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Uni-President China 统一企业中国 (220 HK) ACCUMULATE

Lukewarm noodles and drinks Share Price Target Price Uni-president Enterprises Corporation, the largest F&B conglomerate in Taiwan, HK$7.74 HK$8.2 seek to expand its global market and established a business in China through the subsidiary company, Uni-President China (“UPC”) in 1992. The overall instant noodles and beverage industry in China slipped over the past few years and have China / Consumer goods / Food & Beverage seen a recovery. The trend transformed to the rising demand for premium food and health-conscious. With the strong product innovation and diversified 26 November 2018 products, we believe UPC can continue its upward trend in profits. We thus initiate coverage on UPC with ACCUMULATE rating and DCF-based TP HK$8.2. Cyrus Tai (SFC CE: BKJ685)  Strong product innovation compared with peers. Consumers in China trend to seek (852) 3519 1292 new flavors, brands and products, resulting in product lifecycles shrinking. Therefore, [email protected] innovation is important to drive industry growth. UPC launched lots of new products in recent years; we are waiting for other star products like “Soup Daren” and “Classmate Xiaoming” to boost sales growth significantly in future. Latest Key Data Total shares outstanding (mn) 4,319  A healthy pace of growth in Q1-Q3 2018. UPC posted its unaudited 3Q18 results; the Market capitalization (HK$mn) net profit increased by 9.3% yoy to 399 million yuan in 3Q18, up 19.1% yoy to 1.1 billion 33,432 yuan in the first three quarters of 2018. Although management mentioned the sales Enterprise value (HK$mn) 31,800 growth of instant noodles and beverage were both slowed down from 2018H1 due to 12M daily turnover (HK$mn) 48.7 the impact of weather conditions and high-base effect, the sales performance was 12M volatility (%) 42 in-line with the market and UPC controlled its channel inventory well. We believe UPC PEG FY17-19E (X) 2.3 can achieve mid-single digit percentage sales growth for 2018. RoE avg FY17-19E (%) 8 P/B FY18E (x) 2.2  Maintain margin growth outlook. The sales contribution of high-end products with Net debt/equity FY18E (%) Net cash high-margin will increase continuously due to the consumption upgrades. On the other hand, UPC continues to control its costs effectively such as saving A&P expenses and labor cost. Performance (%) 1M YTD 12M  Tend to maintain a high dividend payout ratio of 70%. UPC increased their dividend payout ratio to 70% in 2017 which was higher than the level of 20% over the past 5 Absolute (2.5) 18.4 21.9 years. The management has no significant M&A and CAPEX so far. We thus believe UPC Relative to HSI (4.8) 31.7 34.6 will continue to maintain a high dividend payout ratio of 70%.

 Intensified competition in China’s beverage industry. Due to the beverages business in Major Shareholders (%) China is saturated and fragmented, UPC is under pressure to differentiate themselves Cayman President Holdings Ltd. 70.5 from rivals. In addition, consumer preferences uncertainty will drive product diversification in both high-end and low-end products. Auditor PricewaterhouseCoopers  Initiate ACCUMULATE. We value the counter at HK$8.2 based on our DCF valuation, which translates into 28.2x FY18 P/E and 2.7x FY18 P/B. Parameters include 0% discount and 3% terminal Price Chart growth rate. We initiate coverage with ACCUMULATE rating and TP of HK$8.2. Turnover (HK$mn) Price (HK$) Investment Summary FY-end DEC 2016 2017 2018E 2019E 2020E Turnover (RMB mn) 20,986 21,297 21,914 22,791 23,702 Chg (%) (5) 1 3 4 4

Net Profit (RMB mn) 607 878 1,086 1,158 1,257

Chg (%) (27) 45 24 7 9

EPS (RMB) 0.141 0.203 0.251 0.268 0.291

Chg (%) (27) 45 24 7 9

P/E (x) 48.8 33.8 27.3 25.6 23.6

P/B (x) 2.5 2.3 2.2 2.2 2.1

P/OCF (x) 13.9 12.1 14.6 13.1 12.1 EV/EBITDA (x) 11.3 10.5 10.5 10.1 9.5 DPS (RMB) 0.028 0.142 0.176 0.188 0.204 Source: Bloomberg, Orient Securities (Hong Kong) Yield (%) 0.4 2.1 2.6 2.7 3.0 Source: Company data, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1

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Uni-President China: A major F&B Player in China

Uni-President China is Mainland China subsidiary of Uni-President Enterprises

Corporation (TWSE: 1216), which is the largest F&B conglomerate in Taiwan and

one of the largest in Asia. UPC has commenced operation since 1992 and has

now developed into one of the leading manufacturers of beverages and instant

noodles in PRC.

Figure 1: key milestones

Uni-President Enterprises Corporation (TWSE: 1216) Enter into Chinese Business-Uni President China 1967-1973 (The Pioneering Period) Seek and grasped market opportunities in Taiwan On January 13, 1992, the Group launched its first manufacturing plant in Xijiang, PRC. 1974-1982 (Growth Period) Enhanced competitive advantage to cater the needs of consumers 1983-1989 (Conglomeration Period) In 1998, UPC established operational headquarter in Shanghai Developed diversified new business and divided the Chinese market into seven regions: Northeast, to unleash synergistic advantage North, East, South, Central, West, and Xinjiang regions. The group aims to penetrate the market by setting up manufacturing 1990-1998 (Internationalization Period) bases and sales offices in each province. Constructed new plants in emerging markets throughout Asia Pacific, including China, Indonesia, Thailand, Vietnam and the Philippines Nowadays, UPC has 35 manufacturing plants, including the new 1999-Present (Global Village Period) developing plant in Tianjin and sells their products primarily Created competitive products in different countries through their vast network of distributors in first and second-tier of cities in China, accounting for around 90% of sales.

UPC is developing the new manufacturing plant in Tianjing which plans to start production in 2019. UPC contains the overall of 78 production lines of instant noodles business and 89 production lines of beverage business.

Source: company data, Orient Securities (Hong Kong)

Figure 2: Shareholding structure Strong parent company and stable shareholding structure UPC listed on the Hong Kong Stock Exchange in 2007 with its IPO price at Uni-President HK$4.22 per share. The parent company which has a market capitalization of HK$110bn is an ultimate controlling shareholder of UPC, holding approximately 100% 100% 70.5% equity interest. Strong parent company supported UPC to take ownership Cayman President President (BVI) over the operational and strategic decision-making processes. 70.49% 0.05% During the past 11years after listed, UPC expanded and penetrated into Chinese market continuously. The sales amount increased from 8.7 billion yuan to 21.9 Uni-President China billion yuan, at a CAGR of 8.8%.

