1

Yum Cha 飲 茶 August 03, 2017

INDICES Closing DoD%

Hang Seng Index

27,607.4

0.2

HSCEI

11,055.4

0.3

Shanghai COMP

3,285.1

(0.2)

Shenzhen COMP

1,869.3

(0.7)

Gold

1,266.7

(0.2)

BDIY

965.0

2.0

Crude Oil, WTI(US$/BBL)

49.6

0.9

Crude Oil, BRENT(US$/BBL)

52.4

1.1

HIBOR, 3-M

0.8

(0.0)

SHIBOR, 3-M

4.3

0.1

RMB/USD

6.7

0.1

DATA RELEASES DUE THIS WEEK

Aug 3 Caixin China PMI Composite

Aug 3 Caixin China PMI Services

Source: Bloomberg

TALKING POINT - THE MOMENT OF TRUTH

According to local Chinese news flow, China United Network Communications Group

[600050.CH] will announce its reform plan as soon as mid-Aug 2017. The Company has set up

two operating centers, which aim to take a further step in cooperation with Alibaba [BABA.US]

and Tencent [700.HK]. The two operating centers focus mainly on product design, event plan-

ning, and research and development. Trading in the shares of the Company has been suspend-

ed since 5 April 2017, and the Company announced on 14 July that the suspension would con-

tinue for one month from 17 Jul 2017. We therefore believe that it is highly likely that China Unit-

ed Network Communications Group will resume trading in mid-August and release details of its

SOE reform plan. Despite its relative share price outperformance vs. other telecom operators,

we believe that investors in Hong Kong may pursue China Unicom [762.HK], which is treated as

a beneficiary of the SOE reform plan. In addition, as Alibaba and Tencent may join China United

Network Communications Group’s SOE reforms, we believe the reforms will speed up the in-

vestment plan, which is positive for equipment makers such as ZTE [0763.HK] and YOFC

[6869.HK]. Apart from China Unicom, investors may chase other SOE reform-related compa-

nies, such as Shenhua [1088.HK], Air China [753.HK] and Guodian Group, and other IPPs, such

as Datang [0991.HK], as the Chinese government may speed up the SOE reform plan once the

China United Network Communications Group deal is completed.

Source: Bloomberg

Analyst: Mark Po, CFA RESEARCH NOTES

FLUOROCHEMICAL INDUSTRY - Due to impact of supply side reform and increasing envi-

ronmental protection, along with the pick-up in economic activity, shares of commodity and

cyclical names in sectors such as iron & steel, cement, glass and pipe, ferrous metals and coal

mining have performed well YTD. In general, the HK-list commodity names are up 30.6% YTD,

outperforming the HSI, HSCEI and Shanghai Composite index by 5.1%, 12.9% and 24.7%,

respectively. We believe that some investors may switch from the major commodity plays,

including coal mining, iron & steel and ferrous metals, which have been discussed for some

time, to other niche commodity types which haven’t been fully exploited by the market. In this

note, we re-visit the fluorochemical industry, which has seen a recovery YTD due to: a) a pick

up in economic activity; and b) no major capacity expansion by industry players. We share the

view that shares of HK-listed fluorochemical names, including both Dongyue [0189.HK] and

Lee & Man Chemical [0746.HK], have risen a lot YTD, so investors may wait for details of their

interim results before taking action. Based on our understanding, the market doesn’t have

strong expectations for either name, as they are out of favour and have been de-rated for a

long time. We believe that there is further upside for them, given: a) the valuation gap vs. their

A-share-listed peers, and b) increasing market activity.

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01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17

China Mobile China Unicom China Telcom Hang Seng HSCEI

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RESEARCH NOTES

STOCK CONNECT UPDATE - In today’s report, we screen the recent net buying and selling by the Southbound Stock

Connect funds. In the past month, Southbound money flows have been building positions in Healthcare stocks, and mining

stocks. In the last fortnight, we also see buying in non-bank financials, and mining plays. On the other hand, in terms of

net selling, the most affected stocks are gaming and other consumer plays, the airlines and China Life.

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COMPANY / INDUSTRY NEWS

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

INDUSTRY UPDATE – Introduction of the fluorochemical industry in China.

Cyclical names performed well YTD. Due to the impact of supply-side reform and increasing environmental protection, along with the pick-up in economic activity, shares of commodity and cyclical names in sectors such as iron & steel, cement, glass and pipe, ferrous metals and coal mining have performed well YTD. In general, the HK-list commodity names are up 30.6% YTD, outperforming the HSI, HSCEI and Shanghai Composite index by 5.1%, 12.9% and 24.7%, respectively. Sectors such as iron & steel, cement, ferrous metals and coal mining lead in share price performance. Their outperformance is due to a substantial improvement in operating results, which is a result of industry recovery. Based on news flow, it seems that near-term sentiment on cyclical names may be supported by the enforcement of environmental protection measures by the Chinese government. We believe that some investors may switch from major commodity plays, including coal mining, iron & steel and ferrous metals, which have been dis-cussed for some time, to other niche commodity types which haven’t been fully exploited by the market. In this note, we re-visit the fluorochemical industry, which has seen a recovery YTD due to: a) a pick-up in economic activity; and b) no major capacity expansion by industry players. We share the view that shares of HK-listed fluorochemical names, including both Dongyue [0189.HK] and Lee & Man Chemical [0746.HK], have risen a lot YTD, so investors may wait for details of their interim results before taking action. Based on our understanding, the market doesn’t have strong expectations for either name, as they are out of favour and have been de-rated for a long time. We believe that there is further upside for them, given: a) the valua-tion gap vs. their A-share-listed peers, and b) increasing market activity.

