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26 Sep, 2014 (Friday)

            
SINOLIFE UNITED( 3332)
Analysis¡G
Sinolife United (3332) is principally engaged in the manufacturing and sales of nutritional and dietary supplements and health food in PRC. The performance of its first half was in line, with operating income was RMB 96 million, an increase of 11.6% yoy. Profit attributable to shareholders increased 10.4% to RMB 32.8 million. Overall gross profit margin was 89.6%, up 2.7 percentage points, which mainly due to the adjustment of the sales mix that increased the sales of Chinese developed and manufactured nutritional and dietary supplements. In June this year, the Group entered into a cooperation agreement with COFCO Nutrition & Health Research Institute to share the latest product development and research. Both two sides will also jointly launched project "COFCO Sino Nutrition and Health Supermarket" to promote high-quality nutritional products in mainland. As well as jointly set up research centers to develop nutritional and dietary supplements.
Strategy¡G
Buy-in Price: $1.40, Target Price: $1.60, Cut Loss Price: $1.30

PHOENIX HEALTHCARE(1515)
Analysis¡G
Phoenix Healthcare (1515) released outperforming interim results last month, which recorded a turnover of RMB 507 million (as below), up 20.79% yoy. Gross profit was RMB 119 million, up 36.52% yoy, while net profit was 82.38 million, rose 63.61% yoy. Earnings per share was RMB 0.1, no interim dividend. The Group mainly provided services in hospitals and medical facilities in Beijing, while in the conference, the management also revealed the future plan of investment - operate - transfer (IOT) model, to develop the markets outside Beijing or to set up jointly operated hospitals with foreign capitals. Phoenix has recently also entered into an IOT agreement with Beijing Maternal & Child Health (MCH) Hospital for the operation until 2030.
Strategy¡G
Buy-in Price: $12.70, Target Price: $14.00, Cut Loss Price: $12.30


2014 Interim Report of China¡¦s Banking Sector - Stable growth of profits with potential risks of asset quality

-In all, China's economic growth slowed down but sill maintained on quite stable increase over 7% in 1H2014. Stable macroeconomic environment provided the good external condition for the development of China's banking sector. According to NBSC, as at the end of 2Q2014, accumulated GDP increased by 7.4% to RMB26.9 trillion, the same as the growth in 1Q;

-By the end of 1H2014, China's foreign reserve increased largely by 14.20% y-y to US$3.99 trillion accumulatively, but both the growth rate and the amount went down. The scale of China's reserve increased consistently mainly benefited from FDI, trade surplus and international capital inflow, representing that international investors have confidence in China's economy, but the growth of capital inflow will slow down. On the other hand, this will reduce inflationary pressure to China and bring more rooms of the adjustment for the PBOC to manage the growth of loans;

-Due to the reduce of the liquidity, CPI decreased slowly this year, by the end of Aug 2014, China's CPI increased by 2.0% y-y, of which food index increased by 3.0% y-y, both dropped obviously compared with the beginning of the year. We think China may face the deflationary pressure in future if CPI dropped largely under the downward trend of the economy;

-The PBOC continues to hold quite easing monetary policy in 2014. By the end of Aug 2014, 1-year deposit and lending interest rates of Chinese financial institutions maintained 3% and 6% respectively. According to the money supply, China's M1 and M2 increased by 5.71% and 12.84% y-y respectively, which trended to decrease;

-Deposit of residents decreased continually in 2014 while RMB loans of financial institutions dropped as well. By the end of Jun 2014, personal savings increased by 8.45% to RMB4.837 trillion, and RMB loans of China's financial institutions reached to RMB77.63 trillion, up 14.03% y-y, as 14.15% in Jun 2013. It is worth noting that personal savings decreased in Jul and Aug;

-Due to the slow-down of macroeconomic environment, the performance of domestic banks trended to decrease in 1H2014. According to the data in 1H2014, Chinese banks` profit growth decreased, in line with our expectation. In all, considering the large difference of the operating scale, we exclude city commercial banks, NIMs of 9 domestic listed banks continued to decrease, and net profits increased by 8.7% in average;

