Monday, 20 November 2017

(Asia Edition) Asian Daily EPS, TP and Rating changes Top of the pack ... EPS TP (% change) T+1 T+2 Chg Up/Dn Rating Guangzhou (7.5) (2.8) 0 21 O (O) China Basic Materials Sector Yang Luo (3) Automobile Group New report: Key takeaways from recent trip

NetEase.com (0.9) 2 20 16 O (O) SMIC (2.2) (36.5) (1) (3) U (U) Singapore Banks Sector Danny Goh (4) ZhongAn Online P&C Initiation 1 N (NA) New report: 3Q17—setting up for a bright FY18 Insurance Co., Ltd. United Spirits Ltd. 9 9 38 16 O (O) TPK Holdings (3.3) 2 14 42 O (N) India Corporate Health Tracker Ashish Gupta (5) Muang Thai Leasing Co 2 3 7 22 O (O) New report: IBC key to NPA resolution

Srisawad Power 1979 (3) 0 7 25 O (O) Public Co. ZhongAn Online P&C Insurance (6060.HK) – Initiating Coverage with N Thomas Chong (6) DBS Group 0 0 8 17 O (O) New report: Data technology makes the difference UOB 0 0 8 19 O (O) OCBC 0 0 8 10 N (N) TPK Holdings (3673.TW) – Upgrade to O Jerry Su (7) Connecting clients to corporates Back into the iPhone XY touch sensor lamination supply chain from 2H18

Thematic Trip CS pic of the day Telco Tour in Bangkok and Jakarta Date 20-23 November, Bangkok, Jakarta Taiwan AutoTech Sector: Smartphone vs Smartcar CAGR comparison (2016-2020E) Analyst Colin McCallum We believe automotive electronics will represent the next growth opportunity for the supply chain, after

NagaCorp Cambodia Visit smartphones, because it has (1) a faster growth rate of 8% vs 0% for smartphones, and (2) a longer product life Date 23-24 November, Phnom Penh cycle, which in theory should translate into better profitability. We think the adoption of the 48-volt electrical system Analyst Lok Kan Chan will become one of the key growth drivers for AutoTech in the next 5-10 years, given affordable cost increase for an improved driving experience and better fuel economy (to meet CO2 emission standard). Delphi estimates 48-volt China Home Appliance Tour vehicles will see over a 50% CAGR in 2017-25E versus ADAS of 30%+. Date 27-28 November, Qingdao , Hangzhou Analyst Charlie Chen / Carey Shi 35%

Corporate Days / Conferences 30% Asia Financials Corporate Day 25% Date 22 November, Hong Kong 20% Analyst Sanjay Jain 15%

7th Annual Macro Conference 10% Date 05 January, Singapore 5% Hong Kong / China (Non-deal roadshow) 0% Lens Connectors PCB Chargers Cooling fans Keppel DC REIT (KEPE.SI) Smartphone Smartcar Date 22-23 November, Hong Kong Analyst Nicholas Teh Source: Frost & Sullivan, Prismark, NT information, IEA, Credit Suisse Tarena International TEDU.OQ) Post Result

Date 22-23 November, Hong Kong Analyst Thomas Chong ... and the whole pack Singapore (Non-deal roadshow) Cyient Ltd (CYIE.NS) Global Date 27 November, Singapore Global Equity Strategy Andrew Garthwaite (8) Analyst Nitin Jain The case for defence US (Non-deal roadshow) Inari Amertron (INAR.KL) China Date 29 November, New York China Economics Vincent Chan (9) Analyst Randy Abrams New regulation on shadow-banking activities Europe (Non-deal roadshow) China Banks Sector Sanjay Jain (10) LG Display Co., Ltd (034220.KS) Unified rules for asset management to formalise the March-April guidelines for banks Date 20-24 November, London Analyst Keon Han China Basic Materials Sector Yang Luo (3) New report: Key takeaways from recent trip Others (Non-deal roadshow) China Oil & Gas Sector Horace Tse (11) LG H&H (051900.KS) What oil prices are the stocks pricing in post recent correction? Date 08 December, Tokyo Analyst A-hyung Cho Great Wall Motor (2333.HK) – Maintain O Bin Wang (12)

Contact [email protected] or your usual Guangzhou auto show takeaways: SUV continues to heat up with global brands finally catching up sales representative. Guangzhou Automobile Group (2238.HK) – Maintain O Bin Wang (13) Long awaited A-share placement completed at Rmb 19.91/sh (13% above H-share close)

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Monday, 20 November 2017

Asian Daily

Asian indices - performance NetEase.com (NTES.OQ) – Maintain O Thomas Chong (14) (% change) Closing 1D 1W 3M YTD Revitalise in 2018 ASX300 5,912 0.2 (1.2) 3.8 5.2 CSEALL 6,484 0.5 (1.1) 0.7 4.1 Semiconductor Manufacturing Int'l Corp. (0981.HK) – Maintain U Randy Abrams, CFA (15) Hang Seng 29,199 0.6 0.3 8.0 32.7 Business transition to extend through 2018 at lower profitability H-SHARE 11,609 0.6 (1.2) 8.6 23.6 JCI 6,052 0.2 0.5 2.7 14.3 Tuniu Corporation (TOUR) – Maintain O Ivy Ji (16) KLSE 1,722 0.2 (1.2) (3.1) 4.9 Preliminary 3Q17 non-GAAP breakeven: A firm step towards profitability KOSPI 2,534 (0.0) (0.4) 7.4 25.0 ZhongAn Online P&C Insurance (6060.HK) – Initiating Coverage with N Thomas Chong (6) KSE100 40,844 0.1 (1.4) (5.2) (14.6) NIFTY 10,284 0.7 (0.4) 4.5 25.6 New report: Data technology makes the difference NIKKEI 22,397 0.2 (1.3) 15.0 17.2 TOPIX 1,764 0.1 (2.0) 10.4 16.1 India PCOMP 8,311 1.3 (1.5) 3.7 21.5 India Market Strategy Neelkanth Mishra (17) RED CHIP 4,324 (0.6) (2.5) 2.7 20.5 Moody's upgrade of India ratings stalls the unwarranted self-reinforcing bond yield spike that was in SET 1,709 1.1 1.2 9.1 10.8 progress STI 3,382 1.2 (1.1) 4.0 17.4 TWSE 10,702 0.7 (0.3) 3.7 15.6 India Corporate Health Tracker Ashish Gupta (5) VNINDEX 891 (0.2) 2.6 15.8 34.0 New report: IBC key to NPA resolution Thomson Reuters Asian currencies (vs US$) United Spirits Ltd. (UNSP.BO) – Maintain O Arnab Mitra (18) (% change) Closing 1D 1W 3M YTD Price hikes and a potential fall in input costs a heady cocktail A$ 0.757 (0.3) (1.3) (4.6) 4.9 Bt 32.8 (0.2) (0.9) (1.2) (8.4) Japan D 22,712 0.0 0.0 (0.1) (0.3) For Japan equity reports, please see Japan Daily (First Edition) – 20 November 2017 HK$ 7.81 0.0 0.1 (0.2) 0.7 JPY 112.1 (0.9) (1.3) 2.7 (4.1) Malaysia NT$ 30.05 (0.0) (0.3) (0.9) (7.4) P 50.80 0.2 (0.8) (1.1) 2.5 IOI Corporation Berhad (IOIB.KL) – Maintain U Ella Nusantoro (19) PRs 105.2 0.0 0.4 (0.1) 0.8 One-off gain boosts profit RM 4.16 (0.4) (0.7) (3.0) (7.2) Rmb 6.62 (0.0) (0.2) (0.7) (4.6) Philippines Rp 13,525 (0.1) (0.0) 1.2 0.4 Philippines Market Strategy – Maintain UW Dan Fineman (20) Rs 65.01 (0.4) (0.3) 1.4 (4.3) S$ 1.36 (0.1) (0.4) (0.6) (6.4) 3Q results review: Roughly in line W 1,093 (0.3) (2.4) (4.0) (9.4) Thomson Reuters Singapore Global indices Singapore Banks Sector Danny Goh (4) (% change) Closing 1D 1W 3M YTD New report: 3Q17—setting up for a bright FY18 DJIA 23,358 (0.4) (0.3) 7.8 18.2 S&P 500 2,579 (0.3) (0.1) 6.3 15.2 South Korea NASDAQ 6,783 (0.2) 0.5 9.1 26.0 Korea Economics Ray Farris (21) SOX 1,307 (0.5) 0.3 21.9 44.2 EU-STOX 3,137 (0.1) (1.3) 3.1 4.2 KRW strength could temper BoK hawkishness FTSE 7,381 (0.1) (0.7) 0.8 3.3 Korea Property Sector Minseok Sinn (22) DAX 12,994 (0.4) (1.0) 6.8 13.2 Uptrend in the housing price, of late, less likely to sustain CAC-40 5,319 (0.3) (1.1) 4.0 9.4 10 YR LB 2.363 0.1 (1.5) 7.6 (3.5) Taiwan 2 YR LB 1.721 0.5 3.5 31.0 43.7 TPK Holdings (3673.TW) – Upgrade to O Jerry Su (7) US$:E 1.179 0.2 1.1 0.3 12.2 US$:Y 112.1 (0.9) (1.3) 2.7 (4.1) Back into the iPhone XY touch sensor lamination supply chain from 2H18 GOLD 1,294 1.2 1.4 0.8 12.4 Thailand VIX 11.4 (2.8) 1.2 (19.8) (18.6) Thomson Reuters Netbay – NOT COVERED Thaniya Kevalee (23) MSCI Asian indices – valuation & perf. Low penetration of e-transaction in Thailand EPS grth. P/E (x) Performance Muang Thai Leasing Company Limited (MTLS.BK) – Maintain O Atul Sethi (24) MSCI Index 17E 18E 17E 18E 1D 1M YTD Upgrade cycle to continue Asia F X Japan 20 11 15.4 13.9 0.7 2.1 37.2 Asia Pac F X J. 20 9 15.5 14.2 0.5 1.2 31.1 Srisawad Power 1979 Public Company Limited (SAWAD.BK) – Maintain O Atul Sethi (25) Australia 16 7 19.7 16.9 (0.3) (2.7) 9.2 3Q17 miss likely a blip China 17 14 16.7 14.6 0.8 2.6 51.8 Hong Kong 9 7 18.2 16.9 0.2 0.2 28.7 India 14 19 20.3 17.0 1.0 0.9 29.9 Indonesia 17 14 17.8 15.6 1.0 1.7 15.2 Japan 16 12 18.0 16.0 0.6 3.0 19.1 Korea 43 7 10.8 10.1 0.3 5.1 46.3 Malaysia 2 7 16.3 15.3 0.4 (0.3) 12.8 Pakistan 5 15 8.7 7.6 (0.0) (3.1) (27.2) Philippines 4 11 20.4 18.3 1.2 (1.2) 17.3 Singapore 7 7 15.3 14.2 1.5 3.0 26.8 Sri Lanka 11 8 14.9 13.8 2.0 (4.3) 2.1 Taiwan 7 9 16.3 14.9 0.9 0.1 25.4 Thailand 10 13 10.6 9.4 1.5 1.1 24.2 Thomson Reuters; All data as of the most recent market close.

O=Outperform N=Neutral U=Underperform R=Restricted OW= Overweight MW=Market Weight UW=Underweight Research mailing options To make any changes to your existing research mailing details, please e-mail us directly at [email protected] Sales Contact Hong Kong 852 2101 7211 Singapore 65 6212 3052 London 44 20 7888 4367 New York 1 212 325 5955 Boston 1 617 556 5634

- 2 of 31 - Monday, 20 November 2017

Asian Daily

Top of the pack ... China Basic Materials Sector ------New report: Key takeaways from recent trip Yang Luo / Research Analyst / 852 2101 6328 / [email protected] Peter Li / Research Analyst / 852 2101 6320 / [email protected] ● Recent on-the-ground check confirms our optimistic outlook. Our measures. This is evidenced by blast furnaces' operation rate in key takeaways from the recent steel conference are: (1) Tangshan (a major steel hub in China) plummeting to 43.3% as of last environmental policies are strictly implemented; (2) current week from 68.3% a week earlier. As a result, the rebar price arrived at demand is resilient, the order book remains sound; (3) inventory a three-month high of Rmb4,170/t. level is low; (4) most steel mills believe high profitability could be Inventory is down and pricing power over iron ore producers is sustained in 2018. Full report. up. These steel mills confirmed that the current inventory is about the ● Price is more geared to production disruption than demand. 2017 YTD low level. They are confident on the sustainability of the Utilisation rate moved lower in response to strict environmental current high profitability as they are gaining pricing power over iron protection measures. This is evidenced by blast furnaces' ore producers. However, domestic iron ore producers are struggling at operation rate in Tangshan at 43.3% (vs. 68.3% a week earlier). breakeven level, according to them. Outperform on China steel names and Anhui Conch. With ● Inventory is down and pricing power over iron ore producers is up. improving supply demand dynamics and rising pricing power within Current inventory is about 2017 YTD low level. Mills are confident the industry chain, we are optimistic on China steel names. The on the sustainability of the current high profitability as they are production curb is set to further push up cement price as well, in our gaining pricing power over iron ore producers. view. We have OUTPERFORM rating on Angang Steel, Magang Steel ● Stay OUTPERFORM on China steel names and Anhui Conch. We and Anhui Conch. are optimistic on China steel names. The production curb is set to Figure 2: Rebar price vs. days of inventory further push up cement price as well. We are Outperform on 11 5,300 Angang Steel (A&H), Magang Steel (A) and Anhui Conch (A&H). 10 4,500 Figure 1: Production curbs to further push up steel price 9 8 3,700 110% 5,000 7 2,900 100% 4,100 6 2,100 90% 3,200 5 4 1,300 80% 2,300

70% 1,400 Jul-14

Apr-13 Oct-10 Oct-15

Jan-12 Jun-12 Jan-17 Jun-17

Mar-11 Feb-14 Mar-16

Nov-12 Dec-14 Nov-17

Aug-11 Sep-13 Aug-16 May-15 60% 500 Days of inventory Rebar price (Rmb/t) (RHS)

Source: WIND, CEIC, CISA, Credit Suisse

Oct-13 Oct-16 Oct-12 Oct-14 Oct-15 Oct-17

Jun-18 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-13 Figure 3: Rebar price vs iron ore price Blast furnace operation rate % (China) 5,000 2,000 Source: WIND, CEIC, China Iron and Steel Association (CISA), Credit Suisse 4,000 1,600 Recent on-the-ground check confirms our optimistic outlook. We 1,200 joined a major conference organised by CISA and interacted with 20+ 3,000 steel mills in China. The key takeaways are: (1) environmental policies 800 are being strictly implemented in North China; (2) current demand is 2,000 400 resilient and the order book (leading 1-3 months) remains sound; (3) 1,000 - inventory level is low; and (4) most steel mills believe high profitability

could be sustained in 2018.

Jul-12 Jul-17

Oct-13 Apr-16

Jan-15 Jun-15

Feb-17 Feb-12 Mar-14

Dec-12 Nov-15

Sep-11 Aug-14 Sep-16 Price is more geared to production disruption than demand. We May-13 talked to a few steel mills located in North China. They confirmed Px gap (RHS) Rebar (Rmb/t) Iron Ore (RHS) lower utilisation rate in response to strict environmental protection Source: WIND, CEIC, CISA, Credit Suisse Valuation metrics Company Ticker Rating Price Target TP Up/dn Year EPS Chg EPS EPS grth (%) P/E (x) DY P/B Scenario Chg to TP (%) (%) (x) (prev.) Local price (prev.) (%) (%) T T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+1 Blue sky Grey sky Angang (H) 0347.HK O 6.86 10.00 0 46 12/16 0 0 0.67 0.73 201 9 8.6 7.9 3.5 0.9 13.20 4.00 Magang (H) 0323.HK O 3.56 5.00 0 40 12/16 0 0 0.51 0.53 1,617 4 6.0 5.8 — 0.9 7.00 2.00 Conch (H) 0914.HK O 35.05 42.00 0 20 12/16 0 0 2.40 2.57 48 7 12.4 11.6 2.6 1.8 48.30 18.00 Shenhua (H) 1088.HK O 19.08 23.00 0 21 12/16 0 0 2.26 1.94 81 (14) 7.2 8.3 5.0 1.1 32.00 10.00 Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates

- 3 of 31 - Monday, 20 November 2017

Asian Daily

Singapore Banks Sector ------New report: 3Q17—setting up for a bright FY18 Danny Goh / Research Analyst / 60 3 2723 2083 / [email protected] Dawei Lee / Research Analyst / 65 6212 3004 / [email protected] ● UOB/OCBC reported profits above expectations due to higher forecasting Singapore’s GDP to be in the upper half of 2-3%, and loan growth/improvement in NIMs. 9M17 net profit for the three improving domestic residential property fundamentals should bode well for banks accounts for 68-79% of the street's full-year estimate. loan growth. Accordingly, we raise our loan growth projections to reflect ● Singapore banks saw loan growth above the mid-single digits thus the more positive loan growth outlook. Banks expect NIM to rise in FY18, far and have officially moved up their guidance to the high-single hinged on the number of US rate hikes and the pass-through to digits. Banks expect NIM to rise in FY18, though quantum of SOR/SIBOR. increase will again hinge on the number of US rate hikes and the Divergence in asset quality trends pass-through to SOR/SIBOR. DBS/UOB accelerated recognition of support-service NPAs, taking the ● We note that OCBC may follow its peers and conduct a kitchen- opportunity to clean up their books ahead of IFRS 9. We view this as a sinking exercise in 4Q17. For FY18, we expect DBS’s overall positive as it will allow the banks to enter FY18 on a clean slate. But credit costs to decline YoY (from 53 bp to 28 bp) due to kitchen- OCBC did not make any kitchen-sinking efforts. For FY18, we expect sinking efforts this quarter, which would increase its earnings overall credit costs to decline YoY for DBS (from 53 bp in FY17 to 28 bp in growth (34.7% YoY) compared to OCBC (13.5% YoY). FY18) and UOB (34bp to 22bp), thus helping them push up their YoY ● We raise TPs, considering lower CoE as operational risks recede. earnings growth (34.7% and 19.9%, respectively) as compared to OCBC We prefer DBS (top pick) over OCBC given that (1) kitchen- (13.5% YoY). sinking efforts would help improve credit costs in 2018, (2) both Potential kitchen-sinking efforts by OCBC in 4Q have surplus capital that could spell potential upside for dividend, As of 3Q17, OCBC has classified 24% of its o&g offshore support vessels and (3) OCBC may kitchen-sink in 4Q. Full report sector vs. UOB ~26% and DBS 57%. If we assume in 4Q they classify Figure 1: SG banks to deliver double-digit EPS growth in FY18… another 26% of the exposure, NPL ratio could rise to ~1.9% from 1.3% in 3Q17. Assuming OCBC provides for 50%, we are looking at additional 42 '15 '16 '17E '18E 34.7 SPs of ~S$750 mn. Assuming they use ~S$400 mn from general 32 19.9 allowances to offset, we are looking at S$350 mn/~8% impact on profits 22 16.2 12.0 13.5 and allowance coverage falling from ~100.9% to ~87.5%. 12 6.6 4.2 0.4 2 Switch to DBS or UOB from OCBC

