HONG KONG Carnival Group An early-stage option on tourism It all depends on execution of strategy We are initiating coverage on Carnival Group as we build our coverage of the PRC theme park and tourism industry (See China Consumer: A Journey Just Begun). We initiate with a Neutral rating and a DCF-driven target price of HK$1.10 (8% potential upside) – hardly an exciting return for a little-known company. Nevertheless, we think the company merits close attention – it is in the early stages of a strategy to build out integrated theme parks across China, and a wide variety of outcomes are possible. Their first project in Qingdao looks
exciting, and a strong management team has been assembled. 996 HK Neutral Our base case scenario calls for two integrated parks by 2020, reaching a combined 10.1m visitors. In a bull case scenario, if Carnival opens three parks Price (at 10:46, 24 May 2016 GMT) HK$1.02 by 2020 with 20m visitors with similar returns to Haichang (2255 HK), a valuation
Valuation HK$ 1.10 of HK$1.62, 59% higher than the current price, is justified. The delivery of returns - DCF (WACC 7.3%, beta 1.0, ERP 8.0%, RFR 3.0%, TGR 3.0%) 12-month target HK$ 1.10 commensurate with well-run parks is essential to the investment story. If the Upside/Downside % +7.8 market reverts to simply assigning market property values to its existing projects, 12-month TSR % +7.8 our adjusted NAV is HK$0.27, 74% lower than current levels. Key developments Volatility Index High to watch are: 1) visitation and spending figures during summer at Rio Carnival; GICS sector Real Estate 2) clarity on integrated park pipelines in other cities, such as Haikou. Market cap HK$m 15,180 First project fully open this summer Market cap US$m 1,954 Next month, Carnival is scheduled to fully open its first landmark integrated Free float % 29 leisure development in Qingdao (Rio Carnival). It will boast two hotels (738 30-day avg turnover US$m 1.6 rooms), an outlet mall (~70,000 sq. m) and – the key differentiator – an Number shares on issue m 14,882 integrated amusement park – all along the coastline in the Southern part of Investment fundamentals Qingdao. As of March, it had opened 121 of 177 shops. Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 1,146.9 1,805.6 2,679.8 3,619.7 The Rio Carnival project will comprise three connected theme parks with family EBIT m 83.5 322.2 628.2 911.8 and thrill rides, and the company aims to charge an entry fee of Rmb200 to EBIT growth % 77.8 286.1 95.0 45.1 Reported profit m 120.5 168.1 340.3 513.5 access all three parks. These parks should help drive family travel demand, with Adjusted profit m 137.6 185.3 374.7 547.8 project IRR of 12%, assuming Carnival can attract one-third of the visitations to EPS rep ¢ 0.9 1.1 2.3 3.5 EPS rep growth % 160.4 32.5 99.5 50.9 the integrated facility. We forecast Carnival will have its on-site hotel and EPS adj ¢ 1.0 1.3 2.5 3.7 exhibition venue open by August 2016. EPS adj growth % nmf 26.8 99.7 46.2 PER rep x 117.9 89.0 44.6 29.6 Visitation Growth is Key Earnings Driver PER adj x 102.6 80.9 40.5 27.7 Total DPS ¢ 0.0 0.0 0.0 0.0 Carnival is still in process of moving away from its legacy property sales. Half of Total div yield % 0.0 0.0 0.0 0.0 FY16 sales will be from property, falling to 40% in 2017 and 36% in 2018 – ROA % 0.4 1.4 2.7 3.8 ROE % 2.8 3.5 6.8 9.2 completely disposing of its residential properties by 2019E. The growth will EV/EBITDA x 231.8 45.5 26.7 19.6 come from retail and F&B rentals as well as admissions to the park. We forecast Net debt/equity % 100.6 98.7 90.3 81.5 P/BV x 2.8 2.8 2.7 2.4 Rio Carnival will see 2.5 million visitors in 2016E. Of the new park business,
approximately half of revenues are from outlet and F&B. We forecast visitation to Source: FactSet, Macquarie Research, May 2016 reach 4.5m in 2017E, when the facility is fully operational. We expect mature (all figures in HKD unless noted) ROEs of 8–10% on our base case, with OpCF positive from 2017. Key Risks Carnival’s strategy differs from that of traditional theme parks – integrating parks with malls – and it will have to deliver strong visitation ramp at Rio Carnival in the Analyst(s) next 12 months. With investments from Wanda and other property developers in Timothy Lam +852 3922 1086 [email protected] theme parks, Carnival faces tough competition to reach its visitation projections. Erin Lin Carnival scores in the 4th quartile of our proprietary Macquarie Governance & +86 21 2412 9028 [email protected] Risk score, primarily due to its early stage nature. 25 May 2016 Macquarie Governance and Risk Score (MGRS) Macquarie Capital Limited On our proprietary Governance and Risk Score Carnival Group scores in the fourth quartile of our current universe coverage.
Please refer to page 20 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Macquarie Research Carnival Group
Inside New Destination in Qingdao
An early-stage option on tourism 3 Company Profile Valuation and Earnings Sensitivity 6 . Carnival Group International is developing a large-scale integrated tourism Risks, Management, Corporate complex in Qingdao, Shandong Province, and is exploring similar opportunities in Taiwan and in the PRC. Governance 9 Rising Family Destinations 11 . Carnival’s project in Qingdao is one of the first large-scale integrated commercial, residential and tourism complexes, with total site area of 350,000 Integrate Leisure with Spending 12 sq. m. and GFA of 800,000 sq. m. The indoor and outdoor theme parks have Rising Demand for Leisure+ Projects 13 a total GFA of 60,000 sq. m., and the complex include two hotels for a total of Financial Analysis 15 738 rooms, managed by Langham Hospitality Group.
AppendicesError! Bookmark not defined. . The company has another project in Sanya and is also in talks with several Macquarie Quant View 18 provincial governments to develop new integrated leisure projects.
. Carnival also operates complementary leisure services such as touring carnivals (under Global Star Carnival, 78% held by Carnival), kid entertainment venue (under Haokaishi, 68% held by Carnival), and full-service buffet chain (under Golden Jaguar).
Fig 1 996 HK rel HSI performance Fig 2 Qingdao Rio Carnival Project – Master Layout Plan
Source: FactSet, Macquarie Research, May 2016
Source: Macquarie Research, May 2016
Fig 3 DCF Sensitivity to Visitor and Spending in Qingdao
Visitors HK$ per share -50% Base Case (4.5m in 2017) +50% +100% +20% 0.87 1.17 1.48 1.78 Spending Per Head Base Case (Rmb450) 0.84 1.10 1.37 1.64 -20% 0.80 1.03 1.27 1.50 Source: Macquarie Research, May 2016
25 May 2016 2
Macquarie Research Carnival Group
An early-stage option on tourism Meeting demand from family tourism
Carnival is Carnival Group International (Carnival) is a developer of integrated leisure projects in China, developing family which provide an outlet shopping experience and an entertainment complex suitable for tourism product, in family visits. We believe its core strengths are in the capability to attract quality commercial an integrated tenants, and its ability to offer robust developments in entertainment units. complex that The biggest challenge in the sector is intense competition from other commercial mall combined shopping operators, and Carnival’s facilities stand out from its peers in their ability to attract non-local outlet, hotel and visitors. Its unique features such as multiple theme parks and hotel allow visitors to “stay and leisure facilities play” in this beachfront facility. This should allow the facility to attract both tour groups and self-directed travellers, and maybe able to achieve similar success in integrated developments by Shenzhen OCT in Shenzhen, China (See p. 13). As we highlighted in our China Leisure report, we see replicable and integrated projects are two models for success, such as Haichang Ocean Park (2255 HK, OP). We also like CITS (601888 CH OP) and CYTS (600138 CH) two A-share tourism plays (see China Consumer: A Journey Just Begun). Exporting Outlet + Entertainment Concepts Carnival’s project combines outlet shopping with entertainment venue for children and other family members. This concept should play well with China tourists, who tend to prefer family travel, and who are starting to appreciate the outlet model of shopping, buying branded products at discounted prices. Carnival’s facilities include children’s edutainment (e.g. Lego School, Children Career Simulation Programs) and other specialized activities that enable more time to be spent inside the integrated facility. We visited the facility and met with Carnival’s local management in October 2015, and since then we saw concrete progress. The outlet malls offer a 70–80% discount to marked prices, and the outlet shops are operated directly by the brands. The commercial area will charge tenants a percentage of their revenue. The company has engaged with The Sanderson Group to plan and design three connected theme parks.