China is a major producer of fluorspar. China has the world’s 3rd deposits of fluorspar and is one of the major exporters. The fluorochemical indus-try grew rapidly in China before 2012, achieving a CAGR of 13% in 2006-2010 vs. low single-digit growth in the rest of the world. This strong growth was due to the government’s policy of supporting the new materials industry, such as PTFE. Due to strong growth in 2006-2010, China became one of the top four (along with the US, EU and Japan) fluorochemical producers in the world in 2012. However, due to fast expansion of industry capacity and a slowdown in economic activity, the fluorochemical industry peaked in 2011-2012. The prices of key products in the fluorochemical supply chain, including R22, R134a, CMS and PTFE, dropped a lot from their peak and remained at low level from 2011 to 2016. Thanks to industry consolidation due to environmental protection controls and a pick-up in economic activity, we have seen a recovery in the prices of fluorochemical chemicals since the beginning of 2017. On average, prices of R22, CMS and PTFE are up, 24.7% YoY, 25.4% YoY and 18.7% YoY YTD, respectively. The major industry players, including Dongyue, Zhejiang Juhua [000600.CH], Lee & Man Chemicals, and Shanghai 3-F [600636.CH], are expected to see a ma-jor recovery in operating performance in 2017, given a more favourable supply/demand situation. We have also seen a rebound in shares of A-share-listed fluorochemical names recently, which may also boost sentiment on HK-listed names, such as Dongyue and Lee & Man Chemicals.

The industry is tightly controlled by the government. Fluorspar is the key raw material in the fluorochemical industry. As a non-renewable mineral commodity, it has been named one of the 14 critical raw materials by the European Union, and is given increasing strategic importance similar to rare earth elements worldwide. Based on the available information, China holds about 110m tonnes of fluorspar reserves, which accounted for 24% of global reserves as of 2008. China is the largest producer of fluorspar, and accounted for over 50% of global production in 2008. For various reasons, the production volume of fluorspar in some other countries has been constrained. For example, in Mexico it is hard to remove the high arsenic concen-tration during production; in South Africa there is insufficient power supply for production; and in Mongolia and the US, there is a restrictive regulatory environment for the mining industry. Acid-grade fluorspar has the highest purity of calcium fluoride (CaF2) content, greater than or equal to 97%, and is used as an input for the fluorochemicals industry. Metallurgical-grade (85%-96% CaF2) and ceramic-grade (below 60% CaF2) fluorspar is used in other industries, such as steel and ceramics. In line with rare earth elements, China is increasing controls on exports of fluorspar to support the devel-opment of the fluorochemicals industry in China. The output of fluorspar has been controlled by the Chinese government to avoid over exploitation of fluorspar. Sulphuric acid is used to concentrate fluorspar into hydrogen fluoride and anhydrous hydrogen fluoride (HF/AHF), the key upstream product for the fluorochemicals industry. AHF and chloromethane are used to produce refrigerants such as R22 and R134a. However, given the ozone deplet-ing nature and global warming potential of fluorocarbons used as refrigerants, the industry has seen various restrictions over the past few decades. Refrigerants are used in refrigeration systems. They undergo phase transitions from liquid to gas to cool the working materials. Currently, there are four generations of products: a) the R11 and R12 based first-generation refrigerants, which are no longer used; b) the R22 based second-generation and R134 and R410a based third-generation refrigerants, which are the most commonly used types; and c) fourth-generation refrigerants, which are still in the early stages of commercialization, with minimal production. Based on various applications, the second-generation refrigerants are commonly used for in the manufacture of fixed-speed air conditioners; and the third-generation refrigerants are used in the production of variable-speed air condi-tioners and are also commonly used in the automobile industry. One of the major components of refrigerants is hydrofluoric acid, which is a colourless solution that is highly corrosive. Over 71% of the total hydrofluoric acid capacity is in Jiangxi, Zhejiang, Fujian and Inner Mongolia. In 2017, environ-mental inspection work has started and may exacerbate the short-term supply of hydrofluoric acid.

Going downstream to PTFE. According to the Montreal Protocol, R22 will be progressively phased out as a refrigerant by the end of 2030 and will be replaced by green refrigerants. The Chinese government has stopped granting approval for building new R22 capacity. Since 2013, the Chinese gov-ernment has been enforcing a quota system for sales of R22 as a refrigerant or ozone-depleting substance for all of domestic R22 manufacturers. Sales of R22 cannot exceed the quota obtained by the manufacturers. The R22 quota for domestic sales is based on the 2009-2010 average. It was reduced by 10% on January 1, 2015, 35% in 2020, and 67.5% in 2025; the overall R22 refrigerant quota in 2016 was 27.4m tons. Based on the plan, there will be a one-time quota reduction of 70,000 tons in 2020 and a one-time reduction of 100,000 tons in 2025, so the supply of R22 will become tighter over time. R22 is also used as a feedstock for fluoropolymers such as PTFE and HFP. Fluoropolymers are a widely used material in manufac-turing and are often used as a substitute for petrochemical-based plastics. These products are used in a wide range of applications, including automo-tive, architectural coatings, photovoltaic (for solar power), plumbing, textile laminates tubing, wire & cable, and lubricants. Most fluoropolymer products are produced in small quantities by niche producers, with the exception of Polytetrafluoroethylene (PTFE), which contributes more than 50% of the total fluoropolymers consumed. PTFE has a very low coefficient of friction and is very non-reactive with most chemicals. It is often used as a lubricant in machinery and as a coating on containers and pipes for reactive chemicals. It also has dielectric properties, making it suitable for use as an insula-tor in wires and electronic components. It also has a higher melting point and is stronger than polyethylene. Within China, given its long supply chain, the fluorochemical industry is highly fragmented. However, the refrigerants and feedstock (R22) for PTFE are dominated by several Chinese players,

