Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Shenzhen Stock Exchange Composite Index / Technical Analysis

China (MSCI China, Shenzhen A Share) offers a plethora of attractive setups and is a major focus in today’s report. Taiwan (TAIEX) is another focus as it is one of the few global indexes that is not yet breaking down. Lastly, Turkey (ISE National 100) appears to offer an attractive pullback opportunity. Within EM, we highlight attractive opportunities across the technology, consumer discretionary, health care and communications sectors.

China (MSCI China, Shenzhen A Share) offers a plethora of attractive setups and is a major focus in today’s report. Taiwan (TAIEX) is another focus as it is one of the few global indexes that is not yet breaking down. Lastly, Turkey (ISE National 100) appears to offer an attractive pullback opportunity. Within EM, we highlight attractive opportunities across the technology, consumer discretionary, health care and communications sectors.

Asia and Global Semiconductor and Tech Research

Andrew Lu

Equity Bottom-Up

Contemporary Amperex Technology (CATL) / Equity Bottom-Up

<ul><li>A leading EV battery vendor in China: CATL aims to be listed at Shenzhen Stock Exchange as A-share listing middle next year. The company will issue no more than 217.2mn new shares at IPO price of RMB$60.4 per share or US$1.98bn IPO size (US$19.8bn market cap).</li><li>ASP free fall will be a major concern: Affected by ASP decline of likely 30% y/y to below US$210/kWh in 2H17 from US$309/kWh in 2016 and US$224/kWh in 1H17, we expect 2017E sales growth to decelerate massively. We attribute ASP decline to 1) Competition from China peers and global leaders; 2) Some EV subsidies cut; 3) Pricing pressure from EV car vendors.</li><li>Margin contraction inevitable: Given expecting EV battery cost per kWh decline of 15-20% y/y for next few years is less than price decline of 20-30% y/y, we expect gross margin contraction to 37% in 2018E and 35% in 2019E from 44% in 2016.</li><li>Valuation is demanding: The preliminary IPO price is suggesting over 40x 2018/2019E EPS and 6x book value at lower ROE of &lt;10% (after US$1.98bn cash dilution). We thus see CATL is overvalued over peers' unless the company can deliver much stronger than expected 2H17 sales/earnings. </li><li>Strong performance expected before the lock-up period ends: Despite the demanding valuation, CATL stands out in China and global with higher operating margin, technology leadership, better yield rate, production efficiency, rich EV battery clients portfolio, and shares gain. Due to limited shares free float available post-IPO, we expect strong performance over the next 6 months (post-IPO) until approaching the lock-up period of 12 months for key shareholders.</li></ul>

A leading EV battery vendor in China: CATL aims to be listed at Shenzhen Stock Exchange as A-share listing middle next year. The company will issue no more than 217.2mn new shares at IPO price of RMB$60.4 per share or US$1.98bn IPO size (US$19.8bn market cap).ASP free fall will be a major concern: Affected by ASP decline of likely 30% y/y to below US$210/kWh in 2H17 from US$309/kWh in 2016 and US$224/kWh in 1H17, we expect 2017E sales growth to decelerate massively. We attribute ASP decline to 1) Competition from China peers and global leaders; 2) Some EV subsidies cut; 3) Pricing pressure from EV car vendors.Margin contraction inevitable: Given expecting EV battery cost per kWh decline of 15-20% y/y for next few years is less than price decline of 20-30% y/y, we expect gross margin contraction to 37% in 2018E and 35% in 2019E from 44% in 2016.Valuation is demanding: The preliminary IPO price is suggesting over 40x 2018/2019E EPS and 6x book value at lower ROE of &lt;10% (after US$1.98bn cash dilution). We thus see CATL is overvalued over peers' unless the company can deliver much stronger than expected 2H17 sales/earnings. Strong performance expected before the lock-up period ends: Despite the demanding valuation, CATL stands out in China and global with higher operating margin, technology leadership, better yield rate, production efficiency, rich EV battery clients portfolio, and shares gain. Due to limited shares free float available post-IPO, we expect strong performance over the next 6 months (post-IPO) until approaching the lock-up period of 12 months for key shareholders.

CATL IPO - Riding on Global and China EV Battery Demand

China

Sichuan Chengfei Integration Technology Co Ltd researches, designs, and manufactures car molds, aircraft molds and frames.

Sichuan Chengfei Integration Tech (002190 CH)

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Sichuan Chengfei Integration Tech (002190 CH)

EM Outperforming; Favor EM over EAFE

China (MSCI China, Shenzhen A Share) offers a plethora of attractive setups and is a major focus in today’s report. Taiwan (TAIEX) is another focus...

Vermilion Research

CATL IPO - Riding on Global and China EV Battery Demand

A leading EV battery vendor in China: CATL aims to be listed at Shenzhen Stock Exchange as A-share listing middle next year. The company will...

Andrew Lu

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