Source: company data, Orient Securities (Hong Kong)

See last page for disclaimer. * All selling prices are recorded from Taobao 2

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Instant noodle sales bounced back: Entering into the new era

China is among the world’s largest consumers of instant noodles. Instant noodles sales in

China have increased every year since the 1990s and sold 46.2 billion packages in 2013,

which means that 1,465 packages of instant noodles were consumed in every second.

However, the sales of instant noodles dropped by 8 billion packages from 2013 to 2016. Low instant noodles sales pointed to the economic rise of rural China and rapid growth of online meal ordering services which increased from 21.68 billion yuan to more than 200 billion yuan from 2011 to 2017, at a CAGR of c.37%.

But the Chinese instant noodle market has recovered since 2017, according to the data from Nielsen. The overall sales volume and sales amount increased by 0.3% yoy and 3.6% yoy respectively in 2017. In 2018H1, the warming trend continued more obvious, overall sales volume and sales increased by 5.9% yoy and 10.1% yoy respectively. Figure 3: The overall performance of instant noodles industry in China Overall production volume of instant noodles in china Overall sales of instant noodles in China (Bn package) (Bn yuan) (RMB per package) 40 85 4 ~3 30 36.8 35.1 80 2.23 2.31 2.4 2.45 2.51 3 32.1 29.5 31.2 29.4 81 20 75 2 82 81 77 74 10 70 72 1 0 65 0 2013 2014 2015 2016 2017 2018H1 2013 2014 2015 2016 2017 2018H1 The instant noodles industry has recovered since 2017 because of the rapid sales growth of premium instant noodles

Sales distribution by different price level 2016-2020E CAGR 13% 15% 23% : Above 3 yuan/ package and above 4.5 yuan/ cup noodles 69% : 2-2.5 yuan/ package and 3.5-4 yuan/ cup noodles -2% 67% : 1-2 yuan/ package and snack noodles 19% -15% 10% 2016 2020E

Source: chyxx(中国产业信息),Orient Securities (Hong Kong) The rebound of instant noodles business reflected rapid changes in consumers’ consumption pattern. The convenience and economical value of instant noodles were the key factors to success in the past. Driven by the growth of consumer spending power and continuous optimization of the consumer environment, consumers are willing to spend more money on improving the quality of life, seeking for psychological and spiritual satisfaction, not

just for basic requirements of life. Chinese instant noodles manufactures are trying hard

to meet consumers’ request.

The overall instant noodle industry in China is transformed from low-end fast food to high-end, healthy and snack. Premium products conveyed a safe and healthy image to consumers and gained a rapid growth of sales. Therefore, the average price of instant noodles rose continuously from 2.23 yuan per package in 2013 to around 3 yuan per package in 2018. The share of selling premium noodles is expected to increase from 13% to 23% by 2020 and push the average price up.

See last page for disclaimer. * All selling prices are recorded from Taobao 3

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UPC: Pioneering the new age of instant noodles in China

Players in Instant noodles have remained fairly steady Figure 4: Highly concentrated instant The instant noodles market in China is highly concentrated and led by two major players, noodles market TingYi and UPC, which represented the total market share of approximately 50.6% and

21.2% in terms of sales in 2017 respectively. There was no aggressive price war in recent Uni- years and the high market concentration constrained the expansion of smaller Others, President 28.2% , 21.2% manufacturers. Therefore, the market landscape has not changed much to date.

Strong innovation keeps UPC one step ahead Tingyi, 50.6% Facing to the new era of instant noodles industry, UPC has diversified products and put more focus on promoting its premium noodles with multiple specifications so as to meet the consumers’ request. The Group introduced the new concept of “lifestyle noodles” in Source: company data, Orient Securities (Hong Kong) 2017 and provided a better quality from the four aspects of "soup, material, taste,

noodles" to consumers.

Instant noodles business has provided nearly 40% of total revenue of the Group. The chart below shows that instant noodles sales amount bounced back in 2016 and segment profit reached a record high in 2017. The segment profit has grown faster than revenue since 2015, mainly driven by the increasing sales ratio of high-priced instant noodles, which increased from 13% to 25% in the last two and a half years.

Figure 5: UPC’s instant noodles sales (Mn yuan) *restated 7,826 7,960 8,221 8,163 7,800 7,270 7,567 5,936 5,800 3,846 4,152 3,800

1,800 316 412 165 225 (143) (94) 174 188 223 (200) 2011 2012 2013 2014 2015 2016 2017 2017H1* 2018H1*

Source: company data, Orient Securities (Hong Kong)

Innovated another high-end convenience food - self-heating food Self-heating food is a type of convenience food which uses exothermic chemical reaction to heat food without external heating power. It marked as a convenient, anytime, anywhere products so as to suit the fast-paced lifestyle of urban consumers. UPC

introduced the first self-heating convenient hot pot “Chongqing Old Hotpot (重慶老火 鍋)” which cost 45 yuan/bowl (370g) under the brand of “Lazy Time (煮時光)” in January 2018. It has already sold more than 42 thousand bowls in the first three quarters.

In October 2018, UPC launched another type of self-heating rice brand “開小灶”. It has three products which cost 30 yuan/bowl (251g) now. Compared with online meal ordering services, it has an advantage in convenience and safety.

Figure 6: New Products: Self-heating food

Eating self-heating food instruction: 1. Pour cold water until water level for heat bag 2. Quickly put the upper container which contained all the foods on the top of heat bag 3.Fully close the cover, wait for 15 mins 45 yuan/ bowl (370g) 30 yuan/ bowl (251g)

Source: company data, Orient Securities (Hong Kong) See last page for disclaimer. * All selling prices are recorded from Taobao 4

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UPC-Focusing on high-priced instant noodles in recent years

Major Brands Selling Description launch date price*

The most expensive instant noodles 2016 RMB 29.9/bowl brand in UPC Imperial Banquet(满汉宴)

Although the contribution to total 2015 RMB 18/bowl sales of the group is low, its sales growth was exceed 100% every year.

