Industrials / China 9 July 2013

Time for bottom-fishing China Transportation Sector • We expect the market to remain volatile over the near term due to Positive (unchanged) uncertainty about the macroeconomic environment Neutral • We recommend accumulating stocks with resilient earnings prospects, especially those with a long-term growth story Negative

• Out top picks are AviChina, TravelSky, BCIA, and SITC; we see short-term trading opportunities for CEA, CX, OOIL, and YTI How do we justify our view?

Top picks: AviChina Industry & HKD4.20 (from HKD4.60) on cuts Technology (AviChina), to our earnings forecasts. Travelsky Technology (TST), Beijing Capital International We revise our six-month target Airport (BCIA) and SITC prices as follows: Air China (AC) to Kelvin Lau International (SITC). We believe HKD7.50 (from HKD8.00), CEA to (852) 2848 4467 AviChina will benefit the most HKD3.30 (from HKD4.10), CX to [email protected] from the opening up of China’s HKD16.50 (from HKD16.80), OOIL general aviation market. We raise to HKD61 (from HKD64), China Leo Siu our six-month target price to Shipping Container Lines (CSCL) to (852) 2773 8243 [email protected] HKD5.40 (from HKD5.30). HKD2.40 (from HKD2.70), and YTI to HKD4.45 (from HKD4.68). Major

TST and BCIA should be the main risks to our calls include lower-than- ■ What's new beneficiaries of continued air-traffic expected demand growth and a With the stock market expected to volume rises, as they are not affected higher-than-expected fuel price. remain volatile over the near term, by declines in air fares or rises in the we recommend buying companies jet-fuel price. We raise our six-month ■ How we differ that we believe offer resilient target price for TST to HKD5.90 (from We are more bullish than the market earnings and a long-term growth HKD5.00). SITC should benefit on recoveries in passenger and cargo story. We also see short-term significantly from growth in demand traffic on the back of the better- trading opportunities for some for logistics services. We lower our six- than-expected capacity discipline, stocks. month target price marginally to and a rise in demand in 2H13E. We HKD3.20 (from HKD3.30). are among the few analysts covering ■ What's the impact AviChina, TST, and SITC. We believe China’s aviation market Short-term trades: China will continue to expand over 2013-15. Eastern Airlines (CEA), Cathay Pacific Airways (CX), Orient We forecast an air-traffic CAGR of Key stock calls 12% for the period, providing a strong Overseas International (OOIL) and Yuexiu Transport New Prev. revenue source for volume players. AviChina Industry & Technology (2357 HK) Infrastructure (YTI). We expect Rating Buy Buy In addition, we believe the general both CEA and CX to benefit from Target 5.40 5.30 aviation and logistics areas will an expected recovery in passenger Upside  36% continue to develop. The former is at traffic to Japan in 2H13. In the TravelSky Technology (696 HK) the first development stage, while shipping space, a near-term freight Rating Buy Buy earnings in the latter should be driven rate recovery would be positive for Target 5.90 5.00 by demand from manufacturing OOIL. YTI stands to benefit most Upside  16.8% activities moving to inland China. from the introduction of a toll-by- SITC International (1308 HK) Rating Buy Buy weight system in Guangdong. Target 3.20 3.30 ■ What we recommend Upside  18.5% We reiterate our Positive rating for We upgrade China Southern Airlines (CSA) to Buy (1) from Beijing Capital International Airport (694 HK) the China Transportation Sector. Rating Buy Buy Outperform (2), for its Target 5.40 5.40 undemanding-looking valuation. We Upside  12.5% lower our six-month target price to Source: Daiwa forecasts.

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Positive (unchanged) How do we justify our view?

Neutral  Growth outlook

Negative  Valuation

 Earnings revisions

 Growth outlook  China Transportation Sector: net profit (% CAGR for 2012-15E)

Among all the subsectors, we forecast airlines to record (USDm) n.a 38% 10% 10% 16% 35% the highest CAGR in net profit over 2012-15, of 38%, 1,200 followed by AviChina with a CAGR of 35%. We expect 1,000 many of the Asia shipping lines to just about break even for 2013. 800 600 Among the infrastructure stocks, we forecast the port 400 and airport companies we cover to record net-profit CAGRs of 10% for 2012-15, mainly on a recovery in 200 traffic volume. The earnings impact on the toll-road 0 operators of the toll-free policy over national holidays Shipping Airline Port & airport Toll road TST AviChina should be less in 2H13 than in 1H13, and we forecast a 2013E 2014E 2015E net-profit CAGR of 10% for the sector for 2012-15. Source: Daiwa forecasts Note: Earnings are on an adjusted basis

 Historical 12-month forward PBR and PER for transportation  Valuation companies The airline and container-shipping stocks are trading (PBR x) (PER x) currently at average 12-month forward PBRs of 0.8x 3 40 and 0.9x, respectively, based on our BVPS forecasts, 30 much lower than their respective past-five-year averages 2 of 1.2x and 1.1x. We consider their current valuations to 20 be undemanding. 1 10 For the airlines, we apply 2013E PBRs of 1.0-1.4x, which 0 0 are at discounts of 0-30% to the 2010 industry average 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 of 1.4x, because we expect the industry to start to 2013E Airlines (LHS) Shipping (LHS) recover (as it did in 2010). For the same reason, we Toll road (RHS) Aviation related (RHS) apply discounts of 10-20% to the 2010 average PBRs of Port (RHS) the shipping lines, though we are concerned about Asia- Source: Bloomberg, Thomson Reuters, Daiwa forecasts Europe trade.

 2014 consensus net profit forecasts for shipping, port, aviation,  Earnings revisions and toll road stocks The consensus 2014 earnings forecasts for the shipping (USDm) (USDm) companies and airlines have been on a downward trend, 6,300 1,000 especially since the 1H13 results. However, we expect 6,250 900 some companies, such as AviChina, SITC, TST, and CX, 800 6,200 to see YoY rises in earnings for 1H13. 700 6,150 600 We believe the negative impact of toll-free travel over 6,100 500 public holidays has been fully reflected in the consensus 6,050 400 2014 earnings forecasts for the toll-road companies. For Jul-12 Apr-13 Oct-12 Jun-13 Jun-12 Jan-13 the port operators, we expect only modest revisions to Mar-13 Feb-13 Aug-12 Sep-12 Nov-12 Dec-12 May-13 2014 consensus earnings forecasts. Shipping (LHS) Aviation (LHS) Toll road (RHS) Port (RHS) Source: Bloomberg Note: Earnings are on an adjusted basis

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Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Air China 753 HK 5.29 Buy Buy 7.50 8.00 (6.3%) 0.436 0.520 (16.1%) 0.557 0.613 (9.1%) AviChina Industry & Technology 2357 HK 3.97 Buy Buy 5.40 5.30 1.9% 0.155 0.155 0.0% 0.199 0.199 0.0% Beijing Capital International Airport 694 HK 4.80 Buy Buy 5.40 5.40 0.0% 0.329 0.329 0.0% 0.400 0.400 0.0% Cathay Pacific Airways 293 HK 13.50 Buy Buy 16.50 16.80 (1.8%) 0.553 0.762 (27.5%) 1.045 1.243 (15.9%) China COSCO 1919 HK 3.26 Buy Buy 4.00 4.00 0.0% (0.200) (0.130) n.a. 0.219 0.233 (6.2%) China Eastern Airlines 670 HK 2.34 Buy Buy 3.30 4.10 (19.5%) 0.299 0.369 (18.9%) 0.399 0.451 (11.5%) China Merchants Holding International 144 HK 23.15 Buy Buy 34.00 34.00 0.0% 1.538 1.538 0.0% 1.945 1.945 0.0% China Shipping Container Lines 2866 HK 1.94 Buy Buy 2.40 2.70 (11.1%) (0.061) 0.061 n.a. 0.109 0.149 (27.1%) China Southern Airlines 1055 HK 3.01 Buy Outperform 4.20 4.60 (8.7%) 0.273 0.304 (10.4%) 0.298 0.370 (19.6%) COSCO Pacific 1199 HK 9.96 Outperform Outperform 12.00 12.00 0.0% 0.118 0.118 0.0% 0.113 0.113 0.0% Hutchison Port Holdings Trust HPHT SP 0.745 Hold Hold 0.800 0.800 0.0% 0.255 0.255 0.0% 0.278 0.278 0.0% Jiangsu Expressway 177 HK 7.64 Outperform Outperform 8.40 8.40 0.0% 0.525 0.525 0.0% 0.603 0.603 0.0% Orient Overseas International 316 HK 47.70 Buy Buy 61.00 64.00 (4.7%) 0.510 0.578 (11.9%) 0.759 0.833 (8.8%) Shenzhen Expressway 548 HK 2.80 Hold Hold 2.90 2.90 0.0% 0.299 0.299 0.0% 0.344 0.344 0.0% SITC International 1308 HK 2.70 Buy Buy 3.20 3.30 (3.0%) 0.041 0.048 (15.0%) 0.060 0.069 (12.6%) TravelSky Technology 696 HK 5.05 Buy Buy 5.90 5.00 18.0% 0.448 0.400 12.0% 0.509 0.445 14.5% Yuexiu Transport Infrastructure 1052 HK 3.73 Outperform Outperform 4.45 4.68 (4.9%) 0.284 0.302 (6.1%) 0.364 0.385 (5.5%) Zhejiang Expressway 576 HK 6.11 Hold Hold 6.00 6.00 0.0% 0.382 0.382 0.0% 0.351 0.351 0.0% Source: Daiwa forecasts; note: prices as of close on 5 July 2013

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Contents

Large sell-off provides a good buying opportunity ...... 5 Macro environment a concern over the near term ...... 5 Potentially weak 1H13 results should be mostly priced in ...... 6 Weak sentiment should provide a buying opportunity ...... 6 Aviation: the worst should be over ...... 8 Yields under pressure in 1H13 ...... 8 More positive outlook for 2H13 ...... 10 Long-term earnings growth appears intact ...... 10 Marine: concerns over overcapacity easing ...... 12 Asia-Europe has been the biggest headache in 1H13 ...... 12 Improved outlook for 2H13 ...... 12 Land transport: better truck traffic ...... 15 Policy turning more positive ...... 15 Logistics demand continue to increase ...... 16 Recommendations ...... 17 Buy on long-term themes...... 17 Short-term trading ideas ...... 17

Company Section AviChina Industry & Technology ...... 24 TravelSky Technology ...... 27 Beijing Capital International Airport ...... 30 SITC International ...... 33 China Eastern Airlines ...... 36 Cathay Pacific Airways ...... 39 Orient Overseas International ...... 42 Yuexiu Transport Infrastructure ...... 45 Air China ...... 48 China Southern Airlines ...... 51 China COSCO ...... 54 China Shipping Container Lines ...... 57

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Import growth for May also shrank, to 0.3% YoY, down from 16.8% YoY for April and 8.5% YoY for 1Q13. This was likely due mainly to low commodity prices and weak domestic economic growth. The June PMI, meanwhile, showed that export orders remained at a recessionary level of 47.7, and represented a fall from Large sell-off provides the 49.4 for May. The weak foreign trade data resulted in negative investor sentiment towards transportation a good buying stocks, especially those in the marine sector. opportunity  China: industrial production and retail sales

(% YoY) We recommend investors buy selected 24 stocks on weakness, as we see the sector’s 21 fundamentals improving. 18 15 12 Macro environment a concern 9 over the near term 6 3 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 Weakening manufacturing activity and IP Retail sales investment in China Source: CEIC According to the data for May 2013, industrial- production growth declined to 9.2% YoY, from 9.3%  China: PMI vs. export growth YoY for April and 9.6% YoY for 1Q13. Fixed-asset (%) investment (FAI) growth decelerated to 19.7% YoY for 57 May, again down from the levels for April (19.8% YoY) and 1Q13 (20.9% YoY). These numbers led to concerns 54 among investors about a slowdown in investment and 51 manufacturing activity in China.  48  China: FAI and industrial production 45 (YoY %) (YoY %) 24 13 Jul-11 Jul-12 Jan-11 Jan-12 Jan-13 Mar-11 Mar-12 Mar-13 Sep-11 Nov-11 Sep-12 Nov-12 May-11 May-12 May-13 23 12 PMI New order New export order 22 11 Source: CEIC 21 10 20 Potential liquidity squeeze also affected 19 9 sentiment 18 8 Recent concerns about money outflows as a result of the US Federal Reserve’s exit from the market also Jul-12 Oct-12 Apr-13 Apr-12 Jun-12 Jan-13 Jan-12 Mar-13 Mar-12 Feb-13 Feb-12 Nov-12 Dec-12 Aug-12 Sep-12 May-13 May-12 affected the stock market. Daiwa’s senior economist, FAI growth (LHS) IP growth (RHS) Kevin Lai, expects money outflows to become much Source: CEIC clearer over the coming months. As central banks in Asia are compelled to stabilise their currencies, Foreign trade also not looking good massive buy-backs of local-currency money could put Meanwhile, exports rose by only 0.9% YoY for May, pressure on domestic liquidity and credit conditions, in down from 14.7% YoY for April and 18.3% YoY for his view. We expect this to result to weak market 1Q13. Daiwa’s economics team believes the major sentiment as well. reasons for this were tight monitoring of fake export reports and weak demand from traditional markets (exports to the US fell by 1.6% YoY, to the EU dropped by 9.7% YoY and to Japan declined by 5.7% YoY).

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Potentially weak 1H13 results Weak sentiment should provide a should be mostly priced in buying opportunity

Cyclical stocks likely to be most affected Valuations starting to reach three-year We believe the cyclical stocks, especially the shipping lows lines, will record weak 1H13 results. We expect China The share prices of the airline and shipping companies COSCO and China Shipping Container Line (CSCL) to have been weak since the start of the year. As at 28 post net losses for 1H13, due to weak Asia-Europe June, the share prices of these two sectors had declined freight rates. We forecast substantial net-profit by 5-24% YTD. The current valuations of some stocks, declines of 72% YoY for China Eastern Airlines (CEA) particularly the airlines, are close to their past-three- due to weak domestic passenger yields. For year lows, which should already reflect the weakness in infrastructure companies, such as airports and ports, air fares and freight rates in the respective sectors. we forecast YoY increases in net profit due to improvements in passenger and cargo throughput for We see the current environment as providing a good the two respective segments. We forecast toll-road opportunity to accumulate quality names, as we believe operators to record YoY falls in net profit due to the the fundamentals of the companies in some subsectors toll-free policy over national holidays. are improving rather than deteriorating. In addition, we see short-term catalysts for some airlines and However, we believe potentially weak 1H13 results are shipping companies in 2H13. In the following sections mostly factored into share prices, as these have been at we discuss the outlooks for the aviation, marine, and three-year lows recently. If, as we expect, 1H13 results land-transport sectors. are weak, this is likely to result in short-term pressure on share prices, but we believe it will provide a buying  China Airline Sector: 12-month forward PBR opportunity rather than herald a further sell-off. (x) 3.0  China Transportation Sector: 1H13E earnings previews 2.5 +1SD: 2.0x Airline sector AC CSA CEA CX 2.0 Currency CNYm CNYm CNYm HKDm Mean: 1.4x Net profit 868.6 138.0 296.1 385.2 1.5 YoY % (25.8) (34.6) (72.3) n.a 1.0 Aviation-related sector BCIA TST AviChina Currency CNY m CNY m CNY m 0.5 -1SD: 0.9x Net profit 679.9 673.3 400.0 0.0 YoY % 17.3 15.7 27.8 -10 -11 -10 -11 y y Shipping sector OOIL CSCL China COSCO SITC p p Jul-10 Jul-11 Jul-12 Jan-11 Jan-12 Jan-10 Jan-13 Mar-11 Mar-12 Mar-10 Mar-13 Nov-10 Nov-11 Se Se Sep-12 Nov-12 Ma May-12 Ma Currency USDm CNYm CNYm USDm May-13 Net profit 63.8 (1,341.0) (3,066.8) 46.5 Weighted average PBR Mean +1 SD -1 SD YoY % (45.3) n.a n.a 11.5 Source: Thomson Reuters, Daiwa forecasts Port sector CMHI COSCO Pacific HPHT Currency HKDm USD m HKDm  China Shipping Sector: 12-month forward PBR Net profit 1833.2 177.2 777.6 YoY % 4.4 (1.0) (25.4) (x) 2.5 Toll-road sector JSE ZJE SZE YTI Currency CNYm CNYm CNYm CNYm 2.0 Net profit 1,227.8 926.1 329.5 179.3 +1SD: 2.0x YoY % (2.6) 3.9 (21.3) (5.2) 1.5 Mean: 1.4x Source: Daiwa forecasts Note: All earnings are adjusted for one-off gains or losses; HPHT – Hutchison Port 1.0 Holdings Trust, JSE – Jiangsu Expressway, ZJE – Zhejiang Expressway, SZE – Shenzhen -1SD: 0.9x Expressway 0.5

0.0 -10 -11 -10 -11 y y p p Jul-10 Jul-11 Jul-12 Jan-11 Jan-12 Jan-10 Jan-13 Mar-11 Mar-12 Mar-10 Mar-13 Nov-10 Nov-11 Se Se Sep-12 Nov-12 Ma May-12 Ma May-13 Weighted average PBR Mean +1 SD -1 SD

Source: Thomson Reuters, Daiwa forecasts

- 6 - China Transportation Sector 9 July 2013

 China Transportation Sector: current share prices compared with past-three-year low valuations Current share price Current Lowest (HKD) Share price Share price Diff (%) vs. Diff (%) vs. valuation valuation Shipping 5-Jul-2013 (lowest) Date (highest) Date lowest highest (2013E) (x)* (x)* Date Orient Overseas International Ltd. 47.7 28.55 04/10/2011 86.35 18/04/2011 67% -45% 0.8 0.55 03/10/2011 China Shipping Container 1.94 1.01 04/10/2011 3.96 11/01/2011 92% -51% 0.7 0.43 03/10/2011 China COSCO Holdings 3.26 2.76 05/09/2012 11.20 11/01/2010 18% -71% 1.4 0.54 03/10/2011 SITC International holdings 2.7 1.55 04/10/2011 5.59 21/01/2011 74% -52% 1.1 0.82 25/11/2011 Port operators Hutchison Port Holdings Trust 0.745 0.58 29/11/2011 1.01 08/04/2011 30% -26% 22.6 16.27 23/09/2011 China Merchants Holdings International 23.15 19.20 04/10/2011 37.55 21/04/2011 21% -38% 11.8 9.12 26/09/2011 COSCO Pacific Ltd. 9.96 7.91 26/09/2011 16.74 26/04/2011 26% -41% 10.6 6.44 26/09/2011 Aviation Air China Ltd. 5.29 4.45 14/06/2012 11.42 26/10/2010 19% -54% 1.0 0.90 28/06/2012 China Southern Airlines Co. 3.01 2.47 04/01/2010 5.91 26/10/2010 22% -49% 0.7 0.73 19/06/2013 China Eastern Airlines Co. 2.34 2.11 04/10/2011 5.23 26/10/2010 11% -55% 0.8 0.77 19/06/2013 Cathay Pacific Airways 13.5 11.88 04/10/2011 24.10 07/12/2010 14% -44% 0.9 0.81 28/05/2012 Beijing Capital International Airport 4.8 2.86 26/09/2011 6.95 14/02/2013 68% -31% 11.2 10.62 26/09/2011 Travelsky Technology Ltd. 5.05 3.28 03/10/2011 5.97 08/11/2010 54% -15% 8.8 7.43 03/10/2011 AviChina Industry & Technology 3.97 2.06 26/09/2011 5.30 27/05/2011 93% -25% 19.8 17.32 27/07/2012 Expressway Jiangsu Express Co. Ltd. 7.64 5.09 23/09/2011 9.66 11/11/2010 50% -21% 11.6 8.36 21/09/2011 Zhejiang Expressway Co. 6.11 4.16 26/09/2011 8.20 04/11/2010 47% -25% 12.8 8.54 19/10/2011 Shenzhen Expressway Co. 2.8 2.70 26/09/2011 5.40 07/04/2011 4% -48% 7.3 5.67 11/01/2012 Yuexiu Transport Infrastructure 3.73 2.74 26/09/2011 4.56 26/04/2010 36% -18% 10.0 6.78 30/09/2011 Source: Bloomberg, Thomson Reuters, Daiwa forecasts Note: * For airlines and shipping companies, we apply PBR as the valuation benchmark; for the other companies we apply PER

