Chinese equities rebounded more than 3% in June on hopes of a new round of stimulus. We do expect further support from the government, given the weak economic confidence. China risks sliding into a vicious cycle if households and the private sector continue to deleverage. We add CG Services and Li Auto to our BUY list.
WHAT’S NEW
• Review of June. The MSCI China and HSI rose 3.4% and 3.7% respectively in June, as the slew of weaker macro data has led to rising expectations that the Chinese government would introduce a new round of stimulus. As we highlighted in the last report, we expect upside risk for the indices as investors’ concerns have been priced in. Even with the rebound, the MSCI China Index is still trading at an undemanding 10.0x 12-month forward PE, while the HSI is at 8.9x. For June, Shuanghuan Driveline (002472 CH/BUY) was the best performer among our stock picks, having increased 52.8% in Jun 23.
• For July, investors will be waiting for potential announcements of new stimulus from the Politburo meeting. We do expect new measures to be implemented and provide a meaningful boost to both economic and market confidence. We expect the policies to focus on boosting consumption and property demand. The risk though is that these potential positives could be tampered by the renewed Sino-US tensions over the tech sector. We are adding CGS Holdings and Li Auto to our BUY list, which are likely beneficiaries of any policy stimulus.
ACTION
• Add CG Services (6098 HK) to our BUY list as it will be a beneficiary of demand side
policy stimulus and the faster-than-expected implementation of housing maintenance fund.
• Add Li Auto (2015 HK) to our BUY list as we expect it to report strong earnings in the
future, driven by strong orders.
• Take profit on Shuanghuan Driveline (002472 CH) from our BUY list.
• Cut losses on Link REIT (823 HK) and Great Wall Motor (2333 HK).
• Maintain BUY on Aier Eye Hospital (300015 CH), Anta (2020 HK), BYD (1211 HK), CATL
(300750 CH), COLI (688 HK), COSCO Shipping Ports (1199 HK), Inovance (300124 CH),
KE Holdings (2423 HK), Kuaishou (1024 HK), Moutai (600519 CH), and Tencent (700 HK).
Aier Eye Hospital Group – BUY (Carol Dou/Sunny Chen)
• Aier has been experiencing a rapid business recovery in the recent few months, with momentum remaining strong. It is confident in delivering strong results in 2023, and maintains its target of having its 2024 revenue double that of 2021. We expect Aier to deliver even stronger growth in 2Q-4Q23, and to achieve revenue growth of 30.1% yoy in 2023, supported by robust demand for eye care services. Meanwhile, Aier’s balanced organic growth and M&A strategy will continue to fuel growth in China and overseas. It acquired 40 hospitals through its M&A funds in Nov 22 and Jan 23. Most of these newly acquired hospitals are prefecture- or county-level hospitals, indicating its continued penetration effort in the lower-tier markets.
We believe these fast-growing hospitals will allow it to form economies of scale and fuel growth in the next 2-3 years. It invests approximately 10% of its total revenue as capex for M&A activities. Moreover, Aier indicates that policy impact is limited as it has continued to upgrade technology and boost demand for high-end cataract services. It also states that the possible tender on OK Lenses may reduce the medical cost for patients and hospitals and hence, boost service demand and benefit it in the longer term. The increasing economies of scale will also help it to improve profitability.
Maintain BUY and DCF-based target price of Rmb26.00, assuming WACC of 10.7% and terminal growth rate of 4%.
Share Price Catalyst
• Event: (a) Expects strong results in 2023 and revenue to double in three years by 2024; (b) Strong market demand for ophthalmic medical services; (c) Effective growth strategy and business model supports business expansion in China and overseas.
• Timeline: 2H23
Anta Sports Products – BUY (Stella Guo/ Jo Yee Ng)
• We are bullish on Anta given: a) the improving brand equity supported by high exposure of DTC, and b) the company’s multi-brand strategy, which allows it to cater to customers’ demands from different sporting segments and income groups. We are also optimistic on Anta’s premium brand expansion in China (such as Arc’teryx and Descente) due to the rising popularity of outdoor activities. Anta is our top pick among China sportswear sector, as we see: a) high visibility and upside potential for gross profit margin recovery in 2023, b) operational improvement of Fila business (inventory turnover: <5x in 1Q23 vs 7x in 4Q22), and c) more contribution from Amer JV.
Share Price Catalyst
• Event: Potential upgrade of guidance post 2Q23 results.
