Financials / China 12 March 2014
Demystifying Internet finance China Financials and Internet sectors
• We expect the rise of Internet-finance products to drive innovations in financial institutions’ existing lending and payment businesses • Financial products fuel the use of Internet companies’ online- payment services, thus ramping up their business monetisation
• To invest in the Internet finance theme, we choose Citic Bank, China Merchants Bank, Haitong Securities and Tencent How do we justify our view?
a money market fund (MMF) increase their stickiness. Haitong operated through Alibaba, has Securities (6837 HK, HKD9.9, Buy drawn significant market attention [1]) is reducing its costs related to and led to investor concerns about traditional branches and making its the stability of banks’ deposit brokerage accounts a multi- Leon Qi, CFA funding. We believe the impact on functional financial platform. (852) 2532 4381 bank funding will be less than it [email protected] initially appeared. Among the Internet players, we believe Tencent (700 HK, John Choi We believe the Internet-based HKD602.0, Buy [1]) has a strong (852) 2773 8730 [email protected] lending business has the least competitive advantage in the impact on the bank sector as it is Internet finance field, given its Liz Zeng easy for banks to launch similar leading position in China’s Internet (852) 2532 4349 products. Besides, banks do have an industry, especially its strong mobile [email protected] edge in terms of due diligence, risk platform, combined with its huge
management, and sales platform and loyal user base. Internet compared with pure-Internet financial products are one of the ■ What's new platforms. products and services offered by China has witnessed a wave of new Tencent to improve its user traffic Internet-based financial products Overall, we believe the innovations and stickiness on its WeChat app. since 2013, some of which are in Internet finance products will Allowing its users to purchase changing the traditional landscape push financial institutions for more financial products via WeChat is also for some financial services. In this product innovations. For Internet one of the good approaches to report, we present our in-depth companies, we expect these financial educate those users to use Tencent’s analysis of these new products in an products to fuel the use of their payment service, which paves the attempt to shed light on their online payment services, and hence way for further development of its attractiveness, problems, ramp up the monetisation on their payment-related business. developments and potential impact mobile businesses. Meantime, their on financial institutions and user traffic and stickiness as well as ■ How we differ Internet players. time spent should also improve. Unlike some investors who are concerned about the challenges to ■ What's the impact ■ What we recommend traditional financial institutions We think among various Internet- On stock ideas for the Internet posed by Internet players, we see finance services, online-payment finance theme, we believe Citic Internet-based financial services services are in the best position to Bank (998 HK, HKD4.22, complementing the existing services compete with banks, because this is Outperform [2]) has established a provided by banks and other types of an area that requires the least first-mover advantage in Internet- financial institution, especially in expertise in terms of financial risk based lending and is benefiting from areas that were mostly neglected management and has the lowest the growth of Yuebao. China previously. We also believe new connectivity with other financial Merchants Bank (3968 HK, Internet products will be used to services. HKD12.66, Buy [1]) has a prudent differentiate the services offered by risk-management system and traditional financial institutions, The exponential growth and attractive non-bank online services which are currently quite attractive returns offered by Yuebao, catering to small enterprises to homogeneous.
See important disclosures, including any required research certifications, beginning on page 37 China Financials and Internet sectors 12 March 2014
Contents
Third-party online payment services ...... 3 Riding the booming trend ...... 3 Impact on banks’ payment services ...... 7 Internet investment products ...... 9 The legend of Yuebao ...... 9 Licaitong – Tencent’s first move into the mobile Internet finance field ...... 11 Impact on banks ...... 12 Impact on Internet companies ...... 12 Internet-based lending business ...... 14 P2P – a new form of financial disintermediation ...... 14 POS micro loans – combining big data with credit-risk management ...... 18 Regulations and potential tightening ...... 19 1. Most risky area – P2P lending ...... 19 2. Rise in liquidity-reserve requirements for MMFs ...... 19 3. Strict implementation of penalties for advance withdrawal of interbank deposits ...... 20 4. Capital requirements for Internet players engaged in financial services ...... 20 The inception of ‘Tencent Bank’ and ‘Alibaba Bank’ ...... 21 Internet players setting up banks ...... 21 Stock implications ...... 22 Stock implications ...... 22
Company Section China Citic Bank ...... 23 China Merchants Bank ...... 26 Haitong Securities ...... 29 Tencent Holdings ...... 32
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We expect further development of Internet payment services in the next few years, as online payment is the critical link in the online shopping process. On the other side, we believe the effort the major Chinese Internet companies such as Alibaba and Tencent are putting into promoting and educating Internet users to Third-party online use their online payment services, such as Tenpay and Alipay, will lead to a boom in the development of the payment services online payment industry. Besides, those big Internet players are aggressively building online to offline Among various Internet finance services (O2O) ecosystems, which are stimulating the development of the online payment industry, in our and products, we see online payment view, as Internet payments are the critical gateway for services as in the best position to compete O2O ecommerce business. with banks. Online payment services also Industry data show that the overall gross merchandise provide a critical gateway for the volume (GMV) of China third-party payments reached development of an O2O eco-system for CNY12.9tn in 2012, among which online payments Internet companies. accounted for 28%. We expect the percentage of total third-party payments to online payments to increase in the next few years, as more and more offline companies Riding the booming trend (especially retail merchants) start to operate part of their business segments online. Also, the rapid Increase in online retail market boosts the development of the online-shopping market in China development of online payment services over the past few years should also contribute to this growth. According to the annual payment system reports released by the National Bureau of Statistics and the China: third-party online payment GMV People’s Bank of China, retail sales by Chinese (CNYtn) residents in 2012 reached CNY21tn, up 14% YoY. The 6.0 5.4 number of people who used bank cards to pay for goods as a percentage of the total population in China 5.0 increased to 44% in 2012 from 22% in 2007. Combined 4.0 3.7 with the development of China’s Internet industry, the 3.0 online retail market as a percentage of overall retail 2.2 sales in China has been increasing rapidly. Specifically, 2.0 the number of residents shopping online jumped 25% 1.0 to 302m in 2013 based on the latest statistical data. 1.0 0.5
0.0 Social retail sales and bank card consumption of Chinese 2009 2010 2011 2012 2013 residents (2006-12) Source: Bloomberg (CNYtn) (%) 30 60 We also think mobile payments are likely to become one of the important catalysts for the future 20 40 development of Internet payment services, and will likely ramp up the monetisation of mobile business for 10 20 those Internet companies with mobile business exposure. 0 0 2006 2007 2008 2009 2010 2011 2012
Social retail sales (CNYm) - LHS Bank card consumption (CNYm) - LHS Penetration of bank card (%) - RHS YoY growth of bank card consumption (%) - RHS Source: Annual payment system reports released by the National Bureau of Statistics and the People’s Bank of China. Note: Bank card consumption here excludes real estate transactions or wholesale transactions, among others.
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Market share structure of online payments in China (2013) Major third-party payment companies/services in China e-Commerce Payment Cooperation/ acquisition of Overseas regions Online Gaming Company B2B solutions overseas institutions covered 2.7% QR Code, Sound 3.4% Hong Kong, Macau, Tele- Wave, Online communication Soft Bank of Japan, PSP, Oncard Taiwan, Japan, South Online Shopping Alipay Payment, Text Payments, VISA, MasterCard Korea, Europe and 4.3% 32.4% Message, America Bluetooth Online Payment, Flight Ticket Tenpay American Express U.K. & U.S. 10.3% QR Code 190 nations and 99Bill Online Payment Western Union regions(cooperated with PayPal) Overseas mainstream acquirers Global regions including China Online Payment including PayPal , Sumitomo, Hong Kong, Japan, U.S., Others UnionPay 47.0% Bank of East Asia, etc., etc. Source: State Administration of Foreign Exchange, the National Bureau of Statistics Source: Bloomberg Brief introduction of Alipay and Tenpay Major players in China Alipay, an affiliate of Alibaba Group, is a China Among those enterprises that provide third-party Internet payment service provider that was launched in payment services in China, such as Alipay, Tenpay, 2004. It products include Alipay (online payment), China UnionPay, Sandpay, Allinpay, 99Bill, ChinaPnR, Alipay Wallet (mobile app supports Android, iOS and Yeepay, and IPS, we like Alipay and Tenpay the most Windows) and Yuebao. According to iResearch, Alipay given that they are operated by Internet giants Alibaba dominates the sector with almost half of the market and Tencent, which have long-standing experience in share, at 300m users and 12.5bn trades in 2013. the Chinese Internet industry. The company cooperates with more than 65 financial Also, both Alibaba and Tencent own huge user bases institutions, including Visa and Mastercard, to provide that allow them to monetise their products and services payment solutions to Taobao and Tmall, as well as easily by users’ use of their own payment services. more than 460,000 external merchants for cyber Besides, Tencent and Alibaba have continued to launch gaming, utilities fee payments, online retail, digital a series of products and services on their mobile communications, etc. Internationally, more than 300 platforms, which have allowed them to get more worldwide merchants use Alipay to sell directly to exposure to the mobile Internet payment area. consumers in China. It currently supports transactions in 12 foreign currencies. In terms of market share of the Chinese third-party online payment industry, Alipay dominates with a In terms of Alipay Wallet, its user base achieved more market share of 49% in 2013. Tenpay was ranked No.2 than 100m users in 2013 with 2.78bn trades through with a 19% share and China UnionPay accounted for the mobile app. Its transaction volume was more than 11% and was ranked No. 3 in 2013. USD150bn, surpassing the combined volume of PayPal and Square Inc., at about USD50bn in 2013. Market share of third-party Internet payment companies/ services in China (%) Alipay: commission rate on PC and mobile 2009 2010 2011 2012 2013 Alipay PC Alipay Mobile Alipay 49% 50% 49% 49% 49% Cash Deposit Transaction Commission Cash Deposit Transaction Commission Tenpay 22% 20% 20% 20% 19% Value Charge Value Charge China UnionPay 7% 8% 7% 7% 11% 0-60k 1.20% 0-10k 2.50% 99bill 4% 6% 8% 9% 7% 60k~500k 1% 10k~100k 2.40% ChinaPHR 6% 7% 7% 6% 0 500k-1m 0.90% 0 100k-1m 2.20% Yeepay 2% 4% 3% 3% 3% 1-2m 0.80% >1m 2.00% IPS 3% 4% 3% 3% 3% >2m 0.70% Others 13% 2% 2% 2% 2% Source: Compiled by Daiwa Total 100% 100% 100% 100% 100% Source: Bloomberg Tenpay, officially launched in 2005, had a market
share of 19% in 2013, after trailing Alipay. In 2013,
Tenpay was integrated into WeChat to provide payment support for the WeChat platform.
