Asia Pacific Dailyasiaresearch.daiwacm.com/eg/cgi-bin/files/Daily06Nov14.pdf · See important...

Asia Pacific Daily

See important disclosures, including any required research certifications, beginning on page 58.

6 November 2014

Top story P.3

MediaTek (2454 TT) Rating: Hold

Initiation: wait for the next tide Target price: TWD422- MTK’s wave of high earnings growth, driven by the revolutionary smartphone cycle, seems close to an end

- We see 4G migration as evolutionary rather than revolutionary; price competition could add to margin pressure

- Initiating with Hold (3) rating; we recommend waiting for the next tide (Internet of Things) before revisiting -- Rick Hsu/ Lynn Cheng/ Olivia Hsu

Major changes Analyst Rating Page

SembCorp Marine (SMM SP) Royston Tan Outperform → Hold

P.6 First sign of strain

Target price ↓18.9% to SGD3.81

Bangkok Chain Hospital (BCH TB) Siriporn Arunothai

Buy → Sell P.10 Profit rebound looks priced in

Target price ↓8.4% to Bt8.70

Chularat Hospital Pcl (CHG TB) Siriporn Arunothai Buy P.11 Strong growth, long horizon

Target price ↑56.7% to Bt23.50 Other research

Swire Properties (1972 HK) Jonas Kan Buy P.12 Largest office landlord and more

Macau Gaming Sector Jamie Soo Neutral P.16 A read into October’s poor numbers

econtext Asia (1390 HK) John Choi Hold P.18 Headwinds persist

Wistron (3231 TT) Steven Tseng Buy P.21 Likely margin hiccup

Makalot Industrial (1477 TT) Helen Chien Outperform P.25 Expect solid 2H14 earnings growth

Coal India (COAL IN) Saurabh Mehta Buy P.29 2Q preview, October volume update

Petronas Gas (PTG MK) Kevin Low Reduce P.33 Room for improvement

British American Tobacco (ROTH MK) Kevin Low Reduce P.34 Flames start to flicker

Jaya Tiasa (JT MK) Nadia Subhan Reduce P.35 Log production down due to bad weather

Modern Internasional (MDRN IJ) Wendy Chandra Not Rated P.36 Company visit note: On the way to flourish

Japan equity research

Pola Orbis Holdings (4927 JP) Katsuro Hirozumi 1 → Outperform

P.37 Cut rating from Buy to Outperform; Pola struggles

Seiko Epson (6724 JP) Hirokazu Mitsuda Outperform P.40 Stronger-than-expected profit momentum on brisk inkjet printer sales

Company Roadshows

Date Company Event Venue3-7 Nov China Merchants Bank

(3968 HK) NDR US

3-7 Nov Naga Corp (3918 HK) NDR US4 Nov Krungthai Card PCL (KTC TB) NDR Tokyo4-6 Nov Chaowei Power (951 HK) NDR EU5-6 Nov REXLot Holdings (555 HK) NDR Tokyo6 Nov Real Nutriceutical (2010 HK) NDR Tokyo7 Nov Petron Corp (PCOR PM) NDR Tokyo12-14 Nov Chaowei Power (951 HK) NDR US13-14 Nov Quality House (QH TB) NDR Tokyo18-19 Nov Huchems (069260 KS) NDR SG19 Nov Spark Infrastructure Group

(SKI AU) NDR Tokyo

20-21 Nov Inari Amertron Bhd (INRI MK) NDR Tokyo21-26 Nov Daum Kakao (035720 KS) NDR US24-28 Nov WHA Corp (WHA TB) NDR EU26 Nov Top Glove (TOPG MK) NDR SG27 Nov Pacific Textiles (1382 HK) NDR HK27 Nov Pacific Textiles (1382 HK) Group

Luncheon (VC)SG

27 Nov China South City (1668 HK) NDR HK

Daiwa Asian Events

Date Company Venue 18-21 Nov Daiwa Investment Conference Hong Kong

2014 Hong Kong

8 Dec Daiwa Pan-Asia Discovery Corporate Day New York10 Dec Daiwa Pan-Asia Discovery Corporate Day Chicago11 Dec Daiwa Pan-Asia Discovery Corporate Day San

Francisco11-12 Dec Daiwa Taiwan New Growth Corporate

Day Tokyo 2014 Tokyo

Source: Daiwa

Regional indices

Performance chg

(%) EPS growth

(%) PER (x)

Market 1D 1M YTD 13E 14E 13E 14ETPX 0.2 7.0 5.3 6.2 13.2 14.2 12.5 HSCEI (1.0) 2.6 (1.8) 8.4 7.7 6.2 5.8 HSI (0.6) 2.7 1.7 5.5 7.5 10.5 9.7 KOSPI (0.2) (2.3) (4.0) 13.2 26.1 12.1 9.6 TWSE (0.3) (1.6) 4.1 18.3 9.1 13.9 12.8 SENSEX* 0.2 5.1 31.9 14.8 16.4 17.7** 15.2** FSSTI 0.2 1.1 3.8 7.0 7.9 14.0 13.0 FBMKLCI* (0.4) (0.1) (1.5) (0.5) 8.9 16.5** 15.2** SET* (0.5) 0.5 21.5 7.2 14.4 14.9** 13.0** PCOMP* (0.2) (0.5) 22.4 6.6 13.2 20.5** 18.1** JCI* (0.1) 2.4 18.5 9.4 11.8 15.5** 13.8** AS51 (0.0) 3.8 3.1 5.4 8.9 15.1 13.9 Source: Thomson Reuters *Valuation based on MSCI Universe **MSCI index priced as of 4 Nov

https://lzone.jp.daiwacm.com/seminar/conference/index.srvt?OPEN=&pdfName=Daiwa+REIT+Day+2014+-+Save+the+Date.pdf

Macro research

Indonesia’s 3Q14 GDP Arga Samudro P.43 3Q14 GDP: lower than our and consensus estimates

Euro wrap-up Robert Kuenzel P.44 Overview Memos – quick updates

Simplo (6121 TT) Steven Tseng P.46 October revenue update; 3Q14 results preview

Sinotrans (598 HK) Kelvin Lau P.47 Further info after conference call, - s/t -ve

Sinotrans (598 HK) Kelvin Lau P.48 Minimal impact from the fraud investigation

SMIC (981 HK) Rick Hsu P.49 SMIC releases 3Q results; we expect a negative market reaction

StarHub (STH SP) Ramakrishna Maruvada

P.50 Challenges remain

Daiwa’s Banner Products P.51 Economic calendar – November 2014 P.52 Rating and target-price information P.53 Recently published reports P.54

Asia Pacific Daily | 2

See important disclosures, including any required research certifications, beginning on page 14

■ Investment case MediaTek (MTK) has delivered robust earnings growth in 2013-14E, thanks to the revolutionary smartphone cycle. But this high tide looks to be waning, and we expect its earnings growth to return to normal given price competition in the 4G migration cycle, which we see as evolutionary in nature. We initiate coverage with a Hold (3) rating and believe 2Q15 may be a better time to revisit the stock. ■ Catalysts Hide tide is ebbing. We expect MTK’s high earnings growth, driven by smartphone migration, to lose momentum. As the stock’s performance is closely correlated with its earnings growth, and we expect earnings growth to return to

normal levels, the stock could be range-bound in the next 3 months. 4G: evolutionary not revolutionary. Unlike the smartphone migration, which created revolutionary demand that spurred the silicon value/box, the 4G migration is set to be an evolutionary stage that will not suffice to sustain MTK’s high earnings growth, in our view. Also, we expect intense 4G price competition and a slowdown in global smartphone demand, to pressure MTK’s blended ASP, margins and total profitability from 4Q14. Next tide could be IoT. Though we expect muted earnings growth in 2015, we believe the Internet of Things (IoT) could herald a return of high earnings growth. MTK looks ready to capitalise on this potential with its offer of an Aster chipset solution bundled with its LinkIt system design platform. ■ Valuation We set our target price at TWD422, on a 15x PER applied to our 12-month forward EPS. With the stock some 20% below its peak of this year, we believe much of the earnings momentum loss (we forecast slowing earnings growth for 3Q-4Q14 and a YoY fall in 1H15) is priced in. Still, we see few share-price catalysts on a 3-month horizon. We expect greater

visibility on the IoT theme, and MTK’s role in it, by 2Q15. ■ Risks The key upside risk to our call is less intense competition than we expect; the main downside risk is MTK losing 4G smartphone market share.

Information Technology / Taiwan2454 TT

5 November 2014

MediaTek

Initiation: wait for the next tide

• MTK’s wave of high earnings growth, driven by the revolutionary smartphone cycle, seems close to an end

• We see 4G migration as evolutionary rather than revolutionary; price competition could add to margin pressure

• Initiating with Hold (3) rating; we recommend waiting for the next tide (Internet of Things) before revisiting

Source: FactSet, Daiwa forecasts

Information Technology / Taiwan

MediaTek2454 TT

Target (TWD): 422.00Downside: 1.1%5 Nov price (TWD): 426.50

BuyOutperformHold (initiation)

UnderperformSell

1

2

3

4

5

85

93

100

108

115

380

423

465

508

550

Nov-13 Feb-14 May-14 Aug-14 Nov-14

Share price performance

Mediatek (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 388.00-535.00Market cap (USDbn) 21.973m avg daily turnover (USDm) 95.82Shares outstanding (m) 1,571Major shareholder Li Tsui-Hsin (3.0%)

Financial summary (TWD)Year to 31 Dec 14E 15E 16ERevenue (m) 209,048 216,011 232,116Operating profit (m) 48,522 48,236 53,427Net profit (m) 46,252 45,476 50,203Core EPS (fully-diluted) 29.441 28.947 31.956EPS change (%) 44.4 (1.7) 10.4Daiwa vs Cons. EPS (%) (3.9) (11.8) (6.0)PER (x) 14.5 14.7 13.3Dividend yield (%) 3.5 4.7 5.9DPS 15.0 20.0 25.0PBR (x) 3.0 2.8 2.7EV/EBITDA (x) 10.8 10.4 9.5ROE (%) 22.2 19.9 20.6

Rick Hsu(886) 2 8758 [email protected]

Lynn Cheng(852) 2773 [email protected]

Olivia Hsu(886) 2 8758 [email protected]

How do we justify our view?How do we justify our view?


Information Technology / Taiwan 2454 TT

5 November 2014

- 3 -

Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EBlended Smartphone ASP (US$) 0.00 0.00 13.44 12.60 11.37 10.22 8.31 7.59Smartphone Shipment ('000) 0 0 16,992 86,083 197,804 354,254 485,296 613,589Total Handset Market Share (%) 0.0 32.5 31.3 23.6 24.9 31.9 33.5 36.3

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EOptical Storage Revenue 0 19,265 17,729 15,887 15,925 15,072 13,735 12,648Digital Home Revenue 0 14,643 11,355 14,393 14,648 42,409 41,300 39,824Other Revenue 115,512 79,614 57,774 68,983 105,483 151,567 160,975 179,644Total Revenue 115,512 113,522 86,857 99,263 136,056 209,048 216,011 232,116Other income 0 0 0 0 0 0 0 0COGS (47,694) (52,614) (47,513) (58,201) (76,250) (107,649) (113,271) (121,029)SG&A (7,245) (6,519) (5,816) (6,174) (8,108) (12,907) (12,984) (13,559)Other op.expenses (24,185) (23,311) (21,184) (22,384) (26,454) (39,969) (41,519) (44,102)Operating profit 36,387 31,079 12,345 12,505 25,244 48,522 48,236 53,427Net-interest inc./(exp.) 494 586 1,007 1,621 1,609 1,940 2,083 2,257Assoc/forex/extraord./others 539 623 852 2,494 2,694 1,919 1,300 1,300Pre-tax profit 37,420 32,288 14,203 16,620 29,547 52,381 51,619 56,984Tax (725) (1,351) (587) (971) (2,062) (6,173) (6,194) (6,838)Min. int./pref. div./others 10 25 7 39 30 45 52 57Net profit (reported) 36,706 30,961 13,623 15,688 27,515 46,252 45,476 50,203Net profit (adjusted) 36,706 30,961 13,623 15,688 27,515 46,252 45,476 50,203EPS (reported)(TWD) 34.118 28.439 12.350 12.896 20.508 29.441 28.947 31.956EPS (adjusted)(TWD) 34.118 28.439 12.350 12.896 20.508 29.441 28.947 31.956EPS (adjusted fully-diluted)(TWD) 33.899 28.149 11.872 12.896 20.391 29.441 28.947 31.956DPS (TWD) 13.965 26.034 19.943 8.491 9.000 15.000 20.000 25.000EBIT 36,387 31,079 12,345 12,505 25,244 48,522 48,236 53,427EBITDA 39,632 34,056 15,074 16,202 26,971 51,012 50,615 55,968

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 37,420 32,288 14,203 16,620 29,547 52,381 51,619 56,984Depreciation and amortisation 3,245 2,978 2,729 3,696 1,727 2,489 2,379 2,542Tax paid (725) (1,351) (587) (971) (2,062) (6,173) (6,194) (6,838)Change in working capital 2,424 (4,488) 379 (3,650) 5,374 (14,500) 13,500 (15,000)Other operational CF items 12,876 (19) (16) (4,292) 4,987 45 52 57Cash flow from operations 55,240 29,408 16,707 11,403 39,573 34,241 61,355 37,744Capex (1,574) (2,122) (2,585) (2,268) (1,629) (3,136) (3,240) (3,482)Net (acquisitions)/disposals 4,367 (3,406) (260) 231 (369) 0 0 0Other investing CF items (1,025) (746) 3,860 (2,140) (216) 0 0 0Cash flow from investing 1,769 (6,274) 1,016 (4,177) (2,214) (3,136) (3,240) (3,482)Change in debt (1) 0 4,255 4,768 20,145 (17) (14) (11)Net share issues/(repurchases) 0 0 (2,110) 0 0 0 0 0Dividends paid (15,024) (28,343) (21,999) (10,328) (12,074) (23,565) (31,420) (39,275)Other financing CF items 136 270 (62) 139 (23) 0 0 0Cash flow from financing (14,889) (28,073) (19,917) (5,421) 8,048 (23,582) (31,434) (39,286)Forex effect/others (494) (3,781) 2,088 (1,759) 1,724 0 0 0Change in cash 41,626 (8,721) (106) 46 47,131 7,523 26,681 (5,024)Free cash flow 53,667 27,285 14,123 9,134 37,944 31,106 58,115 34,262

Financial summary



5 November 2014

- 4 -

Balance sheet (TWDm)

Key ratios (%)


Company profile

MediaTek is the largest fabless chipmaker (IC design house) in Asia, and No. 3 in the world, in terms of 2013 revenue. It has successfully captured the industry demand cycles in the past decade, from ODD (optical disk drive) to feature phones to the current smartphone cycle. MediaTek is the global leader in optical storage and TV SoC IC supply, and one of the major suppliers in the global handset chipset market.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 96,847 92,073 91,032 90,276 139,219 146,742 173,423 168,400Inventory 8,173 9,388 9,392 13,867 9,347 23,347 10,847 25,847Accounts receivable 7,267 7,164 7,384 6,585 7,628 15,628 8,628 16,628Other current assets 1,751 3,970 4,234 7,343 5,547 5,000 5,000 5,000Total current assets 114,038 112,595 112,042 118,071 161,741 190,717 197,898 215,874Fixed assets 6,889 7,808 9,810 10,708 11,312 12,943 14,994 17,205Goodwill & intangibles 10,623 9,572 16,151 15,842 15,509 73,631 73,631 73,631Other non-current assets 7,043 8,059 9,738 65,622 70,075 11,918 12,418 12,918Total assets 138,593 138,035 147,741 210,243 258,637 289,209 298,941 319,628Short-term debt 0 0 4,089 8,880 29,052 29,052 29,052 29,052Accounts payable 28,112 24,088 24,736 22,187 10,944 18,444 12,444 20,444Other current liabilities 1,343 1,698 1,603 1,806 21,389 19,017 19,014 18,011Total current liabilities 29,454 25,786 30,428 32,873 61,385 66,513 60,510 67,507Long-term debt 0 0 148 114 87 69 56 44Other non-current liabilities 248 535 837 1,482 1,812 1,700 1,700 1,800Total liabilities 29,703 26,321 31,413 34,469 63,283 68,283 62,265 69,351Share capital 10,901 10,999 11,475 13,494 13,495 15,710 17,925 20,140Reserves/R.E./others 97,968 100,714 104,803 162,246 181,821 205,216 218,750 230,136Shareholders' equity 108,869 111,713 116,278 175,740 195,315 220,926 236,675 250,277Minority interests 21 0 50 34 38 0 0 0Total equity & liabilities 138,593 138,035 147,741 210,243 258,637 289,209 298,941 319,628EV 573,205 577,959 583,286 588,784 559,989 552,410 525,715 530,728Net debt/(cash) (96,847) (92,073) (86,796) (81,282) (110,081) (117,621) (144,316) (139,304)BVPS (TWD) 101.194 102.612 105.409 144.473 145.577 140.628 150.653 159.310

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 27.8 (1.7) (23.5) 14.3 37.1 53.6 3.3 7.5EBITDA (YoY) 62.7 (14.1) (55.7) 7.5 66.5 89.1 (0.8) 10.6Operating profit (YoY) 72.8 (14.6) (60.3) 1.3 101.9 92.2 (0.6) 10.8Net profit (YoY) 91.3 (15.6) (56.0) 15.2 75.4 68.1 (1.7) 10.4Core EPS (fully-diluted) (YoY) 87.2 (17.0) (57.8) 8.6 58.1 44.4 (1.7) 10.4Gross-profit margin 58.7 53.7 45.3 41.4 44.0 48.5 47.6 47.9EBITDA margin 34.3 30.0 17.4 16.3 19.8 24.4 23.4 24.1Operating-profit margin 31.5 27.4 14.2 12.6 18.6 23.2 22.3 23.0Net profit margin 31.8 27.3 15.7 15.8 20.2 22.1 21.1 21.6ROAE 38.5 28.1 12.0 10.7 14.8 22.2 19.9 20.6ROAA 30.9 22.4 9.5 8.8 11.7 16.9 15.5 16.2ROCE 38.2 28.2 10.6 8.2 12.3 20.5 18.7 19.6ROIC 197.1 188.0 48.1 19.0 26.1 45.4 43.4 46.2Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Effective tax rate 1.9 4.2 4.1 5.8 7.0 11.8 12.0 12.0Accounts receivable (days) 20.1 23.2 30.6 25.7 19.1 20.3 20.5 19.9Current ratio (x) 3.9 4.4 3.7 3.6 2.6 2.9 3.3 3.2Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 40.9 91.5 161.5 65.8 43.9 50.9 69.1 78.2Free cash flow yield 8.0 4.1 2.1 1.4 5.7 4.6 8.7 5.1

Financial summary continued …



■ What's new Sembcorp Marine (SMM) achieved a 2% YoY increase in net profit from SGD129.7m to SGD132.0m for 3Q14 amid challenging market conditions. The group secured SGD1.7bn in new contracts in 3Q14, bringing the net order book to SGD12.6bn as at 5 November 2014. Separately, Upstream, in its latest issue on 31 October, reported that Sembcorp’s Estaleiro Jurong Aracruz (EJA) shipyard could be at risk of losing its two FPSO orders with Petrobras due to persistent delays. We turn cautious on the company with execution risks in its Brazilian yard a foremost concern. We downgrade the stock to a Hold (3) with a lower 6-month target price of SGD3.81. This note marks the transfer of coverage to Royston Tan ■ What's the impact Earnings still in line. Overall group PATMI grew 2% YoY in 3Q14 which was lower than our expectation. Operating margin was lower at 9.7% for 3Q14 vs. 11.1% for 2Q14 due to procurement content for its drillships that generated a lower margin.

Hiccups in project execution. In its 31 October issue, Upstream highlighted the possible cancellation of two FPSOs, the P-68 and P-71 modules which SMM clinched in August 2012 from Petrobras for a total consideration of USD674m. The report indicated that delays with environmental permits and problems on detailed engineering were so serious that Petrobras is considering cancelling the integration contracts. Despite management assurances that work on the two FPSOs is still underway, we see significant execution/cancellation risks. Look beyond a strong order book. SMM has a strong order book of SGD12.6bn as at 5 November, but it masks potential execution issues which the market might not have factored in. The seven drillships for Sete Brasil account for about half of its order book, and will be built at its new Brazilian yard where SMM faces an uphill battle in fulfilling orders in a timely fashion. Sete Brasil, the Petrobras-sponsored entity responsible for building 29 ultra-deepwater rigs, could itself be facing cash constraints. EPS changes. We are lowering our EPS forecasts for 2014-16 by 12-17% on the back of our revised revenue and operating margin outlook. We note that SMM has started to recognise revenue contribution from 4 drillship contracts, but foresee execution delays resulting in lower margins given SMM’s limited operating history in Brazil. ■ What we recommend We downgrade SMM from an Outperform (2) to a Hold (3) with a revised 6-month DCF/PER-based target price of SGD3.81. Our DCF calculation uses a 9.1% WACC and 1% terminal growth rate, and values

SMM at SGD4.07. Based on our blended 2014 and 2015 EPS estimates, our target PER of 13x is pegged to -0.5 SD of SMM’s five-year historical PER. This values SMM at SGD3.54. Downside risks include lower oil prices and delays in project delivery while upside risks include better execution of the projects in Brazil. ■ How we differ Our 2014-16 EPS estimates are 1-15% lower than the Bloomberg estimates which we attribute to our lower operating-profit margin forecasts.

5 November 2014

First sign of strain

• 3Q14 results lower than

expectation • Potential cancellation of FPSO

contracts with Petrobras • Downgrade to Hold(3) and

lower target price to SGD3.81

Source: Daiwa forecasts


Industrials / Singapore

SembCorp MarineSMM SP

BuyOutperformHold (from Outperform)

UnderperformSell

1

2

3

4

5Target (SGD): 4.70 3.81 Upside: 5.0% 5 Nov price (SGD): 3.63

Royston Tan(65) 6321 3086

[email protected]

Forecast revisions (%)Year to 31 Dec 14E 15E 16ERevenue change (16.2) (3.1) 7.2Net profit change (16.2) (12.0) (16.9)Core EPS (FD) change (16.2) (12.0) (16.9)

75

83

90

98

105

3.5

3.8

4.0

4.3

4.5



SembCorp M (LHS)Relative to FSSTI (RHS)

(SGD) (%)

12-month range 3.58-4.45Market cap (USDbn) 5.933m avg daily turnover (USDm) 10.53Shares outstanding (m) 2,107Major shareholder SembCorp Industries (60.6%)

Financial summary (SGD)Year to 31 Dec 14E 15E 16ERevenue (m) 6,018 6,782 6,523Operating profit (m) 664 745 682Net profit (m) 544 608 558Core EPS (fully-diluted) 0.258 0.287 0.262EPS change (%) (2.6) 11.2 (8.7)Daiwa vs Cons. EPS (%) (5.2) (1.0) (15.1)PER (x) 14.1 12.6 13.9Dividend yield (%) 3.6 4.0 3.6DPS 0.130 0.144 0.132PBR (x) 2.6 2.3 2.2EV/EBITDA (x) 7.5 7.4 8.2ROE (%) 19.3 19.5 16.4


Industrials / Singapore SMM SP

5 November 2014

- 2 -

SMM: Quarterly financial comparison SembMarine (SGD m) 3Q13 2Q14 3Q14 YoY (%) QoQ (%)Revenues 1,658.8 1,340.8 1,711.6 3.2% 27.7%COGS (1,478.9) (1,146.9) (1,507.0) 1.9% 31.4%Gross profits 179.8 193.9 204.5 13.7% 5.5%Other operating income 19.2 4.2 18.6 -3.4% 340.1%General & administrative expenses (34.2) (36.4) (39.5) 15.7% 8.7%Other operating expenses 1.9 (7.2) (12.2) -753.2% 70.5%Total operating expenses (13.1) (39.3) (33.2) 153.6% -15.6%Operating profits 166.7 154.5 171.4 2.8% 10.9%Financial expenses (2.3) (3.6) (5.4) 133.7% 51.5%Dividend & interest income 2.4 3.5 2.2 -6.5% -35.3%Associates & JVs 4.2 10.4 3.4 -19.2% -67.3%Other non-operating items (0.1) 0.0 0.3 -504.6% n.m.PBT 171.0 164.8 171.8 0.5% 4.3%Tax (32.7) (24.6) (32.6) -0.3% 32.3%Minority interest (8.6) (8.5) (7.2) -15.7% -15.1%Net profit 129.7 131.6 132.0 1.8% 0.3%Gross margins (%) 10.8% 14.5% 11.9% 1.1ppt -2.5pptEBITDA margins (%) 11.8% 13.4% 11.6% -0.2ppt -1.8pptOperating margins (%) 10.1% 11.5% 10.0% 0.0ppt -1.5pptPre-tax margins (%) 10.3% 12.3% 10.0% -0.3ppt -2.3pptEffective tax rate (%) -19.1% -14.9% -19.0% 0.2ppt -4.0pptNet margins (%) 7.8% 9.8% 7.7% -0.1ppt -2.1pptSource: Company

SMM: Historical and forecast net profit vs. free cash flow SMM: Quaterly operating-profit margins 1Q07 to 3Q14

Source: Company, Daiwa estimates Source: Company

Contracts secured YTD14 at SGD4.17bn Net order book at SGD12.6bn

Source: Company Source: Company

(500)

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014E 2015E 2016ENet profit Free cash flow

(SGDmn)

0

5

10

15

20

25

30

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

(%)

02,0004,0006,0008,000

10,00012,000

Conversion & Platform Semi-sub/Intervention rig Jack-up Drillship

02,0004,0006,0008,000

10,00012,00014,000

Conversion & Platform Semi-sub/Intervention rig Jack-up

Drillship Shipbuilding



5 November 2014

- 3 -

Key assumptions

Profit and loss (SGDm)

Cash flow (SGDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EOrder book (local curr.m) 5,540 4,418 5,096 12,666 12,140 11,122 9,341 7,818Semi-sub in order-book (each) 10 9 7 6 7 8 7 6Jack-ups in order-book (each) 13 9 17 21 21 16 14 12New order wins, net (SGDbn) 2 3 5 12 5 5 5 5

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ERig building 3,635 3,048 2,205 2,356 3,564 2,798 3,606 3,601Offshore & conversion 1,343 820 1,073 1,395 1,204 2,191 2,146 1,893Other Revenue 747 687 682 679 758 1,029 1,029 1,029Total Revenue 5,725 4,555 3,960 4,430 5,526 6,018 6,782 6,523Other income 22 21 19 34 87 87 89 90COGS (4,739) (3,426) (3,094) (3,736) (4,818) (5,205) (5,859) (5,675)SG&A (141) (162) (138) (149) (148) (203) (228) (220)Other op.expenses (4) (45) (10) (25) (2) (32) (38) (36)Operating profit 862 943 737 554 644 664 745 682Net-interest inc./(exp.) (5) (7) (2) (3) (8) (7) (8) (8)Assoc/forex/extraord./others 51 142 125 75 29 28 29 29Pre-tax profit 908 1,078 860 626 665 685 766 703Tax (151) (184) (91) (62) (77) (110) (123) (112)Min. int./pref. div./others (57) (34) (17) (29) (33) (32) (36) (33)Net profit (reported) 700 860 752 535 556 544 608 558Net profit (adjusted) 708 808 752 535 556 544 608 558EPS (reported)(SGD) 0.340 0.415 0.361 0.256 0.265 0.258 0.287 0.262EPS (adjusted)(SGD) 0.344 0.390 0.361 0.256 0.265 0.258 0.287 0.262EPS (adjusted fully-diluted)(SGD) 0.343 0.389 0.361 0.256 0.265 0.258 0.287 0.262DPS (SGD) 0.150 0.360 0.250 0.130 0.130 0.130 0.144 0.132EBIT 862 943 737 554 644 665 745 682EBITDA 938 1,026 820 648 745 766 849 790

