Moving up a Gear

Consumer Discretionary / Taiwan 1536 TT Consumer Discretionary / Taiwan 17 June 2014

Hota Industrial Manufacturing

Hota Industrial Manufacturing Target (TWD): 66.00 Upside: 24.5% 1536 TT 17 Jun price (TWD): 53.00

Initiation: moving up a gear 1 Buy (initiation) • Strong revenue growth expected over 2014-16, fuelled by orders 2 Outperform from BorgWarner, Bombardier, Tesla, and AGCO 3 Hold • Tesla Motors looks poised to become a top-5 client in 2014, 4 Underperform allowing Hota to diversify into the electric-vehicle space 5 Sell • Initiating with a Buy (1) rating and PER-based target price of TWD66

How do we justify our view?

We expect annual revenue from mid-cap companies in our coverage BorgWarner (its largest OEM client in universe. 2013 and Bombardier (4th-largest in 2013) to remain strong, rising by ■ Risks CAGRs of 20% (BorgWarner) and The main risks to our call are: 1) Helen Chien 23% (Bombardier) over 2014-16. worse-than-expected sales growth (886) 2 8758 6254 for its key clients, and 2) lower-than- [email protected] Tesla (for which Hota has been the expected margin expansion. exclusive OEM supplier of reduction Mark Chang, CFA gear sets since 2011) and AGCO (886) 2 8758 6245 (since 2013) look likely to become [email protected] Share price performance significant sales-growth drivers for Hota, and 2 of its top-5 clients in (TWD) (%) terms of sales by 2016. We forecast 60 235 ■ Investment case 50 196 Hota Industrial Manufacturing sales increases of 130% to Tesla and 40 158 (Hota) is Taiwan’s largest 230x to AGCO over 2013-15. 30 119 manufacturer of gears and shafts for 20 80 cars, trucks, and motorcycles. We Margin expansion. We forecast Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 expect electric vehicle (EV) designer gross and operating margin expansion Hota (LHS) Relative to TWSE Index (RHS) and manufacturer Tesla Motors of 1.5pp and 2.1pp, respectively, over (Tesla) to become one of Hota’s top- 2014-16, driven by an improving 12-month range 23.57-57.20 5 clients by revenue in 2014 (from product and client mix, greater Market cap (USDbn) 0.40 No.7 in 2013). We forecast Hota to economies of scale, a rising utilisation 3m avg daily turnover (USDm) 4.88 rate (90% for 2014E, vs. 85% for Shares outstanding (m) 225 deliver strong sales growth over Major shareholder Shen family (20.0%) 2014-16, driven by the promising 2013), a rise in the proportion of outlook for its key clients as well as automation products (40% for 2014E, Financial summary (TWD) favourable auto industry trends. We vs. 30% for 2013), and better Year to 31 Dec 14E 15E 16E initiate coverage with a Buy (1) operating efficiency. Hota’s 29.6% Revenue (m) 4,359 5,534 6,308 rating. gross margin for 1Q14 was its 2nd- Operating profit (m) 697 944 1,142 highest quarterly level since 2007. Net profit (m) 544 746 909 Core EPS (fully-diluted) 2.388 3.276 3.990 ■ Catalysts EPS change (%) 26.4 37.2 21.8 Strong new order growth. We ■ Valuation Daiwa vs Cons. EPS (%) (9.6) (7.1) n.a. forecast CAGRs of 20% for revenue We have a 6-month target price of PER (x) 22.2 16.2 13.3 and 29% f0r net profit over 2014-16, TWD66, based on 20x our 2015E Dividend yield (%) 3.2 4.4 5.3 EPS, close to the high end of the DPS 1.7 2.3 2.8 driven by strong growth from clients PBR (x) 4.4 3.9 3.4 such as BorgWarner, Bombardier stock’s past-3-year trading range EV/EBITDA (x) 15.1 11.9 10.0 Recreational Products (Bombardier), and corresponding to the past-3- ROE (%) 19.7 25.8 27.8 Tesla, and AGCO. year average of the Taiwan small-to- Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 18 Consumer Discretionary / Taiwan 1536 TT 17 June 2014

1 Buy (initiation) How do we justify our view? 2 Outperform

3 Hold  Growth outlook

4 Underperform  Valuation 5 Sell  Earnings revisions

 Growth outlook  Hota: net profit We believe Hota’s key OEM clients will account for a (TWDm) greater portion of its sales and net profit over 2014-16, 1,500 CAGR: 29% driven by improving demand for vehicle/agricultural 1,000 machinery globally, particularly in North America, to which Hota has considerable exposure. 500

0 Reflecting this outlook, we forecast revenue and net- profit CAGRs of 20% and 29%, respectively, for 2014-16. (500)

(1,000) We forecast Hota’s gross and operating margins to improve to 29% and 16%, respectively, for 2014 (from (1,500) 25.8% and 12.4% for 2013), on a better product and 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E client mix, higher utilisation/automation rate, and Source: Company, Daiwa forecasts better economies of scale and operating efficiency.

 Valuation  Hota: 1-year forward PER bands Our 6-month target price of TWD66 is based on a target (TWD) PER of 20x on our fully diluted 2015E EPS, which 80 translates into a 0.7x PEG based on our 2014-16 EPS 70 25x forecasts. Our target PER is close to the high end of the 60 20x stock’s past-3-year trading range of 6-23x. We think a 50 15x target PER of 20x is fair given that Hota’s PER trading 40 range has risen over the past year due to client Tesla’s 30 10x strong sales growth. 20 5x 10 Our target price is supported by a DCF analysis, from 0 which we derive a fair value per share of TWD68, Feb-12 Feb-13 Feb-14 Nov-11 Nov-12 Nov-13 Aug-11 Aug-12 Aug-13 May-11 May-12 May-13 assuming a WACC of 8.7% and a terminal growth rate of May-14 3%. Source: Bloomberg, Daiwa forecasts

