Investor Notes - Phillip Securities (HK) Ltd
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23 May, 2019 (Thursday)

The company is mainly engaged in 1) Great Southern TCM (pharmaceutical manufacturing business, including procurement-production-sales), 2) Great Health Industry (Wang Lao Ji herbal tea production and sales) and 3) Great Commerce (Pharmaceutical distribution and retail business, including “Cai Zhi Lin”, “Jian Min” and other well-known pharmaceutical retail chain). In Q1 2019, the Company recorded RMB18.06 billion in revenue, representing an increase of 161.3% YoY. Net profit for Q1 2019 grew 55.4% YoY to RMB1.41 billion. In 2018, the company`s revenue amounted to RMB42.23 billion, increased by 101.55% YoY; the total profit was RMB4,02 billion, increased by 61.20% YoY; and the net profit attribute to shareholders of the company was RMB3,44 billion, increased by 66.90% YoY. In 2018, major asset purchase event of acquiring 30% equity interest in GP Corp. by the company and the asset transfer & change in business registration was completed on 31 May, thereafter, GP Corp. became a subsidiary which is controlled as to 80% by the company. After that, the company completed the acquisition of 48.05% equity interest in Wang Lao Ji, and Wang Lao Ji became a subsidiary controlled as to 96.09% by the company. With the steady progress of the above two acquisitions, it`s expected that the GP margin of Great Health business will improve, Great Southern TCM and Great Commerce businesses will continue experiencing stable growth in the future.
Buy-in Price: $34.20, Target Price: $38.20, Cut Loss Price: $31.50

ETFMG Prime Cyber Security ETF ( HACK )
ETFMG Prime Cyber Security ETF is a first US-listed equity ETF targeting the cyber security industry, with market cap of approximately USD1.61 billion and expense ratio of 0.6%. Within the cyber security sector, HACK ETF mainly offers exposure to 2 types of companies including hardware & software developer and service provider.In October of 2018, massive Facebook data breach left 50 million accounts exposed which aroused great public concern about the data privacy issue towards other internet giants including Twitter and Google. Hence, U.S. regulators will likely enact rules akin to the EU's General Data Protection Regulation program. Due to the future technology advancement such as Internet of thing and artificial intelligence, there will be thousands of data available online which are easily susceptible to rising cyberattacks. According to the research by Cybersecurity Ventures, cybercrime expected to cost the world $6 trillion annually by 2021. Facing increased scrutiny from worldwide regulators and fast-growing cybercrime, technology companies are set to boost security spending. Cybersecurity Ventures predicted that the global spending of cybersecurity products and services will exceed $1 trillion cumulatively by 2021. Due to the fact that companies from cybersecurity industry are mainly small-cap and volatile, investors can diversify the risk and capitalize on the high growth of this industry through investing HACK ETF. Suggested to buy at $40, target price $44.24, cut loss if drop below $38.33.

Travelsky Technology (696.HK) - United States trade war resumed, Airline industry will suffer in the short term

Investment Summary

Travelsky Technology is the largest provider of the aviation information systems in China, which developed systems, such as flight control, air ticket distribution, check-in, boarding and load planning, accounting, settlement and clearing system, and aviation logistic. Based on DCF valuation, we derived a TP of HK$23.74, implied a P/E of 24.5x and 22x in 2019/20F. We maintain a “Buy” rating with a potential upside of 42.8%. (Closing price at 20 May 2019)

The pessimistic outlook on economy and depreciation on RMB reduce the number of tourists and freight transport volume in China in the short term

As the China - United States trade war resumed, the number of tourists and freight transport volume in China may reduce due to the pessimistic outlook on economy and depreciation on RMB. The China - United States trade war was reignited, after the US urged to raise the tax rate from 10% to 25% for goods from China worth USD 200 bn on 6 May and officially came into effect on 10 May. China also retaliated by imposing a tax rise on goods from US worth USD 60bn. If the intensity of conflict between US and China remains or goes up, it will definitely drive down their economic growth, or even the global economic growth. Besides, the depreciation on RMB could somehow alleviate the effect of tax rise from US side, which could maintain the competitiveness of the Chinese export. The RMB has depreciated by 2.7% in since May, reaching the previous bottom in 2017.

As the pessimistic outlook on economy and depreciation on RMB, the willingness to travel for Chinese may reduce. First, traveling is attributed to the discretionary spending, implying that it is vulnerable to the economic cycle. If the economy is heading into a recession, the number of travelling may reduce. Second, the depreciation on RMB lowers the purchasing power of Chinese travelers in foreign countries, which may eventually reduce their willingness to travel.

If the number of tourists drops, it would reduce the bookings through the Group's systems, thereby lowering the revenue of Group. The recession may also reduce the freight transport volume, which will affect the revenue from Accounting, Settlement and Cleaning Services.

However, we believe the number of traveling will remain its uptrend in the long term despite the shocks in the short term , thanks to the increase in GDP per capita. Once the monopoly due to the protection from the Civil Aviation Administration remains, the Group will be the only company that benefits from this uptrend in number of travelling.

At present, some of the impacts can be seen from the operational data released by the group. Although the number of bookings for Chinese commercial airlines increased by 7.74% YoY from January to April, and the number of foreign and regional commercial airlines` bookings increased by 8.95% YoY. However, the growth rate of bookings for Chinese commercial airlines in March and April were the lowest in nine years, only 3.3% and 4.3%. The trade war was reignited in May, so the operating data for the next few months may remain low.

Spring Airlines adopted Travelsky's computer reservation system (CRS)

The Group released on May 15 that Spring Airlines has adopted their computer reservation system (CRS) - eTerm, implying that the travel agents will be able to purchase the air ticket of Spring Airlines via the Group's CRS.

Previously, Spring Airlines mainly sold their ticket through their own website. However, as its size became larger and the increase in international flights, direct sales will not be able to cope with the volume. As a result, Spring Airlines decided to adopt the Group's CRS.

Although Spring Airlines did not adopt the Group's Inventory Control System (ICS), the system we believe creates the greatest competitive advantage, the cooperation still could enhance the competitiveness of the Group's Global Distribution System (GDS).

Earnings Forecast

We lower our revenue growth forecast in 2019/20F by 1.1%/0.46%, to 9.2%/10.6%, reflecting the pessimistic outlook on Chinese economy and depreciation on RMB, but we should see the growth resume to normal in the long term.


We adopted the DCF model for valuation, where we assume the discount rate to be 9.76%, and terminal growth to be 2.5%, with FCFF forecast to 2028F. We derived a TP of HK$23.75, implied a P/E of 24.5x and 22x in 2019/20F, 6.8% lower than our previous TP, due to the pessimistic outlook on Chinese economy and depreciation on RMB. We believe the investment ground in the long term still remains, but may suffer in the short term due to the intensified trade war. In view of the plunge in stock price, we maintain a “Buy” rating with a potential upside of 42.8%. (HKD/CNY=0.887)


1. Economic downturn

2. Aviation system market opening up

3. Airlines develop their own systems


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Recommendation on 23-5-2019
Price on Recommendation Date$ 16.620
Suggested purchase priceN/A
Target Price$ 23.740
Writer Info
Terry Li
(Research Analyst)
Tel: +852 2277 6527

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