Aug 03, 2017

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COMPANY / INDUSTRY NEWS

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

INDUSTRY UPDATE – Introduction of the fluorochemical industry in China.

including Dongyue, Juhua, Shanghia 3-F, Jiangsu Meilan and Zhonghao Chenguang. Based on our understanding, Dongyue had about a 27% market share of R22-based production quota in 2014. China had PTFE capacity of 114,000 tonnes in 2016, which accounted for 40% of global capacity. The utilization rate has improved from 56% in 2013 to about 74% in Jun 2017.

Dongyue [0189.HK] is engaged primarily in the manufacture and distribution of refrigerants, fluoropolymers and organic silicone. The Company is one of the largest fluorochemical producers in China, with about a 30% share of the Chinese R22 market in terms of capacity, and was the leading produc-er of fluoropolymers in 2011. Dongyue is headquartered in China’s Shandong Province and was listed on the HKEX main board in 2007. Apart from fluorochemicals, Dongyue is one of the leading producers of organic silicon in China. Organic silicon is used in aerospace, building insulation, elec-tronics and lubricants. Dongyue is also involved in the production of ion-exchange membrane chlor-alkali (used in textiles, petrochemicals and pesti-cides, and exhibits low energy consumption and low pollution). Trading in the shares of Dongyue was suspended from Apr 1, 2016 to Jun 9, 2017 due to: a) an investigation into the alleged misappropriation of funds made by certain former employees of Dongyue; and b) a delay in the publication of its 2015 and 2016 annual results. Dongyue appointed Elite Partners CPA Limited as its independent auditor. Regarding the accounting issue, Dongyue wrote off RMB1,478.2m during the year ended Dec 31, 2015 related to the potential misappropriation of funds allegation made by certain former em-ployees of the Company. Dongyue also released its 2015 and 2016 annual results (with a Qualified Opinion on the amount of receivables and cash balance). Even with the Qualified Opinion, Dongyue reported a net profit of RMB588m in 2016. Dongyue declared a final dividend of HK$0.10 per share, and based on its 2016 results, Dongyue issued a positive profit alert on Jun 13, 2017. According to the announcement, based on the prelimi-nary review of the unaudited consolidated management accounts of the Company for the five months ended May 31, 2017, Dongyue recorded a YoY increase in net profit of approximately 130% for the five months ended May 31, 2017. The reasons for the significant increase in net profit for the five months ended May 31, 2017 were mainly: a) a general improvement in market sentiment for the fluorine silicon industry and an increase in market prices for Dongyue’s major products; b) a recovery in the organic silicone material industry overall, which has led to an improvement in the Company’s organic silicone business; c) higher margins, as ASPs have increased faster than raw material prices; d) the maintenance of stable, large-volume pro-duction by leveraging the scale of the Company’s fluorine silicon production chain; and e) continuous improvement in the Company’s technical exper-tise and enhanced production efficiency through management efforts. According to market information, the ASPs of Dongyue’s key products remained strong in Jun and Jul 2017. Even after its strong share price movement after the resumption of trading, the valuation of Dongyue doesn't look exces-sive compared with its A-share-listed peers such as Zhejiang Juhua. We share the view that it will take time for the market to understand and regain confidence in Dongyue. We believe that Dongyue may continue to perform well despite the recent correction, given: a) strong fluorochemical prices, b) the narrowing valuation between Dongyue and its peers, and c) speculation of inclusion in Shenzhen-Hong Kong Connect (even though it may take some time).

Lee & Man Chemical [0746.HK] is a sister Company of Lee & Man Paper [2314.HK], which has production facilities in Jiangsu and Jiangxi. Lee & Man Chemical’s production facilities are located next to the facilities of Lee & Man Paper. The major products of Lee & Man Chemical are methylene chloride, chloroform and caustic soda (by-products of producing methylene chloride & chloroform). The unexciting operating performance of Lee & Man Chemical in last several years was mainly due to weak product prices and pre-operating expenses for building its production base in Jiangxi. The decline in net profit in 2016 was a result of a 19% YoY and 13% YoY decline in the ASPs of methylene chloride and chloroform, respectively. Howev-er, as mentioned, fluorochemical prices reported a sharp rebound, which may indicate that Lee & Man Chemical’s product prices will see a major re-bound in 2017. Lee & Man Chemical also issued a positive profit alert in late Jul 2017 that the Company's net profit in 1H 2017 is expected to increase over 100% YoY, which is mainly due to an increase in the volume and selling prices of its products. The profit margin of Lee & Man Chemical also increased YoY in 1H 2017. The first and second phase of Lee & Man Chemical’s production lines in Jiangxi have been officially put into production and have contributed profit to Lee & Man Chemical since the end of 2015. The investment period has passed, according to management, and with the increase in some chemical product prices, its chemical business is expected to resume growth in 2017. The trial production of new products will begin gradually in Q2 2017, including chlorinated polyvinyl chloride, thionyl chloride and styrene-acrylic latex surface sizing agent. These new products are likely to make positive contribution and create growth potential for the Company’s top line starting in 2H 2017. We share the view that the trading li-quidity of Lee & Man Chemical is low, which may create concerns for some investors. However, given the major shareholder’s background and track record, and the turnaround in the industry dynamics, we suggest investors put Lee & Man Chemical on their radar screen.