 Earnings revisions  Hota: consensus 2014-15E EPS revisions The Bloomberg consensus 2014-15 EPS forecasts for (TWD) Hota have been rising since early 2H13, driven by the 4.0 ongoing recovery in the North America auto industry in particular (where Hota has high exposure), and globally, 3.5 and due to expectations of a better sales outlook. (The 3.0 consensus 2014-15E EPS fell slightly in late 2H13, on concerns over EPS dilution after the conversion of 2.5 convertible bonds and preferred stock at that time.) 2.0 Our 2014-15 EPS forecasts are 7.1-9.6% lower than Feb-14 Aug-13 Nov-13 May-14 those of the Bloomberg consensus, which we attribute to May-13 our lower sales assumptions. 2014E EPS 2015E EPS Source: Bloomberg

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Financial summary

 Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Sales to BorgWarner (TWDm) 267.4 659.3 667.4 893.7 900.7 1,250.0 1,500.0 1,800.0 Sales to Bombardier (TWDm) 1.0 0.6 0.9 6.9 207.4 350.0 500.0 530.0 Sales to AGCO (TWDm) 0.0 0.0 0.0 0.0 2.6 100.0 600.0 800.0 Sales to Tesla (TWDm) 0.0 0.0 3.1 60.1 174.6 275.0 400.0 500.0 Consolidated gross margin (%) 15.1 23.4 22.3 23.6 25.8 29.0 29.8 30.5

 Profit and loss (TWDm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E North America 899 1,608 1,679 1,992 2,011 2,582 3,350 3,851 Asia Pacific 379 689 882 1,340 1,229 1,114 1,261 1,320 Other Revenue 126 255 285 290 484 663 922 1,137 Total Revenue 1,405 2,552 2,846 3,623 3,724 4,359 5,534 6,308 Other income 00000000 COGS (1,192) (1,955) (2,213) (2,767) (2,763) (3,095) (3,887) (4,384) SG&A (289) (302) (285) (351) (378) (432) (537) (599) Other op.expenses (61) (66) (87) (105) (120) (135) (166) (183) Operating profit (137) 229 262 399 463 697 944 1,142 Net-interest inc./(exp.) (101) (78) (71) (70) (54) (57) (60) (62) Assoc/forex/extraord./others (790) (21) 75 20 105 20 20 20 Pre-tax profit (1,028) 130 266 349 514 660 904 1,100 Tax 49 (10) (51) (60) (79) (112) (154) (187) Min. int./pref. div./others 0 (3) (5) (2) (5) (4) (4) (4) Net profit (reported) (979) 117 209 287 431 544 746 909 Net profit (adjusted) (979) 117 209 287 431 544 746 909 EPS (reported)(TWD) (6.949) 0.740 1.322 1.692 2.297 2.415 3.313 4.035 EPS (adjusted)(TWD) (6.949) 0.740 1.322 1.692 2.297 2.415 3.313 4.035 EPS (adjusted fully-diluted)(TWD) (6.949) 0.642 0.932 1.216 1.890 2.388 3.276 3.990 DPS (TWD) 0.000 0.000 0.000 0.208 1.556 1.690 2.319 2.824 EBIT (137) 229 262 399 463 697 944 1,142 EBITDA 58 419 463 675 734 944 1,211 1,430

 Cash flow (TWDm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Profit before tax (1,028) 130 266 349 514 660 904 1,100 Depreciation and amortisation 196 191 201 276 272 246 267 288 Tax paid 49 (10) (51) (1) (34) (112) (154) (187) Change in working capital 43 246 293 (687) (580) (379) (290) (179) Other operational CF items 840 (70) (9) (24) (16) 37 40 42 Cash flow from operations 99 487 699 (87) 156 452 767 1,063 Capex (49) (118) (330) (226) (274) (450) (450) (450) Net (acquisitions)/disposals247(5)(8)502000 Other investing CF items53(15)(14)(24)13000 Cash flow from investing 250 (138) (352) (199) (259) (450) (450) (450) Change in debt (475) (536) 64 38 129 46 100 100 Net share issues/(repurchases) 103 236 0 0 (51) 0 0 0 Dividends paid 0000(47)(292)(381)(522) Other financing CF items 001(1)0000 Cash flow from financing (373) (299) 65 37 31 (245) (281) (422) Forex effect/others (3)10(2)(15)7000 Change in cash (27) 59 410 (263) (65) (243) 36 191 Free cash flow 50 369 369 (313) (118) 2 317 613 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (TWDm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment 212 271 681 417 352 109 145 336 Inventory 702 675 868 1,060 1,072 1,269 1,594 1,797 Accounts receivable 731 876 799 917 920 1,238 1,489 1,643 Other current assets 310 358 174 157 136 30 30 30 Total current assets 1,955 2,180 2,521 2,551 2,480 2,646 3,258 3,807 Fixed assets 2,884 2,800 2,947 3,106 3,471 3,675 3,858 4,020 Goodwill & intangibles 19 4 1 129999 Other non-current assets 152 208 422 558 630 630 630 630 Total assets 5,010 5,191 5,891 6,226 6,591 6,960 7,755 8,466 Short-term debt 1,301 851 867 976 605 600 600 600 Accounts payable 488 796 1,224 1,240 979 1,114 1,399 1,578 Other current liabilities 66 79 58 54 75 387 427 468 Total current liabilities 1,856 1,725 2,149 2,270 1,659 2,101 2,426 2,647 Long-term debt 1,563 1,489 1,574 1,443 1,779 1,800 1,900 2,000 Other non-current liabilities 112 166 207 329 290 290 290 290 Total liabilities 3,531 3,380 3,929 4,042 3,728 4,191 4,617 4,937 Share capital 1,741 2,003 2,003 2,003 2,242 2,253 2,253 2,253 Reserves/R.E./others (305) (239) (92) 132 568 459 825 1,211 Shareholders' equity 1,435 1,764 1,911 2,135 2,811 2,712 3,078 3,464 Minority interests 4447505053576165 Total equity & liabilities 5,010 5,191 5,891 6,226 6,591 6,960 7,755 8,466 EV 14,637 14,056 13,751 13,992 14,025 14,289 14,356 14,269 Net debt/(cash) 2,652 2,069 1,760 2,002 2,032 2,291 2,355 2,264 BVPS (TWD) 8.071 8.492 9.421 10.833 12.535 12.038 13.660 15.376

 Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Sales (YoY) (44.5) 81.6 11.5 27.3 2.8 17.1 27.0 14.0 EBITDA (YoY) (80.5) 617.2 10.3 46.0 8.7 28.5 28.4 18.0 Operating profit (YoY) n.a. n.a. 14.3 52.6 15.9 50.8 35.4 20.9 Net profit (YoY) n.a. n.a. 78.5 37.0 50.2 26.4 37.2 21.8 Core EPS (fully-diluted) (YoY) n.a. n.a. 45.1 30.5 55.4 26.4 37.2 21.8 Gross-profit margin 15.1 23.4 22.3 23.6 25.8 29.0 29.8 30.5 EBITDA margin 4.2 16.4 16.3 18.6 19.7 21.7 21.9 22.7 Operating-profit margin n.a. 9.0 9.2 11.0 12.4 16.0 17.1 18.1 Net profit margin (69.7) 4.6 7.4 7.9 11.6 12.5 13.5 14.4 ROAE n.a. 8.9 14.8 17.9 19.0 19.7 25.8 27.8 ROAA n.a. 2.3 3.8 4.7 6.7 8.0 10.1 11.2 ROCE n.a. 5.4 6.1 8.9 9.4 13.4 17.5 19.4 ROIC (3.1) 5.3 5.6 8.4 8.6 11.6 14.9 16.8 Net debt to equity 184.8 117.2 92.1 93.8 72.3 84.5 76.5 65.4 Effective tax rate n.a. 7.7 19.3 17.2 15.3 17.0 17.0 17.0 Accounts receivable (days) 207.3 114.9 107.4 86.4 90.0 90.4 89.9 90.6 Current ratio (x) 1.1 1.3 1.2 1.1 1.5 1.3 1.3 1.4 Net interest cover (x) n.a. 2.9 3.7 5.7 8.6 12.2 15.7 18.5 Net dividend payout 0.0 0.0 0.0 13.4 56.6 70.0 70.0 70.0 Free cash flow yield 0.4 3.1 3.1 n.a. n.a. 0.0 2.7 5.1 Source: FactSet, Daiwa forecasts

 Company profile Founded in 1973, Hota Industrial Manufacturing (Hota) is the largest manufacturer of gears and shafts for cars, motorcycles, and trucks (including agricultural tractors) in Taiwan. The company’s major customers include BorgWarner, Eaton, Punch, Bombardier, AGCO and Tesla Motors.

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 Hota: gears and shafts

Initiation: moving up a gear

We initiate coverage on Hota with a Buy (1), as we expect it to benefit from ongoing industry growth and strong Source: Company sales to its diverse range of customers  Hota: ATVs and medical equipment over 2014-16.

Taiwan’s largest maker of gears and shafts

Founded in 1973, Hota is one of the world’s leading manufacturers of automotive transmission-system parts. Based in Taiwan, the company mainly produces gears and shafts for use in cars, trucks and motorcycles (accounting for 96% of its revenue in 2013). It derived the remainder of its revenue in 2013 from all-terrain vehicles (ATVs), medical equipment (3%), and Source: Company precision gear-processing machines (1%).  Hota: precision gear-processing machines

 Hota: 2013 revenue by application

Others 16%

Motorcycles 13%

Cars and trucks 71%

Source: Company

Source: Company The company has production facilities in Taiwan (93% of its total production capacity in 2013) and China (7%), and mainly exports to North America, Asia, and Europe.

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 Hota: 2013 revenue by market (2013)  Hota: 2013 revenue by client

Europe Others BorgWarner Knorr 19.0% 13.0% 2.1% 24.2% Meritor 2.1% YMTT 2.2% GM 2.1% North America Tesla Punch 54.0% Asia Pacific 4.7% 12.8% 33.0% Concentric 4.7% AGCO ZF Eaton 0.1% 4.9% 11.0% Bombardier Ducati Triumph 5.6% 2.0% 2.7%

Source: Company Source: Company Note: Others comprise ATVs, medical equipment, and precision gear-processing machines  Hota: 2013 revenue by OEM/AM AM Expanding capacity amid strong demand 1% According to management, Hota has a capacity utilisation rate of around 90% currently, and plans to boost its production capacity in Taiwan by 27% YoY in 2014 and 11% YoY in 2015. In addition, the company intends to expand the value of its production capacity in China by 200% by 2016 compared with that for 2013 (to TWD500-800m from TWD300m).

Competitive edge in R&D OEM 99% We believe Hota is able to offer its clients quality

Source: Company products at competitive prices by leveraging its 4o Note: AM = after market years of experience in the industry and R&D team, which accounts for 10% of its total headcount. As a Strong relationships with clients testament to the quality of its products, we note that As gear parts are key components in cars, trucks and Hota is the only transmission-parts supplier in Taiwan motorcycles, automakers typically go through a to have won ISO 9002, ISO 14001 and ISO/TS16949 certification period of 3-5 years before approving a new certifications. supplier. We believe this lengthy certification process serves as a barrier to would-be market entrants, and Broadening its product line thus works in Hota’s favour. Hota also provides ATVs (to European and Middle East trading companies), medical equipment (with 50% of Hota charges its OEM clients using a cost-plus model its products sold to one British medical equipment and targets a gross-profit margin on the business from distributor on an OEM basis and the other half sold each client of 26-35%. As Hota provides precision auto- under the Hota brand), and precision gear-processing transmission components, it faces little pricing machines (for well-known companies like AISIN pressure from its clients (typically its contracts with (Toyota Group), as well as other main automotive parts clients feature price discounts of only 1.5%/year during for various major OEMs. the 2nd-4th years, with prices remaining stable after the 4th year. Hota sees medical equipment as one of its long-term revenue drivers and believes this model will help it to Hota has a diverse customer base of 40-50 clients maintain good quality control, generate further cost globally, for which it is a typically a major supplier or savings and diversify its overall revenue base. the sole supplier.

