Thursday, 26 January 2017 Macq-ro insights 3
Global slump scenarios and the EM economies that Peter Eadon-Clarke concern us the most When economies are running hard in one direction, we believe it is wise to research the other. With the global recovery maturing, we examine 3 scenarios that would lead to global growth beneath 2.5% pa, our definition of a slump.
POSCO (Outperform) 4
Weak results, but solid outlook Anna Park POSCO reported seemingly disappointing 4Q16 results with OP of Won472bn. 4Q16 results miss is not as bad as it looks. POSCO's 4Q16 OP came in at Won472bn (+38.3% YoY), missing both our estimate of Won811bn and the street's recently revised down estimate of Won660bn by big margin.
Hyundai Motor Company (Outperform) 5
Domestic market matters James Hong Hyundai Motor Company (HMC) reported a disappointing 4Q16 earnings. Its OP came in lower than what we expected even after considering a surge in warranty provisions (non-cash item in SG&A).
Indonesia telecoms, towers 6
Follow the network investment Nathania Nurhalim We expect to see the beginning of 4G monetization drive further strong revenue momentum in 2017 for the Indonesian telco industry. As 4G utilization is on the rise, operators suggest that some pricing uplifts should be due in the near term.
Korea consumer sector 7
Making money during tough times Kwang Cho We expect a challenging macro environment for the Korean consumer sector after the consumer sentiment index hit its lowest level since the Global Financial Crisis.
Alibaba Group Holding (Outperform) 8
CNOOC (Outperform) 9
Crompton Consumer (Outperform) 10
Guangzhou Automobile (Outperform) 11
Lens Tech (A-Share) (Outperform) 12
LINE (Neutral) 13
Mahindra & Mahindra Fin. Services (Outperform) 14
Please refer to page 30 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Maruti Suzuki (Outperform) 15
Maybank (Neutral) 16
Right-On (Downgrade to Underperform) 17
Sakata Seed (Outperform) 18
Samsung ElectroMechanics (Neutral) 19
Samsung Engineering (Outperform) 20
SUMCO (Outperform) 21
Tung Thih (Outperform) 22
TVS Motors (Neutral) 23
XL Axiata (Outperform) 24
Wipro (Neutral) 25
Wockhardt (Neutral) 26
Hong Kong Property 27
Hong Kong Property 28
Macquarie Commodities Comment 29
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GLOBAL Macq-ro insights Global slump scenarios and the EM economies that concern us the most When economies are running hard in one direction, we believe it is wise to research the other. With the global recovery maturing, we examine 3 scenarios that would lead to global growth beneath 2.5% pa, our definition of a slump. Our 2016, 2017 and 2018 global real GDP growth forecasts are 2.6%, 3.0% & 2.9%, respectively. Our long-standing ‘long grinding cycle thesis’ is for global Why this issue matters to investors growth to remain in a 2.5-3.0% pa range.
1) A global slump and associated commodity With the economies of the US, the Eurozone and China each being around 20% price weakness would return EM of global GDP (using market exchange rate weights), then our three scenarios commodity-exporters to the difficult have each in turn growing 2% less than currently forecast. Each scenario takes adjustment years of 2011-15 0.4% off global growth directly, with spill over consequences doing the rest: 2) Vulnerabilities vary depending on a country’s export composition and the Global slump scenarios policy reaction 1) The US risk scenario was detailed in The US economy, Oil, and Overheating wherein 3) We recommend focussing on the fiscal surging oil prices towards US$80 spur energy capex into an increasingly tight labour deficit as the best indicator of a country’s market, leading in time to the Fed having to catch up aggressively with inflationary struggle with adjustment. pressures 2) For the Eurozone it is a repeat of the 2011-13 recession, a banking crisis, liquidity crunch 4) The countries with relatively high fiscal and inappropriately tight fiscal policy. Over the longer term, we agree with the Eurozone’s deficits are: Venezuela, Egypt, Saudi Achilles’ heel that “monetary union must be complemented by fiscal union and Arabia, Brazil, Zambia, Bolivia and mutualisation of debt; or the Euro is ultimately doomed” Argentina 3) Whilst 2% off our current forecasts for the US and the Eurozone lead to slightly positive Our forecasts: and slightly negative real GDP growth respectively, for China it implies that the ongoing gentle fade in growth, we forecast 6.5% growth in 2017 and 6.0% in 2018, becomes a Please see the 17 January 2017 The Global quicker slide to 4.0% to 4.5%.The Is China on the wrong side of history? note has a
Macro Outlook. Online access to our global discussion of China’s growth model. macro forecasts is available on request Our risk assessments
1) This is a boom & bust cycle, which we believe is low risk (a probability of 10%) partially Analyst(s) because of the downside risks in 3). We do not believe protectionism enhances growth. Macquarie Capital Securities (Japan) Limited Peter Eadon-Clarke 2) We judge another banking-led crisis in the Eurozone to be also low risk (10% probability). +81 3 3512 7850 [email protected] The Eurozone, four years behind the US, has begun an employment-, consumption-, Nara Song consumer credit-led recovery. Growth above trend provides some room to tackle financial +81 3 3512 7878 [email protected] sector problems Macquarie Capital Markets Canada Ltd. 3) China’s ability to use its policy tools to gently fade growth could be impaired by an David Doyle, CFA increasing number of impediments from the US, e.g. a) tightening US monetary policy, b) +1 416 848 3663 [email protected] an activist US trade policy (Fortress America: Buy America! Trade policy is great again), Macquarie Securities (Australia) Limited c) increasingly tense US-China diplomatic relations. We judge this to be a low but rising James McIntyre, CFA +61 2 8232 8930 [email protected] risk (15% probability) Macquarie Capital Limited Source: Macquarie Research, January 2017 Larry Hu, PhD +852 3922 3778 [email protected] Jerry Peng The EM economies that concern us the most +852 3922 3548 [email protected] Macquarie Capital Securities India (Pvt) Ltd With a global growth shock, we believe attention would return to the underlying Tanvee Gupta Jain +91 22 6720 4355 [email protected] vulnerabilities of EM commodity-exporters. 2016 has provided cyclical relief in Macquarie Equities South Africa (Pty) Ltd global industrial production and related commodity prices. The adjustment that Elna Moolman +27 11 583 2570 [email protected] began in 2011, however, has further to run, in our opinion, pages 2-12. We Macquarie Capital (Europe) Limited recommend focussing on the fiscal deficit as the best indicator of a country’s Matthew Turner struggle with adjustment. The countries with relatively high fiscal deficits are: +44 20 3037 4340 [email protected] Venezuela, Egypt, Saudi Arabia, Brazil, Zambia, Bolivia and Argentina. 25 January 2017
Please refer to page 62 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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KOREA POSCO 005490 KS Outperform Weak results, but solid outlook Price (at 12:31, 25 Jan 2017 GMT) Won267,500
Valuation Won 320,000 Event - Price to Book 12-month target Won 320,000 . POSCO reported seemingly disappointing 4Q16 results with OP of Upside/Downside % +19.6 Won472bn. 12-month TSR % +22.6 Volatility Index Medium Impact GICS sector Materials . 4Q16 results miss is not as bad as it looks. POSCO’s 4Q16 OP came in at Market cap Wonbn 23,323 Won472bn (+38.3% YoY), missing both our estimate of Won811bn and the Market cap US$m 20,266 street’s recently revised down estimate of Won660bn by big margin. However, Free float % 78 looking into the details, the OP miss of Won339bn compared to our estimate 30-day avg turnover US$m 63.1 mainly came from Won360bn of one-off expense from POSCO E&C without Number shares on issue m 87.19 which normalized OP would’ve been Won832bn (details are on pg 2). Investment fundamentals Furthermore, steel core OP, especially, was solid, coming in at Won636bn Year end 31 Dec 2015A 2016E 2017E 2018E which is in line with our estimate of Won686bn. If we add back one-off Revenue bn 58,192 53,340 62,370 60,529 EBIT bn 2,410 2,845 3,563 3,778 expenses the parent POSCO incurred (employee bonus of Won50bn and EBIT growth % -25.0 18.0 25.3 6.0 maintenance expense of Won70bn), normalized core steel OP would’ve been Reported profit bn -96 1,290 1,832 2,073 Adjusted profit bn 181 1,491 2,107 2,380 Won756bn – which is even better than our estimate of Won686bn. EPS rep Won -1103 14,799 21,011 23,778 EPS rep growth % nmf nmf 42.0 13.2 . Margin expansion is ahead of us. Looking at 1Q17, we estimate that EPS adj Won 2,072 17,097 24,162 27,298 EPS adj growth % -71.1 725.3 41.3 13.0 POSCO’s OP will recover to Won713bn. While the street seems still PER rep x nmf 18.1 12.7 11.2 concerned over the sharp rise in coal and iron ore input costs in 1Q17, we PER adj x 129.1 15.6 11.1 9.8 differ. We believe the current price gap between coal spot price (175$/t) and Total DPS Won 8,000 8,000 8,000 8,000 Total div yield % 3.0 3.0 3.0 3.0 contract price (285$/t) should bode well for POSCO’s 1Q and beyond ROA % 2.9 3.6 4.5 4.7 earnings. POSCO’s exposure to spot coal is around 40% while its global ROE % 0.4 3.6 5.0 5.4 EV/EBITDA x 8.3 7.1 6.0 5.8 peers’ costs seem to be mainly tied with contract, giving POSCO cost Net debt/equity % 45.2 42.4 40.3 30.7 advantage. Assuming average ASP hike of Won80k/t in 1Q17, we expect P/BV x 0.6 0.6 0.5 0.5 POSCO can expand steel margin by at least Won25k/t, which should translate 005490 KS rel KOSPI performance, & to OP of Won230bn. Also, the company expects POSCO E&C to turn around rec history in 1H17 which will be a plus alpha for earnings. . Favourable outlook of Asian steel industry continues. Our economics team led by Peter Eadon-Clarke sees the cyclical recovery of global industrial production and PMI is maturing. However, industrial production is still expected to grow 2.5% in 2017, which would drive mild acceleration of real GDP growth through 2017. This suggests supportive trend to global steel demand (Fig. 9). On top of that, potentially earlier and larger than expected China’s capacity cut (~9% by end-June this year); and low level of steel
Note: Recommendation timeline - if not a continuous line, then there was no inventory would further provide positive momentum to Asian steel equities. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 We think overcapacity of the steel industry is passing its peak. (all figures in Won unless noted, TP in KRW) Earnings and target price revision
. We raise our FY17/18E OP estimates by 6.4%/8.9%, respectively, mainly on Analyst(s) stronger than expected steel prices. On change in earnings, we hike our TP to Macquarie Securities Korea Limited Won320k from Won280k. Anna Park +82 2 3705 8669 [email protected] Price catalyst Rose Kim +82 2 3705 9815 [email protected] Macquarie Capital Securities (Singapore) Pte. . 12-month price target: Won320,000 based on a Residual Income Model. Limited Ian Roper . Catalyst: Global capacity closures accelerating; ASP hike; solid 1Q result. +65 66010698 [email protected] Action and recommendation 26 January 2017 . Maintain Outperform.
Please refer to page 10 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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KOREA Hyundai Motor Company 005380 KS Outperform Domestic market matters Price (at 08:50, 25 Jan 2017 GMT) Won146,500
Valuation Won 170,000 Event - PER 12-month target Won 170,000 . Hyundai Motor Company (HMC) reported a disappointing 4Q16 earnings. Its Upside/Downside % +16.0 OP came in lower than what we expected even after considering a surge in 12-month TSR % +19.5 warranty provisions (non-cash item in SG&A). Volatility Index Low/Medium GICS sector Automobiles & Impact Components . Disappointing 4Q16 earnings. HMC reported 4Q16 revenue of Won 24.5tr Market cap Wonb 38,689 n (-0.9% YoY and +11.1% QoQ), OP of Won 1,021bn (OPM of 4.2%, flat YoY Market cap US$m 33,184 and -60bps QoQ) and NP of Won 1,000bn. Its OP missed ours and market Free float % 69 expectations by large margin. While the spike in warranty provisions due to 30-day avg turnover US$m 46.9 weak year-end FX rate was well-flagged in the market, its cash margin Number shares on issue m 264.1 (automotive OP plus warranty provision) came in at 5.9%, 130bps lower than our expectations. Management attributed this weak cash margin to prolonged Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E labour strike as export sales were booked based on high per-unit cars which Revenue bn 91,959 93,649 98,030 99,218 have been produced during 3Q16. EBIT bn 6,358 5,193 6,462 6,949 EBIT growth % -15.8 -18.3 24.4 7.5 . Domestic retail market matters...and that’s why bottoming-out still Reported profit bn 6,417 5,406 6,632 7,131 intact. Despite the ASP expansion in 4Q16 of 2.8% YoY, HMC failed to enjoy Adjusted profit bn 6,417 5,406 6,632 7,131 EPS rep Won 22,479 18,938 23,230 24,979 margin expansion due to low utilization and fall in domestic retail sales volume EPS rep growth % -12.7 -15.8 22.7 7.5 of -17.8% YoY. However, we expect a sequential improvement in utilization EPS adj Won 22,479 18,938 23,230 24,979 EPS adj growth % -12.7 -15.8 22.7 7.5 and ASP in the domestic market thanks to 1) low base (on low inventory at PER rep x 6.5 7.7 6.3 5.9 year end), 2) high ASP models (Grandeur and Genesis), and 3) new product PER adj x 6.5 7.7 6.3 5.9 Total DPS Won 4,000 4,000 5,000 6,000 launches including compact SUV and Genesis G70 in 2H17. Total div yield % 2.7 2.7 3.4 4.1 ROA % 4.1 3.1 3.8 3.8 . EM turnaround should add earnings momentum. On top of normalized ROE % 10.7 8.4 9.6 9.6 EV/EBITDA x 7.5 8.0 6.8 6.3 earnings from the domestic retail market, we expect EM turnaround should Net debt/equity % 59.7 56.6 53.2 48.6 add earnings tailwind in 2017. As we highlighted earlier, HMC is enjoying P/BV x 0.7 0.6 0.6 0.5 above-market growth in EM such as Russia and Brazil, driven by new product 005380 KS rel KOSPI performance, & (Hyundai Motor Company – Oh, Russia!, 13 January 2017). We expect HMC rec history to deliver better sales volume than its guidance on EM recovery. . Shareholder return policy. HMC management announced year-end dividend of Won 3,000, ending full-year dividend at Won 4,000 (payout ratio of 21%). Moreover, management guided 30-50% of FCF to be used for shareholder return policy going forward. We expect HMC to announce formula soon, following the footstep of Samsung Electronics. Earnings and target price revision
Note: Recommendation timeline - if not a continuous line, then there was no . We revise EPS forecasts for 2016/2017/2018 by -14%/-1%/-1%. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 . No change in target price. (all figures in Won unless noted)
Price catalyst
. 12-month price target: Won170,000 based on a PER methodology.