- 7 - China Transportation Sector 9 July 2013

 Big-3 China airlines: trend in passenger yields (YoY %) 15

10

5 Aviation: the worst 0 (5) should be over (10) (15) We expect a significant recovery in 1H11 2H11 1H12 2H12 AC: Domestic CSA: Domestic CEA: Domestic passenger traffic on Japan routes in AC: Intel' CSA: Intel' CEA: Intel' 2H13. We are also seeing initial signs of Source: Companies recovery at some companies. Premium traffic still under pressure The IMF expects Europe GDP to be flat YoY for 2013. Yields under pressure in 1H13 Although the US has been performing better, the weak economic growth in the EU continues to affect general Slight overcapacity in domestic market expectations on the pace of the recoveries in the global economy and corporate earnings. This leads to the Slow economic growth globally over the past two years tightened control of travel budgets by companies in has adversely affected long-haul traffic, especially general. Therefore, we expect the recovery in premium premium (both business and first class) traffic. In view traffic to be limited to certain airlines initially, with of the weak demand on long-haul routes, the Big-3 those airlines with strong brands, such as CX, seeing China airlines (AC, CSA, and CEA) redeployed some of better recoveries. the capacity to the domestic market and regional routes, eg, Southeast Asia, where they can see good  IMF forecasts for GDP growth demand growth due to the better economic growth GDP growth Change (pp YoY) than in the US and Europe. 2012 2013E 2014E 2012 2013E 2014E EU (0.6) (0.3) 1.1 (2.0) 0.2 1.4 However, as many airlines in Asia are doing the same US 2.2 1.9 3.0 0.4 (0.4) 1.1 (ie, redeploying long-haul capacity to Asia), there has World 3.2 3.3 4.0 (0.8) 0.2 0.7 been some overcapacity in Asia as well as in the China Source: IMF domestic market since 4Q12. So while there has been  Global premium traffic growth high passenger-traffic growth the yield has declined. (YoY %) 25  Big-3 China airlines: aggregate available seat kilometres (ASK) growth 20 15 (YoY %) 30 10 25 5 0 20 (5) 15 (10) 10 -11 -12 p p Jul-12 5 Jul-11 Jan-12 Jan-13 Jan-11 Mar-12 Mar-13 Mar-11 Nov-11 Se Nov-12 Se May-12 May-11 0 Overall Europe - Far East North & Mid Pacific (5) Source: IATA -11 -12 -13 y y y

Jul-11 Jul-12 Jan-11 Jan-12 Jan-13 Mar-11 Mar-12 Mar-13 Sep-11 Nov-11 Sep-12 Nov-12 Ma Ma Ma International ASK Domestic ASK

Source: Companies

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Negative impact from H7N9 virus Air-freight volume remains under pressure Apart from the slight overcapacity, travel sentiment in Despite the more frequent launches of new Mainland China was also affected by an outbreak of smartphones and tablet PCs, increased demand for H7N9 avian flu in 1H13. However, based on similar electronic goods has been unable to offset poor previous outbreaks, such as that of the H5N1 virus, the consumer sentiment in the EU since 2012, which has peak time for infection appears to be during winter and led to long periods of low inventory at retailers. The US spring. Therefore, we expect the number of new inventory-to-sales ratio did not recover much even infected cases of H7N9 to be low over the summer, and after the global financial crisis in 2008. We expect air- believe travel sentiment will recover in 2H13. freight demand to remain sluggish for 2H13, even  though we expect a gradual seasonal pick-up in  Number of infected cases reported for H5N1 demand in 4Q13. (No. of people) (No. of people) 25 600  Global air-cargo traffic

20 500 (YoY %) 54 400 15 300 36 10 200 18 5 100 0 0 0 (18) -05 -10 p p Jul-06 Jul-11 Apr-05 Apr-10 Oct-07 Jan-09 Jun-09 Feb-06 Feb-11 Mar-08 Nov-04 Se Dec-06 Dec-11 Aug-08 Nov-09 Se

May-07 (36) -08 Confirmed human H5N1 cases (LHS) Cumulative cases (RHS) -06 -09 y p g Jul-12 Jul-07 Apr-11 Apr-06 Oct-08 Jan-10 Jun-10 Jan-05 Jun-05 Mar-09 Feb-12 Feb-07 Au Nov-10 Sep-11 Dec-12 Nov-05 Se Dec-07 Source: World Health Organisation (WHO) Ma Global Asia Pacific Europe N. America  Cumulative number of infected cases reported for SARS Source: IATA (No. of people) (No. of people) 9,000 1000  Consumer confidence indices in the US and EU 8,000 (Index) (Index) 7,000 800 40 120 6,000 600 5,000 20 80 4,000 400 3,000 0 40 2,000 200 1,000 (20) 0 0 0 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 (40) (40) Cumulative cases (LHS) No. of death (RHS) Jul-12 Jul-07 Apr-11 Apr-06 Oct-08 Jan-10 Jun-10 Jan-05 Jun-05 Mar-09 Feb-12 Feb-07 Aug-09 Nov-10 Sep-11 Dec-12 Nov-05 Sep-06 Dec-07 May-13 May-08 Source: WHO EU consumer confidence index (LHS) US consumer confidence index (RHS)  Number of confirmed cases reported for H7N9 (2013) Source: Bloomberg (No. of cases) 8  US inventory-sales ratio over the past five years (Index) 6 1.6

1.5 4 1.4

2 1.3

1.2 0 19-Feb 5-Mar 19-Mar 2-Apr 16-Apr 30-Apr 14-May 28-May 1.1 Source: WHO r-08 r-09 r-10 r-11 r-12 p p p p p Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 A A A A Apr-13 A Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Source: Bloomberg

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 Jet fuel price More positive outlook for 2H13 (USD/bbl) (YoY %) 145 25 Summer season should see a turnaround 20 15 We believe the H7N9 outbreak has led to some leisure 130 10 travel being postponed to the summer season (July- 5 August). We expect concerns about the H7N9 virus to 0 ease and demand to recover over the summer. Based 115 (5) (10) on our discussions with the management of Big-3 (15) China airlines, we forecast passenger growth for the 100 (20) airlines over the summer to be similar to that for last Jul-12 Apr-12 Apr-13 Oct-12 Jan-12 Jun-12 Jan-13 Jun-13 Feb-12 Mar-12 Feb-13 Mar-13 Nov-12 Dec-12 Aug-12 Sep-12 year at about 10% YoY, while we expect their combined May-12 May-13 yield to be be flat or fall slightly YoY, and to be slightly Jet fuel price (LHS) YoY growth (RHS) better than the YoY decline for 1H13. CX is very bullish Source: Bloomberg on summer passenger traffic, especially on its Japan  Airlines: jet-fuel price sensitivity routes. Sensitivity to fuel-price increases (2014E) AC CSA CEA CX International fuel consumption (%) 50 20 33 100 Japan traffic should recover in 2H13 Fuel hedging (% of total) 0 0 0 20~38 Impact on FY14E EPS: We do not expect the tensions between the China and USD1/bbl increase Japan governments to increase, and believe that this, in international fuel (CNY/HKD) (0.016) (0.019) (0.013) (0.079) together with the depreciation of the Yen, will result in EPS impact (%) (2.5) (5.6) (2.9) (10.2) a better YoY rise in the number of Mainland and Hong Source: Daiwa estimates Kong passengers going to Japan HoH for 2H13. The YoY increase should be substantial given a low base last year due to the political dispute over the Diaoyu Long-term earnings growth Islands. appears intact

 Traffic from China to Japan since 2H12 China outbound traffic should remain ('000 people) (YoY %) strong 250 150 For 1Q13, outbound passenger traffic from Beijing and 200 100 Shanghai increased by 30% YoY. We forecast total 150 50 outbound traffic from China to rise by 20% YoY for 2013, and believe this level of growth is sustainable 100 0 over the coming three years. 50 (50) The major earnings drivers for the Big-3 airlines in 0 (100) China over the near term should be passenger traffic to

Jul-12 Korea and the US, the visa-application process for Oct-12 Apr-13 Jan-13 Mar-13 Feb-13 Aug-12 Sep-12 Nov-12 Dec-12 May-13 No. of vistors YoY growth which was simplified in mid-2012. In addition, we Source: CEIC expect the depreciation of the Yen against the Renminbi and the easing of tensions between the China Jet-fuel price should continue to be low for and Japan government to result in a boost to China a while outbound traffic to Japan in 2H13.

Due to concerns about the weak demand recovery in Europe, we expect the jet-fuel price to remain at its current low level for 2H13. This could benefit all the airlines.

We forecast the average jet-fuel price to decline from USD127/bbl for 2012 to USD120/bbl for 2013 and USD118/bbl for 2014-15. We expect this relatively low fuel price to be a driver of improved profitability for 2H13.

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 China: quarterly outbound traffic  China: provinces that have been opened up to general aviation (’000 people) (YoY %) 1,600 100 1,400 80 1,200 Heilongjiang 1,000 60 800 Changchun Jilin 600 40 Liaoning 400 Xinjiang 20 Beijing 200 Xinjiang Gansu Inner Mongolia 0 0 Hebei Shanxi Ningxia Shandong

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Qinghai Jiangsu No. of travellers (LHS) YoY growth (RHS) Shaanxi Henan Tibet Source: Shanghai Municipal Tourism Administration, Beijing Municipal Commission of Anhui Hubei Tourism Development Sichuan Zhejiang Note: data only combined Beijing and Shanghai Jiangxi Hunan Fujian  China: annual outbound traffic Guizhou Yunnan Guangdong (m people) (YoY %) Guangxi 100 75

80 60 Source: Various media

60 45

40 30

20 15

0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

No. of travellers (LHS) YoY growth (RHS) Source: National Bureau of Statistic of China

 China: outbound traffic mix (excludes Hong Kong and Macau)

Singapore Vietnam 4.5% 5.1% US 6.1% Thailand Others 6.9% 43.1% Japan 7.4%

Malaysia 7.9%

Taiwan Korea 8.3% 10.7% Source: National Bureau of Statistic of China

Opening up of general aviation market in progress We believe the government is still targeting the end of 2015 as the year when low-altitude airspace will be opened fully for general aviation use. Currently, trials are under way in about 50% of the country (including most of the coastal, northeast, and central provinces) on a system that simplifies the approval process for the use of general-aviation aircraft. We believe the target of 2015 should be achievable.

- 11 - China Transportation Sector 9 July 2013

 CCFI: shipping freight rate index (Index) 2,100 1,900 1,700 1,500 Marine: concerns over 1,300 1,100 overcapacity easing 900 700 Jul-12 Apr-12 Apr-13 Oct-12 Jan-12 Jun-12 Jan-13 Jun-13 Feb-12 Mar-12 Feb-13 Mar-13 Aug-12 Sep-12 Nov-12 Dec-12 We expect a successful freight rate May-12 May-13 USEC USWC Overall increase in 3Q13, which would help to Europe Mediterranean boost sentiment toward the marine sector Source: Shanghai Shipping Exchange in the near term. Note: CCFI = China Containerized Freight Index Improved outlook for 2H13 Asia-Europe has been the biggest headache in 1H13 More capacity discipline emerging On the positive side, according to Alphaliner, CSCL, Weaker-than-expected demand from Evergreen (Not rated), and Zim (Not listed) together Europe withdrew joint weekly Asia-Europe services from 17 The volume growth on Asia-Europe routes remained June. Moreover, the G6 Alliance of shipping companies sluggish for the first four months of 2013, declining by (comprising Hapag-Lloyd, APL [part of Singapore’s 1% YoY, according to Alphaliner. This sluggishness, Neptune Orient Lines], Hyundai Merchant Marine, together with the continuous delivery of new vessels in Mitsui OSK Lines, Nippon Yusen Kaisha, and Orient the market, led to high pressure on freight rates on Overseas Container Line) said it had cancelled one Asia-Europe routes in 1H13. According to the Shanghai joint weekly service on the Asia-Europe route from 1 Containerized Freight Index (SCFI), the freight rate July. We believe these cancellations were due mainly to from Shanghai to Europe was only USD514/TEU as at the continuously low freight rates on the route, which the week ended 21 June, well below the industry break- caused liners to pull out capacity. We therefore expect even level of around USD1,000-1,100/TEU. the capacity cuts to have a greater impact in 2H13.

Therefore, even though we expect a better pick-up on  Recent capacity withdrawals on Asia-Europe routes Date Detail freight rates to the US, weakness on Asia-Europe Jul-13 The G6 Alliance confirms the cancellation of Loop 7 sailing in week 27 (1 July), routes would likely adversely affect the profitability of originally scheduled to depart from Asia to Europe. the liners in 1H13. Jun-13 The CKYH Alliance, Evergreen and the G6 Alliance void their respective Asia/North Europe weekly express service 7, China-Europe Mediterranean service and Loop 6 service in weeks 25 and 26 (17 and 24 June).  SCFI: shipping freight rate Jun-13 More void sailings are planned on Far East- Mediterranean routes, with the CKYH (USD/FEU) (USD/TEU) Alliance skipping the MD1 sailings on weeks 25 and 28 (17 June and 8 July), 4,450 2500 Evergreen skipping the US West Coast-Asia-Mediterranean service sailing on week 27 (1 July) and China Shipping Container Lines/K-Line, Yang Ming, Pacific 3,950 2000 International Line, and Wanhai Line void the ABX sailing on week 28 (8 July). 3,450 May-13 CSCL, Evergreen and Zim set to remove their CES2/AEX Loop 2 (9 x 8,400- 2,950 1500 10,000TEU) in June 2013. 2,450 Mar-13 The CKYH Alliance abandons its Asia/North Europe weekly express service, effective 1,950 1000 April 2013. The carrier will also not resume the North Europe express service (8 x 1,450 8,000-9,500TEU) 500 950 Source: Alphaliner 450 0 Jul-12 Apr-12 Oct-12 Apr-13 Jan-12 Jun-12 Jan-13 Jun-13 Mar-12 Mar-13 Feb-12 Feb-13 Aug-12 Sep-12 Nov-12 Dec-12 May-12 May-13 Europe (RHS) USEC (LHS) USWC (LHS) Overall (RHS) Med (RHS) Source: Shanghai Shipping Exchange Note: SCFI = Shanghai Containerized Index

- 12 - China Transportation Sector 9 July 2013

 Shipping capacity growth on AE and TP routes  Bunker price (YoY) (USD/bbl) (YoY%) 15% 800 45 10% 750 30 5% 700 15 0% 650 0 600 (5%) 550 (15) (10%) 500 (30) Jul-12 Jul-13 Apr-12 Oct-12 Apr-13 Jan-12 Jan-13 Jun-12 Jun-13 Mar-12 Mar-13 Feb-12 Feb-13 Aug-12 Sep-12 Nov-12 Dec-12 May-12 May-13 Jul-12 Apr-12 Apr-13 Oct-12 Jan-12 Jun-12 Jan-13 Jun-13 Feb-12 Mar-12 Feb-13 Mar-13 Aug-12 Sep-12 Nov-12 Dec-12 May-12 May-13 AE AE - forecasts TP TP - forecasts Bunker price (LHS) YoY growth (RHS) Source: Alphaliner, Daiwa forecasts Source: Bloomberg Note: AE: Asia-Europe routes; TP: Transpacific routes  Shipping: bunker-fuel price sensitivity  Weekly capacity on Asia-Europe routes OOCL China COSCO CSCL SITC Jun-2013 TEUs YoY % MoM % Bunker cost Maersk 70,100 (17) 0 A USD10/ton increase (3.3) (9.6) (8.5) (2.4) CKYH 69,380 (2) 10 % to total operating cost 19.0 27.0 29.0 21.0 MSC 56,140 (4) 0 Source: Daiwa CMA CGM 41,740 (5) 1 Grand Alliance 42,210 19 10 New World Alliance 29,200 (6) (3) Scrapping should remain active in 2014 Evergreen 20,580 30 (9) Based on current delivery schedule, Alphaliner now CSCL 22,610 10 1 forecasts capacity growth of 7% YoY for 2014. Some of UASC 11,150 0 0 Zim 9,320 56 11 the deliveries scheduled in 2013 had been deferred to Others 1,460 18 0 2014 (about 213,000 TEUs), which led Alphaliner to Total 373,900 (1) 2 raise in June its forecast to 7% YoY from 6% YoY Source: Alphaliner earlier this year.

Rate hike in July could be a short-term However, we believe scrapping activity will remain share-price catalyst active in 2014, given the weak freight rates observed so As mentioned, given the weak demand on Asia-Europe far this year. Even though we expect the freight rate routes, some liners have started to withdraw their hike in July to be successful, the full-year average capacity recently. On the demand side, we expect a freight rate would still likely be lower than last year. pick-up in sea-freight demand in 3Q13 on the back of According to SCFI, the average freight rate up to the restocking activities for the back-to-school season, week ending 21 June was USD1,102/TEU, which was Thanksgiving and Christmas orders. Therefore, we see 11% YoY lower than that for the same period last year. a good chance of a successful freight rate hike in July, Therefore, we believe the ship-owners will remain which could be a short-term positive share-price cautious on capacity increases and continue to be catalyst for the sector. active on scrapping activities.

Low bunker prices would lend a helping As such, we expect scrapping to remain at around the hand 400,000 TEUs level in 2014, against Alphaliner’s forecast of 200,000 TEUs, which would lead to a Similar to jet-fuel prices, we expect bunker prices to milder increase of 6% YoY, closer to our demand remain at a low level of USD600/t for 2H13. This forecast of 5% YoY for 2014. translates into an average bunker price of USD610/t in 2013 (compared with USD664/t in 2012). We expect US still a good driver bunker prices to remain low at around the USD600/t level in 2014. Therefore, low bunker prices in 2H13- Demand from the US has remained stronger than from 2014 could also be an earnings catalyst for the sector. Europe. The major drivers have been the auto industry and the recovery in the US housing market. We believe the US economy will remain in a recovery stage and expect demand to continue to increase.

- 13 - China Transportation Sector 9 July 2013

 US auto sales trend since 2012 (m vehicles) 16 25

20 15 15

10 14 5

13 0 Jul-12 Jan-12 Jan-13 Mar-12 Mar-13 Sep-12 Nov-12 May-12 May-13 US auto sales (LHS) YoY growth (RHS) Source: Bloomberg

 US new housing starts since 2012

(’000 units) (YoY %) 1,100 45

950 30

800

15 650

500 0 Jul-12 Apr-12 Oct-12 Apr-13 Jan-12 Jun-12 Jan-13 Mar-12 Mar-13 Feb-12 Feb-13 Aug-12 Sep-12 Nov-12 Dec-12 May-12 May-13 US new housing starts (LHS) YoY growth (RHS) Source: Bloomberg

- 14 - China Transportation Sector 9 July 2013

 China: ownership, gearing ratio and profitability of toll roads (2011) Private Total Total debt Total Government owned investment outstanding gearing Net profit Provinces owned (%) (%) (CNY bn) (CNY bn) ratio (CNY bn) Shanghai 26 74 66.6 31.2 47% (1.6) Beijing 6 94 75.6 43.9 58% 0.4 Land transport: better Guizhou 2 98 62.1 36.4 59% (1.4) Anhui 3 97 101.1 62.8 62% (1.7) Shandong 78 22 162.6 108.1 66% (8.8) truck traffic Liaoning 100 0 86.9 47.2 54% 0.0 Tianjin 0 100 71.7 44.8 62% (0.4) Jiangsu 44 56 231.8 133.8 58% (5.6) We expect the policy risk for toll-road Hunan 60 40 93.7 60.3 64% (0.0) Yunnan 63 37 179.6 111.5 62% (2.6) operators to turn from negative to Chongqing 0 100 118.1 64.6 55% (3.3) positive over the near term, whereas Ningxia 100 0 41.9 14.7 35% 0.0 Guangdong 46 54 384.8 226.7 59% (3.2) demand for logistics transport remains Zhejiang 11 89 249.5 161.9 65% (5.5) robust. Gansu 100 0 70.7 44.5 63% 0.1 Fujian 72 28 149.8 96.3 64% 1.1 Hubei 57 43 150.2 98.0 65% (0.5) Hebei 73 27 190.0 140.9 74% 0.9 Policy turning more positive Guangxi 84 16 98.9 61.3 62% (1.0) Henan 33 67 186.9 133.5 71% (4.3) Shanxi 70 30 117.9 85.4 72% 1.0 Positive sentiment from policy review Shaanxi 93 7 196.5 143.5 73% (0.2) The Ministry of Transport is now reviewing the pricing Inner Mongolia 71 29 112.0 62.6 56% 2.4 policy for the toll-road sector. We expect good news Qinghai 95 5 25.3 12.9 51% (0.1) Hainan 100 0 10.9 6.0 55% 0.1 regarding compensation for toll-road operators due to Xinjiang 100 0 42.1 25.2 60% (0.5) the negative impact from private cars being allowed to Jilin 86 14 63.8 47.3 74% (1.2) travel toll-free over national holidays. We believe Heilongjiang 83 17 52.6 32.6 62% (0.1) compensation will come in the form of extending Jiangxi 50 50 111.2 62.6 56% (0.6) (2.5) concession periods rather than in cash from the Sichuan 76 24 147.3 90.7 62% Source: Provincial governments, various media government. Such as move would still be slightly positive for the valuations of the toll-road operators, as Toll-by-weight to be implemented in it would mean the charging periods for the companies would also be increased. Guangdong Currently, most provinces in China have already In addition, we expect the government to provide implemented a toll-by-weight policy. However broad guidelines on setting toll fees. This would Guangdong lags behind other provinces in terms of provide toll-road operators with greater clarity about implementation. According to the Guangdong when they can raise tariffs. Government, the facilities for implementing the toll- by-weight policy should be installed on all expressways Compared with policies announced in 2012 which were located in the central region of the Pearl River Delta by mostly negative for the toll-road operators, including the end of September this year, which includes the aligning toll fees and allowing toll-free travel for cities of Guangzhou and Shenzhen. private cars over national holidays, we see the government’s current review of the pricing regime as a Also, the government aims to unify the toll-charging turnaround in its policy in an attempt to attract system in the Pearl River Delta area by the end of 2013, investors to the sector. We believe it is essential for the which is a prerequisite for the introduction of the toll- government to achieve this, as the sector still needs by-weight system. Currently, the northern, eastern and more private-capital investment, as most of the toll- western parts of Guangdong province have already road operators are highly geared and are not profitable implemented the toll-by-weight policy. Therefore, we currently. believe there is high likelihood that the system will be implemented throughout all of Guangdong by the end of 2Q14 at the latest.