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 US car market: new car sales volume Favourable business-growth (m vehicles) 20 CAGR: 3% outlook for 2014-16 18 16 Looks well-positioned amid favourable 14 industry trends. We are positive on Hota’s revenue- 12 growth potential in North America and globally for the 10 next few years, as we believe the industry environment 8 6 is favourable, supported by a rising sales-volume trend 4 for new cars in the US and globally, as the next charts 2 show. These drivers should support secular demand for 0 Hota’s products over the next few years. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E  Global car market: new car sales volume Source: Ward’s, Daiwa forecasts (m vehicles) 100 Among Hota’s client base, we expect the company’s CAGR: 4% 95 main clients in North America – BorgWarner, 90 Bombardier Recreational Products (Bombardier), Tesla 85 and AGCO – to be its major revenue-growth drivers 80 over 2014-16. 75 70 In the following table we present our sales-growth 65 assumptions for these key clients and compare them 60 with the respective sales-growth guidance (for 2014E) 55 and the Bloomberg consensus figures (for 2015-16E) 50 2009 2010 2011 2012 2013 2014E 2015E for these key clients.

Source: International Organization of Motor Vehicle Manufacturers (OICA), Industrial Economics and Knowledge (IEK)

  Hota: sales-growth assumptions from main North American clients (2014E) Sales growth Sales growth Hota client (guidance) (Daiwa forecasts) Difference (guidance vs. Daiwa forecasts)  Hota is supplying to BorgWarner’s drivetrain segment, which is seeing strong sales growth BorgWarner 12-16% 39%  BorgWarner is a key supplier on Ford’s new project (Hota supplies 3 pieces per transfer case on this project)  Hota is benefiting from existing 800cc and 900cc products after taking market share from one of its Indian peers Bombardier 9-13% 69%  Taking new orders for 1,400cc products in 2014. At least 56% In line Tesla growth in shipments (Model S) 57%  Low base in 2013 AGCO 2% 37x  Hota is now a major supplier to AGCO’s plant in Changzhou, China Source: Hota and annual report of BorgWarner, Bombardier, Tesla and AGCO; Daiwa forecasts

 Hota: sales-growth assumption from main North American clients (2015E) Sales growth Sales growth Hota client (BBG consensus) (Daiwa forecasts) Difference (guidance vs. Daiwa forecasts)  Hota supplies to the drivetrain segment, which is seeing strong sales growth BorgWarner 13% 20%  BorgWarner is a key supplier on Ford’s new project (Hota supplies 3 pieces per transfer case on this project) Bombardier 7% 43% Hota is favoured by Bombardier for 1,400cc/1,600cc products, in its new car models launches in 2014-15 Tesla 42% 45% In line  Still off a low base in 2014 AGCO -4% 5x  Hota is a major supplier to AGCO’s plant in Changzhou, China Source: Bloomberg, Daiwa forecasts

 Hota: sales-growth assumptions at major North American clients (2016E) Sales growth Sales growth Hota client (BBG consensus) (Daiwa forecasts) Difference (guidance vs. Daiwa forecasts)  Hota supplies to the drivetrain segment, which is seeing strong sales growth BorgWarner 15% 20%  BorgWarner is a key supplier on Ford’s new project (Hota supplies 3 pieces per transfer case on this project) Bombardier 6% 6% In line Tesla 31% 25% We use more conservative sales-growth assumptions AGCO -2% 33% Hota is a major supplier to AGCO’s plant in Changzhou, China Source: Bloomberg, Daiwa forecasts

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 Hota: annual revenue proportion from main North American Hota has been the major supplier of transfer case key clients components for auto components to BorgWarner since 35% 2000. Hota supplies to the drivetrain segment of 30% BorgWarner, and over 2009-13 this segment saw a sales 25% CAGR of 22% (larger than the 15% CAGR in the other engine segment over the same period). 20%

15% The Bloomberg consensus forecasts a 14% revenue CAGR 10% for BorgWarner over 2014-16 (as shown in the preceding

5% chart), and we believe this growth outlook bodes well for Hota, as it suggests increasing orders from BorgWarner. 0% As such, we forecast the company’s sales derived from 2011 2012 2013 2014E 2015E 2016E orders from BorgWarner to rise by 39% YoY for 2014, and BorgWarner Bombardier AGCO Tesla 20% YoY for each of 2015 and 2016 (compared with a Source: Company, Daiwa forecasts 34% CAGR over 2000-13).