-By the end of 2Q, net loans of 9 domestic banks increase by 8.07% in average. BOC's net loans recorded the largest growth, up 10.73% to RMB8.024 trillion compared with the end of 2013, the only one gained more than 10% of growth rate among the peers. BoCom had the lowest growth rate, up 5.06% to RMB3.35 trillion;

-In 1H2014, banks scale remained stable growth, most of them gained the higher growth of assets compared with the end of last year. CMB and CITIC Bank's total assets increased by 25.3% and 18.4% respectively, and BOC's total assets also increased by 11.5%;

-According to the distribution of loans, manufacturing, wholesale and retail, transportation, storage & postal, and property development are still the major parts of the banks` loans, especially the proportion of the loans in manufacturing was much higher than others;

-The bank's asset quality still remained stable, and however, the NPL ratios went up slowly with the increased amount of the NPLs. By the end of 2Q2014, ABC still owned the highest NPL ratio as 1.24% among the peers while CMBC had the lowest one as 0.93%. We expect most of the banks` NPL ratio will up continually in the next few quarters, representing the continued deterioration of banks` asset quality;

-Based on the new method approved by the CBRC since 2013, domestic banks` CAR declined obviously, but started to rebound this year. As at the end of Jun 2014, all banks` CAR increased y-y except BOC, CARs of state-owned banks were much lower than others. We expect the CARs will continue to go up in 2H2104;

-By the end of June, BOC's NIM was the lowest among the peers, but continued to increase slowly. ABC's NIM was the highest, maintained at the stable level. Additionally, CMBC's NIM increased rapidly, and its incomes gained the large growth due to the low base. The performance of ABC's profit growth was better than other large-sized banks. Quarterly net profit of 9 domestic banks increased by 8.67% in average. CMB gained the highest growth as 17.09% while CITIC Bank owned the lowest one as 1.39% only;

-Currently, the valuation of domestic banks is relatively lower. Overall, domestic banks` P/B now is below 1.0x and P/E is lower than 10x, around 4.0-6.0x, therefore the valuation is quite attractive and we still recommend the Buy rating for the sector;

-Considering the operating performance and share prices of banks, we prefer ABC and BOC among the large-sized state-owned banks, and CMBC, CITIC Bank and CMB among joint-stock commercial banks.

China's macroeconomic environment maintained stable

Overall, China's economic growth slowed down but sill maintained on quite stable increase over 7% in 1H2014. Stable macroeconomic environment provided the good external condition for the development of China's banking sector. According to NBSC, as at the end of 2Q2014, accumulated GDP increased by 7.4% to RMB26.9 trillion, the same as the growth in 1Q;

We believe the range of decrease should be small although China's economy trends to go down based on the current data, and it should be around 7.3%-7.4% in 2014.

According to the foreign reserve, China's reserve decreased obviously after 2011 based on the previous high base. However, it has started to increase since 2H2012 affected by internal and external economic environment.

By the end of Jun 2014, China's foreign reserve increased largely by 14.20% y-y to US$3.99 trillion accumulatively, but both the growth rate and the amount went down. The scale of China's reserve increased consistently mainly benefited from FDI, trade surplus and international capital inflow, representing that international investors have confidence in China's economy, but the growth of capital inflow will slow down. On the other hand, this will reduce inflationary pressure to China and bring more rooms of the adjustment for the PBOC to manage the growth of loans.

However, we expect the scale of international capital inflow will continue to increase under the further opening of China's market in future.

Due to the decrease of the liquidity, CPI decreased slowly this year, by the end of Aug 2014, China's CPI increased by 2.0% y-y, of which food index increased by 3.0% y-y, both dropped obviously compared with the beginning of the year. We think China may face the deflationary pressure in future if CPI dropped largely under the downward trend of the economy;

The PBOC continues to hold quite easing monetary policy in 2014. By the end of Aug 2014, 1-year deposit and lending interest rates of Chinese financial institutions maintained 3% and 6% respectively.

