Hang Seng Index Performance

Source: Bloomberg

Major Market Indicators

Hong Kong Close 1-Day 1-Mth 6-Mth 12-Mth

Hang Seng Index 28,366.62 -0.8% -0.6% -4.9% 5.5%

HSCEI (H-Shares) 10,943.08 -0.7% 1.8% -8.8% 3.5%

Mkt T/O ($ Mn) 84,747.34 -7.0% -14.1% -61.3% -30.5%

Oversea

DJIA 25,313.14 -0.8% 1.2% 2.7% 15.8%

NASDAQ 7,839.11 -0.7% 0.2% 11.8% 25.3%

Shanghai SE Composite 2,795.31 0.0% -1.3% -12.2% -12.9%

Shenzhen Component 8,813.49 0.7% -5.5% -14.9% -14.4%

Commodities and FX

Crude Oil Futures (US$) 67.76 0.2% -4.6% 14.5% 38.8%

Gold Futures (US$) 1,213.70 0.0% -2.2% -8.8% -6.0%

Baltic Dry Index 1,691.00 -0.2% 1.5% 51.8% 48.6%

USD / Euro 1.14 -0.1% -2.4% -7.8% -3.4%

Yen / USD 110.65 0.1% 1.6% -2.7% -1.1%

CNH / USD 6.87 0.0% -2.4% -7.8% -2.7%

% Change

Market Overview

Hang Seng Index closed down 0.8% at 28,366. HSCEI lost 0.7%. Heavily weighted HSBC (5), Tencent (700) and AIA Group (1299) dropped 0.5%-1.0%. HK banking, technology, oil, airline, cement, power, gaming and consumption stocks underperformed the market. Hang Seng Bank (11) and Bank of East Asia (23) retreated 3.5% and 2.6% respectively. AAC Technologies (2018) and Sunny Optical (2382) tumbled 3.0% and 1.6% respectively. Three largest oil companies lost 1.5%-2.2%. Air China (753) and Anhui Conch (914) fell 2.6% and 1.6% respectively. Galaxy Entertainment (27) and Sands China (1928) lost 1.2%-1.7%. Mengniu Dairy (2319) and Want Want China (151) cut 1.7%-2.5%. Huaneng Power (902) and China Resources Power (836) shrank 3.5% and 2.3% respectively.

HK property, PRC financial, pharmaceutical, telecom, automobile and railway related stocks lacked clear direction. Wharf REIC (1997) lost 2.4% while Swire Pacific (19) rose 1.1%. China Life Insurance (2628) slid 0.8% while Zhongan Online (6060) grew 2.1%. Four largest Chinese banks dropped 0.9%-1.1%. Postal Savings Bank (1658) added 0.8%. Dongfeng Motor (489) lost 2.2% whilst BYD (1211) soared 4.4%, making it the best performing stock in HSCEI. CSPC Pharmaceutical (1093) decreased1.7% while Sinopharm (1099) increased 1.3%. Ten largest Chinese property developers surged an average 3.6% among which China Evergrande (3333) and Sunac China (1918) jumped 8.0% and 5.6% respectively. We expect Hang Seng Index to test 27,000 in the worst scenario.

13 August 2018

We expect Hang Seng Index to test 27,000 in the worst scenario.

Market in Focus Name

Bloomberg Ticker

BUY

$8.20

Rating

3M Avg Turnover ($, Mn)Target Price

Free Float (%)

30.1

3.84 - 7.57

55.6%

153.7

570 HK Equity

China Traditional Chinese Medicine MKT Cap ($Bn)

52-week High/Low ($)

China Traditional Chinese Medicine (570): Bullish on the industry growth, Maintain BUY

China Traditional Chinese Medicine (570, $5.98, CTCM) is the core platform established by Sinopharm Group for the traditional Chinese medicine segment. The Company has a complete industrial chain and integrates research, manufacturing and sales as a whole. It has more than 900 patent medicine regulations (of which more than 140 regulations are included in National Essential Medicine List 2012), over 700 varieties of TCM formula granules and over 400 varieties of classic compound granules. CTCM is one of the leading manufacturers of traditional Chinese medicine (TCM). Through an 87.3% stake in the largest TCM granule manufacturer (Tianjiang Pharmaceutical), CTCM is able to provide more than 700 types of TCM granules with approximately 50% market share of TCM granule market. The TCM granules segment contributed 66% of revenue and 72% of segment profit in 2017.