BorgWarner (Hota’s largest client since 2004) The robust growth that we forecast for 2014 is mainly should continue to generate solid order and driven by the stronger sales growth in the drivetrain sales growth for Hota segment and from the new orders on Ford’s new project BorgWarner is a leading worldwide supplier of highly for 2014. According to management, Hota will supply 3 engineered automotive systems and components, pieces per transfer case in the new products (vs. 2 pieces primarily for powertrain applications, and has a per transfer case in existing products). diversified customer base globally. Its main clients include Volkswagen and its Audi brand, Daimler, Ford We note that Hota has received orders from BorgWarner and Toyota (as shown in the following chart). that span 2014-22 for Ford’s new P552 pick-up truck, and 2016-24 for the P558. The 8-year durations of the  BorgWarner: company’s revenue breakdown guidance by contracts should ensure a steady order flow for Hota from customer for 2014 BorgWarner. We see this long order visibility as another Nissan Hyundai/Kia Toyota factor that makes the company an attractive investment. 1.0% 4.0% 4.0% Volkswagen/Audi Honda 12.0% 1.0% Daimler  Hota: annual revenue contribution from BorgWarner China OEMs 6.0% 10.0% (TWDm) New orders for Ford’s new New orders for Ford’s new Chrysler 2,000 P558 pickup truck prototype 45% 5.0% Ford P552 pickup truck prototype 12.0% 40% Asian OEMs Renault 35% 2.0% 1,500 3.0% 30% BMW 25% Others 3.0% 1,000 Fiat 20% 22.0% 1.0% Commercial 15% Vehicles PSA GM 500 8.0% 1.0% 5.0% 10% Source: BorgWarner’s 2013 annual report 5% Note: GM = General Motors, PSA = Peugeot 0 0% 2012 2013 2014E 2015E 2016E  BorgWarner: annual revenue Sales (LHS) Sales YoY growth (RHS) Source: Company, Daiwa forecasts (USDm)

12,000 CAGR: 14% Bombardier poised to become Hota’s 3rd- 11,000 10,000 largest client in 2014. Canada-based Bombardier is 9,000 among the global leaders in the design, manufacture, 8,000 distribution, and marketing of high-powered sports 7,000 CAGR: 8.3% vehicles and engines. Bombardier has a stated 6,000 5,000 intention to enhance its sales over the coming years 4,000 through continuous product innovation, expanding its 3,000 dealer network and winning more orders outside North 2,000 America. We expect Hota to be one of the beneficiaries

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 of this in terms of revenue growth. 2014E 2015E 2016E

Source: BorgWarner, Bloomberg consensus forecasts

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 Bombardier: annual revenue trend (CADm) A major supplier to Tesla 4,500 4,000 CAGR: 11% Hota has been the sole supplier of reduction 3,500 gear sets for Tesla’s Model S since 2012. Hota 3,000 has expanded the applications of its products into the 2,500 segment of EVs, notably with client Tesla, and which 2,000 we expect to provide a further boost to its revenue 1,500 growth over the next 3 years. 1,000 500 We expect Tesla to become one of Hota’s top-5 clients 0 by revenue in 2014 (up from the 7th-largest in 2013). 2010 2011 2012 2013 2014E 2015E 2016E Tesla accounted for less than 5% of the group’s revenue

Source: Bombardier, Bloomberg consensus forecasts for 2013, but we expect this proportion to exceed 5% in 2014. Furthermore, we believe Hota will continue to be While Bombardier is guiding for 9-13% sales growth in the sole supplier for Tesla’s Model X vehicle, which is 2014, our forecast for Hota’s sales to Bombardier is due to be launched in 2015. much higher since Hota has been gaining market share within Bombardier (at the expense of one of its Indian Demand for Tesla’s Model S car continues to outstrip peers). Hota became the sole supplier of heavy supply. The model was available only in the US for over motorcycle gear sets to Bombardier in 2013, when it a year after its launch in the summer of 2012. However, replaced one of Bombardier’s Indian suppliers for shipments to Europe began in the autumn of 2013 and 800cc and 900cc products. Also, Hota is currently in Asia (starting with China) in April 2014. receiving orders from Bombardier for its 1,400cc and 1,600cc engines for new car models that it plans to Tesla plans to produce EVs in China over the next 3-4 launch in 2014 and 2015, respectively. years in order to avoid the 25% tariff imposed by China on EV and other car imports and provide competitive As such, we forecast the company’s sales derived from selling prices. Tesla sees strong sales potential for its orders from Bombardier to rise by 69% YoY for 2014, EVs in China within the next few years. In this context, 43% YoY for 2015, and 20% YoY for 2016. Tesla opened its first showroom in the country, in Beijing, in November 2013. It plans to expand its EV-  Hota: annual revenue contribution from Bombardier charging network and construct its 4th supercharger (TWDm) station in China. 600 CAGR: 23%

500 We forecast Hota’s orders for EV gears from Tesla to rise by 57% YoY for 2014, 45% YoY for 2015 and 25% 400 YoY for 2016, given the strong demand outlook for

300 Tesla’s EVs. Tesla targets to sell at least 35,000 units of its Model S in 2014 (up from 22,477 units in 2013), 200 implying shipment growth of at least 56% YoY for

100 2014. Additionally, we note that Tesla recently disclosed plans to construct a battery “Gigafactory” 0 that would be sufficient to allow the company to deliver 2012 2013 2014E 2015E 2016E 500,000 EVs annually by 2020. Source: Company, Daiwa forecasts

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 Tesla: EV shipments (No. of cars) (YoY) Riding on the rising demand for 300,000 820% agricultural machinery 720% 250,000 620% 200,000 Hota has tapped into the agricultural 520% machinery segment successfully. The US’s AGCO, 150,000 420% one of Hota’s main clients, is the world’s 3rd-largest 320% 100,000 provider of agricultural equipment and related 220% 50,000 replacement parts, including tractors, combines, hay 120% tools, sprayers, and forage equipment. Hota became 0 20% the major supplier of transmission gear and shafts to 2012 2013 2014E 2015E 2016E 2017E 2018E AGCO’s plant in Changzhou in China in 2013. ShipmentsShipment (LHS) (LHS) YoY (RHS) Source: Tesla, Daiwa forecasts We see strong potential for AGCO to become a major revenue contributor to Hota, given the quality of the  Tesla: annual revenue latter’s products and advanced R&D capability. (USDm) 8,000 AGCO’s guidance calls for sales of USD10.8-11bn YoY 7,000 CAGR: 36.5% (vs. the Bloomberg consensus of USD10.4bn) for 2014, 6,000 which translates into growth of around 2% YoY. 5,000 However, from a low base in 2013, we forecast Hota 4,000 sales to AGCO to rise by 37x YoY for 2014, 5x YoY for 2015, and 33% YoY for 2016. 3,000

2,000 1,000 0 We forecast revenue contributions from AGCO of 2.3% 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E for 2014, 10.8% for 2015, and 12.7% for 2016 (up from Source: Company, Bloomberg forecasts 0.07% for 2013). We expect AGCO to become one of

 Hota: annual revenue contribution from Tesla the company’s top-3 clients by revenue by 2016.

