yum cha 飲 茶spot price on 65% import iron ore (fe) at tianjin port has lost 30% this year, to...
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Yum Cha 飲 茶 June 6, 2014
TALKING POINTS
CHART OF THE DAY— IMPLICATION ON WEAK SEABORNE IRON ORE PRICES
Source: Bloomberg
INDICES Closing DoD%
Hang Seng Index 23,109.7 (0.2)
HSCEI 10,364.6 0.5
Shanghai COMP 2,040.9 0.8
Shenzhen COMP 1,058.3 1.3
Gold 1,253.3 (0.0)
BDIY 977.0 1.9
Crude Oil, WTI(US$/BBL) 102.5 (0.0)
Crude Oil, BRENT(US$/BBL) 108.8 0.4
HIBOR, 3-M 0.4 (0.8)
SHIBOR, 3-M 4.8 (0.3)
RMB/USD 6.3 0.1
DAILY NOTES FOR THIS WEEK
Jun 07 Trade Balance
Jun 07 Exports YoY
Jun 07 Imports YoY
TRULY INTERNATIONAL [0732.HK, BUY] - The company recorded a monthly turnover of
HK$1.8bn for May 2014—the highest monthly turnover in 2014. On a year-to-year (YoY)
comparison the growth remains challenging at a decrease of 3.3%, although recovering from
down 7.1% YoY in April 2014. We believe the number for May is an encouraging sign
confirming the weak period is short-lived where backend-loaded orders related to 4G
smartphone are starting to pick-up gradually. Despite the stock has offered a total return
(share price gain plus dividend income) of +16% since our initiation on 14 May, it is still trading
at 7.1x PER FY14e with 6.0% dividend yield FY14e — a substantial discount to peers. We
reiterate BUY with a target price HK$6.25 (28% upside).
Spot price on 65% import iron ore
(Fe) at Tianjin port has lost 30% this
year, to US$94.60/t as of the latest
- falling below US$100/t decisively
first time since 2012. While industry
experts attributed the price decline
to inventory destocking and weak
demand on steel due to slowdown
in property construction activities,
there are more signs that global iron
ore market is in fact entering into an
early stage of structural oversupply,
echoing the comment made in May
by the head of Vale’s metals
division that supply is greater than
demand for the first time in 10
years. Iron ore imports grew
strongly by 20% to 305m tons for
the first four months of 2014, even
though total inventories at ports
have soared to record high. Near-
term outlook for iron ore prices is,
undoubtedly, pessimistic until a
more vigorous destocking cycle is
underway. Chinese steel mills have
been responding to the change in
cost curve, by cutting long term
contracts or even cancelling the shipment, and instead by purchasing inventories at the spot
market. Although it does alleviate some margin pressure, sluggish steel demand remains as
the biggest threat on steelmakers. Decline in iron ore would also put pressure on domestic
high-cost iron ore miners which will eventually be forced to shut down as seaborne price
continues to trade below their marginal cost. Hong Kong listed miners with iron ore exposure
(either in China or globally): China Vanadium (893 HK, pure play domestic high-cost iron ore
miner); IRC (1029 HK, pure play iron ore exposure in Russia); Citic Pacific (267 HK,
conglomerate with iron ore exposure in Australia).
Source: Bloomberg
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June 6, 2014
Monthly Turnover Bottoming Out in May
Highest monthly turnover in FY14. Truly International [0732.HK] released its
monthly turnover for May 2014, recording HK$1,800 million—the highest monthly
turnover in 2014. On a year-to-year (YoY) comparison the growth remains
challenging at a decrease of 3.3%, although recovering from down 7.1% YoY in April
2014. Turnover on five-months-to-date grew 11.0% YoY.
New 4G orders start contributing. The increase in monthly turnover from
HK$1.57Bn in Apr 2014 to HK$1.86Bn in May 2014 is an encouraging sign
confirming the weak period is short-lived where backend-loaded orders related to 4G
smartphone are starting to pick-up gradually. We expect monthly turnover for June
will resume positive growth on YoY basis, opening the window of a much stronger
second half. We also notice that gross margin in 2Q14 will improve QoQ (1Q14:
12.5%) as production is starting to enjoy better operating efficiency at a monthly
turnover of HK$1.8bn or above.
Reiterate BUY on value & growth. Our investment thesis remains intact: Truly is
the deepest value counter within the component sector, and deserves a re-rating.
Revenue growth over the next three years will be lifted by: 1) Better product mix in
capacitive touch panels such as full lamination module; 2) strong demand on TFT
auto displays. Despite the stock has offered a total return (share price gain plus
dividend income) of +16% since our initiation on 14 May, it is still trading at 7.1x PER
FY14e with 6.0% dividend yield FY14e — a substantial discount to peers. We
reiterate BUY with a target price HK$6.25 (28% upside).
