Yum Cha 飲 茶 · 2015-09-01 · RMB/USD 6.4 (0.0) DATA RELEASES DUE THIS WEEK Aug 19 MNI August...
Transcript of Yum Cha 飲 茶 · 2015-09-01 · RMB/USD 6.4 (0.0) DATA RELEASES DUE THIS WEEK Aug 19 MNI August...
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Yum Cha 飲 茶 August 19, 2015
Source: Bloomberg
INDICES Closing DoD%
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Crude Oil, BRENT(US$/BBL) 48.8 0.1
HIBOR, 3-M 0.4 (0.4)
SHIBOR, 3-M 3.1 0.1
RMB/USD 6.4 (0.0)
DATA RELEASES DUE THIS WEEK
Aug 19 MNI August Business Indicator
Aug 23 Caixin China PMI Mfg
RESEARCH NOTES CHINA LONGYUAN [0916.HK; HK$8.98; BUY] - Longyuan’s net profit in 1H15 jumped 62%
year-on-year (YoY) to RMB2,207m. Adjusting for one-off items (mainly equity investment
gains), core net profit came in at RMB2,167m (+50% YoY). The strong earnings growth was
driven by good control on overall operating expenses, reduction on coal consumption cost (-
15% YoY) as well as net finance expense (-11% YoY). We see potential upside to our earnings
estimates after the results. In additional to fast growing installation, we believe further easing
monetary policy will help drive down finance expense going forward. Reiterate BUY with un-
changed DCF-based TP of HK$11.00.
ZCSR [3898.HK; HK$54.2; BUY] Net income beats market expectation by ~15% and up
over 40% YoY in 1H15 due to improvement of GPM as a result of effective cost control.
Strong growth in urban rail segment offset decline in MUs segment. Management expects
MUs order delivery to pick up in 2H15 and retains a full year segment growth of 15-20%
YoY. We revise up our net income estimation with a target price from HK$ 74.80 to HK$
78.23. Mass production of IGBT and marine engineering businesses will be long term
growth drivers besides addressable market enlargement by order taking from CNR. Reit-
erate BUY.
O-NET [0877.HK; HK$1.95; NOT-RATED] - O-Net’s 1H15 net profit attributable to equity hold-
ers surged 2.3x to HK$25.9m, in line with previous profit alert. Reported revenue was up 30.1%
YoY to HK$520.5m in 1H15, mainly due to the organic growth in optical networking business,
diversification into automation and sensing business, new revenue source from coating service,
as well as the contribution from ITF Technologies Inc. Management expects strong operating
performance to continue in 2H15, due to its sustained launch and ensuing mass production of
new products that gradually contribute to the revenue growth. O-Net is one of HK-listed optical
component plays with a strong global presence. Current valuation of O-Net is higher than its HK
-listed telecommunications equipment makers & optical fiber peers, but is somewhat reasona-
ble considering its stronger growth in operating performance and strong R&D capability.
CHINA MEDICAL SYSTEM [0867.HK; HK$9.46; BUY] - Recent share price weakness should
mainly attribute to the uncertainties about the policy risk of distribution model and new product
prospects. The solid 1H15 performance should ease some concerns about the growth prospect
of CMS. We believe the company will expand with stable growth from core products and in-
creasing contribution from newly acquired products. We forecast 2014-2017E EPS CAGR of
28% for the company and we believe the current valuation of 17.1x 2015E EPS is undemanding
and therefore, maintain BUY with new target price of HK$14.40, reflecting a lower RMB:HK$
exchange rate assumption.
TUL [3933.HK; HK$4.58; BUY] - In spite of ASP pressure, intermediate products of TUL still
showed strong growth momentum and demand due to the exit of competitors. We expect this
momentum to continue with its upstream business. On the other hand, the promising insulin
business will continue to undergo rapid expansion with the expected completion of drug tender
in 2H15. 1H15 results is in line with our expectations and we maintain our 2014-2017E core
EPS CAGR forecast of 22.5%. The company is trading at 2016E PER of 8.9x. 1H15 perfor-
mance should improve sentiment towards the company and trigger a round of re-rating. We
maintain BUY on the company with target price (HK$7.25) unchanged.
CHINA LESSO [2128.HK; HK$5.80; BUY] - After delivering solid results in 2H14 and 1H15, we
believe China Lesso has laid a solid foundation for re-rating. Striking a balance between volume
and profitability, we expect the company to achieve mild double-digit earnings growth in 2015E
and 2016E. We understand that some investors have concerns about whether the good results
are sustainable in 2H15. Based on 1H15 results of some A-share listed peers, aggressive price
competition among larger players seems unlikely to happen, in our view. We raise our FY15E/
FY16E EPS by 11%/7% to reflect the better-than-expected pricing power. We reiterate our BUY
call and raise our target price from HK$8 to HK$8.1 based on 10x 2016E (Our new RMB:HK$
assumption for end-2016 is lowered from 1.25 to 1.18.).
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China Longyuan Power Group [0916.HK]
Longyuan’s net profit in 1H15 jumped 62% YoY to RMB2,207m. Adjusting for one-off items (mainly equity investment gains), core net profit came in at RMB2,167m (+50% YoY). The strong earnings growth was driven by good con-trol on overall operating expenses, reduction on coal consumption cost (-15% YoY) as well as net finance expense (-11% YoY). We see potential upside to our earnings estimates after the results. In additional to fast growing installation, we believe further easing monetary policy will help drive down finance expense going forward. Reiterate BUY with unchanged DCF-based TP of HK$11.00.
Revenue growth largely in line with expectation. Revenue increased by
13% YoY in 1H15, of which wind power revenue grew 20% YoY, versus a gross wind power generation growth of 22% YoY. Wind utilization increased by 4.7% YoY to 1,085 hours. On-grid tariff for wind power slightly increased by RMB0.005 to RMB0.588/kwh. Coal power revenue increased by 2% YoY, less than the gross coal power generation growth of 4% due to lower tariff.
Surprise on the cost side. EBIT increased by 23% YoY in 1H15, higher
than the revenue growth due to (1) operating leverage driven by increase in wind utilization hours, (2) good control on material cost and repair cost which up only 4% and 8% respectively, as well as (3) coal cost reduction (-15%). On the other hand, net finance cost dropped 11% YoY to RMB1.4bn, mainly due to: (1) higher finance income helped by gain on securities; (2) lower fi-nance expense due to lower interest rate and higher capitalized interest ex-pense.
Strong cash flow. Operating cash flow in 1H15 increased by 44% YoY to
RMB8,954m, more than covers investing cash flow of RMB7,289m.
Analyst meeting today at 4:15 p.m. (HK time). Venue: Harbour View Ball-
room, 4/F, Four Seasons Hotel.
Risks: (1) Further change in tariff; (2) capacity ramp-up risk; (3) rebound of
grid curtailment rate; (4) delay in power transmission line construction.
Wayne Fung, CFA —Analyst
(852) 3698-6319
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
Wind Power Sector Net profit +62% YoY in 1H15 better than expectation; Further
easing policy to drive finance cost reduction; Reiterate BUY
BUY (Unchanged)
Close: HK$8.98 (Aug 18, 2015)
Target Price: HK$11.00 (+22%)
Share Price Performance
Market Cap US$9,306m
Shares Outstanding 8,036.4m
Auditor KPMG
Free Float 35%
52W range HK$7.12-11.36
3M average daily T/O US$10m
Major Shareholding Guodian Group
(58.4%)
Aug 19, 2015
Key financials (RMB m) 2012 2013 2014 2015E 2016E
Revenue 17,288 19,123 18,207 20,430 22,386
Change (YoY) 7.0% 10.6% -4.8% 12.2% 9.6%
Other income 1,296 432 437 469 647
Adjusted EBIT 4,749 5,568 6,121 7,836 8,891
Change (YoY) 26.1% 17.2% 9.9% 28.0% 13.5%
Recurring net profit 1,788 2,404 2,633 3,368 4,124
Change (YoY) 5.6% 34.4% 9.5% 27.9% 22.5%
Recurring EPS 0.239 0.299 0.328 0.419 0.513
Change (YoY) 5.4% 25.1% 9.5% 27.9% 22.5%
PER (x) 30.5 23.7 21.8 17.3 14.1
Dividend yield 0.9% 0.7% 0.8% 1.0% 1.3%
PBR (x) 1.8 1.8 1.7 1.6 1.5
EV/EBITDA (x) 12.3 11.6 10.4 8.6 7.6
Net debt/equity 146.9% 144.4% 165.1% 162.0% 157.7%
Recurring ROE 6.5% 8.0% 8.2% 9.8% 10.9%
Sources: Company, CGIHK Research estimates
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Figure 1: Longyuan 1H15 results
Note: 1H14 figures here are not restated
Income Statement (RMB m) 1H13 1H14 1H15 YoY chg
Revenue by sector (ex. Service concession construction revenue) 9,155 8,966 10,160 13%
Wind power 5,119 5,610 6,713 20%
Coal power 3,764 2,999 3,056 2%
Others 405 500 739 48%
Intersegment revenue (134) (143) (348) 143%
Revenue by nature 9,654 8,987 10,541 17%
Sales of electricity 7,254 7,502 8,577 14%
Sales of steam 139 125 122 -2%
Service concession construction revenue 499 20 381 1762%
Sales of electricity equipment 26 40 107 165%
Sales of coal 1,520 1,141 1,120 -2%
Others 216 158 233 48%
Other net income 210 217 210 -3%
Government grants
CERs and VERs income 38 0 0 n/a
Others 176 192 201 5%
Rental income from investment ppt 3 3 3 25%
Net (loss)/income from investment ppt/disposal of PP&E (16) 1 0 -64%
Gain on disposal of associate/subsidary 5 0 0 n/a
Others 4 22 6 -75%
Operating expenses (4,205) (3,209) (3,644) 14%
Coal consumption (1,084) (893) (761) -15%
Coal sales costs (1,445) (1,077) (1,060) -1%
Service concession construction costs (499) (20) (381) 1762%
Personnel costs (445) (495) (548) 11%
Material costs (164) (180) (188) 4%
Repairs & maintenance (221) (190) (206) 8%
Administrative expenses (125) (115) (134) 17%
Others (220) (238) (366) 54%
EBITDA 5,659 5,995 7,107 19%
Adjusted EBITDA 5,449 5,778 6,897 19%
D&A (2,086) (2,406) (2,683) 11%
EBIT 3,573 3,588 4,424 23%
Adjusted EBIT 3,364 3,371 4,214 25%
Net finance expenses (1,307) (1,579) (1,409) -11%
Finance income 332 63 132 109%
Finance expenses (1,639) (1,642) (1,541) -6%
Share of profit/(loss) of JV and associates 23 167 224 34%
Pretax profit 2,290 2,176 3,238 49%
Income tax (362) (287) (363) 27%
After tax profit 1,927 1,890 2,875 52%
Minority interest (463) (524) (668) 28%
Net profit 1,464 1,365 2,207 62%
Recurring net profit 1,334 1,440 2,167 50%
Recurring EPS (RMB) 0.166 0.179 0.270 50%
EPS (RMB) 0.182 0.170 0.275 62%
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Figure 2: Key Assumptions