. Catalyst: domestic retail sales and market share gain, EM demand recovery, Analyst(s) product refresh James Hong +82 2 3705 8661 [email protected] Action and recommendation 25 January 2017 . Maintain Outperform. Short-term share price weakness following Macquarie Securities Korea Limited disappointing 4Q16 earnings seems difficult to avoid but we see sequential improvement in domestic retail and EM markets.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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INDONESIA Indonesia telecoms, towers Inside Follow the network investment Follow the network investment 2 We expect to see the beginning of 4G monetization drive further strong revenue Monetization through volume 6 momentum in 2017 for the Indonesian telco industry. As 4G utilization is on the EXCL: expectation gap, not valuation trap 9 rise, operators suggest that some pricing uplifts should be due in the near term. Valuations 14 We sense that the market is waiting for this to materialize as the next positive catalyst for the industry. We maintain our overweight stance on the telcos, while Earnings changes 17 upgrading our view of the tower sector to neutral on a country basis as we sense some of the risks we foresaw have now been priced in. Our top pick within the Changes to TP and headline forecasts telcos is EXCL for its unexpected revenue turnaround, while within the towers FY16E FY17E FY16E FY17E TP revenue revenue EPS EPS space we prefer TOWR for better exposure to future tower sales. TLKM IJ -2% -1% -4% 0% -5% EXCL IJ 8% -5% -3% 52% 3% Top pick EXCL: network-driven upside surprise ISAT IJ 0% -2% -3% -25% -3% TBIG IJ 8% 0% 0% 0% 0% We reiterate our preference for EXCL within the telco sector on the back of its TOWR IJ 6% 1% -2% 1% -4% recent data network investment, which, in our view, should have a positive Source: Macquarie Research, January 2017 correlation with its future revenue momentum. With its recently added 16k 3G Indonesia telecom stock coverage BTS addition over 2Q-3Q16 (89% YoY expansion) as well as highest number of Bbg Code Rec. Price 12m TP Upside Mkt cap 4G BTS among the big three, we believe a turnaround in revenue momentum (lcy) (lcy) (%) (US$m) would positively surprise the market’s low expectations. Furthermore, valuations TLKM IJ OP 3,840 4,700 22% 28,972 are attractive at 4.7x FY17E EV/EBITDA, and at our increased TP of Rp4,000 EXCL IJ OP 2,630 3,700 41% 2,104 ISAT IJ OP 6,150 10,900 77% 2,501 from Rp3,700 would still imply a reasonable 6.4x. TBIG IJ N 5,000 5,000 0% 1,696 TOWR IJ OP 3,490 4,000 15% 2,665 A tide that lifts all boats Source: Macquarie Research, Share prices at close 24 January 2017 The positive impact of 4G monetization premises upon the sustainability of the
competitive environment. We believe this should prevail, at least in the short to Key ratios medium term, and hence maintain our positive view on all three telcos. While we Bbg Code EV/EBITDA (x) PER (x) FCF yield continue to see smooth sailing for Telkomsel, we are incrementally concerned 17E 18E FY17E FY17E TLKM IJ 8.6 7.9 18.4 6.4 about the TLKM group’s fixed broadband execution. We keep TLKM at OP with EXCL IJ 4.8 4.1 40.3 4.0 a slightly lower TP of Rp4,600 from Rp4,700, implying an 18% TSR at 8.6x ISAT IJ 3.7 3.3 13.7 10.5 TBIG IJ 12.9 12.3 22.1 7.3 FY17E EV/EBITDA. Meanwhile, we think ISAT’s well-executed new marketing TOWR IJ 9.1 8.0 13.4 5.5 strategy should be able to sustain its healthy revenue momentum. It is the Source: Macquarie Research, January 2017 cheapest telco in ASEAN at 3.7x EV/EBITDA while at our TP of Rp10,900 and 77% TSR would still imply an undemanding 5.5x.
Regulation to remain cloudy for a while
Our recent discussions with industry players suggest that the regulatory issues with regards to spectrum auction, network sharing, and even interconnect rates seem likely to remain an overhang for the short-to-medium term. The delay on these regulations bodes well for TLKM as it prolongs the incumbent’s ex-Java dominance, but would be incrementally negative if implemented in the long run. Expectations moderated, tower sector upgraded to Neutral While we preserve our cautious stance on the potential downward pressure on lease rates that have not yet materialized, we sense that the market has already Analyst(s) tapered down its prior high growth expectation to a more moderate one. In light PT Macquarie Capital Securities Indonesia of the share price de-rating of the big two towercos, we upgrade our Nathania Nurhalim +62 21 2598 8365 [email protected] recommendation for TBIG to Neutral with a revised TP of Rp5,400 from Rp5,000 Macquarie Capital Securities (Malaysia) Sdn. Bhd. at a fair 12.9x FY17E EV/EBITDA and TOWR from Neutral to OP at 9.1x Prem Jearajasingam EV/EBITDA. We prefer the latter for its stronger balance sheet in support of +60 3 2059 8989 [email protected] future tower acquisitions. 25 January 2017
Please refer to page 19 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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KOREA Korea consumer sector Consumer sentiment hits a new low Consumer sentiment index 130 Making money during tough times 120
110 Conclusion
100 . We expect a challenging macro environment for the Korean consumer sector 90 after the consumer sentiment index hit its lowest level since the Global 80 Financial Crisis. We thus advise investors to focus on structural market share 70
60 gainers like Hanssem, e-commerce proxy CJ Korea Express, and defensive
stocks such as Coway and LOEN with highly visible cash flows.
2008. 07 2008. 11 2008. 03 2009. 07 2009. 03 2010. 07 2010. 03 2011. 07 2011. 11 2011. 07 2012. 11 2012. 07 2013. 11 2013. 07 2014. 11 2014. 03 2015. 11 2015. 03 2016. 11 2016. 2010. 11 2010. 03 2012. 03 2013. 03 2014. 07 2015. 07 2016. 2009. 11 2009. Source: Korean Statistical Information Service, Jan 2017 Impact Stock details . Household disposable income growth decelerated to 0-2% range. We
Targe Last think this is because the quality of employment has deteriorated. Although the tpx px Up/dn M cap latest monthly unemployment rate was low at 3.4%, the percentage of Company Code Rec (W k) (W k) (%) ($bn) employees working less than 36 hours per week has been steadily rising, and CJ KX 000120 OP 270 167 62% 3.2 such part-time jobs are often low-paying positions. The labour force Hanssem 009240 OP 270 210 29% 4.1 Loen 016170 OP 113 74 52% 1.6 participation rate hit an all-time high, but we are seeing the sharpest increase Coway 021240 OP 110 88 25% 5.6 in the over 60-year age group, as seniors are finding low-paying jobs after Source: Macquarie Research, priced as of 24 Jan 2017 retirement because they are financially ill-prepared to retire or they still need Income growth stagnant to support their adult children. Urban worker household average disposable income growth (YoY) 10% . Propensity to consume is also falling on pessimistic outlook. This 8% suggests many households are raising savings believing the worst is yet to 6% come. It is also structural due to demographic changes, as the percentage of 4% households headed by the 40-49 year age group, which has the highest 2% propensity to consume, is steadily falling due to ageing population. Fast rising 0% household debt could be another structural reason, as it would be prudent for -2% households to save more in light of higher leverage. -4%
. We project Chinese visitation to Korea will fall 6% in 2017, due to rising
2006 1/42006 1/42007 3/42007 1/42008 3/42008 1/42009 3/42009 3/42010 1/42011 3/42011 1/42012 3/42012 1/42014 3/42014 1/42015 3/42015 1/42016 2010 1/42010 1/42013 3/42013 3/42016 2006 3/42006 political tension between the two countries. We estimate Chinese shopping Source: Korean Statistical Information Service, Jan 2017 spending accounted for 4% of Korean retail sales. The cosmetics and apparel Propensity to consume falling sectors will be particularly hard hit, as these two were the most popular Propsensity to consume (%) 76.0 shopping items among Chinese visitors.
75.0
74.0 Our top picks
73.0 . Hanssem (structural market share gainer): Korea’s furniture retailing 72.0
71.0 industry is outdated and fragmented, as about 60-70% of the market is 70.0 dominated by non-branded products sold through small mom and pop stores. 69.0 Hanssem is replacing these outdated retail channels with its modern large 68.0 scale furniture specialty stores and online shops, and we think this
modernization trend will continue, irrespective of economic cycle.
2006 1/4 2006 3/4 2006 3/4 2007 1/4 2008 1/4 2009 3/4 2009 1/4 2010 3/4 2010 3/4 2011 1/4 2012 1/4 2013 3/4 2013 1/4 2014 3/4 2014 3/4 2015 1/4 2016 2008 3/4 2008 1/4 2011 3/4 2012 1/4 2015 3/4 2016 2007 1/4 2007 Source: Korean Statistical Information Service, Jan 2017 . CJ Korea Express (e-commerce proxy): Although offline retail sales have been weak lately, e-commerce sales growth has been accelerating, which will
inevitably fuel parcel delivery service demand. CJ Korea Express, Korea’s Analyst(s) Kwang Cho largest parcel company with 44% market share, is our preferred proxy. +82 2 3705 4953 [email protected] KJ Lee . Coway and LOEN (defensive growth): The businesses of Coway and LOEN +82 2 3705 9935 [email protected] are based on monthly subscription models and thus generate highly visible Rose Kim +82 2 3705 9815 [email protected] streams of cash flow. For Coway, a sharp earnings turnaround from the product recall in 2016 and aggressive dividend payouts are likely to be 25 January 2017 additional catalysts. For LOEN, a sharp ARPU increase following the price Macquarie Securities Korea Limited hike in 2016 will be a catalyst.
Please refer to page 11 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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UNITED STATES Alibaba Group Holding BABA US Outperform Re-defining the retail Price (at 04:37, 25 Jan 2017 GMT) US$101.43
Valuation US$ 123.00 Conclusion - PER . 3QFY17 revenue and earnings beat consensus by 6%/17%, on the back of 12-month target US$ 123.00 12-month TSR % +21.3 accelerated growth of Core Commerce and solid margins. Total revenue GICS sector Software & increased 54% yoy to RMB53.2bn, despite the high base comp in December Services quarter. Organic growth, excluding Lazada and Youku, also came in strong at Market cap US$m 253,096 44% yoy. Despite aggressive investment in content and new initiatives, 30-day avg turnover US$m 882.2 adjusted EBITA margin expanded 5.7ppts qoq to 48%. Non-GAAP diluted Number shares on issue m 2,495 EPS grew 38% yoy to RMB9.02. The company raised its FY17 revenue
Investment fundamentals growth guidance to 53% yoy from 48% yoy. We lift our FY17/FY18 earnings Year end 31 Mar 2016A 2017E 2018E 2019E by 6%/4%, and raise TP from US$120 to US$123 on 28x FY18 PE. Revenue bn 101.1 155.1 199.5 254.3 Impact EBIT bn 29.1 47.3 57.2 73.9 Reported profit bn 71.5 40.6 52.5 65.1 . China retail growth accelerated. Revenue growth in the China retail Adjusted profit bn 43.1 62.3 77.7 96.3 Gross cashflow bn 49.6 71.5 92.3 113.7 business accelerated to 42% yoy in 3QFY17 from 35% yoy the same quarter CFPS Rmb 19.36 27.83 35.57 43.37 last year. Online marketing service increased 47% yoy driven by strong traffic CFPS growth % -8.4 43.7 27.8 21.9 PGCFPS x 35.9 25.0 19.6 16.0 growth and an improving click through rate. Mobile MAU expanded 25% yoy EPS adj Rmb 16.82 24.25 29.92 36.74 to 493m, and time spent also increased thanks to improving user engagement EPS adj growth % 20.9 44.1 23.4 22.8 PER adj x 41.3 28.7 23.2 18.9 and personalized content. The proposed Intime deal will enable BABA to Total DPS Rmb 0.00 0.00 0.00 0.00 launch a full-scale test of the online-offline retail format, and it is a Big step Total div yield % 0.0 0.0 0.0 0.0 ROA % 0.2 16.5 15.8 17.0 forward in shaping the “New Retail”. ROE % 24.4 25.5 25.1 25.2 . Globalization strategy well-executed. Revenue from International EV/EBITDA x 53.8 35.7 25.8 19.3 Net debt/equity % -19.6 -10.2 -22.6 -32.6 Commerce grew 94% yoy to RMB4.0b, ahead of our estimate of 56% yoy. P/BV x 8.1 6.2 5.1 4.2 This is attributable to the consolidation of Lazada in mid-April as well as the BABA US vs S&P 500, & rec history re-acceleration of the AliExpress business. Globalization is one of the three key strategies that management identified for 2017. We believe BABA is on top of its globalization strategy, as shown by this strong international result. . Margins held up well despite continuous investment. Gross profit margin expanded 2.4ppts sequentially to 64%, 2.1ppts ahead of our estimate. Despite continuous investment in content acquisition and could infrastructure, adjusted EBITA margin held up well at 48%, representing a qoq expansion of 5.7ppts. While we still expect gross margin to gradually decline given the aggressive investment, we believe this will be partially offset by improving
Note: Recommendation timeline - if not a continuous line, then there was no operational efficiency for a better-than-expected non-GAAP operating margin. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 . Nailed a 12-year partnership with the IOC. Alibaba recently signed deal (all figures in Rmb unless noted, TP in USD) with the International Olympic Committee (IOC) to be the official cloud services and e-commerce platform services provider for the Olympic games through 2028. BABA will leverage its technology and innovation to help the IOC to transform and to embrace the digital era. Alibaba will have the right to operate the Olympic Channel to make content available to the Chinese audience. This should also help BABA to enhance its global brand image. Analyst(s) Earnings and target price revision Wendy Huang, CFA +852 3922 3378 [email protected] . We lift our FY17/FY18 earnings estimate by 6%/4% to reflect strong revenue Ivy Luo growth and solid margin. +852 3922 1507 [email protected] Hillman Chan, CFA Price catalyst +852 3922 3716 [email protected] Joe Yu . 12-month price target: US$123.00 based on a PER methodology. +852 3922 1160 [email protected] . Catalyst: Global expansion, cloud computing, and Ant Financial listing 25 January 2017 Action and recommendation Macquarie Capital Limited . We reiterate BABA as our top pick in the China e-commerce space given its
robust growth momentum. Please refer to page 12 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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HONG KONG CNOOC 883 HK Outperform Still meaningful upside, but multiple to Price (at 05:50, 25 Jan 2017 GMT) HK$9.70
Valuation HK$ 13.42 remain suppressed near-term - DCF (WACC 8.2%, beta 1.1, ERP 6.8%, RFR 2.0%, TGR 2.0%) 12-month target HK$ 12.00 We cut our one-year price target on CNOOC to HK$12.00 from HK$13.50, and 12-month TSR % +28.9 remove the stock from Macquarie’s Marquee Buy list. Put simply, the oil price GICS sector Energy optionality has yet to play out and, in our opinion, the recent cut to production Market cap HK$m 433,080 guidance may serve as a near-term overhang on CNOOC’s arguably cheap Market cap US$m 55,831 trading multiples. However with still 29% TSR upside to our price target and 40% Free float % 35 upside to our residual income valuation, we firmly maintain an Outperform 30-day avg turnover US$m 56.2 recommendation. Number shares on issue m 44,647
Investment fundamentals Reflecting prudent guidance Year end 31 Dec 2015A 2016E 2017E 2018E EBITDA bn 90.9 63.5 104.9 117.8 The combined impact of an average 7% cut to CNOOCs 2017-18 production EBITDA growth % -34.7 -30.1 65.2 12.3 guidance and the top-end of CNOOCs capex range for 2017 is an average cut of Reported profit bn 20.2 -4.7 23.7 32.8 7% to EBITDA, 13% to EPS and 9% to residual income valuation. For context a Adjusted profit bn 20.2 5.6 23.7 32.8 EPS adj Rmb 0.45 0.13 0.53 0.74 $5 move in the oil price makes a 10-25% impact on the same parameters. EPS adj growth % -66.4 -72.3 321.8 38.5 PER adj x 18.9 68.2 16.2 11.7 Cheap multiple to remain suppressed near-term Total DPS Rmb 0.42 0.35 0.45 0.45 Total div yield % 4.8 4.1 5.2 5.2 ROA % 2.6 -1.0 5.1 7.1 CNOOC trades on 3.5x 2018 EV-DACF, a 30% discount to EM comps (fig 7, 10). ROE % 5.3 1.5 6.5 8.8 The common deflection we get on this is ‘why should the shares trade on more EV/EBITDA x 4.7 6.8 4.1 3.7 Net debt/equity % 14.4 13.5 9.6 6.9 than 1x price-to-book if the company is going to run out of oil in 8 years and P/BV x 1.0 1.1 1.0 1.0 more quickly offshore China?” CNOOCs production guidance cut will likely add
weight to this bear argument and serve as a near-term overhang for the shares. 883 HK rel HSI performance, & rec history However, we would be buyers of the pullback and argue: (1) CNOOC’s current production guidance reflects a low watermark as only economic barrels at $51/bbl Brent have been included in guidance; (2) reserve life (fig 9) on a standalone basis is largely meaningless and CNOOC’s 10-year average organic proven reserve replacement ratio of 115% (fig 11) is potentially a more useful metric to gauge future production potential; (3) return metrics will rise along with higher oil prices and our forecast average 2017-20 ROE of 10% implies a justified P/B of 1.2x (5-year trading range 0.9-2.2x, fig 8).
