BOCOM Int'l Research Morning Express 2 May 2019 Focus of the Day China Railway Construction 1186 HK Global Stock Indices Earnings outlook intact for 2019, reiterate Buy Rating: Buy Close 1D% YTD% CP: HK$ 9.26 TP: HK$ 12.20 Upside: +31.7% HSI 29,699 0.00 12.52 HSCEI 11,542 0.00 14.00 Fay Zhou [email protected] SH A 3,224 0.00 23.46 Net profit of China Railway Construction increased 13.6% YoY in 1Q19 to SH B 312 0.00 15.02 SZ A 1,712 0.00 29.11 RMB3,885.6m. Solid contract backlog growth buttressed robust revenue growth SZ B 1,011 0.00 20.70 of 19.3% YoY in 1Q19, surpassing its peers. DJIA 26,430 -0.61 13.30 S&P 500 2,924 -0.75 16.63 Although new contract value growth remained slow in 1Q19, we expect Nasdaq 8,050 -0.57 21.32 continuous improvement in 2Q19, mainly driven by contribution from urban FTSE 7,385 -0.44 9.77 transit, railway, and property development segments. CAC 5,586 0.00 18.09 DAX 12,344 0.00 16.91 Looking ahead, we expect revenue to maintain high single-digit growth in 2019, Source: FactSet in light of solid contract backlog growth of 10.3% YoY as of 1Q19. We maintain Key Commodity/Forex Indicators our earnings estimates for FY19-21E. We reiterate Buy call and TP of HK$12.20. Close 3M% YTD% Brent 71.99 14.69 33.74 Gold 1,282.80 -2.59 0.35 Silver 14.99 -6.40 -3.10 China Eastern Airlines 670 HK Copper 6,442.00 5.65 8.00 Strong domestic demand lifted 1Q19 results JPY 111.18 -1.62 -1.31 Luya You [email protected] GBP 1.31 -0.08 2.72 EUR 1.12 -1.98 -1.67 China Eastern Airlines (CEA) reported 1Q19 net profit of RMB2,006m, up 1.2% bps change 3M 6M YoY, while revenue gained 12.3% YoY. Consolidated RPK rose 12.4% YoY HIBOR 2.08 21.11 -0.79 (15.0%/8.0% for domestic/international), with RFTK up 2.3% YoY, the highest US 10yr yield 2.51 -6.66 -20.11 among three major PRC airlines. Source: FactSet We expect the highest traffic growth for CEA in Korea/Japan markets in FY19, HSI Technical while traffic in SE Asia, North America, and Europe may see stable or even HSI 29,699.11 decelerating growth. While short-haul destinations (Korea, Japan) should still see 50D MA 29,514.20 200D MA 27,400.36 high demand, we expect international passenger yield to expand 1-2% in FY19 14D RSI 52.67 due to slower long-haul demand. Short sell (HK$ m) 10,313 Source: FactSet We maintain Neutral and TP of HK$5.50, equivalent to 1.0x FY19E P/B. CEA’s lackluster international expansion could mean further market share erosion Hao Hong, CFA given peers’ aggressive global expansion plans. Despite strong domestic demand Head of Research in 1Q19, CEA may struggle to add routes given tightening capacity and increasing [email protected] slot restrictions at major domestic airports. Analyst certifications, disclosures and disclaimer at the back forms part of this report and must be read. Download our reports from Bloomberg: BOCM or https://research.bocomgroup.com 2 May 2019 Morning Express Orient Overseas Int'l 316 HK Flat start to FY19, Long Beach sale to boost Rating: Neutral earnings CP: HK$ 53.00 TP: HK$ 55.94↑ Upside: +5.5% Maggie Wang [email protected] In 1Q19, total shipping volume of OOIL inched up 1.6% YoY, which reflected the unfavorable demand for container trade at year beginning, in our view. Average freight rate rose 4.2% YoY on the back of a 5.9% YoY increase in total revenue. Its Transpacific revenue (~38% of total) grew only 5.6% YoY in 1Q19, vs. double-digit growth in 1Q18. OOIL has agreed to sell its wholly-owned Long Beach Container Terminal (LBCT) to a subsidiary of Macquarie Asset Management. Total amount of US$1.78bn fully paid by cash will bring ~US$1.29bn pre-tax gain for OOIL, according to its announcement. We expect this to result in a FY19 net profit surge of 704.7% YoY to US$870.4m. Given the limited liquidity for OOIL and the unfavorable outlook for container shipping sector, we maintain our Neutral call for now. We lift our TP from HK$48.50 to HK$55.94, equivalent to 0.8x FY19E P/B. China Education Group 839 HK ST expenses dragged earnings but LT M&A funds Rating: Buy ample; maintain Buy CP: HK$ 12.36 TP: HK$ 14.39↓ Upside: +16.4% Scarlett Shi [email protected] China Education Group’s revenue continued to surge in 1HFY19, up 70.6% YoY to ~RMB930m, while gross profit/profit after tax grew 66.7%/33.8% YoY to RMB540m/344m. Both revenue and profit missed our estimates. Student number increased rapidly to 147,414 as of end-Feb 2019. We estimate expense ratio to drop in 2HFY19 and gross margin to gradually pick up starting FY21E when the company no longer pays administration fees for two colleges upon their independence from public universities. We expect Quancheng College of Jinan University to contribute revenue upon consolidation from Jun 2019. The company maintains its plan to acquire 2-3 schools every