The toll-by-weight policy is beneficial for toll road operators, as it helps increase truck traffic and avoids over-weight trucks damaging the road surface, which would increase the maintenance cost. From the - 15 - China Transportation Sector 9 July 2013

experience of other listed toll-road operators, the toll-  China: commercial vehicle sales growth by-weight policy would result in 15-40% YoY increases ('000units) (YoY) in unit revenue. 600 40% 500 30% 20%  China: toll-by-weight impact for the listed expressway 400 companies 10% 300 0% (%) 200 (10%) 80 (20%) 100 (30%) 60 0 (40%) (100) (50%) 40 Jul-11 Jul-12 Jan-11 Jan-12 Jan-13 Mar-11 Mar-12 Mar-13 Sep-11 Nov-11 Sep-12 Nov-12 20 May-11 May-12 May-13 CV YoY 0 Source: CEIC (20) Huning (Jiangsu) Hening (Anhui) Gaojie (Anhui) Chengyu (Sichuan)

Traffic growth Revenue growth Unit revenue growth Source: Company, Daiwa

Logistics demand continue to increase

Truck-traffic growth should be steady in 2H13 Truck traffic has been rising in China since 1H13. Daiwa’s economics team forecasts the country’s exports and imports to rise by 9.5% YoY each for 2013, as a result of increased foreign trade. This in turn could lead to a rise in truck traffic on toll roads.

Also, we believe continuing increases in domestic consumption and the ongoing movement of manufacturing bases inland will stimulate demand for logistics in China. For 2012, trade from tax-exempt bonded zones rose in terms of value by 51% YoY, which indicates to us strong demand for such logistics.

 China: truck traffic growth (YoY%) 40 30 20 10 0 (10) (20) Jul-12 Apr-12 Apr-13 Oct-12 Jun-12 Jan-13 Mar-12 Feb-13 Mar-13 Aug-12 Sep-12 Nov-12 Dec-12 May-12

AHE ZJE JSE SZE Source: Company

- 16 - China Transportation Sector 9 July 2013

We also expect demand for logistics in China to remain robust due to the continuous inland migration of manufacturing bases to locations where labour is cheaper, and the increase in domestic consumption as a result of China’s urbanization. Some two-thirds of SITC’s net profit comes from logistics, and it is the Recommendations largest logistics player listed in Hong Kong. Therefore, we believe SITC will become attractive for investors We recommend investors buy AviChina, looking for logistics companies. TravelSky, SITC and BCIA for their sustainable long-term themes. For short- Short-term trading ideas term trading opportunities, we like CEA, CX, OOIL and YTI. Top picks – CEA, CX, OOIL and YTI We expect a recovery in China-Japan passenger traffic due to Yen depreciation and our assumption that the Buy on long-term themes political tension between the two governments will not be as bad as it was last year, when the two clashed over Top picks – AviChina, TravelSky, SITC, and the Diaoyu Islands. Also, the base last year was low, BCIA which should mean the YoY improvement in traffic will be strong for 2H13, and lead to improved sentiment We remain optimistic about air-passenger growth in toward airlines stocks such as CEA. China over the next three years, and forecast a CAGR of 12% YoY, which we see as achievable. As such, we For the marine sector, we expect the freight rate recommend investors buy TST and BCIA, the earnings increase in July to be successful and the impact of of which rely heavily on passenger bookings and recent capacity withdrawal to be more significant in throughput growth, respectively, and are immune from 3Q13, when the industry will enter the peak season. On any weakness in air fares. the back of this, we suggest accumulating OOIL, as it should be more successful in raising freight rates than We recently upgraded BCIA to Buy (1) from Sell (5) its peers on the back of its strong services. (see our flash note, Time to buy now, 25 June 2013). As our target price now offers only offers 13% upside For the expressways, we expect YTI to enjoy more potential we will continue to monitor the situation short-term share-price catalysts from further asset closely. Key catalysts that would lead us to reviewing acquisitions, the full implementation of the toll-by- our valuation include passenger throughput and weight system in Guangdong, and accelerated truck aircraft movement growth coming in higher than we traffic growth on its major roads, such as the expect (our forecasts call for total passenger Guangzhou Northern Second Ring Expressway. throughput growth of 4.8-5.7% in 2013-14, and total aircraft movement growth of 2.0-3.2% over the same period), and the final capex for the second Beijing airport coming in lower than our expectations of CNY32-33bn.

Apart from the traffic on normal scheduled services, China should continue to pursue the opening of the general aviation market in the next three years, in which we believe AviChina would be the major beneficiary. Strong growth momentum from its helicopter business, which recorded a 41% YoY increase in orders for helicopters as at the end of 2012, should provide solid support for its earnings for the next three years.

- 17 - China Transportation Sector 9 July 2013

 Airlines in China and globally: valuation comparison Total Share Share market Bloomberg price price 6M target cap PBR (x) Dividend yield (%) EV/EBITDA (x) ROE (%) Company code Currency 5-Jul-13 Rating price (USDm) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E China Air China Ltd-H * 753 HK HKD 5.29 Buy 7.50 8,796 1.0 0.9 1.1 1.3 4.7 4.2 10.1 11.5 China Southern Airlines Co-H * 1055 HK HKD 3.01 Buy 4.20 4,234 0.7 0.6 2.4 2.6 5.4 4.9 8.2 8.4 China Eastern Airlines Co-H * 670 HK HKD 2.34 Buy 3.30 4,764 0.8 0.7 0.0 0.0 5.0 4.3 13.7 15.9 China Southern Airlines Co-A 600029 CH CNY 2.75 NR NR 4,234 0.8 0.8 1.8 1.0 6.0 5.3 9.2 8.9 China Eastern Airlines Co-A 600115 CH CNY 2.53 NR NR 4,764 1.2 1.1 0.0 0.0 6.0 6.0 14.2 10.0 Air China Ltd-A 601111 CH CNY 4.09 NR NR 8,796 1.1 0.9 1.5 1.2 6.8 5.7 8.5 9.8 Hainan Airlines Co-A 600221 CH CNY 2.03 NR NR 4,059 1.0 n.a. 2.5 2.5 8.5 n.a. 13.1 n.a. Mean 0.9 0.8 1.3 1.2 6.1 5.1 11.0 10.8 Median 1.0 0.8 1.5 1.2 6.0 5.1 10.1 9.9 Asia

Cathay Pacific Airways * 293 HK HKD 13.5 Buy 16.50 6,849 0.9 0.8 1.5 2.8 5.1 4.1 3.7 6.8 Singapore Airlines Ltd * SIA SP SGD 10.1 Hold 9.80 9,250 0.9 0.9 3.4 3.8 2.7 2.5 3.4 4.4 China Airlines Ltd 2610 TT TWD 11.35 NR NR 1,959 1.1 1.1 n.a. 0.5 14.0 11.2 1.0 4.4 Eva Airways Corp 2618 TT TWD 17 NR NR 1,839 1.5 1.4 0.0 0.6 8.8 9.4 4.2 5.4 Ana Holdings Inc 9202 JP JPY 217 Hold 210 7,562 1.0 1.0 1.8 1.9 5.2 5.1 6.4 5.6 Japan Airlines Co Ltd 9201 JP JPY 5,380 Buy 6,000 9,669 1.7 1.5 3.5 3.1 3.4 3.7 35.5 23.4 Qantas Airways Ltd QAN AU AUD 1.315 NR NR 2,673 0.5 0.5 0.0 0.2 3.8 3.4 1.2 1.4 Air New Zealand Ltd AIR NZ NZD 1.445 NR NR 1,223 0.9 0.9 3.8 5.1 4.5 2.9 3.4 10.5 Malaysian Airline System Bhd MAS MK MYR 0.31 NR NR 1,618 1.2 1.1 0.0 0.0 n.a. 14.1 n.a. n.a. Thai Airways International ** THAI TB THB 22 SELL 23 1,538 0.6 0.6 2.3 3.7 6.2 5.7 7.1 8.9 Korean Air Lines Co Ltd 003490 KS KRW 29600 NR NR 1,884 0.8 0.8 0.0 0.8 8.6 8.2 8.2 n.a. Asiana Airlines 020560 KS KRW 5120 NR NR 873 1.1 1.0 0.0 0.2 9.1 9.3 6.9 3.0 Mean 1.0 1.0 1.5 1.9 6.5 6.6 7.4 7.4 Median 0.9 0.9 1.5 1.3 5.2 5.4 4.2 5.5 International Alaska Air Group Inc ALK US USD 51.82 NR NR 3,658 2.5 2.1 0.0 0.0 4.0 3.5 23.9 23.8 Us Airways Group Inc LCC US USD 16.75 NR NR 2,776 3.3 2.1 0.0 0.0 4.6 3.5 n.a. 52.1 United Continental Holdings UAL US USD 31.23 NR NR 10,635 n.a. n.a. 0.0 0.0 6.0 4.4 29.6 n.a. Delta Air Lines Inc DAL US USD 18.41 NR NR 16,263 n.a. n.a. 0.0 0.0 6.0 5.2 37.7 26.8 Deutsche Lufthansa-Reg LHA GR EUR 15.34 NR NR 9,071 1.6 1.0 0.0 2.4 3.8 3.1 3.6 8.3 Air France-Klm AF FP EUR 6.739 NR NR 2,606 0.6 0.5 0.0 3.0 7.4 4.9 n.a. n.a. Latam Airlines Group Sa LAN CI CLP 8165.1 NR NR 7,815 1.5 1.4 n.a. 0.1 13.6 8.8 n.a. 6.3 Aeroflot-Russian Airlines AFLT RM EUR 57.95 NR NR 1,923 1.0 0.9 n.a. 10.2 5.5 4.6 16.8 16.5 Mean 1.7 1.3 0.0 2.0 6.3 4.8 22.3 22.3 Median 1.5 1.2 0.0 0.1 5.8 4.5 23.9 20.1 LCC Airasia Bhd AIRA MK MYR 3.19 Buy 4.00 2,770 1.6 1.4 1.9 2.5 6.3 5.2 15.2 18.4 Tiger Airways Holdings Ltd TGR SP SGD 0.635 NR NR 489 2.6 1.5 0.0 0.0 30.1 10.7 n.a. 21.7 Easyjet Plc EZJ LN GBP 1351 NR NR 7,954 n.a. n.a. 0.0 0.0 10.9 8.6 13.9 17.6 Ryanair Holdings Plc RYA ID EUR 7.236 NR NR 13,341 3.2 2.8 0.0 0.5 9.9 9.0 16.4 17.6 Gol Linhas Aereas Intel-Adr GOL US USD 2.97 NR NR 795 n.a. 1.0 n.a. 0.7 n.a. n.a. n.a. n.a. Southwest Airlines Co LUV US PHP 12.71 NR NR 9,267 1.3 1.2 0.3 0.7 5.5 4.1 5.7 8.9 Cebu Air Inc CEB PM PHP 69.85 NR NR 972 1.8 1.7 1.4 1.2 8.5 7.5 14.2 15.4 Mean 2.1 1.6 0.6 0.8 11.9 7.5 13.1 16.6 Median 1.8 1.4 0.1 0.7 9.2 8.1 14.2 17.6

Total Weighted average 1.0 0.9 0.7 1.2 6.2 5.1 11.9 10.9 High 3.3 2.8 3.8 10.2 30.1 14.1 37.7 52.1 Low 0.5 0.5 0.0 0.0 2.7 2.5 1.0 1.4 Median 1.1 1.0 0.0 0.7 6.0 5.1 8.8 9.9 Source: Bloomberg, *Daiwa forecasts Note: **covered by Thanachart Securities

- 18 - China Transportation Sector 9 July 2013

 Airports in China and globally: valuation comparison Total Share Share 6M market Dividend yield Bloomberg price price target cap PER (x) PBR (x) (%) EV/EBITDA (x) ROE (%) Company code Currency 5-Jul-13 Rating price (USDm) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E China Beijing Capital Intl Airpo-H * 694 HK HKD 4.8 Buy 5.40 2,681 11.5 9.5 1.1 1.0 2.9 2.6 8.1 7.2 7.9 9.0 Hainan Meilan Intl Airport-H 357 HK HKD 7.57 NR NR 462 10.6 10.2 1.4 1.3 4.2 4.4 5.4 4.9 13.8 11.9 Guangzhou Baiyun Internati-A 600004 CH CNY 6.31 NR NR 1,183 8.0 7.2 0.9 0.9 4.9 5.2 3.4 3.0 12.3 12.9 Shanghai International Air-A 600009 CH CNY 12.66 NR NR 3,978 12.5 10.8 1.4 1.3 2.7 3.0 6.8 6.2 11.6 12.4 Xiamen International Air-A 600897 CH CNY 11.92 NR NR 579 8.5 7.7 1.3 1.1 n.a. n.a. 4.1 3.6 17.6 16.9 Shenzhen Airport Co-A 000089 CH CNY 3.56 NR NR 981 11.0 11.5 0.8 0.7 n.a. n.a. 6.4 n.a. 7.3 6.3 Mean 10.4 9.5 1.2 1.1 3.7 3.8 5.7 5.0 11.7 11.6 Median 10.8 9.8 1.2 1.1 3.5 3.7 5.9 4.9 12.0 12.2

Asia Airports Of Thailand Pcl ** AOT TB THB 168 BUY NR 7,693 23.9 20.0 2.8 2.6 1.7 2.0 11.7 9.8 12.6 13.2 Malaysia Airports Hldgs Bhd MAHB MK MYR 6.37 NR NR 2,454 19.7 19.7 1.7 1.6 2.4 2.5 10.7 9.5 9.0 8.4 Auckland Intl Airport Ltd AIA NZ NZD 2.945 NR NR 3,017 25.8 23.4 1.6 1.6 3.9 4.3 14.0 13.2 6.0 6.6 Japan Airport Terminal Co 9706 JP JPY 1626 NR NR 1,362 78.9 38.5 1.3 1.3 0.6 0.7 9.5 9.0 1.7 3.4 Mean 37.1 25.4 1.8 1.8 2.1 2.4 11.5 10.4 7.3 7.9 Median 24.8 21.7 1.6 1.6 2.0 2.2 11.2 9.7 7.5 7.5 Europe Flughafen Wien Ag FLU AV EUR 44.14 NR NR 1,189 13.9 12.2 1.0 1.0 2.7 3.2 6.7 6.4 7.7 8.4 Fraport Ag Frankfurt Airport FRA GR EUR 46.45 NR NR 5,499 19.0 16.2 1.4 1.3 2.7 2.9 8.8 8.1 7.7 8.6 Gemina Spa GEM IM EUR 1.395 NR NR 2,636 28.5 18.4 1.1 1.1 0.7 0.9 6.6 5.9 4.4 5.9 Save Spa SAVE IM EUR 12.35 NR NR 877 21.5 19.9 2.1 2.0 3.7 3.9 8.7 8.0 9.9 10.1 Adp ADP FP EUR 73.91 NR NR 9,384 19.8 17.8 1.9 1.8 2.9 3.3 9.5 8.8 9.6 10.2 Flughafen Zuerich Ag-Reg FHZN SW CHF 486.25 NR NR 3,102 20.0 15.0 1.5 1.4 2.0 2.3 7.5 7.2 8.1 9.5 Mean 20.4 16.6 1.5 1.4 2.5 2.8 8.0 7.4 7.9 8.8 Median 19.9 17.0 1.4 1.4 2.7 3.0 8.1 7.6 7.9 9.1

Latin America Grupo Aeroportuario Del-B Sh GAPB MM MXN 64.66 NR NR 2,785 19.6 18.3 1.7 1.6 3.6 3.8 10.2 9.4 8.4 8.5 Grupo Aeroportuario De Sur-B ASURB MM MXN 151.35 NR NR 3,486 21.4 18.8 2.7 2.5 2.9 2.5 12.7 12.0 11.8 12.8 Grupo Aeroportuario Del Cent OMAB MM MXN 42.86 NR NR 1,313 18.4 16.8 2.5 2.4 3.7 3.3 10.1 9.6 13.9 14.4 Mean 19.8 18.0 2.3 2.2 3.4 3.2 11.0 10.4 11.4 11.9 Median 19.6 18.3 2.5 2.4 3.6 3.3 10.2 9.6 11.8 12.8

Others Travelsky Technology Ltd-H * 696 HK HKD 5.05 Buy 5.90 1,906 8.9 7.8 1.4 1.3 3.3 3.9 5.2 4.9 14.4 15.0 Hong Kong Aircraft Engineerg 44 HK HKD 106 NR NR 2,274 21.1 16.6 2.8 2.6 2.6 3.3 15.1 n.a. 13.9 16.3 Sia Engineering Co Ltd SIE SP SGD 4.98 NR NR 4,326 19.2 17.9 3.9 3.8 4.5 4.8 27.1 25.8 21.1 21.0 Amadeus It Holding Sa-A Shs AMS SM EUR 24.6 NR NR 14,126 18.3 16.7 6.0 5.1 2.2 2.6 9.9 9.3 32.5 29.9 Mean 16.9 14.8 3.6 3.2 3.2 3.6 14.3 13.4 20.5 20.6 Median 18.7 16.7 3.4 3.2 3.0 3.6 12.5 9.3 17.7 18.7

Total Weighted average 19.1 16.1 2.6 2.3 2.5 2.7 10.0 8.8 13.8 13.9 High 78.9 38.5 6.0 5.1 4.9 5.2 27.1 25.8 32.5 29.9 Low 8.0 7.2 0.8 0.7 0.6 0.7 3.4 3.0 1.7 3.4 Median 19.2 16.7 1.5 1.4 2.9 3.2 8.8 8.1 9.9 10.2 Source: Bloomberg, *Daiwa forecasts Note: **covered by Thanachart Securities

