Asia Pacific Daily
30 October 2017 Company Roadshows Date Company Event Venue 30 Oct BOC Aviation (2588 HK) NDR Seoul 1-2 Nov BTS Group (BTS TB) NDR Tokyo 9 Nov Guangdong Investment NDR Beijing, (270 HK) China 20-21 Nov Guangdong Investment NDR Tokyo (270 HK) 23-24 Nov L'Occitane (973 HK) NDR SG
Daiwa Asian Events
Date Company Venue Major changes Analyst Rating Page 7-10 Nov Daiwa Investment Conference Hong Kong HK 2017 Samsung Engineering (028050 KS) Mike Oh Outperform P.4 20-21 Nov Daiwa Asia Communication Days 2017 London Solid new order recovery likely 7-8 Dec TWSE-Daiwa Taiwan Corporate Day Tokyo Tokyo Target price 21.7% to KRW14,000 2017 Other research 2-5 Jan Daiwa P.U.R.E. Energy Conference 2018 HK 2018 Discovery John Choi P.8 5-9 Mar Daiwa Investment Conference Tokyo 2018 Tokyo Asia Small-cap Weekly 2018 China Construction Bank (939 HK) Yan Li Outperform P.9 Source: Daiwa Starting point for further growth Daiwa: latest rating and target price revisions Ping An Insurance (2318 HK) Leon Qi Hold P.13 Rating Target price 3Q17 results: VNB growth moderates Company Ticker Latest Chg Latest Chg Date China Life Insurance (2628 HK) Leon Qi Buy P.17 Samsng Eng 028050 KS 2 14,000 27-10 2018 jumpstart headwinds may have been Ping An In 2318 HK 3 62.00 27-10 exaggerated Ch Unicom 762 HK 1 13.80 27-10 Ch Con Bk 939 HK 2 8.00 27-10 Baidu (BIDU US) John Choi Hold P.21 China Life 2628 HK 1 31.00 27-10 3Q17: a mixed quarter, feed ads shine, iQiyi Ch Telecom 728 HK 1 4.98 27-10 hiccup CDL REIT CDREIT SP 3 1.61 27-10 China Unicom (762 HK) Ramakrishna Buy P.25 Baidu BIDU US 3 245.00 27-10 On the cusp of a mobile turnaround Maruvada Sinbon 3023 TT 1 98.00 27-10 SSG SSG SP 4 0.88 27-10 China Telecom (728 HK) Ramakrishna Buy P.29 Yes Bank YES IN 1 380.00 27-10 Gaining revenue share in mobile Maruvada Source: Daiwa New China Life Insurance (1336 HK) Leon Qi Buy P.33 Significant acceleration in 3Q17 new regular premium Advanced Semicon Eng (2311 TT) Rick Hsu Buy P.37 EMS strength to offset inventory tailwind Sinbon Electronics (3023 TT) Helen Chien Buy P.41 Riding on multiple trends CDL Hospitality Trusts (CDREIT SP) David Lum Hold P.45 Still waiting for the Singapore industry recovery Sheng Siong Group (SSG SP) Jame Osman Underperform P.49 Still cautious on near-term risks GSS Energy (GSSE SP) Jame Osman No Rating P.53 A manufacturing base with an oil and gas option Thai Union Group Pcl (TU TB) Kalvalee Buy P.55 Cyclical impact Thongsomaung
Indonesia Tobacco Michael W Setjoadi Neutral P.56 HMSP & GGRM to benefit from the new regulation; upgrading HMSP United Tractors (UNTR IJ) Henry Wibowo Buy P.57 Solid Komatsu and Pama numbers in 3Q17, Re- affirm BUY Bumi Serpong Damai (BSDE IJ) Renaldy Effendy Buy P.58 3Q17 results: Dragged by one-off costs
See important disclosures, including any required research certifications, beginning on page 103.
Asia Pacific Daily | 1
Bank Jabar (BJBR IJ) Alvin Baramuli Reduce P.59 3Q17 Earnings Miss, Reiterate Reduce Japfa Comfeed (JPFA IJ) Michael W Setjoadi Buy P.60 JPFA 3Q17 results: Below our and consensus estimates Blue Bird (BIRD IJ) Gregorius Gary Buy P.61 3Q17 results: Strong q-q earnings growth; Maintain BUY London Sumaterax Indonesia (LSIP IJ) Gregorius Gary Buy P.62 3Q17 results: Above consensus expectations, reiterate BUY Eagle High Plantations (BWPT IJ) Gregorius Gary Buy P.63 3Q17 results: Narrowing net loss, strong EBIT growth; Maintain BUY Sri Rejeki Isman (SRIL IJ) Michael W Setjoadi Buy P.64 SRIL 3Q17 results: Below our but in line with consensus estimates Tenaga (TNB MK) Ng Chi Hoong Buy P.65 Positive surprise from higher DPS WCT Holdings (WCTHG MK) Loong Chee Wei Buy P.66 Good foreign interest Yes Bank (YES IN) Punit Srivastava Buy P.67 Strong quarter, masked by NPL-related divergence
Japan equity research
Fanuc (6954) Hirosuke Tai Neutral P.71 May take until 2018 to see benefits from added capacity JCR Pharmaceuticals (4552) Kazuaki Outperform P.72 New drug development using J-Brain Cargo Hashiguchi
US equity research
Ford Motor (F) Jairam Nathan Neutral P.73 NA Price/Cost Dynamics Key As Product Pace Weakens Intel (INTC) Deepak Sitaraman Neutral P.74 Strong Q3 results and Q4 outlook United Parcel Service (UPS) Jairam Nathan Neutral P.75 Growth Investment Acceleration Calls For Muted 2018 Visa (V) Takahiro Yano Outperform P.76 Guiding for FY18 EPS growth at high end of mid-teens
Macro research
Bahana Macrosight Sarah Jessica P.77 2018 budget: More populist, more prudent Hutapea
US Data Review Michael Moran P.78 Third Quarter GDP
Memos – quick updates
PURE Brunch Dennis Ip P.79 27 October 2017 Taiwan Financial Pulse Nora Hou P.80 27 October 2017 Adlink (6166 TT) Steven Tseng P.81 3Q17 EPS in line to us, but margins came in weaker
Asia Pacific Daily | 2
China Communication Construction Kelvin Lau P.82 (1800 HK) Acquisition of AECON, a leading Canadian construction company China Eastern Airlines (CEA) (670 HK) Kelvin Lau P.83 Key takeaways: likely moderate domestic yield recovery on limited flight schedule China Pacific Insurance Group (2601 HK) Leon Qi P.84 Agency FYP deceleration in 3Q17 China Railway Group (CRG) (390 HK) Kelvin Lau P.85 Net profit shrank 12% YoY in 3Q17 on flattish revenue growth and lower profit margin CRRC Corp (1766 HK) Kelvin Lau P.86 Net profit up 15% YoY in 3Q17, while that for 9M17 is still below our estimate Great Wall Motor (GWM) (2333 HK) Kelvin Lau P.87 3Q17 conference call key takeaways Hyundai Steel (HS) (004020 KS) Sung Yop Chung P.88 3Q17 earnings were in-line and poised for a stronger earnings rebound in 4Q17 Hyundai Wia (Wia) (011210 KS) Sung Yop Chung P.89 3Q17 operating profit drops to record low, but bracing for a stronger rebound in 4Q17 Indofood Agri Resources (IFAR SP) Jame Osman P.90 3Q17 performance disappoints Kia Motors (Kia) (000270 KS) Sung Yop Chung P.91 3Q17 earnings turn into the red for the first time in a decade on ordinary wage ruling Orient Overseas International Limited Kelvin Lau P.92 (OOIL) (316 HK) 3Q17 operating data: stronger-than-expected freight rate recovery Suntec REIT (SUN SP) David Lum P.93 3Q17 results: DPU 1% below our forecast Wynn Macau (1128 HK) Jamie Soo P.94 3Q17 results was largely in-line Xinjiang Goldwind Science & Technology Dennis Ip P.95 (2208 HK) Takeaways from 3Q17 results call: Expects lower WTG shipments this year, but sees recovery in 2018-19
Korea: share prices and Daiwa recommendation trends P.96 Daiwa’s Banner Products P.97 Rating and target-price information P.98 Recently published reports P.99
Asia Pacific Daily | 3
Korea Industrials 27 October 2017
Samsung Engineering (028050 KS)
Target price: KRW14,000 (from KRW11,500) Share price (27 Oct): KRW12,500 | Up/downside: +12.0%
Solid new order recovery likely
Weak 3Q17 results but we see limited downside in 2018 earnings Mike Oh (82) 2787 9179 USD2.5bn UAE order looks imminent [email protected] Reiterating Outperform (2); raising our 12-month TP to KRW14,000
What's new: Despite its weak 3Q17 earnings, we think Samsung Forecast revisions (%) Engineering’s (SE) YoY new order improvement and backlog mix Year to 31 Dec 17E 18E 19E enhancement should lead to a share-price recovery going forward. We Revenue change 5.4 2.4 1.3 believe that not only overseas orders but also resilient captive new orders Net profit change (71.4) (4.4) 5.6 Core EPS (FD) change (71.4) (4.4) 5.6 should ensure its EPS growth over the next two years. Source: Daiwa forecasts
What's the impact: Weak 3Q17 results: SE’s 3Q17 operating profit came Share price performance in at KRW15.3bn, 32% lower than the Bloomberg consensus estimate due (KRW) (%) to KRW65bn of cost recognition from two overseas projects (ie, KRW34bn 13,500 125 for UAE CBDC project, KRW31bn for Iraq Badra project). However, we 12,375 113 think the negative earnings impact from the two projects should be limited 11,250 100 in 2018E, given their completion stands at 96% and 94%, with remaining 10,125 88 9,000 75 provision balances of KRW30.7bn and KRW16bn, respectively. Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Samsng Eng (LHS) Strong order momentum: We expect that the long-awaited USD2.5bn Relative to KOSPI (RHS) UAE Process Offshore Crude (POC) order should be finally awarded in 4Q17. Lucrative captive orders from Samsung affiliates YTD stand at 12-month range 9,150-13,500 Market cap (USDbn) 2.18 KRW2.4tn and we think the number could go up to KRW3tn for 2017. Thus, 3m avg daily turnover (USDm) 18.09 we revise up our 2017 new order forecast by 22% to KRW8.2tn, from Shares outstanding (m) 196 KRW6.7tn. Given that SE expects bids worth KRW27tn for 2018E and we Major shareholder Samsung SDI (11.7%) also expect over KRW3tn worth of captive new orders in 2018, we believe SE’s earnings turnaround will become more apparent from 2018. Financial summary (KRW) Year to 31 Dec 17E 18E 19E Revenue (bn) 5,945 6,337 6,780 Earnings revision: Overseas provisioning and the high concentration of Operating profit (bn) 78 218 324 likely new orders in 4Q17 lead us to cut our 2017E EPS by 71%. We also Net profit (bn) 18 171 247 cut our 2018E EPS by 4% to factor in the two ailing projects’ completion Core EPS (fully-diluted) 92 872 1,258 delays to 2018 but raise our 2019E EPS by 6% to factor in the project mix EPS change (%) (29.9) 845.9 44.3 Daiwa vs Cons. EPS (%) (69.4) 5.4 13.3 improvement. PER (x) 135.7 14.3 9.9 Dividend yield (%) 0.0 0.0 0.0 What we recommend: We reiterate our Outperform (2) rating as we DPS 0 0 0 believe a likely 64% YoY new order improvement for 2017 should lead to PBR (x) 2.4 2.0 1.6 EV/EBITDA (x) 26.3 11.8 7.7 an earnings turnaround for SE over the next two years. We raise our 12 - ROE (%) 1.8 15.0 17.9 month TP to KRW14,000 (from KRW11,500) as we apply a peer ROE-PBR Source: FactSet, Daiwa forecasts regression-based target PBR of 2.2x (from 1.9x) to our average 2018E BVPS (previously 2017-18E BVPS). We have used SE’s sustainable ROE of 20% in the peer regression analysis (previously 17%) to factor in the recent solid new order intake. Key risk to our view includes an unexpected sharp decline in oil prices, resulting in overseas new order delays.
How we differ: Our 2017E EPS currently stands 69% below that of the Bloomberg consensus, which has likely not been updated to reflect the weak 3Q17 results. However, our 2018-19E EPS are 5-13% higher than the consensus as we believe that its backlog margin will improve faster than the market’s expectation.
See important disclosures, including any required research certifications, beginning on page 6
Asia Pacific Daily | 4
Samsung Engineering (028050 KS): 27 October 2017
SE: 3Q17 earnings review SE: sales and earnings revisions 3Q17 Difference (%) Actual Change (%) New Daiwa forecasts Previous Change (%) (KRWbn) Actual Daiwa Consen Daiwa Consen 3Q16 2Q17 YoY QoQ (KRWbn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Sales 1,294.2 1,352.5 1,349.0 -4% -4% 1,630.9 1,356.0 -21% -5% Sales 5,945 6,337 6,780 5,639 6,189 6,690 5.4% 2.4% 1.3% OP 15.3 26.3 22.4 -42% -32% 53.2 12.4 -71% 23% OP 78 218 324 115 228 308 -32.4% -4.4% 5.5% RP 4.8 21.2 26.3 -77% -82% 9.0 31.8 -47% -85% RP 23 218 314 80 228 298 -71.4% -4.4% 5.6% NP 7.0 17.0 24.0 -59% -71% 1.9 31.8 268% -78% NP 18 171 247 63 179 233 -71.4% -4.4% 5.6%
Source: Company, Bloomberg, Daiwa forecasts Source: Daiwa forecasts
SE: potential new-order pipelines Country Project Amount (USDbn) UAE POC (Process Offshore Crude) 2.5 Bahrain Refinery 1.3 Saudi Sabic EO/EG 0.7 Saudi Sabic ASU 0.4 Saudi Hawiyah 0.8 Total 5.7
Source: Company, Daiwa research
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Asia Pacific Daily | 5
Samsung Engineering (028050 KS): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E New order growth (YoY%) 10.8 (51.8) 1.4 (17.8) (4.7) 64.0 (10.1) 3.9 Order book growth (YoY%) (5.0) (19.3) (18.1) (5.9) (36.5) 28.6 7.3 4.8 Overseas new order growth (%) 9.1 (49.1) 1.0 (28.4) (55.8) 253.3 (7.5) (16.1) Overseas business sales growth (%) 35.2 (18.2) (12.8) (29.9) 8.8 (15.2) 6.6 7.0
Profit and loss (KRWbn) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Hydrocarbon Revenues 7,550 6,964 5,376 3,283 3,287 2,894 3,314 3,585 I&I Revenues 3,890 2,842 3,535 3,159 3,722 3,052 3,022 3,195 Other Revenue (0) 0 (0) (0) 0 0 0 0 Total Revenue 11,440 9,806 8,911 6,441 7,009 5,945 6,337 6,780 Other income 0 0 0 0 0 0 0 0 COGS (10,150) (10,353) (8,365) (7,530) (6,527) (5,516) (5,745) (6,055) SG&A (554) (481) (384) (365) (412) (351) (374) (400) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 737 (1,028) 162 (1,454) 70 78 218 324 Net-interest inc./(exp.) (30) (23) (22) (24) (5) (10) 5 5 Assoc/forex/extraord./others (2) 136 (82) 28 (8) (45) (5) (15) Pre-tax profit 705 (915) 58 (1,450) 56 23 218 314 Tax (181) 209 (4) 146 (47) (5) (44) (63) Min. int./pref. div./others 3 2 (1) (1) 16 (0) (3) (5) Net profit (reported) 527 (705) 53 (1,305) 26 18 171 247 Net profit (adjusted) 527 (705) 53 (1,305) 26 18 171 247 EPS (reported)(KRW) 13,180 (17,624) 1,322 (32,632) 131 92 872 1,258 EPS (adjusted)(KRW) 13,180 (17,624) 1,322 (32,632) 131 92 872 1,258 EPS (adjusted fully-diluted)(KRW) 13,180 (17,624) 1,322 (32,632) 131 92 872 1,258 DPS (KRW) 3,000 0 0 0 0 0 0 0 EBIT 737 (1,028) 162 (1,454) 70 78 218 324 EBITDA 792 (963) 230 (1,385) 120 130 268 374
Cash flow (KRWbn) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 705 (915) 58 (1,450) 56 23 218 314 Depreciation and amortisation 55 65 68 69 50 52 50 49 Tax paid (181) 209 (4) 146 (47) (5) (44) (63) Change in working capital 0 0 0 0 0 0 0 0 Other operational CF items (779) (590) 155 402 128 (343) 158 (6) Cash flow from operations (199) (1,231) 278 (833) 188 (272) 382 295 Capex (209) (43) (68) (20) (24) (30) (35) (45) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items 35 124 (154) 41 119 0 0 0 Cash flow from investing (174) 81 (222) 20 94 (30) (35) (45) Change in debt 370 1,213 (48) 1,283 (1,370) 198 (400) (150) Net share issues/(repurchases) 0 0 0 0 780 0 0 0 Dividends paid (111) (111) 0 0 0 0 0 0 Other financing CF items (0) (112) 98 (211) 489 0 0 0 Cash flow from financing 259 990 50 1,072 (102) 198 (400) (150) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (114) (160) 106 259 180 (104) (53) 100 Free cash flow (408) (1,274) 210 (854) 164 (302) 347 250 Source: FactSet, Daiwa forecasts
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Asia Pacific Daily | 6
Samsung Engineering (028050 KS): 27 October 2017
Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 505 412 645 882 928 785 733 856 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 3,132 3,316 3,403 2,402 2,483 2,687 2,517 2,508 Other current assets 551 539 509 491 247 380 404 423 Total current assets 4,188 4,266 4,557 3,775 3,658 3,853 3,655 3,787 Fixed assets 733 715 690 687 746 643 678 674 Goodwill & intangibles 40 52 59 50 96 97 99 100 Other non-current assets 713 895 846 1,119 1,021 942 1,000 976 Total assets 5,674 5,929 6,152 5,631 5,520 5,535 5,432 5,537 Short-term debt 380 1,207 1,373 2,014 1,476 1,350 1,150 1,000 Accounts payable 3,029 2,946 3,181 2,634 2,582 2,443 2,430 2,415 Other current liabilities 146 125 168 136 256 215 216 211 Total current liabilities 3,554 4,277 4,722 4,784 4,314 4,008 3,796 3,625 Long-term debt 3 426 226 861 10 400 300 300 Other non-current liabilities 428 320 250 299 200 92 94 98 Total liabilities 3,985 5,023 5,199 5,944 4,524 4,501 4,190 4,023 Share capital 200 200 200 200 980 980 980 980 Reserves/R.E./others 1,489 706 753 (513) 16 54 262 533 Shareholders' equity 1,689 906 953 (313) 996 1,034 1,242 1,513 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 5,674 5,929 6,152 5,631 5,520 5,535 5,432 5,537 EV 2,328 3,671 3,404 4,443 3,007 3,415 3,167 2,894 Net debt/(cash) (122) 1,221 954 1,993 557 965 717 444 BVPS (KRW) 45,688 24,493 25,783 n.a. 5,083 5,277 6,336 7,722
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 23.0 (14.3) (9.1) (27.7) 8.8 (15.2) 6.6 7.0 EBITDA (YoY) 19.9 n.a. n.a. n.a. n.a. 8.1 106.4 39.3 Operating profit (YoY) 17.6 n.a. n.a. n.a. n.a. 11.4 179.2 48.9 Net profit (YoY) 2.7 n.a. n.a. n.a. n.a. (29.9) 845.9 44.3 Core EPS (fully-diluted) (YoY) 2.7 n.a. n.a. n.a. n.a. (29.9) 845.9 44.3 Gross-profit margin 11.3 n.a. 6.1 n.a. 6.9 7.2 9.3 10.7 EBITDA margin 6.9 n.a. 2.6 n.a. 1.7 2.2 4.2 5.5 Operating-profit margin 6.4 n.a. 1.8 n.a. 1.0 1.3 3.4 4.8 Net profit margin 4.6 (7.2) 0.6 (20.3) 0.4 0.3 2.7 3.6 ROAE 35.1 n.a. 5.7 n.a. 7.5 1.8 15.0 17.9 ROAA 9.7 n.a. 0.9 n.a. 0.5 0.3 3.1 4.5 ROCE 43.0 n.a. 6.4 n.a. 2.8 3.0 8.0 11.8 ROIC 50.4 (55.7) 7.4 (81.1) 0.7 3.5 8.8 13.3 Net debt to equity n.a. 134.8 100.1 n.a. 56.0 93.3 57.7 29.3 Effective tax rate 25.6 n.a. 7.3 n.a. 83.3 20.0 20.0 20.0 Accounts receivable (days) 93.8 120.0 137.6 164.5 127.2 158.7 149.9 135.3 Current ratio (x) 1.2 1.0 1.0 0.8 0.8 1.0 1.0 1.0 Net interest cover (x) 24.9 n.a. 7.5 n.a. 13.4 7.8 n.a. n.a. Net dividend payout 22.8 n.a. 0.0 n.a. 0.0 0.0 0.0 0.0 Free cash flow yield n.a. n.a. 8.6 n.a. 6.7 n.a. 14.2 10.2 Source: FactSet, Daiwa forecasts
Company profile
Samsung Engineering provides EPC services to the plants market globally. The company specialises in building petrochemical and industrial plants overseas and does not have any domestic housing exposure.
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Asia ex Japan Small Cap 27 October 2017
Discovery
Asia Small-cap Weekly
¾ Man Wah issued a profit warning for 1H FY18, but we remain positive
on the company’s long-term business fundamentals ¾ Discovery idea: GGS Energy John Choi ¾ Pick of the week: S1 Corporation (852) 2773 8730 [email protected] Regional Small-cap Team
What’s new: This week, Man Wah Holding (1999 HK, HKD7.33, Buy [1]) issued a profit warning for a 10% YoY decline in 1H FY18. We believe the miss is mostly a result of FX losses and gross and operating margin pressure, rather than a significant slowdown in top-line growth. We expect revenue to come in largely in line with our expectations, led by continued strength in its domestic China market (high 30% growth) and low-mid single-digit growth for the US market. Its legacy European business, while
likely still weak, should be offset by continued double-digit percentage growth of Home Group. We expect a stronger 2H FY18 due to likely Recent company visits (16 Oct – 27 Oct) stronger China gross margins and a potential pick-up in its US business. Company Bloomberg code Best Pacific 2111 HK Discovery idea: GGS Energy (GSSE SP, NR) is an integrated precision CITIC Telecom International 1883 HK Nine Dragon Paper 2689 HK engineering manufacturer based in Singapore. Its business includes Stella International* 1836 HK production of plastic injection moulding parts, precision shafts as well as Nameson Holdings 1982 HK printed circuit board assembly. GSS’s new management came on board in SUNeVision Holdings 8008 HK Chinasoft International 354 HK September 2014 and has been instrumental in driving a sustained JNBY Design 3306 HK turnaround in the company’s core engineering business. GGS’s overall net Taiwan Acceptance Corporation 9941 TT profit improved from SGD0.4m in 2012 to SGD4.2m in 2016. Also, the ITEQ corporation 6213 TT LIG Nex1 079550 KS company has increased its production capacity in Changzhou, which Noah Holding NOAH US - Phoenix New Media FENG US focuses on higher value products and electronics manufacturing services. Source: Daiwa, *Note: Results Pick of the week: This week, Thomas Kwon, our Pan-Asia Head of Upcoming company visits Internet & Telecommunications, upgraded S1 Corporation (012750 KS, Company Bloomberg code KRW91,800) from Outperform (2) to Buy (1). Thomas expects a gradual San Shing Fastech 5007 TT improvement in S1’s profitability for 2H17-19E on the back of: 1) the QST International 8349 TT synergies created from S1’s leadership in Korea’s security-service market Vtech Holding* 303 HK Shenzhou International 2313 HK to its building management service (BMS) from 2H17, 2) the company’s Texhong Textile 2678 HK robust subscriber growth for alarm-security services, and 3) diversification Source: Daiwa *Note: Results of service regions into residential segments.
Daiwa’s small-cap top picks Stock Mkt cap Stock Target % FY1E FY1E FY1E EV/ FY1E Div. Company LCY Rating Investment summary code (USDm) price price upside PER PBR EBITDA ROE yield Cosmax 192820 KS 1,116.39 KRW Buy 139,500 151,000 8.2% 40.0 5.6 21.6 15.19 0.93 Has the highest revenue-growth prospects among the Korean cosmetics companies that Daiwa covers; rosier domestic earnings growth prospects on increasing exports. Chailease Holding 5871 TT 3,287.79 TWD O/P 78.60 90.00 14.5% 12.0 1.9 19.7 18.20 4.63 We like Chailease's ongoing improvement in asset quality (particularly in China and Taiwan) and operating efficiency. Also, we expect the company to benefit from China's expanding purchasing managers' index (PMI). Texhong Textile 2678 HK 1,277.16 HKD Buy 11.16 15.50 38.9% 7.4 1.4 5.4 20.33 4.19 Texhong is on track for vertical integration and we expect the jeanswear business to start contributing positively to earnings in 2018. Also, its product diversification has lessened the impact from greater competition. Sinbon Electronics 3023 TT 622.77 TWD Buy 83.50 92.00 10.2% 15.4 3.0 9.6 21.22 4.70 We like Sinbon's stable business model, earnings visibility, and R&D capability. Increasing revenue from the industrial and automotive segments could catalyse an upwards stock rerating. Goodbaby 1086 HK 592.70 HKD Buy 4.17 4.60 10.3% 18.7 1.8 8.9 9.83 1.50 We remain bullish on the sales recovery of its core brands such as GB International and CYBEX. We see additional upside from the recently announced acquisition of Goodbaby's non-durable business.
Source: FactSet, Daiwa forecasts; prices as of 26 October 2017; Note: O/P = Outperform
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Asia Pacific Daily | 8
China Financials 27 October 2017
China Construction Bank (939 HK)
Target price: HKD8.00 (from HKD7.75) Share price (27 Oct): HKD6.99 | Up/downside: +14.4%
Starting point for further growth Yan Li (852) 2773 8822 ¾ Lower-than-peers’ deposit cost helping to widen NIM [email protected] ¾ Decline in overdue loans; more focus on retail banking Leon Qi, CFA (852) 2532 4381 ¾ Reiterating our Outperform(2) rating and lifting TP to HKD8.0 [email protected]
What's new: On 27 October, CCB held an analyst briefing after Forecast revisions (%) announcing its 3Q17 results on 26 October (see Interest income driving Year to 31 Dec 17E 18E 19E further earnings improvement, 26 October 2017). Management guided for PPOP change 0.5 1.3 2.3 Net profit change 0.7 1.8 3.3 better NIM and gave more details on asset quality and its retail business. Core EPS (FD) change 0.7 1.8 3.3 We expect CCB to continue to benefit from an interest income recovery. Source: Daiwa forecasts
What's the impact: Further details on widening NIM. Management Share price performance explained the positive factors which led to the NIM widening: 1) lowest (HKD) (%) (among the 4 large state-owned banks) average cost of deposits helped 7.5 115 reduce the total liability cost. CCB’s average deposit cost fell to 1.34% as of 6.9 110 6.3 105 end-1H17, even lower than the 1.36% for ABC (1288 HK, HKD3.69, Sell 5.6 99
[5]). CCB said it has deliberately managed its time deposit growth and 5.0 94 worked on attracting more demand deposits, and 2) after benchmark Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 interest rate cuts in 2015, CCB completed loan repricing in 2016 and Ch Con Bk (LHS) Relative to HSI (RHS) deposit repricing in 2017. Along with the recent rising interest rates and relatively better economic demand vs. the previous year, loan pricing is 12-month range 5.45-7.04 increasing and we believe the uptrend will continue in 2018. Market cap (USDbn) 223.98 3m avg daily turnover (USDm) 248.91 Shares outstanding (m) 250,011 Declining overdue loans a good sign. As of end-3Q17, CCB’s overdue Major shareholder Huijin (57.2%) loans fell 8% QoQ to CNY170bn from CNY186bn at end-1H17. Its overdue loan ratio declined 11bp QoQ to 1.38%, according to management. We see Financial summary (CNY) the “double-decline” in balance and ratio of overdue loans as a good sign Year to 31 Dec 17E 18E 19E for further slowing in NPL formation going forward. Total operating income (m) 604,249 653,559 709,887 Pre-provision operating profit(m) 430,074 466,842 508,947 Net profit (m) 241,832 257,919 280,543 Retail business. CCB is currently working on 2 aspects to grow its retail Core EPS (fully-diluted) 0.967 1.032 1.122 business. 1) Its small-loan brand (“ᘛ䍧”, meaning “convenience/rapid EPS change (%) 4.5 6.7 8.8 loan”) for small loans capped at CNY300,000, mainly through its online Daiwa vs Cons. EPS (%) 0.7 0.2 0.0 PER (x) 6.1 5.8 5.3 platform. According to CCB, its technology developments have helped Dividend yield (%) 4.9 5.2 5.7 reduce the operating cost of such retail loans and capture a broader range DPS 0.290 0.310 0.337 of customers. 2) Credit cards. As of end-3Q17, CCB has issued more than PBR (x) 0.9 0.8 0.7 100 million credit cards and credit card loans reached CNY527bn, with ROE (%) 14.7 14.2 14.0 56% or CNY295bn of high-yield installment loans (credit card interest rate Source: FactSet, Daiwa forecasts up to 36% pa, the regulatory cap).
What we recommend: We reiterate our Outperform (2) rating and lift our Gordon Growth model-based 12-month TP to HKD8.0. It is currently trading at a 0.86x 2017E PBR, lower than 1.51x for CMB (3968 HK, HKD31.55, Buy[1]) and 0.93x for ICBC (1398 HK, HKD6.39, Outperform [2]). Key downside risk: deterioration in asset quality due to a weak economy.
How we differ: We believe that the market may be overlooking CCB’s efforts in technology development and retail banking, which would help reduce its operating cost and increase its operating margin in the long run.
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 9
China Construction Bank (939 HK): 27 October 2017
CCB: P&L summary (CNYm) 9M17 9M16 % YoY 3Q17 2Q17 % QoQ 3Q16 % YoY Net interest income 333,324 315,802 5.5 115,470 110,931 4.1 104,812 10.2 Non-interest income 114,998 112,680 2.1 29,719 33,164 (10.4) 27,991 6.2 of which: fees 93,649 92,314 1.4 25,569 29,313 (12.8) 25,124 1.8 Operating income 448,322 428,482 4.6 145,189 144,095 0.8 132,803 9.3 Operating expenses (111,018) (117,844) (5.8) (40,471) (35,452) 14.2 (38,728) 4.5 Pre-provisioning profits 337,304 310,638 8.6 104,718 108,643 (3.6) 94,075 11.3 Impairment losses (86,964) (63,704) 36.5 (26,454) (24,348) 8.6 (17,094) 54.8 Operating profit 250,340 246,934 1.4 78,264 84,295 (7.2) 76,981 1.7 Other income 195 (58) (436.2) 178 25 612.0 17 947.1 Profit before tax 250,535 246,876 1.5 78,442 84,320 (7.0) 76,998 1.9 Tax & others (49,293) (53,041) (7.1) (15,539) (15,993) (2.8) (16,573) (6.2) Net profit 201,242 193,835 3.8 62,903 68,327 (7.9) 60,425 4.1
Source: Company, Daiwa
CCB: key ratios (%) 3Q17 2Q17 3Q16 Chg. QoQ (pp) Chg. YoY (pp) NIM * 2.20 2.15 2.14 0.05 0.06 Loan-to-deposit * 77.3 76.9 75.4 0.45 1.93 NPL ratio 1.50 1.51 1.56 (0.01) (0.06) Provision coverage 163 160 149 2.76 14.13 Loan-loss reserves 2.44 2.42 2.32 0.02 0.12 Credit cost - annualized (bps) * 86 75 62 11 24 Cost-to-income ratio (incl. business tax) 27.9 24.6 29.2 3.27 (1.29) Core tier-1 CAR 12.84 12.68 13.37 0.16 (0.53) Tier-1 CAR 12.99 12.84 13.54 0.15 (0.55) Total CAR 14.67 14.50 15.36 0.17 (0.69)
Source: Company, Daiwa Note: *NIM and credit costs are based on Daiwa's estimates; Loan-to-deposit ratios are based on Daiwa's calculation and may differ from CBRC’s figures.
CCB: key balance sheet items (CNYm) 3Q17 2Q17 % QoQ Gross loans 12,757,117 12,507,021 2.0% Customer deposits 16,502,595 16,274,393 1.4% NPL balance 190,949 188,752 1.2%
Source: Company, Daiwa
China banks: NIM China banks: overdue loan ratio
3.0% 4% 2.5% 3% 2.0% 1.5% 2% 1.0% 1% 0.5% 0.0% 0% ABC ABC CEB CEB CCB CCB BOC BOC CMB CMB ICBC ICBC CITIC CITIC BoCom BoCom Minsheng Minsheng
2016 1H17 2016 1H17
Source: Companies, Daiwa Source: Companies, Daiwa Note: not all banks have disclosed 3Q17 results so far Note: not all banks have disclosed 3Q17 results so far
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China Construction Bank (939 HK): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Net interest margin (%) 2.75 2.74 2.80 2.63 2.20 2.16 2.18 2.22 NPL (%) 1.0 1.0 1.2 1.6 1.5 1.5 1.5 1.5 Credit cost (bps) 54.5 52.6 65.0 92.0 80.0 100.5 105.0 106.0 Provision coverage (%) 271 268 222 151 150 168 190 212 Loan loss reserve (%) 2.69 2.66 2.66 2.39 2.29 2.54 2.83 3.12 Loan growth (%) 15.6 14.3 10.3 10.7 12.1 9.0 9.0 9.0 Deposit growth (%) 13.6 7.8 5.5 6.0 12.7 9.0 9.0 9.0 Fee to income ratio (%) 20.2 20.4 19.5 19.4 21.2 20.0 18.9 17.7 Expense to income ratio (%) 37.0 36.8 35.2 33.2 30.6 28.8 28.6 28.3
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Net-interest income 353,202 389,544 437,398 457,752 417,799 459,818 505,532 558,159 Net fees & commission 93,507 104,283 108,517 113,530 118,509 120,879 123,297 125,763 Trading and other income 15,824 17,313 10,825 15,405 23,552 23,552 24,730 25,966 Net insurance income 0 0 0 0 0 0 0 0 Total operating income 462,533 511,140 556,740 586,687 559,860 604,249 653,559 709,887 Personnel expenses (79,710) (86,830) (91,563) (91,499) (92,847) (94,769) (96,938) (98,827) Other expenses (91,371) (101,355) (104,425) (103,327) (78,668) (79,406) (89,778) (102,114) Total expenses (171,081) (188,185) (195,988) (194,826) (171,515) (174,175) (186,716) (200,941) Pre-provision operating profit 291,452 322,955 360,752 391,861 388,345 430,074 466,842 508,947 Total provision (40,041) (43,209) (61,911) (93,639) (93,204) (120,466) (136,774) (150,115) Operating profit after prov. 251,411 279,746 298,841 298,222 295,141 309,607 330,068 358,832 Non-operating income 28 60 245 275 69 300 300 300 Profit before tax 251,439 279,806 299,086 298,497 295,210 309,907 330,368 359,132 Tax (57,837) (64,684) (70,839) (69,611) (62,821) (65,949) (70,303) (76,424) Min. int./pref. div./other items (423) (465) (417) (741) (929) (2,127) (2,146) (2,165) Net profit 193,179 214,657 227,830 228,145 231,460 241,832 257,919 280,543 Adjusted net profit 193,179 214,657 227,830 228,145 231,460 241,832 257,919 280,543 EPS (CNY) 0.773 0.859 0.911 0.913 0.926 0.967 1.032 1.122 EPS (adjusted) (CNY) 0.773 0.859 0.911 0.913 0.926 0.967 1.032 1.122 EPS (adjusted fully-diluted) (CNY) 0.773 0.859 0.911 0.913 0.926 0.967 1.032 1.122 DPS (CNY) 0.268 0.300 0.301 0.274 0.278 0.290 0.310 0.337
Change (YoY %) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Net-interest income 16.0 10.3 12.3 4.7 (8.7) 10.1 9.9 10.4 Non-interest income 15.3 11.2 (1.9) 8.0 10.2 1.7 2.5 2.5 Total operating income 15.8 10.5 8.9 5.4 (4.6) 7.9 8.2 8.6 Total expenses 18.4 10.0 4.1 (0.6) (12.0) 1.6 7.2 7.6 Pre-provision operating profit 14.4 10.8 11.7 8.6 (0.9) 10.7 8.5 9.0 Total provisions 11.9 7.9 43.3 51.2 (0.5) 29.3 13.5 9.8 Operating profit after provisions 14.8 11.3 6.8 (0.2) (1.0) 4.9 6.6 8.7 Profit before tax 14.8 11.3 6.9 (0.2) (1.1) 5.0 6.6 8.7 Net profit (adjusted) 14.1 11.1 6.1 0.1 1.5 4.5 6.7 8.8 EPS (adjusted, FD) 14.1 11.1 6.1 0.1 1.5 4.5 6.7 8.8 Gross loans 15.6 14.3 10.3 10.7 12.1 9.0 9.0 9.0 Deposits 13.6 7.8 5.5 6.0 12.7 9.0 9.0 9.0 Total assets 13.8 10.0 9.0 9.6 14.2 9.3 8.1 8.2 Total liabilities 13.6 9.7 8.4 9.1 14.6 9.2 8.0 8.0 Shareholders' equity 16.1 13.2 16.5 15.5 9.9 10.7 10.3 10.2 Avg interest-earning assets 13.7 10.7 10.0 11.1 9.1 12.4 8.8 8.3 Avg risk-weighted assets 13.0 29.3 3.4 5.1 11.3 15.8 8.2 8.3 Source: FactSet, Daiwa forecasts
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China Construction Bank (939 HK): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & equivalent 3,490,305 3,229,799 3,399,518 3,376,016 3,707,723 4,302,144 4,698,780 5,132,057 Investment securities 2,879,319 3,433,527 3,741,607 4,302,905 5,158,370 5,484,929 5,846,582 6,245,277 Net loans and advances 7,309,879 8,361,361 9,222,910 10,234,523 11,488,355 12,489,919 13,573,535 14,751,004 Fixed assets 130,178 151,409 167,365 174,762 184,837 186,685 188,552 190,438 Goodwill 0 0 0 0 0 0 0 0 Other assets 163,147 187,114 212,706 261,283 424,420 445,464 467,555 490,745 Total assets 13,972,828 15,363,210 16,744,106 18,349,489 20,963,705 22,909,140 24,775,003 26,809,522 Customers deposits 11,343,079 12,223,037 12,899,153 13,668,533 15,402,915 16,789,177 18,300,203 19,947,222 Borrowing 1,155,176 1,389,294 1,787,646 2,401,758 3,052,384 3,431,666 3,595,036 3,774,903 Debentures 262,991 357,540 431,652 415,544 451,554 451,554 451,554 451,554 Other liabilities 262,037 319,010 373,794 418,571 467,198 476,542 486,073 495,794 Total liabilities 13,023,283 14,288,881 15,492,245 16,904,406 19,374,051 21,148,939 22,832,866 24,669,473 Share capital 250,011 250,011 250,011 269,670 269,670 269,670 269,670 269,670 Reserves & others 691,657 815,940 991,499 1,164,350 1,306,830 1,476,062 1,656,551 1,852,871 Shareholders' equity 941,668 1,065,951 1,241,510 1,434,020 1,576,500 1,745,732 1,926,221 2,122,541 Minority interests 7,877 8,378 10,338 11,063 13,154 14,469 15,916 17,508 Total equity & liabilities 13,972,828 15,363,210 16,744,093 18,349,489 20,963,705 22,909,140 24,775,003 26,809,522 Avg interest-earning assets 12,845,124 14,220,279 15,643,042 17,378,883 18,963,167 21,315,720 23,197,944 25,123,618 Avg risk-weighted assets 7,637,705 9,872,790 10,203,643 10,722,082 11,937,774 13,826,055 14,963,191 16,199,237 BVPS (CNY) 3.767 4.264 4.966 5.657 6.227 6.904 7.626 8.411
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Loan/deposit 66.2 70.3 73.5 76.7 76.3 76.3 76.3 76.3 Tier-1 CAR 11.3 10.8 12.1 13.3 13.1 13.2 13.3 13.5 Total CAR 14.3 13.3 14.9 15.4 14.9 14.7 14.9 15.0 NPLs/gross loans 1.0 1.0 1.2 1.6 1.5 1.5 1.5 1.5 Total loan-loss prov./NPLs 271.3 268.2 222.3 151.0 150.4 167.6 190.3 211.8 ROAA 1.5 1.5 1.4 1.3 1.2 1.1 1.1 1.1 ROAE 22.0 21.4 19.7 17.2 15.6 14.7 14.2 14.0 Net-interest margin 2.7 2.7 2.8 2.6 2.2 2.2 2.2 2.2 Gross yield 4.7 4.5 4.7 4.4 3.7 3.7 3.7 3.7 Cost of funds 2.1 2.0 2.1 2.0 1.6 1.7 1.7 1.8 Net-interest spread 2.6 2.6 2.6 2.5 2.1 2.0 2.0 2.0 Total cost/total income 37.0 36.8 35.2 33.2 30.6 28.8 28.6 28.3 Effective tax 23.0 23.1 23.7 23.3 21.3 21.3 21.3 21.3 Dividend-payout 34.7 34.9 33.0 30.0 30.0 30.0 30.0 30.0 Source: FactSet, Daiwa forecasts
Company profile
China Construction Bank (CCB) is one of the Big-4 banks in China. The bank's traditional strengths are its infrastructure-funding and mortgage businesses.
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Asia Pacific Daily | 12
China Financials 27 October 2017
Ping An Insurance (2318 HK)
Target price: HKD62.00 (from HKD58.00) Share price (27 Oct): HKD68.75 | Up/downside: -9.8%
3Q17 results: VNB growth moderates Leon Qi, CFA (852) 2532 4381 3Q17 VNB growth weakened to 14% YoY [email protected] Lufax saw acceleration in key operating metrics Susie Liu (852) 2773 8745 Maintaining our Hold (3) rating; lifting TP to HKD62 [email protected]
What's new: Ping An announced its 3Q17 results on 27 October with net Forecast revisions (%) profit of CNY22.9bn, +41% YoY (vs. China Life +365% YoY) while VNB Year to 31 Dec 17E 18E 19E growth substantially slowed down to 14% YoY. However, management is Net premiums change - (1.1) (2.3) Net profit change 0.6 1.4 2.1 optimistic on 2018 jumpstart sales. Core EPS (FD) change 0.6 1.4 2.1 Source: Daiwa forecasts What's the impact: Life saw 38% YoY growth of agency new business for 9M17, implying an 11% YoY growth for 3Q17 (vs. CPIC Life: +8% YoY, NCI: Share price performance +59% YoY, and China Life: +56% YoY – China Life data is based on new (HKD) (%) regular premiums from all channels). Agent headcount grew by 28% YoY, 70 140 or 8% QoQ, as at end-3Q17, and agent productivity on an FYP basis saw a 61 129 10% YoY rise for 9M17. Ping An attributed the slowdown in premium and 53 118 VNB growth mainly to its early suspension of fast-return products in June 44 106 35 95 while alternative products were only launched in October 2017 (see “Last Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 call” effect led to some rush sales 17 October 2017). Ping An In (LHS) Relative to HSI (RHS)
Management also guided an optimistic outlook for 2018 jumpstart sales. 12-month range 38.40-68.75 Ping An Life will mainly promote a participating annuity product, Xi Yue Ren Market cap (USDbn) 161.07 Sheng (玺越人生), bundled with a universal insurance product, Ju Cai Bao 3m avg daily turnover (USDm) 319.79 (聚财宝), to meet customers’ protection and investment needs (see What Shares outstanding (m) 18,280 happens to 2018 “jumpstart” sales, published on 12 October 2017 and Major shareholder Charoen Pokphand Group (12.9%) Replacing “fast-return” products with long-term PAR, 26 September 2017). Financial summary (CNY) Year to 31 Dec 17E 18E 19E P&C saw 24% YoY premium growth for both 9M17 and 3Q17. Non-auto Net premiums (m) 544,546 649,921 773,796 insurance premiums grew by 66% YoY for 9M17 or 34% for 3Q17, mainly due Net investment income (m) 122,735 140,869 153,149 to restructuring of the credit guarantee insurance. The combined ratio (CoR) Net profit (m) 70,850 79,878 90,894 went up by 1.2pp YoY to 96.1% for 9M17, up by 1.4pp YoY for 3Q17 on our Core EPS (fully-diluted) 3.876 4.370 4.972 EPS change (%) 10.8 12.7 13.8 estimate. Management suggested a stable CoR for the auto business YoY. Daiwa vs Cons. EPS (%) (1.2) (6.2) (8.0) PER (x) 15.1 13.4 11.8 Lufax Holding saw its trading volume grow by 49% in the wealth Dividend yield (%) 2.0 2.2 3.0 management business and 29% in institutional trading YoY for 9M17. The DPS 1.163 1.311 1.740 PBR (x) 2.4 2.1 2.0 run-rate of Lufax platform P2P transactions for September 2017 rose to ROE (%) 17.2 17.0 17.3 CNY111bn, vs. CNY17bn in January 2017. Active investor users reached Source: FactSet, Daiwa forecasts 7.69m as at end-9M17, up by 17% YoY. We understand half a million of them participated in at least one investment on the Lufax platform in September. The balance of loans under management of Lufax Holding went up 20% QoQ.
What we recommend: We lift our 12-month SOTP-based TP to HKD62 (from HKD58) and slightly revise up our 2017-19E EPS, mainly as we raise our 2017-19E EVPS on Ping An’s strong investment income. However, we lower our 2017-18E VNB growth to 33% and 19% YoY, respectively, and maintain a Hold (3) rating. Key upside/ downside risks: dividend upside/capital risk at PAB.
How we differ: Unlike some in the market, we think it will take time for Ping An Bank’s retail ecosystem to nurture success (see our note on CMB, 21 August).
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 13
Ping An Insurance (2318 HK): 27 October 2017
Ping An: profit mix (9M17) Ping An Life: agent headcount
100% 1,600 (Thousands) 37% 40% 13.4% 15.2% 1,400 28% 35% 80% 13.1% 28% 16.8% 1,200 27% 30% 60% 19.2% 15.6% 1,000 25% 18.5% 14% 40% 800 20% 55.7% 20% 41.6% 600 15% 400 10% 0% 200 5% -5.8% -4.3% (20%) 0 0% 9M16 9M17 end-2013 end-2014 end-2015 end-2016 end-1H17end-9M17
Life P&C Bank Asset Management Fintech Others Number of Agents YoY (RHS)
Source: Company, Daiwa Source: Company, Daiwa
Ping An Life: FYP agent productivity Ping An P&C: premium mix 14,000 16% 18% (CNY) 100% 12,000 16% 14.2% 20.1% 19.8% 14% 80% 10,000 12% 10% 12% 60% 8,000 10% 6,000 8% 40% 85.8% 79.9% 80.2% 4% 6% 4,000 4% 20% 2,000 2% 0% 0 0% 2016 1H17 9M17 2014 2015 2016 1H17 9M17 FYP agent productivity YoY (RHS) Auto Non-auto
Source: Company, Daiwa Source: Company, Daiwa Note: FYP agent productivity is FYP per month per agent, calculated based on average of period-end agent number
Ping An Bank: NPL and SML ratio Ping An Bank: core CAR and total CAR 5.0% 4.15% 4.11% 25% CNY14.8bn CNY10bn 1) CNY20bn CNY26bn 3.89% preference shares convertible 3.61% placement placement 4.0% in Dec 2013 in May in Mar 2016; 2) bond CNY10bn tier-2 20% 2015 (pending capital bonds in issuance) 3.0% Apr 2016 2.13% 15% 11.4% 10.9% 10.9% 11.5% 11.3% 2.0% 9.9% 9.0% 1.00% 10% 8.6% 8.6% 8.6% 8.4% 8.3% 0.59% 0.71% 1.74% 1.75% 1.0% 1.45% 5% 0.95% 0.89% 1.02% 0.0% 0.58% 0.53% 2010 2011 2012 2013 2014 2015 2016 9M17 0% NPL SML end-2012 end-2013 end-2014 end-2015 end-2016 end-9M17 Core tier-1 CAR Total CAR
Source: Company, Daiwa Source: Company, Daiwa
China/Hong Kong insurance companies: valuation comparison Company Ticker Share price Rating P/EV (x) P/EV (Adjusted 1) (x) P/EV (Adjusted 2) (x) (HKD) 16A 17E 18E 16A 17E 18E 16A 17E 18E
China Life 2628 HK 25.65 Buy 0.95 0.82 0.72 0.95 0.88 0.77 0.95 0.99 0.87 Ping An 2318 HK 68.75 Hold 1.68 1.40 1.19 1.68 1.45 1.22 1.68 1.50 1.27 CPIC 2601 HK 38.45 Buy 1.21 1.04 0.88 1.21 1.10 0.94 1.21 1.17 1.00 PICC Group 1339 HK 3.70 Outperform 0.96 0.89 0.76 0.96 0.91 0.78 0.96 0.97 0.84 New China Life 1336 HK 50.40 Buy 1.03 0.88 0.75 1.03 0.93 0.80 1.03 0.97 0.83 Taiping 966 HK 25.85 Outperform 0.72 0.63 0.56 0.72 0.64 0.58 0.72 0.66 0.60 Sector 1.29 1.10 0.94 1.29 1.15 0.98 1.29 1.22 1.04
Source: Bloomberg, Daiwa forecasts; Note: 1) EV (Adjusted 1) assumes that investment yield assumption is revised down by 50bps and risk discount rate is also revised down by 50bps at the same time; 2) EV (Adjusted 2) assumes the investment yield assumption is revised down to 4.0% and risk discount rate is revised down to 10.0%; 3) Sector figures do not include AIA and Zhong An; 4) Priced as of 27 October 2017.
