Yum Cha 飲 茶 March 20, 2013 Source: Bloomberg TALKING POINTS TIANNENG POWER [0819.HK, HK$5.50] — Gross margin of about 18% (based on original accounting treatment) in 2H12 is largely in line with the historical low in 1H10. With 3%-4% hike in selling prices in early January, gross margin should have already reached the bottom. Downside risk is limited based on 6.9x 2013E PER and 4.3% dividend yield. HUTCHISON TELECOM [215.HK, HK$3.68] — In line results as lower acquisition costs offset lower GM from handset sales. Ray of light is lower capex next year and new fibre services in the fixed line segment. We think the stock still holds 10% upside near term on news flow and upgrades. SHENGUAN HOLDINGS [829.HK, HK$4.14] – 2H unexciting with earnings up 8.5%. Company entering a stable growth phase with limited upside in both ASP and gross margin. Reiterate our Hold rating with target of HK$4.03. WIND POWER SECTOR – The National Energy Administration (NEA) released officially yesterday the 3rd batch of approved wind power project list for the 12th Five-year plan, with project size reaching 28.7GW. We see further regional diversification but big players market share dropped. INDICES Closing DoD% Hang Seng Index 22,041.9 (0.2) HSCEI 10,740.1 (0.5) Shanghai COMP 2,257.4 0.8 Shenzhen COMP 924.5 0.2 Gold 1,612.5 (0.0) BDIY 912.0 1.4 Crude Oil, WTI(US$/BBL) 92.2 0.0 Crude Oil, BRENT(US$/BBL) 107.6 0.1 HIBOR, 3-M 0.4 - SHIBOR, 3-M 3.9 0.0 RMB/USD 6.22 0.0 Analyst: John Mulcahy, Managing Director, Research CHART OF THE DAY—FDI UP, BUT MARKET CAUGHT IN HEADLIGHTS Foreign direct investment (FDI) into China rose year-on-year (YoY) in February, the first in- crease in nine months, although month-on-month FDI fell, due in part to the holiday distortion. The FDI figures will not solve the current puzzle pointed out by our Beijing strategist, noting that the market lacks direction currently as the dividing line between bulls and bears is the direction of the economy. The bulls appeared to have won the argument by the end of 2012, and showed this by a dramatic rally in A shares from early December until February. But the macro data then began to falter, or at least raised some doubts, as exports continued to soar in the early weeks of 2013, but imports were way below expectations, while inflation (as meas- ured by the consumer price index) rose faster than expected in February. The People’s Bank of China (PBoC) indicated that it would be on ―high alert‖ over inflation, signaling a more hawk- ish attitude. The State Council then issued its stern warning on property, and the market has retreated under all the weight. So, we await confirmation of macro data—is the economy re- covering (our view) or has it run out of steam again? The FDI figures suggest multinationals are confident, and the currency remains strong, but there is still not enough evidence of a trend. With valuations back in attractive territory, the A-share and H-share markets are in the buy zone again. DIARY NOTES FOR THIS WEEK March 14-19 February Actual FDI YoY% [previous –4.8%] March 21 March HSBC Flash Manufacturing PMI [previous—50.9] MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR +
12
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Yum Cha 飲 茶€¦ · Yum Cha 飲 茶 March 20, 2013 Source: Bloomberg TALKING POINTS TIANNENG POWER [0819.HK, HK$5.50] — Gross margin of about 18% (based on original accounting
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Yum Cha 飲 茶 March 20, 2013
Source: Bloomberg
TALKING POINTS TIANNENG POWER [0819.HK, HK$5.50] — Gross margin of about 18% (based on original accounting treatment)
in 2H12 is largely in line with the historical low in 1H10. With 3%-4% hike in selling prices in early January, gross
margin should have already reached the bottom. Downside risk is limited based on 6.9x 2013E PER and 4.3%
dividend yield.
HUTCHISON TELECOM [215.HK, HK$3.68] — In line results as lower acquisition costs offset lower GM from
handset sales. Ray of light is lower capex next year and new fibre services in the fixed line segment. We think the
stock still holds 10% upside near term on news flow and upgrades.
SHENGUAN HOLDINGS [829.HK, HK$4.14] – 2H unexciting with earnings up 8.5%. Company entering a stable
growth phase with limited upside in both ASP and gross margin. Reiterate our Hold rating with target of HK$4.03.
WIND POWER SECTOR – The National Energy Administration (NEA) released officially yesterday the 3rd batch
of approved wind power project list for the 12th Five-year plan, with project size reaching 28.7GW. We see further
regional diversification but big players market share dropped.
