Hang Seng Index Performance

Source: Bloomberg

Major Market Indicators

Hong Kong Close 1-Day 1-Mth 6-Mth 12-Mth

Hang Seng Index 25,971.47 0.5% -0.7% -16.8% -13.4%

HSCEI (H-Shares) 10,486.07 0.2% 0.0% -15.1% -12.3%

Mkt T/O ($ Mn) 78,292.99 1.1% -21.4% -18.4% -50.1%

Oversea

DJIA 24,464.69 0.0% -3.4% -1.5% 4.0%

NASDAQ 6,972.25 0.9% -6.6% -5.5% 1.5%

Shanghai SE Composite 2,651.50 0.2% -0.1% -17.5% -22.7%

Shenzhen Component 7,908.47 0.4% 2.1% -26.5% -31.6%

Commodities and FX

Crude Oil Futures (US$) 54.63 2.2% -21.0% -24.3% -5.9%

Gold Futures (US$) 1,227.70 0.6% 0.1% -5.1% -5.1%

Baltic Dry Index 1,003.00 -2.0% -36.5% -16.3% -29.0%

USD / Euro 1.14 0.0% -0.7% -3.3% -3.4%

Yen / USD 113.01 0.0% -0.3% -1.9% -1.3%

CNH / USD 6.922 -0.1% 0.3% -8.4% -4.7%

% Change

Market Overview

Hang Seng Index closed up 0.5% at 25,971. Market turnover improved to $78.3Bn. HSCEI climbed 0.2% at 10,486. Heavily weight Tencent ( 700 ), HSBC ( 5 ) and AIA Group ( 1299 ) rose 2.8%, 0.3% and 1.1% respectively.

Macau gaming, technology, PRC property, securities and pharmaceutical stocks outperformed the market. Galaxy Entertainment ( 27 ) and Sands China ( 1928 ) increased 3.8% and 1.4%. Both Sunny Optical ( 2382 ) and AAC Technologies ( 2018 ) increased 1.9%. Ten largest Chinese property developers grew an average 2.8% among which China Evergrande ( 3333 ), Country Garden ( 2007 ) and Logan Property ( 3380 ) increased 4.8%-5.4%. Five securities stocks in HSCEI added an average 2.4% among which hina Galaxy Securities ( 6881 ) and GF Securities ( 1776 ) rose 2.7%-3.1%. Sino Biopharmaceutical ( 1177 ) and CSPC Pharmaceutical ( 1093 ) increased 3.5% and 2.2%.

Telecom, railway and oil stocks underperformed the market. Three telecom stocks lost 0.7%-1.3%. CRRC Corp ( 1766 ) and CCCC ( 1800 ) cut 1.0%-1.2%. Three largest oil companies fell an average 1.9% among which CNOOC ( 883 ) and PetroChina ( 857 ) declined 2.5% and 2.0%. Consumption, automobile, local property, HK banking, insurance, utilities stocks lacked clear direction. Mengniu Dairy ( 2319 ) and Hengan International ( 1044 ) added 1.5%-1.7% while WH Group ( 288 ) cut 2.2%. Geely ( 175 ) and Great Wall Motor ( 2333 ) advanced 4.2%-4.7% while BYD ( 1211 ) and Dongfeng Motor ( 489 ) decreased 2.7% and 0.1%. Zhongan ( 6060 ) and PICC Property & Casualty ( 2328 ) advanced 4.9% and 0.9% while China Pacific Insurance ( 2601 ) and New China Life ( 1336 ) fell 0.7% and 0.1%. PRC banking stocks moved in line with Hang Seng Index. We expect Hang Seng Index to be highly volatile in the short term.

22 November 2018

We expect Hang Seng Index to be highly volatile in the short term

Index Movers

Source: Bloomberg, Mason Securities

Name Price % Chg Points Name Price % Chg Points

Country Garden ( 2007 ) 9.68 4.9% 10.4 Zhongan ( 6060 ) 33.95 4.9% 1.6

Geely ( 175 ) 15.28 4.7% 11.2 Great Wall Motor ( 2333 ) 4.95 4.2% 1.7

Galaxy Entertainment ( 27 ) 46.75 3.8% 12.3 China Galaxy Securities ( 6881 ) 4.29 3.1% 1.3

Sino Biopharmaceutical ( 1177 ) 7.44 3.5% 5.3 Tencent ( 700 ) 289.60 2.8% 15.5

Tencent ( 700 ) 289.60 2.8% 66.4 GF Securities ( 1776 ) 12.00 2.7% 1.4

CSPC Pharmaceutical ( 1093 ) 16.56 2.2% 4.5 China Vanke ( 2202 ) 28.00 2.4% 2.4

Sunny Optical ( 2382 ) 77.20 1.9% 3.2 Huatai Securities ( 6886 ) 13.60 2.3% 1.4

AAC Technologies ( 2018 ) 54.95 1.9% 2.2 CSPC Pharmaceutical ( 1093 ) 16.56 2.2% 1.9

