HK Market Quarterly Outlook and Sector Update

股

票

Research 研究

Equity Jake Wang 汪昌江 Jack Wu 吴狄 Andy Huang 黄凯鸿 (86755) 2397 6675 (86755) 2397 6718 (86755) 2397 6702 [email protected] [email protected] [email protected]

15 October 2018 HK Market Quarterly Outlook and Sector Update

策 Table of Contents

略 Summary ...... 2

Report

报 Quarterly Market Data ...... 3 告 Quarterly Market Review ...... 6

Strategy Market Outlook ...... 11 Latest China, US and Europe Macroeconomic Data ...... 13 Sectors Quarterly Update ...... 15 Automobiles & Components Sector ...... 16 Aviation Sector ...... 19 Banking Sector ...... 22

Cement and Construction Materials Sector ...... 25

证 Clean Energy Sector - Natural Gas ...... 28 券 Clean Energy Sector - Solar ...... 31

研 Clea n Energy Sector - Wind & Others ...... 34

Consumer告 Sector - Apparel ...... 37 究

Consumer报 Sector - Food & Beverage...... 40

报

告 Consumer究 Sector - Hotels ...... 43

EquityResearch Report

Consumer研 Sector - Household Products ...... 46

Consumer Sector - Retail ...... 49

券

Electricity Sector ...... 52

证 Electric Equipment Sector ...... 53 Environmental Protection Sector ...... 56 Gaming Sector ...... 59

Health Care Sector ...... 62 香 Infrastructure Sector ...... 65 港 Insurance Sector ...... 68 市 Internet Sector ...... 71 场 Internet - E-commerce Sector ...... 72 季 Nonferrous Metals ...... 75 度 Petrochemicals Sector ...... 76

展 Port Sector ...... 79 望 Precious Metals Sector ...... 82 及 Property Sector ...... 83 行 Shipping and Logistics Sector ...... 88 业 Telecom Equipment Sector ...... 89 更

新 HK Market HK and Update Outlook Sector Quarterly

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Summary  As at 12 October, 2018, the Hang Seng Index (HSI) fell by 9.4% QoQ (13.8% YTD) to 25,801, and the Hang Seng China Enterprises Index (HSCEI) decreased 4.2% QoQ (12.0% YTD) to 10,299. 3Q18 Quarterly market news: 1) Domestic economic indicators remained mostly stable but economic downward pressure increased. 2) The U.S. Federal Reserve (the "Fed") raised interest rates on 3 September; the European Central Bank released its forward guidance after the September monetary policy meeting. 4) Domestic tax reform policy benefits will take effect. 5) Domestic infrastructure construction is speeding up to offset downward pressure on the economy. 6) Sino-U.S. trade friction continued to escalate. 7) Hitting a new record low; the RMB exchange rate faced a challenging last quarter. 8) Hong Kong banks announced simultaneous increase of interet rates to the U.S. Federal Reserve and revised up Hong Kong dollar prime rates. 9) Exchange rate fluctuations in emerging markets has brought new risks.

 We expect that the Chinese economy will be basically stable. In the short term, there could be no further significant depreciation for the RMB exchange rate, but downside pressure still exists as there has been no clear guidance from thegovernment. The U.S. Federal Reserve will continue to raise interest rates steadily, supported by strong US economic fundamentals; the European Central Bank will continue to support inflation in the short term.

 The domestic economy is expected to stabilize from the gradual growth trend in capital investment. The alleviation of tax burden on enterprises and the general public brought by fiscal and taxation reform is likely to stimulate the potential spending power of the whole society. Recent RRR cuts by the PBOC may help to increase market liquidity and improve company operations, yet we expect the liquidity of the market to remain at neutral levels. The increase in Hong Kong dollar prime rates may alleviate capital outflow incurred by the increase in the U.S. federal funds rate. Meanwhile, with the psychological impact together with low investment sentiment, Sino-U.S. trade friction remained as a persistent uncertainty factor. The surge in U.S. treasury yields and potential depreciation pressure of RMB/USD exchange rate may have negative impacts to the market. We think that the Hong Kong stock market may continue to fluctuate in the 4th quarter, while short-term investment opportunities may exist for some sectors. Currently we are bullish on clean energy (wind & solar), consumer (apparel, hotel), infrastructure and petrochemicals sectors.

Top picks in sectors under GTJA International coverage Sectors Company name Code Rating 6 to 18m TP (HKD) Remarks Automobiles&Components Geely Auto 00175 HK Buy 22.80 Maintained Aviation Air China 00753 HK Buy 9.00 Maintained Banking BOC Hong Kong 02388 HK Buy 47.52 Maintained Cement and Construction Materials Chinares Cement 01313 HK Buy 11.00 Newly Added Clean energy - Natural Gas China Resources Gas 01193HK Buy 43.74 Maintained Clean energy - Solar Singyes Solar 00750 HK Buy 3.00 Maintained Clean energy - Wind & Others China Longyuan 00916 HK Buy 8.30 Maintained Consumer - Apparel Anta Sports 02020 HK Buy 48.50 Maintained Consumer - Food & Beverage Mengniu Dairy 02319 HK Accumulate 28.00 Maintained Consumer - Hotels Huazhu Group HTHT US Buy US$42.00 Maintained Consumer - Household Products Hengan Intl 01044 HK Buy 83.00 Maintained Consumer - Retailing Haier Electronics Group 01169 HK Buy 30.57 Maintained Electric Equipment SH Electric 02727 HK Buy 3.63 Maintained Environmental Protection BJ Ent Water 00371 HK Buy 5.20 Maintained Gaming MGM China 02282HK Accumulate 20.00 Maintained Health care Sinopharm 01099 HK Accumulate 43.46 Maintained Infrastructure China Railway 00390 HK Buy 8.90 Maintained Insurance China Taiping 00966 HK Buy 32.60 Maintained Internet Alibaba Group BABA US Buy US$235.00 Maintained Petrochemicals CNOOC 00883 HK Buy 16.50 Maintained Ports COSCO Shipping Ports 01199 HK Accumulate 8.85 Maintained Property CR Land 01109 HK Accumulate 28.08 Maintained Property Hang Lung Properties 00101 HK Buy 19.60 Maintained Source: Guotai Junan International.

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Quarterly Market Data

Indicator 12 October 2018 chg % QoQ chg % YoY Remarks

HSI 25,801.49 (9.4) (9.3)

HSI forward PE 10.69 (6.1) (17.1) below the avg. PE of 12.78 from 2007 to 2017

HSI forward PB 1.19 (4.9) (11.0) below the avg. PB of 1.57 from 2007 to 2017

HSCEI 10,299.09 (4.2) (10.4)

HSCEI forward PE 7.78 3.3 (11.0) below the avg. PE of 10.59 from 2007 to 2017

HSCEI forward PB 0.95 4.1 (4.9) below the avg. PB of 1.59 from 2007 to 2017

Average daily turnover (ADT) HK$91,609.58 mn (13.7) (1.7)

AH Premium Index 122.67 6.2 (4.0) above the avg. of 120.84 since the beginning of 2007

Source: Bloomberg, Guotai Junan International.

Major Stock Market Performance Stock Index 2018YTD 2017 2016 2015 2014 2013 2012 2011

NASDAQ COMPOSITE INDEX 8.60 28.24 7.50 5.73 13.40 38.32 15.91 (1.80)

BRAZIL IBOVESPA INDEX 8.53 26.86 38.93 (13.31) (2.91) (15.50) 7.40 (18.11)

S&P/NZX 50 Index Gross 5.30 22.04 8.81 13.58 17.55 16.49 24.18 (1.04)

S&P 500 INDEX 3.50 19.42 9.54 (0.73) 11.39 29.60 13.40 (0.00)

DOW JONES INDUS. AVG 2.51 25.08 13.42 (2.23) 7.52 26.50 7.26 5.53

S&P BSE SENSEX INDEX 1.99 27.91 1.95 (5.03) 29.89 8.98 25.70 (24.64)

NIKKEI 225 (0.31) 19.10 0.42 9.07 7.12 56.72 22.94 (17.34)

S&P/ASX 200 INDEX (2.79) 7.05 6.99 (2.13) 1.10 15.13 14.60 (14.51)

FTSE Bursa Malaysia KLCI (3.68) 9.45 (3.00) (3.90) (5.66) 10.54 10.34 0.78

MEXICO IPC INDEX (3.87) 8.13 6.20 (0.39) 0.98 (2.24) 17.88 (3.82)

CAC 40 INDEX (4.08) 9.26 4.86 8.53 (0.54) 17.99 15.23 (16.95)

S&P/TSX COMPOSITE INDEX (4.90) 6.03 17.51 (11.09) 7.42 9.55 4.00 (11.07)

TAIWAN TAIEX INDEX (5.61) 15.01 10.98 (10.41) 8.08 11.85 8.87 (21.18)

FTSE 100 INDEX (9.00) 7.63 14.43 (4.93) (2.71) 14.43 5.84 (5.55)

DAX INDEX (10.79) 12.51 6.87 9.56 2.65 25.48 29.06 (14.69)

IBEX 35 INDEX (11.37) 7.40 (2.01) (7.15) 3.66 21.42 (4.66) (13.11)

FTSE MIB INDEX (11.89) 13.61 (10.20) 12.66 0.23 16.56 7.84 (25.20)

HANG SENG CHINA ENT INDX (12.04) 24.64 (2.75) (19.39) 10.80 (5.42) 15.09 (21.71)

KOSPI INDEX (12.39) 21.76 3.32 2.39 (4.76) 0.72 9.38 (10.98)

HANG SENG INDEX (13.76) 35.99 0.39 (7.16) 1.28 2.87 22.91 (19.97)

PSEi - PHILIPPINE SE IDX (18.15) 25.11 (1.60) (3.85) 22.76 1.33 32.95 4.07

SHANGHAI SE COMPOSITE (21.17) 6.56 (12.31) 9.41 52.87 (6.75) 3.17 (21.68)

Athex Composite Share Pr (21.69) 24.66 1.95 (23.58) (28.94) 28.06 33.43 (51.88)

ChiNext Price Index (27.63) (10.67) (27.71) 84.41 12.83 82.73 (2.14) (35.88)

SZSE COMPONENT INDEX (31.54) 8.48 (19.64) 14.98 35.62 (10.91) 2.22 (28.41) Source: Bloomberg, Guotai Junan International. Note: Prices are as at Oct. 12, 2018 for 2018 YTD data.

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HSI & HSCEI monthly performance Monthly HSI average turnover

35,000 HSI(L) 30.0% 250,000 monthly avg turnover (HK$ mn) 140.0% HSCEI(L) HSI increase % mom turnover increase % mom 120.0% 30,000 HSCEI increase % mom 20.0% 200,000 100.0%

25,000 80.0% 10.0% 150,000 60.0% 20,000 0.0% 40.0% 15,000 100,000 20.0% -10.0% 10,000 0.0% 50,000 -20.0% -20.0% 5,000 -40.0%

0 -30.0% 0 -60.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: HKEX, Guotai Junan International. Source: HKEX, Guotai Junan International.

HSI & HSCEI quarterly performance Quarterly daily turnover

12,000 HK$ mn 29,800 HSI (Left) HSCEI 160,000 daily avg turnover (HK$ mn)

140,000 29,000 11,500 120,000 28,200 100,000

27,400 11,000 80,000

60,000 26,600 10,500 40,000 25,800 20,000

25,000 10,000 0 1-Jul 1-Aug 1-Sep 1-Oct 1-Jul 15-Jul 29-Jul 12-Aug 26-Aug 9-Sep 23-Sep 7-Oct

Source: HKEX, Guotai Junan International. Source: HKEX, Guotai Junan International.

Performance of sectors under GTJA coverage relative to Performance of sectors under GTJA coverage relative to HSI over the past quarter HSI over the past 6 months

Infrastructure 29.0 Conglomerate 32.1 Telecommunication Services 21.1 Infrastructure 30.3 Manufacturing 19.5 Petrochemicals 25.0 Conglomerate 17.8 Telecommunication Services 24.6 Petrochemicals 15.2 Manufacturing 21.9 Precious Metals 12.4 Electricity 21.5 Ports 9.8 Clean energy - Natural Gas 18.8 Electricity 8.3 Cement and Construction Materials 15.4 Cement and Construction Materials 7.7 Ports 14.1 Shipping and Logistics 7.6 Insurance 9.7 Insurance 5.7 Shipping and Logistics 8.4 Clean energy - Natural Gas 4.7 Health Care 4.0 Banking 3.6 Consumer -- Foods & Beverage 3.4 Machinery 3.5 Consumer -- Retailing 3.1 Health Care 1.2 Precious Metals 1.7 Consumer -- Household Products -0.4 Banking 1.4 Clean energy - Solar -0.7 Consumer -- Household Products 1.3 Property -0.9 Clean energy - Wind & Others -0.3 Consumer -- Retailing -1.1 Machinery -3.1 Electric Equipment -1.4 Property -4.8 Automobiles & Components -1.7 Environmental Protection -5.5 Aviation -3.3 Consumer -- Apparel -7.3 Clean energy - Wind & Others -4.2 Automobiles & Components -7.5 Others -4.3 Electric Equipment -7.8 Consumer -- Foods & Beverage -7.2 Internet -11.8 Consumer -- Apparel -10.1 Gaming -12.5 Nonferrous metals -10.9 Aviation -13.4 Environmental Protection -11.5 Others -15.7 Gaming -11.9 Telecommunication Equipment -19.1 Telecommunication Equipment -13.9 Clean energy - Solar -21.1 Internet -14.6 Nonferrous metals -21.9 Consumer -- Hotels -21.1 Consumer -- Hotels -27.6 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International. Note: Based on GTJA International sector names. Note: Based on GTJA International sector names.

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Sector performance on HKEX Main Board relative to HSI Sector performance on HKEX Main Board relative to HSI over the past quarter over the past 6 months

Health Care Facilities & Svcs 54.6 Telecom 20.8 Medical Equipment & Devices 26.0 Engineering & Construction Svcs 20.1 Telecom 24.5 Oil, Gas & Coal 15.1 Oil, Gas & Coal 24.4 Transportation Equipment 14.7 Commercial Services 23.4 Iron & Steel 13.6 Engineering & Construction Svcs 21.7 Medical Equipment & Devices 11.8 Transportation Equipment 20.6 Home & Office Products 9.0 Iron & Steel 20.2 Construction Materials 8.8 Construction Materials 14.8 Aerospace & Defense 8.5 Home & Office Products 14.2 Health Care Facilities & Svcs 7.9 Utilities 13.8 Media 7.1 Specialty Finance 11.0 Asset Management 6.9 Retail - Consumer Staples 10.0 Insurance 6.8 Media 7.9 Retail - Consumer Staples 6.3 Apparel & Textile Products 7.0 Specialty Finance 5.9 Transportation & Logistics 5.1 Banking 5.3 Insurance 4.7 Commercial Services 4.1 Electrical Equipment 4.1 Transportation & Logistics 2.9 Chemicals 3.6 Utilities 1.6 Renewable Energy 3.3 Machinery 1.0 Machinery 3.2 Renewable Energy 1.0 Banking 3.2 Electrical Equipment 0.9 Consumer Products 2.8 Automotive -0.3 Consumer Services 2.2 Apparel & Textile Products -0.8 Distributors - Consumer Staples 2.2 Waste & Environ Svcs & Equip -0.9 Waste & Environ Svcs & Equip 1.5 Containers & Packaging -1.3 Aerospace & Defense 1.5 Chemicals -1.9 Recreation Facilities & Svcs -0.7 Real Estate -2.1 Real Estate -2.4 Industrial Services -2.5 Asset Management -2.5 Passenger Transportation -2.6 Retail - Discretionary -2.5 Metals & Mining -2.8 Passenger Transportation -3.2 Consumer Products -3.1 Semiconductors -4.9 Institutional Financial Svcs -4.4 Leisure Products -5.5 Design, Mfg & Distribution -4.4 Gaming, Lodging & Restaurants -5.6 Distributors - Consumer Staples -4.5 Containers & Packaging -5.8 Distributors - Discretionary -6.5 Industrial Services -6.3 Manufactured Goods -6.6 Technology Services -8.5 Retail - Discretionary -6.6 Automotive -9.3 Recreation Facilities & Svcs -6.9 Biotech & Pharma -9.5 Gaming, Lodging & Restaurants -8.7 Institutional Financial Svcs -10.8 Forest & Paper Products -9.0 Metals & Mining -10.9 Leisure Products -9.0 Software -11.3 Technology Services -12.2 Design, Mfg & Distribution -11.8 Hardware -14.3 Manufactured Goods -12.1 Software -14.6 Forest & Paper Products -12.1 Semiconductors -15.4 Distributors - Discretionary -12.7 Biotech & Pharma -16.0 Hardware -15.4 Consumer Services -21.4 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0

Source: Bloomberg, Guotai Junan International Source: Bloomberg, Guotai Junan International.

AH Premium Index

250.00

200.00 平均水平为 120.84

150.00

100.00

50.00

0.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Hang Seng Index Company, Bloomberg, Guotai Junan International.

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HSI forward PE and PB HSCEI forward PE and PB

20.00 Est P/E (L) Est P/B 3.50 20.00 6.00 Est P/E (L) Est P/B 18.00 18.00 3.00 5.00 16.00 16.00

14.00 2.50 14.00 4.00 12.00 12.00 2.00 10.00 10.00 3.00 1.50 8.00 8.00 2.00 6.00 1.00 6.00 4.00 4.00 1.00 0.50 2.00 2.00

0.00 0.00 0.00 0.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International.

Quarterly Market Review and Market Outlook

Quarterly Market Review The Hong Kong stock market experienced a downward trend in the third quarter. The announcement of tariffs on $34 billion worth of Chinese goods from the United States government came into effect. The Hang Seng Index fell 2.7% to 28,182 points in the first three trading days of July. The U.S. government imposed tariff sanctions to Turkey on 10 August. The Turkish lira fell sharply and triggered a continued sell-off in the emerging market currencies and in the share markets. Both the Hong Kong dollar and RMB fell sharply. Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA) intervened eight times in August. The Hang Seng Index dropped for four consecutive days to 27,100 points starting 13 August. Due to the escalation of global trade tension and the slump in share prices of technology stocks like Tencent (00700 HK) which was affected by the new online game policy, the Hang Seng Index fell 2.4% in August. Domestic economic data released in early September was worse than expectation. Also, investors were worried that the Trump administration would impose tariffs on US$ 200 billion of commodities imported from China. The Hang Seng Index fell 5.8% from 5 September to 12 September. The Chinese government continued to promote tax reform and enhance infrastructure investment to stabilize the economy. The Hang Seng Index rebounded gradually to 27,953 from 12 September to 21 September. U.S. treasury yields rose sharply in early October; yields on 10-year treasuries hit a recent high of 3.23% on 5th October which led to a huge subsequent decrease in global stock markets during the second week of October. As at 12 October, 2018, the Hang Seng Index fell by 9.4% QoQ (13.8% YTD) to 25,801, and the HSCEI index decreased 4.2% QoQ (12.0% YTD) to 10,299.

 Domestic economic indicators remained mostly stable, but economic downward pressure increased. In September, official manufacturing PMI fell 0.5 percentage points to 50.8 per month, worse than expected; China's Caixin manufacturing PMI fell 0.6 percentage points to 50.0 per month, worse than expected. External trade performed well in the third quarter of 2018.In USD terms, cumulative exports surged 12.2% YoY while imports edged up 20.9% YoY in August. China recorded a cumulative trade surplus of USD 193.65 billion in August. Cumulative fixed-asset investment in China increased by 5.3% YoY in August, worse than market expectations. Meanwhile, cumulative Chinese real estate investment increased 10.1% YoY. CPI and PPI increased by 2.0% and 4.0% in Jan - Aug 2018, respectively. Total social financing in China declined 2.4% YoY to RMB 1.52 trillion, which was higher than expected. New RMB-denominated loans expanded RMB 190.0 billion YoY to RMB 1.28 trillion, which was lower than expected.

 The U.S. Federal Reserve raised interest rates in September. The Fed announced another increase in the federal funds rate after the FOMC meeting in September. The federal funds rate was increased 25 basis points to a range of 2.0% to 2.25%. This is the third round of the interest rate hikes in 2018. The first and second interest rate hikes were in March and June. During Wednesday’s announcement, the FOMC dropped the statement "The stance of monetary policy remains

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accommodative". The committee expressed that the federal funds rate will likely remain slightly above the "neutral" interest rate level by the end of 2019, which is neither restrictive nor stimulating. According to the Fed’s latest interest rate dot-plot, there will be 4 interest rate hikes in 2018, 3 interest rate hikes in 2019, and 1 interest rate hike in 2020. There is a 78.5% chance that the Fed will increase federal funds rate by 25 basis points to a range between 2.25% to 2.5% in December. The median long-term federal funds rate forecast is 3.00%, an increase of 12.5 basis points from the forecast in June of 2.875%.

 The European Central Bank (ECB) released its forward guidance after the September monetary policy meeting. The ECB reiterated that the benchmark interest rate will stay at the current level at least until summer in 2019. After the September monetary policy meeting, the ECB decided to keep the refinance rate unchanged at 0.0%, the overnight interest rate at 0.25%, and the overnight deposit rate at -0.40%. The ECB planned to maintain the amount of asset purchase on 30 billion Euros per month until September 2018. From October to December, the amount of debt purchase will shrink to EUR 15 billion per month. Based on the latest economic data, the ECB will stop purchasing net assets at the end of December. We believe that corporations in Europe will bear higher costs of debt than before ECB’s shrinking in scale of asset purchase. Furthermore, investors are discouraged by the threat of trade protectionism. Nevertheless, the ECB will repurchase the debt at maturity when necessary and hold them to maintain favourable liquidity conditions and an ample degree of monetary accommodation. The ECB lowered the expectation of YoY growth for 2018 GDP from 2.1% to 2.0%, and the expectation of 2019 GDP YoY growth from 1.9% to 1.8%. The expectation of 2020 GDP YoY growth remains at 1.7 % unchanged. The expectation of YoY growth in inflation rates in 2018, 2019, and 2020 has been kept at 1.7%, lower than the target rate 2.0%. We believe that the ECB will increase benchmark interest rate by 10 basis points in October, 2019.

 Domestic tax reform will release policy benefits. On 6 September, Premier Li Keqiang stressed the need to study how to reduce the social security premium rate properly and ensured that the overall burden of enterprises would not increase to stimulate market vitality and guide social expectations in a state council executive meeting. On 7 September, the Ministry of Finance and the State Administration of Taxation issued a notice on the application of personal income tax deduction expenses and tax rates in the fourth quarter of 2018, which included raising the starting point of individual taxation from RMB 3,500 to RMB 5,000, expanding the range of low tax rates, especially expenses and other special deductions on expenditure on children's education and medical care for serious illnesses. The latest tax regulations and tax rates have been officially implemented since 1 October 2018. On 26 September, the State Council issued the opinion on promoting the high-quality development of innovation and entrepreneurship and creating an upgraded edition of "Double Creation". The main points of the opinion are as follows: the policy of increasing R&D cost plus deduction ratio of enterprises to 75% should be extended from small and medium-sized technological enterprises to all enterprises; the direct financing channels for innovation and entrepreneurship should be broadened. We believe that the tax reform is being carried out more comprehensively and thoroughly, which will reduce the tax cost of enterprises and increase people's disposable income to effectively enhance potential consumption capacity of the whole society and reduce operating costs of enterprises, comprehensively improving social efficiency and effectively offsetting potential pressure of trade friction and economic downturn.

 Domestic infrastructure construction is speeding up to offset downward pressure in the economy. Premier Li Keqiang chaired a State Council executive meeting on 23 July. He proposed that the fiscal policy should be more active and the issuance of RMB 1.35 trillion in local government special bonds should be sped up. The process in current infrastructure projects needs to be accelerated. On 14 August, the Ministry of Finance issued opinions on the issuance of local government special bonds, which demanded for speeding up of the issuance and use of local government special bonds so as to play an important role in stabilizing investment, expanding domestic demand and improving shortcomings. On 18 August, the Banking and Insurance Regulatory Commission issued the "Circular of the General Office of the China Banking and Insurance Regulatory Commission on Further Performing Credit to Enhance the Economic Efficiency to Serve Entities".

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It requested the banking and insurance industry to support the infrastructure sector to improve shortcomings, promote steady growth of effective investment, and increase capital allocation without increasing the hidden debt of local governments. Capital should be allocated to infrastructure projects with standardized operation and fluent capital. We found that the policy has gradually shifted in the direction of stabilizing the economy, especially with the loosening of monetary and infrastructure policies after the middle of the year. It is expected that infrastructure construction will support the economy more effectively to offset potential downward pressure.

 Sino-U.S. trade friction continued to escalate. On 17 September, US President Trump formally decided to impose tariffs on US$ 200 billion of Chinese goods. The new tariff came into effect on 24 September 2018, with an initial tariff rate of 10% and an increase of 25% after 2019. In response to the announcement, the State Council Tariff Commission announced that tariffs on imports of about US$ 60 billion originating in the United States were imposed since 24 September. Sino-US trade friction continued to escalate. The State Council Information Office issued a white paper on 24 September on Sino-U.S. economic and trade friction and China's position in order to clarify the facts of Sino-U.S. economic and trade relations and clarifying China's policy stance, promoting a rational solution to the problem. We believe that Sino-U.S. trade friction will be a long-term bilateral game with no signs of easing in the short term, which will continue to bring obvious negative effects on China and even global economic recovery.

 Hitting a new record low, the RMB FX rate has been facing a challenging quarter. The RMB-USD FX rate slid more than 160 basis points before the US tariff took effect in July, and the offshore RMB-USD FX rate closed at 6.630 RMB/USD. The onshore and offshore RMB-USD FX rate jumped high whereas the USD index slid when China fought back with the same amount of tariff. The U.S. Secretary of the Treasury, Mnuchin, invited China to a new round of trade negotiation. Offshore RMB-USD FX rate rose more than 400 basis points, up 0.6% to 6.827 RMB/USD, a fresh high since 7 September. On 26 September, the Fed announced a 25 basis point increase in the Fed funds rate. Shortly after, the Chinese central bank decided to cut the RMB required reserve rate by 1 percent in order to optimize liquidity structure and alleviate economic downside pressure. The offshore RMB-USD FX rate once approached 6.920 RMB/USD on 12 October. We think that the fundamentals of the Chinese economy are still stable. China will continue to control and resolve financial risks with debt ratio deleveraging. Taking into account the counter cyclical factor adjustment for RMB, we think that the RMB-USD FX rate is unlikely to further depreciate significantly in the near future. Yet the reduction of deposit reserve ratio might have conveyed signs of monetary easing to the market. Trade friction between China and the U.S. is expected to impose negative impacts on the domestic economy and the stability of the RMB FX rate. Depreciation pressure for the RMB FX rate will still exist in the short term if there's no clear government guidance.

 Hong Kong banks announced simultaneous increase in interet rates to the U.S. Federal Reserve and revised up the Hong Kong dollar prime rate. The Hong Kong dollar fluctuated greatly in the third quarter, mainly due to a strong US dollar. Most emerging market currencies were influenced by the incident. Since mid-August, the Hong Kong dollar has repeatedly touched the level of 7.85 for undervalued exchange guarantees. Under the linked exchange rate system, the Hong Kong Monetary Authority intervened eight times in August and bought HK$ 33.12 billion Hong Kong in total. On 27 September, the HKMA announced that it would raise the base interest rate by 25 basis points following the U.S. Federal Reserve's synchronized interest rate increase. The one-month HIBOR rate continued to rise in the third quarter to 2.23% on 28 September, with one-month LIBOR and HIBOR spread of 0.03%. There is no chance of borrowing spread arbitrage as the HIBOR-LIBOR spreads gradually narrowed. We believe that the simultaneous increase in the prime rate by banks have raised the investor confidence in the Hong Kong dollar, while the arbitrage spread continues to narrow and the Hong Kong dollar will become more and more stable. In August 2018, Hong Kong CPI increased by 2.3% YoY, the unemployment rate remained at a low level of 2.8% and total retail sales in Hong Kong increased by 9.5% YoY. The strong economy of Hong Kong is expected to generally stay healthy given the negative effects of the rise of interest rates.

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Hong Kong’s aggregate balance and 1-month HIBOR USD/HKD interest spread

HKD million % % 7.90 1.5 450,000 2.5 400,000 350,000 2 7.85 1.0 300,000 1.5 250,000 7.80 200,000 0.5 1 150,000 7.75

100,000 0.5

2009 2010 2013 2014 2015 2016 2017 2018 2012 50,000 2011 0.0 7.70

0 0

2009 2011 2012 2014 2015 2017 2018 2013 2016 2010 7.65 -0.5

Aggregate Balance (LHS) 1 Month HIBOR (RHS) USD/HKD (LHS) Interest Spread (RHS)

Source: HKMA, Hong Kong Treasury Markets Association, Bloomberg. Source: Bloomberg, Guotai Junan International.

 Exchange rate fluctuations in emerging markets have brought new risks. The United States announced tariff sanctions against Turkey on 10 August, raising import tariffs on steel and aluminum products from Turkey valued at about US$ 1 billion to 50% and 20%, respectively. Affected by the incident, the Turkish lira has depreciated sharply against the US dollar. As at 12 October, the US dollar to Turkish lira spot exchange rate was 5.87 TRY/USD, an increase of 55.2% over the beginning of the year. The collapse of the lira exchange rate triggered a sustained sell-off of emerging market currencies and widespread volatility in global stock markets due to concerns about possible exposure to European banks. We believed that the vulnerability of exchange rates in emerging markets is due to excessive debt ratios, insufficient foreign exchange reserves and single development models. In the context of continued increase of interest rates in the United States, the pressure of capital outflow from emerging markets persisted. Meanwhile the exchange rate crises may spread to affect domestic capital markets and economies. Exchange rate problems in emerging markets are expected to persist and will continue to interfere with investor risk preferences.

 Major global stock markets tumbled over the last quarter. As at 12 October 2018, the S&P 500 index and the Dow Jones Industrial Average increased 3.50% YTD and 2.51% YTD, respectively. The UK FTSE 100 index decreased 9.00% YTD; German DAX index edged down by 10.79% YTD, and the French CAC 40 index decreased 4.08% YTD. The Nikkei Stock Average decreased 0.31% YTD. Global revival of industrial activities together with oil production cuts was supported by crude oil prices. WTI crude oil prices swelled 18.07% YTD to US$ 71.34 per barrel, while Brent crude oil rallied 20.28% YTD to US$ 80.43 per barrel. COMEX gold futures slid 6.67% YTD to US$ 1,222.0/oz.

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Sector Performance

Sectors (calculated from companies under GTJA coverage) that significantly outperformed or underperformed the market during the past quarter are listed as follows:

Underperform / Relative return Sector Reasons Outperform to HSI (ppts)

The Chinese government had decided to stabilize the economy by speeding up the issuance of RMB 1.35 trillion in special debt in order to increase investment in infrastructure and lead a new Outperform 29.0 Infrastructure round of investment enthusiasm. Also, the PBOC released more than RMB 800 billion incremental liquidity through reverse repurchase and MLF in September.

The performance of the three operators was better than market expectations and revenue from mobile Internet traffic Telecommunication Outperform 21.1 achieved more significant growth. Significant improvements in Services fundamentals and valuation repair were the main reasons for the great performance of the sector.

Crude oil prices increased due to concerns about tightened supply/demand balance. Global oil supply risk escalation: 1) Iranian sanctions were expected to aggravate the negative impact on oil supply; 2) OPEC decided not to formally increase Outperform 15.2 Petrochemicals oil production to offset the impact of Iranian sanctions on oil supply; 3) oil production growth in the U.S. was flat; 4) oil production of Libya was unstable and production of Venezuela continued to decline. In addition, the growth rate of oil demand remained stable.

The growth rate of investment in fixed assets in eco-water conservancy in July and August was lower than expectation; the central government issued a number of policies, but the actual funding was not so much. Income growth of local Environmental governments slowed down and most of the investment in Underperform (11.5) Protection environmental protection did not bring economic returns and even damaged economic returns. In addition, the seasoned equity offering with huge discount of China Everbright International (00257 HK) dragged down overall return of the industry.

The government further tightened the gaming industry, seriously affecting revenue expectations of internet companies Underperform (14.6) Internet represented by Tencent. The advantages of the internet have further diminished and the monthly number of active users has continued to slow.

2Q18 results missed expectations for both Huazhu Holdings (HTHT US) and Ctrip (CTRP US), even after normalizing for non-recurring items. Sector growth is also slowing down. During Underperform (21.1) Consumer - Hotel 1H18, China's domestic tourism revenue growth slowed to 12.5% YoY, down from 15.6% in 1H17 and 15.9% in 2017, and growth in the number of domestic tourists slowed to 11.4% YoY, down from 13.5% in 1H17 and 12.8% in 2017. Source: Bloomberg, Guotai Junan International.

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Market Outlook

Domestic economic data in the fourth quarter is expected to be stable with policy support. We expect that the money supply is still fluent and stable and M2 YoY growth is expected to rebound slightly, with credit transmission gradually settling in the fourth quarter. Aggregate social financing is expected to stabilize and rebound. Meanwhile, real interest rates may increase following the Fed’s rate increase in September. CPI is still likely to go up, driven by rising price of crude oil and pork, and PPI is expected to fall due to the loosening of environmental restrictions. Investment in fixed assets data will gradually recover with momentum from infrastructure construction. We expect improvement in comsumption areas, driven by rapid tax reform. Trade data may gradually deteriorate due to negative effects brought by Sino–U.S. trade friction.

SHIBOR trend (Overnight) SHIBOR trends (1 month and above)

% %

3.2 5.0 3.0 4.5 2.8 2.6 4.0 2.4 3.5 2.2 2.0 3.0 1.8 2.5 1.6

1.4 2.0

17 17 18 18

17 17 17 17 17 18 18 18 18 17 17 18 18

1.2 17

------

- -

Jul Jul

17 17 17 18 18 18 17 18

17 17 17 17 17 17 17 18 18 18 18 18

18 17

Apr Oct Apr Oct

Jan Jun Jun Jan

Feb Mar Feb Mar

- - - -

------

Aug Dec Aug Sep Sep Nov

- -

May May

Jul Jul

Apr Apr Oct Oct

Jan Jun Jan Jun

Mar Mar

Feb Feb

Aug Sep Nov Dec Sep Aug May May 1M 3M 6M 9M 1Y LPR(1Y) Source: CFETS，Guotai Junan International. Source: CFETS，Guotai Junan International.

China M1 And M2 Growth China New Social Aggrefate Financing

30.0 % M1 (YoY) M2 (YoY) New Social Aggregate Financing YoY 4.0 RMB Tn 200%

25.0 3.5 150%

20.0 3.0 100% 2.5 15.0 2.0 50%

10.0 1.5 0%

1.0 5.0 -50% 0.5 0.0 0.0 -100% Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Source: PBOC，Guotai Junan International. Source: PBOC，Guotai Junan International.

The fundamentals of the United States are strong and the probability of interest rate hikes is still high in December. U.S. GDP was revised to 4.2% in the second quarter. Core CPI grew 2.2% YoY and unemployment rate was 3.7% in September. Fundamentals remained strong. On 26 September, the U.S. Federal Reserve announced a 25 basis point increase in the target range of federal funds rate to 2.25%, and for the first time deleted the phrase "monetary policy stance is still loose". At the same time, the Fed raised growth expectations for the U.S. economy, which the Fed expects to grow by 3.1% and 2.5% in 2018 and 2019, respectively, higher than the 2.8% and 2.4% forecasts made in June. We expect the Federal Reserve to raise interest rates in December.

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U.S. treasury yield hikes are expected to affect investor sentiment and increase global stock market volatility in the short term. As the Federal Reserve raised interest rates steadily and oil prices climbed high, U.S. treasury yields rose to a recent high of 3.23% on 5 October. The U.S. stock market was then pulled down by huge sell-offs in technology stocks; this led to a notable decrease in global stock markets during the second week of October. Considering the strong recovery trend in the U.S. economy and continuous increase from the U.S. federal funds rate, we expect U.S. treasury yields to remain at relatively high levels in the short term. The increase in treasury yields would usually indicate higher financing costs for businesses and investors, which may continue to affect market valuation levels for growth-oriented companies.

The negative impacts of Sino-US trade friction is exepected to persist. The white paper on the facts surrounding Sino-U.S. economic and trade friction and China's position was issued on 24 April, which clarified the facts surrounding Sino-U.S. economic and trade relations, China's policy stance and trade friction, and promotion of a rational solution to the problem. But the U.S. is still pressing China by imposing tariffs on about US$ 200 billion of commodities exported to United States from China. What’s more is that the U.S. State Department approved new arms sales to Taiwan on 24 September, allowing U.S. defense companies to sell US$ 330 million worth of aviation spare parts and other related support systems to Taiwan. Sino-U.S. diplomatic relations are near freezing point. We expect that economic and trade disputes between the two countries will persist for some time and will continuously affect the domestic economy psychologically and have negative impacts on investment sentiment in financial makets.

Upcoming events to watch: The U.K. Prime Minister Theresa May is preparing to propose a major new Brexit plan to the European Union regarding Irish border issues. The European Central Bank will announce their interest rate decision on 25 October. The Bank of Japan will announce their interest rate decision on 31 October; it is the focus of the market whether the Bank of Japan will raise interest rate. The United States will usher in mid-term elections on 6 November, which will have great influences on the US political structure and the future trend of Sino–U.S. relations. The U.S. Federal Reserve will announce a decision on interest rates in the early morning of 9 November, which will give forward-looking guidance to whether the U.S. Federal Reserve will raise interest rates in December.

The domestic economy is expected to stabilize from the gradual growth in capital investment. The alleviation of tax burden on enterprises and the public brought by fiscal and taxation reform is likely to stimulate the potential spending power of the whole society. Recent RRR cuts by the PBOC may help to increase market liquidity and improve company operations, yet we expect liquidity of currencies to remain at neutral levels. The increase in Hong Kong dollar prime rates may alleviate capital outflow incurred by the increase in U.S. federal funds rates. Meanwhile, with the psychological impact together with low investment sentiment, Sino-U.S. trade friction remained as a persistent uncertainty factor. The surge in U.S. treasury yields and the potential depreciation pressure of RMB/USD exchange rate may have negative impacts to the market. We think that the Hong Kong stock market may continue to fluctuate in the 4th quarter, while short-term investment opportunities may exist for some sectors. Currently, we are bullish on clean energy (wind & solar), consumer (apparel, hotel), infrastructure and petrochemicals sectors.

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Latest China, US and Europe Macroeconomic Data

China

Indicator data period mom / qoq YoY

Official Manufacturing PMI Sep 50.8 (0.5ppts) (1.6ppts)

Exports (bn USD) Sep 226.7 4.9% 14.5%

Imports (bn USD) Sep 195.0 2.9% 14.3%

Trade Balance (bn USD) Sep 31.7 18.9% 15.8%

Money Supply - M1 (YoY) Aug 3.9% (1.2ppts) (10.1ppts)

Money Supply - M2 (YoY) Aug 8.2% (0.3ppts) (0.4ppts)

New RMB Loans (bn) Aug 1,280 (11.7%) 17.4%

Total social financing (bn RMB) Aug 1,520 45.94% (2.5%)

PPI YoY Aug 4.1% (0.5ppts) (2.2ppts)

PPI mom Aug 0.4% 0.3ppts (0.5ppts)

CPI YoY Aug 2.3% 0.2ppts 0.5ppts

CPI mom Aug 0.7% 0.4ppts 0.3ppts

Actual FDI (bn USD) Aug 10.4 34.6% 11.4%

Retail Sales (YoY) Aug 9.0% 0.2ppts (1.1ppts)

Power consumption (KWH bn) Aug 652.1 0.6% 8.8%

Industrial Production (YoY) Aug 6.1% 0.1ppts 0.1ppts

Power output (KWH bn) Aug 640.5 0.1% 7.3%

FAI excl. rural (bn) Aug 5,936.0 1.5% 4.6%

Real estate investment (bn) Aug 1,063.3 2.7% 9.3%

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Beijing new house selling prices YoY Aug 0.2% 0.7ppt (5.4ppt)

Beijing new house selling prices mom Aug 0.0% (0.2ppt) 0.0ppt

GDP YoY growth 2Q18 6.7% (0.1ppts) (0.2ppts)

Foreign exchange reserve (bn USD) Sep 3,087.0 (0.8%) (4.3%) Source: National Bureau of Statistics of China, the People's Bank of China, China Customs, Ministry of Commerce of the PRC.

U.S.

Indicators data period chg mom / qoq

ISM Manufacturing Sep 59.8 (1.5ppts)

Unemployment Rate Sep 3.7% (0.2ppts)

Chg in Nonfarm Payrolls (mom '000) Sep 134.0 (50.4%)

Retail & Foods service Sales SA (bn USD) Aug 509.0 0.1%

Industrial Production (mom) Aug 4.9% 0.9ppts

PPI (YoY) Sep 2.6% (0.2ppts)

Core PPI (YoY) Sep 2.5% 0.2ppts

CPI (YoY) Sep 2.3% (0.4ppts)

Core CPI (YoY) Sep 2.2% 0.0ppts

Housing Starts annualized (SA, '000) Aug 1,282.0 9.2%

Existing Home Sales (mn units) Aug 5.3 0.0%

House Price Index (mom) Jul 0.2% (0.1ppts)

Trade Balance (bn USD) Aug (53.2) (6.4%)

Total Net TIC Flows (bn USD) Jul 52.2 (72.5%)

Net foreign purchases of LT US securities (bn USD) Jul 40.6 Change from -ve to +ve

Monthly deficits +/ surplus - (bn USD) Aug (214.1) (178.6%)

University of Michigan Consumer Sentiment Oct 99.0 (1.1ppts)

New Home Sales annualized (SA '000) Aug 629.0 3.5%

Durable Goods New Orders SA (bn USD) Aug 259,551.0 4.4%

S&P/Case-Shiller 20 Home Price Indices, mom, SA Jul 0.1% (0.1ppts)

Real GDP growth QoQ 2Q18 4.2% 2.0ppts

Factory Orders SA (bn USD) Aug 510,466.0 2.3%

Total Vehicle Sales annualized (mn) Sep 17.4 4.8% Source: U.S. Bureau of Labor Statistics, U.S. Department of Commerce, U.S. Census Bureau, ISM, FHFA, NAR, the Federal Reserve, US Department of Treasury, University of Michigan.

Europe

Indicators data period chg mom/qoq

Euro area GDP QoQ 2Q18 0.4% 0.0ppts

Euro area GDP YoY 2Q18 2.1% (0.3ppts)

Euro-zone annual inflation (flash) Sep 2.1% 0.1ppts

Euro-zone monthly inflation (final) Sep 0.5% 0.3ppts

Markit Euro-zone Manufacturing PMI SA Sep 53.2 (1.4ppts)

Euro-zone PPI YoY Aug 4.2% (0.1ppts) Source: Eurostat, Markit.

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Sectors Quarterly Update

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Automobiles & Components Sector Analyst: Toliver Ma 马守彰 (852) 2509 5317 汽车行业 [email protected]

Rating: Neutral

评级：中性 Industry dynamics 行业动态

 Sales declined in August 2018 on decreasing PV sales. According to the China Association of Automobile Manufacturers ("CAAM"), China vehicle sales Vehicle sales in August 2018 decreased 3.8% YoY, with passenger vehicle ("PV”) sales 汽车销售 having decreased by 4.6% YoY, while commercial vehicles ("CV") increased by

1.1% YoY. YTD vehicle sales increased 3.5% YoY, with PV maintaining 2016 2017 YTD 2018 relatively healthy growth of 2.6% YoY in 1-8M18. Similar to July, all major PV 30% types recorded YoY drop, with SUVs down by 4.7% YoY, the third monthly 25% decline this year. Meanwhile, sedan sales fell by 3.4% YoY. In terms of new 20% energy vehicles, sales momentum continues which up by 49.5% YoY, and YTD 15% 11.5% 11.3% sales up 88% YoY as driven by PHEV of PV. 10% 9.1% 5% 4.5% 4.7%  Industry filled with uncertainties. Despite a largely positive 1H18 results, 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -5% market continues to worry the future of the industry. Sales growth was slowing -4.2%-3.8% -10% down since April, and recorded back-to-back YoY decline in the last two months. -11.4% -15% Moreover, inventory coefficient spiked in June and remains high, especially for self-owned brands. On the other hand, higher imported cars in July and August Source: CAAM. have put pressure in luxury brands. Average discount rate also rise to the highest level since Nov. 2016, indicating sales pressure mounting in the retail end. This concern the market about the future of industry, and high comparison PV sales proportion by vehicle type base should keep sales growth in the fourth quarter under pressure. 乘用车型销售占比 Key assumptions update 关键假设更新 Sedan MPV SUV Crossover 100%  Our estimation for overall 2018 vehicle market sales growth is 3.8%. We 6.8% 5.2% 3.0% 2.2% 2.0% 15.6% 14.6% 9.1% 80% 16.7% 20.7% believe the overall trend has not changed, which we should see slow growth in 11.2% 12.9% 29.4% 36.8% 41.5% 41.8% 3.4% 2018 to 2020. 3.2% 7.3% 9.7% 60% 10.0% 10.3% 8.4% 7.3% 40% Investment suggestions 投资建议 69.8% 69.4% 67.0% 62.8% 55.4% 50.0% 48.9% 20% 47.9%  Currently, the OEM valuation is trading at 6.3x 12M forward PER, which we

consider rather low. With such attractive valuation, we suggest investors to 0%

2012 2013 2014 2015 2016 2017 accumulate stock for strong growth outlook companies. Current rating for the 2011

auto sector is “Neutral”. Top pick is Geely Auto (00175 HK). YTD2018

Source: CAAM.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Geely Auto 00175 14.380 Buy 7.9 6.3 5.4 34.8 2.4 Dongfeng Motor Group 00489 8.140 Neutral 4.0 3.8 3.7 13.1 0.5 Brilliance China 01114 11.000 Buy 6.4 5.5 4.6 25.9 1.5 Nexteer 01316 11.760 Buy 9.8 8.6 7.8 24.5 2.2 BAIC Motor 01958 5.960 Neutral 5.8 5.0 4.4 16.4 0.9 Guangzhou Automobile Group 02238 7.640 Buy 5.4 4.6 4.3 16.8 0.9 Great Wall Motor 02333 4.730 Neutral 5.3 4.7 4.5 13.6 0.7 Xiezhong International 03663 1.450 Neutral 38.9 22.8 13.7 3.2 1.2 Sinotruk 03808 14.860 Buy 7.6 6.9 6.2 19.1 1.3 Weighted Average Neutral 6.5 5.5 4.9 22.3 1.4 市值加权平均 Source︰the Companies, Guotai Junan International, Bloomberg.