Fig 4 Rio Carnival Project – Site Plan
Source: Carnival Group, Macquarie Research, May 2016
25 May 2016 3 Macquarie Research Carnival Group
Unique Products to Support Family Demand In traditional city-centre shopping malls, commercial space is focused on tenant mix and convenience. For destination travel, Rio Carnival needs to stand out as a “worth a specific visit,” with unique shops to attract visitors. The Lego School – an edutainment learning experience – is unique in the Qingdao market. Parents will be able to drop off their children and leave them for several hours, so they are free to visit other parts of the facility. The project has attracted popular restaurants such as Din Tai Fung and Hsin Yeh Taiwanese Restaurant. The facility also offers an ice-skating rink, as well as other attractions designed to appeal to various age groups.
Fig 5 Lego School (Under Construction) Fig 6 Jackie Chan Theatre with DMAX Screen
Source: Macquarie Research, Oct 2015 Source: Carnival Group, May 2016
By including various child-friendly components, the project has the potential to be a leading destination in Huangdao, which is half an hour’s drive from Qingdao city centre. Improving Logistics Support LT Developments We are more conservative than management guidance on visitation, as the project faces two major risks: seasonality due to its open-air design and traffic constraints while it gains traction with both individual travellers and with travel groups. We forecast visitors to rise from 2.5m in 2016 to 5.9m in 2018 (Fig 7), which will help company to see multi-year sales growth from the shopping outlet.
Fig 7 Rio Carnival – Forecast Visitation in 2016-2020E Visitor Forecasts FY16E FY17E FY18E FY19E FY20E
Rio Carnival (Mall) 2,500,000 4,500,000 5,850,000 7,020,000 7,722,000 Rio Carnival (Theme Park) 750,000 1,440,000 1,989,000 2,527,200 2,934,360 Source: Macquarie Research, May 2016
Qingdao attracted over 66m tourists in 2015, and we believe seasonality will play a significant role for this project. We believe both visitation and sales are likely to drop off during winter, as it is open-air, and close to Qingdao’s coast. The travelling time to Huangdao might be a near-term deterrent to group tours. We believe Carnival’s Qingdao project will benefit from improving road and rail infrastructure. It is located in Huangdao, a new development area west of Qingdao city, and from 2017, there will be a stop at Rio Carnival on the Line 1 subway line. This will enable Rio Carnival to be a destination for day-trippers.
25 May 2016 4 Macquarie Research Carnival Group
Mobile Carnival and other earnings catalysts Carnival is also developing a mobile carnival exhibition and other leisure-related businesses. These are mobile parks that offer temporary exhibitions in major Chinese cities with thrill rides and carnival games. The company held a mobile carnival in Hong Kong in 1Q16 at the former Kai Tak Runway and it targets to run the carnival again in either Beijing or Shanghai in 2H16. Its mobile carnival project costs US$20m per set, and the company targets US$13-15m in revenue for each 3-month showing. We model two additional sets to be added in 2017 and 2019, and think that this will help drive annual visitors from 2m in 2016E to 9m by 2020E. Carnival is also investing in a number of edutainment (education and entertainment) systems, such as Discovery Kids Curiosity Centre and Haokaishi edutainment centre, targeting children from 0 to 12 years old, which will complement its leisure park developments. Carnival plans to open up to 100 self-owned Haokaishi centres and franchise up to 400 centres in the PRC over the next 5 years. Carnival holds a residential and commercial project in Chengdu, Sichuan Province, which has a land area of 72,500 sq. m. and GFA of 481,000 sq. m. The project is expected to be completed in stages in 2016, and company plans to sell these residential units over the next 3-4 years, and hopes to see pre-sales revenue of HK$400-500m in 2016. Carnival also operates a restaurant and catering business under the “Golden Jaguar” brand, which operates 26 restaurants and catering services, located in 18 tier-1 and tier-2 cities. The company expects the restaurant chain to break even in FY16.
Fig 8 Mobile Carnival Ride in Hong Kong Fig 9 Haokaishi Education Centre in Shanghai
Source: Carnival Group, Macquarie Research, May 2016 Source: Carnival Group, Macquarie Research, May 2016
25 May 2016 5 Macquarie Research Carnival Group
Valuation and earnings sensitivity Carnival is developing an integrated, multi-purpose park and is making significant efforts to differentiate its offerings from typical commercial properties. While we value the company primarily on its existing assets, we see potential upside from its expansion plans in different provinces, which may be less capital-intensive. The company’s flagship product at Qingdao has components of commercial shopping, entertainment and auxiliary services. Our base valuation is to look at the company as a whole on a DCF basis, and we value the firm at HK$1.10/share based on WACC of 7.3%. Our WACC is driven by high debt weight (80%), as we assume cost of debt of 8.0%. We have assumed that company will have second project ramp from 2019E and third facility to ramp from 2022E. Fig 10 DCF Valuation Table (HKD m) HKD millions 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Revenue 1,147 1,806 2,680 3,620 3,914 3,825 4,387 5,088 5,677 6,540 7,309 ... Growth -19% 57% 48% 35% 8% -2% 15% 16% 12% 15% 12% Gross Profit 591 898 1,402 1,866 2,042 2,021 2,342 2,749 3,091 3,598 4,051 ... GP Margin 52% 50% 52% 52% 52% 53% 53% 54% 54% 55% 55% EBIT 83 322 628 912 1,069 1,089 1,286 1,540 1,787 2,162 2,482 Add: Amortisation 0 0 0 0 0 0 0 0 0 0 0 Add: Depreciation 15 174 212 230 254 278 295 306 312 312 313 EBITDA 98 496 840 1,142 1,323 1,367 1,581 1,846 2,099 2,474 2,795 … Margin 9% 27% 31% 32% 34% 36% 36% 36% 37% 38% 38% Less: Tax -8 22 82 142 204 215 274 338 400 499 582 Less: Minority Interests -17 30 60 91 103 102 123 152 180 224 262 Less: Change in WC 139 706 742 519 834 -269 84 -21 48 58 71 Less: Capex 1,256 1,129 679 929 1,129 929 729 629 329 329 329 ... Capex: Depreciation 84.6x 6.5x 3.2x 4.0x 4.4x 3.3x 2.5x 2.1x 1.1x 1.1x 1.1x Free Cash Flow -1,010 121 860 534 707 -226 470 607 1,101 1,325 1,476 ... FCF Growth -30.4% -112.0% 610.1% -37.9% 32.5% -131.9% -308.6% 29.1% 81.4% 20.3% 11.4% PV of FCF 116 768 444 549 -163 317 382 645 723 751 Source: Company data, Macquarie Research, May 2016
Fig 11 DCF Valuation Table – Per Share Calculation – (WACC = 7.3%) Rmb million
Sum of PV of FCF 4,533 Terminal Growth 3.0% PV of Terminal Value 18,095 Enterprise Value (HK$ m) 22,628 add Net Cash (FY15) -7,127 Market Capitalization Value (HK$ m) 15,501 US$/HK$ exchange rate 7.75 Market Capitalization Value (US$ m) 2,000 Terminal as % total 117% Per Share HK$ 1.10 Source: Macquarie Research, May 2016
While the DCF valuation provides a forecast of its long-term cash flows, some investors may be keen to evaluate the company based on its existing asset value. We believe this may undervalue its ability to develop similar integrated leisure facilities in other Chinese cities. NAV-based property valuations alone does not justify current valuation – Our adjusted NAV for Carnival is HK$3.8bn (HK$0.27/share). We assumed sale of the properties to complete between 2016-19E, while we factor in hotel value for its leisure park based on 7.5% rental yield. The table does not factor in a discount for the NAV, as Carnival does not have significant land bank on its book. Our NAV assumptions include 1) Rmb120/sqm on mall asset based on GFA, assuming 90% occupancy ratio; 2) Rmb80/sqm for theme park, which value the segment near its investment cost; 3) hotel assumption of Rmb2.0m per room, benchmarked to Rmb2-3m in the region.
