Pan Asia Research www.equities.htisec.com Target Price HK$9.70 Distributed by Societe Generale and its affiliates Current Price HK$5.50 TCL Communication Technology Holdings (2618 HK) % Upside 76% Share Price Correction Overdone

Technology Hardware  Lowering Earnings and Target Price Hong Kong Summary: We believe TCL Communication Technology Holdings’ (TCLC’s) recent share 7 Aug 2015 price weakness has more than factored in market concerns about a smartphone demand slowdown in overseas emerging markets as well as the possibility of the company falling short of its guided 30% YoY sales growth in FY15 and perhaps needing to revise down this guidance. With a forward PER of just 5x on our reduced forecasts and 5x on consensus BUY forecasts, and a forward dividend yield of 8–9%, we believe TCLC has emerged as one of

Target: HK$9.70 the best dividend plays in the Hong Kong-listed technology hardware space. We reiterate % Upside: 76% our BUY rating given TCLC’s strong exposure to overseas emerging-markets, where we believe smartphone growth should continue to outpace that in China over the next couple of years. We also think the company’s non-hardware business could emerge as a 52wk Low HK$5.50 52wk High HK$5.50 (0%) 06 Aug 2015 HK$10.52 (91%) new earnings driver in the next 2–3 years. Potential cooperation and alliances with

Unchanged leading Chinese Internet companies could help boost the stock’s valuation in the medium term, although the earnings contributions from such initiatives may come later.

Target Price and Catalyst: We have lowered our FY15–17 earnings forecasts by 7–12% Basic Share Information and have cut our target price from HK$11.00 to HK$9.70 based on a fair PER of 9x a Market cap HK$6.93b / US$0.89b blend of our FY15–16 EPS forecasts (we previously saw fair value at 12x our prior FY15 Daily volume (3mth) US$3.75m EPS estimate). Near-term positive catalysts for the share price include stronger Shares outstanding 1,193m smartphone shipment growth in H2 FY15 than we currently expect. Free float 33.32%

Net debt-to-equity 27.1% Earnings: We believe Q2 FY15 sales increased 22% YoY to HK$8.1bn thanks to the 1 yr high HK$10.52 continued migration from feature phones to smartphones. Our sales forecast for Q2 is in 1 yr low HK$5.50 line with the consensus estimate. We forecast Q2 gross margin was similar to that in Q1 Major shareholding 62% despite continued price pressure as we believe TCLC has been able to adjust its product Last HTI contact w/ Co 10 Jul 15 mix to mitigate this pressure to some extent. Our Q2 gross margin estimate is higher NoteL Share price and market data as of 6 August 2015. than the consensus figure of 18.9%. We also think operating leverage increased in Q2, leading to a further reduction in operating costs as a percentage of sales QoQ. Overall, Price/Volume we project Q2 NP rose 7% YoY to HK$271mn, slightly ahead of the consensus estimate.

Price Close Rel. to Hang Seng Index (rhs) For full-FY15, we forecast sales growth of 23% YoY, followed by increases of 13% YoY in 10.9 110.0 9.9 100.0 FY16 and 10% YoY in FY17, as the continued migration to smartphones drives both 8.9 90.0 7.9 80.0 volumes and blended selling prices upward. We see net margin slipping from 3.6% in 6.9 70.0 5.9 60.0 FY14 to 3.2% in FY15–16 and to 3.1% in FY17. 4.9 50.0 40 30 20 Valuation: Our target price of HK$9.70 is based on 9x the average of our FY15 and FY16 10 Volume m Volume EPS estimates. We forecast a CAGR for earnings of 9.0% for FY16–17, which translates Aug-14 Nov-14 Feb-15 May-15 into a PEG ratio of 1x. Our target PER of 9x is in line with TCLC’s historical trading mean. Source: Bloomberg We expect TCLC to maintain a dividend-payout ratio above 40% through FY17.

1mth 3mth 12mth Absolute -12.2% -31.7% -46.3% Absolute USD -12.2% -31.7% -46.3% Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E Trend Relative to HSI -8.8% -19.9% -45.4% Total turnover (HK$m) 19,362 30,691 37,750 42,657 46,923 Operating profit (HK$m) 50 772 944 1,066 1,173 Pre-tax profit (HK$m) 298 1,149 1,334 1,467 1,584 Jones Ku Net income to ord equity (HK$m) 313 1,093 1,226 1,349 1,458 Haitong International Research Ltd Net profit growth na 248.6% 12.2% 10.1% 8.0% [email protected] P/E (x) 20.00 6.01 5.35 4.86 4.50 Lily Xu Adj EV/EBITDA (x) 5.53 3.48 2.85 2.32 1.86 P/B (x) 2.15 1.60 1.37 1.18 1.03 Haitong International Research Ltd ROE 12.0% 31.2% 27.6% 26.1% 24.5% [email protected] Dividend yield 1.9% 7.2% 8.1% 8.9% 9.6%

EPS HTI New (HK$) 0.28 0.92 1.03 1.13 1.22 Local Knowledge, Global Reach Consensus EPS (HK$) 0.25 0.89 1.01 1.10 1.19 Tokyo Office (81) 3 6402 7620 HTI EPS vs Consensus 11.4% 2.9% 1.9% 3.0% 2.6% London Office (44) 20 7397 2700 Source: Company data, Bloomberg, HTI estimates Click here to download the working model Hong Kong Office (852) 2899 7090

This research is the product of Haitong International Research Limited (“HTIRL”), which is authorized and regulated by the Securities and Futures Commission (“SFC”) of Hong Kong. It is issued by HTIRL and distributed by Société Générale (“SG”) and its affiliates in their respective jurisdictions. See the Appendix at the end of this document for the HTIRL analyst certification and non-US HTIRL analyst disclosure, Important Disclosures and Disclaimers regarding HTIRL and SG and DistributionThis document and Regional was forwardedNotices which by include JONES SG’s KU EU (HAITONGregulators in theINTERNATIONAL) “Notice to UK Investors”. and is currently being read by LILY XU (HaitongPowered by International) EFA Platform TCL Communication Technology Holdings (2618 HK) Buy

Valuation

P/E (x) vs EPS Growth 800 10,000% 700 8,500%  Investment Thesis 600 7,000% 500 5,500% 400 4,000% 300 2,500% 200 1,000% Buy 100 -500% 0 -2,000%

 We believe TCLC’s recent share price weakness has more than factored in market

Jul-12 Jul-13 Jul-14 Jul-15

Jan-13 Jan-14 Jan-15 Jan-12 concerns about a smartphone demand slowdown in overseas emerging markets, as Rolling P/E (x) (lhs) EPS growth (rhs) Source: Company data, Bloomberg, HTI estimates well as the possibility of the company falling short of its guided 30% YoY sales growth

Earnings Trends in FY15 and perhaps needing to revise down this guidance. 2,000%  With a forward PER of just 5x on our reduced forecasts and 5x on consensus estimates 1,500% 1,000% as well as a forward dividend yield of 8–9%, we believe TCLC has emerged as one of 500% the best dividend plays in the Hong Kong-listed technology hardware space. 0%

 We expect TCLC to continue to benefit from its strong exposure to overseas emerging-

Dec-15E

Dec-13A Dec-14A Revenue growth Operating profit growth markets, where we believe smartphone growth should continue to outpace that in Net profit growth EPS growth China over the next couple of years. Source: Company data, Bloomberg, HTI estimates  The company’s non-hardware business could emerge as a new earnings driver should Earnings: HTI vs Consensus it start to bear fruit over the next 2–3 years. 0% 1% 1% 2% 2% 3%  Potential cooperation and alliances with leading Chinese Internet companies could HTI EPS HTI vs Consensus help boost the stock’s valuation over the medium term, although the earnings (top) contributions from such initiatives may come later. Consensus EPS  Vivek Misra of Societe Generale noted in his Asia Equity Compass, published on 21 0.99 1 1.01 1.02 1.03 -2% -2% -1% -1% 0% July 2015, that Hong Kong-listed Chinese shares had not rallied as much as onshore listed stocks during the past year's run-up, and he expects that they might now HTI P/E outperform their mainland peers. We believe such a trend could help TCLC's stock HTI P/E at Target outperform the market. HTI vs Consensus Consensus P/E (top)

0 2 4 6 8 10 Source: Company data, Bloomberg, HTI estimates

FY15 Sales Breakdown

 Company Snapshot TCL Communication Technology Holdings (TCLC) was founded in 2004 as a subsidiary of TCL Industrial Holdings (unlisted) and listed on the Hong Kong Stock Exchange in 2004. The company is a global mobile communications vendor that manufactures and markets feature phones and smartphones. TCLC produces handsets under the brands TCL and

Source: HTI estimates Alcatel OneTouch, distributes mobile phone components, and manufactures fixed-line telephone products. It also develops software for mobile handsets. TCLC derives most of its sales from overseas markets, which accounted for 90% of its total sales in FY14.