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Figure 1: Fluorochemical supply chain

Sources: CGIS Research

Figure 2: R22 market price

Sources: WIND, CGIS Research

Figure 3: R143a market price

Sources: WIND, CGIS Research

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Figure 4: CMS market price

Sources: WIND, CGIS Research

Figure 5: PTFE market price

Sources: WIND, CGIS Research

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Figure 6: Dongyue’s 2016 turnover breakdown

Sources: WIND, CGIS Research

Figure 7: Dongyue’s 2016 segmental profit breakdown

Sources: WIND, CGIS Research

Refrigerants23%

Polymers28%

Organic Silicone21%

Dichloromethane PVC and liquid

alkali15%

Property11%

Others2%

Refrigerants19%

Polymers23%

Organic Silicone8%

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alkali14%

Property29%

Others7%

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Figure 8: Peer Comparison

Sources: Bloomberg, CGIS Research

Sector Ticker Company PE EV/EBITDA

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

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

Glass 868 HK Xinyi Glass Holdings Ltd 7.65 3914.3 8.2 7.4 7.0 8.2 7.5 7.1 2.0 1.9 24.8 25.0 13.8 14.2 5.6 5.9 -1.0 13.1 14.4 33.9 24.5968 HK Xinyi Solar Holdings Ltd 2.6 2507.4 8.1 7.2 6.9 7.3 6.3 5.7 2.2 2.2 33.2 30.0 11.1 12.1 5.3 5.6 18.4 13.7 2.9 -8.0 8.33300 HK China Glass Holdings Ltd 0.7 164.4 n.a. n.a. n.a. n.a. n.a. n.a. 0.6 n.a. 1.1 n.a. 0.4 n.a. 0.0 n.a. 1.4 -16.5 -13.4 -33.0 -13.43606 HK Fuyao Glass Industry Group-H 27.2 8735.4 16.7 14.8 13.1 10.3 9.0 8.0 3.2 2.9 18.2 18.3 11.5 11.6 3.2 3.6 -9.2 -0.2 20.1 36.3 12.96865 HK Flat Glass Group Co Ltd-H 1.3 306.3 3.7 3.1 n.a. 1.9 1.5 n.a. 0.7 n.a. 21.9 18.7 13.2 18.7 6.3 6.7 -7.6 -22.2 -22.7 4.7 -22.7Average 9.2 8.1 9.0 6.9 6.1 6.9 1.7 2.3 19.9 23.0 10.0 14.2 4.1 5.5 0.4 -2.4 0.3 6.8 1.9

Cement 914 HK Anhui Conch Cement Co Ltd-H 29.1 19179.4 11.1 11.2 10.8 6.4 6.3 6.3 1.7 1.6 11.7 14.5 8.0 10.4 2.0 2.7 7.2 7.4 14.6 42.0 37.93323 HK China National Building Ma-H 4.8 3281.0 8.7 9.2 8.4 8.6 8.9 8.8 0.5 0.5 2.5 5.1 0.5 0.7 1.1 2.3 2.4 -4.8 2.8 32.3 26.01893 HK China National Materials - H 3.2 1480.4 8.9 7.9 6.4 5.3 5.0 4.6 0.6 0.6 3.7 6.6 0.6 1.1 1.1 2.2 24.1 23.2 57.3 70.5 79.0743 HK Asia Cement China Holdings 2.6 525.2 10.2 9.4 6.4 5.5 5.4 4.8 0.4 0.4 1.4 3.8 0.8 1.6 1.3 4.4 13.4 12.0 26.0 66.9 46.42233 HK West China Cement Ltd 1.1 783.9 11.6 9.9 8.5 4.8 4.5 4.4 0.9 0.8 0.2 7.1 0.1 4.2 0.0 2.3 -4.2 -2.6 13.0 56.9 29.91313 HK China Resources Cement 4.6 3869.7 10.3 9.8 9.5 7.2 7.2 7.1 1.1 1.1 5.0 10.7 3.5 5.7 1.9 4.1 4.5 2.3 11.5 30.2 22.9Average 10.1 9.6 8.3 6.3 6.2 6.0 0.9 0.8 4.1 8.0 2.2 3.9 1.2 3.0 7.9 6.2 20.9 49.8 40.3

Pipe 2128 HK China Lesso Group Holdings L 5.4 2159.2 6.7 6.0 5.5 4.5 4.1 3.5 1.3 1.1 18.3 18.1 9.9 10.4 2.8 3.2 -9.3 -12.7 -0.4 23.9 8.2Average 6.7 6.0 5.5 4.5 4.1 3.5 1.3 1.1 18.3 18.1 9.9 10.4 2.8 3.2 -9.3 -12.7 -0.4 23.9 8.2