-8 -2.7 -2.2 -1.5 We kept earnings forecasts unchanged but lowered CoE to 9%/9.3% for

-18 -11.7 DBS/UOB and OCBC, respectively, from 9.5% previously. We have DBS UOB OCBC factored in a lower CoE for DBS/UOB given that they have already Source: Company data, Credit Suisse estimates. cleaned up their o&g loan book to reduce asset quality risks. We raise our Figure 2: SG system loan growth vs. GDP growth and loan to GDP TPs from S$25.3 to S$27.4 for DBS, from S$27.1 to S$29.3 for UOB and 40 30 from S$11.7 to S$12.6 for OCBC. 25 30 20 Figure 3: DBS Fwd P/E(x) vs SG GDP growth 20 15 10 30 25.0 10 5 20.0 0 0 25 -5 15.0 -10 -10 20 -20 -15 10.0 Dec-93 Oct-95 Aug-97 Jun-99 Apr-01 Feb-03 Dec-04 Oct-06 Aug-08 Jun-10 Apr-12 Feb-14 Dec-15 Avg P/E = 12.9 15 5.0 SG system loan growth (YoY%) GDP YoY% (RHS) Loan/GDP (RHS) 0.0 Source: Company data, Credit Suisse estimates. 10 -5.0 Positive NII outlook for FY18 5 -10.0 All three banks have delivered loan growth above the mid-single-digit Dec-97 Jul-99 Feb-01 Sep-02 Apr-04 Nov-05 Jun-07 Jan-09 Aug-10 Mar-12 Oct-13 May-15 Dec-16 range thus far and have officially moved up their guidance to the high- DBS 12m fwd P/E(x) Avg GDP YoY% (RHS) single digits. The improving domestic economic sentiment, with the MAS Source: Company data, Credit Suisse estimates. Valuation Metrics Company Ticker Rating Price Target TP Up/dn Year EPS Chg EPS EPS grth (%) P/E (x) DY P/B Scenario Chg to TP (%) (%) (x) (prev.) Local price (prev.) (%) (%) T T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+1 Blue sky Grey sky DBS Group DBSM.SI O (O) 23.34 27.40 (25.30) 8.3 17 12/16 0 0 1.69 2.28 0 35 13.8 10.3 2.8 1.2 29.00 16.50 UOB UOBH.SI O (O) 24.70 29.30 (27.10) 8.1 19 12/16 0 0 2.04 2.45 7 20 12.1 10.1 3.2 1.2 32.00 18.00 OCBC OCBC.SI N (N) 11.45 12.60 (11.70) 7.7 10 12/16 0 0 0.97 1.11 17 14 11.7 10.3 3.1 1.2 13.70 8.20 Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates

- 4 of 31 - Monday, 20 November 2017

Asian Daily

India Corporate Health Tracker ------New report: IBC key to NPA resolution Ashish Gupta / Research Analyst / 91 22 6777 3895 / [email protected] Kush Shah / Research Analyst / 91 22 6777 3862 / [email protected] Anurag Mantry / Research Analyst / 91 22 6777 3942 / [email protected]

● Share of debt having interest cover (IC)<1 was slightly changed QoQ Figure 2: Aggregate EBITDA remained muted, declining 7% YoY at 40%, though aggregate IC improved to 2.4x with 4% EBITDA 5.0 EBITDA growth (% yoy) (RHS) IC coverage 25 growth. Share of debt with loss-making companies was stable at 20 ~29%. Metals, power & telecom account for > 40% of the IC<1 debt, 4.0 15 as debt of 55% steel, 43% power and 60% telecom remains stressed. 3.0 Full report. 10 5 ● Performance of "House of Debt" groups still remains concerning, with 2.0 0 IC well below one, excluding commodity companies. Over the last two 1.0 years, seven of the original ten groups have had default events and -5

Rs3 tn debt is now NPA/impaired, even after Rs1.2 tn of asset sales. 0.0 -10

1Q13 2Q13 3Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 ● IBC’s progress on RBI's 1st list has been timely, with most cases in 4Q13 Source: Prowess, Company data, Credit Suisse post-EOI stage and bids for 11cases due in next 2-10 weeks. RBI's 2nd list is also likely to be in this process by Dec., post which ~40% House of Debt adding up the impairment Performance of our "House of Debt" groups still remains concerning of bank NPAs will be under IBC, with 40% of debt from steel cos. and excluding the commodity companies, their aggregate IC is well ● Banks need to provide ~40 bp of loans to meet RBI’s coverage below one. Over the last two years, seven of our original ten "House levels, for which Axis is best placed with little incremental of Debt" groups have had default events and Rs3 tn of their debt is provisioning needs, while ICICI and SBI need 45-50 bp. However, now NPA/impaired, even after Rs1.2 trillion of asset sales. if IBC resolutions come through over the next year, SBI and ICICI may witness a 400 bp drop in NPAs. IBC key to NPA resolution IBC process on the RBI's 1st list has witnessed timely progress, with Valuation metrics most cases now in post-EOI stage and bids for 11 cases due in next Company Ticker Rating Price Target Year P/E (x) P/B nd (x) 2-10 weeks. RBI's 2 list of NPAs is also likely to be in this process by Local price T T+1 T+2 T+1 Dec, post which ~40% of bank NPAs will likely be under IBC. ICICI ICBK.BO O 325.10 347.00 03/17 23.6 18.3 2.0 In the two lists referred to the IBC, 40% of debt is from steel co’s, 20% Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates from EPC and 10% from textile. Bidding interest appears to be the Corporate stress levels unchanged highest in steel assets (multiple EOIs). Given that even at current In 2Q, share of debt with companies having interest cover (IC) < 1 saw steel prices, 60% haircut in debt is needed to reach IC of one; RBI- little change ~40% (vs 42% in 1Q), even as aggregate interest cover mandated 50% provision does not appear excessive. Other assets, improved sequentially to 2.4x on the back of a 4% EBITDA growth. particularly EPC, are likely to see deeper haircuts. Banks currently Share of debt with loss-making companies remained stable at ~29%. need provisions of 0.4% of loans to reach the RBI-mandated levels. Metals, power and telecom accounted for > 40% of the IC<1 debt, as Figure 3: Addl prov of 20-70 bp of loans on IBC lists 55% of steel, 43% of power and 60% of telecom debt is still stressed. Additional provision needed on IBC cases (bps of loans) List 1 List 2 0.8% 0.7% 0.7% Figure 1: 40% of debt with companies having IC<1 0.7% 0.6% 45% 45% 0.6% % of sample debt with companies with IC <1 % not covering interest in at least 4 quarters 0.5% 0.5% 0.5% 0.4% 0.4% 40% 40% 0.4% 0.4% 0.3% 35% 35% 0.3% 0.3% 0.2% 0.2% 0.2% 30% 30% 0.1% 0.1% 0.1% 25% 25%

0.0%

ICI…

SN…

UN…

SIB

BOI

KVB YES

CBK PNB BOB

20% 20% OBC

INBK SBIN AXSB Source: Company data, Credit Suisse estimates 15% 15% Axis is best placed with less incremental provisioning needs, while 10% 10% ICICI and SBI need 45-50 bp provisions to reach the RBI-provision

Source: Prowess, Company data, Credit Suisse levels. However, if resolutions through IBC come through over the next year, SBI and ICICI may witness a 400 bp drop in NPAs.

- 5 of 31 - Monday, 20 November 2017

Asian Daily

ZhongAn Online P&C Insurance Co., Ltd. ------Initiating Coverage with NEUTRAL New report: Data technology makes the difference Thomas Chong / Research Analyst / 852 2101 6164 / [email protected] Charles Zhou, CFA / Research Analyst / 852 2101 6177 / [email protected] Alex Xie / Research Analyst / 852 2101 7462 / [email protected] Eddie Zhou / Research Analyst / 852 2101 6192 / [email protected] ● We initiate coverage on ZhongAn Insurance with a NEUTRAL Integration with dynamic ecosystems rating and a target price of HK$75.50. Founded in 2013, ZhongAn ZhongAn has five ecosystems: lifestyle consumption, consumer is a leading player in the Insuretech sector supported by Ant finance, health, auto and travel. Its open platform strategy covers 199 Financials, Tencent and Ping An Insurance. partners across different verticals and serves over 490 mn customers ● ZhongAn serves over 490 mn customers with over half aged with over 7.2 bn policies sold since inception to December 2016, between 20 and 35, and has sold more than 7.2 bn policies since thanks to data technology supported by its cloud-based platform. its inception to 31 December 2016. We expect it to ride the fast Technology leadership to expand future monetisation growth momentum in the Insuretech sector. opportunities ● We believe the distribution of technology solutions creates new In 2016, the company incorporated ZhongAn Technology which business models for ZhongAn on top of premium income. We focuses on research and development of internet technologies and estimate revenue from technical solution services to witness a exports core competencies in advanced technologies such as cloud, 65% CAGR from 2018 to 2022. AI and blockchain to enterprises across different industries. Combined with ZhongAn's solid big data capabilities and sophistication in ● We use sum-of-the-parts in order to capture the value of two customer profiling under various scenario-based settings, we believe different segments: (1) HK$44.3 for the insurance segment and the distribution of technology solutions creates new business models (2) HK$31.2 for the technology segment based on DCF. Key with huge potential. We forecast revenue from technical solution risks: reliance on key shareholders and intensified market services to witness a 65% CAGR from 2018 to 2022. competition. Initiate with NEUTRAL and TP of HK$75.5 Bbg/RIC Price (16 Nov 17 , HK$) 74.65 We initiate coverage on ZhongAn with a NEUTRAL rating and a TP of Rating (prev. rating) N (NA) [V] TP (prev. TP HK$) 75.50 (NA) HK$75.50, implying 45x/25x 2019/20E P/E. We use SOTP valuation 52-wk range (HK$) 93.7 - 63.5 Est. pot. % chg. to TP 1 in order to capture the value of two different segments: (1) HK$44.3 Mkt cap (HK$/US$ bn) 109.7/ 14.1 Blue sky scenario (HK$) 98.15 ADTO-6M (US$ mn) 134.0 Grey sky scenario (HK$) 60.40 for the insurance segment based on its adjusted underwriting profit

Free float (%) 71.5 Performance 1M 3M 12M and net tangible assets and (2) HK$31.2 for the technology segment Major shareholders Ant financial- 14.06% Absolute (%) (9.0) — — based on DCF valuation. We could turn more positive if visibility on Relative (%) (13.1) — — exporting technology solution improves. Key risks include: reliance Year 12/15A 12/16A 12/17E 12/18E 12/19E on key shareholders and intensified market competition. Life GWP (Rmb mn) — — — — — P&C GWP (Rmb mn) 2,283 3,408 6,395 11,605 18,890 Figure 1: Fast growing Insuretech market in China Net profit (Rmb mn) 44 9 38 668 2,087 EPS (CS adj. Rmb) 0.04 0.01 0.03 0.45 1.42 6 China insurance market China Insuretech market - Change from prev. EPS (%) n.a. n.a. - Consensus EPS (Rmb) n.a. n.a. (0.32) 0.22 0.83 5 4.9 EPS growth (%) 3.1 (80.2) 242.8 1,654.1 212.6 CAGR: +9.6% P/E (x) 1,661.2 8,386.7 2,446.7 139.5 44.6 NTA per share (Rmb) 5.9 5.4 12.2 12.6 14.0 4 EV per share (Rmb) 3.1 Dividend yield (%) 0 0 4.7 9.5 14.2 3 EV/EBITDA (x) 1,347.7 2,395.5 721.2 83.6 28.5 P/B (x) 10.7 11.5 5.1 4.9 4.5 CAGR: +31.2% 2 ROE (%) 1.1 0.1 0.3 3.6 10.5 1.41 P&C combined ratio (%) 127.3 105.4 112.3 107.1 99.9

Note 1: ZhongAn is a leading Insuretech company in China. tn) (Rmb premium written Gross 1

Click here for detailed financials 0.36 Redefining insurance with Insuretech - 2016 2021F 2016 2021F The Insuretech market in China is expected to surge at a 31% CAGR from Rmb363 bn in 2016 to Rmb1,413 bn in 2021. ZhongAn is a Source: Oliver Wyman report, CIRC, Credit Suisse research pioneer in China’s Insuretech market and is the first company to have obtained an online insurance license. ZhongAn is the largest online- only insurer in terms of GWP in 2016. ZhongAn has a market share of 17% in the rapidly growing ecosystem-oriented innovation segment that is expected to reach Rmb223 bn by 2021.

- 6 of 31 - Monday, 20 November 2017

Asian Daily

TPK Holdings ------Upgrade to OUTPERFORM Back into the iPhone XY touch sensor lamination supply chain from 2H18 EPS: ▲ TP: ▲ Jerry Su / Research Analyst / 886 2 2715 6361 / [email protected] ● Back into XY touch sensor lamination from 2H18. We believe TPK expect TPK to provide the same services for OLED models from 2H19, will provide cover glass and XY touch sensor lamination (without after the second OLED panel ramps up the shipment. We expect the display) for TFT iPhone from 2H18, as in-cell has difficulty cover glass and XY lamination to account for 10% of its 2H18 revenue working on large-size TFT. We believe it will provide cover glass (6% for 2018,) which will increase to 12% of sales in 2019. and XY film lamination for OLED iPhone from 2H19. We estimate Force touch volume to further grow in 2018 this business to account for 6% of 2018 sales and 12% in 2019. We believe the two OLED models will account for 65% of 2H18 builds, ● Force touch volume to further grow in 2018. We expect there will be hence, the adoption rate of the new force touch should lift the ASP two OLED iPhones in 2018; hence, adoption rate of the new force and profit per unit in 2H18-19, despite a lower GM. We believe that touch should continue to increase in 2H18-2019. We believe this will ASP for the new structure using resistive/strain gauge sensing method help in growth of profit growth, although it is slight dilutive to GM. is 40%+ higher vs the older capacitive design, and the dollar profit is ● 1Q18 could be better than seasonal. We expect the iPhone force also better, given TPK provides more process on lamination, bonding, touch builds to slow down in 1Q18, but TPK’s 1Q18 sales decline dispensing, and requires higher accuracy. Although the new structure of 20% QoQ will still be better than historical ~30% QoQ on better is currently used on OLED model, we believe it is also likely to be mix. We believe it could stay profitable during the slow season. adopted on the TFT model to enhance user experience and simplify ● We lower 2017 EPS by 3% on less favourable FX but raise 2018-19 supply-chain management. Nevertheless, we have not included its EPS by 2-8% to factor in cover glass and the XY film lamination adoption in TFT iPhone in our model yet. business from 2H18. We upgrade the stock to OUTPERFORM with 1Q18 could be better than seasonal TP of NT$125 using 15x 2H18-1H19 P/E (vs prior 15x 2018). We believe iPhone force touch builds will slow down in 1Q18 on Bbg/RIC 3673 TT / 3673.TW Price (17 Nov 17 , NT$) 88.20 slower seasonality and uncertainty about iPhone X demand. We Rating (prev. rating) O (N) [V] TP (prev. TP NT$) 125.00 (110.00) expect TPK’s 1Q18 sales to decline by 20% QoQ, better than 52-wk range (NT$) 131.5 - 53.0 Est. pot. % chg. to TP 42 historical ~30% QoQ decline on better mix, as new force touch has Mkt cap (NT$/US$ mn) 35,867.7/ 1,194.0 Blue sky scenario (NT$) 180.00 ADTO-6M (US$ mn) 49.2 Grey sky scenario (NT$) 50.00 40% higher ASP. We believe TPK will stay profitable during slow

Free float (%) 60.0 Performance 1M 3M 12M seasons, as it has successfully reduced its annual OPEX to below Major shareholders Chairman (25.88%) Absolute (%) (10.3) (28.9) 66.4 NT$5 bn vs over NT$10 bn in 2013-14, and depreciation will also Relative (%) (10.1) (32.6) 47.4 decline ~NT$1 bn in 2018. Year 12/15A 12/16A 12/17E 12/18E 12/19E Revenue (NT$ mn) 121,364 89,216 104,981 120,123 129,981 Automotive to reach ~4% of 2018 sales EBITDA (NT$ mn) (10959) 8,410 13,021 12,378 12,565 TPK has been working with various automotive makers in the last few Net profit (NT$ mn) (20007) (1462) 2,921 3,072 3,651 years and has entered Tesla supply chain. We believe its ASP and GM EPS (CS adj. NT$) (57.7) (4.2) 8.0 7.6 9.0 - Change from prev. EPS (%) n.a. n.a. (3.3) 1.5 8.4 for automotive application should be better than consumer devices, given - Consensus EPS (NT$) n.a. n.a. 6.97 8.06 8.34 the higher spec requirement and larger sizes, though volume could be EPS growth (%) n.m. n.m. n.m. (5.5) 18.8 less. We estimate automotive to account for ~2% of revenue in 2017 and P/E (x) n.m. n.m. 11.0 11.7 9.8 will increase to ~4% in 2018. The partnership with O-Film could help it to Dividend yield (%) 0 0 4.1 4.3 5.1 penetrate into the Chinese automotive market. EV/EBITDA (x) (5.5) 6.1 3.5 3.7 3.2 P/B (x) 1.0 1.0 1.0 0.9 0.8 Upgrade to OUTPERFORM ROE (%) (52.1) (4.8) 8.7 7.8 8.6 We lower 2017 EPS by 3% on less favourable FX but raise 2018-19 Net debt(cash)/equity (%) 79.0 53.7 26.2 23.6 9.9

Note 1: TPK Holding Co., Ltd. is a Taiwan-based holding company principally engaged in the EPS by 2-8% to factor in the XY lamination business from 2H18. We research, development, manufacture and distribution of capacitive touch sensors, modules and upgrade the stock to OUTPERFORM with TP of NT$125 using 15x monitors.

