China Industrials 4 July 2016

China Industrial Sector

Highlights of Daiwa’s Auto and Industrial Leaders Conference – industrials and aviation

 Weak trade affected most of the marine and logistics companies in 1Q16 despite a slight improvement in April and May Kelvin Lau  Construction and aviation companies expect to see better earnings (852) 2848 4467 growth in 1H16 due to favourable contract growth, low fuel prices [email protected] Brian Lam  Our pecking order is now: CSCI, AviChina, CRG, SITC and CALC; we (852) 2532 4341 remain cautious on airlines such as CSA and CEA [email protected]

Event wrap: During Daiwa’s Auto and Industrial Leaders Conference, held Key stock calls in Hong Kong on 20-24 June, trade-related companies, such as shipping New Prev. and logistics companies, said the outlook was challenging, while China State Construction International (3311 HK) Rating Buy Buy construction companies expect a strong 1H16. Target 15.00 15.00 Upside p 46.8% The trade outlook for 5M16 remained weak for both the sea- and air-freight AviChina Industry & Technology (2357 HK) industries, but due to increased idling of container vessels in the market, Rating Buy Buy there was some pick-up in Asia-Europe and transpacific shipping freight Target 7.90 7.90 rates in April and May. We think Brexit will bring some uncertainty to Upside p 47.1% demand from Europe/the UK, and thus remain cautious on the shipping China Railway Group (390 HK) Rating Buy Buy and freight forwarding business. Meanwhile, the construction companies Target 7.40 7.40 said they were seeing stable new contract growth and expected their 1H16 Upside p 28.5% results to be strong due to the low base last year. SITC International (1308 HK) Rating Buy Buy The airlines at the conference said that, on the passenger side, they had been Target 5.30 5.30 feeling the pain of overcapacity on international routes after aggressive Upside p 30.5% expansion over the past 3 years. As such, they expect their organic China Aircraft Leasing Group (1848 HK) Rating Buy Buy international passenger yields for 1H16 to drop by a double-digit percentage. Target 9.20 9.20 From April, some airlines said they had redeployed capacity to domestic Upside p 26.5%

routes, which may help improve the profitability of international routes, but Source: Daiwa forecasts could be slightly negative for their domestic routes. Companies that participated in our event What we recommend: China Industrial Sector. We now recommend in Aviation Air China (753 HK) this order: China State Construction International (CSCI) (3311 HK, AviChina Industry & Technology (2357 HK) HKD9.74, Buy [1]), replacing Beijing Urban Construction Design & China Aircraft Leasing Group Holdings (1848 HK) Development (1599 HK, HKD4.02, Buy [1]), AviChina Industry and TravelSky Technology (696 HK) Technology (2357 HK, HKD5.11, Buy [1]), China Railway Group (CRG) Construction and engineering Beijing Urban Construction Design & Development Group (390 HK, HKD5.66, Buy [1]), replacing TravelSky (696 HK, HKD15. 16, Buy (1599 HK) [1]), SITC International (1308 HK, HKD4.05, Buy [1]) and China Aircraft China Railway Group (390 HK) Leasing (CALC) (1848 HK, HKD7.31, Buy [1]) for their continued growth in China State Construction International Holdings (3311 HK) Logistics infrastructure contracts, asset injections and policy support, stable railway Kerry Logistics Network (636 HK) spending in China, a strong trade outlook for Southeast Asia, as well as NWS Holdings (659 HK) strong demand for aircraft leasing. The main risks to our positive industrial Shenzhen International Holdings (152 HK) picks: a weaker-than-expected trade outlook, lower demand for aircraft Sinotrans (598 HK) SITC International Holdings (1308 HK) leases and FAI spending, as well as slower-than-expected policy support. Marine Orient Overseas International (316 HK)

China Aviation Sector. We remain cautious on airlines such as China Source: Daiwa Southern Airlines (CSA) (1055 HK, HKD4.26, Sell [5]) and China Eastern Airlines (CEA) (670 HK, HKD4.06, Underperform [4]) due to our concerns about a potential weakening of the CNY against the USD after Brexit, which could significantly affect sentiment toward the airlines. The main risk to our negative view is a stronger-than-expected CNY against the USD.

See important disclosures, including any required research certifications, beginning on page 28

China Industrial Sector: 4 July 2016

Daiwa: HK and China Industrial coverage universe Name Bloomberg Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code 30-Jun-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E Logistics Sinotrans Limited 598 HK 3.43 Outperform 10.1 9.3 0.8 0.8 6.0 5.8 3.0 3.3 8.5 8.7 SITC International holdings 1308 HK 4.06 Buy 9.5 8.1 1.5 1.4 7.5 6.4 6.5 7.6 16.4 17.9 Kerry Logistics 636 HK 9.99 Outperform 14.8 13.5 1.0 0.9 8.4 7.7 1.7 1.9 7.0 6.9 Shenzhen International 152 HK 11.20 Outperform 10.7 10.2 1.1 1.1 9.9 10.9 2.7 4.0 10.9 10.8

Construction and Engineering CRRC 1766 HK 6.91 Underperform 12.7 11.9 1.5 1.4 6.2 5.5 2.0 2.1 12.5 12.3 Zhuzhou CSR Times Electric 3898 HK 42.60 Buy 12.8 11.1 2.6 2.2 9.9 8.2 1.4 1.6 22.6 21.5 CCCC 1800 HK 8.30 Hold 6.9 6.5 0.7 0.7 9.2 9.2 2.8 3.0 10.8 10.6 CRCC 1186 HK 9.67 Buy 8.1 7.5 0.9 0.8 6.3 6.0 2.0 2.1 11.8 11.6 CRG 390 HK 5.76 Buy 8.5 7.6 0.8 0.7 7.8 6.8 1.9 2.1 9.7 10.0 China State Construction International 3311 HK 10.22 Buy 8.7 7.6 1.5 1.3 8.2 7.3 3.3 4.0 19.3 18.1 Beijing Urban Construction 1599 HK 4.20 Buy 10.5 9.2 1.4 1.3 n.a. n.a. 2.5 2.9 14.1 14.4

Marine Orient Overseas International Ltd. 316 HK 26.35 Buy 7.1 6.6 0.4 0.4 5.6 5.4 6.4 6.6 6.1 6.3 China Merchants Holdings International 144 HK 20.60 Underperform 12.7 12.5 0.9 0.9 13.7 9.6 2.5 3.0 7.2 7.0 COSCO Pacific Ltd. 1199 HK 7.71 Hold 10.4 10.2 0.7 0.6 3.8 4.3 3.4 3.9 6.0 6.2

Aviation Air China Ltd. 753 HK 5.30 Outperform 5.0 5.9 0.8 0.8 3.9 3.9 1.4 2.9 17.8 12.8 China Eastern Airlines Co. 670 HK 3.86 Underperform 5.1 5.9 1.0 0.8 5.9 5.9 n.a. n.a. 22.1 15.3 China Southern Airlines Co. 1055 HK 4.37 Sell 4.9 6.1 0.9 0.8 4.2 4.1 1.9 3.5 18.5 13.5 Cathay Pacific Airways 293 HK 11.32 Hold 4.0 4.4 0.8 0.8 2.2 2.2 4.3 3.8 21.8 18.2 Beijing Capital International Airport 694 HK 8.40 Hold 16.9 15.5 1.6 1.5 7.5 7.2 1.3 1.6 9.8 10.0 Travelsky Technology Ltd. 696 HK 14.90 Buy 20.4 17.6 2.8 2.5 12.8 10.6 1.7 1.9 14.6 15.2 AviChina Industry & Technology 2357 HK 5.37 Buy 27.8 24.8 2.0 1.8 9.8 9.0 0.5 0.5 7.3 7.6 China Aircraft Leasing Group 1848 HK 7.27 Buy 10.0 8.1 1.7 1.4 12.9 11.4 4.3 5.3 22.4 23.3

Source: Bloomberg, Daiwa forecasts

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China Industrial Sector: 4 July 2016

Table of contents

Aviation ...... 4 Sector read-across ...... 4 Company section ...... 7 Construction and Engineering ...... 11 Sector read-across ...... 11 Company section ...... 13 Logistics ...... 16 Sector read-across ...... 16 Company sections ...... 18 Marine ...... 23 Sector read-across ...... 23 Company section ...... 25

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China Industrial Sector: 4 July 2016

Aviation Sector read-across Air traffic holding up well, but yields declining Airlines are redeploying According to the companies that attended our recent Daiwa Auto and Industrial Leaders their capacity to the Conference, traffic volume remained strong, rising by around 10% YoY in 5M16. However, domestic market from passenger and cargo yields were both under pressure. On the passenger side, the international international passenger yield declined the most, by more than 10% YoY for the big-3 airlines, due mainly to overcapacity on routes like Japan.

As such, many airlines have already reallocated their capacity from the international market to the domestic market. However, this reallocation has caused pressure on overall domestic passenger yields as the increase in capacity has mostly occurred in secondary cities in China due to the airport slot limitation at major airports. Nevertheless, the airlines still expect to achieve strong 1H16 results on lower jet-fuel prices YoY.