Truly International [0732.HK; TP 6.25]
Price Performance
Market Cap US$1,827m
Shares Outstanding 2,915m
Auditor Deloitte
Free Float 47%
52W range HK$3.40-5.82
3M average daily T/O US$1.41m
Major Shareholding Lam, Wai Wah (44%)
Chan, Kin Sun (7%)
Source: Company, Bloomberg
Samuel Chan, CFA—Senior Analyst
(852) 3698-6391
John Mulcahy—Head of Research
(852) 3698-6889
BUY
Close: HK$4.86 (June 5, 2014)
Target Price: HK$6.25 (+28%)
China Technology Sector
Source: Company, CGIHK Research
Key Financials (HK$m) FY2012 FY2013 FY2014e FY2015e FY2016e
Revenue 12,374.4 20,680.8 24,990.1 29,400.7 32,989.9
Change (yoy %) 18% 67% 21% 18% 12%
Gross Profit 1,556.9 2,891.9 3,513.5 4,238.4 4,834.4
Change (yoy %) 19% 86% 21% 21% 14%
Net Profit 716.0 1,768.3 2,187.2 2,605.3 2,974.5
Change (yoy %) 88% 147% 24% 19% 14%
EPS $0.257 $0.574 $0.686 $0.817 $0.933
DPS $0.110 $0.190 $0.226 $0.270 $0.308
ROE (%) 15.0% 28.6% 27.2% 26.4% 25.0%
Payout Ratio (%) 43% 33% 33% 33% 33%
PER (x) 18.93 8.46 7.08 5.95 5.21
PBR (x) 0.78 1.55 1.32 1.10 0.92
Dividend Yield (%) 7.8% 5.0% 6.0% 7.1% 8.1%
FCF Yield (%) 11.88% 13.78% -3.31% 0.02% 2.85%
Net Gearing (%) 36.7% 15.6% 17.3% 14.3% 9.4%
0
100
200
300
400
500
600
3
3.5
4
4.5
5
5.5
6
(HK$ million)(HK$)
Turnover (RHS) Price (LHS)
3
Figure 3: Peers Comparison
Source: Bloomberg estimates, CGIHK Research
Figure 1: Monthly Unaudited Turnover
Source: Company data, CGIHK Research
Figure 2: More Share Buyback After 1Q14 Result
Source: Bloomberg
PBR (x)
Company Ticker Rating Price
Market
cap
(US$m)
2013 2014E 2015E 2013 2013 2014E 2015E 2013 2014E 2015E
HK Listed
Truly International 732 HK Equity BUY 4.86 1,752 8.5 7.1 5.9 1.6 5.0 6.0 7.1 123.7 19.5 19.1 16.5
AAC Technologies 2018 HK Equity NR 47.15 7,468 18.1 17.5 14.9 5.9 2.3 2.1 2.5 46.3 3.4 17.3 25.2
FIH Mobile 2038 HK Equity NR 4.49 4,398 55.7 21.4 17.0 1.2 n.a. - - (124) 159.6 25.9 7.7
BYD Electronics 285 HK Equity NR 5.55 1,613 15.4 11.3 9.8 1.1 0.6 1.0 1.5 70.6 36.2 15.7 23.1
Sunny Optical 2382 HK Equity NR 9.71 1,374 17.7 14.2 11.5 3.0 1.6 2.0 2.5 23.2 24.2 23.8 28.8
Tongda Group 698 HK Equity NR 1.06 747 14.2 11.3 9.0 2.1 2.4 2.8 3.6 17.3 25.8 25.5 103.8
SAS Dragon 1184 HK Equity NR 3.07 247 9.4 n.a. n.a. 2.1 4.3 n.a. n.a. 87.6 n.a. n.a. 70.0
Varitronix 710 HK Equity NR 7.79 329 10.4 n.a. n.a. 1.6 6.4 n.a. n.a. 41.7 n.a. n.a. (6.0)
Average 17.3 12.7 10.4 2.3 3.2 2.1 2.6 35.8 43.8 21.6 24.7
Others
TPK HOLDING CO L 3673 TT Equity NR 235.5 2,595 15.2 16.5 12.2 1.4 2.1 4.5 3.2 (3.2) (29.8) 26.1 34.9
SHENZHEN O-FIL-A 002456 CH Equity NR 24.17 2,273 31.1 21.5 16.2 5.8 0.4 0.9 1.3 49.7 57.4 32.5 (12.0)
Average 23.1 19.0 14.2 3.6 1.3 2.7 2.2 23.3 13.8 29.3 11.5
HK Listed & Others Average 19.6 15.1 12.1 2.6 2.8 2.4 2.7 33.3 37.0 23.2 29.2
EPS Growth (%yoy)PER (x) Dividend yield (%)YTD
Perf
(%)
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Key Financials
Source: Company Data, CGIHK Research
Income Statement (HK$m) FY2012 FY2013 FY2014e FY2015e Cash Flow Statement (RMBm) FY2012 FY2013 FY2014e FY2015e
Revenue 12,374 20,681 24,990 29,401 Profit (loss) after tax 710 1,768 2,187 2,605
Growth yoy% 17.8% 67.1% 20.8% 17.6% Depreciation & Amort. 562 619 828 1,077
Gross Profit 1,557 2,892 3,514 4,238 Change in Working Capital (209) 15 (356) (557)