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Asia Pacific Daily | 14
Ping An Insurance (2318 HK): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Life premum growth (%) 8.7 13.7 19.5 13.7 32.0 31.4 22.6 22.5 VNB growth (%) (5.4) 14.1 20.9 74.9 32.2 32.9 19.4 20.9 P&C premium growth (%) 18.4 16.7 23.8 14.5 8.7 20.5 12.1 10.7 Combined ratio (%) 95.3 97.3 95.3 95.6 95.9 96.8 97.8 97.6 Investment assets growth (%) 42.0 25.3 13.2 19.2 13.5 16.0 14.0 11.0 Net investment yield - Group 4.7 5.1 5.3 5.8 6.0 5.6 5.6 5.3 Embedded value growth (%) 21.3 15.3 39.2 20.2 15.6 19.4 18.5 17.8 Solvency ratio - Group (%) 186 174 205 225 210 233 233 233 Payout ratio (%) 17.8 18.3 16.7 17.9 22.0 30.0 30.0 35.0
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Net written prem. & policy fees 221,089 248,017 301,763 360,804 451,728 543,964 648,256 769,799 Net earned premiums 213,144 240,199 288,779 349,846 441,620 544,546 649,921 773,796 Net claims incurred (165,994) (198,002) (228,326) (289,510) (324,814) (388,187) (449,237) (526,647) Deferred policy acq. cost amort. 0 0 0 0 0 0 0 0 Underwriting & policy acq. cost (20,437) (25,390) (34,941) (50,644) (78,754) (111,018) (140,562) (172,179) G&A expenses (68,477) (81,753) (102,565) (135,155) (141,007) (138,998) (154,988) (172,604) P'holders' div. & profit particip. 0 0 0 0 0 0 0 0 Other underwriting inc./(exp.) 5,626 6,675 5,427 9,761 14,168 2,141 5,684 7,521 Underwriting profit/(loss) (36,138) (58,271) (71,626) (115,702) (88,787) (91,515) (89,183) (90,113) Net investment inc./(exp.) 41,598 54,310 70,337 90,512 116,675 122,735 140,869 153,149 Net realised & unrealised gains/(losses) (14,220) 1,273 1,201 44,410 (1,622) 14,553 4,484 5,037 on inv. Associates' profits (46) (264) (62) (281) (1,370) 763 789 818 Other inc./(expenses) (2,793) (7,090) (14,805) (29,862) (44,090) (51,568) (55,737) (59,677) Profit before tax 32,338 46,224 62,353 93,413 94,411 108,097 120,797 136,395 Tax (5,588) (10,210) (14,423) (28,235) (22,043) (27,024) (30,199) (34,099) Min. int./pref. div./others (6,700) (7,860) (8,651) (10,975) (9,974) (10,223) (10,719) (11,402) Net profit (reported) 20,050 28,154 39,279 54,203 62,394 70,850 79,878 90,894 Net profit (adjusted) 20,050 28,154 39,279 54,203 62,394 70,850 79,878 90,894 EPS (reported) (CNY) 2.533 3.557 4.933 2.981 3.496 3.876 4.370 4.972 EPS (adjusted) (CNY) 2.533 3.557 4.933 2.981 3.496 3.876 4.370 4.972 EPS (adjusted, fully-diluted)) (CNY) 2.533 3.545 4.659 2.980 3.496 3.876 4.370 4.972 DPS (CNY) 0.450 0.650 0.823 0.533 0.750 1.163 1.311 1.740 EV/share (CNY) 36.113 41.644 51.598 30.170 34.885 41.640 49.331 58.098
Change (YoY %) and margins (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Gross premium growth 12.6 15.0 21.3 18.3 21.6 22.8 18.7 18.4 Net premium growth 14.2 12.7 20.2 21.1 26.2 23.3 19.4 19.1 Net claims incurred n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Underwriting profit/(loss) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net investment income 21.3 30.6 29.5 28.7 28.9 5.2 14.8 8.7 Net profit (reported) 3.0 40.4 39.5 38.0 15.1 13.6 12.7 13.8 Net profit (adjusted) 3.0 40.4 39.5 38.0 15.1 13.6 12.7 13.8 EPS (reported) 1.2 40.4 38.7 (39.6) 17.3 10.8 12.7 13.8 EPS (adjusted) 1.2 40.4 38.7 (39.6) 17.3 10.8 12.7 13.8 EPS (adjusted, fully-diluted) 1.2 40.0 31.4 (36.0) 17.3 10.8 12.7 13.8 DPS 10.6 44.4 26.6 (35.2) 40.8 55.0 12.7 32.8 EV/share 21.3 15.3 23.9 (41.5) 15.6 19.4 18.5 17.8 Underwriting margin (%) (17.0) (24.3) (24.8) (33.1) (20.1) (16.8) (13.7) (11.6) PBT margin (%) 15.2 19.2 21.6 26.7 21.4 19.9 18.6 17.6 Net-profit margin (%) 9.4 11.7 13.6 15.5 14.1 13.0 12.3 11.7 Source: FactSet, Daiwa forecasts
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Asia Pacific Daily | 15
Ping An Insurance (2318 HK): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & bank balances 480,103 410,208 538,992 622,882 752,977 416,280 460,530 507,330 Total investment 1,449,577 1,813,646 2,045,128 2,432,003 2,755,629 3,211,189 3,660,756 4,063,439 Loans and advances 709,402 861,770 1,053,882 1,245,371 1,458,291 1,662,452 1,895,195 2,160,522 Deferred acquisition costs 0 0 0 0 0 0 0 0 Investment in associates 9,960 12,081 12,898 26,858 48,955 53,851 59,236 65,159 Net fixed assets 17,539 18,873 28,341 35,158 40,143 44,157 48,573 53,430 Goodwill & other intangibles 37,536 43,896 43,032 44,916 63,017 66,168 69,476 72,950 Assets under management 0 0 0 0 0 0 0 0 Reins. recov. on unpaid losses 9,341 13,839 15,587 17,872 15,269 17,712 20,369 23,322 Receivables 65,095 73,605 130,881 162,435 179,524 95,718 114,048 135,746 Other assets 65,713 112,394 137,170 177,664 263,098 901,680 1,111,406 1,436,430 Total assets 2,844,266 3,360,312 4,005,911 4,765,159 5,576,903 6,469,207 7,439,589 8,518,329 Customer deposits 1,407,251 1,700,981 1,966,601 2,124,165 2,479,171 2,632,369 2,796,151 2,971,339 Technical reserves 866,461 1,007,578 1,172,992 1,380,038 1,579,789 1,782,926 2,047,203 2,360,684 Unearned premium reserves 50,801 60,987 72,154 82,610 90,614 161,789 226,394 298,331 Payables 59,974 79,591 94,333 115,513 152,603 181,824 214,586 252,503 Borrowing 36,795 54,757 81,232 257,605 349,825 349,825 349,825 349,825 Other liabilities 213,335 216,713 264,783 391,657 438,440 806,360 1,180,029 1,603,634 Total liabilities 2,634,617 3,120,607 3,652,095 4,351,588 5,090,442 5,915,094 6,814,188 7,836,316 Share capital 7,916 7,916 8,892 18,280 18,280 18,280 18,280 18,280 Reserves & others 151,701 174,793 280,672 315,968 365,169 422,599 483,167 528,377 Shareholders' equity 159,617 182,709 289,564 334,248 383,449 440,879 501,447 546,657 Minority interests 50,032 56,996 64,252 79,323 103,012 113,235 123,954 135,356 Total equity & liabilities 2,844,266 3,360,312 4,005,911 4,765,159 5,576,903 6,469,207 7,439,589 8,518,329
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E ROAE (adjusted) 13.8 16.4 16.6 17.4 17.4 17.2 17.0 17.3 Net earned premium/equity 133.5 131.5 99.7 104.7 115.2 123.5 129.6 141.6 Total investment return 2.9 5.1 5.1 7.8 5.3 5.5 5.1 4.8 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 17.3 22.1 23.1 30.2 23.3 25.0 25.0 25.0 Dividend payout 17.8 18.3 16.7 17.9 21.5 30.0 30.0 35.0 Source: FactSet, Daiwa forecasts
Company profile
Ping An Insurance is a diversified financial group, with life and non-life insurance businesses, a bank subsidiary, and a few diversified financial subsidiaries. The company was founded in 1988 as a P&C insurance company, shifted its focus to life insurance in 1994, and was listed in 2004. Ping An is China’s second-largest life and non-life insurer based on total premiums, with market shares of 12.7% and 19.2%, respectively, for 2016.
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Asia Pacific Daily | 16
China Financials 27 October 2017
China Life Insurance (2628 HK)
Target price: HKD31.00 (from HKD30.00) Share price (27 Oct): HKD25.65 | Up/downside: +20.9%
2018 jumpstart headwinds may have been exaggerated Leon Qi, CFA (852) 2532 4381 ¾ Significantly increased long-term treasury and NSA investments in 3Q17 [email protected] ¾ Management sees limited impact from ban of fast returns/universal riders Kevin Jiang (852) 2532 4383 ¾ Reiterating Buy (1), lift TP to HKD31; most sensitive to rising treasury yield [email protected]
What's new: China Life’s 3Q17 results conference call suggests it has Forecast revisions (%) seen limited impact to date from tighter product rules that took effect from Year to 31 Dec 17E 18E 19E October 2017 (see our profit alert and results). Net premiums change - (2.6) (3.5) Net profit change - 1.1 (0.5) Core EPS (FD) change - 1.1 (0.5) What's the impact: 2018 jumpstart. According to management, China Source: Daiwa forecasts Life is looking to achieve a balance between product sales in 4Q17 and 1Q18. We understand that China Life plans to use a product bundling Share price performance strategy for 2018 jumpstart sales (see What happens to 2018 “jumpstart” (HKD) (%) sales? 12 October). The company said it will offer all forms of traditional, 26 125 participating and universal products, and will likely begin its presales 24 118 campaign relatively later vs. peers. It also noted that its guarantee rate on 23 110 21 103 universal products will not be revised up in 2018 and that it plans to 19 95 continue to cut the number of single-premium sales in 2018. Oct-16 Jan-17 Apr-17 Jul-17 Oct-17
China Life (LHS) Relative to HSI (RHS) Investments. China Life increased its allocation to long-term fixed income assets during 3Q17. It increased its long-term non-standard assets by 12-month range 19.06-25.80 CNY40bn with an average maturity of over 10 years. It also increased its Market cap (USDbn) 92.92 treasury investments with an average duration over 30 years. Strong 3m avg daily turnover (USDm) 142.61 investment income recorded was mainly a result of recognition of stock Shares outstanding (m) 28,265 Major shareholder China Life Insurance (Group) (68.4%) investment gains (CNY4.2bn from A-shares and CNY3.2bn from Stock
Connect), higher fixed-income yield, and helped by its increased stake in - Financial summary (CNY) Guangfa Bank from end August 2016. Year to 31 Dec 17E 18E 19E
Net premiums (m) 494,427 548,814 609,183 Reserve top-ups led to CNY4.6bn of additional reserves in 3Q17 (3Q16: Net investment income (m) 117,368 118,266 128,221 CNY7.8bn) as a result of a smaller decline vs. 3Q16 in China’s 750-day Net profit (m) 30,685 34,204 42,370 average treasury yield. Assuming the yield on 10-year treasury bonds Core EPS (fully-diluted) 1.086 1.210 1.499 EPS change (%) 60.4 11.5 23.9 remains flat at 3.82% as of 25 October 2017, we estimate that its 750-day Daiwa vs Cons. EPS (%) 20.6 12.0 13.8 average yield would be flat for 4Q17, up 4.3bps in 1H18 and +10.1bps in PER (x) 20.1 18.0 14.6 2H18. Dividend yield (%) 1.7 1.9 2.4 DPS 0.380 0.424 0.525 PBR (x) 1.8 1.8 1.7 Agency. China Life guided that it would focus less on the number of agents ROE (%) 9.6 10.0 11.7 and more on agent productivity going forward, by applying more stringent Source: FactSet, Daiwa forecasts agent validation standards.
What we recommend: We lift our 12-month SOTP-based target price to HKD31 as we roll forward the P/EV by 6 months to mid-2017-18 EVPS, partly offset by likely lower 2018 jumpstart sales. We reiterate our Buy (1) call, largely as China Life’s net profit and EV are the most sensitive to interest rate rises among listed insurers (see China Life upgrade, 25 August and When the tide turns, 5 January). Key risk: further tightening on product sales rules.
How we differ: We have been more positive than the market on China Life’s net profit momentum. Our 2017 net profit forecasts have consistently been 18-21% higher than consensus in the past 3 months and at present.
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 17
China Life Insurance (2628 HK): 27 October 2017
China major life insurers: January premium as % of full-year China life insurers: 2017 jumpstart products likely to be premium (2016) affected in 2018 jumpstart sales Name of Universal rider 50% 46% Company Name of product product Universal rider (Chinese) 45% (Chinese) 40% China Life Xin Fu Ying Jia 䪛⾿䎒ᇦ Xin Account 䪛ᑀᡧ 35% Ping An Ying Yue Ren Sheng 䎒䎺Ӫ⭏ Ju Cai Bao 㚊䍒ᇍ 29% 28% 30% Life Cai Fu Tian Ying 䍒ᇼཙ䎒 Ju Cai Bao 㚊䍒ᇍ 24% 25% Dong Fang Hong 19% 19% CPIC Life ьᯩ㓒㌫ࡇ Cai Fu Ying Jia 䍒ᇼ䎒ᇦ 20% series Fu Xiang Yi Sheng ⾿ӛа⭏ n.a. n.a. 15% NCI Mei Li Ren Sheng 㖾࡙Ӫ⭏ n.a. n.a. 10% PICC Life Xin Xiang Zhi Zun 䪛ӛ㠣ሺ n.a. n.a. 5% Taiping 0% Zhuo Yue Zhen Xiang ঃ䎺㠫ӛ n.a. n.a. Life China Life Ping An Life CPIC Life NCI PICC Life Taiping Life
Source: Companies, Daiwa Source: Companies, Daiwa Note: Ping An Life includes Ping An Annuity and Ping An Health Note: All products affected have “fast-return” features
China: quarterly movement of 750-day average treasury rate (10-year tenor) (bp) 8 7 6 4 3 2 2 2 1 1 0 0 -2 0 -4 -3 -6 -5 -6 -6 -8 -6 -10 -10 -12 -10 -14 -12 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E
Source: China Bonds, WIND, Daiwa Estimates Note: Update as of 26 October 2017, assuming treasury spot rate stays unchanged going forward
China/Hong Kong insurance companies: valuation comparison Company Ticker Share price Rating PBR (x) PER (x) Div yield(%) (HKD) 16A 17E 18E 16A 17E 18E 16A 17E 18E AIA 1299 HK 60.00 Buy 2.6 2.3 2.2 22.1 18.9 17.1 1.4 1.8 1.9 China Life 2628 HK 25.65 Buy 2.0 1.8 1.8 32.2 20.1 18.0 1.1 1.7 1.9 Ping An 2318 HK 68.75 Hold 2.8 2.4 2.1 16.7 15.1 13.4 1.3 2.0 2.2 CPIC 2601 HK 38.45 Buy 2.2 2.1 2.0 24.6 18.5 16.6 2.1 3.0 3.3 PICC Group 1339 HK 3.70 Outperform 1.1 0.9 0.8 9.3 7.6 8.2 1.1 1.3 1.2 PICC P&C 2328 HK 15.30 Underperform 1.6 1.4 1.2 10.7 9.2 9.6 2.4 2.7 2.6 New China Life 1336 HK 50.40 Buy 2.3 2.1 1.8 27.1 20.7 14.7 1.1 1.5 2.1 Taiping 966 HK 25.85 Outperform 1.7 1.5 1.4 19.5 16.7 13.8 0.4 0.6 1.3 Zhong An 6060 HK 76.90 Not rated 11.8 n.a. n.a. 6542.1 n.a. n.a. n.a n.a. n.a. *Sector 2.3 2.0 1.8 21.9 16.5 14.6 1.4 2.0 2.2
Company Ticker Share price Rating P/EV (x) P/EV (Adjusted 1) (x) P/EV (Adjusted 2) (x) (HKD) 16A 17E 18E 16A 17E 18E 16A 17E 18E China Life 2628 HK 25.65 Buy 0.95 0.82 0.72 0.95 0.88 0.77 0.95 0.99 0.87 Ping An 2318 HK 68.75 Hold 1.68 1.40 1.19 1.68 1.45 1.22 1.68 1.50 1.27 CPIC 2601 HK 38.45 Buy 1.21 1.04 0.88 1.21 1.10 0.94 1.21 1.17 1.00 PICC Group 1339 HK 3.70 Outperform 0.96 0.89 0.76 0.96 0.91 0.78 0.96 0.97 0.84 New China Life 1336 HK 50.40 Buy 1.03 0.88 0.75 1.03 0.93 0.80 1.03 0.97 0.83 Taiping 966 HK 25.85 Outperform 0.72 0.63 0.56 0.72 0.64 0.58 0.72 0.66 0.60 Sector 1.29 1.10 0.94 1.29 1.15 0.98 1.29 1.22 1.04
Source: Source: Bloomberg, Daiwa forecasts; Note: 1) EV (Adjusted 1) assumes that investment yield assumption is revised down by 50bps and risk discount rate is also revised down by 50bps at the same time; 2) EV (Adjusted 2) assumes the investment yield assumption is revised down to 4.0% and risk discount rate is revised down to 10.0%; 3) Sector figures do not include AIA and Zhong An; 4) Priced as of 27 October 2017.
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China Life Insurance (2628 HK): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Life premium growth (%) 1.4 1.1 1.4 10.0 18.3 16.0 11.0 11.0 VNB growth (%) 3.1 2.2 9.2 35.6 56.4 30.0 12.4 13.8 Embedded Value growth (%) 15.3 1.4 32.9 23.2 16.4 14.8 14.1 14.3 Investment assets growth (%) 19.8 3.2 13.6 8.9 7.2 12.0 9.0 9.0 Net investment yield (%) 4.4 4.5 4.7 4.3 4.6 4.5 4.1 4.1 Solvency ratio - Group (%) 236 226 294 359 306 282 270 259 Payout ratio (%) 35.8 34.2 35.1 34.2 35.5 35.0 35.0 35.0
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Net written prem. & policy fees 322,358 325,734 330,495 362,993 428,740 498,878 553,755 614,668 Net earned premiums 322,126 324,813 330,105 362,301 426,230 494,427 548,814 609,183 Net claims incurred (302,594) (314,106) (317,252) (354,483) (412,361) (470,954) (495,593) (537,345) Deferred policy acq. cost amort. 0 0 0 0 0 0 0 0 Underwriting & policy acq. cost (27,754) (25,690) (27,147) (35,569) (52,022) (70,333) (82,504) (94,656) G&A expenses (23,283) (24,805) (25,432) (27,458) (31,854) (36,067) (38,927) (43,209) P'holders' div. & profit particip. (3,435) (18,423) (24,866) (33,491) (15,883) (17,371) (19,007) (21,067) Other underwriting inc./(exp.) (3,183) (4,209) (5,393) (7,431) (4,214) (6,149) (6,462) (6,967) Underwriting profit/(loss) (38,123) (62,420) (69,985) (96,131) (90,104) (106,447) (93,679) (94,062) Net investment inc./(exp.) 73,243 82,816 93,548 97,582 109,147 117,368 118,266 128,221 Net realised & unrealised gains/(losses) (27,189) 5,930 12,928 42,506 (1,056) 21,626 12,717 13,996 on inv. Associates' profits 3,037 3,125 3,911 1,974 5,855 6,041 6,246 6,472 Other inc./(expenses) 0 0 0 0 0 0 0 0 Profit before tax 10,968 29,451 40,402 45,931 23,842 38,587 43,549 54,628 Tax 304 (4,443) (7,888) (10,744) (4,257) (7,276) (8,647) (11,393) Min. int./pref. div./others (211) (243) (303) (488) (458) (626) (698) (865) Net profit (reported) 11,061 24,765 32,211 34,699 19,127 30,685 34,204 42,370 Net profit (adjusted) 11,061 24,765 32,211 34,699 19,127 30,685 34,204 42,370 EPS (reported) (CNY) 0.391 0.876 1.140 1.228 0.677 1.086 1.210 1.499 EPS (adjusted) (CNY) 0.391 0.876 1.140 1.228 0.677 1.086 1.210 1.499 EPS (adjusted, fully-diluted)) (CNY) 0.391 0.876 1.140 1.228 0.677 1.086 1.210 1.499 DPS (CNY) 0.140 0.300 0.400 0.420 0.240 0.380 0.424 0.525 EV/share (CNY) 11.944 12.108 16.094 19.822 23.070 26.492 30.215 34.551
Change (YoY %) and margins (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Gross premium growth 1.4 1.1 1.4 10.0 18.3 16.0 11.0 11.0 Net premium growth 1.2 0.8 1.6 9.8 17.6 16.0 11.0 11.0 Net claims incurred n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Underwriting profit/(loss) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net investment income 20.6 13.1 13.0 4.3 11.9 7.5 0.8 8.4 Net profit (reported) (39.7) 123.9 30.1 7.7 (44.9) 60.4 11.5 23.9 Net profit (adjusted) (39.7) 123.9 30.1 7.7 (44.9) 60.4 11.5 23.9 EPS (reported) (39.7) 123.9 30.1 7.7 (44.9) 60.4 11.5 23.9 EPS (adjusted) (39.7) 123.9 30.1 7.7 (44.9) 60.4 11.5 23.9 EPS (adjusted, fully-diluted) (39.7) 123.9 30.1 7.7 (44.9) 60.4 11.5 23.9 DPS (39.1) 114.3 33.3 5.0 (42.9) 58.3 11.5 23.9 EV/share 15.3 1.4 32.9 23.2 16.4 14.8 14.1 14.3 Underwriting margin (%) (11.8) (19.2) (21.2) (26.5) (21.1) (21.5) (17.1) (15.4) PBT margin (%) 3.4 9.1 12.2 12.7 5.6 7.8 7.9 9.0 Net-profit margin (%) 3.4 7.6 9.8 9.6 4.5 6.2 6.2 7.0 Source: FactSet, Daiwa forecasts
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Asia Pacific Daily | 19
China Life Insurance (2628 HK): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & bank balances 75,605 27,483 53,187 82,429 73,379 82,430 89,849 97,935 Total investment 1,715,233 1,821,198 2,047,683 2,205,210 2,379,904 2,665,247 2,905,119 3,166,580 Loans and advances 0 0 0 0 0 0 0 0 Deferred acquisition costs 0 0 0 0 0 0 0 0 Investment in associates 28,991 34,775 44,390 47,175 119,766 125,754 132,042 138,644 Net fixed assets 22,335 23,393 25,348 26,974 30,389 31,908 33,504 35,179 Goodwill & other intangibles 0 0 0 0 0 0 0 0 Assets under management 0 0 0 0 0 0 0 0 Reins. recov. on unpaid losses 948 1,069 1,032 1,420 2,134 1,780 1,949 2,134 Receivables 8,738 9,876 11,166 11,913 13,421 14,981 16,629 18,458 Other assets 47,066 55,147 63,761 73,194 77,958 44,545 69,385 98,152 Total assets 1,898,916 1,972,941 2,246,567 2,448,315 2,696,951 2,966,646 3,248,477 3,557,083 Customer deposits 0 0 0 0 0 0 0 0 Technical reserves 1,451,176 1,559,584 1,675,721 1,800,091 2,043,692 2,201,974 2,355,441 2,513,574 Unearned premium reserves 0 0 0 0 0 0 0 0 Payables 63,868 79,204 116,435 170,349 162,506 189,788 165,284 190,541 Borrowing 67,981 67,985 67,989 67,994 37,998 37,998 37,998 37,998 Other liabilities 92,790 43,583 99,091 83,667 145,107 198,473 332,333 438,049 Total liabilities 1,675,815 1,750,356 1,959,236 2,122,101 2,389,303 2,628,233 2,891,057 3,180,162 Share capital 28,265 28,265 28,265 28,265 28,265 28,265 28,265 28,265 Reserves & others 192,820 192,066 255,856 294,227 275,356 305,495 323,805 342,440 Shareholders' equity 221,085 220,331 284,121 322,492 303,621 333,759 352,070 370,705 Minority interests 2,016 2,254 3,210 3,722 4,027 4,653 5,351 6,216 Total equity & liabilities 1,898,916 1,972,941 2,246,567 2,448,315 2,696,951 2,966,646 3,248,477 3,557,083
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E ROAE (adjusted) 5.4 11.2 12.8 11.4 6.1 9.6 10.0 11.7 Net earned premium/equity 145.7 147.4 116.2 112.3 140.4 148.1 155.9 164.3 Total investment return 2.8 5.0 5.4 6.2 4.6 5.3 4.6 4.5 Net debt to equity net cash 18.2 5.2 net cash net cash net cash net cash net cash Effective tax rate (2.8) 15.1 19.5 23.4 17.9 18.9 19.9 20.9 Dividend payout 35.8 34.2 35.1 34.2 35.5 35.0 35.0 35.0 Source: FactSet, Daiwa forecasts
Company profile
China Life was established in June 2003 through the restructuring of China Life Insurance Company. The company is the largest life insurer in China, with a distribution network that spans the whole of China.
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Asia Pacific Daily | 20
China Information Technology 27 October 2017
Baidu (BIDU US)
Target price: USD245.00 (from USD215.00) Share price (26 Oct): USD260.62 | Up/downside: -6.0%
3Q17: a mixed quarter, feed ads shine, iQiyi hiccup John Choi (852) 2773 8730 ¾ Feed ads shine; lukewarm traditional search recovery [email protected] ¾ We expect a short-term revenue hiccup for iQiyi in 4Q17E Alex Liu (852) 2848 4976 ¾ Maintaining our Hold (3) rating; raising TP to USD245 [email protected]
What's new: Baidu posted mixed results on 27 October. 3Q17 revenue Forecast revisions (%) rose 29% YoY while non-GAAP net income grew by 153%, 0%/95% ahead Year to 31 Dec 17E 18E 19E of consensus estimates respectively, on lower traffic acquisition cost and Revenue change (1.5) (0.3) (0.8) Net profit change 37.6 13.3 (4.9) content spending and c.CNY4bn disposal gain for Baidu Takeout. 4Q17 Core EPS (FD) change 37.6 13.3 (4.9) guidance of 22-29% YoY rise in revenue was below consensus forecasts of Source: Daiwa forecasts 36% YoY. While we are upbeat on newsfeed-ad monetisation progress, we are concerned on: 1) traditional search revenue momentum, 2) near-term Share price performance revenue uncertainty on iQiyi, 3) competition/execution risk on feed-ad (USD) (%) monetisation, and 4) low visibility on content and R&D spending plans. 275 135 246 123 What's the impact: Feed ads shine, unexciting traditional search 218 110 189 98 recovery; we expect short-term revenue hiccup for iQiyi in 4Q17E. 160 85 Management noted gross revenue from feed ads reached c.USD250m for Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 3Q17. However, we estimate traditional search ad revenue grew by only Baidu (LHS) Relative to S&P 500 Index (RHS) 12% YoY in 3Q17 despite a low base. Baidu expects feed ads to be an incremental revenue stream to traditional search revenue on enlarged 12-month range 161.67-272.82 advertising ARPU. However, we see a structural deceleration of traditional Market cap (USDbn) 91.30 search revenue as ad dollars flow to a wider spectrum of digital media 3m avg daily turnover (USDm) 733.32 Shares outstanding (m) 350 properties. Separately, Baidu intentionally slowed entertainment content Major shareholder Robin Yanhong Li (16.1%) th slated to roll out in 4Q17 as the 19 CPC Congress was held late in October. We believe this would result in a CNY700m QoQ decline in iQiyi Financial summary (CNY) ad revenue for 4Q17 (c.3% of revenue). Excluding such impact, guidance Year to 31 Dec 17E 18E 19E implies a 25-34% YoY revenue growth for 4Q17. Revenue (m) 84,481 102,600 121,033 Operating profit (m) 15,364 17,596 20,394 Net profit (m) 21,789 20,239 23,464 Likely high content investment in 2018E. 3Q17 content expense was up Core EPS (fully-diluted) 62.698 58.236 67.518 76% YoY, lower than 83%/93% YoY for 2Q17/1Q17. Content spending EPS change (%) 62.7 (7.1) 15.9 organic growth will likely remain high heading into 2018 with some 4Q17 Daiwa vs Cons. EPS (%) 34.4 (4.2) (15.6) spending likely postponed to 1H18 (we model 72/53% content cost YoY PER (x) 27.6 29.7 25.6 Dividend yield (%) 0.0 0.0 0.0 growth in 2017/18). 3Q17 operating expense was under control - excluding DPS 0.000 0.000 0.000 iQiyi, with Baidu’s non-GAAP operating margin stabilising at 35%. We PBR (x) 5.2 4.4 3.8 expect the deconsolidation of Baidu Takeout (from 4Q17) to further support EV/EBITDA (x) 26.6 21.4 16.9 ROE (%) 20.4 15.8 15.7 operating margin expansion, while increasing revenue contribution from Source: FactSet, Daiwa forecasts feed ads and iQiyi’s revenue hiccup in 4Q17 could result in operating deleverage. Baidu expects the 4Q17 non-GAAP operating margin to see sequential decline QoQ. In all, we revise 2017-19E EPS by -4.9% to 37.6% to factor in higher feed-ad revenue offset by lower content cost and tax rate.
What we recommend: We maintain our Hold (3) rating and lift our SOTP- based TP to USD245 from USD215 (see page 2). Key upside risk: lower marketing expenditure; key downside risk: slower search revenue growth.
How we differ: We are more cautious than the market on Baidu’s traditional search advertising revenue outlook for the medium term.
See important disclosures, including any required research certifications, beginning on page 5
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Baidu (BIDU US): 27 October 2017
Baidu: SOTP valuation SOTP-based target price Baidu SOTP valuation of USD245 Core business (including feed ads & O2O business) Baidu core-search revenue (average 2017-18E) 82.5 Multiply: Core-search EBIT Margin % 38% Within our SOTP Core-search EBIT (average 2017-18E) 31.4 framework, we do not Multiply: Tax rate % 15% value Nuomi (groupbuy) Core-search EBIAT (average 2017-18E) 26.6 Valuation multiple: Price-to-earnings Ratio 16.0x separately as we view it Core-business valuation (CNYbn) 426.4 as an organic extension Core-business valuation (USDbn) 62.7 of Baidu’s search iQiyi (online video) business iQiyi revenue (average 2017-18E) 20.1 Valuation multiple: Price-to-sales Ratio 3.5x iQiyi valuation (CNYbn) 70.3 We roll over our iQiyi valuation (USDbn) 10.3 valuation basis to 2018E Baidu’s ownership in iQiyi 60% from the average of iQiyi valuation (USDbn) 6.2 Total SOTP valuation for Baidu: 2017-2018E Core-business (including O2O) valuation (USDbn) 62.7 iQiyi valuation (USDbn) 6.2
Ctrip's current market cap – fully diluted (USDbn) 29.2 Multiply: Baidu's ownership in Ctrip % - fully diluted 15% Plus: Valuation of Baidu's stake in Ctrip (USDbn) 4.4
Elema valuation– last round of financing (USDbn) 6.0 Multiply: Baidu's ownership in Elema % 8% Plus: Valuation of Baidu's stake in Elema (USDbn) 0.5
Plus: average 2017-18E net cash (USDbn) 11.6 Multiply: holding discount 0% SOTP valuation for Baidu (USDbn) 85.4 Implied SOTP-based target price for Baidu (USD) 245.0
Source: Daiwa
Baidu: earnings revisions New Old Difference % (in CNYm except for per ADS figure) FY2017E FY2018E FY2019E FY2017E FY2018E FY2019E FY2017E FY2018E FY2019E Total revenues - reported 84,481 102,600 121,033 86,201 104,794 125,689 -1.5% -0.3% -0.8% % change YoY 20% 21% 18% 22% 22% 20%
Gross profit 41,518 48,171 54,283 39,265 45,061 56,083 4.9% 8.1% -2.9% % change YoY 18% 16% 13% 11% 15% 24% Gross margin 49.1% 47.0% 44.9% 45.6% 43.0% 44.6% 3.01ppt 3.65ppt -0.97ppt
Operating income – GAAP 15,364 17,596 20,394 12,274 13,623 20,890 18.6% 20.4% -6.2% % change YoY 53% 15% 16% 22 11% 53% Operating margin 18.2% 17.2% 16.9% 14.2% 13.0% 16.6% 3.08ppt 2.95ppt -0.97ppt
Net income – non-GAAP 21,789 20,239 23,464 15,240 17,255 24,110 37.6% 13.3% -4.9% % change YoY 63% -7% 16% 14% 13% 40% Net profits margin – non-GAAP 25.8% 19.7% 19.4% 17.7% 16.5% 19.2% 7.33ppt 2.36ppt -0.83ppt
Net income per ADS – non-GAAP 62.70 58.24 67.52 43.85 49.65 69.38 37.6% 13.3% -4.9% % change YoY 63% -7% 16% 14% 13% 40%
Source: Daiwa forecasts
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Baidu (BIDU US): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Online marketing services revenue 22,246 31,802 48,487 64,037 64,525 72,683 84,312 95,430 (CNYm) Other services revenue (CNYm) 60 142 565 2,344 6,024 11,799 18,288 25,603 Selling & general expenses as % of 11.2 16.2 21.2 25.7 21.4 15.6 13.8 12.0 revenue (%) R&D expenses as % of revenue (%) 10.3 12.9 14.2 15.3 13.3 15.3 16.0 16.0
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Online marketing services 22,246 31,802 48,487 64,037 64,525 72,683 84,312 95,430 Other services 60 142 565 2,344 6,024 11,799 18,288 25,603 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 22,306 31,944 49,052 66,381 70,549 84,481 102,600 121,033 Other income 1,513 2,636 3,948 5,837 3,725 5,124 7,076 9,799 COGS (6,449) (11,472) (18,885) (27,458) (35,279) (42,963) (54,429) (66,750) SG&A (2,501) (5,174) (10,382) (17,076) (15,071) (13,213) (14,159) (14,524) Other op.expenses (3,817) (6,743) (10,929) (16,012) (13,875) (18,065) (23,492) (29,165) Operating profit 11,051 11,192 12,804 11,671 10,048 15,364 17,596 20,394 Net-interest inc./(exp.) 759 813 974 1,321 1,184 1,332 1,450 1,500 Assoc/forex/extraord./others 156 180 307 24,914 3,276 4,651 1,839 2,415 Pre-tax profit 11,965 12,185 14,085 37,906 14,509 21,347 20,885 24,310 Tax (1,574) (1,829) (2,231) (5,474) (2,914) (2,663) (4,135) (4,791) Min. int./pref. div./others 65 163 943 1,232 37 24 51 73 Net profit (reported) 10,456 10,519 12,797 33,664 11,632 18,708 16,801 19,591 Net profit (adjusted) 10,668 11,034 13,662 35,051 13,392 21,789 20,239 23,464 EPS (reported)(CNY) 29.926 30.066 36.499 96.394 33.559 53.976 48.474 56.523 EPS (adjusted)(CNY) 30.533 31.537 38.966 100.366 38.636 62.864 58.391 67.697 EPS (adjusted fully-diluted)(CNY) 30.499 31.492 38.816 100.043 38.534 62.698 58.236 67.518 DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT 11,051 11,192 12,804 11,671 10,048 15,364 17,596 20,394 EBITDA 12,564 13,828 16,752 17,508 13,773 20,488 24,672 30,193
Cash flow (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 11,965 12,185 14,085 37,906 14,509 21,347 20,885 24,310 Depreciation and amortisation 1,513 2,636 3,948 5,837 3,725 5,124 7,076 9,799 Tax paid (1,574) (1,829) (2,231) (5,474) (2,914) (2,663) (4,135) (4,791) Change in working capital 781 967 3,249 4,237 510 3,132 4,310 4,771 Other operational CF items (689) (166) (1,503) (18,846) (750) 2,127 2,279 2,507 Cash flow from operations 11,996 13,793 17,548 23,660 15,080 29,068 30,416 36,596 Capex (2,311) (2,757) (4,827) (5,230) (9,129) (10,594) (14,828) (20,755) Net (acquisitions)/disposals (1,031) 10,240 39,498 (2,805) 1,621 1,831 2,051 2,328 Other investing CF items (10,408) (30,806) (57,138) (19,697) (81) (270) (351) (357) Cash flow from investing (13,750) (23,323) (22,468) (27,731) (7,589) (9,033) (13,128) (18,784) Change in debt 9,389 6,025 7,741 10,410 1,959 1,972 1,976 1,979 Net share issues/(repurchases) 57 1,397 193 (6,152) 0 0 0 0 Dividends paid 0 0 (338) 0 0 0 0 0 Other financing CF items 100 1,397 1,847 3,528 0 0 0 0 Cash flow from financing 9,546 8,819 9,442 7,786 1,959 1,972 1,976 1,979 Forex effect/others (12) (201) 80 179 0 0 0 0 Change in cash 7,780 (911) 4,602 3,894 9,450 22,007 19,264 19,791 Free cash flow 9,685 11,036 12,720 18,430 5,950 18,474 15,588 15,841 Source: FactSet, Daiwa forecasts
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Baidu (BIDU US): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 32,880 38,686 58,084 68,025 77,475 99,482 118,746 138,537 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 1,253 2,221 3,664 3,927 4,174 4,998 6,070 7,161 Other current assets 541 2,122 4,093 6,281 5,104 6,176 8,021 9,999 Total current assets 34,674 43,029 65,841 78,234 86,753 110,657 132,837 155,697 Fixed assets 3,888 5,370 8,705 10,627 16,354 22,186 30,346 41,766 Goodwill & intangibles 5,465 20,495 20,993 18,730 16,786 14,594 12,135 9,342 Other non-current assets 1,642 2,092 4,122 40,262 41,140 42,363 43,872 45,595 Total assets 45,669 70,986 99,662 147,853 161,034 189,800 219,189 252,400 Short-term debt 0 0 93 100 93 93 93 93 Accounts payable 3,807 7,362 12,965 17,840 16,431 20,010 25,351 31,272 Other current liabilities 4,430 3,671 7,213 8,163 9,150 10,601 12,487 14,406 Total current liabilities 8,237 11,033 20,271 26,103 25,675 30,704 37,931 45,770 Long-term debt 9,693 17,229 23,507 33,942 35,942 37,942 39,942 41,942 Other non-current liabilities 524 2,058 1,378 3,593 3,559 3,531 3,507 3,485 Total liabilities 18,454 30,321 45,156 63,638 65,176 72,177 81,379 91,198 Share capital 0 0 0 0 0 0 0 0 Reserves/R.E./others 27,088 38,425 53,421 84,204 95,845 117,610 137,798 161,189 Shareholders' equity 27,089 38,425 53,421 84,204 95,845 117,610 137,798 161,189 Minority interests 127 2,240 1,085 12 12 12 12 12 Total equity & liabilities 45,669 70,986 99,662 147,853 161,033 189,799 219,188 252,399 EV 582,690 586,534 572,352 571,779 564,321 544,314 527,050 509,259 Net debt/(cash) (23,187) (21,457) (34,484) (33,983) (41,441) (61,448) (78,712) (96,503) BVPS (CNY) 77.472 109.690 152.498 240.373 273.606 335.738 393.366 460.141
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 53.8 43.2 53.6 35.3 6.3 19.7 21.4 18.0 EBITDA (YoY) 48.5 10.1 21.1 4.5 (21.3) 48.8 20.4 22.4 Operating profit (YoY) 45.9 1.3 14.4 (8.8) (13.9) 52.9 14.5 15.9 Net profit (YoY) 57.1 3.4 23.8 156.6 (61.8) 62.7 (7.1) 15.9 Core EPS (fully-diluted) (YoY) 57.0 3.3 23.3 157.7 (61.5) 62.7 (7.1) 15.9 Gross-profit margin 71.1 64.1 61.5 58.6 50.0 49.1 47.0 44.9 EBITDA margin 56.3 43.3 34.2 26.4 19.5 24.3 24.0 24.9 Operating-profit margin 49.5 35.0 26.1 17.6 14.2 18.2 17.2 16.9 Net profit margin 47.8 34.5 27.9 52.8 19.0 25.8 19.7 19.4 ROAE 49.3 33.7 29.8 50.9 14.9 20.4 15.8 15.7 ROAA 30.9 18.9 16.0 28.3 8.7 12.4 9.9 10.0 ROCE 39.7 23.6 18.8 11.9 8.0 10.7 10.6 10.7 ROIC 237.1 81.9 54.9 28.4 15.3 24.3 24.5 26.5 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 13.2 15.0 15.8 14.4 20.1 12.5 19.8 19.7 Accounts receivable (days) 15.2 19.8 21.9 20.9 21.0 19.8 19.7 19.9 Current ratio (x) 4.2 3.9 3.2 3.0 3.4 3.6 3.5 3.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow yield 1.6 1.8 2.1 3.0 1.0 3.0 2.6 2.6 Source: FactSet, Daiwa forecasts
Company profile
Founded in 2000, Baidu is the world's largest Chinese-language search engine. Its Internet search services cover web pages, news, images, documents, and multimedia files. Baidu had about 470,000 active online marketing customers in 2Q17.
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China Telecommunication Services 27 October 2017
China Unicom (762 HK)
Target price: HKD13.80 (from HKD14.10) Share price (27 Oct): HKD11.40 | Up/downside: +21.1%
On the cusp of a mobile turnaround
Mobile strategy showing all-round improvement Ramakrishna Maruvada (65) 6499 6543 We trim our EBITDA forecasts by 0.4-2.9% [email protected] Reaffirm Buy (1) rating with a slightly lower TP of HKD13.80
What’s new: China Unicom’s 3Q17 results suggest that its mobile Forecast revisions (%) business is on the cusp of a turnaround, driven by sharp acceleration in Year to 31 Dec 17E 18E 19E mobile data usage levels among its customers. We believe management Revenue change (2.8) (1.6) (0.1) Net profit change (20.3) (31.2) (23.8) execution has improved significantly over the past 18 months, and hence Core EPS (FD) change (14.0) (31.2) (23.8) reaffirm our Buy (1) rating. Source: Daiwa forecasts
What’s the impact: Though China Unicom’s 3Q17 service revenue growth Share price performance lagged its peers, this was largely expected by the market given the loss of (HKD) (%) momentum in its core mobile business since 2014. However the sharp 12.5 115 acceleration in its mobile service revenue (3Q17: 9.8% YOY; 2Q17: 7.5%; 11.5 110 10.5 105
1Q17: 2.8%) suggests that its management turnaround strategy centred on 9.5 99 driving data usage in cooperation with internet companies is beginning to 8.5 94 pay off. For example, in 3Q17, we estimate that China Unicom’s mobile Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 data volume share rose by 15.9pp YoY to 34%. Ch Unicom (LHS) Relative to HSI (RHS)
While the mobile performance was solid, two things surprised us: 1) weak 12-month range 8.50-12.36 revenue trends in the fixed-line division due to rising competition from Market cap (USDbn) 46.10 China Mobile (941 HK, HKD 79.2, Buy [1]), and 2) a sharp increase in 3m avg daily turnover (USDm) 73.41 Shares outstanding (m) 31,550 employee expenses (up 19% YoY) partly due to greater incentives for Major shareholder China Unicom BVI Ltd (41.3%) frontline staff. While we continue to think the company’s plans to overhaul staff compensation would pay dividends over the longer run, we Financial summary (CNY) nonetheless see this as posing risk to our 2017-19E EBITDA margin Year to 31 Dec 17E 18E 19E forecasts. Overall, we raise our 2017-19E service revenue forecasts by 0.1- Revenue (m) 279,007 299,647 320,086 3.1% driven by strong mobile performance, but revise down our EBITDA Operating profit (m) 9,728 17,209 23,411 Net profit (m) 6,124 12,591 17,382 forecasts by 0.4-2.9% due to lower margin assumptions. Core EPS (fully-diluted) 0.256 0.399 0.551 EPS change (%) 872.1 56.0 38.1 In addition to the above, we also revise up non-cash depreciation expenses Daiwa vs Cons. EPS (%) 33.9 6.1 2.8 PER (x) 37.9 24.3 17.6 and net interest expense forecasts, the latter based on our revised Dividend yield (%) 1.0 1.6 0.0 expectations – we expect its capital injection to be done by end 4Q17 vs. DPS 0.098 0.154 0.000 3Q17 previously and expect cash to earn nominal interest vs. previous PBR (x) 1.0 1.0 0.9 expectation of a debt reduction – for its mixed-ownership reform process. In EV/EBITDA (x) 4.1 3.3 2.9 ROE (%) 2.3 4.0 5.3 aggregate, we raise these below-EBITDA expenses, which have outsized Source: FactSet, Daiwa forecasts impact on EPS rather than valuation, by 2.2-8.9%.
What we recommend: We trim our SOTP-based 12-month target price slightly to HKD 13.80 (from HKD 14.1) driven by our EBITDA revisions. An escalation in competition is a key downside risk to our call.
How we differ: Our relative preference in the sector, where China Unicom ranks behind China Mobile and China Telecom (728 HK, HKD 3.96, Buy [1]), differs from some in the consensus. We believe the 3Q17 operational performance, notably the service revenue trends (China Mobile: 7.4%, China Telecom: +7.2%, China Unicom: 4.9%) lends support to this view.
