Myanmar Capital Goods Sector

Myanmar Industrials 16 November 2016

Set to fly higher

 Myanmar’s growth prospects are looking up, with a new democratic government and the implementation of reformative policy

 Serge Pun’s “banks to burgers” business portfolio seen as best-in- class assets for investors now eyeing Myanmar exposure Jame Osman (65) 6321 3092  We initiate coverage of First Myanmar Investment and affiliated Yoma [email protected] Strategic Holdings with Buy (1) ratings Shane Goh

(65) 6499 6546 [email protected]

See important disclosures, including any required research certifications, beginning on page 106

Myanmar Industrials 16 November 2016

Myanmar Capital Goods Sector

Set to fly higher

 Myanmar’s growth prospects are looking up, with a new democratic government and the implementation of reformative policy

(65) 6499 6546 [email protected]

What's new: Myanmar has seen big changes since the West lifted Key stock calls sanctions in 2012, most notably in its telecoms and property sectors, and New Prev. we believe the transition of power to a new democratic government will First Myanmar Investment (FMI) Rating Buy catalyse the next leg of growth and take the country and its leading Target 22,500.00 companies to new heights. Upside p 40.6% Yoma Strategic (YOMA SP) The recent implementation of reform policies such as the Myanmar Rating Buy Investment Law and Financial Institutions Law indicates the government is Target 0.730 Upside p 28.1% taking a balanced approach — welcoming foreign investment while being mindful of the interests of local businesses. In our view, further clarity in the Source: Daiwa forecasts form of by-laws that are likely to be proposed in the near term will compel businesses now waiting on the sidelines to head into Myanmar. For investors seeking exposure to Myanmar today, we believe Serge Pun’s listed business portfolio features best-in-class assets in a wide range of sectors, making them proxies for the broader growth story.

In this report, we highlight First Myanmar Investment (FMI) and affiliated Yoma Strategic Holdings, home-grown Myanmar companies respectively listed in Yangon and Singapore. Both look well placed relative to local peers in terms of operational execution as well as corporate governance – the latter a crucial trait for international investors keen to navigate the complex business landscape in Myanmar. While FMI is off limits to foreign investors for now, our report serves as an introduction to the company and should help investors better understand Yoma given the 2 companies’ close ties.

Catalysts: We highlight 3 sector-level catalysts to watch for: 1) clarity on further regulatory reform, in particular any moves favouring liberalisation of the banking sector (eg, market-driven interest rates, expansion of uncollateralised lending) and foreign ownership of investment property, 2) signs of greater political stability and effective enforcement of a transparent judicial system, and 3) an acceleration in foreign direct investment flows.

What we recommend: We initiate on First Myanmar Investment (FMI) with a Buy (1) call and 12-month SOTP-based TP of MMK22,500, and on Yoma Strategic Holdings (YSH) with a Buy (1) rating and SOTP-based TP of SGD0.73. Given our expectation of strong earnings growth for both companies (we forecast a net profit CAGR of 140% for FMI and PBT CAGR of 22% for YSH over FY16-19), valuations appear attractive, with FMI and YSH trading at FY18E PERs of 19.6x and 23.3x, respectively.

How we differ: We are the first in the market to take a top-down and bottom-up view of Serge Pun’s listed entities and the relationship between them.

See important disclosures, including any required research certifications, beginning on page 106

Myanmar Capital Goods Sector: 16 November 2016

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg First Myanmar Investment FMI 16,000.00 Buy 22,500.00 117.058 816.259 Yoma Strategic YOMA SP 0.570 Buy 0.730 0.031 0.024 Source: Bloomberg, Daiwa forecasts

Progress and timeline of key regulations for FMI (see Appendix 1 for further details) Date Description Myanmar Investment Law (MIL) Jun-16 Formation of a new Myanmar Investment Commission (MIC) Sep-16 Draft of new MIL submitted to Parliament Oct-16 MIL was passed by the House of Nationalities (Upper House) on 5 October after passing through the House of Representatives (Lower House) the previous week Companies Act 2013 A Companies Act begins to be drafted by the government with assistance from Asian Development Bank Jun-15 Revised first draft published Oct-16 Draft law is “still in the pipeline for inter-ministerial review” 1Q17 Expected to be submitted to Parliament for approval Financial Institutions Law (FIL) 2013 New FIL drafted with the assistance of the World Bank Jan-16 New FIL successfully passed in Parliament Condominium Law Jan-16 Law passed by Myanmar's Union Parliament May-16 Yangon City Development Committee (YCDC) issued city-wide suspension on construction of high-rise residential buildings for inspections Nov-16 YCDC finished inspections Dec-16 By-laws expected to be released

Source: compiled by Daiwa

Infrastructure Electricity consumption (kWh) 221.5 2,500.7 1,133.2 Roadways (km) 34,377 180,053 206,633 Railway length (km) 6,000 4,071 3,147

Healthcare Health Expenditure: Total: % of GDP 2.3 6.5 7.1 Health Expenditure: Private: % of GDP 1.2 0.9 3.2 Health Expenditure: Public: % of GDP 1.0 5.6 3.8 Health Expenditure per Capita (USD) 20.3 360.4 142.4 Health Expenditure per Capita: PPP: 2011 Price (USD) 103.5 950.1 390.5 Physicians: per 1000 People 0.6 0.4 1.2 Hospital Beds: per 1000 People 0.6 2.1 2.0

Banking Domestic credit to private sector by banks (% of GDP) 17.4% 117.2% 111.9% Automated teller machines (ATMs) (per 100,000 adults) 1.6 111.9 23.6 Commercial bank branches (per 100,000 adults) 3.1 12.7 3.8 Gross savings (% of GDP)* 26.7% 28.0% 30.0% Deposit interest rate 8.0% 1.4% 4.7% Lending interest rate 13.0% 6.6% 7.1% Sovereign credit rating (Moody's)** Unrated Baa1 B1

Source: MNPED, CEIC, World Bank, CIA World Factbook Note: *data unavailable for Myanmar, calculated using savings deposits data disclosed by CBM divided by GDP (2014); **Myanmar’s sovereign credit has yet to be rated by any rating agency

Myanmar Capital Goods Sector: 16 November 2016

Table of contents

Myanmar: set to fly higher ...... 5 The path to political reform ...... 5 Approval of new MIL could spur FDI ...... 7 Regulatory environment: upheaval done, with steady changes to come ...... 9 Who’s who: family-owned conglomerates in Myanmar ...... 11

Company Section First Myanmar Investment ...... 13 Yoma Strategic ...... 57

Myanmar Capital Goods Sector: 16 November 2016

Myanmar: set to fly higher The path to political reform Myanmar’s opening up to the world is rooted in the political reform process which began in 2011, effectively putting to rest 50 years of military rule and geo-economic isolation. The sudden about-turn was believed to have been initiated by then General Than Shwe (who governed the country over 1992 to March 2011) who had reportedly been keen to avoid an ‘Arab Spring’-like scenario during that period.

The speed with which Myanmar has since introduced reforms cannot be understated, especially when one considers the almost ‘hermit’-like status of the country previously. In the span of less than a year, the regime dissolved the military government in March 2011 and installed a nominally civilian government presided over by President Thein Sein. At the same time, it proceeded to release more than 600 political prisoners, one of whom included the current National League for Democracy’s (NLD) leader, Aung San Suu Kyi.

On 1 April 2012, the NLD successfully contested in the country’s first by-elections, winning 43 of 44 seats (37 of the 440 seats in the Lower House and 6 of the 224 seats in the Upper House), culminating in Suu Kyi’s election to Parliament.

Myanmar: key political milestones Year Description 1886-1948 Under British colonial rule 1948-1962 Independent republic named the Union of Burma 1962 (til 2011) Military regime; socialist constitution adopted 1988 8888 Uprising' protests over economic management and political oppression; military government finalised plans for elections to be held on 31 May 1989 1990 First free election in 30 years held and won by the National League for Democracy; military government refuses to hand over control 1997 Myanmar joins ASEAN 2007 Anti-government protests held, dubbed the "Saffron Revolution" 2010 Elections held - Union Solidarity and Development Party (USDP), the military's proxy, claims resounding victory but opposition groups allege widespread fraud 2011 Military government is dissolved in Mar 2011. Thein Sein is sworn in as president of a new, nominally civilian government 2012 US progressively eases sanctions on Myanmar 2013 European Union lifts all sanctions on Myanmar 2015 Elections held on 8 November, NLD wins by a landslide 2016 Htin Kyaw sworn in as president, NLD term begins 1 April

Source: Various sources, Daiwa compiled

Renewed foreign interest The lifting of economic sanctions by the West in the aftermath of these changes, following the lifting of particularly the April 2012 elections, was swift. The Obama administration announced it sanctions imposed on planned to gradually ease certain sanctions, while the EU suspended all sanctions on Myanmar Myanmar in April 2012. These moves opened the floodgates for renewed interest from foreign investors eager to participate in the next wave of the country’s economic development.

Subsequently, the November 2015 elections were closely watched as the country’s most recent political milestone. While the election of the NLD was a widely expected outcome, the real challenge now for Myanmar as identified by the newly elected democratic government, will be how to lay a foundation for broad-based growth which will benefit the entire populace, beginning by tackling the issue of cronyism, which observers perceive to have been rife in the country under authoritarian rule.

Most recently, US President Barack Obama announced on 13 September 2016 that he was prepared to completely lift sanctions on Myanmar, including granting a special trade status which would allow the import of duty-free products.

Myanmar Capital Goods Sector: 16 November 2016

Political stability still far from a certainty Another emerging issue in Myanmar has centred on racial and religious tensions involving the oppression of the Burmese Rohingya people in the Northern Rakhine State, in tandem with the rise of far right-leaning political parties such as the Union Solidarity and Development Party (USDP). Since 1982, Myanmar’s junta was reported to have stripped the ethnically Muslim population of its citizenship status, despite its centuries-long presence in the region.

The elephant in the room Even with the country’s transition to a new democratic system of government, violence levels appear to have escalated, leading to an exodus of refugees fleeing afflicted areas, according to various media sources. Some observers have questioned Nobel laureate Aung San Suu Kyi’s relative inaction on the issue since the NLD has taken office – recently (August 2016) she appointed former UN chief Kofi Annan to lead a commission to address the issues of human rights abuses in Rakhine.

In our view, the civil strife in Myanmar represents a test of the NLD’s resolve to create an inclusive society and tackle issues of persecution before they potentially boil over. Failing such, we believe it could have significant negative implications for Myanmar’s economic development in the near term and its attractiveness as a market for foreign investors.

Strategic location Sandwiched between Myanmar is strategically located amidst 3 of the largest and fastest-developing regions in India, China and SEA the world: China to the north, India to the west, and South Asia to its east. With a total land area of around 677,000sq km, it is larger than neighbouring Thailand (513,000 sq km), although with a far lower population density (see table on next page). The country has had a longstanding relationship with China; it provides the latter with access to the Indian Ocean. Similarly, Thailand has had great interest in engaging Myanmar in order to shorten its transport routes, particularly by sea.

Roadblocks to economic growth Basic infrastructure is The slow progress of some of Myanmar’s key development projects can be attributable to still lacking; skilled several roadblocks still facing the country: 1) Myanmar’s supporting infrastructure remains labour in short supply poor – many parts of the country lack access to a reliable power supply, with an estimated 87% of the population without regular electricity (blackouts are common even within major cities), according to the International Energy Agency, 2) access to capital has been limited, due to prior delays in the passing of the Myanmar Investment Law (MIL) as well as the controlled interest-rate policy and collateralised lending requirements of the CBM, and 3) the absence of a skilled labour pool, as the junta had historically shut down the country’s universities several times in the past few decades.

Bright spots emerging One bright spot has been the breakneck pace at which Myanmar’s telecoms sector has developed. Since its liberalisation with the awarding of telecom licences to foreign operators Telenor and Ooredoo in 2013, mobile penetration has increased sharply with the number of SIM cards in circulation reaching close to the population of the country (51.5m) – a significant increase from just around 1m several years ago. This increased capability in communications represents a crucial catalyst for further economic growth, in our view.

Currency On 1 April 2012, the government floated the kyat after 35 years of being pegged to the International Monetary Fund’s special drawing rights basket at USD1:MMK6.4, a rate only available to state-owned companies. A new reference rate of USD1:MMK818 was set to gradually move to a market rate.

Myanmar Capital Goods Sector: 16 November 2016

Other key facts Myanmar’s GDP per capita is currently the lowest in Asia (USD5,207), with around 70% of the population residing in rural areas of the country. Meanwhile, its population remains relatively young, with a median age of 28.62 and with only around 8.2% of the population aged over 60 years as at 2012. We highlight a summary of key facts on Myanmar in the following table.

Myanmar: key demographic facts Description Myanmar Thailand Vietnam Area (km2) 676,578 513,120 332,698 Population (m) 51.5 68.0 91.7 Population density (per km2) 76 132 276 Population under 35 (%) 74% 45% 56% GDP (PPP) (USD bn) 270.0 1,152.0 593.5 GDP per capita (USD) 5,207 16,706 6,414 Urban population (%) 30% 49% 33% Infrastructure Electricity consumption (kWh) 221.5 2,500.7 1,133.2 Roadways (km) 34,377 180,053 206,633 Railway length (km) 6,000 4,071 3,147 Healthcare Health Expenditure: Total: % of GDP 2.3 6.5 7.1 Health Expenditure: Private: % of GDP 1.2 0.9 3.2 Health Expenditure: Public: % of GDP 1.0 5.6 3.8 Health Expenditure per Capita (USD) 20.3 360.4 142.4 Health Expenditure per Capita: PPP: 2011 Price (USD) 103.5 950.1 390.5 Physicians: per 1000 People 0.6 0.4 1.2 Hospital Beds: per 1000 People 0.6 2.1 2.0 Banking Domestic credit to private sector by banks (% of GDP) 17.4% 117.2% 111.9% Automated teller machines (ATMs) (per 100,000 adults) 1.6 111.9 23.6 Commercial bank branches (per 100,000 adults) 3.1 12.7 3.8 Gross savings (% of GDP)* 26.7% 28.0% 30.0% Deposit interest rate 8.0% 1.4% 4.7% Lending interest rate 13.0% 6.6% 7.1% Sovereign credit rating (Moody's)** Unrated Baa1 B1

Approval of new MIL could spur FDI Since the easing of economic sanctions imposed by the West in 2012, foreign direct investment into Myanmar has been on a clear uptrend (see chart below), although the pace of FDI inflows has likely been slower than expected by the market. Part of this can be attributed to existing restrictions imposed by the government on foreign investment inflows, while regulatory ambiguity and uncertainty persist in several key sectors including property and banking (see section on regulatory environment below).

FDI could accelerate In FY16, FDI was around USD9.4bn, with almost USD4bn pushed through in the final with the approval of the month of March. However, following the election of the NLD, the reformation of a new new MIL in October 2016 Myanmar Investment Commission (MIC), led by Kyaw Win (Minister of Finance and Planning), did not take place until June 2016, leading to a backlog of around USD2.3bn in foreign investment projects. The new MIC deliberated on a new direction and action plan which balances economic development while preserving domestic interests, culminating in the recent approval of the new MIL in Parliament on 5 October 2016 (see discussion on regulatory environment below). Although some issues remain unclear (eg, restricted industries), the enactment of the law is expected to expedite the approvals process for future investment projects.

At present, China, Thailand and Singapore account for around a combined 68% of cumulative FDI into Myanmar since 1988.

Myanmar Capital Goods Sector: 16 November 2016

Myanmar: foreign direct investment (March year-end) (USDbn) 20 18 16 14 12 10 8 6 4 2 0 1996 2001 2006 2011* 2012 2013 2014 2015 2016

Source: DICA Note: *mainly investment from China and HK; March year-end

Myanmar: cumulative FDI by country since 1988 (USDbn) 20 18 16 14 12 10 8 6 4 2 0 China Singapore Thailand Hong Kong U.K. Republic of Malaysia The India Vietnam Korea Netherlands

Source: DICA

Economic outlook According to the World Bank and Asian Development Bank, Myanmar’s economic growth slowed to an estimated 7.2% YoY in 2015 following 2 years of strong YoY growth, due to a few factors including: 1) severe flooding in several areas of the country, 2) lower commodity prices affecting its main exports (rice, energy, minerals, etc.), and 3) some uncertainty in the lead-up to the December 2015 elections eventually won by the NLD.

GDP growth of 8.6% YoY Looking ahead, Asian Development Bank forecasts Myanmar’s GDP to grow at a rate of expected in 2016 8.6% YoY in 2016 and 8.3% YoY in 2017, the fastest in Asia, driven by garment and natural gas exports, as well as strong tourist arrivals.

Myanmar: GDP trend (YoY %) 10.0 8.7 9.0 8.4 8.0 7.3 7.2 7.0 5.6 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2011 2012 2013 2014 2015

Source: Asian Development Bank

Myanmar Capital Goods Sector: 16 November 2016

Myanmar: GDP per capita comparison in ASEAN (USD) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Singapore Brunei Malaysia Thailand Indonesia Philippines Vietnam Laos Myanmar Cambodia

Source: IMF

Regulatory environment: upheaval done, with steady changes to come Since 2012, Myanmar’s regulatory system has undergone real upheaval. Under the newly elected NLD, expectations are high that the regulatory environment could continue to be liberalised to allow foreign investment to flourish in the country.

Dismantling old policies Our discussions on the ground suggest that this process has to take place at a measured pace. Given its past system of governance, dismantling and reconstructing policies is clearly a new and challenging issue for the NLD – its focus appears to be placed on addressing long-standing questions of corruption concerning the junta – while carefully laying a foundation for sustainable growth over several decades.

A sound judicial system Further, in her first international engagement after more than 2 decades, Suu Kyi is important for proper highlighted the priority for a formation of an independent judiciary, warning investors that enforcement of “even the best investment law would be of no use whatsoever if there is no court clean regulation enough and independent enough to be able to administer these laws justly”.

Within the context of FMI’s businesses, we highlight the following key regulations which could affect its operations.

Key regulations Banking: Financial Institutions Law The banking landscape in Myanmar is governed by the Central Bank of Myanmar (CBM) under the Central Bank of Myanmar Law (2013), an autonomous body with licensing and regulatory authority. At present, the CBM has the ability to independently adjust interest rates, as well as conduct currency and exchange operations.

In January 2016, the Financial Institutions Law (FIL) was passed in Parliament, replacing the old version from 1990. In essence, this new law represents a tightening of requirements on banks, including: 1) requirements that banks will have to keep 5% of customer deposits with the CBM “interest-free” (vs. 10% previously; but with up to 75% in Treasury bonds), 2) stricter capital adequacy and liquidity ratios in compliance with Basel standards, as well as 3) outlining requirements for corporate governance and risk management practices.

Strict regulations favour While some investors appear to be expecting the CBM to announce policies favouring a Yoma Bank, in our view more “market-driven” banking system in Myanmar, we believe this is unlikely to happen in the near term. Additionally, the tighter regulatory environment is likely to pose challenges for smaller banks, as well as banks with inadequate risk management and poor corporate governance practices. In the medium term, this could spur consolidation in the sector, which would favour Yoma Bank, given what we see as its strong emphasis on strict standards of governance and managing risk adequately.

Myanmar Capital Goods Sector: 16 November 2016

MIL and Companies Act MIL approved in The MIL combines and replaces the Foreign Investment Law enacted in 2012 (first enacted Parliament on 5 October in 1988) as well as the Myanmar Citizens Investment Law enacted in 2013 (first in 1994). 2016 Under the purview of the Directorate of Investment and Company Administration (DICA) and the recently elected NLD government, a new Myanmar Investment Commission (MIC) was formed on 7 June 2016. Since then, the MIC had published a draft of the proposed new law which was recently approved in parliament on 5 October 2016 and is expected to be enacted by the next parliamentary session.

The MIL is important because it is expected to: 1) affect both the quality and quantity of investment flowing into the country, by addressing issues ranging from tax breaks to the definition of joint venture companies, 2) allow for certain investments to be made without the prior approval of the MIC (previously all investment needed approval by the MIC), and 3) reduce confusion by merging local and foreign investment laws into one.

Some details still need For example, foreigners will now be able to make investments and own up to 100% of to be ironed out businesses without the need of a local partner. However, this is likely to continue to be restricted to certain sectors as well as on a case-by-case basis. In addition, tax breaks will be granted to businesses investing in classified zones (according to how developed the area is), without further detail on the location of these zones as of yet. The MIC has also highlighted labour intensive sectors such as manufacturing, agriculture and food, as well as infrastructure development as potential sectors to be promoted.

The government is still Based on our discussions with the government, it is keen to attract foreign investment, keen on foreign while mindful to ensure quality as well as transparency in accordance with international investment into best practices and the ASEAN Comprehensive Investment Agreement. Myanmar Separately, the new Companies Act is currently being drafted with the assistance of the Asian Development Bank and has yet to be submitted to parliament. The Companies Act is widely expected to be key to defining a “foreign company”, as well as allowing foreign ownership of Myanmar-listed shares on the YSX.

In essence, the MIL is aimed at controlling the allocation of capital and investments in Myanmar, while the Companies Act establishes a framework governing how both foreign and local companies conduct their operations in the country.

Property: Condominium Law Currently, only locals may purchase residential properties in Myanmar, but foreigners may soon gain access to the market. On 22 January 2016, Myanmar’s Union Parliament approved a draft of the Condominium Law that will allow foreign nationals to legally purchase condominiums in the country. However, total foreign ownership in any one project is limited to 40% of the total project space, and they may only buy units on the sixth floor or higher. Buyers will acquire shared ownership of the land and apartment, which is viewed as an improvement over previous property laws favouring landowners over apartment owners.

Law provides legal The Condominium Law also provides a legal framework allowing the financing of framework for bank condominiums (ie, bank loans), as it gives legal status to the property and allows the buyer financing in purchase of to arrange for bank financing using the property as collateral. Presently, buyers mostly pay houses using cash, as other financing options are largely unavailable. Although there are no limitations on financing for foreign buyers, who may seek offshore sources, the buyer must purchase through a transfer of funds from abroad, as there is no current allowance for in- country payment.

While we believe the enactment of the Condominium Law would be a positive sign in encouraging foreign investment into Myanmar’s real estate market over the long run, the opaque circumstances on certain processes and criteria currently may deter foreign inflows, until investors receive clarity on the regulations.

Myanmar Capital Goods Sector: 16 November 2016

One such concern is whether any limitations will be placed on the commercial use by foreign owners of registered units. The law stipulates that foreigners are not permitted to manage condominiums, which raises the question as to whether they will be allowed to rent out the units. At Pun Hlaing Estate, about half of condominiums are owner-occupiers while the other half is leased out, according to management.

Who’s who: family-owned conglomerates in Myanmar An end to perceptions of Given the absence of a free-market driven economy under the junta’s rule over the past crony capitalism? several decades, a number of Myanmar’s largest family-run conglomerates have thrived, apparently through their close relationships with the military. Many of these businesses appear to have benefited in one way or another from: 1) concessions/licenses to mine the country’s rich natural resources, 2) the underground drug trade (Myanmar continues to be the second-largest producer of opium after Afghanistan, and a leading supplier of methamphetamine), as well as 3) grants to land rights or contracts for major infrastructure development projects.

2010 “privatisation In 2010, Myanmar’s government implemented the largest privatisation exercise in its exercise” history, which saw around 300 state-owned assets, including sectors ranging from real estate to gas stations and airlines, being privatised and handed to several of these local conglomerates.

With the perception of corruption has proved a very real problem for the country, the NLD has prioritised tackling this issue to provide a clean foundation for future economic growth of which a larger proportion of the population could stand to be beneficiaries.

Cognisant of this, some of these family-run conglomerates have sought to revamp their image and distance themselves from their murky past, particularly under the leadership of a second-generation of scions who are seeking to consolidate and retool their businesses to compete on a potentially more level playing field. A number of companies whose names have been removed from international sanctions lists have since sought to tie-up with foreign investors to leverage their position as a strong local partner, which is still considered a necessity for foreign investors seeking to navigate Myanmar’s complex business environment.

We highlight some well-known Myanmar family-owned conglomerates and their associated businesses in the table below.

FMI: a benchmark for corporate governance standards in Myanmar Notably, the Pun family has been excluded from international sanctions lists, unlike other prominent Burmese families who own numerous businesses in the country. FMI’s management led by Chairman Serge Pun has consistently been a strong advocate of and upheld high standards of corporate governance and ethnical business practice in Myanmar. The successful listing of affiliated company Yoma Strategic Holdings on Singapore’s stock exchange in 2006 is a clear testament to this.

Yoma Strategic For example, a similar proposed reverse takeover (RTO) deal of bed linen retailer Aussino Holding’s listing a Group on SGX, which would have seen Max Myanmar Group’s U Zaw Zaw inject his petrol testament to FMI’s kiosk business into the listed company, was rejected in April 2006. SGX cited corporate corporate governance governance concerns and Zaw Zaw’s place on the US sanctions list as key reasons behind standards its decision not to approve the deal.

Further, with its status as one of the earliest home-grown public companies (on the OTC market since 1992) and the first company to list on the YSX in March 2016, the company has actively disclosed and communicated its operational and financial performance with the investment community. FMI represents one of the few reliable Myanmar conglomerates for foreign investors to partner, in our view. We believe the company will continue to leverage its market position and establish business relationships over the longer term.

Myanmar Capital Goods Sector: 16 November 2016

Myanmar: major family-owned conglomerates Annual income Previously on US Key person Company Industries Key companies Comments (USDm) sanctions list? Tay Za Htoo Group Trading, logistics, property, AGD Bank, Air Bagan, Myanmar's best-known business tycoon, and described by the 500 Yes agro-industries, tourism, oil Elite-Tech Co, Aureum US as the former regime's 'top crony' and retail, airline Palace Hotels and Resorts, Htoo Trading U Zaw Zaw Max Myanmar Timber, gems and rubber Ayeyarwady Bank, Max Max Myanmar Group failed in its bid for an RTO of SGX-listed Yes Group plantations, construction, Strategic Investments Aussino in 2013 banking, hospitality and tourism, automotive import, petrol stations Aung Ko Win Kanbawza 11 subsidiaries across KBZ Bank (largest Former school teacher with close connections with General Yes (Saya (KBZ) Group industries such as private bank), Air KBZ, Maung Aye (former VC of SPDC), and secured numerous Kyaung) construction, garments, Myanmar Airways concessions for ruby and sapphire mines insurance, banking, oil, International communications, cement, aviation and gems mining U Tun Myint Asia World Industrial development, Asia Light Supermarket, Son of drug trafficker Lo Hsing Han, Steven Law is married to Yes Naing (Steven Group construction, transportation Asia World Port Cecila Ng where several businesses in Singapore are Law) (port and airport operations Management, Kokang registered under her name. management), import-export, Singapore supermarkets In 1996, Lo Hsing Han formed a JV with Robert Kuok to develop Traders Hotel in Yangon, which Asia World holds a 10% stake.

Granted numerous other government licenses to develop infrastructure, distribute electricity and fuel, as well as SIM cards

U Nay Aung/U IGE Group Timber, rice, oil & gas, United Amara Bank Sons of former Minister and General U Aung Thaung. Placed Yes Pyi Aung banking, hospitality, telecoms, on US sanctions list and accused of blocking key democratic construction reforms.

Second largest timber company in Myanmar. Major supplier of materials used in the construction of electrical substations and transmission lines, rice exporter. Established in 1994 and registered company in Singapore in 2001.

Aik Thun Shwe Taung Residential and hotel Asia Wealth Bank, Shwe Formerly known as Olympic Construction Company, renamed 300 Yes Group development, construction Taung Development Co, as Shwe Taung Group in 2004 following the 2003 banking crisis and engineering, cement, Octagon Iternational in Myanmar as well as money laundering accusation and drug importer of machinery and Services Co links against its affiliated Asia Wealth Bank (closed by the construction vehicles Myanmar government in 2005) by the US department of Treasury.

Ne Win Tun Ruby Dragon Gold and gem mining, Widely believed that high-ranking Burmese generals are Yes Jade & Gems cement, hospitality shareholders in the company. Co Khin Shwe Zaykabar Real estate development, In 1997, founder Khin Shwe hired Bain and Associates Inc, to Yes Company construction, telecoms improve relations with the US. However, in 2007, he was placed on the US sanctions list for his close ties to the regime. The company is responsible for several high-profile projects including the Yangon Industrial Park.

Win Aung Dagon Infrastructure construction, Co-founded the company with former army captain Win Thein Yes International timber, real estate, tourism in the early 1990s to invest in construction projects in Rangoon, closely connected to former junta regime

Chit Khaing Eden Group Real estate development, Myanma Apex Bank Close ties to the SPDC regime. Eden Group was one of the construction, banking (MAB) only 8 local companies to construct Nay Pyi Taw.

Received preferential private banking licenses from the Central Bank of Myanmar in 2010 and established MAB.

Dr. Sai Sam Loi Hein FMCG manufacturing and Loi Hein Distribution Known primarily for its soft drink products, including the Alpine Yes Htum Group distribution Company bottled water brand, and Thai energy drink brand Shark

Michael Moe Myint & Oil & gas A former senior pilot at Myanmar Airways. Described as one of No Myint Associates Burma's most legitimate businessmen. The first private Burmese company to enter the oil & gas industry.

Serge Pun SPA/FMI Real estate development, First Myanmar Founder Serge Pun left Burma for Beijing in 1963 and No Group healthcare, banking, Investments (FMI), spent many years in China and Hong Kong in the property automotive, tourism, Yoma Strategic, Yoma industry. Originally founded SPA Group in HK in 1991 as a retailing, airlines Bank, Convenience real estate developer. Prosperity Company

Aung Moe IBTC Beverage manufacturing International Beverages Son-in-law of Thein Tun, who brought Pepsi to Myanmar in No Kyaw Trading Company 1991. Distributor for Heineken; in 2013, diversified by Myanmar Distillery collaborating with Singapore JC&C to distribute vehicles Company

Source: Various, Daiwa compiled

Myanmar Industrials 16 November 2016

(FMI) First Myanmar Investment First M yanmar Investment

Target price: MMK22,500.00 Share price (14 Nov): MMK16,000.00 | Up/downside: +40.6%

Initiation: a cut above the rest Jame Osman (65) 6321 3092  A quality proxy for Myanmar’s economic growth across key sectors [email protected]  Yoma Bank likely instrumental in driving near-term earnings growth Ramakrishna Maruvada  Initiating with a Buy (1) rating and SOTP-based TP of MMK22,500 (65) 6499 6543 [email protected]

Investment case: We initiate coverage of First Myanmar Investment (FMI) Share price performance with a Buy (1) rating. FMI is a respected home-grown Myanmar (MMK) (%) conglomerate which offers investors diversified exposure across 3 key 41,000 105 sectors – banking, healthcare and real estate – with each of its businesses 34,500 99 well-positioned vis-à-vis the competition, in our view. While its shares are 28,000 93 21,500 86 currently only accessible to local investors, we believe the approval of the 15,000 80 Myanmar Companies Act, expected within the next year, will pave the way Mar-16 Jun-16 Sep-16 for foreign investors to purchase shares of listed companies in the country. FMI (LHS) Relative to MYANPIX (RHS)

Over FY16-19, we expect FMI’s banking division to be the key driver 12-month range 15,500.00-41,000.00 behind our 139.7% net-profit CAGR forecast for the company. Subsidiary Market cap (USDbn) 0.28 Yoma Bank, which was once one of Myanmar’s largest private banks prior 3m avg daily turnover (USDm) 0.03 Shares outstanding (m) 23 to government restrictions imposed in 2003, appears poised to reclaim its Major shareholder Serge Pun (69.4%) position. We believe the successful launch of its mobile banking app, Wave Money (a tie-up with Telenor Myanmar), in August 2016 will be instrumental Financial summary (MMK) in expanding its customer reach into the still largely rural areas of the Year to 31 Mar 17E 18E 19E country. We also see significant opportunities in tandem with regulatory Revenue (m) 144,650 250,766 418,287 reform, which could allow for the introduction of new banking products into Operating profit (m) 3,580 33,740 87,300 Net profit (m) 2,710 18,894 44,141 the market and drive longer-term industry deposit and loan growth. Overall, Core EPS (fully-diluted) 117.058 816.259 1,906.970 we also think management’s consistent emphasis on strong corporate EPS change (%) (15.4) 597.3 133.6 governance and risk management cannot be understated, as this aligns the Daiwa vs Cons. EPS (%) n.a. n.a. n.a. PER (x) 136.7 19.6 8.4 company with the priorities of the new government and should elevate its Dividend yield (%) 0.2 1.5 3.6 credibility among foreign investors – crucial traits when establishing DPS 35.117 244.878 572.091 relationships in the country’s rapidly evolving business landscape. PBR (x) 1.7 1.4 1.1 EV/EBITDA (x) 27.4 1.6 n.a. ROE (%) 1.3 7.8 14.8 Catalysts: In the near term, we see the following rerating catalysts: 1) clarity on regulatory reform including the liberalisation of the banking sector, Source: FactSet, Daiwa forecasts 2) evidence of strong deposit traction and Wave Money account sign-ups, and 3) announcements of hospital expansion plans.

