Win Semiconductors (Initiating Coverage with Outperform) 3 Pegatron (Downgrade to Neutral) 4 Wharf Holding (Outperform) 5 Sunny

Wednesday, 10 May 2017 Win Semiconductors (Initiating coverage with Outperform) 3

Winner expanding its arms Lynn Luo We initiate coverage on Win Semi with an Outperform rating and a target price of NT$155 (15x 2018E P/E). We believe Win Semi is expanding its addressable market beyond RF (radio frequency) components.

Pegatron (Downgrade to Neutral) 4

Downgrading into recent strength Jeffrey Ohlweiler After the recent share price outperformance (up 23.4% off its 2017 lows vs up 9.7% for TWSE over same period) and our downward earnings revisions, we are downgrading Pegatron to Neutral.

Wharf Holding (Outperform) 5

Recovery on the fast lane David Ng Harbour City (HC) is recovering faster than our expectation with 1.4% YoY sales growth for 1Q17, versus the overall HK retail market down 1.3%. The outperformance was driven by a luxury sales recovery, which was even more pronounced at its mainland China malls.

Sunny Optical (Outperform) 6

Handset Lens continue to beat Allen Chang April shipments beat despite weak smartphone seasonality: 1) Handset lens at 44m (+9% MoM, +111% YoY), vs. Largan rev at +2% MoM, +19% YoY. January-April tracking our 1H17 estimates by 80%, 2) Vehicle lens at 3m (-4% MoM, +39% YoY).

AUO (Underperform) 7

Inventory correction just beginning Louis Cheng AUO's ADR (NYSE: AUO) share price slumped by 8.2% overnight, reaffirming our concern on 1) weaker-than-expected Apr sales (-11% MoM), 2) inventory correction happening (2Q panel shipments revised down to 15m units from 16.3m units in 1Q), and 3) TV brands switching their focus back to 32” from ultra large-sized (55-65”) on cost efficiency.

Accton Technology (Upgrade to Outperform) 8

AIA Group (Neutral) 9

Asahi Glass Company (Neutral) 10

Brilliance China Automotive (Outperform) 11

China Longyuan Power (Outperform) 12

Ginko (Downgrade to Neutral) 13

Great Wall Motor Company (Outperform) 14

Please refer to page 31 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. IHI Corp (Neutral) 15

Korea Electric Power (Outperform) 16

MinebeaMitsumi (Outperform) 17

Mitsubishi Heavy Industries (Neutral) 18

NGK Spark Plug (Neutral) 19

SCREEN Holdings (Neutral) 20

Skyworth (Outperform) 21

SoftBank (Outperform) 22

Sony (Outperform) 23

Subaru (Neutral) 24

Sumitomo Heavy Industries (Outperform) 25

Supalai PCL (Outperform) 26

Uni-President China (Outperform) 27

Union Bank of India (Underperform) 28

China autos 29

Macquarie Commodities Comment 30

TAIWAN

Win Semiconductors 3105 TT Outperform Winner expanding its arms Price (at 14:41, 08 May 2017 GMT) NT$122.00 We initiate coverage on Win Semi with an Outperform rating and a target price of Valuation NT$ 155.00 - PER NT$155 (15x 2018E P/E). We believe Win Semi is expanding its addressable 12-month target NT$ 155.00 market beyond RF (radio frequency) components. We believe WiFi and cellular Upside/Downside % +27.0 content in smartphones will continue to increase, while the Infrastructure 12-month TSR % +30.7 segment will grow amid increasing data consumption demand. With margin Volatility Index High expansion on better product mix, we forecast Win Semi’s earnings to grow at a GICS sector 16% CAGR in 2016-19E. Semiconductors & Semiconductor Equipment Optical devices: expanding TAM Market cap NT$m 49,129 Market cap US$m 1,630 We estimate optical devices will contribute 2%/4% of Win Semi’s revenue in 30-day avg turnover US$m 16.0 2017/18, mainly driven by VCSEL (vertical-cavity surface-emitting laser) for Number shares on issue m 402.7 smartphone 3D sensing. In addition, the optical business should help Win Semi to expand the addressable market from RF components to a wider range of Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E applications like high data rate optical devices and auto electronics. With better Revenue m 13,623 15,055 17,154 19,146 margins, we believe this business should also help Win Semi’s margin Reported profit m 3,113 3,271 4,146 4,798 expansion. We expect GM/OPM to expand +1.5/+2.0ppts pa for 2017/18. EPS rep NT$ 7.30 8.10 10.30 11.91 EPS rep growth % 27.9 10.9 27.1 15.7 PER rep x 16.7 15.1 11.8 10.2 WiFi/Cellular continue migration Total DPS NT$ 0.63 4.50 4.75 6.02 Total div yield % 0.5 3.7 3.9 4.9 We believe Win Semi will continue to benefit from cellular and WiFi content growth ROA % 13.8 14.5 16.3 17.4 in smartphones and other applications. We see smartphone WiFi continuing ROE % 17.9 17.7 20.3 21.1 EV/EBITDA x 8.7 7.7 6.7 5.8 migration to dual band MIMO (multiple input, multiple output) and MU-MIMO Net debt/equity % 12.2 5.2 1.3 -3.3 (multi-user MIMO), while home networking and enterprise WLAN (wireless local P/BV x 2.8 2.5 2.3 2.1

area network) will migrate to 802.11ac. For cellular, more complex carrier Source: FactSet, Macquarie Research, May 2017 aggregation and 4x4 MIMO may serve as key growth drivers before 5G launches (all figures in NT$ unless noted, TP in TWD) in 2020. We expect WiFi/Cellular revenue to grow at a 10% CAGR in 2016-19. Infrastructure strong growth We expect Win Semi will continue to benefit from strong infrastructure growth amid increasing data consumption demand. Strong growth of LTE small cells could be one of the key growth drivers. Also, satellite communication, fiber- optics, and automobile connectivity should see increasing demand for RF content. In addition, infrastructure build for 5G should start around 2019-20, which would be a long-term growth driver for Win Semi’s Infrastructure business. We expect Infrastructure segment revenue to grow at 14% CAGR in 2016-19. Valuation and risks Our target P/E multiple of 15x is higher than its long-term trading average of 11x, as we believe the stock deserves a re-rating with an expanding TAM and 16% Analyst(s) earnings CAGR in 2016-19E. Our 2018 earnings estimate is higher than Macquarie Capital Limited, Taiwan Securities consensus by 6%, as we expect margin expansion on better product mix. We Branch Lynn Luo believe the next catalyst will be in 2Q/3Q17, when Win Semi enters peak season +886 2 2734 7534 [email protected] for smartphone RF component and VCSEL demand. In the 3D sensing/VCSEL Patrick Liao space, we also like Himax and Chroma. +886 2 2734 7515 [email protected] Macquarie Capital Limited Key downside risks to our view include: 1) weaker than expected demand for Allen Chang +852 3922 1136 [email protected] smartphones; 2) slower adoption progress of LTE and WiFi new technologies; Verena Jeng and 3) more severe competition from peers. +852 3922 3766 [email protected] Chris Yu +86 21 24129024 [email protected] Macquarie Governance and Risk Score (MGRS) On our proprietary Governance and Risk Score Win Semiconductors scores in the second 9 May 2017 quartile of our current universe coverage.

Please refer to page 19 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

TAIWAN Pegatron 4938 TT Neutral Downgrading into recent strength Price (at 06:41, 09 May 2017 GMT) NT$89.70

Valuation NT$ 91.00 Conclusion - PER 12-month target NT$ 91.00 . After the recent share price outperformance (up 23.4% off its 2017 lows vs up Upside/Downside % +1.4 9.7% for TWSE over same period) and our downward earnings revisions, we 12-month TSR % +6.9 are downgrading Pegatron to Neutral. Volatility Index Medium GICS sector . After market today, Pegatron reported 1Q17 results and held an analyst call. Technology Hardware & Equipment Previously announced sales of NT$239bn (-34% QoQ, -7% YoY) were 9%/6% Market cap NT$m 230,977 below our/consensus. GM/OPM of 5.0%/2.3% vs 4.8%/2.5% in 4Q16 and Market cap US$m 7,657 5.8%/2.6% in 1Q16 were slightly below our/consensus of 5.3%/2.6-2.4%. Pre- Free float % 71 tax income (including an FX loss of NT$1.3bn) of NT$5.1bn was down 43% 30-day avg turnover US$m 12.6 QoQ and 21% YoY and was 26%/14% below our/consensus. Net profit of Number shares on issue m 2,575 NT$3.9bn was down 34% QoQ and down 5% YoY and was 15% below our

Investment fundamentals and 3% above consensus. 1Q17 EPS was NT$1.51. Year end 31 Dec 2016A 2017E 2018E 2019E . For 1Q17, Communication sales (68%) were down 37% QoQ but up 4% YoY, Revenue bn 1,157.7 1,149.7 1,194.7 1,206.7 Reported profit bn 19.3 21.1 23.5 23.8 Computing sales (17%) were down 7% QoQ and 19% YoY, Consumer sales Profit bonus exp bn 19.3 21.1 23.5 23.8 (7%) were down 46% QoQ and 42% YoY, subsidiary sales fell to 8% of total Bon exp/rep profit % 0.0 0.0 0.0 0.0 Adjusted profit bn 19.3 21.1 23.5 23.8 (from 10% in 1Q16). EPS rep NT$ 7.49 8.18 9.13 9.23 EPS rep growth % -19.0 9.3 11.6 1.1 Impact EPS bonus exp NT$ 7.49 8.18 9.13 9.23 EPS bonus growth % -19.0 9.3 11.6 1.1 . The company guided 2Q17 NB units to fall 20% QoQ, desktop/motherboards PER rep x 12.0 11.0 9.8 9.7 PER bonus exp x 12.0 11.0 9.8 9.7 units to fall 5-10% QoQ and for non-PC related to be down slightly Total DPS NT$ 5.00 4.91 5.48 5.72 sequentially with 2Q17 being the bottom for margins in 2017 (on lower Total div yield % 5.6 5.5 6.1 6.4 ROA % 7.0 6.7 6.8 6.6 utilisation rates). No change to Pegatron’s US$400m capex plan in 2017 with ROE % 13.0 13.9 14.7 14.2 2Q/3Q equipment pull-in. EV/EBITDA x 3.1 3.2 2.9 2.8 Net debt/equity % -42.7 -24.1 -28.8 -33.3 P/BV x 1.6 1.5 1.4 1.3 . We forecast 2Q17 sales will fall 8% QoQ (down 2% YoY) and for 2017 sales to decline 1% YoY. 4938 TT rel TAIEX performance, & rec history Earnings and target price revision . We lower our 2017/18 forecasts by 9.3%/10.4% to account for a combination of lower sales (mainly from subsidiary and consumer) and slightly lower margin assumptions (FX and product mix). We lower our TP to NT$91 (from NT$102) to account for lower forecasts (maintain 10x 2018E multiple). Price catalyst

. 12-month price target: NT$91.00 based on a PER methodology.

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Catalyst: Monthly sales, 2Q17 earnings, Apple forecasts Source: FactSet, Macquarie Research, May 2017 (all figures in NT$ unless noted, TP in TWD) Action and recommendation

. We downgrade Pegatron to Neutral with a NT$91 target price (10x 2018E earnings) as we now believe, after the recent share price rally, there is equal Analyst(s) risk on both the upside and downside. Reasonable valuations and good Jeffrey Ohlweiler +886 2 2734 7512 [email protected] dividend yield are now equally balanced with potential risks of iPhone Kaylin Tsai allocation in 2017 and 2018 and FX headwinds. +886 2 2734 7523 [email protected]

9 May 2017 Macquarie Capital Limited, Taiwan Securities Branch

Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG Wharf Holding 4 HK Outperform Recovery on the fast lane Price (at 08:50, 09 May 2017 GMT) HK$66.55

Valuation HK$ 96.52 Event - DCF 12-month target HK$ 77.23 . Harbour City (HC) is recovering faster than our expectation with 1.4% YoY Upside/Downside % +16.0 sales growth for 1Q17, versus the overall HK retail market down 1.3%. The 12-month TSR % +19.6 outperformance was driven by a luxury sales recovery, which was even more Volatility Index Low/Medium pronounced at its mainland China malls. We expect the recovery to continue GICS sector Real Estate throughout the year (-6.4% in 3Q16, -3.8% in 4Q16 and 1.4% in 1Q17) and Market cap HK$m 201,861 the anticipated opening of Ocean Terminal annex (mainly F&B) should boost Market cap US$m 25,935 traffic in 3Q17. The mall also enjoys a unique position in being able to attract Free float % 38 mainland and non-mainland tourists as well as domestic customers. 30-day avg turnover US$m 18.4 Number shares on issue m 3,033 . We recently visited the mall and adjoining Canton Road (see page 2) and saw

tourists lining up again on the street. New restaurant The Cheesecake Factory Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E required a three-hour wait and mall traffic remained packed even without Revenue m 46,627 43,596 45,060 51,250 major promotional events. HC accounts for 51% of our NAV and should be a EBIT m 17,065 17,304 19,307 23,565 key catalyst for the stock. We reiterate our Outperform rating with 20% TSR. EBIT growth % 14.9 1.4 11.6 22.1 Reported profit m 21,440 14,542 15,261 17,736 Adjusted profit m 13,754 14,542 15,261 17,736 . We see little threat from new openings in the vicinity and in other districts of EPS rep HK$ 7.07 4.80 5.03 5.99 HK due to widely different positioning and retailers consolidating their footprint EPS rep growth % 33.8 -32.2 4.9 19.1 EPS adj HK$ 4.54 4.80 5.03 5.93 in the best-performing venue for their merchandise. EPS adj growth % 25.4 5.7 4.9 17.8 PER rep x 9.4 13.9 13.2 11.1 Impact PER adj x 14.7 13.9 13.2 11.2 Total DPS HK$ 2.15 2.35 2.47 2.71 . What could positively surprise us later this year is a potentially early-than- Total div yield % 3.2 3.5 3.7 4.1 ROA % 3.8 3.9 4.2 5.1 expected recovery of Times Square (TS). TS (10% of NAV) faces strong ROE % 4.4 4.5 4.6 5.2 competition from SOGO (Lifestyle – Proxy of HK retail), Lee Gardens portfolio EV/EBITDA x 10.6 10.5 9.4 8.4 Net debt/equity % 7.9 3.0 -4.7 -10.0 and Hang Lung portfolio, all located within a 10-minute walking distance in P/BV x 0.6 0.6 0.6 0.6 Causeway Bay. TS reported a 4.8% YoY retail sales decline during 1Q (-7.0%

4 HK rel HSI performance, & rec history in 4Q16), versus a mid-single digit SSSg decline for SOGO. We expect retail rental revenue decline for TS in 2017-19, but management reiterated guidance of positive reversion for both malls in 2017. . TS upper floors remain a challenge and improvements are coming soon with a Lego Certified Store opening in July and Facesss opening a 6,500 sqft store in July. Facesss, a mega cosmetic cluster, is a key important attraction for HC. When opened this summer in TS, it will augment the current cosmetic offering of Lane Crawford.

Price catalyst

. 12-month price target: HK$77.23 based on a Sum of Parts methodology.

. Catalyst: Ocean Terminal annex in 3Q, new mall openings in China.

Analyst(s) Action and recommendation David Ng, CFA +852 3922 1291 [email protected] . The stock has completed a two-year V-shape. Most of the downside risks have Catherine Li been removed and we project EPS and DPS growth of 30% and 26% in the +852 3922 1161 [email protected] next three years combined. Apart from continuous recovery of retail sales, 9 May 2017 mgmt’s study to consider a separate listing of its HK IP assets may help further Macquarie Capital Limited un-lock the value of its assets. Wharf trades at a 31% NAV discount and 0.6x PB with HC and TS valued conservatively at 4.56% and 4.65% NPI yield.

