Investor Notes - Phillip Securities (HK) Ltd

11 Jun, 2019 (Tuesday)

AOYUAN HEALTHY(3662)
Analysis：
Aoyuan Healthy Life Group (3662) is principally engaged in offering diversified property management services for residential and non-residential properties and a full range of commercial operational services for shopping malls, with a focus on mid to high-end properties and mixed-use property development projects. As at 31 December 2018, the Group provided property management services to 61 properties in 25 cities across 11 provices, municipalities and autonomous regions in the PRC with a total GFA under management of approximately 10.4 million sq. m.. Separately, the Group provided commercial operational services to nine shopping malls in operation with GFA under management of 424,000 sq.m. in seven cities in the PRC and contracted to provide commercial operational services to 25 shopping malls with contracted GFA of 1.3 million sq.m.. Going forward, the Group plans to put its focus on third and fourth-tier cities in the PRC with high population and growth potentials and to enter into new markets in Zhanjiang, Hezhou, Guilin Beihai and Loudi. (I do not hold the above stock)
Strategy：
Buy-in Price: $3.95, Target Price: $4.30, Cut Loss Price: $3.70

SINOPHARM(000028.SZ)
Analysis：
The company is a comprehensive pharmaceutical listed company under the China National Pharmaceutical Group and Sinopharm Group, and it is the leading enterprise in pharmaceutical industry of the country. After the completion of major asset restructuring in 2016, all of the businesses are related to pharmaceutical business, including pharmaceutical distribution and pharmaceutical retail. The company actively promoted the “wholesale and retail integration” strategy, the revenue growth rate gradually rebounded: in 2019Q1, the revenue of the company was RMB11.88 billion, an increase of 15.8% YoY, the net profit attributed to owners was RMB300 million, a YoY increase of 2.53%. The company has transformed and innovated in the distribution field, actively expanded its business development areas, and controlled costs and expenses, the revenue growth of the distribution business rebounded gradually: in 2018, the revenue of distribution business was RMB32.76 billion, a YoY increase of 3.92%, the net profit was RMB716 million, a YoY increase of 11.89%. In addition, apart from injecting Guoda Drugstore, the company has introduced the world's largest drugstore retailer, Walgreens Boots Alliance, in order to accelerate the internationalization process. We believe that the comprehensive competitiveness of the company will be further enhanced.
Strategy：
Buy-in Price: RMB39.00, Target Price: RMB50.25, Cut Loss Price: RMB37.70

EnBio Holdings (6092.JT)
EnBio Holdings established in 1999. In addition to their main businesses which are the soil contamination countermeasure business (investigation, purification work and risk consulting of soil contamination) and the brownfield revitalisation business (effective utilisation support for contaminated soil regions), company also engages in the natural energy business. For FY2019/3 results announced on 15/5, net sales increased by 2.1% to 8.563 billion yen compared to the previous period, operating income decreased by 19.5% to 633 million yen, and net income fell into the red with 150 million yen loss from the previous term's 403 million yen profit. Although company has secured an increase in revenue, the record of a 496 million yen loss of withrdrawal from operations involving consolidated subsidiaries, in addition to development costs involved with the introduction of an in situ purification technology have added up. For FY2020/3 plan, net sales is expected to increase by 7.9% to 9.237 billion yen compared to the previous year, and operating income to increase by 32.7% to 840 million yen. In China, the Soil Pollution Prevention and Control Law was enforced on 1/2019, and due to growing risks of a suspension in operations due to environmental regulations, their number of consulting orders increased from 11 cases within 4-12/2018 to 25 cases within 1-3/2019. In the midst of the US-China friction escalating, we can look forward to the increase in their number of orders from firms planning to reduce risk from Chinese businesses. Recommend to buy at ¥820, target price ¥1000, cut loss if drop below ¥700.

Haichang Ocean Park (2255.HK) - Rising profitability of new projects

Investment Summary

Stable Revenue Growth in Theme Park Segment with Continuous Improvement of Revenue Structure

Haichang Ocean Park, China's leading theme park developer and operator, is operating ten projects in Dalian, Qingdao, Tianjin, Yantai, Wuhan, Chengdu, Chongqing, Shanghai and Sanya. The operating projects include seven ocean theme parks, one adventure-themed amusement park, one immersive ocean-themed entertainment complex and one water-themed park. In addition, a new project is under construction in Zhengzhou.

The Company's operation segment maintained a stable growth in 2018, as revenue generated from ten theme parks reached RMB1.62 billion, grew by 7.9% year-on-year; specifically, ticket revenue was RMB1.27 billion (+7.8%yoy) while non-ticket revenue, the proportion of which increased to 29%, reached RMB470 million (+8.5%yoy). Revenue generated from the Company's property segment decreased by 30% to RMB44.4 million. The Company's other income and gains increased from RMB160 million in 2017 to RMB440 million, mainly due to the increase in government grants.