Sources: Company, CGIHK Research estimates
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Wind power
Capacity installed (MW)
Consolidated 587 1,298 2,503 4,504 6,556 8,598 10,544 11,910 13,543 15,343 17,143
Change YoY - 121.3% 92.8% 79.9% 45.6% 31.1% 22.6% 13.0% 13.7% 13.3% 11.7%
Annual addition 712 1,205 2,001 2,053 2,042 1,945 1,366 1,633 1,800 1,800
Average 254 653 1,553 2,718 4,577 6,592 8,474 10,388 11,661 13,402 15,202
Change YoY - 157.0% 137.7% 75.1% 68.4% 44.0% 28.5% 22.6% 12.2% 14.9% 13.4%
Consolidated power generation (Gwh)
Gross 562 1,514 3,655 6,211 10,094 13,355 16,820 21,929 23,088 27,749 32,153
Change YoY - 169.5% 141.5% 69.9% 62.5% 32.3% 25.9% 30.4% 5.3% 20.2% 15.9%
Net 529 1,419 3,407 5,684 9,442 12,562 16,027 20,565 22,131 26,362 30,545
Change YoY - 168.0% 140.1% 66.8% 66.1% 33.0% 27.6% 28.3% 7.6% 19.1% 15.9%
Average utilization hours 2,211 2,317 2,354 2,268 2,217 2,026 1,985 2,111 1,980 2,071 2,115
Change YoY - 4.8% 1.6% -3.7% -2.2% -8.6% -2.0% 6.3% -6.2% 4.6% 2.1%
Weighted average on-grid tariff (Rmb/kwh, Incl-VAT) 0.672 0.598 0.561 0.567 0.572 0.578 0.582 0.583 0.585 0.586 0.583
Weighted average on-grid tariff (Rmb/kwh, ex-VAT) 0.574 0.511 0.480 0.485 0.489 0.494 0.498 0.498 0.500 0.501 0.498
Change YoY - -11.0% -6.2% 1.1% 0.8% 1.0% 0.8% 0.1% 0.3% 0.2% -0.5%
Coal power
Capacity installed (MW)
Consolidated 2,425 2,425 1,875 1,875 1,875 1,875 1,875 1,875 1,875 1,875 1,875
Change YoY - 0.0% -22.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Average 2,425 2,425 2,103 1,875 1,875 1,875 1,875 1,875 1,875 1,875 1,875
Change YoY - 0.0% -13.3% -10.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Consolidated power generation (Gwh)
Gross 12,809 12,442 12,670 10,910 11,353 11,749 11,231 11,064 9,641 10,313 10,313
Change YoY - -2.9% 1.8% -13.9% 4.1% 3.5% -4.4% -1.5% -12.9% 7.0% 0.0%
Net 11,980 11,638 11,863 10,207 10,670 10,672 10,497 10,330 8,966 9,591 9,591
Change YoY - -2.9% 1.9% -14.0% 4.5% 0.0% -1.6% -1.6% -13.2% 7.0% 0.0%
Average Utilization hours 5,282 5,131 6,024 5,819 6,055 6,266 5,990 5,901 5,142 5,500 5,500
Change YoY - -2.9% 17.4% -3.4% 4.1% 3.5% -4.4% -1.5% -12.9% 7.0% 0.0%
Weighted average on-grid tariff (Rmb/kwh, Incl-VAT) 0.371 0.369 0.403 0.421 0.423 0.433 0.452 0.448 0.439 0.425 0.410
Weighted average on-grid tariff (Rmb/kwh, ex-VAT) 0.317 0.315 0.345 0.360 0.362 0.370 0.386 0.383 0.375 0.363 0.350
Change YoY - -0.6% 9.3% 4.4% 0.5% 2.4% 4.4% -0.9% -2.0% -3.2% -3.5%
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Figure 3: Longyuan income statement projection
Note: Adjusted EBITDA and adjusted EBIT exclude "other net income"
Net interest coverage = EBITDA/net finance expenses
Sources: Company, CGIHK Research estimates
Income Statement (RMB m) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Revenue by sector (ex. Service concession construction revenue) 6,354 8,861 12,762 15,366 16,770 18,456 17,980 20,430 22,386
Wind power 1,638 2,754 4,620 6,212 7,981 10,272 11,133 13,205 15,218
Coal power 4,373 5,873 7,714 8,625 8,052 7,525 6,156 6,281 6,158
Others 455 563 695 740 1,007 1,099 1,196 1,464 1,530
Intersegment revenue (112) (329) (267) (210) (270) (441) (505) (520) (520)
Revenue by nature 8,555 9,744 14,213 16,159 17,288 19,123 18,207 20,430 22,386
Sales of electricity 5,752 6,467 8,544 10,270 12,404 14,686 14,913 17,313 19,259
Sales of steam 121 230 311 319 274 252 227 226 218
Service concession construction revenue 2,200 883 1,450 793 519 667 228 0 0
Sales of electricity equipment 264 128 262 289 232 106 130 130 130
Sales of coal 0 1,648 3,276 4,109 3,395 3,010 2,388 2,388 2,388
Others 218 388 369 378 464 402 322 373 390
Other net income 390 574 986 1,271 1,296 432 437 469 647
Government grants
CERs and VERs income 118 210 392 727 742 54 0 0 0
Others 208 327 362 400 402 346 383 459 636
Rental income from investment ppt 25 22 18 15 11 9 9 10 11
Net (loss)/income from investment ppt/disposal of PP&E 21 4 (3) 112 8 6 (4) 0 0
Gain on disposal of associate/subsidary 0 0 187 0 0 5 29 0 0
Others 19 10 29 17 133 12 21 0 0
Operating expenses (6,441) (5,869) (8,882) (9,549) (8,842) (9,163) (7,085) (6,962) (7,161)
Coal consumption (3,128) (2,290) (2,737) (2,877) (2,627) (2,226) (1,741) (1,608) (1,518)
Coal sales costs 0 (1,553) (3,046) (3,897) (3,197) (2,860) (2,247) (2,269) (2,269)
Service concession construction costs (2,200) (883) (1,450) (793) (519) (667) (228) 0 0
Personnel costs (384) (540) (662) (769) (925) (1,115) (1,225) (1,282) (1,457)
Material costs (295) (150) (278) (328) (479) (398) (344) (486) (446)
Repairs & maintenance (87) (108) (184) (254) (305) (521) (450) (507) (589)
Administrative expenses (107) (148) (219) (294) (402) (396) (378) (358) (390)
Others (240) (197) (305) (338) (390) (980) (474) (453) (493)
EBITDA 2,504 4,449 6,317 7,882 9,742 10,391 11,559 13,937 15,872
Adjusted EBITDA 2,113 3,875 5,331 6,610 8,446 9,959 11,122 13,468 15,225
D&A (1,083) (1,590) (2,236) (2,845) (3,697) (4,391) (5,001) (5,632) (6,334)
EBIT 1,421 2,858 4,081 5,036 6,045 6,000 6,559 8,305 9,538
Adjusted EBIT 1,031 2,285 3,095 3,765 4,749 5,568 6,121 7,836 8,891
Net finance expenses (857) (1,020) (1,098) (1,487) (2,518) (2,531) (2,951) (3,861) (4,176)
Finance income 146 51 79 400 143 540 198 119 52
Finance expenses (1,003) (1,071) (1,177) (1,887) (2,660) (3,071) (3,149) (3,980) (4,228)
Share of profit/(loss) of JV and associates 53 105 228 60 140 60 454 612 632
Pretax profit 616 1,944 3,211 3,609 3,667 3,529 4,062 5,056 5,994
Income tax (2) (296) (441) (305) (342) (561) (510) (683) (839)
After tax profit 614 1,647 2,770 3,304 3,325 2,968 3,551 4,374 5,155
Minority interest (276) (753) (751) (667) (732) (919) (993) (1,006) (1,031)
Net profit 337 894 2,019 2,638 2,593 2,049 2,558 3,368 4,124
Recurring net profit 199 679 1,461 1,693 1,788 2,404 2,633 3,368 4,124
Exceptional gain/(loss) 139 215 558 945 805 (354) (75) 0 0
Recurring EPS (RMB) 0.04 0.13 0.20 0.23 0.24 0.30 0.33 0.42 0.51
EPS (RMB) 0.07 0.17 0.27 0.35 0.35 0.26 0.32 0.42 0.51
DPS (RMB) 0.00 0.00 0.05 0.07 0.07 0.05 0.06 0.08 0.09
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Figure 4: Longyuan growth rate and margins
Sources: Company, CGIHK Research estimates
Growth rates (YoY) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Revenue by sector (ex. Service concession construction revenue) 30.0% 39.5% 44.0% 20.4% 9.1% 10.1% -2.6% 13.6% 9.6%
Wind power 125.4% 68.1% 67.8% 34.4% 28.5% 28.7% 8.4% 18.6% 15.2%
Coal power 8.8% 34.3% 31.3% 11.8% -6.6% -6.5% -18.2% 2.0% -2.0%
Others 92.7% 23.7% 23.4% 6.5% 36.0% 9.2% 8.9% 22.4% 4.5%
Intersegment revenue 22.7% 193.0% -19.0% -21.2% 28.4% 63.3% 14.6% 3.0% 0.0%
Revenue by nature 22.9% 13.9% 45.9% 13.7% 7.0% 10.6% -4.8% 12.2% 9.6%
Sales of electricity 30.4% 12.4% 32.1% 20.2% 20.8% 18.4% 1.5% 16.1% 11.2%
Sales of steam 33.3% 91.1% 35.0% 2.6% -14.3% -7.7% -10.2% -0.1% -3.5%
Service concession construction revenue 6.1% -59.9% 64.3% -45.3% n/a n/a n/a n/a n/a
Sales of electricity equipment 162.0% -51.5% 104.5% 10.5% -19.8% -54.5% 23.1% 0.0% 0.0%
Sales of coal n/a n/a 98.8% 25.4% -17.4% -11.4% -20.7% 0.0% 0.0%
Others -23.8% 78.1% -4.8% 2.4% 22.8% -13.4% -20.0% 15.8% 4.8%
EBITDA 32.0% 77.7% 42.0% 24.8% 23.6% 6.7% 11.2% 20.6% 13.9%
Adjusted EBITDA 22.3% 83.3% 37.6% 24.0% 27.8% 17.9% 11.7% 21.1% 13.0%
EBIT 47.0% 155.6% 187.3% 76.2% 48.1% 19.1% 8.5% 38.4% 45.4%
Adjusted EBIT 8.5% 121.7% 35.5% 21.6% 26.1% 17.2% 9.9% 28.0% 13.5%
Pretax profit -20.3% 215.5% 65.2% 12.4% 1.6% -3.8% 15.1% 24.5% 18.5%
After tax profit -13.8% 168.3% 68.2% 19.3% 0.6% -10.7% 19.7% 23.1% 17.9%
Net profit 56.9% 165.0% 125.8% 30.7% -1.7% -21.0% 24.8% 31.7% 22.5%
Recurring net profit -7.7% 242.1% 115.1% 15.9% 5.6% 34.4% 9.5% 27.9% 22.5%
EPS n/a 157.9% 55.4% 30.7% -1.9% -26.4% 24.8% 31.7% 22.5%
Recurring EPS n/a 232.9% 48.0% 15.9% 5.4% 25.1% 9.5% 27.9% 22.5%
Margins 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
EBITDA margin 39.4% 50.2% 49.5% 51.3% 58.1% 56.3% 64.3% 68.2% 70.9%
Adjusted EBITDA margin 33.3% 43.7% 41.8% 43.0% 50.4% 54.0% 61.9% 65.9% 68.0%
EBIT margin 22.4% 32.3% 32.0% 32.8% 36.0% 32.5% 36.5% 40.7% 42.6%
Adjusted EBIT margin 16.2% 25.8% 24.3% 24.5% 28.3% 30.2% 34.0% 38.4% 39.7%
Pretax profit margin 9.7% 21.9% 25.2% 23.5% 21.9% 19.1% 22.6% 24.7% 26.8%
After tax profit margin 9.7% 18.6% 21.7% 21.5% 19.8% 16.1% 19.8% 21.4% 23.0%
Net margin 5.3% 10.1% 15.8% 17.2% 15.5% 11.1% 14.2% 16.5% 18.4%
Recurring net margin 3.1% 7.7% 11.4% 11.0% 10.7% 13.0% 14.6% 16.5% 18.4%
Net Interest coverage 2.9 4.4 5.8 5.3 3.9 4.1 3.9 3.6 3.8
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Figure 5: Longyuan balance sheet projection
Sources: Company, CGIHK Research estimates
Balance Sheet (RMB m) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Non current assets
PP&E 24,290 37,305 50,642 64,967 73,352 79,594 88,307 97,132 105,685
Investment properties 172 133 101 98 76 20 5 5 5
Lease prepayments payments 557 741 876 1,215 1,417 1,657 1,873 1,873 1,873
Intangible assets 5,083 6,086 7,661 8,163 8,322 8,684 8,530 8,101 7,673
Goodwill 0 0 12 12 12 12 12 12 12
Investment in associates and JV 527 799 1,315 1,554 2,127 2,297 3,602 4,215 4,847
Other assets 350 2,319 3,459 4,962 4,553 4,482 6,282 6,507 6,408
Deferred tax assets 190 205 206 181 194 162 155 155 155
31,169 47,587 64,271 81,151 90,054 96,908 108,765 117,999 126,657
Current assets
Inventories 279 333 632 926 816 753 1,017 700 1,066
Trade and bill receivables 1,241 2,181 3,474 5,430 7,998 6,708 6,411 6,463 7,030
Prepayments and other current assets 1,805 853 1,502 2,899 3,155 2,365 4,072 4,072 4,072
Restricted deposits 500 492 245 32 232 725 440 440 440
Cash 1,055 16,503 4,089 3,708 5,138 2,715 2,389 2,365 1,110
Others 1 5 419 478 448 500 425 425 425
4,880 20,367 10,362 13,473 17,786 13,766 14,753 14,463 14,142
Total assets 36,049 67,954 74,634 94,624 107,840 110,674 123,518 132,463 140,800
Current liabilities
Borrowings 4,686 17,087 17,200 19,078 26,170 24,680 36,070 37,670 40,270
Trade and bill payable 2,729 1,943 1,515 1,597 1,261 2,142 1,021 1,535 1,133
Obligations under finance lease 0 0 0 0 0 0 0 0 0
Other payables 1,918 4,521 6,004 9,004 8,525 9,753 9,039 8,703 9,021
Others 80 140 196 158 119 101 118 118 118
