Jun 19, 2015
Equity Research
Dim Sum Express
Key index performance
Market
HSI
HSCEI
MXCN
SHSZ300
SHCOMP
SZCOMP
INDU
SPX
CCMP
UKX
NKY
Chg (%)
1D 1M
YTD
-0.2 -3.6 13.1
-1.1 -6.5 10.7
-0.6 -7.2 14.7
-4.1 4.2 39.5
-3.7 8.3 47.9
-3.6 13.5 105.9
1.0 -1.1
1.6
1.0 -0.3
3.0
1.3 1.2
8.4
0.4 -4.1
2.2
1.0 0.8 15.7
A-Share Market
EPS (%)
14E 15E
-3.1 10.6
2.9 10.9
2.2 12.8
19.8 14.5
22.1 13.8
80.2 26.1
6.4 8.8
10.3 11.9
71.6 15.0
2.3 12.1
43.4 10.9
P/E
14E 15E
12.9 11.6
9.4 8.5
11.5 10.2
18.6 16.3
19.2 16.8
42.0 33.3
16.1 14.8
17.9 16.0
22.4 19.5
16.3 14.5
19.1 17.2
Hong Kong ADRs
HK
ticker Company
857 PETROCHINA
1398 ICBC
941 CHINA MOBILE
939 CCB
3988 BANK OF CHINA
700 TENCENT
5 HSBC
2628 CHINA LIFE
386 SINOPEC
2318 PING AN
Local Daily
(HK$) (%)
8.6 -0.81
6.4 -0.93
99.0 -1.39
7.5 -0.53
5.2 -1.15
154.3 0.00
72.4 0.70
34.0 -2.16
6.6 1.87
110.2 -0.63
ADR
(US$)
111.3
16.5
64.4
19.4
16.7
20.1
46.7
22.1
84.6
28.6
Daily
(%)
-0.24
-0.06
-0.43
0.00
0.06
0.80
-0.02
-0.32
2.45
0.23
Econ data release
China
Data
Date Period
Prior
Markit China Mfg PMI 22-Jun JUN P 49.20
Westpac MNI Con Sen 23-Jun
JUN 111.10
US
Data
Existing Homes Sales
Dur Goods New Ord
Markit US Mfg PMI
1Q GDP QoQ
Initial Jobless Claims
Cont Jobless Claims
Markit US Serv PMI
Cons
49.39
-
Auto: PV sales down slightly YoY in May; decline in commercial vehicles narrowing
Overall auto sales volume slid 0.4% YoY in May, with the sales volume of sedans, MPVs & SUVs
down 0.8% and that of commercial vehicles down 8.2%. Fourth and fifth-tier cities were the main
drivers of license plate registration in Apr. Sales volume growth was mixed among different types of
passenger vehicles, while declines were seen across different types of commercial vehicles. Amid
stable sector fundamentals and cheap relative valuations, we believe accelerated sector M&A driven
by the “Made in China 2025” plan will lead to sector re-ratings.
Santai Holding (002312 CH): Strategic stake acquisition in China Securities Credit
Promotion Investment
Santai’s access to a large user base should substantially enlarge CSCPI’s databases. Going forward,
Santai is likely to tap into CSCPI’s statistical analysis and modeling capabilities so as to expand the
scope of its community services, which will be a step forward in its internet finance development. We
expect to see synergy between the two companies. Santai’s investment in a way serves as
recognition of CSCPI’s industry position and paves the way for Santai’s further cooperation with other
financial institutions and internet companies in the future.
Kingstar Winning Software (300253 CH): Incentive stock option to strengthen growth
momentum; major shareholders’ promise to bolster market confidence
The company has passed an incentive stock option plan which should ensure stability in its key
personnel. Separately, some of the company’s major shareholders have promised not to reduce their
stakes over the next 18 months, which should significantly boost market confidence in the company.
We expect the company to push ahead with its cloud computing development strategy at a faster
pace now with such efforts to yield fruits shortly. We are positive on the company’s leading market
position, solid technical know-how and strong execution capabilities.