2H18-1H19 P/E (vs prior 15x 2018). We believe the stock has

Click here for detailed financials Back into the XY touch sensor lamination from 2H18 factored in slower iPhone X ramp in 4Q17, but re-entering of XY touch We believe TPK will be returning to the XY touch sensor lamination lamination from 2H18 should support the share price to rebound. supply chain from 2H18. Our supply-chain checks have suggested Figure 1: TPK quarterly P/L there will be one TFT and two OLED iPhones for 2H18 refresh. We NT$ mn 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 2016 2017E 2018E believe the TFT model will have larger screen size vs current 4.7” and Revenue 30,513 30,645 24,532 22,570 36,430 36,591 89,216 104,981 120,123 5.5”, and the touch structure will change from current in-cell touch to Gross profit 2,615 2,365 1,544 1,356 3,059 3,154 3,266 7,691 9,113 out-of-cell touch, since in-cell has difficulty working on a large-sized OP profit 1,342 1,039 454 214 1,726 1,783 (1,872) 2,932 4,178 screen and has higher requirement of electrical performance. Net income 870 1,108 225 50 1,246 1,552 (1,462) 2,921 3,072 EPS (NT$) 2.41 2.73 0.55 0.12 3.06 3.82 (4.21) 7.99 7.56 We believe orders for lamination of cover glass and XY film sensor will GM (%) 8.6 7.7 6.3 6.0 8.4 8.6 3.7 7.3 7.6 be split between TPK and GIS, but lamination of the touch module OPM (%) 4.4 3.4 1.9 0.9 4.7 4.9 (2.1) 2.8 3.5 with display will still be done by panel makers. We believe it will be Source: Company data, Credit Suisse estimates difficult for new comers to enter this market in the near term as the unique mechanical design of the cover glass leads to higher technology barrier. We expect TPK and GIS to add new tools in the next six months to prepare for the new lamination business. We also

- 7 of 31 - Monday, 20 November 2017

Asian Daily

Global Global Equity Strategy ------The case for defence Andrew Garthwaite / Research Analyst / 44 20 7883 6477 / [email protected] ● Last October we highlighted that investors should be long of The world has become a more dangerous place over the past 12 defence stocks, especially local players in regions where defence months: We see four potential sources of friction globally: Russia, spending was low (Germany and Japan). Full report. China, North Korea and the Middle East. We believe defence is a ● The listed defence sector has outperformed in all major regions better geo-political hedge than oil, with oil suffering structural apart from the UK and France, but we continue with a strong challenges from EV and shale. overweight of the sector for the following reasons: (1) Defence A rising oil price helps defence spending: Oil-exporting countries spending as proportion of GDP remains low; (2) The world has accounted for 13 out of the biggest 15 cuts to defence spending last become a more dangerous place over the past 12 months; (3) A year. Defence spending by oil exporters tends to lag the oil price by rising oil price helps defence spending; (4) A cyber play. two years, with Russia and Saudi Arabia having the third and fourth ● (5) The need for more self-sufficiency on defence given President largest defence budgets globally. Trump's remarks on NATO; (6) A relatively undisrupted sector; (7) Agnostic to the cycle; (8) A play on fiscal QE; (9) Valuation is high Figure 3: Defence spending as a percentage of GDP in Saudi Arabia and Russia has tended to follow the oil price with a lag of two years but not extreme. ● Outperform-rated defence names that are cheap on HOLT® include Thales, Dassault and Bodycote. We like local defence plays within Germany and Japan. The outlook for UK defence spending is more problematic, but UK defence stocks are on a near record 35% discount to global defence stocks.

Figure 1: The best performing names this year have been in Germany, the US and Japan; only the UK and French names have underperformed

Source: Thomson Reuters, Credit Suisse research The need for more self-sufficiency on defence given President Trump's remarks on NATO: If all NATO countries spent at least 2% of GDP on defence, by 2024 NATO defence spending would rise by 12%. Germany has at least partially committed to this level and would need to spend 67% more to achieve it. A relatively undisrupted sector: Threats from Chinese competition and technological disruption (through 3D printing) are relatively low. Source: Thomson Reuters, Credit Suisse research A cyber play: 9% and 5% of BAE and Raytheon earnings are cyber The case for defence related. We find that the price to 2020 sales of quoted cyber stocks is We continue with a strong overweight of the sector for the following 1.4x, while the price to the cost of cybercrime is 0.4x. Defence spending as proportion of GDP remains low: In the US Agnostic to the cycle: The sector’s sensitivity to PMIs is only and Europe, defence spending as a share of GDP is 33% and 51%, middling at time when PMIs are close to a peak. respectively, below the 40-year average. A play on fiscal QE: We see defence spending being part of fiscal Figure 2: Developed countries' military spending is near historic low levels QE into the next downturn, with fiscal spending on infrastructure being the most effective major policy weapon into the next recession. In our view, defence spending could become part of a broader focus on social infrastructure. Valuation is high but not extreme: The US names trade on only a 13% premium to their 2002-08 average and on a dividend yield relative in line with their norm. The European names are trading on a near-record 29% discount to US names. This is an extract from Andrew Garthwaite's Global Equity Strategy report published on 17 November 2017.

Source: Thomson Reuters, Credit Suisse research

- 8 of 31 - Monday, 20 November 2017

Asian Daily

China China Economics ------New regulation on shadow-banking activities Vincent Chan / Research Analyst / 852 2101 6568 / [email protected] ● PBOC, along with CBRC, CSRC, CIRC and SAFE, announced Different regulation based on products, not institutions the consultative document of the first comprehensive set of rules In the future, all wealth management or investment products sold will governing shadow banking activities. be classified under equity, fixed income, commodities and mixed, with ● Issues like implicit guarantee, product classification, customer different regulations imposed on different products, irrespective of classification, regulatory arbitrage and leverage of these products whether these products are issued by banks, insurance, securities, are addressed in the regulation. fund management or trusted companies. ● We expect that the new FSC under the State Council, headed by Different products for different customers a Deputy Premier, will take a more proactive attitude in regulating Wealth management products in the future will be classified under shadow-banking activities and prevent financial systemic risks. those which raise funds from general public and those which raise funds through private placement. Public funds will only be allowed to ● If implemented smoothly and effectively, it will improve the invest in standard products like bonds and equities with enough confidence of investors in Chinese financial institutions, but at the liquidity, but not in non-standard unlisted products. These unlisted same time it probably will create a more tight credit environment in products could only be sold through private placement. the near term which could affect economic/investment growth and hurt sectors like commodities, industrial and property (particularly Non-standard fixed income products for those high leverage developers). In the past few years to avoid the loan quota control as well as reduce the cost of regulatory capital, it was rather common for banks to People’s Bank of China (PBOC), along with China Banking Regulatory package their loans to be sold as non-standard fixed income products Commission (CBRC), China Securities Regulatory Commission through the wealth management product channel. The new regulation (CSRC), China Insurance Regulatory Commission (CIRC) and State has highlighted the need to control such activities, but there are Administration of Foreign Exchange (SAFE), has published a limited details on how to control it. consultation document about the regulation of shadow-banking Quantitative guidance on leverage activities in China. It is still a consultation document, but effectively we The regulation has specified rather concrete guidance on leverage of could assume that the final set of rules promulgated will be very different asset management products, as well as the asset similar to this document. There are a few key contents in the new rule. concentration in each product. Eliminate the implicit guarantee Overall, this is the first comprehensive effort by the government to The document explicitly highlights that a big problem of shadow- regulate shadow-banking activities across different types of financial banking activities is that financial institutions always provide implicit institutions. There will be more to come. We expect that controlling guarantee for such products, which in effect pushes up the risk-free shadow banking activities and preventing financial risks will be the interest rates offered to depositors above the government-regulated major tasks of the newly established Financial Stability Commission level and increases the risk to the financial system. (FSC) under the State Council which will be headed by a Deputy The new rules require financial institutions to provide an estimation of Premier. the fair way of underlying financial assets to the customers, informing If implemented smoothly and effectively, it will improve the confidence them of the appreciation or depreciation of asset value. Also, if a of investors in Chinese financial institutions, but at the same time it financial institution is caught providing compensation to clients in case probably will create a more tight credit environment in the near term the full principal of the product cannot be recovered, it would be counted which could affect economic/investment growth and hurt sectors like as deposit-taking activities, and the financial institutions would have to commodities, industrial and property (particularly for those high- pay a penalty, the minimum being the required reserve for deposits. leverage developers).

Figure 1: Size of Asset Management activities by end-2016 (End-216) Rmb tn On-balance sheet wealth management by banks 5.9 Off-balance sheet wealth management by banks 23.1 Trusts 17.5 Mutual Funds 9.2 Private Raised Funds 10.2 Asset management by Securities Companies 17.6 Asset management by Fund Management Companies and their subsidiaries 16.9 Asset management by Insurance Companies 1.7 Source: PBOC.

- 9 of 31 - Monday, 20 November 2017

Asian Daily

China Banks Sector ------Unified rules for asset management to formalise the March-April guidelines for banks Sanjay Jain / Research Analyst / 65 6306 0668 / [email protected] ● On 17 Nov, the PBOC along with CBRC, CSRC, CIRC and SAFE Generally speaking, banks need to (1) improve risk management and jointly announced a consultative document for supervision forbids creation of “pooling" products that allow banks to roll over the standard on financial institutions’ asset management business. It products constantly, with the investment losses implicitly covered by aims to create a unified regulation, reduce arbitrage and ensure the new product issuance), and containing products that have maturity healthy development of the entire asset management sector. mismatch; (2) separate self-run business from agency business; (3) ● The document tackles a broad range of risk issues such as high prevent peer WMP services channeling; (4) standardise WMP design: leveraging, supervisory arbitrage, implicit guarantee of returns and control leverage, prevent inter-circulation of funding within the peer WMP channelling services, potentially related to shadow financial system; and (5) strengthen product info disclosure and risk banking activities. The draft is open to public opinion until 16 Dec. and provide services to clients based on risk-taking ability. ● On banking sector, the new draft rules deepen and widen the Regulation to be based on products, not institutions regulations on wealth management promulgated in CBRC’s April WMPs will be classified into equity, fixed income, commodities and guidelines. In that sense, they are not new and we saw the impact mixed, and regulated based on product type rather than the issuer on banks' margins and fee income during 3Q. Banks' WMP type. WMPs will be classified into public or private and public funds balances are believed to be flat or falling during 2Q-3Q. will be allowed to invest in standard products like bonds and equities. ● Big banks will be less impacted, thanks to lower risk exposure and In the past few years, to avoid the loan quota control as well as less involvement in WMPs, non-standard credit assets, shadow reducing regulatory capital burden, banks would package their loans lending, etc. Joint stock banks are likely to be more impacted, and to be sold as non-standard fixed income products wealth management we maintain our preference for the large banks. channel. The new regulation aims to control such activities. Valuation metrics Quantitative guidance on leverage Company Ticker Rating Price Target Year P/E (x) P/B It would require public funds’ total assets not to exceed 140% of the (x) funds’ net assets, while for private funds' it would be 200%. “Net Local price T T+1 T+2 T+1 assets” refers to the value of a fund’s total assets minus its total ICBC (H) 1398.HK O 6.19 6.90 12/16 6.7 6.1 0.9 liabilities. CCB (H) 0939.HK O 6.81 8.70 12/16 6.1 5.4 0.8 ABC (H) 1288.HK O 3.62 4.40 12/16 5.1 4.6 0.7 Figure 2: Non-standard credit asset and WMP exposure of banks (1H17) BOC (H) 3988.HK O 3.78 4.80 12/16 5.4 4.9 0.7 40 34 BCOM (H) 3328.HK N 5.82 6.30 12/16 5.5 5.1 0.6 31 CMB (H) 3968.HK N 31.30 28.70 12/16 9.8 8.8 1.5 30 CITIC (H) 0998.HK N 5.02 5.20 12/16 4.9 4.5 0.6 20 21 20 MSB (H) 1988.HK N 7.51 7.30 12/16 4.9 4.8 0.6 19 18 20 15 16 CEB (H) 6818.HK N 3.66 3.80 12/16 4.6 4.3 0.5 13 11 9 9 PSBC 1658.HK N 4.44 5.20 12/16 6.9 6.0 0.8 10 7 7 3 CRCB 3618.HK O 5.31 6.00 12/16 5.2 4.7 0.7 1 0 0 0 BOCQ 1963.HK N 6.16 6.80 12/16 4.1 3.6 0.6 0 PAB 000001.SZ U 13.18 8.80 12/16 9.6 8.1 1.0 ICBC CCB BOC ABC BCOM CMB CITIC MSB CEB PAB CQRC Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM On BS NSCAs as % of assets WMP balance as % of total asset Source: Company data, Credit Suisse estimates

Although it is a consultative document, we should assume that the Source: Company data, Credit Suisse estimates final set of rules will be very similar to this document. Once the rules Figure 3: Asset allocation of China banks' WMPs (1H17) become effective, financial institutions will be given a grace period Others until June 2019. 26% Figure 1: Size of asset management activities in China Bond (End-2016) Rmb tn 43% On-balance sheet wealth management by banks 5.9 Off-balance sheet wealth management by banks 23.1 Trusts 17.5 Cash, dep NSCAs Mutual Funds 9.2 15% 16% Private Raised Funds 10.2 Asset management by Securities Companies 17.6 Source: Company data, Credit Suisse estimates Asset management by Fund Management Companies and their subsidiaries 16.9 Asset management by Insurance Companies 1.7 Source: PBOC Not really a new-new regulation for the banks Earlier in April, CBRC had issued guiding opinions on Banking Risk Prevention and Control, which contained similar regulation on wealth management business. CBRC asked the banks to self-inspect their WMPs and report the details to the regulator by June, later relaxed to September. Now the joint (draft) regulation covers all the players.

- 10 of 31 - Monday, 20 November 2017

Asian Daily

China Oil & Gas Sector ------What oil prices are the stocks pricing in post recent correction? Horace Tse / Research Analyst / 852 2101 7379 / [email protected] Beatrice Lam / Research Analyst / 852 2101 7693 / [email protected] Andy Li / Research Analyst / 852 2101 6197 / [email protected] ● Oil prices have corrected 5% in past two weeks to $61/bbl (Brent) Current global oil supply is dampened by supply disruptions in Algeria, amid two consecutive weeks of US crude oil inventory builds, plus Nigeria and Venezuela, geopolitical concerns as well as tensions in the IEA’s commentary last week that global oil market has yet to the Middle East (read Saudi), but these factors appear to be find a “new normal”. The China Big 3 Oils have corrected 5-8% temporary and do not indicate a prolonged lower supply growth in over the same period. 2018. On a global S/D balance perspective, the IEA anticipates an ● Post-correction, CNOOC is now pricing in $55/bbl LT oil prices, inventory-building 1H18 whereby, on current estimates, 1Q18 should while PTR/SNP are pricing in $68/$64 respectively. At current see a +0.6 mb/d of crude build and another +0.2 mb/d build in 2Q18. spot oil, both CEO & SNP are valued at 4x 2018 EV/EBITDA vs With that in mind, the IEA’s view is that global oil market has not found PTR at 6x. This compares to 7-9x 2018 EV/EBITDA for global a “new normal” that sustains a $60/bbl oil price environment, hence E&Ps. cautious about the recent rally being not sustainable. ● We continue to favour CNOOC given its lowered cost structure, making it highly competitive at $60/bbl oil. PetroChina’s winter gas Figure 2: China Big 3 Oils past 3M price performance – CNOOC has significantly outperformed its peers price hike was weaker than our original estimate (overall 12% (17-Aug-2017 = 100) hike, or 6% after taking into account the Sep cut), so the earnings 130 CEO upside from higher gas prices should be muted. 125

● Sinopec’s share price has hit YTD low, but its performance is 120 likely to be capped amid deteriorating marketing profitability due to 115 PTR ongoing retail price war, in our opinion. 110

Valuation Metrics 105 Price Target Year P/E (x) P/B (x) Company Ticker Rat. Local price T T+1 T+2 T+1 100 PetroChina (H) 0857.HK N 5.20 5.00 12/16 30.6 16.7 0.7 95 Sinopec (H) 0386.HK O 5.48 7.20 12/16 10.8 8.3 0.8 SNP CNOOC 0883.HK O 10.60 14.50 12/16 10.1 7.7 1.0 90 17-Aug 31-Aug 14-Sep 28-Sep 12-Oct 26-Oct 9-Nov Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates Source: The BLOOMBERG PROFESSIONAL™ service, Credit Suisse. Weaker demand + temporary supply disruptions = no “new Reality check post correction normal” yet The share price correction past two weeks has sparkled investors In its latest Monthly Oil Market Report published last week, the queries on the current valuation for the Chinese Oils. In our models, International Energy Agency (IEA) commented that its latest CNOOC is now pricing in $55/bbl LT oil prices—the lowest among the assessment suggests 2018 global oil market does not look as tight as Big 3 Oils—compared to $68/bbl for PetroChina and $64/bbl for it previously thought. In essence, 2018 global oil demand was weaker Sinopec. In terms of EV/EBITDA, if we plug the current spot oil prices than prior estimates—the IEA now forecasts +1.3 mb/d global demand ($61/bbl Brent) into our 2018 assumption, this would yield 3.9x 2018 growth, 190 kb/d lower vs prior month forecast. After the stellar 2Q17 EV/EBITDA for CNOOC, 4.4x EV/EBITDA for Sinopec and 6.2x for where oil demand grew +2.2 mb/d, 3Q17 has reverted to +1.3 mb/d, in PetroChina. US E&Ps are currently trading at 7-9x 2018 EV/EBITDA part dampened by Hurricane Harvey/Irma hitting US oil demand. on average. Global demand is expected to remain at a normalised level of +1.4 mb/d over the next two quarters. Figure 3: China Big 3 Oils – LT oil price & 2018 EV/EBITDA comparison LT oil prices 2018 EV/EBITDA Figure 1: US crude oil inventories (US$/bbl) (x) (mmbbl) 80 7 550 6.2 75 6 500 70 $68 $64 5 4.4 450 65 3.9 4 60 400 $55 3 55 350 50 2 300 45 1 Shaded area indicates historical 5-year range 250 40 - PTR SNP CEO PTR SNP CEO Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2015 2016 2017 Avg Source: Credit Suisse estimates. Source: US EIA, Credit Suisse.

