Zhitong Hong Kong Stock Analysis: Chinese companies' overseas expansion boosts confidence, technology wave takes the lead.

【Market Analysis】

After just one day of adjustment yesterday, both markets once again showed signs of a rebound today, with divergences in the morning turning into unanimity in the afternoon. The transition was so smooth, and the Hang Seng Index closed up by 0.94%. Trading volume exceeded a trillion once again.

The 2024 Geneva Motor Show will officially open on February 26th, local time in Switzerland. This is the first time the Geneva Motor Show has returned to Geneva, Switzerland since the mask incident. Due to several years of suspension due to the epidemic and last year's postponement to Qatar, this year's Geneva Motor Show is quite bleak. According to the official website, there are only over 30 exhibitors at this year's auto show, with foreign mainstream brands including Renault, Dacia, Isuzu, and American electric vehicle startup Lucid. Chinese car companies have become the focus of the entire event.

BYD (01211) unveiled eight new energy vehicle models, including the debut of its million-level high-end new energy vehicle brand "Yongwang" in Europe for the first time. It also showcased its independently developed DM-i super hybrid technology to European consumers for the first time, featuring the model Song PLUS DM-i (named SEAL U DM-i overseas) equipped with this technology. SAIC Group's two major independent brands, IM Motors and MG, unveiled 10 new electric and intelligent vehicles including IM L6 and MG3 HEV at the 2024 Geneva Motor Show. The Italian government is reportedly in contact with BYD to negotiate the establishment of a factory. Recently, BYD has been quite active, including launching new low-end products and building factories overseas, leading to a 5.32% surge today.

Of course, the most dazzling stock in the automotive sector is Li Auto (02015), which has been repeatedly mentioned in this column in recent days. Its fourth-quarter revenue reached RMB 41.73 billion, exceeding market expectations of RMB 39.8 billion. Compared to the same period last year at RMB 17.65 billion, it surged by 136.4% YoY. Its high-end positioning has deeply impressed the market. After the performance announcement, it continued to open high and rise, demonstrating the market's continued confidence in its first-quarter report. The market believes that the company is the first to break out of the internal competition. Li Auto stated that in the next five years, it will not produce vehicles priced below RMB 200,000. It predicts that in the market for new energy vehicles priced above RMB 200,000, the top three brands will capture 70% of the market share in the fourth quarter of this year, a very enticing blueprint. No wonder it surged by over 25 points. Also, pay attention to Zeekr Auto (09863), as reports suggest that Stellantis Group is considering producing Zeekr brand electric vehicles at the Mirafiori plant in Italy, with a planned production volume of 150,000 vehicles. It is gradually emerging from the bottom.

Furthermore, this year's Mobile World Congress MWC 2024 has become the main stage for Chinese technology. Chinese mobile phone brands such as Honor, Huawei, Xiaomi, and ZTE are concentrated in the same area as Samsung. However, the Chinese exhibition booth is significantly more popular than Samsung's nearby booth. Chinese products are seizing the absolute spotlight, with companies like Visionox in the display field, TCL (01070) in the smart terminal field, Lenovo (00992) in the PC and server field, Unisoc in the chip field, and XREAL in the AR field. The trend of Chinese consumer electronics products continuously expanding globally is inevitable, with giants like Sunny Optical (02382) and AAC Technologies (02018) expected to continue to catalyze this trend.

According to reports, NVIDIA recently listed Huawei as a major competitor in categories such as AI chips for the first time in the documents submitted to the U.S. Securities and Exchange Commission. It also stated that if the U.S. government further restricts chip exports, it will further damage NVIDIA's competitiveness. Foreign Ministry spokesperson Mao Ning stated that the fact proves that "small courtyards with high walls" cannot stop the pace of China's innovative development and are not conducive to the healthy development of the entire industry, including U.S. companies. The autonomous controllable chip initiative has been fully launched, with Prudential Technology (00650) announcing that on February 23, 2024, the company sent out orders to customers for the Incellplate Cu series chain copper plating equipment. The revenue from these equipment purchase orders has not been confirmed yet. The stock surged by over 18 points today. Other companies like SMIC (00981) and Shanghai Fudan (01385) also rose by over 10 points.