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG Sunny Optical 2382 HK Outperform Handset Lens continue to beat Price (at 06:41, 09 May 2017 GMT) HK$64.05

Valuation HK$ 80.00 Event - PER 12-month target HK$ 80.00 . April shipments beat despite weak smartphone seasonality: 1) Handset Upside/Downside % +24.9 lens at 44m (+9% MoM, +111% YoY), vs. Largan rev at +2% MoM, +19% 12-month TSR % +26.1 YoY. January-April tracking our 1H17 estimates by 80%, 2) Vehicle lens at Volatility Index High 3m (-4% MoM, +39% YoY). January-April tracking our 1H17 estimates by GICS sector 75%, 3) Camera module at 21m (-10% MoM, +9% YoY). January-April Technology Hardware & Equipment tracking our 1H17 estimates by 96%. Market cap HK$m 70,263 Market cap US$m 9,027 . We retain our Street-high TP of HK$80 and believe the strong April Free float % 61 shipments echo our view of business enhancement from low-margin Camera 30-day avg turnover US$m 42.1 modules to high-margin Handset Lens/Vehicle Lens and we expect the Street Number shares on issue m 1,097 to raise GM assumptions. Bloomberg consensus on GM is 18.4%/18.9%/

Investment fundamentals 19.5% for 2017-19E while Sunny Optical already delivered 19.4% in 2H16. Year end 31 Dec 2016A 2017E 2018E 2019E Impact Revenue m 14,612 18,752 22,523 24,705 EBITDA m 1,688 3,153 4,569 5,664 EBITDA growth % 54.6 86.8 44.9 24.0 . Strong handset lens shipments show continuous business EBIT m 1,417 2,792 4,139 5,182 enhancement: April shipments grew 111% YoY, vs. Largan’s rev at +19% EBIT growth % 67.4 97.1 48.3 25.2 Reported profit m 1,271 2,485 3,739 4,782 YoY, despite no dual camera exposure to Apple iPhone and the Street’s EPS rep Rmb 1.17 2.29 3.45 4.41 concerns on slower China smartphone. January-April shipments grew 86% EPS rep growth % 66.8 95.6 50.4 27.9 EPS adj Rmb 1.17 2.29 3.45 4.41 YoY, much stronger than 2016 shipments of 26% YoY and our 2017E EPS adj growth % 66.8 95.6 50.4 27.9 estimates of 39% YoY. The strong shipments echo our view that the company PER rep x 48.4 24.8 16.5 12.9 PER adj x 48.4 24.8 16.5 12.9 is enhancing to high-margin handset lens, supporting the company’s gross Total DPS Rmb 0.35 0.69 1.04 0.00 margin in the long run. Total div yield % 0.6 1.2 1.8 0.0 ROA % 16.7 25.6 29.3 29.3 . Vehicle lens as long-term growth driver: April shipments grew 39% YoY, in ROE % 29.7 44.5 48.1 44.5 EV/EBITDA x 36.6 19.4 13.4 10.8 line with our estimate of 40% YoY. The Street thinks the story (ADAS) is Net debt/equity % 6.8 -18.8 -48.9 -59.5 priced in while we believe industry trends and the potential total addressable P/BV x 12.9 9.4 6.7 4.9 market are not yet factored in given the low adoption rate of ADAS before 2382 HK rel HSI performance, & rec 2018 (mandatory policies to kick off in 2018). history . Camera modules, the lower the better blended GM: April shipments grew 9% YoY, in line with our single-digit YoY estimate for 2017E. We see continuous business enhancement, with CCM shipments YoY down from 41% in 2014 to 22%/18% in 2015-16. We believe the Street has overstated the negative impact from the declining CCM shipments, which should be partially offset by ASP enhancement (from 5/8MP to 13MP, and from single cam to dual cam). In addition, lower CCM shipments should better support the blended GPM (legacy camera modules’ ~10% vs. Handset Lens’ >35%/

Note: Recommendation timeline - if not a continuous line, then there was no Vehicle Lens’ 40%). Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 Earnings and target price revision (all figures in Rmb unless noted, TP in HKD)

. No change. Price catalyst

. 12-month price target: HK$80.00 based on a PER methodology. Analyst(s) Allen Chang . Catalyst: 1H17 results. +852 3922 1136 [email protected] Action and recommendation 9 May 2017 Macquarie Capital Limited . Maintain Outperform.

Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

TAIWAN AUO 2409 TT Underperform Inventory correction just beginning Price (at 13:51, 08 May 2017 GMT) NT$12.15

Valuation NT$ 7.40 Conclusion - Price to Book 12-month target NT$ 7.40 . AUO’s ADR (NYSE: AUO) share price slumped by 8.2% overnight, reaffirming Upside/Downside % -39.1 our concern on 1) weaker-than-expected Apr sales (-11% MoM), 2) inventory 12-month TSR % -35.8 correction happening (2Q panel shipments revised down to 15m units from Volatility Index Medium 16.3m units in 1Q), and 3) TV brands switching their focus back to 32” from GICS sector ultra large-sized (55-65”) on cost efficiency. Underperform. Technology Hardware & Equipment Market cap NT$m 116,935 Impact

Market cap US$m 3,881 st Free float % 93 . TV brands’ overbooking is coming to an end post May 1 demand. The 30-day avg turnover US$m 45.3 strongest evidence is that AUO’s April sales dropped by 11% MoM despite Number shares on issue m 9,624 management's overly optimistic guidance of full utilization rate (and panel supply tightness throughout 2017). Our industry study shows China’s 1st May Investment fundamentals shipments likely fell to 1.84-1.88m units, down 7-9% YoY vs 2.0m units a year Year end 31 Dec 2016A 2017E 2018E 2019E Revenue bn 329.1 313.6 284.0 269.7 ago with sales falling to Rmb5.7bn-5.8bn (down 7-8% YoY, vs Rmb6.2bn in Adjusted profit bn 7.8 11.5 6.9 6.7 2016). EPS rep NT$ 0.81 1.19 0.72 0.69 EPS rep growth % 13.1 46.9 -39.8 -3.3 . Falling LCD prices + full utilization rate = profit declining. Panel pricing PER rep x 15.0 10.2 16.9 17.5 Total DPS NT$ 0.40 0.40 0.40 0.40 weakness observed: 1) 49-55” pricing has stopped growing for the first time Total div yield % 3.3 3.3 3.3 3.3 since 2H16; 2) 40” flat for four months in a row; 3) 32” has dropped 4% since ROE % 3.9 5.8 3.5 3.4 P/BV x 0.6 0.6 0.6 0.6 October 2016; d) 4-4.5” is down 8-10% since November). Innolux Corp (3481 TT, NT$13.75, Underperform, TP: NT$10.40)P: NT$10.40) could likely to 2409 TT rel TAIEX performance, & rec history report stronger 1Q results vs AUO, thanks to non-op gains (gains on GIS stake sold, earthquake insurance). . Panel market shifting from a seller’s market to a buyer’s market no later than June, given Innolux’s new gen-8.5 fab is to begin mass production (followed by two more gen-8.5 fabs to begin MP in 3Q17 by Chinese panel makers). Note that we expect Chinese panel makers’ share gains to speed up from 3Q17, backed by existing fabs’ yield rate improvement and Beijing’s policy target for the domestic supply ratio.

Note: Recommendation timeline - if not a continuous line, then there was no Earnings and target price revision Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 . We fine-tune 2Q17-4Q17E estimates, but keep full-year earnings largely (all figures in NT$ unless noted, TP in TWD) unchanged. The earnings revision resulted in <1% change to our valuation base (2018E BVPS). As a result, we keep our TP of NT$7.40 (0.4x 2018E PB) unchanged. Price catalyst

Analyst(s) . 12-month price target: NT$7.40 based on a Price to Book methodology. Macquarie Capital Limited, Taiwan Securities Branch . Catalyst: Industry supply-demand rebalance, new business development. Louis Cheng, CFA +886 2 2734 7526 [email protected] Jeffrey Ohlweiler Action and recommendation +886 2 2734 7512 [email protected] . We reiterate Underperform on AUO. Our TP of NT$7.40 is based on 0.4x Macquarie Capital Limited 2018E PB. Our target multiple of 0.4x forward PB is the company’s trough PB Allen Chang multiple vs the 3-year average of 0.6x and peak of 0.9x. +852 3922 1136 [email protected] Verena Jeng . We suggest investors to switch to Skyworth (751 HK, HK$4.34, Outperform, +852 3922 3766 [email protected] Chris Yu TP: HK$7.54), on 1) falling panel costs (70-75% of TV BOM cost), 2) +86 21 2412 9024 [email protected] increasing global presence, 3) product mix improvement (richer mix of 4K smart TV as well as own-brand sales in overseas). 9 May 2017

Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

TAIWAN Accton Technology 2345 TT Outperform 1Q OPM beat; upgrading to OP Price (at 08:50, 09 May 2017 GMT) NT$64.10 Event Valuation NT$ 73.00 - PER . We are upgrading the shares of Accton Technology to Outperform from 12-month target NT$ 73.00 Neutral given that the company’s better OPEX leverage/control has lifted the Upside/Downside % +13.9 OPM despite a flattish GM (as evidenced in 1Q17 results that were released 12-month TSR % +20.0 today after market). The company indicated that it is working on solutions to Volatility Index Medium increase capacity, which could pose upside to our sales growth forecasts. We GICS sector believe that the pull-back in the shares over the past month (-11% vs +1% for Technology Hardware & Equipment TAIEX) offers a good entry opportunity. We are raising our target price to Market cap NT$m 34,960 NT$73 (15x 2018E PE) from NT$56 (13x 2018E PE), with higher OPM Market cap US$m 1,166 Free float % 100 assumptions for 2017/18. 30-day avg turnover US$m 15.8 Impact Number shares on issue m 545.4 . 1Q17 beats on OPEX leverage: Previously announced sales of NT$8.6bn Investment fundamentals (+2% QoQ, +44% YoY) were in line with our and the consensus forecasts. Year end 31 Dec 2016A 2017E 2018E 2019E GM of 20.0% (vs 20.3% in 4Q16 and 23.2% in 1Q16) was slightly below our Revenue m 29,369 35,100 38,101 40,366 Reported profit m 1,888 2,415 2,660 2,813 estimate but beat consensus. OPM of 9.1% (vs 8.6% in 4Q16 and 9.1% in Profit bonus exp m 1,888 2,415 2,660 2,813 1Q16) was above our and the consensus estimates at 8.0–8.5%. Operating Bon exp/rep profit % 0.0 0.0 0.0 0.0 profit of NT$779m (+7% QoQ, +44% YoY) was 7%/13% ahead of our/street Adjusted profit m 1,888 2,415 2,660 2,813 EPS rep NT$ 3.51 4.43 4.88 5.16 estimates. Net income of NT$648m (+22% QoQ, +63% YoY) was 12%/24% EPS rep growth % 60.4 26.1 10.1 5.8 above our/street estimates. EPS came in at NT$1.19. EPS bonus exp NT$ 3.51 4.43 4.88 5.16 EPS bonus growth % 60.4 26.1 10.1 5.8 . 2Q continues to be upbeat: We pointed out strong 1H17 demand for PER rep x 18.2 14.5 13.1 12.4 PER bonus exp x 18.2 14.5 13.1 12.4 datacentre switches in our previous note. April sales of NT$2.8bn (-23% MoM, Total DPS NT$ 3.10 3.90 4.30 4.55 +49% YoY) have reconfirmed our view. We are modelling 2Q sales growth of Total div yield % 4.8 6.1 6.7 7.1 ROA % 14.9 16.8 17.3 17.3 3% QoQ (+19% YoY), which would sustain the momentum from 4Q16 and with ROE % 22.2 26.3 27.0 27.2 a flattish margin vs 1Q17. We are forecasting 2017/18 sales growth of 20%/9%. EV/EBITDA x 10.2 8.6 7.7 7.3 Net debt/equity % -91.2 -82.1 -78.5 -80.8 . GM pressure continues, but more than offset by OPEX leverage: Our P/BV x 3.9 3.7 3.5 3.3 checks in the supply chain suggest that Accton is still leading the high-end 2345 TT rel TAIEX performance, & rec datacentre switch market and benefitting from an increasing white box switch history adoption rate. While we continue to believe the company’s GM is being pressured due to competition (eg, Quanta, Delta Networks, Inventec), Accton showed better OPEX leverage/control in 1Q, which gives us more confidence regarding its earnings growth. Earnings and target price revision . We are raising our 2017/18E EPS 7%/14% on higher OPM assumptions. We are raising our target price to NT$73 (15x 2018E PE) from NT$56 (13x 2018E PE). We believe our higher target multiple is justified by higher earnings

Note: Recommendation timeline - if not a continuous line, then there was no growth (26%/10% for 2017/18E) Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 Price catalyst (all figures in NT$ unless noted, TP in TWD) . 12-month price target: NT$73.00 based on a PER methodology.

. Catalyst: 2Q/3Q sales and margins, potential new client additions.

Analyst(s) Action and recommendation Kaylin Tsai . We are upgrading the shares to Outperform from Neutral on the better-than- +886 2 2734 7523 [email protected] Jeffrey Ohlweiler expected 1Q OPM and the company’s greater commitment to growth on +886 2 2734 7512 [email protected] increasing capacity, with downside support from a high dividend yield (6%/7%

for 2017/18E). 9 May 2017 Macquarie Capital Limited, Taiwan . In the Taiwan networking space, we prefer Accton over Alpha Networks, as Securities Branch we believe that while both companies are seeing margin expansion from execution, Accton’s business strategy (focusing on white box switches) provides it with a better top-line growth outlook. Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG AIA Group 1299 HK Neutral A shot in the dark Price (at 13:51, 08 May 2017 GMT) HK$54.45

Valuation HK$ 53.56 Conclusion - Appraisal Value 12-month target HK$ 53.00 . We have taken a fresh look at the AIA investment case given the recent stock Upside/Downside % -2.7 outperformance and likely strong 1H17 results. We lift our numbers but retain 12-month TSR % -0.7 a Neutral rating. Volatility Index Low GICS sector Insurance Impact Market cap HK$m 657,351 . HK cross-border remains the #1 swing factor. We estimate that HK cross- Market cap US$m 84,473 border sales have risen by 66% CAGR since the IPO in FY10 (vs 25% VNB Free float % 100 CAGR for the Group). SAFE initiatives late last year have left us cautious 30-day avg turnover US$m 139.9 about the sustainability of this segment; however a stronger RMB and the Number shares on issue m 12,073 recent recovery in FX reserves are pushing out our concerns. It also seems Investment fundamentals that recent restrictions on mainland bank transfers are not yet being enforced. Year end 30 Nov 2016A 2017E 2018E 2019E Considering this together, we are somewhat more comfortable with Life Prem m 20,444 24,139 27,889 31,894 Life Total Rev m 27,065 31,463 36,016 40,996 forecasting that HK cross-border sales can be sustained into 2H17. Beyond Pretax Life Op Inc m 4,776 5,601 6,323 7,071 that time however, the outlook remains subject to regulatory risk. PBT m 4,776 5,601 6,323 7,071 Reported profit m 4,164 4,628 5,225 5,843 Net Op Income m 3,981 4,628 5,225 5,843 . We can’t forecast what we can’t see. To be bullish on AIA in the near term EPS adj ¢ 33.0 38.4 43.3 48.5 requires high confidence in the sustainability of HK cross-border sales. Whilst PER adj x 21.2 18.2 16.1 14.4 DPS ¢ 11.0 13.4 16.0 17.9 recent momentum is clear, the future policy landscape is not; and the lack of Dividend yield % 1.6 1.9 2.3 2.6 available statistics makes understanding trends in this key segment opaque Total SH Funds m 35,310 36,942 40,499 44,358 for investors. Without sufficient visibility, our HK forecasts remain admittedly BV/S ¢ 290.2 303.7 333.2 365.2 ROE % 12.4 12.9 13.6 13.9 on the conservative side. ROA % 2.3 2.4 2.4 2.4 P/BV x 2.4 2.3 2.1 1.9 . So what’s priced in here? Our bull-bear analysis (refer p9-10) shows that Tot Embedded Val m 38,900 43,777 49,064 54,819 the most material upside/downside risk for the stock is HK cross-border sales. 1299 HK rel HSI performance, & rec In this light, the risk-reward is roughly evenly balanced at present. The stock history is trading on a scenario that cross-border growth is sustainable albeit at lower growth rates than at present. By contrast, it seems very unlikely to us that Beijing will not act again at some point, either to alter regulations or enforce existing ones. The probability of further intervention is likely subject to China macro factors. Earnings and target price revision

. We have lifted our FY17/18 EPS forecasts by 6%/10%, and we have lifted our FY17/18 VNB forecasts by a substantial 21%/21%. These changes are Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. attributable to strong 1Q17 sales volumes and allowance for ongoing Source: FactSet, Macquarie Research, May 2017 momentum in HK and China. Our target price rises by 13% to HK$53 which (all figures in USD unless noted, TP in HKD) implies a demanding 1.9x P/EV and 13x VNB.

Price catalyst

. 12-month price target: HK$53.00 based on an Appraisal Value methodology.

. Catalyst: Sales trends in HK, Beijing capital controls, 1H17 results due in July. Analyst(s) Action and recommendation Scott Russell, FIAA +852 3922 3567 [email protected] . Calling AIA stock in the short term is difficult. On the one hand, Beijing has Howard Li +852 3922 1497 [email protected] eased back on capital controls and so strong HK cross-border sales can likely be sustained for a period. On the other hand, the company offers zero 9 May 2017 visibility into its #1 growth driver whilst policy risk remains reasonably high, in Macquarie Capital Limited our view. With risks roughly evenly balanced, we retain Neutral rating.