Air China: year-to-May operating data YoY % Jan-16 Feb-16 Mar-16 Apr-16 May-16 YTD Revenue Passenger Kilometres - RPK 18.6% 11.1% 4.3% 9.8% 7.6% 10.1% Domestic 6.8% 5.0% (2.9%) 7.8% 7.1% 4.6% International 43.7% 26.0% 20.3% 14.5% 9.9% 22.3% Regional 21.9% 4.3% 9.4% 5.2% (1.7%) 7.3% Revenue Freight Tonne Kilometres - RFTK 7.7% (1.8%) 5.6% 6.9% 3.9% 4.7% Revenue Tonne Kilometres RTK 14.8% 8.1% 4.9% 8.9% 6.4% 8.5% Available Seat Kilometres ASK 14.0% 12.7% 8.4% 9.7% 8.7% 10.6% Available Freight Tonne Kilometres - AFTK 10.0% 14.2% 8.5% 6.5% 7.8% 9.2% Available Tonne Kilometres - ATK 12.4% 13.3% 8.5% 8.4% 8.3% 10.1% Passenger Load Factor (ppt %) 3.1% (1.2%) (3.1%) 0.1% (0.8%) (0.4%) Domestic 2.1% (0.2%) (3.5%) (0.1%) 0.5% (0.3%) International 4.5% (2.4%) (3.1%) (0.5%) (3.0%) (0.8%) Regional 9.1% (1.6%) 7.2% 7.4% 0.9% 4.6% Cargo Load Factor (ppt %) (1.1%) (6.7%) (1.5%) 0.2% (2.0%) (2.2%) Overall (ATK) Load Factor (ppt %) 1.4% (3.1%) (2.4%) 0.3% (1.2%) (1.0%) Passenger carried 11.8% 6.8% 0.7% 8.5% 7.0% 6.8% Cargo and mail carried 8.4% (5.3%) 5.4% 4.6% 4.0% 3.9%

Source: Company, Daiwa

CEA: year-to-May operating data YoY % Jan-16 Feb-16 Mar-16 Apr-16 May-16 YTD Revenue Passenger Kilometres - RPK 24.7% 14.8% 9.9% 13.4% 13.4% 15.0% Domestic 17.8% 11.0% 3.9% 5.4% 5.5% 8.4% International 40.8% 24.0% 24.8% 33.2% 33.0% 30.9% Regional 14.3% 0.2% 7.5% 9.0% 1.2% 6.1% Revenue Freight Tonne Kilometres - RFTK -0.4% -22.1% -2.9% -2.4% -5.6% -6.3% Revenue Tonne Kilometres RTK 16.5% 5.4% 6.4% 9.0% 8.0% 9.0% Available Seat Kilometres ASK 20.1% 16.0% 11.8% 12.9% 13.4% 14.8% Available Freight Tonne Kilometres - AFTK 14.7% 8.9% 8.7% 5.5% 4.5% 8.4% Available Tonne Kilometres - ATK 18.2% 13.5% 10.7% 10.2% 10.2% 12.5% Passenger Load Factor (actual %) 78.8% 80.8% 81.4% 82.1% 79.7% 80.6% Domestic 78.3% 80.7% 83.2% 83.4% 80.6% 81.2% International 80.1% 81.1% 78.5% 80.0% 78.5% 79.6% Regional 76.9% 78.1% 74.9% 80.0% 75.4% 77.0% Cargo Load Factor (actual %) 50.9% 37.7% 51.9% 51.1% 51.0% 48.6% Overall (ATK) Load Factor (actual %) 68.1% 64.8% 70.5% 71.0% 69.5% 68.8% Passenger carried 18.5% 10.7% 5.3% 5.5% 5.6% 8.8% Cargo and mail carried 9.4% -16.9% 1.2% -5.1% -4.9% -2.9%

Source: Company, Daiwa

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China Industrial Sector: 4 July 2016

CSA: year-to-May operating data YoY % Jan-16 Feb-16 Mar-16 Apr-16 May-16 YTD Revenue Passenger Kilometres - RPK 10.5% 8.1% 2.2% 8.4% 9.2% 7.6% Domestic 3.6% 1.4% -5.4% 1.3% 3.5% 0.8% International 32.2% 28.8% 27.6% 33.1% 28.9% 30.1% Regional -1.1% 8.9% 4.1% -9.6% -17.6% -3.3% Revenue Freight Tonne Kilometres - RFTK 22.4% -7.5% 21.0% 12.7% 11.0% 12.8% Revenue Tonne Kilometres RTK 12.9% 5.3% 6.8% 9.4% 9.6% 8.8% Available Seat Kilometres ASK 10.7% 10.9% 6.0% 8.7% 9.7% 9.2% Available Freight Tonne Kilometres - AFTK 16.9% 13.6% 15.7% 12.6% 13.4% 14.4% Available Tonne Kilometres - ATK 12.8% 11.8% 9.2% 10.0% 11.0% 11.0% Passenger Load Factor (actual %) 78.2% 81.1% 79.7% 81.7% 79.0% 79.9% Domestic 77.4% 80.7% 79.7% 81.3% 79.7% 79.7% International 80.6% 82.5% 80.1% 83.0% 77.8% 80.8% Regional 72.4% 75.8% 71.8% 77.5% 73.1% 74.1% Cargo Load Factor (actual %) 51.9% 34.0% 50.3% 51.0% 52.6% 48.2% Overall (ATK) Load Factor (actual %) 67.6% 63.6% 68.6% 70.1% 69.4% 67.9% Passenger carried 5.1% 2.5% -2.3% 1.9% 3.4% 2.0% Cargo and mail carried 16.3% -13.5% 8.4% 3.9% 6.8% 5.2%

Source: Company, Daiwa

TravelSky: year-to-May operating data Monthly Jan-16 Feb-16 Mar-16 Apr-16 May-16 Bookings on Chinese Commercial Airlines: Chinese Commercial Airlines - International 5,961,501 6,288,758 5,896,105 6,089,725 5,952,173 Chinese Commercial Airlines - Domestic 32,654,317 33,610,111 34,309,388 34,960,653 34,459,113 Chinese Commercial Airlines - Total 38,615,818 39,898,869 40,205,493 41,050,378 40,411,286 Bookings on Foreign and Regional Commercial Airlines 1,434,063 1,342,971 2,100,652 1,905,551 2,155,484 Total bookings on domestic routes 32,654,317 33,610,111 34,309,388 34,960,653 34,459,113 Total bookings on international and regional routes 7,395,564 7,631,729 7,996,757 7,995,276 8,107,657 Total bookings on all routes 40,049,881 41,241,840 42,306,145 42,955,929 42,566,770 YoY% Jan-16 Feb-16 Mar-16 Apr-16 May-16 Bookings on Chinese Commercial Airlines Chinese Commercial Airlines - International 36.3% 24.4% 23.5% 22.2% 17.3% Chinese Commercial Airlines - Domestic 12.5% 9.4% 4.9% 9.5% 8.9% Chinese Commercial Airlines - Total 15.6% 11.5% 7.3% 11.2% 10.1% Bookings on Foreign and Regional Commercial Airlines (3.6%) 25.3% 1.1% (6.6%) 3.5% Total bookings on domestic routes 12.5% 9.4% 4.9% 9.5% 8.9% Total bookings on international and regional routes 26.2% 24.5% 16.7% 13.8% 13.3% Total bookings on all routes 14.8% 11.9% 6.9% 10.3% 9.7% YTD YTD-Jan YTD-Feb YTD-Mar YTD-Apr YTD-May Bookings on Chinese Commercial Airlines Chinese Commercial Airlines - International 5,961,501 12,250,259 18,146,364 24,236,089 30,188,262 Chinese Commercial Airlines - Domestic 32,654,317 66,264,428 100,573,816 135,534,469 169,993,582 Chinese Commercial Airlines - Total 38,615,818 78,514,687 118,720,180 159,770,558 200,181,844 Bookings on Foreign and Regional Commercial Airlines 1,434,063 2,777,034 4,877,686 6,783,237 8,938,721 Total bookings on domestic routes 32,654,317 66,264,428 100,573,816 135,534,469 169,993,582 Total bookings on international and regional routes 7,395,564 15,027,293 23,024,050 31,019,326 39,126,983 Total bookings on all routes 40,049,881 81,291,721 123,597,866 166,553,795 209,120,565 YoY% YTD-Jan YTD-Feb YTD-Mar YTD-Apr YTD-May Bookings on Chinese Commercial Airlines Chinese Commercial Airlines - International 36.3% 29.9% 27.8% 26.3% 24.4% Chinese Commercial Airlines - Domestic 12.5% 10.9% 8.8% 9.0% 9.0% Chinese Commercial Airlines - Total 15.6% 13.5% 11.3% 11.3% 11.0% Bookings on Foreign and Regional Commercial Airlines (3.6%) 8.5% 5.2% 1.6% 2.0% Total bookings on domestic routes 12.5% 10.9% 8.8% 9.0% 9.0% Total bookings on international and regional routes 26.2% 25.3% 22.2% 19.9% 18.5% Total bookings on all routes 14.8% 13.3% 11.1% 10.9% 10.6%

Source: Company, Daiwa

General aviation moving gradually The industry seems to During our meeting with AviChina, the airline said progress on general aviation opening be moving in the right seems to be moving slowly. While more details on the opening of low-altitude airspace in direction China remain pending, asset restructuring in the industry has been moving forward. For AviChina, the most recent asset injection, AVIC Planning, would be 20% EPS-accretive, based on our estimates, and the next asset injection for the maintenance, repair and operations (MRO) business unit and surveillance drones would also be positive for the future asset quality of the airline. We see the industry moving in a positive direction, even though it may be a long-term growth story rather than offering a short-term rise in orders and earnings growth.