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 908 1,078 860 626 665 685 766 703Depreciation and amortisation 75 83 84 94 101 101 103 108Tax paid (58) (145) (170) (90) (54) (62) (104) (127)Change in working capital (519) 376 (418) (396) 243 915 (440) (201)Other operational CF items 8 (87) (29) (26) (17) (29) (29) (29)Cash flow from operations 414 1,305 326 208 937 1,609 296 454Capex (67) (73) (438) (517) (815) (700) (500) (400)Net (acquisitions)/disposals 20 3 (6) (13) 17 28 28 28Other investing CF items (13) (3) (34) 3 (0) 10 10 10Cash flow from investing (61) (72) (477) (527) (798) (662) (462) (362)Change in debt (206) (12) 27 300 438 (311) 0 0Net share issues/(repurchases) 10 16 14 0 (20) 0 0 0Dividends paid (233) (328) (763) (529) (283) (273) (274) (305)Other financing CF items 0 0 (43) (3) 0 0 0 0Cash flow from financing (429) (323) (765) (232) 135 (583) (274) (305)Forex effect/others 0 27 (10) (30) 11 3 3 3Change in cash (75) 937 (925) (581) 286 368 (436) (209)Free cash flow 347 1,232 (112) (309) 122 909 (204) 54

Financial summary



5 November 2014

- 4 -

Balance sheet (SGDm)

Key ratios (%)


Company profile

SembCorp Marine (SembMarine) is a Singapore-based offshore and marine company, offering construction, overhaul, conversion, and repair services for commercial shipping vessels, as well as offshore-energy exploration and production vessels.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 1,979 2,915 1,990 1,409 1,695 2,063 1,627 1,418Inventory 1,253 751 926 1,731 2,084 1,426 2,247 2,332Accounts receivable 284 194 480 468 442 482 543 522Other current assets 3 41 3 32 0 0 0 0Total current assets 3,518 3,900 3,399 3,641 4,221 3,971 4,417 4,272Fixed assets 678 682 1,034 1,476 2,394 2,987 3,377 3,662Goodwill & intangibles 6 6 37 34 30 27 24 20Other non-current assets 485 691 581 636 604 606 610 605Total assets 4,688 5,279 5,052 5,786 7,250 7,591 8,427 8,559Short-term debt 12 8 35 34 166 166 166 166Accounts payable 1,592 1,462 1,786 1,687 1,781 1,953 2,202 2,131Other current liabilities 1,031 979 579 996 1,583 1,759 1,977 1,895Total current liabilities 2,635 2,449 2,400 2,718 3,530 3,878 4,345 4,192Long-term debt 8 0 0 300 611 300 300 300Other non-current liabilities 84 143 145 221 300 300 300 300Total liabilities 2,727 2,592 2,546 3,239 4,441 4,478 4,945 4,791Share capital 445 448 450 450 452 454 457 459Reserves/R.E./others 1,439 2,151 1,965 1,989 2,225 2,494 2,826 3,076Shareholders' equity 1,884 2,599 2,414 2,439 2,677 2,948 3,283 3,535Minority interests 76 88 92 109 132 164 200 232Total equity & liabilities 4,688 5,279 5,052 5,786 7,250 7,591 8,427 8,559EV 5,498 4,521 5,405 6,264 6,416 5,773 6,246 6,490Net debt/(cash) (1,959) (2,907) (1,955) (1,074) (918) (1,597) (1,160) (951)BVPS (SGD) 0.913 1.251 1.158 1.169 1.277 1.399 1.550 1.661

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 13.0 (20.4) (13.1) 11.9 24.7 8.9 12.7 (3.8)EBITDA (YoY) 63.8 9.4 (20.0) (21.0) 14.9 2.8 10.8 (6.9)Operating profit (YoY) 71.9 9.3 (21.8) (24.8) 16.2 3.3 12.0 (8.5)Net profit (YoY) 55.6 14.1 (6.9) (28.8) 3.9 (2.1) 11.8 (8.3)Core EPS (fully-diluted) (YoY) 55.0 13.4 (7.2) (29.0) 3.3 (2.6) 11.2 (8.7)Gross-profit margin 17.2 24.8 21.9 15.7 12.8 13.5 13.6 13.0EBITDA margin 16.4 22.5 20.7 14.6 13.5 12.7 12.5 12.1Operating-profit margin 15.1 20.7 18.6 12.5 11.7 11.1 11.0 10.5Net profit margin 12.4 17.7 19.0 12.1 10.1 9.0 9.0 8.6ROAE 44.2 36.0 30.0 22.0 21.7 19.3 19.5 16.4ROAA 15.2 16.2 14.6 9.9 8.5 7.3 7.6 6.6ROCE 48.4 40.3 28.1 20.4 19.9 18.6 19.8 16.7ROIC (306.0) (716.1) 397.7 49.3 33.9 32.8 32.6 22.3Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Effective tax rate 16.6 17.1 10.6 9.9 11.5 16.0 16.0 16.0Accounts receivable (days) 26.5 19.1 31.1 39.1 30.1 28.0 27.6 29.8Current ratio (x) 1.3 1.6 1.4 1.3 1.2 1.0 1.0 1.0Net interest cover (x) 161.8 132.1 295.8 169.9 79.8 94.1 92.3 84.5Net dividend payout 44.1 86.6 69.2 50.7 49.0 50.4 50.1 50.4Free cash flow yield 4.5 16.1 n.a. n.a. 1.6 11.9 n.a. 0.7



Please see the important notice on the back page

SELL (From: BUY) TP: Bt 8.70 (From: Bt 9.50) 5 NOVEMBER 2014

Change in Recommendation Downside : -11.2%

Bangkok Chain Hospital (BCH TB)

SIRIPORN ARUNOTHAI

662 – 617 4900 [email protected]

Profit rebound looks priced in

We slash our earnings forecasts by 18-25% in 2014-16 to reflect BCH’s weaker-than-expected performance. Although we still estimate EPS growth of 18.7% p.a. in 2015-17, PE of 37.2x looks priced in. We downgrade BCH to SELL with a new TP of Bt8.7 while CHG is our preferred choice.

Turnaround looks priced in; downgrade to SELL BCH’s earnings turnaround is continuing but it is proceeding slower than both we and the market had expected. We therefore slash our 2014-16 earnings forecasts by 18-25%. Our 12-month DCF-based TP is also revised down to Bt8.7/share from Bt9.5. The 62% YTD surge in BCH’s share price to trade at 37.2x 2015F PE in our view fully reflects market expectations of BCH enjoying improving earnings. With this demanding PE and slower-than-expected growth, we downgrade our rating on BCH to SELL from Buy. Chularat Hospital (CHG TB) is now our preferred choice.

Growth at a slower place BCH reported negative EPS growth of 36% in 2013 due to a Bt298m loss contribution from its World Medical Center (WMC) hospital. We and the Street previously expected BCH’s performance in 2014 to turn around from 2013 after WMC began its second year of operation. But we still see BCH’s EPS declining by 6% this year as a result of WMC’s slow patient flow growth, particularly for Thai patients. Foreign patient numbers have also fallen due to martial law. We estimate WMC’s loss at Bt261m this year. Meanwhile, its core Kasemrad hospital chain is also growing at a slower place given sluggish growth in cash patients due to the economic slowdown as well as a declining ability to raise prices and boost the intensity of its medical treatments.

19% EPS growth p.a. in 2015-17F Despite weaker-than-expected earnings turnaround momentum leading to our earnings cuts, we still forecast around 18.7% EPS growth p.a. in 2015-17. From a lower earnings base in 2014F, we expect earnings drivers in 2015-17 to be rising patient flows, increasing billing size and improving gross margin. BCH has signed more contracts with agencies in Myanmar, China and Libya and plans more marketing in Laos. With this strategy, we project the number of patients at Kasemrad Sriburin and WMC to increase. Meanwhile, we expect an improving economy to raise local demand and boost BCH’s ability to raise prices.

Some new hospitals delayed BCH’s policy to focus on all three segments – premium, mid-tier and low-end segment through its three brands – WMC, Kasemrad and Karunvej – remains on track. Management is still seeking opportunities to acquire more hospitals in the mid-to low-end markets. However, given its slow earnings improvement, BCH has delayed three new greenfield projects – Kasemrad Ramkhamhaeng, Karunvej Pattaya and WMC Pattaya – for one to three years and they are now due to open in 2018, 2019 and 2021 respectively though Karunvej Rattanatibeth is still scheduled to open in January next year.

COMPANY VALUATION

Y/E Dec (Bt m) 2013A 2014F 2015F 2016F

Sales 4,702 5,368 5,817 6,332

Net profit 585 555 656 789

Consensus NP 667 820 1,003

Diff frm cons (%) (16.7) (20.0) (21.3)

Norm profit 585 555 656 789

Prev. Norm profit 745 850 965

Chg frm prev (%) (25.4) (22.8) (18.2)

Norm EPS (Bt) 0.2 0.2 0.3 0.3

Norm EPS grw (%) (36.4) (6.0) 18.2 20.3

Norm PE (x) 41.4 44.0 37.2 31.0

EV/EBITDA (x) 21.9 20.4 18.1 16.1

P/BV (x) 6.2 5.9 5.5 5.2

Div yield (%) 1.6 1.5 1.7 2.1

ROE (%) 15.4 13.7 15.4 17.3

Net D/E (%) 71.8 74.0 57.6 48.3

PRICE PERFORMANCE

(20)

0

20

40

60

0

5

10

15

Nov-13 Mar-14 Jul-14 Nov-14

(%)(Bt/shr) BCH Rel to SET Index

COMPANY INFORMATION

Price as of 5-Nov-14 (Bt) 9.80

Market cap (US$ m) 744.1

Listed shares (m shares) 2,493.7

Free float (%) 38.4

Avg daily turnover (US$ m) 2.0

12M price H/L (Bt) 10.80/5.65

Sector Healthcare

Major shareholder Harnphanich Family 50%

Sources: Bloomberg, Company data, Thanachart estimates

Th

an

ach

art

Sec

uri

ties

Th

an

ach

art

Sec

uri

ties


5 NOVEMBER 2014

Please see the important notice on the back page.

BUY (Unchanged) TP: Bt 23.50 (From: Bt 15.00)

Change in Numbers Upside: 16.9%

Chularat Hospital Pcl (CHG TB)

SIRIPORN ARUNOTHAI 662 – 617 4900

[email protected]

Strong growth, long horizon After our recent conversation with CHG’s management, we see CHG’s growth prospects strengthening and extending to a far longer horizon than we had expected earlier. We now forecast earnings growth to sustain at a significant 20% p.a. for 2015-19F and this is why PE looks high on 2015F numbers. We reiterate our BUY call with a new TP of Bt23.5.

Short-term multiple doesn’t tell the whole story Looking at CHG’s high 2015F PE may discourage investors from taking

position in the stock. In this report we justify our BUY call by laying out

CHG’s growth path which we now see being sustained at 20% p.a.

throughout a lengthy horizon of 2015-19F. We have been a believer in

CHG’s growth story via its already announced project expansion and

acquisitions. However, after our recent chat with management, and on our

expectations of strong healthcare demand in the eastern region where CHG

is located and expanding faster, we decided to add one more 100-bed

hospital assumption into our earnings model. We also revisit our numbers to

reflect CHG’s stronger-than-expected existing business. As a result, we raise

earnings by 1-11% for 2014-16F and an average 33% from 2017F onward.

Our 12-month DCF-based TP is lifted to Bt23.5 from Bt15.0. Reiterate BUY.

Management’s solid growth mindset We feel CHG’s management has a stronger and clearer growth mindset to

open more hospitals, both via greenfield projects and M&As. The focus is still

on its prime areas of dominance in the east of Bangkok (Suvarnabhumi

area), the east of Thailand and other high-potential industrial estate (IE)

areas such as Prachinburi. They still provide medical services to the middle-

to low-income segments for cash and social security patients. That is on top

of the announced expansions at Chularat hospitals 3, 9 and 11, Cholvaej

Hospital and the greenfield Arkanay Hospital in Prachinburi.

Spotlight on prime eastern locations On the demand side, we see high potential for growth in healthcare demand

in the Suvarnabhumi area and eastern Thailand from expansion of industrial,

commercial and residential zones driven by investment and logistics network

expansion, Suvarnabhumi airport’s phase 2, and the launch of the AEC. On

the supply side, CHG is the strongest and largest hospital chain in Samut

Prakan and Chachoengsao provinces. With CHG’s competitiveness

(franchise, service network, financial status and economies of scale),

together with availability of hospital assets in those areas, we see M&As as

real opportunities for CHG, apart from new greenfield investments.

CHG’s existing business has done well CHG is focusing more on high-complexity treatments at its specialized

medical centers (integrated heart centers 1 and 2 at Chularat 3 Hospital and

cancer center at Chularat 9 Hospital). It is also boosting operating efficiency

by increasing bed turnover and controlling costs. We see CHG’s specialized

centers gaining more recognition and a better reputation, thus enjoying

stronger flows of cash patients and referred patients under the managed-

care scheme. That should help not only the top line but also margins. We

project a rising trend for ROE, which we forecast at 20% in 2015.

COMPANY VALUATION

Y/E Dec (Bt m) 2013A 2014F 2015F 2016F

Sales 2,221 2,634 3,288 4,217

Net profit 414 496 589 701

Consensus NP 506 589 673

Diff frm cons (%) (2.0) (0.1) 4.2

Norm profit 414 496 589 701

Prev. Norm profit 492 551 630

Chg frm prev (%) 0.8 6.9 11.3

Norm EPS (Bt) 0.4 0.5 0.5 0.6

Norm EPS grw (%) (15.7) 19.7 18.6 19.0

Norm PE (x) 53.3 44.5 37.6 31.5

EV/EBITDA (x) 35.0 30.6 26.1 22.1

P/BV (x) 8.4 7.8 7.2 6.6

Div yield (%) 1.3 1.5 1.7 2.1

ROE (%) 22.0 18.2 20.0 21.9

Net D/E (%) (42.5) (25.1) (17.4) (13.2)

PRICE PERFORMANCE

(20)

0

20

40

60

80

100

0

5

10

15

20

25

Nov-13 Mar-14 Jul-14 Nov-14

(%)(Bt/shr) CHG Rel to SET Index

COMPANY INFORMATION

Price as of 5-Nov-14 (Bt) 20.10

Market cap (US$ m) 673.2

Listed shares (m shares) 1,100.0

Free float (%) 36.8

Avg daily turnover (US$ m) 5.3

12M price H/L (Bt) 20.30/9.40

Sector Healthcare

Major shareholder Plussind Family 26.3%

Sources: Bloomberg, Company data, Thanachart estimates

Thanachart

Securities

Ad Hoc Research

Ad Hoc Research



■ What's new After reviewing the quarterly KPIs of Swire Properties, and assessing recent developments and the supply outlook for the Hong Kong office market, we reaffirm our Buy (1) rating. We believe Swire Properties has entered a harvesting period for its decades-long investments in 2 key locations in Hong Kong, while its China and Miami businesses are showing promise. ■ What's the impact Office portfolio progressing. The occupancy rate for Pacific Place returned to 95% for 3Q14 (from 93% in 2Q14 and 91% in 1Q14), and rents for Taikoo Place (Island East) are now in the “low to high 40s”, vs. “low to mid 40s” prior to 2Q14. We see the latter as a sign the higher rents achieved by One Island East (mid 50s to high 60s) are having a positive spill-over for Taikoo Place, which we think could filter through to the Cityplaza portion of the Island East portfolio (now letting at low to mid 40s), in our view. Poised to become the largest office landlord in Hong Kong. We believe the image and quality of

Swire Properties’s Island East portfolio will take a major leap forward in around 2020, following the redevelopment of its 3 techno-centres. Moreover, we think Swire Properties will be the most important player in office supply in Hong Kong in the run-up to 2018, owning a sizeable portion of single-landlord and larger-sized (over 500,000 sq ft in GFA) office buildings (see page 2). China malls reaching fruition. Swire Properties’s 3 malls saw retail sales growth of 10.9-78.4% in 3Q14, notwithstanding a challenging overall environment. While its Hong Kong malls were the weakest segment in its portfolio, with negative retail sales growth for Cityplaza (-3.4%) and Pacific Place mall (-1.1%), we do not believe Cityplaza faces fundamental problems, as the decline in retail sales was caused by upgrading work which caused temporary disruption. Granted, the Pacific Place mall has been facing challenges for some time. Still, we believe that high volatility is in the nature of high-end malls, and the mall’s still-reasonable occupancy cost (about 16% of retail sales) should help protect its rental income from any weakness in retail sales before efforts to strengthen the F&B and lifestyle elements produce the desired results. Besides, the Pacific Place mall generates only about 15% of Swire’s gross rental income and its gross rental should be collectively surpassed by its China malls by 2015, on our estimates. Separately, the company continued to sell units at Brickcell City Centre in Miami (72% sold) and AREZZO in Mid-Levels in Hong Kong (52% sold) towards end-3Q14, and we believe it has yet to realise the full potential of its residential property businesses.

■ What we recommend We reaffirm our Buy (1) rating and 6-month target price of HKD33.0, on an unchanged 30% discount applied to our end-2015E NAV of HKD47.10. The key downside risk would be a marked downturn in the Hong Kong economy. ■ How we differ We believe the market has yet to recognise that Swire Properties is entering a harvesting period (see our May 2014 report: A large “nurturing discount” awaits.)

5 November 2014

Largest office landlord and more

• Largest supplier of new office

space in the coming years • China malls showing promise • Reaffirming Buy (1) call



Financials / Hong Kong

Swire Properties1972 HK

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5Target (HKD): 33.00 33.00 Upside: 34.4% 5 Nov price (HKD): 24.55

Jonas Kan, CFA(852) 2848 4439

[email protected]

Forecast revisions (%)Year to 31 Dec 14E 15E 16ERevenue change - - -Net profit change - - -Core EPS (FD) change - - -

90

98

105

113

120

19

21

23

25

28



Swire Prop (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 19.02-27.10Market cap (USDbn) 18.533m avg daily turnover (USDm) 6.97Shares outstanding (m) 5,850Major shareholder Swire Pacific (82.0%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16ERevenue (m) 14,931 15,551 17,331Operating profit (m) 8,718 9,571 10,306Net profit (m) 6,760 7,502 8,352Core EPS (fully-diluted) 1.156 1.282 1.428EPS change (%) 6.3 11.0 11.3Daiwa vs Cons. EPS (%) (3.7) 6.1 10.3PER (x) 21.2 19.1 17.2Dividend yield (%) 2.5 2.8 2.9DPS 0.620 0.680 0.720PBR (x) 0.7 0.7 0.7EV/EBITDA (x) 18.2 16.8 15.7ROE (%) 3.3 3.6 4.0


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Swire_Properties_140522.pdf#page=1

Financials / Hong Kong 1972 HK

5 November 2014

- 2 -

Swire Properties: quarterly KPIs (office properties in Hong Kong) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14Pacific Place offices Occupancy (period end) 98% 97% 97% 97% 97% 91% 91% 93% 95%New and renewed area let (sq ft) 175,135 215,720 351,628 418,676 441,523 466,831 41,852 141,574 198,418Reversion +34% +32% +36% +29% +27% +27% +8% +5% +7%Spot rents (period end, HKD/sq ft) 95-110 95-110 95-110 90-110 90-110 90-110 90-110 90-110 90-110Cityplaza offices Occupancy (period end) 98% 98% 99% 99% 98% 97% 98% 98% 99%New and renewed area let (sq ft) 188,118 191,928 189,835 256,854 284,184 286,030 223,470 235,636 281,953Reversion +30% +30% +54% +51% +52% +53% +26% +24% +25%Spot rents (period end, HKD/sq ft) low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40sTaikoo Place Occupancy (period end) 98% 99% 99% 99% 99% 99% 99% 99% 98%New and renewed area let (sq ft) 564,459 571,226 281,830 325,447 413,090 429,664 401,833 508,121 541,444Reversion +30% +29% +52% +51% +48% +48% +26% +27% +27%Spot rents (period end, HKD/sq ft) low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-high 40s low-high 40sOne Island East Occupancy (period end) 100% 100% 98% 100% 100% 100% 99% 100% 98%New and renewed area let (sq ft) NA NA 36,697 63,872 67,415 67,415 110,459 171,117 171,117Reversion +51% +51% +82% +85% +85% +85% +17% +14% +14%Spot rents (period end, HKD/sq ft) mid 50s-high

60smid 50s-high

60s mid 50s-high

60smid 50s-high

60smid 50s-high

60smid 50s-high

60smid 50s-high

60s mid 50s-high

60smid 50s-high

60sTechno-centres Occupancy (period end) 97% 100% 100% 100% 100% 100% 99% 100% 100%New and renewed area let (sq ft) 153,683 153,683 204,981 204,981 237,911 237,911 61,061 61,061 61,061Reversion +20% +20% +25% +25% +25% +25% +13% +13% +13%Spot rents (period end, HKD/sq ft) low-mid 20s low-mid 20s low-mid 20s low-mid 20s low-mid 20s low-mid 20s mid 20s mid 20s mid 20sSource: Company, Daiwa

Swire Properties: quarterly KPIs (retail properties) Swire Properties: quarterly KPIs (residential properties) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14HONG KONG Pacific Place Mall Occupancy (period end)

100% 100% 100% 100% 100% 100% 100% 100% 100%

Retail sales growth

+2.4% +0.3% -1.0% +1.9% +2.1% +0.7% 0% +0.8% -1.1%

Cityplaza Mall Occupancy (period end)

100% 100% 100% 100% 100% 100% 100% 100% 100%

Retail sales growth

+6.8% +6.0% +3.5% +2.9% +2.7% +2.4% -5.6% -5.6% -3.4%

Citygate Mall Occupancy (period end)

100% 100% 100% 100% 100% 100% 100% 100% 100%

Retail sales growth

+21.6% +21.2% +19.2% +19.2% +16.5% +13.5% +7.5% +5.3% +6.0%

CHINA Taikoo Hui Mall Occupancy (period end)

100% 99% 100% 99% 99% 99% 99% 99% 99%

Retail sales growth

n.a. n.a. +33.1% +28.8% +25.6% +24.9% +13.1% +13.0% +10.9%

Taikoo Li Sanlitun Occupancy (period end)

93% 94% 93% 92% 94% 94% 94% 97% 97%

Retail sales growth

n.a. n.a. +12.7% +15.5% +16.0% +17.0% +20.5% +22.8% +22.4%

INDIGO Mall Occupancy (period end)

83% 84% 87% 88% 95% 96% 94% 95% 95%

Retail sales growth

n.a. n.a. n.a. n.a. n.a. n.a. +106% +94.4% +78.4%

Total no. No. of units sold of units 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14AZURA 126 103 108 111 111 118 119 120 122 122ARGENTA 30 - 6 7 7 10 13 16 22 27Dunbar Place

53 - - 21 21 24 34 44 48 53

ASIA 123 111 111 112 112 122 122 122 122 122Mount Parker Residences

92 - - - - - - 58 71 83

Brickell City Centre

390 - - - - - - - 184 281

AREZZO 127 - - - - - - - - 66Source: Company, Daiwa

Hong Kong: major office projects (over 0.5m sq ft GFA) for completion in 2015-18 Year of GFA Projects Districts completion (sq ft) Developers One Bay East & One Bay West*

Kowloon East

2015 914,828 Wheelock Properties

One HarbourGate** Hunghom 2015 522,300 Wheelock PropertiesGoldin Financial Global Centre

Kowloon East

2016 852,371 Goldin Financial consortium

Junction of Wang Chiu Rd & Lam Lee St

Kowloon East

2017 536,840 Swire Properties

Junction of Hang Yip St, Wai Yip St & Kwun Tong Rd

Kowloon East

2017 660,307 Mapletree

Somerset House redevelopment

Hong Kong East

2018 1,020,000 Swire Properties

Source: Company, Daiwa Source: CBRE

Note:*sold to Manulife and Citibank **likely to be for sale



5 November 2014

- 3 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Completed investment properties in HK (m sq ft) 14.1 14.1 12.9 13.2 13.7 13.9 13.9 13.9

Blended average rent in Pacific Place portfolio (on GFA) (HKD/sq ft) 61.9 63.2 64.9 70.9 75.5 79.6 84.1 88.8

Blended average rent in Taikoo Place portfolio (on GFA) (HKD/sq ft) 29.0 30.1 33.5 37.3 38.8 40.0 42.4 44.1

Completed investment properties in China (m sq ft) 1.6 1.6 1.6 4.8 6.0 6.9 7.0 8.9

Pay-out ratio (%) 0.0 0.0 80.3 50.6 55.2 53.7 53.0 50.4

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EGross rental income 7,433 7,875 8,557 9,015 9,677 10,187 11,098 11,905Property trading 504 400 213 4,147 2,207 3,564 3,200 4,061Other Revenue 255 596 811 890 1,052 1,180 1,253 1,365Total Revenue 8,192 8,871 9,581 14,052 12,936 14,931 15,551 17,331Other income 0 0 0 0 0 0 0 0COGS (2,080) (2,261) (2,334) (3,770) (3,531) (4,924) (4,616) (5,583)SG&A (707) (911) (1,029) (873) (974) (1,032) (1,094) (1,160)Other op.expenses (210) (224) (222) (222) (244) (257) (270) (282)Operating profit 5,195 5,475 5,996 9,187 8,187 8,718 9,571 10,306Net-interest inc./(exp.) (1,107) (1,237) (1,477) (1,367) (1,447) (1,505) (1,565) (1,628)Assoc/forex/extraord./others 245 584 890 453 500 643 771 1,035Pre-tax profit 4,333 4,822 5,409 8,273 7,240 7,856 8,777 9,713Tax (512) (940) (770) (1,199) (769) (1,052) (1,229) (1,311)Min. int./pref. div./others (95) (49) (267) (142) (111) (44) (46) (49)Net profit (reported) 3,726 3,833 4,372 6,932 6,360 6,760 7,502 8,352Net profit (adjusted) 3,726 3,833 4,372 6,932 6,360 6,760 7,502 8,352EPS (reported)(HKD) n.a. n.a. 0.747 1.185 1.087 1.156 1.282 1.428EPS (adjusted)(HKD) n.a. n.a. 0.747 1.185 1.087 1.156 1.282 1.428EPS (adjusted fully-diluted)(HKD) n.a. n.a. 0.747 1.185 1.087 1.156 1.282 1.428DPS (HKD) 0.000 0.000 0.600 0.600 0.600 0.620 0.680 0.720EBIT 5,195 5,475 5,996 9,187 8,187 8,718 9,571 10,306EBITDA 5,405 5,699 6,218 9,409 8,431 8,975 9,841 10,588

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 4,333 4,822 5,409 8,273 7,240 7,856 8,777 9,713Depreciation and amortisation 210 224 222 222 244 257 270 282Tax paid (380) (420) (485) (875) (615) (842) (983) (1,049)Change in working capital 240 285 415 153 167 179 221 316Other operational CF items 636 671 139 (1,928) 808 299 296 (16)Cash flow from operations 5,039 5,582 5,700 5,845 7,844 7,749 8,581 9,246Capex (3,045) (3,910) (5,265) (3,004) (7,398) (7,890) (7,220) (5,560)Net (acquisitions)/disposals 0 0 18,305 0 0 0 0 0Other investing CF items (413) (425) (1,322) (1,367) (145) (165) (185) (190)Cash flow from investing (3,458) (4,335) 11,718 (4,371) (7,543) (8,055) (7,405) (5,750)Change in debt 0 0 0 0 0 0 0 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid 0 0 (12,439) (2,340) (3,393) (3,510) (3,744) (4,154)Other financing CF items 685 750 4,157 (355) (1) (217) (223) (245)Cash flow from financing 685 750 (8,282) (2,695) (3,394) (3,727) (3,967) (4,399)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 2,266 1,997 9,136 (1,221) (3,093) (4,033) (2,791) (903)Free cash flow 1,994 1,672 435 2,841 446 (141) 1,361 3,686