Currently, sales of decoction pieces (including TCM granules) amounted to over RMB190 billion and accounted for approximately one-fourth of overall TCM market. With the gradual liberalization of policies, TCM granules will replace part of decoction pieces and TCM finished drugs’ market. Together with consumption upgrade that consumers demand more convenient methods of taking TCM, we expect the penetration rate of TCM granules will continue to increase. According to the estimation of Frost & Sullivan, it is expected that the sales of TCM granules will increase at a CAGR of 40% in the coming four years, reaching a market scale of approximately RMB44 billion by 2020, and account for about 15% in the market of TCM decoction pieces.

In the past few years, TCM granules products have quickly won the favor of consumers in TCM market, mainly due to the products retaining all the features of the TCM decoction pieces, together with a variety of advantages including no need to cook, similar curative effect and easy to carry. From 2010 to 2017, TCM granules grew at a CAGR of approximately 40% vs 20% of TCM finished drugs and TCM decoction pieces respectively. We believe TCM granules will eventually become the mainstream of the overall TCM market. Therefore, it is expected that the growth of decoction pieces (including concentrated TCM granules) will outpace that of the TCM industry in the future, with a rapid increase in proportion.

Fig1: 1 Year Share Price

Source: Bloomberg, Mason Securities

We believe CTCM will benefit from 1) solid industry development; 2) channel expansion in high-to-low tier hospitals; 3) the increasing penetration rate of TCM granules due to consumption upgrade more and more provinces including TCM granules in medical insurance in the future. We continue to take a positive view on TCM granule market.

According to Bloomberg estimates, the company’s earnings to reach

RMB1.46bn in 2018 and RMB1.77bn in 2019, up approximately 24.7% and 21.4% respectively. EPS is expected to reach RMB 0.302 in 2018 and RMB 0.362 in 2019. Traded at 2018 P/E of 17.3x and 2019 P/E 14.4x, we believe the valuation of CTCM is still reasonable to long term investors. We maintain our BUY rating on CTCM with 12-month target price of $8.2 based on 2019 P/E of 20.0x.

Technical Ideas

Stock Code

BUY $26.10

$28.71 $33.06

$24.80

114.9 51.5%

1,659 661

227% 251%

7.9X 1.98X

249%

SMA10 23.77 RSI (14) 47.4

SMA20 24.72 BB (Upper) 27.69

SMA100 30.15 BB (Lower) 21.75

Technical Indicator

Name

Rating / Last Closing Price

MKT Cap ($Bn) / Free Float

Turnover / 30D Avg ($Mn)

Our TP / Bloomberg TP

Sunac China Holdings Ltd

1918 HK Equity

Cut Loss

Net Debt (Cash) / Equity

Forward PER / PBR

Turnover vs 5D & 30D Avg

Sunac China

Stock Code

BUY $10.30

$11.33 $12.24

$9.79

13.5 57.0%

197 89

143% 221%

8.2X 4.59X

-97%

SMA10 10.02 RSI (14) 46.4

SMA20 10.28 BB (Upper) 11.15

SMA100 11.09 BB (Lower) 9.40

Technical Indicator

Name

Rating / Last Closing Price

MKT Cap ($Bn) / Free Float

Turnover / 30D Avg ($Mn)

Our TP / Bloomberg TP

IGG Inc

799 HK Equity

Cut Loss

Net Debt (Cash) / Equity

Forward PER / PBR

Turnover vs 5D & 30D Avg

IGG

Source: Bloomberg, Mason Securities

Recent Recommendations

Date of Issue Stock Pick Recommendation Highlights Rating (TP)

30/7/2018 China Oriental Group

(581)

China Oriental Group (581): Re-rating on sustainable profitability, Maintain BUY

• COG issued a profit alert on July 23 its net profit is expected to record a very significant increase for 1H18

• We believe strong financial results for 1H18 to be announced in August and sustainable profitability in 2018 will serve as share price catalysts for COG in short-term

BUY ($9.00)

31/7/2018 Colour Life Services

(1788)