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Analyst: Toliver Ma 马守彰 Geely Automobile (00175 HK) (852) 2509 5317 吉利汽车 (00175 HK) [email protected]

Company updates 公司近况 Rating: Buy

 Geely Auto’s (00175 HK) vehicle sales were 125,522 units in Aug, up 30.1% YoY. In 1-8M18, Geely Auto sold 1,012,429 units, up 41.0% YoY. Sales momentum 评级：买入 continued in August, MoM increased 14.2%. In the Lynk & Co. brand, 01 sold 8,900

units in August, maintained almost the same unit of sales for the last few months. While 02 ramp up to 4,371 units of sales in its second month, which we expect to ramp up at constant rate in the next few months. Meanwhile, the Geely brand (excluding Lynk& Co.) increased 15.9% YoY as contributed by new models such as 6-18m TP 目标价: HK $ 22.80 the new Vision X1 / X3 / S1 contributed additional 16,432 units of sales, despite the older model of Vision SUV, Emgrand GS and Boyue slightly drop YoY. In this Share price 股价： HK$14.380 month, Geely Auto starts to report sales of new energy vehicles, in which 10,439 units were sold in August. In particular, the Emgrand EV and the new Borui GE

(PHEV / MHEV) contributed 4,647 and 4,407 units, respectively. Stock performance

Earnings comments 业绩评论股价表现

 1H18 profit attributable to shareholders was up 53.6% YoY to RMB 6,670 20.0 % of return million, align with our expectations. Revenue increased 36.2% YoY to RMB 10.0 53,709 million, as vehicle sales volume up by 44.5% YoY in 1H18. Despite of the 0.0 decrease of the average ASP of 5.7% YoY, due to more sales towards lower-priced (10.0)

Vision models (X1 / X3 / S1), gross profit still improved 1.0 ppts YoY or 0.6 ppts hoh (20.0) to 20.2% in 1H18. This is because of strong economies of scales realized as cost of (30.0) goods sold grew slower than revenue. Share of results of invested entities (40.0) increased 5.7x YoY to RMB 238 million. This is mainly from the result from the Lynk & Co. joint venture, with the 01 model started selling since Dec. 2017. The (50.0) Company recorded net finance income of RMB 17 million in 1H18, contrasted to a (60.0) Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 RMB 9 million expense in 1H17. Net margin improved 1.4 ppts YoY to 12.4%. On HSI index Geely Automobile top of the better gross margin, distribution cost per revenue ratio decreased 0.2 ppts YoY to 4.2% and effective tax rate rate decreased by 1.8 ppts YoY to 15.5%. Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 Valuation, catalysts & risks 估值、催化剂和风险 Abs. % (7.5) (24.2) (44.5) 绝对变动 %  The Company’s valuation has experienced sharp correction together with the Rel. % to HS index (5.0) (18.5) (38.1) overall auto sector. This is in despite of much stronger vehicle sales recorded as 相对恒指变动 % Avg. share price(HK$) compared to its peers and the overall market. In 1H18, profitability continued to 15.0 16.9 22.2 平均股价（港元） improve with margin expansion. Further, the Lynk & Co. JV achieved profit in only 6 Source: Bloomberg, Guotai Junan International. months, indicating huge potential when other models start to contribute in the second half. Valuation has dropped below the long-term historical mean, and we reiterate "Buy" rating for Geely Auto on strong growth outlook and attractive valuation. Our TP is HK$22.80, representing 12.5x 2018 PER and 9.9x 2019 PER. Our valuation is slightly above Geely Auto’s historical mean, and we believe this is fair.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 53,722 5,112 0.580 125.7 22.2 2.776 4.6 0.120 0.9 23.3 2017A 92,761 10,634 1.198 106.7 10.0 3.908 3.1 0.290 2.4 36.1 2018F 113,288 14,067 1.575 31.5 7.9 5.192 2.4 0.402 3.3 34.8 2019F 125,277 17,646 1.976 25.4 6.3 6.848 1.8 0.509 4.1 32.8 2020F 133,765 20,616 2.308 16.8 5.4 8.754 1.4 0.601 4.9 29.6

Shares in issue (m) 总股数 (m) 8,972.9 Major shareholder 大股东 Geely Holding 42.7% Market cap. (HK$ m) 市值 (HK$ m) 129,112.3 Free float (%) 自由流通比率 (%) 57.3 3 month average vol. 3 个月平均成交股数 (‘000) 53,221.6 FY18 Net gearing (%) FY18 净负债/股东资金 (%) Net Cash 52 Weeks high/low (HK$) 52 周高/低 (HK$) 29.800 / 13.700 FY18 Est. NAV (HK$) FY18 每股估值（港元） 29.0

Source: the Company, Guotai Junan International.

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Financial statements and ratios [Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F PPE Total Revenue 53,722 92,761 113,288 125,277 133,765 10,650 14,053 18,628 24,693 32,733 Intangible assets Cost of sales (43,880) (74,779) (89,726) (98,277) (103,937) 6,462 10,552 14,290 18,424 22,839 Interest in associates and JV Gross profit 9,842 17,981 23,561 27,000 29,828 1,002 4,805 5,940 8,998 13,429 Prepaid land lease payment 2,003 2,124 1,665 1,780 1,902 Deferred tax assets Distribution expenses (2,503) (4,056) (4,532) (5,011) (5,351) 188 401 612 876 1,185 Others Administration expenses (2,560) (2,923) (3,399) (3,853) (4,063) 29 38 38 38 38 Total Non-current Assets Operating Profit 4,779 11,003 15,631 18,136 20,414 20,334 31,973 41,173 54,809 72,125

Cash & Cash Equivalents Share of results of Asso. and JV (9) 42 1,135 3,058 4,431 15,045 13,415 16,523 19,297 20,387 Pledged deposit Other income 1,506 1,792 911 936 986 39 36 39 42 45 Inventories Finance costs, net (30) (35) (13) 10 29 3,066 6,027 5,553 6,140 6,556 Trade and other receivables Share-based payment (42) (28) (35) (31) (33) 29,041 33,478 38,177 42,217 45,078 Prepaid land lease payment Profit Before Tax 6,204 12,774 17,629 22,108 25,827 43 48 43 46 49 Others 15 4 5 5 6 Total Current Assets Income Tax (1,034) (2,039) (3,510) (4,402) (5,143) 47,249 53,008 60,339 67,748 72,120

profit After Tax 5,170 10,735 14,119 17,706 20,684 Total Assets 67,583 84,981 101,512 122,557 144,246

Non-controlling Interest (58) (102) (52) (59) (68) Trade payables Shareholders' Profit / Loss 5,112 10,634 14,067 17,646 20,616 39,779 47,533 52,382 57,374 60,678 Bank borrowing 174 1,296 0 0 0 Other liabilities Basic EPS 0.580 1.198 1.575 1.976 2.308 677 1,073 1,419 1,781 2,080 Total Current Liabilities Diluted EPS 0.580 1.198 1.575 1.976 2.308 40,630 49,902 53,801 59,154 62,758

Dividend per share (RMB) 0.120 0.290 0.402 0.509 0.601 Senior notes 2,068 0 0 0 0 Deferred tax liabilities 198 268 941 1,784 2,769

Total Non-current Liabilities 2,266 268 941 1,784 2,769 [Table_CashFlowStatement] Cash Flow Statement Total Liabilities 42,897 50,170 54,742 60,938 65,527

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Total Shareholders' Equity 24,437 34,467 46,375 61,164 78,196 EBT 6,204 12,774 17,629 22,108 25,827 Minority Interest 249 344 395 455 523 Depreciation and amortization 1,654 1,938 2,339 3,067 4,006 Total Equity 24,686 34,811 46,770 61,618 78,718 Finance cost 116 162 13 (10) (29) BPS(RMB) 2.776 3.908 5.192 6.848 8.754 Interest income (85) (127) (127) (156) (183)

Changes in working capital 1,538 (510) 625 364 27 Share of results of associates 9 (42) (1,135) (3,058) (4,431) Financial Ratios Exchange gain/(losses) (230) (4) 30 37 39

Income taxes paid (754) (1,759) (3,510) (4,402) (5,143) 2016A 2017A 2018F 2019F 2020F Change of other operating Items (114) (438) (1,159) 90 (16) Profitability Cash from Operating Activities 8,338 11,994 14,705 18,040 20,098 Gross profit margin (%) 18.3 19.4 20.8 21.6 22.3

EBITDAR (%) 14.1 15.3 17.7 20.1 22.3 Net investments in PPE (410) (3,396) (6,125) (5,008) (6,510) EBIT Margin (%) 11.0 13.2 15.6 17.7 19.3 Net change of prepaid land lease (103) (240) 459 (115) (123) Net profit margin (%) 9.5 11.5 12.4 14.1 15.4 Net change of intangible assets (2,643) (3,950) (3,738) (4,134) (4,414) ROE (%) 23.3 36.1 34.8 32.8 29.6 Net change of pledged deposit 1 3 (3) (3) (3) ROA (%) 7.6 12.5 13.9 14.4 14.3 Interest income 85 127 127 156 183

Net investments in Asso. and JV 1,110 (3,750) 0 0 0 Growth Others (599) (706) (2,284) (3,494) (4,782) Sales volume growth (%) Cash from Investing Activities (2,557) (11,911) (11,564) (12,597) (15,649) Revenue growth (%) 78.350.1 72.762.8 22.133.1 10.622.1 6.83.9

EPS (%) 125.7 106.7 31.5 25.4 16.8 Net change of LT bank loan 163 1,122 130 143 157 BPS (%) 25.1 41.0 34.4 31.7 27.8 Issuance of senior notes 0 (2,034) 1,980 0 0

Issuance of shares 273 314 0 0 0 Liquidity and solvency Interest paid (105) (127) (13) 10 29 Gearing ratio (%) net cash net cash net cash net cash net cash Dividend paid (281) (960) (2,160) (2,857) (3,584) Interest cover ratio 196.3 347.17 1,294.14 n.a. n.a. Others (21) 0 0 0 0 Cash ratio 0.4 0.3 0.3 0.3 0.3 Cash from Financing Activities 29 (1,685) (63) (2,705) (3,399) Quick ratio 1.1 0.9 1.0 1.0 1.0 Net Changes in Cash 5,810 (1,602) 3,078 2,737 1,051 Current ratio 1.2 1.1 1.1 1.1 1.1 Other adjustment 69 (29) 30 37 39 Cash at Beg of Year 9,167 15,045 13,415 16,523 19,297 Efficiency Cash at End of Year 15,045 13,415 16,523 19,297 20,387 Inventory turnover 25 20 20 20 20 Days receivable 149 123 123 123 123 Days payable 249 213 213 213 213

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 18 of 91 HK Market Quarterly Outlook and Sector Update

Aviation Sector Analyst: Toliver Ma 马守彰 (852) 2509 5317 航空行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 According to China Aviation Administration of China (“CAAC”), latest (Jul. 2018) operating data maintain healthy growth in China aviation 评级：跑赢大市 sector. RPK recorded growth of 12.2% YoY, driven by international route and domestic route which increase 12.9% and 12.0% YoY respectively. Passenger load factor (“PLF”) up 0.2 to 83.7 in Jul. 2018. In the first day of national Industry RPK (monthly) holiday, industry passenger traffic up by 10%, with high average PLF of 82%. We are confident that passenger traffic to maintain strong growth for the rest of 收入客公里

the year. RPK: million pax-km Domestic yoy International yoy Regional yoy 1000 RPK yoy 55%  China big three airlines announced their 1H18 results in late Sep. 2018, 800 with underlying profits improved. Facing against rising fuel price, and 35% uncertain currency movement, Chinese airlines set cost control as one of the 600 15% top priorities. We saw cost per ATK (ex. Fuel) improved in the big three airlines, 400

with Air China (“AC”) improved the most, followed by China Eastern Airlines -5% 200 (“CEA”). Meanwhile, AC and CEA both able to recorded improved operating

margins, a rather strong performance considering average oil price (Brent) 0 -25%

Jun 12 Jun 13 Jun 14 Jun 15 Jun 17 Jun Jun 18 Jun

rose 29.0% YoY in 1H18. 16 Jun

Dec13 Dec15 Dec16 Dec17 Dec14 Dec12

 Chinese Airlines to raise fuel surcharge on domestic routes in October. Source: CAAC. Several Chinese carriers including AC are set to apply a higher fuel surcharge to domestic routes in 5th Oct 2018, the second time this year as oil price continue reach new high. The fuel surcharge charges for domestic flights under Industry PLF 800 km will increase from RMB10 to RMB20 per passenger; the fuel surcharge 客载率 for domestic flights over 800 km will raise from RMB10 to RMB30 per passenger. 90.00

Key assumptions update 关键假设更新 85.00

80.00  We expect passenger traffic of China’s airlines to increase stably during 75.00 2018 to 2020 due to the increasing demand of outbound and domestic tourism. 70.00

 We expect average oil price to gradually increase in 2018 to 2020, rising to 65.00 USD70 / USD75 / USD80 per barrel in 2018 to 2020, respectively.

 We have also revised our assumptions on the RMB due to sudden depreciation since 2Q18. Full year should record an exchange loss, as we Source: CAAC. expect depreciation in 2018.

Investment suggestions 投资建议

Long term growth remains unchanged for the industry. Industry will be greatly benefited from the outbound travel demand as air travel still lag behind developed countries. Further, pricing reform on domestic routes to improve airlines’ top line in the next few years as we expect the ticket pricing to fully open up in 2020. However, we understand rising fuel cost, RMB depreciation and the uncertainty of trade dispute between US and China to cause short term fluctuation for the stock price. Current rating for the aviation industry is “Outperform”. Top pick is Air China (00753 HK).

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Air China 00753 7.010 Buy 11.1 7.3 5.5 8.8 0.9 China Eastern Airlines 00670 4.660 Accumulate 11.2 7.8 5.9 9.0 1.0 Weighted Average. Outperform 11.1 7.5 5.7 8.9 0.9 市值加权平均 Source︰the Companies, Guotai Junan International, Bloomberg.

See the last page for disclaimer page 19 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Toliver Ma 马守彰 Air China (00753 HK) (852) 2509 5317 中国国航 (00753 HK) [email protected]

Company updates 公司近况 Rating: Buy

 RPK grows with premium traveler. Air China maintains strong RPK growth in 1-8M18, up by 11.4% YoY, with domestic/ international/ regional routes up YoY by 评级：买入 8.9%/ 15.5%/ 13.2%, respectively. The strong RPK growth was just slightly below

ASK, leading to mild decline of PLF to 81.0%. Despite flat PLF, we think AC’s large loyal and premium customer base helped to mitigate loss of efficiency. Premium class travel was up by 8 ppts and 15 ppts for domestic and international routes in 1H18. In addition, business class PLF was up by 1.3 ppts, much better than the 6-18m TP 目标价: HK $ 9.00 decrease of overall PLF. Revenue from its "Phoenix Miles" membership was up by 12% YoY in 1H18, accounting for about 45% of sales, an increment of 1.5 ppts Share price 股价： HK$7.010 YoY. Moreover, these memberships drive ancillary revenue to a certain extent. In particular, pay to upgrade and seat picking revenue recorded 160% YoY and 26%

YoY increase, respectively. Stock performance

Earnings comments 业绩评论股价表现

 Air China’s 1H18 net profit increased 4.1% YoY to RMB 3,476 million, in-line 100.0 % of return

with expectations, with underlying profit up by 53.8% YoY. Passenger revenue 80.0 up 11.6% YoY to RMB 61,969 million on strong RPK growth in 1H18. More aggressive capacity growth keeps relatively stable PLF of 80.5% and a flat 60.0

passenger yield (-0.13% YoY). Jet fuel cost increased 29.0% YoY but cost structure 40.0 improved with operating margin able to extend 0.1 ppts to 10.0%. Meanwhile, investment income booked profit of RMB 77 million as Cathay Pacific loss narrowed 20.0 during the period, but booked exchange loss of RMB 518 million on RMB 0.0 depreciation. (20.0) Valuation, catalysts & risks 估值、催化剂和风险 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 HSI index Air China Ltd-H  Despite the challenging environment from rising fuel cost and currency risk, operations are indeed very positive for Chinese airlines, especially AC. Revenue Change in Share Price 1 M 3 M YTD continue to show growing trend as supported by the better passenger traffic and 股价变动 1 个月 3 个月年初累计 Abs. % stronger ticket pricing power. Coupled with the more efficient cost structure, margin (2.2) (2.8) 6.5 绝对变动 % is raising and expected to endure. We have a “Buy” investment rating on AC, Rel. % to HS index 0.2 2.9 12.9 and a TP of HK$9.00. Our TP represents 1.2x 2018 PBR and 1.0x 2019 PBR. 相对恒指变动 % Avg. share price(HK$) We believe the current valuation has already reflected the pessimistic view on the 7.1 7.1 8.7 平均股价（港元） overall industry. Our valuation aligns with long-term average and we believe our Source: Bloomberg, Guotai Junan International. valuation is fair.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 115,145 6,809 0.554 (3.5) 11.3 5.258 1.2 0.108 1.7 10.6 2017A 124,026 7,244 0.538 (2.9) 10.8 5.924 1.0 0.115 2.0 9.4 2018F 137,990 7,882 0.543 0.9 11.1 6.352 0.9 0.125 2.1 8.8 2019F 151,375 11,968 0.824 51.7 7.3 7.051 0.9 0.190 3.2 12.3 2020F 167,230 16,030 1.104 34.0 5.5 7.965 0.8 0.254 4.2 14.7

Shares in issue (m) 总股数 (m) 14,524.8 Major shareholder 大股东 CNAHC 41.6% Market cap. (HK$ m) 市值 (HK$ m) 101,818.8 Free float (%) 自由流通比率 (%) 58.4 3 month average vol. 3 个月平均成交股数 (‘000) 16,922.2 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 86.2 52 Weeks high/low (HK$) 52 周高/低 (HK$) 12.860 / 6.180 FY18 Est. NAV (HK$) FY18 每股估值（港元） 10.7

Source: the Company, Guotai Junan International.

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Financial statements and ratios [Table_IncomeStatement] [Table_BalanceSheet] Income Statement Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Total Revenue 115,145 124,026 137,990 151,375 167,230 PPE 158,013 168,536 173,724 182,976 189,496 Passenger 98,993 105,125 117,682 129,023 141,144 Lease prepayment 3,058 3,300 3,250 3,349 3,446 Cargo 8,305 10,255 11,280 12,450 13,698 Advance payment and deposit for 21,312 21,048 20,100 21,369 24,704 Other operating revenue 7,847 8,646 9,027 9,903 12,387 aircraft Investment in associates 15,309 15,439 15,627 16,521 17,823 Operating cost (84,138) (98,674) (107,345) (115,700) (124,538) Others 6,373 6,561 6,930 7,296 7,722 Jet fuel (21,982) (28,409) (37,026) (40,063) (43,243) Total Non-current Assets 204,065 214,885 219,632 231,512 243,190 Maintenance (4,655) (6,213) (6,917) (7,745) (8,639) Routing (16,045) (17,326) (19,120) (20,535) (22,032) Cash & Cash Equivalents 6,848 5,563 9,875 11,118 20,738 Operating lease (6,253) (7,311) (7,844) (8,298) (8,568) Pledged deposit 474 697 658 647 634 Staff cost (20,076) (22,392) (20,841) (21,949) (23,154) Inventories 1,681 1,536 2,045 1,965 2,508 Selling expense (3,893) (4,497) (4,420) (4,849) (5,357) Trade receivable 3,287 3,491 4,093 4,274 4,971 Admin. expense (1,402) (1,727) (1,921) (2,108) (2,329) Others 7,696 9,473 9,276 10,133 10,478 Others (9,833) (10,800) (9,256) (10,154) (11,217) Total Current Assets 19,986 20,760 25,947 28,137 39,329 EBITDA 31,006 25,352 30,645 35,675 42,692 Depreciation & amortization (13,474) (13,596) (15,273) (16,321) (17,456) Total Assets 224,051 235,645 245,579 259,649 282,519 Operating Profit 17,533 11,756 15,372 19,355 25,236 Bank loans 25,976 28,655 18,071 15,139 11,930 Non-operating revenue / (cost) (7,320) (269) (2,920) (380) 189 Finance lease 6,099 6,237 7,271 7,970 8,705 Net finance costs (3,108) (2,831) (2,500) (1,914) (1,732) Trade payable 10,832 13,254 16,400 14,894 18,048 FX gain / (loss) (4,234) 2,938 (608) 641 619 Air traffic liabilities 6,314 7,406 8,910 10,228 11,772 Share profit of asso. 22 (376) 189 893 1,302 Accruals and payable 13,095 13,337 14,838 16,278 17,982 Profit Before Tax 10,213 11,486 12,452 18,975 25,424 Others 1,864 3,243 3,300 4,346 5,366 Income Tax (2,454) (2,845) (3,050) (4,699) (6,302) Total Current Liabilities 64,180 72,132 68,789 68,854 73,803 profit After Tax 7,759 8,641 9,402 14,276 19,122 Long Term borrowing 37,833 22,108 20,835 17,454 13,755 Non-controlling Interest (950) (1,397) (1,520) (2,308) (3,092) Financial lease 36,295 37,799 43,265 47,428 51,801 Shareholders' Profit / Loss 6,809 7,244 7,882 11,968 16,030 Others 9,345 8,747 10,101 10,859 11,736 Total Non-current Liabilities 83,474 68,654 74,200 75,741 77,292 Basic EPS 0.554 0.538 0.543 0.824 1.104 Underlying EPS (RMB) 0.815 0.385 0.574 0.791 1.072 Total Liabilities 147,655 140,786 142,989 144,595 151,095 DPS(RMB) 0.108 0.115 0.125 0.190 0.254 Total Shareholders' Equity 68,799 86,048 92,259 102,414 115,692 Minority Interest 7,597 8,811 10,331 12,640 15,731 Total Equity 76,396 94,859 102,590 115,054 131,424 [Table_CashFlowStatement] Cash Flow Statement BPS(RMB) 5.258 5.924 6.352 7.051 7.965

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F [Table_FinancialRatio] PBT 10,213 11,486 12,452 18,975 25,424 Financial Ratios Depreciation and amortization 13,408 14,240 15,273 16,321 17,456 Finance Cost 3,235 3,047 2,779 2,415 2,148 (%) 2016A 2017A 2018F 2019F 2020F FX loss / (gain) 4,234 (2,938) 608 (641) (619) EBITDAR 26.9 20.4 22.2 23.6 25.5 Net interest income / (cost) (127) (224) (278) (502) (415) Opt margin 15.2 9.5 11.1 12.8 15.1 Change in working cap. 3,943 3,697 5,039 1,152 5,162 Net Profit margin 5.9 5.8 5.7 7.9 9.6 Share of profit / loss of asso. (22) 376 (189) (893) (1,302) Passenger revenue growth 3.2 6.2 11.9 9.6 9.4 Tax payment (2,103) (2,454) (2,845) (3,050) (4,699) Cargo revenue growth -1.7 23.5 10.0 10.4 10.0 Interest paid (3,358) (3,446) (3,143) (2,732) (2,429) Total revenue growth 4.6 7.7 11.3 9.7 10.5 Others (2,056) (2,929) (983) (684) (117) EBITDA growth 8.6 -18.2 20.9 16.4 19.7 Cash from Operating Activities 27,366 20,854 28,714 30,362 40,609 Operating profit growth 12.7 -32.9 30.8 25.9 30.4 Net profit growth -3.6 6.4 8.8 51.8 33.9 Capital expenditure (including EPS growth -3.6 -2.9 0.9 51.8 33.9 (8,977) (15,505) (7,450) (13,549) (10,795) finance lease) Underlying EPS growth -4.8 -52.8 49.3 37.7 35.5 Advance payments and deposits (10,799) 264 948 (1,269) (3,335) BPS growth 15.1 12.7 7.2 11.0 13.0 Increase of lease prepayment (92) (242) 50 (100) (96) ROA 3.3 3.4 3.6 5.2 6.6 Invest in associates 0 0 0 0 0 ROE 10.6 9.4 8.8 12.3 14.7 Others 855 1 318 512 429 Net gearing 144.4 103.7 86.2 75.1 56.6 Cash from Investing Activities (19,013) (15,482) (6,135) (14,406) (13,797) Interest coverage 564.1 415.2 614.8 1011.3 1456.7 Current ratio 31.1 28.8 37.7 40.9 53.3 Net change of LT bank loan (725) (9,385) (9,691) (5,338) (5,945) Quick ratio 16.5 13.5 21.3 23.3 35.7 Issuance of senior notes (6,469) (6,988) (7,010) (7,670) (8,592) Dividend paid (1,588) (1,564) (1,670) (1,813) (2,753) ASK growth 8.5 6.4 8.6 5.6 5.6 Others 0 11,200 0 0 0 RPK growth 9.6 6.9 10.3 7.3 6.5 Cash from Financing Activities (8,781) (6,737) (18,371) (14,821) (17,289) Pax LF 80.7 81.1 82.4 83.7 84.4 AFTK growth 6.4 4.4 3.2 3.4 3.6 Net Changes in Cash (428) (1,365) 4,208 1,135 9,522 RFTK growth 6.6 8.0 6.5 5.6 5.2 Cash at Beg of Year 7,138 6,848 5,563 9,875 11,118 Cargo LF 54.9 56.8 58.6 59.8 60.7 Other adjustment 138 80 105 108 97 Cash at End of Year 6,848 5,563 9,875 11,118 20,738

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 21 of 91 HK Market Quarterly Outlook and Sector Update

Banking Sector Analyst: Richard Cao 曹柱 (86755) 23976870 银行行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform  In August 2018, new RMB loans achieved RMB 1,280.0 bn, up 17.4% YoY and down 11.7% MoM. Medium-term and long-term RMB loans decreased by 评级：跑赢大市 3.3% YoY and 17.1% MoM. Of which, personal medium-term and long-term RMB loans decreased by 1.2% YoY and 3.5% MoM. The marginal decrease in

personal medium-term and long-term RMB loans was partly due to decrease in leverage of residents in our view. Banking Sector Net Profit and YoY Growth  Nine mainland banks under our coverage recorded net profit of RMB 677.5 银行业净利润及其同比增速 bn in 1H18, up 6.2% YoY. Of which, CMB's net profit YoY growth of 14.0% was

the highest of the nine banks, while BANKCOMM's YoY growth of 4.6% was the 人民币百亿 lowest. NPL ratios of seven banks (excluding MSB and CITIC) decreased YoY, of 200.0 40.0% 180.0 35.0% 160.0 which, 0.19 pts YoY decline of ABC's NPL ratio was the largest as of the end of 30.0% 140.0 1H18 120.0 25.0% 100.0 20.0% 关键假设更新 80.0 15.0% Key assumptions update 60.0 10.0% 40.0  We expect the loans to still be the main driver and the negative impact 20.0 5.0%

from investment and inter-bank assets to mitigate gradually for the asset's 0.0 0.0%

13 14 15 17 18 12 16

12 14 15 16 17 13

11 12 13 15 16 17 14

12 14 15 16 18 13 17

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Jun Jun Jun Jun Jun Jun Jun

Sep Sep Sep Sep Sep Sep

Dec Dec Dec Dec Dec Dec Dec

Mar Mar Mar Mar Mar Mar growth. We expect YoY growth of the Chinese banking sector's balance of total Mar Net profit YoY growth loans and total assets to be 12.8% and 8.7% in 2018, respectively.  We expect that China’s liquidity conditions will be neutral in the rest of 2018, and Source: the CBRC, GuotaiJunan International. we project the NIM of the banking sector to increase slightly YoY to 2.12% in 2018. NPL ratio of Chinese banking sector  Asset quality is expected to stay stable in the rest of 2018, and the NPL ratio of 中国银行业不良贷款率 the banking sector is projected to reach around 1.85% at the end of 2018.

 All things considered, we expect the banking sector's YoY growth of net

profit for 2018 and 2019 to be 6.9% and 8.5%, respectively. 2.00 % 1.80 1.60 Investment suggestions 投资建议 1.40 1.20  In the rest of 2018, we expect the following factors to support bank valuations: 1) 1.00 0.80 we expect the Chinese economy to grow stably and economic structure to be 0.60 0.40 optimized further; 2) we think the Chinese economic risks will decrease further; 0.20

3) the negative impact from stringent regulation on the banks' valuation is 0.00

12 13 15 16 17 14

13 14 16 17 18 15

13 14 16 17 15

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- - - -

expected to mitigate; 4) we expect the cut of RRRs by the PBOC will strengthen -

Jun Jun Jun Jun Jun Jun

Sep Sep Sep Sep Sep

Dec Dec Dec Dec Dec Dec

Mar Mar Mar Mar Mar the banks' profitability; 5) we project the Chinese banking sector's net profit Mar growth to recover somewhat; and 6) we expect the Chinese banking sector's Source: the CBRC. asset quality to stay stable. Therefore, we maintain “Outperform” rating for the banking sector. Our top pick for this sector is BOCHK (02388 HK), mainly because BOCHK is expected to continue to grow stably in 2018, given the projected good performance of Hong Kong's economy, and the expected U.S. Fed's interest rates hike and shrinkage of balance sheet. Company Name Code Price Rating 18 PER 19 PER 20 PER 18ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) ICBC 01398 5.720 Accumulate 5.8 5.4 4.9 14.0 0.8 CCB 00939 6.840 Accumulate 5.6 5.1 4.7 14.9 0.8 ABC 01288 3.840 Accumulate 5.5 5.2 4.7 13.4 0.7 BOC 03988 3.480 Accumulate 4.9 4.5 4.1 11.4 0.6 BANKCOMM 03328 5.870 Accumulate 5.2 4.9 4.5 11.2 0.6 CMB 03968 31.800 Buy 8.7 7.4 6.2 16.6 1.3 MSB 01988 5.810 Accumulate 3.5 3.3 3.0 13.4 0.4 CITIC 00998 5.010 Accumulate 4.5 4.1 3.7 11.7 0.5 Huishang 03698 3.400 Accumulate 3.7 3.2 2.8 14.8 0.5 Weighted Average. Outperform 5.7 5.2 4.7 13.7 0.8 市值加权平均 HSBC 00005 69.200 Accumulate 13.9 12.6 11.7 7.5 1.0 BOCHK 02388 37.200 Buy 11.6 10.4 9.3 13.5 1.5 Weighted Average. Outperform 13.4 12.1 11.2 8.8 1.1 市值加权平均 Source︰the Companies,GuotaiJunan International, Bloomberg.

See the last page for disclaimer page 22 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Richard Cao 曹柱 BOC Hong Kong (02388HK) (86755) 23976870 中银香港 (02388 HK) [email protected]

Company updates 公司近况 Rating: Buy

 Expanding cross-border business in the Greater Bay Area is expected to contribute to the Company's future development. In 1H18, the Company 评级：买入 earnestly carried out BOC Group's strategic requirements and remained committed to "Building a top-class, full-service and internationalized regional bank". In 1H18, the Company seized market opportunities and developed the local market in Hong Kong. Its core businesses realized satisfactory growth with major financial 6-18m TP 目标价: HK$47.52 indicators remaining at solid levels. The Company continued to implement its regional development strategies and made satisfactory progress in its business expansion in Southeast Asia. The Company remained committed to expanding its Share price 股价： HK$37.200 cross-border business in the Greater Bay Area with a focus on integrated collaboration with BOC Group through integrated development of the Guangdong-Hong Kong-Macao region, which is expected to contribute to the Company's future development. Stock performance 股价表现 Earnings comments 业绩评论 25.0 % of return

 The 1H18 financial results was basically in Line. The Company’s 1H18 net profit 20.0

attributable to ordinary shareholders slightly increased by 0.2% YoY to HK$ 17.5 bn, 15.0

mainly attributable to the high base arising from the discontinued business in 1H17. 10.0 Excluding effects from the discontinued business, the Company's net profit 5.0 attributable to ordinary shareholders increased by 17.7% YoY. 0.0  In the rest of 2018, the projected good performance of the Hong Kong economy is (5.0) expected to continue to drive the Company's loans to grow at a relatively good level (10.0) Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 and the expected rise in overall interest rate level in Hong Kong is projected to HSI BOCHK continue to contribute to the Company's NIM expansion. We forecast the Company's EPS for FY18/ FY19/ FY20 to be HK$ 3.213/ HK$ 3.590/ HK$ 4.000,

up 9.3% YoY/ 11.7% YoY/ 11.4% YoY, respectively.

Change in Share Price 1 M 3 M YTD Valuation, catalysts & risks 估值、催化剂和风险股价变动 1 个月 3 个月年初累计

Abs. %  Maintain our "Buy" rating for the Company. We expect the Company to benefit (5.2) (2.5) (1.6) 绝对变动 from the following factors: 1) the Chinese economy is projected to still record % Rel. % to HS index moderate growth, and the Hong Kong economy is expected to continue to grow (3.2) (0.0) (2.9) 相对恒指变动 % steadily; 2) the promotion of the Belt and Road Initiative; 3) the U.S. Fed’s interest Avg. share price(HK$) 36.5 36.8 37.5 rate hike and shrinkage of balance sheet; 4) prospective development of 平均股价（港元） businesses in the ASEAN region; and 5) expanding cross-border business in the Source: Bloomberg, GuotaiJunanInternational. Greater Bay Area. Therefore, we maintain our "Buy" rating for the Company. Meanwhile, we maintain our target price for the Company at HK$ 47.52, equivalent to 14.8x FY18 PER, 13.2x FY19 PER, 1.9x FY18 PBR and 1.7x FY19 PBR.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (HKD m) (HKD m) (HKD) (△%) (x) (HKD) (x) (HKD) (%) (%) 2016A 53,129 55,503 5.250 107.1 7.1 21.248 1.8 1.880 5.1 26.6 2017A 66,490 31,070 2.939 (44.0) 12.7 22.959 1.6 1.398 3.8 13.3 2018F 71,997 33,973 3.213 9.3 11.6 24.774 1.5 1.125 3.0 13.5 2019F 79,378 37,959 3.590 11.7 10.4 27.240 1.4 1.257 3.4 13.9 2020F 87,436 42,295 4.000 11.4 9.3 29.983 1.2 1.400 3.8 14.0

Shares in issue (m)总股数 (m) 10,572.8 Major shareholder 大股东 BOC 66.2% 393,307.4 Market cap. (HK$ m)市值(HK$ m) Free float (%) 自由流通比率(%) 33.8 10,530.5 3 month average vol. 3 个月平均成交股数(‘000) FY18 CET-1 Ratio FY18 普通股权一级资本比率 (%) 16.6 42.150 / 35.150 52 Weeks high/low (HK$) 52 周高/低 FY18 NPL Ratio FY18 不良贷款率 (%) 0.2

Source: the Company, GuotaiJunan International.

See the last page for disclaimer page 23 of 91 HK Market Quarterly Outlook and Sector Update

Financial statements and ratio

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F

Net interest income 25,428 34,708 37,475 41,768 46,408 Cash & cash equivalents 299,465 423,261 393,633 425,123 459,133

Net fee income 10,541 11,516 12,817 14,125 15,594 HKSARG Certificates of indebtedness 123,390 146,200 160,528 174,975 190,723

Other non interest income 17,160 20,266 21,705 23,485 25,434 Investment 659,523 711,366 818,071 897,424 979,987

Total non interest income 27,701 31,782 34,522 37,609 41,028 Loans 992,137 1,189,609 1,340,689 1,468,055 1,603,116

Operating income 53,129 66,490 71,997 79,378 87,436 Other assets 253,266 175,317 199,670 217,880 237,523

Net insurance Bs/Cs (11,375) (17,721) (15,240) (16,276) (17,432) Total Assets 2,327,781 2,645,753 2,912,590 3,183,457 3,470,482

Operating expense (12,213) (13,703) (15,299) (16,828) (18,493)

PPOP 29,541 35,066 41,458 46,273 51,511 Customer deposits 1,504,076 1,771,513 1,932,721 2,102,800 2,283,641

Provision loss (578) (1,076) (1,053) (1,060) (1,065) Deposits and balances from banks/Fis 192,413 223,074 251,627 281,823 315,642

Operating profit 28,963 33,990 40,404 45,213 50,446 HKSARG currency notes 123,390 146,200 160,528 174,975 190,723

Other profits 489 1,272 1,382 1,424 1,466 Other liabilities 277,342 257,622 301,409 331,311 358,737

Profit before tax 29,452 35,262 41,786 46,637 51,913 Total Liabilities 2,097,221 2,398,409 2,646,285 2,890,909 3,148,742

Income tax (4,622) (6,048) (7,062) (7,882) (8,773)

Profit after tax 24,830 29,214 34,724 38,755 43,139 Total Shareholders' Equity 224,653 242,739 261,931 287,999 317,008

Net profit from discontinued business 31,493 2,623 Minority Interest 5,907 4,605 4,375 4,550 4,732

Non-controlling interest (820) (767) (752) (797) (845) Total Equity 230,560 247,344 266,306 292,549 321,740

Shareholders' profit / loss 55,503 31,070 33,973 37,959 42,295

Basic EPS 5.250 2.939 3.213 3.590 4.000

[Table_FinancialRatio] Financial Ratios

2016A 2017A 2018F 2019F 2020F

[Table_CashFlowStatement] Cash Flow Statement EPS(HK$) 5.250 2.939 3.213 3.590 4.000

BVPS(HK$) 21.248 22.959 24.774 27.240 29.983

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F DPS(HK$) 1.880 1.398 1.125 1.257 1.400

Operating cash before taxation (68,686) 138,522 (78,957) 37,971 45,088 Growth (%)

Hong Kong profits tax paid (4,497) (4,703) (5,491) (6,129) (6,822) Net interest income (1.2) 36.5 8.0 11.5 11.1

Overseas profits tax paid (434) (383) (683) (762) (848) Net fee income (8.1) 9.2 11.3 10.2 10.4

Cash from operating activities (73,617) 133,436 (85,132) 31,080 37,417 Non-interest income (0.6) 14.7 8.6 8.9 9.1

Operating income (0.9) 25.1 8.3 10.3 10.2

Additions of PPE (1,501) (1,523) (1,371) (1,453) (1,540) PPOP 1.5 18.7 18.2 11.6 11.3

Additions of IPs (6) (13) (14) (15) (17) Net profit 107.1 (44.0) 9.3 11.7 11.4

Proceeds from disposal of PPE 2 13 14 16 20 EPS 107.1 (44.0) 9.3 11.7 11.4

Proceeds from disposal of IPs 0 2 2 2 2 Efficiency and liquidity (%)

Dividend received from A&J 2 2 2 2 2 Cost-to-income 23.0 20.6 21.3 21.2 21.2

Acquisition of entities (4,076) (6,618) (6,287) (5,973) (5,674) Loan-to-deposit 66.0 67.2 69.4 69.8 70.2

Cash from disposal of discontinued Income contribution (%)

operations 26,992 810 770 731 694 Net interest income 47.9 52.2 52.1 52.6 53.1

Cash from investing activities 21,413 (7,327) (6,961) (8,353) (10,023) Non-interest income 52.1 47.8 47.9 47.4 46.9

Profitability and Valuation

Dividend paid to shareholders (20,448) (13,375) (10,701) (11,957) (13,323) ROE(%) 26.6 13.3 13.5 13.9 14.0

Dividend paid to non-controlling interests (139) (152) (149) (158) (167) ROA(%) 2.4 1.2 1.2 1.2 1.3

Repayment of subordinated liabilities 0 (16) 0 0 0 Dividend yield(%) 5.1 3.8 3.0 3.4 3.8

Interest paid for subordinated liabilities (476) (595) (594) (683) (785) PE(x) 7.1 12.7 11.6 10.4 9.3

Cash from financing activities (21,063) (14,138) (11,444) (12,798) (14,276) PB(x) 1.8 1.6 1.5 1.4 1.2

CAR (%)

Net changes in cash (73,267) 111,971 (103,537) 9,930 13,118 CET-1 ratio 17.6 16.5 16.6 16.1 15.6

Cash at beg of year 313,095 249,574 377,944 275,407 286,237 CAR 22.4 20.4 20.1 19.6 19.1

FX adjustments 1,132 16,399 1,000 900 800 Asset Quality (HKD million, year ended 31

Cash at end of year 240,960 377,944 275,407 286,237 300,155 Dec)

NPLs 1,946 2,079 2,967 3,107 3,239

NPLs ratio (%) 0.20 0.18 0.23 0.22 0.21

LLR / NPLs (%) 160.5 196.4 190.4 215.9 240.0

LLR / Loans (%) 0.32 0.36 0.44 0.47 0.50

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 24 of 91 HK Market Quarterly Outlook and Sector Update

Cement and Construction Materials Sector Analyst: Gary Yang 杨光 (852) 2509 2642 水泥建材行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform  National cement output grew by 0.48% YoY during Jan. – Aug. 2018. Output in Northern China, Northwest and Northeastern China dropped the most owing 评级：跑赢大市 to worse macro economy and less effective implementation of the Winter Production Halts compared to the corresponding period in 2017. For other regions, output posed a mild YoY increase during the first eight months. Coal prices and Cement-Coal Spread  Decent 4Q18 demand is expected, but stricter restrictions on property 煤炭价格及水泥煤炭价差 financing environment will finally transmit to investment side. We think while acceleration in infrastructure investments sets to become a major pillar of RMB/t Cement-coal price gap RMB/t incremental cement demand, the spread of recently stricter financing restrictions 350 QHD5,500 thermal coal FOB (RHS) 900 in more cities may finally drag down the property new starts, cyclically leaving 800 300 less incremental cement demand. 700 250  The loose monetary policy may be less effective than before. The central 600 200 bank of China announced on Oct. 7 2018 to cut the RRR by 1% which will be 500 expected to release RMB750 billion yuan. The new policy will facilitate to 150 400 300 improve the financing environment of property environment, but we expect the 100 effect on the cement and construction material industry may be less significant 200 50

due to the overall deteriorating economy development, and the slowdown of the 100

Jun Jun Jun Jun Jun Jun Jun Jun

Feb Feb Feb Feb Feb Feb Feb Feb

Oct Oct Oct Oct Oct Oct

infrastructure investment which may not change in the near future. 0 Oct 0

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11 12 13 14 15 16 17

11 12 13 14 15 16 17 18

11 12 13 14 15 16 17 18  Production control continues to be the key cement price supporting factor, but relaxed policies signal appeared. We see now production control and coordination among regional leading enterprises to be the key fundamental to Source: Digital Cement, Guotai Junan International 。 support current cement price environment. While we believe such effort to last in 2018 and 2019, we expect this mechanism will sooner or later diminish due to recent signals of more loose polices. We expect the off-peak production control Regional Cement Prices on cement industry will continue in 2018 and 2019, but degree of the control will 区域水泥价格 decrease in the future. North China Northeast China East China Central South China RMB/t Southwest China Northwest China Key assumptions update 关键假设更新 550  We expect a flat national cement output in 2018. The market is now in 500 consensus of a flat cement demand in 2018. However, if property investments 450 consistently deliver positive surprises, demand assumption will be revised up. 400 350  We anticipate a stable price environment in 2018. Subject to a flat demand 300

outlook, continuing production control and the overall stable cement price in the 250

Mar Mar Mar Mar Mar Mar Mar

Sep Sep Sep Sep Sep Sep Sep

first eight months of 2018, we expect cement price to remain stable in 2018. This 200 Sep

------

implies a continuing earnings improvement for the industry in 2018. -

12 13 14 15 16 17 18

12 13 14 15 16 17 18 11  We expect the national cement output and price keep stable in 2019. With Source: Digital Cement, Guotai Junan International 。 the increasing cement demand from property and infrastructure construction, and the continuing production control expected to be in place at least until 2020, we are optimistic on the stable performance of cement price and output in 2019.

Investment suggestions 投资建议  The sector valuation now seems fair but we see relatively certain upside potential for CRC (01313 HK). We see CRC to have the most upside potential among all cement names, based on its location with more healthy economy environment in Southern China.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价(HK$) 投资评级市盈率(x) 市盈率(x) 市盈率(x) 净资产收益率(%) 市净率(x)

Anhui Conch 00914 44.95 Accumulate 7.8 6.9 6.5 26.4 1.9 CNBM 03323 6.69 Buy 4.5 4.2 4.0 14.3 0.6 CRC 01313 8.67 Buy 7.5 6.8 6.5 22.1 1.5 Weighted Average. 市值加权平均 Buy 7.2 6.5 6.1 23.7 1.6 Source: The Company, Bloomberg, Guotai Junan International.

See the last page for disclaimer page 25 of 91 HK Market Quarterly Outlook and Sector Update

China Resources Cement (01313 HK) Analyst: Gary Yang 杨光 (852) 2509 2642 华润水泥 (01313 HK) [email protected]

Company updates 公司近况 Rating: Buy

 The Company emphasized three main development strategies: 1) brand building, 2) prefabricated construction and smart factories, and 3) particular focus 评级：买入 on the importance of the development of prefabricated construction business, which

could replace concrete business. The Company also revealed that the gross profit margin of prefabricated construction business would be higher than that of concrete, and the construction period of production plants should be around 12-14 6-18m TP 目标价: HK $ 11.00 months. Based on this expectation, the two new production plants are expected to be completed in the second half of 2020. Share price 股价： HK$8.670  The company's four new clinker production lines are progressing steadily.

These are expected to be completed at the end of 2018 or early 2019, but the possibility of delays cannot be ruled out. The new aggregate business is still in its Stock performance early stages and likely to be delayed. 股价表现 Earnings comments 业绩评论 120.0 % of return  1H18 results beat market expectations; positive 2018 results ahead. Cement 100.0 sales volume was up by 13.3% YoY during 1H18, an increase of 30.5% QoQ in 80.0

2Q18. 1H18 GPM recorded 39.4%, up 9.9 ppt YoY with GP/t at HK$166, up 81.3% 60.0

YoY. GP/t during 2Q18 reached HK$177, up 18.0% QoQ, with GPM hitting 41.7%. 40.0 Net profit surged 145.5% YoY during 1H18, and 2Q18 net profit was up 24.7% 20.0 QoQ. The average selling price of the Company’s cement products was HK$382.6 from January to August 2018, as compared with HK$287.8 for the same period in 0.0 2017, representing an increase of 32.9%. (20.0) Oct-17 Jan-18 Apr-18 Jul-18 Sep-18

HSI Index China Resources Cement  Southern China should maintain strong performance in 4Q18 due to: 1) a

stable investment environment in property and infrastructure industries, 2) lower probability of cross-regional cement float from north to south and limited impact on Change in Share Price 1 M 3 M YTD cement prices in southern provinces, and 3) cement and clinker inventory in the 股价变动 1 个月 3 个月年初累计 eastern and southern regions are both at low levels. Abs. % (1.6) 27.3 69.6 绝对变动 % 估值、催化剂和风险 Rel. % to HS index Valuation, catalysts & risks 0.9 33.0 82.6 相对恒指变动 % Avg. share price(HK$)  The current valuation on the cement sector is still compelling. CRC is currently 8.9 8.6 7.5 平均股价（港元） trading at 7.5x FY18 PER, slightly higher than the sector average. We reiterate the Source: Bloomberg, Guotai Junan International。 "Buy" rating and maintain CRC's TP at HK$11.00.

 The main catalyst of the cement industry should be the continuously tight control on the supply side. As long as the production control coordination could remain unchanged in the future, the overall cement industry can deliver better earnings results. On the other side, the main risk could be the continuously relaxation of the production control or even the cancellation of the policy which could tremendously increase the supply and strike the cement price.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (HK$ m) (HK$ m) (HK$) (△ %) (x) (HK$) (x) (HK$) (%) (%) 2016A 25,647 1,326 0.203 30.6 42.7 3.981 2.18 0.090 1.0 5.0 2017A 29,958 3,617 0.554 172.9 15.7 4.639 1.87 0.266 3.1 12.8 2018F 41,135 7,853 1.162 109.7 7.5 5.815 1.49 0.581 6.7 22.1 2019F 42,361 8,845 1.267 9.0 6.8 6.519 1.33 0.671 7.7 20.5 2020F 43,354 9,337 1.337 5.5 6.5 7.185 1.21 0.735 8.5 19.5

Shares in issue (m)总股数 (m) 6,982.9 Major shareholder 大股东 CRNC 68.7% Market cap. (HK$ m)市值(HK$ m) 60,541.7 Free float (%) 自由流通比率(%) 31.3% 3 month average vol. 3 个月平均成交股数(‘000) 25,259.6 FY18 Net gearing (%) FY18 净负债/股东资金(%) 4.1 52 Weeks high/low (HK$) 52 周高/低 10.380 / 4.680 FY18 Est. NAV (HK$) FY18 每股估值（港元） 12.0

Source: The Company，Guotai Junan International.