Iron & steel 347 HK Angang Steel Co Ltd-H 6.4 6803.8 14.9 12.6 11.4 8.7 8.1 8.0 0.9 0.8 3.7 5.8 3.6 3.5 n.a. 1.9 9.5 23.4 7.2 62.1 38.2323 HK Maanshan Iron & Steel-H 3.78 5,055 10.1 10.4 9.9 7.8 7.7 7.4 1.2 1.1 6.4 11.1 3.8 3.6 n.a. 1.1 21.2 44.8 32.2 111.2 67.31053 HK Chongqing Iron & Steel Co-H 1.51 1350.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -11.4 n.a. 0.0 n.a. 31.3 22.8 -25.2 -9.0 -33.21266 HK Xiwang Special Steel Co Ltd 1.37 351.7 4.8 4.0 2.9 5.9 4.8 4.3 0.6 0.5 8.3 11.7 2.8 4.2 0.0 n.a. 23.4 23.4 13.2 104.5 61.2581 HK China Oriental Group Co Ltd 4.16 1874.1 3.0 4.0 4.5 2.4 3.1 3.3 1.1 0.9 8.1 n.a. 3.3 n.a. 3.7 8.1 43.0 90.1 140.5 275.3 275.31029 HK Irc Ltd 0.33 294.9 n.a. n.a. n.a. n.a. n.a. n.a. 2.2 n.a. -14.4 n.a. -4.3 n.a. 0.0 n.a. 30.5 6.6 -27.8 91.2 0.0893 HK China Vanadium Titano - Magn 0.28 77.8 n.a. n.a. n.a. n.a. n.a. n.a. 0.4 n.a. -45.4 n.a. -21.1 n.a. 0.0 n.a. 26.7 7.7 -27.3 5.7 -12.5Average 8.2 7.7 7.2 6.2 5.9 5.8 1.1 0.8 -5.5 9.5 -3.3 3.8 0.7 3.7 26.5 31.3 16.1 91.5 56.6

Ferrous metals 2600 HK Aluminum Corp Of China Ltd-H 5.14 13061.8 25.5 19.1 12.5 11.1 10.0 9.1 1.7 1.6 1.0 6.5 0.2 2.8 0.0 0.2 28.5 34.9 23.3 96.9 60.6486 HK United Co Rusal Plc 4.50 8746.8 7.0 6.1 6.3 8.3 7.7 8.8 2.3 2.0 50.3 801.5 8.8 8.7 2.9 2.8 22.7 26.8 15.1 84.6 51.73933 HK The United Laboratories Inte 4.90 1019.9 18.2 14.9 12.1 7.4 6.8 6.9 1.3 1.3 -4.9 6.5 -1.8 2.5 0.0 n.a. -4.9 0.2 3.4 62.8 -7.2Average 16.9 13.4 10.3 8.9 8.2 8.3 1.8 1.6 15.5 271.5 2.4 4.6 1.0 1.5 15.5 20.6 13.9 81.5 35.0

Coal mining 1088 HK China Shenhua Energy Co-H 20.40 51909.9 9.8 10.7 10.7 5.0 5.2 5.0 1.1 1.1 8.2 11.1 5.7 7.2 2.6 4.2 17.4 31.8 45.4 58.2 64.31898 HK China Coal Energy Co-H 3.97 10664.0 10.5 12.2 11.5 9.2 9.5 9.7 0.5 0.5 2.0 5.2 0.7 2.4 1.1 2.8 5.0 6.4 -5.3 -4.8 7.91171 HK Yanzhou Coal Mining Co-H 7.78 7980.6 7.2 9.3 8.0 7.7 10.1 9.4 0.9 0.8 4.5 11.2 1.4 3.1 1.8 4.2 11.1 14.6 27.8 58.8 47.1639 HK Shougang Fushan Resources Gr 1.79 1214.2 13.6 14.6 14.2 5.3 5.6 5.6 0.7 0.6 0.7 4.4 0.6 3.9 3.4 2.8 23.4 26.1 19.3 41.0 17.81393 HK Hidili Industry Intl Develop 0.32 82.4 n.a. n.a. n.a. n.a. n.a. n.a. 0.2 n.a. -36.0 n.a. -8.4 n.a. 0.0 n.a. 3.3 -12.5 61.5 61.5 61.5Average 10.3 11.7 11.1 6.8 7.6 7.4 0.7 0.8 -4.1 8.0 0.0 4.2 1.8 3.5 12.1 13.3 29.7 42.9 39.7

Paper 2314 HK Lee & Man Paper Manufacturin 7.95 4593.8 8.5 8.4 8.2 7.6 7.8 7.7 2.2 1.9 16.8 23.1 8.1 10.1 2.8 4.0 9.7 28.6 11.7 23.6 32.12689 HK Nine Dragons Paper Holdings 11.18 6685.7 10.9 9.8 9.2 7.8 7.1 6.7 1.6 1.5 4.4 14.7 4.2 6.2 1.4 2.6 7.5 31.1 19.2 74.4 59.01812 HK Shandong Chenming Paper-H 11.74 3956.4 n.a. n.a. n.a. n.a. n.a. n.a. 1.3 n.a. 11.2 n.a. 2.6 n.a. 5.9 n.a. 18.8 30.6 29.3 76.5 46.92002 HK China Sunshine Paper Hldgs 2.16 221.8 n.a. n.a. n.a. n.a. n.a. n.a. 0.9 n.a. 7.9 n.a. 1.6 n.a. 3.3 n.a. 24.1 45.9 41.2 89.5 55.4Average 9.7 9.1 8.7 7.7 7.4 7.2 1.5 1.7 10.1 18.9 4.1 8.1 3.3 3.3 15.0 34.1 25.3 66.0 48.4