Please refer to page 12 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN Asahi Glass Company 5201 JP Neutral On track to beat guidance Price (at 13:49, 09 May 2017 GMT) ¥993

Valuation ¥ 980 Conclusion - Price to Book 12-month target ¥ 980 . 1Q17 OP of ¥22.2bn is higher than our ¥21.5bn and this includes ¥1.3bn one- Upside/Downside % -1.3 off M&A expense. As we highlighted in electronic component preview and 12-month TSR % +0.7 Ready for Battle, the chemicals profits surprised on the upside. But we also Volatility Index Medium find 1Q electronics & display OP weaker. Overall we think AGC is on track to GICS sector Capital Goods beat its guidance, and the management also expressed ‘higher confidence’ to Market cap ¥bn 1,178 achieve its target. Market cap US$m 10,462 Free float % 74 Impact 30-day avg turnover US$m 35.4 . Chemicals continue to surprise. Of the ¥22.2bn OP in 1Q17, chemicals Foreign ownership % 24.9 Number shares on issue m 1,187 posted ¥11bn OP (including ¥1.3bn M&A charges from two recent acquisitions CMC Biologics and Vinythai) (vs. our ¥8.9bn estimate) as the Investment fundamentals PVC/ethylene spread remains high in 1Q17, and AGC indicated that the two Year end 31 Dec 2016A 2017E 2018E 2019E acquisitions contributed ¥8.5bn sales and ¥0.5bn OP in 1Q (which suggests Revenue bn 1,282.6 1,364.2 1,383.4 1,410.5 EBIT bn 96.3 112.4 120.0 120.3 that CMC Biologics probably posted losses). LCD glass volume declined mid- EBIT growth % 35.3 16.7 6.8 0.3 single digit QoQ and ASP dropped low single digit QoQ (in line with Recurring profit bn 67.6 102.0 108.6 108.9 Reported profit bn 47.4 72.6 77.3 77.5 guidance), but electronics & display’s ¥4.2bn OP is lower than our ¥6.5bn Adjusted profit bn 47.4 72.6 77.3 77.5 estimate. Flat glass OP of ¥7.1bn came above our ¥6.5bn estimate but AGC EPS rep ¥ 40.0 61.2 65.1 65.3 EPS rep growth % 10.6 53.0 6.4 0.3 indicated that glass profit is slightly weak due to increased production costs EPS adj ¥ 40.0 61.2 65.1 65.3 associated with auto glass. EPS adj growth % 10.6 53.0 6.4 0.3 PER rep x 24.8 16.2 15.3 15.2 PER adj x 24.8 16.2 15.3 15.2 . ‘1H OP guidance achievement rate is high’. AGC expects all segments to Total DPS ¥ 18.0 20.0 20.0 20.0 post QoQ profit increase on seasonality. AGC expects PVC/ethylene spread to Total div yield % 1.8 2.0 2.0 2.0 ROA % 5.0 6.1 6.3 6.1 remain high in 2Q, and profit should rise further in 2Q as ¥1.3bn M&A cost and ROE % 4.6 7.2 7.3 7.0 ¥1bn maintenance charge from Chiba plant disappears. AGC guides 2Q LCD EV/EBITDA x 6.8 6.2 5.7 5.7 Net debt/equity % 30.2 28.7 21.3 14.9 glass volume to rise mid-single digit QoQ and ASP pressure to ease further. 1Q P/BV x 1.2 1.1 1.1 1.0 is usually the slowest quarter for flat glass, and 2Q demand should rise. In

5201 JP vs TOPIX, & rec history addition, AGC raised European glass price by 5% in March which should further raise profits in 2Q. Since AGC already achieved 49% of the 1H ¥45bn OP target, the company indicated high confidence to achieve 1H target. . LCD glass supply expansion will be under control. AGC re-iterated its mid-single digit LCD volume growth target in 2017. Despite Chinese LCD panel makers’ aggressive expansion plans, AGC indicated that it has no plan to increase the number of furnaces and to devote large capitals in capacity expansion. AGC will continue to shift furnaces from elsewhere to China, and

in the process to expand capacity through improving production efficiencies. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Earnings and target price revision Source: FactSet, Macquarie Research, May 2017 (all figures in JPY unless noted) . We raise 2017-19 OP estimate by 1% to reflect 1Q results and raise TP slightly from ¥960 (1.0x 2017 PBR) to ¥980 (1.0x 2017 PBR). Price catalyst Analyst(s) George Chang . 12-month price target: ¥980 based on a Price to Book methodology. +81 3 3512 7854 [email protected] Chenyu Yao . Catalyst: Macro cycle, LCD glass pricing. +81 3 3512 7849 [email protected]

10 May 2017 Action and recommendation Macquarie Capital Securities (Japan) . Maintain Neutral. Limited

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG Brilliance China Automotive 1114 HK Outperform 5 Series and X1 drive April sales Price (at 08:50, 08 May 2017 GMT) HK$13.00

Valuation HK$ 14.50 Conclusion - PER 12-month target HK$ 14.50 . The CPCA (China Passenger Car Association) reported April auto wholesale Upside/Downside % +11.5 shipment data for BMW Brilliance (BBA) after the market close on 8 May. The 12-month TSR % +14.7 JV posted 49% YoY growth in April to 35k units due to the restocking of the 5 Volatility Index High Series and easy comps for the X1 SUV. GICS sector Automobiles & Components . Our proprietary ISE survey indicates that BBA’s overall discounts expanded Market cap HK$m 65,518 2.5ppt MoM to 16.5% in April. That said, the pricing of the 5 Series largely Market cap US$m 8,419 remained stable. We maintain our Outperform rating on Brilliance China. 30-day avg turnover US$m 20.7 Number shares on issue m 5,040 Impact

Investment fundamentals . The old 5-Series and X1 drive growth: Total shipments jumped 49% YoY in Year end 31 Dec 2016A 2017E 2018E 2019E April to 35k units. Sales of the 5 Series were at a 7-month high level of 14k Revenue m 5,125.1 5,084.0 5,166.0 5,248.0 units as dealers prepare inventory for sales in May and June – the JV stopped EBIT m -741.5 -731.4 -739.4 -747.2 EBIT growth % -13.8 1.4 -1.1 -1.1 production of the old model in April. The new X1 sold 7k units, vs. only 12 Reported profit m 3,682.1 4,446.5 6,338.3 8,156.0 units last April ahead of the launch of the new model, providing an easy comp. EPS rep Rmb 0.73 0.88 1.26 1.62 EPS rep growth % 4.9 20.8 42.5 28.7 The 1 Series, which was launched in late February, shipped 2.5k units. PER rep x 15.8 13.1 9.2 7.1 Total DPS Rmb 0.10 0.22 0.38 0.65 . Pricing of the 5 Series remains disciplined: BBA’s discounts expanded Total div yield % 0.8 1.9 3.3 5.6 2.5ppt MoM to 16.5% in April according to our proprietary ISE survey. ROA % -2.6 -2.3 -2.1 -1.9 ROE % 16.9 17.6 21.9 24.5 Discounts rose across the board, led by the X1 SUV (12.3%, +1.2ppt MoM) EV/EBITDA x 15.1 12.5 8.9 6.9 and 3 Series (18.1%, +1.1ppt). Discounts on the 5 Series remained resilient at Net debt/equity % -5.1 -5.1 -11.0 -13.7 P/BV x 2.4 2.2 1.9 1.6 19.3% in April. This level is lower than any month in June-November 2016,

pointing to the solid market position of the model. 1114 HK rel HSI performance, & rec history . The new 5 Series will be launched on 20 June: As it is being produced at a new plant in Dadong, the ramp up of production will likely continue until September. The new model contains a lot of new technology and overall has been well received. Pricing has not been decided but BBA is considering being more aggressive on price to limit discounts. . Margin improvement and higher dividend payout ahead: BMW Brilliance’s margin should improve in 2018, benefiting from its solid model line-up and localisation of engines. Capex is expected to fall from Rmb7.9bn in 2016 to

Note: Recommendation timeline - if not a continuous line, then there was no Rmb6.5bn in 2017, even as profits increase, and decline further in 2018. The Macquarie coverage at the time or there was an embargo period. improved cash flow should turn into dividends to the two JV partners. In Source: FactSet, Macquarie Research, May 2017 BMW’s 1Q earnings report, profit from BBA was up 86% YoY to €188m. We (all figures in Rmb unless noted, TP in HKD)

expect it could fall YoY in 2Q/3Q before rebounding in 4Q supported by the new 5 Series. Earnings and target price revision

. No change. Price catalyst

Analyst(s) . 12-month price target: HK$14.50 based on a PER methodology. Macquarie Capital Securities (Japan) Limited Janet Lewis, CFA . Catalyst: Launch of the new 5 Series on 20 June, interim results in August +81 3 3512 7856 [email protected] Macquarie Capital Limited Allen Yuan Action and recommendation +86 21 2412 9009 [email protected] . We maintain our Outperform rating on Brilliance China. The outlook for profit 9 May 2017 growth is especially strong in 2018 and 2019, with potential upside to our

estimates from the new X2.

Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG China Longyuan Power 916 HK Outperform April data: strongest utilization growth Price (at 10:31, 09 五月 2017 GMT) HK$5.95

Valuation HK$ 8.10 YTD - DCF (WACC 7.6%, beta 1.1, ERP 7.0%, RFR 3.0%, TGR 1.0%) 12-month target HK$ 8.10 Event Upside/Downside % +36.1 12-month TSR % +38.5 . Longyuan Power reported April power generation data, with wind output up Volatility Index High 20% YoY in April. The implied wind utilization grew by 9% YoY in April, higher GICS sector Utilities than the 3% YoY growth in 1Q17, mainly driven by strong utilization recovery Market cap HK$m 47,814 in the severely-curtailed provinces with progressive implementation of the Market cap US$m 5,988 minimum-purchase policy. We maintain our positive view on China wind IPPs 30-day avg turnover US$m 6.9 and reiterate our Outperform rating on Longyuan Power. Number shares on issue m 8,036 Impact Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E . Implied utilization up 9% YoY April, stronger than the 3% YoY growth in Revenue m 22,304 25,161 26,991 28,956 EBIT m 7,548 8,776 10,484 11,713 1Q17. In particular, the severely-curtailed six provinces including Inner EBIT growth % 5.8 16.3 19.5 11.7 Mongolia, Xinjiang, Gansu, Ningxia, Heilongjiang and Jilin, registered a Reported profit m 3,415 4,472 5,579 6,352 Adjusted profit m 3,415 4,472 5,579 6,352 utilization recovery of 7%-76% YoY and contributed ~70% of total wind power EPS rep Rmb 0.42 0.56 0.69 0.79 output growth in April. This was attributed to a further implementation of EPS rep growth % 18.7 30.9 24.8 13.9 EPS adj Rmb 0.42 0.56 0.69 0.79 minimum-purchase policy, with curtailment rate further reduced by 7ppts YoY EPS adj growth % 18.7 30.9 24.8 13.9 to 11% in April (vs 16% in 1Q17). PER rep x 12.4 9.5 7.6 6.7 PER adj x 12.4 9.5 7.6 6.7 . Market-based sales proportion unlikely to increase in 2017E. We believe Total DPS Rmb 0.08 0.11 0.14 0.17 Total div yield % 1.6 2.1 2.6 3.3 Longyuan’s utilization recovery in 2017E (up 5% YoY) would be mainly driven ROA % 5.5 6.1 6.9 7.2 by the minimum-purchase policy instead of market-based sales. In 1Q17, its ROE % 9.0 10.5 11.9 12.2 EV/EBITDA x 8.2 7.3 6.4 5.8 market-based sales proportion edged down to 12% from 13% in 2016 and Net debt/equity % 154.6 143.9 128.9 112.4 average tariff discount narrowed to Rmb0.12/kWh (~20% discount to P/BV x 1.0 0.9 0.9 0.8 benchmark vs ~23% discount in 2016). For full-year 2017, we 916 HK rel HSI performance, & rec conservatively estimate the proportion and discount to remain stable, history leading to a stabilized blended wind tariff. . Maintain positive view on China wind IPPs, on a) a continuous and sustainable utilization recovery driven the progressive minimum-purchase policy, to achieve the government’s target of a <5% curtailment rate in 2020E (from 16% by end-1Q17); and b) blended average wind tariffs could be stabilized from 2017E compared with market concerns of a blended tariff decline with an increasing market-based sales proportion.

Earnings and target price revision Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 . No change. (all figures in Rmb unless noted, TP in HKD) Price catalyst

. 12-month price target: HK$8.10 based on a DCF methodology.

. Catalyst: Monthly power generation data, interim results, execution details regarding green certificate. Analyst(s) Action and recommendation Patrick Dai +86 21 2412 9080 [email protected] . Reiterate Outperform. The stock is trading at 9.5x 2017E PE, which we think Yingying Tang +852 3922 3289 [email protected] is attractive vs its three-year earnings CAGR of 17%.

9 May 2017 Macquarie Capital Limited

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

TAIWAN Ginko 8406 TT Neutral Takes time to rebuild confidence Price (at 13:49, 09 May 2017 GMT) NT$241.50

Valuation NT$ 240.00- Event 260.00 - PER . Ginko posted a set of disappointing 1Q17 results after market on 9 May, with 12-month target NT$ 250.00 poor April sales (-21% YoY), which we believe point to some adverse impact Upside/Downside % +3.5 on brand image from the CFDA event (See here). The company admitted 12-month TSR % +6.6 demand from distributors as well as end consumers dropped after the failure Volatility Index Medium of the CFDA inspection. We are concerned that the brand image of this GICS sector leading contact lens brand in PRC has been damaged to some extent and Health Care Equipment & Services that it could take a while to recover. We cut our 2017-18E recurring EPS by 7- Market cap NT$m 22,387 10% and lower our TP to NT$250 (on a lower target PER of 14x from 18x); Market cap US$m 742 downgrade to Neutral (from Outperform). 30-day avg turnover US$m 2.2 Number shares on issue m 92.70 Impact

Investment fundamentals . Lacklustre 1Q17 results. Prior released 1Q17 sales were up 2% YoY (-3% Year end 31 Dec 2016A 2017E 2018E 2019E QoQ) to NT$1,575m, which is roughly in line with estimates. Gross margin was Revenue m 6,539.5 6,733.0 7,480.2 8,471.5 Reported profit m 1,517.1 1,648.9 1,759.0 1,980.3 flattish YoY (-0.9ppt QoQ) at 61.1%, higher than our estimate of 57.2% and Adjusted profit m 1,529.6 1,648.9 1,759.0 1,980.3 consensus of 59.4%. However, the opex % came to five-year high of 36.4%, on EPS rep NT$ 16.37 17.79 18.98 21.36 EPS rep growth % -3.2 8.7 6.7 12.6 higher marketing expenses. OPM thus dropped by 3ppts YoY (-6ppts QoQ) to PER rep x 14.8 13.6 12.7 11.3 24.7%, which drove OP to miss consensus by 9% (though in line with our Total DPS NT$ 6.80 7.39 7.88 8.88 Total div yield % 2.8 3.1 3.3 3.7 estimate). Although EPS of NT$4.2 came in 14%-28% higher than estimates, ROA % 12.1 11.1 11.7 12.2 that is primarily due to FX gains of ~NT$100m (strong NTD on its USD debt). ROE % 15.2 15.5 15.1 15.4 EV/EBITDA x 9.3 9.4 8.6 7.9 Overall, we deem this a set of weak results. Net debt/equity % 24.2 11.7 6.9 5.0 P/BV x 2.2 2.0 1.8 1.7 . Brand image hurt. The mgmt indicated that the CFDA event did adversely

impact demand for its products, not only from distributors but also end 8406 TT rel TAIEX performance, & rec history customers. Even though there were no quality issues raised by CFDA, some competitors seized the opportunity to attack Ginko’s brands, in both PRC and Taiwan markets. As the end of each month is normally peak shipping time, it did impact sales from April (-21% YoY in NTD, or -11% YoY in RMB) and mgmt mentioned the influence would continue before market confidence recovers. It now aims to resume production on 20 May at the soonest, but we are concerned it will take longer for market confidence to be rebuilt. . High opex % becomes the norm. Ginko’s opex % grew 36.4% in 1Q17, after increasing to 29.1% in 2016 from 27.8% in 2015, partly due to the secular

Note: Recommendation timeline - if not a continuous line, then there was no trend of higher ad costs in PRC, said mgmt. On top of that, mgmt indicated it Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 is spending on ads to secure the brand image after the CFDA event. We (all figures in NT$ unless noted, TP in TWD) believe the company could also need to increase its subsidy to offline distribution partners to enhance market share. Earnings and target price revision . We cut 2017-18E recurring EPS by 7-10% and lower our TP to NT$250 (from Analyst(s) NT$352, to reflect the impact on brand image). Marcus Yang +886 2 2734 7532 [email protected] Price catalyst Corinne Jian, CFA +886 2 2734 7522 [email protected] . 12-month price target: NT$250.00 based on a PER methodology. Benson Pan +886 2 2734 7527 [email protected] . Catalyst: Monthly sales, 2Q17 results.