Source: FactSet, Macquarie Research, January 2017 Fundamental buy case with meaningful upside remains (all figures in Rmb unless noted, TP in HKD) While our confidence on the timing of a re-rating for CNOOC has waned, our conviction on the free cash flow generation potential and the leverage to rising crude prices has not changed. Strong organic FCF generation. We calculate robust Rmb80bn cash from operations for CNOOC in 2017, even assuming: (a) US$50/bbl Brent, (b) 450mmboe production, the bottom end of guidance, and (c) 30% opex inflation. This strong internal cash flow generation enables CNOOC to fund its rising capex requirement while maintaining a stable dividend, in our opinion. Our base case modelling implies an average 8.5% FCF yield (fig 5, 14) and cash return on capital employed (CROCE) of 13% for 2017-19e (fig 13). What good is FCF if not shared? CNOOC has maintained a relatively stable Analyst(s) absolute dividend payment since 2011 and has been willing to pay above FCF. Aditya Suresh, CFA Our dividend estimate for CNOOC is c.30% above consensus. (fig 15) +852 3922 1265 [email protected]
Oil price optionality for free. CNOOC today is discounting US$51/bbl 2017 and 25 January 2017 US$67/bbl long-term/2020+ Brent oil price. Every $10/bbl change in long-term oil Macquarie Capital Limited price assumptions makes a c.40% impact on fair valuation. (fig 16)
Please refer to page 14 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
9
INDIA Crompton Consumer CROMPTON IN Outperform Standing Tall Price (at 10:57, 25 Jan 2017 GMT) Rs183.00
Valuation Rs 221.00 Event - PER . The 3Q FY17 top-line performance from Crompton Consumer should be 12-month target Rs 221.00 sustained, in our view, and we believe the company will build on its market- Upside/Downside % +20.8 12-month TSR % +21.6 share gains in existing categories as well as launch in new segments. We find Volatility Index Medium margin expansion despite ESOP and other one-time costs commendable, and GICS sector we believe there is scope for another 100bp of expansion over FY17–19. Our Consumer Durables & Apparel FY18/19E EPS are 6–7% above consensus. We are raising our target price to Market cap Rsm 114,686 Rs221 as we roll forward to FY19E at a 33x PER. Market cap US$m 1,579 Impact Free float % 63 30-day avg turnover US$m 2.0 . Drivers in place for top-line growth to improve: Premium Fans continue to Number shares on issue m 626.7 see very strong growth, with volume rising 40% in 3Q. We believe this
segment can continue to grow to become 20–25% of the Fans category. Investment fundamentals Year end 31 Mar 2017E 2018E 2019E 2020E Agricultural Pumps is a new segment for the company and is being impacted Revenue m 39,736 45,253 51,500 57,917 by demonetisation, but we believe improvement will be seen as the rural EBIT m 4,648 5,507 6,451 7,227 economy improves in 1H FY18E. Lighting growth of 5%, despite a sharp EBIT growth % nmf 18.5 17.1 12.0 Recurring profit m 4,236 5,171 6,269 7,254 reduction in EESL sales, looks very positive. In FY18E, CFL should decline to Reported profit m 2,838 3,465 4,200 4,860 a very small share in Lighting. Adjusted profit m 2,838 3,465 4,200 4,860 EPS rep Rs 4.53 5.53 6.70 7.75 New product categories such as water heaters and coolers should also EPS rep growth % nmf 22.1 21.2 15.7 EPS adj Rs 4.53 5.53 6.70 7.75 add to growth in FY18E. Heaters witnessed 28% growth in 3Q, which is a EPS adj growth % nmf 22.1 21.2 15.7 good start. This will be the first effective season for Air Coolers, which will PER rep x 40.4 33.1 27.3 23.6 PER adj x 40.4 33.1 27.3 23.6 be shipped from late-4Q FY17. Total DPS Rs 1.36 1.66 2.01 2.33 Total div yield % 0.7 0.9 1.1 1.3 . GST should aid market share gains: Sixty percent of the portfolio (Lighting, ROA % 25.2 25.2 26.5 27.5 Pumps and other durables, except Fans) has a large unorganised share. ROE % 88.8 66.5 54.8 46.0 EV/EBITDA x 24.7 20.8 17.7 15.8 Despite potential disruption in1Q FY18 due to GST, we believe market-share Net debt/equity % 77.8 22.9 -6.9 -25.9 gains later in FY18E should be enough to cover for any shortfall. P/BV x 28.0 18.1 12.7 9.5
. Levers intact for margin expansion: We find the 100bp margin expansion CROMPTON IN rel BSE Sensex performance, & rec history despite ESOP costs and one-time costs of Rs80mn (0.9% of revenue) very commendable. Mix improvement and a reduction in corporate charges should drive margins over the FY17–19 period. . We are 6–7% above consensus: Our FY18/19E EPS estimates are 6–7% above Bloomberg consensus, which we believe is driven by our 14–15% revenue growth estimate for FY18/19E vs consensus at 11–12%. Earnings and target price revision . We are increasing our FY17E EPS by 7% and have made minor adjustments
Note: Recommendation timeline - if not a continuous line, then there was no to FY18/19 estimates. We are raising our target price 9.4% to Rs221 as we Macquarie coverage at the time or there was an embargo period. roll forward to FY19E. Source: FactSet, Macquarie Research, January 2017 (all figures in INR unless noted) Price catalyst
. 12-month price target: Rs221.00 based on a PER methodology. Analyst(s) . Catalyst: Margin expansion and earnings growth. Inderjeetsingh Bhatia +91 22 6720 4087 [email protected] Action and recommendation Sumangal Nevatia, CFA +91 22 6720 4093 [email protected] . Expect industry-leading earnings growth to be sustained: Crompton
reported 35% YoY earnings growth in 3Q. We believe this sets the base for 25 January 2017 consensus to be easily beaten in FY17 and for upgrades to FY18 numbers. Macquarie Capital Securities India (Pvt) Crompton’s discount to Havells on FY18E earnings looks understated, as it Ltd has a non-cash ESOP cost that reduces earnings by 7%. We prefer Crompton over Havells India (HAVL IN, Rs412.15, Outperform, TP: Rs404.00). Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
10
HONG KONG Guangzhou Automobile 2238 HK Outperform Profit alert suggests weak 4Q16 Price (at 11:04, 25 Jan 2017 GMT) HK$10.68
Valuation HK$ 13.70 Conclusion - PER 12-month target HK$ 13.70 . After the market close Wednesday, Guangzhou Auto (GAC) announced a Upside/Downside % +28.3 positive profit alert, indicating NPAT for the year to December 2016 would be 12-month TSR % +32.2 up 30-55% YoY, representing a range of Rmb5,500-6,560m. This is below our Volatility Index Medium estimate of Rmb7,443m and consensus of Rmb7,285m. Further, it implies GICS sector Automobiles & that 4Q NPAT ranged from a loss of Rmb100m to a profit of Rmb951m vs Components NPAT of Rmb1,508 in 4Q 2016 and 9M16 NPAT of Rmb5,609m. We believe Market cap HK$m 136,181 the market will be disappointed with this result and there could be some Market cap US$m 17,522 selling pressure. Free float % 23 30-day avg turnover US$m 17.2 . GAC delivered solid volume growth in 4Q, up 16.4% YoY, which suggests the Number shares on issue m 12,751 profit shortfall in 4Q relates to one-off factors. This could relate to write-offs related to FCA and in particular the Fiat brand. Fiat’s two models, the Viaggio Investment fundamentals and Ottimo, combined shipped only 1,080 units in 4Q. This is unsustainable Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 29,418 45,607 54,254 64,135 for a brand. We would view it as positive if GAC-FCA were to abandon the EBIT m 387 2,862 3,316 3,833 Fiat brand and focus on building the Jeep brand, which has enjoyed success EBIT growth % nmf 639.8 15.9 15.6 Reported profit m 4,212 7,443 8,520 9,572 since it launched the Cherokee in late 2015. The Cherokee and Renegade – EPS rep Rmb 0.65 1.16 1.28 1.33 launched in June 16 – sold 133k in 2016. We reiterate our Outperform rating EPS rep growth % 31.9 76.7 11.0 3.7 and target of HK$13.70. PER rep x 14.4 8.2 7.4 7.1 Total DPS Rmb 0.20 0.35 0.37 0.40 Total div yield % 2.1 3.7 4.0 4.2 Impact ROA % 0.6 3.8 3.6 3.5 ROE % 11.4 17.8 15.4 13.7 . Solid performance at GAC Honda & GAC Toyota: Among the factors EV/EBITDA x 9.6 5.8 5.2 5.1 supporting the solid profit growth for the year, GAC’s release to the HKEX Net debt/equity % 1.0 4.5 -29.7 -34.5 P/BV x 1.6 1.4 1.0 0.9 noted the growth at its JVs with Honda and Toyota, with volumes up 10.1% and 4.6%, YoY. As volumes were supported by robust sales of SUVs like the 2238 HK rel HSI performance, & rec history Honda Vezel and Toyota Highlander, we expect profits grew ahead of sales. In 2017 Honda’s sales should be supported by the recently launched Avancier full-size SUV, however, Toyota’s lack of capacity is likely to limit sales growth. . Own brand doing well: GAC cited the solid performance of its own brand Trumpchi, which posted sales growth of 93.5% led by China’s second-best selling SUV, the GS4, which sold 327k units. The success of the GS4 pushed GAC’s operating profit firmly into positive territory, with the OPM reaching 5.3% in 1H16 vs -6.2% in 1H15. We expect this solid trend to continue.
. Success of Jeep, synergies within group: Other factors that GAC cites Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. include the success of Jeep. It notes that it turned a loss into a profit, but it is Source: FactSet, Macquarie Research, January 2017 not clear if this is just for the Jeep brand or for GAC-FCA overall. It also (all figures in Rmb unless noted, TP in HKD) suggests the company is benefiting from economies of scale in parts procurement, commercial services and financial segments, enhancing operating performance. Earnings and target price revision . No change. Analyst(s) Price catalyst Macquarie Capital Securities (Japan) Limited Janet Lewis, CFA . 12-month price target: HK$13.70 based on a PER methodology. +81 3 3512 7856 [email protected] Macquarie Capital Limited . Catalyst: Monthly sales; 2016 results in late March 2017. Allen Yuan +86 21 2412 9009 [email protected] Action and recommendation
. We maintain our Outperform rating. 25 January 2017
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
11
CHINA Lens Tech (A-Share) 300433 CH Outperform 4Q16 guidance as expected Price (at 08:50, 25 Jan 2017 GMT) Rmb25.51
Valuation Rmb 36.00 Event - PER 12-month target Rmb 36.00 . Lens Tech released 2016 net income guidance of down 10~22% YoY (vs. Upside/Downside % +41.1 our -11% YoY and Street’s -8% YoY) on Jan 25 after market close. We 12-month TSR % +42.3 believe this negative NI growth guidance is already in the price, given 1) as Volatility Index Very High we highlighted in Oct (report link, Oct 31), management have toned down full GICS sector year NI guidance given weak 1H16 NI growth of -64% YoY, and 2) share price Technology Hardware & Equipment has slumped by 13% (vs. SHCOMP of -2%) since the peak in late 2016. Market cap Rmbm 55,663 Market cap US$m 8,033 . We remain Outperform on Lens Tech and see positive catalysts going Free float % 99 forward, including 1) the released 4Q16 guidance should ease Street’s 30-day avg turnover US$m 12.0 concerns on the company’s 4Q16 results, 2) as we highlighted in Jan (report Number shares on issue m 2,182 link, Jan 10), management are confident of 1Q17 revenues growth, and 3)
Investment fundamentals launch of more glass / ceramic casing by smartphone brands (Fig. 1). The Year end 31 Dec 2015A 2016E 2017E 2018E stock currently trades at 20x our 2017E PE, vs. 28x historical trading average. Revenue m 17,227 16,006 24,430 34,869 EBITDA m 3,929 3,840 5,350 7,122 Impact EBITDA growth % nmf -2.3 39.3 33.1 EBIT m 1,867 1,496 2,974 4,698 . 4Q16 guidance as expected: Management guide 2016 net income to down EBIT growth % nmf -19.9 98.8 58.0 Reported profit m 1,543 1,248 2,554 4,092 by 10~22% YoY, implying the midpoint of 4Q16 net income at Rmb501m, or EPS rep Rmb 0.78 0.63 1.29 2.07 +9% YoY. The negative net income growth guidance for 2016 is mainly EPS rep growth % nmf -19.1 104.6 60.2 PER rep x 32.7 40.4 19.8 12.3 dragged by weak 1H16 NI growth of -64% YoY. The weak 1H16 was mainly Total DPS Rmb 0.00 0.37 0.30 0.61 on the account of the main client’s weak demand. Total div yield % 0.0 1.4 1.2 2.4 ROA % 9.1 7.2 12.7 17.3 . Management confident of 1Q17: Despite a slow season in 1Q17, ROE % 15.0 11.6 21.7 30.3 EV/EBITDA x 39.1 13.7 9.9 7.4 management is confident it can deliver over 30% YoY increase in revenues Net debt/equity % 36.4 23.2 12.2 4.3 given increasing use of glass in China smartphones. Since 2016, we’ve seen P/BV x 14.5 4.6 4.1 3.5 increasing brands launch glass / ceramic casing or 3D cover glass 300433 CH rel CSI 300 performance, & smartphones, including Huawei, Vivo, Xiaomi, Gionee and Meizu. rec history . Premium non-metal casing: We continue to see a trend of premium non- metal casing in China smartphones, and believe this is driven by 1) differentiation: bringing new excitements to the saturated smartphone market, 2) same premium feel and cool touch as metal casing, and 3) wireless chargeable (report link, Nov 25) and radio frequency transparent (better support 5G). . Lens Tech competitiveness: Lens Tech is the only actionable name in tier- one cover glass / glass casing suppliers, with higher yield rate, larger capacity, Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. and a leading client base across global tier and China smartphone. Its shipment Source: FactSet, Macquarie Research, January 2017 gap vs the second-tier suppliers widened to 4x in 3Q16 from 3x in 2Q16, (all figures in Rmb unless noted, TP in CNY) echoing our view leaders are key beneficiaries in the rising glass trend.