25 May 2016 6 Macquarie Research Carnival Group
Fig 12 NAV Adjustment on Carnival Group Property for Sale (HK$m) 2016 2017 2018 2019 Sum
Sale of property 828 1,044 1,253 752 3,876 Prop tax (on 20% GPM, 25% rate) - 41 - 52 - 63 - 38 Land appreciation tax (assume 0) 0 0 0 0 PV from sales 754 886 991 554 3,185 Hotel Valuation (HK$m) 2016 2017 2018 2019 Room value (Rmb2 to 3 million/room) 2.0 Total rooms 738 PV for hotel rooms 1,318 1,318
Book Value Adjustments Original Adjustments Adj. Value Assets Reason for Adjustments HK$m HK$m HK$m PP&E 5,976 - 5,976 Hotel and Theme Park, Based on construction cost Projects Under Development Investment Properties 4,420 - 2,165 2,255 Shopping Mall Based on Rental Yield Inventories 3,312 - 127 3,185 Residential Completed for Sale Adj. for Pre-sales, ASP Pre-sales Deposit 982 - 982 - For Residential Units Offset Inventory Adjustments
Total Equity (End-2015) 7,086 - 3,275 3,812
HK$ HK$ HK$ NAV Per Share (HK$) 0.50 - 0.23 0.27 Source: Macquarie Research, May 2016
Fig 13 NAV Calculation for Carnival (Qingdao Asset) Gross Net Reversion Reversion Yield Occupancy MV on NAV/sqm Attrib Area Attrib Area Rental Rental Rate Completion (sf)/(no.) (sqm) (Rmb psm) (Rmb $m) (%) (%) (Rmb$m) Mall 130,500 120 187.92 7.5% 90% 2,255 17,280 Theme Park 60,000 80 57.60 7.5% 100% 768 12,800 Hotel 80,000 75% 1,099 13,733 Source: Macquarie Research, May 2016
Earnings are sensitive to visitation growth and spending We believe profitability of its projects will depend on visitation growth in the coming 1-2 years, driven by the company’s marketing success, and its ability to stand out from its peers in the Qingdao market. Our base case is for Carnival’s Qingdao project to see 2.5m visitors in 2016 and 4.5m in 2017, with an average spending of Rmb450/person. If the company can ramp to 9m visitors by 2017 (which is the mid-point of management’s target traffic of 8m-10m), we could see 32% upside on our net profit forecasts. We also note the management team is in discussion to develop several new integrated leisure projects in other Chinese cities, which may provide upside to our long-term forecasts, likely post-2018E.
Fig 14 Rio Carnival Sensitivity Analysis on Visitor and Spending Per Head
2016E NP (HK$m) -50% Base Case (2.5m in 16) +50% +100% +20% 154 184 214 243 Spending Per Head Base Case (Rmb450) 144 168 193 217 -20% 133 151 170 189 2017E NP (HK$m) -50% Base Case (4.5m in 17) +50% +100% +20% 303 364 427 492 Spending Per Head Base Case (Rmb450) 290 340 394 450 -20% 277 316 360 406 Source: Macquarie Research, May 2016
In terms of valuation target, we have a wide range given the uncertainty to its visitation ramp. Based on our current model, our bear case is at HK$0.46/share on 20x 2017E PER, benchmarked with our leisure sector peers, while our bull case scenario (100% higher traffic in Rio Carnival than our base case) we will reach HK$1.64/share.
25 May 2016 7 Macquarie Research Carnival Group
Fig 15 Valuation Based on Bull and Bear Case Scenarios
(HK$) 2.00 1.80 1.60 1.40 0.54 1.20 0.08 1.00 1.64 0.80 0.56 0.60 1.02 1.10 0.40 0.20 0.46 0.00 Bear Case 20X Current Price DCF Base Case Bull Case (DCF TP 2017E PER (Target Price) based on 100% higher visitation)
Source: Macquarie Research, May 2016
Valuation comparison to leisure peers We benchmark Carnival with other leisure players. We also included Shenzhen OCT in our valuation comparison table. Shenzhen OCT similarly develop integrated leisure projects in Shenzhen, as well as residential projects. Carnival’s valuation is above many of its regional peers; other leisure companies trading at high EV/EBITDA multiples are Songcheng and Dalian Sunasia, two theme park companies operating in China.
Fig 16 Valuation comparison – Leisure and tourism sector
Price Rating TP Mkt Cap ADT PER EV/EBITDA P/Bk ROE (%) Name Ticker LCY LCY USD m USD m FY16E FY17E FY16E FY17E FY16E FY16E FY17E
HK/China Carnival 996 HK 1.02 Neutral 1.10 1,993 2.3 89.1 44.6 43.8 25.7 2.8 3.5 6.8 Carnival at TP 996 HK 1.10 2,107 96.1 48.1 46.1 27.1 3.1 3.5 6.8 Haichang 2255 HK 1.62 Outperform 2.25 834 1.5 21.0 17.1 8.6 7.3 1.4 6.9 6.9 CTS HK 308 HK 2.29 Not Rated NA 1,619 2.0 17.0 14.7 6.2 5.7 0.8 4.6 4.6 Shenzhen OCT 000069 SZ 6.47 Not Rated NA 8,101 95.4 8.4 7.3 6.0 5.3 1.7 16.9 12.0 Songcheng 300144 SZ 25.63 Not Rated NA 5,681 65.2 36.9 33.0 25.4 21.7 9.4 16.2 16.0 CITS 601888 SH 42.99 Outperform 49.00 6,404 16.5 25.4 22.1 15.5 13.6 3.4 14.2 14.7 CYTS 600138 SH 19.35 Outperform 22.00 2,137 19.5 37.1 24.4 15.8 10.7 2.8 7.8 10.9 Shanghai Yuyuan 600655 SH 10.84 Underperform 9.00 2,377 17.3 18.6 17.9 12.9 13.0 1.8 10.1 9.6 Lijiang Yulong 002033 SZ 11.69 Not Rated NA 754 48.5 23.3 20.5 10.9 10.0 2.9 11.9 12.1 Dalian Sunasia 600593 SH 31.46 Not Rated NA 442 22.2 70.6 60.0 21.6 16.8 7.0 4.5 5.5 Average 33.6 25.3 17.2 13.5 3.0 9.8 10.3 Source: Bloomberg, Macquarie Research. Prices as of May 24, 2016; estimates for not-rated companies are based on Bloomberg consensus.