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 Key Investment Metrics  Revenue Growth We forecast sales growth of 23% YoY in FY15, 13% YoY in FY16, and 10% YoY in FY17, mainly as the continued migration to smartphones drives up volume and blended selling prices. We see TCLC’s smartphone shipments increasing 33% YoY in FY15, 18% YoY in FY16 and 13% YoY in FY17.  Profit Margins We expect gross margin to dip from 19.3% in FY14 to 19.1% in FY15 and to 19.0% in FY16– 17 on increasing price pressure for both smartphones and feature phones. Despite some improvement in operating leverage, we see net margin falling from 3.6% in FY14 to 3.2% in FY15–16 and to 3.1% in FY17.  Shareholder Returns We expect ROE to decline from 31.2% in FY14 to 27.6% in FY15, to 26.1% in FY16 and to 24.5% in FY17 as price pressure causes margins to shrink. Nevertheless, this ROE is still well above the average ROE in the mid-teens for the company’s domestic smartphone peers as TCLC enjoys a much higher gross margin for its smartphones thanks to its greater overseas exposure.  Balance Sheet Risks We expect the balance sheet to remain healthy despite the company being in a net debt position (we project a net debt-to-equity ratio of 13.0% in FY15). We expect the company to move into a net cash position thereafter with the net debt-to-equity ratio moving to -1.2% in FY16 and to -13.0% in FY17 thanks largely to increasing cash flows from the core business.

 Barriers to Entry TCLC is one of the top 10 smartphone brands globally. The barriers to entry are relatively high for new players in this space as they would lack brand awareness among consumers, they would likely have insufficient scale to be competitive, and they would not have established relationships with operators, retail channels or supply-chain companies. TCLC’s patents also represent a barrier to entry.  Asia Exposure TCLC’s sales in Asia are relatively low, with the Asia-Pacific region including China only accounting for about 17% of total sales in 2014. However, we believe the company’s Asia exposure could trend up on increasing sales in the China market, which accounted for 13% of total Q1 FY15 sales (up from 9% in FY14).  FX Exposure TCLC has high forex exposure given its strong presence in overseas markets, including several emerging markets. The company has exposure to a variety of currencies including the EUR, USD, BRL, RUB, GBP, MYR and CNY and has entered into various forward currency contracts to hedge its forex exposure.  Corporate Governance TCLC has relatively strong corporate governance in our view. The company has become a global brand since the acquisition of the Alcatel brand and has retained most of the latter’s key personnel. TCLC strives to achieve high standards of corporate governance in order to maintain its favorable corporate and brand images.

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Our Model Assumptions Profit & Loss (HK$m) Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E Total turnover 19,362 30,691 37,750 42,657 46,923

We project sales growth of Cost of sales (15,690) (24,774) (30,540) (34,553) (38,031)

23% YoY in FY15, 13% YoY in Gross profit 3,672 5,918 7,210 8,105 8,892

FY16 and 10% YoY in FY17 Total operating costs (3,622) (5,146) (6,266) (7,038) (7,719) Operating profit 50 772 944 1,066 1,173 Operating EBITDA 1,186 2,124 2,431 2,703 2,973 We forecast gross margin Depreciation and amortisation (1,136) (1,352) (1,488) (1,636) (1,800) declines from 19.3% in FY14 to Operating EBIT 50 772 944 1,066 1,173 19.1% in FY15 and to 19.0% in Net income from investments (2) (0) - - - FY16–17 Other recurring income 242 408 410 410 410 Interest income 113 69 80 90 100 Interest expense (105) (100) (100) (100) (100) We expect operating costs as Pre-tax profit 298 1,149 1,334 1,467 1,584 a percentage of sales to dip Taxation 18 (41) (93) (103) (111) from 16.6% in FY15 to 16.5% Minority interests (3) (15) (15) (15) (15) in FY17 thanks to an increase Net income to ord equity 313 1,093 1,226 1,349 1,458 Source: Company, HTI estimates in operating leverage

The effective tax rate should be stable at around the 7% level over our forecast period

Low Medium High

We forecast sales growth of 23% YoY in FY15, 13% YoY in FY16, and 10% YoY in FY17,  Key P/L Takeaway mainly as the continued migration to smartphones drives up volume and blended selling We expect NP to rise 12% YoY prices. We see TCLC’s smartphone shipments increasing 33% YoY in FY15, 18% YoY in FY16 in FY15, 10% YoY in FY16 and and 13% YoY in FY17. 8% YoY in FY17 thanks to top- We expect gross margin to dip from 19.3% in FY14 to 19.1% in FY15 and to 19.0% in FY16– line growth and stable OPM 17 on increasing price pressure for both smartphones and feature phones. Despite some improvement in operating leverage, we see net margin falling from 3.6% in FY14 to 3.2% in FY15–16 and to 3.1% in FY17.

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Our Model Assumptions Balance Sheet (HK$m) Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E Total cash and equivalents 1,933 2,807 3,306 4,010 4,781 Inventories 2,649 3,293 4,060 4,593 5,056 Accounts receivable 6,036 8,244 10,140 11,458 12,604 We assume an inventory Other current assets 1,248 1,661 1,635 1,478 1,300 period of 44–46 days through Total current assets 11,866 16,006 19,141 21,540 23,741 FY17 Tangible fixed assets 1,070 1,598 1,758 1,934 2,127 Intangible assets 1,210 1,514 1,514 1,514 1,514 We project an accounts Total investments 82 281 281 281 281 receivable period of 89–94 Total other assets 195 298 366 414 455 days during FY15–17 Total non-current assets 2,557 3,691 3,919 4,142 4,377 Total assets 14,423 19,696 23,060 25,682 28,118 Short-term debt 2,205 3,941 3,941 3,941 3,941 Over our forecast period, we Accounts payable 3,875 5,167 6,369 7,206 7,932 anticipate an accounts payable Other current liabilities 5,141 6,300 7,767 8,788 9,672 period of 69–73 days Total current liabilities 11,221 15,408 18,077 19,935 21,545 Total long-term debt 196 - - - - Other liabilities 93 109 109 109 109 We expect TCLC’s debt level to Total non-current liabilities 289 109 109 109 109 be stable through to FY17 Total liabilities 11,510 15,517 18,186 20,044 21,654 Common stocks 1,097 1,211 1,211 1,211 1,211 Other reserves 1,813 2,878 3,572 4,337 5,163 Shareholders' equity 2,909 4,089 4,784 5,548 6,374 Minority interests 4 90 90 90 90 Other equity 0 - 0 0 0 Total equity 2,913 4,179 4,874 5,638 6,465 Total liabilities & shareholders' equity 14,423 19,696 23,060 25,682 28,118 Source: Company, HTI estimates