FY2018 Result Suffered from High Opening Expenses of New Projects in Shanghai/Sanya

Haichang Ocean Park reported revenue of RMB1.79 billion in 2018, increased by 6.5% compared to that of 2017. Net profit attributable to owners of the parent company decreased to RMB39.56 million, down 86% yoy compared to RMB280 million in 2017, mainly attributable to the one-off preliminary expenses incurred from the opening of the Shanghai Project and the commencement of trial operation of the Sanya Project.

Shanghai Haichang Ocean Park opened on November 16, 2018, and the Sanya Project commenced its trial operation on December 28, 2018. During the period, selling costs, selling and marketing expenses and administrative expenses reported an substantial yoy increase of 19% (or RMB140 million), 54% (or RMB80 million) and 63% (or RMB230 million) respectively, lowering overall gross profit margin by 5.3 ppts to 48.8%, increasing selling expenses by 3.7 ppts to 12.2% and administrative expenses by 11.7 ppts to 33.5%. Finance costs increased year-on-year by 83% or RMB120 million to RMB270 million in 2018, mainly resulting from financing these two new major projects.

In addition, the Shanghai Project recorded only over 300,000 tourists for the year as it did not officially open during the Golden Week of the National Day. Moreover, due to promotion and tourist attraction strategies like free tickets in the early stage of opening and other reasons, its revenue only recorded over RMB60 million and the price per customer was more than RMB200, generating a limited contribution to overall revenue.

Revenue-doubling Plan for 2019 because of New Projects

During the Spring Festival, peak season, Shanghai Haichang Ocean Park received 150,000 tourists, with price per customer reaching RMB344/person (RMB240 for ticket and RMB104 for non-ticket). For Q2, Shanghai Haichang Ocean Park will start its night operation. The construction of its Whale Shark Rafting Area will soon be completed and this area will be ready to open. After ticket price offer for sale promotion expires, the price will regain to a normal range, RMB299-360/person. It is expected that the Shanghai Project will receive over 4.5 million tourists in 2019, contributing revenue of more than RMB1.3 billion and a gross profit margin of over 46%.

SanyaHaichang Fantasy Town is an open project where a new mode of no ticket expenses but separate charges for venues is trialed. This attracts tourist groups and facilitates multiple experiences of individual tourists. During the Spring Festival, SanyaHaichang Fantasy Town received approximately 200,000 tourists, achieving a tourism market penetration rate of 20% in Sanya. It is expected that its overall revenue in 2019 will be around RMB200-250 million and thus reporting break-even. From 2020, as expenditures of all costs and expenses become stable in the future, it is expected that Shanghai Project and Sanya Project will accelerate to unleash the profitability. Zhengzhou Project is currently under construction and will officially open in 2020.

Future Transformation to Light-asset Mode for Partially Relief of Financial Pressure

Though adhering to a development strategy of equal focus on light asset and heavy asset, the Company has been faced with sudden finance pressure as a result of investing three new major projects in the past few years. As at the end of 2018, the net gearing ratio increased to 135%. In the future, in addition to attaching great importance to developing existing projects, the Company also plans to actively develop its light asset business. For example, the Company will focus on the deployment of Midoo Park Project to quickly expand this business nationwide. In 2018 the Company newly signed 11 contracts. By now the Company has commenced 18 projects in 13 PRC cities and has entered into 45 contracts in total, with an aggregate contracted amount of approximately RMB400 million. It is planned that the profit contribution rate of light asset business will increase from 10% in 2017 to 30% in 2020.

With respect to existing projects, the Company aims to introduce new products and enrich tourist experience. In particular, a new ancient aquarium is added in Tianjin Project and a new Marine Mozoo World in Wuhan Project; Chongqing Anping Camping Hotel grandly opened; the Chongqing Hot Spring product was put into operation so as to maintain stable growth. We believe that stable contribution from existing projects in cash flow, rising profitability of new projects and influence of light asset projects will gradually relieve the Company's finance pressure.

Investment Thesis

China's theme park industry has huge growth prospects and high barriers to entry. The company's business belongs to the industry's first echelon, and it is expected to continue to benefit from the prosperity of domestic tourism consumption in the future.

We expect the company's net profit for 2019/2020 to reach 356/537 million yuan and the target price of HK$2.05, corresponding to 2019/2020 20/13.4x P/E, Buy rating. (Closing price as at 6 June 2019)

Financials

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Recommendation on 11-6-2019
Recommendation	BUY
Price on Recommendation Date	$ 1.430
Suggested purchase price	N/A
Target Price	$ 2.050

Writer Info

Zhang Jing
(Research Analyst)

Tel: (+86 21 51699400-103)

Email:
zhangjing@phillip.com.cn

Enquiry : 2277 6666 OR investornotes@phillip.com.hk
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