Imperial Big Meal New Concept: 满汉大餐 ( ) A cross-industry cooperation with Lifestyle noodles “Mazilu (马子禄)”, the only Lanzhou Contributed 25% Beef Noodles restaurant with the title 2014 RMB 12/bowl （中华 of sales to total of “China’s Time-honored Brand The Champion（冠軍榜） 老字号）” revenue in 2018H1 As the major brand of the Group’s reform of instant noodles, the revenue 30% RMB 8/bowl 25% increased by 90% to 1 billion yuan in 25% 2008 RMB 5/cup the first three quarter of 2017 on a yoy 20% RMB 3.8 /pac basic and it continued to have 15% 12% Provided a better double-digit percentage growth in Soup Daren(汤达人) 10% quality from the revenue in 2018H1. 5% 0% four aspects of Products obtained regional features 2016 2018H1 "soup, material, 2016 RMB 5/bowl with orthodox taste taste, noodles" Urban Bistro（都會小館）

2016 RMB 5.8/bowl Mixed noodles brands create the most

representative “summer noodle”

Mix-up in Town with You brand as a vision. (相拌一城)

RMB 5.8/bowl 1996 RMB 3/pac Jiang Ban Mian(酱拌面) Above 5 yuan

New star products; it succeed to Below 5 yuan RMB 4/cup 2017 expand the territory of instant noodles RMB 2.5/pac and seized market share quickly after Instant noodles Teng Jiao(藤娇) launched.

RMB 4/cup Contributed 75% 2008 RMB 2.5/pac Those are UPC’s successful long lasting of sales to total Qiao Mian Guan (巧面馆) brands. Among them, “Uni-President revenue in Lao Tan Pickled Cabbage and Beef 2018H1 Flavored Noodles” have been launched 1996 RMB 4/cup 88% for 15 years and the market share 90% 85% Lay Yi Tong(來一桶) remained number one among the 80% same category in China, accounted for 75% more than 54% of the market share in 75% 2017H1. 70% 1996 RMB 2.5/pac 65% 2016 2018H1

Uni-President 100(統一 100)

Snack noodles Little Raccoon: RMB 1.0/pac High-quality puffed casual snacks that Xiao Dang Jia: RMB0.7/pac can eat everytime, everywhere.

Little Raccoon 小浣熊 Xiao Dang Jia (小当家)

See last page for disclaimer. * All selling prices are recorded from Taobao 5

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The internal and external challenges for beverage industry

External challenges-1.Chinese beverage industry market has gone through three stages

Carbonated beverages dominated the Chinese beverage market before the year 2000.

However, its shares have been declining in recent years due to the tastes, fashion and

consumer preferences appeared to be changing. The key beverage trends in China seem

to be amongst health conscious, including low sugar, tea based beverages and use of

natural vegetable or fruit. Therefore, bottled water, fruit and vegetable juices and

protein drinks are more attractive nowadays. Soymilk and soda water sales increased

87% and 110% yoy as of the end of June 2018 respectively, according to Kantar

Worldpanel.

Figure 7: Fragmented China beverage market Figure 8: Market share breakdown by sales in 2016

2011-2016 2016-2020E 100% 2% 10% CAGR CAGR 90% 15.4% 7.1% 29% Bottled water 80% 47% 46% 49% 52% 53% Carbonated 0.2% -1.9% 70% 24% Beverages 60% Condensed juice 1.5% -1.7% 4% 3% 3% 50% 4% 4% Fruit juice 3.6% 0.1% 3% 3% 4% 7% 4% 40% 7% 6% 4% 18% RTD coffee 29.4% 14.3% 4% 4% 4% 5% 4% 1% 2% 2% 4% 5% 17% 30% 3% 4% 5% RTD tea based 17% 18% 16% 5.9% -1.1% 20% 14% 12% 0% Beverage 10% 17% 15% 15% 14% 14% Energy Drinks 20.0% 11.1% 0% Others 13.7% 1.7% 2012 2013 2014 2015 2016 Source:Euromonitor, Orient Securities (Hong Kong) External challenges-2.Freshly handmade drinks is another trend in the lifestyle upgrade Freshly handmade beverages brands such as Heytea and Starbucks are marked as hip, healthy and affordable which created viral trends and attracted young consumers in China. According to Kantar Worldpanel, around 450 million consumers in urban areas in China aged 15 to 45 buy 14.3 cups of freshly handmade drinks a year with an average price of 15.2 yuan, making it a market worth 97.8 billion yuan in 2017.

Figure 9: Total production volume of beverages in China Figure 10: Total sales of beverages in China (Mn tons) (Bn yuan) 200 20% 700 14% 17% 12% 12% 600 11% 15% 10% 150 500 10% 8% 11% 10% 7% 9% 400 6% 100 5% 6% 4% 5% 300 4% 2% 50 200 0% 0% 100 -2% -2% -3% 0 -5% 0 -4% 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

Source: Qianzhan Industry Research Institute , Orient Securities (Hong Kong) Internal challenges-Failed to satisfy the customer needs Consumers in china seek new flavors, brands and product, resulting in product lifecycles shrinking. The growth of domestic beverage market slowed down obviously over the past few years and appeared negative growth in 2017. The production volume and sales

amount were 180.5 million tons and 636.3 billion yuan in 2017, down 1.6% and 2.9% yoy respectively. However, the domestic beverage industry rebounded in 2018H1, the sales volume and sales amount increased by 3.4% and 5.0% yoy respectively, according to the data from Nielsen.

See last page for disclaimer. * All selling prices are recorded from Taobao 6

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UPC: Moving out of the woods in beverage business

The beverage business normally provided nearly 60% of total revenue of the Group.

Among them, the tea drinks segment has generated nearly 50% of total revenue of

beverage segment in recent years. In 2017, the sales of beverage segment rebounded, up

2.34% yoy and increased by 5.26% yoy continuously in 2018H1.

Figure 11: Sales performance of beverage business

16,000 14,000 12,000 +9.9% -4.4% -13.1% -4.6% 10,000 +18.5% 8,000 -7.5% +6.6% +8.6% -41.5% -18.5% 6,000 4,000 -10% +5.4% +1.5% 2,000 +9.8% +0.8% 0 2012 2013 2014 2015 2016 2017 Source: company data, Orient Securities (Hong Kong) Due to the beverage business is saturated and fragmented, what are the business strategies that UPC can survive and enhance competiveness in beverage market?