In the computing power sector, A-shares surged across the board today, and the Hong Kong stock market also performed well. One reason is market rumors that computing power subsidies are about to be issued. However, this rumor has not been officially confirmed. The second reason is the significant breakthrough of Bitcoin, driving a surge in virtual currencies. The value of computing power is also reflected behind the virtual currency market. If the subsidies are successfully implemented, computing power stocks will bring new expectations for performance. Looking solely at computing power, China Telecom (00728) ranks first in total computing power domestically, but it is not high-end computing power. Sensetime (00020) has relatively high-end computing power, reaching 6800P. With the completion of the second phase of Sensetime's large-scale facility, Sensetime's computing power in 2024 will reach 16500P, with rental income of approximately 2.5 billion. Shenzhou Holdings (00861) has maintained a long-term and in-depth cooperation with NVIDIA, with a first-mover advantage in the construction and operation of intelligent computing centers. Several intelligent computing center projects are progressing both domestically and internationally. Recently, Shenzhou Holdings (00861) successfully delivered the first phase of the Hong Kong SAR Government's large-scale intelligent computing center project in collaboration with NVIDIA, with a total amount of nearly 600 million Hong Kong dollars. This project is also the world's first computing cluster project to receive NVIDIA's cutting-edge technology (DGX H800). The vigorous development of computing power is beneficial for equipment suppliers like ZTE (00763) in terms of boosting product sales. The upstream fiber optics sector is also expected to be driven, such as Yangtze Optical Fibre and Cable (06869).

China is about to launch consumer-grade satellite internet products to the market. China Satcom will provide more consumer-grade satellite internet products to the market and collaborate with airlines to launch aviation satellite internet product data plans. In 2023, Nanjing Panda (00553) formed the "Low Earth Orbit Satellite Internet Terminal Industry Alliance" with Southeast University, XingSi Semiconductor, and other units to conduct research on new generation satellite communication terminal technologies. In addition, its subsidiary Panda Communications won the bid for the new generation satellite terminal project, with a bid amount of over 9 million yuan.

With the privatization of China Traditional Chinese Medicine (00570) kicking off, the Hong Kong stock market has another "rumored" company. Media cited sources saying that Samsonite (01910) is considering various options, including privatization, after receiving acquisition intentions from potential buyers. The news also mentioned that some private equity firms have been studying the possibility of acquiring Samsonite and relisting it at a higher valuation in another market such as the United States. Today's significant rise exceeded 13 points. Let's keep an eye on the follow-up news.

Baiji Shenzhou (06160) reported a 73% increase in full-year revenue in 2023. The European Medicines Agency (EMA) Human Medicines Committee (CHMP) has issued a positive opinion recommending the approval of its drug Toripalimab for three non-small cell lung cancer (NSCLC) indications. The revenue growth is a significant boost for innovative drugs. Sinobioway (01801) and Rongchang Biotech (09995) have also shown positive performance.

The American Chamber of Commerce stated that its President, Clark, will lead a delegation to visit China this week and is expected to meet with Chinese officials. The media views this visit as "the latest sign of improving relations between the world's two largest economies." Hopefully, this visit will bring marginal improvements to the relationship. Let's observe if there are breakthroughs in carbon neutrality in sectors such as photovoltaics, pharmaceuticals, and e-commerce.

The rise in the Hong Kong stock market today is different from the previous purely policy-driven nature. The continuous demonstration of China's technological strength overseas has boosted investor confidence on another level. With comprehensive activation, breaking the 17,000 mark in the Hong Kong stock market is only a matter of time.

[Sector Focus]

On February 27, 111 domestic game licenses were issued, including highly anticipated games like "Black Myth: Wukong" (scheduled for August 20, 2024), "Infinite Warmth" by Paper Stack, "Perfect New World" by Perfect World, and "Endless Hegemony Mobile Game" by NetEase. The number of domestic game licenses exceeded one hundred in December 2021 and January 2022. The long-pending DNF mobile game import license was approved in February, significantly boosting confidence among game companies and investors. The industry continues its recovery trend, with expectations of high-quality license issuance and proactive regulatory statements leading to market sentiment recovery and sector valuation improvement. Additionally, the gaming sector is seen benefiting from AI applications as a major scene, continuously benefiting from the iterative breakthroughs of AI large models.

The accelerated pace of game licenses indicates a positive change in the regulatory attitude towards the industry, coupled with AI catalysis, the gaming sector is expected to see an increase in valuation. Key stocks include: XD Inc. (02400), NetEase (09999), Bilibili (09626), ZHONGSHOUYOU (00302), and Tencent (00700).

[Stock Analysis]

Changfei Optical Fiber Cable (06869): Accelerating Broadband Frontier Construction, Fiber-related Products are Ready for Mass Production

Thirteen departments including the Ministry of Industry and Information Technology and the Ministry of Education jointly issued a notice on accelerating the construction of "broadband frontiers." By the end of 2025, county towns and townships in border areas will achieve 5G and gigabit optical network coverage; administrative villages, rural population gathering areas with over 20 households, border management and trade institutions will reach 100% coverage; mobile network coverage will be basically achieved along national and provincial highways; and network coverage will be provided on demand in inland sea areas.