- 11 of 31 - Monday, 20 November 2017

Asian Daily

Great Wall Motor ------Maintain OUTPERFORM Guangzhou auto show takeaways: SUV continues to heat up with global brands finally catching up EPS: ◄► TP: ◄► Bin Wang / Research Analyst / 852 2101 6702 / [email protected] Carrie Jiang / Research Analyst / 852 2101 6723 / [email protected] Nick Li / Research Analyst / 852 2101 6704 / [email protected]

● Buoyed by China's booming SUV demand (up 17% YoY in the Figure 1: New models list in the 2017 Guangzhou Auto Show first 10 months), car makers are aggressively developing their Brand Model Segment Global / Local SUV line-ups. There are 18 new SUV products exhibited at Mazda CX-3 small-size SUV Global Guangzhou auto show, accounting for 72% of total 25 different Toyota Izoa small-size SUV Global new products. Hyundai ENCINO small-size SUV Global ● We highlight global brands have finally caught up in new SUVs VW T-Rocstar medium-size SUV Global Skoda Karoq medium-size SUV Global offering with nine models (or 50% of total new SUV products), vs DS DS7 cross back medium-size SUV Global Chinese local brands' dominance previously. Meanwhile, middle-size Kia NP medium-size SUV Global SUV was the hottest segment with 13 news models or 72% new Hyundai Ix35 medium-size SUV Global SUV products. Volvo XC60 medium-size SUV Global ● Once again, leading Chinese local brands took centre stage at the Geely Vision S1 medium-size SUV Local Guangzhou auto show, such as Geely, Great Wall, BYD, GAC, Roewe RX3 medium-size SUV Local SAIC and Chang'an. This was because of their upgraded interior Landwind Xiaoyao medium-size SUV Local and exterior design, world-class craftsmanship, and power train, Baojun 530 medium-size SUV Local which proved to be better than most mass market global brands. Haval H4 medium-size SUV Local Haval new H6 coupe medium-size SUV Local ● Great Wall launched its 1.5T new generation "H6", along with new Chery EXEED TX medium-size SUV Local "H4" series and "H6 coupe" during the auto show, which are likely to Changhe Q7 large-size SUV Local be volume products in 2018. We also highlight GAC’s Trumpchi Zhonghua V6 large-size SUV Local "GM8" MPV as a stand out with excellent design and space. Chang'an new Eado sedan Local Bbg/RIC 2333 HK / 2333.HK Price (17 Nov 17 , HK$) 8.88 Nissan new Leaf sedan Global Rating (prev. rating) O (O) TP (prev. TP HK$) 13.50 (13.50) Toyota Camry sedan Global 52-wk range (HK$) 11.30 - 6.95 Est. pot. % chg. to TP 52 Acura TLX sedan Global Mkt cap (HK$/US$ bn) 109.2/ 14.0 Blue sky scenario (HK$) 20.00 Jaguar XEL sedan Global ADTO-6M (US$ mn) 87.3 Grey sky scenario (HK$) 9.00

Free float (%) 44.0 Performance 1M 3M 12M Major shareholders Wei Jianjun GAC Trumpchi GM8 MPV Local Absolute (%) (16.4) (11.9) 27.4 Relative (%) (19.7) (23.8) (22.1) JAC M6 MPV Local

Year 12/15A 12/16A 12/17E 12/18E 12/19E Source: Company data, Credit Suisse Revenue (Rmb mn) 73,147 94,783 96,401 129,341 141,742 EBITDA (Rmb mn) 11,781 15,414 10,301 16,148 17,848 Net profit (Rmb mn) 8,059 10,551 5,828 10,423 11,434 Figure 2: Great Wall Motor sales by models in Nov.'s first two weeks EPS (CS adj. Rmb) 0.88 1.16 0.64 1.14 1.25 (unit) Nov-17 Nov-16 Oct-17 YoY MoM - Change from prev. EPS (%) n.a. n.a. 0 0 0 1-10 1-11 1-13 - Consensus EPS (Rmb) n.a. n.a. 0.63 0.90 1.00 8 9 5 EPS growth (%) 0.2 30.9 (44.8) 78.9 9.7 Total Sales 38,810 39,381 29,473 10.9% -17.7% P/E (x) 8.5 6.5 11.8 6.6 6.0 SUV 38,733 38,508 29,402 13% -18% Dividend yield (%) 3.6 4.6 2.5 4.5 5.0 Haval H1 200 2,754 180 -92% -31% EV/EBITDA (x) 7.6 5.9 8.6 5.4 4.6 P/B (x) 1.8 1.5 1.3 1.2 1.0 Haval H2 9,044 8,364 7,079 22% -20% ROE (%) 22.4 24.6 11.8 18.9 18.2 Haval H5 526 881 476 -33% -31% Net debt(cash)/equity (%) (8.6) (3.9) (7.8) (9.0) (15.5) Haval H6 18,932 23,772 12,956 -10% -9% Note 1: ORD/ADR=10.00. Note 2: Great Wall is China's leading local brand passenger vehicle Haval H7 694 2,054 953 -62% -54% maker. The company is now the largest SUV and pick-up producer in China, and is diversifying its product portfolio to sedan segment. Haval H8 246 281 185 -2% -17%

Click here for detailed financials Haval H9 443 402 622 24% -55% Above sector-wide 8% YoY sales rise in November's first two weeks, Haval M6 2,990 2,478 -25% Great Wall’s sales rose 11% YoY in the same period – the highest VV5 2,611 2,172 -25% growth this year. Key growth driver is the new “WEY” brand operation VV7 3,047 2,301 -17% – 5,658 units in the first two weeks or 15% of total Great Wall sales. In Sedan 77 873 71 -90% -32% particular, leading indicator – customer orders at Autohome for Source: Thinkercar. “VV5”/“VV7” hit a new high on 19 Nov at 25,538/30,796 units, implying “VV5”/“VV7” monthly retail sales will likely hit 10k/12k units, assuming a 40% sector-average “online customer order to retail sales” conversion rate.

- 12 of 31 - Monday, 20 November 2017

Asian Daily

Guangzhou Automobile Group ------Maintain OUTPERFORM Long awaited A-share placement completed at Rmb 19.91/sh (13% above H-share close) EPS: ▼ TP: ◄► Bin Wang / Research Analyst / 852 2101 6702 / [email protected] Carrie Jiang / Research Analyst / 852 2101 6723 / [email protected] Nick Li / Research Analyst / 852 2101 6704 / [email protected]

● GAC completed its long-awaited A-share private placement on 16 Figure 1: GAC Group sales in November's first two weeks Nov. The group issued 753.4 mn A-shares (or 11.6% of existing (unit) Nov-17 Nov-16 Oct-17 YoY MoM share number count) at Rmb19.91 per share (13% premium to H- 1-10 1-11 1-13 share's latest close), implying 14x consensus 2017E P/E and 3x P/B. 8 9 5 Total Sales 58,801 50,021 56,082 32% -34% ● GAC declared net proceeds of Rmb14.9 bn, which can save GAC Honda 30,264 22,911 30,061 49% -37% annualised finance cost by Rmb0.9 bn (6.4% of 2018E earnings). The Fit 3,572 3,612 4,319 11% -48% group previously disclosed its planned use of proceeds as: Rmb7.65 City 2,099 1,927 3,859 23% -66% bn (51%) for GAC Trumpchi local brand new plants and new models, Crider 3,386 3,744 4,000 2% -47% Rmb0.95 bn (6%) for engines and transmissions, Rmb6.4 bn (43%) Accord 7,082 5,906 4,794 35% -8% for technology R&D, especially new energy vehicles. Odyssey 2,020 1,539 1,151 48% 10% Avancier 4,763 252 4,095 2026% -27% ● We are positive on this placement given the high valuation and Vezel 7,342 5,931 7,454 39% -38% GAC's strong capability in delivering return on capital, i.e., 20% RoE. GAC Toyota 10,778 16,484 8,364 -26% -19% GAC recently launched "GS3" compact SUV /"GS7" middle-size Yaris 2,809 2,523 2,190 25% -20% SUV strongly with 20k/10k units order backlog currently. Meanwhile, Camry 209 3,763 656 -94% -80% the company just penetrated into the MPV market with "GM8" luxury Highlander 3,030 3,461 1,769 -2% 7% Levin 4,730 6,485 3,749 -18% -21% MPV (preliminary price range of Rmb180k-270k) for business elites. GAC Trumpchi 16,919 5,332 15,684 257% -33% ● Due to the increase in number of shares, we revise down our 2018- GA3 164 3 260 6050% -61% 20E EPS by 2.1%-7.5% GA6 739 62 648 1241% -29% GA8 74 16 64 420% -28% Bbg/RIC 2238 HK / 2238.HK Price (17 Nov 17 , HK$) 20.70 GE3 154 88 9% Rating (prev. rating) O (O) TP (prev. TP HK$) 25.00 (25.00) GS7 941 513 15% 52-wk range (HK$) 21.1 - 9.0 Est. pot. % chg. to TP 21 GS8 3,397 2,691 -21% Mkt cap (HK$/US$ bn) 184.5/ 23.6 Blue sky scenario (HK$) 35.00 GS3 1,610 1,855 -46% ADTO-6M (US$ mn) 49.2 Grey sky scenario (HK$) 16.00 GS4 9,838 5,238 9,565 111% -36% Free float (%) 90.9 Performance 1M 3M 12M Major shareholders GAIC GAC Fiat 840 5,294 1,973 -82% -73% Absolute (%) 8.9 37.5 117.0 Relative (%) 4.8 24.7 67.5 Source: Thinkercar.

Year 12/15A 12/16A 12/17E 12/18E 12/19E Figure 2: Planned use of proceeds – A-share price placement Revenue (Rmb mn) 29,418 49,418 73,912 89,236 98,896 EBITDA (Rmb mn) 2,047 4,324 8,302 10,108 11,651 Net profit (Rmb mn) 4,212 6,288 11,107 14,036 15,445 EPS (CS adj. Rmb) 0.65 0.95 1.53 1.93 2.12 - Change from prev. EPS (%) n.a. n.a. (7.5) (2.8) (2.1) - Consensus EPS (Rmb) n.a. n.a. 1.60 1.91 2.14 EPS growth (%) 31.7 45.3 61.2 26.4 10.0 P/E (x) 26.9 18.5 11.5 9.1 8.3 Dividend yield (%) 1.1 1.7 2.7 3.4 3.7 EV/EBITDA (x) 74.6 35.1 16.0 12.6 10.4 P/B (x) 2.9 2.6 1.9 1.7 1.5 ROE (%) 11.4 15.2 20.1 19.7 18.9 Net debt(cash)/equity (%) (9.4) (11.0) (34.7) (37.6) (40.0)

Note 1: ORD/ADR=10.00. Note 2: GAC is a leading passenger vehicle maker in China. With strong exposure to Japanese brands (JVs with Honda, Toyota, Mitsubishi), it has recently diversified its brand mix by localizing Jeep SUV and developing its own brand Trumpchi.

Click here for detailed financials Maintain OUTPERFORM rating and unchanged target price of HK$25. Our target price of HK$25 is based on 11x 2018 P/E, which is slightly higher than our previously 10.5x 2018 P/E as we are more confident on GAC's earnings growth after the future development capital funding sourcing being satisfied by the completion of this private placement. Above the sector-wide 8% YoY sales rise in the first two weeks of November, GAC group’s sales rose 32% YoY in the same period. This is the highest growth in the past eight months. Key growth drivers are GAC Trumpchi and GAC Honda JV – up 49% and 257% YoY, respectively. Source: Company data, Credit Suisse estimates.

- 13 of 31 - Monday, 20 November 2017

Asian Daily

NetEase.com ------Maintain OUTPERFORM Revitalise in 2018 EPS: ▲ TP: ▲ Thomas Chong / Research Analyst / 852 2101 6164 / [email protected] ● NetEase reported 3Q17 results with revenue up 36% YoY, in line Undergoing transition in 2H17 with consensus and our estimates. Non-GAAP net profit remained We view NetEase’s success coming from its dedication to gamer flattish YoY at Rmb3.0 bn, 5% and 8% above consensus and our experience which has been successfully replicated into mobile with estimates on lower-than-expected taxes. key titles like mobile version of FWJ, WJO and Ghost. Client-based ● NetEase is a renowned online games leader in China and has game FWJ has been in the market for over 10 years and again been consistently ranked in top 2 in the iOS game category clocked record-high revenue in 3Q17. globally. Different from peers, NetEase has superior R&D In 4Q17, we estimate mobile games and PC games revenues to capabilities and is transitioning into genre-diversifying in 2H17 for decline 19% and 2% QoQ, respectively, as new mobile games titles long-term growth. There are four new games which are remain under testing stage while licensed PC games remain soft. noteworthy at this stage, including Minecraft, Wilderness, Deferred revenue grew 1% QoQ to Rmb6.2 bn in 3Q17 (vs 12% QoQ Terminator 2 and the MOBA version of Onmyoji. We expect more decline in 2Q17), which we estimate the transitional stage of NetEase new games to be announced in coming gaming conferences. in genre-diversification is making progress with a number of new ● We revise up our earnings estimates by 2/3% in 2018-2019 games to be fully launched in 2018. factoring in our positive outlook after transition in 2H17. ● We maintain OUTPERFORM and raise TP to US$377.0 (from Making a new start in 2018 US$315.0) as current visibilities signal a solid set of games ready We are positive about genre-diversification in mobile next year after for monetisation in 2018. It announced new share repurchase of success in PC in 2010/2011. In 2017, NetEase is in transition stage in up to US$1.0 bn for a period not exceeding 12 months. mobile, with Minecraft (30 mn registrations), Wilderness, Terminator 2 and MOBA version of Onmyoji in preparation stage and yet to start Bbg/RIC NTES US / NTES.OQ Price (16 Nov 17 , US$) 326.24 monetisation. In 2018, we estimate total online games to grow 25% Rating (prev. rating) O (O) TP (prev. TP US$) 377.00 (315.00) YoY (prior 20%), driven by expansion pack of existing games and new 52-wk range (US$) 333.6 - 213.1 Est. pot. % chg. to TP 16 Mkt cap (US$ bn) 43.1 Blue sky scenario (US$) 490.10 launches. We expect more new titles announced in upcoming gaming ADTO-6M (US$ mn) 146.9 Grey sky scenario (US$) 263.90 conferences in late 2017/early 2018.

Free float (%) 97.9 Performance 1M 3M 12M Major shareholders William Lei Ding Absolute (%) 17.5 20.7 37.8 Figure 1: 3Q17 Results review (44.4%) Relative (%) 14.6 7.8 (12.6) (Rmb mn) 3Q16 3Q17 YoY B'berg est +/(-) CSe +/(-)

Year 12/15A 12/16A 12/17E 12/18E 12/19E B'berg CSe Revenue (Rmb mn) 22,803 38,179 53,163 70,272 90,475 est EBITDA (Rmb mn) 7,455 12,956 13,534 17,044 20,427 Net revenue 9,212 12,478 35% 12,577 -1% 12,387 1% Net profit (Rmb mn) 7,420 12,595 13,553 16,232 19,531 Online games 6,568 8,112 24% 8,412 -4% EPS (CS adj. Rmb) 56 95 102 121 144 Ecommerce and others 2,080 3,735 80% 3,350 11% - Change from prev. EPS (%) n.a. n.a. (0.9) 2.3 3.4 Online advertising 563 631 12% 625 1% - Consensus EPS (Rmb) n.a. n.a. 93 110 127 Cost of services (3,878) (6,530) (6,370) EPS growth (%) 44.1 69.6 7.2 18.6 19.1 Gross profit 5,334 5,948 12% 6,017 -1% P/E (x) 38.5 22.7 21.2 17.9 15.0 Dividend yield (%) 0.5 0.9 0.9 0.9 0.9 GP margin 57.9% 47.7% 48.6% EV/EBITDA (x) 37.8 21.9 20.3 15.4 12.0 Operating expenses (2,487) (3,398) (3,532) P/B (x) 9.8 7.5 5.8 4.6 3.7 Selling and marketing (1,275) (1,646) (1,736) ROE (%) 28.1 37.4 31.0 29.0 27.4 General and administrative (392) (599) (644) Net debt (cash)/equity (%) (13.0) (4.2) (22.3) (37.3) (50.2) Research and development (820) (1,153) (1,151)

Note 1: ORD/ADR=25.00. Note 2: Note 1: ORD/ADR=25.00. Note 2: NetEase is one of China's Operating profit 2,847 2,550 -10% 2,837 -10% 2,485 3% leading Internet and online game services providers.

OP margin 30.9% 20.4% 20.1% Click here for detailed financials Net profit 2,740 2,527 -8% 2,407 5% 2,311 9% 3Q17 results review Non-GAAP net profit 3,017 3,025 0% 2,885 5% 2,811 8% Net revenues declined 6.7% QoQ and grew 36% YoY to Rmb12.5 bn, Source: Bloomberg, company data, Credit Suisse estimates. in line with consensus and our estimates. Maintain OUTPERFORM and raise TP to US$377.0 (from Online games revenue (65% of total) grew 24% YoY to Rmb8.1 bn, US$315.0) 4% behind our estimate. Mobile games, accounting for 68% of total We maintain OUTPERFORM on NetEase on its strong R&D revenue, came down from 72% in 2Q17.Online advertising revenue capabilities over peers. As a top-2 leader in iOS game category by (5% of total) grew 12% YoY to Rmb631 mn, in line with our estimate. grossing, we are positive about the upcoming new launches of NetEase and games pipeline to be announced. Our SOTP valuation GAAP operating profit declined 10% YoY to Rmb2.5 bn, 10% below includes (i) US$360.0 for online games and others, and (ii) US$25.0 consensus but 3% above our estimates. GAAP operating margin on e-commerce and others. We apply 10% holding discount on decreased 10 pp YoY to 20%, 2.1 pp behind consensus and largely in NetEase and our TP includes US$30.0 in net cash. We use SOTP as line with our estimates. our valuation methodology with our core business valued at US$360 Non-GAAP net profit remained flattish YoY at Rmb3.0 bn, 5% and 8% vs. US$300 based on PEG, reflecting our medium-term growth rate above consensus and our estimates on lower-than-expected taxes. which is revising up from about 19% to 23% CAGR.