See the last page for disclaimer page 26 of 91 HK Market Quarterly Outlook and Sector Update

Financial Statements and Ratios [Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F Total Revenue 25,647 29,958 41,135 42,361 43,354 Fixed assets 29,784 30,903 30,579 30,081 29,494 Cost of sales (18,622) (20,728) (24,622) (24,588) (24,796) Lease prepayments 2,675 2,816 2,730 2,644 2,558 Gross profit 7,025 9,230 16,513 17,773 18,558 Intangible assets 2,264 2,335 2,328 2,317 2,301 Selling expenses (1,676) (1,784) (2,543) (2,590) (2,704) Deposits for acquisition of Administrative expenses (2,302) (2,676) (3,237) (3,321) (3,398) fixed assets 441 464 529 603 687 Other income 271 389 363 553 668 Interests in associate & JCE 6,697 6,961 7,074 7,192 7,316 Operating Profit 2,900 5,423 11,017 12,370 13,078 Other non-current assets 1,222 1,153 928 876 859 Share profits of associates (58) 21 28 28 28 Total Non-current Assets 43,083 44,632 44,168 43,712 43,216 Share profits of JCE 9 78 86 91 96 Finance costs (692) (638) (676) (715) (774) Cash & Cash Equivalents 3,159 5,384 14,428 19,913 25,554 Exchange losses (419) 264 (79) (44) (46) Inventories 1,943 1,717 2,029 2,089 2,138 Profit Before Tax 2,158 4,884 10,454 11,774 12,428 Trade & other receivable 3,401 3,449 4,582 4,680 4,768 Income Tax (897) (1,291) (2,655) (2,990) (3,157) Pledged Bank deposits 1 1 7 8 10 profit After Tax 1,262 3,593 7,799 8,783 9,272 Other current assets 569 1,344 1,391 1,389 1,361 Non-controlling Interest 64 24 55 61 65 Total Current Assets 9,074 11,895 22,437 28,079 33,831 Shareholders' Profit / Loss 1,326 3,617 7,853 8,845 9,337 Total Assets 52,157 56,527 66,605 71,791 77,047 Basic EPS 0.203 0.554 1.162 1.267 1.337 Bills & other payable 7,592 8,341 8,855 8,825 8,824 Key assumptions Short term loans 3,230 6,572 6,716 6,892 7,289 Cement & Clinker (HK$) 2016A 2017A 2018F 2019F 2020F Other current liabilities 3,995 444 854 1,054 1,148 ASP/t (ex. VAT) 249 297 391 391 391 Total Current Liabilities 14,817 15,357 16,425 16,771 17,261 Unit cost 179 199 225 218 217 Long-term debts 7,616 6,990 5,956 6,112 6,464 GP/t 70 98 167 173 174 Other non-current liabilities 3,472 3,697 3,499 3,326 3,157 Total Non-current Liabilities 11,088 10,687 9,455 9,438 9,621

[Table_CashFlowStatement] Cash Flow Statement Total Liabilities 25,905 26,044 25,880 26,209 26,881 Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F Total Shareholders' Equity 26,007 30,309 40,606 45,524 50,173 Profit before tax 2,158 4,884 10,454 11,774 12,428 Minority Interest 245 173 119 57 (8) Depreciation & amortization 1,902 1,833 1,989 1,972 1,943 Total Equity 26,252 30,482 40,725 45,582 50,166 Finance costs 692 638 676 715 774

Other items 942 197 (149) (320) (427) [Table_FinancialRatio] Financial Ratios Working capital change (170) 849 (755) (14) 32 Interest & Tax (1,414) (1,789) (2,984) (3,561) (3,874) 2016A 2017A 2018F 2019F 2020F Cash from Operating Activities 4,112 6,613 9,230 10,565 10,877 Growth (%): Revenue (4.2) 16.8 37.3 3.0 2.3 CAPEX (1,865) (1,214) (1,600) (1,500) (1,400) Gross profit 9.5 31.4 78.9 7.6 4.4 Net advances to government 227 (60) (65) (74) (84) Operating profit 61.7 87.0 103.1 12.3 5.7 Interest received 42 68 111 274 373 Net profit 30.6 172.8 117.1 12.6 5.6 Others (75) (682) (12) (12) (12) Cash from Investing Activities (1,671) (1,888) (1,566) (1,312) (1,124) Profitability (%): Gross margin 27.4 30.8 40.1 42.0 42.8 Change in debts (4,552) 2,281 (891) 332 749 Operating margin 11.3 18.1 26.8 29.2 30.2 Dividends paid (229) (1,241) (1,736) (3,927) (4,688) Net margin 5.2 12.1 19.1 20.9 21.5 Others 3,746 (3,832) 4,007 (173) (173) ROA 2.5 6.7 12.8 12.8 12.5 Cash from Financing Activities (1,035) (2,791) 1,380 (3,768) (4,112) ROE 5.0 12.8 22.1 20.5 19.5

Net Changes in Cash 1,406 1,933 9,044 5,485 5,641 Liquidity & Solvency Cash at Beg of Year 1,938 3,159 5,384 14,428 19,913 Current Ratio (x) 0.6 0.8 1.4 1.7 2.0 Foreign exchange rate Quick Ratio (x) 0.5 0.7 1.2 1.5 1.8 changes (185) 292 0 0 0 Total Liabilities to 49.7 46.1 38.9 36.5 34.9 Cash at End of Year 3,159 5,384 14,428 19,913 25,554 Total Assets (%) Interest coverage (x) 4.1 8.7 16.5 17.5 17.1

Source: the Company, Guotai Junan International. Dividend payout ratio 44.3 48.0 50.0 53.0 55.0 (%)

See the last page for disclaimer page 27 of 91 HK Market Quarterly Outlook and Sector Update

Clean Energy Sector - Natural Gas Analyst: Kevin Guo 郭勇 (0755) 2397 6671 清洁能源行业 -- 天然气 [email protected]

Rating: Outperform Industry dynamics 行业动态

 Natural gas consumption of China increased by about 19.4% YoY to 179.4 评级：跑赢大市

billion m3 in the first 8 months of 2018. Natural gas consumption growth of China accelerated in 2018 compared to the same period last year. Natural gas consumption from all types of customers, except CNG station, recorded fast NYMEX Natural Gas Price growth and “coal to gas” projects contributed significant gas consumption 纽约商品交易所天然气价格 growth.

 Total import of natural gas in the first 8 months of 2018 increased by 34.9% 7.00 USD/MMBtu YoY to 57.4 million tons. The import of LNG increased by 47.9% YoY to 32.8 6.00

million tons and the import of pipeline gas increased by 20.7% YoY to 24.6 5.00 million tons. 4.00

 The average import costs of natural gas increased with the rise in oil 3.00 prices. The average import price of LNG in the first 8 months of 2018 2.00

increased by 24.5% YoY to USD 464.3/t, the average import price of pipeline 1.00 gas decreased by 8.1% YoY to USD 296.3/t. 0.00 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Source: Bloomberg, Key assumptions update 关键假设更新

 We expect China’s consumption of natural gas to grow by about 15%-20% in 2018. Natural gas consumption growth accelerated in the first half of 2018 Stock Price Performance and we expect it to maintain fast growth in the second half of 2018 due to strong 股价表现 demand and sufficient supply. 60.0  We expect gas dollar margin of the Company to remain stable in 2018. We 50.0 %Return believe that gas procurement costs will be more stable in winter seasons of 2018 40.0 30.0

and customer mix change will only have limited impact. 20.0

10.0 Investment suggestions 投资建议 0.0 -10.0

 Natural gas distribution industry possesses great growth potential due to -20.0 energy structure adjustment of China. Natural gas consumption of China is -30.0 expected to maintain fast growth in the next 5-10 years due to the boost of clean -40.0 Jan-18 Mar-18 May-18 Jul-18 Sep-18 energy consumption by the government. We expect net profit of gas distribution HSI Index 3 392 2688 2886 1193 companies to maintain fast growth due to more gas sales. Top pick is China Resources Gas (01193 HK). Source: Bloomberg,

Company Name Code Price Rating 18PER 19PER 20PER 18ROE 18P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) 14.920 Buy 23.4 21.9 20.2 14.3 3.2 HK and China Gas 00003 30.350 Buy 13.9 12.5 11.2 20.5 2.1 China Resources Gas 01193 41.800 Buy 6.8 6.0 5.3 11.1 0.7 Beijing Enterprises 00392 61.500 Buy 14.9 12.8 11.2 19.9 2.3 ENN Energy 02688 1.280 Buy 5.8 3.4 2.7 17.1 0.9 Binhai Investment 02886 Weighted Average. Outperform 18.1 16.6 15.1 15.9 2.5 市值加权平均 Source︰the Companies, GuotaiJunan International, Bloomberg.

See the last page for disclaimer page 28 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Kevin Guo 郭勇 China Resources Gas (01193HK) (0755) 2397 6671 华润燃气 (01193 HK) [email protected]

Company updates 公司近况 Rating: Buy

 The sale growth of natural gas accelerated in the first half of 2018. Total sale of gas increased 22.9% YoY to 12.38 billion m3: natural gas consumed by industrial 评级：买入 customers increased by 29.8% YoY to 5.18 billion m3, natural gas consumed by

commercial customers increased by 27.2% YoY to 3.29 billion m3, and natural gas consumed by residential customers increased by 13.8% YoY to 3.04 billion m3.

 Connection service business maintained fast growth and was in line with our 6-18m TP 目标价: HK$43.74 estimation. Revenue contributed by connection services increased by 5.7% YoY to HK$ 3.34 billion in the first half of 2018. The Company added about 1.1 million new residential customers. Share price 股价： HK$30.350

Stock performance Earnings comments 业绩评论股价表现

The 2018 interim results of the Company were higher than market consensus 50.0  % of return and our expectations. Total revenue of the Company increased 34.8% YoY to 40.0 HK$ 23.85 billion and net profit attributable to shareholders increased 25.2% YoY to 30.0 HK$ 2.65 billion. 20.0 Gas dollar margin of piped gas remained stable. Gas dollar margin of natural  10.0 gas distribution companies was much stable under new pricing mechanism. Gas supply problems in the winter season will vastly improve as more gas storage 0.0 facilities are under construction and governments and gas suppliers all take (10.0)

effective measures to expand supply. (20.0) Oct-17 Jan-18 Apr-18 Jul-18 Sep-18

HSI Index China Resources Gas

Valuation, catalysts & risks 估值、催化剂和风险

 Net profit growth of China resources Gas is strongly supported by fast Change in Share Price 1 M 3 M YTD natural gas sales growth and stable gas dollar margin. China resources Gas 股价变动 1 个月 3 个月年初累计

is one of the largest gas distributors in China and operates gas distribution business Abs. % (18.6) (8.5) 10.6 across China. We expect total sale of piped gas of the Company to benefit from the 绝对变动 % Rel. % to HS index (15.7) (1.0) 18.5 restructuring of energy structure in China and continue to maintain fast growth in 相对恒指变动 % the next few years. We also expect gas dollar margin of the Company to be more Avg. share price(HK$) 35.7 35.4 29.5 stable under new pricing mechanisms. 平均股价（港元） Source: Bloomberg, Guotai Junan International.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (HK$ m) (HK$ m) (HK$) (△%) (x) (HK$) (x) (HK$) (%) (%) 2016A 32,916 3,289 1.510 16.2 18.9 10.893 2.6 0.380 1.3 18.9 2017A 39,838 3,654 1.680 11.3 17.0 13.391 2.1 0.450 1.6 18.4 2018F 48,190 4,763 2.187 30.2 13.1 14.737 1.9 0.547 1.9 20.5 2019F 55,656 5,283 2.425 10.9 11.8 16.270 1.8 0.606 2.1 20.3 2020F 64,215 5,914 2.715 11.9 10.5 18.029 1.6 0.679 2.4 20.2

Shares in issue (m)总股数 (m) 2,178.2 Major shareholder 大股东 CR Holdings 64.0% Market cap. (HK$ m)市值(HK$ m) 69,048.9 Free float (%) 自由流通比率(%) 36.0 3 month average vol. 3 个月平均成交股数(‘000) 5,102.69 FY18 Net gearing (%) FY17 净负债/股东资金(%) 5.7 52 Weeks high/low (HK$) 52 周高/低 38.950 / 23.850 FY18 Est. NAV (HK$) FY17 每股估值（港元） 48.2

Source: the Company, GuotaiJunan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 32,916 39,838 48,190 55,656 64,215 PPE 24,059 28,608 31,990 35,455 38,553

Cost of sales (21,732) (27,922) (34,572) (40,547) (47,382) Prepaid lease payments 1,522 1,715 1,766 1,819 1,873

Gross profit 11,184 11,916 13,618 15,109 16,833 Interests in JV 9,029 10,818 11,359 11,927 12,524

Other income 648 691 836 886 939 Interests in associates 1,863 2,227 2,294 2,363 2,434

S&D expenses (3,413) (3,734) (4,193) (4,731) (5,201) Goodwill 633 678 684 691 698

Administrative expenses (2,464) (2,567) (2,699) (2,838) (3,082) Operating rights 1,247 1,259 1,297 1,335 1,376

Operating Profit 5,955 6,305 7,562 8,426 9,488 Others 1,351 686 272 285 300

Finance costs (538) (479) (272) (306) (348) Total Non-current Assets 39,704 45,991 49,662 53,876 57,757

Share results of JV 653 654 753 813 878

Share results of associates 119 133 426 460 497 Inventories 413 595 1,012 1,113 1,188

Profit Before Tax 6,189 6,613 8,468 9,392 10,514 Trade and other receivables 8,021 9,463 10,120 11,688 12,843

Income Tax (1,751) (1,703) (2,117) (2,348) (2,629) Amounts due from customers 1,882 2,257 2,891 3,339 3,853

profit After Tax 4,438 4,911 6,351 7,044 7,886 Cash & Cash Equivalents 5,501 10,356 10,120 11,131 11,880

Non-controlling Interest (1,148) (1,257) (1,588) (1,761) (1,971) Other deposits 4,025 0 0 0 0

Shareholders' Profit / Loss 3,289 3,654 4,763 5,283 5,914 Others 129 102 10 8 7

Total Current Assets 19,971 22,773 24,153 27,280 29,771

Basic EPS 1.510 1.680 2.187 2.425 2.715

Total Assets 59,675 68,764 73,815 81,156 87,528

Trade and other payables 10,574 13,242 14,939 16,697 17,980

Amounts due to customers 11,163 12,808 12,529 13,079 13,485 Bank and other borrowings 3,139 5,328 4,032 4,935 4,105

[Table_CashFlowStatement] Cash Flow Statement Taxation payable 495 593 640 691 747

Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F Others 45 41 43 45 47

Profit before taxation 6,189 6,613 8,468 9,392 10,514 Total Current Liabilities 25,416 32,011 32,184 35,447 36,364

Adjustments for:

Interest expense 538 479 272 306 348 Government grants 134 163 171 180 189

Share results of JV (653) (654) (753) (813) (878) Bank and other borrowings 3,302 252 2,409 3,339 5,137

Share results of associates (119) (133) (426) (460) (497) Other liabilities 5,726 5,788 5,498 5,223 4,962

Depreciation 1,090 1,206 1,331 1,536 1,702 Amount due to subsidiary 188 159 169 179 190

Change of working capital 286 2,314 (290) 191 (54) Deferred tax liabilities 1,204 1,222 1,283 1,347 1,415

Income Tax paid (1,751) (1,703) (2,117) (2,348) (2,629) Total Non-current Liabilities 10,554 7,584 9,531 10,269 11,892

Cash from Operating Activities 5,580 8,123 6,486 7,804 8,507

Total Liabilities 35,970 39,594 41,715 45,716 48,257

Payments for acquisition (3,000) (2,800) (3,600) (3,200) (3,200) Total Shareholders' Equity 17,768 21,993 24,565 27,528 30,963

Investment in JV (436) (471) (509) (549) (593) Minority Interest 5,937 7,177 7,536 7,912 8,308

Dividend received from JV 294 294 339 366 395 Total Equity 23,705 29,169 32,101 35,440 39,271

Withdrawal of deposits 16 17 17 18 18

Cash from Investing Activities (3,126) (2,960) (3,753) (3,366) (3,380) [Table_FinancialRatio] Financial Ratios

Dividends paid (827) (980) (1,191) (1,321) (1,479) Year end 31 Dec (HK$ m) 2016A 2017A 2018F 2019F 2020F

Interest paid (538) (479) (272) (306) (348)

Net borrowings raised (2,731) (801) 573 1,557 707 Gross margin 34.0% 29.9% 28.3% 27.1% 26.2% Others (3,607) 1,953 (2,079) (3,357) (3,258) Net margin 10.0% 9.2% 9.9% 9.5% 9.2% Cash from Financing Activities (7,704) (307) (2,969) (3,426) (4,378) ROE 18.9% 18.4% 20.5% 20.3% 20.2% Net Changes in Cash (5,250) 4,855 (236) 1,011 748 ROA 7.4% 7.1% 8.6% 8.7% 9.0% Cash at Beg of Year 10,751 5,501 10,356 10,120 11,131 Free CF 2,580 5,323 2,886 4,604 5,307 Foreign exchange rate changes 0 0 0 0 0 Net gearing 11.1% 3.5% 5.7% 6.7% 5.9% Cash at End of Year 5,501 10,356 10,120 11,131 11,880

Source: the Company, Guotai Junan International.

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Clean Energy Sector - Solar Analyst: Jun Zhu 朱俊杰 (852) 2509 7592 清洁能源行业 - 太阳能 [email protected]

Industry dynamics 行业动态 Rating: Neutral Outperform

 Nationwide solar newly installed capacity in China in 6M2018 reached 24.3 GW. According to NEA, newly installed solar capacity in China in 1H2018 评级：中性跑赢大市 reached 24.3 GW, a level similar to that of 6M2017. In which, concentrated solar projects added 12.1 GW (flat YoY) while distributed solar project contributed 12.2 GW (+72% YoY). Meanwhile, according to the stats of CEC, Historical & Forecast PV Installations new installations in 8M2018 reached 33.0 GW, down 13.7% YoY. 历史及预测光伏装机容量  Price of solar materials fell dramatically in 9M2018. Demand on solar 210

materials plunged following the promulgation of 531 PV new policy. For the first 200 9 months ending 26th September 2018, the YoY return for the price of poly-silicon, multi-wafer, mono-wafer, multi-cell and module was -7.0%, -29.4%, 154.5 150 -30.6%, -24.5% and -15.6%, respectively. The price downtrend is expected to 130.3 continue in the remaining months of 2018 as demand is expected to be sluggish. GW 100 77.4  Per watt investment cost of solar energy investment is expected to fall to 50 RMB 5.00 / RMB 4.50 by the end of 2018 / 2019. Downstream cost cutting 35.8 28.1 pressure will force solar material makers to further lower product selling price, 19.4 6.5 0.8 3.3 which incentivizes solar project investments. Further, the production cost of 0 2010 2011 2012 2013 2014 2015 2016 2017 6M2018 2020E solar materials is expected to decline thanks to new production technologies used and cost cutting efforts made by solar materials producers. Source: NEA, Guotai Junan Interational.

Key assumptions update 关键假设更新

 Nationwide new solar installation is expected to fall to between 35 GW and PV Cell and Module Price 40 GW in 2018. Following 531 PV new policy, we expect nationwide new solar 光伏电池片及组件价格走势 installations to fall sharply to between 35 GW and 40 GW in 2018 (down from 53 GW installed in 2017). We are optimistic about the outlook of the solar industry Polysilion (left) Multi Wafer (right) Mono Wafer (right) especially after solar grid parity is achieved, which is expected to be in mid 2019. 35 0.45 0.40 Further, we expect nationwide cumulative installed solar capacity to hit 210 GW 30 0.35 by 2020 from the 154.5 GW in 1H2018. 25 0.30 20  Price of solar materials is expected to continue its downtrend. As the 0.25

15 0.20 US$ /US$ Kg

investment cost is the key to achieve PV grid-parity, we see no sign that the /US$ Watt 0.15 solar materials price will rebound moving forward, especially following the 10 0.10 5 promulgation of 531 PV new policy aiming to cut tariff subsidies. We expect the 0.05 potential rise in solar materials demand globally following the solar materials 0 0.00 price plunge as a result of 531 PV new policy is set to reverse the current Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 downtrend of solar industry. Source: PVinsights,

Investment suggestions 投资建议

We favor solar EPC service providers. Demand for solar materials in China is certain to fall following the 531 PV new policy and solar materials makers are set to be hit by this new policy. As EPC service providers are somewhat immune from solar materials price fluctuations, our current top pick for this sector is Singyes Solar (00750 HK).

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) GCL New Energy 00451 0.275 Buy 6.6 4.2 3.9 11.0 0.6 GCL Poly Energy 03800 0.520 Neutral 15.4 10.5 8.7 2.3 0.4 Singyes Solar 00750 2.620 Buy 4.4 3.9 3.7 9.3 0.4 Xinyi Solar 00968 2.360 Neutral 8.4 9.1 8.9 19.7 1.6 Weighted Average. Neutral 9.8 8.4 7.8 12.9 1.0 市值加权平均 Source︰the Companies, Guotai Junan International, Bloomberg.

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Analyst: Jun Zhu 朱俊杰 Singyes Solar (00750 HK) (852) 2509 7592 兴业太阳能 (00750 HK) [email protected]

Company updates 公司近况 Rating: Buy

 An established solar EPC service provider with sizable amount of solar projects. Aside from completing more than 300 MW of solar EPC projects in the 评级：买入 first half of 2018, the Company maintains grid connected solar farm capacity of

327.7 MW at the end of June 2018, with another 67.4 MW pending for grid connection and 72.7 MW of solar projects currently under construction, totaling 468 MW of self-owned solar projects. The Company will selectively sell some of these solar projects to independent third parties when the opportunity arises. 6-18m TP 目标价: HK $ 3.00

 Share placement was made on 12th October. The Company announced that it is to subscribe and sell a total of 17.8 mn existing placing shares to not less than 6 Share price 股价： HK$2.620 investors at the placing price of HK$2.2 per placing share, which is a 12% discount

to the closing price of the last trading day. The placing shares represent Stock performance approximately 2.1% of the enlarged issued share capital of the Company. Gross proceeds from the placement will be approximately HK$ 39.2 mn and is intended to 股价表现 be used for general working capital purposes. 50.0 % of return

Earnings comments 业绩评论 40.0

 Earnings in 1H2018 went up 185.7% YoY, better than expectations. In 1H2018, 30.0

sales and net profit of Singyes went up YoY by 3.9% and 185.7%, respectively. 20.0 Gross margin was up YoY by 3.6 ppts to 24.4%. The core operations remained healthy during the period. Key reasons behind the strong earnings growth are the 10.0

fall in financing expense and the sharp rise in gross profit during the period. We 0.0 expect asset disposals to bring in unexpected surge in earnings from 2H2018 to (10.0) 1H2019. (20.0)  More than 500 MW of solar projects expected to be completed per year from Aug-17 Nov-17 Feb-18 May-18 Aug-18 2018 to 2020. The Company completed approximately 320 MW (up 39.1% YoY or HSI Singyes Solar an increment of 90 MW) of solar EPC projects in the first half of 2018, with average

gross margin of 30.3%. Per watt construction sales of solar projects averaged at RMB 5.60. The improvement in solar EPC margin was mainly due to the drop in solar materials costs. We estimate Singyes to complete 510 MW/ 550 MW/ 575 MW of solar EPC projects from FY18 to FY20, respectively. Solar EPC per watt sales Change in Share Price 1 M 3 M YTD are estimated to be RMB 5.5/ RMB 5.0/ RMB 4.7, respectively, from 2018 to 2020. 股价变动 1 个月 3 个月年初累计 Abs. % (2.8) (17.3) (7.3) Valuation, catalysts & risks 估值、催化剂和风险绝对变动 % Rel. % to HS index 相对恒指变动 % (0.8) (11.0) (7.5) The valuation of Singyes Solar is at historic low and deserves a rebound. We Avg. share price(HK$) are optimistic about the outlook of Singyes Solar as the plunge in solar materials 平均股价（港元） 2.38 2.44 2.78 Source: Bloomberg, Guotai Junan International. price did nothing but improved the margin of the solar EPC business of Singyes. Our investment rating for the Company is "Buy" and the target price is HK$ 3.00, equivalent to 5.0x 2018 PER or 0.4x 2018 PBR. The cheap valuation of the Company deserves a strong rebound, especially given its impressive 1H2018 operations and a sanguine outlook from 2018 to 2020.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 5,240 502 0.661 29.7 3.6 4.966 0.5 0.070 3.0 13.3 2017A 5,675 144 0.172 (73.9) 12.7 5.277 0.4 0.030 1.4 3.4 2018F 5,795 426 0.511 196.3 4.4 5.760 0.4 0.026 1.1 9.3 2019F 6,009 487 0.584 14.3 3.9 6.301 0.4 0.029 1.3 9.7 2020F 6,232 513 0.615 5.4 3.7 6.917 0.3 0.031 1.4 9.3

Shares in issue (m) 总股数 (m) 834.1 Major shareholder 大股东 Mr. Liu, Hongwei - 38.5% Market cap. (HK$ m) 市值 (HK$ m) 2,026.8 Free float (%) 自由流通比率 (%) 61.6 3 month average vol. 3 个月平均成交股数 (‘000) 1,600.6 FY18 Net gearing (%) FY18 净负债/股东资金(%) 91.0 52 Weeks high/low (HK$) 52 周高/低 3.660 / 2.240 FY18 EV / EBITDA (x) FY18 企业值 / EBITDA（x） 6.0

Source: the Company, Guotai Junan International.

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Financial statements and ratios Income statement Balance sheet

Year end 31 Dec (RMB) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB) 2016A 2017A 2018F 2019F 2020F

Total Revenue 5,240 5,675 5,795 6,009 6,232 PPE 4,364 4,284 4,192 4,070 3,913

COGS (4,105) (4,537) (4,436) (4,537) (4,701) Prepaid Expense 9 19 38 78 160

Gross profit 1,135 1,139 1,359 1,472 1,531 Others 416 397 397 396 414

SG&A expense (485) (518) (550) (559) (561) Total Non-current Assets 4,788 4,699 4,627 4,544 4,487

Other income & gains 361 348 365 383 403 Cash & Cash Equivalents 680 1,202 1,555 1,602 1,658

Other expenses (16) (76) (64) (72) (81) Inventories 893 1,088 1,863 2,042 2,162

Operating Profit 995 892 1,110 1,225 1,292 Trade receivable 3,373 3,752 3,535 3,606 3,864

Net finance costs (368) (621) (499) (498) (474) Others 1,260 1,633 1,484 1,559 1,658

Profit Before Tax 627 270 611 727 818 Total Current Assets 6,206 7,676 8,437 8,808 9,343

Income Tax (114) (120) (168) (219) (278) Total Assets 10,995 12,375 13,065 13,352 13,830 profit After Tax 513 150 442 508 540 Short-term debts 1,293 1,279 1,307 1,382 1,151

Non-controlling Interest (11) (7) (16) (21) (27) Convertibles 0 0 86 86 86

Shareholders' Profit / Loss 502 144 426 487 513 Trade payable 1,369 1,317 1,357 1,387 1,437

Senior note 554 1,239 2,789 2,889 2,989

Basic EPS 0.661 0.172 0.511 0.584 0.615 Others 510 601 469 506 535

Total Current Liabilities 3,726 4,436 6,007 6,250 6,198

Long-term debts 1,770 1,439 1,839 1,339 1,239

Senior note 217 1,677 0 0 0

Convertibles 719 81 0 0 0

Cash flow statement Others 358 251 309 381 470

Year end 31 Dec (RMB) 2016A 2017A 2018F 2019F 2020F Total Non-current Liabilities 3,064 3,448 2,148 1,720 1,709

Net income 502 144 426 487 513 Total Liabilities 6,790 7,885 8,155 7,970 7,907

D&A 152 179 214 257 309 Total Shareholders' Equity 4,142 4,402 4,804 5,255 5,769

Change in working capital (518) (615) (473) (227) (368) Minority Interest 62 89 105 127 153

Others 40 34 194 180 210 Total Equity 4,204 4,490 4,909 5,382 5,922

Cash from Operating Activities 176 (259) 360 697 664 Total liabilities & equity 10,995 12,375 13,065 13,352 13,830

Investing activities

Capital expenditure (950) (360) (290) (300) (312) Key financial ratios

Proceeds from disposal 147 176 168 167 161 2016A 2017A 2018F 2019F 2020F

Others (130) (1) 8 (2) (25) Gross margin 21.7% 20.1% 23.4% 24.5% 24.6%

Cash from Investing Activities (933) (185) (114) (136) (175) EBIT margin 12.4% 10.9% 13.9% 15.2% 15.6%

Financing activities EBITDA margin 15.3% 14.1% 17.6% 19.5% 20.5%

Debt raised / (repaid) 275 1,162 305 (325) (231) Net margin 9.6% 2.5% 7.4% 8.1% 8.2%

Dividend paid (21) (58) (42) (21) (24) ROE 13.3% 3.4% 9.3% 9.7% 9.3%

Stock issues 310 0 0 0 0 ROA 4.9% 1.2% 3.3% 3.7% 3.8%

Others (398) (138) (157) (168) (178) Net gearing (%) 93.5 102.5 91.0 76.1 64.3

Cash from Financing Activities 167 965 106 (514) (433) Inventory turnover(day) 79.4 87.5 153.3 164.3 167.9

Net Changes in Cash (590) 522 353 47 56 AR turnover (day) 235.0 241.3 222.7 219.0 226.3

Adjustments 5 0 0 0 0 AP turnover (day) 119.7 104.1 109.5 109.5 109.5

Cash at Beg of Year 1,265 680 1,202 1,555 1,602 EV/EBITDA (x) 7.1 7.9 5.9 4.9 4.3

Cash at End of Year 680 1,202 1,555 1,602 1,658 Quick ratio (x) 1.1 1.1 0.8 0.8 0.9

Current ratio (x) 1.7 1.7 1.4 1.4 1.5

Source: the Company, Guotai Junan International.

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Clean Energy Sector - Wind & Others Analyst: JakeWang 汪昌江 (86755) 2397 6675 清洁能源行业 - 风电及其它 [email protected]

行业动态 Industry dynamics Rating: Outperform Nationwide wind power generation increased by 25.7% YoY to 239.3  MMWh for the first 8 moths of 2018; cumulative wind utilisation hours was up by 13.4% YoY to 1,412 hours. For the first 8 months of 2017, nation 评级：跑赢大市

wide newly installed wind capacity recorded 10.3GW, and the total installed capacity increaced 11.5% YoY to 174.0GW; the increase in power generation apparently exceeded capacity growth. Cumulative Wind Utilisation Hours  YTD wind power investment reduced by 21.3% YoY to RMB25.8 bn for Jan. 累计风电利用小时数 - Aug. 2018, showing another slowdown in new investment growth. The

2018 wind power investment growth were acutally stablizing since the constant Hrs 2014 2015 2016 2017 2018 2018YoY double-digit YoY decrease in 2017, but once again turned worse in August. We 2,500 35% think this was mainly due to the competitive bidding policy for new wind projects 27.6% 30% 2,000 (recently issued in May. 2018), which lowered the new orders for project 26.4% 22.5% 25% initiation. Yet the market expectation for the ROE of future projects will gradually 17.5% 20% 1,500 16.2%15.6% recover as wind curtailment steadily eases. Also, according to the new policy 13.4% 15% 1,000 from NEA on accelerating the grid parity process issued in Sep, future project 10%

developments (except for red-alert areas) will no longer be limited by the annual 5% 500 construction scale if they require no subsidy. We expect to see a rebound in 0% wind power investment starting from 2019.

0 -5%

Jul

Apr Oct

Jun Jan

Feb Mar

Dec

Aug Sep Nov  The NEA issued the second consultation draft of Renewable Portfolio May Standard. The new consultation draft of RPS has brought up several targeted solutions for the deficit in the funding of renewable energy subsidy and Source:National Energy Administration, Guotai Junan International. confirmed that total existing subsidy will remain unchanged. We expect that the collection of receivables for wind power companies will be notably improved during 2H18 and finance expenses will be effectively managed. YTD Wind Power Investment Key assumptions update 关键假设更新累计风电投资额  We expect the nationwide wind utilisation hours to be around 2,150 hours RMB Bn 2014 2015 2016 on average for 2018, with estimated wind curtailment rate of 8.5%. The 2017 2018 2018YoY 120 40% national average curtailment rate has already dropped to 8.7% in 1H18; most of 14.5% 100 20% the provinces / areas have essentially solved the wind curtailment problem, 2.9% -2.0% -4.9% -6.8% -7.9% 0% except Inner Mongilia, Gansu and Xinjiang. We expect the utilisation 80 -21.3% performance to continue to improve in 2H18 from the steady decrease in -20% curtailment rate and the expansion in market trading electricity. 60 -40% 40  We now assume the nation wide cumulative wind capacity addition to be -60% around 22GW - 25GW for 2018. Total national installed wind capacity is 20 -80% estimated to be 224.7GW by the end of year 2020, which represents a CAGR of

13.3% for the 13th Five-Year period. 0 -100%

Jul

Apr Oct

Jan Jun

Mar Feb

Dec

Aug Sep Nov May Investment suggestions 投资建议

Source:National Energy Administration, Guotai Junan International. Maintain sector rating as "Outperform". Wind curtailment situations contiues to alleviate; capacity expands with stability. The policy uncertainty regarding renewable energy subsidy resolved, which favors sector valuation recovery. We maintain positive regarding the earnings prospects for wind power companies. Currently our sector top pick is Longyuan Power (00916 HK), with rating of "Buy" and TP of HK$8.30.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Longyuan Power 00916 6.420 Buy 9.4 8.0 7.4 9.9 0.9 Huaneng Renewables 00958 2.360 Accumulate 5.9 5.3 4.8 14.0 0.8 Datang Renewables 01798 1.100 Buy 5.2 4.4 3.8 12.1 0.5 Huadian Fuxin 00816 1.550 Accumulate 4.5 3.8 3.2 10.3 0.4

Weighted Average. Outperform 7.5 6.5 5.9 11.2 0.8 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

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Longyuan Power (00916HK) Analyst: Jake Wang 汪昌江 (86755) 2397 6675 龙源电力 (00916 HK) [email protected]

Company updates 公司近况 Rating: Buy  The Company's wind power generation increased by 2.5% YoY to 2,348GWh in Aug. 2018; estimated monthly wind power utilisation decreased 3.0% YoY 评级：买入 to 128 hours. The YoY decrease in monthly utilisation hour was mainly caused by

lower average wind speed, but was partially offset by the notable improvement in wind curtailment situations. The Company’s wind curtailment rate for Aug. was only 2.90%, down by 4.8 ppts YoY. The estimated cumulative wind curtailment rate for the first 8 months of 2018 was about 6.2%, and the corresponding cumulative wind 6-18m TP 目标价: HK$8.30 utilisation hour was estimated to be 1,415 hours, up by 14.1% YoY. We expect that growth rate of the Company's full-year wind power generation hours will be approximately 19.7% on a YoY basis and wind utilization hours to be 2,200 hours or Share price 股价： HK$6.420 higher.

 The Company's market trading electricity sales volume was 5.1MMWh in 1H18, representing 24.6% of the Company's total power generation. The average discount of market trading electricity to the benchmark tariff was around Stock performance RMB0.114/KWh. The management expects the percentage of market trading 股价表现 electricity for 2018 full year to be 25.0% - 26.0%, and expects the discount to remain basically flat YoY. 45.0 % of return 40.0 Earnings comments 业绩评论 35.0 30.0  The Company's 1H18 net profit attributable to equity holders was up 28.0% 25.0 20.0 YoY to RMB3,193 mn, representing 58.7% of our previous full-year estimate 15.0 and was lower than expected. Revenue was up by 8.5% YoY while total operating 10.0 5.0 expense was basically flat YoY in 1H18. Accounts receivables related to renewable 0.0 (5.0) energy subsidies was up by 30.0% YoY to RMB13.0 bn, but the collection is (10.0) expected to notably accelerate in Oct. We think that the lower-than expected 1H18 (15.0) (20.0) results were mainly caused by the decline in wind resources during the second (25.0) quarter. Considering the steady improvement in wind curtailment, we expect to see Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 a rebound in the Company’s earnings growth starting from the 4th quarter. HSI Index Longyuan Power The Company revised target capacity addition for 2018 to 1.0GW. The  Company has been working on the approval process of 490 MW of on-shore and Change in Share Price 1 M 3 M YTD 1.4 GW of off-shore wind power projects. Future capacity addition is expected to be 股价变动 1 个月 3 个月年初累计 at least 1.0 GW/year for the next 2 years, including 400MW-500WM offshore. Abs. % (2.3) 6.5 17.3 绝对变动 Valuation, catalysts & risks 估值、催化剂和风险 % Rel. % to HS index 0.2 12.2 28.5 相对恒指变动 %  Our TP is HK$8.30 and rating is “Buy” for LYP. We revise down our EPS Avg. share price(HK$) 6.4 6.7 6.3 forecasts for 2018/ 2019/ 2020 to RMB0.590/ RMB0.690/ RMB0.751 on lower 平均股价（港元） Source: Bloomberg, Guotai Junan International. electricity sales revenue estimates and higher finance expense forecasts. Full-year power generation is still likely to record sizable increase given the Company's healthy fundamentals; valuation is quite appealing. Our current TP represents 12.1x/ 10.4x/ 9.5x 2018/ 2019/ 2020 PER. Major risks include: 1) financing cost rise, and 2) higher tax expenses from less-than-expected capacity increase.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 22,304 3,415 0.425 18.7 13.5 5.088 1.1 0.085 1.5 8.6 2017A 24,592 3,688 0.459 8.0 11.6 5.740 0.9 0.092 1.7 8.5 2018F 26,575 4,744 0.590 28.6 9.4 6.235 0.9 0.118 2.1 9.9 2019F 28,039 5,541 0.690 16.8 8.0 6.803 0.8 0.138 2.5 10.6 2020F 29,193 6,036 0.751 8.9 7.4 7.165 0.8 0.150 2.7 10.8

Shares in issue (m) 总股数 (m) 8036.4 Major shareholder 大股东 China Energy Investment Corp Ltd. 52.4% Market cap. (HK$ m) 市值 (HK$ m) 51,593.6 Free float (%) 自由流通比率 (%) 38.7 3 month average vol. 3 个月平均成交股数 (‘000) 11,215.7 FY18 Net gearing (%) FY18 净负债/股东资金(%) 143.3 52 Weeks high/low (HK$) 52 周高/低 7.780 / 5.020 FY18 Est. NAV (HK$) FY18 每股估值（港元） 12.2

Source: the Company, Guotai Junan International.

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Financial statements and ratios Income Statement Balance Sheet Year end Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Revenue 22,304 24,592 26,575 28,039 29,193 PP&E 105,598 109,473 111,092 114,072 117,057 Other Net Income & Gains 647 712 601 834 880 Investment Properties 4 10 8 7 6 Service Concession Costs (541) (74) (300) (400) (500) Lease Prepayments 2,137 2,165 2,228 2,339 2,445 D&A (6,342) (6,798) (7,239) (7,650) (7,932) Intangible Assets 8,798 8,692 8,584 8,581 8,678 Coal Consumption (1,702) (2,475) (2,322) (2,154) (2,059) Others 8,790 8,172 7,883 8,218 8,515 Coal Sales Cost (3,410) (3,762) (3,015) (3,169) (3,204) Non-current Assets 125,328 128,513 129,795 133,217 136,702 Personnel Costs (1,603) (1,677) (1,771) (1,859) (1,951) Inventories 1,040 953 1,145 1,164 1,205 Material Costs (216) (233) (190) (190) (190) Receivables 5,901 7,155 6,839 6,815 6,682 Repairs & Maintenance (642) (622) (778) (796) (836) Prepayments 3,644 3,629 3,179 3,148 3,129 SG&A (429) (542) (575) (610) (647) Cash and Equivalent 1,901 5,072 4,020 4,273 4,259 Other Expenses (518) (784) (936) (1,024) (1,073) Others 846 313 383 402 423 Opt. Profit 7,548 8,337 10,051 11,021 11,681 Current Assets 13,333 17,122 15,565 15,801 15,698 Net Financial Expense (2,774) (3,215) (3,398) (3,278) (3,275) Total Assets 138,661 145,635 145,360 149,019 152,399 Profits from Asso. & JV 376 344 320 333 346 Payables 2,550 1,891 1,548 1,834 1,887 Profit Before Tax 5,150 5,465 6,973 8,076 8,752 Current Borrowings 44,472 35,774 34,132 32,833 32,733 Taxation (660) (916) (1,151) (1,376) (1,558) Tax Payable 176 229 255 300 341 Profit After Tax 4,490 4,550 5,822 6,701 7,194 Other Payables 8,610 9,266 7,465 8,738 8,977 Perpetual MT Note (133) (158) (242) (242) (218) Current Liabilities 55,807 47,159 43,400 43,705 43,939 Minority Interest (941) (704) (835) (917) (940) Non-current Borrowings 31,327 41,620 41,717 40,129 40,007 Shareholders' Profit 3,415 3,688 4,744 5,541 6,036 Others Non-Current Liabilities 3,740 3,556 2,520 2,460 2,429 EPS (Basic) (RMB) 0.425 0.459 0.590 0.690 0.751 Non-current Liabilities 35,067 45,176 44,236 42,590 42,436 DPS (RMB) 0.085 0.092 0.118 0.138 0.150 Equity to Shareholders 40,890 46,126 50,108 54,675 57,578 Margin and Efficiency Minority Interest 6,896 7,173 7,616 8,049 8,446 2016A 2017A 2018F 2019F 2020F Total Equity 47,786 53,299 57,724 62,724 66,024 Total Liability and Equity 138,661 145,635 145,360 149,019 152,399 EBITDA Margin (%) 64.0 62.9 66.3 67.8 68.4 BVPS (RMB) 5.09 5.74 6.24 6.80 7.16 Operating Margin (%) 33.8 33.9 37.8 39.3 40.0 Cash Flow Statement Net Profit Margin (%) 15.3 15.0 17.9 19.8 20.7 Year end Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Dividend Payout Ratio (%) 20.0 20.0 20.0 20.0 20.0 Inventory Days 17.4 14.8 14.4 15.0 14.8 PBT 5,150 5,465 6,973 8,076 8,752 Receivable Days 83.0 96.9 96.1 88.9 84.4 D&A 6,342 6,798 7,239 7,650 7,932 Payable Days 36.4 33.0 23.6 22.0 23.3 Net Interest Expense 2,578 2,964 2,903 2,929 2,870 Growth Profits of Asso. & JV (376) (344) (320) (333) (346) 2016A 2017A 2018F 2019F 2020F Other Adjustments (11) 248 374 214 259 Changes in WC 483 (2,221) (236) 362 102 Revenue (%) 13.3 10.3 8.1 5.5 4.1 Income Tax Paid (634) (780) (1,148) (1,351) (1,535) EBITDA (%) 7.4 8.5 13.8 7.9 5.0 Operating Cash Flow 13,533 12,131 15,786 17,548 18,035 Operating Profit (%) 5.8 10.5 20.6 9.7 6.0 Purchase of Fixed Assets (13,990) (9,104) (11,001) (9,662) (10,772) Net Profit (%) 18.7 8.0 28.6 16.8 8.9 Net Outflow for Loans and Advances 2,013 44 48 36 27 Dividend (%) 18.5 8.0 28.6 16.8 8.9 Interest & Dividends Received 238 455 551 388 330 Profitability Others 531 (8) 21 25 26 2016A 2017A 2018F 2019F 2020F Investing Cash Flow (11,209) (8,614) (10,380) (9,212) (10,389) Perpetual Securities Issue 0 2,000 0 0 (2,000) ROE (%) 8.6 8.5 9.9 10.6 10.8 Proceeds from Borrowings 52,463 69,436 56,500 54,000 54,500 ROA (%) 2.5 2.6 3.3 3.8 4.0 Repayment of Borrowings (51,671) (67,872) (58,046) (56,886) (54,722) ROC (%) 6.3 6.7 7.9 8.5 8.8 Dividends to NCI (730) (613) (472) (557) (621) Financial Ratios Dividends to Shareholders (576) (683) (738) (949) (1,108) 2016A 2017A 2018F 2019F 2020F Interest Paid for Borrowings (3,149) (2,938) (3,165) (3,299) (3,285) Interest Paid for Perpetual Mid-term Note (133) (133) (242) (242) (218) Net Debt/Equity (x) 1.8 1.6 1.4 1.3 1.2 Others 512 451 100 100 100 Current Ratio (x) 0.2 0.4 0.4 0.4 0.4 Financing Cash Flow (3,284) (352) (6,063) (7,833) (7,354) Dividend Yield (%) 1.5 1.8 2.2 2.6 2.8 FX Adjustments (25) 6 (395) (250) (305) Interest Coverage (x) 2.6 2.6 3.1 3.4 3.7 Ending Cash Balance 1,901 5,072 4,020 4,273 4,259 Source: the Company, Guotai Junan International.

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Consumer Sector - Apparel Analyst: Terry Hong 洪学宇 (86) 0755 2397 6722 消费行业 - 服装 [email protected]

Industry dynamics 行业动态 Rating: Outperform  Growth in apparel industry remained strong. January to August 2018 accumulated retail sales of clothing and textile in China grew 8.9% YoY to 评级：跑赢大市 RMB852 billion, better than growth of 7.8% for the full year of 2017. January to August 2018 accumulated online sales of wearable goods increased 23.4%

YoY, which was much higher than offline channels. Retail Sales Growth of Clothing and  Sportswear sector in China was weaker than expected. Sales of sports and Textile (YoY) entertainment goods recorded YoY decline in five out of the first eight months of 服装纺织品零售额同比增速 2018, resulting in a decrease of 1.3% in January to August accumulated sales. 16%

This was mainly due to extreme weather conditions in recent months in China, 14%

and the performances of lower-end brands were especially weak. 12%

10%

 Raw material prices dropped a little in September after a big raise. The 8%

China Cotton Index (CC Index) raised significantly in May but has been declining 6% since then, and closed at RMB16,073/t as at 5 October 2018, which was still 4% higher than a year ago. Prices of other major raw materials including fiber, PTA, 2% polyester, etc., increased largely in July and August but also has been 0%

decreasing since then.

Feb/14 Feb/16 Feb/17 Feb/15 Feb/18

Aug/14 Aug/15 Aug/17 Aug/18 Aug/16

Nov/14 Nov/16 Nov/17 Nov/15

May/15 May/16 May/18 May/17 May/14

Source: The National Bureau of Statistics of China. Key assumptions update 关键假设更新  We expect sales of clothing and textile to grow YoY by high-single-digit Major Raw Materials Prices percentage in 2018. Domestic demand for apparel products in China remains 主要原材料价格 strong. The market conditions for sportswear products has shown certain

recovery in September, and we remain confident in the mid-term growth of 40,000 RMB/ton sportswear sector in China. The industry growth will also be driven by the fast 35,000 growing e-commerce business in China. 30,000 25,000  Raw materials prices are expected to continue decreasing in 4Q18. 20,000 15,000 According to a report of China National Cotton Information Center, cotton supply 10,000

in both China and overseas market is expected to be very strong in the rest of 5,000 2018, which may cause decreases in cotton price. Supply of other major raw 0 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 materials is also recovering, while prices may still remain relatively high in 4Q18. 粘胶短纤粘胶长丝涤纶短纤涤纶长丝DTY 涤纶长丝FDY 涤纶长丝POY 乙二醇MEG 精对苯二甲酸PTA 聚酯切片

Source: www.sinotex.cn, Guotai Junan International. Investment suggestions 投资建议

 The valuation of the apparel sector is still attractive. Excluding Prada (01913 HK), weighted average 2018 and 2019 PER is 20.0x and 16.1x, respectively. We remain optimistic on sportswear industry in China due to supportive government policies and strong market demand. Our top pick is Anta Sports (02020 HK) with a TP of HK$48.50 and investment rating is "Buy".

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价(HK$) 投资评级市盈率(x) 市盈率(x) 市盈率(x) 净资产收益率(%) 市净率(x)

Esprit 00330 1.88 Neutral n.a. n.a. n.a. (6.8) 0.4 Giordano 00709 3.93 Buy 11.0 10.3 9.5 20.4 2.2 361 Degrees 01361 1.99 Buy 7.0 6.4 6.0 8.5 0.6 Xtep 01368 4.53 Buy 14.0 12.0 10.5 11.8 1.6 Prada 01913 37.50 Accumulate 34.2 28.6 25.6 10.6 3.5 Anta 02020 37.55 Buy 22.2 17.4 14.0 27.0 5.7 Li Ning 02331 7.40 Accumulate 22.4 16.8 13.7 12.8 2.7 China Dongxiang 03881 1.31 Buy 8.9 9.0 8.8 7.8 0.7 Weighted Average. Outperform 25.7 21.2 18.3 17.7 4.2 市值加权平均 Source: Bloomberg, Guotai Junan International.

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Anta Sports (02020 HK) Analyst: Terry Hong 洪学宇 (86) 0755 2397 6722 安踏体育 (02020 HK) [email protected]

Company updates 公司近况 Rating: Buy  Potential acquisition of new brands. On 12 September 2018, Anta announced its interests in acquiring the entire share capital of Amer Sports (AMEAS.FH) at 评级：买入 EUR40.00 per share. Amer Sports owns 13 world-famous brands including Arc'teryx, Salomon, Wilson, etc. Currently Anta owns eight sub-brands, all focusing

on China market. Suppose that the acquisition succeeds, Anta will not only have more brands to further exploit China market, but also get a good opportunity to hit international market. But on the other side, the offered acquisition price is too high, 6-18m TP 目标价: HK$48.50 and total consideration equals to around 1/3 of Anta's current market capitalization.