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China Industrial Sector: 4 July 2016

Global airline peer valuation comparison Name Bloomberg Trading Share price Rating PBR (x) EV/EBITDA(x) ROE (%) Code Currency 30-Jun-16 FY16E FY17E FY16E FY17E FY16E FY17E China Air China Ltd-H * 753 HK HKD 5.30 Outperform 0.8 0.8 3.9 3.9 17.8 12.8 China Eastern Airlines Co-H * 670 HK HKD 3.86 Underperform 1.0 0.8 5.9 5.9 22.1 15.3 China Southern Airlines Co-H * 1055 HK HKD 4.37 Sell 0.9 0.8 4.2 4.1 18.5 13.5 China Southern Airlines Co-A 600029 CH CNY 7.06 NR 1.6 1.4 4.0 3.9 15.0 15.8 China Eastern Airlines Co-A 600115 CH CNY 6.61 NR 1.9 1.7 7.0 7.0 16.4 16.4 Air China Ltd-A 601111 CH CNY 6.76 NR 1.3 1.1 6.0 5.9 13.5 13.6 Hainan Airlines Co-A 600221 CH CNY 3.17 NR 1.2 1.1 n.a. n.a. 11.0 12.3 Asia Cathay Pacific Airways * 293 HK HKD 11.32 Hold 0.8 0.8 2.2 2.2 21.8 18.2 Singapore Airlines Ltd ** SIA SP SGD 10.66 NR 1.0 0.9 4.0 3.6 6.1 6.7 China Airlines Ltd 2610 TT TWD 9.69 NR 0.8 0.8 5.4 5.3 9.5 8.3 Eva Airways Corp 2618 TT TWD 14.70 NR 1.1 1.0 5.1 4.8 12.0 10.7 Ana Holdings Inc *,** 9202 JP JPY 291.20 Hold 1.2 1.1 5.4 4.8 8.3 10.3 Japan Airlines Co Ltd *,** 9201 JP JPY 3292.00 Buy 1.3 1.2 2.9 2.9 21.7 21.6 Qantas Airways Ltd *** QAN AU AUD 2.82 NR 1.6 1.2 2.9 2.9 32.6 30.8 Air New Zealand Ltd *** AIR NZ NZD 2.10 NR 1.0 0.9 2.6 2.8 28.9 22.7 Thai Airways International THAI TB THB 24.10 NR 1.5 1.3 8.0 7.8 9.7 10.8 Korean Air Lines Co Ltd 003490 KS KRW 25950.00 NR 0.8 0.7 6.1 6.1 0.9 13.9 Asiana Airlines 020560 KS KRW 4370.00 NR 1.0 0.9 8.3 8.2 5.0 3.9 International Alaska Air Group Inc ALK US USD 58.29 NR 2.4 2.0 3.5 3.4 34.1 30.0 United Continental Holdings UAL US USD 41.04 NR 1.4 1.2 3.2 3.4 28.7 28.6 Delta Air Lines Inc DAL US USD 36.43 NR 1.9 1.5 3.4 3.5 37.7 29.0 Deutsche Lufthansa-Reg LHA GR EUR 10.70 NR 0.8 0.7 2.2 2.1 19.9 18.3 Air France-Klm AF FP EUR 5.72 NR 3.0 1.3 2.4 2.3 95.4 65.1 Latam Airlines Group Sa LAN CI CLP 4380.70 NR 1.2 1.1 7.5 6.6 3.0 5.8 Aeroflot-Russian Airlines AFLT RM RUB 85.50 NR n.a. 5.5 4.8 4.3 n.a 159.7 LCC Spring Airlines 601021 CH CNY 47.94 NR 4.7 3.7 12.2 9.8 24.1 24.3 Nok Airlines Pcl NOK TB THB 8.55 NR 1.7 1.5 n.a. 4.0 n.a 14.6 Airasia Bhd AIRA MK MYR 2.60 NR 1.3 1.2 6.9 7.0 21.5 16.2 Easyjet Plc **** EZJ LN GBp 10.86 NR 1.7 1.4 4.8 4.3 22.5 22.7 Ryanair Holdings Plc ** RYA ID EUR 11.32 NR 3.3 3.0 7.3 6.4 30.7 32.9 Gol Linhas Aereas Intel-Adr GOL US USD 10.59 NR n.a. n.a. 8.6 7.2 24.9 16.9 Southwest Airlines Co LUV US USD 39.21 NR 2.6 2.2 4.6 4.4 32.4 27.4 Virgin Australia Holdings Lt *** VAH AU AUD 0.21 NR 0.8 0.7 6.0 4.7 0.7 6.4 Cebu Air Inc CEB PM PHP 97.85 NR 1.8 1.5 5.3 5.5 29.2 21.6 Total Weighted average 1.7 1.5 4.6 4.4 23.5 22.0 High 4.7 5.5 12.2 9.8 95.4 159.7 Low 0.8 0.7 2.2 2.1 0.7 3.9 Median 1.3 1.2 4.9 4.4 20.7 16.3

Source: Bloomberg, *Daiwa forecasts Note: **Year ended 31 Mar, ***Year ended 30 Jun, ****Year ended 30 Sept

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China Industrial Sector: 4 July 2016

Company section Air China (753 HK) International yields decline notably in 1Q, but showing signs of recovery AC’s international yield dropped significantly by 17% YoY in 1Q16, which management attributed to the opening of new long-haul routes in 4Q15. To return to better yield levels, the company relocated more capacity to the domestic market. As a result, its international yield narrowed to 15% in April and May, and to 10% YoY so far in June. For 2016, management now guides for lower international ASK growth of 16-18% YoY (from 20%). Overall, management still sees strong demand for outbound traffic in China.

Domestic yield faces more pressure in April and May In 1Q16, AC’s domestic yield held up well, rising by 1-2% YoY. However, due to the above- mentioned relocation of capacity to the domestic market, the company’s domestic yield dropped by 2% YoY in April and 1% YoY in May. The problem was compounded by a lack of slots at airports in tier-1 cities, which forced the company to deploy more capacity to lower-tier cities that often have lower yields. That said, management believes that, as the summer peak season approaches, a pick-up in air traffic demand will help sustain its domestic yield. So far in June, its domestic yield is up mildly by 0.5% YoY. For 2016, management now guides for its domestic ASK to increase by 4-5% YoY, higher than its previous guided level of 3% YoY growth.

Direct sales increasing AC’s direct sales proportion increased from 30% at end-2015 to 38% at end-1Q16. The company targets to raise the ratio to 50% by the end of 2017, which should help to lower its commission expenses by 50% from the 2015 level.

Change in commission scheme should be beneficial Management believes the recent change in the commission scheme will be beneficial for the company (our comment: please click here) as it should allow the company to reduce its commission costs and retain quality agents.

Valuation and recommendation Based on management’s update, we believe the yield concerns may put pressure on the stock. However, we expect yields to start to pick up in the upcoming peak season. Thanks to what we regard as the company’s prudent capacity expansion approach compared to peers, better yield management and the stock’s undemanding valuation, AC remains our preferred pick among the airlines; but in general we are cautious due to potential CNY depreciation. We reaffirm our Outperform (2) rating on the stock and 12-month target price of HKD6.50, based on a PBR of 1.0x on our 2016 BVPS forecast. The key risk to our call is weaker-than-expected traffic demand and yield growth.

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

TravelSky (696 HK) Concerns about fundamentals; Umetrip capitalisation unlikely in 2016 Most of the questions from investors focused on the company’s fundamentals, especially a potential margin improvement in 2016. Investors were sceptical about the margin improvement but management sees otherwise, as the new generation system has been rolled out already. To our surprise, there were few questions about Umetrip. There has been no update on Umetrip’s capitalisation, and as such, we do not expect it to be realised in 2016.

Potential lack of government subsidies in 2016 As for government subsidies, there has so far been no notice from the Shunyi district government, and we see only a slim chance that TravelSky will receive government subsidies this year. This news may have come as a slight disappointment to some investors who had been looking forward to this free money for the company to improve its balance sheet.

Change to preferential tax policy TravelSky has already received notification from the government about its preferential tax scheme, which will now be based on self-evaluation rather than an assessment by the government. TravelSky needs to clarify with the accounting department as to how to calculate its tax rate, but it is likely that some provisions might be needed.

Valuation and recommendation We remain positive on a margin improvement for the company and expect positive sentiment to continue in the near term. As such, we reiterate our Buy (1) rating on the stock and DCF-based 12-month target price of HKD16. We would recommend that investors revisit the stock on any major retreat in the share price. The key risk to our call is lower-than-expected booking growth.

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

AviChina (2357 HK) AVIC Planning may be consolidated in interim results Management is trying its best to complete the transaction and recognise the impact in AviChina’s interim results. We estimate the company will see 20% EPS accretion from the acquisition.

Optronics business will likely remain strong; helicopter business should recover in 2Q16 Management expects around a 15% YoY increase in its helicopter business revenue for 1H16. However, we estimate its gross margin will decline from 13% in 2015 to a more normal level of 10% in 2016, as the ASP increase in 2015 was a one-off. Delivery of the new L15 trainer jets remains slow. Its optronics business should see more than a 30% YoY increase in net profit, and for its avionics business, management guides for a 20% YoY increase in revenue in 2016 due to the low base in 2015. The gross margin for its component business should remain stable YoY in 1H16.

Asset injection may not improve sentiment Management plans to continue to seek asset injections from its parent, particularly for its maintenance, repair and operations (MRO) unit for military aircraft (annual sales of CNY100m) and surveillance drones. AviChina is also seeking European parts and components companies to acquire. However, we believe investor sentiment would be unlikely to improve much unless the asset had a big financial impact on AviChina.

Airbus Helicopter assembly plant to be slightly negative for AviChina The recent setting up of an assembly plant in Qingdao by Airbus Helicopter (a joint venture among China Aviation Supplies, Qingdao United General Aviation Industrial Development and CITIC Offshore Helicopter) could increase the competition for one of AviChina’s products, the AC311 helicopter (c.5% of its total helicopter orders). This could be slightly negative for AviChina in terms of share-price sentiment in the near term.