Financial summary



5 November 2014

- 4 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

Swire Properties is the property arm of Swire Pacific, one of the largest and oldest conglomerates in Hong Kong. The company is a leading developer, owner, and operator of mixed-use developments, principally commercial properties in Hong Kong, Mainland China, and the US. At the end of 2013, it owned some 20.2m sq ft attributable GFA of completed commercial properties and had a significant presence in 2 locations in Hong Kong: Admiralty (where it has built the Pacific Place) and Island East (Taikoo Place). Swire Properties was listed on the Hong Kong stock market in January 2012.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 965 1,042 1,180 1,940 2,521 2,521 2,730 2,827Inventory 0 0 0 0 0 0 0 0Accounts receivable 1,233 1,168 1,945 2,930 2,522 2,869 2,915 3,261Other current assets 3,180 5,719 7,059 7,068 8,149 8,250 8,362 8,421Total current assets 5,378 7,929 10,184 11,938 13,192 13,640 14,007 14,509Fixed assets 3,742 6,333 6,615 6,837 7,225 7,381 7,768 8,155Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 164,619 191,450 201,435 218,285 231,540 237,707 243,738 249,114Total assets 173,739 205,712 218,234 237,060 251,957 258,729 265,513 271,779Short-term debt 32,253 9,322 8,630 4,664 7,589 7,609 7,609 7,609Accounts payable 5,071 5,199 8,088 7,155 8,007 8,198 8,329 9,319Other current liabilities 177 379 445 710 211 245 260 265Total current liabilities 37,501 14,900 17,163 12,529 15,807 16,052 16,198 17,193Long-term debt 3,198 28,556 20,250 26,197 26,946 30,959 33,959 34,959Other non-current liabilities 19,975 3,900 4,246 5,078 6,054 6,235 6,350 6,480Total liabilities 60,674 47,356 41,659 43,804 48,807 53,246 56,507 58,632Share capital 4,582 5,690 5,850 5,850 5,850 5,850 5,850 5,850Reserves/R.E./others 108,062 152,187 170,193 186,764 196,500 199,107 202,567 206,648Shareholders' equity 112,644 157,877 176,043 192,614 202,350 204,957 208,417 212,498Minority interests 421 479 532 642 800 526 590 650Total equity & liabilities 173,739 205,712 218,234 237,060 251,957 258,729 265,513 271,779EV 170,627 169,288 158,211 157,582 159,532 163,064 165,598 166,175Net debt/(cash) 34,486 36,836 27,700 28,921 32,014 36,047 38,838 39,741BVPS (HKD) n.a. n.a. 30.093 32.925 34.590 35.035 35.627 36.324

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 16.1 8.3 8.0 46.7 (7.9) 15.4 4.2 11.4EBITDA (YoY) 9.6 5.4 9.1 51.3 (10.4) 6.5 9.6 7.6Operating profit (YoY) 9.9 5.4 9.5 53.2 (10.9) 6.5 9.8 7.7Net profit (YoY) 4.7 2.9 14.1 58.6 (8.3) 6.3 11.0 11.3Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. 58.6 (8.3) 6.3 11.0 11.3Gross-profit margin 74.6 74.5 75.6 73.2 72.7 67.0 70.3 67.8EBITDA margin 66.0 64.2 64.9 67.0 65.2 60.1 63.3 61.1Operating-profit margin 63.4 61.7 62.6 65.4 63.3 58.4 61.5 59.5Net profit margin 45.5 43.2 45.6 49.3 49.2 45.3 48.2 48.2ROAE 3.6 2.8 2.6 3.8 3.2 3.3 3.6 4.0ROAA 2.3 2.0 2.1 3.0 2.6 2.6 2.9 3.1ROCE 3.7 3.2 3.0 4.3 3.5 3.6 3.9 4.1ROIC 3.3 2.6 2.6 3.7 3.2 3.2 3.4 3.6Net debt to equity 30.6 23.3 15.7 15.0 15.8 17.6 18.6 18.7Effective tax rate 11.8 19.5 14.2 14.5 10.6 13.4 14.0 13.5Accounts receivable (days) 48.7 49.4 59.3 63.3 76.9 65.9 67.9 65.0Current ratio (x) 0.1 0.5 0.6 1.0 0.8 0.8 0.9 0.8Net interest cover (x) 4.7 4.4 4.1 6.7 5.7 5.8 6.1 6.3Net dividend payout n.a. n.a. 80.3 50.6 55.2 53.7 53.0 50.4Free cash flow yield 1.4 1.2 0.3 2.0 0.3 n.a. 0.9 2.6



See important disclosures, including any required research certifications, beginning on page Error! Bookmark not defined.

■ What's new The Macau gaming industry saw its gross gaming revenue (GGR) for October 2014 decline by 23.2% YoY with an average daily run rate of MOP904m. While top-line growth was in line with our expectations, the mass market segment disappointed with a drop of 8% YoY (the first month of a YoY decline in history); VIP revenue was down by 31% YoY. We believe this set of numbers provides insights into some of Macau’s gaming structural weaknesses in the foreseeable future. ■ What's the impact Mass: post-Golden Week worse than pre-Golden Week. The mass GGR fall of 8% YoY for October suggests that average daily rates following Golden Week are significantly weaker than levels in

September (which was already the worst performing month YTD pre-October). This marks a clear divergence from prior peak seasons, which typically see average daily rates pick up post-peak seasons vs. pre-peak season levels. We believe this sequential softness is a worrisome trend, indicating challenges in both existing business and disappointing incremental new growth from new player sign-ups during Golden Week. Both factors point to a potentially challenging November and December (especially against high bases last year). This suggests further downside risks to our already below-consensus GGR forecast for 2014 (we forecast 21% YoY mass revenue growth for 2014, implying 10% YoY growth for November/December 2014). Galaxy: VIP decline points to weakness among larger junkets. Galaxy’s VIP rolling volume fell by 14% YoY, marking the largest month of drop YTD for the operator (albeit still ahead of the industry’s 29% YoY drop). Our proprietary research on junkets indicates Galaxy’s VIP business is characterised by a high gaming table count allocated among a small number of strong large junkets (especially Suncity, the largest/best-performing junket in Macau). Implication: a drop in Galaxy’s VIP business suggests VIP pressures are now being felt by the mid/larger-sized junkets, a trend we highlighted in our recent report (2015 to be much worse than 2014, 10 October 2014). We expect VIP fundamentals to remain challenged in the foreseeable future. Sands: lacklustre mass growth points to weaknesses in grind mass. Sands has the highest grind-mass exposure of the 6 casino

operators. Despite Macau’s robust 17% YoY growth in the number of Mainland Chinese tourists during Golden Week (likely a record high for the number of tourists), Sands’ mass revenue growth declined by 5% YoY (it was already the best-performing operator in October). Implication: grind mass is the most structurally intact segment but also faces a decline in per-customer spend, likely in part due to the shift in the tourist mix to lower-spending tour groups. The divergence between mass revenue growth (falling) and tourist growth (rising) is a worrisome trend. MPEL and Wynn: premium mass still weak. Mass revenue at these 2 operators declined by 17% and 12% YoY, respectively, suggesting continuous softness in the higher end/premium mass segment, likely driven by: 1) a fall in the frequency of visits among higher-betting clients, and 2) a 20% decline in average gaming spend per customer. We highlight that MGM’s mass business grew by 16% YoY, likely due to its small operating base and solid execution. ■ What we recommend The latest set of numbers underpins our view that new supply in 2015 may not create incremental demand in this macro environment. Thus, we maintain our Neutral sector rating. We continue to prefer operators with more defensive cost profiles, and hence SJM (880 HK, HKD15.60, Outperform [2]) and MGM (2282 HK, HKD24.30, Outperform [2]) remain our top picks. ■ How we differ While the market as a whole seems to favour supply-side-driven growth, our stock picks are based on cost defensiveness.

5 November 2014

Macau Gaming Sector

A read into October’s poor numbers

• October’s GGR down 23.2%

YoY to MOP28bn, with falls of 31% YoY in VIP segment and 8% YoY in mass segment

• Larger junkets begin to feel macro pressures; mass weakness suggests downside to bearish GGR assumptions

• We forecast a 17-25% YoY drop in GGR for November

Consumer Discretionary / Macau

Positive

Neutral (unchanged)

Negative

Jamie Soo(852) 2773 [email protected]

Adrian Chan(852) 2848 [email protected]


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Macau_Gaming_Sector_141010.pdf#page=1

Macau Gaming Sector 5 November 2014

- 2 -

Macau gaming industry: mass market average daily rates (pre- and post- peak seasons)

Source: APG, Daiwa

Macau gaming industry: VIP rolling chip volume Macau gaming industry: mass revenue

Source: APG

Source: APG

Macau gaming operators: monthly GGR market shares Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14

Sands 20.5% 21.4% 20.9% 21.9% 20.9% 20.5% 22.8% 22.7% 22.1% 20.3% 21.9% 23.2% 21.8% 25.1% 22.0% 22.3% 23.2% 22.0% 23.1% 24.7% 21.8% 23.8%Sands Macao 3.6% 3.0% 3.7% 3.0% 2.9% 3.6% 3.6% 2.7% 3.2% 2.5% 2.7% 3.8% 2.3% 3.4% 2.7% 3.5% 3.3% 3.0% 3.1% 3.1% 3.0% 3.3%Venetian Macao 8.6% 9.5% 7.7% 8.9% 8.8% 8.0% 8.2% 8.8% 8.8% 9.2% 9.8% 9.9% 9.6% 10.1% 9.5% 8.5% 10.3% 9.4% 8.9% 9.1% 8.9% 9.7%Four Seasons 3.0% 2.1% 2.6% 3.9% 3.6% 2.2% 3.5% 3.7% 3.1% 1.8% 1.7% 2.6% 2.5% 4.1% 3.3% 2.9% 1.7% 2.9% 3.1% 4.1% 1.5% 2.3%Sands Cotai Central 5.3% 6.9% 7.0% 6.1% 5.6% 6.6% 7.6% 7.5% 6.9% 6.7% 7.7% 7.0% 7.3% 7.5% 6.5% 7.4% 7.9% 6.7% 8.0% 8.4% 8.4% 8.6%Galaxy 18.6% 18.4% 18.4% 17.6% 18.8% 19.3% 19.9% 17.1% 18.5% 21.0% 18.8% 17.5% 20.2% 21.0% 20.0% 18.9% 21.2% 21.1% 20.6% 20.9% 22.9% 21.4%StarWorld 7.5% 7.0% 7.5% 6.1% 8.0% 7.7% 7.8% 5.8% 6.9% 7.2% 6.3% 6.9% 7.3% 7.5% 7.0% 5.6% 6.6% 7.2% 7.5% 7.1% 7.8% 6.7%Galaxy Macau 9.7% 10.3% 9.9% 10.4% 9.6% 10.5% 11.1% 10.3% 10.3% 13.1% 11.5% 9.6% 12.0% 12.5% 11.9% 12.5% 13.6% 12.8% 12.0% 12.9% 14.0% 13.8%CityClub 1.4% 1.2% 1.1% 1.1% 1.2% 1.1% 1.0% 1.0% 1.2% 0.7% 0.9% 1.0% 0.9% 0.9% 1.1% 0.7% 1.0% 1.2% 1.1% 1.0% 1.0% 0.9%Melco 14.3% 12.7% 13.5% 16.2% 13.9% 14.5% 13.1% 14.3% 13.7% 13.3% 13.6% 14.3% 14.4% 11.9% 12.7% 14.1% 12.7% 12.0% 12.2% 12.9% 12.5% 14.2%Altira 3.9% 3.0% 3.5% 3.8% 3.5% 3.6% 3.0% 3.0% 3.1% 2.6% 2.7% 3.1% 2.3% 2.3% 2.9% 2.6% 2.1% 2.2% 2.4% 2.2% 1.8% 2.9%City of Dreams 10.3% 9.7% 10.0% 12.5% 10.5% 10.9% 10.1% 11.3% 10.6% 10.8% 10.9% 11.2% 12.0% 9.6% 9.8% 11.5% 10.6% 9.8% 9.8% 10.8% 10.7% 11.3%Wynn 11.2% 11.8% 11.2% 9.4% 12.0% 10.2% 10.2% 11.6% 11.4% 10.3% 11.4% 11.4% 9.2% 10.9% 11.9% 10.7% 10.5% 9.5% 11.2% 10.2% 10.8% 8.9%SJM 26.3% 25.5% 27.0% 25.9% 22.9% 24.5% 24.4% 23.9% 24.7% 26.0% 23.4% 23.8% 23.0% 22.1% 24.0% 24.6% 23.1% 25.0% 24.2% 22.4% 20.9% 23.5%MGM 9.2% 10.1% 8.9% 8.9% 11.4% 11.0% 9.5% 10.3% 9.6% 9.1% 11.0% 9.8% 11.5% 9.1% 9.4% 9.4% 9.3% 10.3% 8.8% 8.8% 11.2% 8.2%

Source: APG

3%

9%

-18%(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

0

100

200

300

400

500

600

Sep-13 Golden Week(2013)

Post-GoldenWeek

Jan-14 Lunar NewYear

(2014)

Post-LunarNew Year

Sep-14 Golden Week(2014)

Post-GoldenWeek

Prior peak seasons mass ADR 2014 Golden Week mass ADR MoM mass ADR growth excl peak season week (RHS)

A clear decline in mass ADR compared to run rates pre-Golden Week is an especiallly

worrisome sign; poor new player sign-ups during Golden Week a contributing factor to

post-peak season weakness

Average daily rates typically picks up in the weeks post-peak season in part due to incremental growth driven by new player sign-ups

(HKD)

(40%)(30%)(20%)(10%)0%10%20%30%40%

0100200300400500600700800

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

VIP Rolling (LHS) VIP Rolling YoY growth (RHS)

(YoY %)(HKDbn)

(20%)(10%)0%10%20%30%40%50%60%

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Mass revenue (LHS) Mass revenue YoY growth (RHS)

(YoY %)(HKDm) (YoY %)(HKDm)



■ What's new We met with the management of econtext Asia (econtext) for an update on its business. We still have near-term concerns about econtext’s core agency payment business, which continues to be adversely impacted by stiff competition in Japan. Its other new business initiatives are progressing slower than expected and are unlikely to generate material revenue until FY15. The BOJ’s surprise stimulus measures announced for Japan may help drive more online spending in Japan, although we believe any benefits for econtext may be partially offset by continual JPY depreciation. ■ What's the impact As implied by econtext’s 14% share price rise on 31 October, when the BOJ announced a surprise stimulus package for Japan, stronger economic growth in Japan arising from this stimulus may benefit econtext, as it derives nearly all of its revenue from Japan. We believe the market has

overreacted to the news, as: 1) competition in the payment space remains tough, evidenced by econtext’s continual declines in its average payment fee margins and settlement data transaction ASPs, and 2) the stimulus is likely to put more pressure on the JPY, which would result in forex translation losses for econtext as it reports in HKD. As for econtext’s other business initiatives, such as its trAd advertisement platform and overseas expansion, management agreed that progress has been slow and that these businesses will likely still take a while to contribute materially to revenue and earnings. Management noted that its Indonesia business is seeing revenue double on a MoM basis so far in FY15, though econtext only has a 23% interest in its Indonesia JV and that this JV is growing off a low base. Management said the average fee margin for its agency payment service was 1.95% in October, which is only slightly below 1.96% on average for FY13. The fees proved more resilient than we expected, and hence we raise our FY15E average fee margin to 1.92% (from 1.85%). Still, we lower our FY15-16 gross margin assumptions by 0.5-2.5pp, and thus reduce our FY15-16E EPS by 6-11%. Our FY17 forecasts call for EPS growth of 8.4% YoY to HKD0.15. ■ What we recommend We lower our 6-month target price for econtext Asia to HKD3.20 (from HKD3.30), based on an unchanged target PER of 24x (30% discount to its closest competitor, GMO Payment) now applied to the average of our revised FY15-16E EPS (previously FY15E EPS). Despite near-term headwinds, we maintain our Hold (3) rating on

econtext, as we believe the negatives are priced in and thus downside for the stock is limited. On an ex-cash basis (net of payment-processing cash flows), econtext’s market cap is USD102m, implying an attractive 11.5x PER on the average of our FY15-16E EPS. The key downside risk to our call would be a further margin deterioration due to greater competition in Japan, while faster-than-expected transaction value growth in Japan is the key upside risk. ■ How we differ As far as we know, we are the only broker currently covering econtext.

5 November 2014

Headwinds persist

• Japan’s latest stimulus looks

unlikely to benefit econtext Asia

• But its ex-cash valuation remains attractive

• Lower target price to HKD3.20, maintain Hold



Information Technology / Japan

econtext Asia1390 HK

BuyOutperformHold (unchanged)

UnderperformSell

1

2

3

4

5Target (HKD): 3.30 3.20 Downside: 4.2% 5 Nov price (HKD): 3.34

John Choi(852) 2773 [email protected]

Carlton Lai(852) 2532 [email protected]

Forecast revisions (%)Year to 30 Jun 15E 16E 17ERevenue change 3.5 6.0 n.a.Net profit change (5.9) (10.9) n.a.Core EPS (FD) change (5.9) (10.9) n.a.

40

76

113

149

185

2

4

5

7

9

Dec-13 Mar-14 Jun-14 Sep-14


EAL (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 2.56-8.41Market cap (USDbn) 0.223m avg daily turnover (USDm) 0.41Shares outstanding (m) 519Major shareholder Digital Garage (58.5%)

Financial summary (HKD)Year to 30 Jun 15E 16E 17ERevenue (m) 1,177 1,339 1,565Operating profit (m) 112 123 133Net profit (m) 67 72 79Core EPS (fully-diluted) 0.129 0.140 0.151EPS change (%) 38.4 8.4 8.4Daiwa vs Cons. EPS (%) n.a. n.a. n.a.PER (x) 25.9 23.9 22.1Dividend yield (%) 0.8 0.8 0.9DPS 0.026 0.028 0.030PBR (x) 0.9 0.9 0.9EV/EBITDA (x) 0.9 n.a. n.a.ROE (%) 3.7 3.9 4.1


Information Technology / Japan 1390 HK

5 November 2014

- 2 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 30 Jun 2010 2011 2012 2013 2014 2015E 2016E 2017EAgency payment fees (HKDm) n.a. 245 421 949 901 973 1,108 1,301Agency payment amount (HKDm) n.a. 10,753 18,383 48,329 46,087 50,696 58,300 69,960Average fee margin (%) n.a. 2.28 2.29 1.96 1.95 1.92 1.90 1.86Settlement transaction fees (HKDm) n.a. 5 18 67 55 60 70 83Number of data transactions (million) n.a. 7 26 123 140 161 185 213Average selling price (HKD) n.a. 0.68 0.71 0.54 0.39 0.37 0.38 0.39

Year to 30 Jun 2010 2011 2012 2013 2014 2015E 2016E 2017EAgency payment fees 0 245 421 949 901 973 1,108 1,301Settlement transaction fees 0 5 18 67 55 60 70 83Other Revenue n.a. 29 53 151 132 144 161 181Total Revenue n.a. 279 492 1,167 1,088 1,177 1,339 1,565Other income n.a. 0 0 0 0 0 0 0COGS n.a. (196) (353) (853) (810) (883) (1,015) (1,197)SG&A n.a. (41) (65) (182) (178) (182) (201) (235)Other op.expenses n.a. 0 0 0 0 0 0 0Operating profit 0 42 74 131 100 112 123 133Net-interest inc./(exp.) 0 0 0 (1) (1) (0) (0) (0)Assoc/forex/extraord./others n.a. 0 (0) (11) 11 2 2 2Pre-tax profit 0 42 74 119 110 114 125 135Tax n.a. (18) (32) (56) (49) (48) (52) (56)Min. int./pref. div./others n.a. 0 0 2 (0) 1 0 0Net profit (reported) 0 24 43 65 60 67 72 79Net profit (adjusted) 0 24 43 65 48 67 72 79EPS (reported)(HKD) n.a. n.a. n.a. n.a. 0.116 0.129 0.140 0.151EPS (adjusted)(HKD) n.a. n.a. n.a. n.a. 0.093 0.129 0.140 0.151EPS (adjusted fully-diluted)(HKD) n.a. n.a. n.a. n.a. 0.093 0.129 0.140 0.151DPS (HKD) n.a. n.a. n.a. n.a. 0.000 0.026 0.028 0.030EBIT 0 42 74 131 100 112 123 133EBITDA 0 52 92 186 156 170 187 202

Year to 30 Jun 2010 2011 2012 2013 2014 2015E 2016E 2017EProfit before tax 0 42 74 119 110 114 125 135Depreciation and amortisation n.a. 10 18 55 56 58 64 69Tax paid n.a. 0 (35) (38) (39) (48) (52) (56)Change in working capital n.a. (36) 146 176 (108) 32 90 125Other operational CF items n.a. 0 0 4 (9) 0 0 (1)Cash flow from operations 0 16 203 316 10 156 226 272Capex n.a. (3) (4) (34) (3) (30) (30) (50)Net (acquisitions)/disposals n.a. (7) n.a. (93) (74) 0 0 0Other investing CF items n.a. (28) (119) 143 (7) 0 0 0Cash flow from investing 0 (38) 462 15 (84) (30) (30) (50)Change in debt n.a. 0 (20) (101) 74 0 0 0Net share issues/(repurchases) n.a. 0 0 100 516 0 0 0Dividends paid n.a. 0 0 (102) 0 (13) (14) (16)Other financing CF items n.a. 0 0 (0) (44) 0 0 0Cash flow from financing 0 0 (20) (103) 546 (13) (14) (16)Forex effect/others n.a. 38 20 (225) (16) 0 0 0Change in cash 0 17 665 3 455 113 181 207Free cash flow 0 14 199 281 7 126 196 222

Financial summary


Information Technology / Japan 1390 HK

5 November 2014

- 3 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

econtext Asia was the second-biggest player by revenue for 2012 in the online-payment services market in Japan, according to data from MIC Research Institute. The company processes transaction data between online merchants and financial institutions primarily in Japan and transfers funds to online merchants for the settlement of transactions made online. Its core business (online payment services) accounted for 91.1% of total revenue in FY13.

As at 30 Jun 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & short-term investment 0 442 1,087 1,090 1,546 1,658 1,840 2,046Inventory n.a. 0 0 0 0 0 0 0Accounts receivable n.a. 349 692 654 579 632 719 840Other current assets n.a. 42 167 31 13 0 0 0Total current assets 0 833 1,946 1,775 2,138 2,290 2,558 2,886Fixed assets 0 6 19 47 37 53 65 71Goodwill & intangibles n.a. 20 1,360 1,106 1,067 1,022 977 952Other non-current assets n.a. 9 31 43 98 99 100 101Total assets 0 868 3,357 2,970 3,340 3,465 3,700 4,010Short-term debt n.a. 19 0 0 76 76 76 76Accounts payable n.a. 558 1,441 1,425 1,208 1,291 1,469 1,716Other current liabilities n.a. 2 11 25 49 38 38 38Total current liabilities 0 580 1,453 1,449 1,334 1,406 1,584 1,831Long-term debt n.a. 0 0 1 1 1 1 1Other non-current liabilities n.a. 0 280 221 211 211 211 211Total liabilities 0 581 1,733 1,671 1,546 1,617 1,795 2,042Share capital 0 0 0 1,623 2,096 2,096 2,096 2,096Reserves/R.E./others n.a. 287 1,616 (329) (306) (253) (195) (133)Shareholders' equity 0 287 1,616 1,294 1,789 1,843 1,901 1,963Minority interests n.a. 0 9 5 5 4 4 4Total equity & liabilities 0 868 3,357 2,970 3,340 3,465 3,700 4,010EV n.a. 1,310 650 646 265 151 (32) (239)Net debt/(cash) n.a. (422) (1,087) (1,089) (1,469) (1,581) (1,763) (1,969)BVPS (HKD) n.a. n.a. n.a. n.a. 3.450 3.553 3.664 3.784

Year to 30 Jun 2010 2011 2012 2013 2014 2015E 2016E 2017ESales (YoY) n.a. n.a. 76.7 136.9 (6.8) 8.2 13.8 16.8EBITDA (YoY) n.a. n.a. 78.9 101.4 (16.1) 9.3 9.7 8.2Operating profit (YoY) n.a. n.a. 76.8 76.3 (23.8) 12.1 10.2 7.9Net profit (YoY) n.a. n.a. 75.7 51.1 (25.6) 38.4 8.4 8.4Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. 38.4 8.4 8.4Gross-profit margin n.a. 29.7 28.3 26.9 25.5 25.0 24.2 23.5EBITDA margin n.a. 18.5 18.7 15.9 14.3 14.5 14.0 12.9Operating-profit margin n.a. 15.1 15.1 11.2 9.2 9.5 9.2 8.5Net profit margin n.a. 8.8 8.7 5.6 4.4 5.7 5.4 5.0ROAE n.a. 17.0 4.5 4.5 3.1 3.7 3.9 4.1ROAA n.a. 5.6 2.0 2.1 1.5 2.0 2.0 2.0ROCE n.a. 27.4 7.7 9.0 6.3 5.9 6.3 6.6ROIC n.a. (35.8) 21.2 18.6 20.5 21.9 35.0 110.1Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Effective tax rate n.a. 42.4 42.6 46.9 45.0 42.0 42.0 41.7Accounts receivable (days) n.a. 228.6 385.9 210.6 206.9 187.7 184.0 181.7Current ratio (x) n.a. 1.4 1.3 1.2 1.6 1.6 1.6 1.6Net interest cover (x) n.a. n.a. n.a. 261.1 126.4 345.9 381.1 411.4Net dividend payout n.a. n.a. n.a. n.a. 0.0 20.0 20.0 19.7Free cash flow yield 0.0 0.8 11.5 16.2 0.4 7.3 11.3 12.8




■ What's new Wistron is due to report its 3Q14 results on 13 November. While we expect the operating margin in 3Q14 to miss market expectations, its profit margins should recover in 4Q14. We remain positive on Wistron’s growth outlook for 2015, driven by ramping smartphone shipments and an improving notebook business. Reiterate Buy. ■ What's the impact 3Q14 preview: likely hiccup in margin. While Wistron reported solid 15% QoQ growth in 3Q14 revenue, its operating margin is likely to drop to 0.8% (from 1.2% for 2Q14), below the consensus forecast of 1.2% and our previous forecast of 1.3%, due to: 1) higher labour costs for ramping up smartphone shipments, 2) better-than-expected volume growth of notebook PCs (up 16% QoQ vs. our previous estimate of 8-9%) which could impact the blended margin. We now forecast net profit to reach TWD1.39bn (EPS: NTD0.57), below our prior forecast (TWD1.86bn) and the Bloomberg consensus forecasts (TWD1.48bn).

4Q14 outlook. We now forecast 4Q14 revenue to grow by 6% QoQ (previously 9% QoQ). While revenue for most of the major businesses could stay flat due to seasonality, smartphones should be the key growth driver, thanks mainly to the ramping up of iPhone 5C shipments, while orders from Blackberry look resilient. Wistron’s iPhone business could still be in a loss due to its lack of scale, but the loss should narrow as volumes continue to pick up, which we believe will drive an operating margin recovery in 4Q14. Besides, the recent depreciation of the TWD (against the USD) bodes well for the 4Q14 gross margin. Promising outlook for 2015. As indicated in our upgrade note dated 7 August (Upgrading: buy into likely strong earnings recovery), we still see strong growth for Wistron in 2015, mainly driven by smartphones (ramping up of iPhone 5C volumes, and another potential iPhone model win in 1H15), notebooks (likely outsourcing share gain in Acer, HP, and Dell), as well as sustained momentum of TVs, servers, etc. We forecast Wistron’s 2015 revenue and net profit to rise by 17% and 57% YoY, respectively (from 17% and 39% YoY previously). Earnings revisions. We lower our 2014-16E EPS by 1-13% to mainly reflect: 1) our lower margin assumptions for 3Q14, 2) the 4% addition to the share count due to the 2% stock dividend this year and new shares issued for employee warrants. ■ What we recommend We trim our 6-month target price to TWD36 (from TWD37), based on our revised 1-year-forward EPS (ie, now 4Q14-3Q15, from 3Q14-2Q15 previously) and unchanged target PER of 12x (the mid-point of the

past-3-year trading range of 9-15x). While we expect the hiccup in Wistron’s 3Q14 margins to hurt near-term sentiment, that does not change our positive view on the stock, which is trading currently at an attractive 9.6x on our 2015E EPS. The key risk to our call is a worse-than-expected shipment ramp-up for its iPhone-related business. ■ How we differ We are more positive than the market on Wistron’s revenue growth and the improving operating leverage over 2015-16E.