Gross Margin % 12.6% 14.0% 14.1% 14.4% Cash from Operation 1,067 2,403 2,659 3,125
Adminsitrative Expenses (365) (480) (565) (706) Capital Expenditure (810) (1,244) (2,490) (2,462)
Distribution and Selling Expenses (206) (326) (340) (412) Sale of PP&E 13 0 0 0
Operating Profit 986 2,087 2,609 3,121 Cash Acquisitions - - - -
OP Margin % 8.0% 10.1% 10.4% 10.6% Divestitures - 0 0 0
Non-Operating Income (Loss) 71 107 79 79 Change in Other Investing Activities 0 (111) 0 0
Interest Expenses (73) (79) (21) (23) Cash from Investing (651) (1,355) (2,490) (2,462)
Income Tax Expense (268) (346) (480) (572) Debt Issuance / Repayment 0 729 0 0
Net Profit 716 1,768 2,187 2,605 Issuance / Repurchase of Comm Stock (4) 3 0 0
Net Income Margin % 5.8% 8.6% 8.8% 8.9% Dividends Paid (194) (304) (536) (661)
Net Profit Attributable to Shareholders 710 1,620 2,003 2,386 Other Financing Activities 114 (79) 0 0
Cash from Financing 40 348 (536) (661)
Balance Sheet (HK$m) FY2012 FY2013 FY2014e FY2015e Foreign Exchange Rate Adj. 7 79 0 0
Net Change in Cash 462 1,475 (366) 2
ASSETS
Cash And Equivalents 1,331 2,806 2,440 2,442 Ratios FY2012 FY2013 FY2014e FY2015e
Accounts Receivable 3,778 5,385 6,372 7,497
Other Receivables 231 524 524 524 Profitability
Inventory 1,016 1,489 1,999 2,352 Return on Assets % 7% 13% 12% 13%
Other Current Assets 7 7 7 7 Return on Equity % 15% 29% 27% 26%
Total Current Assets 6,471 10,210 11,342 12,821 Return on Common Equity % 15% 27% 26% 26%
Net Property, Plant & Equipment 4,893 5,517 7,179 8,564
Long Term Investments 48 332 332 332 Margin Analysis
Goodwill 0 0 0 0 Gross Margin % 12.6% 14.0% 14.1% 14.4%
Other Intangibles 155 155 155 155 Operating Margin % 0.0% 7.5% 7.5% 7.4%
Deferred Tax Assets, LT 9 9 9 9 Net Income Margin % 5.8% 8.6% 8.8% 8.9%
Other Long-Term Assets 11 57 57 57
Total Long Term Assets 5,116 6,071 7,732 9,118 Asset Turnover
Total Assets 11,587 16,281 19,074 21,939 Total Asset Turnover 1.1x 1.5x 1.4x 1.4x
Fixed Asset Turnover 2.6x 4.0x 3.9x 3.7x
LIABILITIES & EQUITY Accounts Receivable Turnover 3.6x 4.5x 4.3x 4.2x
Accounts Payable 2,460 4,203 5,345 6,266
Short-term Borrowings 1,375 2,949 2,949 2,949 Liquidity
Curr. Income Taxes Payable 164 84 84 84 Current Ratio 1.2x 1.3x 1.2x 1.3x
Other Current Liabilities 292 826 826 826 Cash Conversion Cycle 65.5 40.0 36.3 34.6
Total Current Liabilities 5,505 8,062 9,204 10,124 Total Liabilities/Total Assets 27.2% 23.9% 20.4% 17.7%
Long-Term Debt 906 935 935 935
Def. Tax Liability, Non-Curr. 36 57 57 57 Growth Over Prior Year
Total Liabilities 6,447 9,054 10,196 11,117 Total Revenue 18% 67% 21% 18%
Common Stock 55 58 58 58 Gross Profit 19% 86% 21% 21%
Additional Paid In Capital 546 2,792 2,792 2,792 Operating Profit 20% 112% 25% 20%
Retained Earnings 2,738 4,053 5,521 7,246 Net Income 88% 147% 24% 19%
Minority Interest 163 323 506 725 Payout Ratio % 43% 33% 33% 33%
Total Equity 5,140 7,227 8,878 10,822
Total Liabilities And Equity 11,587 16,281 19,074 21,939
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BUY share price will increase by >20% within 12 months in absolute terms :
SELL share price will decrease by >20% within 12 months in absolute terms :
HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :