that SMIC can deliver growth both organically from industry growth and from market share gains from its peers, such as UMC and Global-

foundries. SMIC also has exposure to packaging through JECT, which may help it gain market share. SMIC seems to be lagging behind the leading

global players regarding EUV development. However, EUV development requires huge CAPEX and expertise, and in our view, it is not a bad idea for

SMIC not to release its plan for EUV development. Overall, given their uniqueness, the HK-listed listed foundries have been re-rated recently, as they

are not trading at the higher end of their historical PBV range. We continue to suggest clients broaden their radar screen from foundries to IC design

names (CE Huada [0085.HK], Solomon Systech [2878.HK] and Shanghai Fudan [1385.HK], materials (AVIC Int’l [0161.HK]’s Shannan Circuits), and

equipment (ASMPT [0522.HK]. We reiterate that the impact of off-loading by a major shareholder is expected to fade and that shares of ASMPT are

expected to be supported by its share buy-back program. ASMPT is a global leader in packaging equipment, and we suspect that ASMPT might look

interesting to Chinese companies as an M&A target, as ASMI has reduced its stake in ASMPT to 25%. Despite their smaller cap and lower trading

liquidity, HK-listed IC design houses, such as Solomon Systech, Fudan and CE Huada, are also doing well, as the market has been re-rating the

whole IC supply chain in China. There are suggestions in the market that Hauwei’s V9 is using Solomon Systech’s maXTouch display driver. Solomon

Systech is also co-operating with Visionox (an OLED developer in China). Solomon Systech’s small market cap. and lower trading volume may be a

concern to investors, but if the Company can leverage maXTouch to penetrate the OLED display segment, there will be a major re-rating of Solomon

System. Investors should put Solomon Systech on their radar screen.

Displays. Top-line growth of AUO and Innolux in Oct 2017 continued to slow down vs. Sep 2017. Amtran continued to report weak top-line figures in

Oct 2017. However, we haven’t seen a major pick-up in demand for TFT-LCD panels even though panel prices stabilized in late Oct 2017. Shares of

TV makers, especially Skyworth [0751.HK] and TPV [0903.HK], have been under pressure recently, and we don’t think this is the end of the de-rating.

Sharp (selling mostly TVs) ranked no.7 and was ranked even higher than Midea (no. 10) on the Tmall platform during Double 11. We believe that the

major reason for Sharp becoming one of the top-selling brands during “Double Eleven” was its aggressive price cutting, which is likely to put pressure

on the leading Chinese brands. The operating environment is even more challenging for TV makers like Skyworth without in-house panel support.

Skyworth’s Nov 2017 shipments may be impacted. We still prefer TCL Multimedia (TCLM) [1070.HK], which is gaining market share in developed

markets such as the US and support from CSOT. Based on our understanding, TCLM is the TV supplier for Roku Inc. [ROKU.US], and according to its

official website, Roku TV is a smart TV with the added functionality and features of a Roku® streaming player. From one simple interface, Roku TV

provides subscribers with access to all entertainment sources, such as a game console, cable box, antenna and streaming channels like Netflix, The

Roku Channel and YouTube. Roku’s recent share price rally may also trigger a re-rating of smart TV platforms, which would be positive for TCLM.

Optical communications. The average turnover growth rate of Taiwanese optical communications names accelerated in Oct 2017 vs. Sep 2017

(fastest YoY growth since Apr 2017). Major names such as Landmark reported better turnover figures in Sep 2017, which has attracted market atten-

tion to optical communications names. Recent messages from Taiwanese optical communications names have reaffirmed our positive view of the

optical communications segment. We maintain a positive view on the outlook for ZTE [0763.HK], YOFC [6869.HK] and O-Net [0877.HK], given the

continuous investment in wired networks, 5G and IoT networks by telecom operators. We note that shares of ZTE and YFOC rebounded after a cor-

rection in Oct 2017, as they are treated as proxies for optical communications investment. O-Net has been underperforming YOFC and ZTE. We be-

lieve that O-Net is likely to catch up, given its exposure to both the telecom and datacom segments.

Others. Regarding other hardware names, we maintain the view that energy storage names such as BYD [1211.HK] and Xinyi HK [8328.HK] will re-

port good growth in the coming years, given government policy promoting the energy storage industry. In our view, the market will also look at HK-

listed auto electronics names. In HK, FIT Hon Teng and Truly have exposure to the auto electronics segment. Even though it is in a transformation

phase, TUS Intl [0872.HK] is on track to become an ADAS equipment and solutions supplier. We believe that TUS Intl’s future corporate activity will

attract market attention. Meitu’s [1357.HK] underperformance, in our view, is disappointing, as the Company may be treated as a quasi-AI name and

because of recent TMT IPO activity. We still maintain the view that the strong share performance of AI names will boost sentiment on Meitu.

3

COMPANY / INDUSTRY NEWS

Sources: Bloomberg , CGIS Research

Figure 1: Monthly YoY turnover growth of Taiwan-listed companies Sector Ticker Name 03/17 04/17 05/17 06/17 07/17 08/17 09/17 10/17 YoY growth picked up in May vs Apr 2017 YoY growth picked up in Jun vs May 2017 YoY growth picked up in Jul vs Jun 2017 YoY growth picked up in Aug vs Jul 2017 YoY growth picked up in Sep vs Aug 2017 YoY growth picked up in Oct vs Sep 2017

Materials & Equipment 2360 TT Equity CHROMA ATE INC -19.4 23.9 -10.5 23.4 -28.6 31.7 52.2 94.2 Yes Yes Yes Yes

2395 TT Equity ADVANTECH CO LTD -1.6 1.9 4.3 12.3 4.7 6.8 11.1 14.1 Yes Yes Yes Yes Yes

6414 TT Equity ENNOCONN CORP 23.8 17.4 7.6 28.9 180.3 203.2 237.5 280.0 Yes Yes Yes Yes Yes

6166 TT Equity ADLINK TECHNOLOGY INC 20.6 12.8 18.5 16.4 24.8 10.2 42.5 20.3 Yes Yes Yes

1590 TT Equity AIRTAC INTERNATIONAL GROUP 26.8 19.0 16.7 34.0 37.7 34.1 43.6 33.1 Yes Yes Yes

6510 TT Equity Chunghwa Precision 52.9 36.4 30.1 21.2 25.4 21.8 19.2 -2.4 Yes

2049 TT Equity HIWIN TECHNOLOGIES CORP 37.1 23.9 14.0 14.3 22.5 39.2 38.4 35.4 Yes Yes Yes

8215 TT Equity BENQ MATERIALS CORP -12.0 -16.0 -16.0 -12.9 -14.2 -14.2 -12.3 -19.3 Yes Yes Yes

16.0 14.9 8.1 17.2 31.6 41.6 54.0 56.9 Yes Yes Yes Yes Yes

IC design 3034 TT Equity NOVATEK MICROELECTRONICS COR 2.24 2.09 3.70 3.81 3.60 0.64 5.19 10.37 Yes Yes Yes Yes

2379 TT Equity REALTEK SEMICONDUCTOR CORP -0.60 -1.24 -0.79 5.73 8.29 3.94 7.48 6.29 Yes Yes Yes Yes

6462 TT Equity EGIS TECHNOLOGY INC 2231.06 534.48 51.58 758.73 370.99 200.06 187.22 26.66 Yes

2454 TT Equity MEDIATEK INC -2.43 -22.91 -25.16 -11.97 -23.57 -13.04 -19.95 -11.74 Yes Yes Yes

5274 TT Equity ASPEED TECHNOLOGY INC 39.53 52.31 25.73 67.15 37.45 33.05 22.95 17.05 Yes

2344 TT Equity WINBOND ELECTRONICS CORP 6.62 3.28 9.96 12.91 13.39 18.49 18.84 21.06 Yes Yes Yes Yes Yes Yes

2337 TT Equity MACRONIX INTERNATIONAL 35.88 17.54 20.20 42.65 34.09 62.78 46.52 67.68 Yes Yes Yes Yes

6138 TT Equity ANPEC ELECTRONICS CORP 16.12 19.12 26.85 15.07 26.19 17.06 8.62 10.60 Yes Yes Yes

6411 TT Equity AMAZING MICROELECTRONIC CORP 26.15 11.38 14.60 14.58 0.92 6.22 10.64 6.28 Yes Yes Yes

3014 TT Equity ITE TECHNOLOGY INC 4.34 6.72 -0.29 -12.11 4.13 -5.31 1.62 8.31 Yes Yes Yes

4947 TT Equity ON-BRIGHT ELECTRONICS INC 0.34 8.11 5.21 4.13 17.30 20.77 27.14 32.17 Yes Yes Yes Yes

2436 TT Equity WELTREND SEMICONDUCTOR INC 28.96 4.98 14.61 19.21 9.70 16.97 24.22 11.74 Yes Yes Yes Yes

8261 TT Equity ADVANCED POWER ELECTRONICS 19.01 17.07 24.20 34.69 5.71 21.31 28.85 27.32 Yes Yes Yes Yes

8262 TT Equity NIKO SEMICONDUCTOR CO LTD -1.48 -3.93 -14.13 -0.21 18.88 11.62 10.34 -2.84 Yes Yes

6435 TT Equity SINOPOWER SEMICONDUCTOR 20.76 29.34 51.51 15.87 46.35 27.81 27.45 23.89 Yes Yes

4966 TT Equity PARADE TECHNOLOGIES LTD -4.41 2.86 24.29 24.55 84.46 22.65 7.00 15.19 Yes Yes Yes Yes

5269 TT Equity ASMEDIA TECHNOLOGY INC 92.33 111.24 121.23 116.59 98.87 14.36 6.57 61.53 Yes Yes

3443 TT Equity GLOBAL UNICHIP CORP -15.00 38.29 62.49 41.72 92.32 23.38 31.08 76.33 Yes Yes Yes Yes

6202 TT Equity HOLTEK SEMICONDUCTOR INC 20.63 2.45 8.33 6.07 -2.73 13.97 3.76 15.30 Yes Yes Yes

132.63 43.85 22.32 61.01 44.54 26.14 23.98 22.27 Yes

Wafer 3523 TT Equity EFUN TECHNOLOGY CO LTD -36.95 -42.02 -44.45 -28.42 -63.58 -76.42 -87.11 -90.70 Yes