5 November 2014

Likely margin hiccup

• 3Q14 operating margin likely

to miss market expectations • But we expect profit margins

to recover in 4Q14; 2015 growth looks intact to us

• Lower price target to TWD36 (from TWD37); reiterate Buy



Information Technology / Taiwan

Wistron3231 TT

Buy (unchanged)


1

2

3

4

5Target (TWD): 37.00 36.00 Upside: 19.0% 5 Nov price (TWD): 30.25

Steven Tseng(886) 2 8758 6252

[email protected]

Forecast revisions (%)Year to 31 Dec 14E 15E 16ERevenue change (1.0) (0.6) (1.7)Net profit change (9.9) 2.0 (1.2)Core EPS (FD) change (13.0) (1.4) (4.5)

85

94

103

111

120

24

27

30

32

35



Wistron (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 24.01-35.00Market cap (USDbn) 2.443m avg daily turnover (USDm) 20.55Shares outstanding (m) 2,462Major shareholder Cathay Life Insurance Co., Ltd. (3.9%)

Financial summary (TWD)Year to 31 Dec 14E 15E 16ERevenue (m) 582,572 681,254 725,319Operating profit (m) 5,023 8,467 9,975Net profit (m) 4,922 7,734 8,758Core EPS (fully-diluted) 1.999 3.142 3.558EPS change (%) (17.3) 57.1 13.2Daiwa vs Cons. EPS (%) 3.8 8.6 13.4PER (x) 15.1 9.6 8.5Dividend yield (%) 6.0 5.4 7.4DPS 1.8 1.6 2.2PBR (x) 1.1 0.9 0.9EV/EBITDA (x) 4.6 3.5 2.9ROE (%) 7.2 10.1 10.3


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Wistron_140807.pdf#page=1


5 November 2014

- 2 -

Wistron: revenue and earnings forecast revisions and comparison with consensus 2014E 2015E 2016E

(TWDm) Previous New Consensus Previous New Consensus Previous New ConsensusRevenue 588,240 582,572 281,225 685,401 681,254 668,436 737,955 725,319 705,224Diff (%) -1.0% 107.2% -0.6% 1.9% -1.7% 2.8%Gross Margin (%) 5.4% 5.7% 5.6% 5.5% 5.6% 5.6% 5.5% 5.6% 5.6%Operating profit 5,798 5,023 5,305 8,618 8,467 8,402 10,441 9,975 9,300Op Margin (%) 1.0% 0.9% 1.9% 1.3% 1.2% 1.3% 1.4% 1.4% 1.3%Net profit 5,464 4,922 4,743 7,579 7,734 7,122 8,862 8,758 7,723EPS (TWD) 2.30 2.00 1.93 3.19 3.14 2.89 3.73 3.56 3.14 Diff (%) -13.0% 3.8% -1.4% 8.6% -4.5% 13.4%Source: Company, Bloomberg, Daiwa forecasts

Wistron: quarterly and annual P&L statement

2014E 2015E (TWDm) 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 2013 2014E 2015ENet sales 125,818 135,885 155,805 165,063 150,413 160,124 177,552 193,166 624,009 582,572 681,254COGS -119,268 -127,346 -147,015 -155,685 -142,197 -151,207 -167,311 -182,094 -593,806 -549,314 -642,808Gross profit 6,550 8,539 8,790 9,378 8,216 8,917 10,241 11,072 30,203 33,258 38,446Operating costs -6,335 -6,916 -7,557 -7,428 -6,648 -7,142 -7,883 -8,306 -24,117 -28,235 -29,979Operating profit 215 1,624 1,234 1,950 1,568 1,776 2,358 2,766 6,086 5,023 8,467Non-operating profit 238 -0 554 522 332 372 372 370 1,829 1,314 1,446Pre-tax profit 454 1,624 1,788 2,472 1,900 2,148 2,730 3,135 7,915 6,337 9,913Taxes -112 -408 -393 -494 -380 -430 -546 -815 -2,164 -1,415 -2,179Net profit 342 1,211 1,393 1,976 1,518 1,716 2,182 2,318 5,751 4,922 7,734Net EPS (TWD) 0.14 0.51 0.57 0.80 0.62 0.70 0.89 0.94 2.42 2.00 3.14Operating Ratios Gross margins 5.2% 6.3% 5.6% 5.7% 5.5% 5.6% 5.8% 5.7% 4.8% 5.7% 5.6%Operating margin 0.2% 1.2% 0.8% 1.2% 1.0% 1.1% 1.3% 1.4% 1.0% 0.9% 1.2%Pre-tax margin 0.4% 1.2% 1.1% 1.5% 1.3% 1.3% 1.5% 1.6% 1.3% 1.1% 1.5%Net margin 0.3% 0.9% 0.9% 1.2% 1.0% 1.1% 1.2% 1.2% 0.9% 0.8% 1.1%YoY (%) Net revenues -20% -17% -3% 15% 20% 18% 14% 17% -5% -7% 17%Gross profit -19% 26% 9% 28% 25% 4% 17% 18% -5% 10% 16%Operating income -88% 0% -33% 121% 629% 9% 91% 42% -26% -17% 69%Pre-tax income -78% -29% -8% 55% 319% 32% 53% 27% -14% -20% 56%Net income -79% -30% -5% 113% 344% 42% 57% 17% -14% -14% 57%QoQ (%) Net revenues -12% 8% 15% 6% -9% 6% 11% 9% Gross profit -10% 30% 3% 7% -12% 9% 15% 8% Operating income -76% 655% -24% 58% -20% 13% 33% 17% Pre-tax income -72% 258% 10% 38% -23% 13% 27% 15% Net income -63% 254% 15% 42% -23% 13% 27% 6%

Source: Company, Daiwa forecasts

Wistron: 1-year forward PER Wistron: revenue breakdown by product

Source: TEJ, Daiwa forecasts Source: Company, Daiwa forecasts

10

20

30

40

50

60

Jan06 Oct06 Jul07 Apr08 Jan09 Oct09 Jul10 Apr11 Jan12 Oct12 Jul13 Apr14

(TWD)

5x 8x 11x 14x 3231 Wistron

65%48% 46% 42%

9%

12% 12%10%

5%6% 8%

7%

5%6% 6%

5%

5%3% 6%

6%

7%15% 13% 23%

2% 3% 4% 3%2% 5% 2% 2%1% 3% 3%

0%

20%

40%

60%

80%

100%

2012 2013 2014E 2015ENotebook PC Desktop PC Server/Storage LCD Monitor TVHandheld Service Tablet Others



5 November 2014

- 3 -

Key assumptions


Cash flow (TWDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ENotebook shipment (m units) 25.8 27.5 31.6 31.4 24.1 20.8 23.5 24.5Smartphone shipment (m units) 0.7 6.0 9.7 13.3 21.4 10.8 16.4 19.2Tablet shipment (m units) 0.0 0.0 0.3 2.0 5.2 3.0 2.6 1.8Non-notebook revenue (%) 25 33 35 35 52 54 58 61

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ENotebook PC 411,163 412,174 427,938 424,709 302,393 270,446 285,342 283,838Smart devices 3,558 24,607 34,514 62,498 121,312 87,519 165,512 189,400Other Revenue 131,945 178,403 195,915 170,638 200,304 224,607 230,400 252,081Total Revenue 546,666 615,185 658,367 657,845 624,009 582,572 681,254 725,319Other income 0 0 0 0 0 0 0 0COGS (516,716) (580,661) (626,040) (625,917) (593,806) (549,314) (642,808) (684,499)SG&A (10,914) (10,882) (10,407) (11,750) (11,150) (14,830) (15,736) (16,100)Other op.expenses (8,287) (9,883) (11,338) (11,956) (12,967) (13,405) (14,243) (14,745)Operating profit 10,749 13,759 10,582 8,221 6,086 5,023 8,467 9,975Net-interest inc./(exp.) (294) (104) 113 73 (662) 877 987 1,005Assoc/forex/extraord./others 1,041 1,690 933 886 2,491 438 459 470Pre-tax profit 11,496 15,345 11,628 9,180 7,915 6,337 9,913 11,450Tax (2,325) (3,305) (2,563) (2,519) (2,160) (1,407) (2,171) (2,683)Min. int./pref. div./others (36) 10 0 (6) (3) (8) (8) (8)Net profit (reported) 9,135 12,050 9,065 6,655 5,751 4,922 7,734 8,758Net profit (adjusted) 9,135 12,050 9,065 6,655 5,751 4,922 7,734 8,758EPS (reported)(TWD) 4.900 6.083 4.348 3.028 2.418 1.999 3.142 3.558EPS (adjusted)(TWD) 4.900 6.083 4.348 3.028 2.418 1.999 3.142 3.558EPS (adjusted fully-diluted)(TWD) 4.900 6.083 4.348 3.028 2.418 1.999 3.142 3.558DPS (TWD) 1.080 2.709 3.180 2.193 1.489 1.802 1.619 2.230EBIT 10,749 13,759 10,582 8,221 6,086 5,023 8,467 9,975EBITDA 15,963 19,015 16,756 15,064 13,990 14,780 18,893 21,184

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 11,496 15,345 11,628 9,180 7,915 6,337 9,913 11,450Depreciation and amortisation 5,214 5,257 6,174 6,844 7,904 9,757 10,426 11,209Tax paid (2,325) (3,305) (2,563) (2,519) (2,160) (1,407) (2,171) (2,683)Change in working capital (7,674) (11,862) (268) 2,109 (5,247) (736) (6,667) (4,088)Other operational CF items 6,578 2,228 (3,898) (2,872) 723 (509) (145) (148)Cash flow from operations 13,289 7,662 11,073 12,741 9,135 13,443 11,357 15,739Capex (6,566) (13,007) (13,429) (13,122) (4,812) (4,492) (5,253) (5,593)Net (acquisitions)/disposals (424) (1,668) (559) (13) (82) (82) (82) (82)Other investing CF items 75 373 (1,254) (53) (3,149) (387) 0 0Cash flow from investing (6,916) (14,303) (15,242) (13,189) (8,043) (4,961) (5,335) (5,675)Change in debt (5,083) 34,339 14,513 32,268 (3,199) 5,178 0 0Net share issues/(repurchases) 7,234 0 0 0 0 0 0 0Dividends paid (1,638) (5,049) (6,300) (4,573) (3,274) (4,285) (3,987) (5,491)Other financing CF items 661 829 (100) 1,359 1,335 (439) 7 7Cash flow from financing 1,174 30,119 8,113 29,054 (5,138) 455 (3,979) (5,484)Forex effect/others (182) (2,061) 943 (1,588) 1,528 1,070 0 0Change in cash 7,366 21,418 4,887 27,019 (2,518) 10,007 2,042 4,580Free cash flow 6,723 (5,345) (2,356) (381) 4,323 8,951 6,104 10,146

Financial summary



5 November 2014

- 4 -


Key ratios (%)


Company profile

Established in 2001 as a spin-off from the design and manufacture department of Acer, Wistron Corp is currently the world’s third-largest notebook PC ODM player in terms of shipments. Aside from notebooks, the company has also diversified into other products such as TVs, smartphones, monitors, servers, etc.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 20,796 40,764 45,569 72,589 70,937 80,425 82,459 87,031Inventory 27,669 33,633 39,398 46,234 49,985 44,505 52,080 55,458Accounts receivable 99,415 102,102 116,039 93,715 89,262 92,555 107,397 115,130Other current assets 4,140 4,674 6,654 7,905 6,122 7,151 7,151 7,151Total current assets 152,020 181,172 207,660 220,443 216,306 224,637 249,087 264,770Fixed assets 17,900 23,497 31,531 37,179 35,928 30,663 25,490 19,874Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 10,375 12,985 15,307 14,850 18,307 18,801 19,029 19,259Total assets 180,296 217,654 254,498 272,472 270,542 274,101 293,605 303,903Short-term debt 1,885 41,846 55,987 76,327 57,073 59,731 59,731 59,731Accounts payable 101,725 98,519 117,956 104,602 95,457 92,535 108,284 115,307Other current liabilities 14,872 17,745 15,245 13,921 15,819 30,201 20,570 20,570Total current liabilities 118,482 158,110 189,188 194,849 168,349 182,467 188,586 195,609Long-term debt 5,765 143 493 11,646 28,340 13,928 13,928 13,928Other non-current liabilities 2,034 2,531 3,267 3,979 7,656 7,527 7,527 7,527Total liabilities 126,281 160,784 192,949 210,474 204,346 203,922 210,041 217,064Share capital 18,643 19,809 20,850 21,979 23,782 24,619 24,619 24,619Reserves/R.E./others 34,436 37,061 40,700 40,013 42,405 45,413 58,798 62,073Shareholders' equity 53,079 56,870 61,550 61,993 66,187 70,032 83,417 86,692Minority interests 936 0 0 6 9 148 148 148Total equity & liabilities 180,296 217,654 254,498 272,472 270,542 274,101 293,605 303,903EV 62,262 75,697 85,383 89,861 88,956 67,853 65,819 61,247Net debt/(cash) (13,145) 1,225 10,912 15,384 14,475 (6,766) (8,800) (13,372)BVPS (TWD) 28.472 28.709 29.520 28.205 27.831 28.447 33.884 35.214

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 22.8 12.5 7.0 (0.1) (5.1) (6.6) 16.9 6.5EBITDA (YoY) 32.3 19.1 (11.9) (10.1) (7.1) 5.7 27.8 12.1Operating profit (YoY) 24.7 28.0 (23.1) (22.3) (26.0) (17.5) 68.6 17.8Net profit (YoY) 32.8 31.9 (24.8) (26.6) (13.6) (14.4) 57.1 13.2Core EPS (fully-diluted) (YoY) 8.0 24.2 (28.5) (30.4) (20.1) (17.3) 57.1 13.2Gross-profit margin 5.5 5.6 4.9 4.9 4.8 5.7 5.6 5.6EBITDA margin 2.9 3.1 2.5 2.3 2.2 2.5 2.8 2.9Operating-profit margin 2.0 2.2 1.6 1.2 1.0 0.9 1.2 1.4Net profit margin 1.7 2.0 1.4 1.0 0.9 0.8 1.1 1.2ROAE 20.3 21.9 15.3 10.8 9.0 7.2 10.1 10.3ROAA 5.7 6.1 3.8 2.5 2.1 1.8 2.7 2.9ROCE 19.2 17.1 9.8 6.1 4.0 3.4 5.6 6.3ROIC 21.9 21.8 12.6 8.0 5.6 5.4 9.6 10.3Net debt to equity n.a. 2.2 17.7 24.8 21.9 n.a. n.a. n.a.Effective tax rate 20.2 21.5 22.0 27.4 27.3 22.2 21.9 23.4Accounts receivable (days) 54.5 59.8 60.5 58.2 53.5 57.0 53.6 56.0Current ratio (x) 1.3 1.1 1.1 1.1 1.3 1.2 1.3 1.4Net interest cover (x) 36.6 132.6 n.a. n.a. 9.2 n.a. n.a. n.a.Net dividend payout 23.8 55.3 52.3 50.4 49.2 74.5 81.0 71.0Free cash flow yield 9.0 n.a. n.a. n.a. 5.8 12.0 8.2 13.6




■ What's new Makalot announced solid revenue for October of TWD2,454m (up 28.5% YoY, 8.3% MoM) and is due to report its 3Q14 results in mid-November. We expect its revenue momentum to remain strong in 4Q14, driven mainly by US customers such as Target and Gap. (See too Prospects in 2H14 intact, 26 August 2014.) ■ What's the impact Positive business prospects intact for 2H14. For 3Q14, we forecast solid net profit growth of 25% YoY on revenue growth of 15.2% YoY (comprising shipment growth of 12% YoY and an ASP increase of 2.9% YoY). For 4Q14, we forecast net profit growth of 25.2% YoY on revenue growth of 20% YoY. The company’s strong revenue for October, bringing YTD revenue growth to 16%, underpins our projections. Cotton price weakness likely to curb ASP rise. The current weakness in the cotton price means

Makalot will likely see only a modest ASP rise for 2014 and a flat ASP for 2015, in our view. However, we believe garment manufacturers like Makalot are well positioned to lower their procurement costs and improve their gross margins, as their ASPs are not pegged as closely to cotton prices as the ASPs of upstream and midstream players. In addition, we continue to expect operating-margin expansion for Makalot on better control of its opex/sales ratio over 2015-16 (we forecast an 11% ratio, following on from 11.3% for 2014E due to more staff hires this year). Earnings-forecast revisions. Reflecting the cotton price weakness, we adjust down our ASP growth assumptions (2014: from 2.5% YoY to 3% YoY, 2015: from 1% YoY to flat YoY, 2016: from 0.8% YoY to flat YoY). We reduce slightly our shipment growth forecast for 2014 to 12.3% YoY (from 14% YoY) but maintain them at 15% YoY growth for each of 2015 and 2016. As such, we reduce our 2014-16 revenue forecasts by 1-2.5%. Our EPS forecasts for the period are reduced by 4.7-6.6% to factor in also share dilution of 11.8% from the capital raising carried out in 3Q14. ■ What we recommend We raise our 6-month target price to TWD177 (from TWD166), based on our revised 2015E EPS (previously average of 2014-15E EPS) and assigning a new target PER of 17x (previously 16x), given we now forecast a a net profit CAGR of 19% for 2014-16 (previously 16% as we lift our net profit forecasts for 2015 and 2016). We reiterate Outperform (2). Notwithstanding the cotton price weakness, our revised forecasts call for solid 21.7% YoY net profit

growth for 2015. Also, Makalot has fairly long order visibility for its industry (6 months), is moving towards vertical integration, and has a high dividend yield of 5.1-6.8% for 2014-16E, based on our DPS forecasts and at its current share price. The main risks to our view: 1) a lower-than-expected ASP and gross margin, 2) weaker-than-expected shipment growth. ■ How we differ Our 2014-16E EPS are 1-5% below the Bloomberg consensus, which we attribute to our conservative assumptions for revenue growth.

5 November 2014

Expect solid 2H14 earnings growth

• We forecast solid net-profit

growth of 25% YoY for 2H14 • Cotton price weakness should

have little impact; staying positive on 4Q14 and 2015 outlook

• Raising TP to TWD177, reiterating Outperform



Consumer Discretionary / Taiwan

Makalot Industrial1477 TT

BuyOutperform (unchanged)

HoldUnderperformSell

1

2

3

4

5Target (TWD): 166.00 177.00 Upside: 9.3% 5 Nov price (TWD): 162.00

Helen Chien(886) 2 8758 [email protected]

Forecast revisions (%)Year to 31 Dec 14E 15E 16ERevenue change (1.1) (2.0) (2.5)Net profit change (1.3) 3.6 4.5Core EPS (FD) change (4.7) (6.6) (5.7)

70

79

88

96

105

135

146

158

169

180



Makalot In (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 139.09-178.97Market cap (USDbn) 1.013m avg daily turnover (USDm) 4.45Shares outstanding (m) 191Major shareholder Li-Pian Zhou (Chairman) (4.0%)

Financial summary (TWD)Year to 31 Dec 14E 15E 16ERevenue (m) 20,708 23,814 27,469Operating profit (m) 2,140 2,510 2,931Net profit (m) 1,669 2,031 2,376Core EPS (fully-diluted) 9.162 10.412 12.179EPS change (%) 19.6 13.6 17.0Daiwa vs Cons. EPS (%) (2.6) (1.1) (5.2)PER (x) 17.7 15.6 13.3Dividend yield (%) 5.1 5.8 6.8DPS 8.3 9.4 11.0PBR (x) 4.0 3.7 3.4EV/EBITDA (x) 11.3 9.5 8.0ROE (%) 25.5 25.1 27.4


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20140826tw_Makalot_Industrial.pdf#page=1

Consumer Discretionary / Taiwan 1477 TT

5 November 2014

- 2 -

Makalot: revisions to revenue and earnings forecasts 2014E 2015E 2016E

(TWDm) New Previous Change New Previous Change New Previous ChangeASP (TWD/dozen) 1,755 1,747 0.5% 1,755 1,764 -0.5% 1,761 1,778 -1.0%Shipments (m dozen) 11.80 11.98 -1.5% 13.57 13.78 -1.5% 15.60 15.85 -1.5%Sales 20,708 20,929 -1.1% 23,814 24,309 -2.0% 27,469 28,179 -2.5%Gross profit 4,479 4,447 0.7% 5,156 5,190 -0.7% 5,952 6,030 -1.3% Gross-profit margin 21.6% 21.3% 0.4pp 21.7% 21.4% 0.3pp 21.7% 21.4% 0.3ppOperating profit 2,139 2,083 2.7% 2,510 2,414 4.0% 2,931 2,790 5.1% Operating-profit margin 10.3% 10.0% 0.4pp 10.5% 9.9% 0.6pp 10.7% 9.9% 0.8ppNet profit 1,669 1,691 -1.3% 2,031 1,961 3.6% 2,376 2,273 4.5% Net-profit margin 8.1% 8.1% 0.0pp 8.5% 8.1% 0.5pp 8.6% 8.1% 0.6ppEPS (TWD) 9.16 9.61 -4.7% 10.41 11.14 -6.6% 12.18 12.92 -5.7%Source: Daiwa forecasts

Makalot: quarterly P&L statement Makalot: monthly revenue trend (TWDm) 1Q14 2Q14 3Q14E 4Q14E

Revenue 5,213 4,355 5,952 5,188Gross profit 1,259 978 1,206 1.037Operating profit 596 488 577 478Net profit 489 351 459 369Basic EPS (TWD) 2.89 2.06 2.41 1.94Diluted EPS (TWD) 2.80 2.00 2.35 1.89Margins Gross margin 24.2% 22.4% 20.3% 20.0%Operating margin 11.4% 11.2% 9.7% 9.2%Net margin 9.4% 8.1% 7.7% 7.1%Changes, YoY Revenue 21.3% 5.6% 15.2% 20.0%Gross profit 40.7% 19.1% 21.2% 21.1%Operating profit 38.9% 36.0% 20.4% 33.9%Net profit 26.8% 19.8% 25.0% 25.2%Basic EPS (TWD) 24.0% 17.3% 10.2% 11.1%Diluted EPS (TWD) 27.5% 19.1% 11.6% 13.0%Changes, QoQ Revenue 20.6% -16.5% 36.7% -12.8%Gross profit 47.1% -22.4% 23.3% -14.0%Operating profit 67.2% -18.2% 18.3% -17.3%Net profit 65.9% -28.3% 30.8% -19.6%Basic EPS (TWD) 65.7% -28.6% 16.7% -19.6%Diluted EPS (TWD) 67.1% -28.4% 17.4% -19.6%

Source: Company, Daiwa forecasts Source: Company

Makalot: ASP and shipments Makalot: 1-year forward PER bands

Source: Company Source: Company, Daiwa forecasts

0

500

1,000

1,500

2,000

2,500

3,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

(TWDm)

2011 2012 2013 2014

0

500

1,000

1,500

2,000

2,500

3,000

02468

1012141618

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 E2015 E2016 E

Shipments (m dozen) (LHS) ASP (TWD/dozen) (RHS)

0

50

100

150

200

250

May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14

(TWD)

19x

16x

13x10x

22x



5 November 2014

- 3 -

Key assumptions


Cash flow (TWDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EASP (TWD) (dozen) 1,848.7 1,740.8 1,853.4 1,732.2 1,704.2 1,755.3 1,755.3 1,760.6Shipments (m dozen) 7.2 8.1 8.2 9.2 10.5 11.8 13.6 15.6Consolidated gross margin (%) 21.7 20.1 20.9 19.9 19.9 21.6 21.7 21.7

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EUS 13,224 13,979 13,870 14,168 15,785 18,016 20,480 23,348Japan 0 0 0 159 896 1,346 1,905 2,610Other Revenue 87 157 1,253 1,540 1,230 1,346 1,429 1,511Total Revenue 13,311 14,135 15,123 15,867 17,911 20,708 23,814 27,469Other income 0 0 0 0 0 0 0 0COGS (10,428) (11,296) (11,966) (12,712) (14,344) (16,229) (18,659) (21,516)SG&A (1,534) (1,503) (1,709) (1,671) (1,943) (2,340) (2,646) (3,022)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 1,349 1,337 1,449 1,484 1,624 2,140 2,510 2,931Net-interest inc./(exp.) (25) (24) (23) (8) (38) (50) (4) 0Assoc/forex/extraord./others (109) (139) (20) (38) 61 (30) 0 0Pre-tax profit 1,215 1,174 1,406 1,438 1,647 2,059 2,506 2,931Tax (335) (257) (293) (261) (304) (389) (474) (554)Min. int./pref. div./others 0 0 (2) (1) (1) (1) (1) (1)Net profit (reported) 881 918 1,111 1,175 1,342 1,669 2,031 2,376Net profit (adjusted) 881 918 1,111 1,175 1,342 1,669 2,031 2,376EPS (reported)(TWD) 5.795 5.905 6.916 7.169 8.025 9.416 10.657 12.466EPS (adjusted)(TWD) 5.795 5.905 6.916 7.169 8.025 9.416 10.657 12.466EPS (adjusted fully-diluted)(TWD) 5.505 5.506 6.630 6.895 7.663 9.162 10.412 12.179DPS (TWD) 5.200 4.570 6.133 6.257 7.785 8.285 9.379 10.970EBIT 1,349 1,337 1,449 1,484 1,624 2,140 2,510 2,931EBITDA 1,577 1,549 1,632 1,677 1,827 2,392 2,779 3,217

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 1,215 1,174 1,406 1,438 1,647 2,059 2,506 2,931Depreciation and amortisation 228 212 183 193 203 253 269 286Tax paid (335) (257) (293) (261) (281) (389) (474) (554)Change in working capital (132) (82) (817) 878 (575) 1,382 97 32Other operational CF items 5 87 (2) 17 (2) 80 4 (0)Cash flow from operations 982 1,134 476 2,264 993 3,386 2,403 2,695Capex (99) (127) (394) (252) (3,238) (285) (285) (285)Net (acquisitions)/disposals 39 13 26 5 2 0 0 0Other investing CF items (2) (1) (9) (2) (144) (48) (54) 23Cash flow from investing (63) (116) (377) (249) (3,380) (333) (339) (262)Change in debt 647 178 139 353 1,183 100 (100) (100)Net share issues/(repurchases) 0 0 0 0 0 2,120 0 0Dividends paid (304) (802) (734) (994) (1,029) (1,302) (1,468) (1,787)Other financing CF items (115) 0 0 4 0 0 0 0Cash flow from financing 228 (624) (595) (637) 153 918 (1,568) (1,887)Forex effect/others (17) (99) 63 (43) 42 0 0 0Change in cash 1,130 296 (433) 1,336 (2,192) 3,971 495 546Free cash flow 883 1,007 83 2,012 (2,245) 3,101 2,118 2,410

Financial summary



5 November 2014

- 4 -


Key ratios (%)


