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3 May, 2016 (Tuesday)

            
TENGY ENV(1527)
Analysis¡G
Zhejiang Tengy Environmental Technology Co. recently announced that the Group is considering and exploring the possibility of issuance of A shares. The Group is an integrated atmospheric pollution control solution provider, with a primary focus on particulate emission control by offering mega-sized precipitators to customers in various industries. The New Environmental Protection Law was officially implemented in the PRC on 1 January 2015. Besides, the "Law of the Prevention and Control of Atmospheric Pollution (Revised Bill)" has been proposed to The Standing Committee of the National People`s Congress for consideration and approval. Increasingly stringent environmental protection regulations will accelerate the development of the environmental protection industry, particularly the industry of operations and maintenance services for atmospheric pollution control facilities. As a leading integrated atmospheric pollution control solution provider, the Group will continue to be benefited from the relevant policies. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $6.20, Target Price: $7.00, Cut Loss Price: $5.75

GEELY AUTO(175)
Analysis¡G
GEELY will introduce a new brand with Volvo in 2017 with a codename of L, developed by the CMA platform, which was jointly cooperated by two companies, as Reuters cited insiders. It is learnt that the new brand will introduce one SUV and one limousine. However, the spokesperson of Geely and Volvo refused to comment on the above news. An insider said the brand L aims to compete with Sino-foreign car brands, so Volvo can continue to focus on the luxury car market, while Geely can put the focus on the competition against other local Chinese automobile brands.
Strategy¡G
Buy-in Price: $3.87, Target Price: $4.80, Cut Loss Price: $3.405


China Railway Signal & Communication (3969.HK) - Advantage Prominent but Undervalued

Stable Growth in 2015

China Railway Signal & Communication (CRSC) is the world's largest solution provider for rail control system. With world's leading technology, it has monopolistic advantages in the field of railway signal, and is the leader in other rail traffic signal fields. In 2015, the company recorded the revenue of RMB23.95 billion, up 38.2% year-on-year. The net profit was RMB2.5 billion, an increase of 22.8%.

Among the three businesses, the revenue of design integration business increased by 18.3% to RMB5.808 billion, and the revenue of equipment manufacturing business grew by 17.6% to RMB6.9 billion, and that of the system delivery business increased by 38.6% to RMB7.44 billion. The three businesses were mainly benefited from the stable development of Chinese rail transit industry. In addition, the revenue of other businesses soared by 221.9% to RMB3.8 billion, which was also benefited from the company's efforts in vigorously developing related business besides devoting to signal business in the meantime.

As for the profitability, the company reversed the small decline in the last two years, resulting in a year-on-year increase in gross profit margin by 0.9% to 25.1%. The gross profit margin of design integration, equipment manufacturing and delivery system businesses increased by 3.8%, 3.0% and 1.0%, respectively as the company reduced the cost and increased the efficiency through fine management and adjustments of sales structure. However, the company's operating expenses increased a bit faster as the sales expenses grew by 41%, mainly on expansion of the business. The administrative cost grew by 31% due to the increased R&D input, which also dragged down the company's result growth.

Rapid Outbreak in Urban Rail and Overseas Market

The rapid growth period of railway business has come to past already, and the 12,000 km high-speed railway newly built during the ¡§13th Five-Year Plan¡¨ will maintain a normal growth in the railway sector. However, China's vast rail network will face huge market in terms of system upgrade and operation maintenance. Currently, the high-speed rails running over 7 years account for only 4% of the total operating mileage, but those running for 5 to 7 years take up about 23%. Thus, the revenue from operation and maintenance is expected to rise soon. In general, the railway business is still expected to experience a double-digit growth continuously in the future.

The company has equipped Line 8 of Beijing Subway with its CBTC system of proprietary intellectual property rights, and will cooperate with CASCO to seek more metro market opportunities. Rapid growth is expected to take place in 2016. Tram market has been rising rapidly with its advantages of low cost, short construction cycle, large capacity and use of clean energy. The estimated annual growth is expected to be 64%. As the leader in control system of this field, the company is expected to take up over 40% of market share. Presently, the company has officially started its construction project cooperated with Tianshui City in PPP mode. In 2015, the company signed new contracts in the field of urban rail transit, worth RMB9.92 billion with a Y-o-Y increase of 209.1%, which will support the rapid growth in coming two years.

Besides, although the proportion of revenue from overseas market decreased slightly in 2015, the total amount of contracts newly signed increased by 57%. Projects of Indonesia high-speed railway and Mongolia-Inner Mongolia railway will contribute to profits if they both progress smoothly in 2016. The company's high-speed railway technology connects with European standard seamlessly, which can help its ¡§One Belt, One Road¡¨ oversea expansion face a promising prospect.

Advantage Prominent but Undervalued

With leading technology, oligopoly status, sufficient funds and lower debt ratio, CRSC not only maintains a steady growth in the field of railway, but will also expand rapidly in emerging areas such as PPP. In addition, the company will maintain an explosive growth on urban rail transit market. Meanwhile, the company will continue relying on reducing cost and increasing efficiency, bulk procurement and lean management, thus maintaining the gross profit margin at 25%. Therefore, the company is still expected to experience a promising prospect in rapid growth. We give an estimation of 13.5x EPS in 2016, and the target price is HKD5.56, with the "Buy" initially. (Closing price as at 28 Apr 2016)

Risks

The development of overseas business could not meet expectation.

Safety accidents break out.

Financials

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Recommendation on 3-5-2016
RecommendationBuy
Price on Recommendation Date$ 4.620
Suggested purchase priceN/A
Target Price$ 5.560
Writer Info
Fan Guohe
(Research Analyst)
Tel: (86) 21 51699400-110
Email:
fanguohe@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
Guangdong Land Holdings12418/04/2016Buy 3.152.3
China Merchants Bank396816/03/2016Buy 2215.96
Transportation and Automobiles Zhang Jing (86) 2151699200-103zhangjing@phillip.com.cn
SIA60000927/04/2016Buy34.828.31
SIA60000926/04/2016Buy34.828.31
Mainland Property Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
HengTen Networks13628/04/2016No Rating0.35
Evergrande Real Estate333325/04/2016Neutral5.965.75
Insurance Xingyu Chen (86) 2151699400-105chenxingyu@phillip.com.cn
Properties  
LESSO212823/09/2015Buy7.96.02
FORTUNE REIT77814/10/2014Accumulate7.326.92
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
KPC Pharmaceuticals60042212/04/2016BUY39.630.01
Humanwell Healthcare60007905/04/2016Buy24.6618.2
Hotels and Entertainment Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Poly Culture363618/03/2016Accumulate 19.517.1
CUTC60035808/03/2016N/A10.41
New Energy  
Grandblue ENV60032320/04/2016Buy 17.513.11
Grandblue ENV60032319/04/2016Buy 17.513.11
Food, Beverage and Retail  
Kweichow Moutai60051922/03/2016Buy 280226
Tianyi Summi75607/03/2016Buy21.23
Telecommunications  
China Railway Signal & Communication396903/05/2016Buy5.560.000
ZTE Corporation76322/04/2016Buy15.7512.12
Oil and Gas Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
TSC GROUP20628/07/2015Buy2.82.11
SPT Energy125124/02/2015Reduce1.51.74
Software & Service  
Goldpac Group331518/02/2015N/A4.77
IGG800221/11/2014Accumulate3.953.44

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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