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6 Sep, 2019 (Friday)

            
SH PHARMA(2607)
Analysis¡G
Shanghai Pharmaceuticals (2607) is mainly engaged in pharmaceutical manufacturing, distribution, and retail, with comprehensive advantages in industry chain that enables it to be continuously driven by major links of the value chain of the pharmaceutical industry. For innovative drugs, the Group`s development strategy focuses on macromolecule biological drugs. For pharmaceutical services, the Group strives to increase its market share by accelerating account opening at hospital terminals and extending distribution channels downward to achieve full coverage of medical institutions in Shanghai, Liaoning, and other regions. In addition, the Group continues to strengthen cooperation with renowned drug companies in China and overseas. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $14.80, Target Price: $16.30, Cut Loss Price: $14.00


CPIC(2601)
Analysis¡G
China Pacific Insurance released its 2019 interim results. The company achieved operating income of 220.386 billion yuan in the first half of the year, of which insurance business income was 207.809 billion yuan, a year-on-year increase of 7.9%; net profit was 16.183 billion yuan, A significant increase of 100% year-on-year. As the end of the first half of this year, the assets under management of CPIC Group were 1.87 trillion yuan, an increase of 12.5% compared to the end of the previous year. The number of group customers reached 134 million, an increase of 7.1 million compared to the end of last year. There are three main reasons for the good performance of CPIC: First, the quality of the business itself is improved; second, a new tax deduction policy is Implementing in the Mainland; third, investment returns increase. In the first half of the year, renewal of life insurance grew by 9.9%, boosting insurance business income to 138.428 billion yuan in the first half of the year, up 5.6% year-on-year. Life insurance realized a net profit of 12.259 billion yuan in the first half of the year, an increase of 88.5% over the same period of the previous year. In terms of investment income, in the first half of 2019, CPIC realized net investment income of 29.691 billion yuan, a year-on-year increase of 13.5%, mainly due to the increase in interest income from fixed income investment; annualized net investment yield was 4.6%, up 0.1 percentage point year on year. The company`s investment business maintained the most stable asset allocation. Last year, it was the least affected by the stock market decline (net value growth rate of 4.8%), and this year, was benefited from a rise in stock market (net value growth rate of 5.9%).
Strategy¡G
Buy-in Price: $32.00, Target Price: $36.00, Cut Loss Price: $28.00


Morinaga & Co., Ltd. (2201)
Founded in 1899 as Japan's first factory specializing in western confectionery, ¡§Morinaga's Western Confectionery Shop¡¨. Carries out the manufacture, purchasing, and retail of confectionery (caramels, biscuits, chocolates, etc.), foodstuff (cocoa, cake mixes, etc.), chilled desserts (ice cream, etc.) and health foods (jelly beverages, etc.). Has expanded bases in the US, China, Taiwan and Thailand.For 1Q (Apr-Jun) results of FY2020/3 announced on 9/8, net sales increased by 4.3% to 52.43 billion yen compared to the same period the previous year, operating income increased by 21.8%to 6.177 billion yen, and net income increased by 52.7% to 4.455 billion yen. In addition to the increase in sales of popular chocolate products with a high cocoa content, etc. such as ¡§Carré de chocolat¡¨, ¡§HI-CHEW¡¨ has also grown due to a diversification in their packaging form. An improvement in cost rate has also contributed.For its full year plan, net sales is expected to increase by 7.9% to 207 billion yen compared to the previous year, operating income to increase by 3.9% to 21 billion yen, and net income to increaseby 13.1% to 14.5 billion yen. Company's policy is to focus on their 8 mainstay brands, which are ¡§DARS¡¨, ¡§Chocoball¡¨, ¡§Carré de chocolat¡¨, ¡§MOONLIGHT¡¨, ¡§Canned Amazake¡¨, ¡§HI-CHEW¡¨,¡§Choco Monaka Jumbo¡¨, and ¡§in Jelly¡¨.