6488 TT Equity GLOBALWAFERS CO LTD 232.06 174.21 177.80 208.16 169.62 179.41 193.25 175.67 Yes Yes Yes Yes

6182 TT Equity WAFER WORKS CORP 15.54 4.47 12.71 21.33 17.40 28.55 28.64 28.52 Yes Yes Yes Yes

70.22 45.55 48.69 67.03 41.15 43.84 44.93 37.83 Yes Yes Yes Yes

Foundry 2330 TT Equity TAIWAN SEMICONDUCTOR MANUFAC 17.49 -14.92 -1.06 3.44 -6.26 -2.54 -1.25 3.77 Yes Yes Yes Yes Yes

2303 TT Equity UNITED MICROELECTRONICS CORP -1.30 10.79 -1.52 -3.16 2.34 0.87 -6.83 7.60 Yes Yes

5347 TT Equity VANGUARD INTERNATIONAL SEMI 9.91 -20.11 -10.77 3.68 -11.02 -0.90 4.91 -7.32 Yes Yes Yes Yes

3105 TT Equity WIN SEMICONDUCTORS CORP 5.99 10.21 5.26 6.34 11.40 17.40 44.74 67.99 Yes Yes Yes Yes Yes

8.02 -3.51 -2.02 2.57 -0.89 3.70 10.39 18.01 Yes Yes Yes Yes Yes

LED 2393 TT Equity EVERLIGHT ELECTRONICS CO LTD 3.82 -6.64 2.44 -1.89 -2.72 -14.23 -8.33 -2.89 Yes Yes Yes

2448 TT Equity EPISTAR CORP -0.08 -4.51 2.67 6.25 3.12 5.26 12.77 -2.92 Yes Yes Yes Yes

6271 TT Equity TONG HSING ELECTRONIC INDUST -10.22 -10.64 -14.37 -9.15 -3.57 0.46 7.76 6.64 Yes Yes Yes Yes

3603 TT Equity UPEC ELECTRONICS CORP -64.48 -67.57 -80.95 -82.57 -77.24 -69.11 -70.70 -71.54 Yes Yes

3698 TT Equity LEXTAR ELECTRONICS CORP 1.67 -18.71 -15.66 -12.60 6.71 -9.95 -20.28 -17.58 Yes Yes Yes Yes

-13.86 -21.61 -21.18 -19.99 -14.74 -17.51 -15.76 -17.66 Yes Yes Yes Yes

Optical Communications 3081 TT Equity LAND MARK OPTOELECTRONICS -43.33 -35.18 -28.43 -11.26 -7.40 1.39 68.24 93.30 Yes Yes Yes Yes Yes Yes

3450 TT Equity ELITE ADVANCED LASER CORP 8.07 7.01 5.81 15.26 3.49 -7.94 4.22 -1.54 Yes Yes

3234 TT Equity TRUELIGHT CORP 17.77 9.29 -8.62 -3.01 7.68 -7.94 -7.94 4.84 Yes Yes Yes

4979 TT Equity LUXNET CORP 9.88 8.49 9.95 15.66 20.67 18.33 21.63 25.76 Yes Yes Yes Yes Yes

-1.90 -2.60 -5.32 4.16 6.11 0.96 21.54 30.59 Yes Yes Yes Yes

PCBs 2377 TT Equity MSI 7.09 -4.69 -2.84 13.55 12.43 -10.10 -4.14 3.04 Yes Yes Yes Yes

6269 TT Equity FLEXIUM INTERCONNECT INC -2.04 -7.92 4.93 23.59 11.31 15.38 42.49 28.48 Yes Yes Yes Yes

4958 TT Equity ZHEN DING TECHNOLOGY HOLDING -4.78 -9.75 -4.29 17.14 37.93 46.91 44.61 19.30 Yes Yes Yes Yes

3044 TT Equity TRIPOD TECHNOLOGY CORP 8.94 -2.82 -0.59 2.57 2.57 5.45 9.48 9.59 Yes Yes Yes Yes Yes

2376 TT Equity GIGABYTE TECHNOLOGY CO LTD -11.55 1.88 36.13 14.18 26.29 10.03 8.70 9.39 Yes Yes Yes

3189 TT Equity KINSUS INTERCONNECT TECH -12.24 -9.26 -15.95 -18.86 -12.36 -4.12 7.85 26.39 Yes Yes Yes Yes

6510 TT Equity Chunghwa Precision 52.94 36.40 30.11 21.16 25.40 21.81 19.25 -2.39 Yes

6415 TT Equity SILERGY CORP 33.32 21.13 21.91 21.74 21.52 25.47 17.29 11.96 Yes Yes

3037 TT Equity UNIMICRON TECHNOLOGY CORP -11.55 -10.71 -4.53 6.47 -4.04 6.62 17.37 15.67 Yes Yes Yes Yes

6153 TT Equity CAREER TECHNOLOGY CO LTD 0.38 -20.47 -10.64 -8.58 -5.24 -9.89 -1.87 -7.15 Yes Yes Yes Yes

6141 TT Equity PLOTECH CO LTD 18.24 24.75 16.95 20.64 24.51 36.66 26.99 20.29 Yes Yes Yes

7.16 1.68 6.47 10.33 12.76 13.11 17.09 12.23 Yes Yes Yes Yes Yes

TFT-LCD 2409 TT Equity AUO 18.19 7.60 4.73 3.97 5.00 4.11 -3.82 -9.89 Yes

3481 TT Equity Innolux 67.63 35.57 24.82 19.99 11.05 8.66 1.24 -11.86

6116 TT Equity Hannstar 76.89 22.58 14.11 15.32 16.18 6.16 -25.71 -24.70 Yes Yes Yes

8069 TT Equity E INK HOLDINGS INC 41.79 21.22 -1.14 -7.22 9.95 2.72 11.27 39.88 Yes Yes Yes

8105 TT Equity GIANTPLUS TECHNOLOGY CO LTD 9.38 4.82 1.33 12.10 24.34 12.73 11.04 5.14 Yes Yes

3049 TT Equity HANNSTOUCH SOLUTION INCORPOR 15.20 805.50 17.44 8.02 -18.34 -11.64 -29.63 -40.47 Yes

38.18 149.55 10.22 8.70 8.03 3.79 -5.94 -6.98

Packaging & Testing 6147 TT Equity CHIPBOND TECHNOLOGY CORP 11.76 19.66 -3.36 11.10 8.73 8.45 4.53 4.08 Yes

2311 TT Equity ADVANCED SEMICONDUCTOR ENGR -3.32 1.31 9.01 5.99 2.99 2.24 -0.31 7.55 Yes Yes

2325 TT Equity SILICONWARE PRECISION INDS 3.85 -3.99 -6.27 -6.96 -0.75 -0.76 1.54 -0.38 Yes Yes

2449 TT Equity KING YUAN ELECTRONICS CO LTD 6.72 -1.80 -4.99 -5.76 -5.54 -5.45 -3.30 -5.51 Yes Yes Yes

6239 TT Equity POWERTECH TECHNOLOGY INC 19.71 20.70 17.52 30.63 24.91 31.61 27.40 24.17 Yes Yes

7.74 7.18 2.38 7.00 6.07 7.22 5.97 5.98 Yes Yes Yes

Casings 2474 TT Equity CATCHER TECHNOLOGY CO LTD -22.84 -14.90 3.51 29.97 24.23 21.74 48.23 51.49 Yes Yes Yes Yes

5264 TT Equity CASETEK HOLDINGS LTD -28.47 -29.89 25.44 74.31 17.36 28.79 18.74 36.13 Yes Yes Yes Yes

6235 TT Equity WAFFER TECHNOLOGY CO LTD 51.79 35.15 19.98 39.02 26.10 44.85 56.23 35.89 Yes Yes Yes

0.16 -3.21 16.31 47.77 22.56 31.79 41.07 41.17 Yes Yes Yes Yes Yes

LENs 3008 TT Equity LARGAN PRECISION CO LTD 20.01 18.86 11.72 7.35 -3.27 3.95 9.87 10.66 Yes Yes Yes