Oil & gas 857 HK Petrochina Co Ltd-H 5.02 209646.0 25.7 18.1 13.0 6.7 6.3 5.9 0.7 0.7 0.7 2.5 1.1 n.a. 1.4 1.6 5.0 -7.5 -17.2 -5.0 -12.8386 HK China Petroleum & Chemical-H 5.95 106712.7 12.0 10.9 9.8 4.7 4.4 4.2 0.9 0.8 6.7 7.4 3.9 n.a. n.a. 4.9 -2.3 -4.6 -3.9 6.4 8.2883 HK Cnooc Ltd 8.75 49980.2 15.8 11.9 9.2 3.9 3.6 3.3 0.9 0.9 0.2 5.7 0.1 n.a. 4.1 4.2 2.3 -2.5 -9.5 -5.5 -9.8338 HK Sinopec Shanghai Petrochem-H 4.49 9495.8 8.5 8.8 8.6 7.6 7.6 7.8 1.7 1.5 26.8 19.1 19.2 n.a. 6.5 4.8 7.4 2.3 -7.6 18.2 6.9Average 15.5 12.4 10.2 5.7 5.5 5.3 1.0 1.0 8.6 8.7 6.1 n.a. 4.0 3.9 3.1 -3.1 -9.5 3.5 -1.9

Fertilizer 3983 HK China Bluechemical Ltd - H 2.23 1315.2 13.8 9.6 8.2 3.6 2.9 2.7 0.7 0.6 -1.6 4.5 -1.1 2.7 2.6 3.3 20.5 4.9 -17.4 44.4 6.81866 HK China Xlx Fertiliser Ltd 2.08 266.1 5.8 4.7 4.7 6.3 5.6 5.5 0.6 0.7 1.0 n.a. 0.3 n.a. n.a. 5.6 0.5 4.5 -23.0 -6.7 -15.8Average 9.8 7.2 6.5 5.0 4.2 4.1 0.6 0.7 -0.3 4.5 -0.4 2.7 2.6 4.4 10.5 4.7 -20.2 18.9 -4.5

Chemcial 148 HK Kingboard Chemical Holdings 34.45 4578.8 7.5 6.3 6.5 5.4 4.3 4.7 1.0 0.9 13.8 13.5 6.7 6.7 3.8 3.3 10.8 19.3 24.8 103.9 48.2Average 7.5 6.3 6.5 5.4 4.3 4.7 1.0 0.9 13.8 13.5 6.7 6.7 3.8 3.3 10.8 19.3 24.8 103.9 48.2Grand average 10.7 9.6 8.7 6.5 6.2 6.1 1.2 1.1 6.3 38.1 2.9 6.5 2.3 3.6 11.0 12.8 12.2 48.7 30.6

Florochemical 189 HK Dongyue Group 3.75 1013.1 5.1 6.6 6.6 n.a. n.a. n.a. 1.3 n.a. 11.5 20.0 5.3 11.0 2.8 n.a. -0.3 173.7 173.7 173.7 173.7746 HK Lee & Man Chemical Company L 4.47 471.8 n.a. n.a. n.a. n.a. n.a. n.a. 1.6 n.a. 9.2 n.a. 4.6 n.a. 2.0 n.a. 10.4 17.6 63.1 90.2 84.0600160 Ch Zhejiang Juhua Co-A 12.74 4002.5 26.0 21.3 13.8 14.4 12.3 n.a. 2.5 2.5 1.7 10.2 3.4 8.5 n.a. 3.5 5.9 -10.2 12.5 24.3 20.4600636 CH Shanghai 3F New Materials-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -11.7 3.5 -6.3 2.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a.002407 CH Do-Fluoride Chemicals Co-A 26.99 2522.1 31.6 34.3 46.5 22.5 24.9 23.6 6.2 5.8 22.1 16.4 9.6 n.a. n.a. 1.2 22.7 18.4 1.2 -28.7 -1.1002326 CH Zhejiang Yongtai Tech-A 15.10 1847.5 40.8 35.1 n.a. 21.7 19.0 n.a. 4.6 5.1 14.0 13.4 8.9 6.4 n.a. 0.7 8.9 4.9 -0.2 -14.6 -7.4Average 25.9 24.3 22.3 19.5 18.7 23.6 3.2 4.5 7.8 12.7 4.2 7.0 2.4 1.8 9.5 40.9 50.1 49.0 53.9