Hong Kong Market
Kingsoft (3888 HK, Accumulate): Takeaways from meeting with management in Beijing
Date Period
Prior
Cons
22-Jun MAY
5.04
5.25
23-Jun MAY
-1.00
-0.72
23-Jun JUN P 54.00
54.42
24-Jun
1Q T
-0.70
-0.23
25-Jun
267.00 277.60
25-Jun
2222.00 2214.00
25-Jun JUN P 56.20
56.47
Operating margin is expected to drop to a single-digit in FY15, and management gave flat guidance
of zero growth for FY15 net profit. They indicated that the group will continue to implement its “all-in”
strategy and increase investment in Cheetah Mobile, its cloud business and mobile WPS. This may
offset its strong revenue growth. The company expects operating margin to rebound progressively
in 2016, mainly thanks to ongoing revenue expansion and cost reductions in Cheetah Mobile, the
rising contribution from mobile games, and narrowing losses in its cloud business.
Source: Bloomberg
GF events
Date Event
23 Jun IGG NDR
Location
Shenzhen
Source: GF Securities (HK)
Alex Fan, CFA, Head of Research, SFC CE No. ADJ672 [email protected] +852 3719 1047
Gao Yedong, Editor, SFC CE No. BAI002 [email protected] +852 3719 1026
Dim Sum Express
Jun 19, 2015
Auto: PV sales down slightly YoY in May; decline in commercial vehicles
narrowing
May sales data/Apr license plate registration review Overall auto sales volume slid 0.4% YoY
in May, with the sales volume of sedans, MPVs & SUVs down 0.8% and that of commercial vehicles
down 8.2%. The number of license plates registered for sedans, MPVs and SUVs during Apr grew
just 1.8% YoY to represent 88.2% of the number sold to auto dealers; license plate registration
during 4M15 picked up 14.9% YoY, equivalent to 102.3% of vehicles sold to dealers. It is worth
noting that fourth and fifth-tier cities were the main drivers of license plate registration in Apr.
Sector share price performance in May The auto sector rose 15.3% during May, outperforming
the CSI 300 by 13.4pp. The P/E and P/B valuations of both the auto making and auto part
subsectors increased from Apr.
Breakdown by vehicle type Among passenger vehicles, the sales volume of SUVs and MPVs
rose 43.9% and 44.4% YoY in May, while sedans and minibuses dropped 17.2% and 20.7%.
Declines were seen across different types of commercial vehicles, with medium & heavy duty trucks,
light trucks and medium & large buses down 27.0%, 2.9% and 17.2% YoY respectively.
Production costs essentially flat MoM Our index for auto production raw material costs fell 11.9%
YoY in May though edging up 0.7% MoM. The natural gas to diesel price ratio (one of the main
indicators of natural gas vehicle demand) for the 21 provinces we track stood at 81.5% in May, with
20 of the provinces seeing a ratio above 70%.
Top picks Amid stable sector fundamentals and cheap relative valuations, we believe accelerated
sector M&A driven by the “Made in China 2025” plan will lead to sector re-ratings. We highlight the
following stocks:

Listcos from the FAW and Dongfeng families;

Other companies expected to be consolidated such as Beiqi Foton Motor (600166 CH),
Jianghuai Automobile (600418 CH), CNHTC Jinan Truck (000951 CH) and Shanghai
Diesel Engine (600841 CH);

Automakers and auto part companies with cheap valuations such as Great Wall Motor
(601633 CH), SAIC Motor (600104 CH), HUAYU Automotive Systems (600741 CH), Beiqi
Foton Motor (600166 CH), Chongqing Changan Automobile (000625 CH) and Jiangling
Motors (000550 CH);

Auto part companies with strong performance that are in line with the “Made in China 2025”
plan such as Fulin Precision Machining (300432 CH), Beijing WKW Automotive Parts
(002662 CH), Tianrun Crankshaft (002283 CH), Yunnei Power (000903 CH) and Weifu
High-Technology (000581 CH).