9,413 23,692 24,915 29,836 36,075 36,676 46,248 48,027 50,542
Non current liabilities
Borrowings 17,345 16,219 19,975 31,828 32,482 32,961 33,762 37,162 38,562
Deferred income 2,145 2,268 2,225 1,993 1,903 1,876 1,790 1,662 1,535
Others 73 95 104 642 958 1,120 868 868 868
19,564 18,582 22,304 34,462 35,343 35,957 36,421 39,693 40,965
Equity
Paid in capital 3,163 7,464 7,464 7,464 8,036 8,036 8,036 8,036 8,036
Reserves 712 14,436 15,810 18,444 21,393 22,872 25,021 27,909 31,426
Attributable to equity owner 3,875 21,900 23,275 25,909 29,429 30,908 33,057 35,945 39,463
Minority interests 3,198 3,780 4,139 4,417 6,992 7,132 7,792 8,798 9,829
7,073 25,680 27,414 30,325 36,422 38,040 40,849 44,743 49,292
Total equity and liabilities 36,049 67,954 74,634 94,624 107,840 110,674 123,518 132,463 140,800
BVPS (RMB) - 2.93 3.12 3.47 3.94 3.85 4.11 4.47 4.91
8
Figure 6: Longyuan cash flow projection and key ratios
Sources: Company, CGIHK Research estimates
Cash Flow Statement (RMB m) 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Pretax profit 616 1,944 3,211 3,609 3,667 3,529 4,062 5,056 5,994
Income tax (45) (236) (340) (371) (471) (566) (522) (683) (839)
D&A 1,083 1,590 2,236 2,845 3,697 4,391 5,001 5,632 6,334
Interest expense 932 1,024 1,088 1,677 2,551 2,810 2,971 3,980 4,228
Interest income (37) (33) (58) (110) (60) (60) (84) (119) (52)
Share of profit / (loss) of JV and associates (53) (105) (228) (60) (140) (60) (454) (612) (632)
Dividend income (47) (16) (1) (62) (46) (56) (55) 0 0
Change in working capital 360 (83) (1,813) (1,633) (2,370) 3,085 1,976 316 (1,046)
Others 30 1 (74) (272) 169 538 (26) 0 0
Operating cash flow 2,840 4,085 4,021 5,624 6,998 13,611 12,868 13,570 13,986
Purchase/(disposal) of PP&E and intangible assets (11,578) (16,121) (17,770) (13,048) (13,392) (10,275) (18,206) (13,860) (14,040)
Acquisition of subsidiaries/disposal of subsidiaries 0 8 (65) (493) (847) (197) (24) 0 0
Investment in/(disposal of) financial assets, JV & associates (253) (340) (138) (578) (912) (175) (867) 0 0
Dividend received 96 30 45 161 91 218 67 0 0
Interest received 48 32 58 124 87 86 105 119 52
Others 602 1,235 170 (199) 855 45 (1,921) 0 0
Investing cash flow (11,086) (15,156) (17,700) (14,034) (14,117) (10,299) (20,848) (13,741) (13,988)
Net proceeds from issuance of shares 0 17,022 0 0 2,295 0 0 0 0
Capital contribution - equity owner 1,500 492 126 72 30 41 186 0 0
Capital contribution - minority interest 451 0 0 0 0 0 0 0 0
Proceeds from /(repayment of) borrowings 7,922 10,952 3,677 10,506 8,067 (1,272) 12,028 5,000 4,000
Proceeds from senior perpetual securities 0 0 0 0 2,476 0 0 0 0
Interest paid (1,119) (1,567) (1,319) (2,094) (3,025) (3,251) (3,376) (4,374) (4,647)
Dividend paid to equity owner 0 0 (632) (403) (515) (512) (382) (480) (606)
Others (310) (325) (539) (444) (472) (668) (801) 0 0
Financing cash flow 8,444 26,575 1,313 7,637 8,856 (5,662) 7,655 146 (1,253)
Net change in cash 198 15,505 (12,365) (773) 1,736 (2,350) (326) (24) (1,255)
Valuation
PER (recurring) (x) 200.1 59.8 39.7 32.7 30.5 23.7 21.8 17.3 14.1
Dividend yield 0.0% 0.0% 0.7% 0.9% 0.9% 0.7% 0.8% 1.0% 1.3%
PBR (x) - 2.7 2.5 2.1 1.8 1.8 1.7 1.6 1.5
EV/EBITDA (x) 48.0 27.0 19.0 15.2 12.3 11.6 10.4 8.6 7.6
Ratios
Net margin 5.3% 10.1% 15.8% 17.2% 15.5% 11.1% 14.2% 16.5% 18.4%
ROE 5.9% 5.3% 6.5% 6.9% 6.5% 8.0% 8.2% 9.8% 10.9%
ROA 0.7% 1.3% 2.0% 2.0% 1.8% 2.2% 2.2% 2.6% 3.0%
Net debt / Equity 297% 65% 121% 156% 147% 144% 165% 162% 158%
Current ratio 0.52 0.86 0.42 0.45 0.49 0.38 0.32 0.30 0.28
9
ZCSR [3898.HK]
Steve Wong
(852) 3698-6391
Wong Chi Man - Head of Research
(852) 3698-6317
Capital Goods Solid 1H15 results beat market expectation, reiterate BUY
BUY (Unchanged)
Close: HK$ 54.20 (Aug 18, 2015)
Target Price: HK$78.23 (44.3%)
Share Price Performance
Market Cap US$8,168m
Shares Outstanding 1,176m
Auditor Ernst & Young
Free Float 48.06%
52W range HK$75.00-26.10
3M average daily T/O US$27m
Major Shareholding CRRC [1766 HK]
(51.94%)
August 19, 2015
Net income beats market expectation by ~15% and up over 40% YoY in 1H15 due to im-
provement of GPM as a result of effective cost control. Strong growth in urban rail segment
offset decline in MUs segment. Management expects MUs order delivery to pick up in
2H15 and retains a full year segment growth of 15-20% YoY. We revise up our net income
projection with a target price from HK$ 74.80 to HK$ 78.23. Mass production of IGBT and
marine engineering businesses will be long term growth drivers besides addressable mar-
ket enlargement by order taking from CNR. Reiterate BUY.
1H Results beat expectation. Revenue was up 10.5% YoY to RMB 5.7bn, in line
with our expectation. The revenue growth was mainly due to strong order delivery for
subway products, which was up 66.1% YoY to RMB 837m in 1H15. Order delivery for
MUs product declined by 15% YoY in 1H15, but is expected to pick up in 2H15. Man-
agement retains full year expectation of 15-20% YoY growth in FY15. Net income was
up 42.4% YoY to RMB1.2bn, beating market and our expectation by ~15%, thanks to
improvement of GPM. GPM was up 3.7ppt YoY to 39.2% in 1H15.
Profitability improvement. ZCSR’s GPM trended up from 33.2% in FY12 to 39.2% in
1H15. Management attributed to: 1) improvement of production technology; 2) stream-
lining internal cost structure; and 3) economies of scales lowing unit fixed cost. Con-
sidering these structural changes of production capability, we believe unit production
cost to be sustained in future. Nevertheless, management hints that improvement of
ZCSR’s profitability may trigger price cut to customers. A drop in ASP will drag down
profit margin in 2H15, and we estimate full year GPM will be back to the level in FY14.
Reiterating smooth process of getting order from CNR. Management reiterates
process of getting order from CNR to be smooth. ZCSR has started developing prod-
ucts for CNR. Considering that development of new products takes one to two years,
ZCSR will likely to get the first locomotive/MUs order from CNR in 2016. We expect
the assets consolidation under CRRC Group to speed up upon completion of merger
of CNR Group and CSR Group in early August.
Reiterate BUY. The solid 1H results coming from profitability improvement reflects strong
execution capability of the company. We revise up our FY15-16E net income forecasts by
12.7% and 8.4% because of GPM improvement. We retain our BUY rating on ZCSR and
raise our target price from HK$ 74.80 to HK$ 78.23, representing 25x of FY15/16E PER, or
the upper ceiling of historical PER band. Our earnings projection is yet to reflect potential
earnings growth on mass production of IGBT (one of key component on rolling stock electri-
cal system) and marine engineering businesses segment from acquisition of SDM complet-
ed in Q2 2015.
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Turnover (RHS) Price (LHS)
Sources: Company, CGIHK Research estimates
FY ended Dec 31 FY12A FY13A FY14A FY15E FY16E
Revenue (RMBm) 7,186 8,781 12,576 15,405 18,232
Net Income (RMBm) 1,224 1,467 2,395 2,927 3,305
EPS (RMB) 1.129 1.332 2.038 2.491 2.813
Growth (% YoY) 18.03 52.98 22.22 12.90
P/E (x) 34.47 22.53 18.44 16.33
BVPS (RMB) 5.705 7.673 9.354 11.445 13.760
P/B (x) 5.99 4.91 4.01 3.34
DPS(RMB) 0.350 0.373 0.400 0.498 0.563
Yield (%) 0.81 0.87 1.08 1.22
ROAE (%) 21.29 19.30 23.94 23.95 22.32
Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash
10
Figure 1: 1H15 financial data breakdown
Sources: Company data, CGIHK Research estimates
Figure 2: Major changes of our forecast
Sources: CGIHK Research estimates
Finanancial summary 1H14 2H14 FY14 1H15 2H15E FY15E 1H15 FY15E
(% YoY) (% YoY)
Operating revenue (RMBm) 5,180 7,496 12,676 5,723 9,810 15,533 10.48 22.54
Locomotives electrical systems 716 2,988 3,704 841 2,892 3,733 17.46 0.78
EMUs electrical systems 2,830 1,929 4,759 2,418 3,064 5,482 (14.56) 15.19
Metro electrical systems 504 704 1,208 837 907 1,744 66.07 44.36
Other train-borne systems 739 984 1,723 984 695 1,679 33.15 (2.57)
Electric components and others 391 891 1,282 643 2,253 2,896 64.45 125.90
Business taxes & surcharges (RMBm) 30 70 100 37 92 129 23.33 28.93
Revenue (RMBm) 5,150 7,426 12,576 5,686 9,719 15,405 10.41 22.49
Less: Operating cost (RMBm) 3,324 4,552 7,876 3,460 6,155 9,615 4.09 22.08
Gross Profit (RMBm) 1,826 2,874 4,700 2,226 3,564 5,790 21.91 23.19
GPM (%) 35.46 38.70 37.37 39.15 36.67 37.59 3.69ppt 0.21ppt
Selling cost (RMBm) 275 606 881 243 835 1,078 (11.64) 22.40
Administrative cost (RMBm) 494 855 1,349 679 967 1,646 37.45 22.04
SG&A (RMB mn) 769 1,461 2,230 922 1,803 2,725 19.90 22.18
SG&A-to-revenue (%) 14.93 19.67 17.73 16.22 18.55 17.69 1.28ppt -0.05ppt
Net profit (RMBm) 857 1,538 2,395 1,220 1,707 2,927 42.36 22.22
Net profit margin (%) 16.64 20.71 19.04 21.46 17.57 19.00 4.82ppt -0.04ppt
Total debt (RMBm) 60 42 984 1,032 1,540.00 2,356.19
Total cash and equivalents (RMBm) 2,729 2,680 3,930 3,001 44.01 11.98
Net debt (cash) (RMBm) (2,669) (2,638) (2,946) (1,969) 10.38 (25.35)
Total equity (RMBm) 9,656 11,171 11,926 13,638 23.51 22.09
Net gearing (%) (27.64) (23.61) (24.70) (14.44) N/A N/A
(RMBm) FY15E FY16E
Old New Change (%) Old New Change (%)
Operating revenue 15,675 15,533 (0.90) 18,546 18,385 (0.87)
Train-borne electrical systems 11,100 10,959 (1.27) 13,088 12,927 (1.23)
Other rolling stock components 1,679 1,679 - 1,944 1,944 -
Others 2,896 2,896 - 3,513 3,513 -
Less: business tax 130 129 (0.90) 154 153 (0.87)
Revenue 15,545 15,405 (0.90) 18,392 18,232 (0.87)
Gross profit 5,421 5,790 6.80 6,360 6,659 4.71
GPM (%) 34.58 37.27 2.69ppt 34.29 36.22 1.93ppt
Net income 2,598 2,927 12.66 3,049 3,305 8.37
Net margin (%) 16.58 18.84 2.27ppt 16.44 17.98 1.53ppt
EPS 2.211 2.491 12.66 2.595 2.813 8.37
11
Figure 3: Financial statements
Sources: CGIHK Research estimates
Consolidated income statement of ZCSR Consolidated balance sheet of ZCSR
FY Ended Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E As of Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E
Operating revenue 7,249 8,856 12,676 15,533 18,385 Current assets 7,203 10,813 14,166 16,507 20,575
Train-borne electrical systems 4,741 6,177 9,671 10,959 12,927 Cash and equivalent 2,319 3,136 2,680 3,001 5,481