Valuation: We adopt an SOTP-based approach to value FMI shares, deriving a 12-month TP of MMK22,500. We value Yoma Bank (60% of our valuation) by applying a target PBR of 2.29x to our FY18E BV under a 2- stage DDM, as we expect the bank to enter a high-growth phase over an 8- year horizon. For FMI’s real-estate division (36% of our valuation), we adopt an RNAV valuation approach, given its substantial landbank and as we expect its key developments to contribute meaningfully only from FY21. We also apply a 20% scarcity premium to our TP, given FMI is only one of 3 listed companies on the Yangon Stock Exchange (YSX).

Risks: Regulatory and political risks pose the biggest challenge to our positive thesis under the new government.

See important disclosures, including any required research certifications, beginning on page 106

First Myanmar Investment (FMI): 16 November 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook FMI: adjusted net-profit (PATMI) forecasts

We forecast FMI’s adjusted net profit (PATMI) to rise at a (MMKbn) 139.7% CAGR over FY16-19, driven mainly by its banking 90 division, which cumulatively accounts for around 95% of 80 our net-profit forecast. For Yoma Bank, we forecast a net- 70 FY16-19E CAGR: 136% profit CAGR of 155% over the same period, as we expect 60 an acceleration in deposit and loan growth following the 50 successful launch of its mobile banking app, Wave Money, 40 in August 2016. We expect FMI’s healthcare division to 30 turn EBITDA-positive by FY19. For its real-estate division, 20 we forecast a 23.3% CAGR in associates’ contribution over 10 FY16-19, as its key Landmark Project should begin to 0 FY15 FY16 FY17E FY18E FY19E contribute by FY18. Source: Company, Daiwa forecasts

Valuation FMI: share-price performance

FMI is only 1 of 3 listed companies on the YSX. The stock (MMK) is trading currently at an FY18E PER of 19.6x and PBR of 42,000 1400 1300 1.4x, which appear attractive to us mainly as: 1) its strong 37,000 1200 earnings growth profile implies a low PEG of 0.15x – we 32,000 1100 believe FMI is one of the few conglomerates in Myanmar 1000 27,000 well positioned to capture the potential upside of the 900 22,000 800 country’s likely economic growth over the longer term, 2) 700 17,000 the company’s strong corporate governance and 600 transparency represent a key value proposition, making 12,000 500

FMI an attractive target for partnerships with foreign

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May-16 May-16 investors, and 3) we believe FMI’s current book value is FMI (LHS) MYANPIX Index (RHS) understated by its real-estate segment, which is equity Source: YSX accounted and not measured at fair value.

Earnings revisions

There is currently no reliable source available to derive and monitor consensus earnings forecasts for FMI. We are the only international firm covering FMI.

First Myanmar Investment (FMI): 16 November 2016

Financial summary Key assumptions Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Banking - Loan growth (YoY %) 0.0 0.0 0.0 0.0 74.1 60.0 70.0 70.0 Banking - Deposit growth (YoY %) 0.0 0.0 0.0 0.0 58.9 50.0 70.0 70.0 Banking - CAR (%) 0.0 0.0 0.0 0.0 8.3 10.2 10.1 10.1 Banking - NIM calculated (%) 0.0 0.0 0.0 0.0 2.7 2.7 3.9 4.7 Healthcare - Revenue per doctor (MMK 0.0 0.0 0.0 0.0 81.7 88.2 95.2 102.9 m) Healthcare - Staff costs YoY growth 0.0 0.0 0.0 0.0 116.5 33.0 36.0 30.0 (%)

Profit and loss (MMKm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Financial services 0 0 0 18,387 95,304 129,790 230,431 391,696 Healthcare services 0 0 0 4,123 11,922 14,860 20,335 26,591 Other Revenue 0 0 0 10,808 2,798 0 0 0 Total Revenue 0 0 0 33,319 110,024 144,650 250,766 418,287 Other income 0 0 0 0 133 0 0 0 COGS 0 0 0 (20,401) (74,932) (100,570) (172,477) (281,983) SG&A 0 0 0 (12,402) (32,050) (37,406) (40,890) (44,415) Other op.expenses 0 0 0 (2,229) (3,913) (3,094) (3,660) (4,590) Operating profit 0 0 0 (1,713) (737) 3,580 33,740 87,300 Net-interest inc./(exp.) 0 0 0 0 0 0 0 0 Assoc/forex/extraord./others 0 0 0 75,943 11,252 1,447 4,859 7,083 Pre-tax profit 0 0 0 74,231 10,515 5,027 38,599 94,382 Tax 0 0 0 (1,107) (1,599) (754) (5,790) (14,157) Min. int./pref. div./others 0 0 0 1,532 511 (1,564) (13,915) (36,084) Net profit (reported) 0 0 0 74,655 9,427 2,710 18,894 44,141 Net profit (adjusted) 0 0 0 74,655 3,204 2,710 18,894 44,141 EPS (reported)(MMK) n.a. n.a. n.a. 3,811.478 407.277 117.058 816.259 1,906.970 EPS (adjusted)(MMK) n.a. n.a. n.a. 3,811.478 138.400 117.058 816.259 1,906.970 EPS (adjusted fully-diluted)(MMK) n.a. n.a. n.a. 3,811.478 138.400 117.058 816.259 1,906.970 DPS (MMK) 0.000 0.000 0.000 120.000 135.000 35.117 244.878 572.091 EBIT 0 0 0 (1,713) (737) 3,580 33,740 87,300 EBITDA 0 0 0 (108) 2,738 6,174 36,850 91,284

Cash flow (MMKm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 0 0 0 74,231 10,515 5,027 38,599 94,382 Depreciation and amortisation 0 0 0 1,605 3,475 2,594 3,110 3,985 Tax paid 0 0 0 (2,070) (2,972) (754) (5,790) (14,157) Change in working capital 0 0 0 74,947 83,638 114,959 343,066 582,895 Other operational CF items 0 0 0 (75,838) (1,520) 1,694 (4,309) (6,478) Cash flow from operations 0 0 0 72,875 93,136 123,521 374,676 660,627 Capex 0 0 0 (29,860) (11,996) (12,295) (21,315) (35,554) Net (acquisitions)/disposals 0 0 0 83,536 9,142 0 0 0 Other investing CF items 0 0 0 (34,524) (56,758) (45,842) (199,479) (339,244) Cash flow from investing 0 0 0 19,152 (59,612) (58,137) (220,794) (374,799) Change in debt 0 0 0 11,039 9,642 0 0 0 Net share issues/(repurchases) 0 0 0 25,551 0 0 0 0 Dividends paid 0 0 0 (3,597) (2,746) (813) (5,668) (13,242) Other financing CF items 0 0 0 2,817 18,208 (500) (550) (605) Cash flow from financing 0 0 0 35,810 25,104 (1,313) (6,218) (13,847) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 0 0 0 127,837 58,628 64,071 147,663 271,982 Free cash flow 0 0 0 43,015 81,140 111,225 353,361 625,073 Source: FactSet, Daiwa forecasts

First Myanmar Investment (FMI): 16 November 2016

Financial summary continued … Balance sheet (MMKm) As at 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 0 0 0 129,014 187,642 251,713 399,376 671,358 Inventory 0 0 0 480 612 805 1,396 2,328 Accounts receivable 0 0 0 2,835 21,258 27,948 48,451 80,818 Other current assets 0 0 0 425,582 733,696 1,166,991 1,976,080 3,351,531 Total current assets 0 0 0 557,911 943,208 1,447,457 2,425,303 4,106,035 Fixed assets 0 0 0 107,339 66,333 76,034 94,239 125,809 Goodwill & intangibles 0 0 0 56,008 55,527 55,527 55,527 55,527 Other non-current assets 0 0 0 240,256 336,103 443,554 708,395 1,135,448 Total assets 0 0 0 961,515 1,401,172 2,022,572 3,283,464 5,422,819 Short-term debt 0 0 0 3,930 0 0 0 0 Accounts payable 0 0 0 26,554 24,577 32,312 56,017 93,438 Other current liabilities 0 0 0 692,157 1,099,759 1,649,964 2,800,011 4,754,961 Total current liabilities 0 0 0 722,641 1,124,336 1,682,276 2,856,027 4,848,399 Long-term debt 0 0 0 13,793 14,497 14,497 14,497 14,497 Other non-current liabilities 0 0 0 124 12,170 12,170 12,170 12,170 Total liabilities 0 0 0 736,558 1,151,003 1,708,943 2,882,695 4,875,066 Share capital 0 0 0 22,480 23,480 23,480 23,480 23,480 Reserves/R.E./others 0 0 0 153,054 163,325 195,822 239,647 311,346 Shareholders' equity 0 0 0 175,534 186,805 219,302 263,127 334,826 Minority interests 0 0 0 49,423 63,363 94,327 137,642 212,927 Total equity & liabilities 0 0 0 961,515 1,401,172 2,022,572 3,283,464 5,422,819 EV 370,352 370,352 370,352 250,865 203,723 169,169 59,961 (143,819) Net debt/(cash) 0 0 0 (111,291) (173,145) (237,216) (384,879) (656,861) BVPS (MMK) n.a. n.a. n.a. 8,961.739 8,070.376 9,474.302 11,367.670 14,465.196

Key ratios (%) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) n.a. n.a. n.a. n.a. 230.2 31.5 73.4 66.8 EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 125.5 496.8 147.7 Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. 842.4 158.7 Net profit (YoY) n.a. n.a. n.a. n.a. (95.7) (15.4) 597.3 133.6 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. (96.4) (15.4) 597.3 133.6 Gross-profit margin n.a. n.a. n.a. 38.8 31.9 30.5 31.2 32.6 EBITDA margin n.a. n.a. n.a. n.a. 2.5 4.3 14.7 21.8 Operating-profit margin n.a. n.a. n.a. n.a. n.a. 2.5 13.5 20.9 Net profit margin n.a. n.a. n.a. 224.1 2.9 1.9 7.5 10.6 ROAE n.a. n.a. n.a. 85.1 1.8 1.3 7.8 14.8 ROAA n.a. n.a. n.a. 15.5 0.3 0.2 0.7 1.0 ROCE n.a. n.a. n.a. n.a. n.a. 1.2 9.1 17.9 ROIC n.a. n.a. n.a. (3.0) (0.7) 4.0 62.1 (159.2) Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate n.a. n.a. n.a. 1.5 15.2 15.0 15.0 15.0 Accounts receivable (days) n.a. n.a. n.a. 15.5 40.0 62.1 55.6 56.4 Current ratio (x) n.a. n.a. n.a. 0.8 0.8 0.9 0.8 0.8 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout n.a. n.a. n.a. 3.1 33.1 30.0 30.0 30.0 Free cash flow yield 0.0 0.0 0.0 11.6 21.9 30.0 95.4 n.m. Source: FactSet, Daiwa forecasts

Company profile

Founded in 1992, First Myanmar Investment (FMI) was the first Myanmar-based company to list on the Yangon Stock Exchange in March 2016. Following a major restructuring of the business in FY15, the company has re-focused its operations into 3 key pillars - banking, healthcare and real estate. Prior to the revocation of its banking licence in 2003, subsidiary Yoma Bank had one of the largest branch networks amongst private banks in Myanmar.

First Myanmar Investment (FMI): 16 November 2016

A cut above the rest Investment summary The Final Frontier ‘Cautiously optimistic’ has been a phrase used by stakeholders to describe the outlook for Myanmar since US sanctions on the country were lifted in 2012. Since then, the initial euphoria amongst investors appears to have settled into a realisation that the path to reform for the newly elected National League for Democracy (NLD) will be an arduous one. Nevertheless, with the recent approval of several key enabling regulatory policies, the country’s economic growth holds the potential to accelerate quicker than some market observers expect. Should this happen, we believe FMI’s business is well positioned, vis-à- vis the competition, to be a key beneficiary of this growth.

Key question 1: Where does Myanmar currently stand in its reform process, and has the pace of progress been fast enough? In some ways, Myanmar is heavily advantaged with the benefit of hindsight – grafting experience and avoiding the missteps of its ASEAN neighbours. As a result, since 2012, the country has observed accelerated growth in certain sectors of its economy. For example, in the telecoms sector, mobile penetration has seen a rapid increase (from 7% in 2012 to around 90% currently), as the country has leapfrogged its way to 3G/4G services following the awarding of telecom licences to foreign operators Telenor and Oreedoo in January 2014.

However, perceptions of systemic corruption and cronyism which have woven their way into the fabric of Myanmar’s society over the past several decades (Myanmar is presently 147th of 168 countries in Transparency International’s 2015 Corruption Perception Index) imply that other sectors have yet to benefit from the same sort of accelerated growth. The banking sector, for example, has faced several crises and deep public mistrust. In such cases, the foremost priority of the new government appears to be on improving governance and accountability, ahead of allowing a more ‘free-market’-driven industry.

New government policy On balance, our recent visits to Myanmar indicate to us that sentiment toward the country’s will likely be a key economic growth prospects remains upbeat, while expectations for the NLD appear to be enabler for economic high. Further, investors continue to closely watch the development of several key enabling growth regulations (see table below). While some have highlighted the lack of detail in some areas, the successful approval of these fundamental laws establishes a critical baseline from which fine-tuning can be implemented at a measured pace over the medium-to-longer term.

Progress and timeline of key regulations for FMI (see Appendix 1 for further details) Date Description Myanmar Investment Law Jun-16 Formation of a new Myanmar Investment Commission (MIC) (MIL) Sep-16 Draft of new MIL submitted to Parliament Oct-16 MIL was passed by the House of Nationalities (Upper House) on 5 October after passing through the House of Representatives (Lower House) the previous week Companies Act 2013 A Companies Act begins to be drafted by the government with assistance from Asian Development Bank Jun-15 Revised first draft published Oct-16 Draft law is “still in the pipeline for inter-ministerial review” 1Q17 Expected to be submitted to Parliament for approval Financial Institutions Law 2013 New FIL drafted with the assistance of the World Bank (FIL) Jan-16 New FIL successfully passed in Parliament Condominium Law Jan-16 Law passed by Myanmar's Union Parliament May-16 Yangon City Development Committee (YCDC) issued city-wide suspension on construction of high-rise residential buildings for inspections Nov-16 YCDC aims to finish inspections Dec-16 By-laws expected to be released

Source: compiled by Daiwa

First Myanmar Investment (FMI): 16 November 2016

Key question 2: How is FMI positioned to ride Myanmar’s potential growth? Diversified business exposure across three key sectors FMI’s strategy: FMI was the first company to list on the YSX on 25 March 2016. Over the past 2 years, positioning its business FMI’s management has undertaken a restructuring exercise to streamline its business along ‘3 key pillars’ along 3 ‘key pillars’: banking, healthcare and real estate. Management’s strategy to focus on these 3 sectors was driven largely by: 1) the level of opportunities it saw in each of these industries which could deliver sustainable growth over the long term, as well as 2) FMI’s expertise and competitive positioning in these industries which would enable the company to fully capitalise on these opportunities.

In FY15, the company booked a MMK60.6bn restructuring charge after disposing of non-core businesses and increasing its stake in 2 key subsidiaries: 1) Yoma Bank, in which it currently owns a 51% stake (from 36% in FY14), and 2) Pun Hlaing International Hospital (PHIH), in which it owns a 60% stake (from 35% in FY14). In FY16, its banking division accounted for most of FMI’s earnings (around 51%), followed by its real-estate division (42%).

FMI: FY16 net-profit breakdown by segment FMI: FY16 contribution and breakdown of profitable segments

(MMKm) -4,839 (MMKm) 14,000 12,000 10,000 4,568 6,189 8,916 8,000 Real estate services (associates contribution) 6,000 3,775 -777 3,774.5 , 45% 4,000 4,568.1 , 55% Financial services 2,000 0 Real estate Financial Airline Healthcare Other Net profit services services services services segments* FY16 (associates contribution) Source: Company Source: Company Note: * Other segments include mainly exceptional items – gain from sale of FMI Air stake and extinguishing of hospital division liabilities

Strong competitive advantage in each of its businesses We see distinct competitive advantages in each of FMI’s 3 ‘pillars’:

 In its banking division, Yoma Bank’s established and trusted brand (with its tagline ‘The Responsible Bank’, Yoma Bank was at one stage the second-largest private bank in Myanmar prior to the revocation of its licence in 2003) should enable the company to re- establish public trust and outperform its peers – its deposit and loan growth has outpaced the industry average in the past 2 years. Further, relative to its peers in the private banking sector, its superior asset quality, as well as emphasis on corporate governance and risk management, will be crucial when the regulator decides to clamp down on errant banks, in our view. Finally, we view its mobile money service (Wave Money) positively as a key competitive advantage to drive banking penetration into rural areas of Myanmar.

 In its healthcare division, we believe FMI’s partnership with Indonesia’s Siloam International Hospitals should improve its perception as a quality private healthcare provider, a value proposition we believe no other operator currently has in Myanmar. In addition, the experience of its new management (including ex-CEO of Siloam Dr. Gershu Paul) will be critical in driving an operational turnaround of its existing 174-bed Pun Hlaing hospital, as well as outlining a structured plan toward hospital expansion across Myanmar over the longer term (10 new hospitals over the next 7 years).

 In its real estate division, FMI’s chairman, Serge Pun, has extensive experience in property development both in Myanmar and markets abroad, and the company is recognised as one of Myanmar’s most established property developers. FMI City was the company’s first successful large-scale foray into Myanmar’s property market in 1995. Looking ahead, its proposed Landmark Project is a luxury development located in the

First Myanmar Investment (FMI): 16 November 2016

prime area of Yangon, which we believe has the potential to drive earnings growth for the company from FY19 onward.

Overall, we believe conglomerates in Myanmar which have taken a more proactive approach toward aligning their businesses with the priorities of the new government are more likely to capture a greater share of the potential upside in the country’s economic growth over the near-to-medium term.

Aligning its priorities In this context, we believe FMI is well positioned, both as a consequence of: 1) its with that of the new reputable standing as a ‘home-grown’ Myanmar conglomerate which placed emphasis on government corporate governance early on (of which Chairman Serge Pun has consistently been a strong advocate), as well as 2) its initiatives to ensure it is at the forefront of technology, risk management as well as skilled human capital. FMI’s status as the first Myanmar company to list on the YSX, in addition to its affiliated company Yoma Strategic’s (YOMA SP, SGD0.595, Buy [1]) (covered by Shane Goh) listing on the SGX in August 2006, is testament to management’s commitment to transparency and disclosure, which should elevate its credibility amongst foreign investors, in our view.

Key question 3: What other key events could catalyse FMI’s business growth prospects? Our base case for FMI’s business outlook is premised on Myanmar’s existing political and regulatory environment. However, favourable regulatory changes could prove to be the single biggest driver of earnings growth for the company. While it is difficult to take a view on the timeline and quantify the impact of regulatory changes on FMI’s business due to the uncertainty and array of factors at play, we broadly identify the following potential catalysts:

 The relaxation of the controlled interest-rate environment and lending restrictions on private banks: a more market-driven interest-rate environment would allow for risk- adjusted pricing of loans, while uncollateralised lending (all loans must currently be backed by collateral) would likely fuel strong credit demand in Myanmar for SMEs, as well as a mortgage market which could drive property sales.

 The passing of the Myanmar Companies Act in Parliament – this would properly define a ‘foreign company’ in Myanmar, while it is also widely expected to pave the way for foreign ownership of shares on the YSX. This would allow FMI improved access to quality capital to fulfil its expansion plans over the longer term. We believe foreign investors could be allowed to invest in locally listed companies in the next 1-2 years.

 Further clarity on the Condominium Law, specifically addressing issues pertaining to foreign ownership and leasing, could spark near-term interest in the sector.

Initiating coverage with a Buy (1) rating and target price of MMK22,500 We expect Yoma Bank to Focusing on the potential of FMI’s 3 key divisions, we forecast an adjusted PATMI CAGR be a key driver of FMI’s of 139.7% for the company over the FY16-19 period, driven largely by earnings growth at earnings growth over its banking division, for which we believe there is the greatest visibility over profitability in FY16-19 the near term. We forecast a net-profit CAGR of 155.1% for Yoma Bank over the FY16-19 period, on the back of our 97.5% NII CAGR forecast.

Even as an ambitious strategy has been laid for FMI’s healthcare division, we believe its healthcare division performance could continue to be weighed down by start-up costs associated with its new healthcare facilities under development targeted to be opened in 2Q FY17 – we forecast the division to post net losses over the FY16-19 period, although we expect it to turn EBITDA-positive in FY19.

Finally, we believe contributions from its associates (comprising its real-estate division) will be driven by its 2 key development projects – the Landmark and Star City – and forecast a 23.3% CAGR in earnings from real estate associates over the FY16-19 period.

First Myanmar Investment (FMI): 16 November 2016

Yoma Bank accounts for We initiate coverage of FMI with a Buy (1) rating and a SOTP-based 12-month target price 60% of our SOTP- of MMK22,500. On our estimates, FMI’s banking division accounts for around 60% of our valuation valuation of FMI, followed by its real-estate division (36%). Our valuation for Yoma Bank is based on a target PBR of 2.29x applied to our FY18 book value forecast. We derive our target PBR based on 2-stage dividend-discount model (DDM) methodology to factor in strong medium-term growth prospects for the business. We assume a high-growth phase for the company over an 8-year horizon, where we believe Yoma Bank could achieve a sustained ROE level of 25%.

FMI’s real-estate division contributes around 11% of our cumulative net-profit forecast over FY16-19 but accounts for 36% of our SOTP valuation, mainly as we value its undeveloped landbank and projects under development on an RNAV basis. We expect its Landmark development to contribute more significantly to earnings from FY21 onward, following the launch of its commercial/office space and the recognition of recurring rental income (see our report on Yoma Strategic for further details).

FMI: consolidated SOTP valuation Fair Value Effective stake Per share value % Segment Basis (MMK m) FMI stake (%) (MMK m) (MMK) valuation Yoma Bank 2-stage DDM 508,747.1 51% 259,461.0 11,209.3 60% PHSH 25x EV/EBITDA 3,756.8 60% 2,254.1 97.4 1% Real estate RNAV 1,009,974.0 16% 158,229.4 6,835.8 36% Portfolio investments FMI Air Carrying value 35,077.3 10% 3,507.7 151.5 1% Myanmar Parkson Carrying value 2,589.4 10% 258.9 11.2 0% Thilawa SEZ Market value 159,610.0 2.5% 3,990.3 172.39 1% SHC Capital Market value 51,796.0 11.7% 6,060.1 261.81 1% Total value 433,761.5 18,739.4 20% scarcity premium 520,513.9

Shares outstanding (m) 23.1 SOTP value per share (MMK) 22,500* 100%

Source: Daiwa estimates Note: *rounded to nearest 100

FMI: SOTP valuation breakdown

Portfolio investments, 3%

Real estate , 36%

Yoma Bank, 60%

PHSH, 1%

Source: Daiwa estimates

Valuations appear attractive as real-estate division is likely understated FMI’s shares are trading currently at an FY18E PER of 19.6x and PBR of 1.4x, which look attractive to us, mainly as: 1) its strong earnings growth profile over our forecast horizon of FY16-19 implies a PEG of 0.15x – we believe FMI is one of the few conglomerates in Myanmar well positioned to capture upside from the country’s expected economic growth over the longer term, 2) the company’s consistent emphasis on corporate governance and transparency represents a key value proposition as it makes FMI an attractive target for partnerships with foreign investors, and 3) we believe FMI’s current book value is understated by its real-estate segment, which is equity-accounted and not measured at fair value (we estimate FMI’s effective stake in its real-estate segment at fair value is around MMK158,229 or MMK6,836/share).

First Myanmar Investment (FMI): 16 November 2016

Banking division Yoma Bank: a key engine for near-term growth Yoma Bank is arguably the ‘central pillar’ of FMI’s business, accounting for 51% of FMI’s FY16 earnings. We expect the banking division to continue to account for the lion’s share of FMI’s earnings growth over the FY16-19 period. We believe accelerating capital formation from a rekindled public trust in Myanmar’s banking system, coupled with strong underlying credit demand and improved accessibility to lending facilities, will ultimately play an important role in the country’s overall economic growth – primarily by enabling the expansion of local businesses, particularly in the SME space, a target market on which Yoma Bank is focusing.

A clean slate again after a series of industry shocks Yoma Bank’s banking FMI’s banking division had taken a backseat in the past decade, chiefly due to the activities were restricted revocation of Yoma Bank’s banking licence in 2003 in the aftermath of a banking crisis in 2003 … which had negative repercussions for the entire private banking sector. Prior to that, Yoma Bank had had the largest branch network amongst private banks in Myanmar, since its first branch was established in August 1993 and following the partial liberalisation of the banking sector in the 1990s.

Yoma Bank branch in Yangon Yoma Bank branch in Yangon

Source: Company Source: Company

However, in early 2003, mounting public distrust in the private banking sector amidst money-laundering allegations against some banks, coupled with the instability of other improperly governed non-bank financial institutions, led to a severe industry-wide bank run. The ensuing panic and flight of funds led the closure of 3 banks – Asia Wealth Bank, Mayflower Bank and Myanmar Universal Bank.

… although its full Since then, the financial sector has gone through a phase of reparation, with the banking licence was government reinstating Yoma Bank’s full banking licence in 2012. Management has since eventually reinstated in taken various steps to rebuild Yoma Bank – particularly in the areas of: 1) improving asset 2012 quality, corporate governance and risk management in order to meet the CBM’s regulatory requirements for private banks, 2) adopting greater technology (Central Banking System, Wave Money, etc.) to bolster competitiveness, and 3) investing in a strong team of qualified personnel. As at 30 September 2015, Yoma Bank had 55 branches located in 24 cities, with around 3,000 personnel employed.

First Myanmar Investment (FMI): 16 November 2016

It’s a question of trust Banking penetration is Myanmar is still very much a cash economy. As a consequence of the deep public mistrust low at around 20% in the banking sector, local Burmese have a tendency to keep cash at home instead of in the banking system – bank account penetration is currently at an estimated 20% of the population (some sources estimate access to financial services to be as low as 5% in the country), even after renewed liberalisation of the sector in the past few years. Investing in the property market is also perceived to be an important method of wealth preservation.

Myanmar banking: bank account penetration across ASEAN countries (2014) Account at a financial institution (% age 15+) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Singapore Malaysia Thailand Indonesia Vietnam Philippines Myanmar Source: World Bank

We see low related party Further, with most private banks in Myanmar under the ownership of established family- risk for Yoma Bank owned conglomerates, the issue of related party lending raises the concern of heightened default risk amidst a lack of industry disclosure and poor corporate governance practice among private banks. For Yoma Bank, management said that RPT loans represent just around 1% of its total loan book. Our industry discussions lead us to believe that this is likely to be significantly higher for a number of other private banks, although exact numbers are unknown.

Positioned well to comply with regulatory requirements New FIL passed in We believe the recently passed Financial Institutions Law (FIL) in January 2016 reflects January 2016 the government’s desire to re-establish public trust in the private banking sector. Moreover, as the CBM expands its oversight on the sector while providing ample time for banks to restructure their balance sheets and adjust to these new regulatory requirements, we believe enforcement against errant banks would be an inevitable step toward establishing a precedent. While the regulatory environment for the Myanmar Banking Sector is likely to remain challenging in the near term, we believe Yoma Bank has positioned itself well to address these challenges and leverage the potential industry growth over the medium-to- longer term.

Private banks currently face a myriad of regulatory requirements Lending remains Currently, the Central Bank of Myanmar has the ability to independently adjust interest restricted rates. Banks are restricted to a minimum interest rate for savings and fixed deposit accounts at 8.0% per year, while the maximum lending rate is currently set at 13.0% per year. Further, all bank loans must be backed by collateral (typically land/property). According to the company, Yoma Bank currently offers fixed deposit terms of 1, 3, 8, 9 and 12 months, with interest rates ranging from 9-10% depending on the tenor.

First Myanmar Investment (FMI): 16 November 2016

Myanmar banking sector: CBM 5-year Treasury bond rate 14% 11.5% 11.5% 12% 10.5% 9.5% 9.5% 9.5% 9.5% 10% 9.0% 9.0%

0% 1995 2000 2005 2010 2011 2012 2013 2014 2015

Source: CBM

Based on the new FIL, which is more closely aligned with Basel II practices, banks are also required to maintain 1) a capital adequacy ratio (CAR) of 10% under more stringent risk weightings for assets, 2) a level of their liquid assets against their eligible liabilities at not less than 20% (ie, LTD limit of 80%), and 3) 5% of customer deposits to be deposited with the CBM in a non-interest bearing account (from 1 April 2015). According to management, Yoma Bank’s CAR is currently around the 12% level under IFC standards.

Myanmar Banking Sector: key requirements for private banks Attribute Requirement Comments Minimum fixed deposit rate 8% Maximum lending rate 13% All loans must be backed by collateral; no single customer’s borrowing should exceed 20% of capital and reserves Maximum loan tenure 1 year Minimum LDR 80% Banks must keep 5% of deposits as cash with the CBM (previously 10%; although 75% could comprise Treasury bonds Minimum CAR 10% Minimum capital MMK20bn Minimum liquidity 20% Liquid assets to current liabilities General provisioning 2% Of total loan portfolio Specific provisioning Nil As all loans are collateralised; specific provisioning is raised only if the value of the collateral is less than the value of the outstanding loan

Source: CBM, Daiwa compiled

State banks are exempt Further, due to the fragility of the private banking sector brought about by several industry from these rules shocks over the past decades – private banks are subject to several regulatory requirements not currently applied to the state banks: 1) capital/deposit ratios are currently imposed only on private banks, 2) deposit interest income from state banks remains tax- free, 3) state banks are not required to comply with financial reporting requirements as often as private banks, 4) private banks are effectively locked out from lending to the agriculture sector, and 5) private banks cannot lend more than 20% of their capital (including reserves) to a single individual, enterprise or economic group.

Yoma Bank’s deposit and loan growth better than industry According to the CBM, deposit growth in the industry has slowed in the past 2 years (FY16: +27% YoY; FY15: +39% YoY; FY14: +45% YoY), with an average loan-to-deposit (LTD) ratio of 63%. In comparison, Yoma Bank grew its loan book to MMK722.8bn (up 74% YoY), while deposits had grown to MMK1.1tn (up 55% YoY) as at end-FY16, representing an LTD ratio of 66%. Consequently, the bank’s interest income increased by 94.3% YoY to MMK84.4bn on its expanded loan book in FY16.

Asset quality appears In terms of NPLs, Yoma Bank’s management shared that NPLs comprise 0.98% on a 90- healthy day basis and 0.67% on a 180-day basis of its loan book, which appears healthy even when compared to the Singapore banks under Daiwa’s coverage, although this could be attributed to the requirement that all loans have to be collateralised. In contrast however, recently listed Myanmar Citizen’s Bank’s NPL levels were 2.69% as at 31 March 2016 (under its own definition of NPLs and not the CBM’s).