 Key B/S Takeaway We expect the balance sheet to remain healthy despite the company being in a net debt We forecast shareholders’ position (we project a net debt-to-equity ratio of 13.0% in FY15). The company should equity grows 15–17% annually move into a net cash position thereafter with the net debt-to-equity ratio of -1.2% in FY16 over our investment horizon and -13.0% in FY17 thanks largely to increasing cash flows from the core business. supported by earnings growth

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Our Model Assumptions Cash Flow (HK$m) Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E Operating profit 50 772 944 1,066 1,173

We believe operating cash Depreciation and amortisation 1,136 1,352 1,488 1,636 1,800 Changes in working capital 132 (1,140) 33 163 179 flow should remain positive Other operating cash flow 265 321 282 283 285 during FY15–17 thanks to cash Operating cash flow 1,582 1,305 2,747 3,148 3,437 generation by the core Cash flow from operations 1,582 1,305 2,747 3,148 3,437 business Capex (1,431) (1,881) (1,648) (1,812) (1,994) Other investing cash flow (154) (605) (68) (48) (41) We expect capex to increase Cash flow from investing activities (1,585) (2,486) (1,716) (1,860) (2,035) through FY16–FY17 as the Increase in debt (3,625) 1,556 - - - company looks to meet its Other financing cash flow 277 174 (531) (585) (632) Cash flow from financing activities (3,348) 1,729 (531) (585) (632) production needs Cash at beginning of period 5,191 1,840 2,388 2,887 3,591 Total cash generated (3,351) 548 499 704 771 Other than capex, we do not Implied cash at end of period 1,840 2,388 2,887 3,591 4,362 anticipate any major changes Free cash flow 151 (576) 1,099 1,336 1,444 in investment cash flow Source: Company, HTI estimates through FY17

We also do not foresee any major change in debt levels during FY15–17

Overall, we believe TCLC is likely to maintain a healthy cash position, with operating cash  Key Cash Flow Takeaway flow remaining strong and capex manageable. As such, we do not expect the company to TCLC should generate positive turn to any equity or debt financing over the medium term unless there are major M&A free cash during FY15–17 opportunities that would be beneficial to its prospects. We expect the company to supported by increased maintain a dividend payout ratio above 40% through FY17. operating cash flow and manageable capex

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Our Model Assumptions Per Share Data Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E EPS (HK$) 0.28 0.92 1.03 1.13 1.22 We forecast EPS growth of FDEPS (HK$) 0.27 0.88 1.03 1.13 1.22 12% YoY in FY15, 10% YoY in Revenue per share (HK$) 16.99 25.73 31.64 35.76 39.33 FY16 and 8% YoY in FY17 Operating EBITDA per share (HK$) 1.04 1.78 2.04 2.27 2.49 BVPS (HK$) 2.55 3.43 4.01 4.65 5.34 DPS (HK$) 0.10 0.40 0.45 0.49 0.53 We expect management to Recurrent cash flow per share (HK$) 1.39 1.09 2.30 2.64 2.88 maintain the dividend payout Shares in issue (million) 1,140 1,193 1,193 1,193 1,193 ratio above 40% throughout Year end adjusted shares in issue (m) 1,140 1,193 1,193 1,193 1,193 our forecast period Key Ratios Dec-13A Dec-14A Dec-15E Dec-16E Dec-17E Valuation Measures P/Sales (x) 0.32 0.21 0.17 0.15 0.14 We assume no change in the P/E (x) 20.00 6.01 5.35 4.86 4.50 number of shares outstanding P/CF (x) 3.96 5.03 2.39 2.08 1.91 during FY15–17 P/B (x) 2.15 1.60 1.37 1.18 1.03 Adj EV/EBITDA (x) 5.53 3.48 2.85 2.32 1.86 Dividend yield 1.9% 7.2% 8.1% 8.9% 9.6% The dividend yield should rise Growth on earnings growth and a Revenue growth 60.9% 58.5% 23.0% 13.0% 10.0% Operating profit growth na 1430.5% 22.3% 13.0% 10.0% stable payout ratio Net profit growth na 248.6% 12.2% 10.1% 8.0% Margins Gross margin 19.0% 19.3% 19.1% 19.0% 19.0% Operating EBITDA margin 6.1% 6.9% 6.4% 6.3% 6.3% Operating margin 0.3% 2.5% 2.5% 2.5% 2.5% Pretax profit margin 1.5% 3.7% 3.5% 3.4% 3.4% Tax rate (6.0%) 3.6% 7.0% 7.0% 7.0% Net profit margin 1.6% 3.6% 3.2% 3.2% 3.1% Key Ratios ROE 12.0% 31.2% 27.6% 26.1% 24.5% ROA 2.3% 6.4% 5.7% 5.5% 5.4% Capex/revenue 7.4% 6.1% 4.4% 4.2% 4.2% Current ratio (x) 1.06 1.04 1.06 1.08 1.10 Creditor days 73.32 66.61 68.94 71.70 72.64 Debtor days 87.76 84.91 88.88 92.40 93.59 Inventory days 45.51 43.78 43.94 45.70 46.30 Sales/avg assets 1.40 1.80 1.77 1.75 1.74 Credit analysis EBITDA/interest paid (x) 11.30 21.35 24.43 27.16 29.88 OCF/interest paid (x) 15.07 13.11 27.60 31.64 34.54 Debt/EBITDA (x) 2.02 1.86 1.62 1.46 1.33 Debt/equity 82.4% 94.3% 80.9% 69.9% 61.0% Net debt to equity 16.1% 27.1% 13.0% (1.2%) (13.0%) Source: Company, HTI estimates

We assume ROE declines from 31.2% in FY14 to 27.6% in FY15, to 26.1% in FY16 and to  Key Driver Takeaway 24.5% in FY17 as price pressure causes margins to shrink. Nevertheless, TCLC’s ROE is still We expect the balance sheet well above the average ROE in the mid-teens for the company’s domestic smartphone to remain healthy over the peers as it enjoys a much higher gross margin for its smartphones thanks to its greater next few years, with the overseas exposure. company’s key ratios reflecting its financial strength

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Company Outline and Operational Review We reiterate our BUY rating but We believe TCLC’s recent share price weakness has more than factored in market concerns revise down our FY15–17 earnings about a smartphone demand slowdown in overseas emerging markets as well as the forecasts by 7–12% and lower our possibility of the company falling short of its guided 30% YoY sales growth in FY15 and target price to from HK$11.00 to perhaps needing to revise down this guidance. With a forward PER of just 5x on our HK$9.70 reduced forecasts and 5x on consensus estimates, and a forward dividend yield of 8–9%, we believe TCLC has emerged as one of the best dividend plays in the Hong Kong-listed technology hardware space. We reiterate our BUY rating given TCLC’s strong exposure to overseas emerging markets, where we believe smartphone growth should continue to outpace that in China over the next couple of years. We also think the company’s non- hardware business could emerge as a new earnings driver in the next 2–3 years. Potential cooperation and alliances with leading Chinese Internet companies could help boost the stock’s valuation in the medium term, although the earnings contributions from such initiatives may come later. We have lowered our FY15–17 earnings forecasts by 7–12% and have cut our target price from HK$11.00 to HK$9.70 based on a fair PER of 9x a blend of our FY15–16 EPS forecasts (we previously saw fair value at 12x our prior FY15 EPS estimate). Near-term positive catalysts for the share price include stronger smartphone shipment growth in H2 FY15 than we currently expect

HTI Sales and Earnings Forecasts for TCLC HKD mn 2015E 2016E 2017E New Old Diff New Old Diff New Old Diff Sales 37,750 39,898 -5.4% 42,657 47,080 -9.4% 46,923 52,730 -11.0%

Gross profit 7,210 7,541 -4.4% 8,105 8,851 -8.4% 8,892 9,913 -10.3% Gross margin 19.1% 18.9% 19.0% 18.8% 19.0% 18.8%