INDICES Closing DoD%
Hang Seng Index
22,041.9
(0.2)
HSCEI
10,740.1
(0.5)
Shanghai COMP
2,257.4
0.8
Shenzhen COMP
924.5
0.2
Gold
1,612.5
(0.0)
BDIY
912.0
1.4
Crude Oil, WTI(US$/BBL)
92.2
0.0
Crude Oil, BRENT(US$/BBL)
107.6
0.1
HIBOR, 3-M
0.4
-
SHIBOR, 3-M
3.9
0.0
RMB/USD
6.22
0.0
Analyst: John Mulcahy, Managing Director, Research
CHART OF THE DAY—FDI UP, BUT MARKET CAUGHT IN HEADLIGHTS
Foreign direct investment (FDI) into China rose year-on-year (YoY) in February, the first in-
crease in nine months, although month-on-month FDI fell, due in part to the holiday distortion.
The FDI figures will not solve the current puzzle pointed out by our Beijing strategist, noting
that the market lacks direction currently as the dividing line between bulls and bears is the
direction of the economy. The bulls appeared to have won the argument by the end of 2012,
and showed this by a dramatic rally in A shares from early December until February. But the
macro data then began to falter, or at least raised some doubts, as exports continued to soar
in the early weeks of 2013, but imports were way below expectations, while inflation (as meas-
ured by the consumer price index) rose faster than expected in February. The People’s Bank
of China (PBoC) indicated that it would be on ―high alert‖ over inflation, signaling a more hawk-
ish attitude. The State Council then issued its stern warning on property, and the market has
retreated under all the weight. So, we await confirmation of macro data—is the economy re-
covering (our view) or has it run out of steam again? The FDI figures suggest multinationals
are confident, and the currency remains strong, but there is still not enough evidence of a
trend. With valuations back in attractive territory, the A-share and H-share markets are in the
buy zone again.
DIARY NOTES FOR THIS WEEK
March 14-19 February Actual FDI YoY%
[previous –4.8%]
March 21 March HSBC Flash Manufacturing
PMI [previous—50.9]
MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR
+
COMPANY / INDUSTRY NEWS
Analyst: Wong Chi Man, CFA
TIANNENG POWER [0819.HK, HK$5.50] – MARGIN PRESSURE WITHIN CONTROL IN 2H12; SET TO RECOVER IN 2013
Market Cap: US$786m; Free Float: 57.6%
TIANNENG POWER (0819.HK) 2012 results in line with expectation. Reported net profit grew
15% year-on-year (YoY) to RMB710m last year. Revenue surged
82% YoY to RMB98.9bn, driven by a 108% jump in volume to 88m
units. The average selling price (ASP) dropped 11% YoY to
RMB104 due to more aggressive sales rebates. As a result, gross
margin declined from 26.4% in 2011 to 18.8% in 2012 (more out-
sourcing was also a reason).
2H12 gross margin at acceptable level. Gross margin in 2H12
was 16.1%, far below the 23% level in 1H12. However, the compa-
ny adjusted its accounting policy to include warranty provisions in
cost of goods sold. Based on original accounting treatment, we esti-
mate gross margin in 2H12 was about 18%, which is in line with the
historical low of 18.3% in 1H10.
Gross margin should have reached bottom. The track record
shows that Tianneng is a sensible market player. In 1H10, it pushed
its gross margin to 18.3% to gain market share, i.e. revenue surged
71% YoY. However, it raised prices in 2H10 after reaching its goal
and gross margins rebounded to 27%. We believe the ASP hike of
3%-4% in early January suggests Tianneng believes it has
achieved its market share goal and has re-focused on profitability.
Potential upside in our 2013E forecasts. We expect flat earnings
growth in 2013 by assuming gross margins recover from 16.1% in
2H12 to 17.8% in 1H13 and to 19.2% in 2H13 (based on new ac-
counting treatment), after taking potential weakness in 2Q and 4Q
into account, i.e. low season. Yet under the bull case scenario
(similar to the strong recovery from 1H10 to 2H10), we see 39%
upside from our existing 2013E profit forecast if gross margin reach-
es 21.3% (about 23% based on original accounting treatment). In
addition, we have not considered potential cost savings from the
lead battery recycling plant, which is still under trial operation.
Proposed issue of US$ senior notes. Interest rate and fund rais-
ing size have not been determined yet. Given that about 95% of the
company’s loan is short-term debt, issuing senior notes to achieve a
more balanced financing structure is reasonable, in our view.
Limited downside with 4.3% yield and favourable 2014 outlook.
The company is trading at 6.9x 2013E EPS. Although flat earnings
growth this year seems unexciting, we believe a dividend yield of
>4% should offer some downside protection. Furthermore, we are
forecasting 41% EPS growth in 2014, as we believe the margin
should move closer to the normal level once the Lead-acid Battery
Industry Entry Requirement becomes fully effective at the end of
this year. (Note: 1H13E net profit is likely to record a decline YoY