25 May 2016 8 Macquarie Research Carnival Group
Risks, Management, Corporate Governance The Carnival project We believe Carnival’s integrated resort is promising, but the complexity also raises questions is in the early stage on its long-term investment thesis as follows: of development and . Ability to attract and maintain strong tenant mix for its outlet mall, which is crucial to drive successful foot traffic and raise spending. marketing will be crucial to drive . Successful ramp of its two hotels, which have undergone several management changes in critical mass to its the past 5 years. outlet mall and . Ability for Carnival to replicate its business model in other parts of China, often times with leisure facilities different consumer taste and preferences. . Rising competition from both domestic and international players in theme parks would likely lift the benchmark to attract tourists; rise in investment by property companies such as Dalian Wanda, in the scale of 15-20 projects, may also put pressure on visitations. . Successful fundraising to meet its capital needs, as company develop projects in other parts of China. . Chairman holds 71.4% as of end-2015, with 28.6% free float. Experienced Management to Lead Carnival Group has Carnival’s management team consists of professional managers with experience in different assembled an fields, the majority of whom joined the company in 2014. The controlling founder, Mr. King, experienced team to has a background in real estate, and has assembled a strong operational team. The CEO, lead project Mr. Eric Leung is China Gas’ (384.HK) former CFO/Deputy MD. Ms. Mara Wang is Group development and Vice President of Commercial Asset Development, and she was the Regional Director, Head funding needs of Retail at Jones Lang LaSalle, Taiwan. Mr. William Lim is the CEO of Global Star Carnival, the theme park operating subsidiary, with 20 years’ experience in entertainment, producing Holiday on Ice and others. On May 10, company appointed Mr. Meng Cai as an Executive Director. Mr. Meng was in charge of market expansion and product planning for China Merchants Property between 2003-2007 and 2011-2016, with 30 years of experience in real estate in China. The team has strong experience with multi-national corporations and secure financing, as the company improve its tenant portfolio and replicate its model in other projects.
Fig 17 Profile of company’s Management Executive Directors
Mr. Pak Fu KING Mr. King is the Chairman of the company and he is experienced in property development and corporate management. Mr. Eric Wing Cheong LEUNG Mr. Leung is the CEO and ED of the company, responsible for the business development and general operations of the company. Mr. Xiao Cheng GONG Mr. Gong holds an accounting degree and is an ED of the company. He is also an ED of Qilu Commodity Exchange. Mr. Meng Cai Mr. Cai is in charge of market expansion and investment into new leisure projects. Non-Executive Directors Mr. Admiral Wai Cheung CHAN Mr. Chan is an INED of the firm, with 15 years of experience in accounting and auditing. He is also INED for Jia Meng (8101 HK), Energy Int’l (353 HK). Mr. Chi Wing LIE Mr. Lie is an INED of the firm, and he is also a member of the audit committee and remuneration committee. He has extensive experience in auditing and corporate advisory services. Mr. Gin Ing HU Ms. Hu is an INED of the firm, and she is also a member of each of the audit committee, the remuneration committee and the nomination committee. She holds the Corporate CFO position of Acer Incorporated, and is a director and an INED for a number of HK-listed companies. Source: Macquarie Research, May 2016
25 May 2016 9 Macquarie Research Carnival Group
Corporate Governance and Risk Score Carnival has a low Our proprietary Macquarie Governance and Risk Score places Carnival in the fourth quartile MGRS score, partly in Asia. Its low score is partly due to its listing history. Carnival was a reverse listing from because of its 2012, as company was still in early stages of developing the Rio Carnival project. HLB listing history Hodgson Impey Cheng has been Carnival’s auditor since 2007. Positive highlights
. Management team has good experience in commercial leisure facilities; CEO has experience in managing growing enterprises in China Gas, and company also hired experienced management team for business development . Management team has strong experience in multinationals and have been successful in various real estate and leisure project developments. Negative highlights . Carnival is not audited by a top 4 audit firm; its auditor has been HLB since 2007. . The company was backdoor-listed in Hong Kong, and pro forma adjustment for its property assets may place pressure on the profitability of its inventories. . The chairman has significant other business interests, including Fujian Start Group and Rentian (885 HK) . The company has a limited track record on delivering earnings, which affect its growth visibility; new projects are also subject to government approvals and infrastructure support. . Carnival has completed CB offerings the past twelve months to meet its capital expenditure needs, which may have a dilutive impact to equity holders if the debt are converted to equity.
Fig 18 Corporate Governance Score – Carnival’s Position By Quartile
Q1 Q2 Q3 Q4
Overall Score ● Corporate Governance ● History ● Shareholding ● Access ● Board & Mgmt ● Compensation ● Balance Sheet Mgmt ● Risk ● Accounting & Audit ● Visibility of Growth ● Earnings Quality and Risk ● True BS Strength ● Misc Risks ● Source: Macquarie Research, May 2016
25 May 2016 10 Macquarie Research Carnival Group
Family destinations Location near Summer Festivals Each summer, Qingdao hosts an international festival (Qingdao Beer Festival), which attracts more than two million tourists over eight days. Carnival’s Rio project is 15-20 minutes’ drive from Golden Sands Beach Wanren Square (Fig 19), which tends to fill up during the festival as visitors enjoy the scenic view of the coastlines and the beachfront area. Rio Carnival is a secondary venue in the event, located west of the main site. According to management, the Rio project has total assets of Rmb9.4bn, including commercial developments (36%), hotels and conference facilities (25%), and residential properties (33%), and a theme park (7%). A subway line to the entrance is scheduled for completion in 2017.
Fig 19 Rio Carnival is Located in Huangdao (West of Qingdao Downtown)
Qingdao City Centre
Qingdao Beer Festival
Source: Carnival Group, Macquarie Research, May 2016
Rio Carnival will provide an alternative venue for large scale entertainment to the visitors for the beer festivals, as it will also host a festival during the summer. This should help raise the profile of Rio Carnival and establish it as a new landmark in the Huangdao area. Competing with Traditional Malls Carnival’s project While Carnival’s model has significant potential, the market in Qingdao faces competition faces competition from other integrated developments, most notably with Qingdao MixC, a 450,000 sq.m. facility from nearby with entertainment and cultural facilities, and some of the best commercial offerings in the city property developers centre. The MixC project employs Benoy as its interior design team, and features a skating and other leisure rink and other leisure facilities. The site features Family Box (a children’s playhouse), operators JOYPOLIS (Video entertainment centre licensed from Sega) and other family-oriented shops. Rio Carnival will have some similar features, and the key difference will be its amusement park development. The park will feature a variety of attractions, including a family-oriented park and a thrill-oriented park, in order to attract visitors beyond the typical malls. Challenging competition may affect Carnival’s ability to reach its forecast visitations. Besides CR Land’s project, the Qingdao area also faces a number of commercial mall operators, as the city supported commercial developments on a rising population. Other notable comparisons are Wanda’s Wanda Plaza and Marina City. With over 60m tourists a year to the city, these new facilities compete for visitor traffic during their stay.
25 May 2016 11 Macquarie Research Carnival Group
Integrate leisure with spending “Integrated leisure+” – a robust development model “Integrated leisure+” developments provide a hybrid of amusement rides, shopping and dining experiences, and both Carnival and Shenzhen OCT are developing projects on this model. Unlike entry-fee based theme parks, these venues generally have free entry as operators share revenue with commercial tenants to cover the operating costs. In Fig 20 we compare how leisure+ projects differ from traditional malls or theme parks.