This will raise Anta's financial costs as well as risks of operating the new brands. Share price 股价： HK$37.550  Retail channel performance remained healthy. Retail sales of Anta branded

products grew YoY by low-teen percentage in 2Q18. Retail sales of non-Anta branded products increased YoY by 90%-95%, which was the highest growth rate in the past two years. Discount rate of the Anta and FILA brand in 1H18 remained Stock performance healthy at 24%-25% and 20%-25%, respectively. Channel inventory turnover for 股价表现 Anta branded products and FILA branded products in 2Q18 was kept at very healthy levels of 4 months and 5 months, respectively. However, new brands 60.0 % of return including Kolon and KingKow are still underperforming with inventory turnover of 50.0 more than 10 months in 2Q18. 40.0 30.0 Earnings comments 业绩评论 20.0  1H18 results beat expectations. Revenue increased by 25.1% YoY to RMB10.6 10.0 billion, which beat Bloomberg consensus by 10.3%. Revenue from the FILA brand 0.0 was estimated to have increased by more than 60% YoY in 1H18 and contributed (10.0) Sep-17 Dec-17 Feb-18 May-18 Jul-18 Sep-18 more than 30% to total revenue. Overall GPM was up 3.7 ppt YoY to 54.3%. Net HSI Index Anta profit increased by 34.0% YoY to RMB1.95 billion, which beat Bloomberg consensus by 10.5%. Interim dividend was HK$50 cents per share, representing a payout ratio of 60.1%. Change in Share Price 1 M 3 M YTD  We expect improvement in GPM during 2018-2020. We expect overall GPM to 股价变动 1 个月 3 个月年初累计 continue improving during 2018-2020, driven by the fast-growing FILA brand and Abs. % (10.4) (6.9) 14.5 the inclusion of new brands which target the high-end market. However, operating 绝对变动 % expenses are also expected to grow fast during 2018-2020, mainly due to fast Rel. % to HS index (8.4) (4.5) 13.2 expansion of retail channels as well as strengthened focus on R&D. We forecast 相对恒指变动 %

2018-2020 net margin to be 17.9%, 18.7% and 19.3%, respectively. Avg. share price(HK$) 37.8 39.2 38.5 平均股价（港元） Valuation, catalysts & risks 估值、催化剂和风险 Source: Bloomberg, Guotai Junan International.  TP is HK$48.50 and investment rating is "Buy". Anta delivered strong growth in 1H18, especially for the FILA brand and kids segment. The management of Anta expects the FILA brand to grow at a CAGR of 50% during 2018-2020, better than previous expectations. We forecast the Company's EPS to grow at a CAGR of 25.3% during 2018-2020. Our TP represents 28.7x, 22.5x and 18.1x 2018, 2019 and 2020 PER, respectively.  Major risks: 1) a slowdown in China's sportswear industry growth, 2) fierce competition in e-commerce business sector, and 3) higher operational risks from the expansion of self-operated retail stores.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△%) (x) (RMB) (x) (RMB) (%) (%) 2016A 13,346 2,386 0.954 16.8 35.3 3.816 8.8 0.698 2.1 26.3 2017A 16,692 3,088 1.170 22.7 26.7 5.106 6.1 0.811 2.7 26.6 2018F 21,753 3,903 1.454 24.3 22.2 5.659 5.7 1.019 3.4 27.0 2019F 26,672 4,985 1.857 27.7 17.4 6.366 5.1 1.312 4.3 30.9 2020F 31,991 6,177 2.301 23.9 14.0 7.233 4.5 1.628 5.4 33.8

Shares in issue (m)总股数 (m) 2,684.9 Major shareholder 大股东 Ding’s Family 61.9% Market cap. (HK$ m)市值(HK$ m) 100,817.7 Free float (%) 自由流通比率(%) 38.2 3 month average vol. 3 个月平均成交股数(‘000) 8,403.6 FY18 Net gearing (%) FY18 净负债/股东资金(%) Net Cash 52 Weeks high/low (HK$) 52 周高/低 49.300 / 31.339 FY18 Est. NAV (HK$) FY18 每股估值（港元） 57.0 Source: the Company, GuotaiJunan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 13,346 16,692 21,753 26,672 31,991 Property, Plant and Equipment 1,170 1,203 1,406 1,591 1,821

Cost of Sales (6,887) (8,451) (10,596) (12,826) (15,233) Construction in Progress 157 706 827 945 1,085

Gross Profit 6,459 8,241 11,157 13,846 16,757 Lease Prepayments 342 431 461 490 519

Intangible Assets 478 705 730 766 814

Other Revenue 260 458 476 557 668 Others 624 588 591 718 813

Selling and Distribution Expenses (2,831) (3,809) (5,373) (6,295) (7,390) Total Non-current Assets 2,770 3,632 4,014 4,510 5,052

Administrative Expenses (685) (901) (1,008) (1,328) (1,616)

Operating Profit 3,203 3,989 5,252 6,780 8,419 Cash & Cash Equivalents 5,830 6,968 6,819 7,176 7,951

Inventories 1,295 2,155 2,489 2,825 3,207

Net Finance Income (costs) 108 322 173 149 166 Trade and Other Receivables 2,641 3,733 4,582 5,304 6,113

Profit Before Tax 3,311 4,311 5,426 6,929 8,585 Pledged Deposits 195 150 150 150 150

Income Tax (866) (1,152) (1,432) (1,829) (2,266) Fixed Deposit 1,492 2,436 3,436 4,436 5,436

Profit After Tax 2,445 3,159 3,993 5,100 6,319 Others 0 0 0 0 0

Non-controlling Interest (59) (71) (90) (115) (142) Total Current Assets 11,453 15,442 17,477 19,892 22,857

Shareholders' Profit / Loss 2,386 3,088 3,903 4,985 6,177

Basic EPS 0.954 1.170 1.454 1.857 2.301 Total Assets 14,224 19,074 21,491 24,402 27,909

YoY 16.8% 22.7% 24.3% 27.7% 23.9%

Bank Loans 938 148 141 133 127 Trade and Other Payables 3,060 3,978 4,719 5,474 6,350

[Table_CashFlowStatement] Cash Flow Statement Current Taxation 267 353 435 533 640

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Others 7 19 2 2 2

Profit Before Taxation 3,311 4,311 5,426 6,929 8,585 Total Current Liabilities 4,273 4,498 5,297 6,143 7,118

D&A 226 250 290 341 401

Other Adjustments (50) (139) (145) (149) (166) Deferred Tax Liabilities 14 215 258 310 372

Changes in Working Capital (216) (381) (460) (303) (314) Others 40 0 0 0 0

Income Tax Paid (948) (1,013) (1,408) (1,777) (2,203) Total Non-current Liabilities 55 215 258 310 372

Interest Received 145 154 149 153 168

Cash from Operating Activities 2,468 3,181 3,852 5,195 6,471 Total Liabilities 4,327 4,714 5,555 6,453 7,491

Capital Expenditure (571) (573) (689) (739) (838) Share Capital 243 259 259 259 259

Purchase of Equity Securities 176 (103) 117 0 0 Reserves 9,306 13,447 14,934 16,831 19,159

Change in Fixed Deposits (127) (944) (1,000) (1,000) (1,000) Total Shareholders' Equity 9,549 13,706 15,193 17,090 19,418

Others 8 41 0 0 0 Minority Interest 348 654 744 859 1,001

Cash from Investing Activities (515) (1,579) (1,572) (1,739) (1,838) Total Equity 9,896 14,361 15,936 17,949 20,419

Net Borrowings (392) (827) (7) (7) (7) [Table_FinancialRatio] Dividends Paid (1,572) (1,976) (2,417) (3,088) (3,849) Financial Ratios

Others 566 2,801 (4) (4) (3) 2016A 2017A 2018F 2019F 2020F

Cash from Financing Activities (1,398) (2) (2,429) (3,099) (3,858) Gross Margin (%) 48.4 49.4 51.3 51.9 52.4

Operating Margin (%) 24.0 23.9 24.1 25.4 26.3

Net Changes in Cash 555 1,601 (148) 357 775 Net Margin (%) 17.9 18.5 17.9 18.7 19.3

Cash at Beg of Year 5,166 5,830 6,968 6,819 7,176 ROE (%) 26.3 26.6 27.0 30.9 33.8

Foreign Exchange Effect 109 (463) 0 0 0 ROA (%) 17.9 18.5 19.2 21.7 23.6

Cash at End of Year 5,830 6,968 6,819 7,176 7,951 ROCE (%) 47.8 49.2 46.5 49.4 52.6

Payout Ratio (%) 73.2 70.5 70.1 70.7 70.8

Inventory Days 61.2 74.5 80.0 75.6 72.3

A/C Receivable Days 38.7 41.0 38.7 37.7 36.9

A/C Payable Days 44.0 50.9 54.3 52.5 51.2

Net Gearing (%) Net cash Net cash Net cash Net cash Net cash

Current Ratio (x) 2.7 3.4 3.3 3.2 3.2

Source: the Company, Guotai Junan International.

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Consumer Sector - Food & Beverage Analyst: Barney Wu 吴宇扬 (86755) 2397 6680 消费行业-食品饮料 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 Food CPI rebounded significantly in Aug. Though Jan.-Aug. China YTD food CPI increased slightly by 1.2% YoY, but China’s CPI YoY growth rate in 评级：跑赢大市

Aug 2018 was 1.7%, notably up 1.2 ppt MoM, and the MoM change rate was 2.4%, up 2.3 ppt MoM. The strong Food CPI recovery in Aug. 2018 was mainly attributable to the surge in egg and vegetable prices, which recorded Food CPI Changes 10.2% YoY and 4.3% YoY growth, respectively, which were primarily 食品 CPI 变动 affected by extreme rainy days in Aug 2018. In addition, pork price, which was the major driver lowering Food CPI in 1H18, reported strong MoM 7% recovery in Aug 2018, up 6.5% MoM. 5%

3% Main business income maintain steady growth. Main business income of  1% foods in China grew by 7.7% YoY in Jan.-Aug., 2018, slightly lower than -1% 2017. Main business income of liquor, beverage and refined tea in China increased 9.0% YoY in Jan.-Aug., 2018, better than 7.7% YoY growth in -3%

2017. During Jan.- Aug., 2018, YTD Retail sales above designated size of -5%

15 15 15 15 15 15 16 16 16 16 16 16 17 17 17 17 17 18 18 18 18 15 16 17 17

15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 15 16 17 18

------

Jul Jul Jul Jul

Oct Oct Oct

Apr Apr Apr Apr

Jan Jun Jan Jan Jun Jan Jun

grain, oil, foodstuff, beverages, tobacco, and liquor increased 9.5% YoY, Jun

Feb Mar Feb Mar Feb Mar Feb Mar

Aug Sep Dec Aug Sep Nov Dec Aug Nov Aug Nov Sep Dec

May May May May generally in line with 2017. Food CPI YoY Change Food CPI MoM Change Source: National Bureau of Statistics of China Key assumptions update 关键假设更新

 Surging packaging costs are still a major threat to gross margin. As at September 30, 2018, YTD price of flour, palm oil and sugar declined 1.3% Main Business Income Growth YoY, 17.0% YoY and 15.3% YoY, respectively. However, as at September 30, 主营业务收入增速

2018, the YTD price of PET rose 16.5% YoY. Also, cardboard prices still Manufacture of Foods: Main Business Income YTD YoY stayed at a high level due to limited upstream supply. 13.0% Manufacture of Liquor, Beverage and Refined Tea: Main Business Income YTD YoY 12.0%  Solid volume growth and notable price hike suggest sustainable 11.0% prospects. Due to input costs pressure, most leading F&B manufacturers 10.0% have significantly raised ASP, by lifting ex-factory price or improving product 9.0% 8.0% mix. Despite of economic downturn, the demand for food & beverage is solid. 7.0% And F&B industry may benefit from government's strategy on tax reduction 6.0%

and encouraging consumption. 5.0%

4.0% Investment suggestions 投资建议 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Source: National Bureau of Statistics of China  The sector rating is “Outperform”. F&B industry witnesses sound sales growth and profitability improvement, showing great resilience to economic fluctuation. The sector top pick is Mengniu Dairy (2319 HK) with investment rating of “Accumulate” and TP of HK$28.00.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Uni-President China 0220 HK 8.15 Neutral 26.9 23.4 21.0 8.8 2.3 China Resources Beer 0291 HK 28.50 Accumulate 40.1 30.5 24.9 10.8 4.1 Tingyi 0322 HK 14.14 Neutral 28.1 23.7 20.6 12.8 3.4 Cafe De Coral 0341 HK 17.56 Accumulate 22.2 19.6 18.3 13.0 2.9 Vitasoy 0345 HK 26.20 Accumulate 47.2 40.3 34.6 21.8 9.5 China Foods 0506 HK 3.83 Accumulate 23.1 19.1 16.1 9.5 2.2 China Mengniu Dairy 2319 HK 24.15 Accumulate 26.9 21.0 17.2 12.8 3.3 Dali Foods 3799 HK 5.98 Buy 18.7 16.3 14.4 26.9 4.8 Tianyun International 6836 HK 1.31 Buy 7.2 5.7 4.8 21.9 1.4 Weighted Average. Outperform 29.4 23.9 20.3 15.2 4.1 市值加权平均 Source︰the Companies, Guotai Junan International., Bloomberg.

See the last page for disclaimer page 40 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Barney Wu 吴宇扬 Mengniu Dairy (02319 HK) (86755) 2397 6680 蒙牛乳业 (02319 HK) [email protected]

Company updates 公司近况 Rating: Accumulate

 Tit-for-tar competition may continue but become less intense in 2H18. In 1H18, market competition was intense as Yili offered notable discounts on its 评级：收集 products and invested considerable amounts to sports advertisements as a counter

to Mengniu’s World Cup themed promotion activities, resulting in decline in profitability of both companies. We expect that tit-for-tat competition between Mengniu and Yili may not be settled as Yili has shown firm determination to reinforce its leading position. But competition may become less intense in 2H18 due 6-18m TP 目标价: HK $ 28.00 to lack of mega-event and short-term profitability pressure for both companies.

 Route to Market (RTM) strategy achieved satisfactory results with the help of Share price 股价： HK$24.150 B2B platforms. 1) Branch companies improved POS coverage by adding sales

staff and improving visiting efficiency. 2）Mengniu has added 95,000 stores in Stock performance countries and villages by adding township-based sales staff. 3) Campus channels, e-commerce and new retail channels made steady progress. 4) Cooperation with 股价表现

B2B platforms assisted Mengniu to increase penetration in uncharted regions. 40.0 % of return Sales in B2B platforms reached around RMB100 million per month. 30.0 Earnings comments 业绩评论 20.0

 Top-line growth beat expectations. Mengniu's 1H18 revenue increased 17.0% 10.0 YoY to RMB34,474 million in 1H18, better than expectations, mainly driven by product mix trade-up and World Cup themed marketing and promotion. Generally, 0.0

sales volume growth and ASP hike contributed around 7% and 10% to sales (10.0) growth, respectively. Viewed separately, Mengniu’s sales in liquid milk, ice-cream (20.0) and milk formula grew by 14.0% YoY, 12.8% YoY and 64.9% YoY, respectively. Oct-17 Jan-18 Mar-18 Jun-18 Sep-18 HSI Mengniu  Impressive gross margin expansion did not cover the increase in selling

expenses. In 1H18, Mengniu’s gross margin was up 3.6 ppt YoY, respectively, due to product mix trade-up and stable raw milk price. But due to the Company’s active Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 channel development and strengthened brand promotion strategies, A&P expenses Abs. % 0.0 (11.4) 6.3 ratio rose 3.8 ppt YoY to 12.8%. Nevertheless, thanks to higher interest income, 绝对变动 % less loss from associates, as well as low effective tax rate, Mengniu’s shareholders’ Rel. % to HS index 2.3 (4.5) 13.7 profit increased by 38.5% YoY to RMB1,562 million; in line with expectation. 相对恒指变动 % Avg. share price(HK$) 23.9 23.8 24.4 平均股价（港元）  Valuation, catalysts & risks 估值、催化剂和风险 Source: Bloomberg, Guotai Junan International.

 Due to lower valuation of the industry and competition risk, we slightly lower our TP to HK$28.00. We believe that strengthened brand influence, improved product mix and continuous channel penetration are able to further drive the Company’s growth. We have "Accumulate" rating and TP of HK$28.00, which represents 31.1x 2018 PER, 24.2x 2019 PER and 20.8x 2020 PER.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) FY16A 53,779 (751) (0.193) (131.7) (112.1) 5.311 4.1 0.089 0.4 (3.5) FY17A 60,156 2,048 0.526 (372.5) 37.2 5.756 3.4 0.120 0.6 9.4 FY18F 69,564 3,045 0.775 47.4 26.8 6.475 3.2 0.178 0.9 12.7 FY19F 77,547 3,907 0.995 28.3 20.9 7.355 2.8 0.229 1.1 14.4 FY20F 86,514 4,545 1.157 16.3 17.9 8.347 2.5 0.266 1.3 14.7

Shares in issue (m) 总股数 (m) 3,927 Major shareholder 大股东 COFCO 31.4% Market cap. (HK$ m) 市值 (HK$ m) 94,846.8 Free float (%) 自由流通比率 (%) 68.6 3 month average vol. 3 个月平均成交股数 (‘000) 15,188.8 FY1 8 Net gearing (%) 2018 年净负债率 (%) 22.3 52 Weeks high/low (HK$) 52 周高/低 30.200 / 18.514 FY18 Est. NAV (HK$) FY18 每股估值（港元） 29.3

Source: the Company, Guotai Junan International.

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Financial statements and ratios [Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 53,779 60,156 69,564 77,547 86,514 Property, plant and equipment 12,698 12,715 13,402 14,046 14,559

Cost of sales (36,144) (38,973) (42,910) (47,468) (52,965) Interests in associates 4,132 7,194 7,194 7,315 7,473

Gross profit 17,635 21,183 26,654 30,079 33,549 Goodwill 4,528 4,533 4,632 4,637 4,639

Others 12,457 12,212 12,583 12,844 13,045

Other income and expense 702 338 411 477 506 Total Non-current Assets 29,287 32,121 33,178 34,206 35,078

Distribution costs (13,435) (14,869) (19,684) (21,938) (24,461)

Administrative expenses (2,471) (2,497) (2,704) (3,256) (3,713) Cash & Cash Equivalents 3,356 3,129 3,034 4,997 7,194

Other operating expenses (2,851) (1,182) (940) (806) (817) Time deposit over 3 months 2,715 2,829 2,785 2,789 2,819

Operating Profit (420) 2,972 3,737 4,556 5,063 Inventories 3,314 3,510 3,896 4,297 4,410

Bills receivable 2,340 2,647 2,385 3,309 3,043

Finance costs, net 184 184 38 122 379 Others 10,827 16,731 16,346 16,180 16,106

Share of profits from associates (225) (532) 0 121 158 Total Current Assets 19,837 26,018 25,661 28,783 30,753

Profit Before Tax (461) 2,625 3,775 4,799 5,601 Total Assets 49,124 58,139 58,839 62,989 65,831

Income Tax (351) (594) (646) (800) (931) Short-term debts 3,045 7,935 5,642 4,846 3,843

Profit after Tax (813) 2,031 3,130 3,999 4,670 Bills payable 5,406 6,342 6,707 7,468 8,203

Accrued expenses and other payables 6,511 7,324 7,677 8,918 9,598

Non-controlling Interest 62 17 (85) (92) (125) Others 341 965 370 349 330

Shareholders' Profit / Loss (751) 2,048 3,045 3,907 4,545 Total Current Liabilities 15,303 22,566 20,396 21,581 21,975

Basic EPS (0.193) 0.526 0.775 0.995 1.157 Net current assets 4,535 3,451 5,265 7,202 8,778

Total assets less current liabilities 33,822 35,572 38,443 41,408 43,856

Core Operating profit 1,493 3,377 3,758 4,490 4,927

Core EBITDA 3,425 4,832 5,489 6,333 6,852 Long-term debts 5,542 6,015 5,851 5,134 3,421

Others 2,776 2,450 2,576 2,709 2,849

[Table_CashFlowStatement] Cash Flow Statement Total Non-current Liabilities 8,318 8,465 8,427 7,843 6,270

Total Liabilities 23,621 31,032 28,823 29,424 28,244

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Share capital 357 358 358 358 358 PBT (461) 2,625 3,775 4,799 5,601 Reserves 20,488 22,247 25,070 28,527 32,424 DD&A 1,536 1,622 1,642 1,753 1,834 Total Shareholders' Equity 20,845 22,604 25,428 28,885 32,782 Change in working capital 1,897 1,229 196 340 1,190 Minority Interest 4,659 4,503 4,588 4,680 4,805 Others 2,405 1,028 301 96 (198) Total Equity 25,504 27,107 30,016 33,565 37,586 Cash generated from operations 5,377 6,504 5,914 6,988 8,428

Income and interest tax paid (864) (999) (1,204) (1,260) (1,330) Table_FinancialRatio] Financial Ratios Cash from Operating Activities 4,513 5,505 4,710 5,728 7,098 2016A 2017A 2018F 2019F 2020F

Revenue Growth (%) 9.7 11.9 15.6 11.5 11.6 Investing activities Gross Profit Growth (%) 14.7 20.1 25.8 12.8 11.5 Capital expenditure (2,980) (2,034) (2,584) (2,559) (2,427) Core EBITDA Growth -6.8 41.1 13.6 15.4 8.2 Interest income 442 600 596 582 779 Operating Profit Growth (%) -115.9 807.6 25.7 21.9 11.1 Others (1,467) (10,016) 67 353 283 Core Operating Profit Growth (%) -34.6 126.2 11.3 19.5 9.7 Cash from Investing Activities (4,005) (11,450) (1,921) (1,624) (1,366) Net Profit Growth (%) -115.2 668.9 43.8 27.1 16.7

Gross Margin (%) 32.8 35.2 38.3 38.8 38.8

Financing activities Core Operating Margin 2.8 5.6 5.4 5.8 5.7

Loans changes (2,970) 9,842 (2,457) (1,513) (2,716) Operating Margin -0.8 4.9 5.4 5.9 5.9

Dividend paid (553) (345) (471) (700) (899) PAT Margin (%) -1.5 3.4 4.5 5.2 5.4

Others (513) (3,749) 43 73 80 Net Margin (%) -1.4 3.4 4.4 5.0 5.3

Cash from Financing Activities (4,036) 5,748 (2,885) (2,140) (3,535) ROA (%) -1.5 3.8 5.2 6.4 7.1

ROE (%) -3.5 9.4 12.7 14.4 14.7

Net Changes in Cash (3,529) (196) (96) 1,964 2,197 Inventory turnover days 38.6 32.0 31.5 31.5 30.0 Account receivable days 13.4 15.1 13.2 13.4 13.4 Foreign exchange effect 51 (30) 0 0 0 Account payable days 50.7 55.0 55.5 54.5 54.0 Cash at Beg of Year 6,834 3,356 3,129 3,034 4,997 Net gearing (%) 12.1 35.4 22.3 7.6 Net Cash Cash at End of Year 3,356 3,129 3,034 4,997 7,194

Source: the Company, Guotai Junan International. Net interest cover (x) -1.4 7.4 6.7 9.9 12.7 Payout ratio (%) -46.5 23.0 23.0 23.0 23.0

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Consumer Sector - Hotels Analyst: Noah Hudson (86755) 2397 6684 消费行业 - 酒店 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 The quality of tourism continued to improve during 1H18. According to the China Ministry of Culture and Tourism, the Comprehensive Index of 评级：跑赢大市 Tourism Economic Operation Quality, in 1Q18 and 2Q18 was 77.2 and 76.9, respectively, up 2.9 ppt and 0.8 ppt YoY, respectively. Various indicators such as tourism public services, industry services and development environmental Domestic Tourism Revenue quality continued to be optimized, with YoY increases of 0.5, 1.2 and 0.6 ppt, respectively. During 1H18, the National Tourism Quality Supervision and 国内旅游收入 Tourist Complaint Index reached 74.8, which was basically the same as that of Domestic Tourism Revenue YoY % the same period last year. Going forward, we expect tourism quality to continue RMB Trillion 15.9% to improve as a number of government initiatives under the "13-5 Tourism 5 15.4% 15.2% 15.6% 18% Development Plan" are still being implemented including measures to develop 16% 4 12.8% 12.5% ice and snow tourism, marine and waterfront tourism, rural tourism, self-driving 14% 12% 3 travel and low altitude air travel tourism. The "13-5 Plan" has a clear direction 10% 8% for infrastructure development and upgrading through 2020, such as vigorously 2 promoting the "toilet revolution", speeding up the construction of roads and 6% 4% highways, encouraging new types of accommodation, such as mobile homes, 1 3.03 3.42 3.94 4.57 2.17 2.45 2% and optimizing the travel agency industry. 0 0% 2014 2015 2016 2017 1H17 1H18  Smart Tourism continues to make advances in China. Various localities

have used smart tourism systems and related new media platforms to Source: China Ministry of Culture and Touris m. strengthen tourism services, market supervision and passenger flow. For example, the “Yun Yunnan” mobile APP was officially launched during the National Day holiday with eight core features such as “face scan” admission and Domestic Tourists e-guides at popular tourist destinations. 国内旅游人数 Key assumptions update 关键假设更新 Domestic Tourists YoY %  China's domestic tourism revenue growth rate slowed to 12.5% during RMB Trillion 6 13.5% 16% 1H18. According to the China National Tourism Administration, China's 12.8% 11.4% 14% domestic tourism revenue was RMB2.45 trillion in 1H18, up 12.5% YoY, 5 10.7% 11.2% 10.5% 12% reflecting a slowdown in growth compared to the 15.2% and 15.9% growth 4 10% achieved in 2016 and 2017, respectively. Also during the first half of the year, 3 8% China's total number of domestic tourists reached 2.826 billion person-trips, 6% 2 reflecting YoY growth of 11.4%, compared with growth of 11.2% and 12.8% 4% achieved in 2016 and 2017, respectively. The total number of inbound and 1 3.61 3.99 4.44 5.00 2.54 2.83 2% outbound tourists was 141 million, an increase of 6.9% YoY. The number of 0 0% Chinese citizens leaving the country increased by 15.0% YoY to 71.31 million. 2014 2015 2016 2017 1H17 1H18

 The China Tourism Academy forecasts domestic tourism revenue will Source: China Ministry of Culture and Touris m. reach 5.07 trillion yuan in 2018, an increase of 11%. The number of domestic tourists is forecast to increase 10% in 2018 to 5,501 million person trips. The China Tourism Research Institute estimates that during the 1-7 Oct. 2018 National Day holiday, there were 726 million domestic tourists, up 9.4% YoY, and domestic tourism revenue increased by 9.0% YoY to RMB599.08 bn.

Investment suggestions 投资建议

 We recommend to "Buy" our sector top pick Huazhu Group (HTHT US) with target price of US$42.00. We also have "Buy" ratings for Ctrip (CTRP US) and Jin Jiang Hotels (02006 HK). Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (x) (x) (x) (%) (x) Ctrip.Com-Adr CTRP US US$35.370 Buy 27.4 23.1 17.2 5.4 1.5 Jin Jiang Hotels 02006 HK HK$1.990 Buy 12.8 10.8 8.6 7.8 0.9 Huazhu Group -Adr HTHT US US$29.980 Buy 37.6 23.5 18.4 20.4 7.1 Weighted Average 25.5 19.7 15.0 9.4 2.6 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

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Analyst: Noah Hudson Huazhu Group (HTHT US) (86755) 2397 6684 华住酒店 (HTHT US) [email protected]

Company updates 公司近况 Rating: Buy

 Huazhu Group ("Huazhu)’s management raised its guidance range for 2018 full-year gross hotel openings to 680 to 730 (previous range of 650 to 700).As 评级：买入 at June 30, 2018, Huazhu's number of hotels under development reached a record

high of 839, of which 65%were midscale and upscale brands, which have stronger growth of same hotel average daily rates, mainly due to higher pricing power.

 As at June 30, 2018, the Company had 3,909 hotels in operation under 16 6-18m TP 目标价: US $ 42.00 brands.Manachised & franchised hotels accounted for 82.8% hotels in operation while midscale and upscale hotels accounted for 26.8% of all hotels in operation compared to 20.6% one year earlier. ADR price 股价： US$29.980

Earnings comments 业绩评论 Stock performance  Huazhu’s 2Q18 recurring EBITDA grew 18.4% to RMB745.6 million, which was 股价表现 14.6% below our previous forecast and 13.3% below Bloomberg consensus forecast. Recurring EBITDA excludes other income, unrealized losses from fair 60 % change value changes of equity securities and foreign exchange loss, which combined netted to a loss of RMB137.4 million in 2Q18 compared to a gain of RMB69.7 40 million in 2Q17. For 2Q18, reported EBITDA increased 6.8% YoY to RMB608.2 million with corresponding EBITDA margin down 10.8 ppt YoY to 24.1%. Net 20 income decreased 47.9% YoY to RMB201.0 million, with net margin down by 11.3 ppt YoY to 8.0%. Basic and diluted earnings per ADR amounted to RMB1.20 and 0 RMB1.14, down by 13.3% YoY and 14.9% YoY, respectively. (20)  During 2Q18, Huazhu'aincome from operations (excluding other operating

income) increased by 42.1% YoY to RMB605.8, mainly attributable to higher (40) net revenue and lower hotel operating costs as a percentage of revenue. The Oct-17 Nov-17 Jan-18 Mar-18 May-18 Jun-18 Aug-18 Oct-18 NASDAQ COMP Index Huazhu Group decrease in hotel operating costs as a percentage of revenue was largely due to improved blended RevPAR and increased proportion of M&F hotels. In 2Q18, Huazhu’s mature same hotel RevPAR increased 7.9% YoY to RMB194. Mature Change in ADR Price 1 M 3 M YTD same hotel ADR saw a 7.5% increase to RMB210. Midscale and upscale hotels 股价变动 1 个月 3 个月年初累计 recorded a 7.2% YoY same hotel RevPAR improvement for 2Q18, mainly driven by Abs. % (4.4) (28.8) (6.3) a 4.8% YoY ADR increase augmented by a 2.0 ppt YoY increase in occupancy rate. 绝对变动 % Rel. % to NASDAQ index 相对纳指变动 % (3.0) (30.1) (24.5) Valuation, catalysts & risks 估值、催化剂和风险 Avg. ADR price(HK$) 平均股价（港元） 30.4 34.6 35.8  We recommend to "Buy" our sector top pick Huazhu Groupwith target price Source: Bloomberg, Guotai Junan International. of US$42.00. We expect EBITDA margin to continue to increase for the remainder of 2018 and into 2019. The improving hotel portfolio mix, a growing proportion of Manachised hotels, and growing proportion of midscale and upscale hotels will be the main forces to continue to lift Huazhua's EBITDA margin. After new hotel brands are acquired, they are soon fully integrated into the Huazhu operating platform with the application of all the Company's standard technologies.

Year[Table_ End Turnover Net Profit Earnings/ADR Earnings/ADR PER BV/ADR PBR DP ADR Yield ROE Profit] 每份 ADR 每份 ADR 每份 ADR 净资产收益年结收入股东净利市盈率市净率每份 ADR 股息股息率净利净利变动净资产率 12/31 (RMB m) (RMB m) (RMB) (△%) (x) (RMB) (x) (RMB) (%) (%)

2016A 6,539 805 2.913 (58.2) 71.5 19.625 10.6 1.004 0.5 18.2 2017A 8,170 1,237 4.423 51.8 44.1 23.055 8.5 1.097 0.6 20.9 2018F 9,919 1,426 5.051 14.2 37.6 26.835 7.1 0.758 0.4 20.4 2019F 11,533 2,309 8.096 60.3 23.5 36.238 5.2 0.810 0.4 25.8 2020F 13,194 2,978 10.330 27.6 18.4 48.145 3.9 0.826 0.4 24.6

ADR in issue (m) 总 ADR 数 (m) 291.4 Major shareholder 大股东 Qi Ji 42.7% Market cap. (US$ m) 市值 (US$ m) 8,736.2 Free float (%) 自由流通比率(%) 43.9 3 month average vol. 3 个月平均成交股数(‘000) 1,719.7 FY18 Net gearing (%) FY18 净负债/股东资金(%) 42.0 52 Weeks high/low (US$) 52 周高/低 49.600 / 25.668 FY18Est. NAV (US$) FY18 每股估值（美元） 54.9

Source: the Company, Guotai Junan International.

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Huazhu Group financial statements and ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F PP&E 3,710 4,523 4,354 4,364 4,522 Total Revenue 6,539 8,170 9,919 11,533 13,194 Intangible assets, net 343 1,644 1,650 1,656 1,661 Hotel Operating Costs (4,932) (5,674) (6,478) (7,086) (7,688) Long term investment 1,064 2,362 6,040 6,040 6,040 Pre-opening Expense (72) (206) (282) (287) (289) Goodwill 172 2,265 2,265 2,265 2,265 S&M (147) (215) (306) (356) (407) Others 530 873 872 1,212 1,677 G&A (500) (708) (810) (940) (1,120) Total Non-current Assets 5,819 11,666 15,181 15,536 16,165

Operating Profit 888 1,366 2,043 2,864 3,690

Interest income 67 113 166 236 308 Cash & Cash Equivalents 3,235 3,475 5,133 6,485 8,696 Short-term investments 0 130 138 146 155 interest expense (11) (87) (225) (206) (201) Accounts receivable, net 142 163 191 215 239 Others 139 205 (13) 229 229 Prepaid rent 446 660 774 869 968 Profit Before Tax 1,084 1,597 1,972 3,123 4,027 Others 352 1,334 1,055 1,149 1,249 Income Tax (287) (360) (546) (812) (1,047) Total Current Assets 4,175 5,761 7,291 8,864 11,307 profit After Tax 796 1,237 1,426 2,311 2,980

Non-controlling Interest 8 1 (0) (3) (1) Total Assets 9,993 17,427 22,472 24,400 27,472

Shareholders' Profit / Loss 805 1,237 1,426 2,309 2,978 Short-term debt & accounts payable 883 897 1,189 1,212 1,239

Salary & welfare payable 274 427 378 425 473 EBITDA 1,741 2,361 2,898 3,918 4,762 Deferred revenue 750 832 976 1,096 1,221

Accrued expenses and other current Basic Earnings per ADS 2.913 4.423 5.051 8.096 10.330 liabilities 896 1,265 1,484 1,666 1,856 Diluted Earnings per ADS 2.832 4.263 4.719 7.471 9.503 Others 163 255 136 213 303

Total Current Liabilities 2,966 3,677 4,165 4,612 5,091

Deferred rent 1,024 1,380 1,620 1,818 2,025 Deferred revenue 167 172 202 226 252 [Table_CashFlowStatement] Cash Flow Statement Others 420 5,724 8,867 7,339 6,134

Total Non-current Liabilities 1,611 7,277 10,688 9,384 8,411 Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Group net income (loss) 796 1,237 1,426 2,311 2,980 Total Liabilities 4,577 10,953 14,853 13,996 13,502

Share-based compensation 55 66 75 85 97 Total Shareholders' Equity 5,400 6,439 7,565 10,330 13,877 D&A 695 792 868 827 844 Minority Interest 17 36 55 74 93 Deferred taxes 33 (76) (211) (299) (422) Total Equity 5,416 6,474 7,619 10,404 13,970 Impairment loss 154 169 169 169 169

Change in WC 341 189 426 549 581 Others (28) 76 2 2 2 [Table_FinancialRatio] Financial Ratios Cash from Operating Activities 2,048 2,453 2,756 3,646 4,251 2016A 2017A 2018F 2019F 2020F

Purchase of PP&E (503) (820) (690) (828) (994) L&O hotels income margin 3.7% 10.5% 13.0% 15.2% 17.4% Total hotel income margin 24.6% 30.6% 34.7% 38.6% 41.7% Purchase of intangibles (14) (8) (6) (5) (5) Operating margin 13.6% 16.7% 20.6% 24.8% 28.0% Others 700 (5,889) (3,388) 478 586 Net profit margin 12.3% 15.1% 14.4% 20.0% 22.6% Cash from Investing Activities 184 (6,716) (4,085) (355) (413) EBITDA margin 26.6% 28.9% 29.2% 34.0% 36.1%

Net proceeds from issuance of ordinary Asset Turnover (x) 0.8 0.6 0.5 0.5 0.5 shares upon exercise of option 12 9 15 12 12 ROA 9.1% 9.0% 7.1% 9.9% 11.5% Short term debt (26) (168) 159 (88) (88) Assets/Equity (x) 2.0 2.3 2.8 2.6 2.1 Dividends paid to ordinary shareholders (276) (306) (214) (231) (238) ROE 18.2% 20.9% 20.4% 25.8% 24.6%

Others 43 5,001 3,060 (1,599) (1,280) Interest coverage (x) 80.4 15.6 9.1 13.9 18.4 Cash from Financing Activities (248) 4,536 3,020 (1,906) (1,594) Net gearing Net Cash 25.1% 42.0% 1.0% Net Cash

Debt/equity 5.7% 79.0% 109.9% 64.1% 37.9% Cash at Beg of Year 1,238 3,235 3,475 5,133 6,485 Current ratio (x) 1.4 1.6 1.8 1.9 2.2 Net Changes in Cash 1,984 272 1,691 1,385 2,244 Effect of Foreign Exchanges 13 (33) (33) (33) (33)

Cash at End of Year 3,235 3,475 5,133 6,485 8,696

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 45 of 91 HK Market Quarterly Outlook and Sector Update

Consumer Sector - Household Products Analyst: Barney Wu 吴宇扬 (86755) 2397 6680 消费行业-日用品 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 Retail sales of articles for daily use above designated grew by 12.8% YoY in Jan.-Aug. 2018. The growth rate in Jan.-Aug. 2018 was up 4.8 ppt 评级：跑赢大市

compared to 2017, mainly driven by the strong growth of personal care products sales. China's daily use products sales performed strongly, driven by customers' demand for high-end products and categories that serve Retail Sales of Articles for Daily Use specific needs. Above Designated: YoY

 Household products companies in 1H18 maintained solid growth 限额以上日用品零售额变动

Hengan's sales increased 16.3% YoY in 1H18 while Vinda and C&S reported % Retail Sales of Articles for Daily Use Above Designated: YoY organic growth of 8.1% and 21.8% YoY. The market competition in tissue 18.0 paper market is becoming less intense as major tissue paper players have 16.0 Retail Amount: Articles for Daily Use: YTD: YoY 14.0 reduced market expenses. Online channel sales still experienced high growth. 12.0 Hengan's online sales expanded 60% YoY while Vinda increased 27.5% YoY 10.0 in 1H2018. 8.0 6.0  The global pulp prices stay high. Although China wood pulp prices have 4.0 remained flat since 2018, global pulp prices have continuously risen since 2.0

Mar. Global pulp prices stay at a historical high. 0.0

14 15 16 17 18

15 16 17 18 14

14 15 16 17

14 15 16 17 18

- - - - -

- - - -

- - - - -

Feb Feb Feb Feb Feb

Aug Aug Aug Aug Aug

Nov Nov Nov Nov

May May May May Key assumptions update 关键假设更新 May

Source: National Bureau of Statistics of China  Due to tight global supply of wood pulp, the possibility of wood price turning down in 2H18 is relatively low. As well as rapid RMB depreciation, the industry will face higher pulp costs in terms of RMB in 2H18. In addition, as low price Global Wood Pulp Prices inventory have been consumed gradually, tissue paper companies' costs of sales will continuously rise. Hengan's average pulp costs amounted to 国际木浆价格 USD750 per ton in 1H18, and the cost of its current pulp inventory increased USD/ton CFR Spot Price: Bleached Softwood Pulp: Harmac to around USD800 per ton. 1,000 (Canada) CFR Spot Price: Bleached Hardwood Pulp: Ria Cell (Brazil)  In China, tissue paper sales are expected to maintain sustainable growth 900

driven by product trade-up and rise in consumption per capita. Diaper sales 800 are expected to remain flat due to sluggish growth in number of new born baby. Premiumization will be a major driving force of sanitary napkins. 700

600 Investment suggestions 投资建议 500 The sector rating is “Accumulate”. As most major players in tissue paper industry have revised up ex-factory prices and lower the dividend on channel 400 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 promotions, the profitability of the sector is rising. And the demand for Source: Wind household products is solid. The sector top pick is Hengan International (01044 HK) with investment rating of “Buy” and TP of HK$83.00.

Company Name Code Price Rating 18 PER 19 PER 20 PER 19 ROE 19 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Hengan International 01044 71.00 Buy 18.9 17.4 16.0 23.5 4.3

Vinda International 03331 12.88 Accumulate 18.6 15.9 13.4 10.1 1.6

Weighted Average. Outperform 18.9 17.2 15.6 21.5 3.9 市值加权平均 Source︰the Companies, Guotai Junan International., Bloomberg.

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Analyst: Barney Wu 吴宇扬 Hengan International (01044 HK) (86755) 2397 6680 恒安国际 (1044 HK) [email protected]

Company updates 公司近况 Rating: Buy

 The Company's target is to maintain double-digit percentage revenue growth over the next 3 years. Benefiting from the rise in market concentration and 评级：买入 continuous booming market, Hengan's tissue paper sales are expected to maintain

low double-digit percentage growth. On the other hand, despite that penetration of sanitary products have remained high, the Company is able to improve product mix by increasing penetration of its high-end products such as the Super Slim series and Super Long 420 night series in low-tier cities. 6-18m TP 目标价: HK $ 83.00

 Fully applying the amoeba model in the Company's operations. The management expects that by the end of 2018, 80% of amoeba teams will be able to Share price 股价： HK$71.000 meet their targets. In addition, Hengan is extending the amoeba model to more

operational divisions including R&D departments, marketing departments and Stock performance production departments. The Company intends to replace unqualified distributors with its well-qualified amoeba teams, especially in the traditional channel of diapers. 股价表现

Earnings comments 业绩评论 20.0 % of return

15.0  Revenue recorded robust growth. In 1H18, the Company's revenue surged 10.0 16.3% YoY to RMB10,137 million, mainly driven by robust tissue paper sales growth, which impressively rose 21.1% YoY to RMB5,084 million. The strong 5.0 growth of tissue paper sales was attributable to sales volume growth as Hengan 0.0

gained market share in 1H18 with its attractive price compared to competitors (5.0) having considerably adjusted product prices. In 1H18, sanitary napkins sales (10.0) recorded 5.0% YoY growth, mainly attributable to the rise in ASP resulted from (15.0) improvement in product mix. Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 HSI Hengan International  Net profit was above expectations. In 1H18, Hengan's gross margin declined 4.0

ppt YoY to 39.6%, mainly attributable to the significant fall in tissue paper gross margin. Due to surging wood pulp price, gross margin of paper products was down Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 3.8 ppt YoY to 25.8%. The Company’s marketing expenses was up 1.4 ppt YoY due Abs. % to investment in the national brand campaign, but staff costs and transportation (3.3) (7.4) (7.9) 绝对变动 % expenses declined notably, leading to a stable distribution expenses ratio. In 1H18, Rel. % to HS index (0.4) 0.0 (0.0) the Company's shareholders’ profit increased 5.0% YoY to RMB1,947 million. 相对恒指变动 % Avg. share price(HK$) 70.2 69.0 72.7 平均股价（港元） Valuation, catalysts & risks 估值、催化剂和风险 Source: Bloomberg, Guotai Junan International.

 Hengan met challenges regarding surging raw material prices, sluggish diaper sales and underperformance of some distributors, but we are still bullish on Hengan as its foundations are solid and profit is expected to improve sustainably. The operations of Hengan and amoeba teams have gone more smoothly in 2018. We believe that Hengan’s current valuation is attractive.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) FY16A 19,277 3,597 2.967 11.1 21.4 12.223 5.2 1.950 3.1 24.4 FY17A 19,825 3,794 3.149 6.1 18.3 13.353 4.3 2.100 3.7 24.6 FY18F 20,297 4,162 3.451 9.6 17.5 14.505 4.2 2.243 3.7 24.8 FY19F 22,227 4,575 3.792 9.9 15.9 16.104 3.7 2.465 4.1 24.8 FY20F 23,833 4,931 4.088 7.8 14.8 17.727 3.4 2.657 4.4 24.2

Shares in issue (m) 总股数 (m) 1,206.2 Major shareholder 大股东 Mr Sze and Mr. Hui 39.5% Market cap. (HK$ m) 市值 (HK$ m) 85,646.3 Free float (%) 自由流通比率 (%) 60.5 3 month average vol. 3 个月平均成交股数 (‘000) 2,897.2 FY18 Net gearing (%) 2018 年净负债率 (%) Net Cash 52 Weeks high/low (HK$) 52 周高/低 88.700 / 63.450 FY18 Est. NAV (HK$) FY18 每股估值（港元） 89.5

Source: the Company, Guotai Junan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2019F

Total Revenue 19,277 19,825 20,297 22,227 23,833 Property, plant and equipment 8,439 8,923 8,903 9,051 9,187

Cost of sales (9,873) (10,526) (12,226) (13,382) (14,333) Leasehold land and land use rights 751 773 746 724 703

Long-term bank deposits 1,760 2,500 2,625 2,756 2,894

Gross Profit 9,404 9,299 8,071 8,845 9,500 Others 1,067 1,033 1,020 1,007 998

Distribution costs (3,721) (3,891) (2,395) (2,623) (2,836) Total Non-current Assets 12,018 13,229 13,293 13,537 13,782

Administrative expenses (1,483) (1,292) (1,137) (1,267) (1,335)

Other income and other gains – net 543 1,156 1,213 1,274 1,338 Cash & Cash Equivalents 5,563 6,785 14,667 14,430 16,191

Bank deposits 9,312 11,645 9,312 10,312 9,912

Operating Profit 4,743 5,272 5,752 6,230 6,667 Inventories 3,195 3,436 4,469 4,183 5,084

Finance income, net (184) (311) (474) (429) (414) Bills receivable 2,744 2,312 2,470 2,767 2,849

Others 1,314 1,491 1,605 1,763 1,936

Profit before Tax 4,559 4,961 5,278 5,801 6,253 Total Current Assets 22,127 25,669 32,524 33,454 35,972

Income Tax (1,079) (1,159) (1,108) (1,218) (1,313) Total Assets 34,145 38,898 45,817 46,992 49,754

Recurring Profit after Tax 3,480 3,801 4,170 4,583 4,940 Short-term debts 11,919 15,375 15,875 16,375 16,875

Discontinued Profit 282 0 0 0 0 Bills payable 2,079 2,129 2,427 2,559 2,781

Profit after Tax 3,761 3,801 4,170 4,583 4,940 Accrued expenses and other payables 1,202 1,199 1,259 1,322 1,388

Non-controlling Interest (165) (7) (8) (8) (9) Others 81 483 487 22 23

Shareholders' Profit / Loss 3,597 3,794 4,162 4,575 4,931 Total Current Liabilities 15,280 19,186 20,048 20,279 21,068

Recurring Shareholders' Profit 3,472 3,794 4,162 4,575 4,931

Current assets less current liabilities 6,847 6,482 12,476 13,175 14,903

Total assets less current liabilities 18,865 19,712 25,769 26,713 28,685 Basic EPS 2.967 3.149 3.451 3.792 4.088

Long-term debts [Table_CashFlowStatement] Cash Flow Statement 3,997 3,247 7,900 6,900 6,900 Others 106 120 126 132 139

Total Non-current Liabilities 4,104 3,368 8,026 7,032 7,039 Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2019F Total Liabilities 19,384 22,554 28,074 27,312 28,107 Operating activities

PBT 4,559 4,961 5,278 5,801 6,253 Share capital 127 127 121 121 121 DD&A 626 667 706 702 713 Reserves 14,600 15,979 17,376 19,306 21,263 Change in working capital 66 (544) (977) 28 (869) Total Shareholders' Equity 14,727 16,106 17,497 19,426 21,384 Others 47 (148) 532 462 447 Minority Interest 34 238 246 254 262 Cash generated from operations 5,298 4,936 5,539 6,994 6,544 Total Equity 14,761 16,344 17,743 19,680 21,646 Income and interest tax paid (1,211) (909) (1,110) (1,210) (1,308)

Cash from Operating Activities 4,087 4,026 4,429 5,784 5,236 [Table_FinancialRatio] Financial Ratios

2016A 2017A 2018F 2019F 2019F Investing activities Revenue growth (%) 3.3 2.8 2.4 9.5 7.2 Capital expenditure (901) (889) (850) (850) (850) Gross profit growth (%) 5.2 -1.1 -13.2 9.6 7.4 Interest income 370 410 105 133 138 Net profit growth (%) 10.3 5.5 9.7 9.9 7.8 Others (1,249) (3,069) 2,208 (1,131) 262 Recurring net profit growth (%) 7.4 9.3 9.7 9.9 7.8 Cash from Investing Activities (1,780) (3,548) 1,463 (1,848) (450) Gross margin (%) 48.8 46.9 39.8 39.8 39.9

- Sanitary napkins 72.6 72.2 69.3 69.5 69.9 Financing activities - Tissue paper 37.9 32.9 25.0 26.0 26.3 Loans changes 5,262 3,716 5,153 (500) 500 - Disposable diapers 50.8 46.9 40.5 40.1 40.5 Early redemption of convertible bonds (4,483) 0 10 (466) 0 Operating profit margin (%) 24.6 26.6 28.3 28.0 28.0 Share placing 1 63 0 0 0 - Sanitary napkins 43.4 45.8 49.8 49.3 49.0 Dividend paid (2,197) (2,470) (2,593) (2,645) (2,973) - Tissue paper 10.9 5.8 8.3 9.7 10.5 Others (973) (357) (579) (562) (552) - Disposable diapers 20.2 16.4 16.1 14.5 14.7 Cash from Financing Activities (2,391) 953 1,991 (4,173) (3,025) Net margin (%) 18.7 19.1 20.5 20.6 20.7

ROE (%) 24.4 24.6 24.8 24.8 24.2 Net Changes in Cash (84) 1,431 7,883 (237) 1,761 ROA (%) 10.7 10.4 9.8 9.9 10.2 Foreign exchange effect and others (247) (209) 0 0 0 Cash conversion cycle 86.4 88.5 93.0 93.0 93.0 Cash at Beg of Year 5,894 5,563 6,785 14,667 14,430 Net gearing (%) Net Net Net Net Net Cash at End of Year 5,563 6,785 14,667 14,430 16,191 Cash Cash Cash Cash Cash Source: the Company, Guotai Junan International. Payout ratio (%) 94.7 66.7 65.0 65.0 65.0

See the last page for disclaimer page 48 of 91 HK Market Quarterly Outlook and Sector Update

Consumer Sector - Retail Analyst: Andrew Song 宋涛 (852) 2509 5313 消费行业-零售 [email protected]

Industry dynamics 行业动态 Rating: Neutral

 Total retail sales of consumer goods were up 9.3% YoY in Jan.-Aug. 2018. Total retail sales remained weak and missed market consensus. Retail sales of 评级：中性

the enterprises above designated size rose 7.1% YoY during the period. However, online sales remained rapid growing in Jan.- Aug. Total online retail sales of physical goods rose 28.6% YoY, accounting for 17.3% of total retail Total Retail Sales of Consumer Goods sales of consumer goods. We think that overall total retail sales gowth is facing 社会消费品零售总额 chanllenges in 2018 but categories performance is expected to mix. RMB bn

 Consumption upgrade categories showed strongest performance. Whithin 7,000 11.0% 6,000 the necessities category, most categories including food, beverages, apparel, 10.5% household products and medicines showed stable growth. Property related 5,000 4,000 10.0% categories performance mixed, of which home furniture achieved steady growth 3,000 9.5% while home appliances and building materials underperformed. Consumption 2,000 9.0% update categories maintained strong growth. Cosmetics and jewellery sales 1,000 remained decent in a relatively weak environment. 0 8.5%

 Retailing companies did not show surprises. Sun Art’s (06808 HK) revenue Total retail sales of consumer goods (LHS) was flat YoY and net profit slightly rose 0.1% YoY. SSSG decreased 1.56% YoY growth (RHS) YoY. Haier Electronics’ (01169 HK) revenue was up 18.1% YoY and net profit Source: National Bureau of Statistics of China increased 23.7% YoY, outperforming the industry. Chow Sang Sang’ (00116 HK) showed strong recovery with revenue up 19.3% YoY and net profit up 54.4% YoY, mainly due to low base and industry rebound in 1H18. Consumer Confidence Index Key assumptions update 关键假设更新消费者信心指数

 Total retail sales of consumer goods are expected to remain high Consumer Confidence Index single-digit to low double-digit growth in 2018, fluctuating in the range of Consumer Satisfactory Index 9.0%-10.0%. 130 Consumer Expectation Index 125  CPI started to pick up in August 2018. We expect CPI to be around 2.0%-2.5% 120 115 in 2018 and may benefit supermarket companies. 110 105 Investment suggestions 投资建议 100 95  Our top pick is Haier Electronics (01169 HK) with investment rating of 90 “Buy” and TP of HK$30.57. We are cautious on the retailing industry in the context of slowdown total retial sales in 2018 and maintain “Neutral” rating.