Figure 12: Profit margin of beverage segment ❶ For the traditional brands, UPC will focus on key brands and key markets, cut off 14% those products with low margin and no future competiveness to maximize the benefits 13% 12% with limited resources. Through refreshing classic products and price increasing, the 10% 11% 8% 8% classic products “Uni Ice Tea” and “Uni Green Tea” recovered and generated double-digit 8% 7% 6% 5% 6% 5% percentage growth in sales in 2018H1. 4% 2% 0% ❷Focusing on emerging trends in Chinese consumer lifestyles and developing differentiated products with high-margin. For example, short shelf-life products are

Source: company data, Orient Securities (Hong Kong) always related to “fresh, healthy and less additives” which coincided with the new consumer preference. Therefore, UPC launched the new refrigerated drinks such as “Refreshing Tea 茶• 瞬鲜”, “Fruit Trio 果重凑”,“REMIX 爱混”, which have only 21 Figure 13: Me-too products days shelf-life on May 2018. They sold 9.9 yuan and distributed mainly in eastern China. We believe those products which unfamiliar with the regular drinks on market will have a very high probability of success. If customers receive ❸ Differentiated products with high-margin. In order to in line with the market trends low-priced fake products of poor and needs of customers, the group launches new product categories or extending quality and do existing brand lines with new products, new flavors or packaging. As we can see the chart not realize it is a from the left, the beverage segment profit margin of the Group increased annually, copy, this will mainly driven by focusing on promoting its premium products with high-margin in recent affect the bran’s years. reputation.

❹UPC owned granted patents to prevent me-too products in the market to affect the Left: UPC’s products Group’s reputation and interests of the Group. For example, the product of“Haizhiyan Right: Me-too products (海之言）”registered the bottles of each color to prevent competitors from copying their Source: company data, Orient Securities (Hong Kong) invention.

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Diversified product mix to enhance competiveness

Selling Price* RMB 3/250ml, RMB 2.7/500ml RMB 5/480ml RMB 20/290ml RMB 9.9/400ml RMB 4.3/500ml

Launch date 1990s 2015 2017 2017 2018 Classic products Star products“Classmate “Taimoxing (泰魔性)” first Fruits and Vegetables “Refreshing Tea(茶• 瞬 Uni Ice Tea and Uni Xiaoming（小茗同学）” , A Introduced Thai-style Enzyme Drink in China 鲜)”

Green Tea significant brand priced at lemon juice and tea Tea Drinks RMB5.0 and above processing technology

Selling Price* RMB 3.5/450ml RMB 2.7/500ml RMB 3.3/500ml RMB 4.5/245ml RMB 15/300ml Launch date 1999 2011 2014 2014 2016

Classic products Chinese traditional health Star products Chinese-featured juice juice dessert drink “Keep “Uni More Orange drink series. “Haizhiyan (海之言)” brand “Ruyin（如飲）” Sweet (恬蜜光年)”

Juice (统一鲜橙多)” “Seasonal Drinks (饮养四 季)”

Juice Drinks RMB 3.3/500ml RMB 9.9/300ml

2018 2018 A sparkling drink Refrigerated juice drinks” ” Fighting (打气)” “Fruit Trio 果重奏”

Selling Price* RMB4.5/500ml, RMB 9.9/250ml RMB 9.9/250ml ClassicRMB 2.0/250ml products The cute packaging design Refrigerated milk tea Launch date “Uni2009 Assam Milk Tea (统 2015 2018

一阿萨姆Classic products )” The cute packaging design Refrigerated milk tea “Uni Assam Milk Tea (REMIX 爱混) Milk Tea (统一阿萨姆)”

Combined

Drinks RMB 4.5/500ml RMB 6/300ml 2016 2016

Delicious lactic acid No synthetic chemical bacteria flavor ingredients such as taurine

Aqua More Energy Drinks

Selling Price* RMB4.5/500ml, RMB3/250ml RMB 2.0/250ml

Launch date 2009 2018 Classic products (“A-Ha A new soymilk brand” 雅哈 诚实豆” Coffee ) Soymilk

Others RMB 10/500ml RMB 4.0/570ml 2013 2016 A pure and quality water quality bottle water with significant differences in product source from Bama, design and positioning Guangxi Bottled water

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UPC has an advantage of innovation skills and diversified products

The uncertainty of raw materials price Figure 14: Cost of raw materials Raw materials, packaging materials, consumables and purchased commodity used represented more than 80% of the Group’s cost of sales. To alleviate (RMB Mn) potential cost pressure (See appendix for material price), we believe UPC will 14,000 100% mainly rely on the new products and new business categories so as to boost the 80% 13,000 sales and GP margin expansion. 60% 12,000 40% UPC has come out from the downturn while the overall instant noodles and 11,000 20% beverage industry has started to recover since 2017. 10,000 0% In 2018H1, the sales of the Group’s beverage business increased by 5.3% yoy to 2013 2014 2015 2016 2017 6.8 billion yuan, mainly driven by the sales of tea drinks and milk tea segments,

Source: company data, Orient Securities (Hong Kong) representing an increase of 5.6% and 13.3% yoy respectively. On the other hand, the sales of the instant noodles business increased by 8% yoy, mainly driven by the mid and high-end product “Soup Daren”, which maintained a double-digit * New revised HKFRS 15 Standard: Starting percentage growth in 2018H1. from 2018, the discounts to customers will In 2018E/2019E, we expect the overall industry rebound continuously and the be directly deducted from revenue which Group’s revenue will increase in the mid-single digit percentage range. We are recorded those discounts in A&P expenses waiting for other star products like “Soup Daren” and “Classmate Xiaoming” to previously. boost sales growth significantly in future.