Other rolling stock components 1,589 1,674 1,723 1,679 1,944 Trade and bill receivables 3,628 4,908 5,998 7,028 8,379
Others 919 1,005 1,282 2,896 3,513 Inventories 1,110 1,428 2,207 3,061 3,280
Other current assets 146 1,341 3,281 3,417 3,434
Less: business tax 63 75 100 129 153
Revenue 7,186 8,781 12,576 15,405 18,232 Non-current assets 2,454 2,586 2,759 4,403 4,636
PP&E 1,701 1,830 1,883 2,950 3,025
Less: COGS 4,803 5,695 7,876 9,615 11,573 Land use right 160 173 201 203 205
Gross profit 2,383 3,086 4,700 5,790 6,659 Total intangible assets 111 74 81 543 546
Long term investments 255 233 237 261 287
Less: SG&A 1,197 1,503 2,230 2,725 3,202 Other non-current assets 227 276 357 446 573
Add: Other income (loss) 131 81 191 280 309
Operating profit 1,317 1,664 2,661 3,346 3,767 Total assets 9,657 13,399 16,925 20,911 25,211
Add: Net fin income (cost) 9 27 43 (29) (20) Current liabilities 3,033 3,821 4,987 5,556 6,992
Add: JV, associate & others 78 13 51 50 55 Trade and bill payables 1,988 2,679 3,431 3,945 4,933
Pre-tax profit 1,404 1,704 2,755 3,367 3,801 Receipts in advance 292 388 588 509 889
Short term borrowings 41 31 4 82 91
Less: Income tax 179 238 363 438 494 Other current liabilities 712 723 964 1,020 1,079
Total net profit 1,225 1,466 2,392 2,929 3,307
Non-current liabilities 305 428 767 1,716 1,850
Less: Minority interests 1 (1) (3) 2 2 Long-term borrowings 28 52 37 949 1,044
Net income 1,224 1,467 2,395 2,927 3,305 Other non-current liabilities 277 376 730 767 806
EPS (RMB) 1.129 1.332 2.038 2.491 2.813
DPS (RMB) 0.350 0.373 0.400 0.498 0.563 Total liabilities 3,338 4,249 5,754 7,272 8,842
EBIT 1,395 1,677 2,712 3,395 3,821 Minority interests 135 134 180 190 201
EBITDA 1,542 1,837 2,980 3,708 4,132 Shareholders' equity 6,184 9,016 10,991 13,448 16,168
BVPS (RMB) 5.705 7.673 9.354 11.445 13.760
Consolidated cash flow statement of ZCSR Key ratios of ZCSR
FY ended Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E FY ended Dec 31 (RMBm) FY12A FY13A FY14A FY15E FY16E
Profit before tax 1,404 1,704 2,755 3,367 3,801 Sales mixed (%)
Depreciation and amortization 147 160 271 313 310 Train-borne electrical systems 65.40 69.75 76.29 70.55 70.31
Changes in working capital (21) (867) (957) (1,483) (253) Other rolling stock components 21.92 18.90 13.59 10.81 10.58
Financial cost 16 3 3 57 63 Others 12.68 11.35 10.11 18.64 19.11
Income tax paid (129) (513) (502) (451) (509)
Others (170) 239 487 153 35 Profit & loss ratios (%)
CF Operating 1,247 726 2,057 1,955 3,448 Gross margin 33.16 35.14 37.37 37.59 36.52
Net profit margin 17.03 16.71 19.04 19.00 18.13
CAPEX (382) (293) (335) (2,086) (390) Effective tax rate 12.75 13.97 13.18 13.00 13.00
Increase in investment (807) (1,101) (4,500) (24) (26)
Others 1,205 67 2,707 - - Growth (%)
CF Investing 16 (1,327) (2,128) (2,110) (416) Revenue 1.51 22.20 43.22 22.49 18.36
Gross profit (3.91) 29.50 52.30 23.19 15.01
Capital injection 10 1,776 52 - - EBIT (0.92) 20.22 61.72 25.20 12.54
Net debt financing (632) 28 (38) 991 103 EBITDA (0.06) 19.13 62.22 24.43 11.43
Dividend & interest paid (397) (382) (412) (467) (587) Net profit 3.38 19.85 63.26 22.22 12.90
Others - - - (47) (68)
CF Financing (1,019) 1,422 (398) 476 (552) Balance sheet ratios
Current ratio (x) 2.37 2.83 2.84 2.97 2.94
Net change in cash 244 821 (469) 321 2,480 Quick ratio (x) 2.01 2.46 2.40 2.42 2.47
Cash at the beginning 2,158 2,319 3,136 2,680 3,001 Cash ratio (x) 0.76 0.82 0.54 0.54 0.78
Time deposit & FX effect (83) (4) 13 - - Trade & bill receivables days 147 178 159 155 155
Cash at the end 2,319 3,136 2,680 3,001 5,481 Trade & bill payables days 127 150 142 140 140
Inventory turnover days 106 81 84 100 100
Total debt / equity ratio (%) 1.09 0.91 0.37 7.56 6.93
Net debt / equity ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash
Returns (%)
ROAE 21.29 19.30 23.94 23.95 22.32
ROAA 13.38 12.72 15.78 15.48 14.34
Payout ratio 31.05 28.02 19.62 20.00 20.00
12
Figure 4: Rolling forward PER and PER band of ZCSR Figure 5: Rolling forward PBR and PBR band of ZCSR
Sources: Bloomberg, CGIHK Research estimates Sources: Bloomberg, CGIHK Research estimates
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Figure 6: Revenue breakdown of ZCSR, 1H15
Sources: Company, CGIHK Research
13
COMPANY NEWS
Analyst: Mark Po
O-net Communications (Group) Limited [877.HK; HK$1.95; Not Rated] -
Strong 1H15 results attributable to diversification strategy and sustained product offerings launch
Market Cap: US$184.0m; Free Float: 31.87%; 3-months Average Daily Turnover: US$0.5m
The Company. O-Net Communications (Group) Limited (O-Net) is one of
the leading high-tech enterprises in China engages in optical networking,
business related to electronic cigarettes, coating services and machine
vision solutions. O-Net is among the top five global leading supplier for
Passive Optical Component (POC), with a 7.5% market share in 2014.
Total market size for POC was estimated to be US$1.35bn in 2013. It is the
No.1 global supplier for Free space optical isolators, with a 41% market
share, and No.3 global supplier for WDM (Wavelength Division
Multiplexing) and No.4 global supplier for EDFA (Erbium-Doped Fiber
Amplifier).
O-Net’s 1H15 net profit attributable to equity holders surged 2.3x to
HK$25.9m, in line with previous profit alert. Reported revenue was up
30.1% YoY to HK$520.5m in 1H15, mainly due to the organic growth in
optical networking business, diversification into automation and sensing
business, new revenue source from coating service, as well as the
contribution from ITF Technologies Inc.. Management expects strong
operating performance to continue in 2H15, due to its sustained launch and
ensuing mass production of new products that gradually contribute to
revenue growth.
The group continued to re-position its strategic focus from a sole telecom
passive component supplier to a high technology leader providing
advanced products and solutions for cloud data center, broadband and
wireless access markets. It has successfully launched an integrated
Coherent Receiver (100GbE active product) for telecommunications, and
the Active Optical Cable (AOC) and QSFP+BIDI (two 40GbE active
products) for data communication markets to target at leading supplier in
cloud data center market, while its effort in innovative WiFi solution provider
strengthens competitiveness in hyper-scale access market. Overall optical
networking business (including revenue from ITF) achieved solid revenue
growth of 15.5% YoY, with gross margin improving from 33.4% in 1H14 to
33.7% in 1H15. According to management, the telecommunications market
will continue to be driven by 100GbE demand while data centers continued
to be bright spot, 40GbE product is expected to also achieve good growth
in data-communication market.
O-Net is riding on ITF’s platform to successfully tap into industrial laser
business, as ITF is a leading supplier of material processing in fiber laser
market. Through acquisition, O-Net has entered the industrial laser
business to offer ultra-reliable fiber-optic components, such as fiber Bragg
grating and high-power fused components for fiber lasers markets. The
group’s new revenue source from this industrial laser business amounted to
HK$29.3m with 55.7% gross margin in 1H15. According to the group, as
fiber laser offers flexibility for operation at several wavelengths and allows
access to multiple markets-ranging from materials processing and laser
marking to sensor applications and laser spectroscopy, as well as medical
applications, 3D printing and digital projections, the fiber lasers market
therefore is experiencing the fastest growth rate among all other currently
available laser technologies. In addition, coating services business also
started to bear fruits. By leveraging its optical coating and processing
platform, O-Net generated new revenue source of HK$25.2m from its
coating services business in 1H15.
With positive market response for automation solutions to E-cigarettes, the
group’s revenue from automation and sensing business surged by 43.8%
August 19, 2015
Source: Bloomberg, Company Data, CGIHK
[O-Net Communications (Group) Limited]
YoY to HK$19.3m. China’s automation industry is estimated to be
worth ~US$100bn, while 2014-2019 CAGR for in domestic machine
vision and sensors market is estimated to be ~17.7%, especially
under the new national industry directive of “Made-in-China 2025”.
As one of the earliest providers of Industry 4.0 components, the
group already launched a series of machine vision and fiber sensing
products to seize this opportunities.
Regarding the issue of Canada government’s intervention on the
acquisition of ITF Technologies Inc., management has already made
formal discussion with local government to facilitate the progress and
is in active negotiation towards a possible solution. Market concerns
will be relieved once the issue gets resolved.
Our view. O-Net is one of HK-listed optical component plays with a
strong global presence. Current valuation of O-Net is higher than its
HK-listed telecommunications equipment makers & optical fiber
peers, but is somewhat reasonable considering its stronger growth in
operating performance and strong R&D capability.
Catalyst. Accelerated qualification for new products from major
customers, increased spending of Internet giants for data center,
increasing policy support on industry, increasing IR activities.
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Aug14 Oct14 Dec14 Feb15 Apr15 Jun15
(HK$ million)(HK$)
Turnover (RHS) Price (LHS)
Key Financials
(in HKD m)2011 2012 2013 2014
Rev enue 669.4 727.4 661.5 831.3
Gross Prof it 299.8 300.4 211.8 288.9
Gross Margin % 44.8 41.3 32.0 34.8
Net Prof it 133.4 97.8 13.4 43.3
Net Margin % 19.9 13.4 2.0 5.2
EPS (Basic) 0.16 0.13 0.02 0.06
ROE (%) 10.2 7.1 1.0 3.2
Div idend Yield (%) 1.54 1.54 - -
PER (x) 12.19 15.00 97.50 32.50
PBR (x) 1.14 1.06 1.03 1.04
Capex (m) (160.3) (246.2) (145.9) (135.6)
Free cash f low (m) (19.2) (81.1) (115.2) (135.1)
Net cash/(net debt) (mn) 781.4 629.8 436.1 170.9
14
Figure 2: Peer comparison
Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks
Ticker Company
Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F 2014 2015F 2014 2015F 2014 2015F 2014 2015F
