Guangzhou Pharma (00874 HK): Be Cautious of Down-side Risks

What happened: In the last two weeks, share price of Guangzhou Pharma (00874 HK) rose by about 50% to HK$10.38, and at the same time, its A-share price rose by about 50% to RMB19.01. Reasons include 1) according to our previous comments, its 1Q results indicated faster growth than before and investors may have expected the reform had been effect ive; 2) According to its Announcement dated on 11 May, its controlling parent, Guangyao Group, ha s successfully ceased the trademark licensing of Wanglaoji from Jiaduobao Group.

Comments and Views: We have not noticed any clear progress in the reform of the Company. The beautiful 1Q2012 results and the reorganization proposal could not convince us of significant changes in its fundamentals. It might be positive in the long run for the Company that its controlling parent has ceased the trademark licensing from Jiaduobao Group, but for now there are several uncertainties including 1) The Company has limited experience in FMCG business and it has not a time table to produce Red-can Wanglaoji herbal tea, 2) Jiaduobao Group has controlled the distribution channels of Red-Can herbal tea and may control a certain market share of herbal tea by adjusting its marketing strategies, 3) The Wanglaoji brand belongs to Guangyao Group, which has 48.2% stake in the Company for now, or 45.3% after reorganization, and it is un known that how the Wanglaoji Brand will be acquired by the Company from Guangyao Group (according to Guangyao Group, the brand is valued at abou RMB108 billion).

Investment suggestion: Share price of the Company has risen greatly. The Company might benefit from the Wanglaoji brand in the long run, but there ar e lots of uncertainties. We suggest investors be cautious of down-side risks of the Company. Our pr evious TP is HK$7.50 with Accumulate rating.

Banking Sector: PBOC cut RRR by 50 bps with response to the weak loan data and economic slowdown

What happened: PBOC announced monetary data of April 2012, and a 50bps cut in RRR for the 3 rd time since Nov. 2011, with effect from May 18, 2012. Then, RRR will be 20% for the large State-owned banks, and 18% for the medium and small-sized banks. RMB 421.2 bn is to be unfrozen accordingly after the adjustment.

Comments and Views: 1) The new lending in April is significantly lower than market expectations (RMB780 bn). Bill financing contributed to 35.3% of the new added loan s, implying that real loan demand in April deteriorated seriously; 2) Personal and ent erprises’ new mid-to-long term loans slipped MoM, a reflection of the weak property market and FAI growth. Bank deposits declined MoM by RMB465.6bn, attributed to seasonal factors. We observed that drops in the yields of banks’ wealth management products are quite obvious. So deposits are not a bi g concern, and likely to flow back to the banking system; 3) The policy implications of PBOC’s quick ac tion are quite clear: economic growth is now a more important concern as inflation is eased gradually; 4) RRR cut would be a bit negative to banks’ net interest margin as loan pricing is to weaken, but positive to banks’ asset quality. We expect more loosening measures to come so as to stabilize the aggregate economic growth.

Investment suggestion: Maintain “Outperform” rating for the banking sector. Bank’s earnings growth in 2012 is expected to slow down obviously from last year. However, downside risks of banking stocks are largely offset by the historical low valuation, as ban ks’ stock prices are only slightly higher than their book value. We prefer the small caps, as their asset qua lity could benefit more from the loosening measures.

We recommend Minsheng Bank (01988 HK) for its franchise in SME lending and CITIC Bank (00998 HK) as a valuation laggard play.

Home Inns & Hotels (HMIN US): 1Q12 Results Miss Expectations

1Q12 operating loss was RMB36.9 million, which is 6.5% and 332.4% worse than our and market expectations of operating losses of RMB34.7 million and RMB8.9 million, respectively. The Company posted its 1Q12 unaudited results this morning. 1Q12 revenue of RMB1.256 billion, which beat the Company’s own guidance range o f RMB1.210-1.240 billion, was 2.3% above our forecast and was 2.6% above consensus.1Q12 net loss was RMB103.2 million, which is 194.1% and 255.0% worse than our and market expectations, respectively. The loss includes a RMB24.8 million loss on change in fair value of convertible notes. EBITDA for the quarter was RMB93.1million, missing our and market expectations by 24.5% and 33.7%, respectively. Worse than expected results were due to increasing hotel operating costs . The Company’s rent expense and personnel costs were both higher than we had expected.

Hotel performance deteriorates slightly YoY in 1Q12. Excluding the Motel 168 hotels, RevPAR for the quarter was RMB139, representing a YoY decrease of 1.2%. The Company opened 59 new hotels in 1Q12, including 5 leased-and-operated hotels and 54 franchised-and-managed hotels. As of March 31, 2012, the Company had 1,479 hotels in operation, including 702 leased-and-operate d hotels and 777 franchised-and-managed hotels.

Less Motel 168 integration costs were expensed than we had forecast, otherwise 1Q12 results would have been even worse. In 1Q12, the Company booked integration expens es of RMB24.6 million, which is less than the RMB62.2 million we were expecting. However, we don’t think this indicates that total FY12 integration expenses will be lower than we had expected, but will instead be pushed into later quarters.

Our current investment rating is ‘Buy’ and target price is US$38.70. We will adjust our earnings forecasts and will put out a new Company Report.

Infrastructure Sector: Jan-Apr 2012 FAI Growth at 20.2%, Slightly below Expectation

According to Statistics of Bureau, urban FAI reached RM B7.6 trillion during Jan-Apr 2012, up 20.2% YoY, 0.3% lower than the market consensus and 0.7% below the Jan-Mar 2012 20.9% growth rate. Growth rates of the two main FAI growth drivers, manufacturing sector and property development sector, contin ue to slow down, growing 24.4% and 18.7% respectively, comparing with 24.8% and 23.5% duri ng first three months, while the combined contribution declined from 58.8% during first three months to 57.0% duri ng first four months. Although FAI growth rate continued to slow down, compared with the 2012 target of 16.0% FAI grow th rate set by the NDRC, the growth rate of first four months was still 4.2% higher.