• Timeline: 3Q23
BYD Company – BUY (Ken Lee)
• Since Berkshire’s latest stake disposal on 19 Jun 23, BYD’s stock has fallen by 6%. We see the pullback a good opportunity to take position, based on the accelerating sales and earnings momentum. BYD has almost completed its product transition, and we expect sales and earnings to recover qoq through 2Q-4Q23 along with the sales ramp-up of the models launched in 1H23, including the Champion versions of Qin Plus, Han, Tang, Song Pro, Song Plus, Seagull, Seal, and the debut of new models in 2H23, including Denza N7/N8, Fang Cheng Bao SF, Yangwang U8/U9. Maintain BUY with target price of HK$590.00 based on 10-year DCF (WACC: 12%/terminal growth: 4%).
Share Price Catalyst
• Event: Growth of monthly EV sales volume; upbeat 2Q23 results
• Timeline: Jul-Aug 23
Contemporary Amperex Technology Co – BUY (Ken Lee)
• CATL has been launching multiple brand-new battery products in 2023, including Qilin battery, M3P battery, condensed battery, sodium-ion battery, which we believe will boost the company’s sales growth. We expect revenue to grow at 26% CAGR based on 40% CAGR in battery sales volume. Gross margin will likely remain steady at 20-21% in 2023- 25, based on the plunge in the prices of lithium carbonate and other battery materials and the ramp-up of the company’s upstream projects, including lithium, nickel and cobalt. Lithium carbonate price rebounded to Rmb300,000/tonne, due to restocking after the depletion of channel inventories. Looking ahead, lithium carbonate price will probably stabilise at around Rmb200,000 from 4Q23 with new lithium mining projects coming onstream worldwide. Maintain BUY with target price of Rmb390.00 based on 10-year DCF (WACC: 10%/terminal growth: 4%).
Share Price Catalyst
• Event: Growth of monthly EV battery shipments; drop in lithium carbonate prices; 2Q23 results
• Timeline: Jul-Aug 23
CG Services – BUY (Jieqi Liu/Damon Shen)
• We maintain BUY on Country Garden Services (CGS) Holdings with a target price of HK$13.86. The minister of MOHURD announced exploring the establishment of Housing Maintenance Fund (HMF) system on 26 June. The Ningbo government recently announced the rules of HMF, mentioning that local governments will provide 50% subsidy for fully-funded account of HMF. We think with more local governments offering subsidies, the HMF will grow at a faster-than-expected pace and will boost the demand of AEI works of aged residential communities. Major property management companies have established properties maintenance services and are expected to be a major beneficiary. Besides, with further weakening of sales recovery and China’s households on the verge of deleveraging, we think the is a rising possibility of the government further easing policies. With the re-rating of PM companies, CGS will also be a key beneficiary as a leading POE.
Currently CGS is trading at 9.2x 2024F PE (close to 1.5SD below mean), and 4.1% 2024F dividend yield. CGS targets a double-digit growth in revenue, and GFA expansion on track in 1H23, and expects lower risks of impairment loss on goodwill in 2023.
Share Price Catalyst
• Event: a) easing of demand-side industry policies; b) faster-than-expected implementation of HMF.
• Timeline: 3Q23-4Q23
COSCO SHIPPING Ports – BUY (Roy Chen)
• CSP is our top pick for the regional transportation sector. We like CSP for its: a) global market leadership (one of the global top five port/terminal operators by container throughput), b) well-diversified investment portfolio across Asia, the Middle East and Europe with good asset quality, and c) strong backing from its parent company COSCO SHIPPING Holdings (CSH, 1919 HK), which is China’s largest and a globally leading container shipping company with large cargo flow.
• We expect CSP to see sequential earnings improvement in 2Q-3Q23. 1Q23 earnings were likely the trough for CSP due to the combinational effects of weak seasonality and the COVID-19 outbreak in China. We note that after a particularly slow Jan-Feb 23 period (when manufacturing activities of China were impacted the most by the pandemic and the Chinese New Year), the container volume of CSP’s China and overseas portfolios have bottomed out in Mar-May 23 with low single-digit yoy growth, led by the ports/terminals with more domestic and RCEP exposures (eg the Bohai Rim port/terminals and the Beibu
Gulf port). While there are still macroeconomic uncertainties ahead in the rest of the year, we expect CSP’s earnings to show sequential improvement in the next two quarters.
• CSP has cheap valuation with good dividends, with its share price downside limited by major shareholder purchases. Its current price implies PE of 7.5x/7.3x on our conservative 2023F/24F earnings estimates, leading to decent yields of 5.3%/5.5%. CSP’s cash-rich parent CSH has been proactively buying CSP shares in the open market since 2 Sep 22, CSH has bought 340m shares (about 9% of CSP’s issued capital) from the open market, with the latest purchase price of HK$5.90 on 10 May 23 representing a 25% upside to CSP’s current price. With potential share price support/boost from major shareholder purchases, we deem CSP a safe bet which can reward shareholders nicely with decent dividends while waiting for a turnaround of global trade outlook.