First Myanmar Investment (FMI): 16 November 2016

This performance was achieved despite Yoma Bank not providing ATM services, while its physical branch expansion has been relatively conservative. Management attributed this partially to the overall industry-wide trend of increasing deposit growth, as well as a return of its customers who previously identified with Yoma Bank’s entrenched brand and reputation prior to the revocation of its banking licence.

In the near term, management believes deposit growth will be driven largely by investment in Wave Money bearing fruit, which we discuss in a later section of this report.

Yoma Bank: breakdown of branches by location (as of 30 Sept 2015) Name of Region No. of branches Yangon Region 17 Mandalay Region 11 Bago Region 5 Magway Region 5 Shan Region 5 Sagaing Region 4 Ayeyarwady Region 3 Mon Region 1 Rakhine Region 1 Kachin Region 1 Kayin Region 1 Tanintharyi Region 1 Total 55

Source: Company

Targeting the SME segment SMEs account for 49% of Management has highlighted the SME segment as a key focus area to drive loan growth in Yoma Bank’s loan book the years ahead. According to the company, SMEs represent over 99% of the total industries in Myanmar, but at least half of them are not officially registered. Businesses in the SME sector are typically trading, manufacturing, and retail-based companies which need capital to grow. SMEs currently represent around 49% of Yoma Bank’s loan book, with the remaining 51% extended to corporates, according to the company. Loan sizes to SMEs typically range between MMK100m and MMK1bn.

However, the regulatory restrictions at present remain a key hurdle, particularly 1) strict collateral requirements – land is the preferred collateral (or in some cases, other forms of physical collateral such as agricultural produce), while the loan amount granted is typically only around 50% of the collateral item, and 2) short repayment periods which do not exceed 12 months.

A growing hire purchase For the moment, hire purchase loans represent the only viable alternative for SMEs, and market this is still a relatively new lending model in Myanmar. Since 4Q FY14, Yoma Bank began providing hire purchasing financing for businesses seeking to acquire fixed assets including vehicles and farming and agricultural plant and machinery, with ownership of the fixed asset transferred to the customer upon completion of the payment plan (typically a 1- to 3-year tenure).

In FY17, Yoma Bank will receive technical assistance from Rabobank International to expand its agricultural lending in a sustainable manner through an USD18.7m grant from the Livelihoods and Food Security Trust Fund (LIFT) fund.

Competition: potential industry consolidation on the horizon As at 21 June 2016, there were four state-owned banks, 24 private banks, representative offices of 24 foreign banks and branches of ten foreign banks in Myanmar.

State-owned banks Myanmar’s state-owned banks had a market share 64.3% in terms of assets and private account for 64% market and semi-governmental banks had the remaining 35.7% as at 31 March 2014. Similarly, in share by asset size terms of bank branches, the state-owned banks operate around 40% of the roughly 1,300 bank branches across the country. Within the private and semi-governmental banking space, over around 60% of the market share by asset size is held by the top-4 banks

First Myanmar Investment (FMI): 16 November 2016

(Kanbawza Bank, Myawaddy Bank, Co-Operative Bank and Ayeyarwady Bank). KBZ bank is by the far the largest player in the private banking space, with around a 39% market share, compared with Yoma Bank’s roughly 4% market share.

Myanmar banking sector: semi-government and private banks market share by asset size (Mar 2014)

Others, 12.5%

YB, 3.7%

AGD, 4.3% KBZ, 38.5% GT, 5.2%

MAD, 6.6%

AYWD, 9.0%

MWD, 9.2% CB, 11.0%

Source: CBM, GIZ Report Note: KBZ: Kanbawza Bank; CB: Co-operative Bank; MWD: Myawady Bank; AYWD: Ayeyarwady Bank; MAB: Myanmar Apex Bank; GT: Global Treasure Bank; AGD: Asia Green Development Bank; YB: Yoma Bank

Industry growth led by Although state-owned banks currently dominate the market, the private banking sector has private banking sector seen the greatest growth in recent years due to better recapitalisation ability, better IT systems and more robust banking practices, and as a result, has been gaining market share in the industry. In contrast, state-owned banks such as Myanmar Agricultural Development Bank (MADB) (the largest state-owned bank in terms of loan book) have been plagued by asset quality and profitability issues largely as a result of lending to farmers under heavily subsidised terms.

Foreign bank activities On Oct 2014, the government announced that nine foreign banks would be allowed to are still heavily provide banking services; in March 2016 a second round of licenses awarded increased restricted the number of foreign banks to 13. However, these foreign banks will not be allowed to provide retail banking services to the domestic market, and can only provide services to foreign corporates as well as other local banks. Foreign banks can also establish syndicated loans with local banks to be extended to local companies.

The competitive environment for the banking sector in Myanmar is admittedly a challenging one, attributable to the combination of strict regulations as well as a large number of players vying for customer deposits and loans in a market where people remain wary of putting their money in banks, while restrictions on unsecured lending limit the customer pool.

Distinguishing itself from the pack Despite this, management believes Yoma Bank differentiates itself by its reputation as one of the oldest banks in Myanmar (with some branches having been around for more than 20 years) and strong branding as a “responsible bank”. Moreover, its emphasis on risk management and strict credit policies ensure that its loan book quality remains high, which we believe will be critical especially when the CBM begins to take action on errant banks.

A disciplined approach Further, management is adopting a more disciplined approach to physical branch to branch expansion expansion – targeting a roll-out of around 10 branches a year. Given the high cost of gathering deposits through a branch model, as well as the intense competition for deposits in the market, management believes its Wave Money initiative will be a key driver for deposit growth in the longer term (refer to our discussion below).

Interest-rate liberalisation likely to be much further down the road Yoma Bank’s management said it believes the controlled interest-rate environment represents an impediment to earnings growth, mainly as it hinders the bank’s ability to price its loans on a risk-adjusted basis. Moreover, management believes the minimum reserves requirement is overly punitive as it means that 5% of its deposit base is unable to accrue any form of interest.

First Myanmar Investment (FMI): 16 November 2016

Market-driven interest Our discussions with the CBM indicate to us that its priorities are focused on capital and rates appear unlikely in corporate governance in the private banking sector. It believes that easing restrictions on the near term interest rates at this stage could be untimely, and that it could possibly reassess the issue only in the next 1-2 years. At present, it believes most private banks are unable to even meet its requirements for capital adequacy ratios in alignment with Basel II regulations – it believes less than 10% of Myanmar banks meet this requirement.

Industry asset quality In the area of corporate governance, which has long been a thorny issue for the private needs to improve banks, the CBM said that several banks are still unable to satisfactorily furnish the required documentation, particularly their disclosure of NPLs. Given the undeniably murky history of some Myanmar banks, how the issue of asset quality and balance sheet integrity of some of the private banks could be addressed remains unclear to us at this juncture.

Trust in the banking It is clear to us, however, that interest-rate liberalisation can only occur when public trust in system has to precede the banking system returns to the market, which can only come when the balance sheets all else of the banks have been cleaned up and the CBM is able to adequately monitor and enforce its regulations on the private banks, which remains some ways away, in our view.

Wave Money – a key gamble which could pay off We see 3 key reasons supporting Wave Money’s importance to Yoma Bank’s overall strategy: 1) it is key to enabling customer reach to the vast rural areas of Myanmar, 2) its tie-up with Telenor Myanmar is an important competitive advantage, given the latter’s experience with similar mobile banking platforms in emerging markets, and 3) it enables Yoma Bank to pursue a conservative physical branch expansion strategy, allowing greater cost efficiencies in the near term.

Investment in Digital Given the prohibitively high cost of land (especially in cities such as Yangon and Money Myanmar with Mandalay), as well as challenges in finding suitable locations, management said it intends Telenor to adopt a less aggressive physical branch expansion strategy (it added 10 new branches in FY16 to 55 as at end-FY16). Instead, it is looking to drive deposit growth primarily through its investment in Digital Money Myanmar (DMM). FMI has a 44% stake in DMM (the remaining stake is owned 5% by Yoma Bank and 51% by Telenor) which it acquired from Yoma Bank on 1 June 2016 (under current CBM regulations, a bank may not own more than 10.0% of the equity in another company).

Successfully launched in DMM successfully launched its mobile banking services primarily through its ‘Wave Money’ August 2016 application in late August 2016, and has since been downloaded over 10,000 times, according to figures from Google’s Play store. The app will allow customers to send or receive money on their mobile phone – physical cash can be deposited or withdrawn from authorised Wave Shops (including teashops, restaurants and grocery stores, as well as existing stores offering Telenor SIM cards). The model replicates similar existing successful mobile payment platforms in the Philippines and Africa, and leverages Telenor’s market leadership position in the mobile subscriber base in Myanmar (it has around a 39% market share with 16.9m mobile subscribers as of June 2016).

First Myanmar Investment (FMI): 16 November 2016

FMI: screenshots of Yoma Bank’s Wave Money app

Source: Google Play store (Sept 2016)

Wave Money key to In this manner, Yoma Bank targets to reduce its reliance on physical bank branches as well enabling rural reach as ATMs, thereby reducing overall operating costs. Further, mobile banking will be important to facilitate the penetration of banking services to rural areas of Myanmar without the need for a physical bank branch. According to the GIZ Report, the Myanmar Government has set an objective to increase telephone density from 50% in FY14-15 to 80% by FY15-16 mainly through the mobile network.

Notably, Myanmar Citizens Bank (MCB) was one of the first private banks to have launched a similar mobile payment system under the “663 Mobile Money” brand (soft launched in July 2015). As of May 2016, the company reportedly had a network of over 700 agents, 800 merchants and over 6,600 subscribers in the lower Myanmar region, although it is unclear how exactly this has affected deposit growth for MCB.

Wave Money: Authorized ‘Wave Shop’

Source: Company

First Myanmar Investment (FMI): 16 November 2016

Telenor’s experience and Comparatively however, we believe Yoma Bank’s Wave Money has a clear competitive brand a distinct advantage through its partnership with mobile operator Telenor, leveraging its large mobile competitive advantage subscriber base. According to management, Wave Money’s launch in August 2016 involves around 4,000 ‘Wave Shops’ almost nationwide, making its reach extensive. We forecast Yoma Bank’s deposit growth to accelerate to 70% YoY in FY18-19 following the launch of Wave Money in August 2016. Consequently, we also expect Yoma Bank’s cost of funds to decline due to a greater proportion of deposits in current accounts, where banks are not mandated to pay interest.

Case studies: mobile money in other markets While mobile money services have been launched across numerous emerging markets, only a handful have achieved sustainable success – most notably in Kenya (M-Pesa) as well as in the Philippines (GCASH and SMART Money). Usually, the underlying case for mobile money is the same across such markets – a large unbanked rural population with poor access to traditional banking channels, but relatively better mobile telecom penetration.

Markets which have seen sustainable success in mobile money services Country Mobile money service Mobile operator Kenya M-PESA Safaricom (Vodafone) Sri Lanka eZ Cash Dialog Philippines SMART Money, GCASH PLDT, Globe Zimbabwe EcoCash Econet Pakistan Easypaisa Telenor Pakistan

Source: Daiwa compiled

Key drivers of mobile In the context of markets such as Kenya and the Philippines, the success of mobile money money adoption services in gaining traction amongst consumers is observed to have been enabled by several key factors, including: 1) a conducive regulatory environment allowing non-banks to offer banking services, 2) the effective design and development of a supporting ecosystem (including managing an agent network and making it easy for customers to utilise services), and 3) alignment and commitment of interests within participants in the mobile money ecosystem.

Mobile money: growth in transaction value of mobile payments in Kenya following M-PESA launch in 2007 (KES bn) 3,000

2,500 92.7% CAGR in mobile payment 2,000 transacted value over 2007-2015

1,500

1,000

500

0 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Central Bank of Kenya

In the Philippines, telecom operator Globe launched its GCASH service in 2004. Since then, the company has attracted 2.32m GCASH account holders and established a network of 7,555 agents across the country as at end-2015. As mobile users in the Philippines have historically been heavy-SMS users, messaging is a preferred method of using mobile money services, enabling its traction. Further, the large overseas worker community and market for international remittances has also contributed to the success of mobile money in the country. Last, Bangko Sentral ng Pilipinas (BSP) has been working with the telecom industry to create an environment which facilitates the success of mobile money services in the country, such as by allowing non-banks to offer financial services, as well as remittance agents to perform cash in/out services.

First Myanmar Investment (FMI): 16 November 2016

From offering a regular remittance service back in 2004, GCASH has evolved into offering more comprehensive mobile money solutions which include funds transfers, mobile airtime top-ups, salary disbursement, international remittances, bill payments, etc. Relative to rival PLDT, Globe adopted a different distribution approach, by partnering and building up a network of non-bank agents, including pawnshops and moneychangers, ‘sari-sari’ and department stores, as well as rural banks.

Investing in human capital Bringing in experienced Since recovering its full banking licence, one of management’s key initiatives has been to international personnel rebuild a strong team of skilled personnel at Yoma Bank, particularly in the middle-to-upper management of the business as well as in departments such as risk management, in alignment with its high standards of corporate governance and market positioning as ‘The Responsible Bank’. To ensure its personnel are equipped with the necessary skillset, Yoma Bank also entered into an agreement in September 2014 with GIZ to provide trainers for its Yoma School of Banking. Yoma Bank’s current CEO, Mr. Hal Bosher, an experienced banker with 10 years with the World Bank Group at both the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), joined the bank in January 2013.

Consequently, Yoma Bank’s administrative expenses increased by 273% YoY in FY16 while its expense-to-income ratio reached 83%. As at 30 June 2016, Yoma Bank had 2,781 employees (vs. 2,536 as at 30 Sept 2015). Looking ahead, management said the bulk of its recruitment process is over, as it shifts its focus toward driving profitability in the near term. We forecast Yoma Bank’s expense-to-income ratio to decline to 75.0% in FY17 and 32.7% by FY19.

Shoring up capital adequacy as well as potential dilution from IFC investment Yoma Bank has taken steps to shore up its capital adequacy to meet the CBM’s requirements, as well as to position itself to drive loan growth in the medium term, mainly via: 1) a loan being obtained from Bangkok Bank (end-FY16) at the FMI level and injected into Yoma Bank in the form of new shares amounting to MMK9.56bn (representing its [FMI’s] 51% stake), as well as 2) a direct medium-term convertible loan of MMK4.855bn to Yoma Bank from International Finance Corporation (IFC) at an annual rate of 8% maturing on 27 April 2019.

Under the specified terms and conditions outlined, IFC has the option to convert 50% of its loan to equity (5% of Yoma Bank’s share capital) 3 years after the disbursement of the loan in September 2014, although this is currently not allowed under existing laws governing foreign ownership of private banks in Myanmar. This date may be extended by up to 1 year by mutual agreement of the parties.

Revalued property to Further, based on our current forecasts for loan and deposit growth for Yoma Bank, we boost Tier-2 capital believe the company may not be able to fulfil the required CAR ratio of 10%, even under the assumption of a zero dividend payout. According to the company, it believes it should be able to compensate for the additional capital requirements through revaluation of its existing property under Yoma Bank. The company had engaged Jones Lang Laselle to carry out an independent valuation on its real estate currently held at historical cost on its books since 1992. Based on this, the company estimates a further USD40m in revaluation gains could be treated as Tier-2 capital, which would eliminate the need for further capital injections in the near term. The company has appealed to the CBM to allow this treatment, and is confident that approval will be obtained.

First Myanmar Investment (FMI): 16 November 2016

Our forecasts We forecast a net-profit CAGR of 155.1% for Yoma Bank over the FY16-19 period, on our forecast of an NII CAGR of 97.5%. Our expectations for growth at such elevated levels are driven mainly by: 1) our assumption of strong deposit growth of 70% YoY in FY18-19 following the launch of Wave Money in August 2016, which should provide a solid base for our corresponding loan growth forecast of 70% YoY over the same period, 2) operational leverage from a lower expense-to-income ratio of 46.7% in FY18 with Yoma Bank’s recruitment process largely completed in FY16, and 3) a 2.0pp improvement in the NIM over the FY16-19 period as we expect average interest rates on customer loans to be supported by strong overall credit appetite in Myanmar, as well as a lower cost of funds with the acceleration of Wave Money deposits.

Our base case does not include expectations for the regulator to ease its stance of tightening its oversight on the private bank sector in Myanmar. Hence, while we expect the industry to remain competitive under a controlled interest-rate environment, we believe Yoma Bank will be able to leverage its position as a bank with superior corporate governance and risk management as an attractive proposition for customers, to drive overall deposit and loan growth.

FMI: Yoma Bank loan and deposit growth assumptions Core assumptions FY15 FY16 FY17E FY18E FY19E Loan growth (YoY %) 74.1% 60.0% 70.0% 70.0% Deposit growth (YoY %) 58.9% 50.0% 70.0% 70.0% LDR (%) 60.2% 66.0% 70.4% 70.4% 70.4% CAR (%) 8.3% 10.2% 10.1% 10.1% Opex growth (% YoY) 40.0% 40.0% 40.0% 30.0% Expense-to-income ratio 0.83 0.75 0.47 0.33 0.31 NIM 2.7% 2.7% 3.9% 4.7%

Source: Company, Daiwa forecasts

FMI: Yoma Bank NII growth FMI: Yoma Bank net-profit growth

(MMKbn) (MMKbn) 180 180% 80 600% 160 160% 70 500% 140 140% 60 400% 120 120% 50 100 100% 40 300% 80 80% 30 60 60% 200% 20 40 40% 100% 10 20 20% 0 0% 0 0% FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E NII (LHS) YoY growth (RHS) Net profit (LHS) YoY growth (RHS)

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

How would Yoma Bank perform should regulatory requirements ease? While it is difficult to take a view on the timeline and details of how the regulatory environment for Myanmar’s banking sector could ease, we construct a bull-case scenario for Yoma Bank around 2 possible key changes: 1) an expanded unsecured lending environment, and 2) the removal of interest-rate restrictions.

Strong underlying credit The relaxation of collateral requirements is likely to have the greatest impact on the demand could fuel banking sector in terms of enabling the formation of a proper mortgage market in significant loan growth Myanmar. At the same time, banks would invariably have to build a sufficient deposit base from which to lend to home buyers. Under such circumstances, we could see private banks increasing deposit rates to compete for customer deposits. However, given the higher risk of unsecured mortgage lending, we would correspondingly assume that banks would seek to price mortgage rates significantly higher than the existing 13% cap on loan rates imposed by the CBM. Further, in the context of Yoma Bank, we believe Wave Money will enable the company to keep its overall cost of funds low, as deposits collected from rural areas could then be used to lend to urban customers.

First Myanmar Investment (FMI): 16 November 2016

Significant opportunities In terms of potential non-interest fee-income growth, the company said that while it has for fee-income growth plans to launch ATM and credit card services, they remain a less critical priority in the near term. While they represent a value-added service for customers, the profitability of offering such services is likely to be minimal relative to other potential areas of growth. Further, the absence of a Credit Bureau in Myanmar makes issuing credit cards to customers a much more risky initiative. We believe fee-income growth is instead likely to come mainly from Yoma Bank’s cash management/treasury services (eg, automated salary disbursements for employees, customer billing, etc.), given the bank’s focus on the SME sector and supported by the scope of services Wave Money offers.

Thus, we make the following bull-case scenario assumptions for our FY18-19 forecasts: 1) a 200bps increase in Yoma Bank’s average cost of funds from our present forecast, 2) a 400bps increase in the average interest rate on customer loans from our present forecast, 3) both loan and deposit growth of 100% YoY in FY18-19, and 4) non-interest income growth of 30% (vs. 15% on our current forecasts).

Yoma Bank: bull-case scenario Scenario 1 Scenario 2 Base case Bull case Assumptions Loan growth YoY 70.0% 100.0% Deposit growth YoY 70.0% 100.0% Cost of funds 5.0-5.5% 7.5% Average interest rate on loans 9.5% 13.5% Non-interest income growth YoY 15% 30% Impact FY16-19E net-profit CAGR 155.1% 207.0% FY19 ROE 25.3% 37.0% % increase to FY18-19E forecasts 74.0% Assumed high-growth ROE level 25.0% 32.0% Fair value PBR (x) 2.29 3.45 Potential fair value (MMKm) 508,747.1 867,627.1

Source: Daiwa estimates

Overall, on our estimates, an easing in regulatory environment could affect our FY19 net- profit forecasts for Yoma Bank by 74% and result in a 207% net-profit CAGR over the FY16-19 period (vs. our current forecast of 155.1%). We could also see sustainable ROE levels during the company’s high-growth phase (8 years in our DDM model) increase to around 32%, which could result in a fair value PBR of around 3.45x and implied fair value of MMK867.6bn for Yoma Bank (vs. our current valuation of MMK508.7bn).

First Myanmar Investment (FMI): 16 November 2016

Healthcare division Pun Hlaing-Siloam Hospitals: early signs of a pulse FMI holds a 60% stake in Yoma Siloam Hospital Pun Hlaing Limited (YSHPH), which currently operates: 1) a 174-bed tertiary hospital situated in its Pun Hlaing residential development located around 13 miles from downtown Yangon, 2) a clinic located at its existing FMI Centre building, and 3) the Nyaung Shwe Clinic in Shan State, the company’s first facility outside Yangon, opened on 11 December 2015. FMI also has a similar 60% stake in Pun Hlaing International Hospital Ltd (PHIH), which owns the land for these facilities.

Looking for a turnaround Even as FMI’s healthcare division has historically been a drag on its overall earnings (FY16: net loss of MMK776.9m), management has identified the segment as a key pillar of business growth for the company, given the significant potential in the healthcare services space in Myanmar. Although we believe start-up costs associated with the opening of its newer facilities (including its Mandalay Express Hospital in 2Q 2017) could weigh negatively on the segment’s near-term profitability, we expect the business to turn EBITDA- positive by FY19 as indicated by our 30.7% revenue CAGR forecast over FY16-19.

Pun Hlaing Siloam Hospital Pun Hlaing Siloam Hospital

Source: Company Source: Daiwa

Healthcare infrastructure lacking, spending remains low Government remains the Like many other sectors in Myanmar, the accessibility and quality of healthcare services in biggest healthcare the country are still in rudimentary stages, relative to the majority of the country’s ASEAN provider peers. At present, the government sector remains instrumental in providing the public with healthcare services, primarily through the Ministry of Health (MOH).

According to the MOH, there were 1,010 public hospitals and 1,635 rural health centres in Myanmar, as at 31 March 2013. Of these, 944 public hospitals are operated by the MOH. In addition, other ministries (Ministry of Defence, Ministries of Railways, Labour, Mines, Industry, Energy, Cooperatives and Home Affairs, etc.) also operate a total of around 66 of their own hospitals.

According to the World Bank, Myanmar had around 0.6 hospital beds per 1,000 population in 2006 (last available data point), compared to Singapore with around 2.6 beds per 1,000 population.

First Myanmar Investment (FMI): 16 November 2016

Myanmar healthcare: comparison of hospital beds per 1,000 population (Hospital beds per 1,000 population) 3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Vietnam Singapore Thailand India Cambodia Laos Indonesia Myanmar Bangladesh Source: WHO, Daiwa compiled

Private players likely to Healthcare sector spending in the country remains dismal to date. Total healthcare play a crucial role in expenditure in Myanmar was 1.8% of its GDP in 2012, which was the lowest among its developing Myanmar’s ASEAN peers, and significantly lower than that of Cambodia (7.3%). Notably, the private healthcare system sector accounted for around 75% of total healthcare spending, contrasting countries such as Singapore (65%) and suggesting to us that the role of private healthcare operators could remain an important one in developing the quality of the sector.

Myanmar healthcare: total expenditure on health as a % of GDP (2012) (Total expenditure on health as a % of GDP) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Cambodia Vietnam Thailand Philippines Singapore Malaysia Indonesia Brunei Laos Myanmar

Source: WHO Health Statistics

Demand for healthcare is The poor infrastructure and lack of access to quality healthcare are also reflected in clear as greater indicators such as Myanmar’s under-5-years-old mortality rates per thousand live births (78 affordability comes with per thousand), compared with countries like Indonesia (48 per thousand) and the economic affluence Philippines (34 per thousand).

The need for quality healthcare in Myanmar is apparent – with an expected increase in urbanisation and economic affluence, a greater proportion of its population is expected to be able to afford healthcare services, as the infrastructure is correspondingly developed in the country.

As always, finding a Other challenges. Besides the shortage of skilled clinical care staff (which we have suitable location is key highlighted in the section below), management highlighted the challenge of securing in Myanmar suitable locations for its facilities owing to the high cost of leasing land, a similar problem Yoma Bank faces for its physical bank branches. As such, management said it has to be selective in its choice of location to open a hospital. In terms of the regulatory environment, management believes it remains favourable for private healthcare operators in Myanmar.

First Myanmar Investment (FMI): 16 November 2016

Scope for growth in private sector healthcare Highest out-of-pocket Myanmar’s healthcare system is currently split around 92% to 8% between the public and healthcare spend private sectors in terms of the number of hospital beds. As highlighted earlier, the globally government plays an important role in providing healthcare services – while public healthcare services in Myanmar are deemed ‘free’, in reality, patients end up having to pay out-of-pocket (OOP) for items such as medicine, as well as to expedite certain types of treatments. As a result, an estimated 82% of healthcare spending in Myanmar is OOP, the highest globally.

Myanmar healthcare: split between public and private sector by hospital beds (end-Mar 2013)

Private hospital beds 8.4%

Public hospital beds 91.6%

Source: Department of Health

Universal health Further, there is currently no universal health insurance system in Myanmar, while a social insurance targeted by security system (established in 1956) for workers employed in the private sector covers 2030 less than 1% of the population. The government has committed to implementing a Universal Health Coverage programme, although only by 2030.

A fragmented market in Myanmar’s private health sector appears largely fragmented with several small operators. the private sector According to the Department of Health, there were 166 private hospitals in Myanmar as of end-December 2012, with a total of around 5,092 licensed beds (vs. 44,120 MOH hospital beds and 11,185 hospital beds from other government departments) as at 31 March 2013.

Myanmar healthcare: list of major private healthcare operators Operator Number of beds Number of hospitals Pin Lon Group of Hospitals 500 3 Yee Shin Company Limited 500 2 Shwe La Min Hospital Group 400 5 Family Mandalar Company Limited 250 2 Sakura Group 250 2

Source: Company

Targeting locals who travel abroad for better quality healthcare services Around 30,000 Burmese Due to the lack of quality healthcare services currently available in the country, wealthier travel abroad for Burmese citizens and foreign expats typically travel to neighbouring countries, particularly treatment each year Thailand due to its proximity and cultural similarities, seeking higher-quality treatment. Management said it estimates this number to be around 30,000 patients/year. For example, Bangkok Chain Hospital (BCH TB, THB10.90, Sell [5]) reported Myanmar as its second-largest foreign patient base after the UAE. As higher-quality private healthcare operators establish their presence and reputation, we believe a larger proportion of the medical tourist market could be re-captured.

Overall, the government appears keen to allow the growth of private healthcare operators in the market to bolster the quality of the overall system; hence, we believe the regulatory environment should remain favourable for FMI.

First Myanmar Investment (FMI): 16 November 2016

Ensuring a pool of skilled clinical care staff As at end-September 2016, YSHPH had 160 doctors (vs. 146 as at 30 September 2015), comprising 38 resident (in-house) medical officers, 34 exclusive full-time specialists and 88 part-time specialists practicing and providing services to its patients.

Like most other markets, the competition for skilled healthcare professionals is a key challenge in the private healthcare sector. In Myanmar, the total health workforce increased by around 20% from 73,855 in FY07 to 88,975 in FY11. As a result, the number of doctors, nurses and midwives per 1,000 population increased from 1.27 in FY07 to 1.49 in FY11. Despite the increase, it is still far below the global standard of 2.28.

Myanmar healthcare: clinical care staff density (per 1,000 pop.)

2.4 2.28

2.2

2.0

1.8

1.6 1.49

1.4 1.27 1.2

1.0 FY07 FY11 Global average

Source: WHO

According to management, there exists a greater challenge in finding sufficiently skilled nurses in Myanmar as compared to doctors. Currently, around 1,200 doctors graduate from medical schools per year, with around 20% joining the private sector. Comparatively, only around 400-500 nurses graduate annually to join the healthcare services sector. Management said it estimates around 400-500 doctors will be required to operate its target of 10 hospitals over the next 10 years, while it will need around 150 nurses per hospital.

Plans for a nursing To tackle the potential shortage of nurses, management said it is planning to open a school by end-FY18 nursing school in its existing Pun Hlaing hospital by end-FY18 to attract and train nurses according to its standards of care, at an estimated cost of USD2.5m. Management said that it is currently awaiting clarity on regulations pertaining to private nursing schools in Myanmar, which were initially expected to be passed in 2Q16, but have since been delayed to end-2016.

Convincing more Further, current industry practice amongst doctors is such that they typically practise on a doctors to practise on a ‘non-exclusive’ basis by visiting multiple hospitals, while medical professionals working in residency basis public facilities are only allowed to practise privately after office hours. As a result, management shared that it is actively trying to implement a full-time (residency) based model for doctors – it is currently the only hospital in Myanmar able to provide 24/7 ‘on- duty’ services across its specialist areas. It believes that encouraging such a model will increase time for patient contact as well as foster institutional accountability. Management is also trying to lure Burmese doctors currently practicing abroad, who are used to a residency model, to return to Myanmar to practice with YSHPH.

Targeting the high-end segment; outlining plans for aggressive growth New management on YSHPH’s only hospital is around 10 years old, and has been loss-making since its board to turn around the establishment. However, more recently, the company has seen a change in management, business now led by CEO Dr Gershu Paul (who had been formerly instrumental in the business growth of Indonesia’s Siloam International Hospital), who joined in May 2014. Management said it has refocused on its strategy as well as on building its brand (co-branding with Siloam) in order to establish trust amongst locals of the quality of its services. Consequently, the healthcare segment turned EBITDA-positive in FY16 (MMK794.3m) and

First Myanmar Investment (FMI): 16 November 2016

is seeing strong patient volume growth in both inpatient and outpatient services – its hospital utilisation is currently at around 80%, while it is seeing around 200 OPD patients/ day, according to the company.

Targeting 10 new Looking ahead, management has outlined its target to build a nationwide network of hospitals in 7 years hospitals, and has recently introduced a ‘5-tiered pricing’ model for its hospital beds to ensure affordability to all patient demographics. Over the longer term, it is looking at a target of 10 hospitals (or 2,000 beds) over the next 7 years (by 2023). Thus far, the following expansion plans are concrete:

1) The moving of its existing clinic at FMI Centre (which is expected to be closed for redevelopment in 1Q 2017 as part of the Landmark Development) to a location situated nearby on Bogyoke Aung San Road. The new clinic will provide an expanded range of services (including 24-hour emergency services) as well as promote cross- referrals to its existing hospital.

2) Construction of a 119-bed Express Hospital, with construction currently under way in Mandalay (Mandalay 73) to be developed in 2 phases – Phase 1 is scheduled to be opened by end-2Q 2017 with 27 beds initially staffed with 10 full-time specialists, while Phase 2 is scheduled to be opened by 4Q 2017 with 92 beds. The estimated cost of this development is MMK11.7bn.