year. We cut FY19-21E EPS by 9-15%, trim TP from HK$15.54 to HK$14.39 but maintain Buy. Download our reports from Bloomberg: BOCM or https://research.bocomgroup.com 2 2 May 2019 Morning Express Fosun Pharmaceutical 2196 HK 1Q19 remained subdued, but pipeline on track Li Zhao, PhD [email protected] Fosun Pharma’s 1Q19 revenue of RMB6.73bn (+18% YoY) and attributable net profit of RMB712m (+0.92% YoY) were below our expectations, mainly on surging R&D expenses, higher selling expenses and higher finance cost due to YoY growth of interest rate. As the company may launch three biosimilars in 2019/20 and has multiple candidates in clinical trials, we expect its R&D and selling expenses to remain high in 2019. The company has a stronger mAb pipeline than peers and thus enjoys first-mover advantages in the biosimilar market. Blockbuster products to be launched in 2019/20 will also alleviate the pressure from rising expenses. Maintain Buy and TP of HK$32.00 on our optimistic outlook. Healthcare Sector Weekly As of 30 April 2019 Rating: Outperform Li Zhao, PhD [email protected] Company news: Luye Pharma (2186 HK) was granted the exclusive right to develop and commercialize Zepsyre in China; its main product Lipusu was included in the Chinese Society of Clinical Oncology (CSCO) Guideline as a first- line treatment for primary lung cancer. Fosun Pharma’s (2196 HK) Trastuzumab for injection was accepted for drug registration by NMPA, and Adalimumab injection was granted priority review. CSPC’s (1093 HK) SYHA136 and paclitaxel cationic liposome for injection received clinical trial approval from NMPA. Industry news: The National Health Commission announced on 25 April that since 2018, 17 new anticancer drugs have entered the NRDL with 56.7% average price cut; and a total of 1,714 anti-cancer drugs have seen price cut by 10% on average through the provincial special procurement of anticancer drugs. Download our reports from Bloomberg: BOCM or https://research.bocomgroup.com 3 2 May 2019 Morning Express Economic data releases for this week – US Economic data releases for this week – China Date Event Survey Prior Date Event Survey Prior 1 May MBA mortgage applications (%) -- -7.30 30 Apr Manufacturing PMI 50.6 50.5 1 May ISM manufacturing 55 55.3 2 May Initial jobless claims (k) -- 230 2 May Durable goods order (%) -- 2.70 2 May Factory orders (%) 1.00 -0.50 3 May Change in Non-farm payrolls(k) 181 196 3 May Change in Private payrolls(k) 180 182 3 May Unemployment rate (%) 3.80 3.80 3 May ISM non-manufacturing 57.2 56.1 Source: Bloomberg Source: Bloomberg BOCOM Research latest reports Date Report Analyst 30 Apr Fosun Pharmaceutical (2196 HK) - 1Q19 remained subdued, but pipeline on track Li Zhao, PhD, Kelvin Chen, PhD, Kent Lin, Mengmeng Xi 30 Apr China Eastern Airlines (670 HK) - Strong domestic demand lifted 1Q19 results Luya You, Maggie Wang 30 Apr China Communications Const (1800 HK) - Upgrade to Buy on new contract recovery and Fay Zhou undemanding valuation 30 Apr Datang Int'l Power (991 HK) - No sign of improvement in profitability; maintain Neutral & TP Spencer Luo, Wallace Cheng 30 Apr Great Wall Motor (2333 HK) - 1Q19 net profit slumped on margin and R&D expenses Angus Chan 30 Apr Sohu.com Inc (SOHU US) - 1Q19 in line; lift TP on US$337m cash dividend from Changyou Brandy Sun, Connie Gu, CPA, Gigi Zhou 30 Apr Bank of China (3988 HK) - 1Q19 missed slightly on provisions, but loan reserves remain Jaclyn Wang, Hannah Han moderate 30 Apr COSCO Shipping Holdings (1919 HK) - Improved 1Q19 results, recovery on track Maggie Wang, Fay Zhou 30 Apr Industrial & Comm Bank of China (1398 HK) - 1Q19 in line, good PPOP offset by loan Jaclyn Wang, Hannah Han provision 30 Apr China Merchants Bank (3968 HK) - NIM expanded QoQ and YoY; stronger reserves and Jaclyn Wang, Hannah Han capitalization 30 Apr China Construction Bank (939 HK) - 1Q19 in line; prudent provision offset fee growth, NIM up Jaclyn Wang, Hannah Han QoQ 30 Apr China Railway Group (390 HK) - Robust earnings growth in 1Q19, full-year outlook cautiously Fay Zhou positive 30 Apr Huaneng Renewables (958 HK) - 1Q19 earnings slightly beat; maintain Buy Louis Sun, Bob Wen 30 Apr Air China (753 HK) - Pace to pick up after slow start in 1Q19; maintain Buy Luya You, Maggie Wang 30 Apr Ping An Insurance (2318 HK) - NBM jumped; lift TP Li Wan, CFA, FRM 30 Apr Transportation & Infrastructure Sector Weekly - As of 26 April 2019 Fay Zhou, Luya You, Maggie Wang, Vicky Zhang 30 Apr China Education Group (839 HK) - ST expenses dragged earnings but LT M&A funds ample; Scarlett Shi, Mengdi Lin maintain Buy 29 Apr HEC Pharm (1558 HK) - 1Q19 growth robust, but selling expense hike to squeeze margin Li Zhao, PhD, Kelvin Chen, PhD, Kent Lin, Mengmeng Xi 29 Apr Agricultural