Operating profit 944 1,077 -12.4% 1,066 1,318 -19.1% 1,173 1,476 -20.5% Operating margin 2.5% 2.7% 2.5% 2.8% 2.5% 2.8%

Net profit 1,226 1,322 -7.3% 1,349 1,525 -11.5% 1,458 1,652 -11.8% Net margin 3.2% 3.3% 3.2% 3.2% 3.1% 3.1%

EPS (HKD) 1.03 1.11 -7.3% 1.13 1.28 -11.5% 1.22 1.38 -11.8% Source: HTI estimates

Dividend Play at the Current Level We see little downside to the share TCLC’s share price has decreased about 40% from its recent high and we believe the price from current levels thanks to current forward PER of just 5x on our reduced earnings forecasts and 5x on consensus the high dividend yield estimates is attractive (the company’s 3-year historical mean PER is about 8x). The dividend yield of 8–9% is among the highest for Hong Kong-listed smartphone and component companies. Given this high dividend yield and attractive valuation, downside for TCLC’s share price seems limited from here. The share price has remained firm despite the overall market weakness over the past 1–2 weeks. We see TCLC as an option in the Hong Kong listed technology hardware space for investors seeking stocks with high dividend income and cheap valuation and that are relatively defensive in the current volatile market.

Strong Overseas Market Exposure to Drive Growth and Help Sustain Margins We expect heavy overseas market We believe TCLC’s strong exposure to overseas markets should continue to drive its top- exposure to help drive top-line line growth over the next few years. Frost & Sullivan, an independent data firm, forecasts growth and sustain relatively high CAGR for smartphone shipments in emerging markets excluding China of 16% during 2015– gross margins 19, following the CAGR of 52% over 2010–14, on the continued migration from feature phones to smartphones. We estimate that overseas emerging markets account for about

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60% of TCLC’s sales and expect this percentage to trend up. Overall, we project TCLC’s overseas sales exposure accounts for about 85% of its total sales over our forecast period, despite growth in the China business that has been coming from a relatively low base. The company’s high overseas sales exposure should help it sustain gross margin well above the level seen by Chinese smartphone makers. On our estimates, gross margin for TCLC’s overseas smartphones is about 19%. This compares with gross margin for smartphones of other makers with similar specifications of only 10–13% in China, where competition is keener.

Smartphone Shipments in Emerging Markets, Excluding China (mn units)

1,400 Title: Source: 1,200 1,151.9 1,044.3 1,000 923.4 794.0 800 665.5 Please fill in the values above to have them entered in your report

600 534.1 391.0 400 253.1 166.6 200 101.5

0 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Source: Frost & Sullivan

TCLC Sales Breakdown by Region (%) TCLC Sales Breakdown by Product (%)

100 100 Title: Title: 7.3 9.4 5.0 4.0 90 12.5 14.0 14.7 8.0 Source: Source: 7.6 7.2 2.5 2.0 90 15.0 80 1.8 70 80 36.4 60 45.0 51.7 58.0 70 50 59.0 59.0 40 60 Please fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in your report 30 50 20 40.1 92.0 95.0 96.0 31.7 85.0 10 27.0 25.0 24.5 40 0 30 63.6 FY13 FY14 FY15E FY16E FY17E 20 10 China 0 Asia Pacific FY13 FY14 FY15E FY16E FY17E Americas Europe, Middle East and Africa Smartphones Featurephones

Source: Company data, HTI estimates Source: Company data, HTI estimates

Non-Hardware Income Could Become New Earnings Driver We expect TCLC’s ‘Double +’ TCLC has also been actively building a mobile ecosystem. The contribution of this business strategy to start to bear fruit over to sales and earnings is currently small. Nevertheless, we think non-hardware income the next couple years including service fees, smart home initiatives and pre-loaded app activation fees could become a significant new income source for the company in the future. The company has been adopting a ‘Double +’ strategy (i.e., ‘Smart + Internet’ and ‘Product + Service’) as the main direction of its business transformation. This strategy includes the following:

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 The formation of a joint venture with parent TCL Corp. (000100 CH, Rmb5.10, NR) and TCL Multimedia Technology (1070 HK, HK$4.00, NR) to launch the Smart Home Project and enter the Internet of Things business.  Launching a mobile self-service health care app that integrates a variety of mobile health care resources.  Teaming up with TCL Corp. and Cisco (CSCO US, US$28.21, NR) to establish an enterprise cloud service platform that provides domestic enterprises and individual users with video communications services. Overall, we believe this is an appropriate direction for TCLC. With the cooperation and support of TCLC’s group companies, we think these initiatives could start to bear fruit for TCLC over the next couple years.

China Business to Grow and More Cooperation with Internet Firms Possible We believe cooperation and TCLC and TCL Corp. have established Momoda (unlisted) in China to streamline TCLC’s alliances between TCLC and Chinese organizational structure and integrate its mobile Internet and smart device brands. TCL Internet firms would be positive for Corp. holds a majority stake in Momoda and TCLC treating its contributions as investment all parties income. As a result, we see no impact from the highly competitive low-margin China smartphones business on TCLC’s gross margin as a whole. We believe TCLC’s increasing focus on its China business is strategically right and that ramping up this business is essential if the company is to transform itself into a more balanced smart device and mobile Internet player. We anticipate increased cooperation or even alliances between TCLC and leading Chinese Internet companies over the medium term. For the Internet companies, working with TCLC would provide them with instant penetration into overseas markets, especially emerging markets, given TCLC’s strong exposure in these regions. From the prospective of TCLC, although earnings contributions would depend on the format or level of cooperation, working with the Internet firms could boost its share price as the market would likely perceive such a move as being its diversification into high-margin businesses.

Q2 FY15 Results Preview We forecast Q2 FY15 NP grows 7% For Q2 FY15, we look for sales to grow 22% YoY to HK$8.1bn thanks to the continued YoY to HK$271mn, slightly above migration from feature phones to smartphones. Our sales forecast for Q2 is in line with the the consensus target consensus estimate. We estimate Q2 gross margin was similar to that in Q1 despite continued price pressure as we believe TCLC has been able to adjust its product mix to mitigate this pressure to some extent. Our Q2 gross margin estimate is higher than the consensus figure of 18.9%. We also think operating leverage increased in Q2, leading to a further reduction in operating costs as a percentage of sales QoQ. Overall, we project Q2 NP rose 7% YoY to HK$271mn, slightly ahead of the consensus estimate.

TCLC Quarterly Sales and Profits HKD mn Q2 FY15E Q2 FY14 YoY Q1 FY15 QoQ Sales 8,146 6,677 22.0% 6,690 21.8%

Gross profit 1,552 1,294 19.9% 1,278 21.4% Gross margin 19.1% 19.4% 19.1%

Operating profit 212 172 22.9% 92 129.4% Operating margin 2.6% 2.6% 1.4%

Net profit 271 254 6.7% 185 46.6% Net margin 3.3% 3.8% 2.8% Source: Company data, HTI estimates

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Q1 Results Highlights Q1 FY15 sales totaled HK$6.7bn, which was up 22% YoY but down 37% QoQ, and was 5–6% below our forecasts and the consensus estimate. Gross margin at 19.1%, which was down from 19.6% in Q1 FY14 and 19.2% in Q4 FY14, was above our forecast of 18.7%. OPM at 1.4% was below our target of 2.5%, due mainly to increased R&D expenses related to the company’s streamlining its organization and the integration of its non-hardware businesses. NP was HK$185mn, 10% below our forecast. However, if one-off R&D expenses are excluded, core NP would have only been slightly below or in line with our target and consensus forecasts.