Fig 20 Comparing Theme Parks, Integrated Developments, and Shopping Malls
Integrated Leisure+ Shopping Malls Theme Parks Developments
Visit Haichang Shopping Experience Seaworld Carnival Disney Resort Dalian Wanda Shenzhen OCT
Revenue Model Rely on entry fee Revenue sharing Lease and mgmt fee
Ongoing Capital Needs Medium to High Medium Low to Medium
Target Audiences Youth or families Broad based Shoppers
Competitiveness Medium to High Medium Very high
Key Operating Metric Meet consumer interest Tenant quality Tenant mix, location
Source: Macquarie Research, May 2016
These large-scale developments often include specific mall-based leisure projects with activities for both children and elderly people, to attract a wide range of age groups. The entertainment facilities typically charge on an activity basis (i.e. based on boat rental, museum visit, etc). Despite high ongoing capital needs, this model can reach a wider audience base and appears to be gaining traction with Chinese consumers. Existing theme park operators are also taking a more active role to develop nearby commercial areas. For example, Haichang is in discussions to integrate retail/commercial projects with the aquarium/beach park in Qingdao, subject to local government approval. We profiled two leisure+ projects on the next page. These incorporate leisure activities, shopping and dining experiences for visitors. Unlike typical entry-fee based projects, profitability hinges on the ability to attract strong tenants for shops and restaurants and provide a variety of leisure activities (i.e. Ferris wheel, ice skating rink, fireworks, etc) to help drive foot traffic. The success of these projects hinges on getting sustained interest from visitors, which requires the facility to renovate constantly to meet changing consumer demand, and have strong anchor tenants and services to drive interest. The model will also require continuous efforts to promote and attract both local and non-local visitors, in order to retain the tenant base.
25 May 2016 12 Macquarie Research Carnival Group
Rising demand for leisure+ projects We also see rising development of “integrated leisure+” projects, providing a combination of theme park, shopping and dining experiences to drive visitor traffic and revenues. Projects by Carnival (996 HK) and Shenzhen OCT (000069 CH) provide various entertainment venues, including Ferris wheels, indoor roller coasters/children’s attractions, and performance venues. We believe this hybrid infrastructure should continue to gain traction with Chinese consumers. Family travel is growing in popularity and these projects provide a comprehensive solution. An integrated facility will not require visitors to pay entry fees at a flat rate, and different attractions can allow families to have a longer stay than a traditional theme park. Case studies on what works We profiled a leisure+ project in China (Shenzhen OCT), and draw comparison to a well- established project in Japan (Nagashima Spa – unlisted). While they have high upfront capital requirements, developers appear to be shifting from traditional malls to these projects due to following: . More attractive to tenants – Department stores and mall are under intense pressure due to e-commerce and this is forcing innovation. Even high-quality brands need to be located where the foot traffic is, and the entertainment is driving the foot traffic. . Wide audience target – Leisure+ projects can service a variety of customers and be tailored to the needs of family travel. This attracts families with children, who may attend a particular attraction, while parents (and grandparents) are able to visit surrounding shopping and scenic areas. . Revenue sharing with tenants – Developers have been more successful in getting revenue sharing agreements with tenants with Leisure+ projects. Shenzhen OCT Harbour (Shenzhen OCT 000069 CH) Shenzhen Overseas Chinese Town (OCT) started commercial operation of its “OCT Harbour” in 2013. It is an integrated, 300,000 sq. m. development with restaurants, malls, man-made canals and lake, and commercial buildings. A role play theatre allows kids to “work” in various careers, such as postman, dentist, etc. On Saturday evenings, OCT Harbour has a musical show featuring water fountains and fireworks in its open air amphitheatre. The OCT Harbour project attracted clients like H&M and Muji, and also has an upscale supermarket (Ole). This facility also complements two amusement parks developed by Shenzhen OCT, located a 5-minute car ride away. Visitors visiting the area can enjoy a mixture of entertainment and shopping, while the adjacent neighbourhoods will also benefit from the extensive landscaping work.
Fig 21 Commercial Buildings at OCT Harbour Fig 22 Landmark Design at OCT Harbour
Source: Macquarie Research, May 2016 Source: Macquarie Research, May 2016
25 May 2016 13 Macquarie Research Carnival Group
These mixed-use projects are designed as centrepieces of new urban centres, and can also become a destination for leisure travellers. The biggest challenge is to secure anchor tenants, along with large chain restaurants and shops, to drive traffic into the premises, especially during the low season. OCT has been able to develop this project by attracting key restaurant chains to occupy a “restaurant park”, and its IMAX theatre is also popular for local residents on weekends.
Fig 23 Commercial Tenant at OCT Harbour Fig 24 Integrated Park + Shop + Dining Experience
Source: Macquarie Research, November 2015 Source: Macquarie Research, November 2015
Nagashima Spa Land (Nagashima Kanko Kaihatsu, Unlisted) One of the global top-20 theme parks is Nagashima Spa Land, which is a major “integrated leisure+” development in central Japan. The park features roller coasters, a water park, an outlet shopping mall, a children’s museum park and a hot spring facility. The integrated developments allow the park, first opened in 1966, to receive over 5 million visitors annually. The park is ranked #19 in worldwide attendance for amusement and theme parks. Its spa draws the elderly, while the amusement park and museum draws young people. For working-age adults, shopping is the draw, along with facilities for weddings and banquets. The combined efforts have helped this to be a major domestic attraction with high number of recurring visitors. We believe an integrated facility offer advantages over traditional parks. Unlike a visit to Disney, the attractions are in essence co-located in one travel destination, and family visitors can split up to attend different parts of the integrated facility, depending on their interests. Park operators tend to focus on attracting high quality tenants and attraction operators, rather than developing an all-inclusive atmosphere. Over time, the facility can expand its offerings in order to increase its client reach. While this project was constructed earlier than many new theme parks, the project continued to gain attention, driven by its wide demographic coverage. This suggest that an integrated resort may see continued developments, to help keep the project up-to-date and meeting the amenity standards of changing consumer interests.
25 May 2016 14 Macquarie Research Carnival Group
Financial analysis Carnival’s revenue in the past two years was largely driven by property sales. Sale of properties accounted for 99.99% of its sales in 2014 and 55.57% in 2015, and restaurant operations and gains from financial assets was 22% and 17% of 2015 sales respectively. As company develop its integrated leisure facility, we expect segment of revenue from leisure- related operations to rise sharply in 2016-17E, supported by its Rio Carnival project and as company launch new projects in other parts of China. We forecast Carnival’s GPM to be 50% in FY16E (down 180bps YoY), and can see gradual improvement as its outlet mall see improvement in visitor traffic. Income statement We model Carnival’s revenue to rise 57% and 48% in 2016E and 2017E, on sales ramp from its Rio Carnival project and improvement to property sales. We expect its SG&A to rise 13% YoY in 2016E, after 151% jump in 2015, and we forecast 2016E operating profit to rise 154% YoY to HK$407m. We model net profit of HK$168m in FY16, compared to HK$120m in FY15. The majority of GFA is a premium brand outlet shopping mall, where tenants share 12-15% of revenue with Carnival. In Qingdao and surrounding areas, the commercial segment faces competition including CR Land’s MiXC, Wanda’s Wanda Plaza, and Marina City. But management argues (and it is clear on visiting) that the project will be set apart by the leisure facilities such as an ice-skating rink, three theme parks and specialty restaurants – all of which should help drive visitors. The hotel (operated by Langham) has 544 rooms and is targeted for opening in 2Q16, at Rmb900 ADR during seasonal peak periods (May-Nov). Carnival is selling 500 of the remaining residential units in the Rio project over the next two to three years, at Rmb12k-13k psm. The project has 1,440 units in total. Our revenue line includes sale of property, which we estimate will account for 46% of sales in 2016E and 39% in 2017E, as revenue from its leisure related operations rise. This should help the company to rely less on sales of its existing property inventory in the coming 12-24 months.