FMI: summary of existing and upcoming healthcare facilities Cost Name (MMKm) Timeline Description Existing healthcare facilities Pun Hlaing Siloam Hospital, Yangon 174-bed tertiary hospital Clinic, FMI Centre, Yangon To be closed due to redevelopment and moved close by on Bogyoke Aung San Road Clinic, Nyaung Shwe 22 Provides OPD services Upcoming Clinic, Bogyoke Road, Yangon 1Q17 Former clinic at FMI Centre relocated Express Hospital, Mandalay 11,700 end-2Q17/4Q17 Phase 1 by end-2Q17 with 27 beds, Phase 2 by end-4Q17 with 92 beds

Source: Company

Clinic in Nyaung Shwe Model of upcoming Express Hospital in Mandalay

Source: Company Source: Company

First Myanmar Investment (FMI): 16 November 2016

Our forecasts We forecast a revenue CAGR of 30.7% over the FY16-19 period for FMI’s healthcare division, driven by higher patient volume from the expected opening of its Express Hospital in 2Q FY17 (also note that the healthcare business was only fully consolidated in FMI’s books from FY16 onward). We expect the number of operating beds to increase from 174 currently to 319 by end-FY17. Concurrently, we assume that average bed utilisation could decline from 75% currently to around 50% levels following the opening of the new hospitals. We expect the Consequently, we forecast that the segment could turn EBITDA-positive by FY19 following company’s healthcare the initial start-up costs, driven mainly by a ramp-up in patient volume as well as greater division to turn EBITDA- operational efficiencies across both its existing hospital in Pun Hlaing as well as its positive by FY19 upcoming facilities. We believe the healthcare division’s experienced new management will play a crucial role in repositioning and implementing operational improvements to attract patients as well as manage costs effectively. We expect staff headcount to increase from 146 doctors currently to 281 by end-FY19, as YSHPH hires more doctors over the period.

Management has outlined its plan to expand its network to 10 hospitals from a single hospital currently over the next 7 years. We expect announcements of new facilities to serve as share-price catalysts for FMI.

FMI: healthcare division revenue forecasts FMI: healthcare division EBITDA forecasts

(MMKbn) (MMKbn) 30 40% 900 35% 800 25 700 30% 20 600 25% 500 15 20% 400 15% 300 10 10% 200 5 100 5% 0 0 0% (100) FY15 FY16 FY17E FY18E FY19E (200) Revenue (RHS) YoY growth (LHS) FY16 FY17E FY18E FY19E

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Note: Segment was only fully consolidated from FY16 onward; FY16 included one-off gain from sale of land to Yangon Land

First Myanmar Investment (FMI): 16 November 2016

Real-estate division Growth driven by the Landmark development FMI and affiliate Yoma Strategic Holdings (YSH) (YOMA SP, SGD0.545, Buy [1]; covered by analyst Shane Goh) work closely on most of FMI’s key real-estate development projects – FMI City, Star City and the upcoming Landmark development.

The earnings contribution from FMI’s real-estate division is recognised mainly through the company’s investment in associate companies. Real-estate related associate entities accounted for around 97% of FMI’s associates’ contribution in FY16, and around 37% of overall net profit. On a valuation level, FMI’s real-estate division is significant as it accounts for around 36%of our SOTP-derived target price, due mainly to the valuation of its land bank held at historical cost in its books.

We forecast a 23.3% CAGR in FMI’s associates’ earnings contribution over the FY16-19 period, driven mainly by sales from the development of Star City and Landmark. We expect the earnings contribution from the Landmark development to pick up more significantly only from FY21 onward, following the launch of the commercial and office portions of the project.

We highlight the key associates which form part of FMI’s real-estate divisions below, although further details can be found in our initiation report on Yoma.

Thanlyin Estate Development (STAR CITY) Thanlyin Estate, in which FMI owns a 30% stake, owns the land development rights (LDRs) to around 135 acres of land in Thanlyin Township, on which its Star City project has been undergoing development in various phases. Star City is located 8 miles from the Thilawa Special Economic Zone, 6 miles from downtown Yangon, and is adjacent to the 9- hole Pun Hlaing Links golf course.

Star City Zone C to be The first 2 zones in Star City (Zones A and B) measuring about 3m sq ft of GFA, have completed in phases already been developed and substantially sold. Thanlyin is currently developing Zone C from March 2018 onward (Galaxy Towers); this third phase of Star City will feature 6 condominium blocks of between 25 and 28 storeys, totalling 954 apartments with about 1.2m sq ft of GFA and offering around 1.1m sq ft of NSA. Thus far, 334 units have been launched for sale. Two of the 6 towers are scheduled for completion in March 2018, with another in June 2018. The remaining 3 towers are slated for completion from 2019 onward.

Meeyahta (Landmark development – Landmark project + Peninsula Hotel) Landmark development Meeyahta International Hotel Limited (MIHL) owns leasehold rights to develop 10 acres of expected to contribute land in the heart of Yangon’s central business district (CBD), which includes an area where from FY18 onward FMI’s existing FMI Centre is situated. The land is to be redeveloped for mixed-use, and is expected to include 2 Grade-A office buildings (37% of GFA), serviced apartments and business hotel (22%), 4 floors of retail space (17%) and luxury residential units (17%). In addition, the Peninsula Yangon luxury hotel, located on land occupied by the former Myanmar Railway Company headquarters (6% of GFA), will be operated by The Hong Kong and Shanghai Hotels Limited. Following the signing of 2 new master leases in July 2016, work on this development has commenced, with sales for the residential units expected to begin from April 2017 onwards. The company expects the project to be completed by end-FY20.

First Myanmar Investment (FMI): 16 November 2016

Landmark development: current site location Landmark development: future design plans

Source: Company Source: Company

LSC-FMI KrisPLAZA project on LSC-FMI is a joint venture formed between FMI and Lighting Specialist (LSC) with plans to hold develop a mixed-use project called KrisPLAZA in Myanmar’s capital, Nay Pyi Taw. Situated on 1.25 acres of land in the Zabu Thiri Township, the project will represent FMI’s first real- estate foray outside Yangon and reflects its ambition to become a nationwide developer. KrisPLAZA is expected to comprise 114 apartments (with a total GFA of 133,677 sq ft) and commercial space with a total saleable/leasable area of 29,579 sq ft. According to the company, construction plans for the development are currently on hold, mainly as management is reviewing the overall business strategy of KrisPLAZA.

First Myanmar Investment (FMI): 16 November 2016

Financial analysis and forecasts

A clearer strategy following the restructuring of its business One-off gain of Prior to its listing on the YSX in March 2016, FMI undertook a significant restructuring of its MMK60.6bn booked in business in FY15 and disposed of its stakes in various associate companies. Further, it FY15 increased its stake in key businesses, Yoma Bank (from 36% to 51%) and PHIH (from 35% to 75%), as part of management’s strategy to re-focus the business according to what it has identified as its key ‘3 pillars’ – banking, healthcare and real estate. Consequently, in FY15 the company booked a MMK60.6bn one-off gain on the disposal, accounting for around 81.2% of its FY15 PATMI.

FMI: breakdown of gain recognised in FY15 from restructuring activities Subsidiaries Stake MMK m Yoma Yarzar 90% (819.8) SPA Motorcycle 100% (471.9) Agribusiness and Rural Development Consulting Co., Ltd. 55% (39.7) SPA Motors Ltd. 100% 418.7 FMI Syndication 90% 4,245.9 Total gain from disposal of Subsidiaries 3,333.1 Associates Stake MMK m Yoma Bank * 36% 52,454.0 PHIH * 35% 3,113.5 Convenience Prosperity 40% 1,014.6 Shine Laundry Ltd. 35% 318.4 Myanmar Agri-Tech Carbon Capital Ltd. 30% (37.3) FMI Flotilla Ltd. 50% 169.2 Myanmar Motors Pte Ltd. 30% 275.5 Total gain from disposal of Associates 57,308.0 Total gain from FY15 restructuring 60,641.1

Source: Company Note: *FMI increased its stake in associates Yoma Bank from 36% to 51% and PHIH from 35% to 50% in FY15 and consolidated these entities

FMI also presented its financial statements on a consolidated basis for the first time in FY15, which means that historical data is unavailable for the purpose of meaningfully analysing the company’s longer-term historical financial performance.

Reduced its stake in In FY16, FMI reduced its stake in loss-making FMI Air from 50% to 10% and classified its loss-making FMI Air from holding as a portfolio investment. At the same time, it recognised a gain of MMK4.4bn from 50% to 10% in FY16 a cash consideration of MMK9.23bn from the 40% stake sale to related party Yangon Land (owned by Serge Pun’s SPA Myanmar). Further, a new entity Yoma Siloam Hospital Pun Hlaing (YSHPH) was formed for the purpose of transferring the operations of FMI’s healthcare segment, with FMI injecting USD7.9m. Its stake in PHIH was reduced to 60% (from 75%). FMI recognised a gain of MMK2.53bn from the cancellation of a loan from this restructuring transaction. In total, the company booked around MMK6.22bn in non- recurring gains in FY16.

Overall earnings growth driven by Yoma Bank We forecast a 139.7% CAGR in FMI’s adjusted PATMI over the FY16-19 period, driven largely by our expectations of acceleration in earnings growth at Yoma Bank (FY16-19E: 155.1% CAGR). Although our base case for the banking division does not call for a significant easing of regulations in Myanmar in the near term, we believe loan growth could be fuelled by: 1) strong credit demand in Myanmar, and 2) Yoma Bank’s launch of Wave Money, which should see an acceleration in customer deposits (our FY17-19 forecasts: 50- 70% YoY) and an increase in its asset base from which loans can be structured.

First Myanmar Investment (FMI): 16 November 2016

FMI: net-profit forecasts

90 MMK bn 80 70 60 50 40 30 20 10 0 FY15 FY16 FY17E FY18E FY19E

Source: Company, Daiwa forecasts

We forecast FMI’s healthcare division to turn EBITDA-positive by FY19 as a result of higher patient volume at its existing hospital and the upcoming Express Hospital (2Q 2017), as well as improved operational efficiencies on its new management’s initiatives (tiered-pricing for in-patient admissions, streamlined patient/bed management processes, etc.).

Landmark expected to Last, we expect FMI’s real-estate division’s performance (through its share of profit from begin contributing to associates) to be largely driven by ongoing sales from its Star City project, while we see a earnings from FY19 pick-up in earnings growth for the segment following the completion of the initial phase of the development of its key Landmark project in Yangon in FY19. We forecast a 23.3% net- profit CAGR for the real-estate segment over the FY16-19 period.

FMI: summary of key forecasts FY15 FY16 FY17E FY18E FY19E FY16-19E CAGR Revenue Real estate services 3,042.2 - - - - Automotive services 27.1 - - - - Airline services 7,264.5 2,342.5 - - - Financial services 18,387.3 95,304.2 129,789.8 230,430.9 391,696.0 60.2% Healthcare services 4,122.9 11,922.3 14,860.4 20,335.4 26,591.3 30.7% Other segments 474.6 455.3 - - - Total revenue 33,318.5 110,024.3 144,650.2 250,766.3 418,287.3 56.1% YoY growth (%) 230.2% 31.5% 73.4% 66.8% Net profit Real-estate services (associates contribution) 12,601.4 3,774.5 1,447.4 4,859.2 7,082.8 23.3% Automotive services (419.0) - - - - Airline services (3,117.8) (4,838.8) - - - Financial services 2,368.4 4,568.1 4,815.5 30,390.2 75,861.4 155.1%

Healthcare services 1,811.4 (776.9) (1,989.6) (2,440.4) (2,719.1) 51.8% Other segments 59,878.7 6,189.1 - - - -100.0% Total net profit 73,123.2 8,916.0 4,273.3 32,809.0 80,225.1 108.0% Adjusted PATMI 14,014.3 3,203.6 2,709.5 18,894.0 44,140.6 139.7% YoY growth (%) -77.1% -15.4% 597.3% 133.6%

Source: Company, Daiwa forecasts

Balance sheet distorted by Yoma Bank Yoma Bank could FMI’s balance sheet is distorted by the consolidation of its 51% stake in Yoma Bank into its account for 95% of FMI’s books, rendering the analysis of several key ratios (eg, EV/EBITDA, ROIC, working asset base by end-FY19 capital/cash flow ratios) meaningless, due to the build-up of cash arising from the growth in customer deposits not otherwise utilised for lending or other interest-bearing assets.

To present a clearer picture of FMI’s balance sheet for investors, we attempt to break down key balance sheet items by the major segments. On our estimates, we expect Yoma Bank to account for 95% of FMI’s asset base by end-FY19 (vs. 85% as at end-FY16), driven by our forecast for an acceleration in loan growth over the FY16-19 period.

First Myanmar Investment (FMI): 16 November 2016

FMI: balance sheet breakdown MMK m FY16 FY17E FY18E FY19E Banking division 1,190,782.3 1,802,999.8 3,042,934.1 5,153,020.5 Healthcare division 21,465.1 28,460.6 38,694.8 48,422.5 Others (includes real-estate associates/portfolio investments) 188,924.2 188,924.2 191,111.4 201,835.3 Total assets 1,401,171.6 2,022,571.8 3,283,464.1 5,422,818.6 Banking division 1,123,764.6 1,671,166.6 2,820,710.8 4,774,935.8 Healthcare division 3,886.1 12,865.2 25,534.0 37,974.8 Others (includes real-estate associates/portfolio investments) 23,352.5 23,352.5 24,911.1 36,449.8 Total liabilities 1,151,003.2 1,708,943.0 2,882,694.5 4,875,066.1 Banking division 67,017.66 131,833.15 222,223.30 378,084.66 Healthcare division 17,579.02 15,595.33 13,160.82 10,447.67 Others (includes real-estate associates/portfolio investments) 165,571.73 165,571.73 166,200.34 165,385.47 Total net assets 250,168.4 313,628.8 400,769.6 547,752.5

Source: Company, Daiwa estimates

Dividend policy Likely to prioritise FMI’s management does not have a stated dividend policy, although the company has capital preservation over consistently paid out dividends to shareholders throughout the company’s history. The dividend payouts in the company announced a FY16 final dividend of MMK135/share, representing a 33% payout near to medium term ratio. We assume a 30% payout for the FY16-19 period. Our FY17 forecast implies a forward dividend yield of less than 1%. Given the numerous expansion projects in the next few years, we believe management is likely to preserve capital and manage execution risks, particularly in its healthcare division, where it has outlined an ambitious target of developing 10 hospitals over the next 7 years.

FMI: dividend forecasts (MMK/share) 33% 600 35% 30% 30% 30% 500 30% 25% 400 20% 300 15% 200 10% 3% 100 5% 0 0% FY15 FY16 FY17E FY18E FY19E DPS (LHS) FCFE/share Payout ratio (RHS)

Source: Company, Daiwa forecasts

First Myanmar Investment (FMI): 16 November 2016

Valuation and recommendation Initiating coverage with a Buy (1) rating and target price of MMK22,500 Methodology 41% upside from current We initiate coverage of FMI with an Buy (1) rating and SOTP-based 12-month target price share-price levels of MMK22,500. Our target price implies 41% upside potential from current levels. On our estimates, FMI’s banking division accounts for around 60% of our valuation of FMI, followed by its real-estate division (36%).

Shares outstanding (m) 23.1 SOTP value per share (MMK) 22,500* 100%

Source: Daiwa estimates Note: *rounded to nearest 100

We value each of FMI’s 3 key business pillars – banking, healthcare and real estate – according to the following methodologies:

Banking: We have used a 2-stage DDM to arrive at an estimated, fair-value PBR for Yoma Bank, and multiplied this ratio by our end-FY18 book-value forecast of MMK222.2bn. We have assumed an initial high-growth stage over an 8-year period, where we believe the bank could sustainably achieve an ROE of 25%, after which Yoma Bank’s financial performance would revert to a stable-growth stage to perpetuity.

Based on our valuation assumptions (see table below), we derive a target PBR of 2.29x for Yoma Bank, which translates into an implied fair value of MMK426.8bn.

(1 + 푔)푛 (푅푂퐸 ∗ 푃푎푦표푢푡 푅푎푡푖표 ∗ (1 + 푔) ∗ (1 − ) 푛 푃0 (1 + 푟)푛 푅푂퐸푛 ∗ 푃푎푦표푢푡 푅푎푡푖표푛 ∗ (1 + 푔) ∗ (1 + 푔푛) = [ + 푛 ] 퐵푉0 (푟 − 푔) (푟 − 푔푛)(1 + 푟)

The major parameters of the 2-stage model are as follows:

High-growth stage ROE = assumed return on equity during the high-growth stage Payout ratio = payout ratio during the high-growth stage g = the implied growth rate during the high-growth stage, that is, ROE x (1 – payout ratio) n = the number of years of (initial) high growth

Stable-growth stage

ROEn = assumed return on equity during the stable-growth stage Payout ration = payout ratio during the stable-growth stage gn = the implied growth rate during the stable-growth stage, that is, ROEn x (1 – payout ration)

First Myanmar Investment (FMI): 16 November 2016

Cost of equity r = the cost of equity

For Yoma Bank, we have assumed a uniform cost of equity of 17.5% for the high-growth and stable-growth stages, determined through the capital-asset pricing model (CAPM) formulation: r = β * equity risk premium + risk-free rate where

β = 1.00 (assumed market beta given the scarcity of YSX-listed stocks) equity risk premium = an assumption of 8.0% risk-free rate = 9.5% (based on the 5-year Myanmar government treasury bond yield)

FMI: Yoma Bank valuation Valuation Stage High-growth Stable-growth Period 8 years after 8 years ROE (%) 25.0% 20.0% Payout ratio (%) 10.0% 50.0% Implied growth (%) 22.5% 10.0% Cost of equity (%) 17.5% 17.5% Cost of equity assumptions Adj beta 1.0 Equity risk premium 8.0% Beta x ERP 9.0% Risk-free rate 9.5% Cost of equity 17.5% Valuation calculation Forward BV (12-mth) (MMK m) 222,223.3 Fair value PBR (x) 2.29 Fair value (MMK m) 508,747.1

Source: Daiwa estimates, CBM

Given the sensitivity of Yoma Bank’s derived target PBR to our ROE assumptions for both the high and stable growth stages, we have included a sensitivity table as follows:

FMI: Yoma Bank PBR sensitivity to high-growth and stable-growth ROE assumptions (x) High Stable ROE 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 2.07 2.17 2.27 2.37 2.47 24.0% 2.07 2.18 2.28 2.38 2.48 25.0% 2.08 2.19 2.29 2.39 2.49 26.0% 2.09 2.20 2.30 2.40 2.50 27.0% 2.10 2.21 2.31 2.41 2.51

Source: Daiwa estimates

Relative to its peers in Asia, Yoma Bank is trading closest in terms of multiples and ROE, to some of the Indonesia and Vietnam banks, although we forecast significantly higher EPS growth and potential ROE levels of 25% for Yoma Bank during its higher growth phase. Further, our base case is predicated on the Myanmar regulator’s existing policy stance, which, should there be an earlier-than-expected easing of requirements on private banks (in favour of a more market-driven interest-rate environment or a relaxation of collateralised lending), could have a positive impact on earnings growth for Myanmar’s private banks.

First Myanmar Investment (FMI): 16 November 2016

Regional banks valuations Bloomberg Share price Market cap PER (x) PBR (x) ROE (%) EPS growth (%) Company name code (local curr.) (USD m) 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Regional peers 14-Nov-16 OCBC OCBC SP 8.61 25,464 10.2 10.0 9.6 1.0 0.9 0.9 10% 10% 10% -9% 2% 4% Public Bank PBK MK 19.52 17,289 15.3 14.4 13.3 2.2 2.1 1.9 15% 15% 15% 4% 7% 8% Bank Rakyat Indonesia BBRI IJ 11,125.00 20,568 10.7 9.5 8.4 2.0 1.7 1.5 20% 19% 19% 5% 13% 12% Kasikorn Bank KBANK TB 168.00 11,358 10.3 10.1 8.2 1.3 1.2 1.0 13% 12% 13% -6% 2% 23% BDO Unibank BDO PM 109.90 8,144 15.3 13.7 12.0 1.8 1.7 1.5 13% 13% 13% 6% 12% 15% Axis Bank AXSB IN 498.75 17,579 28.9 11.8 8.9 2.1 1.8 1.6 8% 17% 19% -50% 145% 32% Average 15.1 11.6 10.1 1.7 1.6 1.4 13% 14% 15% -8% 30% 16% Frontier market peers Vietcombank VCB VN 35,800.00 5,763 22.6 19.7 17.2 2.5 2.2 2.2 14% 15% n.m. 31% 14% 15% Vietinbank CTG VN 16,500.00 2,749 12.2 11.4 10.1 1.1 1.0 0.9 10% 10% 9% 6% 7% 12% BIDV BID VN 15,350.00 2,348 11.2 10.9 7.6 1.2 1.1 1.1 13% 12% 17% 0% 3% 44% Commercial Bank COMB SL 148.00 880 10.1 9.2 7.9 1.7 1.6 1.3 18% 18% 18% 8% 10% 16% Hatton National Bank HNB SL 233.00 625 7.4 6.6 5.9 1.1 1.0 0.9 16% 16% 16% 23% 12% 11% Sampath Bank SAMP SL 265.00 318 5.5 5.1 4.6 1.0 0.9 0.7 20% 19% 18% 32% 9% 11% Average 11.5 10.5 8.9 1.5 1.3 1.2 15% 15% 16% 17% 9% 18%

Source: Bloomberg

Healthcare: We value FMI’s healthcare division by applying a target EV/EBITDA multiple of 25.0x to our FY19 EBITDA forecast, which is when we expect the segment could turn EBITDA-positive following initial start-up costs and a corresponding ramp-up in utilisation at its new facilities. Our target multiple is based on a comparable multiple to the regional hospital operators in ASEAN. While our valuation of FMI’s healthcare division implies a relatively low PBR of around 0.3x, we do not think PBR is a relevant measure for the business mainly as we expect it to continue as a going concern in the near term.

FMI: Healthcare division valuation Valuation FY19E EBITDA (MMK m) 220.6 Target EV/EBITDA multiple (x) 25.0 Total Enterprise Value 5,514.7 Less: Estimated net debt (end-FY16) 1,757.9 Fair value (MMK m) 3,756.8

Source: Daiwa estimates

Real estate valuation Real estate: Our valuation for FMI’s real-estate division is based on its stake in its key understated as its property projects (the Landmark development, Star City, Pun Hlaing and FMI City) which associate’s stake is also involves affiliate YSH. In addition to valuing FMI’s stake in these projects (in terms of equity accounted completed, projects under development as well as unutilised land bank on an RNAV basis (30% discount to its gross asset value [GAV]), FMI also has a 50% stake in its Nay Pti Taw project KrisPLAZA (which Yoma does not have a stake in) – we value its landbank separately at MMK1.3bn. Overall, FMI’s real-estate division contributes around 11% to our cumulative net-profit forecast over FY16-19 but accounts for 36% of our SOTP valuation, mainly as we expect its Landmark development to contribute more significantly to earnings from FY21 onward, following the launch of its commercial/office space.

First Myanmar Investment (FMI): 16 November 2016

FMI: real-estate division valuation Business GAV (SGD m) Land development rights Stake Remaining landbank (m sq ft) Land price (SGD per sq ft) StarCity 30% 4.2 65 82 KrisPlaza 50% 0.1 52 1 Sub-total 83

Development properties Stake StarCity 30% 8

Residential developments (NPV) Stake Discount rate StarCity 30% 16.6% 14 Landmark Residences 12% 16.6% 1 FMI City (Orchid Garden) 48% 16.6% 1 FMI City Gate 20% 16.6% 1 16

Capital value (100% basis) Investment properties Stake Cap Rate / Price per key (SGD m) (SGD m) Landmark - Office 12% 9% 568 68 - Retail 12% 9% 233 28 - Serviced apartments and business hotel 12% 0.75 293 35 - The Peninsula Yangon hotel 6% 1.00 114 7 Sub-total 138 Total GAV (SGD m) 246 Total GAV (MMK m) 226,042 Discount 30% RNAV 158,229

Source: Daiwa estimates

Portfolio investments. FMI also currently has 4 “portfolio investments” (namely FMI Air, Myanmar Parkson, Thilawa SEZ and SHC Capital [formerly under Chindwin Holdings]) – management says that it could marginally increase or decrease its stake in these investments according to market conditions and opportunities. We value FMI Air and Myanmar Parkson at its carrying value, while we value its Thilawa SEZ investment at market value as it is publicly listed on the YSX.

FMI’s stake in its tourism FMI also previously held a 30% stake in associate Chindwin Holdings (with the remaining associate was spun off 70% stake held by YSH), which operates a tourism business including its popular product, into a listed entity on the “Balloons over Bagan”. On 24 October, YSH announced a reverse takeover of SGX-listed SGX in October 2016 SHC Capital (SHC SP, SGD0.136, not rated), which would see YSH inject its tourism assets into the exchange for shares in the latter. The assets will be sold at a premium (at a sale price of SGD43.9m vs. book value of SGD38m as of 30 September 2016), implying that YSH will record a disposal gain of SGD5.9m from the divestment. The deal is expected to be completed by end-FY17.

From FMI’s perspective, the company said its stake in the enlarged share capital of SHC would be around 13%, although we estimate it will be closer to 11.7% as the company will have to issue additional shares to maintain SGX’s free float requirement of 15%. While the company is expected to book a disposal gain, we do not expect it to be realised in the P&L. For the purposes of our valuation, we treat FMI’s stake in SHC as a portfolio investment, and the entity’s performance is not expected to contribute to our forecasts for FMI’s share of associate’s profit going forward.

Based on our SOTP valuation methodology, we derive a fair value of MMK520.5bn (after applying a 20% scarcity premium) for FMI, which implies a FY18E PBR of 2.0x and PER of 27.5x. To better understand the composition of our valuation of the business, we estimate the breakdown of this target PBR and PER into the various key divisions. For Yoma Bank, as mentioned above, we apply a target PBR of 2.29x to our FY18 BV estimate (2.7x after applying a scarcity premium). In the case of the hospital division, our fair-value estimate of MMK4.5bn for the business implies a FY17E PBR of 0.3x. For the real estate division, we do not forecast the segment’s balance sheet as it is an associate; however based on our earnings contribution forecast for the segment, we estimate a FY18 PER of 33x.

First Myanmar Investment (FMI): 16 November 2016

FMI: SOTP-valuation breakdown: implied target multiples based on fair value by division 20% scarcity 20% scarcity premium premium Fair value Fair value FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E (MMKm) (MMKm) FY17E BV FY18E BV earnings earnings PBR PBR PER PER PBR PBR PER PER Yoma Bank 508,747.1 610,496.5 131,833.1 222,223.3 4,815.5 30,390.2 3.9 2.3 105.6 16.7 4.6 2.7 126.8 20.1 PHSH 3,756.8 4,508.2 15,595.3 13,160.8 (1,983.7) (2,434.5) 0.2 0.3 n.a. n.a. 0.3 0.3 n.a. n.a. Real estate (associates) 158,229.4 189,875.2 n.a. n.a. 1,447.4 4,859.2 n.a. n.a. 109.3 32.6 n.a. n.a. 131.2 39.1 Portfolio investments 13,817.1 16,580.5 11,941.2 11,941.2 n.a. n.a. 1.2 1.2 n.a. n.a. 1.4 1.4 n.a. n.a. Consolidated (ex-NCI) 433,761.5 520,513.9 219,301.7 263,127.4 2,709.5 18,894.0 2.0 1.6 160.1 23.0 2.4 2.0 192.1 27.5

Source: Daiwa estimates

Share-price performance FMI’s shares were listed at a price of MMK26,000/share on 25 March, although they have since declined by around 38%. Currently, trading on the YSX is only open to retail investors, although the approval of the Companies Act is widely expected to pave the way for foreign investors to purchase shares of listed companies in Myanmar. Given the stock’s liquidity, largely retail investor base and the lack of stock coverage, we believe the chances of market mispricing are significantly higher.

We believe FMI’s share-price underperformance could also be attributed to: 1) uncertainty over the regulatory outlook for the banking sector, 2) near-term weakness at its healthcare division as start-up costs from its new Express Hospital is expected to weigh on profitability, and 3) a slowdown in the overall Myanmar property market.

FMI: share-price performance (MMK) 42,000 1400 1300 37,000 1200 32,000 1100 1000 27,000 900 22,000 800 700 17,000 600

12,000 500

Jul-16 Jul-16 Jul-16 Jul-16

Apr-16 Apr-16 Apr-16 Apr-16 Oct-16 Oct-16 Oct-16

Jun-16 Jun-16 Jun-16 Jun-16

Mar-16

Aug-16 Aug-16 Aug-16 Aug-16 Aug-16 Sep-16 Sep-16 Sep-16 Sep-16

May-16 May-16 May-16 May-16 May-16 FMI (LHS) MYANPIX Index (RHS)

Source: YSX

Attractive valuations vs. At the current share price, the stock is trading at a FY18E PER of 19.6x and PBR of 1.4x. earnings growth profile We believe valuations are attractive mainly as: 1) its strong earnings growth profile over our forecast horizon of FY16-19 implies a PEG of 0.15x – we believe FMI is one of the few conglomerates in Myanmar well positioned to capture upside from the country’s potential economic growth over the longer term, 2) the company’s strong corporate governance and transparency represent a key value proposition, making FMI an attractive target for partnerships with foreign investors, and 3) we believe FMI’s current book value is understated by its real-estate segment, which is equity accounted and not measured at fair value (we estimate FMI’s effective stake in its real-estate segment at fair value to be around MMK158,229 or MMK6,836/share.

First Myanmar Investment (FMI): 16 November 2016

Investment risks We identify the following key risks to our thesis:

Regulatory risks Under the newly elected NLD government, we highlight regulatory and political risks as the greatest uncertainty facing the company, particularly in the key sectors of banking, healthcare and property where FMI’s businesses are focused. In Myanmar’s banking sector, we believe industry liberalisation in the form of: 1) market-driven interest rates, and 2) relaxed loan collateral requirements represent the biggest upside risk to our forecasts for Yoma Bank, given that we believe underlying credit demand remains strong in the country.

In the property sector, although the approval of the Condominium Law in January 2016 allows for limited foreign ownership in property developments, certain details remain unclear. Regulation which restricts the rental of investment property by foreign owners, or which hinder the development of a domestic mortgage market, would represent key downside risks to our forecasts for the segment.

Supportive regulatory Last, we believe the existing regulatory environment in the healthcare sector remains most policies would be a key favourable for private operators. New regulatory developments which support the enabler of economic expansion activities of the private hospital operators (tax breaks, government grants, etc.) growth as well as increase people’s access to healthcare services (government subsidies, insurance schemes, etc.) could lead to upside to our forecasts for the division.

Political risks Given the upheaval of Myanmar’s political system under the newly elected NLD, we believe significant political risks remain in the country. It seems reasonable to argue that Myanmar’s new government must introduce fresh policies which are seen to address perceptions of systemic corruption issues left behind by the previous military government, in order to ensure broad-based prosperity for the population. A significant delay in the issuance of key policies could hinder economic growth in the near to medium term, which could affect FMI’s businesses and would thus pose risks to our existing forecasts.

Key management risk FMI’s executive chairman, Serge Pun, has been instrumental in establishing and shaping the company, as well as forging new businesses relationships with foreign investors, given his extensive overseas experience and local understanding of the market. Further, the company has invested in bringing in experienced new management (in Yoma Bank, YSHPH) to structure the various divisions’ expansion plans over the longer term. A lack of continuity of existing management may disrupt the execution of key strategic milestones in the near term, which would pose risks to our existing forecasts.

We believe the risk of departures at the management level would be mitigated by: 1) attractive remuneration packages to retain key talent, 2) the selection of skilled expat personnel with experience in frontier markets such as Myanmar, who understand the challenges and peculiarities of the domestic market, and 3) the assessment of character fits to ensure that staff integrate well with FMI’s overall corporate culture and vision.

Capital-raising risks Given the numerous expansion initiatives outlined by management, we believe FMI could require additional capital injections in the medium term in order to: 1) fund its future healthcare expansion projects, as well as 2) maintain a buffer to meet capital adequacy and liquidity requirements at its banking division, as we expect loan growth to accelerate over the FY16-19 period.

First Myanmar Investment (FMI): 16 November 2016

Despite the growing asset base of Yoma Bank, FMI’s own access to debt capital, much like many other businesses in Myanmar, remains very much limited under current CBM regulation. Further, Yoma Bank’s strict corporate governance guidelines have kept related party loans at around 1% of its loan book. While the recent Financial Institutions Law (FIL) has improved access to debt funding by allowing foreign banks to indirectly lend to local companies, management has said it could seek a balance between debt and equity financing in the future. While it is as yet uncertain how new share issuances could work on the YSX, management said a placement to a strategic institutional shareholder could be preferable.