Share Price Catalyst
• Event: a) Sequential earnings improvement in the next two quarters; b) major shareholder purchases in the open market.
• Timeline: 2Q23-3Q23
China Overseas Land & Investment – BUY (Jieqi Liu/Damon Shen)
• We maintain BUY on China Overseas Land & Investment (COLI) with a target price of HK$27.14. In May 23/5M23, COLI’s contracted sales grew by 11.2%/54.7% yoy to Rmb29.4/Rmb147.0b respectively. In June, land markets in core cities marginally cooled down, and COLI notably accelerated its pace of land acquisition, winning seven land plots in Beijing, Tianjin, Guangzhou, Chengdu, Xiamen, Qingdao, Shenyang, for a total land consideration of Rmb15.2b. As comparison, COLI in aggregate bought six land plots in 5M23 with total land cost of Rmb9.2b. With a strong balance sheet, we expect COLI to maintain strong competitiveness in 2H23. Besides, with further weakening of sales recovery and China’s households on the verge of deleveraging, we believe the possibility of the government further easing policies is rising. With abundant scalable resources (Rmb790b in 2023), COLI will be a key beneficiary of demand-side policy. Currently COLI is trading at 0.456x FY24F P/B, below 1.0SD below mean (since 2017); 4.7x dividend yield, close to 1.0SD below mean (since 2017).
Share Price Catalyst
• Event: a) Further easing of policies of the property industry; b) RRR cut.
• Timeline: 3Q23
Shenzhen Inovance – BUY (Johnny Yum)
• Domestic leaders such as Inovance will continue to benefit from an on-going import substitution trend despite increased efforts from foreign competitors to expand share in China, as: a) we believe the import substitution trend is irreversible as domestic leaders gradually catch up in technology, and b) domestic manufacturers now heavily favour a shorter supply chain and highly customisable solutions provided by domestic players. Inovance, as the most dominant automation components/solutions provider, will be one of the biggest beneficiaries in the import substitution trend, as well as the upcoming automation upcycle from end-23. Inovance is also exploring new businesses such as linear guide equipment, and expanding into the overseas market, which should both serve as growth drivers in the mid-long term.
Our target price for Inovance is Rmb82.00. While the slowdown in China’s manufacturing activities ytd has turned out to be worse than expected, we believe investors are already well aware of any downside risks, and the recent price correction provided a window to accumulate its share for mid-long term investment.
Share Price Catalyst
• Event: Improvements in official industrial output data
• Timeline: July-23
Li Auto Inc – BUY (Ken Lee)
• Li Auto’s sales momentum is accelerating with monthly deliveries expected to grow from over 30,000 units in May 23 to 40,000 units before end-23, driven by the strong orders for its newly launched L7 mid- to large-sized (C-segment) SUV. Going forward, Li Auto plans to more than triple its product lines from three currently (L7/L8/L9) to 11 by 2025, including five extended range electric vehicles (EREVs) (L7/L8/L9 and two new models) and six battery electric vehicle (BEV) models with a price of Rmb200,000-450,000. By end-23, Li Auto will release its first BEV model Li Mega MPV, which features a large space for family users and over 1,000km in single-charge range with CATL’s Qilin battery. Li Auto registered two consecutive quarters of profit in 4Q22-1Q23. We expect Li Auto’s net profit to grow from Rmb4.18b in 2023 to Rmb9.15b/Rmb16.00b in 2024/25 respectively. Maintain BUY with target price of HK$246.00 based on 10-year DCF (WACC: 20%/ terminal growth: 4%).
Share Price Catalyst
• Event: Strong monthly sales, upbeat 2Q23 earnings
• Timeline: Jul-Aug 23
KE Holdings Inc – BUY (Julia Pan/Ming San Soong)
• For 2Q23, total revenue is projected to surge 35-40% yoy to Rmb19b, while GTV is forecasted to ramp up by 25-30% yoy. This is primarily bolstered by revenue growth of 20%/25-30% from existing home and new home transaction services respectively. The renovation business is guided to contribute 20-25% of total revenue, mainly underpinned by resilient contract performance in 1Q23 which will stimulate revenue growth in 2Q23. Beike held around Rmb78b net cash as of Mar 23, equivalent to 60% of its current market cap. Management commented that 70% of its cash holdings are offshore. As of Mar 23,
Beike had repurchased 16.2m American Depositary Shares (ADS) with a total consideration of US$229m, out of its US$1b share repurchase programme effective from Sep 22 to Aug 23. After its 1Q23 results, Beike has resumed its share repurchase programme, buying back Rmb1.29m ADSs at a consideration of US$20m in May.
Management has committed to sustaining the repurchase pace in the near term, and is also considering other ways to pay back to shareholders after its GAAP profit turns positive in 2023.