9 May 2017 Action and recommendation Macquarie Capital Limited, Taiwan . Downgrade to Neutral. We suggest investors stay on the sidelines amid the Securities Branch event which could potentially hurt brand value. Ginko is now trading at 13x 2018E PER, which we believe has partly factored in the recent crisis.

Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG Great Wall Motor Company 2333 HK Outperform Weak April due to product transition Price (at 13:51, 08 May 2017 GMT) HK$8.04

Valuation HK$ 15.50 Event - PER 12-month target HK$ 13.50 . Great Wall reported April auto wholesale shipment data after the market close Upside/Downside % +67.9 on 8 May. Total shipments declined 8% YoY to 73,171 units. We attribute the 12-month TSR % +72.9 decline to the company’s ongoing product transition and overall sluggish auto Volatility Index High demand. We view the results as weak and the market may react negatively. GICS sector Automobiles & While we consider Great Wall’s valuations (PER, yield) attractive, we would Components hold off accumulating until there is more clarity on the strategy for Market cap HK$m 73,383 differentiating sales of the Haval and WEY brands. Market cap US$m 9,430 30-day avg turnover US$m 60.7 Impact Number shares on issue m 9,127 . Sales weakened due to product transition and sluggish auto demand: Investment fundamentals GWM’s total sales declined 8% YoY to 73k units in April. Shipments of the Year end 31 Dec 2016A 2017E 2018E 2019E Haval H6 dropped 17% YoY to 36k units. We attribute the decline to 1) weak Revenue bn 98.6 112.6 138.5 156.5 EBIT bn 12.3 12.6 16.1 18.5 auto demand; and 2) channel adjustment ahead of the launch of the new EBIT growth % 30.3 2.8 27.5 15.0 generation H6 (photo Fig 2) and WEY brand in late April. Some customers Reported profit bn 10.6 10.8 13.8 15.8 EPS rep Rmb 1.16 1.19 1.51 1.73 may postpone their purchase to wait for the new H6. As production of the new EPS rep growth % 30.9 2.7 27.1 14.8 models ramps, sales should gradually recover. Sales of the H2 grew 57% PER rep x 6.2 6.0 4.7 4.1 Total DPS Rmb 0.35 0.36 0.45 0.52 YoY to 17k units, supported by the H2s. Total div yield % 4.9 5.0 6.4 7.3 ROA % 14.9 13.1 14.7 14.8 . Discounts continue to rise in April: The proprietary ISE survey (see Fig 1) ROE % 24.6 21.2 23.1 22.6 EV/EBITDA x 4.3 4.2 3.4 2.9 indicates that GWM’s overall discounts rose 0.4ppt MoM to 6.6% in April. Net debt/equity % -3.9 -4.3 -7.9 -12.4 Discounts rose across the board for key models, including the H2 (9.8%, P/BV x 1.4 1.2 1.0 0.9 +3.4ppt MoM), H6 (5.7%, +1.5ppt), H7 (7.8%, +0.4ppt), and H7L (6.6%, 2333 HK rel HSI performance, & rec +0.4ppt). We attribute the elevated discounts to the Red Envelope campaign history as well as heightened competition among domestic brands. Discounts on the H2s (1.6%, +0.1ppt) were largely stable MoM in April. . Solid product line-up, but WEY brand creates near-term uncertainties: Following the launches of the WEY vv7 (photo Fig 4) and the new generation H6, GWM will launch the WEY vv5 (photo Fig 3) in 3Q17. We expect to see improved product mix in 2017 though the start-up cost for new models may dampen profitability. That said, differentiating the Haval and WEY brands poses a challenge for the company in the near term – the two brands offer

Note: Recommendation timeline - if not a continuous line, then there was no parallel models in many cases, such as the WEY vv7 vs Haval H7L, WEY vv5 Macquarie coverage at the time or there was an embargo period. vs. Haval H6. We will be better able to gauge the prospects for the WEY Source: FactSet, Macquarie Research, May 2017 brand once we see the marketing strategies that help to differentiate the (all figures in Rmb unless noted, TP in HKD)

positioning of the new brand. Earnings and target price revision

. We are reviewing the numbers. Price catalyst

. 12-month price target: HK$13.50 based on a PER methodology. Analyst(s) Macquarie Capital Securities (Japan) Limited . Catalyst: Monthly auto sales, order backlog of the vv7 and new H6 Janet Lewis, CFA +81 3 3512 7856 [email protected] Macquarie Capital Limited Action and recommendation Allen Yuan +86 21 2412 9009 [email protected] . We maintain our Outperform rating on GWM on a 12-month view in light of the

low valuations and solid model line-up, but we are cautious in the near term 9 May 2017 until there is more visibility on the reception of the new models.

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

14 JAPAN IHI Corp 7013 JP Neutral Progress towards normal earnings Price (at 08:50, 09 May 2017 GMT) ¥395 Valuation ¥ 250-450 Conclusion - EV/IC=ROIC/WACC 12-month target ¥ 350 . IHI announced FY3/17 results at 2pm and held a briefing at 2:30pm on 9 May. Upside/Downside % -11.4 OP expanded 2.1-fold YoY to ¥47.9bn. The FY3/17 results do not come as a 12-month TSR % -9.8 surprise because IHI revised guidance on 25 April. Volatility Index High GICS sector Capital Goods . The FY3/18 guidance targets ¥65bn in OP, a 37% YoY increase. While this is Market cap ¥m 610,986 lower than our ¥75.8bn forecast, IHI’s outlook is close to the consensus view Market cap US$m 5,424 (¥67bn) and unlikely to be a surprise. We think IHI is generally on track to 30-day avg turnover US$m 44.3 restoring normal earnings as it nears completions or transfers of projects that Number shares on issue m 1,547 resulted in heavy losses over the past two years, such as the US-based Cove Point LNG plant, drill-ship hull construction, FPSO (Floating, Production, Investment fundamentals Year end 31 Mar 2017A 2018E 2019E 2020E Storage and Offloading system) hull construction, and LNG-ship aluminum Revenue bn 1,486.3 1,581.0 1,630.0 1,653.0 tank construction. We maintain our ¥350 price target and Neutral rating. We EBIT bn 47.4 75.8 82.2 86.1 intend to review our forecasts, if necessary, after direct contact. EBIT growth % 114.9 60.0 8.4 4.7 Recurring profit bn 22.0 66.2 72.6 76.5 Reported profit bn 5.2 35.6 39.3 41.5 Impact Adjusted profit bn 9.2 35.6 39.3 41.5 EPS rep ¥ 3.4 23.1 25.5 26.9 . Industrial system and general-purpose machinery was a surprise in FY3/18 EPS rep growth % 243.1 578.5 10.4 5.6 segment OP guidance. IHI projects a 37% YoY decline to ¥11bn (vs. our EPS adj ¥ 5.9 23.1 25.5 26.9 EPS adj growth % -28.8 287.8 10.4 5.6 ¥21.1bn forecast). While it targets a 9% increase in turbocharger sales to PER rep x 116.2 17.1 15.5 14.7 ¥190bn, which is roughly on par with our ¥195bn forecast, IHI explains that PER adj x 66.4 17.1 15.5 14.7 Total DPS ¥ 0.0 6.0 7.0 8.0 segment profit is likely to weaken mainly because of higher R&D expenses. Total div yield % 0.0 1.5 1.8 2.0 ROA % 2.8 4.4 4.6 4.8 . IHI guides for a 30% decline in aero engine, space and defense OP to ¥37bn. ROE % 2.9 10.5 10.5 10.3 EV/EBITDA x 7.9 6.4 6.1 5.9 The outlook for weaker profitability owing to increased sales of the PW1100G Net debt/equity % 68.9 67.1 61.8 54.4 engine used in the Airbus A320neo matches our view (we forecast ¥44bn in P/BV x 1.9 1.7 1.6 1.5 segment OP). 7013 JP vs TOPIX, & rec history Earnings and target price revision

. We maintain our earnings forecasts and price target (¥350). Price catalyst

. 12-month price target: ¥350 based on an EV/IC=ROIC/WACC methodology.

. Catalyst: (1) occurrence of extra costs for SPB tanks used in LNG ships and (2) occurrence of extra costs in construction of the US-based LNG plant Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Action and recommendation Source: FactSet, Macquarie Research, May 2017 (all figures in JPY unless noted) . We maintain a Neutral rating.

Analyst(s) Kunio Sakaida +81 3 3512 7873 [email protected] Tomoki Takeshima +81 3 3512 7432 [email protected]

10 May 2017 Macquarie Capital Securities (Japan) Limited

Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

KOREA Korea Electric Power 015760 KS Outperform Recovery story remains intact Price (at 13:51, 08 May 2017 GMT) Won45,800

Valuation Won 60,000 Conclusion - Price to Book 12-month target Won 60,000 . KEPCO’s 1Q17 OP came in at Won1.5tn, missing our estimate by a large Upside/Downside % +31.0 margin. However, we think the majority of negatives should disappear from 12-month TSR % +34.9 2Q17, and we recommend investors continue to accumulate the stock. Volatility Index Low GICS sector Utilities Impact Market cap Wonbn 29,402 . 1Q17 results: disappointing mainly due to lower nuclear utilization… Market cap US$m 25,956 KEPCO’s 1Q17 OP came in at Won1.5tn, missing our est. of Won2.5tn by a Free float % 49 large margin. The OP difference of Won1tn between the actual number and 30-day avg turnover US$m 41.2 our est. came from 1) the decline in profit contribution from overseas business Number shares on issue m 642.0 (Won0.2tn) amid a sharp appreciation of KRW at the quarter end; and the Investment fundamentals remaining from 2) much higher power purchase costs. While this result is Year end 31 Dec 2016A 2017E 2018E 2019E disappointing, we think the majority of negatives should disappear from 2Q17. Revenue bn 60,190 58,348 59,263 60,101 EBIT bn 12,002 9,335 12,175 11,685 . …however, nuclear run-rate to rise to 83% in 2Q17. Due to lower nuclear EBIT growth % 5.8 -22.2 30.4 -4.0 Reported profit bn 7,148 5,597 7,382 6,924 utilization ratio, KEPCO’s dependence on expensive power from outside the Adjusted profit bn 7,049 5,503 7,259 6,808 firm went up to 23% in 1Q17 from 19% in 2016, which led to a rise in power EPS rep Won 11,142 8,724 11,506 10,792 EPS rep growth % -46.7 -21.7 31.9 -6.2 purchase costs. However, this seems mainly due to longer-than-expected EPS adj Won 10,986 8,578 11,314 10,611 maintenance of nuclear reactors (from 192 to 521 days). Given completion of EPS adj growth % -47.0 -21.9 31.9 -6.2 maintenance, KEPCO guided nuclear run-rate of 83% in 2Q vs. 74% in 1Q. PER rep x 4.1 5.3 4.0 4.2 PER adj x 4.2 5.3 4.0 4.3 Total DPS Won 1,980 1,800 2,000 2,000 . Positives from lower fuel costs and better fuel mix remain intact. KEPCO Total div yield % 4.3 3.9 4.4 4.4 is adding 5.5GW of new coal/nuclear power plants for the rest of this year. As ROA % 6.8 5.2 6.6 6.2 ROE % 10.2 7.5 9.4 8.4 such, KEPCO will be able to further reduce power purchase from outside the EV/EBITDA x 3.9 4.4 3.8 3.9 firm in 2H17. This should translate to a rise in OP of Won1.9tn pa. On top of Net debt/equity % 69.3 65.8 59.8 57.3 P/BV x 0.4 0.4 0.4 0.4 that, our cautious view on coal price is on track. Coal prices declined by more than 30$/t now from the latest high of 110$/t. We estimate KEPCO’s OP to 015760 KS rel KOSPI performance, & increase by Won98bn pa for every 1$/t drop in coal price. rec history . Regulatory risks may not be as big as the street thinks. We believe investors should note presidential candidates’ focus on providing green power to the Korean public. Given green power remains in loss-making territory due to higher costs, if the new government wants to push the election pledge of lowering reliance on coal and nuclear, it underscores the need for tariff hikes. The risk to our view is the government could make KEPCO bear the costs rather than attract cleaner power players. However, even under this case, we think KEPCO’s earnings could expand into 2018. When taking Mr. Moon’s

Note: Recommendation timeline - if not a continuous line, then there was no target to reduce coal generation by 30% “during his term” (from coal to LNG), Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 the est. rise in costs would be Won1.3tn. This could be cancelled out by (all figures in Won unless noted, TP in KRW) improved fuel mix and/or ~4% in industrial tariff hikes.

Earnings and target price revision . On reflecting weak 1Q17 results, we cut our FY17 OP est. by 9.6%. Our TP is unchanged despite the earnings cut, as we roll our base year to FY17/18. Price catalyst Analyst(s) . 12-month price target: Won60,000 based on a Price to Book methodology. Anna Park +82 2 3705 8669 [email protected] . Catalyst: coal price fall, industrial tariffs hike, adoption of cost-linked pricing

9 May 2017 Action and recommendation Macquarie Securities Korea Limited . Maintain Outperform.

Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN MinebeaMitsumi 6479 JP Outperform Upside to above-consensus guidance Price (at 13:49, 09 May 2017 GMT) ¥1,620

Valuation ¥ 1,900 Event - Price to Book 12-month target ¥ 1,900 . Our takeaways from the analyst meeting are: 1) above-consensus ¥56bn OP Upside/Downside % +17.3 guidance is likely conservative with potentially more upside from Mitsumi; 2) 12-month TSR % +18.6 backlight sales decline and profit impact appears to be less than what we Volatility Index High thought; 3) if Minebea can achieve its mid-term plan with organic OP rising GICS sector Capital Goods ¥80bn by FY3/20, we estimate the fair value could to rise to ¥2,400. Market cap ¥m 691,902 Market cap US$m 6,143 Impact Free float % 82 . FY3/18 guidance could be conservative. As we highlighted in the preview 30-day avg turnover US$m 46.8 note, Minebea is likely one of the few companies to guide OP above Foreign ownership % 27 Number shares on issue m 427.1 consensus. Our takeaway from the analyst meeting is that FY3/18 ¥56bn OP guidance (vs. ¥54.8bn consensus) is likely conservative as Minebea guides Investment fundamentals ¥8bn+ OP from Mitsumi (¥10bn OP on pre-elimination level subtract <¥2bn Year end 31 Mar 2017A 2018E 2019E 2020E elimination), but Mitsumi already posted ¥3.7bn OP in 4Q. Management Revenue bn 638.9 706.7 609.5 620.3 EBIT bn 49.0 57.9 57.6 59.4 indicated that its assumptions for game assembly and actuator growth are EBIT growth % -4.7 18.1 -0.5 3.1 relatively conservative. In addition, Minebea took ¥3.2bn impairment charge Recurring profit bn 48.4 57.8 58.6 61.1 Reported profit bn 41.1 43.5 44.1 46.1 on BLU assets in 4Q to further reduce depreciation burden, and guides BLU Adjusted profit bn 41.1 45.5 46.1 48.1 fixed assets to drop to ¥1.3bn by FY3/18 so BLU sales decline in FY3/19 will EPS rep ¥ 96.6 102.1 103.5 108.2 EPS rep growth % 6.0 5.7 1.3 4.5 have limited impact to earnings onward. EPS adj ¥ 96.4 106.8 108.1 112.8 EPS adj growth % 6.6 10.8 1.3 4.3 . Detailed mid-term plan. Minebea reiterated its FY3/21 ¥100bn OP mid-term PER rep x 16.8 15.9 15.7 15.0 PER adj x 16.8 15.2 15.0 14.4 plan (¥15bn OP from M&A) but the interesting point is the ¥85bn organic OP Total DPS ¥ 14.0 20.0 25.0 25.0 by FY3/21, driven by steady growth in machined components, ¥30bn OP from Total div yield % 0.9 1.2 1.5 1.5 ROA % 8.9 8.9 8.5 8.4 electronic devices & components, and ¥16bn OP from Mitsumi. The company ROE % 14.9 13.4 12.3 11.8 guides BLU sales to drop from ¥241bn in FY3/17 to ¥108bn in FY3/19 (we EV/EBITDA x 9.9 8.4 8.1 8.0 Net debt/equity % 21.7 2.8 -7.0 -13.3 only forecast ¥26bn BLU sales in FY3/19) and rising to ¥130bn by FY3/20 P/BV x 2.1 1.9 1.8 1.6 driven by auto and lighting application. While Minebea guides BLU sales to

6479 JP vs TOPIX, & rec history decline, it expects electronic devices & components OP to drop slightly to ¥20.5bn in FY3/19 and rising to ¥30bn in FY3/20. While we think ¥30bn OP appears high, Minebea guides motor sales and OP to continue to improve. . Fair value at ¥2,400 if Minebea does execute the target. We need to further clarify BLU sales and OP breakdown for the electronic devices & components outlook as we only forecast ¥59bn OP by FY3/20. We estimate that Minebea’s fair value could rise to ¥2,400 (2.4x FY3/20 PBR, or 17x FY3/20 PER) if it is able to execute on the mid-term plan.

