Li Ning (02331 HK): FY09 EPS increased 30.3%, in line with expectation.

Analyst: Jerry Peng

What happened: Li Ning announced FY09 results. EPS increased by 30.3% to RMB 90.75 cents, 3.5% and 2.5% higher than market and our expectations. Driven by revenue growth of 25.4% to RMB 8,387mn and operating profit margin improvement by 1.6 ppt to 16%, the Company’s net profit increased by 31.0% to RMB 945 mn. Gross profit margin decreased 0.8 ppt to 47.3%. Number of Li Ning brand retail stores reached 7,249, a net increase of 1,004 stores. The company proposed a final dividend of RMB 22.54 cents per ordinary share. Together with an interim dividend of RMB 13.58 cents, the total dividend payout ratio is 40% for FY09, higher than our expected 30%.

Comments and Views: Despite 0.8 p.p. lower-than-expected gross margin, turnover is 7% higher than our expectation, reflecting better-than-expected demand at higher price discount in our view. In addition, as the number of Li Ning brand retail stores is higher than our expectation of 7,100, we believe inventory pressure to decrease and retail environment to recover. We expect Li Ning’s 3Q10 order book value growth to be better than 1Q10’s 11.6% and 2Q10’s 15.4%, given peers’ better 3Q10 results. We maintain our FY10-11 turnover forecasts of RMB 9,325 mn and RMB 10,956 mn. We will update management guidance on FY10 same store sales growth, profit margins and etc in the analyst meeting this morning. We currently maintain our FY10-11 EPS forecasts of RMB 1.073 and RMB 1.266, an increase of 18.3% and 18.0% respectively.

Investment suggestion: Maintain ACCUMULATE and 22.0x FY10 PE based target price of HK$26.8.

Tencent (00700): Strong FY09 performance with in-line results, reiterate Buy

Analyst: Jake Li

Comments and Views: The Company’s FY09 EPS was 0.7% lower than our estimate and 1.4% higher than market consensus. More details, total revenue grew by 73.9%, driven by IVAS revenue growth of 93.9%, offset by MVAS and online ad business, which recorded yoy growth of 36.2% and 16.5% respectively. Due to contribution from DNF and Cross Fire, online game achieved strongest growth rate of 131.5%. Given the expansion of sales team, TV brand ad campaign, as well as R&D team expansion, SG&A expense was up 41% yoy. However, due to the faster revenue growth, operating margin improved by 3.0 p.p. to 48.4%. Looking ahead, in terms of user traffic, as IM peak simultaneous user has exceeded 100 million and Qzone active concurrent user has also exceeded 500 million, we think strong user base may support the Company’s monetization capability further especially in community VAS categories. Meanwhile, game pipeline is also remained strong, as 4 new games are scheduled to be launched in 2010. FY10-11 EPS is expected to be revised down slightly by around 2-3% to reflect the uncertainty of MVAS business, as well as lowered game users growth, given the concern on policies. However, FY09-12 EPS CAGR is also remained as strong as around 40%.

Investment suggestion: As an integrated internet company, we believe Tencent should deserve valuation premium, as: 1) weak performance of a single game could not impact its earnings significantly, 2) multi-platform could strengthen its monetization foundation, 3) it has great competitive advantages, 4) growth momentum will be stronger if search engine and e-commerce business are considered. We reiterate Buy rating. And TP is estimated to remain at HK$190.0

OPEC 156th Meeting Maintained Production Unchanged, in-line-with Market Expectations

Analyst: Grace Liu

What happened: The 156th Meeting of the Conference of OPEC convened in Vienna yesterday. The Conference again decided to maintain the current oil production ceiling unchanged，which is in line with market expectations. Member Countries reiterated their commitment to their individually agreed production allocations. The situation will be reviewed at the next Ordinary Meeting of the Conference, which is scheduled to be convened on 14 October 2010.

Comments and Views: Crude oil prices return to the US$70-80/bbl levels due to improvement of the industry fundamentals and are expected to be higher because it is approaching the high demand season during Mar-Sept. We expect global economic recovery should revive demand and OPEC would control its production to maintain market supply/demand balance. OPEC’s spare capacity is expected to be more than 7% of the total global demand in 2010. We expect crude oil prices to increase modestly along with economic growth in 2010-2011. We maintain our average Brent crude oil price assumptions in 2010-2012 to be US$80/bbl, US$90/bb and US$100/bbl, respectively.

Investment suggestion: CNOOC (00883) and CNPC (HK) (00135) should benefit from higher crude oil prices directly. Although crude oil prices fluctuated frequently between US$70-80/bbl since Aug., 09, price changes should not exceed 4% compared that of last time when domestic refined oil price increased, domestic refined oil prices are expected to maintain until March and then increase. PetroChina (00857) and Sinopec (00386) will benefit from the price band when crude oil prices are at the comfortable levels of US$70-80/bbl, at which earnings of the two companies have the best visibility. The target prices and rating of the above four companies are HK$14.45 (Buy), HK$9.20 (Accumulate), HK$10.40 (Accumulate) and HK$8.00 (Buy), respectively.

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