Company profile

Makalot Industrial (Makalot) is a diversified garment manufacturer for brands and retailers globally. It not only produces apparel as an original equipment manufacturer (OEM), but is also an original brand manufacturer (OBM) with the launch of its FISSO brand in Taiwan and Mainland China in 2013.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 2,020 2,316 2,039 3,378 1,181 5,151 5,647 6,193Inventory 1,371 2,065 2,279 2,389 2,872 3,051 3,507 4,045Accounts receivable 186 106 191 339 293 442 508 587Other current assets 1,512 834 1,775 770 1,205 1,079 1,044 1,010Total current assets 5,089 5,321 6,283 6,877 5,551 9,723 10,706 11,835Fixed assets 1,026 723 964 1,014 4,121 3,762 3,731 3,683Goodwill & intangibles 0 0 0 0 36 0 0 0Other non-current assets 232 328 267 283 387 164 239 239Total assets 6,347 6,372 7,514 8,174 10,095 13,649 14,676 15,757Short-term debt 47 225 364 17 0 1,300 1,200 1,100Accounts payable 1,054 1,005 1,199 1,278 1,448 3,100 3,664 4,254Other current liabilities 1,130 1,294 1,436 1,416 1,562 1,312 1,312 1,312Total current liabilities 2,231 2,525 2,999 2,712 3,010 5,712 6,176 6,666Long-term debt 463 0 0 644 1,640 0 0 0Other non-current liabilities 42 53 98 141 116 101 101 101Total liabilities 2,736 2,578 3,097 3,497 4,765 5,813 6,277 6,767Share capital 1,534 1,587 1,627 1,655 1,691 1,906 1,906 1,906Reserves/R.E./others 2,072 2,202 2,783 3,010 3,609 5,898 6,461 7,049Shareholders' equity 3,606 3,789 4,410 4,665 5,299 7,804 8,367 8,955Minority interests 5 5 7 12 31 32 33 35Total equity & liabilities 6,347 6,372 7,514 8,174 10,095 13,649 14,676 15,757EV 29,369 28,788 29,206 28,170 31,364 27,055 26,461 25,816Net debt/(cash) (1,510) (2,091) (1,674) (2,717) 459 (3,851) (4,447) (5,093)BVPS (TWD) 23.512 23.873 27.101 28.193 31.344 40.948 43.900 46.987

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 1.0 6.2 7.0 4.9 12.9 15.6 15.0 15.3EBITDA (YoY) 67.5 (1.8) 5.4 2.7 9.0 30.9 16.2 15.7Operating profit (YoY) 94.3 (0.9) 8.3 2.4 9.5 31.7 17.3 16.8Net profit (YoY) 203.9 4.2 21.0 5.8 14.2 24.4 21.7 17.0Core EPS (fully-diluted) (YoY) 197.1 0.0 20.4 4.0 11.1 19.6 13.6 17.0Gross-profit margin 21.7 20.1 20.9 19.9 19.9 21.6 21.7 21.7EBITDA margin 11.8 11.0 10.8 10.6 10.2 11.6 11.7 11.7Operating-profit margin 10.1 9.5 9.6 9.4 9.1 10.3 10.5 10.7Net profit margin 6.6 6.5 7.3 7.4 7.5 8.1 8.5 8.6ROAE 26.9 24.8 27.1 25.9 26.9 25.5 25.1 27.4ROAA 16.0 14.4 16.0 15.0 14.7 14.1 14.3 15.6ROCE 38.1 32.9 32.9 29.3 26.4 26.6 26.8 29.8ROIC 46.9 54.9 51.6 51.6 34.2 35.5 51.3 60.6Net debt to equity n.a. n.a. n.a. n.a. 8.7 n.a. n.a. n.a.Effective tax rate 27.5 21.9 20.9 18.2 18.5 18.9 18.9 18.9Accounts receivable (days) 8.4 3.8 3.6 6.1 6.4 6.5 7.3 7.3Current ratio (x) 2.3 2.1 2.1 2.5 1.8 1.7 1.7 1.8Net interest cover (x) 54.8 56.7 63.1 192.8 42.8 42.8 618.9 n.a.Net dividend payout 89.7 77.4 88.7 87.3 97.0 88.0 88.0 88.0Free cash flow yield 2.9 3.3 0.3 6.5 n.a. 10.0 6.9 7.8




■ What's new CIL is due to announce 2Q FY15 results on 8 November. We expect these to be weak due to a lower fuel supply agreement (FSA) coal ASP and lower e-auction volumes, though strength in e-auction ASPs should limit overall profitability weakness. Weak results, and the government’s pending sale of its partial stake, could lead to some near-term share-price pressure, but we remain positive on CIL’s mid- to long-term share price performance, which we expect to be driven by its production volume ramp-up. (See New volume target: 1bn tonnes by 2019, of 3 November.) ■ What's the impact 2Q FY15 preview. With dispatches for 2Q FY15 already reported at 110.3m tonnes (up 1.2% YoY), we

forecast overall revenue to be flat YoY at INR153.4bn, due to an ASP decline for FSA coal to INR1,290/t (down 2.3% QoQ) and lower e-auction volumes (down 5-7m tonnes from 12.9m tonnes in 2Q FY14). However, we forecast strong e-auction ASPs of INR2,550/t (up 14-15% QoQ and YoY), which should limit the weakness in the blended ASP to INR1,390/t (down 1.7% YoY). Wage costs will likely have risen due to a higher bonus wage rise, though we forecast a limited 5% YoY increase due to an actuarial write-back. Hence, we forecast EBITDA of INR189.4/t, down 26% YoY, and PAT of INR25bn, down 18% YoY.

CIL: 2Q FY15 results preview 2QFY15E % ch YoY % ch QoQ

Production (m tonnes) 102.4 5.0 (5.4)Off-take (m tonnes) 110.3 1.2 (7.7)Rakes availability (unit) 178.4 (2.3) (4.5)ASPs (INR per tonne) 1,390.1 (1.7) (6.6)Net sales (INRbn) 153.4 (0.5) (13.8)EBITDA (INR per tonne) 189.4 (26.1) (47.1)Net profit (INRbn) 25.0 (18.1) (38.0)Source: Daiwa forecasts

October and YTD FY15 volume update. Production was 40.2m tonnes (up 14.8% YoY), dispatches were 39.1m tonnes (up 10% YoY) and rake availability was 192/day (up 13.3% YoY). CIL’s strong volume performance in October was aided by a low comparison base as October last year was affected by the cyclone and heavy rainfall. Further, CIL’s volume performance for 7M FY13 (April-October 2014) was reasonably strong, with production of 251m tonnes (up 6.6% YoY) and dispatches of 269.1m tonnes (up 3.6% YoY). Based on CIL’s volume performance YTD, we see limited risk to our FY15 forecasts for 6.6% YoY growth in production and 5% YoY growth in dispatches, as our forecasts imply that it would need to raise production and dispatches by 6-7% YoY, in 5M FY15.

■ What we recommend We reaffirm our Buy (1) rating and maintain our DCF-based 6-month target price of INR420, as CIL looks well placed to gain from the steps being taken by the government to increase coal volumes significantly, which should aid a recovery in its earnings growth. The pending stake sale by the government remains a near-term risk to our call. ■ How we differ We are more positive vs. consensus on volumes as well as CIL’s ability to manage costs and raise prices.

5 November 2014

2Q preview, October volume update

• 2Q FY15 results likely weak

due to a lower FSA coal ASP and lower e-auction volumes

• Possible near-term share price pressure if results are weak and given government’s pending stake sale

• Mid- to long-term progress on volume ramp-up should drive share-price appreciation; reaffirm Buy



Energy / India

Coal IndiaCOAL IN

Buy (unchanged)


1

2

3

4

5Target (INR): 420.00 420.00 Upside: 20.4% 5 Nov price (INR): 348.95

Saurabh Mehta(91) 22 6622 1009

[email protected]

Ajay Devnani(91) 22 6622 [email protected]

Forecast revisions (%)Year to 31 Mar 15E 16E 17ERevenue change - - -Net profit change - - -Core EPS (FD) change - - -

80

90

100

110

120

240

286

333

379

425



Coal India (LHS)Relative to SENSEX Index (RHS)

(INR) (%)

12-month range 243.60-420.25Market cap (USDbn) 35.893m avg daily turnover (USDm) 17.92Shares outstanding (m) 6,316Major shareholder President of India (90.0%)

Financial summary (INR)Year to 31 Mar 15E 16E 17ERevenue (m) 735,855 812,132 899,443Operating profit (m) 168,187 205,028 214,119Net profit (m) 168,376 195,118 210,708Core EPS (fully-diluted) 26.657 30.891 33.359EPS change (%) 11.5 15.9 8.0Daiwa vs Cons. EPS (%) 1.1 3.6 3.1PER (x) 13.1 11.3 10.5Dividend yield (%) 3.8 4.4 4.8DPS 13.329 15.445 16.680PBR (x) 4.4 3.8 3.3EV/EBITDA (x) 8.5 6.5 5.7ROE (%) 36.6 36.3 33.8


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Coal_India_141103.pdf#page=1

Energy / India COAL IN

5 November 2014

- 2 -

CIL: monthly production volumes CIL: monthly dispatch volumes


CIL: production growth at subsidiaries, YoY (April-Oct 2014) CIL: dispatch growth at subsidiaries, YoY (April-Oct 2014)


CIL: % of April-Oct 2014 production targets achieved CIL: % of April-Oct 2014 dispatch targets achieved


47.4 42.6

53.4

37.5 36.3 34.6 33.0

34.5 34.9

40.2

2.1

(0.2)

(3.6)

5.0 5.0 6.1

11.5

9.0

5.2

14.8

(5)(3)(1)13579111315

0

10

20

30

40

50

60

Jan-

14

Feb-

14

Mar-1

4

Apr-1

4

May-1

4

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct-1

4

Production (LHS) YoY growth (RHS)

(%)(m tonnes)44.5

40.5 44.8

40.6 40.7 38.3 38.0 37.3 35.1 39.1

0.6 1.8

(3.9)

1.7

6.4

3.2

9.5

6.3

(1.9)

10.1

(4)(2)024681012

0

10

20

30

40

50

Jan-

14

Feb-

14

Mar-1

4

Apr-1

4

May-

14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct-1

4

Dispatch (LHS) YoY growth (RHS)

(%)(m tonnes)

6.6

5.8

6.2

9.6

2.8

9.8

(1.7)

16.7

(5) 0 5 10 15 20

CIL

ECL

BCCL

CCL

NCL

WCL

SECL

MCL

(%) 3.6

5.5

0.1

1.8

4.4

7.8

(0.3)

6.8

(2) 0 2 4 6 8 10

CIL

ECL

BCCL

CCL

NCL

WCL

SECL

MCL

(%)

101

104

103

89

94

93

101

80 85 90 95 100 105 110

ECL

BCCL

CCL

NCL

WCL

SECL

MCL

(%)(%)102

98

92

94

91

92

94

85 90 95 100 105

ECL

BCCL

CCL

NCL

WCL

SECL

MCL

(%)



5 November 2014

- 3 -

Key assumptions

Profit and loss (INRm)

Cash flow (INRm)


Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ECoal Production (m tonnes) 431.3 431.3 435.8 452.2 462.4 492.9 523.4 553.8Coal Dispatch (m tonnes) 415.1 424.5 433.1 466.2 471.5 495.1 524.8 554.7Coal avg. blended price per tonnes (INR) 1,074.7 1,183.3 1,443.8 1,462.7 1,459.2 1,486.4 1,547.6 1,621.6

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ECoal Revenues 446,153 502,330 625,266 681,930 687,978 735,855 812,132 899,443Other Revenue 0 0 0 0 0 0 0 0Other Revenue 0 0 0 0 0 0 0 0Total Revenue 446,153 502,330 625,266 681,930 687,978 735,855 812,132 899,443Other income 27,362 12,150 3,810 (4,939) (927) 0 0 0COGS (298,739) (312,360) (394,507) (423,407) (448,864) (472,299) (504,272) (575,206)SG&A (19,336) (22,316) (21,966) (26,332) (26,919) (28,265) (29,678) (30,569)Other op.expenses (66,297) (62,813) (74,671) (65,781) (71,854) (67,103) (73,153) (79,549)Operating profit 89,142 116,992 137,932 161,470 139,414 168,187 205,028 214,119Net-interest inc./(exp.) 25,575 29,074 50,116 59,788 52,704 47,043 51,877 62,136Assoc/forex/extraord./others 24,928 18,604 25,789 27,434 36,554 36,077 34,316 38,234Pre-tax profit 139,646 164,670 213,838 248,693 228,672 251,307 291,221 314,489Tax (43,425) (55,959) (64,845) (76,227) (77,679) (82,931) (96,103) (103,781)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 96,221 108,711 148,994 172,466 150,993 168,376 195,118 210,708Net profit (adjusted) 96,221 108,711 148,994 172,466 150,993 168,376 195,118 210,708EPS (reported)(INR) 15.234 17.211 23.589 27.305 23.905 26.657 30.891 33.359EPS (adjusted)(INR) 15.234 17.211 23.589 27.305 23.905 26.657 30.891 33.359EPS (adjusted fully-diluted)(INR) 15.234 17.211 23.589 27.305 23.905 26.657 30.891 33.359DPS (INR) 3.499 3.900 10.000 14.000 29.000 13.329 15.445 16.680EBIT 89,142 116,992 137,932 161,470 139,414 168,187 205,028 214,119EBITDA 102,281 134,646 157,625 179,600 159,378 187,409 225,425 235,691

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017EProfit before tax 139,646 164,670 213,838 248,693 228,672 251,307 291,221 314,489Depreciation and amortisation 6,750 17,654 19,692 18,387 19,959 19,222 20,397 21,572Tax paid (39,990) (56,228) (67,044) (86,517) (88,264) (82,931) (96,103) (103,781)Change in working capital (1,310) (43,284) 35,647 (68,390) 2,442 36,878 57,370 44,611Other operational CF items (24,719) (24,803) (52,260) (81,965) (70,390) (46,935) (51,769) (62,028)Cash flow from operations 80,377 58,008 149,874 30,208 92,419 177,540 221,115 214,862Capex (19,804) (25,682) (34,094) (24,540) (41,164) (40,000) (40,000) (35,000)Net (acquisitions)/disposals 0 0 0 0 0 0 0 0Other investing CF items 0 0 0 0 0 0 0 0Cash flow from investing (19,804) (25,682) (34,094) (24,540) (41,164) (40,000) (40,000) (35,000)Change in debt (616) (5,035) (2,474) (2,287) (12,634) 0 0 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (22,100) (25,832) (74,291) (79,070) (242,430) (96,816) (112,193) (121,157)Other financing CF items 28,031 30,346 53,435 62,938 54,715 47,043 51,877 62,136Cash flow from financing 5,315 (522) (23,330) (18,418) (200,349) (49,773) (60,316) (59,021)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 65,888 31,804 92,449 (12,750) (149,093) 87,767 120,799 120,841Free cash flow 60,573 32,326 115,780 5,669 51,256 137,540 181,115 179,862

Financial summary



5 November 2014

- 4 -

Balance sheet (INRm)

Key ratios (%)


Company profile

Coal India is the largest coal-mining company in the world in terms of raw coal production (463m tonnes for FY14), extractable coal reserves (21.75bn tonnes), and resources base (64.7bn tonnes).

As at 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & short-term investment 390,782 458,064 582,028 622,360 523,895 611,586 732,277 853,010Inventory 44,018 55,856 60,713 56,178 55,681 59,556 65,729 72,795Accounts receivable 21,686 34,187 56,679 104,802 82,410 73,585 60,910 67,458Other current assets 86,778 142,164 174,855 103,501 131,969 141,153 155,784 172,532Total current assets 543,265 690,272 874,275 886,841 793,955 885,879 1,014,700 1,165,796Fixed assets 142,461 149,005 163,437 169,617 191,002 211,780 231,384 244,812Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 22,425 19,369 31,755 46,500 57,466 57,466 57,466 57,466Total assets 708,151 858,646 1,069,466 1,102,958 1,042,424 1,155,126 1,303,550 1,468,074Short-term debt 16,199 15,210 15,274 13,053 1,778 1,778 1,778 1,778Accounts payable 0 0 0 0 0 0 0 0Other current liabilities 415,557 493,429 629,356 581,490 590,764 631,876 697,375 772,349Total current liabilities 431,757 508,638 644,630 594,543 592,542 633,654 699,153 774,127Long-term debt 3,432 326 0 0 0 0 0 0Other non-current liabilities 14,774 16,214 19,770 23,059 25,201 25,201 25,201 25,201Total liabilities 449,963 525,178 664,400 617,602 617,743 658,855 724,354 799,327Share capital 63,164 63,164 63,164 63,164 63,164 63,164 63,164 63,164Reserves/R.E./others 194,789 269,978 341,367 421,556 360,881 432,472 515,397 604,948Shareholders' equity 257,952 333,142 404,530 484,720 424,045 495,635 578,560 668,111Minority interests 236 326 536 636 636 636 636 636Total equity & liabilities 708,151 858,646 1,069,466 1,102,958 1,042,424 1,155,126 1,303,550 1,468,074EV 1,833,181 1,761,893 1,637,877 1,595,424 1,682,614 1,594,924 1,474,233 1,353,500Net debt/(cash) (371,151) (442,529) (566,754) (609,307) (522,117) (609,807) (730,499) (851,232)BVPS (INR) 40.839 52.743 64.045 76.740 67.134 78.468 91.597 105.775

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ESales (YoY) 15.0 12.6 24.5 9.1 0.9 7.0 10.4 10.8EBITDA (YoY) 324.5 31.6 17.1 13.9 (11.3) 17.6 20.3 4.6Operating profit (YoY) 1,094.0 31.2 17.9 17.1 (13.7) 20.6 21.9 4.4Net profit (YoY) 363.2 13.0 37.1 15.8 (12.5) 11.5 15.9 8.0Core EPS (fully-diluted) (YoY) 363.2 13.0 37.1 15.8 (12.5) 11.5 15.9 8.0Gross-profit margin 33.0 37.8 36.9 37.9 34.8 35.8 37.9 36.0EBITDA margin 22.9 26.8 25.2 26.3 23.2 25.5 27.8 26.2Operating-profit margin 20.0 23.3 22.1 23.7 20.3 22.9 25.2 23.8Net profit margin 21.6 21.6 23.8 25.3 21.9 22.9 24.0 23.4ROAE 43.0 36.8 40.4 38.8 33.2 36.6 36.3 33.8ROAA 14.5 13.9 15.5 15.9 14.1 15.3 15.9 15.2ROCE 36.4 37.3 35.9 35.2 30.1 36.4 38.0 34.2ROIC (61.9) (69.6) (71.0) (78.4) (83.2) (106.8) (103.7) (86.0)Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Effective tax rate 31.1 34.0 30.3 30.7 34.0 33.0 33.0 33.0Accounts receivable (days) 16.4 20.3 26.5 43.2 49.7 38.7 30.2 26.0Current ratio (x) 1.3 1.4 1.4 1.5 1.3 1.4 1.5 1.5Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 23.0 22.7 42.4 51.3 121.3 50.0 50.0 50.0Free cash flow yield 2.7 1.5 5.3 0.3 2.3 6.2 8.2 8.2



5 November 2014

Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd)

Page 1 of 6

Room for improvement PGas’ 3Q14 results were within expectations. Nonetheless, we believe there is scope for improvement in operations to stimulate sequential revenue growth. Valuations does not appear cheap to us. Therefore, we maintain REDUCE with an unchanged TP of RM20.20.

Within expectations PETRONAS Gas’ (PGas) 9M14 results were within our and consensus expectations as core net profit of RM1.26bn (+9.8% yoy) accounted for 73% of both our and consensus full-year estimates respectively.

Revised agreements help lift earnings PGas’ 3Q14 revenue increased by 9.8% to RM1.12bn, partly due to the Gas Transportation Agreements (GTA) and Gas Processing Agreement (GPA), which resulted in a revision to PGas’ remuneration terms that took effect on 1 Apr 2014. As a result, gas processing and gas transportation revenue posted a 6.1% and 8.6% yoy growth respectively. Utilities revenue saw the biggest jump in revenue (+31.8% yoy) partly due to the average electricity tariff hike of 14.9% on 1 Jan. Coupled with better operating margins and lower finance cost (-9.9% yoy), 3Q14 PBT jumped 16.6% yoy. However, net profit grew just 2.2% yoy due to a higher effective tax rate.

Room for improvement While PGas’ results were within expectations, we think there is scope for improvement in operations. For the second consecutive quarter, PGas is still experiencing lower plant liquid performance compared to target, and this is reflected in the relatively flat gas processing revenue growth. A higher efficiency may help PGas to record positive earnings surprises going forward. Recall under the new GPA, future revenue is dependent on efficiency in plant performance benchmarked against agreed targets.

Reaffirm REDUCE with an unchanged PT of RM20.20 We maintain our REDUCE rating on PGas with an unchanged RNAV-based 12-month TP of RM20.20. Our earnings forecasts are unchanged. Currently trading at 23x FY15E PER, we believe the growth prospects of PGas are largely priced in at this juncture. For exposure to the utilities sector, we continue to like Tenaga (TNB MK, BUY, RM13.64) for cheaper valuations and possible re-rating catalysts from a potential tariff hike. Key risk includes addition of LNG projects or power plant projects.

Earnings & Valuation Summary FYE 31 Dec 2012 2013 2014E 2015E 2016E Revenue (RMm) 3,576.8 3,892.1 4,768.6 5,190.8 5,287.4 EBITDA (RMm) 2,443.4 2,618.2 3,089.6 3,299.5 3,346.7 Pretax profit (RMm) 1,851.3 1,896.4 2,325.3 2,533.8 2,630.2 Net profit (RMm) 1,405.0 2,078.9 1,723.5 1,881.4 1,954.4 EPS (sen) 71.0 105.1 87.1 95.1 98.8 PER (x) 30.7 20.7 25.0 22.9 22.1 Core net profit (RMm) 1,345.7 1,477.9 1,723.5 1,881.4 1,954.4 Core EPS (sen) 68.0 74.7 87.1 95.1 98.8 Core EPS growth (%) (12.9) 9.8 16.6 9.2 3.9 Core PER (x) 32.1 29.2 25.0 22.9 22.1 Net DPS (sen) 50.0 65.0 70.0 70.0 70.0 Dividend Yield (%) 2.3 3.0 3.2 3.2 3.2 EV/EBITDA (x) 17.4 16.6 14.2 13.1 12.6 Chg in EPS (%) - - - Affin/Consensus (x) 1.0 1.0 1.0 Source: Company, Affin Hwang estimates

Results Note

Petronas Gas PTG MK Sector: Utilities RM21.80 @ 4 Nov 2014

REDUCE (maintain) Downside 7% Price Target: RM20.20 Previous Target: RM20.20

Price Performance

1M 3M 12MAbsolute -4.6% -2.7% -10.3%Rel to KLCI -5.0% -1.2% -12.2%

Stock Data

Issued shares (m) 1,978.7Mkt cap (RMm)/(US$m) 43,136.4/12,918.6Avg daily vol - 6mth (m) 1.252-wk range (RM) 20.92-24.96Est free float 21%BV per share (RM) 5.22P/BV (x) 4.18Net cash/ (debt) (RMm) 69ROE (2014F) 17.7%Derivatives NilShariah Compliant Yes

Key Shareholders

Khazanah Nasional 60.6%EPF 12.1%KWAP 5.4%Source: Affin Hwang, Bloomberg

Kevin Low (603) 2145 2235

[email protected]


5 November 2014


Page 1 of 4

Flames start to flicker Last Saturday, the government raised the tobacco excise duty by 12%. Though the off-budget excise hike was expected, we are quite surprised by the quantum of the hike. We maintain our REDUCE on BAT given slowing industry volumes and limited growth prospects.

Excise hike not a surprise British American Tobacco (BAT) announced that it has raise its cigarette selling prices by RM1.50 per pack effective 5 Nov 2014. This is subsequent to the government’s off-budget initiative to increase the excise duty on tobacco by 12% (or +3sen/stick) to 28sen/stick. Although we had previously expected an excise-duty hike, the quantum of the hike was higher than our expectations as we had only factored in a moderate +1.5sen/stick hike in our forecasts.

Price per pack of cigarettes increases by RM1.50 BAT’s Dunhill and Kent brands will now retail at RM13.50 (from RM12) per pack while its value-for-money (VFM) brands such as Pall Mall and Peter Stuvyesant will now sell at RM12 (from RM10.50). Given the pricier cigarettes, we believe that the proliferation of illegal cigarettes will heighten as consumers turn to cheaper alternatives. Note that the illicit cigarette market grew to 39% (from 35%) of the total industry volume (TIV) in Oct-Dec after the price hike back in September 2013.

Adverse impact on BAT That said, given: i) more stringent efforts by the government to curb smoking and; ii) higher ASPs which would further aggravate the illegal market, we are lowering our 2014-16E TIV to a contraction of 4-10% (from a softer contraction of 2-8%). We cut our volume assumption for BAT by 2-9% but input in the higher ASPs, resulting in a 1-3% increase to our 2014-16 EPS forecasts.

Maintain REDUCE with higher TP of RM63.40 Overall, we maintain our REDUCE rating on BAT with a slightly higher DDM-derived 12-month TP of RM63.40 (was RM62.40). Despite its decent dividend yields of over 4% over the next three years, we see the risk reward as unfavourable, given that the group is operating in a fairly mature sector with no immediate re-rating catalysts in the medium term. Key risks to our view include: i) stronger-than-expected sales volume growth and ii) lower-than-expected operating expenses.

Earnings & Valuation Summary FYE Dec 2012 2013 2014E 2015E 2016E Revenue (RMm) 4,364.8 4,517.2 4,608.4 4,511.7 4,355.2 EBITDA (RMm) 1,124.8 1,182.4 1,315.0 1,276.0 1,233.2 Pretax profit (RMm) 1,054.4 1,105.4 1,235.1 1,201.6 1,163.5 Net profit (RMm) 797.7 823.4 926.3 902.1 873.6 EPS (sen) 279.4 288.4 324.4 315.9 306.0 PER (x) 24.3 23.6 21.0 21.5 22.2 Core net profit (RMm) 797.7 823.4 926.3 902.1 873.6 Core EPS (sen) 279.4 288.4 324.4 315.9 306.0 Core EPS growth (%) 10.9 3.2 12.5 (2.6) (3.2) Core PER (x) 24.3 23.6 21.0 21.5 22.2 Net DPS (sen) 272.0 282.0 317.0 307.0 297.0 Dividend Yield (%) 4.0 4.1 4.7 4.5 4.4 EV/EBITDA (x) 17.6 16.8 15.0 15.4 15.9 Chg in EPS (%) 1.7 2.8 0.6 Affin/Consensus (x) 1.0 1.0 1.0 Source: Company, Affin Hwang estimates, Bloomberg

Company Update

British American Tobacco ROTH MK Sector: Consumer RM67.86 @ 4 November 2014

REDUCE (maintain) Downside -6.6% Price Target: RM63.40 Previous Target: RM62.40

Price Performance

1M 3M 12MAbsolute -0.4% -3.0% +8.2%Rel to KLCI -0.7% -1.4% +5.8%

Stock Data

Issued shares (m) 285.5Mkt cap (RMm)/(US$m) 19,376.1/5,797.6Avg daily vol - 6mth (m) 0.252-wk range (RM) 58.00-73.98Est free float 33.1%BV per share (RM) 1.96P/BV (x) 34.55Net cash/ (debt) (RMm) (3Q14) (356.4)ROE (2014F) 178.3%Derivatives NilShariah Compliant No

Key Shareholders

British American Tobacco 50.0%Aberdeen 8.3%EPF 7.8%Source: Affin Hwang, Bloomberg

Kevin Low (603) 2143 2235

[email protected]


5 November 2014


Page 1 of 6

Log production down due to bad weather

Jaya Tiasa’s 3Q14 log production declined by 5.4% yoy due to bad weather condition that has affected harvesting process. This has helped to support firm ASPs also due to the tight global supply of logs. We maintain our REDUCE rating on Jaya Tiasa with a SOTP-derived target price of RM1.80. Stock looks overvalued and has already priced in the expected sharp earnings growth for the palm oil division.

Jaya Tiasa’s 3Q14 log production declined by 5.4% yoy Jaya Tiasa’s 3Q14 log production fell by 5.4% yoy to 250,268m3. Similarly, the average monthly log production YTD is lower at 81,370m3 as compared to 86,310m3 in 9M13 (2013 monthly average production: 88,539m3). The drop in log production was partly attributed to the bad weather condition that has slowed down the harvesting process.

Timber ASPs have remained firm… Due to the tight global supply of logs after Myanmar’s ban, the ASPs for Jaya Tiasa’s logs and plywood in 2Q14 increased by 10.7% and 3.1% respectively to RM696/m3 and RM1,876/m3. This has helped to mitigate a larger drop in Jaya Tiasa’s timber division revenue contribution due to lower logs and plywood sales volume.