Mengniu Dairy ( 2319 ) 24.50 1.7% 3.4 CITIC Securities ( 6030 ) 14.96 2.2% 1.7

Sino Land ( 83 ) 12.88 1.6% 1.8 Haitong Securities ( 6837 ) 8.50 1.8% 1.4

Hengan International ( 1044 ) 63.20 1.5% 2.1 Air China ( 753 ) 7.41 1.8% 0.7

Sands China ( 1928 ) 32.20 1.4% 3.3 Hengan International ( 1044 ) 63.20 1.5% 0.9

Want Want China ( 151 ) 5.59 1.3% 1.2 Cinda Asset Management ( 1359 ) 2.09 1.5% 0.7

Sun Hung Kai Properties ( 16 ) 109.30 1.2% 5.2 Postal Savings Bank of China ( 1658 ) 4.61 1.3% 1.5

AIA Group ( 1299 ) 63.45 1.1% 25.8 Guangdong Investment ( 270 ) 14.26 1.3% 0.7

Swire Pacific ( 19 ) 87.70 1.1% 1.4 Huarong Asset ( 2799 ) 1.59 1.3% 0.6

China Overseas ( 688 ) 26.65 0.8% 2.3 Huaneng Power International ( 902 ) 4.78 1.1% 0.6

Link ( 823 ) 73.40 0.8% 3.5 PICC Property & Casualty ( 2328 ) 8.11 0.9% 1.3

BOC ( 3988 ) 3.38 0.6% 4.8 China Minsheng Banking ( 1988 ) 5.82 0.9% 0.9

Hang Seng Bank ( 11 ) 177.20 0.6% 2.3 CMB ( 3968 ) 31.65 0.8% 2.7

ICBC ( 1398 ) 5.43 0.6% 6.7 China Gas ( 384 ) 25.40 0.8% 0.5

CK Infrastructure ( 1038 ) 57.80 0.5% 0.6 Guangzhou Automobile ( 2238 ) 7.94 0.6% 0.4

CITIC ( 267 ) 12.38 0.5% 1.1 BOC ( 3988 ) 3.38 0.6% 4.4

China Shenhua ( 1088 ) 18.74 0.4% 0.8 Agricultural Bank ( 1288 ) 3.50 0.6% 1.5

Henderson Land ( 12 ) 38.40 0.4% 0.6 ICBC ( 1398 ) 5.43 0.6% 5.6

Hang Lung Properties ( 101 ) 15.48 0.4% 0.4 CITIC ( 267 ) 12.38 0.5% 0.5

HKEx ( 388 ) 225.00 0.4% 2.9 China Shenhua ( 1088 ) 18.74 0.4% 0.8

BOC Hong Kong ( 2388 ) 29.70 0.3% 1.1 Shenzhou International ( 2313 ) 94.00 0.3% 0.3

Shenzhou International ( 2313 ) 94.00 0.3% 0.7 CCB ( 939 ) 6.50 0.3% 3.1

CCB ( 939 ) 6.50 0.3% 6.6 Ping An Insurance ( 2318 ) 75.30 0.1% 1.4

HSBC ( 5 ) 65.30 0.3% 8.0 BOCOM ( 3328 ) 5.92 0.0% 0.0

New World Development ( 17 ) 10.64 0.2% 0.4 CITIC Bank ( 998 ) 5.02 0.0% 0.0

CLP Holdings ( 2 ) 88.65 0.2% 0.9 CGN Power ( 1816 ) 1.96 0.0% 0.0

Ping An Insurance ( 2318 ) 75.30 0.1% 1.7 People's Insurance ( 1339 ) 3.44 0.0% 0.0

Hong Kong & China Gas ( 3 ) 15.30 0.1% 0.6 China Life Insurance ( 2628 ) 16.50 0.0% 0.0

BOCOM ( 3328 ) 5.92 0.0% 0.0 Dongfeng Motor ( 489 ) 7.56 -0.1% -0.1

China Life Insurance ( 2628 ) 16.50 0.0% 0.0 New China Life ( 1336 ) 36.05 -0.1% -0.1

China Resources Power ( 836 ) 14.80 -0.3% -0.2 Anhui Conch Cement ( 914 ) 40.05 -0.5% -0.7

Wharf ( 1997 ) 49.60 -0.4% -0.7 China Resources Land ( 1109 ) 29.30 -0.5% -0.5

MTR ( 66 ) 39.25 -0.5% -0.9 China Pacific Insurance ( 2601 ) 29.10 -0.7% -1.5

China Resources Land ( 1109 ) 29.30 -0.5% -1.3 China Telecom ( 728 ) 4.03 -0.7% -1.1

