Dim Sum Express
A-Share Market
Investment Strategy: Increasing head wind for ongoing market rebound Market sentiment appears to have improved substantially, with optimism based on 1) negative effective interest rate triggered by rising inflation and 2) the stabilization of the Rmb exchange rate. However, we point out that a rapid rise in inflation will be a negative at this moment when economic fundamentals have just started to pick up, and that the Rmb exchange rate will be subject to uncertainties as long as the government maintains a pro-growth stance. We believe that a higher-than-expected CPI for Mar would be the first factor to put an end to the current market rally.
Macro: Further monetary easing unlikely as CPI nears 3% We believe Mar CPI is very likely to be above 2.8%, which would be much higher than currently expected by the market. Leaving aside uncertainties such as the effect of the El Nino and commodity price changes, inflation is set to remain high in 2Q16 given last year’s comparable base. There is currently little pressure for the economy to hit the lower limit of the government’s targeted range as 1Q16 GDP is likely to come in at 6.7-6.8%, whereas a certain level of pressure has arisen for the economy to hit the upper limit. This means further monetary easing is unlikely to be seen.
Hong Kong Market
Tech (Hardware): 2015 results review Tongda was the best performer under our coverage, with earnings up 40% YoY in 2015, underpinned by strong demand from Huawei and Xiaomi, and a rising contribution from its smartphone metal casings business. We see the company as an inexpensive growth stock. Coolpad was the worst performer, with an operating loss of HK$150m, compared to an operating profit of HK$536m in 2014. Sunny Optical has strong fundamentals, but is fairly priced, in our view. Kingboard Laminates is a stable dividend yield play, and we see Q Tech as an earnings recovery play, despite its disappointing 2015 results.
Property: 2015 earnings review; COLI the top performer COLI saw revenue rise 7% YoY and earnings increase by 23% YoY in 2015. CR Land’s net profit was up 16% YoY on top-line growth and a stable margin; the company appears confident in its earnings visibility for 2016. Vanke’s earnings rose 15% YoY. Guangzhou R&F saw net profit increase by 8% YoY; high gearing remains a key concern. In negative territory, Shenzhen Investment’s earnings declined by 8% YoY due to a decrease in one-off gains, and Country Garden saw net profit drop 9% YoY - we believe management needs to prove its execution ability. Healthcare: 2015 earnings review; CSPC Pharma the best performer CSPC Pharma’s net profit rose 31% YoY - management has promised a CAGR in EPS of over 30% during 2015-19. Consun Pharma’s earnings increased 18% YoY - we estimate gross margin will remain stable in 2016 and that net earnings will grow at a CAGR of 15% in 2015-17. Sino BioPharma saw net profit rise 18% YoY - we expect net profit to grow at a CAGR of 15-20% in 2015-17. Baiyunshan’s earnings were up 9% YoY. On the negative side, CMS saw net profit drop 5% YoY, and SSY Group earnings dropped 33% YoY on a lower gross margin.
Goodbaby (1086 HK, Buy): Good execution; margin expansion remains intact The turnaround of Evenflo within one year and solid FY15 results have established a good execution track record since Mr Martin Pos was appointed as Deputy CEO in Dec 2014. Looking ahead, we believe the company’s margin expansion remains intact, driven by a higher own brand sales mix, product upgrade and the development of service sharing platforms used by all of its brands. We raise our FY16/17 net profit estimates by 13%/11% to factor in higher gross and operating profit margins. Our target price is raised from HK$3.85 to HK$4.34, still based on 18x FY16E P/E, representing 0.64x PEG, which is still undemanding compared to international peers’ average of 1.23x.