Figure 15: Revenue breakdown by segments (million yuan) 2013 2014 2015 2016 2017 2018E* 2019E* Comments YoY Growth 7.7% 1.7% (4.9%) 8.6% (0.7%) 3.2% 5.0% The overall Industry rebounded and Instant transformed to premium noodles 7,826 7,960 7,567 8,221 8,163 8,424 8,845 noodles which is 5 yuan above. Growth is mainly driven by key YoY Growth 9.8% (10.0%) 5.4% 1.5% 0.8% - - products of “Classmate Xiaoming” of Tea Drinks and “Uni Ice Tea” and Green Tea. YoY Growth The demand for juice drinks of Juice 6.6% (7.5%) 8.6% (41.5%) (18.5%) - - decreased and still has not Revenue Drinks recovered since 2016 Growth is mainly driven by milk tea, bottled water and coffee in recent YoY Growth years. Milk tea business of Others 9.9% (4.4%) -13.1% (4.6%) 18.5% - - represented the total market share Drinks of 71.8% in terms of sales in 2017, maintaining the leading position. YoY Growth 8.9% (7.6%) 0.3% (13.3%) 2.3% 3.0% 4.0% Industry rebounded and indicated consumers’ demand for innovative 15,152 14,005 14,051 12,181 12,465 12,839 13,353 Beverage beverage products.  Stop intense price YoY Growth 5.8% (60.1%) 177.4% (6.7%) 23.3% 25.8% 6.7% competition with peers and started to enter premium noodles during industry Operating OPM 4.0% 1.7% 4.7% 4.6% 5.6% 6.8% 7.0% downturn. Profit and  Raising prices in old products OPM Operating and the sales contribution of 932 372 1,032 963 1,187 1,492 1,593 Profit premium products increase continuously.

Source: company data, Orient Securities (Hong Kong)

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Strong execution to expand margin

Apart from raising prices in old products and diversified products to high-end products, the Group grew its bottom line faster than revenue by effectively controlling its costs during the recession of instant noodles and beverage business over past few years.

❶The sales of associate Jinmailang (今麦郎) UPC sold its all interests, approximately 47.83% of the total issued share capital of Jinmailang for RMB1.29 billion to Consistent Returns Pte. Ltd., and ended its joint ventures with Jinmailang in 2016. We believe the reasons for the disposal as below:  Jinamlilang primarily focus on low-end products which is different from current UPS operation strategies.  In 2015, the revenue and after-tax profit was 2.58 billion yuan and 0.18 billion yuan respectively, which only finished 1/4 sales target in 10years goal.  Obtained similar products with low commentary Afterwards, UPC can focus on building its own brands and continue to speed up the development of its sales channel.

Figure 16: Promotion and advertising expenses Figure 17: Labor cost (RMB Million) *restated (RMBmn) 2013 2014 2015 2016 2017 2017H1* 2018H1 3,500 14% Revenue 23,329 22,488 22,102 20,986 21,297 10,589 11,224 Total 12.3% 3,000 12% 38,453 36,717 33,619 31,754 29,502 29,081 29,145 10.9% employed 10.5% 10.7% labor 2,500 10% YOY -4.5% -8.4% -5.5% -7.1% - 0.2% 8.4% 2,000 8% Total 5.9% labor cost 1,500 5.2% 6% (including 3,030 3,029 3,165 3,177 3,025 1,498 1,605 directors' 1,000 4% fees) 500 2% YOY -0.03% 4.49% 0.38% -4.77% 7.13% As % of 13.0 13.5 14.3 15.1 14.2 14.1 14.3 0 0% revenue 2013 2014 2015 2016 2017 2017H1* 2018H1* Source: company data, Orient Securities (Hong Kong) ❷Saving in promotion and advertising expenses

As the shrinking product lifecycles, it is hard to determine the demand for the products. The group adjusted the sales strategy of the beverage business and channel inventory Figure 18: Margin performance management since the second half of 2016. The group will determine the quantities of production according to seasons and market sizes. As a result, the ratio of promotion and 40% advertising expenses to revenue dropped from 12.3% to 8.4% between 2013 and 2017. 35% We expect the ratio of selling and distribution expenses to revenue will decrease from 30% 24.2% to 22.7% in 2018E, including the adjustments for the new revised HKFRS 15 25% Standard. 20% 15% ❸Saving in labor cost 10% Although the china minimum monthly wages has increased rapidly since 2010, the total 5% labor cost (including directors’ fees) of the Group was similar to 2013-2017, mainly 0% driven by the optimization of employee team, resulting in nearly 2,000 labors less annually within these five years. As the overall industry rebounded, we believe the Group’s revenue will increase and cause of a decrease in the labor-to-revenue ratio in Source: company data, Orient Securities (Hong Kong) future.

❹Saving in trial-and-error costs UPC launches a new product at a small-scale to receive valuable information on customer response, marketing channels and distribution issues. With the results from test market in hand, UPC will do further adjustment and promote to nationwide afterwards, resulting in reduce trial-and-error costs.

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Strong net cash position supports high dividend payout

UPC cut its debt and reduced the risk to financial health We observed that the Group has been working hard to reduce debt in recent years. The long-term and short-term borrowings of the Group has been reduced from 6 billion yuan to 1.3 billion yuan for 5 years and the Group recorded the positive net cash position in 2017 finally. We expect the Group will further reduce the debt level afterwards. Moreover, Taiwan Ratings Corporation, a credit rating agency, upgraded the Group’s long term credit rating from “twAA-” to “twAA” on 26 June 2017. The rating outlook is “Stable”.

Manufacturing capacity utilization is low so far

According to the management, the maximum of manufacturing capacity

utilization of instant noodles and beverage can achieve c.60% and c.70% respectively but the manufacturing capacity utilization of instant noodles and beverage are 45% and 35% respectively so far. We believe the Group is not essential to construct new factories to expand production capacity and the Capex will be around 1 billion yuan to 1.5 billion, which was mainly resulted from investments in acquiring new equipment, modifying equipment, building a distribution network and acquiring R&D equipment in recent years.

Maintain a 70% payout ratio UPC increased their payout ratio to 70% in 2017 which is higher than the level of

20% over the past 5 years. The management has no any planning for M&A and

factories construction which require lots of cash so far. Therefore, we expect

UPC will maintain the payout ratio to 70% until a lot of money is needed for

other purposes.

