10 October 2014 Shanghai-HK Stock Connect Technology Sector Miles Xie Technology Sector (852) 2977 9216 [email protected] High-quality HK-listed industry leaders will likely be favored Investment Summary 1. High-quality industry leaders listed in Hong Kong with scarcity value will likely be favored by investors. 2. HK-listed technology stocks are generally more attractively valued than their A-share counterparts. Sector Attributes % of index* 5 most representative stocks in the universe Valuation Sector average A Shares HK Shares SSE 180 Index (3.07%) SSE 380 Index (5.71%) Sichuan Changhong (600839 CH) Sanan Optoelectronics (600703 CH) Hisense Electric (600060 CH) Jiangsu Changjiang Electronics (600584 CH) Qingdao Haier (600690 CH) Hang Seng Composite Large Cap Index (1.41%) Hang Seng Composite Mid Cap Index (4.57%) Lenovo (992 HK) SMIC (981 HK) AAC Tech (2018 HK) Digital China (861 HK) ASM Pacific (522 HK) A shares: 27.9x 2014E P/E HK shares: 17.5x 2014E P/E, indicative of notable valuation discount Fundamental view Commonalities A new boom cycle for the global technology sector driven by mobile, smart devices and enhanced connectivity; Benefitting from huge demand from China; and Rising competitiveness and market position of the Chinese companies across the global industry chain Differences The A-share market (including Shenzhen Stock Exchange) has more technology stocks. A-share listed technology stocks are mainly private companies with smaller scales and higher valuations. A) Trading strategies Source: Factset, Company The HK market has industry leaders with scarcity value, some of which possess global competitiveness. HK-listed technology stocks enjoy notable valuation advantage. Watch Qingdao Haier (600690.CH), given Its leadership in the China refrigerator and washing machine industries; and Foray into e-commerce with Alibaba *Approximate representations as of Sept 14, 2014. HK) Buy Lenovo and SMIC, given: Lenovo is a leader in the global PC industry; and SMIC benefits directly from the rise of China’s semi-conductor industry. Valuation Summary Company Stock name ticker Rating TP (HK$) Lenovo 992.HK BUY 13.00 SMIC 981.HK BUY 2018.HK Digital China ASM Pacific CP ––––– EPS ––––– EPS Consensus –––––– P/E –––––– –––––– P/B –––––– FY14E FY14E FY15E FY14E FY15E (HK$/RMB) (RMB) (RMB) (RMB) (RMB) (x) (x) (x) (x) (%) 11.82 0.062 0.079 0.087 0.100 16.2 14.2 4.1 3.4 2.2 0.81 0.79 0.000 0.004 0.005 0.006 19.3 15.5 1.14 1.06 0.0 NEUTRAL 46.70 46.20 1.41 1.83 2.02 2.30 19.5 17.2 5.2 4.4 2.2 861.HK NEUTRAL 8.10 7.35 1.065 0.593 0.791 0.862 9.9 9.1 0.9 0.8 2.3 522.HK BUY 92.00 77.85 1.73 1.40 3.69 4.67 22.8 18.0 4.3 3.8 1.0 Sichuan Changhong 600839.CH NR NA 4.33 0.11 0.10 0.10 0.14 45.6 32.1 1.4 1.4 0.2 Sanan 600703.CH NR NA 14.80 0.72 0.68 0.68 0.94 22.6 16.4 2.9 2.6 1.2 Hisense 600060.CH NR NA 11.76 1.21 1.13 1.13 1.24 10.3 9.4 1.4 1.3 2.0 Jiangsu Changjiang 600584.CH NR NA 11.93 0.01 0.23 0.23 0.39 51.9 30.1 3.3 3.0 0.6 Qingdao Haier 600690.CH NR NA 16.78 1.53 1.69 1.69 1.97 9.3 8.0 2.3 1.9 3.4 AAC Tech FY15E Yield FY14E FY15E Source: Company, BOCOM Int’l estimates (H shares), Bloomberg consensus estimates (A shares) Download our reports from Bloomberg: BOCM〈enter〉 1 10 October 2014 Lenovo Group (992.HK) LT BUY Neutral Solid leadership in the PC industry; X86 server business promising BUY SELL Stock Miles Xie Last Closing: HK$11.68 Tel: (852)2977 9216 Upside: 11.3% [email protected] Target Price: HK$13.00→ Technology Sector Financial Highlights Stock data Y/E 31 Mar 2012 Revenue (USD m) 29,574 YoY growth (%) 37 Net profit (USD m) 473 EPS (USD) 0.047 Vs. Consensus (+/- %) Na EPS growth (%) 65 P/E (x) 30.3 P/B (x) 5.9 Dividend yield (%) 1.3 Source: Company data, BOCOM Int’l estimates 2013 33,873 15 635 0.062 Na 32 23.0 5.4 1.7 2014 38,707 14 817 0.079 na 28 17.9 4.8 2.2 2015E 42,551 10 903 0.087 2.3 10 16.2 4.1 2.1 2016E 45,397 7 1,036 0.100 -0.9 15 14.2 3.4 2.4 52w High (HK$) 12.70 52w Low (HK$) 7.62 Market cap (HK$m) 125,803.82 Issued shares (m) 10,589.55 Avg daily vol (m) 38.97 1-mth change (%) -4.19 YTD change (%) 25.98 50d MA (HK$) 11.66 200d MA (HK$) 9.91 14-day RSI 51.11 Source: Company data, Bloomberg Why we like the stock in the sector Lenovo is a top player in the global PC industry with solid leadership in the China market. It continues to expand its global market share and enhance profitability. By acquiring the X86 server business of IBM, it is expected to replicate its success in PC in the server market. In mobile Internet, Lenovo has made steady progress in smartphones and tablets. The acquisition of Motorola’s mobile business from Google will accelerate its mobile Internet business development. Strengths: − − Weaknesses: Leadership in the global PC industry; Successful M&A track record Opportunities: − − Needs to strengthen the mobile Internet business; High reliance on the China market − − Threats: Likely to replicate its success in the PC market after acquisition of IBM’s X86 server business; Consolidation and matching of quality resources Growth outlook of the PC business is threatened by mobile Internet; Heightened competition − − Source: BOCOM Int’l Profit & loss (USD m) Year ended 31 Mar Cash flow (USD m) 2012 2013 Revenue 29,574 33,873 Less: Operating cost -26,128 -29,800 -33,643 -36,964 -39,436 Operating tax Sales expense 2014 2015E 2016E Year ended 31 Mar 38,707 42,551 45,397 -107 -170 -197 -221 -254 Balance sheet (USD m) 2012 2013 582 Add: Depreciation and amortization Provisions for impairment of assets Net profit 2014 2015E 2016E Year ended 31 Mar 2012 2013 2014 2015E 2016E 801 1,014 1,105 1,269 3,758 3,454 3,858 4,066 78 92 110 167 163 Financial assets held for trading n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. A/C receivable 2,994 3,458 3,619 3,596 3,671 Monetary fund 4,397 -1,691 -1,888 -1,900 -2,064 -2,179 Loss on changes in fair value n.a. n.a. n.a. n.a. n.a. Inventory 1,218 1,965 2,701 2,218 2,248 Administrative expense -730 -847 -1,403 -1,574 -1,680 Finance expense 43.5 42.9 81.0 73.8 64.1 Financial assets held for sale n.a. n.a. n.a. n.a. n.a. Other expenses -453 -624 -732 -808 -863 Gain from investment n.a. n.a. n.a. n.a. n.a. Fixed assets 392 480 667 651 638 Investment and exchange gain n.a. n.a. n.a. n.a. n.a. Minority interest n.a. n.a. n.a. n.a. n.a. Other non-current assets 4,040 4,492 4,957 5,124 5,373 Operating profit 584 800 1,052 1,148 1,313 Total assets 18,949 Finance expense -43 -43 -81 -74 -64 Total profit 582 801 1,014 1,105 Less: Income tax -107 -170 -197 Net profit 473 635 817 Change in operating cash flow 1,389 -823 273 -180 -109 15,861 16,882 18,357 18,265 Cash flow from operating activities 1,940 20 1,432 1,021 1,193 Short-term debts 63 176 445 499 551 1,269 Cash flow from investment activities -837 -245 -584 -495 -492 Account payable 4,178 3,724 4,860 4,175 4,171 -221 -254 Cash flow from financing activities -316 -68 -430 -318 -370 Notes payable n.a. n.a. n.a. n.a. n.a. 903 1,036 Net change in cash 787 -294 418 208 331 Other current liabilities n.a. n.a. n.a. n.a. n.a. 0 303 10 10 7 n.a. n.a. n.a. n.a. n.a. 13,413 14,202 15,332 14,665 14,690 33 33 1,650 1,650 1,650 Retained earnings 2,328 2,633 1,360 1,953 2,634 Shareholders’ equity 2,448 2,680 3,025 3,599 4,259 Long-term debts Other non-current liabilities Total liabilities Share capital Source: Company data, BOCOM Int’l estimates Download our reports from Bloomberg: BOCM〈enter〉 2 10 October 2014 Qingdao Haier (600690.CH) Leader in the refrigerator and washing machine industry likely to benefit from the Stock Connect Miles Xie Last Closing: RMB 16.78 Tel: (852) 2977 9216 [email protected] Technology Sector Financial Highlights Stock data Y/E 31 Dec Revenue (RMB m) YoY growth (%) Net profit (RMB m) EPS (RMB) EPS growth (%) P/E (x) P/B (x) Dividend yield (%) 2011 73,853 14 2,690 0.888 20 18.9 4.4 2012 79,857 8 3,270 1.079 22 15.6 3.3 2013 86,488 8 4,168 1.532 27 12.2 2.5 2014E 96,514 12 5019 1.693 11 9.3 2.3 3.4 2015E 108,669 13 5885 1.973 17 8 1.9 3.8 Source: Company data, estimates based on Bloomberg consensus 52w High (RMB) 22.77 52w Low (RMB ) 13.63 Market cap (RMB m) 48,872.77 Issued shares (m) 3,029.93 Avg daily vol (m) 20.58 1-mth change (%) -2.42 YTD change (%) -17.28 50d MA (RMB ) 16.19 200d MA (RMB ) 16.74 14-day RSI 47.05 Source: Company data, Bloomberg Why we are interested in the stock Leadership in the China refrigerator and washing ssssmachine industries; and Cooperation with Alibaba in e-commerce Strengths: − − Weaknesses: Positioned as the leader of the Chinese refrigerator and washing machine industry; Strong product innovation capability Opportunities: − − Slowing growth of the white goods sector; Success of cooperation with Alibaba remains to be seen − − Threats: Cooperation with Alibaba in e-commerce; Consumption upgrade in smart home appliances and products Fluctuations in raw material prices; Muted end-user demand − − Source: BOCOM Int’l Profit & loss (RMB m) Year ended 31 Dec Cash flow (RMB m) 2011 2012 Revenue 73,853 79,857 Less: Operating cost -56,589 -59,904 -64,804 Operating tax Sales expense 2013 2014E 2015E Year ended 31 Dec 86,488 96,514 108,669 Net profit Balance sheet (RMB m) 2011 2012 2013 2014E 2015E Year ended 31 Dec 2,690 3,270 4,168 5,019 5,885 Monetary fund 2011 2012 12,890 16,284 20,626 2013 2014E 2015E n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Add: Depreciation and amortization 578 628 647 n.a. n.a. Financial assets held for trading n.a. n.a. n.a. Provisions for impairment of assets n.a. n.a. n.a. n.a. n.a. A/C receivable 3,091 4,197 4,327 n.a. n.a. -13,170 -14,818 -15,750 n.a. n.a. Loss on changes in fair value n.a. n.a. n.a. n.a. n.a. Inventory 5,981 7,099 6,864 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 31,394 39,700 49,547 n.a. n.a. 8,390 9,989 11,469 n.a. n.a. 39,784 49,688 61,016 n.a. n.a. n.a. n.a. Administrative expense n.a. n.a. n.a. n.a. n.a. Finance expense n.a. n.a. n.a. n.a. n.a. Financial assets held for sale Other expenses n.a. n.a. n.a. n.a. n.a. Gain from investment n.a. n.a. n.a. n.a. n.a. Fixed assets Investment and exchange gain n.a. n.a. n.a. n.a. n.a. Minority interest n.a. n.a. n.a. n.a. n.a. Other