- 14 of 31 - Monday, 20 November 2017

Asian Daily

Semiconductor Manufacturing International Corp. ------Maintain UNDERPERFORM Business transition to extend through 2018 at lower profitability EPS: ▼ TP: ▼ Randy Abrams, CFA / Research Analyst / 886 2 2715 6366 / [email protected] Kyna Wong / Research Analyst / 852 2101 6950 / [email protected] Haas Liu / Research Analyst / 886 2 2715 6365 / [email protected] ● 3Q17 sales at upper half, though GMs in line. 3Q17 sales +2.5% sensors, and power management ICs. GMs were guided for another QoQ, at the upper half of guidance, driven by seasonal ramps in 400 bp QoQ decline to 18-20% in 4Q17, also below CS at 23.2% and communications following a soft 1H17. GMs were down 280 bp QoQ Street at 24.4%, due to rising deprecation (+35% YoY vs sales up 7- due to rising depreciation. With lower opex, EPS is at HK$0.041, 8% in 2017), 28 nm HKC start-up costs and pricing pressure. Opex is between CS/Street of HK$0.024/HK$0.124, respectively. guided higher at US$207 mn midpoint vs CS/Street at US$185-190 ● 4Q17 sales and margin guidance well below. 4Q17 sales were mn, respectively, putting 4Q17 into losses ex-subsidies and grants. guided +1%-3% QoQ, below CS/Street, and GMs were guided 18- Figure 1: SMIC’s 3Q17-4Q17 estimates, CS vs Street 20% on rising deprecation, 28 nm HKC start-up costs and pricing 3Q17 4Q17 1Q18 pressure on 28 nm. Opex is guided higher at US$207 mn midpoint, (US$ mn) Actual CS(old) Street CS CS(old) Street Guidance Net sales $770 $766 $848 $791 $805 $827 $777-793mn pulling SMIC into losses, ex-subsidies and R&D sharing credits. Change 2.5% 2.0% 7.0% 2.8% 5.0% 7.5% Up 1-3% QoQ ● Strides may be capped by competition. Despite 28 nm improving, GM % 23.0% 23.2% 26.9% 19.5% 23.2% 24.4% 18-20% OpM % 2.9% 1.2% 8.6% -3.7% 1.3% 1.9% Opex $204-210mn earnings may lag on rising depreciation and competition as Net income 26 16 79 21 36 42 Minority: $48-50mn evidenced by UMC’s limited profits on 28 nm. Competition is rising EPS (US$) $0.005 $0.003 $0.016 $0.004 $0.007 $0.008 with TSMC building 16 nm in Nanjing and joined by UMC, Huali, ADR EPS (US$) $0.26 $0.15 $0.80 $0.21 $0.36 $0.40 HK EPS (HK$) $0.040 $0.024 $0.124 $0.033 $0.055 $0.062 GF and Powerchip, lifting 12” China capacity by 41% YoY in 2018. Source: Company data, Credit Suisse estimates, Bloomberg consensus ● Awaiting better entry. We lower our 2017/2018 EPS to Technology strides take time and face rising competition HK$0.225/HK$0.164 and target price to HK$11.15 (1.5x 2018 P/B), We note SMIC is ramping 28 nm from 5% of sales in 1Q17 to 7% in high-end of its .9-1.5x range and will wait for better entry levels. 3Q17 with capacity running full on PolySiON and mild contribution Bbg/RIC 981 HK / 0981.HK Price (16 Nov 17 , HK$) 11.52 from HKC, but believe it does not guarantee strong financials, as Rating (prev. rating) U (U) [V] TP (prev. TP HK$) 11.15 (11.30) UMC’s yield improvement only allowed it to reach 20-25% of sales at 52-wk range (HK$) 14.36 - 7.03 Est. pot. % chg. to TP (3) a modest 6% OpM by 2H16 and has now retreated to 17% of sales, Mkt cap (HK$/US$ mn) 53,728.4/ 6,881.7 Blue sky scenario (HK$) 14.87 as TSMC has aggressively added capacity and moved to 28 nm ADTO-6M (US$ mn) 63.5 Grey sky scenario (HK$) 9.29

Free float (%) 66.0 Performance 1M 3M 12M HPC+ and qualifying 22 nm, plus building Nanjing fab for 16 nm. Major shareholders Datang (19%) UMC, Huali, GlobalFoundries and Powerchip are also ramping 12” Absolute (%) 13.6 60.0 10.8 Relative (%) 12.5 48.7 (37.7) fabs in China. We estimate that China’s 12” foundry capacity will grow

Year 12/15A 12/16A 12/17E 12/18E 12/19E 41% from 147k in 4Q17 to 207k in 4Q18, with max capacity capable Revenue (US$ mn) 2,236 2,914 3,105 3,523 4,063 of 510k (3.5x 4Q17 levels). For SMIC, its capex will sustain at current EBITDA (US$ mn) 758 1,092 1,082 1,231 1,599 Net profit (US$ mn) 253.4 368.4 146.8 107.3 191.9 levels in 2018, putting pressure on GM improvement with depreciation EPS (CS adj. US$) 0.06 0.08 0.03 0.02 0.04 up 25% YoY in 2018–19 vs sales falling short its long-term target for - Change from prev. EPS (%) n.a. n.a. (2.2) (36.5) (3.8) 20% CAGR, lifting depr/sales from 19% in 2016 to 28% in 2019, a 900 - Consensus EPS (US$) n.a. n.a. 0.04 0.05 0.06 EPS growth (%) 38.0 29.3 (61.9) (26.9) 78.9 bp margin headwind over three years. P/E (x) 25.1 19.4 50.9 69.6 38.9 Stock should pull back from peak valuation Dividend yield (%) 0 0 0 0 0 EV/EBITDA (x) 9.7 7.2 8.2 7.1 5.3 We lower 2017/2018 EPS from HK$0.230/HK$0.259 to P/B (x) 1.7 1.7 1.6 1.5 1.5 HK$0.225/HK$0.164 on slower near-term business outlook and ROE (%) 7.6 9.3 3.3 2.2 3.9 lengthened transition into 2018. We maintain UNDERPERFORM and Net debt(cash)/equity (%) 11.1 17.7 33.8 28.7 21.4 lower TP from HK$11.3 to HK$11.15, 1.5x 2018 P/B. We note SMIC’s Note 1: ORD/ADR=5.00. Note 2: Semiconductor Manufacturing International Corporation is a semiconductor foundry, which operates through its subsidiaries. It operates three eight-inch wafer profitability outlook is even weaker and management acknowledges a fabrication facilities in its Shanghai mega-fab located in the Zhangjiang High-Tech region.

two-year ‘transition’ that will take through 2017-18. With the stock up Click here for detailed financials 100% in three months on longer-term optimism but not much change in 3Q17 sales at the upper half, though GMs only in line near-term and reaching peak 1.9x P/B and 9x EV/EBITDA with ROEs 3Q17 sales were up 2.5% QoQ vs +0-3% QoQ guidance and between staying 3-4% in 2018-19 (ex 1x excess subsidies/gains), we see risk here CS/Street +2.0/+2.8% QoQ, respectively. The mild rebound is mainly and will wait for better entry levels. driven by seasonal ramps in communications, following a soft 1H17, and NOR Flash ramp from a low base. GMs were 23%, the midpoint Figure 2: SMIC 2017–18 estimates CS vs Street 2017 2018 2019 of guidance for 22-24% but -280 bp QoQ as higher revenue scale is (US$ mn) CS CS(old) Street CS CS(old) Street offset by rising depreciation and pricing pressure from competition, Net sales $3,105 $3,115 $3,146 $3,523 $3,537 $3,662 Change 6.6% 6.9% 40.7% 13.5% 13.5% 16.4% offsetting lower opex from higher R&D grants and putting HK$ EPS at GM % 24.0% 25.0% 25.6% 21.1% 23.8% 25.4% HK$0.041, between CS/Street at HK$0.024/HK$0.124, respectively. OpM % 3.0% 3.8% 5.3% 1.2% 3.7% 6.6% Net income 147 150 181 107 169 246 4Q17 sales and margin guidance well below EPS (US$) $0.029 $0.030 $0.037 $0.021 $0.033 $0.053 SMIC guided 4Q17 sales up 1% to 3% QoQ, below CS/Street +5/+8% ADR EPS (US$) $1.45 $1.48 $1.85 $1.06 $1.67 $2.65 HK EPS (HK$) $0.225 $0.230 $0.287 $0.164 $0.259 $0.411 QoQ, respectively, and putting full-year sales on track to the revised Source: Company data, Credit Suisse estimates, Bloomberg consensus guidance for up mid-to-high single digits, with business remaining slow offsetting 28nm ramp and growth in flash memory, fingerprint

- 15 of 31 - Monday, 20 November 2017

Asian Daily

Tuniu Corporation ------Maintain OUTPERFORM Preliminary 3Q17 non-GAAP breakeven: A firm step towards profitability EPS: ◄► TP: ◄► Ivy Ji / Research Analyst / 852 2101 7951 / [email protected] Kenneth Fong / Research Analyst / 852 2101 6395 / [email protected] ● Tuniu reported preliminary 3Q17 non-GAAP net income of procurement was 40% of GMV in 1H17. The decent revenue growth, Rmb35-40 mn, which beat consensus/CS estimates of net loss of in our view, reaffirms our thesis that thanks to an extensive network of Rmb3 mn/Rmb16 mn. It is the company’s first quarterly profit offline service centre, Tuniu has built entry barriers to protect its since listing. Top-line growth at 52-54% YoY is 4%/3% ahead of market share as the No. 1 player in the online packaged tour segment consensus/CSe. and therefore the cut in branding related costs does not pose ● We believe the strong result was driven by: (1) decent GMV imminent threat to growth. growth; (2) take-rate expansion; (3) continued cost saving; and (4) A firm step toward full-year profitability positive operating leverage in the high season. This reaffirms our This is the company’s first quarterly non-GAAP profit since its listing in thesis that Tuniu has built entry barriers to protect its market share 2014 and should help boost confidence in management execution, in and the impact on growth from marketing spending cut is limited. our view. We thus see Tuniu firmly on track to achieve the target of ● This encouraging result should also help boost confidence in full-year non-GAAP breakeven in 2018E on the back of: (1) healthy execution and in achieving full-year non-GAAP breakeven in GMV growth, (2) take-rate expansion thanks to stronger pricing power 2018E. We expect more details on GMV growth, take rate and from direct procurement; (3) margin improvement from efficiency margin progression upon the release of full result on 27 Nov. enhancement and economy of scale; and (4) marketing spending ● Tuniu is now trading at 3.4x/2.3x 2017/18e P/S, at a deep discount to discipline. Meanwhile, the potential lift of the group tour travel ban to Ctrip’s at 6.1x/5.1x. With net cash at 57% of market cap and South Korea (imposed since 2Q17) should also bring a tailwind for improving profitability, we see attractive risk-reward at this level. We growth in the coming year, in our view. await the full result before revisiting our forecasts. Maintain That said, we continue to expect a non-GAAP operating loss in 4Q17 OUTPERFORM. slightly narrowing from 2Q17 mainly due to sequentially slower growth in the light season was well as investment in offline service centres. Bbg/RIC TOUR US / TOUR.OQ Price (17 Nov 17 , US$) 8.97 Rating (prev. rating) O (O) TP (prev. TP US$) 11.00 (11.00) Figure 1: Tuniu preliminary 3Q17 result table (in Rmb mn) 52-wk range (US$) 9.40 - 6.83 Est. pot. % chg. to TP 23 Mkt cap (US$ mn) 878.8 Blue sky scenario (US$) 13.75 Year ended on 31 Dec 3Q16 4Q16 1Q17 2Q17 3Q17 ADTO-6M (US$ mn) 0.6 Grey sky scenario (US$) 9.35 Net revenue 525 322 456 460 800-810

Free float (%) 39.2 Performance 1M 3M 12M YoY % chg 53% 52% 52-54% Major shareholders HNA Group Cost of sales (271) (153) (204) (219) Absolute (%) 15.9 31.3 (2.6) Relative (%) 11.7 18.6 (52.1) Non-GAAP gross profit 254 169 252 242

Year 12/15A 12/16A 12/17E 12/18E 12/19E Non-GAAP GP margin 48.4% 52.4% 55.2% 52.3% Revenue (Rmb mn) 7,645 10,548 2,173 3,118 4,128 Adjusted operating exp. EBITDA (Rmb mn) (1427) (2484) (927) (193) 24 Research and development (166) (168) (157) (144) Net profit (Rmb mn) (1344) (2259) (668) (16) 200 Sales and marketing (465) (366) (219) (187) EPS (CS adj. Rmb) (16.2) (18.2) (5.4) (0.1) 1.6 G&A (148) (181) (127) (145) - Change from prev. EPS (%) n.a. n.a. n.m n.m 0 Non-GAAP operating income (522) (536) (247) (230) - Consensus EPS (Rmb) n.a. n.a. (5.05) (0.24) 1.48 Non-GAAP net profit/(loss) (493) (508) (227) (212) 35-40 EPS growth (%) n.m. n.m. n.m. n.m. n.m. Source: Company data, Credit Suisse estimates. P/E (x) n.m. n.m. n.m. n.m. 37.0 Dividend yield (%) 0 0 0 0 0 The full 3Q17 result is scheduled to be released on 27 November and EV/EBITDA (x) (2.4) (1.9) (4.6) (21.8) 165.0 a conference call will be held on 8 am EST (9 pm HKT) on 27 Nov P/B (x) 1.7 1.7 2.0 2.1 2.0 ROE (%) (56.8) (57.8) (16.3) (0.4) 5.6 (Monday) to discuss the results. We think the key focus areas would Net debt(cash)/equity (%) (73.1) (26.4) (41.9) (44.1) (48.7) be: (1) details on GMV growth and take-rate trend in 3Q17; (2) gross

Note 1: Tuniu is a leading online travel agency in China with a focus on leisure travel products. It is margin progression; (3) growth and profit outlook for 4Q17 and 2018. now the No.1 player in the online package tour market.

Click here for detailed financials Maintain OUTPERFORM Preliminary non-GAAP breakeven in 3Q17 Tuniu’s share price has been under pressure in the past 12 months On 17 November, Tuniu announced preliminary 3Q17 non-GAAP net mainly on investor concerns on growth and profit outlook. The stock is income of Rmb35-40 mn, which beat consensus and CS estimate of now trading at 3.4x/2.3x 2017/18e P/S, at a deep discount to Ctrip’s at non-GAAP net loss of Rmb 3mn and Rmb16 mn, respectively. We 6.1x/5.1x. With net cash at 57% of market cap, we think the downside believe the strong result was achieved through: (1) decent top-line here is quite limited. Meanwhile, valuation for the franchise value is at growth; (2) continued efforts in cost saving and (3) positive operating historic low despite improving profitability, which is unjustified, in our leverage in the peak summer travel season. view. We continue to see attractive risk-reward in the stock. We await the release of the full result on 27 Nov before revisiting our model and Preliminary net revenue of Rmb800 mn-810 mn implies 52%-54% forecasts. Maintain Outperform rating and target price unchanged. YoY growth, mid-point of which is 6% ahead of the guidance range of 45-50% and also beat consensus and CS estimates by 4% and 3%, respectively. We believe the solid revenue growth was driven by a combination of healthy GMV growth and take-rate expansion underpinned by the direct procurement initiatives. To recall, direct

- 16 of 31 - Monday, 20 November 2017

Asian Daily

India India Market Strategy ------Moody's upgrade of India ratings stalls the unwarranted self-reinforcing bond yield spike that was in progress Neelkanth Mishra / Research Analyst / 91 22 6777 3716 / [email protected] Prateek Singh / Research Analyst / 91 22 6777 3894 / [email protected] ● In the first change to India's ratings in more than a decade (the Sharply reduces the risk of a self-reinforcing currency dip last one was in Jan-07 by S&P), Moody's has upgraded India to This improves the outlook for net foreign portfolio inflows over the next Baa2, one notch above S&P and Fitch's BBB-. Past rating six months. As the last rating change was a long time back, it may not changes by different agencies have not been close to each other. be completely appropriate to use that precedent, but bond inflows did ● Moody's highlights the following four reasons for the upgrade: (1) pick up in the quarters following the upgrade (Fig 2). better medium-term growth due to reforms (it quotes GST, IBC, DBT Figure 2: Portfolio flows improved in 2003-04 after ratings upgrade and demonetisation), even as GST and demonetisation have FPI flows improved 20 undermined growth near-term; (2) low risk of a sharp rise to debt-to- post ratings upgrade GDP ratio; (3) FRBM Review and MPC; and (4) PSU Bank Recap. 15 ● This improves the outlook for net foreign portfolio inflows over the 10 next six months (Fig 2). FDI increase is also likely over time, as 5 risk weights attached to India projects are brought down, but one 0 needs one more agency to upgrade for it to be meaningful. -5 ● Gap between the 10-yr yield and repo rate had spiked recently (Fig 3), -10 given uncertainty around the macro (fiscal/GST, oil, recent inflation Quarterly FPI Inflows ($ bn) -15 spike). These remain uncertainties but the self-reinforcing bond yield Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 spike should get stalled as the bond-sellingweak INRbond-selling Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates loop is disrupted. This reduces near-term risks for the market and is also good for banks' ability to raise foreign bonds. FDI increase is also likely over time, as the risk weights attached to India projects are brought down, though this would be meaningful if at Figure 1: Past rating changes by the rating agencies least two of the three main rating agencies upgrade. The near-term Moody's S&P Fitch uncertainty on fiscal/currency remains (even though we believe 12 Rating Date Rating Date Rating Date month outlook is benign). But the uncertainty had elevated the risk of Ba2 28-Jul-99 BB+ 07-Dec-92 BB+ 08-Mar-00 a self-reinforcing bond yield spike—this stalls that process. Ba1 03-Feb-03 BB 22-Oct-98 BB 21-Nov-01 Baa3 22-Jan-04 BB+ 02-Feb-05 BB+ 21-Jan-04 Figure 3: Term premium, or gap between repo and 10yr yield was high Baa2 16-Nov-17 BBB- 30-Jan-07 BBB- 01-Aug-06 11 3 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates 10 The first rating change in more than a decade 2 In the first change to India's ratings in more than a decade (the last 9 one was in Jan-07 by S&P), Moody's has upgraded India to Baa2, one 8 1 notch above S&P and Fitch's BBB-. Past rating changes by different agencies have not been close to each other (Fig 1). 7 0 The agency highlights the following four reasons for the upgrade: 6 -1 5 ● Decline in general government debt burden over the medium term RBI Repo Rate G-Sec Yield Diff (RHS) as economic and institutional reforms (Moody's quotes GST, NPL 4 -2 May-01 May-03 May-05 May-07 May-09 May-11 May-13 May-15 May-17 resolution, Direct Benefits Transfer (DBT) and demonetisation) have lifted the medium-term economic potential, even as "GST Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates and demonetisation have undermined growth over the near term"; Figure 4: High FPI Bond holdings acted as an overhang for INR ● While debt to GDP of 68% is much higher than the Baa median of 4 80 44%, 90% is locally owned, and the reforms "have reduced the risk of a sharp increase in debt, even in potential downside 2 70 scenarios". "Robust domestic demand has enabled the 60 0 government to lengthen the maturity of its debt stock over time." It 50 expects GST and expenditure efficiency through DBT to have -2 gradual improvement in India's fiscal metrics; 40 -4 ● Efforts to improve fiscal transparency and accountability through 30 the new FRBM Act, and the improvement in transparency and the -6 20 efficiency of monetary policy through the setup of the MPC; and Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 FPI Debt Inflows ($bn) FPI Investment ($bn, RHS) ● PSU bank recap addresses "a key weakness in India's sovereign credit profile" even if it increases debt ratio by 0.8% of GDP. Source: the BLOOMBERG PROFESSIONAL™ service, NSDL, Credit Suisse estimates

- 17 of 31 - Monday, 20 November 2017

Asian Daily

United Spirits Ltd. ------Maintain OUTPERFORM Price hikes and a potential fall in input costs a heady cocktail EPS: ▲ TP: ▲ Arnab Mitra / Research Analyst / 91 22 6777 3806 / [email protected] Rohit Kadam, CFA / Research Analyst / 91 22 6777 3824 / [email protected] ● The spirits industry has started receiving price hikes in price- from ~38% in FY13 to 58% in FY17, but standalone EBITDA margins controlled markets after a lull of 3-4 years. In the past few went down 13-11.5% in this same period. quarters, 6-7 states have given price hikes. Franchising seems to be working on the pricing front: USL has ● Price hikes had dried up after Diageo took over United Spirits in franchised out the low margin 'Popular' segment brands in over 13 2012. The sudden change in the ways of doing business by the states, which have price control. This was earnings-accretive for USL market leader led to state beverage corporations denying price as it retained gross contribution and also lowered working capital. hikes. As a result, the gains of premiumisation for United Spirits However, the main gain from this arrangement in our view is that went into mitigating cost inflation and did not flow to EBITDA. these franchisees would be in a better position to negotiate price hikes ● USL changed its business model in FY17 where it franchised out with state governments, which would then flow for the entire industry. popular segment brands in price-controlled states with an USL's franchisee fees are a fixed amount and the franchisee gets to understanding that they will be in a better position to negotiate for keep the upside, if any, as and when price hikes come through. price hikes. This seems to be working as of now. ● A new tailwind emerging is lower input costs. Media reports Glut in sugarcane production can cause a sharp drop in spirit (including Business Standard) indicate that prices of molasses have prices which could be a margin tailwind from FY19: Media reports fallen sharply due to the jump in sugarcane production. We increase (Business Standard) indicate that there has been a sharp drop in earnings by ~10%. We also move to an EV/EBITDA valuation as prices of molasses by ~45%, which is the key input used in India for margins are beginning to normalise. We value USL on EV/EBITDA spirit manufacturing. This is because the sugarcane production has of 27x, TP moves to Rs3,600; maintain OUTPERFORM. seen a major increase in FY18, driven by higher acreage and normal rains. The government's first estimate of sugarcane production Bbg/RIC UNSP IN / UNSP.BO Price (16 Nov 17, Rs) 3,111.80 increase for FY18 is 10% YoY after two years of declines. As Rating (prev. rating) O (O) TP (prev. TP Rs) 3,600 (2,600) 52-wk range (Rs) 3111.8 - 1785.7 Est. pot. % chg. to TP 16 molasses is a bulky by-product of the sugar crushing process, the Mkt cap (Rs/US$ bn) 452.2/ 7.0 Blue sky scenario (Rs) 4,500 prices can see a sharp drop if there is oversupply. The government ADTO-6M (US$ mn) 23.1 Grey sky scenario (Rs) 1,800 will try to support demand by increasing the procurement by oil Free float (%) 45.0 Performance 1M 3M 12M marketing companies, but this takes time as these contracts are Major shareholders Diageo Absolute (%) 24.4 19.5 65.0 based on tenders and have many specifications of supply. Lower Relative (%) 21.8 13.5 37.5

Year 03/16A 03/17A 03/18E 03/19E 03/20E molasses spirit prices will help lower costs for popular brands in states Revenue (Rs mn) 239,209 257,568 256,419 291,972 326,481 like Maharashtra and Karnataka, where USL has retained the popular EBITDA (Rs mn) 9,646 9,892 12,469 16,493 20,343 business, and will also help in McDowells No1, which is USL's largest Net profit (Rs mn) 1,575 3,578 5,989 9,231 12,153 Prestige+ brand. EPS (CS adj. Rs) 10.9 24.8 41.6 64.0 84.3 - Change from prev. EPS (%) n.a. n.a. 9.3 8.9 Figure 1: Sugarcane production likely to be up after two years of decline - Consensus EPS (Rs) n.a. n.a. 36.4 52.0 64.4 15.0% EPS growth (%) (63.4) 127.2 67.4 54.1 31.7 Sugarcane production growth (% YoY) P/E (x) 284.8 125.4 74.9 48.6 36.9 10.0% Dividend yield (%) 0 0 0 0 0 EV/EBITDA (x) 50.6 49.4 38.3 28.7 22.8 5.0% P/B (x) 27.4 25.1 18.5 13.4 9.8 ROE (%) 9.2 20.9 28.5 32.0 30.8 0.0% Net debt (cash)/equity (%) 218.9 206.9 106.9 61.0 26.2

Note 1: United Spirits Limited (USL) is an India-based company engaged in the business of -5.0% manufacture, purchase and sale of beverage alcohol (spirits and wines), including through tie-up units/ brand franchisees. -10.0%

Click here for detailed financials -15.0% Price hikes have re-started in the spirits industry after a gap of 3- FY12 FY13 FY14 FY15 FY16 FY17 FY18E 4 years: We have had broad-based price hikes from multiple states Source: Government of India, Credit Suisse for the spirits industry in the past 6 months. Some price hikes like Maharashtra tax hikes could be a near term risk: Maharashtra has Andhra Pradesh (5-7%) will flow in from 3Q FY18. We see this as a hiked the taxes on beer recently but is yet to do the same for spirits. trend and more states could follow. This comes after almost 3-4 years There is anticipation that this may happen as the Local Body tax (LBT) of no price hikes for the spirits industry. Price hikes of ~3% annually at was subsumed in GST. This could be a near-term headwind as the national level were a norm in the spirts industry, with most states Maharashtra is 20-25% of USL's volumes. However, we understand that giving a hike once in 2-3 years. However, this changed after 2012 the gains of lower LBT have been retained mostly by trade and thus a when Diageo took over United Spirits. The sudden change in the ways hike in taxes may be funded by normalising those margins again. of doing business by the market leader led to state beverage corporations, who control pricing decisions, denying price hikes. As a result, all the gains of premiumisation for United Spirits could not even mitigate the basic cost inflation in the business and did not flow down to EBITDA margins. USL's revenue mix of Prestige+ segment went up

- 18 of 31 - Monday, 20 November 2017

Asian Daily

Malaysia IOI Corporation Berhad ------Maintain UNDERPERFORM One-off gain boosts profit EPS: ◄► TP: ◄► Ella Nusantoro / Research Analyst / 62 21 2553 7917 / [email protected] ● IOI reported its 1Q18 with net profit above our estimates, but Crude palm oil (CPO) production for the period improved by 10% QoQ operational-wise, it is in line. Its net profit increased sixfold to (-1% YoY) reaching 191th tonnes. CPO production is in line with our RM347 mn on 5% lower revenue YoY to RM2.2 bn. This was on full-year estimate, representing 25% of our estimated 78th tonnes. the back of higher results on its investments, forex gain, as well as Palm kernel oil production increased by 9% QoQ (-3% YoY) reaching higher operating profit (+18% YoY). 42th tonnes in 1Q18. ● Operating profit on its plantation business was 11% lower YoY to We maintain an UNDERPERFORM rating on the stock, with target RM278 mn, or 69% of the total. This is mostly derived from the price of RM4.6. Our target price equates to 24x P/E 2018E and 17x higher CPO prices that increased 7% YoY to RM2,645, while its EV/EBITDA 2018E with EV/hectare at US$52,732. production was relatively flat. ● Crude palm oil (CPO) production for the period improved by 10% Figure 1: IOIB—quarterly results QoQ (-1% YoY) reaching 191th tonnes. CPO production is in line RMmn 1Q17 2Q17 3Q17 4Q17 1Q18 QoQ YoY % to CS18E chg chg CS with our full-year estimate, representing 25% of our estimated Revenue 2,330 4,627 3,473 3,698 2,206 -40% -5% 18% 12,518 78th tonnes. Palm kernel oil production increased by 9% QoQ (- Operating profit 329 530 292 272 387 42% 18% 27% 1,433 3% YoY) reaching 42th tonnes in 1Q18. EBIT 345 565 348 302 418 38% 21% ● We maintain an UNDERPERFORM rating on the stock, with Pre-tax profit 136 182 402 367 450 23% 231% 32% 1,388 target price of RM4.6. Our target price equates to 24x P/E 2018E. Net profit 52 58 316 307 347 13% 564% 34% 1,024 Margins analysis: and 17x EV/EBITDA 2018E with EV/hectare at US$52,732. Operating 14% 11% 8% 7% 18% 11% Bbg/RIC IOI MK / IOIB.KL Price (17 Nov 17 , RM) 4.44 Pre-tax 6% 4% 12% 10% 20% 11% Rating (prev. rating) U (U) TP (prev. TP RM) 4.60 (4.60) Net 2% 1% 9% 8% 16% 8% 52-wk range (RM) 4.81 - 4.35 Est. pot. % chg. to TP 4 % to FY: Mkt cap (RM/US$ mn) 27,900.3/ 6,706.8 Blue sky scenario (RM) 4.90 Revenue 18% 37% 27% 29% 18% ADTO-6M (US$ mn) 3.7 Grey sky scenario (RM) 4.30 Operating profit 23% 38% 21% 19% 27% Free float (%) 45.1 Performance 1M 3M 12M Pre-tax profit 10% 14% 30% 27% 32% Major shareholders The Lee Family Absolute (%) (2.2) (2.6) 1.4 Net profit 5% 6% 32% 31% 34% (47.9%) Relative (%) (0.6) 0.4 (4.5) Revenue: Year 06/15A 06/16A 06/17E 06/18E 06/19E External 37 80 59 59 64 8% 71% Revenue (RM mn) 11,542 11,739 12,871 12,522 11,373 Manufacturing 2,290 4,544 3,412 3,634 2,140 -41% -7% EBITDA (RM mn) 1,581 1,813 2,013 1,989 2,079 Others 3 3 3 5 3 -36% -3% Net profit (RM mn) 52 630 1,177 1,152 1,226 Operating profit breakdown: EPS (CS adj. RM) 0.01 0.10 0.19 0.18 0.19 Plantation 311 363 200 234 278 19% -11% - Change from prev. EPS (%) n.a. n.a. 0 0 0 Manufacturing 41 232 13 76 123 62% 200% - Consensus EPS (RM) n.a. n.a. 0.17 0.18 0.21 EPS growth (%) (95.9) 1,123.7 86.9 (2.1) 6.4 Others 1 4 2 2 2 -25% 38% P/E (x) 543.9 44.4 23.8 24.3 22.8 Operating margin Dividend yield (%) 2.0 1.8 2.1 2.1 2.2 Plantation 53% 56% 36% 42% 47% EV/EBITDA (x) 20.7 18.4 16.4 16.5 15.6 Manufacturing 2% 5% 0% 2% 6% P/B (x) 4.0 3.9 3.6 3.4 3.2 Others 42% 124% 73% 51% 60% ROE (%) 0.7 8.9 15.9 14.5 14.4 Production (Th Tonnes) Net debt(cash)/equity (%) 66.2 73.4 64.7 58.0 49.6 FFB 873 828 655 800 870 9% 0% 24% 3,551 Note 1: IOI is engaged in investment holding and the cultivation of oil palm and processing of palm CPO 194 185 138 174 191 10% -1% 25% 781 oil. It is also involved in property development, property investment and resource-based manufacturing. PK 44 40 32 39 42 9% -3% 23% 187

Click here for detailed financials *Financial year ended June Source: Company data, Credit Suisse estimates IOI reported its 1Q18 with net profit above our estimates, but operational wise, it is in line. Its net profit increased sixfold to RM347 mn on 5% lower revenue YoY to RM2.2 bn. It was on the back of higher results on its investments, forex gain as well as higher operating profit (+18% YoY). Operating profit on its plantation business was 11% lower YoY to RM278 mn, or 69% of the total. This is mostly derived from higher CPO prices that increased 7% YoY to RM2,645, while its production was relatively flat. As at the end of Sep-17, the company has a net debt position of RM5,414 mn, with a cash position of RM1,391 mn. Debt-to-equity ratio stood at 0.9x for the period. Current ratio for the company stood at 1.5x with current assets at RM3,604 mn and current liabilities at RM2,381 mn.

- 19 of 31 - Monday, 20 November 2017

Asian Daily

Philippines Philippines Market Strategy ------Maintain UNDERWEIGHT 3Q results review: Roughly in line Dan Fineman / Research Analyst / 66 2 614 6218 / [email protected] Justin Cimafranca / Research Analyst / 63 2 858 7756 / [email protected] ● All index stocks have reported, and in aggregate, the numbers Downgrades continue were roughly in line. The street continued to cut 2018 forecasts in October and the first half of th ● Aggregate adjusted 9M earnings for index stocks ex-PLDT reached November. November was the 15 -straight month of downgrades. By 74.7% of consensus’ full-year forecasts, a bit above the six-year contrast, the region has seen 17 straight months of upgrades (Figure 3). median and average figures, but excluding SMC, the figure fell below Figure 3: 2018 consensus EPS forecasts—Phils lagging region

the historical levels. Consumer stocks missed significantly, largely 105% due to URC, and conglomerates ex-SMC missed slightly. Property,

led by ALI, performed the best. 100% ● Consensus forecasts are falling again in November for the 15th straight month. In contrast, the street continues to raise forecasts 95% for the region. 90% ● Consensus expects 12% EPS growth next year. We consider it

optimistic and anticipate downgrades. The Philippines has 85% underperformed the region by 15 pp YTD. We believe that earnings misses have played a big role. 80% Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17

Figure 1: 9M earnings as percent of full year—2017 roughly in line with Philippines - EPS17 NJA - EPS17 historical trends Source: the BLOOMBERG PROFESSIONALTM service estimates, Credit Suisse 79% calculations

77% 3Q GDP not as strong as it appears 75% The in-line 3Q earnings of the listed companies contrast with the big

73% positive surprise on headline 3Q GDP, which hit 6.9% against

71% consensus forecasts of 6.6%. We believe that the headline figure

69% masks considerable weakness, especially for the listed companies.

67% Government spending, mainly recurrent rather than infrastructure, and decelerating imports, a reflection of weak domestic demand, drove the 65% 2011 2012 2013 2014 2015 2016 2017 Full 2017 Market headline GDP beat. Consumption tumbled to 4.5% from 5.9% in 2Q, Market ex-SMC

9M Market Earnings as percent of FY earnings hitting a seven-year low, while fixed asset investment fell from 9.4% to 7.1%. Government spending has limited direct links with earnings, Source: Company data, the BLOOMBERG PROFESSIONALTM service estimates, Credit Suisse calculations (ex-PLDT for all years; 2017 adjusted for one-off MBT provision) while consumption and investment are crucial. It, therefore, should not be surprising that earnings failed to match the headline GDP beat A bit behind historical benchmarks (see QT: Strategy implications of 3Q GDP report & QT: Philippines 3Q earnings appear roughly in line. From 2011-16, index stocks generated earnings the first three quarters equal on average to 73.9% 3Q17 GDP Weakest consumption spending in seven years). of full-year net income, with a median of 74.1%. This year's 74.7% Excessive optimism on 2018 moderately exceeds both benchmarks. But if we exclude SMC, the We expect downgrades to continue next year. For seven straight aggregate falls short of historical figures (Figures 1 and 2). Our years, EPS growth has lagged nominal GDP growth, but the street's calculations adjust for MBT's one-off provision for a fraud case and 2018 forecast implies an EPS/GDP multiplier of about 1.2x. delete PLDT due to distortion from the Beacon sale. Figure 2: 9M17 earnings summary Market 9M17 as % of full- 9M as % of full Difference year consensus year - 2011-16 (pp) forecast average Banks 71.4 75.5 -4.1 Banks ex-MBT write-off 73.8 75.5 -1.6 Conglomerates 73.9 72.0 1.9 Consumer 68.5 71.6 -3.2 Telco 86.4 77.5 8.9 Telco ex-PLDT 73.4 81.0 -7.6 Property 74.2 72.4 1.8 Utilities 77.1 76.9 0.2 Petron + ICTSI 90.4 76.6 13.8 Total ex-MBT writeoff 75.6 74.1 1.5 Total ex-PLDT & MBT writeoff 74.7 73.9 0.8 Total ex-SMC, PLDT & MBT writeoff 74.4 74.9 -0.5 Source: the BLOOMBERG PROFESSIONALTM service, Credit Suisse estimates

- 20 of 31 - Monday, 20 November 2017

Asian Daily

South Korea Korea Economics ------KRW strength could temper BoK hawkishness Ray Farris / Economist / 65 6212 3412 / [email protected] Trang Thuy Le / Economist / 852 2101 7426 / [email protected] ● USDKRW broke below the important technical level of 1110 this We agree with our technical team that the risk is towards further won week, and has since fallen further on the back of the weaker USD, strength in the near term, but we think a number of factors would rebound in equity sentiment, and receding North Korea tensions. prevent a sharp break-away from 1100: (1) won strength is facing ● This sharp move in FX is facing strong official resistance. The strong official resistance; (2) The three-month forecast horizon takes BoK said that the won has appreciated "fast in a short time", and us into early 2018, when Korea's current account surplus seasonally FX authority is closely monitoring markets. We suspect the BoK is weakens; (3) Any positive surprise on US tax and/or hawkish Fed intervening in the FX market, buying USD and triggering a could deliver a boost to the USD in early 2018; and (4) The change in correction in USDKRW from the day low of 1093 to 1097. Korea's FX hedging behaviour we expect will likely present a drag on the won over the longer term, which was behind our 1120 12-month ● With USDKRW sitting at our three-month target of 1100, we now forecast (see report). expect a new range to be established around this level. Near-term risk is skewed to the downside of 1100 but a substantial break The fourth factor above refers to our expectation that lingering North lower will likely face strong BoK resistance. Korea risks will drive foreign investors to hedge their inflows into ● We have recently called for the BoK to begin hiking rates in its 30 Korea assets, while domestic institutions are increasingly under November meeting, with one more hike penciled in 1H 2018 pressure to invest abroad unhedged. The Korea's National Pension (see report). The risk we now see is that further won strength into the Fund has planned to reduce the currency hedging on its overseas meeting could lead the BoK to temper its hawkishness in an attempt bond investments to 0% in 2018 from 50% in 2017, a change that to dampen expectation for future hikes. There is also a possibility of it would require roughly $10 bn of buying for unwinding hedges. The delaying the first hike altogether into 2018. Full report. drag on the KRW would be stronger if other domestic institutions follow suit. Figure 1: USDKRW broke below a technically important level Won strength in facing strong official's resistance… 1210 The Bank of Korea (BoK) said this morning (17 Nov) that the won has

1190 USDKRW appreciated "fast in a short time", and the FX authority is closely monitoring markets. 1170 We also suspect that the BoK is intervening in the FX market, buying USD and triggering a correction in USDKRW from the day low of 1093 1150 to 1097 currently. 1130 …and may temper BoK hawkish shift The bigger risk we see is further won strength into the BoK's 30 1110 November meeting may lead it to temper its hawkishness for fear of further encouraging long won positions. 1090 Jan-17 May-17 Sep-17 We have recently called for the BoK to begin hiking rates in its 30 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service November meeting, with one more hike pencilled in 1H 2018 (see Favourable backdrop for the won report). Positive 3Q GDP growth in Korea and the normalisation in the A number of recent positive developments including the upside Korea-China relations support a growth recovery outlook, while wage surprises to Korea growth data, BoK's hawkish shift, and receding growth could start to pick up following the minimum wage hike and North Korea risks and tensions with China have combined with a improvement in domestic demand. weak USD backdrop and a recovery in equity sentiment to drive the won stronger. We maintain this call for now but note that further won strength into the meeting could lead the BoK to temper its hawkishness in an The break in USDKRW below 1110 is a technically important one – as attempt to dampen expectation for future hikes. There is also a our technical team highlighted in their note, which they think opens the possibility of it delaying the first hike altogether into 2018. The market bear trend for 1065/1059. is pricing for about one hike in the next three months and a total of two In FX, we had expected the won to strengthen towards our three- hikes over the year ahead and could be vulnerable to a BoK month forecast of 1100 on the back of solid growth and export disappointment. performance (see Asia FX: Prepare for lower lines in the sand). USDKRW is now sitting at our target, and we expect a new range to be formed around 1100.

- 21 of 31 - Monday, 20 November 2017

Asian Daily

Korea Property Sector ------Uptrend in the housing price, of late, less likely to sustain Minseok Sinn / Research Analyst / 82 2 3707 8898 / [email protected] Hoonsik Min / Research Analyst / 82 2 3707 3761 / [email protected] ● Korea's housing transaction volume of 63K units in October 2017 variables for the property market outlook. Additionally, while CS’ Asia went down by 42% YoY and 25% MoM. Tightened regulation on Economics team expects BoK to raise its standard rate by 25 bp in Nov new mortgage loan access appeared to directly hit liquidity and (the first rate hike since 2011) and another 25 bp hike in 1H18, the rate investment sentiment in the property market. hike could be one of more impactful variables for the direction of the ● Despite the stabilisation package revealed in early August, CS’ price property market, considering: (1) the surge in money inflow due to the index for the metro Seoul area indicates that the average apartment absence of a better investment alternative under the continued low price in the region has gone up by ~3% since end-July. interest environment has been one of the key drivers for the market’s sharp rebound in recent years and (2) Korea’s household debt is ● However, slowing transaction activities, of late, indicate that the currently at a record-high level. 50 bp rise in the mortgage rate could housing price uptrend is less likely to sustain, considering that the solely deteriorate the housing affordability in Seoul by c.4.5%, in our transaction volume has been a key indicator of housing price in the estimates. market’s history, while we expect the squeezed liquidity to continue depressing transaction activities through 2018. Figure 1: Korea—housing transaction volume ● From a fundamental standpoint, sharp deterioration of housing Oct 2017 10M17 (units) Volume YoY (%) MoM (%) Volume YoY (%) affordability since 2015 and surge of new completions in 2H17- The metro Seoul area 31,487 -48 -32 428,995 -8 1H19E are the key overhangs for Korea’s housing price outlook, in The provinces 31,723 -34 -17 371,315 -6 our view. Additionally, while CS Asia Economics team expects Korea 63,210 -42 -25 800,310 -7 BoK to raise its standard rate by 50 bp by June 2018, we estimate Korea (Avg, 2007-16) 86,1601 757,2762 that housing affordability in Seoul could deteriorate by c.4.5% if the 1: Average monthly transaction volume for Oct over 2007-2016. 2: Average transaction volume for Jan-Oct over 2007-16. Source: MoLIT, Credit Suisse mortgage rate rises by 50 bp. Figure 2: The metro Seoul area—housing transaction volume and Valuation Metrics housing price change Company Ticker Rating Price Target Year P/E (x) P/B ('000 units) (MoM, %) 100 2.0 (x) Housing price chg (RHS) 80 Housing transaction volume 1.5 Local price T T+1 T+2 T+1 60 1.0 Daelim Industrial 000210.KS O 82,600 120,000 12/16 4.5 5.1 0.6 40 0.5 Hyundai E&C 000720.KS N 36,000 45,000 12/16 12.6 8.6 0.6 20 0.0 KCC 002380.KS N 394,500 440,000 12/16 18.2 16.3 0.6 - -0.5

Hanssem 009240.KS N 167,000 170,000 12/16 22.6 19.0 5.3

Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Jan-07 Source: Company data, Credit Suisse estimates Source: MoLIT, Credit Suisse Housing transaction volume in Oct down by 25% MoM Figure 3: The metro Seoul area—changes in apartment price Korea's housing transaction volume of 63K units in October 2017, Size Dec- Dec- Dec- Jul- Oct- down by 42% YoY and 25% MoM, was 27% lower than the market’s Region Apartment (W mn) (sqm) 06 13 16 17 17 historical average transaction volume for the same month over the last Gangnam, Seoul Daechi Eunma 102 1,125 783 1,183 1,338 1,358 Apgujeong Hyundai 116 1,390 1,190 1,825 1,925 1,975 ten years. Tightened regulation on new mortgage loan access (a key Gangbuk, Seoul Namsan Town 106 560 530 635 670 700 part of the government’s comprehensive property market stabilisation Gongdeok Samsung 3 106 675 643 745 780 845 package, revealed on 2 August; LINK) appeared to directly hit liquidity The metro Bundang Hanshin 106 735 585 648 715 785 and investment sentiment in the property market. Seoul area Ilsan Gangchon 106 505 325 400 400 400 Credit Suisse price index (Jan. 2004 = 100) 166 136 155 191 197 Housing price is continuing to rise, despite the stabilization Source: Kookmin Bank, Credit Suisse estimates package; however, price uptrend is less likely to sustain Figure 4: Seoul—housing price-to-household income ratio and Credit Credit Suisse’s apartment price index for the metro Seoul area indicates Suisse’s housing affordability index that the average apartment price in the region has gone up by ~3% since (100 = Median household income equals with income (x) capable of mortgage loan repayment) end-July, despite the announcement of the stabilisation package in early 12 Price-to-income ratio - Seoul 100 CS housing affordability index - Seoul (RHS) August. However, slowing transaction activities, of late, indicate that the 10 80 housing price uptrend is less likely to sustain, considering that the transaction volume has been a key indicator of the housing price in the 8 60

market’s history, while we expect the squeezed liquidity to continue 6 40

Jan-97 Jan-02 Jan-07 Jan-12 Jan-17 Jan-98 Jan-99 Jan-00 Jan-01 Jan-03 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-13 Jan-14 Jan-15 Jan-16 depressing transaction activities in the market through 2018. Jan-96 Source: Kookmin Bank, Credit Suisse estimates Deterioration of affordability and surge of new housing completions also indicate limited room for further upside Sharp deterioration of housing affordability since 2015 and surge of new housing completions in 2H17-1H19 are the key overhangs for Korea’s housing price outlook, in our view, while we believe: (1) income growth outlook, (2) affordability, (3) cost spread between owning and renting, (4) supply-demand balance and (5) regulations are the five fundamental

- 22 of 31 - Monday, 20 November 2017

Asian Daily

Thailand Netbay ------NOT COVERED Low penetration of e-transaction in Thailand Thaniya Kevalee / Research Analyst / 66 2 614 6219 / [email protected] Siriporn Sothikul, CFA / Research Analyst / 662 614 6217 / [email protected] ● We had a meeting with the CEO discussing the business and Key advantages lie in its human resource capability industry landscape of e-transaction services in Thailand and The CEO believes its human assets are the key advantage of Netbay. market positioning of Netbay, which is focused on BtoG and BtoB. Of the staff strength of 95, 60% are IT engineers and technicians. ● The CEO said Netbay has 70% market share in e-customs volume Netbay provides competitive salaries and fringe benefits (bonus, (the other two gateway providers for Thai Customs Department, health insurance and provident fund). Staff turnover has been low, i.e., TCD, equally split the share). About 90% of TCD’s transactions they lost only a few staff over the previous year. are still paper-based, thus long-term growth potential is high, Comprehensive coverage and competitive pricing keep although he admitted it is not possible to predict when penetration competitors away will rise at a steeper rate. Netbay continues to seek opportunities Netbay provides a one-stop shopping service for customers at very with many government agencies, he added. reasonable prices (transaction costs vary from Bt5 to Bt50). For ● Department of Land Transport (DLT) is still in the process of instance, for exporter and importer customers, apart from dealing with cleaning up its IT platform, but management expects by 1Q18, Thai Customs Department, they have to deal with airports, shipping DLT should be ready, allowing Netbay to launch on-line vehicle companies, airline companies, banks, etc. NetBay’s system allows renewal services for leasing companies. exporters and importers to deal with all these parties in a very simple manner, in management’s view. These factors help keep competitors ● Netbay has outperformed SET index by 171% over the past year away because it is hard for a newcomer to have sufficient resources and now trades at Bloomberg consensus 2017E P/E of 75x and or the capability to provide comprehensive services from day one. Big 2017E P/B of 21.9x, with higher ROE and faster earnings growth e-commerce players such as Alibaba and Lazada are focusing more than Thai peers, based on annualised 9M17 results. on BtoC, which requires different platform and skill sets and they are Figure 1: Netbay financials not interested in penetrating Netbay’s segment. Management says Bbg/RIC NETBAY TB Price (17 Nov 17, Bt) 43.00 Netbay is also not interested at this stage to move to BtoC due to high Ratring (prev. rating) Not rated TP (prev. TP Bt) n.a. fixed cost requirements, which demands massive scale-up. Shr. outstanding (mn) 200 52-wk range (Bt) 13.4-44.0 DLT project may begin early 2018 ADTO- 6m (mn) 1.5 Mkt cap (Bt/US$ bn) 8,800/0.26 ADTO-6m (US$ mn) 1.7 Netbay has been granted permission to become the gateway provider Free float (%) 19 Performance 1M 3M 12M for online vehicle registration renewal services. The key obstacle is Major shareholders Absolute (%) 18.1 64.5 214.3 that DLT has not yet fixed and revamped its own IT platform, but this Relative (%) 19.3 51.1 171.3 should be completed soon. Netbay aims to provide the service for Year 12/13A 12/14A 12/15A 12/16E 12/17E leasing companies, focusing first on four-wheel vehicles. The fee has Revenue (Bt mn) n.a. 185 224 273 n.a. not been finalised yet, but this should not exceed Bt50/transaction (the EBITDA (Bt mn) n.a. 38 70 98 n.a. current maximum rate it is charging). Netbay continues to work on Net profit (Bt mn) n.a. 16 65 89 107 EPS (Bt) n.a. 0.1 0.4 0.5 0.5 opportunities to provide similar services to many other government EPS Growth (%) n.a. n.a. 272.7 19.5 0.1 agencies (names not provided). P/E (x) n.a. n.a. n.a. 35.7 81.5 High operating leverage offers room for margin improvement Dividend yield (%) n.a. n.a. n.a. 1.3 n.a. In 3Q17, Netbay’s net profit margin improved to 38% from 36% in EV/EBITDA (x) n.a. n.a. n.a. 32.7 n.a. P/B (x) n.a. n.a. n.a. 10.2 n.a. 1H17 (29% in 2015). The CEO said that the current engineer force ROE (%) n.a. n.a. 49.3 35.7 20.9 (accounts for majority of cost and expenses) can be utilised a lot more Net debt (cash)/equity (%) n.a. (132.6) (109.0) (87.7) n.a. for additional revenue generation. 2017E is based upon annualised 1H17. Source: Bloomberg consensus estimates, Credit Suisse research Figure 2: Valuation comparison Low penetration of e-transaction services among BtoG and 2017E profit growth* 2017 P/E (x) * P/B (x) ROE (%) * BtoB NETBAY 26% 75 21.9 31% Netbay’s CEO, Mr Pichit Viwatrujirapong, believes the penetration of AIT 12% 12 2.1 17% INET Loss -25 1.2 -5% e-transaction services in Thailand is still low at 5%, particularly within MFEC 1% 14 1.1 8% BtoG and BtoB sectors, which are its primary focus. For instance, for MEYG.MK # 29% 29 10.2 40% Thai Customs Department (Netbay claims to have about 70% market * Based upon annualised 9M17 earnings; # based upon 2018 as its year end is 31 Mar. share of the e-customs volume), there are about 200 custom forms, Source: Company data, the BLOOMBERG PROFESSIONALTM service consensus but only about 10% are recorded electronically. He believes a similar estimates ratio can be applied to other government agencies too, which should leave huge room for growth over the long term. Nonetheless, he admitted that it is difficult to say when penetration will rise at a steeper rate. This requires a change in mindset of both the public and private sectors. Also, there are not enough players in the market to drive acceleration of transition to a paperless society.

- 23 of 31 - Monday, 20 November 2017

Asian Daily

Muang Thai Leasing Company Limited------Maintain OUTPERFORM Upgrade cycle to continue EPS: ▲ TP: ▲ Atul Sethi / Research Analyst / 66 2 614 6211 / [email protected] ● After positive 3Q17 results, we upgrade our 2017-2019E EPS by For 2017E, we revise up our year-end YoY loan growth target from 2-3%, and raise our target price of MTLS to Bt47 from Bt44. 50% to 53% to reflect this. Our loan growth targets of 35% and 25% ● 3Q17 results came in ahead of market expectations, primarily due for 2018E and 2019E remain unchanged. Our forecasts also to faster-than-expected branch expansion. MTLS is on track to incorporate a moderate decrease in credit costs after a drop in 3Q17: end the year with 2,400 branches, 200 more—equal to 9% we now have a 255 bp credit cost assumption for 2017E. Whilst the higher—than the company's original target of 2,200 branches. We drop in credit costs in 3Q17 is welcome, we note that due to quarterly believe it likely that MTLS will have close to 3,000 branches in its reversals of previously set provisions from collateral sales, credit cost network by end-2018E. trends have a reasonably high degree of fluctuation. Also incorporated in our upgrades is a moderate cut to fee income. ● Our revised earnings forecasts factors in higher loan growth estimates—now 53% for 2017E vs. 50% earlier—and credit costs Upgrade cycle to continue of 255 bp commensurate with the drop seen in 3Q17. We We see room for further consensus earnings upgrades following 3Q17 maintain loan growth estimates of 35% and 25% for 2018E and results. 2017E and 2018E earnings have been raised by 22% and 2019E, respectively. We are 6% higher than consensus for 2018E 30%, respectively, by the street YTD, and we believe will continue. earnings, and see room for upgrades following 3Q17 results. Consenus' 2017E net profit forecast assumes a 4% QoQ drop in ● Our revised target price is calculated using the Gordon Growth earnings for 4Q17, which appears highly unlikely to us. We view model, and factors in a reduction in risk-free rate from 3.0% to upgrades as likely to continue to support further share price 2.5%. Our new target price of Bt47 implies 22% upside to current outperformance. share price. Target price revised to Bt47 We also upgrade our Gordon Growth model-based target price to Bbg/RIC MTLS TB / MTLS.BK Price (17 Nov 17 , Bt) 38.50 Rating (prev. rating) O (O) TP (prev. TP Bt) 47.00 (44.00) Bt47 per share. This reflects upgrades to our 2018E earnings, and 52-wk range (Bt) 39.8 - 22.2 Est. pot. % chg. to TP 22 also a reduction in our risk free rate assumption from 3.0% to 2.5%. Mkt cap (Bt/US$ mn) 81,620.0/ 2,486.9 Blue sky scenario (Bt) 52.00 Our revised target price implies 21% upside to current share price. ADTO-6M (US$ mn) 11.4 Grey sky scenario (Bt) 30.00

Free float (%) 24.9 Performance 1M 3M 12M MTLS currently trading at ~10% discount to LT P/E multiple Major shareholders Petraamphai family Absolute (%) 2.7 18.5 69.6 Despite some market observer comments that MTLS is expensive, we (70%) Relative (%) 1.7 9.6 53.6 note that the stock is currently trading at a 12-month forward P/E Year 12/15A 12/16A 12/17E 12/18E 12/19E multiple of 24.3x, which is close to a 10% discount to LT average of Pre-prov Op profit (Bt mn) 1,062.8 2,159.4 3,828.5 5,481.7 7,163.0 Net profit (Bt mn) 825 1,464 2,446 3,490 4,553 26.6x. We believe that MTLS' multiples are justified when looked at EPS (CS adj. Bt) 0.39 0.69 1.15 1.65 2.15 side-by-side with earnings growth prospects. MTLS is also on an - Change from prev. EPS (%) n.a. n.a. 2 3 2 upward ROE trajectory, with 3Q17 ROE of close to 33%, the highest - Consensus EPS (Bt) n.a. n.a. 1.13 1.56 2.07 level in a single quarter. The key risk to our view on MTLS is EPS growth (%) 32.1 77.6 67.1 42.7 30.5 P/E (x) 99.0 55.7 33.4 23.4 17.9 unfavourable changes in the regulatory environment, but on balance Dividend yield (%) 0.5 0.3 0.0 0.0 0.0 we view the prospects for growth and further penetration into the BVPS (CS adj. Bt) 2.67 3.16 4.31 5.96 8.11 underbanked market as outweighing these concerns. P/B (x) 14.4 12.2 8.9 6.5 4.7 ROE (%) 15.3 23.7 30.9 32.0 30.5 Figure 1: MTLS trading at ~10% discount to 12m forward P/E mult avg ROA (%) 7.5 7.8 8.0 8.1 8.2 (x) Tier 1 ratio (%) — — — — —

Note 1: MTLS provides loans backed by vehicle titles in Thailand. As of 1H17, MTLS has over 2,000 50 branches in its nationwide network.

45 Click here for detailed financials Upgrade earnings and target price post 3Q17 results 40 After an impressive set of 3Q17 results, we upgrade our earnings and 35 +1 STDV target price for MTLS. Our earnings forecasts are increased by 2-3% for 2017-2019E, bringing us 4-6% above consensus in forecast years. 30 Avg = 26.6x Branch openings beating schedule, again 25 The main driver behind our earnings upgrade is higher forecast for 20 –1 STDV loan growth, due to faster-than-expected branch expansion. MTLS is 15 on track to have 2,400 branches by the end of the year, 200 more— equal to 9% higher—than the company's original target of 2,200 10

branches. This also represents upside on 2018E year-end branch

Oct-15 Apr-15 Apr-16 Oct-16 Apr-17 Oct-17

Jun-17 Jun-15 Jun-16

Feb-15 Feb-16 Feb-17

Dec-14 Aug-16 Dec-15 Dec-16 Aug-17 Aug-15 target, currently set at 2,800. We believe it is likely that MTLS will Source: Bloomberg, Company data, Credit Suisse estimates. have close to 3,000 branches by the end of 2018E.

- 24 of 31 - Monday, 20 November 2017

Asian Daily

Srisawad Power 1979 Public Company Limited ------Maintain OUTPERFORM 3Q17 miss likely a blip EPS: ▼ TP: ▲ Atul Sethi / Research Analyst / 66 2 614 6211 / [email protected] ● SAWAD's 3Q17 results came in weaker than expected, resulting Loan yield near bottom in a share price drop of 5% yesterday (16 Nov). Whilst there was Two factors drove a dip in loan yields in the quarter, the effect of both an element of surprise in the results, we do not anticipate the we expect to soon dissipate. First, the main factor driving decreasing factors driving the miss to be a drag going forward. yields YTD has been putting new loan contracts under hire-purchase ● Loan yields were lower than expected, due to higher-than- structure, under which SAWAD pays 7% VAT. At 4Q16, HP-based expected mix of contracts booked under the hire-purchase contracts represented 19% of total receivables, but jumped to 28% at contract structure, under which SAWAD pays 7% VAT on interest 1H17. As at the end of 3Q17, SAWAD has begun to structure new income. As at the end of 3Q17, SAWAD has begun to structure lending contracts under BFIT, akin to their legacy collateral-backed new bookings under BFIT, akin to the legacy collateral-backed structure. This structure does not require VAT payments, and as such structure—where no VAT payments are required—and should blended yields should increase from 4Q17. increase blended yields going forward. Another factor that resulted in the yield decrease in 3Q17 was BFIT ● We trim our 2017E yield assumption on the 3Q17 drop, resulting branches not being open on weekends to process loan registrations, in an earnings cut of 3%. We leave FY18-19 estimates resulting in delay in recognition of interest income during the quarter. unchanged, and see a potential upside to 2018E yields. Branches and BFIT operations are now open through weekend. ● We revise up our Gordon Growth model-based TP by reducing SAWAD just started to use BFIT for new loans in 3Q17, causing what our risk-free rate assumption from 3.0% to 2.5%. Our new TP of we see as a one-time impact in the quarter. Bt80 (from Bt75) implies 25% upside to the current share price. Trim 2017E yields, but highlight potential upside in 2018E We trim our FY2017E yield from 25.4% to 24.7% on the back of the Bbg/RIC SAWAD TB / SAWAD.BK Price (17 Nov 17 , Bt) 64.25 3Q17 drop, incorporated into our 3% cut for EPS in 2017E. We also Rating (prev. rating) O (O) TP (prev. TP Bt) 80.00 (75.00) incorporate other housekeeping items in our revisions, such as 52-wk range (Bt) 72.8 - 35.6 Est. pot. % chg. to TP 25 Mkt cap (Bt/US$ mn) 69,860.0/ 2,128.6 Blue sky scenario (Bt) 85.00 increasing our estimate for non-interest income, in line with 9M17 ADTO-6M (US$ mn) 10.2 Grey sky scenario (Bt) 56.00 numbers. We leave our 2018-19 estimates unchanged, and highlight

Free float (%) 36.5 Performance 1M 3M 12M potential upside to loan yield forecasts as SAWAD begins to book new Major shareholders Thida Kaesbootda Absolute (%) (7.9) 33.9 67.1 contracts under BFIT without attracting VAT payments. Our loan yield (31%) Relative (%) (8.9) 25.0 51.1 estimate for 2017 is 25%, more than 300 bp under SAWAD's yields Year 12/15A 12/16A 12/17E 12/18E 12/19E Pre-prov Op profit (Bt mn) 1,837.2 2,681.0 3,731.1 4,775.7 6,005.4 prior to switching contract structure to the HP-based format. Net profit (Bt mn) 1,336 2,005 2,617 3,464 4,348 Increase in credit costs baked in EPS (CS adj. Bt) 1.32 1.94 2.50 3.31 4.16 - Change from prev. EPS (%) n.a. n.a. (3) 0 0 The 3Q17 increase in credit costs was not a surprise. The main driver - Consensus EPS (Bt) n.a. n.a. 2.48 3.14 3.99 of the jump was a Bt40 mn special provision made at BFIT during the EPS growth (%) 35.4 46.7 29.0 32.4 25.5 quarter, utilising the benefit from a Bt83 mn gain from sale of P/E (x) 48.6 33.1 25.7 19.4 15.4 investments at BFIT. Our implied 4Q17 credit cost assumption of Dividend yield (%) 0.3 0.0 0.0 0.0 0.0 BVPS (CS adj. Bt) 4.7 6.5 9.1 12.4 16.6 1.8% leaves room for further provisioning for SAWAD to bring loan P/B (x) 13.7 9.8 7.1 5.2 3.9 loss reserve closer to BOT requirements, and we believe they are in ROE (%) 32.6 34.5 32.1 30.9 28.8 good shape. LLR constitutes 4.5% of total loans, comparable with ROA (%) 12.0 11.2 10.0 10.1 10.1 Thai banks average of 5%, and NPL coverage ratio is 93%—up from Tier 1 ratio (%) — — — — —

Note 1: SAWAD provides loans backed by vehicle titles in Thailand. As of 1H17, SAWAD has over 61% at the end of 2016. Thai banks have a higher NPL coverage 2,200 branches in its nationwide network. average of 137%, but in SAWAD's case, higher collateral value

Click here for detailed financials provides relatively more cushion to what the BOT may require, as 3Q17 results not a cause for broader concern compared to banks. In any case, SAWAD has been guiding the SAWAD's 3Q17 results came in weaker than expected, prompting market that they do not foresee a big impact from complying with BOT probing questions from some investors, but we think there is little requirements. reason to be overly concerned. There were two items in particular which grabbed the market's attention and resulted in a miss. First, a Increase target price up to Bt80 drop in loan yields from 25.4% in 1H17 to 24.2% in 3Q17. Second, an We increase our Gordon Growth model-based target price to Bt80 per increase in credit costs from 1.07% in 1H17 to 1.76% in 3Q17. Whilst share, which reflects a reduction in our risk free rate assumption from the drop in loan yields came as a surprise, we do not anticipate a 3.0% to 2.5%. SAWAD's share price reacted negatively to the results further decrease. Some of this was a one-off and thus should not be a yesterday (16 Nov), but is up again today (17 Nov): We would view factor going forward. Separately, the increase in credit costs was not a any dip in share price or weakness due to a perceived drop in yields major surprise: our full-year estimate of 1.50% does assume an as an opportunity to accumulate the stock. increase in 2H17. Even if we were to make an onerous assumption that credit costs increase further to 2.0% in 4Q, FY17E credit costs would be 1.55%, close to our number.

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Recently Published Research Date Title Author(s) Tel. E-mail Mon 20 Nov China Basic Materials Sector - Key takeaways from recent Yang Luo 852 2101 6328 [email protected] trip Peter Li 852 2101 6320 [email protected] Mon 20 Nov Singapore Banks Sector - 3Q17: Setting up for a bright Danny Goh 60 3 2723 2083 [email protected] FY18 Dawei Lee 65 6212 3004 [email protected] Mon 20 Nov ZhongAn Online P&C Insurance Co., Ltd. - Data Thomas Chong 852 2101 6164 [email protected] technology makes the difference Charles Zhou 852 2101 6177 [email protected] Alex Xie 852 2101 7462 [email protected] Eddie Zhou 852 2101 6192 [email protected] Fri 17 Nov India Corporate Health Tracker - IBC key to NPA Ashish Gupta 91 22 6777 3895 [email protected] resolution Kush Shah 91 22 6777 3862 [email protected] Anurag Mantry 91 22 6777 3942 [email protected] Thu 16 Nov Asia Pacific Equity Strategy - Net foreign buying: Buyers Sakthi Siva 65 6212 3027 [email protected] on the sidelines Kin Nang Chik 852 2101 7482 [email protected] Thu 16 Nov Asia Pacific Equity Strategy - Reporting Season Sakthi Siva 65 6212 3027 [email protected] Scorecard: Breadth improves Kin Nang Chik 852 2101 7482 [email protected] Thu 16 Nov Asia Telecoms Sector: 3Q17: Quarterly earnings and Colin McCallum, CA 852 2101 6514 [email protected] trend analyser Sunil Tirumalai 91 22 6777 3714 [email protected] Eric Cha 82 2 3707 3764 [email protected] Varun Ahuja, CFA 65 6212 3017 [email protected] Camille Xu 852 3969 5761 [email protected] Viral Shah 91 22 6777 3827 [email protected] Billy Lee 852 2101 6529 [email protected] Thu 16 Nov India Market Strategy - 2Q18: best in 3 years? But can't Neelkanth Mishra 91 22 6777 3716 [email protected] extrapola Prateek Singh 91 22 6777 3894 [email protected] Thu 16 Nov Jump-Start Manish Nigam 852 2101 7067 [email protected] Thu 16 Nov PT Bank Danamon Indonesia Tbk - MUFG bid: Six Sanjay Jain 65 6306 0668 [email protected] questions come to mind Laurensius Teiseran 62 21 255 37931 laurensius.teiseran@credit- Rikin Shah 65 6212 3098 suisse.com [email protected] Thu 16 Nov Taiwan AutoTech Sector - Buy lower-ASP AutoTech Pauline Chen 886 2 2715 6323 [email protected] components Angela Pan 886 2 27156352 [email protected]

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Companies mentioned Advncd Info Tech (AIT.BK, Bt29.0) Agricultural Bank of China (1288.HK, HK$3.62) Agricultural Bank of China (601288.SS, Rmb3.66) Angang Steel Company Ltd (000898.SZ, Rmb6.31, OUTPERFORM, TP Rmb8.5) Angang Steel Company Ltd (0347.HK, HK$6.86, OUTPERFORM, TP HK$10.0) Anhui Conch Cement Co. Ltd. (0914.HK, HK$35.05, OUTPERFORM, TP HK$42.0) Anhui Conch Cement Co. Ltd. (600585.SS, Rmb28.34, OUTPERFORM, TP Rmb35.7) Anhui Jianghuai Automobile Group Co Ltd (600418.SS, Rmb9.21) Apple Inc (AAPL.OQ, $171.1) Axis Bank Limited (AXBK.BO, Rs541.9) Ayala Land (ALI.PS, P42.55) Bank of Baroda (BOB.BO, Rs183.55) Bank of China Ltd (3988.HK, HK$3.78) Bank of China Ltd (601988.SS, Rmb3.92) Bank of Chong Qing (1963.HK, HK$6.16) Bank of Communications (3328.HK, HK$5.82) Bank of Communications (601328.SS, Rmb6.22) Bank of India (BOI.BO, Rs207.95) Bodycote Plc (BOY.L, 873.0p) Broadcom Corp. (BRCM.OQ^B16) Canara Bank (CNBK.BO, Rs388.45) China Citic Bank (0998.HK, HK$5.02) China Citic Bank (601998.SS, Rmb6.13) China Construction Bank (0939.HK, HK$6.81) China Construction Bank (601939.SS, Rmb6.99) China Everbright Bank (601818.SS, Rmb4.09) China Everbright Bank (6818.HK, HK$3.66) China Merchants Bank Co Ltd (3968.HK, HK$31.3) China Merchants Bank Co Ltd (600036.SS, Rmb29.38) China Minsheng Banking Co Ltd (1988.HK, HK$7.51) China Minsheng Banking Co Ltd (600016.SS, Rmb8.54) China Shenhua Energy Company Limited (1088.HK, HK$19.08, OUTPERFORM, TP HK$23.0) China Shenhua Energy Company Limited (601088.SS, Rmb23.37, NEUTRAL, TP Rmb19.6) Chongqing Changan Automobile Company Limited (000625.SZ, Rmb13.16) Chongqing Rural Commercial Bank (3618.HK, HK$5.31) CNOOC (0883.HK, HK$10.6, OUTPERFORM, TP HK$14.5) Ctrip.com International, Ltd. (CTRP.OQ, $47.74) Daelim Industrial (000210.KS, W82,600, OUTPERFORM, TP W120,000) Dassault Aviation (AVMD.PA, €1302.0) DBS Group Holdings Ltd (DBSM.SI, S$23.34, OUTPERFORM, TP S$27.4) F-GIS (6456.TW, NT$250.5) Geely Automobile Holdings Ltd (0175.HK, HK$27.45) Global Foundries (Unlisted) Great Wall Motor (2333.HK, HK$8.88, OUTPERFORM, TP HK$13.5) Great Wall Motor (601633.SS, Rmb11.49) Guangzhou Automobile Group (2238.HK, HK$20.7, OUTPERFORM, TP HK$25.0) Guangzhou Automobile Group (601238.SS, Rmb27.36) Hanssem (009240.KS, W167,000, NEUTRAL, TP W170,000) Honda Motor (7267.T, ¥3,670) HuaLi (Unlisted) Hyundai E&C (000720.KS, W36,000, NEUTRAL, TP W45,000) Hyundai Motor Company (005380.KS, W157,000) ICICI Bank (ICBK.BO, Rs325.1, OUTPERFORM, TP Rs347.0) Indian Bank (INBA.BO, Rs412.75) Industrial & Commercial Bank of China (1398.HK, HK$6.19) Industrial & Commercial Bank of China (601398.SS, Rmb6.03) Internet Thai (INET.BK, Bt4.2) Int'l Container Terminal Inc. (ICT.PS, P102.4) IOI Corporation Berhad (IOIB.KL, RM4.44, UNDERPERFORM, TP RM4.6) Karur Vysya Bk (KARU.BO, Rs120.4) KCC Corp (002380.KS, W394,500, NEUTRAL, TP W440,000) Kia Motors (000270.KS, W33,850) Maanshan Iron & Steel Co Ltd (0323.HK, HK$3.56, OUTPERFORM, TP HK$5.0) Maanshan Iron & Steel Co Ltd (600808.SS, Rmb4.19, NEUTRAL, TP Rmb4.2) Mazda Motor (7261.T, ¥1,522) Metropolitan Bank & Trust Co (MBT.PS, P92.5) MFEC (MFEC.BK, Bt4.92) Muang Thai Leasing Company Limited (MTLS.BK, Bt38.5, OUTPERFORM, TP Bt47.0) MY E.G. Services Berhad (MYEG.KL, RM2.14) Netbay (NETBAYm.BK, Bt43.0) NetEase.com (NTES.OQ, $326.24, OUTPERFORM, TP $377.0) Nissan Motor (7201.T, ¥1,070) Orient Bank Comm (ORBC.BO, Rs128.45) Oversea-Chinese Banking Corp Ltd (OCBC.SI, S$11.45, NEUTRAL, TP S$12.6) Pernod-Ricard (PERP.PA, €127.7) PetroChina (0857.HK, HK$5.2, NEUTRAL, TP HK$5.0) PetroChina (601857.SS, Rmb8.12) Petron Corporation (PCOR.PS, P9.72) Philippine Long Distance Telephone Company (TEL.PS, P1660.0) Ping An Bank (000001.SZ, Rmb13.18) Postal Savings Bank of China Co., Ltd. (1658.HK, HK$4.44) Powerchip Semiconductor (5346.TWO^L12) Punjab National Bank Ltd (PNBK.BO, Rs190.7) QUALCOMM Inc. (QCOM.OQ, $66.11) San Miguel Corporation (SMC.PS, P113.2)

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Semiconductor Manufacturing International Corp. (0981.HK, HK$11.52, UNDERPERFORM[V], TP HK$11.15) Shenzhen O-film Tech Co., Ltd (002456.SZ, Rmb23.92) Sinopec (0386.HK, HK$5.48, OUTPERFORM, TP HK$7.2) Sinopec (600028.SS, Rmb6.0) South Indian (SIBK.BO, Rs30.6) Srisawad Power 1979 Public Company Limited (SAWAD.BK, Bt64.25, OUTPERFORM, TP Bt80.0) State Bank Of India (SBI.BO, Rs337.4) Syndicate Bnk (SBNK.BO, Rs89.7) Taiwan Semiconductor Manufacturing (2330.TW, NT$238.0) Tesla Motors Inc. (TSLA.OQ, $312.5) Thales (TCFP.PA, €88.0) Toyota Motor (7203.T, ¥6,917) TPK Holdings (3673.TW, NT$88.2, NEUTRAL[V], TP NT$110.0) Tuniu Corporation (TOUR.OQ, $8.97, OUTPERFORM, TP $11.0) Union Bank of India (UNBK.BO, Rs170.4) United Microelectronics (2303.TW, NT$15.6) United Overseas Bank Ltd (UOBH.SI, S$24.7, OUTPERFORM, TP S$29.3) United Spirits Ltd. (UNSP.BO, Rs3111.8, OUTPERFORM, TP Rs3600.0) Universal Robina Corporation (URC.PS, P136.5) Volkswagen (VOWG_p.DE, €158.75) Yes Bank Ltd (YESB.BO, Rs306.45) ZhongAn Online P&C Insurance Co., Ltd. (6060.HK, HK$74.65, NEUTRAL[V], TP HK$75.5)

Disclosure Appendix Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between - 5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (65% banking clients) Neutral/Hold* 40% (59% banking clients) Underperform/Sell* 13% (54% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers- ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit- suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf .

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Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. 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No information or communication provided herein or otherwise is intended to be, or should be construed as, a recommendation within the meaning of the US Department of Labor’s final regulation defining "investment advice" for purposes of the Employee Retirement Income Security Act of 1974, as amended and Section 4975 of the Internal Revenue Code of 1986, as amended, and the information provided herein is intended to be general information, and should not be construed as, providing investment advice (impartial or otherwise). Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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