Valuation and recommendation We reiterate our Buy (1) rating and SOTP-based 12-month TP of HKD7.90 for AviChina. We remain positive on the company in the long run despite the near-term concerns over its Airbus Helicopter plant. The key risk: a derating of its A-share subsidiaries. (See 21 June note, Looking forward to an earnings recovery.)

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

China Aircraft Leasing (1848 HK) Deliveries for 2016 on track; targeting to raise non-mainland ratio CALC expects to take delivery of 18 aircraft in 2016, 17 from its previous direct order with Airbus and 1 from the second-hand market. This level of deliveries is slightly higher than our previous estimate of a total of 17 aircraft. Of the 18 aircraft expected to be delivered in 2016, 8 would be delivered to non-mainland airlines. Management expects the ratio of non- mainland airlines it supplies to increase to 19% by the end of 2016 from 11% at the end of 2015. Management also plans to actively explore opportunities in the overseas market to raise its non-mainland airline ratio to 50%.

More focus on securitisation this year As management now expects more than 4 aircraft to be securitised, we recently trimmed our previous forecast of 6 aircraft to 5 in 2016-18. We do not expect much progress on its China Aircraft Global (CAG) venture as management is now focusing on securitisation. Thus, we recently revised up our 2016-18E EPS by 1-3% to factor in our revised delivery figures and securitisation forecasts.

Disposal of China Aircraft Disassembly Centre stake should lower gearing Compared with other aircraft leasing companies under the Chinese banks, CALC not only focuses on operating leases but also has the ability to disassemble an aircraft to gain extra return upon the expiration of its lease. According to management, the reduction of CALC’s stake (from 100% to 48%) in China Aircraft Disassembly Centre (CADC) would help alleviate the pressure on gearing in the future. CALC expects its average borrowing cost in 2016 to remain similar to that in 2015 (4.67%), as its new USD300m bond (at 5.9% interest rate) is small in comparison to the total bank borrowings of HKD22bn, as at the end of December 2015.

Valuation and recommendation We reiterate our Buy (1) call and recently raised our DCF-based 12-month TP to HKD9.20 from HKD9.00 to reflect the changes in our earnings forecasts and our valuation base to an average of 2016-17E (previously: 2016E). We see CALC as well-positioned to capture the air traffic growth in China and Asia. We think its CADC stake reduction and CAG venture should help reduce its gearing while allowing it to maintain control over these businesses. We believe CALC could regain investor interest by delivering strong 1H16 results. The key risk to our call: fewer-than-expected aircraft deliveries. (For details, please refer to our 22 June note, Business outlook should remain solid in 2016.)

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

Construction and Engineering Sector read-across Strong new contract momentum due to low base last year CRG’s management guides for continued strong new-contract growth in 1H16, driven by railway and urban rail transit (URT) projects (helped by a lower population requirement for cities applying for URT construction), but said road construction has yet to see a recovery in contracts. CRG believes the loosening credit environment in China bodes well for infrastructure investment. Similarly, BUCD management also sees robust new contract growth in 1H16 for both its construction and design segments, and looks to sign off 1-2 public-private partnership (PPP) projects in 2H16. In terms of its operations, BUCD believes it is on track to achieve its full-year revenue target. We expect the company to record strong earnings growth in 1H16 as a result of the low base in 1H15.

Earnings growth driven by margin expansion Margin improvement According to management, CRG plans to be more selective in bidding for new contracts from construction (taking into account local governments’ payment track records), to foster higher margins. A companies higher mix of URT construction (which carries higher margins than railway construction), and its rising exposure to overseas projects (on which gross margins tend to be c.4-5pp higher than for domestic projects) should help improve its blended margin. CRG targets overseas revenue to contribute 10-15% of total revenue by end-2020, from 5% at end-2015.

Infrastructure construction continues to grow due to PPP projects Companies are being According to CEIC, transportation FAI was up 9% in the year to May 2016. Infrastructure selective on PPP contracts for roads and bridges were mainly supported by PPP projects, and saw FAI contracts increase by 10% YoY in the year to May 2016. According to our meeting with the listed construction companies that attended our conference, most contracts nowadays are through PPP projects, which have better funding than previously non-PPP ones. However, the returns on the projects are not necessarily attractive, and CRG and CSCI both said they were being selective on PPP projects.

China: railway FAI forecasts for FYP plan China: annual railway FAI forecasts (CNYbn) (CNYbn) (CNYbn) (CNYbn) Daiwa expects 5,000 4,500 1,000 843 809 824 835 845 840 40% 10% growth 1% -1% 4,000 20% 21% 3% 1% 3,905 800 634 666 4,000 3,550 3,500 591 5% 20% -30% 7% 3,000 600 3,000 2,422 2,500 0% 400 2,000 2,000 -20% 1,500 200 1,000 1,000 490 0 -40% 500 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 0 0 Train purchase & Maintenance investment 10th FYP 11th FYP 12th FYP 13th FYP Railway Infrastructure Investment Railway FAI - Original Target Railway FAI - Actual/Expected Investment YoY Growth (RHS) Source: CRC, Daiwa forecasts Source: CRC, Daiwa forecasts

China: high-speed rail operating mileage China: URT operating mileage (km) (YoY %) (km) 148,172 9,000 8,570 160,000 136,052 12% Representing 121,352 128,286 9% +20% CAGR 7,452 111,821 6% 6% 8,000 140,000 103,145 9% 10% 97,625 8% 7,000 6,480 120,000 93,250 6% 2% 5% 5,635 100,000 8% 6,000 4,334 80,000 6% 5,000 3,612 4,000 3,155 60,000 4% 2,746 40,000 3,000 2,286 1,599 1,887 2% 2,000 20,000 912 1,076 0 0% 1,000 2011 2012 2013 2014 2015 2016E 2017E 2018E 0 Railway operating mileage (LHS) YoY growth (RHS) 2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E2019E2020E

Source: China Association of Metros Source: China Association of Metros

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China Industrial Sector: 4 July 2016