3406 TT Equity GENIUS ELECTRONIC OPTICAL CO 19.03 2.26 -26.14 -14.30 -10.02 20.37 24.88 12.59 Yes Yes Yes Yes

3019 TT Equity ASIA OPTICAL CO INC 11.48 9.34 4.64 9.64 0.78 -7.84 -1.59 2.12 Yes Yes Yes

3630 TT Equity NEWMAX TECHNOLOGY CO LTD 13.98 5.62 -28.93 -29.59 -14.31 -25.45 -27.26 -31.29 Yes

3441 TT Equity UNIQUE OPTICAL INDUSTRIAL CO 0.63 100.29 31.92 51.12 20.04 17.37 4.80 55.67 Yes Yes

6209 TT Equity KINKO OPTICAL CO LTD -3.30 -6.27 -2.03 -1.30 2.39 -7.42 -24.52 -17.54 Yes Yes Yes Yes

4976 TT Equity CALIN TECHNOLOGY CO LTD 8.07 7.01 5.81 15.26 3.49 -7.94 4.22 -1.54 Yes Yes

9.99 19.59 -0.43 5.45 -0.13 -0.99 -1.37 4.38 Yes Yes

DRAMs 2408 TT Equity NANYA TECHNOLOGY CORP 27.05 45.11 42.06 36.98 32.14 25.95 32.83 32.73 Yes

3006 TT Equity ELITE SEMICONDUCTOR MEMORY 45.67 32.53 6.28 25.66 1.90 -11.21 20.92 -6.33 Yes Yes

36.36 38.82 24.17 31.32 17.02 7.37 26.88 13.20 Yes Yes

Components 3152 TT Equity ADVANCED CERAMIC X CORP 17.78 16.95 11.91 8.22 0.48 -1.20 -4.22 -7.36

3673 TT Equity TPK HOLDING CO LTD 6.37 14.48 23.56 55.60 29.17 2.02 22.72 21.18 Yes Yes Yes

6121 TT Equity SIMPLO TECHNOLOGY CO LTD -10.50 -9.17 -8.09 -3.57 7.22 6.57 9.11 4.00 Yes Yes Yes Yes

6456 TT Equity GENERAL INTERFACE SOLUTION 19.89 50.09 206.90 178.87 149.89 120.85 92.58 58.64 Yes

2308 TT Equity DELTA ELECTRONICS INC 2.36 2.85 -2.80 4.59 2.33 6.32 5.79 6.80 Yes Yes Yes

2439 TT Equity MERRY ELECTRONICS CO LTD 114.21 39.89 63.64 34.47 6.25 42.24 44.19 73.75 Yes Yes Yes Yes

3026 TT Equity HOLY STONE ENTERPRISE CO LTD 17.77 9.29 -8.62 -3.01 7.68 -7.94 -7.94 4.84 Yes Yes Yes

2492 TT Equity WALSIN TECHNOLOGY CORP 9.88 8.49 9.95 15.66 20.67 18.33 21.63 25.76 Yes Yes Yes Yes Yes

5317 TT Equity KAIMEI ELECTRONIC CORP -21.42 -21.52 -9.73 -6.49 -10.13 -9.54 -21.58 -13.76 Yes Yes Yes Yes

5328 TT Equity HUA JUNG COMPONENTS CO LTD -19.84 -22.74 -28.27 -16.98 6.27 -17.05 -10.43 -10.17 Yes Yes Yes Yes

2327 TT Equity YAGEO CORPORATION -2.85 3.75 6.87 7.29 9.62 10.32 15.99 26.39 Yes Yes Yes Yes Yes Yes

4943 TT Equity CONCRAFT HOLDING CO LTD 41.54 24.71 55.37 118.05 184.77 145.20 138.15 162.99 Yes Yes Yes Yes

3665 TT Equity BIZLINK HOLDING INC 31.66 16.39 82.86 78.53 84.13 90.89 89.51 90.80 Yes Yes Yes Yes

1536 TT Equity HOTA INDUSTRIAL MFG CO LTD 16.97 19.83 12.36 8.45 20.64 22.73 27.93 12.02 Yes Yes Yes

2231 TT Equity CUB ELECPARTS INC -2.38 -0.98 4.31 3.45 0.17 4.42 0.52 5.23 Yes Yes Yes

14.76 10.16 28.01 32.21 34.61 28.94 28.26 30.74 Yes Yes Yes Yes

ODMs 2324 TT Equity COMPAL ELECTRONICS 13.70 31.80 23.65 18.17 23.86 21.58 8.10 12.10 Yes Yes

2382 TT Equity QUANTA COMPUTER INC -1.82 1.48 6.09 32.28 19.09 25.11 25.94 48.31 Yes Yes Yes Yes Yes

2356 TT Equity INVENTEC CORP 2.91 2.16 1.08 4.19 13.38 9.84 10.06 16.54 Yes Yes Yes Yes

2317 TT Equity HON HAI PRECISION INDUSTRY 0.61 0.12 -5.27 3.32 7.53 1.31 -3.70 2.87 Yes Yes Yes

2354 TT Equity FOXCONN TECHNOLOGY CO LTD -2.63 -16.81 -1.24 67.05 66.35 94.19 165.19 176.91 Yes Yes Yes Yes Yes

3231 TT Equity WISTRON CORP 20.99 33.52 33.38 29.15 38.70 13.93 27.82 36.81 Yes Yes Yes

4938 TT Equity PEGATRON CORP -16.87 26.01 18.16 -13.92 13.88 7.89 1.74 10.40 Yes Yes

2.41 11.18 10.84 20.04 26.11 24.84 33.59 43.42 Yes Yes Yes Yes

OBMs 2451 TT Equity TRANSCEND INFORMATION INC 5.44 -5.00 -6.29 -7.53 0.52 -4.33 5.61 -12.35 Yes Yes

2353 TT Equity ACER INC -7.98 2.69 3.67 -14.28 6.24 5.71 -0.77 11.74 Yes Yes Yes

2357 TT Equity ASUSTEK COMPUTER INC -7.23 -6.85 -1.60 -8.30 -5.34 -5.14 1.11 -9.51 Yes Yes Yes Yes

2489 TT Equity AMTRAN TECHNOLOGY CO LTD 15.48 -7.36 -29.92 -59.28 -41.48 -15.96 -50.33 -42.81 Yes Yes Yes

2498 TT Equity HTC CORP 25.41 -18.03 -32.91 8.38 -1.97 -54.39 -30.24 -25.79 Yes Yes Yes

6.22 -6.91 -13.41 -16.20 -8.41 -14.82 -14.92 -15.75 Yes

Distribution 3702 TT Equity WPG HOLDINGS LTD 3.12 -4.20 -6.06 -3.09 4.73 5.38 0.57 2.80 Yes Yes Yes Yes

2347 TT Equity SYNNEX TECHNOLOGY INTL CORP -0.08 -10.78 -5.35 6.25 -0.24 14.14 15.97 19.10 Yes Yes Yes Yes Yes

3036 TT Equity WT MICROELECTRONICS CO LTD 37.14 36.93 30.10 34.88 39.39 18.79 15.05 28.04 Yes Yes Yes

13.39 7.32 6.23 12.68 14.63 12.77 10.53 16.64 Yes Yes Yes

Terminals 8114 TT Equity POSIFLEX TECHNOLOGY INC 72.84 63.02 59.64 35.12 42.35 51.51 7.96 8.87 Yes Yes Yes

6105 TT Equity PORTWELL INC -20.99 -35.85 -16.62 6.47 -4.83 18.32 -16.89 Yes Yes Yes Yes

3545 TT Equity FOCALTECH SYSTEMS CO LTD -7.76 -15.95 -9.00 -12.00 -4.48 11.06 15.65 6.45 Yes Yes Yes Yes

5388 TT Equity SERCOMM CORPORATION -5.00 -0.70 -0.36 2.00 5.02 10.28 17.41 13.56 Yes Yes Yes Yes Yes

2387 TT Equity SUNREX TECHNOLOGY CORP -7.83 -4.73 -16.08 -10.02 -24.72 -28.75 -18.52 -17.47 Yes Yes Yes

6285 TT Equity WISTRON NEWEB CORP 1.77 6.84 14.11 22.99 -0.56 7.69 6.43 25.44 Yes Yes Yes Yes

2397 TT Equity DFI INC -7.88 -22.49 0.53 17.26 -11.58 4.24 25.75 3.61 Yes Yes Yes Yes

3.59 -1.41 4.60 8.83 0.17 10.62 5.40 6.75 Yes Yes Yes Yes

4

COMPANY / INDUSTRY NEWS

Sources: Bloomberg , CGIS Research

Figure 2: Peer comparison Ticker Company

Price Market Cap 2017F 2018F 2019F 2017F 2018F 2019F 2016 2017F 2016 2017F 2016 2017F 2016 2017F 1M 3M 6M 12M YTD 1D

Lcy US$m x x x x x x x x % % % % % % % % % % % %

HK listed names

2878 HK Solomon Systech (Intl) Ltd 0.52 165 n.a. n.a. n.a. n.a. n.a. n.a. 1.7 n.a. -6.6 n.a. -5.3 n.a. 0.0 n.a. 36.8 57.6 40.5 48.6 55.2 26.8

1385 HK Shanghai Fudan Microelect-H 7.93 670 n.a. n.a. n.a. n.a. n.a. n.a. 3.1 n.a. 19.1 n.a. 13.7 n.a. 0.0 n.a. 26.3 56.7 36.5 21.3 35.6 -2.0

85 HK China Electronics Huada Tech 1.72 448 n.a. n.a. n.a. n.a. n.a. n.a. 2.0 n.a. 68.4 n.a. 3.1 n.a. 1.7 n.a. 19.4 62.3 16.2 -5.0 10.3 -0.6

1679 HK Risecomm Group Holdings Ltd 3.23 335 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 24.9 n.a. 15.1 n.a. n.a. n.a. 30.2 2.5 n.a. n.a. n.a. 3.9