- 19 - China Transportation Sector 9 July 2013

 AviChina and peers globally: valuation comparison Total Share Share 6M market Dividend yield Bloomberg price price target cap PER (x) PBR (x) (%) EV/EBITDA (x) ROE (%) Company code Currency 5-Jul-13 Rating price (USDm) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E PRC Avichina Industry & Technology * 2357 HK HKD 3.97 Buy 5.40 2,803 20.2 15.8 1.7 1.3 0.7 1.0 8.3 5.8 8.9 9.5 Jiangxi Hongdu Aviation Indust 600316 CH CNY 16.64 NR NR 1,946 62.8 43.8 n.a. n.a. 0.1 0.2 68.0 33.9 n.a. n.a. Hafei Aviation Industry Co Ltd 600038 CH CNY 23.3 NR NR 1,282 50.4 36.7 4.5 3.9 0.4 0.6 37.1 16.5 9.7 12.2 China Avic Electronics Co Ltd 600372 CH CNY 23.88 NR NR 5,269 50.6 39.9 7.8 6.5 0.3 0.4 28.5 22.4 14.0 16.2 China Aviation Optical-Electri 002179 CH CNY 13.09 NR NR 989 19.8 16.0 2.9 2.5 1.1 1.3 n.a. n.a. 15.6 16.1 Avic Aircraft Co Ltd 000768 CH CNY 9.58 NR NR 4,146 66.1 36.4 2.2 2.0 0.8 1.0 28.1 23.9 4.9 7.6 Xi' An Aero-Engine Plc 600893 CH CNY 17.01 NR NR 3,022 46.9 36.3 1.9 1.8 0.6 0.8 25.4 21.8 6.7 7.8 Avic Heavy Machinery Co Ltd 600765 CH CNY 14.07 NR NR 1,785 43.6 40.8 3.2 3.0 n.a. n.a. n.a. n.a. 5.7 6.7 Hubei Aviation Precision Machi 002013 CH CNY 13.19 NR NR 1,541 21.5 18.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tianma Microelectronics Co Ltd 000050 CH CNY 13.88 NR NR 1,300 39.7 30.0 4.9 4.2 n.a. n.a. 12.3 10.2 12.4 14.4 China Spacesat Co Ltd 600118 CH CNY 15.34 NR NR 2,293 43.5 34.2 5.2 4.5 n.a. n.a. 24.5 19.8 12.3 13.5 Citic Offshore Helicopter Co L 000099 CH CNY 6.38 NR NR 534 18.8 15.6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sichuan Haite High-Tech Co Ltd 002023 CH CNY 12.21 NR NR 671 35.1 24.5 2.6 2.3 n.a. n.a. 22.9 18.3 7.7 10.1 Wisesoft Co Ltd 002253 CH CNY 15.88 NR NR 361 30.2 22.7 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Mean 38.3 28.7 3.6 3.2 0.9 1.2 28.4 19.3 9.6 11.4 Median 39.7 30.0 3.1 2.8 0.6 0.8 25.4 19.8 8.7 11.1

Asia Singapore Technologies Enginee STE SP SGD 4.05 NR NR 9,864 20.3 19.1 6.3 5.8 4.5 4.7 13.7 12.9 31.5 31.5 Korea Aerospace Industries Ltd 047810 KS KRW 30500 NR NR 2,603 26.0 21.5 3.0 2.7 n.a. n.a. 15.9 11.8 11.8 12.9 Mean 23.1 20.3 4.6 4.3 4.5 4.7 14.8 12.4 21.6 22.2 Median 23.1 20.3 4.6 4.3 4.5 4.7 14.8 12.4 21.6 22.2

Europe Bba Aviation Plc BBA LN GBP 286.7 NR NR 2,063 9.5 8.9 1.3 1.2 5.0 5.3 9.3 8.8 13.6 13.6 Bae Systems Plc BA/ LN GBP 411.1 NR NR 19,915 9.7 9.9 3.2 3.0 5.0 5.1 5.4 5.5 31.8 28.8 Qinetiq Group Plc QQ/ LN GBP 191 NR NR 1,890 12.9 12.7 2.5 2.2 2.1 2.4 7.3 7.3 19.5 17.4 Ultra Electronics Holdings Plc ULE LN GBP 1778 NR NR 1,853 13.9 13.4 3.5 3.2 2.4 2.5 9.4 9.2 25.0 22.9 Meggitt Plc MGGT LN GBP 549.5 NR NR 6,498 14.3 13.3 2.0 1.9 2.3 2.5 10.0 9.4 13.9 13.6 Rolls-Royce Holdings Plc RR/ ln GBP 1201 NR NR 33,825 18.2 16.7 3.2 2.8 1.8 2.0 9.7 8.9 18.8 17.6 Cobham Plc COB LN GBP 282.5 NR NR 4,564 13.5 13.0 2.8 2.6 3.4 3.7 8.9 8.6 18.7 18.6 European Aeronautic Defence An EAD FP EUR 41.57 NR NR 42,051 15.3 11.3 3.3 2.7 2.3 3.1 5.2 4.4 21.0 26.0 Dassault Aviation Sa AM FP EUR 909.95 NR NR 11,880 18.8 17.2 1.8 1.7 1.3 1.5 10.8 9.2 8.8 9.0 Finmeccanica Spa FNC IM EUR 3.952 NR NR 2,946 8.3 5.4 0.6 0.6 1.7 5.1 4.8 4.3 7.0 10.6 Safran Sa SAF FP EUR 41.795 NR NR 22,472 16.7 14.6 2.5 2.3 2.6 2.9 7.9 7.0 17.1 17.5 Zodiac Aerospace ZC FP EUR 105.3 NR NR 7,768 16.5 14.6 2.5 2.2 1.5 1.8 11.1 10.0 16.0 15.6 Mtu Aero Engines Ag MTX GR EUR 75.45 NR NR 5,058 14.8 13.4 3.0 2.6 2.1 2.4 8.1 7.4 22.1 21.5 Saab Ab SAABB SS SEK 130.4 NR NR 2,158 10.4 9.3 1.2 1.1 3.8 4.2 4.0 3.7 10.6 12.4 Mean 13.8 12.4 2.4 2.1 2.7 3.2 8.0 7.4 17.4 17.5 Median 14.1 13.1 2.5 2.2 2.3 2.7 8.5 8.0 17.9 17.4

North America Heico Corp HEI US USD 51.64 NR NR 2,276 28.2 24.1 4.4 3.9 3.4 0.2 12.3 10.8 13.1 n.a. Boeing Co/The BA US USD 102.89 NR NR 78,061 16.2 14.5 10.3 8.9 1.9 2.0 9.3 8.1 57.3 57.9 United Technologies Corp UTX US USD 94.73 NR NR 87,085 15.5 13.6 3.0 2.7 2.3 2.5 9.7 8.9 20.4 21.7 Textron Inc TXT US USD 25.64 NR NR 7,124 12.7 10.7 2.0 1.7 0.3 0.4 7.6 6.8 16.8 17.5 B/E Aerospace Inc BEAV US USD 63.1 NR NR 6,609 17.8 14.9 2.6 2.2 n.a. n.a. 11.2 9.6 15.2 15.6 Spirit Aerosystems Holdings In SPR US USD 21.67 NR NR 3,113 9.9 8.6 1.3 1.2 n.a. n.a. 5.6 5.1 14.4 14.5 Triumph Group Inc TGI US USD 79.55 NR NR 4,114 12.5 11.0 1.8 1.5 0.2 0.2 7.5 6.8 12.9 14.9 Kaman Corp KAMN US USD 35.25 NR NR 953 15.4 13.0 0.8 0.8 0.9 n.a. 8.9 7.9 13.8 15.5 Rockwell Collins Inc COL US USD 63.57 NR NR 8,625 13.9 13.0 6.4 5.9 1.9 2.0 8.9 8.4 50.3 54.4 Precision Castparts Corp PCP US USD 230.19 NR NR 33,626 18.9 16.3 2.8 2.5 0.1 0.1 12.5 11.0 16.1 16.7 Northrop Grumman Corp NOC US USD 82.93 NR NR 19,503 11.5 11.0 2.1 2.0 2.8 3.0 6.3 6.4 17.7 18.0 Lockheed Martin Corp LMT US USD 107.2 NR NR 34,347 11.8 11.9 n.a. n.a. 4.4 4.8 7.0 7.0 n.a. n.a. Bombardier Inc BBD/B CN CAD 4.7 NR NR 7,874 12.0 9.2 4.3 3.1 2.2 2.3 8.1 6.6 44.1 43.0 Aerovironment Inc AVAV US USD 19.91 NR NR 450 49.7 37.3 n.a. n.a. n.a. n.a. 14.6 11.6 11.6 n.a. Alliant Techsystems Inc ATK US USD 83.51 NR NR 2,689 10.7 10.5 1.8 1.5 1.3 1.5 6.2 6.3 15.9 13.6 Northrop Grumman Corp NOC US USD 82.93 NR NR 19,503 11.5 11.0 2.1 2.0 2.8 3.0 6.3 6.4 17.7 18.0 L-3 Communications Holdings In LLL US USD 85.6 NR NR 7,704 10.7 10.5 1.4 1.3 2.5 2.7 7.7 7.8 13.2 12.4 Transdigm Group Inc TDG US USD 153.7 NR NR 8,054 21.9 19.2 n.a. n.a. 8.4 0.0 13.4 12.0 55.2 40.4 Booz Allen Hamilton Holding Co BAH US USD 17.58 NR NR 2,563 11.4 11.4 4.9 3.2 2.3 2.3 7.6 7.6 57.5 37.8 Esterline Technologies Corp ESL US USD 74.95 NR NR 2,344 14.1 12.6 1.3 1.2 n.a. n.a. 8.3 7.5 9.9 n.a. Hexcel Corp HXL US USD 34.57 NR NR 3,466 19.1 16.8 3.1 2.7 n.a. n.a. 10.9 9.5 16.8 16.7 Mantech International Corp/Va MANT US USD 26.26 NR NR 975 11.8 12.5 0.8 0.8 3.2 3.2 5.6 5.8 7.0 6.5 Curtiss-Wright Corp CW US USD 37.27 NR NR 1,741 13.4 11.5 1.1 1.0 1.0 1.1 7.3 6.8 9.9 8.8 Lmi Aerospace Inc LMIA US USD 18.36 NR NR 236 10.9 7.8 1.3 1.1 n.a. n.a. 7.4 6.6 8.8 16.5 Raytheon Co RTN US USD 65.15 NR NR 21,149 11.8 11.7 3.0 2.7 3.3 3.7 7.0 7.0 21.5 20.5 Moog Inc MOG/A US USD 53.74 NR NR 2,435 15.7 13.7 2.4 2.3 n.a. n.a. 8.3 7.8 11.0 n.a. Mean 15.7 13.8 2.8 2.4 2.4 1.9 8.7 7.9 21.9 22.9 Median 13.1 12.2 2.1 2.0 2.3 2.2 7.9 7.6 15.9 16.7

Sourth America Embraer Sa EMBR3 BZ BRL 20.59 NR NR 6,652 15.8 13.2 2.1 1.9 0.0 0.0 8.1 7.0 13.0 13.6

Total Weighted average 16.6 14.4 3.7 3.2 2.2 2.4 9.3 8.3 23.8 24.0 High 66.1 43.8 10.3 8.9 8.4 5.3 68.0 33.9 57.5 57.9 Low 8.3 5.4 0.6 0.6 0.0 0.0 4.0 3.7 4.9 6.5 Median 15.6 13.5 2.6 2.3 2.2 2.3 8.9 8.0 14.2 15.9 Source: Bloomberg, *Daiwa forecasts

- 20 - China Transportation Sector 9 July 2013

 Port operators in China and globally: valuation comparison Total Share Share 6M market Dividend yield Bloomberg price price target cap PER (x) PBR (x) (%) EV/EBITDA (x) ROE (%) Company code Currency 5-Jul-13 Rating price (US$m) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Hong Kong & China China Merchants Hldgs Intl * 144 HK HKD 23.15 Buy 34.00 7,440 11.9 10.3 1.3 1.2 2.7 3.4 12.4 14.4 8.7 10.6 Cosco Pacific Ltd * 1199 HK HKD 9.96 Outperform 12.00 3,579 10.9 11.4 0.9 0.8 3.9 8.3 8.8 7.8 9.5 7.6 Xiamen International Port-H 3378 HK HKD 0.91 NR NR 320 8.7 8.3 n.a. n.a. n.a. n.a. 5.1 5.1 7.9 7.4 Dalian Port (Pda) Co Ltd-H 2880 HK HKD 1.42 NR NR 1,423 8.9 7.7 0.5 0.4 4.3 4.9 9.8 9.2 5.2 5.4 Tianjin Port Dvlp Hlds Ltd 3382 HK HKD 1 NR NR 794 7.9 7.3 0.5 0.5 5.4 5.8 6.8 6.4 7.9 8.3 Shenzhen Yantian Port Hld-A 000088 CH CNY 3.2 NR NR 1,013 n.a. n.a. 1.1 1.0 n.a. n.a. n.a. n.a. 7.5 7.3 Shenzhen Chiwan Wharf Hldg-A 000022 CH CNY 10.3 NR NR 1,051 13.6 13.5 1.7 1.6 3.6 4.1 8.8 7.8 12.6 13.2 Shenzhen Chiwan Wharf Hldg-B 200022 CH CNY 11.63 NR NR 1,051 15.4 15.2 1.9 1.8 3.4 3.5 8.8 7.8 12.6 13.2 Zhuhai Port Co Ltd-A 000507 CH CNY 3.25 NR NR 418 11.2 10.0 1.1 1.0 n.a. n.a. 9.8 8.8 9.0 9.8 Rizhao Port Co Ltd -A 600017 CH CNY 2.28 NR NR 1,143 8.0 7.2 0.7 0.7 n.a. n.a. n.a. n.a. 9.5 9.3 Shanghai International Por-A 600018 CH CNY 2.66 NR NR 9,870 11.3 10.3 1.2 1.1 4.7 5.0 7.6 7.3 10.9 11.6 Wuhu Port Storage&Transpor-A 600575 CH CNY 2.36 NR NR 937 6.2 5.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tianjin Port Co Ltd-A 600717 CH CNY 5.16 NR NR 1,409 n.a. n.a. n.a. n.a. n.a. n.a. 6.0 5.4 8.9 9.1 Tangshan Port Group Co Ltd-A 601000 CH CNY 2.82 NR NR 934 5.5 6.4 n.a. n.a. n.a. n.a. n.a. n.a. 13.0 12.7 Jiangsu Lianyungang Port -A 601008 CH CNY 2.89 NR NR 382 13.4 10.7 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Ningbo Port Co Ltd-A 601018 CH CNY 2.05 NR NR 4,279 9.0 7.9 0.9 0.8 4.4 5.9 n.a. n.a. 10.6 11.5 Mean 10.1 9.4 1.1 1.0 4.0 5.1 8.4 8.0 9.6 9.8 Median 9.9 9.1 1.1 1.0 4.1 4.9 8.8 7.8 9.2 9.6

Global Hutchison Port Holdings Tr-U * HPHT SP USD 0.745 Hold 0.80 6,490 22.6 20.8 0.7 0.8 1.1 1.0 12.4 12.4 3.4 3.3 Dp World Ltd DPW DU USD 15.3 NR NR 12,699 22.7 19.4 1.5 1.4 0.0 0.0 11.8 10.4 6.9 7.4 Hamburger Hafen Und Logistik HHFA GR EUR 16.805 NR NR 1,576 19.5 17.1 2.0 2.0 0.0 0.0 5.3 5.0 11.9 12.9 Adani Ports And Special Econ ADSEZ IN INR 148.4 NR NR 5,089 16.5 12.9 3.7 2.9 0.8 1.0 13.1 10.7 25.1 25.4 Bintulu Port Holdings Bhd BPH MK MYR 7.2 NR NR 1,039 21.6 19.5 2.8 2.7 4.1 4.1 13.5 12.8 21.6 18.6 Port Of Tauranga Ltd POT NZ NZD 13.75 NR NR 1,443 21.7 22.2 2.4 2.3 3.3 3.4 15.6 14.3 10.2 10.2 Intl Container Term Svcs Inc ICT PM PHP 90.8 NR NR 4,259 n.a. n.a. n.a. n.a. 0.0 0.0 12.6 10.7 15.8 17.2 Mean 20.8 18.6 2.2 2.0 1.3 1.4 12.0 10.9 13.5 13.6 Median 21.6 19.5 2.2 2.1 0.8 1.0 12.6 10.7 11.9 12.9

Total Weighted average 17.3 15.3 1.6 1.4 2.4 3.0 11.6 10.9 12.5 13.1 High 22.7 22.2 3.7 2.9 5.4 8.3 15.6 14.4 25.1 25.4 Low 5.5 5.4 0.5 0.4 0.0 0.0 5.1 5.0 3.4 3.3 Median 11.3 10.3 1.2 1.1 3.3 3.4 9.3 8.3 9.5 10.0 Source: Bloomberg, *Daiwa forecasts

- 21 - China Transportation Sector 9 July 2013

 Shipping companies in China and globally: valuation comparison Total Share Share 6M market Bloomberg price price target cap PBR (x) Dividend yield (%) EV/EBITDA (x) ROE (%) Company code Currency 5-Jul-13 Rating price (US$m) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Hong Kong & China Orient Overseas Intl Ltd * 316 HK HKD 47.7 Buy 61.00 3,850 0.8 0.8 3.0 4.0 8.4 6.7 7.8 10.5 China Shipping Container-H * 2866 HK HKD 1.94 Buy 2.40 3,435 0.7 0.6 0.0 0.0 9.7 6.2 2.7 6.2 China Cosco Holdings-H * 1919 HK HKD 3.26 Buy 4.00 4,820 1.3 1.2 0.0 0.0 29.6 10.6 0.0 11.2 Sitc International Holdings * 1308 HK HKD 2.7 Buy 3.20 900 1.1 1.0 6.2 8.6 5.0 3.7 16.6 20.8 China Shipping Development-H 1138 HK HKD 3.21 NR NR 1,750 0.5 0.5 1.7 2.6 14.6 11.0 1.5 2.2 Sinotrans Shipping Ltd 368 HK HKD 1.9 NR NR 978 3.3 3.3 0.3 0.4 0.6 0.5 2.0 3.3 Pacific Basin Shipping Ltd 2343 HK HKD 4.16 NR NR 1,039 5.9 5.4 0.5 0.8 7.3 5.4 5.8 10.0 China Cosco Holdings-A 601919 CH CNY 3 NR NR 4,820 1.2 1.1 0.6 1.8 13.4 10.4 4.3 10.6 China Shipping Container-A 601866 CH CNY 1.93 NR NR 3,435 0.8 0.7 0.0 1.7 9.4 6.1 4.0 7.4 Mean 1.7 1.6 1.4 2.2 10.9 6.7 5.0 9.1 Median 1.1 1.0 0.5 1.7 9.4 6.2 4.0 10.0

Asia Neptune Orient Lines Ltd * NOL SP SGD 1.06 Hold 1.10 2,153 0.9 0.8 3.2 2.5 8.8 7.2 6.3 10.4 Misc Bhd MISC MK MYR 5.2 NR NR 7,280 3.2 2.8 0.9 0.9 9.8 8.8 5.9 6.7 Thoresen Thai Agencies Pcl TTA TB THB 15.6 NR NR 496 0.5 0.4 1.3 2.0 8.0 6.9 2.6 3.8 Precious Shipping Pcl PSL TB THB 17 NR NR 567 1.1 1.0 2.1 3.4 8.4 6.3 6.1 9.2 Regional Container Line Pcl RCL TB THB 6 NR NR 160 0.4 n.a. 1.1 1.7 5.4 5.1 1.5 2.7 Evergreen Marine Corp Ltd 2603 TT TWD 16.3 NR NR 1,886 0.9 0.8 2.3 2.6 n.a. n.a. n.a. n.a. Yang Ming Marine Transport 2609 TT TWD 12.25 NR NR 1,150 1.1 1.0 2.0 2.2 8.9 n.a. 11.8 n.a. Wan Hai Lines Ltd 2615 TT TWD 15.8 NR NR 1,167 1.0 1.0 2.4 4.5 3.0 n.a. n.a. n.a. U-Ming Marine Transport Corp 2606 TT TWD 47.1 NR NR 1,346 1.6 n.a. 2.4 1.5 n.a. n.a. n.a. n.a. Hyundai Merchant Marine 011200 KS KRW 14750 NR NR 1,993 3.2 3.7 1.7 3.4 n.a. n.a. n.a. n.a. Hanjin Shipping Co Ltd 117930 KS KRW 7330 NR NR 802 0.9 0.9 2.5 2.3 n.a. n.a. n.a. n.a. Mitsui Osk Lines Ltd 9104 JP JPY 410 Outperform 460 4,939 0.8 0.7 1.7 2.5 8.1 7.0 8.9 11.6 Nippon Yusen 9101 JP JPY 279 Hold 300 4,738 0.7 0.6 2.3 2.9 8.2 7.2 6.8 8.4 Kawasaki Kisen Kaisha Ltd 9107 JP JPY 209 Hold 230 1,961 0.5 0.5 2.7 3.8 6.6 5.7 7.5 9.5 Mean 1.1 1.1 2.0 2.6 7.5 6.8 6.4 7.8 Median 0.9 0.8 2.2 2.5 8.2 7.0 6.3 8.8