Note: Recommendation timeline - if not a continuous line, then there was no Earnings and target price revision Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 . We raise FY3/18-19 OP estimate by 1% to reflect results and new profit (all figures in JPY unless noted) breakdown (part of Mitsumi profit shifted to eliminations) and maintain TP unchanged at ¥1,900. Price catalyst Analyst(s) George Chang . 12-month price target: ¥1,900 based on a Price to Book methodology. +81 3 3512 7854 [email protected] Chenyu Yao . Catalyst: Macro cycle, Mitsumi turnaround, M&A. +81 3 3512 7849 [email protected]

10 May 2017 Action and recommendation Macquarie Capital Securities (Japan) . Maintain Outperform. Limited

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN Mitsubishi Heavy Industries 7011 JP Neutral Needs to tackle tough issues in core Price (at 08:50, 09 May 2017 GMT) ¥456

Valuation ¥ 260-620 businesses - EV/IC=ROIC/WACC 12-month target ¥ 440 Conclusion Upside/Downside % -3.5 12-month TSR % -0.9 . Mitsubishi Heavy Industries (MHI) announced FY3/17 results at 1:30pm and Volatility Index Medium held a briefing from 3:15pm on 9 May. The FY3/17 results were not a surprise GICS sector Capital Goods because MHI already lowered guidance on 26 April. OP fell 51% YoY to Market cap ¥bn 1,538 ¥150.5bn, mainly due to weaker gas turbine sales (down 15% to ¥444bn, Market cap US$m 13,655 including a 14% decline in aftermarket sales to ¥235bn) and margin erosion 30-day avg turnover US$m 53.4 for Boeing B787 fuselage parts. Number shares on issue m 3,374 . The FY3/18 guidance targets a 53% YoY rise in OP to ¥230bn, missing our Investment fundamentals Year end 31 Mar 2017A 2018E 2019E 2020E ¥282bn forecast and the ¥292bn consensus estimate. This is disappointing Revenue bn 3,914.0 4,300.0 4,608.0 4,759.0 particularly since, at the 3Q FY3/17 (Oct-Dec 2016) briefing on 3 February, EBIT bn 150.5 282.0 323.0 355.0 President Shunichi Miyanaga guided for FY3/18 OP ¥350bn, based on cost EBIT growth % -51.4 87.3 14.5 9.9 Recurring profit bn 124.3 257.0 298.0 330.0 improvements in thermal power plant and steel and metal production Reported profit bn 87.7 90.0 116.0 135.0 machinery businesses. MHI is facing difficult issues in core businesses that Adjusted profit bn 42.3 189.8 216.1 235.2 EPS rep ¥ 26.1 26.8 34.5 40.2 need to be resolved (details below). We intend to review our forecasts, if EPS rep growth % 37.4 2.6 28.9 16.4 necessary, after talking to the company. We maintain our ¥440 price target EPS adj ¥ 12.6 56.5 64.4 70.0 EPS adj growth % -79.2 348.7 13.9 8.8 and Neutral rating. PER rep x 17.5 17.0 13.2 11.3 PER adj x 36.2 8.1 7.1 6.5 Impact Total DPS ¥ 12.0 12.0 12.0 13.0 Total div yield % 2.6 2.6 2.6 2.9 . MHI faces the following issues in core businesses. ROA % 2.7 5.0 5.4 5.9 ROE % 2.4 10.6 11.9 12.3 EV/EBITDA x 7.3 4.7 4.3 4.0 (1) The power systems segment (MHI changed the segment framework from Net debt/equity % 32.2 40.1 40.4 34.7 FY3/18) has excess capacity and personnel because of slumping demand P/BV x 0.9 0.9 0.8 0.8 for gas turbines and coal power equipment (particularly in Japan). 7011 JP vs TOPIX, & rec history (2) The aircraft, defence & space segment is confronting excess capacity and personnel due to a decline in B777 output and delayed delivery of Mitsubishi Regional Jet (MRJ). (3) The industry & infrastructure segment needs to lower costs and improve project duration for LNG ships. . President Miyanaga explained at the results briefing that ‘It will be difficult to achieve numerical goals (such as ¥450bn in OP) in the current medium-term business plan (final year in FY3/18), but we hope to attain these levels in the Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. second year of the next medium-term plan (FY3/20).’ This stance delayed the Source: FactSet, Macquarie Research, May 2017 goals by two years. (all figures in JPY unless noted)

Earnings and target price revision . We maintain our earnings forecasts and price target (¥440). Price catalyst

Analyst(s) . 12-month price target: ¥440 based on a EV/IC=ROIC/WACC methodology. Kunio Sakaida +81 3 3512 7873 [email protected] Tomoki Takeshima . Catalyst: resolution of dispute on South Africa thermal power plant +81 3 3512 7432 [email protected] Action and recommendation 10 May 2017 Macquarie Capital Securities (Japan) . We maintain a Neutral rating. Limited

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN NGK Spark Plug 5334 JP Neutral Underlying assumptions largely in line Price (at CLOSE#, 09 May 2017) ¥2,545

Valuation ¥ 2,700 Event - Price to Book 12-month target ¥ 2,700 . FY3/17 OP of ¥53.6bn was higher than our ¥52.4bn estimate. While FY3/18 Upside/Downside % +6.1 OP guidance of ¥53.4bn appears to be lower than our ¥61bn estimate, this is 12-month TSR % +7.8 mainly due to forex assumption of ¥105/US$ vs. our ¥110 assumption Volatility Index Medium (¥1/US$ change impacts OP by ¥1.6bn/year). GICS sector Automobiles & Components Impact Market cap ¥m 568,808 . Favourable forex and solid volume growth in automobile in 4Q FY3/17. Market cap US$m 4,984 Free float % 68 FY3/17 OP of ¥53.6bn was higher than our ¥52.4bn estimate mainly due to 30-day avg turnover US$m 20.4 stronger plug OP of ¥36.8bn (vs. our ¥35.5bn estimate). In addition to our Foreign ownership % 33.6 estimated ¥0.8bn positive impact from favourable forex in 4Q (¥112.1/US$ vs. Number shares on issue m 223.5 our ¥110/US$ assumption), NGKSP also attributed stronger OP to volume growth in plugs and sensors. Plug volume totalled 830mn in FY3/17, or +6.5% Investment fundamentals Year end 31 Mar 2017A 2018E 2019E 2020E YoY and 1% above NGKSP’s previous guidance. Sensor volume totalled Revenue bn 372.9 387.0 400.8 415.9 106.5mn, +7.6% YoY and 2% above its guidance. Ceramic packaging posted EBIT bn 53.6 61.0 66.8 70.9 a ¥0.9bn loss in 4Q (vs. our ¥0.8bn loss estimate), slightly larger than the EBIT growth % -19.1 13.9 9.4 6.2 Recurring profit bn 55.6 63.5 69.3 73.5 ¥0.6bn loss in 3Q due to seasonality and in line with the company’s internal Reported profit bn 25.6 40.9 45.5 48.3 plan. Adjusted profit bn 46.3 43.9 47.5 50.3 EPS rep ¥ 111.5 178.1 198.2 210.5 . FY3/18 underlying assumptions are largely in line. FY3/18 OP guidance of EPS rep growth % -16.9 59.7 11.3 6.2 EPS adj ¥ 201.8 191.2 206.9 219.2 ¥53.4bn (based on ¥105/US$) is lower than our ¥61bn estimate (based on EPS adj growth % -10.1 -5.3 8.2 5.9 ¥110/US$). Of the FY3/18 OP guidance, stripping out a -¥6.2bn impact from PER rep x 22.8 14.3 12.8 12.1 PER adj x 12.6 13.3 12.3 11.6 FX assumption, NGKSP guides FY3/18 core OP to increase about ¥6bn YoY Total DPS ¥ 42.0 44.0 46.0 46.0 on a combination of ¥13bn marginal profit gains from sales increase/ Total div yield % 1.7 1.7 1.8 1.8 ROA % 9.8 10.5 10.7 10.8 rationalization, to be offset by ¥3.4bn negative impact from ASP decline, ROE % 13.4 11.9 11.9 11.5 ¥2.8bn negative impact from cost increase, etc. NGKSP’s assumptions are EV/EBITDA x 8.6 7.7 7.2 6.8 Net debt/equity % 15.0 9.0 3.8 -1.0 based on 1% growth in global auto production and guide plug volumes to P/BV x 1.7 1.5 1.4 1.3 increase only +2%. The company guides sensor volume to increase 5.2%

5334 JP vs TOPIX, & rec history YoY, in particular driven by strong UEGO sensor growth (+20% YoY), which should help product mix change. NGKSP forecasts losses in ceramic packaging to narrow to ¥4.1bn (vs. ¥4.8bn loss in FY3/17 and our ¥2.2bn loss estimate for FY3/18). We think the timid YoY improvement is likely due to forex assumptions. NGK indicated that it expects a sharper improvement from FY3/19. Earnings and target price revision . We tweaked FY3/18-19 OP estimates by 1% to reflect FY3/17 results and

Note: Recommendation timeline - if not a continuous line, then there was no maintain our TP at ¥2,700 (1.5x FY3/18E PBR). Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 Price catalyst (all figures in JPY unless noted)

. 12-month price target: ¥2,700 based on a Price to Book methodology.

Analyst(s) . Catalyst: Forex movement, ceramic packaging improvement George Chang +81 3 3512 7854 [email protected] Action and recommendation Chenyu Yao +81 3 3512 7849 [email protected] . Maintain Neutral. 9 May 2017 Macquarie Capital Securities (Japan) Limited

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN SCREEN Holdings 7735 JP Neutral Modest growth expectation for FY3/18 Price (at CLOSE#, 09 May 2017) ¥8,860

Valuation ¥ 8,260 Conclusion - Price to Book 12-month target ¥ 8,260 . We believe SCREEN’s share price is close to fair value, and we anticipate a Upside/Downside % -6.8 moderate pull-back from the recent surge given the modest FY3/18 guidance 12-month TSR % -5.2 (+1% OP growth). We maintain our Neutral rating and ¥8,260 TP. Volatility Index High GICS sector Impact Semiconductors & Semiconductor . Robust FY3/17 result: OP rose 43% YoY to a record high of ¥33.7bn, Equipment beating our ¥32bn estimate and guidance of ¥31bn. The FY OPM of 11.2% Market cap ¥m 449,999 Market cap US$m 3,969 was an all-time high and above the mid-term target of 10%. SPE revenues 30-day avg turnover US$m 32.8 increased a robust 24% YoY to ¥206bn, driving segment profit up 57% YoY to Number shares on issue m 50.79 ¥29.3bn. This more than offset setbacks in the printing equipment business.

Investment fundamentals . What we liked: We liked the dividend hike, the commitment to a 25%+ payout Year end 31 Mar 2017A 2018E 2019E 2020E ratio, and elimination of takeover defences. We also appreciate Revenue bn 300.2 314.6 326.9 337.9 management’s aim to continue boosting profitability (the new ‘Challenge 2019’ EBIT bn 33.7 36.4 39.2 40.5 EBIT growth % 43.2 7.9 7.6 3.4 mid-term plan targets a 13%+ OPM on ¥300bn+ of annual revenue – vs Recurring profit bn 31.1 35.1 37.8 39.1 11.2% in FY3/17) and developing a post-sales business to further enhance Reported profit bn 24.2 25.6 27.6 28.5 EPS rep ¥ 512.0 545.5 588.2 608.2 growth and margins. We also favour SCREEN’s efforts to drive growth in EPS rep growth % -74.2 6.6 7.8 3.4 print-on-demand (POD) equipment and to develop new businesses. PER rep x 17.3 16.2 15.1 14.6 Total DPS ¥ 87.0 136.0 147.0 154.0 . That said, we expect market disappointment at the conservative Total div yield % 1.0 1.5 1.7 1.7 ROA % 11.8 11.6 11.6 11.2 guidance and limited margin improvement in FY3/18. SCREEN is guiding ROE % 18.4 16.7 15.8 14.5 to ¥34bn in OP for FY3/18 (up just 1% YoY) and NP of ¥22.3bn (down 8% EV/EBITDA x 9.9 8.2 8.0 7.7 Net debt/equity % -21.9 -32.1 -39.6 -46.0 YoY) – below consensus estimates that we had considered too optimistic (OP P/BV x 2.9 2.5 2.2 2.0 of ¥37.5bn). The SPE revenue guidance of ¥202bn (down 2% YoY) is likely 7735 JP vs TOPIX, & rec history conservative, and we see upside to ¥212bn. That said, we think SCREEN’s SPE growth rate is intrinsically limited compared with Tokyo Electron due to its lower exposure to the memory sector (28% of FY3/17 SPE orders) – which is the key driver of chip sector capex growth – and SCREEN’s specialisation in the relatively mature cleaning equipment segment. Earnings and target price revision . There are no significant changes to FY3/18–19 OP estimates, but we are making cuts to NP estimates to reflect a higher tax rate assumption. Our

Note: Recommendation timeline - if not a continuous line, then there was no unchanged TP of ¥8,260 is based on ~2.1x P/B (LTROE 13.5% / CoE 6.5%). Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 Price catalyst (all figures in JPY unless noted)

. 12-month price target: ¥8,260 based on a Price to Book methodology.

. Catalyst: SPE order trends Action and recommendation . While we are bullish on the prospects for the SPE sector in 2017–19, we believe that SCREEN’s valuations are already broadly fair – a factor behind Analyst(s) our downgrade of the shares in early-April. We continue to prefer Tokyo Damian Thong, CFA Electron (8035 JP, ¥14,730, Outperform, TP: ¥15,400). For a cheaper market +81 3 3512 7877 [email protected] valuation (<13x PER FY3/19E vs SCREEN at 15x), TEL offers stronger OP 10 May 2017 growth (+39% in FY3/18E vs SCREEN’s +8%) due to robust sales growth in Macquarie Capital Securities (Japan) etchers (>50% YoY in FY3/17; 25–30% in FY3/18E), a surge in FPDE sales Limited (>40% YoY vs +4% at SCREEN, based on MRE) driven by TEL’s 100% share in 10.5G coater/developers and etchers, and a booming post-sales business.