Maintain BUY with a target price of HK$70.00 (US$26.00), using unchanged 22x PE against average earnings of 2023/24, implying a 1.9x 2023 EV/sales. Beike is trading at 0.75x 12-month forward EV/sales, 0.7SD below its historical mean of 2.4x.
Share Price Catalyst
• Event: a) Higher monetisation rates, b) less competition, c) positive policies issued by the government to simulate housing transactions, and a better funding environment for property developers, and d) household income recovery after China’s reopening.
• Timeline: 2H23
Kuaishou Technology – BUY (Julia Pan/Ming San Soong)
• According to Kuaishou Technology’s (Kuaishou) 618 shopping festival reports, from 1-18 Jun 23, the order volume on its e-commerce platform grew 40% yoy and the number of buyers increased 30% yoy, in line with its 2Q23 GMV guidance of 30% yoy growth. The order volume through Soft-Form Video (SFV) surged by 210% yoy while gross merchandise value (GMV) of search and payment based soared by nearly 130% yoy. Self-broadcast GMV for brands was up by 64% yoy and the average order value increased by 33% yoy. Kuaishou reported that e-commerce orders/number of buyers hiked 40%/30% yoy. For 2Q23, management guided for revenue to ramp up by midtwenties, while non-GAAP net profit was guided to be in the range of Rmb1.2b-1.3b, thanks to a decline in marketing expense (accounted for 32% of revenue vs 40% in 2Q22) and continuous narrowing overseas loss.
External performance ads are expected to resume positive growth in 2H23, in light of events such as the 618 promotion, refined channel policies, summer break period and peak season for gaming clients. By improving coordination between the front-end business and the product and algorithm teams, Kuaishou has expanded its advertising reach to a wider audience in the gaming, social networking, and financial sectors. In addition, the launch of the storewide return on investment (ROI) product in March validated the model and paved the way for a large-scale rollout in 2Q23. We remain optimistic on Kuaishou due to resilient growth in live-streaming and ad recovery momentum.
BUY with a target price of HK$90.00 that implies 1.8x 2023F PS. The company is trading at 2x 12-month forward EV/sales (26x 2024 PE), below its historical mean of 4.2x.
Share Price Catalyst
• Event: a) Higher monetisation rates across all categories, b) less competition from peers, positive government policies to simulate consumption, and c) lifting of regulations on internet platforms.
• Timeline: 2H23
Kweichow Moutai – BUY (Jo Yee Ng/Stella Guo)
• Despite the tepid overall baijiu market, the demand for premium baijiu, particularly Moutai, remains relatively unaffected. This is evident from the low success rate of purchases made through the i-Moutai app and the stable wholesale prices. We stay confident with the company’s full-year revenue growth target of 15% yoy and improving profitability with a net margin expansion of 0.5ppt yoy. Moutai stands out with its strong brand reputation and earnings visibility, making it our top pick among consumer staples. Our DCF-based target price of Rmb2,520 implies 43.4x 2023F PE (around +2.5SD of historical mean).
Share Price Catalyst
• Event: Increasing wholesale prices leading up to the Mid-Autumn Festival and National Day holidays.
• Timeline: 3Q23
Tencent Holdings – BUY (Julia Pan/ Ming San Soong)
• To date, Tencent has received 13 approvals since the normalisation of China game
approvals in Dec 22. The appealing content from Tencent has led to increased investment of time and money by players. Tencent expects to see a normalised trend of regulations upon the finalisation of inspections. It also expects to see additional devotion of resources from regulators to promote healthy development and innovation of the overall industry moving forward.
On 19 June, Tencent unveiled its new large-scale model product Tencent Cloud MaaS (Model as a Service). Tencent defines the product as a “curated store”, offering tailored services supported by large-model technology, databases, computational power, and apps. Enterprises can feed business data into Tencent’s basic models to receive exclusive models based on their specific business requirements and context. Tencent is also actively scaling up its optimisation efforts throughout the entire training production line. Leveraging its robust infrastructure in the cloud business, the company also announced the introduction of a high-performance computing cluster powered by 100 graphics processing units (GPU) which significantly enhances training efficiency.
We model revenue growth of 14% in 2023, bolstered by yoy growth of 12%/20%/18%/6% in online game/advertising/FBS/social network revenue. Maintain BUY on Tencent with a target price of HK$435.00, which implies 25.8x PE based on 2023 EPS. The company currently trades at 20x 12-month forward PE, 1.2SD below its historical mean of 28x.
Share Price Catalyst
• Event: a) Improving online advertising from Wechat video account, b) game licence approval, and c) collaboration with various internet platform operators on Tencent’s WeChat ecosystem.
• Timeline: 2H23