See important disclosures, including any required research certifications, beginning on page 5
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China Unicom (762 HK): 27 October 2017
China Unicom: 3Q17 results summary CNY billion 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 % YoY Service revenue 60.8 61.1 60.8 58.2 61.4 62.7 63.8 4.8 Revenue 70.3 69.9 66.9 67.1 69.0 69.2 67.6 1.1 EBITDA 20.0 21.3 20.5 17.7 21.0 22.6 21.8 6.6 Net profit 0.5 0.9 0.2 -1.0 0.9 1.6 1.6 925.8 Key metrics Service EBITDA margin (%) 32.8% 34.9% 33.6% 30.5% 34.1% 36.0% 34.2% 0.6 pp Wireless service revenue 36.2 36.9 36.6 35.4 37.2 39.6 40.2 9.8 Wireline revenue 24.1 24.1 23.7 22.8 23.8 22.8 23.1 (2.7) Mobile ARPU (CNY) 46.9 47.3 46.7 44.9 46.7 49.3 49.2 5.4 Mobile net adds (m) -27.7 1.8 1.4 1.7 2.4 3.2 7.4 nm Broadband net adds (m) 1.1 0.5 1.1 0.2 1.4 0.3 0.5 (56.4)
Source: Company, Daiwa forecasts
China Unicom: key changes in forecasts (%) China Unicom: key changes to our assumptions (%) 2017 2018 2019 2017 2018 2019 Service revenue 0.1 1.5 3.1 Subscribers Revenue (2.8) (1.6) (0.1) Wireless 2.2 4.2 6.1 EBITDA (0.4) (2.9) (0.5) Fixed-line (4.8) (9.9) (16.5) Service EBITDA margin -0.2 p.p -1.6 p.p -1.3 p.p Fixed-broadband (0.6) (1.2) 1.0 EBITDA margin 0.7 p.p -0.4 p.p -0.1 p.p Blended ARPU Pre-tax profit (20.3) (31.2) (23.8) Wireless 0.9 1.9 3.4 Net profit (20.3) (31.2) (23.8) Fixed-line 0.0 0.0 (2.0)
Fixed-broadband (3.8) (4.8) (7.7) Capex 0.0 1.5 3.1
Source: Daiwa Source: Daiwa
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China Unicom (762 HK): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Subscribers 'million 239.3 281.0 299.1 286.7 263.8 284.0 304.2 324.4 4G Subscribers (millions) 0.0 0.0 2.1 44.2 104.6 175.0 255.7 296.1 Blended Average revenue per user per 47.9 48.4 44.6 40.6 43.9 47.6 49.1 50.5 month (CNY) Access lines (millions) 92.0 87.6 82.1 73.9 66.6 59.6 54.6 51.6 Wireline Broadband Subscribers 63.9 64.6 68.8 72.3 75.2 78.2 81.2 84.2 (millions) Access line ARPU 22.0 20.7 18.3 16.0 15.7 15.4 15.1 14.8
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Mobile 164,771 207,526 194,898 184,391 178,233 183,157 201,064 219,892 Fixed Line 83,277 86,566 88,481 91,261 94,659 95,850 98,582 100,195 Other Revenue 878 946 1,302 1,397 1,305 0 0 0 Total Revenue 248,926 295,038 284,681 277,049 274,197 279,007 299,647 320,086 Other income 0 0 0 0 0 0 0 0 COGS 0 0 0 0 0 0 0 0 SG&A (176,267) (211,075) (191,910) (189,547) (194,699) (193,065) (205,231) (217,639) Other op.expenses (61,057) (68,196) (73,868) (76,738) (76,805) (76,214) (77,206) (79,036) Operating profit 11,602 15,767 18,903 10,764 2,693 9,728 17,209 23,411 Net-interest inc./(exp.) (3,424) (2,940) (4,334) (6,496) (3,857) (4,405) (3,667) (3,413) Assoc/forex/extraord./others 1,343 887 1,362 9,767 1,948 2,810 3,178 3,178 Pre-tax profit 9,521 13,714 15,931 14,035 784 8,133 16,721 23,176 Tax (2,425) (3,306) (3,876) (3,473) (154) (2,009) (4,130) (5,794) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 7,096 10,408 12,055 10,562 630 6,124 12,591 17,382 Net profit (adjusted) 7,096 10,408 12,055 10,562 630 6,124 12,591 17,382 EPS (reported)(CNY) 0.301 0.440 0.505 0.441 0.026 0.256 0.399 0.551 EPS (adjusted)(CNY) 0.301 0.440 0.505 0.441 0.026 0.256 0.399 0.551 EPS (adjusted fully-diluted)(CNY) 0.288 0.422 0.486 0.441 0.026 0.256 0.399 0.551 DPS (CNY) 0.120 0.160 0.200 0.170 0.000 0.098 0.154 0.000 EBIT 11,602 15,767 18,903 10,764 2,693 9,728 17,209 23,411 EBITDA 72,659 83,963 92,771 87,502 79,498 85,942 94,416 102,447
Cash flow (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 9,521 13,714 15,931 14,035 784 8,133 16,721 23,176 Depreciation and amortisation 61,057 68,196 73,868 76,738 76,805 76,214 77,206 79,037 Tax paid (1,679) (3,219) (4,620) (2,244) (1,972) (2,009) (4,130) (5,794) Change in working capital 633 (2,263) (1,329) (3,340) (3,898) (5,617) 7,637 7,563 Other operational CF items 5,218 6,963 8,592 3,736 7,477 1,595 489 234 Cash flow from operations 74,750 83,391 92,442 88,925 79,196 78,317 97,923 104,216 Capex (86,783) (72,758) (69,586) (88,465) (98,293) (45,000) (59,784) (78,513) Net (acquisitions)/disposals 1,086 1,544 (2,278) 1,328 6,280 0 0 0 Other investing CF items (13,783) (5,896) (3,455) (4,217) (3,736) 0 0 0 Cash flow from investing (99,480) (77,110) (75,319) (91,354) (95,749) (45,000) (59,784) (78,513) Change in debt 36,575 3,645 (27,909) 8,759 26,366 0 0 0 Net share issues/(repurchases) 1 1,102 871 1 0 77,669 0 0 Dividends paid (2,283) (2,686) (3,677) (4,643) (4,071) 0 (2,358) (4,847) Other financing CF items (6,419) (5,044) 17,394 (5,314) (4,021) (4,405) (3,667) (3,413) Cash flow from financing 27,874 (2,983) (13,321) (1,197) 18,274 73,264 (6,025) (8,261) Forex effect/others (272) (20) 2 219 1,709 1,709 1,709 1,709 Change in cash 2,872 3,278 3,804 (3,407) 3,430 108,290 33,823 19,150 Free cash flow (12,033) 10,633 22,856 460 (19,097) 33,317 38,138 25,702 Source: FactSet, Daiwa forecasts
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Asia Pacific Daily | 27
China Unicom (762 HK): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 18,282 21,560 25,364 21,957 25,387 131,968 164,081 181,523 Inventory 5,803 5,536 4,378 3,946 2,431 2,790 2,996 3,201 Accounts receivable 14,509 15,450 16,803 19,797 40,254 19,470 20,296 21,113 Other current assets 9,580 9,664 10,029 10,970 14,146 14,146 14,146 14,146 Total current assets 48,174 52,210 56,574 56,670 82,218 168,374 201,520 219,983 Fixed assets 430,997 431,625 438,321 454,631 451,115 444,905 427,483 426,960 Goodwill & intangibles 2,771 2,771 2,771 2,771 2,771 2,771 2,771 2,771 Other non-current assets 34,182 42,565 47,406 96,274 78,050 78,050 78,050 78,050 Total assets 516,124 529,171 545,072 610,346 614,154 694,100 709,823 727,764 Short-term debt 139,240 129,470 101,527 106,380 134,089 134,089 134,089 134,089 Accounts payable 117,364 112,804 129,174 178,146 158,028 131,987 140,656 149,240 Other current liabilities 45,716 52,965 50,052 51,548 50,538 73,007 69,828 66,650 Total current liabilities 302,320 295,239 280,753 336,074 342,655 339,082 344,573 349,979 Long-term debt 2,536 13,483 35,047 40,676 40,371 40,371 40,371 40,371 Other non-current liabilities 1,763 1,550 1,731 2,380 3,446 3,446 3,446 3,446 Total liabilities 306,619 310,272 317,531 379,130 386,472 382,899 388,390 393,796 Share capital 2,311 2,328 179,101 179,102 179,102 256,771 256,771 256,771 Reserves/R.E./others 207,194 216,571 48,440 52,114 48,305 54,429 64,662 77,197 Shareholders' equity 209,505 218,899 227,541 231,216 227,407 311,201 321,434 333,968 Minority interests 0 0 0 0 275 0 0 0 Total equity & liabilities 516,124 529,171 545,072 610,346 614,154 694,100 709,823 727,764 EV 429,344 427,243 417,060 430,949 455,198 348,342 316,229 298,787 Net debt/(cash) 123,494 121,393 111,210 125,099 149,073 42,492 10,379 (7,063) BVPS (CNY) 8.891 9.204 9.502 9.655 9.496 9.864 10.188 10.585
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 19.0 18.5 (3.5) (2.7) (1.0) 1.8 7.4 6.8 EBITDA (YoY) 14.6 15.6 10.5 (5.7) (9.1) 8.1 9.9 8.5 Operating profit (YoY) 115.2 35.9 19.9 (43.1) (75.0) 261.2 76.9 36.0 Net profit (YoY) 67.9 46.7 15.8 (12.4) (94.0) 872.1 105.6 38.1 Core EPS (fully-diluted) (YoY) 61.9 46.7 15.2 (9.3) (94.0) 872.1 56.0 38.1 Gross-profit margin 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin 29.2 28.5 32.6 31.6 29.0 30.8 31.5 32.0 Operating-profit margin 4.7 5.3 6.6 3.9 1.0 3.5 5.7 7.3 Net profit margin 2.9 3.5 4.2 3.8 0.2 2.2 4.2 5.4 ROAE 3.4 4.9 5.4 4.6 0.3 2.3 4.0 5.3 ROAA 1.5 2.0 2.2 1.8 0.1 0.9 1.8 2.4 ROCE 3.5 4.4 5.2 2.9 0.7 2.2 3.5 4.7 ROIC 2.8 3.6 4.2 2.3 0.6 2.0 3.8 5.3 Net debt to equity 58.9 55.5 48.9 54.1 65.6 13.7 3.2 n.a. Effective tax rate 25.5 24.1 24.3 24.7 19.6 24.7 24.7 25.0 Accounts receivable (days) 19.9 18.5 20.7 24.1 40.0 39.1 24.2 23.6 Current ratio (x) 0.2 0.2 0.2 0.2 0.2 0.5 0.6 0.6 Net interest cover (x) 3.4 5.4 4.4 1.7 0.7 2.2 4.7 6.9 Net dividend payout 39.9 36.4 39.6 38.5 0.0 38.5 38.5 0.0 Free cash flow yield n.a. 3.5 7.5 0.2 n.a. 10.9 12.5 8.4 Source: FactSet, Daiwa forecasts
Company profile
China Unicom is an integrated information services operator with operations in Mainland China. It provides cellular services, based on 2G GSM, 3G WCDMA, and 4G FD-LTE technology platforms, in addition to fixed-line and broadband services. As at end 2015, the company had 75 million fixed- broadband subscribers and mobile subscribers of about 286 million. The company was listed on the New York Stock Exchange and the Stock Exchange of Hong Kong on 21st June 2000 and 22nd June 2000 respectively.
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Asia Pacific Daily | 28
China Telecommunication Services 27 October 2017
China Telecom (728 HK)
Target price: HKD4.98 (from HKD4.91) Share price (26 Oct): HKD3.95 | Up/downside: +26.1%
Gaining revenue share in mobile
¾ 3Q17 results are in line with our expectations Ramakrishna Maruvada (65) 6499 6543 ¾ Company continues to gain revenue share in the mobile segment [email protected] ¾ Reaffirming Buy (1) on compelling valuations; raising TP to HKD4.98
What’s new: The in-line 3Q17 results reinforce our belief that China Forecast revisions (%) Telecom’s operations are evolving along our expected lines. Accordingly, Year to 31 Dec 17E 18E 19E we reaffirm our Buy (1) rating as we believe valuations – 2018 EV/EBITDA Revenue change 0.7 1.6 1.0 Net profit change 0.8 1.8 1.4 at 22% discount to past-14-year average are very depressed. – Core EPS (FD) change 0.8 1.8 1.4 Source: Daiwa forecasts What’s the impact: China Telecom reported a 3Q17 net profit of CNY6.0bn (up by 1.6% YoY) on a 7.2% YoY increase in service revenues Share price performance accompanied by a 1pp YoY decline in the service EBITDA margin. The (HKD) (%) 3Q17 earnings were 4% ahead of our forecast due to lower-than-expected 4.2 105 depreciation expenses. Both service revenues and EBITDA were in line. 4.0 98 3.9 90 3.7 83
The strong service revenue growth (3Q17: +7.2% YoY) was driven by 3.5 75 better-than-expected performance in the mobile segment (3Q17: +10% Oct-16 Jan-17 Apr-17 Jul-17 Oct-17
YOY), where China Telecom is outperforming the competition. However, Ch Telecom (LHS) Relative to HSI (RHS) this robust mobile performance is not translating into average revenue per user (ARPU) improvement, perhaps because of the dilution effects caused 12-month range 3.56-4.20 by dual-SIM handsets. We arrive at this assessment as China Telecom’s Market cap (USDbn) 40.97 customer additions for the quarter remain strong (3Q17: 10m vs 3Q16: 3m avg daily turnover (USDm) 27.98 Shares outstanding (m) 80,932 5.6m), and mirror the industry-wide acceleration in customer subscriptions Major shareholder China Telecom Group (70.9%) seen this year (9M17: +84% YOY). Meanwhile, in the wire-line division, the broadband ARPU underwhelmed our expectations, due to rising Financial summary (CNY) competition from China Mobile (941 HK, HKD79.2, Buy [1]). Year to 31 Dec 17E 18E 19E Revenue (m) 371,890 393,681 407,843 On the cost side, the key trends are: 1) continued increase in network Operating profit (m) 29,901 33,481 34,569 Net profit (m) 20,814 23,655 24,598 expenses (3Q17: +8.9% YoY) due to higher scale of business, and 2) the Core EPS (fully-diluted) 0.257 0.292 0.304 company’s reliance on third party sales channels to promote 6-mode EPS change (%) 15.6 13.6 4.0 handsets, which is leading to a reduction in handset costs and associated Daiwa vs Cons. EPS (%) 3.7 5.9 (0.0) PER (x) 13.1 11.5 11.1 subsidies (down by 10% YoY) while driving up marketing expenses (3Q17: Dividend yield (%) 3.2 3.6 3.8 +12% YoY). Both these trends are developing along expected lines. DPS 0.108 0.123 0.127 PBR (x) 0.8 0.8 0.8 For 2017-19E, we are raising our mobile subscriber forecasts, which drives EV/EBITDA (x) 3.5 3.1 2.9 ROE (%) 6.5 7.0 7.0 slight upward revisions to both our service revenue and EPS (by 0.8-1.8%). Source: FactSet, Daiwa forecasts
What we recommend: Driven by our EPS-forecast revisions, we raise our SOTP-based 12-month TP to HKD4.98 (from HKD4.91). We reaffirm our Buy (1) rating. An escalation in competition would be a key downside risk.
How we differ: Our relative preferences in the sector, where we like China Telecom ahead of China Unicom (762 HK, HKD11.40, Buy [1]) but behind China Mobile, differs from some in the consensus. We believe the 3Q17 operational performance, notably the service revenue trends (China Mobile: 7.4%, China Telecom: +7.2%, China Unicom: 4.9%) lends support to this view.
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 29
China Telecom (728 HK): 27 October 2017
China Telecom: 3Q17 results summary CNY billion 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 YOY (%) 3Q17E Var (%) Service revenue 76.4 78.9 78.3 76.2 82.1 83.8 83.9 7.2 83.4 0.6 Revenue 86.4 90.4 87.0 88.5 91.4 92.7 90.6 4.1 98.3 -7.9 EBITDA 23.8 26.7 25.5 19.1 24.8 27.6 26.4 3.7 26.1 1.1 Net profit 5.1 6.6 5.9 0.5 5.3 7.2 6.0 1.6 5.7 4.3
Key metrics Service EBITDA margin (%) 31.2% 33.9% 32.6% 25.1% 30.2% 33.0% 31.5% -1 pp 31.4% 0.1 pp Wireless service revenue 33.0 34.5 35.2 31.8 37.2 38.6 39.0 10.9 Wireline revenue 43.3 44.4 43.1 44.4 44.9 45.1 44.9 4.1 Mobile ARPU (CNY) 55.0 56.1 57.1 51.3 56.8 57.0 55.3 Broadband ARPU (CNY) 56.0 55.5 52.1 51.5 53.0 50.9 44.3 Mobile net adds (m) 4.7 4.3 5.6 2.5 6.5 8.3 10.7 Broadband net adds (m) 3.1 1.8 2.7 2.4 2.7 2.3 3.2
Source: Company, Daiwa forecasts
China Telecom: key changes in our forecasts China Telecom: key changes in our assumptions (%) % 2017E 2018E 2019E % 2017E 2018E 2019E Service revenue 0.9 1.9 1.2 Subscribers (%) EBITDA 0.2 0.6 0.6 Wireless 7.7 8.6 9.2 Service EBITDA margin -0.2pp -0.4pp -0.2pp Fixed-line 1.0 1.0 1.1 Net profit 0.8 1.8 1.4 Fixed-broadband 0.9 0.9 0.9
Blended ARPU (%) Wireless (0.5) (1.0) (1.5) Fixed-line (1.1) (3.6) (4.6) Fixed-broadband (3.4) (5.4) (7.3) Capex (%) 0.0 1.9 1.2
Source: Daiwa forecasts Source: Daiwa forecasts
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Asia Pacific Daily | 30
China Telecom (728 HK): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Subscribers (m) 160.6 185.6 185.6 197.9 215.0 251.0 272.6 288.8 4G Subscribers (m) 0.0 0.0 7.1 58.5 121.9 184.0 238.0 288.8 Blended Average revenue per user per 53.9 54.8 54.0 54.1 55.5 55.8 55.8 55.8 month (CNY) Access lines (m) 163.0 155.8 143.6 134.3 126.9 120.9 115.9 110.9 Wireline Broadband Subscribers (m) 90.1 100.1 107.0 113.1 123.1 133.9 137.9 139.9 Access line ARPU (CNY) 21.7 20.2 18.7 17.8 16.6 15.6 14.8 14.4
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Mobile 117,826 151,186 151,611 156,529 172,223 191,389 211,388 225,849 Fixed Line 165,247 170,398 172,783 174,673 180,062 180,501 182,293 181,994 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 283,073 321,584 324,394 331,202 352,285 371,890 393,681 407,843 Other income 0 0 0 0 0 0 0 0 COGS 00000000 SG&A (212,232) (225,033) (229,541) (237,096) (257,146) (269,992) (283,420) (292,910) Other op.expenses (49,655) (69,083) (66,345) (67,664) (67,938) (71,997) (76,780) (80,364) Operating profit 21,186 27,468 28,508 26,442 27,201 29,901 33,481 34,569 Net-interest inc./(exp.) (1,564) (5,153) (5,291) (4,273) (3,235) (4,122) (4,057) (3,896) Assoc/forex/extraord./others 171 773 40 4,524 131 1,929 2,046 2,046 Pre-tax profit 19,793 23,088 23,257 26,693 24,097 27,708 31,471 32,719 Tax (4,753) (5,422) (5,498) (6,551) (5,988) (6,788) (7,710) (8,016) Min. int./pref. div./others (115) (121) (79) (88) (105) (105) (105) (105) Net profit (reported) 14,925 17,545 17,680 20,054 18,004 20,814 23,655 24,598 Net profit (adjusted) 14,925 17,545 17,680 20,054 18,004 20,814 23,655 24,598 EPS (reported)(CNY) 0.184 0.217 0.218 0.248 0.222 0.257 0.292 0.304 EPS (adjusted)(CNY) 0.184 0.217 0.218 0.248 0.222 0.257 0.292 0.304 EPS (adjusted fully-diluted)(CNY) 0.184 0.217 0.218 0.248 0.222 0.257 0.292 0.304 DPS (CNY) 0.068 0.075 0.075 0.080 0.093 0.108 0.123 0.127 EBIT 21,186 27,468 28,508 26,442 27,201 29,901 33,481 34,569 EBITDA 70,841 96,551 94,853 94,106 95,139 101,898 110,262 114,933
Cash flow (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 19,793 23,088 23,257 26,693 24,097 27,708 31,471 32,719 Depreciation and amortisation 49,655 69,083 66,345 67,664 67,938 71,997 76,780 80,364 Tax paid (4,011) (4,539) (6,407) (4,099) (5,988) (6,788) (7,710) (8,016) Change in working capital 6,009 450 8,796 18,940 12,376 4,098 5,862 3,810 Other operational CF items 834 5,484 9,802 3,778 6,055 2,194 2,011 1,850 Cash flow from operations 72,280 93,566 101,793 112,976 104,478 99,208 108,413 110,726 Capex (50,028) (70,921) (80,273) (101,898) (96,817) (89,000) (83,890) (86,860) Net (acquisitions)/disposals 0 0 710 755 0 0 0 0 Other investing CF items 1,776 (37,027) (2,145) (1,107) (2,221) 0 0 0 Cash flow from investing (48,252) (107,948) (81,708) (102,250) (99,038) (89,000) (83,890) (86,860) Change in debt (14,431) 10,930 (3,797) 11,013 (4,124) 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (5,625) (5,433) (6,198) (6,160) (6,461) (7,548) (8,726) (9,917) Other financing CF items (1,359) (5,075) (5,720) (4,270) (2,318) (4,122) (4,057) (3,896) Cash flow from financing (21,415) 422 (15,715) 583 (12,903) (11,670) (12,783) (13,813) Forex effect/others 923 (395) (912) 1,264 1,023 0 0 0 Change in cash 3,536 (14,355) 3,458 12,573 (6,440) (1,462) 11,740 10,053 Free cash flow 22,252 22,645 21,520 11,078 7,661 10,208 24,523 23,866 Source: FactSet, Daiwa forecasts
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Asia Pacific Daily | 31
China Telecom (728 HK): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 32,712 18,357 21,815 34,388 27,948 26,486 38,226 48,279 Inventory 5,928 6,523 4,225 6,281 5,081 5,578 5,905 6,118 Accounts receivable 18,768 20,022 21,562 21,105 21,423 22,685 24,015 24,878 Other current assets 7,802 7,881 11,941 16,334 19,520 19,555 19,691 19,828 Total current assets 65,210 52,783 59,543 78,108 73,972 74,304 87,837 99,103 Fixed assets 406,227 418,498 426,057 443,084 470,029 498,276 505,386 511,882 Goodwill & intangibles 39,132 37,962 38,901 40,659 41,167 29,923 29,923 29,923 Other non-current assets 34,503 33,996 36,773 67,710 67,200 68,887 70,691 72,495 Total assets 545,072 543,239 561,274 629,561 652,368 671,390 693,837 713,404 Short-term debt 16,735 47,760 44,058 51,758 103,108 103,056 103,056 103,056 Accounts payable 175,072 151,136 161,207 203,143 214,637 220,495 228,013 232,899 Other current liabilities 1,654 1,202 1,060 1,028 1,253 1,253 1,253 1,253 Total current liabilities 193,461 200,098 206,325 255,929 318,998 324,804 332,322 337,208 Long-term debt 83,073 62,617 62,918 64,911 9,420 9,370 9,370 9,370 Other non-current liabilities 2,508 1,860 1,923 3,970 7,655 7,655 7,655 7,655 Total liabilities 279,042 264,575 271,166 324,810 336,073 341,829 349,347 354,233 Share capital 80,932 80,932 80,932 80,932 80,932 80,932 80,932 80,932 Reserves/R.E./others 184,137 196,809 208,251 222,852 234,392 247,658 262,587 277,268 Shareholders' equity 265,069 277,741 289,183 303,784 315,324 328,590 343,519 358,200 Minority interests 961 923 925 967 971 971 971 971 Total equity & liabilities 545,072 543,239 561,274 629,561 652,368 671,390 693,837 713,404 EV 339,902 364,788 357,931 355,093 357,396 358,757 347,016 336,963 Net debt/(cash) 67,096 92,020 85,161 82,281 84,580 85,940 74,200 64,147 BVPS (CNY) 3.275 3.432 3.573 3.754 3.896 4.060 4.245 4.426
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 15.5 13.6 0.9 2.1 6.4 5.6 5.9 3.6 EBITDA (YoY) (6.0) 36.3 (1.8) (0.8) 1.1 7.1 8.2 4.2 Operating profit (YoY) (12.2) 29.7 3.8 (7.2) 2.9 9.9 12.0 3.2 Net profit (YoY) (9.6) 17.6 0.8 13.4 (10.2) 15.6 13.6 4.0 Core EPS (fully-diluted) (YoY) (9.6) 17.6 0.8 13.4 (10.2) 15.6 13.6 4.0 Gross-profit margin 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin 25.0 30.0 29.2 28.4 27.0 27.4 28.0 28.2 Operating-profit margin 7.5 8.5 8.8 8.0 7.7 8.0 8.5 8.5 Net profit margin 5.3 5.5 5.5 6.1 5.1 5.6 6.0 6.0 ROAE 5.7 6.5 6.2 6.8 5.8 6.5 7.0 7.0 ROAA 3.1 3.2 3.2 3.4 2.8 3.1 3.5 3.5 ROCE 6.3 7.3 7.3 6.5 6.4 6.9 7.4 7.4 ROIC 5.3 6.0 5.8 5.2 5.2 5.5 6.1 6.2 Net debt to equity 25.3 33.1 29.4 27.1 26.8 26.2 21.6 17.9 Effective tax rate 24.0 23.5 23.6 24.5 24.8 24.5 24.5 24.5 Accounts receivable (days) 24.0 22.0 23.4 23.5 22.0 21.6 21.6 21.9 Current ratio (x) 0.3 0.3 0.3 0.3 0.2 0.2 0.3 0.3 Net interest cover (x) 13.5 5.3 5.4 6.2 8.4 7.3 8.3 8.9 Net dividend payout 37.0 34.8 34.4 32.2 41.9 41.9 41.9 41.9 Free cash flow yield 8.2 8.3 7.9 4.1 2.8 3.8 9.0 8.8 Source: FactSet, Daiwa forecasts
Company profile
China Telecom is an integrated information-services operator. The company provides cellular services, based on CDMA and 4G FD-LTE technology platforms, in addition to fixed-line and broadband services in China. As at the end of 2015, it had 121m fixed-broadband subscribers and mobile subscribers of about 198m. China Telecom’s H shares and American Depositary Shares are listed on the Hong Kong Stock Exchange and New York Stock Exchange, respectively.
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Asia Pacific Daily | 32
China Financials 27 October 2017
New China Life Insurance (1336 HK)
Target price: HKD62.00 (from HKD62.00) Share price (27 Oct): HKD50.40 | Up/downside: +23.0%
Significant acceleration in 3Q17 new regular premium Leon Qi, CFA (852) 2532 4381 NCI’s agency FYRP surged by 67% YoY in 3Q17 [email protected] First half of strategic transformation close to completion Susie Liu (852) 2773 8745 Reiterating Buy (1) call and TP of HKD62 [email protected]
What's new: New China Life (NCI) posted a 67% YoY rise in agency new Forecast revisions (%) regular premium growth in 3Q17. Net profit for 3Q17 came in at Year to 31 Dec 17E 18E 19E CNY1.81bn, up 24% YoY with 9M17 net profit at 83% of the Bloomberg Net premiums change - (4.2) (3.4) Net profit change (8.9) (0.1) (0.6) full-year consensus. Core EPS (FD) change (8.9) (0.1) (0.6) Source: Daiwa forecasts What's the impact: Strong regular premium growth bodes well for VNB acceleration. NCI recorded a 67% YoY rise in its agency-channel Share price performance new regular premium (or first-year regular premium, FYRP) in 3Q17 (HKD) (%) (compared with CPIC Life: +4% YoY, Ping An Life: +11% YoY [agency new 60 140 business], and China Life: +56% YoY [for FYRP from all channels]). We 53 129 45 118 understand that NCI suspended sales of fast-return products relatively late 38 106 compared with Ping An Life and CPIC Life. But we believe the main reason 30 95 behind the agency FYRP surge is NCI’s long-term commitment to improve Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 premium mix, as NCI’s FYRP with payment periods of over ten years rose New Ch Lif (LHS) Relative to HSI (RHS) by 59% YoY. On 9M17 terms, these two metrics posted 36% and 47% growth, respectively. Its bancassurance channel also saw FYRP growth 12-month range 33.60-55.10 accelerating to 44% YoY in 3Q17. Market cap (USDbn) 20.15 3m avg daily turnover (USDm) 47.69 Shares outstanding (m) 3,120 Overall FYRP rose by 61% YoY in 3Q17. Hence we estimate NCI’s VNB Major shareholder Central Huijin Investment Ltd. (31.3%) growth in 3Q17 should be around 40% YoY, compared with +14% for Ping An Life and +15% for CPIC Life (on our estimates). Financial summary (CNY) Year to 31 Dec 17E 18E 19E Premium mix improvement. NCI continued to suspend all bancassurance Net premiums (m) 108,201 124,432 150,562 single-premium sales in 3Q17. As a result, agency regular premiums made Net investment income (m) 33,183 35,463 38,526 Net profit (m) 6,466 9,049 11,151 up 78% of NCI’s total premium in 9M17 (9M16: 59%), up from 77% in 1H17. Core EPS (fully-diluted) 2.072 2.900 3.574 EPS change (%) 30.8 40.0 23.2 NCI’s reserve top-up should have come down to around CNY0.8bn in Daiwa vs Cons. EPS (%) 4.5 12.0 12.7 PER (x) 20.7 14.8 12.0 3Q17 vs. CNY1.2bn in 3Q16 (both on our estimates). The China 10-year Dividend yield (%) 1.5 2.1 2.6 treasury yield saw a 5.5bp decline from its 750-day average yield in 3Q17 DPS 0.642 0.899 1.108 (3Q16: -9.6bps). Total investment yield (annualised) was 5.2% in 9M17 PBR (x) 2.0 1.8 1.6 (9M16: 5.1%, 1H17: 4.9%) while book value rose by 3% QoQ. ROE (%) 10.4 12.9 14.3 Source: FactSet, Daiwa forecasts What we recommend: We reiterate our Buy (1) call and 12-month Gordon Growth Model-based target price of HKD62. Our 2017-19E EPS revisions of -8.9% to -0.1% mainly reflect the tighter product rules and greater strain on new business. A near-term catalyst may be the corporate day on 1 December (see Another CPIC Life in the making 5 Jan 2017). Key risk: asset risk and cash flow risk if interest rates rise too quickly.
How we differ: We believe the market has not fully recognised NCI’s progress in upgrading into a high-quality insurer by utilising its expertise in health insurance.
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 33
New China Life Insurance (1336 HK): 27 October 2017
China major life insurers: 9M17 premium growth (YoY) China major life insurers: agency FYRP YoY growth (3Q17)
40% 36.3% 80% 35% 30.7% 67% 27.8% 70% 30% 60% 56% 25% 19.6% 20% 50% 15% 40% 10% 5% 30% 0% 20% 11% -5% 4% -10% -3.8% 10% China Life Ping An Life CPIC Life New China Taiping Life 0% Life China Life Ping An Life CPIC Life NCI
Source: Companies, Daiwa Source: Companies, Daiwa Note: FYRP stands for first-year regular premiums; China Life growth for FYRP from all channels; Ping An Life growth for agency FYP
NCI: total premium mix NCI: FYP mix
100% 100% 4% 4% 6%
53% 58% 55% 45% 60% 70% 71% 68% 50% 69% 62% 50% 81% 74% 67% 16% 22% 24% 15% 22% 0% 7% 11% 38% 34% 16% 25% 2014 2015 2016 2017E 2018E 9M16 9M17 0% Renewals Bancassurance & Group FYP single 2014 2015 2016 2017E 2018E 9M16 9M17 Bancassurance & Group FYP regular Individual FYP single Bancassurance & Group FYP single Bancassurance & Group FYP regular Individual FYP regular Individual FYP single Individual FYP regular Source: Company, Daiwa Source: Company, Daiwa
China/Hong Kong insurance companies: valuation comparison Company Ticker Share price Rating PBR (x) PER (x) Div yield(%) (HKD) 16A 17E 18E 16A 17E 18E 16A 17E 18E
AIA 1299 HK 60.00 Buy 2.6 2.3 2.2 22.1 18.9 17.1 1.4 1.8 1.9 China Life 2628 HK 25.65 Buy 2.0 1.8 1.8 32.2 20.1 18.0 1.1 1.7 1.9 Ping An 2318 HK 68.75 Hold 2.8 2.4 2.1 16.7 15.1 13.4 1.3 2.0 2.2 CPIC 2601 HK 38.45 Buy 2.2 2.1 2.0 24.6 18.5 16.6 2.1 3.0 3.3 PICC Group 1339 HK 3.70 Outperform 1.1 0.9 0.8 9.3 7.6 8.2 1.1 1.3 1.2 PICC P&C 2328 HK 15.30 Underperform 1.6 1.4 1.2 10.7 9.2 9.6 2.4 2.7 2.6 New China Life 1336 HK 50.40 Buy 2.3 2.1 1.8 27.1 20.7 14.8 1.1 1.5 2.1 Taiping 966 HK 25.85 Outperform 1.7 1.5 1.4 19.5 16.7 13.8 0.4 0.6 1.3 Zhong An 6060 HK 76.90 Not rated 11.8 n.a. n.a. 6542.1 n.a. n.a. n.a n.a. n.a. 2.3 2.0 1.8 21.9 16.5 14.6 1.4 2.0 2.2 *Sector
Company Ticker Share price Rating P/EV (x) P/EV (Adjusted 1) (x) P/EV (Adjusted 2) (x) (HKD) 16A 17E 18E 16A 17E 18E 16A 17E 18E
China Life 2628 HK 25.65 Buy 0.95 0.82 0.72 0.95 0.88 0.77 0.95 0.99 0.87 Ping An 2318 HK 68.75 Hold 1.68 1.40 1.19 1.68 1.45 1.22 1.68 1.50 1.27 CPIC 2601 HK 38.45 Buy 1.21 1.04 0.88 1.21 1.10 0.94 1.21 1.17 1.00 PICC Group 1339 HK 3.70 Outperform 0.96 0.89 0.76 0.96 0.91 0.78 0.96 0.97 0.84 New China Life 1336 HK 50.40 Buy 1.03 0.88 0.75 1.03 0.93 0.80 1.03 0.97 0.83 Taiping 966 HK 25.85 Outperform 0.72 0.63 0.56 0.72 0.64 0.58 0.72 0.66 0.60 Sector 1.29 1.10 0.94 1.29 1.15 0.98 1.29 1.22 1.04
Source: Bloomberg, Daiwa forecasts; Note: 1) EV (Adjusted 1) assumes that investment yield assumption is revised down by 50bps and risk discount rate is also revised down by 50bps at the same time; 2) EV (Adjusted 2) assumes the investment yield assumption is revised down to 4.0% and risk discount rate is revised down to 10.0%; 3) Sector figures do not include AIA and Zhong An; 4) Priced as of 27 October 2017.
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Asia Pacific Daily | 34
New China Life Insurance (1336 HK): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Life premium growth (%) 3.1 6.1 6.0 1.8 0.6 (3.0) 15.0 21.0 VNB growth (%) (4.3) 1.5 16.0 56.0 36.4 28.6 22.7 29.5 Investment assets growth (%) 28.1 14.7 13.9 1.6 6.9 6.0 10.0 10.0 Net investment yield - Group (%) 4.7 4.6 5.2 4.9 5.1 4.9 4.7 4.6 Embedded value growth (%) 16.1 13.3 32.4 29.8 17.0 17.3 17.1 18.2 Solvency Ratio - Group (%) 193 170 227 281 281 263 251 237 Payout Ratio (%) 34.1 10.6 10.2 10.1 30.3 31.0 31.0 31.0
Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Net written prem. & policy fees 98,086 103,780 109,663 111,304 111,712 108,276 124,517 150,666 Net earned premiums 97,951 103,615 109,470 111,355 111,635 108,201 124,432 150,562 Net claims incurred (90,558) (104,610) (113,161) (120,050) (109,961) (104,414) (113,482) (132,043) Deferred policy acq. cost amort. 0 0 0 0 0 0 0 0 Underwriting & policy acq. cost (7,047) (6,422) (7,641) (10,679) (13,538) (15,087) (18,857) (24,032) G&A expenses (9,785) (9,977) (11,335) (12,655) (13,081) (12,462) (14,082) (16,738) P'holders' div. & profit particip. 0 0 0 0 0 0 0 0 Other underwriting inc./(exp.) (1,833) (2,385) (1,874) (1,793) (855) (1,985) (2,139) (2,258) Underwriting profit/(loss) (11,272) (19,779) (24,541) (33,822) (25,800) (25,747) (24,128) (24,510) Net investment inc./(exp.) 19,894 23,309 28,769 29,662 32,620 33,183 35,463 38,526 Net realised & unrealised gains/(losses) (6,335) 1,065 3,015 15,407 (486) 910 395 462 on inv. Associates' profits 1 364 539 535 148 163 179 197 Other inc./(expenses) 0 0 0 0 0 0 0 0 Profit before tax 2,288 4,959 7,782 11,782 6,482 8,509 11,909 14,675 Tax 646 (535) (1,375) (3,180) (1,539) (2,042) (2,858) (3,522) Min. int./pref. div./others (1) (2) (1) (1) (1) (1) (2) (2) Net profit (reported) 2,933 4,422 6,406 8,601 4,942 6,466 9,049 11,151 Net profit (adjusted) 2,933 4,422 6,406 8,601 4,942 6,466 9,049 11,151 EPS (reported) (CNY) 0.941 1.417 2.053 2.757 1.584 2.072 2.900 3.574 EPS (adjusted) (CNY) 0.941 1.417 2.053 2.757 1.584 2.072 2.900 3.574 EPS (adjusted, fully-diluted)) (CNY) 0.941 1.417 2.053 2.757 1.584 2.072 2.900 3.574 DPS (CNY) 0.321 0.150 0.210 0.280 0.480 0.642 0.899 1.108 EV/share (CNY) 18.228 20.643 27.327 35.465 41.490 48.652 56.960 56.960
Change (YoY %) and margins (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Gross premium growth 3.1 6.1 5.8 1.8 0.6 (3.1) 15.0 21.0 Net premium growth 2.4 5.8 5.7 1.7 0.3 (3.1) 15.0 21.0 Net claims incurred n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Underwriting profit/(loss) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net investment income 44.8 17.2 23.4 3.1 10.0 1.7 6.9 8.6 Net profit (reported) 4.8 50.8 44.9 34.3 (42.5) 30.8 40.0 23.2 Net profit (adjusted) 4.8 50.8 44.9 34.3 (42.5) 30.8 40.0 23.2 EPS (reported) (24.4) 50.7 44.9 34.3 (42.5) 30.8 40.0 23.2 EPS (adjusted) (24.4) 50.7 44.9 34.3 (42.5) 30.8 40.0 23.2 EPS (adjusted, fully-diluted) (24.4) 50.7 44.9 34.3 (42.5) 30.8 40.0 23.2 DPS 156.8 (53.2) 40.0 33.3 71.5 33.9 40.0 23.2 EV/share 16.0 13.3 32.4 29.8 17.0 17.3 17.1 0.0 Underwriting margin (%) (11.5) (19.1) (22.4) (30.4) (23.1) (23.8) (19.4) (16.3) PBT margin (%) 2.3 4.8 7.1 10.6 5.8 7.9 9.6 9.7 Net-profit margin (%) 3.0 4.3 5.9 7.7 4.4 6.0 7.3 7.4 Source: FactSet, Daiwa forecasts
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New China Life Insurance (1336 HK): 27 October 2017
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & bank balances 25,066 18,570 14,503 13,904 14,230 15,084 16,592 18,251 Total investment 455,050 523,216 602,730 620,335 664,384 703,995 774,042 851,093 Loans and advances 0 0 0 0 0 0 0 0 Deferred acquisition costs 0 0 0 0 0 0 0 0 Investment in associates 708 9,404 10,150 3,626 4,575 5,033 5,536 6,089 Net fixed assets 4,126 4,471 5,917 6,827 7,849 9,026 10,380 11,937 Goodwill & other intangibles 102 1,512 1,559 1,693 1,792 1,828 1,864 1,902 Assets under management 0 0 0 0 0 0 0 0 Reins. recov. on unpaid losses 3,282 2,954 3,020 3,360 2,693 3,783 4,123 4,494 Receivables 1,556 1,581 1,543 1,525 1,846 1,638 1,883 2,279 Other assets 3,803 4,141 4,287 9,290 1,812 16,128 10,179 2,768 Total assets 493,693 565,849 643,709 660,560 699,181 756,514 824,600 898,814 Customer deposits 0 0 0 0 0 0 0 0 Technical reserves 381,260 452,814 508,313 551,607 573,299 601,348 630,448 663,363 Unearned premium reserves 0 0 0 0 0 0 0 0 Payables 1,340 1,445 3,614 4,542 6,207 3,877 4,207 4,585 Borrowing 15,000 15,000 19,000 19,000 14,000 14,000 14,000 14,000 Other liabilities 60,215 57,272 64,418 27,570 46,550 72,035 101,362 135,571 Total liabilities 457,815 526,531 595,345 602,719 640,056 691,260 750,018 817,519 Share capital 3,120 3,120 3,120 3,120 3,120 3,120 3,120 3,120 Reserves & others 32,750 36,192 45,239 54,715 55,998 62,125 71,452 78,162 Shareholders' equity 35,870 39,312 48,359 57,835 59,118 65,245 74,572 81,282 Minority interests 8 6 5 6 7 8 10 12 Total equity & liabilities 493,693 565,849 643,709 660,560 699,181 756,514 824,600 898,814
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E ROAE (adjusted) 8.7 11.8 14.6 16.2 8.5 10.4 12.9 14.3 Net earned premium/equity 273.1 263.6 226.4 192.5 188.8 165.8 166.9 185.2 Total investment return 3.2 4.8 5.8 7.5 5.1 5.1 4.7 4.7 Net debt to equity net cash net cash 9.3 8.8 net cash net cash net cash net cash Effective tax rate (28.2) 10.8 17.7 27.0 23.7 24.0 24.0 24.0 Dividend payout 34.1 10.6 10.2 10.1 30.3 31.0 31.0 31.0 Source: FactSet, Daiwa forecasts
Company profile
New China Life was established in 1996 and is headquartered in Beijing. As one of the major players in the China life insurance industry, it is currently the third-largest life insurer in China, with a market share of around 8.7% for 2014. In 2011, NCI launched its IPO, becoming the first insurer in China to list on the Shanghai Stock Exchange and Hong Kong Exchange simultaneously.
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Asia Pacific Daily | 36
Taiwan Information Technology 27 October 2017
Advanced Semicon Eng (2311 TT)
Target price: TWD47.00 (from TWD47.00) Share price (27 Oct): TWD37.50 | Up/downside: +25.3%
EMS strength to offset inventory tailwind Rick Hsu (886) 2 8758 6261 ¾ 3Q17 results upbeat on higher margins and non-op gains [email protected] ¾ 4Q17 guidance mixed: EMS strong, SAT seasonally weak Martin Lee (886) 2 8758 6262 ¾ Overall fundamentals intact; reaffirming Buy (1) and TP of TWD47 [email protected]
What's new: On 27 October, ASE released a set of upbeat results for Forecast revisions (%) 3Q17 and gave mixed guidance for its 4Q17 business outlook: strong EMS Year to 31 Dec 17E 18E 19E diluted by seasonally weak SAT, resulting in still-upbeat total revenue Revenue change 1.1 (0.2) 0.2 Net profit change 2.2 (1.7) (3.5) growth. Since its EMS rebalancing effort of focusing on margin and product Core EPS (FD) change (1.6) (5.3) (7.0) mix improvements appears to be unfolding intact, we keep our positive Source: Daiwa forecasts stance on ASE’s fundamentals, regardless of our modest forecast revisions on lowering SAT revenue/margin trajectory. We reaffirm our Buy (1) and our Share price performance TP of TWD47; ASE remains our preferred stock in the Asian OSAT sector. (TWD) (%) 41 100 What's the impact: Results upbeat. ASE reported 3Q17 net profit of 39 96 TWD6.3bn, up by 30% YoY and 9%/3% above our/consensus estimates 37 91 34 87 due to higher margins across its IC ATM (ie, SAT) and EMS businesses, as 32 82 well as non-operating gains associated with FX and ECB. We are positive Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 particularly on ASE’s EMS business rebalancing effort, which appears to be Adv Semi (LHS) Relative to TWSE Index (RHS) paying off well. The EMS gross margin (GM) finished at 10.3% for 3Q17,
1.1pp above our previous assumption (table on p. 2). 12-month range 32.10-40.85 Market cap (USDbn) 10.83 Guidance a mixed bag. ASE expects IC ATM revenue for 4Q17 to be 3m avg daily turnover (USDm) 18.55 roughly flat QoQ, below our previous forecast of a 5% QoQ growth, but Shares outstanding (m) 8,725 Major shareholder ASE Enterprises Ltd. (16.6%) guides EMS revenue to reach some TWD41bn, 13% above our previous forecast. Accordingly, we are now looking for its total 4Q17 revenue to grow Financial summary (TWD) by 10% QoQ, compared with our previous forecast of a 5% QoQ growth. Year to 31 Dec 17E 18E 19E While we attribute the SAT business shortfall to the likely tailwind effect Revenue (m) 287,979 326,161 372,680 from the lingering Android inventory correction, where TSMC expects to Operating profit (m) 24,987 32,481 37,906 Net profit (m) 22,975 26,225 30,714 normalise only by end-2017 (TSMC result note), the EMS strength appears Core EPS (fully-diluted) 2.633 3.006 3.520 to be a reflection of robust customer demand for ASE’s SiP products, EPS change (%) (0.2) 14.1 17.1 especially for the new iPhones and Watch, in our opinion. We expect EMS Daiwa vs Cons. EPS (%) 0.6 4.0 9.1 PER (x) 14.2 12.5 10.7 to contribute 50% of ASE’s 4Q revenue for the first time since 2H15. GM Dividend yield (%) 4.0 3.7 4.3 guidance for both business units is broadly in line with our expectations. DPS 1.5 1.4 1.6 PBR (x) 1.8 1.6 1.5 What we recommend: In light of the robust EMS demand recovery EV/EBITDA (x) 7.3 6.2 5.5 ROE (%) 13.4 13.5 14.7 partially offset by lower SAT revenue/GM trajectory, we only fine-tune our Source: FactSet, Daiwa forecasts 2017-19E net profit. Although we trim our 2017-19E EPS by 2-7% to reflect the increase in its outstanding shares, this doesn’t harm the valuation and we stick with our 12-month TP of TWD47, on an unchanged ROE-adjusted PBR of 1.9x with a shift in BVPS to 2018E (previous: 2017-18E average). Our Buy (1) rating stands with key downside risk being the new iPhone sell- through below sell-in.
How we differ: We are 1-9% above the consensus on our 2017-19 EPS forecasts given our belief that the HoldCo deal would go through to help ASE gain market share and expand margins.