As such, we believe earnings dilution risks are possible over the near-to-medium term, although we have not explicitly factored such a potential into our existing forecasts.

First Myanmar Investment (FMI): 16 November 2016

Appendix I: Company background History First Myanmar Investment (FMI) was established in 1992 by Executive Chairman U Theim Wai also known as Serge Pun together with a group of local entrepreneurs. The company was one of the first to be publicly listed in 1992 (OTC market) following the adoption of a market economy and the promulgation of the Myanmar Investment Law in the early 1990s.

In 1993, the company invested as a founding shareholder in Yoma Bank, and in its initial investment in FMI Centre in downtown Yangon.

In 1995, the company began development of FMI City, representing its first major foray into Myanmar’s real-estate market.

From 1996 to 2009, FMI continued to expand its existing key businesses while also investing in other sectors ranging from agriculture, healthcare and automotive. The company opened Pun Hlaing Hospital, the first ISO certified hospital in Myanmar, in 2005.

In 2010, FMI invested in Thanlyin Estate Development, the developer for its Star City project, together with Yoma Strategic Holdings, marking Yangon’s largest residential housing project to date.

In 2012, FMI invested in FMI Air, representing its first foray into the airline market.

Over 2014-15, FMI’s management undertook a major restructuring initiative to re-focus the business along its identified 3 key pillars – banking, healthcare and real estate.

In March 2016, FMI was listed on the YSX, making it the first company to list in Myanmar.

FMI: company milestones Timeline Milestone FY 1992-1993 First Myanmar Investment Co., Ltd. is established. FY 1993-1994 Yoma Bank Ltd. is established as one of the first private banks in Myanmar. FMI also invests in FMI Syndication Ltd., to construct FMI Centre in Yangon and Shine Laundry Ltd. FY 1994-1995 FMI makes investments into SPA Motorcycle Ltd. and FMI Garden Development Ltd. to develop FMI City in Yangon’s Hlaing Thayar Township. FMI Centre is opened. FY 1997-1998 FMI invests in Myanmar Nissan Co., Ltd., and ground is broken on the Pun Hlaing Golf Estate in Hlaing Tharyar Township, Yangon. FY 1998-1999 FMI invests in Myanmar Suzuki Motor Co., Ltd., as well as Pun Hlaing Golf Estate. FY 1999-2000 SPA Motors Co., Ltd. is established to develop FMI’s businesses in the automotive sector. FMI makes an investment in SPA Elevators Co., Ltd. FY 2000-2001 FMI makes an initial investment into Pun Hlaing Hospital Ltd. as the Pun Hlaing Golf Course opens. The Orchid Garden Project is launched in FMI City FY 2002-2003 FMI makes an investment in Mandalay Cement Industries Co., Ltd. FY 2003-2004 Ground is broken on the Pun Hlaing Links Golf Course, now a part of Thanlyin Star City FY 2004-2005 Pun Hlaing International Hospital is opened, raising the standard of medical care in Myanmar FY 2005-2006 Yoma Thitsar Commercial Co., establishes FMI Trading Centre as a convenient location for shareholders to trade their FMI shares. FY 2006-2007 FMI invests in Myanmar Agri-Tech Ltd. which opens the Maw Tin Estate near Pathein. Yoma Strategic Holdings Ltd., is listed on the Singapore Exchange (SGX). FY 2008-2009 FMI makes investments into Agribusiness & Rural Development Consultants Ltd. the first agricultural consultancy firm in Myanmar. FY 2009-2010 Seven Golden Gates Co., Ltd. and Successful Goal Trading Co., Ltd. are established to bolster FMI’s presence in the automotive sector. FY 2010-2011 FMI makes an investment into Thanlyin Estate Development Ltd. and a corner laying ceremony is held at the company’s Thanlyin Star City site. FY 2011-2012 FMI invests in Pun Hlaing Links Services Co., Ltd. to further develop the golf course at Thanlyin Star City, as well as Convenience Prosperity Co., Ltd. to sell New Holland agricultural machinery. FMI also starts FMI Air Charter Ltd., marking the company’s entry into the transportation sector. FY 2012-2013 FMI further establishes its transportation business through an investment in FMI Flotilla Ltd., a water-transport company. FMI also invests in Myanmar Parkson Co., Ltd. which opens its first branch in FMI Centre. FMI sponsors the first Yoma Yangon International Marathon. FY 2013-2014 FMI enters the tourism sector through its investment in Chindwin Holdings, the majority shareholder of the legendary Balloons Over Bagan hot air balloon experience. FMI also announces its intention to list on the Yangon Stock Exchange. FY 2014-2015 FMI completes a major restructuring which leaves it more focused, with an emphasis on financial services, real estate, and healthcare. The company also begins reporting its financial performance on a consolidated basis. FY 2015-2016 FMI becomes the first company to list on the Yangon Stock Exchange on March 25, 2016. Source: Company

First Myanmar Investment (FMI): 16 November 2016

Shareholding structure and key management Serge Pun is the largest shareholder of FMI, with a direct and indirect stake of 69.39%.

FMI: substantial shareholders Shareholder No. of shares % shareholding U Theim Wai @ Serge Pun 7,933,778 33.79% Yangon Land 7,276,909 30.99% U Phyo Phyu Noe 1,109,080 4.72% SPA Assets Management Ltd. 1,083,500 4.61% Yoma Myittar Development Co., Ltd. 1,000,000 4.26%

Source: Company Note: As of Mar 2016

FMI: selected profiles of key management Name Designation Qualifications Experience Serge Pun @ Theim Chairman Conferred the title of Doctorate in Philosophy (Ph.D) in Business - Founder and Chairman of the Serge Pun & Associates (SPA) Group. He has Wai Administration, honoris causa, by the Southern California University for over 40 years of international business and investment experience in Hong Professional Studies. He was also appointed an Honorary Business Kong, China, Taiwan, Malaysia, Thailand, Singapore, Western Europe, North Representative of International Enterprise Singapore for Myanmar from 2004 America and Myanmar. to 2007. - Notable projects that Mr. Pun was involved in include Stewart Terrace on the Peak, Village Gardens in Yau Yat Chuen in Hong Kong, Sand River Golf Club in Shenzhen Abdulrahim Place in Bangkok, Thailand and The Grant Central in Dalian, China.

Melvyn Pun CEO, Yoma Bachelor of Arts (First Class Honours), Masters of Engineering and Masters - Prior to Mr. Melvyn Pun's appointment as CEO of Yoma, he was the Strategic of Arts from University of Cambridge in 2000 Alternate Director to Mr. Serge Pun in the company and CEO of SPA. Mr. Pun Holdings has been extensively involved in developing the company's relationships with key parties, including Mitsubishi Corporation, Yum! Brands and Case New Holland. - Prior to joining SPA, Mr. Pun spent 12 years at Goldman Sachs in Hong Kong, where he was Managing Director, Head of Asia Ex-Japan Corporate Solutions Group

Cyrus Pun Head of Real Bachelor’s Degree in Economics from the London School of Economics in - Appointed as the Head of Corporate Development of Yoma in June 2010, Estate, Yoma 2003. and has headed various corporate exercises to identify and develop new Strategic business opportunities as well as evaluating existing businesses of the group. Holdings - He currently oversees Yoma's Real Estate division. Prior to joining SPA in February 2007, Mr. Pun worked for Hutchison Port Holdings where he was involved in revenue analysis, setting price strategy, contract negotiation, as well as responsible for account management for a substantial client portfolio.

Hal Bosher CEO, Yoma BA in economics and political science from McGill University in Montreal; an - Advisor to the Chairman and CEO of Yoma Bank based in Yangon. Bank MA in International Finance and Southeast Asian Studies from the John - Prior to joining Yoma Bank, he spent 10 years with the World Bank Group at Hopkins School of Advanced International Studies (SAIS) in Washington, both the International Finance Corporation (IFC) and the Multilateral DC; and an MBA from IESE Business School in Spain. Investment Guarantee Agency (MIGA). - MIGA's Regional Representative for Northern Asia based in Hong Kong. While at MIGA, he founded the Agency's private equity business supporting the development of frontier market funds. - Prior to joining the World Bank, Mr. Bosher worked for Price Waterhouse Coopers (PwC), McKinsey & Co., and INSEAD Business School. Mr. Bosher has extensive experience in banking operations and SME finance.

Dr. Gershu Paul CEO, Pun Bachelor of Medicine; Bachelor of Surgery (MBBS) from the University of - Over 25 years of international health experience at an executive level with Hlaing Bangalore, India in 1986, and a Masters of Business Administration (MBA) expertise is in health services planning, strategy development, project Hospital from the University of Otago, New Zealand in 1997. In addition, he also management and implementation, and clinical operations. graduated as a Fellow of the Royal Australasian Medical College of - Prior to joining Pun Hlaing Hospital as CEO in 2014, he served as President Administrators (FRACMA), Melbourne, Australia in 2006. of Siloam Hospitals, Indonesia’s largest and fastest growing hospital group. He was instrumental in successfully taking Siloam from 4 to 24 hospitals and listing the company on the Jakarta Stock Exchange in September 2013.

Source: Companies

First Myanmar Investment (FMI): 16 November 2016

FMI’s relationship with Yoma Strategic FMI often works in close partnership with its affiliated companies and related parties such as Yoma Strategic Holdings (YSH) (mainly on real estate projects), as well as other companies in the SPA (Myanmar) Group. SPA was initially engaged as a managing agent for FMI, while the latter did not have a dedicated management team of its own. Investments in new businesses were typically proposed to FMI’s board by SPA’s Chairman Serge Pun for approval. However, during 2003-06, a severe decline in the Myanmar economy made it difficult for FMI to raise capital in the local market, which prompted Pun to seek further capital abroad.

Consequently, YSH was listed on the Singapore Exchange (SGX) via a reverse takeover of Sea View Hotel for SGD102m in August 2006. YSH injected its majority stakes in 3 Myanmar developments – FMI City, Evergreen Condominium and Pun Hlaing Golf Estate – in exchange for shares. YSH’s listing provided an avenue for foreign investors seeking exposure to Myanmar, given the restrictions on foreign ownership of public companies, and the notable absence of a stock exchange at the time. Likewise, the company was able to obtain access to the capital markets to secure funding for its various expansion activities.

A clearer strategic focus Between 2006 and 2014, the decision for capital allocation for various projects undertaken from 2014 onward across the three affiliated companies was a largely unstructured process, and usually dependent on funding capabilities, balance sheet constraints and regulatory requirements. To address this, in 2014, management decided to undertake a restructuring process which would more clearly define the strategy across the three companies for investors. According to management, its decision for FMI to focus on 2 of its 3 divisions – healthcare and banking – was driven by a few factors including regulatory sensitivities, FMI’s stronger more established brand, as well as its early involvement in these businesses. In terms of real-estate projects, YSH plays an important role in raising capital to fund its projects, while FMI plays more of a government relations role. Eventually, YSH’s scope of businesses has evolved to include consumer businesses, including the automotive business.

Ultimately, the decision on project allocation for potential future ventures will be mainly based on: 1) funding capabilities, as well as 2) management expertise/capability to operate the business.

First Myanmar Investment (FMI): 16 November 2016

FMI: relationship with Yoma Strategic FMI Yoma Strategic Holdings Major shareholder: Mr. Serge Pun (69.4%) Major shareholder: Mr. Serge Pun (37.1%) Other shareholders: Public float (30.6%) Other shareholders: Aberdeen (9.9%), Capital Group (8%), Eaton Vance (5%), public float (40%)

Other shareholders: owns 51% owns 70% Other shareholders: Yoma Bank Pun Hlaing Estate Yangon Land (45%), FMI: 12% Department of Human others (4%) Yoma: 48% Landmark (Meeyahta Other shareholders: Settlement and Housing International Hotel) Mitsubishi Corporation Development (30%) and Mitsubishi Estate owns 100% KFC business Other shareholders: Yoma Siloam Hospital owns 60% (30%), Asian (franchisee license) Lippo Group (40%) Development Bank (5%), IFC (5%) FMI: 6% owns 100% New Holland tractors Other shareholders: Pun Hlaing owns 60% Yoma: 24% Peninsula Yangon Other shareholders: distribution license Lippo Group (40%) International Hospital Hotel (Meeyahta Hongkong and Shanghai Hotels (70%) FMI: 11.7% owns 100% JCB equipment Yoma: 46.7% SHC Capital Other shareholders: distribution license External vendors (16.7%), SHC Capital Holdings Pte Ltd (10%), owns 100% Yoma fleet Public float (15%) FMI: 30% Yoma: 70% Star City (Thalyin Estate Development)

FMI: 47.5% Yoma: 52.5% FMI City (Orchid Garden)

Legend: - Financial

- Healthcare

- Real estate

- Consumer

- Automotive Source: Company

First Myanmar Investment (FMI): 16 November 2016

Appendix II: miscellaneous charts Key competitors We highlight both FMI and YSH’s key competitors in each of their respective business segments in the table below:

Myanmar: key competitors of FMI and YSH by sector Key competitors by sector Banking Company name Assets (MMKbn) Comments Kanbawza Bank 4144.97 Owned by KBZ Group, owner Aung Ko Win Ayeyarwaddy Bank 1200 Owned by Max Myanmar Group, owner U Zaw Zaw Co-operative Bank 1180.7 Owned by KMA Group owner, Khin Maung Aye Myawaddy Bank 1028.1 Myanmar Apex Bank 721.2 Owned by Eden Group, owner Chit Khaing Global Treasure Bank 588.9 Yoma Bank 506 Owned by FMI United Amara Bank 505 Owned by IGE Group Asia Green Development 463.1 Owned by Htoo Group, owner Tay Za Bank Myanmar Oriental Bank 238.9 IFC signed a USD7bn convertible loan in August 2015 Healthcare Company name No. of inpatient beds Comments Pin Lon Group of Hospitals 750 3 hospitals: 1 in Nay Pyi Taw (250 beds), 2 in Yangon (200 and 300 beds respectively) Yee Shin Company Limited 500 Under the brand City Hospital Shwe La Min Hospital Group 400 Family Mandalar Company 250 Limited Sakura Group 250 Automotive Company name No. of showrooms Comments Convenience Prosperity 11 Owned by Yoma. Sells Case New Holland agricultural equipment. Company Limited SSS Group (Super Seven 11 Sells passenger and commercial vehicles (Hyundai, Kia, Peugeot, SsangYong, and King Stars) Long) Htoo Han Thit Company 3 Sells passenger cars (Toyota) and commercial vehicles (Mitsubishi, Nissan, Caterpillar, Limited Volvo, Komatsu) Capital Automotive Limited 1 A JV by Capital Diamond Star Group and RMA Group. Sole distributor of Ford, Jaguar, Land Rover and John Deere vehicles. Sakura Trade Center Co., Ltd 1 Sells new and used passenger and commercial vehicles (brands include Toyota, Nissan, Mitsubishi) Golden Dragon Trading 1 Sells mainly new passenger cars (brands include Bentley, BMW and Mini Cooper) F&B Fast food chain No. of outlets Comments Lotteria 8 A subsidiary of South Korea's Lotte Group. Opened its first outlet in April 2014 KFC 6 Yoma owns franchisee license. Targets 12 outlets by end-FY17. Pizza Hut 2 A JV between Jardine Restaurant Group Myanmar and City Mart Holding. Opened its first outlet in November 2015. Burger King 1 Franchisee license owned by Thai firm Minor Food Group. Opened its first outlet in July 2016. Real estate Company name Assets (MKKbn) Comments Hoang Anh Gia Lai Group 2,951 Headquartered in Vietnam. Developed phase 1 of a mixed-use project, Myanmar Centre, and The Lake Suites. Dagon Group of companies 450 Developed Dagon Centre Shopping malls Max Myanmar Group 531 Developed Novotel Yangon Max Htoo Group 24 Developed Mindhama Condominiums & Residences Capital Diamond Star Group - Developed mixed-use Capital City with 1.1m sq ft residential GFA in Phase 1. Annual turnover of USD400m in FY15 (about MMK514bn). Shwe Taung Group - MMK369bn in revenue in FY15. Developing 2 mixed-use projects: Crystal Residence & Tower and Junction City Mandalay Golden Wings - Developed residential project, Diamond Inya Palace Construction Golden Land Real Estate - Headquartered in Singapore. Developing a mixed-use project called Golden City

Source: Daiwa compiled

First Myanmar Investment (FMI): 16 November 2016

Myanmar: map of Myanmar by state

Source: Google, Daiwa

First Myanmar Investment (FMI): 16 November 2016

Myanmar: map of Yangon

Source: Wikipedia, Daiwa

Singapore Real Estate 16 November 2016

Yoma Strategic (YOMA SP) Yoma Strategic

Target price: SGD0.730 Share price (14 Nov): SGD0.570 | Up/downside: +28.1%

Initiation: conglomerate with multiple growth drivers Shane Goh (65) 6499 6546  Monetisation of legacy land bank provides near-term earnings visibility [email protected]  KFC, automotive business, Landmark project offer long-term growth Ramakrishna Maruvada (65) 6499 6543  Initiating coverage with a Buy (1) call and SOTP-based TP of SGD0.73 [email protected]

Investment case: A new political party, an influx of foreign investments, and Share price performance lifting of sanctions by Europe and the US appear to be setting Myanmar on (SGD) (%) an upward trajectory over the medium term. We believe Yoma offers 0.65 140 investors a way to ride on the growth of the country’s real-estate sector, as 0.59 128 well as its overall economic expansion in the last frontier market within 0.53 115 0.46 103

ASEAN, with the conglomerate’s aim to diversify its earnings base, and 0.40 90 derive 50% of revenue from non-real-estate sources by FY20. Nov-15 Feb-16 May-16 Aug-16

Yoma Strat (LHS) Relative to FSSTI (RHS) Monetising its legacy land bank. Yoma’s residential land bank (50% of SOTP) offers healthy margins (estimated gross margin of 30-50%), as this 12-month range 0.405-0.635 land bank was acquired during low-cost periods. Clarity on the Condominium Market cap (USDbn) 0.69 Law, which enables foreigners to purchase homes in the country, would 3m avg daily turnover (USDm) 2.00 Shares outstanding (m) 1,733 provide a key impetus to drive residential sales, in our view. We forecast Major shareholder Mr. Serge Pun (37.1%) sales of 150 units in FY17E, before accelerating to 305-315 units per year in FY18-19E from 3 projects: Star City, Pun Hlaing Estate and Landmark Financial summary (SGD) Residences. Consequently, we forecast PBT to rise at a 22% CAGR for Year to 31 Mar 17E 18E 19E FY16-19E, with the real-estate segment contributing more than 85% of PBT Revenue (m) 123 230 323 Operating profit (m) 71 60 87 over this period. Further, completion of the Landmark, a mixed-used Net profit (m) 54 42 61 development (retail, office and hospitality) spanning 2m sq ft GFA, by FY20 Core EPS (fully-diluted) 0.031 0.024 0.035 would be a key growth driver for rental income in FY21. EPS change (%) 45.3 (21.4) 44.5 Daiwa vs Cons. EPS (%) 107.3 28.6 0.9 PER (x) 18.3 23.3 16.1 Non-real-estate businesses. We believe Yoma’s KFC business is set to Dividend yield (%) 0.5 0.4 0.6 attain critical mass and break even at the EBIT level from FY17E onwards, DPS 0.003 0.002 0.004 PBR (x) 1.4 1.3 1.2 with a target of 12 outlets by end-FY17. On automotive, increased adoption EV/EBITDA (x) 14.1 15.6 11.0 of mechanisation in the agriculture segment and growth in the construction ROE (%) 7.8 5.8 7.8 sector should boost revenue from agriculture and equipment vehicle sales. Source: FactSet, Daiwa forecasts

Catalysts: The key catalyst would be clarity on the Condominium Law, which would enable overseas buyers to purchase homes in Myanmar. The government is expected to unveil a raft of detailed regulations and procedures by December 2016. Other catalysts include signing up new franchisee or distributorship licences in its F&B and automotive businesses.

Valuation: We initiate coverage with a 12-month TP of SGD0.73, based on a 30% discount to our SOTP valuation of SGD1.04. Our SOTP includes the present value of residential sales, the revaluation of its undeveloped land bank and investment properties, as well as ascribing earnings multiples to its other businesses. Notably, Landmark, which contributes 30% of our SOTP valuation, would only generate revenue from FY21 onwards.

Risks: We view a delay in favourable policy changes and intensifying competition from new entrants as overseas players look to Myanmar as the last untapped emerging market in the ASEAN region as key risks.

See important disclosures, including any required research certifications, beginning on page 106

Yoma Strategic (YOMA SP): 16 November 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Yoma: profit before tax breakdown excl. fair value gains (SGD m) We forecast Yoma’s PBT to record a 22% CAGR from 250 FY16-19E, as we expect its core operational businesses to turn positive in FY17E, led mainly by residential sales for 200 its 3 projects: Star City, Pun Hlaing Estate and Landmark 150 Residences. We expect the real-estate segment to be the 100 key contributor to earnings (more than 85% of PBT) over 50 this period. 0 (50) We also expect its KFC business to break even at the EBIT FY17E FY18E FY19E FY20E FY21E level in FY17E, before hitting an EBIT margin of 8% in Residential sales Rental income Automotive Tourism F&B FY19E, driven by outlet expansion. We expect Yoma’s automotive segment to generate EBIT margin of 15-18% in Source: Company, Daiwa forecasts FY17-19, driven by the growth in vehicle sales and an expansion of its fleet leasing business. Valuation Yoma: SOTP valuation We initiate on Yoma with a Buy (1) call and 12-month SOTP (SGD m) % of SOTP SOTP-based TP of SGD0.73, after ascribing a 30% Residential 907 50% Investment properties 703 39% conglomerate discount to our valuation of SGD1.04. We Consumer (KFC, distribution, tourism) 47 3% believe the 30% discount is justifiable in light of the risks Telecom 104 6% from an emerging market standpoint. The key components Automotive 45 2% Total SOTP 1,806 100% in our valuation involve: revaluing the company’s remaining Source: Daiwa estimates undeveloped land bank, adding the present value of future profits from its residential sales, valuing the Landmark mixed-use development by applying a cap rate to its office and retail components, and a price per key on its hospitality segment, and applying an earnings multiple to its consumer, telecom and automotive businesses.

Earnings revisions Yoma: Bloomberg-consensus earnings revisions

The Bloomberg consensus has lowered its FY17E/18E net- 110 profit forecasts for Yoma by 29%/58% over the past 12 100 months, probably concerned that the Myanmar election (in 90 November 2015) and potential delays in regulatory 80 approvals would dampen demand for Yoma’s residential 70 developments. However, we believe demand would return 60 following progress on the regulatory front and now that the 50 election has completed. 40

Jul-16

Oct-15 Apr-16

Jan-16 Jun-16

Mar-16

Feb-16

Nov-15 Sep-15 Dec-15 Aug-16 Our FY16-17E EPS are significantly above the Bloomberg May-16 consensus, likely as we have factored in fair value and FY17 EPS FY18 EPS disposal gains from its telecom and tourism businesses. Source: Bloomberg

Yoma Strategic (YOMA SP): 16 November 2016

Financial summary Key assumptions Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E No. of residential units sold 0.0 0.0 0.0 0.0 0.0 149.0 305.0 314.0 EBIT margin for residential sales (%) 0.0 0.0 0.0 0.0 37.6 41.9 41.5 40.9 No. of New Holland tractors sold 0.0 0.0 0.0 494.0 607.0 849.8 1,147.2 1,491.4 No. of KFC outlets as of year-end 0.0 0.0 0.0 0.0 4.0 12.0 22.0 32.0

Profit and loss (SGDm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Real estate 38 58 93 93 67 60 127 180 Automotive 1 2 1 9 30 44 79 105 Other Revenue 0 0 7 9 15 20 23 38 Total Revenue 39 60 100 111 112 123 230 323 Other income 1 8 7 31 53 67 22 22 COGS (28) (34) (56) (65) (71) (76) (141) (197) SG&A (5) (17) (24) (29) (39) (34) (37) (43) Other op.expenses (1) (1) (2) (3) (7) (9) (13) (18) Operating profit 7 16 26 44 48 71 60 87 Net-interest inc./(exp.) (1) 0 (0) (1) (1) (5) (5) (5) Assoc/forex/extraord./others (0) (0) (0) (0) 0 (2) 3 4 Pre-tax profit 6 16 26 43 48 64 59 86 Tax (0) (2) (2) (4) (4) (7) (6) (8) Min. int./pref. div./others (0) 0 (8) (11) (7) (4) (11) (16) Net profit (reported) 6 14 16 28 37 54 42 61 Net profit (adjusted) 6 14 16 28 37 54 42 61 EPS (reported)(SGD) 0.011 0.015 0.014 0.020 0.021 0.031 0.024 0.035 EPS (adjusted)(SGD) 0.011 0.015 0.014 0.020 0.021 0.031 0.024 0.035 EPS (adjusted fully-diluted)(SGD) 0.011 0.014 0.014 0.020 0.021 0.031 0.024 0.035 DPS (SGD) 0.000 0.000 0.000 0.000 0.003 0.003 0.002 0.004 EBIT 7 16 26 44 48 71 60 87 EBITDA 8 17 28 47 55 80 73 105

Cash flow (SGDm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 6 16 26 43 48 64 59 86 Depreciation and amortisation 1 1 2 3 7 9 13 18 Tax paid (0) (0) (2) (4) (2) (7) (6) (8) Change in working capital 12 (16) (52) (41) 25 13 (13) (24) Other operational CF items 0 (1) (3) (21) (64) (54) (20) (20) Cash flow from operations 19 (1) (30) (20) 13 26 34 52 Capex (0) (2) (11) (14) (28) (17) (30) (39) Net (acquisitions)/disposals 0 (110) (36) (226) (51) 0 0 0 Other investing CF items 0 0 0 (6) 0 0 0 0 Cash flow from investing (0) (113) (47) (246) (79) (17) (30) (39) Change in debt (1) 0 (14) 10 66 10 10 10 Net share issues/(repurchases) 0 203 0 261 1 0 0 0 Dividends paid 0 0 (6) 0 0 (5) (4) (6) Other financing CF items (0) (2) 7 (2) (6) (5) (5) (6) Cash flow from financing (1) 201 (13) 269 60 (0) 0 (2) Forex effect/others 0 (1) (0) 0 (1) 0 0 0 Change in cash 18 86 (90) 3 (8) 9 4 11 Free cash flow 19 (3) (41) (34) (15) 9 4 13 Source: FactSet, Daiwa forecasts

Yoma Strategic (YOMA SP): 16 November 2016

Financial summary continued … Balance sheet (SGDm) As at 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 20 106 17 20 13 22 26 37 Inventory 9 24 40 183 197 199 215 231 Accounts receivable 7 35 86 89 58 50 115 175 Other current assets 9 13 33 50 94 135 152 168 Total current assets 44 179 176 343 362 406 508 612 Fixed assets 1 3 5 17 34 44 63 85 Goodwill & intangibles 12 11 13 32 30 29 27 25 Other non-current assets 91 270 290 443 521 536 539 540 Total assets 148 463 483 834 948 1,015 1,137 1,263 Short-term debt 0 14 0 10 59 59 59 59 Accounts payable 11 35 39 60 82 86 149 194 Other current liabilities 1 3 3 4 5 5 5 5 Total current liabilities 13 52 42 73 145 149 212 257 Long-term debt 0 14 23 29 67 77 87 97 Other non-current liabilities 0 0 0 0 0 0 0 0 Total liabilities 13 66 65 102 212 226 299 354 Share capital 121 327 327 588 590 590 590 590 Reserves/R.E./others 15 30 44 74 79 128 166 221 Shareholders' equity 136 357 372 662 669 718 756 811 Minority interests (0) 39 47 70 67 71 81 98 Total equity & liabilities 148 463 483 834 948 1,015 1,137 1,263 EV 967 948 1,040 1,032 1,128 1,129 1,143 1,154 Net debt/(cash) (20) (77) 6 19 112 113 119 118 BVPS (SGD) 0.257 0.359 0.321 0.471 0.386 0.414 0.436 0.468

Key ratios (%) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 249.6 54.2 66.2 10.4 0.8 10.2 86.2 40.7 EBITDA (YoY) n.a. 112.7 66.1 70.7 15.1 46.6 (8.4) 43.4 Operating profit (YoY) n.a. 120.4 64.0 70.4 7.8 47.7 (14.5) 44.1 Net profit (YoY) 116.6 139.1 13.5 71.1 32.6 45.3 (21.4) 44.5 Core EPS (fully-diluted) (YoY) 116.6 26.0 (2.6) 41.3 7.9 45.3 (21.4) 44.5 Gross-profit margin 29.8 43.3 44.4 41.1 36.4 38.0 38.5 39.0 EBITDA margin 20.1 27.7 27.7 42.8 48.8 65.0 31.9 32.6 Operating-profit margin 18.4 26.3 25.9 40.0 42.8 57.4 26.3 27.0 Net profit margin 15.4 23.9 16.3 25.3 33.2 43.8 18.5 19.0 ROAE 4.5 5.9 4.5 5.4 5.6 7.8 5.8 7.8 ROAA 4.2 4.7 3.5 4.3 4.2 5.5 3.9 5.1 ROCE 5.3 5.7 6.0 7.3 5.9 7.9 6.3 8.5 ROIC 5.7 6.5 6.6 6.9 5.5 7.2 5.9 7.9 Net debt to equity n.a. n.a. 1.6 2.8 16.7 15.8 15.8 14.6 Effective tax rate 1.5 11.1 6.3 9.0 7.4 10.3 9.4 9.5 Accounts receivable (days) 48.8 126.3 220.5 288.4 240.5 159.7 130.7 163.8 Current ratio (x) 3.5 3.4 4.2 4.7 2.5 2.7 2.4 2.4 Net interest cover (x) 9.1 n.a. 57.9 50.3 58.2 14.9 12.1 16.4 Net dividend payout 0.0 0.0 0.0 0.0 11.6 10.0 10.0 10.0 Free cash flow yield 1.9 n.a. n.a. n.a. n.a. 0.9 0.4 1.3 Source: FactSet, Daiwa forecasts

Company profile

Yoma Strategic Holdings is a conglomerate with businesses in real estate, consumer, automotive as well as investments in tourism and telecommunication-related companies. The company's notable developments include FMI City, StarCity, Pun Hlaing Estate and the upcoming Landmark Development. Yoma is affiliated to Serge Pun & Associates Limited and First Myanmar Investment Company Limited, which is a public company listed on the Yangon Stock Exchange. The company listed on the Mainboard of the Singapore Exchange through a reverse takeover in August 2006.

Yoma Strategic (YOMA SP): 16 November 2016

Myanmar: ASEAN’s last untapped frontier market

The change in government, economic reform, and a rise in consumption should set the Myanmar economy on a path of strong growth over the medium term, in our view. Further, the development of regulatory policies, in particular for the banking and property sectors, should help stoke loan growth for banks, and encourage foreign investment in real estate.

We believe First Myanmar Investments (FMI MM, MMK16,000, Buy [1]) and Yoma represent opportunities for investors to benefit from the last untapped frontier market in ASEAN. The former offers exposure to banking and healthcare, while the latter is a conglomerate with businesses in the real-estate, consumer, automotive and tourism sectors.

Yoma’s long-term strategy: a conglomerate taking shape Yoma is predominantly a Presently, Yoma is primarily a real-estate company with other businesses in automotive, real-estate company, F&B (KFC business) and tourism. We believe Yoma’s real-estate business has developed with businesses in the a strong reputation through the successful launches of its past developments in FMI City, automotive, tourism and Pun Hlaing Estate and Star City. On its non-real-estate segments, we believe the company F&B sectors acts as a local partner to global brands, with its understanding of local preferences, ability to identify choice locations and automotive distribution network. Looking ahead, we believe Yoma’s ability to identify and secure more of such distributorship licences and JVs would be critical to the company’s transformation into a fully-fledged conglomerate, and would be a key share-price catalyst, in our view.