Overseas chemicals DD US Du Pont (E.I.) De Nemours 82.66 71732.8 21.2 19.8 18.7 13.6 12.8 12.2 5.9 6.4 25.6 32.8 5.2 n.a. 1.8 1.8 2.4 3.4 8.5 20.3 12.6HON US Honeywell International Inc 137.01 104205.6 19.3 17.6 16.1 12.9 11.9 11.2 5.1 5.0 25.5 26.5 9.3 n.a. 1.9 2.0 2.8 4.4 16.1 19.4 18.36367 JP Daikin Industries Ltd 11725.00 31026.1 19.9 18.0 16.7 11.2 10.3 9.5 3.1 2.8 13.4 14.8 6.8 n.a. n.a. 1.2 2.2 9.1 5.0 33.5 9.25201 JP Asahi Glass Co Ltd 4635.00 9840.7 15.7 14.9 14.1 6.3 6.1 5.9 1.0 1.0 4.3 6.0 3.0 n.a. n.a. 2.1 -2.0 -6.6 10.9 52.0 16.53407 JP Asahi Kasei Corp 1286.50 16290.2 15.4 14.6 13.6 7.4 7.1 6.7 1.6 1.5 8.6 10.0 5.1 n.a. n.a. 1.9 6.5 19.8 23.3 59.8 26.2SOLB BB Solvay Sa 123.20 15442.8 15.2 14.2 13.0 7.2 6.9 6.6 1.3 1.3 7.3 9.6 3.5 n.a. n.a. 2.8 4.9 4.7 12.4 36.2 10.6GFLC IN Gujarat Fluorochemicals Ltd 789.00 1359.0 n.a. n.a. n.a. n.a. n.a. n.a. 1.9 n.a. 9.0 n.a. 0.8 n.a. 0.4 0.6 6.8 2.4 63.8 25.6 69.6Average 17.8 16.5 15.4 9.8 9.2 8.7 2.8 3.0 13.4 16.6 4.8 n.a. 1.4 1.8 3.4 5.3 20.0 35.2 23.3HSI Index Hang Seng Index 7.2 11.8 19.1 24.8 25.5HSCEI Index Hang Seng China Ent Indx 6.7 8.7 14.0 21.1 17.7SHCOMP Index Shanghai Se Composite 2.9 4.5 4.0 10.6 5.8MXCN Index Msci China 8.8 15.9 27.3 36.5 35.4

P/B Share Price PerformanceROE ROA Div yield

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Strategy Notes 3rd August 2017

Stock Connect – Monthly Review

Analysts: Johnson Cheung (johnsoncheung@chinastock.com.hk: Tel 3698-6725)

In today’s report, we screen the recent net buying and selling by the Southbound Stock Connect funds. In the past month, Southbound money flows have been building positions in Healthcare stocks, and mining stocks. In the last fortnight, we also see buying in non-bank financials, and mining plays. On the other hand, in terms of net selling, the most affected stocks are gaming and other consumer plays, the airlines and China Life. 1) Top Stock Connect Net Buying as a % of Outstanding Shares Figure 1: Top 20 Net Accumulaton in Stock Connect positions since June 30

th 2017

Bbg Net purchase as a % of Market Cap Since Current

Rank Name Code 14-Jul 30-Jun Ownership (%)

1 TECH PRO TECHNOLOGY DEVELOPM 3823 HK 1.4 7.4 31.82 CHINA VANKE CO LTD-H 2202 HK 0.5 2.6 5.43 SHANGHAI DAZHONG PUBLIC UT-H 1635 HK 1.6 2.4 7.94 DONGJIANG ENVIRONMENTAL-H 895 HK 0.7 1.8 10.25 SHANDONG XINHUA PHARMACEUT-H 719 HK 0.4 1.7 23.26 GUANGZHOU AUTOMOBILE GROUP-H 2238 HK 0.5 1.3 27.07 SHANDONG CHENMING PAPER-H 1812 HK 0.1 1.3 10.18 SHANGHAI FOSUN PHARMACEUTI-H 2196 HK 1.1 1.3 12.99 GUANGZHOU BAIYUNSHAN PHARM-H 874 HK -1.1 1.3 29.210 MAANSHAN IRON & STEEL-H 323 HK -0.4 1.2 5.511 NEW CHINA LIFE INSURANCE C-H 1336 HK 2.9 1.2 28.712 CHINA PACIFIC INSURANCE GR-H 2601 HK -0.1 1.2 6.713 HEALTH AND HAPPINESS H&H INT 1112 HK 0.6 1.0 10.614 VISION FAME INTERNATIONAL HO 1315 HK 0.6 1.0 4.815 ZIJIN MINING GROUP CO LTD-H 2899 HK 1.6 1.0 20.716 ZOOMLION HEAVY INDUSTRY - H 1157 HK 0.2 0.9 3.617 SMI HOLDINGS GROUP LTD 198 HK 1.0 0.9 3.518 LUYE PHARMA GROUP LTD 2186 HK 0.5 0.9 8.319 HUATAI SECURITIES CO LTD-H 6886 HK 0.2 0.9 4.720 JIANGXI COPPER CO LTD-H 358 HK 0.3 0.8 4.5 Sources: Bloomberg, CGIS,

Figure 2: Top 20 Net Accumulation in Stock Connect positions since July 14

th 2017

Bbg Net purchase as a % of Market Cap Since Current

Rank Name Code 14-Jul 30-Jun Ownership (%)