Global construction peers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 30-Jun-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E China Construction companies - H Shares BUCD * 1599 HK HKD 4.20 Buy 10.5 9.2 1.4 1.3 n.a. n.a. 2.5 2.9 14.1 14.4 CRG * 390 HK HKD 5.76 Buy 8.5 7.6 0.8 0.7 7.8 6.8 1.9 2.1 9.7 10.0 CRCC * 1186 HK HKD 9.67 Buy 8.1 7.5 0.9 0.8 6.3 6.0 2.0 2.1 11.8 11.6 CCC * 1800 HK HKD 8.30 Hold 6.9 6.5 0.7 0.7 9.2 9.2 2.8 3.0 10.8 10.6 CSCI * 3311 HK HKD 10.22 Buy 8.7 7.6 1.5 1.3 8.2 7.3 3.3 4.0 19.3 18.1 MCC 1618 HK HKD 2.37 NR 6.9 6.1 0.7 0.6 10.4 9.6 2.9 3.3 9.5 10.0 Sinopec Engineering 2386 HK HKD 7.00 NR 8.7 8.6 1.0 0.9 3.2 3.2 4.6 4.7 12.1 11.7 CMEC 1829 HK HKD 5.03 NR 8.1 7.4 1.1 1.0 n.a. n.a. 4.7 5.1 14.9 15.0 China Construction companies - A Shares CRG 601390 CH CNY 6.97 NR 12.0 11.1 1.2 1.1 8.6 8.0 1.3 1.4 10.2 10.1 CRCC 601186 CH CNY 9.96 NR 9.5 8.7 1.1 1.0 6.8 6.2 1.7 1.9 12.0 12.0 CCC 601800 CH CNY 10.53 NR 9.7 8.6 1.1 1.0 9.4 8.4 2.1 2.3 12.2 12.3 MCC 601618 CH CNY 7.79 NR 27.0 23.8 2.5 2.3 10.5 9.7 0.8 0.9 9.6 9.8 China Construction Engineering 601668 CH CNY 5.32 NR 5.5 4.9 0.9 0.8 5.2 4.6 4.2 4.7 17.0 16.5 China Railway ErJu 600528 CH CNY 11.96 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a. Long Yuan Cons 600491 CH CNY 8.58 NR 31.4 24.2 2.1 1.9 n.a. n.a. 1.4 1.3 8.3 9.3 Shanghai Tunnel Engineering 600820 CH CNY 8.39 NR 15.7 13.6 1.5 1.4 9.4 8.3 2.1 2.3 9.8 10.2 Shanghai Construction 600170 CH CNY 3.83 NR 13.3 12.4 1.2 1.1 6.7 5.8 4.3 4.6 9.8 9.6 China CAMC Engineering 002051 CH CNY 19.67 NR 14.4 12.1 2.5 2.2 8.2 7.0 1.2 1.3 16.9 17.0 Hongrun Construction 002062 CH CNY 5.92 NR 23.7 18.5 n.a. n.a. n.a. n.a. 0.8 0.8 10.7 12.5 China Design Companies Jiangsu Transport 300284 CH CNY 19.49 NR 27.0 21.2 3.4 3.0 17.6 13.8 0.7 0.8 13.3 14.5 China Haisum 002116 CH CNY 19.36 NR 30.4 25.0 6.0 5.0 14.8 12.5 1.0 1.0 18.0 18.0 East China Engineering 002140 CH CNY 15.26 NR 42.4 61.0 3.3 3.1 36.7 37.9 0.2 0.2 5.9 5.2 Asian Construction Companies Daewoo E&C * 047040 KS KRW 5610.00 Hold 12.7 8.6 0.8 0.7 7.9 6.6 n.a. n.a. 6.5 8.9 GS E&C * 006360 KS KRW 27750.00 Underperform 12.5 9.5 0.6 0.5 13.1 8.9 n.a. n.a. 4.6 5.8 Hyundai E&C * 000720 KS KRW 33350.00 Outperform 7.0 6.5 0.6 0.5 4.0 3.7 1.5 1.5 8.4 8.5 Daelim Ind * 000210 KS KRW 76000.00 Hold 10.1 7.9 0.7 0.7 6.3 4.1 0.5 0.5 6.8 8.5 ST Engineering STE SP SGD 3.15 NR 19.2 18.1 4.4 4.2 13.5 13.0 4.5 4.7 23.2 23.5 Shimizu ** 1803 JP JPY 956.00 Outperform 13.0 11.0 1.4 1.4 8.7 7.8 1.3 1.8 11.1 13.0 Nishimatsu Construction ** 1820 JP JPY 476.00 NR 9.0 9.8 0.8 0.8 n.a. n.a. 3.2 3.3 9.4 7.6 Toda Corp. ** 1860 JP JPY 440.00 NR 6.5 7.2 0.7 0.7 7.3 7.8 2.0 2.2 10.7 9.8 Gamuda **** GAM MK MYR 4.86 NR 19.2 16.7 1.8 1.7 24.2 20.6 2.4 2.6 9.6 10.4 Kolon E & C 003070 KS KRW 13800.00 NR 11.5 12.5 1.0 2.0 14.2 15.2 n.a n.a 5.4 6.4 Kajima ** 1812 JP JPY 708.00 Outperform 10.4 10.6 1.5 1.4 7.9 7.0 1.1 1.8 12.4 14.0 WCT Engineering WCTHG MK MYR 1.50 NR 13.8 11.6 0.7 0.7 16.9 14.4 2.5 2.9 5.5 6.1 IJM ** IJM MK MYR 3.49 NR 19.8 18.3 1.4 1.4 12.1 12.0 2.7 2.6 7.5 7.6 US & Europe Construction Companies Vinci DG FP EUR 63.69 NR 15.4 14.2 2.2 2.1 8.6 8.3 3.2 3.5 14.8 14.8 ACS ACS SM EUR 24.40 NR 10.4 9.8 2.0 1.8 5.5 5.3 4.8 4.8 21.1 18.4 FCC FCC SM EUR 7.59 NR 26.7 21.1 2.6 2.2 9.3 8.8 n.a n.a 13.2 10.8 Boskalis Westminster BOKA NA EUR 30.89 NR 14.0 16.2 1.0 1.0 6.9 7.7 4.7 4.7 7.3 6.2 Hochtief HOT GR EUR 115.70 NR 23.4 20.7 3.1 3.0 7.7 7.4 2.0 2.3 15.6 15.1 Skanska SKAB SS SEK 175.40 NR 13.8 13.9 2.8 2.6 7.9 8.0 4.4 4.6 20.7 19.0 Atlas Copco AB ATCOA SS SEK 217.30 NR 20.2 18.9 5.1 4.6 11.9 11.4 3.0 3.3 26.5 25.5 Sandvik AB SAND SS SEK 83.75 NR 17.7 16.1 2.8 2.6 9.8 9.3 3.1 3.4 16.6 17.1 Chicago Bridge & Iron Co NV CBI US USD 34.63 NR 6.9 7.0 1.4 1.2 5.5 5.8 0.8 0.8 22.5 19.8 McDermott International Inc MDR US USD 4.94 NR 73.7 73.7 0.8 0.8 6.0 5.8 n.a n.a 1.4 0.2 Fluor FLR US USD 49.28 NR 14.6 13.9 2.0 1.8 6.5 6.5 1.7 1.8 15.6 14.8 Indian Construction IVRCL ** IVRC IN INR 4.60 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a. Nagarjuna ** NJCC IN INR 74.25 NR 20.8 16.4 1.2 1.1 6.7 6.0 0.5 0.6 5.8 6.9 Gammon ** GISP IN INR 5.75 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a. Jaiprakash ** JPA IN INR 8.85 NR n.a. n.a. 0.2 0.2 10.7 12.1 n.a n.a n.a n.a ABB (India) ABB IN INR 1223.95 NR n.a. n.a. n.a. n.a. n.a. n.a. 0.4 0.5 n.a. n.a. Larsen & Toubro ** LT IN INR 1496.50 NR 32.4 25.1 3.1 2.8 20.0 16.3 1.1 1.2 10.2 11.7 Weighted average 13.9 12.5 1.9 1.7 9.0 8.3 2.4 2.7 13.7 13.7 High 73.7 73.7 6.0 5.0 36.7 37.9 4.8 5.1 26.5 25.5 Low 5.5 4.9 0.2 0.2 3.2 3.2 0.2 0.2 1.4 0.2 Median 13.2 11.9 1.3 1.3 8.4 8.0 2.0 2.3 10.9 11.6

Source: Bloomberg, *Daiwa forecasts Note: **Year ended 31 Mar, ***Year ended 30 Jun, ****Year ended 31 Jul

12

China Industrial Sector: 4 July 2016

Company section China Railway Group (390 HK) Strong new-contract growth to continue in 2Q16 According to CRG, its new contracts rose by 21% YoY for 1Q16, driven by steady contract growth in the railway construction segment (up 93% YoY), albeit offset by a 25% YoY decline in contracts for the road segment. Management guided for continued strong new- contract growth in 2Q16, driven by railway and URT projects (helped by a lower population requirement for cities applying for URT construction), but noted that road construction has yet to see a contract recovery. PPP/build-and-transfer (BT) projects accounted for about 10% of CRG’s new contracts in 2015. Although there are more than 7,000 PPP projects listed in the NDRC’s database, amounting to a CNY8tn total investment, CRG’s management said it will not see a significant change in its PPP new-contract mix, as not all projects are profitable and CRG has high-level requirements when it comes to PPP project bidding.

Margin enhancement on greater selectivity in signing new contracts and better project mix Management plans to be more selective in signing new contracts (taking into account local governments’ payment track records and financial positions), to foster higher margins. A higher mix of URT construction, which carries higher margins than railway construction, should also help improve its blended margin, according to management. In addition, CRG’s rising exposure to overseas projects, whose gross margins tend to be c.4-5pp higher than for domestic projects, should help increase its overall gross margin in 2016. CRG targets overseas revenue to contribute 10-15% of total revenue by end-2020, from 5% at end-2015.

Valuation and recommendation We reiterate our Buy (1) call, backed by our expectation of margin enhancement on a better project mix and stringent cost control, as well as on interest savings resulting from CRG’s improved balance sheet and the relaxation of monetary policy in China. Our 12- month TP is HKD7.40, based on an 11x 2016E PER. The key risk: unexpected contract defaults in overseas markets. (See our 21 June note, Strong new-contract growth should continue in 2Q16.)

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

13

China Industrial Sector: 4 July 2016

China State Construction International (3311 HK) New-contract growth remains strong According to management, CSCI was awarded new contracts worth HKD37bn in 5M16, 47% of management’s 2016 full-year guidance. As in previous years, management sees a target revision as a possibility following its interim results announcement in August. Overall, CSCI expects its China segment to continue to lead its new-contract growth, while management sees upside for the gross margins of its Hong Kong construction segment, which was dragged down by the provision made for the lead water incident in 2015.

Gearing concerns should be relieved CSCI’s end-2015 net gearing ratio rose to 46%, slightly above the 40% management target, due mainly to CNY depreciation. After the injection of China Overseas Building (COB) from its parent company in mid-May and strong cash collection, CSCI’s net gearing has fallen back to about 30% by the end of June. Management is confident of maintaining a ratio of below 40% for the next 3 years.

Next M&A target will likely be overseas assets Though no concrete timetable was given, management said the next asset injection target would likely be an overseas construction subsidiary from its parent in the mature Asian market. We expect a share issuance on the asset acquisition, but believe sentiment would be better if it were acquired at the current low valuation of the stock.

Valuation and recommendation We reiterate our Buy (1) rating on the stock with a 12-month target price of HKD15, based on a 12x PER, the average of our 2016-17 EPS forecasts. We think the market overreacted to the purchase of COB and expect the stock to recover on potential new- contract revisions, strong net-profit growth and asset injections. The stock is trading close to its railway construction peers in terms of 2016E PER, which we see as undemanding given its strong earnings track record. The key risk to our call is lower-than-expected new- contract growth. (See our 20 June flash note, Worth a revisit.)

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

Beijing Urban Construction Design & Development (1599 HK) Strong new-contract growth in 1H16 BUCD has seen a significant rebound in its new contract growth in 1H16 (partly helped by the low base in 1H15 when its new contracts were down 25% YoY, due to the lack of guidelines on the PPP investment model). According to management, supportive government policies on URT construction, such as cutting the population requirement for cities applying for a URT (to 1.5m residents from 3m), should continue to boost China’s URT demand.

PPP project update BUCD aims to sign off on 2 PPP projects in 2H16. Construction of its first PPP (Anqing Road) project, awarded in May 2015, should be completed and start operating by October 2016, 7 months earlier than originally planned. Management expects to secure more capital-intensive PPP projects in the future, in line with industry trends.

Design capacity still the bottleneck Despite its potentially strong new contract growth and rich order backlog, management guides for stable revenue growth of 10% YoY for its design segment, due to capacity constraints. BUCD’s top-line growth should mainly come from a gradual capacity increase and efficiency improvement. Management believes it will be difficult to expand its design capacity aggressively through M&A activities, as most of its peers are either SOEs or private companies with high valuations.

A-share listing BUCD is still preparing the documents for its pending A-share listing. We view the listing as positive, as the A-share design companies carry higher valuations than their equivalent H- shares. Moreover, as the Beijing Municipal Government is BUCD’s controlling shareholder, we view the company as a front-line beneficiary of the Beijing-Tianjin-Hebei integration.

