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27 May, 2015 (Wednesday)

            
HAOHAI BIOTEC(6826)
Analysis:
Shanghai Haohai Biological Technology (6826) is engaged in the research and development, manufacturing and sales of absorbable biomedical materials which are non-toxic, biodegradable in the human body and can be used in various general and specialty surgeries. The Company strategically target the fast-growing therapeutic areas in the absorbable biomedical materials market in China, including orthopedics, anti-adhesion and hemostasis, ophthalmology and wound care and tissue filling. According to SME Research estimates, the CAGR of the PRC Orthopedic Intra-Articular Viscosupplement market, Post-operative Anti-adhesion market, Ophthalmic Viscoelastic market and rhEGF market from 2014 to 2019 will be26.3%,23.1%,16.2% and 26% respectively, implying huge growth potentials for HaoHai. (I do not hold the above stock)
Strategy:
Buy-in Price: $57.50, Target Price: $63.50, Cut Loss Price: $55.00


Semiconductor Manufacturing International Corporation (981.HK) - 1Q15 results are better than guidance

In 1Q15, SMIC's net profit registered US$55.48million, representing a significant growth of 174% yoy and 95% qoq, which was profit for the consecutive 12 quarters. The gross margin of 29.4% represented the highest over the past 10 years, higher than the expected range of 27-29%. The sustained good results can be attributed to its implementation of the short-term strategy which attached much importance to mature technology and maximized use of existing assets. Meanwhile, it has also upgraded the product portfolio. Furthermore, with depreciation drawn sufficiently with some equipment, the depreciation declined by nearly 10 ppts yoy and qoq, which also improved the profitability.

According to the guidance given by the management, the revenues for Q2 continued to grow by 2%-5% qoq standing at US$520 million to US$535 million and with gross margin between 27% and 29%, still better than expected. We attribute this to the optimistic demand for wafer foundry. In the mainland, the industry will grow more rapidly due to the import substitution.

SMIC's introduction of 28nm technology is going well, for it has received orders and risk production is scheduled to begin in Q2. It is likely that the new technology contributes to revenues next quarter. This helps further optimize the Company's product portfolio and improve gross margin structurally.

China Integrated Circuit Industry Investment Fund announced its participation in SMIC issuing additional stock with HK$3.1 billion, which will be used for capital expenditure, debt repayment and overall operation expenditure. We understand that the government is beginning to lend substantial support to the semiconductor industry, which is beneficial for the Company to improve its manufacturing capability and ease the pressure on its capital expenditure. Moreover, we believe that the government will issue more supportive policies to drive IC industry. As the leading company, SMIC will definitely benefit from the move.

The sustained profit may improve investors` expectation

Thanks to its implementation of sustainable profit strategy, SMIC has experienced sustained stable results, with both capacity utilization and profitability reaching a high level, which may help improve investors` expectation. In the future, the Company will continue to benefit from import substitution and products upgrading, the positive progress in introducing more sophisticated technology and the new industry-supporting policies are likely to become catalyst. We fix the target price at HK$ 0.99 with 1.3X 2015BVPS and maintain it “Accumulate” rating. (Closing price as at 25 May 2015)

1Q15 results are better than guidance

According to the latest Q1 report, SMIC recorded revenues of US$510 million in the quarter, representing a growth of 13.02% yoy or 4.92% qoq, close to the upper limit of what is expected. Its net profit registered US$55.48million, representing a significant growth of 174% yoy and 95% qoq, which was profit for the consecutive 12 quarters. The gross margin of 29.4% represented the highest over the past 10 years, higher than the expected range of 27-29%.

We think that, compared to the previous unstable performance, the sustained good results can be attributed to its implementation of the short-term strategy which attached much importance to mature technology and maximized use of existing assets. Meanwhile, due to the growth of IC ecological chain in the mainland, the revenues from Chinese customers accounted for 40% of its total over the past eight quarters and even 47% of the total registered over the first quarter. All factors helped to take its capacity utilization up to historical high of 99.7%.

In addition, SMIC implemented the upgrading of its product portfolio. Its sales of 40/45nm wafers accounted for 16%, up by 6.2 ppts yoy and 5.1 ppts qoq. The combined revenues generated from 40nm and 65nm wafers increased by 25% qoq and 58% yoy. Furthermore, with depreciation drawn sufficiently with some equipment, the depreciation declined by nearly 10 ppts yoy and qoq, which also improved the profitability.

2Q15 results guidance continue to be better than expected

According to the guidance given by the management, the revenues for Q2 continued to grow by 2%-5% qoq standing at US$520 million to US$535 million and with gross margin between 27% and 29%, still better than expected. We attribute this to the optimistic demand for wafer foundry. It is forecast that the global semiconductor industry will still be in booming cycle and grow by 6% or so in 2015, while in the mainland, the industry will grow more rapidly due to the import substitution. Currently, SMIC has a lower market share compared to comparable international companies such as TSMC. But with the fast development of China-based design companies like HiSilicon Technologies and Spreadtrum Communications, which are gaining an increasing market share, Chinese wafer foundries including SMIC will benefit. It is worth mentioning that according to the management, the demand for 40/45nm wafer is promising and will help the Company maintain high-level profitability.