Please refer to page 11 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG Skyworth 751 HK Outperform Updating estimates; Buy on weakness Price (at 13:49, 09 May 2017 GMT) HK$4.44

Valuation HK$ 7.54 Event - PER 12-month target HK$ 7.54 . Following our review note on Skyworth’s earnings alert, we update our Upside/Downside % +69.8 earnings forecast to include 1) raising China shipments to 10m units (+7% 12-month TSR % +74.6 YoY), 2) a higher 4K smart TV proportion of domestic product mix (55% of Volatility Index High total shipments), and 3) overseas shipments reaching 9m units (+30% YoY). GICS sector Outperform. Consumer Durables & Apparel Market cap HK$m 13,509 Impact Market cap US$m 1,736 Free float % 60 . Overseas to see both shipment growth and margin improvement. Note 30-day avg turnover US$m 7.5 that we expect upside risks to management’s guidance on overseas Number shares on issue m 3,043 shipments of 9m units (+30% YoY) in FY18E, given the strong growth achieved in FY17E (+57% YoY) as well as distribution channels consolidated Investment fundamentals globally (Metz for EU, Toshiba for emerging Asia). More importantly, we Year end 31 Mar 2016A 2017E 2018E 2019E Revenue m 42,695 42,041 50,865 61,087 believe Skyworth’s overseas own-brand sales will grow to 50% of total EBIT m 2,065 823 1,208 1,469 overseas sales in FY19E (vs <30% in FY17E), which should drive the Adjusted profit m 2,170 1,486 2,013 2,450 EPS rep HK$ 0.77 0.52 0.71 0.86 company’s overseas margin improvement (own-brand sales generate 15-17% EPS rep growth % -30.8 -31.5 35.5 21.7 GM vs ODM/OEM’s c10% GM). PER adj x 5.8 8.5 6.3 5.1 Total DPS HK$ 0.21 0.21 0.21 0.22 . Opportunity to accumulate shares, given 1) the negative impact from high Total div yield % 4.7 4.8 4.8 5.0 ROE % 13.6 8.6 10.4 10.9 panel costs in 3Q16-4Q17 is well known (we originally modelled Skyworth's P/BV x 0.8 0.7 0.6 0.5 FY17E earnings to decline by 21% YoY), 2) panel price trends have reversed

751 HK rel HSI performance, & rec to trend down (please refer to our panel pricing report), and 3) overseas history expansion could help Skyworth to more than offset. . Falling LCD costs a strong catalyst for margin improvement, as LCD accounts for 70-75% of TV BOM cost. In April 2017, we have observed strong signals that panel pricing has reversed to trend down, including 1) 49-55” pricing has stopped growing for the first time since 2H16; 2) 40” flat for four months in a row; 3) 32” has dropped 4% since October 2016; d) 4-4.5” is down 8-10% since November). Note that, the 40-43” (the global average TV size) panel cost rose by 58% YoY in 1Q17 (40” LCD price reached US$141 in March 2017 vs US$86 in March 2016, 43” LCD price reached US$151 in Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. March 2017 vs US$92 in March 2016). Source: FactSet, Macquarie Research, May 2017 (all figures in HKD unless noted) Earnings and target price revision

. Trim FY17E (ended in March 2017) earnings by 14% to factor in lackluster domestic shipments as well as high panel costs. We keep our FY18E-FY19E earnings unchanged, and thus our TP of HK$7.54 (8.8x 12-month forward PE) Analyst(s) remains unchanged. Macquarie Capital Limited, Taiwan Securities Branch Price catalyst Louis Cheng, CFA +886 2 2734 7526 [email protected] . 12-month price target: HK$7.54 based on a PER methodology. Jeffrey Ohlweiler +886 2 2734 7512 . Catalyst: Increasing global presence and 4K smart-TV demand. [email protected] Macquarie Capital Limited Allen Chang Action and recommendation +852 3922 1136 [email protected] Verena Jeng . Reiterate Outperform. Our TP of HK$7.54 is based on 8x 12-month forward +852 3922 3766 [email protected] PE. The stock is trading at 5.0x FY19E PE, which is below its three-year Chris Yu +86 21 2412 9024 [email protected] average PE multiple of 6.0x (vs peak of 10x and trough of 3x).

10 May 2017

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JAPAN SoftBank 9984 JP Outperform All about 3 deals in 2017 Price (at 08:50, 09 May 2017 GMT) ¥8,620

Valuation ¥ 11,330 Conclusion - Sum of Parts 12-month target ¥ 11,330 . We expect 4Q OP to be slightly below consensus forecasts. However we Upside/Downside % +31.4 think deals for Vision Fund, India and USA are key catalysts for Softbank to 12-month TSR % +31.9 compress its discount to SOTP in 2017. We reduce OP forecasts by 0-7% as Volatility Index Medium a result of YJ and Sprint results. TP from ¥11,550 to ¥11,330. Outperform. GICS sector Telecommunication Services Impact Market cap ¥bn 9,488 . 4Q slight miss: Consensus expect 4Q Sales at ¥2,340bn and OP of ¥209bn Market cap US$m 84,234 Free float % 74 which compares to our ¥2,277bn and ¥197bn and hence we expect a slight 30-day avg turnover US$m 336.5 miss. We do not think consensus have included recent Sprint or YJ results. Number shares on issue m 1,101 We admit the risk to our forecasts is higher promotion costs done with YJ in the qtr which could have improved the domestic telecoms business. Softbank Investment fundamentals as usual will not issue guidance for FY3/18. Year end 31 Mar 2016A 2017E 2018E 2019E Revenue bn 8,881.8 8,858.6 9,133.1 9,318.1 . Sprint ready to do deals: Sprint management at 1Q results confirmed they EBIT bn 908.9 1,146.5 1,304.5 1,393.0 EBIT growth % -1.1 26.1 13.8 6.8 were ready to do deals but were not in any hurry. Amy Yong, our US Telco Recurring profit bn 919.2 1,235.7 1,461.2 1,656.3 analyst, thinks news that Comcast/Charter will combine their efforts for mobile Reported profit bn 474.2 1,021.9 939.6 1,065.1 EPS rep ¥ 401 917 854 968 might actually accelerate the interest in T-Mobile/Sprint merger. We think in EPS rep growth % -28.7 128.7 -6.9 13.4 fact T-Mobile might acquire Sprint given DT’s financial position. Given Sprint’s PER rep x 21.5 9.4 10.1 8.9 Total DPS ¥ 41 44 44 44 spectrum position we expect the business to be well positioned when the Total div yield % 0.5 0.5 0.5 0.5 industry consolidates given the more favourable FCC/Government ROA % 4.4 4.8 4.6 4.8 ROE % 17.4 35.0 25.4 23.0 environment. EV/EBITDA x 8.1 7.0 6.2 5.7 Net debt/equity % 266.8 278.3 204.3 147.1 . Vision Fund adds 0.4%: We look to the results to get confirmation of the P/BV x 4.0 2.9 2.3 1.8 timing of launching the Vision Fund. We think the Vision Fund combined with 9984 JP vs TOPIX, & rec history Fortress will add 8-10% to RP longer term if it reaches US$100bn in funds. We estimate the VF/Fortress, India EC investments and net debt related would add around 0.4% to our SOTP for Softbank when the deal is completed assuming VF initial FUM is US$12bn. . India play: We think Softbank is manouvering to consolidate EC players in India and create its next Alibaba but in India. We are concerned in the short term a write-down of Snapdeal to US$1bn valuation (100%, Softbank owns ~35%, we currently value at US$3.8bn) and Freecharge (we value at zero). However we think these two assets can merge with Flipkart and PayTM Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. competitors, combined with extra investment it will leave Softbank with a 20% Source: FactSet, Macquarie Research, May 2017 stake in the leading EC platform and 14% stake in a pay system in India. The (all figures in JPY unless noted) Indian EC market is expected to grow from US$14.5bn in 2016 to over US$50bn in 2020 according to Forrester. Earnings and target price revision . OP: FY3/17E 0%, FY3/18E -3.7%, FY3/19E -5.2% and FY3/20E -7.1%

Analyst(s) . TP from ¥11,550 to ¥11,330 on lower TP for YJ and Sprint. David Gibson, CFA +81 3 3512 7880 [email protected] Price catalyst Aya Haruyama +81 3 3512 7867 [email protected] . 12-month price target: ¥11,330 based on a Sum of Parts methodology.

9 May 2017 . Catalyst: 10th May Softbank results Macquarie Capital Securities (Japan) Limited Action and recommendation

. Maintain Outperform. Note our EPS is 29% higher than consensus in FY3/18.

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JAPAN Sony 6758 JP Outperform Driving towards ¥600bn in OP Price (at 13:51, 08 May 2017 GMT) ¥3,989

Valuation ¥ 4,520 Conclusion - Price to Book 12-month target ¥ 4,520 . We are raising our TP to ¥4,520 (14% TSR) from ¥4,300, ahead of Sony’s IR Upside/Downside % +13.3 Day, and maintaining our Outperform rating. We believe the shares will be 12-month TSR % +14.3 driven by expectations that Sony will achieve OP of ¥600bn or greater. Volatility Index Medium Impact GICS sector Consumer Durables & Apparel . We forecast ¥535bn in OP in FY3/18, up 85% YoY. We expect OP to rise Market cap ¥bn 5,033 substantially YoY and exceed the ¥500bn OP guidance, helped by a reduction Market cap US$m 44,657 in one-off charges, growth in CMOS image sensors and game software profits 30-day avg turnover US$m 188.6 and upside in the Music segment (notably due to the Fate/Grand Order mobile Number shares on issue m 1,262 game). Guidance includes a ¥40bn “risk buffer” and a ~¥40bn forex risk

Investment fundamentals adjustment (Sony assumes ¥105/US$ and ¥110/€ at the group level), which Year end 31 Mar 2017A 2018E 2019E 2020E we doubt will be fully used. The main negative offset that we anticipate is the Revenue bn 7,603.3 7,975.4 8,106.5 8,438.6 Mobile segment – where we expect an operating loss and additional asset EBIT bn 288.7 535.0 598.3 633.3 EBIT growth % -1.9 85.3 11.8 5.9 impairments rather than the guided ¥5bn profit. Recurring profit bn 251.6 504.8 571.4 613.8 Reported profit bn 73.3 320.0 367.3 412.5 . We expect OP to increase further to ¥598bn in FY3/19 and ¥633bn in EPS rep ¥ 57.1 249.5 286.4 321.6 FY3/20. We see Sony’s OP durably expanding beyond the previous record of EPS rep growth % -51.6 336.6 14.8 12.3 PER rep x 69.8 16.0 13.9 12.4 ¥520bn set in FY3/98. While we do not expect Sony to present new financial Total DPS ¥ 20.0 40.0 60.0 80.0 targets at their IR Day, we expect them to broadly illuminate prospective Total div yield % 0.5 1.0 1.5 2.0 ROA % 1.7 3.0 3.2 3.3 pathways to >¥600bn of OP – which we think requires new growth drivers. ROE % 3.0 12.1 12.5 12.7 EV/EBITDA x 8.7 6.5 5.9 5.6 . What we expect from the IR Day: (1) A reinvigorated stance vis-à-vis Net debt/equity % 7.6 -3.1 -7.0 -10.0 premium consumer electronics and professional products, as underscored by P/BV x 2.0 1.8 1.7 1.5 industrial design and commercial successes in cameras, TVs and 6758 JP vs TOPIX, & rec history headphones (e.g. the Alpha A9 camera, the MDR-Z1R headphones, and the new A1 Series 4K OLED TVs); (2) An overview of Sony’s strategy and technology roadmap in CMOS image sensors; (3) An update of Sony’s successes and setbacks in the games business, and hints as to future plans. We do not expect an update on the Pictures segment strategy given that Michael Lynton’s successor as President and CEO of Sony Pictures Entertainment has yet to be chosen. . We do not expect a big unveiling at Sony’s E3 presentation: We expect the focus of the event will be on upcoming game titles, including first-party Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. titles. On the hardware side, we believe Sony may provide a modest update of Source: FactSet, Macquarie Research, May 2017 the PS4 Pro, and possibly revised pricing (e.g. for PS VR). While we continue (all figures in JPY unless noted) to expect Sony to release a ‘PS5’ console in 4Q CY18, we do not expect any indications to emerge at E3, where the spotlight will be on Microsoft’s upcoming ‘Project Scorpio’ and also Nintendo’s momentum with the Switch. Earnings and target price revision . +2-5% to FY3/18-20 OP estimates. Our TP of ¥4,520 is based on 1.85x P/B FY3/19E (LTROE 12% / CoE 6.5%, and vs 1.75x prev) and implies ~16x PER FY3/19E.

Analyst(s) Price catalyst Damian Thong, CFA +81 3 3512 7877 [email protected] . 12-month price target: ¥4,520 based on a Price to Book methodology.

. Catalyst: IR Day (23 May); E3 presentation (12 June, 1800 PT) 9 May 2017 Macquarie Capital Securities (Japan) Action and recommendation Limited . We maintain our Outperform rating ahead of the IR Day.

Please refer to page 18 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN Subaru 7270 JP Neutral Subdued outlook on higher costs Price (at 13:49, 09 May 2017 GMT) ¥4,099

Valuation ¥ 4,310 Conclusion - PER . Subaru surprised the market with a rather subdued outlook for FY3/18. 12-month target ¥ 4,310 Upside/Downside % +5.1 Although it expects volumes to increase 4% YoY, including a 3% gain in its 12-month TSR % +8.7 main market the US, the deterioration in mix and higher incentives due to Volatility Index Medium rising interest rates are expected to weigh on profits. It has also locked in GICS sector Automobiles & higher material costs for 1H, which is reducing profits for models made in Components Japan especially. R&D is forecast to jump 17% YoY to ¥134bn (3.9% of Market cap ¥bn 3,153 revenue) as it accelerates investments in electrification and ADAS. As a Market cap US$m 27,992 result, OP is projected flat at ¥410bn and NPAT to rise just 1% to ¥285bn. Free float % 71 . The outlook for FY3/19 is better, as mix should improve following the launch 30-day avg turnover US$m 139.2 of the new Ascent 3-row SUV shown as a concept vehicle at the recent New Number shares on issue m 769.2 York auto show. We maintain our Neutral rating but trim our target price to Investment fundamentals ¥4,310, based on 10x FY3/19E. Year end 31 Mar 2017A 2018E 2019E 2020E Revenue bn 3,326.0 3,407.4 3,813.1 4,008.5 Impact EBIT bn 410.8 422.1 466.2 498.3 . EBIT growth % -27.4 2.8 10.4 6.9 Mix deterioration in FY3/18: Most of the volume gains in FY3/18 are Recurring profit bn 394.7 426.1 470.6 503.9 expected to be driven by the recently launched Impreza, which is positioned Reported profit bn 282.4 301.4 333.0 356.7 at the bottom of Subaru’s line-up. Volumes for higher-priced models such as EPS rep ¥ 365.8 390.4 431.4 462.0 EPS rep growth % -34.6 6.7 10.5 7.1 the Legacy and Outback are expected to slip, indicating mix deterioration, PER rep x 11.2 10.5 9.5 8.9 something we have flagged earlier. Total DPS ¥ 144.0 144.0 148.0 152.0 Total div yield % 3.5 3.5 3.6 3.7 . Incentives on the rise: Incentives have continued to move higher in the US, ROA % 15.3 14.8 15.1 14.6 ROE % 20.2 19.4 18.9 17.9 which Subaru attributes primarily to rising interest rates coupled with a higher EV/EBITDA x 5.4 5.2 4.7 4.4 proportion of customers using leases and loans. They are particularly high on Net debt/equity % -34.9 -34.8 -40.6 -45.8 P/BV x 2.2 1.9 1.7 1.5 the Legacy, which is suffering from the weak popularity of sedans and its

aging status. We note in April 2017 incentives were up 5.5% MoM to US$957 7270 JP vs TOPIX, & rec history and up sharply from US$595 in April 2016. The absolute level is low vs other automakers, but the trend is moving steadily higher. The impact is visible in the projection that profit from SOA will decline 20% to US$538m. . Locked in to higher material costs: In FY3/17 lower material costs supported operating profits by ¥13.9bn, but Subaru projects a drag of ¥19.4bn in FY3/18. As it locks in steel, copper and aluminium prices six months ahead, it might only benefit from the recent downtrend in material prices in 2H. . Raising target dividend payout range: Subaru has raised its target payout

Note: Recommendation timeline - if not a continuous line, then there was no ratio range to 30–50% from 20–40%. We believe there is upside to its Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 projected flat dividend of ¥144/share, which implies a payout ratio of just (all figures in JPY unless noted) under 40%. Management noted that given the potential for volatile earnings

from changes in the yen-dollar rate, it would review the proposed payout later in the year. Earnings and target price revision . FY3/18E EPS cut 9% and FY3/19E cut 8% on higher costs. TP cut 4% to ¥4,310. Price catalyst Analyst(s) . 12-month price target: ¥4,310 based on a PER methodology. Janet Lewis, CFA +81 3 3512 7856 [email protected] . Catalyst: 1Q results late-July/early-August; monthly US sales and incentives.

10 May 2017 Action and recommendation Macquarie Capital Securities (Japan) . Maintain Neutral rating. We prefer OEMs geared into growing Asian markets Limited on lower valuations.

Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

JAPAN Sumitomo Heavy Industries 6302 JP Outperform Conservative FY3/18 guidance; Price (at 08:50, 09 May 2017 GMT) ¥800

Valuation ¥ 800-1,300 positive on potential share buyback - EV/IC=ROIC/WACC 12-month target ¥ 1,050 Conclusion Upside/Downside % +31.3 12-month TSR % +33.6 . Sumitomo Heavy Industries (SHI) reported FY3/17 results at 3pm and held a Volatility Index Medium conference call at 6:30pm on 9 May (the results briefing takes place at GICS sector Capital Goods 1:30pm on 10 May). The ¥48.4bn in OP (-4% YoY), beat our ¥45.9bn forecast Market cap ¥m 491,622 (vs. ¥43bn guidance and the ¥47bn consensus estimate). Market cap US$m 4,365 30-day avg turnover US$m 20.7 . The FY3/18 guidance targets ¥51bn in OP (+5% YoY), which is below our Number shares on issue m 614.5 ¥58.3bn forecast and the ¥57.6bn consensus. However, we are not overly concerned because of SHI’s tendency to present conservative guidance (for Investment fundamentals Year end 31 Mar 2017A 2018E 2019E 2020E example, it posted ¥48.4bn in FY3/17 OP versus guidance at ¥43bn). We Revenue bn 674.3 730.0 770.0 793.0 intend to review our forecasts, if necessary, after the briefing and direct EBIT bn 48.4 58.3 67.2 72.7 contact. We maintain our ¥1,050 price target and Outperform rating. EBIT growth % -4.2 20.4 15.3 8.2 Recurring profit bn 48.3 55.8 64.7 70.2 Reported profit bn 33.6 35.5 41.2 44.7 Impact Adjusted profit bn 34.6 35.5 41.2 44.7 EPS rep ¥ 54.8 57.9 67.2 72.9 . Restoration of increases in orders value (YoY) for two of SHI’s three early EPS rep growth % 1.5 5.6 16.1 8.5 cyclical products in 4Q (Jan-Mar 2017) was an upbeat aspect in the FY3/17 EPS adj ¥ 56.4 58.0 67.3 73.0 EPS adj growth % -1.5 2.7 16.0 8.5 results. Specifically, orders value rose 15% for plastic injection molding PER rep x 14.6 13.8 11.9 11.0 equipment and 18% for construction machinery (excavators +18%, cranes PER adj x 14.2 13.8 11.9 11.0 Total DPS ¥ 16.0 18.0 21.0 22.0 +16%). Speed reducer orders, meanwhile, dropped 9%. Total div yield % 2.0 2.3 2.6 2.8 ROA % 6.1 7.2 8.0 8.4 . Segment FY3/18 OP guidance projects a 10% YoY gain to ¥10bn in ROE % 8.9 8.7 9.4 9.6 EV/EBITDA x 6.8 6.1 5.3 5.0 machinery components (mainly speed reducers), versus our ¥11.5bn forecast, Net debt/equity % -0.8 -4.3 -7.3 -11.8 a 10% increase to ¥16bn in precision machinery (primarily plastic injection P/BV x 1.2 1.2 1.1 1.0 molding equipment), versus our ¥18.2bn, and a 54% decline to ¥5bn in 6302 JP vs TOPIX, & rec history industrial machinery (steam turbines and industrial cranes), versus our ¥9.5bn. We think SHI’s targets are conservative. . SHI released a new medium-term business plan, which lasts through FY3/20, along with the FY3/17 results. The plan contains conservative FY3/20 goals (similar to FY3/18 guidance) of ¥800bn in sales and ¥60bn in OP. On a positive note, SHI stated in the shareholder return policy that, in addition to the existing commitment to 30% dividend payout ratio, ‘the company will consider share buybacks when it has an outlook of retaining excess cash’. We expect SHI to generate ¥39.4bn in free cash flow after paying dividends (this Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. amount corresponds to 8% of market cap) in the three years of FY3/18-20. Source: FactSet, Macquarie Research, May 2017 (all figures in JPY unless noted) Earnings and target price revision

. We maintain our earnings forecasts and price target (¥1,050). Price catalyst

. 12-month price target: ¥1,050 based on a EV/IC=ROIC/WACC methodology. Analyst(s) Kunio Sakaida . Catalyst: (1) switch to a YoY increase in sales of plastic injection molding +81 3 3512 7873 [email protected] Tomoki Takeshima machines in FY3/18, and (2) announcement of share buybacks +81 3 3512 7432 [email protected] Action and recommendation 9 May 2017 Macquarie Capital Securities (Japan) . We maintain an Outperform rating. Limited

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

25 THAILAND Supalai PCL SPALI TB Outperform A weak quarter, NP down 51% YoY Price (at 08:50, 09 May 2017 GMT) Bt25.00 Valuation Bt 29.70 Event - DCF (beta 1.0, ERP 8.0%, RFR 3.0%, TGR 3.0%) 12-month target Bt 30.00 . On Tuesday evening, SPALI reported its 1Q17 net profit of Bt687m, down Upside/Downside % +20.0 51% YoY and 43% QoQ, due to lower realised revenue and a surge in the 12-month TSR % +24.8 SG&A-to-sales ratio on new condo openings in the quarter. This is 25% below Volatility Index Low our quarterly forecasts and 39% lower than the Bloomberg’s consensus GICS sector Real Estate expectations. 3M17 results are 13% of our full-year net profit forecasts. Market cap Btm 42,914 Market cap US$m 1,238 . Due to its weak 1Q results, we lower our 2017 EPS estimates by 4.3%. We Free float % 65 believe SPALI’s 1Q17 should be the lowest quarter of the year and that its 30-day avg turnover US$m 2.5 performance should improve momentum for the remaining quarters of the Number shares on issue m 1,717 year. We keep our TP unchanged at Bt30 and our Outperform rating. Investment fundamentals Impact Year end 31 Dec 2016A 2017E 2018E 2019E Revenue m 23,336 24,396 28,706 34,349 . Lower revenues in 1Q17. SPALI delivered total revenue of Bt3.8bn, down EBIT m 6,341 6,521 7,838 9,119 40% YoY and 39% QoQ, in 1Q17. Of that, Bt3.6bn came from project sales EBIT growth % 8.8 2.8 20.2 16.3 Reported profit m 4,887 5,136 6,128 7,003 with the rest being service income. Revenue from four completed condos— Adjusted profit m 4,887 5,136 6,128 7,003 Supalai Lagoon Phuket (Bt570m total project value), Supalai City Resort @ EPS rep Bt 2.85 2.99 3.57 4.08 EPS rep growth % 12.4 5.1 19.3 14.3 Bearing Station (Bt820m), Supalai City Resort Rayong (Bt920m), and Supalai EPS adj Bt 2.85 2.99 3.57 4.08 Monte Viang Chiangmai (Bt1.67bn)—were realised in the first quarter. EPS adj growth % 12.4 5.1 19.3 14.3 PER rep x 8.8 8.4 7.0 6.1 . Gross margin dropped slightly. SPALI reported softer gross margin of PER adj x 8.8 8.4 7.0 6.1 Total DPS Bt 1.14 1.20 1.43 1.63 38.4% in 1Q17 vs. 38.6% in 1Q16, albeit improving from 37.0% in 4Q16. This Total DPS growth % 13.9 5.1 19.3 14.3 should be because the portion of revenue realised from high-margin condos Total div yield % 4.6 4.8 5.7 6.5 ROA % 12.8 12.4 13.5 13.4 were lower than that of the same period last year. ROE % 22.8 20.9 21.8 21.6 EV/EBITDA x 6.5 6.3 5.3 4.6 . Surging SG&A-to-sale ratio a key drag. In 1Q17, SPALI’s SG&A expenses Net debt/equity % 86.1 65.9 69.5 76.5 came in at Bt610m, up 5% YoY but down 14% QoQ. This represented 16.2% P/BV x 1.9 1.6 1.4 1.2 of total revenue, vs 9.3% in 1Q16 and 11.4% in 4Q16. The significant rise of SPALI TB rel SET performance, & rec its SG&A-to-sale ratio derives from the low revenue base in the quarter and history the reductions of the transfer fee from 2.0% to 0.01% during the same period last year. . Strong presales in 1Q17. SPALI reported presales of Bt7.6bn, up 43% YoY, in 1Q17 thanks to its stronger low-rise presale momentum and higher condo presales from its newly launched condo, SPALI plans to launch three new condos near the mass transit stations, total value of Bt9.7bn, in 2H17. Earnings and target price revision

Note: Recommendation timeline - if not a continuous line, then there was no . We trim our EPS estimates by 4.3% in 2017 on weaker than expected 1Q17 Macquarie coverage at the time or there was an embargo period. results, while maintain 2018-19 forecasts and TP of Bt30, unchanged. Source: FactSet, Macquarie Research, May 2017 (all figures in THB unless noted) Price catalyst . 12-month price target: Bt30.00 based on a DCF methodology. . Catalyst: Rising presales and accelerated transfers. Sustainable margins.

Analyst(s) Action and recommendation Patti Tomaitrichitr, CFA +66 2 694 7724 [email protected] . We retain our Outperform rating and Bt30 TP. SPALI is one of our top picks in the Thai property sector, along with Asian Property (AP TB, Bt7.70, 9 May 2017 Outperform, TP: Bt9.00) and LPN Development (LPN TB, Bt11.90, Macquarie Securities (Thailand) Limited Outperform, TP: Bt14.00).

HONG KONG Uni-President China 220 HK Outperform The road less travelled Price (at 11:12, 09 May 2017 GMT) HK$5.31 Event Valuation HK$ 6.40 - PER . Uni-President China (UPC) reported 1Q17 results after market close today. 12-month target HK$ 6.40 1Q17 net profit declined 60% YoY to Rmb174m, 13% below our estimate. We Upside/Downside % +20.5 continue to expect UPC to largely remain in transition for 1H17 but that a 12-month TSR % +22.1 sequential improvement should be seen on the back of an improving revenue Volatility Index Medium trend and active cost-control efforts. We believe there is high chance that the GICS sector Food, Beverage & Tobacco company will pay a higher cash dividend on the back of FCF accumulation. Market cap HK$m 22,934 We maintain our Outperform rating and are slightly raising our target price to Market cap US$m 2,997 HK$6.40 from HK$6.20, based on an unchanged 25x FY18E PER. We Free float % 29 suggest investors buy now, as we believe the 1Q17 earnings decline should 30-day avg turnover US$m 2.3 be the trough. Number shares on issue m 4,319 Impact Investment fundamentals . Beverage making good progress, with milk tea surprising on the upside. Year end 31 Dec 2016A 2017E 2018E 2019E AC Nielsen data suggests beverage sales value rose 7.6% YoY, and sales Revenue m 20,986 21,542 23,058 24,299 EBIT m 963 930 1,213 1,306 volume also grew, by 6.1% YoY. With the exception of juice and milk tea, all EBIT growth % -6.7 -3.4 30.5 7.7 other categories saw positive sales growth, with RTD tea up 28.2% YoY, bottled Reported profit m 607 721 936 1,015 Adjusted profit m 607 721 936 1,015 water up 13.9% YoY and Asia traditional drink up 10.6% YoY. As for UPC, milk EPS rep Rmb 0.14 0.17 0.22 0.23 tea exceeded management’s expectation, with positive growth YTD, while juice EPS rep growth % -27.2 18.7 29.8 8.4 EPS adj Rmb 0.14 0.17 0.22 0.23 remained tough. Looking ahead, management hopes to see positive revenue EPS adj growth % -27.2 18.7 29.8 8.4 growth in 2Q17 as the utilisation rate improves to c.40%. Hence, we project PER rep x 33.5 28.2 21.7 20.0 PER adj x 33.5 28.2 21.7 20.0 2017 and 2018 beverage OPM of 7.1% and 8.1%, respectively. Total DPS Rmb 0.03 0.07 0.09 0.09 Total div yield % 0.6 1.4 1.8 2.0 . Addressing noodle product mix. The noodle industry in 1Q17 saw sales ROA % 4.5 4.6 5.8 6.0 value decline 0.8% YoY and sales volume fall 3.2% YoY. UPC’s 1Q17 noodle ROE % 5.1 5.9 7.2 7.5 EV/EBITDA x 8.2 9.2 7.9 7.4 revenue saw flattish growth, with old products facing increased pressure from a Net debt/equity % 1.1 -7.8 -5.8 -13.3 tightening of competition and a high base, while revenue for high products, such P/BV x 1.7 1.6 1.5 1.5 as Soup Daren, saw revenue grow in the high double digits YoY. 1H17 noodle 220 HK rel HSI performance, & rec GPM is likely to be under some pressure due to higher raw material prices, but history management hopes to see better GPM in 2H17 on the back of easing raw material price pressure and better product mix. Overall, we expect noodle OPM to dip 0.3ppt YoY to 3.5% this year but grow 0.5ppt YoY to 4.0% next year. . Using disciplined cost spending to preserve profitability; balance sheet improving with higher dividend payout capability. Thanks to active cost- control efforts, we expect to see a gradual reduction in the SG&A percent this year, with the result likely more prevalent in the second half. UPC reduced headcount by 1,600 in 1Q17, and total headcount now stands at slightly under 30,000. Moreover, we expect UPC to turn net cash of 7.8% this year. As Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. previously mentioned, management does not rule out the possibility of Source: FactSet, Macquarie Research, May 2017 increasing the dividend payout ratio after earnings growth momentum (all figures in Rmb unless noted, TP in HKD) reaccelerates. We project the company to raise its dividend payout to 40% from 20%, implying a 1.4% dividend yield this year. Earnings and target price revision . We are lowering FY17E net profit 2.2% but raising FY18E 3.1%. We are Analyst(s) Linda Huang, CFA raising our target price to HK$6.40 from HK$6.20. +852 3922 4068 [email protected] Sunny Chow Price catalyst +852 3922 3768 [email protected] . 12-month price target: HK$6.40 based on a PER methodology. 9 May 2017 . Catalyst: 1H17 results. Macquarie Capital Limited Action and recommendation . Retain Outperform. Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

INDIA Union Bank of India UNBK IN Underperform 4Q FY17 – Elevated slippages, but Price (at 06:42, 08 May 2017 GMT) Rs190.10

Valuation Rs 110.00 tax writebacks to the rescue - Gordon Growth 12-month target Rs 110.00 Conclusion Upside/Downside % -42.1 12-month TSR % -41.3 . Union Bank reported a PBT loss in 4Q FY17, with persistent high slippages Volatility Index High and credit costs. Had it not been for trading gains and income tax writebacks, GICS sector Banks 4Q FY17 could have ended up in a loss. Market cap Rsm 130,683 . Management expects FY18 credit costs at 150–175bp after ending FY17 at Market cap US$m 2,003 ~250bp. We are conservatively building in credit costs of 200bp for Free float % 37 FY18E/19E. We maintain an Underperform rating and our target price of 30-day avg turnover US$m 15.6 Rs110.00. Number shares on issue m 687.4

Investment fundamentals Impact Year end 31 Mar 2017A 2018E 2019E 2020E . No major respite from slippages: Slippages in 4Q FY17 came in at Net interest Inc bn 87.0 95.4 101.0 106.5 Rs29.5bn (slippage ratio of 4.25%), with a large ~Rs13bn slippage from a Non interest Inc bn 48.5 43.2 48.6 54.9 Underlying profit bn 74.8 72.6 79.4 84.4 large steel sector exposure. For UNBK, SMA2 loans remain elevated at PBT bn 8.4 8.5 13.0 17.2 Rs160bn (~5.6% of loans) despite having a slippage ratio of ~6% in FY17; PBT growth % -52.5 1.8 52.0 32.5 Recurring profit bn 8.4 8.5 13.0 17.2 this remains a key concern. In addition, SDR/S4A/5:25 loans stand at close to Reported profit bn 5.6 5.7 8.7 11.5 3% of the loan book, potentially implying stressed assets at upward of 12% of Adjusted profit bn 5.6 5.7 8.7 11.5 EPS rep Rs 8.18 8.33 12.65 16.76 the book (excluding SMA2 loans). Thus, we believe management’s guidance EPS rep growth % -58.4 1.8 52.0 32.5 for 150–175bp of credit costs for FY18 appears quite ambitious. In addition, EPS adj Rs 8.18 8.33 12.65 16.76 EPS adj growth % -58.4 1.8 52.0 32.5 exposure to top 50 NPL accounts is ~40–50% of UNBK’s NPL mix, and there PER rep x 23.2 22.8 15.0 11.3 could be additional haircuts that would be required on this exposure. PER adj x 23.2 22.8 15.0 11.3 Total DPS Rs 1.00 1.50 2.00 2.00 . NIMs inch up, fee income a positive surprise: Margins improved in 4Q by a Total div yield % 0.5 0.8 1.1 1.1 ROA % 0.1 0.1 0.2 0.2 sharp 25bp QoQ, led by a 35bp uptick in domestic margins, as cost of ROE % 2.4 2.3 3.2 4.0 deposits dipped 40bp QoQ to 5.9%. Fee income rose 16% YoY and was P/BV x 0.6 0.6 0.6 0.6 ahead of our estimate. Union Bank’s trading gains of Rs7.3bn drove a sharp UNBK IN rel BSE Sensex performance, uptick in operating profit during the quarter. & rec history . Sequential loan growth quite strong: The loan book was up 9% QoQ (7% YoY), which is a bit surprising to us given the subdued credit demand environment. And sequential growth was led by the Corporate, SME and Agri segments, which grew 8–11% QoQ. In our view, such a brisk pace could potentially be either NIM-dilutive (especially in the corporate segment if it is towards short-term loans) or poses future asset-quality risks. . Capital position – marginally better: Union Bank’s FY17 RWA growth was 0.6%, and AT1 capital further boosted the Tier1 position during the year. Tier1

Note: Recommendation timeline - if not a continuous line, then there was no CAR now stands at 9.02%, with CET1 at 7.7% Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2017 . UNBK’s current CMD will demit office at the end 1Q FY18, at which point Mr. (all figures in INR unless noted) Rajkiran Rai (currently ED at Oriental Bank of Commerce) will become the MD and CEO. Earnings and target price revision Analyst(s) Suresh Ganapathy, CFA . No change. +91 22 6720 4078 [email protected] Sameer Bhise Price catalyst +91 22 6720 4099 [email protected] . 12-month price target: Rs110.00 based on a Gordon Growth methodology. 9 May 2017 . Catalyst: high credit costs, low return ratios. Macquarie Capital Securities India (Pvt) Ltd Action and recommendation

. Maintain Underperform.