Figure 19: Net Cash/(Debt) Figure 20: Dividend payout ratio (RMB mn) (RMB) 4,000 0.16 80% 2,911 2,919 2,783 2,785 2,827 2,463 2,128 0.14 70% 2,000 1,414

0.12 60% Issue of 71.9 million new 0 ordinary shares at HKD4.56 (902) (835) (835) (835) (835) (1,556) (1,589) 0.1 50% (2,100) each on the basis of 1 share for (200) every 5 shares to reduce debt (500) (500) (400) (2,000) 0.08 level. 40%

0.06 30% (4,000) Net Cash since 2017 (3,562) (2,665) 0.04 20% (6,000) (4,280) 0.02 10% (5,102)

(8,000) 0 0% 2013 2014 2015 2016 2017 2018E 2019E 2020E 2012 2013 2014 2015 2016 2017

Source: company data, Orient Securities (Hong Kong)

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Hong Kong Equity | China Consumer Goods Company in-depth

Positive outlook on future prospects

Through Market rebounded + Product diversification + Strong innovation

(RMB mn) We expect the sales of 24,000 10% 9.0% 4.0% new products with 1.5% 2.9% 4.0% 5% 22,000 high-margin will Revenue 0% increase continuously -1.7% 20,000 -3.6% -5.1% -5% and push the average price up. 18,000 -10% 2013 2014 2015 2016 2017 2018E 2019E 2020E (RMB mn) 8,500 38% Gross Profit 36.8% 33.8% 8,000 36% 33.6% & GPM The raw material prices 34.4% 33.1% 33.5% 7,500 34% are still at a high level, 33.3% 32.5% thus we expect GPM 7,000 32% grow moderately. 6,500 30% 2013 2014 2015 2016 2017 2018E 2019E 2020E

(RMB mn) 10,000 32.9% 32.3% 40% 33.2% 32.6% 28.8% 27.8% 27.6% 27.4% S,G&A 30%

5,000 20% 10% Adjusting the sales strategy ; saving in 0 0% P&A expenses and 2013 2014 2015 2016 2017 2018E 2019E 2020E (RMB mn) labor cost boost the 1,500 5.1% 6% 5.0% 5.3% net profit growth faster than revenue Net Profit 1,000 3.9% 3.8% 4.1% 4% growth. & NPM 2.9% 500 2% 1.3%

0 0% 2013 2014 2015 2016 2017 2018E 2019E 2020E (RMB mn) 6,000

CAPEX 4,000 2,000 0 2013 2014 2015 2016 2017 2018E 2019E 2020E Without any plan for (RMB mn) production capacity 4,000 expansion and M&A, 2,000 We expect CAPEX Net Cash/ 0 remains at low level, (debt) (2,000) (4,000) around 1.0-1.5 billion (6,000) yuan. Although UPC cut 2013 2014 2015 2016 2017 2018E 2019E 2020E its debt in recent years, (RMB mn) we believe UPC is 1,000 strong enough to 500 maintain a 70% payout Net Cash 0 ratio. Flow

(500)

(1,000) 2013 2014 2015 2016 2017 2018E 2019E 2020E

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Hong Kong Equity | China Consumer Goods Company in-depth

Initiate at ACCUMULATE with a TP of HK$8.2

We initiate “ACCUMULATE” on UPC with a target price of HK$8.2 based on two-stage growth DCF valuation method. The relevant assumptions are as follows: (We assume a HKDRMB rate of 0.87)

Figure 21: Key assumptions of UPC’s  WACC. We applied WACC of 10.0% in valuation. The assumption is based DCF model on cost of equity of 6.70% with the risk free rate of 3.3%, market risk WACC 10.0% premium of 3.4% and beta of 1.0. The after-tax cost of debt assumed to Terminal growth rate (%) 3% be 3.1%, subject to tax rate of 31.2% and debt-to-equity ratio of 10.4%. Terminal value (HK$mn) 16,722  Long-term growth. We conservatively assume revenue growth will be slow and steady at 3-4% between 2019 and 2027. After 2027, we will Total FCF (HK$mn) 33,062 apply a 3% terminal growth rate to follow the historical inflation rate. NAV Price/Share (HK$) 8.2  CAPEX. We believe the Group is not essential to construct new factories Target NAV Discount (%) 0 to expand production capacity and the Capex will be around 1 billion yuan to 1.5 billion. Target price (HK$) 8.2  Cash flow. Supported by steady earnings growth, operating cash flow will Upside potential 5.9% maintain positive for the next decade. We expect the 2018-2027 CAGR of free cash flow (RMB) to reach 12.5%. Source: Company, Orient Securities (Hong Kong)

Figure 22: UPC’s DCF forecast

(RMBmn) 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Pre-tax profit 1,574 1,678 1,822 1,979 2,152 2,330 2,459 2,649 2,792 3,035 Taxes paid (488) (520) (565) (613) (667) (722) (762) (821) (866) (941) Depreciation & amortization 1,112 1,129 1,147 1,145 1,143 1,142 1,130 1,119 1,098 1,078 Change in working capital (197) 83 79 82 78 74 78 56 66 41 Others (55) 67 5 6 5 5 7 5 8 7 Operating cash flow 2,027 2,273 2,447 2,553 2,667 2,783 2,861 2,961 3,044 3,166 CAPEX (1,337) (1,359) (1,380) (1,181) (1,180) (1,179) (1,068) (1,058) (941) (924) Annual free cash flow 689 914 1,066 1,371 1,487 1,604 1,793 1,903 2,104 2,242 (RMB$mn) Annual free cash flow 792 1,051 1,226 1,576 1,709 1,844 2,061 2,187 2,418 2,577 (HK$mn) Discounted free cash flow 880 1,127 1,271 1,579 1,654 1,724 1,862 1,909 2,039 2,100 (HK$mn)

Source: Company, Orient Securities (Hong Kong)

Scenario analysis for the stock price of UPC Through this scenario analysis, we can discover that how is the UPC’s revenue growth between 2019E to 2021E at different stock price interval, assuming other factors are as same as the base-case scenario analysis. Figure 23: Scenario analysis

(HK$) 2017 2018E 2019E 2020E 2021E 9.0 1.48% 2.90% 9.5% 8.0% 7.0% 8.5 1.48% 2.90% 7.5% 5.5% 4.0%

8.0 1.48% 2.90% 3.5% 3.0% 3.0% 7.5 1.48% 2.90% 2.0% 0.5% 0.0% 7.0 1.48% 2.90% -4.0% -2.5% 1.0% 6.5 1.48% 2.90% -7.0% -4.0% -3.0%

Source: Company data, Orient Securities (Hong Kong)

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Hong Kong Equity | China Consumer Goods Company in-depth

Appendix

Figure 24: Raw material prices RMB/Ton Palm Oil Corrugated paper 7,000 10,000 9,000 6,000 8,000 5,000 7,000 6,000 4,000 5,000 3,000 4,000 3,000 2,000 2,000 1,000 1,000