However, we like industry leaders with high operating efficiency and wide sales Source: National Bureau of Statistics of China. channel coverage. We are positive on the Haier Electronics’ high-end home

appliances sales with leading market share.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Chow Sang Sang 00116 15.20 Neutral 9.5 9.1 8.4 10.4 1.0 Luk Fook 00590 27.15 Accumulate 10.9 9.9 9.0 14.1 1.5 VSTECS 00856 4.15 Buy 6.4 5.5 4.8 18.5 1.1 Haier Electronics 01169 19.64 Buy 14.2 12.6 10.9 17.9 2.4 Morris Holdings 01575 1.11 Buy 5.1 3.9 3.0 46.6 2.0 Samsonite 01910 29.00 Buy 20.1 14.0 12.0 14.1 2.1 Chow Tai Fook 01929 8.14 Accumulate 16.5 14.7 13.3 14.7 2.4 Sun Art Retail 06808 9.80 Neutral 32.3 30.1 26.0 12.5 3.9 Weighted Average Neutral 20.7 18.3 16.0 14.5 2.7 市值加权平均 Source︰the Companies, Guotai Junan International., Bloomberg.

See the last page for disclaimer page 49 of 91 HK Market Quarterly Outlook and Sector Update

Haier Electronics (01169 HK) Analyst: Andrew Song 宋涛 (852) 2509 5313 海尔电器 (01169 HK) [email protected]

Company updates 公司近况 Rating: Buy

 The Company announced to acquire water purifying business from the group and to dispose of part of their logistics interest in an exchange. Pursuant to the 评级：买入 asset swap agreement, the Company will achieve 51% interest of Qingdao Haishi,

who is engaged in R&D and sales of household water purifying solutions, and sell around 9.4% of its logistics business Gooday to Haier International. The Company will still retain 47% interest in Gooday but Gooday will be removed from the Company’s core business and recorded as a long-term investment. In 2017, 6-18m TP 目标价: HK $ 30.57 Qingdao Haishi’s net profit was RMB103 million, up 81.3% YoY. Also, Haier International guaranteed that Qingdao Haishi’s net profit in 2018-2020 shall not be Share price 股价： HK$19.640 less than RMB470.5 million in aggregate, or it will provide compensation pro rata. Therefore the valuation of Qingdao Haishi is around 13.7x 2019 PER. On the other

hand, valuation of Gooday is around 32x 2017 PER and 29x 2018 PER, according Stock performance to our calculation. We are positive on the Company’s asset swap agreement and 股价表现 expect faster growth and higher profit margin by acquiring water purifying business.

60.0 % of return 业绩评论 Earnings comments 50.0

 Revenue reached RMB42,315 million in 1H18, up 18.1% YoY, and 40.0 shareholders’ profit rose 23.7% YoY to RMB1,668 million. Revenue from 30.0 washing machines/ water heaters/ channel services/ logistics rose by 20.0%/ 20.0

21.9%/ 17.4%/ 15.4%, respectively. Overall gross profit margin improved by 1.0 ppt 10.0

YoY to 16.9% thanks to upgrades in the product mix for washing machines and 0.0 water heaters. Adjusted operating profit reached RMB1,829 million, up 15.8% YoY. (10.0)

(20.0)  The Company outperformdd the industry in a chanllenging consumption Oct-17 Jan-18 Apr-18 Jul-18 Sep-18 environment. In 1H18, especially in 2Q18, the home appliances market in China HSI Index HAIER ELECTRONICS experienced headwinds in the context of the slowdown in property sales and

unfavorable air conditioner sales. However, Haier Electronics still realized decent results and maintained its leading postion in China. In addition, top-end brand Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 Casarte achieved rapid growth of over 50% YoY with higher ASP and gross margin, Abs. % (2.2) (21.0) (2.1) capturing consumer upgrade opportunities in the high-end market 绝对变动 % Rel. % to HS index 0.6 (13.5) 5.8 Valuation, catalysts & risks 估值、催化剂和风险相对恒指变动 % Avg. share price(HK$) 20.1 21.7 24.0 平均股价（港元）  We maintain investment rating as “Buy” and TP of HK$30.57, representing Source: Bloomberg, Guotai Junan International. 19.0x/ 16.9x 2018/2019 PER, respectively. We believe that the Company deserves valuation premium over its peers based on its leading market position and consumption upgrade trend. The Company’s stock price experienced sharp slump and we believe the current price is attractive. The main risks include slower-than-expected white goods sales growth in 2H18.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 63,855 2,785 1.002 2.1 17.6 6.317 2.8 0.153 0.9 17.2 2017A 78,798 3,358 1.206 20.4 13.6 7.500 2.2 0.243 1.5 17.5 2018F 88,983 3,886 1.384 14.8 12.2 8.043 2.1 0.346 2.0 17.9 2019F 103,144 4,362 1.553 12.2 10.9 9.041 1.9 0.466 2.8 18.2 2020F 116,424 5,042 1.796 15.6 9.4 10.118 1.7 0.539 3.2 18.7

Shares in issue (m) 总股数 (m) 2,805.0 Major shareholder 大股东 Haier Group 55.7% Market cap. (HK$ m) 市值 (HK$ m) 55,089.9 Free float (%) 自由流通比率 (%) 43.6 3 month average vol. 3 个月平均成交股数 (‘000) 6,006.8 FY18 Net gearing (%) FY17 净负债/股东资金(%) Net cash 52 Weeks high/low (HK$) 52 周高/低 29.665 / 18.320 FY18 Est. NAV (HK$) FY17 每股估值（港元） 33.0

Source: the Company, Guotai Junan International.

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Financial statements and ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 63,855 78,798 88,983 103,144 116,424 PPE & other tangible assets 4,718 5,764 7,208 8,022 8,787

Cost of sales (52,783) (64,974) (72,495) (84,257) (95,084) Intangible assets & Goodwill 524 513 512 511 509

Gross profit 11,072 13,824 16,488 18,887 21,339 Available-for-sale investments 1,401 1,283 1,283 1,283 1,283

Deferred tax assets 712 1,002 1,135 1,290 1,464

Other income & gains 493 540 407 446 481 Others 337 298 291 334 384

Selling & distribution expenses (6,091) (7,877) (9,343) (10,882) (12,108) Total Non-current Assets 7,692 8,860 10,429 11,440 12,429

Administrative expenses (2,033) (2,352) (2,758) (3,094) (3,493)

Other expenses & losses (63) (52) (52) (52) (52) Cash & Cash Equivalents 12,673 15,015 14,642 17,305 17,891

Operating Profit 3,377 4,084 4,741 5,305 6,167 Inventories 5,183 8,414 6,606 9,979 7,801

Receivables 10,187 9,057 12,414 12,350 15,463

Profit of JVs (27) 3 3 4 4 Pledged deposits 71 120 132 145 160

Finance income, net 143 263 261 309 323 Others 460 1,975 0 0 0

Profit Before Tax 3,493 4,350 5,005 5,618 6,494 Total Current Assets 28,575 34,581 33,794 39,779 41,314

Income Tax (684) (825) (926) (1,039) (1,201)

profit After Tax 2,810 3,525 4,079 4,578 5,292 Total Assets 36,268 43,441 44,223 51,218 53,743

Non-controlling Interest (24) (167) (193) (216) (250)

Shareholders' Profit / Loss 2,785 3,358 3,886 4,362 5,042 Payables & Accruals 15,512 17,866 17,781 21,635 20,762

Basic EPS 1.002 1.206 1.384 1.553 1.796 Interest-bearing borrowings 73 162 73 73 73 Provisions & other liabilities 1,822 674 701 732 768

[Table_CashFlowStatement] Cash Flow Statement CEB 1,223 0 0 0 0

Total Current Liabilities 17,407 18,702 18,556 22,440 21,603

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

PBT 3,493 4,350 5,005 5,618 6,494 Deferred income 89 161 161 161 161

Finance costs, net (143) (263) (261) (309) (323) Deferred tax liabilities 54 178 178 178 178

Depreciation & amortisation 299 342 425 497 540 Provisions & other liabilities 320 1,307 348 361 377

Change in WC 346 145 (1,863) 468 (1,931) Total Non-current Liabilities 463 1,646 688 700 716

Income tax paid (690) (762) (933) (1,075) (1,207)

Others 290 361 389 438 449 Total Liabilities 17,870 20,349 19,243 23,141 22,318

Cash from Operating Activities 3,594 4,173 2,762 5,635 4,023 Total Shareholders' Equity 17,565 20,881 22,587 25,389 28,415

Minority Interest 833 2,212 2,392 2,689 3,010

PPE (736) (1,121) (2,048) (1,635) (1,717) Total Equity 18,398 23,093 24,980 28,078 31,424

Additions to other assets (125) (128) (247) (247) (247) [Table_FinancialRatio] Change in deposits (39) (49) (12) (13) (15) Financial Ratios

Others (26) (1,240) 41 41 41 2016A 2017A 2018F 2019F 2020F

Cash from Investing Activities (926) (2,538) (2,266) (1,854) (1,937) Profitability:

Gross margin (%) 17.3 17.5 18.5 18.3 18.3

Issuance (17) 61 0 0 0 PBT margin (%) 5.5 5.5 5.6 5.4 5.6

Net bank loans (13) (61) (89) 0 0 Net profit margin (%) 4.4 4.3 4.4 4.2 4.3

Net capital contribution (346) 778 (774) (1,110) (1,496) ROE (%) 17.2 17.5 17.9 18.2 18.7

Others 60 (6) (7) (7) (4) ROA (%) 8.4 8.8 9.3 9.6 10.1

Cash from Financing Activities (317) 772 (870) (1,117) (1,500)

Operating (days):

Net Changes in Cash 2,351 2,407 (373) 2,664 585 Inventory days 33.1 38.2 37.8 35.9 34.1

Cash at Beg of Year 10,244 12,673 15,015 14,642 17,305 A/C receivable days 30.50 26.67 26.14 26.01 25.88

Foreign exchange effect 78 (65) 0 0 0 A/C payable days 30.0 30.0 28.5 27.1 25.7

Cash at End of Year 12,673 15,015 14,642 17,305 17,891 Cash conversion cycle 33.6 34.9 35.5 34.9 34.3

Liquidity & Solvency:

Current ratio (x) 1.6 1.8 1.8 1.8 1.9

Interest cover (x) 81.2 391.2 725.2 814.1 1,515.2

Net gearing (%) Net cash Net cash Net cash Net cash Net cash

Pay-out ratio (x) 15.3% 20.2% 25.0% 30.0% 30.0%

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 51 of 91 HK Market Quarterly Outlook and Sector Update

Electricity Sector David Liu 刘静骁 (852) 2509 5441 电力行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 M1-M8 2018 Hong Kong electricity consumption rose 1.6% YoY to 110,154 TJ, mostly due to hotter than average weather resulting in higher 评级：跑赢大市 residential power demand. Residential, commercial, and industrial electricity use over the same period were up 4.3%, 2.3%, and 0.2% YoY to 29,246 TJ, 71,204 TJ, and 7,525 TJ, respectively. 1-2Q2018 local electricity production rose Hong Kong Electricity Consumption 10.7% YoY to 64,159 TJ. 香港用电量

 Hong Kong’s new Scheme of Control (“SoC”) agreements will reduce Terajoule 20 000 20% permitted rates of return for CLP (00002 HK) and HKEI (02638 HK) from 18 000 9.99% to 8.0%. The new SoC agreement was implemented for CLP beginning 16 000 15% October 2018, and will start for HKEI in January 2019. We expect a one-time drop 14 000 10% 12 000 in earnings in 2019 as a result, after which we expect earnings to resume stable 10 000 5% 8 000 growth. Both SoC agreements will be effective for 15 years with tariff reviews by 0% 6 000 the Hong Kong Government conducted annually. 4 000 (5%) 2 000

 The utilities industry has largely remained stable. CLP’s (00002 HK) and 0 (10%)

14 15 16 17 18

14 15 15 16 16 17 17 18 14 18

14 17 15 16

- - - - -

------

- - -

Power Assets’ (00006 HK) 1H2018 shareholders’ earnings were up 25.8% and -

Jul Jul Jul Jul Jul

Apr Oct Apr Apr Apr Oct Apr Oct Oct

Jan Jan Jan Jan Jan 2.4% YoY respectively. DPS rose 3.4% and remained flat YoY, respectively. Domestic Commercial Industrial Steet lighting and exports 2H2018 performance is expected to be slightly weaker due to expected lower YoY (RHS) energy prices in Australia and a weaker British pound despite stable Hong Kong Source: HK Census and Statistics Department. operations and healthy power demand growth in mainland China.

Hong Kong Electricity Production 香港发电量 Key assumptions update 关键假设更新 Terajoule  Estimated annual average electricity tariff growth rates for CLP and HK 50 000 15.3% 20% 45 000 15% Electric during 2019-2023 are 3.7% and 6.2%, respectively. Higher gas-fired 40 000 7.2% 7.2% 6.0% 10% power capacity is expected to replace coal-fired capacity due to efforts by both 35 000 5.4% 4.6% 2.1% 1.9% 5% 30 000 (0.3)% (0.4)% companies to conform with the Hong Kong Government’s “Hong Kong Climate (1.9)% (1.3)% 25 000 (3.9)% (2.8)% 0% 20 000 (7.2)% Action Plan 2030+”, which will most likely lead to higher fuel costs as power (9.0)% (5%) 15 000 (10.8)% suppliers gradually switch from coal to gas-based power generation. (14.3)% (10%) 10 000 5 000 (15%) 0 (20%)

Investment suggestions 投资建议

2014Q1 2014Q2 2014Q3 2014Q4 2015Q2 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q3 2017Q4 2018Q1 2018Q2 2015Q1 2015Q3 2017Q2 Electricity generated at local plant YoY (RHS)  CLP (00002 HK) and Power Assets (00006 HK) remain attractive defensive Source: HK Census and Statistics Department. investments. Our investment rating for CLP is “Accumulate” and TP HK$95.00.

Operations in Hong Kong will provide a stable earnings base to support CLP’s efforts for growth opportunities abroad. Our investment rating for Power Assets is “Accumulate” and TP HK$60.00. Power Assets’ operations remain stable and opportunities for acquisitions to expand the company’s asset base and increase returns exist despite facing foreign exchange rate risk.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) CLP Holdings 00002 87.100 Accumulate 14.6 15.3 15.2 11.7 1.7 Power Assets 00006 53.500 Accumulate 13.9 13.9 13.7 9.7 1.3 Weighted Average. Outperform 14.3 14.8 14.7 11.0 1.6 市值加权平均 Source︰the Companies, Guotai Junan International, Bloomberg.

See the last page for disclaimer page 52 of 91 HK Market Quarterly Outlook and Sector Update

Electric Equipment Sector Analyst: Jun Zhu 朱俊杰 (852) 2509 7592 电力设备行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 At the end of August 2018, nationwide cumulative installed power generating capacity reached 1,746 GW, up YoY by 5.4%. Of the total 评级：跑赢大市 cumulative installed power capacity, thermal, hydro, nuclear, wind and others contributed 63.6%, 17.4%, 2.2%, 10.0% and 6.8%, respectively. Historical Power Investment in China  In 8M2018, newly installed power capacity in China reached 72.54 GW, down YoY by 11.2%. Thermal power contributed 29.2% of the new installations 中国历史电力投资 during the first 8 months of 2018, while solar energy became the dominant RMB Bn Power Source Investment Power Grid Investment source of energy investment and contributed 45.5% of total new installations. Power Source Investment YoY (%) Power Grid Investment YoY (%) 600 17.1% 20% Whereas, hydro and wind power contributed 7.9% and 14.1%, respectively. 12.6% 15% 500 6.9% 6.4% 5.8% 10%  Nationwide power investment amounted to RMB 410.5 bn during the first 4.4% 400 6.8% 5% 8 months of 2018, down YoY by 12.9%. Of which, power generating -0.7% -2.2% infrastructure went down YoY by 10.9% to RMB 130.2 bn during the period 0% 300 -0.4% -0.8% while power grid investment was down YoY by 13.7% to RMB 280.3 bn. -1.1% -5% -11.5% -5.0% 200 -13.4% -13.7% -10%

Key assumptions update 关键假设更新 -10.9% -15% 100 -20.8%  We expect newly installed power capacity to be approximately 110 GW in -20% 0 -25% 2018, down YoY by 17.7%. Thermal, hydro, nuclear, wind and solar are 2010 2011 2012 2013 2014 2015 2016 2017 8M2018 expected to contribute 30GW, 12GW, 8GW, 20GW and 40GW, respectively, in

new installations in China during 2018. Source: NEA, CEC.

 Nationwide power utilization hours reached 2,591 hours in 8M2018, up YoY by 3.5%. All power sources recorded YoY increase in utilization hours during the Power Utilization Hours of China first 8 months of 2018. Thermal, hydro, nuclear and wind power utilization hour went up YoY by 5.2%, 1.5%, 1.6% and 13.4%, respectively. As the domestic 中国发电设施利用小时一览

power consumption growth is expected to average at 9% in 2018, we expect Thermal Hydro Nuclear Wind National Average

nationwide average utilization hours to return to around 4,100 hours in 2018, 9,000

7,893 7,893

7,855 7,855

7,840 7,840

7,787 7,787

7,759 7,759

7,716 7,716 7,679 7,679

8,000 7,403

with thermal power utilization hours hitting 4,500 hours in 2018. 7,108 7,042 7,042 7,000

 Renewable energy is expected to grow at between 70GW and 85GW per 6,000

5,305 5,305

5,031 5,031

5,012 5,012

4,885 4,885

4,982 4,982

4,820 4,820

4,865 4,865

4,739 4,739

4,730 4,730

4,650 4,650

4,648 4,648

4,579 4,579 4,546 4,546

year from 2018 to 2020. We expect the thermal power capacity to grow at less 5,000 4,511

4,364 4,364

4,318 4,318

4,209 4,209

4,165 4,165

3,988 3,988

3,786 3,786

3,785 3,785

3,669 3,669

3,579 3,579

3,621 3,621

3,591 3,591 3,590

3,589 3,589 Hour

than 30 GW per year from 2018 to 2020, while renewable energy power sources 4,000 3,404

3,328 3,328

3,318 3,318

2,939 2,939

3,019 3,019 2,591 2,591

(i.e. nuclear, wind and solar) are expected to have new additions of between 70 3,000 2,338

2,087 2,087

2,080 2,080

2,077 2,077

2,047 2,047

2,046 2,046

1,948 1,948

1,929 1,929

1,900 1,900

1,742 1,742 1,724 1,724

GW and 85 GW per annum for the period from 2018 to 2020. We expect solar 2,000 1,412

energy to lead the renewable energy investment during the period. 1,000

Investment suggestions 投资建议

2008 2008 2009 2010 2011 2012 2013 2013 2014 2015 2016 2017 8M2018  SOE reforms will continue to drive growth. SOE reform is expected to accelerate and bring fundamental changes to this sector. Our current top pick for Source: NEA, CEC, the sector is Shanghai Electric (02727 HK) given its market leading position and its continued transformation.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) China High Speed Trans. 00658 8.290 Sell 49.0 48.3 46.8 2.2 1.1 China Energy Engineering 03996 0.920 Accumulate 4.2 4.0 3.8 10.9 0.4 Dongfang Electric 01072 4.450 Accumulate 10.4 6.6 4.9 4.1 0.4 Harbin Electric. 01133 2.460 Accumulate 29.6 19.5 17.7 0.8 0.2 Shanghai Electric 02727 2.740 Buy 11.3 10.1 9.3 5.5 0.6 Weighted Average. Outperform 15.1 13.5 12.6 6.2 0.6 市值加权平均 Source︰the Companies, Guotai Junan International, Bloomberg.

See the last page for disclaimer page 53 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Jun Zhu 朱俊杰 Shanghai Electric (02727 HK) (852) 25097592 上海电气 (02727 HK) [email protected]

Company updates 公司近况 Rating: Buy

 The second round of restructuring was officially completed in Nov 2017. The Company completed its second round of restructuring with its parent (Shanghai 评级：买入 Electric Group) in November 2017 with the placing of approximately 1.3 bn new

A-shares in acquiring new assets from its parent and in securing approximately RMB 3 bn in new capital funding. The substantial growth seen in 1H2018 can be attributable to the completion of 2nd round of corporate restructuring. 6-18m TP 目标价: HK $ 3.63  New orders in the first 6 months of 2018 went up YoY by 20.8%. New orders signed in 1H2018 reached RMB 66.53 bn, up YoY by 20.8%, and orders on hand reached RMB 226.1 bn (including RMB 104.6 bn in orders not yet coming into Share price 股价： HK$2.740 effect), which was relatively flat compared to that at year end 2017. New orders of

modern services grew 68.6% YoY to RMB 28.6 bn and became the key contributor Stock performance of new orders growth. New energy & environmental protection equipment, high efficiency & clean energy equipment, industrial equipment and modern services 股价表现 accounted for 14.5%, 40.0%, 5.6% and 39.9% of orders on hand, respectively. 25.0 % of return

20.0 Earnings comments 业绩评论 15.0

10.0  1H2018 earnings went up YoY by 12.5%, beating expectations. Sales and net 5.0 profit in 1H2018 went up YoY by 24.4% and 12.5%, respectively. Sales of all 0.0 business segments experienced dramatic growth during the reporting period, in (5.0)

which sales of new energy & environmental protection equipment grew 34.2% YoY (10.0)

to RMB 6.6 bn, sales of high efficiency clean energy equipment grew 32.4% YoY to (15.0)

RMB 15.2 bn, sales of industrial equipment grew 12.6% YoY to RMB 18.1 bn, sales (20.0) of modern services grew 22.9% YoY to RMB 9.5 bn, and sales of other businesses (25.0) grew 84.0% YoY to RMB 1.8 bn. Gross margin for the period went down YoY by 2.3 (30.0) Sep-17 Nov-17 Mar-18 May-18 Aug-18 ppt to 17.1% and net margin was down YoY by 0.4 ppt to 3.4%. HSI Shanghai Electric

 We expect net earnings to grow 16.6% / 12.6% / 8.3% in 2018 / 2019 / 2020, respectively. The recently completed restructuring and the continued

transformation is expected to help drive the growth of Shanghai Electric and pull the Company from the thermal downtrend. We expect overall sales to experience sharp Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 growth while gross margin to gradually recover over time. Abs. % (2.8) (18.9) (28.8) 绝对变动 % Valuation, catalysts & risks 估值、催化剂和风险 Rel. % to HS index (3.9) (9.1) (29.6) 相对恒指变动 % Avg. share price(HK$)  Continued transformation expected to drive growth. As the SOE reforms 2.52 2.58 2.89 平均股价（港元） continued to transform the Company to become an advanced energy & industrial Source: Bloomberg, Guotai Junan International. equipment giant, we are confident about the outlook of Shanghai Electric. We believe that Shanghai Electric's share price has been undervalued and should deserve a strong rebound. Our target price of HK$ 3.63 is equivalent to 15.0x 2018 PER or 0.8x 2018 PBR.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 88,507 2,355 0.171 7.7 14.3 3.566 0.7 0.000 0.0 5.4 2017A 79,544 2,627 0.187 9.2 12.2 3.772 0.6 0.092 4.0 5.1 2018F 99,325 3,062 0.208 11.1 11.3 3.758 0.6 0.083 3.5 5.5 2019F 110,991 3,448 0.234 12.6 10.1 3.772 0.6 0.082 3.5 6.2 2020F 120,525 3,733 0.253 8.3 9.3 3.800 0.6 0.089 3.8 6.7

Shares in issue (m) 总股数 (m) 14,725.2 Major shareholder 大股东 SEC Group - 60.8% Market cap. (HK$ m) 市值 (HK$ m) 40,647.0 Free float (%) 自由流通比率 (%) 35.8 3 month average vol. 3 个月平均成交股数 (‘000) 8,657.8 FY18 Net gearing (%) FY18 净负债/股东资金(%) Net Cash 52 Weeks high/low (HK$) 52 周高/低 3.700 / 2.380 FY18 EV / EBITDA (x) FY18 企业值 / EBITDA（x） 5.1

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 54 of 91 HK Market Quarterly Outlook and Sector Update

Financial statements and ratios

Income statement Balance sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 88,507 79,544 99,325 110,991 120,525 PPE 15,501 16,469 19,018 23,045 27,312

COGS (71,657) (63,702) (82,277) (91,074) (98,635) Investment in affiliates 9,264 10,705 11,990 12,589 13,218

Gross profit 16,850 15,842 17,049 19,916 21,890 Intangible & goodwill 3,976 4,042 5,481 6,990 8,638

Selling expense (2,553) (2,254) (2,433) (2,775) (3,073) Other non-current assets 20,186 23,773 19,570 21,468 23,078

Admin expense (10,482) (11,447) (9,734) (11,488) (12,655) Total Non-current Assets 48,927 54,988 56,059 64,091 72,247

Operating Profit 3,815 2,141 4,881 5,654 6,161 Cash & Cash Equivalents 40,917 33,391 34,158 35,517 33,747

Other income 1,639 2,340 1,170 1,228 1,290 Inventories 22,185 29,057 31,265 36,430 39,454

Gain from affiliates & JVs 826 1,342 1,007 1,057 1,110 Trade receivable 44,034 49,148 54,629 55,495 57,852

Finance income (354) (458) (666) (838) (959) Other current assets 30,538 32,761 27,036 30,581 34,079

Profit Before Tax 5,925 5,365 6,392 7,101 7,602 Total Current Assets 137,674 144,357 147,087 158,023 165,131

Income Tax (1,283) (522) (1,003) (1,210) (1,304) Total Assets 186,601 199,346 203,146 222,114 237,378

Profit After Tax 4,642 4,843 5,389 5,891 6,298 Short-term debts 2,582 3,224 8,436 9,056 7,461

Non-controlling Interest (2,288) (2,216) (2,327) (2,443) (2,565) Bonds, ST 499 1,600 0 0 0

Shareholders' Profit / Loss 2,355 2,627 3,062 3,448 3,733 Trade payable 38,543 40,885 41,138 45,537 49,317

Advances & deposits 46,587 47,425 41,717 46,616 50,620

Basic EPS (RMB) 0.171 0.187 0.208 0.234 0.253 Others 18,164 18,186 18,770 20,457 21,832

DPS (RMB) 0.000 0.092 0.083 0.082 0.089 Total Current Liabilities 106,375 111,320 110,061 121,666 129,231

Long-term debts 3,371 4,144 6,694 9,194 10,694

Corporate bond 11,148 10,058 10,258 12,258 15,258

Others 3,288 3,102 3,291 3,496 3,714

Cash flow statement Total Non-current Liabilities 17,807 17,304 17,341 17,492 17,655

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Total Liabilities 124,182 128,624 130,304 146,614 158,897

Operating activities Total Shareholders' Equity 47,900 55,537 55,331 55,545 55,961

Net income 2,355 2,627 3,062 3,448 3,733 Minority Interest 14,519 15,185 17,511 19,955 22,520

D&A 1,891 2,249 2,429 2,623 2,833 Total Equity 62,419 70,722 72,842 75,500 78,481

Change in working capital 4,377 (11,904) (5,497) 1,176 90 BPS (RMB) 3.566 3.772 3.758 3.772 3.800

Others 2,093 (496) 401 397 412

Cash from Operating Activities 10,716 (7,525) 395 7,645 7,068

Investing activities Key financial ratios

Capital expenditure (5,386) (5,511) (4,966) (6,659) (7,231) 2016A 2017A 2018F 2019F 2020F

Others (5,623) 1,184 1,667 (3,754) (3,497) Gross margin (%) 19.0% 19.9% 17.2% 17.9% 18.2%

Cash from Investing Activities (11,009) (4,327) (3,299) (10,414) (10,728) EBIT margin (%) 4.3% 2.7% 4.9% 5.1% 5.1%

Financing activities EBITDA margin (%) 6.4% 5.5% 7.4% 7.5% 7.5%

Debt raised / (repaid) 4,238 325 6,363 5,119 2,906 Net margin (%) 2.7% 3.3% 3.1% 3.1% 3.1%

Dividend paid 0 0 (1,354) (1,225) (1,207) ROE (%) 5.4% 5.1% 5.5% 6.2% 6.7%

Others (7,617) 2,872 (1,338) 233 191 ROA (%) 1.3% 1.4% 1.5% 1.6% 1.6%

Cash from Financing Activities (3,379) 3,198 3,671 4,128 1,890 Net gearing (%) n.a. n.a. n.a. n.a. n.a.

Inventory turnover (day) 110.0cash 144.8 136.8 144.0 144.0

Net Changes in Cash (3,672) (8,655) 766 1,359 (1,770) AR turnover (day) 173.4cash 210.9 198.0 180.0 172.8

Adjustments 7,620 1,129 0 0 0 AP turnover (day) 177.3 224.4 180.0 180.0 180.0

Cash at Beg of Year 36,970 40,917 33,391 34,158 35,517 EV/EBITDA(x) 3.4 6.7 5.1 5.2 5.6

Cash at End of Year 40,917 33,391 34,158 35,517 33,747 Quick ratio (x) 0.9 0.8 0.8 0.7 0.7

Current ratio (x) 1.3 1.3 1.3 1.3 1.3 Source: the Company, Guotai Junan International.

See the last page for disclaimer page 55 of 91 HK Market Quarterly Outlook and Sector Update

Environmental Protection Sector Analyst: Gary Wong 黄家玮 (852) 2509 2616 环保行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 The State Council promulgated the “Three-Year Action Plan to Win the Blue Sky Defence War”. The main objectives include: 1) By 2020, the total 评级：跑赢大市 emissions of sulfur dioxide and nitrogen oxides will be reduced by more than 15% compared with 2015; 2) number of cities at prefecture level and above with PM2.5 concentration not up to standard decreased by more than 18% Water Irrigation FAI YoY Growth compared with 2015; 3) the ratio of days with superior air quality of cities at prefecture level and above reached 80%, and the ratio of pollution days at 水利管理业固定资产投资同比增速 severe and above level decreased by more than 25% compared with 2015. 30%  “Law of the People's Republic of China on the Prevention and Control of Soil Pollution” was passed and will be implemented on January 1, 2019. 20% Highlights include: 1) Encouraging local legislation based on the experience of local implementation of soil pollution prevention and control methods. 2) 10% Clarifying the relevant parities responsible for soil pollution has the obligation to 0% implement the control and restoration of soil pollution. 3) Establishing a soil

pollution prevention fund system. -10%

15 15 16 16 17 17 18

16 17 18

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 The State Council issued the “Strategic Planning for Rural Revitalization -

Feb Feb Feb

Aug Nov Aug Nov Aug Nov Aug

May May (2018-2022)”. Main policies include: 1) Improving the investment protection May mechanism and improving the Gvoernment investment mechanism, including Source: National Bureau of Statistics of China the mechanism of “sharing of payment between financial subsidy and reasonable payment from rural households” for the first time; 2) vigorously carrying out the construction and renovation of rural toilets and the construction Environmental FAI YoY Growth of rural sanitation facilities; 3) faciliting rural sewage treatment environment and increasing the proportion of rural areas household waste treatment rate 环境业固定资产投资同比增速 from 65% in 2016 to 90% by 2020. 60% 关键假设更新 Key assumptions update 50%

 Lower 2018 ecological environmental investment growth rate estimate to 40%

15% (from 40%) on much lower than expected fixed assets investment growth 30%

rate for ecological environmental investment. 20%

 Raise minimum borrowing cost estimate for listed non-state-owned 10%

environmental protection companies to 8% (from 6%) on tightening bank 0%

15 15 16 16 17 17 18

16 17 18

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- -

loan approval for non-state-owned environmental protection companies and -

Feb Feb Feb

Aug Nov Aug Nov Aug Nov Aug

May May increase in number of bond defaults of listed environmental protection May companies. Source: National Bureau of Statistics of China Investment suggestions 投资建议

 In view of a deleveraging environment with increasing difficulty in obtaining debt financing, we prefer companies with a state-owned background having a business model with growing cash flows from operational projects, such as China Everbright International (00257 HK) and Beijing Enterprise Water Group (00371 HK). We also recommend companies generating most of its revenue from non-local governments’ clients, preferably private companies, such as Dongjiang Environmental Protection (00895 HK).

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) BJ ENT WATER 00371 4.08 Buy 7.0 6.4 5.8 20.4 1.3 CHINA EB INT'L 00257 6.96 Buy 6.9 7.3 6.2 14.6 1.0 DONGJIANG EMV - H 00895 8.84 Accumulate 11.8 9.9 8.2 9.7 1.6 CHINA WATER 00855 7.97 Buy 1.3 1.1 1.0 16.9 0.2 Weighted Average. Outperform 6.6 6.4 5.5 16.7 1.1 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

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Beijing Enterprises Water (00371 HK) Analyst: Gary Wong 黄家玮 (852) 2509 2616 北控水务 (00371 HK) [email protected]

Company updates 公司近况 Rating: Buy

 On 20 July, 2018, the Company completed issue of medium-term notes of RMB1 billion for a term of 5 years and coupon rate at 4.45% per annum, and 评级：买入 medium-term notes of RMB2 billion for a term of 7 years and coupon rate at

4.72% per annum.

Earnings comments 业绩评论 6-18m TP 目标价: HK$ 5.20  1H18 revenue increased 9.7% YoY to HKD10.009 billion. Net profit increased

23.6% YoY to HKD2.366 billion. Results were in line with expectation. Gross margin increased 4.8 ppts YoY to 38.3%. Daily design capacity increased by Share price 股价： HK$4.060 2,647,598 tons/day in 1H18. As at 30 June 2018, total designed capacity was at

34,035,418 tons/day.  We expect capacity of sewage and reclaimed water daily designed treatment Stock performance and capacity of water distribution to increase annually by 1,500,000 tons/day 股价表现 and 1,000,000 tons/day, respectively, in 2018-2020. As requested by the

government to better reflect market costs, we assume that the average sewage 20.0 % of return treatment tariff will increase 2.5% annually in 2019 and 2020. As for construction of 10.0 BOT projects, we expect construction scale to be kept at HKD7.1 billion in 2018-2020 due to the Company’s intention to keep down its gearing ratio. We think 0.0 that technical services and machinery sales for water environmental renovation (10.0)

business has benefited from the boom in market consolidation and treatment of (20.0) quality upgrades, and the segment can maintain fast growth over the 13th (30.0) Five-Year Plan period. (40.0)

Valuation, catalysts & risks 估值、催化剂和风险 (50.0) Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

 Our EPS estimates are HKD0.502, HKD0.550 and HKD0.607 for 2018/ 2019/ 2020, HSI index BJ ENT WATER respectively. We think the Company has passed its high-growth period and is trying to achieve slower and sustainable growth, while the valuation shift can take more Change in Share Price 1 M 3 M YTD than 5 years given its current growth pace. Lower the TP to HKD5.20, or 10.4x/ 股价变动 1 个月 3 个月年初累计 Abs. % 9.4x/ 8.5x 2018/ 2019/ 2020 PER. Maintain "Buy". (1.8) (2.5) (33.3) 绝对变动 % Rel. % to HS index 0.7 3.2 (27.0) 相对恒指变动 % Avg. share price(HK$) 4.0 4.0 4.9 平均股价（港元） Source: Bloomberg, Guotai Junan International.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (HK$ m) (HK$ m) (HK$) (△%) (x) (HK$) (x) (HK$) (%) (%) 2016A 17,355 3,227 0.370 31.2 11.0 1.888 2.2 0.119 2.9 19.7 2017A 21,192 3,717 0.424 14.6 9.6 2.364 1.7 0.155 3.8 19.9 2018F 23,271 4,636 0.502 18.4 8.1 2.624 1.5 0.176 4.3 20.4 2019F 25,968 5,181 0.550 9.6 7.4 3.086 1.3 0.193 4.8 19.3 2020F 28,925 5,709 0.607 10.4 6.7 3.598 1.1 0.212 5.2 18.1

Shares in issue (m) 总股数 (m) 9,412.6 Major shareholder 大股东 BEHL 42.4% Market cap. (HK$ m) 市值 (HK$ m) 38,215.2 Free float (%) 自由流通比率 (%) 57.6 3 month average vol. 3 个月平均成交股数 (‘000) 18,954.9 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 91.5 52 Weeks high/low (HK$) 52 周高/低 6.495 / 3.528 FY18 Est. NAV (HK$) FY18 每股估值（港元） 5.2

Source: the Company, Guotai Junan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Total Revenue 17,355 21,192 23,271 25,968 28,925 Property, Plant and Equipment 2,831 3,842 4,397 5,067 5,954 Cost of Sales (11,570) (14,728) (15,326) (17,182) (19,269) Goodwill 3,312 3,304 3,304 3,304 3,304 Gross Profit 5,785 6,465 7,945 8,786 9,656 Amounts from Contract Customers 16,204 15,060 15,598 16,676 17,753 Long Term Investments 6,378 11,898 13,097 14,416 15,869 Interest Income 203 281 301 322 344 Others Non-current Assets 30,346 42,818 47,988 53,718 59,900 Other Income/Expenses, Net (311) (343) (301) (318) (321) Total Non-current Assets 59,072 76,922 84,384 93,180 102,779 Other Income and Gains, Net 1,122 1,007 1,309 1,439 1,583 Administrative Expenses (1,538) (1,753) (1,978) (2,155) (2,343) Inventories 91 135 156 179 206 Operating Profit 5,260 5,656 7,276 8,074 8,920 Trade and Bills Receivables 3,024 2,853 3,266 3,800 4,429 Prepayment and Other FV Gain on Derivative Financial Receivables 4,415 6,745 6,250 6,567 6,918 410 40 0 0 0 Instruments Cash & Cash Equivalents 10,921 9,939 12,581 14,468 16,761 Finance Costs (1,401) (1,458) (1,662) (1,912) (2,256) Other Current Assets 3,524 3,867 4,328 4,883 5,510 Share of Profits and Losses of Total Current Assets 21,975 23,539 26,580 29,897 33,824 375 1,078 957 1,170 1,432 JV/Associates Total Assets 81,047 100,461 110,965 123,078 136,602 Profit Before Tax 4,644 5,315 6,571 7,331 8,096 Income Tax (971) (875) (1,156) (1,320) (1,498) Trade and Bills Payables 9,843 11,688 12,834 14,321 15,952 Profit After Tax 3,673 4,441 5,414 6,011 6,598 Other Payables and Accruals 5,234 6,770 6,273 6,591 6,943 Interest Bearing Borrowings 4,812 4,689 5,149 5,746 6,400 Non-controlling Interest (446) (723) (778) (831) (889) Other Current Liabilities 725 4,547 5,146 5,350 5,576 Shareholders' Profit / Loss 3,227 3,717 4,636 5,181 5,709 Total Current Liabilities 20,615 27,693 29,402 32,008 34,871

Basic EPS 0.370 0.424 0.502 0.550 0.607 Interest Bearing Borrowings 31,266 35,014 38,230 41,929 46,183 DPS 0.119 0.155 0.176 0.193 0.212 Other Non-current Liabilities 2,400 4,712 5,592 6,220 6,919 Total Non-current Liabilities 33,665 39,726 43,823 48,149 53,102

Total Liabilities 54,280 67,420 73,225 80,158 87,973 [Table_CashFlowStatement] Cash Flow Statement Share Capital 874 879 941 941 941 Reserves 15,627 19,905 23,764 28,114 32,933 Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Total Shareholders' Equity 16,501 20,785 24,706 29,055 33,875 Profit Before Taxation 4,644 5,315 6,571 7,331 8,096 Minority Interest 10,266 12,257 13,034 13,865 14,754 Depreciation and Amortization 403 422 445 574 672 Total Equity 26,767 33,041 37,740 42,920 48,629 Change in the Working Capitals (7,879) (12,279) (4,527) (5,367) (5,691) Total Equity and Liabilities 81,047 100,461 110,965 123,078 136,602 Other Operating Activities 331 (173) 1,258 545 564 Cash from Operating Activities (2,500) (6,714) 3,746 3,083 3,641 BVPS 1.888 2.364 2.624 3.086 3.598

Capital Expenditure (2,600) (3,760) (3,141) (3,476) (3,884) [Table_FinancialRatio] Other Investing Activities 571 3,645 (1,458) 460 420 Financial Ratios Cash from Investing Activities (2,029) (115) (4,599) (3,016) (3,463) 2016A 2017A 2018F 2019F 2020F Gross Margin 33.3 30.5 34.1 33.8 33.4 Issuance of Shares 0 0 3,615 0 0 Operating Margin 30.3 26.7 31.3 31.1 30.8 Issuance / (Repayment) of Debts 5,889 6,688 3,677 4,296 4,908 Net Margin 18.6 17.5 19.9 19.9 19.7 Dividends (958) (1,227) (1,358) (1,623) (1,813) ROA (%) 3.3 3.2 3.8 4.0 4.2 Other Financing Activities 4,538 (1,492) (2,464) (859) (1,002) ROE (%) 19.7 19.9 20.4 19.3 18.1 Cash from Financing Activities 9,469 3,968 3,469 1,814 2,093 Net Gearing Ratio (%) 94.0 101.4 91.5 86.1 81.4 Interest Coverage (x) 3.8 3.9 4.4 4.2 4.0 Cash at Beg of Year 6,366 10,912 8,596 11,178 12,999 Net Changes in Cash 4,940 (2,861) 2,617 1,881 2,271 Forex (393) 544 (34) (60) (52) Time Deposit 9 1,343 1,403 1,470 1,543 Cash at End of Year 10,921 9,939 12,581 14,468 16,761

Source: the Company, Guotai Junan International.

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Gaming Sector Analyst: Noah Hudson (86755) 2397 6684 博彩行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 Macau's new smoking rule will go into effect on 1 Jan. 2019. Currently, smoking is allowed freely in VIP gaming areas and also in smoking lounges in 评级：跑赢大市 mass gaming areas. Starting from 1 Jan. 2019, smoking at all gaming areas, including VIP rooms, will be allowed only in new higher-standards smoking lounges approved by the Macau government that have better air ventilation Macau GGR & YoY Growth equipment. While this new rule is old news, having been known since July 2017, 澳门博彩总收入同比增长 the surprise is that as of a 28 Sept. deadline, only 27 out of Macau's 47 gaming venues had applied for approval for such smoking areas. Any applications Total GGR Total GGR (YoY) MOP (bn) received by the Macau government after 28 Sept. will likely not have a chance of 85 30% 21.9% 21.8% being approved in time by 1 Jan. 2019 when the new rule goes into effect. This 19.8%20.5% 75 means that many gaming areas would be entirely non-smoking and won't even 17.2% 20% have smoking lounges for at least part of 2019, which we expect to have a 65 negative pull on 2019 Gross Gaming Revenue ("GGR"). The Macau government 10% 55 has so far approved a total of just 12 of the new-standard smoking lounges. 63 67 72 77 74 45 0%  HK-Zhuhai-Macau Bridge had been expected to open in 1H18 but is now 2Q17 3Q17 4Q17 1Q18 2Q18 expected to open in Oct. While no official opening date has been announced Source: Macau Gaming Inspection and Coordination Bureau, Government of Macao yet, according to the South China Morning Post, the bridge is undergoing final Special Administrative Region Statistics and Census Service. testing and if all goes well it will open by the end of October with an opening ceremony which would include the visit of a "state leader". While the bridge will certainly facilitate visitation to Macau, we expect it to be used mainly by tour Stock Performance groups and low end mass market gamers and so we don't expect it to have a 股价表现 very large impact as a catalyst for Macau GGR growth. 80.0 % return Key assumptions update 关键假设更新 60.0  We now forecast 16% growth for Macau 2018 GGR, revised down from 21% 40.0 previously. Year-to-date through Sept., Macau's GGR has increased by 15.8% YoY. Macau's September GGR increased by just 2.8% YoY to 22.0 billion 20.0 patacas, worse than already low market expectations of 6.5% growth. The 0.0 Macau government ordered all Macau casinos to close for a total of 33 hours from 11:00 p.m. on 15 Sept. until 8:00 a.m. on 17 Sept. as Typhoon Manghut (20.0) struck, marking the first time the Macau government has ever ordered all (40.0) casinos to temporarily close. While to a certain degree typhoon Manghut has Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Sep-18 HSI SJM Hds. stifled GGR growth during Sept., all casinos were operating normally soon after Galaxy Ent. Wynn Macau Melco Resorts MGM China the typhoon passed; we expect that the effects of the typhoon will not significantly impact Macau's continued positive GGR growth trend. On the bright Source: Bloomberg. side, Macau visitation growth continues to trend strongly as the quality of visitors continues to improve; YTD through August total visitation is up 8.9% YoY to 23.3 mn visitors, while the number of air arrivals increased by 23.1% YoY and GGR per visitor increased by 7.8% YoY to MOP8,688.