Valuation and Recommendation We reiterate our Buy (1) rating and DCF-based 12-month TP of HKD6.60 (assuming a WACC of 14% and unchanged terminal growth rate of 2%), considering the company’s bumpy earnings outlook and strong net cash position. Key risk: delays in revenue recognition. (See our 23 June note, Business on track; new contract improvement.)

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

15

China Industrial Sector: 4 July 2016

Logistics Sector read-across Headwinds from weak trade China’s freight-forwarding business is in general being affected by the country’s weak exports and imports. In May 2016, exports declined by 6.2% YoY and imports by 4.7% YoY, on a seasonally adjusted basis, continuing the weak trend seen since January 2015. The managements of the logistics companies that we cover said they remained cautious for 2H16 on the limited macro recovery expected in China during this period.

China: exports and imports seasonally adjusted YoY growth (YoY %) 10 4.0 1.1 5 -1.4 -1.4 -1.4 0.2 -4.1 -4.3 -2.8 0 -4.8 -5.9 -5.7 -5.6 -6.2 -7.9 -6.3 -5 -9.0 -10 -4.7 -7.6 -7.3 -15 -9.9 -8.4 -12.3 -11.3 -20 -14.5 -14.1 -13.5 -15.0 -14.9 -13.9 -17.2 -16.1 -16.7 -25 -30 -25.5 Jul-15 Apr-15 Oct-15 Apr-16 Jan-15 Jun-15 Jan-16 Feb-15 Mar-15 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 May-15 May-16 CN: Export: YoY: SA CN: Import: YoY: SA

Source: CEIC, Daiwa

Southeast Asia is seeing better YoY growth Factory migration According to our investor meetings with the logistics companies such as Kerry Logistics boosting trade demand (636 HK, HKD10.36, Outperform [2]) and SITC, their trade growth in the ASEAN region in ASEAN remained relatively strong in May 2016 YTD. We see the headline decline in trade flows in China as likely exaggerated by currency movements. This is in line with our expectations (as described in our report “China Industrial Sector: Panning for ideas in a challenging year”, published on 13 January 2016). We believe the freight flows between North Asian and ASEAN countries will continue to be driven by the structural migration of part of the assembly line from China to ASEAN, and also relatively higher GDP growth in the ASEAN region compared to North Asia for the same period.

China: currency-adjusted exports/imports from ASEAN countries (growth May 2016 YTD YoY) Brunei Myanmar Cambodia Indonesia Lao Malaysia Philippines Singapore Thailand Vietnam Overall Export to -49% 0% 12% -7% -29% -11% 30% -7% 12% -6% -5% Import from 1048% 35% 29% 1% 17% -4% -11% -12% 2% 58% -6%

Source: CEIC, Daiwa Compile

China: currency-adjusted exports/imports from Japan, Korea and Taiwan (growth May 2016 YTD YoY) Japan Korea Taiwan Export To 10% -6% -6% Import from 12% -8% -4%

Source: Bloomberg, Daiwa compile

16

China Industrial Sector: 4 July 2016

Global logistics peers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 30-Jun-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E 3PL- Global Kerry Logistics Network Ltd * 636 HK HKD 9.99 Outperform 14.8 13.5 1.0 0.9 8.4 7.7 1.7 1.9 7.0 6.9 Deutsche Post Ag-Reg DPW GY EUR 25.18 NR 12.5 11.8 2.5 2.3 6.8 6.4 3.8 4.1 20.5 19.9 Kuehne & Nagel Intl Ag-Reg KNIN US CHF 136.20 NR 22.7 21.4 7.3 6.9 14.0 13.3 3.8 4.1 32.8 33.4 Expeditors Intl Wash Inc EXPD US USD 49.04 NR 20.7 19.2 5.3 5.4 11.0 10.4 1.6 1.7 25.8 26.5 Other 3PL Sinotrans Limited-H * 598 HK HKD 3.43 Outperform 10.1 9.3 0.8 0.8 6.0 5.8 3.0 3.3 8.5 8.7 Hyundai Glovis Co Ltd * 086280 KS KRW 171500.00 Outperform 10.7 10.4 1.7 1.5 6.5 6.3 1.6 1.7 17.9 15.9 Cj Korea Express Corp * 000120 KS KRW 217000.00 Hold 45.3 39.7 1.5 1.4 16.4 15.5 n.a. n.a. 4.5 4.8 Qube Holdings Ltd ***** QUB AU AUD 2.21 NR 27.6 23.0 1.5 1.4 15.1 14.4 2.4 2.5 5.7 6.4 Dsv A/S ***** DSV DC DKK 280.20 NR 22.8 18.1 4.0 3.5 15.5 13.0 0.7 0.8 16.5 20.1 Other Logistic Company-Global C.H. Robinson Worldwide Inc CHRW US USD 74.25 NR 19.6 18.4 8.5 7.8 11.9 11.3 2.3 2.5 45.1 44.1 United Parcel Service-Cl B UPS US USD 107.72 NR 18.6 17.3 36.1 24.2 9.9 9.5 2.9 3.1 175.3 198.0 Panalpina Welttransport -Reg PWTN SW CHF 116.40 NR 27.6 21.0 4.2 4.0 12.8 10.4 3.1 3.8 15.9 20.1 Fedex Corp **** FDX US USD 151.78 NR 14.1 12.7 2.7 2.6 n.a. n.a. 0.7 1.0 19.2 20.2 Other Logistic Company-Asia Sitc International Holdings * 1308 HK HKD 4.06 Buy 9.5 8.1 1.5 1.4 7.5 6.4 6.5 7.6 16.4 17.9 Keppel Telecom & Transport KPTT SP SGD 1.41 NR 10.8 10.0 1.3 1.3 22.1 17.0 2.8 2.8 10.5 13.2 Nippon Express Co Ltd ** 9062 JP JPY 466.00 Hold 13.5 12.7 0.8 0.8 7.0 6.8 2.2 2.4 6.7 7.0 Yamato Holdings Co Ltd ** 9064 JP JPY 2340.50 Hold 23.9 22.3 1.7 1.6 7.9 7.7 1.1 1.2 7.0 7.5 Mitsubishi Logistics Corp ** 9301 JP JPY 1422.00 Hold 27.7 26.8 0.9 1.0 11.1 11.3 0.8 1.0 3.4 3.5 Kamigumi Co Ltd ** 9364 JP JPY 942.00 NR 14.9 14.5 0.8 0.7 6.5 6.4 1.3 1.4 5.3 5.3 Others related China South City Holdings ** 1668 HK HKD 1.50 NR 7.9 9.5 0.5 0.4 11.5 13.2 4.3 3.9 6.6 6.3 Hydoo International Holding 1396 HK HKD 0.93 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a. Beijing Properties Holdings 925 HK HKD 0.50 NR n.a. 35.4 0.7 0.5 26.5 11.5 n.a n.a n.a 1.2 Haier Electronics Group Co 1169 HK HKD 11.84 NR 10.1 9.3 1.6 1.4 5.6 5.1 1.1 1.2 17.2 16.1 Shenzhen Intl Holdings * 152 HK HKD 11.20 Outperform 10.7 10.2 1.1 1.1 9.9 10.9 2.7 4.0 10.9 10.8 Global Logistic Properties L ** GLP SP SGD 1.81 NR 25.3 22.8 0.7 0.7 31.5 27.8 2.8 3.3 4.9 3.2 Total Weighted average 17.6 16.3 19.8 13.7 8.4 7.9 2.2 2.4 98.1 109.9 High 27.7 35.4 36.1 24.2 31.5 27.8 6.5 7.6 175.3 198.0 Low 7.9 8.1 0.5 0.4 5.6 5.1 0.7 1.0 3.4 1.2 Median 14.5 14.5 1.3 1.3 10.5 10.7 2.5 2.6 10.7 10.8

Source: Bloomberg, *Daiwa forecasts Note: **Year-end 31 Mar, ***Year-end 31 Jan, ****Year-end 31 May, *****Year-end 30 Jun

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China Industrial Sector: 4 July 2016

Company sections Kerry Logistics Network (Kerry) (636 HK) 2016 likely to be another tough year Management previously had expected the trade flow to start picking up in 4Q16. However, the company is now more bearish as it believes clients are still very cautious and maintaining low levels of inventory with no plans to replenish. Overall, management expects its business landscape to remain tough for 2H16.

Performance could be dragged down by forex losses Kerry’s 1H16 earnings could be dragged down by the strong USD exchange rate, vs. the CNY, and the resulting translation losses for its China, Thailand, Vietnam and Europe businesses, etc. However, excluding the exchange rate impact, management still expects the company to achieve a low single-digit earnings growth rate.

US M&A completed, expecting more synergies The company completed the US acquisition of an international freight forwarder at the end of May 2016. Management believes the acquisition is important for Kerry as part of its global expansion plan. It now owns a sizable international freight-forwarding sales team in the US. And management expects the profitability of its international freight forwarding (IFF) business to improve for 2H16, on synergies from the merging of its existing and newly acquired businesses.

Land conversion to columbarium still under progress Kerry is still waiting to get a date from the Town Planning Department for its land conversion approval hearing to change a warehouse in Chai Wan, Hong Kong, into a columbarium. The company said it plans to provide 82,000 niches and that the conversion would help to unlock the value of the land, which currently has a yearly rental yield of only 3%. However, due to public resistance to the plan and the Legislative Council by-elections this year, we don’t expect Kerry to receive approval in the short term.

Valuation and recommendation We remain positive on the company's outlook given its vast service network and quality brand name, which allows the company to acquire and retain a high-end customer base. Though the 1H16 results may be weaker than we previously expected, its ongoing M&A activity should help to boost earnings. Hence, we reiterate our Outperform (2) rating on the stock with our SOTP-based 12-month target price of HKD11.80. The key risk to our call would be lower-than-expected logistics services demand.