Earnings and target price revision
. No change in 2017-18E. Raise 4Q16 opex ratio given higher R&D on 3D glass Analyst(s) and ceramic to factor in the guidance, leading to lower 2016E EPS by 9%. Verena Jeng +852 3922 3766 [email protected] Allen Chang Price catalyst +852 3922 1136 [email protected] Chris Yu . 12-month price target: Rmb36.00 based on a PER methodology. +86 21 24129024 [email protected] . Catalyst: 4Q16 results 25 January 2017 Macquarie Capital Limited Action and recommendation
. Maintain Outperform.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
12
JAPAN LINE 3938 JP Neutral CPM no growth is a big issue Price (at 14:51, 20 Jan 2017 GMT) ¥4,025
Valuation ¥ 3,960 Conclusion - PER 12-month target ¥ 3,960 . LINE disappointed in 1) 4Q OP ¥1.6bn significantly below our estimate ¥5bn Upside/Downside % -1.6 and consensus ¥4.5bn, 2) 1Q Guidance for OPM of mid-teens is well below 12-month TSR % -1.6 our 21%, 3) 1Q sales growth guidance of similar to 4Q (it was 18% YoY) is Volatility Index Medium well below our 20% forecast and 4) lack of CPM growth which means YOY GICS sector Software & growth of 53% by Dec 2017 we forecast looks very hard to achieve. We are Services negative on the results and think the market will be too. Market cap ¥m 875,917 Market cap US$m 7,613 Impact Free float % 20 30-day avg turnover US$m 15.4 . CPM not growing: LINE Ad Platform (LAP) reported sales of ¥4.1bn (up Number shares on issue m 217.6 13.6% QoQ) slightly better than our ¥3.9bn forecast (but worse than consensus of ¥4.5bn). Add impressions were+12% QoQ (we had 0%) and Investment fundamentals hence the qtr did not see CPM increases (it was flat at ¥467). LINE Year end 31 Dec 2015A 2016E 2017E 2018E Revenue bn 120.9 146.5 171.6 196.4 commented that the growth in impressions was mainly from NEWS. We are EBIT bn 2.0 23.3 38.2 50.2 surprised by no growth in CPM and raises very real concerns that advertisers EBIT growth % nmf 1,088.7 63.9 31.4 Recurring profit bn -8.1 18.8 37.9 49.9 are not attracted to the platform and long term forecasts for rising CPM (¥608 Reported profit bn -7.6 8.5 23.2 31.8 in Dec 2017) look harder to achieve. The lack of CPM growth is all the more EPS rep ¥ -41.0 35.4 96.4 132.0 concerning given the auction system used. While seasonally ad revenues EPS rep growth % nmf nmf 172.4 36.8 PER rep x nmf 113.7 41.7 30.5 should improve in 1Q (plus video mix rising and Asia) we are concerned the Total DPS ¥ 0.0 0.0 0.0 100.0 impact will be small. We understand Asian expansion of the platform had little Total div yield % 0.0 0.0 0.0 2.5 ROA % 1.6 13.4 15.6 17.6 impact in 4Q and hence the negative trends relate to Japan. LINE’s game ROE % -42.7 9.8 13.8 17.3 (content) reported sales of ¥10.8bn below our ¥11.9bn (+10.3%QoQ) forecast EV/EBITDA x 142.9 34.6 22.5 17.6 Net debt/equity % 58.6 -85.8 -90.8 -107.1 which contrast with AppApe data showing +29% QoQ increase for Japan. P/BV x 44.2 6.2 5.4 5.2 . 4Q OP miss on higher costs: The company reported 4Q OP of ¥1.6bn 3938 JP vs TOPIX, & rec history significantly below our estimate ¥5bn and consensus ¥4.5bn. Operational costs for marketing were ¥1.1bn higher than we expected, authentication and other service expenses (¥1bn higher) and other operating expenses (¥1.4bn higher) were also higher than expected. LINE also booked a reconciliation charge of ¥1.1bn in 4Q from differences in settlement amounts from sales records and in-app payment processing platform providers. Excluding the charge the costs look to be an ongoing issue. . 1Q guidance miss: LINE expected YoY sales growth in 1Q to be similar to
Note: Recommendation timeline - if not a continuous line, then there was no 4Q. We find this very disappointing and imply the LINE Ad Platform will not Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 grow much sequentially in 1Q despite seasonally being the strongest period. (all figures in JPY unless noted) In addition LINE said OPM would be mid-teens which compares to our current
21% forecasts. Earnings and target price revision
. No change. Price catalyst Analyst(s) David Gibson, CFA . 12-month price target: ¥3,960 based on a PER methodology. +81 3 3512 7880 [email protected] Aya Haruyama . Catalyst: Game launches +81 3 3512 7867 [email protected]
25 January 2017 Action and recommendation Macquarie Capital Securities (Japan) . Maintain Neutral although we see short term negative reaction by the market. Limited It would be more positive if sales growth was stronger.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
13
INDIA Mahindra & Mahindra Fin. MMFS IN Outperform
Price (at 14:50, 24 Jan 2017 GMT) Rs274.60 Services
Valuation Rs 330.00 - Gordon Growth Washout quarter, 4Q holds key 12-month target Rs 330.00 Upside/Downside % +20.2 Event 12-month TSR % +21.5 Volatility Index Medium . Given the cyclical business model focused on rural geographies, MMFS has GICS sector Diversified been impacted most by demonetization in our NBFC coverage universe. Financials 3QFY17 profits were a meagre Rs117m – missing our and consensus Market cap Rsm 156,183 estimates by wide margin. We believe the pain in rural areas is higher given Market cap US$m 2,291 the greater dependence on cash transactions. At the same time, improving Free float % 46 availability of cash in 4Q will ensure that return to normalcy will be swifter. 30-day avg turnover US$m 8.5 Number shares on issue m 568.8 . Nevertheless, the impact of demonetization results into higher credit costs and lower NIMs near-term driving a 16-30% cut in FY17-19E EPS for MMFS. Investment fundamentals Our revised target price for the stock is Rs330 (2.4x FY18E P/BV, revised Year end 31 Mar 2016A 2017E 2018E 2019E Net interest Inc m 34,499 37,545 45,341 54,371 lower from Rs390). Maintain Outperform. Non interest Inc m 2,782 3,478 4,348 5,435 Underlying profit m 23,669 24,322 29,789 36,292 Impact PBT m 12,241 10,233 15,672 20,954 PBT growth % -12.6 -16.4 53.2 33.7 . 4Q collections key to asset quality: Given that 4Q is seasonally the Recurring profit m 12,241 10,233 15,672 20,954 Reported profit m 7,874 6,754 10,344 13,830 strongest quarter for MMFS, collections in this period will reflect the true Adjusted profit m 7,874 6,754 10,344 13,830 picture on asset quality largely negating the transitory impact caused by EPS rep Rs 13.95 11.96 18.32 24.49 EPS rep growth % -14.9 -14.2 53.2 33.7 unavailability of cash in rural areas due to demonetization. Improvement in EPS adj Rs 13.95 11.96 18.32 24.49 cash availability and better rural earnings due to a strong rabi crop output EPS adj growth % -14.9 -14.2 53.2 33.7 PER rep x 19.7 23.0 15.0 11.2 should ideally drive better collection efficiency. At the same time, impact on PER adj x 19.7 23.0 15.0 11.2 borrowers’ earnings due to missed business in 3Q will linger longer and thus Total DPS Rs 4.03 2.91 3.94 4.79 Total div yield % 1.5 1.1 1.4 1.7 we build elevated credit costs of 2.9% in FY17E and an avg of 245bps in ROA % 1.9 1.4 1.9 2.1 FY18-19E. Management aspires for an 8% GNPL ratio by Mar-17E as against ROE % 12.7 10.1 14.1 16.7 P/BV x 2.4 2.2 2.0 1.8 current levels of 11% (which does not include loans worth Rs6.5bn under RBI’s dispensation). MMFS IN rel BSE Sensex performance, & rec history . Disbursements growth was relatively healthy: Disbursements grew 15% YoY primarily led by robust performance pre-demonetization in Oct-16. We expect some return to normalcy and build similar disbursements/AUM growth of ~16% for FY17E. Earnings and target price revision
. Cutting FY17-19E EPS by 16-31% to factor in high credit costs and lower NIMs. Revised target price is Rs330 (against Rs390 earlier) valuing MMFS at 2.4x FY18E P/BV. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 Price catalyst (all figures in INR unless noted) . 12-month price target: Rs330.00 based on a Gordon Growth model
methodology.
Analyst(s) . Catalyst: rural economic recovery, outlook on kharif crop. Sameer Bhise +91 22 6720 4099 [email protected] Suresh Ganapathy, CFA Action and recommendation +91 22 6720 4078 [email protected] . At CMP, MMFS trades close to its long-term mean 2x one-year forward P/BV. 24 January 2017 While acknowledging the weakness in asset quality, we believe current Macquarie Capital Securities India (Pvt) valuations ignore its large rural franchise, potential benefits of a strong Ltd monsoon crop after a period of three years. Maintain Outperform.
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
14
INDIA Maruti Suzuki MSIL IN Outperform Good show continues Price (at 14:50, 24 Jan 2017 GMT) Rs5,703.80
Valuation Rs 6,600.00 Event - PER 12-month target Rs 6,600.00 . Maruti Suzuki 3QFY17 PAT was 8.0% ahead of our estimate. Despite the Upside/Downside % +15.7 adverse impact of demonetisation on passenger vehicle (PV) demand, MSIL 12-month TSR % +17.0 reported to 16% growth in operating profits. As highlighted in our recent report Volatility Index Low/Medium (India Auto Sector: A bright future, an uncertain present), we are optimistic on GICS sector Automobiles & PV demand growth in FY18/19E and expect the competitive environment in Components this segment to remain benign. Maruti’s new models (Vitara Brezza, Baleno Market cap Rsbn 1,724 and Ignis) have been successful and these models have an order backlog of Market cap US$m 25,286 10-24 weeks. Maruti has an exciting model launch plan for 2017-18E too, Free float % 44 which along with its large dealership network makes it best placed for growth 30-day avg turnover US$m 48.7 in the Indian PV market. We maintain Outperform with a TP of Rs6600. Number shares on issue m 302.2
Investment fundamentals Impact Year end 31 Mar 2016A 2017E 2018E 2019E . Revenue bn 567.0 666.6 763.9 863.7 ASP growth drives margin improvement. Improved model mix led to strong EBITDA bn 80.3 97.3 108.1 118.9 8.6% YoY growth in ASPs. The average discount declined 13% YoY but was EBITDA growth % 37.9 21.1 11.1 10.0 EBIT bn 52.1 71.3 81.4 91.6 18% higher QoQ to Rs19k or 4.4% of ASP. However, gross margin declined EBIT growth % 55.2 36.9 14.2 12.5 60bp YoY as the benefits of favourable mix and cost reduction initiatives were Reported profit bn 45.7 70.9 81.0 91.1 offset by higher commodity costs (110bp) and adverse currency. The royalty Adjusted profit bn 46.4 70.9 81.0 91.1 EPS rep Rs 151.37 234.93 268.22 301.65 cost was 5.5% of sales (-60bp QoQ). PAT grew 47% YoY led by 16% growth EPS rep growth % 23.2 55.2 14.2 12.5 in EBITDA, 144% growth in treasury income and 12% decline in depreciation. EPS adj Rs 153.71 234.93 268.22 301.65 EPS adj growth % 23.4 52.8 14.2 12.5 PER rep x 37.7 24.3 21.3 18.9 . Market share increased and mix improved in 9MFY17. Maruti’s domestic PER adj x 37.1 24.3 21.3 18.9 sales grew 9.3% YoY in 9MFY17, led by 124% growth in UV sales. The model Total DPS Rs 35.00 57.00 75.00 90.00 Total div yield % 0.6 1.0 1.3 1.6 mix has been strong as the growth was led by Vitara Brezza and Baleno. The ROA % 14.3 16.6 16.3 15.9 mini segment (Alto, Wagon R) sales declined 4.5% YoY. The drivers of PV ROE % 18.3 24.0 23.3 22.5 EV/EBITDA x 21.4 17.7 15.9 14.5 demand in FY18E will be strong income growth led by state pay commission Net debt/equity % 0.6 0.0 -0.5 -0.6 awards, rural consumption revival on higher agriculture income and rise in the P/BV x 6.4 5.4 4.6 4.0 government spending and lower cost of ownership. Like in the recent years, MSIL IN rel BSE Sensex performance, & we expect the new models to continue to drive PV sales growth in FY17-19E. rec history Maruti has exciting pipeline of new model launches planned for 2017-18E. . Key points from earnings call: a) The new order bookings had declined sharply in the week following demonetisation announcement but recovered by the end of 3QFY17, b) the demand improvement for MSIL has been similar in rural and urban areas; c) the share of MSIL’s sales to government employees has increased to 20% from 16% last year reflecting implementation of 7th pay commission recommendation and the company’s reach-out efforts; d) the salaried employees constitute ~45% of MSIL’s sales. There has been an
Note: Recommendation timeline - if not a continuous line, then there was no increase in the share of first-time buyers and government employees but Macquarie coverage at the time or there was an embargo period. sales to traders/small businessmen have been impacted post demonetisation. Source: FactSet, Macquarie Research, January 2017 (all figures in INR unless noted) Earnings and target price revision
. No change.
Analyst(s) Price catalyst Amit Mishra, CFA +91 22 6720 4084 [email protected] . 12-month price target: Rs6,600.00 based on a PER methodology.
26 January 2017 . Catalyst: Sales volume growth and market-share trends Macquarie Capital Securities India (Pvt) Ltd Action and recommendation
. Maintain Outperform. We expect PAT CAGR of 25% over FY16-19E.
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
15
MALAYSIA Maybank MAY MK Neutral ROE recovery still a ways off Price (at 22:46, 23 Jan 2017 GMT) RM8.28
Valuation RM 8.00 Conclusion - DCF (WACC 10.5%) 12-month target RM 8.00 . Focus on relatively low-beta commercial banking / insurance and non-interest Upside/Downside % -3.4 income drivers, coupled with commendable sub-50% cost-income ratio (CIR), 12-month TSR % +2.7 has supported pre-provisioning operating profit (PPOP) resilience. However, Volatility Index Low continuing provisioning pressures, including a potentially sizeable impact from GICS sector Banks IFRS 9, coupled with conservative capital build-up have underlying ROE falling Market cap RMm 84,400 below 10%, making Maybank’s current premium 1.2x book valuation full. Peer Market cap US$m 19,122 CIMB, as articulated in our Turning the corner update, is preferred exposure for Free float % 91 leveraging into a potential sector re-rating as operating income drivers look set 30-day avg turnover US$m 14.4 to recover over 2017 even as loan loss provisioning is moderating. We transfer Number shares on issue m 10,193 coverage to Anand Pathmakanthan, and reiterate our Neutral rating. Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E Impact Net interest Inc m 14,545 15,161 15,991 17,149 Non interest Inc m 6,346 6,254 6,405 6,807 . Provisioning to remain elevated: we forecast net credit cost to decline only Underlying profit m 10,606 10,718 11,103 11,763 incrementally, from 60bps in FY16E (FY15: 39bps), to 55bps in FY17E and PBT m 8,458 7,790 8,380 9,136 PBT growth % -7.2 -7.9 7.6 9.0 then to 50bps in FY18E. Maybank continues to classify new NPLs in Malaysia Reported profit m 6,836 5,754 6,198 6,768 in oil & gas, shipping, steel and commercial real estate whilst delaying the Adjusted profit m 6,489 5,754 6,198 6,768 EPS rep sen 72.0 57.4 58.6 60.8 reclassification to performing of R&R (restructured and rescheduled) loans EPS rep growth % -2.9 -20.3 2.2 3.7 featuring over 1H16. Loan loss cover at 75% is low vs. 89% sector average. EPS adj sen 68.4 57.4 58.6 60.8 EPS adj growth % -7.4 -16.1 2.2 3.7 . CIR maintained below 50%: helping contain CIR pressures is modest capital PER rep x 11.5 14.4 14.1 13.6 PER adj x 12.1 14.4 14.1 13.6 markets-centric drivers and minimal “backfilling” of departing staff, with group Total DPS sen 54.0 50.0 50.0 50.0 workforce c.10% lower than 3 years ago. Non-core operations (e.g. Papua, Total div yield % 6.5 6.0 6.0 6.0 ROA % 1.0 0.8 0.8 0.8 Thai and most recently, WOM Finance in Indo) also continue to be trimmed. ROE % 11.3 9.0 9.0 9.4 Equity to assets % 58.6 nmf nmf nmf . Capital accumulation appears excessive: Maybank’s CET 1 ratio has risen P/BV x 1.3 1.2 1.2 1.3 by a hefty 200bps over the last 12 months, supported by slowing asset growth MAY MK rel KLCI performance, & rec and continuing dividend reinvestment plan (DRP). Resulting ROE drag looks history unlikely to reverse given sustained provision drag, pending IFRS 9 impact. . IFRS 9 indicative impact sizeable: estimated provision shortfall is RM4.5bn (0.9% of gross loans), with an increase in NPL coverage to 103%. CET 1 ratio impact of 99bps is after taking into account regulatory reserve cushion. Earnings and target price revision
. Maybank currently trades above the Malaysian banking sector average price- book (ex-Public Bank) of 1.0x despite underlying 9-10% adjusted ROE barely
Note: Recommendation timeline - if not a continuous line, then there was no meeting estimated cost of equity (10.0%). However, resilient PPOP and an Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 eventual moderation in provisioning coupled with continued low-RAROC asset (all figures in MYR unless noted) disposals should boost medium-term returns. Gordon Growth valuation uses a
sustainable return on tangible book value (RoTBV) of 12% which generates a 1.5x TP multiple on 2017 RoTBV (COE and LT growth assumption inputs are 10.0% and 6.0%, respectively) for a TP of RM8.00 or 1.2x FY17 book value. Price catalyst Analyst(s) Anand Pathmakanthan . 12-month price target: RM8.00 based on a Price to Book methodology. +60 03 2059 8993 [email protected] . Catalyst: sustained decline in credit costs, rolling back of ROE-punitive DRP,
sale of non-core / non-Asean assets, e.g. 20% stake in Pakistan’s MCB Bank 25 January 2017 Macquarie Capital Securities (Malaysia) Action and recommendation Sdn. Bhd. . Maintain Neutral rating and TP of RM8.00 or 1.2x FY17E book. Prefer CIMB. Please refer to page 13 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
16
JAPAN Right-On 7445 JP Underperform Off Price (at 08:50, 25 Jan 2017 GMT) ¥994
Valuation ¥ 500-900 Conclusion - price cash flow 12-month target ¥ 720 . We are lowering our 8/17 EPS forecast by 87% and downgrading to Upside/Downside % -27.6 Underperform because we think the company has an uncompetitive cost 12-month TSR % -24.1 structure and is unable to meaningfully differentiate its merchandise Volatility Index Medium assortment. GICS sector Retailing Market cap ¥m 29,454 Impact Market cap US$m 260 . The company revised guidance for first half revenue by almost 10%, Free float % 43 indicating that consumers are unimpressed with the freshness of the current 30-day avg turnover US$m 1.6 merchandise assortment and that customer traffic has suffered. Foreign ownership % Number shares on issue m 29.63 . When viewed against last year’s hurdle rates, the monthly revenue trends are
Investment fundamentals actually above the average of peers, so management’s guidance probably Year end 31 Aug 2016A 2017E 2018E 2019E reflects misguided inventory build, and an aggressive plan to fix this quickly at Revenue m 86,462 84,856 89,100 93,500 the expense of current profits. EBIT m 3,733 1,327 1,600 1,700 EBIT growth % 61.3 -64.5 20.6 6.3 . Still, we think Right-On’s inability to sell its merchandise profitably stems from Recurring profit m 2,997 897 1,050 1,100 Reported profit m 1,754 259 750 800 structural weaknesses in the business model that cannot easily be fixed. Adjusted profit m 1,754 259 750 800 Lacking a direct procurement or internal design capability, the company can’t EPS rep ¥ 63.9 9.4 27.5 29.3 EPS rep growth % 135.4 -85.2 190.9 6.7 differentiate its merchandise on either the basis of price or on originality. EPS adj ¥ 63.6 9.4 27.5 29.3 EPS adj growth % 134.4 -85.2 191.2 6.7 . Without a differentiated merchandise assortment, the company will struggle in PER rep x 15.6 105.3 36.2 33.9 PER adj x 15.6 105.4 36.2 33.9 the traditional brick-and-mortar business and cannot even participate in web- Total DPS ¥ 65.0 22.0 58.0 58.0 based sales, which is currently the only channel in apparel retailing that is Total div yield % 6.5 2.2 5.8 5.8 ROA % 5.8 2.1 2.7 2.9 growing. ROE % 5.2 0.8 2.2 2.4 EV/EBITDA x 3.7 6.8 6.1 5.7 Earnings and target price revision Net debt/equity % -19.7 -24.0 -16.2 -5.8 P/BV x 0.8 0.8 0.8 0.8 . We lower EPS for 8/17 by 87%, 8/18 by 69% and 8/19 by 70%. 7445 JP vs TOPIX, & rec history . We lower our target to ¥720 (7.3x cfps), from ¥1,150 (7.4x cfps) Price catalyst
. 12-month price target: ¥720 based on a PCF methodology.
