6th May, 2016 Hang Seng Index Performance Index Performance Abs chg % Change Hong Kong Close 1-Day 1-Day 1-Mth 3-Mth Hang Seng Index 20,449.82 -76.01 -0.37 1.20 6.02 HSCI 2,792.77 -13.92 -0.50 0.56 6.86 HSCCI (Red Chips) 3,641.98 -33.91 -0.92 -0.44 7.01 HSCEI (H-Shares) 8,626.73 -70.64 -0.81 -0.48 7.10 Mkt T/O ($ Mn) 56,469.88 -4,968.92 -8.09 -20.08 1.93 Oversea DJIA 17,660.71 9.45 0.05 -0.31 8.98 NASDAQ 4,717.09 -8.55 -0.18 -4.14 8.11 Shanghai SE Composite 2,997.84 6.57 0.22 -1.73 8.48 Crude Oil Futures (US$) 44.32 0.00 0.00 17.40 43.48 Gold Futures (US$) 1,278.70 6.40 0.50 4.49 10.45 Baltic Dry Index 642.00 -10.00 -1.53 28.40 116.16 USD / Euro 1.1399 -0.0013 -0.11 -0.14 2.10 Yen / USD 107.380 0.1000 -0.09 2.18 7.69 HSCEI HSI 20-Day MA 8,979.88 21,024.95 8,712.86 20,462.28 Source: Bloomberg 50-Day MA 9-Day RSI 30.89 32.61 Market Outlook Eric Yuen - [email protected] Hang Seng Index closed down 0.4% at 20,450. Market turnover decreased to $56.5 billion. Heavily weighted HSBC (5) and Tencent (700) cut 1.4% and 0.8% respectively. AIA Group (1299) surged 2.0%. Cheung Kong Infrastructure (1038) We expect Hang Seng climbed 2.4%, the most in Hang Seng Index. Hong Kong utilities and gaming stocks ended higher. Power Assets (6), CLP Holdings (2) and HK & China Gas (3) rose 0.1%- Index to decline this 0.9%. Sands China (1928) and Galaxy Entertainment (27) added 0.2%-0.4%. month due to profit Consumption and local property stocks tumbled. Henderson Land (12), New World Development (17) and Hang Lung Properties (101) tumbled 1.5%-1.7%. Hengan taking with a technical Int’l (1044), Belle Int’l (1880) and China Mengniu Dairy (2319) shrank 1.6%-2.3%. support at 20,000. HSCEI declined 0.8% led by power, cement and railway stocks. CGN Power (1816) and China Longyuan (916) plunged 1.6%-2.5%. Anhui Conch (914) and CNBM (3323) lost 1.0%-3.0%. China Railway Group (390), CRRC Corporation (1766) and CCCC (1800) slid 1.6%-3.1%. Securities, insurance and banking shares in HSCEI dropped an average 0.9%, 0.6% and 0.6% respectively. Air China (753), the best performing HSCEI stock, advanced 0.7%. We expect Hang Seng Index to decline this month due to profit taking with a technical support at 20,000. Remarks: Mason Securities Ltd (“Mason Securities”) is licensed by the Securities and Futures Commission to carry on ｜ ｜ Types 1, 4, and 6 regulated activities in Hong Kong. Mason Futures Ltd is licensed by the Securities and Futures Securities Futures Bullion Commission to carry on Type 2 regulated activity in Hong Kong. Bullion trading service is provided by Mason Bullion Ltd. Industry / Corporate News Becky Yuen, CFA – [email protected] Initiate BUY on Tongda Group (698) as company continues to win market share in metal handset casings Initiate BUY • Well-positioned to benefit from increasing adoption of metal casings of low- and mid-end smartphones thanks to high cost-performance ratio of its metal casing products Risk Level: Medium • Gross margin expansion to continue thanks to better product mix Time Horizon: Medium • Valuation is undemanding at 9.2x 2016 PER with a 38% EPS growth Tongda Group (698, $1.61) released a 1Q16 business update on operating performance on April 27, with turnover up 16.7% yoy to $1.4bn. Specifically, company cited that the metal handset casings orders from key customers increased as company started to produce some major handset models during the period, including Huawei Maimang 4, OPPO A53 and R9, Xiaomi Redmi 3, Redmi Note 3 and Xiaomi 4c. As a result, sales derived from Tongda’s top five customers in 1Q16 increased 21% yoy to $872mn, among which sales from handset customers grew 38% yoy to $799mn. Comment: We see the strong growth of handset-related sales in 1Q16 as a positive sign of Tongda’s rosy business outlook in 2016. Even though the strong growth from smartphone-related orders was largely driven by the launch of Xiaomi new models in 1Q16, we expect the strong momentum to continue as other Chinese smartphone brands are also pushing the adoption of metal casings for their new low- and mid-end models. We believe Tongda is a beneficiary of this trend thanks to its ability to offer a lower-cost option to smartphone brands with the use of Nano Molding Technology (NMT) as compared to the traditional use of pure CNC machines for metal casing manufacturing. Due to the high cost-performance ratio of Tongda’s metal casing products, we believe the company