non-current assets 4,471 5,544 6,820 n.a. n.a. Change in operating cash flow 2,233 731 947 n.a. n.a. Total assets -53 -116 -106 n.a. n.a. Cash flow from operating activities 6,200 5,519 6,510 n.a. n.a. Short-term debts 1,144 1,098 1,174 n.a. n.a. 4,417 5,428 6,714 n.a. n.a. Cash flow from investment activities -4,512 -1,182 -1,376 n.a. n.a. Account payable 16,937 21,078 25,856 n.a. n.a. -767 -1,068 -1,163 n.a. n.a. Cash flow from financing activities 755 -469 -925 n.a. n.a. Notes payable n.a. n.a. n.a. n.a. n.a. 2,690 3,270 4,168 5,019 5,885 2,443 3,869 4,210 n.a. n.a. Other current liabilities 25,969 31,341 38,006 n.a. n.a. 670 759 717 n.a. n.a. 2,252 2,921 3,016 n.a. n.a. Total liabilities 28,221 34,262 41,022 n.a. n.a. Share capital 2,685 2,685 2,721 n.a. n.a. Retained earnings 8,341 11,129 14,467 n.a. n.a. 536 1,613 2,806 n.a. n.a. Operating profit Finance expense Total profit Less: Income tax Net profit Net change in cash Long-term debts Other non-current liabilities Shareholders’ equity Source: Company data, estimates based on Bloomberg consensus Download our reports from Bloomberg: BOCM〈enter〉 3 Technology Sector BOCOM International 11/F, Man Yee Building, 68 Des Voeux Road, Central, Hong Kong Main: + 852 3710 3328 Fax: + 852 3798 0133 Rating System Company Rating www.bocomgroup.com Sector Rating Buy: Expect more than 20% upside in 12 months LT Buy: Expect more than 20% upside but longer than 12 months Neutral: Expect low volatility Sell: Expect more than 20% downside in 12 months Outperform (“OP”): Expect more than 10% upside in 12 months Market perform (“MP”): Expect low volatility Underperform (“UP”): Expect more than 10% downside in 12 months Research Team Head of Research @bocomgroup.com Raymond CHENG, CFA, CPA, CA (852) 2977 9393 @bocomgroup.com raymond.cheng Strategy Economics Hao HONG, CFA Miaoxian LI (852) 2977 9384 hao.hong (852) 2977 9212 yangqingli Fei WU (852) 2977 9392 fei.wu Shanshan LI, CFA (86) 10 8800 9788 - 8058 lishanshan Tony LIU (852) 2977 9390 xutong.liu Li WAN, CFA (86) 10 8800 9788 - 8051 Wanli Alfred LAU, CFA, FRM (852) 2977 9235 alfred.lau Toni HO, CFA, FRM (852) 2977 9220 toni.ho Luella GUO (852) 2977 9211 luella.guo (86) 21 6065 3606 louis.sun (852) 2977 9209 lizhiwu (852) 2977 9216 miles.xie Geoffrey CHENG, CFA (852) 2977 9380 geoffrey.cheng Ian FENG (852) 2977 9381 Yinan.feng (86) 21 6065 3675 wei.yao Banks Consumer Discretionary Property Phoebe WONG (852) 2977 9391 phoebe.wong Anita CHU (852) 2977 9205 anita.chu Consumer Staples Renewable Energy Summer WANG (852) 2977 9221 summer.wang Shawn WU (852) 2977 9386 shawn.wu Johnson SUN (852) 2977 9203 johnson.sun Milo LIU (852) 2977 9387 milo.liu (852) 2977 9389 liwenbing Healthcare Louis SUN Telecom & Small/ Mid-Caps Insurance Zhiwu LI Technology Internet Miles XIE Transportation & Industrial Yuan MA (86) 10 8800 9788 - 8039 yuan.ma Connie GU, CPA (86) 10 8800 9788 - 8045 conniegu (852) 2977 9243 jovi.li Metals & Mining Jovi LI miaoxian.li Oil & Gas/ Gas Utilities Qingli YANG Jerry LI (86) 10 8800 9788 - 8043 Automobile Download our reports from Bloomberg: BOCM〈enter〉 Wei YAO 4 Technology Sector Analyst Certification The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report; (iii) no insider information/ non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations were being received by the authors. 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