Two main points were particu larly notable for the first four months stat istics. 1) FAI growth rate in property development has declined sharply from 23.5% during the first three months to 18.7% during the first four months, showing that the regulating policy for t he property market has taken increasingly significant effect on the market, and 2) FAI in transportation has not recovered in April, FAI in railway and in roads were down 43.6% and 2.7% respectively during Jan-Apr, compared with declines of 41.8% and 3.0% respectively during Jan-Mar, in particular, the recovery of FAI in railway was significantly worse th an expected. Although we expect the 2012 investment target of RMB500 billion in railway could be accomplished, we do not expect any significant rebound in investment before start of Q3.

We maintain the view that FAI in transportation infrastruc ture would be weak in 1H 2012, for both road and railway. From a full year perspective, we have a more positive view on railway compared with road. According to the MoR’s planning, there would be more than 6,300 km of new railway mileage, in which 3,500 km high-speed, to be put into use this year, whereas there is no sign the plan has chan ged. We expect railway infrastructure construction would resume in large scale starting Q3, along with resumption of new construction biddings. Railway infrastructure contractors, having a higher operating and financial leverages and more attractive valuation compared with stock-rolling manufacturers, should benefit more from those. We maintain “Accumulate” rating for both China Railway Group (00390 HK) and China Railway Construction (01186 HK) with TP at HKD3.83 and HKD6.53 respectively, and “Neutral” rating for CSR Corporation (01766 HK), with TP at HKD6.57.

China Coal Energy (01898 HK): Continue to Increase Spot Sales Ratio, Maintain “Accumulate”

The contribution of new coal mine capacity is slower than our expectation, resulting in a lower than previously expected coal production volume growth in FY12-13. We expect the consolidated commercial coal production volume to increase by 14.0%, 11.5% and 2.1% YoY in FY12/13/14 to 112Mt/121Mt/124Mt, respectively.

The spot thermal coal sales ratio is expected to continue to increase to reach 71.6% in FY14, which help increasing the ASP of the overall coal sales. We expect that the spot thermal coal sales ratio is estimated to increase 59.6%/67%/71.6% in FY12/13/14.

During FY12/13/14, we believe that the co ntract coal price of China Coal will grow at a relatively steady rate, while the spot coal price may stay relatively stable. We expect the ASP of spot thermal coal to change by -3%/3%/2% YoY and the ASP of contract thermal c oal to change by 8%/5%/5% YoY in FY12/13/14.

We cut our FY12-13 EPS estimates by 22.0% and 13.5% respectively. Our current EPS estimates for FY12-14 are RMB0.800, RMB1.036 and RMB1.072. The last close of China Coal is HK$8.14, representing 8.2x/6.4x/6.2x FY12/13/14 PER and 0.98x/0.87 x/0.79x FY12/13/14 P/B. We iterate the “Accumulate” rating for China Coal and revised down TP to HK$10.87, representing 11.0x/8.5x/8.2x FY12/13/14 PER.

Agile Property (03383 HK): Disappointing Sales Performance, Maintain ‘Neutral’

We are disappointed by Agile’s sales performance in the first four months of 2012. Agile’s contracted sales in the first four months of 2012 is RMB8.5 bn, down 25.7% YoY. The GFA sold in the first four months decreased 18.8% YoY to 755,000 sq.m; just slightly higher than the 730,000 sq.m of GFA sold in the first four months of 2010, which was the lowest record in last 3 years. We concern w hether it can achieve its sales target or not.

The Company is attempting to accelerate sales schedule and construction speed in 2012. The Company plans to launch 11 new projects in 2012 and expects to complete about 3.97 mn sq.m in 2012. The Company expects to recognize more revenues and more GFA to reach pre-sale standards in 2012. However, Agile’s launching pace of new projects is affected by the sales permission delay and constructing schedule lag. So far, the Company launched only one new project, less than its plan.

The net gearing could be higher in 2012. We estimate if t he cash collection rate of contracted sales is 80%, total cash inflow will be RMB27.3 bn. But the total cash outflow will be RMB31.8 bn. There will be a capital shortage of RMB4.5 bn in 2012. The Company’s net gearing ratio could be 76.9% in 2012.

Disappointing sales performance; maintain Agile’s investment rating as ‘Neutral’. Our target price of HK$12.59, represents a 45% discount to 2012E NAV, which also impl ies 7.8x 12PE, 7.7x 13PE, 1.4x 12PB and 1.1x 13PB.

DISCLOSURE OF INTERESTS

(1)The Analysts and their associates do not serve as an officer of the issuer in this Research Report.

(2)The Analysts and their associates have no financial interests in relation to the issuer mentioned in this Research Report.

(3) Except for Shandong Chenming (01812), Guotai Junan and its group companies do not hold more than 1% of the market capitalization of the issuer mentioned in this Research Report.

(4)Guotai Junan and its group companies have had investment banking relationships with China All Access (00633) / Xiangyu Dredging (00871) / Huaneng Power (00902) / China Titans Energy (02188) / TC Interconnect Holdings Ltd (00515) / Costin New Materials (02228) / Billion Industrial (02299 HK) / Longfor Properties (00960 HK) / Kingworld Medicines (01110 HK) / China Minsheng Banking (01988 HK) mentioned in this Research Report within the preceding 12 months.

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