Global Ap Moeller-Maersk A/S-B MAERSKB DC 42080 NR NR 31,068 0.8 0.7 3.1 3.4 3.5 3.2 9.6 10.7

Total Weighted average 1.2 1.1 2.0 2.5 7.5 5.3 6.4 8.7 High 5.9 5.4 6.2 8.6 29.6 11.0 16.6 20.8 Low 0.0 0.0 0.0 0.0 0.6 0.5 0.0 2.2 Median 0.9 0.8 1.9 2.4 8.3 6.5 5.9 9.3 Source: Bloomberg, *Daiwa forecasts

- 22 - China Transportation Sector 9 July 2013

 Toll-road operators in China and globally: valuation comparison Total Share Share 6M market Dividend yield Bloomberg price price target cap PER (x) PBR (x) (%) EV/EBITDA (x) ROE (%) Company code Currency 5-Jul-13 Rating price (USDm) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E China - H share Jiangsu Express Co Ltd-H * 177 HK HKD 7.64 Outperform 8.40 4,334 11.5 10.0 1.6 1.5 6.2 5.7 6.4 5.7 13.9 15.4 Zhejiang Expressway Co-H * 576 HK HKD 6.11 Hold 6.00 3,422 12.6 13.8 1.3 1.3 5.9 5.5 7.0 6.6 10.6 9.5 Shenzhen Expressway Co-H * 548 HK HKD 2.8 Hold 2.90 917 7.4 6.4 0.5 0.5 5.3 6.2 5.9 5.0 6.7 7.4 Yuexiu Transport Infrastruct * 1052 HK HKD 3.73 Outperform 4.45 805 10.4 8.1 0.6 0.5 7.4 8.2 8.1 6.6 5.7 7.0 Hopewell Highway Infrastruct 737 HK HKD 3.67 NR NR 1,459 18.7 17.4 1.6 1.6 5.3 5.7 10.0 9.2 8.5 9.6 Anhui Expressway Co Ltd-H 995 HK HKD 3.57 NR NR 885 8.4 8.1 0.8 0.8 5.2 5.3 4.6 4.2 10.0 9.7 Sichuan Expressway Co-H 107 HK HKD 2.03 NR NR 1,176 5.9 5.8 0.6 0.5 3.6 3.5 6.7 6.2 10.3 9.6 Mean 10.7 9.9 1.0 1.0 5.6 5.7 7.0 6.2 9.4 9.7 Median 10.4 8.1 0.8 0.8 5.3 5.7 6.7 6.2 10.0 9.6 China - A share Anhui Expressway Co Ltd-A 600012 CH CNY 3.46 NR NR 885 7.7 8.0 0.8 0.8 5.8 5.8 4.5 4.1 10.9 9.9 Jiangsu Expressway Co Ltd-A 600377 CH CNY 5.03 NR NR 4,334 10.2 9.3 1.3 1.3 7.5 7.9 6.8 6.4 12.7 13.1 Shandong Hi-Speed Co Ltd -A 600350 CH CNY 2.88 NR NR 2,259 6.4 6.4 n.a. n.a. n.a. n.a. n.a. n.a. 10.4 10.6 Shenzhen Expressway Co Ltd-A 600548 CH CNY 2.77 NR NR 917 9.1 7.6 0.6 0.6 5.0 5.5 7.2 6.9 6.8 7.2 Sichuan Expressway Co-A 601107 CH CNY 2.67 NR NR 1,176 6.4 6.3 n.a. n.a. 2.6 2.6 6.6 6.2 n.a. n.a. Fujian Expressway Developm-A 600033 CH CNY 1.92 NR NR 859 Mean 7.9 7.5 0.9 0.9 5.2 5.5 6.3 5.9 10.2 10.2 Median 7.7 7.6 0.8 0.8 5.4 5.7 6.7 6.3 10.7 10.2 International Bangkok Expressway Pub Co** BECL TB THB 36 SELL 32 890 9.0 11.0 1.2 1.2 0.0 0.0 7.6 7.0 14.7 10.6 Abertis Infraestructuras Sa ABE SQ EUR 13.815 NR NR 14,498 16.4 15.2 2.6 2.6 4.9 5.2 8.3 7.8 17.0 17.9 Atlantia Spa ATL IM EUR 12.87 NR NR 10,971 13.9 12.7 2.0 1.9 6.0 6.2 9.2 8.6 15.0 16.1 Citra Marga Nusaphala Per Pt CMNP IJ IDR 3175 NR NR 699 22.8 20.1 n.a. n.a. 1.2 1.0 10.8 9.6 11.5 11.4 Jasa Marga (Persero) Tbk Pt JSMR IJ IDR 6300 NR NR 4,286 23.7 19.4 4.2 3.7 1.8 2.1 12.7 10.5 19.3 21.1 Mean 17.2 15.7 2.5 2.3 2.8 2.9 9.7 8.7 15.5 15.4 Median 16.4 15.2 2.3 2.2 1.8 2.1 9.2 8.6 15.0 16.1

Total Weighted average 13.6 12.5 1.9 1.8 4.8 5.0 7.8 7.2 13.7 14.3 High 23.7 20.1 4.2 3.7 7.5 8.2 12.7 10.5 19.3 21.1 Low 5.9 5.8 0.5 0.5 0.0 0.0 4.5 4.1 5.7 7.0 Median 10.2 9.3 1.3 1.2 5.2 5.5 7.1 6.6 10.8 10.2 Source: Bloomberg, *Daiwa forecasts Note: **covered by Thanachart Securities

When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.daiwacm.com/hk/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

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Industrials / China 2357 HK Industrials / China 9 July 2013

AviChina Industry & Technology

AviChina Industry & Technology Target (HKD): 5.30  5.40 Upside: 36.0% 2357 HK 5 Jul price (HKD): 3.97

Invest for the long haul 1 Buy (unchanged) • The opening of China’s general aviation market should continue, 2 Outperform even with slower economic growth in the near term 3 Hold • Strong growth in AviChina’s order book in 2012 supports our 4 Underperform forecast for earnings growth of 28-41% YoY for 2013-15E 5 Sell • Our top sector pick; reiterating our Buy rating

businesses. For further details, see likely because we have reflected the our flash note Reaffirm bullish AVIC Avionics acquisition in our outlook, published on 21 June 2013. forecasts.

■ What we recommend Forecast revisions (%) Kelvin Lau We reaffirm our Buy (1) rating on Year to 31 Dec 13E 14E 15E (852) 2848 4467 AviChina and believe any further Revenue change - - - [email protected] share-price weakness arising from Net profit change - - - Core EPS (FD) change - - - concerns about China’s macro outlook should be seen as a good Source: Daiwa forecasts ■ What's new entry opportunity. In our view, We believe the recent retreat in potential near-term share-price Share price performance share prices has provided a good catalysts include approval for (HKD) (% ) opportunity to buy aviation stocks domestic deliveries of AviChina’s 4.3 155 with resilient earnings growth, like 3.7 136 L15 trainer, more supportive 3.2 118 AviChina. The company’s earnings government policies for general growth is unlikely to slow due to its 2.6 99 aviation, a further asset injection 2.0 80 strong order-book on hand and new from its parent, more orders for its Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 product launches. existing products, and robust Avichina (LHS) Relative to HSI (RHS) earnings growth in 2013. ■ What's the impact We still see AviChina posting strong 12-month range 2.27-4.28 We lift our six-month target price to Market cap (USDbn) 2.80 earnings growth this year on the HKD5.40 from HKD5.30, based on a 3m avg daily turnover (USDm) 5.61 back of its profitable helicopter 30% discount applied to our SOTP Shares outstanding (m) 5,474 Major shareholder AVIC (56.7%) business and a likely turnaround for valuation. Our SOTP valuation is its trainer business. Our forecast now based on the past-five-year Financial summary (CNY) earnings growth of 28-41% YoY for average PBR of AviChina’s 2013-15 should be secured by the Year to 31 Dec 13E 14E 15E subsidiaries on 2013E BVPS, except Revenue (m) 21,611 26,954 32,324 41% YoY growth in AviChina’s order for AVIC Avionics, for which we use Operating profit (m) 1,901 2,544 3,371 book recorded for 2012. the average PBR since the Net profit (m) 849 1,088 1,420 Core EPS (fully-diluted) 0.155 0.199 0.259 completion of its restructuring in EPS change (%) 41.4 28.2 30.5 As for the component business, we 2010. Risks to our call would include look for stable organic revenue Daiwa vs Cons. EPS (%) 15.7 23.4 20.7 lower-than-expected growth in PER (x) 20.2 15.8 12.1 growth of 12% YoY for 2013-15. At AviChina’s order book. Dividend yield (%) 0.7 1.0 1.2 recent visits to subsidiaries AVIC DPS 0.023 0.030 0.039 PBR (x) 1.7 1.3 1.2 Avionics and Jonhon Optronics, ■ How we differ company officials were upbeat about EV/EBITDA (x) 8.3 5.8 4.6 Our 2013-14E EPS are 16-23% above ROE (%) 8.9 9.5 10.4 the long-term outlooks for these the Bloomberg consensus figures, Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Revenue growth from helicopters (%) 3.4 (5.4) 8.3 22.0 3.2 31.7 64.2 33.1 Revenue growth from trainers (%) (10.8) (0.6) 8.5 6.3 22.3 19.0 18.6 21.8 Revenue growth from aviation parts 0.0 0.0 117.2 17.7 27.0 29.0 12.2 12.4 and components (%)

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Aircraft revenue 4,979 3,028 5,268 6,555 8,273 10,614 14,613 18,455 Aviation components revenue 0 2,627 5,705 6,716 8,527 10,997 12,341 13,868 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 4,979 5,654 10,973 13,271 16,800 21,611 26,954 32,324 Other income 62 118 136 132 156 74 74 74 COGS (3,963) (4,285) (8,097) (10,160) (13,083) (16,820) (21,057) (25,068) SG&A (580) (786) (1,498) (1,806) (2,156) (2,524) (2,943) (3,410) Other op.expenses (135) (182) (390) (459) (447) (440) (485) (549) Operating profit 364 519 1,125 979 1,270 1,901 2,544 3,371 Net-interest inc./(exp.) (83) (68) (53) (19) 13 (4) (107) (182) Assoc/forex/extraord./others 39 33 32 92 56 68 81 97 Pre-tax profit 320 484 1,104 1,052 1,339 1,965 2,518 3,286 Tax (40) (61) (145) (143) (182) (267) (342) (446) Min. int./pref. div./others (1,342) (185) (74) (410) (557) (849) (1,088) (1,420) Net profit (reported) (1,063) 237 885 499 600 849 1,088 1,420 Net profit (adjusted) 135 248 503 444 600 849 1,088 1,420 EPS (reported)(CNY) (0.229) 0.051 0.181 0.101 0.110 0.155 0.199 0.259 EPS (adjusted)(CNY) 0.029 0.053 0.103 0.090 0.110 0.155 0.199 0.259 EPS (adjusted fully-diluted)(CNY) 0.029 0.053 0.103 0.090 0.110 0.155 0.199 0.259 DPS (CNY) 0.000 0.000 0.010 0.011 0.020 0.023 0.030 0.039 EBIT 364 519 1,125 979 1,270 1,901 2,544 3,371 EBITDA 499 701 1,515 1,438 1,717 2,341 3,029 3,920

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 320 484 1,104 1,052 1,339 1,965 2,518 3,286 Depreciation and amortisation 135 182 390 459 447 440 485 549 Tax paid (51) (66) (126) (178) (209) (267) (342) (446) Change in working capital (605) 571 1,211 (960) (2,244) (874) (868) (1,041) Other operational CF items (72) (98) (103) (126) (70) (92) (106) (122) Cash flow from operations (274) 1,072 2,475 248 (736) 1,172 1,688 2,226 Capex (426) (250) (941) (699) (795) (1,918) (700) (700) Net (acquisitions)/disposals 149 90 217 198 (133) 60 60 60 Other investing CF items (215) (1,108) (1,830) (81) (1,239) (349) (349) (349) Cash flow from investing (493) (1,268) (2,555) (582) (2,167) (2,207) (989) (989) Change in debt 1,879 2,061 1,712 2,365 2,599 1,500 1,500 1,500 Net share issues/(repurchases) 0 0 894 0 970 0 0 0 Dividends paid (32) (102) (96) (192) (109) (164) (182) (218) Other financing CF items (1,476) (1,909) 493 (2,355) (1,630) (2,652) (1,658) (1,658) Cash flow from financing 371 50 3,004 (182) 1,829 (1,316) (340) (376) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (395) (145) 2,924 (516) (1,074) (2,351) 359 862 Free cash flow (700) 822 1,534 (452) (1,531) (746) 988 1,526 Source: FactSet, Daiwa forecasts

- 25 - China Transportation Sector 9 July 2013

Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 3,736 3,637 9,110 8,651 8,447 6,096 6,455 7,317 Inventory 5,265 3,414 5,679 8,197 11,226 14,441 18,011 21,599 Accounts receivable 3,910 2,445 3,569 4,388 5,957 7,663 9,558 11,462 Other current assets 2,077 8,931 9,273 2,831 2,464 3,431 4,094 4,774 Total current assets 14,987 18,427 27,632 24,067 28,094 31,631 38,119 45,153 Fixed assets 7,066 2,166 4,004 4,483 4,856 4,934 5,167 5,336 Goodwill & intangibles 241 225 247 53 51 51 51 51 Other non-current assets 995 1,253 2,153 2,370 2,895 6,079 9,344 9,344 Total assets 23,289 22,071 34,035 30,973 35,896 42,695 52,681 59,884 Short-term debt 5,681 1,458 2,073 1,887 2,652 1,658 1,658 1,658 Accounts payable 7,262 3,222 5,490 6,914 10,043 12,811 15,989 19,013 Other current liabilities 3,041 6,401 8,408 6,620 5,792 7,279 8,931 10,590 Total current liabilities 15,984 11,081 15,971 15,421 18,487 21,748 26,577 31,261 Long-term debt 949 1,152 957 1,171 696 2,646 3,510 3,352 Other non-current liabilities 225 231 339 263 220 220 220 220 Total liabilities 17,158 12,464 17,267 16,855 19,403 24,613 30,307 34,833 Share capital 4,644 4,644 4,949 4,949 5,474 5,474 5,474 5,474 Reserves/R.E./others (1,984) 720 3,467 2,596 3,652 4,392 7,595 8,852 Shareholders' equity 2,660 5,363 8,416 7,545 9,126 9,866 13,070 14,326 Minority interests 3,471 4,244 8,353 6,573 7,367 8,216 9,304 10,724 Total equity & liabilities 23,289 22,071 34,035 30,973 35,896 42,695 52,681 59,884 EV 23,204 19,969 18,594 17,097 18,344 19,316 17,643 18,043 Net debt/(cash) 2,894 (1,028) (6,080) (5,593) (5,099) (1,792) (1,288) (2,308) BVPS (CNY) 0.573 1.155 1.721 1.525 1.667 1.802 2.387 2.617

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) (69.9) 13.6 94.1 20.9 26.6 28.6 24.7 19.9 EBITDA (YoY) (11.9) 40.5 116.2 (5.1) 19.4 36.3 29.4 29.4 Operating profit (YoY) n.a. 42.6 117.0 (13.0) 29.7 49.7 33.8 32.5 Net profit (YoY) n.a. 84.3 102.7 (11.8) 35.2 41.4 28.2 30.5 Core EPS (fully-diluted) (YoY) n.a. 84.3 92.5 (12.8) 22.2 41.4 28.2 30.5 Gross-profit margin 20.4 24.2 26.2 23.4 22.1 22.2 21.9 22.4 EBITDA margin 10.0 12.4 13.8 10.8 10.2 10.8 11.2 12.1 Operating-profit margin 7.3 9.2 10.3 7.4 7.6 8.8 9.4 10.4 Net profit margin 2.7 4.4 4.6 3.3 3.6 3.9 4.0 4.4 ROAE 4.4 6.2 7.3 5.6 7.2 8.9 9.5 10.4 ROAA 0.6 1.1 1.8 1.4 1.8 2.2 2.3 2.5 ROCE 2.9 4.2 7.0 5.3 6.9 9.0 10.2 11.7 ROIC 3.4 5.1 10.1 8.8 11.0 11.9 11.8 13.3 Net debt to equity 108.8 net cash net cash net cash net cash net cash net cash net cash Effective tax rate 12.5 12.6 13.1 13.6 13.6 13.6 13.6 13.6 Accounts receivable (days) 262.0 205.1 100.0 109.4 112.4 115.0 116.6 118.7 Current ratio (x) 0.9 1.7 1.7 1.6 1.5 1.5 1.4 1.4 Net interest cover (x) 4.4 7.6 21.3 52.4 n.a. 488.1 23.8 18.5 Net dividend payout n.a. 0.0 5.6 11.0 18.2 15.0 15.0 15.0 Free cash flow yield n.a. 4.8 8.9 n.a. n.a. n.a. 5.8 8.9 Source: FactSet, Daiwa forecasts

 Company profile AviChina Industry & Technology is mainly engaged in the development, manufacture, sale, and upgrading of aviation equipment and related products. The major shareholder of the company's H shares is Aviation Industry Corporation of China, with a 56.7% stake.

