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Daily Commentary

21 Aug 2018

Market Outlook

HSI might fluctuate at around 27,300 and 27,800 points today.

The Hang Seng Index opened higher by 60 points yesterday and then turned to a negative territory. The index once dropped 4 points to touch its intra-day low of 27,209 points. Afterwards, the market extended its gains thanks to the upward trend of A-share and grew 244 points in the morning. During the afternoon session, HK stocks further extended its gains and grew 396 points at most to reach its intra-day high of 27,609 points. The HSI finally closed at 27,598.02 points, up 384.61 points or 1.41%. Market turnover amounted to HKD93.683 billion. When US President Trump was interviewed by Reuters, he criticized Fed Chair Powell for raising interest rates and accused China of manipulating the RMB exchange rate to offset the impact of US import tariffs. In addition, investors are looking forward to the trade war talk between China and the U.S. this Wednesday. The ADR proportional HSI index closed overnight at 27,579 points with 19 points or 0.07% lower than closing price yesterday. Dow was up by 89 points or 0.35% to 25,758 points. HSI may fluctuate at around 27,300 to 27,800 points today.

Today’s A-share Snapshot

Company’s Profile:Juewei (603517.SH) specializes in the development, manufacture and distribution of marinated snack food.

Brief Comments:The Company’s performance for 1H2018 met the expectation. During the period, the Company’s revenue rose 12.62% YoY to RMB2.085 billion while its net profit added 32.55% YoY to RMB315 million. In particular, for 2Q2018, the Company’s revenue rose 14.87% YoY to RMB1.12 billion while its net profit added 33.74% YoY to RMB165 million. As at 30 June 2018, the Company opened 9,459 shops, up 849 units YoY. The shop growth of the Company brought positive impact to the Company’s results in 1H2018, which is expected to continue in 2H2018.The main raw material of the Company represent a large proportion of the Company’s cost. The increasing price of duck recently might put a drag on the Company’s gross profit margin in 2H2018.

Stock Pick

YOFC benefited by strong fibre demand with undemanding valuation

YOFC(06869) has been the leader in the China optical fibre industry since its establishment with market share in optical fibre preform, optical fibre and cable reaching 28.3%, 20.2% and 18.3%. YOFC has been constantly winning No.1 or No.2 market share in telecom operators’ tenders.

We see a strong momentum in the optical fibre market globally thanks to the explosive data traffic growth on the back of AI, big data and cloud, and the upcoming 5G. Also, management guided that the supply shortage of its 3 business segments will continue in 2018, therefore we expect a continuous upside in ASP and volume. Management expects YOFC to achieve 14.62-26.69% YoY revenue growth and 30.97-44.75% YoY earnings growth in 1H18. We suggest investors to buy at or below HKD32, with target price of HKD40 and stop price of HKD28.

Recently, the market has paid too much attention to the unfavorable factors of the Sino-US trade war, and has neglected the structural factors that the demand for domestic mobile data traffic is rising due to the low price and the popularity of live video. The current forecast P/E ratio is 9.2X, which is 10X lower than the 10-year average. According to Bloomberg, 3-year CAGR (2018-2020) will be 22%, and the valuation is undemanding. We recommend investors to buy at HKD26 or below, with a target price of HKD31.2 and a stop-loss price of HKD23.4.


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