Lcy US$m x x x x x x x x % % % % % %
6869 HK YOFC 8.38 691 7.9 6.8 6.1 6.1 5.4 5.0 1.6 1.6 25.5 20.6 8.0 8.0 2.4 3.2
2342 HK Comba Telecom Systems 1.77 422 11.2 9.5 4.6 4.8 4.4 3.4 0.9 0.8 -6.4 8.8 1.5 2.9 1.2 2.5
552 HK China Communications Service 3.28 2,930 7.7 7.0 6.2 3.3 3.1 2.7 0.8 0.8 10.6 10.2 4.3 4.7 3.4 3.9
763 HK ZTE Corp-H 16.68 11,813 15.7 13.5 12.3 15.1 13.6 12.8 2.3 1.8 6.2 12.8 2.5 2.6 1.2 1.6
6168 HK China U-Ton Holdings Ltd 1.17 265 17.2 13.8 11.6 n.a. n.a. n.a. 3.8 2.6 24.7 16.2 13.0 8.6 0.0 1.0
3777 HK China Fiber Optic Netw ork Sy 1.57 434 5.1 4.4 3.9 3.1 2.7 2.4 0.9 0.8 18.9 16.5 10.4 10.6 0.0 3.1
877 HK O-Net Communications Group 1.95 184 15.0 11.5 8.5 n.a. n.a. n.a. 1.0 n.a. 1.0 6.3 2.8 n.a. 0.0 n.a.
1300 HK Trigiant Group Ltd 1.73 349 4.4 4.0 4.8 5.6 5.2 4.9 1.0 0.8 25.0 18.1 11.2 11.9 7.8 7.4
941 HK China Mobile Ltd 100.20 264,579 15.4 14.4 13.4 5.1 4.8 4.5 2.0 1.8 16.1 12.8 8.9 8.4 2.8 2.8
762 HK China Unicom Hong Kong Ltd 10.46 32,303 15.7 14.1 13.0 3.3 3.1 3.0 0.9 0.9 4.9 6.5 2.2 2.6 2.3 2.4
728 HK China Telecom Corp Ltd-H 4.23 44,149 14.6 12.9 11.7 3.7 3.5 3.3 1.0 0.9 6.5 6.5 3.2 3.7 2.2 2.3
1883 HK Citic Telecom International 3.50 1,525 14.9 14.0 13.2 9.3 8.9 8.6 1.8 1.7 22.2 11.5 4.3 5.0 3.2 3.4
Average 12.1 10.5 9.1 5.9 5.5 5.1 1.5 1.3 12.9 12.2 6.0 6.3 2.2 3.0
000063 CH Zte Corp-A 19.33 11,813 22.5 18.9 16.1 14.3 12.6 11.8 3.2 2.6 6.2 12.5 2.5 3.3 0.9 1.0
600804 CH Dr Peng Telcom & Media Gr-A 24.27 5,285 43.8 32.7 23.3 11.6 9.4 8.3 6.5 6.2 10.0 13.8 4.5 4.1 n.a. 0.8
300134 CH Shenzhen Tat Fook Technolo-A 22.95 2,413 32.8 28.0 n.a. 19.0 17.0 n.a. 5.8 n.a. 2.6 n.a. 16.6 n.a. 2.1 0.8
600198 CH Datang Telecom Tech Co-A 29.09 4,014 36.4 29.1 n.a. n.a. n.a. n.a. 6.6 7.4 7.0 16.7 1.4 n.a. 0.0 n.a.
600498 CH Fiberhome Telecom Tech Co-A 24.53 4,017 33.6 27.5 20.8 29.9 25.2 n.a. 3.9 3.4 9.5 10.6 3.6 4.9 n.a. 0.9
002396 CH Fujian Star-Net Communicat-A 23.82 1,962 37.4 31.6 23.2 n.a. n.a. n.a. 5.9 4.9 12.4 18.2 6.8 10.3 n.a. 0.9
002281 CH Accelink Technologies Co -A 42.78 1,404 39.0 29.5 21.5 19.9 16.1 n.a. 3.7 3.5 10.4 9.3 4.6 5.8 1.2 0.5
600487 CH Hengtong Optic-Electric Co-A 34.27 2,218 29.6 24.1 18.8 20.9 19.4 n.a. 3.4 3.1 11.3 11.0 3.0 3.9 n.a. 0.9
002491 CH Tongding Interconnection I-A 13.43 2,534 32.8 28.2 34.9 38.3 33.2 29.0 6.7 6.1 12.4 11.6 3.7 6.0 0.2 0.6
600522 CH Jiangsu Zhongtian Technolo-A 23.40 3,158 26.1 21.7 18.5 15.0 12.5 12.6 2.5 2.5 10.8 10.1 5.8 6.9 n.a. 0.7
000070 CH Shenzhen Sdg Info Co Ltd-A 24.73 1,048 73.8 56.2 48.5 30.3 24.0 21.0 6.2 6.5 6.6 8.7 2.4 1.9 n.a. 0.2
300299 CH Fuchun Communications Co L-A 23.92 1,464 83.9 63.8 49.3 n.a. n.a. n.a. 16.0 17.2 2.9 23.9 2.9 16.3 0.3 0.4
Average 37.5 29.9 25.1 22.5 19.0 16.5 4.9 4.6 8.5 12.2 4.8 5.2 0.6 0.7
PRY IM Prysmian Spa 21.78 5,197 18.2 15.1 13.1 9.4 8.5 7.9 3.9 3.7 13.2 20.1 2.0 3.9 n.a. 2.1
JNPR US Juniper Netw orks Inc 28.32 10,887 14.7 13.3 12.4 8.1 8.0 7.7 2.6 2.6 6.2 15.1 -4.6 7.7 1.1 1.4
4063 JP Shin-Etsu Chemical Co Ltd 7438.00 25,830 21.8 19.7 18.2 8.1 7.3 6.8 1.6 1.5 7.0 7.2 5.8 7.2 n.a. 1.4
5803 JP Fujikura Ltd 686.00 1,989 13.7 12.1 11.2 7.1 6.8 6.6 0.9 0.9 1.7 7.3 2.4 3.7 n.a. 1.2
MSI US Motorola Solutions Inc 65.27 13,496 19.6 17.0 15.8 10.8 9.9 10.5 7.4 27.9 31.7 30.7 5.4 7.0 2.1 2.1
CSCO US Cisco Systems Inc 28.83 146,601 12.6 11.9 11.0 6.6 6.5 6.3 2.5 2.3 18.1 17.6 8.2 9.7 2.8 2.9
ALU FP Alcatel-Lucent 3.24 10,058 18.3 12.2 10.5 6.6 5.7 5.1 3.7 3.5 -53.5 18.0 0.6 3.6 n.a. 0.0
ERICB SS Ericsson Lm-B Shs 89.45 34,426 17.2 14.0 12.7 8.6 7.2 6.8 2.1 2.0 8.7 10.4 3.8 4.9 n.a. 4.0
NOK1V FH Nokia Oyj 6.42 25,903 21.6 19.0 17.0 9.6 8.1 7.2 2.5 2.6 -8.5 14.8 17.3 8.3 n.a. 2.5
Average 17.0 14.4 13.1 8.2 7.5 7.2 3.1 5.6 2.7 15.6 3.5 6.2 2.0 1.9
PE EV/EBITDA P/B ROE ROA Div yield
Figure 1: 1H15 Results highlights
Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks
1H15 Results Highlights (HKD m) 1H15 1H14 YoY change
Optical networking business 447 387 15.5%
Automation and sensing business 19 13 44.0%
Industrial applications business 55 0.1 75609.7%
Total Turnover 521 400 30.1%
Cost of sales and services (345) (266) 30.0%
Gross profit 175 135 30.3%
Other income and other gains and losses 9 10 -14.3%
Distribution and selling expenses (23) (20) 15.4%
Administrative expenses (63) (55) 15.5%
R&D expenses (66) (56) 18.1%
Others
Finance costs
Share of profits of joint ventures (1) (2)
Share of profits of associates (2) (3)
Profit before tax 28 9 204.6%
Income tax expense (2) (2) 57.1%
Net profit 26 8 233.4%
Gross margin (%) 33.7 33.6 0.1 ppt
Net margin (%) 5.0 1.9 3.0 ppt
15
Figure 3: Domestic optical network business supply chain
Sources: Bloomberg, CGIHK Research
Operators
Construction
Optical Fiber Cable
Optical Fiber Preform
Optical System
Optical Component
IT Services
China Telecom [728.HK]China Mobile [941.HK]China Unicom [762.HK]
Digital China [861.HK]
CCS [552.HK]China U-Ton [6168.HK]
Trigiant [1300.HK]Zhongtian Tech [600522.CH]Hengtong Photoelectric [600487.CH]
ZTE [763.HK]Huawei [Unlisted]Alcatel-Lucent [ALU.US]Fiberhome [600498.CH]
YOFC [6869.HK]Shin-Etsu Chemical Co Ltd[4063.JP]Corning [GLW.US]Sumitomo Electric Industries [5802.JP]Fujikura [5803.JP]
O-Net [877.HK]JDSU[6869.HK]Finisar [FNSR.US]Accelink [002281.CH]
16
China Medical System [867.HK]
BUY
Close: HK$9.46 (Aug 18, 2015)
Target Price: HK$14.40(+52.2%)
Price Performance
Market Cap US$3,034m
Shares Outstanding 2,487m
Auditor Deloitte
Free Float 49.0%
52W range HK$8.40-15.54
3M average daily T/O US$9.4m
Major Shareholding Lam Kong (46.4%)
Sources: Company, Bloomberg
Cyrus Ng, CFA—Analyst
(852) 3698-6275
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
Sources: Company, CGIHK Research
China Healthcare Sector Recent share price weakness should mainly due to the uncertainties about the policy risk of
distribution model and new product prospects. The solid 1H15 performance should ease some
concerns about the growth prospect of CMS. We believe the company can maintain its expan-
sion with stable growth from core products and increasing contribution from newly acquired
products. We forecast 2014-2017E EPS CAGR of 28% for the company and we believe the
current valuation of 17.1x 2015E EPS is undemanding and therefore, maintain BUY with new
target price of HK$14.40(previous: HK$15.20), reflecting a lower RMB:HK$ exchange rate
assumption.
Investment Highlights
Revenue growth driven by academic promotion model: As stated in our initiation
report, we believe the academic promotion model will be the future trend for drugs promo-
tion in China and this business segment of CMS delivered strong revenue growth of
29.5% year-on-year (YoY) in 1H15. The strong growth of academic promotion model
compensated the stagnant growth of agency model and resulted in a 22.7% YoY total
revenue growth in 1H15.
Slow down of core products expected, in our view: One market concern was about
the slow down of growth of core products. In 1H15, revenue of seven core products grew
21.4% YoY, falling from 37.7% of 2014. In our view, core products are relatively mature
products and we do not expect a strong growth momentum from these products due to
their high base. The growth of major products is indeed in line with our annual forecast of
23.2%. We believe the future growth of CMS will be driven by (1) stable and relatively
slower growth of core products, and (2) strong ramp up of newly acquired products.
Immediate contribution from newly acquired products: Since the end of 2014, CMS
acquired seven products and has launched four products in 1H15. With only four months
of contribution, these four products recorded a revenue of RMB85.5m. With the launch of
the other three new products in 2H15, we believe these seven new products can reach
our annual revenue forecast of RMB300m. According to management, NuoDiKang, Hiru-
doid and Combizym are other high potential products and will become an important
growth driver for the company.
Balance sheet to return normal level in 2H15: Inventory turnover days and accounts
receivable turnover days increased from 57 days and 55 days of 1H14 to 78 days and 76
days respectively. Management explained this was due to the inventories related to ac-
quiring new products and distribution model accounting treatment change for XiDaKang.
They expected the level would return to normal level in 2H15.
1H Briefing takeaways: Maintain BUY with solid growth prospect
August 19, 2015
Y/E Dec 31 2013 2014 2015E 2016E 2017E
Turnover (RMB m) 2,249 2,945 3,910 4,825 5,837
Core net profit (RMB m) 646 833 1,075 1,318 1,618
Core net margin (%) 28.7 28.3 27.5 27.3 27.7
Core EPS (RMB) 0.27 0.34 0.44 0.53 0.65
% Change 22.0 28.9 26.2 21.7 22.8
PER (x) 28.3 22.0 17.4 14.3 11.6
PBR (x) 5.8 4.7 3.5 3.0 2.6
ROE (%) 19.7 20.9 19.9 21.1 22.2
EV/EBITDA (x) 25.7 20.0 14.5 11.7 9.4
17
No major M&A coming for new products: The company has acquired sev-
en immediately marketable products since the 2H14. Management expected
the future focus would be on adjusting marketing strategy in ramping up these
new products. They expected no further acquisition of new products in the
next one to two years.
1H15 net profit grew 20.0% YoY: 1H15 revenue grew 22.7% YoY to
RMB1,676m. Gross margin improved from 53.9% to 57.1% while net margin
dropped slightly from 30.1% to 29.5% due to the increased selling expenses
and finance expenses ratio. Net profit grew 20.0% YoY to RMB495m.