981 HK Semiconductor Manufacturing 14.36 8,581 49.7 36.1 15.3 10.2 8.3 7.2 1.8 1.9 9.6 3.9 3.3 1.6 0.0 0.0 42.7 99.4 71.4 28.2 17.9 3.8

3355 HK Advanced Semiconductor Man-H 1.24 244 n.a. n.a. n.a. n.a. n.a. n.a. 1.6 n.a. 3.4 n.a. 6.0 n.a. 0.0 n.a. 4.2 44.2 55.0 103.3 93.8 0.8

1347 HK Hua Hong Semiconductor Ltd 16.20 2,149 15.5 13.8 12.4 7.7 6.6 5.9 1.3 1.3 8.6 8.7 7.3 7.1 0.0 1.7 46.7 53.7 42.1 75.3 87.1 2.1

522 HK Asm Pacific Technology 131.00 6,852 19.9 19.7 17.8 14.0 13.3 12.0 5.1 4.9 17.2 27.8 15.0 17.2 1.8 2.2 11.6 37.7 10.3 74.0 59.5 4.9

2018 HK Aac Technologies Holdings In 179.20 28,070 34.6 26.1 21.4 25.2 19.1 16.1 12.5 10.4 31.6 32.6 22.7 20.5 0.9 1.1 28.0 67.9 86.7 160.3 154.4 5.8

2382 HK Sunny Optical Tech 149.00 20,952 52.4 36.5 27.2 40.3 27.9 21.8 24.4 19.7 29.1 42.9 18.8 19.4 0.5 0.5 22.2 54.4 133.5 280.6 338.9 6.0

1415 HK Cowell E Holdings Inc 3.64 388 7.9 6.5 6.2 4.4 3.8 3.7 1.3 1.1 9.8 15.3 8.7 8.7 2.7 3.0 3.4 12.0 52.3 64.0 86.7 -1.9

1478 HK Q Technology Group Co Ltd 17.56 2,466 32.8 21.9 17.0 22.6 15.7 12.6 9.4 8.0 13.7 26.9 9.1 9.7 0.2 0.5 10.7 39.6 170.6 344.6 339.0 -4.0

732 HK Truly International Holdings 3.83 1,532 35.1 13.0 9.1 8.2 6.2 5.1 1.6 1.6 8.4 4.5 -0.2 0.8 1.3 1.2 6.4 58.3 44.5 18.9 26.8 -0.5

710 HK Boe Varitronix Ltd 6.71 632 n.a. n.a. n.a. n.a. n.a. n.a. 1.8 n.a. 2.2 n.a. 2.0 n.a. 0.4 n.a. 44.0 72.1 59.0 114.4 107.1 -1.0

334 HK China Display Optoelectronic 1.15 307 13.4 9.7 8.6 9.9 7.4 6.0 4.9 4.2 38.5 31.4 8.6 5.9 0.0 2.4 9.5 9.5 -0.9 55.4 59.7 -8.0

877 HK O-Net Technologies Group Ltd 5.28 540 19.3 14.0 11.0 11.8 9.5 n.a. 2.4 2.3 9.5 13.2 6.6 8.2 0.0 0.4 -11.3 13.8 5.2 23.4 45.9 -5.0

259 HK Yeebo International Hldgs 3.79 486 n.a. n.a. n.a. n.a. n.a. n.a. 2.4 n.a. 16.1 n.a. 24.3 n.a. 1.6 n.a. 2.4 -6.9 -4.1 28.5 -16.2 1.6

1979 HK Ten Pao Group Holdings Ltd 1.70 218 7.8 6.0 4.9 4.9 3.9 3.2 3.7 2.7 49.8 42.1 13.6 14.9 3.2 3.8 -38.8 -29.5 -10.1 4.9 20.6 -6.6

3336 HK Ju Teng International Hldgs 2.59 381 6.0 5.7 4.8 4.2 3.8 3.5 0.4 0.4 7.8 7.6 2.5 2.8 3.9 3.8 -13.1 -15.6 -11.3 9.3 7.9 -1.5

285 HK Byd Electronic Intl Co Ltd 22.95 6,629 16.3 13.6 12.0 8.8 7.7 7.0 3.4 3.1 11.1 20.1 9.1 10.7 3.4 1.1 -9.1 24.7 73.6 225.5 276.2 0.0

698 HK Tongda Group Holdings Ltd 2.20 1,707 12.3 9.4 7.7 9.0 7.2 6.0 2.7 2.4 23.0 20.9 8.8 10.1 2.2 2.5 -0.9 12.8 -18.5 1.4 10.0 0.5

6088 HK Fit Hon Teng Ltd 5.48 4,730 22.0 17.1 14.9 10.3 8.7 7.9 n.a. 2.4 13.6 13.8 6.9 7.1 n.a. 1.7 -2.3 21.8 n.a. n.a. n.a. 14.4

Average 23.0 16.6 12.7 12.8 9.9 8.4 4.4 4.4 18.6 20.8 9.1 9.6 1.2 1.7 12.2 34.0 42.6 83.8 90.8 1.8

A share listed names

300433 CH Lens Technology Co Ltd-A 38.18 15,051 46.2 30.2 24.1 26.9 20.1 17.1 6.8 6.0 9.9 14.1 4.8 8.7 n.a. 0.3 28.9 25.4 37.0 66.8 65.9 0.2

300136 CH Shenzhen Sunway Communicat-A 55.93 8,277 53.9 34.7 25.6 49.3 30.7 22.2 21.0 18.6 32.1 38.0 24.0 27.6 n.a. 0.1 21.1 51.3 54.3 130.6 96.2 1.2

300408 CH Chaozhou Three-Circle Grou-A 22.50 5,854 31.0 22.9 16.5 25.7 16.8 11.2 7.1 6.7 22.6 20.5 16.2 18.5 n.a. 1.0 -8.9 9.3 2.3 27.0 41.7 1.0

300115 CH Shenzhen Everwin Precision-A 30.22 4,110 30.4 20.1 14.5 19.1 14.0 10.1 6.2 5.8 18.7 19.6 8.8 12.5 n.a. 0.6 -10.3 -6.4 13.2 8.3 16.0 0.3

002456 CH Shenzhen O-Film Tech Co-A 25.90 10,589 47.3 31.6 24.8 31.4 22.8 18.9 7.8 7.1 10.2 16.1 4.4 5.4 n.a. 0.3 16.1 38.7 67.4 66.0 88.9 6.1

002241 CH Goertek Inc -A 22.80 11,141 32.0 25.4 21.9 20.5 16.5 14.4 5.2 5.6 16.3 18.8 8.1 10.3 n.a. 0.5 9.5 17.2 31.8 57.0 71.9 3.4

002273 CH Zhejiang Crystal-Optech -A 30.90 3,085 52.9 35.6 24.9 n.a. n.a. n.a. 6.5 6.3 9.1 11.8 10.3 9.9 n.a. 0.3 14.0 36.2 48.7 34.7 55.3 1.3

300083 CH Guangdong Janus Intellig-A 8.81 1,900 19.6 13.5 10.4 13.7 9.3 7.2 2.3 2.2 2.6 11.4 4.5 6.6 n.a. 0.7 -2.5 -4.0 4.3 6.9 19.9 -1.7

002475 CH Luxshare Precision Industr-A 25.79 12,322 44.5 31.9 25.2 31.2 23.6 18.5 6.7 6.2 13.8 14.6 7.0 8.2 n.a. 0.4 21.0 25.9 39.8 85.4 86.4 0.1

300207 CH Sunwoda Electronic Co Ltd-A 12.50 2,432 26.4 20.0 16.6 21.8 17.1 13.6 6.1 5.4 22.1 22.9 5.3 6.3 n.a. 1.2 0.8 10.2 -2.2 -13.2 -10.1 -0.1

000725 CH Boe Technology Group Co Lt-A 6.41 33,414 27.3 22.8 18.8 10.5 9.0 7.7 2.7 2.5 2.4 10.0 4.0 4.9 n.a. 0.6 25.7 73.2 68.7 133.9 124.1 -1.4

300207 CH Sunwoda Electronic Co Ltd-A 12.50 2,432 26.4 20.0 16.6 21.8 17.1 13.6 6.1 5.4 22.1 22.9 5.3 6.3 n.a. 1.2 0.8 10.2 -2.2 -13.2 -10.1 -0.1

603160 CH Shenzhen Huiding Technolog-A 116.27 7,953 53.6 47.9 41.2 48.0 42.8 36.9 18.9 14.6 43.9 30.9 37.2 31.4 0.3 0.5 22.8 31.0 24.3 -32.0 13.2 5.2

002008 CH Han'S Laser Technology In-A 57.43 9,228 36.8 31.1 25.2 28.8 25.9 21.1 8.9 9.3 15.0 27.1 12.9 13.8 n.a. 0.8 27.9 63.2 87.7 146.6 154.1 0.4

002185 CH Tianshui Huatian Technolog-A 9.37 3,007 38.1 29.4 22.7 16.9 13.0 10.6 3.8 3.7 8.2 10.1 6.0 7.1 n.a. 0.4 10.2 39.4 50.8 48.1 55.1 3.5

603690 CH Pnc Process Systems Co Ltd-A 27.07 858 91.8 59.5 41.5 59.6 38.7 25.8 14.4 10.5 16.7 12.3 8.1 6.3 n.a. 0.1 26.8 80.0 47.5 n.a. n.a. 1.5

