Research Reports and Commentaries

Daily Commentary

18 July 2018

Market Outlook
HSI might fluctuate at around 28,000 and 28,600 points today.

The Hang Seng Index opened lower by 88 points yesterday and then its losses once narrowed to 78 points. Afterwards, the market posted a downward trend and fell below its 10-day MA at approximately 28,414 points. The index dropped 284 points in the morning. During the afternoon session, HK stocks further extended its losses and decreased 401 points at most to touch its intra-day low of 28,137 points. The HSI finally closed at 28,181.68 points, down 357.98 points or 1.25%. Market turnover amounted to HKD78.239 billion. The ADR closed yesterday at 28,310 points with 129 points higher than the closing price of HSI. Dow rose 55 points to 25,119 points. HSI may fluctuate at around 28,000 to 28,600 points today.

Today’s A-share Snapshot

Company’s Profile:Yonyou (600588.SH) is mainly engaged in the businesses of cloud service, software and financial service around Yonyou Cloud.

Brief Comments:

Business catalysts:The Company issued a positive profit alert, expecting to realize a net profit between RMB130 million to RMB130 million for 1H2018, as compared with the loss of RMB63.77 million for the corresponding period of last year. Besides, the Company also predicted that the turnover increased by more than 35% during the period. These are expected to bring positive effects to the Company’s performance in this fiscal year. In June 2018, China’s Ministry of Industry and Information published the list of proposed supporting industrial internet innovation and development projects, in which, the Company was selected to become one of the eight units for the project of cross-industry and cross-sector industrial internet platform test. Thus, the Company is expected to benefit from the construction of China’s industrial internet.

Risk factors:The fierce competition in China’s internet service industry might increase uncertainties to the Company’s core business.

Stock Pick

AAC benefited by optics and acoustic upgrade with attractive valuation.

Revenue growth of AAC Tech (02018) in 2Q18 might decelerate to a single digit due to lower volumes and seasonality. Also, we expect gross margin weakness to sustain in 2Q due to an FX headwind, before a recovery in 2H18. But, in the long term, the roll out of the SLS platform and optics business will give some supports to its share price.

AAC expects the acoustic revenue to grow in double digits in 2018, driven by the dollar content hike on spec upgrades (stereosound and water-proofing) and rising contribution from Super Linear Structure - SLS (a new platform to deliver high sound quality within a miniature design). We see that AAC has launched its Gen-1.0 of SLS for the Android camp with ASP up 30% and 150mn shipment in 2018. In our view, the penetration of stereo speakers and dust-and-waterproof solutions are still low among Chinese smartphone brands, we see ample room for spec upgrade. And it will not only be used on smartphone (high/mid/low end), but also smart speaker, AR/VR, and automotive application. We think acoustic business still embraces a bright future.

Also, AAC’s plastic lens development is on track to meet the target of 30mn/month shipments by 2Q18 (increased from 10mn/month last year to 20mn/month currently). The progress in plastic lens indicated the improving production yields and margins. Since full year shipment in 2017 was 40mn (which means 100% capacity shipped), we think its excellent execution power and strong lens demand can boost its optics business.

Investors are suggested to buy at or below HKD107, with target price of HKD120 and stop loss price of HKD100.