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 37
Advanced Semicon Eng (2311 TT): 27 October 2017
ASE: quarterly P&L forecasts TWDm 1Q17 2Q17 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 2016 2017E 2018E 2019E Packaging revenue 29,809 30,494 32,880 32,904 32,076 35,208 37,768 38,017 125,283 126,086 143,069 159,041 Testing revenue 6,365 6,350 6,889 6,834 6,611 7,382 7,964 8,032 27,032 26,438 29,990 34,716 EMS & other revenue 30,377 29,182 34,109 41,787 32,538 34,150 40,705 45,709 122,569 135,455 153,102 178,923 Total revenue 66,551 66,026 73,878 81,525 71,224 76,741 86,437 91,759 274,884 287,979 326,161 372,680 COGS -54,573 -53,913 -60,030 -66,713 -58,530 -61,852 -69,603 -74,277 -221,690 -235,229 -264,262 -301,481 Gross profit 11,978 12,113 13,848 14,812 12,694 14,889 16,834 17,481 53,194 52,750 61,899 71,199 Opex -6,750 -6,896 -6,779 -7,337 -6,624 -6,983 -7,736 -8,075 -26,486 -27,763 -29,418 -33,293 Operating profit 5,228 5,216 7,068 7,475 6,070 7,905 9,098 9,407 26,709 24,987 32,481 37,906 EBITDA 12,488 12,403 14,743 15,326 13,877 15,722 17,068 17,492 56,130 54,959 64,159 69,584 Pretax profit 3,857 11,379 7,815 8,042 6,351 8,361 9,648 9,921 28,041 31,092 34,281 40,413 Income taxes -885 -3,207 -1,083 -1,568 -1,238 -1,630 -1,881 -1,935 -5,091 -6,744 -6,685 -8,083 Net profit 2,569 7,837 6,336 6,232 4,858 6,396 7,381 7,589 21,680 22,975 26,225 30,714 FD O/S (m) 8,278 8,380 8,380 8,725 8,725 8,725 8,725 8,725 8,220 8,725 8,725 8,725 FD EPS (TWD) 0.31 0.94 0.76 0.71 0.56 0.73 0.85 0.87 2.64 2.63 3.01 3.52 Margin Gross 18% 18% 19% 18% 18% 19% 19% 19% 19% 18% 19% 19% Operating 8% 8% 10% 9% 9% 10% 11% 10% 10% 9% 10% 10% EBITDA 19% 19% 20% 19% 19% 20% 20% 19% 20% 19% 20% 19% Net 4% 12% 9% 8% 7% 8% 9% 8% 8% 8% 8% 8% Growth (QoQ) Packaging revenue -11% 2% 8% 0% -3% 10% 7% 1% Testing revenue -13% 0% 8% -1% -3% 12% 8% 1% EMS & other revenue -16% -4% 17% 23% -22% 5% 19% 12% Total revenue -14% -1% 12% 10% -13% 8% 13% 6% Gross profit -22% 1% 14% 7% -14% 17% 13% 4% Operating profit -36% 0% 36% 6% -19% 30% 15% 3% EBITDA -20% -1% 19% 4% -9% 13% 9% 2% Net profit -68% 205% -19% -2% -22% 32% 15% 3% FD EPS -68% 201% -19% -6% -22% 32% 15% 3% Growth (YoY) Packaging revenue 6% 1% -2% -2% 8% 15% 15% 16% 7% 1% 13% 11% Testing revenue 6% -2% -5% -6% 4% 16% 16% 18% 7% -2% 13% 16% EMS & other revenue 7% 13% 6% 15% 7% 17% 19% 9% -13% 11% 13% 17% Total revenue 7% 5% 2% 6% 7% 16% 17% 13% -3% 5% 13% 14% Gross profit 5% -1% -2% -4% 6% 23% 22% 18% 6% -1% 17% 15% Operating profit 0% -12% -5% -8% 16% 52% 29% 26% 7% -6% 30% 17% EBITDA -1% -6% 0% -1% 11% 27% 16% 14% 3% -2% 17% 8% Net profit -38% 68% 30% -22% 89% -18% 16% 22% 11% 6% 14% 17% FD EPS -39% 64% 28% -26% 79% -22% 12% 22% 11% 0% 14% 17% Source: Company, Daiwa forecasts
ASE: 3Q17 results and 4Q17 outlook comparison 3Q17 Growth 4Q17E TWDm Actual Daiwa Variance QoQ YoY Guidance Daiwa (previous) Revenue 73,878 74,273 -1% 12% 2% ATM revenue similar to 3Q17 up 5% QoQ SAT* 40,780 41,324 -1% 23% 7% EMS revenue similar to IC ATM in 4Q17 TWD36bn EMS 33,098 32,949 0% 0% -4% Gross profit 13,848 13,405 3% 14% -2% ATM GM similar to 3Q17 25.0% SAT 10,439 10,374 1% 15% -1% EMS GM > 1Q16 level 9.5% EMS 3,409 3,031 12% 12% -5% Operating profit 7,068 6,721 5% 35% -5% Pretax profit 7,815 7,153 9% -31% 25% Net profit 6,336 5,794 9% -19% 30% Adjusted EPS (TWD) 0.76 0.69 9% -19% 28% Margin Gross 18.7% 18.0% 0.7% SAT 25.6% 25.1% 0.5% EMS 10.3% 9.2% 1.1% Operating 9.6% 9.0% 0.5% Net 8.6% 7.8% 0.8% Operation Wirebonder utilisation mid-80s 81% beat Tester utilisation high 70s 80% miss Bumping utilisation mid-80s 81% beat
Source: Company, Daiwa forecasts Note: * SAT referred to IC ATM as defined by ASE including IC packaging, testing, direct materials and other revenues
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Asia Pacific Daily | 38
Advanced Semicon Eng (2311 TT): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Packaging uilization (%) 82.5 83.2 82.5 73.7 79.9 79.2 86.4 92.3 Testing utilization (%) 81.6 79.5 80.7 75.5 76.7 74.9 79.4 87.6 FC & bumping utilization (%) 90.4 85.3 84.8 79.1 81.0 80.4 93.1 98.8
Profit and loss (TWDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Packaging revenue 104,392 112,604 121,337 116,607 125,283 126,086 143,069 159,041 Testing revenue 22,657 24,732 25,875 25,193 27,032 26,439 29,990 34,716 Other Revenue 66,923 82,526 109,379 141,502 122,569 135,455 153,102 178,923 Total Revenue 193,972 219,862 256,591 283,303 274,884 287,979 326,161 372,680 Other income 00000000 COGS (157,348) (177,049) (203,052) (233,167) (221,690) (235,229) (264,262) (301,481) SG&A (10,988) (11,700) (13,673) (14,313) (15,095) (15,802) (16,372) (18,386) Other op.expenses (7,874) (9,069) (10,295) (10,938) (11,391) (11,962) (13,046) (14,907) Operating profit 17,762 22,044 29,571 24,885 26,709 24,987 32,481 37,906 Net-interest inc./(exp.) (1,682) (2,095) (2,111) (2,071) (2,031) (1,850) (1,633) (1,363) Assoc/forex/extraord./others 511 (593) 1,013 2,474 3,364 7,955 3,433 3,870 Pre-tax profit 16,591 19,356 28,474 25,288 28,041 31,092 34,281 40,413 Tax (3,042) (3,202) (4,252) (4,839) (5,091) (6,744) (6,685) (8,083) Min. int./pref. div./others (458) (466) (629) (970) (1,270) (1,374) (1,371) (1,617) Net profit (reported) 13,092 15,689 23,593 19,478 21,680 22,975 26,225 30,714 Net profit (adjusted) 13,092 15,689 23,593 19,478 21,680 22,975 26,225 30,714 EPS (reported)(TWD) 1.758 2.089 3.069 2.370 2.829 2.633 3.006 3.520 EPS (adjusted)(TWD) 1.758 2.089 3.069 2.370 2.829 2.633 3.006 3.520 EPS (adjusted fully-diluted)(TWD) 1.724 2.023 2.887 2.370 2.638 2.633 3.006 3.520 DPS (TWD) 0.570 1.043 1.296 1.861 1.598 1.507 1.380 1.600 EBIT 17,762 22,044 29,571 24,885 26,709 24,987 32,481 37,906 EBITDA 41,176 47,515 55,922 54,403 56,130 54,959 64,159 69,584
Cash flow (TWDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 16,591 19,356 28,474 25,288 28,041 31,092 34,281 40,413 Depreciation and amortisation 23,414 25,471 26,350 29,519 29,422 29,972 31,678 31,678 Tax paid (3,042) (3,202) (4,252) (4,839) (5,091) (6,744) (6,685) (8,083) Change in working capital (5,705) (4,058) (12,542) 1,894 (1,202) (4,400) (13,500) (6,000) Other operational CF items (2,241) 3,729 8,380 6,267 1,399 626 629 383 Cash flow from operations 29,018 41,296 46,411 58,128 52,569 50,547 46,403 58,392 Capex (39,301) (29,143) (39,599) (30,280) (26,714) (27,230) (29,760) (31,200) Net (acquisitions)/disposals (294) (471) 1,610 (32,845) (15,117) (930) 0 0 Other investing CF items (500) (312) (829) (227) (1,329) 0 0 0 Cash flow from investing (40,094) (29,926) (38,818) (63,351) (43,159) (28,160) (29,760) (31,200) Change in debt 7,969 18,383 73 17,616 (1,801) (16,226) (14,778) (11,822) Net share issues/(repurchases) 0 3,393 0 0 0 0 0 0 Dividends paid (4,242) (7,835) (9,967) (15,297) (12,244) (13,152) (12,040) (13,959) Other financing CF items 3,193 (551) 13,687 5,098 (4,735) 0 0 0 Cash flow from financing 6,920 13,391 3,793 7,416 (18,779) (29,378) (26,818) (25,782) Forex effect/others 00000000 Change in cash (4,156) 24,761 11,386 2,193 (9,370) (6,991) (10,175) 1,411 Free cash flow (10,283) 12,153 6,812 27,848 25,855 23,317 16,643 27,192 Source: FactSet, Daiwa forecasts
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Advanced Semicon Eng (2311 TT): 27 October 2017
Financial summary continued … Balance sheet (TWDm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 24,436 50,168 58,217 59,115 41,462 35,401 25,226 26,637 Inventory 32,073 34,870 44,149 48,971 45,625 53,125 58,625 68,625 Accounts receivable 37,213 43,236 52,921 44,932 51,146 51,046 65,046 67,046 Other current assets 4,321 3,903 4,668 3,714 4,556 4,500 4,500 4,500 Total current assets 98,042 132,176 159,955 156,733 142,790 144,072 153,398 166,808 Fixed assets 126,150 131,497 151,587 149,997 143,880 157,203 160,117 163,301 Goodwill & intangibles 19,946 20,784 19,996 20,492 20,420 20,800 19,800 19,300 Other non-current assets 2,366 2,357 2,434 38,066 50,853 50,853 50,853 50,853 Total assets 246,504 286,814 333,971 365,288 357,943 372,929 384,168 400,263 Short-term debt 40,099 50,626 44,007 49,379 37,181 35,733 32,778 30,413 Accounts payable 24,227 28,989 35,411 34,139 35,804 38,804 44,804 50,804 Other current liabilities 20,378 21,220 31,781 36,985 31,490 29,364 32,867 36,079 Total current liabilities 84,703 100,835 111,199 120,502 104,476 103,902 110,449 117,297 Long-term debt 44,592 51,057 55,375 66,234 73,890 59,112 47,289 37,831 Other non-current liabilities 4,750 7,756 8,961 10,132 10,230 10,000 10,500 11,500 Total liabilities 134,045 159,649 175,535 196,868 188,596 173,013 168,238 166,628 Share capital 75,941 77,560 78,525 79,029 79,365 79,365 79,365 79,365 Reserves/R.E./others 33,573 45,461 71,692 77,887 77,990 107,185 121,828 137,916 Shareholders' equity 109,515 123,021 150,217 156,916 157,355 186,549 201,192 217,281 Minority interests 2,944 4,144 8,219 11,504 11,992 13,366 14,737 16,354 Total equity & liabilities 246,504 286,814 333,971 365,288 357,943 372,929 384,168 400,263 EV 390,371 382,832 376,557 395,174 408,773 399,982 396,750 385,134 Net debt/(cash) 60,254 51,516 41,165 56,497 69,609 59,444 54,841 41,608 BVPS (TWD) 14.421 15.861 18.382 19.090 19.143 21.382 23.060 24.904
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 4.7 13.3 16.7 10.4 (3.0) 4.8 13.3 14.3 EBITDA (YoY) 3.5 15.4 17.7 (2.7) 3.2 (2.1) 16.7 8.5 Operating profit (YoY) 5.6 24.1 34.1 (15.8) 7.3 (6.4) 30.0 16.7 Net profit (YoY) (4.6) 19.8 50.4 (17.4) 11.3 6.0 14.1 17.1 Core EPS (fully-diluted) (YoY) (3.3) 17.3 42.7 (17.9) 11.3 (0.2) 14.1 17.1 Gross-profit margin 18.9 19.5 20.9 17.7 19.4 18.3 19.0 19.1 EBITDA margin 21.2 21.6 21.8 19.2 20.4 19.1 19.7 18.7 Operating-profit margin 9.2 10.0 11.5 8.8 9.7 8.7 10.0 10.2 Net profit margin 6.7 7.1 9.2 6.9 7.9 8.0 8.0 8.2 ROAE 12.4 13.5 17.3 12.7 13.8 13.4 13.5 14.7 ROAA 5.6 5.9 7.6 5.6 6.0 6.3 6.9 7.8 ROCE 9.4 10.3 12.2 9.2 9.5 8.7 11.0 12.7 ROIC 8.9 10.5 13.3 9.5 9.4 7.9 9.9 11.1 Net debt to equity 55.0 41.9 27.4 36.0 44.2 31.9 27.3 19.1 Effective tax rate 18.3 16.5 14.9 19.1 18.2 21.7 19.5 20.0 Accounts receivable (days) 63.7 66.8 68.4 63.0 63.8 64.8 65.0 64.7 Current ratio (x) 1.2 1.3 1.4 1.3 1.4 1.4 1.4 1.4 Net interest cover (x) 10.6 10.5 14.0 12.0 13.2 13.5 19.9 27.8 Net dividend payout 32.4 49.9 42.2 78.5 56.5 57.2 45.9 45.4 Free cash flow yield n.a. 3.7 2.1 8.5 7.9 7.1 5.1 8.3 Source: FactSet, Daiwa forecasts
Company profile
Advanced Semiconductor Engineering (ASE) is the world’s largest Outsourced Semiconductor Assembly and Test (OSAT) maker offering integrated circuit (IC) packaging and testing services with a wide range of technologies, including leadframe-based wirebonding (WB), substrate-based WB, flip- chip (FC) packaging, system in packaging (SiP) and electronics manufacturing services (EMS). Its client base overlaps to a high degree with the IC foundry companies, including the fabless chipmakers and IDMs globally.
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Taiwan Information Technology 27 October 2017
Sinbon Electronics (3023 TT)
Target price: TWD98.00 (from TWD92.00) Share price (27 Oct): TWD82.50 | Up/downside: +18.8%
Riding on multiple trends
¾ 3Q17 EPS beat our forecast by 7% on better operating efficiency Helen Chien (886) 2 8758 6254 ¾ 2018 revenue drivers include automotive, medical and industrial [email protected] ¾ Reiterating our Buy (1) call; revising up our TP to TWD98
What's new: Sinbon posted its 3Q17 results on 27 October after market Forecast revisions (%) close. The record-high EPS beat our forecast by 7%, but came in 2% below Year to 31 Dec 17E 18E 19E Revenue change (2.2) (2.3) (2.1) the consensus. We continue to expect Sinbon to benefit from several Net profit change 1.2 0.9 2.4 favourable trends, which should help boost earnings visibility and support Core EPS (FD) change 1.2 0.9 2.4 solid DPS growth over 2017-19E. We expect stronger YoY earnings growth Source: Daiwa forecasts of 16.3% in 4Q17E and 11.2% for 2018, vs. 6.8% YoY in 9M17. Share price performance What's the impact: Upbeat 3Q17 results. Sinbon reported 3Q17 revenue (TWD) (%) 90 110 of TWD3,507m (up 5.3% QoQ and 8.5% YoY), lower than our and the 84 103 consensus forecast by 2.6-3.8%. Operating profit beat our estimate by 78 95 6.1% on improving operating efficiency but was lower than the market 71 88 expectation by 2.5%. In addition, Sinbon booked FX losses of TWD19m 65 80 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 following a stronger TWD and CNY. Thus, 3Q17 EPS was TWD1.56 (up Sinbon (LHS) 3.2% QoQ and 18.8% YoY), beating our forecast by 6.7% but lower than Relative to TWSE Index (RHS) the Bloomberg consensus by 2.3%. Its 3Q17 gross margin of 25.0% rose from 24.0% in 3Q16, given a favourable product mix (non-communication 12-month range 66.10-86.80 revenue reached 67.6% of total in 9M17, vs. 65.9% in 2016), and we Market cap (USDbn) 0.62 3m avg daily turnover (USDm) 3.90 expect the trend to continue, which should bode well for gross-margin Shares outstanding (m) 225 expansion over 2018-19E (gross margin for non-communication segments Major shareholder Wang family (8.9%) was 25-32%, vs. communication’s 15% for 9M17). Financial summary (TWD) Growth across multiple themes, ie Amazon, augmented reality (AR), Year to 31 Dec 17E 18E 19E sportswear, EV and ADAS. Revenue (m) 13,501 14,879 16,364 For 2018, we expect stronger revenue growth Operating profit (m) 1,566 1,792 2,007 YoY (12-15%) from its auto, medical and industrial segments as we Net profit (m) 1,279 1,423 1,581 assume new projects and clients win on top of its R&D capability and Core EPS (fully-diluted) 5.504 6.123 6.806 customised services, ie new orders win from Europe-based lighting EPS change (%) 10.2 11.2 11.2 Daiwa vs Cons. EPS (%) (3.1) (2.4) 1.5 provider, US-based AR provider and Japan-based wind power projects. PER (x) 15.0 13.5 12.1 Additionally, we believe Amazon, Trimble, Enphase, ASML, Schneider, Dividend yield (%) 4.8 5.4 6.0 Zebra and GE Healthcare are likely to be the revenue drivers for 2018. The DPS 4.0 4.4 4.9 above positive developments and strong 3Q17 results lead us to fine-tune PBR (x) 3.0 2.8 2.5 EV/EBITDA (x) 9.3 8.1 7.0 - - - up our 2017 19E earnings by 1 2%, while we trim our 2017 19E revenue by ROE (%) 21.5 22.0 22.6 2% as we expect lower revenue at its green energy and medical segments. Source: FactSet, Daiwa forecasts
What we recommend: We reaffirm our Buy (1) call and lift our 12-month TP to TWD98 (from TWD92), still based on a 1-year forward EPS and an unchanged target PER of 16x, in line with its peers’ PER trading average. Key downside risk: disappointing gross-margin expansion if its segment mix were to turn out to be less favourable than we expect.
How we differ: We are only one of two foreign brokers covering the stock, and our 2017-18E EPS are 2-3% below consensus, which we attribute to our factoring in the 3% CB dilution effect.
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See important disclosures, including any required research certifications, beginning on page 5
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Sinbon Electronics (3023 TT): 27 October 2017
Sinbon: Daiwa revenue and earnings forecast revisions 2017E 2018E 2019E (TWDm) New Previous Change New Previous Change New Previous Change Sales 13,501 13,807 -2.2% 14,879 15,237 -2.3% 16,364 16,712 -2.1% Gross profit 3,361 3,466 -3.0% 3,733 3,836 -2.7% 4,102 4,206 -2.5% Gross margin 24.9% 25.1% -0.2pp 25.1% 25.2% -0.1pp 25.1% 25.2% -0.1pp Operating profit 1,566 1,557 0.5% 1,792 1,745 2.7% 2,007 1,928 4.1% Operating margin 11.6% 11.3% 0.3pp 12.0% 11.4% 0.6pp 12.3% 11.5% 0.7pp Net profit 1,279 1,263 1.2% 1,423 1,410 0.9% 1,581 1,544 2.4% Net margin 9.5% 9.1% 0.3pp 9.6% 9.3% 0.3pp 9.7% 9.2% 0.4pp Fully Diluted EPS (TWD) 5.50 5.44 1.2% 6.12 6.07 0.9% 6.81 6.65 2.4% Source: Daiwa forecasts
Sinbon: quarterly P&L TWDm 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17E 4Q17E Revenue 3,323 3,425 3,232 2,947 3,214 3,331 3,507 3,449 Gross profit 830 824 774 781 797 851 875 838 Operating profit 415 387 371 245 395 367 435 370 Profit before tax 420 444 393 340 379 475 461 417 Net profit 308 308 294 247 282 340 351 287 Basic EPS (TWD) 1.41 1.42 1.31 1.01 1.25 1.51 1.56 1.27 Margin Gross margin 25.0% 24.0% 24.0% 26.5% 24.8% 25.6% 25.0% 24.3% Operating margin 12.5% 11.3% 11.5% 8.3% 12.3% 11.0% 12.4% 10.7% Pre-tax margin 12.6% 13.0% 12.2% 11.5% 11.8% 14.3% 13.2% 12.1% Net margin 9.3% 9.0% 9.1% 8.4% 8.8% 10.2% 10.0% 8.3% YoY Revenue 10.5% 9.2% 0.1% 7.5% -3.3% -2.7% 8.5% 17.1% Gross profit 23.0% 17.5% 5.8% 27.2% -4.0% 3.4% 13.1% 7.2% Operating profit 56.5% 25.3% 25.2% 24.8% -4.9% -5.3% 17.3% 50.6% Profit before tax 31.2% 26.6% -6.5% 22.0% -9.8% 7.0% 17.3% 22.7% Net profit 29.1% 22.0% -0.7% 35.3% -8.5% 10.3% 19.3% 16.3% QoQ Revenue 21.3% 3.1% -5.6% -8.8% 9.1% 3.6% 5.3% -1.6% Gross profit 35.1% -0.8% -6.0% 0.9% 2.0% 6.8% 2.8% -4.3% Operating profit 111.0% -6.7% -4.3% -33.8% 60.8% -7.1% 18.6% -15.0% Profit before tax 50.7% 5.9% -11.5% -13.7% 11.5% 25.5% -3.0% -9.6% Net profit 69.0% 0.1% -4.6% -16.2% 14.3% 20.7% 3.2% -18.3% Source: Company, Daiwa forecasts
Sinbon: 3Q7 results vs. Daiwa and the Bloomberg forecast TWDm Sinbon’s 3Q17 results Daiwa forecast for 3Q17E Differ Bloomberg consensus for 3Q17E Differ Revenue 3,507 3,600 -2.6% 3,645 -3.8% Gross profit 875 900 -2.7% 911 -3.9% Operating profit 435 410 6.1% 446 -2.5% Profit before tax 461 462 -0.1% 493 -6.4% Net profit 351 330 6.5% 361 -2.9% Basic EPS (TWD) 1.56 1.46 6.7% 1.60 -2.3% Margin Gross margin 25.0% 25.0% 0.0pp 25.0% 0.0pp Operating margin 12.4% 11.4% 1.0pp 12.2% 0.2pp Pre tax margin 13.2% 12.8% 0.3pp 13.5% -0.4pp Net margin 10.0% 9.2% 0.9pp 9.9% 0.1pp Source: Company, Daiwa and Bloomberg forecasts
Sinbon: QFII holding Sinbon: 1-year-forward PER
(%) (TWD) 50 100 16x 45 90 40 80 14x 35 70 12x 30 60 10x 25 50 8x 20 40 15 30 10 20 5 10 0 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Source: TEJ Source: Bloomberg, Daiwa forecasts
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Sinbon Electronics (3023 TT): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Industrial revenue YoY growth (%) 8.1 8.7 31.3 21.7 6.6 9.0 13.0 13.0 Medical revenue YoY growth (%) 29.4 17.2 (1.0) 5.2 (0.1) (10.0) 12.0 12.0 Automotive revenue YoY growth (%) 131.5 17.2 39.0 (2.5) 7.0 10.0 15.0 12.0
Profit and loss (TWDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Non-communication revenue 5,402 6,048 7,319 8,076 8,520 8,884 9,985 11,177 Communication revenue 4,610 4,507 4,323 4,035 4,406 4,617 4,894 5,188 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 10,012 10,555 11,643 12,111 12,926 13,501 14,879 16,364 Other income 0 0 0 0 0 0 0 0 COGS (7,859) (8,287) (9,112) (9,389) (9,717) (10,140) (11,146) (12,262) SG&A (1,142) (1,189) (1,228) (1,271) (1,361) (1,377) (1,495) (1,604) Other op.expenses (323) (346) (352) (384) (430) (419) (446) (491) Operating profit 689 733 951 1,067 1,418 1,566 1,792 2,007 Net-interest inc./(exp.) (54) (30) (26) (12) (16) (15) (12) (11) Assoc/forex/extraord./others 89 164 118 315 195 200 163 163 Pre-tax profit 724 867 1,044 1,370 1,597 1,751 1,943 2,160 Tax (246) (259) (269) (416) (435) (468) (515) (572) Min. int./pref. div./others 69 55 19 16 (4) (5) (5) (6) Net profit (reported) 547 663 794 970 1,157 1,279 1,423 1,581 Net profit (adjusted) 547 663 794 970 1,157 1,279 1,423 1,581 EPS (reported)(TWD) 2.924 3.195 3.822 4.529 5.150 5.673 6.311 7.015 EPS (adjusted)(TWD) 2.924 3.195 3.822 4.529 5.150 5.673 6.311 7.015 EPS (adjusted fully-diluted)(TWD) 2.816 3.091 3.673 4.377 4.997 5.504 6.123 6.806 DPS (TWD) 2.136 2.501 2.750 3.123 3.700 3.971 4.418 4.911 EBIT 689 733 951 1,067 1,418 1,566 1,792 2,007 EBITDA 928 969 1,178 1,248 1,599 1,743 2,000 2,235
Cash flow (TWDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 724 867 1,044 1,370 1,597 1,751 1,943 2,160 Depreciation and amortisation 239 236 228 182 181 177 208 228 Tax paid (246) (259) (269) (416) (435) (468) (515) (572) Change in working capital (197) 72 (323) 179 (243) 744 (186) (207) Other operational CF items 159 (37) (65) 138 117 15 12 11 Cash flow from operations 680 879 616 1,453 1,217 2,220 1,462 1,619 Capex (171) (93) (165) (212) (99) (600) (500) (200) Net (acquisitions)/disposals 98 46 38 12 73 70 70 70 Other investing CF items (75) 40 130 (357) 197 0 0 0 Cash flow from investing (148) (6) 3 (557) 171 (530) (430) (130) Change in debt 157 (384) 295 73 (309) 509 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (305) (415) (519) (581) (675) (831) (895) (996) Other financing CF items (45) 7 (0) 234 11 0 0 0 Cash flow from financing (193) (792) (224) (275) (973) (322) (895) (996) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 339 81 395 621 414 1,367 136 493 Free cash flow 509 787 450 1,241 1,117 1,620 962 1,419 Source: FactSet, Daiwa forecasts
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Sinbon Electronics (3023 TT): 27 October 2017
Financial summary continued … Balance sheet (TWDm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 1,700 1,879 2,412 3,044 3,130 4,498 4,634 5,127 Inventory 1,576 1,633 1,982 2,242 2,116 2,282 2,466 2,735 Accounts receivable 2,940 3,131 3,341 3,036 3,445 3,492 3,907 4,265 Other current assets 90 125 214 209 116 18 18 18 Total current assets 6,307 6,769 7,949 8,531 8,807 10,289 11,025 12,143 Fixed assets 1,612 1,555 1,539 1,508 1,339 1,925 2,217 2,189 Goodwill & intangibles 93 5 9 10 10 0 0 0 Other non-current assets 864 1,057 989 1,066 926 926 926 926 Total assets 8,877 9,385 10,487 11,114 11,083 13,140 14,168 15,259 Short-term debt 1,724 1,513 1,843 1,970 1,601 1,610 1,610 1,610 Accounts payable 1,977 2,497 2,774 2,921 3,093 3,973 4,310 4,652 Other current liabilities 363 116 179 225 351 716 874 1,031 Total current liabilities 4,064 4,126 4,796 5,116 5,046 6,299 6,794 7,294 Long-term debt 541 346 301 5 17 517 517 517 Other non-current liabilities 152 259 306 355 240 83 83 83 Total liabilities 4,757 4,732 5,403 5,476 5,303 6,900 7,395 7,894 Share capital 2,000 2,077 2,077 2,158 2,246 2,254 2,254 2,254 Reserves/R.E./others 1,981 2,496 2,942 3,425 3,487 3,934 4,462 5,047 Shareholders' equity 3,982 4,572 5,019 5,583 5,733 6,189 6,716 7,302 Minority interests 138 81 65 55 47 52 57 63 Total equity & liabilities 8,877 9,385 10,487 11,114 11,083 13,140 14,168 15,259 EV 19,300 18,658 18,393 17,582 17,132 16,278 16,147 15,661 Net debt/(cash) 565 (20) (269) (1,070) (1,512) (2,370) (2,506) (2,999) BVPS (TWD) 19.907 22.018 24.168 25.869 25.523 27.454 29.794 32.391
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 12.2 5.4 10.3 4.0 6.7 4.5 10.2 10.0 EBITDA (YoY) 24.4 4.4 21.7 5.9 28.1 9.0 14.7 11.8 Operating profit (YoY) 24.4 6.4 29.7 12.2 32.9 10.4 14.4 12.0 Net profit (YoY) 22.5 21.1 19.7 22.2 19.3 10.5 11.2 11.2 Core EPS (fully-diluted) (YoY) 24.6 9.8 18.8 19.2 14.2 10.2 11.2 11.2 Gross-profit margin 21.5 21.5 21.7 22.5 24.8 24.9 25.1 25.1 EBITDA margin 9.3 9.2 10.1 10.3 12.4 12.9 13.4 13.7 Operating-profit margin 6.9 6.9 8.2 8.8 11.0 11.6 12.0 12.3 Net profit margin 5.5 6.3 6.8 8.0 9.0 9.5 9.6 9.7 ROAE 15.1 15.5 16.6 18.3 20.5 21.5 22.0 22.6 ROAA 6.3 7.3 8.0 9.0 10.4 10.6 10.4 10.7 ROCE 11.0 11.4 13.8 14.4 18.9 19.9 20.8 21.8 ROIC 9.6 11.0 14.9 15.8 23.4 28.2 32.4 34.2 Net debt to equity 14.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 34.0 29.8 25.7 30.4 27.3 26.7 26.5 26.5 Accounts receivable (days) 100.9 105.0 101.4 96.1 91.5 93.8 90.7 91.1 Current ratio (x) 1.6 1.6 1.7 1.7 1.7 1.6 1.6 1.7 Net interest cover (x) 12.9 24.2 37.2 90.5 89.7 104.6 147.6 183.1 Net dividend payout 73.1 78.3 71.9 69.0 71.8 70.0 70.0 70.0 Free cash flow yield 2.7 4.2 2.4 6.7 6.0 8.7 5.2 7.6 Source: FactSet, Daiwa forecasts
Company profile
Founded in 1989 and listed on Taiwan’s main board in 2002, Sinbon Electronics (Sinbon) is a solutions provider of electronics integration based in Taiwan, including component design, manufacturing, distribution service as well as wireless components. Around 70% of its revenue is derived from the cable-assembly business and 30% from the connector-trading business. Its product applications include communication, industrial application, green energy, medical health and automotive.
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Singapore Real Estate 27 October 2017
CDL Hospitality Trusts (CDREIT SP)
Target price: SGD1.610 (from SGD1.580) Share price (26 Oct): SGD1.650 | Up/downside: -2.4%
Still waiting for the Singapore industry recovery
¾ RevPAR outlook still uncertain; signs of stronger corporate demand David Lum, CFA (65) 6329 2102 ¾ Orchard Hotel refurbishment could pose a mild execution risk [email protected] ¾ Maintain Hold (3) rating with slightly higher TP of SGD1.61
What’s new: CDLHT announced its 3Q17 results on 27 October and Forecast revisions (%) Daiwa hosted its post-results briefing for investors. Given the continued Year to 31 Dec 17E 18E 19E uncertainty in revenue-per-available room (RevPAR) outlook for most of its Revenue change (1.2) (1.6) (1.6) hotel markets and the negligible changes to our DPU forecasts for 2018- Net-property-income chg 1.5 (1.7) (1.6) DPU change (8.3) - (0.1) 19E, we maintain our Hold (3) rating for the stock. Source: Daiwa forecasts
What’s the impact: Considering that 3Q17 was a transitional quarter that Share price performance included a rights issue on 2 August 2017 and the acquisition of 94.5% of (SGD) (%) the Pullman Hotel Munich on 14 July 2017, revenue and net-property 1.70 115 income (NPI) were in line with our forecasts. The distribution was 8% lower 1.59 109 than our forecast due to higher than expected borrowing costs, income tax 1.48 103 1.36 96 and other trust expenses. For the Singapore hotel operations (56% of 3Q17 1.25 90 NPI), RevPAR declined by 1.4% YoY for 3Q17 to SGD166 vs. a YTD Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 decline of 1.2% to SGD160. Management appeared slightly more upbeat CDL REIT (LHS) Relative to FSSTI (RHS) on 2018 in view of the better bookings it is seeing for Grand Copthorne
Waterfront (a good proxy for corporate demand) vs. the same time last 12-month range 1.295-1.680 year. CDLHT announced a refurbishment of all 260 rooms in the Orchard Market cap (USDbn) 1.45 Wing of Orchard Hotel (preliminary budget of SGD3m) to enhance its 3m avg daily turnover (USDm) 1.83 product at an aggressive refurbishment timetable (from mid-December Shares outstanding (m) 1,202 Major shareholder Millennium and Copthorne (37.0%) 2017 to early April 2018). Financial summary (SGD) Its New Zealand hotel (11% of 3Q17 NPI) continues to perform strongly Year to 31 Dec 17E 18E 19E (3Q17 RevPAR up 32% YoY) and its large size is a competitive advantage Revenue (m) 207 237 251 Net property income (m) 152 161 172 in attracting aircrew, which is an attractive business for the market. In the Distribution (m) 105 120 128 Maldives, the change to a Raffles-branded resort for 1 of its properties will DPU 0.094 0.099 0.105 require a 12-month transition period. With gearing of 33.3% as at 30 DPU change (%) (6.2) 6.0 6.0 Daiwa vs Cons. DPU (%) 1.7 2.3 4.2 September 2017, management said it was firmly targeting Europe for DPU yield (%) 5.7 6.0 6.4 potential acquisitions given the forbidding valuations in other markets. PER (x) 20.3 19.9 18.5 Core EPU (fully-diluted) 0.081 0.083 0.089 What we recommend: We maintain our Hold (3) rating, as although we P/BV (x) 1.1 1.1 1.0 ROE (%) 5.3 5.5 5.7 expect Singapore to experience a RevPAR recovery of about 6% YoY for Source: FactSet, Daiwa forecasts 2018E and 12% YoY for 2019E, the market appears to have partially discounted this outlook as CDHLT’s 2018-19E DPU yields, based on our forecasts, are 6-6.4%, undemanding but certainly not compelling, in our opinion. We have made negligible changes to our DPU forecasts for 2018- 19E and raise our DDM-derived 12-month target price to SGD1.61 from SGD1.58, solely due to a higher present value from the passage of time since our previous note on 3 July 2017. Upside risk: a strong Singapore RevPAR recovery. Downside risk: overpaying for an acquisition.
How we differ: Our DPU forecasts, which already assume an industry recovery in Singapore, are slightly higher than the Bloomberg consensus.
See important disclosures, including any required research certifications, beginning on page 5
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CDL Hospitality Trusts (CDREIT SP): 27 October 2017
CDLHT: quarterly results summary CDLHT: Daiwa DDM valuation SGDm 3Q16 2Q17 3Q17 3QE var %var Weighted-average remaining leasehold (years) 86 Revenue 45.4 47.8 54.8 57.0 (2.2) (4) Cost of equity 8.5% NPI 34.8 34.9 40.4 39.0 1.4 3 Long-term growth rate 2.0% Distribution 24.2 24.9 27.4 29.6 (2.2) (8) Effective cap rate 6.5% DPU (¢) 2.44 2.29 2.28 2.47 (0.19) (8) PV of 10-year DPU forecasts (SGD) 0.78 PV of terminal value (SGD) 0.83 PV of debt obligation (SGD) (0.00) DDM valuation (SGD) 1.61
Source: CDLHT, Daiwa forecasts Source: Daiwa estimates
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CDL Hospitality Trusts (CDREIT SP): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Average daily rate (SGD) 231 218 210 199 187 183 194 218 Average occupancy rate (%) 88.7 87.4 89.1 87.7 85.4 87.2 87.5 87.7 Average RevPAR (SGD) 205 191 188 175 160 160 170 191 Gross debt to assets (%) 24.9 29.7 31.7 36.4 36.8 33.2 32.6 32.1 Funds from operations (SGDm) 107.2 103.7 104.8 80.9 71.0 88.0 100.1 108.3 FFO per unit (SGD) 0.111 0.107 0.107 0.082 0.072 0.081 0.083 0.089
Profit and loss (SGDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Total revenue 150 149 167 172 181 207 237 251 Operating expenses (10) (11) (26) (35) (43) (55) (76) (79) Net property income 139 137 141 137 138 152 161 172 Other income 00000000 Management fees (12) (12) (13) (13) (13) (14) (15) (16) Other operating expenses (2) (2) (5) (20) (20) (18) (19) (19) Depreciation and amortisation 0 0 0 0 0 0 0 0 EBIT 125 123 123 104 105 120 127 137 Net-int. income/(expenses) (16) (17) (16) (22) (33) (28) (21) (23) Share of associates 0 0 0 0 0 0 0 0 Revaluation gains/(loss) 15 37 18 (30) (22) 3 82 79 Except./other inc./(exp.) 0 0 0 0 0 0 0 0 Profit before tax 125 143 124 52 50 95 188 194 Taxation (2) (3) (1) (1) (1) (4) (6) (6) Min. int./pref. div./others 0 0 0 0 0 (0) (0) (0) Net profit 122 140 122 51 49 91 182 188 Total return 122 140 122 51 49 91 182 188 Adjustments (1) (22) (3) 58 56 21 (54) (51) Distributable income 122 119 120 109 106 112 128 137 Distribution rate 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 Distribution 109 107 108 99 99 105 120 128 EPU (SGD) 0.111 0.107 0.107 0.082 0.072 0.081 0.083 0.089 DPU (SGD) 0.113 0.110 0.110 0.101 0.100 0.094 0.099 0.105
Cash flow (SGDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 125 143 124 52 50 95 188 194 Depreciation and amortisation 0 0 0 0 0 0 0 0 Net-interest expenses 16 17 16 22 33 28 21 23 Share of associate 0 0 0 0 0 0 0 0 Change in working capital 1 (2) 4 0 2 13 0 0 Tax paid 0 (0) (0) (1) (1) 0 0 0 Other operating CF items (5) (27) (5) 58 49 (5) (70) (67) Cash flow from operation 136 131 139 131 133 131 139 149 Capex (6) (14) (27) (15) (14) (14) (14) (14) Net investment and sale of FA 0 (167) (66) (134) 0 (246) 0 0 Other investing CF items 1 0 0 0 0 0 0 0 Cash flow from investing (5) (181) (93) (149) (14) (260) (14) (14) Change in debt 0 167 84 140 16 (1) 15 17 Equity raised/(repaid) 0 0 0 0 0 255 0 0 Distribution paid (110) (107) (106) (103) (97) (104) (112) (124) Other financing CF items (16) (17) (18) (24) (24) (26) (20) (22) Cash flow from financing (126) 43 (39) 14 (105) 124 (117) (128) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 5 (7) 8 (4) 15 (5) 8 7 Source: FactSet, Daiwa forecasts
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CDL Hospitality Trusts (CDREIT SP): 27 October 2017
Financial summary continued … Balance sheet (SGDm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & cash equivalent 75 69 76 72 82 70 71 71 Accounts receivable 14 15 21 20 27 28 28 28 Other current assets 0 0 0 0 0 0 0 0 Total current assets 89 84 98 92 109 98 99 99 Investment properties 2,045 2,239 2,351 2,455 2,426 2,708 2,803 2,897 Fixed assets 00000000 Associates 00000000 Goodwill and intangible assets 0 0 0 0 0 0 0 0 Other long-term assets 0 0 1 0 0 1 1 1 Total assets 2,134 2,323 2,450 2,547 2,535 2,807 2,903 2,997 Short-term debt 260 146 317 219 0 0 0 0 Accounts payable 25 22 40 32 33 48 48 48 Other current liabilities 0 0 1 0 2 4 4 4 Total current liabilities 285 168 358 252 36 51 51 51 Long-term debt 270 542 458 703 929 931 946 963 Other non-current liabilities 15 17 19 19 24 35 35 35 Total liabilities 570 727 834 974 989 1,017 1,032 1,049 Unitholders' funds 1,564 1,595 1,616 1,573 1,546 1,784 1,866 1,943 Minority interests 0 0 0 0 0 5 5 5 Total equity & liabilities 2,134 2,323 2,450 2,547 2,535 2,807 2,903 2,997 Book Value per unit 1.613 1.635 1.645 1.591 1.551 1.485 1.543 1.597
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Total revenue (YoY) 6.0 (0.5) 12.1 3.4 4.9 14.5 14.3 5.9 Net property income (YoY) 3.0 (1.4) 2.3 (2.5) 0.4 10.8 5.4 6.9 Net profit (YoY) 4.0 (3.2) 1.1 (22.8) (12.3) 24.0 13.8 8.2 Distribution (YoY) 3.0 (2.6) 0.8 (7.8) (0.1) 5.9 13.9 6.7 EPU (YoY) 3.4 (3.8) 0.4 (23.3) (12.8) 13.4 2.2 7.5 DPU (YoY) 2.4 (3.1) 0.1 (8.4) (0.8) (6.2) 6.0 6.0 ROE 6.9 6.6 6.5 5.1 4.5 5.3 5.5 5.7 ROA 5.0 4.7 4.4 3.2 2.8 3.3 3.5 3.7 ROCE 6.0 5.6 5.2 4.3 4.2 4.6 4.6 4.8 ROIC 6.1 5.7 5.3 4.3 4.2 4.5 4.5 4.7 Debt to asset 24.8 29.6 31.6 36.2 36.6 33.2 32.6 32.1 Net debt to equity 29.0 38.8 43.2 54.0 54.8 48.1 46.8 45.8 Effective tax rate 1.9 1.9 1.2 1.8 2.0 4.4 3.0 3.0 Source: FactSet, Daiwa forecasts
Company profile
CDL Hospitality Trusts (CDLHT) owns 6 hotels and a shopping arcade in Singapore, a hotel in Auckland, New Zealand, 5 hotels in Perth and Brisbane, Australia, 2 villa-resorts in the Maldives, 2 hotels in Tokyo, Japan, and 2 hotels in the UK and a hotel in Munich, Germany. Its portfolio consists of 5,414 rooms with a portfolio valuation of SGD2.7bn, as at 30 September 2017.
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Singapore Consumer Staples 27 October 2017
Sheng Siong Group (SSG SP)
Target price: SGD0.880 (from SGD0.860) Share price (26 Oct): SGD0.930 | Up/downside: -5.4%
Still cautious on near-term risks
¾ 3Q17 results beat our forecasts on one-off tax refund and better trends Jame Osman (65) 6321 3092 ¾ 2018 revenue growth trajectory remains a key uncertainty, in our view [email protected] ¾ Reaffirming Underperform (4) with a higher TP of SGD0.88
What's new: Sheng Siong’s consistently prudent cost control and signs of Forecast revisions (%) an incrementally improving retail consumption environment featured in its Year to 31 Dec 17E 18E 19E 3Q17 results, which beat our estimates. However, we remain wary of near- Revenue change 1.5 4.0 3.8 Net profit change 6.2 4.6 3.4 term risks (increased price competition and uncertainty over new store Core EPS (FD) change 6.2 4.6 3.4 openings) and hence reaffirm our Underperform (4) rating. Source: Daiwa forecasts
What's the impact: Sheng Siong reported 3Q17 net profit of SGD19.6m Share price performance
(+25.3% YoY), on the back of a 0.1pp YoY decline in its gross margin and (SGD) (%) 4.2% YoY increase in revenue. Net profit was 22.1% above our forecast, 1.10 100 mainly due to a one-off tax refund of SGD2.2m. Meanwhile, management 1.05 93 1.00 85 attributed the strong operating margin performance (+0.6pp YoY) – despite 0.95 78 a decline in its closely watched gross margin (-0.1pp YoY) – to the closure 0.90 70 of its less productive Verge outlet (closed in June). We expect that a similar Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 result could be observed when its Woodlands Centre outlet closes in SSG (LHS) Relative to FSSTI (RHS) - November (previously October), leading us to fine tune our operating margin forecasts for 2017-18 by +0.1pp. 12-month range 0.905-1.070 Market cap (USDbn) 1.03 With the inevitable closure of its two largest stores (see page 2) (total area 3m avg daily turnover (USDm) 1.90 of 86k sq ft) by end-2017, a key question is whether Sheng Siong can open Shares outstanding (m) 1,504 Major shareholder Sheng Siong Holdings Pte Ltd (29.9%) enough new stores to compensate for the decline in revenue (the two stores contributed 7.6% to its 1H17 revenue). According to management, Financial summary (SGD) securing of 4 new stores YTD (total area of 24k sq ft), together with the 15k Year to 31 Dec 17E 18E 19E sq ft enlargement of its Tampines outlet, could plug the shortfall. However, Revenue (m) 830 827 864 revenue growth would have to come from further new store openings in Operating profit (m) 81 81 86 Net profit (m) 70 68 72 4Q17 and into 2018, in our view. We leave our 2018 gross floor area Core EPS (fully-diluted) 0.047 0.045 0.048 addition forecast unchanged at 15k sq ft. EPS change (%) 12.1 (3.0) 5.1 Daiwa vs Cons. EPS (%) 6.2 (1.5) (0.8) We are raising our 2018-19 revenue forecasts by 4% to reflect the positive PER (x) 19.9 20.5 19.5 Dividend yield (%) 3.5 3.4 3.6 comparable same store sales trends (3Q17: +2.7% YoY), and forecast a DPS 0.033 0.032 0.033 largely flattish revenue growth in 2018 (-0.4% YoY) mainly as we remain PBR (x) 5.0 4.7 4.3 wary of the near-term price competition from online players (Amazon, EV/EBITDA (x) 13.7 13.1 12.1 ROE (%) 26.2 23.4 22.9 RedMart). Overall, we raise our 2017-19E EPS forecasts by 3-6%, which Source: FactSet, Daiwa forecasts also incorporates the SGD 2.2m tax refund impact into our 2017E EPS.
What we recommend: Driven by our EPS-forecast revisions, we raise our DCF-based 12-month TP to SGD0.88 (from SGD0.86). We reaffirm our Underperform (4) rating, as we believe the risk-reward ratio for Sheng Siong’s shares appears unfavourable considering the company’s growth profile against the near-term risks and headwinds facing the business. Key risk: a decline in competitive pressures.
How we differ: Unlike some in the market, we are more cautious on the near-term competitive pressures and operational outlook for Sheng Siong.
See important disclosures, including any required research certifications, beginning on page 5
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Sheng Siong Group (SSG SP): 27 October 2017
Sheng Siong: 3Q17 results summary YoY Variance SGD m 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 (%) 3Q17E (%) Revenue 188.8 202.4 197.0 217.1 201.5 210.9 4.2 204.5 3.1 Gross profit 49.4 52.5 51.8 54.3 53.5 54.5 3.8 53.1 2.6 Gross profit margin (%) 26.1 25.9 26.3 25.0 26.6 25.8 -0.1p.p 26.0 -0.1p.p Operating Profit 18.2 19.1 18.9 20.6 19.7 21.0 10.3 19.2 9.7 Operating profit margin (%) 9.6 9.4 9.6 9.5 9.8 10.0 0.6p.p 9.4 0.6p.p Net Profit 15.2 15.7 15.4 17.1 16.1 19.6 25.3 16.1 22.1
Source: Company, Daiwa forecasts
Sheng Siong: changes to our key forecasts FY17 FY18 FY19 Revenue 1.5 4.0 3.8 Gross profit 1.3 4.0 3.8 Operating profit 2.9 4.6 3.4 Operating margin 0.1 p.p 0.1 p.p 0 p.p Profit before income tax 2.9 4.6 3.4 Net profit 6.2 4.6 3.4 EPS 6.2 4.6 3.4
Source: Daiwa forecasts
Sheng Siong: gross floor area changes in 2017 thus far GFA Period Starting gross floor area (GFA) 450,000 Additions from new store openings/renovations Fajar Rd (Bukit Panjang) 4,000 Aug-17 Woodlands Street 12 11,800 Dec-17 Anchorvale Crescent Blk 338 5,100 Dec-17 Edgedale Plains Blk 660A 3,100 Dec-17 Enlargement of renovated Loyang store 1,200 Mar-17 Enlargement of renovated Tampines store 15,000 Jun-17 Reductions from store closures/renovations The Verge (45,000) Jun-17 Woodlands Centre (41,400) Nov-17 Ending GFA 403,800
Source: Company, Daiwa compiled
Sheng Siong: revenue and gross-profit margin trends Sheng Siong: store count
240 (SGD m) (%) 27 50 45 220 26 45 43 200 25 39 40 180 24 34 160 23 35 33 33
140 22 30 120 21 25 25 22 100 20 20
2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 2010 2011 2012 2013 2014 2015 2016 2017 confirmed Revenue (LHS) Gross margin (RHS) to date
Source: Company Source: Company
Sheng Siong: sensitivity of DCF analysis Sheng Siong: sensitivity of DCF analysis WACC Base Discount NPV of Enterprise Equity Per Share Terminal FCF 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% Rate FCF Value Value (SGD) 1.0% 1.08 0.99 0.91 0.84 0.78 0.73 0.69 0.65 0.62 5.4% 313.7 2,175.3 2,238.8 1.49 1.5% 1.18 1.06 0.97 0.89 0.83 0.77 0.72 0.68 0.64 5.9% 310.6 1,897.1 1,960.7 1.30 Base 2.0% 1.30 1.16 1.05 0.95 0.88 0.81 0.76 0.71 0.67 6.4% 307.6 1,682.2 1,745.7 1.16 2.5% 1.46 1.28 1.14 1.03 0.94 0.86 0.80 0.75 0.70 6.9% 304.6 1,511.1 1,574.6 1.05 3.0% 1.68 1.44 1.26 1.12 1.01 0.93 0.85 0.79 0.74 7.4% 301.7 1,371.7 1,435.3 0.95 7.9% 298.9 1,256.1 1,319.6 0.88 8.4% 296.1 1,158.7 1,222.2 0.81 8.9% 293.3 1,075.4 1,139.0 0.76 9.4% 290.6 1,003.6 1,067.1 0.71 9.9% 287.9 940.9 1,004.4 0.67 10.4% 285.3 885.7 949.2 0.63
Source: Daiwa estimates Source: Daiwa estimates
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Sheng Siong Group (SSG SP): 27 October 2017
Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Same store sales (SGD / sq ft) 1,778 1,738 1,788 1,830 1,803 1,961 2,040 2,060 New store sales (SGD / sq ft) 1,314 1,661 1,952 1,888 1,850 1,998 2,158 2,222
Total gross floor area (GFA) ('000 sq ft) 399.2 399.2 403.2 431.0 450.0 395.0 410.0 425.0
Profit and loss (SGDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Supermarkets operations 637 687 726 764 797 830 827 864 Other Revenue n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Total Revenue 637 687 726 764 797 830 827 864 Other income 4 5 5 9 11 8 8 8 COGS (496) (529) (550) (576) (592) (615) (611) (639) SG&A (96) (105) (111) (116) (123) (125) (122) (126) Other op.expenses (10) (11) (13) (15) (17) (17) (21) (22) Operating profit 39 47 57 66 76 81 81 86 Net-interest inc./(exp.) 1 1 1 1 1 1 1 1 Assoc/forex/extraord./others 10 0 0 0 0 0 0 0 Pre-tax profit 50 48 58 68 76 82 82 86 Tax (9) (9) (10) (11) (13) (12) (14) (15) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 42 39 48 57 63 70 68 72 Net profit (adjusted) 31 39 48 57 63 70 68 72 EPS (reported)(SGD) 0.030 0.028 0.033 0.038 0.042 0.047 0.045 0.048 EPS (adjusted)(SGD) 0.023 0.028 0.033 0.038 0.042 0.047 0.045 0.048 EPS (adjusted fully-diluted)(SGD) 0.023 0.028 0.033 0.038 0.042 0.047 0.045 0.048 DPS (SGD) 0.028 0.026 0.030 0.035 0.038 0.033 0.032 0.033 EBIT 39 47 57 66 76 81 81 86 EBITDA 48 57 68 80 91 96 100 106
Cash flow (SGDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 5048586876828286 Depreciation and amortisation 8 10 11 13 15 15 19 20 Tax paid (8) (9) (7) (9) (13) (12) (14) (15) Change in working capital (6) (3) 12 3 1 6 (0) 2 Other operational CF items (12) (1) (1) (1) (1) (1) (1) (1) Cash flow from operations 33 45 71 74 78 91 86 93 Capex (12) (26) (81) (30) (90) (31) (33) (15) Net (acquisitions)/disposals 14 0 0 0 1 1 1 1 Other investing CF items 1 1 1 1 1 1 1 1 Cash flow from investing 3 (25) (80) (30) (89) (30) (32) (14) Change in debt 0 0 0 0 0 0 0 0 Net share issues/(repurchases) 0 0 79 0 3 0 0 0 Dividends paid (38) (41) (40) (49) (55) (44) (49) (48) Other financing CF items 0 0 0 0 (0) 0 0 0 Cash flow from financing (38) (41) 39 (49) (52) (44) (49) (48) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (2) (21) 31 (5) (63) 17 5 32 Free cash flow 21 19 (10) 44 (11) 60 53 78 Source: FactSet, Daiwa forecasts
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Sheng Siong Group (SSG SP): 27 October 2017
Financial summary continued … Balance sheet (SGDm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 120 100 130 126 64 81 86 117 Inventory 4046435262504951 Accounts receivable 2 6 5 4 6 6 6 6 Other current assets 5 6 6 8 4 4 4 4 Total current assets 167 157 184 190 136 140 145 179 Fixed assets 75 91 161 178 252 268 283 278 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 0 0 0 0 0 0 0 0 Total assets 242 248 345 368 388 409 428 457 Short-term debt 0 0 0 0 0 0 0 0 Accounts payable 57 64 60 69 77 70 69 72 Other current liabilities 31 32 46 53 54 55 56 58 Total current liabilities 88 96 107 121 131 125 125 130 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 2 2 2 2 2 2 2 2 Total liabilities 90 98 109 124 133 127 127 133 Share capital 156 156 235 235 235 235 235 235 Reserves/R.E./others (5) (7) 1 9 19 46 65 89 Shareholders' equity 152 150 236 244 255 281 300 324 Minority interests 00000000 Total equity & liabilities 242 248 345 368 388 409 428 457 EV 1,278 1,299 1,268 1,272 1,335 1,317 1,312 1,281 Net debt/(cash) (120) (100) (130) (126) (64) (81) (86) (117) BVPS (SGD) 0.110 0.108 0.166 0.162 0.170 0.187 0.200 0.216
Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 10.2 7.9 5.6 5.3 4.2 4.2 (0.4) 4.5 EBITDA (YoY) 34.8 18.7 19.8 17.9 13.3 6.5 4.1 5.2 Operating profit (YoY) 34.4 18.4 22.2 17.0 13.7 7.7 (0.1) 5.1 Net profit (YoY) 40.6 24.7 22.3 19.3 10.4 12.1 (3.0) 5.1 Core EPS (fully-diluted) (YoY) 25.2 24.7 18.9 12.9 10.4 12.1 (3.0) 5.1 Gross-profit margin 22.1 23.0 24.2 24.7 25.7 25.9 26.0 26.0 EBITDA margin 7.5 8.2 9.3 10.5 11.4 11.6 12.1 12.2 Operating-profit margin 6.2 6.8 7.8 8.7 9.5 9.8 9.8 9.9 Net profit margin 4.9 5.7 6.6 7.4 7.9 8.5 8.2 8.3 ROAE 20.8 25.8 24.7 23.6 25.1 26.2 23.4 22.9 ROAA 12.9 15.9 16.0 15.9 16.6 17.6 16.3 16.2 ROCE 26.2 30.9 29.4 27.7 30.3 30.4 28.0 27.4 ROIC 120.5 93.5 60.1 49.8 40.2 35.6 32.6 33.7 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 17.3 18.2 17.6 16.1 17.7 14.3 17.0 17.0 Accounts receivable (days) 1.2 2.1 2.7 2.1 2.3 2.6 2.5 2.4 Current ratio (x) 1.9 1.6 1.7 1.6 1.0 1.1 1.2 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 91.3 92.5 89.7 92.7 89.9 70.0 70.0 70.0 Free cash flow yield 1.5 1.4 n.a. 3.1 n.a. 4.3 3.8 5.5 Source: FactSet, Daiwa forecasts
Company profile
Sheng Siong Group Ltd started its first supermarket operation in 1985 and has grown to be the third- largest provider of daily necessities in Singapore, offering both wet and dry shopping options. As at end-2016, the group had direct control of 43 chain-grocery stores.