(TWDm)  Hota: annual revenue contribution from AGCO 600 900 500 CAGR: 35% 800 700 400 CAGR: 575% 600 300 500 200 400

100 300 200 0 2012 2013 2014E 2015E 2016E 100

Source: Company, Daiwa forecasts 0 2013 2014E 2015E 2016E Source: Company, Daiwa forecasts

- 10 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

Company background Financial analysis

Founded in 1973, Hota manufactures gears and shafts 1Q14 results in Taiwan for machinery, motorcycles and agriculture For 1Q14, Hota had revenue of TWD980m (up 11.8% machinery. The company expanded the uses for its YoY) and net profit of TWD154m (up 15.7% YoY). The products to the automobile segment in 1975. greater rate of increase in earnings than sales was due mainly to an improved gross margin (29.6% for 1Q14 In 1995, it entered the US OEM market after receiving compared with 26.4% for 1Q13) and better operating a sales order from US-based automobile-components leverage (a utilisation rate of 90% for 1Q14 compared manufacturer Meritor and set up a production site in with 85% for 2013, and the proportion of automation Wuxi, China, for local motorcycle makers. In 1996, products manufactured rising to 40% of total products Hota started its aftermarket business in the US. Two manufactured for 1Q14 compared with 30% for 2013). years later, the company entered the Europe market, as an OEM supplier for ZF Group of transmission gear  Hota: quarterly sales products for cars and trucks. (TWDm) 1,400 In 2010, Hota supplied continuously variable 1,200 transmissions to Punch in China, and the company 1,000 became the sole reduction gear set supplier for Tesla in 2013. 800 600 Currently, Hota has 2 plants in Taiwan and 1 plant in 400 China. 200 0 The company was listed on the Taiwan Stock Exchange 2010 2011 2012 2013 2014E in 2001. Its management team has an average of 25 1Q 2Q 3Q 4Q years’ experience in the auto-parts industry. Source: Company, Daiwa forecasts

 Hota: management team (June 2014) Meanwhile, the company announced all-time high Management Position Background and experience monthly sales of TWD365m for May 2014, Mr. Guo-Jung Shen Chairman Mr. Shen has more than 40 years of experience in the precision auto-parts industry. He is responsible for the representing growth of 46.2% YoY and 17.4% YTD. company’s strategy. Mr. Jun-Zhi Chen General Mr. Chen is responsible for execution and general  Hota: monthly sales manager administration. He has more than 40 years of experience in (TWDm) the precision auto-parts industry. 400 Miss Chien -Tzu Shen Vice The daughter of the chairman. Miss Shen is in charge of president R&D and business development. She has more than 10 350 years of experience in the precision auto-parts industry. Mr. Shui-Xiang Shen Vice Mr. Shen is responsible for financial management, and has 300 president more than 20 years of experience in the financial industry. Mr. Ren-You Chang manager Mr. Chang is responsible for R&D and has more than 25 250 years of experience in the precision auto-parts industry. Source: Company 200 150  Hota: major shareholders (as at June 2014) Shareholder Share (%) 100 CHUNG PU INVEST CO LTD 4.3 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec CENTRAL MOTOR WHEEL CO LTD 3.88 2011 2012 2013 2014 HAN LIN BROTHERS INVEST 3.31 Source: Company KAO FONG MACHINERY CO LTD 2.53 KUO-JUNG SHEN 2.51 KING'S TOWN BANK CO LTD 1.7 Outlook YEN-HUI LIN 1.43 We expect the robust demand seen by Hota in 2013 CHUN-LUNG WANG 1.38 from the auto industry globally and the US market in Source: Bloomberg particular to continue this year. We believe the

company’s sales and net profit will benefit from automobile industry growth and increased orders from its clients.

- 11 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

For 2014-16, we forecast a net profit CAGR of 29% due Hence, we expect the operating and net margins for to a 20% sales CAGR, and a rise in the gross-profit 2014 to be at the highest levels since 2007. margin for 2014 to 29%, from 25.8% for 2013. For 2014, we forecast revenue to increase by 17% YoY to  Hota: price of main raw material (steel) TWD4.4bn and net profit to rise by 26% YoY to 2,500 TWD544m. 2,000  Hota: revenue 1,500 (TWDm)

7,000 1,000 6,000 500 5,000

4,000 Global financial crisis 0 Jul-13 3,000 Jul-12 Oct-13 Apr-13 Apr-12 Oct-12 Jun-12 Jan-13 Jan-11 Jun-11 Jan-12 Feb-14 Mar-14 Feb-13 Feb-11 Mar-11 Mar-12 Aug-13 Nov-13 Dec-13 Aug-12 Nov-12 Aug-11 Sep-11 Nov-11 Dec-11 May-13 May-14 May-11

2,000 Source: Bloomberg steel index 1,000  Hota: gross, operating, and net-profit margins 0 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 40% Source: Company, Daiwa forecasts 20%

 Hota: net profit 0% (TWDm) (20%) 1,500 (40%)

1,000 (60%)

500 (80%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0 2014E 2015E 2016E Grossgross profit margin operatingOperating profit profit marginmargin Netnet profit margin (500) Source: Company, Daiwa forecasts (1,000) For 2013, Hota recorded higher gross-profit, operating- (1,500) 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E profit, and net-profit margins than its Taiwan peer, Source: Company, Daiwa forecasts Tsangyow (listed in May 2014) (Not rated).