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Information Technology / China 696 HK Information Technology / China 9 July 2013

TravelSky Technology

TravelSky Technology Target (HKD): 5.00  5.90 Upside: 16.8% 696 HK 5 Jul price (HKD): 5.05

A good alternative play on aviation market expansion 1 Buy (unchanged) 2 Outperform • We expect earnings to be resilient to potential weak macro data 3 Hold as the aviation market is likely to continue to expand 4 Underperform • We believe the impact of allowing non-Mainland airlines to 5 Sell choose their own distribution system is minimal • We forecast EPS growth of 13-16% YoY for 2013-15, and view the current 2014E PER of 7.8x as undemanding

Following a recent discussion with ■ How we differ management, we now forecast rises We are one of only three brokers of 10-11% YoY in total bookings over covering the stock, and remain 2013-15 (8-9% YoY previously), as positive on the company’s outlook.

continuing capacity increases by the Forecast revisions (%) Kelvin Lau Big-3 China airlines will put Year to 31 Dec 13E 14E 15E (852) 2848 4467 pressure on them to attract more Revenue change 1.9 2.3 n.a. [email protected] passengers. Net profit change 12.0 14.5 n.a. Core EPS (FD) change 12.0 14.5 n.a. In terms of capex, the company said Source: Daiwa forecasts ■ What's new that construction of its Beijing We believe TST’s earnings growth is operating centre had begun. We Share price performance resilient to any potential forecast 2013 capex of CNY600m, (HKD) (%) macroeconomic slowdown and see lower than the guidance of 6.0 130 the stock as a good alternative for CNY865m provided by TST earlier 5.4 119 riding on the growth in China’s this year. 4.8 108 aviation market. 4.1 96 3.5 85 ■ What we recommend Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 ■ What's the impact We believe the company’s bookings Management does not expect any and earnings growth will be resilient Travelsky (LHS) Relative to HSI (RHS) major impact from allowing non- to any potential weakness in Mainland airlines to use foreign macroeconomic data as air traffic in 12-month range 3.77-5.60 global distribution systems (GDS) to Market cap (USDbn) 1.91 China will likely continue to increase 3m avg daily turnover (USDm) 0.97 connect with domestic travel agents, over the next three years. Shares outstanding (m) 2,926 as the number of bookings with TST Major shareholder na TravelSky Holding Company (29.3%) by non-Mainland airlines rose by After revising up our EPS forecasts more than 20% YoY from January to we raise our DCF-based six-month Financial summary (CNY) May 2013 and is likely to remain target price to HKD5.90 from Year to 31 Dec 13E 14E 15E strong for the remainder of the year. HKD5.00. We reiterate our Buy (1) Revenue (m) 4,370 4,836 5,356 On the back of this booking rate we rating. Operating profit (m) 1,418 1,619 1,846 raise our 2013-14E EPS by 12-15%. Net profit (m) 1,310 1,490 1,690 Core EPS (fully-diluted) 0.448 0.509 0.577 The stock is trading currently at EPS change (%) 15.7 13.7 13.4 We continue to believe that the 2013-14E PERs of 8-9x, below its Daiwa vs Cons. EPS (%) n.a. n.a. (42.3) impact of the GDS policy past-five-year average of 11x. Risks PER (x) 8.9 7.8 6.9 (implemented on 1 October 2012) to our call include worse-than- Dividend yield (%) 3.9 4.4 5.0 will be minimal given the many expected bookings growth. DPS 0.154 0.175 0.198 restrictions (see Market opens, but PBR (x) 1.3 1.1 1.0 EV/EBITDA (x) 4.8 4.5 4.1 still hard to penetrate). ROE (%) 15.0 15.4 15.6

Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Overall passenger booking growth 3.3 17.9 17.2 13.6 4.7 10.5 9.6 9.7 Domestic passenger booking growth 5.6 21.9 15.5 8.6 7.8 10.0 9.0 9.0 Int'l passenger booking growth (%) (7.2) (3.2) 28.4 12.8 15.3 13.0 13.0 13.0 Foreign airlines passenger booking (0.1) 2.1 29.6 15.5 27.5 20.0 15.0 15.0 growth (%) PRC airlines' int'l passenger booking (9.4) (4.9) 27.9 11.8 10.8 10.0 12.0 12.0 growth (%)

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Aviation information technology service 1,609 1,808 2,083 2,259 2,436 2,664 2,877 3,107 Accounting, settlement and clearing 261 250 296 380 430 485 548 619 Other Revenue 320 469 566 899 1,091 1,221 1,411 1,630 Total Revenue 2,189 2,527 2,945 3,538 3,956 4,370 4,836 5,356 Other income 00000000 COGS (1,004) (1,115) (1,160) (1,497) (1,916) (2,076) (2,257) (2,461) SG&A (241) (273) (393) (452) (491) (543) (595) (653) Other op.expenses (332) (341) (404) (406) (331) (333) (364) (396) Operating profit 612 798 988 1,182 1,218 1,418 1,619 1,846 Net-interest inc./(exp.) 8781396449494949 Assoc/forex/extraord./others2424203738404245 Pre-tax profit 723 904 1,047 1,283 1,304 1,507 1,710 1,939 Tax (68) (109) (130) (208) (142) (162) (181) (205) Min. int./pref. div./others (17) (19) (22) (28) (30) (34) (39) (44) Net profit (reported) 638 776 894 1,047 1,133 1,310 1,490 1,690 Net profit (adjusted) 638 776 894 1,047 1,133 1,310 1,490 1,690 EPS (reported)(CNY) 0.240 0.269 0.306 0.358 0.387 0.448 0.509 0.577 EPS (adjusted)(CNY) 0.240 0.269 0.306 0.358 0.387 0.448 0.509 0.577 EPS (adjusted fully-diluted)(CNY) 0.240 0.269 0.306 0.358 0.387 0.448 0.509 0.577 DPS (CNY) 0.186 0.089 0.105 0.120 0.133 0.154 0.175 0.198 EBIT 612 798 988 1,182 1,218 1,418 1,619 1,846 EBITDA 1,023 1,212 1,446 1,686 1,549 1,751 1,983 2,242

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 723 904 1,047 1,283 1,304 1,507 1,710 1,939 Depreciation and amortisation 332 338 359 354 279 280 312 343 Tax paid (179) (110) (143) (135) (249) (162) (181) (205) Change in working capital (308) (384) 54 (169) (570) 34 0 0 Other operational CF items (109) (37) (14) (14) (67) (33) (35) (38) Cash flow from operations 459 711 1,303 1,319 697 1,625 1,805 2,039 Capex (363) (259) (2,345) (212) (363) (1,495) (1,852) (1,852) Net (acquisitions)/disposals (380) 15 565 (354) 1,058 0 0 0 Other investing CF items 104 87 66 (444) (181) 54 54 55 Cash flow from investing (639) (157) (1,715) (1,010) 514 (1,442) (1,798) (1,797) Change in debt 0 0 0 00000 Net share issues/(repurchases) 0 0 0 00000 Dividends paid (234) (313) (243) (316) (358) (396) (457) (519) Other financing CF items 0 0 0 00000 Cash flow from financing (234) (313) (243) (316) (358) (396) (457) (519) Forex effect/others (7) (1) (2,522) (1,742) (2,461) (1,022) (1,022) (1,022) Change in cash (421) 240 (3,177) (1,748) (1,608) (1,234) (1,472) (1,298) Free cash flow 97 452 (1,041) 1,107 334 130 (47) 188 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 3,651 3,859 2,638 3,483 3,571 3,367 2,927 2,660 Inventory 108 8 429292929 Accounts receivable 1,116 1,561 1,628 2,059 2,543 2,605 2,605 2,605 Other current assets 358 379 265 263 428 805 1,141 1,478 Total current assets 5,135 5,807 4,539 5,809 6,571 6,807 6,702 6,772 Fixed assets 1,004 933 1,098 950 897 1,712 2,896 4,048 Goodwill & intangibles 17 83 104 51 63 63 63 63 Other non-current assets 139 286 2,219 2,196 2,350 2,350 2,350 2,350 Total assets 6,296 7,109 7,960 9,007 9,881 10,932 12,011 13,233 Short-term debt 0 0 0 00000 Accounts payable 744 861 1,033 1,321 1,408 1,504 1,504 1,504 Other current liabilities 15 7 41 40 24 24 24 24 Total current liabilities 759 868 1,073 1,362 1,432 1,528 1,528 1,528 Long-term debt 0 0 0 00000 Other non-current liabilities 0 20 19 18 17 17 17 17 Total liabilities 760 888 1,093 1,380 1,449 1,545 1,545 1,545 Share capital 1,776 1,951 1,951 2,926 2,926 2,926 2,926 2,926 Reserves/R.E./others 3,661 4,160 4,792 4,555 5,337 6,258 7,298 8,476 Shareholders' equity 5,437 6,111 6,743 7,481 8,263 9,184 10,224 11,402 Minority interests 99 110 124 145 168 203 242 286 Total equity & liabilities 6,296 7,109 7,960 9,007 9,881 10,932 12,011 13,233 EV 8,030 7,813 9,042 8,195 8,121 8,358 8,838 9,150 Net debt/(cash) (3,651) (3,859) (2,638) (3,483) (3,571) (3,367) (2,927) (2,660) BVPS (CNY) 2.041 2.088 2.304 2.557 2.824 3.139 3.494 3.896

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 13.1 15.4 16.5 20.1 11.8 10.5 10.7 10.8 EBITDA (YoY) 5.7 18.4 19.3 16.6 (8.1) 13.0 13.3 13.0 Operating profit (YoY) (6.8) 30.3 23.8 19.6 3.0 16.5 14.2 14.0 Net profit (YoY) 1.2 21.5 15.3 17.1 8.2 15.7 13.7 13.4 Core EPS (fully-diluted) (YoY) 1.2 12.3 13.5 17.1 8.2 15.7 13.7 13.4 Gross-profit margin 54.2 55.9 60.6 57.7 51.6 52.5 53.3 54.0 EBITDA margin 46.7 48.0 49.1 47.7 39.2 40.1 41.0 41.9 Operating-profit margin 28.0 31.6 33.5 33.4 30.8 32.4 33.5 34.5 Net profit margin 29.2 30.7 30.4 29.6 28.6 30.0 30.8 31.5 ROAE 13.1 13.4 13.9 14.7 14.4 15.0 15.4 15.6 ROAA 11.4 11.6 11.9 12.3 12.0 12.6 13.0 13.4 ROCE 12.3 13.6 15.1 16.3 15.2 15.9 16.3 16.7 ROIC 35.2 33.0 26.2 23.7 24.1 23.3 21.4 19.9 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 9.4 12.1 12.5 16.2 10.9 10.7 10.6 10.6 Accounts receivable (days) 137.8 193.3 197.6 190.2 212.3 215.0 196.6 177.5 Current ratio (x) 6.8 6.7 4.2 4.3 4.6 4.5 4.4 4.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 77.6 33.2 34.2 33.5 34.4 34.4 34.4 34.4 Free cash flow yield 0.8 3.9 n.a. 9.5 2.9 1.1 n.a. 1.6 Source: FactSet, Daiwa forecasts

 Company profile TravelSky Technology is the dominant service provider of aviation information technology in China. For 2012, the total number of bookings processed by the company was 347m. The China TravelSky Holding Company has a 29.3% stake in the company.

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Industrials / China 694 HK Industrials / China 9 July 2013

Beijing Capital International Airport

Beijing Capital International Airport Target (HKD): 5.40  5.40 Upside: 12.5% 694 HK 5 Jul price (HKD): 4.80

Value emerging 1 Buy (unchanged) • We think BCIA has a resilient earnings-growth profile and see a 2 Outperform good buying opportunity post its recent share-price retreat 3 Hold • 1H13 net profit likely up 17% YoY, higher vs. other China 4 Underperform aviation groups, which should boost sentiment on the stock 5 Sell • Current 2013-14E PERs of 9.5-11.5x look undemanding given our strong net-profit growth forecast of 21-22% YoY

upgrading the aircraft they use for ■ How we differ some flights from narrow-body to We are more optimistic than the wide-body ones, and we expect market about a recovery in BCIA’s airlines to continue with their international traffic in 2H13E.

replacement plans due to long-term Forecast revisions (%) Kelvin Lau strategic considerations (and Year to 31 Dec 13E 14E 15E (852) 2848 4467 irrespective of macro trends). Revenue change - - - [email protected] Net profit change - - - Core EPS (FD) change - - - Consumers’ behaviour at Beijing Airport differs markedly from that in Source: Daiwa forecasts ■ What's new the city, in our view, as the former is We forecast Beijing Capital focused on purchases of souvenirs so Share price performance International Airport (BCIA) to post tends to be less sensitive to the (HKD) (% ) a 1H13 net profit of CNY680m, up macro climate than buying activity 7.0 125 17% YoY and better than the other 6.3 116 in the city for luxury goods and 5.5 108 China aviation companies in our other discretionary items. Thus, we coverage, especially the big-three 4.8 99 continue to expect low volatility for 4.0 90 PRC airlines (for which we forecast BCIA’s non-aeronautical revenue. Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 net-profit declines YoY). We believe B'Jing Cap (LHS) Relative to HSI (RHS) BCIA’s business remains stable and ■ What we recommend that its recent share-price weakness We reaffirm our Buy (1) rating on provides a good buying opportunity. 12-month range 4.47-6.95 BCIA with a DCF-based six-month Market cap (USDbn) 2.68 target price of HKD5.40 (assuming a 3m avg daily turnover (USDm) 3.68 ■ Shares outstanding (m) 4,331 What's the impact WACC of 9.2% and an adjusted beta of Major shareholder Capital Airport Holding Co (56.6%) We forecast increases in BCIA’s 0.77), implying a 12-month forward aircraft movements and passenger PER of 10.6x, which is close to the Financial summary (CNY) throughput of 2% YoY and 5% YoY, stock’s average post-listing PER. respectively, for 2013, which we Year to 31 Dec 13E 14E 15E Revenue (m) 7,153 7,616 8,036 believe could be conservative given BCIA trades currently at a 2014E Operating profit (m) 2,491 2,822 3,152 our outlook for continuous PER of 9.5x (based on our EPS), Net profit (m) 1,423 1,734 1,996 expansion of China’s aviation Core EPS (fully-diluted) 0.329 0.400 0.461 which is less than 1SD below its EPS change (%) 21.4 21.8 15.1 market over 2013-15 and that average post-listing PER of 10x. We Beijing Airport is likely remain a Daiwa vs Cons. EPS (%) (1.9) (0.4) (0.0) see its current valuation as PER (x) 11.5 9.5 8.2 major hub in North Asia. undemanding given our favourable Dividend yield (%) 2.6 3.2 3.6 outlook for its business. The main DPS 0.099 0.120 0.138 BCIA’s passenger throughput PBR (x) 1.0 0.9 0.9 risk to our view would be lower- EV/EBITDA (x) 7.2 6.4 5.7 growth should also be driven partly than-expected passenger throughput by several airlines currently ROE (%) 9.0 10.2 10.8 and aircraft movements. Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Passenger throughput (Int'l) growth 4.7 5.9 22.2 2.1 8.8 4.0 8.0 8.0 (%) Passenger throughput (Domestic) 3.8 20.8 10.6 7.7 2.8 5.0 5.0 4.0 growth (%) Total passenger throughput growth 4.0 17.3 13.1 6.4 4.1 4.8 5.7 4.9 Aircraft movement (Int'l) growth (%) (2.4) (2.2) 11.5 6.9 6.4 2.0 4.0 4.0 Aircraft movement (Domestic) growth 11.5 17.7 4.6 2.0 4.0 2.0 3.0 3.0 (%) Total aircraft movement growth (%) 8.0 13.2 6.0 3.0 4.5 2.0 3.2 3.2

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Aeronautical revenue 2,723 3,029 3,454 3,676 3,893 4,147 4,395 4,602 Non-aeronautical revenue 1,696 1,721 2,086 2,539 2,730 3,006 3,221 3,433 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 4,418 4,749 5,540 6,215 6,623 7,153 7,616 8,036 Other income 00000000 COGS (3,579) (2,479) (2,608) (2,649) (2,982) (3,092) (3,183) (3,277) SG&A 00000000 Other op.expenses (699) (1,562) (1,510) (1,507) (1,516) (1,570) (1,611) (1,606) Operating profit 140 709 1,422 2,060 2,124 2,491 2,822 3,152 Net-interest inc./(exp.) (55) (319) (717) (716) (581) (607) (524) (505) Assoc/forex/extraord./others (16) 7 88 142 20 14 14 14 Pre-tax profit 69 397 793 1,486 1,564 1,898 2,313 2,662 Tax 16 (101) (198) (372) (391) (475) (579) (666) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 85 296 595 1,114 1,173 1,423 1,734 1,996 Net profit (adjusted) 85 296 595 1,114 1,173 1,423 1,734 1,996 EPS (reported)(CNY) 0.020 0.068 0.137 0.257 0.271 0.329 0.400 0.461 EPS (adjusted)(CNY) 0.020 0.068 0.137 0.257 0.271 0.329 0.400 0.461 EPS (adjusted fully-diluted)(CNY) 0.020 0.068 0.137 0.257 0.271 0.329 0.400 0.461 DPS (CNY) 0.000 0.034 0.000 0.077 0.108 0.099 0.120 0.138 EBIT 140 709 1,422 2,060 2,124 2,491 2,822 3,152 EBITDA 2,019 2,336 3,030 3,668 3,738 4,159 4,530 4,856

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 69 397 793 1,486 1,564 1,898 2,313 2,662 Depreciation and amortisation 675 1,512 1,461 1,459 1,483 1,533 1,583 1,583 Tax paid (326) (79) (92) (413) (391) (475) (579) (666) Change in working capital 664 (895) 847 (320) 2 121 19 19 Other operational CF items 140 54 141 (93) 76 25 15 11 Cash flow from operations 1,222 989 3,150 2,119 2,734 3,102 3,352 3,608 Capex (5,278) (899) (322) (347) (400) (2,550) (1,150) (400) Net (acquisitions)/disposals 2 10 (5) (59) (2) (2) (2) (2) Other investing CF items 25 8 7 10 20 20 20 20 Cash flow from investing (5,250) (882) (320) (395) (382) (2,532) (1,132) (382) Change in debt 0 0 (2,736) (1,577) (1,088) (155) (1,500) (1,500) Net share issues/(repurchases) 1,855 0 0 0 0 0 0 0 Dividends paid (369) 0 (147) (77) (430) (338) (436) (528) Other financing CF items 0 0 253 0 69 0 0 0 Cash flow from financing 1,486 0 (2,630) (1,654) (1,450) (493) (1,936) (2,028) Forex effect/others (15) (0) (1) (4) (6) 0 0 0 Change in cash (2,559) 107 199 66 895 76 283 1,198 Free cash flow (4,056) 90 2,828 1,773 2,334 552 2,202 3,208 Source: FactSet, Daiwa forecasts

- 31 - China Transportation Sector 9 July 2013

Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 576 684 882 949 1,818 1,920 2,203 3,401 Inventory 24 58 104 130 125 125 125 125 Accounts receivable 1,863 1,809 1,094 1,061 1,142 1,021 1,002 983 Other current assets 0 0 0 213 0 0 0 0 Total current assets 2,463 2,550 2,079 2,352 3,086 3,066 3,330 4,509 Fixed assets 34,387 33,260 31,911 30,660 29,490 30,516 31,083 30,900 Goodwill & intangibles 127 106 84 61 41 23 14 10 Other non-current assets 830 815 907 825 806 790 774 757 Total assets 37,808 36,731 34,981 33,899 33,423 34,395 35,201 36,177 Short-term debt 0 14,867 143 139 7,655 500 500 500 Accounts payable 16,664 2,272 2,410 2,028 2,160 2,160 2,160 2,160 Other current liabilities 138 183 389 327 311 353 361 369 Total current liabilities 16,802 17,322 2,942 2,494 10,126 3,013 3,022 3,030 Long-term debt 8,489 6,606 18,515 16,813 7,937 14,937 14,437 13,937 Other non-current liabilities 79 69 90 121 78 78 78 78 Total liabilities 25,370 23,997 21,546 19,427 18,140 18,028 17,536 17,044 Share capital 4,331 4,331 4,331 4,331 4,331 4,331 4,331 4,331 Reserves/R.E./others 8,107 8,403 9,104 10,141 10,952 12,037 13,334 14,802 Shareholders' equity 12,438 12,734 13,435 14,472 15,283 16,367 17,665 19,133 Minority interests 00000000 Total equity & liabilities 37,808 36,731 34,981 33,899 33,423 34,395 35,201 36,177 EV 24,311 37,212 34,198 32,426 30,196 29,940 29,157 27,459 Net debt/(cash) 7,913 20,789 17,775 16,003 13,773 13,517 12,734 11,036 BVPS (CNY) 2.872 2.940 3.102 3.341 3.529 3.779 4.079 4.418

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 30.9 7.5 16.6 12.2 6.6 8.0 6.5 5.5 EBITDA (YoY) (9.6) 15.7 29.7 21.1 1.9 11.3 8.9 7.2 Operating profit (YoY) (91.6) 405.3 100.7 44.8 3.1 17.3 13.3 11.7 Net profit (YoY) (92.4) 246.9 101.1 87.2 5.3 21.4 21.8 15.1 Core EPS (fully-diluted) (YoY) (92.7) 235.4 101.1 87.2 5.3 21.4 21.8 15.1 Gross-profit margin 19.0 47.8 52.9 57.4 55.0 56.8 58.2 59.2 EBITDA margin 45.7 49.2 54.7 59.0 56.4 58.1 59.5 60.4 Operating-profit margin 3.2 14.9 25.7 33.1 32.1 34.8 37.1 39.2 Net profit margin 1.9 6.2 10.7 17.9 17.7 19.9 22.8 24.8 ROAE 0.7 2.4 4.5 8.0 7.9 9.0 10.2 10.8 ROAA 0.3 0.8 1.7 3.2 3.5 4.2 5.0 5.6 ROCE 0.9 2.6 4.3 6.5 6.8 7.9 8.8 9.5 ROIC 1.0 2.0 3.3 5.0 5.4 6.3 7.0 7.8 Net debt to equity 63.6 163.3 132.3 110.6 90.1 82.6 72.1 57.7 Effective tax rate n.a. 25.4 25.0 25.0 25.0 25.0 25.0 25.0 Accounts receivable (days) 112.6 141.1 95.6 63.3 60.7 55.2 48.5 45.1 Current ratio (x) 0.1 0.1 0.7 0.9 0.3 1.0 1.1 1.5 Net interest cover (x) 2.5 2.2 2.0 2.9 3.7 4.1 5.4 6.2 Net dividend payout 0.0 49.6 0.0 30.0 40.0 30.0 30.0 30.0 Free cash flow yield n.a. 0.5 17.2 10.8 14.2 3.4 13.4 19.5 Source: FactSet, Daiwa forecasts

 Company profile Beijing Capital International Airport (BCIA) is engaged mainly in aeronautical and non-aeronautical businesses at Beijing Airport. For 2012, aircraft movements and passenger throughput at Beijing Airport were 557,160 and 82m, respectively. The Capital Airport Holding Company has a 56.6% stake in BCIA.