… and this should support timber division’s earnings Based on current log production and ASPs, we estimate that the timber division will generate revenue of about RM165m in 1QFY15 (1QFY14 revenue: RM167.6m). We opine the timber division’s revenue could be affected by the lower log production and a slowdown in demand for plywood but supported by the firm timber ASPs.

Maintain REDUCE and target price of RM1.80 We maintain our REDUCE rating on Jaya Tiasa with a SOTP-derived target price of RM1.80 (implied 14x CY15E), as we think the stock looks overvalued and has already priced in the expected sharp earnings growth for the palm oil division. We value Jaya Tiasa based on 12x 2015E EPS for its timber division, 14x for plantation and 1x BV for forest plantation. Earnings & Valuation Summary FYE 30 June 2013 2014 2015E 2016E 2017E Revenue (RMm) 1,054.1 1,034.6 1,270.6 1,452.9 1,512.8 EBITDA (RMm) 141.9 216.2 286.2 337.7 357.1 Pretax profit (RMm) 32.0 87.1 152.2 209.5 234.3 Net profit (RMm) 23.2 57.1 106.7 147.0 164.3 EPS (sen) 2.4 5.9 11.0 15.2 17.0 PER (x) 87.1 35.4 19.0 13.8 12.3 Core net profit (RMm) 20.5 76.2 106.7 147.0 164.3 Core EPS (sen) 2.4 5.9 11.0 15.2 17.0 Core EPS growth (%) (88.1) 146.0 86.8 37.7 11.8 Core PER (x) 87.1 35.4 19.0 13.8 12.3 Net DPS (sen) 1.0 1.5 2.2 3.0 3.4 Dividend Yield (%) 0.5 0.7 1.1 1.4 1.6 EV/EBITDA (x) 19.8 13.1 10.2 8.5 7.8 Chg in EPS (%) - - - Affin/Consensus (x) 1.0 1.0 0.9 Source: Company, Affin Hwang estimates

Company Update

Jaya Tiasa JT MK Sector: Timber RM2.09 @ 5 Nov 2014

REDUCE (maintain) Downside 13.9% Price Target: RM1.80 Previous Target: RM1.80

Price Performance

1M 3M 12MAbsolute +0.5% -14.3% -8.3%Rel to KLCI +0.6% -12.6% -9.9%

Stock Data

Issued shares (m) 968.0Mkt cap (RMm)/(US$m) 2,023.1/604.0Avg daily vol - 6mth (m) 0.852-wk range (RM) 1.96-2.78Est free float 45.1%BV per share (RM) 1.8P/BV (x) 1.2Net cash/(debt)(RMm)(4QFY14) (800.3)ROE (2015E) 5.9%Derivatives NoShariah Compliant Yes

Key Shareholders

Tiong Toh Siong 21.7%Genine Chain 9.4%Asanas 9.0%Source: Affin Hwang, Bloomberg

Nadia Aquidah (603) 2143 4526

[email protected]


Asiamoney’s

2013

Best Domestic

Equity House

Corporate flash

5 November 2014

Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor

in making their investment decision.

Please see the important disclaimer information on the back of this report

*Based on consensus’ recent changes ↑ (up), ↓ (down), ↔ (unchanged)

2014

Finance Asia

Best

Equity House

Asiamoney's

2013

Best Domestic

Equity House

Modern Internasional Sector: Consumer Discretionary (Neutral)

NOT RATED

Wendy Chandra E-mail: [email protected] Phone: +6221 250 5081 ext. 3606

PX: IDR680 JCI: 5,067

Company visit note: On the way to flourish

Successful transformation: Modern Internasional (MDRN) started as

sole distributor for all FUJIFILM Japan products, and was established in

1971. Currently, MDRN has 4 business divisions, notably modern retailing,

industrial imaging, photography and telecommunications, with the first 3

as main revenue contributors (exhibit 5). Over the past 4 years, MDRN

has successfully developed its modern-retailing business division, which

reached 1H14 revenue of IDR467bn (66% of total revenue), up 17% y-y.

Going forward, MDRN plans to focus on modern retailing, under the 7-

Eleven brand, and industrial imaging, which sells medical-imaging

equipment to several hospitals.

Solid store expansion and stable SSSG: MDRN started 7-Eleven, its

modern retailing business, back in 2009 with only one store, and has

since grown its footprint to 175 stores through end of October 2014. For

the next 5 years, MDRN plans to open around 50 stores annually, focusing

on the Greater Jakarta area. Despite tight competition and solid store

expansion, MDRN’s modern retailing business still booked resilient 2Q14

same-store-sales growth (SSSG) of 9% y-y (exhibit 6), implying robust

demand. MDRN plans to focus more on store-operational improvement

rather than its competitors which have focused on aggressive expansion.

Fixing bottleneck on food production = CDC expansion: MDRN

opened only 33 stores in 2013 due to limited distribution support at its

Combine Distribution Center (CDC), which has the capacity to support

150 stores. Following completion of the 2nd phase at its CDC expansion by

end 2014, MDRN’s distribution-support capacity would reach 350 stores.

MDRN targets to open around 50 stores per annum. Over the long term,

management plans to further increase its store count on the back of the

completion of the 3rd phase of its CDC expansion in 2015 (750-store

support capacity). Also, MDRN could convert its 1,200 Fuji stores into 7-

Eleven outlets, according to management.

Outlook & valuation: Promising growth

Supported by the additional CDC capacity expansion to support growth in its

store count, management is ready to start its aggressive expansion in 2015.

Despite more intense competition in the modern-retailing business,

particularly from convenience stores, management believes that its 7-Eleven

stores carry a differentiated concept (ie their own brand of fresh food and

beverages), which leads to niche market segmentation. Furthermore, MDRN

is not bound by the Ministry of Trade’s regulation regarding the maximum

number of stores as MDRN is registered as a restaurant. In 1H14, MDRN

booked improved EBIT margin of 10% (1H13: 8.5%) due to increased

contribution from its modern-retailing segment. However, MDRN’s 1H14 net

profit was down 12% y-y to IDR31bn due to higher interest expenses from

additional loans required to finance expansion. On valuation, based on the

Bloomberg consensus, shares of MDRN currently trade at a 2015F PE of

31.4x, slightly on par to Indonesia retail companies (Bahana forecasts).

Exhibit 1. Company information

Market cap (IDRb/USDm) : 3,111/255

3M avg.daily t.o.(IDRb/USDm) : 0.3/0.0

Bloomberg code : MDRN IJ

Exhibit 2. Shareholders information

Asialink Electronics (%) : 25.6

Inti Putramodern (%) : 14.3

Fidelity International (%) : 6.8

Free float (%) : 53.3 Source: Bloomberg

Exhibit 3. Key historical and valuation metrics

2011 2012 2013 1H14* Rev. (IDRb) 897 1,009 1,273 703

EBIT (IDRb) 69 89 99 71

Net pro. (IDRb) 57 56 49 31

EPS (IDR) 18 13 12 8

EPS growth (%) (73.0) (24.4) (11.5) (11.8)

EV/EBITDA (x) 23.6 19.5 18.0 37.3

PER (x) 38.4 50.8 57.4 n.a.

FCFPS (IDR) (0.4) (0.2) (0.5) (0.2)n FCF yield (%) (0.1) (0.0) (0.1) n.a.

BVPS (IDR) 132 237 248 256

PBV (x) 1.2 5.1 2.8 n.a.

DPS (IDR) 2 2 2 -

Yield (%) 0.3 0.2 0.3 -

ROAA (%) 6 4 3 n.a.

ROAE (%) 14 8 5 n.a.

EBIT mgn. (%) 8 9 8 10

Net gearing (%) 85 11 50 64 Source: Company, Bahana estimates

Note: Pricing as of close on 5 November 2014

Exhibit 4. Relative share price performance

(30.2)

2.2 3.9 3.3

(9.3)

(32.6) (35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

ytd 1M 3M 6M 9M 12M

(%) (%)

MDRN IJ relative to JCI

Source: Bloomberg


Important disclosures, including any required research certifications, are provided on the last two pages of this report.

Cut rating from Buy to Outperform; Pola struggles Katsuro Hirozumi (81) 3 5555-7155 [email protected]

• 1-3Q op profit up 5.7% to Y10.37

bil; missed our Y10.78 bil forecast • Orbis faring well, but Pola

struggling; overseas ops remain weak, particularly H2O Plus

• Trimmed our forecasts but consol. earnings still solid

What’s new

Pola Orbis Holdings announced 1-3Q FY14 (year ending Dec 2014) results on 4 November.

What’s the impact Our impression was somewhat negative and we feel it necessary to lower our expectations for a significant overshoot vs. the firm’s unchanged FY14 operating profit target of Y17.65 billion (up 10.2% y/y). Still, we continue to give the company high marks for its stance toward total shareholder payouts as well as solid group earnings backed by a diverse portfolio of brands. As such, excessive pessimism is unwarranted, in our view.

Consolidated 1-3Q sales came to Y142.0 billion (up 3.4% y/y) and operating profit to Y10.37 billion (up 5.7%). Earnings topped the early October Nikkei projections of just over Y140.0 billion in sales and slightly more than Y10.0 billion in operating profit. Operating profit was apparently in line with company expectations, but fell short of our pre-release estimate of Y10.78 billion. The gross margin improved 0.4 points

to 80.4% on benefits from domestic plant consolidation and a larger weighting of skin care products in total sales. However, we are concerned about a slowdown in sales of the core Pola brand. Company officials explained that Pola sales missed the initial target by 1.5% (1-3Q sales down 0.4%), commenting that purchasing frequency is declining, while customers are also starting to hold back from purchases of big-ticket items. Indeed, Pola sales apparently fell y/y in October as well. We think sales could catch up, given that (1) customer numbers are increasing, up 4% in 1-3Q, (2) sales grew roughly 5% at Pola the Beauty stores, an earnings driver, and (3) because the firm sells directly to consumers, it can respond to market changes relatively easily. Still, we think some caution is necessary.

The Orbis brand continued to perform well, with 1-3Q operating profit up 15.0% y/y on 6.1% sales growth. The firm changed its rewards program for Orbis in late September, offering points rather than discounts at the time of purchase. The firm booked apparently booked about Y1.0 billion in costs associated with the new program in 3Q, but this was offset by higher sales. As for Jurlique, for which there are high expectations in China, same-store sales in China advanced 6% y/y in 1-3Q, improving by 3 points vs. 1H, as the firm curbed store openings there. However, Jurlique posted an operating loss of Y1.41 billion (after goodwill amortization), with the red ink expanding Y170 million y/y due to increased personnel, sales promotion, and other expenses. It was thus unable to make up for the shortfall in 1H (loss widened by Y310 mil). We think the firm’s initial target of having Jurlique break even at the operating level (after goodwill amortization) for the full fiscal year is becoming more difficult to achieve. Meanwhile, H2O Plus operations in

China are in the middle of restructuring, including reshuffling and strengthening management, and earnings for the brand remained poor. In 1-3Q, sales declined 11.9% y/y, while the operating loss widened Y610 million to Y1.19 billion (after goodwill amortization).

What we recommend We have lowered our estimates to reflect the firm’s announcement and now call for consolidated operating profit of Y17.65 billion (up 10.2% y/y; previously Y18.3 bil) in FY14 and Y20.8 billion (up 17.8%; Y21.2 bil) in FY15. At the 4 November closing

Chemicals / Japan5 November 2014

Japanese report: 5 Nov 14

Buy Outperform (▼ from 1) Neutral

Pola Orbis Holdings 4927 | TSE 1

Underperform

Target price: Y4,860 Up/downside: +7.2% Share price (4 Nov): Y4,535 Sell

Share Price Chart

1 ,4 00

2 ,3 00

3 ,2 00

4 ,1 00

5 ,0 00

11 /11 6 /12 1 /1 3 8 /13 3 /14 1 0 /1 4

(Y )

7 0

9 0

1 10

1 30

1 50R e la ti ve to T OP IX

Source: Compiled by Daiwa.

Market Data (consol) 12-month range (Y) 3,300-4,780Market cap (Y mil; 4 Nov) 250,713Shares outstanding (000; 11/14) 55,284Foreign ownership (%; 6/14) 20.3 Investment Indicators (consol)

12/13 12/14 E 12/15 EP/E (X) 34.3 28.3 22.4EV/EBITDA (X) 8.8 8.5 7.5P/B (X) 1.45 - -Dividend yield (%) 1.21 1.92 2.25ROE (%) 4.3 - - Income Summary (consol)

(Y mil) 12/13 12/14 E 12/15 ESales 191,355 198,500 206,000Op profit 16,017 17,650 20,800Rec profit 17,836 18,200 21,200Net income 7,318 8,850 11,200EPS (Y) 132.4 160.1 202.6DPS (Y) 55.00 87.00 102.00

See end of report for notes concerning indicators.


Pola Orbis Holdings (4927) 5 November 2014

- 2 -

price of Y4,535, the shares are trading at 22.4X our revised FY15 EPS estimate, just shy of the simple average multiple of just over 23X for the 12 cosmetics and toiletry sector companies under our coverage. We continue to credit the firm for (1) its sustainable growth potential, (2)

clear visibility for medium-term earnings, and (3) high awareness of the importance of enhancing total shareholder payouts and ROE. On the other hand, weaker Pola sales and clouded visibility for Chinese operations should also be taken into account. On balance, we downgraded

our investment rating from 1 (Buy) to 2 (Outperform), while setting a three-month target price of Y4,860, equivalent to 24X our FY15 EPS estimate. Of note, our target multiple incorporates a slight premium to the sector average P/E.

Chart 1: Consolidated Earnings by Segment (Y mil)

FY11 12 13 14 E 15 E 16 E 14 PE 15 PE 1-3Q 12 1-3Q 13 1-3Q 14 Sales 166,657 180,873 191,355 198,500 206,000 214,000 199,500 208,000 129,724 137,346 142,019 (y/y %) (0.8) (8.5) (5.8) (3.7) (3.8) (3.9) (4.3) (4.3) (8.2) (5.9) (3.4) Gross profit 133,196 143,927 152,700 159,200 165,620 172,480 159,600 166,820 103,274 109,810 114,122 Gross margin (%) 79.9 79.6 79.8 80.2 80.4 80.6 80.0 80.2 79.6 80.0 80.4 SG&A 120,342 130,407 136,682 141,550 144,820 148,380 141,300 145,620 95,261 100,000 103,754 SG&A ratio (%) 72.2 72.1 71.4 71.3 70.3 69.3 70.8 70.0 73.4 72.8 73.1 Operating profit 12,853 13,520 16,017 17,650 20,800 24,100 18,300 21,200 8,013 9,809 10,367 (y/y %) (4.8) (5.2) (18.5) (10.2) (17.8) (15.9) (14.3) (15.8) (-8.8) (22.4) (5.7) Operating profit margin (%) 7.7 7.5 8.4 8.9 10.1 11.3 9.2 10.2 6.2 7.1 7.3 Recurring profit 13,322 14,604 17,836 18,200 21,200 24,500 18,300 21,600 8,425 10,852 10,869 (y/y %) (8.8) (9.6) (22.1) (2.0) (16.5) (15.6) (2.6) (18.0) (-7.5) (28.8) (0.2) Recurring profit margin (%) 8.0 8.1 9.3 9.2 10.3 11.4 9.2 10.4 6.5 7.9 7.7 Pretax income 11,255 14,311 13,293 16,650 20,400 23,700 17,500 20,800 8,382 9,073 9,354 Income taxes 3,226 7,646 6,037 8,000 9,350 10,550 8,350 9,600 4,709 4,241 4,677 Effective tax rate (%) 28.7 53.4 45.4 48.0 45.8 44.5 47.7 46.2 56.2 46.7 50.0 Noncontrolling interests -10 -16 -62 -200 -150 -100 -200 -150 -14 -72 -210 Net income 8,039 6,681 7,318 8,850 11,200 13,250 9,350 11,350 3,687 4,905 4,879 (y/y %) (13.4) (-16.9) (9.5) (20.9) (26.6) (18.3) (27.8) (21.4) (-32.7) (33.0) (-0.5) Net income margin (%) 4.8 3.7 3.8 4.5 5.4 6.2 4.7 5.5 2.8 3.6 3.4 By segment Beauty care Sales 154,778 168,811 178,306 184,950 192,300 200,150 186,050 194,400 120,847 127,720 131,944 Operating profit 10,787 11,812 14,780 16,550 19,750 23,100 17,150 20,100 6,687 8,676 9,405 Op profit margin (%) 7.0 7.0 8.3 8.9 10.3 11.5 9.2 10.3 5.5 6.8 7.1 By product Cosmetics Sales 141,453 155,849 165,508 172,700 180,350 188,500 173,750 182,400 111,955 119,139 NA Operating profit 11,192 11,644 14,684 16,450 19,650 23,000 17,050 20,000 6,892 8,906 NA Op profit margin (%) 7.9 7.5 8.9 9.5 10.9 12.2 9.8 11.0 6.2 7.5 - Fashion Sales 13,324 12,962 12,798 12,250 11,950 11,650 12,300 12,000 8,892 8,581 NA Operating profit -404 168 96 100 100 100 100 100 -205 -229 NA Op profit margin (%) -3.0 1.3 0.8 0.8 0.8 0.9 0.8 0.8 -2.3 -2.7 - By brand Pola Sales 97,353 99,204 100,740 101,100 102,400 103,800 102,700 105,200 71,160 72,421 72,118 (y/y %) (0.8) (1.9) (1.5) (0.4) (1.3) (1.4) (1.9) (2.4) (2.6) (1.8) (-0.4) Operating profit 6,168 7,031 7,951 8,250 9,300 10,350 8,350 9,450 4,123 4,785 4,990 Op profit margin (%) 6.3 7.1 7.9 8.2 9.1 10.0 8.1 9.0 5.8 6.6 6.9 Orbis Sales 47,918 48,009 48,163 50,750 51,650 52,650 49,750 50,550 35,471 35,467 37,641 (y/y %) (-2.9) (0.2) (0.3) (5.4) (1.8) (1.9) (3.3) (1.6) (-0.3) (0.0) (6.1) Operating profit 6,526 7,881 8,807 10,100 11,150 12,150 9,650 10,500 5,677 6,681 7,684 Op profit margin (%) 13.6 16.4 18.3 19.9 21.6 23.1 19.4 20.8 16.0 18.8 20.4 Brands under Sales 7,654 8,587 9,104 10,400 11,550 12,800 10,400 11,550 5,956 6,395 7,393 development Operating profit -1,826 -1,202 -1,082 -700 -300 200 -750 -350 -1,040 -969 -668 Op profit margin (%) -23.9 -14.0 -11.9 -6.7 -2.6 1.6 -7.2 -3.0 -17.5 -15.2 -9.0 Overseas Sales 1,851 13,011 20,298 22,700 26,700 30,900 23,200 27,100 8,259 13,435 14,791 brands Operating profit -81 -1,897 -895 -1,100 -400 400 -100 500 -2,072 -1,820 -2,601 Op profit margin (%) -4.4 -14.6 -4.4 -4.8 -1.5 1.3 -0.4 1.8 -25.1 -13.5 -17.6 Real estate Sales 3,089 2,841 3,035 3,200 3,250 3,300 3,150 3,200 2,143 2,266 2,379 Operating profit 1,283 1,139 1,258 1,300 1,300 1,300 1,300 1,300 917 1,011 1,031 Op profit margin (%) 41.5 40.1 41.4 40.6 40.0 39.4 41.3 40.6 42.8 44.6 43.3 Other Sales 8,790 9,220 10,013 10,350 10,450 10,550 10,300 10,400 6,732 7,359 7,695 Operating profit 501 335 410 400 400 400 450 450 214 351 311 Op profit margin (%) 5.7 3.6 4.1 3.9 3.8 3.8 4.4 4.3 3.2 4.8 4.0

Eliminations/unallocated (op profit) 282 234 -431 -600 -650 -700 -600 -650 193 -229 -380 Source: Company materials; compiled by Daiwa. E: Daiwa estiamtes. PE: Previous estimates.

Pola Orbis Holdings (4927): Income Summary (Y mil; y/y %)

Year to Sales Op profit Rec profit Net income EPS (Y) CFPS (Y) DPS (Y) Consol 12/11 166,657 (1) 12,853 (5) 13,322 (9) 8,039 (13) 145.4 242.4 45.00 12/12 180,873 (9) 13,520 (5) 14,604 (10) 6,681 (-17) 120.9 237.8 50.00 12/13 191,355 (6) 16,017 (18) 17,836 (22) 7,318 (10) 132.4 253.7 55.00 12/14 E 198,500 (4) 17,650 (10) 18,200 (2) 8,850 (21) 160.1 286.7 87.00 12/15 E 206,000 (4) 20,800 (18) 21,200 (16) 11,200 (27) 202.6 329.2 102.00 12/16 E 214,000 (4) 24,100 (16) 24,500 (16) 13,250 (18) 239.7 366.3 120.00 12/14 PE 199,500 (4) 18,300 (14) 18,300 (3) 9,350 (28) 169.1 295.7 87.00 12/15 PE 208,000 (4) 21,200 (16) 21,600 (18) 11,350 (21) 205.3 331.9 103.00 12/14 CP 198,000 (3) 17,650 (10) 17,900 (0) 8,800 (20) 159.2 - 87.00 E: Daiwa estimates. PE: Previous Daiwa estimates. CP: Company projections.


Pola Orbis Holdings (4927) 5 November 2014

- 3 -

Chart 2: Consolidated Balance Sheet (Y mil) FY08 09 10 11 12 13

Current assets 115,070 116,055 107,230 111,093 88,844 102,537 Cash and cash equivalents 42,578 42,132 34,678 50,679 22,551 34,492 Accounts receivable 19,418 18,844 19,543 20,719 22,684 24,023 Marketable securities 19,315 30,984 32,169 18,412 19,801 17,608 Inventories 17,284 16,930 15,341 15,663 17,277 18,781 Other 16,475 7,165 5,499 5,620 6,531 7,633

Fixed assets 65,594 65,854 80,541 81,933 120,296 115,467 Tangible fixed assets 48,042 50,892 51,651 49,420 55,408 56,989 Intangible fixed assets 4,329 4,539 4,140 12,137 39,677 38,025 Investments and other assets 13,222 10,422 24,750 20,376 25,209 20,452

Total assets 180,664 181,909 187,771 193,027 209,140 218,005 Current liabilities 32,223 29,896 23,623 23,788 31,086 30,640

Accounts payable 3,580 3,285 3,549 2,894 3,630 4,105 Short-term borrowings 10,000 10,000 1,753 1,500 1,733 1,034 Other 18,643 16,611 18,321 19,394 25,723 25,501

Long-term liabilities 10,876 11,123 11,044 12,180 13,157 13,477 Straight bonds/convertible bonds - - - - - - Long-term borrowings - - - - - 1,000 Other 10,876 11,123 11,044 12,180 13,157 12,477

Total liabilities 43,099 41,019 34,667 35,969 44,244 44,117 Noncontrolling interests 173 103 86 82 546 Total net assets 137,564 140,890 153,104 157,057 164,896 173,887 Total liabilities and net assets 180,664 181,909 187,771 193,027 209,140 218,005 Source: Company materials; compiled by Daiwa.

Translation: New York Translation Team Style check: K.R. Accuracy check: A.C.



Stronger-than-expected profit momentum on brisk inkjet printer sales Hirokazu Mitsuda (81) 3 5555-7124 [email protected]

• 2Q profits beat our estimates • Company outlook looks

conservative even after upgrade

• Our bullish stance retained

What’s new Seiko Epson announced 2Q FY14 results and held an analyst meeting on 31 October. Sales grew 7% y/y to Y266.5 billion, business profit increased 15% to Y27.3 billion, and operating profit rose 4% to Y23.9 billion. 2Q business profit beat the company’s Y14.4 billion projection and our Y25.1 billion estimate.

What’s the impact The strong earnings were driven by growth in the firm’s mainstay inkjet printers, for which sales apparently grew by around 17% y/y. Sales volume only grew 4% as competing printer makers adopted aggressive pricing strategies. However, a higher average selling price on growth in high-capacity tank models and inkjet printers for commercial use contributed handsomely to sales growth. Sales of consumables, one of our focuses, grew 2% in volume terms and high single digits in value terms due to an increase in the

business inkjet printer MIF (machines in field). Other product lines generally fared well. Indeed, sales were up y/y for projectors, POS printers, semiconductors, and industrial sensing systems, which all contributed to higher profits. Seiko Epson also announced that it would begin offering printers with high-capacity tanks in Europe from 2H FY14. Until recently these printers had been developed mainly for emerging economies. Company officials explained that brand-name products account for only a small percentage of consumables used in Europe and that there are good opportunities there to boost profits through models with high-capacity tanks. Indeed, the firm has raised its FY14 high-capacity tank model sales target to around 4.5 million units. As part of its commercial inkjet printer business, Seiko Epson began offering from August its Smart Charge service in which commercial customers pay a flat monthly fee that covers use of printers, ink/toner refills, and maintenance. Domestic orders have been brisk and the firm now expects to have 20,000 printers under this plan in one year and 40,000 in two years. The company said it will start selling similar models even in western Europe from 2H FY14. Seiko Epson’s smart marketing strategy in which it actively introduces products in areas with room for growth reconfirms its aggressiveness, in our view. The firm also upgraded its FY14 projections and now expects sales of Y1,060 billion (Y1,040 bil previously), business profit of Y105 billion (Y92 bil), and operating profit of Y132 billion (Y120 bil).

However, the firm appears to have left its 2H profit forecasts unchanged. Considering favorable 1H operating performance, we believe the revised company projections are still overly conservative with a pullback in consumable sales projected in the absence of 1H’s sales to distribution channels ahead of schedule. Our tentative FY14 estimates for Y1,079.0 billion in sales, Y110.8 billion in business profit, and Y137.5 billion in operating profit all outshine the company’s projections.

Electric appliances / Japan5 November 2014

Japanese report: 4 Nov 14

Buy Outperform (unchanged) Neutral

Seiko Epson 6724 | TSE 1

Underperform

Target price: Y6,130 Up/downside: +20.4% Share price (31 Oct): Y5,090 Sell

Share Price Chart

1 00

1 ,6 00

3 ,1 00

4 ,6 00

6 ,1 00

11 /11 6 /12 1 /1 3 8 /13 3 /14 1 0 /1 4

(Y )

4 0

1 10

1 80

2 50

3 20R e la ti ve to T OP IX

Source: Compiled by Daiwa.

Market Data (consol) 12-month range (Y) 1,594-5,750Market cap (Y mil; 31 Oct) 910,547Shares outstanding (000; 10/14) 178,889Foreign ownership (%; 3/14) 25.6 Investment Indicators (consol)

3/14 3/15 E 3/16 EP/E (X) 10.9 8.1 10.0EV/EBITDA (X) 7.5 3.8 4.4P/B (X) 2.61 1.88 1.62Dividend yield (%) 0.98 1.38 1.38ROE (%) 27.6 27.1 17.5 Income Summary (consol)

(Y mil) 3/14 3/15 E 3/16 E Sales 1,003,606 1,079,000 1,120,000Op profit 84,968 137,500 113,900Pretax income 71,916 139,700 114,300Net income 83,698 112,900 91,400EPS (Y) 467.9 631.1 510.9DPS (Y) 50.00 70.00 70.00

See end of report for notes concerning indicators. Note: Based on Japanese GAAP through FY13; IFRS from

FY14.


Seiko Epson (6724) 5 November 2014

- 2 -

What we recommend We rate Seiko Epson 2 (Outperform) with a six-month target price of Y6,130, roughly 12X our FY15 EPS estimate of Y511. 2Q FY14 earnings confirm that the company’s strategy to pursue profit

growth through sales gains in the targeted markets for high-capacity tank models and commercial inkjet printers has been successful. Our view is unchanged that Seiko Epson is in a more advantageous position in capturing printing volumes than copier and laser printer makers.

That said, despite such growth expectations, the shares are trading at a P/E of 10X our FY15 EPS estimate, representing a discount to peers. As such, there should be room for revaluation.