Report Review of August. 2019

Sectors:

Air, Automobiles (Zhang Jing),

TMT& Education (Terry Li)

Retail & Property (Tracy Ku)

Pharmaceuticals, Energy & Environment (Leon Duan)

Automobile & Air (ZhangJing)

This month I released 4 updated reports of Geely (175.HK), GAC (2238.HK), GWM (2333.HK) and Tuopu (601689.CH), which got success by their unique Competitive edge. Among them, we recommend GAC and Tuopu first.

In 2019 H1 GAC Toyota sold 311,200 vehicles, an increase of 21.68% yoy; and GAC Honda sold 394,500 vehicles, an increase of 16.41% yoy. GAC Toyota and GAC Honda grew against the trend of weak domestic demand, revealing a strong products competitiveness and good command of the market. GAC Honda has launched Odyssey Sport Hybrid, new Vezel and other new models in late April and mid-June, and GAC Toyota has launched officially the upgrading generation Levin in June, and will launch an EV model in 2019 H2 and withdraw CHR EV in 2020. As driven by new models, the growth is expected to remain strong in H2. Thanks to the strong momentum of GAC Toyota/GAC Honda, the Company's result safety mat is thicker; the self-owned brands are expected to gradually stabilize and rebound under the help of the new generation models and new energy models.

We believe that the declined performance of the Tuopu in short term was the result of disturbance factors in the industry, and in the long term, with its technical strength and customer relations in traditional businesses, the Company is expected to get new incremental orders from new energy vehicle enterprises in the field of emerging businesses (lightweight chassis and automotive electronics) in the future. Besides, the launch of Tesla's factory in Shanghai will bring a breakthrough for the Company.

TMT& Education (Terry Li)

I released four reports on Hope Education (1765.HK), Perfect World (002624.SZ), Kingdee International (268.HK) and Yonyou (600588.SH). We highly recommend Hope Education.

The Group was one of the largest private higher education group in China, engaging in the bachelor program, junior college program and vocational education. The population of the relevant age group in higher education will drop since 2020, and stabilize in 2025. As the GDP per capita in China increases, we should see gross enrollment rate in China catches up with the developed countries in the future. The penetration rate of private education will increase thanks to the rising acceptance in private universities and the dependence on private education form local governments. The tuition fee should grow with the CPI in China. Regarding those four factors where three are rising, whereas one is dropping in the short term and will rebound in long term, we expect the growth rate of private higher education will decrease from 2018 to 2020E, and will reach a mid to high single-digit growth. As of 2018/19 school year, the capacity of the schools reached 125,096, implying a utilization rate of 76%. Even if there is no increase in capacity, the schools could still accommodate 30,000 more students.

As the junior college should be the beneficiary in this expansion, having a closer look at the utilization rate, the utilization rate of Jiaotong College, Tianyi College, Automotive Vocational College, Vocational Institute of Technology and Automotive Technical College which offers junior college educations (the beneficiary in this expansion) were all below 70% in the 2018/19 school year. As a result, the Group should be able to enjoy such enrollment expansion.

According to Chinese independent college and private university ranking (Wu Shulian) in 2018, Guizhou College and College of Technology are ranked the first and the second in Guizhou. the department of administration management of Jiaotong College ranked 10% - 20% out of 256 schools who offering administration management. The medical department of Shanxi College ranked 20% - 30% out of 62 schools providing medical study. The department of administration management and economics of Guizhou College both ranked 10% - 20% out of 256 and 215 schools. The department of economics of College of Technology ranked 20% - 30% out of 215 schools. We believe those schools are with a decent quality of teaching, giving their protection once the student enrollment decreases. Shanxi College, Tianyi College and College of Culture & Communication have shown how good the Group was in school integration. Shanxi College grew at a 5-year CAGR of 25.1%; Tianyi College grew at an 8-year CAGR of 5.7%; College of Culture & Communication grew at a 5-year CAGR of 30.6%.