. Catalyst: Company ends fiscal year on the 20th of August, and releases monthly sales on the 20th. We expect declines to average 10% or more through April.
Note: Recommendation timeline - if not a continuous line, then there was no Action and recommendation Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 . We initiated after the company had already underperformed significantly, and (all figures in JPY unless noted) while concerned about the business model, had been reluctant to join the
momentum. As it turns out, the consumer’s judgement seems to have been harsher than we expected. We are lowering our target by 37% and our rating to Underperform from Neutral.
Analyst(s) Mike Allen +81 3 3512 7859 [email protected]
25 January 2017 Macquarie Capital Securities (Japan) Limited
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
17
JAPAN Sakata Seed 1377 JP Outperform Reconfirms overseas growth potential Price (at 14:49, 17 Jan 2017 GMT) ¥3,215
Valuation ¥ 3,200- Conclusion 3,900 - DCF . Sakata Seed held a briefing on 1H FY5/17 results on 25 January, and we 12-month target ¥ 3,800 reconfirmed that the overseas growth story is unchanged and healthy. We Upside/Downside % +18.2 maintain our ¥3,800 price target and Outperform rating. 12-month TSR % +18.9 Volatility Index Medium . We think FY5/17 OP guidance of ¥7bn is conservative and maintain our ¥8bn GICS sector Food, Beverage forecast. & Tobacco . Sales of mainstay broccoli seeds (estimated at about ¥9bn in FY5/16) were Market cap ¥m 155,641 up by just over 10%, even on a yen basis, in 1H FY5/17. We hence think Market cap US$m 1,386 sales expanded at a roughly 25% YoY pace on a forex-neutral basis (the 30-day avg turnover US$m 5.4 Number shares on issue m 48.41 USD/JPY rate was ¥120/$ in 1H FY5/16 and ¥101/$ in 1H FY5/17).
Investment fundamentals Impact Year end 31 May 2016A 2017E 2018E 2019E Revenue m 58,773 57,500 60,100 63,000 . Sakata Seed America, the North American subsidiary, incurred a 16% YoY EBIT m 7,317 8,000 9,500 11,500 decline in 1H OP, due to accelerated 1H recognition of production-related EBIT growth % 53.1 9.3 18.8 21.1 Recurring profit m 7,554 8,200 10,000 12,000 reserves ($2.5mn) that had been planned for 2H. We estimate OP increases Reported profit m 5,215 5,700 7,000 8,400 excluding the reserves impact of 47% YoY on a local-currency basis and 24% Adjusted profit m 5,267 5,700 7,000 8,400 EPS rep ¥ 115.9 126.7 155.5 186.7 on a yen basis. EPS rep growth % 36.5 9.3 22.8 20.0 EPS adj ¥ 117.0 126.7 155.5 186.7 . The 2H guidance projects profit declines at various overseas subsidiaries. EPS adj growth % 27.7 8.2 22.8 20.0 Sakata Seed expects a 24% YoY drop in North American OP for 2H despite PER rep x 27.7 25.4 20.7 17.2 PER adj x 27.5 25.4 20.7 17.2 the above-mentioned early cost recognition. We think guidance generally Total DPS ¥ 25.0 26.0 30.0 35.0 uses conservative assumptions for SG&A expenses at the subsidiaries. Total div yield % 0.8 0.8 0.9 1.1 EV/EBITDA x 14.4 13.5 11.6 9.8 Net debt/equity % -15.1 -17.5 -18.3 -19.9 . Sakata Seed presented a favourable outlook for improving inventory control at P/BV x 1.6 1.5 1.5 1.4 the briefing. Seed inventories expand as preparation for future sales in the
1377 JP vs TOPIX, & rec history seeds business. This aspect creates a structural challenge for expansion of free cash flow because of reduction of the inventory turnover rate and rise in working capital. However, Sakata Seed suggested at the briefing that it sees room to improve inventory control by applying stricter management rules. It also indicated that the current inventory level can be explained by upturn in inventory pricing with an increase in original seeds and higher seed prices and inventory quality itself is not a concern. Earnings and target price revision
Note: Recommendation timeline - if not a continuous line, then there was no . We maintain our forecasts and keep our price target at ¥3,800. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 Price catalyst (all figures in JPY unless noted)
. 12-month price target: ¥3,800 based on a Price to Book methodology.
. Catalyst: Confirmation of overseas profit growth potential in results announcements. Action and recommendation Analyst(s) . We maintain our Outperform rating. Satsuki Kawasaki +81 3 3512 7879 [email protected]
25 January 2017 Macquarie Capital Securities (Japan) Limited
Please refer to page 10 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
18
KOREA Samsung ElectroMechanics 009150 KS Neutral 2017 the year of normalization Price (at 08:50, 25 Jan 2017 GMT) Won56,600
Valuation Won 56,000 Event - Price to Book 12-month target Won 56,000 . Samsung ElectroMechanics’ (SEMCO) 4Q16 financial results were Upside/Downside % -1.1 disappointing, with the company seeing the lowest quarterly sales in five 12-month TSR % -0.2 years as well as operating losses. Volatility Index Medium Impact GICS sector Technology Hardware & Equipment . Poor sales to Samsung Electronics (SEC) took its toll on 4Q16 results. Market cap Wonb 4,227 Sales fell 8%QoQ to Won1,345bn, the lowest since 4Q11. Weak sales to its n captive market, SEC, was the major reason, although the company grew Market cap US$m 3,504 component sales to Chinese vendors. Pricing pressure on SEMCO’s products Free float % 74 mounted due to the lack of a premium phone model (the recall of Galaxy 30-day avg turnover US$m 16.8 Note7) and the limited spec upgrade for high-end phones. With a smaller Number shares on issue m 74.69 revenue base, operating and net losses amounted to Won47bn (-3.5% Investment fundamentals margin) and Won35bn (-2.6% margin), respectively. Year end 31 Dec 2015A 2016E 2017E 2018E . The worst seems over in 2016. SEMCO posted sizeable one-off expense Revenue bn 6,176.3 6,033.0 5,769.2 5,703.7 EBIT bn 301.3 24.4 188.0 255.5 items related to the business streamlining and restructuring in 2016. EBIT growth % 372.6 -91.9 670.7 35.9 Moreover, the company suffered from collateral damage from the Galaxy Reported profit bn 411.4 39.3 192.6 287.4 Adjusted profit bn 411.4 39.3 192.5 287.4 Note7 recall in 2H16. Now, as the Galaxy S8 component build is poised to EPS rep Won 5,507 526 2,578 3,848 start soon, its business should largely normalize, and management is EPS rep growth % -56.7 -90.4 389.8 49.3 EPS adj Won 5,507 526 2,578 3,848 confident it will turn around in 1Q17. However, we believe this should have EPS adj growth % -56.7 -90.4 390.0 49.3 limited impact on its earnings profile, which we find far from exciting. PER rep x 10.3 107.5 22.0 14.7 PER adj x 10.3 107.6 22.0 14.7 . Multiple challenges ahead. We note that the company is still in the middle of Total DPS Won 500 500 500 500 Total div yield % 0.9 0.9 0.9 0.9 business restructuring, including the relocation of plants and entering into high ROA % 4.0 0.3 2.6 3.5 value-added products. Auto-component sales are estimated at just ROE % 9.4 0.9 4.6 6.8 EV/EBITDA x 6.5 8.5 5.8 5.5 US$100mn in 2017, or 2% of total sales. Meanwhile, we believe the company Net debt/equity % 15.6 23.9 17.8 12.8 needs to reduce its dependency on SEC. Although management claims that P/BV x 1.0 1.0 1.0 1.0 its sales to Chinese clients are more than 20% of total sales, we point out that 009150 KS rel KOSPI performance, & this is partly because sales to its captive customer collapsed in 2H16. rec history . Rapidly falling sales in ACI division. ACI sales fell 30% YoY on an apples- to-apples comparison, with a grim business outlook for HDI (for smartphone boards), FC BGA (for PC CPUs) and FC SCP (for smartphone APs). New initiatives, such as PLP and RF-PCB, need more time to make up for the sales gap. Earnings and target price revision . We are cutting our 2017 net profit forecast by 64% and will revisit our estimates once full earnings become available. We are lowering our target Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. price to Won56,000, on an unchanged 1x 2017E book value, from Source: FactSet, Macquarie Research, January 2017 Won59,000. (all figures in Won unless noted, TP in KRW)
Price catalyst . 12-month price target: Won56,000 based on a Price to Book methodology. Analyst(s) . Catalyst: Galaxy S8 component build; new growth drivers (RF-PCB, PLP). Daniel Kim +82 2 3705 8641 [email protected] Action and recommendation Ryan Kim +822 3705 8771 [email protected] . Although earnings seem to have bottomed, we do not find the stock attractive,
not only because valuation multiples look demanding, at 22x 2017E EPS for 25 January 2017 dismal profitability, but because we are sceptical about genuine core Macquarie Securities Korea Limited competencies for its key products. Neutral.
Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
19
KOREA Samsung Engineering 028050 KS Outperform Look at underlying trend! Price (at 08:50, 25 Jan 2017 GMT) Won11,650
Valuation Won 13,500- Event 16,300 - Average of P/BV vs. ROE and EV/backlog . Samsung Engineering reported disappointing 4Q16 earnings due to a one-off 12-month target Won 15,000 cost for the cancellation of the Yanbu power & desalination project. Although Upside/Downside % +28.8 the amount of cost from this cancellation was bigger than we expected, we 12-month TSR % +28.8 have become more confident in its turnaround given positive developments Volatility Index Very High we found in 4Q16 earnings. GICS sector Capital Goods Market cap Wonbn 2,283 Impact Market cap US$m 1,958 . Positive developments under disappointing numbers. Samsung Engineering Free float % 65 reported 4Q16 revenue of Won2,024bn (+2.8% YoY and +24.1% QoQ) and 30-day avg turnover US$m 18.2 operating loss of Won13bn, and net profit of Won13bn. Its disappointing OPM Number shares on issue m 196.0 was due to one-off items such as the 1) cancellation cost for the Yanbu power & Investment fundamentals desalination project (Won198bn) and 2) gain from an order change in the Badra Year end 31 Dec 2015A 2016E 2017E 2018E project (Won 79bn) and others (Won20bn). While numbers may look Revenue bn 6,441.3 7,009.4 6,165.2 6,296.4 EBIT bn -1454.3 70.0 405.4 495.1 disappointing, we see positive developments from the 1) clearing of overhanging EBIT growth % nmf nmf 478.9 22.1 risk from the Yanbu project (well-flagged in the market), and 2) order change and Reported profit bn -1305.3 25.7 270.6 325.6 Adjusted profit bn -1288.3 55.8 300.6 355.6 margin recovery in the Badra GOSP project, which was considered as one of four EPS rep Won -22451 131 1,380 1,661 problematic projects. EPS rep growth % nmf nmf 951.2 20.3 EPS adj Won -19906 284 1,534 1,814 . Underlying profitability on track to recovery. Excluding one-off items in EPS adj growth % nmf nmf 439.2 18.3 PER rep x nmf 88.7 8.4 7.0 each product segment, GPM of hydrocarbon/industrial & infrastructure came PER adj x nmf 41.0 7.6 6.4 in at 6.7%/9.0% in 4Q16. Thanks to lower revenue contribution from Total DPS Won 25 0 0 0 Total div yield % 0.2 0.0 0.0 0.0 problematic projects (0% GPM) and the rising lucrative Samsung captive ROA % -24.7 1.3 7.3 8.5 order, we expect its GPM to further expand in 2017 to 11.6% (vs. 6.9% in ROE % -403.7 12.5 22.4 22.0 EV/EBITDA x -1.2 22.3 7.2 6.1 2016). Furthermore, we estimate its cost structure remains effective with per Net debt/equity % nmf 45.5 37.9 54.4 capita revenue at above-Won1bn (no fixed cost burden). The cash position P/BV x nmf 1.9 1.5 1.3 improved as the company reduced net debt by Won460bn during 4Q16 on 028050 KS rel KOSPI performance, & receivable turnover and a pick-up in captive orders. rec history . Orders to turn around. We expect order momentum to pick up from mid- 1Q17 as they won downstream hydrocarbon orders in the Middle East. Middle East downstream hydrocarbon is entering another round of capacity additions and modernization from 2017 on 1) oil-exporters’ incentives to control the crude price, 2) value chain expansion to capture refining/petrochemical margins, 3) environmental regulation from 2021, and 4) job creation (Samsung Engineering – Double upgrade at a cyclical bottom, 19 January 2017).