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Singapore Information Technology 27 October 2017
GSS Energy (GSSE SP)
Target price: n.a. Share price (26 Oct): SGD0.162 | Up/downside: -
A manufacturing base with an oil and gas option
¾ Strong earnings growth potential from precision engineering segment Jame Osman (65) 6321 3092 ¾ Key oil and gas asset remains main driver of profitability [email protected] ¾ Healthy balance sheet and cash flow generation
Background: GSS Energy Limited (GSS) is an integrated precision Share price performance engineering manufacturer based in Singapore – its businesses include (SGD) (%) production of plastic injection molding parts and printed circuit board 0.20 210 assembly, as well as manufacturing of precision shafts for a range of 0.17 178 international customers including Philips, Lego and Panasonic. GSS 0.13 145 0.10 113 currently operates a total of 6 production facilities in Indonesia (3), 0.06 80 Singapore (1) and China (2). Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 GSS Energy (LHS) Highlights: Relative to FSSTI (RHS) Initially listed on the Singapore stock exchange in 1993 under the name Giken Sakata, GSS’ new management, which came on board in 12-month range 0.07-0.19 September 2014, has been instrumental in driving a sustained turnaround Market cap (USDbn) 0.06 in the company’s core engineering business – its overall net profit 3m avg daily turnover (USDm) 0.51 (excluding one-off items) improved from SGD0.4m in 2012 to SGD4.2m in Source: FactSet, Daiwa forecasts 2016. The company has also increased its production capacity – it recently commenced operations of its relocated plant in Changzhou (China) focusing on higher-value products and electronics manufacturing services. According to management, utilisation levels are high (>80%) – it is expecting to complete a new factory in Batam (Indonesia) by end-2018 which will expand its manufacturing operations further at a development cost of SGD8.5m. In the meantime, management expects the near-term earnings growth from its engineering business to remain strong (1H17: SGD3.9m; +57% YoY), driven by a continued ramp-up in production levels.
GSS also holds a key oil and gas asset – in November 2016, it signed a 15-year cooperation contract (KSO) with the Indonesia state-owned oil company Pertamina (not listed) for onshore oil production of an area in Central Java encompassing 47.6sq km and estimated to have around 24.3m barrels of contingent resources (at a depth of up to 800m). Management said that it is currently in the advanced stages of preparation to commence production activities and expects to start drilling in 2H17. While the segment was a drag on the company’s 2016 financials (adjusted PBT loss of SGD2.1m), expenses incurred will be recoverable upon commercial production, while the low cost of onshore production, against a backdrop of a recovering crude oil price environment, could point to a higher earnings contribution from the segment in the near to long term.
GSS had a healthy net cash balance of SGD8.1m as at end-1H17. Management said it expects maintenance capex levels of around SGD3m in 2017. The company does not yet have an official dividend policy.
Valuation: GSS’ share price has risen by 94% YTD. There are no consensus estimates available for GSS. Based on its reported 2016 results, the company is trading at a PER of around 16.2x (2016 reported net profit of SGD13.4m, adjusted for one-off items of SGD2.5m).
See important disclosures, including any required research certifications, beginning on page 3
Asia Pacific Daily | 53
GSS Energy (GSSE SP): 27 October 2017
GSS Energy: revenue and gross profit margin trend GSS Energy: adjusted profit before tax (PBT) trend
SGD m 140 30% 6 SGD m 120 25% 5 100 20% 80 4 15% 60 3 10% 40 20 5% 2
0 0% 1 2012 2013 2014 2015 2016 0 Revenue (LHS) Gross profit margin (RHS) 2012 2013 2014 2015 2016
Source: Company Source: Company Note: FY2015 began on 1 September 2014 and ended on 31 December 2015, a period of 16 Note: FY2015 began on 1 September 2014 and ended on 31 December 2015, a period of 16 months due to a change in financial year months due to a change in financial year
GSS Energy: key precision engineering segment products
Source: Company
2
Asia Pacific Daily | 54
BUY (Unchanged) TP: Bt 23.00 (From: Bt 24.00 ) 27 OCTOBER 2017
Change in Numbers Upside : 25.7%
Thai Union Group Pcl (TU TB)
Cyclical impact
TU’s 2H17F is likely to remain under pressure from high tuna costs,
which leads us to cut our earnings by 9-14% over 2017-19F. However, KALVALEE THONGSOMAUNG we still look for 13% EPS growth p.a. in 2018-19F as the improving 662 – 617 4975 shrimp, salmon, and pet-food businesses should alleviate the impact [email protected] of high tuna costs. Maintain BUY with a new TP of Bt23 (from Bt24.0)
Cutting our earnings COMPANY VALUATION
TU’s 2H17F performance is tracking weaker than we had earlier Y/E Dec (Bt m) 2016A 2017F 2018F 2019F expected due to rising tuna prices (we note that tuna remains a key contributor, at 33% of our 2017F revenue). We cut our 2017- Sales 134,375 141,486 151,030 162,805
19F earnings by 9-14% to reflect the weaker-than-expected tuna Net profit 5,254 5,485 5,688 6,426 gross margin. Overall, we now expect 2017-19F gross margins of Consensus NP 5,560 6,337 7,170 13.8-14.5% (from 14.6-15.5%). Despite our earnings cuts, we still Diff frm cons (%) (1.3) (10.2) (10.4) look for 13% EPS growth p.a. in 2018-19F, driven by TU’s other Norm profit 5,335 5,029 5,688 6,426 improving businesses (ie, shrimp, salmon and pet food) as well Prev. Norm profit 5,543 6,509 7,460 as additional revenues from new divisions (ie, emerging markets, Chg frm prev (%) (9.3) (12.6) (13.9) product innovation and food services). We maintain our BUY call Norm EPS (Bt) 1.1 1.1 1.2 1.3 with a new DCF-based 12-month target price of Bt23 (from Norm EPS grw (%) (16.5) (5.7) 13.1 13.0 Bt24.0) as the rollover in our base year to 2018F (from 2017F) Norm PE (x) 16.4 17.4 15.4 13.6 largely offsets our lower earnings base. EV/EBITDA (x) 15.9 17.7 15.9 14.1
Higher base in tuna raw materials… P/BV (x) 2.0 1.9 1.8 1.7
Div yield (%) 3.4 3.6 3.8 4.3 TU reported that YTD the average raw tuna price was USD1,800/tonne, up 26% y-y. The September price actually ROE (%) 12.1 11.3 12.1 13.0 reached USD2,100/tonne. Given industry dynamics, we believe Net D/E (%) 136.9 137.3 130.8 123.5
the raw tuna price has changed its base to a higher one and it is difficult to go back to the level in the past. The average price was PRICE PERFORMANCE USD1,360 in 2014, USD1,170 in 2015 and USD1,425 in 2016. We attribute the higher price to many uncontrollable factors such (Bt/shr) TU Rel to SET In dex (%) Thanachart Securities as unfavorable weather conditions, lower fishing-fleet supply, and 23 10 22 sustainable and environmental-friendly management of seafood 0 21 causing higher tuna supply-chain costs. We assume TU’s tuna 20 (10) gross margin will remain under pressure in 2018-19F as cost 19 (20) pass-on, or re-pricing, should have at least a six-month lag time. 18 17 (30) Oct-16 Feb-17 Jun-17 Oct-17 …but other businesses are performing well Thanachart Securities Despite the weak tuna business, other businesses are doing well. 1) The shrimp business, including frozen shrimp and shrimp feed, COMPANY INFORMATION should see sales growth of 6% in 2017F and 7-8% in 2018-19F Price as of 27-Oct-17 (Bt) 18.30 due to rising volumes, resulting in margin expansion. 2) The salmon business's gross margin has turned positive since the Market Cap (US$ m) 2,623.1 beginning of this year due to a re-pricing strategy. 3) The pet food Listed Shares (m shares) 4,771.8 business, a high margin division, has performed much stronger Free Float (%) 65.9 (+9% y-y revenue growth in 1H17) on better volumes and pricing. Avg Daily Turnover (US$ m) 6.0 Given that the shrimp, salmon and pet-food businesses account 12M Price H/L (Bt) 22.60/18.10 for 50% of our 2017F gross profit, we expect TU’s average gross Sector FOOD margin to rise to 14.2% in 2018F, from 13.8% in 2017F. Major Shareholder Chansiri family 16.9% Likely unexciting 3Q17F, despite high season Sources: Bloomberg, Company data, Thanachart estimates
3Q is typically a high earnings season. However, due to the high tuna cost, we expect TU's 3Q17F results to be unexciting with falling gross margins on a y-y basis. Also the 3Q is typically a low earnings season for Red Lobster restaurants in the US, and this year should be worse given the impact from recent hurricanes.
Please see the important notice on the back page
Asia Pacific Daily | 55
Sector Flash 27 October 2017
NEUTRAL Indonesia Tobacco JCI: 5,975 (Unchanged) Michael W Setjoadi Mega Christina E-mail: [email protected] E-mail: [email protected] Phone: +6221 250 5081 Ext. 3620 Phone: +6221 250 5081 Ext. 3623
HMSP & GGRM to benefit from the new regulation; upgrading HMSP Exhibit 1. TP and recommendation changes TP (IDR) Recommendation What’s new? Under the new PMK 146/010/2017, the government announced Old New Old New 2018 excise tax details and new regulations on minimum cigarette retail selling HMSP IJ 4,300 4,500 HOLD BUY GGRM IJ 79,000 83,000 BUY BUY prices with the maximum discount of 15% from the government’s suggested Source: Bahana retail price (HJE). In addition, new brands launched should have equal or higher Exhibit 2. Sector relative valuations, 2017F CP TP Upside/ Mkt. cap 3M Avg. PER (X) PBV (X) ROAE Div. yield FCF yield retail prices than the existing brands offered by the same manufacturer. Rating (IDR) (IDR) (Down.) (USDmn) to (USDmn) 17F 17F 17F 17F 17F Staples 45,763 4.9 43.9 49.5 93.7 1.8 1.6 Moreover, the government is simplifying the excise tax brackets from 2018 (10 UNVR IJ HOLD 49,150 48,500 (1.3) 28,146 6.5 54.8 77.5 141.5 1.8 1.8 ICBP IJ BUY 8,900 10,700 20.2 7,790 2.6 26.9 5.3 19.6 1.7 0.3 INDF IJ HOLD 8,250 7,950 (3.6) 5,437 3.8 18.1 2.3 12.9 2.9 3.3 tiers) to 2021 (5 brackets). In our view, this is positive for the market leaders: MYOR IJ BUY 2,250 2,200 (2.2) 3,776 0.3 36.2 7.0 19.4 0.7 0.7 ROTI IJ REDUCE 1,325 960 (27.5) 615 0.4 32.5 4.3 13.3 0.8 1.8 Tobacco 44,493 5.1 31.3 11.1 33.5 2.7 4.3 HMSP for machine-rolled cigarette LTLN (SKM LTLN) and white cigarette (SPM) HMSP IJ BUY 3,990 4,500 12.8 34,833 4.7 34.9 13.4 38.3 2.7 3.1 GGRM IJ BUY 66,900 83,700 25.1 9,661 6.5 18.3 3.0 16.3 2.6 8.3 and GGRM for machine-rolled cigarette FF (SKM FF) while disadvantaging the Total 90,257 5.0 37.7 30.6 64.0 2.3 2.9 Source: Bloomberg, Bahana forecasts, pricing as of 27 Oct 2017 smaller players that offer discounted pricing or targeting lower tiers. Thus, we are Note: When a report covers six or more subject companies, please access important disclosures for Daiwa Capital Markets Hong Kong raising our TPs for HMSP and GGRM, as we raise our earnings forecasts on better Limited at http://www.daiwacm.com/hk/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets prospects for higher market share, to IDR4,500 and IDR83,000, respectively, Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, based on unchanged target 2018 PER multiples of 38x and 21x, respectively . We Hong Kong. are also upgrading HMSP to BUY (from: HOLD), and maintaining BUY on GGRM. Exhibit 3. Relative performance to JCI, ytd (%) (%) Risks to our calls: further government restrictions on the cigarette industry, 0 50 advertising bans and the continued decline in the industry sales volume. (5) 40 (10) (8.1) 30 (8.6) (9.1) Exhibit 6. Tier-1 excise tax per stick, 2015-2018 (15) 20 (20) 10 Tier-1 2015 2016 16 y-y (%) 2017 17 y-y (%) 2018 18 y-y (%) (25) 0
SKM 415 480 15.7 530 10.4 590 11.3 (30) (10)
SKT 290 320 10.3 345 7.8 365 5.8 (35) (20)
SPM 425 495 16.5 555 12.1 625 12.6 (40) (36.8) (30) GGRM HMSP Sector RMBA Source: Ministry of Finance, Bahana Source: Bloomberg, Bahana, pricing as of 27 Oct 2017 Exhibit 7. Excise tiering, 2018-2021 Exhibit 4. HMSP relative performance (%) Tier (%) 8 6.8 8 No. Type Group 2018 2019 2020 2021 6 6
I 1 1 1 1 4 4
1 SKM 2 2 2 2 2 2 II 0.1 3 1 1 1 0 0
I 4 3 1 1 (2) (0.7) (2)
2 SPM 5 (4) (4) II 4 2 2 6 (6) (6)
7 5 3 (8) (8) I 3 8 6 4 (10) (8.6) (10) (10.4) (10.1) 3 SKT/SPT II 9 7 5 4 (12) (12) III A ytd 1M 3M 6M 9M 12M 10 8 6 5 Source: Bloomberg, Bahana, pricing as of 27 Oct 2017 III B Source: Ministry of Finance, Bahana Exhibit 5. GGRM relative performance (%) (%) Widening excise tariff gap for different tiers 5 5 0.1 We note that the excise tariff gap between SKM tier-1 (IDR590/stick) and tier-2 0 0 (IDR385) has widened from IDR165/stick (2017) to IDR205/stick (2018), up 24% (5) (5) (4.3) y-y. This might be at a disadvantage for tier-1 SKM producers, as the smaller (6.2) (8.1) (10) (10) players face less excise cost pressure. Similar to SPM producers, the tier-1 excise (9.6) tariff was at IDR625 (2018), vs. IDR370, the tariff gap has widened from IDR225 (15) (15) to IDR255, up 13% y-y. On the other hand, tier-1 SKT producers with HJE higher than IDR1,215 (i.e. Dji Sam Soe Kretek 12) have seen a narrower excise-tax gap (20) (18.6) (20) ytd 1M 3M 6M 9M 12M to lower priced tier-1 cigarettes (Sampoerna A Hijau and Gudang Garam Merah). Source: Bloomberg, Bahana, pricing as of 27 Oct 2017
New regulations to benefit HMSP and GGRM going forward
Red highlights in exhibit 10 below shows products with retail ASPs that do not comply with the minimum HJE requirement. A couple of key products that have not complied with this regulation are Lucky Strike Mild & Bold, and Magnum Mild.
Djarum has aggressively increased ASP ytd, resulting in most of the company’s products complying with the regulation, but at the expense of its sales volume.
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report Asia Pacific Daily | 56
Corporate Flash 27 October 2017
United Tractors PX: IDR32,675 BUY JCI: 5,975 (Unchanged) Coal & Mining (Neutral) TP/consensus: 101%
TP: IDR35,000 Coal & Mining Research Team (Unchanged) PT Bahana Sekuritas | Daiwa Capital Markets
Solid Komatsu and Pama numbers in 3Q17, Re-affirm BUY Henry Wibowo E-mail: [email protected] What’s new? United Tractors recently published its monthly operational statistics Phone: +6221 250 5081, Ext. 3622 for Sep-2017. Overall numbers were in line with our FY estimates. We maintain our Andrew Franklin Hotama 12M TP of 35,000 and reiterate our BUY call on UNTR. Our bullish thesis is largely E-mail: [email protected] premised on improvement in Komatsu heavy-equipment sales and Pama’s volume Phone: +6221 250 5081, Ext. 3619 expectations, driven by the rebound in coal prices (ytd coal prices: +46% y-y). Ryan Hansel Jackdy Komatsu 3Q17 volume jumped 80% y-y: UNTR's Komatsu sales reached 333 E-mail: [email protected] units in Sep-17 (-4.9% m-m, +64% y-y), bringing the 3Q17 total sales to 993 Phone: +6221 250 5081, Ext. 3621 units (+9.8% q-q, +79.9% y-y). The strong sales growth in the 3Q17 was mostly driven by the agriculture (+59.2% q-q), construction (+21.7% q-q) and forestry Exhibit 1. Company information Market cap (IDRt/USDb) : 121.9/9.0 (+113.4% q-q) sectors, which accounts for 50.3% of UNTR’s total heavy- 3M avg.daily t.o.(IDRb/USDm) : 90.6/6.7 equipment sales, despite weaker q-q sales to the mining sector (-14.7% q-q, Bloomberg code : UNTR IJ Source: Bloomberg +178.2% y-y). This brings total 9M17 sales to 2,744 units (+72.8% y-y) and Exhibit 2. Shareholders information accounts for 89.4% of our FY17 forecast of 3,068 units (above expectation). Astra International (%) : 59.5 September segment breakdown: Agriculture: 73 units (+16% m-m, +416% y-y); Free float (%) : 40.5 Construction: 87 units (+8% m-m, +25% y-y), Forestry: 33 units (+18.9% m-m, Source: Company -21.9% y-y); and Mining: 140 units (-21.6% m-m, +81.3% y-y). Exhibit 3. Key forecasts and valuations 2015 2016 2017F 2018F Pama’s 3Q17 OB volume up 16% y-y: UNTR’s mining contracting division, Revenue (IDRt) 49,3 45,5 56,5 60,8 EBIT (IDRb) 8,586 6,706 9,338 9,999 Pama Persada, booked Sep-17 OB removal volume of 75.7m bcm (+1% m-m, Net profit (IDRb) 3,853 5,002 7,184 7,778 +32.3% y-y), bringing the 3Q17 total volume to 211.5m bcm (+10.7% q-q, Bahana/cns. (%) - - 102 96
EPS (IDR) 1,033 1,341 1,926 2,085 +15.7% y-y) and the 9M17 overburden volume to 585.1m bcm (+11.7% y-y), EPS growth (%) (28.2) 29.8 43.6 8.3 which accounts for 76% of our FY17 forecast of 772m bcm (in line). In terms of EPS momentum - - EV/EBITDA (x) 8.0 9.4 7.0 6.2 coal extraction, Pama recorded Sep-17 coal extraction of 10.1mt (-2.9% m-m, PER (x) 29.3 22.6 15.7 14.5 +9.8% y-y), bringing the 3Q17 total to 28.5m tonnes (+5.2% q-q, flat y-y) and PBV (x) 3.2 3.0 2.6 2.4 ROAA (%) 6.3 8.0 10.8 10.5 the 9M17 total to 82.4m tonnes (+4.8% y-y). Hence, the stripping ratio in 3Q17 ROAE (%) 10.3 12.7 16.9 16.4 was recorded at 7.4x (+5.2% q-q, +15.3% y-y) and 9M17 at 7.1x (+6.6% y-y). Net gearing (%) nc nc nc nc Source: Company, Bahana estimates Coal mining 3Q17 volume up 11.9% y-y: UNTR’s coal mining division, TTA, Note: Pricing as of 27 October 2017 booked September production volume of 434,000 tonnes (-15.1% m-m, +51.7% Exhibit 4. Relative share price performance (%) (%) 45 45 y-y), bringing the 3Q17 total production to 1.4m tonnes (-16.8% q-q, +11.9% y- 41.0 41.3 y) and 9M17 total to 5.1m tonnes (-11.6% y-y), accounting for 68% of our FY17 40 40 35 33.3 35 forecast of 7.5m tonnes (slightly below estimate). 30 30 25 25
20 20 Rock-solid 3Q17 operational stats, expecting strong earnings next week: 16.4 15 15
All in all, this was a robust 3Q17 performance by UNTR, as the company managed 10 8.9 10 5.5 to record double-digit growth in its heavy-equipment sales as well as overburden 5 5 0 0 removal volume on the back of an increase in Indonesia’s coal mining activities, ytd 1M 3M 6M 9M 12M after heavy rainfalls throughout 1H17. We also believe UNTR will book strong Source: Bloomberg, Bahana earnings in 3Q17 (3Q17 net profit estimate: IDR2.1tn, +8% q-q, +63% y-y). Exhibit 5. UNTR revenue breakdown Recommendation: Reiterate BUY as top sector pick – We continue to like Construction Industry UNTR, as we believe the current coal rally should result in higher heavy-equipment 3% Coal Mining sales and improving coal mining activities, with UNTR being the #1 proxy. Hence, 11% we maintain our BUY call and TP of IDR35,000, based on a target PER of 17.5x
Construction (+1.0 SD above its 5-year mean) on the average of our 2017-18F EPS. We would Machinery 46% also like to emphasize UNTR’s strong net cash level, which stood at IDR15tr Mining Contracting (USD1.1bn) as per 1H17, representing 12% of its current market cap and 40% providing ample dry powder for M&A and diversification into other sectors like power plants or non-coal mining. Key risks: 1) lower-than-expected coal prices, 2) stronger-than-expected Rupiah, and 3) macro downturn and political instability. Source: Bloomberg, Bahana
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Asia Pacific Daily | 57
Corporate Results 27 October 2017
Bumi Serpong Damai PX: IDR1,750 BUY JCI: 5,996 (Unchanged) Property (Overweight) TP/consensus: 92%
TP: IDR2,090 Renaldy Effendy (Unchanged) E-mail: [email protected] Phone: +6221 250 5081 Ext. 3606
3Q17 results: Dragged by one-off costs Exhibit 1. Company Information Market cap (IDRt/USDb) : 33.7/2.5 What’s New? – BSDE recently announced 3Q17 results. Earnings were below 3M avg.daily t.o.(IDRb/USDm) : 26.3/1.9 our quarterly expectations (71% of our 3Q17F) due to higher forex losses and Bloomberg code : BSDE IJ other expenses items (IDR91bn – mostly for building destruction in Surabaya Source: Bloomberg for its high-rise project) that are unlikely to recur. 3Q17 net profit stood at Exhibit 2. Shareholders Information IDR292bn (-77.1% q-q, -13.2% y-y), bringing the 9M17 net profit to IDR2.3tn Praga Artamida (%) : 26.6 Ekacentra Usahamaju (%) 25.0 (+99% y-y), accounting for 84% of our and 87% of consensus 2017 estimates. Est. Free Float (%) : 48.4 We reaffirm our BUY call on the stock with an unchanged 12-month TP of Source: Company IDR2,090, based on a 60% discount to our end-2018F NAV, as our pre-sales Exhibit 3. Key Forecasts And Valuations forecast suggests a +13% annual growth excluding one-off transactions (land 2015 2016 2017F 2018F plot JV sales). Downside risks: Slower take-up rate on newly-launched projects. Revenue (IDRbn) 6,210 6,522 8,450 8,504 EBIT (IDRbn) 2,901 2,835 3,951 4,076 Revenue growth driven by condo and office sales – BSDE booked decent Net profit (IDRbn) 2,139 1,796 3,095 3,315 15% y-y growth on its 3Q17 revenue of IDR1.6tn (-34% q-q, +15% y-y), EPS (IDR) 112 94 163 174 (16.0 translating to 6% below our quarterly expectation. Its 9M17 revenue grew 36% EPS growth (%) (46.8) 72.3 7.1 P/E (x) 16.1 19.1) 11.1 10.4 y-y to IDR5.8tn (1H17: 47% y-y), 78% of our and the consensus 2017E, PBV (x) 1.8 1.7 1.5 1.3 mainly contributed by sales of land and buildings (+42% y-y) which include the DPS (IDR) 15 5 4 7 15ha commercial land-plot sales to Mitsubishi with a total transaction value of Yield (%) 0.8 0.3 0.2 0.4 ROAE (%) 12.5 9.1 14.0 13.2 IDR1.4tn, of which IDR683bn had been booked in 2Q17. Consolidated 9M17 Source: Bloomberg, Bahana estimates gross margin stood at 73%, slightly decreased from 9M16 (74%), mainly due Note: Pricing as of 26 October 2017 to weaker revenue mix on its property development. However, the operating Exhibit 4. Relative Share PX Performance to JCI (%) (%) margin went up to 46% from 42% in 9M16 as opex only went up 14% y-y. 0 0
(5) (3.4) (5) Another land-plot sale of IDR2tn likely to be booked in 4Q17 – In 3Q17, (4.5) (10) (7.5) (10) BSDE sold c.8ha of commercial land plots to a Chinese developer for a total (15) (13.5) (15) transaction value of around IDR1.5tn, translating to an ASP/sqm of c.IDR17mn. (20) (18.0) (20)
We expect to see this transaction recognized as revenue in 4Q17, as revenue (25) (25) from sales of land, without buildings thereon, are recognized based on the full (30) (30) (30.4) (35) (35) accrual method and all conditions (>20% payments made & collectible, land ytd1M3M6M9M12M development process is complete, BSDE has no involvement in the construction BSDE IJ relative to JCI of the building on the land) have been met. Hence, we raise our 2017-18F Source: Bloomberg (26 October 2017) revenue by 9-13% and earnings by 13-14%.
Exhibit 3. BSDE 3Q17 result summary q-q y-y 3Q17/ y-y 9M17/ 9M17/ (IDRbn) 3Q16 2Q17 3Q17 (%) (%) 3Q17F 9M17 (%) 2017F Cons. Sales 1,407 2,460 1,614 (34.4) 14.7 94.0 5,827 36.2 77.8 78.3 Gross profit 1,061 1,917 1,166 (39.2) 10.0 4,259 34.2 Operating expenses 550 529 626 18.4 13.8 1,578 13.8 Operating profit 511 1,389 541 (61.1) 5.8 94.8 2,682 50.0 75.3 78.5 Net interest income/(expense) (89) (51) (72) 42.8 (18.3) (204) (33.3) Forex gain (expenses) 4 (9) (35) 292.7 (972.8) (25) 228.5 Other income/(expense) 13 23 (91) (500.0) (806.7) (42) (330.5) Income from associated 39 99 67 (32.0) 73.4 328 454.8 Pretax profit 478 1,451 409 (71.8) (14.4) 2,737 76.4 Taxation (82) (115) (77) (33.4) (5.9) (278) 11.3 Minority interest (60) (58) (40) (30.7) (32.6) (157) 9.4 Net profit 336 1,277 292 (77.1) (13.2) 71.3 2,302 98.8 84.3 86.6 BS & Ratio analysis 3Q16 2Q17 3Q17 9M16 9M17 2015 2016 2017F Gross margin (%) 75.4 78.0 72.3 74.2 73.1 74.7 71.8 73.4 Operating margin (%) 36.3 56.5 33.5 41.8 46.0 46.7 43.5 45.7 Pretax margin (%) 34.0 59.0 25.4 36.3 47.0 43.7 37.2 41.9 Net margin (%) 23.9 51.9 18.1 27.1 39.5 34.5 27.5 32.8 Receivable Days 11 15 22 11 18 7 15 10 Payable Days 79 62 145 74 124 55 57 69 Total cash 3,996 5,398 4,543 3,996 4,543 6,109 3,569 3,569 Total debt 6,865 8,525 8,354 6,865 8,354 7,750 7,370 7,370 Net gearing (%) 12.3 13.9 16.7 12.3 16.7 7.4 15.6 4.5 Source: Company, Bloomberg, Bahana forecasts
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report Asia Pacific Daily | 58
Corporate Results 27 October 2017
Bank Jabar (BJBR) PX: IDR2,470 REDUCE JCI: 5,975 (Unchanged) Banking (Overweight) TP/consensus: 80%
TP: IDR1,550 Alvin Baramuli Henry Wibowo (Unchanged) E-mail: [email protected] E-mail: [email protected] Phone: +6221 250 5081 Ext. 3601 Phone: +6221 250 5081 Ext. 3622
3Q17 Earnings Miss, Reiterate Reduce Exhibit 1. Company information Market cap (IDRtn/USDbn) : 23.9/1.8 What’s new? – BJBR recently hosted its 3Q17 analyst meeting, where overall 3M avg.daily t.o.(IDRbn/USDmn) : 42.6/3.1 results were below our expectations. 3Q17 net profit stood at IDR244bn (-36% q- Bloomberg code : BJBR IJ q, -21% y-y), bringing total 9M17 net profit to IDR1.1tn (-8% y-y). This accounted Source: Bloomberg for 60%/67% of Bahana and consensus 2017E. We are maintaining our REDUCE Exhibit 2. Shareholders information call given BJBR’s stretched valuation of 2.6x 2017F PBV, +2SD above its 5-yr West Java Government : 75% Est. free float (%) : 25% mean, and reiterating our TP of IDR1,550, based on PBV of 1.5x average of 2017- Source: Bloomberg 2018F BVPS. Risks to our call include: 1). Stronger-than-expected economic Exhibit 3. Key forecasts and valuations growth, 2).Stronger NII growth and 3). Lower-than-expected provisioning. This Year 2015 2016 2017F 2018F report marks the transfer of coverage to Alvin Baramuli. Net int. inc.(IDRbn) 4,976 6,079 7,068 7,847 Net profit (IDRbn) 1,381 1,153 1,773 1,987 Negative earnings growth dragged by subdued NII – BJBR recorded net EPS (IDR) 142 119 183 205 interest income of IDR1.6tn in 3Q17, up merely by 1.1% y-y (vs. 4.8% in 2Q17), EPS growth (%) 24.8 (16.2) 10.2 12.1 totaling IDR4.7tn in 9M17 (+3.5% y-y). This was due to an increase in 9M17 P/E (x) 17.4 20.8 13.5 12.0 BVPS (IDR) 795 993 968 1,072 interest expenses of 11.7% y-y, while interest income decelerated to 7.1% y-y. PBV (x) 3.1 2.5 2.6 2.3 Accordingly, NIM dropped to 6.7% (vs. 6.8% in 1H17, 7.2% in 9M16), though still DPS (IDR) 85 89 101 113 within management guidance of 6.5%-7.0% for 2017. PPOP was down by 4.1% y- Yield (%) 3.4 3.6 4.1 4.6 y (vs. +6.8% in 1H17) in 9M17 to IDR1.97tn. Furthermore, provision expenses ROAE (%) 18.7 15.7 19.8 20.1 Source: Bloomberg, Bahana estimates were higher by 2.8% y-y (vs. 110.6% in 1H17) in 9M17 to IDR543bn, bringing Note: Pricing as of close on 27 October 2017 annualized credit cost to 1.0% (vs. 1.1% in 1H17, 0.6% in 9M16). Exhibit 4. Relative share price performance (%) (%) 50 50 Loans up by 12% y-y; Driven by rising Micro & Pension loans – Bank only 42.6 40 40 total loans reached IDR70.5tn, higher by 11.9% y-y (vs. 12.9% in 1H17, 15.7% in 30 30 21.3 17.8 9M16) and 11.7% YTD. Growth drivers: Consumer (66% of total) +9.2% y-y, 20 20 Micro (7% of total) +34.5% y-y, Commercial (20% of total) +14.4% and 10 10 0 0
Mortgages (7% of total) +13.5% y-y. Within the Consumer segment, Pension (10) (3.5) (5.3) (10) loans grew strongly at 44.1% y-y, while Civil Servant loans were up by just 2.7% (20) (20) (30) (30) y-y. Additionally, one of BJBR’s priorities going forward is to focus on the Micro (40) (40) (39.9) loan segment by utilizing a network of provincial and regional banks called “BPR (50) (50) ytd 1M 3M 6M 9M 12M Linkage”. We believe that this could provide a support to its loan growth in the near term as well as its NIM given its high yield of 9%-27% p.a. However, as Source: Bahana, Bloomberg based on 27 October 2017 closing price competition intensifies and purchasing power weakness lingers in the Micro segment, it would be difficult to find opportunities for growth. Loan growth was still below guidance of 13%-14% in 2017, however, this might be achieved should the uptrends in Micro and Pension loans continue.
Deposits surged 19% y-y; LDR stood at 82% – On the other hand, 9M17 bank only total deposits totaled IDR86.5tn, rising 18.6% y-y (vs. 15.3% in 1H17). Demand deposits (30% of total) down 5.8% y-y, Savings (17% of total) up 14.3% y-y, while Total Deposits (53% of total) up 40.2% y-y. LDR stood at 81.5% (vs. 86.3 in 1H17), providing ample of liquidity for the bank to grow its assets. Management projects the LDR to hover at 88-90% in 2017 by trimming down a portion of its TD, thus could potentially lower its interest expenses.
NPL maintained at below 2% - 9M17 NPL ratio stood at 1.5%, showing an improving trend from 1.6% in 1H17 and 1.7% in 9M16. By segment, Consumer at 0.24% (vs. 0.09% in 9M16), Micro at 5.5% (vs. 12.2% in 9M16), Commercial at 2.9% (flat against 9M16) and Mortgages at 6.0% (vs. 6.1% in 9M16). Additionally, SML ratio was slightly lower at 2.7% vs. 2.8% in 1H17 but still above 2.2% in 9M16. Coverage ratio has been declining from 62.4% in 9M16 to 49.7% in 9M17 but asset quality deterioration remains contained.
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report Asia Pacific Daily | 59
Result Flash 27 October 2017
PX: IDR1,415 JCI: 5,975 BUY Japfa Comfeed TP/consensus: 107%
TP: IDR1,650 Michael W Setjoadi Mega Christina (From: IDR1,750) E-mail: [email protected] E-mail: [email protected] Phone: +6221 250 5081 Ext. 3620 Phone: +6221 250 5081 Ext. 3623
JPFA 3Q17 results: Below our and consensus estimates Exhibit 1. TP and recommendation changes TP (IDR) Recommendation Recommendation: Lower TP but still BUY Old New Old New Post the lower-than-expected 3Q17 earnings, we revised down our 2017-19F earnings by 3-12% on lower feed margin assumptions despite revising up the 1,750 1,650 BUY BUY top-line estimates on improved sales volumes. We maintain our BUY Source: Bahana recommendation on JPFA with a lower TP of IDR1,650 (previously IDR1,750), Exhibit 2. Company information based on an unchanged 12x 2018F PER, and it remains our top sector pick Market cap (IDRt/USDb) : 16.1/1.2 3M avg.daily t.o. (IDRb/USDm) : 7.7/0.6 being the cheapest in the sector with a low net gearing and given its business Bloomberg code : JPFA IJ diversification. Risks to our call: Intensifying price competition on expected Source: Bloomberg; Note: closing prices as of 27 October 2017 higher DOC supplies starting 4Q17, resulting in unhealthy chicken price Exhibit 3. Shareholders information Japfa Ltd (%) : 51.0 movements , and continued limited supply in domestic corn. KKR Jade Investments Pte Ltd (%) : 12.0 Est. free float (%) : 37.0 x 3Q17 sales slightly above estimates (up 0.7% q-q, and 7.0% y-y): Source: Bloomberg JPFA recorded 3Q17 sales of IDR7,562bn, up 0.7% q-q, and up 7.0% y-y, Exhibit 4. Key forecasts and valuations translating to 9M17 revenue of IDR21,694bn, up 5.3% y-y, slightly above Year to 31 (Dec) 2015 2016 2017F 2018F our and consensus’ estimates. This was mainly due to much higher sales Revenue (IDRb) 25,023 27,063 29,536 31,587 volume growth across the segments for the quarter. 3Q17 feed sales Net profit (IDRb) 468 2,065 1,149 1,566 volume jumped 25.6% y-y to c.800k tons, while the DOC volume grew EPS (IDR) 44 181 101 137 EPS growth (%) 38.0 312.0 (44.4) 36.3 21.1% y-y to 184mn birds, and broilers were at 167k tons, up 14.0% y-y. EPS mom. Separately, feed ASP was at IDR6,169/kg, -0.2% q-q, and -1.2% y-y P/E (x) 32.8 8.0 14.3 10.5 (DOC: IDR5,114/kg, -4.7% q-q and -9.1% y-y, Broiler: IDR17,395/kg, - BVPS (IDR) 526 775 858 985 0.5% q-q, but +14.0% y-y). PBV (x) 2.7 1.9 1.7 1.5 DPS (IDR) - 21.0 18.1 10.1 x Lower 3Q17 GPM on high local corn prices and cullings: JPFA booked Yield (%) - 1.5 1.3 0.7 Source: Bloomberg, Bahana forecasts a 3Q17 gross profit of IDR1,345bn, down 3.3% q-q, and 20.1% y-y, Note: pricing as of 27 October 2017 translating to a 9M17 gross profit of IDR3,833bn, down 12.8% y-y. The Exhibit 5. Relative share price performance lower gross profit was mainly due to much higher local corn prices as the (%) 30 30 harvest season usually falls in 2Q and 4Q of the year. Furthermore, there 20 18.0 20 are four cullings done YTD, driving up DOC’s breakeven cost. However, 12.7 10 10 weaker-than-expected demand has dampened the price support from the culling program. As a result, the 3Q17 gross margin stood at 17.8%, down 0 0 (10) (10) 0.7ppt q-q, and 6.1ppt y-y. (8.5) (20) (15.6) (20) 3Q17 feed operating profit dropped 3.1ppt q-q and 5.5ppt y-y: JPFA x (30) (30) (29.9) recorded a 3Q17 operating profit of IDR636bn, down 14.4% q-q, and (31.7) (40) (40) 42.8% y-y, with the feed segment seeing most of the drop. On the back of ytd 1M 3M 6M 9M 12M Source: Bloomberg Note: pricing as of 27 October 2017 the lower DOC ASP in 3Q17 on a higher sales volume, the DOC EBIT Exhibit 6. DOC and broiler monthly ASP margin dropped 10.3ppt q-q and 20.6ppt y-y to 24.2%. The broiler (IDR/kg) (IDR/DOC) segment saw a 2.3ppt q-q margin improvement to 5.3%, which was down 22,000 5,500 21,000 2.1ppt y-y. On a consolidated basis, JPFA booked a higher salary expense, 20,000 5,000 19,000 up 2.1% q-q and 133.0% y-y. 18,000 4,500 17,000 x Lower 3Q17 net profit: JPFA reported a 3Q17 net profit of IDR362bn, 16,000 4,000 15,000 down 8.5% q-q, and 52.4% y-y, translating to a 9M17 net profit at 14,000 3,500 13,000 IDR850bn, down 50.7% y-y. Interest expenses improved to IDR136bn, 12,000 3,000 down by 15.2% q-q, and 1.9% y-y. Jul-15 Jul-16 Jul-17 Jan-15 Jan-17 Jan-16 Jun-15 Jun-16 Jun-17 Oct-15 Oct-16 Apr-15 Apr-16 Apr-17 Feb-15 Feb-16 Feb-17 Sep-15 Sep-16 Sep-17 Dec-15 Dec-16 Aug-15 Aug-16 Aug-17 Nov-15 Nov-16 Mar-15 Mar-16 Mar-17 May-15 May-16 May-17 Broiler DOC (RHS)
Source: Company
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report
Asia Pacific Daily | 60
Corporate Flash 27 October 2017
Blue Bird PX: IDR4,500 BUY JCI: 5,975 (unchanged) Land Transportation (Neutral)
TP: IDR 4,900 Gregorius Gary (unchanged) E-mail: [email protected] Phone: +6221 250 5081 ext. 3604
3Q17 results: Strong q-q earnings growth; Maintain BUY Exhibit 1. Company information Market cap (IDRtn/USDbn) : 11.3/0.8 What’s new? Blue Bird (BIRD IJ) recently published its 3Q17 results, which 3M avg.daily t.o.(IDRbn/USDmn) : 0.8/0.1 Bloomberg code : BIRD IJ were below our and consensus expectations. However, we note that its 3Q17 Source: Bloomberg net profit increased sharply by 44% q-q on the back of improved operating Exhibit 2. Shareholders information efficiencies and lower interest expenses. We reiterate our BUY recommendation Pusaka Citra Djokosoetono (%) : 37.2 Prawiro H Purnomo (%) 9.6 on BIRD with an unchanged 12M TP of IDR4,900, based on a 22x PER target : Others (%) : 37.7 multiple, at par with its past-3-year mean, on 2018F EPS. Downside risks to our Free float (%) : 15.5 Source: Bloomberg positive call include lower fleet utilization rates and lower daily income per unit. Exhibit 3. Key financial data 3Q17 earnings up 44.2% q-q due to lower operating and finance cost: Year to 31 Dec 2016 2017F 2018F 2019F BIRD booked solid 3Q17 earnings of IDR109bn, up 44.2% q-q but down 17.3% Revenue (IDRbn) 4,796 4,450FFFF 4,846 5,325 y-y. This translates to a 9M17 net profit of IDR302.1bn, -16.3% y-y, and EBIT (IDRbn) 807 663 731 922 Net profit (IDRbn) 507 447 551 684 accounting for 68%/46% of our and the consensus full-year estimates, Bahana/cons. (%) 68 84 na respectively. The earnings improvement in 3Q17 was largely supported by lower EPS (IDR) 203 179 220 273 operating expenses (-7% q-q to IDR145.6bn) due to lower staff allowances and EPS growth (%) (38.4) (11.9) 23.4 23.9 consultant fees. Additionally BIRD managed to lower its net gearing level to EV/EBITDA (x) 8.2 8.7 8.4 7.3 12.2% (2Q17: 1.34tn, 3Q16: IDR1.97tn), leading to lower interest expenses in PER (x) 22.2 25.2 20.4 16.5 FCFPS (IDR) 247 326 47 195 3Q17 (-15% q-q or -51% y-y to IDR25.7bn). As a result, BIRD’s 3Q17 net FCF yield (%) 5.5 7.2 1.1 4.3 profit margin stood at 10.4% vs. 7.3% in 2Q17. BVPS (IDR) 1,834 1,952 2,119 2,326 PBV (x) 2.5 2.3 2.1 1.9 Soft 3Q17 revenue growth at +0.7% q-q; Improving utilization rates: DPS (IDR) 66 61 54 66 BIRD’s 3Q17 total revenue stood at of IDR1.05tn, up 0.7% q-q but down 10.6% Yield (%) 1.5 1.4 1.2 1.5 y-y, bringing the 9M17 revenue to IDR3.13tn, down 14.1% y-y. This was an Source: Bloomberg, Bahana estimates Note: Pricing as of close on 27 October 2017 improvement compared to the 16% y-y decline in revenue in 1H17. We believe Exhibit 4. Relative share price performance the 9M17 revenue drop was mainly driven by intense competition with app- (%) (%) 60 60
50.4 based taxis, a smaller regular taxi fleet size of 22.9k units, down 11.2% y-y, 50 50 40.2 40 37.2 40 and weak seasonality in BIRD’s bus segment due to the school holiday season 30 30 during the month of July. However, BIRD’s regular taxi fleet utilization rate in 20 20 9.7 10 10
3Q17 reached 67.8%, up 1.8ppt from 66% in 2Q17, although still 5.1ppt lower 0 0
(10) (10) than 72.9% in 3Q16. Looking ahead, we expect BIRD to increase its regular taxi (7.6) (8.3) (20) (20) ytd 1M 3M 6M 9M 12M fleet utilization rate to 70% in 2018F on the back of its successful ridesharing Source: Bloomberg, Bahana partnership with Go Car. Exhibit 5. BIRD IJ 3Q17 results summary q-q y-y 3Q17/ y-y 9M17/ 9M17/
(IDRbn) 3Q16 2Q17 3Q17 (%) (%) 3Q17F 9M17 (%) 2017F Cons. Sales 1,173.6 1,042.1 1,049.1 0.7 (10.6) 94 3,131.2 (14.1) 70 57 Gross Profit 342.6 264.6 279.7 5.7 (18.4) 852.0 (16.2)
Operating expenses (132.6) (156.5) (145.6) (7.0) 9.8 (435.8) 0.1
Operating profit 210.0 108.0 134.1 24.1 (36.2) 81 416.2 (28.5) 63 41 Net int. income/(expense) (52.5) (30.2) (25.7) (15.0) (51.0) (92.8) (41.4)
Forex gain (expenses) (0.9) (0.0) 0.6 na na 0.1 na
Other income/(expense) 19.9 23.3 31.3 34.4 57.8 73.8 14.9
Pretax profit 176.5 101.1 140.3 38.8 (20.5) 397.2 (17.9)
Taxation (44.0) (25.0) (30.6) 22.5 (30.5) (93.2) (23.1)
Minority Interest (0.6) (0.5) (0.7) 31.7 11.3 (1.9) (3.7)
Net profit 131.9 75.6 109.0 44.2 (17.3) 98 302.1 (16.3) 68 46 BS & Ratio analysis 3Q16 2Q17 3Q17 9M17 2016 2017F 2018F
Gross margin (%) 29.2 25.4 26.7 27.2 28.6 27.4 27.6
Operating margin (%) 17.9 10.4 12.8 13.3 16.8 14.9 15.1
Pretax margin (%) 15.0 9.7 13.4 12.7 14.4 13.5 15.3
Net margin (%) 11.2 7.3 10.4 9.6 10.6 10.0 11.4
Inventory days 1 1 1 1 1 1 1
Receivable days 15 17 16 16 14 16 16
Payable days 6 5 10 10 6 6 6
Total cash (IDRb) 338 592 500 500 592 751 439
Total debt (IDRb) 1,966 1,338 1,080 1,080 1,844 1,338 1,038
Net gearing (%) 36.6 16.1 12.2 12.2 27.3 12.0 11.3
Source: Company, Bloomberg, Bahana estimates Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report
Asia Pacific Daily | 61
Corporate Flash 27 October 2017
London Sumatera Indonesia PX: IDR1,505 BUY Plantations (Neutral) JCI: 5,973 (unchanged)
TP: IDR1,800 Gregorius Gary (from: IDR2,085) E-mail: [email protected] Phone: +6221 250 5081 ext. 3604
3Q17 results: Above consensus expectations, reiterate BUY Exhibit 1. Company information Market cap (IDRtn/USDbn) : 10.2/0.8 What’s new? London Sumatera Indonesia (LSIP IJ) recently published its 3Q17 3M avg.daily t.o.(IDRbn/USDmn) : 21.7/1.6 Bloomberg code : LSIP IJ results. Overall numbers were largely in line with our but above the consensus Source: Bloomberg estimate. We reiterate our BUY recommendation with a lower 12M TP of Exhibit 2. Shareholders information IDR1,800, translating to 20% upside from the current price level. Below are our SIMP IJ (%) : 59.5 Indofood Agri Resources Ltd. (%) 0.1 key takeaways. : Free float (%) : 40.4 Source: Bloomberg 3Q17 earnings grew 12.7% y-y on higher palm oil and rubber sales: Exhibit 3. Key financial data LSIP reported 3Q17 net profit of IDR180bn, up 111.3% q-q and up 12.7% y-y, Year to 31 Dec 2016 2017F 2018F 2019F bringing 9M17 net profit to IDR639.5bn, up significantly by 134.8% y-y and Revenue (IDRbn) 3,848 4,614 4,962 5,246 translating to 75%/81% of our previous/consensus full-year 2017 estimates. EBIT (IDRbn) 790 1,100 1,098 1,211 The solid 3Q17 earnings result was mainly driven by higher revenue (+10.3% Net profit (IDRbn) 594 858 876 983 q-q, +14.7% y-y to IDR1.1tn) due to improvements in LSIP’s palm oil segment. Bahana/cons. (%) 109 105 108 EPS (IDR) 87 126 128 144 Palm oil (>90% revenue): 3Q17 sales up 16% y-y on higher volumes: EPS growth (%) (4.7) 44.5 2.1 12.2 LSIP’s palm oil division recorded 3Q17 sales of IDR1.0tn, up 14.2% q-q and up EV/EBITDA (x) 7.9 6.9 6.3 5.3 PER (x) 17.3 12.0 11.7 10.4 15.9% y-y, bringing 9M17 total palm product sales to IDR3.3tn, up 37.5% y-y. FCFPS (IDR) 100 147 171 185 This is largely supported by higher 3Q17 sales volume of CPO (up 12.6% q-q FCF yield (%) 6.7 9.8 11.4 12.3 and up 21.7% y-y to 105k tons) and PK products (up 36.9% q-q and up 28% BVPS (IDR) 1,120 1,216 1,293 1,386 y-y to 30.9k tons). On the price front, we noted LSIP’s 3Q17 CPO ASP declined PBV (x) 1.3 1.2 1.2 1.1 DPS (IDR) 3.5% q-q and was down -3.1% y-y to IDR7,805/kg. Similarly, 3Q17 PK ASP 37 35 51 52 Yield (%) 2.5 2.3 3.4 3.5 was recorded at IDR6,320/kg, up 6% q-q but down 15.7% y-y. ROAA (%) 6.3 8.6 8.4 8.8 Rubber (6% revenue): 3Q17 sales slightly rose 1% y-y on higher ASP: ROAE (%) 7.8 10.3 9.9 10.4 EBIT margin (%) 20.5 23.8 22.1 23.1 LSIP’s rubber division booked 3Q17 sales of IDR56.2bn, down 32.9% q-q but Net gearing (%) nc nc nc nc up 1.3% y-y, translating to 9M17 total rubber sales of IDR219.7bn, up 53.7% Source: Bloomberg, Bahana estimates Note: Pricing as of close on 27 October 2017 y-y. The soft performance of LSIP’s rubber division in 3Q17 mainly resulted Exhibit 4. Relative share price performance from lower sales volumes, which declined 13.1% q-q or -9.2% y-y to 2.5k tons. (%) (%) Additionally, the 3Q17 rubber ASP was recorded at IDR22,170/kg, down 22.8% 10 10 4.8 4.6 5 5 q-q but up 11.6% on annual basis. 2.8 0 0 3Q17 FFB nucleus production at 360.8k tons (+11% q-q or +27% y-y): (5) (5) On the production front, LSIP recorded 3Q17 FFB nucleus production of 360.8k (10) (10) (12.3) (15) (15) tons, up 11% q-q and 27% y-y. This translates to 9M17 FFB nucleus production (20) (17.7) (20) of 946.4k tons, up 16.1% y-y, and implies an improved 9M17 FFB yield of 11 (25) (25) (26.3) tons/ha (9M16: 9.8 tons/ha). The strong FFB production improvement mainly (30) (30) ytd 1M 3M 6M 9M 12M resulted from the production recovery post the El Nino impact in 2016. Going Source: Bloomberg, Bahana forward, we expect LSIP to book 19% y-y FFB nucleus production growth in Exhibit 5. Relative performance to JCI, ytd 2017F. (%) (%) 40 40 28.1 Recommendation: Reiterate BUY with lower 12M TP of IDR1,800 30 30 We are satisfied overall with LSIP’s 9M17 performance. However, we revised 20 17.0 20 down our 2018F EPS forecast by 10% mainly to adjust for our previous overly 10 10 optimistic estimates. Furthermore, we are rolling over our valuation to 2018F 0 0 EPS from 2017F EPS previously. As such, our 12M TP comes down to IDR1,800 (10) (5.5) (10) (20) (13.9) (20) (from IDR2,085), based on unchanged 14x PER multiple, which is derived from (22.3) (30) (25.9) (26.3) (30) TBLA SGRO SIMP Sector BWPT AALI LSIP 0.5 SD below its past-3-year mean level. With 20% upside to our new TP, we Source: Bloomberg, Bahana maintain our BUY recommendation on LSIP. Note that LSIP’s stock has underperformed JCI by 26% ytd, thus we believe creating a good buying opportunity at the current level. Key risks to our positive call include lower FFB production and lower CPO prices.