Fig 25 Carnival – Leisure Segment to Drive Growth 2015 2016E 2017E 2018E 2019E Revenue Growth -19% 57% 48% 35% 8% EBITDA Growth -36% 405% 69% 35% 18% EBIT Growth 78% 286% 95% 45% 17% Gross Profit Margin 52% 50% 52% 52% 52% EBITDA Margin 9% 28% 31% 32% 34% EBIT Margin 7% 18% 23% 25% 27% Net Profit Margin 9% 11% 15% 17% 18% Source: Company data, Macquarie Research, May 2016
Fig 26 Carnival – Income Statement (2014-2018E, HKD m) Profit And Loss 2015A 2016E 2017E 2018E 2019E Sales Revenue 1,147 1,806 2,680 3,620 3,914 Gross Profit 591 898 1,402 1,866 2,042 COGS 556 908 1,278 1,754 1,872 EBITDA 98 496 840 1,142 1,346 Depreciation 15 174 212 230 278 Amortisation - Intangibles 0 0 0 0 0 Other Amortisation 0 0 0 0 0 Total EBIT 83 322 628 912 1,069 Other pre-tax income 94 62 63 60 62 Pre-Tax Profit 96 220 482 746 889 Tax Expense -8 22 82 142 204 Net Profit After Tax 104 198 400 604 684 Minority Interest -17 30 60 91 103
Reported Earnings 120 168 340 513 582 Adjusted Earnings 138 185 375 548 616 Source: Company data, Macquarie Research, May 2016
25 May 2016 15 Macquarie Research Carnival Group
Balance Sheet Carnival’s key assets include its Rio Carnival project, Global Star Carnival, Haokaishi, Golden Jaguar, and Carnival International Community in Chengdu, China. Its business is shifting from property for sale to leisure development, and the company reclassified its property for sale as inventories in FY15, and accounted for HK$4.3bn or 19% of its total asset. Most of the company’s sales are denominated in Rmb, but its reporting currency is HKD, and it does not hedge its currency risks. In 2015, the company has entered into placement agreements to issue two senior bonds, convertible bonds and stock options to meet its capital needs. We believe that completing the sale of its remaining property asset will lower its working capital days, as company disposes of its residential property asset over the next 3 years.
Fig 27 Carnival – Working Capital Rising on Longer A/R Days 2015 2016E 2017E 2018E 2019E Inventory days 2,820 1,370 770 370 171 A/R days 1,082 722 523 404 375 AP days 370 360 330 300 290 Source: Company data, Macquarie Research, May 2016
Fig 28 Carnival – Balance Sheet (2014-2018E, HKD m) Balance Sheet 2015A 2016E 2017E 2018E 2019E Cash 3,089 3,166 3,602 3,787 4,756 Total Receivables 3,316 3,574 3,843 4,010 4,025 Inventories 4,294 3,408 2,696 1,778 877 Fixed Assets 5,976 6,585 7,053 7,753 8,628 Other 6,345 6,355 6,403 6,453 6,506 Total Assets 23,020 23,088 23,597 23,781 24,793 Short term Debt 4,217 4,068 3,929 3,719 3,648 Long Term Debt 6,000 6,289 6,612 6,823 7,315 Provisions 1,529 1,544 1,560 1,576 1,418 Other Liabilities 4,188 3,903 3,811 3,376 3,439 Total Liabilities 15,934 15,804 15,912 15,492 15,820 Shareholders Fund 2,216 2,384 2,724 3,238 3,819 Minority Interest 1,894 1,924 1,984 2,075 2,177 Total S/H Equity 7,086 7,284 7,685 8,289 8,973 Total Liab & S/H Fund 23,020 23,088 23,597 23,781 24,793 Source: Company data, Macquarie Research, May 2016
Cash flow After HK$1.3bn negative operating cash flow in 2014, Carnival’s OpCF turned positive in 2015 amid better working capital management. We forecast further working capital improvement as company complete sale of its property inventory in the next few years, which explains why we forecast more steady operating cash flows. Carnival’s OpCF from its Rio Carnival project should also improve in 2016, as the facility become fully operational and we expect positive OpCF from 2017 from the project. We forecast capex spending to be lower in 2016 and 2017, with capex mainly for the completion of the leisure facilities at Rio Carnival theme parks. In our longer-term capex forecast, we expect company to increase spending as construction for its new leisure facilities ramp in 2018-19E.
25 May 2016 16 Macquarie Research Carnival Group
Fig 29 Carnival – Cashflow Statement (2014-2019E, HKD m) Cashflow Analysis 2015A 2016E 2017E 2018E 2019E EBITDA 98 496 840 1,142 1,346 Tax Paid -3 8 -22 -82 -142 Change in Working Capital -309 706 742 519 834 Net Interest Paid 0 0 0 0 0 Others 460 40 -21 -115 -201 Operating Cashflow 246 1,250 1,539 1,463 1,837 Acquisitions 0 0 0 0 0 Capex -1,256 -1,129 -679 -929 -1,129 Asset sales 1 0 0 0 0 Others -2,618 40 41 54 65 Investing Cashflow -3,873 -1,089 -638 -875 -1,065 Dividends 0 0 0 0 0 Others -1,193 -85 -465 -403 198 Financing Cashflow 3,073 -85 -465 -403 198
Net Chg in Cash/debt -554 76 436 185 970 Free Cash Flow -1,010 121 860 534 707 Source: Company data, Macquarie Research, May 2016
25 May 2016 17 Macquarie Research Carnival Group Macquarie Quant View
The quant model currently holds a marginally negative view on Carnival Attractive Displays where the Group. The strongest style exposure is Growth, indicating this stock has company’s ranked based on good historic and/or forecast growth. Growth metrics focus on both top and s
l the fundamental consensus a bottom line items. The weakest style exposure is Valuations, indicating this t
n Price Target and stock is over-priced in the market relative to its peers. e
Macquarie’s Quantitative m
a Alpha model.
665/946 d n
u Two rankings: Local market Global rank in F (Hong Kong) and Global Real Estate sector (Real Estate) % of BUY recommendations 0% (0/0) Quant Local market rank Global sector rank Number of Price Target downgrades 0 Number of Price Target upgrades 0
Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.
CIFI Group 1.6 CIFI Group
Yuexiu Real Estate Invest… 1.2 Yuexiu Real Estate Invest…
Logan Property 1.2 Logan Property
Fortune REIT 1.1 Fortune REIT
Carnival Group -0.4 Carnival Group
China South City -0.9 China South City
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum
Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.