Power Assets ( 6 ) 53.20 -0.6% -1.3 Sinopharm Group ( 1099 ) 38.45 -0.9% -1.2

China Unicom ( 762 ) 8.69 -0.7% -1.1 China Railway ( 390 ) 7.57 -0.9% -0.8

CK Hutchison ( 1 ) 80.85 -1.0% -6.6 CCCC ( 1800 ) 7.78 -1.0% -1.0

China Mobile ( 941 ) 75.50 -1.3% -18.7 CRRC Corp ( 1766 ) 7.16 -1.2% -1.1

Sinopec ( 386 ) 6.59 -1.3% -7.0 China Mobile ( 941 ) 75.50 -1.3% -8.1

CK Asset Holdings ( 1113 ) 53.80 -1.9% -8.3 Sinopec ( 386 ) 6.59 -1.3% -6.4

PetroChina ( 857 ) 5.43 -2.0% -7.1 PetroChina ( 857 ) 5.43 -2.0% -6.5

WH Group ( 288 ) 6.13 -2.2% -3.8 CNOOC ( 883 ) 12.72 -2.5% -7.5

CNOOC ( 883 ) 12.72 -2.5% -17.4 BYD ( 1211 ) 57.00 -2.7% -2.9

H S C E IH S I

Market in Focus Name

Bloomberg Ticker

BUYRating

3M Avg Turnover ($, Mn)Target Price

Free Float (%)

22.2

6.24 - 16.6

25.8%

71.9

839 HK Equity

China Education Group MKT Cap ($Bn)

52-week High/Low ($)

China Education Group (839) is to benefit from proposed personal income tax reduction – Maintain BUY

Since our BUY commentary dated October 23, China Education Group (839, CES, $11.0) has climbed 11.1% compared with a loss of 0.7% for Hang Seng Index over the same period. The outperformance is mainly triggered by the proposed tax cut in China. According to the “draft guideline of personal income tax reduction” issued by Ministry of Finance and State Administration of Taxation, parents will be able to claim a maximum tax deduction of RMB12,000 per annum against their children’s education expenses, while all adults will be allowed to offset RMB4,800 for higher education and RMB3,600 for vocational education expenses. The proposed personal income tax reduction will be effective on 1st January 2019 and is likely to benefit CES which is a leading provider of private higher education service in China. Moreover, CES is also less affected by the “Draft Amendments on the Implementation Rules for the Law for Promoting Private Education” issued in August.

CES has changed financial year end date to 31 August to align with academic year. For the eight months ended 31 August 2018, revenue grew 58.6% yoy to RMB933mn thanks to maiden contribution from three newly acquired vocational schools, namely Baiyun Technician College, Zhengzhou Transit School and Xi’an Railway College. Tuition fees, boarding fees and ancillary services made up 90.5%, 8.2% and 1.3% of revenue respectively. Gross margin improved from 57.0% for the pro form period 2017 to 61.4% due to implementation of cost control measures. Adjusted net profit increased by 62.9% to RMB482mn compared to RMB296mn recorded in the pro forma period 2017. As of 31 August 2018, CES had net cash of RMB1.61bn.

As at 31 August 2018, the total number of enrolled students was 121,315 representing an increase of 61.2% from enrollment as at 31 Augsut 2017. In September 2018, CES completed acquisition of the entire interests in Songtian University and Songtian College in Guangzhou for a total consideration of RMB537.9mn. Songtian University and Songtian College currently have a total of 12,000 students and registered net profit of RMB74mn in 2017. We believe CES is still financially capable of making further M&A to expand its operations.

We expect CES’s net profit to reach RMB860mn (EPS RMB0.426) for the twelve months ended 31 August 2019. This implies CES is presently valued at forward P/E of 22.9x that we think is attractive to long term investors. We therefore maintain our BUY recommendation on CES with an unchanged 6-month price target of $12.1 based on 2019 P/E of 25.0x.

Fig1: 1 Year Share Price

Source: Bloomberg, Mason Securities

Technical Ideas

Stock Code

BUY $15.86 1347

$17.45 $22.66 Hua Hong Semiconductor (1347, $15.86) TP: $17.45 BUY

$15.07 TP: $17.45

CL: $15.0720.4 49.8%

128 144

127% 89%

12.7X 1.01X

-17%

SMA10 15.71 RSI (14) 51.5

SMA20 14.77 BB (Upper) 17.42

SMA100 20.06 BB (Lower) 12.13

Hua Hong Semiconductor Ltd

1347 HK Equity

Cut Loss

Net Debt (Cash) / Equity

Forward PER / PBR

Turnover vs 5D & 30D Avg

Hua Hong Semiconductor

Technical Indicator

Name

Rating / Last Closing Price

MKT Cap ($Bn) / Free Float

Turnover / 30D Avg ($Mn)