Analysis: In recent years, the market size of optical fiber cables has been continuously expanding. With the construction of 5G networks and the upgrading of gigabit optical fibers driving the continuous increase in market demand, it is estimated that the market size of optical fiber cables will reach 540.8 billion yuan by 2025, maintaining a growth trend. According to the 2023-2024 G.654E fiber optic cable product centralized procurement results announced by China Mobile on October 12, 2023, Changfei ranked first with a 40% share of the winning bids, maintaining a leading position in the industry. The company disclosed that in the first half of 2023, Changfei Fiber participated in the bidding for 8 projects in the operator fiber optic cable centralized procurement project, with a total winning scale of 22.93 million core kilometers. The focus is on the overseas market. Since acquiring the Brazilian network solutions provider Poliron, Changfei has established 6 production bases in Indonesia, South Africa, Brazil, Poland, and more than 50 overseas companies/offices, forming a global overseas marketing and service network. In response to the demand for increasing fiber optic transmission capacity, Changfei has successfully developed a series of multi-core fibers, low-mode fibers, and other space-division multiplexing fiber products, with the ability for mass production. In the optical module business, Changfei's subsidiary Bochuang Technology's 10G PON OLT optical module shipment volume leads domestically, and its 25G LR silicon optical module for 5G fronthaul and 50G PAM4 optical module for 5G midhaul have achieved large-scale sales. In the third-generation semiconductor field, Changfei Advanced Semiconductor completed a Series A equity financing of over 3.8 billion yuan this year for the construction of third-generation semiconductor epitaxy, wafer manufacturing, packaging, and testing production lines. After completion, it will have the capacity to produce 360,000 6-inch silicon carbide wafers and epitaxy annually, and 61 million power device modules.

China Telecom (00728): Central Enterprises to Strengthen AI Algorithm Construction for Further Growth in Emerging Businesses

On February 19, the State-owned Assets Supervision and Administration Commission of the State Council held a Central Enterprise Artificial Intelligence Special Promotion Meeting on "AI Empowering Industry Renewal." China Telecom has planned to build the Zhisuanzhong cluster heart in Shanghai, which can support the training of trillion-parameter large models.

Commentary: The company's digital business is the main driver of revenue growth, accounting for over 70% of incremental service revenue. In terms of emerging businesses, the revenue from January to November reached 332.6 billion yuan, accounting for 21.4% of the total telecommunications revenue, with a year-on-year growth rate of over 20%, driving a 3.8 percentage point increase in telecommunications revenue growth. Among them, cloud computing and IoT revenue grew by 39.7% and 22.7% year-on-year, respectively, while big data business continued its high growth momentum with a 43.3% year-on-year increase. With the continuous improvement of the top-level design of the domestic data element industry and the exploration and implementation by governments at all levels and various industries, the potential of data elements of operators is expected to be released faster, driving further growth in emerging businesses. The three major operators attach great importance to shareholder returns, with the cash dividend ratio continuously increasing. Both China Mobile and China Telecom have stated that the profit distribution for the full year of 2023 will increase to over 70% of the profit attributable to shareholders. The State-owned Assets Supervision and Administration Commission stated that considering incorporating market value management into the performance evaluation indicators of state-owned enterprises, relevant policies will drive Chinese telecom stocks to continue increasing their dividend payout ratios after the 2023 fiscal year and strengthen share buybacks to improve shareholder returns. Considering the stable growth performance of operators, the future dividend returns of operators are highly attractive. Ganfeng Lithium (01772): Lithium prices are expected to stabilize in the medium to long term, with the cost center likely to shift downwards

Core Lithium, a major lithium supplier in Australia, announced the temporary suspension of the BP33 project, halting open-pit mining. Greenbushes Lithium Mine has lowered its lithium concentrate production plan for 2024. In addition, the pricing model for lithium concentrate at the world's largest lithium mine, Greenbushes, has changed from Q-1 to M-1 pricing mechanism.

Analysis: If subsequent mining companies continue to reduce production, the oversupply situation in the lithium supply side is expected to gradually ease with capacity clearance, and lithium prices are likely to stabilize. Ganfeng Lithium has diversified its global lithium resources and is developing high-quality lithium brine projects with lower costs. Considering the lower cost of brine lithium extraction and the increase in the company's own resources, the company's long-term cost center is expected to further shift downwards. Ganfeng Lithium holds equity lithium resources exceeding 47 million tons of LCE, ranking among the top tier globally. The company plans to achieve a total annual production capacity of lithium products of no less than 600,000 tons of LCE by 2030 or earlier. In terms of recent increments, Marion lithium concentrate production capacity has expanded to 900,000 tons/year and is ramping up; the first phase of 40,000 tons of lithium carbonate production capacity at the Cauchari-Olaroz brine in Argentina is scheduled to start production in 2023Q2. The lithium salt products produced by the company's high-priced lithium concentrate in the early stage have been gradually sold out, with lithium prices falling for a year, completing the phase of excessive profits. Next year will see capacity reduction, followed by inventory reduction the year after, with the supply-demand balance point expected to be around 80,000. In the long term, lithium mines remain the highest quality assets in the lithium battery industry chain, and current lithium prices may accelerate their bottoming out. The company's midstream lithium processing capacity is rapidly expanding, with the second phase of the C-O brine, PPG brine, and the first and second phases of the Shangrao lithium brine projects expected to start production in 2025.

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