North America In North America, overall sales volume increased 87% YoY to 3.5mn units in Q1 FY15, with smart device volume up 43% YoY to 1.9mn units. Sales value rose 26% YoY to HK$1.8bn. The North America business unit has expanded its product mix by creating a smart ecosystem that connects smart devices such as smartphones, wearable smart devices and car accessories. In Q4 FY14, Gartner ranked TCLC fourth in handset sales and fifth in smartphone sales in North America. In Q2 FY15, TCLC introduced a targeted pricing strategy to strengthen its new sales channels.

South America In South America, Q1 FY15 sales volume reached 5.4mn units, down 6% YoY. TCLC sold 3.4mn smart devices, up 54% YoY. Sales value was HK$2.1bn, up 18% YoY. In Q4 FY14, Gartner ranked TCLC number one in handset sales in the region and number two in smartphone sales. In Q2 FY15, TCLC launched more entry-level smartphone models and developed its online sales channels.

Europe In Europe, Q1 FY15 sales volume reached 2.9mn units, up 1% YoY, while sales value was HK$1.1bn, down 16% YoY. Sales of smart devices totaled 1.8mn units, up 18% YoY. In Q4 FY14, IDC ranked TCLC as the number three seller of phones in Central and Eastern Europe (excluding Russia) as well as the number three seller of phones in Russia. In Q2 FY15, TCLC focused on strengthening its sales channels in these regions to enhance the competitiveness of its products.

Middle East and Africa In the Middle East and Africa, TCLC’s volume reached 1.4mn units, up 47% YoY in Q1 FY15. Smart device unit sales surged 133% YoY to 0.8mn units. Sales value jumped 174% YoY to HK$0.7bn. In Q4 FY14, Garner ranked TCLC fourth in both phone sales and smartphone sales in the region. In Q2 FY15, TCLC explored entry into new markets, including Nigeria and Pakistan.

Asia-Pacific In the Asia-Pacific region, Q1 FY15 sales volume plunged 73% YoY to 0.3mn units, while sales value dropped 67% YoY to HK$200mn. Despite entering into new markets such as Myanmar and Nepal, smart device sales slumped 55% YoY to 0.2mn units. In Q2 FY15, TCLC focused on competitively priced entry-level smartphones to improve it market penetration through the operator-network distribution channel.

China In China, Q1 FY15 sales volume jumped 118% YoY to 2.3mn units while sales value surged 161% YoY to HK$800mn. Smart device sales doubled YoY to 1.6mn units. Provinces such as Shaanxi, Jiangsu and Hunan recorded growth in the sales of smart devices. TCLC and TCL Corp. established Momoda, streamlined the company’s operating structure and

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implemented the ‘Double+’ strategy to develop a mobile Internet ecosystem comprising services, smart home technologies, smart health care technologies and Big Data. In Q2 FY15, TCLC established an online mall (www.mmd.cn) and adopted the e-commerce sales channel to enhance its product mix and competitiveness.

Q1 FY15 Breakdown of TCLC Feature Phone and Q1 FY15 Breakdown of TCLC Smart Device Sales by Other Product Sales by Region Region

2% 2%

4% Title: Title: 9% 11% 13% Source: Source:

18% 17% 23% 43%

24% 34%

China North America South America China North America South America Europe MEA APAC Europe MEA APAC

Source: Company data Source: Company data

TCLC Quarterly Handsets and Other Product Revenue

12 12 Title: 10.7 Source: 10 1.1 10

7.8 8 7.5 8 6.7 1.0 6.7 2.3 0.7 6 5.5 5.5 1.3 6 1.2 9.6 4.0 2.1 4 3.9 4 3.1 6.8 3.0 1.5 6.0 2.1 2.0 2.4 5.2 5.4 1.9 1.5 4.3 2 1.2 3.4 2 1.5 1.9 2.5 1.1 1.6 1.2 0 0.6 0 Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15

Smart devices Feature phones and other products

Source: Company data

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TCLC Quarterly Smartphone Sales Volume Weighting and Selling Prices

60 55.1 54.7 70% Title: 52.2 52.4 53.4 50.2 62% 62% 60% Source: 50 45.4 58% 41.8 53% 46% 50% 40 37.1 37.1 37.0 34.6 35.6 40% 34% 40% 30 27% 30% 20 19% 17% 17% 14% 20% 10% 10 10%

0 0% Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15

ASP Smart devices %

Source: Company data

Financial Analysis We forecast sales growth of 23% YoY in FY15, 13% YoY in FY16 and 10% YoY in FY17 as the continued migration to smartphones drives up volume selling prices. We see TCLC’s smartphone shipments climbing 33% YoY to 55mn units this year followed by growth of 18% YoY to 65mn units in FY16 and 13% YoY to 73.5mn units in FY17. We project selling prices climb 12% YoY, 5% YoY and 3% YoY, respectively in FY15, FY16 and FY17 as the sales mix shifts towards higher-priced smartphones. We expect gross margin to dip from 19.3% in FY14 to 19.1% in FY15 and to 19.0% in FY16– 17 on increasing price pressure for both smartphones and feature phones. Despite some improvement in operating leverage, we see net margin falling from 3.6% in FY14 to 3.2% in FY15–16 and to 3.1% in FY17.

TCLC Sales (HK$mn) TCLC Gross Margin and OPM (%)

50,000 46,923 70 25 Title: Title: 61 Source: Source: 45,000 59 42,657 60 19.3 40,000 37,750 20 19.0 19.1 19.0 19.0 50 35,000 30,691 30,000 40 15 Please fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in your report 25,000 19,362 20,000 23 30 10 15,000 13 20 10,000 10 5 10 2.5 2.5 2.5 2.5 5,000 0.3 - 0 0 FY13 FY14 FY15E FY16E FY17E FY13 FY14 FY15E FY16E FY17E

Sales YoY Growth Gross margin Operating margin

Source: Company data, HTI estimates Source: Company data, HTI estimates

We expect ROE to decline from 31.2% in FY14 to 27.6% in FY15, to 26.1% in FY16 and to 24.5% in FY17 as price pressure causes margins to shrink. Nevertheless, TCLC’s ROE is still well above the average ROE in the mid-teens for the company’s domestic smartphone peers as it enjoys a much higher gross margin for its smartphones thanks to its greater overseas exposure.

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TCLC Net Income (HK$ mn) TCLC ROE (%)

Title: Title: 1,600 1,458 400 35 31.2 1,349 Source: Source: 1,400 249 300 1,226 30 27.6 1,200 1,093 26.1 200 24.5 25 1,000 100 Please fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in your report 12 10 800 8 20 0 600 15 -100 12.0 400 313 -200 10 200 N/A - -300 5 FY13 FY14 FY15E FY16E FY17E 0 Net Income YoY Growth FY13 FY14 FY15E FY16E FY17E

Source: Company data, HTI estimates Source: Company data, HTI estimates

Risks to Our Target Price We see the following as the main risks to our target price.  Slower growth in smartphone shipments than we project due to the possibility of poor execution by the company.  Weakness in smartphone shipments on a global scale as global economies slow following robust shipment growth over the past 2–3 years.  Stiff competition from other major smartphone players such as Huawei (unlisted) and ZTE (763 HK, HK$16.58, HTI NEUTRAL) in the Europe, Middle East, Africa and US markets, which could weaken TCLC’s smartphone shipments in these regions given the similar price points for the handsets. Other risks include temporary shortages in handset components, quality issues for TCLC’s handsets that could tarnish its brand image, and inventory management risk.

Valuation Our target price of HK$9.70 is based on a PER of 9x a blend of our FY15 and FY16 EPS estimates. We forecast a CAGR for earnings of 9.0% for FY16–17, which translates into a PEG ratio of 1x. Our target PER of 9x is in line with TCLC’s historical trading mean. We expect TCLC to maintain a dividend-payout ratio above 40% through FY17.