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report
Asia Pacific Daily | 62
Corporate Flash 27 October 2017
Eagle High Plantations PX: IDR248 BUY JCI: 5,975 (unchanged) Plantations (Neutral)
TP: IDR500 Gregorius Gary (unchanged) E-mail: [email protected] Phone: +6221 250 5081 ext. 3604
3Q17 results: Narrowing net loss, strong EBIT growth; Maintain BUY Exhibit 1. Company information Market cap (IDRtn/USDbn) : 7.8/0.6 What’s new? Eagle High Plantations (BWPT IJ) recently published its 3Q17 3M avg.daily t.o.(IDRbn/USDmn) : 11.1/0.8 Bloomberg code : BWPT IJ results, which left us with a positive impression. We reiterate our BUY Source: Bloomberg recommendation on BWPT with an unchanged 12-month DCF-based TP of Exhibit 2. Shareholders information IDR500 (WACC: 9.7%), translating to 100% upside potential from the current PT Rajawali Corpora (%) : 37.5 FIC Properties Sdn Bhd (%) 37.0 price. Note that BWPT’s share price has underperformed the JCI by 41% in the : Free float (%) : 25.5 past 9M, creating a good buying opportunity at the current level. Key risks to Source: Bloomberg our positive call include lower-than-expected FFB production, lower CPO sales Exhibit 3. Key financial data volumes and lower CPO prices. Year to 31 Dec 2016 2017 2018F 2019F Revenue (IDRbn) 2,542 3,330 4,111 2,542 3Q17 net loss at IDR84bn, improving on q-q and y-y basis: BWPT EBIT (IDRbn) 245 414 931 245 reported a 3Q17 net loss of IDR84.4bn, smaller than the net losses of Net profit (IDRbn) (390) (282) 102 (390) IDR106.4bn in 2Q17 and IDR93.8bn in 3Q16. This translates to a 9M17 net loss Bahana/cons. (%) na na na EPS (IDR) (12) (9) 3 (12) of IDR209bn, which is a significant improvement from the net loss of IDR301bn EPS growth (%) 117 (28) (136) 117 in 9M16. EV/EBITDA (x) 21.1 14.8 14.2 21.1 PER (x) na na 76.8 na 3Q17 EBIT jumped 165% q-q or 395% y-y on the back of strong sales: FCFPS (IDR) (564) 163 489 (564) On the operating front, BWPT booked a strong 3Q17 EBIT of IDR91.3bn, FCF yield (%) (2) 1 2 (2) significantly up 165% q-q or 395% y-y, bringing the 9M17 EBIT to IDR229.6bn, BVPS (IDR) 195 186 188 195 47 times the 9M16 EBIT of IDR4.9bn. The solid 3Q17 operating performance PBV (x) 1.3 1.3 1.3 1.3 DPS (IDR) - - 1 - was mainly driven by higher sales due to improvements in BWPT’s production Yield (%) - - 0.3 - output. The 3Q17 EBIT margin improved to 12.3% (2Q17: 5.2%, 3Q16: 3.7%). Source: Bloomberg, Bahana estimates Note: Pricing as of close on 27 October 2017 3Q17 total sales growing to IDR739.2bn (+12.2% q-q or +49.7% y-y): Exhibit 4. Relative share price performance (%) (%) BWPT’s 3Q17 total sales rose sharply by 49.7% y-y to IDR739.2bn, translating 30 30 to consolidated 9M17 sales of IDR2.24tn, up 40.2% y-y. This was largely 20 17.5 20 10.3 10 10 supported by higher contribution from BWPT’s CPO (+8.3% q-q or +54.1% y-y 0 0
(10) (10) to IDR615bn) and palm kernel (+294.9% q-q or 152% y-y to IDR153bn) (9.4)
(20) (20) products. Volume-wise, BWPT booked a 3Q17 CPO sales volume of 81.4k tons, (22.3) (30) (26.1) (30) up 18.3% q-q or 46.1% y-y, bringing the 9M17 total CPO sales volume to (40) (40) (41.4) (50) (50) 234.1k tons, up 16.9% y-y. This is relatively in line with our full-year CPO sales ytd 1M 3M 6M 9M 12M Source: Bloomberg, Bahana volume estimate of 358.5k tons, up 20% y-y. Exhibit 5. BWPT IJ 3Q17 results summary q-q y-y 3Q17/ y-y 9M17/ 9M17/ (IDRbn) 3Q16 2Q17 3Q17 (%) (%) 3Q17F 9M17 (%) 2017F Cons. Sales 493.8 659.0 739.2 12.2 49.7 93 2,237.0 40.2 67 134 Gross Profit 85.6 122.3 197.9 61.8 131.3 514.9 114.5 Operating expenses 67.1 87.9 106.6 21.4 58.8 285.3 21.3 Operating profit 18.4 34.5 91.3 164.6 395.4 88 229.6 4,561.0 55 50 Net int. income/(expense) (165.4) (185.9) (153.9) (17.2) (6.9) (515.7) 9.2 Forex gain (expenses) 18.3 (0.9) (17.3) na na 7.2 (93.6) Other income/(expense) 16.6 1.8 0.6 (68.3) (96.5) 25.0 (592.0) Pretax profit (112.1) (150.5) (79.4) na na (253.9) na Taxation 16.0 40.6 (7.6) na na 38.7 (31.3) Minority Interest 2.3 3.9 2.6 (33.5) 10.0 6.2 120.9 Net profit (93.8) (106.4) (84.4) na na na (209.0) na na na BS & Ratio analysis 3Q16 2Q17 3Q17 9M17 2016 2017F 2018F Gross margin (%) 17.3 18.6 26.8 23.0 23.3 23.8 32.4 Operating margin (%) 3.7 5.2 12.3 10.3 9.6 12.4 22.6 Pretax margin (%) (22.7) (22.8) (10.7) (11.4) (13.2) (11.2) 3.3 Net margin (%) (19.0) (16.1) (11.4) (9.3) (15.3) (8.5) 2.5 Inventory days 56 47 44 41 (64) (42) (42) Receivable days 19 7 10 10 12.02 34 34 Payable days 93 55 65 61 (48) (84) (84) Total cash (IDRb) 472 48 51 51 129 46 64 Total debt (IDRb) 8,857 8,170 8,229 8,229 8,476 8,226 7,776 Net gearing (%) 134.6 135.0 137.9 137.9 135.9 139.6 129.8 Source: Company, Bloomberg, Bahana estimates Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report
Asia Pacific Daily | 63
Result Flash 27 October 2017
PX: IDR372 JCI: 5,975 BUY Sri Rejeki Isman TP/consensus: 73%
TP: IDR450 Michael W Setjoadi Mega Christina (Unchanged) E-mail: [email protected] E-mail: [email protected] Phone: +6221 250 5081 Ext. 3620 Phone: +6221 250 5081 Ext. 3623
SRIL 3Q17 results: Below our but in line with consensus estimates Exhibit 1. Company information Market cap (IDRt/USDb) : 6.9/0.5 Recommendation: Reiterate BUY with TP of IDR450 3M avg.daily t.o. (IDRb/USDm) : 158.5/11.6 Slightly lower-than-expected 3Q17 results were due to a short-term cost Bloomberg code : SRIL IJ Source: Bloomberg ;Note: closing prices as of 27 October 2017 inefficiency stemming from the newly operated garment line. Going forward, Exhibit 2. Shareholders information we expect a recovery in margins, especially with a weaker IDR/USD currency Huddleston Indonesia (%) : 56.0 (our house forecast calls for IDR13,000 in 2017F , and IDR12,500 in 2018F), Family (%) : 0.2 and maintain our BUY recommendation on SRIL with an IDR450 TP using a PER Est. free float (%) : 43.8 of 7.0x on 2018E EPS. Risks to our call: Potential related-party transactions Source: Bloomberg ;Note: closing prices as of 27 October 2017 that could show signs of poor corporate governance and changes in free-trade Exhibit 3. Key forecasts and valuations agreements that could adversely impact SRIL’s export sales. Year to 31 2015 2016 2017F 2018F Revenue 622 680 791 886 x 3Q17 revenue down 21.7% q-q, +33.9% y-y: SRIL recorded 3Q17 Net profit 56 59 73 87 revenue of USD172mn, down 21.7% q-q but up 33.9% y-y, in line with EPS (IDR) 41 43 53 63 our and consensus estimates, translating to 9M17 revenue of USD573mn, EPS growth 22.8 3.9 23.2 19.6 up 14.8% y-y. 9M17’s high revenue growth was mainly driven by new EPS mom. - - capacity installed in finishing and garments, as expected. We believe the P/E (x) 9.0 8.7 7.0 5.9 BVPS (IDR) quarterly number is not relevant at this stage due to the seasonality factor 205 239 289 347 PBV (x) 1.8 1.6 1.3 1.1 of Lebaran festivities shifting forward to 2Q17. DPS (IDR) 5.9 2.9 4.3 5.3 x Profitability drop mainly due to newly operated garment line: On Yield (%) 1.6 0.8 1.2 1.4 Source: Bloomberg, Bahana forecasts; Note: closing prices as the gross profit front, SRIL booked a lower 3Q17 gross profit of USD36mn, of 27 October 2017;revenue and net profit in USDmn -22.2% q-q and -27.4% y-y, translating to 9M17 gross profit of Exhibit 4. Relative share price performance USD123mn, up 18.0% y-y. The garment division saw a -1ppt GPM decline (%) (%) q-q and an -11.8ppt decline y-y to 28.0%. On the other hand, the 60 60 48.9 weaving segment saw a +1ppt q-q and +4ppt y-y gain in GPM to 19.0%. 50 47.7 47.3 50
x 3Q17 operating profit and net margin: On the operating profit front, 40 40
SRIL recorded an operating profit of USD30mn, -14.0% q-q but +33.2% 30 30 y-y, on the back of lower operating expenses of USD6mn (-47% q-q and - 20 18.1 20 5.2% y-y), translating to a 9M17 operating profit of USD99mn, up 24.1% 10 10 5.0 y-y. On the net profit front, 3Q17 net profit was at USD14mn, down 3.2 14.0% q-q and 24.9% y-y, bringing its 9M17 net profit to USD47mn, up 0 0 ytd 1M 3M 6M 9M 12M 5.2% y-y. SRIL’s net profit margin was 7.9%, up 0.7ppt q-q but down Source: Bloomberg Note: pricing as of 27 October 2017 6.3ppt y-y. Exhibit 5. SRIL IJ 3Q17 results summary q-q y-y 3Q17/ y-y 9M17/ 9M17/ (USDmn) 3Q16 2Q17 3Q17 (%) (%) 3Q17F 9M17 (%) 2017F Cons. Sales 128 221 172 (21.7) 33.9 92.6 573 14.8 72.4 75.1 Gross Profit 29 47 36 (22.2) 27.4 123 18.0 Operating expenses 6 12 6 (47.0) 5.2 24 (1.5) Operating profit 23 35 30 (14.0) 33.2 118.0 99 24.1 76.8 Net int. income/(expense) (1) (18) (14) (19.9) 1,023.5 (45) 64.1 Forex gain/ (expense) 1 (0) (0) - - (1) 98.0 Other income/ (expense) (1) 1 0 (81.0) (115.4) 1 134.3 Pretax profit 21 18 16 (10.4) (25.9) 54 3.5 Taxation (3) (2) (2) 23.1 (32.0) (7) (7.5) Net profit 18 16 14 (14.0) (24.9) 72.0 47 5.2 64.9 77.2 BS & Ratio analysis 3Q16 2Q17 3Q17 9M16 2016 9M17 2017F 2018F Gross margin (%) 22.4 21.2 21.2 20.9 21.4 21.5 21.4 21.8 Operating margin (%) 17.8 16.0 17.6 15.9 16.2 17.2 16.2 16.6 Pretax margin (%) 16.7 8.0 9.2 10.4 9.7 9.4 10.2 10.9 Net margin (%) 14.2 7.2 7.9 9.0 8.7 8.2 9.2 9.8 Inventory days 132 92 116 100 95 105 95 94 Receivable days 99 62 74 76 67 66 74 75 Payable days 11 9 7 8 6 7 4 4 Total cash (IDRb) 77 110 114 77 60 114 125 136 Total debt (IDRb) 499 632 601 499 568 601 610 610 Net gearing (%) 137.4 145.0 130.6 137.4 153.4 130.6 122.0 99.3 Source: Company, Bloomberg, Bahana forecasts
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report Asia Pacific Daily | 64 27 October 2017
Positive surprise from higher DPS
FY17A net profit at RM6,904m is below consensus but within our Results Note expectation, as it constitutes 91% and 99% of street and our forecasts respectively. The proposed final DPS of 44sen did, however, come as a positive surprise, as full-year DPS at 61sen is above the 51sen Tenaga consensus is expecting. We view the decision to pay out at the higher TNB MK end of the pay-out range as positive, as it indicates that management Sector: Utilities is confident that the ICPT mechanism will continue smoothly despite the uncertainty pending GE-14. RM14.34 @ 26 October 2017
Higher dividend payout reinforcing that ICPT is intact BUY (maintain) Apart from announcing a higher dividend for FY17A (pay-out ratio of 50%), Upside 15% the board has also decided to increase the current dividend pay-out range from the 30-50% currently to 30-60%. During the analyst call, management Price Target: RM16.50 also guided that the current pay-out is sustainable, indicating their Previous Target: RM16.50 confidence that the mechanism will continue, in our view. There could also (RM) be upside risk to our numbers, as our DPS is based on a 45-50% pay-out 16.00 ratio. 14.00 12.00
10.00 One-off in 3QFY17A impacted overall FY17A profitability 8.00 Net profit for the 4QFY17A is down 2.4% yoy, mainly due to a higher 6.00 4.00 effective tax rate for the quarter. However, net profit for FY17A is lower by 2.00 6.3% yoy as a result of a one-off cost in 3QFY17A coupled with the higher 0.00 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 tax rate. The one-off cost arose from the RM150m interest payment to the stabilisation fund, while the effective tax rate is expected to normalise at Price Performance around 20%, as the reinvestment allowance will be fully utilised by 2019. 1M 3M 12M The current effective tax rate is 16.5% for FY17A. Absolute -0.4% 0.8% 0.1% Rel to KLCI 1.2% 2.5% -3.5%
Maintain BUY and TP of RM16.50 Stock Data We are maintaining our BUY call on the stock, with an unchanged DCF- Issued shares (m) 5,659 based TP of RM16.50, as we believe that under the ICPT mechanism, the Mkt cap (RMm)/(US$m) 81,150/19,166 increase in fuel costs will be earnings neutral to TNB, supporting the Avg daily vol - 6mth (m) 8.3 current pay-out. We are not overly perturbed by the 1% yoy demand 52-wk range (RM) 13-14.8 Est free float 43.8% growth, due to exceptionally high demand in FY16 from the warmer BV per share (RM) 9.78 weather. TNB remains our country top pick. A major risk lies in any P/BV (x) 1.47 changes to the current ICPT mechanism. Net cash/ (debt) (RMm) (26,325) ROE (2018E) 12.2% Earnings & Valuation Summary Derivatives Nil FYE 31 Dec FY16A FY17A* 2017E 2018E 2019E Shariah Compliant Yes
Revenue (RMm) 44,531.5 47,416.9 12,379.2 47,339.7 48,739.2 EBITDA (RMm) 14,794.2 15,469.0 4,628.7 16,541.1 17,109.1 Key Shareholders Pretax profit (RMm) 8,066.8 8,281.8 2,544.4 9,197.5 9,628.7 Khazanah Nasional 28.2% Net profit (RMm) 7,367.6 6,904.0 2,372.6 7,540.7 7,370.4 Employees Provident Fund 11.8% EPS (sen) 130.5 122.3 42.0 133.6 130.6 Skim Amanah Saham 6.5% PER (x) 11.0 11.7 34.1 10.7 11.0 Kumpulan Wang Persaraan 5.5% Core net profit (RMm) 7,757.6 6,917.7 2,358.9 7,540.7 7,370.4 Source: Affin Hwang, Bloomberg Core EPS (sen) 137.5 122.6 41.8 133.6 130.6 Core EPS growth (%) 11.8 (10.8) (69.6) 9.0 (2.3) Core PER (x) 10.4 11.7 34.3 10.7 11.0 Ng Chi Hoong Net DPS (sen) 29.0 61.0 13.0 60.1 65.3 (603) 2146 7470 Dividend Yield (%) 2.0 4.3 0.9 4.2 4.6 [email protected] EV/EBITDA (x) 7.5 7.1 23.7 6.5 6.3
Chg in EPS (%) - (0.1) (0.1) Affin/Consensus (x) - - - Note: For FY16A and FY17A*, its financial year-ends are Aug 2015 and Aug 2016. For FY17E, the financial reporting is from Sept 2017 – Dec 2017 (4 months). Source: Company, Affin Hwang forecasts, Bloomberg
Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com Page 1 of 5
Asia Pacific Daily | 65 27 October 2017
Good foreign interest Company Update We recently hosted a roadshow for WCT in Singapore. There was good interest with WCT management meeting 7 foreign institutional investors. Most investors were surprised by the second proposed private placement of up to 10% of share capital. We understand the private placement was WCT Holdings proposed on concern that most of the outstanding WCT-WD warrants are WCTHG MK Sector: Construction & Infra not converted when it expires on 11 December 2017. WCT targets to reduce its net gearing to 0.5-0.6x from 0.85x currently, by mid-2018. We RM1.56 @ 26 Oct 2017 reiterate our BUY call with TP of RM2.46, based on 10% discount to RNAV.
Surprise private placement BUY (maintain) WCT’s proposed private placement of up to 140m new shares (10% of Upside: 58% share capital) came as a surprise to most investors. This was less than 7 months after raising RM178m from an earlier private placement of 100.5m Price Target: RM2.46 new shares at RM1.77 on 29 March 2017. Timing of issuance could be 2% Previous Target: RM2.46 of share capital by end-2017 and another 8% of share capital from April (RM) 2018 onwards at the earliest due to the limit of private placement issuance 2.50 equivalent to 10% of share capital within a year. At an indicative price of 2.00 RM1.73, WCT could raise up to RM240m in net proceeds. If the remaining WCT-WD warrants are exercised at RM1.71/share, raising about RM200m, 1.50 this could alleviate the need to issue shares under the private placement. 1.00
WCT REIT listing in mid-2018 0.50
WCT is scheduled to open its Paradigm Johor Bahru (JB) Mall on 28 0.00 November 2017 with tenants secured for about 83% of net lettable area Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 (NLA). WCT may consider injecting the mall into the proposed WCT REIT to Price Performance be listed in mid-2018, if the mall does well after opening. This could 1M 3M 12M potentially double the total asset size of the REIT to RM2bn. WCT is close to Absolute -9.4% -17.1% -7.7% completing negotiations with AEON to extend the BBT Mall lease for another Rel to KLCI -8.0% -15.8% -11.2% 5 years, potentially improving the yield on the asset. Stock Data Property sales pick up Issued shares (m) 1,406.7 WCT achieved RM228m sales for 9M17 with bookings worth RM49m Mkt cap (RMm)/(US$m) 2180.4/515.5 pending sales confirmation. However, WCT still has inventories of properties Avg daily vol - 6mth (m) 3.1 worth RM644m at end-2Q17, which could balloon to RM1bn due to 52-wk range (RM) 1.49-2.48 Est free float 66.7% construction completion by end-2017 if not sold. The company is pushing BV per share (RM) 2.16 sales by improving its marketing strategy and giving higher rebates. P/BV (x) 0.72 Net cash/ (debt) (RMm) (2Q17) (2,626.39) Maintain BUY ROE (2017E) 5.0% We believe the correction in the share price provides an opportunity to Derivatives Yes accumulate the stock in light of improving long-term prospects. WCT is one (Warr 12/17, WP RM0.27, EP RM1.71) (Warr 15/20, WP RM0.32, EP RM2.08) of our top sector BUYs with a 12M TP of RM2.46. Key risks to our positive Shariah Compliant Yes view would be slower property sales and construction execution risks.
Earnings & Valuation Summary Top 3 Key Shareholders FYE 31 Dec 2015 2016 2017E 2018E 2019E Dominion Nexus Sdn Bhd 17.6% Revenue (RMm) 1,667.9 1,933.6 2,277.4 2,828.7 2,800.9 EPF 8.0% EBITDA (RMm) 126.4 145.7 224.3 313.5 371.6 LTH 7.1% Pretax profit (RMm) 271.6 122.0 184.2 298.8 364.3 Net profit (RMm) 219.1 68.4 130.2 220.1 262.9 Source: Affin Hwang, Bloomberg EPS (sen) 13.9 5.2 8.7 13.2 15.6
PER (x) 13.3 35.5 21.2 14.1 11.9
Core net profit 72.3 58.6 151.3 220.1 262.9 Loong Chee Wei CFA Core EPS (sen) 5.5 4.6 10.0 13.2 15.6 (603) 2146 7548 Core EPS growth (%) (31.2) (16.0) 117.1 31.4 18.5 [email protected] Core PER (x) 33.7 40.1 18.5 14.1 11.9 Net DPS (sen) 6.0 2.0 4.0 4.0 4.0 Dividend Yield (%) 3.2 1.1 2.2 2.2 2.2 EV/EBITDA (x) 33.9 30.6 20.3 14.3 11.8 Chg in EPS (%) 0.0 0.0 0.0 Affin/Consensus (x) 0.9 1.3 1.4 Source: Company, Affin Hwang forecasts, Bloomberg
Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com Page 1 of 8
Asia Pacific Daily | 66
India Financials 27 October 2017
Yes Bank (YES IN)
Target price: INR380.00 (from INR420.00) Share price (26 Oct): INR331.70 | Up/downside: +14.6%
Strong quarter, masked by NPL-related divergence Punit Srivastava (91) 22 6622 1013 ¾ RBS exercise led to 4.2% additional NPLs, 81% of this addressed [email protected] ¾ Strong loan book, fee income and CASA growth, stable NIM Meghna Luthra (91) 22 6622 1016 ¾ Reiterating our Buy (1) call; lowering TP by 10% to INR380 [email protected]
What's new: YES Bank reported strong 25% YoY growth in net profit in 2Q Forecast revisions (%) FY18, driven by 35% YoY growth in its loan book, stable NIM QoQ of 3.7%, Year to 31 Mar 18E 19E 20E 35% YoY growth in non-interest income and 51% YoY growth in CASA. PPOP change (2.2) (4.5) (4.6) Net profit change (4.8) (6.3) (5.2) However, the RBI’s risk-based supervision (RBS) exercise for F17 led to Core EPS (FD) change (5.0) (6.6) (5.6) INR63.6bn of additional NPLs for the bank over and above its reported Source: Daiwa forecasts NPLs for FY17, leading to a deterioration in asset quality. Despite the rise in NPLs, management said it aims to keep its credit cost within the earlier Share price performance guided range of 50-70 bps for FY18. (INR) (%) 380 130 What's the impact: Gross NPLs increased 99% QoQ and the gross NPL 340 120 300 110 ratio was up 85bps to 1.82%. The results of the RBS exercise conducted 260 100 by the RBI for FY17 were provided to the bank in October 2017, which 220 90 resulted in a total divergence of INR64bn in NPLs (difference between YES Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Bank’s reported NPLs and the RBI assessed NPLs for FY17). Of the total Yes Bank (LHS) Relative to SENSEX Index (RHS) amount of divergence in NPLs, around 81% has been already repaid, sold or classified as standard, with the remaining 19% downgraded to the NPL 12-month range 220.30-377.00 category during 2Q FY18. However, around 47% of the NPLs downgraded Market cap (USDbn) 11.72 by RBI in its RBS exercise were upgraded by the bank in Q2 FY18 to 3m avg daily turnover (USDm) 30.90 Shares outstanding (m) 2,291 standard loans. However, we remain watchful with regards to these 47% of Major shareholder Promoters (20.1%) loans as there is a risk that the RBI may not agree with the upgrades. The bank has been reporting a high amount of RBS-related divergence in its Financial summary (INR) gross NPLs in the past 3 years (FY15-17). However, it is encouraging to Year to 31 Mar 18E 19E 20E note that of the total RBS-related divergence amount in NPLs of Total operating income (m) 130,059 165,884 208,934 INR105.5bn over FY15-17, 71% has been already recovered by the bank Pre-provision operating profit(m) 76,183 93,866 116,569 Net profit (m) 42,097 53,570 67,920 or upgraded to standard loans, 13% sold to asset reconstruction Core EPS (fully-diluted) 18.411 23.386 29.650 companies (ARC) and only 16% has so far become NPLs. We lower our EPS change (%) 21.2 27.0 26.8 net profit for FY18-20E by 5-6% largely due to lower NII growth and the Daiwa vs Cons. EPS (%) (0.9) 0.1 (0.8) PER (x) 18.0 14.2 11.2 higher provisions that we now expect. Dividend yield (%) 0.9 1.2 1.4 DPS 2.900 3.900 4.800 What we recommend: We lower our 12-month TP to INR380 (from PBR (x) 3.1 2.6 2.2 INR420) and now value the stock using a PER of 3.2x (from 3.5x) applied ROE (%) 18.2 19.9 21.3 to our average FY18-19E EPS, based on our Gordon Growth Model. Our Source: FactSet, Daiwa forecasts lower target PBR is largely due higher provisions that we now expect over FY18-19E. However, we remain positive on the bank’s overall financial performance and reiterate our Buy (1) call. The key risk to our call: higher- than-expected increase in NPLs in FY18.
How we differ: The market may have asset quality concerns linked to the bank’s large corporate loan book and RBS-related asset quality divergence. However, the bank has historically demonstrated the capability to keep its NPLs low even in the worst economic environment. We believe that the bank has the potential to re-rate, once the RBS-related divergence issue subsides, likely in the next 6 months.
See important disclosures, including any required research certifications, beginning on page 5
Asia Pacific Daily | 67
Yes Bank (YES IN): 27 October 2017
Yes Bank: 2Q FY18 results summary Particulars (INRm) 2Q FY18 2Q FY17 YoY, % 1Q FY18 QoQ, % Interest income 48,003 40,604 18.2 46,538 3.1 Interest expense 29,153 26,482 10.1 28,449 2.5 Net interest income 18,851 14,122 33.5 18,089 4.2 Non-interest income 12,484 9,219 35.4 11,322 10.3 -Financial markets 3,518 2,992 17.6 3,221 9.2 -Financial advisory 4,768 3,097 54.0 4,108 16.1 -Transaction banking 1,439 1,034 39.2 1,352 6.4 -Retail banking fees and others 2,718 2,096 29.7 2,589 5.0 Net total income 31,335 23,340 34.3 29,411 6.5 Operating expenses 12,269 9,481 29.4 12,369 -0.8 Pre-provisioning profit 19,067 13,860 37.6 17,042 11.9 Provisions & contingencies 4,471 1,617 176.5 2,858 56.4 Profit before tax 14,596 12,243 19.2 14,184 2.9 Tax 4,569 4,228 8.1 4,529 0.9 Net profit 10,027 8,015 25.1 9,655 3.9 Yields & margins (%) Yield on advances 10.20 10.90 -70bps 10.40 -20bps Cost of funds 6.10 6.80 -70bps 6.20 -10bps Net interest margin 3.70 3.40 30bps 3.70 0bps Cost to income ratio 39.15 40.62 -147bps 42.06 -290bps Asset quality Gross NPLs 27,203 9,167 196.8 13,644 99.4 -Gross NPLs (%) 1.82 0.83 99bps 0.97 85bps Net NPLs 15,433 3,230 377.8 5,453 183.0 -Net NPLs (%) 1.04 0.29 75bps 0.39 65bps Fresh slippages (INRm) 19,890 3,015 559.7 2,010 889.6 Provisioning coverage (%) 43.3 64.8 -2150bps 60.0 -1670bps Capital adequacy (%) Tier-I 13.2 10.1 310bps 13.8 -60bps CAR 17.8 15.0 280bps 17.6 20bps Balance sheet (INRbn) Advances 1,487 1,102 34.9 1,400 6.2 Deposits 1,580 1,280 23.4 1,502 5.2 CASA (%) 37.2 30.3 690bps 36.8 40bps
Source: Company
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Asia Pacific Daily | 68
Yes Bank (YES IN): 27 October 2017
Financial summary Key assumptions Year to 31 Mar 2013 2014 2015 2016 2017 2018E 2019E 2020E Loan growth (YoY%) 23.7 18.4 35.8 30.0 34.7 28.0 27.0 25.0 Deposit growth (YoY%) 36.2 10.8 22.9 22.5 27.9 26.8 28.7 30.0 Average yield on advances (%) 12.7 12.7 12.2 11.2 10.6 10.4 10.3 10.5 Average cost of deposits (%) 7.9 8.0 7.9 7.1 6.4 5.8 5.9 5.9
Profit and loss (INRm) Year to 31 Mar 2013 2014 2015 2016 2017 2018E 2019E 2020E Net-interest income 22,188 27,163 34,878 45,667 57,973 79,415 101,675 129,127 Net fees & commission 10,762 12,609 19,765 24,592 31,400 39,249 50,239 63,804 Trading and other income 1,812 4,607 700 2,530 10,178 11,395 13,969 16,003 Net insurance income 0 0 0 0 0 0 0 0 Total operating income 34,762 44,378 55,343 72,789 99,551 130,059 165,884 208,934 Personnel expenses (6,555) (7,844) (9,797) (12,968) (18,050) (23,827) (31,451) (39,628) Other expenses (6,790) (9,655) (13,051) (16,796) (23,115) (30,050) (40,567) (52,737) Total expenses (13,345) (17,499) (22,847) (29,764) (41,165) (53,876) (72,018) (92,365) Pre-provision operating profit 21,417 26,880 32,496 43,025 58,385 76,183 93,866 116,569 Total provision (2,160) (3,617) (3,395) (5,363) (7,934) (12,361) (13,755) (16,036) Operating profit after prov. 19,257 23,263 29,101 37,662 50,451 63,822 80,111 100,533 Non-operating income 0 0 0 0 0 0 0 0 Profit before tax 19,257 23,263 29,101 37,662 50,451 63,822 80,111 100,533 Tax (6,251) (7,085) (9,048) (12,268) (17,140) (21,725) (26,541) (32,613) Min. int./pref. div./other items 0 0 0 0 0 0 0 0 Net profit 13,007 16,178 20,053 25,394 33,311 42,097 53,570 67,920 Adjusted net profit 13,007 16,178 20,053 25,394 33,311 42,097 53,570 67,920 EPS (INR) 7.311 8.997 10.305 12.118 15.193 18.411 23.386 29.650 EPS (adjusted) (INR) 7.311 8.997 10.305 12.118 15.193 18.411 23.386 29.650 EPS (adjusted fully-diluted) (INR) 7.311 8.997 10.305 12.118 15.193 18.411 23.386 29.650 DPS (INR) 1.200 1.600 1.800 2.000 2.400 2.900 3.900 4.800
Change (YoY %) Year to 31 Mar 2013 2014 2015 2016 2017 2018E 2019E 2020E Net-interest income 37.3 22.4 28.4 30.9 26.9 37.0 28.0 27.0 Non-interest income 46.7 36.9 18.9 32.5 53.3 21.8 26.8 24.3 Total operating income 40.6 27.7 24.7 31.5 36.8 30.6 27.5 26.0 Total expenses 43.1 31.1 30.6 30.3 38.3 30.9 33.7 28.3 Pre-provision operating profit 39.1 25.5 20.9 32.4 35.7 30.5 23.2 24.2 Total provisions 139.4 67.5 (6.1) 58.0 47.9 55.8 11.3 16.6 Operating profit after provisions 32.8 20.8 25.1 29.4 34.0 26.5 25.5 25.5 Profit before tax 32.8 20.8 25.1 29.4 34.0 26.5 25.5 25.5 Net profit (adjusted) 33.1 24.4 24.0 26.6 31.2 26.4 27.3 26.8 EPS (adjusted, FD) 31.0 23.1 14.5 17.6 25.4 21.2 27.0 26.8 Gross loans 23.5 18.5 35.9 29.7 34.9 28.1 27.0 25.0 Deposits 36.2 10.8 22.9 22.5 27.9 26.8 28.7 30.0 Total assets 34.5 10.0 24.9 21.4 29.7 24.0 25.6 26.4 Total liabilities 35.2 9.2 22.2 21.7 27.4 24.9 26.5 27.1 Shareholders' equity 24.2 22.6 64.0 18.0 55.2 15.9 17.3 18.8 Avg interest-earning assets 29.1 20.6 18.3 22.2 24.3 25.4 24.1 23.4 Avg risk-weighted assets 25.3 20.6 25.1 31.3 35.1 29.6 23.6 23.3 Source: FactSet, Daiwa forecasts
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Yes Bank (YES IN): 27 October 2017
Financial summary continued … Balance sheet (INRm) As at 31 Mar 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & equivalent 40,658 58,917 75,572 82,184 188,901 207,791 228,571 251,428 Investment securities 429,760 409,504 466,052 488,385 500,318 575,366 719,207 827,088 Net loans and advances 469,996 556,330 755,498 982,099 1,322,627 1,692,962 2,150,062 2,687,578 Fixed assets 2,296 2,935 3,190 4,707 6,835 7,519 8,271 9,098 Goodwill 0 0 0 0 0 0 0 0 Other assets 48,332 62,472 61,392 95,259 125,325 175,601 234,904 447,635 Total assets 991,041 1,090,158 1,361,704 1,652,634 2,144,006 2,659,239 3,341,015 4,222,827 Customers deposits 669,556 741,920 911,759 1,117,195 1,428,739 1,811,858 2,332,664 3,032,464 Borrowing 141,483 145,429 194,282 208,966 252,535 303,041 363,650 418,197 Debentures 67,738 67,714 67,922 107,624 133,532 152,360 174,071 202,097 Other liabilities 54,187 63,877 70,942 80,983 115,253 143,917 179,752 224,510 Total liabilities 932,965 1,018,940 1,244,904 1,514,768 1,930,059 2,411,177 3,050,138 3,877,268 Share capital 3,586 3,606 4,177 4,205 4,565 4,581 4,581 4,581 Reserves & others 54,491 67,611 112,623 133,661 209,383 243,481 286,295 340,977 Shareholders' equity 58,077 71,217 116,800 137,866 213,947 248,063 290,877 345,559 Minority interests 00000000 Total equity & liabilities 991,041 1,090,158 1,361,704 1,652,634 2,144,006 2,659,239 3,341,015 4,222,827 Avg interest-earning assets 817,514 985,970 1,166,873 1,425,730 1,772,806 2,222,461 2,757,387 3,402,156 Avg risk-weighted assets 596,075 719,146 899,996 1,181,288 1,595,927 2,068,263 2,557,379 3,154,101 BVPS (INR) 32.389 39.496 55.920 65.568 93.736 108.291 126.982 150.853
Key ratios (%) Year to 31 Mar 2013 2014 2015 2016 2017 2018E 2019E 2020E Loan/deposit 70.0 74.9 82.8 87.7 92.5 93.4 92.2 88.6 Tier-1 CAR 9.5 9.8 11.5 10.7 13.3 12.5 11.5 11.0 Total CAR 18.3 14.4 15.6 16.5 17.0 17.0 16.0 15.5 NPLs/gross loans 0.2 0.3 0.4 0.8 1.5 2.1 1.8 1.5 Total loan-loss prov./NPLs 92.6 85.1 72.0 62.0 46.9 48.0 55.0 60.0 ROAA 1.5 1.6 1.6 1.7 1.8 1.8 1.8 1.8 ROAE 24.8 25.0 21.3 19.9 18.9 18.2 19.9 21.3 Net-interest margin 2.7 2.8 3.0 3.2 3.3 3.6 3.7 3.8 Gross yield 10.1 10.1 9.9 9.5 9.3 9.0 9.2 9.5 Cost of funds 8.0 7.9 7.6 6.9 6.5 6.0 5.9 6.0 Net-interest spread 2.1 2.2 2.3 2.6 2.7 3.1 3.3 3.5 Total cost/total income 38.4 39.4 41.3 40.9 41.4 41.4 43.4 44.2 Effective tax 32.5 30.5 31.1 32.6 34.0 34.0 33.1 32.4 Dividend-payout 16.4 17.8 17.5 16.5 15.8 15.8 16.7 16.2 Source: FactSet, Daiwa forecasts
Company profile
Yes Bank is a private-sector bank with total assets of INR2,374bn as at the end of September 2017. Established in 2004, it is a new private-sector bank, as classified by the Reserve Bank of India. The bank has 1,040 branches across India. It is primarily a wholesale bank catering to the lending needs of corporates.
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Japan Electric appliances 27 October 2017 Japanese report: 27 October 2017
Fanuc (6954)
Target price: Y25,000 (from Y25,000 as of 31 Jul)
Share price (26 Oct): Y25,075 | Up/downside: -0.3% Neutral (unchanged)
May take until 2018 to see benefits from added capacity
¾ Jul-Sep orders lacked punch Hirosuke Tai 81-3-5555-7069 ¾ Eyes for now on whether added capacity leads to order growth [email protected] ¾ Robodrill orders peaked; competition intensifying in industrial robots Daiwa Securities Co. Ltd.
What’s new: On 26 October, Fanuc held an analyst meeting about 2Q Share Price Chart FY17 results as well as a tour to its new plant in Mibu, Tochigi Prefecture, for computer numerical control (CNC) systems. In short, the events offered nothing beyond the scope of our expectations. Regarding 2Q earnings, however, orders lacked punch, apparently due to (1) production capacity constraints, (2) an end to the recent round of front-loaded order placements by customers, and (3) a peak-out in demand for certain products. From the second half of 2018, Fanuc will begin utilizing the capacity currently being added in full gear. This signals a rise in Source: Compiled by Daiwa. fixed-cost burdens, which we view as a risk to earnings if demand for the Market data firm s offerings is found to be weak around that time. ’ 12-month range (Y) 17,790-26,760
Market cap (Y mn; 26 Oct) 4,860,772 What's the impact: For 2Q, orders came to Y170.6bn, up 33% y/y but Shares outstanding (000; 10/17) 193,849 down 14% q/q. The q/q drop owed to seasonality as well as a peak-out in Foreign ownership (%; 3/17) 53.9 Robodrill demand from smartphone industry customers. The 2Q order figure was in fact below the 2Q sales figure of Y179.1bn. By segment, orders were Investment Indicators up 40% y/y (down 13% q/q) in FA, up 13% (down 12%) in robots, up 84% 3/17 3/18 E 3/19 E (down 27%) in robomachines, and up 13% (up 7%) in service. Meanwhile, P/E (X) 38.1 27.1 25.9 orders were helped by those from customers in Asia (incl. China, Taiwan, S. EV/EBITDA (X) 22.7 16.3 15.4 Korea) as well as machine tool industry customers in Japan. P/B (X) 3.57 3.32 3.19 Dividend yield (%) 1.58 2.22 2.31 We nudged up our earnings estimates for FY17-18, in part reflecting ROE (%) 9.5 12.7 12.5 changes to our currency assumptions. While we continue to assume Net debt/equity (X) -0.6 -0.5 -0.5
Y110/$ for 2H FY17 and beyond, we now call for Y130/€ (previously Income Summary
Y125/€). Our new FY17 forecasts are sales of Y700bn (up 30% y/y; (Y mn) 3/17 3/18 E 3/19 E previously Y677bn) and operating profit of Y220bn (up 44%; Y200bn). For Sales 536,942 700,000 715,000 FY18, we now expect sales of Y715bn and operating profit of Y230bn. Our Op profit 153,217 220,000 230,000 view is unchanged that FY18 will see only modest y/y growth in profits on a Rec profit 168,829 240,000 251,000 consolidated basis due to a fall in Robodrill sales to smartphone industry Net income 127,697 179,500 187,500 customers. EPS (Y) 658.6 926.0 967.2 DPS (Y) 395.18 555.59 580.35
What we recommend: We retain our 3 (Neutral) investment rating. The See end of report for notes concerning indicators. shares are now trading at around 26X our FY18 EPS estimate (around 22X on basis excl. liquidity on hand) and around 3.2X our estimate of end-FY18 book value. Note that our target price calculations for Fanuc have employed asset-based valuations, which are less volatile than earnings-driven indicators. Although we previously afforded a fair P/B multiple of around 3.5X to the stock, we see limited upside from the current price. Thus, we reiterate our 12-month target price of Y25,000.
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
Asia Pacific Daily | 71
Japan Pharmaceuticals 27 October 2017 Japanese report: 27 October 2017
JCR Pharmaceuticals (4552)
Target price: Y4,000 (as of 21 Sep) Share price (26 Oct): Y3,705 | Up/downside: +8.0% Outperform (not reviewed)
New drug development using J-Brain Cargo
¾ 1H profit overshot on under-budget spending; TEMCELL sluggish Kazuaki Hashiguchi 81-3-5555-7158 ¾ Joint research for J-Brain Cargo looks to have made strides [email protected] ¾ Starting clinical development of new Hurler Syndrome treatment Daiwa Securities Co. Ltd.
What's new: JCR Pharmaceuticals (JCR) announced 2Q FY17 results after the market closed on 26 October.
1Q FY16 1H 1-3Q 16 1Q 17 1H 1H CP 17 CP 17 PCP 17 E 17 CE Sales (Y mn) 3,801 8,534 13,100 18,085 4,386 10,187 10,300 20,400 19,800 19,900 19,946 Operating profit (Y mn) 362 1,370 1,858 2,362 609 2,447 1,840 3,500 2,640 2,770 2,816 Recurring profit (Y mn) 374 1,363 1,939 2,534 628 2,469 1,840 3,530 2,650 2,780 2,872 Net income (Y mn) 279 1,022 1,416 1,863 495 1,881 1,340 2,650 1,970 2,070 2,139 DPS (Y) - 10.00 - 22.00 - 12.00 11.00 24.00 22.00 24.00 - E: Daiwa estimates. CP: Company projections. PCP: Previous company projections. CE: Consensus estimates (IFIS). Note: IFIS consensus data obtained after market close on 25 Oct.