300162 CH Ledman Optoelectronic Co-A 9.01 474 n.a. n.a. n.a. n.a. n.a. n.a. 3.2 n.a. 2.6 n.a. 0.9 n.a. n.a. n.a. -14.4 -6.3 -20.3 -48.0 -37.0 -1.1

600584 CH Jiangsu Changjiang Electro-A 25.69 5,260 77.6 42.8 28.7 12.6 10.4 9.1 3.8 4.1 2.4 4.8 0.7 1.8 n.a. 0.2 31.7 73.1 53.9 31.1 45.6 5.4

002808 CH Suzhou Goldengreen Technol-A 15.49 448 n.a. n.a. n.a. n.a. n.a. n.a. 5.7 n.a. 10.0 n.a. 8.9 n.a. 0.4 n.a. -8.3 -7.5 -26.8 -58.0 -39.4 -1.5

300604 CH Hangzhou Chang Chuan Techn-A 73.10 839 98.5 71.1 57.0 n.a. n.a. n.a. 18.7 18.6 20.4 18.7 16.7 15.2 0.2 n.a. 50.2 135.8 34.6 n.a. n.a. 2.4

300493 CH Shanghai Fortune Techgroup-A 17.22 778 n.a. n.a. n.a. n.a. n.a. n.a. 10.7 n.a. 10.6 n.a. 6.3 n.a. 0.3 n.a. 6.3 48.1 28.0 -28.6 -11.1 3.1

603986 CH Gigadevice Semiconductor B-A 163.12 4,979 66.4 44.7 38.5 53.3 34.3 24.0 25.5 18.5 19.1 29.2 13.7 24.2 0.0 0.4 24.3 138.5 67.6 83.3 83.3 0.0

300346 CH Jiangsu Nata Opto-Electron-A 30.10 729 301.0 100.3 60.2 n.a. n.a. n.a. 4.0 n.a. 0.6 n.a. 1.8 n.a. n.a. n.a. 4.5 30.0 8.8 -13.6 -1.1 2.7

002371 CH Naura Technology Group Co-A 46.26 3,190 147.8 95.4 61.1 n.a. n.a. n.a. 6.5 6.3 3.5 5.1 1.8 5.0 n.a. 0.1 54.3 102.9 91.4 33.8 73.9 10.0

300672 CH Goke Microelectronics Co-A 72.80 1,225 n.a. n.a. n.a. n.a. n.a. n.a. 8.6 n.a. 7.5 n.a. 6.4 n.a. n.a. n.a. 27.9 174.8 n.a. n.a. n.a. 6.0

002049 CH Unigroup Guoxin Co Ltd-A 42.12 3,849 85.1 73.3 64.8 68.6 70.0 67.4 7.6 7.3 11.1 8.9 5.9 5.0 n.a. 0.1 22.5 76.7 36.4 17.2 27.9 3.2

300458 CH All Winner Technology Co L-A 31.85 1,595 45.7 32.0 24.4 n.a. n.a. n.a. 5.3 3.3 8.3 9.3 4.2 6.0 0.5 n.a. 2.3 36.1 20.9 -36.6 -30.2 3.1

300233 CH Shandong Jincheng Pharmace-A 19.40 1,148 21.3 15.8 12.8 n.a. n.a. n.a. 2.0 n.a. 11.7 n.a. 7.0 n.a. n.a. n.a. -9.3 -0.4 -15.7 -25.1 -20.4 -0.4

300623 CH Jiangsu Jiejie Microelectr-A 89.00 1,254 n.a. n.a. n.a. n.a. n.a. n.a. 12.5 n.a. 25.4 n.a. 22.6 n.a. 0.6 n.a. 20.7 43.7 18.1 n.a. n.a. 3.3

300613 CH Shanghai Fullhan Microelec-A 240.87 1,612 72.6 49.6 36.5 n.a. n.a. n.a. 29.5 14.7 52.7 23.6 41.4 19.9 n.a. 0.0 25.5 88.7 44.1 n.a. n.a. 2.9

Average 63.0 40.1 30.2 31.1 24.0 19.4 9.1 8.2 15.0 17.4 10.2 11.3 0.3 0.5 14.7 47.8 31.5 28.3 38.4 2.0

Taiwan listed names

2330 TT Taiwan Semiconductor Manufac 239.50 205,742 18.2 16.3 14.4 9.2 8.2 7.4 4.3 4.0 25.6 23.3 19.3 17.5 n.a. 3.1 0.8 12.7 16.3 32.0 32.0 -0.4

2303 TT United Microelectronics Corp 15.65 6,545 21.9 21.9 18.8 3.9 3.8 3.7 0.9 0.9 3.8 4.0 2.7 2.1 n.a. 3.2 -1.9 11.4 27.2 37.9 37.3 -1.3

3034 TT Novatek Microelectronics Cor 116.00 2,338 14.3 12.8 12.0 9.2 8.3 7.8 2.6 2.5 17.7 17.5 12.6 11.8 n.a. 6.0 1.3 5.5 -2.5 11.0 8.9 -2.1

5347 TT Vanguard International Semi 58.80 3,193 21.4 18.4 16.6 11.2 10.1 9.4 3.6 3.4 19.7 15.9 14.2 13.2 n.a. 4.9 6.7 11.6 5.4 1.4 4.6 -0.7

2311 TT Advanced Semiconductor Engr 37.25 10,767 13.5 12.6 11.1 7.0 6.4 6.1 1.7 1.8 13.8 13.4 6.7 6.3 n.a. 4.1 -2.1 -1.6 -0.5 9.4 13.0 0.3

2379 TT Realtek Semiconductor Corp 115.50 1,938 16.7 15.1 13.7 8.3 8.0 7.4 2.9 2.5 13.5 15.2 5.5 6.0 n.a. 4.7 3.6 4.1 15.4 15.4 14.3 0.0

6462 TT Egis Technology Inc 225.50 522 22.5 10.1 7.1 16.5 6.9 5.5 8.6 7.4 7.8 37.2 20.8 22.2 n.a. 1.4 -9.8 -9.1 33.8 -2.0 -14.9 -2.2

3105 TT Win Semiconductors Corp 272.00 3,628 30.7 22.8 20.0 16.6 13.2 11.4 6.3 5.8 17.9 18.6 10.4 12.7 n.a. 1.7 16.7 59.5 109.2 227.7 199.2 2.6

3152 TT Advanced Ceramic X Corp 349.00 798 26.9 22.0 16.3 18.6 15.2 11.5 7.7 7.2 25.6 26.7 25.1 23.2 n.a. 3.2 -3.6 -6.7 15.2 46.0 46.9 -2.5

5264 TT Casetek Holdings Ltd 116.50 1,317 17.1 12.5 10.0 5.2 4.1 3.5 1.4 1.4 9.4 7.7 5.2 4.7 n.a. 2.6 21.6 19.1 43.6 48.2 35.6 -2.9

2474 TT Catcher Technology Co Ltd 329.50 8,410 11.1 9.0 8.0 4.4 4.0 3.5 2.0 1.9 18.5 17.7 12.3 11.8 n.a. 3.2 5.4 -11.4 3.3 52.2 47.1 -2.4

3008 TT Largan Precision Co Ltd 5700.00 25,330 27.3 18.7 15.6 19.5 13.7 11.6 9.1 8.3 32.4 32.9 27.2 26.7 n.a. 1.3 2.7 2.4 16.7 67.9 50.4 -0.7

3673 TT Tpk Holding Co Ltd 83.00 1,118 11.7 10.3 10.0 3.9 3.9 4.0 1.0 0.9 -4.9 8.1 2.3 3.1 n.a. 2.0 -20.6 -30.3 -19.8 67.0 39.5 -3.6

2360 TT Chroma Ate Inc 156.00 2,095 26.5 22.4 19.8 20.1 17.0 14.7 5.6 5.1 17.2 20.6 9.6 12.6 n.a. 2.5 20.9 66.0 68.3 103.4 106.9 -2.5

2317 TT Hon Hai Precision Industry 107.00 61,427 12.4 10.4 9.6 7.1 6.1 5.8 1.7 1.6 14.3 13.0 6.5 5.6 n.a. 4.2 -0.9 -8.2 4.4 35.4 27.1 -0.5

2454 TT Mediatek Inc 317.50 16,636 27.5 18.4 15.4 21.8 12.9 10.2 2.0 2.0 9.8 7.3 5.6 4.6 n.a. 2.7 -1.4 11.0 48.9 48.5 47.5 -2.6

Average 20.0 15.9 13.7 11.4 8.9 7.7 3.8 3.5 15.1 17.4 11.6 11.5 n.a. 3.2 2.5 8.5 24.1 50.1 43.5 -1.3

Korean listed names

066570 KS Lg Electronics Inc 93000.00 13,576 9.2 9.5 8.5 5.1 4.6 4.4 1.2 1.2 0.6 13.9 2.4 4.8 n.a. 0.5 5.1 26.7 14.5 103.3 80.2 -1.5

011070 KS Lg Innotek Co Ltd 161000.00 3,399 19.1 11.4 10.5 6.8 5.1 4.7 2.1 1.9 0.3 10.5 2.6 4.5 n.a. 0.2 -1.5 -0.3 21.1 109.6 82.1 -5.8

009150 KS Samsung Electro-Mechanics Co 100000.00 6,663 41.4 19.6 16.6 8.9 6.6 5.9 1.7 1.7 0.3 4.2 0.0 2.7 n.a. 0.6 0.2 9.8 29.2 113.4 96.9 -4.3