According to the money supply, as at the end of Aug, China's M1 and M2 increased by 5.71% and 12.84% y-y to RMB33.20 trillion and RMB119.75 trillion respectively, which trended to decrease;

The PBOC has strictly controlled the loans since 2010, and the growth of both deposits and loans of China's financial institutions maintained at the low level. Deposit of residents decreased continually in 2014 while RMB loans of financial institutions dropped as well. By the end of Jun 2014, personal savings increased by 8.45% to RMB4.837 trillion, and RMB loans of China's financial institutions reached to RMB77.63 trillion, up 14.03% y-y, compared with 14.15% in Jun 2013. It is worth noting that personal savings decreased in Jul and Aug, down to RBM47.1 trillion in Aug.

Currently, loans of financial institutions still increase by over 10%. By the end of Aug, RMB loans of China's financial institutions reached to RMB78.72 trillion. The market concerned about the risks of shadow banks of financial institutions in China.

Currently, the concern is mainly from the uncertainty of the scale of shadow banks, and there are large differences of the estimation based on different methods. According to FSB, take the US as the benchmark, China is still at the early stage of the financial market, and the scale of shadow banks would be very small based on the financial derivatives, hedge funds, etc., around RMB5-10 trillion as estimated.

However, considering China's unique financial system, including non-banking financial institutions such as securities, funds, trusts, leasing, wealth management and PE, etc., we forecast China's shadow banks would amount to RMB45 trillion approximately, around 60% of total RMB loans of China's financial institutions.

Shadow banks would be one of the largest threats for China's current financial system considering it was one of main reasons of financial crisis in the U.S. in 2008, and it is difficult to estimate its real scale. We believe it may be one of major causes for China's financial crisis in future.

Stable operating performance of domestic banks

Due to the slow-down of macroeconomic environment, the performance of domestic banks trended to decrease in 1H2014. According to the data in 1H2014, Chinese banks` profit growth decreased, in line with our expectation. In all, considering the large difference of the operating scale, we exclude city commercial banks, NIMs of 9 domestic listed banks continued to decrease, and net profits increased by 8.7% in average;

By the end of 2Q, net loans of 9 domestic banks increase by 8.07% in average. BOC's net loans recorded the largest growth, up 10.73% to RMB8.024 trillion compared with the end of 2013, the only one gained more than 10% of growth rate among the peers. BoCom had the lowest growth rate, up 5.06% to RMB3.35 trillion;

In 1H2014, banks scale remained stable growth, most of them gained the higher growth of assets compared with the end of last year. CMB and CITIC Bank's total assets increased by 25.3% and 18.4% respectively, and BOC's total assets also increased by 11.5%.

We believe total assets of banks will continue to increase stably in 2H2014, with the average growth of 10% approximately.

According to the distribution of loans, manufacturing, wholesale and retail, transportation, storage & postal, and property development are still the major parts of the banks` loans, especially the proportion of the loans in manufacturing was much higher than others. However, in recent years, the banks increased the proportion of loans in wholesale and retail sector, and reduced the proportion of other main sectors.

The bank's asset quality still remained stable, and however, the NPL ratios went up slowly with the increased amount of the NPLs. By the end of 2Q2014, ABC still owned the highest NPL ratio as 1.24% among the peers while CMBC had the lowest one as 0.93%.

We expect most of the banks` NPL ratio will up continually in the next few quarters, representing the continued deterioration of banks` asset quality. However, the absolute value of the NPL ratio still maintained at the low level as 1% in average, therefore total risks are under control in the short term.

The other main risk is coming from the capital pressure. Based on the new method approved by the CBRC since 2013, domestic banks` CAR declined obviously, but started to rebound this year. As at the end of Jun 2014, all banks` CAR increased y-y except BOC, CARs of state-owned banks were much lower than others. CMBC and CITIC Bank gained the largest growth of CAR, and CCB had the highest CAR of 13.89% based on the absolute value among the peers.

We expect the CARs will continue to go up in 2H2104.

On the other hand, according to the profit performance, profits of domestic banks continued to increase stably. This is because the bank's NIM maintained at the stable level under the unchanged interest rates made by the PBOC.

By the end of June, BOC's NIM was the lowest among the peers, around 2.27%, but continued to increase slowly. ABC's NIM was the highest as 2.93%, maintained at the stable level. Additionally, CMBC's NIM increased rapidly, and its incomes gained the large growth due to the low base. The performance of ABC's profit growth was better than other large-sized banks.