Source: FactSe; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

SITC International Holdings (1308 HK) Volume growth expected in 1H16 In 5M16, both its shipping volume and land logistics volume rose by 4% YoY. The growth was likely driven by an increase in demand from the migration of its factory from China to ASEAN. However, its China-Korea and China-Japan trade declined by 15% YoY and 3% YoY, respectively, over the same period.

Management confident gross margin can improve According to management, the 5M16 freight rate declined by around 6% YoY due to lower fuel prices. However, due to the lower fuel cost and as it now owns more vessels, management guided that the 1H16 gross margin for its sea-freight logistics business would improve from 5.8% in 2015. It also expects increased contributions from its logistics parks (Ningbo and Haiphong) and custom-clearance services to result in a higher land logistics gross margin. Management guided that SITC’s overall gross margin would improve YoY in 1H16.

Low capex requirement may lead to higher dividend SITC has taken delivery of 2 new vessels and purchased 2 used vessels in 2016 YTD. In the coming 3-5 years, the company plans to expand through second-hand market purchases unless new-vessel prices decline significantly. Lower capex needs could lead to higher payouts, according to management. Given SITC’s strong cash flow, management will consider distributing an interim dividend instead of the usual special dividend after its 3Q16 results, which should boost positive sentiment on the stock as it would show management’s commitment to distributing consistently high dividends.

Valuation and recommendation We reiterate our Buy (1) rating and SOTP-based 12-month TP of HKD5.30. We believe strong 1H16 results and dividends would lead to a rerating of the stock. While the recent JPY appreciation YTD is likely to cost the company in terms of unexpected hedging losses, SITC believes that the positive revenue impact of a higher JPY should help to offset this loss. The key risks to our call would be slower-than-expected shipping volume and freight rate increases (see our flash note on 21 June 2016, “Strong execution may lead to outperformance.

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

Shenzhen International Holdings (152 HK) Toll-road business to see flat earnings contribution in 2016 Management expects its toll-road business’ contribution to the company’s overall bottom line to be flat YoY. And the contribution from its Guilong project may be small. In the long term, management said it is likely to use the proceeds from the sale of some of its toll roads previously to invest in other toll-road projects (such as the Outer Ring Road) and potentially in waste-water-treatment plants in Shenzhen, where it sees strong demand.

Likely lower contribution from logistics With the absence of contributions from the Huatongyuan and Shenzhen West logistics parks due to the redevelopment of the land, management expects profit contributions from its logistics business to decline YoY in 1H16. However, management said the company will try to speed up the redevelopment process in these 2 areas so that it can recognise revenue and profit from disposal gains in 2H16.

Airlines contribution should increase Due to the lower jet-fuel prices, the earnings contribution from Shenzhen Airlines should improve YoY in 2016, according to management. This would help to offset part of the expected logistics profit loss. However, if the CNY were to continue to depreciate against the USD (Daiwa’s economics team expects a 14% YoY depreciation by the end of 2016), the contribution would likely be negative instead. For every 1% depreciation in the CNY:USD exchange rate, we estimate that SZI’s net profit would decline by 8%.

Valuation and recommendation We expect the 1H16 results to be lacklustre. However, share-price catalysts could come from breakthroughs in terms of the development of its Qianhai and Huatongyuan projects. We reiterate our Outperform (2) rating on SZI, and have an SOTP-based 12-month target price of HKD14. The key risk to our call would be lower-than-expected toll revenue and contributions from its airline business.

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

Sinotrans (598 HK) Freight forwarding businesses still under pressure According to management, Sinotran’s sea freight and storage/terminal businesses recorded single-digit volume growth for the first 5 months of the year, while the logistics volume was up by more than 10% YoY — similar to the trend in 1Q16. Management said the gross margin may improve slightly in 1H16, despite the decline in revenue on the lower fuel surcharge. The peak season this year has been quiet, though the company said it had gained market share.

Logistics services growth intact In logistics services, Sinotrans recorded better YoY top-line growth compared with freight forwarding. Management believes that project logistics and energy logistics have had a leg up from China’s One Belt One Road initiative.

SInoAir-DHL JV weighed down by fuel-price rebound, but partly offset by Euro depreciation The net earnings contribution from the SinoAir-DHL JV declined by 1.2% YoY in 1Q16. Given a time lag in passing through higher fuel prices to customers, the profitability of the JV is affected as the cost (ie, network charge) from DHL is calculated based on a certain formula and thus any fuel price hike is passed through to Sinotrans immediately. However, the potential depreciation of the Euro post-Brexit would benefit SinoAir-DHL JV as the network charges is Euro denominated.

Asset injection process ongoing Sinotrans is still awaiting government approval for the planned asset injection from its parent, Sinotrans CSC Group. According to the company, the size of the assets would be lower than the previously expected CNY900m and the business scope would be similar to the current core business of freight forwarding and shipping agencies. There is no timetable for the potential merger of China Merchants Logistics (CML) with Sinotrans, but as Sinotran chairman Mr Zhao Huxiang already serves as the chairman of CML, management believes the 2 entities will merge in the long term.

Valuation and recommendation Our takeaway from the conference is that the business is performing mostly in line with our expectations, albeit with uncertainty over the contribution from the SinoAir-DHL JV. We believe the planned asset injection could be the next share-price catalyst. We reiterate our 12-month target price of HKD3.80 based on a 2016E PER of 11x, which represents a 13% discount to its peer and is in line with its past-3-year average. The major risk to our continued Outperform (2) rating would be lower-than-expected volume growth for freight forwarding, logistics services and SinoAir-DHL.

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

21

China Industrial Sector: 4 July 2016

NWS Holdings (659 HK) Infrastructure (61% of 2015 operating profit) In NWS Holdings’ infrastructure segment, roads accounted for the largest portion of attributable operating profit (AOP) in 2015, at 42%, followed by Ports & Logistics (40%) and Energy & Water (18%).

a) The roads AOP (of which Hangzhou, Zhuhai, Guanghzou and Tangjin combined accounted for 90%) was down by 8% YoY in 2015; but excluding CNY depreciation impact, the roads AOP would have been up by 12% YoY.

b) The company expects the other infrastructure segment to see stable AOP growth for 1H16, except for the energy segment (expiring concessionary rights for BOT energy projects). The company is looking for brownfield renewable energy projects, most likely in the wind arena.

c) In ports & logistics, the company has a 10.35% stake in Beijing Airport which it considers to be a long-term investment. The company sees upside to Beijing Airport’s non-aeronautical business. Management believes the construction of the new airport in Beijing could lead to upside in BCIA’s international traffic if more domestic traffic is diverted to the new airport.

d) As for aircraft leasing, NWS has a 40% stake in Goshawk Aviation, which has 67 aircraft currently (targeted to expand to more than 70 by end-June). The operation mainly services tier-1 and -2 budget airlines.

Services (39% of 2015 operating profit) The services segment includes duty-free shops, construction services, transportation and Hong Kong Convention and Exhibition Centre (HKCEC) facility management. The Glenagles HK Hospital project (in Wong Chuk Hang), with a total investment of HKD5bn and an estimated IRR of 10%, is targeted to open in early 2017.

Valuation NWS Holdings is trading at a 11.4x forward PER, based on Bloomberg consensus forecasts for 2016, which is largely in line with the stock’s past-5-year PER. NWS views itself as a defensive company with a solid dividend payout of more than 50%, representing a 5% dividend yield currently.

Changed pricing as of 30 June 2016

Source: Factset; based on pricing as of 30 June 2016

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China Industrial Sector: 4 July 2016

Marine Sector read-across Modest pick-up in Asia-Europe trade, but still weak overall According to our meeting with Orient Overseas International (OOIL) (316 HK, HKD26.55, Buy [1]), the company saw a pick-up in Asia-Europe trade during April and May compared with the 1Q16 performance, with a fairly stable freight rate on this route for the same period. We believe the slight pick-up in Asia-Europe trade stems from an increase in the idle rate and the likelihood of a large amount of scrapping this year amid pessimism in the industry. Still, in the aftermath of the Brexit decision, we believe the shipping industry will remain under pressure for the rest of the year.