Results overview: Sales of TEMCELL, a treatment for acute graft-vs.-host Share Price Chart disease (acute GVHD), fell short of the company target but sales of human growth hormone Growject and other products overshot. Profit beat company expectations thanks to stronger-than-anticipated showings by high-margin drugs and SG&A coming in under budget. TEMCELL sales were also weaker than we had forecast, but profits were better than we anticipated due to below-budget SG&A outlays. Sluggish sales for TEMCELL, which we had expected driving growth for the time being, were disappointing. Source: Compiled by Daiwa.
Market data Outlook: JCR has upgraded its full-FY17 projections. It lowered its targets 12-month range (Y) 2,133-3,950 for TEMCELL, while raising those for Growject and other products. In light of Market cap (Y mn; 26 Oct) 113,879 progress with joint research of J-Brain Cargo, the proprietary BBB Shares outstanding (000; 10/17) 30,737 (blood-brain-barrier) penetration technique, the firm looks to have lifted its Foreign ownership (%; 3/17) 30.1 projection for contract fee income. The revised sales target looks slightly ambitious. Even so, the firm could very well achieve the new profit Investment Indicators targets should SG&A spending come in under budget in 2H as well. 3/17 3/18 E 3/19 E Along with the earnings release, the firm announced it has decided to P/E (X) 62.9 56.5 53.7 initiate clinical development of a treatment for Hurler Syndrome leveraging EV/EBITDA (X) 28.6 26.9 26.0 J-Brain Cargo. It said an animal study showed rather promising results. This P/B (X) 4.28 4.08 3.90 decision likely reflects steady headway with Phase I/II trials of JR-141, an Dividend yield (%) 0.59 0.65 0.70 enzyme preparation for treating a similar disease, Hunter Syndrome, and ROE (%) 6.9 7.4 7.4 developed under the same concept. The firm is likely to unveil some data Net debt/equity (X) -0.0 -0.1 -0.1 from Phase I/II trials of JR-141 at the 2Q results briefing scheduled for Income Summary
the morning of 1 November. If the data turns out to be favorable, market (Y mn) 3/17 3/18 E 3/19 E expectations may rise even further for earnings contributions from JR-141 Sales 18,085 19,900 20,700 and J-Brain Cargo. Op profit 2,362 2,770 2,920 Rec profit 2,534 2,780 2,930 Net income 1,863 2,070 2,180 EPS (Y) 58.9 65.5 69.0 DPS (Y) 22.00 24.00 26.00
See end of report for notes concerning indicators.
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
Asia Pacific Daily | 72 US Automobile Daiwa Capital Markets America Inc. 26 October 2017
Ford Motor (F)
Target price: $12 (from $11 as of 26 July) Share price (25 Oct): $12.04 | Up/downside: -0.3% Neutral (unchanged)
NA Price/Cost Dynamics Key As Product Pace Weakens
¾ 3Q:17 upside driven by stronger pricing and cost performance in NA Jairam Nathan, CFA +1-212-612-6181 ¾ Improvement in used car values buoy Ford Credit outlook for 2017 [email protected] Daiwa Capital Markets America ¾ Lack of product help in NA and UK market conditions key risks for 2018
What's new: Before market open on October 26th, Ford reported 3Q:17 Share Price Chart non-GAAP EPS of $0.43, better than our $0.35 estimate and consensus (USD) (%) 19 110 estimate of $0.33. All of the upside was driven by better-than-expected 18 100 performance in North America. The company tightened 2017 EPS guidance 17 90 range higher to $1.75-$1.85 from $1.65-$1.85. We are raising our 2017 and 15 80 2018 EPS estimates to $1.90 and $1.75 from $1.80 and $1.65 prior. 14 70 13 60
11 50 Results overview: Pre-tax profit totaled $2 billion for the quarter compared 10 40 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 to $1.4 billion a year ago and our expectation of $1.6 billion. The upside F F Relative To S&P500 (RHS) against our expectations was driven by North America (NA), which saw strong pricing and cost performance. The yoy cost performance was helped Source: Datastream, Compiled by DCMA by the absence of a large recall charge that impacted 3Q:16. Profits at Market data AsiaPac were also above expectations, as Ford continued to improve 12-month range ($) 10.47 - 13.27 operations in Asia, ex-China. China joint venture (JV) income was down yoy Market Cap ($ mn; 25 Oct) 46,973 due to negative pricing, volume and mix. Ford’s European operation under- Shares Outstanding (mn, 10/17) 3,901 performed expectations on weaker cost performance. Investment Indicators 12/16 12/17E 12/18E Ford burnt $1.6 billion in free cash flow by our calculation. Capex was about P/E (X) 6.8 6.3 6.9 $300 million more than D&A. However, the outflow was driven by a working EV/EBITDA (X) 4.0 4.8 5.3 P/B (X) 1.6 1.4 1.3 capital increase and expense timing that were a drag of $3 billion. Ford Dividend Yield (%) 7.1 5.4 5.0 ROE (%) 24.4 24.1 19.4 expects these to reverse in 4Q:17. Net debt/equity (X) 0.5 0.5 0.4
Outlook: Ford tightened 2017 EPS guidance range higher to $1.75-$1.85 Income Summary from $1.65-$1.85. We are raising our 2017 EPS estimate to $1.90 from ($ mn) 12/16 12/17E 12/18E Sales (auto only) 141,546 144,920 145,078 $1.80 prior to reflect the 3Q:17 EPS beat and stronger performance in Ford Pretax Income 10,375 8,964 10,076 Net Income 7,054 7,593 7,028 Credit. Our pre-tax profit estimate for 4Q:17 imply a 5% yoy increase in auto EPS ($) 1.76 1.90 1.75 pre-tax profit and is led by a smaller loss in South America. For 2018, we DPS ($) 0.85 0.65 0.60 model auto pre-tax profit increasing 16%, led by improvements in South Source: Bloomberg, Company materials, DCMA estimates America and AsiaPac (ex-China). We expect China JV income to decline, in Non-GAAP basis See end of report for notes concerning indicators 2018 as pricing pressure could intensify with a rise in vehicle tax rates. Despite higher pre-tax income, a return to 30% tax rate from 15% in 2017 drives a reduction in EPS. Ford upgraded its outlook for Ford Credit as used car prices have rebounded. Management now expects used car auctions values to decline only 3% yoy going forward compared to 6% prior.
What we recommend: We are maintaining our 3/Neutral rating but raising our target to $12 from $11 to reflect higher 2018 EPS estimate and Ford Credit book value. Our $12 target assigns equal weights to a $12 P/E-based valuation (7x 2018 EPS estimate of $1.75) and $12 free cash flow valuation. The latter assumes $2.2 billion in free cash generation across a cycle for the auto business and value Ford Credit at forward book value of $4 per share. Our target and rating assume that the S&P500 remains unchanged over the next 12 months.
This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Capital Markets America retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent. For important company disclosure information please go to the link below. Disclaimer: https://daiwa3.bluematrix.com/sellside/Disclosures.action Asia Pacific Daily | 73 US Information Technology Daiwa Capital Markets America Inc. 26 October 2017
Intel (INTC)
Strong Q3 results and Q4 outlook ¾ Beat & raise quarter largely driven by CCG strength & lower spending Deepak Sitaraman, CFA +1-212-612-6115 ¾ DCG outlook unchanged at “high-single digit” revenue growth in 2017 [email protected] Daiwa Capital Markets America ¾ Full year 2017 op. income/ EPS outlook raised by 5%/8% respectively
What's new: Intel reported Q317 revenue of $16.1bn (+9.4% q/q and +2.4% y/y, +6% y/y ex-McAfee) ahead of consensus & guidance of $15.7bn Current rating 3 (Neutral) (-0.5% y/y). Non-GAAP EPS of $1.01 beat consensus/guidance of $0.80. Share price ($; 26 Oct) $41.35 Q4 revenue/EPS guidance of $16.3bn/$0.86 is ahead of prior consensus of $16.1bn/$0.83 and the full year guide for 2017 now stands at $62.0bn/$3.25, up from $61.3bn/$3.00 previously, with $0.11 of the $0.25 upside driven by non-operating items.
Results overview: Revenue & EPS beat: Relative to segments, strength in the quarter was driven by CCG, IoTG, NSG and PSG while DCG revenue was largely in-line.
Details: Client Computing Group in-line (CCG): Revenue of $8.9bn (55% of total revenue) grew 8% q/q with units +5% q/q and ASPs +1% q/q – on a y/y basis, units /ASPs were -7%/+7% respectively. The impact of a declining PC market was offset by growth in the modem business (iPhone) and other adjacencies. CCG operating margins of 40.6% were +380bps q/q driven by lower unit costs and spending reductions.
Data Center Group upside (DCG): Revenue of $4.9bn (30% of total revenue) grew 11.6% q/q (+7.4% y/y) on units +10 q/q and flat ASPs q/q – on a y/y basis, volumes/ASPs were +4%/ +2% respectively. Within DCG, Cloud, Comm.SP and adjacencies (networking) grew +24%/+9%/+16% y/y while Enterprise was -6% y/y (versus –11% in Q2). DCG operating margins rebounded to 46.2%, +824bps q/q and were down 23bps y/y. Management continues to expect DCG OMs to be in the 40-45% range LT.
Better gross margin & lower opex: Q3 GM of 63.9% (+98 bps q/q) was slightly above the mid-point of guidance of 63.0% with higher ASPs, lower unit costs and volume leverage offsetting unfavorable mix (growth in memory & modems), higher engineering costs into Q4 and the impact of changes made to customer co-marketing programs. Core non-GAAP opex of $4.8bn (-6.9% q/q) was better than guidance of ~$5.1bn and drove operating income to $5.5bn versus guidance of $4.8bn.
Outlook: Q4 and 2017 outlook better. Q417 revenue /EPS guidance of $16.3bn (+1% q/q%)/ $0.86 is above consensus of $16.1bn/$0.83. Management now expects full year 2017 revenue/EPS of $62.0bn/$3.25 versus prior guidance of $61.3bn/$3.00. Looking out, management reiterated their commitment to lower spending to 30% of revenue by “at least 2020”, down from 34% YTD in 2017. The outlook for 2017 capital spending was lowered to $11.5bn from $12.0bn.
What we recommend: While Q3 results and the Q4 outlook are solid, we note that strength is largely being driven by CCG (stable PCs & better modem) and lower spending. Accelerating DCG growth would make us incrementally more positive.
This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Capital Markets America retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent. For important company disclosure information please go to the link below. Disclaimer: https://daiwa3.bluematrix.com/sellside/Disclosures.action Asia Pacific Daily | 74 US Transportation Daiwa Capital Markets America Inc. 26 October 2017
United Parcel Service (UPS)
Growth Investment Acceleration Calls For Muted 2018 ¾ 3Q:17 EPS in-line with expectations, 2017 guidance raised marginally Jairam Nathan, CFA +1-212-612-6181 ¾ US domestic margins hurt by weather issues, growth capacity initiatives [email protected] Daiwa Capital Markets America ¾ Management tempering expectations for margin expansion in 2018
What's new: Before market open on October 26th, UPS reported 3Q:17 EPS of $1.45, largely in-line with consensus estimate of $1.45 and our Current rating 3 (Neutral) expectation of $1.47, despite a $50 million hit from weather-related issues. Share price ($; 26 Oct) 119.33 The company raised the lower end of its outlook for an EPS range of $5.85-$6.10 compared to $5.80-$6.10 prior. UPS plans to open 5 million sq. ft. of building capacity in 2018 compared to 1 million in 2017.
Results overview: UPS reported 3Q:17 revenue of $16 billion, which was up 7% yoy, led by a 4.6% increase in average daily volumes and 2.7% increase in yield. Revenue grew by 11% in International packages, 4% in Domestic and 13% in Supply Chain and Freight (SC&F) segment. Key drivers of volume increase were 19% growth in export package volume, 8% growth in next-day air and 6% growth in less-than-truckload (LTL) weight hauled. Operating income for the quarter totaled $2 billion, flat yoy while margins declined 90bps to 12.7%. The chart below shows revenue and operating margin by segment.
Chart 1: UPS Quarterly Performance By Segment Revenue (in millions) Operating Margin Segment 3Q:16 2Q:17 3Q:17 3Q:17PE 3Q:16 2Q:17 3Q:17 3Q:17PE U.S. Domestic Package $9,289 $9,745 $9,649 $10,000 13.5% 14.3% 12.2% 13.2% International Package 3,024 3,163 3,364 3,110 19.0% 18.4% 18.6% 16.7% Supply Chain & Freight 2,615 2,842 2,965 2,903 7.9% 8.4% 7.6% 8.1% Total 14,928 15,750 15,978 16,013 13.6% 14.1% 12.7% 13.0% Source: Company reports; compiled by DCMA; PE: DCMA estimate prior to earnings release Domestic segment margins declined 130bps yoy, reflecting $50 million in negative hurricane impact and another $40 million in start-up costs related to capacity expansion projects and deployment of Saturday delivery. International segment margins contracted 40 bps, led by the absence of $62 million in currency hedge benefits last year. Margins would have expanded 150bps on a currency neutral basis. Supply Chain & Freight margins declined 30 bps despite a 9% increase in operating profit dollars and reflects the changing mix of revenue.
Outlook: UPS revised its 2017 EPS outlook to $5.85-$6.10 from $5.80-$6.10. 4Q:17 results will be impacted by $100 million ($0.07/share) in lack of currency hedging benefits and yoy comparisons will be unfavorable due to a $0.05 tax benefit reported in 4Q:16. In light of the significant increase in the pace of capacity buildout in 2018, the company raised its capex outlook to 8% of sales from 6%-7% prior. Our 2017 EPS estimate of $5.95 implies 7% revenue growth and 50bps of margin contraction in 4Q:17. Our 2018 EPS estimate of $6.40 is based on mid-single digit revenue growth and assumes margins stabilizing in 2018.
What we recommend: UPS’s aggressive capacity expansion plan could preclude domestic segment margins from stabilizing in 2018. Our Neutral rating reflects limited potential for stock outperformance as margins remain under pressure and capital intensity remains elevated.
This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Capital Markets America retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent. For important company disclosure information please go to the link below. Disclaimer: https://daiwa3.bluematrix.com/sellside/Disclosures.action Asia Pacific Daily | 75 US 26 October 2017 Financials Daiwa Capital Markets America Inc.
Visa (V)
Guiding for FY18 EPS growth at high end of mid-teens ¾ FY17 results topped company targets Takahiro Yano, CFA +1-212-612-6110 ¾ Almost 100% of profit returned to shareholders [email protected] Daiwa Capital Markets America ¾ FY17 results, FY18 outlook both robust, in our view
What's new: Visa announced earnings for 4Q FY17 (year ended Sep 2017). On top of strong results, the firm also presented an upbeat outlook for FY18, leaving a positive impression.
㻳㻭㻭㻼 㻠㻽㻝㻢 㻝㻽㻝㻣 㻞㻽㻝㻣 㻟㻽㻝㻣 㻠㻽㻝㻣 㼥㼛㼥 㼝㼜㼝 㻠㻽㻝㻣㻌㻯㼛㼚㼏㼑㼚㼟㼡㼟 㻺㼑㼠㻌㼛㼜㼑㼞㼍㼠㼕㼚㼓㻌㼞㼑㼢㼑㼚㼡㼑 䠄㻐㻌㻹㼕㼘䠅 㻠㻘㻞㻢㻝 㻠㻘㻠㻢㻝 㻠㻘㻠㻣㻣 㻠㻘㻡㻢㻡 㻠㻘㻤㻡㻡 㻗㻝㻠㻑 㻗㻢㻑 㻠㻘㻢㻟㻜 㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼕㼚㼏㼛㼙㼑 䠄㻐㻌㻹㼕㼘䠅 㻞㻘㻢㻞㻡 㻟㻘㻝㻜㻜 㻞㻘㻤㻜㻤 㻟㻘㻜㻞㻠 㻟㻘㻞㻝㻞 㻗㻞㻞㻑 㻗㻢㻑 㻙 㻺㼑㼠㻌㼕㼚㼏㼛㼙㼑 䠄㻐㻌㻹㼕㼘䠅 㻝㻘㻥㻟㻝 㻞㻘㻜㻣㻜 㻠㻟㻜 㻞㻘㻜㻡㻥 㻞㻘㻝㻠㻜 㻗㻝㻝㻑 㻗㻠㻑 㻞㻘㻜㻜㻜 㻰㼕㼘㼡㼠㼑㼐㻌㻱㻼㻿 䠄㻐䠅 㻜㻚㻣㻥 㻜㻚㻤㻢 㻜㻚㻝㻤 㻜㻚㻤㻢 㻜㻚㻥㻜 㻗㻝㻠㻑 㻗㻡㻑 㻜㻚㻤㻡 㻺㼛㼠㼑㻦㻌㻌㻯㼛㼚㼟㼑㼚㼟㼡㼟㻌㼑㼟㼠㼕㼙㼍㼠㼑㼟㻌㼍㼞㼑㻌㼜㼡㼎㼘㼕㼟㼔㼑㼐㻌㼎㼥㻌㻮㼘㼛㼛㼙㼎㼑㼞㼓㻚㻌㻻㼜㼑㼞㼍㼠㼕㼚㼓㻌㼕㼚㼏㼛㼙㼑㻌㼑㼤㼏㼘㼡㼐㼑㼟㻌㼕㼚㼏㼑㼚㼠㼕㼢㼑㼟㻚
Results overview: 4Q results, released before the market open on 25 Current rating 2 (Outperform) October (US time), spotlighted a continued robust performance by Visa. For Share price ($; 24 Oct) 108.41 full FY17, operating revenues advanced 22% y/y and adjusted EPS rose 23% (22% increase shown in company materials), topping the firm’s y/y growth targets of roughly 20% for both figures. While 4Q marked the first quarter for which the acquisition of Visa Europe did not affect y/y comparisons, the firm still turned in strong figures for the quarter, with net operating revenues up 14% and adjusted EPS up 15%. In addition, the firm returned roughly $2.1bn to shareholders in the form of dividends and share repurchases in 4Q, continuing generous payouts of almost 100% of net income. Of note, with boosts from the acquisition Visa Europe played out, y/y growth rates for total volume and other key metrics slowed relative to the prior quarter. Total volume in the US slowed from y/y growth of 11% in 3Q to 8% in 4Q; cross-border volume growth slowed from 11% to 10%, and Visa processed transaction growth stayed flat at 13% (3Q figures normalized to include Europe activity in FY16). In the US, the boost from the start of alliances with Costco and USAA played out in 4Q, weighing on growth in total volume. With cross-border volume, a weaker dollar apparently depressed outbound commerce from the US and inbound commerce into Europe (particularly to UK).
What's the impact: Our impression of the earnings release is positive. Visa turned in a strong performance for both 4Q and the full year in FY17 and also presented an upbeat outlook for FY18. Of note, although it is guiding for adjusted EPS growth at the high end of the mid-teens, the firm apparently sees fluctuations on a quarterly basis, calling for mid-teen growth in 1Q. In addition, it plans total shareholder payouts of over $9.0bn in FY18 (vs. $8.5bn in FY17).
(This is an abridged translation of the Japanese memo dated 25 October 2017)
This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Capital Markets America retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent. For important company disclosure information please go to the link below. Disclaimer: https://daiwa3.bluematrix.com/sellside/Disclosures.action Asia Pacific Daily | 76 Economics flash 27 October 2017
INDONESIA Bahana Macrosight
Overweight Sarah Jessica Hutapea Henry Wibowo (Unchanged) E-mail: [email protected] E-mail: [email protected] Phone: +6221 2505081 ext. 3693 Phone: +6221 2505081 ext. 3622
2018 budget: More populist, more prudent Exhibit 1. Economic indicators 2015A 2016A 2017F 2018F Key highlights: Cur acc (% GDP) -2.1 -1.8 -1.7 -2.1 Fiscal bal (% GDP) -2.4 -2.5 -2.7 -2.5 x VAT increases +14% y-y vs. total tax revenue +10% y-y and nominal GDP GDP growth (% y-y) 4.8 5.0 5.2 5.4 Inflation (% y-y) 3.4 3.0 4.0 3.8 remains at 9.8% y-y. Oil price (USD/bbl) 52.6 56.8 55.0 60.0 Oil price (USD/bbl)* 45.1 45.1 55.0 60.0 x Compared to 2017’s revised budget, ministerial spending increases on IDR/1USD 13,788 13,473 13,300 13,500 election-related expenses: Election Commission (+IDR9.2tn, +280% y-y) 7-D Rev. Repo Rate - 4.75 4.25 5.00 FX reserve (USDbn) 105 116 133 149 and National Election Supervisory Body (+IDR3.7tn, +192% y-y). Source: Bloomberg, Bahana forecasts *average Brent oil price x Infra spending slightly up 5.8% y-y (2017: +44.3% y-y). Health and Exhibit 2. Education, infra, health budget education spending also higher 5.8% y-y (exhibit 3). (IDRtn) (IDRtn) 500 x Total subsidies down IDR12.6tn (vs. 2017 revised budget), allocated to: 111 110 450 444 100 energy-related subsidy IDR4.7tn (+5% y-y), credit program subsidy 400 411 90 350 IDR5.0tn (+38% y-y) and tax subsidy IDR1.3tn (+14% y-y). Seed subsidy 80 300
shifts to the Agriculture Ministry budget, while the food subsidy shifts to the 250 70 Social Affairs Ministry budget. 200 60 150 50
x The credit program subsidy (including KUR, housing down payment 100 40 2013 2014 2015 2016 2017 2018 supports, and subsidy for housing loan interest rates) increases IDR5.0tn Education Infrastructure Health (RHS) (+38% y-y). Good for banks (BBTN and BBRI), and then would benefit contractors applying to the housing program. Source: MoF Exhibit 3. Education, infra, health budget 2018 budget proposal vs. 2018 budget (Exhibit 5) 2013 2014 2015 2016 2017 APBNP 2018 RAPBN 2018 APBN Education 332.5 353.4 390.1 370.4 420 441 444 x The government has made some big changes in its revenue forecast in the Contribution 20% 20% 20% 2018 budget (vs. the 2018 budget proposal), with an additional IDR16.2tn Growth YoY 6.3% 10.4% -5.0% 13.3% 5.0% 5.8% Health (RHS) 46.1 59.7 65.9 92.3 105 110 111 in spending in the 2018 budget (vs. the original budget proposal). The Contribution 5% 5% 5% IDR16.2tn of additional spending is expected to be funded by additional tax Growth YoY 29.6% 10.4% 40.1% 13.7% 5.1% 5.8% Infrastructure 155.9 154.7 256.1 269 388 409 411 revenue of IDR8.7tn (IDR2.2tn from oil and gas income tax + IDR6.5tn from Contribution 18% 19% 18% VAT) and IDR7.6tn of additional revenue from non-tax, mostly oil and gas Growth YoY -0.8% 65.5% 5.1% 44.3% 5.3% 5.8% Source: MoF non-tax revenue of IDR3.1tn. We expect VAT would be higher due to more *RAPBN: Budget proposal, APBN: Budget, APBNP: and higher transactions and prices and the positive impact from the online Revised budget facilities provided by the MoF. The government expects higher revenue from Exhibit 4. Macro assumptions Changes (2017 Changes (2018 oil and gas with the expected increase in gas production lifting to 1.2mn 2018 budget revised budget vs. budget proposal Macro assumptions 2017 budget 2017 revised budget proposal 2018 budget 2018 budget) vs. 2018 budget) bblpd (2017 revised budget: 1.15mn bblpd). GDP growth (%) 5.1 5.2 5.4 5.4 3.8% 0.0% x In terms of spending, ministerial expenditures are higher and amount to Inflation (%) 4.0 4.3 3.5 3.5 -18.6% 0.0% IDR/USD1 (%) 13,300 13,400 13,500 13,400 0.0% -0.7% IDR33.3tn, in addition to a transfer of IDR5.1tn to regions and village funds. SPN 3M 5.3 5.2 5.3 5.2 0.0% -1.9% ICP (USD/bbl) 45 48 48 48 0.0% 0.0% Notably, subsidies are lower than in the previous proposal and amount to Oil lifting (k bbl) 815 815 800 800 -1.8% 0.0% Gas lifting (k bblpd) 1,150 1,150 1,200 1,200 4.3% 0.0% IDR16.1tn, coming from a lower subsidy from fuel (-IDR4.2tn), electricity (- Source: MoF
IDR4.5tn), and the non-energy subsidy (IDR7.4tn). We expect the reduced subsidy funds to be allocated more to ministerial budgets, especially for the Ministry of Social Affairs (+21.6%), National Intelligence Agency (+224.4%) and Indonesian Police (+22.2%) as well as transferred to the regions’ funds. We believe that the government is still concerned about welfare distribution to the regions.
2017 revised budget vs. 2018 budget (Exhibit 6)
x Compared to the 2017 revised budget, the 2018 budget appears more prudent as we see spending only increasing IDR87.3tn, with higher revenue amounting to IDR158.6tn. x We expect that the higher VAT (+14% y-y) is coming from more and higher transactions and prices, following improved consumer spending. We also see some effect from the Asian Games 2018, World Bank-IMF Annual Meetings 2018, and recreation and leisure (expected higher hotel occupation rates and restaurant receipts). The MoF should guard the VAT
Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report Asia Pacific Daily | 77
US Economic Research 27 October 2017
U.S. Data Review
GDP: solid growth in Q3 Michael Moran Daiwa Capital Markets America 212-612-6392 [email protected]
Third Quarter GDP The U.S. economy grew at an annual rate of 3.0 percent in the third quarter, faster than the consensus estimate of 2.6 percent. A sizeable portion of the advance was the result of inventory investment (0.7 percentage point), but final sales (GDP excluding inventory investment) also was respectable with growth of 2.3 percent. This pace was in line with the average of the past few years, and it probably would have been firmer were it not for the hurricanes.
The results generally bode well for the outlook. Consumers provided good support and are likely to remain active. Businesses invested actively in new equipment and orders for capital goods suggest the trend will remain upward. Investment in new structures fell, but this might have reflected a pullback in oil drilling and was partly influenced by the hurricanes. The trade sector added 0.4 percentage point to GDP growth, and this sector could remain in the plus column with the dollar having eased in recent months. Nondefense government spending fell, but outlays for disaster recovery will provide a boost in coming quarters.
Detail is shown below; we will provide additional commentary in our weekly economic comment.
GDP & Related Items*
15-Q4 16-Q1 16-Q2 16-Q3 16-Q4 17-Q1 17-Q2 17-Q3 1. Gross Domestic Product Asia0.50.62.22.81.81.23.13.0 Pacific Daily | 78 2. Personal Consumption Expenditures 2.71.83.82.82.91.93.32.4 3. Nonresidential Fixed Investment -5.1 -4.0 3.3 3.4 0.2 7.2 6.7 3.9 3a. Nonresidential Structures -21.4 2.3 0.5 14.3 -2.2 14.8 7.0 -5.2 3b. Nonresidential Equipment -4.6 -13.1 -0.6 -2.1 1.8 4.4 8.8 8.6 3c. Intellectual Property Products 8.0 6.3 11.1 4.2 -0.4 5.7 3.7 4.3 4. Change in Business Inventories -0.7 -0.6 -0.7 0.2 1.1 -1.5 0.1 0.7 (Contribution to GDP Growth) 5. Residential Construction 7.3 13.4 -4.7 -4.5 7.1 11.1 -7.3 -6.0 6. Total Government Purchases 0.3 1.8 -0.9 0.5 0.2 -0.6 -0.2 -0.1 6a. Federal Government Purchases 2.5 -1.5 -0.9 1.6 -0.5 -2.4 1.9 1.1 6b. State and Local Govt. Purchases -1.1 3.9 -1.0 -0.2 0.6 0.5 -1.5 -0.9 7. Net Exports -0.3 -0.3 0.3 0.4 -1.6 0.2 0.2 0.4 (Contribution to GDP Growth) 7a. Exports -2.3 -2.6 2.8 6.4 -3.8 7.3 3.5 2.3 7b. Imports 0.0 -0.2 0.4 2.7 8.1 4.3 1.5 -0.8
Additional Items 8. Final Sales 1.21.22.92.60.72.72.92.3 9. Final Sales to Domestic Purchasers 1.41.52.62.22.32.42.71.8 10. Gross Domestic Income 1.5 -0.3 0.2 4.1 -1.7 2.7 2.9 -- 11. Average of GDP & GDI 1.0 0.1 1.2 3.4 0.0 2.0 3.0 -- 12. GDP Chained Price Index 0.80.32.41.42.02.01.02.2 13. Core PCE Price Index 1.22.12.02.01.31.80.91.3 * Percent change SAAR, except as noted Source: Bureau of Economic Analysis
This report is issued by Daiwa Securities Group Inc. through its relevant group companies. Daiwa Securities Group Inc. is the global brand name of Daiwa Securities Co. Ltd., Tokyo (“Daiwa Securities”) and its subsidiaries worldwide that are authorized to do business within their respective jurisdictions. These include: Daiwa Capital Markets Hong Kong Ltd. (Hong Kong), regulated by the Hong Kong Securities and Futures Commission, Daiwa Capital Markets Europe Limited (London), regulated by the Financial Conduct Authority and a member of the London Stock Exchange, and Daiwa Capital Markets America Inc. (New York), a U.S. brokerdealer registered with the U.S. Securities and Exchange Commission, a futures commission merchant regulated by the U.S. Commodity Futures Trading Commission, and a primary dealer in U.S. government securities. The data contained in this report were taken from statistical services, reports in our possession, and from other sources believed to be reliable. The opinions and estimates expressed are our own, and we make no representation or guarantee either as to accuracy, completeness or as to the existence of other facts or interpretations that might be significant.
C 27 October 2017
PURE Brunch
Sector: Power, Utilities, Renewable & Environmental (PURE)
27 October 2017 MEMO
Dennis Ip News (852) 2848 4068 [email protected] Japan to provide USD10bn to support the construction of LNG infrastructure in Asia According to Nikkei Sangyo Shimbun, the fund will be provided in the form of both debt and Daniel Yang (852) 2848 4443 equity and the target LNG infrastructure includes LNG terminals and gas-fired power plants, [email protected] etc. It is reported that the act is to help the US open up the Asian LNG market. By 2018, the US is expected to become a net exporter of natural gas (Chine5e, 26 October) Don Lau (852) 2848 4469 [email protected] Natural gas consumption grew 24.5% YoY in September in China Anna Lu The consumption growth for natural gas slowed down a bit from 30.2% YoY in August due (852) 2848 4465 to the high base last year. On the supply side, local production and imports grew YoY by [email protected] 10.0%/39.6%, respectively, to 11bcm/7.4bcm. For 9M17, natural-gas consumption grew by 18.4% YoY to 168bcm (NDRC, 25 October)
Three ministries jointly published Five-Year Plan for Water Pollution Control in Key River Basins The Ministry of Environmental protection, NDRC and the Ministry of Water Resources recently jointly issued the "Water Pollution Control Program for Key River Basins (2016- 2020)". The program chooses 580 control units for priority among 1,784 control units in the entire country, states five important tasks, including industrial pollution control, municipal pollution control, agricultural pollution control, river basin protection and drinking water sources environmental protection. (Sina, 26 October)
Everbright Greentech secures Henan Zhecheng Integrated Project and Jiangxi Guixi Hazardous Waste Treatment Project China Everbright Greentech (1257 HK, not rated) has recently secured Henan Zhecheng Integrated Biomass and Waste-to-Energy Project, and Jiangxi Guixi Hazardous Waste Integrated Treatment Project, with a total investment of c.CNY918m. Zhecheng Integrated Project (Biomass) is designed with an annual agricultural waste processing capacity of 300,000 tonnes and is expected to generate c.210,000,000 kWh of electricity annually. Zhecheng Integrated Project (Waste-to-Energy) Phase I will be invested and constructed on a BOT model; it is designed with a daily household waste processing capacity of 400 tonnes. Guixi Project will be invested and constructed on a BOO model. The project is designed with a total annual industrial waste processing capacity of 40,000 tonnes, including an annual hazardous waste incineration processing capacity of 20,000 tonnes, an annual physical-chemical processing capacity of 10,000 tonnes, and an annual landfill processing capacity of 10,000 tonnes. The operation period of the project will be no less than 50 years.
PetroChina registered 400% increase in shale gas production in Sichuan to 200mcm (Newsbase, 24 Oct)
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 79
C 27 October 2017
Taiwan Financial Pulse
27 October 2017 MEMO
Nora Hou News: (886) 2 8758 6249 Financials [email protected] Chairman of First Bank verbally resigned over the syndicated loan defaulted by Frank Fang Ching Fu Shipbuilding – Economic Daily News, Commercial Times (886) 2 8758 6257 x Chairman Tsai Ching-nien of First Bank (subsidiary of First Financial [2892 TT, TWD [email protected] 19.65, Outperform (2)]) reportedly verbally resigned over the bank's potential maximum loss of TWD3.55bn from a syndicated loan defaulted by Ching Fu Shipbuilding (not listed). Tsai reportedly has said that the bank is trying to minimize the loss as it is seeking other solutions. Meanwhile, the bank will set aside loan-loss provisions for the default in accordance with the Bank Act. (please see our latest memo click here for reference) x Media reports that the creditors of the syndication loan will find it most acceptable if CSBC Corp. (2208 TT, not rated) takes over the defaulting debtor's ship-building project commissioned by the government's Coast Guard Administration. x Among other participating banks, Chang Hwa Bank (2801 TT, not rated) reportedly will set aside loan-loss provisions of around TWD610m against its potential maximum loss from the syndicated loan to Ching Fu Shipbuilding. Taiwan Business Bank (2834 TT, not rated) said the loan default may incur losses of TWD1.71bn and it will set aside provisions accordingly. Hua Nan Bank (subsidiary of Hua Nan Financial [2880 TT, not rated]) will also set aside loss provisions based on its outstanding exposure of TWD2.11bn to the shipbuilder.
Upcoming investor conferences x China Development Financial (2883 TT, not rated) – 31 October 2017 x Cathay Financial (2882 TT, not rated) – mid-November 2017 (preliminary) x E.Sun Financial (2884 TT, TWD18.4, Buy [1]) – 13 November 2017 x Shin Kong Financial (2888 TT, not rated) – 16 November 2017 x Taishin Financial (2887 TT, TWD13.35, Hold [3]) – 20 November 2017 (preliminary) x Fubon Financial (2881 TT, not rated) – the week of 27 November 2017 (preliminary) x First Financial (2892 TT, TWD19.9, Outperform [2]) – 30 November 2017 x SinoPac Financial (2890 TT, TWD9.24, Underperform [4]) – 2 December 2017 (preliminary)
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 80
C 27 October 2017
Adlink (6166 TT)
Share price (27 Oct): TWD69.00 12-mth rating: Outperform (2) Target price: TWD72.00
3Q17 EPS in line to us, but margins came in weaker MEMO
Steven Tseng What’s new: Adlink released its 3Q17 P/L highlights after the market close today (27 (886) 2 8758 6252 October). Its 3Q17 net profit came in at TWD166m (EPS: TWD0.76), in line with our [email protected] forecast (TWD165m) and above the Bloomberg consensus (TWD153m) by 8%. However, Elsa Cheng the earnings were supported by non-op gains since both the gross and operating margins (886) 2 8758 6253 missed market expectations. [email protected] Table: Adlink’s 3Q17 results highlights (TWDm) Actual QoQ % YoY % Daiwa Diff % Consensus Diff % Revenue 2,888 6% 25% 2,777 4% 2,741 5% Gross profit* 1,057 3% 9% 1,122 -6% 1,104 -4% Gross margin (%) 36.6% 40.4% 40.3% Operating profit* 158 40% 35% 208 -24% 181 -12% Operating margin (%) 5.5% 7.5% 6.6% Pre-tax profit 210 41% 228% 206 2% 185 14% Net profit 166 37% 236% 165 1% 153 8% EPS (TWD) 0.76 37% 236% 0.76 1% 0.71 8%
Source: Company data (* estimated based on profit margins), Daiwa forecasts, Bloomberg
What's the impact: 3Q17 result recap: lower-than-expected margins offset by higher non-op gain x Adlink’s 3Q17 revenue (up 6% QoQ and 25% YoY) was 4-5% ahead of our and market expectations (see table above) thanks to stronger demand from Networking, Communication and Public (NCP) and Design & Manufacturing Service Center (DMSC) segments. That said, both gross and operating margins (36.6% and 5.5%, respectively) in 3Q17 missed our and market expectations, although the operating margin did improve sequentially (from 4.2% in 2Q17). The company highlighted two culprits for the weaker gross margin in 3Q17: 1) rising component costs (ie, DRAM and flash) and 2) unfavorable sales mix, as both NCP and DMSC segments offered lower-than-average gross margins.
x As 3Q17 non-op profit (TWD52m) came in much better than we expected (we had TWD2m in our model), which was contributed by FX gains and R&D-related subsidies from the government, Adlink’s 3Q17 net profit (TWD166m; EPS: TWD0.76) came in line with our forecast (TWD165m) and 8% ahead of consensus (TWD153m).
4Q17 outlook: likely no major catalyst x We currently expect modest QoQ growth in 4Q17 revenue on normal seasonality. As for margins, since Adlink expects that there are likely no major changes in product mix and component price trends, the profit margins in 4Q17 could remain similar to those in 3Q17, which suggest potential downside risks to our current 4Q17 forecasts, as we expect sequential margin improvement in 4Q17.
What we recommend x We have an Outperform (2) rating on the stock, with a 12-month target price of TWD72, based on a target PER of 23x applied to our 1-year-forward EPS estimate. The counter’s share price has been performing well over the past three months, but we suspect the weaker-than-expected 3Q17 margins and likely muted 4Q17 earnings outlook could cool down the near-term sentiment, though we continue to like the stock on a 12-month basis. Adlink plans to release the audited 3Q17 results by mid- November and we will provide further updates in due course.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 81
C 27 October 2017
China Communication Construction (1800 HK)
Share price (26 Oct): HKD9.84 12-mth rating: Outperform (2) Target price: HKD11.20
Acquisition of AECON, a leading Canadian construction company MEMO
Kelvin Lau What’s new (852) 2848 4467 x CCC announced on 26 October that it has entered into an agreement to acquire [email protected] - AECON (ARE CA, not rated) via a special purpose vehicle (SPV). We reiterate our Fiona Liang Outperform (2) rating on the stock given its stable and decent earnings growth for (852) 2532 4341 2017-19E. [email protected] Analysis x Details of the deal – The total consideration is approximately CAD1.45bn (equivalent to HKD8.84bn) and is to be paid in cash, funded through existing cash resources and external financing. The acquisition price was determined with reference to the recent trading prices of AECON shares and CCC’s view on the value of its assets and businesses. The acquisition price at CAD20.37 represents a premium of 42% relative to the closing price of AECON’s shares on 24 August 2017. The proposed acquisition is expected to enhance CCC’s international development strategy with AECON’s strong presence in the construction market in Canada. If the deal is successful, it would be the third overseas acquisition of CCC after John Holland Group in Australia and Friede Goldman in the US. The deal is pending to receive applicable government and regulatory approvals by the relevant authorities in Canada and China.
x Company background – Listed on the Toronto Stock Exchange, AECON is a leading provider of construction services and a pioneer in public to private partnerships and concessions operations. It operates in 4 segments, including infrastructure, energy, mining, and concessions with competitive know-how. It booked a net profit of CAD46.8m in 2016 (equivalent to CNY240m), which would be around 1.4% of CCC’s net profit in 2016. Its shareholder’s equity as at end-December 2016 was approximately CAD753.6m (equivalent to CNY3.89bn).
Recommendation x Overall, we expect CCC to deliver stable and decent earnings growth for 2017-19E on the back of its PPP and overseas projects. We reiterate our Outperform (2) rating and 12-month target price of HKD11.20, based on a PER of 8x applied to our average EPS for 2017-18E. Key downside risks to our call include weaker local government funding and slower-than-expected revenue recognition from projects.
To see our recent update on CCC: Growth prospects remain intact for 2017-19, 30 August 2017: please click here
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 82
x
Country 27 October 2017
China Eastern Airlines (CEA) (670 HK)
HKD4.07 Sell (5) HKD3.70 Share price (27 Oct): 12-mth rating: Target price:
Key takeaways: likely moderate domestic yield recovery on limited flight
MEMO schedule
Kelvin Lau What’s new: CEA hosted a conference call for its 3Q17 results on 27 October. (852) 2848 4467 Management guided a moderate improvement in domestic yield on CAAC’s recent [email protected] implementation of strict controls on airports’ flight schedules, but with continuous pressure Michelle Wang on international yield. We have a Sell (5) rating on the stock, expecting likely yield pressure (852) 2773 8842 from international routes to continue in 2017-18 . [email protected] Highlights Likely domestic yield recovery on CAAC’s stricter flight schedule controls – According to management, CEA’s domestic passenger yield (Revenue/RPK) improved by 0.3% YoY in 3Q17, against 1% YoY growth for 1H17, while the international yield was down by 0.6% YoY, narrowing the decline of 5% YoY in 1H17, likely due to an accelerated capacity expansion in 3Q17. For 4Q17-2018, management guided a moderate improvement in domestic yield on limited capacity supply due to CAAC’s strict flight controls for better on-time service, but pressure from high-speed railway competition remains. According to CAAC’s latest regulation, 21 targeted airports, including Beijing and Shanghai’s airports, are required to limit flight schedule growth by 3% YoY, while the total flight schedules for other airports in the southeast region are limited to 5% YoY growth in the upcoming winter-spring flight season. Meanwhile, management believes its international yield remains under pressure.
Capacity expansion tilts towards international routes – Given CAAC’s strict controls on domestic flight schedule growth, management targets to increase its domestic ASK by 7% YoY for 4Q17 and 8% YoY for 2018 by replacing short-haul routes with long-haul routes, and its international ASK by 13% YoY for 4Q17 and 12% for 2018, especially for Australian and Southeast Asian routes with respective growth rates of 20-30% YoY and 15% YoY.
Recommendation: Overall, despite a likely domestic yield improvement going forward, we believe that the potential yield pressure on international routes could be an overhang on CEA’s profitability. Thus, we have a Sell (5) rating on CEA with 12-month TP of 3.70HKD based on 0.9x 2017-18E BVPS. Key risks to our call would be better-than-expected passenger traffic and yield growth, and lower-than-expected CNY depreciation against the USD and lower-than-expected fuel prices.
To see our recent updates on CEA: China Eastern Airlines: Supported only by one-off gains (30 August 2017), please click here
In the interests of timeliness, this document has not been edited.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
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C 27 October 2017
China Pacific Insurance Group (2601 HK)
Share price (27 Oct): HKD38.45 12-mth rating: Buy (1) Target price: HKD46.00
Agency FYP deceleration in 3Q17 MEMO
Leon Qi, CFA, CPA What’s new (852) 2532 4381 x CPIC announced a 9M17 net profit growth of 24% YoY, tracking 77% of Bloomberg [email protected] 2017 full-year consensus. Implied 3Q17 net profit saw 64% growth, surging from 6% - - Susie Liu YoY in 1H17, likely due to less reserve top up pressure and higher investment income. (852) 2773 8745 Agency FYP growth slowed down in 3Q17 to 8% YoY likely as a result of early [email protected] suspension of fast-return product sales.
Analysis x Life premium saw 32% YoY growth in 9M17, underpinned by agency new premium growth of 38% YoY. However, agency FYP in 3Q17 decelerated to 8% YoY growth (Ping An Life: +11% YoY, NCI: +59% YoY), likely due to the early sales suspension of fast-return annuity products since late-July. (see Replacing “fast-return” products with long-term PAR 26 Sep 2017)
x 2018 Jumpstart. we understand that CPIC Life’s 2018 Jumpstart sales feature “Ju Bao Pen” (倂⭅䙮), a participating annuity product that could be bundled with a stand- alone universal product, “Cai Fu Ying Jia” (峊崊⭞), or an endowment participating rider for children, “Wei Lai Xing” (㛒㜍㗇㔁做慹). Pre-sales for 2018 jumpstart sales will commence in November 2017. (See What happens to 2018 “jumpstart” sales 12 Oct 2017)
x P&C premium growth was 9% YoY in 9M17, up from 7% YoY in 1H17, mainly due to 17% premium expansion in non-auto line in 9M17, or 23% YoY growth in 3Q17, likely as a result of synergies from Anxin agriculture insurance. Its auto insurance line saw 7% YoY premium growth in 9M17.
x Reserve top-up should have led to CNY1.5bn additional reserves in 3Q17 compared to CNY2.5bn in 3Q16 (both on our estimates) as a result of the smaller decline in China’s 750-day average treasury yield. 10-year treasury saw 5.5bp decline in its 750- day average yield in 3Q17 (3Q16: -9.6bp).
x Solvency. Core solvency margins at CPIC Life and CPIC P&C were 245% and 243% at end-9M17, compared with 256% and 243% at end-1H17, respectively.
China: quarterly movement of 750-day average treasury rate (10-year tenor)
Source: China Bonds, WIND, Daiwa Estimates Note: Update as of October 26, 2017, assuming treasury spot rate stays unchanged going forward
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
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Country 27 October 2017
China Railway Group (CRG) (390 HK)
HKD6.62 Outperform (2) HKD7.00 Share price (27 Oct): 12-mth rating: Target price:
Net profit shrank 12% YoY in 3Q17 on flattish revenue growth and lower profit
MEMO margin
Kelvin Lau What’s new (852) 2848 4467 China Railway Group (CRG) reported its 3Q17 results on 27 October. Net profit shrank [email protected] by 12% YoY in 3Q17 while net profit for 9M17 was up 19.4%, coming in below our full- year expectation of 37.6% YoY. We have an Outperform (2) rating on the stock. Fiona Liang (852) 2532 4341 [email protected] Highlights 3Q results recap – Net revenue was CNY171bn, up moderately by 1% YoY but decelerating from 13.2% YoY in 2Q17 and 7.6% YoY 1Q17. The gross profit margin deteriorated 0.2pp to 8.6%, and SG&A expenses as a percentage of revenue climbed to 4.9% from 4.7%. The aforementioned reasons led to a net profit drop of 12% YoY in 3Q17. The weaker-than-expected 3Q17 result was attributable to: the construction halt in the Beijing-Tianjin-Hebei region due to environmental regulations; price hikes of raw materials, especially steel and cement; and lower revenue recognition from the railway segment as some projects were close to completion.
PPP projects remained robust – CRG booked CNY21.04bn of new orders for PPP projects in 9M17, up 3% YoY from CNY205bn in 9M16. The management expects to register CNY300bn of new orders for PPP projects in 2017 and CNY300bn in 2018, flattish as the company intends to control the investment scale of PPP projects as well as the financial risks.
Urban transit segment remained robust – The new order growth of the urban transit segment has been weaker than expected in 9M17, up 9% YoY compared with more than 100% for CRCC. CRG said that it was due to a high base in 9M16, and remained confident on the growth potential of the urban transit segment. The gross margin of the urban transit projects saw continuous improvement as well, reading ~9.8% in 9M17, up ~1.5pp from 9M16.
Operating cash outlay due to big increase of inventory and receivables – CRG booked negative operating cash flow of CNY15bn for 9M17, versus the positive CNY149mn for 9M16, due to a CNY40bn increase in inventory and receivables. It resulted from increased working capital needs from property and PPP projects. However, CRG targets positive operating cash flow for the whole year.
Recommendation Overall, we believe the company will be able to achieve stable earnings for 2017-19E driven by municipal works, road, and other businesses. We have an Outperform (2) rating on the stock and a 12-month target price of HKD7.20, based on a 9x average 2017-18E PER. Key risks to our call: unexpected disruptions in overseas markets and changes in policy for PPP projects.
Please see our recent update on CRG: China Railway Group: We expect stable earnings for 2017-18 (5 September 2017)
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
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Country 27 October 2017
CRRC Corp (1766 HK)
HKD7.56 Hold (3) HKD7.10 Share price (27 Oct): 12-mth rating: Target price:
Net profit up 15% YoY in 3Q17, while that for 9M17 is still below our estimate MEMO
Kelvin Lau What’s new: (852) 2848 4467 CRRC hosted a conference call for its 3Q17 results on 27 October. Net profit [email protected] rebounded robustly by 15.2% YoY to CNY3.14bn, but that for 9M17 was down 9.4% Fiona Liang YoY, still tracking worse than our full-year estimate of 3.1% YoY. The management (852) 2532 4341 considers 2017 to be a transition year with the growth of both revenue and net profit [email protected] likely to be subdued, while remaining upbeat on 2018 prospects. We have a Hold (3) rating on the stock.