Our TP / Bloomberg TP

Stock Code

BUY $5.16 1030

$5.68 $8.63 Future Land Development (1030, $5.16) TP: $5.68 BUY

$4.90 TP: $5.68

CL: $4.930.5 28.4%

284 112

364% 253%

5.4X 1.52X

117%

SMA10 4.67 RSI (14) 57.3

SMA20 4.59 BB (Upper) 5.06

SMA100 5.53 BB (Lower) 4.12

Technical Indicator

Name

Rating / Last Closing Price

MKT Cap ($Bn) / Free Float

Turnover / 30D Avg ($Mn)

Our TP / Bloomberg TP

Future Land Development Holdin

1030 HK Equity

Cut Loss

Net Debt (Cash) / Equity

Forward PER / PBR

Turnover vs 5D & 30D Avg

Future Land Development

Source: Bloomberg, Mason Securities

Recent Recommendations

Date of Issue Stock Pick Recommendation Highlights Rating (TP)

9/11/2018 China Overseas

Property

(2669)

Attractive valuation after a deep share price correction – Maintain BUY China Overseas Property (2669)

• Recent outperformance indicates that market concern about an increase in employee benefit expenses after a strict enforcement of China’s social security taxes in 2019 has been over

• We remain optimistic about the growth prospects of COPH given strong support from parent company and ongoing industry consolidation

BUY ($2.60)

12/11/2018 China Gas

(384)

Focus on long-term trend – Maintain BUY China Gas Holdings (384)

• Recent rally in share price was mainly due to concerns relieved about city connection fee cut of Chinese downstream gas sector

• The valuation of China Gas is still reasonable to long term investors

BUY ($30.40)

13/11/2018 Hua Hong

Semiconductor

(1357)

Substantial 2019 EPS dilution from share placement – Downgrade Hua Hong Semiconductor (1347) to HOLD

• The outperformance is mainly driven by better-than-expected quarterly results, completion of share placement and bullish management guidance for the fourth quarter

• EPS growth will be 19.2% in 2018 and -13.9% in 2019 due to dilution from the share placement

HOLD ($17.0)

14/11/2018 PetroChina

(857)

Main beneficiary of gas price hike; A good entry opportunity today after international oil price slump – BUY PetroChina (857) for short-term trading purpose

• We expect more cities to raise the gas price for non-residential use during the heating season. PetroChina is the main beneficiary of the price hike given its high earnings sensitive to gas price

BUY ($6.54)

15/11/2018 A-Living Services

(3319)

Weakness in share price presents a good buying opportunity – Maintain BUY A-Living Services (3319)

• Investors have over-reacted on unexpected resignation of the CEO.

• Undemanding valuation at forward P/E of 16.3x in 2018 and 11.1x in 2019 with a 2-year EPS CAGR of 48%.

BUY ($13.0)

16/11/2018 CSCI

(3311)

China’s infrastructure investment picked up in October – Maintain BUY China State Construction (3311)

• As at 31 October 2018, the unfinished contract value grew 21.2% yoy to $235.35bn of which 77% or $181.47bn were infrastructure investments in China

• Traded at 2018 P/E of 5.1x and 2019 P/E of 4.4x, CSCI looks unreasonably cheap compared with its historical valuation at 5-year average forward P/E of 9.7x

BUY ($9.00)

19/11/2018 Huadian Fuxin

(816)

Huadian Fuxin (816): Improving fundamentals with undemanding valuation; BUY

• Underperformance was mainly due to a drag of hydropower generation which recorded a negative growth of 47.3% for 10M18

• Sequential improvement on the main earnings driver will serve a ST catalyst for the company

BUY ($1.84)

20/11/2018 Shimao Property

(813)

Fundamental remains solid - Maintain BUY on Shimao Property (813)

• Thanks to improvement in product mix and abundant saleable resources, Shimao’s contracted sales increased by 48% in 2017 and 73% yoy in the first ten months of 2018 compared to industry growth of 13.7% and 12.5% respectively

BUY ($21.9)

21/11/2018 CTCM

(570)

Promising growth with undemanding valuation – Maintain BUY on CTCM (570)

• We believe CTCM will benefit from 1) solid industry development; 2) channel expansion in high-to-low tier hospitals; 3) the increasing penetration rate of TCM granules due to more and more provinces including TCM granules in medical insurance in the future

BUY ($6.70)

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Guide to stock ratings

Note: Newly issued research recommendations and target prices supersede previously published research.

BUY Based on a current 12-month view of total shareholder return (change in share price from current price + projected dividend yield), we expect a positive return

of over 10%.

HOLD Based on a current 12-month view of total shareholder return, we expect the return to range between +10% to -10%.

SELL Based on a current 12-month view of total shareholder return we expect a negative return of over 10%.

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Email: research@masonhk.com