CIFI Group CIFI Group 1.4 Yuexiu Real Estate Invest… Yuexiu Real Estate Invest… -1.2 Logan Property Logan Property 2.0 Fortune REIT Fortune REIT -0.5 Carnival Group Carnival Group NaN
China South City -1.0 China South City
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -80% -30% 20% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return
What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative Capex Growth 46% Score to sector(/946) to market(/546) Alpha Model Score -0.36 Incremental Capex 37% Valuation -0.84 Change in PPE FY0 32% Growth 0.02 Number of Shares Increase… 22% Profitability -0.58 Earnings Momentum NaN EV/EBITDA FY0 -38% Price Momentum -0.22 ROIC FY0 -39% Quality -0.72 Capital & Funding -0.40 Price to Earnings FY0 -40% Liquidity -1.49 Return on Assets FY0 -44% Risk -0.20 Technicals & Trading -0.51 -60% -40% -20% 0% 20% 40% 60% 0 50 100 0 50 100 0 0 1 1
Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])
25 May 2016 18 Macquarie Research Carnival Group
Carnival Group (996 HK, Neutral, Target Price: HK$1.10) Interim Results 2H/15A 1H/16E 2H/16E 1H/17E Profit & Loss 2015A 2016E 2017E 2018E
Revenue m 643 722 1,083 1,126 Revenue m 1,147 1,806 2,680 3,620 Gross Profit m 322 359 539 589 Gross Profit m 591 898 1,402 1,866 Cost of Goods Sold m 320 363 545 537 Cost of Goods Sold m 556 908 1,278 1,754 EBITDA m -55 198 298 353 EBITDA m 98 496 840 1,142 Depreciation m 10 70 104 89 Depreciation m 15 174 212 230 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m -65 129 193 264 EBIT m 83 322 628 912 Net Interest Income m -2 -56 -85 -71 Net Interest Income m -59 -141 -169 -186 Associates m -4 -3 -3 -3 Associates m -6 -6 -6 -6 Exceptionals m -17 -7 -10 -14 Exceptionals m -17 -17 -34 -34 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 90 31 31 31 Other Pre-Tax Income m 94 62 63 60 Pre-Tax Profit m 2 94 126 207 Pre-Tax Profit m 96 220 482 746 Tax Expense m -2 -9 -13 -34 Tax Expense m 8 -22 -82 -142 Net Profit m 1 85 113 173 Net Profit m 104 198 400 604 Minority Interests m -1 -12 -18 -25 Minority Interests m 17 -30 -60 -91
Reported Earnings m -0 73 95 148 Reported Earnings m 120 168 340 513 Adjusted Earnings m 17 80 106 162 Adjusted Earnings m 138 185 375 548
EPS (rep) ¢ 0.0 0.5 0.6 1.0 EPS (rep) ¢ 0.9 1.1 2.3 3.5 EPS (adj) ¢ 0.1 0.6 0.7 1.1 EPS (adj) ¢ 1.0 1.3 2.5 3.7 EPS Growth yoy (adj) % nmf -36.8 481.4 97.3 EPS Growth (adj) % nmf 26.8 99.7 46.2 PE (rep) x 117.9 89.0 44.6 29.6 PE (adj) x 102.6 80.9 40.5 27.7
EBITDA Margin % -8.5 27.5 27.5 31.3 Total DPS ¢ 0.0 0.0 0.0 0.0 EBIT Margin % -10.1 17.8 17.8 23.4 Total Div Yield % 0.0 0.0 0.0 0.0 Earnings Split % 12.4 43.0 57.0 43.2 Basic Shares Outstanding m 14,034 14,882 14,882 14,882 Revenue Growth % 16.2 43.2 68.6 55.8 Diluted Shares Outstanding m 13,925 14,670 14,882 14,882 EBIT Growth % -166,605.1 -13.2 nmf 104.7
Profit and Loss Ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E
Revenue Growth % -18.8 57.4 48.4 35.1 EBITDA m 98 496 840 1,142 EBITDA Growth % -62.0 404.5 69.3 35.9 Tax Paid m -3 8 -22 -82 EBIT Growth % 77.8 286.1 95.0 45.1 Chgs in Working Cap m -309 706 742 519 Gross Profit Margin % 51.5 49.7 52.3 51.6 Net Interest Paid m 0 0 0 0 EBITDA Margin % 8.6 27.5 31.3 31.5 Other m 460 40 -21 -115 EBIT Margin % 7.3 17.8 23.4 25.2 Operating Cashflow m 246 1,250 1,539 1,463 Net Profit Margin % 12.0 10.3 14.0 15.1 Acquisitions m 0 0 0 0 Payout Ratio % 0.0 0.0 0.0 0.0 Capex m -1,256 -1,129 -679 -929 EV/EBITDA x 231.8 45.5 26.7 19.6 Asset Sales m 1 0 0 0 EV/EBIT x 276.2 70.5 35.8 24.6 Other m -2,618 40 41 54 Investing Cashflow m -3,873 -1,089 -638 -875 Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0 ROE % 2.8 3.5 6.8 9.2 Equity Raised m 518 0 0 0 ROA % 0.4 1.4 2.7 3.8 Debt Movements m 3,748 0 0 0 ROIC % 0.8 2.0 3.6 5.1 Other m -1,193 -85 -465 -403 Net Debt/Equity % 100.6 98.7 90.3 81.5 Financing Cashflow m 3,073 -85 -465 -403 Interest Cover x 1.4 2.3 3.7 4.9 Price/Book x 2.8 2.8 2.7 2.4 Net Chg in Cash/Debt m -593 76 436 185 Book Value per Share 0.4 0.4 0.4 0.4 Free Cashflow m -1,010 121 860 534
Balance Sheet 2015A 2016E 2017E 2018E
Cash m 3,089 3,166 3,602 3,787 Receivables m 3,316 3,574 3,843 4,010 Inventories m 4,294 3,408 2,696 1,778 Investments m 0 0 0 0 Fixed Assets m 5,976 6,585 7,053 7,753 Intangibles m 0 0 0 0 Other Assets m 6,345 6,355 6,403 6,453 Total Assets m 23,020 23,088 23,597 23,781 Payables m 0 0 0 0 Short Term Debt m 4,217 4,068 3,929 3,719 Long Term Debt m 6,000 6,289 6,612 6,823 Provisions m 1,529 1,544 1,560 1,576 Other Liabilities m 4,188 3,903 3,811 3,376 Total Liabilities m 15,934 15,804 15,912 15,492 Shareholders' Funds m 5,192 5,360 5,701 6,214 Minority Interests m 1,894 1,924 1,984 2,075 Other m 0 0 0 0 Total S/H Equity m 7,086 7,284 7,685 8,289 Total Liab & S/H Funds m 23,020 23,088 23,597 23,781
All figures in HKD unless noted. Source: Company data, Macquarie Research, May 2016
25 May 2016 19 Macquarie Research Carnival Group Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders’ Outperform – expected return >+10% funds Neutral – expected return from -10% to +10% Low–medium – stock should be expected to Gross cashflow = adjusted net profit + depreciation Underperform – expected return <-10% move up or down at least 25–30% in a year. *equivalent fully paid ordinary weighted average Macquarie - Canada number of shares Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or Neutral – return within 5% of benchmark return down at least 15–25% in a year. All Reported numbers for Australian/NZ listed stocks Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks are modelled under IFRS (International Financial only Reporting Standards). Macquarie - USA
Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return
Recommendation proportions – For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients)
2255 HK vs HSI, & rec history 601888 CH vs HSI, & rec history 600138 CH vs HSI, & rec history
(all figures in HKD currency unless noted) (all figures in CNY currency unless noted) (all figures in CNY currency unless noted)
600655 CH vs HSI, & rec history 996 HK rel HSI performance
(all figures in CNY currency unless noted) (all figures in CNY currency unless noted)
Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 12-month target price methodology 2255 HK: HK$2.25 based on a DCF methodology 601888 CH: Rmb49.00 based on a PER methodology 600138 CH: Rmb22.00 based on a PER methodology 600655 CH: Rmb9.00 based on a PER methodology 996 HK: HK$1.10 based on a DCF methodology
Company-specific disclosures:
Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
Date Stock Code (BBG code) Recommendation Target Price
Target price risk disclosures: 2255 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.
25 May 2016 20 Macquarie Research Carnival Group 601888 CH: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 600138 CH: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 600655 CH: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 996 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.