China Containerized Freight Index (CCFI): 2014-YTDJune New Shanghai Containerized Index (SCFI): 2014-YTD June (Index) (Index) 1,900 6,000 1,700 5,000 1,500 4,000 1,300 3,000 1,100 2,000 900 700 1,000 500 0 Jul-14 Jul-15 Jul-14 Jul-15 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16 Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16 Feb-14 Mar-14 Feb-15 Mar-15 Feb-16 Mar-16 Mar-14 Mar-15 Mar-16 Feb-14 Feb-15 Feb-16 Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 May-14 May-15 May-16 May-14 May-15 May-16 Europe US EC Overall Index Overall Europe Mediterranean US WC Mediterranean USWC USEC Source: Shanghai Shipping Exchange Source: Shanghai Shipping Exchange Note: US WC = US West Coast, US EC = US East Coast Note: US WC = US West Coast, US EC = US East Coast

Global container shipping industry: demand and supply growth (2011-2017E) (YoY %) 10

8

6

4

2

0 2011 2012 2013 2014 2015 2016E 2017E Supply Demand Supply forecasts-Alphaliner Demand forecasts-Alphaliner Supply forecasts-Daiwa Demand forecasts-Daiwa Source: Alphaliner, Daiwa forecasts

Global container shipping industry: scrapping activities Global container shipping industry: idle fleet capacity

('000 TEU) (Year) (% of cellular fleet) 500 35 14 30 12 400 25 10 300 20 8 200 15 6 10 100 4 5 2 0 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 Scrapped unit Average age 2016 YTD Source: Alphaliner Source: Alphaliner

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China Industrial Sector: 4 July 2016

Global shipping peers: valuation comparison Name Bloomberg Trading Share price Rating PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 30-Jun-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E Hong Kong & China SITC International Holdings * 1308 HK HKD 4.06 Buy 1.5 1.4 7.5 6.4 6.5 7.6 16.4 17.9 Orient Overseas Intl Ltd * 316 HK HKD 26.35 Buy 0.4 0.4 5.6 5.4 6.4 6.6 6.1 6.3 China Shipping Container-H * 2866 HK HKD 1.60 NR 0.7 0.7 17.6 14.8 0.3 0.7 1.4 4.8 China Cosco Holdings-H 1919 HK HKD 2.73 NR 1.1 1.2 25.8 27.7 n.a. n.a. n.a n.a China Shipping Development-H 1138 HK HKD 4.37 NR 0.5 0.5 13.3 12.7 3.4 3.4 6.4 5.2 Sinotrans Shipping Ltd 368 HK HKD 1.23 NR 0.3 0.3 4.0 1.8 1.9 1.9 n.a 0.8 Pacific Basin Shipping Ltd 2343 HK HKD 0.73 NR 0.3 0.3 11.8 8.2 n.a. 4.3 n.a n.a China Cosco Holdings-A 601919 CH CNY 5.08 NR 2.5 2.6 80.1 24.9 n.a. n.a. n.a n.a China Shipping Container-A 601866 CH CNY 3.96 NR 2.0 1.9 17.3 13.8 0.1 0.2 2.2 5.1 Asia Neptune Orient Lines Ltd NOL SP SGD 1.30 NR 1.2 1.2 18.4 11.4 n.a. 0.6 n.a n.a Misc Bhd MISC MK MYR 7.46 NR 0.9 0.9 8.3 7.8 2.9 2.9 7.7 7.3 Thoresen Thai Agencies Pcl *** TTA TB THB 9.05 NR n.a. n.a. 6.7 5.2 0.4 1.2 1.4 3.7 Precious Shipping Pcl PSL TB THB 6.35 NR 0.7 0.7 24.7 14.1 n.a. 1.1 n.a n.a Regional Container Line Pcl RCL TB THB 5.85 NR 0.5 n.a. 5.1 5.0 2.3 3.2 2.8 n.a. Evergreen Marine Corp Ltd 2603 TT TWD 11.95 NR 0.8 0.8 37.5 15.8 0.1 1.4 n.a n.a Yang Ming Marine Transport 2609 TT TWD 7.85 NR 0.9 1.0 n.a. 14.7 n.a. 0.8 n.a n.a Wan Hai Lines Ltd 2615 TT TWD 17.80 NR 1.0 n.a. 8.2 5.2 1.6 4.8 10.1 n.a. U-Ming Marine Transport Corp 2606 TT TWD 24.85 NR 0.8 n.a. 13.9 9.4 0.5 4.0 0.4 n.a. Hyundai Merchant Marine 011200 KS KRW 14700.00 NR n.a. n.a. n.a. 29.9 n.a. n.a. n.a n.a Hanjin Shipping Co Ltd 117930 KS KRW 2005.00 NR 0.8 0.9 19.3 14.5 n.a. n.a. n.a n.a Mitsui Osk Lines Ltd ** 9104 JP JPY 216.00 NR 0.4 0.4 14.5 13.7 2.1 1.9 n.a 3.8 Nippon Yusen ** 9101 JP JPY 179.00 NR 0.4 0.4 6.8 8.1 3.5 2.4 3.7 1.9 Kawasaki Kisen Kaisha Ltd ** 9107 JP JPY 240.00 NR 0.5 0.7 8.6 10.2 2.1 0.6 n.a n.a Global Ap Moeller-Maersk A/S-B MAERSKB DC DKK 8705.00 NR 0.8 0.7 5.0 4.4 3.4 3.6 4.2 6.3 Shipping related business China International Marine Container -H 2039 HK HKD 9.54 NR 0.7 0.7 11.1 10.1 2.3 2.5 6.3 6.9 China International Marine Container -A 000039 CH CNY 14.17 NR 1.3 1.3 11.7 10.6 1.3 1.3 6.4 7.0 Singamas Container Holdings 716 HK HKD 0.74 NR 0.4 0.4 9.4 8.7 2.1 1.0 1.4 1.7 Total Weighted average 1.0 1.0 16.3 11.3 2.0 2.2 3.5 4.3 High 2.5 2.6 80.1 29.9 6.4 6.6 10.1 7.3 Low 0.3 0.3 4.0 1.8 0.1 0.2 0.4 0.8 Median 0.7 0.7 11.7 10.4 2.1 1.9 4.0 5.1

Source: Bloomberg, *Daiwa forecasts Note: **Year ended 31 Mar, ***Year ended 30 Sept

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China Industrial Sector: 4 July 2016

Company section Orient Overseas International (316 HK) Encouraging YTD trade volume growth According to management, most trade routes have shown a recovery to varying degrees. For example, Transpacific Eastbound trade volume grew by 3.9% YoY in May YTD, compared with 3.6% YoY in 2015. Trans-Atlantic Westbound trade also improved, rising by 5.8% YoY in April YTD, compared with 4.7% YoY in 2015. However, Intra Asia trade flow grew by only 1.4% YoY in April YTD, trailing growth of 2.4% in 2015. Perhaps the biggest surprise was from Asia Europe Westbound trade, which was up by 2.5% YoY in April YTD, compared with a 3.2% YoY decline in 2015. Although management did not characterise these growth rates as very exciting, the data does at least provide a hint that the industry may be bottoming out.

Supply now more under control Management revealed that YTD new ship orders show that vessel delivery for the period 2015 to 2018 is gradually slowing. Further, the YTD ship scrapping stands at 250,000 TEUs, which has surpassed the full-year figure for 2015. The idle ship ratio stood at 5.1% in May 2016, a recent high which suggests that some vessels may be awaiting scrapping. Management believes that all these factors signal that capacity growth is much milder now than in 2015.

Reshuffling of shipping alliance OOIL has signed an MOU to from a new shipping alliance, namely OCEAN Alliance, with CMA CGM, COSCO and Evergreen. Management expects the new alliance to kick off in 2Q17, subject to regulatory approval. It also expects other shipping companies to form a new alliance in response, and the number of global shipping alliances to fall ultimately to 3 (from 4 currently).

LBCT commenced operations OOIL’s fully automated Long Beach Container Terminal (LBCT) handled its first ship in April 2016. The project is scheduled to be completed in 2020, by which time management expects it to enhance the company’s EBIT margin by 1pp through cost savings.

Valuation and recommendation We consider management’s update to be encouraging, with recent industry data suggesting that the industry outlook is better than the market had expected. If this trend persists for the remainder of 2016, we would expect it to be a share-price catalyst for OOIL. At the same time, we believe the stock’s prevailing 2016-17E PBR multiples of 0.4x are attractive. Hence, we reaffirm our Buy (1) rating on the stock with a 12-month target price of HKD38, based on a 2016E PBR of 0.6x. The major risks to our call would be lower-than-expected trade volumes and increases in freight rates.

Source: FactSet; based on pricing as of 30 June 2016 Source: FactSet, Daiwa forecasts

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China Industrial Sector: 4 July 2016

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; John HETHERINGTON (852) 2773 8787 [email protected] Shipbuilding; Steel Regional Deputy Head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Banking; Capital Goods (Construction and Machinery) Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Kevin LAI (852) 2848 4926 [email protected] Consumer/Retail Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Jonas KAN (852) 2848 4439 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Head of Hong Kong and China Property Thomas Y KWON (82) 2 787 9181 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Property (China) Kevin JIN (82) 2 787 9168 [email protected] Leon QI (852) 2532 4381 [email protected] Small/Mid Cap Banking (Hong Kong/China); Broker (China); Insurance (China) Yan LI (852) 2773 8822 [email protected] TAIWAN Banking (China) Rick HSU (886) 2 8758 6261 [email protected] Anson CHAN (852) 2532 4350 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Consumer (Hong Kong/China) (Regional) Adrian CHAN (852) 2848 4427 [email protected] Christie CHIEN (886) 2 8758 6257 [email protected] Consumer (Hong Kong/China) Banking; Insurance (Taiwan); Macro Economics (Regional) Jamie SOO (852) 2773 8529 [email protected] Steven TSENG (886) 2 8758 6252 [email protected] Gaming and Leisure (Hong Kong/China) IT/Technology Hardware (PC Hardware) Dennis IP (852) 2848 4068 [email protected] Christine WANG (886) 2 8758 6249 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer John CHOI (852) 2773 8730 [email protected] Kylie HUANG (886) 2 8758 6248 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap IT/Technology Hardware (Handsets and Components) Kelvin LAU (852) 2848 4467 [email protected] Helen CHIEN (886) 2 8758 6254 [email protected] Head of Automobiles; Transportation and Industrial (Hong Kong/China) Small/Mid Cap Brian LAM (852) 2532 4341 [email protected] Transportation – Railway; Construction and Engineering (China) INDIA Thomas HO (852) 2773 8716 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Custom Products Group Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] PHILIPPINES Capital Goods; Utilities Patricia Tamase (63) 2 797 3024 [email protected] Banking SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Banking; Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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China Industrial Sector: 4 July 2016

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Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: econtext Asia Ltd (1390 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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

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

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

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

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

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

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

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 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.

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

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the conduct of business in Germany.

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

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).

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

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

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

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

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

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* 66.9% Hold** 19.7% Sell*** 13.5% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 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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