August 1, 2015
INITIATION Legend Holdings (3396.HK)
Neutral Equity Research Leading investor in China but fairly valued; initiate at Neutral
Investment view Investment Profile With management capability proven by the success of its holdings in Low High Lenovo and China Auto Rental, Legend is widely recognized for value Growth Growth creation, generating above-peer CROCI of c.14%-17% in 2012-2014. Its Returns * Returns * Multiple Multiple diversified asset portfolio with industry-leading companies is well- Volatility Volatility positioned to benefit from: 1) urbanization, 2) consumption upgrade, and Percentile 20th 40th 60th 80th 100th 3) other secular growth trends in China, while established investment Legend Holdings (3396.HK) platforms should help it attract new opportunities. However, we initiate Asia Pacific Conglomerates Peer Group Average coverage with a Neutral rating as Legend is trading close to our 12-month * Returns = Return on Capital For a complete description of the investment profile measures please refer to the NAV-based target price of HK$36.2. disclosure section of this document.
Core drivers of growth Key data Current Price (HK$) 35.00 (1) We project 13% earnings CAGR for Legend in 2014-17E, driven by 12 month price target (HK$) 36.20 integration of the Motorola Mobility and x86 businesses acquired by Market cap (HK$ mn / US$ mn) 82,479.6 / 10,639.6 Foreign ownership (%) -- Lenovo in 2014, and turnaround of the modern services, food and chemical divisions. (2) As with other holding companies, Legend enjoys the flexibility 12/14 12/15E 12/16E 12/17E to invest in new segments, leveraging its sizeable capital base and EPS (Rmb) 2.08 3.77 2.63 3.42 EPS growth (%) (14.0) 81.3 (30.3) 30.1 cashflow from more mature divisions. With group capex likely peaking this EPS (diluted) (Rmb) 2.08 3.77 2.63 3.42 EPS (basic pre-ex) (Rmb) 2.76 3.08 2.63 3.42 year, FCF should turn positive in 2017E. Leveraging up its net debt to P/E (X) NM 7.4 10.7 8.2 capital (ex-Lenovo) from 41% at end-2015E to 50% could raise Rmb17.5bn. P/B (X) NM 1.2 1.1 1.0 EV/EBITDA (X) -- 8.7 7.6 5.9 Dividend yield (%) NM 1.1 0.8 1.0 Risks to the investment case ROE (%) 14.1 19.2 10.9 12.5 CROCI (%) 11.2 6.8 7.9 9.1 Capital market volatility, with 40% of FY15E NAV attributed to financial or listed investments; regulatory & operational risks for portfolio assets. Price performance chart 44 105 Valuation 43 100 42 95 Our NAV-based 12-month target price of HK$36.2 is based on a 25% 41 90 40 85 discount to 2015E NAV/sh of HK$48.3, benchmarking the mid-cycle NAV 39 80 discounts of closest comps Fosun and CITIC given similarities in sector 38 75 37 70 exposure and corporate strategy. Our TP implies 1.28x P/B and 10.2x P/E. 36 65 35 60
34 55 Industry context May-15 Jun-15 Jul-15 Diversified investment group Legend mainly conducts businesses in seven Legend Holdings (L) MSCI China (R) segments. China conglomerates now trade at 41%-63% NAV discount. INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Neutral Absolute ------Rel. to MSCI China ------
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/31/2015 close. Coverage View: Neutral Janet Lu +852-2978-1642 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Simon Cheung, CFA covered in its research reports. As a result, investors should be +852-2978-6102 [email protected] Goldman Sachs (Asia) L.L.C. aware that the firm may have a conflict of interest that could Alex Ye affect the objectivity of this report. Investors should consider +852-2978-6666 [email protected] Goldman Sachs (Asia) L.L.C. this report as only a single factor in making their investment
decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research August 1, 2015 Legend Holdings (3396.HK)
Legend Holdings: Summary Financials
Profit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E
Total revenue 289,475.8 345,798.4 366,263.0 399,189.6 Cash & equivalents 40,604.7 28,509.9 23,191.0 29,372.1 Cost of goods sold (243,467.5) (282,220.0) (296,558.7) (322,340.0) Accounts receivable 72,034.1 73,261.6 74,443.2 79,834.3 SG&A (27,972.1) (37,553.3) (39,156.4) (40,933.7) Inventory 20,217.4 24,185.6 24,699.8 25,599.8 R&D (6,044.3) (11,386.1) (11,747.5) (12,085.2) Other current assets 42,471.2 44,745.9 51,090.0 50,243.3 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 175,327.4 170,703.0 173,423.9 185,049.4 EBITDA 11,991.9 14,639.0 18,800.4 23,830.6 Net PP&E 28,614.8 48,420.2 55,805.7 59,855.5 Depreciation & amortization (2,866.3) (5,364.8) (5,585.3) (5,660.5) Net intangibles 56,386.5 53,242.3 49,975.0 46,612.9 EBIT 9,125.6 9,274.2 13,215.1 18,170.2 Total investments 23,216.5 30,141.7 33,360.4 37,027.9 Interest income 591.0 572.4 402.5 385.5 Other long-term assets 5,456.3 5,456.3 5,456.3 5,456.3 Interest expense (3,185.5) (3,874.1) (3,841.9) (3,914.3) Total assets 289,001.5 307,963.5 318,021.3 334,002.0 Income/(loss) from uncons. subs. 291.7 580.1 870.1 1,178.3 Others 6,098.8 7,201.9 4,152.0 4,258.7 Accounts payable 108,512.4 106,522.4 102,787.8 106,880.9 Pretax profits 12,921.6 13,754.4 14,797.8 20,078.4 Short-term debt 19,570.5 19,570.5 19,570.5 19,570.5 Income tax (3,738.1) (3,822.4) (3,665.0) (4,967.5) Other current liabilities 23,674.9 25,471.1 27,401.9 27,400.6 Minorities (3,661.8) (3,214.8) (4,935.9) (7,051.0) Total current liabilities 151,757.8 151,564.0 149,760.2 153,852.0 Long-term debt 56,550.1 52,550.1 55,320.1 55,320.1 Net income pre-preferred dividends 5,521.7 6,717.3 6,196.9 8,059.8 Other long-term liabilities 27,828.3 27,828.3 27,828.3 27,828.3 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 84,378.4 80,378.4 83,148.4 83,148.4 Net income (pre-exceptionals) 5,521.7 6,717.3 6,196.9 8,059.8 Total liabilities 236,136.3 231,942.4 232,908.6 237,000.4 Post-tax exceptionals (1,361.3) 1,500.0 0.0 0.0 Net income 4,160.4 8,217.3 6,196.9 8,059.8 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 31,985.9 53,587.2 60,292.0 68,771.3 EPS (basic, pre-except) (Rmb) 2.76 3.08 2.63 3.42 Minority interest 20,879.4 22,433.9 24,820.7 28,230.2 EPS (basic, post-except) (Rmb) 2.08 3.77 2.63 3.42 EPS (diluted, post-except) (Rmb) 2.08 3.77 2.63 3.42 Total liabilities & equity 289,001.5 307,963.5 318,021.3 334,002.0 DPS (Rmb) 0.170.300.210.27 Dividend payout ratio (%) 8.2 8.0 8.0 8.0 BVPS (Rmb) 15.99 22.74 25.58 29.18 Free cash flow yield (%) -- (22.4) (6.7) 9.8
Growth & margins (%) 12/14 12/15E 12/16E 12/17E Ratios 12/14 12/15E 12/16E 12/17E Sales growth 18.7 19.5 5.9 9.0 CROCI (%) 11.2 6.8 7.9 9.1 EBITDA growth 21.4 22.1 28.4 26.8 ROE (%) 14.1 19.2 10.9 12.5 EBIT growth 15.1 1.6 42.5 37.5 ROA (%) 1.6 2.8 2.0 2.5 Net income growth (14.0) 97.5 (24.6) 30.1 ROACE (%) 16.0 11.9 10.7 12.7 EPS growth (14.0) 81.3 (30.3) 30.1 Inventory days 27.9 28.7 30.1 28.5 Gross margin 15.9 18.4 19.0 19.3 Receivables days 83.1 76.7 73.6 70.5 EBITDA margin 4.1 4.2 5.1 6.0 Payable days 149.0 139.1 128.8 118.7 EBIT margin 3.2 2.7 3.6 4.6 Net debt/equity (%) 67.2 57.4 60.7 46.9 Interest cover - EBIT (X) 3.5 2.8 3.8 5.1
Cash flow statement (Rmb mn) 12/14 12/15E 12/16E 12/17E Valuation 12/14 12/15E 12/16E 12/17E Net income pre-preferred dividends 5,521.7 6,717.3 6,196.9 8,059.8 D&A add-back 2,866.3 5,364.8 5,585.3 5,660.5 P/E (analyst) (X) NM 7.4 10.7 8.2 Minorities interests add-back 3,661.8 3,214.8 4,935.9 7,051.0 P/B (X) NM 1.2 1.1 1.0 Net (inc)/dec working capital (12,116.8) (11,168.6) (9,719.7) (1,218.7) EV/EBITDA (X) -- 8.7 7.6 5.9 Other operating cash flow (3,115.6) (8,098.4) (5,660.2) (6,311.3) EV/GCI (X) -- 0.8 0.8 0.7 Cash flow from operations (3,182.6) (3,970.1) 1,338.2 13,241.3 Dividend yield (%) NM 1.1 0.8 1.0
Capital expenditures (9,087.8) (14,742.0) (7,444.4) (4,046.6) Acquisitions (18,586.3) (1,067.4) (980.2) (1,052.2) Divestitures 1,005.3 0.0 0.0 0.0 Others 5,708.0 1,715.2 2,042.2 2,324.7 Cash flow from investments (20,960.8) (14,094.2) (6,382.4) (2,774.1)
Dividends paid (common & pref) (332.8) (657.2) (495.6) (644.6) Inc/(dec) in debt 31,267.4 (4,000.0) 2,770.0 0.0 Common stock issuance (repurchase) 0.0 12,287.0 0.0 0.0 Other financing cash flows (3,716.4) (1,660.3) (2,549.1) (3,641.5) Cash flow from financing 27,218.3 5,969.6 (274.8) (4,286.1) Total cash flow 3,074.8 (12,094.8) (5,318.9) 6,181.1 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Analyst Contributors
Janet Lu [email protected]
Simon Cheung, CFA [email protected]
Alex Ye [email protected]
Goldman Sachs Global Investment Research 2 August 1, 2015 Legend Holdings (3396.HK)
Table of contents
Company overview, business model and strategies 4 Key strengths – solid management team and investment platform to capture opportunities from China’s economic transformation 7 (1) Diversified portfolio positioned to benefit from macro themes 7 (2) Quality assets with dominant market positions 12 (3) Strong management capabilities and track record 14 (4) Established investment platform to identify future potential 18 Stock fairly valued; initiate at Neutral with target price of HK$36.2 19 (1) SOTP-based FY15E NAV of Rmb91.3bn/HK$113.8bn (HK$48.3/sh) 19 (2) Target price of HK$36.2 based on a 25% target NAV discount 22 Growth strategies and outlook by divisions 28 (1) IT (29% of GAV, 20% of earnings) 28 (2) Property (19% of GAV, 16% of earnings) 30 (3) Financial services (11% of GAV, 9% of earnings) 33 (4) Modern services (10% of GAV, 0.4% of earnings) 37 (5) Agriculture and food (2% of GAV, -1.5% of earnings) 42 (6) Chemical and energy (4% of GAV, -3% of earnings) 44 (7) Financial investments (24% of GAV, 58% of earnings) 47 Financials 52 13% earnings CAGR in 2014-17E driven by IT and the turnaround of a number of other businesses 52 Group FCF to turn positive in 2017E 53 Balance sheet and debt profile 54 Appendix: Valuation comp sheets by sector 61 Key risks 59 Disclosure Appendix 65
The prices in the body of this report are based on the market close of July 30, 2015 (unless specified otherwise).
Goldman Sachs Global Investment Research 3 August 1, 2015 Legend Holdings (3396.HK)
Company overview, business model and strategies
Company background – diversified investment group founded in 1984 Legend Holdings is a diversified investment group in China conducting its businesses through strategic and financial investments. Its strategic investments span across six segments, namely IT, property, financial services, modern services, agricultural & food, and chemicals & energy materials, for which management sees growth potential and could benefit from China’s key macro and development themes in the coming decades. Its financial investments mainly consist of venture capital, private equity and angel investments. It also directly invests in private and listed companies domestically and overseas with a fair value of Rmb17bn as of end-2014.
Founded by its current Chairman, Mr. Liu Chuanzhi, with approval from the Chinese Academy of Sciences (CAS) in 1984, Legend started off with the PC distribution business acting as a sales agent for IBM, AST and HP in China from 1985. In 1990, it launched its own “Legend” brand (later changed to Lenovo), which became the leader in China’s PC market in 1997 (in terms of shipment, according to IDC). In early 2000, the group made the decision to diversify into financial investment and property sectors by forming Legend Capital, Hony Capital and Raycom. Then in 2010, Legend formulated its mid-term strategy of further diversification and set up a number of new businesses through both acquisitions and greenfield startups.
Exhibit 1: Legend is now in Phase 3 of development with its diversification strategy taking shape
Phase 1: Phase 2: Phase 3: 1984-2000 2001-2010 2010 - present Started off with Lenovo and First attempt to Strategic asset allocation to capture successfully established the diversify the consumer upgrade in China and brand name the growth of service industry
• Founding of Founding of Lenovo and • Founding of Legend Launch of Joyvio IPO of China Legend Digital China Capital, Raycom Real Legend’s new Auto Rental • Acquired stake in Holdings spin off from Estate strategy (CAR, 0699.HK) Legend Zhengqi • IPO of Digital China Financials • Acquired stake in Union Insurance
1984 19941997 2000 2001 2003 2005 2010 2011 2012 2014 2015
IPO of Lenovo (992.HK) Founding of Lenovo acquired IBM’s • Acquired stake in Hony Capital PC Division CAR • Acquired stake in Lakala
Source: Company data, Sina.com.
Shareholding structure – 15.1% free float; circulation of domestic shares a focus As shown in Exhibit 2, after the June 2015 IPO of Legend, CAS Holdings (100% owned by the Chinese Academy of Sciences) owns 29.0% of the company, followed by Lian Chi Zhi Yuan (20.4%) and Lian Heng Yong Xin (7.6%), both of which are employee shareholding platforms. As a passive investor with a non-executive board seat, China Oceanwide Holdings Group holds a 17% interest, while another 9.4% is controlled by six individuals (including Chairman Liu Chuanzhi, President Zhu Linan and CFO Ning Min). The public free float of Legend is 15.1%.
Goldman Sachs Global Investment Research 4 August 1, 2015 Legend Holdings (3396.HK)
Other than the 15.1% stake held by public shareholders and 1.5% of the shares held by the National Social Security Fund (NSSF), the rest are domestic shares which are issued to investors within mainland China and cannot be traded interchangeably with the H-shares. Any conversion would require approval from the China Securities Regulatory Commission (CSRC) and Hong Kong Exchanges & Clearing (HKEx).
Exhibit 2: Group structure of Legend Holdings (as of July 2015)
China Employees through Employees through ` Public CAS Holdings Oceanwide NSSF^^ Lian Chi Zhi Yuan Lian Heng Yong Xin shareholders (国科控股 ) Holdings Group Individuals* (联持志远 ) 联恒永信 ( ) (中国泛海) 1.51% 15.1% 29.0% 20.4% 7.6% 17% 9.4%
Legend Holdings
Strategic investments Financial investments (76% of 2015E GAV) (24% of 2015E GAV)
20% Legend Capital ** (Venture capital) IT Financial services Modern services Agriculture & food Property Chemicals & energy materials (29% of 2015E GAV) (11% of 2015E GAV) (10% of 2015E GAV) (2% of 2015E GAV) (20% of 2015E GAV) (4% of 2015E GAV) 20% Hony capital ** (PE investment) Joyvio 30.55% Lenovo 92.00% Zhengqi 23.87%^ CAR 100% (Premium 93.09% Raycom 90.00% Levima (0992.HK) Financial (0699.HK) fruit Real Estate (Chemical business) producer) 100% Legend Star (Angel investment) 15.33% Hankou 54.90% Funglian 100% Raycom 50.77% Phylion Battery Bybo Dental 93.30% Bank (Chinese Property (Energy business) liquor) Investment Other financial investments Union Zeny 94.00% 48.00% Insurance (cold chain Broker logistics)
31% 100.0% EnsenCare Lakala (Senior care)
10.00% Suzhou Trust
Note: The light blue highlighted shareholders hold H-shares; others are domestic shares. * Individuals refer to Chuanzhi Liu, Linan Zhu, Shaopeng Chen, Xudong Tang, Ning Min, and Shaokang Huang ^^ Represents H share converted from domestic shares and held by NSSF pursuant to relevant PRC regulations regarding reductions of state-owned shares ^ Beneficial interest ** The group is a limited partner in each limited partnership fund and holds interests in each GP of funds structured as limited partnerships.
Source: Company data, Goldman Sachs Global Investment Research.
Business strategy – proactive asset management and established platform The group strives to achieve value creation by actively managing a dynamic portfolio of assets across different industries, leveraging its deep understanding of the Chinese economy and strong management expertise accumulated over 30 years of operating experience. After nurturing Lenovo to become one of China’s leading PC companies, management foresaw the rapid growth of the Chinese economy with rising housing demand on urbanization and the need for alternative investments. The establishment of Raycom (property), Legend Capital (venture capital) and Hony Capital (private equity) were to address these trends. With China transforming from an export-driven to a consumption- led economy, together with emergence of the middle class, Legend anticipated growing demand for more sophisticated products and services. Since 2012, it has started to expand its strategic investments into other service and consumer-related industries, such as car rental, insurance, senior care, etc. We highlight below its growth strategies.
Goldman Sachs Global Investment Research 5 August 1, 2015 Legend Holdings (3396.HK)
Sustain growth by both strategic and financial investments – Legend believes the importance of maintaining both strategic and financial investments as two key pillars to sustain long-term earnings growth. For strategic investments, the group provides value-added support (e.g., brand image, financial assistance) and adjusts resource allocation to its portfolio companies based on the different stages of industry and business cycles. It is also committed to identifying new investment opportunities and expanding into new segments where the group sees growth potential. For financial investments, the group puts great emphasis on deal sourcing and financial returns.
Optimize portfolio mixture and enhance liquidity – In view of changing macro and industry trends, the group monitors, evaluates and optimizes its portfolio assets continuously. It also plans to access the market to enhance the liquidity of its portfolio and to realize value—aside from the listing in 1994 of Lenovo, which in turn spun off Digital China in 2001 (Exhibit 1), Legend realized significant value from the listing of the car rental business, China Auto Rental (CAR), in late-2014. Its c.23.9% beneficial interest is worth Rmb7.5bn as of July 30, 2015. Further, Legend’s disposal of a 10% interest in Lakala for Rmb300mn in 2014 also helped crystalize the value for its interest in the latter.
Leverage investment platform companies to share opportunities and information – Legend Capital, Hony Capital and Legend Star have accumulated substantial information and experience across different industries from investing in over 300 companies not only in China but also overseas. These enhance synergies among its portfolio companies and help the group to identify opportunities for its strategic investments, in our view. CAR was originally an investment made by Legend Capital and later became a strategic investment of Legend Holdings.
Exhibit 3: Legend believes in the importance of Exhibit 4: Legend enhances value by providing various maintaining both strategic and financial investments as support to portfolio companies two key pillars to sustain long-term growth
Sustainable value growth Supervision and operational Improvement √ Legend has Investment and post-investment management professionals Insightful guidance on strategic planning, corporate government, incentive √ • Value enhancement of •Financial return scheme and operational enhancement etc portfolio companies • Deal sourcing Brand IT • Adjustment and √ Leveraging on the brand name of Legend optimization of investment portfolio Angel investment √ Expertise and capability to build brands Financial services Financial supports √ Reducing cost of capital Venture Capital Modern services √ More funding sources Strategic Financial √ Larger funding size Agriculture & Food Investments Investments Private equity Synergies within the portfolio companies Property √ Information sharing Others √ Resource sharing Chemicals & √ Cooperation and business co-development Energy Materials Complementary investment platforms cover different stages of the companies’ life cycle and create value by interaction
Source: Company data. Source: Company data.
Goldman Sachs Global Investment Research 6 August 1, 2015 Legend Holdings (3396.HK)
Key strengths – solid management team and investment platform to capture opportunities from China’s economic transformation
(1) Diversified portfolio positioned to benefit from macro themes Legend has a diversified asset portfolio with IT, property, financial services, modern services, agricultural & food, chemicals & energy, and financial investments representing 29%, 20%, 11%, 10%, 2%, 4% and 24% of its 2015E gross asset value (GAV). In asset terms, they represented 61%, 17%, 4%, 2%, 1%, 3% and 11% of the group’s total assets at end- 2014. As these sectors together contribute over half of China’s GDP (Exhibit 5), we view Legend as a proxy to the local economy, although management also reviews its asset mix to more specifically target at various macro themes shaping China’s development in the coming decades.
Exhibit 5: Legend’s asset mix mirrors the composite of China’s economy
% of China % of Legend's total % of Legend's GAV Legend Companies Industries GDP (2014) assets (2014) (2015E) Legend Capital, Hony Capital, Union Insurance, Lakala, Financials 7.3% 14.9% 34.6% Zhengqi Financial, Hankou Bank, Suzhou Trust IT 3.5% Lenovo 61.4% 29.2% Real Estate 12.4% Raycom 17.0% 20.1% Agriculture 10.0% Joyvio 0.9% 0.9% Chemicals & Mining 5.8% Levima 3.1% 3.4% Renewable Energy NA Phylion Battery 0.8% Consumer Retail 11.1% Funglian, Zeny 2.3% 1.8% Healthcare 1.6% Bybo, EnsenCare 1.8% Transport 4.7% China Auto Rental (CAR) 0.5% 7.2% Source: CEIC, Company data, Goldman Sachs Global Investment Research.
Positioned to benefit from economic transformation China has experienced significant economic growth with nominal GDP quadrupling from US$1.9trn in 2004 to US$10.4trn in 2014, mainly driven by exports and infrastructure spending. Given weaker external demand post the financial crisis and slower productivity with excess capacity across industries, the government called for an economic restructuring to sustain the country’s future growth. We discuss below how Legend’s sector exposure and investments could position itself to benefit from various macro trends and policy supports:
Consumption growth and upgrade – One of the government’s policy objectives is to stimulate consumption spending, which represented only 37% of China’s GDP in 2014, much lower than 50%-70% in other developed countries. As disposable income continues to rise, Chinese consumers have shown willingness to improve their quality of life aside from fulfilling their basic needs. Legend has started to position itself to such consumption and service upgrading trends since 2010 by making a number of strategic investments. Examples include Bybo (largest private dental chain in China in terms of number of outlets as of June 2014), Joyvio (No.1 market share in kiwi and blueberry by retail sales volume in 2013 in China), Funglian (carries four Chinese liquor brands) and CAR (largest car rental company in China in terms of fleet size in 2013 according to Roland Berger).
Urbanization – China is still at a much earlier developmental stage than Japan and the US. 75% of US households lived in urban areas in 1970, while China’s urbanization rate only reached 50% recently. Our Global Macro Research team estimates that population growth, urbanization, smaller household sizes and upgrades could drive demand for 8mn housing units each year in China. Founded in 2001, its property arm, Raycom, has 50 projects with a total GFA of 14.5mn sqm as of April 30, 2015 spanning across 15 cities, mostly second-tiered, where the group sees greater growth potential.
Goldman Sachs Global Investment Research 7 August 1, 2015 Legend Holdings (3396.HK)
Transforming and new economy – In the State Council meeting last year, Premier Li outlined six areas that the government targets to support with preferential policies, i.e., healthcare, tourism, education, housing, internet and environmental protection. We believe a number of Legend’s portfolio companies could benefit from the secular growth and policy supports to these industries, e.g., Bybo and EnsenCare for elderly senior citizens or healthcare; Lenovo and Zeny for e-commerce and internet; CAR for tourism; Phylion Battery for environmental protection.
SME financing – The current tight regulation around banks provides opportunities for other financial service companies to fulfill short-term financing needs by SMEs and individuals, in our view. Founded in 2012, Legend’s subsidiary, Zhengqi Financial, provides a wide range of services including direct loans, credit guarantees, pawn loans, financial leasing and entrust loans. Its angel investment arm, Legend Star, offers not only funding but also management advice for startup and SME companies.
Demand for wealth management and insurance products – Given the housing price rally and strong return in the past decade, real estate now makes up a significant portion (over 60%) of Chinese households’ balance sheets, according to our China property research team’s estimate. As they become wealthier and seek ways to diversify their investments, we expect growing demand for wealth management and alternative investment products. Legend Capital and Hony Capital are leading venture capital and private equity investment companies in China. Union Insurance is an insurance brokerage company specializing in education-related products.
Exhibit 6: Legend has been proactively adjusting its asset portfolio to capture opportunities arising from China’s transforming economy Key macro and policy themes in China and how they relate to Legend’s investments
% of China % of Legend's total % of Legend's GAV Macro and policy themes Industries GDP (2014) assets (2014) (2015E) √ The State Council, Ministry of Finance and the Central Bank set out policies to encourage Financials 7.3% 14.9% 34.9% financial institutions to extend more loans to SMEs
√ The State Council has identified IT as an emerging industry with strategic importance and a crucial foundation for an information-based society. IT 3.5% 61.4% 29.4% √ The State Internet Information Office (SIIO) aims to run security checks on all critical information technology products and services before they are allowed in systems that may affect national security and public interest
√ The Chinese Academy of Social Sciences expects home sales to grow steadily, and Home Purchase Restrictions to be removed in some smaller cities with oversupply issue. Real Estate 12.4% 17.0% 19.4% √ Government is supporting smart/low energy-consuming office buildouts
√ The Circular on Comprehensive Deepening of Rural Reform and Accelerating Agricultural Agriculture 10.0% 0.9% 0.9% Modernization aims to extend more support and protection for the domestic agriculture industry.
√ China Materials Research Society is proposing to NDRC for a Rmb20bn total investment to Chemicals & Mining 5.8% 3.1% support core technology research and industrialization of key chemical and materials sectors 3.4%
√ The 12th Five-Year Plan on Greenhouse Emission Control aims to reduce China's overall carbon Renewable Energy NA 0.8% intensity by 17% by 2015 vs. that of 2010
Consumer Retail 11.1% √ China is shifting its economy to a more self-sustaining mode on growth of domestic consumption 2.4% 1.8% √ The government has set the goal of promoting public health and making health care accessible Healthcare 1.6% 1.8% and affordable via the healthcare reform.
√ China auto rental industry is growing at 20-30% p.a. in recent years according to the statistics Transport 4.7% 0.5% 7.3% from China Auto Rental Association
Source: CEIC, Various media sources (incl. people.cn, sina.com), Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 8 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 7: In 2014, the State Council highlighted these six Exhibit 8: China’s consumer expenditure per capita is still areas as policy support focus significantly below developed countries Global comparison of consumer expenditure
Area Detailed policies Potential Beneficiaries 2013 consumer expenditure (US$bn, LHS) Encourage online Shopping / E- Internet, Tech Hardware 2013 consumer expenditure per capita ('000 US$, RHS) commerce 12,000 40 Internet Increase broadband speed Telecoms 35.6 35 10,000 Encourage environmentally-friendly 30 Environmental consumption 24.5 25.1 23.6 Clear Energy 8,000 22.9 protection 20.7 25 Subsidize new energy facilities 6,000 20 Step up social housing construction Construction Materials 15 Property 4,000 Support property consumption Property 7.4 10 2,000 6.8 0.9 Support tourism 2.5 5 Tourism Tourism 0 0 Allow paid leave for employees
Education Support education-related consumption Education
Encourage capital investment and Healthcare Elderly consumption in elderly care and the healthcare industry Insurance
Source: The State Council, Goldman Sachs Global Investment Research. Source: CEIC.
Greater flexibility for capital allocation to invest for growth Similar to other investment groups, one advantage for Legend’s diversified business structure is the flexibility for capital allocation to those areas management believes have growth potential. It also enhances the company’s ability to adjust and optimize its asset mix. Exhibit 9 lays out the group’s cashflow breakdown by division. As Lenovo is a standalone, listed company, we deconsolidate its contribution and only account for its dividend distribution.
Legend has been in an investment mode over the past three years, having spent over Rmb7bn on acquisitions of new businesses or financial assets. It also incurred a significant amount of capex for expansion, resulting in negative FCF across most divisions. This suggests the company has been deploying residual cashflow from Lenovo (in the form of dividends), financial services, and financial investments (i.e., monetization from exiting its positions, or drawdown of funds) to subsidize its expansion elsewhere.
We forecast Legend’s net debt to net capital (ex. Lenovo) to stand at 41% at 2015E, in line with that of its closest comparable Fosun (40%-50% in 2012-2014). If it were to leverage up to 50%, we estimate the group has the potential to raise another Rmb17.5bn, taking into account cash inflows and an expanded balance sheet.
Goldman Sachs Global Investment Research 9 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 9: Legend has been in an investment mode over the past three years, having spent Rmb47bn to expand and Rmb7bn to acquire financial assets, resulting in negative FCF for most divisions Cash flow analysis after deconsolidating Lenovo’s financials
(Rmb mn) 2012 2013 2014 2015E 2016E 2017E Cash flow by division (Lenovo deconsolidated)
Operating cash flow 3,558 12,961 10,801 7,100 9,696 10,958 IT 211 404 806 359 638 893 Financial Servcies 386 813 879 1,030 1,406 1,753 Modern services (93) (465) (449) 59 469 714 Agriculture and food (0) (84) (265) (34) 64 159 Property 4,992 11,663 7,870 6,707 7,411 7,594 Chemicals and energy materials 86 (56) (103) 146 454 523 Financial Investment (347) 1,532 3,106 527 791 900 Unallocated (1,675) (847) (1,044) (1,694) (1,538) (1,580)
Change in working capital (238) (4,201) 5,209 1,887 (6,311) (3,099)
Capex (14,438) (14,704) (18,271) (13,463) (11,765) (5,501) IT ------Financial Servcies (46) (31) (124) (18) (14) (43) Modern services (525) (367) (418) (583) (631) (293) Agriculture and food (563) (580) (297) (80) (108) (49) Property (11,253) (11,187) (14,074) (11,263) (10,393) (5,037) Chemicals and energy materials (1,682) (2,532) (3,339) (1,500) (600) (60) Financial Investment (356) (0) (12) (12) (12) (12) Unallocated (12) (6) (7) (7) (7) (7)
Free cash flow from operations (11,118) (5,944) (2,262) (4,476) (8,380) 2,358 IT 211 404 806 359 638 893 Financial Servcies 339 782 756 1,012 1,392 1,710 Modern services (618) (832) (867) (524) (162) 421 Agriculture and food (564) (664) (562) (115) (44) 111 Property (6,261) 476 (6,204) (4,556) (2,982) 2,558 Chemicals and energy materials (1,596) (2,588) (3,442) (1,354) (146) 463 Financial Investment (704) 1,532 3,094 515 779 888 Unallocated (1,688) (853) (1,051) (1,701) (1,545) (1,586) Change in working capital (238) (4,201) 5,209 1,887 (6,311) (3,099)
Disposal (430) 794 (1,166) - - - Acquisition 3 713 (833) - - - Sale of financial assets 1,932 3,610 2,171 - - - Purchase of financial assets (1,625) (1,992) (3,455) (1,067) (980) (1,052) Government grants - 215 432 432 432 432 Other financing cashflow - - - 12,287 - -
Residual cash flow (11,238) (2,603) (5,113) 7,176 (8,928) 1,738 Dividends to shareholders (275) (303) (333) (657) (496) (645) Change in cash (11,513) (2,906) (5,445) 6,519 (9,424) 1,094
Deconsolidated net debt ex-Lenovo 24,562 28,761 43,344 39,469 43,905 39,432 (Increase)/decrease (4,199) (14,583) 3,876 (4,436) 4,473
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 10: We estimate that Legend has the potential to raise Rmb17.5bn if it were to gear up to 50% net debt to capital (ex. Lenovo) in 2015E
(Rmb mn) 2015E Total equity 76,021 Less: Lenovo equity not owned by Legend 19,122 Total equity (deconsolidating Lenovo) - (a) 56,899
Consolidated net debt of Legend 43,611 Less: Net debt of Lenovo 4,142 Deconsolidated net debt ex-Lenovo - (b) 39,469 Net debt to capital (ex. Lenovo) - (b/(a+b)) 41.0%
Capital that can be raised if gearing up to 5,000 10,000 15,000 17,500 20,000 25,000 Net debt to capital (ex. Lenovo) of 43.9% 46.5% 48.9% 50.0% 51.1% 53.1%
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 10 August 1, 2015 Legend Holdings (3396.HK)
More diversified and asset lighter vs. Hong Kong listed investment groups Exhibit 11 sets out a comparison of Legend’s GAV breakdown vs. major listed HK/China investment groups. Several observations:
More diversified – Legend’s asset mix is more diversified and ties closely with the domestic economy, compared with most HK/China investment groups whose portfolios are skewed toward 1-2 key sectors. Among the HK-based ones, over 60% of Swire Pacific, Wharf, Hopewell and MTRC’s GAV is attributed to property. Among the China ones, CITIC and Shanghai Industrial are more exposed to financial and property segments respectively. Fosun appears to have a more comparable business mix to Legend’s.
Asset light – Many of the other investment groups are asset heavy investing in property and infrastructure-related segments, in line with the drivers of HK and China’s economic growth over the past decade. Legend’s portfolio is asset lighter with greater emphasis on intellectual properties. Intangible assets (e.g., goodwill, trademarks) represented 20% of the group’s total assets in 2014, for example.
More exposed to the “new economy” – Starting off as an IT company and having actively adjusted its portfolios in anticipation of market changes, Legend’s business mix is driven more by the “new economy”, such as technology, consumer and service industries. As China continues to pursue reforms to rebalance its economy, we expect these sectors to face less regulatory pressure than those in the “old economy”.
Goldman Sachs Global Investment Research 11 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 11: 2015E GAV breakdown for Legend vs. major Hong Kong/China investment groups
Legend Holdings CKH Holdings Wharf (0004.HK) 2015E GAV = Rmb102,775mn 2016E EV = HK$789,429mn 2015E GAV = HK$361,016mn HK China development investment properties properties 3% Financial 22% investments IT Container ports 24% 29% 17% China Telecoms & development media properties Chemicals and Logistics and 30% 12% energy Retail and terminal materials manufacturing 4% 4% 22% HK investment properties Property Financial Infrastructure Telecommunica 58% 19% Consumer services 23% tion and media services 11% Energy 1% Agriculture and 11% 8% food 2% Swire Pacific (0019.HK) Jardine Matheson (JARD.SI) MTRC (0066.HK) 2015E GAV = HK$221,342mn Hotel 2015E GAV = US$32,962mn 2015E GAV = HK$264,812mn (Mandarin Oriental) New or 3% Auto (Jardine HK station overseas rail Cycle & commercial projects Carriage+Jardi Insurance & and rental 12% ne Motor) reinsurance management Property 26% (Jardine Lloyd 20% 65% Retail (Dairy Thompson) Farm) 4% 31% Aviation Jardine Pacific HK rail assets 21% 7% 26% HK property assets Properties Offshore oil Cash and other 42% (HKLand) exploration financial 24% support holdings at JS Industries & 4% 5% Beverage trading 7% 3% Fosun Int'l (0656.HK) Hopewell (0054.HK) NWS (659.HK) 2015E GAV = HK$260,067mn 2015E GAV = HK$39,248mn 2015E GAV = HK$66,748mn Resources Ports and Steel 11% Power Plants Logistics 6% 2% 23% Insurance HK Property 13% development Facilities 14% property HK investment Water Management 20% property 12% 22% 53% Entertainment China & Leisure development 9% Investements property and Asset To ll roa d Health 4% Management 17% Contracting 12% 34% To l l ro ad Strategic and Transport 20% Investments 7% 17% Banking and Power plant Financials 3% 1% CITIC Ltd (0267.HK) Shanghai Industrial (0363.HK) Tianjin Development (0882.HK) 2015E GAV = HK$727,520mn 2015E GAV = HK$54,438mn 2015E GAV = HK$11,650mn Hotel Machinery Highway 4% Infrastructure 9% Financial 18% services Utilities 7% 61% Utilities Real estate and Real Estate 11% infrastructure 44% Strategic 17% Investments Infrastructure 55% Engineering 25% contracting 1% Consumer 27% Others Resources and 7% Energy Manufacturing 8% 6% Source: Goldman Sachs Global Investment Research.
(2) Quality assets with dominant market positions While it takes time to grow and expand, especially in sectors which the group has newly ventured into, many of its existing businesses already have dominant or strong market positions in their respective industries (Exhibit 12). To highlight a few below: Lenovo (c.30.6% interest) – Listed on the HK Stock Exchange since 1994, Lenovo is now the world’s largest PC maker with a 19.2% market share in terms of shipment volume in 2014, according to IDC. It also dominates China’s PC market with a 36.6% share, a distant No.1 vs. a 9.9% share for Dell, the No.2 player as of 2014. After the acquisition of Motorola Mobility, it ranks No.3 in the global smartphone and tablet markets. Union Insurance (48% interest) – UIB is a leading insurance broker in education-related products with over 90% share in the school liability insurance market, and also ranks No.1 for student accident insurance in terms of premium in 2013, according to Euromonitor. As of end-2014, it had cooperated with 297,000 schools across 32 provinces and municipalities in China.
Goldman Sachs Global Investment Research 12 August 1, 2015 Legend Holdings (3396.HK)
Lakala (31% interest) – According to Euromonitor, Lakala is the dominant player with a 74.7% share in 2013 in the offline terminal payment market in China. It had over 800,000 point-of-sale (POS) terminals in 31 provinces and municipalities serving over 4.5mn active users as of end-2014. It also had authorized 700,000 POS terminals for its card acceptance services. Joyvio (100% interest) – According to Euromonitor, Joyvio is the largest corporation for supplying and operating fruit businesses as well as the biggest grower of blueberry and kiwi in China, contributing 22.3% of blueberry and 0.8% of kiwi retail sales in China in 2013, vs. 8.3% and 0.7% for the No.2 players in the respective markets. China Auto Rental (c.23.9% beneficial interest) – According to Roland Berger, CAR was the largest car rental company in China in terms of fleet size in 2013. It directly operates 723 outlets across 70 major and 176 smaller cities, along with 219 services locations by franchisees. Excluding those owned by its franchisees, its fleet size totaled 63,522 vehicles at end-2014. Bybo (54.9% interest) – Bybo is the largest private dental chain in China with nine hospitals, 66 clinics and 724 dental chairs across 14 provinces and municipalities as of end-2014. Exhibit 12: Many of the existing businesses already have dominant or strong market positions in respective industries Legend’s assets with leading position in respective markets
Core earning contribution (Rmb mn) 14-17E % core earning contribution Industries Assets Leading position in respective markets 2014 2015E 2016E 2017ECAGR 2014 2015E 2016E 2017E √ World’s largest PC maker with 19.2% market share √ No. 1 PC brand in China with 37% market share √ No. 1 PC maker in Asia Pacific IBM x86 server business transforms Lenovo into No.3 x86 √ IT Lenovo global server player and has higher margins than PC 1,669 1,427 2,128 3,009 22% 30.2% 21.3% 34.5% 37.5% MMI provides Lenovo a strong market presence in the North √ America and Latin America smartphone market Successfully integrated NEC PC in Japan, Medion in Germany, √ CCE in Brazil √ 50 projects in 15 cities Expertise and mix of income streams from both residential Real Estate Raycom √ development and recurring income from Raycom Infotech Park and 1,397 1,123 1,193 1,450 1% 25.3% 16.7% 19.3% 18.1% services √ Fortune Global 500 tenants A national pioneer in insurance brokerage business focusing on the Union Insurance √ (28) (35) 30 60 n.a. -0.5% -0.5% 0.5% 0.7% education sector Financial services Lakala √ China’s largest offline payment company (74) (69) (30) 2 n.a. -1.3% -1.0% -0.5% 0.0% Zhengqi Financial √ A tier-1 financial services provider for SMEs 349 451 542 635 22% 6.3% 6.7% 8.8% 7.9% Funglian √ A Chinese liquor company (219) (72) (23) 19 n.a. -4.0% -1.1% -0.4% 0.2% Modern Agriculture A leading premium fruit producer in China with the largest & Food services Joyvio √ market share in both blueberries and kiwifruits measured by (84) (32) (0) 37 n.a. -1.5% -0.5% 0.0% 0.5% retail sales volume in China (Euromonitor) China Auto Rental √ China’s largest car rental company and first to be listed 104 255 366 463 64% 1.9% 3.8% 5.9% 5.8% Modern services EnsenCare √ A senior care services provider - 14 38 41 n.a. 0.0% 0.2% 0.6% 0.5% Zeny Supply Chain √ A modern, comprehensive logistics service provider (371) (279) (217) ( 195) -19% -6.7% -4.2% -3.5% -2.4% Levima √ Produces refined chemicals and new chemical materials (301) (234) (111) ( 58) n.a. -5.4% -3.5% -1.8% -0.7% Chemicals & New A quality provider of Lithium-ion battery to new energy clients in materials Phyllion Battery √ 22 39 45 50 32% 0.4% 0.6% 0.7% 0.6% China and overseas
Source: Company data, IDC, Euromonitor, Roland Berger, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 13 August 1, 2015 Legend Holdings (3396.HK)
(3) Strong management capabilities and track record Similar to many other well-run investment groups, Legend has demonstrated its ability to create value by allocating its capital efficiently across divisions, successfully nurturing individual businesses to become industry leaders organically and through M&A, taking advantage of lower funding costs at the holding company level.
Strong brand attracts investment opportunities and partnerships Founder and Chairman Mr. Liu Chuanzhi is widely recognized as one of China’s most influential leaders within the business community for his strategic vision and deep understanding of the economy. Together with the rest of the senior management team, all of whom have over 15 years of experience in their areas of expertise, the Legend brand is often associated with “innovation and strong management execution”, which help the group attract many investment opportunities and partnerships, in our view. An example is Bybo, in which Legend acquired a 51% interest in July 2014 for Rmb616.5mn (aside from a Rmb30mn shareholder loan) valuing the company at 1.6x price to sales, vs. 3-4x for industry comps (source: Bloomberg). Although losing majority control, the founder of Bybo believes Legend can help expedite Bybo’s development and expansion. Exhibit 17 below sets out the series of acquisitions Legend has conducted since 2012.
In terms of investment criteria, it looks for companies with the following attributes: (1) existing or have the potential to become leaders, especially in industries at the early stage of development and/or with fragmented market structures; (2) strong management teams with sound strategies and execution capabilities; (3) a good fit to Legend’s culture; and (4) potential synergies with its other portfolio companies.
Enhance value by providing various supports to portfolio companies Legend believes it can create and enhance value in its portfolio companies by providing the following tangible benefits and supports:
Strategic and management guidance – Legend has board seats in its portfolio companies and assigns professionals to serve in key positions where needed. With its industry insights and management experience, the group offers them advice and guidance on strategic planning and operational enhancement. For instance, after Lenovo recorded a significant loss in 2009, Mr. Liu Chuanzhi returned to the company as its chairman and implemented strategic and management changes. Its profitability quickly recovered in 2010 and became the global No.1 PC maker in terms of unit shipment for the first time in 2013. Legend made its first investment in Lakala in 2010 (source: Sina.com, February 2012) and has assisted the company to expand into internet finance and community O2O businesses.
Brand image – The brand image of Legend helps its portfolio companies to accelerate market expansion. An example is Joyvio. With its joint public appearance and advertisement with Legend, it has gained recognition as a trustworthy brand for consumers who value food quality and safety, in our view. Its financial services subsidiary, Zhengqi Financial, had been able to secure investment opportunities, e.g., acquisition of the small loan business from the Hefei government in 2012.
Financial support and lower cost of funding – Aside from the initial equity investment, the group also assists its portfolio companies to obtain low-cost financing by extending shareholder loans and guaranteeing them external bank loans. As of end- 2014, total shareholder loans and financial guarantees to its subsidiaries & associates amounted to Rmb9.3bn and Rmb4.4bn respectively (Exhibit 13), compared to total net debt of Rmb22bn at the holding company level. Average borrowing costs at the holdco was around 6%, vs. 8+% at some of its subsidiaries.
Goldman Sachs Global Investment Research 14 August 1, 2015 Legend Holdings (3396.HK)
Synergies among companies – The spectrum of businesses the group has interests in creates a significant amount of information, resources and experience they can share, which enhance cooperation and development. The setup of its strategic investment management department is to help facilitate the information flow.
Solid execution track record of value creation Legend has demonstrated its ability to deliver solid returns by capital allocation and improving the efficiency of its underlying businesses. As shown in Exhibit 15, group CROCI was c.14%-17% in 2012-14 (at the higher end when compared with our HK/China investment group coverage universe. We believe CROCI is a better measure of peer comparison than ROA and ROE, as the latter two could be affected by accounting policies (e.g., investment groups with heavy rental property exposure have to revalue their assets periodically) and financial leverage (e.g., highly geared companies typically have higher ROE net of interest).
A breakdown of its return by segment (Exhibit 14) shows that the group achieves the highest returns from the IT (i.e., Lenovo) and financial services divisions, since most of the others are still in investment mode and are incurring significant expenses and capex for expansion. Success in building up the scale and turning them around financially could serve as a driver for group CROCI, which we expect to improve to 10.8% and 12.3% in 2016E and 2017E from 8.2% in 2015E. Below, we discuss a few successful cases in Legend’s past and recent history:
Lenovo as one of the few Chinese companies succeeds in integrating overseas acquisition and emerges as a global market leader – The most representative example in our view is the transformation of Lenovo from a sales agent for IBM, AST and HP branded computers in China in the late 1980s to the world’s No.1 PC maker by unit shipment in 2014. Although it had experienced some setbacks in 2009 post the global financial crisis, the issue was quickly resolved by the formulation of its medium-term strategy to diversify into the consumer segment. Having successfully outgrown the global PC market by deepening its presence in the US, EMEA and other emerging markets, Lenovo made the strategic decision to venture into mobile and enterprise businesses by acquiring Motorola Mobility and IBM’s x86 service business in October 2014. Over the past two decades, Lenovo’s revenue and net profit jumped respectively from US$0.5bn and US$11mn in 1995 to US$39bn and US$817mn in 2004. Its market cap surged from less than US$0.1bn in 1994 to c.US$13.5bn as of July 30, 2015.
Success in building a portfolio of companies offering diversified financial services – Although Legend only started to venture into the financial service industry in 2010, it has successfully built up a portfolio that covers a broad range of services, including traditional commercial banking services by Hankou Bank, SME financing by Zhengqi, insurance brokerage and consulting services by UIB, third-party payment by Lakala and trust products by Suzhou Trust. Zhengqi tripled its asset size over the last three years and achieved 35% earnings CAGR in 2012-14. Lakala also achieved a valuation of Rmb3bn in its recent transaction of disposing a 10% interest to a third party in 2014.
Pioneers in China’s alternative management industry – Legend was among the first to explore growth opportunities in the alternative investment industry in China by setting up Legend Capital (venture capital business) in 2001, followed by Hony Capital (private equity platform) in 2003 and Legend Star (angel investor) in 2008. As we discuss later in the report, these companies have achieved strong investment track records with a median IRR of 33.6%/43.4% for Hony Capital/Legend Capital, and are recognized as leaders in these respective segments.
Goldman Sachs Global Investment Research 15 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 13: As of 2014, total shareholder loans & financial Exhibit 14: IT and Financial Services investments have guarantees to Legend’s subsidiaries & associates been the key drivers of Legend’s ROE amounted to Rmb9.3bn and Rmb4.4bn respectively Legend’s ROE breakdown by division Shareholder loans and financial guarantees
(Rmb mn) 2012 2013 2014 2012 2013 2014 2015E 2016E 2017E Shareholder loan n.a. n.a. 9,340 ROE by division - Property n.a. n.a. 2,627 IT 25.3% 29.6% 22.6% 17.1% 21.6% 25.2% - Modern services n.a. n.a. 1,256 Financial Servcies 4.3% 10.3% 7.4% 9.1% 10.8% 11.5% Modern services 22.7% 9.1% -4.5% 0.9% 11.2% 14.7% - Agriculture & food n.a. n.a. 2,180 Agriculture and food -4.8% -88.7% n.m. n.m. n.m. n.m. - Chemicals and energy materials n.a. n.a. 3,277 Property 10.8% 11.6% 12.3% 6.7% 6.7% 7.5% Chemicals & energy materials -8.4% -36.7% n.m. n.m. n.m. n.m. Financial guarantee provided to related parties Financial Investment -2.2% 8.9% 6.9% 11.6% 5.2% 5.5% - CAR 2,964 3,694 3,415 ROE 6.3% 23.1% 18.7% 15.7% 10.9% 12.5% - Others 337 450 1,005 Note: Period end equity used. Total 3,301 4,143 4,420
Holdco net debt 14,743 16,993 22,166 Source: Company data. Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 15: Legend generates higher CROCI and ROE than most other China investment groups Comparison of CROCI, ROE, net debt to capital and FCF yield
2012 2013 2014 2015E 2016E 2017E CROCI Legend 12.6% 17.2% 14.8% 8.2% 10.8% 12.3% Fosun 8.3% 11.1% 9.7% 7.2% 7.0% 7.3% Citic Ltd 4.3% 5.2% 3.1% 2.8% 2.7% 2.6% Shanghai Industrial 7.8% 7.1% 7.8% 6.9% 6.6% 6.6% Tianjin Development 5.9% 4.8% 8.9% 8.9% 8.8% 8.9%
ROE Legend 6.3% 23.1% 18.7% 15.7% 10.9% 12.5% Fosun 10.5% 13.9% 13.9% 12.3% 12.5% 12.4% Citic Ltd 3.5% 3.3% 9.5% 12.4% 12.4% 12.1% Shanghai Industrial 8.6% 10.2% 7.5% 9.5% 8.7% 8.4% Tianjin Development 3.0% 1.9% 4.8% 4.8% 4.9% 5.0%
Net debt to capital Legend -4% 16% 40% 36% 38% 32% Fosun 38% 46% 42% 36% 37% 37% Citic Ltd * n.a. 12% 14% n.a. n.a. n.a. Shanghai Industrial 24% 15% 25% 30% 31% 31% Tianjin Development -48% -60% -88% -92% -97% -101% * Holdco net debt to capital for CITIC as it consolidates CITIC Bank whose balance sheet strength should not be measured by this metric Note: Legend’s CROCI uses period end invested capital and adjusts for disposal gains/fair value change.
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 16: Founder and Chairman Mr. Liu is well regarded as one of the most influential leaders for his strategic vision Profile of management team (as of July 2015) Date of Date of joining appointment Name Position Age Legend as Director Experience
Mr. LIU Chuanzhi Chairman of the Board 70 Nov-1984 Feb-2014 √ Founder of the Group √ Currently holds position as chairman of Legend Investment and Raycom √ Honorary chairman and senior advisor of Lenovo √ Widely recognized as one of China's most influential business leaders
Mr. ZHU Linan President 52 Apr-1989 Feb-2014 √ Chairman and Founder of Legend Capital since Nov 2003 Extensive experience in corporate management and investment incl. management capacity √ in Lenovo
Mr. ZHAO John Huan Executive Vice President 52 Jan-2003 Feb-2014 √ CEO and founder of Hony Capital since Jan 2003 √ Prior experience in senior management positions at several companies in US and PRC √ Advisor to CEO of Lenovo from 2002-2003 √ Currently an executive director of CSPC Pharmaceutical
Mr. CHEN Shaopeng Senior Vice President 45 Apr-1993 Feb-2014 √ Responsible for agriculture & food business and modern services business √ Chairman of Joyvio and Funglian
Mr. TANG Xudong Senior Vice President 53 Apr-1990 Feb-2014 √ Responsible for Legend Star Investment and Legend Management Institute √ Overseeing human resources department, administrative matter and the Party office
Mr. NING Min Senior Vice President, 45 Jul-1991 Feb-2014 √ Responsible for asset management CFO Overseeing public affairs and investor relationship, financial management and capital √ Secretary to the Board market related matters
Source: Company data.
Goldman Sachs Global Investment Research 16
August 1, 2015 Goldman Sachs Global Investment Research Exhibit 17: Summary of Legend’s historical acquisitions
Total Consideration Date Division Buyers Target Details Deal valuation Partner (Rmb mn) 2010-2012 2010 Modern services Legend China Auto Rental 50% of stake Rmb1.2bn Issued 633mn shares to Legend (19.14% 2010 Financial services Legend Hankou Bank Rmb1,139mn Rmb1.8/share, implying 0.9x P/B stake at that time, biggest shareholder) 2012 Jan-12 Agriculture & food Legend 86.64% stake of Chengde Qianlong Zui Spirits * Chinese Liquor brand "Bancheng" Additional 13.36% stake in Chengde Qianlong Zui May-12 Agriculture & food Legend Chinese Liquor brand "Bancheng" Spirits * Au g-12 Agriculture & food Funglian An additional 61% stake in Wuling Spirits Chinese Liquor brand "Wuling" Oct-12 A griculture & food Funglian Anhui Wenwang Spirits Co. Ltd Chinese qLiuor brand "Wenwang" Nov-12 Agriculture & food Funglian Qufu Confucius Family Spirits Chinese Liquor brand "Confucius Family" Rmb2,162mn Implied P/B = 1.4x Oct-12 A griculture & food Joyvio 65% of Qingdao Wallen Blueberry Fruit Co. Ltd Blueberry planting Rmb518.9mn Implied P/B = 1.8x Nov-12 Financial services Zhen gqi 100% of Hefei Innovative Financing Guarantee Co. Financing guarantee business Nov-12 Financial services Zhen gqi 100% of Hefei Guozheng Microlending Co. Ltd Small loan business Nov-12 Financial services Zhen gqi 95.2% of Anhui Jinfeng Pawn Co. Ltd Pawn business Hefei Guozheng Microlending Co. Ltd Implied P/B = 1.3x. Implied valuation = Rmb846.7mn Implied P/B = 1.3x Rmb1.34bn, vs. Rmb1.73bn when they Nov-12 Financial services Legend Holdings 51% of Union Insurance Insurance brokerage Rmb683.7mn sold 3% of it for Rmb52mn in Dec 2014. Engaged in development and sale of cloud Dec-12 IT Legend Holdings 100% stake in Stoneware Rmb296.3mn Implied P/B = 4.4x com puting related software Server alliance, storage OEM/reseller Dec-12 IT Lenovo 51% of EMC JV relationship and network-attached storage Rmb630.8mn Implied P/B = 1.8x products EMC 2012 IT Legend Holdings Additional 77.4mn shares of Lenovo (0.73% stake) From open market Rmb588mn ~HK$9.5 per share 2013 Manufacturing and marketing of personal Jan-13 IT Lenovo 100% stake in CCE Rmb446.4mn vs. negative book value of Rmb474mn puterscom and consumer electronics 100% stake in Sichuan China New Agricultural Feb-13 Agriculture & food Joyvio Kiwifruit planting Rmb379mn Implied P/B = 1.6x Science & Technolo gy Producing Blueberries, Kiwifruits, grapes, 2013 Agriculture & food Joyvio Five agricultural companies in Chile clementine and walnuts To expand Zeny's current supply chain Several companies engaged in express delivery and 2013 Modern services Zeny business for building a nationwide delivery other related services network Rmb251.2mn Implied P/B = 1.6x 2014
Mar-14 Modern services 21.43% stake in Bybo n.a. Rmb214.3mn Implied valuation for Bybo = Rmb1bn May-14 Modern services 4.7% stake inybo B n.a. Rmb47mnplied Im valuation for Bybo = Rmb1bn Huaxia Liantong Ma y-14 Modern services 14.57% stake inybo B n.a. Rmb145.0mnplied Im valuation for Bybo = (subsidiary of Legend Captial increase which raises the stake in Implied valuation for Bybo = Jul-14 Modern servicesHoldings) Bybo Rmb210.2mn B ybo from 40.7% to 51% Rmb1,208mn Same as the previous aggregate cost Oct-14 Modern services Legend Holdings 51% of Bybo Transferred from Huaxia Liantong to Legend Rmb616.5mn to Huaxia Liantong. Rmb13.2bn (US$1.87bn and Oct-14 IT Lenovo IBM's x86 server business n.a. issuance of 182mn of Lenovo Implied P/B = 2.3x shares ) Rmb19.3bn (US$872.5mn Oct-14 IT Lenovo 100% of Motorola Mobility n.a. cash + 519.1mn shares + Implied P/B = 2.1x US$1.5bn notes ) 2015 The remaining stake in Bybo is owned as to
18.34% by Mr. Li Changren, 7.79% by Zhuhai Legend Holdings (3396.HK) iByer Dental Hospital Management, 6.03% by Implied valuation for Bybo = Zhuhai Jinchuang Pharmaceutical Industry Jan-15 Modern services Legend Holdings 3.896% of Bybo From Ms Zhuang Bingbing Rmb66.8mn Rmb1,717mn Investment Fund, 4.96% by Haitong Kaiyuan Investment, 1.95% by Mr. Li Qiang and 0.84% by Zhuhai Hengqin New District Haisheng Investment Fund Management Partnership
* Qianlong Zui Spirits was transferred to Funglian in July 2012
Source: Company data, CAR, Goldman Sachs Global Investment Research.
17
August 1, 2015 Legend Holdings (3396.HK)
(4) Established investment platform to identify future potential Legend’s three financial investment platforms, namely Legend Capital, Hony Capital and Legend Star, invest in companies across different industries ranging from TMT and healthcare to consumption and machinery. With shared research results and market information, they help Legend Holdings to identify future potential for its own strategic investments. There are also referrals of investment opportunities across the three platform companies. Some of the past examples include:
China Auto Rental (CAR) – Legend Capital first invested Rmb14.5mn in CAR through LC Fund III in 2010. Then in 2011, Legend Holdings made a strategic investment for the amount of Rmb208mn in exchange for a 45.3% interest. The group provides CAR with a bank loan guarantee to secure lower-cost funding, guides on its strategies and operations, and also assists in bringing in strategic investors and solving regulatory issues. CAR has successfully developed into the largest car rental company in China as of end-2013.
iDreamSky Games – iDreamSky Games is a mobile game publishing platform by partnering up with other game developers, redesigning and optimizing third-party games, and delivering them to users through third-party and its own distribution channels, i.e., the iDreamSky Game Center and www.uu.cc. According to Sina.com (August 2014), Legend Star first invested Rmb1mn in iDreamSky in April 2010 and later referred it to Legend Capital and other investors, which invested US$10mn in the company. According to a report by Analysys, it is the largest independent mobile game publishing platform with a 27.8% market share and 110.6mn active users at end-4Q14.
Monetize and crystalize value through the capital market In both cases above, Legend was able to realize the value of its investments by seeking public listings in the capital market. CAR was listed on the Hong Kong Stock Exchange in 2014 and has a market cap of Rmb31.3bn as of July 30, 2015, valuing Legend’s beneficial 23.87% interest at Rmb7.5bn, or 39x MOIC (multiple on invested capital) compared to its initial investment (source: Sina.com, September 2014). iDreamSky was listed on the NASDAQ in August 2014 and had a market cap of US$551mn as of July 30, 2015, valuing Legend Capital’s 15% interest at US$83mn. Other successful examples include acquisitions of CSPC Pharma, Zoomlion, CIMC etc, whose values have significantly appreciated subsequently.
Exhibit 18: With shared research results/information, Legend Capital, Hony Capital and Legend Star help Legend Holdings identify future potential for its own strategic investments Legend Capital Example of investees iFLYTEK √ 6 USD funds & 3 RMB funds joyo.com NSFOCUS √ Total commitment Legend Capital Zhaopin.com US$1.63bn for USD funds HICONICS Rmb7.19bn for RMB funds AutoNavi √ 200+ enterprises invested
√ 39 cases fully exited Made VC investments in Hi-tech sector with expertise developed in IT industry
Hony Capital Example of investees Zoomlion √ 5 USD funds & 3 RMB funds STX Entertainment CSPC Pharmaceutical √ Total commitment Hony Capital CIMC US$4.46bn for USD funds Pizza Express Rmb16.03bn for RMB funds Shanghai Jin Jiang International Hotels √ 80+ transactions completed
√ 23 cases fully exited Focuses on industries riding on urbanization and consumption upgrade Source: Company data.
Goldman Sachs Global Investment Research 18 August 1, 2015 Legend Holdings (3396.HK)
Stock fairly valued; initiate at Neutral with target price of HK$36.2
We believe NAV-based valuation derived using sum-of-the-parts (SOTP) is an appropriate valuation methodology for Legend because: (1) it has a diversified asset portfolio, each in different industries, market cycles and operating with different business models, all of which should be valued differently; (2) the common P/E or multiple-based valuation approach would not be meaningful, since a number of its businesses are still loss-making as the group is aggressively reinvesting its cashflow to grow its scale. It is also difficult to find directly comparable companies with similar earnings profiles, with a significant portion of earnings derived from mark-to-market gains from financial investments (i.e., Rmb4.2bn out of Rmb6.7bn total in FY15E).
We see Fosun and CITIC Ltd as arguably the closest comps for Legend in terms of asset mix and geographical exposure (Exhibit 22), and they have mid-cycle NAV discounts of 20%-25%. Benchmarking these, we apply a 25% discount to Legend’s 2015E NAV of HK$48.3 per share, imputing a 12-month target price of HK$36.2. With just 4% potential upside to our price target from current levels, we initiate coverage on Legend with a Neutral rating. We cross-check our SOTP valuation using EV to invested capital vs. CROCI or P/B vs. ROE.
(1) SOTP-based FY15E NAV of Rmb91.3bn/HK$113.8bn (HK$48.3/sh) A detailed breakdown of our SOTP-based FY15E NAV derivation for Legend is shown in Exhibit 19. Our FY15E GAV is Rmb102.8bn, with 76% attributed to strategic investments including IT (29%), property (19%), financial services (11%), modern services (10%), agriculture & food (2%), and chemical & energy materials (4%). The remaining 24% comes from financial investments. After deducting the holdco net debt, our 2015E NAV stands at Rmb91.3bn or HK$113.8bn. We discuss below the valuation methodology, rationale and comparables for each of the businesses. Exhibit 20 highlights Legend’s NAV sensitivity to key variables including Lenovo’s share price, performance of its financial investments, property price and cap rate assumptions for Raycom’s projects.
IT (Rmb30.2bn GAV and 29% of FY15E group GAV) We value Legend’s 30.6% interest in Lenovo (0992.HK; Neutral; HK$8.58 as of July 30, 2015) based on our Asia-Pacific technology research team’s 12-month target price of HK$11.10, which implies a 14.2x 2016E P/E vs. its historical average of 15x. Lenovo historically trades at a premium to other PC makers or OEM hardware companies, we believe on the back of its higher ROE and faster earnings CAGR of 22% (2014-17E).
Property (Rmb20.0bn GAV and 19% of FY15E group GAV) Raycom owns 8.4mn sqm landbank in China. We value its development properties at Rmb25bn through DCF methodology based on 9.6% WACC. We value its investment properties at Rmb9.5bn using rental capitalization on a 7% cap rate, in line with the assumptions used by our China property research team. Note that this is higher than the reported Rmb6bn investment properties on the group’s balance sheet at end-2014, which only values Raycom Info Tech Center Block B at book as the project is not completed yet. We then deduct Rmb17bn net debt at Raycom’s level but add back the Rmb2.7bn shareholder loan extended by the group to arrive at our GAV of Rmb20bn, implying 1.0x 2015E P/B, in line with major HK-listed mid-sized Chinese developer stocks (Exhibit 80). By way of sensitivity, our analysis shows that every 10% increase in the property price could change Legend’s FY15E NAV by 4% (Exhibit 20).
Goldman Sachs Global Investment Research 19 August 1, 2015 Legend Holdings (3396.HK)
Financial services (Rmb11.2bn GAV and 11% of FY15E group GAV) Given the different business nature and return profiles of the five companies under this division, we use different comparables and valuation approaches for them.
Zhengqi – As shown in Exhibit 75, most other diversified financing companies in China are trading at 1.0x-1.3x 2015E P/B, except for Credit China at 4.2x (based on Bloomberg consensus). Among them all, Hanhua appears to be the most direct comparable offering similar services (e.g., SME financing, guarantee, etc.). Far East Horizon has diversified into industrial operations, while Credit China focuses more on collateralized or property loans. We apply a 1.5x 2015E P/B on Zhengqi (vs. Hanhua at 1x) due to its higher ROE of 14% vs. 6% for Hanhua (based on Bloomberg consensus). We also note that one of Zhengqi’s investments has appreciated significantly in value ytd, but is not captured in our 2015E book value.
Union Insurance (UIB) – UIB is still loss-making due to its aggressive expansion into new businesses. We value Legend’s 48% equity interest at Rmb832mn based on the most recent transaction in December 2014 when it sold 3% to a third party for Rmb52mn. This values the whole company at Rmb1.7bn or 1.5x 2015E P/B, vs Rmb1.3bn when Legend acquired its 51% stake for Rmb683mn in November 2012. Since then, UIB’s revenue has more than doubled.
Lakala – Similar to UIB, although its payment service business is profitable on a standalone basis, Lakala recorded a net loss of Rmb165mn last year for costs incurred expanding into e-commerce and online businesses. In June 2014, it received a Rmb300mn capital injection from an investor and Legend also transferred a 10% stake to a third-party for Rmb300mn, both valuing the whole company at Rmb3bn. Lakala recently entered into an agreement to place 15% of its shares to third parties for Rmb1.5bn, valuing the whole company at Rmb10bn. This implies a valuation of Rmb3.1bn for Legend’s 31% stake.
Hankou Bank and Suzhou Trust – Benchmarked with the other H-share regional banks (e.g., Bank of Nanjing, Bank of Ningbo) which generate similar ROE (Exhibit 76), we value Hankou Bank at 1x 2015E P/B or Rmb2.5bn for its 15.3% equity interest. We also apply 1x 2015E P/B for Legend’s 10% interest in Suzhou Trust which generated 15% ROE in 2014.
Modern Services (Rmb10.7bn GAV and 10% of FY15E group GAV) Legend acquired its interest in CAR and Bybo in 2011 and 2014 respectively from their founders. Both companies already have leading positions in their respective industries. Zeny and EnsenCare are greenfield companies incorporated by the group and its partners in 2012.
CAR – CAR was listed on the HK Stock Exchange last year and had a market cap of Rmb31.3bn as of July 30, 2015. The group’s 23.87% interest is worth Rmb9.1bn, which implies 29.5x 2015E and 20.5x 2016E P/E, vs. the No.2 car rental company in China, eHi (GSe: 5.6x/15.9x) and another global company Avis Budget Group, (GSe: 12.7x/12.7x) (Exhibit 78).
Bybo – We value its 54.9% interest in Bybo at Rmb1.6bn based on 3x price to 2015E sales, in line with recent sale transactions in the dental industry (Exhibit 77). This compares with Rmb647mn Legend paid to acquire its interest from the founder last year, although we note that the negotiation and valuation was determined a while ago.
Zeny and EnsenCare – We value both Zeny and EnsenCare at invested capital, i.e., Rmb1.4bn (inclusive of Rmb1.2bn shareholder loans) and Rmb200mn respectively, as both are still in growth phases and are loss-making. Zeny is preparing to expand by acquiring cold storage facilities in Tianjin and Henan. EnsenCare’s senior care apartments are still under construction and will start operation in late-2015.
Goldman Sachs Global Investment Research 20 August 1, 2015 Legend Holdings (3396.HK)
Agriculture and Food (Rmb2bn GAV and 2% of FY15E group GAV) The two platform companies, Joyvio and Funglian, were only formed in 2012 and are still loss-making for different reasons.
Joyvio – Joyvio is loss-making because it generally takes time for its fruit plants to reach their peak output levels, which we expect to come through in 2016. The company also invests to expand into selling other premium fruits (e.g., cherries, grapes), tea and imported wine. We value Legend’s 100% interest at invested cost of Rmb973mn, including Rmb773mn of shareholder loans. This implies 1.8x 2015E and 1.5x 2016E price to sales, vs. an average of 3.8x 2014 for other fruit or related companies (Exhibit 79).
Funglian – We value the 93% interest in Funglian at Rmb1bn based on its Rmb1.6bn invested cost (net of Rmb621mn goodwill writedown recognized last year). It was loss- making in the last two years due to intense regional competition and downturn in the Chinese liquor market due to the effects of the anti-graft campaign. Exhibit 79 sets out the valuation for comparable white spirit companies listed in the A-share market.
Chemical and Energy (Rmb4.0bn GAV and 4% of FY15E group GAV) Most value in this division comes from Levima, for which Legend has invested Rmb3.6bn (inclusive of Rmb3.3bn shareholder loans), vs. Rmb177mn in Phylion Battery.
Levima – Levima has three key subsidiaries, namely Jining Zhongyin Electrochemical, Shenda and Haoda Chemicals. We estimate the GAV for Legend’s stake in Levima at Rmb3.2bn, i.e., its invested cost after deducting its share of Rmb477mn impairment loss for Zhongyin last year due to competition in an oversupplied chlor-alkali product market. Both Shenda and Haoda will only start operations upon the completion of their production facilities later this year.
Phylion Battery – We value its 50.8% interest in Phylion Battery at Rmb789mn, based on 20x 2015E P/E, benchmarked with other battery companies at 22-23x (Exhibit 81).
Financial Investments (Rmb24.6bn GAV and 24% of FY15E group GAV) Legend generates return from its financial investments from two key sources, which we value as below:
Limited partner in its financial investments – It is an investor with equity interest in its own managed (i.e., Legend Capital, Hony Capital, Legend Star) and other third-party funds. With mark-to-market adjustments at each interim, the reported balance on the group’s balance sheet should reflect their fair value. To avoid double counting, we strip out the financial assets held directly by Lenovo (i.e., Rmb436mn) and arrive at Rmb17bn at end-2014. By assuming 35% price appreciation given our strategy team’s constructive view on the China market (12m CSI300: 5,000 (+22%); 12m MXCN: 90 (+30%)1), we estimate its LP investments would be worth Rmb24.1bn at end-2015. By way of sensitivity, every 10% value appreciation for its financial investments could lift the group’s FY15E NAV by 2% (Exhibit 20).
General partner in Legend Capital and Hony Capital as fund manager – It has a 20% equity interest in the general partners of its two managed funds. Paid-in capital totaled Rmb53bn at end-2014 based on which the group charges management and carrying fees. We value its GP investments at Rmb0.6bn by applying a 5% price to AUM ratio for 2015E, benchmarked with global asset managers, i.e., 1.7%-3.6% average for traditional managers, 8.6% for alternative managers.
1 For details please see “China: Portfolio Strategy Research: A correction, not a collapse”, July 13, 2015.
Goldman Sachs Global Investment Research 21 August 1, 2015 Legend Holdings (3396.HK)
(2) Target price of HK$36.2 based on a 25% target NAV discount Our 12-month target price for Legend of HK$36.2 is based on a 25% target NAV discount applied to our end-2015E HK$48.3 NAV per share. This target price implies a 1.28x P/B, 10.2x P/E and 0.82x EV to invested capital in 2015E. We take the following factors into consideration:
Investment groups trade at a wide range of NAV discount – As shown in Exhibit 21, the HK/China investment groups under our coverage trade at a wide range of NAV discount from 14% in the case of MTRC to 63% for Tianjin Development. There are many factors contributing to such variations in our view, e.g., asset and earnings mix, balance sheet strength, investment and cashflow cycles, management quality, track record of value creation, scarcity value, accessibility to businesses in the open market (i.e., whether its underlying companies are also listed). Mean-reversion and long-term average – While the NAV discounts of investment groups fluctuate significantly on market sentiment and industry cycles, they usually reverse to mean or historical averages, unless there are structural factors driving changes in the companies’ return profiles in the long run. An example was Wharf’s step-up in China investments since 2006, leading to a widening of its NAV discount closer to the Chinese comps. Fosun, CITIC and Shanghai Industrial better comparables for Legend – Many of the HK investment groups have heavy exposure to Hong Kong’s property sector or, in the case of Jardine Matheson, ASEAN consumer markets; hence they are not necessarily good comparables with Legend, in our view. Among the Chinese investment groups, we see Fosun and CITIC having similarly diversified business mix exposed to sectors tracking closely with China’s economy. Shanghai Industrial is geographically more concentrated in Shanghai vs. Legend nationwide. The majority of Tianjin Development’s valuation comes from the separately listed Tianjin Port and cash on hand to prepare itself for potential asset injection from its parentco. Exhibit 23 lays out the asset and earnings breakdown by segments for the Chinese investment groups under our coverage. We see greater similarities between Legend and Fosun’s investment strategies and focus – Similar to Legend, Fosun has changed its asset mix in accordance to emerging macro trends, starting off with steel, resources and property in the last decade, and gradually shifting to sectors in the “new economy”, such as pharmaceutical, healthcare, entertainment & leisure. It also makes direct financial investments (e.g., Folli Follie, Thomas Cook, etc.) as Legend does. Both companies believe in the future of mobile internet and try to integrate it into their existing businesses by, for example, setting up O2O platforms. They have also successfully expanded to overseas markets (e.g., IBM acquisition by Lenovo, insurance companies by Fosun). Fosun is trading at 41% discount to 2015E NAV, 1.23x EV to invested capital and 1.8x P/B with 10.3% CROCI and 12.3% ROE in 2015E (vs. Legend at 8.2% and 15.7%). 35% of its GAV is attributed to publicly listed assets (vs. 40% for Legend). CITIC has greater exposure to the “old economy” – After the asset injection last year, CITIC Ltd holds substantially all of CITIC Group’s assets. With its long history as the largest state-owned investment group in China, its portfolio includes financial services, resources & energy, manufacturing, real estate & infrastructure, engineering contracting, etc, many of which are in “old economy” industries. The group is often seen as a holdco of its financial businesses (e.g., CITIC Bank, CITIC Securities), as they represent close to 62% of the group’s GAV. In fact, 62% of its GAV could be attributed to separately listed companies (vs. 40% for Legend). CITIC is trading at 50% discount to 2015E NAV, similar to other holdcos, e.g., Jardine Matheson, Wheelock. It is trading at a lower 2015E P/B of 0.7x vs. 1.8x for Fosun due to its “heavier asset” nature and significant exposure to banks which trade at lower multiples.
Goldman Sachs Global Investment Research 22 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 19: Our SOTP-based 12-month target price for Legend is based on 25% discount to 2015E NAV/share of HK$48.3 Breakdown of our 2015E NAV for Legend
Rmb mn, unless otherwise specified Valuation Rmb mn % of total Rmn mn Invested Shareholder Comment Rmb /sh % stake methodology 2015E EV PDIE capital loan
Strategic Investments
IT Lenovo * 30.55% Market value 30,230 12.8 29% 36,669 Implies 21.1x 2015E and 14.2x 2016E P/E
Property Development property DCF 25,458 10.8 25% 25,455 9.6% WACC Investment property 100.00% Rental capitalization 9,480 4.0 9% 9,480 7% cap rate Less: net debt excluding shareholder loans (14,966) (6.4) -15% (14,966) Subtotal 19,972 8.5 19% 19,969 2,627 Implies 1.0x 2015E P/B
Financial services Zhengqi 92.00% P/B 4,388 1.9 4% 4,388 1.5 x P/B vs. peers at 1.0-1.2x for higher ROE Union Insurance (UIB) 48.00% Transaction comp 832 0.4 1% 832 Sold 3% at Rmb52mn in Dec-14. Implies 1.5x 2015E P/B Lakala 30.97% Transaction comp 3,097 1.3 3% 3,097 Sold 15% for Rmb1.5bn in 1H15 Hankou Bank 15.33% P/B 2,496 1.1 2% 2,496 1.0x 2015E P/B Suzhou Trust 10.00% P/B 392 0.2 0% 392 1.0x 2015E P/B Subtotal 11,205 4.8 11% 11,205
Modern services CAR 23.87% Market value 7,504 3.2 7% 9,072 208 - Implies 29.5x 2015E and 20.5x 2016E P/E Bybo 54.90% Price/Sales 1,619 0.7 2% 1,619 647 30 3.0x price to sale inline with recent transactions of dental clinics Zeny 94.00% Invested capital 1,414 0.6 1% 1,414 1,414 1,226 EnsenCare 100.00% Invested capital 200 0.1 0% 200 200 - Subtotal 10,737 4.6 10% 12,305 2,469 1,256
Agriculture and food Joyvio 100.00% Invested capital 973 0.4 1% 973 973 773 Implies 1.8x 2015E and 1.5x 2016E Price to sale Funglian 93.30% Invested capital 1,015 0.4 1% 1,015 1,015 1,407 Net of Rmb621mn goodwill writedown Subtotal 1,988 0.8 2% 1,988 1,988 2,180
Chemicals and engergy materials Chemical business (Levima) 90.00% Invested capital 3,208 1.4 3% 3,208 3,160 3,277 Net of Rmb477mn asset writedown Energy material (Phylion Battery) 50.77% P/E 789 0.3 1% 789 171 - 20.0x 2015E P/E Subtotal 3,997 1.7 4% 3,997 3,331 3,277
Strategic Investments total 78,130 33.2 76% 86,133 9,340
Financial Investments
LP value Associates measured at fair value through P&L Book value 18,181 7.7 18% 18,164 1.0x 2015E P/B Available-for-sale financial assets (net of Lenovo) Book value 4,357 1.8 4% 4,358 1.0x 2015E P/B Financial assets at fair value through P&L Book value 1,550 0.7 2% 1,550 1.0x 2015E P/B Subtotal 21.89% 24,088 10.2 23% 24,072
GP value Hony Capital 20.00% Price/AUM 425 0.2 0% 425 Legend Capital 20.00% Price/AUM 132 0.1 0% 131 Subtotal 557 0.2 1% 556
Financial Investments total 24,645 10.5 24% 24,628
Gross asset value (GAV) 102,775 43.6 100% 110,761 Reported headquarter net (debt)/cash (11,484) (4.9) (12,744) Net asset value (NAV) 91,291 38.7 98,017 Net asset value (NAV, HK$) 113,758 48.3 Share price (HK$) 34.8 Premium/(Discount) to NAV -28%
* Lenovo (0992.HK; Neutral; HK$8.58 as of July 30, 2015): 12-month P/B-based target price is HK$11.1; Risks: turnaround at Moto; PC pricing pressure; competition from ODMs for server business Note: US$/Rmb=6.20
Source: Datastream, Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 23 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 20: Our sensitivity analysis shows that every 10% change in Lenovo’s share price could impact Legend’s 2015E NAV by 3%, while every 10% property price change could have a 3%-4% impact NAV and earnings sensitivity Base case Current px GS TP Lenovo share price (HK$) 6.66 7.77 8.64 9.99 11.10 12.21 13.32 14.43 % change vs. base case -40% -30% -22% -10% 0% +10% +20% +30% Implied 2015E P/E for Lenovo (x) 12.7 14.8 16.5 19.0 21.1 23.3 25.4 27.5 Implied 2016E P/E for Lenovo (x) 8.5 9.9 11.0 12.8 14.2 15.6 17.0 18.4 Exchange rate (HK$ / Rmb) 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 Lenovo NOSH (mn) 11,109 11,109 11,109 11,109 11,109 11,109 11,109 11,109 2015E NAV / share (HK$) 41.88 43.48 44.73 46.67 48.27 49.87 51.47 53.07 % change vs. base case -13% -10% -7% -3% 0% 3% 7% 10%
End 2014 Financial investments (LP value, Rmb mn) 16,862 17,051 19,270 21,679 24,088 26,497 28,906 31,314 % change vs. base case -30% -29% -20% -10% 0% +10% +20% +30% 2015E NAV / share (HK$) 44.45 44.55 45.73 47.00 48.27 49.55 50.82 52.09 % change vs. base case -8% -8% -5% -3% 0% 3% 5% 8% Core net profit (2015E) 2,278 2,394 3,758 5,238 6,717 8,197 9,677 11,157 % change vs. base case -66% -64% -44% -22% 0% 22% 44% 66%
2015E property price yoy% assumption -15% -10% -5% 0% +5% +10% +15% 2015E NAV / share (HK$) 45.41 46.61 47.36 48.27 49.15 49.98 50.74 % change vs. base case -6% -3% -2% 0% 2% 4% 5%
Cap rate 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 2015E NAV / share (HK$) 49.52 49.04 48.62 48.27 47.97 47.70 47.47 % change vs. base case 3% 2% 1% 0% -1% -1% -2%
Source: Goldman Sachs Global Investment Research.
Exhibit 21: HK/China investment groups in our coverage universe trade at a wide range of NAV discounts, from 14% in the case of MTRC to 63% for Tianjin Development Valuation comp of HK/China investment groups
Prem/ (disc) to Dividend GS Share 2015E FwdP/E (X) P/B (X)yld (%) EV/GCI CROCI Company Ticker Rating ccy price NAV/sh NAV (%) 2015E 2016E 2015E 2015E 2016E 2015E 2015E 2016E
Hong Kong CKH Holdings 0001.HK Buy HKD 112.40 164.65 (31.7) 13.6 11.7 1.0 2.4% 2.6% 1.07 9.9% 9.6% Wharf Holdings 0004.HK Buy HKD 49.25 96.11 (48.8) 12.5 11.4 0.5 4.2% 4.7% 1.21 7.5% 8.3% Wheelock & Co. 0020.HK Neutral HKD 40.10 64.55 (37.9) 7.2 6.0 0.4 3.0% 3.5% 1.15 7.3% 8.2% MTR Corporation 0066.HK Neutral HKD 34.45 39.87 (13.6) 21.1 19.3 1.2 2.8% 2.8% 0.86 6.3% 6.5% Hopewell Holdings 0054.HK Neutral HKD 26.80 42.78 (37.4) 18.3 14.2 0.5 4.4% 4.8% 1.28 4.9% 6.5% Swire Pacific 'A' 0019.HK Neutral HKD 98.40 138.78 (29.1) 13.8 12.7 0.7 4.5% 4.9% 1.25 8.5% 8.8% Jardine Matheson JARD.SI Neutral USD 54.98 83.77 (34.4) 12.7 11.7 1.0 2.8% 3.0% 1.32 12.4% 12.6% NWS Holdings 0659.HK Neutral HKD 11.62 14.59 (20.4) 11.6 10.1 1.0 4.4% 5.0% 0.92 8.8% 9.7%
China Legend Holdings 3396.HK Neutral HKD 34.75 48.27 (28.0) 9.8 10.6 1.2 1.1% 0.8% 0.80 8.2% 10.8% Tianjin Dev Hldgs 0882.HK Buy HKD 6.40 17.06 (62.5) 12.1 11.3 0.6 1.6% 1.7% 1.12 8.9% 8.8% Fosun International 0656.HK Buy HKD 16.02 27.08 (40.8) 14.2 13.9 1.8 1.3% 1.3% 1.23 10.3% 10.4% CITIC 0267.HK Buy HKD 13.82 27.61 (50.0) 6.0 5.4 0.7 3.3% 3.7% 0.16 2.8% 2.7% Shanghai Industrial 0363.HK Neutral HKD 22.50 38.14 (41.0) 8.2 7.9 0.6 4.3% 4.4% 0.82 6.9% 6.5% Note: Legend’s CROCI uses period end invested capital and adjusts for disposal gains/fair value change.
Source: Datastream, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 24 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 22: We see greater similarities between Legend and Fosun’s investment strategies and focuses Comparison of Legend, Fosun and CITIC
Legend Fosun CITIC Long-term average discount to NAV Nil 25% 20%
Shareholding structure Key shareholders Government-controlled entities: 29% Government-controlled entities: Nil Government-controlled entities: 78% Management and employees: 37% Management and employees: 72% Management and employees: Nil Other major shareholders*: 18% Other major shareholders: Nil Other major shareholders*: 5% Free float: 15% Free float: 28% Free float: 17% Note: * China Oceanwide Group and NSSF Note: * Social Security Fund % of assets listed Listed assets as % of 2015E GAV 40% 35% 62% - Comprising mainly: Lenovo - 29% Fosun Pharma - 13% CITIC Bank - 46% China Auto Rental - 7% Hainan Mining - 9% CITIC Securities - 9% Financial investments in listed assets - 4% Shanghai Yuyuan - 4% Others - 7% Nanjing Iron & Steel - 3% Others - 10% Investment Focus % of 2015E GAV from "new economies" 40% 21% Nil IT 29% Nil Nil Consumer* 10% 21% Nil
% of 2015E GAV from "old economies" 34% 46% 88% Property 19% 12% 10% Financial services 11% 21% 62% Metal, mining and energy Nil 13% 15% Chemicals and energy materials 4% Nil Nil
% of 2015E GAV from financial investments 24% 33% Nil Note: * Including consumer service, agriculture and food for Legend; Healthcare and entertainment for Fosun Return profile CROCI 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 8.2% 10.8% 12.4% 7.2% 7.0% 7.3% 2.8% 2.7% 2.6%
ROE 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 15.7% 10.9% 12.5% 12.3% 12.5% 12.4% 12.4% 12.4% 12.1% Leverage Net debt to capital (2014) 40.2% 42.2% 14.2% Note: Legend’s CROCI uses period end invested capital and adjusts for disposal gains/fair value change.
Source: HKEx, Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 25
August 1, 2015 Goldman Sachs Global Investment Research Exhibit 23: Summary of asset, earnings and NAV breakdown of Legend and other China investment groups
Chemicals and Metals Financial ConsumerAgriculture energy LP/GP &mining and Engineering Infra- Divisional US$mn IT services servicesand food Property materials investments energy contracting structure Others total Corporate Group total
Asset breakdown (2014)
US$ breakdown Legend 28,393 1,790 805 688 7,842 1,591 5,116 - - - - 46,226 388 46,613 Fosun - 7,203 5,690 - 1,195 - 19,748 19,732 - - - 53,568 804 54,372 Citic Ltd - 686,775 - - 30,959 - - 33,084 5,680 - 9,360 765,858 1,604 767,462 Shanghai Industrial - - 862 - 10,741 - - - - 3,585 - 15,188 1,234 16,422 Tianjin Development - - - - 126 - - - 1,835 943 - 2,905 855 3,760
% breakdown Legend 61% 4% 2% 1% 17% 3% 11% 100% Fosun 13% 11% 2% 37% 37% 100% Citic Ltd 90% 4% 4% 1% 1% 100% Shanghai Industrial 6% 71% 24% 100% Tianjin Development 4% 63% 32% 100%
Earnings breakdown (2015E)
US$ breakdown Legend 231 108 4 (17) 181 (31) 670 - - - - 1,146 (62) 1,083 Fosun - 351 238 - 376 - 362 109 - - - 1,436 (230) 1,206 Citic Ltd - 5,871 - - 548 - - 440 323 366 68 7,616 (160) 7,456 Shanghai Industrial - - 152 - 119 - - - - 152 - 422 1 423 Tianjin Development - - - - 3 - - - 52
32 - 86 (13) 74
% breakdown Legend 20% 9% 0% -1% 16% -3% 58% 100% Fosun 24% 17% 26% 25% 8% 100% Citic Ltd 77% 7% 6% 4% 5% 1% 100% Shanghai Industrial 36% 28% 36% 100% Tianjin Development 3% 60% 37% 100%
NAV breakdown (2015E) EV Net debt NAV US$ breakdown Legend 4,876 1,807 1,732 321 3,221 645 3,975 - - - - 16,577 (1,852) 14,724 Fosun - 8,872 9,107 - 4,950 - 14,150 5,598 - - - 42,677 (4,736) 37,942 Citic Ltd - 79,824 - - 13,275 - - 18,927 1,524 6,111 8,133 127,794 (2,065) 125,729 Shanghai Industrial - - 2,373 - 2,504 - - - - 2,501 - 7,377 (717) 6,660 Tianjin Development - - - - 72 - - - 1,177 592 289 2,130 927 3,058
% breakdown % listed Legend 29% 11% 10% 2% 19% 4% 24% 100% 40%Legend Holdings (3396.HK) Fosun 21% 21% 12% 33% 13% 100% 35% Citic Ltd 62% 10% 15% 1% 5% 6% 100% 62% Shanghai Industrial 32% 34% 34% 100% 39% Tianjin Development 3% 55% 28% 14% 100% 30%
Source: Company data, Goldman Sachs Global Investment Research.
26
August 1, 2015 Legend Holdings (3396.HK)
Exhibit 24: NAV discount tends to track with cash Exhibit 25: …so does EV to invested capital return… HK & China conglo sector average EV/GCI vs. cash ROIC HK & China conglo sector average discount to NAV vs. CROCI
Sector avg NAV discount (LHS) Sector avg CROCI (RHS) Sector avg EV/GCI (LHS) Sector avg CROCI (RHS) 0.0% 10.5% 1.40 11.0%
‐5.0% 10.0% 1.30 10.0% ‐10.0% 9.5% +1 stdev 1.20 9.0% ‐15.0% +1 stdev 9.0% 8.5% 1.10 ‐20.0% 8.0% ‐25.0% 1.00 8.0% 7.5% Average sector EV/GCI ‐30.0% 0.90 = 1.08x ‐1 stdev ‐1 stdev 7.0% Average NAV discount = ‐22% 7.0% ‐35.0% 6.5% 0.80 ‐40.0% 6.0% 6.0% 0.70 ‐45.0% 5.5%
‐50.0% 5.0% 0.60 5.0% 2004 2004 2005 2005 2006 2006 2007 2008 2008 2010 2011 2009 2009 2011 2012 2012 2013 2013 2014 2015 2015 2017 2016 2016 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2015 2016 2016 2017 2015 2008 2009 2009 2010 2011 2011 2012 2012 2013 2013 2014 2008 2004 2004 2005 2005 2006 2006 2007 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jan Jan Jun Jun Jul Jul Oct Oct Apr Apr Feb Sep Feb Sep Dec Dec Aug Aug Nov Nov Jan Jan Mar Mar Jun Jun Oct Oct May May Apr Apr Sep Feb Sep Feb Dec Dec Aug Aug Nov Nov Mar Mar May May Source: Datastream, Goldman Sachs Global Investment Research. Source: Datastream, Goldman Sachs Global Investment Research.
Exhibit 26: Fosun is trading at a 41% discount to NAV vs. Exhibit 27: CITIC is trading at a 50% discount to NAV vs. its mid-cycle level of 25% its mid-cycle level of 20% Fosun historic NAV discount CITIC historic NAV discount (%) (%) 30.0 20
20.0 10
10.0 0 +1SD 0.0 +1stdev (10) (10.0)
Average discount: Average discount = (20.0) (20) -25% -20% (30.0) (30)
(40.0) -1SD -1stdev (40) (50.0)
(50) (60.0)
(70.0) (60) Jul-09 Jul-15 Oct-11 Apr-12 Jan-09 Jun-10 Jan-15 Jul, 14 Mar-13 Feb-14 Aug-08 Dec-09 Nov-10 Sep-12 Sep-13 Aug-14 May-11 Apr, 14 Oct, 14 Oct, 14 Oct, Apr, 15 Jun, 14 Jun, Jan, 15 Jan, 15 Jun, Mar, 14 Mar, Feb, 15 15 Mar, Aug, 14 Aug, 14 Sep, Nov, 14 Dec, 14 May, 14 May, 15 Source: Datastream, Goldman Sachs Global Investment Research. Source: Datastream, Goldman Sachs Global Investment Research.
Exhibit 28: Shanghai Industrial is trading at a 41% Exhibit 29: Tianjin Development is trading at a 63% discount to NAV vs. its mid-cycle level of 30% discount to NAV vs. its mid-cycle level of 48% Shanghai Industrial historic NAV discount Tianjin Development historic NAV discount
(%) Shanghai Industrial Historical Discount to NAV Chart (%) Tianjin Development Discount to NAV Chart
40.0 (10.0)
30.0 (20.0) 20.0 (30.0) +1 stdev 10.0
0.0 (40.0)
(10.0) +1stdev (50.0) Average discount: (20.0) Average discount: -48% 30% (60.0) (30.0) -1 stdev (40.0) (70.0)
(50.0) -1stdev (80.0) (60.0) Jul-07 Jul-10 Jul-15 Apr-08 Oct-09 Oct-14 Jan-09 Jun-12 Jan-14 Mar-10 Feb-12 Mar-13 Mar-15 Nov-07 Aug-08 Dec-10 Sep-11 Nov-12 Aug-13 May-11 May-09 May-14 Jul-15 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 May-03 May-04 May-05 May-06 May-07 May-08 Source: Datastream, Goldman Sachs Global Investment Research. Source: Datastream, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 27 August 1, 2015 Legend Holdings (3396.HK)
Growth strategies and outlook by divisions
(1) IT (29% of GAV, 20% of earnings) With Legend having de-facto control of Lenovo, the latter is consolidated in the group’s financials even though its equity interest is only 30.55%. It represented 61% of the group’s total assets in FY14, and we expect it to contribute 29% of GAV and 20% of the group’s net profit in FY15E. Based on our Asia-Pacific technology research team’s projection, we estimate Legend would receive Rmb487mn and Rmb834mn dividend uplift from Lenovo in 2015E and 2016E, respectively.
Outgrowing competitors by penetrating into global markets outside of China Lenovo is the world’s largest PC company with a 19.2% market share by shipping volume in 2014, ahead of HP (18.5%), Dell (13.5%), Acer (7.8%), and Apple (6.4%) (Exhibit 31), according to IDC. It generated 77% of its revenue from PC sale last year, 17% from tablet, smartphone or other mobile devices, 3.8% from enterprise server & storage, and 2.7% from ecosystem & cloud services. China remains its key market which contributed 33% of revenue last year, followed by 28% in EMEA, 24% in America and 15% from the rest of Asia Pacific.
In light of the competition from smartphones and tablets, the global PC market has been shrinking, with total shipments falling from 358mn units in 2010 (as per IDC) to 308mn last year. Nevertheless, Lenovo has been able to grow its shipment volume by 20% per annum, lifting its PC market share from 9.5% (as per IDC) to 19.2% during this period. This was driven by its success in penetrating into overseas markets, such as the US where its share jumped from 3% (as per IDC) to 10.7%, leveraging its significant business scale for R&D, manufacturing, sales & marketing, product return and warranty functions. Some smaller players (e.g., Sony, Samsung) also took the strategic decision to exit the PC market.
Looking ahead, our Asia-Pacific technology research team expects the global PC market to continue shrinking and forecasts 6.5%/2.8% shipments decline in 2015E/16E with pressure spilling over to mid-tier companies, e.g., Asus, Acer. As competition generally centers on pricing not on innovation, we believe cost advantage would be the key differentiator. With significant cost overlap between its notebook and desktop businesses, coupled with its scale from a dominant market position, Lenovo should be able to price competitively, thereby sustaining its outperformance over other companies – our Asia-Pacific technology research team forecasts 5%/9% PC shipment growth for Lenovo in 2015E/16E, implying a further increase in its PC market share to 21.1%/23.1% respectively.
“Protect and Attack” strategy In addition to maintaining its leadership in the PC market, Lenovo’s “Protect and Attack” strategy also involves developing into new areas. The acquisitions of Motorola Mobility and IBM’s x86 service businesses in October last year were aimed at strengthening its market positions and enhancing its competitiveness in mobile and enterprise segments.
Mobile – The acquisition of Motorola Mobility from Google has lifted Lenovo’s share in the global smartphone market from 5% to 7%, ranking it the No.3 player by shipment (according to IDC, 2014), though still a distant gap from Apple (19.9%) and Samsung (20.0%). It helped to expand the company’s global presence, particularly in America where Motorola has a 7% market share vs. <1% for Lenovo. Our Asia-Pacific technology research team believes Lenovo can extend its product lineup with more high-end smartphones. A richer IP portfolio also reduces legal disputes associated with patents when it expands overseas. Lenovo has acquired over 2,000 patents and 21,000 patent cross authorizations from Google from the deal.
Goldman Sachs Global Investment Research 28 August 1, 2015 Legend Holdings (3396.HK)
Enterprise business – Prior to the acquisition of IBM x86, Lenovo had a 3% share in the global server shipment market (2014, as per IDC). The transaction increased its market share to 11%, translating to around US$5bn annual revenue (out of a US$50bn global server market as per IDC). The company sees potential synergy from cross-selling IBM’s server solution to enterprise customers taking advantage of its strong PC distribution coverage in China. It also sees growth potential in the fast-growing hyperscale data center market, leveraging IBM’s R&D capability and scale economies.
Our Asia-Pacific technology research team projects 22% earnings CAGR for Lenovo in 2014-17E, driven by: (1) growing mobile business with Motorola Mobility contributing 16%/19% of Lenovo’s revenue and its EBIT turning around from a loss of US$295mn in 2015E to a profit of US$322mn in 2016E; and (2) successful integration of IBM’s x86 business, boosting its server profit operating margin to 4%-5% in FY16E-17E, from -6.7% in FY14. Our technology team also expects steady contribution from its PC business with +1%/5% revenue growth in 2016E/17E.
Exhibit 30: Main products of Lenovo Exhibit 31: Lenovo has the highest market share in the global PC market PC market share by region (2014) Largest commercial PC producer Global China √ Yoga Series (Multimode Ultrabook with touch screen) Lenovo 19.2% Lenovo 36.6% √ T Series (Premium laptops) HP 18.4% Dell 9.9% PC √ M Series All-in-Ones (All-in-one desktops) Dell 13.5% ASUS 6.3% business Largest consumer PC producer √ Y Series (Premium Multimedia laptops) Acer 7.8% HP 5.5% √ Flex Series (Flex dual-mode laptops with rotatable and touch screen) Apple 6.4% Acer 4.8% √ A Series All-in-Ones (Stylish and ultra-slim desktop computers) Others 34.7% Others 36.9% Lenovo smartphones √ Viber Z (First cutting-edge 4G LTE Smartphone) US Asia Pacific √ S Series (Slim Android Smartphone) HP 27.6% HP 17.2% √ A Series (Affordable Android Smartphone) Motorola mobility Dell 24.3% Dell 12.4% Mobile √ Moto X Apple 12.2% Acer 11.6% business √ Moto G Lenovo 10.7% Lenovo 11.6% √ DROID Series Toshiba 6.5% ASUS 8.8% Tablets Others 18.7% Others 38.4% √ ThinkPad Helix √ Yoga Tablet Enterprises √ ThinkServer Products business √ X86 server business from IBM Ecosystem √ Ecosystem (develop and launch apps on smart mobile services) and cloud √ Cloud services (offers convenient data backup, sync and other functions) services √ Other services (New Business Development) Source: Company data. Source: IDC.
Goldman Sachs Global Investment Research 29 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 32: We project 22% earnings CAGR in 2014-17E for the IT division of Legend Key financials of IT division IT YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 211,636 230,505 272,344 326,548 344,421 372,945 9% 18% 20% 5% 8% 11%
Repoted cost of sales (Including D&A) (186,917) (200,269) (234,644) (274,784) (287,686) (310,443) 7% 17% 17% 5% 8% 10% Reported gross profit (post D&A) 24,719 30,236 37,700 51,764 56,735 62,502 22% 25% 37% 10% 10% 18% Gross profit margin 11.7% 13.1% 13.8% 15.9% 16.5% 16.8%
SG&A (19,989) (24,095) (30,312) (45,284) (47,022) (48,951) 21% 26% 49% 4% 4% 17% EBITDA 5,957 7,662 9,767 11,171 14,432 18,321 29% 27% 14% 29% 27% 23% EBITDA margin 2.8% 3.3% 3.6% 3.4% 4.2% 4.9% Depreciation & amortization (1,227) (1,521) (2,378) (4,691) (4,719) (4,770) 24% 56% 97% 1% 1% 26% Consolidated EBIT (subsidiaries) 4,730 6,141 7,388 6,481 9,713 13,551 30% 20% -12% 50% 40% 22% EBIT margin 2.2% 2.7% 2.7% 2.0% 2.8% 3.6% Profit of associates and JCEs (8) (7) (13) (13) (13) (13) -13% 98% 0% 0% 0% 0% Total EBIT (incl. associates and JVs) 4,722 6,134 7,375 6,467 9,699 13,537 30% 20% -12% 50% 40% 22%
Investment income and gains (0) 139 9 150 13 (228) n.a. -93% 1534% -91% n.m. -392% Finance income 278 228 203 272 292 304 -18% -11% 34% 7% 4% 14% Finance costs (346) (576) (1,119) (1,502) (1,610) (1,675) 66% 94% 34% 7% 4% 14% Net finance cost (68) (348) (916) (1,229) (1,318) (1,371) 413% 163% 34% 7% 4% 14%
Pre-tax profit 4,654 5,925 6,468 5,387 8,395 11,938 27% 9% -17% 56% 42% 23% Income tax expense (952) (1,102) (1,057) (673) (1,382) (2,010) 16% -4% -36% 105% 45% 24% Implied effective tax rate 20.4% 18.6% 16.3% 12.5% 16.4% 16.8% Total profit before MI 3,702 4,823 5,411 4,714 7,012 9,928 30% 12% -13% 49% 42% 22% Total core profit before MI 3,702 4,823 5,411 4,714 7,012 9,928 30% 12% -13% 49% 42% 22%
Minority interest (2,571) (3,326) (3,742) (3,287) (4,884) (6,919) 29% 13% -12% 49% 42% 23% Net profit attributable to Legend 1,131 1,497 1,669 1,427 2,128 3,009 32% 11% -15% 49% 41% 22% Core profit attributable to Legend 1,131 1,497 1,669 1,427 2,128 3,009 32% 11% -15% 49% 41% 22%
Total asset 110,929 116,637 176,038 179,580 184,510 191,523 5% 51% 2% 3% 4% 3% Total liability 96,319 100,360 152,055 152,055 152,055 152,055 4% 52% 0% 0% 0% 0% Total equity 14,610 16,277 23,983 27,525 32,455 39,468 11% 47% 15% 18% 22% 18% Return on equity (ROE) 25.3% 29.6% 22.6% 17.1% 21.6% 25.2% 17% -24% -24% 26% 16% 4%
Capex 2,429 4,558 6,224 11,994 5,952 3,463 88% 37% 93% -50% -42% -18% Source: Company data, Goldman Sachs Global Investment Research.
(2) Property (19% of GAV, 16% of earnings) Raycom was founded in 2001 as a platform company for the group to tap into China’s growing property market to benefit from the urbanization trend. It represented 17% of Legend’s total assets in FY14, and we expect it to contribute 19% of FY15E GAV and 16% of FY15E group net profit. We estimate the majority or 91% of its earnings would come from its sale of development properties and 9% from its investment properties this year. Maintain business scale; focus on operating efficiency and profitability Raycom has 50 projects spanning across 15 cities in China with a wide geographical coverage from Daqing, Heilongjiang in the north to Sanya, Hainan in the south. These projects have a total GFA of 14.5mn sqm including 11.6mn residential and 2.9mn sqm commercial (office and industrial). As of April 30, 2015, 5.7mn sqm have been completed. For the remaining 8.4mn sqm unsold GFA, only 0.80mn sqm are situated in first-tier cities (i.e., Beijing, Tianjin) and the vast majority (5.6mn sqm or 66%) are in second-tier cities including Hangzhou, Chongqing, Changsha etc. It also has exposure in smaller cities, such as Daqing, Jiangyin, Tangshan and Jindezhen, which account for 24% of the landbank (Exhibit 33). A comparison of Raycom’s property sales with other Chinese developers ranks it among the mid-sized companies. Though not directly comparable with other developers, the average cost of its landbank is quite low at around Rmb2,200 psm vs. the c.Rmb3,000 psm average for developers (Exhibit 34).
After the robust growth over the past decade, Legend’s management believes China’s housing market will grow more steadily and at a slower pace. As opposed to expanding aggressively as what it does in other segments, it plans to maintain Raycom’s business scale at around 6mn sqm or 4-5 years of landbank years by matching its pace of property sale, completion and landbanking. It will focus on operating efficiency, profitability and cashflow by adopting the following strategies:
Goldman Sachs Global Investment Research 30 August 1, 2015 Legend Holdings (3396.HK)
Decentralized management system – Raycom relies on local teams whom they believe have more on-the-ground experience and market insights to better manage its projects with respect to customer acquisitions and product marketing in accordance to local tastes. The headquarters focuses more on investment decisions, such as capital allocation, land acquisition.
Local partnership to source quality & low-cost landbank – It has been able to leverage the Legend brand to attract local partners (either private enterprises or SOEs) to help acquire quality landbank and expand in a more cost-efficient way. For instance, according to Soufun.com, it has joined hands with Caofeidian Development Investment Group under Caofeidian SASAC to develop Raycom Up Town project in Tangshan, Hebei, in which Raycom holds a 42% stake.
Keep rental properties for cashflow – While Raycom emphasizes more on asset turn by developing and selling residential properties or office towers (e.g., Raycom Wangjing Property Center, Sohu New Media Plaza), it also keeps selected office buildings as investment properties for cashflow streams. An example is Raycom Infotech Tower A and C in Zhongguancun area of Beijing with 102,264 sqm GFA and is 95% occupied. Tower B with 60,004 sqm GFA is scheduled for completion this year.
Modest volume recovery, price and margin stabilization as with overall market Over the past three years, Raycom’s contracted sales have been volatile, rising from Rmb7bn in 2012 to Rmb13.8bn in 2013, and subsequently dropping to Rmb10bn in 2014 (source: Soufun.com), in line with market trends affected by the macro environment and government policies. Revenue grew steadily from Rmb7.5bn in 2012 to Rmb11.5bn last year, while EBIT increased from Rmb2.5bn to Rmb3.1bn over the same period implying a margin decline from 33% to 27%, albeit still respectable vs. 13%-32% for other mid-sized China developers last year.
Looking ahead, our China property research team expects volume recovery and price stabilization, helped by improving affordability as a result of lower down-payments & mortgage rates, price cuts by developers on balance sheet pressures, less supply-demand imbalance etc. This should support margin trend for property developers. For Raycom, we model 1% earnings CAGR in 2014-17E by assuming: (1) steady growth in its contract sales (Rmb10.3bn/10.5bn/10.9bn in 2015E-17E, up from Rmb10bn in 2014); (2) increasing rental contribution from Rmb216mn in 2014E to Rmb387mn in 2017E for gradual ramp-up of Raycom Info Tech Center; and (3) stable EBIT margin of 25%-27% in 2015E-17E. Exhibit 35 lays out our projection for its property division.
Goldman Sachs Global Investment Research 31 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 33: Raycom has 8.4mn sqm of unsold landbank as Exhibit 34: Raycom recorded around Rmb10bn of of 2014 contract sales in 2014 GFA breakdown by city and by type of property 2014 contract sales of mid-sized property developers in China
(Sqm) Total GFA Completed GFA Saleable GFA % breakdown (Rmb bn) Contract sales (LHS) Average land cost (RHS) (Rmb psm) Beijing 1,169,580 1,079,012 300,385 4% 30.0 8,000 Tianjin 1,193,758 672,526 502,965 6% Hangzhou 556,648 127,004 510,106 6% 7,000 Wuhan 1,169,495 462,994 272,363 3% 25.0 Chongqing 2,207,499 949,837 1,254,081 15% 6,000 Changsha 1,252,658 934,626 295,797 4% 20.0 Hefei 2,004,631 513,679 1,315,614 16% 5,000 Wuxi 767,393 319,688 453,267 5% 15.0 4,000 Kunming 1,460,884 107,361 1,275,873 15% Dalian 196,280 - 184,950 2% 3,000 Sanya 255,534 - 225,743 3% 10.0 Daqing 1,628,328 274,449 1,450,811 17% 2,000 Jiangyin 101,407 35,043 65,180 1% 5.0 Tangshan 201,116 201,116 15,792 0% 1,000 Jingdezhen 311,166 48,108 288,350 3% - - Total 14,476,377 5,725,443 8,411,277 100%
1st tier 2,363,338 1,751,538 803,350 10% 2nd tier 9,615,488 3,415,189 5,562,051 66% 3rd tier 2,497,551 558,716 2,045,876 24% Total 14,476,377 5,725,443 8,411,277 100% Note: 1st tier - Beijing, Tianjin; 2nd tier - Hangzhou, Wuhan, Chongqing, Changsha, Hefei, Wuxi, Kunming, Dalian; 3rd tier - Daqing, Jiangyin, Tangshan, Jingdezhen Under Future Completed GFA development development Total % Type (sqm) (sqm) (sqm) (sqm) breakdown Residential 5,388,232 2,223,666 3,938,980 11,550,878 80% Commercial 337,211 14,335 2,573,953 2,925,499 20% - Office 337,211 - - 337,211 2% - Industrial - 14,335 2,573,953 2,588,288 18% Total 5,725,443 2,238,001 6,512,933 14,476,377 100% Source: Company data, Goldman Sachs Global Investment Research. Source: Company data.
Exhibit 35: We model 1% earnings CAGR in 2014-17E for the property division of Legend Key financials of property division Property YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 7,545 9,162 11,515 10,507 9,922 12,963 21% 26% -9% -6% 31% 4% - Property development 7,206 8,879 11,228 10,179 9,484 12,513 23% 26% -9% -7% 32% 4% - Property investment 321 276 279 320 429 442 -14% 1% 15% 34% 3% 17% - Other income 18 7 8 8 8 8 -59% 12% 0% 0% 0% 0%
Consolidated EBIT (subsidiaries) 2,521 2,533 3,071 2,990 2,790 3,493 0% 21% -3% -7% 25% 4% - Property development 2,322 2,331 2,855 2,733 2,432 3,106 0% 22% -4% -11% 28% 3% - Property investment 199 202 216 258 358 387 1% 7% 19% 39% 8% 21%
EBIT margin 33.4% 27.7% 26.7% 28.5% 28.1% 26.9% - Property development 32.2% 26.3% 25.4% 26.8% 25.6% 24.8% - Property investment 62.0% 73.3% 77.5% 80.5% 83.5% 87.5%
Profit of associates and JCEs 0 3 10 133 179 299 2297% 245% 1207% 34% 67% 208% Total EBIT (incl. associates and JVs) 2,521 2,536 3,081 3,123 2,969 3,791 1% 21% 1% -5% 28% 7%
Investment income and gains 2 162 4 4 4 4 Other income and gains/(losses) - fair value gain of IP 622 202 249 1,100 - -
Finance income 53 95 51 51 51 51 Finance costs (381) (342) (181) (217) (261) (313) Net finance cost (328) (247) (130) (167) (210) (262) -25% -47% 28% 26% 25% 26%
Pre-tax profit 2,818 2,653 3,204 4,061 2,763 3,534 -6% 21% 27% -32% 28% 3%
Income tax expense (1,083) (1,138) (2,222) (1,839) (1,570) (2,083) 5% 95% -17% -15% 33% -2% Implied effective tax rate 38.4% 43.0% 69.6% 46.8% 60.7% 64.4% - Income tax (600) (615) (946) (1,015) (691) (883) 2% 54% 7% -32% 28% -2% - LAT (483) (523) (1,276) (823) (879) (1,200) 8% 144% -35% 7% 37% -2% Total profit before MI 1,735 1,514 983 2,223 1,193 1,450 -13% -35% 126% -46% 22% 14% Net margin 23.0% 16.5% 8.5% 21.2% 12.0% 11.2%
Exceptionals 622 202 (505) 1,100 - - Total core profit before MI 1,112 1,313 1,488 1,123 1,193 1,450 18% 13% -25% 6% 22% -1%
Net profit attributable to Legend 1,504 1,216 891 2,223 1,193 1,450 -19% -27% 149% -46% 22% 18% Core profit attributable to Legend 882 1,014 1,397 1,123 1,193 1,450 15% 38% -20% 6% 22% 1%
Capex 119 122 154 120 120 120 2% 26% -22% 0% 0% -8% Net debt n.a. n.a. 14,380 14,966 14,407 8,031 n.a. n.a. 4% -4% -44% -18%
Contracted sales (Rmb mn) 7,000 13,800 10,000 10,283 10,456 10,889 97% -28% 3% 2% 4% 3% Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 32 August 1, 2015 Legend Holdings (3396.HK)
(3) Financial services (11% of GAV, 9% of earnings) Legend’s financial services division includes a 92% interest in Zhengqi Financial, 48% in Union Insurance, 36.4% in Lakala, 15.3% in Hankou Bank and 10% in Suzhou Trust as of 2014. The group acquired minority interests in Suzhou Trust in 2008, Lakala and Hankou Bank in 2010. It was not until 2012 when it founded Zhengqi Financial, which acquired small loan, pawn loan and financial guarantee businesses in Hefei and Anhui. It also acquired a 51% interest in Union Insurance (UIB) in November 2012. The financial services division represented 4% of the group’s total assets in FY14, and we expect it to contribute 11% of GAV and 9% of group net profit in FY15E. Unfulfilled demand for SME financing, insurance and wealth management We believe financing needs for individuals and SMEs are unfulfilled since traditional banks have little incentive to lend to them than to SOEs given China’s tight loan quota policy, implicit government guarantees for SOEs, the 8.5%-9.5% tier-1 capital ratio cap and an undeveloped credit investigation system for smaller borrowers. Funding costs for SMEs could be in excess of 16%, considerably higher than 5%-6% for large corporates (Exhibit 36). As shown in Exhibit 37, SME loans represented 31% of total loans in China in 2013, up from 29% in 2011. Consumer leverage is also much lower than corporate leverage in China, suggesting scope for individual lending to grow. According to Euromonitor, China’s short- term non-bank financing industry grew 33% CAGR in 2011-13 and is projected to maintain at 35% per annum till 2016, with rising demand for different products, e.g., small, pawn loans, financing leasing, etc.
With an aging population and rising disposal incomes, demand for insurance, wealth management and trust products should also grow rapidly. Per Euromonitor, total premium generated by insurance brokerage companies amounted to Rmb43bn in 2013, representing only 2.5% of the total insurance premium in China, much lower than 10+% in developed markets such as the US and UK. Euromonitor projects the insurance brokerage industry to grow at a 19% CAGR in 2013-16, as brokers continue to expand and provide more value- added services (e.g., risk management, personal consulting).
We note another segment with growth potential is the payment service industry, as more consumers do not want to carry cash around and prefer to pay their bills with bank cards or other non-cash systems. Indeed, the value of bank card transactions in China grew at a 52% CAGR to Rmb31.8trn in 2013, representing 47% of retail sales (excluding property, auto, wholesale, etc.) up from 24% in 2009. Close to 10mn merchants now accept bankcard payments (source: PBOC). Our China banking research team forecasts total transaction volumes would more than double and reach Rmb73bn by 2017E (Exhibit 39), with 58% of retail sales in China settled by bankcards. The fast-growing e-commerce and online shopping industry also suggests more transactions would be conducted through online payment systems, which only represent 3% of retail sales in China – another area of opportunity.
Goldman Sachs Global Investment Research 33 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 36: SMEs have much higher funding costs than Exhibit 37: SMEs loans accounted for only 31% of bank large corporates loans in 2013
Funding cost by borrower type 20% 2012 SME loans as % of total loans 18.6% 15.6% 16% 2013 31.0% 31% 12% 30.5% 30% 8% 5.9% 4.7% 30.0% 4% 29% 0% 29.5% 1Y Informal Chailease CCB corp loan AAA Corp 1Y lending in China(secured yield 29.0% Guangzhou SMEs) 28.5% Proxy for Proxy for subprime Proxy for Proxy for 2011 2012 2013 big corps SME/consumers secured SMEs big corps Source: PBOC, Company data, Wind. Source: PBOC, Company data, Wind.
Exhibit 38: Consumer leverage has been much lower than Exhibit 39: Our China banking research team projects corporate leverage in China, suggesting meaningful 20%/10% CAGR in bank card consumption volume and growth potential for consumer banking in China no. of POS terminals in 2014-17E
(as % of GDP) LGFV leverage(loan, bond, trust) (Rmb bn)Bank card Consumption Volume (LHS) (mn) 270 Corporate leverage 80,000 No. of POS (RHS) 20 240 Govt. Leverage 70,000 18 36 Household leverage 16 210 34 31 60,000 25 14 180 27 23 50,000 12 24 10 40,000 10 150 9 12 13 14 15 16 30,000 8 7 158 120 146 6 139 143 122 20,000 112 127 4 114 90 107 106 98 98 96 97 10,000 109 103 2 60 108 11 3 0 0 100 23 23 24 27 24 2008 2009 2010 2011 2012 2013 2014 30 26 32 28 30 28 29 25 24 25 2015E 2016E 2017E 22 22 26 068 16 19 19 20 22 24 0 0 1 2 4 6 9 12 12 12 11 12 12 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E Source: PBOC, Gao Hua Securities Research. Source: PBOC, Gao Hua Securities Research.
Established financial platforms offering diversified services To capture the opportunities as discussed above, Legend has set up a platform with five portfolio companies each offering different types of services. The group provides them with capital or other supports (e.g., government relationship) and identifies potential synergies (e.g., product cross-selling, customer sharing) with other companies.
Zhengqi Financial (92% interest) – Zhengqi acquired the small loan, pawn loan and financing guarantee businesses from the Hefei/Anhui SASAC for Rmb846.7mn in November 2012. Since then, its asset base more than tripled from Rmb1.9bn at end- 2012 to Rmb6.8bn at end-2014, as the company turned more aggressive in extending SME loans (i.e., direct loan customers increased from 130 to 183) and providing credit guarantees to third-party borrowers (i.e., the number of financing guarantee contracts rose from 708 to 909). Benefiting from Anhui’s strong economic growth and low funding cost, Zhengqi has been able to achieve a higher net margin of 48% in 2014, vs. an average of 32% for other financing companies. Its net interest and fee income grew 50% and 38% yoy respectively last year, driving strong earnings growth of 35%. For 2015E/16E, we model 29%/20% income growth by assuming steady net interest margin (NIM) of 15% and 22%/19% growth in loan book.
Goldman Sachs Global Investment Research 34 August 1, 2015 Legend Holdings (3396.HK)
Union Insurance (48% interest) – Union Insurance (UIB) is a leading insurance broker in education-related products in China. It works with more than 30 insurance companies and typically receives 20%-30% of the annual premium as commission. It does not take on any underwriting risk and only acts as a distribution platform. Legend acquired a 51% stake in UIB for Rmb684mn in November 2012. After selling a 3% interest to a third party for Rmb52mn last year, its equity interest dropped to 48% and hence its financials are no longer consolidated. UIB’s revenue grew 18% yoy to Rmb592mn last year, driven by the acquisition of more insurance agents. But with additional costs incurred for new business expansion, it recorded a net loss of Rmb54mn last year, vs. a profit of Rmb41mn in 2013. It targets to set up 1,000 new stores to cross-sell insurance products in non-education related industries (e.g., shipping, environment protection, medical) (source: UIB website). It also plans to form an actuarial firm to develop more innovative products. We expect initial costs associated with these expansions to further drag UIB’s profitability and model Rmb35mn net loss in 2015E before turning around to Rmb30mn profit in 2016E.
Lakala (31% interest) – Founded in 2005, Lakala started off by offering convenient financial payment services through point-of-sale (POS) terminals located in local communities, convenience stores and office buildings, with which customers gain easy access to automated banking services. It also provides card acceptance services by allowing SMEs to process payments with debit or credit cards. Most recently, in 2012, it launched pocket-sized card terminals plugged to mobile phones and developed a mobile payment app. Given Lakala’s established presence in over 300 cities in China with a dominant 75% market share in the offline terminal payment market, we believe the company will continue to benefit from the rapid growth in China’s card payment industry. Although its payment service business is profitable on a standalone basis, Lakala incurred Rmb76mn net loss as a whole in 2014 for its investments to expand into an e-commerce and online platform. We assume it will remain loss-making in 2015 and turn around in 2017. Lakala recently entered into an agreement to place 15% of its shares to third parties for Rmb1.5bn, implying a valuation of Rmb10bn for the whole company (note details of completion date have not been provided).
Hankou Bank (15.3% interest) – Legend acquired its interest in Hankou Bank in 2010. Recognized as an associate in the group’s financials, it is a leading regional commercial bank in Wuhan city with 112 branches mostly in Hubei province, specializing in high technology enterprise financing with over 1,300 high-tech customers (out of 8,663 total corporate customers). Its asset size has been steady at Rmb160bn-180bn over the past three years, with 10% ROE in 2014 partly dragged by more provisions for bad debts. We model 10% earnings CAGR in 2014-17E.
Suzhou Trust (10% interest) – Suzhou Trust is one of Legend’s earlier investments in this division back in 2008. It conducts trust, financial advisory and other consulting services for 10,717 clients mostly in Jiangsu province at end-2014. Its earnings contribution to the group increased at a 34% CAGR from Rmb28mn in 2012 to Rmb50mn in 2014. We model a steady 17% CAGR in 2014-17E to Rmb80mn.
Goldman Sachs Global Investment Research 35 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 40: Summary of the five entities’ business model under the financial service division of Legend
Customer profile Interest rate Typical amount Typical terms Net asset (2014) Diversified financial services for SMEs, incl. Rmb2,689mn (1) Direct loans Primarily for SMEs across broad range of sectors 1.68-2% per month < Rmb15mn 2-6 months Rmb1,278mn Fee: 1.5-2.4% per annum (financing guarantees); ~2% (2) Credit guarantees Primarily for SMEs in manufacturing industry n.a. n.a. Rmb705mn per annum (non-financing Zhengqi guarantees) (92% stake) (3) Pawn loans Primarily for SMEs in property development industry 1.68-2.1% per month Rmb2-20mn <6 months Rmb319mn Customers in various industries incl. manufacturing and 3 years with rental (4) Financial leasing n.a. n.a. Rmb428mn healthcare services payable quarterly Primarily for SMEs in property development, (5) Entrusted loans 1.68-2% per month Rmb10-30mn 6-12 months n.a. manufacturing and commercial services industry (1) A leading regional city commercial bank in Wuhan, Hubei with 112 branches and sub-branches Hangkou Bank (2) Specializes in high-tech enterprises (1,300+ high-tech enterprise customers vs. 8,663 total corporate customers as of 2014) Rmb14.6bn (15.33% stake) (3) 5.9mn debit cards and c. 202,000 credit cards issued (4) 897,245 e-banking and 690,998 mobile banking customers (1) Trust business, financial advisory and other consulting services Suzhou Trust (2) Established wealth management platform in Jiangsu (10% stake) (3) 129 individual trust products and 80 collective trust products Rmb3.3bn (4) 10,717 clients as of 2014 A leading third-party payment provider with payment and community O2O services 74.7% market share in the offline terminal payment market in China Payment services √ Convenient financial services - 0.8mn POS terminals in over 31 provinces/municipalities; over 4.5mn average monthly active users Lakala √ Card acceptence services - c. 0.70mn POS terminals authorized (31% stake) √ Mobile payment services - Pocket-sized card terminals
Community O2O services Providing e-commerce services and financial products through designated online platform Insurance brokerage (1) A leading professional insurance intermediary in China Union (2) Dominant market position in China's education-related insurance brokerage busines (90% market share in school liability insurance) Insurance (3) No. 1 insurance broker in student accident insurance in terms of insurance premium in 2013 (48% stake) Risk consulting and other services Evaluating risk management needs and designs customized insurance programs
Source: Company data.
Goldman Sachs Global Investment Research 36 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 41: We forecast 28%/33% earnings growth in 2015E/16E for the financial services division of Legend Key financials of financial services division
Financial services YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 51 997 1,318 937 1,126 1,320 1866% 32% -29% 20% 17% 0% - Zhengqi 26 495 726 937 1,126 1,320 1786% 47% 29% 20% 17% 22% - UIB 24 502 592 - - - 1952% 18% -100% n.a. n.a. -100%
Cash cost of sales (47) (969) (1,284) (608) (691) (778) 1982% 32% -53% 14% 13% -15% Cash gross profit 4 28 35 329 435 543 569% 25% 849% 32% 25% 150% Cash gross profit margin 8.2% 2.8% 2.6% 35.1% 38.6% 41.1% SG&A (19) 429 467 327 353 381 n.a. 9% -30% 8% 8% -7% EBITDA (15) 457 502 656 788 924 n.a. 10% 31% 20% 17% 23% EBITDA margin -29.0% 45.8% 38.1% 70.0% 70.0% 70.0% Depreciation & amortization (4) (28) (35) (30) (30) (30) 569% 25% -14% 0% 0% -5% Consolidated EBIT (subsidiaries) (19) 429 467 626 759 895 n.a. 9% 34% 21% 18% 24% EBIT margin -37.2% 43.0% 35.4% 66.8% 67.4% 67.8% Profit of associates and JCEs 254 293 186 205 337 429 15% -36% 10% 65% 27% 32% - Hankou Bank (汉口银行)285 317 226 262 282 302 11% -29% 16% 7% 7% 10% - Union Insurance (联保投资) - - - (35) 30 60 n.a. n.a. n.a. -186% 100% n.a. - Lakala (拉卡拉) (85) (75) (74) (69) (30) 2 -12% -2% -7% -56% -107% n.m. - Suzhou Trust (苏州信托)28 36 50 62 71 80 29% 38% 25% 15% 12% 17% - Others 27 15 (15) (15) (15) (15) -42% -199% 0% 0% 0% 0% Total EBIT (incl. associates and JVs) 235 722 653 831 1,096 1,324 207% -9% 27% 32% 21% 27%
Investment income and gains 1 - 650 400 - - -100% n.a. -39% -100% n.a. -100%
Finance income 2 7 18 18 18 18 247% 156% 0% 0% 0% 0% Finance costs (2) (5) (23) (23) (23) (23) 188% 331% 0% 0% 0% 0% Net finance cost 0 2 (4) (4) (4) (4) 653%-305%0%0%0%0%
Pre-tax profit 237 724 1,299 1,227 1,092 1,320 205% 80% -6% -11% 21% 1% Income tax expense (4) (116) (220) (117) (151) (185) 3053% 90% -47% 29% 23% -6% Implied effective tax rate -21.3% 26.9% 19.7% 11.5% 20.0% 20.8% Total profit before MI 233 608 1,080 1,110 941 1,135 161% 78% 3% -15% 21% 2% Exceptionals - - 553 400 - - Total core profit before MI 233 608 527 710 941 1,135 161% -13% 35% 33% 21% 29%
Minority interest 13 (43) (4) (39) (47) (55) n.m. -91% 967% 20% 17% 147% Net profit attributable to Legend 247 565 1,076 1,071 894 1,079 129% 90% -1% -16% 21% 0%
Core profit attributable to Legend 247 565 523 671 894 1,079 129% -7% 28% 33% 21% 27% - Zhengqi Financial 8 260 349 451 542 635 3135% 35% 29% 20% 17% 22% - Hankou Bank 285 317 226 262 282 302 11% -29% 16% 7% 7% 10% - Union Insurance (15) 21 (28) (35) 30 60 -242% -233% 26% -186% 100% -229% - Lakala (85) (75) (74) (69) (30) 2 -12% -2% -7% -56% -107% -130% - Suzhou Trust 28 36 50 62 71 80 29% 38% 25% 15% 12% 17% - Investment and others 26 7 - - - - -72% -100% n.a. n.a. n.a. n.a.
Core return on equity (ROE) 4.3% 10.3% 7.4% 9.1% 10.8% 11.5% - Zhengqi Financial 0.5% 15.8% 14.1% 15.4% 15.6% 15.5% - Hankou Bank 15.6% 15.4% 10.1% 10.5% 10.1% 9.8% - Union Insurance -7.4% 6.3% -9.2% -6.3% 5.1% 9.3% - Lakala n.a. n.a. n.a. n.a. n.a. n.a. - Suzhou Trust 14.0% 15.7% 15.0% 15.8% 15.4% 14.7% - Investment and others 1.7% 0.6% 0.0% 30.9% 0.0% 0.0%
Capex 46 31 124 18 14 43 -33% 298% -85% -22% 207% -30%
Source: Company data, Goldman Sachs Global Investment Research.
(4) Modern services (10% of GAV, 0.4% of earnings) Legend’s modern services division includes its c.23.9% beneficial interest in CAR, 54.9% in Bybo, 94% in Zeny and the wholly-owned EnsenCare. Legend Capital first invested in CAR in 2010 and introduced it to Legend Holdings, which turned it into a strategic investment. The group incorporated EnsenCare and Zeny in August 2011 and July 2012 respectively. Through a series of acquisitions in 2014-15, Legend acquired a combined 54.9% interest in Bybo for Rmb683mn. This modern services division represented 2% of the group’s total assets in FY14, 10% of GAV and 0.4% of the group’s net profit in FY15E.
Goldman Sachs Global Investment Research 37 August 1, 2015 Legend Holdings (3396.HK)
Opportunities from China’s transition to a service-oriented economy To capture growth potential from rising disposable incomes and the transition from a manufacturing to service-oriented economy, Legend has made investments in four modern service industries and will continue to identify other opportunities associated with innovation (e.g., internet, mobile usage). It believes brands and service quality are key factors that distinguish its companies, some of which are already widely recognized among Chinese consumers, such as CAR, Bybo.
Growth potential from fragmented and lowly-penetrated industries A quick review of its asset portfolio in this division suggests most of these industries are in the early stage of development given low penetration. The fragmented market structure also provides scope for them to build up their business scale by greenfield expansion or market consolidation. We model a turnaround of divisional profit from Rmb121mn net loss in 2014 to a profit of Rmb25mn in 2015 and Rmb323mn in 2016 (Exhibit 48).
Bybo (54.9% interest) – Bybo is the No.1 ranked private dental chain in China, with 296 dental chairs in 75 outlets (9 hospital and 66 clinics as of December 2014) across 14 municipalities and provinces (Exhibits 42-43). China’s dental market has experienced significant growth with revenue up 22% CAGR to Rmb9.4bn in 2009-13, although the market is still underdeveloped with on average only 1 dentist serving every 10,000 people in China, vs. 8 in Japan (2010), 5.8 in Canada (2008) and 5.3 in UK (2012) according to Euromonitor. Most dental treatments in China are conducted in general hospitals which offer only basic services and accounted for 52% of total clinical visits in 2013, followed by dental hospitals 26% and private dental chains 23%. With greater demand for premium dental services (e.g., teeth whitening, implantation), we see strong growth potential for private dental chains. Bybo was still loss-making last year and made a partial year (stake was only acquired in July 2014) net loss contribution of Rmb34mn to the group. For costs incurred for aggressive expansion (i.e., it targets to grow its dental chain network from 75 to 200 by 2017, according to Legend), we expect net loss attributable to Legend to widen to Rmb129mn this year, then narrow to a Rmb29mn loss in 2016E and turn around in 2017E with a Rmb29mn profit.
CAR (23.87% beneficial interest) – CAR is the largest car rental company in China in terms of fleet size in 2013 with 63,522 vehicles under 723 self-operated outlets across 70 major cities, according to Roland Berger. It also has 219 franchisee stores. Its direct- operated network is four times the size of its closest competitor, eHi as of 2013. China’s car rental market is in the early growth phase with 0.4% penetration as measured by the number of rental vehicles vs. total passenger vehicles in the country, vs. 1.7%, 2.5% and 2.6% in the US, Korea and Japan respectively, according to Frost & Sullivan (Exhibit 44). The market is also more fragmented, as the top three players contributed 11% of market revenue in 2013 (vs. 95% in the US, 47% in Korea, 33% in Japan). As an early mover with significant scale, CAR has enjoyed substantial pricing discount from its vehicle suppliers and secured sufficient license plates to accommodate its expansion plan which enable it to cope with government restrictions on the issuance of new and transfer of old license plates in key cities such as Beijing, Shanghai etc. Since its listing in 2014, CAR’s financials are disclosed publicly, with earnings turning around from a loss of Rmb223mn in 2013 to a profit of Rmb436mn last year, helped by strong top-line growth of 30% and scale economies with EBIT margin jumping from 3.6% to 22.6%. We model Rmb1.07bn/Rmb1.54bn net profit in 2015E/2016E, with Rmb255mn/366mn attributable to Legend for its 23.87% beneficial interest.
Goldman Sachs Global Investment Research 38 August 1, 2015 Legend Holdings (3396.HK)
Zeny (94% interest) – Zeny provides several types of logistic services including: (1) temperature-controlled supply chain with refrigerated storage and distribution through its cold storage facilities in Hubei province; (2) cross-border delivery and logistic services between China and Japan, China and HK; (3) delivery services for cross-border e-commerce; and (4) domestic express services with 2,706 outlets covering 31 provinces and municipalities as of end-2014. It plans to expand through acquiring more cold chain facilities in Tianjin and Henan. Despite strong top-line growth (from Rmb58mn in 2012 to Rmb362mn in 2014), Zeny was still loss-making last year which we expect to narrow gradually. Aside from an initial investment of Rmb188mn, Legend has also provided Zeny with a shareholder loan of Rmb1.2bn.
EnsenCare (100% interest) – Legend entered the senior care business by setting up EnsenCare with an initial capital of Rmb200mn. EnsenCare develops apartments and provides a broad range of accommodation services for senior citizens, e.g., independent living, disease prevention, skilled nursing, health management, rehabilitation etc. As of end-2014, EnsenCare had 345 apartment units with 819 beds under construction covering a total GFA of 49,386 sqm. We believe the pace of its future expansion hinges on its ability to identify quality property at good locations.
Exhibit 42: Bybo had 75 outlets as of 2014 Exhibit 43: Bybo is the No.1 private dental chain in China Key statistics of Bybo Ranking of private dental chains in China by no. of outlets 12-14 No. of No. of 2012 2013 2014 CAGR Name clinics hospitals No. of outlet 34417549%Bybo 44 6 Floor space (sqm) 19,333 24,788 52,200 64% Arrail Dental 30 1 No. of dental chair 296 359 724 56% Jiamei Dental 28 1 No. of dentists 183 297 451 57% TC Medical 14 11 C.K.J Professional Dental 12 0 Note: As of June 2014 Source: Company data. Source: Euromonitor. Exhibit 44: Relatively low car rental penetration rate in Exhibit 45: Larger number of driver license holders amid China, measured by rental/service vehicles as a % of total an increase in leisure traveling may lead to faster passenger vehicles demand growth in the car rental industry Car rental and car service penetration rate in 2013 Driver’s license holders and total passenger vehicles 3.0% Driver's license holders (# mn) Total passenger vehicles (# mn) 350 2.6% 2.5% 2.5% 300 295 273 253 2.0% 250 234 217 1.7% 200 200 1.5% 174 159 151 150 137 138 119 1.0% 102 100 88 72 58 0.5% 0.4% 46 50 35
0.0% ‐ Japan Korea United States China 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Frost & Sullivan. Source: Frost & Sullivan.
Goldman Sachs Global Investment Research 39 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 46: The top 3 companies in China’s car rental Exhibit 47: CAR accounted for 8.1% of China’s car rental industry accounted for only 11% of the market in terms revenue in 2013 of revenue in 2013 China’s vehicle rental market breakdown by segment and Market share breakdown in each different market company 100% 100% 4.6%
90% 90% China Car Rental Market 21.2% Rmb 29.7bn revenue in 2013 80% 80% 51.9% Car service 70% 70% 10% 67.6% 60% 25.7% Other industry 60% 89.2% players Other industry players, 89.2% 50% # 3 player 50% 9.9% 40% # 2 player 40% Other industry players 13.5% # 1 player 30% 30% Avis China 11.1% 48.5% Car rental 20% 20% eHi 10.7% 90% 24.7% 1.2% 10% 1.2% 1.5% 10% 1.5% China Auto 10.6% 8.1% 8.1% Rental 0% 0% United States Korea Japan China Car rental market Source: Frost & Sullivan. Source: Frost & Sullivan.
Goldman Sachs Global Investment Research 40 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 48: We expect an earnings turnaround for the modern services division of Legend in 2015E Key financials of modern services division
Modern services YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 58 274 853 1,651 2,357 2,720 373% 211% 93% 43% 15% 47% - Bybo - - 358 965 1,473 1,735 n.a. n.a. 169% 53% 18% 69% - Zeny 58 187 362 507 634 729 222% 94% 40% 25% 15% 26% - EnsenCare - - - 46 117 124 n.a. n.a. n.a. 154% 6% n.a. - Others (0) 88 133 133 133 133 n.a. 51% 0% 0% 0% 0%
Reported gross profit (post D&A) 28 102 170 579 974 1,169 267% 67% 240% 68% 20% 90% - Bybo 175 442 704 847 n.a. n.a. 153% 59% 20% 69% - Zeny (137) (25) 63 109 n.a. n.a. -82% -350% 73% -193% - EnsenCare - 29 74 80 n.a. n.a. n.a. 151% 8% n.a. - Others 133 133 133 133 n.a. n.a. 0% 0% 0% 0%
Gross profit margin 47.8% 37.0% 19.9% 35.1% 41.3% 43.0% - Bybo 48.8% 45.8% 47.8% 48.8% - Zeny -37.9% -5.0% 10.0% 15.0% - EnsenCare 63.8% 63.1% 64.7% - Others 100.0% 100.0% 100.0% 100.0%
SG&A (46) (228) (375) (822) (908) (960) 392% 64% 119% 10% 6% 37% EBITDA 7 (42) (81) (86) 251 410 n.m. 95% 5% -393% 64% n.m. EBITDA margin 12.5% -15.2% -9.5% -5.2% 10.6% 15.1% Depreciation & amortization (26) (85) (124) (158) (184) (201) 227% 46% 27% 17% 9% 18%
Consolidated EBIT (subsidiaries) (19) (127) (205) (243) 67 209 577% 62% 18% -127% 213% n.m. - Bybo (27) (178) 22 131 n.a. n.a. 554% n.m. 483% n.m. - Zeny (311) (219) (146) (117) n.a. n.a. -29% -33% -20% -28% - EnsenCare - 21 58 62 n.a. n.a. n.a. 170% 8% n.a. - Others 133 133 133 133 n.a. n.a. 0% 0% 0% 0%
EBIT margin -32.2% -46.1% -24.1% -14.7% 2.8% 7.7% - Bybo -7.6% -18.4% 1.5% 7.5% - Zeny -85.8% -43.3% -23.1% -16.1% - EnsenCare 46.5% 49.4% 50.4% - Others 100.0% 100.0% 100.0% 100.0%
Profit of associates and JCEs (89) (399) (309) 255 366 463 347% -22% -182% 44% 26% -214% - CAR (72) (100) 104 255 366 463 39% -204% 145% 44% 26% 64% - Change in fair value of preferred shares of parentco (17) (298) (413) - - - 1637% 38% -100% n.a. n.a. -100% Total EBIT (incl. associates and JVs) (108) (525) (514) 12 433 672 387% -2% -102% 3663% 55% -209%
Investment income and gains 400 338 1,646 - - -
Finance income 1 4 8 10 10 10 353% 98% 25% 0% 0% 8% Finance costs (21) (67) (98) (145) (169) (161) 225% 47% 47% 17% -5% 18% Net finance cost (20) (63) (90) (135) (159) (151) 220% 44% 49% 18% -5% 19%
Pre-tax profit 272 (250) 1,041 (123) 274 521 n.m. n.m. n.m. n.m. 90% -21% Income tax expense 9 38 32 24 11 (8) 341% -17% -24% -53% n.m. n.m. Implied effective tax rate -2.4% -25.5% -2.3% 6.4% 12.3% 13.8% Total profit before MI 281 (212) 1,073 (99) 285 513 n.m. n.m. -109% n.m. 80% -22% Total core profit before MI 298 87 (160) (99) 285 513 -71% n.m. -38% n.m. 80% n.m.
Minority interest 2 9 39 124 38 (11) 410% 330% 217% -70% -131% n.m. Net profit attributable to Legend 282 (203) 1,112 25 323 502 n.m. n.m. -98% 1208% 55% -23% Exceptionals (17) (298) 1,233 - - - Core profit attributable to Legend 300 96 (121) 25 323 502 -68% n.m. n.m. 1208% 55% n.m. - Bybo - - (19) (129) (29) 29 n.a. n.a. 588% -78% n.m. n.m. - CAR (72) (100) 104 255 366 463 39% n.m. 145% 44% 26% 64% - Zeny (28) (142) (371) (279) (217) (195) 410% 160% -25% -22% -10% -19% - EnsenCare - - - 14 38 41 n.a. n.a. n.a. 170% 8% n.a. - Other operations 400 338 164 164 164 164 -15% -51% 0% 0% 0% 0%
Return on equity (ROE) 21.3% -20.0% 39.6% -3.8% 9.9% 15.1%
Capex 525 367 418 583 631 293 -30% 14% 40% 8% -54% -11% - Bybo 174 483 531 193 n.a. n.a. 177% 10% -64% 4% - Zeny 244 100 100 100 n.a. n.a. -59% 0% 0% -26%
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 41 August 1, 2015 Legend Holdings (3396.HK)
(5) Agriculture and food (2% of GAV, -1.5% of earnings) Legend ventured into the food industry by setting up two platform companies, namely Joyvio Group and Funglian Holdings Limited, in 2012. This division represented 1% of the group’s total assets in FY14 and we expect it to contribute 2% of GAV in FY15E. Excluding a writedown of Rmb620mn for its liquor business, it incurred a net loss of Rmb259mn in 2014.
Growing demand for quality products and focus on food safety Chinese consumers’ taste and food preference have evolved with greater emphasis on healthy and quality products, especially after the numerous food safety incidents that dominated the headlines in recent years. To gain consumers’ trust, the company positions its products as premium quality to avoid being commoditized and hence the need to compete on prices. It will continue to expand its product lineup and invest in other sub-segments.
Joyvio – leading position in premium fruit market China’s fruit market has grown steadily at a 5% CAGR in 2011-13 with growing demand for new fruit varieties, such as blueberries and kiwifruits given their high nutritional value. According to Euromonitor, the sales volume of blueberries in China registered 48% CAGR from 8,700 tons in 2011 to 19,000 tons in 2013 and is expected to grow further at a 39% CAGR to 46,500 tons by 2016E. China is the largest kiwifruit producing country, accounting for over 60% of global kiwifruit plantation areas and 40% of production volumes as per Euromonitor. Kiwifruit consumption is projected to grow at a 7.8% CAGR in 2014-16E (vs. 7.6% in 2011-13). Joyvio commenced its blueberry operations in 2012, including the propagation of seedlings, planting, fruit processing, sale and import/export, and has over 700 hectares of plantations in China’s Shandong, Liaoning, Jilin, Sichuan and Hubei provinces and over 64 hectares in Chile now. It began cultivating kiwifruits in Sichuan, Shaanxi and Henan in 2013 and has 11 orchards. It was ranked No.1 by retail sales of both blueberry and kiwifruit in China in 2013, capturing 22.3% and 0.8% share in these two rather fragmented markets, according to Euromonitor (Exhibits 51-52). Since blueberry bushes usually take 3 years to bear fruits and 5-6 years to reach peak output levels, and kiwi generally takes 4-5 years to bear fruits and 7-8 years to reach peak output levels (vs. Joyvio’s average plant age of 3.5 and 5.6 years), we expect Joyvio’s blueberry and kiwi production to pick up gradually in the next few years to reach peak levels in 2016-2019 – we model 41%/13% CAGR in 2014-17E. In addition, the company has also expanded into other product categories, including cherries and grapes by importing from its own planting sites in Chile and other suppliers around the world, premium wines by importing from producers in France, Australia and Chile, and “Longjing” tea by harvesting from its plantations in Hangzhou and Zhejiang. Overall, we model Joyvio’s earnings to turn around in 2016E and contribute Rmb34mn profit to the group in 2017E.
Funglian – financial turnaround as spirit market recovers Following the robust growth over the last decade, China’s spirit industry has undergone an adjustment phase, with revenue growth slowing from 20+% in 2011 to 5% in 2014 due to competition from other alcoholic drinks (e.g., red wine) and effects of the recent anti-graft campaigns. As government-related consumption fell to below 15% in 2014 (per our China consumer research team’s estimate), there are signs of stabilization in recent months with modest recovery in wholesale prices of the top-tier brands (e.g., Moutai, Wuliangye). Alcohol sales at restaurants also resumed growth ytd (source: CEIC). Just like in past cycles when China’s liquor revenue rebounded after periods of consolidation (i.e., 1998-2002, 2002-2004, 2008-09), our China food and beverages research team projects 10% growth in 2015, followed by 16% in both 2016-17. They also see three trends shaping industry development in future years: (1) expansion of product lineup and distribution channels to capture growing private demand; (2) accelerating industry consolidation; and (3) improving operating efficiency.
Goldman Sachs Global Investment Research 42 August 1, 2015 Legend Holdings (3396.HK)
Legend’s 93.3%-owned subsidiary, Funglian, acquired four spirit brands “Bancheng”, “Confucius Family”, “Wenwang” and “Wuling” in 2011-13, each with strong brand names in their respective local markets in Hebei, Shandong, Anhui and Hunan, the generally wealthier provinces in China. Together, they have a total annual production capacity of 38,750 tonnes. To cope with challenges facing the liquor market in recent years, Funglian has adjusted its strategies by introducing new product designs and marketing campaigns for the younger generation. It has also explored growth opportunity overseas, leveraging Confucius Family’s strong reputation. Having reported a 14% revenue decline last year, we model 9%/15%/15% top-line recovery in 2015/16/17E, resulting in a turnaround in net profit of Rmb19mn in 2017E. Overall, for its agriculture and food division, we model an earnings turnaround from a loss of Rmb303mn last year to Rmb104mn and Rmb23mn net loss in 2015E and 2016E, and a profit of Rmb56mn in 2017E. A detailed breakdown is laid out in Exhibit 53.
Exhibit 49: We project sales of blueberry to grow at 41% Exhibit 50: …while kiwifruits should grow at 13% CAGR CAGR in 2014-17E… in 2014-17E Sales volume of blueberry by Joyvio Sales volume of kiwifruits by Joyvio (Tonnes) (Tonnes) 5,000 4,000 3,490 4,196 3,815 3,500 4,000 2,684 3,468 3,000 2,939 2,500 1,917 3,000 2,472 2,000 1,237 2,000 1,500 927 1,000 1,000 500 64 0 0 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 51: Joyvio has a dominant 22.3% market share in Exhibit 52: …and is also the No.1 player in China’s more China’s blueberry retail market (2013)… fragmented kiwifruit retail market (2013) Market share breakdown of blueberry retail sales in China Market share breakdown of kiwifruit retail sales in China
25% 22.30% 1.00% 0.80% 20% 0.80% 0.70% 0.70% 0.60% 15% 0.60% 0.50%
10% 8.30% 0.40% 6.00% 4.80% 5% 3.90% 0.20%
0% 0.00% Joyvio Lanbaoshi Baidi Luohui Yanweidie Joyvio Qingling Qifeng Xingfu Yang Weigao Xiandu
Source: Euromonitor. Source: Euromonitor.
Goldman Sachs Global Investment Research 43 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 53: We expect an earnings turnaround for the agriculture & food division of Legend in 2017E Key financials of agriculture & food division
Agricultural & Food YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 974 1,688 1,532 1,750 2,065 2,408 73% -9% 14% 18% 17% 16% - Joyvio 63 387 410 533 665 799 511% 6% 30% 25% 20% 25% - Funglian Holdings 911 1,298 1,121 1,217 1,399 1,609 43% -14% 9% 15% 15% 13%
Reported gross profit (post D&A) 341 577 523 674 817 961 70% -9% 29% 21% 18% 22% - Joyvio 28 114 130 211 270 333 311% 14% 63% 28% 23% 37% - Funglian Holdings 313 460 393 463 546 628 47% -15% 18% 18% 15% 17%
Gross profit margin 35.0% 34.2% 34.2% 38.5% 39.6% 39.9% - Joyvio 43.8% 29.4% 31.6% 39.6% 40.6% 41.6% - Funglian Holdings 34.4% 35.4% 35.1% 38.1% 39.1% 39.1%
SG&A (386) (669) (1,344) (650) (683) (717) 73% 101% -52% 5% 5% -19% Consolidated EBIT (subsidiaries) (46) (92) (821) 24 134 245 100% 797% -103% 449% 82% -167% - Joyvio (95) 11 60 112 - Funglian Holdings (106) 13 74 132 - Impairment (621) - - -
EBIT margin -4.7% -5.4% -53.6% 1.4% 6.5% 10.2% - Joyvio -23.1% 2.1% 9.1% 14.1% - Funglian Holdings -9.4% 1.1% 5.3% 8.2%
Profit of associates and JCEs - 0 1 1 1 1 Total EBIT (incl. associates and JVs) (46) (91) (820) 25 135 246 99% 799% -103% 432% 81% -167%
Investment income and gains - (1) 7 (1) - - Other income and gains/(losses) - - 45 43 37 36
Finance income 6 10 7 7 7 7 Finance costs (10) (126) (200) (208) (210) (211) Net finance cost (3) (116) (192) (200) (202) (204) 3233% 65% 4% 1% 1% 2%
Pre-tax profit (49) (209) (960) (133) (29) 77 324% 359% -86% -78% -362% -143% Income tax expense (24) 8 12 20 4 (15) -133% 47% 68% -78% -450% -209% Implied effective tax rate -48.8% 3.9% 1.2% 15.0% 15.0% 20.0% Total profit before MI (73) (201) (948) (113) (25) 62 174% 372% -88% -78% -347% -140% Exceptionals - - (621) - - - Total core profit before MI (73) (201) (328) (113) (25) 62 174% 63% -66% -78% -347% -157%
Minority interest 5 25 67 9 2 (6) Net profit attributable to Legend (68) (176) (882) (104) (23) 56 159% 400% -88% n.a. -341% n.a. - Joyvio - (89) (84) (32) (0) 37 - Funglian Holdings - (87) (219) (72) (23) 19 - Impairment loss and others - - (579) - - -
Core profit attributable to Legend (68) (176) (303) (104) (23) 56 159% 72% -66% n.a. -341% n.a. - Joyvio (89) (84) (32) (0) 37 - Funglian Holdings (87) (219) (72) (23) 19
Capex 563 580 297 80 108 49 3% -49% -73% 35% -55% -45% Source: Company data, Goldman Sachs Global Investment Research.
(6) Chemical and energy (4% of GAV, -3% of earnings) Legend has two subsidiaries in this division including a 90% interest in Levima and a 50.77% interest in Phylion Battery. They represented 4% of the group’s total assets in 2014 and we expect them to contribute 4% of 2015E GAV. Stripping out the Rmb477mn impairment loss for Zhongyin Electric Chemical under Levima, this division generated a net loss of Rmb270mn last year as its high-end olefin production facilities are not in operation yet.
Levima focuses on high-end chemical products; Phylion on lithium-ion batteries Legend started off its chemical business by acquiring Jining Zhongyin Electrochemical in 2010, which produces chlor-alkali products such as caustic soda, cyclohexanone, paste PVC resin and chlorparaffin. In 2012, it acquired Shenda and Haoda Chemicals which began the construction of their production facilities. Both focus on high-end olefin products used for the production of foam materials, PV film, hot melt glue, wire and cable materials, coating materials, agricultural film and package film (Exhibit 54). Shenda’s facilities are completed and undergoing trial operations, while Haoda’s EVA production facilities are scheduled for completion in 3Q15. All three companies are grouped under Levima, which Legend incorporated with an initial capital of Rmb400mn and extended Rmb3.3bn shareholder loans.
Goldman Sachs Global Investment Research 44 August 1, 2015 Legend Holdings (3396.HK)
China’s chemical industry is transforming from one dominated by commoditized products to one with more specialized, higher value-added chemicals, as robust economic growth, rising income and urbanization all support growing demand for downstream applications. Euromonitor forecasts China’s production volume of PP, EVA and EO will grow at 13%, 12% and 16% CAGR in 2014-18 respectively (Exhibit 56). The government’s emphasis and favorable policies toward environmental-friendly products also encourage technological investments by Chinese chemical producers, which lag behind that of other developed countries. Levima believes its high-end olefin products produced through the more environmental-friendly deep catalytic cracking process are positioned for such opportunities. It also sees itself having the following competitive advantages: (1) lower costs from centralized procurement and as a result of the location of its production facilities in an area with many suppliers of methanol, a key raw material for its PP, EVA and EO products; (2) access to advanced technologies by leveraging Legend’s relationship with CAS. Its research center in Changzhou has developed over 100 products, 46 of which were approved for industrial use; and (3) low cost financing provided by its parentco in the form of shareholder loans. For Phylion Battery in which the group has invested Rmb171mn, the company was founded in 2013 and produces lithium-ion batteries used mainly in electric bicycles (E- bikes) and vehicles. Its products are sold both domestically and overseas (Exhibit 57); main clients include the top three E-bike producers in China, i.e., Aima, Yadea and Sunra. Its production facilities have a designed annual capacity of 370 megawatt-hours. For its 50.77% interest, Phylion Battery contributed Rmb10mn net profit to the group last year. Overall, we model the divisional net loss to narrow from Rmb279mn last year to Rmb195/66/8mn in 2015/16/17E, driven by: (1) ramp-up of Shenda and Haoda’s production facilities, which we expect to generate Rmb1.5bn/3.3bn revenue in 2015/16; and (2) increased contribution from Phylion Battery which we project would double its earnings from Rmb22mn last year to Rmb39mn this year.
Exhibit 54: Production process of major products Exhibit 55: Major products and capacity of Levima Foam materials Annual Propylene/ PP unit PP Capacity C3 PV film Unit Product (Tonnes) Polypropylene ("PP") 200,000 DMTO Hot melt glue unit EVA unit Shenda Chemicals Ethylene 170,000 C4 and C5 60,000 Ethylene/ EVA Wire and cable Methanol materials Ethylene-Vinyl acetate ("EVA") 100,000 C2 EO EO Haoda Chemicals Ethylene oxide ("EO") 120,000 EO unitEO derivatives Coating EO derivatives 120,000 unit Derivatives Caustic soda 300,000 Agricultural film Cyclohexanone 60,000 C4 and C5 Zhongyin Electrochemical Packaging film Paste PVC resin 40,000 Chlorparaffin 40,000 Source: Company data. Source: Company data.
Exhibit 56: Euromonitor expects PP, EVA and EO markets Exhibit 57: Geographical sales breakdown of Phylion to grow at 13%/12%/16% CAGR in 2014-18 (unit, 2014) Overall market size of key chemical products in China 09-14 14-18 North ('000 tonnes) 2012 2013 2014 2015 2016 2017 2018 CAGR CAGR Others, America, Polypropylene (PP) 11,090 12,539 14,332 16,671 18,855 21,042 23,188 12% 13% 190,000, 10% Ethyl Vinyl Acetate (EVA) 313 295 323 357 398 448 506 6% 12% 250,000, 13% Ethylene Oxide (EO) 1,484 1,903 2,331 2,790 3,267 3,744 4,200 26% 16% Polythylene glycol (PEG) 92 99 107 118 131 148 171 5% 12% Surfactants 653 789 809 875 935 990 1,041 15% 6%
YoY% China, Polypropylene (PP) 14% 13% 14% 16% 13% 12% 10% 510,000, Europe, Ethyl Vinyl Acetate (EVA) 18% -6% 10% 11% 11% 12% 13% 27% Ethylene Oxide (EO) 25% 28% 22% 20% 17% 15% 12% 950,000, 50% Polythylene glycol (PEG) 2% 8% 8% 10% 11% 13% 16% Surfactants 23%21%3%8%7%6%5%
Source: Euromonitor. Source: Company data.
Goldman Sachs Global Investment Research 45 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 58: We model the chemicals and energy materials divisional net loss for Legend to narrow from Rmb279mn last year to Rmb195mn/66mn/8mn in 2015E/16E/17E Key financials of chemicals and energy materials division
Chemicals YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 1,461 1,282 1,909 3,579 5,502 5,889 -12% 49% 88% 54% 7% 46% - Chemical business 1,253 1,089 1,609 3,189 5,074 5,427 -13% 48% 98% 59% 7% 50% - Zhongyin Electrochemical 734 623 1,264 1,328 1,394 1,464 -15% 103% 5% 5% 5% 5% - Shenda and Haoda - - - 1,500 3,300 3,564 n.a. n.a. n.a. 120% 8% n.a. - Others 519 466 345 362 380 399 -10% -26% 5% 5% 5% 5% - Energy material 208 193 300 389 428 463 -7% 55% 30% 10% 8% 16%
Reported gross profit (post D&A) 229 103 94 361 803 894 -55% -9% 283% 122% 11% 112% - Chemical business 25 256 686 765 n.a. n.a. 906% 168% 12% 211% - Zhongyin Electrochemical 25 40 56 59 n.a. n.a. 58% 40% 5% 32% - Shenda and Haoda - 213 624 698 n.a. n.a. n.a. 194% 12% n.a. - Others 0 4 6 8 n.a. n.a. 2159% 55% 39% 265% - Energy material 69 105 118 130 n.a. n.a. 53% 12% 10% 23%
Gross profit margin 16% 8% 5% 10% 15% 15% - Chemical business 0% 0% 2% 8% 14% 14% - Energy material 0% 0% 23% 27% 28% 28%
SG&A (265) (257) (733) (329) (372) (392) EBITDA 126 19 (453) 359 917 989 EBITDA margin 9% 2% -24% 10% 17% 17% Depreciation & amortization (162) (173) (186) (326) (486) (486)
Consolidated EBIT (subsidiaries) (36) (153) (639) 32 431 502 - Chemical business (205) (45) 342 403 - Zhongyin Electrochemical (155) (149) (143) (150) - Shenda and Haoda - 153 534 603 - Others (50) (49) (49) (50) - Energy material 43 78 89 99 - Impairment loss (477) - - -
EBIT margin -2%-12%-33%1%8%9% - Chemical business -13% -1% 7% 7% - Zhongyin Electrochemical -12% -11% -10% -10% - Shenda and Haoda 0% 10% 16% 17% - Others -14% -13% -13% -12% - Energy material 14% 20% 21% 21%
Profit of associates and JCEs ------Total EBIT (incl. associates and JVs) (36) (153) (639) 32 431 502 324% 316% n.m. 1233% 17% n.m.
Investment income and gains 3 - (2) (2) (2) (2)
Finance income 91 133 57 118 118 118 Finance costs (119) (227) (170) (351) (587) (578) Net finance cost (28) (94) (113) (233) (469) (459)
Pre-tax profit (62) (248) (754) (203) (40) 41 301% 204% -73% -80% n.m. n.m. Income tax expense (12) 19 (15) 20 6 (6) Implied effective tax rate -20% 8% -2% 10% 15% 15% Total profit before MI (74) (228) (769) (182) (34) 35 Exceptionals (before MI) - - (477) - - - Total core profit before MI (74) (228) (291) (182) (34) 35
Minority interest 7 23 60 (12) (31) (42) Net profit attributable to Legend (67) (206) (709) (195) (66) (8) 209% 245% -73% -66% -88% -78% - Chemical business - - (301) (234) (111) (58) n.a. n.a. -22% -53% -47% -42% - Energy material - - 22 39 45 50 n.a. n.a. 82% 15% 12% 32% - Exceptionals - - (429) - - -
Core profit attributable to Legend (67) (206) (279) (195) (66) (8) 209% 36% -30% -66% -88% -70% - Chemical business - - (301) (234) (111) (58) n.a. n.a. -22% -53% -47% -42% - Energy material - - 22 39 45 50 n.a. n.a. 82% 15% 12% 32%
Capex 1,682 2,532 3,339 1,500 600 60 51% 32% -55% -60% -90% -74%
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 46 August 1, 2015 Legend Holdings (3396.HK)
(7) Financial investments (24% of GAV, 58% of earnings) Financial investment is another driver of Legend’s long-term growth and it goes hand-in- hand with the six segments of strategic investments. These investments together represented 11% of the group’s total assets in 2014 and we expect them to represent 24% of its 2015E GAV.
Legend Capital – A venture capital fund founded by group president, Mr. Zhu Linan, in 2001 focusing primarily on TMT, healthcare, consumer goods and service industries. As of end-2014, it managed six USD funds and three Rmb funds with a total commitment of US$1.63bn and Rmb7.19bn respectively by investors from fund-of- funds, family funds, banks and other financial institutions domestically and overseas. Since its establishment, Legend Capital has invested in over 200 enterprises and exited its investments in 39 companies with an average IRR of approximately 43%.
Hony Capital – A private equity fund set up in 2003 by group executive VP, Mr. John Zhao, focusing on consumer goods and services, advanced manufacturing, healthcare, retailing and other service industries. The five USD and three Rmb funds it manages have a total commitment of US$4.46bn and Rmb16bn respectively as of end-2014. Investors include pension funds, insurance companies, endowments in overseas countries, and large Chinese state-owned institutions. Similar to Legend Capital, it has a track record of achieving an average IRR of over 30% for the 23 companies it has exited, out of 80+ completed transactions.
Legend Star – Founded in 2008, Legend Star is an angel investor assisting startup companies with funding, concept commercialization, talent recruitments, training and other resources. It has invested Rmb343mn in 63 projects domestically and HK$62mn in 16 projects overseas. It also offers management of the startups platform supports in cooperation with other angel investors and local governments, as well as entrepreneur trainings, seminars and lecture sessions led by Chairman Mr. Liu Chuanzhi and other senior members of the group.
Fund investments – The group also invests in its own and other third-party managed funds in different asset classes, e.g., angel investment, PE, VC, quantitative funds etc. Its capital commitment was around Rmb13.8bn including US$1.1bn in USD funds and Rmb5.2bn in Rmb funds as of end-2014.
Legend generates return or income in its financial investments division from a few sources:
Value appreciation and dividend income of LP funds – The group itself has directly invested in all nine funds in Legend Capital and all eight funds in Hony Capital. It also invests in eight other third-party funds (Exhibit 59). These funds receive dividend income from companies they invest in, which they either pass through to investors or reinvest back into the funds. Their value is subject to adjustments at the end of each reporting period based on the valuation of their underlying investments taking into account the cash in and outflows (e.g., calls, distribution). It is recognized in the group’s balance sheet as “associates measured at fair value through P&L”, which increased from Rmb9.7bn at end-2012 to Rmb12.7bn at end-2014.
Management and performance fees as a general partner managing its funds – The group also has 20% equity interest in the general partners of its own managed funds and 10% in Quant Star fund. As the fund manager, it receives: (1) an annual management fee representing 1.0%-2.2% of the AUM; and (2) a carrying fee calculated based on the change in AUM. It recognized Rmb417mn associate profit from running the fund management operation in 2014.
Goldman Sachs Global Investment Research 47 August 1, 2015 Legend Holdings (3396.HK)
Value appreciation from angel investments – Its angel or other private investments recognized under “financial assets at fair value” is also revalued by different valuation methodology where applicable. As of end-2014, they totaled Rmb4.4bn, net of holdings by Lenovo.
Overall, its financial investment division recognized Rmb2.1bn net profit in both 2013-14. Taking into account mark-to-market gains and distributed dividends, we note the value of its financial investments appreciated by 12%-16% in 2013-14 (Exhibits 60-61). For 2015, we model Rmb4.2bn net profit by assuming: (1) HK$5bn investment income from an estimated 35% mark-to-market gain from its LP fund investments, given the strong equity market performance ytd, especially that of the A-share market. For instance, the market cap for one of its investments, NSFOCUS, for which Legend Capital holds a 13.2% stake (source: Bloomberg) has quadrupled ytd, translating into a potential Rmb3bn revaluation gain; (2) nil profit from its fund management operation, which fluctuates year over year depending on whether the group would realize gain from divestment (vs. profit of Rmb417mn in 2014, loss of Rmb164mn/13mn in 2012/13). We also assume the group would pour in more capital into its own funds, as the total capital commitment in Legend Capital and Hony Capital were Rmb17.3bn and Rmb43.7bn respectively, vs. paid-in capital of Rmb12.5bn and Rmb41.1bn as of end-2014. Exhibit 62 lays out the details of its individual funds.
Exhibit 59: Structure of the financial investment division
Fund Investment
Angel Venture capital Private equity Other fund investment
CITIC PE, Zhenghedao, DCM Venture Capital, SBI BB Mobile, Legend Star Legend Capital Hony Capital CDB Investment, Bona Qiushi and Quant Star 100% stake GP/LP GP/LP GP/LP
Total investment Legend's paid-in capital Legend's paid-in capital Legend's paid-in capital HK$61.7mn+Rmb343.2mn US$391mn + Rmb1,554mn US$690mn + Rmb3,473mn US$13mn + Rmb186mn
Legend Capital Hony Capital Business Venture capital investments Private equity investment description Focuses on TMT, healthcare, consumer goods Focused on investments in consumer goods & services, & services industries advanced manufacturing, healthcare and retailing industries
Size 6 USD funds with total commitment of US$1.63bn 5 USD funds with total commitment of US$4.46bn 3 Rmb funds with total commitment of Rmb7.19bn 3 Rmb funds with total commitment of Rmb16.03bn
Solid investment Invested in 200+ companies Completed 80+ transactions capacity Exited 39 investments Exited 23 investments
Other financial investment
√ Equity investment in private & listed companies in China and overseas √ Plans to expand investments to other alternative products √ Book value as of 2014 - Rmb2,210.1mn + US$75.2mn √ Initial cost of investments as of 2014 - Rmb1,523mn and US$28mn
Source: Company data.
Goldman Sachs Global Investment Research 48 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 60: We note the value of Legend’s financial Exhibit 61: …and 16% in 2014 investments appreciated by 12% in 2013… Performance in 2014 Performance in 2013
NASDAQ 38.3% CSI300 51.7% Performance of Legend's financial S&P 500 29.6% 16.2% investments
DOW 26.5% NASDAQ 13.4% Performance of Legend's financial 12.3% S&P 500 11.4% investments
Hang Seng Index 2.9% DOW 7.5%
MSCI China 0.4% MSCI China 4.7%
CSI300 -7.6% Hang Seng Index 1.3%
-10% 0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50% 60% Source: Bloomberg, Goldman Sachs Global Investment Research. Source: Bloomberg, Goldman Sachs Global Investment Research.
Exhibit 62: Legend invested in a total of nine fund groups as of 2014 Details of the fund groups invested by Legend
Commen Fai value of Legend's Fund Legend's -cement End Total paid-in Legend's total Legend's total paid- Legend's effective Group Fund Type role date date Total commitment capital commitment in capital investment stake USD funds Hony International Ltd USD funds GP/LP NA NA US$29mn US$29mn Rmb73mn 40.00% Hony Capital II, L.P. USD funds GP/LP Jul-2004 Aug-2014 US$87mn US$87mn Rmb510mn 41.38% Hony Capital Fund III, L.P. USD funds GP/LP Sep-2006 Nov-2016 US$580mn US$613mn Rmb2,162mn 34.48% US$484mn US$391mn Hony Capital Fund 2008, L.P. USD funds GP/LP May-2008 Jun-2018 US$1,398mn US$1,583mn Rmb1,106mn 14.31% Hony Capital Fund V, L.P. USD funds GP/LP Aug-2011 Dec-2021 US$2,368mn US$1,850mn Rmb1,368mn 10.98% Hony Capital Sub-total US$4,462mn US$4,162mn
RMB funds Hony Investment Industry Fund I (Tianjin) L.P. Rmb funds GP/LP Apr-2008 Apr-2018 Rmb5,026mn Rmb4,995mn Rmb1,120mn 29.84% Hony Capital Rmb Fund 2010, L.P. Rmb funds GP/LP Oct-2010 Oct-2018 Rmb9,965mn Rmb9,315mn Rmb1,634mn 20.07% Rmb2,483mn Rmb1,554mn Hony Capital Mezzanine RMB Fund I, L.P. Rmb funds GP/LP May-2013 Sep-2016 Rmb1,040mn Rmb1,034mn n.a. n.a. Sub-total Rmb16,031mn Rmb15,344mn
USD funds LC Fund I USD funds GP/LP NA NA US$35mn US$41mn n.a. n.a. LC Fund II USD funds GP/LP NA NA US$60mn US$60mn n.a. n.a. LC Fund III, L.P. USD funds GP/LP Apr-2006 Apr-2015 US$170mn US$170mn Rmb813mn 49.41% LC Fund IV, L.P. USD funds GP/LP Apr-2008 Apr-2018 US$350mn US$369mnUS$708mn US$690mn Rmb764mn 29.77% LC Fund V, L.P. USD funds GP/LP May-2011 May-2021 US$515mn US$413mn Rmb760mn 19.42% Legend LC Fund VI. L.P. USD funds GP/LP Jan-2014 Apr-2024 US$500mn US$182mn Rmb275mn 23.20% Capital Sub-total US$1,630mn US$1,235mn
RMB funds Beijing Junlian Ruizhi Venture Capital Center L.P. Rmb funds GP/LP Sep-2009 Sep-2017 Rmb1,000mn Rmb961mn Rmb418mn 31.00% Tianjin Junruiqi Equity Investment L.P. Rmb funds GP/LP Mar-2011 Mar-2019 Rmb3,632mn Rmb3,294mn Rmb1,176mn 31.67% Rmb3,610mn Rmb3,473mn Beijing Junlian Maolin Private Equity Partnership L.P. Rmb funds GP/LP Sep-2014 Sep-2022 Rmb2,558mn Rmb552mn n.a. n.a. Sub-total Rmb7,190mn Rmb4,807mn
Others CITIC PE Rmb funds LP Rmb200mn Rmb170mn Zhenghedao Partnership Rmb funds LP Rmb30mn Rmb12mn DCM Venture Capital USD funds LP US$1mn US$0.15mn Rmb499mn SBI BB Mobile Investment LPS USD funds LP US$10mn US$10mn China Development Bank Investment USD funds LP US$10mn US$3.20mn Bona Qiushi Rmb funds LP Rmb4mn Rmb4mn Quant Star Rmb funds GP/LP Rmb12mn -
Total - USD funds US$1,213mn US$1,094mn Total - RMB funds Rmb6,339mn Rmb5,213mn Total in US$mn US$2,235mn US$1,935mn
Source: Company data.
Goldman Sachs Global Investment Research 49 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 63: We model Rmb4.2bn net profit in 2015E for Legend’s financial investments division by assuming 35% mark- to-market gain from its LP fund investments Key financials of financial investment division
Financial investment YoY% 14-17E Rmb mn 2012 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E CAGR
Total revenue 4,619 101 43 43 43 43 -98% -58% 0% 0% 0% 0%
Consolidated EBIT (subsidiaries) (991) (239) (153) (153) (153) (153) -76% -36% 0% 0% 0% 0% Profit of associates and JCEs (164) (13) 417 - - - Total EBIT (incl. associates and JVs) (1,156) (252) 264 (153) (153) (153) -78% n.m. n.m. 0% 0% n.m.
Investment income and gains 1,027 2,549 2,491 5,691 2,781 3,131 148% -2% 128% -51% 13% 8% - Fair value change 505 457 (1,682) 4,839 1,577 1,782 - Disposal gain (288) 319 157 - - - - Dividend income 810 1,774 4,016 853 1,204 1,349
Pre-tax profit (128) 2,297 2,755 5,538 2,628 2,978 n.m. 20% 101% -53% 13% 3%
Income tax expense (387) (190) (642) (1,385) (657) (744) -51% 238% 116% -53% 13% 5% Implied effective tax rate n.a. 8% 27% 25% 25% 25% Total profit before MI (515) 2,107 2,113 4,154 1,971 2,233 n.m. 0% 97% -53% 13% 2%
Net profit attributable to Legend (515) 2,107 2,113 4,154 1,971 2,233 n.m. 0% 97% -53% 13% 2% Core profit attributable to Legend (515) 2,107 2,113 4,154 1,971 2,233 n.m. 0% 97% -53% 13% 2%
Return on equity (ROE) -2.2% 8.9% 6.9% 11.6% 5.2% 5.5%
Capex 356 0 12 12 12 12
LP investments 722 2,164 1,050 979 1,051 200% -51% -7% 7% -21% - New LP investments - - 590 329 323 - Reinvestment of dividends received 722 2,164 461 650 728
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 50
August 1, 2015 Goldman Sachs Global Investment Research Exhibit 64: SWOT analysis for each division
Strengths Weaknesses Opportunities Threats Strategic investments
● Strong track record and brand recognition ● Concentration on hardware manufacturing historically ● Acquisition of Motorola Mobility and IBM's x86 server ● Pricing competition in a shrinking PC market with competition ● Leading PC maker globally ● A late entrant into the handset market with 5% smartphone businesses could strengthen its competitiveness in mobile and from smartphones and tablets IT (Lenovo) ● Cost advantage with its scale and much overlap between its market share (or 7% post acquisition of Motorola) enterprise segments ● Fierce competition with incumbents (e.g., Apple, Samsung) in laptop and desktop businesses ● Lower penetration in overseas PC market when smaller the handset market as Lenovo tries to expand its market share players exiting.
● Decentralized management structure and localized teams with ● Landbank concentration in second (67%) and third (23%) tier ● Potential volume recovery and price stabilization in China ● 26% of Raycom's unsold landbank is industrial park which more market insights in project management cities, especially Chongqing, Kunming, Hefei and Daqing which property market depends on government planning in the future Property (Raycom) ● Ability to leverage on Legend brand to attract local partner to together account for 63% of Raycom's landbank ● Potential policy easing in some second-tier cities where most acquire quality landbank at reasonable price of Raycom's landbank are located
Financial Services Zhengqi Union Insurance (UIB) Lakala Hankou Bank ● Diversified platform for SME financing services supported by ● UIB and Lakala are loss-making due to their expansion into ● Unfulfilled demand for individual and SME financing ● Tough operating environment for regional banks due to macro Suzhou Trust Anhui government new businesses. ● Rapid growth in demand for insurance, wealth management slowdown which resulted in higher bad debt provision for Hankou ● UIB has dominant market position in China's education-related ● Zhengqi has relative short operating history. Bad debt and risk and trust products with aging population and rising disposable Bank in 2014 insurance brokerage management are important income in China ● Increasing competition in the SME short-term financing market Modern services ● Lakala is a dominant third-party payment provider in China with ● Potential growth in payment service industry with increasing CAR payment and community O2O services card payment transactions in China
Bybo Zeny ● Strong brand recognition for CAR and Bybo, both leading ● Bybo relies heavily on M&A to expand. It is still loss-making ● Growth potential from rising disposable income and transition ● Competition of dental treatment services from general EnsenCare players in their industries ● EnsenCare is a new startup and only commences operation from manufacturing to service-oriented economy hospitals which charge lower price vs. private dental chains ● Legend's capability to identify new opportunities and later this year ● Most of the service industries it is in are relatively ● Uncertainty in cold chain industry's growth in China could affect A developing existing businesses by providing them with unpenetrated. Legend could leverage on its operational the pace of turnaround for Zeny management and financing supports experience to consolidate and gain market share in these markets. griculture and food
Joyvio ● Premium quality for Joyvio's kiwifruit and blueberry, which ● Both Joyvio and Funglian are still loss-making - we expect ● Growing demand for quality products with more emphasis on ● Competition in the Kiwifruit market in China due to its ranked No. 1 by retail sales in China Funglian to turnaround by 2016E and Joyvio by 2017E food safety. This provides opportunity for Joyvio as a premium fragmented market structure (The No. 1 seller Joyvio accounts ● Most of Joyvio's plants have just started to bear fruits, ● Most brands are only popular in their regional markets with less fruit producer for only 0.8% market share) suggesting strong growth in production volume in next few years nationwide presence ● Strong regional brands to capture private consumption demand ● Any further austerity measure may negatively impact sales Funglian ● Strong brand name in local markets for Funglian's four liquor for liquor volume for Funglian brands ● Competition from other alcohol drinks, e.g., red wine, etc.
Chemicals and ener gy materials ● Levima focuses on high-end olefin products produced through ● Levima - (1) lower costs from centralized procurement and as ● Zhongyin Electrochemical (chlor-alkali business) is loss more environmentally-friendly deep catalytic cracking● Potential process competition in the two markets - high-end olefin Chemical business (Levima)a result of the location of its production facilities in an area with making. Its new plants Shenda and Haoda which focus on high- are well positioned for the below two trends - products and lithium-ion batteries many suppliers of methanol; (2) access to advanced end olefin products will only start in 2015 ◦ Transformation of China’s chemical industry from● Potential one rise in raw material cost which could negatively affect technologies by leveraging on Legend’s relationship with CAS; dominated by commoditized products to one with moreprofitability (3) low cost financing provided by its parentco in the form of specialized, higher value-added chemicals shareholder loans Energy material (Phylion Battery)● Phylion's lithium-ion batteries enjoy leading market share ◦ Government’s emphasis and favorable policies toward among top E-bike producers in China (>50% share) environmental-friendly products
Financial investments
● Strong investment team with solid track record. A median IRR ● Cash uplift to parentco may be volatile and depends on capital ● Both Legend and Hony Capital focuses on TMT, healthcare, ● Competition in terms of deal sourcing as most VC/PE funds of over 43% market condition, which also affects their secondary market consumer goods & services industries and advanced focus on similar sectors ● Leverage on Legend brand for deal sourcing. Provide support investments and PE/VC project manufacturing, which could benefit from China's economic Financial investments for invested companies transformation. ● Legend is an LP in each limited partnership fund and holds interests in each GP of funds structured as limited partnerships. Legend Holdings (3396.HK)
Source: Goldman Sachs Global Investment Research.
51
Financials
Even though Legend holds 30.6% voting rights in Lenovo, the group does not have full control on its cashflow and earnings stream, but only receives the dividend it distributes. In addition, its financial investments are recognized as associates, the value of which is subject to mark-to-market adjustment which may not be reflective of the actual cashflow.
13% earnings CAGR in 2014-17E driven by IT and the turnaround of a number of other businesses Legend’s earnings trajectory has been volatile over the last three years, driven by various exceptional items including impairment losses for non-financial assets, disposal gains, forex gain/loss etc. Of the Rmb1.36bn exceptional loss in 2014, for example, Rmb1.8bn loss was related to impairment loss for its property projects and writedown of goodwill for its Chinese liquor and chemical businesses. The group also recognized Rmb1.6bn dilution gain from CAR’s listing in 2014, Rmb650mn gain from disposal of interests in Lakala and UIB (Exhibit 65). Excluding all these exceptionals, group core net profit increased from Rmb1.43bn in 2012 to Rmb5.5bn in 2014, driven by: (1) increased contribution from Lenovo, financial services and property divisions helped by new acquisitions (e.g., lending businesses by Zhengqi in late-2012); (2) turnaround of its financial investments from a loss of Rmb515mn in 2012 to a profit of Rmb2.1bn in 2014 as its funds appreciated in value along with monetization of underlying investments (e.g., listing of iDreamSky in August 2014), offset by (3) widened loss from modern services, agricultural & food, chemical & energy divisions as the group invested more to expand into new areas (e.g., new production facilities by Levima).
Looking ahead, we model its core net profit to jump to Rmb6.7bn/Rmb6.2bn in 2015E/2016E, then rising to Rmb8.1bn in 2017E, with greater contribution from its strategic investments accounting for 76% of group total in 2017E (up from 52% in 2014), driven by gradual turnaround of its loss-making businesses (e.g., UIB under financial services, Joyvio and Funglian under food & agriculture, Bybo under modern services, and Levima under chemical & energy). As discussed earlier, our Asia-Pacific technology research team projects 22% earnings CAGR (2014-17E) for Lenovo with successful integration and financial turnaround of Motorola Mobility and IBM’s x86 enterprise server businesses acquired late last year. We also forecast its property arm, Raycom, to register a steady 1% earnings CAGR (2014-17E) driven by increasing rental income from its investment property (i.e., Raycom Info Center B) completed this year and 3% annual growth in residential sales. As for its financial investments division, we believe its earnings contribution would be choppy, since the majority is attributed to mark-to-market gain based on the fair value of its funds and investments. Note that the group also received Rmb606mn, Rmb1.1bn and Rmb1.3bn government grants in 2012, 2013 and 2014 respectively primarily for its IT, chemical and energy businesses. We model a steady Rmb1.3bn government grant in 2015E-17E. We also pencil in Rmb1.1bn property revaluation gain for Raycom Info Tech Center and Rmb400mn gain from the 15% share placement by Lakala in 2015E.
Exhibit 65 sets out the group’s earnings breakdown by division and business. Please refer to the “Growth strategies and outlook by divisions” section in this report for detailed drivers for each division.
August 1, 2015 Legend Holdings (3396.HK)
Exhibit 65: We model 13% core earnings CAGR for Legend in 2014-2017E, driven largely by Lenovo as well as the gradual turnaround of its currently loss-making businesses Earnings breakdown by division
12-14 14-17E (Rmb mn) 2012 2013 2014 2015E 2016E 2017E CAGR CAGR Core net profit Strategic investment 2,425 2,790 2,886 2,950 4,455 6,097 9% 28% IT 1,131 1,497 1,669 1,430 2,133 3,017 21% 22% Financial Servcies 247 565 523 671 894 1,079 46% 27% Modern services 300 96 (121) 25 323 502 n.a. n.a. Agriculture and food (68) (176) (303) (104) (23) 56 111% n.a. Property 882 1,014 1,397 1,123 1,193 1,450 26% 1% Chemicals and energy materials (67) (206) (279) (195) (66) (8) 105% n.a. Financial Investment (515) 2,107 2,113 4,154 1,973 2,235 n.a. 2% Unallocated (1,083) 955 250 (386) (230) (272) n.a. n.a. Total core net profit 1,432 5,755 5,522 6,717 6,197 8,060 96% 13% YoY% 302% -4% 22% -8% 30%
% breakdown Strategic investment 169% 48% 52% 44% 72% 76% IT 79% 26% 30% 21% 34% 37% Financial Servcies 17% 10% 9% 10% 14% 13% Modern services 21% 2% -2% 0% 5% 6% Agriculture and food -5% -3% -5% -2% 0% 1% Property 62% 18% 25% 17% 19% 18% Chemicals and energy materials -5% -4% -5% -3% -1% 0% Financial Investment -36% 37% 38% 62% 32% 28% Unallocated -76% 17% 5% -6% -4% -3% Total core net profit 100% 100% 100% 100% 100% 100%
Total exceptionals 856 (918) (1,361) 1,500 - - Investment gain/(loss) from financial services - - 553 - - - Change in fair value of preferred shares of CAR's parentco under modern services (17) (298) (413) - - - Gain from CAR's IPO - - 1,646 - - - Impairment loss from Funglian - - (579) - - - Impairment loss from Raycom - - (755) - - - Fair value gain from investment property 622 202 249 1,100 - - Impairment loss for Zhongyin Electrochemical - - (429) - - - De-recognition of contigent consideration 125 - - - - - Losses on disposal of PP&E and intangible assets (17) (35) (274) - - - Net foreign exchange losses (155) (408) (1,020) - - - Others 297 (378) (340) 400 - -
Reported net profit Strategic investment 3,030 2,693 3,158 4,450 4,455 6,097 2% 25% IT 1,131 1,497 1,669 1,430 2,133 3,017 21% 22% Financial Servcies 247 565 1,076 1,071 894 1,079 109% 0% Modern services 282 (203) 1,112 25 323 502 98% -23% Agriculture and food (68) (176) (882) (104) (23) 56 260% n.a. Property 1,504 1,216 891 2,223 1,193 1,450 -23% 18% Chemicals and energy materials (67) (206) (709) (195) (66) (8) 226% n.a. Financial Investment (515) 2,107 2,113 4,154 1,973 2,235 n.a. 2% Unallocated (227) 37 (1,111) (386) (230) (272) 121% n.a. Total reported net profit 2,288 4,838 4,160 8,217 6,197 8,060 35% 25%
Source: Company data, Goldman Sachs Global Investment Research.
Group FCF to turn positive in 2017E As far as cashflow is concerned, the group was running in negative FCF over the past three years, due to: (1) sizeable acquisitions made by its subsidiaries, e.g., Motorola Mobility and IBM’s x86 businesses by Lenovo, Bybo in the modern services division; and (2) a cumulative Rmb21bn capex for business expansion across divisions in 2012-2014 (e.g., construction of chemical production facilities by Levima, more seedlings and plantings by Joyvio). Its working capital was also negative, as Raycom spent more in acquiring and completing its residential and rental projects than the amount of cash inflow it received from property sales. If we deconsolidate Lenovo and only account for dividend receipts, we estimate Legend holdco still incurred a negative FCF of Rmb11.2bn, Rmb2.6bn and Rmb5bn in 2012, 2013 and 2014 respectively. Segregating its FCF by division shows that financial services was the only one that was self-funded last year among its strategic investments (Exhibit 9).
Goldman Sachs Global Investment Research 53 August 1, 2015 Legend Holdings (3396.HK)
Based on the existing project pipeline and capex plans, we expect the group as a whole to turn positive FCF in 2017. Taking into account dividends to be declared (we model Rmb570mn based on the same earnings payout of 8% as in 2014), we estimate Legend’s consolidated net debt would peak at Rmb51.7bn at end-2016E, implying 38% net debt to net capital ratio. If we were to deconsolidate Lenovo, we estimate its net debt to net capital ratio would potentially reach 41% at end-2015E, in line with that of Fosun (40%-50% in 2012-2014).
Group EBITDA more than double till 2017 – We forecast group EBITDA would grow at a 26% CAGR from Rmb12.0bn in 2014 to Rmb23.8bn in 2017, mainly driven by Lenovo —our Asia-Pacific technology research team projects its EBITDA to double from Rmb9.8bn to Rmb18.3bn. Raycom and financial services would also be key contributors, with EBITDA posting 4% and 23% CAGR (2014-17E) to Rmb3.5bn and Rmb0.9bn respectively.
Capex to peak this year, then falling gradually – We project group capex to rise further from Rmb9.1bn in 2014 to Rmb14.7bn in 2015E, before falling gradually to Rmb4bn in 2017E. Among all, our Asia-Pacific technology research team expects Lenovo to incur higher capex this year due to new plant development, expansion of existing plants, as well as R&D centers to facilitate the integration of Motorola and x86 server businesses. For other divisions, except for modern services where Bybo plans to step up its expansion with a target of 200 dental chain outlets by 2017 (source: Legend website) vs. 75 last year, most are expected to incur less capex this year onwards. For instance, we model capex at the chemical & energy division would fall from Rmb3.3bn in 2014 to Rmb1.5bn this year then Rmb600mn in 2016, as the construction of Levima’s production facilities would be completing soon. We also model around Rmb1.2bn annual contribution into financial investments to fulfill the outstanding capital commitment of its funds. Legend Capital and Hony Capital, for example, have received Rmb53.4bn paid-in capital as of end-2014, vs. Rmb60.7bn commitment for all its funds.
Balance sheet and debt profile Similar to other investment groups, Legend also takes advantage of its sizeable capital base and better credit profile to secure cheaper funds, and provide financial guarantees and/or shareholder loans to its portfolio companies, many of which would have been charged higher interests if borrowing on their own at early stages of development, in our view. In some cases, by extending them shareholder loans as opposed to outright equity injection, Legend also allows the founders or shareholders of the invested companies to retain more equity interest as an incentive for them to grow and manage their companies. As of end-2014, the outstanding shareholder loans extended by Legend amounted to Rmb9.34bn (Exhibit 66). It also provides financial guarantees for Rmb4.42bn bank loans, primarily to CAR.
In terms of debt profile, of its Rmb76.1bn total borrowing at end-2014, Rmb19.6bn or 26% are due within a year, Rmb16.5bn due within two years and Rmb37bn within five years. These include Rmb21bn bonds with 3-10 years of maturity and the remaining Rmb55bn mostly bank loans with interest rates ranging from 1.26% to 13.56% (or an average of 8%). At the holdco level, the group had Rmb22.2bn net debt at end-2014 (Rmb76.1bn total debts, Rmb42.0bn cash, Rmb9.34bn shareholder loans to portfolio companies). According to the company, the key covenants for its external borrowings include: (1) interest cover no less than 2x, vs. 5.1x at end-2014; (2) no change in CAS Holdings’ ownership in the group.
Goldman Sachs Global Investment Research 54 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 66: Legend has extended Rmb9.34bn shareholder Exhibit 67: Rmb19.6bn out of the total Rmb76.1bn debt loans to its portfolio companies; it has also provided will be due in one year Rmb4.42bn financial guarantees primarily to CAR Total borrowing breakdown Shareholder loans and financial guarantee provided to related parties
(Rmb mn) 2012 2013 2014 (Rmb mn) 2012 2013 2014 Shareholder loan n.a. n.a. 9,340 Total borrowings repayable: - Property n.a. n.a. 2,627 - Within 1 year 11,524 13,396 19,571 - Modern services n.a. n.a. 1,256 - After 1 year but wihtin 2 years 8,189 13,768 16,523 - Agriculture & food n.a. n.a. 2,180 - After 2 year but wihtin 5 years 10,334 14,229 36,962 - Chemicals and energy materials n.a. n.a. 3,277 - After 5 years 8,818 4,222 3,065 Total 38,865 45,615 76,121 Financial guarantee provided to related parties - Bank loans 25,289 28,816 42,302 - CAR 2,964 3,694 3,415 - Other loans 6,426 7,416 12,598 - Others 337 450 1,005 - Corporate bond 7,150 9,383 21,220 Total 3,301 4,143 4,420 Holdco net debt / (cash) 14,743 16,993 22,166 Holdco net debt 14,743 16,993 22,166 Consolidated net debt/ (cash) -3,189 6,490 34,137
Source: Company data. Source: Company data.
Goodwill and asset writedown Legend had Rmb56.4bn intangible assets at end-2014, including mining rights, goodwill, trademarks, patent & technology, customer relationship, etc., mostly from its IT division. Of the Rmb29.7bn goodwill, Rmb28.8bn was attributed to past acquisitions conducted by Lenovo, Rmb511mn to Joyvio and Rmb421mn to other businesses. In view of the stagnant growth of China’s liquor industry, it made a Rmb621mn provision in 2014 and had written down its goodwill in Funglian to nil by assuming 3-10% 5-year annual growth rate (vs. 14% previously). It also wrote down the value in Zhongyin Electrochemical by lowering the 5- year growth assumption from 10% to 6% (Exhibit 69).
Exhibit 68: Goodwill accounted for 53% of total Exhibit 69: Legend wrote down goodwill in IT, food and intangible assets as of 2014 chemical divisions by more conservative assumptions Intangibles assets breakdown (2014) Underlying assumptions by Legend in calculating goodwill
2012 2013 2014 Intangible assets = Rmb56.4bn (2014) Growth rate Growth rate Growth rate Customer Others, Mining rights, 5- Long- Disc. Long- Disc. Long- Disc. relationships, Rmb0.1bn, Rmb0.5bn, year termrate 5-year termrate 5-year term rate IT Rmb8.3bn, 0% 1% Trademarks, 15% - China 8% 0% 11% 2% 0% 11% 0% 0% 9% Rmb8.6bn, - Asia Pacific/Latin America -2% 0% 11% -1% 0% 11% -2% 0% 9% 15% - EMEA -1% 0% 11% -2% 0% 11% -5% 0% 9% - North America 0% 0% 11% 0% 0% 11% -1% 0% 9% Softwares, Agriculture and food Patent and Rmb1.3bn, - Chinese liquor 22% 2% 12% 8-15% 0% 14% 3-10% 0% 14% technology, 2% - Agriculture NA NA NA 30% 0% 12% 28% 0% 12% Rmb7.9bn, Chemicals & energy materials - Chlor-alkali business 13% 2% 15% 10% 2% 12% 6% 0% 12% 14%
Goodwill, Rmb29.7bn, 53%
Source: Company data. Source: Company data.
Goldman Sachs Global Investment Research 55 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 70: Summary of Legend’s income statement
(Rmb mn) 2012 2013 2014 2015E 2016E 2017E Total revenue Strategic investment 221,724 243,909 289,471 345,793 366,258 399,184 IT 211,636 230,505 272,344 327,369 345,287 373,883 Financial Servcies 51 997 1,318 937 1,126 1,320 Modern services 58 274 853 1,651 2,357 2,720 Agriculture and food 974 1,688 1,532 1,750 2,065 2,408 Property 7,545 9,162 11,515 10,507 9,922 12,963 Chemicals and energy materials 1,461 1,282 1,909 3,579 5,502 5,889 Financial Investment 4,619 101 43 43 43 43 Unallocated (27) (52) (37) (37) (37) (37) Total revenue 226,316 243,958 289,476 345,798 366,263 399,190 YoY% 8% 19% 19% 6% 9%
EBIT (incl asso. and JCEs) Strategic investment 7,289 8,622 9,136 10,507 14,788 20,107 IT 4,722 6,134 7,375 6,483 9,724 13,572 Financial Servcies 235 722 653 831 1,096 1,324 Modern services (108) (525) (514) 12 433 672 Agriculture and food (46) (91) (820) 25 135 246 Property 2,521 2,536 3,081 3,123 2,969 3,791 Chemicals and energy materials (36) (153) (639) 32 431 502 Financial Investment (1,156) (252) 264 (153) (153) (153) Unallocated (1,082) (564) 18 (500) (550) (605) Total EBIT 5,052 7,807 9,417 9,854 14,085 19,348 YoY% 55% 21% 5% 43% 37%
Investment income and gains Strategic investment 405 637 2,315 552 16 (226) IT (0) 139 9 150 13 (228) Financial Servcies 1 - 650 400 - - Modern services 400 338 1,646 - - - Agriculture and food - (1) 7 (1) - - Property 2 162 4 4 4 4 Chemicals and energy materials 3 - (2) (2) (2) (2) Financial Investment 1,027 2,549 2,491 5,691 2,783 3,133 Total Investment income and gains 1,433 3,187 4,806 6,243 2,799 2,907
Other income and gains (losses) 1,479 479 (69) 2,459 1,353 1,351 Government grants 606 1,098 1,316 1,316 1,316 1,316 De-recognition of contigent consideration 125 - - - - - Losses on disposal of PP&E and intangible assets (17) (35) (274) - - - Fair value gain on investment properties 622 202 249 1,100 - - Net foreign exchange losses (155) (408) (1,020) - - - Others 297 (378) (340) 43 37 36 Total other income and gains (losses) 1,479 479 (69) 2,459 1,353 1,351
Total finance income 521 539 591 572 403 386 Total finance costs (1,841) (2,049) (3,186) (3,874) (3,842) (3,914) Total net interest expense (1,320) (1,510) (2,595) (3,302) (3,439) (3,529)
Total pre-tax profit 6,643 9,962 11,560 15,254 14,798 20,078 Total tax expense (2,179) (2,249) (3,738) (3,822) (3,665) (4,968) Total minority interest (2,177) (2,876) (3,662) (3,215) (4,936) (7,051) Total reported net profit 2,288 4,838 4,160 8,217 6,197 8,060 YoY% 111% -14% 98% -25% 30%
Total exceptionals 856 (918) (1,361) 1,500 - -
Core net profit Strategic investment 2,425 2,790 2,886 2,950 4,455 6,097 IT 1,131 1,497 1,669 1,430 2,133 3,017 Financial Servcies 247 565 523 671 894 1,079 Modern services 300 96 (121) 25 323 502 Agriculture and food (68) (176) (303) (104) (23) 56 Property 882 1,014 1,397 1,123 1,193 1,450 Chemicals and energy materials (67) (206) (279) (195) (66) (8) Financial Investment (515) 2,107 2,113 4,154 1,973 2,235 Unallocated (1,083) 955 250 (386) (230) (272) Total core net profit 1,432 5,755 5,522 6,717 6,197 8,060 YoY% 302% -4% 22% -8% 30%
Core net profit yoy % Strategic investment 15% 3% 2% 51% 37% IT 32% 11% -14% 49% 41% Financial Servcies 129% -7% 28% 33% 21% Modern services -68% n.m. n.m. 1208% 55% Agriculture and food 159% 71% -66% -78% n.m. Property 15% 38% -20% 6% 22% Chemicals and energy materials 209% 36% -30% -66% -88% Financial Investment n.m. 0% 97% -53% 13% Unallocated n.m. -74% n.m. -40% 18% Total core net profit 302% -4% 22% -8% 30% Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 56 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 71: Summary of Legend’s cash flow statement
(Rmb mn) 2012 2013 2014 2015E 2016E 2017E Pre-tax profit 6,643 9,962 11,560 15,254 14,798 20,078 Add: Depreciation and amortization 1,955 1,949 2,866 5,365 5,585 5,660 Add: Net finance cost in P&L 1,320 1,510 2,595 3,302 3,439 3,529 Add: Impairment loss 562 495 2,687 - - - Less: Net income from associates and jointly controlled entities 7 122 (292) (580) (870) (1,178) Less: Fair value gain on investment properties (622) (202) (249) (1,100) - - Less: Fair value gain on financial investments (505) (457) 1,682 (4,839) (1,578) (1,783) - Financial assets at fair value through P&L 499 1,291 (422) - - - - Associates at fair value through P&L (1,004) (1,748) 2,104 - - - Less: Dividend income from financial investments (810) (1,774) (4,016) (853) (1,205) (1,350) - Financial assets at fair value through P&L (367) (254) (185) - - - - Associates at fair value through P&L (382) (1,401) (3,745) - - - - Dividend income from available for sale investments (61) (119) (86) - - - Less: Net gain on asset sales (96) (886) (2,157) - - - Share-based payment 459 514 594 623 655 687 Net foreign exchange losses 155 408 1,020 - - - (Increase)/decrease in working capital (3,490) (11,170) (12,117) (11,169) (9,720) (1,219) Inventories, properties under development and completed properties held for sale (9,153) (10,064) (8,365) (8,829) (5,787) 861 Receivables (7,011) (4,183) (2,308) (2,145) (2,129) (6,172) Payables 12,673 3,077 (1,444) (194) (1,804) 4,092 Interest paid (2,180) (3,227) (4,618) (6,152) (6,101) (6,216) Income tax paid (1,921) (2,055) (2,737) (3,822) (3,665) (4,968) Other operating cash flow items (125) - 0 - - - Operating Cashflow 1,351 (4,809) (3,183) (3,970) 1,338 13,241
Capital expenditure (4,904) (6,971) (9,088) (14,742) (7,444) (4,047) Disposal of PP&Es 60 82 109 - - - Acquisitons of subsidiaries (2,170) (1,169) (14,815) - - - Disposal of subsidiaries (502) 274 (2,016) - - - Acquisition or capital injection in associates (772) (783) (2,479) (1,067) (980) (1,052) Disposal of associates 12 438 741 - - - Dividends received from investments, associates, JCEs 902 2,114 4,359 1,143 1,640 1,939 - Dividends from associates at fair value through P&L 382 1,401 3,745 645 986 1,120 - Dividends from associates using equity methods 149 177 415 290 435 589 - Dividends from financial assets at fair value through P&L 367 254 185 194 204 214 - Dividends from available for sale investments 4 282 13 14 15 15 Proceeds from financial assets 1,932 3,610 2,171 - - - (Purchase) of financial assets (1,039) (1,269) (1,292) - - - Interest received 771 658 550 572 403 386 Change in restricted deposit (114) (100) 799 - - - Other investing cash flows (490) 644 - - - - Cash flow from investing (6,313) (2,471) (20,961) (14,094) (6,382) (2,774)
Operating cashflow including dividend received 3,025 (2,037) 1,726 (2,255) 3,380 15,566 Free cash flow (4,961) (7,280) (24,143) (18,064) (5,044) 10,467
Dividends paid to shareholders (275) (303) (333) (657) (496) (645) Dividends paid to non-controlling shareholders (1,643) (1,618) (1,891) (1,660) (2,549) (3,642) Capital contribution from non-controlling shareholders 1,093 93 375 - - - Transactions with non-controlling interests (1,979) (283) (1,694) - - - Change in bank and other borrowings 11,812 6,413 31,267 (4,000) 2,770 - Other financing cash flows - - - 12,287 - - Cash flow from financing 9,008 4,302 27,725 5,970 (275) (4,286)
Exchange gains/(losses) 5 (22) (507) - - -
Net increase/(decrease) in cash and cash equivalents 4,051 (2,999) 3,075 (12,095) (5,319) 6,181 Beginning cash & cash equivalent 40,529 37,530 40,605 28,510 23,191 Ending cash balance 40,529 37,530 40,605 28,510 23,191 29,372 Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 57 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 72: Summary of Legend’s balance sheet (December year end)
(Rmb mn) 2012 2013 2014 2015E 2016E 2017E Inventories 12,020 16,979 20,217 24,186 24,700 25,600 Properties under development 21,613 27,170 28,569 21,240 18,790 18,831 Completed properties held for sale 1,729 1,519 6,002 14,286 22,009 20,207 Receivables 53,057 59,714 72,034 73,262 74,443 79,834 Available-for-sale financial assets 207 7 114 114 114 114 Loans to customers 686 2,496 3,966 4,884 5,831 6,612 Derivative financial instruments 666 557 1,294 1,294 1,294 1,294 Financial assets at fair value through P&L 5,958 3,426 1,148 1,550 1,673 1,807 Cash and cash equivalent 41,232 39,125 41,983 29,888 24,569 30,751 Current assets 137,166 150,992 175,327 170,703 173,424 185,049
Leasehold land and land use rights 1,261 1,534 1,512 1,512 1,512 1,512 PP&E 8,968 12,641 21,079 35,450 42,836 46,886 Investment properties 6,630 5,705 6,023 11,457 11,457 11,457 Intangible assets 22,128 22,944 56,387 53,242 49,975 46,613 Associates and JCEs 14,257 16,271 19,667 25,461 28,331 31,622 Available-for-sale financial assets 3,311 2,568 3,550 4,680 5,029 5,406 Deferred tax assets 2,599 2,906 3,331 3,331 3,331 3,331 Other non-current assets 1,592 1,889 2,125 2,125 2,125 2,125 Non-current assets 60,745 66,459 113,674 137,261 144,597 148,953
Total assets 197,911 217,452 289,002 307,964 318,021 334,002
Payables 87,698 90,212 108,512 106,522 102,788 106,881 Derivative financial instruments 412 369 573 573 573 573 Provisions 4,981 5,086 7,050 7,050 7,050 7,050 Advance from customers 6,710 11,151 7,873 9,669 11,600 11,599 Deferred revenue 2,491 2,504 4,664 4,664 4,664 4,664 Current income tax liabilities 2,106 2,544 3,515 3,515 3,515 3,515 Borrowings 11,524 13,396 19,571 19,571 19,571 19,571 Current liabilities 115,921 125,262 151,758 151,564 149,760 153,852
Borrowings 27,341 32,219 56,550 52,550 55,320 55,320 Deferred revenue 2,598 2,603 3,743 3,743 3,743 3,743 Retirement benefit obligations 972 997 1,530 1,530 1,530 1,530 Provisions 2,360 1,951 2,596 2,596 2,596 2,596 Deferred income tax liabilities 2,466 2,600 3,410 3,410 3,410 3,410 Other non-current liabilities 6,810 7,842 16,550 16,550 16,550 16,550 Non-current liabilities 42,548 48,213 84,378 80,378 83,148 83,148
Total liabilities 158,469 173,475 236,136 231,942 232,909 237,000
Share capital 661 661 2,000 2,300 2,300 2,300 Other reserves 6,343 6,168 5,482 5,482 5,482 5,482 Retained earnings 15,685 20,207 24,503 45,805 52,509 60,989 Shareholders' equity 22,690 27,035 31,986 53,587 60,292 68,771 Minority interests 16,752 16,942 20,879 22,434 24,821 28,230 Total equity 39,442 43,977 52,865 76,021 85,113 97,002
Total liabilities & equity 197,911 217,452 289,002 307,964 318,021 334,002
Total debt 38,865 45,615 76,121 72,121 74,891 74,891 Total cash and cash equivalents 40,529 37,530 40,605 28,510 23,191 29,372 Net debt / (cash) (1,664) 8,085 35,516 43,611 51,700 45,519 Net Debt to equity % -4.2% 18.4% 67.2% 57.4% 60.7% 46.9% Net Debt to capital % -4.4% 15.5% 40.2% 36.5% 37.8% 31.9%
Ex Lenovo net debt / (cash) 24,562 28,761 43,344 39,469 43,905 39,432 Ex Lenovo total equity 29,295 32,673 36,209 56,899 62,558 69,564 Ex Lenovo net debt to equity % 83.8% 88.0% 119.7% 69.4% 70.2% 56.7% Ex Lenovo net debt to capital % 45.6% 46.8% 54.5% 41.0% 41.2% 36.2%
Interest coverage (EBITDA / interest exp.) 4.3 5.9 5.1 4.1 5.3 6.6 ROE 10.1% 17.9% 13.0% 15.3% 10.3% 11.7% Core ROE 6.3% 21.3% 17.3% 12.5% 10.3% 11.7% ROA 2.3% 3.5% 2.7% 3.7% 3.5% 4.5% Note: Period-end equities and assets are used for ROE and ROA.
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 58 August 1, 2015 Legend Holdings (3396.HK)
Key risks
Price movements in the capital market Price movements in the capital markets would have an impact on the valuation of the group’s financial investments, which are marked to market at each interim. With 24% of group 2015E NAV attributed to financial investments, our sensitivity analysis shows that every 10% change in their valuation could impact group NAV by 3%. It would also affect group earnings through investment gain/loss on its P&L – every 10% mark-down of its Rmb24.6bn financial investments could cut Legend’s net profit by Rmb1.5bn or 22% in FY15E. Two of its strategic investments, namely Lenovo and CAR, are publicly listed, representing 29% and 7% of the group’s 2015E NAV. Their share price movements would also affect Legend’s valuation (Exhibit 19).
Interest rate and currency movement; contingent liabilities We forecast the group would have Rmb44bn net debt at end-2015E. In theory, every 1% change in borrowing rate would cut its FY15E earnings by Rmb0.3bn or 4%. In reality, its impact also hinges on the duration and floating-rate exposure of its debts. Of its Rmb76bn total borrowing at end-2014, Rmb16.8bn are in floating rates. We estimate every 1% increase in the interest rate could cut group FY15E earnings by Rmb126mn or 2%. The majority of the group’s overseas earnings come from Lenovo, which generates 75% of its 2015E gross profit outside of China. We estimate every 10% Rmb appreciation would cut Lenovo’s 2015E earnings by 7%, translating to 2% for the group. With Lenovo representing 29% of group NAV, it would also have a 2% impact on Legend’s NAV.
In addition, Legend had Rmb13.3bn total contingent liabilities from various guarantees it provides, including: (1) Rmb3.3bn guarantees on bank mortgages for purchasers of its properties; (2) Rmb4.0bn financial guarantees Zhengqi provided for its SME customers; and (3) Rmb5.9bn financial guarantees for borrowings extended to its portfolio companies and other parties. Failure to turn around and grow its portfolio companies may result in writedown of the group’s invested capital and shareholder loans extended to them.
Management and reputation risks The sustainability of Legend’s long-term growth depends not only on management’s ability to nurture its portfolio companies to become leaders in their respective industries, but also their strategic vision to identify and invest in areas with future growth potential ahead of competitors. Founder and Chairman Mr. Liu Chuanzhi is widely recognized for his business vision and deep understanding of China’s economy. There is currently no plan for his succession.
Legend’s strong brand name and reputation have helped attract investment opportunities. Any negative publicity associated with its portfolio companies may affect the group’s reputation and its ability to secure opportunities in the future. The group often ventures into new businesses or sectors by investing in and partnering up with existing players, leveraging their industry knowledge and experience. Any disputes with existing partners could affect the group’s future expansion in particular industries.
Regulatory and other risks associated with each segments We also highlight in Exhibit 73 the regulatory and operational risks associated with the group’s businesses in each division.
Goldman Sachs Global Investment Research 59 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 73: Summary of key regulatory and operational risks of each division
Regulatory risks Operational risks ● Any change in tax rebate or other government supports to the IT industry. ● Intense product and price competition against a contracting PC market ● Regulatory risks in overseas markets, e.g, license requirement, cash repatriation, ● Failure to integrate acquisitions of x86 server business and Motorola Mobility patent rights etc. ● Foreign currency and interest risks - China, Asia Pacific, EMEA and America IT accounted for 33%, 15%, 28% and 24% of Lenovo's sales in 2014 ● Receivable and inventory management risk
● Tightening in regulatory requirement for capital adequacy and asset quality for SME ● Potential defaults resulting in non-performing loans, guarantees and financial loan and short-term financing industry leasing, adversely affecting asset quality and profitability Current regulations ● Concentration of customers - Majority of Legend's customers are SMEs which ◦ Small Loan - Bank borrowing / net capital < 50%, LLR / NPL > 100% usually have fewer financing resources and more vulnerable to macro downturn; The ◦ Financing Guarantee - Outstanding (o/s) guarantees / net asset < 10x, total direct loan, credit guarantee and financial leasing businesses are also concentrated in investment amount / net asset < 20%, unearned premium reserve / guarantee income Anhui provinces and in industries like manufacturing, property > 50%, guarantee reserve / year-end guarantee > 1% ● Higher security deposit (historically 10%) required by cooperating banks for credit ◦ Financial Leasing - Risky assets / net assets < 10x guarantee business could reduce the amount of guarantee Legend can provide ◦ Pawn Loan - Total amount owing in respect of equity interest pledged by customers / registered capital < 50%, total amount owing in respect of real estate mortgaged by Financial customers / registered capital < 100% services ● Tightening in regulatory requirement for max/min interest rate for SME loan and short-term financing industry Current regulations ◦ Small Loan - Interest rate cannot be higher than 4x of similar bank loans and cannot be lower than 0.9x the PBOC benchmarket rate ◦ Pawn Loan - (1) Maximum pawn period is 6 months, and can be extended for a maximum of 6 months; (2) Interest rate must not exceed the PBOC official interest rate for 6-month loan; (3) Monthly admin fees paid by the pledgor cannot exceed 4.2% of loan amount secured by movable property, 2.7% of loan amount secured by mortgaged real estate, or 2.4% of loan amount secured by equity interest. ● Any tightening policy in China property market, such as purchase restriction, etc. ● Property market downturn in cities Legend is exposed to (e.g., Beijing, Tianjin, etc.) ● Rising interest rate may propel valuers to increase cap rate which could negatively may negatively affect projects' selling price and pace Property affect investment property's valuation. ● Failure to replenish landbank at reasonable price may reversely affect future project sales and profitability
● CAR is subject to various regulations and may vary with local government, in terms ● CAR - (1) Competition in the car rental market would affect CAR's RevPAC; (2) of vehicle licensing, penalties for violation of traffic regulations, use of electric Profitability also hinges on vehicle residual value. Modern vehicles, car rental and service regulations. Any unfavorable change could impact ● Bybo - (1) Failure to identify M&A targets may negatively affect revenue growth as services CAR's revenue growth and profitability. Legend historically relied on acquisition to expand scale; (2) Reputational risk - Any incorrect decision by dentists may result in complaints or claims from patients.
● Joyvio - Joyvio's products are subject to the Agriculture Products Safety Law. ● Joyvio - (1) Unpredictable weather conditions, pest infestations and plant diseases Failure to comply with it in terms of use of chemical products, preservatives, additives may adversely affect blueberry and kiwifruit production; (2) Potential earnings volatility may result in potential fines and reputational risk. from seasonal growing cycle of the fruits and fluctuation in fruit price; (3) Higher costs Agriculture ● Funglian - Tax regulation in Chinese liquor industry - Consumption tax is the main and lower demand arising from food safety concerns. and Food tax for Chinese liquor producers and is charged based on ex-factory price. It has been ● Funglian - (1) Further austerity measures may continue to hinder liquor demand; reported that the government may increase it to be based on wholesale price. (2) Concentration risk - Funglian's brands mainly concentrate in four regional markets. (Sina.com, May, 2014)
● Both chemicals and energy materials businesses are subject to PRC environmental ● Slower-than-expected ramp-up of production facilities under trial operation (i.e., regulations, regarding emission and disposal of pollutants. Failure to comply with them Shenda and Haoda) Chemicals may result in potential fines or disruption of operation. ● Operational safety risk - Methanol and other chemical components are combustible and Energy and volatile materials ● Less-than-expected demand for Legend's chemicals and energy materials products and volatility in raw material price may negatively affect profitability
Current regulations for VC ● Failure to identify investment opportunities and a downturn in China's capital market ● Actual paid-up capital shall be no less than Rmb 30mn could negatively affect the return from the funds Legend invests in ● No. of investors shall not exceed 200, or if the VC is a limited liability company, No. ● Failure to raise capital from investors and sizeable capital redemption of Legend Financial of investors shall not exceed with each's investment being no less than Rmb 1mn Capital and Hony Capital will limit future growth opportunities investments ● The company shall have at least 3 senior management personnel with two or more years of experience in VC investment, all of whom shall bear responsibility of investment management
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 60 August 1, 2015 Legend Holdings (3396.HK)
Appendix: Valuation comp sheets by sector
Exhibit 74: Technology comp sheet
Price Market cap. 30D ADTO EPS EPS growthP/E (X) P/B (X) ROE Dividend yield Ticker Company 30-Jul US$mn US$mn 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E Hardware - OEM 0992.HK Lenovo Group 8.64 11,893 69.1 0.08 0.10 1% 33% 14.2 10.7 2.6 2.3 20.2% 22.9% 0.3% 0.4% 2353.TW Acer 13.25 1,279 7.9 0.01 -0.06 -98% NM NM NM 0.6 0.6 0.1% -0.3% 0.0% 0.0% 2357.TW ASUSTeK Computer 290.00 7,168 23.3 25.25 27.28 -4% 8% 11.5 10.6 1.2 1.2 11.1% 11.3% 6.1% 5.9% Upstream Semiconductor 1347.HK Hua Hong Semiconductor Ltd. 7.69 1,026 2.9 0.10 0.12 -5% 15% 9.6 8.4 0.7 0.6 7.0% 7.5% 0.0% 0.0% 2303.TW United Microelectronics Corp. 11.35 4,683 24.3 1.01 1.06 4% 4% 11.2 10.7 0.6 0.6 5.6% 5.7% 4.8% 5.1% 2330.TW TSMC 138.50 114,106 190.7 12.10 12.85 19% 6% 11.4 10.8 2.9 2.5 27.7% 25.2% 3.2% 3.6% 3658.TWO Hermes Microvision Inc. 1595.00 3,602 27.0 56.04 70.82 23% 26% 28.5 22.5 8.0 6.7 30.6% 32.3% 2.1% 2.7% Fabless design 2454.TW Mediatek 327.00 16,334 107.7 27.60 33.48 -8% 21% 11.8 9.8 2.0 1.9 17.2% 19.8% 6.7% 6.3% 4966.TWO Parade Technologies Ltd. 294.50 711 14.2 15.89 20.26 -2% 27% 18.5 14.5 3.6 3.0 20.9% 22.9% 1.8% 2.5% Communications technology 0763.HK ZTE Corp. (H) 17.60 9,054 18.4 0.84 0.89 32% 6% 16.7 15.8 2.1 1.9 13.2% 12.7% 1.3% 1.3% Hardware - ODM/EMS 2317.TW Hon Hai Precision 90.90 42,768 114.9 8.64 8.94 -3% 3% 10.5 10.2 1.3 1.2 13.0% 12.2% 2.2% 2.1% 2324.TW Compal Electronics 21.55 2,958 14.9 2.47 2.69 51% 9% 8.7 8.0 0.9 0.9 10.5% 11.0% 7.0% 8.0% 2382.TW Quanta Computer 61.50 7,449 16.9 5.33 6.12 9% 15% 11.5 10.1 1.7 1.6 15.3% 16.8% 6.5% 7.1% 3231.TW Wistron 20.55 1,502 11.9 2.22 2.30 52% 3% 9.2 9.0 0.7 0.7 7.8% 7.8% 5.6% 8.7% 4938.TW Pegatron 90.80 7,389 28.2 7.41 7.82 19% 6% 12.2 11.6 1.7 1.6 13.8% 14.2% 6.0% 8.1% Hardware - Components 2018.HK AAC Technologies 42.20 6,685 25.9 2.42 2.70 28% 12% 14.0 12.5 3.8 3.1 29.4% 27.4% 2.0% 2.3% 2474.TW Catcher Technology 330.00 7,879 67.0 31.17 38.20 34% 23% 10.6 8.6 2.2 1.8 22.7% 23.2% 1.8% 2.4% 3008.TW Largan Precision 3135.00 13,290 73.0 182.67 246.25 26% 35% 17.2 12.7 6.6 4.8 44.5% 43.4% 1.6% 2.1% 3673.TW TPK Holding 120.00 1,332 47.4 5.94 16.50 NM 178% 20.2 7.3 0.9 0.8 4.5% 11.6% 0.2% 1.1% 5264.TW Casetek Holdings 180.00 1,617 12.1 16.50 25.82 14% 56% 10.9 7.0 2.0 1.6 18.9% 25.7% 4.0% 4.6%
Source: Datastream, Goldman Sachs Global Investment Research.
Exhibit 75: Comp sheet for social financing companies
P/B P/E Net margin ROE Mkt cap / equity value (Rmb mn) 2014 2015E 2014 2015E 2014 2015E 2014 2015E Zhengqi (Rmb mn) 4,769 1.77 1.50 12.6 9.7 52.3% 52.3% 14% 15%
Trading comp (Rmb mn) Hanhua Financial Holding * 3903.HK 4,931 0.7 n.a. 14.3 n.a. 21.3% n.a. 6% n.a. Credit China * 8207.HK 4,742 4.2 n.a. 89.5 n.a. 17.7% n.a. 6% n.a. Far East Horizon 3360.HK 24,145 1.5 1.1 8.7 6.8 34.7% 35.2% 14% 12% China Financial Services Holdings * 605.HK 2,039 1.0 n.a. 10.7 n.a. 52.9% n.a. 12% n.a. China Huirong Financial Holdings * 1290.HK 1,173 0.8 n.a. 8.9 n.a. 42.4% n.a. 11% n.a.
Transaction comp (Rmb mn) Chaodong Co. Ltd. * 600318.SS 17,693 1.1 n.a. 15 n.a. 22.8% n.a. 8% n.a.
Average ^ 1.0 n.a. 11.5 n.a. 32.0% n.a. 9% n.a. * Not covered; ^ Average multiples excludes Credit China
Source: Datastream, Company data, Bloomberg (for *Not Covered companies), Goldman Sachs Global Investment Research.
Exhibit 76: Comp sheet for banks
Mkt Adj. P/B 30-Jul Cap/equity P/B (X) (X) P/E (X) Earning growth (%) ROE (%) NIM value (US$ Price bn) 2014 2015E 2016E 2015E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E Hankou Bank n.a. 2.6 1.12 1.00 0.90 n.a. 11.1 9.5 8.9 16% 7% 7% 10.1 10.5 10.1 2.84 3.04 3.04
BOC (H) 3988.HK 4.22 196.7 0.90 0.81 0.73 0.85 5.7 5.3 5.0 4.6 7.8 5.9 17.0 15.9 15.1 2.29 2.20 2.14 CCB (H) 0939.HK 6.29 244.1 1.00 0.88 0.78 0.89 5.5 5.2 4.9 6.1 4.9 6.9 19.6 17.9 17.0 2.75 2.61 2.48 ABC (H) 1288.HK 3.49 179.3 0.90 0.80 0.71 0.77 5.0 4.7 4.3 7.9 6.4 8.7 19.5 18.4 17.7 2.92 2.79 2.71 BoCom (H) 3328.HK 6.81 72.3 0.85 0.77 0.70 0.81 6.1 5.8 5.6 5.7 4.3 4.7 14.7 12.4 11.3 2.27 2.21 2.16 CMB (H) 3968.HK 19.88 75.8 1.26 1.10 0.96 1.13 7.1 6.2 5.6 8.1 14.2 11.3 19.2 18.9 18.4 2.59 2.38 2.36 CNCB (H) 0998.HK 5.56 40.9 0.77 0.66 0.58 0.74 5.0 4.5 4.1 3.9 11.0 10.5 16.6 15.8 15.2 2.40 2.28 2.18 CQRCB 3618.HK 5.58 7.8 0.96 0.85 0.75 0.91 6.0 5.5 4.9 13.7 10.2 10.7 17.1 16.3 15.9 3.37 3.12 2.94 BOCQ 1963.HK 6.84 2.8 0.92 0.80 0.70 0.84 5.2 4.6 4.2 21.4 11.9 9.8 18.8 18.5 17.7 2.61 2.39 2.28 H-share average 0.95 0.84 0.74 0.88 5.6 5.2 4.8 8.1 8.1 8.2 18.2 17.0 16.2 2.66 2.50 2.39
Source: Datastream, Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 61 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 77: Transaction comp sheet for dental clinics Date Ticker Company Target Stake (%) Price (RMBmn) Sales (RMBmnImplied Price/Sales Comments^ Jul-13 QNM SP Equity Q&M Dental Group Aoxin Stomatology 60.00 108.00 42.00 4.29 2012 sales Dec-11 600587 CH Equity Shinva Medical Instrument Shandong Zhongde Dental 45.00 3.28 4.19 1.74 2010 sales Oct-10 600763 CH Equity Topchoice Medical Corporation Kunming Oral Hospital 58.59 25.39 5.91 7.33 2011 sales Dec-07 600763 CH Equity Topchoice Medical Corporation Cangzhou Oral Hospital 70.00 3.85 4.70 1.17 2008 sales Jun-07 600763 CH Equity Topchoice Medical Corporation Ningbo Oral Hospital 70.00 8.75 8.12 1.54 2007 sales ^ Sales period used is as close to the transaction date as possible, subjected to data availability. Average 3.21 Average ex-Aoxin, Kunming 1.48 Source: Company data.
Exhibit 78: Comp sheet for car rental companies
Market cap / Gross margin Net margin ROE Sales growth Earning growth P/E P/B equity value Company Ticker(US$mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E CAR * 699.HK 6,114 35.2% 39.4% 40.8% 12.4% 18.9% 21.0% 7.8% 16.0% 18.7% 30% 60% 30% n.a. 145% 44% 86.9 35.5 24.7 6.8 5.7 4.6
eHi Car Services EHIC 811 48.1% 57.4% 61.5% -40.4% 55.9% 13.4% -18.7% 26.3% 7.5% 50% 77% 56% n.a. n.a. -65% n.a. 5.6 15.9 1.8 1.2 1.2 Hertz Global Holdings HTZ 7,724 29.8% n.a. n.a. 7.0% n.a. n.a. 28.7% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10.2 n.a. n.a. 2.8 n.a. n.a. Avis Budget Group CAR 4,556 23.1% 23.3% 22.6% 3.8% 4.2% 4.1% 45.1% 55.3% 45.3% 7% 2% 4% 35% 15% 5% 14.6 12.7 12.1 6.8 7.1 4.4 Average 33.7% 40.3% 42.1% 5.4% 30.0% 8.8% 18.4% 40.8% 26.4% 29% 39% 30% 35% 15% -30% 12.4 9.1 14.0 3.8 4.2 2.8 * Not covered Source: Datastream, Company data, Goldman Sachs Global Investment Research.
Exhibit 79: Comp sheet for agriculture & food businesses
Market cap / Sales growth Gross margin Net margin ROEP/E P/sales P/B equity value Company Ticker(US$mn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E Chinese alcohol
Funglian n.a. 175 9% 15% 15% 32.3% 33.1% 34.0% -15.3% -4.4% -1.2% -22% -7% -2% n.m. n.m. n.m. 1.0 0.9 0.8 1.00 1.00 1.00
Kweichow Moutai 600519.SS 41,666 4% 16% 18% 92.7% 91.0% 90.3% 47.8% 48.0% 48.0% 31% 29% 29% 17.1 15.4 13.0 8.0 6.9 5.9 5.15 4.35 3.73 Jiangsu Yanghe 002304.SZ 14,731 -2% 10% 15% 60.6% 62.8% 63.7% 30.7% 32.7% 34.1% 24% 25% 26% 22.2 18.8 15.8 6.2 5.6 4.9 5.05 4.43 3.87 Wuliangye Yibin 000858.SZ 15,729 -15% 2% 9% 72.5% 73.3% 74.3% 27.8% 30.9% 33.3% 15% 16% 17% 18.0 15.8 13.5 4.6 4.5 4.2 2.67 2.42 2.18 Luzhou Laojiao 000568.SZ 5,399 -49% 40% 15% 47.6% 52.7% 53.8% 16.4% 24.8% 25.7% 9% 19% 24% 40.5 19.2 16.2 6.3 4.5 3.9 3.67 3.87 4.15 Qinghai Huzhu Barley Wine Co. 002646.SZ 1,742 -6% 12% 22% 69.2% 71.3% 72.0% 23.4% 25.7% 26.9% 15% 17% 19% 37.8 30.8 24.1 8.0 7.1 5.8 5.39 4.84 4.29 Anhui Gujing Distillery Co. 000596.SZ 2,986 2% 13% 16% 68.6% 71.0% 71.5% 12.8% 15.1% 16.4% 15% 18% 19% 31.3 23.7 18.8 4.0 3.5 3.1 4.47 3.87 3.30 Shanxi Xinghuacun Fen Wine 600809.SS 2,507 -36% 16% 19% 67.4% 68.3% 68.4% 9.1% 11.9% 13.9% 9% 13% 15% 47.6 31.4 22.5 4.0 3.4 2.9 4.35 3.82 3.27 Average -15% 15% 16% 68.4% 70.0% 70.6% 24.0% 27.0% 28.3% 17% 19% 21% 30.6 22.2 17.7 5.9 5.1 4.4 4.39 3.94 3.54
Fruit
Joyvio n.a. 156 6% 30% 25% 39.6% 40.6% 41.6% -6.0% -0.1% 4.7% -9% -3% 0% n.m. n.m. n.m. 2.4 1.8 1.5 1.00 1.00 1.00
Haoxiangni Jujube Co. Ltd - A * 002582.SS 523 7% n.a. n.a. 43.1% n.a. n.a. 4.2% n.a. n.a. 3% n.a. n.a. n.m. n.a. n.a. 3.4 n.a. n.a. 2.32 n.a. n.a. Lontrue Co. Ltd - A * 300175.SS 730 34% n.a. n.a. 17.3% n.a. n.a. 9.7% n.a. n.a. 9% n.a. n.a. n.m. n.a. n.a. 5.6 n.a. n.a. 5.32 n.a. n.a. China Culiangwang Beverage * 0904.HK 140 -4% n.a. n.a. 28.7% n.a. n.a. -22.7% n.a. n.a. -9% n.a. n.a. n.m. n.a. n.a. 0.4 n.a. n.a. 0.05 n.a. n.a. Tingyi Holdings 0322.HK 10,893 -6% -1% 4% 30.5% 32.2% 31.0% 3.9% 4.6% 5.0% 10% 10% 11% 26.0 22.9 21.2 1.1 1.1 1.0 3.47 3.20 2.95 Tenwow Intl * 1219.HK 768 8% n.a. n.a. 16.8% n.a. n.a. 6.8% n.a. n.a. 14% n.a. n.a. 13.5 n.a. n.a. 0.9 n.a. n.a. 1.84 n.a. n.a. Average 8% n.a. n.a. 27.3% 32.2% 31.0% 0.4% 4.6% 5.0% 5% 10% 11% 19.8 22.9 21.2 2.3 1.1 1.0 2.60 3.20 2.95 * Not covered Source: Datastream, Company data, Bloomberg (for *Not Covered companies), Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 62 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 80: Comp sheet for mid-sized Chinese property developers
Market cap / Landbank Landbank 2014 contract sales equity valueP/E P/B Disc. to (mm sqm) years EBIT Margin (%) ROE Company Ticker (US$mn) 2014 2015E 2014 2015E NAV (%) 1H14 mn sqm Rmb mn 2014 2015E 2014 2015E Raycom n.a. 3,449 17.8 16.7 1.4 1.0 n.a. 9.1 4-5 n.a. 10,000 26.7% 28.5% 12.3% 6.7%
Hong Kong-listed mid-size developer CIFI Group * 0884.HK 1,493 4.0 3.6 0.79 n.a. n.a. 9.5 5.5 1.73 21,200 n.a. n.a. n.a. 21.1% Glorious Property * 0845.HK 975 5.4 7.8 0.31 n.a. n.a. 15.0 55.8 0.27 4,041 n.a. n.a. n.a. n.a. Beijing Capital Land * 2868.HK 984 4.0 3.3 n.a. n.a. n.a. 10.9 4.4 2.50 24,860 n.a. n.a. n.a. 16.2% Central China Real Estate * 0832.HK 548 3.0 3.0 0.49 n.a. n.a. 19.6 9.0 2.18 15,600 n.a. n.a. n.a. 16.8% Agile 3383.HK 2,245 3.6 3.9 0.4 0.4 (67.8) 42.0 9.2 4.59 44,170 26.8% 20.3% 12.5% 10.4% Chi Mer Land 0978.HK 893 14.7 8.2 1.2 1.1 (37.9) 7.0 9.7 0.72 9,150 24.4% 22.5% 7.8% 13.8% COGO 0081.HK 928 6.5 4.1 0.7 0.6 (62.3) 13.1 7.1 1.85 14,390 18.7% 19.0% 10.5% 13.4% Greentown 3900.HK 2,137 8.0 5.0 0.6 0.6 (49.9) 37.8 8.9 4.27 91,300 18.9% 17.4% 6.5% 10.0% R&F 2777.HK 3,206 5.1 4.7 0.7 0.6 (59.3) 46.4 11.5 4.05 54,401 31.7% 25.2% 11.6% 11.2% KWG 1813.HK 2,224 5.2 4.1 0.8 0.7 (54.6) 10.7 7.2 1.49 20,523 29.2% 22.4% 13.5% 15.2% Poly Property (H) 0119.HK 1,361 52.2 22.5 0.4 0.4 (72.3) 2.3 1.0 2.35 24,100 13.2% 9.5% 0.7% 1.6% Shimao 0813.HK 6,081 5.4 5.0 1.0 0.9 (53.7) 12.5 2.2 5.79 70,208 27.0% 22.3% 15.7% 15.3% Shui On Land 0272.HK 2,151 n.m. n.m. 0.5 0.5 (61.7) 30.9 97.2 0.32 6,107 50.8% 7.2% -0.2% -2.0% Average 6.4 7.9 0.67 0.66 (57.2) 20.0 15.5 33.4% 22.2% 8.3% 11.1% * Not covered Source: Datastream, Company data, Bloomberg (for *Not Covered companies), Goldman Sachs Global Investment Research.
Exhibit 81: Comp sheet for chemicals and energy materials
Market cap / equity value P/EP/B Earning growth Gross margin Net margin ROE Company Ticker (US$mn) 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E
Chemicals
Levima n.a. 573 n.a. n.a. 1.0 1.0 n.a. n.a. 8.0% 13.5% -7.3% -2.2% -7.3% -3.5%
China Hubei Yihua Chemical * 000422 SZ 1,208 39.8 46.4 n.a. n.a. n.m. -14% n.a. n.a. n.a. n.a. n.a. n.a. Zibo Qixiang Tengda Chemical * 002408 SZ 1,990 22.4 22.0 3.05 2.72 86% 2% n.a. n.a. 7.2% 7.0% 10.6% 12.9% Jiangxi Black Cat * 002068 SZ 799 32.0 16.3 n.a. n.a. 28% 96% n.a. n.a. n.a. n.a. 11.7% 15.4% Shandong Hualu Hengsheng * 600426 SS 2,024 14.0 11.8 1.72 1.56 11% 19% n.a. n.a. 8.8% 9.3% 13.0% 13.3% Longxing Chemical * 002442 SZ n.a. 53.7 40.3 n.a. n.a. n.m. 33% n.a. n.a. n.a. n.a. n.a. n.a. Sinofert Holdings * 297 HK 1,722 22.1 15.4 0.77 0.74 112% 43% n.a. n.a. 1.5% 2.2% 3.6% 4.9% Qinghai Salt Lake * 000792 SZ 6,650 27.6 23.3 2.14 1.99 15% 18% n.a. n.a. 12.1% 12.5% 7.4% 8.3% China Bluechemical * 3983 HK 1,944 9.0 8.6 0.81 0.76 n.m. 4% n.a. n.a. 12.0% 12.1% 8.5% 8.8%
China Average 27.6 23.0 1.7 1.6 50% 25% n.a. n.a. 8.3% 8.6% 9.1% 10.6%
Regional China Steel Chemical 1723.TW 877 22.0 19.5 4.82 4.55 -29% 12% 27.6% 29.2% 22.4% 23.2% 21.0% 23.5% Nan Ya Plastics 1303.TW 16,504 14.4 14.1 1.73 1.67 26% 2% 14.3% 14.0% 12.5% 12.1% 11.7% 11.4% Formosa Plastics 1301.TW 14,076 15.3 15.3 1.61 1.55 74% 0% 11.4% 11.5% 15.8% 15.3% 10.7% 10.3% Formosa Petrochemical Corp. 6505.TW 22,578 16.5 17.8 3.05 3.00 397% -7% 8.6% 7.2% 6.6% 5.7% 18.6% 17.0% Formosa Chemicals & Fibre 1326.TW 13,536 16.7 19.0 1.56 1.51 156% -12% 9.2% 8.7% 7.8% 6.8% 8.2% 6.9% Far Eastern New Century Corp. 1402.TW 4,770 19.8 16.8 0.81 0.80 -25% 18% 22.5% 23.0% 3.7% 3.8% 3.1% 3.5% Taiwan Synthetic Rubber Corp. 2103.TW 590 22.1 12.1 1.69 1.65 10% 83% 13.9% 17.3% 4.5% 7.7% 6.8% 12.1% PTT Global Chemical PTTGC.BK 7,832 13.2 11.9 1.18 1.11 77% 11% 10.4% 10.8% 6.7% 7.3% 9.1% 9.6% Petronas Chemicals Group PCGB.KL 12,224 25.9 19.9 2.09 1.99 -22% 30% 21.4% 24.6% 12.0% 13.9% 7.7% 9.5% Reliance Industries RELI.BO 51,063 12.8 12.4 1.34 1.23 3% 3% 14.9% 19.9% 6.9% 9.1% 11.0% 10.2%
Regional Average 17.9 15.9 1.99 1.91 67% 14% 15.4% 16.6% 9.9% 10.5% 10.8% 11.4%
Chemicals Average 22.2 19.1 1.89 1.79
Energy material
Phylion Battery n.a. 250 39.5 45.2 n.a. n.a. 82% 15% 27.0% 27.5% 10.1% 10.6% n.a. n.a.
BYD 1211.HK 9,058 59.7 34.1 3.98 3.56 n.m. 75% 22.0% 22.3% 2.6% 3.7% 6.0% 9.6% Tianneng Group * 0819.HK 575 12.4 7.2 1.22 1.07 n.m. 71% n.a. n.a. 1.8% 2.6% 10.2% 11.9% Desay Battery * 000049.SZ 1,267 23.1 17.6 7.95 5.93 45% 31% n.a. n.a. 3.4% 3.5% 32.6% 32.5% Sichuan Tianqi Lithium Industries * 002466.SZ 2,497 70.4 48.0 4.90 4.47 57% 47% n.a. n.a. 9.9% 12.3% 6.7% 9.1% Samsung SDI 006400.KS 7,402 22.8 17.7 0.71 0.68 n.m. 29% n.a. n.a. 4.3% 5.2% 3.1% 3.9%
Average 37.7 24.9 3.8 3.1 51% 51% n.a. n.a. 4.4% 5.5% 11.7% 13.4% * Not covered
Source: Datastream, Bloomberg (for *Not Covered companies), Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 63 August 1, 2015 Legend Holdings (3396.HK)
Exhibit 82: Comp sheet for global asset managers
Ticker MCAP PriceP/E P/B AuM ($Bn) Price/AuM ($MM) 7/30/15 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E Large Traditional Managers 17.2 16.1 14.1 3.2 3.4 2.9 1.8% 1.7% 1.6% AllianceBernstein Holding L.P. AB 2,610 27.2 17.6 15.2 13.3 0.8 n.a. n.a. 474 503 547 0.6% 0.5% 0.5% Affiliated Managers Group Inc. AMG 11,844 209.3 19.9 16.5 14.5 4.7 4.2 3.6 620 698 788 1.9% 1.7% 1.5% Franklin Resources Inc. BEN 28,858 46.2 14.0 14.0 13.4 2.8 2.5 2.3 898 890 911 3.2% 3.2% 3.2% BlackRock Inc. BLK 57,960 338.8 19.3 18.2 16.0 2.3 2.1 2.0 4,652 5,096 5,671 1.2% 1.1% 1.0% Eaton Vance Corp. * EV 4,820 38.7 16.9 16.7 14.9 7.5 7.6 6.0 296 316 336 1.6% 1.5% 1.4% INVESCO Ltd. IVZ 17,549 39.0 16.3 15.4 13.2 2.1 1.6 1.5 792 850 930 2.2% 2.1% 1.9% Legg Mason Inc. * LM 6,297 48.8 15.7 16.1 12.1 1.3 1.3 1.2 709 746 867 0.9% 0.8% 0.7% T. Rowe Price Group Inc. TROW 20,729 77.5 18.2 16.8 15.3 4.0 4.1 3.8 747 808 852 2.8% 2.6% 2.4% Small/Mid Traditional Managers 24.1 18.7 15.1 10.9 8.7 8.6 4.2% 3.6% 3.0% Artisan Partners Asset Management Inc. APAM 3,387 47.3 13.8 14.8 13.1 35.3 30.4 31.7 108 116 133 3.1% 2.9% 2.5% Fifth Street Asset Management, Inc. FSAM 462 9.2 n.a. n.a. n.a. n.a. n.a. n.a. 6 6 7 7.7% 7.7% 6.6% Janus Capital Group Inc. JNS 3,116 16.4 22.9 17.7 14.3 2.1 1.9 1.7 183 206 225 1.7% 1.5% 1.4% Medley Management Inc. MDLY 287 9.4 n.a. n.a. n.a. n.a. n.a. n.a. 3 3 4 10.5% 9.6% 7.2% Virtus Investment Partners, Inc. VRTS 1,102 117.9 11.3 12.6 11.7 1.9 1.8 1.6 46 41 41 2.4% 2.7% 2.7% WisdomTree Investments, Inc. WETF 3,251 23.2 58.8 32.1 22.1 15.4 n.a. n.a. 39 71 89 8.2% 4.6% 3.7%
Alternative Managers 12.4 11.2 9.5 3.7 3.4 3.1 8.8% 7.7% 6.7% Och-Ziff Cap Mgmt Group LLC ^ OZM 5,615 11.5 12.6 8.5 7.5 n.a. n.a. n.a. 48 55 64 11.8% 10.2% 8.7% KKR & Co.L.P. ^ KKR 19,250 24.0 10.0 9.1 8.2 1.7 1.8 1.7 100 115 131 19.3% 16.8% 14.7% Blackstone Group LP ^ BX 45,343 39.3 12.8 10.8 11.2 5.1 4.3 3.9 290 333 385 15.6% 13.6% 11.8% Apollo Global Management, LLC ^ APO 8,229 20.7 13.8 12.5 9.9 4.3 4.5 4.0 160 177 195 5.1% 4.7% 4.2% Ares Management L.P. ^ ARES 4,038 19.0 n.a. n.a. n.a. n.a. n.a. n.a. 82 92 108 4.9% 4.4% 3.7% Oaktree Capital Group LLC ^ OAK 8,387 55.1 17.2 16.9 12.3 6.8 5.5 5.3 93 104 122 9.0% 8.1% 6.9% The Carlyle Group LP ^ CG 8,577 26.5 11.6 10.9 10.0 1.9 2.2 1.8 200 214 233 4.3% 4.0% 3.7% ^ Coverage suspended; * Not covered
Source: Datastream, Company data, Bloomberg (for *Not Covered and Coverage Suspended companies), Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 64 August 1, 2015 Legend Holdings (3396.HK)
Disclosure Appendix
Reg AC We, Janet Lu and Simon Cheung, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Janet Lu: Asia Pacific Conglomerates. Simon Cheung, CFA: Asia Pacific Conglomerates. Asia Pacific Conglomerates: Beijing Enterprises Holdings, Cheung Kong Infrastructure, China Gas Holdings, China Merchants Holdings, China Resources Gas Group, China Suntien Green Energy, CITIC Ltd., CK Hutchison Holdings, COSCO Pacific, Dalian Port Co., ENN Energy Holdings, Fosun International, Galaxy Entertainment Group, Hopewell Holdings, Hutchison Port Holdings Trust, Jardine Matheson, Kunlun Energy Co., Legend Holdings, Melco Crown Entertainment (ADR), Melco International Development, MGM China, MTR Corp., NWS Holdings, Sands China, Shanghai Industrial, Shanghai International Port, Shun Tak Holdings, Sinopec Kantons, SJM Holdings, Summit Ascent Holdings, Swire Pacific, Tianhe Chemicals Group, Tianjin Development Holdings, Tianjin Port Development Holdings, Towngas China, Wharf Holdings, Wheelock and Co., Wynn Macau, Yingde Gases Group. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for investment banking services in the past 12 months: Legend Holdings (HK$35.00) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Legend Holdings (HK$35.00) Goldman Sachs had an investment banking services client relationship during the past 12 months with: Legend Holdings (HK$35.00) Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Legend Holdings (HK$35.00) Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Legend Holdings (HK$35.00) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 53% 15% 46% 38% 33% As of July 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,248 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.
Goldman Sachs Global Investment Research 65 August 1, 2015 Legend Holdings (3396.HK)
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Goldman Sachs Global Investment Research 66 August 1, 2015 Legend Holdings (3396.HK)
following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). 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