005930 KS Samsung Electronics Co Ltd 2819000.00 324,629 9.5 7.9 7.7 4.0 3.4 3.3 1.8 1.8 10.9 20.5 11.4 15.0 n.a. 1.2 4.4 26.4 23.0 76.4 56.4 0.0

000660 KS Sk Hynix Inc 82300.00 53,445 5.5 5.0 5.7 3.2 2.7 2.9 2.1 1.8 13.0 37.1 19.7 29.2 n.a. 1.2 -4.4 34.0 48.8 106.5 84.1 0.4

091700 KS Partron Co Ltd 9020.00 436 60.3 12.9 10.4 8.9 5.7 5.1 1.5 1.4 6.6 2.5 0.5 2.0 n.a. 2.2 3.8 7.0 -11.1 1.1 -12.9 1.0

Average 24.2 11.0 9.9 6.1 4.7 4.4 1.7 1.6 5.3 14.8 6.1 9.7 n.a. 1.0 1.3 17.3 20.9 85.1 64.5 -1.7

US & Europe listed names

LITE US Lumentum Holdings Inc 57.15 3,543 17.0 14.7 14.9 11.7 9.4 9.6 5.5 6.8 -0.7 22.3 -9.3 9.5 0.0 n.a. -1.0 10.0 7.0 56.1 47.9 3.1

OLED US Universal Display Corp 175.90 8,274 76.3 56.8 39.6 50.3 40.8 27.7 13.3 12.4 9.7 18.3 14.8 15.3 0.1 0.1 31.1 57.8 54.0 179.9 212.4 3.7

FNSR US Finisar Corporation 18.96 2,159 13.2 10.0 9.5 5.8 5.0 4.7 1.3 1.3 3.1 4.7 11.5 2.9 0.0 n.a. -14.4 -19.0 -22.2 -38.9 -37.4 3.7

STM FP Stmicroelectronics Nv 20.46 21,706 26.6 20.6 18.7 13.2 10.6 10.1 4.1 4.1 3.6 15.8 6.2 9.1 3.3 1.0 20.9 46.4 34.8 147.5 89.8 -0.1

SOI FP S.O.I.T.E.C. 66.01 2,430 51.9 32.5 23.8 27.2 18.5 14.8 13.4 10.3 n.a. 18.5 2.3 n.a. n.a. 0.0 19.3 35.7 50.1 262.7 124.5 -0.7

VIAV US Viavi Solutions Inc 8.55 1,944 22.0 17.4 18.6 10.5 8.4 n.a. 2.5 2.3 -11.1 4.7 4.5 0.7 0.0 n.a. -9.9 -18.7 -26.7 9.6 4.5 1.5

AMS SW Ams Ag 95.55 8,092 57.8 23.3 16.4 33.3 15.2 11.2 8.7 7.5 15.3 10.9 0.0 4.1 n.a. 0.4 33.4 40.7 48.6 254.4 232.3 1.2

ASML NA Asml Holding Nv 154.05 77,414 34.0 27.7 22.4 24.7 21.2 18.2 6.4 6.2 16.2 19.3 12.4 11.3 n.a. 0.8 3.9 21.1 24.7 68.9 44.4 0.7

ASM NA Asm International Nv 60.43 4,386 20.0 16.5 14.1 20.3 17.4 15.3 1.8 1.8 6.8 9.2 13.1 7.7 n.a. 1.2 8.9 24.6 8.9 56.1 41.8 0.7

KLAC US Kla-Tencor Corp 102.44 16,053 14.4 13.8 13.6 10.1 9.5 9.1 11.0 7.8 126.9 65.5 19.3 18.8 2.2 2.3 -2.7 13.4 2.4 35.8 30.2 0.0

INTC US Intel Corp 45.58 213,314 14.0 14.0 13.8 8.6 8.2 8.0 3.0 3.0 16.0 19.4 11.6 10.8 2.9 2.6 14.9 27.1 28.3 31.7 25.7 -1.6

NXPI US Nxp Semiconductors Nv 116.05 39,239 17.9 16.0 14.9 13.8 12.2 10.9 3.1 3.0 1.8 16.3 8.2 7.3 0.0 0.0 0.8 3.4 8.6 18.7 18.4 0.6

COHR US Coherent Inc 308.97 7,610 20.7 18.3 n.a. 11.6 10.2 n.a. 6.5 5.2 10.3 28.3 11.8 15.9 0.0 n.a. 21.8 44.0 24.1 145.4 124.9 4.1

TXN US Texas Instruments Inc 96.94 95,540 21.4 21.0 19.7 13.8 13.1 12.7 8.7 8.7 34.8 41.3 26.5 26.5 2.1 2.2 3.6 19.8 20.1 38.8 32.8 -0.1

Average 33.3 23.3 19.2 20.7 15.6 13.4 6.8 6.0 18.9 18.9 7.5 8.8 0.9 0.8 9.3 21.9 18.8 90.5 70.9 1.2

HSI Index Hang Seng Index 2.5 8.6 16.0 29.5 32.6 0.2

HSCEI Index Hang Seng China Ent Indx 1.4 10.5 13.6 23.9 24.4 -0.5

SHCOMP Index Shanghai Se Composite 1.7 7.5 11.8 7.9 11.1 0.4

MXCN Index Msci China 3.0 14.6 27.7 48.5 52.1 -0.1

Share Price PerformancePE EV/EBITDA P/B ROE ROA Div yield

COMPANY / INDUSTRY NEWS 14 November 2017

Company Meeting – Red Star Macalline (1528.HK) Analyst: Johnson Cheung (johnsoncheung@chinastock.com.hk; Tel: (852) 3698 6275)

Red Star Macalline (RSM) is the largest operator of Home Improvement and Furnishings shopping mall

chains in China, with a 214-mall network across the nation. Its self-owned malls, which are located in

Tier 1 and 2 cities, account for 32% of its malls, but 68% of its revenue. The Company has

underperformed its peers YTD and is now trading at 10.5x PER and 5% yield. We believe the Company’s

property backing (at 0.68x book value) and the upcoming A-share listing may provide upside for the

share price.

Investment Highlights

Largest Home Furnishings Mall Operator

Red Star Macalline Group Corp. Ltd (RSM) is a unique China landlord, which focuses on the Home Improvement

and Furnishings sector. Under the “Red Star Macalline” brandname, it operates the largest shopping mall chain

in the industry, with over 214 malls in 150 cities across the country. The Company owns 69 malls, which are

located mostly in Tier 1 and 2 cities, with a total GFA of 5.33m sq.m. This includes over 1m sqm GFA in Beijing

and Shanghai. RSM plans to add another 21 portfolio (self-owned) malls this year.

RSM’s malls are designed to facilitate the moving and storage of heavy furniture, with features such as special

lifts, parking bays, and reinforced support for each floor. The tenants also benefit from RSM’s brand power, and

payment and after-sales services. The size of the malls means they can offer one-stop service for end-customers.

As consumers’ brand awareness of home furnishing products is usually limited, RSM offers them a convenient

aggregation of reputable vendors with a full range of products catering for different price points, styles and

accessories.

Annual revenue from its own portfolio malls, including rental income and management fees, is estimated to reach

RMB6.4bn a year. The aggregate book value of its properties is now RMB69bn. Its average operating margin is

over 50%; in addition, the fair value gains on investment properties was over RMB2.6bn last year.

Figure 1: RSM’s Porfolio Malls vs. Managed Malls

Number of GFA Avg. GFA Per Mall Revenue in H1 2017

Malls (mn sq.m) (sqm) (RMBm)

Portfolio Malls 69 5.33 77,246 3,189

Managed Malls 145 7.97 54,966 1,482 Sources: Bloomberg, CGIS Research

Asset-Light Model by Cooperating with Property Developers

With its seasoned management and historically consistent record in opening successful malls, RSM is

leveraging its branding power through an asset-light model, whereby RSM cooperates with other property

developers and local governments, with RSM introducing tenants to shopping malls located in Tier 3 and 4 cities.

In return, RSM receives an initial amount and a regular management fee. This is a rich asset-light model, with an

operating profit margin of slightly less than 50%. Contribution from this business segment was RMB1.48bn in H1

2017, and RMB3bn for the whole year. There are now 145 such managed malls, with a total GFA of 7.97m sq.m.

Financial Position

As at the end of June 2017, RSM had total assets of RMB91bn, and shareholders’ equity of RMB38.5bn.

Approximately 75% of the total assets were investment properties, which consisted mainly of its portfolio malls. It

had cash of RMB7.75bn, but approximately RMB33bn of debt. With net assets of RMB38.5bn, RSM’s net

debt-to-equity ratio is approximately 65%. The debt is a combination of mortgages, bank loans, and bonds. The

average interest rate is 5%. With the Company generating RMB 4bn in cashflow from operations, we believe

RSM’s financial position is reasonable. RSM’s annual capex target is approximately RMB5bn, mainly for the

construction of its own portfolio shopping malls.

Shareholder Structure

The Company was founded in 1992 and listed in the Hong Kong market in June 2015 at HK$13.28 per share.

Chairman Che’s family has a 68.44% interest. Warburg Pincus has a 11% stake, having sold 100mn H shares at

HK$9 per share to China Lesso (2128.HK, HK$5.29) in March 2017; its potential disposal could be an overhang.

The Company is also considering an A-share issue, but this is likely to enhance the book value per share.