28nm technology advances smoothly

SMIC's introduction of 28nm technology is going well, for it has received orders and risk production is scheduled to begin in Q2. It is likely that the new technology contributes to revenues next quarter. It is worth noting that 28nm products are priced significantly higher than the current integrated product price. Therefore, its contribution to revenues is expected to rise up to 10%. This helps further optimize the Company's product portfolio and improve gross margin structurally.

Substantial support by the sector fund aims for long-term development  

China is active in developing IC industry but is relatively backward in the key manufacturing section which relies on huge investment. On Feb.13, 2015, China Integrated Circuit Industry Investment Fund announced its participation in SMIC issuing additional stock with HK$3.1 billion, which will be used for capital expenditure, debt repayment and overall operation expenditure. We understand that the government is beginning to lend substantial support to the semiconductor industry, which is beneficial for the Company to improve its manufacturing capability and ease the pressure on its capital expenditure. Considering such factors as Prism program scandal and national information security, it is believed that the government is expected to issue more supportive policies to drive IC industry. As the leading company, SMIC will definitely benefit from the move.

Catalyst

More industry-supporting policies;

Advanced technology implementation is better than expected.

Risks

Intensified industry competition;

Lower-than expected growth in mainland customers;

Accrued depreciation drags down the rising of profitability.

Financials

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Recommendation on 27-5-2015
RecommendationAccumulate
Price on Recommendation Date$ 0.840
Suggested purchase priceN/A
Target Price$ 0.990
Writer Info
Fan Guohe
(Research Analyst)
Tel: (86) 21 51699400-110
Email:
fanguohe@phillip.com.cn

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Phillip Research - Hong Kong 輝立研究部 – 香港及中國
Company Stock Code Last Update Suggestion Target Price Price on Recom
Mainland Financial Xingyu Chen (86) 2151698900-105chenxingyu@phillip.com.cn
China Life262821/05/2015Buy52.737.7
Bank of Chongqing196313/05/2015Accumulate9.27.85
Transportation and Automobiles Zhang Jing (86) 2151699200-103zhangjing@phillip.com.cn
Geely17522/05/2015Accumulate4.454.19
Cathay Pacific29315/05/2015Accumulate21.319.4
Mainland Property Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Gemdale Group60038319/05/2015Accumulate 1513.9
Beijing Capital Land286808/05/2015Accumulate86.87
Insurance Xingyu Chen (86) 2151699400-105chenxingyu@phillip.com.cn
CPIC260111/11/2014Buy33.728.1
New China Insurance133615/08/2014Buy36.628
Properties  
FORTUNE REIT77814/10/2014Accumulate7.326.92
Hysan Development001418/03/2014Accumulate36.833.35
Local Financials Xingyu Chen (86) 2151698900-105chenxingyu@phillip.com.cn
HSBC509/08/2013Accumulate100.484.25
HSBC Holdings PLC000509/05/2013Accumulate9587.7
Health & Personal Care Fan Guohe  (+ 86 21 51699400-110)fanguohe@phillip.com.cn
Zhongxin Pharmaceuticals60032912/05/2015Hold23.6422.89
Austar Lifesciences Limited611829/04/2015BUY5.63.25
Hotels and Entertainment Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Wisdom Group166105/01/2015BUY6.554.6
Galaxy Entertainment2719/11/2014Accumulate5651.75
New Energy  
Grandblue ENV60032326/05/2015Buy2820.42
Singyes Solar75020/05/2015Buy14.2511.8
Food, Beverage and Retail  
Samsonite International SA191026/03/2015Accumulate30
Samsonite International SA191025/03/2015Accumulate3026.55
Telecommunications  
Semiconductor Manufacturing International Corporation98127/05/2015Accumulate0.990.000
ChinaSoft International35418/05/2015Accumulate5.574.94
Oil and Gas Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
SPT Energy125124/02/2015Reduce1.51.74
CIMC ENRIC389927/10/2014Buy107.67
Software & Service  
Goldpac Group331518/02/2015N/A4.77
KINGDEE INT`L26802/12/2014Accumulate2.752.45

Information contained herein is based on sources that Phillip Securities (Hong Kong) Limited and/or its affiliates ( the “Group”) believe to be accurate. The Group does not bear responsibility for any loss occasioned by reliance placed upon the contents hereof. The Group (or its employees) may have interests in relevant investment products. For details of different products’ risks, please view the Risk Disclosures Statement on http://www.phillip.com.hk.

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