Financials / China 1776 HK Financials / China 8 June 2015

GF Securities

GF Securities Target (HKD): 26.00 Upside: 5.5% 1776 HK 8 Jun price (HKD): 24.65

Initiation: wealth management is a long-term catch 1 Buy 2 Outperform • The only non-SOE large securities firm with strength in SME 3 Hold (initiation) underwriting and long-term potential in wealth management 4 Underperform • Yet drop in commission rates and a larger proportion of overseas 5 Sell capital allocation means it may not be the ideal choice for investors • Deserves only sector-average valuation, in our view, in a cyclical market now. Initiate with a Hold (3) rating and TP of HKD26.0

How do we justify our view?

However, we argue that GFS might sector-average valuation now, amid not be the ideal choice to benefit this cyclical market. from the structural trends in the China Securities Sector because: 1) it ■ Risks is seeing one of the largest We see the key upside risk as GFS Leon Qi, CFA proportional decline in commission quickly converting more of its affluent (852) 2532 4381 rates but only relatively modest clients to its margin finance business, [email protected] market-share gains, and 2) a large while overpaying for overseas proportion of its capital has been acquisitions is main downside risk. Steve Xu allocated overseas, which might (852) 2532 4383 become a drag on the ROE due to [email protected] the surging profitability in the Share price performance industry domestically and Ailsa He (HKD) (%) uncertainties in overseas M&A. 26.5 105 (852) 2773 8745 [email protected] 25.8 102 ■ Catalysts 25.0 99 GFS reaped USD4.1bn cash from its 24.3 95 H-share IPO in April 2015. We think 23.5 92 ■ Investment case Apr-15 GF Securities (GFS) is the only non- its enlarged capital base might enable SOE large China securities firm. We GFS to gain some market share in GF Securit (LHS) Relative to HSI (RHS) like its strategy and established margin loans, which would be a strength in SME underwriting, given share-price catalyst. The upcoming 12-month range 23.55-26.50 Market cap (USDbn) 24.23 our optimism on GFS’s profitability registration-based IPO system should be another upside catalyst, due to 3m avg daily turnover (USDm) 116.32 and focus on smaller deals. In 2015 Shares outstanding (m) 7,621 YTD, GFS is ranked 2nd among all GFS’s strong and SME-focused Major shareholder Liaoning Cheng Da Co., Ltd (16.4%) the China securities firms (1st among investment banking unit. H-share-listed ones) in terms of the Financial summary (CNY) number of IPOs sponsored. ■ Valuation Year to 31 Dec 15E 16E 17E We think GFS is currently fairly Revenue (m) 31,773 34,850 36,895 valued, trading at a 2.0x 2015E PBR. Operating profit (m) 12,870 12,123 11,752 GFS mainly operates in the relatively Net profit (m) 10,095 9,432 9,162 affluent Pearl River Delta area and We use our Gordon Growth Model Core EPS (fully-diluted) 1.403 1.238 1.202 other national tier-1 cities. This to arrive at a 12-month target price EPS change (%) 65.3 (11.8) (2.9) suggests long-term wealth- of HKD26, which implies a 2.2x Daiwa vs Cons. EPS (%) 4.7 (17.9) (27.6) PER (x) 14.1 15.9 16.4 management potential for the 2015E PBR. We initiate coverage with a Hold (3) rating. Unlike the Dividend yield (%) 2.1 1.9 1.8 company. Its deposit per customer DPS 0.421 0.371 0.361 ranked 2nd among all five China consensus, we think that while GFS’s PBR (x) 2.0 1.9 1.8 brokers that we cover at end-2014. long-term net profit growth looks ROE (%) 18.0 12.5 11.2 sustainable, it deserves only a Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 24 Financials / China 1776 HK 8 June 2015

Contents

SME underwriting strength ...... 6 Focused strategy on SMEs underpins sustainable growth and large potential ...... 6 Large potential after upcoming registration-based IPO reform ...... 7 Wealth management a long-term potential ...... 8 Geographic presence in affluent areas ...... 8 Full product line in asset management ...... 8 Declining commissions with no meaningful market-share gains ...... 10 Rapidly declining commission rates ...... 10 Relatively mild market-share expansion ...... 10 Difficult to defend commissions sliding under industry headwinds ...... 11 Margin finance topping the league after H-share IPO but likely to retreat ...... 11 Larger proportion of capital allocated overseas ...... 13 30% overseas allocation of IPO proceeds ...... 13 Valuation and risks ...... 15 Methodology ...... 15 Relative valuation ...... 15 Risks ...... 17 Appendix ...... 18

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1 Buy How do we justify our view? 2 Outperform

3 Hold (initiation)  Growth outlook

4 Underperform  Valuation 5 Sell  Earnings revisions

 Growth outlook  GFS: revenue mix (2015E) We forecast GFS to see 101% net profit growth in 2015, Others driven by significant expansion of its brokerage and 5.9% Trading lending-related revenue. Notably, we look for its 15.4% lending-related revenue to contribute 37% of its total Lending revenue in 2015, up from 22% in 2014, driven by the 37.4% Asset expansion in the market’s balance of margin loans and management GFS’s market-share gains. 5.7% Investment banking 9.3% Traditional brokerage 26.3% Source: Company, Daiwa forecasts

 Valuation  China Securities firms: valuation comparison The China securities firms under our coverage are Company Ticker PBR (x) PER (x) ROE trading currently at a 2.0x 2015E PBR and a 14.5x 2015E 15E 16E 15E 16E 15E 16E PER, on a market-cap weighted basis. GFS’s valuation is CITICS 6030 HK 2.2 2.0 17.1 18.3 14.2 11.3 HTS 6837 HK 2.2 2.1 13.8 18.3 17.9 11.8 generally in line with the sector averages. (Refer to the CGS 6881 HK 1.6 1.7 11.2 15.5 18.5 11.1 valuation section of this report for more on our valuation GFS 1776 HK 2.0 1.9 14.1 15.9 18.0 12.5 methodology and valuation comparisons.) Huatai 6886 HK 1.8 1.6 12.5 13.4 17.3 12.9 Sector 2.0 1.9 14.5 16.8 16.7 11.9 Source: Bloomberg, Daiwa Note: Priced as at 8 June 2015; CITICS stands for CITIC Securities; HTS stands for Haitong Securities; CGS stands for China galaxy securities; GFS stands for Guangfa Securities; Huatai stands for Huatai Securities.

 Earnings revisions  GFS: segmental revenue growth

We expect GFS’s revenue growth to be driven by lending (CNYm) businesses (including interest income and commission 18,000 fees from the margin finance business, and interest 15,000 231% income from stock repo) in 2015. Due to its rising 12,000 market share and the overall spike in the balance of 64% 9,000 margin lending in the sector, we forecast lending-related 43% revenue to grow by 231% YoY and become the largest 6,000 66% 0% 314% revenue contributor. Besides, due to the surging ADT for 3,000 A-shares, we expect GFS’s traditional brokerage 0 business to see 64% YoY growth in 2015, the second- Lending Traditional Investment Asset Trading Others largest revenue item. brokerage banking management 2014 2015E

Source: Daiwa forecasts

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Financial summary

 Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E A-share ADT (CNY mn) 227,557 173,922 131,573 200,000 304,000 800,000 750,000 750,000 Brokerage mkt share of company (%) 4.1 4.1 4.0 4.0 4.3 4.6 4.8 4.8 Commission rate for company (%) 0.120 0.090 0.088 0.085 0.069 0.056 0.048 0.040 Mkt annual equity financing (YoY, %) 162.9 (43.9) (37.6) (6.5) 74.8 100.0 50.0 50.0 Mkt annual debt financing (YoY, %) 0.9 54.7 28.6 (2.6) 38.0 50.0 20.0 20.0 Stock market annual return (%) (14.3) (21.7) 3.2 (6.7) 52.9 40.0 0.0 0.0 Bond market annual return (%) 1.0 5.5 4.4 (0.5) (0.5) 4.0 4.0 4.0 Margin finance bal (mkt) (CNY mn) 12,772 38,201 89,516 346,530 1,025,650 2,129,991 2,195,892 2,294,745 Cost-to-income (%) n.a. n.a. 61.4 52.2 43.9 38.3 38.6 40.5

 Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross fee and commission income n.a. n.a. 4,002 4,399 8,217 14,856 14,728 15,326 Gross interest income n.a. n.a. 1,541 2,349 4,325 12,008 16,723 17,995 Investment income n.a. n.a. 1,688 2,525 3,605 4,891 3,378 3,551 Other income n.a. n.a. 50 58 17 18 20 22 Total Revenue n.a. n.a. 7,281 9,332 16,163 31,773 34,850 36,895 Fee and commission expense (-) n.a. n.a. (150) (106) (241) (519) (502) (516) Finance costs(-) n.a. n.a. (500) (1,379) (2,758) (6,748) (9,272) (10,196) Business tax(-) n.a. n.a. (302) (388) (764) (1,528) (1,833) (2,200) Other Operating Expenses n.a. n.a. (4,017) (4,376) (6,090) (10,108) (11,119) (12,231) Operating profit n.a. n.a. 2,311 3,084 6,311 12,870 12,123 11,752 Profit from Assoc/JV n.a. n.a. 374 393 337 303 323 345 Other Inc/Exp/Extord. (+/-)n.a.n.a.000000 Pre-tax profit n.a. n.a. 2,685 3,477 6,649 13,173 12,446 12,097 Tax n.a. n.a. (495) (665) (1,503) (2,978) (2,814) (2,735) Min. int./pref. div./others n.a. n.a. 1 (0) (123) (100) (200) (200) Net profit (reported) n.a. n.a. 2,191 2,813 5,023 10,095 9,432 9,162 Net profit (adjusted) n.a. n.a. 2,191 2,813 5,023 10,095 9,432 9,162 EPS (reported)(CNY) n.a. n.a. 0.370 0.475 0.849 1.403 1.238 1.202 EPS (adjusted)(CNY) n.a. n.a. 0.370 0.475 0.849 1.403 1.238 1.202 EPS (adjusted fully-diluted)(CNY) n.a. n.a. 0.370 0.475 0.849 1.403 1.238 1.202 DPS (CNY) n.a. n.a. 0.250 0.150 0.200 0.421 0.371 0.361 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment n.a. n.a. 41,699 36,950 90,145 115,292 138,350 166,020 Fee and commission receivables n.a. n.a. 338 872 1,267 1,521 1,825 2,190 Advances to customers n.a. n.a. 5,247 20,491 64,696 149,507 154,202 161,219 Reverse repo & bank placement n.a. n.a. 74 4,826 13,233 20,731 27,946 29,791 Financial assets n.a. n.a. 35,077 45,272 61,438 66,459 69,656 73,007 Long-term equity investments n.a. n.a. 1,995 2,350 1,584 1,901 2,281 2,737 Other assets n.a. n.a. 5,426 6,532 7,736 9,867 12,676 16,403 Total assets n.a. n.a. 89,856 117,292 240,100 365,278 406,935 451,368 Accounts payable n.a. n.a. 34,288 31,609 71,466 97,149 116,579 139,895 Repo and bank placements n.a. n.a. 12,190 24,700 55,891 93,235 77,556 58,694 Financial liabilities n.a. n.a. 7,793 9,568 30,910 37,092 44,510 53,412 Bonds payable n.a. n.a. 0 11,980 26,031 46,031 66,031 86,031 Other liabilities n.a. n.a. 2,630 4,692 14,425 17,311 20,773 24,927 Total liabilities n.a. n.a. 56,901 82,549 198,722 290,818 325,449 362,959 Share capital n.a. n.a. 5,919 5,919 5,919 7,621 7,621 7,621 Reserves/R.E./others n.a. n.a. 27,023 28,685 33,692 64,719 71,322 77,735 Shareholders' equity n.a. n.a. 32,943 34,605 39,611 72,340 78,942 85,356 Minority interests n.a. n.a. 12 138 1,767 2,120 2,544 3,053 Total equity & liabilities n.a. n.a. 89,856 117,292 240,100 365,278 406,935 451,368 BVPS (CNY) n.a. n.a. 5.565 5.846 6.692 10.054 10.359 11.200

 Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross fee and commission (YoY) n.a. n.a. n.a. 9.9 86.8 80.8 (0.9) 4.1 Operating profit (YoY) n.a. n.a. n.a. 33.5 104.6 103.9 (5.8) (3.1) Net profit (YoY) n.a. n.a. n.a. 28.3 78.6 101.0 (6.6) (2.9) EPS (YoY) (FD) n.a. n.a. n.a. 28.3 78.6 65.3 (11.8) (2.9) ROAE n.a. n.a. 6.8 8.3 13.5 18.0 12.5 11.2 ROAA n.a. n.a. 2.6 2.7 2.8 3.3 2.4 2.1 Net dividend payout n.a. n.a. 67.5 31.6 23.6 30.0 30.0 30.0 Brokerage commission/Op inc n.a. n.a. 41.5 47.5 39.1 41.3 34.1 27.5 Inv banking commission/Op inc n.a. n.a. 18.3 5.8 14.2 10.9 15.3 21.2 Assest mgmt inc / Op inc n.a. n.a. 1.7 2.6 8.5 7.4 8.4 9.0 Interest inc / Op inc n.a. n.a. 16.0 12.4 11.8 21.2 29.3 29.4 Inv inc / Op inc n.a. n.a. 21.5 30.7 26.1 19.0 12.6 12.6 Leverage n.a. n.a. 2.7 3.4 5.8 4.9 5.0 5.1 Cost-to-income n.a. n.a. 68.3 66.9 61.0 59.5 65.2 68.1 Net capital ratio n.a. n.a. 67.9 62.1 86.7 87.0 68.6 39.8 Source: FactSet, Daiwa forecasts

 Company profile GF Securities (GFS) is a full-service investment bank in China. It was established in Guangzhou in 1991 and was listed on the Shenzhen Stock Exchange and Hong Kong Stock Exchange in 2010 and 2015, respectively. Its principal business lines include brokerage, investment banking, asset management, proprietary trading and direct investment.

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During 2014, GFS underwrote IPOs with an aggregate amount of CNY14.6bn, ranking it No.1 among all China securities firms. Notably, its market share in terms of underwriting amount on the ChiNext board reached a dominant 10.9% in 2014.

SME underwriting  China Securities Sector: investment bank ranking in underwriting amount (2014) strength (CNYm) 16,000 14,571 14,000 Over the years GFS has established a 12,000 10,000 8,247 leadership position in SME underwriting, 8,000 6,252 6,044 4,232 6,000 3,529 3,146 which bodes well for profitability and 4,000 2,433 2,165 1,866 1,604 2,000 sustainability. 0 HTS GFS CGS CICC BOCI CITIC Huatai Focused strategy on SMEs Guosen Guotai Junan China Securities China underpins sustainable growth Merchants China Source: CSRC, Daiwa and large potential  GFS: IPO underwriting mix Non-SOE securities firm 7 6 GFS is the only non-SOE large China securities firm. Its 6 5 55 3 largest shareholders (holding a 41.7% stake in 5 aggregate after the H-share IPO) are all listed 4 4 4 companies with diversified ownership. 3 3  GFS: major shareholders 2 Name of GFS’ top % of stake Shareholder's largest shareholders 11 Ticker shareholder in GFS and their % of stake 1 0 1 Liaoning Cheng Da 21.12% 600739 CH Liaoning Cheng Da Group 11.11% 2011 2012 2014

Jilin Aodong Main board SME board ChiNext board 2 21.03% 000623 CH Shuhua Jincheng Industrial 24.09% Pharmaceutical Source: CSRC, WIND, Daiwa Zhongshan Public Zhongshan Zhonghui Note: IPO was in suspension in China during 2013 3 11.60% 000685 CH 49.27% Utilities Investment Source: Companies, Daiwa In 2015 YTD, GFS is ranked 2nd among all China Note: all the percentages of stakes are as of 1Q15 st securities firms (1 among H-share listed ones) in th Due to its more balanced and less concentrated share- terms of number of IPOs sponsored, and 5 in terms of ownership structure compared with most major underwriting fees earned. As most of its underwriting th brokers, GFS has a market-oriented business companies are small-cap companies, GFS is ranked 7 mechanism that it has developed over the years. This in terms of underwriting amount in 2015 YTD. has also led to its focus on SME investment banking projects. As of 4 June 2015, GFS had 36 enterprises in the pipeline awaiting IPOs and ranks the top among all the Strength in SME underwriting projects China securities firms. GFS is the top player in terms of total number of deals in the pipeline for the SME board GFS is a leading SME-focused investment bank and has and ChiNext board IPOs. a strong brand in investment banking. Since the inception of the SME Board in 2004 and ChiNext Board in 2009, the company had sponsored the listing of 53 companies on the SME Board and 23 companies on the ChiNext Board by the end of 2014.

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 China securities firms: IPO pipeline by status and listing boards (4 June 2015) Shanghai Stock Exchange Shenzhen Stock Exchange Shenzhen Stock Exchange (Mainboard) (SME board) (ChiNext board) Total No. of stocks No. of stocks No. of stocks No. of stocks No. of stocks in obtained listing No. of stocks in obtained listing No. of stocks in obtained listing No. of stocks in obtained listing pipeline approval pipeline approval pipeline approval pipeline approval CITICS 19 1 5 0 12 1 36 2 GFS 15 1 8 0 13 1 36 2 China Securities 23 1 4 0 5 0 32 1 Guosen 15 1 7 1 8 1 30 3 China Merchants 9 0 9 0 8 1 26 1 Essense Securities 11 1 5 1 5 0 21 2 HTS 12 0 2 0 6 0 20 0 CICC 9 0 3 1 5 0 17 1 Guotai Junan 10 1 2 0 5 0 17 1 Industrial Securities 7 0 1 0 9 0 17 0 Minsheng Securities 6 0 5 1 5 0 16 1 Sinolink 9 0 4 0 2 1 15 1 Huatai 8 0 1 0 5 0 14 0 Oriental Citi 8 1 3 0 1 0 12 1 Hualin 4 1 3 0 4 0 11 1 CGS 4 0 4 0 1 0 9 0 Southwest Securities 3 0 2 0 4 0 9 0 BOCI Securities 6 1 1 1 0 0 7 2 Suzhou Securities 1 0 5 0 1 0 7 0 Guohai Securities 2 0 3 0 2 0 7 0 Source: CSRC, Daiwa Note: as of 4 June 2015

Strategy to solidify SME focus bodes well institutionalized at the National People’s Congress in for sustainability and profitability early 2016.

GFS intends to continue to solidify its leading position The upcoming registration-based IPO system would and business focus on SMEs. Going forward it plans to mean lower huddles for smaller companies to become optimise its investment banking platform to focus on public. Under the old approval system, large key industries and develop a securitization business to companies, especially state-owned ones, enjoyed many drive sustainable net profit growth. implicit privileges. Judging the IPO purely on the

financial and legal documents should improve the We like GFS’s strategy and established strength in SME fairness for SMEs. underwriting given our optimism on the profitability and sustainability of smaller deals. Usually the underwriter has much greater bargaining power in a As an SME-focus securities firm, GFS is likely to SME deal compared with a large company deal. And benefit from the registration-based IPO reform for its the fact that most large state-owned companies are close relationship with SMEs and strong brand of already listed implies much larger deal potential in pricing and distribution capabilities built through years non-state-owned, small and medium company deals. of market-oriented operations.

Large potential after upcoming registration-based IPO reform

The registration-based stock issuance system reform was first mentioned in the Plenum back in November 2013. Most recently, in March 2015, China’s State Council reconfirmed that the reform is on the agenda. In fact, China started to implement a revision to its Securities Law soon after that, and it is likely the registration-based stock issuance mechanism will be institutionalised in this process.

We expect the proposals for reform to be available to the market in 2015, and a final law revision to be

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Full product line in asset management

GFS’s asset management business comprises 5 parts: Wealth management a asset management products operated mainly by GF Asset Management, mutual-fund business from GF long-term potential Fund and E Fund, private equity business from GF Xinde, overseas subsidiary GF Asset Management (Hong Kong) and alternative investments operated by GFS concentrates in affluent areas in GF Qianhe. China, which bodes well for its long-term  GFS: asset management business potential to develop its wealth Asset management business Subsidiaries management business. Asset management products GF Asset Management Mutual fund business GF Fund and E Fund Private equity business GF Xinde Alternative investments GF Qianhe Geographic presence in affluent Overseas subsidiary GF Asset Management (Hong Kong) Source: Company, Daiwa areas The total AUM of GF Fund, E-fund and GF Asset Geographically, as GFS originated in Guangzhou, it Management combined reached CNY536.4bn at end- mainly operates in the relatively affluent Pearl River 2014, No. 1 in terms of total AUM of mutual funds and Delta area and other national tier-1 cities. We believe CAM schemes. In terms of total mutual fund AUM, GF this suggests long-term wealth management potential Fund and E-Fund together managed the largest mutual for the company. funds AUM of CNY339.8bn in China.

If we look at the average brokerage deposit per  GFS: AUM mix (end-2014) customer, besides CITIC Securities (CITICS, 6030 HK, HKD31.65, Underperform [4]), which is more institutional-focused, GFS’s average balance was the highest among the 4 China brokers under our coverage. At the end of 2014, GFS’s average customer deposit GF Fund was c.CNY17,100, higher than peers, such as Haitong GF Asset 34.5% Securities (HTS, 6837 HK, HKD25.20, Outperform [2]) Management 51.8% and China Galaxy Securities (CGS, 6881 HK, E Fund HKD12.56, Hold [3]) 13.7%

 China securities companies: average deposit per customer (end-2014)

(CNY'000) Source: Company, Daiwa 50.0 Note: For GF Fund and E Fund, the calculation only includes the AUM of mutual fund. And 45.0 41.0 the AUM of E Fund was calculated on GFS’s 25% equity interest. 40.0 35.0 GF Asset Management 30.0 GF Asset Management is the platform through which 25.0 20.0 16.9 17.1 GFS provides financial products under 3 categories, 13.2 14.4 15.0 namely, collective-asset-management (CAM) products 10.0 to retail customers, and target-asset-management 5.0 (TAM) and special-asset-management (SAM) products 0.0 to institutional investors and high-net-worth CITICS HTS CGS GFS Huatai individuals. Source: Companies, Daiwa

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 GFS: asset-management AUM and fee rates GF Fund and E-Fund were the 8th and 3th largest funds (CNYm) 2010 2011 2012 2013 2014 in China in terms of total AUM as of end-1Q15. Collective Asset Mgmt (CAM) 4,529 7,919 9,508 15,560 48,083 Growth (%) 74.9% 20.1% 63.7% 209.0% AM fee 73 105 107 144 315  Ranking of funds by total AUM (as of end-1Q15) AM fee rate (%) 1.69% 1.23% 1.15% 0.99% Tianhong Target Asset Mgmt (TAM) 524 431 12,171 120,224 145,288 14.0% Growth (%) -17.8% 2725.0% 887.8% 20.8% AM fee 12 7 5 63 111 China AMC AM fee rate (%) 1.472% 0.079% 0.094% 0.083% 5.1% Special Asset Mgmt (SAM) - - - 3,406 E Fund 5.2% growth (%) - - - - - Others AM fee - - - - 1 50.0% ICBC-CS AM fee rate (%) - - - 0.035% 0.035% 5.1% Total AUM 5,053 8,350 21,678 135,784 196,777 Harvest 4.1% growth (%) 65% 160% 526% 45% Southern Fund Total AM fee income 85 112 112 206 426 3.7% AM fee rate (%) 1.679% 1.342% 0.517% 0.152% 0.216% Fullgoal Fund CM FundGuangfa Fund HTF Fund 3.1% Source: Company, Daiwa 3.6% 2.9% 3.1% Source: WIND, Daiwa GF Asset Management managed 65 CAM schemes, 166 TAM schemes as of 31 December 2014. Also, GFS GF Xinde established the first SAM scheme on the Shenzhen GFS engages in private equity investments through its Stock Exchange (SZSE) in 2014. The CSRC strictly wholly owned subsidiary, GF Xinde. GF Xinde has controlled the growth of SAM between 2006 and 2012, made investments in 68 enterprises, 16 of which are but changed its attitude towards SAM in 2014, when it listed on the A-share market and post a decent return changed the pre-approval system to a post-launch of 392.3%. filing system. As such, we believe the SAM business will be the next driver of revenue growth for GFS. GF Qianhe

 GFS: AUM by the type of investment scheme GF Qianhe is the alternative investment platform through which GFS focuses on investments in private (CNYbn) 250 placements, non-standard fix-income products, venture capital and industrial investment funds. GF 3 200 Qianhe had, as at 31 December 2014, an investment return of 52.5% from 13 projects exited and invested 27 150 145 projects with total investment amount to CNY2bn. 100 120 GF Asset Management (Hong Kong) 50 - 48 GF Asset Management (Hong Kong) is the subsidiary - 12 16 0 - 10 of GFHK, the holding company for the overseas 2010 2011 2012 2013 2014 business. GF Assets Management (Hong Kong) CAM TAM SAM managed total assets of HKD4.5bn at end-2014. Source: Company, Daiwa

GF Fund and E-Fund GFS holds a 51.13% equity interest in GF Fund and 25% equity interest in E Fund. On 19 August 2014, GFS increased its equity interest in GF Fund from 48.33% to 51.13% as a result of a capital injection, and consolidated the results of GF Fund in its financial statements.

GF Fund and E-Fund realised a decent return on net profit in 2014 due to the bull market. The GF Fund (of which GFS has a 51% stake) accounted for 38.7% of the total net profit of GFS’s asset management business, while E-Fund (25% stake) accounted for 17.5%.

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 GFS: average commission rate trend (2010-14) (bps) 16.0

14.0 12.0 12.0 Declining commissions 10.0 9.0 8.8 8.5 8.0 6.9 with no meaningful 6.0 4.0 market-share gains 2.0 0.0 2010 2011 2012 2013 2014 We argue that GFS’s rapidly declining Source: Company, Daiwa estimates commission rates have not been compensated by enough market-share Relatively mild market-share expansion, and its commission rate is still expansion facing severe downside pressure. Compared with Huatai, which is gaining market share Rapidly declining commission aggressively after commission rate cuts, GFS’s market share gains seem quite modest. Its brokerage share rates went up from 4.0% in 2013 to 4.3% in 2014, and 4.8% in 4M15. GFS was ranked sixth among the China GFS’s brokerage business saw a material deterioration brokers for brokerage volume in 4M15. in commission rates in 2014, with the average brokerage commission rate sliding from 8.5bp in 2013  GFS: brokerage market share to 6.9bp in 2014. 6.0% 4.85% 5.0% We think that among the 5 China securities firms under 4.33% our coverage, Huatai is one of the brokers proactively 4.11% 4.04% 4.02% 4.0% waging commission rate cuts, while GFS and CGG have a greater client overlap with low-cost brokers 3.0% (including but not limited to Huatai), which means they are likely to suffer the most from commission 2.0% pressure in the industry. 1.0%

 China securities firms: average commission rate (2013 and 0.0% 2014) 2011 2012 2013 2014 4M15

(bps) Source: WIND, Daiwa 12.0 9.2  China securities companies: brokerage market share 10.0 8.7 8.5 8.5 8.0 (%) 7.4 8.0 6.9 6.6 6.9 9.0 7.98.0 6.0 4.8 8.0 6.46.56.4 7.0 5.8 6.1 4.0 5.4 6.0 5.1 5.15.25.05.2 4.9 4.54.84.8 2.0 5.0 4.04.04.3 4.0 0.0 3.0 CITICS HTS CGS GFS Huatai 2.0 2013 2014 1.0 Source: Companies, Daiwa estimates 0.0 Note: data of CITICS, HTS and CGS are Daiwa estimates. CITICS HTS CGS GFS Huatai

2012 2013 2014 4M15 Source: Wind, Daiwa

- 10 - Financials / China 1776 HK 8 June 2015

According to our on-the-ground research, GFS is Difficult to defend commissions offering as low as a 3bp commission rate to some retail sliding under industry headwinds customers now, after the introduction of multiple accounts. Its rapidly declining overall commission rate In our view, GFS’s brokerage commission strategy is a is a reflection of a growing population of such mixed one. On the one hand, it aims to offer services to customers. its wealthy clients and utilise its branch network to defend the decline in commission rates. On the other hand, it has also come up with various Internet and Margin finance topping the mobile apps to capture price-sensitive customers. league after H-share IPO but likely to retreat We believe it will be difficult for GFS to try to defend its commission rates amid the current industry GFS was among the first six securities firms to launch a headwinds, especially after the liberalisation of online margin finance business in March 2010. At the end of account opening rules, the trend of mini brokerage 2014, it had an outstanding balance of margin loans of branches being set up, and multiple brokerage CNY64.4bn, ranking it 4th among all China securities accounts being allowed by the CSRC. firms, with a 6.3% market share. Most recently, helped

by its H-share IPO proceeds, GFS’s margin finance From 13 April 2015, the CSRC abolished China’s long- balance reached CNY131bn, the highest in the sector, standing “single account” rule (under which an investor with a market share of 7.1% at end-April 2015. was only allowed to open a brokerage account with one broker, and investors had to close any existing accounts  GFS: margin loan balance and market share if they wanted to switch to another broker for lower (CNYbn) commissions). Now, investors are allowed to have 200 8% 7.1% multiple accounts (to a maximum of 20) with different 6.1% 6.3% 6.5% 7% 5.8% 5.7% brokers, and they do not have to close the existing 150 5.5% 6% account before opening another one. 5% 100 4% As a result of this liberalisation, we have seen the 3% number of new brokerage accounts opened every week 50 2% surge from 1.4m (the average of the 5 weeks before the 1% deregulation) to 3.0m (the average of the 5 weeks after 0 0% 2012 1H13 2013 1H14 2014 End-Mar End-Apr the deregulation), suggesting a sizeable number of 2015 2015 customers opening new accounts with new brokers. Margin finance Market share (RHS)

Source: CSRC, WIND, Daiwa  China Securities Sector: weekly new accounts

('000) Benefiting from its affluent client base (over 14,500 4,000 Loosening single account high-net-worth clients and over 193,000 wealth 3,500 restriction point 3,000 management clients), GFS’s penetration ratio (ie, 2,500 number of margin finance accounts as a percentage of 2,000 brokerage customers eligible for margin finance) was 1,500 only 35.5% at end-2014, suggesting significant 1,000 potential to increase its margin loan penetration. 500 0

Jul-14 Apr-15 Oct-14 Apr-14 Jun-14 Jan-15 Feb-15 Mar-15 Aug-14 Sep-14 Nov-14 Dec-14 May-15 May-14 Weekly new accounts 3M avg Source: China Securities Depository and Cleaning Corporation, Daiwa

We believe this will intensify the commission rate competition among brokers as it lowers the switching costs of brokerage customers. As the retail brokerage service in China is still highly homogenous, the commission rate is a key factor that attracts customers.

- 11 - Financials / China 1776 HK 8 June 2015

 China securities companies: outstanding margin loan balances (end-April 2015) 050100150(CNYbn)

GFS

CGS

China Merchants

Huatai

HTS

Guotai Junan

CITICS

Guosen

Source: China Securities Depository and Clearing Co., WIND, Daiwa Note: CITIC Securities data includes data for CITIC Wantong and CITIC Securities (Zhejiang)

Although the capital strength soon after its H-share IPO is brining GFS a larger market share in margin loans, we believe after other China securities firms finish capital replenishments (through placements and IPOs in both H-share and A-share), GFS’s market share in margin loan will gradually retreat a bit to stabilise at around 7.0% in the long term, on our estimates.

- 12 - Financials / China 1776 HK 8 June 2015

 GFS and Huatai: use of proceeds from H-share IPOs Segment Details GFS Huatai Margin finance and securities lending Capital-based New types of financing products and 50% 60% intermediary businesses finance platform Trading: become a leading market maker Trading 20% 10% to enhance pricing ability Strengthen overseas platform for cross- Larger proportion of Overseas operation border business including acquisitions 30% 10% and mergers capital allocated Invest in private equity funds to expand Asset management the business - 10% business Hire professional asset managers and overseas research experts, upgrade IT system Working capital and general corporate Others - 10% purposes Compared with other recent fund-raising Source: Companies, Daiwa activities of H-share China brokers, GFS We also analysed all 5 H-share China securities firms’ allocates a much larger proportion of capital allocations between their domestic and overseas funds overseas. We estimate its overseas operations. Factoring in all their placement/IPO capital allocation is now close to CITICS activities recently, CITICS and GFS have the highest proportion of capital allocated overseas. CITICS’s and much higher than other peers. 11.6% capital in its overseas operation was mainly a result of the CLSA acquisition. For GFS, most of the 11.5% overseas capital came from its recent H-share 30% overseas allocation of IPO IPO. proceeds  China securities firms: domestic vs. overseas capital allocation (end-May 2015, Daiwa estimates) One of the biggest differences between GFS’ and 1.7% 4.3% Huatai’s use of IPO proceeds is that GFS has allocated 100% 11.6% 8.0% 11.5% a substantially larger portion of funds for overseas business expansion. According to GFS, around 30% of 80% its IPO proceeds would be used for international 60% operations to further globalise and strengthen its 98.3% 95.7% 88.4% 92.0% 88.5% overseas business. This compares with 10% for Huatai. 40%

Specifically, this move by GFS includes primarily 20% investing greater resources in overseas wealth 0% management businesses in selected markets where CITICS HTS CGS GFS Huatai Domestic Overseas there are sizeable populations of affluent Chinese individuals, including but not limited to Hong Kong, Source: Companies, Daiwa estimates Canada and the UK; strengthening the overseas mergers and acquisitions, investment management and Overseas expansion can take 2 forms: organic growth trading and institutional client services businesses; and acquisitions. But we argue that neither of them establishing new business platforms through making delivers a higher ROE to investors than the domestic strategic investments; and advancing comprehensive utilization of capital. services globally by satisfying the needs of Chinese individuals and companies based overseas. First, in the short-term because of the booming brokerage and margin finance market in Mainland For Huatai, it only plans to allocate 10% of its IPO China, major securities firms are generating a stellar proceeds for overseas and invest more heavily in its ROE in 2015 (more than 15% on our forecasts). lending businesses, such as margin finance and stock repo. Second, even assuming market-neutral, the higher margin lending penetration level, coupled with deregulation of multiple new business lines with high profitability (such as stock repo, derivatives, and OTC board, etc.) and rising leverage in the sector still point to higher sustainable ROE levels (11-14%) vs. global peers (6-10% on Bloomberg consensus).

- 13 - Financials / China 1776 HK 8 June 2015

Third, overseas acquisitions might involve overpaying and business uncertainties, which could cause drags on both the level and sustainability of ROE.

We are not against the idea of China securities firms investing in cross-border business. We hail the thought to gradually capitalising on the synergies between their domestic and overseas businesses as China’s capital markets gradually open up to global investors and domestic investors going abroad.

However, from an investor’s perspective, we prefer securities firms that invest overseas in a step-by-step manner, and those that can carefully utilise their expertise both locally and globally, and exercise caution rather than making a lump-sum bet.

- 14 - Financials / China 1776 HK 8 June 2015

history, we make reference to its historical A-share valuation. Over the past 5 years, it's A-share average 1- year-forward PBR was 2.3x, with a low of 1.2x and a high of 5.0x.

 GFS: PBR and share price Valuation and risks Rolling PBR (x) Price (HKD) 2.1 27.0 26.0 Our Gordon Growth Model and relative 2.0 valuation suggest GFS is fairly valued. 25.0 24.0 1.9 23.0 Methodology 1.8 22.0 Apr-15 Apr-15 Apr-15 Jun-15 Fair value = PBR of 2.2x May-15 May-15 May-15 May-15 May-15 One-year forward rolling PBR Average PBR We use our Gordon Growth Model to arrive at our -1SD +1SD target 2015E PBR of 2.2x. We use 2015E BVPS as the Price basis for our target price because we believe investors Source: Bloomberg, Daiwa will pay more attention to the company’s balance- Note: priced as of 5 June 2015 sheet-driven businesses. Our PBR implies a The table below shows the sensitivity of our target PBR fundamental 12-month target price of HKD26. to varying assumptions for ADT and the market index.

We have assumed a 9.7% cost of equity, a terminal  GFS: sensitivity of target PBR on ADT and market index growth rate of 8% (these assumptions are changes (2015E) homogeneous across H-share China Securities firms in ADT (CNYbn) our coverage) and a sustainable ROE of 11.7%, 640 720 800 880 960 3,623 1.3 1.6 1.8 2.0 2.3 reflecting an ROA of 2.6% and sustainable leverage of 4,076 1.6 1.8 2.0 2.3 2.5 Market 4.4x. 4,529 1.8 2.0 2.2 2.5 2.7 index 4,982 2.0 2.2 2.4 2.6 2.9 5,435 2.2 2.4 2.6 2.8 3.1 Relative valuation Source: Daiwa forecasts Note: Market index refers to Shanghai Composite Index.

Historical trading multiples GFS is trading currently at a 2.0x 2015E PBR and a 14.1x 2015E PER. Due to its short H-share listing

 China securities firms: 12-month-rolling forward PBRs 3.0

2.5

2.0

1.5

1.0

0.5

0.0 Jul-12 Jul-13 Jul-14 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Jan-12 Jun-12 Jan-13 Jun-13 Jan-14 Jun-14 Jan-15 Jun-15 Feb-12 Mar-12 Feb-13 Mar-13 Feb-14 Mar-14 Feb-15 Mar-15 Nov-11 Dec-11 Nov-12 Dec-12 Nov-13 Dec-13 Nov-14 Dec-14 Aug-12 Sep-12 Aug-13 Sep-13 Aug-14 Sep-14 May-12 May-13 May-14 May-15

CITICS HTS CGS GFS Haitai

Source: Bloomberg, Daiwa Note: updated as at 5 June 2015

- 15 - Financials / China 1776 HK 8 June 2015

A-H valuation spread 31% to their A-shares. GFS’s H-shares are trading Among all 5 H-share listed China securities firms currently at a 34% discount to the A-shares. Huatai has under our coverage, 4 are also A-share listed. Their H- the largest discount of 36%. shares currently are trading at an average discount of

 CITICS, HTS and GFS: H-share premium/discount to A-shares 40%

30%

20%

10%

0%

(10%)

(20%)

(30%)

(40%)

(50%) Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 CITICS HTS GFS Huatai

Source: Bloomberg, Daiwa Note: Priced as at 5 June 2015  Global peer comparison   Global investment banks: valuation comparison Company Ticker Rating Market cap Current PBR PER ROE (%) ROA (%) Leverage (x) (USD bn) price FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 CHINA - H SHARE CITICS 6030 HK Underperform 58 31.65 2.2 2.0 17.1 18.3 14.2 11.3 3.2 2.5 4.5 4.5 HTS 6837 HK Outperform 48 25.20 2.2 2.1 13.8 18.3 17.9 11.8 3.7 2.4 4.8 4.9 CGS 6881 HK Hold 15 12.56 1.6 1.7 11.2 15.5 18.5 11.1 3.4 2.1 5.5 5.2 GFS 1776 HK Hold 34 24.65 2.0 1.9 14.1 15.9 18.0 12.5 3.3 2.4 5.4 5.1 Huatai 6886 HK Buy 33 25.20 1.8 1.6 12.5 13.4 17.3 12.9 3.0 2.3 5.7 5.5 Sector 188 2.0 1.9 14.5 16.8 16.7 11.9 3.3 2.4 5.0 5.0 CHINA - A SHARE CITICS 600030 CH NR 58 33.48 3.1 2.7 23.0 19.0 14.5 15.1 3.3 3.1 4.4 4.8 HTS 600837 CH NR 48 28.34 3.4 3.0 23.6 20.1 14.5 15.1 3.2 3.0 4.5 5.0 Shenwan Hongyuan Sec 000166 CH NR 46 19.15 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a GFS 000776 CH NR 34 29.74 3.3 2.7 21.6 18.8 17.1 15.7 3.3 3.0 5.1 5.2 Huatai 601688 CH NR 33 31.29 3.5 2.9 25.4 21.4 16.0 15.0 2.9 2.9 5.5 5.2 China Merchants Sec 600999 CH NR 32 34.14 4.1 3.6 27.0 23.4 15.1 14.4 3.4 3.5 4.5 4.2 Everbright Securities 601788 CH NR 20 36.44 4.0 3.4 31.0 26.7 12.6 16.1 3.4 3.2 3.8 5.0 Industrial Securities 601377 CH NR 15 17.68 4.6 4.5 35.0 28.8 16.7 17.5 3.3 3.9 5.1 4.5 Changjiang Securities 000783 CH NR 14 18.80 5.5 4.6 29.1 24.9 20.4 21.2 3.7 3.6 5.5 6.0 Sinolink Securities 600109 CH NR 16 33.23 8.3 7.6 61.9 51.5 15.7 16.3 3.2 3.2 4.9 5.1 Sector 315 3.4 2.9 23.6 20.0 13.2 13.4 2.8 2.7 4.0 4.2 REGIONAL Nomura Holdings 8604 JP Neutral 26 844 1.1 1.0 13.9 13.0 7.8 7.9 0.5 0.5 15.8 15.8 Daiwa Securities 8601 JP NR 13 959 1.3 1.2 12.9 12.0 9.6 9.6 0.5 0.6 18.4 16.0 Yuanta Financial 2885 TT NR 6 17.05 1.0 1.0 15.4 14.1 6.8 6.9 1.0 1.0 6.9 7.3 Samsung Securities 016360 KS NR 4 61,400 1.2 1.2 14.4 13.7 8.8 8.5 1.1 1.1 8.0 7.9 Daewoo Securities 006800 KS NR 5 15,500 1.2 1.1 15.6 16.8 7.8 6.4 1.0 0.9 7.8 7.1 Sector 53 1.1 1.1 14.0 13.3 8.2 8.1 0.6 0.7 14.2 13.6 GLOBAL Goldman Sachs GS US Underperform 95 210.45 1.2 1.1 10.9 10.7 11.2 10.6 1.0 1.0 11.3 10.6 UBS UBSN VX NR 83 20.20 1.4 1.4 14.9 12.3 8.6 11.0 0.5 0.6 17.2 18.3 Morgan Stanley MS US Underperform 77 39.29 1.1 1.0 12.7 11.6 8.8 9.2 0.7 0.8 12.3 11.5 Credit Suisse Group CSGN VX NR 45 25.84 0.9 0.9 11.6 9.5 7.5 9.3 0.4 0.5 18.4 17.8 Lazard LAZ US NR 7 56.38 10.7 11.4 15.9 13.9 100.3 92.3 17.5 20.0 5.7 4.6 Sector 307 1.4 1.4 12.7 11.2 11.5 12.1 1.1 1.2 14.1 13.8 Source: Bloomberg, Daiwa Note: Daiwa forecasts for CITIC, Haitong, Galaxy, GF Securities and Huatai Securities H-share; Bloomberg consensus for other stocks. Priced as of 8 June 2015

- 16 - Financials / China 1776 HK 8 June 2015

has allocated a substantial 30% of its IPO proceeds for Risks potential overseas acquisitions.

We see the key upside risk as GFS quickly increasing its As GFS has dedicated capital to its margin finance margin finance penetration within its affluent client business, regulatory tightening on margin finance is a base. The additional funds raised during its H-share secondary downside risk for the stock. IPO have provided it with the means to achieve this.

Meanwhile, we think the main downside risk is overpaying for an overseas acquisition, given that GFS

- 17 - Financials / China 1776 HK 8 June 2015

CNY64.4bn, making GFS No.4 among all securities firms.

 GFS: segment revenue mix (per company disclosure) Investment Investment Others Banking Management 2.8% 11.0% Appendix 11.2%

Company background Established in Guangzhou in 1991, GFS was the 4th Trading largest securities company by net assets in China at the 21.1% end of 2014. The company had 249 branches and 9,349 employees in total at end-2014. Its customers include over 14,500 high net worth clients and 193,000 wealth Brokerage management clients. 53.8%

It was listed on the Shenzhen Stock Exchange in 2010 Source: Company, Daiwa by completing a reverse takeover of Yan Bian Road  GFS: industry rankings (2014) Construction Co (000776 SZ). The company was listed on the Hong Kong Exchange on 10 April 2015. Revenue

GFS’s principal business lines include brokerage, 4 investment banking, asset management, proprietary No. of branches 4 Net profit trading and direct investment. In addition, it conducts 4 overseas operations through its investment holding company, GFHK, which controls its subsidiaries: GF Securities (Hong Kong), GF Capital (Hong Kong), GF Asset Management (Hong Kong) and GF Investments 5 (Hong Kong). Being a leading full-service securities Net capital 3 Total asset firm, GFS has a number of major subsidiaries, including: Source: WIND, Daiwa • GF Futures, which was established in 1993 and focuses on commodity and financial futures Senior management brokerage, futures investment consultation and asset Sun Shuming has been chairman and executive management. Director since May 2012. Mr. Sun previously served in • GF Fund, incorporated in 2003, is a fund- various positions in the Ministry of Finance. He was management company that provides fundraising, supervisor of China Galaxy Securities from September fund sales and asset management services in China. 2003 to January 2006. Also, he was deputy chief officer of the accounting department of the CSRC from • GF Asset Management was established in 2014; its January 2006 to April 2007, and chief officer from principal business is to provide asset management April 2007 to March 2011. services. • GF Xinde, established in 2008, primarily runs the Lin Zhihai has been executive director and general business of equity investments and the provision of manager since March 2008 and April 2011, investment advisory services. respectively. He joined the company in 1996 as a general manager at the Dalian branch. He has also • GF Qianhe mainly provides project investment, been a director of GFHK since July 2011, and was investment management and investment chairman of GF Asset Management from January- consultation. August 2014.

At end-2014, GFS ranked No.1 in underwriting amount Qin Li has executive director and standing deputy in the investment banking business. For the brokerage general manager since April 2011. He has been a business, its market share in terms of stock-based director of GFHK since September 2006, was chairman trading volume was 4.5% for 2014 (4.0% in 2013). As of of GF Xinde from May 2010 to August 2013, director of 31 December 2014, the closing balance of its margin E Fund since May 2012, and chairman of the board of financing and securities lending amounted to Guangdong Equity Exchange since September 2013. - 18 - Financials / China 1776 HK 8 June 2015

Sun Xiaoyan is a deputy general manager and the 2009. He is in charge of monnitoring GF Xinde, GF chief financial officer of the company and was Qianhe and the office of the Board of Directors. appointed as an executive director in December 2014. She previously worked at GF Fund as chief financial Yang Long has been a deputy general manager of GFS officer. Ms Sun was appointed chairman of the first since May 2014. He is in charge of overseeing the session of supervisory committee of Zhengtong (証通股 general management office oof the brokerage business 份有限公司 ) in December 2014. (including its wealth managgement department, operation management depaartment, institutional Zeng Hao has deputy general manager of GFS since business department and private placement Auugust 2002. He is in charge of managing the research department), e-commerce department and information center for development, stock sales and trading technology department. department annd asset custody department. Wuu Jifu was appointed a deputy general manager and Ouyang Xi has been a deputy general manager of GFS the chief compliance officer in May 2014. He is in since November 2014. He is in charge of managing the charge of managing the riskk management department, investment banking administration department, whhich general office, compliance annd legal affairs department encompasses the mergers and acquisitions and audit department. department, capital markets department, and investment banking business general management Zhang Wei waas appointed a deputy general manager department. of in May 2014. He is in chaarrge of managing the debt underwriting department and GF Asset Management. Luo Binhua has been a deputy general manager and the secretary to the Board of GFS since November

Shareholding structure and major subsiddiaries and associates   GFS: shareholding structure and major subsidiaries and associates

Source: Company, Daiwa

- 19 - Financials / China 1776 HK 8 June 2015

Company comparable charts

 Revenue breakdown per disclosure (2014)  Revenue breakdown per business line (2014) (%) 100% 3.3 100 2.8 2.7 11.8 10.8 15.2 80% 28.1 1.5 21.1 80 7.8 8.6 60% 32.8 11.2 9.0 47% 17.1 60 11.0 43% 40% 32% 15.7 8.0 20% 5.6 10% 40 76.6 20% 9.2 64.6 30% 53.8 21% 24% 22% 22% 20 41.2 0% 30.5 CITICS HTS CGS GFS Huatai 0 Lending Traditional brokerage Investment banking CITICS HTS CGS GFS Huatai Asset management Trading Financial leasing Brokerage Investment banking Asset management Trading Others Others

Source: Companies Source: Daiwa estimates

 ROA (2013 and 2014)  ROE (2013 and 2014) (%) (%) 3.50 16 3.02 2.96 2.99 2.92 13.91 13.50 3.00 2.73 2.70 2.80 14 12.18 11.88 11.60 2.38 2.31 12 2.50 2.20 9.69 10 8.30 2.00 6.70 8 6.02 6.30 1.50 6 1.00 4 0.50 2 0.00 0 CITICS HTS CGS GFS Huatai CITICS HTS CGS GFS Huatai 2013 2014 2013 2014

Source: Companies Source: Companies

 Cost-to-income ratios (2013 and 2014)  Brokerage market share (4M15) (%) 69.7 (%) 70 67.3 66.9 9.0 8.0 65.7 64.8 7.9 62.6 8.0 65 61.6 6.5 61.0 7.0 6.4 6.1 6.4 58.3 5.8 60 5.4 5.2 5.2 56.7 6.0 5.1 4.8 4.8 5.0 5.1 4.9 5.0 4.5 4.3 55 4.0 4.0 4.0 50 3.0 2.0 45 1.0 40 0.0 CITICS HTS CGS GFS Huatai 2012 2013 2014 4M15 2013 2014 CITICS HTS CGS GFS Huatai

Source: Companies Source: CSRC, Wind, Daiwa

- 20 - Financials / China 1776 HK 8 June 2015

 Number of IPO deals (5M15)  Amount of IPO underwriting fees (5M15) 16 14 (CNYm) 14 4.0 3.4 3.3 12 10 999 10 2.7 2.6 2.6 3.0 2.5 2.4 8 7 2.1 1.8 1.7 6 5555 2.0 4 1.0 2 0 0.0 Qilu HTS GFS CICC HTS GFS Huatai CICC CITICS Sinolink Guosen Huatai CITICS Industrial Guosen Sinolink China Securities Everbright Merchants UBS Securities UBS China Merchants China Source: Shanghai and Shenzhen Stock Exchange, Daiwa Source: Shanghai and Shenzhen Stock Exchange, Daiwa Note: Including IPOs that have received final listing approval and those pending listing. As Note: Including IPOs that have received final listing approval and those pending listing. As of 26 May 2015 of 26 May 2015

 Unhedged equity and derivative investment exposure (end-  China Securities firms: total lending balance (end-4M15) 2014) (CNYm) (CNYbn) 60,000 100% 200 90.7% 50,000 80% 160 40,000 69.2% 58 58 3 11 61.2% 60% 120 32 30,000 42.8% 40% 80 20,000 118 131 102 106 107 40 10,000 20% 13.0% 0 0% 0 CITICS HTS CGS GFS Huatai CITICS HTS CGS GFS Huatai Value of equity securities and derivatives (CNYm) as % of net capital (RHS) Margin lending Stock repo

Source: Companies Source: Shanghai and Shenzhen Stock Exchanges, WIND, Daiwa estimates Note: CITICS data includes data for CITIC Securities (Zhejiang) and CITIC Securities (Shandong)

 Leverage ratios (end-2014)  Net capital and net-capital ratios (x) (CNYm) 6.49 50,000 100% 7.0 6.14 5.80 88.4% 86.7% 6.0 40,000 80% 4.74 4.88 4.68 5.0 4.08 3.79 3.83 30,000 60% 4.0 3.60 56.3% 57.1% 53.2% 3.0 20,000 40% 2.0 10,000 20% 1.0 0 0% 0.0 CITICS HTS CGS GFS Huatai CITICS HTS CGS GFS Huatai Net capital (CNY m) Nat capital as % of net assets Gross leverage Net leverage

Source: Companies, Daiwa Source: Companies



- 21 - Financials / China 1776 HK 8 June 2015

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] Jun Yong BANG (82) 2 787 9168 [email protected] Regional Head of Product Management Oil; Chemicals; Tyres Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan) TAIWAN Junjie TANG (852) 2773 8736 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Macro Economics (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Jonas KAN (852) 2848 4439 [email protected] (Regional) Head of Hong Kong and China Property Steven TSENG (886) 2 8758 6252 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (PC Hardware) Banking (Hong Kong/China); Broker (China); Insurance (China) Christine WANG (886) 2 8758 6249 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Handsets and Components) Gaming and Leisure (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Dennis IP (852) 2848 4068 [email protected] Small/Mid Cap Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Becky HAN (852) 2848 4464 [email protected] Head of India Research; Strategy; Banking/Finance Small/Mid Cap (Regional) Saurabh MEHTA (91) 22 6622 1009 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Capital Goods; Utilities Head of Transportation (Hong Kong/China); Transportation (Regional) Brian LAM (852) 2532 4341 [email protected] SINGAPORE Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering Ramakrishna MARUVADA (65) 6499 6543 [email protected] (China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jibo MA (852) 2848 4489 [email protected] Royston TAN (65) 6321 3086 [email protected] Head of Custom Products Group Oil and Gas; Capital Goods Thomas HO (852) 2773 8716 [email protected] David LUM (65) 6329 2102 [email protected] Custom Products Group Property and REITs

Evon TAN (65) 6499 6546 [email protected] PHILIPPINES Property and REITs Bianca SOLEMA (63) 2 737 3023 [email protected] Jame OSMAN (65) 6321 3092 [email protected] Utilities and Energy Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

- 22 - Financials / China 1776 HK 8 June 2015

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Neo Solar Power Corp (3576 TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK); GF Securities Co Ltd (1776 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

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Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any

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direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 61.0% Hold** 26.1% Sell*** 12.9% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2015. * comprised of Daiwa’s Buy and Outperform ratings. - 25 - Financials / China 1776 HK 8 June 2015

** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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