20150702-工银国际-VIEWPOINTS_EXPRESS_12页_403kb_403kb

Market Report Summary - 2 July 2015

Core Content

This market report provides an overview of the China Dairy Farming Sector and TMT Sector as of 2 July 2015, highlighting investment opportunities and market trends.

China Dairy Farming Sector

The report suggests that the China Dairy Farming Sector is expected to recover in the near term due to the anticipated raw milk price rebound in 4Q15. Key factors supporting this recovery include:

• Milk powder destocking continuing
• Global milk powder prices reaching a bottom
• No significant long-term impact from the abolition of EU quota
• 4Q is typically a trough season for raw milk production

The report also emphasizes the downstream growth potential for dairy farming companies, as they move from mature upstream operations to expanding into the liquid milk market. This expansion is supported by the adoption of new marketing models like O2O and e-commerce, which provide higher revenue growth with lower SG&A/sales.

The sector is rated as overweight, and the report recommends a Buy rating for both China Modern Dairy (CMD, 1117.HK) and China Shengmu Organic Milk (1432.HK).

CMD (1117.HK)

• Company Overview: CMD is the largest dairy farm company in China with nationwide farms.
• Rating: Buy
• Target Price: HK$3.60
• Upside Potential: 30.0%
• Key Points:
  • CMD's dairy farming business is expected to become a cash cow.
  • It is forecasted to have a revenue CAGR of 10% and core net profit CAGR of 14% during FY14-17E, driven by liquid milk growth.
  • It has a market leading position, improving product mix, and excellent corporate governance.
  • The selling price to Mengniu was Rmb4.6/kg in 2Q15, slightly down from Rmb4.7/kg in 1Q15.
  • It is expected to expand customer coverage to Central and Southern China after the operation of the Bengbu processing plant.

Shengmu (1432.HK)

• Company Overview: A vertically integrated organic dairy company with a strategic position in the organic market.
• Rating: Buy
• Target Price: HK$2.70
• Upside Potential: 25.6%
• Key Points:
  • It is expected to capture organic growth from consumers' lifestyle changes and increased disposable income.
  • The company has high entry barriers, including strategic location in Ulan Buh desert and dual organic certifications.
  • It is forecasted to have a revenue CAGR of 39% and core net profit CAGR of 38% during FY14-17E.
  • The organic milk model provides less price fluctuation and price premiums over conventional milk.

Sector Valuation and Performance

• Dairy Farming Sector trades at 11.1x 12-month forward PE, which is 10% below the historical average.
• Discounts compared to other sectors:
  • Consumer staples: 54%
  • Retail: 28%
  • Apparel: 28%
• Upside Potential: The report sees meaningful upside potential due to the expected raw milk price recovery in 4Q15, with limited downside risks.

Investment Summary

TMT Sector

The TMT Sector highlights several key developments:

• Baidu is investing Rmb20 billion in online-to-offline (O2O) services in China.
• Shanghai's game industry is expected to account for one third of national game revenue in 2015.
• Xiaoju Kuaizhi is in talks to invest in GrabTaxi, a leading Southeast Asian taxi app.
• Chope, an online restaurant booking service, has raised $8 million and seen revenue double in the past year.
• ABB and Philips are collaborating to tap into the smart home industry in China, integrating Philips Hue and ABB i-jia brands.

Market Indices and Commodity Prices

• HK Equities:

  • Hang Seng Index (HSI): 26,250 (1.1% change)
  • H-share Index: 12,981 (2.3% change)
  • Turnover: HK$155.9 billion
  • -% from HSI: 27.2%
  • -% CBBC, warrants: 22.7%

• China Equities:

  • CSI 300 Index: 4,253 (-4.9% change)
  • Shanghai Composite Index: 13,651 (-4.8% change)
  • Shenzhen Composite Index: 2,346 (-4.8% change)

• Asian Equities:

  • Nikkei 225: 20,329 (0.5% change)
  • Korea KOSPI: 2,098 (1.1% change)
  • Taiwan TWSE: 9,375 (0.6% change)
  • India Sensex 30: 28,021 (0.9% change)

• US/European Equities:

  • DJIA: 17,758 (0.8% change)
  • S&P 500: 2,077 (0.7% change)
  • NASDAQ: 5,013 (0.5% change)
  • UK FTSE 100: 6,609 (1.3% change)
  • Germany DAX: 11,181 (2.2% change)
  • France CAC40: 4,883 (1.9% change)

• Commodity Prices:

  • WTI Oil: $57.0 per barrel
  • Gold: $1,171.6 per troy ounce
  • Copper Futures: $5,775.0 per metric ton
  • Aluminum Futures: $1,727.0 per metric ton
  • Reuters/Jefferies CRB Futures: 224.1
  • Baltic Dry Index: 794.0

• Interest Rates:

  • UST yield 3m: 0.02%
  • UST yield 10y: 2.42%
  • HIBOR 3m: 0.39%
  • USD LIBOR 3m: 0.28%

Key Highlights

• The dairy farming sector is poised for recovery and downstream growth.
• CMD and Shengmu are highlighted as strong investment opportunities.
• The TMT sector shows activity and growth potential, with Baidu, Shanghai's game industry, GrabTaxi, Chope, and ABB-Philips collaboration as key points.
• Market indices across Asia, China, and the US/Europe show mixed performance with some positive changes.
• Commodity prices and interest rates are stable or slightly declining, with gold and aluminum showing minor increases.

This report provides key insights for investors looking to capitalize on the dairy farming sector and TMT industry in China and the Asia-Pacific region.