Asia Pacific Equities Research Asian Daily (Asia Edition)

APAC Quantitative & Systematic, Taiwan Downstream, Taiwan Semiconductor Manufacturing

16 July 2021 Asia Equity Research

Top of the Pack China

APAC Quantitative & Systematic Strategy 5 China Healthcare Sector 10 New report: No direction yet — Growth / Value factor volatility to remain elevated in Conference call takeaways with CStone (2616.HK, Not Covered): Multiple approval 2H and clinical data catalysts in 2H21 Will Stephens Yang Huang Taiwan Downstream SectorArticle intended for:6 China Industrials Sector 11 2H21 outlook - Be selective Industrial capacity utilisation rate in 2Q hit historical high; robot production in June Pauline Chen up 61% Zhao Zhang Taiwan Semiconductor Manufacturing [2330.TW] 7 New report: Sales upsidejason.chiu#uobkayhian.com.hk continues, GMs back to long-term range of 50% China Property Sector 12 Randy Abrams Maintain OUTPERFORM Slowdown in sales/investment growth continued in Jun-2021 Jianping Chen LG Chem Ltd. [051910.KS] 8 xEV battery peers' rally should support LG Chem's valuation from here China Coal Energy Company Limited [1898.HK] 13 Hoonsik Min Upgrade to NEUTRAL 1H21 preliminary results beat market expectation Yang Luo Maintain OUTPERFORM China Sportswear Sector 9 New report: June 2021 online sales -3% YoY, but leading domestic brands grew Li Ning [2331.HK] 14 26-34% YoY Healthy online sales growth continued in June 2021 Jesalyn Wong Jesalyn Wong Maintain OUTPERFORM

Ping An [2318.HK] 15 CS Pic of the Day Improving NB sales in June, but solid and sustainable recovery takes time Charles Zhou Maintain OUTPERFORM

Shandong Gold [1787.HK] 16 1H21 prelim results miss, net loss due to disruptions in operations Peter Li Downgrade to NEUTRAL

Sinopec Shanghai Petrochemical [0338.HK] 17 1H21 profit alert suggests a weak 2Q21; uncertainty ahead in 2H21 Horace Tse Maintain NEUTRAL

Tongkun Group Co. Ltd [601233.SS] 18 1H21 profit alert a beat; higher contribution from ZPC Phase II to drive further upside in 2H21 Horace Tse Maintain OUTPERFORM

Xtep International [1368.HK] 19 Raised guidance; core Xtep brand to grow >20% over next five years Jesalyn Wong Maintain OUTPERFORM

Yunnan Aluminium Co.,Ltd. [000807.SZ] 20 1H21 prelim results beat In Jun-2021, the overall online sportswear industry declined 3% YoY Yang Luo Maintain OUTPERFORM on Tmall/Taobao, a turnaround from high growth in May (+41%), dragged by international brands. This brings 2Q21 to +7% YoY (vs ZhongAn Online P&C Insurance Co., Ltd. [6060.HK] 21 +37% in 1Q21). Divergence in overall growth trends between foreign Solid premiums in June and 1H21 preview and domestic brands continued in Jun. Dominant foreign brand Nike Charles Zhou Maintain NEUTRAL recorded -34%YoY in Jun (-33% in May), while Adidas decline narrowed to 33% on new Yeezy SKU launches (-52% in May). Zhongji Innolight [300308.SZ] 22 Domestic brands have outperformed the last three consecutive 2Q21 NI guidance miss; fundamentals intact for 2H21 datacom upcycle months, with Li Ning/Anta/Xtep at +26/+34/+26% YoY in Jun. Clive Cheung Maintain OUTPERFORM

Research by Markets

This publication contains summaries of recent Credit Suisse research reports to bring notable Research to your attention. ALL FULL REPORTS OF THE SUMMARIES IN THIS PUBLICATION CAN BE ACCESSED THROUGH THE LINKS PROVIDED. THE FULL REPORTS INCLUDE RELEVANT DISCLOSURE APPENDIXES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURES AND INFORMATION ABOUT THE STATUS OF NON-U.S ANALYSTS. For the Equity Research Disclosures click here https://rave.credit-suisse.com/disclosures Friday, 16 July 2021 Hong Kong Connecting clients to corporates

Razer Inc. [1337.HK] 23 APAC Conference Calls 1H21 net profit tracking ahead; momentum to sustain in 2H21 Jerry Su Maintain OUTPERFORM LONGi Green Energy Technology (601012 CH) – Company update and solar market outlook (Mandarin) Date 20 July, 16:00 HKT Info Please email Ting Zhang India ASEAN Internet expert insights: A deep dive in to the digital economy JSW Steel Ltd [JSTL.BO] 24 Date 21 July, 11:00 / 21:00 HKT Spread check: Indian spreads continue to weaken; now at Feb-2021 level Info Please email Crystal Choi Prateek Singh Maintain UNDERPERFORM Sportswear (Adidas, Nike) distributor call discussion Larsen & Toubro [LART.BO] 25 Date 21 July, 16:00 HKT The tail is wagging the dog; core itself has legs such as cyclical, public capex Info Please email Coco Xu improvement, self-help (Wcap), plus valuations Lokesh Garg Maintain OUTPERFORM Dial in/passcode will be given upon registration; *Only for calls with replays (available 4 hours after live call); Hong Kong: 800963117; Singapore: 8006162305; Wipro Ltd [WIPR.BO] 26 China Mainland: 4006322162; UK: 8082340072; New report: 1QFY22 review: BeatArticle on revenue but adjustedintended for one-offs operating for:US: 18554525696; Australia: 1800153898; profit largely in line India: 180030000542; Japan: 120390774; Varun Ahuja Maintain NEUTRAL Philippines: 180016120166; South Korea: 079861361602

Malaysia jason.chiu#uobkayhian.com.hkCorporate Days / Conferences Korea Unicorn & Decacorn Day CIMB Group Holdings Bhd [CIMB.KL] 27 Date 22 - 23 July 2Q21 preview : Weaker QoQ, but likely to be ahead of ROE target Info Virtual Event Danny Goh Maintain OUTPERFORM Malaysia ESG Day Date 27 - 28 July Philippines Info Virtual Event

India Consumer Day Emperador Distillers Inc. [EMP.PS] 28 Increasing its global profile Date 10 - 12 August Info Virtual Event Hazel Tanedo Maintain OUTPERFORM

Indonesia Corporate Day 29 Metropolitan Bank & Trust Co [MBT.PS] Date 12 - 13 August Need to see market share recovery Info Virtual Event Danielo Picache Maintain NEUTRAL Taiwan Non-Tech Day Date 16 - 18 August Singapore Info Virtual Event

Singapore Property Sector 30 9th China Internet C-Level Virtual Conference Primary sales of 872 units in June; in good stead for 2H21 with resumption of Date 30 August - 01 September launches Info Hong Kong Louis Chua 6th Credit Suisse Japan Kyoto+ Conference Date 01 - 03 September South Korea Info Virtual Event

Korea Consumer Monthly 31 22nd Asian Technology Conference Date 06 - 10 September New report: 2Q preview overall solid, 3Q to be affected by social distancing Info Taipei A-Hyung Cho Macau Gaming Day Naver [035420.KS] 32 Date 23 September 2Q21 preview: Solid top-line growth as the biggest beneficiary of digital ad market Info Virtual Event acceleration Soyun Shin Maintain OUTPERFORM 2nd Japan New Economy Day Date 28 - 30 September Info Virtual Event Taiwan 12th Annual China Investment Conference TXC Corp. [3042.TW] 33 Date 01 - 05 November 2Q preliminary result in line; 3Q sub-seasonal on NB supply constraint Info Shenzhen Pauline Chen Maintain NEUTRAL 3rd Japan Corporate Day Date 17 - 19 November Info Virtual Event

Asian Daily (Asia Edition) 2 Friday, 16 July 2021 Key Changes

EPS TP

Up/ (% change) T+1 T+2 Chg Rating Dn

Li Ning 11.5 6.8 23.5 11.0 O Shandong Gold (H) (95.7) (10.3) (28.9) 5.5 N (O) Shandong Gold (A) (95.7) (10.3) (24.9) 6.3 N (O) TSMC (0.5) (0.0) 0.0 9.9 O TXC 9.1 9.2 20.8 8.2 N ZhongAn (16.7) (2.5) (6.0) (5.6) N Tongkun 26.8 17.3 6.3 19.9 O Razer Article239.0 intended127.3 2.9 69.1 O for: Sinopec Shanghai Petrochem (H) (12.5) (0.9) (9.5) 5.6 N Sinopec Shanghai Petrochem (A) (12.5) (0.9) (11.8) (20.8) U Xtep 18.3 22.2 30.3 17.6 O Yunnan Aluminium jason.chiu#uobkayhian.com.hk68.4 48.0 8.7 21.3 O LG Chem 1.1 5.6 32.4 10.0 N (U) Chinacoal (H) 44.4 40.0 34.7 35.2 O Chinacoal (A) 44.4 40.0 24.4 35.8 O Wipro 7.0 5.3 15.0 (0.1) N Innolight (14.6) (14.3) (0.6) 57.6 O Metrobank (12.4) (8.4) 2.5 9.9 N Naver (0.1) 2.9 9.6 26.9 O L&T 0.0 0.0 4.2 16.5 O

Asian Daily (Asia Edition) 3 Friday, 16 July 2021 Asian Indices - Performance Global Indices

% change Latest 1D % 1W % 3M % YTD % %change Latest 1D % 1W % 3M % YTD % ASX300 7,330 (0.2) (0.0) 3.9 11.5 DJIA 34,933 0.1 0.7 2.6 14.1 CSEALL 7,988 0.6 2.3 5.1 17.9 S&P 500 4,374 0.1 0.4 4.9 16.5 Hang Seng 27,996 0.8 3.1 (3.4) 2.8 NASDAQ 14,645 (0.2) (0.1) 4.3 13.6 HS H- SOX 3,289 (0.4) 0.8 0.5 17.7 10,174 1.1 3.6 (7.7) (5.3) Share EU-STOX 3,561 (0.2) 2.0 4.2 14.6 HS Red 3,828 1.0 (0.1) (7.6) 0.8 Chip FTSE 7,097 0.1 0.9 1.1 9.9 JCI 6,047 1.1 0.1 (0.6) 1.1 DAX 15,683 (0.7) 1.7 1.4 14.3 KLSE 1,521 0.6 0.8 (5.4) (6.5) CAC-40 6,535 (0.4) 2.2 3.9 17.7 KOSPI 3,286 0.7 1.0 2.7 14.4 10 YR LB 1.341 (0.6) 3.6 (14.7) 47.1 KSE100 47,700 0.4Article(0.7) intended5.3 9.0 for:2 YR LB 0.227 0.0 15.8 37.4 93.8 NIFTY 50 15,854 0.0 0.8 8.5 13.4 US$:E 1.184 0.0 (0.0) (1.2) (3.1) NIKKEI 28,279 (1.2) 0.6 (4.7) 3.0 US$:Y 109.8 (0.2) 0.0 0.9 6.4 TOPIX 1,940 jason.chiu#uobkayhian.com.hk(1.2) 1.0 (1.1) 7.5 GOLD 1,827 1.1 1.3 3.6 (3.7) PCOMP 6,728 (1.6) (2.8) 3.6 (5.8) VIX 16.33 (4.6) 0.8 (1.4) (28.2) Source: Credit Suisse Rave SET 1,576 0.4 2.1 1.7 8.7 STI 3,138 (0.5) 1.0 (2.0) 10.3 TWSE 18,034 1.1 0.9 5.1 22.4 VNINDEX 1,294 1.1 (5.9) 4.5 17.2

Source: Credit Suisse Rave Asian currencies (vs US$) Asian Indices

% Target Target Index EPS grth.(%) P/E (x) Performance Latest 1D % 1W % 3M % YTD % change 3M 12M T+1 T+2 T+1 T+2 1D% 1M% YTD% A$ 0.748 (0.0) 0.6 (3.3) (2.8) 0.79 0.8 Asia x 37.8 12.0 16.0 14.3 (0.4) (3.0) 2.6 Bt 32.6 0.0 0.2 4.5 8.6 30.9 30.5 Japan Asia Pac x D 23,013 0.0 0.0 (0.2) (0.2) n.a. n.a. 39.2 11.2 16.3 14.7 (0.3) (3.0) 3.3 JP HK$ 7.77 0.0 (0.0) (0.1) 0.2 7.76 7.8 Australia 29.8 17.3 19.8 16.9 0.1 (0.9) 12.1 JPY 109.8 (0.2) 0.0 0.9 6.4 109.0 107.0 China 16.8 18.5 16.4 13.8 (0.5) (4.4) (4.4) NT$ 27.91 (0.2) (0.4) (1.5) (0.6) 31.0 31.0 Hong 32.1 13.5 18.6 16.4 (1.2) (1.3) 7.8 P 50.19 (0.0) (0.0) 3.9 4.5 47.2 47.0 Kong PRs 158.9 0.3 (0.1) 4.2 (0.5) n.a. n.a. India 33.3 16.6 23.4 20.1 0.2 (0.3) 14.7 RM 4.2 (0.1) 0.4 1.7 4.4 4.08 4.05 Indonesia 27.6 20.7 15.8 13.1 (1.0) (7.6) (12.6) Rmb 6.46 (0.1) (0.5) (0.9) (1.0) 6.3 6.29 Japan 21.3 11.2 16.7 15.0 (0.2) 0.2 8.9 Rp 14,495 0.1 (0.2) (0.4) 3.2 14,100 14,000 Korea 99.3 5.0 11.9 11.3 (0.3) 0.1 8.1 Rs 74.52 0.1 (0.3) (0.0) 2.0 74.0 73.5 Malaysia 107.4 (6.0) 12.5 13.3 (0.4) (4.9) (8.9) S$ 1.35 (0.1) 0.0 1.4 2.4 1.31 1.29 Pakistan 26.3 28.1 8.0 6.3 (0.2) (4.6) (10.4) W 1,141 (0.3) (0.5) 2.2 5.2 1,090 1,080 Philippines 53.4 24.6 20.3 16.3 0.6 (1.4) (3.9) Source: Credit Suisse Rave Singapore 45.0 13.4 15.1 13.3 (0.5) 0.1 10.7 Taiwan 43.4 2.2 16.4 16.0 0.3 2.3 18.8 Thailand 60.2 14.1 19.5 17.1 (0.4) (4.5) 3.2

Source: Credit Suisse Rave

Asian Daily (Asia Edition) 4 Full Report

Asian Daily 16 July 2021 APAC Quantitative & Systematic Strategy New report: No direction yet — Growth / Value factor volatility to remain elevated in 2H

▪ Factor volatility has been a dominant theme of 2021, it is set to around the market’s reflation story (China RRR, stimulus, ECB, Delta continue. Recent news has called into question the short- to medium- variant), offset by opposing data points (US CPI beat) add to macro/ term reflation story (China RRR, stimulus, ECB, Delta variant) and factor volatility. With continued mixed macro data points and variant should lead to ongoing elevated factor volatility through 2H21. risks, we expect factor volatility to remain elevated throughout the 2H. ▪ Tech weakness has exacerbated volatility, driven by China Tech weakness has exacerbated volatility. Tech+ regulatory concerns. Tech+ underperformance has been an Asia- underperformance has been an Asia-specific story, likely driven by specific story, as US Tech+ is at ATH. Virtually all of AxJ's tech China regulatory concerns. In recent week’s, US Tech+ has resumed underperformance is from China, down 10% YTD. outperformance and is now +18% YTD to all-time highs. Asian Tech+ names have continued to underperform, -50 bp YTD, though virtually Concentration, crowding risks may have eased. Increased ▪ Article intended for:all of the underperformance is attributable to China tech. China Tech+ dispersion has created more opportunities for stock pickers. Since is -10% YTD and -29% from its February peak. With regulatory risks 4Q20, the risk contribution of the top 3 stocks in MXASJ has elevated, if not accelerating, we think pressure is likely to remain on decreased from 35% to 25%, China's contribution is down to 45%. the sector. China internet / software names account for 43% of AxJ ▪ 2H21 recommendations: Focus on stock picking with names that Tech+ weight, making China a key driver of regional sentiment in the have high "stock specific"jason.chiu#uobkayhian.com.hkrisk relative to factor risk; hedge factor risk space. Note our Technology team remains upbeat on 2H tech hardware with our Growth / Value tilt baskets; structural Asian themes (China fundamentals and expect further EPS upgrades. markets liberalisation, Japan reforms, event opportunities) for alpha. Figure 3: China Tech+: significant reversal on regulatory concerns, factor volatility

Figure 1: The Growth vs Value spread recovered quickly after the “Vaccine Monday” drawdown, but the reversal resumed in Feb-2021

Source: the BLOOMBERG PROFESSIONAL™ service, MSCI, FactSet, Credit Suisse

Concentration, crowding risks may have eased. Increased dispersion has created more opportunities for stock pickers. The Source: the BLOOMBERG PROFESSIONAL™ service, MSCI, FactSet, Credit Suisse proportion of risk contribution of the top 3 stocks in MXASJ has decreased from 35% to 25% since 4Q20. At the same time, China's Factor volatility has been a dominant theme of 2021, it is set to risk contribution has declined from 58% to 45%. Japan risk contribution continue. The focal point has been the relationship between Growth is largely unchanged vs last year. Regional pair-wise correlation has and Value, acting as a stand-in for the market’s views around an declined, back to the lows of the last 5 years. Crowding risk, especially exit from the pandemic regime. Value outperforms on reflation hopes, in China, has eased since February, limiting contagion risks. growth stocks rally when hopes ease. This has been true globally, but more acutely in APAC. Growth / value volatility has increased 2x over 2H21 recommendations: focus on stock-picking amidst factor the last 18 months, as total market volatility decreased. headwinds. It is too early to call for a decisive “return of value”; we suggest investors limit exposure to Growth / Value tilts. With factor Figure 2: The increased frequency of 2, 3 sigma moves in the Value/Growth volatility detracting from returns, we recommend a stock picking spread signals the potential for a regime shift in style factor dynamics approach, focusing on idiosyncratic opportunities. Key ideas: (1) We highlight a screen of names that have high "stock specific" risk relative to factor risk; (2) hedge portfolio factor risk with customised hedges, such as our growth/value tilt baskets; (3) focus on alpha strategies with limited factor exposure (China: Southbound Sentiment, Northbound Alpha, A/H Arbitrage; Japan: Subsidiary Privatisation, Capital Management Event, Activist Attention). Continue to monitor macro indicators for signs of a more sustained regime shift before taking high conviction directional factor views.

Source: the BLOOMBERG PROFESSIONAL™ service, MSCI, FactSet, Credit Suisse

The number of 2+ standard deviation moves in the spread over the last 12 months are the highest seen over the last decade. Recent concerns

Research Analysts Will Stephens / 852 2101 7079 Elita Lai / 852 2101 7089 Dave Yin / 852 2101 6325 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 5 Full Report

Asian Daily 15 July 2021 Taiwan Downstream Sector 2H21 outlook - Be selective

▪ Credit Suisse tech team expected 2H21 performance to catch up However, the supply chain performance might be dampened by milder with strong fundamentals, retaining a positive view on semis. In our spec upgrade in iPhone 13 and intensifying competition landscape. coverage, Advantech is our top pick for 2H21 recovery. We also EMS diversification efforts overshadowed by intense iOS like Delta/Largan/Hulane/ZDT/Topoint, despite seeing cost and mix competition. impacting 2H21 margins. Both Hon Hai and Pegatron are exploring EV opportunities, with Supply readiness and regional mix impact 2H21 revenue momentum. ▪ different approaches. Hon Hai aims to build a vertically integrated IPC/auto expected improving supply, while PC/server supply business model with joint effort from the supply chain through MIH constraints worsen in 2H21. Recovery expectations driven by higher open platform and several JVs. Pegatron remains very computing and vaccination rates are found in Europe/US, but not China, per CQi. Article intended for:assembly centric. We expect both companies' diversification efforts ▪ Smartphones are expected to see better near-term momentum on to take time to bear fruit and it may not be sufficient to mitigate the the iPhone's earlier ramp and China smartphones' rebound from 2Q intensifying competition landscape for their top customer. cuts. Milder spec upgrade in iPhone 13 and intensifying competition Figure 3: CS estimated assembly allocation for Apple in 2021 landscape could cap supply chain's performance, vs Apple. ▪ We have expectedjason.chiu#uobkayhian.com.hkYoY growth deceleration to flat in 2H21 for NB components, but see downside given worsening supply constraints and customers' fading urgency in procurement. We still prefer ABF over BT, but expect yield and team reshuffle to create volatility.

CS expected 2H21 performance to catch up with strong fundamentals. Credit Suisse tech team expected 2H21 performance to catch up Source: Company data, Credit Suisse estimates with strong fundamentals, retaining a positive view on semis. In our NB/server data points noises still high. coverage, Advantech is our top pick for 2H21 recovery. We also like Delta/Largan/Hulane/ZDT/Topoint, despite seeing cost and mix We have expected YoY growth deceleration to flat in 2H21 for NB impacting 2H21 margins. components, but see downside given worsening supply constraints and customers' fading urgency in procurement. In our coverage, Catcher Figure 1: Global PC forecasts has 90%+ sales exposure to NB/tablet, with growing risks from share loss in MacBook. Substrates momentum remains strong, but suppliers' performance will depend on execution and yield. Overall, we prefer ABF over BT. Figure 4: Coverage end market exposure Source: Company data, Credit Suisse estimates

Figure 2: Global smartphone forecast

Source: Company data, Credit Suisse estimates

Supply readiness and regional exposure impact 2H21 revenue momentum. IPC/auto expected improving supply, after placing LT NC PO with suppliers (for IPC) and receiving better foundry support (for auto). On the other hand, PC/server supply constraints worsen in 2H21, Source: Company data, Credit Suisse estimates evidenced by ChenBro, recent PC data, and Wiwynn downgrade. Recovery expectations driven by higher vaccination rates are found in Europe/US, but not China, according to CQi's recent highlights: "Why are China’s 840 million vaccinated people not increasing spending?" Smartphone momentum to improve in 2H21 but likely turn negative in 1H22. Smartphones are expected to see better near-term momentum on new iPhone's earlier ramp (by 1-2 weeks for iPhone 13, vs 3-5 weeks delay in iPhone 12) and China smartphones rebound from 2Q cuts. The timing difference, on top of single-digit YoY unit growth expectations for the product cycle, makes 15-20% YoY unit growth in 2H21 reasonable.

Research Analysts Pauline Chen / 886 2 2715 6323 Carol Hu / 886 2 2715 6352 [email protected] [email protected]

Asian Daily (Asia Edition) 6 Full Report

Asian Daily 16 July 2021 Taiwan Semiconductor Manufacturing (2330.TW) Maintain OUTPERFORM Previous Rating: OUTPERFORM New report: Sales upside continues, GMs back to long-term range of Target price (NT$): 675.00 50% Previous target price (NT$): 675.00

▪ 2Q21 sales at upper-half, GMs light of guidance. Sales +2.7% QoQ Price (15-Jul-21, NT$) 614.00 Est. pot. % chg. to TP 9.9 to NT$327.1 bn, the high-end of guidance, driven by strong HPC/ Mkt cap (NT$/US$ mn) 15,921,254 / 570,552 Blue sky scenario (NT$) 783.86 Auto offset by softer smartphone, IoT, and consumer. GMs were 50 Number of shares (mn) 25,930 Grey sky scenario (NT$) 447.92 Free float (%) 87.3 Performance 1M 3M 12M bp light of mid-point at 50% from 2% FX depreciation, N5 dilution, 52-wk range (NT$) 673 - 358 Absolute (%) 0.8 0.7 69.1 slower cost improvement, and absence of inventory revaluation. ADTO-6M (US$ mn) 997.2 Relative (%) (3.0) (4.4) 21.4 ▪ 3Q21 in line, 2021 lifted >20%. Sales guided +10-12% QoQ, Year 12/19A 12/20A 12/21E 12/22E matching our estimate/street +11% QoQ, with growth across Revenue (NT$ mn) 1,069,985 1,339,255 1,565,986 1,777,403 EBITDA (NT$ mn) 659,543 898,509 1,058,093 1,214,755 platforms. GMs guided 49.5-51.5%, below our estimate/street at EBIT (NT$ mn) 372,701 566,784 631,137 717,755 51.6%/52.4% from FX and dilutive N5. 2021 lifted from 20% to Net profit (NT$ mn) 345,301 518,158 580,726 654,720 >20%, in line with our estimateArticle of +22%. intended for:EPS (CS adj.) (NT$) 13.32 19.98 22.4 25.25 Chg. from prev. EPS (%) n.a. n.a. (0.5) (0.0) ▪ GM and ROIC intact. Structural GM of 50% intact and normalizing Consensus EPS (NT$) n.a. n.a. 22.84 26.24 from high 2020 levels. Blended price increase of 4-5% should offset EPS growth (%) (1.7) 50.1 12.1 12.7 depreciation and maintain GM at historical 50% and ROIC at 20%. P/E (x) 46.1 30.7 27.4 24.3 Dividend yield (%) 1.6 1.6 1.7 1.8 ▪ Earnings growth withjason.chiu#uobkayhian.com.hkrebounding CF ahead. On higher sales now EV/EBITDA (x) 23.5 17.2 14.6 12.9 at >+20% YoY, offset by N5 dilution and FX headwind, we trim our P/B (x) 9.82 8.61 7.36 6.32 2021E EPS from NT$22.50 to NT$22.40, but maintain our 2022-23E ROE (%) 20.9 29.9 28.9 28.0 EPS at NT$25.25/NT$28.60, with path to NT$36.00 earnings in Net debt/equity (%) (25.2) (24.1) (19.6) (10.5) 2025E and upside to NT$750-930 at 20-25x 2025E and FCF Source: Company data, Refinitiv, Credit Suisse estimates rebound to NT$30/share. sales now at >+20% YoY, offset by N5 dilution and FX headwind, 2Q21 sales at the upper-half, GMs slightly light of guidance. we slightly trim our 2021E EPS from NT$22.50 to NT$22.40, but see mid-term sales and structural profitability on track, and maintain our Sales grew 2.7% QoQ to NT$327.1 bn, the high-end of +1-3% QoQ 2022-23E EPS at NT$25.25/NT$28.60, with path to NT$36.00 guidance, with both HPC/Auto +12% QoQ, offset by declines in earnings in 2025E, and upside to NT$750-930 at 20-25x 2025E EPS in smartphone -3%, IoT -2% ,and consumer -12%; with China also 3-4 years and FCF rebound to NT$30/share. rebounding from 6% to 11% on low season bitcoin ramps. GMs were 50 bp light of the mid-point and -240 bp to 50% from 2% FX Figure 2: TSMC’s GMs normalise to 50%, not breaking down depreciation on top of the already guided for N5 dilution, slower cost improvement at very full loadings, and absence of inventory revaluation. Figure 1: TSMC 2Q21-4Q21 and 2021-23 estimates, CS vs street

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

3Q21 in line, full-year growth lifted above 20%. TSMC guided sales +10-12% QoQ, matching print with our estimate/street of +11% QoQ, with growth across platforms. GMs were guided to 49.5-51.5%, slightly below our estimate/street of 51.6%/52.4% as TWD appreciation of 2 pp YoY, GM headwind, N5 ramping, and still 2-3 pp being dilutive to corporate margins until maturing in 2022. Full year Source: Company data, Credit Suisse estimates was lifted from 20% to above 20% (and 2020-25 CAGR to the high- end of +10-15%), in line with our estimate of +22% and supported by Apple (larger die size, Mac/iPad growth), Mediatek and Qualcomm 5G, NVIDIA AI, AMD share gains along with IoT/Automotive. TSMC’s GM and ROIC model still intact. TSMC’s structural profitability of 50% is intact and normalising from high 2020 levels for Huawei’s pre-ban shipments and strong 7nm ramps. TSMC’s combination of higher-priced new nodes and “firmed up” existing node pricing should sustain +4-5% blended price increase to offset depreciation and maintain upcycle GMs in line with historical 50% range and ROIC at 20%. It did note incremental spend to its US$100 bn plan, if it moves ahead with a Japan fab. We expect more mild increase for a 40k 28/40nm fab for auto MCU and CIS, closer to US$4 bn for 40k WPM than the US$8 bn spent in the next three years for capex and initial opex in Arizona for 20k 5nm. Earnings growth with rebounding cash flows to come. On higher

Research Analysts Randy Abrams, CFA / 886 2 2715 6366 Haas Liu / 886 2 2715 6365 [email protected] [email protected]

Asian Daily (Asia Edition) 7 Full Report

Asian Daily 16 July 2021 LG Chem Ltd. (051910.KS) Upgrade to NEUTRAL Previous Rating: UNDERPERFORM xEV battery peers' rally should support LG Chem's valuation from here Target price (W): 900,000 Previous target price (W): 680,000

▪ We upgrade LG Chem to NEUTRAL (from Underperform), following Price (15-Jul-21, W) 819,000 Est. pot. % chg. to TP 9.9 xEV battery peers' recent rally (i.e. since our LG Chem downgrade Mkt cap (W bn/US$ mn) 57,815 / 50,672 Blue sky scenario (W) 1,020,000 on 26th May, CATL's share price has jumped +43%) and incremental Number of shares (mn) 70.59 Grey sky scenario (W) 700,000 Free float (%) 66.0 Performance 1M 3M 12M positive developments in the xEV sector. 52-wk range (W) 1,028,000 - 511,000 Absolute (%) (0.1) (8.7) 50.6 ▪ (1) Tailwinds for the xEV battery sector: On 9 July, Stellantis group ADTO-6M (US$ mn) 279.7 Relative (%) (0.8) (11.3) 1.5 announced EUR30bn investment for auto electrification and Korean Year 12/20A 12/21E 12/22E 12/23E Revenue (W bn) 30,076.5 41,156.7 47,944.9 57,684.6 battery makers are strong candidates for potential battery new orders. EBITDA (W bn) 4,109.1 7,035.4 7,242.9 9,046.3 Also, 2021YTD BEV+PHEV penetration is accelerating (7% in May, EBIT (W bn) 1,798.2 4,692.6 4,552.9 5,848.5 6% YTD vs. 2021E CSe: 4%), making battery S/D tighter. Net profit (W bn) 406.1 3,054.7 2,898.7 3,975.1 Article intended for:EPS (CS adj.) (W) 5,300 39,873 37,836 51,886 ▪ (2) LG Chem's battery insourcing effort starts materializing . Given Chg. from prev. EPS (%) n.a. 1.1 5.6 5.1 tightness in several key battery materials, such material insourcing Consensus EPS (W) n.a. 45,800 40,931 47,059 should create margin upside in both LG Chem's advanced material EPS growth (%) 29.6 652.3 (5.1) 37.1 division and LG energy solution. P/E (x) 154.5 20.5 21.6 15.8 Dividend yield (%) 0.2 1.3 1.2 1.6 ▪ Reflecting such positivejason.chiu#uobkayhian.com.hkdevelopments, we revise up 2022/23E EPS EV/EBITDA (x) 15.7 9.6 9.8 8.3 by 5%, respectively, (fine-tune 21E). Also, thanks to peers' multiple P/B (x) 3.48 2.96 2.69 2.36 expansion, we apply 30x (prev 22x) 2021-22E avg EV/EBITDA ROE (%) 2.3 15.6 13.0 15.9 multiple (40% discount vs Chinese peers' 50x) for LG Chem's battery Net debt/equity (%) 36.1 43.7 54.4 61.8 biz, boosting our SOTP-based target price to W900,000 (from Source: Company data, Refinitiv, Credit Suisse estimates W680,000). Figure 1: LG Chem SOTP valuation: we apply 30x for LG Chem's battery biz Positive developments in xEV battery sector Since our LG Chem downgrade on 26th May, major xEV battery peers' valuation has extended (i.e. CATL/Samsung SDI share price up +43/ 17%), thanks to positive developments in the xEV battery sector. We view such positive developments, along with LG Chem's company- specific effort, should support LG Chem's valuation from here. (1) Potential new orders from major OEMs and more supportive policy measures: On 9 July, Stellantis group announced EUR30bn investment for auto electrification and the group mentioned LG Energy Solution as one of the main suppliers. In addition, EU tries to implement tougher regulation which could make xEV more profitable vs ICEs. Source: Company data, Credit Suisse estimates (2) Accelerating xEV penetration uptake: Also, 2021YTD BEV+PHEV penetration is accelerating (7% in May, 6% YTD vs 2021E (2) Advanced materials: We revise up its OP margin forecast to CSe: 4%); all regions continued momentum from recent months. 6.3/8.6% (prev. 6/7%), reflecting volume/UTR upside in LG Chem's Global EV sales were up 204% YoY in May, with Europe +278% YoY, battery material biz. As such, LG Chem's more proactive movements China +157%, and US +215%. Although low base effect helped such for battery material insourcing makes us raise the multiple for advanced high YoY growth numbers, accelerating xEV penetration should make materials to 10x (prev. 6x) as the business is transforming into battery battery S/D even tighter, resulting in upside in battery margin potentially. materials (high multiple biz) from display materials (low multiple biz). (3) (3) LG Chem's battery material insourcing effort: Given tightness Petrochemical: We cut the multiple for petrochemical biz to 4x (prev. in the key battery materials, LG Chem tries to insource more battery 5x) reflecting weakening petrochemical spread and domestic peers' materials with expansion of its advanced material division (i.e. 35% multiple contraction. All in all, our SOTP-based TP rises to W900,000 self-sufficiency in cathode by 2025E). Such material insourcing policy, (from prev. W680, 000) and makes us upgrade rating to NEUTRAL if successfully implemented, should create margin upside in both LG (from Underperform). Chem's advanced material division and LG energy solution. Peers' rally should be supportive for LG Chem's valuation First of all, we change our TP methodology from 2021E basis to 2021-22E average basis, as we are approaching to 2H21. Plus, reflecting recent developments in the sector, we change our valuation for each divisions as follows: (1) Battery: we apply 30x (prev. 22x) 2021-22E average EV/EBITDA multiple for LG Chem's battery business, following Chinese peers' valuation expansion to 50x 2021-22E average EV/EBITDA multiple (previously, we applied 47x for 2021E only - currently 2021E multiple reaches to 59x). Although country discount between MSCI Korea vs China widened to >40% (prev. 30%), Chinese peers' multiple expansion offsets it. Also we raise our 2022/23E OP margin outlook for battery to 7.3/8.5% (prev. 7/8%). Research Analysts Hoonsik Min / 82 2 3707 3761 [email protected]

Asian Daily (Asia Edition) 8 Full Report

Asian Daily 15 July 2021 China Sportswear Sector New report: June 2021 online sales -3% YoY, but leading domestic brands grew 26-34% YoY

▪ June overall online sportswear industry declined 3% YoY on Tmall/ Figure 2: Apparel market share by sales Figure 3: Footwear market share by Taobao (May +41%) dragged by international brands, bringing 2Q21 value YoY, trailing 3M sales value YoY, trailing 3M +7% YoY (1Q21 +37% ). Divergence in overall growth trends between foreign and domestic brands continued in June. Dominant foreign brands Nike/Adidas recorded -34%/-33%, while domestic brands Li Ning/Anta/Xtep grew +26%/+34%/+26%. ▪ Fila and domestic brands gained share. Fila/Li Ning saw share gains of +4.5/+0.9 pp in apparel. In footwear, Anta saw the highest gain of +3.1 pp, followed by Fila/Li Ning/Xtep at +2.8/+2.4/+1.1 pp. Nike/ Adidas saw sharp marketArticle declines of 6-12 intended pp. for: ▪ Online discounts contracted 2 pp YoY in June, backed by a healthy Source: Taosj.com, Credit Suisse Source: Taosj.com, Credit Suisse inventory level. In terms of Jun ASP, we see strength for Anta and Li Ning, +15-23%. Looking at new product launches, Anta/Xtep are Online discounts contraction of 2 pp YoY in June. Online seeing pricing premiumsjason.chiu#uobkayhian.com.hkof +39%/+7%,whereas Li Ning at -9%; discounts were healthy on normalised inventory levels. In terms of Adidas the highest at 380% on Yeezy series. average prices in Jun, we see strength for Anta and Li Ning, +15/+23% ▪ Our top pick is Anta, as we are positive on the execution of the 'Anta' and +15%/+18% for the apparel/footwear segments. Looking at new brand and a turnaround in 'Amer' and see potential for the street product launches, Anta/Xtep are seeing pricing premiums of to lift estimates. We prefer brands to OEMs to retailers. In domestic +39%/+7%,whereas Li Ning -9%; Adidas the highest at 380% on brands, our pecking order is Anta > Li Ning >Xtep. We revise our TPs Yeezy series; while North Face declined 79%. for Xtep/Li Ning to HK$17.2 (from HK$13.2)/ HK$105 (from HK$85). Figure 4: Discounts levels for apparel and footwear in Tmall flagship stores June 2021 In June, the overall online sportswear industry declined 3% YoY on Tmall/Taobao, a turnaround from high growth in May (+41%), dragged by international brands. This brings 2Q21 to +7% YoY (vs +37% in 1Q21). The divergence in the overall growth trends between foreign and domestic brands continued in June. The dominant foreign brand Nike recorded -34% YoY in June (-33% in May), while Adidas decline narrowed to 33% backed by the new Yeezy SKU launches (-52% in May). Domestic brands have outperformed consecutively over the last three months, with Li Ning/Anta/Xtep at +26%/+34%/+26% YoY in June. Figure 1: June 2021 online Tmall/Taobao sales declined 3%YoY

Source: Taosj.com, Credit Suisse

Fundamental demand in sportswear remains healthy for domestic brands; top pick Anta. Sportswear demand remains healthy on new products launches, increasing penetration levels, and restart of sports events. Our top pick is Anta, on our positive view of the execution of the 'Anta' brand and a turnaround in 'Amer'. We believe there is a potential for street to lift estimates. We prefer brands to Source: Taosj.com, Credit Suisse OEMs to retailers. In domestic brands, our pecking order is Anta > Li Ning > Xtep. Fila and domestic brands gained share, particularly in footwear segment. On a trailing-three-month basis, Fila/Li Ning achieved share gains of +4.5/+0.9 pp YoY in the apparel segment. In footwear, Anta achieved the highest market share gain of +3.1 pp YoY, followed by Fila/Li Ning at +2.8/+2.4 pp, and Xtep at 1 p. Foreign brands Nike and Adidas saw sharp market declines. Nike apparel market share fell 7.2 pp and footwear -6.1 pp, while Adidas apparel share fell 11.9 pp and footwear -5.8 pp.

Research Analysts Jesalyn Wong / 852 2101 6720 Harriet Liu / 852 2101 6591 [email protected] [email protected]

Asian Daily (Asia Edition) 9 Full Report

Asian Daily 16 July 2021 China Healthcare Sector Conference call takeaways with CStone (2616.HK, Not Covered): Multiple approval and clinical data catalysts in 2H21

▪ On 15 July, Dr Anthony Ye, head of corporate strategy and capital Management believes EQRx's innovative business model could markets, and Mr Jun Deng, senior IR director, from CStone joined us effectively enlarge access and make the drugs more affordable for to provide a recent business update. patients. In the US, generally after visiting doctors, patients have to go ▪ CStone has many catalysts for 2H21. For example, two more back to their insurer to authorise the prescription before getting the products, PD-L1 and IDH1 inhibitor, are expected to be approved in medicine from doctors. Also this does not allow patients to pick the China in 2H21. specific prescribed drug among the same class. However, EQRx can negotiate with insurers in advance to offer the drug at a discounted ▪ EQRx's innovative business model could enlarge patient access to price, therefore a certain volume could be guaranteed by the insurers. CStone's PD-L1 and PD-1 in the US. EQRx commercial strategy In this case, physicians can make the prescription right away, largely could be important to watchArticlefor China PD-(L)1intendeddrugs targeted forfor:streamlining the prescription and reimbursement process for patients. globalisation. Given multiple Chinese companies are also targeting globalisation for ▪ CStone is satisfied with the RET mutation testing in China. Its work their PD-1s (e.g., BeiGene, Innovent, Junshi, Akeso), we think on companion diagnostic (CDx) is to meet potential future CDx commercial insurance adoption plays an essential role in opening up requirement for precision medicine. Full-scale biologics access to patients in the US and is one of the key metrics to be watched manufacturing is expectedjason.chiu#uobkayhian.com.hkin 2023 and Wuxi Bio could act as a back- for these PD-1s. up manufacturer then. Companion diagnostic (CDx) could be a prerequisite for precision medicine in the future. For pralsetinib (RET inhibitor), Two more products, including PD-L1 and IDH1 inhibitor, testing for RET alteration is recommended by 2021 Guidelines on expected to be approved in China in 2H21. On 15 July, Dr Anthony Clinical Practice of Molecular Tests in NSCLC in China as level 1 Ye, head of corporate strategy and capital markets, and Mr Jun Deng, recommendation. As a company focussed on precision medicine, senior IR director, from CStone joined us to provide a recent business CStone is developing companion diagnostic (CDx) as well. In update of the company. management's view, along with the increasing availability of NGS (next- Currently, CStone has 2 approved and marketed products in China: generation sequencing) products, NGS testing will become a (1) pralsetinib (RET inhibitor) for 2L RET fusion-positive NSCLC in mainstream method to detect mutated genes prior to applying precision mainland China, and (2) avapritinib (KIT/PDGFRA inhibitor) for medicine in the future. Though regulation does not set a mandatory PDGFRA exon 18/D842V mutant GIST (gastrointestinal stromal tumor) requirement for gene testing now, the company sees CDx development in mainland China and Taiwan. as important to prepare for potential CDx requirement for precision medicine approval. We agree with management on the future trends of In 2H21, multiple catalysts are expected, including: (1) approval of applying CDx tests prior to making treatment plan and prescriptions, sugemalimab (PD-L1) for 1L Stage IV NSCLC in mainland China; (2) which may benefit companies such as Genetron. NDA filing and approval of ivosidenib (IDH1 inhibitor) for IDH1 r/r AML (as it is included in list of drugs of urgent clinical need in China, Full-scale manufacturing to be expected in 2023; Wuxi Bio could accelerated reviewing process with technical review could be done act as a back-up manufacturer then. CStone commenced the within 70 business days, according to management); (3) NDA filing construction of manufacturing facilities in 1H20, including 26,000L for and data readout of sugemalimab for Stage III NSCLC in mainland biologics and 1 bn tablets/capsules for small molecule drugs. As of China; and (4) NDA filing of pralsetinib for 1L NSCLC (data readout now, it is under pilot operation and technology transfer from Wuxi Bio also expected for this indication), RET-mutant MTC and RET fusion- is underway. Management estimate to achieve small-scale production positive TC in mainland China as well as 2L NSCLC in Taiwan. by end of 2022 and full-scale production in 2023. CStone deploys single use bioreactors for production, as this would offer flexibility for Looking beyond 2021, CStone aims to launch its Pipeline 2.0 strategy, manufacturing different products or one product for different markets. which primarily focus on global first-in-class/best-in-class/first wave After the full-scale production in 2023, Wuxi Bio will act as a secondary assets in emerging therapeutic categories. ADCs and multi-specific or back-up CMO provider for CStone's products. We think the molecules are good examples of Pipeline 2.0. Currently, it has two production split as 80:20 between CStone and Wuxi Bio could be early-stage ADCs (one is ROR1 ADC, in-licensed from LegoChem) and possible. three multi-specific molecules (one is PD-L1x4-1BBxHSA, in-licensed from Numab). In the near term, management plans to license in more late-stage candidates, though no more details were not disclosed. EQRx's innovative business model could enlarge patient access to CStone's PD-L1 and PD-1 in the US. CStone has out-licensed ex-China rights to EQRx for sugemalimab (PD-L1) and CS1003 (PD-1), and EQRx will lead clinical development and commercialisation of these two assets outside of Greater China. Per management, EQRx might price its PD-1/PD-L1 to be one- to two-thirds of existing PD-(L1) drugs' price in the US. Currently, EQRx is under discussion with the FDA to determine the first indication for NDA filing. The filing could take place by YE2021 or early next year and CStone's management thinks filings for both indications of Stage III and IV NSCLC could be possible.

Research Analysts Yang Huang, CFA / 852 2101 6435 Jason Liu / 852 2101 6465 Jing Yang / 852 2101 6437 [email protected] [email protected] [email protected] Shirley Chen / 852 2101 6462 [email protected]

Asian Daily (Asia Edition) 10 Full Report

Asian Daily 15 July 2021 China Industrials Sector Industrial capacity utilisation rate in 2Q hit historical high; robot production in June up 61%

▪ NBS industrial capacity utilisation rate booked 78.4% in 2Q, up 1.2 high, and similarly economy will likely decelerate. However, we believe pp QoQ and 4 pp YoY. This is the highest reading in its nine-year the upcycle can last longer, driven by a further recovery of consumption history. We believe tight industrial supply suggests future solid capex, related manufacturing sectors and overseas demand for intermediate and thus demand for industrial machinery. industrial products. ▪ Manufacturing FAI growth in June was 16.4% YoY, accelerated from Improvement of investment to alleviate demand pressure 13.5% in May, despite a higher base. Production of robot showed the A noticeable marginal improvement was seen in June infrastructure FAI same trend, up 60.7% in June, 10.6 pp higher than in May. (from -2.5% YoY in May to -1.5% YoY). Looking into components, ▪ Noticeable marginal improvement was seen in June infrastructure railway FAI has narrowed the 28.2% YoY decline in May to -12.4%. FAI and the property market.ArticleWe believe intendedthe macro pressure onfor:FAI on Public facilities also turned the 2.6% YoY decline to a 0.2% YoY construction machinery demand can be alleviated to some extent. growth. Property investment, despite still in the contraction territory, Nevertheless, we maintain a cautious view on the mid-term. is also undergoing a marginal improvement. Besides, after 5M of slow ▪ We prefer the industrial machinery sector with top picks of Estun and special bonds issuance, June saw a robust new issuance over Rmb430 Yizumi. We also expect a re-rating of Haitian International. bn, which accounts for 42% of the total issuance in 1H21 (2020: 4%). jason.chiu#uobkayhian.com.hkWith the recent RRR cut (which our banks analyst takes as a surprise) NBS announced key statistics in 2Q and June on 15 July. From and a pick-up in special bond issuance, we believe the macro pressure on construction machinery demand can be alleviated to some extent. the industrials perspective, we believe readings are quite positive for automation and industrial machinery. Most indicators further Nevertheless, we maintain a cautious view on the mid-term. We believe accelerated from May despite a higher comp. Infrastructure FAI showed the replacement cycle has ended or come to an end, as suggested a marginal improvement sign, as we expected in our construction by the current fleet age and size of existing fleet. To be specific, machinery report earlier this week. we estimate a 5%, -17% and -12% YoY growth in 2021-23 for domestic excavator demand. We expect a relatively smaller decline for Industrial capacity utilisation rate reached historical high mixer and loader, but tower crane demand to grow, as prefabricated The rate booked 78.4% in 2Q, up 1.2 pp QoQ and 4 pp YoY. This construction achieves further penetration. More importantly, overseas is the highest reading in its nine-year history. Last peak was back to demand will provide a solid support to companies' total sales. 4Q17 with 78%. We believe tight industrial supply suggests future solid We still prefer industrial machinery names in the China industrials capex and demand on industrial machinery. It is worth mentioning that space. Top picks are Estun and Yizumi. We also expect a re-rating of the auto sector only read 74.2%, down 4.3 pp QoQ and 0.4 pp YoY, as Haitian International. a result of chip shortage. Future recovery is expected once the shortage is eased. Figure 2: Industrials-related NBS key statistics in June Figure 1: Industrial capacity utilisation rate

Source: NBS

Manufacturing FAI in June was consistent with the high utilisation rate. Despite a higher base, growth was 16.4% YoY, accelerated from Source: NBS, Credit Suisse estimates 13.5% in May. All key end markets of industrial machinery saw acceleration. General machinery and electronic equipment manufacturing registered nearly 10 pp higher YoY growth, while auto recovered to a positive territory. Production of industrial robot showed the same trend, with volume up 60.7% in June, 10.6 pp higher than in May. Other monthly data related to industrial machinery we are monitoring also remained on the uptrend. Thus, we stay positive on the industrial machinery sector and the sustainability of strong demand. Looking forward, we admit that high growth will be more difficult, as the base of sector sales will become

Research Analysts Zhao Zhang / 852 2101 6915 Edmond Huang / 852 2101 6701 Daniel Cui / 852 2101 6523 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 11 Full Report

Asian Daily 15 July 2021 China Property Sector Slowdown in sales/investment growth continued in Jun-2021

▪ The momentum in national property sales and real estate investment momentum. Also, less cities recorded home price growth in Jun-2021 continued to moderate in Jun-2021, which recorded the YoY growth (i.e., 55 vs. 62 cities in May 2021). Nevertheless, the momentum in of 8.6% and 5.9%, respectively. New-starts registered three tier-1 cities remained resilient, with the MoM home price gain consecutive months of decline and pulled back by 3.8% YoY. accelerating slightly to 0.73% in Jun-2021 (vs. +0.70% in May 2021). ▪ Developers' financing turned tougher in Jun-2021. The YoY decline Leading developers well on track to achieve a full-year sales in construction loans widened to 16.1% YoY and the YoY growth in growth of 12% YoY in 2021. Leading developers covered by us have mortgage loans turned negative for the first time since Apr-2020. completed 48% of their full-year target with their sales increasing by ▪ We expect the slowdown in property sales/investment to continue 27% YoY in 1H21. This was a bit ahead of schedule (i.e., completion in 2H21 amid the combinationArticleof high baseintendedimpact and property for:rate of 42% in 1H20). Looking into full-year 2021, leading developers tightening measures. Nevertheless, our full-year sales growth estimate can comfortably complete the average sales growth target of 12% YoY, of 12% YoY for our covered names stays unchanged, which requires even with their sales declining by 1% YoY in 2H21. sales to stay largely flattish YoY in 2H21. Prefer CRL/Longfor/COGO/Sunac. While the RRR cut has ▪ The sector is trading at an attractive NAV discount of 53%. While improved investors' sentiment slightly, we see better visibility in the RRR cut has improvedjason.chiu#uobkayhian.com.hkinvestors' sentiment slightly, we see better Aug-2021 in terms of policy trends (i.e., results of 2nd round land visibility in Aug-2021 in terms of policy trends (i.e., results of 2nd supply) and margin prospects (i.e., 1H21 results to set the expectation round land supply) and margin prospects (i.e., 1H21 results to set bar). Into the results season, we prefer CRL/Longfor/COGO/Sunac. the expectation bar). Into the results season, we prefer CRL/Longfor/ Figure 1: Sales growth momentum moderated in Jun-2021 COGO/Sunac.

Sales growth momentum moderated in Jun-2021. According to the National Bureau of Statistics (NBS), national property sales volume/ value increased by 7.5%/8.6% YoY in Jun-2021 with the growth rate moderating from that of +9.1%/+17.5% YoY in May 2021. Across different areas, central area outperformed, with sales volume up by 15.8% YoY in Jun-2021 (vs. +5.3%/+2.6% YoY in eastern/western area). In 1H21, national property sales volume/value increased by 27.7%/38.9% YoY, slowing down from growth of +36.3%/+52.4% YoY in 5M21. Excluding the base impact from COVID-19, the sales Source: NBS, Credit Suisse estimates volume/value in 1H21 was 17.0%/31.4% above that in 1H19 (vs. +19.6%/+36.2% in 5M21). Looking into 2H21, we estimate the sales growth momentum to continue moderating amid the property tightening Figure 2: Developers' financing activities weakened measures. Construction activities slowed down. The growth rate of real estate investment slowed down to +5.9% YoY in Jun-2021 (vs. +9.8% YoY in May 2021). New starts declined by 3.8% YoY in Jun-2021, continuing from the downward trend since Apr-2021. Also, momentum in land sales moderated in Jun-2021 as the first batch of land supply largely came to an end. According to CREIS, the land transaction value in 300 cities stabilised in Jun-2021. In 1H21, real estate investment increased by 15.0% YoY and new starts went up by 3.8% YoY (vs. +18.3%/+6.9% YoY in 5M21). Developers' financing stayed tough in Jun-2021. Developers' financing environment remained challenging. In Jun-2021, developers' Source: NBS, Credit Suisse estimates total sources of funds increased by 4% YoY, slowing down from growth of +14% YoY in May 2021. Financing from domestic loans decreased by 16.1% in Jun-2021 amid the de-leveraging environment towards developers. Regarding pre-sale proceeds, while the funds from down- payment grew by 12.7% YoY in Jun-2021, financing from mortgage loans declined by 3.1%, given the tight control over funds flowing into the property sector. Home price growth momentum remained resilient in tier-1 cities but moderated a bit in lower-tier cities. The growth rate of 70-cities home price moderated slightly to +0.4% MoM in Jun-2021 (vs. +0.5% MoM in May 2021), reversing from the previous accelerating

Research Analysts Jianping Chen / 852 2101 7189 Summer Wang, CFA / 852 2101 6539 Kendrick Cheung / 852 2101 6538 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 12 Full Report

Asian Daily 15 July 2021 China Coal Energy Company Limited (1898.HK) Maintain OUTPERFORM Previous Rating: OUTPERFORM 1H21 preliminary results beat market expectation Target price (HK$): 6.60 Previous target price (HK$): 4.90

▪ 1H21 prelim results ahead of market expectation. China Coal Price (14-Jul-21, HK$) 4.81 Est. pot. % chg. to TP 37.2 expected 1H21 preliminary results in the range of Rmb8.1 to 8.9 bn, Mkt cap (HK$/US$ mn) 101,125 / 13,021 Blue sky scenario (HK$) 9.9 +219% to 253% YoY. The company attributes the earnings growth Number of shares (mn) 13,259 Grey sky scenario (HK$) 3.0 Free float (%) 42.0 Performance 1M 3M 12M to (1) higher selling prices and volume sales of coal and coal chemical 52-wk range (HK$) 5.09 - 1.84 Absolute (%) (4.0) 24.6 142.9 products, amid strong demand and (2) effective cost control. ADTO-6M (US$ mn) 13.2 Relative (%) (0.0) 28.6 134.5 We expect limited upside on coal supply in the summer peak season, Year 12/20A 12/21E 12/22E 12/23E ▪ Revenue (Rmb mn) 140,961 158,261 153,225 156,038 supporting coal price. With the end of plum rain season, IPPs' daily EBITDA (Rmb mn) 21,503.0 39,958.2 39,670.1 39,083.6 coal consumption keeps trending up. However, inventory at both EBIT (Rmb mn) 15,048.9 33,504.1 33,216.1 32,629.6 ports and IPPs remains low. Despite production gradually resuming Net profit (Rmb mn) 5,350.7 13,000.0 13,300.0 13,500.0 in major coal-producingArticleprovinces, we expectintendedthe increment being for:EPS (CS adj.) (Rmb) 0.4 0.98 1.0 1.02 limited. Meanwhile, we expect import to remain tight in 2H. Recently, Chg. from prev. EPS (%) n.a. 44.4 40.0 37.8 Consensus EPS (Rmb) n.a. 0.74 0.66 0.62 exports from Indonesia were impacted by the surge in COVID-19 EPS growth (%) (13.7) 143.0 2.3 1.5 cases. P/E (x) 9.9 4.1 4.0 3.9 Earnings estimates revision. We revise up China Coal's 2021-23E Dividend yield (%) 3.3 6.1 6.3 6.3 ▪ jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 8.5 4.6 4.2 3.8 earnings estimates by 44/40/38% to Rmb13.0/13.3/13.5 bn to P/B (x) 0.53 0.48 0.44 0.4 reflect higher volume sales and ASP of coal and coal chemical ROE (%) 5.4 12.2 11.4 10.6 products assumptions. We derive new target prices for H/A shares of Net debt/equity (%) 60.5 46.8 25.8 8.5 HK$6.60 (from HK$4.90) and Rmb10.20 (from Rmb8.20). Maintain Source: Company data, Refinitiv, Credit Suisse estimates OUTPERFORM ratings on both H&A shares. based on the average of (1) 1.0x 2021E P/B and 6.0x three-year ▪ China Coal H shares are trading at 0.48x 21E P/B and 4.1x 21E P/E. average EV/EBITDA. 1H21 pre results ahead of market expectation

China Coal announced 1H21 preliminary results after market close on Figure 1: China Coal H 12 mth forward P/BVPS 14 July. The profit attributable to equity holders for 1H21 is expected to range from Rmb8.065 bn to Rmb8.920 bn (the same period of 2020: Rmb2.529 bn), representing a YoY increase of 218.9% to 252.7%. The 1H21 result implies 2Q21 net income at the range of Rmb4.6-5.4 bn, +142%-188% YoY. The company considers that the earning growth is due to: (1) strong demand for the company's main products amid China's economy recovery; (2) higher selling price of coal and coal chemical products; (3) production expansion and higher sales volume and (4) effective cost control. We expect a tight supply situation in the peak demand season Despite coal mines gradually resuming production in July, inventory at both ports and IPPs remains quite low. With the end of the rainy season in South China, we expect coal consumption to further trend up, offering upside risks on coal price. By this week, daily coal consumption at eight coastal provinces increased by 13.9% WoW to 2.02 mt, with inventory at 26.1 mt (-19.6% WoW). Inventory at Qinhuangdao ports is currently below 4.0 mt. At the same time, we expect the supply from import to remain tight, especially given the rising demand from countries Source: Company data, Credit Suisse estimates other than China. 1H21 total imports declined 19.7% YoY to 139.6 mt. Earnings estimates revision We revise up China Coal's 2021-2023E earnings estimates by 44.4/ 40.0/37.8% by applying higher volume sales and coal and coal chemical products' ASP assumption. We derive H-share's HK$6.60 target price and OUTPERFORM rating based on the average of (1) 0.6x 2021E P/B and (2) 4.4x three-year average (21E-23E) EV/EBITDA. A- share target price of Rmb10.20 and OUTPERFORM rating are derived

Valuation metrics Company Ticker Rating Price Target TP Up/dn Year EPS Chg(%) EPS EPS grth (%) P/E (x) DY P/B (x) Scenario chg to TP (%) (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 Chinacoal (H) 1898.HK O 4.81 6.6 (4.9) 34.7 37.2 12/20 44.4 40.0 0.98 1.0 143.0 2.3 4.1 4.0 6.1 0.5 9.9 3.0 Chinacoal (A) 601898.SS O 7.41 10.2 (8.2) 24.4 37.7 12/20 44.4 40.0 0.98 1.0 143.0 2.3 7.6 7.4 3.3 0.9 15.0 5.0 Source: Refinitiv, Credit Suisse estimates Research Analysts Yang Luo / 852 2101 6328 Peter Li / 852 2101 6320 Jocelyn Zhang / 852 2101 6312 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 13 Full Report

Asian Daily | Focus List Stock 15 July 2021 Li Ning (2331.HK) Maintain OUTPERFORM Previous Rating: OUTPERFORM Healthy online sales growth continued in June 2021 Target price (HK$): 105.00 Previous target price (HK$): 85.00

▪ According to our monthly online sales data tracker, while the industry Price (14-Jul-21, HK$) 90.85 Est. pot. % chg. to TP 15.6 saw a 3% YoY decline in June 2021, domestic growth continued Mkt cap (HK$/US$ mn) 226,612 / 29,178 Blue sky scenario (HK$) 129.0 to outpace foreign brands, for three months consecutively. Leading Number of shares (mn) 2,494 Grey sky scenario (HK$) 73.0 Free float (%) 89.0 Performance 1M 3M 12M foreign brand Anta grew 34% YoY, while Li Ning/Xtep grew 26% 52-wk range (HK$) 95.20 - 24.00 Absolute (%) 22.7 52.4 278.5 YoY in June 2021. ADTO-6M (US$ mn) 123.3 Relative (%) 26.7 56.4 270.1 On a trailing-three-month basis, Li Ning has gained 2.4 pp in the Year 12/20A 12/21E 12/22E 12/23E ▪ Revenue (Rmb mn) 14,457.0 20,813.0 26,731.6 33,934.8 footwear segment, with now an 8.7% market share in Tmall/ EBITDA (Rmb mn) 2,772.2 4,764.9 6,356.5 8,394.6 Taobao. In apparel, Li Ning gained 0.9 pp market share. EBIT (Rmb mn) 2,196.0 4,174.0 5,631.5 7,478.6 We lift our operating profit margin assumptions and now expect Net profit (Rmb mn) 1,698.5 3,217.1 4,323.9 5,725.9 ▪ Article intended for:EPS (CS adj.) (Rmb) 0.69 1.31 1.76 2.33 FY21 operating margin to be 20.1%, with continued expansion to Chg. from prev. EPS (%) n.a. 11.5 6.8 10.4 21.1%/22.0% in FY22/23 on continued strong brand momentum, Consensus EPS (Rmb) n.a. 1.19 1.52 1.9 operating leverage from increased store productivity, and EPS growth (%) 11.7 89.4 34.4 32.4 improvements in supply chain. P/E (x) 109.4 57.8 43.0 32.5 Dividend yield (%) 0.3 0.5 0.7 0.9 ▪ We lift FY21/22/23Ejason.chiu#uobkayhian.com.hkearnings by 11.5%/6.8%/10.4%, forecasting a EV/EBITDA (x) 65.5 37.6 27.6 20.4 33% CAGR over FY21-23. We lift our TP to HK$105 (from HK$85) P/B (x) 21.38 16.98 13.3 10.34 on an unchanged 43x P/E multiple, as we roll over to blended FY22/ ROE (%) 21.5 32.8 34.7 35.8 23E earnings. Maintain Outperform. Net debt/equity (%) (82.7) (90.5) (95.7) (99.7) Source: Company data, Refinitiv, Credit Suisse estimates Li Ning online growth outpaced industry in June. According to our offline channel checks have previously suggested that Li Ning discounts monthly online sales data tracker, while the industry saw a 3% YoY have narrowed in 2Q on strong brand momentum and product decline in June 2021, domestic growth continued to outpace foreign shortages. As such, we lift our operating profit margin assumptions and brands for three months consecutively. Leading domestic brand Anta now expect FY21 operating margin to be at 20.1%, with continued grew 34% YoY, while Li Ning/Xtep grew 26% YoY in June 2021. expansion to 21.1%/22.0% in FY22/23 on continued strong brand Figure 1: Overall sportswear retail sales by brands, monthly YoY momentum, operating leverage from increased store productivity, and improvements in supply chain. Maintain Outperform. We lift FY21/22/23E earnings by 11.5%/6.8%/10.4% and now expect a 33% CAGR over FY21-23. This makes us lift our target price to HK$105 (from HK$85) on an unchanged 43x P/E multiple, as we roll over to blended FY22/23 earnings estimates. Maintain Outperform.

Source: Taosj, Credit Suisse estimates

Market share gain, particularly in footwear segment. On a trailing- three-month basis, Li Ning has gained 2.4 pp in the footwear segment, and now has an 8.7% market share on the Tmall/Taobao platforms, the fourth largest after Nike, Adidas, and Anta. Nike/Adidas saw 6.1/5.8 pp decline. In apparel, Li Ning gained 0.9 pp market share and is the third- largest player, with an 8.2% market share. Figure 2: Footwear market share change by sales value

Source: Taosj, Credit Suisse estimates

Narrowed discounts for Li Ning; raise margin assumptions. Our

Research Analysts Jesalyn Wong / 852 2101 6720 Harriet Liu / 852 2101 6591 [email protected] [email protected]

Asian Daily (Asia Edition) 14 Full Report

Asian Daily 15 July 2021 Ping An (2318.HK) Maintain OUTPERFORM Previous Rating: OUTPERFORM Improving NB sales in June, but solid and sustainable recovery takes Target price (HK$): 110.00 time Previous target price (HK$): 110.00

▪ Life individual NB sales +2.3 YoY in 1H, implying down 23% in 2Q. In Price (15-Jul-21, HK$) 73.05 Est. pot. % chg. to TP 50.6 Jun, NB sales decline narrowed to 12%, in line with our expectation, Mkt cap (HK$/US$ mn) 1,325,307 / 170,633 Blue sky scenario (HK$) 143.0 as adverse impact of early release of CI demand has gradually faded Number of shares (mn) 18,280 Grey sky scenario (HK$) 66.0 Free float (%) 63.4 Performance 1M 3M 12M and low base. In Jun, renewal premium attained 4% growth , leading 52-wk range (HK$) 103 - 70.45 Absolute (%) (8.3) (18.9) (15.6) to slightly better total life and health premium growth (down 3% vs ADTO-6M (US$ mn) 380.2 Relative (%) (4.7) (13.6) (23.1) down 4% in May). Agency headcount reduced to below 900k (CSe). Year 12/20A 12/21E 12/22E 12/23E Life GWP (Rmb mn) 514,513 524,803 566,788 623,466 ▪ Into 3Q21, we expect NB sales headwinds to still be in play, on P&C GWP (Rmb mn) 285,911 264,408 282,916 302,721 agency recruitment challenge, unrecovered insurance demand and Net profit (Rmb mn) 143,099 147,599 176,040 197,781 intensified competitions of CI with short-term health products. EPS (CS adj.) (Rmb) 8.1 8.35 9.96 11.19 Article intended for:Chg. from prev. EPS (%) n.a. 0.0 0.0 0.0 ▪ P&C premium down 7.5% YoY in 1H, implying 1.1% decrease in Jun, Consensus EPS (Rmb) n.a. 8.62 9.89 11.36 lagging major peers. Auto dipped 7% amid auto reform and non-auto EPS growth (%) (3.7) 3.1 19.3 12.3 (excl A&H) also down 16%, while growth of A&H was intact, +30%. P/E (x) 7.5 7.3 6.1 5.4 Overall CoR in FY21E should slightly improve YoY, thanks to CGI. NTA per share (Rmb) 38.2 43.85 50.56 57.97 EV per share (Rmb) 72.65 81.99 92.71 104.57 ▪ PA Life plans to acquirejason.chiu#uobkayhian.com.hk70% RC portfolio at no more than Rmb33 Dividend yield (%) 3.6 3.8 4.2 4.6 bn (4.3% of NAV as of end-1Q), aiming to seek higher yield, improve P/B (x) 1.46 1.28 1.12 0.99 ALM and diversify investment portfolio. We see upside in RC portfolio ROE (%) 19.9 18.1 19.0 18.7 on track record in stable NPI growth, but some investors raised P&C combined ratio (%) 99.2 99.0 98.8 98.6 concerns over risk appetite and solvency pressure under C-ROSS. Source: Company data, Refinitiv, Credit Suisse estimates in 1H20), thanks to supportive government policies on short-term health The NB sales decline narrowed in Jun. Life individual new business insurance. Similar to peers, the pressure of auto combined ratio (CoR) (NB) sales were +2.3% YoY in 1H, implying 23% YoY decline in continued, as the proportion of insurance policies underwritten after 2Q from 19% increase in 1Q. Monthly YoY decline in individual NB Sep-2020 auto reform will increase and be gradually reflected in sales narrowed to 12% in Jun from 31% in May, broadly in line with reported CoR (financial reported basis). Deterioration of auto CoR expectation as we wrote in May premium note. The insurer achieved should be more than offset by better CGI underwriting (U/W) results. improving NB sales momentum in Jun due to (1) the adverse impact As such, overall CoR could improve slightly YoY in FY21, in our view. of early release of critical illness (CI) demand gradually faded and (2) a relatively low base in Jun-2020 (down 16% vs down 3.5% in Acquisition of partial stakes in 6 RC developments in China. Ping May-2020). Renewal premium attained 4% growth in Jun, leading to An Life plans to acquire 70% onshore stake in 6 Raffles City (RC) a slightly better growth of monthly total life and health premium in Jun developments from CapitaLand (RC portfolio) at a total consideration (down 3% YoY, vs 4% decline in May). Total agency headcount, we of no more than Rmb33 bn, accounting for 4.3%/0.9% of Ping An estimate, reduced to below 900k at the end of 1H21, as Ping An cannot Group's shareholder equity/investment portfolio as of end-1Q21. The be immune to the sector-wide challenge of agency recruitment arising investment rationales, in our view, are (1) seeking higher yield amid the from competition on talents imposed by new professions (e.g. food potential low rate environment, (2) mitigate the asset-liability mismatch delivery driver). Looking into 3Q, we expect NB sales headwinds to still by increasing exposure to long duration investment properties, and (3) be in play, on the back of (1) continued agency recruitment difficulty, (2) further diversify investment portfolio. According to CapitaLand, 100% unrecovered demand for insurance products with larger ticket size and interest in RC portfolio is valued at Rmb46.7 bn with net property longer payment term post the pandemic and (3) intensified competition income (NPI) of Rmb1.9 bn, implying a cap rate of 4.1%.The valuation with other cheaper short-term health insurance products (e.g. of RC portfolio is hardly comparable with other commercial properties, Huiminbao and Million Dollar Medical Insurance). as it is one of the very few integrated developments in China. However, we see potential upside given (1) its track record of single-digit growth Figure 1: Individual life NB sales down 12% in June in NPI annually, (2) retail to benefit from gradual pick-up in consumption after the containment of the pandemic, and (3) net absorption of offices to be supported by China's dual circulation policy. Despite the abovementioned pros, some investors raised concerns over: (1) insurer's risk appetite in the real estate sector given the overhang of China Fortune Land Development and recent acquisition of New Founder Group, including its real estate segment, and (2) solvency pressure, as the upcoming C-ROSS Phase II is stricter to real estate- related investments than in Phase I (CS note on C-ROSS Phase II). Source: Company data, Credit Suisse estimates

P&C growth still challenging amid auto insurance reform. Ping AnP&C recorded a 7.5% premium decline in 1H21, implying 1.1% YoY decrease in Jun, lagging CPIC P&C (+2.3%) and PICC P&C (+9.3%). Auto premium was down 7% YoY in 1H21, as premium rates reduced amid auto insurance pricing reform. Non-auto (excluding accident and health, A&H) premium was down 16% in 1H21, possibly due to proactive reduction of credit and guarantee insurance (CGI) business. Growth in A&H premium, however, was intact, +30% (+30%

Research Analysts Charles Zhou, CFA / 852 2101 6177 Jessica Chan / 852 2101 6250 [email protected] [email protected]

Asian Daily (Asia Edition) 15 Full Report

Asian Daily 15 July 2021 Shandong Gold (1787.HK) Downgrade to NEUTRAL Previous Rating: OUTPERFORM 1H21 prelim results miss, net loss due to disruptions in operations Target price (HK$): 13.50 Previous target price (HK$): 19.00

▪ Shandong Gold announced 1H21E prelim net loss of Rmb1.36 bn, Price (14-Jul-21, HK$) 13.24 Est. pot. % chg. to TP 2.0 due to production disruptions. We revise downs earnings to reflect Mkt cap (HK$/US$ mn) 90,959 / 11,712 Blue sky scenario (HK$) 60.0 the negative impact from the disruptions. We downgrade Shandong Number of shares (mn) 4,473 Grey sky scenario (HK$) 5.0 Free float (%) 62.4 Performance 1M 3M 12M Gold H and A shares to NEUTRAL. Cut H share price to HK$13.5 52-wk range (HK$) 25.25 - 13.24 Absolute (%) (14.9) (9.3) (31.5) from previous HK$19.0, cut A share price to Rmb18.4 from Rmb24.5. ADTO-6M (US$ mn) 13.4 Relative (%) (10.5) (4.9) (39.4) Compared to April, one more mine (Yinan) resumed, four mines Year 12/20A 12/21E 12/22E 12/23E ▪ Revenue (Rmb mn) 63,664.0 31,148.4 54,649.0 51,449.5 partially resumed to ~30% of normal capacity, and two mines are EBITDA (Rmb mn) 6,786.3 3,687.6 7,778.1 7,812.3 still seeking approvals for resumption. As a result, Shandong Gold EBIT (Rmb mn) 4,192.1 919.5 4,819.7 4,491.0 production fell to 9.8t in 1H21, down 51% YoY. Net profit (Rmb mn) 2,257.2 100.0 2,600.0 2,400.0 Article intended for:EPS (CS adj.) (Rmb) 0.52 0.02 0.6 0.56 ▪ We revise down Shandong Gold 2021/22/23E earnings forecasts by Chg. from prev. EPS (%) n.a. (95.7) (10.3) (7.7) 96/10/8% to reflect lower sales volume assumptions and net losses in Consensus EPS (Rmb) n.a. 0.53 0.61 0.58 1H 2021. We derive our H share TP of HK$13.5 by averaging (1) 2.0x EPS growth (%) 73.3 (95.5) 2,500.0 (7.7) 2021E P/B and (2) 9.0x three year average EV/EBITDA. We derive P/E (x) 21.2 475.7 18.3 19.8 our A share TP of Rmb18.4 by averaging (1) 2.7x 2021E P/B and (2) Dividend yield (%) 0.5 0.0 0.5 0.5 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 11.9 22.5 10.7 10.7 15.0x three year average EV/EBITDA. P/B (x) 1.98 1.96 1.79 1.65 ▪ Valuation: Shandong Gold H shares are currently trading at 22.5/ ROE (%) 9.7 0.4 10.2 8.7 10.7x 2021E/22E EV/EBITDA and 1.96/1.79x 2021E/22E P/B. Net debt/equity (%) 16.6 22.3 22.7 21.8 Source: Company data, Refinitiv, Credit Suisse estimates

(figure 1). As a result, Shandong Gold production fell to 9.8t in 1H21, down 51% YoY. We expect 2H 2021 production volume would also Figure 1: Shandong Gold mines resumption situation update see decline on annual basis. That said, Shandong Gold is making efforts to resume mines as fast as possible. Earnings forecasts revisions We revise down Shandong Gold 2021/22/23E earnings forecasts by 96/10/8% to reflect lower sales volume assumptions and net losses in 1H 2021. We derive our H share TP of HK$13.5 by averaging (1) 2.0x 2021E P/B and (2) 9.0x three year average EV/EBITDA. We derive our A share TP of Rmb18.4 by averaging (1) 2.7x 2021E P/B and (2) 15.0x three year average EV/EBITDA. Source: Company data, Credit Suisse estimates

1H21 prelim losses of Rmb1.36 bn Shandong Gold announced 1H21E preliminary results of Rmb1.36 bn net loss, driven by production disruptions at some of its mines in Shandong province. This implies net loss of Rmb1.0 bn in 2Q21E (1Q21 net loss Rmb319 mn). We revise downs earnings to reflect the negative impact from the disruptions. However we believe most of the impact has been priced in, given the disruption happed in early 2021. On the other hand, we see support to gold prices amid unprecedented monetary policies and elevated price indices (US CPI and PPI). As a result, we downgrade Shandong Gold H and A shares to NEUTRAL. Cut H share price to HK$13.5 from previous HK$19.0, cut A share price to Rmb18.4 from Rmb24.5. One more mine resumed between April and July Shandong Gold updated mine resumption situation as of July. Compared to April, Yinan gold mine resumed. Yinan mine produced 12k oz of gold in both 2019 and 2020, or 1% of Shandong Gold total annual production. Four mines are partially resumed to ~30% of normal capacity due to lack of access to explosives (materials needed for mine operation), and two mines are still seeking approvals for resumption

Valuation metrics Company Ticker Rating Price Target TP Up/dn Year EPS Chg(%) EPS EPS grth (%) P/E (x) DY P/B (x) Scenario chg to TP (%) (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 Shandong Gold (H) 1787.HK N (O) 13.24 13.5 (19.0) (28.9) 2.0 12/20 (95.7) (10.3) 0.02 0.6 (95.5) 2,500.0 475.7 18.3 0.0 2.0 60.0 5.0 Shandong Gold (A) 600547.SS N (O) 18.34 18.4 (24.5) (24.9) 0.3 12/20 (95.7) (10.3) 0.02 0.6 (95.5) 2,500.0 791.2 30.4 0.0 3.3 65.0 4.0 Source: Refinitiv, Credit Suisse estimates Research Analysts Peter Li / 852 2101 6320 Yang Luo / 852 2101 6328 Jocelyn Zhang / 852 2101 6312 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 16 Full Report

Asian Daily 16 July 2021 Sinopec Shanghai Petrochemical (0338.HK) Maintain NEUTRAL Previous Rating: NEUTRAL 1H21 profit alert suggests a weak 2Q21; uncertainty ahead in 2H21 Target price (HK$): 1.90 Previous target price (HK$): 2.10

▪ Sinopec SPC’s 1H21 profit alert suggests 1H21 NP to range Price (15-Jul-21, HK$) 1.80 Est. pot. % chg. to TP 5.6 between Rmb1.1 bn and Rmb1.4 bn, tracking 35%/34% of CS/ Mkt cap (HK$/US$ mn) 39,690 / 5,110 Blue sky scenario (HK$) 2.3 consensus FY21E at mid-point. Implied 2Q21 NP was just above the Number of shares (mn) 10,824 Grey sky scenario (HK$) 1.4 Free float (%) 47.7 Performance 1M 3M 12M breakeven at Rmb62 mn, down -95% QoQ, a miss vs expectation. 52-wk range (HK$) 2.08 - 1.34 Absolute (%) (10.0) (8.6) (6.2) ▪ Its scheduled large-scale maintenance during the quarter was the ADTO-6M (US$ mn) 5.9 Relative (%) (7.7) (4.7) (15.3) main drag on its 2Q21 result, where production volumes of major Year 12/20A 12/21E 12/22E 12/23E Revenue (Rmb mn) 61,560.9 67,828.1 69,032.4 69,539.8 petroleum products/petrochemicals were down 33%/61% QoQ, EBITDA (Rmb mn) 1,313.3 4,534.7 4,651.0 4,705.8 respectively. This makes SPC unable to capture the current upcycle, EBIT (Rmb mn) (466.2) 2,755.1 2,757.4 2,664.7 unlike its peers where most have achieved a record profit in 2Q21. Net profit (Rmb mn) 645.1 3,048.9 3,072.2 3,034.5 Article intended for:EPS (CS adj.) (Rmb) 0.06 0.28 0.28 0.28 ▪ Similar to Sinopec, SPC also faces an increased headwind in 2H21 Chg. from prev. EPS (%) n.a. (12.5) (0.9) (0.2) due to: (1) potential margin squeeze in Refining if oil goes above Consensus EPS (Rmb) n.a. 0.32 0.34 0.37 US$80/bbl and (2) petrochemical spreads rolling over. We see risk EPS growth (%) (70.9) 373.1 0.8 (1.2) to street’s FY21 earnings, and our revised FY21 NP is 17% below P/E (x) 25.1 5.3 5.3 5.3 consensus. Dividend yield (%) 6.7 6.3 6.3 6.6 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 23.3 6.6 6.4 6.0 ▪ We cut our 2021-23E EPS by 1-12% post model update. Our SPC- P/B (x) 0.55 0.52 0.49 0.47 H target price is cut to HK$1.90 (from HK$2.10) as we lower our ROE (%) 2.2 10.1 9.6 9.1 target multiple to 0.55x 2021E P/B (from 0.6x), and our SPC-A target Net debt/equity (%) (8.0) (9.3) (10.0) (13.6) price is cut to Rmb3.00 (from Rmb3.40) accordingly. Maintain Source: Company data, Refinitiv, Credit Suisse estimates NEUTRAL rating. margin uptick during 1Q21. However, the overshooting of oil prices might curtail growth of refining for the rest of the year, due to potential 2Q21 dragged by the maintenance season margin squeeze when oil goes above US$80/bbl. Furthermore, Sinopec Sinopec SPC released its profit alert after market close on 15 July, SPC's petrochemical business is expected to become more volatile, expecting the 1H21 net profit to come in within Rmb1.1-1.4 bn, which given the ambitious plans on petrochemical's capacity expansions was below the market expectation. If we take the low-end of the among the refiners in China, especially in the paraxylene and ethylene. earnings range, the implied 2Q21 net profit might flip into a negative Figure 2: Sinopec SPC - P/B vs ROE trend territory again after the plunge during the pandemic. The lower-than- expected 2Q results were mainly dragged by the large-scale turnaround, where > 50% units were taken off-line for maintenance. This means Sinopec SPC failed to capture the current upcycle. Taking benzene as an example, the production/sales volumes declined by 73%/71% QoQ, albeit the ASP jumped 35% QoQ amid the limited S- D dynamics.

Figure 1: SPC - Petrochemical margins started to roll-over entering 2Q21

Source: Company data, Credit Suisse estimates

Source: Refinitiv Datastream, Credit Suisse estimates

Headwind ahead Refining and petrochemical businesses have been riding on the robust crude momentum entering the year, where we could see the significant

Valuation metrics Company Ticker Rating Price Target TP Up/dn Year EPS Chg(%) EPS EPS grth (%) P/E (x) DY P/B (x) Scenario chg to TP (%) (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 Sinopec Shanghai Petrochem (H) 0338.HK N 1.8 1.9 (2.1) (9.5) 5.6 12/20 (12.5) (0.9) 0.28 0.28 373.1 0.8 5.3 5.3 6.3 0.5 2.3 1.4 Sinopec Shanghai Petrochem (A) 600688.SS U 3.79 3.0 (3.4) (11.8) (20.8) 12/20 (12.5) (0.9) 0.28 0.28 373.1 0.8 13.4 13.3 2.5 1.3 3.6 2.4 Source: Refinitiv, Credit Suisse estimates Research Analysts Horace Tse / 852 2101 7379 Cynthia Wu / 852 2101 7693 [email protected] [email protected]

Asian Daily (Asia Edition) 17 Full Report

Asian Daily 15 July 2021 Tongkun Group Co. Ltd (601233.SS) Maintain OUTPERFORM Previous Rating: OUTPERFORM 1H21 profit alert a beat; higher contribution from ZPC Phase II to drive Target price (Rmb): 32.20 further upside in 2H21 Previous target price (Rmb): 30.30

▪ Tongkun’s 1H21 profit alert suggests 1H21 NP to be Rmb4.1-4.25 Price (15-Jul-21, Rmb) 26.85 Est. pot. % chg. to TP 19.9 bn, up 305-320% YoY, tracking 78%/70% of our/consensus FY21E Mkt cap (Rmb/US$ mn) 61,420 / 9,509 Blue sky scenario (Rmb) 38.64 at mid-point. Implied 2Q21 NP is at Rmb2.4-2.5 bn, up +39-48% Number of shares (mn) 2,288 Grey sky scenario (Rmb) 25.76 Free float (%) 63.0 Performance 1M 3M 12M QoQ, a record quarter, similar to its peer Xinfengming. 52-wk range (Rmb) 29.00 - 13.83 Absolute (%) 18.6 31.0 79.1 ▪ The robust 1H21 earnings were driven by robust polyester momentum ADTO-6M (US$ mn) 159.6 Relative (%) 20.2 28.6 72.0 in the first half, plus contribution from ZPC Phase II (20% stake) Year 12/20A 12/21E 12/22E 12/23E Revenue (Rmb mn) 45,832.7 61,064.0 65,404.1 66,138.2 that continually ramped up utilisation in 2Q21. POY/FDT/DTY prices EBITDA (Rmb mn) 3,063.2 7,853.8 8,527.7 9,566.3 surged 19%/14%/14% YoY in 1H21 and set a solid foundation EBIT (Rmb mn) 995.2 5,440.3 5,771.6 6,254.2 for the company. Net profit (Rmb mn) 2,846.5 6,825.8 7,332.8 7,769.1 Article intended for:EPS (CS adj.) (Rmb) 1.3 2.98 3.2 3.4 ▪ ZPC contributed ~Rmb1.2 bn (+45% QoQ) to Tongkun’s 2Q21 Chg. from prev. EPS (%) n.a. 26.8 17.3 15.9 earnings, based on our estimate, and we expect a higher contribution Consensus EPS (Rmb) n.a. 2.66 3.09 3.36 in 2H21 to drive earnings upside for Tongkun as: (1) ZPC Phase II EPS growth (%) (17.0) 130.3 7.4 5.9 continues to ramp up; and (2) a more favourable product mix. P/E (x) 20.7 9.0 8.4 7.9 Dividend yield (%) 0.5 1.4 1.8 1.9 ▪ We revise up our 2021-23Ejason.chiu#uobkayhian.com.hkEPS by 16-27% post model update. Our EV/EBITDA (x) 21.9 8.6 8.0 7.5 TP is raised to Rmb32.20 (from Rmb30.30), continues to be based on P/B (x) 2.3 1.84 1.54 1.32 1.9x 2022E P/B target multiple, at a discount to its peer Xinfengming, ROE (%) 12.7 23.1 20.0 18.0 which is currently at 2.2x P/B. Maintain OUTPERFORM. Net debt/equity (%) 22.1 18.1 16.4 21.4 Source: Company data, Refinitiv, Credit Suisse estimates 1H21 well ahead designed with 2mntpa PET capacity. Fujian is one of the most Tongkun released a profit alert that its 1H21 NP is up 305-320% YoY imperative textile markets in China with well-known textile producers to Rmb4.1-4.25 bn, significantly ahead of our and consensus estimate. (i.e., 361 Degrees, Anta, etc.). This, in our view, should help the This implies 2Q21 NP came in at Rmb2.4-2.5 bn (1Q21 NP: Rmb1.7 company enter into new regional markets, stepping up effort to bn), setting another strong quarter with a historical high record. consolidate its leading position via new strategies (vs vertical integration before). Tongkun's core operations remained solid in 1H, as 1H21 POY spread witnessed 17% growth over the year. Even though POY spreads started the downward trajectory entering 2Q21, the average 2Q21 POY spread is still above the five-year average levels. Furthermore, Figure 2: Forward P/B of Tongkun earnings contribution from ZPC Phase II began to kick-in, along with the ramp-up of naphtha crackers and the start-up of ethylene units. 1H21 gasoline/diesel spread recovery, on the back on of strong crude momentum and downstream bullish demand, also provided additional help to the strong earnings. Looking ahead, downstream petrochemical crackers at ZPC Phase II (i.e., EVA, MEG, polyolefin, etc.,) are expected to start commercial operations in 2H, according to the company, with margin for ZPC Phase II to be better than that for Phase I, given its more favourable product mix. Figure 1: Contribution from ZPC has been on an upswing since it was put into commercial operation

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Penetration into new regional markets In Jun-2021, Tongkun announced its Fujian Gulei Project, which is

Research Analysts Horace Tse / 852 2101 7379 Cynthia Wu / 852 2101 7693 [email protected] [email protected]

Asian Daily (Asia Edition) 18 Full Report

Asian Daily 15 July 2021 Xtep International (1368.HK) Maintain OUTPERFORM Previous Rating: OUTPERFORM Raised guidance; core Xtep brand to grow >20% over next five years Target price (HK$): 17.20 Previous target price (HK$): 13.20

▪ Xtep's 2Q grew 30-35% YoY (1Q: 55%), bringing 1H retail sales Price (14-Jul-21, HK$) 13.68 Est. pot. % chg. to TP 25.7 to 40-45%, in line with our expectations. The company announced Mkt cap (HK$/US$ mn) 35,963 / 4,630 Blue sky scenario (HK$) 20.1 1H21 net profit growth was >65% YoY. Management lifted guidance Number of shares (mn) 2,629 Grey sky scenario (HK$) 9.8 Free float (%) 47.8 Performance 1M 3M 12M to >20% revenue growth for FY21 and core Xtep brand to achieve 52-wk range (HK$) 15.92 - 2.25 Absolute (%) 54.1 119.2 492.2 >20% growth over the next five years (from the mid-teens). ADTO-6M (US$ mn) 27.0 Relative (%) 58.0 123.2 483.8 While we view this positively, we believe Xtep's share price reacted Year 12/20A 12/21E 12/22E 12/23E ▪ Revenue (Rmb mn) 8,171.8 9,897.6 11,794.8 14,004.5 negatively on: (1) lower-than-street margins expectation on core brand EBITDA (Rmb mn) 1,083.7 1,643.3 2,050.7 2,476.4 (street expected margins to uplift in 1H, as historically 2H profits are EBIT (Rmb mn) 918.1 1,434.9 1,768.3 2,141.1 lower) and (2) skepticism on the 20% growth guidance. Net profit (Rmb mn) 512.9 840.1 1,080.5 1,323.2 Article intended for:EPS (CS adj.) (Rmb) 0.21 0.34 0.44 0.54 ▪ Hillhouse partnership offers experience in distribution channel, Chg. from prev. EPS (%) n.a. 18.3 22.2 29.7 especially as they are a majority shareholder in Topsports through Consensus EPS (Rmb) n.a. 0.27 0.34 0.41 Belle. However, K-swiss/Palladium will be able to generate positive EPS growth (%) (32.2) 63.8 28.6 22.5 returns only five years down as the brands will need time for P/E (x) 54.7 33.4 26.0 21.2 makeover. Dividend yield (%) 1.1 1.8 2.3 2.8 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 29.8 20.4 16.3 13.5 ▪ We lift earnings by 18%/22%/30% over the next three years, baking P/B (x) 3.89 3.55 3.31 3.07 in higher core Xtep brand revenue and higher operating leverage ROE (%) 7.3 11.1 13.2 15.0 impact. We lift our target price to HK$17.20 (from HK$13.20) on an Net debt/equity (%) 31.4 44.1 41.0 37.9 unchanged DCF model. Maintain Outperform. Source: Company data, Refinitiv, Credit Suisse estimates Pricing increases of 5-10%. Through its new series of xDNA, Xtep 2Q retail sales update and profit alert. Xtep 2Q grew 30-35% (including Shaolin cross over), Jeremy Lin basketball series, etc., Xtep YoY (1Q: 55%), bringing 1H retail sales to 40-45%, in line with our has seen pricing increases of 5-10% with potential for GPM to slowly expectations. Ecommerce growth was slightly higher than overall offline increase. The company is adopting strategy similar to peers, increasing retail sales growth. Retail sales discounts were at normalised levels of exposure to Tier 1-2 cities, targeting to premiumise its brand. Xtep aims 20-25% and inventory levels were healthy at around four months. 1H21 to increase its shopping mall channel to reach 30% and ecommerce net profit growth was not less than 65%. Management lifted guidance channel contribution to reach 30% over the next three years. to above 20% revenue growth for FY21 and core Xtep brand to achieve >20% growth over the next five years (from the mid-teens) . While ASP will see uplifts, Xtep remains clear that it will not increase sell-in cost to distributors (currently at 38% of retail sales value), as The 20% growth will be driven by: (1) ASP increases, (2) strong it believes it is a long-term partnership. Xtep is also unlikely to take growth in kids segment (>50% growth in this year), and (3) store format an aggressive stance towards shifting from wholesale distribution to expansion, with new store additions expected from 2H onwards. directly operated channel, unless distributor indicates a lack of interest Figure 1: Xtep quarterly retail sales in continuing to operate the stores. Earnings uplift. We lift earnings by 18%/22%/30% for the next three years, baking in higher core Xtep brand revenue and higher operating Source: Credit Suisse estimates leverage impact. We now expect net profit to reach Rmb840 m in FY21, Rmb1,081 m in FY22, and Rmb1,323 m in FY23. We lift our target Why did share price react negatively? Despite the positive guidance price to HK$17.20 (from HK$13.20) on an unchanged DCF model, uplift, Xtep's share price reacted negatively. We attribute this to: (1) based on 7.8% WACC and 3% terminal growth. Maintain Outperform. lower-than-expected margins on core brand and (2) street's skepticism on the 20% growth guidance. As Anta and Li Ning have reported positive profit alert, street expected to see margins uplift in 1H, given the outperformance of domestic brands and as historically 2H profits are usually lower. However, management has explained that there is a time lag in revenue recognition and 2H profits will not be lower than 1H given strong growth in trade order, albeit lower operating margins. Our discussions with investors also suggest that some investors are skeptical on Xtep's ability to deliver on its above-20% revenue guidance over the next five years, leading to profit-taking by the street. We remain optimistic about the revenue guidance and lift our revenue estimates by 7-22% for 2021-23E. Updates on new brands. The Hillhouse partnership with the new brands will offer experience in distribution channel, especially as they are a majority shareholder in Topsports through Belle. However, these brands, particularly K-swiss and Palladium, will be able to generate positive returns only five years down, as the brands need time for makeover. Among these brands, Saucony will be the first to achieve breakeven, expected to be 2-3 years down the line as decent traction has been achieved for the new brand.

Research Analysts Jesalyn Wong / 852 2101 6720 Harriet Liu / 852 2101 6591 [email protected] [email protected]

Asian Daily (Asia Edition) 19 Full Report

Asian Daily 15 July 2021 Yunnan Aluminium Co.,Ltd. (000807.SZ) Maintain OUTPERFORM Previous Rating: OUTPERFORM 1H21 prelim results beat Target price (Rmb): 16.30 Previous target price (Rmb): 15.00

▪ 1H21 preliminary results beat market expectation. Yunnan Aluminium Price (14-Jul-21, Rmb) 12.99 Est. pot. % chg. to TP 25.5 released its 1H21 preliminary results, at Rmb1.8 bn-2.0 bn, Mkt cap (Rmb/US$ mn) 40,635 / 6,278 Blue sky scenario (Rmb) 25.0 +640-722% YoY. The results implies a 2Q21 net income of Rmb1.1 Number of shares (mn) 3,128 Grey sky scenario (Rmb) 9.0 Free float (%) 43.0 Performance 1M 3M 12M bn-1.3 bn, +1,694-2,015% YoY. The company attributed the earnings 52-wk range (Rmb) 15.47 - 4.96 Absolute (%) (8.6) 15.2 85.6 growth to higher aluminium price and sales volume during the ADTO-6M (US$ mn) 190.3 Relative (%) (5.9) 12.4 79.8 reporting period. Year 12/20A 12/21E 12/22E 12/23E Revenue (Rmb mn) 29,573.1 36,656.5 37,186.4 37,611.0 ▪ Positive on aluminium margins in 2H21. According to Mymetal, due EBITDA (Rmb mn) 3,756.8 7,272.2 7,901.9 8,355.6 to the historical high power load in South China, the Yunnan province EBIT (Rmb mn) 2,189.7 5,341.8 5,865.8 6,253.6 may again suspend production, previously planned to resume in Aug. Net profit (Rmb mn) 902.6 3,300.0 3,700.0 4,000.0 We expect the supply constraintArticleto continue intendedto benefit the aluminium for:EPS (CS adj.) (Rmb) 0.29 1.05 1.18 1.28 middle-stream. The capped supply (at ~45 mtpa) of aluminium and Chg. from prev. EPS (%) n.a. 68.4 48.0 48.1 Consensus EPS (Rmb) n.a. 0.98 1.11 1.3 oversupply of alumina will continue to ensure pricing power for EPS growth (%) 82.3 265.6 12.1 8.1 aluminium manufacturers along with higher profitability. P/E (x) 45.0 12.3 11.0 10.2 Earnings forecasts revision. We lift our 2021-23E earnings for Yunnan Dividend yield (%) 0.0 0.0 0.0 0.0 ▪ jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 14.5 7.0 6.0 5.2 Aluminium by 68.4%/48%/48% to Rmb3.3/3.7/4.0 bn to reflect P/B (x) 3.53 2.74 2.2 1.81 higher aluminium margins and volume sales assumption. We lift our ROE (%) 7.8 25.1 22.2 19.5 TP to Rmb16.30 (from Rmb15.00). Net debt/equity (%) 100.3 58.6 30.4 9.9 ▪ Yunnan Aluminium is currently trading at 2.7x/2.2x 2021/22E P/B and Source: Company data, Refinitiv, Credit Suisse estimates 12.3x/11.0x 2021/22E P/E. Figure 1: Aluminium cash margin remains healthy Aluminium margins to remain healthy We expect a solid downstream demand, especially from global markets, to support metals prices and margins. The supply constraints will continue to benefit the aluminium middle-stream. We expect the capped supply (at 45 mtpa) of aluminium and oversupply of alumina to continue to ensure midstream manufacturers' pricing power. Aluminium manufacturers should enjoy much higher profitability amid the improving pricing power. Inventory continued to drop by 2.9% WoW, to 834 kt as of 12 July, indicating solid demand. Currently, despite the price fluctuation in the slow season, aluminium cash margins remain at ~Rmb3,500/t. According to Mymetal, the total aluminium capacity in Yunnan province is at 3.95 mtpa. During the previous power rationing, the total suspended capacity was estimated at 0.9 mtpa. This round production Source: SMM, Wind, Credit Suisse estimates suspension happens during the rainy season. This is beyond market expectation, that the rising output of hydro power would alleviate power usage pressure. We expect this will further support aluminium prices in the near term. Raise earnings forecasts, maintain OUTPERFORM rating We raise Yunnan Aluminium's 2021/22/23 earnings estimates by 68.4%/48.0%/48.1% to Rmb3.3/3.7/4.0 bn to reflect higher aluminium margins and volume sales assumption. We derive a new target price of Rmb16.30 (from Rmb15.00). We derive the new target price and maintain an OUTPERFORM rating based on the average of: (1) 3.3x 2021E P/B; and (2) 8.3x 2021E-23E EV/EBITDA.

Research Analysts Yang Luo / 852 2101 6328 Peter Li / 852 2101 6320 Jocelyn Zhang / 852 2101 6312 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 20 Full Report

Asian Daily 15 July 2021 ZhongAn Online P&C Insurance Co., Ltd. (6060.HK) Maintain NEUTRAL Previous Rating: NEUTRAL Solid premiums in June and 1H21 preview Target price (HK$): 47.00 Previous target price (HK$): 50.00

▪ GWP +45% YoY in 1H21 (CSe). We expect health/digital lifestyle Price (14-Jul-21, HK$) 42.70 Est. pot. % chg. to TP 10.1 premium to be strong at +27%/+39% YoY. The impact of reduced Mkt cap (HK$/US$ mn) 62,761 / 8,081 Blue sky scenario (HK$) 61.1 shipping return premium rates on GWP should be limited in 1H21. Number of shares (mn) 1,470 Grey sky scenario (HK$) 23.5 Free float (%) 42.9 Performance 1M 3M 12M Consumer finance is nearly tripled on low base in 1H21 (CSe). By 52-wk range (HK$) 78.80 - 34.05 Absolute (%) 2.6 (9.2) (12.3) contrast, auto is estimated to post a 20% decline in 1H21 on pricing ADTO-6M (US$ mn) 51.5 Relative (%) 7.0 (4.9) (20.3) reform. In 2H, total GWP growth should moderate. Year 12/20A 12/21E 12/22E 12/23E Life GWP (Rmb mn) - - - - ▪ We expect CoR to dip 2.5 pp to 101% in 1H21, due to higher P&C GWP (Rmb mn) 16,708.5 20,922.1 24,647.3 29,090.9 operating leverage with improved efficiency, and reduced loss ratio in Net profit (Rmb mn) 553.8 750.3 1,186.1 1,589.0 consumer finance. Overall, we estimate 101.3% CoR in FY21. EPS (CS adj.) (Rmb) 0.38 0.51 0.81 1.08 Article intended for:Chg. from prev. EPS (%) n.a. (16.7) (2.5) 8.5 ▪ 1H21 NPAT rose 12% (CSe), on: (1) reduced U/W loss, Consensus EPS (Rmb) n.a. 0.52 0.82 1.29 (2) narrowed loss in technology export, and (3) realisation of floating EPS growth (%) n.m. 35.5 58.1 34.0 gains, but partially offset by higher loss in ZA Bank and ZA Life. P/E (x) 94.5 69.7 44.1 32.9 NTA per share (Rmb) 10.36 10.83 11.59 12.61 ▪ We revise down 1H21/FY21/FY22E EPS by 5%/17%/3%, reflecting EV per share (Rmb) - - - - a larger-than-expectedjason.chiu#uobkayhian.com.hkloss from ZA Bank and ZA Life and lower Dividend yield (%) 0.0 0.0 0.0 0.0 shipping return premium rates. Meanwhile, we lift our valuation P/B (x) 3.33 3.18 2.96 2.72 multiple, factoring in business mix shift to tech export. We cut ourTP ROE (%) 3.6 4.7 7.0 8.6 to HK$47 (from HK$50) and maintain a NEUTRAL rating. ZhongAn is P&C combined ratio (%) 109.5 105.8 104.2 103.0 trading at 3.2x P/B (FY21E) with 4.7% ROE. Source: Company data, Refinitiv, Credit Suisse estimates increase in reinsurance cession). CoR of health and digital lifestyle in GWP growth accelerated to 45% YoY in 1H21 from 15%/14% 1H21 was largely stable, compared with FY20 (CSe). Looking into in 1H20/2020, implying a +49% YoY increase in Jun. The excellent 2H, ZA continues its efforts in improving operational efficiency and risk growth was led by all major ecosystems except auto. In the health management. Overall, we estimate 101.3% CoR in FY21. segment, we estimate strong premium growth of ~27% YoY in 1H21, driven by: (1) higher ROI of marketing campaign (e.g., short-video 1H21 NPAT +12% (CSe). We estimate NPAT to increase by 12% platforms), (2) booming Million Dollar Medical Insurance (MDMI), and YoY in 1H21, supported by: (1) reduced underwriting (U/W) loss, (3) proactive cross-selling of health products to customers from (2) narrowed loss in technology export, and (3) realisation of investment consumer finance ecosystem. We expect the premium from digital floating gains, but partially offset by higher loss in ZA Bank and ZA lifestyle segment to surge by 39% YoY in 1H21, thanks to the popularity Life. For technology, we estimate a 60% increase in income, as both of innovative products such as pet insurance and the gradual rekindling domestic and foreign businesses see strong demand, reducing the demand of travel insurance to the pre-pandemic level. For shipping segment loss. In particular, ZhongAn's technology should benefit from return insurance, the impact of lower premium rates on GWP should be the new Measures for Traceable Management of Insurance Sales (or limited (flat) in 1H, as new rules were effective from late-May. Consumer known as 'double recording') in China, as insurers may need more finance's GWP, we estimate, almost tripled in 1H21 (CSe) on low base advanced digital solutions to satisfy regulatory requirements. For bank, (down 57% in 1H20). Auto premium, however, would post 20% decline we estimate an increase in the segment loss in 1H21, given large in 1H21 against a low base (down 22% in 1H20), due to lower premium promotions are likely to accelerate customer acquisition. rates amid the auto insurance pricing reform since Sep-2020. Cut TP to HK$47; maintain NEUTRAL. We revise down 1H21/FY21/ In 2H, we expect premium growth to moderate. The health ecosystem 22E EPS by 5%/17%/3% to reflect: (1) larger-than-expected loss from should be supported by a track record of strong repurchase and ZA Bank and ZA Life, and (2) lower premium rates of shipping return continuous high ROI in the marketing campaign, but intensified insurance under new rules, but lift FY23E EPS by 9% to reflect the competition from the booming Huiminbao, a cheaper short-term medical longer-term potential of insurtech. Meanwhile, we lift valuation multiple insurance endorsed by the local government, is an unknown to factor in the shift of business-mix to technology export, which factor. GWP of digital life is fueled by the demand of innovative deserves a higher multiple. We cut our TP by 6% to HK$47 and products, but partially offset by reduced shipping return premium rates maintain NEUTRAL. ZhongAn is trading at 3.2x P/B (FY21E) with 4.7% under the new rules. Consumer finance growth is likely to decelerate ROE. sequentially, as base recovered in 2H20 (+4% vs -57% in 1H20). Auto premium weakness may continue in 3Q21 amid the lasting impact of pricing reform since Sep-2020, but base should get easier from 4Q21. CoR down 2.5 pp on improved operational efficiency. In 1H21, we estimate a better combined ratio (CoR) of 101% (vs 103.5% in 1H20), thanks to: (1) higher operating leverage with improved operational efficiency (expenses not allocated to ecosystems) and (2) reduced loss ratio in consumer finance on proactive risk management (e.g., Valuation metrics Company Ticker Rating Price Target TP Up/dn Year EPS Chg(%) EPS EPS grth (%) P/E (x) DY P/B (x) Scenario chg to TP (%) (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 ZhongAn 6060.HK N 42.7 47.0 (50.0) (6.0) 10.1 12/20 (16.7) (2.5) 0.51 0.81 35.5 58.1 69.7 44.1 0.0 3.2 61.1 23.5 Source: Refinitiv, Credit Suisse estimates Research Analysts Charles Zhou, CFA / 852 2101 6177 Jessica Chan / 852 2101 6250 Leo Liu / 852 2101 6139 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 21 Full Report

Asian Daily 15 July 2021 Zhongji Innolight (300308.SZ) Maintain OUTPERFORM Previous Rating: OUTPERFORM 2Q21 NI guidance miss; fundamentals intact for 2H21 datacom Target price (Rmb): 53.40 upcycle Previous target price (Rmb): 53.70

▪ Innolight reported 1H21 NI guidance of Rmb330-360 mn (-1.4% to Price (15-Jul-21, Rmb) 33.88 Est. pot. % chg. to TP 57.6 -9.6% YoY), vs CSe of Rmb460 mn, contrary to our prior view of Mkt cap (Rmb/US$ mn) 24,157 / 3,740 Blue sky scenario (Rmb) 75.6 a more meaningful rebound from 2Q21. Implied 2Q21 NI reached Number of shares (mn) 713.02 Grey sky scenario (Rmb) 25.8 Free float (%) 99.9 Performance 1M 3M 12M Rmb197-227 mn (-6.8% to +7.3% YoY), below CSe of Rmb327 mn. 52-wk range (Rmb) 63.30 - 31.76 Absolute (%) (13.6) (0.4) (48.8) ▪ The NI miss was mainly on domestic weakness in 1H21 in datacom/ ADTO-6M (US$ mn) 45.3 Relative (%) (13.3) (4.1) (57.3) telecom segments. There were delays in 100G/200G orders by Year 12/20A 12/21E 12/22E 12/23E Revenue (Rmb mn) 7,049.6 9,103.8 12,115.4 13,084.2 Chinese hyperscalers in 2H21, while telecom 5G demand resumed EBITDA (Rmb mn) 1,282.5 1,608.8 2,236.4 2,807.7 later than expected in May/June with increased price pressure. EBIT (Rmb mn) 787.4 992.0 1,454.7 1,864.3 Overseas datacom demand remains intact, with key customers 200G/ Net profit (Rmb mn) 865.5 846.9 1,191.9 1,566.1 ▪ Article intended for:EPS (CS adj.) (Rmb) 1.22 1.19 1.67 2.2 400G ramp-up resuming from April (after 1Q inventory normalisation) Chg. from prev. EPS (%) n.a. (14.6) (14.3) (7.4) and now on track. We expect a datacom upcycle from 3Q21, Consensus EPS (Rmb) n.a. 1.51 1.93 2.32 and 200G/400G shipments to reach 1.5 mn/2.5 mn units in 2021. EPS growth (%) 67.1 (2.7) 40.7 31.4 P/E (x) 27.8 28.5 20.3 15.4 ▪ We remain constructive on 200/400G upgrade cycle in 2H21, but Dividend yield (%) 0.4 0.3 0.5 0.0 lower our 2021/22/jason.chiu#uobkayhian.com.hk23E EPS by 15%/14%/7% on weaker 1H21 and EV/EBITDA (x) 20.0 16.2 11.9 9.0 slower margin recovery. Our new TP is Rmb53.40 (from Rmb53.70), P/B (x) 3.05 2.63 2.21 1.83 based on 37.0x and roll over to 2H21-1H22 EPS. ROE (%) 11.7 9.9 11.8 13.0 Net debt/equity (%) 18.1 20.9 21.4 8.8 2Q21 NI guidance below expectation. On 14 July, Innolight reported Source: Company data, Refinitiv, Credit Suisse estimates

1H21 NI guidance of Rmb330-360 mn (-1.4% to -9.6% YoY), vs CSe Figure 2: Estimate changes summary of Rmb460 mn, contrary to our prior view of a more significant rebound in 2Q21. Implied 2Q21 NI reached Rmb197-227 mn (-6.8% to +7.3% YoY), below CSe of Rmb327mn. The miss was likely mainly driven by domestic weakness in 1H21 in datacom and telecom segments. Slowdown in cloud and the overall regulatory environment had put domestic hyperscalers under pressure. 200G was pushed out to 2H21, while 100G demand was flattish to slight decline, particularly due to CWDM4 demand delayed to 2H21. In telecom, 5G rollout was modest in 1H21, and therefore demand only resumed later than expected in May/June. Innolight is still fulfilling Source: Credit Suisse estimates demand from last year, but adjusted to a lower market price hitting both top line and margins. 25G front haul competition is still significant and Maintain OUTPERFORM. We remain constructive on the 200G/400G remains a key margin drag for the telecom segment. upgrade cycle in 2H21 and Innolight's leadership position, but lower our 2021/22/23E EPS by 15%/14%/7%, on weaker 1H21 and slower Figure 1: 1H21/2Q21 guidance summary margin recovery. Our new TP is Rmb53.40 (from Rmb53.70) based on 37.0x (+0.5 SD of three-year historical average) and roll over to 2H21-1H22 EPS. We maintain an OUTPEFORM, with attractive risk- reward (NTM P/E at 21.4x vs three-year average 29.9x). Key risks: (1) slowdown of hyperscale capex growth; (2) US-China trade tension; (3) quicker ASP decline; and (4) FX. Figure 3: Innolight—NTM PE Source: Company data, Credit Suisse estimates

Overseas datacom demand intact—positive on 2H21 recovery. After the datacom slowdown in 1Q21, on inventory normalisation, 200G/400G ramp-up from overseas hyperscalers (Facebook, Amazon, Google) resumed from April and is now on track. The company expects 200G/400G demand to reach 1 mn+/2 mn+ (1Q21 guidance 2.0-2.2 mn) units, while our prior expert check guided 1.5 mn/2.5 mn units for 2021. Overall, we expect a strong datacom upcycle from 3Q21. We note a strong cloud demand, with the Top 7 hyperscalers reporting Source: Refinitiv, IBES, Credit Suisse 1Q21 capex rise of +38% YoY to US$30 bn, on track to meet CSe target of US$125 bn (+18% YoY) for the year. We also anticipate Innolight to maintain ~50-60% market share in datacom 200G/400G.

Research Analysts Clive Cheung / 852 2101 7069 Kyna Wong / 852 2101 6950 [email protected] [email protected]

Asian Daily (Asia Edition) 22 Full Report

Asian Daily 15 July 2021 Razer Inc. (1337.HK) Maintain OUTPERFORM Previous Rating: OUTPERFORM 1H21 net profit tracking ahead; momentum to sustain in 2H21 Target price (HK$): 3.50 Previous target price (HK$): 3.40

▪ 1H21 well ahead. Razer released a positive profit alert at noon on 14 Price (14-Jul-21, HK$) 2.12 Est. pot. % chg. to TP 65.1 July and expects 1H21 net profit to be over US$30 mn, significantly Mkt cap (HK$/US$ mn) 18,793 / 2,420 Blue sky scenario (HK$) 4.5 ahead of CSe/street and US$22 mn for FY21. It noted the better 1H Number of shares (mn) 8,864 Grey sky scenario (HK$) 2.0 Free float (%) 43.1 Performance 1M 3M 12M earnings were driven by stronger sales momentum (CSe +59% YoY), 52-wk range (HK$) 3.31 - 1.49 Absolute (%) (1.4) (23.5) 23.3 improving GM (CSe +2.7 pp YoY), and opex control. ADTO-6M (US$ mn) 12.2 Relative (%) 2.3 (20.0) 14.2 Peripheral momentum to sustain. We believe peripheral saw stronger Year 12/20A 12/21E 12/22E 12/23E ▪ Revenue (US$ mn) 1,214.6 1,517.9 1,597.9 1,731.1 YoY growth in 1H21 on a lower 1Q base and promotion activities EBITDA (US$ mn) 16.1 90.0 118.3 158.1 in 2Q. We believe the momentum will sustain in 2H21-2022 on new EBIT (US$ mn) (7.0) 66.0 94.4 134.1 product launches and moving to new areas such as live-streaming and Net profit (US$ mn) 5.6 67.1 92.0 125.8 lifestyle products. SystemArticle sales is expected intended to see stable growth. for:EPS (CS adj.) (US$) 0.0 0.01 0.01 0.01 Chg. from prev. EPS (%) n.a. 239.0 127.3 n.a. ▪ Service growth to accelerate. We believe continuing ramp in services Consensus EPS (US$) n.a. 0.01 0.01 0.0 is the key differentiation for Razer, especially Fintech sales could EPS growth (%) n.m. 1,057.3 37.2 36.7 accelerate in the next few years as it expands its network (recently P/E (x) 439.6 38.0 27.7 20.3 added ShopeePay for Burger King and 99 Speedmart in Malaysia). Dividend yield (%) 0.0 0.0 0.0 0.0 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 112.2 19.2 13.5 9.2 ▪ Raise TP to HK$3.50. We raise 2021/22E EPS from US¢0.21/0.43 P/B (x) 4.25 3.8 3.25 2.74 to US¢0.72/0.99, and lift TP to HK$3.50 (from HK$3.40) on 22x ROE (%) 1.0 10.7 12.7 14.7 average 2022-23E EV/EBITDA (vs prior EV/sales) to better value the Net debt/equity (%) (100.6) (98.9) (101.2) (100.7) company as it is now generating consistent profit. Introduce 2023E. Source: Company data, Refinitiv, Credit Suisse estimates remain the key differentiator for Razer, especially as it has higher entry 1H21 net profit tracking well ahead. Razer released a positive profit barrier on obtaining various licenses and supporting high traffic flows. alert at noon on 14 July and expects its 1H21 net profit to be at least We expect its sales growth from Fintech could accelerate from 2H21 US$30 mn (vs US$18 mn loss in 1H20), significantly ahead of CS/ as consumers continue to shift toward mobile wallets at point-of-sale street expectations of US$1-2 mn and full-year net profit estimate of payments. This is also supported by its recent partnership with US$20-22 mn. Razer said in the release that the better 1H earnings ShopeePay for enabling the mobile wallet as a payment option for all were driven by stronger sales momentum, improving GM, and Burger King and 99 Speedmart in Malaysia. As a result, we believe continuing opex control. We estimate 1H sales growth of 59% YoY, its service sales growth could accelerate post the pandemic, and the mainly driven by peripheral, while GM has expanded 2.7 pp YoY to better GM of 40-50% will be the key driver for the overall GM to 24.7% on improving GM for hardware/system business. With greater improve. scale and continuing opex control, we believe its opex/sales ratio has dropped to 20-21% of total sales in 1H21 , vs 25.8% in 1H20. Figure 2: Razer quarterly P/L Figure 1: Razer's service sales continue to expand

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Reiterate OUTPERFORM, raise TP to HK$3.50. We raise 2021/ Peripheral momentum to sustain. We believe peripheral saw 22E EPS from US¢0.21/0.43 to US¢0.72/0.99. We lift TP to HK$3.50 stronger YoY growth in 2H21 on lower 1Q base, while the promotion (from HK$3.40) on 22x avg. 2022-23E EV/EBITDA (vs prior EV/sales), activities in 2Q (Amazon Prime Day and 618 promotion) have supported 10% discount vs Logitech, as Razer is now turning into black with peripheral sales to see double-digit YoY growth. We expect the improving profitability. We continue to like Razer on robust gaming peripheral sales momentum will sustain in 2H21/2022 as it launches demand, unique service exposure, and margin improving story. new products for the traditional mice, keyboards, headset, console controllers, etc., while its effort on moving to new areas such as live- streaming and lifestyle products (chair, bag, apparel, etc.) could provide another leg of growth on potential consumer gaming demand slowdown as the economy reopens. Moreover, we believe the GM for its peripheral business has improved ~3 pp YoY, or up slightly HoH, on cost reduction, better mix, and lower logistic costs. For the system business, we believe its top line grew mid-20% YoY in 1H on lower base, but will likely normalise to ~5% YoY growth in 2H. We believe industry-wide chipset constraint is also an issue for Razer, but its GM should continue to improve from 2020 trough. Service growth to accelerate. We believe the ramp in service will

Research Analysts Jerry Su / 886 2 2715 6361 Harvie Chou / 886 2 2715 6364 [email protected] [email protected]

Asian Daily (Asia Edition) 23 Full Report

Asian Daily 15 July 2021 JSW Steel Ltd (JSTL.BO) Maintain UNDERPERFORM Previous Rating: UNDERPERFORM Spread check: Indian spreads continue to weaken; now at Feb-2021 Target price (Rs): 550.00 level Previous target price (Rs): 550.00

▪ Indian steel prices in the trade market have fallen US$30/t in Jul, Price (14-Jul-21, Rs) 700.35 Est. pot. % chg. to TP (21.5) while China export prices remained flat and FTA prices fell US$30/ Mkt cap (Rs/US$ mn) 1,684,878 / 22,604 Blue sky scenario (Rs) 760.0 t, normalising towards China export. Despite being at a discount Number of shares (mn) 2,406 Grey sky scenario (Rs) 360.0 Free float (%) 62.0 Performance 1M 3M 12M of 16%/18% to China/FTA, we maintain our cautious stance on 52-wk range (Rs) 759 - 195 Absolute (%) (3.9) 11.4 260.8 domestic prices on expectations of further correction in export prices. ADTO-6M (US$ mn) 103.3 Relative (%) (4.6) 3.0 214.0 China net steel exports remain elevated, rising 186% YoY in Jun, Year 3/21A 3/22E 3/23E 3/24E ▪ Revenue (Rs mn) 780,590 1,142,422 1,059,585 1,086,772 annualising to 60mt in CY21 (vs 37mt in CY20). While the Chinese EBITDA (Rs mn) 183,610 398,076 297,230 280,671 government aims to curb production in 2H CY21, it is a tough ask EBIT (Rs mn) 136,820 349,265 248,419 231,860 (also inflationary), and we remain skeptical. With China steel inventory Net profit (Rs mn) 79,110.0 235,963 164,151 153,210 now running above CY20Article level, exports are intended likely to remain elevated. for:EPS (CS adj.) (Rs) 32.73 97.62 67.91 63.38 Chg. from prev. EPS (%) n.a. 0.0 0.0 0.0 ▪ Coking coal prices have risen US$60/t since May to 2-year highs, Consensus EPS (Rs) n.a. 77.12 69.85 67.24 hurting domestic spreads further. Domestic ore prices remain EPS growth (%) 96.3 198.3 (30.4) (6.7) elevated as well; NMDC's price cut in Jul was only US$3/t, likely to P/E (x) 21.4 7.2 10.3 11.0 compress JSW's spreads further (no cheap ore integration). Dividend yield (%) 0.7 0.7 0.0 0.0 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 12.4 5.5 7.3 7.7 ▪ JSW is trading at the highest valuations in our coverage, at 2.6x P/B (x) 3.81 2.54 2.04 1.72 12-month forward P/B (vs 0.9x 10-Y average) and 6.4x EV/EBITDA. ROE (%) 19.2 42.5 22.0 16.9 With JSW's Vijayanagar 6mt expansion, capex intensity would remain Net debt/equity (%) 129.4 77.8 57.8 46.9 high in the medium term. Reiterate UNDERPERFORM. Source: Company data, Refinitiv, Credit Suisse estimates Figure 3: China steel inventory higher than that in CY20 Indian steel prices in the trade market have fallen US$30/t in Jul, while China export prices remained flat and FTA prices fell US$30/ t, normalising towards China export. Despite being at a discount of 16%/18% to China/FTA, we maintain our cautious stance on prices. Figure 1: Indian steel prices continued to fall in trade market

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

With JSW's Vijayanagar 6mt expansion, capex intensity would remain high in the medium term. Reiterate UNDERPERFORM Figure 4: JSW is trading at 2.6x 12 month forward P/B

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Coking coal prices have risen US$60/t since May to 2-year highs, hurting domestic spreads further. Domestic ore prices remain elevated. Figure 2: Indian non-ore integrated spreads have fallen to Feb-21 level

Source: RAVE, Credit Suisse estimates

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

JSW is trading at the highest valuations in our coverage, at 2.6x 12-month forward P/B.

Research Analysts Prateek Singh / 91 22 6777 3894 Neelkanth Mishra / 91 22 6777 3716 Abhay Khaitan / 91 22 6777 3747 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 24 Full Report

Asian Daily | Focus List Stock 16 July 2021 Larsen & Toubro (LART.BO) Maintain OUTPERFORM Previous Rating: OUTPERFORM The tail is wagging the dog; core itself has legs such as cyclical, public Target price (Rs): 1,875 capex improvement, self-help (Wcap), plus valuations Previous target price (Rs): 1,800

▪ L&T's recent run, like its run over the past few years, continues to Price (15-Jul-21, Rs) 1,609 Est. pot. % chg. to TP 16.5 be driven by re-rating of IT subsidiaries. Subsidiaries now account Mkt cap (Rs/US$ mn) 2,260,080 / 30,331 Blue sky scenario (Rs) 2,250 for Rs735 of valuation and core business contributes Rs1,140 to our Number of shares (mn) 1,405 Grey sky scenario (Rs) 1,100 Free float (%) 88.2 Performance 1M 3M 12M revised SOTP-based TP of Rs1,875 (from Rs1,800). 52-wk range (Rs) 1,609 - 834 Absolute (%) 6.5 18.3 79.9 ▪ Core EPC has barely re-rated despite cyclical and public capex ADTO-6M (US$ mn) 67.4 Relative (%) 5.8 9.5 32.4 improvement. Core remains attractive at <15x FY23E EPS and <10x Year 3/20A 3/21A 3/22E 3/23E Revenue (Rs mn) 1,454,524 1,359,790 1,604,027 1,821,711 EV/EBITDA. Core trades at absolute Mcap which is on par or below EBITDA (Rs mn) 163,290 156,241 207,442 237,524 levels reached in CY13-end post taper tantrum (Aug-2013). EBIT (Rs mn) 138,667 127,199 176,162 206,196 We expect strong core performance on inflows, execution, and Net profit (Rs mn) 95,490.3 69,010.3 114,640 137,116 ▪ Article intended for:EPS (CS adj.) (Rs) 68.02 49.13 81.62 97.62 Wcap. Inflows can be driven by: (1) ordering revival in states, (2) oil Chg. from prev. EPS (%) n.a. n.a. 0.0 0.0 price recovery in the Middle East, and (3) cyclical pick-up in private Consensus EPS (Rs) n.a. n.a. 69.53 86.1 sector. Execution can be driven by catch-up on lost time during EPS growth (%) 10.8 (27.8) 66.1 19.6 Covid-19 and increased visibility to 3.0x (book to bill) vs 2.8x P/E (x) 23.7 32.7 19.7 16.5 (FY17-19 avg.). Dividend yield (%) 1.1 2.2 1.6 1.6 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 21.7 22.0 16.9 14.9 ▪ Working capital can decline further in % terms, while staying stable in P/B (x) 3.39 2.98 2.7 2.4 absolute, reversing excess Wcap investment in 1H FY20, at the time ROE (%) 14.8 9.7 14.4 15.4 of credit crisis (Op cash of Rs181 bn and Wcap release of Rs52 bn Net debt/equity (%) 168.0 134.7 129.3 120.0 in FY21). L&T ended FY21 with just Rs16 bn std. net debt vs Rs158 Source: Company data, Refinitiv, Credit Suisse estimates bn at FY20-end, driving lower interest cost. Ordering activity to pick up; add to strong visibility. We expect strong core business performance on inflows, execution, and working Strong IT subsidiaries re-rating, Core business at <15x FY23E P/ capital. Inflows can be driven by: (1) ordering revival in states, (2) E. L&T's recent run, like its run over last few years continue to be driven oil price recovery in the Middle East, and (3) cyclical pick-up in the by re-rating of IT subsidiaries. Subsidiaries now account for Rs735 of private sector. Execution can be driven by catch up on lost time during valuation and core business contributes Rs1,140 to our revised SOTP- Covid-19 as well as increased visibility to 3.0x (book to bill) vs 2.8x based TP of Rs1,875 (from Rs1,800). (FY17-19 average). Figure 1: L&T SOTP—Core EPC is two-thirds of value Figure 5: Some EPC impact in 1Q from second wave, margins at ~12%

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates WCap release in FY21; debt reduced. L&T reported strong Core EPC has barely re-rated despite cyclical and public capex operating cash flow of Rs181 bn in FY21, driven by absolute Wcap improvement. Core business valuation remains attractive at less than release (Rs52.5 bn). Working capital can decline further in % terms, 15x FY23E EPS and less than 10x FY23E EV/EBITDA. while staying stable in absolute reversing excess Wcap investment in Figure 2: Core business is valuation is still near earlier lows, at 15x P/E 1H FY20. L&T ended FY21 with just Rs16 bn of net debt at std level vs Rs158 bn at FY20-end, driving lower interest cost as well. Figure 6: L&T—trades at less than 15x P/E and 10x EV/EBITDA

Source: Credit Suisse estimates

Figure 3: Subsidiaries value (with 25% Figure 4: Core business MCap below Source: Credit Suisse estimates holdco discount) CY13-end levels (no holdco disc.)

Source: Credit Suisse estimates Source: Credit Suisse estimates

Core business continues to trade at absolute Mcap which is on par or below absolute levels reached in CY13-end post resolution of taper tantrum in Aug-2013.

Research Analysts Lokesh Garg / 91 22 6777 3743 Gaurav Birmiwal / 91 22 6777 3873 [email protected] [email protected]

Asian Daily (Asia Edition) 25 Full Report

Asian Daily 16 July 2021 Wipro Ltd (WIPR.BO) Maintain NEUTRAL Previous Rating: NEUTRAL New report: 1QFY22 review: Beat on revenue but adjusted for one-offs Target price (Rs): 575.00 operating profit largely in line Previous target price (Rs): 500.00

▪ Adjusted operating profit largely inline. Wipro reported robust revenue Price (15-Jul-21, Rs) 575.75 Est. pot. % chg. to TP (0.1) growth of 12% QoQ in constant currency (cc) terms ahead of our Mkt cap (Rs/US$ mn) 3,143,518 / 42,186 Blue sky scenario (Rs) 800.0 and consensus estimates of 8.9% and 7.4%, respectively. Adjusted Number of shares (mn) 5,460 Grey sky scenario (Rs) 400.0 Free float (%) 26.6 Performance 1M 3M 12M for Capco acquisition, the organic CC QoQ growth was 4.9% ahead 52-wk range (Rs) 576 - 262 Absolute (%) 3.2 22.7 119.0 of Infosys (4.8%) and TCS (2.4%). ADTO-6M (US$ mn) 84.7 Relative (%) 2.5 13.8 71.5 Operating profit largely in line. Reported EBIT margin came in Year 3/21A 3/22E 3/23E 3/24E ▪ Revenue (Rs mn) 619,430 783,920 884,751 976,669 19%, a 5.7% beat on operating profit. However, adjusted for one- EBITDA (Rs mn) 150,790 179,146 198,626 213,585 time gains the EBIT margin was 67bps below CS-e, resulting in inline EBIT (Rs mn) 123,134 141,082 160,005 175,999 operating performance. Adjusted EBIT margin declined by 319 bps Net profit (Rs mn) 108,009 122,565 134,745 146,679 QoQ due to Capco dilutionArticle and 1-month impactintended of wage hikes. for:EPS (CS adj.) (Rs) 19.55 22.38 26.09 28.4 Chg. from prev. EPS (%) n.a. 7.0 5.3 5.0 ▪ 2QFY22 guidance of 5-7% cc QoQ growth. 1Q22 revenue growth Consensus EPS (Rs) n.a. 20.67 23.18 25.54 was mainly led by Capco acquisition in BFSI segment, Metro AG EPS growth (%) 15.8 14.5 16.6 8.9 deal ramp (US$700 mn deal) up in consumer vertical and some P/E (x) 29.4 25.7 22.1 20.3 quarter specific projects in energy vertical. Growth in Healthcare and Dividend yield (%) 0.4 0.3 0.4 0.3 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 19.2 16.2 14.8 13.1 Technology verticals remained muted at low single digits, contrary to P/B (x) 5.74 4.69 4.63 3.82 trends seen in TCS and Infosys. ROE (%) 19.5 20.0 20.6 20.7 ▪ Maintain NEUTRAL and increase TP of Rs575 (from Rs500). We Net debt/equity (%) (45.9) (36.5) (32.9) (43.7) change FY22E-24E EPS by 5-7% and increase TP due to earnings Source: Company data, Refinitiv, Credit Suisse estimates changes and roll forward of our valuation to Dec-2022 end. Reported EBIT margin (post-forex) came in 19% (51bps above CS est.), leading to a 5.7% beat on operating profit. However, adjusted Strong beat on revenue for one-time gains on disposal of some acquisitions the EBIT margin Wipro reported strong revenue growth of 12% QoQ in constant declined by 319 bps QoQ and was 15 bps lower YoY, resulting in in- currency (cc) terms ahead of our and consensus estimates of 8.9% and line operating profit. Adjusted EBIT margin of 17.8% is now close to the 7.4%, respectively. The sharp sequential acceleration in revenue was levels seen pre-pandemic (2Q-3QFY20). Sequential decline in margins mainly due to consolidation on Capco during the quarter. Adjusted for was due to Capco acquisition at Apr-end (130 bps) and one-month the same, the organic CC QoQ growth was 4.9% ahead of Infosys impact of wage hikes rolled out to senior employees from 1-Jun-2021. (4.8%) and TCS (2.4%). Organic growth during the quarter was Going forward, several margin pressures are expected: (1) Full impact helped by ramp up of US$700 mn Metro AG deal and some quarter of wage hikes rolled out in 1Q22 to come in 2Q22; (2) Full impact of specific projects in energy & utilities vertical. On a cc YoY basis, Capco margin dilution to be seen in 2Q22 (1Q22 had only 2 months 1Q22 saw 21.3% growth in IT Services revenue, which adjusted for of consolidation); (3) Increasing attrition levels (LTM attrition increased acquisitions should be close to 13%. from 12.1% in 4Q21 to 15.5% in 1Q22, which suggests annualized Figure 1: Beat on revenue growth; Operating profits largely in line attrition of 24% in 1Q22 vs 17% in 4Q21 and pre-pandemic levels of ~17%) and talent shortage in the industry could lead to higher retention costs for the company. Maintain NEUTRAL with a new TP of Rs575 Factoring 1QFY22 results and updated guidance, we adjust our FY22-24E EPS estimate by 5-7%. While Wipro has shown strong momentum on revenue performance over the last 6-9 months, we maintain our NEUTRAL rating mainly due to the rich valuation post the recent stock price run-up. Further, we believe the margins will come under pressure as company strives for sector leading growth. Our TP increases by 15% to Rs575 (from Rs500) due to earnings changes and roll forward of our valuation to Dec-2022 end. Source: Credit Suisse estimates, Company data, VisibleAlpha, Adj EBIT excludes one-time gains (Rs2.2 bn in 1Q22)

The company won 8 large deals in 1Q22 and Total Contract Value for the quarter stood at US$750 mn. While last 2 quarters had instances of mega deals (Metro AG, Telephonica), current quarter was a healthy mix of large, mid-sized and small deals. Healthcare, BFSI and consumer verticals were main contributors to deal wins. Wipro has guided for 5-7% cc QoQ growth for 2Q22. Company continues to maintain that its EBIT margins will be in the range of 19-19.5% ex of Capco. Post 2% Capco dilution, margins will be between 17% to 17.5%. Operating margins largely in-line

Research Analysts Varun Ahuja, CFA / 65 6212 3017 Krati Sankhlecha / 91 22 6777 3892 [email protected] [email protected]

Asian Daily (Asia Edition) 26 Full Report

Asian Daily 15 July 2021 CIMB Group Holdings Bhd (CIMB.KL) Maintain OUTPERFORM Previous Rating: OUTPERFORM 2Q21 preview : Weaker QoQ, but likely to be ahead of ROE target Target price (RM): 5.60 Previous target price (RM): 5.60

▪ Key takeaways from pre-2Q21 results briefing for investors: (1) Price (15-Jul-21, RM) 4.54 Est. pot. % chg. to TP 23.3 revenue could be a touch weaker QoQ due to lower NOII, while NII Mkt cap (RM/US$ mn) 45,464 / 10,838 Blue sky scenario (RM) 5.9 remains healthy; (2) asset quality stable and no major pressure on Number of shares (mn) 10,014 Grey sky scenario (RM) 2.2 Free float (%) 58.5 Performance 1M 3M 12M credit cost; and (3) costs under control. 52-wk range (RM) 4.70 - 2.90 Absolute (%) (1.7) 5.8 23.7 ▪ CIMB is due to release 2Q21 results at end-Aug-2021. The feedback ADTO-6M (US$ mn) 12.1 Relative (%) 2.1 11.3 27.8 so far suggests 1H21 results should be tracking well compared to its Year 12/20A 12/21E 12/22E 12/23E Pre-provision Op profit (RM mn) 8,212.2 9,150.3 9,814.0 10,807.5 6-7% ROE guidance (1Q21 = 9.3%). Pre-tax profit (RM mn) 1,530.3 5,931.0 7,599.2 8,585.6 ▪ While we foresee a robust 1H21 performance that could put pressure Net attributable profit (RM mn) 1,194.4 4,610.3 5,909.0 6,730.7 on the group to review its 2021 ROE target, we expect management EPS (CS adj.) (RM) 0.13 0.47 0.58 0.63 Article intended for:Chg. from prev. EPS (%) n.a. 0.0 0.0 0.0 to exercise some prudence in its 2H guidance, given the operational Consensus EPS (RM) n.a. 0.43 0.51 0.56 headwinds caused by lockdown measures. EPS growth (%) (73.6) 275.8 23.4 8.0 Maintain OUTPERFORM rating. We believe that the group's "self P/E (x) 36.2 9.6 7.8 7.2 ▪ Dividend yield (%) 1.1 5.1 6.3 6.7 help" initiatives could continue to drive expansion in ROE that could BVPS (CS adj.) (RM) 5.82 6.07 6.15 6.2 re-rate the stock. Valuationjason.chiu#uobkayhian.com.hk is attractive at 10x 21 P/E and 0.7x P/BV. P/B (x) 0.78 0.75 0.74 0.73 ROE (%) 2.1 7.9 9.5 10.2 Below are the key updates and preview of the 2Q21 results on CIMB ROA (%) 0.2 0.7 0.9 1.0 following a briefing by management Tier 1 Ratio (%) 14.6 15.1 15.0 15.9 Source: Company data, Refinitiv, Credit Suisse estimates Restructured loans trended lower prior to re-introduction of moratorium. The group's restructured loans (R+R) stood at 13% of results. While asset quality has been stable QoQ, some weakness in total loans as at end-Mar-2021 (Malaysia = 14%, Singapore = 5%, the unsecured loan segment could keep credit cost elevated at closer Thailand = 16%, Indonesia = 13%). In Malaysia, R+R loans as % to the higher end of management's guidance of 240-260 bp. However, of total loans in various segments stood at 11% for consumer, 19% revenue remains robust and well supported by NII strength. for commercial, and 17% for corporates. The level of restructured Making good progress on cost controls. Management has so far consumer loans improved to as low as 6% of total (from 11% in end- been making good progress on its cost take-out plans to reduce cost by Mar-2021) towards end-May-2021 and during the full-lockdown period RM300-500 mn over 2021-22. In 1Q21, management identified areas trended up again to around 9% towards end-Jun-2021. With the re- for cost optimisation in Thailand (RM30 mn) and Singapore (RM45 mn). introduction of the loan moratorium on 7-Jul-2021 for 6 months on "opt- Given these are annualised cost savings, the full impact of the cost in" basis, management expects the level of R+R loans to rise further in savings will only be reflected in 2022), Meanwhile, the de-consolidation Malaysia. However, management does not expect R+R loans to surpass of TNG Digital has also reduced cost by RM200 mn . In 2Q21, 20% of total loans at the group level. management intends to further identify areas within its technology costs No major pressure on credit cost. The group's official credit cost in Malaysia that can be optimised. Having brought CIR down to 48.7% guidance stands at 80-90 bp (82 bp registered in 1Q21). in 1Q21 (first time below 50% since 2007), management remains Per management, asset quality has been relatively stable in positive on the underlying cost trajectory. 2Q21, hence it does not foresee the need for sizeable Digital strategy. Even though Touch'N'go (TNG) did not bid for a COVID-19-related provisions (unlike 1Q21 where close to RM200 mn digital banking license, management does not rule out the possibility of provided for transport sector exposure). Management intends to review working together with one of the successful bidders. There appears to its MEF (macroeconomic factor) and overlay provisions with possibility be intense competition with 29 bidders for 5 digital banking licenses. of further top-ups. While management did not commit to any specific revised credit cost target, we get the impression that there is no major Sensitivity analysis. Our sensitivity analysis suggests that each 5 bp upside risk to the credit cost guidance, as management seems to think shift in NIM from our assumption (2021 NIM +11 bp YoY) results in a that its pre-emptive provisions (RM1.6 bn) should be ample to absorb 6% impact on net profit. Separately, each additional 10 bp of credit cost any pressure from potential asset quality weakness. results in a reduction in 2021 net profit by 6%. Healthy revenue, but likely weaker QoQ. Management said NII (net interest income) remained firm in 2Q21 supported by: (1) better QoQ loan growth following some large drawdowns, and (2) healthy NIM (mainly in Malaysia while to a smaller extent in Indonesia and Singapore). However, NOII is expected to be weaker QoQ in 2Q21 as fee income reverted to a normalised level after a spike in 1Q21. Overall, management expects 2Q21 revenue to be a touch weaker QoQ. Indonesia's PPOP remains robust. The feedback on 2Q21 trend suggests the performance should be broadly consistent with the 1Q21 Figure 1: Summary of sensitivity analysis and management guidance

Source: Company data, Credit Suisse estimates Research Analysts Danny Goh / 60 3 2723 2083 [email protected]

Asian Daily (Asia Edition) 27 Full Report

Asian Daily 15 July 2021 Emperador Distillers Inc. (EMP.PS) Maintain OUTPERFORM Previous Rating: OUTPERFORM Increasing its global profile Target price (P): 13.00 Previous target price (P): 13.00

▪ Emperador Distillers (EMP) reported strong performance in its Price (15-Jul-21, P) 12.60 Est. pot. % chg. to TP 3.2 overseas operations in the past five months (Jan-May), as it continues Mkt cap (P/US$ mn) 198,280 / 3,951 Blue sky scenario (P) 19.0 to expand its brandy and scotch whisky businesses to take advantage Number of shares (mn) 15,736 Grey sky scenario (P) 5.0 Free float (%) 14.1 Performance 1M 3M 12M of the increasing global demand. 52-wk range (P) 12.80 - 8.98 Absolute (%) 21.9 20.5 43.5 ▪ As Emperador diversifies its revenue streams, its international ADTO-6M (US$ mn) 0.5 Relative (%) 25.4 16.9 31.7 footprint could accelerate growth. The shifting product mix will also Year 12/20A 12/21E 12/22E 12/23E Revenue (P mn) 52,834.3 56,007.9 64,239.2 73,802.7 continue to provide margin improvement in the years to come. EBITDA (P mn) 12,702.6 15,031.5 17,449.7 19,785.0 ▪ Emperador is planning a secondary listing in Singapore to raise a EBIT (P mn) 9,985.4 11,682.7 13,399.6 15,763.5 maximum of S$1 bn or ~P36.9 bn. Net profit (P mn) 7,968.3 8,748.9 10,418.5 12,103.7 Article intended for:EPS (CS adj.) (P) 0.49 0.54 0.64 0.75 ▪ Management said that it wants to raise its profile abroad as an Chg. from prev. EPS (%) n.a. 0.0 0.0 0.0 international company based in the Philippines. It also wants to Consensus EPS (P) n.a. 0.53 0.59 0.71 leverage its growing international business. EPS growth (%) 18.5 9.8 19.1 16.2 P/E (x) 25.7 23.4 19.6 16.9 Dividend yield (%) 0.4 1.3 1.5 1.8 Expanding its footjason.chiu#uobkayhian.com.hkprint. We hosted a fireside chat with Emperador EV/EBITDA (x) 17.4 14.4 12.6 11.2 Distillers' President and CEO, Mr Winston Co, and Investor Relations P/B (x) 2.91 2.27 2.1 1.94 Officer, Mr Kenneth Nerecina, to give us updates on the company’s ROE (%) 11.3 10.9 11.1 11.9 Net debt/equity (%) 33.9 20.9 22.6 23.0 business and strategies. Emperador reported strong performance in its overseas operations in the past five months (Jan-May), as it continues Source: Company data, Refinitiv, Credit Suisse estimates to expand its brandy and scotch whisky businesses to take advantage Figure 1: Net profit breakdown of the increasing global demand. As Emperador diversifies its revenue streams, it also shields itself from rising domestic taxes. The shifting product mix will also continue to provide margin improvement in the years to come. Whisky business gaining global ground . Whisky remains the company’s growth driver. In the past five months, whisky sales have been growing ~30% YoY, despite weak travel retail, as the company continues to gain traction across the UK, Asia, and the Americas. Growth was led by strong performance of its top global whisky brands, Dalmore and Jura, which grew double digits across several international markets. Its scotch whisky brand, Tamnauvlin, also gained significant momentum, and is now among the Top 5 scotch whiskey brands in the UK; Fettercairn was introduced just last year. These four brands (single malts) now account for 75% of revenues and net income for its whisky Source: Credit Suisse estimates business. Its brands are now available in six continents and across 100 countries, with many international airports carrying EMP's products. The whisky business has far more potential for growth—in the next five years, its growth will accelerate even further. North America and Asia Figure 2: Global distillers - Key valuations are the most exciting markets—five years ago both contributed 4% to the business, now they account for more than half. Brandy business boosted by international sales. Its branded business has been growing steadily, high single-digit growth in the first five months of 2021. Growth was achieved amid improving demand for both local and offshore brandy sales (e.g., the US, the UK, and Mexico). Its Emperador and Fundador brands both saw increasing sales during the period. The brandy business grew 376% in the UK, 44% in Mexico, 74% in Canada, and 24% in the US, all considered to Source: Credit Suisse estimates be significant markets for Emperador’s international business. In Africa, Tres Cepas Brandy, which is under Emperador’s subsidiary in Spain, has expanded its market share in Guinea and Cameroon. Mulling a Singapore listing . Emperador is planning a secondary listing in Singapore to raise a maximum of S$1 bn or ~P36.9 bn. Management said it wants to raise its profile abroad as an international company based in the Philippines. It also wants to leverage its growing international business. Emperador is eyeing to further expand fits acilities and capacities after seeing an increased demand for its single malt brands. Emperador has allotted a budget of P1.5 bn for capital expenditures this year, as it accelerates its global expansion plans.

Research Analysts Hazel Tanedo / 63 2 885 87757 [email protected]

Asian Daily (Asia Edition) 28 Full Report

Asian Daily 15 July 2021 Metropolitan Bank & Trust Co (MBT.PS) Maintain NEUTRAL Previous Rating: NEUTRAL Need to see market share recovery Target price (P): 53.20 Previous target price (P): 51.90

▪ We review our assumptions amid the recent recovery of the market. Price (14-Jul-21, P) 49.00 Est. pot. % chg. to TP 8.6 Philippines' banks outperformed YTD, albeit, we believe a rerating for Mkt cap (P/US$ mn) 220,373 / 4,390 Blue sky scenario (P) 64.0 MBT is limited, i.e., strong capital position and provisioning policy are Number of shares (mn) 4,497 Grey sky scenario (P) 42.6 Free float (%) 49.0 Performance 1M 3M 12M offset by market share loss in loans and tempered NIM potential. 52-wk range (P) 50.10 - 31.18 Absolute (%) (0.5) 10.5 44.5 ▪ EPS would rebound in 2021-22E, even after cutting these by 12.4% ADTO-6M (US$ mn) 3.5 Relative (%) 0.7 6.0 33.8 and 8.4% on normalisation of credit cost. Asset quality trends are Year 12/20A 12/21E 12/22E 12/23E Pre-provision Op profit (P mn) 61,101.0 44,855.6 49,016.1 54,579.3 manageable, but anemic lending business makes its PPOP profile the Pre-tax profit (P mn) 21,020.0 28,979.4 35,663.1 41,187.1 weakest of the 'Big 3'. We also introduce our 2023E estimates. Net attributable profit (P mn) 13,831.0 21,194.7 26,165.4 30,263.0 A reopening thesis is key as management highlights the slowdown in EPS (CS adj.) (P) 3.08 4.71 5.82 6.73 ▪ Article intended for:Chg. from prev. EPS (%) n.a. (12.4) (8.4) n.a. their corp. segment was in top corporates and shorter duration loans, Consensus EPS (P) n.a. 5.65 6.24 7.26 specifically in the trade and manufacturing sectors. Auto loans have EPS growth (%) (50.7) 53.2 23.5 15.7 been weak, but, sequential monthly sales recovery is encouraging. P/E (x) 15.9 10.4 8.4 7.3 Dividend yield (%) 2.0 8.2 2.0 2.0 ▪ We revise our DDM-based TP by 2.5% to P53.20, from P51.90, as BVPS (CS adj.) (P) 73.54 74.25 79.07 84.8 we roll forward ourjason.chiu#uobkayhian.com.hkvaluation to 2022E, offsetting the EPS cuts. We P/B (x) 0.67 0.66 0.62 0.58 maintain NEUTRAL given a balanced risk-reward picture for MBT. ROE (%) 4.2 6.4 7.6 8.2 Upside catalysts are better loans and market share recovery. Likely ROA (%) 0.6 0.9 1.1 1.2 downside is BVPS erosion from MTM risk in the securities book. Tier 1 Ratio (%) 19.3 18.5 18.5 18.2 Source: Company data, Refinitiv, Credit Suisse estimates Sharp EPS rebound despite cuts in 2021-22E Figure 2: Quarterly asset quality indicators Even after cutting our EPS estimates for MBT by 12.4% and 8.4% in 2021 and 2022E, respectively, we still expect a sharp EPS rebound of 53.2% and 23.5% YoY, which would be primarily driven by the normalisation of credit cost. Asset quality trends have been manageable. However, drivers for MBT's NII have been weak, i.e., we expect loans to decline by 9.2% YoY this year (but recover by 7.2% in 2022E), while NIMs will decline by 36 and 9 bp in 2021-22E, respectively. We also introduce our 2023 estimates. Figure 1: MBT's summary of forecast changes Source: Company data, Credit Suisse estimates But lending momentum will remain weak vs other 'Big 3' MBT has been losing market share for four straight quarters and we do not expect a reversal in this year. Management highlighted the slowdown in their corp. segment was more pronounced in top corporates and shorter duration loans, which meant their customers (specifically in the trade and manufacturing industries) are still uncertain about the economy, amid disrupted business cycles and deferred expansion plans. In the consumer book, the auto loan segment (35% of consumer mix, -28% YoY in 1Q21) will be a key segment to watch as credit standards remain strict despite some sequential recovery in monthly car sales. Source: Company data, Credit Suisse estimates Maintain NEUTRAL, need to see market share recovery Asset quality trends appear stable We revise our DDM-based TP higher by 2.5% to P53.20 as we factor in Provisioning requirement tapered off similar to the experience of other the aforementioned EPS cuts, offset by our valuation assumptions being banks. New NPL formation was subdued with its NPL ratio flat QoQ, rolled forward to 2022E. Nevertheless, we retain NEUTRAL on MBT and NPL coverage marginally improving to 166% in 1Q21. Breaking as we believe its risk-reward profile is currently balanced, i.e., cheap down the NPLs, management shared that it was in the corp. segment valuations with strong capital position and provisioning level, but loan where there was some build-up in bad loans (i.e., 1.9% in 1Q21 vs growth and NIM potential remain tempered. Upside risks: better-than- 1.4% in 4Q20). Although, on the flipside the consumer book declined expected loan recovery (especially in autos), lower new NPL formation (i.e., 4.0% vs 5.6%) likely driven by write-offs. Management is still and provisioning. Downside: further extension of the lockdown (due guiding for a peak NPL ratio of 5.0% and credit cost of ~100 bp for to the wave of new cases from delta variant) and BVPS erosion from 2021E, although there are signs suggesting they may remain below this MTM's risk in the securities book. level (i.e., restructured loans only 0.5% of total loans).

Research Analysts Danielo Picache / 63 2 885 87758 [email protected]

Asian Daily (Asia Edition) 29 Full Report

Asian Daily 15 July 2021 Singapore Property Sector Primary sales of 872 units in June; in good stead for 2H21 with resumption of launches

▪ Private primary sales (ex-EC) in June saw 872 units sold, a broadly with 47.3% of its 296 units sold to date. Product attributes are likely stable -2.6% MoM momentum on HA restrictions. This brings 1H21 the key differentiator of performance (near to MRT etc.), with buyers sales to 6,530 units (+62.8% YoY). Alongside relatively high absolute continuing to appear price sensitive. Observing the inventory position resale volumes of 1,114 units in June, this brings total 1H21 volumes of key large-cap developer projects, sell-through rates appear healthy, to 15,887 units, a strong ~58.0% of our 2021 estimates. with launched projects having already 72% sold collectively. ▪ Hyll on Holland led June's sales with 87 units sold, supported by Figure 3: Inventory position of large-cap developers discounting activity. This is unlikely a broad-based indication of distress, but likely a result of keen competition amongst projects in the submarket. Nonetheless, key large-cap developers' projects remain well-sold at 71.7%, clearArticle of any major distress intended signals. for: ▪ The momentum of sales could likely continue into 2H21, on account of ~18.6k unsold units, while catalysts for the residential sector include the resumption of launches, with UOL's The Watergardens to open for previews from jason.chiu#uobkayhian.com.hk17 July at "under $1,400psf". Steady resumption of launches arguably puts the sector in good stead for a healthy improvement in volumes. ▪ Alongside improving economic conditions, and expectations of steady residential volumes, opportunities for capital recycling and redevelopments remain in store; with developers at 0.72x P/B (-0.66 SD below 10-year historical averages), we maintain our OUTPERFORM ratings on CAPL and UOL. Source: URA, Credit Suisse estimates

Figure 1: June 2021 private primary volumes (ex-ECs) Figure 4: June 2021 primary sales (ex-ECs) -2.6% MoM, -12.6 YoY

Source: URA

Hyll on Holland led June's sales with 87 units sold, supported by discounting activity where transacted ASPs ranged $2,242-2,647 psf, lower versus previous transacted range of $2,440-2,904 psf. In contrast, top selling OCR/RCR projects were relatively more resilient: Treasure at Tampines achieved median ASP of $1,411 (-0.8% MoM) on 80 units sold while Normanton Park achieved median ASP of $1,821 (+0.8% MoM) on 62 units sold. Source: URA, Credit Suisse estimates Figure 2: Top-selling projects (ex-ECs) in June 2021 Figure 5: 1H21 total sales up 129.2% YoY

Source: URA, Credit Suisse estimates

Source: URA

The discounting at Hyll on Holland is unlikely broad-based (CCR flash prices: +0.6% QoQ in 2Q21), and likely case-specific, given slow take- up with only 2.8% of its total 319 units sold in the months prior to June since its Oct'2020 launch on keen competition in the sub-market (now 29.8% sold as of June). By contrast, comparable neighbouring launch of One Holland Village Residences has achieved better take-up

Research Analysts Louis Chua, CFA / 65 6212 5721 Nicholas Teh / 65 6212 3026 Terence Lee, CFA / 65 6212 3011 [email protected] [email protected] [email protected]

Asian Daily (Asia Edition) 30 Full Report

Asian Daily 15 July 2021 Korea Consumer Monthly New report: 2Q preview overall solid, 3Q to be affected by social distancing

▪ 2QTD consumption tracking stronger. May retail sales rose 5.5%, softer than CSe. High base (hygiene personal care goods, beverage) with 2-year CAGR similar to the YTD trend. Consumption base gets and cost-push factor in packaging, raw material/ingredients could higher in June, hence YoY growth could look to decelerate, but the weigh on blended margins, etc. These could be offset by the luxury growth vs 2019 should look similar to the YTD trend. Luxury, apparel, brands growth in China, beverage price hike, and Physiogel brand and food categories look to be strong in 2Q. expansion. ▪ E-commerce GMV +19.8% YoY in May. GMV growth was similar CJCJ. Revenue and OP should be in line with CSe and consensus. to the YTD trend. Online penetration rose to 36.3% from 35.8% Despite the high base and higher soft commodities prices, the company in April. Grocery and cosmetics GMVs were strong, while apparel has raised the prices of some of its processed food, hence the net GMV decelerated. Online penetration was up MoM for cosmetics and impact should still be positive. Bio business should improve with the electronic goods, down Articlefor apparel and grocery. intended for:higher spot price trend in its key products, i.e., tryptophan, lysine, etc. ▪ Social distancing raised to Level 4. July consumer sentiment could be Orion. Revenue and OP could look weaker than our and consensus hurt by surging Delta variant cases leading to tighter social distancing, estimates, on the high base and margin pressure on rising ingredient effective 12-25 July. Discretionary consumption should slow down cost. and dining-in demand should increase near term. Previous social jason.chiu#uobkayhian.com.hkHotel Shilla. TR business revenue looks to be better than expected, distancing cases had around one-month-long impact on broader and hotel business is also improving sequentially. OP should be in line consumption. with consensus but better than our estimates. ▪ 2Q preview. Businesses that were affected by the stay-at-home trend last year should deliver strong recovery in operation this 2Q. 2Q Shinsegae. Revenue and OP look to be better than our and consensus earnings could be better than consensus and CSe for Shinsegae. We estimates. Department store revenue looks better than expected, on expect in-line results for Emart, Amore, LG H&H, Hotel Shilla, Emart, strong luxury and apparel sales. TR looks to be stronger than our BGF Retail, and CJCJ. However, GS Retail, Lotte Shopping, KT&G, estimates. and Orion could post weaker-than-expected 2Q results. Emart. The disclosed parent+SSG.com revenue was in line with CSe. 2Q OP should be better than CSe, but largely in line with consensus. 2QTD consumption is tracking stronger Parent operation was solid on market share gain, higher food price, etc. Most of the businesses’ profit should improve YoY and QoQ except for Figure 1: Total retail sales and YoY Figure 2: E-commerce GMV and YoY the hotel business. Lotte Shopping. Revenue and OP could disappoint. Although department store operation benefited from a low base, monthly operational momentum looked to have lagged vs peers at both department store and hypermarket. Affiliate companies’ operations look weaker than our estimates on seemingly weak electronic appliance demand YoY, on higher base. BGF Retail. Revenue and OP should be in line with our and consensus estimates. Although the overall top line recovery is more gradual, Source: KOSIS, Credit Suisse Source: KOSIS, Credit Suisse category-mix improvement (less tobacco on high base) and various cost reduction efforts should lead to an improved margin. GS Retail. Revenue and OP could be in line with CSe, but weaker than consensus estimates. CVS channel revenue growth does not Figure 3: Consumer Sentiment Index Figure 4: Dept. store sales vs 2019 look to have fully recovered, on extended social distancing measures. Supermarket operation could be weaker YoY on higher base on ongoing restructuring. Losses in new businesses, including e- commerce, could also weigh on profitability.

Source: KOSIS, Credit Suisse Source: KOSIS, Credit Suisse

2Q preview AmorePacific. Revenue and OP should be largely in line with expectations. Key strategies, i.e., rechanneling into e-commerce, offline restructuring, luxury brands growth in China, etc., are well on track, and likely to offset possibly higher A&P expenditure in China. LG H&H. Revenue and OP should be largely in-line with consensus,

Research Analysts A-Hyung Cho / 82 2 3707 3735 [email protected]

Asian Daily (Asia Edition) 31 Full Report

Asian Daily 15 July 2021 Naver (035420.KS) Maintain OUTPERFORM Previous Rating: OUTPERFORM 2Q21 preview: Solid top-line growth as the biggest beneficiary of Target price (W): 570,000 digital ad market acceleration Previous target price (W): 520,000

▪ We preview NAVER's 2Q21 earnings, which is scheduled for 22 July. Price (15-Jul-21, W) 449,000 Est. pot. % chg. to TP 26.9 We expect NAVER's earnings to likely largely meet consensus and Mkt cap (W bn/US$ mn) 73,754 / 64,642 Blue sky scenario (W) 670,000 our estimates. Number of shares (mn) 164.26 Grey sky scenario (W) 370,000 Free float (%) 90.3 Performance 1M 3M 12M ▪ As we had highlighted in our recent Korea Internet Sector report, 52-wk range (W) 449,000 - 263,000 Absolute (%) 16.0 14.7 56.7 NAVER will be the largest beneficiary of accelerated growth of the ADTO-6M (US$ mn) 291.4 Relative (%) 15.2 11.9 7.5 digital ad industry. We estimate top-line growth in 2Q21 to reach Year 12/20A 12/21E 12/22E 12/23E Revenue (W bn) 5,304.1 6,705.4 8,060.4 9,244.1 29% YoY, in spite of seemingly rising offline traffic in the June quarter. EBITDA (W bn) 1,572.8 1,840.0 2,642.5 3,171.2 ▪ In 2H21, key positive operational developments include: (1) rising EBIT (W bn) 1,215.3 1,437.6 2,045.5 2,409.3 visibility on sustaining solid ad sales; (2) NAVER Pay trying to Net profit (W bn) 1,002.1 16,518.4 1,842.0 2,186.6 Article intended for:EPS (CS adj.) (W) 6,893 113,634 12,672 15,042 monetise payment volume multiple times; and (3) ARPU expansion of Chg. from prev. EPS (%) n.a. (0.1) 2.9 0.4 global webtoon platform. Consensus EPS (W) n.a. 105,394 10,644 12,308 We raise our 2022/23 OP estimates by 5.7%/2.3% mainly due to EPS growth (%) 72.1 1,548.6 (88.8) 18.7 ▪ P/E (x) 65.1 4.0 35.4 29.8 stronger top-line growth of core advertising sales. Accordingly, our Dividend yield (%) 0.1 1.8 0.2 0.0 SOTP-based TP increasesjason.chiu#uobkayhian.com.hkto W570k (from W520k). NAVER has EV/EBITDA (x) 46.3 39.8 27.7 22.8 been a laggard compared with other platforms in Korea YTD, and P/B (x) 7.71 2.67 2.6 2.4 we believe rising visibility on stronger top-line growth and accelerated ROE (%) 12.7 100.4 7.4 8.4 monetisation of major subsidiaries could be positive catalysts in 2H21. Net debt/equity (%) (10.6) (2.1) (1.8) (6.0) Source: Company data, Refinitiv, Credit Suisse estimates Solid core advertising momentum to satisfy 2Q21 earnings. providing improved user experience, as in the case of Shopify NAVER is scheduled to report largely in-line 2Q21 earnings on 22 (Lightspeed & Shopify 2030, July 2021). One of the related business July: (1) Advertising sales momentum in 2Q21 should remain solid at model expansion in 2H21 is fulfillment solution, and it is now more 47% YoY for display ad, 10% YoY for search and 20% YoY for the feasible due to the launch of NFA (NAVER fulfillment alliance) with CJ commerce segment. We attribute this strong momentum to acquisition Logistics; of brand advertisers (across electronics, luxury, and fashion segments), and evolvement of advertising products, which can measure 3) ARPU expansion of NAVER Webtoon in the global market. On the performance more effectively. In addition, under-monetized apps, back of rising traffic on digital content platforms as well as completion of Series and ZEPETO, started to offer more ad slots on rising time the Wattpad acquisition, we expect more aggressive ARPU expansion, spent of users; and (2) smartstore GMV growth is intact at over 40% particularly outside of the domestic market. NAVER Webtoon Korea has as brand merchants are increasingly NAVER's commerce solutions' successfully improved profitability through ad sales and various models utilisation (Live commerce tool and brand search ads). We expect the of traffic monetisation, and we believe the company is ready to replicate commerce segment to grow 42% YoY, outgrowing total GMV increase the success in the global market. of 29%, indicating that overall take rate is on the upward trend; and (3) Figure 2: We now expect stronger ad Figure 3: NAVER's commerce sales vs. operating margin would remain flat at 20% due to recognition of equity sales growth take rate compensation cost and hiring of engineers. While we do not expect meaningful profitability expansion in 2Q21, we think market will be more focused on the sustainability of top-line growth. Figure 1: 2Q21 earnings preview table

Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates estimates

Earnings revisions, TP change, and catalyst. We lift our top-line estimates to reflect stronger advertising sales outlook and also updated

Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse equity method gain from Z Holdings. Accordingly, we increase our estimates 2021E-23E OP estimates by 0.4-5.7%. We also increase our SOTP- based TP to W570k (from W520k) as we move our valuation base to We expect positive operational developments in 2H21 the average of 2021-22E from only 2021E. 1) Rising visibility on sustaining solid ad growth momentum. We raise our advertising revenue assumptions for the second half of this year. In spite of a high base, new ad product launches targeting brand merchants and rising efficiency of digital ad solutions should drive further growth; 2) Replicating the business model of Shopify. NAVER, by owning the largest payment solution and a large number of merchants, is best positioned to acquire merchants and monetise multiple times by

Research Analysts Soyun Shin / 82 2 3707 3736 James Oh / 82 2 3707 3764 [email protected] [email protected]

Asian Daily (Asia Edition) 32 Full Report

Asian Daily 15 July 2021 TXC Corp. (3042.TW) Maintain NEUTRAL Previous Rating: NEUTRAL 2Q preliminary result in line; 3Q sub-seasonal on NB supply constraint Target price (NT$): 145.00 Previous target price (NT$): 120.00

▪ We raise our FY21-23E EPS by ~9%, factoring in preliminary 2Q21 Price (15-Jul-21, NT$) 134.00 Est. pot. % chg. to TP 8.2 profits, iPhone early pull-in, and lower tax rates. We roll over our TP to Mkt cap (NT$/US$ mn) 41,507 / 1,487 Blue sky scenario (NT$) 177.15 NT$145.00 to +1 SD (the same) FY22E core EPS, from NT$120.00 Number of shares (mn) 309.76 Grey sky scenario (NT$) 91.17 Free float (%) 82.9 Performance 1M 3M 12M (FY21). 52-wk range (NT$) 134 - 68.00 Absolute (%) 15.5 22.9 88.7 ▪ 2Q21 preliminary operating profits/pre-tax profits are both in line with ADTO-6M (US$ mn) 54.1 Relative (%) 11.7 17.8 40.9 our estimates. Total revenue grew 31% QoQ, biased by "develop & Year 12/20A 12/21E 12/22E 12/23E Revenue (NT$ mn) 11,048.4 15,568.2 16,784.1 18,117.5 sell real estate". Core revenue grew 7% QoQ, in line with seasonal EBITDA (NT$ mn) 2,555.6 4,753.0 5,104.1 5,428.9 (+8%). OPM hit a record high at 24.2%, reflecting further pricing EBIT (NT$ mn) 1,617.7 3,599.7 3,824.2 4,013.9 strength across the board (especially in PC) and operating leverage. Net profit (NT$ mn) 1,429.3 3,073.7 3,261.8 3,442.5 Article intended for:EPS (CS adj.) (NT$) 4.61 9.92 10.53 11.11 ▪ We maintain our NEUTRAL rating, as (1) we expect earnings YoY Chg. from prev. EPS (%) n.a. 9.1 9.2 9.0 growth to decelerate from 2H21 (with a sub-seasonal 3Q21 revenue), Consensus EPS (NT$) n.a. 9.07 9.3 10.4 given a higher base, NB upstream supply constraints, limited auto EPS growth (%) 112.8 115.0 6.1 5.5 capacity, and mix shift to lower-margin miniaturised products (1210/ P/E (x) 29.0 13.5 12.7 12.1 1008); and Dividend yield (%) 2.8 6.1 6.5 0.0 jason.chiu#uobkayhian.com.hkEV/EBITDA (x) 16.1 8.7 7.9 7.1 ▪ (2) we think TXC's investments in new semi manufacturing process to P/B (x) 4.3 3.53 2.92 2.46 be a bold move. It aims to reduce its reliance on Japan (which is a key ROE (%) 15.6 28.7 25.1 22.1 supplier for both ceramic and equipment, but also a key competitor) Net debt/equity (%) (4.0) (2.0) (9.2) (18.4) and improve yield rates for next-generation products (i.e., 0806), but Source: Company data, Refinitiv, Credit Suisse estimates it also creates margin uncertainties. Figure 3: TXC 2Q21/3Q21/2021 outlook Adjust estimates, increase our target price. We raise our FY21-23E EPS by ~9%, factoring in preliminary 2Q21 profits, iPhone early pull-in, and lower tax rates. We roll over our TP to NT$145.00 to +1 SD (the same) FY22E core EPS, from NT$120.00 (FY21).

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Figure 1: TXC forward P/E Figure 2: TXC market weighting Maintain NEUTRAL. We maintain our NEUTRAL rating, as (1) we expect earnings YoY growth to decelerate from 2H21 (with a sub- seasonal 3Q21 revenue), given a higher base, NB upstream supply constraints, limited auto capacity, and mix shift to lower-margin miniaturised products (1210/1008); and (2) we think that TXC's investments in new semi manufacturing process to be a bold move. It aims to reduce its reliance on Japan (which is the key supplier for both Source: Credit Suisse estimates ceramic and equipment, but is also a key competitor) and to improve Source: TEJ, Credit Suisse yield rates for next-generation product (i.e., 0806), but it also creates margin uncertainties. 2Q21 preliminary result in line. TXC reported its June preliminary profits. June OPM slightly pulled back to 22.7%, from 24.8-24.9% in Apr/May, but overall 2Q21 preliminary operating profits/pre-tax profits are both in line with our estimates. 2Q total revenue grew 31% QoQ, Figure 4: Sales breakdown by market Figure 5: Competition landscape (WW biased by "develop & sell real estate". Core revenue grew 7% QoQ, in segment (2021F) Timing Market Share in 2019) line with seasonal (+8%). 2Q OPM hit record high at 24.2%, reflecting further pricing strength across the board (especially in PC) and operating leverage.

3Q21 likely to be sub-seasonal. TXC guided core revenue to grow high-single-digit QoQ, well below seasonal (+15-20% QoQ). While it expects earlier pull-in from top smartphone customer, the upside Source: Company data Source: Company data, CS&A is offset by supply constraints (especially in NB/networking), limited auto capacity to fulfill the strong demand, and early pull-in from IoT customers. It, nevertheless, targets to maintain GM at 2Q21 level, but it is largely up to yield rate improvement for miniaturised products (1210/ 1008).

Research Analysts Pauline Chen / 886 2 2715 6323 Carol Hu / 886 2 2715 6352 [email protected] [email protected]

Asian Daily (Asia Edition) 33