Highlights Revenue dropped moderately for 3Q17 due to poor performance of MU and modern business – Revenue for 3Q17 dropped slightly by 1.7% YoY to CNY51.9bn, due to the sluggish railway equipment segment (-2.4% YoY), new business (-7.5% YoY), and modern services segment (-37% YoY). The urban transit segment saw a 38% YoY growth in 3Q17, being the only segment with positive revenue growth in 3Q17. Within the railway equipment segment, revenue from locomotives, and freight wagon were up 77% YoY and 200% YoY, respectively, while the MU segment remained weak with revenue contracting 34% YoY. As mentioned by the management, it delivered 207 units of MU in 9M17 and targets to deliver 330-350 units in 2017 and up to 400 units in 2018.
Gross margin advanced by 2% to 23.4% in 3Q17 - The management mentioned several reasons for the improvement: 1) Gross margin for the urban transit segment improved gradually in 3Q17, and that for 9M17 was up c.1% to 15.23%; 2) Gross margin for the modern business increased from c.5% for 9M16 to c.10% for 9M17, due to CRRC’s efforts to trim the contribution from less lucrative businesses such as trading services; 3) better product mix with higher revenue contribution from higher- margin products such as locomotive and MU.
Overseas expansion on a healthy track – CRRC’s order backlog for overseas projects reached CNY93.7bn as at the end of September 2017, with CNY24.4bn for locomotives products, CNY5.8bn for MU products, and CNY53.2bn for urban transit products, etc. The overseas project backlog accounts for 39% of the total backlog of CNY241.2bn as at the end of 3Q17.
Recommendation Overall, we think CRRC lacks solid growth drivers other than MUs, even though revenue growth for the MU segment should remain steady and see a recovery in 2018. We have a Hold (3) rating and a 12-month TP of HKD7.10, based on 15x our average 2017-18E EPS. Key risk to our call: worse-than-expected orders and deliveries.
To see our recent update: CRRC Corp: Downgrade: revenue Growth slowing down (28 August 2017), please click here
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 86
C 27 October 2017
Great Wall Motor (GWM) (2333 HK)
Share price (26 Oct): HKD10.58 12-mth rating: Sell (5) Target price: HKD8.00
3Q17 conference call key takeaways MEMO
Kelvin Lau What’s new (852) 2848 4467 x GWM reported 3Q17 results on 26 October 2017 and held a conference call in the [email protected] morning of 27 October 2017. The 3Q17 net profit plunged by 80% YoY to CNY460m, - Harold Liang the result of a significant net margin slump (down 8.7pp to 2.2%) during the same (852) 2848 4970 period, due mainly to the pricing cuts on selected models and higher promotion costs, [email protected] according to management. We expect the 4Q17 results to see a slight QoQ recovery on a net profit improvement due mainly to higher sales volumes, but believe the margin pressure will remain. We reiterate our Sell (5) rating on the stock.
Analysis x 3Q17 margins slumped sharply – The gross margin dropped significantly by 8.4pp YoY to 12.5% (vs. 13.9% [-9.6pp YoY] for 2Q17 and 19.5% [-3.0pp YoY] for 1Q17). According to management, the main reasons were mostly ascribed to: 1) the MSRP cut of selected models such as Haval H7 and Haval Coupe H6; 2) lower gross margins on exisiting models, such as the old Haval H6, Haval H1 due to their higher promotion costs; 3) higher service fees for newly-launched models WEY VV5 and VV7; 4) higher consumption tax for models with large engines (2.0T) such as the WEY VV7. Thus, the net margin plunged by 8.7pp YoY to 2.2% for 3Q17, vs. 3.1% for 2Q17 (down 9.5pp YoY) and 8.7% (down 3.2pp) for 1Q17, but still implied a stable ratio of operating expense/revenue during the period.
x WEY brand is looking for further improvement – Management guided that the WEY VV7 can reach the monthly sales level of 8,000 units, while WEY VV5 can ultimately reach a monthly sales level of 10,000 units. For its dealership network, management admitted that the build out is a bit slower than previously expected, but it expects the number of dealership shops to reach 100-150 by the end of 2017 (vs. 70 currently). In 2018, management expects to launch another new SUV model under the WEY brand, which may drive the sales volumes further. For the new model pipeline, except for the upcoming facelifted models and several potential NEV models, GWM plans to launch a new Haval H4 model in 2018.
x Preparation for NEV credit regulation – Though GWM is a late mover in terms of developing NEV technology compared to other domestic peers such as Geely and BYD, the company plans to make efforts to meet the requirements of NEV credits by: 1) investing in Hebei Yujie to earn NEV credits through the NEV production of parties located there; 2) focusing on developing PHEV models firstly, such as the model Haval H8 PHEV; also, GWM plans to launch the P8 PHEV under the WEY brand in late 2017; 3) continuing to deliver new pure EV sedan models such as the C30 (also an upgraded version of C30 is expected in 2018).
x Capacity bottleneck unlikely to happen in the near future – According to management, the company plans to launch its new plant in Russia in 2019, while the first phase is schedule to have annual capacity of 50,000 units (for SUV models). For the capacity allocation in China, its Baoding factory now is set up to produce annually 300,000 units, its Xushui factory 600,000 units and its Tianjian factory 450,000 units, according to management. We believe the capacity is adequate for GWM’s sales plan and do not foresee any capacity bottleneck in the near future. For 3Q17, the new H6 model accounted for approximately 40% of its total Haval H6 sales and this should
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 87
C 27 October 2017
Hyundai Steel (HS) (004020 KS)
Share price (27 October 2017): KRW57,400 12-mth rating: Buy [1] Target price: KRW70,000 (+21.9%)
3Q17 earnings were in-line and poised for a stronger earnings rebound in 4Q17 MEMO
Sung Yop Chung What’s new? (822) 787 9157 x Hyundai Steel’s 3Q17 revenue was the highest since the adoption of K-IFRS and [email protected] operating profit was in-line with both our and the Bloomberg consensus forecasts. Josh Rhee x We look for HS to record stronger 4Q17 earnings, bolstered by HMG shipment (822) 787 9124 [email protected] recovery. x We have a Buy[1] rating and 12-month TP of KRW70,000. G What’s the impact?: x Hyundai Steel’s 3Q17 revenue was the highest since the adoption of K-IFRS and operating profit was in-line with our estimate and Bloomberg forecast HS’s 3Q17 revenue rose by 18.6% YoY to KRW 4,820bn but operating profit declined by 4.6% YoY to KRW 340bn. The positive factors were: 1) production and sales volume rose by 7.8% and 11.3% to 5.4m tonne and 5.5m tonne, respectively, due to continued favourable demand from construction, and 2) full-fledged impact of a rise in automotive steel prices of KRW 60,000/tonne in May. However, we believe these positive factors were offset by: 1) much steeper-than-expected rise in steel scrap prices by KRW 90,000/tonne QoQ which led to roll margin for long products declining by KRW15,000/tonne QoQ, 2) improving but sluggish profit from its overseas steel service centres (SSC), in view of 22.8% YoY and 31.3% YoY declines in HMG’s OEM shipments in the US and China, and 3) a start-up costs for its new special steel factory in Dangjin.
Hyundai Steel’s 3Q17 earnings: (KRW bn) 3Q17P 3Q17E-Daiwa 3Q17-Bbg Diff(%) 3Q16 YoY(%) 2Q17 QoQ(%) USD/KRW (Average) 1,132.5 1,120.0 1.1 1,130.0 0.2 Revenue 4,820 4,390 4,531 9.8 4,063 18.6 4,692 2.7 COGS 4,209 3,784 3,466 21.4 4,084 3.1 Gross Profit 611 606 597 2.4 608 0.5 GP Margin (%) 12.7 13.8 14.7 13.0 SG&A 271 267 241 12.6 257 5.3 Operating profit 340 338 355 0.5 356 (4.6) 351 (3.1) OP Margin (%) 7.1 7.7 7.8 8.8 7.5 Recurring Profit 244 240 1.7 404 (39.5) 184 32.9 RP Margin (%) 5.1 5.5 9.9 3.9 Tax 69 53 103 45 Tax rate(%) 28.4 22.0 25.5 24.7 Net Income 175 187 201 (6.6) 301 (41.8) 138 26.5 NP Margin (%) 3.6 4.3 4.4 7.4 2.9
Source: Company, Bloomberg-consensus forecasts and Daiwa
x Key highlights from analyst meeting During the analyst call, CFO admitted that a rise in re-bar prices by KRW 30,000/tonne and KRW 40,000/tonne for two consecutive months in September and October were not sufficient to offset much steeper-than-expected rise in steel scrap prices in 3Q17. However, CFO guided for better earnings visibility in 4Q17 bolstered by: 1) global shipment recovery for HMG’s OEMs especially in China market from 4Q17, 2) a rise in its spread between product prices and input costs with declining China steel exports and stabilizing raw material costs, and 2) on further reduction in supply glut for China on PRC government’s more stringent measures for environmental protection. For its long products, HS guided for continued favourable re-bar demand with current re-bar inventory level remaining at 160,000 tonne and recent rise in re-bar prices could be earnings accretive in 4Q17. For flat
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 88
C 27 October 2017
Hyundai Wia (Wia) (011210 KS)
Share price (27 Oct): KRW69,000 12-mth rating: Outperform (2) Target price: KRW80,000 3Q17 operating profit drops to record low, but bracing for a stronger rebound in
MEMO 4Q17
Sung Yop Chung What’s new? (822) 787 9157 x Wia delivered weak earnings, which significantly missed both our and the Bloomberg- [email protected] consensus forecasts x Earnings look likely to rebound from 4Q17E, with better prospects from 2018-19E x We have an Outperform call and DCF/PER-based TP of KRW80,000 G What’s the impact? x Wia delivered weak earnings, which significantly missed both our and the Bloomberg-consensus forecasts. Wia reported its 3Q17 results at 16:00 KST, with its 3Q17 operating profit plummeting to a record low. As was widely expected, a decline in HMG’s OEM China shipments by 31.3% YoY on Sino-Korea tensions and continued losses for its machinery division, were the main culprits for Wia’s operating profit tumbling to a record low . The main discrepancy between our and Wia’s 3Q17 operating profit came from a non-contractual pricing pressure of roughly KRW20bn and a steeper-than-expected revenue decline for its high-margin Factory Automation (FA) revenue to KRW55bn in 3Q17, compared to KRW73bn in 2Q17. On a positive note, Wia secured high-margin FA orders totalling KRW100bn for 3Q17. This, in turn, should be more earnings accretive for Wia’s FA revenue from 2Q18E onwards, given the lead time of 6-12 months.
Wia’s 3Q17 earnings (KRW bn) 3Q17P 3Q17E-Daiwa 3Q17E-Bbg Diff(%) 3Q16 YoY(%) 2Q17 QoQ(%) USD/KRW (Average) 1,132.5 1,120.0 1.1 1,130.0 0.2 Revenue 1,925 1,843 1,836 4.5 1,744 10.4 1,813 6.2 Automotive parts 1,674 1,579 1,491 12.2 1,542 8.5 Machinery 251 263 252 (0.5) 271 (7.3) COGS 1,841 1,728 1,608 1,717 Gross Profit 84 114 136 (38.4) 96 (12.8) GP Margin (%) 4.3 6.2 7.8 5.3 SG&A 69 74 72 (4.6) 66 4.3 Operating profit 15 40 46.6 (62.5) 64 (76.4) 30 (50.0) OP Margin (%) 0.8 2.2 2.5 3.7 1.7 Automotive parts 28 39 60 (53.7) 38 (27.3) OP Margin (%) 1.7 2.5 4.0 2.5 Machinery (13) 0 4 n.m. -8 62.4 OP Margin (%) -5.2 -0.1 1.6 -3.0 Recurring Profit 18 39 26 (29.6) 37 (51.9) RP Margin (%) 0.9 2.1 1.5 2.1 Tax 5 11 25 (81.4) -3 n.m. Tax rate(%) 25.7 27.0 97.1 -7.4 Net Income 13 29 35 (53.1) 1 n.m. 40 (66.8) NP Margin (%) 0.7 1.5 1.9 0.0 2.2 Source: Company, Bloomberg and Daiwa forecasts
What we recommend? We have an Outperform(2) rating and a DCF/PER-based 12- month TP of KRW80,000 .
We continue to look for a potential earnings recovery from 4Q17 onwards, driven mainly by its automotive division. For its automotive division, we envisage the recovery of HMG’s OEM shipments to provide more impetus for an earnings recovery considering that Wia’s China business accounted for 15-20% of is operating profit in 2016.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 89
27 October 2017
Indofood Agri Resources (IFAR SP)
Share price (27 Oct): SGD0.455 12-mth rating: Underperform (4) Target price: SGD0.40
3Q17 performance disappoints MEMO
Jame Osman Results summary (65) 63213092 • Indofood Agri (IndoAgri) reported 3Q17 results which were below both our and [email protected] consensus forecasts. 9M17 PATMI was around 57.6% of our and 50.5% of Bloomberg consensus forecast. • IndoAgri’s 3Q17 adjusted PATMI (excluding fair value gains on biological assets) of IDR80.1bn declined 45.9% YoY, on the back of a 6.1pp decline YoY in operating profit margin and 4.6% YoY increase in revenue. • The key miss was in the company’s Plantations segment, which reported EBITDA decline of 27.2% YoY on a 11.6pp YoY decline in EBITDA margin. • 3Q17 FFB and CPO production increased by 9.6% and 5.9% YoY respectively – 9M17 FFB and CPO production increased 12% and 9% YoY respectively, tracking below our 2017 forecast of 16.5% and 13.6% YoY respectively. • Management is guiding for full year 2017 nucleus FFB production of 3.3m tons or 10% YoY (our forecast: 3.5m tons), while it expects CPO production of around 8-9% YoY in 2017 to around 900k tons (our forecast: 946k tons). Management also said that it believes the bulk of the production recovery post-El Nino has been achieved in 3Q17, and expects 4Q17 to reflect normalised trends. Given that Indo CPO stocks are currently at low levels, Oct CPO prices in excess of 8,200-8,500/kg could support earnings performance amid softer production trends. • Weaker-than-expected 3Q17 plantation segment margins appear to be negatively impacted by weaker CPO selling prices (3Q17 CPO ASP declined around 4% QoQ and 2.7% YoY).
Recommendation • We have an Underperform (4) rating on the stock with a 12-month target price of SGD0.400 (7.5x PER on our average 2017-18E EPS). Given the weaker-than- expected production performance, coupled with our expectations for CPO prices to decline in the near-term, we think IndoAgri’s shares could continue to underperform over the next 12-months. Better-than-expected production growth and FFB yield performance represent upside risks to our view.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
C 27 October 2017
Kia Motors (Kia) (000270 KS)
Share price (26 Oct): KRW34,250 12-mth rating: Underperform [4] Target price: KRW30,500 (-11%) 3Q17 earnings turn into the red for the first time in a decade on ordinary wage
MEMO ruling
Sung Yop Chung What’s new? (822) 787 9157 x Without one-off provisioning of KRW860bn on COGS, Kia’s 3Q17 operating profit [email protected] margin would have still declined by 1.1pp YoY to 3% x Still lingering concerns over its product cycle and mix improvements over the next 12- months. x We have an Underperform [4] rating and 12-month TP of KRW30,500.:
What’s the impact? x Without one-off provisioning of KRW860bn on COGS, Kia’s 3Q17 operating profit margin would have still declined by 1.1pp YoY to 3%.
Kia reported its 3Q17 earnings on 27 October at 10:00 am and shortly held an analyst call, thereafter. As was widely expected, Kia’s 3Q17 operating profit turned into the red for the first time in a decade on a negative court ruling on ordinary wages on the first trial on 31 August 2017. This, in turn, led to Kia provisioning a total of KRW977bn (vs. our estimates of KRW1tn) that included: 1) a provisioning of KRW860bn under COGS, as well as: 2) a provisioning of KRW117bn under non-operating expenses for deferred interest payments. (details)
Even considering the low base from the worst-ever labor dispute in decade for 3Q16, Kia’s 3Q17 revenue was significantly better than both our and the consensus forecasts thanks better global ex-China average-selling-price of KRW23.27m (flat YoY) due to a combination of: 1) currency tailwinds with a 1.1% YoY and 6.4% YoY, respectively, stronger USD and Euro against the KRW, and: 2) a 11% YoY rise in high-margin domestic shipments to 132K units, driven by the recently-launched new products such as B-Class SUV, “Stonic” and its Sports Sedan, “Stinger”. These factors offset the negatives from a 33.5% YoY rise in Kia’s 3Q17 US incentives to USD3,839/car and a 0.7% YoY decline in its US retail shipments to 162k units.
Meanwhile, Kia’s 3Q17 net loss reached KRW292bn, due to weaker-than-expected equity method income from Hyundai Mobis (012330 KS, KRW256,000, Underperform [4]) following a significant fall in its revenue contribution from China (28.3% of its current revenue).
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 91
C 27 October 2017
Orient Overseas International Limited (OOIL) (316 HK)
Share price (27 Oct): HKD74.95 12-mth rating: Outperform (2) Target price: HKD78.00
3Q17 operating data: stronger-than-expected freight rate recovery MEMO
Kelvin Lau What’s new (852) 2848 4467 OOIL announced its 3Q17 operating data on 27 October 2017, with stronger-than- [email protected] expected revenue growth of 19% YoY for 9M17 (above our estimate of 13% YoY growth for Michelle Wang 2017E), as a result of an accelerated recovery for OOIL’s average freight rate and decent (852) 2773 8842 growth for lifting volume. We remain positive on the stock, given the expected freight rate [email protected] recovery on a supply-side normalization. Regarding the COSCO-OOIL acquisition deal, the pre-condition of US anti-trust review has been fulfilled in October. We have Outperform (2) rating with 12-month TP of HKD78.0, based on the offer price.
Analysis x Likely decent lifting volume recovery for 2017 – In 3Q17, OOIL delivered a 5.0% YoY gain in total lifting volume, after growths of 6.6% YoY and 7.0% YoY seen in 2Q17 and 1Q17, which leads to a 6.2% YoY lifting volume growth for 9M17. By trade lanes, trade volume on Asia-Europe (AE) routes, accounting for 20% of total volume, maintained solid growth at 25% YoY (vs. 26% in 2Q17 and 18% YoY in 1Q17) and lifting volume on Trans-Pacific (TP) routes increased by 14% YoY (vs. 26% YoY in 2Q17 and 20% YoY in 1Q17). However, lifting on Intra-Asia/Australasia (IADA) routes, which account for around 50% of total volume, retreated by 7.1% in 3Q17, after 8.5% YoY drop seen in 2Q17 and 1.6% YoY decline in 1Q17. We expect the recovery of lifting volume will remain intact in 2017, on the back of the improved trade environment globally. According to Alphaliner, global container throughput growth is on track to exceed 6% YoY in 2017, driven by strong volume growth across all main regions, especially for mainland China with 9% YoY growth for container throughput in 9M17 and 11% YoY growth for September 2017.
x Upbeat freight rate improvement on IADA and TP routes – In terms of the average freight rate, the company saw average revenue/TEU growth of 20% YoY, up from a 16% YoY growth in 2Q17 and 0.5% YoY decline in 1Q17, partially benefiting from the recent freight rate recovery for IADA and TP routes with respective growths of 21% YoY and 17% YoY (vs. 16% YoY and 4% YoY in 2Q17). As a result, its YTD average freight rate grew by 12% YoY in 9M17, which is better than our expectation of a 10% YoY improvement in 2017.
x Load factor edged down on capacity expansion – On the back of the accelerated expansion in OOIL’s loadable capacity (+6.6% YoY for 3Q17), the company’s 3Q17 load factor was 0.3% lower than for the same period last year.
Recommendation In a nutshell, we believe the 2017-18 earnings outlook for OOIL remains slightly positive, as freight rates may rise further on lower bases in 2016. However, we note a potential of accelerated capacity expansion in 2018, with c.6% YoY growth for global containership supply (vs. 4% YoY growth for 2017, according to Alphliner), outpacing a likely demand growth of 5% YoY. This might constrain any further freight rate recovery in 2018. We have an Outperform (2) rating on the stock. Major risks to our call would be worse-than- expected freight-rate increases.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
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C 27 October 2017
Suntec REIT (SUN SP)
Share price (27 Oct): SGD1.93 12-mth rating: Underperform (4) Target price: SGD1.63
3Q17 results: DPU 1% below our forecast MEMO
David Lum, CFA 3Q17 results: DPU 1% below our forecast (65) 6329 2102 x Suntec announced its 3Q17 results on 27 October 2017. [email protected] x The results were in line overall and the DPU was only 1% lower than our forecast. x To keep the DPU relatively stable QoQ and YoY, there was a capital distribution of SGD8m (vs SGD8m for 2Q17 and SGD4m for 3Q16). x The Suntec City office committed occupancy improved QoQ from 97.9% to 98.4%. The average signing rent was SGD8.35/sq ft vs SGD8.79/sq ft in 2Q17. x The Suntec City mall’s committed occupancy was flat QoQ at 99.3%. The mall saw YTD improvements in footfall (+12.2% YoY) and tenant sales (+4.9% YoY). x As at 30 September 2017, the gearing was 36.8%, while the book value per unit was SGD2.11. x We have an Underperform (4) rating with a DDM-derived 12-month target price of SGD1.63. x An upside risk to our call would be a sharp recovery in Singapore office rents in the coming quarters.
Suntec: quarterly results summary (SGDm) SGDm 3Q16 2Q17 3Q17 3QE Var % var Revenue 82.4 87.3 91.1 92.6 (1.4) (1.5) NPI 57.2 59.4 63.9 64.0 (0.1) (0.2) Distribution 64.3 66.0 65.9 66.6 (0.7) (1.0) DPU (S¢) 2.54 2.493 2.483 2.509 (0.026) (1.0)
Source: Suntec, Daiwa forecasts
In the interests of timeliness, this document has not been edited.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
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C 27 October 2017
Wynn Macau (1128 HK)
Share price (26 Oct): HKD19.90 12-mth rating: Hold (2) Target price: HKD19.30
3Q17 results was largely in-line MEMO
Jamie Soo, CA Highlights: (852) 2773 8529 Key summary. 3Q17 adjusted property EBITDA was USD321m (+8% QoQ, +82% YoY) [email protected] and largely in-line with our/consensus estimates. This was driven by VIP revenue +5% Adrian Chan, CFA QoQ/+77% YoY buoyed mainly by the ramp-up of Wynn Palace over the past quarter (852) 2848-4427 alongside a favourable win rate of 3.2% for the Group vs. 3.0% in 2Q17. That said, total [email protected] VIP rolling volume was -2% QoQ for the Group with Wynn Macau rolling down 17% QoQ. On the other hand, mass market and slot revenue grew by +5% QoQ and +4% QoQ, respectively. The highlight was the significant ramp-up of Wynn Palace’s (opened 3Q16) cross segments with adjusted EBITDA of USD138m (+442% YoY/+58% QoQ).
In terms of market share, Wynn’s market share dropped slightly by 23bps QoQ (+4.7% YoY) but still remained at 16% in 3Q17.
Performance by property
Source: Company, Daiwa
Takeaways from earnings call: Recent trends and upcoming developments. On the call, management said that the Palace continues to be hurt by construction surrounding its property, but has been ramping up well. On the gaming front, Wynn Macau had benefited from favourable luck, which had positively impacted Wynn Macau by USD10-15m, while the typhoon had a negative impact on the performance in the quarter for about 2-3 weeks. That said, management indicated a couple new junkets are interested in opening rooms at Wynn Macau alongside an expansion of a new junket. For non-gaming, new concerts and special events were organized at the Wynn Palace and Wynn Macau, which helped to bring in players. Upgrades on Palace’s amenities is ongoing alongside Wynn Macau, with introduction of a new indoor-outlook dining space in the retail arcade in the quarter, which had proven to be very successful.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
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C 27 October 2017
Xinjiang Goldwind Science & Technology (2208 HK)
Share price (26 Oct): HKD10.58 12-mth rating: Hold (3) Target price: HKD10.6 Takeaways from 3Q17 results call: Expects lower WTG shipments this year, but
MEMO sees recovery in 2018-19
Dennis Ip, CFA What is new?: Xinjiang Goldwind Science & Technology (Goldwind) held a teleconference (852) 2848 4068 to discuss its 3Q17 results on 27 October. Overall, the company expects its WTG [email protected] shipments for 2017 to be lower than original guidance of 5.8GW due to the slow progress Daniel Yang of capacity installation for the whole wind industry, but it expects WTG sales to recover in (852) 2848 4443 2018 and 2019 on potential rush installation. [email protected] Key takeaways Anna Lu x Expects lower WTG shipments this year but recovery in 2018 and 2019. The (852) 2848 4465 [email protected] company expects the capacity addition of the whole wind industry this year to be less than the original expectation due to several factors including environmental checks, SOE reforms and the 19th National Congress. WTG expects national wind capacity addition to be over 18GW but less than 20GW, and thus sees its WTG shipments this year to be lower than its original guidance of 5.8GW. However, the company also indicated that WTG shipments in 2H17 are better than in 1H17, and expects WTG sales volume to recover further in 2018 and 2019 on potential rush installation triggered by implementation of the wind benchmark on-grid tariff cut. According to Goldwind, national installation may exceed 20GW in 2018 (including offshore 1.5- 2.0GW) and the company also expects higher WTG shipments next year.
x Expects to complete wind capacity installation of 600MW in 2017. The company indicated that its wind capacity installation progress will not be impacted by subsidy collection process. It will continue to work on capacity addition of 600MW this year and expects to add capacity of c.1GW each year in 2018/19. The company’s wind farms recorded utilization hours of 1,417 in 9M17, higher than national average of 1,386.
x Expects 2017 full year GPM to be c.29%. The company’s overall GPM in 9M17 was 30%, while GPM in 3Q17 was only 27%, which the company said was due to more sales contribution from WTG sales that has lower GPM than power sales. Management expects full year GPM would be c.29%, while GPM for WTG segment will be c.24.5%.
Valuation: We recently cut our 2018E EPS by 4% on our lower WTG sales estimate (-8%), but raised our 2019E EPS by 2% on likely stronger rush installation before the on-grid tariff cut becomes effective on 1 January 2020. We reiterated our TP of HKD10.60, based on an unchanged PER of 10.5x applied to our 2018E EPS (previous: average 2017-18E). We also downgraded Goldwind to a Hold (3) and recommend investors to visit the stock in 2H18 for more visibility on a potential installation rush for 2019. Key upside/downside risks: higher/lower-than-expected WTG shipments.
See our recent reports: To read our Flash Note on Goldwind (2208 HK) “Downgrading on uncertainty over 2018 installations” (27 October 2017) please click here
In the interests of timeliness, this document has not been edited.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Asia Pacific Daily | 95
Korea: share prices and Daiwa recommendation trends
Samsung Engineering: share price and Daiwa recommendation trend Date Target Price Rating Date Target price Rating 30/03/16 8,800 Underperform 18/05/17 14,000 Outperform
26/01/17 12,000 Hold 17/08/17 11,500 Outperform 70,000 66,500 60,000
50,000
40,000
32,000 30,000
20,000 14,000 12,000 11,500 10,000 8,800
0 Jul-15 Jul-16 Jul-17 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Jan-15 Jun-15 Jan-16 Jun-16 Jan-17 Jun-17 Feb-15 Mar-15 Feb-16 Mar-16 Feb-17 Mar-17 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17 May-15 May-16 May-17
Target price (KRW) Closing Price (KRW)
Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count
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Daiwa’s Banner Products
Click for our latest editions China Internet: Primer: machine learning, deep learning and AI 14 September 2017 Powered by machine learning and deep learning, artificial intelligence looks set to be the next blockbuster technology We believe the large Internet companies have natural advantages China Internet over start-ups, as they have exclusive data and ample funding Reiterating Buy (1) on Alibaba and Tencent; maintaining Hold (3) on Baidu given uncertain medium-term search ad revenue outlook
John Choi (852) 2773 8730 ([email protected]) Alex Liu (852) 2848 4976 ([email protected])
Taiwan Banks: Initiation: more good news than bad 16 August 2017 Positives: NIM expansion, credit cards, credit costs, dividend yields; negatives: wealth management, falling mortgage rates Taiwan Banks Banks likely to outperform insurers/brokers on a 12-month view We favour CTBC and E.Sun (rated Buy [1]); First rated Outperform (2); Mega and Taishin rated Hold (3); SinoPac rated Underperform (4)
Nora Hou (886) 2 8758 6249 ([email protected]) Frank Fang (886) 2 8758 6257 ([email protected])
China Coal-Fired Power: Why ROEs still have a mountain to climb 10 August 2017 Positive factors look unsustainable; 2017-19 unlikely to herald era of 10% ROEs. Initiating on Huaneng Power International H and A with China Coal-Fired Underperform and Sell ratings, respectively. Prefer China Resources Power Power for its diversification into wind power
Dennis Ip, CFA (852) 2848 4068 ([email protected]) Daniel Yang (852) 2848 4443 ([email protected])
China Securities: Option value emerging 21 July 2017 The most challenging regulatory period for the industry seems to be over; we see a number of deregulation possibilities on the horizon China Securities The financial leverage of securities firms and turnover velocity of China’s stock market have likely troughed Current valuations suggest strong option value; upgrading sector rating from Neutral to Positive; top picks: CITICS and GTJA
Leon Qi, CFA (852) 2532 4381 ([email protected])
Daiwa research is available electronically on Bloomberg, Reuters, Thomson One Analytics, FactSet, Capital IQ and Daiwa’s L-ZONE. Please contact your Daiwa sales representative for more information.
Asia Pacific Daily | 97
Rating and target-price information Bloomberg 12M rating 12M target price* Company name code Country Previous Latest Previous Latest Date Samsung Engineering 028050 KS Korea Outperform - Outperform 11500 ↑ 14000 27-Oct-17 Ping An Insurance 2318 HK China Hold - Hold 58 ↑ 62 27-Oct-17 China Unicom 762 HK China Buy - Buy 14.1 ↓ 13.8 27-Oct-17 China Construction Bank 939 HK China Outperform - Outperform 7.75 ↑ 8 27-Oct-17 China Life Insurance 2628 HK China Buy - Buy 30 ↑ 31 27-Oct-17 Japfa Comfeed Indonesia JPFA IJ Indonesia Buy - Buy 1750 ↓ 1650 27-Oct-17 China Telecom 728 HK China Buy - Buy 4.91 ↑ 4.98 27-Oct-17 Thai Union Group PCL TU TB Thailand Buy - Buy 24 ↓ 23 27-Oct-17 CDL Hospitality Trusts CDREIT SP Singapore Hold - Hold 1.58 ↑ 1.61 27-Oct-17 Baidu BIDU US China Hold - Hold 215 ↑ 245 27-Oct-17 Hanjaya Mandala Sampoerna HMSP IJ Indonesia Hold ↑ Buy 4300 ↑ 4500 27-Oct-17 Gudang Garam GGRM IJ Indonesia Buy - Buy 79000 ↑ 83000 27-Oct-17 Sheng Siong Group SSG SP Singapore Underperform - Underperform 0.86 ↑ 0.88 27-Oct-17 Sinbon Electronics 3023 TT Taiwan Buy - Buy 92 ↑ 98 27-Oct-17 Yes Bank YES IN India Buy - Buy 420 ↓ 380 27-Oct-17 TAL Education Group TAL US China Buy - Buy 41 ↓ 35 26-Oct-17 Xinjiang Goldwind Science & Technology 2208 HK China Outperform ↓ Hold 10.6 - 10.6 26-Oct-17 ABB Ltd (India) ABB IN India Sell - Sell 1015 ↓ 945 26-Oct-17 Naver 035420 KS Korea Buy - Buy 980000 ↑ 1050000 26-Oct-17 Vista Land & Lifescapes VLL PM Philippines n.a. → Buy n.a. → 7.1 26-Oct-17 Susco PCL SUSCO TB Thailand Buy - Buy 5.3 ↑ 5.5 26-Oct-17 Samsung SDI 006400 KS Korea Outperform - Outperform 200000 ↑ 219000 25-Oct-17 Frasers Centrepoint Trust FCT SP Singapore Outperform - Outperform 2.36 ↑ 2.4 25-Oct-17 L'Occitane International SA 973 HK Hong Kong Outperform ↓ Hold 17.5 ↓ 16 25-Oct-17 Huaneng Power International 902 HK China Underperform ↑ Outperform 4.3 ↑ 5.7 25-Oct-17 HDFC Bank HDFCB IN India Buy - Buy 2000 ↑ 2150 25-Oct-17 Bank Tabungan Pensiunan Nasional BTPN IJ Indonesia Buy ↓ Hold 3300 ↓ 2750 25-Oct-17 Pecca Group PECCA MK Malaysia n.a. → Hold n.a. → 1.52 25-Oct-17 Blue Bird BIRD IJ Indonesia Buy - Buy 5150 ↓ 4900 24-Oct-17 New Oriental Education & Technology EDU US China Buy - Buy 110 ↓ 107 24-Oct-17 Note: Daiwa’s 30 most recent rating/target-price changes *Local currency; D: delisted
Asia Pacific Daily | 98
Recently published reports No. of Date of Research reports* Subtitle pages publication China Autos – PV Weekly Monitor 1-20 October: sales performance decelerated 16 25-Oct-17 China Economy The arrival of strongman politics 7 25-Oct-17 Taiwan Semiconductor Manufacturing Semiconductors: the next 10 years 10 24-Oct-17 Havells India Strong operational performance despite GST 10 23-Oct-17 Greater China Smartphones Near-term hiccup for iPhone X a buying opportunity 8 23-Oct-17 Keppel Corp Upgrading: integrating to become a real conglomerate 20 23-Oct-17 Yum China Continued confidence in Yum China’s business model 13 20-Oct-17 Anta Sports Products 3Q17 retail sales on track and Europe NDR highlights 11 20-Oct-17 Discovery Asia small-cap weekly 22 20-Oct-17 China Autos – PV Weekly Monitor 1-13 October: sales performance saw weakness 16 18-Oct-17 Thailand Finance Sector Heading for another record 43 18-Oct-17 Poh Huat Initiation: uptrend in wooden furniture demand 17 18-Oct-17 Beijing Enterprises Water Group Stepping into hazardous-waste and sanitation sectors 22 17-Oct-17 Discovery Asia Small-cap Weekly 16 13-Oct-17 China Dairy Upgrading: top cats ready to get the cream 28 13-Oct-17 China Autos – PV Weekly Monitor 1-30 September: sales growth decelerates 16 12-Oct-17 Dali Foods Group Initiation: crouching tiger ready to pounce 34 11-Oct-17 Raffles Medical Group Assessing the medium-term potential for growth 13 10-Oct-17 China Property Relative valuations the guide to streamlining portfolios 25 9-Oct-17 Korea Technology Memory market outlook; positive on supply limitation 25 9-Oct-17 Discovery Asia Small-cap Weekly 14 6-Oct-17 Alibaba Group A walk down the aisles at Hema 17 3-Oct-17 HSS Engineers Attractive acquisition 14 2-Oct-17 Singapore Strategy Playing the two-track stock market 69 2-Oct-17 Discovery Asia small-cap weekly 16 29-Sep-17 Singapore Property Developers Still undemanding ahead of property-market recovery 25 28-Sep-17 Macau Gaming Understanding the true nature of VIP growth 42 27-Sep-17 Singapore Telecoms Premature to turn bullish 23 27-Sep-17 Korea Shipbuilding Prepare for the tide to turn in 2018 41 26-Sep-17 Discovery Asia small-cap weekly 17 22-Sep-17 *The 30 most recent reports published by Daiwa
Asia Pacific Markets Closed
Hong New China SG Malaysia Korea Taiwan Australia India Thailand Philippines Indonesia Kong Zealand Oct 17 2, 5 2, 6 18 18 2-6, 9 4, 9-10 2 23 2, 19 31
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Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Craig CORK (852) 2848 4463 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Olivia XIA (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Macro Economics (Hong Kong/China) Kelvin LAU (852) 2848 4467 [email protected] TAIWAN Head of Automobiles; Transportation and Industrial (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Leon QI (852) 2532 4381 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Regional Head of Financials; Banking; Diversified financials; Insurance (Regional) (Hong Kong/China) Nora HOU (886) 2 8758 6249 [email protected] Yan LI (852) 2773 8822 [email protected] Banking; Diversified financials; Insurance Banking (China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jamie SOO (852) 2773 8529 [email protected] Small/Mid Cap Gaming and Leisure (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Alex LIU (852) 2848 4976 [email protected] Head of India Research; Strategy; Banking/Finance Internet (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Carlton LAI (852) 2532 4349 [email protected] Capital Goods; Utilities Small/Mid Cap (Hong Kong/China) Dennis IP (852) 2848 4068 [email protected] SINGAPORE Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Ramakrishna MARUVADA (65) 6499 6543 [email protected] Kong/China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jonas KAN (852) 2848 4439 [email protected] David LUM (65) 6329 2102 [email protected] Head of Hong Kong and China Property Banking; Property and REITs Cynthia CHAN (852) 2773 8243 [email protected] Royston TAN (65) 6321 3086 [email protected] Property (China) Oil and Gas; Capital Goods Thomas HO (852) 2773 8716 [email protected] Peter NG (65) 6499 6546 [email protected] Custom Products Group Property; Small/Mid Cap
Jame OSMAN (65) 6321 3092 [email protected] PHILIPPINES Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg Ilag (63) 2 737 3023 [email protected] Utilities; Energy
Asia Pacific Daily | 100
Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469
Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets SG Limited 6 Shenton Way #26-08, OUE Downtown 2, SG 068809, (65) 6220 3666 (65) 6223 6198 Republic of SG Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam
DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021
New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550
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Japan: Notes concerning market data and investment indicators . Estimates by Daiwa . Shares outstanding: Common shares outstanding (excl. treasury stock) . Market cap: Based on shares outstanding and closing price as of indicated date . EV: Market cap + interest-bearing debt – liquidity on hand . EBITDA: Operating profit + depreciation . ROE: Net income / average of start-FY and end-FY shareholders’ equity (for SEC-reporting firms net income attributable to shareholders of the parent / average of start-FY and end-FY shareholders’ equity) . Share Price Chart and per-share figures retroactively adjusted to reflect stock splits/reverse stock splits
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Important Disclosures and Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof.
Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., Thanachart Securities, Affin Hwang Investment Bank Berhad, PT.Bahana Sekuritas, Saigon Securities, their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc.,Thanachart Securities, Affin Hwang Investment Bank Berhad, PT.Bahana Sekuritas, Saigon Securities, their respective subsidiaries or affiliates do and seek to do business with the company(s) covered in this publication. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures.
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Portions of this publication are prepared by Affin Hwang Investment Bank Berhad (“Affin Hwang”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication ; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin Hwang and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.
The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.
Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments.
Portions of this publication are prepared by PT. Bahana Sekuritas and reviewed by Daiwa Securities Group Inc. and/or its affiliates, and distributed outside Indonesia by Daiwa Securities Group Inc. and/or its affiliates, except to the extent expressly provided herein. Certain copies of this publication may be distributed inside and outside of Indonesia by PT. Bahana Sekuritas in accordance with relevant laws and regulations. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Any review does not constitute a full verification of the publication and merely provides a minimum check. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Neither Daiwa Securities Group Inc. nor any of its affiliates is licensed to undertake any business within the Republic of Indonesia. Any display of any trade name or logo of the Daiwa Securities Group Inc. on this publication shall not be deemed to be an undertaking of any business within the Republic of Indonesia.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time may have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Portions of this publication are prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Thanachart Securities Public Company Limited (“Thanachart Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Thanachart Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
All research reports are disseminated and available to our clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Daiwa responsible for the redistribution of our research by third party aggregators.
Portions of this publication are prepared by Saigon Securities Inc. and distributed outside Vietnam by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Saigon Securities Inc. (“Saigon Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer
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or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Saigon Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Saigon Securities, Daiwa Securities Group Inc., their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Saigon Securities, Daiwa Securities Group Inc., their respective subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist.
IMPORTANT This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Securities Co. Ltd. retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent.
Ratings Issues are rated 1, 2, 3, 4, or 5 as follows: 1: Outperform TOPIX/benchmark index by more than 15% over the next 12 months. 2: Outperform TOPIX/benchmark index by 5-15% over the next 12 months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next 12 months. 4: Underperform TOPIX/benchmark index by 5-15% over the next 12 months. 5: Underperform TOPIX/benchmark index by more than 15% over the next 12 months.
Benchmark index: TOPIX for Japan, S&P 500 for US, STOXX Europe 600 for Europe, HSI for Hong Kong, STI for SG, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia.
Japan Conflicts of Interest: Daiwa Securities Co. Ltd. may currently provide or may intend to provide investment banking services or other services to the company referred to in this report. In such cases, said services could give rise to conflicts of interest for Daiwa Securities Co. Ltd.
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.: Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Ownership of Securities: Daiwa Securities Co. Ltd. may currently, or in the future, own or trade either securities issued by the company referred to in this report or other securities based on such financial instruments. Daiwa Securities Group has filed major shareholding reports for the following companies of which it owns over 5% (as of 29 September 2017): ICHIKEN (1847); nms Holdings (2162); I.K (2722); ALCONIX (3036); SHINDEN HIGHTEX (3131); Lacto Japan (3139); Nippon Healthcare Investment Corporation (3308); KFC (3420); Samty Residential Investment Corporation (3459); KI-STAR REAL ESTATE (3465); Ooedo Onsen Reit Investment Corporation (3472); WILLPLUS Holdings (3538); Neos (3627); Ateam (3662); Drecom (3793); Double Standard (3925); Konoshima Chemical (4026); Nippon Pigment (4119); TAKE AND GIVE. NEEDS (4331); DKS (4461); RIBOMIC (4591); NOZAWA (5237); Isolite Insulating Products (5358); NIPPON KINZOKU (5491); Toho Zinc (5707); NIPPON SHINDO (5753); TOKYO ROPE MFG. (5981); LINKBAL (6046); Trenders (6069); Shin Maint Holdings (6086); WILL GROUP (6089); Escrow Agent Japan (6093); PUNCH INDUSTRY (6165); HyAS&Co. (6192); TOYO MACHINERY & METAL (6210); Techno Smart (6246); OKADA AIYON (6294); NIPPON PILLAR PACKING (6490); SANSO ELECTRIC (6518); internet infinity (6545); ELECOM (6750); ADVANTEST (6857); ASTI (6899); Helios Techno Holding (6927); ENOMOTO (6928); TAIYO YUDEN (6976); Astmax (7162); GMO Financial Holdings (7177); TRANSACTION (7818); MUTO SEIKO (7927); WAVELOCK HOLDINGS (7940); Daiko Denshi Tsushin (8023); LOOK (8029); Money Partners Group (8732); FUJI (8860); HEIWA REAL ESTATE REIT (8966); Daiwa Office Investment Corporation (8976); Japan Rental Housing Investments (8986); Cerespo (9625); Imperial Hotel (9708); GAKKYUSHA (9769); UEX (9888).
Lead Management: Daiwa Securities Co. Ltd. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) in the past twelve months for the following companies: ASANUMA (1852); Genky Stores (2772); Yoshimura Food Holdings K.K. (2884); Activia Properties (3279); AEON REIT Investment Corporation (3292); Tosei Reit Investment Corporation (3451); Kenedix Retail REIT Corporation (3453); KI-STAR REAL ESTATE (3465); Mitsubishi Estate Logistics REIT Investment Corporation (3481); KOMEDA Holdings (3543); Sushiro Global Holdings (3563); Drecom (3793); ATLED (3969); MACROMILL (3978); User Local (3984); SHARINGTECHNOLOGY (3989); Wantedly (3991); Takemoto Yohki (4248); Idemitsu Kosan (5019); JAPAN POST HOLDINGS (6178); NISSEN (6543); TABIKOBO (6548); GameWith (6552); Renesas Electronics (6723); KEYENCE (6861); Japan Investment Adviser (7172); Casa (7196); ADVAN (7463); KOTOBUKIYA (7809); RINGER HUT (8200); The Ogaki Kyoritsu Bank (8361); ORIX JREIT (8954); Global One Real Estate Investment Corp. (8958); Daiwa House REIT Investment Corporation (8984); Japan Hotel REIT Investment Corporation (8985); PHYZ (9325); RENOVA (9519). (list as of 11 October 2017)
The Affiliates of Daiwa Securities Group Inc.* engaged in investment banking service (lead-manager/joint lead-manager/co-manager of public offerings and/or secondary offerings [excluding straight bonds]) in the past twelve months for the following companies: Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).
*Affiliates of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of:
Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets SG Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable to where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with our company based on the information described in this report, we ask you to pay close attention to the following items.
. In addition to the purchase price of a financial instrument, our company will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, our company also may charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident. . For derivative and margin transactions etc., our company may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. . There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. . There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by our company. . Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with our company.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association
Disclosure of Interest of Thanachart Securities Investment Banking Relationship Within the preceding 12 months, Thanachart Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Rajthanee Hospital Pcl (RJH TB), Banpu Power Pcl (BPP TB), Ratchaphruek Hospital (RPH TB).
Disclosure of Interest of Affin Hwang Investment Bank Investment Banking Relationship
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Within the preceding 12 months, Affin Hwang Investment Bank has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Uchi Technologies Bhd (UCHI MK), Serba Dinamik Holdings Berhad (SDH MK) and HAI-O-ENT (HAIO MK).
Disclosure of Interest of Bahana Sekuritas Investment Banking Relationship Within the preceding 12 months, Bahana Sekuritas has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: PT Waskita Beton Precast Tbk (WSBP IJ), PT Totalindo Eka Persada Tbk (TOPS IJ), PT Integra Indocabinet Tbk (WOOD IJ) and PT Buyung Putera Sembada (HOKI IJ).
Disclosure of Interest of Saigon Securities Inc. Investment Banking Relationship Within the preceding 12 months, Saigon Securities Inc. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Vietnam Dairy Products JSC (VNM_VN). No Va Land Investment Group Corporation (NVL VN), Binh Duong Building Materials and Construction Corporation (MVC_VN); Vietnam National Petroleum Group (Petrolimex)(PLX_VN), Vietjet Aviation JSC (VJC_VN), Hoa Phat Group JSC (HPG_VN), Dong Hai Ben Tre JSC (DHC_VN), Khang Dien Trading and Investment House JSC (KDH_VN); Vietnam Italy Steel JSC (VIS_VN).
Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.
Name of Analyst: Mike Oh
Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.
Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.
Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.
“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated
Additional information may be available upon request.
SG This research is distributed in SG by Daiwa Capital Markets SG Limited and it may only be distributed in SG to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets SG Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets SG Limited’s interest and/or its representative’s interest in securities). Recipients of this research in SG may contact Daiwa Capital Markets SG Limited in respect of any matter arising from or in connection with the research.
Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.
There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not
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operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.
Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex . This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions.
Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action
Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings Rating Percentage of total Buy* 65.9% Hold** 20.1% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2017. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.
For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks: BUY: Total return is expected to exceed +10% over a 12-month period HOLD: Total return is expected to be between -5% and +10% over a 12-month period SELL: Total return is expected to be below -5% over a 12-month period NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation
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Sectors: OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months
Conflict of Interest Disclosure: Affin Hwang
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Relevant Relationships Affin Hwang may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Affin Hwang market making Affin Hwang may from time to time make a market in securities covered by this research.
For stocks and sectors in Indonesia covered by Bahana Sekuritas, the following rating system is in effect: Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. "Buy": the price of the security is expected to increase by 10% or more. "Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%. "Reduce": the price of the security is expected to decline by 5% or more. Sector ratings are based on fundamentals for the sector as a whole. Hence, a sector may be rated “Overweight” even though its constituent stocks are all rated “Reduce”; and a sector may be rated “Underweight” even though its constituent stocks are all rated “Buy”. “Overweight”: positive fundamentals for the sector. “Neutral”: neither positive nor negative fundamentals for the sector. “Underweight”: negative fundamentals for the sector.
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Relevant Relationships (Bahana Sekuritas) Bahana Sekuritas may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Bahana Sekuritas market making Bahana Sekuritas may from time to time make a market in securities covered by this research.
For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect:
Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 10% or more, the rating is BUY. If the downside is 10% or more, the rating is SELL. For stocks where the upside or downside is less than 10%, the rating is HOLD. Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. For the sector, Thanachart looks at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the word “Positive”, is used when Thanachart sees the industry trend improving. An arrow pointing down, or the word “Negative”, is used when Thanachart sees the industry trend deteriorating. A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is Thanachart’s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers. An “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap. “Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap. “Neutral” is used when there are relatively equal weightings of BUYs and SELLs.
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .
Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .
Relevant Relationships (Thanachart Securities) Thanachart Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Thanachart Securities market making Thanachart Securities may from time to time make a market in securities covered by this research.
For stocks in Vietnam covered by Saigon Securities, the following rating system is in effect:
Stock ratings are based on a 12-month horizon, Saigon Securities rates stocks BUY, HOLD or SELL, as determined by the stock’s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to -9%. A HOLD rating implies returns between -9% and 18%. *The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents.
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .
Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .
Relevant Relationships (Saigon Securities) Saigon Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Saigon Securities market making Saigon Securities may from time to time make a market in securities covered by this research.
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Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
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