1 DFZQ-H 3958 HK 3.1 0.5 11.22 NEW CHINA LIFE INSURANCE C-H 1336 HK 2.9 1.2 28.73 FUTURE LAND DEVELOPMENT HOLD 1030 HK 2.8 0.3 7.04 ZHEJIANG SHIBAO CO LTD-H 1057 HK 2.4 -2.0 3.95 ALUMINUM CORP OF CHINA LTD-H 2600 HK 1.6 0.1 4.16 ZIJIN MINING GROUP CO LTD-H 2899 HK 1.6 1.0 20.77 SHANGHAI DAZHONG PUBLIC UT-H 1635 HK 1.6 2.4 7.98 TECH PRO TECHNOLOGY DEVELOPM 3823 HK 1.4 30.5 31.89 LIVZON PHARMACEUTICAL GROU-H 1513 HK 1.3 -1.0 6.010 CHINA FINANCIAL INTERNATIONA 721 HK 1.3 0.0 4.511 XINJIANG GOLDWIND SCI&TEC-H 2208 HK 1.3 0.7 11.012 SINOPEC OILFIELD SERVICE -H 1033 HK 1.2 0.3 15.713 FULLSHARE HOLDINGS LTD 607 HK 1.2 0.3 17.814 HISENSE KELON ELEC HLD-H 921 HK 1.2 0.0 4.115 SHANGHAI FOSUN PHARMACEUTI-H 2196 HK 1.1 1.3 12.916 HUADIAN POWER INTL CORP-H 1071 HK 1.0 0.2 19.017 CHINA GALAXY SECURITIES CO-H 6881 HK 1.0 0.0 4.818 GUANGSHEN RAILWAY CO LTD-H 525 HK 1.0 0.5 11.619 SMI HOLDINGS GROUP LTD 198 HK 1.0 0.9 3.520 COLOUR LIFE SERVICES GROUP 1778 HK 0.9 0.7 3.5 Sources: Bloomberg, CGIS,

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2) Top Stock Connect Net Selling as a % of Outstanding Shares Figure 3: Top 20 Net Reduction in Stock Connect positions since June 30

th 2017

Bbg Net Selling as a % of Market Cap Since Current

Rank Name Code 14-Jul 30-Jun Ownership (%)

1 BEIJING JINGCHENG MACHINER-H 187 HK -0.2 -5.5 21.92 ZHEJIANG SHIBAO CO LTD-H 1057 HK 2.4 -2.0 3.93 CAR INC 699 HK 0.1 -1.0 5.34 LIVZON PHARMACEUTICAL GROU-H 1513 HK 1.3 -1.0 6.05 CHONGQING IRON & STEEL CO-H 1053 HK -1.3 -0.8 15.86 CHINA SOUTHERN AIRLINES CO-H 1055 HK -0.8 -0.8 18.57 SKYWORTH DIGITAL HLDGS LTD 751 HK -1.2 -0.8 3.98 TONGDA GROUP HOLDINGS LTD 698 HK 0.1 -0.7 1.59 MELCO INTERNATIONAL DEVELOP. 200 HK -0.8 -0.6 1.5

10 BBMG CORP-H 2009 HK -0.1 -0.5 11.711 LUK FOOK HOLDINGS INTL LTD 590 HK -0.2 -0.5 0.312 COSCO SHIPPING DEVELOPMENT-H 2866 HK 0.0 -0.4 12.613 CIMC ENRIC HOLDINGS LTD 3899 HK -0.1 -0.4 5.314 GEELY AUTOMOBILE HOLDINGS LT 175 HK -0.1 -0.3 9.715 COSCO SHIPPING ENERGY TRAN-H 1138 HK 0.3 -0.3 8.616 CHINA GREENLAND BROAD GREENS 1253 HK -0.1 -0.3 0.517 FUYAO GLASS INDUSTRY GROUP-H 3606 HK 0.0 -0.3 2.818 VITASOY INTL HOLDINGS LTD 345 HK 0.0 -0.3 0.319 DIGITAL CHINA HOLDINGS LTD 861 HK -0.6 -0.3 39.720 CHINA POWER INTERNATIONAL 2380 HK 0.6 -0.2 5.4

Sources: Bloomberg, CGIS,

Figure 4: Top 20 Net Reduction in Stock Connect positions since July 14

th 2017

Bbg Net Selling as a % of Market Cap Since Current

Rank Name Code 14-Jul 30-Jun Ownership (%)

1 DONGFANG ELECTRIC CORP LTD-H 1072 HK -1.4 -0.1 22.72 CHONGQING IRON & STEEL CO-H 1053 HK -1.3 -0.8 15.83 SKYWORTH DIGITAL HLDGS LTD 751 HK -1.2 -0.8 3.94 GUANGZHOU BAIYUNSHAN PHARM-H 874 HK -1.1 1.3 29.25 MELCO INTERNATIONAL DEVELOP. 200 HK -0.8 -0.6 1.56 CHINA SOUTHERN AIRLINES CO-H 1055 HK -0.8 -0.8 18.57 DIGITAL CHINA HOLDINGS LTD 861 HK -0.6 -0.3 39.78 ZHENGZHOU COAL MINING MACH-H 564 HK -0.6 0.0 18.49 CHINA EVERGRANDE GROUP 3333 HK -0.6 0.0 2.2

10 ZTE CORP-H 763 HK -0.6 0.5 8.211 CHINA SCE PROPERTY HOLDINGS 1966 HK -0.6 0.3 0.912 AIR CHINA LTD-H 753 HK -0.6 -0.2 5.713 AGRICULTURAL BANK OF CHINA-H 1288 HK -0.5 0.0 5.114 CHINA ZHENGTONG AUTO SERVICE 1728 HK -0.5 0.3 4.115 METALLURGICAL CORP OF CHIN-H 1618 HK -0.5 0.1 10.316 COGOBUY GROUP 400 HK -0.5 0.5 2.617 CHINA LIFE INSURANCE CO-H 2628 HK -0.4 -0.2 3.918 SHANDONG MOLONG PETROLEUM-H 568 HK -0.4 -0.1 4.419 MAANSHAN IRON & STEEL-H 323 HK -0.4 1.2 5.520 POLY PROPERTY GROUP CO LTD 119 HK -0.4 0.3 9.8

Sources: Bloomberg, CGIS,

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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 :