Investment suggestions 投资建议

 We recommend to "Buy" our sector top pick MGM China (02282 HK) with target price of HK$20.00. We also have "Buy" investment ratings for Sands China (01928 HK), Melco Resorts & Entertainment (MLCO US) and Wynn Macau (01128 HK. Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (x) (x) (x) (%) (x) Galaxy Entertainment 00027 HK HK$47.300 Neutral 15.1 13.7 12.0 22.6 3.1 Melco Resorts & Entertainment MLCO US US$21.380 Buy 21.2 15.7 12.5 16.5 3.2 Mgm China 02282 HK HK$12.220 Buy 27.7 13.0 9.6 18.6 4.9 Sands China Ltd 01928 HK HK$34.050 Buy 16.3 14.5 13.1 44.9 7.6 Wynn Macau Ltd 01128 HK HK$17.180 Buy 13.5 11.6 10.3 215.3 30.0 Weighted Average Outperform 市值加权平均 16.9 13.9 12.1 55.0 8.5 Source: the Companies, Guotai Junan International, Bloomberg.

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Analyst: Noah Hudson MGM China (02282 HK) (86755) 2397 6684 美高梅中国 (02282 HK) [email protected]

Company updates 公司近况 Rating: Buy

 Strong start to 3Q18 after weak 2Q18 results. According to the Company's management, July gross gaming revenue at MGM Macau increased nearly 20% 评级：买入 YoY and 40% MoM. The management is also calibrating its offerings across the

whole property portfolio and implementing new initiatives and strategies to capture more market share, including the opening of new amenities at MGM Cotai over the course of the coming weeks and months. 6-18m TP 目标价: HK $ 20.00  MGM Cotai's "The Mansion" and "President's Club" are expected to both open in 4Q18. The Mansion is luxury and invitation only villa complex designed to attract and cater to high-end gamers. It is expected to open in October with a Share price 股价： HK$12.220 number of junket operators to support the VIP business. "President's Club" will

target premium mass players and is expected to open at MGM Cotai in 4Q18. Stock performance Earnings comments 业绩评论股价表现

50 % change  MGM China’s 2Q18 adjusted EBITDA increased 1.3% YoY to HK$1,031 mn, in 40 line with Bloomberg consensus forecast. The Company's 2Q18 total net 30 revenue increased 26.1% YoY (decreased 5.6% QoQ) to HK$4,406 mn, 7.7% 20 below Bloomberg consensus forecast due to bad luck with low VIP win rate of 2.3%, 10 which was down 0.7 ppt YoY and down 1.1 ppt QoQ. Adjusted EBITDA margin 0 decreased by 5.7 ppt YoY and 1.7 ppt QoQ to 23.4%. For 2Q18, MGM China's VIP (10) total turnover was HK$80.8 billion, up 20.9 % YoY and 4.2% QoQ, outperforming (20) the Macau sector's 2Q18 VIP GGR of 14.4% YoY growth and 4.5% QoQ decline. (30) Despite strong turnover growth, MGM China's VIP market share for the quarter (40) dropped 1.1 ppt YoY and 1.6 ppt QoQ to 4.6% due to exceptionally poor VIP win (50) Sep-17 Nov-17 Dec-17 Feb-18 Mar-18May-18 Jun-18 Aug-18 Sep-18 rate of 2.3%, which was down 0.7 ppt YoY and down 1.1 ppt QoQ. As a result, the HSI MGM China Company’s VIP gross win fell by 5.7% YoY and 29.3% QoQ to HK$1,851 mn.

 We forecast 2018-2020 adjusted EBITDA of HK$5.1 billion, HK$6.8 billion and Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 HK$7.9 billion, reflecting growth of 10.3%, 35.2% and 15.9%, respectively. The Abs. % (13.5) (24.9) (31.4) Company's 2Q18 revenue was lower than expected, and the new junket VIP 绝对变动 % business was not added to MGM Cotai in September as we had expected, but is Rel. % to HS index (11.3) (19.9) (27.6) now expected to be added during 4Q18. 相对恒指变动 % Avg. share price(HK$) 12.9 15.0 19.6 平均股价（港元） Valuation, catalysts & risks 估值、催化剂和风险 Source: Bloomberg, Guotai Junan International.

 MGM China is our sector top pick with "Buy" investment rating and HK$20.00 target price. Year-to-date, MGM China's share price is down 38.8%, in part due to MGM Cotai's weak 2Q18 performance. Current expectations for MGM China and its new MGM Cotai property are low, which we see as a buying opportunity for investors, especially since new amenities and features are being introduced at MGM Cotai, including the Mansion and President's Club, both of which are expected to open by 4Q18. Our HK$20.00 target price is equivalent to 14.2x forward (next four quarters) EV/Adjusted EBITDA and 28.9x forward PER, and is a 21.6% discount to our DCF derived NAV per share of HK$26.26.

Y[Table_ear End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结Profit ] 收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (HK$ m) (HK$ m) (HK$) (△ %) (x) (HK$) (x) (HK$) (%) (%) 2016A 14,907 3,037 0.799 (46.8) 15.3 1.899 6.4 0.279 2.3 49.3 2017A 15,356 2,320 0.611 (23.5) 20.0 2.240 5.5 0.213 1.7 29.5 2018F 21,112 1,679 0.442 (27.7) 27.7 2.518 4.9 0.177 1.4 18.6 2019F 28,500 3,580 0.942 113.1 13.0 2.995 4.1 0.471 3.9 34.2 2020F 30,826 4,839 1.273 35.1 9.6 3.511 3.5 0.764 6.2 39.1

Shares in issue (m) 总股数 (m) 7,247.6 Major shareholder 大股东 MGM Resorts International 56.0% Market cap. (HK$ m) 市值 (HK$ m) 88,565.7 Free float (%) 自由流通比率 (%) 44.0 3 month average vol. 3 个月平均成交股数 (‘000) 9,953.3 FY18 Net gearing (%) FY18 净负债/股东资金(%) 145.2 52 Weeks high/low (HK$) 52 周高/低 25.500 / 14.880 FY18 Est. NAV (US$) FY18 每股估值（美元） 35.1

Source: the Company, Guotai Junan International.

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MGM China Financial statements and ratios [Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F

Total Revenue 14,907 15,356 21,112 28,500 30,826 Property And Equipment 3,295 3,027 29,954 27,419 25,680

Gaming Taxes And Premiums (6,999) (7,214) (9,979) (13,292) (14,384) Construction in progress 17,915 26,093 583 2,155 3,013

Inventories consumed (273) (303) (416) (513) (432) Land Use Right Premium 1,260 1,191 1,136 1,136 1,136

Staff Costs (1,949) (2,324) (3,195) (3,990) (4,162) Others 568 484 647 560 473

Operating and administrative and other Total Non-current Assets 23,038 30,795 32,320 31,270 30,302 (1,816) (2,092) (2,533) (3,391) (3,637) expenses

Depreciation And Amortization (772) (799) (2,648) (3,053) (2,843) Cash & Cash Equivalents 3,547 5,283 3,509 4,324 5,430

Operating Income 3,099 2,624 2,340 4,260 5,369 Inventories 92 136 187 252 273

Trade Receivables 225 180 190 256 277

Interest Income 6 5 9 8 10 Prepayments And Other Current Assets 108 142 169 228 247

Financing Cost (53) (7) (631) (619) (446) Others 70 70 423 423 423

Net Foreign Currency Differences (1) 17 (6) 0 0 Total Current Assets 4,042 5,811 4,478 5,484 6,650

Profit Before Tax 3,052 2,638 1,712 3,649 4,933

Total Assets 27,080 36,607 36,798 36,754 36,952

Income Tax (15) (318) (33) (69) (94)

Payables & Accruals 4,469 9,319 10,134 13,680 14,797

profit After Tax 3,037 2,320 1,679 3,580 4,839 Land Use Right Payable 111 0 0 0 0

Non-controlling Interest 0 0 0 0 0 Other ST Liabilities 912 6,376 941 402 306

Shareholders' Profit / Loss 3,037 2,320 1,679 3,580 4,839 Total Current Liabilities 5,492 15,696 11,075 14,081 15,103

Basic EPS 0.799 0.611 0.442 0.942 1.273 Bank Borrowings 14,104 11,794 16,123 11,256 8,469

Diluted EPS 0.799 0.609 0.441 0.941 1.271 Construction Retention Payable 259 267 11 0 0

Others 8 337 18 28 28

Total Non-current Liabilities 14,371 12,398 16,152 11,284 8,497 [Table_CashFlowStatement] Cash Flow Statement

Total Liabilities 19,864 28,094 27,227 25,365 23,600

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F

Profit Before Tax 3,052 2,638 1,712 3,649 4,933 Total Shareholders' Equity 7,217 8,512 9,571 11,389 13,352

D&A 772 866 2,648 3,053 2,843 Minority Interest 0 0 0 0 0

Share-Based Payment Expense 73 80 12 12 12 Total Equity 7,217 8,512 9,571 11,389 13,352

Working Capital Adjustments (1,117) 4,764 205 3,085 961

Others (17) (1,191) 286 550 352 [Table_FinancialRatio] Cash from Operating Activities 2,762 7,158 4,863 10,348 9,101 Financial Ratios

2016A 2017A 2018F 2019F 2020F

Payments for Construction in Progress (5,837) (8,178) 25,510 (1,573) (858) Margins

Prepayment for Land Use Right Premium (228) 69 55 0 0 Effective Gaming Tax Rate 47.9% 47.9% 52.9% 52.9% 52.9%

Purchase of P&E (92) (472) (29,498) (415) (1,002) Operating Margin 20.8% 17.1% 11.1% 14.9% 17.4%

Others (116) 1,807 (204) (2) (2) Net Income Margin 20.4% 15.1% 8.0% 12.6% 15.7%

Cash from Investing Activities (6,273) (6,773) (4,136) (1,990) (1,862) Adj. EBITDA Margin 30.1% 29.9% 24.0% 24.0% 25.7%

Bank Borrowings Raised 2,900 3,131 (1,201) (5,137) (2,787) Return Ratios

Dividends Paid (806) (809) (672) (1,790) (2,903) ROA 12.3% 7.3% 4.6% 9.7% 13.1%

Other Financing Activities (455) (972) (631) (619) (446) ROE 49.3% 29.5% 18.6% 34.2% 39.1%

Cash from Financing Activities 1,639 1,349 (2,504) (7,546) (6,136) Return on Capital Employed 16.0% 10.9% 8.9% 17.4% 23.9%

Return on Invested Capital 13.7% 9.2% 7.6% 12.0% 14.0%

Cash at Beg of Year 5,421 3,547 5,283 3,509 4,324

Net Changes in Cash (1,872) 1,733 (1,777) 812 1,103 Liquidity & Leverage

Effect of Foreign Exchanges (2) 3 3 3 3 Leverage (ie., Gearing) 238.6% 226.8% 184.0% 109.7% 70.4%

Cash at End of Year 3,547 5,283 3,509 4,324 5,430 Net Gearing 181.1% 159.7% 145.2% 68.5% 26.5%

Interest Coverage Ratio 66.2x 1,178.4x 3.8x 7.0x 12.3x

Current Ratio 73.6% 37.0% 40.4% 38.9% 44.0%

Source: the Company, Guotai Junan International.

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Health Care Sector Analyst: Kay Mai 麦梓琪 (86755) 2397 6685 医药行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 Retail sales of traditional Chinese and Western medicine amounted to RMB361.3 billion in Jan.-Aug. 2018, representing 9.1% YoY growth (down 评级：跑赢大市 3.0 ppts YoY).

 Slowdown in manufacturing growth: Revenue/ total profit of the Drug Retail Sales YTD YoY pharmaceutical manufacturing industry rose YoY by 13.8% / 11.4% (+2.1 ppts/ -6.9 ppts YoY) to RMB1,619.5 billion/ RMB201.5 billion in Jan.-Aug. 2018. YoY 药品零售额同比增长（月度累计）

growth of total profit has been below that of revenue since May 2018, which we 20 % Traditional Chinese and Western Medicine believe could be mainly attributable to the implementation of the two-invoice Consumption above Designated Size YTD YoY system. 15  The trend towards outflow of prescription is strengthening. According to MOFCOM of the PRC, total sales of seven major types of healthcare products was up 7.1% YoY (-1.0 ppt YoY) to RMB1,036.6 billion (including VAT taxes) in 10 1H18. Dragged by the implementation of the two-invoice system, a further decline in sales growth was recorded in 2Q18, compared with 1Q18. The

industry-average profit margin was 1.8%, flat YoY. Size of the pharmaceutical 5

13 14 15 16 17 18

14 16 13 15 17

14 16 18 15 17

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retail market increased by 9.3% YoY (+ 0.9 ppt YoY) to RMB207.3 billion, -

Feb Feb Feb Feb Feb

Nov Nov Nov Nov Nov

Aug Aug Aug Aug Aug Aug

May May May May extending the growth rebound spotted in 1Q18 and thus indicating an May enhancement in the trend towards outflow of prescription. Source: National Bureau of Statistics of China.

 State joint drug procurement with specific volume (" no matter whether ") is expected to accelerate price cut of generics. It was reported recently that Pharmaceutical Manufacturing National Bureau of Medical Security would pilot SJDPSV in 11 cities targeting at generics which have passed the consistency evaluation, with the guarantee Industry Revenue and Total Profit that the winning bidder would obtain 60%-70% of total volume consumed YTD YoY annualy by public healthcare institutions in those areas. The SJDPSV is expected to give rise to a sharp price cut of generics no matter whether they 医药制造业收入及利润总额同比增长（月度累计）

have passed the consistency evaluation or not and a change of the investment % Pharmaceutical Manufacturing Industry Total Profit YTD YoY Pharmaceutical Manufacturing Industry Revenue YTD YoY thesis of the healthcare sector. 40

35 Key assumptions update 关键假设更新 30

 Health expenditure is expected to increase by 9.5-11.5% YoY in 2018, with 25

further concentration of the industry. Medical insurance fee control will 20 continue; the price cut of generics will accelerate in 4Q18; the negative impact of 15 the two-invoice system will ease from 2H18. 10

Investment suggestions 投资建议 5

13 13 14 14 15 15 16 16 17 17 18

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Apr Apr Apr Apr Apr

Aug Dec Aug Dec Dec Aug Dec Aug Dec Aug  We recommend temporarily avoiding the manufacturing industry which is under Aug policy risk brought by the SJDPSV. As risks of the two-invoice system and zero Source: National Bureau of Statistics of China. mark-up have almost been released, proper attention is suggested to pay to the distribution industry. Top pick is Sinopharm (01099 HK) with TP of HK$43.36. The Company is getting rid of negative impacts induce by the two-invoice system through business structure adjustment with gradual improvement in fundamentals. It is expected to achieve steady improvement in operating efficiency and above-average bottom-line growth in the coming three years.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Sinopharm 01099 37.250 Accumulate 16.1 14.0 11.9 14.8 2.3 CSPC 01093 15.660 Buy 27.2 20.6 16.7 21.6 5.4 Sihuan Pharma 00460 1.640 Accumulate 8.6 7.9 7.2 13.3 1.1 Weighted Average. Outperform 20.6 16.5 13.7 17.7 3.6 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

See the last page for disclaimer page 62 of 91 HK Market Quarterly Outlook and Sector Update

Sinopharm (01099 HK) Analyst: Kay Mai 麦梓琪 (86755) 2397 6685 国药控股 (01099 HK) [email protected]

Company updates 公司近况 Rating: Accumulate

 Falling interest rates favor profit margin. The interest rate of the latest (2018/09/19) SCP issued by the Company fell significantly to 3.46%, compared with 评级：收集 the effective interest rate in 1H18 of 4.8%.

 The acquisition of China National Scientific Instruments and Materials Co. Ltd. ("CNSIM") was approved by EGM and is expected to be completed by the end of 2018. We believe the acquisition will strengthen the competitiveness of 6-18m TP 目标价: HK $ 43.46 Sinopharm in the medical device industry which is under rapid development.

Earnings comments 业绩评论 Share price 股价： HK$37.250

 Strong rebound in shareholders' profit was witnessed in 2Q18 with 22.4% YoY growth under PRC GAAP, compared to -32.7% in 1Q18. 1H18 revenue/ shareholders’ profit was RMB147,486 million/ RMB2,679 million, up 7.1% YoY/ Stock performance -3.1% YoY respectively, slightly above our expectation. The turnover in 2Q18 股价表现 results was attributable to rapid sales growth from high-margin and fast-turnover businesses such as distribution to pharmacies (+ 27.5% YoY), distribution to other 30.0 % of return healthcare institutions (+ 25.1% YoY), and retail pharmacy (+ 24.6% YoY). 25.0 20.0

15.0

 Gross profit margin was raised by 0.75 ppt YoY to 8.66%. Operating profit margin 10.0

improved by 0.10 ppt YoY to 4.38% with non-financial ratios tending to stabilize. 5.0 Net profit margin was down 0.19 ppt to 1.82%, depressed by an increase in 0.0 financial costs triggered by sales structure adjustment induced by the (5.0) (10.0)

two-invoice system. (15.0)

(20.0) Valuation, catalysts & risks 估值、催化剂和风险 Oct/17 Jan/18 Apr/18 Jul/18 Oct/18 HSI Sinopharm-H  Gradual improvement in Sinopharm's fundamentals: 1) thanks to high penetration into low-tier markets, direct distribution, especially those to retail pharmacies and Change in Share Price 1 M 3 M YTD other healthcare institutions which have quicker turnovers than direct distribution to 股价变动 1 个月 3 个月年初累计

Class II/III hospitals, is expected to continuously deliver robust growth and to fade Abs. % (2.1) 23.1 5.7 the impact of the implementation of the two-invoice system on the Company's 绝对变动 % Rel. % to HS index (0.6) 29.3 12.3 revenue as well as financial costs; 2) non-financial ratios are stabilizing; moreover, 相对恒指变动 % with interests rates heading down, a fall in funding costs is expected to improve net Avg. share price(HK$) 37.4 35.6 33.9 profit margin; and 3) the acquisition of CNSIM is expected to be completed this 平均股价（港元） Source: Bloomberg, Guotai Junan International. year, and the complementarity between the medical device business of the target company and the drug distribution business of Sinopharm is expected to trigger synergy and raise profitability as well as competitiveness of the Company. TP is HK$43.46, representing 16.3x/ 18.8x 2019F/ 2018F PER, with investment rating of "Accumulate". Risks include a change in policies related to drug and medical device distribution in various regions and higher-than-expected interest rates

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 258,388 4,647 1.680 23.5 19.9 11.496 2.9 0.500 1.5 15.0 2017A 277,717 5,283 1.909 13.7 16.2 12.742 2.4 0.570 1.8 15.8 2018F 296,126 5,492 1.985 4.0 16.1 14.157 2.3 0.595 1.9 14.8 2019F 332,787 6,345 2.293 15.5 14.0 15.854 2.0 0.688 2.1 15.3 2020F 374,152 7,427 2.684 17.0 11.9 17.850 1.8 0.805 2.5 15.9

Shares in issue (m) 总股数 (m) 2,767.1 Major shareholder 大股东 CNPGC 29.1% Market cap. (HK$ m) 市值 (HK$ m) 103,074.3 Free float (%) 自由流通比率 (%) 43.1 3 month average vol. 3 个月平均成交股数 (‘000) 5,422.4 FY16 Net gearing (%) FY16 净负债/股东资金(%) 29.5 52 Weeks high/low (HK$) 52 周高/低 45.650 / 29.350 FY16 Est. NAV (HK$) FY16 每股估值（港元） 55.6

Source: the Company, Guotai Junan International.

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Financial statements and ratios Income Statement Cash Flow Statement Year end Dec (RMB mn) 2016A 2017A 2018F 2019F 2020F Year end Dec (RMB mn) 2016A 2017A 2018F 2019F 2020F Revenue 258,388 277,717 296,126 332,787 374,152 PBT 8,925 10,173 10,924 12,818 15,003 Cost of sales -237,717 -254,640 -269,959 -302,773 -339,765 D&A 1,068 1,015 1,129 1,252 1,363 Other adjustments 1,439 1,731 2,505 2,701 2,762 Gross Profit 20,671 23,077 26,167 30,015 34,388 Changes in WC -128 -8,844 -15,027 -3,147 -4,692 Other income 272 400 326 466 524 Income tax paid -2,046 -2,409 -2,731 -3,205 -3,751 D&S expenses -6,619 -7,383 -8,528 -9,872 -11,432 Operating Cash Flow 9,258 1,667 -3,199 10,419 10,685 G&A expenses -4,110 -4,187 -4,621 -5,183 -5,815 Capex -1,948 -2,535 -2,945 -2,553 -2,248 Opt. Profit 10,214 11,906 13,343 15,426 17,664 Others 342 -13 284 -36 -111 Other Gain-Net 411 359 115 123 131 Investing Cash Flow -1,606 -2,547 -2,662 -2,589 -2,360 Net finance costs -1,932 -2,534 -3,250 -3,536 -3,698 Share of profit of associates&JV 232 441 716 805 906 Issues of shares 0 0 0 0 0 Profit before tax 8,925 10,173 10,924 12,818 15,003 Debt paid/raised 2,325 7,828 6,007 0 0 Taxation -2,033 -2,305 -2,475 -2,904 -3,399 Dividends paid -1,135 -1,383 -1,577 -1,648 -1,904 Others -3,218 -2,143 -2,410 -2,571 -2,644 Profit After Tax 6,892 7,868 8,449 9,914 11,604 Financing Cash Flow -2,027 4,302 2,020 -4,219 -4,547 Minority Interest -2,244 -2,585 -2,957 -3,569 -4,177 Net Profit 4,647 5,283 5,492 6,345 7,427 Net Increase in Cash 5,625 3,422 -3,841 3,611 3,778 EPS (RMB) 1.680 1.909 1.985 2.293 2.684 Cash at bgn of Yr 19,966 25,573 29,011 25,171 28,781 FX adjustments -18 16 0 0 0

Dividend 1,384 1,577 1,648 1,904 2,228 Cash at end of Yr 25,573 29,011 25,171 28,781 32,559 DPS (RMB) 0.500 0.570 0.595 0.688 0.805

Balance Sheet Year end Dec (RMB mn) 2016A 2017A 2018F 2019F 2020F Margins and Efficiency PP&E 6,752 7,796 9,324 10,358 10,962 2016A 2017A 2018F 2019F 2020F Other non-current assets 18,199 16,900 18,160 19,543 21,073 Gross margin 8.0% 8.3% 8.8% 9.0% 9.2% Non-current Assets 24,952 24,696 27,484 29,901 32,035 EBITDA margin 4.7% 5.1% 5.3% 5.4% 5.5% Operating margin 4.0% 4.3% 4.5% 4.6% 4.7% Cash and cash equivalents 25,573 29,011 25,171 28,781 32,559 Net Profit margin 1.8% 1.9% 1.9% 1.9% 2.0% Bank deposits and restricted cash 5,018 4,858 5,169 5,753 6,481 Dividend Payout Ratio 29.8% 29.9% 30.0% 30.0% 30.0% Inventories 25,760 26,769 28,346 31,950 36,033 DSI 37.1 37.6 37.3 36.3 36.5 Trade receivables 69,245 75,529 92,088 99,694 110,600 DSO 94.8 95.1 103.3 105.2 102.6 Other current assets 7,164 8,676 10,290 12,229 14,123 DPO 97.0 95.6 92.8 90.1 89.9 Current Assets 132,760 144,843 161,063 178,407 199,796 Total Assets 157,712 169,539 188,547 208,308 231,831 Growth and Profitability(%) 2016A 2017A 2018F 2019F 2020F

Long-term borrowings 11,135 5,441 6,287 6,331 6,376 Revenue 13.0% 7.5% 6.6% 12.4% 12.4% Other LT liabilities 2,306 1,952 2,068 2,239 2,429 EBITDA 14.1% 15.0% 11.3% 14.8% 13.9% Non-current Liabilities 13,442 7,393 8,355 8,571 8,805 Operating profit 10.7% 16.6% 12.1% 15.6% 14.5% Net Profit 23.2% 13.7% 4.0% 15.5% 17.0% Short-term borrowings 22,363 30,163 35,624 35,877 36,131 ROE 15.0% 15.8% 14.8% 15.3% 15.9% Trade payables 66,746 66,613 70,729 78,721 88,679 ROA 4.6% 4.8% 4.7% 5.0% 5.3% Other current liabilities 10,629 14,101 14,439 16,079 17,929 ROIC 17.5% 18.6% 15.7% 16.7% 17.5% Current liabilities 99,737 110,876 120,792 130,677 142,738 Financial Ratios Equity to Shareholders 31,811 35,258 39,172 43,870 49,393 2016A 2017A 2018F 2019F 2020F Minority Interest 12,722 16,012 20,228 25,190 30,895 Net Debt/Equity 9.1% 4.9% 29.5% 17.5% 7.0% Total Equity 44,532 51,270 59,400 69,060 80,288 Liabilities/Assets 71.8% 69.8% 68.5% 66.8% 65.4% Total Liability and Equity 157,712 169,539 188,547 208,308 231,831 Current ratio 1.3x 1.3x 1.3x 1.4x 1.4x BVPS (RMB) 11.496 12.742 14.157 15.854 17.850 Interest coverage 5.4x 5.0x 4.4x 4.7x 5.1x Source: the Company, Guotai Junan International.

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Infrastructure Sector Analyst: Gary Wong 黄家玮 (852) 2509 2616 基建行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 According to the National Bureau of Statistics of China, Jan.-Aug. 2018 Urban FAI amounted to RMB41,515.8 billion, up 5.3% YoY, 0.3 ppts lower than 评级：跑赢大市 expectation, and was 0.2 ppts lower than the growth rate of 5.5% in Jan.-Jul. 2018. For August only, growth rate was 4.1%, up 1.1 ppts MoM.

 First, Jan.-Aug. private FAI growth rate was 8.7%, down 0.1 ppts compared with that FAI and Private FAI YoY Growth in Jan.-Jul. 2018, and remained at above 8%. Second, overall infrastructure 中国固定资产投资及民间固定资产投资同比增速 investment growth of 4.3% was 1.5 ppts lower than the 5.8% growth rate in Jan.-Jul. 2018, still under the 10% alert mark, and was worse than expectation. Third, Jan.-Aug. property development investment growth rate was down 0.1 ppts to 10.1% compared with that in Jan.-Jul. 2018, higher than expected. FAI Private FAI

 The executive meeting of the State Council held on 18th September called for 12% increase in effective investments in critical areas and weak links, asking local 10% governments to closely follow national planning and major strategies, and increase 8% investment in infrastructure and traffic backbone network in deep poverty areas such 6% as the “three districts and three states”, especially in the Central and Western regions 4% railways, trunk routes, hubs and feeder airports, major water conservancy and other 2%

agricultural infrastructure and ecology, and construction of environmental protection 0%

16 17 18

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key projects. In addition, the meeting guided that financial institutions should support -

Feb Feb Feb

Aug Nov Aug Nov Aug Nov Aug

May May the construction of weakness projects. Local governments should accelerate the May implementation of funds raised for special bonds to support weakness projects Source: National Bureau of Statistics of China. and promote cooperation with private capital to attract them participating in construction.

Key assumptions update 关键假设更新 Railway and Highway FAI YoY

 Lower 2018 infrastructure investment growth rate estimate to 7.7% (from 8.5%), 铁路和公路固定资产投资累计值同比增速 due to unexpected decline in infrastructure investment growth rate in August. Railway FAI Highway FAI  The Government continues to implement deleveraging policies such as removing off-balance sheet financings and maintaining a low new loan growth, 40% reducing new fundings for infrastructure construction. 20% Investment suggestions 投资建议 0%  We prefer fundings for infrastructure projects directly sourced from Centroal

Government to local governments, and prefer domestic projects to overseas -20%

16 17 18

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projects. That said, we are in favour of companies engaging in projects such as -

Feb Feb Feb

Aug Nov Aug Nov Aug Nov Aug

May May railway (under national planning) rather than municipal projects (under local May governments’ planning), and of companies mainly focused in domestic

infrastructure projects in China with little overseas exposure. We think China Source: National Bureau of Statistics of China. Railway (00390 HK) and China Railway Construction (01186 HK) are worth noting.

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) CHINA RAIL CONS - H 01186 10.400 Buy 6.4 6.2 5.7 12.1 0.7 CHINA RAILWAY - H 00390 7.900 Buy 8.5 7.5 6.4 11.8 0.8 CHINA COMM CONS - H 01800 7.970 Accumulate 5.6 5.0 4.3 11.0 0.6 CHINA STATE CONS INT 03311 8.230 Buy 5.9 5.2 4.5 15.0 0.8 SUNDART HLDS - H 01568 4.670 Accumulate 18.3 15.5 14.1 22.5 4.0 CHINA CSRC 03969 5.530 Accumulate 11.6 9.5 8.6 14.2 1.6 SINOPEC SEG - H 02386 8.790 Accumulate 12.9 11.1 9.8 9.9 1.2 CH ENERGY ENG - H 03996 0.920 Buy 4.3 4.1 3.8 10.9 0.4 Weighted Average. Outperform 9.0 7.5 6.5 11.6 0.9 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

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China Railway Group (00390 HK) Analyst: Gary Wong 黄家玮 (852) 2509 2616 中国中铁 (00390 HK) [email protected]

Company updates 公司近况 Rating: Buy

 On 17 September, 2018, China Railway High-Speed Electrification Equipment Corporation, the Company's wholly owned subsidiary, obtained 评级：买入 letter on approval of quotation of the shares on National Equities Exchange

and Quotations (NEEQ).

Earnings comments 业绩评论 6-18m TP 目标价: HK$ 8.90

 1H18 revenue increased 5.9% YoY to RMB316.1 billion. Shareholders’ net profit increased 23.9% YoY to RMB8.3 billion. Results exceeded expectations. In 1H18, Share price 股价： HK$7.900 the Company received RMB634.7 billion in new contracts, up13.0% YoY. As at 30

June, 2018, the Company had a backlog of RMB2,769.6 billion, up 7.7% HoH.

 Gross margin improvement in infrastructure construction business and Stock performance robust performance of mining business were the two main causes for a strong 1H18 result. We expect infrastructure construction revenue to increase 股价表现 at a CAGR of 7.9% in 2017-2020, while mining business will continue to benefit 25.0 % of return from the growing demand for cobalt in EVs boom. The Company issued RMB11.7 20.0 billion worth of new shares to nine financial institution investors in an asset repurchase 15.0 transaction could lower the gearing and strengthen the strategic relationship of the 10.0 Company with the investors. 5.0 0.0 Valuation, catalysts & risks 估值、催化剂和风险 (5.0) (10.0)  Our EPS estimates for 2018/2019/2020 are RMB0.799, RMB0.910 and (15.0) RMB1.058, respectively. We think the Company can increase its market share in (20.0) other construction markets in a deleveraging environment, current valuation does (25.0) Oct-17 Jan-18 Apr-18 Jul-18 Sep-18 not fully reflect its growth outlook. We raise the TP to HKD8.90, representing HSI index CHINA RAIL GR-H 9.6x/8.4x/7.2x 2018/2019/2020 PER. Maintain “Buy”. Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计

Abs. % 18.1 34.8 19.7 绝对变动 % Rel. % to HS index 20.6 40.6 26.1 相对恒指变动 % Avg. share price(HK$) 7.3 6.7 6.0 平均股价（港元） Source: Bloomberg, Guotai Junan International.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△%) (x) (RMB) (x) (RMB) (%) (%) 2016A 632,856 11,808 0.517 (2.5) 13.6 6.522 1.1 0.088 1.2 9.6 2017A 688,773 15,280 0.669 29.4 10.3 7.422 0.9 0.113 1.7 11.3 2018F 739,372 18,477 0.799 19.4 8.5 8.805 0.8 0.130 1.9 11.8 2019F 805,219 22,341 0.910 13.9 7.5 9.240 0.7 0.150 2.2 12.4 2020F 869,270 25,971 1.058 16.2 6.4 10.351 0.7 0.176 2.6 13.0

Shares in issue (m) 总股数 (m) 22,844.3 Major shareholder 大股东 CRECG 54.4% Market cap. (HK$ m) 市值 (HK$ m) 180,470.0 Free float (%) 自由流通比率 (%) 45.6 3 month average vol. 3 个月平均成交股数 (‘000) 23,690.4 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 31.7 52 Weeks high/low (HK$) 52 周高/低 7.940 / 5.250 FY18 Est. NAV (HK$) FY18 每股估值（港元） 8.9

Source: the Company, Guotai Junan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Total Revenue 632,856 688,773 739,372 805,219 869,270 Property, Plant and Equipment 54,778 59,769 64,425 69,706 75,752 Cost of Sales (583,067) (626,044) (671,386) (730,464) (787,733) Intangible Assets 36,821 35,995 35,889 35,769 35,633 Gross Profit 49,789 62,729 67,987 74,756 81,538 LT Receivables 12,185 23,532 25,496 27,638 29,973 LT Investments 11,482 21,002 22,883 25,198 28,051 Other Income and Gains (7,932) (17,764) (13,982) (13,620) (13,532) Lease Prepayments 11,986 11,952 12,436 12,885 13,293 Selling and Distribution Expenses (2,560) (2,852) (3,179) (3,462) (3,738) Other Non-current Assets 31,946 31,350 32,574 34,105 35,813 Administrative Expenses (17,680) (20,119) (22,181) (24,157) (26,078) Total Non-current Assets 159,198 183,600 193,704 205,302 218,515 Operating Profit 21,617 21,994 28,644 33,517 38,189 Inventories 28,737 30,946 33,187 36,108 38,938 Finance Costs (3,577) (2,698) (3,327) (3,378) (3,610) Trade and Bills Receivables 234,229 264,402 282,531 313,111 329,911 Share of Profits of Associates / JVs 732 1,532 1,881 2,315 2,853 Amounts Due from Customers 111,791 114,459 148,879 137,911 171,692 Profit Before Tax 18,772 20,828 27,199 32,454 37,433 Cash & Cash Equivalents 114,830 116,688 126,188 135,411 141,816 Income Tax (6,069) (6,624) (8,160) (9,736) (11,230) Other Current Assets 105,560 133,827 133,627 133,858 134,527 Profit After Tax 12,703 14,204 19,039 22,718 26,203 Total Current Assets 595,147 660,322 724,412 756,398 816,885 Total Assets 754,345 843,922 918,116 961,700 1,035,399 Non-controlling Interest (895) 1,076 (562) (377) (232) Shareholders' Profit / Loss 11,808 15,280 18,477 22,341 25,971 Trade and Bills Payables 407,418 471,896 521,387 539,286 582,963 Advances from Customers 12,952 14,964 16,460 18,106 19,917 Basic EPS 0.517 0.669 0.799 0.910 1.058 ST Borrowings 80,017 88,483 88,483 88,483 88,483 DPS 0.088 0.113 0.130 0.150 0.176 Other Current Liabilities 6,216 6,373 6,845 7,446 8,038

Total Current Liabilities 506,603 581,716 633,175 653,321 699,401

[Table_CashFlowStatement] Cash Flow Statement LT Borrowings 92,308 85,451 73,854 73,854 73,854 Other Non-current Liabilities 6,438 7,197 7,449 7,761 8,122 Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Total Non-current Liabilities 98,746 92,648 81,304 81,615 81,977 Profit Before Tax 18,772 20,828 27,199 32,454 37,433 Total Liabilities 605,349 674,364 714,479 734,936 781,377 Depreciation and Amortization 8,761 9,057 8,858 9,081 9,307 Change in Working Capitals 27,212 (738) (1,443) (921) (6,150) Total Shareholders' Equity 128,131 143,179 170,305 188,955 210,619 Other Operating Activities (250) 4,031 494 (330) (797) Minority Interest 20,865 26,379 33,333 37,808 43,403 Cash from Operating Activities 54,495 33,178 35,108 40,283 39,793 Total Equity 148,996 169,558 203,637 226,764 254,022 Total Equity and Liabilities 754,345 843,922 918,116 961,700 1,035,399 Capital Expenditure (29,816) (30,231) (28,647) (31,620) (34,621) Other Investing Activities 12,338 (2,146) 6,044 10,038 11,817 BVPS 6.522 7.422 8.805 9.240 10.351 Cash from Investing Activities (17,478) (32,377) (22,603) (21,582) (22,804)

[Table_FinancialRatio] Net Borrowings (3,151) 2,796 (11,597) 0 0 Financial Ratios Interests (8,430) (7,773) (6,108) (6,275) (6,665) 2016A 2017A 2018F 2019F 2020F Dividends (3,207) (3,018) (2,581) (3,005) (3,690) Gross Margin (%) 7.9 9.1 9.2 9.3 9.4 Other Financing Activities (982) 9,536 5,627 (198) (228) Operating Margin (%) 3.4 3.2 3.9 4.2 4.4 Cash from Financing Activities (15,770) 1,541 (3,006) (9,479) (10,583) Net Margin (%) 1.9 2.2 2.5 2.8 3.0 ROA (%) 1.6 1.9 2.1 2.4 2.6 Cash at Beg of Year 93,304 114,830 116,688 126,188 135,411 ROE (%) 9.6 11.3 11.8 12.4 13.0 Net Changes in Cash 21,247 2,342 9,500 9,223 6,406 Net Gearing Ratio (%) 39.2 32.1 13.4 5.8 1.1 Forex Changes 279 (484) 0 0 0 Interest Coverage (x) 3.7 4.6 5.6 6.4 6.9 Cash at End of Year 114,830 116,688 126,188 135,411 141,816

Source: the Company, Guotai Junan International.

See the last page for disclaimer page 67 of 91 HK Market Quarterly Outlook and Sector Update

Insurance Sector Analyst: Wiley Huang 黄重钧 (852) 2509 5409 保险行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform  Life NBV decline is expected to narrow in 2H18 supported by steady 3Q18 FYP growth. 3Q premiums expansions are generally steady. Therefore, we 评级：跑赢大市 expect that 3Q18 FYP growth to be steady as well. With contribution from 3Q18 premiums growth, we expect NBV decline to narrow in 2H18. However, full year NBV of 2018 should remain flat compared to 2017 dragged down by 1Q18 premiums decline. Although forecasted FYP and NBV growth remain flat, the Sector Relative Price Performance quality of premiums and margin improve significantly compared to 2017 which 行业相对价格表现 is positive for long-term development of life insurers. Weighted Average Historical P/B of HK Listed 3.0 Chinese Insurers 2.0 (x) P/B of Hang Seng China H-Financial Index (RHS) (x)  P&C profitability should improve in 2H18 due to measures in lowering motor insurance underwriting expense. In order to reduce underwriting 2.5 1.5 expense on motor insurance, regulator and the sector carried out several measures. CBIRC Rule 57 posted more strict regulation on motor insurance 2.0

pricing, which is expected to reduce commission on motor insurance 1.0 underwriting. Meanwhile, the industrial self-discipline on motor insurance 1.5 commission is also aiming to lower motor insurance underwriting expense.

Besides, non-motor insurance is expected to continue to deliver steady 1.0 0.5

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premiums and profit growth in 2H18. As for tax, the high tax rate pressure -

Jul Jul Jul Jul Jul

Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct

Jan Jan Jan Jan should alleviate as motor insurance underwriting commission decline. Jan Source: Bloomberg, Key assumptions update 关键假设更新

 Lower FYP growth. We lower our FYP forecasts to reflect 1H18 results. Sector Valuation Although premiums should grow steady in 3Q18, full year expansion is still dragged down by 1Q18 premiums decline. 行业估值

 Raise non-motor premiums and profitability. As credit guarantee insurance is 3.0 Weighted Average 12M Forward P/B of HK (x) Listed Chinese Insurers leading premiums growth, we increase premiums forecasts for non-motor insurance. Meanwhile, consider that non-motor insurance saw recovery in 2.5 profitability, we reduce combined ratio forecasts. 2.0  Lower total investment income forecasts. Consider current weak market performance, we lower total investment income forecasts. 1.5

Investment suggestions 投资建议 1.0

14 15 16 17 18

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Oct Oct Oct Oct Oct Oct

Jun Jun Jun Jun Jun

Feb Feb Feb Feb  Premiums quality improves, while valuation is attractive. We maintain Feb "Outperform" rating for the sector with top pick of CTIH (00966 HK). Despite that premiums and NBV are expected to remain flat, we are still positive Source: Bloomberg, for the sector because of improved premium quality and attractive valuation. Based on protection products selling experience in 2018, we believe that life insurers’ selling strategies for 2019 should achieve better results. Therefore, we believe that steady premiums recover should be achieved in 2019. NBV is also expected to recover as margin improves with more long-term and protection products sales. Therefore, we maintain "Outperform" rating for insurance sector with top pick of CTIH(00966 HK).

Company Name Code Price Rating 18 PER 19PER 20 PER 18 ROE 18 P/B 公司名称编号股价(HK$) 投资评级市盈率(x) 市盈率(x) 市盈率(x) 净资产收益率(%) 市净率(x)

CTIH 00966 26.8 Buy 9.3 7.1 5.9 14.6 1.0

PICC Group 01339 8.82 Accumulate 8.3 6.9 6.1 14.4 1.3

PICC P&C 02328 3.57 Accumulate 7.7 6.5 5.7 11.6 1.0

ZhongAn Online 06060 26.9 Accumulate (24.5) (43.4) 35.5 (9.8) 2.5

Weighted Average. Outperform 市值加权平均 8.15 6.48 7.84 13.13 1.21 Source︰the Companies,Guotai Junan International, Bloomberg.

See the last page for disclaimer page 68 of 91 HK Market Quarterly Outlook and Sector Update

CTIH (00966 HK) Analyst: Wiley Huang 黄重钧 (852) 2509 5347 中国太平 (00966 HK) [email protected]

Company updates 公司近况 Rating: Buy

 1H18 life NBV missed our expectation, whereas shareholders’ profit increased 120.3% yoy to HKD5,209 mn. The profit increase was attributable to a 评级：买入 low investment income base in 1H17 as well as reduced accrual in life insurance

contract liabilities. TPL’s NBV was dragged down by 39.5% decline in 1H18 FYP. TPI saw steady premiums growth in 1H18, but net profit only grew 1.5% due to increase in loss ratio and tax rate. 6-18m TP 目标价: HK $ 32.60

Earnings comments 业绩评论 Share price 股价： HK$26.800

 Life NBV decreased 6.8% due to FYP decline and lower-than-expected margin improvement, but agent headcount increased 6.6% hoh. 1H18 NBV dropped 6.8% to HKD7,563 mn as result of 39.5% FYP decline and only 0.3 ppt margin Stock performance improvement. But the positive aspect is that agent headcount increased 6.6% hoh 股价表现 in 1H18, which is expected to allieviate FYP decline in 2H18. Therefore, NBV is expected to recover in 2H18 and record flat growth in 2018. 70.0 % of return

 Despite of steady premiums growth, TPI’s 1H18 net profit was dragged down 60.0 by combined ratio increase and tax rate hike. Motor premiums grew 18.4%, 50.0 while non-motor premiums increased 57.8% in 1H18. However, combined ratio 40.0 recorded slight increase of 0.7 ppt to 99.5% due to increase in loss ratio. High tax rate led by excessive underwriting expense still caused trouble, which increased 30.0 16.6 ppt to 60.7% in 1H18. 20.0 10.0

0.0 (10.0) (20.0) Valuation, catalysts & risks 估值、催化剂和风险 Oct-17 Jan-18 Apr-18 Jul-18 Sep-18 HSI Index CTIH  We lower target price to HKD32.60 and maintain "Buy" to reflect TPL’s agent

headcount increase and attractive valuation. We apply SOTP valuation to derive CTIH’s target price. We employ P/EV method to value TPL. Meanwhile, we assign Change in Share Price 1 M 3 M YTD 1.0x P/B in valuing TPI. After 15% holding company discount, we arrive at the target 股价变动 1 个月 3 个月年初累计

price of HKD32.60, representing 0.64x 2018F P/Group EV. We maintain "Buy" Abs. % 9.0 13.0 20.6 rating due to 1/ 2H18 agent headcount growth expectation and 2/ attractive 绝对变动 % Rel. % to HS index valuation. 11.5 18.7 27.0 相对恒指变动 % Avg. share price(HK$) 27.4 26.7 26.6 平均股价（港元） Source: Bloomberg, Guotai Junan International.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (HKD m) (HKD m) (HKD) (△ %) (x) (HKD) (x) (HKD) (%) (%) 2016A 149,265 4,832 1.274 (28.5) 21.0 19.546 1.4 0.100 0.4 8.1 2017A 178,676 6,136 1.636 28.4 16.4 22.738 1.2 0.100 0.4 9.9 2018F 206,620 10,387 2.890 76.7 9.3 25.957 1.0 0.202 0.8 14.6 2019F 252,909 13,626 3.791 31.2 7.1 30.081 0.9 0.265 1.0 16.5 2020F 303,109 16,210 4.510 19.0 5.9 34.948 0.8 0.316 1.2 16.8

Shares in issue (m) 总股数 (m) 3,594.0 Major shareholder 大股东 China Taiping Group 59.6% Market cap. (HK$ m) 市值 (HK$ m) 96,319.2 Free float (%) 自由流通比率 (%) 40.4 3 month average vol. 3 个月平均成交股数 (‘000) 8,136.3 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 1.3 52 Weeks high/low (HK$) 52 周高/低 36.100 / 22.100 FY18 Est. NAV (HK$) FY18 每股估值（港元） 32.6

Source: the Company, Guotai Junan International.

