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25 Nov, 2014 (Tuesday)

            
CHINAHONGQIAO(1378)
Analysis:
The People`s Bank cut interest rates, which was favorable to high debt stock like China Hongqiao (1378). Coupled with the expected raise in aluminum prices, which would also favorthe company. The Group was principally engaged in the manufacture of aluminum products, including liquid aluminum, aluminum ingots, aluminum casting products. As of the end of June this year, the Group has production capacity of aluminum product design of approximately 3.136 million tons, an increase of 27.7% yoy, ranking as China`s second-largest producer of aluminum products. Its gearing ratio was 60.8%, the financial cost was $742 million in the first half, an increase of 7.9% yoy, which partially eroded the profits. Aluminum prices bottomed out from the first quarter, entered the in the channel rise. In the third quarter, aluminum prices hit a high since February 2013, up to US$ 1,987 per ton, increased by 10.5% qoq. The estimated global aluminum consumption would increase from 52 million tons in 2013 to 66 million tons in 2018, the market would remain in shortage in the foreseeable future . (I do not hold the above stock)
Strategy:
Buy-in Price: $5.80, Target Price: $6.50, Cut Loss Price: $5.50

CHINA CINDA(1359)
Analysis:
Benefit from the People`s Bank interest rate cuts on deposit and lending rates, market was expected the period for interest cut began and generally believed PBC to lower interest rates or the deposit reserve ratio again. Interest rate cut reduced financing costs, led to the surge of interest rate sensitive stocks such as mainland infrastructure, property, insurance, brokerage yesterday. Some even soared more than 10%. Financing costs fell also help to improve the quality of assets, which was favorable to China Cinda (1359) that held a large number of low-quality assets, especially about 40% of the company assets are related to the real estate industry, which would reduce the risk of default on such assets.
Strategy:
Buy-in Price: $3.80, Target Price: $4.50, Cut Loss Price: $3.60


Tongda Group (698.HK) - Persistent growth with improved product mix

-In the third quarter, Xiaomi became the third smart cellphone manufacturer on the global list with its 17, 300 thousand shipments and 5.3% market share; Huawei took the sixth place with 16, 800 thousand and 5.1% share. The two companies’ smart phone shipments increased 211.3% and 32.3% respectively. Tongda Group expects that its cellphone casings will account for 30-40% and 20-25% of Huawei and Xiaomi's shipments respectively, and it will become the major beneficiary of the mainland's cellphone manufacturers` business expansion.

-The company owns the only complete LDS antenna production line in the mainland. This kind of technology is manly applied in 4G cellphones. It is expected that over 30% of domestic 4G products will apply the LDS technology. Therefore, the company will benefit from the rapidly expanding 4G market. Considering LDS and cellphone shell's bonding sell, and that higher selling price can be accomplished, the profitability is to be higher than that of the current business.

-Metal casings` application in the smart phone market will continue to improve. The company's amount of CNC machine tools will rise from 200 in 2013 to 500 at the end of this year. And it will also manufacture more metal cellphone casings in the future. Overall speaking, metal casings have more attractive prices and profitability. Therefore, in the future, the company's cellphone shells business will improve in both production capacity and structures.

-The company's businesses have extended to the production of parts as automotive upholstery. There is not only an increase of 90 million cars but also bigger decoration demands of stock market in the automobile industry. Besides, automobile parts possess great profitability, whose gross margin is as high as 30%. Therefore, we expect that automotive parts will become the company's new growth power in the middle period.

Investment Action

Smart phones` growth is slowing down, and the major its main technical application fails to reach the expectation, which both negatively impact on its recent performance. However, with the 4G market swiftly expanding and metal casing production capacity increasing, it is expected that the company's revenue and profitability will continue to improve.

Although the company’s scale is relatively small, its ability of sustainable growth is rare in the sector. Even conservatively granting it 12X times of EPS in 2015, the target price can reach 1.37 HKD, 35% premium than the latest closing price. We maintain it "Buy" rating.

To benefit from major clients` rapid growth

About half of Tongda Group's revenue comes from cellphone shells, and its major clients cover renowned manufacturers as Xiaomi, Huawei, Coolpad, ZTE and OPPO. As the biggest client, Huawei’s revenue contribution is as high as 30%. Xiaomi and Coolpad only started to largely increase their amounts in the first half year of this year, but their contributions are only standing at single-figure.