Chart 1: Consolidated Income Statement (Y mil)

J-GAAP IFRS FY08 09 10 11 12 13 14 E 15 E 14 CP Revenue (sales) 1,122,497 985,363 973,663 877,997 851,297 1,003,606 1,079,000 1,120,000 1,060,000

Information-related equipment 769,850 712,692 702,918 691,801 685,862 836,436 905,000 939,000 888,000 Devices & precision products 384,323 305,747 297,863 174,811 140,790 148,956 155,000 159,000 153,000 Sensing & industrial solutions 31,828 1,465 1,279 17,316 11,413 16,181 23,000 26,000 23,000 Other, eliminations -63,504 -34,541 -28,397 -5,931 13,232 2,033 -4,000 -4,000 -4,000

Business profit (operating profit) -1,588 18,227 32,709 24,626 21,255 84,968 110,800 115,900 105,000 Information-related equipment 30,143 38,030 70,151 64,888 51,746 121,531 146,700 150,000 142,000 Devices & precision products -20,156 -13,377 8,876 4,629 8,638 9,733 11,000 11,900 12,000 Sensing & industrial solutions -12,073 -6,669 -5,412 -1,545 -9,614 -10,183 -8,000 -8,000 -10,000 Other, eliminations 498 243 -40,906 -43,346 -29,515 -36,113 -38,900 -38,000 -39,000

Operating profit -1,588 18,227 32,709 24,626 21,255 84,968 137,500 113,900 132,000 Pretax income -89,559 -799 15,381 15,622 -3,479 71,916 139,700 114,300 132,000 Net income -111,322 -19,791 10,239 5,032 -10,091 83,698 112,900 91,400 111,000 EPS (Y) -566.9 -99.3 51.3 26.2 -56.4 467.9 631.1 510.9 620.5 DPS (Y) 26.0 10.0 20.0 26.0 20.0 50.0 70.0 70.0 70.0 Book value per share (Y) 1,541.16 1,407.92 1,347.71 1,377.60 1,435.20 1,952.83 2,704.05 3,144.98 - ROE (%) -29.7 -6.8 37.0 2.0 -4.0 27.6 27.1 17.5 - Depreciation & amortization 78,406 47,395 40,971 37,547 39,179 38,545 44,000 45,000 44,000 Capex 55,624 25,937 31,813 38,900 43,100 37,800 50,000 50,000 50,000 R&D expenses 82,058 68,849 54,377 52,106 49,923 50,531 52,000 54,000 49,000 Y/y % Sales -17 -12 -1 -10 -3 18 - 4 - Business profit Loss Profit 79 -25 -14 300 - 5 - Operating profit Loss Profit 79 -25 -14 300 - -17 - Pretax income Loss Loss Profit 2 Loss Profit - -18 - Net income Loss Loss Profit -51 Loss Profit - -19 - Source: Company materials; compiled by Daiwa. Notes: 1) Based on Japanese GAAP through FY13; IFRS from FY14.

2) Figures for FY08-10 retroactively adjusted to reflect segment reclassification in FY11. 3) Business profit = revenue – COGS – SG&A.

E: Daiwa estimates. CP: Company projections.

Seiko Epson (6724): Income Summary (Y mil; y/y %)

Year to Sales Op profit Pretax income Net income EPS (Y) CFPS (Y) DPS (Y) Consol 3/12 877,997 (-10) 24,626 (-25) 15,622 (2) 5,032 (-51) 26.2 221.9 26.00 3/13 851,297 (-3) 21,255 (-14) -3,479 (loss) -10,091 (loss) -56.4 162.6 20.00 3/14 1,003,606 (18) 84,968 (300) 71,916 (profit) 83,698 (profit) 467.9 684.3 50.00 3/15 E 1,079,000 (-) 137,500 (-) 139,700 (-) 112,900 (-) 631.1 877.1 70.00 3/16 E 1,120,000 (4) 113,900 (-17) 114,300 (-18) 91,400 (-19) 510.9 762.5 70.00 3/15 PE 1,057,000 (-) 132,300 (-) 132,700 (-) 109,000 (-) 609.3 860.9 70.00 3/16 PE 1,081,000 (2) 106,300 (-20) 106,700 (-20) 85,400 (-22) 477.4 728.9 70.00 3/15 CP 1,060,000 (-) 132,000 (-) 132,000 (-) 111,000 (-) 620.5 - 70.00 3/15 PCP 1,040,000 (-) 120,000 (-) 119,000 (-) 100,000 (-) 559.0 - 70.00 E: Daiwa estimates. PE: Previous Daiwa estimates. CP: Company projections. PCP: Previous company projections.

Notes: 1) Based on Japanese GAAP through FY13; IFRS from FY14. 2) Sales indicate IFRS-based revenue from FY14.


Seiko Epson (6724) 5 November 2014

- 3 -

Chart 2: Quarterly Earnings (Y mil) FY12 (J-GAAP) 13 (IFRS) 14 (IFRS) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Revenue (sales) 186,360 201,912 235,879 227,144 222,004 249,367 283,800 253,200 246,258 266,549

Information-related equipment 146,665 159,241 197,066 182,890 182,528 201,120 242,900 214,500 201,828 221,168 Devices & precision products 36,524 38,237 34,477 31,552 36,762 39,777 38,200 33,900 38,934 40,476 Sensing & industrial solutions 2,702 3,332 2,358 3,021 3,632 3,381 3,600 5,500 6,737 6,076 Other, eliminations 469 1,102 1,978 9,683 -918 5,089 -900 -700 -1,241 -1,171

Business profit (operating profit) -16,117 1,975 25,936 9,460 9,672 23,897 4,300 13,400 23,510 27,399 Information-related equipment -6,077 9,208 34,860 13,755 16,410 26,176 52,700 28,400 30,220 37,495 Devices & precision products 2,197 3,477 2,257 707 4,032 4,171 2,800 -100 4,306 2,813 Sensing & industrial solutions -2,637 -2,068 -2,657 -2,252 -2,067 -2,693 -2,700 -2,400 -1,774 -2,251 Other, eliminations -9,600 -8,642 -8,524 -2,749 -8,703 -3,757 -48,500 -12,500 -9,242 -10,658

Operating profit -16,117 1,975 25,936 9,460 7,345 23,088 40,100 9,000 54,620 23,962 Pretax income -31,942 2,281 26,963 -781 6,512 23,010 40,900 7,400 54,742 25,876 Net income -34,467 -979 22,834 2,521 4,982 14,914 - - 46,597 19,087 Y/y % Sales -14 -3 -1 6 - - - - 11 7 Business profit Loss -37 81 169 - - - - 143 15 Operating profit Loss -37 81 169 - - - - 644 4 Pretax income Loss Profit 216 Loss - - - - 741 12 Net income Loss Loss 379 -46 - - - - 835 28 Source: Company materials; compiled by Daiwa. Notes: 1) IFRS adopted in FY14. FY13 data retroactively adjusted by the firm based on IFRS. Figures subject to change after accounting audits. FY12 and prior based on

Japanese GAAP. 2) Business profit= revenue – COGS – SG&A.

Translation: Research Production Department Style check: K.R. Accuracy check: H.M.


Asiamoney’s

2013

Best Domestic

Equity House

Economic flash

5 November 2014

Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor

in making their investment decision.

Please see the important disclaimer information on the back of this report

2014Finance Asia's

Best Equity House

Asiamoney's2013

Best DomesticEquity House

Indonesia’s 3Q14 GDP

Arga Samudro E-mail: [email protected] Phone: +6221 250 5081 ext. 3602

3Q14 GDP: lower than our and consensus estimates

Lowest since 3Q09 at 5.01% y-y mainly due to export slowdown:

Indonesia’s 3Q14 GDP growth continued to decelerate to 5.01% y-y,

(2Q14: 5.12% y-y; 3Q14: 2.96% q-q), its lowest level since 3Q09, and

came in below our and consensus expectations (exhibit 2). The lower GDP

growth was mainly due to sluggish export performance in our view.

Only government spending recorded a solid growth: Amid the

austerity program that was implemented in 2Q14, the government

expenditure realization bounced back in 3Q14, reaching 4.37% y-y (2Q14:

-0.71%) supported by infrastructure and other capital spending which

usually starts in 2H. On the flip side, 3Q14 private consumption growth was

slightly down at 5.44% y-y (1Q14: +5.59%) as shown in exhibit 3, despite

domestic demand effects from political-related activities, fasting month and

Lebaran festivities. Additionally, while 3Q14 direct investment realization

recorded by Investment Coordinating Board (BKPM) reached a new record

high, investment component of the GDP growth dropped to 4.02% y-y

(2Q14: +4.53%). On the external front, fragile global economic recovery

resulted in 3Q14 real export growth of only 0.70% y-y (2Q14: -0.76%),

while imports remained weak, reaching -3.63% y-y (2Q14: -5.05%).

Manufacturing dragged down 3Q14 GDP: On the industry side,

manufacturing, transportation-telecommunication, construction, retail

trades and financial business were the main sectors behind the lower

3Q14 GDP growth (exhibit 6).

4Q14 GDP growth will hinge on fuel price hike plan

In the short-term, we are of the view that 4Q14 GDP will hinge on the

government’s plan to raise fuel prices in November but with no indications

on the magnitude of the hike. Assuming IDR2,000/l fuel price hike, we

expect lower purchasing power would lower 4Q14 GDP growth to below 5%

y-y level (exhibit 4).

GDP outlook: 2014 GDP growth may fall to 5.08%

In addition, our sensitivity analysis reveals that given the same scenario,

low level of 4Q14 GDP would translate to 2014 full-year level of 5.08% from

our new baseline level of 5.12%. Furthermore, coupled with relatively weak

exports, we believe 2015 GDP growth could fall to 5.02%, lower than our

baseline level of 5.08% (exhibit 4). We will review our GDP growth targets

once the government announces the fuel price hike implementation.

Exhibit 6. Real GDP growth, by industry, % y-y

3Q13 4Q13 1Q14 2Q14 3Q14

GDP 5.63 5.72 5.22 5.12 5.01

Agriculture 3.33 3.83 3.22 3.39 3.75

Mining and Quarrying 1.99 3.91 -0.26 -0.15 0.27

Manufacturing Industries 5.01 5.29 5.13 5.04 4.60

Electricity, Gas and Water Supplies 3.83 6.62 6.31 5.77 6.63

Construction 6.23 6.68 6.54 6.59 6.26

Trade, Hotel and Restaurant (Retail) 6.14 4.78 4.79 4.53 4.19

Transportation and Communications 9.93 10.32 10.21 9.53 9.02

Financial, Ownership and Business 7.56 6.79 6.16 6.18 6.02

Services 5.62 5.27 5.71 5.68 6.53 Source: Statistics Indonesia

Exhibit 1. Macroeconomic forecasts

2013A 2014F 2015F

Cur acc bal (%GDP) (3.2) (3.1) (2.8)

Fiscal bal (%GDP) (2.4) (2.5) (2.5)

GDP growth (%y-y) 5.8 5.2 4.9

Inflation (%y-y) 8.4 5.9 8.4

Oil price (USD/bbl) 110.8 110.0 105.0

IDR/USD 12,170 11,900 11,700

BI rate (% p.a.)

7.50

7.50

7.75 FX reserve (USDb) 99.4 107.5 100.0

Source: BI, BPS,*Given 31% subsidized fuel price hike in 1Q15

Exhibit 2. GDP growth summary 3Q14 BS Cons. 2Q14

GDP real (%, y-y) 5.01 5.22 5.10 5.12 GDP real (%, q-q) 2.96 3.17 3.03 2.47 Source: Statistics Indonesia, Bloomberg, Bahana estimates

Exhibit 3. GDP by expenditure (% y-y) 2013 2014

3Q 4Q 1Q 2Q 3Q

GDP 5.63 5.72 5.22 5.12 5.01

Priv cons 5.48 5.25 5.61 5.59 5.44

Govt spend 8.91 6.45 3.58 -0.71 4.37

Investment 4.54 4.37 5.14 4.53 4.02

Exports 5.25 7.40 -0.44 -0.76 -0.70

Imports 5.09 -0.60 -0.73 -5.05 -3.63 Source: Statistics Indonesia

Exhibit 4. Sensitivity analysis of fuel price

Price hike (IDR/ltr)

Market

gasoline price

post hike

(IDR/ltr)

CPI (% y-y) GDP (%)

2014F 2015F 2014F 2015F

Bahana's

base case 6,500 5.18 5.50 5.12 5.08

1,000 (+15%) 7,500 6.62 5.51 5.10 5.06

2,000 (+31%) 8,500 8.06 5.67 5.08 5.02

3,000 (+46%) 9,500 9.50 5.76 5.06 4.98

4,000 (+62%) 10,500 10.94 5.88 5.03 4.95

5,000 (+77%) 11,500 12.38 5.96 5.00 4.90

6,000 (+92%) 12,500 13.82 6.05 4.96 4.85

Source: Pertamina, Statistics Indonesia, Bahana estimates

Exhibit 5. GDP growth

5.2

5.1

5.0 5.0

4.9

5.0

5.1

5.2 5.2

5.2 5.3

5.3

4.5

4.6

4.7

4.8

4.9

5.0

5.1

5.2

5.3

5.4

1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F

(%)

Source: Statistics Indonesia, Bahana estimate


Euro wrap-up 05 November 2014

Follow one of the WSJ’s top 50 financial twitter feeds @DaiwaEurope

Robert Kuenzel and Emily Nicol +44 20 7597 8322

Euro area

Euro area activity barely improved in October

Services PMIs across the euro area disappointed today as the improvement suggested by October’s flash was not fully borne out in the final figures, repeating what happened to equivalent manufacturing PMIs on Monday. Combining the indicators, the euro area composite output PMI saw only a minimal (0.1pt) pick-up to 52.1 in October, nearly ¾pt below Q3’s average. And given a much weaker composite new orders balance, evidence that GDP will fail to grow in Q4 is mounting. The composite output price index was equally concerning, dropping to 47.1, the lowest level in 4½ years. With the input price index broadly stable at 52, the two series, which have remained on opposite sides of the neutral 50

mark since mid-2013, indicate squeezed profit margins. And today’s figures provide no hope for an imminent pick-up in consumer price inflation. Spanish recovery keeps euro area afloat

At the country level, only Spain showed convincing signs of growth with a stronger-than-expected services PMI resulting in a composite output PMI of 55.5. Germany’s downward revision from October’s flash composite index to 53.9 suggested that activity has barely improved from recent sluggishness. Italy and France continued to bump along at or below the neutral reading of 50 on their composite output measures, an upside surprise to the Italian index notwithstanding. Overall, the PMIs reinforce the impression of an absence of growth momentum at euro area level as well as the relative ranking of growth at the member state level. With the three largest economies seemingly stuck in either

‘slow-grow’ or ‘no-grow’ mode, it might only be Spain’s continued recovery that is preventing a euro area recession in H214. Consumers remain tight-fisted

Euro area retail sales volumes saw a sharper-than-expected drop of 1.3%M/M to a seven-month low in September, as spending across the region did less than expected to offset Germany’s post-crisis record plunge of 3.2%M/M. Hardly any member state showed positive monthly sales growth, thus making country-specific aberrations an unlikely explanation for weak spending. Instead, consumer surveys suggest households’ cautious stance is largely driven by concerns about the weaker economy. In the third quarter retail sales growth again slowed, and at 0.2%Q/Q suggests that consumer spending is likely to have provided only a very modest lift to Q3 GDP growth (data to be published next week).

Euro area countries: Composite PMIs Euro area: Consumer confidence and spending

Source: Datastream, Markit and Daiwa Capital Markets Europe Ltd. Source: Datastream and Daiwa Capital Markets Europe Ltd.

35

40

45

50

55

60

65

Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14

Euro areaGermanyFrance

Index

-40

-35

-30

-25

-20

-15

-10

-5

0

-5

-4

-3

-2

-1

0

1

2

3

Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14

Retail sales

Consumer confidence (rhs)

%, Y/Y, 3mma Index, 3mma

Overview • Longer-dated Bunds made minor losses as the euro area’s final

composite PMI rose marginally in October.

• Gilts also lost ground in spite of a larger-than-expected drop in the UK composite PMI.

• Tomorrow’s focus will be on the ECB’s and BoE’s policy meetings, while the latest UK industrial production data and German manufacturing orders are also due.

Daily bond market movements

Bond Yield Change*

BKO 0 09/16 -0.0059 -0.005

OBL 0¼ 10/19 0.122 +0.004

DBR 1 08/24 0.826 +0.019

UKT 4 09/16 0.688 +0.027

UKT 1¾ 07/19 1.570 +0.031

UKT 2¾ 09/24 2.261 +0.034

*Change from close as at 4.30pm GMT. Source: Bloomberg


Euro wrap-up 05 November 2014

- 2 -

Tomorrow in the euro area and US

The ECB’s Governing Council meeting tomorrow will dominate attention, despite no new policy announcements being expected. With the ECB’s covered bond purchases having started only two weeks ago and ABS buying beginning later this month, Draghi indicated in October that the ECB will take its time in assessing the impact of the various measures, including TLTROs. However, the macroeconomic ground continues to soften under the Council’s feet as growth prospects for H214 have fallen to near-zero and oil price falls are highly likely to keep Q4 inflation around the current level of 0.4%Y/Y. While Governing Council members are increasingly divided in their views, unless the outlook brightens considerably in the coming months the ECB will have little choice but to extend asset purchases to the larger universe of corporate bonds. Meanwhile, Germany releases manufacturing orders data for September, which are likely to rebound markedly on the month, but still leave orders down on a quarterly basis. In the markets, France will sell a range of longer-dated bonds, while Spain issues bonds in the 3Y-10Y spectrum. In the US, ahead of Friday’s labour market report, tomorrow sees the release of Challenger job cuts data for October, along with the weekly jobless claims figures. Thursday also

brings preliminary readings for non-farm productivity and unit labour costs for Q3.

UK

Services PMI surprises on downside

As the latest two-day MPC meeting got underway, the release of October services and composite PMIs added to the recent flow of softer UK economic data. In particular, the headline services activity index declined a larger-than-expected 2½pts on the month to a seventeen-month low of 56.2. Within the survey detail, there was a drop of the same magnitude in the business expectations balance, while the new orders component was down 1.7pts to a five-month low of 58.3. Composite PMI at seventeen-month low

So, despite an upward surprise in the manufacturing output PMI earlier in the week, the composite PMI also fell 1.7pts on the month to a seventeen-month low of 55.8. Of course, this was still consistent with steady output growth at the start of Q4, as was the new orders component at 57.7 (albeit at its lowest since May-2013). But the output index in October was 2.7pts lower than the average in Q3, suggesting that the pace of expansion moderated further at the start of Q4.

Inflationary pressures still weak

Against the backdrop of softer demand and strong competition, today’s PMIs also suggested that there was a notable drop in firms output prices in October, with the relevant composite index falling below 50 for the first time in more than 2 years. And this came alongside the latest BRC shop price indicator, which continued to report deflation on the High Street for the eighteenth consecutive month in October, and at a steeper 1.9%Y/Y. While non-food deflation slowed marginally to -3.1%Y/Y, food inflation fell to just 0.1%Y/Y, the lowest rate since records began in 2006. Tomorrow in the UK

Therefore, when the BoE’s policy-setting meeting concludes tomorrow we expect no change to policy. Moreover, with the BoE’s updated economic forecasts (which will be published in the Inflation Report on 12 November) almost certain to show downward revisions to both the GDP and inflation outlook, it seems highly likely that the majority on the MPC will remain happy to keep its accommodative policy in place for quite a lot longer yet. Datawise, tomorrow brings the release of September industrial production figures, which are expected to show that output rose 0.4% on the month, a touch weaker than assumed in the first estimate of Q3 GDP.

UK: PMIs by sector UK: GDP growth and composite PMI

Source: Datastream and Daiwa Capital Markets Europe Ltd. Source: Datastream and Daiwa Capital Markets Europe Ltd.

25

30

35

40

45

50

55

60

65

70

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Construction

Services

Manufacturing

Index

30

35

40

45

50

55

60

65

70

-8

-6

-4

-2

0

2

4

6

8

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

GDP growth

Composite PMI (rhs)

Index, 3mma%, Y/Y



■ What’s new Simplo reported October revenue of TWD5.96bn, up 10% MoM and 9% YoY, achieving about 35% of our current 4Q14 revenue forecast (TWD17.1bn, +12% QoQ). The progress appears slightly ahead of our expectation. The company has scheduled its 3Q14 results analyst meeting for 10 November (next Monday), and we expect no major surprises. ■ What's the impact - 3Q14 preview: we forecast

3Q14 net profit to reach TWD832m (EPS: TWD2.70), largely in line with company guidance (TWD791-833m) and the Bloomberg consensus estimate (TWD846m). Simplo’s 3Q14 revenue (TWD15.2bn, +12% QoQ) came in slightly better than its guidance (TWD14.7-15.1bn), and we expect gross and operating margins to reach 10.8%

and 6.3%, respectively, compared to company guidance of 10.9% and 6.3%.

- 4Q14 outlook: we expect

Simplo to guide for 15-20% QoQ growth in its 4Q14 revenue, judging by its October revenue. We believe the growth in 4Q14 will be driven mainly by ramping up battery pack shipments for the iPhone 6 and new iPad Air/mini. We also expect sequential improvement in profit margins due to stronger economies of scale.

■ What's our recommendation - We have Hold (3)

recommendation on the stock with a 6-month price target of TWD163, on a 14x 1-year-forward EPS. The stock currently trades at 13.7x and 12.1x our 2014E and 2015E EPS, respectively. While we are positive on Simplo’s market position and solid expertise in the multi-cell battery business, its major growth areas appear to be single-cell and 2-cell products (for smartphones and tablets) where Chinese battery pack suppliers (e.g., Desay and Sunwoda) are gaining shares steadily. As the contribution from other business (e.g., high-power batteries, automation) remains limited, we are cautious on Simplo’s earnings growth outlook.

- We plan to provide an update following the company’s analyst meeting next Monday. The key risk to our call would be weaker- or stronger-than-expected profit margins.

5 November 2014

Simplo 6121 TT

Share price (5 Nov): TWD149.5 6-mth rating: Hold (3) Target price: TWD 163.0

October revenue update; 3Q14 results preview Steven Tseng (886) 2 8758 6252 [email protected]

■ Simplo October-2014 monthly sales (TWDbn)

Company Ticker Rating Oct. Sales MoM YoY 4Q14E sales QoQ Achieved %14E

PER 3-Yr range Release date

Components

Simplo 6121 TT Hold 6.0 10% 9% 17.1 12% 35% 13.7x 11-18x 5-Nov

Source: Company, Daiwa forecasts

In the interests of timeliness, this document has not been edited.



■ What’s new

• According to China Business News today, the management of two entrusted companies (Sinotrans Guangxi and its subsidiary, Sinotrans Liuzhou) are being investigated for fraud. The news article mentioned misuse of collaterals inside the two companies' warehouses, which include delivering collaterals without permission, duplicate collateralization and fraudulent documents. Management held a conference call at 8pm tonight to clarify that they do not have any responsibility for the above issue.

■ Analysis

• Sinotrans had signed the entrusted management agreement with its Parent Company, Sinotrans & CSC, on 14 February 2014. Under the entrusted management agreement, Sinotrans is responsible for managing all aspects of the business operations of the Entrusted Companies (including Sinotrans Guangxi and Sinotrans Liuzhou) except for key decision-making or any matters outside the scope of ordinary business. In return, Sinotrans

would receive a fee for the entrusted management service. Sinotrans is responsible for operating the entrusted companies only and is not liable for the profits or losses of the operations and the gearing of the entrusted companies. Instead, the Parent Company would be responsible for this.

• Management has stated that the incident has been occurring since January 2014, before the entrusted management was in place and Sinotrans is not liable for the incident. They clarified that the subject matter of the media report does not relate to the operations of Sinotrans or any of its subsidiaries. Going forward, they will continue to provide the collateral business service for clients since this is a part of a supply chain service. They believe stronger internal controls would be very important.

• Sinotrans itself owns similar businesses under the listed entity. However, the scale is minimal and it actually tried to reduce the size in the past two years after finding such businesses to be relatively risky and difficult to control. We believe this is also the reason why management does not want to take over such businesses immediately after seeing the high risks involved. Responding to concerns about the acquisition strategy of the company, Sinotrans stated that it is looking for innovative businesses such as e-commerce and will continue to use an open market approach to find companies that fit their criteria.

• We believe the investigation will slow down the pace of further

asset injection by the parent as management would be more cautious on consolidating the entrusted companies under its umbrella.

• Investors wanted to know Sinotrans would adjust its provisions; management stated that there will be no adjustments and that they have always prepared enough provisions for all kinds of operational or litigation matters.

■ Recommendation

• We see negative sentiment and expect short-term pressure on its share price, as the 3Q results were also not very strong. The stock fell 13% this morning (trading was suspended in the afternoon) and Sinotrans is now trading at a 2015E PER of 11.2x. We have a BUY rating on the stock with a target price of HKD6.60, based on a 2015E PER of 16x. Risks to our call include lower-than-expected contribution from third-party logistics businesses.

• Sinotrans has applied for the resumption of trading on the Stock Exchange at 9 a.m on 6 Nov 2014.

Clarifications announcement http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1105/LTN201411051088.pdf Entrusted management agreement http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0210/LTN20140210288.pdf In the interests of timeliness, this document has not been edited.

5 November 2014

Sinotrans 598 HK

Share price (5 Nov): HKD5. 15 6-mth rating: Buy (1) Target price: HKD6.60 (PER-based)

Further info after conference call, - s/t -ve Kelvin Lau (852) 2848 4467 [email protected] Carrie Yeung (852) 2773 8243 [email protected]


http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1105/LTN201411051088.pdf

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0210/LTN20140210288.pdf


■ What’s new According to China Business News, the management of two entrusted companies (Sinotrans Guangxi and Sinotrans Liuzhou) are being investigated for fraud. We had a chat with Sinotrans management, and expect minimal impact on the listed company. ■ Analysis The news article mentioned misuse of collateral inside the two companies' warehouses, which includes delivering collateral without permission, duplicate collateralization and fraud documents. The companies under investigation does not form part of balance sheet or P&L of the listed co. Sinotrans (598). As they are only entrusted to Sinotrans (in return Sinotrans would receive a management fee), Sinotrans will not be responsible for any compensation or legal liability based on this incident. Sinotrans itself owns similar businesses under the listed entity. However, the scale is minimal and it actually tried to reduce the size in the past two years on finding such businesses to be relatively risky and difficult to control. We believe this

is also the reason why management does not want to takeover such businesses immediately seeing the high risks. We believe the investigation to slow down the pace of further asset injection as management would be more cautious on consolidating the entrusted companies under its umbrella. Management would issue a clarification later today. ■ Recommendation We see it negative to the sentiment and expect short-term pressure on its share price, as the 3Q results were also not very strong. However, we view the investigation to be a corporate governance issue of its parent rather than the listed company, as they only started managing the business earlier this year. The stock is trading at PER 12.8x for 2015E, and we have a BUY rating on the stock. Risk to our call is lower-than-expected contribution from third-party logistics business. In the interests of timeliness, this document has not been edited.

5 November 2014

Sinotrans 598 HK

Share price (4 Nov): HKD5.91 6-mth rating: Buy (1) Target price: HKD6.60 (PER-based)

Minimal impact from the fraud investigation Kelvin Lau (852) 2848 4467 [email protected] Carrie Yeung (852) 2773 8243 [email protected]


■ What’s new SMIC released its 3Q14 results, with net profit attributable to the parent company of USD47.5m, down 16% QoQ and up 12% YoY. The company has guided for 4Q14 revenue to contract 5-9% QoQ with a GM of 19.5-22.5%. We think the market will react negatively to the news, which should weigh on the stock near term. ■ What’s the impact

• Core results miss. Actual 3Q net profit was roughly in line with the consensus estimate of USD46m, but above our estimate of USD41m despite a lower top line, owing to higher non-op due to bookings of USD6.8m in FX gains for the quarter. Regarding core operations, its OP finished at USD40.8bn, below our estimate of USD45m on a lower GM and higher opex. In sum, we think the street was too bullish on SMIC’s 3Q core operations.