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Financial statements and ratios Income Statement Balance Sheet

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Total premiums written and policy fees 149,265 178,676 206,620 252,909 303,109 Cash & cash equivalents 36,168 18,066 20,517 23,944 28,330 Net premiums earned and policy fees 143,569 170,190 193,773 239,365 289,191 Term deposits 46,350 53,225 62,535 72,981 86,349 Net investment income 17,706 20,904 23,771 27,091 31,609 Investment funds 164,699 245,362 276,990 323,260 382,473 Net realised gains and unrealised gains 2,369 743 952 1,053 1,532 Bonds securities 22,222 26,007 32,858 38,346 45,370 Other income 2,919 4,264 5,364 5,364 5,364 Equity securities 12,211 11,961 17,836 20,816 24,629 Total income 166,564 196,100 223,860 272,874 327,695 Other investment assets 147,172 185,309 197,887 230,943 273,246 Net policyholders’ benefits (32,833) (63,262) (75,492) (97,068) (110,103) Total investment assets 428,823 539,930 608,624 710,290 840,397 Net commission expenses (16,704) (21,126) (23,375) (28,867) (33,035) Other assets 80,185 126,544 128,454 130,603 133,020 Administrative and other expenses (22,694) (27,707) (29,708) (36,309) (43,701) Total assets 509,008 666,474 737,078 840,892 973,417 Net chg in life insurance contract liabilities (83,643) (70,690) (75,063) (84,906) (110,705) Life insurance contract liabilities 291,844 383,915 433,140 517,098 626,567 Total benefits, claims and expenses (155,874) (182,785) (203,639) (247,150) (297,545) Investment contract liabilities 22,437 30,714 38,055 39,006 39,981 Finance costs (1,377) (2,124) (1,765) (1,773) (1,781) Interest-bearing payables 5,835 5,958 5,958 5,958 5,958 Share of profit of associates 59 528 (168) (176) (185) Other liabilities 118,643 164,166 166,634 170,718 175,305 Profit before tax 9,371 11,720 18,288 23,774 28,185 Total liabilities 438,759 584,753 643,787 732,780 847,812 Income tax (2,956) (3,756) (4,806) (6,088) (7,145) Total shareholders' equity 57,824 66,440 76,101 88,773 103,849 Profit after tax 6,415 7,964 13,482 17,686 21,039 Minority interest 12,424 15,280 17,190 19,339 21,756 Non-controlling interest (1,583) (1,828) (3,095) (4,060) (4,829) Total equity 70,249 81,721 93,291 108,112 125,605 Shareholders' profit / loss 4,832 6,136 10,387 13,626 16,210

Basic EPS 1.274 1.636 2.890 3.791 4.510 Diluted EPS 1.274 1.636 2.890 3.791 4.510 Financial Ratios Year end 31 Dec (HKD m, except %) 2016A 2017A 2018F 2019F 2020F

Insurance operation (%)

Life GWP yoy 10.9 19.0 11.7 25.0 22.6

Life FYP yoy 10.6 9.1 (27.5) 14.5 14.3 Cash Flow Statement PRC P&C premiums yoy 9.4 19.6 26.4 16.0 11.8 Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F PRC P&C combined ratio 99.8 99.5 99.8 99.7 99.6 Operating activities Investments (%)

Profit before taxation 9,371 11,720 18,288 23,774 28,185 Investment assets yoy 0.9 25.9 12.7 16.7 18.3

Dividend and interest income (1,974) (2,222) (21,818) (25,054) (29,456) Net investment income yoy 7.1 18.1 13.7 14.0 16.7

Increase in unearned premium provisions 1,312 3,057 1,289 3,470 3,958 Total investment income yoy (28.7) 7.8 14.2 13.8 17.8

Increase in life insurance contract liabilities 56,218 69,901 37,372 63,741 83,110 Embedded value (%)

Increase in investment contract liabilities 4,992 6,693 7,341 951 975 Group embedded value (HKD mn) 132,093 160,253 182,490 213,026 250,188

Other operating activities (23,364) (17,408) 20,841 11,416 (3,286) New business value (HKD mn) 9,115 13,638 14,414 16,681 19,463

Cash from operating activities 46,555 71,740 63,313 78,298 83,485 Group EV yoy 7.4 21.3 13.9 16.7 17.4

Investing activities NBV yoy 28.8 49.6 5.7 15.7 16.7

Dividend and interest income received 15,824 16,687 21,818 25,054 29,456 New business margin (FYP) 18.8 25.8 37.6 38.0 38.8

Net increase of investment assets (64,135) (74,026) (68,120) (101,006) (128,944) New business margin (APE) 31.7 36.8 37.7 38.1 38.9

Increase in deposits with maturity above 3m (2,109) (7,848) (9,221) (10,761) (12,732) Others (%)

Others investing activities 1,060 (2,994) (667) 15,270 36,760 ROE 8.1 9.9 14.6 16.5 16.8

Cash from investing activities (49,361) (68,181) (56,190) (71,444) (75,460) Dividend payout ratio 7.8 6.1 7.0 7.0 7.0

Financing activities Per share data (HKD)

Net proceeds from share issued 0 0 0 0 0 Life EV per share 25.612 32.656 39.107 47.059 56.800

Dividend paid 0 (359) (727) (954) (1,135) Group EV per share 36.754 44.589 50.776 59.272 69.612

Interest paid (1,857) (2,166) (2,166) (2,166) (2,166) BPS 19.546 22.738 25.957 30.081 34.948

Other financing activities (770) (2,240) (280) (308) (339) DPS 0.100 0.100 0.202 0.265 0.316

Cash from financing activities (2,627) (4,765) (3,173) (3,427) (3,639) Valuation metrics (x)

Effect of forex (3,643) 1,914 (1,500) 0 0 Current P/B 1.4 1.2 1.0 0.9 0.8

Net changes in cash (9,076) 708 2,450 3,427 4,386 Current P/Group EV 0.7 0.6 0.5 0.5 0.4

Cash at Beg of year 47,633 38,557 39,265 41,716 45,143 TP P/B 1.7 1.4 1.3 1.1 0.9

Cash at End of year 38,557 39,265 41,716 45,143 49,529 TP P/Group EV 0.9 0.7 0.64 0.5 0.5

Source: Guotai Junan International

See the last page for disclaimer page 70 of 91 HK Market Quarterly Outlook and Sector Update

Internet Sector Analyst: Jason Zhou 周桓葳 (852) 2509 5347 互联网行业 [email protected]

Industry dynamics 行业动态 Rating: Neutral

 According to CNNIC, internet users have reached 802 million in June, with the penetration rate of 57.7%. Mobile internet users accounted for 评级：中性

98.3% of the total internet users. Mobile payment users reached over 566 million, thanks to the increasing popularity of offline mobile payments. Size and Penetration of Chinese  AI Technology has been further developed and has been applied in Internet Users in 2018 1H different internet service sector especially in information feeds. The AI 2018 年上半年中国网民规模与渗透 technology, which could have a better understanding of internet users, is Internet users Penetration rate Internet users growth rate

estimated to enhance the monetization capability of internet companies. 10 thousand 90,000 57.7% 60.0% 55.8% 53.2% 54.3%  Online game users reached 486 million in June, representing 60.6% of 51.7% 85,000 50.3% 48.8% 47.9% 50.0% total internet users. Mobile game users accounted for 58.2% of total internet 45.8% 46.9% 44.1% 80,166 80,000 mobile users. However, the revenue growth of online game has been further 77,198 75,116 40.0% slowdown. The total income of online games was RMB 74.3 billion in 75,000 73,125 Jan.–May, 2018, up 24.5% yoy, while the percentage growth in last year was 70,958 70,000 68,826 30.0% 30.8%. In August, the Ministry of Education and other eight departments 66,769 64,875 65,000 63,200 published the "Integrated Prevention and Control of Children and Adolescents 61,758 20.0% Myopia Implementation Plan", which the National Press and Publication 60,000 59,056 10.0% Administration officially expressed the regulated controlling of total amount of 55,000 4.6% online games. 2.3% 2.7% 2.9% 3.1% 3.1% 3.1% 2.7% 2.8% 3.8% 50,000 0.0% 2013.6 2013.12 2014.6 2014.12 2015.6 2015.12 2016.6 2016.12 2017.6 2017.12 2018.6 Key assumptions update 关键假设更新

Source: CNNIC  We expect internet user penetration ratesto be stable due to the further increasing urbanization rates, which would let more low tier cities access the internet. 2018 Jan.-May Online game revenue  From the policy perspective, the mobile game industry is now more likely growth 2018 1-5 月网络游戏增长情况 in a supply-side reform. In the short-term, under the tightening policy, we

expect the impact on leading companies, such as Tencent and Netease, is The growth rate in 2017 The growth rate in 2018

limited but the impact on the small and medium size game involved internet 60.0% companies is relative large. However, it would also has a negative impact on the 48.5% popular games which still have not get the publish version number, such as 50.0% 43.8%

PUBG by Tencent. In the long run, with the enhancement of copyright 39.0% 40.0% awareness and the improvement of the game content, the leading internet 33.2% 30.8% 28.7% companies with strong intellectual property is expected to be further beneficial. 30.0% 28.8% 32.1% 24.9% 30.4% 21.2% 22.1% 27.9% 21.0% Investment suggestions 投资建议 20.0% 24.5%

 The sector rating is “Neutral”. We believe for the leading companies, the 10.0% policy impact on the online game is limited. Even the internet users’ growth is expected to slow down but under the urbanization, we believe the growth rate 0.0% could be stable. AI technology is expected to further optimize the internet products, which could further enhance the internet companies’ monetization capability. Source: CNNIC,

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (x) (x) (x) (%) (x) Tencent 00700 HK HK$299.00 n.a. 30.8 24.0 18.6 26.8 7.6 Chanjet 01588 HK HK$9.180 n.a. 22.6 21.5 n.a. 7.0 1.5 Weibo WB US US$64.250 n.a. 23.2 16.7 12.6 39.3 7.6 Sina Corp SINA US US$64.250 n.a. 21.0 14.3 10.1 6.1 1.4 Baidu Inc. BIDU US US$205.620 Accumulate 20.1 18.0 14.9 17.3 3.4 Netease NTES US US$215.510 n.a. 20.8 16.6 14.1 16.6 3.7 Weighted Average. Neautral 30.4 23.6 18.3 27.0 7.5 市值加权平均 Source︰the Companies, Guotai Junan International, Bloomberg.

See the last page for disclaimer page 71 of 91 HK Market Quarterly Outlook and Sector Update

Internet - E-commerce Sector Analyst: Danny Law 罗沛达 (852) 2509 7768 互联网 - 电商行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform  According to data published by the National Bureau of Statistics of China, China e-commerce GMV in 1M-8M18 reached RMB 5,519.5 bn, up 28.2% 评级：跑赢大市 yoy and the growth down 1.1ppt mom. In August 2018, China commodity e-commerce GMV reached RMB 553.2 bn, up 25.4% yoy, the growth up 0.4ppt mom. China service e-commerce GMV reached RMB 180.0 bn in August 2018, China E-commerce GMV up 10.7% yoy. 全国网上零售额  Mobile shopping remained as the mainstream of online sales. According to (RMB Bn) the latest report issued by China Internet Network Information Center (‘CNNIC”), 1,400 45.0%

71% of China’s internet users used online sales, which stood at 569 mn. Mobile 1,200 40.0% 35.0% shopping users were 557 mn, which remained as the majority of online sales 1,000 30.0% users. 800 25.0% 600 20.0% Key assumptions update 关键假设更新 15.0% 400 10.0%  We expect China e-commerce GMV in 2018 to grow around 28%. During 200 5.0% 1M-8M18, China commodity e-commerce GMV posted the stable growth, which 0 0.0%

grew 28.6% yoy to RMB 4,199.3 bn. China service e-commerce GMV increased

2M18 2M16

4M16 6M16 8M16 3M17 5M17 7M17 9M17 4M18 6M18 8M18

- -

10M16 12M16 11M17

1 1 by 26.9% yoy to RMB 1,320.2 bn in the same period, which decelerated China E-commerce GMV YoY significantly. In our view, China service e-commerce GMV only accounted for Source: China Statistic Bureau, Guotai Junan International. , approximately 24% of total e-commerce GMV during 1M-8M18, we believe that the decelerated service e-commerce GMV might only have some impacts to the China commodity e-commerce GMV whole e-commerce GMV growth. 实物商品网上零售额  Alibaba Group maintained its FY19 revenue guidance, which is expected (RMB Bn) to grow over 60% in FY19. Alibaba Group continues to invest in logistic 1,000 40.0% 900 35.0% services, international business, new retail initiative, food delivery services and 800 30.0% cloud business, each of them posted the strong revenue growth. Meanwhile, 700 25.0% thanks to the growth of ecosystem, core business is expected to grow at a solid 600 500 20.0% pace. 400 15.0% 300 10.0% 投资建议 200 Investment suggestions 100 5.0% 0 0.0%

 The sector rating is "Outperform". We think the sector remains positive, due

2M16 2M18

4M16 6M16 3M17 5M17 9M17 4M18 8M18 8M16 7M17 6M18

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10M16 12M16 11M17 1 to 1) upgrade consumer consumption, 2) gaining popularity of online sales, 3) 1 more products offering via online sales, and 4) increasing users from lower-tier Commodity E-commerce GMV YoY cities and rural area. Our top pick is Alibaba Group. We think the strong Source: China Statistic Bureau, Guotai Junan International., performance in new businesses, such as Aliyun, Ant Financial, Cainiao Logistics, among them; it fuels the revenue growth. However, the heavy investment in new businesses could drag the profit in the short term. Despite the new businesses might not make a return in the short term, more valuation to Alibaba Group is expected in the long term. Our TP represents 38.1x FY19E PE. "Buy".

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价(US$) 投资评级市盈率(x) 市盈率(x) 市盈率(x) 净资产收益率(%) 市净率(x)

Alibaba Group BABA US 154.63 Buy 29.4* 27.5* 20.4* 19.5# 6.8# 58.com Inc WUBA US 66.52 Accumulate 27.0 19.5 14.6 10.1 3.1 JD.com Inc JD US 23.62 Accumulate 63.8 33.7 20.9 0.1 4.4

Weighted Average. 市值加权平均 Outperform 32.0 27.8 20.3 17.8 6.5 Source︰the Companies, Guotai Junan International, Bloomberg. Note: * represents the figure of FY19/FY20/FY21, and # represents the figure of FY19

See the last page for disclaimer page 72 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Danny Law 罗沛达 Alibaba Group (BABA US) (852) 2509 7768 阿里巴巴集团 (BABA US) [email protected]

Company updates 公司近况 Rating: Buy

 Thanks to the growth of ecosystem, revenue for the Company’s core business continues to grow rapidly. During 1QFY19, total China core 评级：买入 commerce revenue was RMB 62,157 mn, up 63% yoy, while international core

commerce revenue reached RMB 6,153 mn, up 45% yoy. Other revenue of RMB 7,159 mn was mainly generated by New Retail businesses in 1QFY19, including contribution from Tmall Import, Intime and Hema. New Retail businesses will be a long-term key strategy of Alibaba Group. 6-18m TP 目标价: US $ 220.00

 Alibaba Group’s business keeps expanding widely. During 1QFY19, cloud business revenue grew 93% yoy to RMB 4,698 mn. The new consolidated Share price 股价： US$154.630 business unit, Ele.me, contributed RMB 2,612 mn in 1QFY19, whereas Cainiao

logistics services revenue was RMB 3,327mn. Furthermore, the revenue of Stock performance digital media and entertainment reached RMB 5,975 mn, up 46% yoy. Meanwhile, Alibaba Group announced that to establish a company to hold 股价表现 Ele.me and Koubei as combined flagship local services vehicle, which already received over US$ 3bn from Alibaba Group and Softbank Group. 40 % change

30 Earnings comments 业绩评论 20  Alibaba Group delivered mixed results in 1QFY19. Alibaba Group’s 1QFY19 10 revenue grew 61% yoy to RMB 80,920 mn, in line with market consensus; non GAAP net profit reached RMB 20,101 mn, flat yoy. The flattish results were 0 mainly due to a decrease in profit sharing from Ant Financial and an increase in (10) exchange loss during 1QFY19. Meanwhile, Alibaba Group maintained its FY19 revenue guidance to achieve over 60% yoy growth. (20)

(30)  The Company keeps investing in new businesses for long-term growth. The Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 new businesses not only fuel the revenue growth, but also offer more synergy CCMP Index Alibaba Group effect to core commerce business in order to drive the revenue. Given that the new businesses are still in the developing stage, we believe margins and profit

might come under pressure in the short term. For the long term, Alibaba Group could take advantage of an increasing scale of new businesses. Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 Abs. % Valuation, catalysts & risks 估值、催化剂和风险 (4.77) (19.58) (13.71) 绝对变动 % Rel. % to NASDAQ index (3.32) (20.88) (31.89)  Our TP set at US$ 220.00 and maintain the investment rating as “Buy”. Our non 相对纳指变动 % Avg. share price(US$) GAAP net profit for FY19-FY21 forecasts are RMB 101,451 mn, RMB 136,362 mn and 161.62 175.17 183.36 平均股价（美元） RMB 175,691 mn, respectively. We recommend investors to “Buy” for the long term. Source: Bloomberg, Guotai Junan International. Once incubation investment of non-core business passes, it could generate more shareholder value in the future. Our TP represents 38.1x FY19E non GAAP P.E.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE

年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率

03/31 (RMB m) (RMB m) (RMB) (△%) (x) (RMB) (x) (RMB) (%) (%)

2017A 158,273 43,675 17.520 (39.7) 61.3 128.812 8.3 0.000 0.0 14.6 2018A 250,266 64,093 25.060 43.0 40.1 170.951 5.9 0.000 0.0 19.9 2019F 395,435 66,261 25.445 1.5 41.0 191.883 5.4 0.000 0.0 16.6 2020F 558,133 103,023 38.787 52.4 26.9 225.382 4.6 0.000 0.0 21.3

2021F 739,337 141,366 52.179 34.5 20.0 271.125 3.8 0.000 0.0 23.3

Shares in issue (m) 总股数 (m) 2,581.0 Major shareholder 大股东 Softbank 29.1% Market cap. (US$ m) 市值 (US$ m) 399,100.0 Free float (%) 自由流通比率 (%) 56.3 3 month average vol. 3 个月平均成交股数 (‘000) 21,556.3 FY19 Net gearing (%) FY19 净负债/股东资金(%) Net Cash 52 Weeks high/low (HK$) 52 周高/低 211.700 / 152.250 FY19 Non GAAP PE FY19 非 GAAP 市盈率 26.8

Source: the Company, Guotai Junan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Mar (RMB m) FY17A FY18A FY19F FY20F FY21F Year end 31 Mar (RMB m) FY17A FY18A FY19F FY20F FY21F Property and Equipment, net 20,206 66,489 96,409 139,793 167,752 Total Revenue 158,273 250,266 395,435 558,133 739,337 Investment Securities 36,143 47,569 129,813 141,697 154,969 Cost of revenues (59,483) (107,044) (215,462) (323,615) (437,470) Investment in Equity Investee 120,368 139,700 84,611 67,559 67,729 Gross profit 98,790 143,222 179,972 234,519 301,867 Goodwill 125,420 162,149 207,551 209,626 216,963 Sales and Marketing Expenses (17,060) (27,299) (39,702) (51,600) (63,275) Intangible Assets 14,108 27,465 51,989 80,230 111,850 General and Administrative Expenses (16,314) (16,241) (25,740) (29,103) (33,626) Prepayments, Receivables and Other 8,703 16,897 16,252 20,447 25,095 Product Development Expenses (12,239) (22,754) (43,425) (42,801) (47,546) Assets

Amortization of Intangible Assets (5,122) (7,120) (8,240) (7,798) (8,023) Total Non-current Assets 324,948 460,269 586,625 659,353 744,359

Impairment of Goodwill, intangible Assets 0 (494) (543) (598) (658) Cash & Cash Equivalents 143,736 199,309 201,672 256,741 317,915 Operating Profit 48,055 69,314 62,323 102,619 148,739 Investment Securities 4,054 4,815 8,186 9,004 10,130 Interest Expense (2,671) (3,566) (5,042) (5,905) (7,312) Short-term Investments 3,011 6,086 10,346 11,381 12,747 Int. and Investment Income/(Loss), Net 8,559 30,495 33,288 36,616 39,557 Prepayments, Receivables and Other 28,408 43,228 46,738 58,804 60,647 Other Income, Net 6,086 4,160 1,994 1,708 1,121 Assets Profit Before Tax 60,029 100,403 92,563 135,038 182,105 Restricted Cash and Escrow 2,655 3,417 6,834 7,517 8,645 Income Tax (13,776) (18,199) (22,955) (29,708) (40,063) Receivables Total Current Assets 181,864 256,855 273,776 343,447 410,083 Profit After Tax 46,253 82,204 69,608 105,330 142,042 Total Assets 506,812 717,124 860,400 1,002,800 1,154,442 Share of Results of Equity Investees (5,027) (20,792) (6,372) (6,358) (6,139)

Non-controlling Interest 2,449 2,681 3,025 4,051 5,463 Accrued Expenses, Accounts Payable, Shareholders' Profit / Loss 43,675 64,093 66,261 103,023 141,366 46,979 81,165 99,870 107,284 106,077 and Other liabilities Non GAAP net income to shareholders 57,871 83,214 101,451 136,362 175,691 Current Bank Borrowings 5,948 6,028 13,022 14,690 15,328 Non-GAAP gross profit 102,683 148,727 191,883 245,646 315,391 Income Tax Payable 6,125 13,689 16,427 18,069 18,973

Non-GAAP EBITA 69,172 97,003 114,332 152,781 202,811 Deferred Revenue-customer Advances 15,052 22,297 26,166 33,776 42,791

Non-GAAP EBITDA 74,456 105,792 135,210 174,331 219,173 Merchant Deposits 8,189 9,578 9,806 7,927 4,059 Escrow Money Payable 2,322 3,053 5,495 6,045 6,257

Total Current Liabilities 93,564 135,810 170,786 187,792 193,484 Basic EPS 17.520 25.060 25.445 38.787 52.179

Diluted EPS 16.970 24.510 24.890 37.940 51.039 Non-current Bank Borrowings 76,835 119,525 149,752 168,937 176,277 23.213 32.595 Non GAAP Basic EPS 38.959 51.338 64.848 Deferred Revenue 641 993 1,594 2,057 2,606 Non GAAP Diluted EPS 23.440 32.860 38.108 50.217 63.432 Deferred Tax Liabilities 10,361 19,312 28,968 31,865 32,821

[Table_CashFlowStatement] Cash Flow Statement Other Liabilities 1,290 2,045 5,726 6,871 7,077 Total Non-current Liabilities 89,127 141,875 186,039 209,730 218,782 Total Liabilities 182,691 277,685 356,825 397,522 412,266 Year end 31 Mar (RMB m) FY17A FY18E FY19F FY20F FY21F

Operating Activities Total mezzanine equity 2,992 3,001 3,901 6,632 7,627 Net income/(loss) 41,226 61,412 63,236 98,972 135,903 Minority Interest 42,330 70,616 67,591 63,540 58,076 Depreciation and Amortization 10,406 15,909 18,316 21,749 16,186 Total Shareholders' Equity 278,799 365,822 432,083 535,106 676,472 Share-based Compensation Expense 15,995 20,075 43,226 41,766 45,392 Total Equity 324,121 439,439 503,575 605,278 742,176 Share of Results of Equity Investees 5,027 20,792 6,372 6,358 6,139 Total Liabilities, mezzanine & 506,812 717,124 860,400 1,002,800 1,154,442 Income Tax Payable 3,335 7,564 5,238 9,527 4,778 Shareholders’ Equity

Deferred Income Taxes 281 976 468 606 817

Other non cash gain or loss 276 (16,910) (25,320) (15,500) (19,500) [Table_FinancialRatio] Financial Ratios Working Capital Change 3,780 15,353 15,818 23,074 (40) FY17A FY18A FY19F FY20F FY21F Cash from Operating Activities 80,326 125,171 127,353 186,552 189,676 Growth % Investing Activities Non GAAP gross profit 45.1% 44.8% 29.0% 28.0% 28.4% Capital Expenditure (17,546) (29,836) (75,981) (98,706) (81,582) Non GAAP EBITA 42.4% 40.2% 17.9% 33.6% 32.7% Investment (36,656) (66,465) (48,468) (36,470) (39,355) Non-GAAP EBITDA 42.3% 42.1% 27.8% 28.9% 25.7% Disposals of PPE, intangible assets and Non GAAP net profit to shareholders 35.2% 43.8% 21.9% 34.4% 28.8% 9,545 13,381 4,014 4,416 4,857 investment Others (33,707) (970) (15,727) (12,545) (17,705) Margin %

Cash from Investing Activities (78,364) (83,890) (136,161) (143,306) (133,785) Non GAAP gross margin 64.9% 59.4% 48.5% 44.0% 42.7% Non GAAP EBITA margin 43.7% 38.8% 28.9% 27.4% 27.4% Financing activities Non-GAAP EBITDA margin 47.0% 42.3% 34.2% 31.2% 29.6% Net Bank Borrowings 29,333 33,625 37,221 20,853 7,979 Non GAAP Net margin 36.6% 33.3% 25.7% 24.4% 23.8% Share issuance or repurchase 1,512 399 459 528 607

Acquisition of additional equity interests in 0 (13,627) (17,034) (8,517) (5,962) non-wholly owned subsidiaries Others 2,069 (38) (1,513) 7,025 159 Cash from Financing Activities 32,914 20,359 19,133 19,889 2,783

Foreign Exchange Rate Effect 2,042 (6,067) (7,962) (8,066) 2,500

Net Changes in Cash 36,918 55,573 2,363 55,070 61,174

Cash at Beg of Year 106,818 143,736 199,309 201,672 256,741

Cash at End of Year 143,736 199,309 201,672 256,741 317,915

Source: the Company, Guotai Junan International.

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Nonferrous Metals Analyst: Kevin Guo 郭勇 (0755) 2397 6671 有色金属行业 [email protected]

Rating: Neutral Industry dynamics 行业动态

rd  All metal prices declined in the 3 quarter of 2018 as market was 评级：中性 concerned about the trade conflict between the U.S. and China. Copper and aluminum price decreased by 6.5% and 5.1% in the 3rd quarter of 2018, respectively; while zinc and nickel price decreased by 11.1% and 15.3%, Nonferrous Metal Prices respectively. 有色金属价格

 The consumption growth speed of base metals of China continued to slow 30.0 down in the first 7 months of 2018. China’s consumption of refined copper % Return 20.0 only increased by 5.3% yoy to 7.06 million tons in the first 7 months of 2018, while the consumption of primary aluminum decreased by 1.09% yoy to 19.10 10.0

million tons. 0.0

-10.0  China’s import growth of refined copper remained slow in the first quarter of 2018. Total import of refined copper increased by 6.09% yoy to 0.85 -20.0

million tons. -30.0

-40.0 Jan/18 Mar/18 May/18 Jul/18 Sep/18 copper aluminum zinc lead nickel tin Key assumptions update 关键假设更新 Source: Bloomberg,  We believe global metal market supply-demand balance to be stable and metal price fluctuation to be small in 2018. We expect metal price fluctuation to be much small in 2018 after significant rise in 2010-2013 and deep-dive in Stock Price Performance 2014-2016, as both global metal supply and demand become more stable. 股价表现

40.0  We expect nonferrous metal prices to be flat or rise moderately in 2018. %Return We expect copper prices to trade between US$ 5,400/t-US$ 7,200/t in 2018, and 30.0 the average copper price may be around US$ 6,000/t-US$6,500/t. We expect 20.0 10.0 the average aluminum prices to fluctuate between US$ 2,150/t. 0.0

-10.0

Investment suggestions 投资建议 -20.0

-30.0  The profitability of nonferrous mining companies is expected remain at a -40.0

comfortable level in 2018. The average metal prices are expected to be flat or -50.0

even rise moderately in 2018, which is positive to improve the profitability of -60.0 nonferrous companies. We maintain the investment ratings at ‘Neutral’. Jan/18 Mar/18 May/18 Jul/18 Sep/18 HSI Index 358 3993 1378 1333 There is no top pick for this sector this month. Source: Bloomberg,

Company Name Code Price Rating 18PER 19PER 20PER 18ROE 18P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) 8.710 10.2 8.9 8.2 5.2 0.5 Jiangxi Copper 00358 Neutral 5.040 4.8 4.0 3.7 13.2 0.5 China Hongqiao 01378 Neutral 3.550 5.4 4.7 4.2 9.6 0.6 China Zhongwang 01333 Buy 3.010 8.7 8.4 8.4 14.5 1.2 CMOC 03993 Neutral Weighted Average. Neutral 7.6 6.9 6.6 11.7 0.8 市值加权平均 Source︰the Companies, GuotaiJunan International, Bloomberg.

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Petrochemicals Sector David Liu 刘静骁 (852) 2509 5441 石化行业 [email protected]

行业动态 Industry dynamics Rating: Outperform  Average YTD Brent oil price is up 38.7% YoY to US$73.02/bbl, above

expectations. The global oil market remained largely balanced during 1-3Q2018 due to stable demand growth combined with both planned and 评级：跑赢大市

unplanned supply disruptions from OPEC. As a result, oil stocks have fallen below the 5-year average and prices have risen. Risks to global oil supply in the near term include the Iran sanctions, instability of Libya’s oil production, and Brent/WTI Prices and Spread prolonged deterioration of Venezuela’s economy. 布伦特和 WTI 油价和价差

 Global oil supply risks are materializing. At the Joint OPEC-non-OPEC US$/bbl US$/bbl 90 12 Ministerial Monitoring Committee meeting in September, OPEC decided to maintain the 100% conformity level to the production cut agreement, which 80 9 implies no production increases from the previous meeting in June. According to 70 6 the IEA, compliance to the OPEC production agreement in August was 115%, average compliance was 113%. Iran’s crude oil exports in September fell 29.8% 60 3 YoY to 1.6 mmbbl/d. Since June 2018, U.S. oil production has hovered around 50 0 11.0 mmbbl/d. 40 (3)  As China’s domestic oil production continues to decline, oil products demand grows. According to the NDRC, during M1-M8 2018, crude oil

production fell 1.7% YoY to 125.97 mmt; crude oil processed grew 6.0% YoY to Brent-WTI Spread (RHS) Brent WTI

391.41 mmt; oil products production increased 8.1% YoY to 244.53 mmt. Source：Bloomberg。 Apparent consumption of oil products increased 5.8% YoY to 213.90 mmt; with OPEC Production and OECD Stocks gasoline and diesel apparent consumption up 6.5% and 4.5% YoY, respectively. OPEC 原油产量和 OECD 商业库存  Industry companies in August announced 1H2018 results. Petrochina’s mmbbl/d mmbbl 34 3,100 (00857 HK) results slightly beat expectations，Sinopec’s (00386 HK) results 33 3,050

were in-line, and CNOOC’s (00883 HK) results were in-line. We expect 2H2018 32 3,000

results to improve in-line with higher oil prices, and over the next few years, we 31 2,950

expect gradual rising oil prices to support growth in the companies’ earnings 30 2,900 Key assumptions update 关键假设更新 29 2,850 28 2,800  We will revise upward our 2018-2020 oil price estimates from US$70 / 27 2,750 US$75 / US$78/bbl to US$75 / US$78 / US$80/bbl. The adjustment reflects our

26 2,700 Jul

expected risks to oil supply in 4Q2018 and higher than expected oil prices during Jul

Apr Oct Apr

Jun Jun Jan Jan

Mar Mar

Feb Feb

Nov Dec Aug Sep Nov Dec Aug

May May 1-3Q2018. As OPEC decided to maintain output quotas and Iran oil exports data OECD Commercial Stocks (RHS) OPEC 12* Production have began to decline, a negative shock to global oil supply is possible in Production Cut Target OPEC Production Source: IEA. November when the Iran sanctions are officially imposed. Offsetting production U.S. Oil Production and Stocks from other OPEC members, Russia, or the U.S. is also becoming increasingly uncertain. Over the next few years, we expect a gradual upward trend in oil 美国和 OPEC 原油产量 prices. mmbbl mmbbl/d 550 11.5

 For 2018, we expect earnings from companies’ refining business to remain 11 stable and the chemicals business to remain high. We expect demand 500 10.5 growth for downstream oil products to outweigh higher input costs from rising oil 450 10 prices. 9.5 400 Investment suggestions 投资建议 9  Upstream company earnings are likely to benefit the most from rising oil 350 8.5 prices. We expect the most significant positive effect from higher average oil 300 8

prices to upstream companies such as CNOOC (00883 HK). Our top pick is

Jul Jul

Oct

Apr Apr

Jan Jun Jan Jun

Feb Mar Feb Mar

Sep Nov Dec Aug Sep Aug

May May CNOOC (00883 HK). Commercial Crude Stock (excl. SPR) Production of Crude Oil (RHS) Source: EIA. Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Petrochina 00857 6.230 Accumulate 24.9 19.6 18.1 3.8 0.9 Sinopec 00386 7.290 Accumulate 8.7 8.2 8.1 10.1 0.9 CNOOC 00883 14.820 Buy 10.3 8.8 8.1 13.4 1.4 Weighted Average. Outperform 17.8 14.5 13.5 7.3 1.0 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

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Analyst: David Liu 刘静骁 CNOOC (00883 HK) +852 2509 5441 中国海洋石油 (00883 HK) [email protected]

Company updates 公司近况 Rating: Buy

 2018 CNOOC’s 1H2018 results improved in-line with our expectations. The 86.7% YoY increase in operating profit was due to a 20.5% YoY increase in oil 评级：买入 and gas sales while total expenses before interest and taxes declined 8.3% YoY.

Interim dividend increased 50.0% YoY and represents a payout ratio of 44.3%. CNOOC’s total production in 1H2018 stayed nearly flat, rising 0.1% YoY to 238.1 mmboe led by an 11.1% YoY increase in natural gas production as crude and 6-18m TP 目标价: HK$16.50 liquids production declined 2.1% YoY. The Company recorded capex of RMB21.0

bn in 1H2018 which represents 26.3%-30.0% of the RMB70-80 billion annual target range. Share price 股价： HK$14.820

Earnings comments 业绩评论 Stock performance 股价表现  Our 2018E-2020E earnings estimates for CNOOC are RMB55,495 mn / RMB64,934 mn / RMB70,455 mn, respectively. Our adjustments reflect higher 70 % of return oil and gas sales revenue from depreciation of the RMB. Growth in the 60 Company s earnings estimates approximately follows the upward trend of oil ’ 50 prices. We expect CNOOC’s gas production to gradually increase over time in 40 order to accommodate growing gas demand in China. 30 We think the Company’s costs are likely to increase as oil prices continue  20 to gradually increase. While per barrel all-in cost rose only 0.3% YoY, operating 10 expenses have increased 11.7% YoY. The weaker rise in all-in cost was due to a 14.5% decrease in DD&A. The Company has executed effective cost control 0

measures over the past few years as oil prices were low, but as oil prices rise, we (10) expect costs to increase over our forecast period as we think CNOOC will need Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 to increase capex substantially in 2H2018 to meet its production targets for CNOOC HSI index

2018E-2020E.

YTD Change in Share Price 1 M 3 M 年初累股价变动 1 个月 3 个月计 Valuation, catalysts & risks 估值、催化剂和风险 Abs. % 10.1 17.7 46.9 绝对变动 %  Maintain TP at HK$16.50 and investment rating, "Buy". The target price Rel. % to HS index 12.5 23.3 53.2 corresponds to 11.42x / 9.76x / 8.99x 2018E-2020E PER, equivalent to 相对恒指变动 % 1.53x/1.40x/1.27x 2018E-2020E PBR, and is al so equivalent to a 12.8% Avg. share price(HK$) 14.6 13.2 11.8 discount on our DCF valuation. 平均股价（港元） Source: Bloomberg, Guotai Junan International.  We think CNOOC will benefit from higher oil prices in 2018. However, downward risks to the Company’s share price include: 1) lower oil demand growth due to higher oil prices; 2) higher than expected growth in costs; and 3) weaker than expected capex could put downward pressure on production growth in the future.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 146,490 637 0.014 (96.9) 930.3 8.564 1.5 0.317 3.7 0.2 2017A 186,390 24,677 0.553 3,850.0 22.3 8.511 1.4 0.368 3.0 6.5 2018F 228,078 55,495 1.243 124.8 10.3 9.256 1.4 0.498 3.8 14.0 2019F 251,016 64,934 1.454 17.0 8.8 10.156 1.3 0.553 4.3 15.0 2020F 267,636 70,455 1.578 8.5 8.1 11.130 1.1 0.604 4.7 14.8

Shares in issue (m)总股数 (m) 44,647.5 Major shareholder 大股东 CNOOC 64.4% Market cap. (HK$ m)市值(HK$ m) 661,675.3 Free float (%) 自由流通比率(%) 35.6 3 month average vol. 3 个月平均成交股数(‘000) 64,276.1 FY18 Net gearing (%) FY18 净负债/股东资金(%) 27.7 52 Weeks high/low (HK$) 52 周高/低 15.78/9.82 FY18 NAV (HK$) FY18 每股估值（港元） 18.9 Source: the Company, Guotai Junan International.

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Oil & Gas sales 121,325 151,888 194,303 210,127 223,604 PPE 432,465 395,868 399,546 415,756 445,695

Marketing & other revenues 25,165 34,502 33,775 40,889 44,032 Investments in JV/A 29,995 29,146 26,149 28,599 30,622

Total Revenue 146,490 186,390 228,078 251,016 267,636 Intangibles 16,644 15,070 15,093 15,316 15,652

Other Non-Current Assets 36,532 38,297 35,238 34,916 33,938

Operating expenses (23,211) (24,282) (27,151) (27,990) (28,916) Total Non-current Assets 515,636 478,381 476,027 494,586 525,907

Selling and administrative expenses (6,493) (6,861) (7,590) (8,353) (8,906)

Exploration expenses (7,359) (6,881) (8,235) (9,351) (9,702) Cash & Cash Equivalents 13,735 12,572 15,122 14,128 12,858

Depreciation, depletion and amortisation (68,907) (61,257) (61,966) (62,546) (64,931) Other Investments (net) 53,332 74,358 90,989 100,140 101,432

Impairment and provision (12,171) (9,130) (232) (46) (9) Inventory 8,709 7,354 7,983 12,551 13,382

Crude oil and product purchases (19,018) (27,643) (26,231) (37,823) (40,249) Trade Receivables 23,289 20,787 27,369 30,122 32,116

Special oil gain levy 0 (55) (2,487) (4,342) (6,350) Other Current Assets 22,980 23,767 31,489 34,877 37,391

Taxes other than income tax (6,941) (7,210) (11,404) (12,551) (13,382) Total Current Assets 122,045 138,838 172,952 191,817 197,179

Others (4,802) (6,021) (2,281) (2,510) (2,676) Total Assets 637,681 617,219 648,979 686,403 723,085

Operating Profit (2,412) 37,050 80,502 85,504 92,515

Interest income 901 653 922 912 1,130 Short-Term Debt 19,678 13,892 5,557 7,446 10,797

Finance income / (cost) (6,246) (5,044) (5,718) (5,920) (5,735) Trade and Accrued Payables 25,345 26,713 29,866 30,789 31,808

Exchange (losses)/gains, net (790) 356 269 148 (32) Other Current Liabilities 22,067 20,807 19,855 21,852 23,299

Investment income 2,774 2,409 3,334 4,731 4,687 Total Current Liabilities 67,090 61,412 55,278 60,087 65,904

Share of profit of associates (609) 302 311 320 330

Share of profit of JV 533 553 (5,707) 802 962 Long-Term Debt 130,798 118,358 119,542 113,804 102,651

Non-operating income, net 574 78 80 81 83 Other Non-Current Liabilities 57,422 57,474 60,921 59,053 57,600

Profit Before Tax (5,275) 36,357 73,993 86,579 93,940 Total Non-current Liabilities 188,220 175,832 180,463 172,856 160,251

Income Tax 5,912 (11,680) (18,498) (21,645) (23,485) Total Liabilities 255,310 237,244 235,740 232,943 226,154

Profit After Tax 637 24,677 55,495 64,934 70,455

Non-controlling Interest 0 0 0 0 0 Share capital 43,081 43,081 43,081 43,081 43,081

Shareholders' Profit / Loss 637 24,677 55,495 64,934 70,455 Reserves 339,290 336,894 370,157 410,379 453,850

Basic EPS 0.014 0.553 1.243 1.454 1.578 Total Shareholders' Equity 382,371 379,975 413,238 453,460 496,931

Diluted EPS 0.014 0.553 1.242 1.453 1.577 Minority Interest 0 0 0 0 0 Total Equity 382,371 379,975 413,238 453,460 496,931

[Table_CashFlowStatement] Cash Flow Statement [Table_FinancialRatio] Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Financial Ratios

Profit before tax (5,275) 36,357 73,993 86,579 93,940 2016A 2017A 2018F 2019F 2020F

Adjustments for: Growth:

Depreciation 68,303 60,802 61,497 62,030 64,381 Oil & gas revenue (17.2)% 25.2% 27.9% 8.1% 6.4%

Amortization 1,020 854 469 516 550 Operating profit (113.8)% (1,636.1)% 117.3% 6.2% 8.2%

Tax Paid 5,912 (11,680) (18,498) (21,645) (23,485) Net profit (96.9)% 3,773.9% 124.9% 17.0% 8.5%

JV/A Income/(loss) - net 76 (855) 5,396 (1,122) (1,292) Margins:

Change in Working Capital (13,113) 2,513 (10,436) (7,324) (1,736) Operating margin (1.6)% 19.9% 35.3% 34.1% 34.6%

Other Operating Cash Flows 15,940 6,743 3,447 (1,869) (1,453) Net profit margin 0.4% 13.2% 24.3% 25.9% 26.3%

Cash from Operating Activities 72,863 94,734 115,868 117,165 130,904 Debt management:

Net gearing 35.6% 32.7% 27.7% 24.7% 21.2%

Capital Expenditure (51,347) (47,734) (65,175) (78,240) (94,320) Total debt to equity 39.4% 36.1% 29.5% 26.1% 22.4%

Investments in financial assets - net 25,541 (14,356) (16,631) (9,151) (1,292) Valuation:

Investments in JV/A (1,865) (1,000) (1,020) (1,040) (1,061) BVPS (RMB) 8.564 8.511 9.256 10.156 11.130

Other investments (282) (1,321) (1,108) (1,167) (715) P/E 930.3 22.3 10.3 8.8 8.1

Cash from Investing Activities (27,953) (64,411) (83,934) (89,598) (97,388) P/B 1.5 1.4 1.4 1.3 1.1

P/CF 7.9 6.1 5.0 4.9 4.4

Dividends Paid (14,153) (16,448) (22,232) (24,712) (26,984) Assumptions & others:

Change in Gross Debt (14,169) (18,226) (7,152) (3,849) (7,802) Payout ratio 2,113.0% 74.7% 41.0% 39.8% 40.1%

Other Financing Cash Flow (14,720) 3,188 0 0 0 Brent oil price (US$/bbl) 45.1 54.7 70.0 75.0 78.0

Cash from Financing Activities (43,042) (31,486) (29,383) (28,561) (34,786) Realised oil price(US$/bbl) 41.4 52.7 68.0 72.9 75.8

Production(mmboe) 476.9 470.2 474.7 485.1 498.6

Cash at Beg of Year 11,867 13,735 12,572 15,122 14,128 Production growth (3.8)% (1.4)% 0.9% 2.2% 2.8%

Net Changes in Cash 1,868 (1,163) 2,550 (994) (1,270) P/reserves(US$/boe) 20.2 16.1

Cash at End of Year 13,735 12,572 15,122 14,128 12,858 RRR % 145%* 305.0%

Source: the Company, Guotai Junan International. *Note: adjusted for economic revisions (impairment).

See the last page for disclaimer page 78 of 91 HK Market Quarterly Outlook and Sector Update

Port Sector Analyst: Spencer Fan 范明 (86755) 2397 6686 港口行业 [email protected]

Industry dynamics 行业动态 Rating: Neutral

 According to throughput data of the above-scale ports from January to August in the Ministry of Transportation, the overall performance was 评级：中性

stable (up 4.9% YoY). Among the top ten ports, only the cargo throughput of Shanghai Port, Tianjin Port and Suzhou Port fell. The declines were -5.4%, -15.2%, -2.3%. Container throughput, the top ten ports maintained a moderate Domestic Port Sector's Throughput growth, Guangzhou Port has been outstanding, with a throughput of 14.29 国内港口吞吐量表现 million TEU, achieving a growth rate of up to 9.4%. mn TEU Major domestic ports' accumulated %  Since the end of September, the State Council has requested that the cost 25,000 throughput 10 of compliance for container import and export to be reduced by more than 20,000 8 $100. We expect that this round (third round) of port logistics fee reduction is mainly targeting port inspection fees and container boxes' collection and 15,000 6 transportation links. The policy will yield less impact on the port companies' 10,000 4 container box loading and unloading rates, which is different from the previous two rounds of foreign trade export container fee-cut guidelines. Therefore, the 5,000 2 overall impact of policies on the profitability of the port industry is limited. 0 0

Key assumptions update 关键假设更新 Source: Ministry of Transportation..

 We expect domestic container throughput to achieve weak endogenous Domestic Export/Import Performances growth in 2018. We estimate domestic throughput to achieve low single-digit (In US$) YoY growth of 3.5%-4.5% for 2018, considering that Sino-U.S trade dispute had 国内进出口表现（按美元计价） been escalating. When expanding overseas, Chinese companies will select

hub-type ports to increase profitability. In response to the impact of the Sino-US % YTD Export YoY YTD Import YoY

trade war, the foreign trade majored ports in the Yangtze River Delta and the YTD Export & Import YoY Pearl River Delta have also adopted risk-hedging measures: expanding the 35

corresponding flows of Southeast Asian routes and the Belt and Road countries. 25

Investment suggestions 投资建议 15 5  Sector valuation under pressure due to external headwinds, but valuation divergence among companies may be catalyzed in future. We believe while (5) further positive earnings elasticity to be very limited, valuations for port (15)

companies should be differentiated by: 1) possibilities of elevated Sino-U.S (25) trade war yielding different impacts on ports. 2) Volume improvements from hub ports with solid economic foundation. For 4Q18, we are only optimistic about two Source: General Administration of Customs of PRC types of ports, 1: ports that have support from the parent company's fleet with own traffic volume, such as COSCO SHIPPING ports (01199 HK, "Accumulate" rating); 2: ports with strong capital integration ability, which can develop logistics parks as downstream industries, such as China Merchants Port (00144 HK, "Accumulate" rating).

Company Name Code Price Rating 18PER 19 PER 20 PER 18 ROE 18P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) COSCO Shipping Ports 01199 8.360 Accumulate 10.9 9.2 7.2 5.6 0.6 China Merchants Port Holdings 00144 14.250 Accumulate 6.3 6.9 6.5 9.8 0.6 Xiamen Interntaional Port 03378 1.080 Neutral 7.9 5.8 5.4 6.0 0.5 Weighted Average 市值加权平均 Neutral 7.5 7.4 6.6 8.6 0.6

Source︰the Companies, Guotai Junan International, Bloomberg.

See the last page for disclaimer page 79 of 91 HK Market Quarterly Outlook and Sector Update

Analyst: Spencer Fan 范明 COSCO SHIPPING Ports (01199 HK) (86755) 2397 6686 中远海运港口 (01199 HK) [email protected]

Company updates 公司近况 Rating: Accumulate

 CSP's future key driving factor will be the incremental volume contributed by the OCEAN Alliance. In 1H18, OCEAN Alliance contributed about 42.0% of CSP's 评级：收集 subsidiary throughput, while the management expected the ratio to be higher in

4Q18 and 2019. OOCL contributed 2.1% of the CSP's subsidiary throughput in 1H18, while OOCL officially became a subsidiary of CSP's parent company CSH by August 2018. Related incremental growth had been seen in Pireaus and Xiamen's operating results. 6-18m TP 目标价: HK $ 8.85

Earnings comments 业绩评论 Share price 股价： HK$8.360  Improving signs continued. CSP’s 1H18 revenues amounted to

US$495,457,000, up 79.7% YoY. From Jan to Aug 2018, CSP's total throughput rose 13.0% YoY to 64.59 mn TEU. CSP recorded 1H18 shareholders’ profit of Stock performance US$168.988 mn during 1H18, up 70.1% YoY, or 56.1% lower if we consider the 股价表现 profit from one-off exceptional items in 1H17.

Valuation, catalysts & risks 估值、催化剂和风险 % of return 20.0  Catalyst: Unaffected by the Sino-U.S trade dispute. With only one U.S terminal, 15.0 10.0 CSP is less affected by the Sino-U.S trade dispute. Seattle terminal’s 2018 5.0 Jan-Aug throughput accounted for only 0.72%/0.19% of CSP’s overseas/total 0.0 throughput, which was insignificant. Also, Overseas ports might become CSP's (5.0) (10.0) growth engine. With Turkey's Kumport being 1H18's highlight, the upcoming port of (15.0) Abu Dhabi may serve as another connecting hub on OCEAN Alliance's Far (20.0) East-Europe route. This greenfield has an annual designed capacity of 2.5 mn TEU. (25.0) OCEAN Alliance's current shipping volume in the Persian Gulf has reached 3.0 mn (30.0) (35.0) TEU by September 2018. Jan/00 Jan/18 Apr/18 Jul/18 Oct/18 HSI COSCO SHIPPING PORTS  Maintain “Accumulate” rating and maintain TP at HK$8.85. State Council's new policy may pressure on port industry's revenue, yet we favor CSP’s growth potential Change in Share Price 1 M 3 M YTD amid secured volume from OCEAN Alliance and enhancing operating efficiency. 股价变动 1 个月 3 个月年初累计 Abs. % Current valuation is attractive. Our TP represents 11.6x, 10.0x and 8.1x 2018-2020 9.7 20.0 (6.5) 绝对变动 % PER. Rel. % to HS index 15.6 29.9 3.3 相对恒指变动 % Avg. share price(HK$)  Risk: 1. weak marine trade in 3Q18 and beyond amid escalating Sino-U.S trade 8.1 7.7 7.6 平均股价（港元） friction, and 2. full-scale execution of cut guidance for terminal handling fees from Source: Bloomberg, Guotai Junan International. the State Council in 2018.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (US$ m) (US$ m) (US$) (△%) (x) (US$) (x) (US$) (%) (%) 2016A 556 247 0.083 (43.2) 13.0 1.466 0.7 0.033 3.7 4.8 2017A 635 512 0.169 103.6 6.3 1.697 0.6 0.030 3.4 10.7 2018F 746 299 0.098 (42.0) 10.9 1.785 0.6 0.027 3.0 5.6 2019F 877 356 0.116 18.4 9.5 1.873 0.6 0.032 3.6 6.4 2020F 1,025 451 0.148 27.6 7.7 1.986 0.5 0.040 4.5 7.7

Shares in issue (m) 总股数 (m) 3,057.5 Major shareholder 大股东 COSCO SHIPPING Holdings 46.1% Market cap. (HK$ m) 市值 (HK$ m) 25,560.4 Free float (%) 自由流通比率 (%) 53.9 3 month average vol. 3 个月平均成交股数 (‘000) 3,985.4 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 32.0 52 Weeks high/low (HK$) 52 周高/低 (HK$) 9.950 / 6.340 FY18 Est. NAV (HK$) FY18 每股估值（港元） 13.8

Source: the Company, Guotai Junan International.