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TCLC Rolling 3-Year Forward PER (x) TCLC Rolling 3-Year Forward PBR (x)

Title: Title: 12.0 3.0 11.0 Source: Source: 10.0 2.5 Rotate left: Rotate left: 9.0 2.0 8.0 7.0 1.5 Please fill in the values above to have them entered in your Pleasereport fill in the values above to have them entered in your report 6.0 5.0 1.0 4.0 0.5 3.0

2.0 0.0

Jul-12 Jul-13 Jul-14 Jul-15 Jul-12 Jul-13 Jul-14 Jul-15

Jan-13 Jan-14 Jan-15 Jan-13 Jan-14 Jan-15

Oct-13 Oct-12 Oct-14 Oct-12 Oct-13 Oct-14

Apr-13 Apr-14 Apr-15 Apr-13 Apr-14 Apr-15

Rolling 3y PER Mean Rolling 3y PBR Mean +1 SD -1 SD +1 SD -1 SD

Source: Bloomberg, HTI estimates Source: Bloomberg, HTI estimates

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P/E (x) vs EPS Growth (%) P/B (x) vs ROE PSR (x) vs OPM (%) 200 1,000% 3.50 35.0% 0.500 4.0% 180 800% 0.450 3.1% 3.00 27.9% 160 600% 0.400 2.2% 140 400% 2.50 20.7% 0.350 1.3% 120 200% 2.00 13.6% 0.300 0.4% 100 0% 0.250 -0.5% 1.50 6.4% 80 -200% 0.200 -1.4% 60 -400% 1.00 -0.7% 0.150 -2.3% 0.100 -3.2% 40 -600% 0.50 -7.9% 20 -800% 0.050 -4.1%

0 -1,000% 0.00 -15.0% 0.000 -5.0%

Jul-14 Jul-14

Jan-12 Jan-17 Jan-12 Jan-17

Jun-12 Jun-12 Jun-17 Jun-17

Oct-15 Oct-15

Apr-13 Apr-13

Sep-13 Feb-14 Sep-13 Feb-14

Dec-14 Dec-14

Jul-16 Jul-12 Jul-13 Jul-14 Jul-15 Jul-17

Aug-16 Aug-16

Nov-17 Nov-17 Nov-12 Nov-12

Mar-16 Mar-16

Jan-15 May-15 Jan-12 Jan-13 Jan-14 Jan-16 Jan-17 May-15 Rolling P/E (x) (lhs) EPS growth (rhs) Rolling PBV (lhs) ROE (rhs) Rolling P/Sales (x) (lhs) Operating margin (rhs) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates

Turnover and Growth - (HK$m) Gross Proft and Margin - (HK$m) Operating Profit and OP Growth - (HK$m) 50,000 70.0% 10,000 19.50% 1,400 1,600% 45,000 63.0% 9,000 19.15% 1,200 1,400% 40,000 56.0% 8,000 18.80% 1,000 1,200% 35,000 49.0% 7,000 18.45% 800 1,000% 30,000 42.0% 6,000 18.10% 600 800% 25,000 35.0% 5,000 17.75% 400 600% 20,000 28.0% 4,000 17.40% 200 400% 15,000 21.0% 3,000 17.05% 0 200% 10,000 14.0% 2,000 16.70% -200 0% 5,000 7.0% 1,000 16.35% -400 -200% 0 0.0% 0 16.00%

-600 -400%

Dec-15E Dec-15E Dec-16E Dec-17E Dec-16E Dec-17E

Dec-14A Dec-12A Dec-13A Dec-14A Dec-12A Dec-13A Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Total turnover (lhs) Revenue growth (rhs) Gross profit (lhs) Gross margin (rhs) Operating profit (lhs) OP growth (rhs) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates

CF from operations vs Capex - (HK$m) Dividend Payout and Yield - (HK$) Net Debt to Equity (%) and Interest Cover (x) 4,000 0.60 12.0% 35.0 300% 3,500 0.50 10.0% 30.0 257% 3,000 25.0 214% 0.40 8.0% 2,500 20.0 171% 2,000 0.30 6.0% 15.0 129% 1,500 0.20 4.0% 10.0 86% 1,000 0.10 2.0% 5.0 43% 500

0 0.00 0.0% 0.0 0%

Dec-13 Dec-12 Dec-14 Dec-15 Dec-16 Dec-17 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Dec-15E Dec-16E Dec-17E

Dec-14A Dec-12A Dec-13A Cash flow from operations Capex DPS (lhs) Dividend yield (rhs) EBITDA/interest paid (x) (lhs) Debt/equity (rhs) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates

ROA (%) and Asset Turnover (x) Cash Operating Cycle Current Ratio (x) vs Quick Ratio (x) 2.00 7.0% 100 1.200 1.80 6.1% 90 1.60 5.2% 80 1.000 70 1.40 4.3% 60 0.800 1.20 3.4% 50 1.00 2.5% 40 0.600 0.80 1.6% 30 20 0.400 0.60 0.7% 10 0.40 -0.2% 0 0.200 0.20 -1.1%

0.00 -2.0% 0.000

Dec-15E Dec-16E Dec-17E

Dec-12A Dec-13A Dec-14A

Jul-14

Jan-17 Jan-12

Jun-12 Jun-17

Oct-15

Apr-13 Feb-14

Inventory days Debtor days Sep-13

Dec-14

Aug-16

Nov-12 Nov-17

Mar-16

Dec-17E Dec-15E Dec-16E

Dec-12A Dec-13A Dec-14A May-15 Sales/avg assets (lhs) ROA (rhs) Creditor days Current ratio (x) Quick ratio (x) Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates Source: Company data, Bloomberg, HTI estimates

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Revenue Growth We forecast sales growth of 23% YoY in FY15, 13% YoY in FY16, and 10% YoY in FY17 as the continued migration to smartphones drives up volume and blended selling prices. We see TCLC’s smartphone shipments increasing 33% YoY in FY15, 18% YoY in FY16 and 13% YoY in FY17.

Profit Margins We expect gross margin to dip from 19.3% in FY14 to 19.1% in FY15 and to 19.0% in FY16–17 on increasing price pressure for both smartphones and feature phones. Despite some improvement in operating leverage, we see net margin falling from 3.6% in FY14 to 3.2% in FY15–16 and to 3.1% in FY17.

Shareholder Returns We expect ROE to decline from 31.2% in FY14 to 27.6% in FY15, to 26.1% in FY16 and to 24.5% in FY17 as price pressure causes margins to shrink. Nevertheless, TCLC’s ROE is still well above the average ROE in the mid-teen for the company’s domestic smartphone peers as it enjoys a much higher gross margin for its smartphones thanks to its greater overseas exposure.

Balance Sheet Risks We expect the balance sheet to remain healthy despite the company being in a net debt position (we project a net debt-to-equity ratio of 13.0% in FY15). TCLC should move into a net cash position thereafter with a net debt-to-equity ratio of -1.2% in FY16 and

-13.0% in FY17 thanks largely to increasing cash flows from the core business.