We forecast a 22% CAGR in PBT in FY16-19E and see 4 earnings growth areas for the company over the next 3-5 years, with the bulk of the contribution derived from its real- estate-related businesses (more than 85% of PBT). Residential sales will be driven by 3 projects: Star City, Pun Hlaing Estate and Landmark Residences. We forecast sales of 150 residential units in FY17E, before accelerating to 305-315 units per year in FY18-19E. Although we expect sales of units in Landmark Residences to contribute to revenue from FY18 onwards, we forecast the commercial portion (retail, office and hospitality) of the Landmark development, which contributes 30% of our valuation, to generate revenue from FY21 onwards only.

Yoma: profit before tax breakdown (SGDm)

250

200 86

150 6 100 22 5 16 13 5 50 13 17 41 36 10 37 64 99 198 0 -2 (50) FY16 FY17E FY18E FY19E FY20E FY21E

PBT from core business Fair value gains from telecom business Fair value gains from investment properties

Source: Company, Daiwa forecasts

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: profit before tax (excl. fair value gains breakdown) (SGD m)

250 7 200 173 150 64 4 100 3 2 106 0 50 643 107 2 75 6 49 4 5 29 0 10 (1) (6) (3) (50) FY17E FY18E FY19E FY20E FY21E

Residential sales Rental income Automotive Tourism F&B

Source: Daiwa forecasts Note: property dominates PBT every year, auto contributes some, and consumer is irrelevant; the text above is misleading

1. Residential sales. We forecast Yoma to generate SGD16-62m in EBIT per year from FY17-19E from the sale of its residential projects: Star City, Pun Hlaing Estate and Landmark Residences. 2. Rental income. We expect rental income to be derived from its residential units at Star Residences and The Residences at Pun Hlaing in FY17-19E. We expect the opening of Landmark, a mixed-use development slated to be completed by end-FY20, to only contribute to revenue from FY21 onwards. Notably, Landmark contributes about 30% of our valuation. 3. Automotive. An increase in the adoption of automation in the agriculture segment and growth in the construction sector will boost sales of Yoma’s agriculture and equipment vehicles, in our view. 4. Consumer. We believe the KFC business will achieve critical mass and break even at the operating margin level by end-FY17, as the company aims to open its 12th outlet by 31 March 2017. We forecast the opening of a further 10 outlets per year in FY18-19.

In addition, we expect Yoma to record fair-value gains from its 12.5% stake in a telecom business over the next 5 years. The gains are derived from the change in mark-to-market valuation of the telecom business based on a trailing 12-month EBITDA and an EV/EBITDA multiple. Although this will not impact Yoma’s top line, the effect will be reflected in its bottom line, and balance sheet. However, the telecom business only contributes 5% of our valuation.

Yoma: residential sales EBIT breakdown by project (SGDm)

70 60 50 19

40 9 18 30 14 20 25 10 10 18 0 6 FY17E FY18E FY19E

StarCity Pun Hlaing Estate Landmark Residences

Source: Daiwa estimates

Yoma Strategic (YOMA SP): 16 November 2016

Real Estate

Yoma has 3 key Yoma’s land bank and development properties are focused on 3 projects: Landmark, Star residential/mixed- City and Pun Hlaing Estate. All of the projects are located in Yangon, which is the development projects: commercial and financial capital of Myanmar. The city is home to 14% of the nation’s Landmark, Star City and population and contributes around a fifth of the country’s GDP. The population has close to Pun Hlaing Estate tripled since 1998 to 7.3m in 2014.

Landmark is a mixed development, with an estimated 2.4m sq ft GFA, including retail, office, residential and hospitality uses. The land bank in Star City and Pun Hlaing Estate, measuring about 11m sq ft, is designated for residential developments. We estimate that Yoma will be able to monetise the legacy land bank and generate gross profit margins of 40-50% from its residential sales at Star City and Pun Hlaing Estate. In addition, Yoma owns 52.5% economic interest in 170,000 sq ft and 80% stake in 59,000 sq ft of land bank in FMI City.

This sizeable land bank enables Yoma to be selective in land bank replenishment activities. Based on our discussion with the company, management’s preference is to acquire large tracts of land rather than small land parcels.

Yoma: property developments in Yangon, Myanmar

Source: Company

Yoma: remaining land bank Project Stake GFA ( sq ft) Effective GFA (m sq ft) Star City 70.0% 4,200,000 2,940,000 Pun Hlaing Estate 70.0% 5,300,000 3,710,000 Landmark Residences 48.0% 426,315 204,631 FMI City - FMI City (Orchid Garden) 52.5% 170,000 89,250 - FMI City Gate 80.0% 59,000 47,200 Total 10,155,315 6,991,081

Source: Company, Daiwa estimates

We forecast Yoma to sell 150 residential units in FY17E, mainly from its Star City and Pun Hlaing Estate projects, before accelerating to 305-315 units per year in FY18-19E, with the launch of Landmark Residences.

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: residential sales breakdown by project (SGDm) Sales from Landmark 180 residential units will be 160 recognised from FY18 140 40 onwards 120 100 20 43

80 34 60 40 81 27 59 20 20 0 FY17E FY18E FY19E StarCity Pun Hlaing Estate Landmark Residences

Source: Daiwa estimates

Supply According to research conducted by Yangon City Development Committee and Japan International Cooperation Agency, some 79% of residential property consists of detached houses, with around 17% made up of collective housing or apartments. According to Frontier Myanmar Research and Advisory (Frontier Myanmar), there are around 6,000 completed condominium units in the central Yangon area. The figure rises when projects in outer suburban areas of the city, such as Star City in Thanlyin, are included. However, the figure remains small for a city of at least 5m people. Frontier Myanmar forecasts the overall number of higher-end apartments to quadruple between 2013 and 2017, albeit from a very low base. Most of these new projects had already launched sales as of 2Q15, with relatively modest average take-up rates of around 57%. Future residential supply is likely to be located in the fringe areas of the city where larger quantities of land are available, especially for mid-range housing.

The pace of construction has picked up in recent years, with an 88% YoY increase in construction costs for completed residential buildings to KYAT131bn in the 12 months ended 31 March 2015. We believe the upward trajectory is set to continue, fuelled by local and overseas developers looking to capitalise on growing demand as the country opens to the rest of the world.

Myanmar: construction cost of completed residential buildings (KYATm) Construction costs rose 140,000 131,442 by 88% YoY to KYAT131bn for the 120,000 12 months ended 100,000 31 March 2015 80,000 69,927

60,000 43,282 40,000 30,254

20,000 9,860 6,075 532 0 2000-2001 2005-2006 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

Source: Department of Human Settlement and Housing Development

About 85% of residential buildings completed from 2010 to 2015 were located in Yangon, with the remainder dispersed across the rest of the country. The breakdown is similar when measured by the number of family units, with 83% of households residing in residential buildings completed during this period located in Yangon as well. As Yangon remains the key commercial hub of Myanmar, we believe the city would continue to enjoy the lion’s share of new developments, for both residential and commercial projects.

Yoma Strategic (YOMA SP): 16 November 2016

Myanmar: no. of residential buildings completed per year 85% of residential 300 buildings completed in 12 0 0 2010-15 were located in 250 64 77 Yangon 200

150 266 229 231 218 100 186 50 6 3 27 0 10 2000-2001 2005-2006 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 Yangon Other Towns

Source: Department of Human Settlement and Housing Development

Myanmar: no. family units in completed residential buildings per year 83% of households 8,000 reside in residential 7,000 1,248 buildings 6,000 5,000 4,000 3,000 738 5,678 2,000 130 0 0 1,000 64 46 2,380 1,223 1,204 0 220 623 336 2000-2001 2005-2006 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

Yangon Other Towns

Source: Department of Human Settlement and Housing Development

Demand According to Frontier Myanmar, the average launch prices of Yangon condominium units have risen quickly over the past 5 years, from about USD50 per sq ft in 2009 to over USD250 per sq ft in 1Q15, before dropping to around USD200 per sq ft in 2Q15. Changes to the country’s political and economic reform plans, as well as a lack of alternative investments were factors which contributed to the rise in prices. Clarity on the Condominium Law passed in January 2016, which would enable foreign buyers to participate in Myanmar’s residential market, would be a key catalyst to increase prices and improve demand for residential units, in our view.

According to Frontier Myanmar, the rental for an average-sized high-end condominium rose almost five-fold between 2010 and 2014, with the most premium properties enjoying higher growth rates and lower grade buildings rising at a more moderate pace. Rental rates remain elevated, but moderated between 2014 and 2015 by 3-11% for a typical 1,700sq ft apartment.

We believe demand for residential units, both owner-occupier and rental purposes, in Yangon will be spurred by: 1) an increasing urbanisation rate, and 2) a young population. Although Myanmar has registered about 1% YoY growth in population over the past 15 years, the country has seen an increase in urbanisation rate over the years. About 34% of the population resided in urban areas in 2015, up from 27% in 2000. The creation of jobs in Yangon is likely to further attract workers to move to urban cities, and boost the urbanisation rate. This is positive for Yoma, which has all of its projects located within relatively close proximity to Yangon city centre. About 56% of Myanmar’s citizens are younger than 30 years old. This would generate demand for new residential buildings as new households are created.

On the banking front, the establishment of a mortgage system would help to spur demand for home purchases as buyers are able to tap into bank loans. Currently, the maximum

Yoma Strategic (YOMA SP): 16 November 2016

loan-term in Myanmar is 12 months with interest rates around 12-13%, inhibiting buyers’ ability to service mortgage payments.

Myanmar: population (m) Myanmar’s population 55 rose to 54m in 2015, 54 from 48m in 2000 53 52 51 50 49 48 47 46 45 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: World Bank

Myanmar: population breakdown by urbanisation rate (%) 34% of citizens resided 75 in urban areas in 2015 65

25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Urban Rural

Source: World Bank

Myanmar: population breakdown by age group 56% of citizens are 12% younger than 30 years old 10% 8%

0% 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65 and above

Source: World Bank Note: As of 30 September 2011

Condominium Law Rents in Yangon’s prime According to Tilleke & Gibbons International, a regional law firm in Southeast Asia, strong areas rival those in lower demand for quality office space and housing, on the back of a series of political and Manhattan economic reforms back in 2011, pushed rental prices in Yangon’s prime areas to as high as USD100 per sq m in 2014, rivalling those found in lower Manhattan and over 3x those in prime areas of Bangkok.

Yoma Strategic (YOMA SP): 16 November 2016

The Condominium Law Only locals may purchase residential properties in Myanmar for now, but foreigners may passed in January 2016 soon gain access to the market. On 22 January 2016, Myanmar’s Union Parliament allows overseas approved the draft of the Condominium Law which will allow foreign nationals to legally investors to buy purchase condominiums in the country. However, the lack of by-laws required for residential property in implementation has prevented the law from being put fully into force. On 10 October 2016, Myanmar The Myanmar Times reported that the by-laws, which would set out detailed regulations and procedures, was targeted to be released in December 2016, according to U Min Htein, director general of the Department of Urban and Housing Development of the Ministry of Construction. From our discussion with management, we believe a target for the release of the by-laws before March 2017 may be more reasonable.

According to the Condominium Law, total foreign ownership in any one project is limited to 40% of the total project space, or condominium apartment block. However, it is unclear at the moment if the total space will be defined by GFA or by number of units. Buyers will acquire shared ownership of the land and apartment, which is viewed as an improvement over previous property laws favouring landowners over apartment owners.

In order for a project to qualify as a condominium suitable for foreign ownership, a building must fulfil certain requirements, including:

1. The developer must construct the building on a “collectively owned” land parcel. This refers to land owned by people who have obtained an apartment ownership registration certificate. The land must be registered through local authorities as collectively owned land, even if the developers are the actual owners of the land. 2. Before development of the project commences, the developer must obtain the approval of the Ministry of Construction to qualify the building as a condominium. After construction is completed and the building is inspected, a “residence permit” must be obtained. 3. A condominium is defined as a building with at least 6 storeys and must be constructed on a land mass of at least 0.5 acres or 20,000 sq ft.

Law provides legal The Condominium Law also provides a legal framework allowing the financing of framework for bank condominiums (ie, bank loans), as it gives legal status to the property and allows the buyer financing in purchase of to arrange for bank financing using the property as collateral. Presently, buyers paid almost houses exclusively in cash, as financing options were largely unavailable. Although there is no limitations on financing for foreign buyers, who may seek offshore sources, the buyer must purchase through a transfer of funds from abroad, as there is no current allowance for in- country payment.

While we believe the enactment of the Condominium Law would be a positive sign in terms of encouraging foreign investment in Myanmar’s real-estate market in the long run, the opaque circumstances on certain processes and criteria at the moment may deter foreign inflows until investors received clarity on the regulations.

One such concern is whether any limitations will be placed on the commercial use by foreign owners of units registered. The law stipulates that foreigners are not permitted to manage condos, beckoning the question as to whether they would be allowed to rent out the units. At the Pun Hlaing Estate, about half are owner-occupiers while the other half is leased out, according to management.

Special Purpose Committee Committee set up to For projects which had commenced development, or that existed before the law was review projects with enacted, a Special Purpose Committee has the authority to review and approve projects as approvals from previous condominiums, provided they meet these main requirements. administration In May 2016, Yangon City Development Council (YCDC) issued a city-wide suspension on the construction of high-rise residential buildings for inspections. Projects could be classified under 2 categories: 1) those that received a construction permit and full approval

Yoma Strategic (YOMA SP): 16 November 2016

to commence work under the previous administration, and 2) those that have obtained a construction permit, but not the approval to break ground. There are 64 buildings in the first category, and a further 158 projects in the latter. The review includes examining the impact that projects might have on their surrounding areas and communities, as well as structural issues.

Of the 64 buildings in the first group, YCDC initially requested changes to 12 of them, as they were not in line with urban planning standards, such as car park space requirements. No changes were required from the other 52 projects, which could proceed as originally planned. In August, Yangon Chief Minister and Head of the high-rise inspection committee U Phyo Min Thein revoked the earlier demand and allowed the 12 developers to resume work. However, the projects must be completed in accordance with terms agreed with the chief minister.

In the second group of 158 projects, 107 had not commenced work when the construction freeze was imposed, while the remaining 51 projects, which had some foundation work done, would have to await the result of an inspection. On 9 November 2016, YCDC completed its review of high-rise building projects and began to accept new applications for construction permits, having stopped considering new permits back in July 2016.

According to Yoma’s 1Q17 results, none of its property developments fell under the list of projects that required modification, and no ongoing projects were halted for inspection.

Commercial According to Frontier Myanmar, demand for office space has been healthy over the past few years, as there are few purpose-built buildings, coupled with a surge of foreign companies entering the country. The average high-end office rental rate in downtown Yangon was about USD68 per sq m per month in 2Q15, up from USD3 per sqm per month in 4Q14, with some premium buildings commanding higher prices of up to USD85-90 per sq m per month. Rental rates for mid-range offices are typically priced around USD10-20 per sq m per month.

Myanmar has attracted The lack of commercial space in Myanmar has attracted investments from other Singapore property investment developers as well. On 8 September 2016, The Straits Times reported that Keppel Land, from Singapore firms, the property arm of Keppel Corp, had entered into a JV with a Burmese conglomerate, including Keppel Corp Shwe Taung Group, to develop a serviced residences and office development in the extension of Junction City.

Keppel Land’s investment in the next phase will be about USD48.6m. It will hold a 40% stake. The office component will offer a GFA of about 50,000 sqm. The serviced residences will comprise 260 serviced apartments, the first Sedona Suites in Myanmar. Construction for phase two is expected to start in 2018.

Junction City Tower, an office building in phase one, was also developed by a JV between the 2 parties. It is a 23-storey office building with an NLA of about 33,400 sqm of office space. It will be completed in 2017. Phase one also includes a 5-star Pan Pacific Hotel, a retail and entertainment centre as well as serviced residences. Keppel Land entered Myanmar in 1993 when it broke ground for Sedona Hotel Yangon, and recently expanded the hotel with a new 29-storey Inya Wing which opened in May 2016.

Star City Yoma holds a 70% Star City is a residential development located in Thanlyin Township, along the banks of the interest in Star City, a Bago River. It is 8 miles from the Thilawa Special Economic Zone and 6 miles from residential development downtown Yangon. The estate has 5.8m sq ft of land area. The project targets the middle- with 11m sq ft of GFA to upper-income market segments. Yoma holds a 70%-economic interest in the LDRs in Star City. The remaining 30% is owned by FMI.

Yoma Strategic (YOMA SP): 16 November 2016

Yoma has developed and substantially sold the first 2 zones in Star City (Zones A and B) measuring about 2.7m sq ft of GFA. In total, these 2 phases have 2,021 units, of which 1,871 have been sold as of 30 June 2016 and the remainder held as rental units, known as Star Residence, by Yoma. We estimate monthly rents of about SGD4 per sq ft. The company is currently developing Zone C, known as Galaxy Towers, which has about 1.2m sq ft in GFA.

We estimate the undeveloped land area to yield over 9m sq ft of residential GFA and 1.7m sq ft in commercial GFA. We note that the company has been able to increase its GFA by raising the heights of the residential buildings from about 8 storeys in Zone A to 25-28 storeys in Zone C. Going forward, we believe more buildings would be developed at heights similar to those in Zone C.

Star City: aerial view of the development Zones A and B are substantially sold; 334 out of 954 units in Zone C have been launched for sale

Source: Company

Rental price range of furnished units for Star City at Yangon Range Average Average per sq ft Size Open view Courtyard view River view Open view Courtyard view River view Open view Courtyard view River view Type (sq ft) (USD per mth) (USD per mth) (USD per mth) (USD per mth) (USD per mth) (USD per mth) (USD per sq ft) (USD per sq ft) (USD per sq ft) 1 Bedroom 622 1620-1880 1790-2140 2190-2540 1,750 1,965 2,365 2.81 3.16 3.80 2 Bedroom 905 2100-2320 2430-2650 2760-3130 2,210 2,540 2,945 2.44 2.81 3.25 3 Bedroom 1185 2730-3100 3010-3390 3330-3920 2,915 3,200 3,625 2.46 2.70 3.06 4 Bedroom 1753 3580 3800 4970-5510 3,580 3,800 5,240 2.04 2.17 2.99 Average 2,614 2,876 3,544 2.44 2.71 3.28

Source: Star City Yangon website

Yoma Strategic (YOMA SP): 16 November 2016

Zone C will be Galaxy Towers, the third phase of Star City, will feature 6 condominium blocks of between completed in phases 25 and 28 storeys. It comprises 954 apartments with about 1.2m sq ft of GFA, offering from March 2018 around 1.1m sq ft of NSA. It will have a mix of 1- to 4-bedroom layouts from 728 to 2,200 onwards sq ft. Yoma has launched 334 units for sale, with 94 units sold as of 30 September 2016. Two of the 6 towers are estimated for completion in March 2018, with another in June 2018. The remaining 3 towers are slated for completion from 2019 onwards. Zone C is developed in collaboration with a third party investor, which provided the project financing. Yoma is entitled to performance fees of USD1.5m per quarter for managing the construction of the project, as well as a share of profit from the sales of units.

Yoma also owns a 70% stake in a 20.3-acre land bank, or 83,000 sq m of GFA, being developed into a Dulwich International School. The development has 3 phases, with the first phase expected to be completed by mid-2017.

Star City: Galaxy Towers (Zone C) details Total GFA (sq ft) 1,235,712 Total NSA (sq ft) 1,124,092 Total number of units 954 Estimated unit size (sq ft) 1,178 Estimated selling price (USD per sq ft) 240 Number of units launched 334 Number of units sold as of 30 September 2016 94

Estimated completion dates Phase 1A (Towers 2 and 4) March 2018 Phase 1B (Tower 3) June 2018 Phase 2 (Towers 1, 5 and 6) 2019 onwards

Source: Company

Star City is the only Star City will be a key beneficiary of the ongoing development of the Thilawa Special large-scale residential Economic Zone (SEZ), a JV between the governments and private companies from development within the Myanmar and Japan, as it is the only large-scale residential development within the SEZ Thilawa Special vicinity. The SEZ is a 2,400-hectare project in the Yangon region which the Myanmar Economic Zone Government has demarcated as an industrial park and is expected to attract industrial investments from local and multinational corporations with various tax and commercial incentives. Zone A, comprising 400 hectares, has been launched with more than 85% of the land taken up by 69 light-industry manufacturers. Zone B, measuring 700 hectares, is slated for launch later this month.

Pun Hlaing Estate Yoma has about 5.3m sq ft of land bank in the Pun Hlaing Estate. The company owns a 70% economic interest in around 4.74m sq ft of Land Development Rights (LDR) and full economic interest in about 0.56m sq ft of LDRs within the estate.

Upcoming launches in The group has sold more than 400 properties to date and upcoming developments Pun Hlaing Estate comprise 71 landed townhouses, 21 villas and a 176-unit condominium. Yoma also owns include 71 townhouses, The Residence at Pun Hlaing, an apartment block offering 16 3-bedroom units for rent, and 21 villas and a 176-unit has 4 other houses for leasing purposes. condominium

Yoma Strategic (YOMA SP): 16 November 2016

Pun Hlaing Estate: previous launch Pun Hlaing Estate: new launch (Lotus Hill)

Source: Company Source: Company

A key feature of the estate is an 18-hole, 7,012-yard golf course. Other amenities include a country club and the Pun Hlaing Siloam Hospital, a joint-venture between FMI and the Lippo Group. In addition, the Group is developing Pun Hlaing Lodge, an international hotel with 46 rooms, scheduled to open in mid-2018. Yoma is also constructing a Dulwich international school on the Pun Hlaing Estate premise, with the first phase slated to open in mid-2017.

Pun Hlaing Estate: current and upcoming launches Current sale price Total units Total units sold (USD) Current launches Fairways Villas 3 2 1,450,000 Lotus Hill (new launch) 71 - 700,000* Lotus Terrace Apartments 18 2 600,000-800,000 Lotus Place 30 22 750,000-825,000

Upcoming launches Golf course villas 21 - 1,500,000-2,000,000* Evergreen Phase 3 176 - From 300,000*

Source: Company Note: (*) – based on company’s estimates

Landmark Landmark is a mixed-use Yoma’s Landmark project is located in the heart of Yangon’s CBD. The project, with an project with 2.4m sq ft estimated 2.4m sq ft of GFA, consists of 2 parts – a mixed-use development and The GFA Peninsula Yangon Hotel. Yoma owns 48% in the former and 24% of the latter. Other investors of the mixed-use development include First Myanmar Investment Company, the International Finance Corporation, a branch of the World Bank that finances private ventures, Asia Development Bank and Mitsubishi Corporation. The Hongkong and Shanghai Hotels is the major shareholder of The Peninsula Yangon Hotel.

Landmark: current site location Landmark: future design plans

Source: Company Source: Company

Yoma Strategic (YOMA SP): 16 November 2016

Landmark was first announced in 2012, but has been hit by regulatory delays over the past 4 years. Yoma signed 2 new master leases for the mixed-use development and The Peninsula Yangon Hotel in July 2016. Works on the development have commenced with sales for the residential units expected to begin from April 2017 onwards. The project is expected to complete by end-FY20.

Landmark’s estimated timeline Status/Target date Milestones Signed Master Lease with agreed commercial terms and timeline Signed Two new master leases for the mixed-use development and The Peninsula Yangon Hotel Commenced Works on The Peninsula Yangon Hotel By end-2016 Approval of incorporation of foreign JV company and major works for the mixed-use development Early 2016 Draw down on debt facilities April 2017 onwards Pre-sales of apartment units By end-FY20 Project completion

Source: Company

Ownership of Landmark mixed-used development Ownership of The Peninsula Yangon Hotel International Asian First Myanmar Finance Development Investment Corporation, 5% Bank, 5% Company Limited, 6% First Myanmar Yoma, 24% Investment Company Limited, 12% Yoma, 48%

Hongkong and Mitsubishi Shanghai Corporation and Hotels, 70% Mitsubishi Estate, 30% Source: Company Source: Company

The mixed-use development is expected to have 2 Grade-A office buildings (37% of GFA), serviced apartments and business hotel (22%), 4 floors of retail space (17%) and luxury residential units (17%). The Peninsula Yangon Hotel, which makes up 6% of GFA, will be operated by The Hongkong and Shanghai Hotels.

Landmark’s office and We estimate that Landmark’s office and retail components can command monthly rents of retail monthly rents SGD6 per sq ft. We also forecast room rates of SGD200/SGD300 per night at the estimated at development’s business hotel and The Peninsula Yangon Hotel, respectively. SGD6 per sq ft Landmark GFA breakdown GFA (sq ft) % of GFA Office 903,651 37% Retail 410,051 17% Serviced apartments and business hotel 547,979 22% The Peninsula Yangon Hotel 151,264 6% Residences 426,315 17% Total 2,439,260 100%

Source: Company

The total development cost for the mixed-use development is estimated at USD660m. This consists of land cost and other development costs including construction, consultants, overheads and contingencies.

Landmark’s total The project will be funded via debt facilities of up to USD135m, equity contribution from the development cost is partners of between USD349m and USD400m, as well as the injection of land. Yoma will about USD660m, with contribute its 80% interest in the land value to the JV, as well as a net cash contribution of the equity contribution USD128-156m, of which USD24m has been invested to date. The net cash contribution for making up 53-61% of the the mixed-use development is about USD92-117m, while the contribution for The funding Peninsula Yangon Hotel is about USD38m.

Yoma Strategic (YOMA SP): 16 November 2016

Landmark mixed-use development: source of funding High-end of presale amount Low-end of presale amount Source (USD m) (USD m) Revenue from presale of residential units 191 125 Debt facilities 120 135 Equity contribution from partners 349 400 Total development cost 660 660

Source: Company, Daiwa estimates

Landmark: Yoma’s net cash contribution Yoma’s outstanding net High-end of presale amount Low-end of presale amount cash contribution is Components (USD m) (USD m) Mixed-used development 92 117 USD106-131m The Peninsula Yangon Hotel 38 38 Sub-total 130 155 Less: investment to date -24 -24 Total net cash contribution 106 131

Source: Company, Daiwa estimates

Cash contribution over Management does not expect any significant cash contribution over the next 12-18 next 12-18 months is months, estimated between USD11m and USD15m. The cash contribution will be funded expected to be USD11- from the sale of non-core assets, debt facilities and internal resources, according to the 15m company. We believe the disposal of its investment property in China, valued at SGD92.9m as of end-FY16, could be on the cards.

We expect Yoma to generate SGD24-65m in EBIT per year from FY17-19E, from the sale of its residential projects, on the back of SGD68-172m in revenue per year in FY17-19E.

Others Yoma owns a 52.5% economic interest in 170,000 sq ft and 80% stake in 59,000 sq ft of land bank in FMI City, a 465-acre development located 3km from Yangon International Airport. The entire development comprises over 2,000 properties that can accommodate in excess of 7,000 residents. Most of FMI City, which began construction in 1995, has been sold.

Yoma Strategic (YOMA SP): 16 November 2016

Automotive and equipment: in the driving seat

We expect the growth in agriculture productivity and the increase in demand for passenger cars to benefit Yoma. The company has exclusive rights to distribute: 1) agriculture equipment for New Holland and FPT Powertrain Technology brands, 2) construction equipment for J C Bamford Excavators (JCB), and 3) passenger and commercial vehicles for various brands including Volkswagen and Mitsubishi. The company also has a leasing business, known as Yoma Fleet. We expect the segment to benefit from the government’s drive to utilise machinery to improve crop yield. Distribution of New Holland, FPT and JCB products are done through Yoma’s wholly-owned subsidiary, Convenience Prosperity Company Limited (CPCL). CPCL has 11 branches throughout Myanmar as of 8 September 2016; this is expected to increase to 14 branches by end-2016.

Automotive and equipment: Yoma’s suite of brands Agriculture and construction equipment Fleet leasing Passenger and commercial vehicles

Source: Company

We expect Yoma to sell The auto segment contributed 27% of Yoma’s FY16 revenue, of which distribution sales by 850 tractors in FY17, up New Holland made up the bulk (88% of auto revenue), with the remainder from its fleet 40% YoY leasing business (12%). About 90% of distribution sales are derived from initial sales (tractors and implements), while the remainder is comprised of after-sales services (spare parts and services). Roughly 2 implements are sold with every tractor. As the accumulated volume of tractors sold increases, we expect the contribution from after-sales services to rise accordingly. We expect Yoma to sell 850 New Holland tractors in FY17 (+40% YoY), before reaching 1,147 tractor sales in FY18 and 1,491 units in FY19, driven by the mechanisation of the agriculture industry. We also expect the company to recognise revenue from the sale of JCB machinery from FY18E onwards. As a result, we expect a 52% CAGR in auto segment revenue from FY16-19E.

Yoma Strategic (YOMA SP): 16 November 2016

Auto segment: sales breakdown (SGD m) We forecast auto 120 segment revenue to rise 100 11 at a CAGR of 52% from 9 80 FY16-19 9 6 60

40 6 85 3 3 64 24 20 35 22 0 FY16 FY17E FY18E FY19E Initial sales After-sales services Yoma fleet Others

Source: Company, Daiwa forecasts

Auto segment: number of New Holland tractors and implements sold

4,000 3,728 3,500 2,983 3,000 2,500 2,294 1,864 2,000 1,700 1,491 1,500 1,095 1,147 885 850 1,000 494 607 500 0 FY15 FY16 FY17E FY18E FY19E FY20E No. of tractors sold No. of implements sold

Source: Company, Daiwa forecasts

We forecast 15.0-17.6% We expect Yoma’s auto segment to turn profitable in FY17E, after being in the red last year EBIT margins for FY17- due to higher administrative and staff expenses related to its new businesses. We forecast 19E for the auto segment the auto segment EBIT margin to range from 15.0-17.6% in FY17-19E, due to a higher contribution from its after-sales services and fleet leasing businesses.

Most of New Holland’s initial sales come from retail customers, which offer a gross margin of about 17%. Yoma also generates some of its initial sales via government contracts, which typically offer higher volumes, but a lower gross margin in the single-digit range. Sales of spare parts and after-sales services offer higher profitability, with gross margins of 40-50%. Yoma’s fleet leasing business generates a gross margin of 30%.

Yoma: auto segment EBIT margin

20% 17.6% 16.3% 14.2% 15.0% 15%

10%

0% -3.7%

(5%) FY15 FY16 FY17E FY18E FY19E

Source: Company, Daiwa forecasts

Yoma Strategic (YOMA SP): 16 November 2016

Agriculture industry: increasing productivity through mechanisation Agriculture is an integral part of the economy as the sector employs about 60-70% of the total population. When the nominally civilian government assumed responsibility in 2011, the first modified economic objective set was the building of a modern industrialised nation through agricultural development, and the all-round development of other sectors of the economy.

Myanmar is one of Asia’s largest exporters of rice, which remains the country’s most crucial agricultural commodity. Other major crops include pulses and beans. Although agriculture’s contribution to Myanmar’s GDP declined to 28% in 2014-15, from 57% back in 2000-01, the absolute amount of contribution from agriculture to Myanmar’s GDP increased about 12-fold during that period.

Myanmar: GDP breakdown by sector of activity

Agriculture made up 100% 28% of Myanmar’s GDP 90% in 2014-15 80% 33% 36% 37% 36% 37% 38% 38% 70% 60% 10% 18% 50% 26% 31% 32% 32% 34% 40% 30% 57% 20% 47% 37% 32% 31% 30% 10% 28% 0% 2000-2001 2005-2006 2010-2011 2011-2012 2012-2013 2013-2014 (p.a) 2014-2015 (End of March) Agriculture Industry Services

Source: Department of Planning

Myanmar has around 653,100sq km of land area. Around 65.4% of its total land area was for forestry and agriculture land use in 2013, down from 69.9% in 2000. This declining trend is likely due to the expansion of other industries such as manufacturing.