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Earnings and target price revision Source: FactSet, Macquarie Research, January 2017 . We revise 2016 EPS forecast by -9% on 4Q16 earnings. No change to our (all figures in Won unless noted, TP in KRW) target price.
Price catalyst . 12-month price target: Won15,000 based on an Average of P/BV vs. ROE and EV/backlog methodology. Analyst(s) . Catalyst: order intake in the hydrocarbon sector, stable oil prices James Hong +82 2 3705 8661 [email protected] Action and recommendation 26 January 2017 . Outperform. The share price might be under pressure due to larger-than- Macquarie Securities Korea Limited expected costs for the Yanbu project. However, we recommend investors to use this as an opportunity to buy the turnaround.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
20
JAPAN SUMCO 3436 JP Outperform Stronger outlook drives TP lift Price (at 14:50, 24 Jan 2017 GMT) ¥1,669
Valuation ¥ 1,950 Conclusion - Price to Book 12-month target ¥ 1,950 . We are raising our TP for SUMCO to ¥1,950 from ¥1,750, based on raised Upside/Downside % +16.8 ASPs, and maintaining our Outperform rating. On 23 Jan, SK Holdings 12-month TSR % +18.0 indicated that it would pay Won 620bn (US$0.5bn) to acquire LG Corp’s 51% Volatility Index High stake in Korean wafer producer Siltron. This caps a period of ownership GICS sector changes in the sector (including GlobalWafers’ acquisition of SunEdison Semiconductors & Semiconductor Semiconductor) that we consider favourable for supply-side discipline. Equipment Market cap ¥m 489,494 Impact Market cap US$m 4,331 30-day avg turnover US$m 77.2 . On 23 Jan, SK Holdings indicated that they would pay Won 620bn Number shares on issue m 293.3 (US$0.5bn) to buy LG’s 51% stake in Korean wafer producer Siltron. This implies an enterprise value of Won 1,865bn (US$1.6bn), i.e. EV/sales of ~2.3x Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E and ~13x EV/EBITDA based on trailing 4Q sales and EBITDA. This is Revenue bn 236.8 209.0 230.5 251.4 cheaper than SUMCO at 2.9x EV/sales 2016E and ~18x EV/EBITDA, but at a EBIT bn 29.4 13.0 30.0 45.2 premium to Siltronic, which is at 1.4x EV/sales and ~10x EV/EBITDA. EBIT growth % 14.8 -55.9 130.7 50.9 Recurring profit bn 25.5 9.0 26.8 42.7 . Given the valuation we expect SK / Siltron to have more incentive to Reported profit bn 19.7 6.2 21.3 34.4 EPS rep ¥ 70.1 21.1 72.8 117.2 remain disciplined on supply. In parallel, in the event of wafer shortages EPS rep growth % 10.8 -69.8 244.3 61.0 there may even be the possibility of Siltron prioritising supply to its top PER rep x 23.8 79.0 22.9 14.2 Total DPS ¥ 20.0 10.0 20.0 30.0 customer (and SK Holdings group firm) SK Hynix. This may benefit other Total div yield % 1.2 0.6 1.2 1.8 wafer producers that have large exposure to Samsung e.g. SUMCO, or that ROA % 5.9 2.7 6.4 9.7 ROE % 10.8 3.0 10.2 14.9 more generally sell wafers to firms other than SK Hynix. Meanwhile, we see EV/EBITDA x 11.9 18.5 11.9 8.6 indications from GlobalWafers supporting expectations of supply-side Net debt/equity % 54.5 60.7 44.9 22.7 P/BV x 2.2 2.4 2.3 2.0 discipline; On 6 Jan, GlobalWafers affirmed that it is prioritising a turn-around
of SunEdison’s profitability, and will not add capacity before this is achieved. 3436 JP vs TOPIX, & rec history . Raising estimates for SUMCO: We are lifting our 2017 300mm wafer US$ ASP growth assumption to 6% from 2%, reflecting supportive comments from TSMC (see TSMC confirms wafer price increases, 16 Jan), which suggests potential for up to 9-10% increases in 300mm wafer pricing –in line with earlier reports. While visibility is still low, we maintain our 9% US$ ASP growth assumption for 2018. Meanwhile, we see greater prospect of 200mm wafer price hikes (we currently assume a flattish trend) as new 200mm fab capacity is ramped-up. As of Nov, Japan wafer producer ASP was just coming off the
Note: Recommendation timeline - if not a continuous line, then there was no absolute low in Sep (Fig. 6) and still down 10% YoY in Yen terms. We expect Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 a return to YoY growth in 1Q17, breaking the downtrend since 2007. (all figures in JPY unless noted) Earnings and target price revision
. 2017-18E OP: +20% to ¥30bn and +14% to ¥45bn respectively, based on ¥110/US$. We are lifting our TP by 10% to ¥1,950 from ¥1,750, based on 2.35x P/B 2018E (16.5% LTROE / 7% CoE). We estimate 4Q16 revenues of ¥53.6bn and OP of ¥4.4bn (unchanged from before). Price catalyst Analyst(s) Damian Thong, CFA . 12-month price target: ¥1,950 based on a Price to Book methodology. +81 3 3512 7877 [email protected] . Catalyst: FY results announcement on 8 February. 25 January 2017 Macquarie Capital Securities (Japan) Action and recommendation Limited . We maintain a positive stance on the wafer sector, in anticipation of a confirmation of wafer price increases and sustained demand growth.
Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
21
TAIWAN Tung Thih 3552 TT Outperform 4Q OP beat guidance and our estimates Price (at 14:50, 24 Jan 2017 GMT) NT$294.00
Valuation NT$ 374.00 Conclusion - PER 12-month target NT$ 374.00 . Tung Thih released December monthly operating income as well as pre-tax. Upside/Downside % +27.2 The preliminary OPI beats our expectation and management’s guidance, and 12-month TSR % +29.2 reaffirms our view that some 1Q17 demand was stimulated in 4Q16 by the Volatility Index High end of subsidies. We retain our bullish view on Tung Thih’s ADAS growth, but GICS sector Automobiles & point out 1Q17 could be weaker than normal seasonality. Components Market cap NT$m 24,794 Impact Market cap US$m 791 . 4Q16 OPI upbeat, thanks to better cost control. Tung Thih’s preliminary Free float % 70 4Q16 revenue of NT$2.5bn (+19% QoQ, +8% YoY) was 3% above our 30-day avg turnover US$m 15.5 Number shares on issue m 84.33 original estimates (vs guidance of NT$2.5bn to NT$2.6bn). This, with management’s efforts on cost control, translates to an OPI of NT$354m (+2% Investment fundamentals QoQ), which was 4% above our original estimates and 8% higher than the top Year end 31 Dec 2015A 2016E 2017E 2018E end of the company’s original guidance (NT$324m to NT$327m). Pre-tax of Revenue m 7,039 9,870 13,772 19,351 Adjusted profit m 790 1,199 1,634 2,057 NT$350m (+18% QoQ) was 4% below our expectation, due mainly to EPS rep NT$ 9.38 14.15 19.24 24.22 unfavourable non-operating items including FX, but still met the company’s EPS rep growth % nmf 50.9 35.9 25.9 PER rep x 31.3 20.8 15.3 12.1 guidance of NT$339m to NT$376m. Total DPS NT$ 5.25 5.51 5.79 6.08 Total div yield % 1.8 1.9 2.0 2.1 . 1Q17 to be weaker than normal seasonality, given the end of government ROE % 21.2 24.9 25.3 26.6 P/BV x 6.7 4.2 3.6 2.9 subsidies. Note that we expect 1Q17 revenue to decline by 4% QoQ, +25% QoQ in 1Q16 and three-year average of +8% QoQ. 3552 TT rel TAIEX performance, & rec history . Auto-parking order wins and share gains within D2XX platform the catalysts for 2017. We point out that Tung Thih is gaining 10 more models for GM’s D2XX platform in 2017 (vs 15-20 models in 2016), backed by the successful track record. More importantly, Tung Thih has secured the ultrasonic-based parking assistant projects within Changan Automobile and Great Wall Motors. This, with Tung Thih’s technology migration, enhances our confidence for further bundle sales to drive earnings growth beyond the rapidly increasing SUV penetration rate in China. Earnings and target price revision Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 . We fine-tune our 4Q16 estimates to factor in preliminary operating income (all figures in NT$ unless noted, TP in TWD) and pre-tax provided by the company. We keep our 2016E-2018E full-year earnings largely unchanged. As a result, our TP of NT$374 (19.4x 2017E PE) remains unchanged.
Analyst(s) Price catalyst Macquarie Capital Limited, Taiwan Securities Branch . 12-month price target: NT$374.00 based on a PER methodology. Louis Cheng, CFA +886 2 2734 7526 [email protected] . Catalyst: Increasing penetration rate of ADAS. Jeffrey Ohlweiler +886 2 2734 7512 [email protected] Action and recommendation Kaylin Tsai +886 2 2734 7523 [email protected] Macquarie Capital Limited . We reiterate our Outperform on Tung Thih, given its leading position within Allen Chang camera-based ADAS supply chain (for China ADAS market forecast please +852 3922 1136 [email protected] refer to our sector report). Our TP of NT$374 is based on 19.4x 2017E PE. Verena Jeng +852 3922 3766 [email protected] . Our top pick in the Taiwan automotive electronics sector is CUB (2231 TT, Chris Yu +86 21 24129024 [email protected] NT$247.0, Outperform, TP: NT$338), on its first-mover advantage, universal
solutions and changes in TPMS regulations. 25 January 2017
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
22
INDIA TVS Motors TVSL IN Neutral Good performance in a tough quarter Price (at 13:24, 24 Jan 2017 GMT) Rs400.90
Valuation Rs 400.00 Event - PER 12-month target Rs 400.00 . TVS Motor (TVSL IN) reported better than expected earnings in 3QFY17. The Upside/Downside % -0.2 government’s move to demonetise high value currency notes on 8th Nov 2016 12-month TSR % +1.1 has led to a sharp decline in 2-wheeler (2W) demand. In this challenging Volatility Index Low/Medium environment, TVSL gained market share in domestic 2Ws and has also GICS sector Automobiles & reported a better than expected operating margin. As per management, Components demand has improved MoM in Jan-17, but it is still lower than last year. Market cap Rsm 190,468 Market cap US$m 2,650 . At its current valuation of 20.2x FY19E standalone EPS, we believe risk- Free float % 38 reward is balanced and maintain our Neutral rating. 30-day avg turnover US$m 7.0 Impact Number shares on issue m 475.1
Investment fundamentals . 3Q PAT was 8% ahead of our expectation. TVS reported 2.3% growth in Year end 31 Mar 2016A 2017E 2018E 2019E sales volume, driven by 27% growth in mopeds, while scooter and motorcycle Revenue bn 111.2 120.6 139.3 156.6 sales declined 4.9% and 4.7%, respectively. The domestic sales grew 4.4% EBITDA bn 7.9 8.7 12.4 14.7 EBITDA growth % 30.5 10.3 42.7 18.1 YoY, while exports remained weak and declined 8.7% YoY. TVS’ operating EBIT bn 5.7 5.9 9.5 11.5 margin declined 75bp QoQ to 7.3% on lower sales volume, but was higher EBIT growth % 25.9 3.4 61.1 21.5 than our expectation of 7.0%. PAT growth was higher at 10% YoY due to a Reported profit bn 4.7 5.3 7.9 9.5 Adjusted profit bn 4.7 5.3 7.9 9.5 lower income tax rate and higher other income. EPS rep Rs 9.91 11.06 16.64 20.00 EPS adj Rs 9.91 11.06 16.64 20.00 . Management maintained market share and margin guidance. TVSL EPS adj growth % 35.4 11.5 50.4 20.2 PER adj x 40.4 36.3 24.1 20.0 reiterated its focus to gain market share driven by exposure to fast-growing Total DPS Rs 2.50 4.00 5.50 5.88 segments and future new product launches. With strong volume growth Total div yield % 0.6 1.0 1.4 1.5 ROA % 11.9 11.3 16.2 18.4 backed by super-brands (Jupiter and Apache), TVSL maintained its guidance ROE % 26.3 25.2 31.9 35.0 of 10% EBITDA margin in FY18E. While this may be too ambitious, we expect EV/EBITDA x 25.0 22.7 15.9 13.5 Net debt/equity % 37.5 29.6 11.5 11.5 management’s focus to now gradually shift towards margin improvement. P/BV x 9.8 8.5 7.0 7.0 . Other earnings call highlights: i) The domestic 2W sales improved MoM in TVSL IN rel BSE Sensex performance, & Jan 2017 but have still not fully recovered as rural markets remain slow; ii) the rec history penetration of organised financing in TVSL’s domestic 2W sales is ~40% and the share of customers buying in cash would be 40-45%; iii) commodity cost pressures continue to remain benign; iv) TVSL will increase prices by ~Rs500-Rs1,800 when it upgrades its models to meet BS IV emission norms; v) TVSL continues to gain market share in its key export market and expects to see growth in export volumes in the near future; vi) TVS reiterated that the BMW-TVS project is on track with the first product launch during the 2017E; and vii) capex guidance remained at Rs4-4.5bn for FY17E.
Note: Recommendation timeline - if not a continuous line, then there was no Earnings and target price revision Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 . We have raised FY17-19E earnings by 1-3% and raised TP to Rs400 (20x (all figures in INR unless noted) FY19E PER) from Rs385 earlier.
Price catalyst
. 12-month price target: Rs400.00 based on a PER methodology.