Largest Home Furnishings Mall Operator

RSM’s share price is up 18% YTD, and 18% since June, so its share price performance has trailed other

Mainland property plays. Its valuation, at 0.67x book and 10.4x earnings, is among the lowest in the industry. The

closest A-share comparable is Zhejiang China Commodities, which is trading at a 100% PER premium. With a

DPS of RMB0.42 (on a dividend payout of 50% of core profit), RSM has a dividend yield of 5%+.

Figure 2: Valuation of Red Star Macalline and its peers Property Companies Bloomberg Price Mark Cap 20D Avg PER (x) P/B(x) Yield Price Change

Code 11/13/2017 (HK$m) TO (HK$m) FY16 FY17E FY18E FY16 (%) MTD QTD HTD YTD

SHENZHEN INTL HOLDINGS 152 HK 14.78 29,972 45.2 13.4 12.1 11.6 1.55 2.9 (1) 1 3 31

CHINA SOUTH CITY* 1668 HK 1.99 15,936 110.8 4.5 3.7 14.2 0.61 2.5 (9) (11) 37 23

CHINA JINMAO HOLDINGS GROUP817 HK 3.61 38,538 88.0 12.9 9.1 7.3 1.13 2.6 3 (8) 12 73

ZHEJIANG CHINA COMMODITIES-A600415 CH 6.70 42,828 128.7 35.3 22.0 16.1 3.60 0.9 (4) (5) (7) (23)

RED STAR MACALLINE GROUP C-H1528 HK 9.58 34,717 18.3 7.3 10.5 9.3 0.68 5.1 3 (1) 20 20

Median * Year End March 12.9 10.5 11.6 1.13 (1) (5) 12 23 Sources: Bloomberg, CGIS Research

Figure 3: RSM’s Share Price and Historic PE Chart

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

5

6

7

8

9

10

11

12

13

14

Share Price (LHS) PER (RHS) Average (RHS)+1 STD (RHS) -1 STD (RHS)

Sources: Bloomberg, CGIS Research

Figure 4: RSM’s Historic PB Chart

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

PBR Average +1 Std -1 Std

Sources: Bloomberg, CGIS Research

Figure 5: RSM’s Simplified Consolidated Statement of Profit and Loss

Year Ended December 31 (RMB m) 2014 2015 2016

Revenue 7,935 8,756 9,282

Cost of goods sold (2,054) (2,242) (2,658)

Gross profit 5,881 6,514 6,624

Other income and gains, net 2,398 2,370 2,284

Other operating expenses (1,977) (2,079) (2,355)

Operating profit 5,924 6,804 6,554

Finance costs (856) (854) (949)

Other gains/ (expenses) 282 (8) 123

Profit before tax 5,350 5,942 5,727

Income tax expense (1,428) (1,573) (1,359)

Profit after tax 3,922 4,370 4,368

Attributable profit to shareholders 3,633 4,098 4,036

Minority interest 289 272 332 Sources: Bloomberg, CGIS Research

Figure 6: RSM’s Simplified Consolidated Statement of Financial Position

Year Ended December 31 (RMB m) 2014 2015 2016

Non-current assets

PPE 63,328 70,926 77,444

LT investments & receivables 237 516 705

Others 3,227 3,887 4,894

Total non-current assets 66,792 75,329 83,043

Current assets

Inventories 38 16 36

Account receivables 1,392 1,788 2,509

Bank balances and cash 3,665 5,954 6,150

Others 30 103 100

Total current assets 5,125 7,861 8,795

Total assets 71,918 83,190 91,837

Current liabilities

Account payables 5,104 5,766 6,599

ST borrowings 2,326 2,297 2,787

Others 2,991 2,559 4,161

Total current liabilities 10,420 10,623 13,547

Non-current liabilities

LT borrowings 9,435 7,376 8,867

Other non-current liabilities 14,650 19,922 21,735

Total non-current liabilities 24,085 27,299 30,602

Total liabilities 34,505 37,921 44,150

Shareholders’ equity

Share capital 3,235 9,241 9,241

Reserves 30,210 31,904 34,230

Total shareholders’ equity 33,445 41,145 43,471

Minority interest 3,968 4,124 4,217

Total equity 37,413 45,268 47,688 Sources: Bloomberg, CGIS Research

1

14 Nov, 2017

Last week we met with Kaisa management, who shared some updates with us.

They stated that the operation crisis and debt issues had been addressed and

that all debt had been disclosed at ~RMB100bn (gearing ratio 300%), i.e. no

more hidden debt. Therefore management can now focus on operations and the

future development of the Company. The Company owns a decent and sizable

landbank in the GMH (Guangdong Macau & Hong Kong) area, and it started to

get back on track after the resumption of trading.

Its valuation looks undemanding at 6.5x 2017E PER (assuming RMB28.5bn

revenue booking for the whole year and a not-aggressive 13% core profit margin

for a China property developer). The valuation is near the low end of the range

compared to its peers of similar scale. We see the potential to narrow the valua-

tion gap, but it will take time to rebuild investor confidence after a trading sus-

pension of two years.

Background: Property projects no longer frozen by the authorities

Kaisa was suspended from trading from 31 Mar 2015 to 25 Mar 2017, after

being accused of political issues and hidden debt. In 2015, some projects in

Shenzhen were frozen and prohibited from being sold. But they were all unfro-

zen by the end of 2016 and contributed partly to FY16 full-year sales of

RMB29.8bn. Management reiterated that all the financial issues had been ad-

dressed.

Financials

Management expects to maintain the current gearing ratio instead of reducing it,

as business expansion is the first priority given the favourable market at present.

As shown in Figure 4, the gearing ratio was 310% as at 30 June 2017. There-

fore, the Company is likely to skip its dividend payment for this financial year.

Management declared that the Company’s total debt was shown in the latest

financial reports as at 30 Jun 2017. Total debt amounted to ~RMB100bn. Fi-

nance costs were 8% both at home and overseas. Near-term financing pressure

should be manageable, as the refinancing needs in the next 12 months amount

to about RMB12bn, which is expected to be refinanced by bonds and bank

loans.

The gross profit margin of FY14, FY15 and FY16 was unusually low for a prop-

erty developer. Management explained that this was because of the debt issue.

As stated above, if the debt issue has been resolved and the P&L reflects the

true situation, the FY17 gross profit margin will be back on track.

Decent land bank with potential to increase from urban redevelopment

Among its 22m sqm land bank, which is sufficient for 5 to 6 years of project

development, 55% is in the GMH area and 18% is in Shenzhen. Another 14m

sqm of urban redevelopment area is under negotiation; of this, Shenzhen ac-

counts for 60% and Guangzhou accounts for 39%.

Many potential buyers are thought to be interested in the good quality landbank

in GMH. Cashing out by selling the projects and unlocking their value would be

the last resort. But so far, management has managed to keep the wheel rolling

and is rather reluctant to do that.

COMPANY UPDATE KAISA GROUP HOLDINGS LTD. [1638.HK; HK$4.59; NOT RATED] -

BUSINESS RESUMING, AWAITING CONSTANTLY STRONG EXECUTION

Market Cap: US$3,556m; Free Float: 31.9%; 3-months Average Daily Turnover: US$33.3m

Analyst: Rachel Chui Tel: 3698 6391 Email: rachelchui@chinastock.com.hk

Source: Bloomberg, Company data, CGIS Research

[KAISA GROUP HOLDINGS LTD. ]

Core competency - urban redevelopment business

For historical reasons, Shenzhen’s local regulations and practices are the

most comprehensive in the country, and this is where Kaisa started its

business. Of the four types of urban redevelopment projects in the Main-

land, Kaisa began with uncompleted/suspended buildings (烂尾楼) before

it was listed. Later the Company mastered the skill-sets required and ap-

plied it to other types of urban redevelopment, i.e. villages in the city (城中

村), old residential communities (旧住宅小区) and unused factories (厂房

改造). The end products aim at mass market first-time home buyers and

are mainly 90-100 sqm (2 bedrooms or 3 bedrooms)

Urban redevelopment is a domain that is rather difficult for property devel-

opers to get into. It features high margins, long development times and

great effort. Getting such projects done is like raising children; it often

takes more than a decade. Therefore, management did not sell any of

these jewels even during the chilly winters of past years.

The construction cost of Kaisa’s projects is HK$4,300-4,500 per sqm, a bit

higher than the industry average. This is probably due to the re-start of

projects and temporarily weak bargaining power with contractors. But with

the help of the low land cost of these urban redevelopment projects, the

gross profit margin can usually hit 40%, and sometimes even 60%.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

0

1

2

3

4

5

6

7

Trading value (HK$ 000) - RHS Price (HK$)

Dec year end FY13 FY14 FY15 FY16

Revenue (RMB m) 19,523 19,600 10,927 17,772

Gross profit (RMB m) 6,600 2,871 343 2,312

Gross margin 33.8% 14.6% 3.1% 13.0%

Adjusted net profit (RMB m) 2,077 (4,828) (4,904) (4,752)

Adjusted EPS (RMB cents) 0.58 (0.26) (0.22) (0.12)

Dividend yield (%) 3.2% N/A N/A N/A

PER (x) 6.2 N/A N/A N/A

PBR (x) 1.3 1.5 1.7 1.8

2

Source: Company data, CGIS Research

Sales and booking outlook: Contracted sales expected to grow at a CAGR of 30% in the coming three years

Contracted sales in FY16 were RMB29.8bn, and the target for FY17 is RMB40bn. Sales in the first 10 months were RMB34.5m (30.8%+ YoY). Manage-

ment expects a CAGR of 30% for sales in the next three years, similar to that of many of its major peers. Revenue booked in 1HFY17 was RMB8.5bn and

expected bookings in 2HFY17 are RMB20bn, for a total of RMB28.5bn in FY17, implying 61% growth YoY. The FY17 gross profit margin is expected to be

25-30%.