According to the IDC statistics, in the third quarter, Xiaomi became the third smart cellphone manufacturer on the global list with 17, 300 thousand shipments and 5.3% market share; Huawei took the sixth place with 16, 800 thousand and 5.1% share. It is worth mentioning that the two smart phones` shipments in the third quarter were 211.3% and 32.3% respectively. In response to the rapid increase of clients` demands, the company's subsidiary Xiamen factory's new production capacity was part of the production in September. It is expected that by the end of 2014, its cellphone shells` annual production may rise by 50% to 60 million, and the company also predicts that cellphone shells will account for 30-40% of Huawei's shipments and 20-25% of Xiaomi 's shipments respectively. Therefore, the company is expected to be the major beneficiary of the mainland's cellphone manufacturers` business expansion.

It is worth mentioning that the mainland's 4G market is rapidly expanding. There are about ten millions of new users every month, and the extension speed is greatly faster than that in the 3G age. Huawei and others are introducing relevant products. We believe that in the future, with the issuing of FDD national license, the 4G market will expand even faster. The company owns the only complete LDS antenna production line in the mainland, which is manly applied in 4G cellphones. It is expected that over 30% of domestic 4G products will apply the LDS technology. Therefore, the company will benefit from the rapidly expanding 4G market. Considering LDS and cellphone shell's bonding sell, and that higher selling price can be accomplished, the profitability is to be higher than that of the current business.

Metal casings` contribution may increase

At the moment, the company is oriented on plastic cellphone shells, which account for about 90%, whereas metal shells only take up 5-6%. What is worth to be brought about is that, after Apple, which is a leading enterprise that applies metal parts, more cellphone manufacturers are employing metal shells, including HTC, Nokia, Huawei, Xiaomi and so forth. As the one with the biggest share of smart phones, Samsung has also continuously released metal shell products recently. In 2013, the permeability of cellphones with metal shells already reached 15%. According to the application trend of digital cameras, tablet computers and ultrabooks using metal parts, we believe that metal shells` application in the smart cellphone market will continue to increase.

Adapting to this trend, the company has actively put investment in CNC machine tool to increase production capacity. The amount of CNC will rise to 500 by the end of the year from 200 in 2013, and the company will manufacture more metal cellphone shells in the future. Metal shells generally have more attractive prices and profitability, and some types` gross margin is as high as 30%, which is far higher than the company's profitability of 20%. Therefore, in the future, the company's cellphone shells business will improve in both production capacity and structures.

Diverse business expansion supports the continuous growth

In the past ten years, the diverse business structure of cellphones, laptops and electronic products guarantees the company's steady growth. This year, the company's business starts to extend to the production of parts as automotive upholstery. To our knowledge, this act is to relieve laptops and other businesses` depression. Although there is still an extensive market available for smart phones that have been supporting the development, the growth power is slowing down. There is not only an increase of 90 million cars but also bigger decoration demand of stock market in the automobile industry. Besides, automobile parts possess great profitability, whose gross margin is as high as 30%. Therefore, we expect that automotive parts will become the company's new growth power in the middle period.

Catalysts

LDS market's substantial extension;

Development of new clients.

Risks

Price pressure by intensified competition of smartphone vendors;

New plants are not put into operation as expected.

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Recommendation on 25-11-2014
RecommendationBuy
Price on Recommendation Date$ 1.040
Suggested purchase priceN/A
Target Price$ 1.370
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
Huishang Bank369818/11/2014Buy4.13.34
China Construction Bank93931/10/2014Accumulate6.55.72
Transportation and Automobiles Zhang Jing (86) 2151699200-103zhangjing@phillip.com.cn
Brilliance China111420/11/2014Buy15.6712.58
GAC Group223813/11/2014Accumulate8.527.47
Mainland Property Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
China South City166804/11/2014Buy5.53.52
Wanda Commercial Properties Group16929/09/2014Accumulate21.73
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
China State Construction International Holdings Ltd331116/05/2014Buy15.813.16
Hotels and Entertainment Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Galaxy Entertainment2719/11/2014Accumulate5651.75
Galaxy Entertainment2716/07/2014Accumulate7262.95
New Energy  
Kangda Env613624/11/2014Neutral4.053.88
Xinjiang Goldwind220810/11/2014Accumulate15.5613.46
Food, Beverage and Retail  
Samsonite International SA191012/11/2014Accumulate3127
Sa Sa International17816/09/2014Reduce5.075.81
Telecommunications  
Tongda Group69825/11/2014Buy1.370.000
AAC Technologies201817/11/2014Accumulate48.5543.85
Oil and Gas Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
CIMC ENRIC389927/10/2014Buy107.67
Anton Oilfield Service333710/10/2014Neutral2.22.29
Software & Service Kay Ng (852) 2277 6751kayng@phillip.com.hk
IGG800221/11/2014Accumulate3.953.44
BOYAA43414/11/2014Accumulate8.527.39

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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