Agricultural and forestry usage as a percentage of total land area Agricultural and forestry 69.9% 70% 69.6% usage makes up 65% of 69.1% 68.7% total land area 69% 68.4% 68.4% 68.4% 68.2% 68.3% 68.2% 67.8% 68% 67.0% 67% 66.2%

66% 65.4%

65% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: World Bank

The EU and US lifted Myanmar’s manufacturing sector looks poised to grow, with positive support from Europe sanctions on Myanmar and the US in recent years. In March 2012, the EU formally lifted its sanctions on Myanmar in 2012 and 2016, with the exception of the arms embargo, internal repression controls and related ancillary respectively, helping to services. In June 2012, Myanmar was reinstated in the EU’s Generalised System of promote the country’s Preferences. This enabled all products originating from Myanmar, except ammunition and manufacturing sector arms, to benefit from full duty-free and quota-free access to EU markets. In 2016, the US lifted its sanctions on Myanmar. Prior to the sanctions, US imported around USD276m from Myanmar in 2003. In 2012, the last full year before the sanctions, the US imported about USD356m of goods from the country. Up until 2004, Myanmar’s garment manufacturing sector relied heavily on exports to the US. Around 85% of its total exports were apparel and textiles, of which an estimated 25% went to the US.

Yoma Strategic (YOMA SP): 16 November 2016

Low labour costs in the In order to entice companies to relocate their manufacturing facilities to Myanmar, the manufacturing sector is government has introduced foreign direct investment incentives including a 5-year tax a key differentiator holiday, 50% income tax relief on exports for 5 years, 50% tax relief on reinvestment profits between Myanmar and for 5 years, 5-year exemption on duties for approved products and access to 30-year land its peers leasing agreements for foreign corporates. Companies have responded positively. The Hong Kong Apparel Society and the Hong Kong Trade Development Council have established a special Hong Kong Industrial Zone to allow 50-80 manufacturers to set up within a 2- to 3-year period. At the Thilawa industrial park, more than 20 companies have signed deals to take up lots in the 210-hectare first phase of the project, measuring 400 acres (about 162 hectares) in total, with a further possibility to develop an additional 250 hectares. A key differentiator between Myanmar and its peers is its low labour cost of USD65 per month (including overtime and allowance) compared to USD358 in Thailand, USD150 in Vietnam and USD88 in Cambodia, according to Forbes.

We believe that the drive to improve productivity, through the use of machinery, will be a key area of focus for the country, in order to raise its crop yield while limiting the allocation of land area for agriculture. There is a lot of room to grow, with Myanmar’s yields among the lowest in ASEAN. One key boost to productivity will be from incorporating mechanised farming – the use of machinery into day-to-day operations. We expect this to support demand for agricultural vehicles, supplied by New Holland and FPT.

Crop yield comparison (kg/ha) Myanmar’s crop yields 5,770 6,000 are among the lowest in 5,000 ASEAN 4,317

4,000 3,150 2,793 2,940 3,000

2,000

1,000

0 Cambodia Myanmar Nepal Sri Lanka Vietnam

Source: CEIC, Myanmar Ministry of Agriculture and Irrigation Note: 2016 data for Sri Lanka, 2015 data for Nepal and Vietnam, 2014 data for Cambodia and Myanmar

Distribution Agriculture and construction equipment New Holland Myanmar is the second Yoma acquired a licence to distribute New Holland Agriculture products in February 2015. largest market for New New Holland Agriculture is one of the brands under CNH Industrial N.V. (CNHI US), a Holland’s tractors in company listed on the New York Stock Exchange, with a market capitalisation of about Southeast Asia USD10.6bn. CNH Industrial generated USD25.9bn in revenue in FY15, and is one of the largest agricultural machinery manufacturers worldwide, with key competitors including John Deere (DE US) and AGCO (AGCO US), which reported revenue of USD28.9bn and USD7.5bn in FY15, respectively. CNH Industrial has a network of about 2,600 full-line dealers and distributors with over 5,600 points of sale, according to CNH Industrial’s 2015 annual report. Within Myanmar, there are around 25 companies competing in the local market, with John Deere the main competitor to New Holland. New Holland is the biggest player in Myanmar’s mid-sized (about 75 horsepower) tractor market with a market share of about 30%. It also has an overall market share of about 13% of total tractors sold in the country.

In order to build its reputation and brand in Myanmar, New Holland provides demonstrations, attends trade shows and organises conferences. Additionally, New Holland focuses on after-sales (spare parts and service) in order to strengthen its competitive advantage and differentiate itself from its peers. It has 15 full-time service teams.

Yoma Strategic (YOMA SP): 16 November 2016

Myanmar is now the second biggest market for New Holland tractors in Southeast Asia based on the number of tractors sold in 2015. This has helped improved its inventory management, which holds about 2 months’ worth of stock, compared to around 8 months’ worth about 2 years ago. CPCL currently has 11 dealing branches. We expect this figure to grow to 14 branches by December 2016, and 19 by end-2017, in order to support farmers in every major farming region in Myanmar. Customers include government farmers and contractors, while target agricultural crops are corn, beans, sugar cane, paddy and palm oil. It also distributes Maschio, CAM, Fieldking and Lemkem implements.

With agriculture being the largest economic sector in Myanmar and the huge potential for mechanisation, we expect New Holland’s business to be one of the fastest growing segments within the Yoma’s auto division in the next few years.

New Holland: Head Office branch in Yangon

Source: Company

New Holland: Branch office in Mandalay

Source: Company

Yoma Strategic (YOMA SP): 16 November 2016

New Holland: Branch office in Pathein

Source: Company

CPCL: distribution network for New Holland

Source: Company

Yoma Strategic (YOMA SP): 16 November 2016

J C Bamford Excavators (JCB) On 8 September 2016, Yoma was appointed the exclusive distributor for JCB’s construction and heavy equipment in Myanmar. Yoma will distribute the full range of products offered by JCB, including light, medium and heavy duty excavators, Loadall telescopic handlers, compactors and skid steer loaders. In our view, acquiring the distributorship licence for JCB is a good way for Yoma to diversify its automotive sales business, as the sale of construction equipment is not seasonal and dependent on weather conditions, as are New Holland’s sales.

JCB is the third largest Founded in 1954, JCB is the world’s third largest manufacturer of construction equipment manufacturer of by volume with 22 manufacturing plants worldwide, employing around 11,000 people on 4 construction equipment continents. JCB sells its products in 150 countries through 2,000 dealer depot locations. It in the world has a leading presence in several countries in Asia, including India where 3 out of 4 pieces of construction machinery sold in the country are from JCB.

A recent industry report by Timetric Construction Intelligence Center reveals that the Myanmar construction industry was valued at USD8.2bn in 2015, and is expected to grow to USD13.5bn in 2020, representing an annual growth rate of 10.4%.

FPT Powertrain Technologies FPT ranks third FPT is part of the CNH Industrial group, which is the parent of New Holland. The company worldwide in the 2-20 ranks third in the world in the 2-20 litre industrial diesel segment production. FPT has 10 litre industrial diesel plants globally across 5 continents and employs around 8,400 employees. It manufactures segment production in excess of 600 units annually, and produces engines for multiple applications. In Myanmar, FPT targets major projects in Yangon and Mandalay, hotels and commercials, construction, SMEs as well as industrials.

Passenger and commercial vehicles Mitsubishi Motors Yoma has a 50% stake in MM Cars Myanmar, a JV with Mitsubishi Corporation to represent Mitsubishi Motors in the servicing and distribution of passenger vehicles and light commercial vehicles. MMC currently operates 2 after-sales service centres in Yangon and Mandalay, and its flagship 3S showroom and workshop in Yangon had been completed in October 2015. With the arrival of the first batch of vehicles in April 2016, MMC has been ramping up its marketing initiatives to drive sales.

Hino Motors For larger vehicles, Yoma has a 40% stake in Summit SPA Motors Limited, a JV with Sumitomo Corporation, to represent Hino brand trucks and buses in Myanmar. Hino Motor, a Toyota Motor Corporation company, is the largest manufacturer of heavy- and medium- duty trucks in Japan. Summit SPA’s first Hino service station commenced operations in December 2014, focused on the commercial vehicle market.

Volkswagen Yoma is the official Myanmar importer and distributor for a range of passenger cars and SUVs manufactured by Volkswagen AG. This arrangement expands upon Yoma’s existing Volkswagen after-sales, service and genuine spare parts distribution businesses which commenced following the signing of a service partner agreement with Volkswagen AG in October 2013. Yoma plans to open a Volkswagen 3S showroom and commence car sales in Yangon in FY18.

Bridgestone Tyres Yoma has a 30% stake in First Japan Tire Services Company Limited, a JV with Mitsubishi Corporation to distribute and provide sales support for Bridgestone tyres. The JV sees the potential growth of Bridgestone in the tyre market in Myanmar and looks to increase the number of dealerships to increase its market share in the premium market segment.

Yoma Strategic (YOMA SP): 16 November 2016

Yoma fleet leasing Yoma owns a fleet leasing business known as Yoma Fleet, a self-drive vehicle hire solution provider. The company commenced operations in 2014, and had successfully leased out 491 vehicles as at 30 September 2016, to MNCs and clients from various industries including the FMCG, telecommunications and construction sectors. About 80% of Yoma Fleet’s leases are medium-to long-term contracts ranging from 3-5 years. No single client makes up more than 10% of Yoma Fleet’s vehicles, in value terms.

We expect demand for its vehicles to increase over the next few years as overseas companies venture into the country to tap into Myanmar’s growth. Accordingly, we expect Yoma to expand its fleet leasing portfolio from 491 vehicles as of 2Q FY17, to 982 vehicles by FY19E, in order to capture this surge in demand.

Yoma: number of vehicles under its fleet leasing business We forecast Yoma’s fleet 1,200 leasing business to 982 1,000 reach 982 vehicles by 832 FY19E 800 632 600 491 332 359 400 280 313 149 152 200 124

0 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 FY17E FY18E FY19E

Source: Company, Daiwa forecasts

Yoma Strategic (YOMA SP): 16 November 2016

Consumer: feeding Myanmar KFC Yoma has 7 KFC outlets KFC was the first major US quick service restaurant brand to enter Myanmar. Yoma fully in Yangon as of October owns the exclusive rights to operate KFC outlets in Yangon, and opened its first flagship 2016 store with 240 seats on 30 June 2015. We believe the company would be the first choice of partner for future expansion of KFC outlets within Myanmar given its track record in Yangon. Initial demand has been strong, with patrons queuing for hours on opening day, as reported by Channel News Asia. A typical transaction for 2 customers costs KYAT5,000 (about SGD5.50).

As of June 2016, Yoma had 6 KFC outlets and the company targets to operate 12 by end- FY17. We expect a further 10 outlet openings per year in FY18-19, and a further 8 stores in FY20. Geographically, we believe most of the outlet openings will be focused in Yangon and Mandalay, and possibly one tertiary city. We estimate the capex to range from USD0.5m for an outlet located in a mall, to USD1m for a free-standing outlet.

KFC: outlet locations in Yangon, Myanmar

Source: Company, Google Maps, Daiwa

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: number of KFC outlets in Myanmar Estimated to open 12 45 40 KFC outlets by end- 40 FY17, and 40 outlets by 35 32 end-FY20 30 25 22 20 15 12 10 6 4 5 0 FY16 2Q17 FY17E FY18E FY19E FY20E

Source: Company, Daiwa estimates

Over the past year, Myanmar has been one of the best-performing markets for KFC within Asia and was recently selected as Yum! Brands’ “Rookie of the Year” franchisee award. KFC is one of the leading consumer brands in the country, bagging the “People’s Choice Best Flagship Award” for its KFC One store.

The F&B segment has yet to turn a profit as it has not attained the critical mass necessary to achieve economies of scale on its HQ costs. However, we forecast the new outlet openings to drive an 87% revenue CAGR for the KFC business over FY16-20. We expect the consumer business to break even at the EBIT level in FY17, after Yoma opens its 10th KFC outlet, and generate an 8% EBIT margin in FY20.

Yoma: revenue and EBIT margin for the KFC business (SGD m) We estimate the KFC 60 10% 20% 5% 8% business to turn 3% 10% 50 profitable at the EBIT 0% 40 margin level in FY17, -10% following the opening of 30 -20% th -30% Yoma’s 10 KFC outlet 20 -40% 10 -56% 5 10 22 36 51 -50% 0 -60% FY16 FY17E FY18E FY19E FY20E

Revenue (LHS) EBIT margin (RHS)

Source: Company, Daiwa forecasts

KFC: outlet in Yangon (store front) KFC: outlet in Yangon (cashier)

Source: Daiwa Source: Daiwa

Yoma Strategic (YOMA SP): 16 November 2016

KFC: outlet in Yangon (seats) KFC: outlet in Yangon (advertisement)

Source: Daiwa Source: Daiwa

How big is Myanmar’s fast food market? We estimate that Yangon We believe companies looking to set up fast food restaurants in Myanmar would cast their and Mandalay can eyes on the country’s 2 main commercial cities, Yangon and Mandalay, which we estimate accommodate around would be able to accommodate around 350 fast food outlets. This represents plenty of 350 fast food outlets growth opportunities for Yoma and KFC, as we estimate that there are fewer than 20 fast food outlets in Myanmar at the moment.

Other fast food firms in Myanmar include South Korea’s Lotteria, Pizza Hut and Burger King. Lotteria, which is a subsidiary of conglomerate Lotte Group, opened its first outlet in Yangon in April 2013, and currently has 7 outlets. It plans to open 24 more by 2016 from Yangon to Nay Pyi Taw. Apart from its regular fare of chicken and burgers, Lotteria also offers dishes tailored to Myanmar consumers, such as chicken rice. Pizza Hut opened its first outlet in Yangon at end-2015, and intends to open 15-20 branches throughout Myanmar in the next 5 years. Pizza Hut is a JV between City Mart Holding and Jardine Restaurant Group Myanmar. Thai firm Minor Food Group opened Myanmar’s first Burger King outlet at Yangon International Airport Terminal 1 on 1 July 2016, and is in discussions to open a second outlet in the domestic terminal next to it, according to the Myanmar Times.

Using other Asian countries as a comparison, the average number of outlets per million population is 94, and ranges from a low of 23 outlets in Indonesia, to a high of 220 outlets in Thailand. As Myanmar is arguably less developed than the countries in our list below, we believe taking the low-end of the range (23 outlets per million population) as an estimate is more reasonable than using the average. Factoring in the population of 15.4m in Yangon and Mandalay, we estimate the 2 cities would together be able to accommodate 355 fast food outlets.

Fast food restaurants: number of outlets in Asian countries/cities Population GDP per capita (USD) Number of fast food outlets Outlet per million population Yangon and Mandalay 15,445,000 1,203# 355* 23* Thailand 65,729,098 6,013 14,443 220 Malaysia 31,661,000 9,504 3,340 105 Vietnam 91,713,300 2,109 8,000 87 Singapore 5,607,283 52,888 450 80 China 1,373,490,000 7,956 107,677 78 Philippines 100,981,437 2,879 6,270 62 Indonesia 258,705,000 3,374 5,934 23 Average (excl. Myanmar) 94

Source: CEIC, US Department of Agriculture, Agriculture and Agri-Food Canada, Singstat 2014, (*) Daiwa estimates Note: GDP per capita is based on current market prices; (#) GDP per capita figure for Myanmar

Yoma Strategic (YOMA SP): 16 November 2016

Comparatively, Myanmar has some ways to go before it is close to its ASEAN peers. However, this figure may be flawed due to the disparity in disposable incomes between Myanmar and its neighbours. Nonetheless, even if we adjust for the difference in GDP per capita, as Myanmar’s figure is one-third of Indonesia’s, it implies that Yangon and Mandalay would together be able to accommodate around 120 fast food outlets.

Distribution Yoma has a 30% stake in Yoma has a 30% stake in Access Myanmar Distribution (AMDC) which produces, markets a producer of alcoholic and distributes alcoholic beverages in Myanmar under Asia Beverages Company Limited beverages, and a JV in a (ABC). ABC’s ‘High Class’ whisky brand is one of the largest domestic whisky brands and distribution solutions has achieved a substantial market share since its launch in 2011. AMDC’s efficient provider operations are supported by a large workforce in over 31 branches and depots, providing extensive geographical coverage across both upper and lower Myanmar. Its strong distribution network will provide a solid, well-established platform for the group to expand into future FMCG ventures.

Myanmar’s economic and demographic conditions are expected to drive the demand for logistics facilities. The group, together with Kokubu Group Corp, has set up a 50-50 joint venture company called KOSPA Limited (KOSPA) to tap into this demand. We expect more synergies to be derived from the JV firm and Yoma’s KFC business, which is the largest customer of the JV company.

The opening of its first Since October 2014, KOSPA has been operating a fleet of multi-temperature controlled multi-temperature trucks to serve its range of customers from the food and beverage, FMCG, agricultural, storage facility enables pharmaceutical and hotel industries. In December 2015, KOSPA opened its first 4,500sqm the distribution JV to multi-temperature storage facility in Yangon, which cost USD5m (SGD7m), to better serve expand its distribution its customers. The newly built multi-temperature storage facility, together with the multi- solutions in Myanmar temperature capability in its fleet of trucks, will allow KOSPA to continue to offer in-bound and out-bound third-party distribution solutions in Myanmar.

Yoma Strategic (YOMA SP): 16 November 2016

Investments: telecoms and tourism

We expect Yoma to record SGD16-41m in fair-value gains per year from its 12.5% stake in a telecom business, edotco Investments Singapore, in FY17-19. Other key investments include a potential 47% stake in SHC Capital (SHC SP, not rated), a Myanmar-focused tourism play, following a proposed RTO.

Telecoms Yoma has a 12.5% stake Yoma owns a 12.5% stake in edotco Investments Singapore, which in turn owns edotco in a company that Myanmar, a company that develops, constructs and leases telecommunications towers in develops, constructs Myanmar. edotco Myanmar currently operates 1,250 towers in the country, serving all 3 and leases telecom mobile operators, and intends to increase its portfolio to 5,000 towers over the next 3 towers … years. Malaysia’s telecommunication company, Axiata Group Berhad, owns the remaining 87.5% in edotco Investments.

… and will recognise It is important to note that Yoma does not record any earnings from the JV; instead, Yoma fair-value gains from its recognises fair-value gains from the investment. Yoma recorded SGD36.3m in fair-value investments, based on gains in FY16. Fair-value gains are calculated based on an EBITDA multiple, and a 12- an EBITDA multiple and month trailing EBITDA. We expect fair-value gains to be recurring over the next few years 12-month trailing due to an increase in the number of towers and improving EBITDA margins. We forecast EBITDA Yoma to record fair-value gains of SGD74m over FY17-19 from its 12.5% stake in edotco Investments.

edotco Myanmar: forecasts of fair-value gains (SGDm) Yoma would record 45 41 about SGD74m in fair- 40 value gains over FY17- 35 19 from its investment in 30 the telecom business, 25 22 according to our 20 17 16 estimates 15 8 10 5 0 FY17 FY18 FY19 FY20 FY21

Source: Daiwa estimates

Exit clauses edotco Investments has granted a put option to Yoma Finance, and Yoma Finance has granted a call option to ecotoc Investments. The put and call options can be exercised at the higher of the following 2 scenarios:

1. USD35m, based on the value of the put option for Yoma’s 12.5% stake in edotco Investments as of 7 November 2016, and 2. a future enterprise valuation, which is based on a multiple of EBITDA and edotco Myanmar’s trailing 12-month actual performance.

This implies that Yoma is guaranteed a sales price of not less than USD35m based on the valuation as of 7 November 2016. However, we note there may be upside to the guaranteed sales price, as the valuation moves according to the second scenario described above. Yoma initially had a 25% interest in edotco Investments Singapore, before agreeing to sell half of its stake (12.5%) to Axiata Group Berhad for USD35m on 7 November 2016.

Yoma Strategic (YOMA SP): 16 November 2016

Quick industry snapshot Myanmar has granted a The country has made strides to liberalise the telecom market in recent years. A new 4th telecommunications Telecommunications Law was approved in October 2013. Two new operators have been licence licensed through an internationally recognised transparent process and the incumbent state-owned operator will elect an operating partner. Furthermore, the Myanmar Government has granted a 4th telecommunications licence. This will enable Myanmar’s telecom industry to transit from a monopoly market into a multi-operator environment.

The number of mobile cellular subscriptions in Myanmar has risen tremendously in the past few years, up to 54 subscriptions per 100 people in 2014, from 1 subscription in 2010. However, Myanmar still lags its ASEAN peers, with Laos being the country with the second lowest subscription rate of 67 per 100 people.

The situation is similar for Internet users. Myanmar has seen a rapid rise to 2.1 Internet users per 100 people in 2014, from 0.3 in 2010. This pales in comparison to Cambodia’s 9 users per 100 people, even though the latter is the second lowest among ASEAN neighbours.

According to the Ministry of Communication and Information Technology (MCIT) of Myanmar, mobile penetration had grown to 55% as at the end of March 2015 from 33% in March 2014, and 11% in 2013. MCIT expects the industry to continue to grow rapidly as MCIT requires the network operators to expand the country’s network coverage to 70% by 2017 and 95% by 2020. GSMA estimates that to reach the interim coverage level of 70%, mobile operators would need to deploy a total of 17,300 towers, more than double the current 8,000 towers in the country.

Mobile cellular subscriptions per 100 people Myanmar lags peers in 160 149 147 147 144 mobile cellular 140 133 129 subscriptions … 120 111 97 100 92 74 80 67 54 60 40 20 0 Malaysia Vietnam Singapore Thailand Cambodia Indonesia Philippines World China India Lao PDR Myanmar

Source: World Development Indicators, 2014

Internet users per 100 people … and Internet users 90 82.0 80 67.5 70 60 49.3 48.3 50 40.7 39.7 40 34.9 30 18.0 17.1 20 14.3 9.0 10 2.1 0 Singapore Malaysia China Vietnam World Philippines Thailand India Indonesia Lao PDR Cambodia Myanmar

Source: World Development Indicators, 2014

Yoma Strategic (YOMA SP): 16 November 2016

Myanmar: mobile cellular subscriptions per 100 people MCIT requires network 60 54.0 operators to expand the country’s network 50 coverage to 70% by 40 2017, up from 54 % as at March 2015 30

20 12.8 10 7.1 2.4 0.0 0.0 0.1 0.1 0.2 0.3 0.4 0.5 0.7 1.0 1.1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Development Indicators, 2014

Myanmar: Internet users per 100 people

3 2.1 2 1.6 2 1.1 1.0 1

1 0.2 0.2 0.2 0.2 0.3 0.0 0.0 0.0 0.0 0.0 0.1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Development Indicators, 2014

Tourism Announced the spin-off On 24 October 2016, Yoma announced the reverse takeover (RTO) of SHC Capital (SHC of its tourism assets into SP, not rated), whereby Yoma will sell its tourism assets to SHC Capital, in exchange for SGX-listed SHC Capital shares in the latter. The assets will be sold at a premium, with a sale price of SGD43.9m via a RTO compared to the book value of SGD38m as of 30 September 2016, implying that Yoma will record a disposal gain of SGD5.9m from the divestment, according to our estimates.

The deal is expected to be completed by end-FY17. Although the company will own 53.48% of SHC Capital initially after the transaction, it is likely that its stake will be diluted as SHC Capital is required to issue new shares (at a minimum price of SGD0.20 per share) until it achieves a 15% free float, per SGX Catalist Rules. Hence, we estimate that Yoma’s eventual stake will be reduced to 46.7% after the new shares have been issued.

SHC Capital: post-RTO shareholding structure Party No. of shares Percentage SHC Capital Holdings Pte. Ltd. 35,662,760 10.0% Yoma Strategic 167,078,848 46.7% First Myanmar Corp 41,947,426 11.7% External vendors 59,700,457 16.7% Public shareholders 53,715,793 15.0% Total 358,105,284 100.0%

Source: SHC Capital, Daiwa estimates

The tourism assets to be injected by Yoma are its 70%-stake in a hot air balloon business and a 4.3-acre land parcel in Bagan, as well as a 46-key hotel called Pun Hlaing Lodge. In addition, SHC Capital would also acquire a 19-key lodge business known as Hpa-An Lodge, located on a parcel of land in Hpa An Township, Karen State, Myanmar, as well as a tourism and destination management business operating under the name “Asia Holidays”.

Yoma Strategic (YOMA SP): 16 November 2016

Tourism assets to be acquired by SHC Capital:

1. A hot air balloon business known as Balloons over Bagan. It operates 14 hot air balloons in Bagan, Mandalay and Inle Lake. Yoma owns 70% of this business. 2. A proposed hotel, known as Pun Hlaing Lodge, is being developed on a parcel of land located in Hlaing Tharyar Township, Yangon, Myanmar. It will have 46 hotel rooms and is slated to be operational in mid-FY18. Yoma owns 100% of this business. 3. A 4.3-acre land parcel located in Ywar Thit Myauk, Nyaung U Township, Bagan, Myanmar, which is slated to be developed into a proposed commercial and tourism- related hospitality project. Yoma owns 70% of this business. 4. A 19-key lodge business operating under the name “Hpa-An Lodge” located in Hpa An Township, Karen State, Myanmar. The business generated USD0.6m in revenue in the 12 months ended 31 March 2016. SHC Capital will acquire the business from an external vendor. 5. A tourism and destination management business known as Asia Holidays. The business made a USD0.3m net profit in the 12 months ended 31 March 2016. SHC Capital will acquire the business from an external vendor.

Following the RTO, SHC Following the proposed RTO, SHC Capital will transform into a Myanmar-focused tourism Capital will transform company, which will be positioned to acquire, develop and operate new tourism-related into a pure play on assets in Myanmar. A new CEO, Mr. Chiel Novatin, will lead the management team of SHC Myanmar tourism Capital. He has over 40 years of experience in managing hotels, including leading roles at Kempinski Hotels, Steigenberger Hotels and Resorts, and the Danone Group. SHC Capital is a cash company listed on the Catalist board of the SGX, following the disposal of its wholly-owned subsidiary, SHC Insurance, on 1 August 2014.

SHC Capital will be granted the right of first offer on the sale of any other tourism assets by Yoma or the other sale parties. In addition, SHC Capital will also have the right of first offer to secure the management and operation rights of any hotel or resort asset in Myanmar that Yoma or other sale parties propose to develop, acquire, invest or participate in.

Hot air balloon business The strict regulations (due mainly to safety issues) and expensive cost of hot air balloons create high barriers of entry to new players looking for a slice of Myanmar’s hot air balloon industry. As a result, we believe Yoma’s hot air balloon business will remain a key player in the industry, which stands to benefit from the growth of the country’s tourist arrivals and expenditure.

Founded in 1999, Balloons Over Bagan was Myanmar’s only commercial ballooning company for more than a decade. There are now other competitors, including Oriental Ballooning. Apart from Bagan, ballooning services are available in Mandalay and Inle Lake. The ballooning season in Bagan typically runs from October through March, when the winds are calmer and the air is cooler.

Balloons over Bagan currently operate 12 balloons with prices starting at USD330 per person for a classic service in Bagan, up to USD400 per person for a premium service. The company’s 2 balloons operating at Inle Lake charge USD390 per passenger. There is also a private charter option available at USD3,000 per passenger for a 2-day tour to see the Southern Shan State.

Yoma Strategic (YOMA SP): 16 November 2016

Hot air balloons in Myanmar: price list The hot air balloon Service type No. of pax Cost (USD/pax) season in Myanmar runs Balloons Over Bagan Classic 12-16 330-340 Premium 8 390-400 from October to March, with rides starting from Balloons Over Inle - 6 390 USD330 per passenger Private Balloon Safaris over Inle and Pindaya Private 2 3,000 Group 3-6 2,500

Oriental Ballooning Bagan Premium 4-12 395 Mandalay Premium 4-12 380 Inle Lake Premium 4-12 390 Thandwe (Ngapali) Premium 4-12 380

Source: Balloons Over Bagan and Oriental Ballooning websites Note: Price quotes are valid from 1 October 2016 to 31 March 2017

Oriental Ballooning was founded in 2013 and obtained its air operator’s certificate in November 2013. Its foreign pilots have a commercial UK balloon licence, with some having lived and worked in Myanmar for many years.

Other significant investments Yoma has a 9% stake in Yoma has a 9% stake in MC-JALUX Airport Services, a JV with Mitsubishi Corporation and the operator of Mandalay JALUX Inc. The JV has a 30-year concession from the Ministry of Transport’s Department International airport of Civil Aviation to update and operate Mandalay International Airport.

Mandalay International Airport is a major hub, connecting 11 domestic and 4 international destinations. The airport is located about 40km south of the Mandalay city centre. Mandalay has a capacity for 3m passengers a year, but only serviced some 750,000 in 2013, with 190,000 of those being domestic and 560,000 international. In comparison, Yangon International Airport handled 4m passengers in 2014, despite only having the capacity for 2.7m per year.

JALXU has over 50 years of experience operating airport retail businesses (across 27 airport facilities), as well as in the management and maintenance of airport facilities in Japan (as of October 2014). JALXU has also jointly operated Wattay International Airport in Vientiane, Laos, with a government corporation since 1999.

Yoma also owns rights Yoma owns rights to the Maw Tin estate, comprising 100,000 acres of contiguous to 100,000 acres of agricultural land in the Ayerwaddy Division of Myanmar. About 3,700 acres have been agricultural land in designated for a Robusta coffee plantation. The company is exploring options to work with Ayerwaddy, Myanmar third parties in order to utilise the land.

Yoma Strategic (YOMA SP): 16 November 2016

Financial analysis

Revenue We forecast a 42.4% CAGR in revenue in FY16-19E, driven mainly by its real-estate businesses. Residential sales in FY17-19E will be driven by 3 projects: Star City, Pun Hlaing Estate and Landmark Residences. We forecast the company to sell 150 units across its projects in FY17, before accelerating to 305-315 units per year in FY18-19, as we expect the company to launch sales for Landmark residential units, Galaxy Tower Zone C’s Phase 2 and Pun Hlaing Estate’s Evergreen Phase 3 from FY18 onwards.

Although we forecast a 15.8% CAGR in rental income from Yoma’s investment properties in FY16-19, driven by better occupancy at its residential apartments, as well as the opening of 2 Dulwich International schools by end-FY18, we only expect a significant boost in the segment’s revenue in FY21, following the completion of the Landmark development by end-FY20. Notably, Landmark contributes 30% to our valuation.

For KFC, we expect an increase in store count to be the key revenue growth driver (110% CAGR over 17-19E). Yoma operated 6 KFC outlets as of 30 September 2016, and targets to have 12 stores by end-FY17. We expect the company to open a further 10 stores per year over FY18-19. For the automotive business, we forecast a 52% CAGR in revenue over FY17-19, driven by increased sales of its construction and agricultural equipment, with a new distributorship licence likely to contribute from FY18 onwards.

Yoma: revenue breakdown by segment (SGDm) Residential and 700 automotive sales 600 64 expected to drive the top 500 line from FY16-19E 51 170 400 36 136 99 300 22 105 200 5 10 79 18 100 8 8 17 5030 4644 17 164 226 291 0 11 15 112 FY16 FY17E FY18E FY19E FY20E FY21E

Residential sales Rental income Real estate services Automotive Tourism F&B

Source: Company, Daiwa estimates

Yoma: residential sales breakdown by project (SGDm) Sales from Landmark 180 Residences will be 160 recognised from FY18E 140 40 onwards 120 100 20 43 80 34 60 40 81 27 59 20 20 0 FY17E FY18E FY19E

StarCity Pun Hlaing Estate Landmark Residences

Source: Company, Daiwa estimates

Profit before tax We forecast a 22% PBT We forecast Yoma’s PBT to rise at a 22% CAGR in FY16-19, as we expect its core CAGR in FY16-19E operational businesses to turn positive in FY17, led mainly by residential sales. We also look for the company to record fair-value gains of SGD16-41m per year from its telecom business in FY17-19.