The 33% gross profit margin of 1HFY17 incorporated the sale of 50% equity shares in an urban redevelopment project in Shenzhen (the equity partner is

Zhongzhi, a related party), which resulted in booking cash income of RMB2bn (27% gross profit margin if this part is taken out). The remaining RMB1.2bn

cash income for this project is expected to be booked in 2HFY17.

Strategy in future sales and land replenishment

In first-tier cities, a high profit margin is the top priority for the Company’s sales deployment. However, in second and third tier cities, fast-asset turnover is

preferred.

For future land replenishment, the Company will endeavour to accelerate the acquisition of old villages/developments (14m sqm in progress) as well as try

to win public tenders at a reasonable price.

The Chairman resides in Hong Kong. Kaisa is also interested in Hong Kong and other overseas projects.

Diverse business for stronger bargaining power with government

In the coming decades, the profit margin of the property development business will undoubtedly be squeezed. Because of the decreasing availability of

high quality land parcels, companies must seek new drivers to differentiate themselves from their competitors. Kaisa started to investigate and invest in

tourism, hotels and healthcare industries. This allows the Company Development to propose different themes to local governments.

Most other major developers started to do this years ago as well. We will see which one prevails in the market later.

Risks: Policy risks, corporate governance, rate hikes and an ASP drop.

Figure 1: Shareholding structure

Figure 3: Contracted sales in FY17

Source: Company data, CGIS Research

Monthly

contracted

sales

(RMB bn)

Monthly

contracted

sales

increase YoY

Contracted

saleable

GFA (sqm)

Contracted

saleable GFA

increase YoY

ASP

(RMB/sqm)

ASP

increase

YoY

Cumulative

contracted

sales in FY

(RMB bn)

Cumulative

contracted

sales in FY

increase YoY

Cumulative

Contracted

saleable GFA

(sqm)

Cumulative

Contracted

saleable GFA

increase YoY

Total ASP

(RMB/sqm)

Total ASP

increase

YoY

Feb-17 2,185 N/A 145,037 N/A 15,068 N/A 5,042 N/A 336,500 N/A 14,983 N/A

Mar-17 2,900 37.6% 175,688 9.5% 16,506 -25.7% 7,942 34.3% 512,188 30.5% 15,506 2.9%

Apr-17 3,272 12.1% 209,806 -17.0% 15,594 35.1% 11,214 27.0% 721,994 11.9% 15,532 13.5%

May-17 3,051 43.7% 208,622 17.0% 14,625 22.8% 14,265 30.2% 930,616 13.0% 15,328 15.2%

Jun-17 8,195 186.2% 458,793 53.5% 17,862 86.4% 22,460 62.5% 1,389,409 23.8% 16,165 31.3%

Jul-17 2,157 25.1% 166,320 -13.9% 12,968 -13.0% 24,616 47.4% 1,555,729 18.3% 15,823 24.7%

Aug-17 2,357 13.8% 164,466 -20.0% 14,072 7.8% 26,973 38.8% 1,723,196 13.0% 15,653 22.8%

Sep-17 3,211 1.2% 119,825 -21.3% 16,071 25.5% 30,184 33.1% 1,923,020 8.1% 15,696 23.1%

Oct-17 4,355 16.9% 332,795 40.2% 13,087 16.7% 34,539 30.8% 2,255,815 11.9% 15,312 16.9%

Shareholder o/s shares (m) % of total

Funde Sino Life Insurance Co., Ltd. 1,538 25.4%

KWOK Ying Shing 1,469 24.3%

KWOK Ying Chi 843 14.0%

Choi Chee Ming 268 4.4%

Others 1,926 31.9%

Total 6,043 100.0% 23.9 23.1

9.3

29.8

40.0

52.0

67.6

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Contracted sales (RMB bn)

Figure 2: Contracted sales in FY13-FY16 & management forecast

Source: Company data, CGIS Research

3

Figure 4: P&L

Source: Company data, CGIS Research

RMB m FY13 FY14 FY15 FY16 1HFY17

Revenue 19,523 19,600 10,927 17,772 8,587

Cost of sales (12,923) (16,729) (10,583) (15,460) (5,728)

- - - - -

Gross profit 6,600 2,871 343 2,312 2,859

Other gains and (losses), net (84) (1,742) (216) (561) 480

Selling and marketing costs (862) (799) (559) (843) (262)

Administrative expenses (952) (1,171) (1,066) (1,745) (788)

Changes in fair value of investment properties 729 3,627 3,825 4,161 1,320

Changes in fair value of financial derivatives 51 (86) (42) (22) (322)

Loss arising from the incident - (483) - - -

Operating profit 5,482 2,217 2,284 3,303 3,287

Share of results of associates - (1) (4) (41) (32)

Share of result of joint ventures - - - 8 (9)

Finance income 318 25 11 39 57

Finance costs (643) (776) (2,117) (2,160) (70)

- - - - -

Finance costs, net (326) (751) (2,106) (2,120) (13)

Gain on extinguishment of financial liabilities - - - 716 -

Profit before income tax 5,156 1,466 174 1,867 3,233

Income tax expenses (2,293) (2,766) (1,428) (2,214) (1,429)

- - - - -

Loss for the year 2,863 (1,300) (1,254) (348) 1,804

- - - - -

Other comprehensive loss, including

reclassification adjustments- - - (0.2) (12)

Total comprehensive loss for the year 2,863 (1,300) (1,254) (348) 1,792

(Loss)/profit for the year attributable to:

Equity holders of the Company 2,857 (1,287) (1,122) (612) 1,891

Non-controlling interests 5 (13) (133) 265 (87)

Total comprehensive (loss)/income for the

year attributable to:

Net profit 2,857 (1,287) (1,122) (613) 1,882

MI 5 (13) (133) 265 (90)

Core profit 2,077 (4,828) (4,904) (4,752) 883

Gain (loss) per share for loss attributable to

equity holders of the Company during the

year (expressed in RMB per share)

0.581 (0.255) (0.218) (0.119) 0.368

4

Source: Bloomberg, CGIS Research

Source: Company data, CGIS Research

Figure 5: Financial position

RMB m As at 30 Jun 17 As at 31 Dec 16

Total Assets 191,616 165,822

Total Liabilities 166,659 142,776

Net Current Assets 78,868 72,422

Total Equity 24,957 23,046

Total Debt 102,215 87,544

Cash and Bank Deposits 24,802 16,573

Net debt 77,413 70,971

Gearing Ratio 310% 308%

RMB m FY13 FY14 FY15 FY16 1HFY17

Revenue 19,523 19,600 10,927 17,772 8,587

Cost of sales (12,923) (16,729) (10,583) (15,460) (5,728)

Gross profit 6,600 2,871 343 2,312 2,859

GP margin 34% 15% 3% 13% 33%

Figure 6: Peers PE comparison

Ticker Company Price Market cap NAV

(HK$) (US$ m) 2017E 2018E (HK$)

81 HK Equity CHINA OVERSEAS G 4.06 1,188 6.1 5.5 10.23 -60%

119 HK Equity POLY PROPERTY 3.56 1,671 29.7 15.0 7.11 -50%

207 HK Equity JOY CITY PPT 1.34 2,445 19.3 14.4 3.16 -58%

3900 HK Equity GREENTOWN CHINA 9.58 2,660 9.2 8.5 16.59 -42%

1813 HK Equity KWG PROPERTY 7.43 3,005 5.5 4.5 11.91 -38%

410 HK Equity SOHO CHINA 4.57 3,046 67.1 61.7 6.51 -30%

884 HK Equity CIFI HOLDINGS GR 4.12 3,981 6.6 5.3 7.11 -42%

3377 HK Equity SINO-OCEAN GROUP 4.95 4,798 8.0 6.5 8.26 -40%

817 HK Equity CHINA JINMAO HOL 3.59 4,913 9.0 7.3 6.43 -44%

3380 HK Equity LOGAN PPT 7.08 4,991 7.9 5.9 11.28 -37%

3383 HK Equity AGILE GROUP HOLD 11.58 5,815 8.5 7.2 16.56 -30%

813 HK Equity SHIMAO PROPERTY 16.14 7,009 6.5 5.5 25.24 -36%

2777 HK Equity GUANGZHOU R&F -H 17.30 7,147 5.9 4.9 25.22 -31%

960 HK Equity LONGFOR PPT 18.88 14,273 9.6 7.9 26.51 -29%

1918 HK Equity SUNAC 36.90 19,602 31.9 13.7 27.14 36%

1109 HK Equity CHINA RES LAND 22.60 20,082 8.3 7.1 36.99 -39%

2007 HK Equity COUNTRY GARDEN 12.28 33,523 13.3 9.5 13.78 -11%

688 HK Equity CHINA OVERSEAS 24.55 34,484 7.5 6.6 37.16 -34%

2202 HK Equity CHINA VANKE-H 28.15 45,046 9.9 8.2 29.19 -4%

3333 HK Equity CHINA EVERGRAND 31.35 52,870 11.7 9.8 34.71 -10%

NAV

Discount

5

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Explanation on Equity Ratings

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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 :