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Industrials / China 1308 HK Industrials / China 9 July 2013

SITC International

SITC International Target (HKD): 3.30  3.20 Upside: 18.5% 1308 HK 5 Jul price (HKD): 2.70

Logistics demand remains strong 1 Buy (unchanged) 2 Outperform • We believe the logistics business in China is still in a growth 3 Hold phase and company is well-positioned to take market share 4 Underperform • SITC’s shipping business should benefit from companies moving 5 Sell their assembly lines from north Asia to ASEAN countries • Current valuation looks attractive, with 2013E dividend yield of 5.2% and a PER of 8.5x. Reiterate Buy rating

Yen exposure and maintained high 2013, and especially on SITC’s net-profit growth of 33% YoY. logistics business.

We are cutting our 2013-15E EPS by

13-17% due to weaker-than-expected Forecast revisions (%) Kelvin Lau freight rates for 2Q13. However, the Year to 31 Dec 13E 14E 15E (852) 2848 4467 low bunker price should be positive Revenue change (2.9) (3.4) (4.4) [email protected] for the company. We are cutting our Net profit change (15.0) (12.6) (16.8) Core EPS (FD) change (15.0) (12.6) (16.8) 2013 bunker-price forecast to USD610/tonne and that for 2014-15 Source: Daiwa forecasts ■ What's new to USD600/tonne (all previously We believe the earnings growth from USD640/tonne). Share price performance SITC’s logistic business will continue (HKD) (% ) over the next three years and see the ■ What we recommend 3.2 140 current valuation as undemanding. 2.8 125 We reaffirm our Buy (1) rating, but 2.5 110 lower our six-month target price to ■ What's the impact 2.1 95 HKD3.20 (from HKD3.30). Our new 1.8 80 We forecast logistics volume to rise target price is still based on a PBR of Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 by 12-15% YoY for 2013-15, due to 1.4x, at a 20% premium to the SITC Int (LHS) Relative to HSI (RHS) increasing demand resulting from shipping industry’s average PBR of the move of China’s manufacturing 1.2x for 2010 (a year of recovery for base inland and the need by 12-month range 1.80-3.15 the industry), reflecting the growth Market cap (USDbn) 0.90 customers for more efficient logistics potential we see for SITC’s business. 3m avg daily turnover (USDm) 1.15 support, especially for electronics The stock is trading at a 2014E PER Shares outstanding (m) 2,587 Major shareholder Resourceful Link (55.1%) and food products. of 5.8x, a dividend yield of 7.4%, and

an ROE of 18.8%, which should Financial summary (USD) SITC’s shipping business is focusing support the share price. on intra-Asia trade, which should Year to 31 Dec 13E 14E 15E Revenue (m) 1,322 1,505 1,713 benefit from companies moving part The main risks to our call include a Operating profit (m) 105 152 174 of their manufacturing assembly line slower-than-expected expansion of Net profit (m) 105 155 178 operations from north Asia to Core EPS (fully-diluted) 0.041 0.060 0.069 SITC’s logistics business, lower- EPS change (%) 12.8 47.2 14.8 ASEAN countries. This should be a than-expected volume and freight- long-term share-price catalyst. Daiwa vs Cons. EPS (%) (7.4) 11.1 11.1 rate increases, and higher-than- PER (x) 8.5 5.8 5.1 expected bunker-price rises. Dividend yield (%) 5.2 7.4 8.5 Meanwhile, we believe the adverse DPS 0.018 0.026 0.029 impact of Yen depreciation was PBR (x) 1.2 1.0 0.9 ■ How we differ EV/EBITDA (x) 6.0 4.5 4.1 reflected in the 1Q13 results, in We are more optimistic than the which SITC effectively hedged its ROE (%) 14.3 18.8 19.0 market on the industry outlook for Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Avg freight rate (USD/TEU) 0.0 450.0 506.0 543.0 539.0 512.1 512.1 512.1 Lifting volume ('000 TEU) 0.0 1,186.8 1,373.2 1,546.3 1,774.1 1,991.6 2,230.6 2,498.2 Bunker price (USD/ton) 0.0 386.0 495.0 669.0 664.0 610.0 600.0 600.0 Avg freight rate growth (%) 0.0 (16.2) 12.4 7.3 (0.7) (5.0) 0.0 0.0 Lifting volume growth (%) 0.0 9.9 15.7 12.6 14.7 12.3 12.0 12.0 Bunker price growth (%) 0.0 24.3 39.5 2.2 (8.1) (1.6) 0.0 0.0 Vessel capacity growth (%) 0.0 5.3 22.5 8.2 13.0 10.0 10.0 10.0

 Profit and loss (USDm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sea freight logistics Revenues 0 430 434 407 488 519 582 652 Land based logistics Revenues 0 264 458 653 716 802 923 1,061 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 0 694 892 1,060 1,205 1,322 1,505 1,713 Other income 0 4 33414141414 COGS 0 (616) (711) (945) (1,057) (1,146) (1,269) (1,442) SG&A 0 (37) (52) (52) (61) (67) (73) (81) Other op.expenses 0 (10) (15) (5) (10) (19) (24) (30) Operating profit 0 36 117 93 91 105 152 174 Net-interest inc./(exp.) 0 (1) (0) 9 5 5 5 5 Assoc/forex/extraord./others 0 (1) (1) (5) 0 2 3 4 Pre-tax profit 0 34 115 96 96 112 160 184 Tax 0 (1) (3) (2) (2) (2) (3) (4) Min. int./pref. div./others 0 (0) (0) (1) (0) (1) (1) (2) Net profit (reported) 0 32 112 94 93 109 155 178 Net profit (adjusted) 0 31 112 75 93 105 155 178 EPS (reported)(USD) n.a. 0.012 0.043 0.036 0.036 0.042 0.060 0.069 EPS (adjusted)(USD) n.a. 0.012 0.043 0.029 0.036 0.041 0.060 0.069 EPS (adjusted fully-diluted)(USD) n.a. 0.012 0.043 0.029 0.036 0.041 0.060 0.069 DPS (USD) 0.000 0.000 0.015 0.015 0.015 0.018 0.026 0.029 EBIT 0 36 117 93 91 105 152 174 EBITDA 0 44 126 93 100 123 175 204

 Cash flow (USDm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 0 34 115 96 96 112 160 184 Depreciation and amortisation 0 9 11 11 16 25 31 36 Tax paid 0 (2) (2) (2) (2) (2) (3) (4) Change in working capital 0 3 31 (14) (8) (5) (8) (5) Other operational CF items 0 2 2 2 2 2 3 5 Cash flow from operations 0 46 157 94 104 132 182 216 Capex 0 (14) (39) (95) (196) (172) (172) (172) Net (acquisitions)/disposals 0 0 1 1 (2) (2) (2) (2) Other investing CF items 0 6 (0) 2 (30) (30) (30) (30) Cash flow from investing 0 (8) (38) (91) (228) (203) (203) (203) Change in debt 0 (21) (18) (42) 96 35 35 35 Net share issues/(repurchases) 0 0 401 (2) (1) 0 0 0 Dividends paid 0 0 (40) (40) (40) (40) (47) (66) Other financing CF items 0 (1) (15) 0 (9) 19 19 19 Cash flow from financing 0 (23) 327 (84) 45 14 7 (13) Forex effect/others 0 (0) 4 14 22 (1) (1) (1) Change in cash 0 15 449 (68) (57) (58) (15) (0) Free cash flow 0 32 118 (1) (92) (39) 11 45 Source: FactSet, Daiwa forecasts

- 34 - China Transportation Sector 9 July 2013

Financial summary continued …

 Balance sheet (USDm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 0 66 504 437 379 321 306 306 Inventory 0 8121619202325 Accounts receivable 0 35 49 79 73 80 91 103 Other current assets 066162840434955 Total current assets 0 175 581 559 510 465 469 489 Fixed assets 0 167 189 264 444 591 732 867 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 0 5 17 28 46 64 83 102 Total assets 0 346 787 852 1,001 1,120 1,284 1,459 Short-term debt 0 17 13 31 17 52 86 121 Accounts payable 0 72 86 141 138 151 167 190 Other current liabilities 0 81 26 20 24 26 29 33 Total current liabilities 0 170 125 192 180 229 283 344 Long-term debt 0 73 66 6 115 115 115 115 Other non-current liabilities 0 3 1 0 1 1 1 1 Total liabilities 0 247 191 198 296 345 399 460 Share capital 0 0 34 33 33 33 33 33 Reserves/R.E./others 0 98 560 617 670 739 847 959 Shareholders' equity 0 98 594 650 703 772 881 992 Minority interests 02332346 Total equity & liabilities 0 346 787 852 1,001 1,120 1,284 1,459 EV 901 925 475 495 647 740 791 827 Net debt/(cash) 0 24 (426) (400) (246) (153) (104) (70) BVPS (USD) n.a. 0.038 0.228 0.250 0.272 0.298 0.340 0.384

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) n.a. n.a. 28.4 18.9 13.6 9.7 13.8 13.8 EBITDA (YoY) n.a. n.a. 186.2 (25.8) 7.7 22.6 42.5 16.3 Operating profit (YoY) n.a. n.a. 227.1 (20.6) (1.7) 15.7 44.1 15.0 Net profit (YoY) n.a. n.a. 261.9 (32.9) 24.4 12.8 47.2 14.8 Core EPS (fully-diluted) (YoY) n.a. n.a. 261.9 (32.6) 25.0 12.8 47.2 14.8 Gross-profit margin n.a. 11.3 20.3 10.9 12.3 13.3 15.6 15.8 EBITDA margin n.a. 6.3 14.1 8.8 8.3 9.3 11.7 11.9 Operating-profit margin n.a. 5.1 13.1 8.7 7.6 8.0 10.1 10.2 Net profit margin n.a. 4.5 12.6 7.1 7.8 8.0 10.3 10.4 ROAE n.a. 63.1 32.4 12.1 13.8 14.3 18.8 19.0 ROAA n.a. 17.9 19.8 9.2 10.1 9.9 12.9 13.0 ROCE n.a. 37.4 26.9 13.6 11.9 11.8 15.0 15.0 ROIC n.a. 54.9 77.3 42.7 24.9 19.1 21.2 20.0 Net debt to equity net cash 24.7 net cash net cash net cash net cash net cash net cash Effective tax rate n.a. 4.4 2.3 2.1 2.4 2.1 2.1 2.1 Accounts receivable (days) n.a. 9.3 17.3 22.0 22.9 21.1 20.7 20.7 Current ratio (x) n.a. 1.0 4.7 2.9 2.8 2.0 1.7 1.4 Net interest cover (x) n.a. 35.6 600.8 n.a. n.a. n.a. n.a. n.a. Net dividend payout n.a. 0.0 35.8 42.8 42.8 42.8 42.8 42.8 Free cash flow yield 0.0 3.5 13.1 n.a. n.a. n.a. 1.2 5.0 Source: FactSet, Daiwa forecasts

 Company profile SITC International Holdings (SITC) is a leading China-based shipping logistics company with an operating capacity of 50,360 TEUs (average vessel age of about 7.7 years). It is the third-largest overall and the largest non-state-owned China-based container shipping company in terms of 2010 shipping capacity. SITC focuses extensively on the intra-Asia market.

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Industrials / China 670 HK Industrials / China 9 July 2013

China Eastern Airlines

China Eastern Airlines Target (HKD): 4.10  3.30 Upside: 41.0% 670 HK 5 Jul price (HKD): 2.34

Better outlook in 2H13 1 Buy (unchanged) • We expect CEA to be the major beneficiary of a traffic recovery 2 Outperform on Japan routes 3 Hold • Domestic travel sentiment should recover assuming a 4 Underperform diminishing impact from the H7N9 flu virus 5 Sell • Our top pick among the Big-3 airlines; reaffirm Buy

profit for 2H13. We now forecast an recovery for CEA, especially in the average 2013 jet-fuel price of Japan market. USD120/bbl (down 5% from our previous forecast of USD126/bbl).

Forecast revisions (%) Kelvin Lau ■ What we recommend Year to 31 Dec 13E 14E 15E (852) 2848 4467 We believe CEA will benefit the most Revenue change (1.1) (1.1) (1.1) [email protected] among the sector stocks we cover Net profit change (18.9) (11.5) (0.3) Core EPS (FD) change (18.9) (11.5) (0.3) from a recovery in China-Japan traffic as a result of the Yen’s depreciation Source: Daiwa forecasts ■ What's new since 4Q12, and from more positive We believe CEA’s 1H13 net profit travel sentiment upon a potentially Share price performance (forecast by us at CNY429m, down diminishing impact of the H7N9 virus. (HKD) (% ) 47% YoY) will be hit by a weak 3.8 135 domestic yield due to the negative 3.4 123 We reduce our 2013-15E EPS by 0.3- 3.0 110 impact from the H7N9 avian flu 19%, after lowering our domestic virus and a decline in traffic to 2.6 98 passenger-yield forecast for 2013 2.2 85 Japan. However, we expect these from flat YoY to a 3% YoY decline Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 two factors to reverse in 2H13. due to the weaker-than-expected China East (LHS) Relative to HSI (RHS) domestic market. As such, we are ■ What's the impact lowering our six-month target price We expect China-Japan traffic to 12-month range 2.24-3.72 to HKD3.30 (from HKD4.10). Market cap (USDbn) 3.40 return to a positive trend in 2H13 3m avg daily turnover (USDm) 4.21 (assuming an easing of political Our target price is now based on the Shares outstanding (m) 11,277 Major shareholder CEA Holding (60.1%) tension), from a low base in 2H12. stock’s past-five-year average PBR of Also, we expect the adverse impact of 1.3x (previously 1.4x), applied to our Financial summary (CNY) the avian flu virus on travel sentiment 2013E BVPS. We believe our new to soften, with possibly fewer infected Year to 31 Dec 13E 14E 15E target PBR reflects a more gradual Revenue (m) 92,852 102,439 113,158 cases in 2H13 (vs. 1H13). This should industry recovery than we assumed Operating profit (m) 3,318 4,983 6,532 help CEA’s domestic passenger yield previously. The risks to our call would Net profit (m) 3,370 4,503 5,884 return to being flat YoY in 2H13E, vs. Core EPS (fully-diluted) 0.299 0.399 0.522 include lower-than-expected traffic EPS change (%) 28.8 33.6 30.7 about a 3% YoY decline in 1H13E. and yields, and a greater-than- Daiwa vs Cons. EPS (%) 1.6 17.5 25.1 expected jet-fuel price increase. PER (x) 6.2 4.6 3.5 Also, we believe the lower jet-fuel Dividend yield (%) 0.0 0.0 0.0 price (around USD/120bbl ■ How we differ DPS 0.000 0.000 0.000 PBR (x) 0.8 0.7 0.6 currently, vs. USD128/bbl on Our 2014-15E EPS are 18-25% average in 1Q13) should help drive a EV/EBITDA (x) 5.0 4.3 3.7 higher than the consensus as we are ROE (%) 13.7 15.9 17.5 YoY improvement in CEA’s net more optimistic about an earnings Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Overall RPK growth (%) (5.9) 13.3 52.9 8.3 8.1 12.4 9.5 8.5 Overall RFTK growth (%) (7.4) 2.2 74.1 2.6 6.3 2.5 10.4 10.5 Overall ASK growth (%) (2.3) 11.2 41.4 7.1 6.9 12.1 8.5 8.5 Overall AFTK growth (%) (5.6) 2.1 45.5 0.2 3.7 5.1 9.1 9.2 Overall PLF (%) 70.8 72.2 78.0 78.9 79.8 80.0 80.7 80.8 Overall CLF (%) 50.4 50.4 60.4 61.8 63.4 61.8 62.6 63.3 Overall passenger yield growth (%) 1.2 (13.6) 17.6 7.9 (4.2) (2.5) 0.9 1.9 Cargo Yield growth (%) 5.49 (24.43) 16.77 (6.15) (6.44) 0.00 1.00 2.00 Int'l jet-fuel price (USD/bbl) 122.070 70.080 90.070 126.000 126.900 120.000 118.000 118.000

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Passenger revenue 33,486 32,800 58,968 68,434 71,419 78,254 86,452 95,549 Cargo revenue 5,358 4,124 8,423 8,080 8,025 8,269 9,222 10,394 Other Revenue 2,228 2,065 6,413 5,889 5,809 6,329 6,766 7,215 Total Revenue 41,073 38,990 73,804 82,403 85,253 92,852 102,439 113,158 Other income 00000000 COGS (37,050) (31,189) (50,524) (59,182) (62,516) (67,181) (73,730) (81,506) SG&A (5,619) (5,730) (11,911) (12,593) (12,710) (13,961) (14,867) (15,793) Other op.expenses (4,782) (5,203) (6,758) (6,966) (7,557) (8,392) (8,860) (9,327) Operating profit (6,378) (3,132) 4,610 3,663 2,470 3,318 4,983 6,532 Net-interest inc./(exp.) (2,239) (1,645) (1,421) (1,311) (1,497) (1,705) (1,717) (1,696) Assoc/forex/extraord./others (6,639) 5,026 2,229 2,489 2,039 1,865 1,866 1,868 Pre-tax profit (15,256) 249 5,418 4,841 3,012 3,478 5,132 6,704 Tax (74) (53) (133) (264) (205) (258) (381) (498) Min. int./pref. div./others 61 (28) (326) (1) 146 159 (238) (310) Net profit (reported) (15,269) 169 4,958 4,576 2,954 3,379 4,513 5,895 Net profit (adjusted) (7,515) (4,021) 3,624 3,258 2,616 3,370 4,503 5,884 EPS (reported)(CNY) (3.137) 0.026 0.445 0.406 0.262 0.300 0.400 0.523 EPS (adjusted)(CNY) (1.544) (0.625) 0.325 0.289 0.232 0.299 0.399 0.522 EPS (adjusted fully-diluted)(CNY) (1.544) (0.625) 0.325 0.289 0.232 0.299 0.399 0.522 DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT (6,378) (3,132) 4,610 3,663 2,470 3,318 4,983 6,532 EBITDA 1,508 4,996 15,945 15,248 15,074 17,009 19,407 21,702

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax (15,256) 249 5,418 4,841 3,012 3,478 5,132 6,704 Depreciation and amortisation 4,782 5,203 6,758 6,954 7,557 8,392 8,860 9,327 Tax paid (87) (78) (99) (158) (205) (258) (381) (498) Change in working capital 2,831 310 (2,845) 30 (947) 383 1,134 1,350 Other operational CF items 7,844 (4,415) (236) 256 1,263 (455) (456) (457) Cash flow from operations 114 1,268 8,996 11,922 10,681 11,540 14,289 16,427 Capex (2,471) (7,613) (9,985) (13,548) (13,477) (13,000) (13,000) (13,000) Net (acquisitions)/disposals 1,456 243 1,692 344 1,359 94 94 94 Other investing CF items 90 134 (340) (1,734) 328 318 324 330 Cash flow from investing (925) (7,236) (8,633) (14,939) (11,789) (12,588) (12,583) (12,576) Change in debt 2,283 (10,356) 515 1,880 (78) 755 (1,656) 313 Net share issues/(repurchases) 0 14,056 519 1,005 454 0 0 0 Dividends paid (53) (44) (42) (157) (179) 0 0 0 Other financing CF items 420 590 0 1,109 (434) 0 0 0 Cash flow from financing 2,650 4,247 992 3,837 (237) 755 (1,656) 313 Forex effect/others (43) 5 (13) (37) (3) (3) (3) (3) Change in cash 1,796 (1,716) 1,343 783 (1,349) (297) 48 4,160 Free cash flow (2,357) (6,344) (988) (1,627) (2,796) (1,460) 1,289 3,427 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 3,451 1,735 3,078 6,755 4,238 3,941 3,989 8,149 Inventory 00000000 Accounts receivable 5,481 3,741 7,284 4,915 6,331 6,915 7,569 8,292 Other current assets 1,468 1,386 1,717 2,038 2,106 2,106 2,106 2,106 Total current assets 10,400 6,863 12,080 13,708 12,675 12,962 13,664 18,547 Fixed assets 52,678 56,704 68,822 73,758 82,519 82,570 82,286 81,667 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 9,973 8,285 22,431 27,273 28,625 33,625 38,625 43,625 Total assets 73,052 71,851 103,334 114,739 123,819 129,157 134,575 143,839 Short-term debt 28,430 14,456 17,348 20,630 25,245 25,657 23,689 23,657 Accounts payable 18,719 19,418 21,389 22,158 22,426 23,452 25,298 27,429 Other current liabilities 6,709 1,637 526 599 952 854 855 856 Total current liabilities 53,858 35,511 39,264 43,387 48,623 49,962 49,842 51,942 Long-term debt 27,480 30,250 40,425 41,405 42,349 42,692 43,004 43,349 Other non-current liabilities 4,353 4,415 7,083 8,142 8,293 8,908 9,383 9,997 Total liabilities 85,691 70,175 86,772 92,934 99,265 101,563 102,229 105,288 Share capital 4,867 9,582 11,277 11,277 11,277 11,277 11,277 11,277 Reserves/R.E./others (17,964) (8,347) 3,995 8,849 11,649 14,850 19,363 25,259 Shareholders' equity (13,097) 1,235 15,271 20,126 22,926 26,126 30,640 36,535 Minority interests 458 442 1,291 1,679 1,628 1,468 1,706 2,016 Total equity & liabilities 73,052 71,851 103,334 114,739 123,819 129,157 134,575 143,839 EV 72,421 63,162 75,619 76,545 84,578 85,471 84,005 80,468 Net debt/(cash) 52,459 42,970 54,696 55,280 63,356 64,408 62,704 58,857 BVPS (CNY) n.a. 0.129 1.354 1.785 2.033 2.317 2.717 3.240