Retail & Property (Tracy Ku)

This month I released the report of Hengan (1044.hk)¡AAusnutria (1717.hk) and Want Want China.Ausnutria ranked the ninth in infant milk formula market in China during 2018, with a market share of 3.9%. But it ranked the first in the imported goat milk formula with a market share up to 62.5%. The management team's target is to be among the top five players in China's overall infant milk market in the next three to five years. 1H of FY2019. Revenue increased by 21.9%y.o.y. and is mainly driven by the increase of 45.3% of its own-branded goat formula milk powder products. The percentage share of this business to revenue increased from 35.2% to 44.9% yoy. The own-branded goat formula milk powder also increased by 20.7%. The adjusted net profit increased by 63.8% yoy.

According to the F& S Report, the retail sales value of China's infant milk formula market increased at a CAGR of 11.2% from 2014 to 2018, and is expected to increase at a CAGR of 6.9% until 2023. The slow down is mainly due to the decreasing birth rate, but super-premium and premium infant milk formula products, is expected to continue as the driving force of the overall industry. This underpinned by accelerating urbanization, rising disposable income, increasingly educated and health conscious consumers and growing demand for high quality infant milk formula products. At the same time, with the gradual improvement of Chinese consumers` awareness of the goodness of goat milk, we are optimistic about the medium to long-term development of Ausnutria. It is expected that the own-branded goat milk infant formula products will maintain rapid growth, especially for higher-end products. Cow milk infant formula products will maintain a stable single digit growth.

The high-end segment of infant milk formula products increased at a CAGR of 27.3% from 2014 to 2018, which accounted for 22% of the overall market in 2014 and 37.9% in 2018. It is expected to grow at a CAGR of 16.6% until 2023, accounting for 58.3% of the overall market. In particular, the super-premium segment grew at a CAGR of 39.5% from 2014 to 2018 and is expected to grow at a CAGR of 16.9% until 2023. This segment accounted for 6.8% of the overall infant milk formula market in 2014, increasing to 16.9% in 2018, and is expected to increase to 26.4% by 2023.The company will continue its R&D projects and launch new products. The elderly goat milk formula product is expected to be launched in 2020.

The organic infant goat milk formula is still awaiting registration and is expected to be also launched in 2020. In terms of cow milk powder, it it just got a new baby milk powder product registration in March this year, and began to have related promotion activities in June. There are still 3 brands that are still waiting to register at the New Zealand plant.

Pharmaceuticals, Energy & Environment (Leon Duan)

I released three reports on CR Pharma (3320.HK) and Canvest Env (1381.HK). We highly recommend CR Pharma.

The company has a leading position in many segments in the China pharmaceutical industry. According to the revenue in 2018, the company is the fifth largest pharmaceutical manufacturer, the third largest pharmaceutical distributor, and the largest OTC drug manufacturer in China, through CR Sanjiu, Dong-E-E-Jiao, CR Zizhu and CR Double-Crane maintained its leading position in the market. The company also has a leading position in the market in nourishing TCM, cardiovascular medicine, cold and flu medicine, large-volume intravenous infusion and emergency contraception. The company's diversified business segments and product portfolio in the pharmaceutical industry, as well as extensive coverage of the medical industry chain, not only help to reduce risks and uncertainties associated with individual product, but also effectively leverage synergies between different platforms. As of the end of 2018, the company manufactured more than 430 pharmaceutical products, of which more than 260 are included in NRDL. The company continued focus on core products, and optimize product structure. In 2018, 49 products exceed HKD 100 million in revenue, an increase of 10 compared to 2017; among which 7 products achieved annual revenue over HKD 1 billion, same with 2017. By the end of 2018, the distribution network has covered 28 provinces, serving over 90,000 downstream customers, including 6,581 Class II&III hospitals, and 51,505 primary medical institutions, customer coverage further improved.

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