0 0

2014-01 2014-07 2015-01 2015-07 2016-01 2016-07 2017-01 2017-07 2018-01 2018-07

2012-01 2012-07 2013-01 2013-07 2014-01 2014-07 2015-01 2015-07 2016-01 2016-07 2017-01 2017-07 2018-01 2018-07

Flour Sugar 4,000 8,000

6,000 3,500

4,000 3,000

2,000 2,500

0 2,000

2012-01 2012-07 2013-01 2013-07 2014-01 2014-07 2015-01 2015-07 2016-01 2016-07 2017-01 2017-07 2018-01 2018-07

2012-01 2012-07 2013-01 2013-07 2014-01 2014-07 2015-01 2015-07 2016-01 2016-07 2017-01 2017-07 2018-01 2018-07

Source: Wind, Orient Securities (Hong Kong)

Figure 25: Peers valuation table

Ticker Company Reporting Price Market P/E PEG P/B Div. Yield EV/EBITDA Currency (Local Capitalization (x) (x) (x) (%) (x) Ccy) (Trd Ccy) 17 18E 19E 20E 17-19E 17 18E 17 18E 17 18E 19E

220 HK UPC CNY 7.74 33,432 33.8 27.3 25.6 23.6 2.3 2.3 2.2 2.1 2.6 10.5 10.5 10.1 3799 HK DALI FOODS CNY 5.87 80,384 20.8 18.5 16.2 14.0 1.6 5.2 4.5 2.9 3.3 12.8 11.5 10.2 322 HK GROUPTINGYI CNY 12.38 69,548 33.9 25.0 21.3 18.8 1.3 3.3 3.0 1.5 2.1 9.8 9.2 8.5 345 HK VITASOY INTL HKD 29.90 31,727 53.9 42.7 36.4 30.2 2.5 10. 10.0 1.2 1.4 29.2 24.4 21.0 151 HK HLDWANT WANT CNY 5.71 71,085 20.3 18.3 17.2 15.7 2.4 4.79 3.9 0.0 2.8 11.4 10.8 10.1 1458 HK CHINAZHOU HEI YA CNY 4.03 9,604 11.2 12.7 12.2 11.1 -2.7 2.1 1.9 2.8 2.3 6.6 7.3 7.0 1475 HK INTENISSIN FOODS HKD 3.63 3,900 15.2 18.7 16.4 15.0 -4.2 1.1 1.1 0.0 2.2 6.6 4.6 4.1 506 HK COCHINA FOODS HKD 3.62 10,126 7.6 21.8 18.0 15.2 -0.2 2.4 2.1 0.7 1.4 4.4 8.7 7.8 603866 CH TOLYLTD BREAD-A CNY 48.00 22,590 42.1 34.8 28.6 23.1 2.0 7.4 6.4 1.7 0.9 28.0 22.7 18.3 000848 CH HEBEI CNY 7.81 7,643 18.6 17.0 14.9 13.5 1.6 4.1 3.7 6.4 3.8 10.1 9.4 8.3 000895 CH CHENGDEHENAN -A CNY 22.75 75,065 17.4 15.1 14.2 12.9 1.6 5.1 4.9 4.8 5.9 11.4 10.1 9.7 600598 CH SHUANHEILONGJIAN-A CNY 8.45 15,021 11.5 10.0 9.4 8.6 1.1 1.4 1.4 5.3 6.7 14.6 11.7 11.3 Listed Food & beverageG-A companies 23.9 21.8 19.2 16.8 0.8 4.2 3.8 2.5 3.0 13.0 11.7 10.5 HK$ Source: Bloomberg, Orient Securities (Hong Kong)

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Hong Kong Equity | China Consumer Goods Company in-depth

Comparison and analysis of current and historical P/E and P/B

We compared the historical and current P/E and P/B ratios with the P/E band

and P/B brand as well as the standard deviation. UPC is currently trading at

27.3x FY18E P/E and 2.2x FY18E P/B, according to the historical valuation range,

the current P/E and P/B ratios are at relatively high levels.

Figure 26: P/E band Figure 27: Historical P/E

HK$12 14.00 +1 sd HK$10 12.5x 12.00 10.6x 10.00 HK$8 average 8.8x 8.00 HK$6 6.9x 6.00 HK$4 5.0x -1 sd 4.00

HK$2 2.00

HK$0 0.00 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Source: Bloomberg, Orient Securities (Hong Kong) Figure 28: P/B band Figure 29: Historical P/B HK$12 2.50

HK$10 2.0x +1 sd 1.7x 2.00 HK$8 1.4x 1.50 average HK$6 1.1x 1.00 0.8x HK$4 -1 sd 0.50 HK$2

HK$0 0.00 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Source: Bloomberg, Orient Securities (Hong Kong)

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Hong Kong Equity | China Consumer Goods Company in-depth

Financial Statements & Forecast

Income statement (consolidated) Balance sheet (consolidated) FY-end Dec (RMB mn) 2016 2017 2018E 2019E 2020E FY-end Dec (RMB mn) 2016 2017 2018E 2019E 2020E Revenue 20,986 21,297 21,914 22,791 23,702 Current assets 5,675 5,820 6,084 6,257 6,474 Beverage 12,181 12,465 12,839 13,353 13,927 Inventories 1,215 1,159 1,186 1,232 1,277 Instant noodles Trade receivable 8,221 8,163 8,424 8,845 9,296 543 563 579 602 627 Others 584 668 651 593 479 Prepayments, deposits and other 1,454 1,255 1,534 1,595 1,659 receivables Cost of sales (13,758) (14,245) (14,573) (15,133) (15,691) Other current assets Gross profit 7,228 7,052 7,341 7,658 8,011 2,463 2,843 2,785 2,827 2,911 Non-current assets 15,032 14,218 14,454 14,699 14,949 Selling and distribution expenses (5,850) (5,154) (5,084) (5,242) (5,404) 2,222 2,105 2,125 2,145 2,165 Administrative expenses (999) (988) (1,017) (1,057) (1,100) Land Use Right 11,097 10,504 10,683 10,864 11,048 Other gains-net 298 (32) 20 21 21 Net Property, plant and equipment Investment properties 365 353 359 365 372 Other income 409 384 307 292 277 Net Intangible assets 30 19 17 15 13 Other expenses (124) (76) (75) (78) (81) Interest in associates and JVs 731 720 747 774 802 Operating profit 963 1,187 1,492 1,593 1,725 Investments accounted for using the 731 720 747 774 803 Finance income-net 12 62 52 55 66 equity method Share of jointly controlled entities AFS financial asset 226 222 222 222 222 93 29 29 31 32 and associate Deferred income tax assets 350 287 295 307 319

