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Top 3 Hong Kong Analysts’ Calls
In the Spotlight | 24 September 2014

Sa Sa International (Target Price: HK$5.070) REDUCE

  • Sa Sa Int`l’s FY14 revenue grew 14.2 percent YoY to HK$8,756.1 million with a stable gross profit margin of 46.5 percent (2013: 46.4 percent). The revenue from Hong Kong and Macau market of HK$7,122.1 million grew 16.7 percent YoY while Mainland China’s and worldwide sales inched up 2.67 percent YoY and 4.62 percent YoY respectively. The overall profit was up 13.3 percent YoY to HK$935.2 million with a net profit margin of 10.7 percent (2013: 10.8 percent). The profit growth in the Hong Kong & Macau market has been slightly offset by the loss in the Mainland China market and the sluggish growth in other segments. Final and special dividends per share proposed were 14.5 HK cents.
  • The continued weak performance of international sales showed that Sa Sa Int`l still struggles to establish a right business strategy. The situation was even worse in the Mainland China market due to a high tax rate on imported cosmetic products. We predict that FY15 revenue will grow 8.2 percent with a stable gross profit margin. We have reservations about the sustainability of future revenue growth because of these factors: (1) the lack of an effective strategy in the Mainland China market; and (2) changing travel and shopping behavior patterns of Mainland China tourists.
  • The extended profit loss in Mainland China market and the 3.7 percent drop of SSG in FY14 revealed that Sa Sa Int`l still has problems in market penetration. Sa Sa Int’l’s pricing strategy has been hampered by the additional 30 percent consumption tax and 10 percent import duty that the Chinese government imposed on foreign cosmetic products in China, thus making imported cosmetic products relatively unattractive in China.
  • We expect Sa Sa Int`l to achieve a 2-year revenue CAGR of 9.12 percent and 9.22 percent EPS CAGR in 2015-16, factoring in the tough business environment in the nearest future. Our TP of HK$5.07 is based on 13x FY16 P/E. Thus, we changed the investment rating from “Accumulate” to “Reduce”.

Source: Philips Securities Group

Huaneng Renewables (Target Price: HK$3.540) BUY

  • In 1H14, the Group realized a turnover of HK$373 million, up by 68.68 percent YoY. Its gross profit stood at HK$235 million and its gross profit margin reached 62.9 percent, which was 0.9 percentage points higher than 1H13. Profits attributable to shareholders were HK$179 million, growing by 99.8 percent YoY. EPS was HK$0.13 and mid-term dividends would not be distributed. The 1H14 performance was a little bit higher than expected, mainly because the Group finalized two large acquisitions in 1H14.
  • In 1H14 the Group realized HK$177 million revenue from sewage treatment which increased by 44.7 percent YoY and HK$96 million revenue from its sludge business. We believe the Group has sufficient funds to carry out or purchase new projects. At present, the Group has HK$246 million in cash. When its debt ratio reached 65 percent of that at the end of 2012, the Group can still obtain HK550 million of loans.
  • The Company’s wind power generation has decreased slightly when compared to the same period last year due to poor wind conditions but returns were still good because of the improvement in cost control and the increase of electrovalence. The cost of wind power projects has gradually decreased due to the decrease in the price of wind turbines. As of the end of 1H14, the Company’s wind power plants’ total capacity has reached 6,320MW, up 99MW when compared with the end of 2013 and the capacity of its solar power plants has reached 400MW, up 70MW when compared with the same period. Currently, the Company has projects of 2GW under construction, which would be put into operation in Oct. Its wind power plants’ capacity would reach 8GW by the end of 2014. Moreover, the Company is trying to develop new projects in recent years, which will improve the Company’s performance.
  • Although the Company’s performance is worse than expected because of the poor wind conditions in 1H14, it will improve because of the new projects which will commence operations in 2H14 and the development of power grid environment. Even though on-grid tariffs may be implemented after 2015, the Company’s performance will not be affected in the next two years so we increase the Company’s 12-month target price to HK3.54, equivalent to 13xP/E2015E, which is “Buy” rating.

Source: Philips Securities Group

PICC (Target Price: HK$4.090) BUY

  • As of the end of June 2014, PICC’s premium income increased greatly with total premium income and net premium income increasing by 29.1 percent and 32.6 percent to RMB204.544 billion and RMB169.186 billion respectively, due to a sharp growth in its life insurance business. The net profits attributable to shareholders decreased by 12.3 percent to RMB6.614 billion as a result of a large increase in operating expenses. Although PICC’s net assets amounting to RMB80.24 billion was up 12.11 percent, its net assets are apparently lower than that of other large insurers. Due to a large increase in capital after the IPO in H shares, PICC’s capital constraints have weakened.
  • However, PICC’s investment returns decreased. As at the end of June, the Group’s investment returns dropped by 7.78 percent to RMB14.145 billion. This is mainly because of the high base from the accounting changes of returns in Industrial Bank during the period. We believe growth in investment returns will increase in 2H due to an improvement in market environment this year. It will stay at approximately 5 percent in 2014.
  • In recent years, the business scale of PICC has increased sharply in recent years, especially its profit growth. The company’s life insurance business has increased rapidly this year. By the end of June, its market share in the life insurance business has increased by 0.6ppts to 7.6 percent when compared with the end of 2013. We expect its market share to go up in future. The performance of PICC has met our expectation and we estimate PICC’s intrinsic value to be around HK$4.30 in 2015 and we expect it to maintain its 12-month TP at HK$4.09 considering the recent market volatility.

Source: Philips Securities Group

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