Figure 1: 1H15 results highlight
Source: Company
Figure 2: Revenue break down of major products
Source: Company
1H14 1H15 YoY Change
RMBm RMBm
Revenue 1,366.7 1,676.4 22.7%
COGS (629.8) (718.5) 14.1%
Gross profit 736.9 957.9 30.0%
Other gain and losses 31.8 30.0 -5.4%
Selling expenses (249.7) (352.4) 41.1%
Admin expenses (71.0) (93.0) 30.9%
Finance costs (4.6) (14.7) 219.1%
Share results of associates 0.1 5.0 5223.4%
Profit before tax 443.4 532.9 20.2%
Tax (33.4) (39.0) 16.9%
Profit for the period 410.0 493.9 20.5%
MI 2.7 1.2 -57.2%
Net profit 412.7 495.0 20.0%
Gross margin 53.9% 57.1% +3.2ppt
Selling expesnes ratio -18.3% -21.0% -2.7ppt
Admin expenses ratio -5.2% -5.5% -0.3ppt
Finance cost ratio -0.3% -0.9% -0.6ppt
Net margin 30.2% 29.5% -0.7ppt
1H14 1H15 YoY Change
RMBm RMBm
Deanxit 384.6 451.1 17.3%
Ursofalk 266.8 318.8 19.5%
XinHuoSu 170.9 218.9 28.1%
Salofalk 69.5 86.6 24.7%
Bioflor 54.2 78.1 44.0%
Stulln Eye-drops 60.6 70.1 15.7%
GanFuLe 25.8 29.8 15.4%
Core products under academic model 1032.5 1253.4 21.4%
DanShenTong - 46.2 N/A
NuoDiKang - 22.7 N/A
Hirudoid - 11.9 N/A
Combizym - 4.6 N/A
New products - 85.4 N/A
ShaDuoLiKa 204.5 160.4 -21.5%
YiNuoShu 69.0 80.7 17.0%
XiDaKang 16.0 68.7 329.7%
YinLianQingGanKeLi 2.0 1.9 -6.3%
Core products under agency model 291.4 311.7 7.0%
18
Figure 3: Rolling forward PER of CMS
Source: Company, CGIHK Research
Figure 4: Peers’ valuation
Source: Bloomberg, CGIHK Research
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
8/2012 2/2013 8/2013 2/2014 8/2014 2/2015
HK$
19.5X
22.8X
26.1X
16.3X
13.0X
Company name Ticker Price (HK$) Market cap (HK$m) 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F
CMS 867 9.46 23,529 21.6 17.4 14.0 5.2 3.7 3.2 22.9 23.0 23.4 20.5 15.5 12.1
Fosun Pharm-H 2196 22.40 67,101 19.4 19.0 16.1 2.5 2.3 2.1 13.5 12.3 13.6 34.7 29.7 24.5
Sino Biopharm 1177 8.95 44,226 32.2 24.7 21.0 6.4 5.1 4.2 21.0 22.8 22.2 17.8 13.8 11.2
CSPC 1093 7.38 43,601 33.7 25.5 20.3 5.2 4.5 4.0 16.3 19.6 21.3 20.4 15.2 12.2
Liv zon-H 1513 40.00 22,030 23.7 20.3 16.5 3.4 3.0 2.6 15.9 14.9 15.7 21.7 17.7 14.3
Luy e 2186 7.82 25,971 35.8 24.6 19.7 3.9 3.5 3.0 17.5 15.2 16.0 24.2 18.0 14.5
Shanghai Fudan-H 1349 7.58 6,996 52.1 41.7 32.0 8.8 7.3 5.9 20.3 19.6 21.1 33.8 28.3 20.8
Lee's Pharm 950 12.30 7,215 35.7 28.8 22.0 7.2 6.0 5.0 21.4 23.9 24.8 N/A N/A N/A
Pionees Pharm 1345 4.30 5,733 15.5 13.6 10.8 3.7 3.4 2.9 24.5 26.1 29.4 13.0 12.2 10.0
Dawnray s 2348 7.34 5,904 23.7 17.5 13.5 4.1 3.4 2.9 15.2 16.3 18.1 15.9 11.9 8.6
Consun 1681 6.00 6,000 22.8 18.3 14.8 3.4 3.1 2.6 15.9 17.7 19.4 N/A 11.3 8.3
Simple average 28.7 22.9 18.2 4.9 4.1 3.5 18.6 19.2 20.5 22.5 17.4 13.6
Weighted average 27.6 22.3 18.2 4.5 3.8 3.2 17.5 17.9 18.8 23.2 18.9 15.3
PER(x) PBR(x) ROE(%) EV/EBITDA (x)
19
Key financials
Source: Company data, CGIHK Research estimates
Balance Sheet
As at Dec 31
(RMBm)
Cash & cash equiv alents 488 244 1,329 1,782 2,340
Inv entories 167 189 252 314 371
Accounts receiv able 859 876 1,153 1,414 1,693
Others 449 236 300 351 386
Current assets 1,963 1,546 3,034 3,861 4,789
Property , plant and equipment 218 254 373 504 664
Intangible assets 244 441 527 626 750
Others 1,493 2,665 2,679 2,697 2,720
Non-current assets 1,955 3,360 3,579 3,827 4,135
Total assets 3,918 4,905 6,613 7,688 8,924
Accounts pay able 245 253 413 522 630
ST borrowings 314 484 625 744 823
Others 32 52 52 52 52
Current liabilities 591 789 1,089 1,318 1,505
Long-term debts 0 0 0 0 0
Others 50 126 129 131 138
Long-term liabilities 50 126 129 131 138
Total liabilities 641 914 1,218 1,449 1,642
Shareholders' equity 3,264 3,991 5,370 6,208 7,241
Minority interests 13 0 25 32 40
Total equity 3,277 3,991 5,395 6,240 7,282
2013A 2014A 2015F 2016F 2017F
Profit and Loss
Year as of Dec 31
(RMBm)
Direct model 1,620 2,230 3,083 3,788 4,560
Agency model 534 635 731 842 963
Others 96 80 96 195 314
Revenue 2,249 2,945 3,910 4,825 5,837
Cost of goods sold (1,023) (1,291) (1,714) (2,169) (2,615)
Gross profit 1,226 1,655 2,196 2,656 3,222
Other gains / (losses) 49 240 36 48 61
Marketing expenses (468) (631) (856) (1,024) (1,259)
Admin expenses (146) (152) (221) (274) (320)
Operating profit 662 1,112 1,156 1,406 1,704
Net interest income / (expense) 23 18 7 18 38
JV, associate and others 1 (1) 15 20 25
Pretax income 685 1,130 1,177 1,444 1,767
Income taxes (50) (87) (98) (120) (139)
Non-controlling interests 1 3 (5) (7) (9)
Net profit 636 1,046 1,075 1,318 1,618
Non-recurring items (10) 213 0 0 0
Core net profit 646 833 1,075 1,318 1,618
EBIT 672 899 1,156 1,406 1,704
EBITDA 709 942 1,240 1,504 1,824
EPS (RMB) 0.263 0.433 0.435 0.530 0.651
Core EPS (RMB) 0.268 0.345 0.435 0.530 0.651
DPS (RMB) 0.104 0.137 0.174 0.211 0.259
2014A 2015F 2016F 2017F2013A
Cash Flow
Year ended Dec 31
(RMBm)
Prof it bef ore tax 685 1,130 1,177 1,444 1,767
Depr & amortization 37 42 84 98 120
Change in working cap. (327) (34) (179) (214) (228)
Income tax paid (53) (67) (95) (118) (132)
Others (6) (230) (20) (37) (61)
Operating cash flow 335 840 967 1,174 1,464
Capex (137) (288) (270) (328) (404)
Change in other assets (38) (648) (29) (2) 39
Investment cash flow (175) (936) (299) (330) (365)
Net change in debt (93) 170 141 119 79
Others (251) (320) 279 (510) (620)
Financing cash flow (345) (150) 420 (391) (541)
Net change in cash (185) (246) 1,088 453 558
2013A 2014A 2015F 2016F 2017F
Key Ratios
Year to Dec 31 2013A 2014A 2015F 2016F 2017F
Growth (% YoY)
Sales 28.1 31.0 32.7 23.4 21.0
EBIT 18.4 34.0 27.6 21.6 21.1
EBITDA 18.0 33.1 30.8 21.2 21.2
Core net prof it 22.0 28.9 29.0 22.6 22.8
Core EPS 22.0 28.9 26.2 21.7 22.8
Profitability (%)
Gross margin 54.5 56.2 56.2 55.0 55.2
EBIT margin 29.9 30.6 29.4 29.0 29.0
EBITDA margin 31.5 32.1 31.6 31.0 31.1
Core net prof it margin 28.7 28.3 27.5 27.3 27.7
ROA 16.5 17.0 16.3 17.1 18.1
ROE 19.7 20.9 19.9 21.1 22.2
Balance sheet ratios
Current ratio (X) 3.3 2.0 2.8 2.9 3.2
Quick ratio (X) 1.7 0.6 1.5 1.7 1.9
Cash ratio (X) 0.9 0.3 1.3 1.4 1.6
Trade & bill receiv ables day s 116.7 107.5 94.7 97.1 97.1
Trade & bill pay able day s 71.7 70.3 70.8 78.7 80.4
Inv entory turnov er day s 47.0 50.4 47.0 47.6 47.9
Total debt to equity ratio (%) 9.6 12.1 11.6 12.0 11.4
Net debt / (cash) to equity (%) (19.1) 0.8 (18.1) (21.9) (25.9)
20
The United Laboratories [3933.HK]
BUY
Close: HK$4.58 (Aug 18, 2015)
Target Price: HK$7.25 (+58.3%)
Price Performance
Market Cap US$960.8m
Shares Outstanding 1,626.9m
Auditor Deloitte
Free Float 33.8%
52W range HK$3.09-6.56
3M average daily T/O US$5.1m
Major Shareholding Ms Ning Kwai Chun
(73.3%)
Sources: Company, Bloomberg
Cyrus Ng, CFA—Analyst
(852) 3698-6275
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
Sources: Company, CGIHK Research
China Healthcare Sector In spite of ASP pressure, intermediate products of TUL still showed strong growth momen-
tum and demand due to the exit of competitors. We expect this momentum to continue with
its upstream business. On the other hand, the promising insulin business will continue to
undergo rapid expansion with the expected completion of drug tender in 2H15. 1H15 re-
sults is in line with our expectations and we maintain our 2014-2017E core EPS CAGR
forecast of 22.5%. The company is trading at 2016E PER of 8.9x. 1H15 performance
should improve sentiment towards the company and trigger a round of re-rating. We main-
tain BUY on the company with target price unchanged.
Investment Highl ights
Growth momentum of intermediate products to continue: Manufacturing capacity
utilization rate of 6-APA increased from 73% in 2014 to 85% in 1H15. As a result, rev-
enue from intermediate products surged 93.4% year-on-year (YoY) to HK$963m.
Management explains the surge in demand was mainly due to exit of smaller competi-
tors because of (1) increasing environmental protection standard, and (2) low ASP
level. The company is the dominant market player in 6-APA with 70-80% market share
and it has a cost advantage over competitors. Management expects growth momen-
tum of intermediate products to continue in 2H15.
Target insulin revenue to grow over 80% YoY: 1H15 insulin revenue surged 70.5%
YoY to HK$121.8m. Management targets annual revenue to reach HK$400m in 2015,
representing a YoY growth of 84.5%. Management explains the relatively slow growth
in 1H15 was due to seasonal factor and lower than expected drug tender progress.
For third generation insulin product, Insulin Glargine Injection, the company said its
facility had passed on-site inspection and is waiting for production approval. Under
normal situation, the approval should be ready within 3-4 months, and in other words,
the company is on track to launch the product in Q4 2015.
Bulk medicine ASP reached trough level: 1H15 Bulk medicine gross margin drop
was mainly due to the increase in raw material cost and drop in ASP. The manage-
ment expects the ASP has already reached the trough level. RMB depreciation should
help boost demand of export products. Management expects slight revenue growth
from bulk medicine in 2H15.
1H Briefing Takeaways: Growth momentum to continue, maintain BUY
August 19, 2015
Y/E Dec 31 2013 2014 2015E 2016E 2017E
Turnover (HK$ m) 7,648 8,030 8,874 9,623 10,375
Core net profit (HK$ m) 402 545 667 833 1,002
Core net margin (%) 5.3 6.8 7.5 8.7 9.7
Core EPS (HK$) 0.25 0.34 0.41 0.51 0.62
% Change 253.1 35.6 22.3 24.9 20.4
PER (x) 18.5 13.7 11.2 8.9 7.4
PBR (x) 1.1 1.1 1.0 0.9 0.8
ROE(%) 6.2 7.8 8.7 9.8 10.6
EV/EBITDA (x) 9.3 6.4 6.3 5.2 4.3
21
Improving debt level: With no major capacity expansion plan, net gearing
ratio of TUL continued to improve, dropping from 72.3% by the end of 2014 to
62.1% by the end of June 2015. We expect net gearing ratio will continue to
improve and reduce the finance cost as a result.
1H15 adjusted core net profit dropped 8.3% YoY: 1H15 revenue grew
9.8% YoY to HK$4,062m. Gross margin dropped from 41.6% to 40.3% due
mainly to 5-7% YoY ASP drop of major intermediate and bulk medicine prod-
ucts. Core net margin also dropped 1.5ppt YoY to 7.7%. Core net profit
dropped 8.3% YoY to HK$310.8m, reaching 46.6% of our annual estimates.