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

CHINA China autos Macquarie China auto coverage Upside/ Premium brands stand out in a topsy- Name Ticker Price Rec TP downside Changan-B 200625 CH 10.27 OP 16.70 62.6% Changan-A 000625 CH 14.45 N 17.00 17.6% turvy market Great Wall-H 2333 HK 8.04 OP 13.50 67.9% Great Wall-A 601633 CH 12.10 OP 13.50 11.6% Conclusion Brilliance 1114 HK 12.84 OP 14.50 12.9% BAIC 1958 HK 7.44 OP 11.80 58.6% . The CPCA (China Passenger Car Association) reported China April auto Dongfeng 489 HK 8.24 N 7.90 -4.1% GAC 2238 HK 12.84 OP 13.70 6.7% wholesale shipment data after the market close on 8 May. Combined sales of Geely 175 HK 10.72 UP 8.30 -22.6% 40 passenger vehicle (PV) OEMs were down 2% YoY, with significant SAIC Motor 600104 CH 28.08 OP 32.00 14.0% Jiangling 000550 CH 20.55 OP 28.00 36.3% variations in the performance among different brands. We believe the Motors continued weakness in sales reflects sluggish auto demand and continued JAC Auto 600418 CH 9.91 N 11.20 13.0% BYD-H 1211 HK 44.00 N 47.90 8.9% impact from the front-loading of demand in 4Q16 ahead of the expiry of the BYD-A 002594 CH 48.79 UP 40.50 -17.0% 50% purchase tax cut. Yutong Bus 600066 CH 19.79 OP 26.00 31.4% King Long 600686 CH 13.10 UP 10.00 -23.7% Motor . Overall premium brands continued to outperform the market. Japanese Nexteer 1316 HK 12.30 OP 13.50 9.8% brands maintained strong growth momentum among mass market JV brands, Minth 425 HK 29.20 OP 32.65 11.8% benefiting from their strong product line-up. Domestic brand leaders are Source: Bloomberg, Macquarie Research, May 2017 emerging while minor players are losing market share quickly.

Impact

. Premium brands outperform the market: All premium brands posted solid sales growth in April except Audi (see Table 1). We attribute the strong growth to 1) robust demand supported by an upgrade in consumption along with the rising personal income, particularly among second-time buyers; 2) successful model changeover or introduction of new localised models, such as the Mercedes-Benz E-Class and BMW 1 Series; and 3) rising auto financing penetration and dealer network expansion. We expect this trend to continue supported by these factors. Audi (-8%) is the exception, as a result of the aging product offerings and repercussions from the dispute between the dealers and Audi Group. . Japanese JVs lead the mass market JV brands: Japanese brands were resilient in the tough market, benefitting from their strong model cycle. Honda JVs both posted over 20% YoY growth, followed by Dongfeng-Nissan (+14% YoY). We can see clear destocking at Changan-Ford, with its April retail sales (62k, +6%) far above wholesale shipments (49k, -20%). Korean JVs, including BAIC-Hyundai (-64%) and Dongfeng-Yueda-Kia (-68%), continued to take the brunt from the anti-Korean sentiment as well as their relatively weaker brand image, while Dongfeng-PSA (-55%) suffered from its less competitive market position and less effective brand and channel management. . Clear tiering among domestic brands: Sales performance varied a lot among domestic brands. Geely (+94%), GAC Trumpchi (+49%) and SAIC Motor (+138%) continued to lead the growth supported by the success of new models, such as the Geely Boyue, Trumpchi GS8 and Roewe RX5. Great Wall’s sales dipped in the middle of its product transition. Other domestic brands, such as Changan (-50%), BAIC Motor (-32%), JAC (-31%) and Zoyte Analyst(s) Macquarie Capital Securities (Japan) Limited (-59%), lost momentum rapidly from their successful years in 2015-2016, Janet Lewis, CFA when there was less competition and favourable policy support. +81 3 3512 7856 [email protected] Macquarie Capital Limited Outlook Allen Yuan +86 21 2412 9009 [email protected] . We prefer Brilliance China and GAC among the China auto names for their 9 May 2017 strong model cycle and improved profitability. We remain cautious on Geely in light of its demanding valuations, uncertainties around the new brand and near-term pricing headwinds. Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

GLOBAL

Commodities Comment LME cash price % change US$/tonne day on day Weaker import volumes in China’s Aluminium 1,873 -1.2 Copper 5,462 -1.8 April commodity trade Lead 2,167 -0.8 Nickel 9,108 0.0 Feature article Tin 19,820 0.8 Zinc 2,590 0.3 . China released preliminary April trade data on Monday that showed a Cobalt 54,450 -1.1 common theme of lower import volumes. While for copper concentrate this Molybdenum 14,890 0.0 can be explained by supply outages, with iron ore and refined copper imports Other prices at six-month lows the current negative sentiment around China commodities % change will be reinforced. day on day Gold (US$/oz) 1,230 0.1 . Coal bucked the trend with a rise in imports, which when coupled with a falling Silver (US$/oz) 16.38 0.7 domestic price, increases the potential for a return of import restrictions. Platinum (US$/oz) 909 0.1 Palladium (US$/oz) 815 0.7 Meanwhile, export trends were divergent, with aluminium rising but steel Oil WTI 46.13 0.1 dropping, despite the domestic price weakness over the month. USD:EUR exchange rate 1.094 -0.5 AUD:USD exchange rate 0.739 -0.3 Latest news

LME/COMEX stocks . Latest preliminary port data shows Australian met coal exports continue to Tonnes Change recover, with last week the highest since Cyclone Debbie hit. Meanwhile, Aluminium 1,592,300 -7,425 shipments from CSN’s port have resumed following the shiploader problem. LME copper 351,550 -3,100 Comex copper 140,673 -157 . Macquarie resource analyst, Alon Olsha, has published a report comparing and Lead 177,225 3,500 contrasting the prospects of the six diversified miners across ten operational, Nickel 380,712 0 Tin 2,375 -115 financial and valuation metrics over the last five years and the next five years Zinc 338,700 -1,750 with the objective of identifying the stock(s) most likely to outperform in the years ahead. BHP achieves top marks on our historical scorecard, while Rio Source: LME, Comex, Nymex, SHFE, Metal comes in second place. BHP’s margins were wider and more stable than peers Bulletin, Reuters, LBMA, Macquarie Research, – a function of both its diversification and low-cost assets. Higher labour May 2017 productivity also helped, with BHP employing 50% fewer people than its peers

(ex. Rio) but producing 30% more in volume. Glencore scores best over the next five years, where it ranks either first or second under seven of the ten metrics, leading to its top-ranked position in our scorecard. Glencore is expected to enjoy the most material uplift in ROIC and the biggest projected earnings growth (+29%). Alon believes the stock’s capital return potential and valuation metrics rank only second to South32 – although we believe Glencore’s propensity to return capital is higher – while the company’s commodity basket price should outperform all peers over the next three years. . Last Friday the local government in Shandong published on its website a plan Analyst(s) to reduce surplus aluminium capacity over 2017 through periodic cuts. The Macquarie Capital (Europe) Limited report suggested that public disclosure of regulation breaches would be Colin Hamilton +44 20 3037 4061 [email protected] increased, while reduction in costs of logistics and power would be Jim Lennon, Senior Commodities Consultant progressed. Platts has noted Shandong plans to limit its aluminum smelting +44 20 3037 4271 [email protected] Matthew Turner capacity to 9 mtpa in 2017 and will open no new smelting capacity between +44 20 3037 4340 [email protected] 2018 and 2020. This highlights again the efforts now being made to prevent Vivienne Lloyd aluminium overcapacity, as we discussed in our recent upgrade. To be clear, +44 20 3037 4530 [email protected] Macquarie Capital Securities (Singapore) Pte. we do not expect aggressive upside in the price – rather, that instead of Limited having to drop back to $1,500–1,600/t to clear excess aluminium capacity, Ian Roper +65 6601 0698 [email protected] Chinese government policy is reducing much of the overhang instead. Macquarie Capital Limited Lynn Zhao . The People's Bank of China, China's central bank, bought no gold again in +86 21 2412 9035 [email protected] April, data released on Sunday showed. This is the sixth consecutive month

and is a reason why we expect much lower net central bank buying of gold 8 May 2017 this year.

Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

30 Macquarie Research Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year – IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up or total assets Macquarie – South Africa down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to move *equivalent fully paid ordinary weighted average Underperform – expected return <-10% up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 31 March 2017 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for global coverage by Macquarie, 8.20% of stocks followed are investment banking clients) Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for global coverage by Macquarie, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for global coverage by Macquarie, 8.00% of stocks followed are investment banking clients)

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Asia Research Head of Equity Research Industrials Telecoms Peter Redhead (Global – Head) (852) 3922 4836 Janet Lewis (Asia) (813) 3512 7856 Soyun Shin (Korea) (822) 3705 8659 Jake Lynch (Asia – Head) (852) 3922 3583 Patrick Dai (China) (8621) 2412 9082 Prem Jearajasingam (ASEAN) (603) 2059 8989 David Gibson (Japan – Head) (813) 3512 7880 Kunio Sakaida (Japan) (813) 3512 7873 Kervin Sisayan (Philippines) (632) 857 0893 Conrad Werner (ASEAN – Head) (65) 6601 0182 William Montgomery (Japan) (813) 3512 7864 James Hong (Korea) (822) 3705 8661 Transport & Infrastructure Automobiles/Auto Parts Benson Pan (Taiwan) (8862) 2734 7527 Janet Lewis (Asia) (852) 3922 5417 Janet Lewis (China, Japan) (813) 3512 7856 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Corinne Jian (Taiwan) (8862) 2734 7522 James Hong (Korea) (822) 3705 8661 Justin Chiam (Singapore) (65) 6601 0560 Azita Nazrene (ASEAN) (603) 2059 8980 Amit Mishra (India) (9122) 6720 4084 Internet, Media and Software Utilities & Renewables Financials Wendy Huang (Asia, China) (852) 3922 3378 Patrick Dai (China) (8621) 2412 9082 Scott Russell (Asia) (852) 3922 3567 David Gibson (Asia, Japan) (813) 3512 7880 Candice Chen (China) (8621) 2412 9087 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Hillman Chan (China, Hong Kong) (852) 3922 3716 Alan Hon (Hong Kong) (852) 3922 3589 Keisuke Moriyama (Japan) (813) 3512 7476 Soyun Shin (Korea) (822) 3705 8659 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Chan Hwang (Korea) (822) 3705 8643 Abhishek Bhandari (India) (9122) 6720 4088 Prem Jearajasingam (Malaysia) (603) 2059 8989 Suresh Ganapathy (India) (9122) 6720 4078 Oil, Gas and Petrochemicals Karisa Magpayo (Philippines) (632) 857 0899 Sameer Bhise (India) (9122) 6720 4099 Gilbert Lopez (Philippines) (632) 857 0892 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Commodities Ken Ang (Singapore) (65) 6601 0836 Aditya Suresh (Asia, China, India) (852) 3922 1265 Colin Hamilton (Global) (44 20) 3037 4061 Passakorn Linmaneechote (Thailand) (662) 694 7728 Anna Park (Korea) (822) 3705 8669 Ian Roper (65) 6601 0698 Isaac Chow (Malaysia) (603) 2059 8982 Conglomerates Jim Lennon (44 20) 3037 4271 Pharmaceuticals and Healthcare Lynn Zhao (8621) 2412 9035 David Ng (China, Hong Kong) (852) 3922 1291 Matthew Turner (44 20) 3037 4340 Conrad Werner (Singapore) (65) 6601 0182 Abhishek Singhal (India) (9122) 6720 4086 Gilbert Lopez (Philippines) (632) 857 0892 Wei Li (China, Hong Kong) (852) 3922 5494 Economics Consumer and Gaming Property Peter Eadon-Clarke (Global) (813) 3512 7850 Larry Hu (China, Hong Kong) (852) 3922 3778 Linda Huang (Asia, China, Hong Kong) (852) 3922 4068 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Zibo Chen (China, Hong Kong) (852) 3922 1130 David Ng (China, Hong Kong) (852) 3922 1291 Quantitative / CPG Terence Chang (China, Hong Kong) (852) 3922 3581 Raymond Liu (China, Hong Kong) (852) 3922 3629 Gurvinder Brar (Global) (44 20) 3037 4036 Sunny Chow (China, Hong Kong) (852) 3922 3768 Wilson Ho (China) (852) 3922 3248 Woei Chan (Asia) (852) 3922 1421 Satsuki Kawasaki (Japan) (813) 3512 7870 William Montgomery (Japan) (813) 3512 7864 Danny Deng (Asia) (852) 3922 4646 Kwang Cho (Korea) (822) 3705 4953 Corinne Jian (Taiwan) (8862) 2734 7522 Per Gullberg (Asia) (852) 3922 1478 KJ Lee (Korea) (822) 3705 9935 Abhishek Bhandari (India) (9122) 6720 4088 Stella Li (Taiwan) (8862) 2734 7514 Aiman Mohamad (Malaysia) (603) 2059 8986 Strategy/Country Amit Sinha (India) (9122) 6720 4085 Kervin Sisayan (Philippines) (632) 857 0893 Viktor Shvets (Asia, Global) (852) 3922 3883 Fransisca Widjaja (65) 6601 0847 Patti Tomaitrichitr (Thailand) (662) 694 7727 Chetan Seth (Asia) (852) 3922 4769 (Indonesia, Singapore) David Ng (China, Hong Kong) (852) 3922 1291 Karisa Magpayo (Philippines) (632) 857 0899 Resources / Metals and Mining Peter Eadon-Clarke (Japan) (813) 3512 7850 Chalinee Congmuang (Thailand) (662) 694 7993 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Chan Hwang (Korea) (822) 3705 8643 Emerging Leaders Coria Chow (China) (852) 3922 1181 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Anna Park (Korea) (822) 3705 8669 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Jake Lynch (Asia) (852) 3922 3583 Sumangal Nevatia (India) (9122) 6720 4093 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Aditya Suresh (Asia) (852) 3922 1265 Technology Anand Pathmakanthan (Malaysia) (603) 2059 8833 Timothy Lam (China, Hong Kong) (852) 3922 1086 Gilbert Lopez (Philippines) (632) 857 0892 Kwang Cho (Korea) (822) 3705 4953 Damian Thong (Asia, Japan) (813) 3512 7877 Conrad Werner (Singapore) (65) 6601 0182 Corinne Jian (Taiwan) (8862) 2734 7522 George Chang (Japan) (813) 3512 7854 Passakorn Linmaneechote (Thailand) (662) 694 7728 Marcus Yang (Taiwan) (8862) 2734 7532 Daniel Kim (Korea) (822) 3705 8641 Conrad Werner (ASEAN) (65) 6601 0182 Allen Chang (Greater China) (852) 3922 1136 Find our research at Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Macquarie: www.macquarieresearch.com/ideas/ Patrick Liao (Greater China) (8862) 2734 7515 Thomson: www.thomson.com/financial Louis Cheng (Greater China) (8862) 2734 7526 Reuters: www.knowledge.reuters.com Kaylin Tsai (Greater China) (8862) 2734 7523 Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Jeff Evans (Boston) (1 617) 598 2508 Amelia Mehta (Singapore) (65) 6601 0211 Michael Santos (Philippines) (632) 857 0813 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Angus Kent (Thailand) (662) 694 7601 Chris Reale (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41 22) 818 7712 Christina Lee (UK/Europe) (44 20) 3037 4873 Justin Morrison (Singapore) (65) 6601 0288 Daniel Clarke (Taiwan) (8862) 2734 7580 Riaz Hyder (Indonesia) (6221) 2598 8486 Sales Trading Nick Cant (Japan) (65) 6601 0210 Brendan Rake (Thailand) (662) 694 7707 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Mike Keen (UK/Europe) (44 20) 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555

Gino C Rojas (Philippines) (632) 857 0861

This publication was disseminated on 09 May 2017 at 18:42 UTC.