Pre-tax profit 1,068 1,277 1,574 1,678 1,822 Other receivables-non-current portion 11 7 7 7 7 Total assets 20,707 20,038 20,538 20,955 21,422 Income tax expense (461) (399) (488) (520) (565) Net profit Current liabilities 7,543 6,296 6,420 6,634 6,846 607 878 1,086 1,158 1,257 1,138 1,396 1,428 1,483 1,538 EBITDA Trade and Bill payables 2,501 2,678 2,686 2,807 2,969 4,044 4,026 4,118 4,277 4,434 EBIT Other payables and accruals 1,068 1,277 1,574 1,678 1,822 2,100 835 835 835 835 EPS (RMB) borrowing 0.141 0.203 0.251 0.268 0.291 260 39 39 39 39 DPS (RMB) Current income tax liabilities 0.028 0.142 0.176 0.188 0.204 0 0 0 0 0 Derivate financial instruments 1,123 925 831 638 445 Cash flow (consolidated) Non-current liabilities Deferred income tax liability 192 174 179 186 194 FY-end Dec (RMB mn) 2016 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E Borrowings 500 500 400 200 0 Profit before tax 1,068 1,277 1,574 1,678 1,822 Other payables- non-current portion 431 251 251 251 251 Income Tax Paid (461) (399) (488) (520) (565) Total liabilities 8,665 7,221 7,251 7,271 7,291 Depreciation and Amortization 1,433 1,402 1,112 1,129 1,147 Share capital Changes in working capital 344 73 (197) 83 79 40 40 40 40 40 Share premium and reserve 12,000 12,776 13,247 13,645 14,092 Interest expenses paid (142) (61) (61) (56) (47) Total equity 12,040 12,815 13,287 13,684 14,131 Others (103) 162 (23) 93 21 Total liabilities & equity 20,705 20,037 20,538 20,956 21,422 Operating cash flow 2,139 2,453 2,027 2,273 2,447 Net cash/(debt) 9,861 8,096 9,677 11,526 13,866 CAPEX (1,062) (811) (1,274) (1,295) (1,316) Working capital (484) 893 995 1,115 1,266 Disposals 1,324 62 24 85 24 Total capital employed 14,184 14,110 16,166 18,481 21,131 Dividend received 5 4 4 4 4 Net gearing (%) 1% NC NC NC NC Acq of Subsidiaries/investments (93) (20) (63) (64) (64) BVPS (RMB) 2.79 2.97 3.08 3.17 3.27 Others 102 (17) - - - Key ratios Investing cash flow 277 (782) (1,310) (1,270) (1,352) FY-end Dec 2016 2017 2018E 2019E 2020E Net proceeds from shares issued 0 0 0 0 0 Growth (%) Change of bank borrowings (1,654) (1,265) (100) (200) (200) Revenue (5.1) 1.5 2.9 4.0 4.0 Payment for derivative financial (2) - - - - Gross profit (11.2) (2.4) 4.1 4.3 4.6 Dividend paid (168) (120) (615) (760) (811) instruments EBITDA (2.8) 7.1 0.3 4.5 5.8 Others 1.04 0.899 0 0 0 EBIT (8.8) 19.6 23.3 6.6 8.6 Financing cash flow (1,823) (1,384) (715) (960) (1,011) Net profit (27.2) 44.6 23.7 6.6 8.6 Free cash flow 1,077 1,642 753 978 1,131 EPS (27.2) 44.6 23.7 6.6 8.6 Net cash flow 592 286 2 42 84 Margin (%)

Gross Semi-annual breakdown 34.4 33.1 33.5 33.6 33.8 EBITDA 11.9 12.6 12.3 12.3 12.5 FY-end De (RMB mn) 2H16 1H17 2H17 1H18 2H18E EBIT 5.1 6.0 7.2 7.4 7.7 Revenue 9,272 10,886 10,410 11,224 10,690 Net 2.9 4.1 5.0 5.1 5.3 Gross profit 2,903 3,659 3,392 3,757 3,584 Others (%) Operating profit 18 789 397 933 560 Effective tax rate 43% 31% 31% 31% 31% Pre-tax profit 43 802 474 1,010 564 Dividend payout ratio 20 70 70 70 70 Tax (210) (233) (166) (296) (192) RoCE 5 6 8 8 9 Adjusted net profit (168) 570 309 714 372 Average RoE 5 7 8 8 9 Gross margin (%) 31.3% 33.6% 32.6% 33.5% 33.5% Average RoA 3 4 5 6 6 Operating margin (%) 0.2% 7.2% 3.8% 8.3% 5.2% Interest cover (x) 12 1 1 1 1 Effective tax rate (%) 494.5% 29.0% 35.0% 29.3% 34.1%

Adjusted net margin (%) Key assumptions (2.0%) 5.2% 3.0% 6.4% 3.5% EPS (RMB) FY-end Dec (YoY %) 2016 2017 2018E 2019E 2020E (0.108) 0.132 0.009 0.165 0.086 Operating figures DPS (RMB) 0.014 0.000 0.028 0.000 0.176 Noodles Segment 8.6 (0.7) 3.2 5.0 5.1 Source: Company, Orient Securities (Hong Beverage segment (13.3) 2.3 3.0 4.0 4.3 Kong )

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Hong Kong Equity | China Consumer Goods Company in-depth

Analyst Certification I, Cyrus Tai (Tai Wai Ho), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report.

Meanings of Orient Securities Ratings Buy – Describes stocks that we expect to provide a total return of >10% within a 12-month period. Accumulate – Describes stocks that we expect to provide a total return of >0% within a 12-month period. Hold – Describes stocks that we expect to provide a total return of between -20% and +20% within a 12-month period. Sell – Describes stocks that we expect to provide a total return of <0% within a 12-month period.

Disclosure & Disclaimer Orient Securities (Hong Kong) Limited does and seeks to do business with the company or companies covered in this report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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