Valuation remains cheap compared to peers – Maintain BUY Colour Life Services (1778)

• Current valuation of CLS is still attractive for long term investors given strong earnings growth for 2018 fueled by M&A

• Organic growth in existing business and maiden contribution from WXM will ensure strong earnings growth for 2018

BUY ($9.75)

1/8/2018 Angang Steel

(347)

Angang Steel (347): A growing consensus on different cycle, re-rating on sustainable profitability

• The overall steel price and margin staying at a relatively high level which have proved our previous thoughts

• Growing consensus on different cycle this time serve as valuation re-rating catalysts in short-term

BUY ($9.60)

2/8/2018 Wisdom Education

(6068)

Capacity expansion for flagship schools in Dongguan will boost earnings for FY19 – Mainain BUY Wisdom Education (6068)

• We continue to take a positive view on China’s education services industry given a fast-growing middle class and rising demand for quality education service.

BUY ($7.50)

3/8/2018 CRG

(1193)

China Resources Gas (1193): Downside risks driven by China economy and industrial activities slowdown in 2H18 ; Downgrade to HOLD

• Valuation does not fully factor in downside risks driven by China economy and industrial activities slowdown and property floor space completion decline

• The factors mentioned above will pose a negative impact on CRG and limit upside risks in 2H18

HOLD ($38.9)

6/8/2018 China Maple Leaf

(1317)

Share price weakness presents a good buying opportunity – Maintain BUY China Maple Leaf (1317)

• We reiterate our BUY rating on MLES given its good earnings track record and continued expansion through acquisition

• We are optimistic about the private education industry in China and believe current valuation of MLES is attractive to long term investors

BUY ($7.10)

7/8/2018 CRP

(836)

China Resources Power (836): Defensive player with fundamental turnaround this year; Maintain Buy

• Thermal coal prices have already peaked out

• Valuation of CRP remains attractive to long term investors in our view given its stable dividend, lower coal price in 2018 and good track record of management and execution ability

BUY ($17.5)

8/8/2018 CSCI

(3311)

Robust new contract value growth for 1H18 – Maintain BUY China State Construction (3311)

• Outperformance of CSCI is mainly driven by speculation on the increase in China’s infrastructure investments in the second half of 2018 and company’s robust growth in new contract value in the first half of 2018

• CSCI looks cheap compared with its historical valuation at 5-year average forward P/E of 10.4x

BUY ($10.5)

9/8/2018 Suntien Green Energy

(956)

China Suntien Green Energy (956): Solid growth in coming years; reiterate BUY

• Tariff cut overhang is removed

• Traded at 2019 P/E of 5.48x and 2019 P/B of 0.72x with a ROE of >13%, valuation of Suntien is still undervalued in our view

BUY ($2.80)

10/8/2018 China Overseas

Property

(956)

Room for further expansion through acquisition – Maintain BUY China Overseas Property (2669)

• We remain optimistic about the growth prospects of COPH given strong support from parent company and ongoing industry consolidation

• Thanks to the acquisition of CITIC Property Service, the GFA under management of COPH increased by 37.3% in 2017 to 128.3mn sq.m.

BUY ($3.20)

Disclosures of Interests

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The views about any and all of the subject securities and issuers expressed in this report accurately reflect the personal views of the research analyst(s) primarily responsible for this report; and

the analysts are paid in part based or the profitability of Mason Securities Limited (“MSL”) and its affiliates (collectively called “Mason Group”) which includes revenue from investment banking

activities.

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The research analyst(s) who prepared this report and/or his/her/their associates has/have no financial interests in relation to listed corporation(s) covered in this report.

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Guide to stock ratings

Note: Newly issued research recommendations and target prices supersede previously published research.

BUY Based on a current 12-month view of total shareholder return (change in share price from current price + projected dividend yield), we expect a positive return

of over 10%.

HOLD Based on a current 12-month view of total shareholder return, we expect the return to range between +10% to -10%.

SELL Based on a current 12-month view of total shareholder return we expect a negative return of over 10%.

Research Team Contact

Research Team,

Mason Securities Limited,

Portion 1, 12/F, The Center,

99 Queen’s Road Central, Hong Kong

Tel: (+852) 2218 2818

Email: research@masonhk.com