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25 Apr, 2019 (Thursday)



HARMONY AUTO(3836)
Analysis:
The group principally engages in the sale of motor vehicles and the provision of motor vehicles after sales services in Mainland China. The Company is mainly engaged in the sales of luxury and super luxury cars, including BMW, Lexus, MINI, Land Rover, Volvo, Infiniti, Rolls Royce, Aston Martin, Ferrari, Maserati and more. The group recorded new vehicle sales volume of 26,998 units in FY18, representing an increase of +4.2% from 2017 at 25,917 units. Revenue for the year stood at RMB10.64b, slight increase compared to RMB10.60b in FY17. Net profit attributable to owners of parents amounted to RMB682.40m, down by -30% compare to FY17 (RMB963.28m). Moving forward to the 2nd quarter, we see an encouraging progress in trade negotiation between US and China and with a possible timeline for a deal in the 2ndquarter of 2019. Coupled with an encouraging GDP growth of +6.4% in 1Q19 vs expectation of +6.3%, improving investors` sentiment could help support a revaluation on the cyclical stock.
Strategy:
Buy-in Price: $2.80, Target Price: $3.50, Cut Loss Price: $2.65


Strike(6196.JT)
Strike was established in 1997. Its main management features certified public accountants and licensed tax accountants, and company carries out M&A intermediation for the entire country's mainstay/small and medium enterprises (corporate merger, corporate acquisition, capital tieup between enterprises, etc.). Company has also expanded a matching site, “M&A market SMART”, on the internet. Also offers due diligence, enterprise evaluation and consulting, etc. For 1H (2018/9-2019/2) results of FY2019/8 announced on 28/3, net sales increased by 41.3% to 2.192 billion yen compared to the same period the previous year, operating income increased by 53.8% to 757 million yen, and net income increased by 52.1% to 503 million yen. Although the number of sets of closed contracts have been stagnant due to an increase in the size of projects, the record from 2 sets of major projects and an overall increase per closed contract amount have led to an increase in income and profit. For its full year plan, net sales is expected to increase by 21.4% to 4.545 billion yen compared to last year, operating income to increase by 17.6% to 1.591 billion yen, and net income to increase by 16.0% to 1.066 billion yen. With the CEOs of small and medium enterprises continuing to age, we can predict an increase in enterprises concerned about the lack of a successor. We can look forward to the future expansion of the M&A market that solves problems of business succession. Recommend to buy at ¥2030, target price ¥2500, cut loss if drop below ¥1912.



CEA (670.HK) - Good Main Business, Oil Price, Exchange Rates and Base Lead To Result Fluctuations

Investment Summary:

Annual Revenues Are Cut In Half

China Eastern recorded revenues of RMB114.93 billion in 2018, up 13.0% yoy, and recorded a net income attributable to the parent company of RMB2.71 billion, down 57.4% yoy, in line with the company's previous result expectation. Basic EPS was RMB0.187. As the company is in the stage of introducing of the audit process of private placement of Shanghai Juneyao (Group) Co., Ltd., no dividends are paid.

Oil Price, Exchange Rates and Base Lead To Result Fluctuations

In 2018, operating indicators of the company grew steadily and reform measures aimed at strengthening sales & marketing and improving service quality were also implemented on a phased basis. However, the company experienced wild fluctuations in its result compared with previous years due to higher oil prices, exchange loss and annual cost base.

1) Affected by average annual oil price increase by 24.93%, the cost of aviation oil increased sharply by RMB8.55 billion (oil price rise added to extra cost of RMB6.72 billion while higher oil consumption increase the cost by RMB1.83 billion.)

2) Meanwhile, the depreciation of RMB exchange rate led to the exchange loss of RMB2.04 billion (the exchange net income was RMB2 billion during the same period of last year);

3) In addition, in 2017, the companytransferred100%equityinterest in Eastern Logistics and obtained an investment income of about RMB 1.754 billion, while there was no investment income in 2018.

Net profit excluding the impact of foreign exchange and non-recurring gains and losses was up about 16% yoy.

Main Business Performs Excellently, with RPK Increasing by 4%

Under the premise of stable demand growth of air travel and austere flight schedules by CAAC, the company's passenger service remained rapid growth in 2018.The company's passenger spending increased by 8.3% yoy, with a net increase of 53 aircraft. Total passenger turnover increased by 10.0% yoy, while passenger transport volume increased by 9.4% yoy. As of the end of December 2018, the number of frequent traveler members of the company's Eastern Miles had reached 39.63 million, up by 18.8% yoy.

Due to tight supply and air fare increase, the quantity and cost of airlines have been rising. The company's P L /F increased by 1.2 percentage points yoy to 82.3%, and RPK (Revenue Passenger Kilometers) recorded RMB0.538, up by 4.1% yoy, and ASK (available seat kilometers) was RMB0.443, up by 5.7% yoy.

Foreign Exchange Risk Has Shrunk Further

Debt to equity ratio values for Eastern Airline at the end of 2018 reduced by 0.22 percentage point to 74.93 percent compared with 2017. The proportion of US dollar debts in interest-bearing debt rapidly reduced from 45% at the end of 2016 and 28% at the end of 2017 to 21.51% in 2018. A 1% rise in the Dollar to Yuan Exchange Rate (USD/CNY) would affect the company's net profit of RMB178 million.

In 2018, the company's market share in Shanghai, Beijing and Kunming (in accordance with the passenger throughput) increased by 0.6, 0.4 and 0.8 percentage point, respectively, while that of Xi`an remained unchanged yoy. The company plans to add 59, 51 and 8 aircraft, respectively to its fleet which will reach 751, 802 and 810, respectively over the next three years.

Investment Thesis

Under dual pressure of the grounding of the Boeing 737 MAX and tight schedule of CAAC, the trend of tight airline capacity will continue unabated while the benefits of the market-oriented reform of air fare are expected to last, and the aviation industry is expected to prosper.

We expect the company's 2019/2020 EPS of RMB0.50/0.58. Given that possible improvement on efficiency after the mix reform, and the expected better ticket price in the future, we are optimistic about the Company's future result flexibility. Therefore, we set the target price at HK$6, equivalent to 10.1X/8.8X estimated P/E in 2019/2020. Also, the "Accumulate" rating is given. (Closing price as at 23 April 2019)

Risk

Traffic demand languished for the deterioration of macro-economy;

The depreciation of the RMB against USD would bring exchange loss;

Oil prices rose exceeded forecast;

War, terrorist attacks, SARS and other emergencies;

Highspeed railway diversion;

Boeing 737MAX deteriorate

Financials

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Recommendation on 25-4-2019
RecommendationAccumulate
Price on Recommendation Date$ 5.470
Suggested purchase priceN/A
Target Price$ 6.000
Writer Info
Zhang Jing
(Research Analyst)
Tel: (+86 21 51699400-103)
Email:
zhangjing@phillip.com.cn

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