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Asia Research Head of Equity Research Software and Internet Transport & Infrastructure Peter Redhead (Global – Head) (852) 3922 4836 Wendy Huang (Asia) (852) 3922 3378 Janet Lewis (Asia) (852) 3922 5417 Matt Nacard (Asia – Head) (852) 3922 1362 David Gibson (Asia) (813) 3512 7880 Azita Nazrene (ASEAN) (603) 2059 8980 Jake Lynch (Asia – Head) (852) 3922 3583 Hillman Chan (China, Hong Kong) (852) 3922 3716 Corinne Jian (Taiwan) (8862) 2734 7522 Nitin Mohta (India) (9122) 6720 4090 Automobiles/Auto Parts Nathan Ramler (Japan) (813) 3512 7875 Utilities & Renewables Janet Lewis (China) (852) 3922 5417 Prem Jearajasingam (Malaysia) (603) 2059 8989 Alan Hon (Hong Kong) (852) 3922 3589 Zhixuan Lin (China) (8621) 2412 9006 Oil, Gas and Petrochemicals Inderjeetsingh Bhatia (India) (9122) 6720 4087 Amit Mishra (India) (9122) 6720 4084 Prem Jearajasingam (Malaysia) (603) 2059 8989 Lyall Taylor (Indonesia) (6221) 2598 8489 James Hubbard (Asia) (852) 3922 1226 Karisa Magpayo (Philippines) (632) 857 0899 Takuo Katayama (Japan) (813) 3512 7856 Aditya Suresh (Asia) (852) 3922 1265 James Hong (Korea) (822) 3705 8661 Duke Suttikulpanich (ASEAN) (65) 6601 0148 Commodities Abhishek Agarwal (India) (9122) 6720 4079 Banks and Non-Bank Financials Colin Hamilton (Global) (4420) 3037 4061 Polina Diyachkina (Japan) (813) 3512 7886 Ian Roper (65) 6601 0698 Matthew Smith (China) (8621) 2412 9022 Anna Park (Korea) (822) 3705 8669 Jim Lennon (4420) 3037 4271 Suresh Ganapathy (India) (9122) 6720 4078 Isaac Chow (Malaysia) (603) 2059 8982 Lynn Zhao (8621) 2412 9035 Lyall Taylor (Indonesia) (6221) 2598 8489 Pharmaceuticals and Healthcare Matthew Turner (4420) 3037 4340 Keisuke Moriyama (Japan) (813) 3512 7476 Rakesh Arora (9122) 6720 4093 Leo Nakada (Japan) (813) 3512 6050 Wei Li (China, Hong Kong) (852) 3922 5494 Chan Hwang (Korea) (822) 3705 8643 Abhishek Singhal (India) (9122) 6720 4086 Economics Gilbert Lopez (Philippines) (632) 857 0892 Property Peter Eadon-Clarke (Global) (813) 3512 7850 Thomas Stoegner (Singapore) (65) 6601 0854 Larry Hu (China, Hong Kong) (852) 3922 3778 Dexter Hsu (Taiwan) (8862) 2734 7530 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Tanvee Gupta Jain (India) (9122) 6720 4355 Passakorn Linmaneechote (Thailand) (662) 694 7728 David Ng (China, Hong Kong) (852) 3922 1291 Quantitative / CPG Conglomerates Raymond Liu (China, Hong Kong) (852) 3922 3629 Wilson Ho (China) (852) 3922 3248 Gurvinder Brar (Global) (4420) 3037 4036 Gilbert Lopez (Philippines) (632) 857 0892 Abhishek Bhandari (India) (9122) 6720 4088 Woei Chan (Asia) (852) 3922 1421 William Montgomery (Japan) (813) 3512 7864 Consumer and Gaming Anthony Ng (Asia) (852) 3922 1561 Aiman Mohamad (Malaysia) (603) 2059 8986 Danny Deng (Asia) (852) 3922 4646 Linda Huang (China, Hong Kong) (852) 3922 4068 Kervin Sisayan (Philippines) (632) 857 0893 Per Gullberg (Asia) (852) 3922 1478 Zibo Chen (Hong Kong) (852) 3922 1130 Corinne Jian (Taiwan) (8862) 2734 7522 Amit Mishra (India) (9122) 6720 4084 Patti Tomaitrichitr (Thailand) (662) 694 7727 Strategy/Country Fransisca Widjaja (Singapore) (65) 6601 0847 Resources / Metals and Mining Viktor Shvets (Asia, Global) (852) 3922 3883 Hendy Soegiarto (Indonesia) (6221) 2598 8369 Chetan Seth (Asia) (852) 3922 4769 Toby Williams (Japan) (813) 3512 7392 Coria Chow (China) (852) 3922 1181 Peter Eadon-Clarke (Japan) (813) 3512 7850 HongSuk Na (Korea) (822) 3705 8678 Rakesh Arora (India) (9122) 6720 4093 David Ng (China, Hong Kong) (852) 3922 1291 Karisa Magpayo (Philippines) (632) 857 0899 Stanley Liong (Indonesia) (6221) 2598 8381 Erwin Sanft (China, Hong Kong) (852) 3922 1516 Polina Diyachkina (Japan) (813) 3512 7886 Emerging Leaders Rakesh Arora (India) (9122) 6720 4093 Anna Park (Korea) (822) 3705 8669 Lyall Taylor (Indonesia) (6221) 2598 8489 Jake Lynch (China, Asia) (852) 3922 3583 Technology Chan Hwang (Korea) (822) 3705 8643 Aditya Suresh (Asia) (852) 3922 1265 Gilbert Lopez (Philippines) (632) 857 0892 Neel Sinha (ASEAN) (65) 6601 0562 Damian Thong (Asia, Japan) (813) 3512 7877 Conrad Werner (Singapore) (65) 6601 0182 Timothy Lam (Hong Kong) (852) 3922 1086 Allen Chang (852) 3922 1136 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Mike Allen (Japan) (813) 3512 7859 (China, Hong Kong, Taiwan) Alastair Macdonald (Thailand) (662) 694 7753 Kwang Cho (Korea) (822) 3705 4953 Nitin Mohta (India) (9122) 6720 4090
David Gibson (Japan) (813) 3512 7880 Industrials George Chang (Japan) (813) 3512 7854 Find our research at Janet Lewis (Asia) (852) 3922 5417 Daniel Kim (Korea) (822) 3705 8641 Macquarie: www.macquarie.com.au/research Patrick Dai (China) (8621) 2412 9082 Soyun Shin (Korea) (822) 3705 8659 Thomson: www.thomson.com/financial Inderjeetsingh Bhatia (India) (9122) 6720 4087 Patrick Liao (Taiwan) (8862) 2734 7515 Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Lyall Taylor (Indonesia) (6221) 2598 8489 Louis Cheng (Taiwan) (8862) 2734 7526 Kaylin Tsai (Taiwan) (8862) 2734 7523 Factset: http://www.factset.com/home.aspx Kenjin Hotta (Japan) (813) 3512 7871 CapitalIQ www.capitaliq.com James Hong (Korea) (822) 3705 8661 Telecoms Email [email protected] for access
Insurance Nathan Ramler (Asia, Japan) (813) 3512 7875 Scott Russell (Asia, Japan) (852) 3922 3567 Danny Chu (852) 3922 4762 Thomas Stoegner (ASEAN) (65) 6601 0854 (China, Hong Kong, Taiwan) Leo Nakada (Japan) (813) 3512 6050 Abhishek Agarwal (India) (9122) 6720 4079 Chan Hwang (Korea) (822) 3705 8643 Prem Jearajasingam (Malaysia, Singapore) (603) 2059 8989 Dexter Hsu (Taiwan) (8862) 2734 7530 Kervin Sisayan (Philippines) (632) 857 0893 Passakorn Linmaneechote (Thailand) (662) 694 7728
Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Jeffrey Chung (Asia) (852) 3922 2074 Amelia Mehta (Singapore) (65) 6601 0211 Michael Santos (Philippines) (632) 857 0813 Jeff Evans (Boston) (1 617) 598 2508 Angus Kent (Thailand) (662) 694 7601 Chris Reale (New York) (1 212) 231 2555 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Ben Musgrave (UK/Europe) (44) 20 3037 4882 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41) 22 818 7712 Julien Roux (UK/Europe) (44) 20 3037 4867 Justin Morrison (Singapore) (65) 6601 0288 Isaac Huang (Taiwan) (8862) 2734 7582 Riaz Hyder (Indonesia) (6221) 2598 8486 Sales Trading Nick Cant (Japan) (65) 6601 0210 Brendan Rake (Thailand) (662) 694 7707 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Mike Keen (UK/Europe) (44) 20 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555 Eric Roles (New York) (1 212) 231 2559 Gino C Rojas (Philippines) (632) 857 0861