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: profit before tax breakdown (SGDm)

250

200 86

150 6 100 22 5 16 13 5 50 13 17 41 36 10 37 64 99 198 0 -2 (50) FY16 FY17E FY18E FY19E FY20E FY21E

PBT from core business Fair value gains from telecom business Fair value gains from investment properties

Source: Company, Daiwa estimates

We forecast PBT from We expect Yoma’s KFC and automotive businesses to record losses before tax in FY17, Yoma’s core businesses related to start-up and expansion costs. However, we expect its KFC business to break to double in FY17-19, even at the EBIT level in FY17, as it achieves economies of scale with the opening of its driven mainly by 10th outlet, before hitting an EBIT margin of 8% in FY19. On automotive, we look for the residential sales and the segment to generate EBIT margins of 15-18% over FY17-19, driven by a rise in vehicle automotive segment sales and an expansion of its fleet leasing business. As we expect Yoma’s intended spin- off of its tourism assets to be completed by end-FY17, we see scope for growth in its tourism segment as it gains exposure from SHC’s other businesses. We only expect a significant acceleration in earnings contribution from its rental income segment in FY21, with the opening of the Landmark development slated for end-FY20.

Yoma: profit before tax (excl. fair value gains breakdown) (SGDm)

250 7 200 173 150 64 4 100 2 103 0 6 50 643 107 62 75 4 29 49 0 10 5 (1) (6) (50) (3) FY17E FY18E FY19E FY20E FY21E

Residential sales Rental income Automotive Tourism F&B

Source: Daiwa forecasts

Return on equity We forecast ROE to We forecast headline ROE of 5.8-7.8% in FY17-19 driven by earnings growth for its core come in at 5.8-7.8% in businesses as well as fair-value gains from the telecom business. Excluding all fair-value FY17-19 gains, from its 12.5% stake in the telecom business and investment properties, the adjusted ROE should come in at 0.7-5.3% over the same period.

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: return on equity

16% 13.6% 14% 11.2% 12% 7.8% 10% 7.8% 12.3% 8% 5.6% 5.8% 6% 8.3% 4% 2% 5.3% 0% 3.1% (2%) 0.7% (4%) -1.3% FY16 FY17E FY18E FY19E FY20E FY21E

ROE Adjusted ROE (excl. fair value gains)

Source: Company, Daiwa estimates

Dividends and cash flow We forecast a dividend payout ratio of 10% for FY17-19, as we believe the company would re-invest its cash into its businesses in the near term. Yoma paid SGD0.25¢ in dividends for FY16, translating into a payout ratio of 12%. This was the first time the company had paid out dividends since its RTO in August 2006. Moving forward, the company has adopted an official payout ratio of 10-20% of net profit per year.

Yoma: EPS, DPS and dividend payout ratio (SGD¢) We forecast a 10% 4.0 3.54 12% dividend payout ratio for 3.5 3.12 12% 12% Yoma in FY17-19 3.0 2.45 11% 2.5 2.00 2.15 2.0 11% 1.5 10% 10% 10% 10% 1.0 0.31 0.35 10% 0.5 0.25 0.24 0.0 9% FY15 FY16 FY17E FY18E FY19E

EPS DPS Dividend payout ratio (RHS)

Source: Company, Daiwa estimates

We believe Yoma will have sufficient cash to support dividend payments over the next 3 years, given our forecast for it to generate free cash flow of SGD4-13m per year in FY17- 19. We forecast the company to spend SGD17-39m per year in capex over FY17-19, with the key capex item being for its mixed-use development, Landmark. Capex for the expansion of its KFC outlets and automotive sales branches are related mainly to fitting- out costs.

Yoma: free cash flow (SGD m) We forecast Yoma to 60 52 generate SGD4-13m in 39 34 free cash flow from 40 28 26 30 14 17 FY17-19 20 13 9 13 4 0

(20) -15 -20 (40) -34 FY15 FY16 FY17E FY18E FY19E

Cash flow from operations Capex Free cash flow

Source: Company, Daiwa forecasts

Yoma Strategic (YOMA SP): 16 November 2016

Gearing We expect Yoma’s gearing ratio to range from 0.15-16x in FY17-19, in line with management’s target of keeping gearing below 0.40x. As of 30 September 2016, the company’s gearing ratio was 0.24x. Unless a compelling investment opportunity (eg, a large tract of land at an attractive price) is presented, we do not expect the company to raise significant debt over this period.

Yoma: net debt and gearing ratio (SGDm) We forecast net gearing 140 0.20 119 to range from 0.15-0.16x, 113 118 120 112 in line with the 0.15 100 0.17 company’s target to 0.16 0.16 80 0.15 keep it below 0.40x 0.10 60 40 19 0.05 20 0.03 0 0.00 FY15 FY16 FY17E FY18E FY19E

Net debt (LHS) Gearing ratio (RHS)

Source: Company, Daiwa forecasts

We note that the Asian Development Bank has extended a USD100m connectivity loan facility to the company. As of 27 July 2016, Yoma had drawn down USD54m of the facility, which was used to fund its investments in telecommunications towers, and the cold chain logistics and fleet leasing businesses. The remaining USD46m of the facility can be used to further expand these businesses, as well as other connectivity projects, including education.

Capital-raising: putting to bed any risk of an equity-raising A key issue for investors has been capital-raising exercises conducted by the company in the past few years. In all, Yoma has carried out 4 such exercises through rights issues and private placements which have generated about SGD460m since 2012. Based on our recent discussions with the company, management highlighted that it does not intend to undertake any additional equity-raising at the moment. We believe this is achievable, as we forecast the company to generate free cash flow in FY17-19, and it possesses sufficient debt head room to pursue investment opportunities, with its gearing ratio at 0.20x as of end-1QFY17E, well within management’s target of keeping it below 0.45x. However, a risk to our forecast is a significant investment, such as in a large plot of land.

Yoma: capital-raising exercises over the past 5 years Yoma has raised Equity raising date Type Amount raised (SGD m) Purpose SGD460m through rights Feb-15 1-for-3 rights issue 164 To fund acquisitions of Landmark, Pun Hlaing Estate and CPCL Jun-14 Private placement 95 To fund working capital, real-estate and non-real-estate businesses issues and private Nov-12 Private placement 100 To fund working capital, real-estate and non-real-estate businesses placements since 2012 Jun-12 4-for-5 rights issue 101 To fund acquisitions of 135 acres of LDRs in Star City

Source: Company

In order to forge a closer alignment of management’s interest with shareholders, Yoma’s CEO, Mr. Melvyn Pun, added 3 restriction clauses to his employee share option scheme on 24 August 2015. First, the option will be priced at market, instead of at a discount (previously: up to 20%). Second, the options may only be exercised upon hitting performance targets for EPS growth and the degree of non-real-estate revenue contribution. Third, the options may only be exercised after 5 years, instead of 2 years, for a discounted-price option.

Yoma Strategic (YOMA SP): 16 November 2016

Valuation

We initiate coverage of Yoma with a Buy (1) call and 12-month SOTP-based TP of SGD0.73, after ascribing a 30% conglomerate discount to our valuation of SGD1.04. This implies upside potential of 28%. The key components in our valuation are:

 Residential. We added the present value of profits from the sales of its residential developments, based on a weighted average cost of capital of 16.6%. In addition, we revalued Yoma’s land development rights as these assets are carried at cost on the company’s balance sheet, and assumed a land price of SGD65 per sq ft.

 Investment properties. For the Landmark development, we have applied a cap rate of 9% to the office and retail components, while valuing its serviced apartments and business hotel, as well as The Peninsula Yangon Hotel, at SGD0.75m and SGD1m per key, respectively. We have also added our fair-value gains forecast to its other investment properties, as we expect higher occupancy rates for its serviced residences in FY17-19, compared to FY16, and income contribution from the Dulwich international schools from mid-2017 onwards. Notably, although Landmark contributes 30% to our valuation, the development is only expected to generate revenue from FY21 onwards.

 Others. We applied a PER to the FY17E net profit of Yoma’s automotive and tourism business. We also applied an EV/EBITDA multiple to its KFC business’s FY17E EBITDA, as we believe using net profit may be understating the true cash-generating ability of the business due to depreciation and amortisation expenses of equipment related to new outlet openings. We have also included our end-FY17E asset value for Yoma’s 12.5% stake in the telecom business (edotco Myanmar)

We believe a 30% discount is justifiable for a property company operating in an emerging market. There are 2 parts to our discount calculation: first, we ascribe a 20% discount in line with our discount applied to the Singapore developers and, second, a further 10% discount is added in light of the risks associated with operating within a frontier market. We note that CapitaLand’s (CAPL SP, SGD3.00, Buy [1]) median price-to-SOTP discount since 2010 has been 18%, which is in line with our 20% discount to SOTP applied for Yoma’s valuation.

Yoma: WACC inputs Risk free rate 9.5% Market risk premium 8.0% Equity beta (x) 1.14 Cost of equity 18.6% Target gearing 20.0% Cost of debt 11.5% Corporate tax rate 25.0% WACC 16.6%

Source: Daiwa estimates

Yoma: SOTP valuation SOTP (SGD m) % of SOTP Residential 907 50% Investment properties 703 39% Consumer (KFC, distribution, tourism) 47 3% Telecom 104 6% Automotive 45 2% Total SOTP 1,806 100%

Source: Daiwa estimates

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: SOTP valuation GAV GAV per share Business (SGD m) (SGD) % of total GAV Land development rights Stake Remaining landbank (m sq ft) Land price (SGD per sq ft) Star City 70% 4.2 65 191 0.11 10% Pun Hlaing Estate 70% 5.3 65 241 0.14 13% Others 10 0.01 1% Sub-total 443 0.25 23%

Residential developments (NPV) Stake Discount rate Star City 70% 16.6% 110 0.06 6% Pun Hlaing Estate 70% 16.6% 167 0.10 9% Landmark Residences 48% 16.6% 23 0.01 1% Others (FMI City) 16.6% 3 0.00 0% Sub-total 303 0.17 16%

Development properties Stake Star City 70% 19 0.01 1% Pun Hlaing Estate 70% 32 0.02 2% Landmark Residences 110 0.06 6% Sub-total 161 0.09 8%

Investment properties Capital value (100% basis) Landmark Stake Cap Rate / Price per key (SGD m) (SGD m) - Office 48% 9% 568 273 0.16 14% - Retail 48% 9% 233 112 0.06 6% - Serviced apartments and business hotel 48% 0.75 293 140 0.08 7% - The Peninsula Yangon Hotel 24% 1.00 114 27 0.02 1% Sub-total 552 0.32 29%

Other investment properties Dalian Shopping Mall 93 0.05 5% Residential units in Myanmar 55 0.03 3% Commercial units in Myanmar 12 0.01 1% Dulwich International schools 46 0.03 2% Sub-total 206 0.12 11%

Others Stake Valuation method FY17E net profit/EBITDA (SGD m) Consumer businesses - KFC business 100% 10x EV/EBITDA 2 15 0.01 1% - Access Myanmar Distribution 30% 29 0.02 1% - Tourism business 47% 10x PER 2 10 0.01 1%

Telecom (edotco Myanmar) 12.5% 104 0.06 5%

Automotive and equipment 100% 16x PER 5 95 0.05 5%

Total GAV (SGD m) 1,918 1.10 100% Less: Net debt (SGD m) -112 SOTP (SGD m) 1,806 Number of outstanding shares (m) 1,737 SOTP per share (SGD) 1.04 Discount to SOTP 30% Target price (SGD) 0.73

Source: Daiwa estimates

Yoma: target price sensitivity table Discount rate 11.6% 12.6% 13.6% 14.6% 15.6% 16.6% 17.6% 18.6% 19.6% 20.6% 21.6% 7.0% 0.83 0.82 0.80 0.79 0.78 0.77 0.76 0.76 0.75 0.74 0.74 7.5% 0.82 0.80 0.79 0.78 0.77 0.76 0.75 0.74 0.74 0.73 0.72

8.0% 0.81 0.79 0.78 0.77 0.76 0.75 0.74 0.73 0.72 0.72 0.71 8.5% 0.79 0.78 0.77 0.76 0.75 0.74 0.73 0.72 0.71 0.71 0.70

9.0% 0.79 0.77 0.76 0.75 0.74 0.73 0.72 0.71 0.71 0.70 0.69 Cap rate Cap 9.5% 0.78 0.76 0.75 0.74 0.73 0.72 0.71 0.70 0.70 0.69 0.68 10.0% 0.77 0.76 0.74 0.73 0.72 0.71 0.70 0.70 0.69 0.68 0.68 10.5% 0.76 0.75 0.74 0.73 0.72 0.71 0.70 0.69 0.68 0.68 0.67 11.0% 0.76 0.74 0.73 0.72 0.71 0.70 0.69 0.68 0.68 0.67 0.66

Source: Daiwa estimates

Yoma Strategic (YOMA SP): 16 November 2016

In addition to our sensitivity table, we note that every 10% change in our land price assumption of SGD65 per sq ft would result in a SGD2¢ (or 2.7%) change to our TP. Yoma’s valuations appear undemanding on a forward PER basis. The stock is trading currently at a 21.6x 12-month forward PER, about 20% below its past 10-year mean of 27.6x. This is likely due to the strong net-profit growth we expect for FY17 (up 45% YoY), as we expect the company’s core operational businesses to record a positive bottom line for the year.

However, the stock appears to be trading at a premium, as its forward PBR of 1.4x is some 25% above its past 9-year average of 1.1x. We believe that using book value would understate the company’s valuation as: 1) land value is held at cost on Yoma’s balance sheet, 2) its income-generating businesses, such as its KFC franchise, operate on an asset-light model as the company leases most of its physical outlets, which are not reflected on the balance sheet, and 3) we expect the telecom business to record fair-value gains over the next few years via growth in EBITDA and increases in the EV/EBITDA multiple used in its revaluation.

Yoma: 12-month forward PER Yoma: 12-month forward PBR 12M forward PER (x) 12M forward PBR (x) 6 100 90 5 80 70 +2 stdev 4 60 50 +1 stdev 3 +2 stdev 40 +1 stdev 2 30 Mean 20 Mean -1 stdev 1 10 -1 stdev

0 0

Jul-07 Jul-09 Jul-08 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Jul-10 Jul-07 Jul-08 Jul-09 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Jan-08 Jan-15 Jan-07 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-16

Source: Bloomberg, Daiwa estimates Source: Bloomberg, Daiwa estimates

Yoma: peer comparable table Market Sh price Discount Book P/B Yield ROA ROE Bloomberg Cap 14-Nov-16 to SOTP SOTP Value FY0 FY1 FY1 FY2 FY0 FY1 FY0 FY1 D/E Ticker Name (USDm) Currency (l.c) (%) (l.c) (l.c.) (x) (x) (%) (%) (%) (%) (%) (%) (%) YOMA SP YOMA STRATEGIC HLDGS LTD* 663 SGD 0.57 30% 1.04 0.39 1.48 1.38 0.5% 0.4% 4.2% 5.5% 5.6% 7.8% 15.5%

Singapore developers CAPL SP CAPITALAND LTD* 8,949 SGD 3.00 20% 4.96 4.21 0.71 0.67 3.2% 3.3% 1.8% 2.3% 4.8% 6.1% 49.7% CIT SP CITY DEVELOPMENTS LTD* 5,408 SGD 8.40 20% 13.50 9.89 0.85 0.81 1.9% 1.9% 3.8% 2.9% 8.9% 6.6% 29.6% UOL SP UOL GROUP LTD 3,194 SGD 5.60 - - 9.94 0.56 0.55 2.7% 2.7% 2.8% 3.2% 4.2% 4.7% 32.6% FCL SP FRASERS CENTREPOINT LTD* 3,103 SGD 1.52 30% 2.82 2.25 0.67 0.62 5.7% 5.7% 2.5% 2.7% 8.5% 9.6% 92.5% GUOL SP GUOCOLAND LTD 1,567 SGD 1.88 - - 2.98 0.63 0.66 2.7% 2.7% 1.0% 3.9% 2.5% 6.0% 116.9% Weighted average 0.71 0.68 3.1% 3.2% 2.5% 2.8% 6.1% 6.5% 53.1%

Source: Bloomberg, (*) Daiwa estimates Note: We ascribed an additional 10% discount to FCL to account for its low free float (12% of total outstanding shares)

CapitaLand: price-to-SOTP (x)

1.6 1.4 1.2 1.0 0.8 0.6

0.4

Jul-07 Jul-12

Apr-06 Oct-08 Apr-11 Oct-13 Apr-16

Jan-05 Jun-05 Jan-10 Jun-10 Jan-15 Jun-15

Mar-14 Feb-07 Mar-09 Feb-12

Nov-05 Dec-07 Nov-10 Dec-12 Nov-15

Aug-04 Sep-06 Aug-09 Sep-11 Aug-14 Sep-16

May-08 May-13

Price-to-SOTP Mean +1 SD -1 SD Median

Source: Bloomberg, Daiwa estimates

Yoma Strategic (YOMA SP): 16 November 2016

Risks

Pace of economic reforms In our view, the taking of office in April 2016 by Myanmar’s new government, Daw Aung San Suu Kyi’s National League for Democracy party, would help to lessen any political risks associated with investing in companies with Myanmar exposure. However, the pace of economic and regulatory reforms remains uncertain at the moment. Clarity on the Condominium Law is a key catalyst for Yoma as a significant portion of our estimated earnings and valuation is derived from sales of its residential projects. Conversely, any delays or lack of progress on the establishment of a framework to provide foreign buyers with confidence to invest in the country could have a negative impact on our assumptions.

Currency risks Presently, most of Yoma’s transactions are conducted in Myanmar Kyat, which has been relatively stable against the Singapore Dollar – the company’s reporting currency. However, certain cost items, such as construction materials, are priced in US dollars. The Kyat has depreciated by 23% against the USD in the past 12 months. The company aims to hedge its forex exposure for any mismatch.

Delays in completion of Landmark development Development plans for Landmark was first announced in November 2012, but the project was saddled with delays over approvals for a lease extension from the Ministry of Railways. Although the master leases were signed in July 2016, any unexpected delays in the completion of the development would be a downside risk to our earnings forecasts in FY21.

Country’s potential growth invites overseas competition The allure of Myanmar’s potential growth has not gone unnoticed, with regional and global companies venturing into the country in recent years. This invites new players in the segments that Yoma operates in, such as its KFC business and investment properties. As competition intensifies, Yoma would have to adapt in order to maintain its first-mover advantage and domestic expertise.

Yoma Strategic (YOMA SP): 16 November 2016

Appendix I: Company background History of Yoma Yoma was listed on the Singapore Exchange via an RTO in August 2006. The company is a conglomerate, with the bulk of its business in the real-estate segment. In FY16, real- estate-related activities contributed 61% of its revenue. The remainder was derived from its KFC, automotive and tourism businesses. Management aims to derive half of its revenue from non-real-estate business by FY20. Within the real-estate half, the company targets contribution split evenly between recurring sources (rental and real-estate services) and non-recurring sources (sales of residence).

Yoma: FY16 revenue breakdown Yoma: company’s targeted FY20 revenue breakdown

Sales of residences, 25% Non-real estate businesses, Sales of 39% residences, Non-real estate 45% businesses, 50%

Rental and real Rental and real estate services, estate services, 25% 16% Source: Company Source: Company

One of Yoma’s well-known developments in Myanmar is FMI City. Established in 1995, FMI City is the country’s first gated community and is today still recognised as the pioneer gated community project in the country. The 465-acre development has a very well established community comprising more than 7,000 residents living in over 2,000 properties. FMI City is a self-contained estate that has its own host of amenities including a sport and recreation centre, a supermarket, a wet market, a bank, food stalls, security, and estate management services.

Yoma’s founder and Yoma was founded by its Mr. Serge Pun, the company’s single largest shareholder (37.1% Executive Chairman, Mr. stake) and its Executive Chairman. Mr. Pun is also the Chairman of Serge Pun & Serge Pun, is its single Associates (Myanmar) Limited (SPA), a company he founded in 1991. Yoma has a first largest shareholder, with right of refusal with SPA to acquire land development rights owned or to-be-owned by SPA a 37.11% stake and its associates, including its Chairman, of any land situated in Yangon, Myanmar.

Yoma: shareholding structure

Yoma

Serge Pun Others 37.1% 62.9%

Source: Company annual report FY16

Yoma Strategic (YOMA SP): 16 November 2016

Yoma: key businesses

Yoma

Real Estate Automotive Consumer Investments

70% 100% New Holland 100% 25% edotco Investments Star City KFC business distributorship Singapore

70% 100% 30% Access Myanmar 47% Pun Hlaing Estate JCB distributorship SHC Capital* Distribution Company

48% 100% 50% Landmark Yoma Fleet KOSPA (logistics firm)

24% The Peninsula Yangon Hotel

53% FMI City Orchid Garden

80% FMI City Gate

Source: Company Note: (*) Daiwa estimates

Yoma: management team Management team Description Mr. Serge Pun @ Theim Wai Mr. Serge Pun is the Chairman of Serge Pun & Associates Myanmar Limited (SPA). He set up SPA in 1991 after spending years in real-estate brokerage and Executive Chairman development overseas in Hong Kong, China, Thailand and Malaysia. Notable projects that Mr. Pun was involved in include Stewart Terrace on the Peak, Village Gardens in Yau Yat Chuen in Hong Kong, Sand River Golf Club in Shenzhen, Abdulrahim Place in Bangkok, Thailand and The Grand Central in Dalian, China. Mr. Melvyn Pun Prior to Mr. Melvyn Pun's appointment as CEO of Yoma, he was the Alternate Director to Mr. Serge Pun in the company and CEO of SPA. Mr. Pun has been CEO extensively involved in developing the company's relationships with key parties, including Mitsubishi Corporation, Yum! Brands and Case New Holland. Prior to joining SPA, Mr. Pun spent 12 years at Goldman Sachs in Hong Kong, where he was Managing Director, Head of Asia Ex-Japan Corporate Solutions Group. Mr. Cyrus Pun Mr. Cyrus Pun was appointed as the Head of Corporate Development of Yoma in June 2010, and has headed various corporate exercises to identify and develop new Head of Real Estate business opportunities as well as evaluating existing businesses of the group. He currently oversees Yoma's Real Estate division. Prior to joining SPA in February 2007, Mr. Pun worked for Hutchison Port Holdings where he was involved in revenue analysis, setting price strategy, contract negotiation, as well as responsible for account management for a substantial client portfolio. Mr. JR Ching Mr. JR Ching joined Yoma in May 2013 and was appointed as CFO in May 2015 to oversee the company's financial functions and strategic business development, as CFO well as its KFC Myanmar business. Prior to this role, he served as Yoma's Head of Business Development where his duties include overseeing acquisition and investment opportunities and reviewing the group's overall business strategy. Before joining Yoma, Mr. Ching spent over a decade at Goldman Sachs in London and Hong Kong, where he was most recently the Head of Structured Finance for the Asia Pacific ex-Japan region. Mr. Peter Crowhurst Mr. Peter Crowhurst joined as Head of Real Estate Asset Management in January 2013 and is responsible for the operation and investment performance of the Head of Asset Management, Group’s real-estate assets. Prior to joining Yoma Strategic, Mr. Crowhurst spent ten years with ING Real Estate Investment Management as Head of Asset Real Estate Management for China and Country Manager for Taiwan, managing assets for co-mingled funds and the company’s balance sheet. He was the portfolio manager for ING Life for their real-estate transactions in Taiwan. Mr. Crowhurst has extensive experience in all real-estate asset classes that include, but are not limited to, full service hotels, retail centres, residential development and commercial, both as an operating general manager and asset manager. Mr. Steven Nelson Mr. Steven Nelson was appointed the Project Director of Pun Hlaing Estate in February 2001. He has been with the enlarged Group since March 1995. Mr. Nelson Head of Project Management, was born and educated in Australia where he obtained a Building Diploma in 1977. He has extensive experience in the areas of construction engineering Real Estate management, quantity survey, design management, infrastructure development and project management in Asia and Australia. Mr. Stephen Purvis Mr. Stephen Purvis was appointed as the Project Director for the Landmark development in April 2015. He joined the Group in December 2013 as the Project Director Project Director, Real Estate for Star City and spearheaded the master planning of the estate. Mr. Purvis has more than 30 years of experience in the real-estate market including developing substantial mixed use city centre projects in emerging and developed markets. Prior to joining the Group, Mr. Purvis was a director in Coral Capital Group Ltd, a Cuba- focused country fund, where he oversaw long term equity real-estate projects, including the design, funding, construction and operation of a portfolio of hotels under the Hotel Saratoga brand. Mr. Kyaw Tun Tun, Paul Mr. Kyaw Thu Tun, Paul was appointed as the Project Director for Pun Hlaing Estate in June 2014. He joined the Group in 2002 as a project manager for Pun Hlaing Project Director, Real Estate Estate where he was a key team member in the development and management of Pun Hlaing Estate. Mr. Kyaw graduated from Rangoon Institute of Technology (RIT) with a Bachelor of Engineering (Mechanical) degree in 1984. He has extensive experience in the Myanmar real-estate market and oversees the development of several large-scale projects from construction to project management. Mr. Michael Rudenmark Mr. Michael Rudenmark was appointed, subsequent to the acquisition of German Car Industres (“GCI”) by Yoma Strategic, in March 2013 and is responsible for Head of Automotive and growing the Group’s Automotive & Equipment business division, including exploring and evaluating opportunities to secure new automotive brands for the Group. Mr. Equipment Rudenmark has lived in Yangon for the past 18 years and has extensive experience in the Myanmar automotive market as the Founder and Managing Director of GCI, an automobile sales and after-sales company, from April 1996 to January 2013. Mr. Gerhad Hartzenberg Mr. Gerhard Hartzenberg joined the Group in January 2015. Prior to joining the Group, he spent more than 30 years in the automotive and related industries with Head of Automotive and companies including Super Group Industrial Products, John Deere and Imperial in South Africa. He has extensive experience in sales and marketing, operations, Construction Equipment network development, training and brand establishment. Mr. Hartzenberg was most recently the Chief Operating Officer for Powerstar, overseeing a network of 56 dealers. He is a member of the John Deere International Marketing Leadership Council, Toyota S.A Dealer Council and Toyota Wings Club. He has also received several awards including three Chairman’s awards from Toyota/Hino and General Motors between 1990 and 2005 Mr. Allan Davidson Mr. Allan Davidson joined the Group in November 2013. Prior to joining the Group, he spent more than 25 years in the vehicle leasing and rental industry in Australia, Head of Yoma Fleet Papua New Guinea, New Zealand and Thailand. Mr. Davidson headed up a joint venture that started the Budget Rent A Car franchise in Thailand. During his eight years there he grew the business into a market leading position with more than 1,450 vehicles across 25 locations. He is a Member of the Military Division of the Order of Australia (AM). Mr. Yue Wai Kihn Mr. Yue Wai Khin joined the Group in December 2014 to oversee the daily operations, recruiting and training and supply chain management functions of KFC COO, KFC Myanmar Myanmar. Prior to joining the Group, he spent more than 25 years in the F&B industry at KFC/Pizza Hut Malaysia with extensive experience in sales and operations, staff development and training and brand development. Mr. Yue was previously the Deputy General Manager for the Pizza Hut Dine-In segment, overseeing 115 restaurants. He was also the Deputy General Manager of Field Human Resource at KFC and the Head of Field Human Resource at Pizza Hut. Mr. Yue has received several awards for both Operations Excellence and Training and Development from Yum! Brands and is certified as a Yum! Master Trainer in Malaysia.

Source: Company

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Yoma and FMI: key businesses FMI Yoma Strategic Holdings Major shareholder: Mr. Serge Pun (69.4%) Major shareholder: Mr. Serge Pun (37.1%) Other shareholders: Public float (30.6%) Other shareholders: Aberdeen (9.9%), Capital Group (8%), Eaton Vance (5%), public float (40%)

FMI: 47.5% Yoma: 52.5% FMI City (Orchid Garden)

Legend: - Financial

- Healthcare

- Real estate

- Consumer

- Automotive Source: Companies, complied by Daiwa

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Appendix II: Tourism Industry The country has recorded strong growth in tourism revenue over the past few years, rising by 19% YoY in 2015, to USD2.1bn (or USD171 per capita per day), or more than 4% of Myanmar’s GDP, according to the Asian Development Bank. The growth was mainly attributable to a surge in tourist arrivals in the past 5 years, with a 54.7% CAGR to 4.7m visitors in 2015. In the 12 months ended March 2015, Thai visitors made up 25% of total visitors to Myanmar while land transport was the preferred mode of entry for visitors.

Tourism income: total earnings (USD m) Tourism generated 2,500 USD2.1bn revenue for 2,122 Myanmar in 2015, up 2,000 1,789 19% YoY 1,500

926 1,000 534 500 254 319 164 182 165 196

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Ministry of Hotels and Tourism

Average expenditure per capita per day (USD) The average tourist 180 170 171 expenditure per capita 160 145 135 per day was USD171 in 140 2015 120 120 102 94 98 95 95 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Ministry of Hotels and Tourism

Tourist arrivals (‘000) 4.7m tourists visited 5,000 4,681 Myanmar in 2015, up 4,500 52% YoY 4,000 3,500 3,081 3,000 2,500 2,044 2,000 1,500 1,059 763 792 816 1,000 597 657 660 630 716 731 500 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Ministry of Hotels and Tourism

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Tourist arrivals breakdown by mode of entry 60% of tourists entered 100% Myanmar via land 29% 80% 39% 35% 37% transport in 2015 42% 48% 60% 60% 23% 16% 12% 25% 16% 11% 40% 7% 51% 48% 42% 49% 41% 20% 36% 33% 0% 2000-2001 2005-2006 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

By Air By Sea By Land

Source: Ministry of Hotels and Tourism Note: Year-end March; includes visitors with visa and daily or overnight travellers with border pass

Tourist arrivals breakdown by geography (12 months ended March 2015) Thais makes up 25% of total visitor arrivals in Others Thai Myanmar 24% 25%

Taiwanese 3% Malaysian Chinese 4% 8% British 5% German Korean 5% 7% Japanese American French 6% 7% 6% Source: Myanmar Immigration and National Registration Department

The Ministry of Hotels and Tourism estimates 6m inbound tourists for 2016, up 25% YoY, due to improved political and economic stability. The World Travel and Tourism Council forecast the tourism sector’s total contribution to Myanmar’s GDP – including indirect inputs – to increase by 5.9% in 2016, and a further 7.8% per year through to 2026. This should take the sector’s contribution to GDP to an average of 6.5% from 2015 to 2026.

The average length of stay had also increased to 9 days in 2014-15, from 6-8.5 from 2006- 13, encouraging increased expenditure. The allure of discovering a new frontier market and growth in infrastructure bode well for an improvement in tourist arrivals, in our view. The rise in tourism expenditure has not gone unnoticed, with operators such as Hilton and Accor opening hotels in Myanmar recently. Plans for a 375-room Sheraton Yangon Hotel have also been announced.

Average length of stay (days) The average length of 10 stay for tourists was 9 days in 2014 and 2015 9

5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Ministry of Hotels and Tourism

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Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Olivia XIA (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Macro Economics (Hong Kong/China) Kevin JIN (82) 2 787 9168 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap

Head of Automobiles; Transportation and Industrial (Hong Kong/China) TAIWAN Brian LAM (852) 2532 4341 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Auto Components; Transportation – Railway; Construction and Engineering (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking; Diversified financials; Insurance (Hong Kong/China) Christie CHIEN (886) 2 8758 6257 [email protected] Yan LI (852) 2773 8822 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Banking (China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jamie SOO (852) 2773 8529 [email protected] Small/Mid Cap Gaming and Leisure (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Carlton LAI (852) 2532 4349 [email protected] Head of India Research; Strategy; Banking/Finance Small/Mid Cap (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Dennis IP (852) 2848 4068 [email protected] Capital Goods; Utilities Power; Utilities; Renewables and Environment (Hong Kong/China) Jonas KAN (852) 2848 4439 [email protected] SINGAPORE Head of Hong Kong and China Property Ramakrishna MARUVADA (65) 6499 6543 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Property (China) David LUM (65) 6329 2102 [email protected] Thomas HO (852) 2773 8716 [email protected] Banking; Property and REITs Custom Products Group Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

Shane GOH (65) 64996546 [email protected] Property and REITs; Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

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United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital

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Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. 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.

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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 (Tel no. 212-612-7000).

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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.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 64.0% Hold** 21.2% Sell*** 14.8% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

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, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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