Figure 1: 1H15 results highlight
Source: Company, CGIHK Research
1H14 1H15 YoY Change
HK$m HK$m
Revenue 3,701.2 4,062.4 9.8%
COGS (2,160.3) (2,424.3) 12.2%
Gross profit 1,541.0 1,638.1 6.3%
Other income 467.9 55.2 -88.2%
Other gains and losses (15.8) 63.1 -500.7%
Selling expenses (627.8) (661.1) 5.3%
Admin expenses (292.2) (370.1) 26.6%
R&D expenses (62.8) (34.0) -45.9%
Other expenses (14.9) (42.2) 184.4%
Impairment changes and fair value changes (40.5) (210.3) 419.5%
Finance costs (164.5) (179.3) 9.0%
Profit before tax 790.4 259.4 -67.2%
Tax (80.5) 20.9 -126.0%
Net profit 709.9 280.3 -60.5%
Deduct: Non-core items 370.9 (30.5)
Core net profit 339.0 310.8 -8.3%
Gross margin 41.6% 40.3% -1.3ppt
Selling expesnes ratio -17.0% -16.3% +0.7ppt
Admin expenses ratio -7.9% -9.1% -1.2ppt
R&D expenses ratio -1.7% -0.8% +0.9ppt
Finance cost ratio -4.4% -4.4% -
Core net margin 9.2% 7.7% -1.5ppt
22
Figure 2: Rolling forward PER band
Source: Bloomberg, CGIHK Research
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
8/2012 2/2013 8/2013 2/2014 8/2014 2/2015
HK$
9.6X
19.0X
15.9X
12.7X
6.5X
Company name Ticker Price (HK$) Market cap (HK$m) 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F
TUL 3933 4.58 7,451 11.3 11.8 10.3 1.0 1.0 0.9 13.3 8.7 9.1 6.4 5.1 4.4
Fosun Pharm-H 2196 22.40 67,070 19.4 19.0 16.1 2.5 2.3 2.1 13.5 12.3 13.6 34.7 29.7 24.5
CSPC 1093 7.38 43,601 33.7 25.5 20.3 5.2 4.5 4.0 16.3 19.6 21.3 20.4 15.2 12.2
Liv zon-H 1513 40.00 22,021 23.7 20.3 16.5 3.5 3.0 2.7 15.9 14.9 15.7 21.7 17.7 14.3
Luy e 2186 7.82 25,971 35.8 24.6 19.7 4.0 3.5 3.0 17.5 15.2 16.0 24.2 18.1 14.5
Hua Han 587 1.08 7,962 17.1 12.9 10.3 1.1 0.9 0.9 6.8 7.8 9.3 N/A N/A N/A
Shanghai Fudan-H 1349 7.58 6,996 52.1 41.7 32.1 8.8 7.3 5.9 20.3 19.6 21.1 33.9 28.3 20.8
Lijun 2005 2.19 6,501 11.1 10.6 8.7 2.0 1.9 1.6 18.6 19.2 20.9 N/A 8.1 6.8
Lee''s Pharm 950 12.30 7,215 35.7 28.8 22.0 7.2 6.0 5.0 21.4 23.9 24.8 N/A N/A N/A
Dawnray s 2348 7.34 5,904 23.7 17.6 13.5 4.1 3.4 2.9 15.2 16.3 18.1 15.9 11.9 8.6
Consun 1681 6.00 6,000 22.8 18.3 14.8 3.4 3.1 2.6 15.9 17.7 19.4 N/A 11.3 8.3
Simple average 26.0 21.0 16.7 3.9 3.4 2.9 15.9 15.9 17.2 22.5 16.1 12.7
Weighted average 26.2 21.5 17.5 3.7 3.2 2.8 15.4 15.3 16.6 22.8 19.0 15.4
EV/EBITDA (x)PER(x) PBR(x) ROE(%)
Figure 3: Peers’ valuation
Source: Bloomberg, CGIHK Research
23
Key financials
Note: the non-operating items and income taxes in 2013 and 2014 was due to the reclassification income of the factory land in Sichuan
Source: Company data, CGIHK Research estimates
24
China Lesso [2128.HK]
BUY
Close: HK$5.80 (August 18, 2015)
Target Price: HK$8.10 (+39.7%)
Price Performance
Market Cap US$2,326m
Shares Outstanding 3,110.3m
Auditor Ernst & Young
Free Float 31.6%
52W range HK$3.41-7.80
3M average daily T/O US$5.52m
Major Shareholding Wong Luen Hei
(68.1%)
Sources: Company, Bloomberg
Wong Chi Man--Head of Research
(852) 3698 6317
Nevin Ning—Analyst
(852) 3698-6321
Sources: Company, CGIHK Research
China Construction Sector
After delivering solid results in 2H14 and 1H15, we believe China Lesso has laid a solid foun-
dation for re-rating. Striking a balance between volume and profitability, we expect the compa-
ny to achieve mild double-digit earnings growth in 2015E and 2016E. We understand that
some investors have concerns about whether the good results are sustainable in 2H15. Based
on 1H15 results of some A-share listed peers, aggressive price competition among larger
players seems unlikely to happen, in our view. We raise our FY15E/FY16E EPS by 11%/7% to
reflect the better-than-expected pricing power. We reiterate our BUY call and raise our target
price from HK$8 to HK$8.1 based on 10x 2016E (Our new RMB:HK$ assumption for end-
2016 is lowered from 1.25 to 1.18.).
Investment Highlights
Investors’ concerns about 2H15 outlook may be overdone. Although the company
delivered impressive recurring profit growth of 19% in 1H15 through margin expansion,
thanks to its pricing power, investors expressed their concerns in yesterday’s analyst
briefing about the risk of price competition due to lacklustre economic outlook. Manage-
ment maintained their style without offering clear margin guidance. We believe the
chance to see severe price competition in 2H15 is small due to: (i) some A-share listed
peers also delivered decent results in 1H15 (Figure 6) therefore they should not have
very strong incentive to launch a price war; (ii) the authorities have become much more
pro-active to boost infrastructure spending since July and the latest example is the pro-
posed issue of specialized construction bonds. Stronger demand should reduce incentive
to cut product prices; (iii) China Plastics Piping Association raised guidance prices slightly
in July (Figure 5), which shows the market landscape is healthier than other sectors like
cement and steel.
Manageable FX risk. Management expects the FX risk is manageable if RMB deprecia-
tion is relatively mild. Given that RMB loan (~5% of its loan balance) interest rate may be
>6% while its HK$/US$ loan interest rate is only >2%, the latter is still relatively more cost
effective. In addition, most of the FX loss due to currency translation of its HK$/US$ loan
will go to the balance sheet directly without hitting P&L, according to management.
Striking balance between volume and profitability. Based on our impression during
the analyst briefing, we believe the company will try to maintain a high single-digit volume
growth instead of chasing double-digit growth to protect margins. As the company’s utili-
zation rate is still rising (from 69.9% in 1H14 to 71% in 1H15), there is room for gross
margin improvement if capacity expansion is managed prudently.
Lesso Mall recorded slim profit in July. Regarding its newly established e-commerce
platform, Lesso Mall, the business recorded a tiny profit in July. Management aims to
achieve >RMB500m revenue (~3.2% of total revenue) for the full year (1H15: RMB215m).
Gross margin in 1H15 was slightly above 1%. (more on next page)
1H15 Briefing Takeaways; Laid Foundation for Re-rating
August 19, 2015
Y/E Dec 31 2011 2012 2013 2014 2015E 2016E
Turnover (RMB m) 10,143 10,891 13,071 14,823 15,867 17,885
Recurring net profit (RMB m) 1,184 1,219 1,405 1,653 1,884 2,137
Net margin (%) 12 11 11 11 12 12
Recurring EPS (RMB) 0.39 0.40 0.46 0.53 0.61 0.69
% Change 4 2 14 16 14 13
PER (x) 12.2 11.7 10.1 8.6 7.9 7.2
PBR (x) 3.0 2.5 2.1 1.7 1.5 1.3
EV/EBITDA (x) 8.6 8.1 6.7 6.0 5.1 4.4
0
50
100
150
200
0
2
4
6
8
10
Aug14 Oct14 Dec14 Feb15 Apr15 Jun15 Aug15
(HK$ million)(HK$)
Turnover (RHS) Price (LHS)
25
Account receivables risk under control. The company’s trade and bills receivables balance
rose 100% from end-2014 to RMB346m at end-1H15. It has been collecting the receivables of
this category since July and management does not expect to see high bad debt risk. In addi-
tion, top five customers only accounted for 4.25% of total revenue in 1H15. A diversified cus-
tomer base should also mitigate bad debt risk.
Tax rate to stay at about 20%. China Lesso’s effective tax rate increased from 17% in 1H14
to 22.2% in 1H15 due to differences in the timing of booking taxes. On a full-year basis, man-
agement expects
1H15 Results Highlights
Year ended 31 Dec 1H2014 1H2015 YoY Change
PVC pipes 3,997,803 4,206,892 5.2%
Non-PVC pipes 2,128,008 2,150,031 1.0%
Others 455,240 686,259 50.7%
Revenue 6,581,051 7,043,182 7.0%
COGS (4,938,032) (5,135,575) 4.0%
Gross profit 1,643,019 1,907,607 16.1%
Operating expenses (784,503) (868,798) 10.7%
Operating profit 858,516 1,038,809 21.0%
Other income and gains 31,754 22,727 -28.4%
EBIT 890,270 1,061,536 19.2%
Net f inance costs (67,885) (12,813) -81.1%
Profits from associates and JCEs 202 612 203.0%
Non-recurrent items (61,365) (14,087) -77.0%
Income before tax 761,222 1,035,248 36.0%
Income tax expense (139,556) (232,919) 66.9%
Minority interests 5,869 3,616 -38.4%
Net income 627,535 805,945 28.4%
Recurring net income 688,900 820,032 19.0%
EPS (RMB) 0.202 0.259 28.4%
Recurring EPS (RMB) 0.221 0.264 19.0%
DPS (HK$) - -
Sales volume (tonnes) 643,018 692,254 7.7%
PVC 508,691 560,172 10.1%
Non-PVC 134,327 132,082 -1.7%
ASP per tonne (RMB) 9,527 9,183 -3.6%
PVC 7,859 7,510 -4.4%
Non-PVC 15,842 16,278 2.8%
Cost per tonne (RMB) 7,049 6,521 -7.5%
Gross profit per tonne (RMB) 2,478 2,662 7.4%
Margins and Ratios:
Gross margin 25.0% 27.1%
Net margin 10.4% 11.6%
EBIT margin 13.5% 15.1%
EBITDA margin 16.6% 18.5%
Effective tax rate 17% 22%
Sources: Company data, CGIHK Research
26
Figure 1: Brent crude prices (US$/barrel)
Sources: WIND Info, CGIHK Research
Figure 2: PVC prices (RMB/tonne)
Figure 3: HDPE prices (RMB/tonne)
Sources: WIND Info, CGIHK Research
Sources: WIND Info, CGIHK Research
Figure 4: PP prices (RMB/tonne)
Sources: WIND Info, CGIHK Research
Figure 5: Guidance prices issued by China Plastics Piping Association (RMB/tonne)
Sources: China Plastics Piping Association, CGIHK Research
Figure 6: Peer comparison
Sources: Companies, CGIHK Research
D ata S ource: W ind Info
S pot P rice: C rude O il: U K B rent D TD
30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13
50 50
60 60
70 70
80 80
90 90
100 100
110 110
120 120USD/barrel USD/barrelUSD/barrel USD/barrel
D ata S ource: W ind Info
M arket P rice (M id): P VC (E thylene P rocess): N ational M arket P rice (M id): P VC (C alcium C arbide P rocess): N ational
30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13
5100 5100
5400 5400
5700 5700
6000 6000
6300 6300
6600 6600
6900 6900
yuan/ton yuan/tonyuan/ton yuan/ton
D ata S ource: W ind Info
M arket P rice: H D P E (P etroC hina D aqing P etrochem ical 5000S ): G uangdong S hunde
30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13
9200 9200
9600 9600
10000 10000
10400 10400
10800 10800
11200 11200
11600 11600
12000 12000
yuan/ton yuan/tonyuan/ton yuan/ton
D ata S ource: W ind Info
C losing P rice: S pot G oods: P P R esin (S pot P P )