Compared with Alipay Wallet, using WeChat for payments provides an attractive 0.6% commission charge to its merchants’ clients, while Alipay Wallet’s
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ranges from 2.0% to 2.5%. However, Alipay Wallet on the WeChat platform to not only enjoy Tencent’s enjoys a shorter payment settlement circle compared innovative mobile payment service, but also tap into with WeChat payment. the massive user base on the WeChat platform. Tencent requires a deposit of CNY20,000 and charges Brief comparison of paying via WeChat and Alipay – mobile a commission rate of 0.6% for using the payment WeChat Alipay Wallet service. The People’s Insurance Company of China Cash Deposit CNY20,000 NA (PICC) will cover losses resulting from payments made Commission Charge 0.6% 2.0-2.5% Settlement Circle T+7 T+0 through WeChat. Source: Compiled by Daiwa It is a significant move for Tencent to extend its Payment by QR code: innovative payment payment offering to both online and offline companies. technology likely to be widely adopted in Although it is too early to gauge the exact impact in the future short term, we think that opening up its payment API Paying through Tenpay provides 3 approaches for its could offer the company more user and business- users: 1) payment via scanning the quick response (QR) growth opportunities, especially in O2O e-commerce, code, 2) payment within the app, and 3) payment via a and broaden its coverage of online and offline public merchant account on WeChat. merchants in China, which we expect could further strengthen its presence in the China payment industry. Among these innovative payment approaches, we are particularly impressed by the payment method that As payment is the critical gateway for connecting allows users to pay via scanning the QR code. WeChat online and offline businesses, industry players (like users who activate their payment accounts on WeChat Tencent, Alibaba, etc) are aggressively grabbing market and link it to their bank accounts, just need to simply share in the payment business in China by launching a scan the QR code of the goods or service provided by series of products and services, such as selling financial the online or offline merchants, and a payment can be products, taxi booking service, top-up mobile phone completed within a few minutes after the users confirm etc. We expect they will continue to enhance their the transaction value and input their payment pass payment businesses in order to build up a code. We think this payment method is likely to have a comprehensive O2O e-commerce eco-system on their significant impact on traditional payment methods and own platforms, which, on the other hand, would affect consumers’ payment habits in the future. stimulate the overall development of the China payment industry. We have confidence in WeChat payment’s position in the mobile payment area, backed by the increasing Mobile payments – an important trend for number of merchants and companies that support the the future development of Internet WeChat payment method and its strong user base of payments both online/offline merchants and individual users. We think mobile payment will be the most important way for Internet companies to further monetise their In early 2014, Tencent tied up with Wangfujing mobile business segments in the future. We also Department Store to launch in-store purchases through believe Internet companies with mobile businesses or WeChat and allow users to settle payments via QR code the potential to extend their business to the mobile scanning. On 8 March, Wangfujing announced that Internet industry would benefit more from such rapid after a period of testing, all its goods and services were development. supported on WeChat payment. Backed by the increasing rate of mobile Internet users Besides, statistical data show that currently about and innovative improvement in mobile payment 10,000 vending machines that support WeChat QR methods led by Tencent, combined with the gradual code scanning have been put into operation in Beijing, changes in consumer habits towards convenience and Shanghai, Guangzhou, Shenzhen and other places. efficiency, mobile payment will play an important role in the overall payment system going forward. Payment is the critical gateway for building up an O2O ecommerce eco-system We expect the continual increase in mobile e- On 4 March 2014, Tencent announced that it had commerce business to further boost the growth of the officially opened up its WeChat payment application- mobile payment market. According to data from programming interface (API) to all verified service iResearch, mobile payment GMV in China reached accounts on its WeChat platform. As such, online CNY151.14bn in 2012, up 89.2% YoY. In addition, the merchants now just need to register a service account
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competition between Tenpay and Alipay has also Alibaba’s Taobao and Tmall dominate the e-commerce fuelled the development of mobile payments in China. industry in China in terms of market share, in both B2C (more than 50% currently) and C2C (more than Display of partial products/services accepted by WeChat 90% currently). We expect this strength to help Alibaba payment and Alipay improve and promote its virtual credit-card services, WeChat payment Alipay backed by its large number of online shoppers. Shopping mall Wangfujing Yintai shopping (银泰百货) Shopping (上品折扣) New World Department Store However, according to Internet news reports, Tencent’s Rainbow Shopping virtual credit card can be used not only for online Maoye Shopping shopping on the WeChat platform, but also to buy Vending machine Youbao (友宝) Youbao (友宝) goods and services offline (through a scanned QR code) 米源 Miyuan ( ) at merchants that co-operate with Tencent. Tencent Yinhaizhixing (银海之星 ) Convenience store Meiyijia (美宜佳) has opened its payment API to a large number of online Seven-eleven(711) and offline merchants, which we expect will provide it Apparel JackJones Giordano with huge potential space to expand the user base of its Only virtual credit card. VeroModa Food McDonalds Jiangtaiwuer (将太无二 ) Haidilao (海底捞) Jiaheyipin (嘉禾一品) We treat the innovative virtual product as Tencent and Xiabuxiabu (呷哺呷哺) 3W café Alibaba’s smart move for further enhancing their Accessories Jinfengchengxiang(金凤呈祥) online payment services. As payment is the critical step Taxis Didi (嘀嘀打车) Kuaidi (快的打车) for business monetisation, especially for mobile Movie Wanda Cinema (万达影城 ) Internet, and the O2O eco-system construction, we Jinyi Cinema (金逸影城 ) expect these Internet players in China to strengthen Hotel 7daysinn (7天连锁酒店 ) Podinns (布丁酒店) themselves in this area, via the approaches of either Online Dianpin.com Nuomi.com cooperation or acquisition. Qunar.com Mogujie.com Source: Company, compiled by Daiwa Comparison: traditional credit cards and virtual credit cards Traditional credit Alibaba’s Internet credit Tencent’s Internet card card credit card Virtual credit cards – an innovative move Customer base Individuals/corporates Users of Alipay Users of Tenpay in Internet payment services Credit line Usually more than Starts from CNY200 CNY50-5,000 CNY5,000 On 11 March 2014, Alibaba announced that it would Application process Troublesome and time- Almost instantly Less than 1 minute roll out its first virtual credit card in China (which it consuming Cards Handling Physical credit cards Virtual card - Being used Virtual card - Being aims to do very soon) as a result of its co-operation on AliPay Wallet used on WeChat with Citic Bank. Just after this, on the same day, Fees Relatively high Low No annual fee Tencent said that it would also team up with Citic Bank Interest rate Higher than other Same as traditional credit Same as traditional to launch a virtual credit card on the WeChat platform. types of loans cards credit cards Risk management Traditional mechanism, Shares big data Insured by Both Alibaba and Tencent plan to issue 1m virtual high cost and low generated and collected ZhongAn credit cards in the first stage. efficiency by Alibaba’s various insurance Internet properties Cross-selling High cost and low Low cost and high Low cost and high Alipay’s users can apply for the virtual credit card by efficiency efficiency efficiency sending a request to the official account of Citic Bank *Mobile socialisation None Medium High on Alipay’s platform. For Tencent, users apply through Source: compiled by Daiwa WeChat. According to news reports, the whole Note: *Daiwa estimates – refers to mobile social platforms application process is expected to take less than a minute. The initial credit amount for Alibaba’s virtual credit card is CNY200, and this could be raised in the future, depending on the purchasing record of the user.
Tencent’s virtual credit card will have 3 credit line tiers: CNY50, CNY200, and CNY1,000-5,000.
Alibaba’s virtual credit card can be used as one of the online payment methods when a user buys goods or services on Alibaba’s platform, while Tencent’s virtual credit card can be used not only for online payments but also to pay for things offline.
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However, third-party payments are still relatively small Impact on banks’ payment by amount compared with the settlement business of services banks, with competition coming in the form of fund transfers and bank card consumption. According to the Third-party payments have seen hyper-growth in China PBOC, these two types of transaction combined in recent years, with the value of transactions rising at recorded a transaction value of CNY227tn in 2012, a CAGR of 62% during 2009-12, according to iResearch which was 61x the amount paid through online third data. In 2012, CNY12.9tn of funds were paid through parties. third parties. The contribution of online third-party payments to total online payments also rose from 17% We believe the credibility of a payment company is the in 2009 to 28% in 2012. key to the success of its payment service. A number of third party payment companies have tried to challenge China: third-party payment GMV banks’ central role in payments, but have not succeeded. (CNYtn) 60 100% Taobao has been the first payment company to be 50 70% 65% 80% successful in this area, because it guarantees the 40 54% payment to both parties involved in the transaction. It 50% 47% 39.5 60% 30 38% ensures that consumers (payers) are charged only 19.4 40% when the goods purchased satisfy the standard quality, 20 12.9 28.6 8.4 and the retailers (payees) do not run the risk of failing 5.1 20% 10 to receive the money as long as the goods being sold 0 0% meet the standards. 2010 2011 2012 2013E 2014E 2015E Third Party Payment YoY (%) From that perspective, of all the commercial
Source: iResearch institutions in China, the banks offer the strongest credit protection. Hence, it is difficult for other players, China: online third-party payment GMV including the pure online payment companies, to
(CNYtn) challenge the banks’ position in the payment industry. 8 40% Although we do not expect online third-party payment 7 28% 35% 6 26% 30% to fully replace fund transfers and card consumption 5 25% through banks in the near future, we do expect it to 20% 3.7 4 17% 20% dilute the banks’ central role in China’s payment 3 2.2 15% system over the next few years. 2 1.0 10% 0.5 1 5% In the case that third-party payment gradually takes 0 0% market share from the banks, the settlement and 2009 2010 2011 2012 Online Third Party Payment as % of total third-party payments clearing income of banks would come under pressure. In 1H13, these two areas contributed 17% of the gross Source: iResearch fee income or 4% of the operating income for all the H- share listed China banks. China: online third-party payment market share (3Q13) Others Among China’s national banks, we believe Agricultural ChinaPnR 8.4% Bank of China (ABC) (1288 HK, HKD3.15, Hold [3]) 6.7% would be affected the most given its largest exposure to 99bill settlement and clearing fee income as a proportion of 6.9% its fee income, while Bank of Communications Alipay (BoCom) (3328 HK, HKD4.68, Hold [3]) and China Unionpay online 48.7% 9.3% Merchants Bank (CMB) would be least affected.
Tenpay 20.0%
Source: iResearch
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China banks: settlement and clearing fees as % of gross fee income (1H13)
30% 24.3% 25% 21.6%
20% 16.6% 14.7% 13.6% 15% 11.4% 11.1% 10% 7.6% 8.3%
5%
0% Citic ABC CEB CCB BOC CMB ICBC BoCom Minsheng
Source: Companies, Daiwa
In our view, banks that offer comprehensive retail services would be less affected by competition because they are able to cross-sell products and minimise the diversion from third parties. For example, a bank with a customer payroll account has more information on the credit condition of the customer, so it can better sell that customer a mortgage or credit card. Also, if a bank notices a large payment to a car dealer, it may then be able to cross-sell an auto loan or auto insurance to that car buyer.
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treasury notes, central bank notes, interbank bond repurchases, and certificates of deposit, after setting aside a certain amount of cash to maintain its liquidity.
As interest rates in China have continued to rise in recent years, MMFs have become increasingly Internet investment appealing to retail investors with little access to investment alternatives apart from bank deposits and products wealth management products (WMP). This has led to a surge in the AUM of the MMF industry in China. At the The exponential growth and attractive end of February 2014, the MMF market in China had expanded to CNY927bn, 3x the size it was 2 years ago. returns offered by Yuebao have attracted significant attention and led to concerns China MMFs: AUM over banks’ deposit funding. We expect (CNYbn) Yuebao’s growth momentum to slow 1,200 1,000 going forward and for the banks to 800 gradually see changes in their funding 600 mix 400
200 The legend of Yuebao 0 Jul 2004 Jul 2005 Jul 2006 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013 Exponential growth since inception Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014
A lot of investors are surprised that Yuebao, the Source: CSRC, WIND, compiled by Daiwa monetary fund from Alibaba, attracted CNY400bn in funds and became the largest fund product in China China mutual funds market: AUM within 8 months. We demystify Yuebao’s success and (CNYbn) the impact it has had on the China banks. 4,000
3,000 Yuebao: assets under management (CNYbn) 2,000 600 1,000 500 0 400 300 Jun 2012 Jun 2013 Mar 2013 Mar Feb 2014 Sep 2012 Dec 2012 Sep 2013 Dec 2013 200 Money market Fixed income Equities Overseas 100 0 Source: CSRC, WIND, compiled by Daiwa Note: Fixed income funds include pure fixed income and principal-guaranteed mutual funds; Equities include pure equities and mixed strategy funds; Overseas funds refer to QDII funds. 12 Jul 13 12 Oct13 12 Jan 14 12 Jun 13 12 Feb 14 12 Aug 13 12 Sep 13 12 Nov 13 12 Dec 13 Source: Media reports, compiled by Daiwa We see 3 reasons for the surge in Yuebao’s AUM: 1) immediate redemption (“T + 0”), 2) low investment Yuebao utilises the Alipay platform to draw money threshold for mass market retail investors, and 3) from retail investors. When retail investors make attractive yield compared with major alternatives. deposits with Yuebao, their funds are subscribed to a MMF managed by Tian Hong Asset Management (Tian • Immediate redemption. Previously all the Hong). Essentially, Yuebao is the distribution channel MMFs in China had “T+1” or “T+2” redemption. for the MMF. Investors had to wait 1 or 2 business days before being able to use their proceeds from the The investment of the MMF is largely similar to all the redemption of a MMF. Yuebao is the first MMF in previous MMFs in China and overseas. The MMF China to offer immediate (“T + 0”) redemption. This invests in interbank instruments, such as short-term greatly improves the convenience for investors. We - 9 - China Financials and Internet sectors 12 March 2014
understand that Alibaba is providing funds for such yield spread to Yuebao and the current yield spread is settlement. almost zero (at 4 March 2014).
• Low threshold for mass retail investors. Yield spread to Yuebao Yuebao’s investment threshold is CNY1, much lower 1.0 (%) than the regular MMF threshold of CNY1,000 and 0.5 CNY50,000 for WMPs. This allows retail investors 0.0 -0.5 to buy Yuebao even with a small amount of money, -1.0 which might not be enough to subscribe for other -1.5 MMFs or WMPs. The immediate redemption -2.0 feature assures that investors can get their money -2.5 back immediately in case they need to use that -3.0 money to make payments. As such, most investors 10 Jul 13 10 Oct13 10 Jun 13 10 Jan 14 10 Feb 14 10 Mar 14 are comfortable with placing a small amount of 10 Aug 13 10 Sep 13 10 Nov 13 10 Dec 13
money to be used as settlement funds with Yuebao. vs. China AMC Cash Enhance vs. E-fund Money
• Attractive yield. Over the past 8 months since its Source: CSRC, WIND, Daiwa introduction, Yuebao has offered annualised returns of between 4% and 7%, which is significantly higher We do not expect Yuebao to grow at such a clip for the than the saving deposit rate which is capped at 0.4% rest of 2014 because: 1) we expect return on Yuebao to in China. It is also higher than the 1-year time moderate, and 2) it would be increasing difficult to deposit rate of 3.3% (assuming 1.1x benchmark keep the immediate redemption feature. deposit rate) and the 3-6% annualised return that most MMFs have been offering. We expect returns from Yuebao to decline in the short term as rates moderate seasonally. Note that Yuebao Comparison of Yuebao, MMF, and time deposit has experienced two periods of high returns (above 6%) since its launch: in June to early July 2013 and 7 (%) December 2013 to early February 2014. Both occurred 6 5.72 during periods when interest rates in China saw severe 5 seasonal fluctuations. In June 2013, the PBOC 4 3.99 restrained its open market operation, together with 3.30 3 seasonal effects, and, as a result, SHIBOR at one point 2 hit over 10% overnight.
From December 2013 to early February 2014, the year- 10 Jul 13 10 Oct13 10 Jun 13 10 Jan 14 10 Feb 14 10 Mar 14 10 Aug 13 10 Sep 13 10 Nov 13 10 Dec 13 end effect, Lunar New Year effect, together with tight Return on Yu'ebao Return on a representative MMF* monetary policy led to high interest rates. 1-yr time deposit rate ceiling Source: PBOC, CSRC, WIND, compiled by Daiwa Comparison of Yuebao, MMF, and time deposit annualized Note: * Return on a mid-sized MMF in China yield on Yuebao (%) 7 June 2013 Year-end tight Demystifying the high yield 6.31 liquidity crisis liquidity 6 Yuebao’s high rate of return comes from its 5.89 institutional platform. Large buyers have more 5 Chinese New bargaining power with sellers. This is also true for Year Yuebao on the interbank market and bank CD market. 4 Currently, Yuebao is the largest MMF in China with 3 almost 40% of the total market share. We estimate that the second largest MMF, managed by China AMC, has 2 only an 8% market share.
