8th Mar, 2017 Hang Seng Index Performance Index Performance Abs chg % Change Hong Kong Close 1-Day 1-Day 1-Mth 3-Mth Hang Seng Index 23,681.07 84.79 0.36 0.83 3.58 HSCI 3,253.01 13.62 0.42 1.20 4.21 HSCCI (Red Chips) 3,880.62 18.60 0.48 0.00 2.85 HSCEI (H-Shares) 10,229.68 58.58 0.58 2.76 3.36 Mkt T/O ($ Mn) 62,669.45 379.15 0.61 -8.81 0.26 Oversea DJIA 20,924.76 -29.58 -0.14 4.34 6.68 NASDAQ 5,833.93 -15.25 -0.26 2.67 7.69 Shanghai SE Composite 3,242.41 8.54 0.26 2.38 0.84 Crude Oil Futures (US$) 52.85 -0.29 -0.55 0.97 3.95 Gold Futures (US$) 1,216.20 0.10 0.01 -1.88 3.74 Baltic Dry Index 1,033.00 54.00 5.52 44.68 -11.10 USD / Euro 1.0571 -0.0004 -0.04 -1.18 -0.36 Yen / USD 113.920 -0.0600 0.05 -1.90 0.24 HSCEI HSI 20-Day MA 10,298.00 23,826.41 50-Day MA 9,893.83 23,137.65 Source: Bloomberg 9-Day RSI 49.08 47.27 Market Outlook Eric Yuen - [email protected] Hang Seng Index closed up 0.4% at 23,681. Market turnover increased to $62.7 billion. Heavily weighted Tencent (700) and China Mobile (941) climbed 1.2% and 0.4% respectively. HSBC (5) was flat. Consumption plays and Chinese property developers outperformed the benchmark index. Want Want China (151) jumped 2.8%. Belle Int’l (1880) and Hengan Int’l (1044) both increased 1.1%. Eight largest Chinese property developers grew an average 3.2% among which Country Garden (2007), Guangzhou R&F (2777) and China Vanke (2202) We forecast a trading surged 4.4%-5.4%. Gaming, local banking and property stocks were mixed. range of 23,000- BOC Hong Kong (2388) added 0.6% while Hang Seng Bank (11) cut 0.6%. Hang Lung Properties (101) climbed 1.9%. Link REIT (823), Swire Pacific (19) and 24,500 for Hang Seng Sino Land (83) all declined 0.7%. Utilities counters ended lower. Power Assets (6), CLP Holdings (2), HK & China Gas (3) and Cheung Kong Infrastructure Index in March but (1038) plunged 0.4%-0.8%. AAC Technologies (2018) was the worst performing index stock, down 2.7%. the risk is on the HSCEI advanced 0.6% led by railway, pharmaceutical and financial stocks. downside. China Railway Construction (1186) surged 2.0%. China Railway Group (390), CRRC Corporation (1766) and CCCC (1800) rose 0.5%-0.7%. Sinopharm (1099) added 1.6%. Postal Savings Bank of China (1658), China Merchants Bank (3968) and China Minsheng Banking (1988) climbed 1.0%-1.2%. China Life (2628) and New China Life (1336) soared 1.3%-1.4%. Power and automobile stocks showed mixed performance. China Shenhua (1088) was the worst performing HSCEI stock, down 1.0%. We forecast a trading range of 23,000- 24,500 for Hang Seng Index in March but the risk is on the downside. Remarks: Mason Securities Ltd (“Mason Securities”, CE No.: AAC086) is licensed by the Securities and Futures Commission ｜ to carry on Types 1, 4, 6 and 9 regulated activities in Hong Kong. Mason Futures Ltd (CE No.: AAG007) is licensed by the Securities Futures Securities and Futures Commission to carry on Type 2 regulated activity in Hong Kong. Industry / Corporate News Jason Lam - [email protected] Initiate BUY on Geely Auto (175) given its strong model cycle in 2017 and improving product mix Initiate BUY • Strong sales performance in the first two months of 2017 Risk Level: Medium • Young product line-up compared to peers, alongside with a strong model cycle in 2017 • Release of new production capacity in 2017 as a key sales performance driver Time Horizon: Long • Undemanding valuation at 11.4x 2017 P/E Geely Automobile (175, $10.70, “Geely”) is a leading Chinese automotive manufacturer that is specialized in the production of low to mid-priced passenger vehicles in China. Leveraging on the design and technological capabilities of Volvo, a leading global automotive manufacturer who was acquired by Geely’s parent company back in 2010, Geely managed to sustain and expand market share in the increasingly competitive automotive market. We hold a positive view on Geely given the following factors: 1) Geely, as shown from its strong sales performance in Jan and Feb, is likely to extend its glamorous sales performance this year despite tax incentive reduction and intensifying competition; 2) Geely has a young product line-up with a strong model cycle in 2017, alongside with improving product mix; and 3) recent retreat in share price offers a good accumulating opportunity for long- term investors who wish to obtain exposure to the expanding Chinese auto market. Geely registered strong sales volume of 102,653 units (+71% yoy) for January and 88,976 units (+167%) for February, achieving 19.2% of the company’s full year sales target of 1.0mn units in the first two months of the year. Although the Chinese government adjusted purchase tax on passenger vehicles with an engine displacement ≤ 1.6L from 5.0% to 7.5% starting 2017 (majority of Geely’s models are below 1.6L), Geely continued to deliver strong sales performance driven by SUVs that accounted for a record high of 41.2% of Geely’s total sales volume year-to-date versus 30.6% in 2016. We believe Geely can maintain its glamorous sales performance this year despite tax incentive reduction and increasing competition. Geely has a relatively young product line-up compared to its main domestic brand competitors (4 of the company’s major sales- driving models were launched in 2016 and contributed approx. 50% of Geely’s sales volume year-to-date), alongside with a strong model cycle in 2017 (6 sedan model upgrades, 1 brand new MPV, 1 brand new small SUV and 1 brand-new SUV and 1 new sedan to be launched under its premium brand “Lynk & Co.”). We noticed that a large backlog on new models (particularly for Boyue and Vision SUV) carried forward by Geely into 2017 was mainly resulted from capacity constraints. As new capacities are released during the further ramp up of Geely’s new production facilities in Baoji, Shanxi and Linhai, we expect these models to extend their strong performance and act as Geely’s main sales drivers for 2017. Moreover, we believe the launch of upcoming models will be well-received by customers and become key earnings drivers of Geely in 2018, given the established client-base of the predecessors for the sedan models and the positive feedbacks received from global media regarding the upcoming CX-11 (SUV) manufactured under the CMA platform co-developed with Volvo. We expect Geely’s sales volume to reach 1.09mn units in 2017, which is 9% higher than management guidance. Our revenue projection stands at RMB85.6bn (+52.2% yoy) for 2017 and RMB109.0bn (+27.3% yoy) for 2018, primarily driven by sales volume growth and higher ASP due to better product mix. This translates into earnings growth of 59% to RMB7.3bn in 2017 and 45% to RMB10.6n in 2018 from our estimated earnings of RMB4.6bn in 2016. Traded at 11.4x 2017 P/E, valuation of Geely is attractive to long-term investors in our view. We therefore initiate a BUY rating on Geely with 6-month target price of $12.00, based on 12.8x 2017 P/E or equivalent to 1.5 standard deviations above its 5-year forward P/E average. 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