Gross-profit margin should improve  Hota: gross- and operating-profit margin comparison (2013) We expect Hota’s 2014 gross margin to reach its Bloomberg Gross Operating Net code Company Product margin (%) margin (%) margin (%) highest level since 2007, and continue to rise over 1536 TT Hota Gears and shafts 25.80 12.42 11.56 2014-16 on an improved product and client mix. The Automatic transmission 1568 TT Tsangyow proportion of the company’s customers and products assembly components 15.76 5.82 4.35 that have low gross margins is decreasing. We forecast Source: Companies the proportion of sales from Punch (the second-largest client in 2013) to fall to 6.9% of Hota’s total sales for Balance sheet and cash flow 2014 from 12.8% for 2013. At the end of 1Q14, Hota had net debt of TWD1.9bn, a current ratio of 1.6x (from 0.9x at the end of 2007) and In addition, stable raw material prices (32% of the cost a quick ratio of 0.9x (from 0.6x at the end of 2007). of goods sold for 2013), as shown in the following However, the company’s net-debt position is narrowing chart, an increasing utilisation rate (90% for 2014E, up and free cash flow is increasing. We expect a reduction from 85% for 2013), the rising proportion of in the net-debt position, increases in its current and automation products (40% of all products Hota quick ratios, and forecast the company to generate manufactured for 2014E and 50% for 2015E, up from positive free cash flow over the next few years. 30% for 2013), improving economies of scale, and the company’s operating-leverage model should help support an upward trend in Hota’s gross margin.

- 12 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

 Hota: current and quick ratios (x) Valuation 1.6 1.4 Our 6-month target price of TWD66 is based on a fully 1.2 diluted EPS of 2015E with a target PER of 20x, which 1.0 translates into a 0.7x PEG on our 2014-16 EPS 0.8 forecasts. Our target PER is close to the high end of the 0.6 stock’s past-3-year trading range of 6-23x. 0.4 0.2 Our target PER also corresponds to the past-3-year 0.0 average of Taiwan small-to-mid-cap companies in our 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E coverage universe that we believe offer strong Current ratio Quick ratio earnings-growth potential. Source: Company, Daiwa forecasts Compared with the other Tesla story names listed in  Hota: free cash flow and net debt Taiwan, such as Bizlink (Not rated) and Sumeeko (Not (TWDm) rated), we believe a 20x multiple is fair. Since listing 4,000 (Bizlink in April 2011 and Sumeeko in September 3,500 2013), these stocks have traded in a 1-year-forward 3,000 2,500 PER range of 5-30x. However, after becoming major 2,000 suppliers to Tesla and benefitting from the strong sales 1,500 of the Tesla Model S, the stocks have been rerated over 1,000 the past one year and trade currently in a 1-year- 500 0 forward PER range of 20-30x. (500) (1,000)  Bizlink: 1-year forward PER bands 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E (TWD) Free cash flow Net debt 220 21x Source: Company, Daiwa forecasts 170 17x Aiming to raise its dividend-payout ratio 13x 120 Hota aims to increase its dividend-payout ratio to 70- 9x 80% in the next 3 years from 57% for 2013. We forecast 70 the dividend yield to rise from 3.2% for 2014 to 5.3% 5x for 2016, based on the current share price. In addition, 20 the dividend should be paid mainly in cash, according to the company. (30) Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Source: Company, Bloomberg

 Sumeeko: 1-year forward PER bands (TWD) 180 29x 160 2 140 23x 120 100 17x 80 60 11x 40 5x 20 0 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14

Source: Company, Bloomberg

- 13 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

 Hota and its peers: valuation comparison Bloomberg Daiwa Market cap Share price PER (x) PBR (x) ROE (%) Dividend yield (%) Companies code rating (USDm) (local curr.) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E OEM/ODM *HOTA INDUSTRIAL MFG CO LTD 1536 TT Equity Buy 398 53 22.2 16.2 4.4 3.9 19.7 25.8 3.2 4.4 TSANG YOW INDUSTRIAL CO LTD 1568 TT Equity Not rated 98 28.6 15.3 NA 2.3 NA 13.3 NA 3.5 NA JUI LI ENTERPRISE CO LTD 1512 TT Equity Not rated 52 8.63 16.9 8.1 0.8 NA 6.5 NA NA NA TA YIH INDUSTRIAL CO LTD 1521 TT Equity Not rated 220 86.5 16.1 NA 3.8 NA 24.4 NA NA NA HU LANE ASSOCIATE INC 6279 TT Equity Not rated 354 109.5 15.9 NA 3.4 NA 21.8 NA 2.1 NA E-LEAD ELECTRONIC CO LTD 2497 TT Equity Not rated 306 77.3 17.6 16 3.8 NA 23.8 25.7 2.9 3 ACTRON TECHNOLOGY CORP 8255 TT Equity Not rated 323 129.5 17 15.2 3.3 3.2 20 21 4.2 4.3 TUNG THIH ELECTRONIC CO LTD 3552 TT Equity Not rated 347 126 21 15.3 3.9 3.2 19.1 22.9 2.1 2.7 HIROCA HOLDINGS LTD 1338 TT Equity Not rated 334 118 17.7 11 NA NA NA 15.2 NA 5 FINE BLANKING & TOOL CO LTD 4535 TT Equity Not rated 129 51.3 NA NA NA NA NA NA NA NA SUPERALLOY INDUSTRIAL CO LTD 1563 TT Equity Not rated 550 83.25 NA NA NA NA NA NA NA NA KIAN SHEN CORPORATION 1525 TT Equity Not rated 180 78 14.6 14.2 1.7 NA 14.5 NA 2.1 NA KS TERMINALS INC 3003 TT Equity Not rated 254 50 15.5 11 NA NA 14.6 18.4 4.0 5.0 Average 17.3 13.4 3.0 3.4 17.8 21.5 3.0 4.1

Tesla theme *HOTA INDUSTRIAL MFG CO LTD 1536 TT Equity Buy 398 53 22.2 16.2 4.4 3.9 19.7 25.8 3.2 4.4 BIZLINK HOLDING INC 3665 TT Equity Not rated 407 153 17.7 13.7 3.3 2.9 19.5 21.9 3.9 4.8 SUMEEKO INDUSTRIES CO LTD 2066 TT Equity Not rated 148 130.5 18.7 15 NA NA 25.9 26.6 3.8 4.6 Average 19.5 15.0 3.9 3.4 21.7 24.8 3.6 4.6 Source: Bloomberg;*Daiwa forecasts Note: Data is based on share prices as at 17 June 2014. NA denotes no Bloomberg-consensus forecasts.

Our TWD66 target price is supported by our DCF- derived fair-value estimate of TWD68/share. Risks

 Hota: DCF assumptions We highlight the following factors as risks to our rating, Cost of equity (%) target price, and forecasts for Hota. Risk-free rate (%) 1.4 Beta 0.9 1) A slowdown in demand globally for new cars, Equity risk premium (%) 9.5 trucks, and motorcycles. CAPM unleveraged discount rate 9.8 2) Worse-than-expected sales growth at BorgWarner, Cost of debt (%) Bombardier, Tesla, and AGCO. Average spread over risk-free rate (%) 2.0 Pre-tax cost of debt (%) 3.4 3) A lower-than expected gross margin. Average corporate tax rate for company (%) 17.0 4) Potential capital-raising in the form of convertible- Post-tax cost of debt (%) 2.8 bond issuance or a secondary public offering given Estimated target gearing (net debt/EV) (%) 15.0 the company’s high gearing ratio. WACC (%) 8.7 Source: Daiwa estimates

 Hota: DCF assumptions (cont’d) Middle period assumptions Growth rate (%) +15.0 Operating-profit margin (%) 18.0 Capex/depreciation ratio (x) 1.3 Working capital/ turnover ratio (%) 25.0 Tax rate (%) 25.0

Terminal-period assumptions Growth rate (%) +3.0 Operating margin (%) 10.0 Capex/depreciation ratio (x) 1.1 Working capital/ turnover ratio (%) 20.0 Tax rate (%) 25.0 Source: Daiwa estimates

- 14 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

Appendix

 Hota: major customers

Source: Company

 Hota: global network  Hota: production site in Taichung, Taiwan

Source: Company Source: Company

 Hota: headquarters building and plant in Taichung, Taiwan

Source: Company - 15 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Deputy Head of Asia Pacific Research Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Rohan DALZIELL (852) 2848 4938 [email protected] Shipbuilding; Steel Regional Head of Product Management Jun Yong BANG (82) 2 787 9168 [email protected] Kevin LAI (852) 2848 4926 [email protected] Tyres; Chemicals Deputy Head of Regional Economics; Macro Economics (Regional) Mike OH (82) 2 787 9179 [email protected] Christie CHIEN (852) 2848 4482 [email protected] Capital Goods (Construction and Machinery) Macro Economics (Taiwan) Sang Hee PARK (82) 2 787 9165 [email protected] Jonas KAN (852) 2848 4439 [email protected] Consumer/Retail Head of Hong Kong Research; Head of Hong Kong and China Property Thomas Y KWON (82) 2 787 9181 [email protected] Jerry YANG (852) 2773 8842 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Banking (Taiwan); Insurance (Taiwan and China) Leon QI (852) 2532 4381 [email protected] TAIWAN Banking (Hong Kong, China); Broker (China) Mark CHANG (886) 2 8758 6245 [email protected] Alison LAW (852) 2532 4308 [email protected] Head of Taiwan Research Head of Regional Consumer; Consumer (Hong Kong/China); Gaming and Leisure Steven TSENG (886) 2 8758 6252 [email protected] (Hong Kong, China) IT/Technology Hardware (PC Hardware) Jamie SOO (852) 2773 8529 [email protected] Christine WANG (886) 2 8758 6249 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (Automation); Cement; Consumer Anson CHAN (852) 2532 4350 [email protected] Kylie HUANG (886) 2 8758 6248 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (Handsets and Components) Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) INDIA Lynn CHENG (852) 2773 8822 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] IT/Electronics (Semiconductor) Head of India Research; Strategy; Banking/Finance Felix LAM (852) 2532 4341 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Capital Goods; Utilities Taiwan); Property (China) Dennis IP (852) 2848 4068 [email protected] SINGAPORE Power; Utilities; Renewables and Environment (Hong Kong/China) Adrian LOH (65) 6499 6548 [email protected] John CHOI (852) 2773 8730 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China) China); Capital Goods (Singapore) Jackson YU (852) 2848 4976 [email protected] Benjamin LIM (65) 6321 3086 [email protected] Small/Mid Cap (Regional) Oil and Gas (ASEAN and China); Capital Goods (Singapore) Joey CHEN (852) 2848 4483 [email protected] Angeline LOH (65) 6499 6570 [email protected] Steel (China) Banking/Finance, Consumer/Retail Kelvin LAU (852) 2848 4467 [email protected] David LUM (65) 6329 2102 [email protected] Head of Transportation (Hong Kong, China); Transportation (Regional) Property and REITs Jibo MA (852) 2848 4489 [email protected] Evon TAN (65) 6499 6546 [email protected] Head of Custom Products Group; Custom Products Group Property and REITs Thomas HO (852) 2773 8716 [email protected] Ramakrishna MARUVADA (65) 6499 6543 [email protected] Custom Products Group Head of ASEAN & India Telecommunications; Telecommunications (China, ASEAN & India) Jame OSMAN (65) 6321 3092 [email protected] Telecom (ASEAN & India); Pharmaceuticals and Healthcare (Singapore)

- 16 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

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- 17 - Consumer Discretionary / Taiwan 1536 TT 17 June 2014

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

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

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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, 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 six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

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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