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Summary of Equity Research Document (Aug 16, 2018)

Core Content Overview

This document provides an equity research analysis of the Chinese and Hong Kong markets, focusing on macroeconomic trends, sector performance, and specific company insights. It includes market indices performance, ADRs data, and detailed reports on the auto and retail sectors, with a special emphasis on Anta Sports. The analysis is supported by economic data, policy expectations, and company financials.

Key Market Indices Performance

• HSI and HSCEI show negative returns over the past year, with MXCN and SHSZ300 experiencing the largest declines.
• CCMP and UKX have seen strong EPS growth, but mixed P/E trends.
• SPX and INDU show relatively stable performance, with SPX having a positive YTD change.

Macro Economic Analysis

Reassessing Monetary Policy

• Rmb supply expanded in July, with new Rmb loans from total social financing (TSF) increasing by 41% YoY to Rmb1.29trn.
• Corporate and institutional new loans rose by 75.7% YoY to Rmb1.45trn, indicating improved financing in the real economy.
• Bond financing recovery is slow, and lower-grade city investment debt net financing remains negative, suggesting credit market reform will take time.
• TSF growth adjusted in July, with a 9.7% YoY increase, and off-balance sheet financing contracting at a slower pace.
• Regulators are likely using the new statistical methods to address bad assets and shadow banking issues.

What Next for China Economy?

• Exports may peak, while infrastructure is expected to bottom out.
• Fiscal expansion in 2H18 could drive infrastructure growth, but debt constraints may limit its ability to fully offset export slowdown.
• China's economy is expected to slow in 2H18, with limited export pressure, but pressure may rise again in 1H19.
• Industrial value added remained flat in July, and auto sector performance was weak.
• Property data remains positive, with growth in land purchases, construction starts, and sales.

Sector Analysis

Auto: Passenger Vehicle Innovation

• Fuel consumption regulations require PV OEMs to reduce average consumption to 5.0L/100km by 2020.
• NEV production requirements are driven by the double-scoring system.
• NEVs are not yet economically efficient compared to traditional vehicles.
• 48V mild-hybrid systems are expected to grow to 6.9-8.7% of PV market share by 2020.
• Purchase tax concessions may help NEVs reach parity with traditional vehicles by 2023.
• Risks: New energy policy not aligning with expectations, slow acceptance of energy-saving vehicle technologies.

Retail: Consumption Trends

• July retail sales increased by 8.8% YoY, with e-commerce up 27.3% YoY.
• NBS data show 7M18 retail sales increased by 9.3% YoY to Rmb21trn.
• E-commerce penetration reached 17.3% in July, with clothing and textiles seeing strong growth.
• Consumers are influenced by housing price increases, asset value growth, and shantytown monetization.
• 2H18 retail sales may grow at a slower pace due to housing destocking, rising D/A ratios, and higher auto taxes.
• Risks: Weak retail demand, slower-than-expected M&A activity.

Company Analysis: Anta Sports (2020 HK, Buy)

• 1H18 net profit rose 34% YoY to Rmb1,945m, exceeding estimates.
• FILA drove significant growth, with store numbers increasing by 44% and per store sales improving.
• Management has raised FILA's revenue CAGR target to 50% for FY18-20.
• Operating cash flow declined by 28%, but the drop is attributed to supplier payments and inventory build-up.
• Valuation was adjusted upward, with target price (TP) raised to HK$49.60 based on 23x FY19E P/E.
• Risks: FILA performance below expectations, macroeconomic slowdown.

Rating Definitions

• Company Ratings:

  • Buy: Expected to outperform benchmark by >15%.
  • Accumulate: Expected to outperform by 5-15%.
  • Hold: Expected to have -5% to 5% relative performance.
  • Underperform: Expected to underperform by >5%.

• Sector Ratings:

  • Positive: Expected to outperform benchmark by >10%.
  • Neutral: Expected to have -10% to 10% relative performance.
  • Cautious: Expected to underperform by >10%.

Analyst Certification and Disclosure

• The research analyst certifies that the views expressed reflect their personal opinions and that remuneration is not tied to specific recommendations.
• GF Securities (Hong Kong) does not hold shares in the mentioned securities and has no investment banking relationships with the companies analyzed.
• The analyst and associates do not have financial interests in the securities or companies mentioned.
• The report is for informational purposes only and does not constitute an offer to buy or sell securities.

Disclaimer

• This report is prepared by GF Securities (Hong Kong).
• It is not an investment recommendation and does not guarantee future performance.
• The information is current as of the date of the report and may change without notice.
• Investments involve risks, and the price of securities may fluctuate. Past performance is not indicative of future results.
• The report is intended for GF Securities (Hong Kong) clients only.