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Financial Statements and Ratios

Income Statement Balance Sheet Year end Dec (US$ m) 2016A 2017A 2018F 2019F 2020F Year end Dec (US$ m) 2016A 2017A 2018F 2019F 2020F Revenue 556 635 746 877 1,025 Property, plant and 2,368 2,980 3,057 3,142 3,237 Terminal and related business 554 635 746 877 1,025 Investment in associates 1,406 2,579 2,666 2,763 2,847 equipment Container leasing, mgmt and sales 2 0 0 0 0 Investment in JVs 1,409 1,197 1,226 1,261 1,303 Land use rights 202 279 273 266 259 Cost of sales (357) (425) (485) (543) (592) Other non-current assets 407 1,067 1,055 1,029 1,067 Administrative expenses (85) (114) (124) (129) (135) Non-current assets 5,791 8,102 8,278 8,460 8,712 Other operating income 17 40 12 14 17 Other operating expenses (36) (5) (20) (20) (15) Cash and cash equivalents 834 560 409 404 480 Gain on disposal of a joint venture and remeasurement 0 322 0 0 0 Trade and other receivables 151 281 200 231 261 Operating profit 95 453 129 199 299 Inventories 10 11 25 31 35 Share of profit of associates and JVs 200 237 260 280 326 Current assets 996 852 634 665 777 Finance income 15 13 11 9 8 Total Assets 6,786 8,954 8,912 9,125 9,489 Finance costs (52) (56) (63) (56) (55) Earnings before taxes 258 646 337 431 578 Short-term bank borrowings 175 477 286 221 188 Trade and other payables 396 502 407 403 421 Taxation (48) (95) (23) (45) (76) Other current liabilities 265 53 140 166 160 Profit after taxation 209 551 314 386 502 Current liabilities 836 1,032 832 790 769 Non-controlling interests (29) (39) (15) (30) (51) Profit from discontinued operations 67 0 0 0 0 Long-term bank borrowings 1,071 1,824 1,740 1,674 1,530 Net profit attributable to shareholders 247 512 299 356 451 Other non-current liabilities 113 253 264 289 424 Basic EPS (US$) 0.083 0.169 0.098 0.116 0.148 Non-current liabilities 1,185 2,077 2,004 1,964 1,954 DPS (US$) 0.033 0.030 0.027 0.032 0.040 Retained earnings 30 51 40 48 61 Other reserves 4,286 5,098 5,325 5,582 5,913

Cash Flow Statement Shareholders' equity 4,355 5,189 5,404 5,669 6,013

Year end Dec (US$ m) 2016A 2017A 2018F 2019F 2020F Non -controlling interests 411 657 672 703 754

Profit before income tax 325 646 337 431 578 Total equity 4,766 5,845 6,076 6,372 6,766 Depreciation and amortization 133 107 123 127 131 BPS(US$) 1.466 1.697 1.785 1.873 1.986 Other gain/loss (203) (524) (197) (224) (270) YoY (%) (26.2) 15.8 5.2 4.9 6.1 Change in working capital 59 88 (23) (41) (17) Interest received 16 11 18 18 18 Tax paid (29) (75) (38) (26) 6 Net cash flow from operating activities 301 253 221 286 445

Purchase s of fixed assets (441) (198) (200) (210) (215) Financial Ratio

Net cash paid for purchase of subsidiaries 0 (302) 0 0 0 2016A 2017A 2018F 2019F 2020F

Investment in joint ventures (46) (386) (50) (60) (43) Gross margin (%) 35.8 33.0 35.0 38.1 42.3 Proceeds on disposal of a subsidiary 1,407 0 0 0 0 SG&A ratio (%) 15.3 18.0 16.6 14.7 13.2 Others 46 128 214 229 252 Net income margin (%) 44.4 80.7 40.0 40.5 44.0 Net cash flow from investing activities 966 (758) (36) (41) (6) ROA (%) 3.6 7.4 3.9 4.6 5.7 ROE (%) 4.8 10.7 5.6 6.4 7.7 Change in bank loans 314 365 (179) (104) (197) Dividends paid (422) (35) (92) (88) (109) Fixed asset turnover (x) 0.2 0.2 0.2 0.3 0.3 Consideration paid for acquisition of a subsidiary (1,162) 0 0 0 0 A/R turnover (x) 2.6 3.0 3.3 4.4 4.4 Others (93) (80) (65) (58) (57) Inventory turnover (x) 0.8 1.0 1.4 1.1 1.1 Net cash flow from financing activities (1,362) 250 (336) (250) (363) Current ratio (x) 1.2 0.8 0.8 0.8 1.0 Beginning cash balance 923 834 560 409 404 Quick ratio (x) 1.2 0.8 0.7 0.8 0.9 Effects of changes in exchange rates 6 (19) 0 0 0 Total debt / EBITDA (x) 3.5 4.4 4.2 3.1 2.1 Change in cash and cash equivalent (95) (255) (151) (6) 77 Net gearing ratio (%) 15.3 26.9 32.0 28.8 22.6 Ending cash balance 834 560 409 404 480 Interest coverage ratio (x) 16.5 14.5 11.0 13.8 20.2 Source: the Company, Guotai Junan International.

See the last page for disclaimer page 81 of 91 HK Market Quarterly Outlook and Sector Update

Precious Metals Sector Analyst: Kevin Guo 郭勇 (0755) 2397 6671 贵金属行业 [email protected]

Rating: Neutral Industry dynamics 行业动态

 Gold price continued to decline in the 3rd quarter of 2018. Gold price 评级：中性 decreased by 5.4% in the 3rd quarter and traded under the level of US$ 1,200/oz. The pace of interest rate hike by the Federal Reserve may exceed market expectations and investors still lack interests in safe haven assets. Precious Metal Price

 The Federal Reserve of the U.S. continued to tighten its monetary policy. 贵金属价格

The Federal Reserve had raised interest rates three times in the first 9 months of 15.0 % Return 2018 and may further tighten its monetary policy. 10.0

 Investors’ interests in gold remain stagnant. Total known gold ETF holdings 5.0

remain at the level of 2,100 tons for a long time as investors’ interest remain 0.0 stagnant. -5.0

-10.0

Key assumptions update 关键假设更新 -15.0

-20.0  We expect gold prices to remain under pressure in 2018 as the monetary Jan-18 Mar-18 May-18 Jul-18 Sep-18 policy of the U.S. Federal Reserve remains tight. We expect gold prices to gold platinum silver fluctuate between US$ 1,100/oz-US$ 1,350/oz in 2018, and the annual average Source: Bloomberg, gold price to be around US$ 1,250/oz.  We expect the Federal Reserve to raise interest rate by 3 to 4 times in 2018. Stock Price Performance We expect the Federal Reserve to continue to tighten its monetary policy in 股价表现 2018 as U.S economy gains steady growth.

60.0 % Return 50.0

40.0 Investment suggestions 投资建议 30.0  We believe gold equity to go down as gold prices are under pressure. We 20.0 expect gold price generally remain under pressure in 2018 as the Federal 10.0 Reserve tighten its monetary policy. We expect gold stocks to lack driving force 0.0 -10.0 as investors lose interest for safe haven assets. There is no top pick for this -20.0 sector this month. -30.0

-40.0 Jan-18 Mar-18 May-18 Jul-18 Sep-18 HSI Index 1818 2899 3330 2099

Source: Bloomberg,

Company Name Code Price Rating 18PER 19PER 20PER 18ROE 18P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Zijin Mining 02899 2.88 Accumulate 10.4 9.7 8.8 14.5 1.0 Zhaojin Mining 01818 6.08 Neutral 25.1 22.7 20.7 5.0 1.4 China Gold Intl. 02099 11.06 Neutral 12.3 6.8 5.9 3.0 0.4 Weighted Average. Neutral 13.6 12.3 11.2 11.9 1.3 市值加权平均 Source︰the Companies, GuotaiJunan International, Bloomberg.

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Property Sector Analyst: Johnny Wong 王俊浩 Analyst: Van Liu 刘斐凡 (852) 25095348 (86755) 23976672 房地产行业 [email protected] [email protected]

Industry dynamics 行业动态 Rating: Outperform

 Steady fundamentals remained. During Jan.-Aug. 2018, the YoY increase in commodity house sales slightly increased compared to that during Jan.-Jul. 评级：跑赢大市 2018. Land area sold raised 15.6% YoY. Moreover, growth in investment maintained strong in Jan.-Aug. 2018, and increased by 10.1% YoY. Saleable areas extended downside momentum. Commodity House Sales Performance

 Targeted and tightening policies will maintain but monetary environment 商品房销售表现 may moderately loose. Targeted policies will be maintained to promote the 1,800 50.0% steady and sound development of the property sector. On 7 Oct. 2018, PBOC 1,600 40.0% 1,400 30.0% 1,200 announced RRR cut. This implies that the monetary policy may not follow rate 20.0% 1,000 10.0% hikes in the US. Overall, for the policy and monetary environment, the key note 800 0.0% 600 of healthy property market maintenance will not change. 400 -10.0% 200 -20.0%

 Hong Kong banks raised HKD prime rates. The market has already 0 -30.0%

15 15 16 17 17 16 18

15 15 16 17 18 14 16 17

15 17 18 16

15 16 17 18

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- - - -

Apr Oct Oct Apr Oct Apr

expected the increase in prime rates but the magnitude of the interest rate Apr

Jun Jun Jun Jun

Feb Feb Feb Feb

Aug Dec Dec Aug Aug Dec Aug Dec increase is more moderate than we thought. We expect that Hong Kong prime GFA Sold of Commodity Houses (LHS)(sq.m. mn) GFA Sold of Residential Houses (LHS) (sq.m. mn) rate will increase further in the coming months, and the capitalization rates GFA Sold of Commodity Houses (RHS) GFA Sold of Residential Houses (RHS) implied in the Hong Kong real estate market will likely be brought up.

Source: National Bureau of Statistics of China. Key assumptions update 关键假设更新 GFA newly started and Investment  Revise up GFA sold of commodity housing for 2018 to range from 1,575 mn sq.m to 1,660 mn sq.m, or -7.0%--2.0% YoY to factor in slight loosening in 新开工与开发投资完成额

monetary environment. To promote the steady and sound development of 25%

property sector, we expect stable ASP. 20% 15.9% 15%  Revise up the 2018 GFA newly started of 1,876 mn sq.m, or 5.0% YoY growth 10.1% 10% to reflect higher-than-expectations GFA newly started and leverage enlargement 5% of property developers.

15 16 17 18

16 17 18 15

15 15 16 16 17 17 18

14 15 16 17

16 17 18 15

- - - -

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 Revise up the 2018 investment of RMB11,419 bn, or up 4.0% YoY on the -5% -

Apr Oct Apr Oct Apr Oct Apr

Jun Jun Jun Jun

Feb Feb Feb Feb

Dec Dec Dec Dec

Aug Aug Aug Aug grounds of revising up GFA newly started growth. -10% -15%

Investment suggestions 投资建议 -20%

-25%  The property sector's current valuation is attractive and the RRR cut Investment YTD YoY GFA Newly Started YTD YoY should be a revaluation trigger. We still think sector leaders with limited operating risks should outperform the sector average amid market consolidation. Source: National Bureau of Statistics of China. Top pick is CR Land (01109 HK) and Hang Lung Properties (00101 HK).

Company Name Code Price Rating 18 PER 19 PER 20 PER 18 ROE 18 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) COLI 00688 23.50 Buy 5.2 4.2 3.7 17.4 0.8 CR Land 01109 25.75 Accumulate 6.1 5.3 4.3 19.4 1.1 Longfor Properties 00960 19.26 Accumulate 6.8 4.8 3.9 19.1 1.2 Evergrande 03333 22.35 Accumulate 6.6 4.9 4.2 30.3 1.8 Country Garden 02007 9.70 Accumulate 5.5 4.6 4.2 29.4 1.4 Shenzhen Invest 00604 2.40 Accumulate 6.7 4.9 4.3 6.7 0.4 China Aoyuan 03883 5.08 Buy 5.0 3.7 3.2 20.8 1.0 Powerlong Real Estate 01238 3.17 Buy 2.9 2.2 2.0 13.8 0.4 Modern Land 01107 1.12 Accumulate 5.5 3.8 3.5 9.4 0.5 China South City 01668 1.22 Buy 2.1 1.9 1.7 12.2 0.2 Ronshine China 03301 9.62 Buy 3.5 2.5 2.0 31.0 0.9 Colour Life 01778 4.20 Buy 8.1 6.3 5.0 17.1 0.9 Weighted Average. Outperform 5.9 4.6 4.0 23.4 1.3 市值加权平均 Henderson Land 00012 38.75 Neutral 12.2 10.2 10.3 6.5 0.5 Development Sino Land 00083 12.74 Accumulate 5.6 15.6 14.8 10.4 0.6 Hang Lung Properties 00101 14.88 Buy 14.4 15.0 14.6 3.6 0.5 Weighted Average. Neutral 10.9 12.6 12.4 6.9 0.5 市值加权平均 Source: the Companies, Guotai Junan International, Bloomberg.

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Analyst: Van Liu 刘斐凡 China Resources Land (01109 HK) (86755) 23976672 华润置地 (01109 HK) [email protected]

Company updates 公司近况 Rating: Accumulate

 China Resources Land ("CR Land") exhibited strong growth in contracted 评级：收集 sales. During Jan. to Aug. 2018, contracted sales reached RMB135.68 bn, up by

54.3% YoY. The contracted GFA amounted to 7.58 mn sq.m, up by 27.2% YoY. The ASP was RMB17,904 per sq.m, up by 21.3% YoY.

 Rental income recorded fairly fast growth. During Jan.-Aug. 2018, rental income raised 28% YoY to RMB6.002 bn. 6-18m TP 目标价: HK $ 28.08

Share price 股价： HK$25.750 Earnings comments 业绩评论

 Bottom-line beat our expectations. In 1H18, total revenue amounted to Stock performance RMB43.778 bn, up by 40.5% YoY. The gross profit amounted to RMB21.066 bn, up 股价表现 by 93.1% YoY. As more GFA delivered with higher gross margins, GPM increased 13.1 ppts to 48.1% in 1H18. The underlying net profit soared by 139.8% YoY to RMB7.970 bn. which beat our expectation.

Aggressive land bank enlargement under the low period of land auction market could protect margins. Total land bank for DP and IP as at 30 Jun. 2018 amounted to 43.22 mn sq.m. and 8.93 mn sq.m., respectively. We estimate that the Company's unit land cost amounted to RMB4,245/sq.m, 24.3% of ASP in Jan.-Aug. 2018. We think that a quality land bank and proper unit land cost will help to stabilize the Company's gross margins. Pre-sales as at the end of 1H18 amounted to over RMB220 bn, with gross margin of around 38%. We estimate gross margin to

increase to 41.6% in 2018, then, remain at around 37.2% in 2019 and 2020.

Valuation, catalysts & risks 估值、催化剂和风险 Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计

Abs. %  CR Land should be a high defensive stock with its solid fundamental outlook. (1.9) 1.0 4.0 绝对变动 % The Company's revenue is likely to sustainably grow on grounds of steadily Rel. % to HS index (0.4) 7.1 10.7 contracted sales growth and fast rental income expansion. Gross margin is likely to 相对恒指变动 % Avg. share price(HK$) stay at a high level of over 35.0% during 2018 and 2020. Despite increasing net 26.8 27.1 26.3 平均股价（港元） gearing ratio in 1H18, CR Land will maintain a healthy balance sheet and low Source: Bloomberg, Guotai Junan International. average funding costs, which will provide financial flexibility to support sustainable growth. Our current target price was HK$28.08, representing a 29% discount to its 2018E NAV, 7.2x underlying 2018 PER and 1.4x 2018 PBR. Risks include lower-than-expected contracted sales and rental income growth.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) 2016A 97,912 15,839 2.520 15.0 9.2 16.800 1.5 0.704 2.7 17.4 2017A 98,729 16,776 2.765 9.7 7.8 20.747 1.2 0.967 3.8 17.1 2018F 134,374 21,931 3.607 30.5 6.1 23.058 1.1 1.221 4.7 19.4 2019F 171,536 25,254 4.173 15.7 5.3 26.498 1.0 1.413 5.5 19.6 2020F 210,113 30,948 5.106 22.4 4.3 30.707 0.8 1.729 6.7 20.8

Shares in issue (m) 总股数 (m) 6,930.9 Major shareholder 大股东 China Resources Co., Limited 68.0% Market cap. (HK$ m) 市值 (HK$ m) 174,312.1 Free float (%) 自由流通比率 (%) 32.0 3 month average vol. 3 个月平均成交股数 (‘000) 12,282.8 FY18 Net gearing (%) FY18 净负债/股东资金(%) 45.8 52 Weeks high/low (HK$) 52 周高/低 34.450 / 21.050 FY18 Est. NAV (HK$) FY18 每股估值（港元） 39.8

Source: the Company, Guotai Junan International.

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Financial statements and ratios

Income Statement Cash Flow Statement

Year End 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year End 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F

Total revenue 97,912 98,729 134,374 171,536 210,113 Profit before income tax 34,379 38,375 52,630 59,047 70,868

Sales of properties 88,418 87,049 119,365 153,959 189,580 - Adjustments for: yoy (%) 12.3% (1.5%) 37.1% 29.0% 23.1% D&A 476 524 576 633 697

Rental income 6,495 7,313 9,333 10,765 12,699 Increase in fair value of IP (4,326) (4,997) (6,467) (7,495) (8,900)

Other income 2,998 4,367 5,677 6,812 7,834 Finance costs 173 1,272 2,226 2,446 2,616

Cost of sales (64,875) (58,986) (78,438) (107,368) (132,585) Others (2,435) (415) (1,744) (1,807) (1,873)

Gross Profit 33,037 39,743 55,936 64,168 77,528 After above adjustments: 28,266 34,759 47,222 52,824 63,407 yoy (%) 22.0% 20.3% 40.7% 14.7% 20.8% Changes in working capital: (767) (18,563) (13,297) (7,640) (7,250)

- FV gains on Ips 4,326 4,997 6,467 7,495 8,900 Net cash from operations 27,500 16,195 33,925 45,184 56,158

- Selling and marketing costs (2,907) (3,245) (4,461) (5,752) (7,116)

- Administrative expenses (2,761) (3,513) (4,829) (6,226) (7,702) Income taxes paid (13,358) (13,202) (25,470) (24,877) (29,638)

- Others 2,318 1,469 1,531 1,577 1,625 Net cash from operating activities 14,142 2,993 8,455 20,306 26,520

Operating profit 34,014 39,451 54,644 61,263 73,235

- Finance income/(costs), net (173) (1,272) (2,226) (2,446) (2,616) Purchase of IPs (6,919) (14,002) (29,179) (20,425) (29,179)

- Others 538 196 212 230 249 Purchase of PPE (1,603) (257) (345) (281) (223) Profit before income tax 34,379 38,375 52,630 59,047 70,868 Other investing cash flow 1,096 (4,562) 11,575 6,455 7,096

- Income tax expense (14,229) (17,222) (24,019) (25,282) (29,248) Cash flow from investments (7,425) (18,821) (17,949) (14,251) (22,306)

Profit for the period 20,150 21,154 28,611 33,765 41,619

Profit attributable to Debt raised/(repaid) 6,008 34,133 22,301 14,208 15,282

- Shareholders (Net income) 17,465 19,162 25,003 28,926 35,393 Dividends paid (4,013) (5,580) (7,281) (8,423) (10,306) yoy (%) 17.8% 9.7% 30.5% 15.7% 22.4% Interest paid (4,346) (4,490) (6,567) (7,296) (7,865)

- Shareholders (Underlying Profit) 15,839 16,776 21,931 25,254 30,948 Proceeds on placement of new shares 0 0 0 0 0

- Minority interest 2,685 1,991 3,608 4,839 6,227 Other financing cash flow (1,795) 5,821 4,853 4,324 4,349

Basic EPS (RMB) 2.520 2.765 3.607 4.173 5.106 Cash flow from financing (4,146) 29,884 13,306 2,813 1,459

Underlying EPS (RMB) 2.285 2.420 3.164 3.644 4.465 Net change in cash 2,571 14,056 3,812 8,868 5,673 yoy (%) 20.8% 5.9% 30.7% 15.2% 22.5% Beginning cash balance 41,039 40,670 53,256 54,129 61,527

DPS (RMB) 0.630 0.805 1.050 1.215 1.487 Exchange losses (2,940) (1,470) (2,940) (1,470) (735)

Dividend payout ratio 25.0% 29.1% 29.1% 29.1% 29.1% Ending cash balance 40,670 53,256 54,129 61,527 66,466

Restricted cash 1,130 518 877 1,330 1,819

Balance Sheet Bank balance 41,800 53,774 55,006 62,857 68,285

Year End 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Ratios

Property, plant and equipment 8,088 8,345 8,690 8,971 9,194 2016A 2017A 2018F 2019F 2020F

Investment properties 85,207 99,209 128,388 148,813 177,992

Prepaid lease payments 2,022 2,288 2,974 2,944 2,797 ROE 17.4% 17.1% 19.4% 19.6% 20.8%

Interests in associates 5,720 6,382 8,297 8,712 9,148 ROCE 23.4% 22.5% 24.3% 22.8% 24.0%

Other non-current assets 14,583 30,127 29,176 31,162 34,048 ROA 8.9% 8.2% 9.1% 8.9% 9.4%

Total non-current assets 115,620 146,351 177,525 200,602 233,178 Net Gearing Ratio 23.8% 35.9% 45.8% 43.2% 41.6%

Inventory of properties 175,232 223,489 275,795 319,236 352,196 Debt to Equity Ratio 68.5% 88.2% 96.7% 93.1% 88.7%

Trade receivables 39,666 42,050 57,232 73,059 89,490

Bank balances 41,800 53,774 55,006 62,857 68,285 Valuation

Other current assets 10,135 14,786 34,921 35,987 38,352 2016A 2017A 2018F 2019F 2020F

Total current assets 266,833 334,099 422,953 491,138 548,323

Total assets 382,453 480,451 600,478 691,740 781,501 Underlying P/E (Diluted(X)) 10.1 8.9 7.0 6.1 5.0

Trade and other payables 52,522 64,109 79,113 91,574 101,029 P/E (Basic(X)) 9.2 7.8 6.1 5.3 4.3

Contracted Liabilities 94,630 119,534 165,334 201,821 232,025 P/E (Diluted(X)) 9.2 7.8 5.8 5.0 4.3

Bank borrowings – due within one year 10,736 25,256 22,730 23,867 25,060 P/B(X) 1.5 1.2 1.1 1.0 0.8

Other current liabilities 24,907 30,925 39,359 41,889 45,125 Dividend Yield (%) 2.7 3.8 4.7 5.5 6.7

Total current liabilities 182,795 239,823 306,536 359,151 403,239

Bank loans - due after one year 41,854 57,213 81,243 89,367 98,304 Margins

Senior notes 18,833 22,685 23,683 28,731 33,933 2016A 2017A 2018F 2019F 2020F

Other long-term liabilities 14,342 16,489 13,879 14,463 15,083

Total non-current liabilities 75,030 96,387 118,805 132,561 147,320 Gross Margin 33.7% 40.3% 41.6% 37.4% 36.9%

Total liabilities 257,825 336,210 425,341 491,712 550,559 Operating Profit Margin 34.7% 40.0% 40.7% 35.7% 34.9% Total common equity 104,279 119,718 137,441 157,943 183,030 EBITDA Margin 35.2% 40.4% 41.0% 36.0% 35.1% Minority interest 20,349 24,522 37,696 42,085 47,912 Underlying Net Profit Margin 16.2% 17.0% 16.3% 14.7% 14.7% Total equity & liabilities 382,453 480,451 600,478 691,740 781,501

Source: the Company, Guotai Junan International.

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Hang Lung Properties (00101 HK) Analyst: Johnny Wong 王俊浩 (852) 2509 5348 恒隆地产 (00101 HK) [email protected]

Company updates 公司近况 Rating: Buy

 A few investment properties under development have been topped out in recent months, including the shopping mall and office tower at Kunming Spring 66 评级：买入 and office tower 2 at Wuxi Center 66.

 Hang Lung Group (00010 HK) disclosed that they had spent HKD1.5 billion during 21 September 2017 to 31 August 2018 to acquire 8.5 million of HLP’s share, raising their shareholding interests in HLP from 55.13% to 57.03%. 6-18m TP 目标价: HK$19.60

Earnings comments 业绩评论 Share price 股价： HK$14.880  Underlying net profit dove 23.7% yoy in 1H18 due to the contraction in property sales. HLP recorded 19.0% decrease in revenue in 1H18. Property leasing revenue increased 7.4% yoy to HKD4,118 million, in which mainland China property leasing revenue and Hong Kong property leasing revenue edged up 11.4% Stock performance yoy and 3.2% yoy, respectively. If we look at mainland China portfolio rental growth 股价表现 in RMB terms, the yoy growth rate was reduced to 2.4%, which is still encouraging when compared to stagnant growth last year. Property sales revenue declined by % of return 59.1% yoy to HKD1,032 million. Gross margin of property leasing business 20.0 15.0 improved 1.3 ppts yoy to 66.7% in mainland China, but dropped 0.4 ppts yoy to 10.0 85.8% in Hong Kong. Overall gross profit fell 18.9% yoy to HKD3,682 million. 5.0 0.0  Mainland China retail portfolio performed well in 1H18, with the exception of (5.0) Shenyang Forum 66 shopping mall. HLP’s 8 shopping malls in mainland China (10.0) received RMB1,367 million in rent during 1H18, which is equivalent to a 2% yoy (15.0) increase to retail rent received last year. Shanghai Plaza 66 shopping mall (20.0) performed very well in 1H18 after its major asset enhancement program was (25.0) Oct-17 Jan-18 Apr-18 Jul-18 Sep-18 completed last year. Shopping malls in second-tier cities were able to at least HSI index HANG LUNG PPT maintain the same amount in rental revenue received the previous year, with one exception being the Shenyang Forum 66 shopping mall. The management emphasized that the worse-than-expected performance in Shenyang Forum 66 was mainly due to major tenant reshuffling, which may take 2-3 years to complete. Change in Share Price 1 M 3 M YTD 股价变动 1 个月 3 个月年初累计 Valuation, catalysts & risks 估值、催化剂和风险 Abs. % (1.8) (4.5) (20.9)  We feel more optimistic towards the future shopping mall performances in 绝对变动 % Kunming Spring City 66 and Wuhan Heartland 66 as we believe that the Rel. % to HS index 0.6 1.2 (14.5) downturn in the mainland China retail market is over. We reiterate our view that 相对恒指变动 %

HLP is unlikely to raise dividend during 2018-2020 given its high capital requirement Avg. share price(HK$) 15.9 17.2 17.9 on both capex and land cost payment for the Hangzhou project. Investors may 平均股价（港元） Source: Bloomberg, Guotai Junan International. expect to see dividend hikes in 2021 when the new projects start to contribute to a higher degree to HLP’s underlying net profit. We expect HLP to maintain its dividend per share at HKD0.75 in 2018-2020, which is equivalent to a dividend yield of 5.0% given the current stock price at HKD14.880. Considering HLP’s financial strength and future growth prospects, we believe that HLP is a good buy for long-term investors at the current stock price.

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 06/30 (HKD m) (HKD m) (HKD) (△ %) (x) (HKD) (x) (HKD) (%) (%)

FY16 13,059 6,195 1.378 41.0 11.0 28.144 0.5 0.750 5.0 4.8 FY17 11,199 8,124 1.806 31.1 8.4 30.273 0.5 0.750 5.0 6.2 FY18 9,705 6,650 1.481 (18.0) 10.2 31.003 0.5 0.750 5.0 4.8 FY19 9,607 4,982 1.110 (25.1) 13.6 31.362 0.5 0.750 5.0 3.6 FY20 10,494 4,949 1.102 (0.7) 13.7 31.714 0.5 0.750 5.0 3.5

Shares in issue (m)总股数 (m) 4,497.7 Major shareholder 大股东 CHAN Adriel Wenbwo 57.82% Market cap. (HK$ m)市值(HK$ m) 6,6926.1 Free float (%) 自由流通比率(%) 42.2 3 month average vol. 3 个月平均成交股数(‘000) 3,912.3 FY18 Net gearing (%) FY18 净负债/股东资金(%) 8.3 52 Weeks high/low (HK$) 52 周高/低 21.650 / 14.620 FY18Est. NAV (HK$) FY18 每股估值（港元） 35.6 Source: the Company, Guotai Junan International.

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Financial Statements and Ratios Income Statement [Table_BalanceSheet] Balance Sheet

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F -Property leasing 7,737 7,779 8,114 8,589 9,444 Investment properties 125,421 134,444 137,903 158,999 160,578 -Property sales 5,322 3,420 1,592 1,019 1,049 Investment properties under Total Revenue 13,059 11,199 9,705 9,607 10,494 development 17,282 21,592 30,738 21,201 24,054

Deposits with banks 0 3,705 3,051 3,051 3,051 Direct Cost Others 1,588 1,582 1,590 1,589 1,580 -Property leasing (2,027) (2,107) (2,097) (2,292) (2,654) Total Non-current Assets 144,291 161,323 173,282 184,840 189,263 -Property sales (2,113) (1,182) (691) (454) (454)

Total direct costs and operating expenses (4,140) (3,289) (2,788) (2,746) (3,108) Cash & Cash Equivalents 24,325 18,401 17,635 16,728 17,225

Trade and other receivables 3,939 2,036 1,629 1,303 1,042 Gross profit Properties for sale 2,352 1,612 1,692 1,238 784 -Property leasing 5,710 5,672 6,017 6,297 6,791 Other assets 0 214 0 0 0 -Property sales 3,209 2,238 901 565 595 Total Current Assets 30,616 22,263 20,956 19,269 19,052 Total Gross profit 8,919 7,910 6,917 6,862 7,386

Total Assets 174,907 183,586 194,239 204,109 208,314 Other net loss 208 549 150 0 0

Administrative expenses (607) (580) (592) (621) (640) Bank loans and other borrowings 568 2,112 2,866 3,793 9,389 Net increase in fair value of investment (286) 2,599 2,759 1,344 1,379 properties Trade and other payables 6,327 6,673 6,308 6,245 6,821 Operating Profit 8,234 10,478 9,235 7,585 8,125 Taxation payable 932 483 449 457 503 Others 0 21 0 0 0 Interest income, net (317) (654) (850) (1,189) (1,761) Total Current Liabilities 7,827 9,289 9,623 10,495 16,714 Share of profits of JV/associates 62 78 101 106 112 Profit Before Tax 7,979 9,902 8,487 6,503 6,476 Bank loans and other borrowings 26,514 22,708 29,437 36,505 32,588 Income Tax (1,372) (1,352) (1,400) (1,073) (1,069) Deferred tax liabilities 8,421 9,025 9,115 9,206 9,298 Profit After Tax 6,607 8,550 7,086 5,430 5,408 Finance lease obligations 0 319 314 314 314 Non-controlling Interest (412) (426) (437) (448) (459) Total Non-current Liabilities 34,935 32,052 38,866 46,026 42,200 Shareholders' Profit / Loss 6,195 8,124 6,650 4,982 4,949 Underlying net profit to equity holders 6,341 5,524 3,890 3,638 3,570 Total Liabilities 42,762 41,341 48,490 56,520 58,914

Basic EPS 1.378 1.806 1.481 1.110 1.102 Share capital 39,912 39,912 39,915 39,915 39,915 Underlying EPS (HKD) 1.410 1.228 0.867 0.810 0.795 Reserves 86,653 96,246 99,529 101,145 102,727 DPS (HKD) 0.750 0.750 0.750 0.750 0.750 Total Shareholders' Equity 126,565 136,158 139,444 141,060 142,642 Minority Interest 5,580 6,087 6,305 6,529 6,758 Total Equity 132,145 142,245 145,749 147,589 149,400

BPS (HKD) 28.144 30.273 31.003 31.362 31.714 [Table_CashFlowStatement] Cash Flow Statement

Year end 31 Dec (HKD m) 2016A 2017A 2018F 2019F 2020F [Table_FinancialRatio] Financial Ratios Profit before taxation 7,979 9,902 8,487 6,503 6,476 2016A 2017A 2018A 2019A 2020A Bank interest income (794) (548) (460) (441) (418) Gross margin (%) 68.3 70.6 71.3 71.4 70.4 Finance costs 1,111 1,202 1,310 1,630 2,179 Operating margin (%) 63.1 93.6 95.2 79.0 77.4 Tax paid (1,002) (1,776) (1,248) (1,301) (934) Change in working capital (662) (306) (2,446) (630) (1,151) Underlying operating margin (%) 63.7 65.5 65.2 65.0 64.3 Others 103 83 78 78 78 Net margin (%) 47.4 72.5 68.5 51.9 47.2 Cash from Operating Activities 6,735 8,557 5,720 5,839 6,229 Underlying net profit margin (%) 48.6 49.3 40.1 37.9 34.0

ROA (%) 3.5 4.5 3.5 2.5 2.4 Payment for property, plant and equipment (2,677) (4,776) (10,693) (10,138) (2,419) Net sale proceeds from disposal of property, ROE (%) 4.8 6.2 4.8 3.6 3.5 plant and equipment 11 560 200 0 0 Dividend payout ratio (%) 54.4 41.5 50.6 67.6 68.0 Interest received 839 518 460 441 418 Dividend payout ratio based on underlying net 53.2 61.1 86.5 92.5 94.3 (Increase)/Decrease in bank deposits with profit (%) maturity greater than three months 3,384 (10,677) 11,733 0 0 Others 56 52 50 50 50 Net gearing ratio (%) 2.2 2.0 8.3 14.5 15.2 Cash from Investing Activities 1,613 (14,323) 1,750 (9,647) (1,951) Total Debt/Equity 20.5 17.4 22.2 27.3 28.1 ROA (Underlying) (%) 3.6 3.0 2.0 1.8 1.7 Net increase in bank loans and other ROE (Underlying) (%) 5.0 4.1 2.8 2.6 2.5 borrowings (5,051) (3,245) 7,483 7,995 1,679 Interest and other borrowing costs paid (1,287) (1,157) (1,360) (1,803) (2,179) Dividends paid to shareholders (3,373) (3,373) (3,374) (3,367) (3,367) Others (322) (312) (312) (312) (312) Cash from Financing Activities (10,033) (8,087) 2,437 2,513 (4,179)

Cash at beg of year in CF 26,870 23,379 10,373 20,686 19,779 Net Changes in Cash (1,685) (13,853) 9,907 (1,295) 99 Effect of foreign exchange rate changes (1,806) 847 406 388 398 Cash at the end of the year in CF 23,379 10,373 20,686 19,779 20,276 Deposits with banks and other FI with maturity over 3 months 946 11,733 0 0 0 Less: Deposits with banks recoverable over 1 year 0 (3,705) (3,051) (3,051) (3,051) Cash at End of Year 24,325 18,401 17,635 16,728 17,225

Source: the Company, Guotai Junan International.

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Shipping and Logistics Sector Analyst: Spencer Fan 范明 (86755) 2397 6686 航运及物流行业 [email protected]

Industry dynamics 行业动态 Rating: Outperform

 The Sino-US trade war has limited impact on shipping demand. 1) The current trade friction involves a small proportion of commodities corresponding 评级：跑赢大市

to global shipping. By estimation, Sino-U.S trade friction involves only 1.5% of the total global shipping volume; 2) the trade friction involves mainly the addition of tariffs, which will increase commodity prices, resulting in demand BDI Component Indexes' Performance reductions; 3) Referring to the trade friction between Japan and the U.S, the BDI 构成指数表现 friction did not have significant negative impact on the bilateral and global trade situation. However, if Sino-U.S trade friction continued to deteriorate and BCI: Capesize BPI: Panamax BSI: Supramax BSI: Handysize escalate, which will have a certain negative impact on global economic growth, 4,000 it may have an indirect negative impact on shipping demand. 3,500 3,000  Business volume of the express logistics industry and the growth rate of 2,500 business revenue continued to run at a high level. In August 2018, national 2,000 express delivery service business volume was 4.10 billion pieces, up 25.7% 1,500 YoY, and realized revenue of RMB48.86 billion, up 20.9% YoY . Average unit 1,000 500 price of express delivery decreased. In August 2018, average unit price of 0 national express delivery was RMB11.9/package, down 3.8% YoY. The overall unit price in the first eight months of 2018 fell by 1.9% YoY.

Key assumptions update 关键假设更新 Source: The Baltic Exchange.

 Dry bulk shipping’s supply-demand status will overturn in 4Q18. We Logistics Prosperity Indexes expect the BDI to keep above the 1,550 level, which would be 30% higher than 物流行业景气度指数

Sinotrans Shipping's 2018 profit breakeven level. On the other hand, we expect LPI: Activity Anticipation Level: Seasonal Adjusted LPI: Inventory Turnover Times: Seasonal Adjusted CCFI to fluctuate in 4Q18 as recent Sino-U.S trade war implication might yield LPI: Facility Utilization: Seasonal Adjusted 70 negative expectation on trade volume. 65.8 65 61.0 61.0  Logistics industry’s expansion pace expected to remain robust. As the 59.9 60.8 58.4 59.6 60 58.1 60.0 national post bureau projected, delivery volumes are expected to growth over 55.8 55.8 55.4 55 55.0 22% YoY to 49 bn packages, which will largely enhance the sub-sector's 51.7 50 51.8 profitability. On the other hand, we believe that giant express delivery firms could 50.4 50.4 51.4 50.7 49.0 48.9 48.6 form alliances to cross-sharing their delivery networks information to provide 45 express deliveries with better qualities. 45.0 40 Investment suggestions 投资建议

Source: China Federation of Logistics & Purchasing.  The logistics sector will enter an era of organic growth, with profitability being continually enhanced. We continue to recommend Sinotrans. U.S bound freight forwarding only occupy 10% of the total freight forwarding volume, while its express delivery business is recording robust growth. Maintain rating of "Buy" and set TP at HK$5.20. The Company's valuation has upside potential considering the high A/H price premium (56.0%) to its initial listing price of A shares, as its A share listing timetable has been made cleared.

Company Name Code Price Rating 18 PER 19 PER 20 PER 17 ROE 17 P/B 公司名称编号股价投资评级市盈率市盈率市盈率净资产收益率市净率 (HK$) (x) (x) (x) (%) (x) Sinotrans Shipping 00368 2.62 Accumulate 13.9 11.7 10.6 5.1 0.7 Sinotrans 00598 3.00 Buy 6.1 5.0 4.5 11.6 0.5 Shenzhen International 00152 15.48 Buy 6.9 6.1 5.7 17.1 1.1 Weighted Average 市值加权平均 Outperform 7.8 6.7 6.1 13.5 0.9

Source︰the Companies, Guotai Junan International, Bloomberg.

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Telecom Equipment Sector Analyst: Gin Yu 余劲同 (852) 2509 2130 通信设备行业 [email protected]

Industry dynamics 行业动态 Rating: Neutral

 2Q2018 global smartphone shipments reached 342 million, down by 1.8% 评级：中性 yoy while global high-end smartphone shipments up by 7% yoy. The

decline of global smartphone shipments is mainly due to the longer smartphone replacement cycle, while the increase of high-end smartphone shipments is mainly due to the demand of smartphone upgrade. In 2Q2018, Global Smartphone Shipments high-end smartphone shipments accounted for about one-fifth of global 全球智能手机出货量 smartphone shipments.

Million Global smartphone shipments (LHS)  In 2Q2018, Samsung, Huawei, Apple, Xiaomi, OPPO ranked the top 5 YoY Growth (RHS) 500 15% position of smartphone shipments with market share of 20.9%/ 15.8%/ 450 12.1%/ 9.3%/ 8.6%, respectively. Global shipments of Huawei surpassed 400 10% Apple, achieving a 40.9% year-on-year growth. Xiaomi achieved a year-on-year 350 300 5% growth of 48.8%, mainly due to the rapid growth of overseas markets. In 250 high-end smarphone market, Apple, Samsung, OPPO, Huawei, Xiaomi 200 0% accounted for 43%/ 24%/ 10%/ 9%/ 3% of the market respectively. 150 100 -5% 50  Smartphone manufacturers has launched many new technologies to 0 -10% improve the variety and quality of products and stimulate the demand, such as waterproof, better performed chips, larger storage capacity, speaker upgrades, 3D glass, 3D structured light, screen fingerprints, AI camera, dual Source: IDC. cameras and triple cameras. Key assumptions update 关键假设更新 2Q18 Global Smartphone Shipments

 Smartphone shipments are expected to remain declining in the 4Q18 while 2018 年第 2 季度全球智能手机出货量 high-end smartphones are expected to grow continuously. Chinese smartphone makers such as Huawei and Xiaomi are expected to maintain the Million 2Q18 Global Smartphone Shipments by Companies (LHS) YoY Growth (RHS) relatively strong growth, and gain more shares in high-end smartphone market. 120 113.7 60%

48.8% 50% 100  Camera is still one of the key areas for smartphone components upgrade. 40.9% 40% At present, the flagship model of various brands basically all adopted dual 80 71.5 30% 20% cameras. Huawei P20 Pro and Oppo R17 Pro have adopted the triple cameras. 60 54.2 41.3 10% 5.1% At the same time, the camera is also upgraded towards high pixels, large 40 0.7% 31.9 0% 29.4 -18.5% apertures, large angles, etc. The increase in dual and triple cameras, as well as -10.4% -10% 20 other optical upgrades will bring opportunities for the optical and optoelectronics -20% 0 -30% market. Samsung Huawei Apple Xiaomi OPPO Others

 The Trade war between China and US is expected to keep bringing uncertainty to the market. The ban on ZTE negatively impacted the telecom Source: IDC. equipment supply chain. The Bloomberg Businessweek’s report saying US companies been infiltrated by malicious chips from China led to the decline in the share price of many Chinese technology companies such as Lenovo. US-China trade war will continue to put pressure on the sector.

Investment suggestions 投资建议

 The sector rating is “Neutral”. We expect smartphone shipments to remain slowing down, and the US-China trade war haze still hangs over the market. 18ROE Company Name Code Price Rating 18 PER 19 PER 20 PER 18 P/B 净资产收益率公司名称编号股价(HK$) 投资评级市盈率(x) 市盈率(x) 市盈率(x) 市净率(x) (%) Sunny Optical 02382 76.700 Buy 29.8 19.1 14.3 35.5 9.3 AAC Tech 02018 76.650 n.a. 15.5 12.5 10.6 27.2 3.9 ZTE 00763 12.000 n.a. n.a. 10.2 7.7 (10.0) 1.3 Lenovo 00992 4.960 n.a. n.a. 14.3 9.9 (5.6) 2.2

Weighted Average. Neutral 22.3 15.6 12.3 14.3 4.4 市值加权平均

Source︰the Companies, Guotai Junan International, Bloomberg.

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Guotai Junan International Research Department 研究部

Grace Liu 刘谷 Head of Research, Market 主管，市场策略、石化 [email protected] (852) 2509 7516 Strategy, Petrochemicals

Noah Hudson Noah Hudson Consumer (Hotels), Gaming 消费（酒店）、博彩 [email protected] (86755) 23976684

Gary Wong 黄家玮 Environmental Protection, 环保、基建 [email protected] (852) 2509 2616 Infrastructure

Kevin Guo 郭勇 Raw Materials, Gas 原材料、燃气 [email protected] (86755) 23976671

Richard Cao 曹柱 Banking 银行 [email protected] (86755) 23976870

Jun Zhu 朱俊杰 Solar, Electric Equipment 太阳能、电力设备 [email protected] (852) 2509 7592

Andrew Song 宋涛 Consumer (Retailing), 消费（零售）、家电 [email protected] (852) 2509 5313 Home Appliances

Van Liu 刘斐凡 Property 房地产 [email protected] (86755) 23976672

Terry Hong 洪学宇 Consumer (Apparel) 消费（服装） [email protected] (86755) 23976722

Johnny Wong 王俊浩 Macroeconomics, Property 宏观、房地产 [email protected] (852) 2509 5348

Toliver Ma 马守彰 Aviation, 航空、汽车 [email protected] (852) 2509 5317 Automobiles & Components

Spencer Fan 范明 Shipping & Logistics, Ports, 航运物流、港口 [email protected] (86755) 23976686

Barney Wu 吴宇扬 Consumer (Food & Beverage, 消费（食品饮料、日用品） [email protected] (86755) 23976680 Household Products)

Jake Wang 汪昌江 Wind & others, Market Strategy 风电及其它、市场策略 [email protected] (86755) 23976675

Wiley Huang 黄重钧 Insurance, Fixed-income 保险、债券 [email protected] (852) 2509 5409

David Liu 刘静骁 Petrochemicals 石化 [email protected] (852) 2509 5441

Kay Mai 麦梓琪 Health care 医药 [email protected] (86755) 23976685

Danny Law 罗沛达 Conglomerate, E-commerce 综合、电子商务 [email protected] (852) 2509 7768

Gary Yang 杨光 Machinery, Construction Materials 机械、建材 [email protected] (852) 2509 2642

Jason Zhou 周桓葳 Internet 互联网 [email protected] (852) 2509 5347

Gin Yu 余劲同 Telecommunication 电信 [email protected] (852) 2509 2130

David Feng 冯廷帅 Research Assistant 研究助理 [email protected] (852) 2509 2113

Jack Liu 柳晨 Research Assistant 研究助理 [email protected] (852) 2509 2149

Andy Huang 黄凯鸿 Research Assistant 研究助理 [email protected] (86755) 23976702

Jack Wu 吴狄 Research Assistant 研究助理 [email protected] (86755) 23976718

Esabella Zhao 赵舒蔓 Research Assistant, Translator 研究助理、翻译员 [email protected] (86755) 23976681

Penny Pan 潘凌蕾 Secretary, Translator 秘书、翻译员 [email protected] (852) 2509 2632

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Company Rating Definition The Benchmark: Hong Kong Hang Seng Index / NASDAQ Composite Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index / NASDAQ Composite Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable.

DISCLOSURE OF INTERESTS

(1) Except for SHENZHEN INTERNATIONAL (00152 HK), the Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for KAISA GROUP (01638 HK),GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),VALUE A SHARE (03095 HK),CAM SCSMALLCAP (03157 HK),MR CSI300 ETF-R (CNY) (83127 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have had investment banking relationships with SMI HOLDINGS GROUP (00198 HK),GOME ELECTRICAL APPLIANCES (00493 HK),CHINA SINGYES SOLAR TECHNOLOGIES (00750 HK),DONGJIANG ENVIRONMENTAL- H SHARES (00895 HK),ANHUI CONCH CEMENT- H SHARES (00914 HK),CHINA MOBILE (00941 HK),MODERN LAND (01107 HK),POWERLONG REAL ESTATE (01238 HK),XIWANG SPECIAL STEEL (01266 HK),SUNDART HOLDINGS LTD. (01568 HK),CHINA SOUTH CITY (01668 HK),CHINA WOOD OPTIMIZATION (01885 HK),BAIC MOTOR- H SHARES (01958 HK),CHINA MINSHENG BANKING CORP.- H SHARES (01988 HK),COUNTRY GARDEN (02007 HK),CHARMACY PHARMACEUTICAL- H SHARES (02289 HK),BOC HONG KONG (02388 HK),GUANGZHOU R&F PROPERTIES- H SHARES (02777 HK),BINHAI INVESTMENT (02886 HK),RONSHINE CHINA (03301 HK),XIEZHONG INTERNATIONAL (03663 HK),CHINA AOYUAN PROPERTY (03883 HK),TIANYUN INTERNATIONAL (06836 HK) mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities mentioned in this Research Report. (6) Guotai Junan and its group companies have not employed an individual serving as an officer of any issuers mentioned in this Research Report. There is no officer of any issuers mentioned in this Research Report associated with Guotai Junan and its group companies.

DISCLAIMER

This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily).

Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan.

Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision.

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