Analyst(s) . Catalyst: Sales volume growth, market share gains, margin improvement Amit Mishra, CFA +91 22 6720 4084 [email protected] Action and recommendation 24 January 2017 . TVS Motor is likely to gain market share given its higher exposure to the Macquarie Capital Securities India (Pvt) faster growing segments like scooters and premium motorcycles and Ltd operating margin to improve with operating leverage. However, we believe these positives are well captured in its premium valuations.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
23
INDONESIA XL Axiata EXCL IJ Outperform Network quality to shake doubts Price (at 05:50, 25 Jan 2017 GMT) Rp2,680 Conclusion Valuation Rp 4,000 - DCF . With network quality becoming a more influential determinant for subscriber 12-month target Rp 4,000 preference, we believe EXCL’s recent 89% YoY expansion in 3G BTS count Upside/Downside % +49.3 and headstart in 4G BTS deployment in 2Q-3Q16 should lead to a turnaround 12-month TSR % +50.3 in revenue momentum that will positively surprise the market’s low Volatility Index High expectations. EXCL’s subscriber base characteristic also gives investors the GICS sector Telecommunication Services best exposure to the industry’s upcoming 4G monetization. We upgrade our Market cap Rpbn 28,644 TP from Rp3,700 to Rp4,000, implying a rerating from 4.8x to 6.4x FY17E Market cap US$m 2,149 EV/EBITDA, which still places it among the cheapest telcos in ASEAN. Free float % 42 Impact 30-day avg turnover US$m 1.2 Number shares on issue m 10,688 . Investment in network and dealer relationships to generate better revenue momentum. EXCL added 15,700 BTS over 2Q16-3Q16, expanding Investment fundamentals its 3G BTS count by 89% YoY. This is more than the aggregate amount of Year end 31 Dec 2015A 2016E 2017E 2018E Revenue bn 22,876 21,366 23,064 24,845 BTS additions it has done over the past 5 years (from 1Q11 to 1Q16). We EBITDA bn 8,393 8,122 8,949 9,896 saw a network expansion of this magnitude from ISAT in 2014 ahead of its EBITDA growth % -2.7 -3.2 10.2 10.6 Adjusted profit bn 221 364 826 1,822 turnaround in 2015. Separately, EXCL is also focusing on being more EPS adj Rp 25.8 34.4 78.1 172.2 competitive within the traditional channel by offering more incentives to EPS adj growth % nmf 33.7 126.7 120.5 dealers – a trait lacking since 1H15 – which should also lead to a pick-up in PER adj x 104.1 77.8 34.3 15.6 Total DPS Rp 0.0 0.0 27.4 74.5 market share. Total div yield % 0.0 0.0 1.0 2.8 ROA % 2.1 0.9 3.9 6.2 . High volume subs provide better exposure to ARPU-accretion during 4G ROE % 1.6 2.1 3.9 8.2 monetization. We think the key to monetizing 4G is to first garner the most EV/EBITDA x 5.5 6.3 5.7 5.2 Net debt/equity % 199.2 84.7 77.2 64.5 volume whilst maintaining a good and consistent network investment. EXCL, P/BV x 1.6 1.4 1.3 1.2 in our view, has a headstart, as it possesses the highest 4G user subs EXCL IJ rel JSX performance, & rec proportion (16% vs peers’ 7%) as well as the most data-intensive usage per history sub, while at the same time carrying the least 4G traffic per 4G BTS. We think a faster move to 4G is advantageous as operators indicate that a 4G user’s ARPU is typically 30% higher than that of a 3G user. . Lest we forget the better industry dynamics and balance sheet. With an improving competitive environment, lower leverage of below 2.0x net debt/EBITDA, minimum exposure to forex losses, EXCL is in a better position than it was 2 years ago, yet trading at -1stdev its average EV/EBITDA. We think the revenue weakness is temporary and that a rerating is justified to reflect these supportive factors in the medium to longer term. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 Earnings and target price revision (all figures in IDR unless noted) . We reduce revenue figures in FY16E to adjust for another weak set of results in 4Q16, but upgrade our revenue growth rates in FY17-18E from mid-single digit to 10% YoY. We upgrade FY17E EPS by 3% on better cost improvements and downgraded FY18E EPS due to higher depreciation expense. Price catalyst . 12-month price target: Rp4,000 based on a DCF methodology. Analyst(s) PT Macquarie Capital Securities Indonesia . Catalyst: Signs of 4G monetization; turnaround in 1H17 revenue momentum. Nathania Nurhalim +62 21 2598 8365 [email protected] Action and recommendation Macquarie Capital Securities (Malaysia) Sdn. Bhd. Prem Jearajasingam . EXCL is our top pick in Indonesia’s telecom sector. Outperform reiterated. +60 3 2059 8989 [email protected]
Macquarie Governance and Risk Score (MGRS) 25 January 2017 On our proprietary Governance and Risk Score XL Axiata scores in the second quartile of our current universe coverage.
Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
24
INDIA Wipro WPRO IN Neutral Wait for turnaround continues Price (at 08:50, 25 Jan 2017 GMT) Rs481.10
Valuation Rs 490.00 Event - PER 12-month target Rs 490.00 . Post the market close on Wednesday (Jan 25), Wipro declared its 3Q FY17 Upside/Downside % +1.8 results. Revenues at US$1,916mn (+0.6% qoq in cc, 0% qoq in reported 12-month TSR % +4.6 terms) was lower than Street expectations. Certain one-time benefits and Volatility Index Low continued efforts on hyper automation aided the +50bp qoq margin GICS sector Software & improvement. We expect Wipro to post the lowest US$ revenue growth Services among the large cap IT pack in India. We maintain our Neutral rating with a Market cap Rsbn 1,169 revised TP of Rs490 (13x FY18E EPS). Our preference order remains: HCLT Market cap US$m 17,158 > Infosys > TCS > Wipro and Tech M. Free float % 25 30-day avg turnover US$m 6.8 Impact Number shares on issue m 2,431 . US$ revenue growth to lag peers even in FY17: Wipro reported 0% qoq, Investment fundamentals 4.2% yoy growth in US$ revenues in 3Q FY17 (constant currency growth of Year end 31 Mar 2016A 2017E 2018E 2019E Revenue bn 512.4 555.0 613.3 676.9 0.6% qoq). 4Q FY17 is like to be soft with subdued guidance of 1-2% growth EBIT bn 97.0 95.0 107.1 124.9 (in constant currency) as near-term headwinds are likely from restructuring of EBIT growth % 0.4 -2.1 12.7 16.7 Adjusted profit bn 88.9 85.7 91.6 105.7 India business (~10% of revenues) and uncertainty in US healthcare. There EPS adj Rs 36.10 35.17 37.73 43.57 are some early signs of stability in the energy vertical (13% of revenues) with EPS adj growth % 1.4 -2.6 7.3 15.5 2.1% qoq growth (in cc) as oil prices have started stabilising. We expect PER adj x 13.3 13.7 12.8 11.0 Total DPS Rs 6.00 13.00 13.00 10.00 Wipro to deliver 5.1% US$ revenue growth in FY17E, lower than its peers Total div yield % 1.2 2.7 2.7 2.1 TCS (6.5%) and Infosys (7.5%). ROA % 14.6 12.4 12.8 13.9 ROE % 20.3 17.6 17.4 18.4 EV/EBITDA x 9.0 9.3 8.3 7.2 . Margin performance decent despite wage hike: Wipro delivered 18.3% Net debt/equity % -22.8 -18.8 -19.9 -20.8 EBIT margin in its IT services business (+50bps qoq). While we think Wipro is P/BV x 2.5 2.3 2.1 1.9 making decent progress on its hyper automation (7,000 FTEs released in 9M WPRO IN rel BSE Sensex performance, and has exceeded target of 4500 FTEs in FY17E) initiative to mitigate pricing & rec history pressures, it will yield results over the medium term. We expect Wipro to deliver a 17.1% EBIT margin in FY17 (-180bps yoy). Stabilisation of India business should aid in some recovery in FY18E (we are building in +40bps). . Other highlights from the conference call: 1) Appirio deal (cloud services company acquired by Wipro in Oct 2016) closed in November 2016. 2) Digital forms 21.7% of total revenues (vs 19.6 in 2Q and 17.9% in 1Q FY17). Organic growth was ~4.5% qoq and total was ~9.9% (driven by Appirio), 3) ~10% of global workforce is in US (~14,000 employees).
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Earnings and target price revision Source: FactSet, Macquarie Research, January 2017 (all figures in INR unless noted) . ~1% change in FY17-19E EPS and TP (to Rs490 from Rs495 earlier).
Price catalyst
. 12-month price target: Rs490.00 based on a PER methodology.
. Catalyst: slow pick up in revenues, weak deal momentum. Action and recommendation
Analyst(s) . While Wipro is making investments in acquisitions (~US$1bn invested in Abhishek Bhandari , CFA +91 22 6720 4088 CY16), we think that these are likely to yield results in the medium term. We [email protected] expect Wipro to lag large cap Indian IT services companies in US$ revenue
growth rate for FY17E. We maintain a Neutral rating with a TP of Rs490. 25 January 2017 Macquarie Capital Securities India (Pvt) Ltd
Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
25
INDIA Wockhardt WPL IN Neutral Demonetisation and forex dent 3Q Price (at 14:50, 24 Jan 2017 GMT) Rs670.60
Valuation Rs 1,300.00 Event - EV/EBITDA 12-month target Rs 740.00 . Wockhardt delivered a weak 3QFY17 show, below our expectations on Upside/Downside % +10.3 profitability front. 3Q performance was hampered because of two key factors 12-month TSR % +10.3 (i) impact of demonetisation on India revenue growth and (ii) forex hit on UK Volatility Index High business due to GBP depreciation. While we remain bullish on the long-term GICS sector fundamentals of the company, multiples could be under pressure in the near Pharmaceuticals, Biotechnology & Life term, driven by uncertainty around remediation timelines. Shift in time-lines Sciences has significant sensitivity to earnings as fixed costs still remain and WPL Market cap Rsm 74,134 continues to invest aggressively in R&D to build the US pipeline. Market cap US$m 1,087 Free float % 25 . WPL has expensed ~US$400m of R&D spend through its P&L over the past 30-day avg turnover US$m 11.9 five years, despite the FDA import alert, the benefits of which should accrue Number shares on issue m 110.5 going forward (either through opening of the plant or its being a take-out
Investment fundamentals candidate as India now allows 74% FDI through automatic route, even for Year end 31 Mar 2016A 2017E 2018E 2019E brownfield acquisition). This remains the biggest optionality on WPL, in our Revenue m 44,614 43,034 51,261 62,487 view; however, given the risk-off mindset currently prevailing, the market is EBIT m 3,757 3,234 7,214 10,123 EBIT growth % -44.8 -13.9 123.1 40.3 unlikely to reward for that in the near term. We reduce our 12-month TP to Recurring profit m 3,714 2,904 6,869 9,523 Rs740 (@ 1.8x FY18E EV/sales, vs. sector avg. of 3.5x) from Rs896 as we Reported profit m 3,257 2,854 6,476 7,806 Adjusted profit m 3,401 2,854 6,476 7,806 expect the stock to trade at a discount to fair value (which is at Rs1,300) in EPS rep Rs 29.28 25.66 58.23 70.20 the medium term, while the regulatory uncertainty prevails. Maintain Neutral. EPS rep growth % -19.6 -12.4 126.9 20.5 EPS adj Rs 30.58 25.66 58.23 70.20 EPS adj growth % -34.9 -16.1 126.9 20.5 Impact PER rep x 22.9 26.1 11.5 9.6 PER adj x 21.9 26.1 11.5 9.6 . 3QFY17 result highlights: In GBP terms, UK business grew by 2% YoY in Total DPS Rs 0.00 0.00 0.00 0.00 3QFY17. While the business remains stable, it was impacted by GBP Total div yield % 0.0 0.0 0.0 0.0 ROA % 5.1 4.1 8.7 11.0 depreciation in 3Q. Excluding one-time opportunity, UK business grew by ROE % 9.0 7.1 14.4 15.0 16% YoY in 9mFY17. India business growth slowed to 5% YoY largely due to EV/EBITDA x 15.5 16.9 9.2 6.7 Net debt/equity % 16.7 10.6 6.7 1.9 impact of demonetisation. In the US, Wockhardt is focussing on third party P/BV x 1.9 1.8 1.6 1.3 site transfers. The company has recently launched an anti-cancer drug in US WPL IN rel BSE Sensex performance, & in partnership with a third party, with annual sales potential of USD10m. rec history . What are we building in our estimates? We anticipate products from Shendra/Waluj/Chikalthana to sell into the US market in late 2HFY18. We have cut our R&D forecast at ~11% of sales for the near term as WPL has slightly cut its R&D spends to focus on critical projects. For FY18, we assume incremental US$50m sales from US. Earnings and target price revision
. We cut our FY17-19 EPS estimates by 12-14% to reflect slower US sales
Note: Recommendation timeline - if not a continuous line, then there was no citing lack of approvals. Our TP is revised from Rs896 earlier to Rs740. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2017 Price catalyst (all figures in INR unless noted)
. 12-month price target: Rs740.00 based on a EV/EBITDA methodology. Analyst(s) Abhishek Singhal . Catalyst: Completion of FDA remediation efforts and opening of plants +91 22 6720 4086 [email protected] Alankar Garude, CFA Action and recommendation +91 22 6720 4134 [email protected] . Current margins are not reflective of inherent potential of this business, given 25 January 2017 the operating leverage driven by US ramp-up and better asset utilization. Macquarie Capital Securities India (Pvt) FDA timeline for facility clearance remains key. Until then, brace for volatility. Ltd We would advise value-hunting only if one has a 12-24m view and can brace up to volatility in the interim.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
26
HONG KONG Hong Kong Property
Land sales results Land pusher: Third Kai Tak site acquired Project Site area GFA Value AV (k sf) (k sf) (HK$bn) (HK$k psf) by HNA group Kai Tak 79 425 5.53 13.0 1L Site 1 Event Source: Lands Department, Macquarie Research, January 2017 . The Chinese Conglomerate HNA group acquired the third Kai Tak residential site in three months’ time, spending ~HK$20bn in aggregate. Total sales
value of the newly purchased site is HK$5.53bn, or AV of HK$13.0k psf. The Land sales summary of Kai Tak district price is above the market estimate (HK$9.0-12.0k psf), similar to its previous since 2013 sites acquired but 27% higher than the site K Wah acquired. 18 developers Time Project Developer Type GFA AV participated in this land tender. k sqft HK$k psf . While we believe HNA group to enjoy synergy effects by developing these 2013 three sites together, we expect a slim profitability using the latest ASP Jun One Kai Tak (I) COLI Resid 418 5.4 Jun One Kai Tak (II) COLI Resid 462 4.9 achieved by COLI’s One Kai Tak II (HK$19k psf) within the region. 2014 Feb K City K Wah Resid 551 5.6 Implications Feb 1 I Site 1 K&K Prop Resid 520 5.3 Feb 1 I Site 3 POLY Resid 601 6.5 . K Wah (173 HK) the key beneficiary. K Wah owns the second largest GFA May 1H Site 3 Wheelock Resid 413 6.1 2016 GFA (1.1m sqft) in the region after that of HNA Group (1.5m sqft). Its blended Nov 1K Site 3 HNA Group Resid 655 13.5 AV would be HK$7.9k psf, compared to the latest ASP achieved by COLI at Nov 1E Site 2 Lifestyle Intl Comm 1,097 6.7 Dec 1L Site 3 HNA Group Resid 398 13.6 HK$19k psf. We expect company to launch its first Kai Tak project K City (嘉 Dec 1K Site 2 K Wah Resid 574 10.2 匯) in 1Q17. Management targets to achieve HK contracted sales of HK$9bn 2017 Jan 1L Site 1 HNA Group Resid 425 13.0 this year, up from HK$4bn in 2016. We view K Wah as a growing small cap Source: Lands Department, Macquarie Research, January 2017 HK developer with a sustainable earnings base of HK$2bn. . Fierce competitions driving up land price. We anticipate more challenges Land cost of Kai Tak residential site in land bank replenishment for major developers, due to more active acquired by HNA group (in red) participations by mid-small scale developers and Chinese developers. 16 Developers like Sun Hung Kai (16 HK) with an existing sizable quality land 13.5 13.6 13.0 14 bank will have a competitive advantage. Other companies may suffer from 12 10.2 lower profitability if they are to replenish their land bank in open market. 10
8 6.5 6.1 Up for sale 5.4 5.6 5.3 6 4.9 . We expect the market focus to shift towards Island South, given the upcoming 4 2 land tenders of Ap Lei Chau and MTR’s Wong Chuk Hang sites. The former 0 site is scalable with total GFA of 762k sqft, and is estimated to worth over
HK$10bn. The latter MTR site received 39 expressions of developer’
K&K
HNA HNA HNA
COLI COLI
POLY
WHEE Wah K K Wah K interests. Total land value could exceed HK$8bn given its GFA of 577k sqft. Jun Jun Feb Feb Feb May Nov Dec Dec Jan Land sales analysis of Kai Tak Area 1L Site 1 residential project 13 13 14 14 14 14 16 16 16 17 Source: Lands Department, Macquarie Research, January Final land price (HK$ m) 5,530 Construction costs (HK$ psf) Land costs (HK$ psf) – GFA 13,000 Residential 4,500 2017; Excluding Commercial site sold in November 2016 Land costs (HK$ psf) – saleable area 14,445 Retail -
GFA (m sqft) 0.425 ASP assumptions Adjustment -10% Current market price (HK$ psf) 19,000 - Saleable residential area 0.383 Premium over secondary 0% Retail GFA - Total appreciation from now^ 0% Total saleable floor area 0.383 Future price (HK$ psf) 19,000
Analyst(s) NAV (HK$ m) (750) Raymond Liu, CFA Discount rate 5% +852 3922 3629 [email protected] Gross margin 0.3% Catherine Li Year 2017 2018 2019 2020 2021 +852 3922 1161 [email protected] Cash outflows David Ng, CFA Land payment 5,530 Construction costs - 431 345 517 431 +852 3922 1291 [email protected] Marketing expenses 109 109 -
Taxation expenses (16) (16) - 25 January 2017 Cash inflows Macquarie Capital Limited Sales proceeds 3,637 3,637 - FCF (5,530) (431) 3,199 3,027 (431) Source: Lands Department, Macquarie Research, January 2017
Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
27
HONG KONG Hong Kong Property Average spot and passing rents for Hopewell Centre Office in Wanchai (Jun Prepare ahead of the slowdown 2010 – Dec 2016) Conclusion
. Ahead of results season, key conglomerate Hopewell Holdings (54 HK, NR), reported 1HFY17 results with a good read-through to the HK property rental market. This is consistent with our anticipation that organic rental growth will slow in coming years. We would not be surprised if some companies start to suffer negative rental reversions. In Hopewell’s HK portfolio, the spread between spot and passing rents among HK offices appeared to converge further, leaving less room for rental growth. The hotel business started to Source: Company data (Hopewell, 54 HK), Macquarie show signs of stabilization after a double-digit decline in room rates since Research, January 2017 2015. Hang Lung Prop (101 HK), Fortune REIT (778 HK) and Mapletree Gr. Blue – Average spot rent Red – Average passing rent China Commercial Trust (MAGIC SP) will report results on 26 January.