Investment Thesis – Target Price – Share Price Catalysts  Key Takeaway We believe TCLC’s recent share price weakness has more than factored in market concerns With a forward PER of just about a slowdown in smartphone demand. We expect the company to continue to benefit 5x on our estimates and 5x from strong exposure to overseas emerging markets, where we believe smartphone on consensus estimates as growth should continue to outpace that in China over the next couple of years. Potential well as a forward dividend cooperation and alliances with leading Chinese Internet companies could help boost the yield of 8–9% level, we see stock’s valuation in the medium term, although the earnings contributions from such TCLC as one of the best initiatives may come later. Our target price of HK$9.70 (previously HK$11.00) is based on dividend plays among Hong PER of 9x a blend of our FY15 and FY16 EPS estimates. We forecast a CAGR for earnings of Kong-listed technology 9.0% for FY16–17, which translates into a PEG ratio of 1x. We maintain our BUY rating. hardware stocks

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Recommendation Chart Definitions for 1st page Metrics Price Close 12.7 Business Growth

10.7 This is the metric which matches the top line in our report. 8.7 Business profit This is the metric which best represents 6.7 operating profit in our report Shareholder Returns 4.7 Return on Equity 2.7 Balance Sheet Risk 0.7 Net Debt to Equity Aug-10 Jun-11 Apr-12 Feb-13 Dec-13 Oct-14

Date Recommendation Target (HKD) Price (HKD)

2015-08-07 Source: Company data Bloomberg, HTI estimates

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Haitong International Coverage as of 31 Jul 2015

Pan Asia Resources Pan Asia TMT Core Coverage Universe Non-Coverage Universe Core Coverage Universe Non-Coverage Universe Sam Thawley (Team Leader) China Oil & Gas Group (603 HK) Neil Juggins (Team Leader) China All Access Holdings (633 HK) Angang Steel (347 HK) Dowa Holdings (5714 JP) Chunghwa Telecom (2412 TT) SIM Technology Group (2000 HK) China Shenhua Energy (1088 HK) Iino Kaiun Kaisha (9119 JP) Far EasTone Telecommunications (4904 TT) Ferrotec (6890 JP) CNOOC (883 HK) Maruichi Steel Tube (5463 JP) KDDI (9433 JP) Fujimi (5384 JP) Daido Steel (5471 JP) Nippon Coke & Engineering (3315 JP) Nippon Telegraph & Telephone (9432 JP) Megachips (6875 JP) Hanwa (8078 JP) NS United Kaiun Kaisha (9110 JP) NTT DoCoMo (9437 JP) Ryosan (8140 JP) Kawasaki Kisen (9107 JP) Osaka Steel (5449 JP) Softbank (9984 JP) Shindengen Electric Mfg. (6844 JP) Kyoei Steel (5440 JP) Shandong Molong Petroleum Machinery (568 HK) Taiwan Mobile (3045 TT) Anxin-China Holdings (1149 HK) Maanshan Iron & Steel (323 HK) Shougang Concord International Enterprises (697 HK) Steve Myers AV Concept Holdings (595 HK) Mitsui O.S.K. Lines (9104 JP) Yamato Kogyo (5444 JP) Canon (7751 JP) ChipMOS Technologies (8150 TT) Nippon Steel & Sumikin Bussan (9810 JP) Fujitsu (6702 JP) FocalTech (5280 TT) PetroChina (857 HK) Hon Hai Precision Industry (2317 TT) Hua Hong Semiconductor (1347 HK) Sanyo Special Steel (5481 JP) Keyence (6861 JP) Micro-Star International (2377 TT) Tokyo Steel Mfg. (5423 JP) Konica Minolta Holdings (4902 JP) TCL Multimedia Technology Holdings (1070 HK) Fook Tat Cho LG Electronics (066570 KS) Truly International Holdings (732 HK) Anton Oilfield Services (3337 HK) Nikon (7731 JP) Unity Opto Technology (2499 TT) China Datang (1798 HK) Samsung Electronics (005930 KS) Varitronix International (710 HK) China Longyuan Power (916 HK) Taiwan Semiconductor Mfg. Co. (2330 TT) Bit-isle (3811 JP) China Singyes (750 HK) Toshiba (6502 JP) GMO Internet (9449 JP) China Suntien (956 HK) Jones Ku Internet Initiative Japan (3774 JP) CIMC Enric (3899 HK) AAC Technologies (2018 HK) Piped Bits (3831 JP) GCL-Poly (3800 HK) BYD Electronic (285 HK) T-Gaia (3738 JP) Hilong (1623 HK) China Communications (552 HK) Alibaba Health Information Technology (241 HK) Honghua Group (196 HK) Coolpad Group (2369 HK) Alibaba Pictures (1060 HK) Huadian Fuxin Energy (816 HK) Sunny Optical (2382 HK) Boyaa Interactive International (434 HK) Huaneng Renewables (958 HK) TCL Communication (2618 HK) Cogobuy (400 HK) SPT Energy (1251 HK) Tongda Group (698 HK) Comba Telecom Systems Holdings (2342 HK) Xinjiang Goldwind (2208 HK) ZTE (763 HK) Digital China (861 HK) Jean-Louis Lafayeedney Feiyu Technology International (1022 HK) Advanced Semiconductor Engineering (2311 TT) Forgame Holdings (484 HK) ASM Pacific Technology (522 HK) IGG (8002 HK) Pan Asia Machinery & Industrial Asustek Computer (2357 TT) NetDragon Websoft (777 HK) Core Coverage Universe Non-Coverage Universe AU Optronics (2409 TT) Ourgame International Holdings (6899 HK) Jenny Zhen (Team Leader) Avic International Holdings (232 HK) Casetek Holdings (5264 TT) Tian Ge Interactive Holdings (1980 HK) China Communications Construction (1800 HK) Chun Wo Development Holdings (711 HK) HTC (2498 TT) Yangtze Optical Fibre & Cable (6869 HK) China Railway Construction (1186 HK) CW Group Holdings (1322 HK) Largan Precision (3008 TT) China Railway Group (390 HK) Shanghai Prime Machinery (2345 HK) Lenovo (992 HK) CRRC (1766 HK) TK Group Holdings (2283 HK) Nidec (6594 JP) Shenzhen International (152 HK) Wah Lee Industrial (3010 TT) Siliconware Precision Industries (2325 TT) Zhuzhou CSR Times Electric (3898 HK) Kato Works (6390 JP) Skyworth Digital Holdings (751 HK) Gary Cheung Mitsui Engineering & Shipbuilding (7003 JP) Justin Weiss Airtac International Group (1590 TT) Nishio Rent All (9699 JP) Colopl (3668 JP) First Tractor (38 HK) Takeuchi Mfg. (6432 JP) Cookpad (2193 JP) Hiwin Technologies (2049 TT) Eagle Industry (6486 JP) CyberAgent (4751 JP) Merida (9914 TT) Komori (6349 JP) DeNA (2432 JP) Techtronic Industries (669 HK) Modec (6269 JP) F@N Communications (2461 JP) Teco Electric and Machinery (1504 TT) Nachi-Fujikoshi (6474 JP) GMO Payment Gateway (3769 JP) Weichai Power (2338 HK) Toyo Engineering (6330 JP) Gree (3632 JP) Zoomlion Heavy Industry (1157 HK) Gurunavi (2440 JP) Sho Fukuhara Infomart (2492 JP) Daikin Industries (6367 JP) Kakaku.com (2371 JP) Fujitsu General (6755 JP) Naver (035420 KS) Glory (6457 JP) Nexon (3659 JP) Hitachi Construction Machinery (6305 JP) Rakuten (4755 JP) IHI (7013 JP) Start Today (3092 JP) Kawasaki Heavy Industries (7012 JP) Yahoo Japan (4689 JP) Komatsu (6301 JP) Daniel Wang Kubota (6326 JP) Alibaba Group Holdings (BABA US) KYB (7242 JP) China Fiber Optic Network System (3777 HK) Makita (6586 JP) China Mobile (941 HK) Mitsubishi Heavy Industries (7011 JP) China Telecom (728 HK) Sato Holdings (6287 JP) China Unicom Hong Kong (762 HK) SMC (6273 JP) Ctrip.com International (CTRP US) THK (6481 JP) Kingdee International Software Group (268 HK) Tony Moyer Kingsoft (3888 HK) Amada (6113 JP) NetEase (NTES US) Azbil (6845 JP) Tencent Holdings (700 HK) Chiyoda (6366 JP) Daifuku (6383 JP) Pan Asia Autos Fanuc (6954 JP) Core Coverage Universe Non-Coverage Universe JGC (1963 JP) Steve Usher (Team Leader) Mabuchi Motor (6592 JP) Nabtesco (6268 JP) Fuji Heavy Industries (7270 HK) Maruwa (5344 JP) Tsugami (6101 JP) Honda Motor (7267 JP) Press Kogyo (7246 JP) Yaskawa Electric (6506 JP) Hyundai Motor (005380 KS) TPR (6463 JP) Yokogawa Electric (6841 JP) Kia Motors (000270 KS) TS Tech (7313 JP) Nissan Motor (7201 JP) Meidong Auto (1268 HK) Suzuki Motor (7269 JP) China Yongda Auto (3669 HK) Toyota Motor (7203 JP) Chaowei Power (951 HK) Yamaha Motor (7272 JP) CAR Inc (699 HK) Rebecca Tang Baoxin Auto (1293 HK) Brilliance China (1114 HK) BYD (1211 HK) Dongfeng Motor (489 HK) Geely Automobile (175 HK) Great Wall Motor (2333 HK) Guangzhou Automobile (2238 HK) Minth (425 HK) Nexteer (1316 HK) Kosuke Matsuda Mazda (7261 JP)