• Guidance weak among peers. SMIC expects its 4Q top line to contract 5-9% QoQ, below the consensus estimate (flat QoQ)

and our expectation (up 8% QoQ), and worse than its Taiwan peers (TSMC: up 4-5% QoQ; UMC: down to low single digits), due likely to share loss in the 8” specialty market and limited exposure in the advanced 28/20nm market. We think these street estimates are also too bullish.

• Taiwan-specific strength. At TSMC, 4Q strength has been driven by strong demand for its 8” specialty tech and non-organic demand from Apple on 20nm (market share gains against Samsung); at UMC, 4Q strength has been driven by strong demand for its 8” specialty tech and 28nm ramp-up from a US-based AP/connectivity design house.

• Downside risks. We expect the market to react negatively to SMIC’s results and guidance. In the foundry space, our preference stays with TSMC (2330 TT, NTD132, Buy [1]).

• 28nm a negative read for UMC. We’ve been concerned that rising competition for SMIC in the 28nm domain could weigh on UMC’s (2303 TT, NTD13.40, Underperform [4]) margins and 2015 profitability. SMIC’s CEO said the company plans to build some 6,000 wpm (wafers per month) in capacity for 28nm in 4Q. This would be about 5% of total capacity. Although it will take time for SMIC to ramp up revenue scale and yield curves, it does support our concerns about UMC that SMIC is rising as a new 28nm competitor, apart from Globalfoundries which has been diluting 28nm orders against UMC.

■ What we recommend We expect the market to react negatively to SMIC’s results and guidance, resulting in downside risk to the shares. While SMIC’s 28nm progress echoes our concerns about UMC’s 28nm competition, our foundry preference is TSMC. Risks to our call include if 28nn competition turns out to be milder than we have expected. In the interests of timeliness, this document has not been edited.

5 November 2014

SMIC 981 HK

Share price (5 Nov): HKD0.75 6-mth rating: Hold (3) Target price: HKD0.65

SMIC releases 3Q results; we expect a negative market reaction Rick Hsu (886) 2 8758 6261 [email protected] Lynn Cheng (852) 2773 8822 [email protected]




■ What’s new StarHub’s reported 3Q14 results were below our forecasts mainly on account of weaker than expected revenue growth momentum, as the company continues to face challenges – particularly in the cable broadband and prepaid segments. Results. StarHub reported a 2.6% YoY increase in 3Q14 net profit on back of a 0.7% YoY decline in service revenue, accompanied by a 0.9pp rise in the EBITDA margin. The 3Q14 net profit was 7% below our expectation on lower than expected revenues, as well as higher than expected tax expense. Highlights. Trends in the 3Q14 results reveal that the company is still grappling with challenges in the broadband and prepaid mobile segments. Cable broadband revenues declined 17.4% YoY, mainly as the average revenue per user (ARPU) has fallen 20.2% YoY and 4.6% QoQ as a result of ongoing

competitive pressure exerted by smaller players. Management said that it intends to focus on bundling its broadband services on its ‘Hubbing’ platform to customers together with its pay-TV packages. Meanwhile, pay-TV subscriber additions continued to see improvement in 3Q14, as the company appears to have reversed the trend of sequential subscriber decline observed between 4Q11-2Q13. In the mobile segment, although both prepaid and postpaid segments observed QoQ improvements in ARPU, mobile revenue growth appeared to be negatively affected by the continued decline in the prepaid subscriber base (3Q14: net loss of 120k prepaid subs) – a consequence of changes in customer behaviour as well as the regulation limiting the number of SIM cards per person. Cost control across all areas of the business continued to be good. Marketing expenses declined 0.8% YoY while traffic expenses saw a 13.9% YoY decline; management attributed this in part to lower interconnect rates as well as lower outbound roaming traffic and better negotiated international rates. Outlook. The company maintained its service revenue guidance at “stable compared to 2013” after it had lowered it in 2Q14 from “low single-digit YoY growth” previously. Management has maintained its

EBITDA margin guidance at 32% for 2014 even as 9M14 EBITDA margin is tracking at 33.7%, as it expects the full impact of iPhone 6 sales to occur in 4Q, following only a two week impact in 3Q14 since its launch in mid-September. ■ What we recommend We have a DDM-based six-month target price of SGD3.68 and an Underperform (4) rating on the stock, which is currently trading at a 2014E EV/EBITDA which is more than 2SD above its past-seven-year historical average of 8.1x. StarHub’s share price has declined 3.5% year-to-date, underperforming the broader STI Index (up 3.6% YTD), as well as rivals M1 (M1 SP, SGD3.48, Hold [3]) and Singapore Telecom (ST SP, SGD3.76, Hold [3]) – a divergence we had expected to play out. A significant fall in 10-year domestic bond yields could pose upside risk to our target price.

5 November 2014

StarHub STH SP

Share price (4 Nov): SGD4.14 6-mth rating: Underperform (4) Target price: SGD3.68

Challenges remain Ramakrishna Maruvada (65) 6499 6543 [email protected] Jame Osman (65) 6321 3092 [email protected]

■ Table 1: StarHub: 3Q14 results summary 3Q13 4Q13 1Q14 2Q14 3Q14 3Q14E YoY (%) Var (%)

P&L summary (SGD m) Service Revenue 557 563 544 552 553 564 (1) (2)Total Revenue 579 613 571 576 592 592 2 0EBITDA 187 172 177 187 191 196 2 (3)Service EBITDA margin (%) 33.6 30.5 32.6 33.9 34.5 34.7 1 p.p -0.2 p.pNet Profit 95 83 84 94 98 105 3 (7)Subsidy analysis Net subsidy (NS) 52 81 60 46 48 47 (9) 2NS as % of service revenue 9 14 11 8 9 8 -0.8 p.p 0.4 p.p

Source: Company

In the interests of timeliness, this document has not been edited.


Click for our latest editions

China Water Sector

China Water Sector: Initiation: cleaning up in China 4 November 2014

The central government’s determination to address water scarcity and pollution should herald a new wave of growth for the sector

While valuations appear rich, a further rerating is likely for the top players on their solid capacity and earnings-growth outlooks

Our top pick is CTE, for its industrial WWT and sludge exposure; we also like BEW, the dominant consolidator in municipal water

Dennis Ip, CFA (852) 2848 4068 ([email protected]) Cindy Li (852) 2773 8535 ([email protected])

Pan-Asia Mobile Games Sector

Pan-Asia Mobile Games Sector: Platforms have a new role to play 24 October 2014

Smart devices are fast becoming the primary “screens” through which entertainment content is consumed

After casual games, we highlight “mid-core” RPGs as the next driver of growth in the region’s mobile-game industry

We favour integrated platforms over pure developers; our top picks are Daum Communications, Tencent and Square Enix Thomas Y. Kwon (82) 2 787 9181 ([email protected]) Satoshi Tanaka (81) 3 5555 7049 ([email protected]) John Choi (852) 2773 8730 ([email protected])

Indonesia: 2015

Compendium

Indonesia: 2015 Compendium: In rough water 21 October 2014

In this annual report, we outline our expectations for Indonesia in the coming year. We assess the outlook for the global and domestic economies, survey the political landscape following the election and highlight potential policy shifts, and update our views of the fundamentals and valuations of 93 companies across our Indonesia universe of coverage.

Harry Su (62) 21 250 5735 ([email protected])

and the PT. Bahana Securities Research Team

Japanese Stock

Strategy Memo

Japanese Stock Strategy Memo: 3Q 2014 stock performance and future outlook 6 October 2014

TOPIX closed 3Q up 5.0% q/q driven by weak yen from mid-Aug

Large-cap growth stocks outperformed; high-quality, low-EV/EBITDA stocks strong

Final decision on sales tax hike key in 4Q; Nikkei to rise to 17,000 range, foreign demand-oriented stocks to gain upper hand

Kazuhiro Miyake (81) 3 5555-7215 ([email protected]) Masahiro Suzuki (81) 3 5555-7328 ([email protected])

Daiwa research is available electronically on Bloomberg, Reuters, Thomson One Analytics, FactSet, Capital IQ and Daiwa’s L-ZONE. Please contact your Daiwa sales representative for more information.

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Sunday Monday Tuesday Wednesday Thursday Friday Saturday2

3

4

5

6

7

Current Account Balance & Budget Balance (Sep)

Trade Bal (Sep)

Foreign

Reserves (Oct) Export

& Import (Oct) Unemployment

Rate (Oct)

8 Trade Balance,

Exports & Imports (Oct)

9

10 Investor

Confidence (Nov) Exports &

Imports (Oct) PPI, New Yuan

Loans & CPI (Oct) Money Supply M0, M1 & M2 (Oct)

11 Exports (Sep) Industrial

Production (Sep) Current Account

Balance & Trade Balance (Sep) Banking Lending & Consumer Confidence (Oct)

12

Unemployment Rate (Sep/Oct)

Money Supply M2 (Sep)

CPI (Oct) Industrial Production (Sep)

Wholesale Trade Sales (Sep)

13 PPI (Oct),

Industrial Production & Capital Utilization (Sep)

Retail Sales & Industrial Production (Oct)

14 GDP

(3Q) Retail

Sales (Sep) Current

Account Bal (3Q) Wholesale

Prices (Oct) Foreign Direct

Investment (Oct)

15

16

17 GDP (3Q) Exports (Oct) GDP (3Q) Unemployment

Rate (Oct) Industrial

Production, Capital Utilization (Oct)

18 CPI & Retail

Price Index (Oct) Housing Loans

(3Q) PPI (Oct)

19 CPI (Oct) PPI (Oct) Leading Index

(Sep)

20 Retail Sales

(Oct) Current Account

Balance (3Q) Trade Balance,

Exports & Imports (Oct)

Composite CPI (Oct)

CPI & Leading Index (Oct)

21 Foreign

Reserves (Oct)

22

23

24 Unemployment

Rate & Industrial Production (Oct)

CPI (Oct) & GDP (3Q)

25 Government

Spending (3Q) Money Supply

M1 & M2 (Oct) Trade Balance &

Imports (Sep) Export, Import &

Trade Balance (Oct) GDP (3Q),

Consumer Confidence Index (Nov)

26 GDP,

Government Spending, Exports & Imports (3Q) Index of Services (Sep)

Consumer Confidence (Nov)

Consumer Sentiment (Nov)

PCE, Pending & New Home Sales (Oct)

Industrial Production (Oct)

27 Business

Confidence (Nov) & M3 Money Supply (Oct)

Money Supply M1& M2 (Oct)

GDP (3Q) Current Account

Balance (Oct)

28 Jobless Rate &

Retail Sales (Oct) Consumer

Confidence (Nov) Ex, Im, Trade

Bal, Current Acct Bal & Cap Uti (Oct)

GDP (3Q) Bank Lending &

MS M3 (Oct) M3 (Oct) Ind Pro &

Leading Index (Oct) M1, M2, Budget

Balance (Oct)

29

c: Consensus; China; Hong Kong; India; Indonesia; Japan; Korea; Malaysia; Philippines; Singapore; Taiwan; Thailand; United Kingdom; United State; EuroZone

Economic calendar – November 2014


Rating and target-price information Bloomberg 6M rating 6M target price* Company name code Country Previous Latest Previous Latest DateMediaTek 2454 TT Taiwan n.a. → Hold n.a. → 422 5-Nov-14SembCorp Marine SMM SP Singapore Outperform ↓ Hold 4.70 ↓ 3.81 5-Nov-14Makalot Industrial 1477 TT Taiwan Outperform – Outperform 166 ↑ 177 5-Nov-14econtext Asia 1390 HK Japan Hold – Hold 3.3 ↓ 3.2 5-Nov-14Chularat Hospital PCL CHG TB Thailand Buy – Buy 12.5 ↑ 23.5 5-Nov-14Bangkok Chain Hospital PCL BCH TB Thailand Buy ↓ Sell 8.5 ↑ 8.7 5-Nov-14Wistron 3231 TT Taiwan Buy – Buy 37 ↓ 36 5-Nov-14British American Tobacco Malaysia ROTH MK Malaysia Reduce – Reduce 62.4 ↑ 63.4 5-Nov-14Daewoo Shipbuilding & Marine Engineering 042660 KS Korea Buy – Buy 31000 ↓ 24000 4-Nov-14TPK 3673 TT Taiwan Sell – Sell 135 ↑ 142 4-Nov-14Kangda International Environmental 6136 HK China n.a. → Outperform n.a. → 4.10 4-Nov-14Novatek Microelectronics 3034 TT Taiwan Hold ↑ Outperform 157 ↑ 180 4-Nov-14Korea Aerospace Industries 047810 KS Korea Outperform – Outperform 43000 ↑ 49000 4-Nov-14Beijing Enterprises Water Group Ltd 371 HK China n.a. → Outperform n.a. → 6.3 4-Nov-14CT Environmental Group 1363 HK China Buy – Buy 8.88 ↑ 9.6 4-Nov-14Harum Energy HRUM IJ Indonesia Reduce – Reduce 1500 ↓ 1100 4-Nov-14Catcher Technology 2474 TT Taiwan Outperform – Outperform 315 ↓ 308 4-Nov-14Malaysia Building Society MBS MK Malaysia Add – Add 2.6 ↑ 2.75 4-Nov-14Cosco Corp Singapore COS SP Singapore Sell – Sell 0.56 ↓ 0.50 3-Nov-14Siam Cement PCL SCC TB Thailand Buy – Buy 490 ↑ 520 3-Nov-14ENN Energy 2688 HK China Outperform – Outperform 57 ↓ 53 3-Nov-14IJM Plantations IJMP MK Malaysia Add – Add 3.71 ↓ 3.63 3-Nov-14Ginko International 8406 TT Taiwan Buy – Buy 492 ↓ 477 3-Nov-14Adhi Karya Persero ADHI IJ Indonesia Buy ↓ Hold 4000 ↓ 2800 3-Nov-14Gajah Tunggal GJTL IJ Indonesia Hold – Hold 1600 ↓ 1400 3-Nov-14Austindo Nusantara Jaya ANJT IJ Indonesia Hold ↑ Buy 1200 ↑ 1550 3-Nov-14Tenaga Nasional Bhd TNB MK Malaysia Buy – Buy 14.7 ↑ 16.5 3-Nov-14Bukit Asam PTBA IJ Indonesia Reduce – Reduce 11700 ↑ 12000 31-Oct-14Mayora Indah Tbk PT MYOR IJ Indonesia Reduce – Reduce 25500 ↓ 20250 31-Oct-14SK Broadband 033630 KS Korea Hold – Hold 3800 ↑ 4300 31-Oct-14

Note: Daiwa’s 30 most recent rating/target-price changes *Local currency; D: delisted


Recently published reports

Research reports* Subtitle No. of pages

Date of publication

MediaTek Initiation: wait for the next tide 16 5-Nov-14Chularat Hospital Pcl Strong growth, long horizon 13 5-Nov-14Bangkok Chain Hospital Profit rebound looks priced in 14 5-Nov-14Novatek Microelectronics Upgrading: tune into finer TV displays 12 4-Nov-14China Water Sector Initiation: cleaning up in China 104 4-Nov-14The Siam Cement Pcl The Siam Cement Pcl 13 3-Nov-14ENN Energy Premature injection a share-price overhang 9 3-Nov-14Coal India New volume target: 1bn tonnes by 2019 29 3-Nov-14Pacific Radiance Initiation: radiating among peers 24 31-Oct-14ASEAN Intelligence What matters this week 52 31-Oct-14Discovery Asia small-cap weekly 19 31-Oct-14AAC Technologies Upgrading: time to focus on 2015 12 30-Oct-14Accordia Golf Trust Initiation: a whole new game 28 29-Oct-14Thailand Property Sector A positive reversal 35 28-Oct-14AP (Thailand) Pcl Riding the wave 15 28-Oct-14United Microelectronics Initiation: watch out for a margin drag 13 28-Oct-14TISCO Financial Group Two stages of turnaround 14 27-Oct-14Major Cineplex Group Pcl New foundation for growth 12 24-Oct-14Pan-Asia Mobile Games Sector Platforms have a new role to play 72 24-Oct-14Discovery Asia small-cap weekly 18 24-Oct-14ASEAN Intelligence What matters this week 29 24-Oct-14Advanced Semiconductor Engineering Initiation: two growth engines at work 13 24-Oct-14TWi Pharmaceuticals Downgrading: new drug launches delayed further 11 22-Oct-14Indonesia: 2015 Compendium In rough water 292 21-Oct-14Airports of Thailand Pcl Addressing some concerns 15 21-Oct-14Thailand Energy Sector Oil prices setting a new level 39 21-Oct-14PTT Global Chemical A big-cap bear BUY 15 20-Oct-14Discovery Asia small-cap weekly 17 17-Oct-14Sansiri Public Co Ltd Cost cuts bear fruit 15 17-Oct-14ASEAN Intelligence What matters this week 40 17-Oct-14China Gas Sector Plenty of juice despite the squeeze 57 17-Oct-14Taiwan Semiconductor Manufacturing Initiation: staying ahead of the curve 14 15-Oct-14

*The 30 most recent reports published by Daiwa

Asia Pacific Markets Closed

Hong Kong

China Singapore Malaysia Korea Taiwan AustraliaNew

ZealandIndia Thailand Philippines Indonesia

Nov 14 4, 6


Daiwa’s Asia Pacific Research Directory

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas (ASEAN/China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Lynn CHENG (852) 2773 8822 [email protected] IT/Electronics (Semiconductor) (Greater China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Carrie YEUNG (852) 2773 8243 [email protected] Transportation (Hong Kong/China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy


Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

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(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

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(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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Japan: Notes concerning market data and investment indicators

Estimates by Daiwa Shares outstanding: Common shares outstanding (excl. treasury stock) Market cap: Based on shares outstanding and closing price as of indicated date EV: Market cap + interest-bearing debt – liquidity on hand EBITDA: Operating profit + depreciation ROE: Net income / average of start-FY and end-FY shareholders’ equity (for SEC-reporting firms net income attributable to shareholders

of the parent / average of start-FY and end-FY shareholders’ equity) Share Price Chart and per-share figures retroactively adjusted to reflect stock splits/reverse stock splits


Disclaimer This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., Thanachart Securities, Affin Investment Bank Berhad, PT.Bahana Securities, their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Portions of this publication are prepared by Affin Investment Bank Berhad (“Affin”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments.

Portions of this publication are prepared by PT. Bahana Securities and reviewed by Daiwa Securities Group Inc. and/or its affiliates, and distributed outside Indonesia by Daiwa Securities Group Inc. and/or its affiliates, except to the extent expressly provided herein. Certain copies of this publication may be distributed inside and outside of Indonesia by PT. Bahana Securities in accordance with relevant laws and regulations. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Any review does not constitute a full verification of the publication and merely provides a minimum check. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Neither Daiwa Securities Group Inc. nor any of its affiliates is licensed to undertake any business within the Republic of Indonesia. Any display of any trade name or logo of the Daiwa Securities Group Inc. on this publication shall not be deemed to be an undertaking of any business within the Republic of Indonesia.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time may have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Portions of this publication are prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Thanachart Securities Public Company Limited (“Thanachart Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Thanachart Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. All research reports are disseminated and available to our clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Daiwa responsible for the redistribution of our research by third party aggregators.

IMPORTANT This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Securities Co. Ltd. retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent.

Ratings Issues are rated 1, 2, 3, 4, or 5 as follows:

1: Outperform TOPIX/benchmark index by more than 15% over the next six months. 2: Outperform TOPIX/benchmark index by 5-15% over the next six months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next six months. 4: Underperform TOPIX/benchmark index by 5-15% over the next six months. 5: Underperform TOPIX/benchmark index by more than 15% over the next six months.

Benchmark index: TOPIX for Japan, S&P 500 for US, DJ STOXX 600 for Europe, HSI for Hong Kong, STI for Singapore, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia.


Japan Conflicts of Interest: Daiwa Securities Co. Ltd. may currently provide or may intend to provide investment banking services or other services to the company referred to in this report. In such cases, said services could give rise to conflicts of interest for Daiwa Securities Co. Ltd.

Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.: Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Ownership of Securities: Daiwa Securities Co. Ltd. may currently, or in the future, own or trade either securities issued by the company referred to in this report or other securities based on such financial instruments. Daiwa Securities Group has filed major shareholding reports for the following companies of which it owns over 5% (as of 15 October 2014): KITA KOUDENSHA (1734); DAIHO (1822); TENOX (1905); Accordia Golf (2131); Full Speed (2159); Azia (2352); BROCCOLI (2706); ALCONIX (3036); SOLITON SYSTEMS (3040); Sansei Landic (3277); Hoshino Resorts REIT (3287); Kuriyama Holdings (3355); SANKO TECHNO (3435); PAPYLESS (3641); mobcast (3664); MAMEZOU HOLDINGS (3756); AVANT (3836); DAIICHI KIGENSO KAGAKU KOGYO (4082); Septeni Holdings (4293); Seiryo Electric (4341); RaQualia Pharma (4579); MEC (4971); JCU (4975); MORESCO (5018); Arisawa Mfg. (5208); Japan Pile (5288); Nakayama Steel Works (5408); Tokyo Tekko (5445); Onamba (5816); NIHON ELECTRIC WIRE & CABLE (5817); SUPER TOOL (5990); JAPAN MATERIAL (6055); RIDE ON EXPRESS (6082); TOYO MACHINERY & METAL (6210); Rheon Automatic Machinery (6272); NISSEI ASB MACHINE (6284); Okada Aiyon (6294); KOKEN BORING MACHINE (6297); Takatori (6338); ANEST IWATA (6381); Kato Works (6390); KANEMATSU ENGINEERING (6402); Fukusima Industries (6420); JUKI (6440); SANSO ELECTRIC (6518); W-SCOPE (6619); TABUCHI ELECTRIC (6624); SEMITEC (6626); TERASAKI ELECTRIC (6637); MIMAKI ENGINEERING (6638); Togami Electric Mfg. (6643); KYOWA ELECTRONIC INSTRUMENTS (6853); Sansha Electric Manufacturing (6882); YAMAICHI ELECTRONICS (6941); SHIBAURA ELECTRONICS (6957); Astmax (7162); SAFTEC (7464); KOKUSAI (7722); WiZ (7835); Daiko Denshi Tsushin (8023); MONEY SQUARE HOLDINGS (8728); Money Partners Group (8732); Daiwa Office Investment Corporation (8976); The First Energy Service (9514); Cerespo (9625); Imperial Hotel (9708); Marubeni Construction Material Lease (9763); PARKER CORPORATION (9845).

Lead Management: Daiwa Securities Co. Ltd. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) in the past twelve months for the following companies: DAIHO (1822); mixi (2121); Nihon M&A Center (2127); Link and Motivation (2170); Japan Best Rescue System (2453); TOKYO ELECTRON DEVICE (2760); Pharmarise Holdings (2796); ARCLAND SERVICE (3085); BRONCO BILLY (3091); The Monogatari Corporation (3097); Torikizoku (3193); HOTLAND (3196); Daiwa House REIT Investment Corporation (3263); Activia Properties (3279); Hulic Reit (3295); Nippon Healthcare Investment Corporation (3308); Tosei Reit Investment Corporation (3451); enish, Inc. (3667); COLOPL (3668); REALWORLD (3691); OPTiM (3694); GMO Research (3695); Daio Paper (3880); QUICK (4318); Daito Pharmaceutical (4577); RIBOMIC (4591); OAT Agrio (4979); Kobe Steel (5406); UCHIYAMA HOLDINGS (6059); Escrow Agent Japan (6093); RareJob (6096); NIPPON VIEW HOTEL (6097); PUNCH INDUSTRY (6165); SUNCORPORATION (6736); KYOWA ELECTRONIC INSTRUMENTS (6853); Imagica Robot Holdings (6879); Financial Products Group (7148); MEIWA INDUSTRY (7284); Nojima (7419); SUN-WA TECHNOS (8137); THE NAGANOBANK (8521); The Ehime Bank (8541); Mitsui Fudosan (8801); TOSHO (8920); Nippon Building Fund (8951); ORIX JREIT (8954); United Urban Investment Corporation (8960); HEIWA REAL ESTATE REIT (8966); Daiwa Office Investment Corporation (8976); Top REIT (8982); Japan Hotel REIT Investment Corporation (8985); AlphaPolis (9467). (list as of 1 November 2014)

Notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable to where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with our company based on the information described in this report, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, our company will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, our company also may charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident.

For derivative and margin transactions etc., our company may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by our company. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with our company. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association

Disclosure of Interest of Thanachart Securities

Investment Banking Relationship Within the preceding 12 months, Thanachart Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: NOK Airlines (NOK TB), MC Group Pcl (MC TB), MK Restaurants Group Pcl (M TB)

Disclosure of Interest of Affin Investment Bank

Investment Banking Relationship

Within the preceding 12 months, Affin Investment Bank has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following company: ALAM MARITIM (AMRB MK)

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

DHK market making DHK may from time to time make a market in the securities covered by this research.

Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst:

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the

investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions


Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts;

2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of

the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or

the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release.

The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next six months.

"2": the security is expected to outperform the KOSPI by 5-15% over the next six months.

"3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months.

"4": the security is expected to underperform the KOSPI by 5-15% over the next six months.

"5": the security could underperform the KOSPI by more than 15% over the next six months.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months.

“Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months

“Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months

Additional information may be available upon request.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.


India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to ,or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.

For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain


This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities:

For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships:

For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making:

For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts:

For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification:

For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

For stocks and sectors in Malaysia covered by Affin, the following rating system is in effect:

Stocks:

BUY: Total return is expected to exceed +15% over a 12-month period

TRADING BUY (TR BUY): Total return is expected to exceed +15% over a 3-month period due to short-term positive developments, but fundamentals are not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on greater risk

ADD: Total return is expected to be between 0% and +15% over a 12-month period

REDUCE: Total return is expected to be between 0% and -15% over a 12-month period

TRADING SELL (TR SELL): Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but the fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on greater risk

SELL: Total return is expected to be below -15% over a 12-month period

NOT RATED: Affin Investment Bank does not provide research coverage or a rating for this company. The report is provided for information purposes only

Sectors:

OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform in line with the KLCI benchmark over the next 12 months

UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to underperform the KLCI benchmark over the next 12 months

Conflict of Interest Disclosure: Affin


Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Relevant Relationships Affin may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Affin market making Affin may from time to time make a market in securities covered by this research.

For stocks and sectors in Indonesia covered by Bahana Securities, the following rating system is in effect: Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. "Buy": the price of the security is expected to increase by 10% or more.

"Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%.

"Reduce": the price of the security is expected to decline by 5% or more.

Sector ratings are based on fundamentals for the sector as a whole. Hence, a sector may be rated “Overweight” even though its constituent stocks are all rated “Reduce”; and a sector may be rated “Underweight” even though its constituent stocks are all rated “Buy”.

“Overweight”: positive fundamentals for the sector.

“Neutral”: neither positive nor negative fundamentals for the sector.

“Underweight”: negative fundamentals for the sector.


Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Relevant Relationships (Bahana Securities) Bahana Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.


Bahana Securities market making Bahana Securities may from time to time make a market in securities covered by this research. For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect:

Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price.

If the upside is 10% or more, the rating is BUY.

If the downside is 10% or more, the rating is SELL.

For stocks where the upside or downside is less than 10%, the rating is HOLD.

Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating.

For the sector, Thanachart looks at two areas, ie, the sector outlook and the sector weighting.

For the sector outlook, an arrow pointing up, or the word “Positive”, is used when Thanachart sees the industry trend improving.

An arrow pointing down, or the word “Negative”, is used when Thanachart sees the industry trend deteriorating.

A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is Thanachart’s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers.

An “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap.

“Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap.

“Neutral” is used when there are relatively equal weightings of BUYs and SELLs.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .

Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .

Relevant Relationships (Thanachart Securities) Thanachart Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Thanachart Securities market making Thanachart Securities may from time to time make a market in securities covered by this research.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law

(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

• In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

• In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

• There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

• Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd.

Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108

Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan

Japan Securities Investment Advisers Association

Type II Financial Instruments Firms Association


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