1

Yum Cha 飲 茶 April 28, 2017

INDICES Closing DoD%

Hang Seng Index 24698.5 0.5

HSCEI 10261.3 (0.5)

Shanghai COMP 3152.2 0.4

Shenzhen COMP 1900.0 0.5

Gold 1264.1 (0.4)

BDIY 1134.0 (1.1)

Crude Oil, WTI(US$/BBL) 49.2 0.4

Crude Oil, BRENT(US$/BBL) 51.4 (0.7)

HIBOR, 3-M 0.9 (0.3)

SHIBOR, 3-M 4.3 0.1

RMB/USD 6.9 0.1

DATA RELEASES DUE THIS WEEK

April 29 Manufacturing PMI

April 29 Non-manufacturing PMI

Source: Bloomberg

TALKING POINT - MGM CHINA Q1 RESULTS

MGM China (2282.HK, HK$16.98), 56%-owned by MGM Resorts, has posted its results for

2017Q1. Based on these numbers, MGM China generated a profit of HK$855m under IFRS.

Total revenue was HK$3,899m, and the adjusted EBITDA was HK$1,224m, a 25% YoY gain.

MGM China's mass segment business looks very resilient. Revenue from floor table games

increased 17% YoY to HK$2.50bn in Q1, versus Macau's overall 8.5% YoY growth. This market

share gain is quite an achievement since two additional hotels have opened in Cotai in the

meantime.

MGM’s VIP baccarat business is less strong. VIP revenue declined 5% YoY (-11.7% QoQ),

compared to the Macau's overall growth of 17% YoY and 6.5% QoQ. Overall, MGM's adjusted

EBITDA increased 25% YoY.

These numbers, although they were skewed by luck, attest to MGM’s strong execution in the

mass segment, and its relative weakness in VIP baccarat. It is just as well that MGM Cotai will

be very retail-centric, as MGM has decided against opening new VIP tables at the new casino.

Regarding the opening of the MGM Cotai, management indicated the launch date would be in

late 2017. So far, the Company has spent US$2.2bn of the $3.3bn project. We remain con-

cerned that MGM Cotai’s opening will lead to price competition with Wynn Palace.

MGM is trading at 17.5x EV/EBITDA, which means it is relatively expensive if there are no addi-

tional catalysts to boost its EBITDA. .

RESEARCH NOTES

CRRC [1766.HK; HK$7.52; SELL] - CRRC released its 1Q17 China-GAAP results and held a

post-results analyst briefing after market close on 27 April 2017. Total revenue in 1Q17 fell

16.7% YoY, with core railway business revenue falling 39.6% YoY. Net profit slid 42.0% YoY,

with deteriorating operating leverage and revenue mix. The weak results echoed our bearish

view on CRRC’s poor earnings growth outlook in 2017. Even with quarterly earnings volatility, its

net profit was equivalent to only 10% and 9% of our and consensus respective full-year earnings

forecasts for the Company in 2017, hitting the low end of the historical range of its 1Q earnings

contribution. We expect to see sequential improvement in its core railway business growth from

2Q onwards, led by large bulk delivery of its locomotive and freight wagon products. But we

expect its MU business to remain a drag on its earnings growth recovery in 2017. We maintain

our earnings forecast and Sell rating on CRRC. Our earnings forecast for CRRC in 2017 is

12.3% below consensus earnings estimates. We expect its share price to come under pressure,

considering there should be downside risk to the consensus earnings estimates after this 1Q17

earnings decline.

MGM3Q Table wins (HKDm) Total July - SeptVIP 22.4 22.4 Mass 22.8 22.8 Slot 5.0 5.0

Average Daily MGM4Q Table wins (HKDm) Total Oct-DecVIP 25.5 25.5 Mass 20.5 20.5 Slot 3.6 3.6

Average Daily MGM1Q Table wins (HKDm) Total Jan-MarVIP 23.0 23.0 Mass 24.0 24.0 Slot 3.8 3.8

MGM’s Average Daily Table Wins

Sources: Bloomberg, Company Accounts

2

RESEARCH NOTES

BBMG [2009.HK; HK$4.22; UPGRADE TO HOLD] – Since Q1 is a low season, BBMG’s recurring net profit of RMB281m is

not very meaningful for analyzing full-year results. However, as the Company’s blended gross profit per tonne for the ce-

ment business reached >RMB70 in March, we believe our previous full-year forecast of RMB61 may be too conservative.

Therefore, we raise our 2017E/2018E recurring EPS by 11%/9.3% after raising our 2017E/2018E gross profit per tonne to

RMB76/RMB76. As a result, we lift our sum-of-the-parts target price from HK$3.77 to HK$4.13 (14.1x 2017E PER and 0.84x

PBR). After a correction of 20% from the peak, we upgrade our rating from SELL to HOLD.

3

CRRC [1766.HK]

Sell

Close: HK$7.52 (April 27, 2017)

Target Price: HK$6.70 (-10.9%)

Price Performance

Market Cap US$40,219m

Shares Outstanding 4,371m

Auditor Deloitte

Free Float 100.0%

52W range HK$6.45-7.99

3M average daily T/O US$21m

Major Shareholding CRCCG (54.2%)

Sources: Company data, Bloomberg

Kelly Zou—Analyst

(852) 3698-6319

kellyzou@chinastock.com.hk

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Source: Company data, CGIS Research estimates

China Railway Sector CRRC released its 1Q17 China-GAAP results and held a post-results analyst briefing after market close on 27 April 2017. Total revenue in 1Q17 fell 16.7% YoY, with core railway busi-ness revenue falling 39.6% YoY. Net profit slid 42.0% YoY, with deteriorating operating lever-age and revenue mix. The weak results echoed our bearish view on CRRC’s poor earnings growth outlook in 2017. Even with quarterly earnings volatility, its net profit was equivalent to only 10% and 9% of our and consensus respective full-year earnings forecasts for the Compa-ny in 2017, hitting the low end of the historical range of its 1Q earnings contribution. We ex-pect to see sequential improvement in its core railway business growth from 2Q onwards, led by large bulk delivery of its locomotive and freight wagon products. But we expect its MU busi-ness to remain a drag on its earnings growth recovery in 2017. We maintain our earnings fore-cast and Sell rating on CRRC. Our earnings forecast for CRRC in 2017 is 12.3% below con-sensus earnings estimates. We expect its share price to come under pressure, considering there should be downside risk to the consensus earnings estimates after this 1Q17 earnings decline.

Investment Highlights

1Q17 core-railway business revenue decline was caused by its MU business. Its core-railway business revenue decline in 1Q17 was led by its MU and passenger carriage business. Its MU business sales volume fell 66.9% YoY in 1Q17, while its passenger carriage business sales volume dropped 89.1% YoY. Its locomotive and freight wagon business, on the other hand, saw sales volume rise 13.8% and 306.3% YoY in 1Q17, respectively. The MU business revenue decline was due to insufficient orders on hand, since China Railway Corporation (CRC) delayed its MU tendering in 2016. The locomo-tive and freight wagon business revenue growth was led by CRC’s order recovery in 1Q17.

Margin contraction due to deteriorating operating leverage and revenue mix. CRRC reported gross profit margin contraction from 22.5% in 1Q16 to 21.0% in 1Q17, led by deteriorating operating leverage and product mix. Its SG&A costs fell 9.5% YoY, while SG&A costs as a percentage of total sales increased by 1.3ppt YoY to 16.2% in 1Q17. The Company reported that net financing cost fell 21.2% YoY in 1Q17. But with a higher effective tax rate, the net profit margin contracted from 6.1% in 1Q16 to 4.5% in 1Q17.

Remain cautious on its poor earnings growth outlook in 2017. Given normalizing delivery recovery of its locomotive and freight wagon business from 2Q onwards, we ex-pect to see sequential improvement in its core railway business growth from 2Q onwards. But we expect its MU business to remain a drag on its earnings growth recovery in 2017. Currently, the Company has c300 MUs on hand for delivery in 2017, which suggests around a 20% YoY sales volume decline in 2017. We expect its urban transit and other new business growth to only partially offset its core railway business growth slow-down.

Maintain Sell on CRRC. We maintain our Sell rating on CRRC. Our target price of HK$6.70 is based on a target multiple of 15x 2017E PER. Historically, the stock has trad-ed at an average forward PER of 17.3x. We don’t think the current valuation of 16.8x 2017E PER is justified with its poor earnings growth outlook.

1Q17 earnings slid as core-railway business struggled with insufficient MU orders

April 28, 2017

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Turnover(HK$m, rhs) Price(HK$)

Y/E Dec 31 2014 2015 2016 2017E 2018E

Turnover (RMB m) 218,451 237,785 224,138 232,604 253,022

Recurring net profit (RMB m) 10,815 11,818 11,296 11,346 12,342

Net margin (%) 5.0% 5.0% 5.0% 4.9% 4.9%

Recurring EPS (RMB) 0.41 0.43 0.41 0.40 0.43

% change na 5.9% -4.4% -4.3% 8.6%

PER(x) 16.3 15.4 16.1 16.8 15.5

PBR(x) 1.0 1.9 1.7 1.6 1.5

EV/EBITDA(x) 4.2 7.4 7.4 7.0 6.4

4

Key financials

Source: Company data, CGIS Research estimates

Revenue breakdown (Rmb m) 2014 2015 2016 2017E 2018E

Locomotives 36,217 32,361 12,339 27,891 30,680

Passenger carriages 11,367 10,227 8,327 5,758 5,758

Freight wagons 14,780 10,138 10,857 15,621 17,183

Multiple units 63,450 76,824 74,652 51,075 51,075

Railway equipment 125,814 129,550 106,175 100,344 104,695

Rapid transit vehicles and urban infrastructure17,931 24,477 26,978 31,025 35,678

New business 40,984 52,513 57,562 64,469 72,206

Modern service 33,722 31,244 33,424 36,766 40,442

Total revenue 218,451 237,784 224,138 232,604 253,022

% YoY

Locomotives na -10.6% -61.9% 126.0% 10.0%

Passenger carriages na -10.0% -18.6% -30.9% 0.0%

Freight wagons na -31.4% 7.1% 43.9% 10.0%

Multiple units na 21.1% -2.8% -31.6% 0.0%

Railway equipment na 3.0% -18.0% -5.5% 4.3%

Rapid transit vehicles and urban infrastructure na 36.5% 10.2% 15.0% 15.0%

New businesses na 28.1% 9.6% 12.0% 12.0%

Modern service na -7.3% 7.0% 10.0% 10.0%

Total revenue na 8.9% -5.7% 3.8% 8.8%

% of total

Locomotives 17% 14% 6% 12% 12%

Passenger carriages 5% 4% 4% 2% 2%

Freight wagons 7% 4% 5% 7% 7%

Multiple units 29% 32% 33% 22% 20%

Railway equipment 58% 54% 47% 43% 41%

Rapid transit vehicles and urban infrastructure 8% 10% 12% 13% 14%

New businesses 19% 22% 26% 28% 29%

Modern service 15% 13% 15% 16% 16%

Total revenue 100% 100% 100% 100% 100%

CRRC (1766 HK)

P&L statement and key revenue segment forecast

(RMB m, except for per share amount)

Interim 1H14 2H14 1H15 2H15 1H16 2H16 P&L 2014 2015 2016 2017E 2018E

Sales Revenue 86,410 132,040 91,816 145,968 92,321 131,817 Sales Revenue 218,451 237,785 224,138 232,604 253,022

COGS -69,762 -105,858 -72,310 -118,940 -71,679 -107,431 COGS -175,620 -191,250 -179,110 -186,559 -203,197

Gross Profit 16,648 26,183 19,507 27,028 20,642 24,386 Gross Profit 42,831 46,535 45,028 46,045 49,825

Selling and distribution costs -2,436 -4,966 -3,372 -4,581 -3,179 -4,071 Selling and distribution costs -7,402 -7,954 -7,250 -7,291 -7,678

Administrative expenses -7,742 -11,985 -9,533 -12,953 -9,987 -12,439 Administrative expenses -19,727 -22,486 -22,427 -23,274 -25,317

Other gains and losses 164 -254 507 876 202 1,911 Other gains and losses -90 1,383 2,114 2,156 2,199

Total EBIT 6,634 8,978 7,108 10,370 7,678 9,787 Total EBIT 15,612 17,478 17,465 17,637 19,029

Depreciation & Amortisation 2,416 2,827 2,816 3,401 3,079 3,426 Depreciation 5,244 6,217 6,505 7,039 7,205

EBITDA 9,050 11,805 9,924 13,771 10,757 13,213 EBITDA 20,856 23,695 23,970 24,675 26,234

Net Interest Income -818 -1,044 -313 -535 -454 -530 Net Interest Expense -1,862 -849 -984 -1,125 -1,075

Profit contribution from JV and associate 315 418 209 210 333 120 Share of Associate Profit (loss) 734 419 453 499 549

Pre-Tax Profit 6,131 8,352 7,004 10,044 7,557 9,377 Pre-Tax Profit 14,484 17,048 16,935 17,010 18,503

Tax Expense -1,108 -1,029 -1,329 -1,621 -1,483 -1,542 Tax Expense -2,137 -2,951 -3,025 -3,038 -3,305

Net Profit After Tax 5,023 7,323 5,675 8,423 6,074 7,836 Net Profit After Tax 12,346 14,098 13,910 13,972 15,198

Minority Interest -626 -905 -976 -1,304 -1,280 -1,335 Minority Interest -1,531 -2,279 -2,614 -2,626 -2,856

Reported Earnings (attributable) 4,398 6,418 4,699 7,120 4,795 6,501 Reported Earnings 10,815 11,818 11,296 11,346 12,342

Adjusted Earnings 4,398 6,418 4,699 7,120 4,795 6,501 Adjusted Earnings 10,815 11,818 11,296 11,346 12,342

EPS (rep) 0.17 0.24 0.17 0.26 0.18 0.24 EPS (rep) 0.41 0.43 0.41 0.40 0.43

EPS (adj) 0.17 0.24 0.17 0.26 0.18 0.24 EPS (adj) 0.41 0.43 0.41 0.40 0.43

DPS 0.00 0.00 0.00 0.15 0.00 0.21 DPS 0.12 0.15 0.21 0.20 0.22

% YoY growth % YoY growth

Revenue 137.1% 119.8% 6.3% 10.5% 0.5% -9.7% Revenue 126.3% 8.9% -5.7% 3.8% 8.8%

Gross profit 172.4% 148.9% 17.2% 3.2% 5.8% -9.8% Gross profit 157.6% 8.6% -3.2% 2.3% 8.2%

EBIT 235.6% 124.2% 7.2% 15.5% 8.0% -5.6% EBIT 161.0% 12.0% -0.1% 1.0% 7.9%

Net profit 200.9% 139.6% 6.9% 10.9% 2.0% -8.7% Net profit 161.2% 9.3% -4.4% 0.4% 8.8%

Margins and ratios Margins and ratios

Gross profit margin 19.3% 19.8% 21.2% 18.5% 22.4% 18.5% Gross profit margin 19.6% 19.6% 20.1% 19.8% 19.7%

EBITDA Margin 10.5% 8.9% 10.8% 9.4% 11.7% 10.0% EBITDA Margin 9.5% 10.0% 10.7% 10.6% 10.4%

EBIT Margin 7.7% 6.8% 7.7% 7.1% 8.3% 7.4% EBIT Margin 7.1% 7.4% 7.8% 7.6% 7.5%

Net Profit Margin 5.1% 4.9% 5.1% 4.9% 5.2% 4.9% Net Profit Margin 5.0% 5.0% 5.0% 4.9% 4.9%

5

Key financials

Source: Company data, CGIS Research estimates

CRRC (1766 HK)

Balance sheet, cash flow statements and ratios

(RMB m, except for per share amount)

Balance sheet 2014 2015 2016E 2017E 2018E Cash flow statement 2014 2015 2016 2017E 2018E

Inventories 59,628 59,747 54,402 56,664 61,237 EBITDA 20,856 23,695 23,970 24,675 26,234

Trade receivables 58,424 72,514 74,053 76,850 83,185 Tax Paid -2,878 -3,328 -3,644 -3,038 -3,305

Bills receivables 8,880 10,166 15,100 15,670 16,637 Change in Working Cap 7,995 -7,001 -587 -591 36

Prepayments and other receivables 19,805 18,787 30,501 31,770 33,959 Net interest paid -2,270 -1,412 -1,264 -1,125 -1,075

Prepaid lease payments 335 348 364 363 362 Others 2,664 1,093 1,209 0 0

Available-for-sale investment 4,400 3,259 52 52 52 Operating Cash Flow 26,367 13,046 19,684 19,921 21,891

Cash and cash equivalent 43,837 34,755 41,034 68,911 77,592 Acquisitions -8,970 -7,188 -18,139 0 0

Other current assets 42 1,243 747 747 747 Capex -9,866 -9,207 -10,373 -10,743 -10,743

Tax recoverable 151 92 140 140 140 Asset Sales 345 351 384 0 0

Pledged bank deposits 5,059 4,614 4,561 4,561 4,561 Investment 3,120 5,413 10,136 0 0

Current assets 200,562 205,526 220,953 255,728 278,473 Others -4,414 5,239 -6,716 0 0

Investing Cashflow -19,785 -5,392 -24,709 -10,743 -10,743

PPE 58,743 62,180 66,364 70,657 74,612 Dividend (ordinary) -3,306 -3,220 -4,064 -5,731 -5,768

Investment properties 64 939 970 925 883 Equity Raised 7,822 0 0 12,000 0

Prepaid lease payments 13,548 14,428 14,492 14,456 14,421 Debt Movements 5,107 -11,294 7,427 12,496 3,301

Goodwill 792 1,315 1,287 1,287 1,287 Others -281 -237 -754 -66 0

Other intangible assets 1,949 3,260 2,820 2,313 1,975 Financing Cashflow 9,343 -14,752 2,609 18,700 -2,467

Long-term equity investment 4,814 3,613 8,472 8,971 9,519

Available-for-sale investment 1,022 3,157 3,819 3,819 3,819 Exchange difference -83 8 486 0 0

Deferred tax assets 1,928 2,744 3,009 3,009 3,009 Net Chg in Cash/debt 15,842 -7,090 -1,930 27,877 8,681

Other non-current assets 15,393 14,533 16,124 16,124 16,124 FCF 6,583 7,654 -5,025 9,178 11,148

Non-current assets 98,252 106,168 117,357 121,561 125,648 2014 2015 2016 2017E 2018E

Valuation

Total assets 298,814 311,694 338,311 377,289 404,121 PE(x) 16.3 15.4 16.1 16.8 15.5

EPS growth(%) 36.3 5.9 -4.4 -4.3 8.6

Trade payables 71,390 83,179 91,950 95,774 104,316 Yield(%) 1.8 2.3 3.2 3.0 3.3

Bills payables 21,551 22,790 19,797 20,621 22,460 PEG(%) 0.4 2.6 -3.6 -3.9 1.8

Other payables and accruals 47,539 41,245 38,217 39,807 43,357 EV/EBITDA(x) 4.2 7.4 7.4 7.0 6.4

Short-term debt 27,375 15,260 27,184 37,795 28,346 PB(x) 1.0 1.9 1.7 1.6 1.5

Retirement benefit obligagtions 391 352 320 320 320

Tax payables 1,310 1,534 1,272 1,272 1,272 Operational

Provision fro warranties 1,952 2,280 1,866 1,936 2,106 Revenue growth(%) 126.3 8.9 -5.7 3.8 8.8

Other current liabilities 1,404 2,451 3,621 3,621 3,621 EBIT margin(%) 7.1 7.4 7.8 7.6 7.5

Current liabilities 172,913 169,091 184,227 201,145 205,797 Net profit margin(%) 5.0 5.0 5.0 4.9 4.9

Long-term debt 12,216 14,316 10,713 12,598 25,348 Days receivables 104 145 180 191 186

Long-term payables 239 276 213 213 213 Days payables 162 235 264 261 254

Retirement benefit obligations 4,201 4,054 3,516 3,516 3,516 Days inventories 92 114 116 109 106

Provision for warranties 1,795 3,741 4,536 4,536 4,536

Deferred tax liabilities 193 242 236 236 236 Current ratio((x) 1.2 1.2 1.2 1.3 1.4

Other non-current liabilities 5,079 6,398 11,065 11,065 11,065 Quick ratio(x) 0.8 0.9 0.9 1.0 1.1

Non-current liabilities 23,724 29,028 30,279 32,164 44,914 Asset/equity(x) 3.3 3.2 3.2 3.1 3.1

Net debt/equity(%) -4.8 -5.3 -3.0 -15.1 -18.5

Total liabilities 196,636 198,119 214,506 233,309 250,711 EBITDA interest coverage(x) 9.2 16.8 19.0 12.9 12.3

ROE(%) 12.1 12.2 10.8 9.3 9.6

Shareholders Fund 89,295 96,900 104,857 122,406 128,980

Minority Interest 12,882 16,674 18,948 21,574 24,430

Total S/H Equity 102,177 113,575 123,805 143,980 153,410

Total Liab & S/H Fund 298,814 311,694 338,311 377,289 404,121

6

Source: Company data, Bloomberg, CGIS Research estimates

Figure 5: CRRC H-share 12-mth forward PER

Source: Bloomberg, CGIS Research estimates

Figure 6: CRRC H-share CYTD performance

Source: Bloomberg, CGIS Research estimates

Figure 7: CRRC A/H premium (discount) band

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Rmb m 1Q17 1Q16 % YoY

Railway equipment 13,103 21,696 -39.6%

Urban transit equipment 5,504 3,872 42.2%

New business 8,882 10,398 -14.6%

Modern services 6,103 4,364 39.8%

Total revenue 33,592 40,331 -16.7%

COGS -26,531 -31,249 -15.1%

GP 7,062 9,082 -22.2%

GPM 21.0% 22.5% -1.5%

SG&A -5,431 -6,001 -9.5%

Other gains and losses 460 247 86.0%

OP 2,090 3,328 -37.2%

OPM 6.2% 8.3% -2.0%

Financing cost -236 -300 -21.2%

Profit contribution from associates 80 53 52.1%

PBT 1,934 3,081 -37.2%

Tax -434 -632 -31.3%

effective tax rate -22.5% -20.5% -2.0%

PAT 1,499 2,449 -38.8%

NPM 4.5% 6.1% -1.6%

Minority interest -347 -462 -24.7%

Profit to common shareholder 1,152 1,988 -42.0%

EPS (Rmb) 0.04 0.07 -42.9%

Figure 4: CRRC 1Q17 result overview

Source: Company data, CGIS Research estimates

7

BBMG Corporation [2009.HK]

Since Q1 is a low season, BBMG’s recurring net profit of RMB281m is not very meaning-

ful for analyzing full-year results. However, as the Company’s blended gross profit per

tonne for the cement business reached >RMB70 in March, we believe our previous full-

year forecast of RMB61 may be too conservative. Therefore, we raise our 2017E/2018E

recurring EPS by 11%/9.3% after raising our 2017E/2018E gross profit per tonne to

RMB76/RMB76. As a result, we lift our sum-of-the-parts target price from HK$3.77 to

HK$4.13 (14.1x 2017E PER and 0.84x PBR). After a correction of 20% from the peak,

we upgrade our rating from SELL to HOLD.

Investment Highlights

Gross profit per tonne began to pick up in March. BBMG’s blended gross profit

per tonne (cement and clinker) was RMB57 in Q1 (Q1 2016: a loss of RMB5/tonne). According to management, the gross profit per tonne reached >RMB70m in March, which suggests a marked improvement after the Lunar New Year holidays as de-mand began to pick up. Blended ASP was RMB233/tonne in Q1 2017, up from RMB212/tonne in 2H16. The ASP continued to go up moderately in April, according to the Company. Therefore, we raise our 2017E blended gross profit per tonne from RMB61 to RMB76.

Sales volume guidance largely unchanged. In Q1, sales volume of cement and

clinker was 13.3m tonnes, up from 6.92m tonnes in the same quarter of last year. The large increase is a result of the inclusion of the Jidong Cement business starting from Q4 2016. On a full-year basis, the Company’s sales volume guidance is 115m tonnes.

Weaker property business gross margin because of sales mix. In Q1, property

development revenue was RMB4,058m (sales volume: 0.2m m2), up 41.8% YoY. However, the gross margin dropped by 3ppt YoY to 37.5% in Q1 because of more revenue booking from projects in Beijing during the quarter. In Q1, the Company reported contracted sales of RMB4,537m or 0.3m m2. Although the authorities have launched purchase restrictions and other control measures in various cities recently, the Company’s sales of existing projects have still been good in April.

Profit breakdown between old BBMG and Jidong. On a reported basis, the Com-

pany recorded a net profit of RMB441m in Q1. About RMB800m was from the origi-nal business of BBMG, while Jidong reported a loss during the quarter because of the low season, with limited sales volume of cement and clinker.

HOLD (upgrade from SELL)

Close: HK$4.22 (Apr 27, 2017)

Target Price: HK$4.13 (-2.1%)

Price Performance

Market Cap US$10,595m

Shares Outstanding 10,677.7m

Auditor Ernst & Young

Free Float 48.26%

52W range HK$2.18-5.25

3M average daily T/O US$42m

Major Shareholder BBMG Group (44.93%)

Sources: Company, Bloomberg

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Livy Lyu—Research Assistant

(852) 3698 6393

livylyu@chinastock.com.hk

Sources: Company, CGIS Research

China Cement Sector

Cement Business Expected to be Stronger in Q2; Upgrade to HOLD

April 28, 2017

Y/E Dec 31 2014 2015 2016 2017E 2018E

Turnover (RMB m) 39,452 38,747 46,168 59,545 64,707

Recurring net profit (RMB m) 1,942 1,873 2,319 2,868 3,654

Net margin (%) 4.9 4.8 5.0 4.8 5.6

Recurring EPS (RMB) 0.20 0.18 0.22 0.27 0.34

% Change (41) (14) 24 24 27

PER (x) 16.4 19.9 16.9 14.4 11.6

PBR (x) 1.14 0.98 0.89 0.86 0.85

Source: Bloomberg

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Figure 1: BBMG results highlights

Sources: Company, CGIS Research

Y/E Dec (Rmb '000) Q1 2016 Q1 2017 Change YOY

Turnover 7,197,381 10,873,147 51.1%

Cost of sales (5,472,303) (8,343,404) 52.5%

Gross Profit 1,725,077 2,529,743 46.6%

Margin 24.0% 23.3%

Operating expenses (1,151,508) (1,925,390) 67.2%

Selling and distribution costs (336,687) (504,513) 49.8%

Administrative expenses (814,821) (1,420,877) 74.4%

Operating profit 573,569 604,353 5.4%

Other expenses (11,847) (10,313) -13.0%

Other income and gains 66,293 122,106 84.2%

EBIT 628,014 716,146 14.0%

Finance costs (269,619) (627,609) 132.8%

Share of profits of associates (9,399) (39,489) 320.1%

Exceptional items (698) 212,248 n.a.

Profit before tax 348,298 261,296 -25.0%

Taxation (266,783) (201,309) -24.5%

Minority interest 69,155 380,600 450.4%

Net Profit 150,670 440,587 192.4%

Adjusted net profit 151,368 281,401 85.9%

Revenue breakdown (intersegment revenue not adjusted)

Cement 1,640,000 3,959,000 141.4%

Modern building materials 2,177,000 2,857,000 31.2%

Property development 2,860,000 4,058,000 41.9%

Property investment 659,000 1,103,000 67.4%

Cement and clinker sales volume ('000 tonnes) 6,920 13,300 92.2%

Blended ASP (RMB) 146 233 59.6%

Gross profit per tonne (RMB) -5 57 n.a.

Net profit per tonne (RMB) -69.8 -30.0 -57.0%

9

Key financials

Figure 3: Sum-of-the-parts valuation

Sources: CGIS Research

Figure 2: Market cement prices in north China (RMB/tonne)

Sources: Digital Cement, CGIS Research

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2013 2014 2015 2016 2017

BBMG (02009.HK)

Income Statement

(RMB'000, except for per share amount)

Year ended 31 Dec 2013 2014 2015 2016 2017E 2018E

Revenue 43,203,573 39,452,065 38,746,899 46,167,928 59,545,499 64,707,252

COGS (34,799,884) (31,272,820) (30,526,041) (36,542,047) (45,608,791) (48,749,108)

Gross profit 8,403,690 8,179,244 8,220,858 9,625,881 13,936,707 15,958,144

Operating expenses (4,377,555) (4,408,173) (4,519,969) (5,662,098) (8,038,768) (8,751,639)

Operating profit 4,026,135 3,771,071 3,700,889 3,963,783 5,897,939 7,206,505

Other income and expenses 662,209 711,639 668,260 716,618 652,163 593,835

EBIT 4,688,344 4,482,710 4,369,150 4,680,401 6,550,102 7,800,341

Net f inance costs (1,017,497) (1,209,437) (1,335,546) (1,603,501) (2,190,702) (2,267,341)

Profits from JCEs and associates (34,334) (28,450) (17,694) 108,900 150,000 240,000

Non-recurrent items 357,240 558,522 166,745 490,732 212,248 -

Income before tax 3,993,753 3,803,345 3,182,654 3,676,532 4,721,647 5,772,999

Income tax expense (750,566) (1,094,373) (1,231,587) (986,183) (1,358,110) (1,620,830)

Minority interests (27,974) (286,250) 66,386 (3,693) (336,354) (498,260)

Net income 3,215,213 2,422,722 2,017,453 2,686,656 3,027,184 3,653,909

Recurring net income 2,953,706 1,941,667 1,873,061 2,318,607 2,867,998 3,653,909

EPS (RMB) 0.375 0.253 0.189 0.252 0.284 0.342

Recurring EPS (RMB) 0.345 0.203 0.175 0.217 0.269 0.342

DPS (HK$) 0.049 0.032 0.018 0.053 0.046 0.054

Depreciation and amortization 1,100,637 1,213,646 1,346,751 1,883,873 3,370,869 3,545,703

EBITDA 5,788,981 5,696,356 5,715,901 6,564,274 9,920,971 11,346,043

Cement and clinker ASP (RMB/tonne) 234 214 178 193 239 238

Cement and clinker vol. ('000 tonnes) 38,900 40,550 39,260 55,214 107,525 109,480

Cement and clinker gross profit (RMB/tonne) 42 33 18 43 76 76

Booked GFA ('000 sq.m) 1,177 1,497 1,263 1,156 900 1,150

Revenue Breakdown:#

Cement 13,122,000 12,722,000 10,828,700 15,365,000 30,891,557 31,402,305

Modern building materials 14,644,500 10,523,000 10,371,700 11,121,400 11,581,143 12,088,953

Property investment 1,945,000 2,192,400 2,692,400 3,260,300 3,602,157 3,921,638

Property development 14,953,000 15,536,600 16,921,400 18,448,500 15,312,255 20,700,000

Growth Rates:

Revenue 33% -9% -2% 19% 29% 9%

EBIT 21% -4% -3% 7% 40% 19%

EBITDA 19% -2% 0% 15% 51% 14%

Core net income 38% -34% -4% 24% 24% 27%

Recurring EPS 38% -41% -14% 24% 24% 27%

Margins and Ratios:

Gross margin 19.5% 20.7% 21.2% 20.8% 23.4% 24.7%

Net margin 6.9% 5.6% 4.7% 5.0% 5.4% 6.4%

EBIT margin 9.3% 9.6% 9.6% 8.6% 9.9% 11.1%

EBITDA margin 13.4% 14.4% 14.8% 14.2% 16.7% 17.5%

Effective tax rate 19% 29% 39% 27% 29% 28%

# Business tax included for f igures since 2012 due to change in disclosure format.

Sources: Company data, CGIS Research estimates

RMB m Note

Cement and other building materials 33,858 1x PBR

Investment properties 18,617 35% valuation discount; 7% cap rate

Property development 34,889 35% valuation discount

JV and associates 2,384

Net debt (32,000)

Minority interests (18,761)

Equity value 38,987

Price Target (HK$) 4.13

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Key financials

Figure 4: PER band of BBMG

Source: CGIS Research Source: CGIS Research

Figure 5: PBR range of BBMG

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BBMG (02009.HK)

Balance Sheet Statement of Cash Flow

(RMB'000 , except for per share amount)

As at 31 Dec 2013 2014 2015 2016 2017E 2018E Year ended 31 Dec 2013 2014 2015 2016E 2017E 2018E

Inventories 37,602,014 48,853,159 54,007,187 64,111,235 70,000,000 77,000,000 Profit before tax 3,993,753 3,803,345 3,182,654 3,676,532 4,721,647 5,772,999

Trade receivables 5,337,443 5,785,423 7,387,536 11,140,789 12,000,000 13,000,000 Depreciation & Amortization 1,169,655 1,278,819 1,346,751 1,883,873 3,370,869 3,545,703

Bills receivable 1,373,660 2,651,028 2,197,924 3,857,029 4,000,000 4,100,000 Change in w orking capital (3,791,176) (7,521,294) (8,477,792) (7,036,273) (6,151,696) (7,200,000)

Others 7,248,598 6,749,024 7,373,104 12,359,459 12,366,302 12,401,302 Others / adjustments (1,932,069) (1,188,687) (797,317) 4,979,617 1,762,118 428,220

Bank balances and cash 8,595,510 10,980,172 18,369,881 28,010,211 27,643,652 28,142,488 Net operating cash f low (559,837) (3,627,817) (4,745,703) 3,503,749 3,702,939 2,546,922

Total current assets 60,157,225 75,018,806 89,335,633 119,478,723 126,009,954 134,643,790

Capex (3,437,698) (3,473,151) (680,623) (2,410,059) (3,500,000) (3,500,000)

PPE, net 18,633,539 18,856,086 19,390,359 49,736,905 48,970,674 48,724,971 Others (280,583) (127,391) 1,169,447 (1,614,942) - -

Prepaid lease payments - - - - - - Net investing cash f low (3,718,281) (3,600,542) 488,824 (4,025,001) (3,500,000) (3,500,000)

Others 20,048,785 21,810,079 22,020,713 39,181,481 39,813,452 40,423,411

Total non-current assets 38,682,323 40,666,165 41,411,072 88,918,386 88,784,126 89,148,382 Change in debt 4,253,226 (1,970,954) 5,279,212 26,568,130 (115,420) 2,000,000

Dividends (334,131) (239,232) (160,167) (491,177) (454,078) (548,086)

Total assets 98,839,549 115,684,971 130,746,704 208,397,109 214,794,080 223,792,172 Others 2,668,521 26,534,848 3,431,827 (18,703,926) - -

Net f inancing cash f low 6,587,616 24,324,662 8,550,872 7,373,027 (569,498) 1,451,914

Trade payables 9,022,805 9,534,764 9,062,191 14,624,964 15,500,000 16,500,000

Other payables 3,154,941 3,696,216 3,626,299 7,179,818 7,200,000 7,300,000 Increase / Decrease in cash 2,689,412 2,384,661 7,389,709 9,640,330 (366,559) 498,836

Bank and other borrow ings 13,516,500 11,635,636 16,805,996 32,027,734 35,000,000 38,000,000 Net cash/(debt) (21,106,510) (23,104,876) (23,324,716) (46,384,605) (46,635,744) (48,136,908)

Others 26,365,726 34,647,039 35,692,087 41,131,670 43,839,383 46,039,383

Total current liabilities 52,059,971 59,513,656 65,186,574 94,964,186 101,539,383 107,839,383 Finance Ratios

Bank and other borrow ings 6,879,920 6,779,500 6,888,600 18,087,686 15,000,000 14,000,000 2013 2014 2015 2016 2017E 2018E

Others 9,874,344 13,144,427 16,489,656 32,435,727 32,435,727 32,435,727 Valuation

Total non-current liabilities 16,754,264 19,923,927 23,378,256 50,523,413 47,435,727 46,435,727 PE(x) 9.7 16.4 19.9 16.9 14.4 11.6

EPS grow th (%) 38 41- 14- 24 24 27

Total liabilities 68,814,236 79,437,583 88,564,830 145,487,599 148,975,110 154,275,110 Yield (%) 1.5 1.0 0.5 1.4 1.2 1.4

PEG (x) 0.25 -0.40 -1.47 0.71 0.61 0.42

Shareholders' equity 26,280,140 31,107,268 38,082,973 44,200,488 46,773,594 49,973,426 EV/EBITDA (x) 18.0 18.3 18.2 15.9 10.5 9.2

Minority interests 3,745,173 5,140,120 4,098,901 18,709,022 19,045,376 19,543,636 PB(x) 1.36 1.14 0.98 0.89 0.86 0.85

Operational

Revenue grow th (%) 33 9- 2- 19 29 9

Gross margin (%) 19.5 20.7 21.2 20.8 23.4 24.7

Net profit margin (%) 6.9 5.6 4.7 5.0 5.4 6.4

Days receivables 41 51 62 73 71 71

Days payables 84 108 111 118 121 120

Days inventories 367 505 615 590 537 550

Current ratio (x) 1.2 1.3 1.4 1.3 1.2 1.2

Quick ratio (x) 0.3 0.3 0.4 0.5 0.4 0.4

Asset/Equity (x) 3.3 3.2 3.1 3.3 3.3 3.2

Net debt/equity (%) 70 64 55 74 71 69

EBITDA interest coverage (x) 5.7 4.7 4.3 4.1 4.5 5.0

Core ROE (%) 12.0 6.8 5.4 5.6 6.3 7.6

Sources: Company data, CGIS Research estimates

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Explanation on Equity Ratings

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China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

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 :