10 Jul 13 10 Oct13 10 Jun 13 10 Jan 14 10 Feb 14 10 Mar 14 If we compare Yuebao with “China AMC Cash 10 Aug 13 10 Sep 13 10 Nov 13 10 Dec 13 Source: PBOC, CSRC, WIND, compiled by Daiwa Enhance”, the second-largest MMF by AUM after Yuebao, the yield spread is smaller than that with “E- fund Money”, which is a smaller MMF. “China AMC Cash Enhance” even recorded a few days of positive
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market funds online is not new in China, Licaitong has Licaitong – Tencent’s first move been able to leverage on WeChat’s large user base. into the mobile Internet finance In addition to China AMC, Tencent has teamed up with field the other 3 leading asset-management companies in the Mainland – China Universal Asset Management, E Following Yuebao’s success, Tencent launched an Fund Management, and GF Fund Management – in asset-management product platform, Licaitong, in order to enhance its ability to launch financial products January this year, cooperating with one of the leading for the huge number of WeChat users (there are more China fund-management companies, China Asset than 600m registered users currently). We believe that Management (China AMC). a diverse range of Internet-financial products will not only attract more users for WeChat but also strengthen Licaitong enables users to buy financial products (such Tencent’s presence in the mobile-Internet finance area. as money market funds) on WeChat through Tenpay (the payment service provided by Tencent). The total Screenshot of Licaitong on WeChat vs. Yuebao on Alipay amount purchased, of more than CNY800m on the first day of operation, was higher than that on Yuebao’s first day of operation, of CNY350m. PICC is the insurer for payments made on Licaitong.
Brief comparison of Licaitong and Yuebao Licaitong Yuebao Launch date 15-Jan-14 13-Jun-13 Fund partner Huaxia Bank Cai Fu Tianhong Asset Management Zeng Li Bao Bao(华夏财富宝) (天弘增利宝货币基金) Capital threshold CNY0.01 CNY1 Amount purchased on the launch date CNY 800m CNY 350m Withdrawal policy Maximum amount per
Yuebao Licaitong
Source: http://funds.hexun.com
Since its launch, Licaitong has attracted a high level of customer deposits into the money market funds it offers. We believe this illustrates the power of Tencent’s online platform. Although offering money
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being phased in since 2007, regulators have more Impact on banks advanced instruments to monitor and regulate balance-sheet risks and liquidity risks in the banking Due to the rapid AUM growth of Yuebao and other system. MMFs, China banks have launched similar MMF products in the past few months to compete. Admittedly, it takes a long time to change the law. However, we believe it is more pragmatic for the The slower YoY growth in deposits in recent months regulator to adjust the definition of LDR in order to may reflect in part the situation that some demand better utilise banks’ balance-sheet potential and make deposits have been shifted to MMFs. For January 2014, the indicator more reflective of the underlying balance- deposit growth in China was only 11.3%, substantially sheet risks. lower than M2 growth of 13.2% and overall loan growth of 14.3% YoY (note: these figures are on a YoY basis Over the long term (3-5 years), we believe the deposit hence seasonal factors are not taken into account). competition from more convenient and high-yield Internet-finance products will mostly affect banks’ China banks sector: deposit and loan growth funding costs, and the composition of funding rather 18% than the amount of funding. More retail funds shifting 17% into MMFs will also force banks to offer higher rates 16% rather than the regulated deposit rates through WMPs, 15% 14% 14.3% which will effectively accelerate the pace of interest- 13% 13.2% rate deregulation in China. 12% 11% 11.3% 10% Impact on Internet companies Jul 2013 Apr 2013 Oct 2013 Jan 2013 Jun 2013 Jan 2014 Feb 2013 Mar 2013 Aug 2013 Sep 2013 Nov 2013 Dec 2013 May 2013 We have undertaken a sensitivity analysis of the Deposit YoY growth Loan YoY growth M2 YoY growth revenue impact from selling the financial products for Tencent’s Licaitong and Alibaba’s Yuebao. Source: PBOC, CSRC, WIND, compiled by Daiwa On the assumption that the commission rate that Under the current regulatory framework, only retail Tencent and Alibaba charge for their total capital size and non-financial enterprise deposits are included in ranges from 1-20bps, the following table shows the the loan-to-deposit ratio (LDR) calculation. Financial- impact on the revenue for each company. institution deposits are excluded. Therefore, the expansion of MMFs tends to lead to a rise in the LDR Based on the current capital size of Licaitong of for the bank sector as a whole. CNY50bn, and with Tencent charging 5bps of the total capital, we estimate that the revenue contribution The LDR requirement – all China banks must maintain would be CNY0.03bn, representing 0.4% of our their LDR at below 75% – was a product of the last forecast WeChat revenue for 2014. Based on the round of banking reforms two decades ago. In 1994, assumption and our forecast revenue from WeChat for the PBOC proposed monitoring banks’ balance sheets 2014, if the capital size of Licaitong reached CNY80bn and liquidity risk by using the LDR. The 75% maximum at the end of this year, the revenue contribution from LDR requirement came into effect in the Commercial Licaitong as a percentage of total WeChat revenue Banking Law in 1995. With the establishment of the would rise to 0.6%. We estimate the percentage would China Banking Regulatory Commission (CBRC), major be 2.4% if Tencent charged a 20bps commission rate amendments were made to the Commercial Banking on Licaitong. Law in 2003, but the 75% LDR requirement remained. Since then, the CBRC has been responsible for Meanwhile, due to the large capital size of Alibaba’s monitoring the banks’ LDRs and implementing the Yuebao (CNY185.3bn as at the end of December 2013, 75% ceiling. and about CNY500bn at the end of February 2014), and assuming Alibaba charges a commission rate of Nowadays, the LDR ceiling seems outdated. On the one 5bps, we estimate that the revenue generated from hand, with the development of China’s financial system Yuebao would account for 0.2% of Alibaba’s total in the past two decades, banks now have much more revenue for 2013. The revenue contribution would complicated types of assets and liabilities in addition to extend to 0.9% if Alibaba were to charge a commission loans and deposits, both on and off their balance rate of 20bps, based on our assumptions. sheets. On the other hand, with Basel II and Basel III - 12 - China Financials and Internet sectors 12 March 2014
Although financial products do not make a significant expect these products to speed up the monetisation of contribution to the revenue of the Internet companies, the companies’ mobile businesses. they help to improve user traffic and stickiness. Importantly, these products also stimulate the In our view, Internet-finance products have their own utilisation rate of the Internet companies’ payment advantages for idle funds given their convenience, account platforms, which should ramp up the backed by the rapid development of the mobile monetisation of these companies’ mobile-Internet Internet. Online-payment platforms such as WeChat businesses. and Alipay are very efficient distribution channels for micro-finance products such as MMFs. We believe Sensitivity analysis on Tencent’s Licaitong companies such as Tencent and Alibaba, which operate 2014E mature platforms and have huge Internet user bases *WeChat Revenue (CNYbn) 6.5 for their services and products, will be the beneficiaries Feb-14 Dec-14 of the development of Internet finance. ^Capital size (CNYbn) 50 80 Commission Est. revenue as % of as % of fee contribution WeChat's Est. revenue WeChat's Meanwhile, we see the launch of Internet-finance assumption as of Feb revenue in contribution in revenue in products on the platforms of the big Internet players in (bps) 2014 (CNYbn) 2014E 2014E (CNYbn) 2014E China as a way for them to extend their businesses into 1 0.01 0.1% 0.01 0.1% 5 0.03 0.4% 0.04 0.6% the finance industry. We note that they do not appear 10 0.05 0.8% 0.08 1.2% to be satisfied only with being distributors of financial 15 0.08 1.1% 0.12 1.8% products: they want to be players in the financial 20 0.10 1.5% 0.16 2.4% industry. According to a new report from Reuters on 7 Note: *Daiwa estimate. ^ Information from the Internet and Daiwa estimate for Dec 2014 March 2014, Baidu has formed a partnership to apply for a private banking licence in order to become a Sensitivity analysis on Alibaba’s Yuebao 2013E certified financial institution. *Total revenue of Alibaba (CNYbn) 40.9 China: major financial products Dec-13E Company Name of product Fund partner *Annualised 7-day return ^Capital size (CNYbn) 185.3 Alibaba Yuebao Tian Hong Asset Management 5.805% Commission fee Revenue contribution as of 30 Dec as % of Alibaba's total Tencent Licaitong China AMC 5.925% assumption (bps) 2013 (CNYbn) revenue in 2013E Baidu Baizhuan Li Gun Li Harvest Fund 6.019% 1 0.02 0.0% NetEast Xianjinbao Universal Asset Management 5.753% 5 0.09 0.2% Suning Lingqianbao GF Fund Management 5.887% 10 0.19 0.5% Source: Compiled by Daiwa 15 0.28 0.7% Note:*As of 8 March 2014 20 0.37 0.9% Note: *Daiwa estimate. ^Information from the Internet
We believe the Internet-finance products launched by the major Internet players, such as Tencent, Alibaba and Baidu, since last year, are good supplements to their businesses, as it diversifies their product and service mix. They have been attracting a huge number of users, as they have a higher rate of return than MMF products.
For example, lots of WeChat users activated Tenpay payment accounts to buy Licaitong, in the process linking their bank cards. Going through the process of buying Licaitong is one way of educating users on how to make payments through WeChat. This, in turn, enhances the likelihood that users will buy other goods and services on the platform, as they know how to use it and that it is convenient. We think it is important for Tencent to develop its mobile e-commerce and its O2O eco-system, as ensuring secure payments is important for the e-commerce industry. We see Internet-finance products as an important way for the Internet companies to diversify their revenue streams, and
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there is the risk that lenders could lose their principal and the expected interest on their investments.
There are two major types of P2P companies. One serves as a platform only. It does not bear any liabilities in the case of a loan default. It makes a profit by Internet-based lending charging a service fee. The other is more involved in the due-diligence process and bears partial or full business responsibility for credit risks. It takes advantage of the spread between the return from loans and that paid to We see the Internet-based lending the investors. business as having little impact on the P2P in China and abroad bank sector as it is very easy for banks to Since the establishment of Zopa, the first Internet- launch such loan products. Banks have an based P2P lending platform, in the UK in 2005, online edge in due diligence, risk management, P2P lending has expanded sharply globally, especially and sales platforms over the pure- in the US. After years of competition in the US, Lending Club (Not listed) and Prosper (Not listed) Internet platforms/pure-Internet together currently account for 80% of the Internet- companies that engage in P2P lending based P2P market there, and their platforms have been the source of USD3.7bn and USD0.7bn in personal loans, respectively, since being established. P2P – a new form of financial disintermediation Lending Club, which was established in 2007, is the leading P2P lending platform in the US. In early 2013, Google bought a USD125m stake in the company from What is P2P? investors. Lending Club is planning to list this year. Over the past decade, Internet-based platforms have emerged that allow individuals to lend money to each Lending Club is the first type of P2P platform that we other. This has become known as person-to-person or mentioned above – it does not take on credit risk. It peer-to-peer lending (P2P lending). makes money from fees. After deducting 1% of the loan as a service fee and any other fees, Lending Club credits P2P demonstrates the concept of financial to each lender’s account his or her share of the disintermediation: people can bypass traditional remaining funds. The total default rate of Lending Club financial institutions to borrow or lend. P2P platforms was about 2.45% as at the end of February 2014. offer lenders the potential to earn relatively high returns (compared with deposits) and a wide choice of borrowers with different levels of credit risk. Naturally,
Business model of P2P lending
Source: US Government Accountability Office
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In P2P lending, the P2P companies act as an Comparison of the catalysts for P2P lending in the US and intermediary between borrowers and lenders. China Participants must register as members and provide US China Residents’ savings Relatively low Relatively high information to determine their eligibility and Credit evaluation system Developed Poor creditworthiness. The P2P company then assigns a Interest rate regulation Liberalized Regulated but loosening proprietary grade to each loan request – based on the Due diligence conducting Good off-line, OK online OK off-line, poor online credit score, credit history, and other factors – to help Population concentration Scattered, less populated Concentrated, populated lenders gauge borrowers’ creditworthiness. The Labour cost High Low company posts approved loan requests, including the Internet acceptance High Medium loan amounts, interest rates, and assigned grades, on Source: Daiwa its website for lenders to review and choose which P2P lending started in China in 2010. According to one(s) they would like to fund. iResearch, there were more than 300 P2P companies in
the country as at the end of 2012 and total loans made Lenders may also view other information, such as the until 2012 amounted to CNY68bn. Among all P2P borrowers’ income levels, and the purpose of the loans, loans, 72% of them involved both online and offline to the extent borrowers provide such data. Lenders due diligence. may scroll through approved loan listings manually to select which loans to fund, or they may build a portfolio China’s P2P market: loan size based on their preferred criteria, such as loan characteristics (eg, amount, term, interest rate) or (CNYbn) 300 borrower characteristics (eg, location, number and 247.18 balance of credit lines, length of employment). 250
In China, there are hundreds of P2P lending platforms 200 144.29 and the market concentration is much lower than in 150 the US. While some of the newly created players are doing good business, many other companies in the 100 68.03 space have gone bankrupt or have disappeared with 50 22.86 lenders’ investments, generating more pressure for 1.37 8.42 regulators in China. 0 2010 2011 2012 2013E 2014E 2015E Unlike their counterparties in the US, most of the P2P Source: iResearch lending platforms in China take the responsibility to China’s P2P market: types of due diligence undertake on-site due diligence on borrowers and select reliable ones for lenders to choose from, because 100% online research is relatively unreliable in China due to 80% the underdeveloped credit system and less 72.4% 71.9% 71.2% 69.6% transparency in commercial registration and taxation 60% information. 40% Furthermore, some P2P platforms in China offer 20% guarantees on P2P loans by a third party or itself to 27.6% 28.1% 28.8% 30.4% attract investors. In most cases, without these offline 0% efforts by the platforms, lenders in China are not 2012 2013E 2014E 2015E willing to take a risk on P2P lending. Compared with Online only Both online and offline the US, the lack of a personal credit-rating system is Source: iResearch one of the key obstacles to the industry in China.
Renrendai is among the largest P2P companies in China. It was founded in Beijing in May 2010. In 2013, the company originated total loans of CNY1.57bn, representing 342% YoY growth. The average interest rate on the platform was 13% for the year. Renrendai finished its USD130m first-round financing in late 2013, led by Trust Bridge Partners.
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The company offers 3 types of loan product: those Renrendai also set up a risk reserve to cover the losses checked by Renrendai physically at the place where the from default loans, similar to the concept of the loan- borrower operates, those backed by institutional loss reserve for banks. As of the end of 2013, the guarantors, and unsecured products. Some 81% of its company’s risk reserve-to-total loans ratio was 1.94%, projects are scanned on-site. higher than its non-performing loan ratio, 0.64%.
Renrendai: loan mix by type of guarantee (end-1H13) The following are the key features of the P2P business Insitutional Unsecured in China. gurantee 5.4% 13.3% • Customer base: small and micro enterprises, high-net-worth individuals. • Loan size: usually less than CNY1m. • Interest rate: 15-40% annualised. • Fee charges: 1-2% service fee/month. • Account management: no “asset pooling” is allowed in principle. The P2P platform must have On-site due standalone accounts for each P2P loan. diligence • 81.3% Regulator: financial institutions engaged in P2P lending are supervised by the CBRC; other P2P Source: Renrendai annual report, compiled by Daiwa platforms are regulated by the Ministry of Industrial Most of Renrendai’s loans were medium term, of and Information Technology. • between 1-3 years. At the end of 1H13, 40% of its loans Defaults: based on our market research, we had durations of 1-2 years and 47% of its loans had estimate that the current default rate is 1-5%. durations of 2-3 years. • Risk reserve: some P2P companies have established risk reserves to repay investors in the Renrendai: loan mix by tenor (end-1H13) event of loan defaults. The percentage of risk- 1-6 months reserve provisions to total loans is 0.5-2%. 7-12 months 2.0% 10.8% Banks engaged in P2P lending As the P2P lending business has expanded hugely over the past few years, some banks have started to enter 2-3 years 47.0% the space, notably China Merchants Bank (CMB) and Ping An Bank (Not rated).
1-2 years 40.2% These banks have large amounts of capital and huge customer bases, in terms of both investors and borrowers.
Source: Renrendai annual report, Daiwa CMB’s P2P lending platform, which is one of the functions in Small Business e-Home (e-Home), was Renrendai: loan mix by geography (end-1H13) launched in April 2013. We expect CMB’s e-Home to Shandong 11.5% help lower the transaction costs by utilising the large Others amount of data accumulated through its traditional 27.6% Shanghai banking operations. Meanwhile, e-Home is more than 11.4% a P2P lending platform; it offers corporate customers a complete online-service package, including credit
Hubei rating, lending, clearing and wealth management. Jiangsu 8.3% 4.5% Unlike most P2P platforms in China, CMB assumes no Hunan Chongqing responsibility for any defaults on P2P loans extended 5.9% 8.2% Liaoning through its online platform. The disclaimer is clearly Fujian Henan 7.3% 7.7% posted on its website and documented in its service 7.6% contracts. Source: Renrendai annual report, compiled by Daiwa
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However, the company does undertake due diligence Ping An Bank was another early mover in the P2P on all potential borrowers and their projects through a business. In March 2012, the company introduced process similar to the due diligence undertaken for its Lufax, an outstanding feature of which is that all corporate loans. products are secured by Ping An Bank’s guarantee company – Ping An Financing Guarantee Company. Most of products on the e-Home platform have a The president of Ping An Bank was assigned to lead maturity of about 180 days, and their expected Lufax, suggesting that P2P business lending is high on annualised returns range from 6.55-7.5%, significantly Ping An Bank’s agenda. higher than that of the traditional WMPs. The platform is also very easy to access and user-friendly, in our Examples of Ping An Bank's P2P projects listed on Lufax Expected Investment amount view, attracting many traditional investors who are new Project Name Tenor annualised return (CNY) to Internet finance. Another advantage of e-Home Stable profit e-loan 12 months 8.40% 50,000 platform is that investors do not have to be existing 14030600584 Stable profit e-loan customers of CMB, meaning it is available to a broader 12 months 8.40% 50,000 1403041159 customer base. Lenders can invest the money they have Stable profit e-loan 27 months 8.61% 38,679 deposited in other banks through third-party payment 14030600797 Stable profit e-loan companies. 28 months 8.61% 15,989 14030600772 Stable profit e-loan 36 months 8.61% 10,000 CMB: homepage 14030300225 Stable profit e-loan 36 months 8.61% 10,000 - 40,000 14030300565 Source: Lufax, compiled by Daiwa
Comparison between e-Home (CMB) and Lufax (Ping An Bank) Name e-Home Lufax Bank CMB Ping An Establishment September 2013 March 2012 Return 6.5-7.5% About 8.6% Tenor About 180 days 1-3 years Transferable No Yes, after 60 days Single loan size CNY1-30m CNY10,000-300,000 Guarantee No Yes Revenue source Service fees Service and guarantee fees Source: Companies, compiled by Daiwa
CMB’s advantage over the other banks and pure- Source: Company Internet P2P platforms is its ability to carry out due diligence for all its lending projects. The unique feature CMB: P2P webpage of Ping An Bank’s Lufax is the guarantee offered on all loans. However, we believe the regulatory limit on the total guarantee amount of Ping An Financing Guarantee Company will restrict the business growth of Lufax. CMB’s small-enterprise customers should benefit from the complete service package e-Home offers and the limited exposure to the risk within its P2P lending platform.
We believe risk management is the key to determining the sustainability and profitability of a lending business, including P2P lending. From this point of view, banks have much greater expertise, experience, and technology than pure Internet P2P platforms. Over the next few years, we believe that only those P2P platforms with a wide user base, strong brand power, and solid risk management system will be able to survive. Most of them are likely to face credibility issues and find it hard to survive. Source: Company
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Citic Bank: asset yield on POS loan vs. total
POS micro loans – combining big 16% data with credit-risk management 14% 12% POS micro loans 10% POS loans (for which banks use point-of-sale [POS] 8% terminal transaction data to make their loan decision) 6% are unsecured loans aimed at micro enterprises. The 4% whole application, approval, and loan disbursement 2% process can be completed online. 0% 2009 2010 2011 2012 1H13 2H13 Credit approval is made based on the POS transaction Average yield of all IEA Average yield of POS loan data of the applicant merchant. The bank filters the Source: Company, compiled by Daiwa POS terminal transaction data provided by UnionPay Note: IEA stands for interest-earning assets and identifies merchants whose credit conditions meet the bank’s standard and promotes its micro loans to Rapid loan-balance growth. Citic Bank launched qualified borrowers. The maximum amount for a POS its POS loan product on 21 October 2013. At the end of micro loan is CNY0.5m and the maximum loan tenor is 2013, CNY1.5bn had been lent. 90 days. A revolving credit line can be used. Cross selling, cost efficiency, and time deposits. Citic Bank has been the pioneer in offering POS micro POS micro loans help Citic Bank attract incremental loans in China. The company’s POS loans can be micro enterprise clients and cross-sell various financial approved 24-7, and loan disbursement usually takes products. In addition, as the loan approval process is less than an hour, greatly improving the convenience to conducted through a pre-designed online platform, small merchants. operating costs are low and hence improves the bank’s overall cost efficiency. Importantly, it attracts Key features of POS micro loans additional time deposits. No. Item Detail 1 Timing 24 hours a day, 7 days a week Huge potential ahead 2 Procedure Simpler than general loans 3 Application method Online Currently, China UnionPay has a presence in 337 cities 4 Speed Usually less than an hour. Can be as fast as 2 minutes. in China, with over 2m merchants and about 3.5m POS 5 Criterion 2-year POS transaction history terminals. 6 Amount No more than CNY0.5m 7 Tenor No more than 90 days 8 Collateral No collateral required We understand that the average size of Citic Bank’s Source: Company, compiled by Daiwa POS micro loans is CNY0.3m. Given this, the CNY1.5bn loan balance at the end of 2013 only corresponds to POS loans are an innovation in bank risk management about 5,000 borrowers, or 0.14% of the total number of as they are characterised by a credit-risk review prior to users of China UnionPay’s POS terminals. a loan application being made and precise marketing. By reviewing the creditworthiness of an applicant We believe that some other banks, such as CMB, China before a specific loan application, the timing of loan Everbright Bank (CEB, 6818 HK, HKD2.87, Buy [1]), approval is shortened substantially. These loans Minsheng Bank (1988 HK, HKD7.32, Hold [3]), and represent the first steps in establishing an O2O Huaxia Bank (Not rated), are also offering POS loans business model in China’s financial sector. By focusing now. on a “white list” (ie, pre-identified borrowers with good credit) only, marketing costs are minimised.
Benefits for the bank High interest margin. Banks usually charge a 60% premium to the benchmark interest rate for its POS micro loans. It takes into consideration the borrowers’ overall contributions to the bank when deciding the lending rates.
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For example, 92.2% of Yuebao’s assets were invested in bank deposits, most of which we believe are not demand deposits. Only 61% of its assets can be liquidated within 30 days. This presents the MMF with a liquidity risk; in the event that a lot of investors redeem their funds at a same time, for example during Regulations and a market-liquidity crisis, the MMF may not be able to meet the redemption requests. potential tightening Yuebao: asset allocation (end-2013) Others Fixed-income As Internet-finance products are quite 0.3% instruments 6.7% new in China, the relevant legislation is Financial assets lagging behind product innovations. purchased under resale However, we expect a few areas to be agreement regulated soon as Internet finance is now 0.8% a significant part of the country’s financial system.
Bank deposits 1. Most risky area – P2P lending 92.2% Source: Tian Hong AM, compiled by Daiwa We think P2P lending is the most risky area among all Yuebao: net asset maturity (end-2013) the Internet-finance products, due to the absence of a 70% regulator and the unclear legal status. 61.0% 60% Currently, there is no specific regulatory body that officially oversees P2P lending in China. With the 50% business growing rapidly and transparency low, there 40% 29.7% were several cases of fraud in 2013 in P2P lending, with 30% the borrower or even the P2P company disappearing after investors committed their funds. According to 20% 8.7% local media reports, there are 2,000 P2P lending 10% platforms in China, and 80 of them have seen some 0.4% 0% type of fraud. < 30 days 30 to 59 days 60 to 89 days >= 90 days
During the recent National People’s Congress, a few Source: Tian Hong AM, compiled by Daiwa proposals were made to regulate P2P lending. We So far, the MMFs in China have not faced any severe understand that formal regulations are likely to be liquidity risks because the market has a net inflow of introduced soon, and that this new industry will be capital. However, when the returns on MMFs start to monitored by financial regulators such as the CBRC decline or alternatives offer higher returns, MMFs would and the PBOC. see a net outflow, which means that the MMFs would need good liquidity in order to offer timely redemptions. 2. Rise in liquidity-reserve If the MMFs do not have enough cash on hand, they might not be able to meet the redemption requests, requirements for MMFs further exacerbating any concerns in the market.
We understand that most MMFs have some level of Currently, all mutual funds in China are required to set maturity mismatch. A substantial proportion of their aside 1% of their NAV as a reserve. We understand that investment portfolio is not current assets that can be the China Securities Regulatory Commission (CSRC) is redeemed immediately. However, investor redemption likely to raise this requirement. Another possibility is of MMFs can take place anytime. that the regulator would make the reserve reflect the certificate deposits exposure of the fund, considering the large exposure of certificate deposits for some funds. - 19 - China Financials and Internet sectors 12 March 2014
Liquidity-reserve regulations CNY1.18bn. The deal is awaiting regulatory approval, Time Regulation and Alibaba expects it to be approved in about July this Fund management companies should set aside a risk reserve and deduct from management fees on a monthly basis. The amount of deduction shall year. August 2006 be no less than 5% of the management fee. No further charge is required when the balance of the reserve is 1% of the NAV of the fund. The percentage of deduction was increased to 10% from 5%. The 1% of November 2008 NAV cap was unchanged. Source: CSRC, Daiwa
3. Strict implementation of penalties for advance withdrawal of interbank deposits
MMFs in China have large investments in interbank deposits. We understand that legally, when an MMF makes an advance withdrawal of interbank time deposits, it should face a penalty. However, in reality, some banks still pay the MMF the agreed time deposit rate in order to maintain the relationship.
Time deposits are not allowed to exceed 30% of an MMF’s investment portfolio. However, according to the CSRC’s definition, for MMFs, time deposits do not include interbank deposits. As a result, most MMFs invest 50-90% of their funds in interbank deposits. And, in most cases, they have agreements that banks will waive the penalty in the event that the MMF withdraws the interbank time deposit before it matures.
4. Capital requirements for Internet players engaged in financial services
Most Internet-finance products are collaborations between Internet companies and financial institutions. We are yet to see Internet companies launch innovative financial products on their own. We think a major obstacle is the licence and their own capital base, as financial regulators usually have high requirements on capital when it comes to granting financial service licences.
In order to compete with bank deposits over the long term, we believe that most of the Internet players will have to build up large amounts of capital to provide immediate liquidity and satisfy regulatory requirements.
Some of the Internet players are aiming to take stakes in financial institutions. In October 2013, in order to seek control of Tianhong Asset Management, Alibaba proposed taking a 51% stake for a consideration of - 20 - China Financials and Internet sectors 12 March 2014
compete head-to-head in those areas that have already been penetrated. Hence, they will have to fill the gaps currently not served by traditional banks.
Earlier in this report, we analysed a few innovative financial products offered by the Internet companies. The inception of With Internet companies being granted banking licences, we expect more product innovation in the ‘Tencent Bank’ and areas of payments, investment, and lending. These products are likely to improve substantially the user ‘Alibaba Bank’ stickiness for Internet companies. Banks will have to respond quickly and better utilise their expertise and Tencent and Alibaba are among the first data accumulated over decades of operation in order to keep up with the services provided by Internet players. private companies to operate private commercial banks in China. Meanwhile, despite the potentially wider business scope that Internet companies such as Tencent and Alibaba might be able to enjoy, we note that by Internet players setting up banks operating under a bank licence these financial products are subject to all the regulations governing banks. This On 11 March this year, during the National People’s means the Internet players will be closely monitored by Congress, CBRC chairman Shang Fulin announced a the financial regulators. pilot programme to allow the establishment of private commercial banks. Ten private companies, including Tencent and Alibaba, will participate in the programme.
The CBRC will allow the private commercial banks to be set up in Shanghai, Tianjin, Guangdong, and Zhejiang. Alibaba will team up with Wanxiang Group, an industrial conglomerate based in Zhejiang, and Tencent will team up with Baiyeyuan Investment, an investment company with a large number of stakes in retailers based in Shenzhen.
The CBRC will attempt to ensure the private commercial banks are focused on different market segments. According to the commission, Alibaba and Wanxiang Group will focus on small and micro clients in both its deposit and loan businesses. The CBRC will set a limit on the maximum size of deposits and loans per client. Alibaba will also make use of its Internet technology to attract small corporates that prefer online banking.
Meanwhile, Tencent and Baiyeyuan will focus on large deposits and will have a minimum threshold for deposit clients. They will also have a maximum loan size per client, similar to Alibaba and Wanxiang.
We believe the establishment of private commercial banks, especially those operated by major Internet players, will help to increase differentiation in banking services. Due to their relatively small capital bases and branch networks compared with most of the traditional banks, private commercial banks will not be able to
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investment in physical branches. We expect HTS’s brokerage business to gain market share and have a higher commission rate than that for the sector over the next few years. The company has been increasing its share of the brokerage market since 2010 despite not making any major cut to the commission rate. Last Stock implications but not least, we think concerns about the commission rate in the market have been overdone. We reiterate We see Citic Bank, China Merchants our view that it will be the lending businesses that will drive the industry leaders’ earnings over the next few Bank, Haitong Securities, and Tencent as years. vehicles for investors to ride on the development of Internet finance in China. Tencent Among the Internet players, we believe Tencent has a strong competitive advantage in the Internet-finance Stock implications field, given its strong mobile platform and a huge and loyal user base. Internet-financial products are Below we discuss the stocks that we believe will allow improving its user traffic and the stickiness on its investors to tap into the growing Internet-finance WeChat app. The process of buying financial products business in China. In the financial space, our is also a good way to educate users on the use of recommendations are Citic Bank, CMB, and Haitong Tencent’s payment service, which we expect to pave the Securities. Among the Internet stocks, we recommend way for the further development on its payment-related Tencent, due to its large and loyal user base, as well as business. We believe financial products fuel the use of its strong presence in the mobile-Internet area. the company’s online-payment service, and hence will increase the monetisation in its mobile business. Citic Bank We see Citic Bank as a good proxy for the Internet- Meanwhile, Tencent is building up strongly its O2O finance theme. The company has a first-mover eco-system, which will strengthen its online-payment advantage in POS lending, which could improve its arm, as the online-payment service is an important lending margin and complement its weak deposit gateway for the eco-system. We expect the company to franchise. It launched China’s first virtual credit card, enhance its online-payment business through together with Alipay, in the middle of March 2014. Citic investment, acquisitions, and co-operation with other Bank will review a potential virtual credit-card payment-related companies. This should strengthen its applicant’s transaction history on Alipay in order to presence in the Internet-finance industry as well. verify their credit worthiness, which should cut down on operating costs significantly.
China Merchants Bank
We think the company’s e-Home business is an appealing way for small enterprises to access a wide spectrum of financial services and non-financial support. By acquiring a large number of small enterprise clients, mostly e-commerce retailers, CMB obtains their operating information, which allows it to promote suitable financial products to them and better assess their risks. This is the idea of “big data”.
Haitong Securities We believe that HTS’s mini-branch strategy and brokerage account-payment service will help the company mitigate commission-rate pressure and expand its brokerage market share. Meanwhile, costs should be under control as a result of low capital
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Financials / China 998 HK Financials / China 12 March 2014
China Citic Bank
China Citic Bank Target (HKD): 4.70 4.70 Upside: 11.4% 998 HK 12 Mar price (HKD): 4.22
A first-mover in the Internet- lending business 1 Buy 2 Outperform (unchanged) • We believe Citic Bank is a good proxy for the Internet finance 3 Hold theme 4 Underperform • Has first-mover advantage in POS lending, which could improve 5 Sell lending margin and make up for its weak deposit franchise • Potential collaboration with Taobao on e-commerce-related micro lending
For example, POS micro loans target have much higher margins than micro merchants who use POS traditional offline loan products. terminals and who need to get cash quickly but are short of collateral. POS micro loans are high-margin Leon Qi, CFA and help bring in demand deposits. Forecast revisions (%) Year to 31 Dec 13E 14E 15E (852) 2532 4381 PPOP change - - - [email protected] We understand that some other Net profit change - - - banks, such as CMB, CEB, Minsheng Core EPS (FD) change - - - Grace Wu and Huaxia are also offering POS Source: Daiwa forecasts (852) 2532 4383 [email protected] loans now. However, so far Citic Bank offers the fastest loan Share price performance disbursement and is the only bank (HKD) (%) ■ What's new that can provide 24-hour/7-day-a- 4.9 105 Since late 2013, Citic Bank has week service and accepts POS 4.5 98 launched a series of Internet-based terminals from all the banks. 4.1 90 financial products in cooperation with 3.6 83 ■ What we recommend 3.2 75 major Internet players in China. We Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 are encouraged by the rapid We reiterate our Outperform (2) development of these Internet rating on Citic Bank. Our Gordon Citic Bk (LHS) Relative to HSI (RHS) products and believe they will help the Growth Model implies a 2014E PBR bank increase its lending margin and of 0.9x, or a fair value of HKD5.95/ 12-month range 3.39-4.86 complement its weak physical deposit share. Factoring in a 30% haircut for Market cap (USDbn) 25.44 LGFV exposure (HKD1.25/ share), 3m avg daily turnover (USDm) 23.30 franchise. We believe Citic Bank is a Shares outstanding (m) 46,787 good proxy for investing in the we derive a 6-month target price of Major shareholder CITIC Limited (61.9%) Internet finance theme. HKD4.70, implying a target 2014E PBR of 0.7x. The key downside risk Financial summary (CNY) ■ What's the impact would be further provision charges to Year to 31 Dec 13E 14E 15E We expect innovative Internet be made with an aim to lift its Total operating income (m) 103,941 116,113 131,644 currently low loan loss reserve ratio. Pre-provision operating profit(m) 63,560 68,413 75,063 financial products, such as POS micro Net profit (m) 38,812 38,889 39,123 loans, Yu’ebao, online payments, and Core EPS (fully-diluted) 0.830 0.831 0.836 e-commerce merchants’ loans, to ■ How we differ EPS change (%) 25.1 0.2 0.6 drive the bank’s NIM and help attract Unlike the market, we do not expect a Daiwa vs Cons. EPS (%) 7.7 1.0 (6.6) low-cost demand deposits. Moreover, significant decline in Citic Bank’s NIM PER (x) 4.0 4.0 4.0 in 2013 and 2014, as it does not rely Dividend yield (%) 5.7 5.7 5.8 some of them will help Citic Bank earn DPS 0.191 0.191 0.192 additional fee income. (For details, see heavily on interbank funding and its PBR (x) 0.7 0.6 0.5 Pioneering Internet finance, new Internet-based loan products ROE (%) 18.2 16.0 14.3 published on 24 February 2014.) Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 37 China Financials and Internet sectors 12 March 2014
Financial summary
Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Net interest margin (%) 3.16 2.51 2.63 3.00 2.81 2.76 2.77 2.82 NPL (%) 1.4 1.0 0.7 0.6 0.7 0.9 1.2 1.4 Credit cost (bps) 81.2 25.1 36.0 42.7 83.7 64.9 80.5 101.0 Provision coverage (%) 136 149 214 272 288 253 229 227 Loan loss reserve (%) 1.92 1.42 1.44 1.62 2.12 2.29 2.68 3.23 Loan growth (%) 27.0 45.9 18.6 13.4 16.0 17.0 12.0 11.0 Deposit growth (%) 30.5 30.6 29.0 13.7 14.6 16.7 14.0 12.0 Fee to income ratio (%) 8.9 10.3 10.1 11.5 12.5 17.3 17.0 15.7 Expense to income ratio (%) 41.5 46.7 40.2 36.8 39.0 38.8 41.1 43.0
Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Net-interest income 37,351 35,984 48,135 65,106 75,486 82,623 92,713 107,095 Net fees & commission 3,720 4,220 5,696 8,837 11,210 17,936 19,730 20,716 Trading and other income 892 779 2,525 3,149 3,015 3,382 3,670 3,833 Net insurance income 00000000 Total operating income 41,963 40,983 56,356 77,092 89,711 103,941 116,113 131,644 Personnel expenses (8,113) (8,921) (10,053) (12,294) (15,434) (18,521) (22,595) (28,244) Other expenses (9,322) (10,210) (12,585) (16,087) (19,545) (21,860) (25,104) (28,337) Total expenses (17,435) (19,131) (22,638) (28,381) (34,979) (40,381) (47,699) (56,581) Pre-provision operating profit 24,528 21,852 33,718 48,711 54,732 63,560 68,413 75,063 Total provision (6,793) (2,619) (5,249) (7,207) (13,104) (11,455) (16,198) (22,527) Operating profit after prov. 17,735 19,233 28,469 41,504 41,628 52,105 52,216 52,536 Non-operating income (22) 32 226 86 (19) (65) (71) (79) Profit before tax 17,713 19,265 28,695 41,590 41,609 52,040 52,145 52,457 Tax (4,459) (4,705) (6,916) (10,746) (10,224) (12,787) (12,813) (12,890) Min. int./pref. div./other items 42 (240) (270) (25) (353) (441) (442) (445) Net profit 13,296 14,320 21,509 30,819 31,032 38,812 38,889 39,123 Adjusted net profit 13,296 14,320 21,509 30,819 31,032 38,812 38,889 39,123 EPS (CNY) 0.339 0.365 0.551 0.711 0.663 0.830 0.831 0.836 EPS (adjusted) (CNY) 0.339 0.365 0.551 0.711 0.663 0.830 0.831 0.836 EPS (adjusted fully-diluted) (CNY) 0.339 0.365 0.551 0.711 0.663 0.830 0.831 0.836 DPS (CNY) 0.085 0.088 0.000 0.200 0.150 0.191 0.191 0.192
Change (YoY %) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Net-interest income 42.7 (3.7) 33.8 35.3 15.9 9.5 12.2 15.5 Non-interest income 158.4 8.4 64.5 45.8 18.7 49.9 9.8 4.9 Total operating income 50.1 (2.3) 37.5 36.8 16.4 15.9 11.7 13.4 Total expenses 47.8 9.7 18.3 25.4 23.2 15.4 18.1 18.6 Pre-provision operating profit 51.8 (10.9) 54.3 44.5 12.4 16.1 7.6 9.7 Total provisions 248.7 (61.4) 100.4 37.3 81.8 (12.6) 41.4 39.1 Operating profit after provisions 24.8 8.4 48.0 45.8 0.3 25.2 0.2 0.6 Profit before tax 24.6 8.8 48.9 44.9 0.0 25.1 0.2 0.6 Net profit (adjusted) 42.0 7.7 50.2 43.3 0.7 25.1 0.2 0.6 EPS (adjusted, FD) 32.0 7.7 51.1 29.0 (6.7) 25.1 0.2 0.6 Gross loans 27.0 45.9 18.6 13.4 16.0 17.0 12.0 11.0 Deposits 30.5 30.6 29.0 13.7 14.6 16.7 14.0 12.0 Total assets 30.5 34.5 17.3 32.9 7.0 13.9 9.7 8.6 Total liabilities 28.4 40.1 17.3 32.2 6.6 13.8 9.4 8.3 Shareholders' equity 42.0 (13.9) 16.9 45.2 13.7 15.0 13.1 11.7 Avg interest-earning assets 41.3 21.1 27.6 18.5 23.9 11.6 11.6 13.6 Avg risk-weighted assets 19.8 48.2 25.2 22.9 14.5 18.4 12.2 8.5 Source: FactSet, Daiwa forecasts
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Financial summary continued …
Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & equivalent 333,662 491,014 534,543 1,066,141 885,643 956,494 1,018,192 1,084,084 Investment securities 223,759 209,442 273,483 255,859 404,743 465,246 502,466 528,195 Net loans and advances 716,386 1,050,479 1,246,026 1,410,779 1,627,576 1,901,022 2,120,751 2,340,596 Fixed assets 10,034 10,482 10,222 10,388 11,853 14,224 16,357 17,993 Goodwill 0 0 0 0 0 0 0 0 Other assets 35,729 13,614 17,040 22,714 30,124 34,527 39,585 43,218 Total assets 1,319,570 1,775,031 2,081,314 2,765,881 2,959,939 3,371,514 3,697,351 4,014,086 Customers deposits 1,030,403 1,344,682 1,741,545 1,968,051 2,255,141 2,631,750 3,000,194 3,360,218 Borrowing 118,085 287,330 157,242 553,792 403,146 406,667 295,432 220,250 Debentures 20,375 18,422 34,915 33,730 56,402 56,402 93,402 93,402 Other liabilities 21,333 17,589 23,074 31,527 42,164 43,292 44,454 45,651 Total liabilities 1,190,196 1,668,023 1,956,776 2,587,100 2,756,853 3,138,111 3,433,483 3,719,521 Share capital 39,033 39,033 39,033 46,787 46,787 46,787 46,787 46,787 Reserves & others 80,333 63,765 81,142 127,709 151,569 181,413 211,358 241,482 Shareholders' equity 119,366 102,798 120,175 174,496 198,356 228,200 258,145 288,269 Minority interests 10,008 4,210 4,363 4,285 4,730 5,203 5,723 6,296 Total equity & liabilities 1,319,570 1,775,031 2,081,314 2,765,881 2,959,939 3,371,514 3,697,351 4,014,086 Avg interest-earning assets 1,183,632 1,433,377 1,829,344 2,167,788 2,685,089 2,995,548 3,342,803 3,797,142 Avg risk-weighted assets 746,547 1,106,648 1,385,262 1,702,861 1,949,578 2,307,612 2,589,219 2,808,775 BVPS (CNY) 3.058 2.634 3.079 3.730 4.240 4.877 5.517 6.161
Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Loan/deposit 70.9 79.2 72.6 72.9 73.7 73.9 72.6 72.0 Tier-1 CAR 12.3 9.2 8.5 9.9 9.9 9.7 9.8 10.1 Total CAR 14.3 10.7 11.3 12.3 13.4 12.7 13.9 12.6 NPLs/gross loans 1.4 1.0 0.7 0.6 0.7 0.9 1.2 1.4 Total loan-loss prov./NPLs 136.1 149.4 213.5 272.3 288.2 252.7 228.7 226.9 ROAA 1.1 0.9 1.1 1.3 1.1 1.2 1.1 1.0 ROAE 13.1 12.9 19.3 20.9 16.6 18.2 16.0 14.3 Net-interest margin 3.2 2.5 2.6 3.0 2.8 2.8 2.8 2.8 Gross yield 5.3 3.9 4.0 4.9 5.2 5.1 5.1 5.0 Cost of funds 2.3 1.5 1.4 2.1 2.6 2.4 2.4 2.4 Net-interest spread 2.9 2.4 2.5 2.8 2.6 2.7 2.7 2.7 Total cost/total income 41.5 46.7 40.2 36.8 39.0 38.8 41.1 43.0 Effective tax 25.2 24.4 24.1 25.8 24.6 24.6 24.6 24.6 Dividend-payout 25.2 24.1 0.0 28.1 22.6 23.0 23.0 23.0 Source: FactSet, Daiwa forecasts
Company profile Founded in 1987, China Citic Bank is the banking arm of CITIC group, a leading conglomerate in China. Traditionally a wholesale bank, China Citic Bank uses its strength in cross-selling and corporate relations with other entities under the parent group. It is also focused on developing its business in the medium and high-end retail segments.
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Financials / China 3968 HK Financials / China 12 March 2014
China Merchants Bank
China Merchants Bank Target (HKD): 21.00 21.00 Upside: 65.9% 3968 HK 12 Mar price (HKD): 12.66
Leading the way in Internet finance for small enterprises 1 Buy (unchanged) 2 Outperform • CMB’s “Small Enterprise e Home” platform offers a range of 3 Hold financial and non-financial services targeting small enterprises 4 Underperform • CMB has been prudent in offering P2P lending with a view to 5 Sell establishing the leading “gateway” to attract small companies • The stock remains our top sector pick, given its low capital risk and regulatory risk; Buy (1) call reiterated
can use free software provided by ■ How we differ CMB, including accounting, We believe CMB has a disciplined company management, inventory risk-weighted asset growth model. and supply-chain tools. Ordinarily such software would be too Leon Qi, CFA expensive for small companies. Forecast revisions (%) (852) 2532 4381 Year to 31 Dec 13E 14E 15E PPOP change 2.8 4.0 4.9 [email protected] By signing up large numbers of Net profit change 5.7 5.0 4.1 small-enterprise clients, mostly e- Core EPS (FD) change 5.7 5.0 4.1 Grace Wu commerce retailers, CMB gains Source: Daiwa forecasts (852) 2532 4383 [email protected] access to their operating information, which it can use to Share price performance better assess credit risks and (HKD) (%) ■ What's new promote relevant financial products. 18 105 China Merchants Bank (CMB) offers 16 98 a range of innovative Internet- ■ What we recommend 15 90 finance products, notably its “Small We reiterate our Buy (1) call on CMB, 13 83 which remains our top pick among 12 75 Enterprise e Home” (e Home) Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 platform, targeting small companies. China’s joint-stock banks (see Among all the China financial Upgrading: Return of the King, Ch Merc Bk (LHS) Relative to HSI (RHS) institutions, we see CMB as the most published on 6 November 2013). likely to win the competition to build 12-month range 12.05-17.08 a “gateway” through which it can CMB reported better-than-expected Market cap (USDbn) 41.13 2013 preliminary results, and thus we 3m avg daily turnover (USDm) 45.63 attract small-enterprise clients. Shares outstanding (m) 25,220 raise 2013-15E core EPS by 4-6%. Major shareholder China Merchants Group (17.9%) ■ What's the impact However, we lower our assumption of CMB formally launched its “Small CMB’s sustainable leverage. Our Financial summary (CNY) Enterprise e Home” service in late- Gordon Growth Model implies a Year to 31 Dec 13E 14E 15E 2013. Small enterprises can use the 2014E PBR of 1.5x, or a fundamental Total operating income (m) 130,517 148,547 165,767 fair value of HKD22.3/share. Pre-provision operating profit(m) 75,871 87,205 95,838 platform to access Internet-finance Net profit (m) 50,228 54,931 56,186 products. Besides traditional Factoring in a 30% haircut for LGFV Core EPS (fully-diluted) 2.175 2.178 2.228 account services, CMB has included exposure, (HKD1.3/share), we have EPS change (%) 3.7 0.1 2.3 P2P lending in the platform to meet an unchanged target price of Daiwa vs Cons. EPS (%) 4.6 1.3 (3.1) the funding needs of small HKD21.0, implying a 1.4x 2014E PBR. PER (x) 4.6 4.6 4.5 The key risk would be a pick-up in Dividend yield (%) 6.5 6.5 6.7 enterprises. Customers with a short- DPS 0.652 0.653 0.668 term surplus of funds can also access provisions to meet the 2.5% loan loss PBR (x) 0.9 0.8 0.7 investment services. As for non- reserve ratio requirement. ROE (%) 21.3 18.8 17.0 financial services, small enterprises Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 37 China Financials and Internet sectors 12 March 2014
Financial summary
Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Net interest margin (%) 3.42 2.23 2.65 3.06 3.03 2.73 2.82 2.92 NPL (%) 1.1 0.8 0.7 0.6 0.6 0.8 1.1 1.3 Credit cost (bps) 44.8 25.3 40.1 54.1 31.5 47.0 64.3 86.5 Provision coverage (%) 223 247 302 400 352 271 238 227 Loan loss reserve (%) 2.47 2.02 2.05 2.24 2.16 2.24 2.55 3.06 Loan growth (%) 29.9 35.6 20.7 14.6 16.0 15.2 11.0 10.0 Deposit growth (%) 32.5 28.6 18.0 17.0 14.1 10.0 13.0 11.0 Fee to income ratio (%) 13.9 15.5 15.9 16.2 17.4 21.2 21.4 21.1 Expense to income ratio (%) 42.6 50.9 45.7 42.5 42.6 41.9 41.3 42.2
Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Net-interest income 46,885 40,364 57,076 76,307 88,374 97,121 111,196 125,369 Net fees & commission 7,744 7,993 11,330 15,628 19,739 27,635 31,780 34,958 Trading and other income 917 3,132 2,933 4,294 5,227 5,659 5,459 5,317 Net insurance income (8) 4 75 69 93 102 113 124 Total operating income 55,538 51,493 71,414 96,298 113,433 130,517 148,547 165,767 Personnel expenses (11,163) (12,686) (16,002) (20,316) (23,932) (27,786) (32,269) (36,948) Other expenses (12,473) (13,521) (16,632) (20,573) (24,418) (26,860) (29,073) (32,981) Total expenses (23,636) (26,207) (32,634) (40,889) (48,350) (54,646) (61,342) (69,929) Pre-provision operating profit 31,902 25,286 38,780 55,409 65,083 75,871 87,205 95,838 Total provision (3,714) (2,971) (5,501) (8,350) (5,583) (9,410) (14,525) (21,506) Operating profit after prov. 28,188 22,315 33,279 47,059 59,500 66,461 72,680 74,332 Non-operating income (1,429) 69 64 63 64 80 90 100 Profit before tax 26,759 22,384 33,343 47,122 59,564 66,541 72,770 74,432 Tax (5,813) (4,149) (7,574) (10,995) (14,287) (16,303) (17,829) (18,236) Min. int./pref. div./other items 131 0 0 2 (4) (10) (10) (10) Net profit 21,077 18,235 25,769 36,129 45,273 50,228 54,931 56,186 Adjusted net profit 21,077 18,235 25,769 36,129 45,273 50,228 54,931 56,186 EPS (CNY) 1.102 0.954 1.231 1.674 2.098 2.175 2.178 2.228 EPS (adjusted) (CNY) 1.102 0.954 1.231 1.674 2.098 2.175 2.178 2.228 EPS (adjusted fully-diluted) (CNY) 1.102 0.954 1.231 1.674 2.098 2.175 2.178 2.228 DPS (CNY) 0.400 0.210 0.290 0.420 0.630 0.652 0.653 0.668
Change (YoY %) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Net-interest income 38.3 (13.9) 41.4 33.7 15.8 9.9 14.5 12.7 Non-interest income 21.1 28.6 28.8 39.4 25.4 33.3 11.8 8.2 Total operating income 35.3 (7.3) 38.7 34.8 17.8 15.1 13.8 11.6 Total expenses 41.2 10.9 24.5 25.3 18.2 13.0 12.3 14.0 Pre-provision operating profit 31.2 (20.7) 53.4 42.9 17.5 16.6 14.9 9.9 Total provisions 12.4 (20.0) 85.2 51.8 (33.1) 68.6 54.4 48.1 Operating profit after provisions 34.2 (20.8) 49.1 41.4 26.4 11.7 9.4 2.3 Profit before tax 27.2 (16.3) 49.0 41.3 26.4 11.7 9.4 2.3 Net profit (adjusted) 38.3 (13.5) 41.3 40.2 25.3 10.9 9.4 2.3 EPS (adjusted, FD) 6.4 (13.5) 29.1 36.0 25.3 3.7 0.1 2.3 Gross loans 29.9 35.6 20.7 14.6 16.0 15.2 11.0 10.0 Deposits 32.5 28.6 18.0 17.0 14.1 10.0 13.0 11.0 Total assets 19.9 31.6 16.2 16.3 21.9 19.4 7.7 7.3 Total liabilities 20.0 32.4 14.9 15.9 22.0 18.4 7.3 6.9 Shareholders' equity 17.0 16.7 44.4 23.1 21.4 35.9 14.1 12.8 Avg interest-earning assets 26.0 31.6 19.1 15.8 17.3 22.0 10.8 8.6 Avg risk-weighted assets 27.7 26.7 24.5 21.7 18.0 21.9 10.0 9.5 Source: FactSet, Daiwa forecasts
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Financial summary continued …
Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & equivalent 368,067 486,292 559,380 676,706 962,670 1,167,625 1,235,262 1,308,680 Investment securities 310,446 377,072 394,176 460,948 519,798 689,268 703,053 717,114 Net loans and advances 852,754 1,161,817 1,402,160 1,604,371 1,863,325 2,144,776 2,373,120 2,596,812 Fixed assets 15,062 16,008 18,397 19,210 20,925 23,018 25,319 29,117 Goodwill 0 0 0 0 0 0 0 0 Other assets 25,468 26,752 28,394 33,736 41,381 44,344 47,588 52,827 Total assets 1,571,797 2,067,941 2,402,507 2,794,971 3,408,099 4,069,029 4,384,342 4,704,551 Customers deposits 1,254,840 1,613,811 1,903,584 2,239,764 2,545,457 2,801,304 3,164,943 3,512,705 Borrowing 168,182 266,593 283,844 316,716 536,059 866,413 776,635 706,262 Debentures 38,436 36,269 31,232 31,187 64,098 64,098 64,098 64,098 Other liabilities 30,558 58,485 49,841 42,294 62,084 64,914 67,880 70,989 Total liabilities 1,492,016 1,975,158 2,268,501 2,629,961 3,207,698 3,796,728 4,073,556 4,354,053 Share capital 14,707 19,119 21,577 21,577 21,577 25,220 25,220 25,220 Reserves & others 64,808 73,664 112,429 143,420 178,751 247,004 285,486 325,193 Shareholders' equity 79,515 92,783 134,006 164,997 200,328 272,224 310,706 350,413 Minority interests 266 0 0 13 73 77 80 85 Total equity & liabilities 1,571,797 2,067,941 2,402,507 2,794,971 3,408,099 4,069,029 4,384,342 4,704,551 Avg interest-earning assets 1,372,657 1,806,243 2,150,615 2,489,714 2,921,423 3,563,519 3,948,724 4,288,340 Avg risk-weighted assets 917,201 1,161,776 1,446,883 1,760,884 2,077,755 2,531,762 2,784,783 3,049,151 BVPS (CNY) 4.159 4.853 6.211 7.647 9.284 10.794 12.320 13.894
Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Loan/deposit 69.7 73.5 75.2 73.3 74.8 78.3 76.9 76.3 Tier-1 CAR 6.6 6.6 8.0 8.2 8.5 9.3 9.9 10.3 Total CAR 11.3 10.4 11.5 11.5 12.1 12.0 12.3 12.5 NPLs/gross loans 1.1 0.8 0.7 0.6 0.6 0.8 1.1 1.3 Total loan-loss prov./NPLs 223.3 246.7 302.4 400.1 351.8 270.7 237.9 226.9 ROAA 1.5 1.0 1.2 1.4 1.5 1.3 1.3 1.2 ROAE 28.6 21.2 22.7 24.2 24.8 21.3 18.8 17.0 Net-interest margin 3.4 2.2 2.7 3.1 3.0 2.7 2.8 2.9 Gross yield 5.3 3.6 3.9 4.9 5.1 4.9 5.0 5.1 Cost of funds 2.0 1.5 1.4 1.9 2.3 2.3 2.3 2.2 Net-interest spread 3.2 2.1 2.6 2.9 2.9 2.6 2.8 2.8 Total cost/total income 42.6 50.9 45.7 42.5 42.6 41.9 41.3 42.2 Effective tax 21.7 18.5 22.7 23.3 24.0 24.5 24.5 24.5 Dividend-payout 36.3 22.0 23.5 25.1 30.0 30.0 30.0 30.0 Source: FactSet, Daiwa forecasts
Company profile Founded in 1987, China Merchants Bank (CMB) is the banking arm of China Merchants Group, one of the leading conglomerates in China. Headquartered in Shenzhen, the bank geographically focuses on wealthy areas in China and has established a good brand-name in retail/credit-card businesses.
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Financials / China 6837 HK Financials / China 12 March 2014
Haitong Securities
Haitong Securities Target (HKD): 16.00 16.00 Upside: 61.6% 6837 HK 12 Mar price (HKD): 9.90
Lower costs, more services 1 Buy (unchanged) • HTS’s brokerage business largely relies on online and mini 2 Outperform branches, which keeps cost down 3 Hold • HTS is seeking to develop payment and e-commerce services, 4 Underperform with the goal of winning market share without cutting prices 5 Sell • Reiterating Buy (1) rating, with unchanged target price of HKD16
In October 2013, HTS launched a ■ How we differ consumption payment service We think commission-rate concerns through clients’ brokerage accounts. are overdone, and believe a higher In essence, the brokerage account amount of lending will drive industry performs some of the functions of a leaders’ earnings going forward. Leon Qi, CFA bank savings account, allowing Forecast revisions (%) (852) 2532 4381 clients to better use the funds in Year to 31 Dec 13E 14E 15E [email protected] their brokerage accounts. Revenue change - - - Net profit change - - - Core EPS (FD) change - - - In the long term, we expect the ■ What's new Source: Daiwa forecasts payment service to benefit HTS in We believe that Haitong Securities’ the following ways: 1) clients will Share price performance (HTS) mini-branch strategy and keep larger average balances in their brokerage-account payment service (HKD) (% ) brokerage accounts, given the 15 110 will mitigate commission-rate availability of more functions, 2) pressure while helping the company 13 101 clients of other securities companies 11 93 to expand its market share. will migrate to HTS, as it offers more 10 84
services, and 3) HTS’s existing 8 75 ■ Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 What's the impact brokerage clients should become In 2H13, HTS announced its mini- less price-sensitive to commission Haitong Se (LHS) Relative to HSI (RHS) branch strategy, under which it would rates. In sum, we expect HTS’s focus its capital investments on mini brokerage business to gain market 12-month range 8.68-14.18 branches. As mini branches do not share while its commission rates Market cap (USDbn) 12.23 provide on-site trading services, their remain higher than those of the 3m avg daily turnover (USDm) 18.53 costs are much lower than for Shares outstanding (m) 9,585 overall sector. Major shareholder Bright Food (Group) Co. Ltd (4.7%) traditional branches and they serve mainly as contact points for online ■ What we recommend customers. When it unveiled its plans Financial summary (CNY) We reiterate our Buy (1) rating on Year to 31 Dec 13E 14E 15E in July 2013, HTS’s goal was to open HTS and our 6-month Gordon Revenue (m) 12,809 17,812 23,224 89 such outlets; we believe it now Growth Model-derived target price Operating profit (m) 5,780 7,677 9,741 plans to open fewer mini branches, as Net profit (m) 4,341 5,773 7,331 of HKD16.0, which implies 1.8x Core EPS (fully-diluted) 0.453 0.602 0.765 it sees less value in having physical 2014E PBR. HTS’s new businesses branches. Due partly to the mini- EPS change (%) 36.8 33.0 27.0 and cost discipline underpin a net Daiwa vs Cons. EPS (%) (1.6) 9.5 10.8 branch strategy, we estimate that profit CAGR of 34% for 2013-15, on PER (x) 17.3 13.0 10.2 HTS’s cost-to-income ratio declined our forecasts. The main downside Dividend yield (%) 2.0 2.7 3.4 DPS 0.158 0.211 0.268 to 45% in 2013, from 56% in 2012. risk to our view would be PBR (x) 1.2 1.2 1.1 proprietary trading losses. ROE (%) 7.2 9.1 10.8
Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 37 China Financials and Internet sectors 12 March 2014
Financial summary
Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E A-share ADT (CNY mn) 109,341 222,288 227,557 173,922 131,573 200,000 200,000 200,000 Brokerage mkt share of company (%) n.a. 4.2 4.1 4.1 4.5 4.7 5.0 5.0 Commission rate for company (%) n.a. 0.147 0.118 0.100 0.085 0.082 0.080 0.080 Mkt annual equity financing (YoY, %) n.a. 12.3 162.9 (43.9) (37.6) (50.0) 150.0 20.0 Mkt annual debt financing (YoY, %) n.a. n.a. (0.9) 55.7 44.0 0.0 20.0 20.0 Stock market annual return (%) (65.4) 80.0 (14.3) (21.7) 3.2 (6.7) 5.0 5.0 Bond market annual return (%) 8.3 2.2 1.0 5.5 4.4 0.0 5.0 5.0 Margin finance bal (mkt) (CNY mn) n.a. n.a. 12,772 38,201 89,516 324,739 463,036 570,709 Cost-to-income (%) n.a. 45.6 54.1 56.8 55.8 44.8 36.9 32.2
Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Gross fee and commission income n.a. 8,753 8,384 6,567 5,213 6,840 7,484 7,843 Gross interest income n.a. 1,407 1,647 2,553 2,877 3,816 6,591 10,773 Investment income n.a. 888 1,078 1,507 2,403 1,803 3,247 3,970 Other income n.a. 267 196 233 251 351 491 638 Total Revenue 0 11,316 11,305 10,860 10,743 12,809 17,812 23,224 Fee and commission expense (-) n.a. (998) (1,176) (1,044) (828) (809) (1,024) (1,067) Finance costs(-) n.a. (245) (281) (460) (704) (1,288) (3,565) (5,999) Business tax(-) n.a. 0 0 0 0 0 0 0 Other Operating Expenses n.a. (4,157) (4,936) (5,129) (5,167) (4,932) (5,546) (6,417) Operating profit 0 5,916 4,912 4,227 4,044 5,780 7,677 9,741 Profit from Assoc/JV n.a. 66 78 73 66 78 71 71 Other Inc/Exp/Extord. (+/-) n.a. 0 0 0 0 0 0 0 Pre-tax profit 0 5,982 4,990 4,300 4,109 5,858 7,748 9,812 Tax n.a. (1,320) (1,122) (1,018) (875) (1,259) (1,666) (2,110) Min. int./pref. div./others n.a. (114) (182) (179) (215) (258) (309) (371) Net profit (reported) 0 4,548 3,686 3,103 3,020 4,341 5,773 7,331 Net profit (adjusted) 0 4,548 3,686 3,103 3,020 4,341 5,773 7,331 EPS (reported)(CNY) n.a. 0.553 0.448 0.377 0.331 0.453 0.602 0.765 EPS (adjusted)(CNY) n.a. 0.553 0.448 0.377 0.331 0.453 0.602 0.765 EPS (adjusted fully-diluted)(CNY) n.a. 0.553 0.448 0.377 0.331 0.453 0.602 0.765 DPS (CNY) n.a. 0.200 0.150 0.150 0.126 0.158 0.211 0.268 Source: FactSet, Daiwa forecasts
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Financial summary continued …
Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 0 94,181 78,743 54,850 55,371 66,445 71,789 78,968 Fee and commission receivables n.a. 677 980 873 1,113 2,583 3,297 3,995 Advances to customers n.a. 2,035 5,814 6,463 11,339 25,827 32,973 39,952 Reverse repo & bank placement n.a. 0 2,120 606 2,235 9,577 35,829 75,651 Financial assets n.a. 19,545 21,956 29,365 43,704 45,583 55,619 73,713 Long-term equity investments n.a. 216 543 926 1,728 1,901 1,996 2,095 Other assets n.a. 4,076 5,256 5,895 10,992 8,715 9,587 10,546 Total assets 0 120,730 115,413 98,977 126,482 160,630 211,089 284,920 Accounts payable n.a. 66,580 63,682 38,014 36,957 42,447 46,692 51,361 Repo and bank placements n.a. 6,898 2,922 9,525 18,191 24,383 50,155 102,170 Financial liabilities n.a. 0 0 2,521 8,632 10,357 15,533 27,297 Bonds payable n.a. 0 0 0 0 17,490 28,490 28,490 Other liabilities n.a. 2,733 3,192 2,307 2,143 2,572 3,086 3,703 Total liabilities 0 76,212 69,796 52,366 65,922 97,249 143,956 213,021 Share capital 0 8,228 8,228 8,228 9,585 9,585 9,585 9,585 Reserves/R.E./others n.a. 35,186 36,240 36,815 49,095 51,916 55,669 60,434 Shareholders' equity 0 43,414 44,467 45,042 58,680 61,501 65,254 70,019 Minority interests n.a. 1,105 1,149 1,568 1,880 1,880 1,880 1,880 Total equity & liabilities 0 120,730 115,413 98,977 126,482 160,630 211,089 284,920 BVPS (CNY) n.a. 5.276 5.405 5.474 6.433 6.416 6.808 7.305
Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Gross fee and commission (YoY) n.a. n.a. (4.2) (21.7) (20.6) 31.2 9.4 4.8 Operating profit (YoY) n.a. n.a. (17.0) (13.9) (4.3) 42.9 32.8 26.9 Net profit (YoY) n.a. n.a. (19.0) (15.8) (2.7) 43.7 33.0 27.0 EPS (YoY) (FD) n.a. n.a. (19.0) (15.8) (12.2) 36.8 33.0 27.0 ROAE n.a. 11.1 8.4 6.9 5.8 7.2 9.1 10.8 ROAA n.a. 4.7 3.1 2.9 2.7 3.0 3.1 3.0 Net dividend payout n.a. 36.2 33.5 39.8 38.1 35.0 35.0 35.0 Brokerage commission/Op inc n.a. 66.9 57.4 41.6 33.5 44.5 37.3 31.0 Inv banking commission/Op inc n.a. 5.4 11.9 12.0 9.7 6.5 8.3 8.2 Assest mgmt inc / Op inc n.a. 6.7 6.5 9.5 8.6 9.1 7.4 6.6 Interest inc / Op inc n.a. 10.5 12.4 20.1 21.6 22.3 21.5 28.0 Inv inc / Op inc n.a. 8.0 9.8 14.5 23.9 14.2 21.7 22.1 Leverage n.a. 2.7 2.5 2.1 2.1 2.5 3.1 4.0 Cost-to-income n.a. 47.7 56.6 61.1 62.4 54.9 56.9 58.1 Net capital ratio n.a. 779.2 571.7 1,456.9 1,428.5 1,773.6 1,655.4 1,413.5 Source: FactSet, Daiwa forecasts
Company profile Haitong Securities (HTS) is a leading full-service investment bank in China. It was established in Shanghai in 1988 and was listed on the Shanghai Stock Exchange and Hong Kong Stock Exchange in 2007 and 2012, respectively. Its principal business lines include a brokerage, investment banking, asset management, proprietary trading and direct investment.
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Information Technology / China 700 HK Information Technology / China 12 March 2014
Tencent Holdings
Tencent Holdings Target (HKD): 710.00 710.00 Upside: 17.9% 700 HK 12 Mar price (HKD): 602.00
It’s all about payments 1 Buy (unchanged) • User numbers and stickiness of payment service improving as a 2 Outperform result of providing platform to sell financial products 3 Hold • We expect mobile-Internet monetisation to increase, backed by 4 Underperform diversified service offerings on the WeChat platform 5 Sell • We forecast strong overall revenue-growth momentum over 2014-15. Reiterating Buy (1) rating
backed by its mature platform and and on Tencent’s online and mobile- huge Internet-user base. games businesses.
We believe all the new initiatives on
WeChat’s platform are enhancing Forecast revisions (%) John Choi the overall user experience on the Year to 31 Dec 13E 14E 15E (852) 2773 8730 company’s WeChat app and Revenue change - - - [email protected] encouraging users to use its Net profit change - - - Core EPS (FD) change - - - payment services, which paves the Liz Zeng way for further monetisation of its Source: Daiwa forecasts (852) 2532 4349 [email protected] mobile-Internet business. We also see mobile payment services as an Share price performance (% ) important gateway to the O2O eco- (HKD) system and expect the revenue- 650 230 ■ What's new 538 193 Among the services Tencent offers growth momentum on Tencent’s 425 155 through its popular mobile platform mobile-Internet to rise over the next 313 118 WeChat (known as Weixin in three years. 200 80 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 China), the feature that allows financial products to be bought is an ■ What we recommend Tencent (LHS) Relative to HSI (RHS) efficient way to raise the active user We reaffirm our Buy (1) rating. Our numbers as well as the stickiness of 6-month target price of HKD710 is 12-month range 237.20-635.00 WeChat’s payment service, in our based on a target PER of 40x, in line Market cap (USDbn) 144.42 view. with its domestic peers’ average, 3m avg daily turnover (USDm) 354.57 applied to the average of our 2014 Shares outstanding (m) 1,862 Major shareholder Naspers Limited (33.8%) We expect Tencent to become one of 15E EPS. We see further rerating the leading global mobile social potential for the stock over the Financial summary (CNY) platforms (GMSP) soon, backed by coming months, with good earnings Year to 31 Dec 13E 14E 15E diverse product and service offerings visibility and a compelling mobile Revenue (m) 60,736 87,257 116,524 and its online-payment services. story. The main risks to our call are Operating profit (m) 19,181 27,429 36,992 Net profit (m) 15,557 22,490 30,533 slower-than-expected monetisation Core EPS (fully-diluted) 8.218 11.847 16.075 ■ What's the impact of WeChat and higher than- EPS change (%) 20.3 44.2 35.7 We see the online-payment platform expected marketing expenses. Daiwa vs Cons. EPS (%) (2.8) 8.0 15.4 as a very efficient distribution PER (x) 58.0 40.2 29.6 channel for micro-finance products ■ How we differ Dividend yield (%) 0.3 0.4 0.5 Our target price is one of the highest DPS 1.256 1.811 2.457 such as MMFs, due to its PBR (x) 16.9 12.2 8.9 convenience. We expect Tencent to among all the brokers covering the EV/EBITDA (x) 38.0 26.0 19.0 be one of the beneficiaries of the stock, as we are more optimistic on ROE (%) 33.2 36.0 35.5 development of Internet finance, revenue generation from WeChat Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 37 China Financials and Internet sectors 12 March 2014
Financial summary
Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Number of WeChat (Weixin) register n.a. n.a. n.a. 50 300 600 800 1,000 users (m) WeChat implied revenues (CNYm) n.a. n.a. n.a. n.a. n.a. 1,207 6,531 11,819 ACU of mini casual games (m) 2.1 2.9 3.2 4.1 4.2 4.2 4.4 4.6 ACU of advanced casual games (m) 0.0 1.1 1.7 2.7 4.3 6.6 8.4 8.7 ACU of MMOG (m) 0.0 1.5 1.2 1.6 1.9 2.2 4.0 4.5
Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Value-added services (VAS) 6,314 11,436 18,198 26,314 35,718 45,862 66,115 83,791 Online advertising 826 962 1,373 1,992 3,382 5,251 5,691 10,863 Other Revenue 15 41 75 190 4,793 9,624 15,451 21,870 Total Revenue 7,155 12,440 19,646 28,496 43,894 60,736 87,257 116,524 Other income 112 78 294 890 552 1,674 1,640 1,933 COGS (2,170) (3,889) (6,320) (9,928) (18,207) (27,657) (39,954) (53,767) SG&A (1,491) (2,070) (3,004) (5,265) (8,139) (12,247) (16,588) (21,290) Other op.expenses (359) (538) (778) (1,939) (2,612) (3,325) (4,926) (6,409) Operating profit 3,246 6,021 9,838 12,254 15,487 19,181 27,429 36,992 Net-interest inc./(exp.) (36) 134 255 504 836 1,181 1,459 1,659 Assoc/forex/extraord./others (106) (114) (180) (659) (1,272) (1,091) (1,530) (1,733) Pre-tax profit 3,105 6,041 9,913 12,099 15,051 19,271 27,358 36,918 Tax (289) (819) (1,798) (1,874) (2,266) (3,662) (4,788) (6,276) Min. int./pref. div./others (31) (66) (62) (22) (53) (53) (80) (109) Net profit (reported) 2,785 5,156 8,054 10,203 12,732 15,557 22,490 30,533 Net profit (adjusted) 2,785 5,156 8,054 10,203 12,732 15,557 22,490 30,533 EPS (reported)(CNY) 1.552 2.862 4.432 5.609 6.965 8.374 12.072 16.380 EPS (adjusted)(CNY) 1.552 2.862 4.432 5.609 6.965 8.374 12.072 16.380 EPS (adjusted fully-diluted)(CNY) 1.514 2.791 4.328 5.490 6.833 8.218 11.847 16.075 DPS (CNY) 0.350 0.400 0.550 0.750 1.000 1.256 1.811 2.457 EBIT 3,246 6,021 9,838 12,254 15,487 19,181 27,429 36,992 EBITDA 3,605 6,558 10,616 14,192 18,099 22,507 32,355 43,400
Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 3,105 6,041 9,913 12,099 15,051 19,271 27,358 36,918 Depreciation and amortisation 359 538 778 1,939 2,612 3,518 4,880 6,463 Tax paid (322) (456) (1,542) (1,836) (2,225) (3,577) (4,676) (6,130) Change in working capital 202 2,106 3,501 15,194 21,654 3,054 4,010 2,366 Other operational CF items 236 170 (366) (14,038) (17,663) (5,019) (7,715) (9,051) Cash flow from operations 3,580 8,398 12,285 13,358 19,429 17,248 23,857 30,566 Capex (1,404) (821) (2,024) (4,848) (4,839) (6,074) (8,726) (8,726) Net (acquisitions)/disposals 0 68 0 (6,875) (4,659) 0 0 0 Other investing CF items (1,110) (4,272) (9,991) (3,632) (6,772) 76 76 76 Cash flow from investing (2,515) (5,025) (12,015) (15,355) (16,270) (5,998) (8,650) (8,650) Change in debt 0 202 0 2,917 (7,041) 0 0 0 Net share issues/(repurchases) (301) 91 (144) (887) 218 0 0 0 Dividends paid (258) (555) (624) (895) (1,225) (1,853) (2,339) (3,375) Other financing CF items (311) (136) 4,880 3,238 5,662 0 0 0 Cash flow from financing (870) (397) 4,112 4,373 (2,386) (1,853) (2,339) (3,375) Forex effect/others (76) (1) (52) (172) (2) 0 0 0 Change in cash 119 2,976 4,331 2,204 771 9,397 12,868 18,540 Free cash flow 2,175 7,578 10,261 8,510 14,591 11,175 15,131 21,840 Source: FactSet, Daiwa forecasts
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Financial summary continued …
Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 5,129 11,354 22,134 26,328 27,189 36,589 49,489 67,989 Inventory 5 0 0 0 568 786 1,129 1,508 Accounts receivable 983 1,229 1,715 2,021 2,354 3,257 4,680 6,249 Other current assets 378 574 1,524 7,155 6,398 7,968 10,302 13,757 Total current assets 6,496 13,157 25,374 35,503 36,509 48,600 65,600 89,504 Fixed assets 1,165 2,517 3,293 5,885 7,403 10,653 15,155 18,075 Goodwill & intangibles 370 269 573 3,780 4,719 3,986 3,254 2,521 Other non-current assets 1,824 1,563 6,591 11,636 26,625 28,870 36,555 45,574 Total assets 9,856 17,506 35,830 56,804 75,256 92,110 120,564 155,674 Short-term debt 0 202 5,299 8,020 1,077 1,077 1,077 1,077 Accounts payable 245 697 1,380 2,244 4,212 6,287 8,940 11,848 Other current liabilities 1,847 3,664 6,343 10,919 15,376 19,046 24,503 29,364 Total current liabilities 2,092 4,563 13,022 21,183 20,665 26,410 34,520 42,290 Long-term debt 0 0 0 3,733 7,517 7,439 7,409 7,378 Other non-current liabilities 645 644 967 2,799 4,926 5,011 5,122 5,268 Total liabilities 2,736 5,207 13,989 27,716 33,108 38,860 47,050 54,935 Share capital 0 0 0 0 0 0 0 0 Reserves/R.E./others 7,021 12,178 21,757 28,464 41,297 52,346 72,530 99,647 Shareholders' equity 7,021 12,179 21,757 28,464 41,298 52,346 72,530 99,647 Minority interests 98 120 84 625 851 904 984 1,092 Total equity & liabilities 9,856 17,506 35,830 56,804 75,256 92,110 120,564 155,674 EV 881,448 875,272 868,884 868,431 864,386 854,987 842,166 823,777 Net debt/(cash) (5,129) (11,151) (16,835) (14,574) (18,595) (28,073) (41,003) (59,534) BVPS (CNY) 3.908 6.696 11.852 15.471 22.283 28.111 38.911 53.459
Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 87.2 73.9 57.9 45.0 54.0 38.4 43.7 33.5 EBITDA (YoY) 97.3 81.9 61.9 33.7 27.5 24.4 43.8 34.1 Operating profit (YoY) 98.5 85.5 63.4 24.6 26.4 23.9 43.0 34.9 Net profit (YoY) 85.8 85.2 56.2 26.7 24.8 22.2 44.6 35.8 Core EPS (fully-diluted) (YoY) 85.6 84.3 55.1 26.9 24.5 20.3 44.2 35.7 Gross-profit margin 69.7 68.7 67.8 65.2 58.5 54.5 54.2 53.9 EBITDA margin 50.4 52.7 54.0 49.8 41.2 37.1 37.1 37.2 Operating-profit margin 45.4 48.4 50.1 43.0 35.3 31.6 31.4 31.7 Net profit margin 38.9 41.4 41.0 35.8 29.0 25.6 25.8 26.2 ROAE 45.6 53.7 47.5 40.6 36.5 33.2 36.0 35.5 ROAA 33.1 37.7 30.2 22.0 19.3 18.6 21.1 22.1 ROCE 51.2 61.4 49.6 36.0 33.8 34.1 38.2 38.7 ROIC 159.5 331.7 261.8 106.1 69.1 63.8 78.5 83.3 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 9.3 13.6 18.1 15.5 15.1 19.0 17.5 17.0 Accounts receivable (days) 38.7 32.5 27.4 23.9 18.2 16.9 16.6 17.1 Current ratio (x) 3.1 2.9 1.9 1.7 1.8 1.8 1.9 2.1 Net interest cover (x) 91.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 22.5 14.0 12.4 13.4 14.4 15.0 15.0 15.0 Free cash flow yield 0.2 0.9 1.2 1.0 1.6 1.3 1.7 2.5 Source: FactSet, Daiwa forecasts
Company profile Tencent is the largest and most used Internet service portal in China. Over the past decade, the company has been able to maintain steady earnings growth under its user-oriented strategy. On 16 June 2004, it was listed on the main board of the Hong Kong Stock Exchange.
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Daiwa’s Asia Pacific Research Directory
HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Daiwa’sRegional Deputy Asia Head Pacific of Asia Pacific Research Research Directory Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Rohan DALZIELL (852) 2848 4938 [email protected] Shipbuilding; Steel Regional Head of Product Management Jun Yong BANG (82) 2 787 9168 [email protected] Kevin LAI (852) 2848 4926 [email protected] Tyres; Chemicals Deputy Head of Regional Economics; Macro Economics (Regional) Mike OH (82) 2 787 9179 [email protected] Christie CHIEN (852) 2848 4482 [email protected] Capital Goods (Construction and Machinery) Macro Economics (Taiwan) Sang Hee PARK (82) 2 787 9165 [email protected] Jonas KAN (852) 2848 4439 [email protected] Consumer/Retail Head of Hong Kong Research; Head of Hong Kong and China Property Jae H LEE (82) 2 787 9173 [email protected] Jeff CHUNG (852) 2773 8783 [email protected] IT/Electronics (Tech Hardware and Memory Chips) Automobiles and Components (China) Joshua OH (82) 2 787 9176 [email protected] Grace WU (852) 2532 4383 [email protected] IT/Electronics (Handset Components) Head of Greater China FIG; Banking (Hong Kong, China) Thomas Y KWON (82) 2 787 9181 [email protected] Jerry YANG (852) 2773 8842 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Banking (Taiwan); Insurance (Taiwan and China) Leon QI (852) 2532 4381 [email protected] TAIWAN Banking (Hong Kong, China); Broker (China) Mark CHANG (886) 2 8758 6245 [email protected] Winston CAO (852) 2848 4469 [email protected] Head of Taiwan Research Capital Goods – Machinery (China) Steven TSENG (886) 2 8758 6252 [email protected] Alison LAW (852) 2532 4308 [email protected] IT/Technology Hardware (PC Hardware) Head of Regional Consumer; Consumer (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Automation); Cement; Consumer Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Eric CHEN (852) 2773 8702 [email protected] INDIA Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Lynn CHENG (852) 2773 8822 [email protected] Head of India Research; Strategy; Banking/Finance IT/Electronics (Semiconductor) Saurabh MEHTA (91) 22 6622 1009 [email protected] Felix LAM (852) 2532 4341 [email protected] Capital Goods; Utilities Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China) SINGAPORE Dennis IP (852) 2848 4068 [email protected] Adrian LOH (65) 6499 6548 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and John CHOI (852) 2773 8730 [email protected] China); Capital Goods (Singapore) Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China) Angeline LOH (65) 6499 6570 [email protected] Jackson YU (852) 2848 4976 [email protected] Banking/Finance, Consumer/Retail Small/Mid Cap (Regional) David LUM (65) 6329 2102 [email protected] Joey CHEN (852) 2848 4483 [email protected] Property and REITs Steel (China) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Head of Transportation (Hong Kong, China); Transportation (Regional) Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group Thomas HO (852) 2773 8716 [email protected] Custom Products Group
PHILIPPINES Norman H PENA (63) 2 813 7344 [email protected] ext 301 Banking/Property Michael David (63) 2 813 7344 [email protected] MONTEMAYOR ext 293 Consumer/Retail Patricia PALANCA (63) 2 813 7344 [email protected] ext 408 Utilities/Mining
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Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469
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DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021
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Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
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Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.
Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.
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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.
United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).
Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
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