Auto R&D and service providers such as China Automotive Engineering Research Institute
(601965 CH).
Risks include slower-than-expected economic growth, deterioration in sector conditions, and
weaker-than-expected policy implementation.
Santai Holding (002312 CH): Strategic stake acquisition in China
Securities Credit Promotion Investment
Santai to subscribe for CSCPI placement Santai has entered into an agreement with China
Securities Credit Promotion Investment (CSCPI), under which it will subscribe for 200m shares in
the latter’s placement with Rmb200m of self-owned funds. Santai will hold 4.65% of CSCPI’s
enlarged share capital following this planned placemen of not more than 1bn shares. The
transaction does not constitute a related party transaction.
A major step in internet finance development The core competitiveness of credit reporting
companies lies in the possession of large databases, good product design and strong execution. In
this regard, Santai has access to a large user base, which should substantially help enlarge CSCPI’s
databases.
Synergy expected Going forward, Santai is likely to tap into CSCPI’s advanced statistical analysis
and modeling capabilities as well as other data sources so as to expand the scope of its community
services, which will be a step forward in its internet finance development. We believe a business
model will be formed where data captured from Santai’s provision of community services, along
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Dim Sum Express
Jun 19, 2015
with data from other sources, after being analyzed and processed by CSCPI’s credit reporting
system, is in turn used in Santai’s provision of community services. We expect to see synergy
between the two companies.
Recognition of CSCPI’s significance The establishment of CSCPI carried considerable
significance as it was initiated by several domestic securities firms, insurance companies, internet
companies as well as government investment platforms. Santai’s investment in a way serves as
recognition of CSCPI’s industry position and paves the way for Santai’s further cooperation with
other financial institutions and internet companies in the future.
Long-term outlook positive This transaction is in line with Santai’s strategy for “virtual banking
cooperation and operation” and is likely to enhance its ability to provide professional financial
services. We have a positive outlook on the company’s sustainable growth in the long term.
Kingstar Winning Software (300253 CH): Incentive stock option to
strengthen growth momentum; major shareholders’ promise to bolster
market confidence
Incentive stock option to ensure key personnel stability The company’s Board has passed an
incentive stock option plan, granting 1.875m stock options to 53 employees with an exercise price
of Rmb80.9. These 53 individuals consist of 17 core business and 8 subsidiary management
members, and 18 core and 10 subsidiary technical employees, all of whom play a key role on the
company’s various business lines. The incentive scheme should ensure stability in the company’s
key personnel in the foreseeable future.
Conditions for exercising stock options Furthermore, the conditions for the exercise of the stock
options reflect the company’s confidence in the industry’s long term growth outlook as well as its
own earnings growth. For the stock options to be exercised, the company needs to achieve revenue
growth of not less than 60%/100%/150% in 2015/16/17 and net profit growth of not less than
70%/125%/200% from the 2013 levels.
Major shareholders promising not to reduce stakes Separately, some of the company’s major
shareholders have promised not to reduce their stakes in the company over the next 18 months.
Any shares sold in breach of this promise will be taken over by the company. This promise should
significantly boost the market’s confidence in the company.
Positive on company We expect the company to push ahead with its cloud computing
development strategy at a faster pace now with such efforts to yield fruits shortly. We are positive
on the company’s leading market position, solid technical know-how and strong execution
capabilities, and forecast 2015/16/17 EPS of Rmb0.33/0.52/0.96.
Key risks include uncertainties surrounding the profitmaking model for remote health management
business developed jointly with other parties.
Kingsoft (3888 HK, Accumulate):
management in Beijing
Takeaways
from
meeting
with
Profitability not the emphasis in FY15 Operating margin is expected to drop to a single-digit in
FY15, and management gave flat guidance of zero growth for FY15 net profit. They indicated that
the group will continue to implement its “all-in” strategy and increase investment in Cheetah Mobile,
its cloud business and mobile WPS. This may offset its strong revenue growth.