Due to the stable level of NIM, interest incomes of domestic banks increased slowly, and the growth of non interest incomes also declined because of the stronger market competition. It is worth noting that intermediate businesses of both CMB and CITIC Bank increased significantly, net commission income and fee grew 67.34% and 60.55% y-y to RMB23.702 billion and 12.807 billion respectively. We expect the banks` incomes would increase continually, but the growth of non interest incomes, especially for commission income and fee will be higher than that of interest incomes.

However, the slow-down of the growth of interest income also caused the bank's profits to decline. By the end of 2Q2014, quarterly net profit of 9 domestic banks increased by 8.67% in average, among which CMB gained the highest growth as 17.09% to RMB15.514 billion, and ABC and CEB also gained the growth rates of 11.6% and 10.43% respectively. CITIC Bank had the lowest one as 1.39% only.

We estimate the quarterly profit growth of domestic banks would continue to decrease, around 7%-8% in average in 2H 2014.

Recommendation and valuation

Currently, the valuation of domestic banks is relatively lower. Overall, domestic banks` P/B now is below 1.0x and P/E is lower than 10x, around 4.0-6.0x, therefore the valuation is quite attractive.

Additionally, according to the share price performance, based on the latest closing price (25 Sep), we can see CITIC Bank gained the best share price performance in terms of the return in 1 year. In the long run, most banks` share price performance is better than the benchmark, among which CMBC's return is the highest, as 108.7% in terms of the price return in 3 years, and CCB has the lowest return, only around 3.7%. In the long term, the banks` risk resistance capability is still quite strong.

However, share prices of banks have changed with a remarkable periodicity, and therefore, timing is a very important issue for purchasing.

In summary, considering the operating performance and current share prices of banks, we prefer ABC and BOC among the large-sized state-owned banks, and CMBC, CITIC Bank and CMB among joint-stock commercial banks, and still recommend the Buy rating for the sector.

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Recommendation on 26-9-2014
RecommendationBuy
Suggested purchase priceN/A
Target PriceN/A
Writer Info
Xingyu Chen
(Research Analyst)
Tel: +86 21 5169 9400 ¡V 105
Email:
chenxingyu@phillip.com.cn

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Phillip Research - Hong Kong ½÷¥ß¬ã¨s³¡ ¡V ­»´ä¤Î¤¤°ê
Company Stock Code Last Update Suggestion Target Price Price on Recom
Mainland Financial Xingyu Chen (86) 2151698900-105chenxingyu@phillip.com.cn
2014 Interim Report of China¡¦s Banking Sector26/09/2014Buy0.000
PICC133918/09/2014Buy4.093.35
Transportation and Automobiles Zhang Jing (86) 2151699200-103zhangjing@phillip.com.cn
China Southern Airlines105523/09/2014Neutral2.782.69
TravelSky69615/09/2014Accumulate8.737.9
Mainland Property Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Color Life177822/09/2014Buy86.58
Greentown China390011/08/2014Accumulate88.16
Insurance Xingyu Chen (86) 2151699400-105chenxingyu@phillip.com.cn
New China Insurance133615/08/2014Buy36.628
New China Insurance133616/07/2013Buy30.1422.2
Properties  
China State Construction International Holdings Ltd331116/05/2014Buy15.813.16
Hysan Development001418/03/2014Accumulate36.833.35
Hotels and Entertainment Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Galaxy Entertainment2716/07/2014Accumulate7262.95
Galaxy Entertainment Group2716/04/2014Accumulate7868.7
New Energy  
Huaneng Renewables95817/09/2014Buy3.542.7
CT Environmental Group136305/09/2014Accumulate7.86.53
Food, Beverage and Retail  
Sa Sa International17816/09/2014Reduce5.075.81
Samsonite International SA191012/09/2014Accumulate3126.55
Telecommunications  
SMIC98125/09/2014Buy10.78
Trigiant Group130019/09/2014Buy32.18
Oil and Gas Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Jutal Offshore Oil Services330303/09/2014Buy3.83.04
Anton Oilfield Service333731/07/2014Accumulate5.24.51
Software & Service Kay Ng (852) 2277 6751kayng@phillip.com.hk
KINGDEE INT`L26824/09/2014Buy3.052.46
PAX GLOBAL TECH32708/09/2014Buy9.557.88

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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