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Haitong International Coverage as of 31 Jul 2015

China Real Estate Asia ex Small Cap Core Coverage Universe Non-Coverage Universe Core Coverage Universe Non-Coverage Universe Andy So (Team Leader) Joy City (207 HK) Yuanyuan Ji (Team Leader) Bolina Holding (1190 HK) Agile Property (3383 HK) China Merchant Prop (978 HK) Best Pacific International (2111 HK) Bonjour Holdings (653 HK) China Overseas Land & Investment (688 HK) Greenland HK (337 HK) Century Sage Scientific (1450 HK) Chigo Holding (449 HK) Country Garden Holdings (2007 HK) Central China Real Estate (832 HK) China Aircraft Leasing Group (1848 HK) China Glass Holdings (3300 HK) Dalian Wanda Commercial Properties (3699 HK) Gemdale (535 HK) CPMC Holdings (906 HK) Goldpac Group (3315 HK) Greentown China Holdings (3900 HK) Yuzhou Properties (1628 HK) Daphne International Holdings (210 HK) Hisense Kelon Electrical Holdings (921 HK) Guangzhou R&F Properties (2777 HK) Emperor International Holdings (163 HK) Dynagreen Environmental Protection (1330 HK) Hua-Han Bio-Pharmaceutical Holdings (587 HK) KWG Property Holding (1813 HK) Pacific Textiles Holdings (1382 HK) Ozone Water International Holding (2014 HK) Pax Global Technology (327 HK) Sinosoft Technology Group (1297 HK) Sa Sa International Holdings (178 HK) Texhong Textile Group (2678 HK) Japan Real Estate Shanghai Fudan Microelectronics (1385 HK) Weiqiao Textile (2698 HK) Core Coverage Universe Non-Coverage Universe Shenzhou International Group (2313 HK) Welling Holding (382 HK) Mark Brown (Team Leader) Daibiru (8806 JP) Sinomedia Holding (623 HK) Yue Yuen Industrial Holdings (551 HK) Daito Trust Construction (1878 JP) Daikyo (8840 JP) Wasion Group Holdings (3393 HK) Cosmax (192820 KS) Daiwa House Industry (1925 JP) Haseko (1808 JP) Kevin Leung DHP Korea (131030 KS) Lixil Group (5938 JP) Hulic (3003 JP) APT Satellite (1045 HK) Easy Bio (035810 KS) Mitsubishi Estate (8802 JP) Kenedix (4321 JP) Boer Power (1685 HK) Hansol HomeDeco (025750 KS) Mitsui Fudosan (8801 JP) Sanwa Holdings (5929 JP) China Pioneer Pharma (1345 HK) Hanssem (009240 KS) Noritz (5943 JP) Sumitomo Real Estate Sales (8870 JP) Cosmo Lady China (2298 HK) Mando (204320 KS) Obayashi (1802 JP) Fu Shou Yuan International (1448 HK) Medy-Tox (086900 KS) Sekisui House (1928 JP) Man Wah Holdings (1999 HK) Naturalendo Tech (168330 KS) Sumitomo Realty & Development (8830 JP) PW Medtech (1358 HK) Sam Chun Dang Pharm (000250 KS) Taisei (1801 JP) Universal Health International (2211 HK) Tokyo Tatemono (8804 JP) Wisdom Holdings (1661 HK) Yestar International (2393 HK) Justin Kim China Consumer Aerospace Technology of Korea (067390 KS) Core Coverage Universe Non-Coverage Universe Jaesong Woo Nicolas Wang (Team Leader) Tenwow International (1219 HK) Hansae (105630 KS) China Medical System (867 HK) Tibet 5100 Water (1115 HK) Hy-Lok (013030 KS) China Mengniu Dairy (2319 HK) China Child Care (1259 HK) Korea Kolmar (161890 KS) China Resources Enterprise (291 HK) Tsui Wah (1314 HK) Osstem Implant (048260 KS) China Traditional Chinese Medicine (570 HK) Hosa (2200 HK) Sung Kwang Bend (014620 KS) CSPC Pharmaceutical Group (1093 HK) Goodbaby (1086 HK) TK Corp. (023160 KS) Hengan International (1044 HK) Le Saunda (738 HK) Youngone (111770 KS) Shanghai Pharmaceuticals (2607 HK) Future Bright (703 HK) Sinopharm Group (1099 HK) C.Banner (1028 HK) Tingyi Cayman Islands Holding (322 HK) Dorsett Hospitality (2266 HK) Tsingtao Brewery (168 HK) China Travel International (308 HK) Japan Small Cap Uni-President China (220 HK) Shanghai Jinjiang International (2006 HK) Core Coverage Universe Non-Coverage Universe Want Want China Holdings (151 HK) Hiroyuki Terada (Team Leader) Meitec (9744 JP) Donald Cheng Accordia Golf (2131 JP) Fujibo Holdings (3104 JP) Galaxy Entertainment (27 HK) Dentsu (4324 JP) Monotaro (3064 JP) Macau Legend Development (1680 HK) Gulliver International (7599 JP) Nichii Gakkan (9792 JP) MGM China (2282 HK) Pigeon (7956 JP) Tohokushinsha Film (2329 JP) Paradise Entertainment (1180 HK) Pola Orbis (4927 JP) Weathernews (4825 JP) Sands China (1928 HK) Recruit Holdings (6098 JP) SJM Holdings (880 HK) Sanrio (8136 JP) Wynn Macau (1128 HK) Shiseido (4911 JP) Sohgo Security Services (2331 JP) Technopro Holdings (6028 JP) Japan Consumer Yamato Holdings (9064 JP) Core Coverage Universe Non-Coverage Universe Yumeshin Holdings (2362 JP) James Moon (Team Leader) Aeon Mall (8905 JP) Yusuke Suzuki FamilyMart (8028 JP) Aoyama Trading (8219 JP) Ain Pharmaciez (9627 JP) Fast Retailing (9983 JP) H2O Retailing (8242 JP) Doutor Nichires Holdings (3087 JP) Japan Tobacco (2914 JP) Honeys (2792 JP) FP (7947 JP) Seven & I Holdings (3382 JP) Parco (8251 JP) Nihon Nohyaku (4997 JP) Unicharm (8113 JP) Nihon Parkerizing (4095 JP) Sky Perfect JSAT Holdings (9412 JP) Sun Frontier Fudousan (8934 JP) Latest Additions to Coverage Takara Leben (8897 JP) AeroSpace Technology of Korea (067390 KS)—Justin Kim Tosei (8923 JP) Nidec (6594 JP)—Jean-Louis Lafayeedney Wowow (4839 JP) Tony Tanaka GCA Savvian (2174 JP) Latest Drops from Coverage None

Latest Transfers of Coverage None

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