Cheetah Mobile business - trading profit for a better market position Management guided that
non-GAAP operating margin in its Cheetah business may drop to zero while its topline growth target
is set at over 100% YoY for FY15. The company plans to substantially increase investment in mobile
user acquisition in both overseas and domestic markets from 2Q15. It is striving to gain a top-three
position in the global mobile advertising market, with Mobile MAU targeted to reach around 600m
at the end of FY15, from 443.6m at end-1Q15. Based on its results YTD, growth in both mobile
MAU and revenue in the first two quarters has been in line with the company’s expectation.
Online games business - mobile games the growth driver PC games should see flat revenue
growth in FY15, with continuously solid growth of 20% YoY for its flagship JX III offset by weakening
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Dim Sum Express
Jun 19, 2015
performance in other PC games. Mobile games are likely to be the growth driver. The company
currently has 12 mobile games under development, a number of which are expected to be
commercially launched in 2H15. The company’s core mobile game studios, such as Westhouse,
are fully dedicated to the development of three games, “神之遗迹”, “剑网 3 移动版” and “剑侠世界
移动版”. The cooperation with Xiaomi, Cheetah Mobile and Tencent should prove to be a big
strength for its mobile game distribution.
Cloud business –250-300% YoY revenue growth, but breakeven likely to be later than guided
The company expects revenue from its cloud business to surge by a significant 250-300% to
Rmb250m-280m in FY15, mainly driven by increasing demand for cloud storage from its largest
customer Xiaomi, which accounts for 80% of total cloud storage volume. Daily average upload data
volume reached around 300TB in 1Q15. Besides cloud storage, its cloud computing business has
also seen strong growth momentum with a focus on the online gaming industry and ongoing
expansion to other verticals, such as the medical, internet and hardware industries. Its gaming cloud
platform currently has over 100 mobile games in operation, including some well-known titles such
as “全民奇迹” and “十万个冷笑话”. However, the cloud business is likely to break even later than its
original guidance of 2Q16 given price competition in the domestic cloud services market.
WPS business - stable growth expected for FY15 The company’s WPS business should see
stable growth in FY15 as the government purchase cycle was restarted in 4Q14. The company
successfully signed some big deals in 1Q15 and will record related revenue in the next few quarters.
The company will continue to invest in mobile user acquisition for the WPS personal version and
expects to start monetizing when mobile WPS MAU reaches 100m, compared to 70m at the end of
1Q15.
Expecting profitability to recover in 2016 The company expects operating margin to rebound
progressively in 2016, mainly thanks to ongoing revenue expansion and cost reductions in Cheetah
Mobile, the rising contribution from mobile games, and narrowing losses in its cloud business.
(Ryan Zhu, Research Analyst, SFC CE No. BDK820, [email protected] +86 755 8826 3160)
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Dim Sum Express
Jun 19, 2015
Rating Definitions
Benchmark: Hong Kong Hang Seng Index
Time horizon: 12 months
Company ratings
Buy
Stock expected to outperform benchmark by more than 15%
Accumulate
Stock expected to outperform benchmark by more than 5% but not more than 15%
Hold
Expected stock relative performance ranges between -5% and 5%
Underperform
Stock expected to underperform benchmark by more than 5%
Sector ratings
Positive
Sector expected to outperform benchmark by more than 10%
Neutral
Expected sector relative performance ranges between -10% and 10%
Cautious
Sector expected to underperform benchmark by more than 10%
Analyst Certification
The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant
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securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific
recommendations or views expressed in this research report.
Disclosure of Interests
(1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated
companies do not hold any shares of the securities mentioned in this research report.
(2) GF Securities (Hong Kong) and/or its affiliated or associated companies did not have any investment banking relationships with the companies
mentioned in this research report in the past 12 months.
(3) All of the views expressed in this research report accurately reflect the independent views of the analyst(s). Neither the analyst(s) preparing this report
nor his/her associate(s) serves as an officer of the companies mentioned in this report, or has any financial interests in or holds any shares of the securities
mentioned in this report.
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