. How to prepare? We suggest investing in companies with growing rental Average spot and passing rent of KITEC Office in Kowloon East (Jun 2010 – Dec income portfolios and good execution in Asset Enhancement Initiatives (AEI). 2016) Those with more new commercial completions should deliver additional recurrent income and growth. In the longer term, they should develop a strong earnings base and can declare a higher dividend to reward shareholders. New World (17 HK) and Sun Hung Kai (16 HK) will have the largest amount of commercial GFA completion while Link REIT (823 HK) has a consistent AEI track record. Impact . Takeaway 1 – Office rental faces more uncertainty in non-Central districts. We note that the spread between office spot and passing rent of Hopewell’s trophy project, Hopewell Centre in Wanchai, is converging. Source: Company data (Hopewell, 54 HK), Macquarie Research, January 2017 Hopewell commented: "In view of uncertainties in the market, the Group will Blue – Average spot rent adopt a defensive rental strategy for the office rental business which will focus Red – Average passing rent on renewing leases of existing tenants with a flexible lease term to increase Upcoming investment property flexibility and capture opportunities brought by the economic turnaround…The completions (including hotels) in next group expects a slight fall of 2% in office rental income YoY in FY17." 12-18 months (sqft) . Takeaway 2 – A rise of Kowloon East Office. Company commented the 3.0 2.8 gap between passing rent and spot rent of its KITEC project (office) narrowed 2.5 2.2 mainly due to softened demand. Management expressed Kowloon East has 2.0 started transforming from industrial to commercial region. They express the 1.5 rent is about to gradually increase despite more new supply, thanks to 1.0 incremental new demand entering the region. 0.5 0.2 0.1 0.1 0.1 0.0 0.0 0.0 . Takeaway 3 – Hotel business turning stable. Panda Hotel (911 rooms) in
Tsuen Wan, one of the most popular destinations for Chinese visitors, saw a
Kerry Kai
K Wah K mild decline of 2% in revenue under an occupancy rate of 97%. The company
Dev
Land
Wheelock Sun HungSun
Sino Land Sino commented “The downward trend for room revenue has become more stable
NewWorld Henderson CK PropertyCK in 2H…and the average room rate remained flat yoy.” This compared to a Source: Macquarie Research, January 2017 yearly drop in average room rate by 18% during July 2015 - June 2016.
Analyst(s) Raymond Liu, CFA Outlook +852 3922 3629 [email protected] Catherine Li . Our picks are SHKP (16 HK), Link REIT (823 HK), New World (17 HK). We +852 3922 1161 [email protected] recently downgraded Hang Lung Prop (101 HK) to Neutral ahead of its results David Ng, CFA on 26 January and following its 16.5% rise in 2016 (vs Hang Seng up 0.4%) +852 3922 1291 [email protected] and an absence of major catalysts in the next 12 months (See Fig 12 for full 25 January 2017 details of stock recommendations). Macquarie Capital Limited
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
28
GLOBAL
Commodities Comment LME cash price % change US$/tonne day on day Zinc still looks sharp, for now Aluminium 1,871 0.9 Copper 5,926 2.6 . Zinc prices continue to look sturdy in the high $2,000s/t, despite Monday’s Lead 2,438 2.6 China trade data and smelter production data once again confirming that Nickel 9,741 0.9 metal market tightness had yet to emerge by the end of 2016. Latest CRU Tin 20,373 1.3 Zinc 2,812 1.3 galvanised steel output data shows a confirmation of the recovery trend in this Cobalt 36,000 0.7 sector (~60% of demand), meanwhile the TCs continued to fall into year-end Molybdenum 14,892 0.0 even as a flurry of spot deals took place, causing concentrates imports into China to lift appreciably and proving the sellers’ strength. Chinese smelters Other prices % change are now announcing (minor) cutbacks in output, while the ex-China market day on day prepares for the 2017 concentrate terms negotiating marathon set to take Gold (US$/oz) 1,217 0.3 place at the IZA conference next month in the US, with the wind certainly in Silver (US$/oz) 17.11 -0.2 the sellers’ favour yet again. Platinum (US$/oz) 992 1.2 Palladium (US$/oz) 789 1.3 . So far so bullish, and we concur with continued price strength expectations Oil WTI 52.67 -0.2 USD:EUR exchange rate 1.076 0.3 this year, looking for prices above $3,000/t by year-end. What comes next, AUD:USD exchange rate 0.759 0.5 however, is less certain. We have the return of Glencore’s shuttered mines at some point, plus new projects being accelerated (Dugald River, Gamsberg), LME/COMEX stocks while zinc’s price relative to other materials (especially aluminium) will begin Tonnes Change Aluminium 2,284,725 -4,550 to create demand destruction the longer it remains extenuated. Producers LME copper 272,150 -2,500 (and other sellers) seem uncertain too; the LME forward curve is flat in 2017 Comex copper 88,489 442 but begins to tip steeply into a backwardation from 2018 onwards – a sure Lead 194,975 -250 sign of hedging away of downside price risk. Nickel 375,504 3,534 Tin 4,605 -50 Latest news Zinc 410,025 -2,475 . Base metals prices rallied on Tuesday, notably copper, which hit its highest Source: LME, Comex, Nymex, SHFE, Metal Bulletin, intraday since December 7 at $5,948/t (LME 3M), on increasing interest in the Reuters, LBMA, Macquarie Research, January 2017 potential Escondida strike story, and aluminium, which benefitted from some additional media reporting about the mooted China capacity cut story (below). . A 2017 air pollution control work draft plan for Beijing-Tianjin-Hebei and neighboring provinces in China was revealed by some media today. According to this draft plan, aluminium and alumina producers from 28 cities in six provinces/municipal cities around this region are required to cut their production by 30% and 50% respectively over the winter heating supply season (usually from middle October to middle March next year in north China), in order to reduce air pollution from this area. It is worth noting that this draft plan is an air pollution control plan instead of a capacity cut plan for the aluminium industry, but if it is really been implemented it would mean 12% Analyst(s) of China aluminium capacity and 20-30% of alumina capacity will be under Macquarie Capital (Europe) Limited suspension over the winter time of 2017. However we believe producers will Vivienne Lloyd +44 20 3037 4530 [email protected] ramp up production in the other six months to prepare for a destock in winter, Colin Hamilton and we still need to wait to see if aluminium industry will be included in the +44 20 3037 4061 [email protected] Jim Lennon, Senior Commodities Consultant overcapacity cut industries as coal and steel. +44 20 3037 4271 [email protected] Matthew Turner . Chinese palladium imports were 68 koz in December, data released on +44 20 3037 4340 [email protected] Monday shows. That was twice their level in the same month of 2015. For the Macquarie Capital Limited Lynn Zhao full year Chinese palladium imports were 646 koz, 22% higher, though this +86 21 2412 9035 [email protected] was still down on the level seen in 2013 and 2014, something that might seem Macquarie Capital Securities (Singapore) Pte. at odds with very rapid car sales growth over this period. However this is to Limited Ian Roper ignore Hong Kong imports, much of which we assume goes into China without +65 66010698 [email protected] being shown in the Chinese trade data. These YTD as of November were 1.4
Moz, up 18% YoY and double the level seen in 2014. Hong Kong trade data 24 January 2017 for December is released on Thursday.
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
29 Macquarie Research Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year – IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up or total assets Macquarie – South Africa down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to move *equivalent fully paid ordinary weighted average Underperform – expected return <-10% up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return
Recommendation proportions – For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)
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Asia Research Head of Equity Research Industrials Telecoms Peter Redhead (Global – Head) (852) 3922 4836 Janet Lewis (Asia) (813) 3512 7856 Soyun Shin (Korea) (822) 3705 8659 Jake Lynch (Asia – Head) (852) 3922 3583 Patrick Dai (China) (8621) 2412 9082 Prem Jearajasingam (ASEAN) (603) 2059 8989 David Gibson (Japan – Head) (813) 3512 7880 Kunio Sakaida (Japan) (813) 3512 7873 Kervin Sisayan (Philippines) (632) 857 0893 Conrad Werner (ASEAN – Head) (65) 6601 0182 William Montgomery (Japan) (813) 3512 7864 James Hong (Korea) (822) 3705 8661 Transport & Infrastructure Automobiles/Auto Parts Benson Pan (Taiwan) (8862) 2734 7527 Janet Lewis (Asia) (852) 3922 5417 Janet Lewis (China, Japan) (813) 3512 7856 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Corinne Jian (Taiwan) (8862) 2734 7522 Takuo Katayama (Japan) (1 212) 231 1757 Justin Chiam (Singapore) (65) 6601 0560 Azita Nazrene (ASEAN) (603) 2059 8980 James Hong (Korea) (822) 3705 8661 Internet, Media and Software Amit Mishra (India) (9122) 6720 4084 Utilities & Renewables Wendy Huang (Asia, China) (852) 3922 3378 Financials Patrick Dai (China) (8621) 2412 9082 David Gibson (Asia, Japan) (813) 3512 7880 Candice Chen (China) (8621) 2412 9087 Scott Russell (Asia) (852) 3922 3567 Hillman Chan (China, Hong Kong) (852) 3922 3716 Alan Hon (Hong Kong) (852) 3922 3589 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Soyun Shin (Korea) (822) 3705 8659 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Keisuke Moriyama (Japan) (813) 3512 7476 Abhishek Bhandari (India) (9122) 6720 4088 Prem Jearajasingam (Malaysia) (603) 2059 8989 Chan Hwang (Korea) (822) 3705 8643 Oil, Gas and Petrochemicals Karisa Magpayo (Philippines) (632) 857 0899 Suresh Ganapathy (India) (9122) 6720 4078 Sameer Bhise (India) (9122) 6720 4099 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Commodities Gilbert Lopez (Philippines) (632) 857 0892 Aditya Suresh (Asia, China, India) (852) 3922 1265 Colin Hamilton (Global) (44 20) 3037 4061 Ken Ang (Singapore) (65) 6601 0836 Anna Park (Korea) (822) 3705 8669 Ian Roper (65) 6601 0698 Passakorn Linmaneechote (Thailand) (662) 694 7728 Duke Suttikulpanich (ASEAN) (65) 6601 0148 Jim Lennon (44 20) 3037 4271 Isaac Chow (Malaysia) (603) 2059 8982 Conglomerates Lynn Zhao (8621) 2412 9035 Pharmaceuticals and Healthcare Matthew Turner (44 20) 3037 4340 David Ng (China, Hong Kong) (852) 3922 1291 Conrad Werner (Singapore) (65) 6601 0182 Abhishek Singhal (India) (9122) 6720 4086 Economics Gilbert Lopez (Philippines) (632) 857 0892 Wei Li (China, Hong Kong) (852) 3922 5494 Peter Eadon-Clarke (Global) (813) 3512 7850 Consumer and Gaming Property Larry Hu (China, Hong Kong) (852) 3922 3778 Tanvee Gupta Jain (India) (9122) 6720 4355 Linda Huang (Asia, China, Hong Kong) (852) 3922 4068 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Zibo Chen (China, Hong Kong) (852) 3922 1130 David Ng (China, Hong Kong) (852) 3922 1291 Quantitative / CPG Terence Chang (China, Hong Kong) (852) 3922 3581 Raymond Liu (China, Hong Kong) (852) 3922 3629 Gurvinder Brar (Global) (44 20) 3037 4036 Sunny Chow (China, Hong Kong) (852) 3922 3768 Wilson Ho (China) (852) 3922 3248 Woei Chan (Asia) (852) 3922 1421 Satsuki Kawasaki (Japan) (813) 3512 7870 William Montgomery (Japan) (813) 3512 7864 Danny Deng (Asia) (852) 3922 4646 Mike Allen (Japan) (813) 3512 7859 Corinne Jian (Taiwan) (8862) 2734 7522 Per Gullberg (Asia) (852) 3922 1478 Kwang Cho (Korea) (822) 3705 4953 Abhishek Bhandari (India) (9122) 6720 4088 KJ Lee (Korea) (822) 3705 9935 Aiman Mohamad (Malaysia) (603) 2059 8986 Strategy/Country Stella Li (Taiwan) (8862) 2734 7514 Kervin Sisayan (Philippines) (632) 857 0893 Viktor Shvets (Asia, Global) (852) 3922 3883 Amit Sinha (India) (9122) 6720 4085 Patti Tomaitrichitr (Thailand) (662) 694 7727 Chetan Seth (Asia) (852) 3922 4769 Fransisca Widjaja (65) 6601 0847 David Ng (China, Hong Kong) (852) 3922 1291 (Indonesia, Singapore) Resources / Metals and Mining Peter Eadon-Clarke (Japan) (813) 3512 7850 Karisa Magpayo (Philippines) (632) 857 0899 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Chan Hwang (Korea) (822) 3705 8643 Chalinee Congmuang (Thailand) (662) 694 7993 Coria Chow (China) (852) 3922 1181 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Emerging Leaders Anna Park (Korea) (822) 3705 8669 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Sumangal Nevatia (India) (9122) 6720 4093 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Jake Lynch (Asia) (852) 3922 3583 Technology Anand Pathmakanthan (Malaysia) (603) 2059 8833 Aditya Suresh (Asia) (852) 3922 1265 Gilbert Lopez (Philippines) (632) 857 0892 Timothy Lam (China, Hong Kong) (852) 3922 1086 Damian Thong (Asia, Japan) (813) 3512 7877 Conrad Werner (Singapore) (65) 6601 0182 Mike Allen (Japan) (813) 3512 7859 George Chang (Japan) (813) 3512 7854 Kwang Cho (Korea) (822) 3705 4953 Daniel Kim (Korea) (822) 3705 8641 Corinne Jian (Taiwan) (8862) 2734 7522 Find our research at Allen Chang (Greater China) (852) 3922 1136 Macquarie: www.macquarieresearch.com/ideas/ Marcus Yang (Taiwan) (8862) 2734 7532 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Conrad Werner (ASEAN) (65) 6601 0182 Thomson: www.thomson.com/financial Patrick Liao (Greater China) (8862) 2734 7515 Reuters: www.knowledge.reuters.com Louis Cheng (Greater China) (8862) 2734 7526 Bloomberg: MAC GO Kaylin Tsai (Greater China) (8862) 2734 7523 Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access
Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Jeff Evans (Boston) (1 617) 598 2508 Amelia Mehta (Singapore) (65) 6601 0211 Michael Santos (Philippines) (632) 857 0813 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Angus Kent (Thailand) (662) 694 7601 Chris Reale (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41 22) 818 7712 Christina Lee (UK/Europe) (44 20) 3037 4873 Justin Morrison (Singapore) (65) 6601 0288 Daniel Clarke (Taiwan) (8862) 2734 7580 Riaz Hyder (Indonesia) (6221) 2598 8486 Sales Trading Nick Cant (Japan) (65) 6601 0210 Brendan Rake (Thailand) (662) 694 7707 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Mike Keen (UK/Europe) (44 20) 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555 Eric Roles (New York) (1 212) 231 2559 Gino C Rojas (Philippines) (632) 857 0861
This publication was disseminated on 25 January 2017 at 18:11 UTC.
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