30-09-13 30-11-13 31-01-14 31-03-14 31-05-14 31-07-14 30-09-14 30-11-14 31-01-15 31-03-15 31-05-15 31-07-1530-09-13
7800 7800
8400 8400
9000 9000
9600 9600
10200 10200
10800 10800
11400 11400
yuan/ton yuan/tonyuan/ton yuan/ton
Product type (Chinese) Product type (English) Sep-14 25-Dec-14 Change % change 24-Mar-15 Change % change 14-Jul-15 Change % change Accumulative change (%)
给水用硬聚氯乙烯(PVC-U)管材 PVC pipes for water supply 10,800 10,500 (300) (2.78) 10,000 (500) (4.76) 10,500 500 4.76 (2.78)
排水用PVC-U管材 PVC pipes for drainage 9,800 9,500 (300) (3.06) 9,000 (500) (5.26) 9,500 500 5.26 (3.06)
埋地排水用PVC-U双壁波纹管材 Underground PVC pipes for drainage 10,500 10,200 (300) (2.86) 9,700 (500) (4.90) 10,200 500 4.90 (2.86)
燃气用埋地聚乙烯(PE)管材 PE pipes for gas supply 18,700 17,700 (1,000) (5.35) 17,200 (500) (2.82) 17,000 (200) (1.18) (9.09)
给水用PE管材 PE pipes for water supply 17,200 16,200 (1,000) (5.81) 15,700 (500) (3.09) 16,700 1,000 5.99 (2.91)
埋地排水用PE双壁波纹管材 Underground PE pipes for drainage 17,100 15,500 (1,600) (9.36) 15,400 (100) (0.65) 16,400 1,000 6.10 (4.09)
PE缠绕结构壁管材 PE pipe wall winding structure 18,100 16,500 (1,600) (8.84) 16,400 (100) (0.61) 17,400 1,000 5.75 (3.87)
1H15 Revenue growth Sales volume growth Net profit growth Gross margin Operating margin Net margin
Zhejiang Weixing New Building Materials 002372.CH 9.1% n.a. 16.0% 43.0% 19.4% 17.1%
Yonggao 002641.CH 3.6% n.a. 22.3% 29.6% 9.9% 7.9%
New choice Pipe 300198.CH
Goody Science & Technology 002694.CH
China Lesso 2128.HK 7.0% 7.7% 19.0% 27.1% 15.1% 11.6%
To be released
To be released
27
Key financials
China Lesso (02128.HK)
Income Statement
(RMB'000, except for per share amount)
Year ended 31 Dec 1H 2H 1H 2H 1H (A) 2H 2012 2013 2014 2015E 2016E
PVC pipes 3,528,040 4,520,930 3,997,803 4,821,458 4,206,892 5,025,765 6,845,360 8,048,970 8,819,261 9,232,657 10,061,213
Non-PVC pipes 1,848,951 2,317,179 2,128,008 2,785,958 2,150,031 3,018,448 3,603,020 4,166,130 4,913,966 5,168,479 6,081,892
Others 315,232 540,215 455,240 634,305 686,259 780,000 442,983 855,447 1,089,545 1,466,259 1,741,448
Revenue 5,692,223 7,378,324 6,581,051 8,241,721 7,043,182 8,824,213 10,891,363 13,070,547 14,822,772 15,867,395 17,884,553
COGS (4,200,369) (5,604,610) (4,938,032) (6,084,006) (5,135,575) (6,424,733) (8,242,055) (9,804,979) (11,022,038) (11,560,308) (13,095,942)
Gross profit 1,491,854 1,773,714 1,643,019 2,157,715 1,907,607 2,399,480 2,649,308 3,265,568 3,800,734 4,307,087 4,788,611
Operating expenses (654,672) (848,247) (784,503) (1,046,303) (868,798) (1,120,675) (1,136,887) (1,502,919) (1,830,806) (1,989,473) (2,201,964)
Operating profit 837,182 925,467 858,516 1,111,412 1,038,809 1,278,805 1,512,421 1,762,649 1,969,928 2,317,614 2,586,647
Other income and gains 41,793 46,606 31,754 47,984 22,727 39,709 62,677 88,399 79,738 62,436 99,447
EBIT 878,975 972,073 890,270 1,159,396 1,061,536 1,318,514 1,575,098 1,851,048 2,049,666 2,380,050 2,686,094
Net f inance costs (63,160) (64,776) (67,885) (36,038) (12,813) (21,205) (112,103) (127,936) (103,923) (34,018) (14,910)
Profits from associates and JCEs 214 176 202 196 612 210 315 390 398 822 440
Non-recurrent items 24,309 19,700 (61,365) (37,983) (14,087) - 18,969 44,009 (99,348) (14,087) -
Income before tax 840,338 927,173 761,222 1,085,571 1,035,248 1,297,519 1,482,279 1,767,511 1,846,793 2,332,767 2,671,624
Income tax expense (162,681) (167,214) (139,556) (166,879) (232,919) (233,553) (251,008) (329,895) (306,435) (466,472) (534,325)
Minority interests 5,077 6,568 5,869 7,797 3,616 - 7,051 11,645 13,666 3,616 -
Net income 682,734 766,527 627,535 926,489 805,945 1,063,966 1,238,322 1,449,261 1,554,024 1,869,911 2,137,299
Recurring net income 658,425 746,827 688,900 964,472 820,032 1,063,966 1,219,353 1,405,252 1,653,372 1,883,998 2,137,299
EPS (RMB) 0.222 0.249 0.202 0.298 0.259 0.342 0.408 0.471 0.500 0.601 0.687
Recurring EPS (RMB) 0.214 0.243 0.221 0.310 0.264 0.342 0.402 0.457 0.532 0.606 0.687
DPS (HK$) - 0.120 - 0.130 - 0.145 0.120 0.120 0.130 0.145 0.162
Depreciation and amortization 173,769 186,569 203,992 235,788 242,007 317,889 252,574 360,338 439,780 559,896 664,071
EBITDA 1,052,958 1,158,818 1,094,464 1,395,380 1,304,155 1,636,613 1,827,987 2,211,776 2,489,844 2,940,768 3,350,605
Sales volume (tonnes) 556,374 716,257 643,018 788,621 692,254 863,046 1,085,415 1,272,631 1,431,639 1,555,300 1,706,400
PVC 439,248 564,114 508,691 617,220 560,172 673,176 855,777 1,003,362 1,125,911 1,233,348 1,330,992
Non-PVC 117,126 152,143 134,327 171,401 132,082 189,870 229,638 269,269 305,728 321,952 375,408
ASP per tonne (RMB) 9,664 9,547 9,527 9,647 9,183 9,321 9,626 9,598 9,593 9,259 9,460
PVC 8,032 8,014 7,859 7,812 7,510 7,466 7,999 8,022 7,833 7,486 7,559
Non-PVC 15,786 15,230 15,842 16,254 16,278 15,897 15,690 15,472 16,073 16,054 16,201
Cost per tonne (RMB) 7,067 7,168 7,049 7,002 6,521 6,635 7,278 7,124 7,023 6,585 6,767
Gross profit per tonne (RMB) 2,597 2,378 2,478 2,645 2,662 2,685 2,348 2,474 2,570 2,674 2,694
Growth Rates:
Revenue 18% 22% 16% 12% 7% 7% 7% 20% 13% 7% 13%
EBIT 15% 20% 1% 19% 19% 14% 1% 18% 11% 16% 13%
EBITDA 20% 22% 4% 20% 19% 17% 5% 21% 13% 18% 14%
Core net income 13% 17% 5% 29% 19% 10% 3% 15% 18% 14% 13%
Recurring EPS 12% 15% 3% 28% 19% 10% 2% 14% 16% 14% 13%
Margins and Ratios:
Gross margin 26.2% 24.0% 25.0% 26.2% 27.1% 27.2% 24.3% 25.0% 25.6% 27.1% 26.8%
Net margin 11.5% 10.0% 10.4% 11.6% 11.6% 12.1% 11.1% 10.7% 11.1% 11.9% 12.0%
EBIT margin 15.4% 13.2% 13.5% 14.1% 15.1% 14.9% 14.5% 14.2% 13.8% 15.0% 15.0%
EBITDA margin 18.5% 15.7% 16.6% 16.9% 18.5% 18.5% 16.8% 16.9% 16.8% 18.5% 18.7%
Effective tax rate 20% 18% 17% 15% 22% 18% 17% 19% 16% 20% 20%
Sources: Company data, CGIHK Research estimates
2015E20142013
28
Key financials
Figure 6: Rolling Forward PER
Sources: Bloomberg, CGIHK Research
Figure 7: Rolling Forward PBR
Sources: Bloomberg, CGIHK Research
China Lesso (02128.HK)
Balance Sheet Statement of Cash Flow
(RMB'000 , except for per share amount)
As at 31 Dec 2012 2013 2014 2015E 2016E Year ended 31 Dec 2012 2013 2014 2015E 2016E
Inventories 1,766,133 2,434,049 2,210,038 2,500,000 2,800,000 Profit before tax 1,482,279 1,767,511 1,846,793 2,332,767 2,671,624
Trade receivables 779,354 854,518 1,127,901 1,300,000 1,500,000 Depreciation & Amortization 252,574 360,338 439,780 518,896 614,071
Bills receivable 243,265 218,041 216,231 230,000 230,000 Change in w orking capital (301,856) (480,951) 393,463 (586,221) (394,000)
Others 401,826 702,773 561,760 834,474 928,474 Others / adjustments (152,553) (143,436) (43,590) 191,116 (448,314)
Bank balances and cash 1,922,325 2,189,242 3,198,902 3,940,793 4,775,551 Net operating cash f low 1,280,444 1,503,462 2,636,446 2,456,558 2,443,381
Total current assets 5,112,903 6,398,623 7,314,832 8,805,267 10,234,025
Capex (1,067,866) (1,161,586) (1,285,113) (1,000,000) (1,000,000)
PPE, net 3,288,261 4,452,109 5,263,614 5,750,149 6,128,624 Others (866,081) (558,605) (296,182) (50,000) (50,000)
Prepaid lease payments 954,279 996,690 1,087,126 1,137,126 1,187,126 Net investing cash f low (1,933,947) (1,720,191) (1,581,295) (1,050,000) (1,050,000)
Others 427,343 450,285 853,956 326,150 377,590
Total non-current assets 4,669,883 5,899,084 7,204,696 7,213,425 7,693,340 Change in debt 552,775 504,749 378,088 (258,729) (100,000)
Dividends (293,834) (291,809) (295,460) (318,373) (373,982)
Total assets 9,782,786 12,297,707 14,519,528 16,018,692 17,927,365 Others (133,033) (72,555) (98,654) (87,566) (84,641)
Net f inancing cash f low 125,908 140,385 (16,026) (664,667) (558,623)
Trade payables 512,054 861,416 973,387 1,050,000 1,150,000
Other payables 832,388 1,252,674 1,564,290 1,650,000 1,750,000 Increase / Decrease in cash (194,316) 266,917 1,009,660 741,891 834,758
Bank and other borrow ings 595,799 1,080,092 1,158,729 900,000 800,000 Net cash/(debt) (302,257) (497,874) 19,068 1,019,688 1,954,446
Others 98,635 103,638 113,440 139,942 160,297
Total current liabilities 2,038,876 3,297,820 3,809,846 3,739,942 3,860,297 Finance Ratios
Bank and other borrow ings 1,628,783 1,607,024 2,021,105 2,021,105 2,021,105 2012 2013 2014 2015E 2016E
Others 87,209 136,920 138,854 160,000 185,000 Valuation
Total non-current liabilities 1,715,992 1,743,944 2,159,959 2,181,105 2,206,105 PE(x) 11.7 10.1 8.6 7.9 7.2
EPS grow th (%) 2 14 16 14 13
Total liabilities 3,754,868 5,041,764 5,969,805 5,921,047 6,066,402 Yield (%) 2.1 2.1 2.2 2.5 2.8
PEG (x) 5.64 0.74 0.53 0.57 0.53
Shareholders' equity 6,010,033 7,239,738 8,545,459 10,096,997 11,860,314 EV/EBITDA (x) 8.1 6.7 6.0 5.1 4.4
Minority interests 17,885 16,205 4,264 648 648 PB(x) 2.5 2.1 1.7 1.5 1.3
Operational
Revenue grow th (%) 7 20 13 7 12
Gross margin (%) 24.3 25.0 25.6 27.1 26.4
Net profit margin (%) 11.1 10.7 11.1 11.9 11.6
Days receivables 30 29 30 33 33
Days payables 16 26 30 32 31
Days inventories 68 78 77 74 74
Current ratio (x) 2.5 1.9 1.9 2.4 2.7
Quick ratio (x) 1.4 1.0 1.2 1.5 1.7
Asset/Equity (x) 1.6 1.7 1.7 1.6 1.5
Net debt/equity (%) 5 7 Net cash Net cash Net cash
EBITDA interest coverage (x) 16.3 17.3 24.0 86.4 224.7
Core ROE (%) 22.2 21.2 20.9 20.2 19.5
Sources: Company data, CGIHK Research estimates
0.7
1.2
1.7
2.2
2.7
3.2
3.7
4.2
Jun
-10
Sep
-10
De
c-1
0
Ma
r-1
1
Jun
-11
Sep
-11
De
c-1
1
Ma
r-1
2
Jun
-12
Sep
-12
De
c-1
2
Ma
r-1
3
Jun
-13
Sep
-13
De
c-1
3
Ma
r-1
4
Jun
-14
Sep
-14
De
c-1
4
Ma
r-1
5
Jun
-15
Rolling forward PBR (x) Average
+1 Standard deviation -1 Standard deviation
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Jun
-10
Sep
-10
Dec
-10
Mar
-11
Jun
-11
Sep
-11
Dec
-11
Mar
-12
Jun
-12
Sep
-12
Dec
-12
Mar
-13
Jun
-13
Sep
-13
Dec
-13
Mar
-14
Jun
-14
Sep
-14
Dec
-14
Mar
-15
Jun
-15
Rolling forward PER (x) Average
+1 Standard deviation -1 Standard deviation
29
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BUY share price will increase by >20% within 12 months in absolute terms :
SELL share price will decrease by >20% within 12 months in absolute terms :
HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :