Equity Market Hong Kong Equity Morning Notes

Martin Ma (SFC CE:BPJ506) (852) 3519 1055 October 9, 2020 Market Wrap HSI▼0.20% HSCEI▼0.05% Turnover HK$117.69 bn ▼12% (30-day average) SSE Composite▼0.20% SZSE Component ▲0.05% Sector tracking Stock tracking 1D ▲% 1Y ▲% 1D ▲% 1Q ▲%

Materials 3.6 Transportation 251.1 SOLARGIGA ENERGY(757) 43.3 NEXION TECHNOLOG(8420) 321.1 Capital Goods 251.1 Capital Goods 2.4 COMTEC SOLAR(712) 35.0 YTO EXPRESS HOLD(6123) 248.3

Materials 126.1 Transportation 2.0 GREAT WATER HOLD(8196) 33.3 SOLARGIGA ENERGY(757) 221.4

Automobiles 81.1 Automobiles 1.2 XINYI AUTOMOBILE(8328) 31.1 C&N HOLDINGS LTD(8430) 215.8

Consumer Services 47.9 Health Care 0.9 CHU KONG PETROLE(1938) 25.8 CHINA ZHONGDI DA(1492) 214.3

Market Highlight Hong Kong Utilities Series V: MTR Corporation (0066 HK ) The MTR Corporation was established in 1975 as the Mass •The Mass Transit Railway Corporation was established Transit Railway Corporation, an urban metro system to help meet 1975 and wholly-owned by the British Hong Kong Government Hong Kong's public transport requirements. The corporation was re-established as the MTR •The Mass Transit Railway Corporation was reorganized Corporation Limited in June 2000 after the Hong Kong government 1998 into the MTR Corporation sold 23% of its issued share capital to private investors in the IPO of MTR on 5 October 2000. The corporation marked another major •The MTR Corporation was privatized and then listed on milestone on 2 December 2007 when the operations of the 2000 the HKEX Kowloon-Canton Railway Corporation (“KCRC”) were merged into the MTR, heralding a new era in Hong Kong railway development. • Hong Kong government and MTR reached a consensus The MTR Corporation has five major segments, namely Hong Kong 2006 on the rail merger, which was approved by the LegCo transport operations, station commercial business, property rental and management business, mainland transport and international •Shareholders voted to pass the Rail Merger at the special transport services. 2007 shareholders meeting of MTR MTR booked gross revenue of HK$54.504B and pre-tax profit of HK$13.501B in 2019, a yoy decrease of 8.8%. The decline was •Hangzhou Metro was built with Hangzhou chiefly due to a big drop in passenger volume in Hong Kong caused 2008 Municipal Government via joint venture by social unrest in 2H19, resulting in the first loss of the Hong Kong transport operations in years. Five segments

HK transport HK station commercial Property dev. and mgt. Mainland and overseas From a single line that opened MTR offers a variety of railway- Based on the “rail plus MTR is engaged in the in 1979, MTR now operates a related services, including property” business model, MTR construction and operation of 262.6-km railway network in station retail outlets, built integrated communities , 14, and Hong Kong that carried over advertising and along the railway network. MTR 16, Shenzhen subway line 4 1.9 billion passenger journeys, telecommunications services. In fully played its property and Hangzhou subway line 1. with an on-time rate of 99.9% 2019, the number of station development and management In addition, overseas business in 2019. MTR strives to be the outlets reached 1,492 with GFA expertise to bridge the property involves the operation and best public transport service of 67,337m2, while the number management business to the management of TfL Rail in the provider in Hong Kong by of advertising units notched properties and shopping malls UK, Melbourne railway in offering safe, reliable and 48,148 and 4G data is built along the railway lines, Australia and Stockholm caring service to customers. accessible along the journey. forging close ties with the subway in Sweden, etc. public community.

Orient Securities (Hong Kong) Limited 1 October 9, 2020

10-year operations and share prices 10-year share price 55 Hong Kong’s rent hike after the (HKD) financial crisis 35 Public order events in 2H19 15 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Operating Income (HKD) and YoY (%) In 2010-2015, with the gentle recovery of the economy, an increasing number of mainland With Hong Kong’s tightening of the 50.00% 5,000.0 Hong Kong visitors to Hong Kong boosted the Hong Kong transport operations of MTR. Moreover, the “fare Individual Visit Scheme, the further 30.00% adjustment mechanism” was implemented since June 2010 after the rail merger. MTR first decline in mainland visitors had a direct 3,000.0 10.00% transport rebates all the proceeds from the price hike in the current year to the citizens through impact on the HK transport operations -10.00% 1,000.0 promotions to reduce the public’s dissatisfaction with the price raise, and then it enjoys the of MTR. Meanwhile, the segment was -30.00% operations growth in the second year. The fare adjustment is carried out basically every year with a range of battered by the slump in mainland 2%-3%, pushing up the results steadily. visitors due to social unrest in 2H19. -1,000.0 2010201120122013201420152016201720182019 -50.00% MTR refurbished multiple integrated stations after the rail merger, whilst the opening of the With the completion of renovation of 50.00% Hong Kong Tseung Kwan O Line and Kowloon Southern Link expanded the area of station shops and platforms, the growth point of the 5,000.0 30.00% station advertising units, with shops increasing from 1,254 in 2009 to nearly 1,400 by 2016, and the station business depends on the hike in 3,000.0 10.00% advertising units jumping roughly 1,200. In addition, as the commercial property rentals rose in rent of shops and the advertising units, -10.00% commercial Hong Kong during the period, MTR saw a stable growth in revenue from station shops. Moreover, whereas the 2019 social unrest had a 1,000.0 -30.00% business since a new agreement on duty-free shops at Lo Wo Station and Hung Hom Station was signed, certain negative impact on shop coupled with rental adjustment, MTR logged a high growth of 25.6% in operating profit in 2013. rentals. -1,000.0 2010201120122013201420152016201720182019 -50.00% As the property market is on rise, MTR’s properties are welcomed MTR’s property dev. earnings MTR booked a profit of HK$5.531B 50.00% 5,000.0 Hong Kong due to its convenient transportation and complete supporting depend on the dev. cycle, from property dev., mainly stemming 30.00% facilities. MTR logged profits of HK$4.034B and HK$4.939B in 2010 while the decline is mostly from the income from Malibu and the 3,000.0 10.00% property and 2011, respectively, by disposal of projects at LOHAS Park, Fo because certain projects gains from the commercial properties -10.00% 1,000.0 dev. Tan, Wu Kai Sha and Tai Wai. In 2014, MTR recorded a profit of which are under dev. or of LOHAS Park. The projects at LOHAS -30.00% HK$4.216B from the sale of the Austin Station project. ready-for-acceptance are Park have entered the mid-to-late -1,000.0 -50.00% excluded from the profit. stage, implying a slower growth. 2010201120122013201420152016201720182019 MTR’s property management business primarily involves management of The gain in profit during the period was mainly due to 50.00% shopping malls and residential properties built above MTR stations under the the increase in rents and residential units of property 5,000.0 Operating income Operating HK property “Rail plus Property” strategy. MTR’s property management business grows management. MTR managed 104,000 residential units as 30.00% robustly with the completion of the co-developing property projects. As of 2016, of 2019, up from the 81,962 units in 2010. The slight 3,000.0 10.00% rental and MTR owned 212,538 m2 of retail properties and 39,410 m2 of office buildings in slide in profit growth in 2019 was largely owing to the -10.00% 1,000.0 mgt. Hong Kong, whilst MTR’s shopping malls maintained an occupancy rate of rent subsidies provided to some tenants by the company -30.00% roughly 100%. In virtue of the rosy economy and notable development trend, amid the social unrest, offsetting the revenue expansion. -1,000.0 -50.00% the lasting growth of shop rentals contributed a lot to earnings. 2010201120122013201420152016201720182019 MTR set up joint ventures in Beijing, Hangzhou and Shenzhen to In 2017, First MTR South Western Trains Limited, a joint venture with 50.00% co-manage several subway lines. However, the profit growth First Group plc, obtained the concession to operate the South Western 5,000.0 30.00% Mainland steadily slowed down. Meanwhile, the company actively invested Railway in the UK. The new franchise took effect on August 20, 2017 in the overseas market. On July 18, 2014, MTR Corporation for a period of 7 years. The Department of Transport in the UK has an 3,000.0 10.00% and intl. -10.00% (Crossrail) Limited, a 100% owned subsidiary of MTR Corporation, option to extend the franchise for 11 months. First Group and MTR 1,000.0 business was awarded the concession to operate the new Elizabeth line each hold 70% and 30% stakes. In the same year, MTR logged -30.00% (previously known as Crossrail) train service across London for a HK$2.314B of income from property development by sale of -1,000.0 2010201120122013201420152016201720182019 -50.00% period of 8 years, which can be extended for more than two years. properties in Shenzhen. 5% -4% HK transport operations 6% 4% 2015 2017 2019 2% 2010 2013 11% HK station commercial 18% 12% 21% business 24% 23% 21% 34% 31% HK property rental and 34% mgt. 8% 32% 21% 31% HK property dev. 19% 27% 26% 32% 28% 26% Mainland and intl.

Operating income by segments business

Orient Securities (Hong Kong) Limited 2 October 9, 2020

Fare Adjustment Mechanism

The Fare Adjustment Mechanism is a system established by Fare adjustments in 2010-2019 the Hong Kong government to regulate the fare increment of Review date Composite Transport Productivity Actual public utilities and urge them to lower fare amid economic CPI salary index component increase in deflation. Franchised buses, MTR and public housing rents fare are all subject to the mechanism. 2009-2010 +2.9% +1.5% N/A +2.2% In 2006, the Environment, Transport and Works Bureau 2010-2011 +5.7% +5.1% N/A +5.4% officially announced the fare adjustment mechanism after 2011-2012 +3.7% +2.9% -0.6% +2.7% the rail merger: overall fare adjustment rate = 0.5 * change 2012-2013 +4.3% +4.1% -0.6% +3.6% in Composite Consumer Price Index (CCPI) + 0.5 * change in 2013-2014 +4.9% +4.9% -0.6% +4.3% Nominal Wage Index (NWI) – productivity factor. Considering that the fare raise caused public dissatisfaction 2014-2015 +2.4% +4.1% -0.6% +2.65% over the years, MTR launched a preferential subsidy program 2015-2016 +1.2% +3.3% 0 Carry forward after yearly price hike. As requested by the government, the 2016-2017 +1.7% +2.8% 0 +3.14% income from fare hike for the year will be refunded to the 2017-2018 +2.5% +5.9% 0 +3.3% public, while MTR enjoys the increment in the second year. 2018-2019 +2.9% +3.4% 0 Carry forward The social unrest in 2H19 coupled with the soft economy 10-yr total +37.17% +45.1% +30.74%

dealt a heavy blow to the number of visitors to Hong Kong. Source: Company, Orient Securities (Hong Kong) In 2019, the total passengers of railway and bus services of YoY change in fare, ridership and operating profit of Hong MTR declined by 6.4% yoy. The delayed recognition of 2019 Kong transport operations in 2010-2019 (%) fare increase caused MTR to book EBIT of HK$-591 million in 20.00% 2019, down 27.68% yoy. 票价增降幅Fare 搭乘人次增降幅Ridership 经营利润增降幅Operating profit As coronavirus spread in 2020, Hong Kong closed most 15.00% checkpoints with the mainland to suspend visits, resulting in 10.00% a sharp slide in Hong Kong's passenger flow this year. Moreover, multiple outbreaks of coronavirus in Hong Kong 5.00% forced companies to make work-from-home arrangements, 0.00% whilst the government placed restrictions on gatherings in 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 public areas like restaurants and entertainment venues. -5.00% Remote work and social distancing further led to a steep plunge in passenger flow. -10.00% Source: Company, Orient Securities (Hong Kong) Solid growth in station commercial business The station commercial business revenue Revenue from station commercial business in stems from station advertising, station retail 2010-2019 (HK$M) and telecommunications services. In 2019, 8000 其他 the station business revenue amounted to Others 7000 电讯服务 HK$6.8B, while the operating profitTelecom reached 广告 6000 HK$5.122B, with an operating profitAdvertisement margin 车站零售 of 75.3%. Among them, station retail shop rental income wasStation HK$4.8 salesB 5000 in 2019, accounting for 70.6% of the station commercial business 4000 revenue. As a result of the public order events in 2H19, many of the 3000 railway stations were damaged or closed early. MTR rolled out rental relief policies for some tenants, causing a skid in profit margins and 2000 growth. MTR was obliged to offer further rental reductions due to the 1000 downturn in passenger flow during the 2020 coronavirus pandemic, 0 which will have a certain impact on the sustainability of MTR’s rental 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 profit growth in 2020. Source: Company, Orient Securities (Hong Kong) Mainland business on track to gain more The mainland railway business provides the main source of profit for MTR’s non-domestic business. Beijing Metro Line 4, Line 14, Line 16 and Daxing Line are operated by Beijing MTR Corporation Limited, a joint venture company of MTR Corporation (49% shareholding). Hangzhou Metro Line 1 and extends and are operated by Hangzhou MTR Corporation Limited (HZMTR), a joint venture of MTR Corporation (49% shareholding). MTR Corporation (Shenzhen) Limited, a 100% owned subsidiary of MTR Corporation, manages and operates Shenzhen Metro Line 4, being responsible for monitoring construction of Line 4 extends under a project management agreement.

Orient Securities (Hong Kong) Limited 3 October 9, 2020

Robust rise in international rail business

For the international business sector, by exporting its sound management model with associated companies, MTR has successively operated multiple subway projects in the UK, Sweden and Australia. In 2019, the non-domestic transport operations booked an operating income of HK$1.531B, of which, the mainland and Macau railways logged a pre-tax profit of HK$1.522B, and the overseas railways only recorded a pre-tax profit of HK$9M, accounting for 1% only. MTR booked an EBIT of HK$412M for its international subsidiaries. The sharp slide in the sector was mainly due to the provision for loss-making contracts of First MTR South Western Trains Limited, which incurred a one-time loss of £43M.

As of today, MTR owns several railway franchise rights in the UK, Sweden and Australia, which guarantee a table Share of rail EBIT from subsidiaries vs. JV/associates in 2015-2019 growth for MTR’s future recurring profits. As most of the Unit: HK$M franchise rights will expire after 2025, MTR will secure EBIT of Subsidiaries (net of 1000 附属铁路公司EBIT(已扣除非控股权益) 应占联营公司合营公司EBIT of JV/associatesEBIT stable returns in the short term. minority interests)

478 677 In addition, with coronavirus spreading in 2020, people 500 309 378 412 reduced unnecessary trips, especially the demand for 41 60 31 public transportation. Therefore, MTR’s profits will 0 probably sink in 2020, as international railway business 2015 2016 2017 2018 -33 2019 may face unavoidable challenges. -500 -403 Source: Company, Orient Securities (Hong Kong)

Property business fueled by high demand Under the strategy of “Rail plus Property”, MTR cooperates with developers to engage in property development over and adjacent to stations and depots, and is responsible for the subsequent property management. As one of the major sources of profits, the property development business is mostly determined by the completion and delivery progress of the property development projects that year. Hong Kong property development business profit amounted to HK$5.531B in 2019, up 157% yoy, which was mainly derived from the share of surplus proceeds from MALIBU project and the sales of commercial space in LOHAS Park. In virtue of the convenient transport of superstructures and the complete supporting facilities, the sustained prosperity of Hong Kong housing market, the increase in mainland and Hong Kong buyers, etc., MTR’s development projects are always well received by the house buyers once they are opened for sale. Among them, Pre-sales of MARINI and GRAND MARINI (LOHAS Park Package 9) were launched in 3Q19, with about 83% and about 49% of the units sold respectively. MONTARA and GRAND MONTARA (LOHAS Park Package 7) launched in May and June 2019 was fully sold. MTR currently has 16 new residential property projects under development, which is expected to provide about 22,000 units in the next six years.

Orient Securities (Hong Kong) Limited 4 October 9, 2020

Property results depend on development cycle The property rental and management businesses are similar to the station commercial business, being the core growth point of Revenue from Hong Kong property rental and management revenue and contributing a lot of profit in the past decade. In in 2015-2019 2019, MTR logged property rental income of HK$4.833B, Unit: HK$M property management income of HK$304M, and a total pre-tax 物业租赁Property rental profit of HK$4.264B, up 0.9% yoy, mainly owing to the rise in 物业管理Property management shopping mall rents. Additionally, as the public order events in 6000 综合增长率Overall yoy 5.00% 2H19 caused damages to some tenants, MTR offered rent relief 4.50% 5000 4.00% to some merchants, partially offsetting the gains from rent hike. 4608 4748 4833 4000 3.50% As of 2019, MTR’s investment property portfolio was 4451 3.00% comprised of 217,774m2 of retail space, 39,410m2 of office 3000 4267 2.50% buildings and 17,764m2 of properties for other purposes. In 2.00% 2000 1.50% terms of property management, MTR managed about 104,000 1.00% 2 1000 residential units and more than 772,000m of commercial areas 266 290 292 307 304 0.50% in Hong Kong. 0 0.00% 2015 2016 2017 2018 2019 Grand opening of three new shopping malls in the next years Source: Company, Orient Securities (Hong Kong) will increase the gross floor area of the retail property portfolio 2 to 152,120m , up 49% from the end of 2019. Among them, The Revenue from Hong Kong property rental and management LOHAS is planned to be opened in 2H20, with an area of in 2015-2019 2 44,500m , while the shopping malls at Tai Wai Station and Unit: HK$M Wong Chuk Hang Station are on course for their target completion dates in 2023, with an area of 60,620m2 and 住宅Residential 4% 10% 47,000m2, respectively. 商场Mall Hong Kong has grappled with three waves of COVID-19 in 16% 2020, and the Hong Kong officials placed a series of social- 写字楼Office distancing restrictions. With reduced commercial activities and softened consumption, it is expected to see a slowdown in rent 停车场Parking 70% hikes. In face of a prolonged ban, MTR probably needs to provide rent relief to most tenants in response to the

pandemic. Therefore, MTR’s property rental business looked Source: Company, Orient Securities (Hong Kong) bearish in the year, which is estimated to improve from 2021. 2020 profit warning The rapid and global spread of the deadly coronavirus severely affected Hong Kong’s economy and people’s daily habits in 2020. Once Hong Kong’s third wave of coronavirus started in July, the government tightened policies again to restrict mass gatherings and suggest people avoid unnecessary public outings. As most of MTR’s business is located in Hong Kong, the government’s ban had a huge impact on the company.

Business Profit warning The number of visitors to Hong Kong slid sharply as Hong Kong closed borders to visitors amid coronavirus pandemic, Hong Kong which further dragged down the passenger volume of MTR in 2020. Moreover, residents were urged to reduce transport gatherings and outings while Hong Kong was struggling with three waves of pandemic. To make matters worse, the operations Hong Kong transport operations headed for an expanded loss during the 2020 pandemic, since the segment saw a loss in EBIT due to a series of public order events in 2019. Hong Kong station The downturn in passenger volume and economic recession may deal a heavy blow to the station advertising commercial business business, whilst the rent relief to tenants would further pull down the overall earnings. The property development projects were less affected in a short term with a burgeoning housing market in Hong Hong Kong Kong, whereas the coronavirus would potentially cause a delay in delivery of projects, resulting in a postponed property development recognition of relevant earnings. In the long run, MTR’s profit would tumble as the housing market was dampened, while Hong Kong’s economy contracted with coronavirus spreading. The residential property management was only slightly impacted by the pandemic, while the property rental business Hong Kong (e.g. shops and office buildings) would incur large loss of earnings. The decline was mostly because of the setback in property rental and management passenger volume and economic downswing, coupled with the rent relief provided to the tenants in the short run. The rent would move downward if the coronavirus was out of control. With successful fight against the virus, China’s overall economy has basically returned to normal levels following the Mainland and shutdowns, while only the first quarter was severely hit by the pandemic. For the international business, the international business coronavirus continued to pummel the economy in the UK and Australia as they were not tough enough on battling virus. MTR’s short- to mid-term results would be harmed given the reduction of unnecessary outings.

Orient Securities (Hong Kong) Limited 5 October 9, 2020

Revenue Profit by segments Financial Summary (HK$m) (HK$M) 2017 2018 2019 -4% 60000 5% Revenue 55,440 54,504 53,930

50000 EBIT 13468 13,501 14,810 34% 31% Net profit 10732 10134 11285 40000 ROE 3.1 3.5 3.3 30000 26% EPS (USD) 17.340 15.740 6.000 20000 DPS (HKD) 2.100 3.000 3.000 10000 HK transport Net gearing 23.9 19.4 15.9 HK station commercial 0 HK property rental and mgt. Free cash flow 5,997 7,268 4,778 HK property dev. 2015 2016 2017 2018 2019 Mainland and intl. business Dividend payout ratio 12.1 19.1 50.0 MTR delivered a solid growth in The four largest segments equally MTR’s earnings were volatile with the revenue each year since 2014. contributed to earnings, showing revaluation gains of investment properties. The business diversity. group remains in sound financial condition with abundant cash flow and low gearing ratio.

Strength Weakness

 As Hong Kong’s sole metro operator, Valuation  The public order events and MTR has great influence in planning of attractiveness pandemic hit Hong Kong’s 5 subway stations and surrounding 4 tourism, thereby pulling down properties. 3 the passenger volume and the  Years of subway operation experiences Dividend 2 Growth overall transport operations generosity momentum and superior management abilities 1 0 Opportunity Threat

 MTR could export its business model, Cash flow Balance sheet  The number of visitors to Hong adequacy stability relying on the premium property Kong plummeted as the management and metro operation coronavirus spread

Key Risk Valuation Our Opinion

 It depends on the post-pandemic  The property management and rental recovery of Hong Kong’s tourism P/E 22.24x business brought a stable cash flows to and related industries the group  The transport operations and

commercial properties would be painfully affected by the spreading P/B 1.47x  The public order events and pandemic of coronavirus dealt double blow to Hong Kong’s  Amid a worsened economy and economy cooler housing market, the group Dividend yield 3.17% was exposed to a large risk of setback in results

Relative Performance P/E Band P/B Band

MTR’s share price underperform the MTR’s P/E is 22.24X, which is higher than MTR’s P/B is 1.47X, which is higher than its 5- HSI in the recent month. its 5-year average of 17.80X. year average of 1.30X.

Orient Securities (Hong Kong) Limited 6 October 9, 2020

Analyst Certification I, Martin Ma (Ma Rong), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report.

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Orient Securities (Hong Kong) Limited 7 October 9, 2020