will be able to grab more market share from upcoming low- and mid-end smartphone models. Note that leading Chinese smartphone brands Huawei, Xiaomi and OPPO are all major customers of Tongda, together accounted for close to 50% of company’s overall revenue in 2015. Tongda used to focus on plastic handset casing production in the past, and only started manufacturing of metal casings in 2H14. Yet the transformation was doing well and we saw revenue contribution of metal casings jumped from 6% in 2H14 to 12% in 1H15 and 35% in 2H15. As a result, handsets-related products now accounted for 61% of total revenue in 2015 as compared to 50.4% in 2014 even though China’s smartphone sales witnessed a slowdown during the period. Given that metal casing products enjoy a much higher gross margin of around 30% compared to approximately 20%-25% for plastic casings, a higher sales contribution from metal casing actually bodes well for Tongda’s profitability. In fact, we saw that Tongda’s overall gross margin had a huge enhancement in 2H15, up 1.5ppts yoy and 2.6ppts hoh respectively to 26.1%. In view of Tongda’s in line 1Q16 sales performance and management guidance of 35-40mn units of metal casings shipment in 2016 (12mn units were shipped in 2015), we estimate that company’s sales in 2016 will up 39.5% yoy to $8,471mn with metal casings accounted for 51% of overall sales. With an improved product mix, we expect gross margin of Tongda will further expand to 26.0% in 2016 whilst operating margin will increase 1.1ppts to 16.2%. This leads to our earnings forecast of $998.9mn, up 42% yoy. EPS growth will be 38% yoy to $0.174 due to the dilution from issuance of new shares. Counter is now trading at 9.2x 2016 PER that we think is undemanding. As such, we initiate BUY with 6-month target price of $1.92, equivalent to 11x 2016 PER. 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The company also manufactures and sells infrastructure materials including cement, concrete, asphalt and aggregates. • Counter corrected a max of 10.9% from its intraday high of $81.1 in early-March, but found initial support at sma100. Yesterday, it rose 2.4% with 9-day RSI surged above 50, indicating a pick-up of momentum. • BUY. Short-term target at $82.7. Cut loss at $69.8. Consensus 2016 PER: 17.8x Consensus target price: $74.36 Source: Bloomberg, Mason Securities Risk: Medium China Agri-Industries (606, $2.81) TP: $3.10 BUY Time Horizon: Short • China Agri-Industries produces biofuel and biochemical. The company also processes oilseed and wheat, and produces malt used for beer brewage. • Counter’s trend gradually improved after it formed a Hammer pattern on Apr 29, indicating the counter may have found support along sma20. Yesterday, it rose 3.3% with expanding turnover, retesting the critical resistance of $2.70. • BUY. Short-term target at $3.10. Cut loss at $2.57. Consensus 2016 PBR: 0.56x Source: Bloomberg, Mason Securities Consensus target price: $3.13 RSI Indicator Overbought (9-day RSI> 80) Oversold (9-day RSI<20) Tickers Tickers 582, 630, 855, 886, 975, 1098, 1348, 1462, 1515, 1673, 2317, 2371, 3683, 3993, 283, 530, 585, 861, 915, 981, 1223, 1321, 1663, 1685, 1811, 2326, 2868 6183 Exceptional Turnover & Price Movements Stock Last Price Turnover / 3-mth Target price up / 2016 Rating*^ Stock Code Price ($) Change (%) daily avg turnover downside (%)* PER* Mongolian Mining Corporation 975 0.14 78.2 11.7 N/A N/A N/A Huscoke Resources 704 0.09 60.0 70.7 N/A N/A N/A Amco United Holding 630 0.53 47.2 2.9 N/A N/A N/A Winsway Enterprises Holdings 1733 0.20 39.6 13.1 N/A N/A N/A Synertone Communication 1613 0.21 23.3 21.3 N/A N/A N/A China Finance Investment 875 0.23 16.4 5.2 N/A N/A N/A Hanny Holdings 275 0.31 13.0 11.3 N/A N/A N/A Great Harvest Maeta Group 3683 1.42 10.9 9.5 N/A N/A N/A Shengjing Bank 2066 12.00 9.3 4.2 -5.8 3.7 8.2 Walker Group 1386 1.53 8.5 2.7 N/A N/A N/A China Molybdenum 3993 1.47 8.1 4.7 2.7 3.5 21.2 Landing International Development 582 0.25 7.8 2.7 N/A N/A N/A Goodbaby International 1086 4.61 4.8 2.1 -1.3 4.8 18.0 Sa Sa International 178 2.48 4.6 4.4 -13.6 1.8 15.4 Phoenix Healthcare Group 1515 12.48 2.8 2.8 1.2 3.7 32.9 Melco International Development 200 8.92 2.5 2.1 31.0 3.1 40.7 Cheung Wo International 9 0.85 2.4 7.2 N/A N/A N/A Source: Bloomberg, Mason Securities; *Based on consensus estimates ^ The “Rating” indicates analysts’ opinions on the security.