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) (3.4) (5.1) 89.3 11.7 3.5 8.9 10.3 10.5 EBITDA (YoY) (80.3) 231.3 219.2 (4.4) (1.1) 12.8 14.1 11.8 Operating profit (YoY) n.a. n.a. n.a. (20.6) (32.6) 34.3 50.2 31.1 Net profit (YoY) n.a. n.a. n.a. (10.1) (19.7) 28.8 33.6 30.7 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. (11.1) (19.7) 28.8 33.6 30.7 Gross-profit margin 9.8 20.0 31.5 28.2 26.7 27.6 28.0 28.0 EBITDA margin 3.7 12.8 21.6 18.5 17.7 18.3 18.9 19.2 Operating-profit margin n.a. n.a. 6.2 4.4 2.9 3.6 4.9 5.8 Net profit margin (18.3) (10.3) 4.9 4.0 3.1 3.6 4.4 5.2 ROAE n.a. n.a. 43.9 18.4 12.2 13.7 15.9 17.5 ROAA n.a. n.a. 4.1 3.0 2.2 2.7 3.4 4.2 ROCE n.a. n.a. 7.6 4.6 2.8 3.5 5.1 6.4 ROIC (14.6) (5.9) 7.8 4.7 2.8 3.4 4.9 6.3 Net debt to equity net cash 3,480.6 358.2 274.7 276.4 246.5 204.7 161.1 Effective tax rate n.a. 21.1 2.5 5.5 6.8 7.4 7.4 7.4 Accounts receivable (days) 45.0 43.2 27.3 27.0 24.1 26.0 25.8 25.6 Current ratio (x) 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.4 Net interest cover (x) n.a. n.a. 3.2 2.8 1.7 1.9 2.9 3.9 Net dividend payout n.a. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. 6.2 16.4 Source: FactSet, Daiwa forecasts

 Company profile As at the end of 2012, China Eastern Airlines (CEA) was the largest Shanghai-based airline in China, with 397 planes. China Eastern Air Holding Company has a 60% stake in CEA.

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Industrials / Hong Kong 293 HK Industrials / Hong Kong 9 July 2013

Cathay Pacific Airways

Cathay Pacific Airways Target (HKD): 16.80  16.50 Upside: 22.2% 293 HK 5 Jul price (HKD): 13.50

Poised for a turnaround in 2H13 1 Buy (unchanged) • We believe the recent bullish guidance from management 2 Outperform indicates a potential strong turnaround in CX’s business 3 Hold • Near-term earnings drivers would be a boost to traffic on Japan 4 Underperform routes and a recovery in passenger yields on long-haul routes 5 Sell • We expect more earnings-forecast upgrades after the 1H13 results; reiterate Buy rating

For 2H13, we expect long-haul traffic ■ How we differ and yields, especially to the US and Our 2013-14E EPS are 12-18% lower the UK, to continue to improve. With than the consensus as we the jet-fuel price low at around incorporate AC’s weak 1H13 results.

USD/120bbl currently (compared to Forecast revisions (%) Kelvin Lau USD128/bbl on average in 1Q13), and Year to 31 Dec 13E 14E 15E (852) 2848 4467 the utilisation of more fuel-efficient Revenue change - - - [email protected] aircraft on long-haul routes, CX’s Net profit change (27.5) (15.9) (10.5) Core EPS (FD) change (27.5) (15.9) (10.5) profitability should be enhanced further in 2H13. Source: Daiwa forecasts ■ What's new We believe Cathay Pacific’s (CX) ■ What we recommend Share price performance recent share-price correction is We reiterate our Buy (1) rating and (HKD) (% ) overdone. According to our fine-tune our six-month target price 16.0 105 discussions with management, the 15.0 100 to HKD16.50 (from HKD16.80), 14.0 96 business outlook remains intact, and based on a PBR of 1.1x applied on the company’s focus is on the 13.0 91 our 2013E BVPS. Our target 12.0 86 profitable Japan routes and long- multiple is in line with the stock’s Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 haul routes to the US and the UK. past-five-year average PBR. We Cathay Pac (LHS) Relative to HSI (RHS) revise down our 2013-15E EPS by 11- ■ What's the impact 28% to reflect our earnings revisions We believe CX is benefiting from a 12-month range 12.10-15.70 for Air China (AC) (753 HK, Market cap (USDbn) 6.85 boost to traffic to Japan as a result HKD5.29, Buy [1]). 3m avg daily turnover (USDm) 8.45 of the Yen depreciation. According Shares outstanding (m) 3,934 Major shareholder Swire Pacific (44.0%) to management, advance bookings Due to recent weakness in sentiment to Japan for the summer season in the stock market and Financial summary (HKD) have been very strong, driven partly transportation companies, CX is by the strong rebound in travel to Year to 31 Dec 13E 14E 15E now trading at a PBR of 0.9x on our Revenue (m) 98,637 105,002 113,506 Japan. As such, we expect the 2013E BVPS. As such, we believe the Operating profit (m) 2,777 5,281 7,457 company to announce strong traffic stock’s recent sell-off is overdone, Net profit (m) 2,174 4,112 6,134 data for August and September. Core EPS (fully-diluted) 0.553 1.045 1.559 particularly as we expect CX’s EPS change (%) 109.9 89.1 49.2 fundamentals to improve, rather Also, we forecast a bottom-line Daiwa vs Cons. EPS (%) (18.4) (12.1) 6.6 than deteriorate, in 2H13. PER (x) 24.4 12.9 8.7 turnaround to a net profit of Dividend yield (%) 1.5 2.8 4.2 HKD385m for 1H13 (from a net loss The risks to our view would include DPS 0.198 0.379 0.567 PBR (x) 0.9 0.8 0.8 of HKD935m for 1H12), which could lower-than-expected traffic and provide positive sentiment towards EV/EBITDA (x) 5.1 4.1 3.4 yield rises, and a greater-than- ROE (%) 3.7 6.8 9.4 the stock in the near term. expected jet-fuel price rise. Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Overall RPK growth (%) 11.2 (1.7) 8.0 5.1 2.3 (1.3) 4.0 5.5 Overall RFTK growth (%) (0.7) (6.6) 23.2 (5.2) (7.3) (6.0) 6.0 8.0 Overall ASK growth (%) 12.7 (3.7) 4.1 9.2 2.6 (1.7) 4.0 5.0 Overall AFTK growth (%) 0.7 (13.1) 15.2 6.9 (3.1) (4.1) 6.0 7.5 Overall PLF (%) 78.8 80.5 83.4 80.4 80.1 80.4 80.4 80.8 Overall CLF (%) 65.9 70.8 75.7 67.2 64.2 62.9 62.9 63.2 Overall passenger yield growth (%) 5.3 (19.7) 19.8 8.7 1.2 3.0 2.0 2.0 Cargo Yield growth (%) 12.4 (26.8) 25.3 3.9 0.0 (1.5) 2.0 2.0 Int'l jet-fuel price (USD/bbl) 122.1 70.1 90.1 126.0 126.9 120.0 118.0 118.0

 Profit and loss (HKDm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Passenger Revenues 57,964 45,920 59,354 67,778 70,133 71,276 75,609 81,352 Cargo Revenues 24,623 17,255 25,901 25,980 24,555 22,735 24,582 27,079 Other Revenue 3,976 3,803 4,269 4,648 4,688 4,626 4,811 5,075 Total Revenue 86,563 66,978 89,524 98,406 99,376 98,637 105,002 113,506 Other income 00000000 COGS (76,653) (56,062) (66,810) (84,064) (86,476) (83,633) (87,437) (93,111) SG&A (851) (571) (736) (791) (777) (764) (794) (834) Other op.expenses (8,678) (8,749) (11,178) (9,872) (10,512) (11,463) (11,489) (12,104) Operating profit 381 1,596 10,800 3,679 1,611 2,777 5,281 7,457 Net-interest inc./(exp.) (1,012) (847) (978) (744) (884) (1,444) (1,798) (1,712) Assoc/forex/extraord./others (9,174) 4,398 5,873 3,538 818 1,131 1,339 1,539 Pre-tax profit (9,805) 5,147 15,695 6,473 1,545 2,465 4,822 7,284 Tax 1,333 (283) (1,462) (803) (417) (165) (432) (713) Min. int./pref. div./others (224) (170) (185) (169) (212) (71) (135) (202) Net profit (reported) (8,696) 4,694 14,048 5,501 916 2,229 4,255 6,370 Net profit (adjusted) (1,515) 716 11,136 4,119 1,036 2,174 4,112 6,134 EPS (reported)(HKD) (2.210) 1.193 3.571 1.398 0.233 0.567 1.082 1.619 EPS (adjusted)(HKD) (0.385) 0.182 2.831 1.047 0.263 0.553 1.045 1.559 EPS (adjusted fully-diluted)(HKD) (0.385) 0.182 2.830 1.047 0.263 0.553 1.045 1.559 DPS (HKD) 0.030 0.100 1.110 0.520 0.080 0.198 0.379 0.567 EBIT 381 1,596 10,800 3,679 1,611 2,777 5,281 7,457 EBITDA 8,652 10,677 20,195 13,081 11,922 14,446 17,552 20,293

 Cash flow (HKDm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax (9,805) 5,147 15,695 6,473 1,545 2,465 4,822 7,284 Depreciation and amortisation 5,195 5,684 6,351 6,168 6,739 7,558 8,036 8,565 Tax paid (1,402) (1,743) (810) (1,461) (1,356) (165) (432) (713) Change in working capital 6,248 (3,472) 1,054 6,472 1,319 (267) 54 0 Other operational CF items 1,197 (2,501) (1,758) (4,089) (1,156) (1,131) (1,339) (1,539) Cash flow from operations 1,433 3,115 20,532 13,563 7,091 8,459 11,142 13,597 Capex (9,228) (6,776) (8,299) (17,610) (20,975) (8,667) (8,667) (8,667) Net (acquisitions)/disposals (397) 1,907 2,130 (2,737) (95) 0 0 0 Other investing CF items 7,964 3,820 (8,394) 7,286 784 0 0 0 Cash flow from investing (1,661) (1,049) (14,563) (13,061) (20,286) (8,667) (8,667) (8,667) Change in debt 3,627 2,392 (2,987) 4,780 17,654 (3,157) (1,587) (1,587) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (2,696) (143) (1,868) (3,966) (1,565) (315) (780) (1,489) Other financing CF items (242) (109) (59) (56) (37) 0 0 0 Cash flow from financing 689 2,140 (4,914) 758 16,052 (3,472) (2,367) (3,076) Forex effect/others (189) 97 156 80 (20) 0 0 0 Change in cash 272 4,303 1,211 1,340 2,837 (3,680) 108 1,854 Free cash flow (7,795) (3,661) 12,233 (4,047) (13,884) (208) 2,475 4,930 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (HKDm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 16,048 17,469 25,219 20,752 25,376 20,194 20,302 22,157 Inventory 00000000 Accounts receivable 10,647 8,161 11,433 9,859 9,922 9,848 10,484 10,484 Other current assets 0 0 0 746 911 911 911 911 Total current assets 26,695 25,630 36,652 31,357 36,209 30,954 31,697 33,551 Fixed assets 66,039 65,495 66,112 73,498 84,278 85,509 86,261 86,485 Goodwill & intangibles 7,782 7,850 8,004 8,601 9,425 9,303 9,181 9,059 Other non-current assets 14,530 14,349 17,285 23,677 25,098 30,598 30,598 30,598 Total assets 115,046 113,324 128,053 137,133 155,010 156,364 157,737 159,693 Short-term debt 4,255 7,828 8,704 8,562 8,157 6,587 6,587 6,587 Accounts payable 26,371 21,040 24,939 27,077 27,051 26,711 27,400 27,400 Other current liabilities 2,129 943 1,541 1,368 687 687 687 687 Total current liabilities 32,755 29,811 35,184 37,007 35,895 33,985 34,674 34,674 Long-term debt 36,025 34,814 30,925 34,773 51,389 51,802 50,215 48,628 Other non-current liabilities 9,437 6,314 7,515 9,409 10,420 11,287 9,948 8,408 Total liabilities 78,217 70,939 73,624 81,189 97,704 97,073 94,837 91,711 Share capital 787 787 787 787 787 787 787 787 Reserves/R.E./others 35,922 41,451 53,487 55,022 56,399 58,313 61,788 66,668 Shareholders' equity 36,709 42,238 54,274 55,809 57,186 59,100 62,575 67,455 Minority interests 120 147 155 135 120 191 326 527 Total equity & liabilities 115,046 113,324 128,053 137,133 155,010 156,364 157,737 159,693 EV 67,878 69,385 54,746 57,931 68,916 73,011 71,451 68,212 Net debt/(cash) 24,232 25,173 14,410 22,583 34,170 38,195 36,500 33,059 BVPS (HKD) 9.334 10.737 13.797 14.187 14.537 15.023 15.907 17.147

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 14.9 (22.6) 33.7 9.9 1.0 (0.7) 6.5 8.1 EBITDA (YoY) (36.8) 23.4 89.1 (35.2) (8.9) 21.2 21.5 15.6 Operating profit (YoY) (94.0) 318.9 576.7 (65.9) (56.2) 72.4 90.2 41.2 Net profit (YoY) n.a. n.a. 1,454.4 (63.0) (74.8) 109.9 89.1 49.2 Core EPS (fully-diluted) (YoY) n.a. n.a. 1,454.5 (63.0) (74.8) 109.9 89.1 49.2 Gross-profit margin 11.4 16.3 25.4 14.6 13.0 15.2 16.7 18.0 EBITDA margin 10.0 15.9 22.6 13.3 12.0 14.6 16.7 17.9 Operating-profit margin 0.4 2.4 12.1 3.7 1.6 2.8 5.0 6.6 Net profit margin (1.8) 1.1 12.4 4.2 1.0 2.2 3.9 5.4 ROAE n.a. 1.8 23.1 7.5 1.8 3.7 6.8 9.4 ROAA n.a. 0.6 9.2 3.1 0.7 1.4 2.6 3.9 ROCE 0.5 2.0 12.1 3.8 1.5 2.4 4.4 6.1 ROIC 0.6 2.3 14.4 4.4 1.4 2.7 4.9 6.7 Net debt to equity 66.0 59.6 26.6 40.5 59.8 64.6 58.3 49.0 Effective tax rate n.a. 5.5 9.3 12.4 27.0 6.7 9.0 9.8 Accounts receivable (days) 46.4 51.2 39.9 39.5 36.3 36.6 35.3 33.7 Current ratio (x) 0.8 0.9 1.0 0.8 1.0 0.9 0.9 1.0 Net interest cover (x) 0.4 1.9 11.0 4.9 1.8 1.9 2.9 4.4 Net dividend payout n.a. 8.4 31.1 37.2 34.4 35.0 35.0 35.0 Free cash flow yield n.a. n.a. 23.0 n.a. n.a. n.a. 4.7 9.3 Source: FactSet, Daiwa forecasts

 Company profile Cathay Pacific Airways is an international airline based in Hong Kong. As at 31 December 2012, together with Dragonair and Air Hong Kong, the company operate 187 aircraft. The Company offers scheduled cargo and passenger services to more than 110 destinations around the world, it also provides related services, including airline catering, aircraft handling, and engineering.

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Industrials / Hong Kong 316 HK Industrials / Hong Kong 9 July 2013

Orient Overseas International

Orient Overseas International Target (HKD): 64.00  61.00 Upside: 27.9% 316 HK 5 Jul price (HKD): 47.70

Boost in sentiment from likely freight-rate recovery 1 Buy (unchanged) 2 Outperform • Recent capacity cuts and upcoming peak season demand should 3 Hold help boost Asia-Europe freight rates 4 Underperform • A successful freight-rate increase and low bunker price would 5 Sell boost sentiment towards the stock • We see OOIL as better-placed than its peers to benefit from any freight rate hikes; reaffirm Buy rating

Among the shipping stocks we cover, we are more optimistic about a we like OOIL, as we think it is better sustainable industry recovery. than its peers at implementing freight-rate increases due to the

services it offers. Forecast revisions (%) Kelvin Lau Year to 31 Dec 13E 14E 15E (852) 2848 4467 We are cutting our 2013 Asia- Revenue change (2.3) (2.8) (2.9) [email protected] Europe freight-rate assumption Net profit change (11.9) (8.8) (7.6) Core EPS (FD) change (11.9) (8.8) (7.6) from a 1% YoY fall to a 7% YoY decline due to the weaker-than- Source: Daiwa forecasts ■ What's new expected pick-up in freight rates in We expect a likely increase in freight 2Q13. As a result, we cut our 2013- Share price performance rates in July and lower bunker 15E EPS by 8-12%. (HKD) (% ) prices to result in positive sentiment 60 125 54 118 towards OOIL, which we see as ■ What we recommend 48 110 better-positioned than its peers to We believe the current share price take advantage of any freight-rate 41 103 factors in lower freight rates YoY for 35 95 rise opportunities. 2013, and we expect a freight-rate Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

rise in 3Q13 and a low bunker price Orient Ov (LHS) Relative to HSI (RHS) ■ What's the impact to improve 2H13 profitability. Following the recent capacity cuts by the shipping lines in the G6 Alliance 12-month range 38.75-56.95 We lower our six-month target price Market cap (USDbn) 3.85 and the CKYH Alliance, we forecast to HKD61 (from HKD64), based on 3m avg daily turnover (USDm) 5.11 the amount of cargo carried by an unchanged 2013E PBR of 1.1x, to Shares outstanding (m) 626 Major shareholder Tung Group (68.7%) vessels on Asia-Europe routes to which we apply a 10% discount to decline by 3% YoY for July. the industry average of 1.2x for Financial summary (USD) 2010, when the industry started to However, we expect demand from Year to 31 Dec 13E 14E 15E see freight rates and volume recover. Revenue (m) 6,529 6,962 7,462 the EU to pick up in 3Q13 for We reiterate our Buy (1) rating. Operating profit (m) 349 510 717 seasonal reasons, as restocking Net profit (m) 319 475 673 activity for the Christmas and year- Core EPS (fully-diluted) 0.510 0.759 1.075 The main risks to our view would be EPS change (%) 7.6 48.9 41.6 end sales periods begins. Therefore, weaker-than-expected cargo traffic we see a good chance that freight Daiwa vs Cons. EPS (%) 1.5 (2.9) 13.9 and freight-rate increases, and PER (x) 12.1 8.1 5.7 rates will be raised substantially in higher-than-expected fuel prices. Dividend yield (%) 2.8 3.8 5.1 July, as rates currently are well DPS 0.174 0.237 0.316 PBR (x) 0.8 0.8 0.7 below the break-even levels of many ■ How we differ of the shipping companies. EV/EBITDA (x) 8.9 7.0 5.2 Our 2015E EPS is 14% higher than ROE (%) 6.9 9.7 12.6

that of the Bloomberg consensus, as Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Avg freight rate (USD/TEU) 1,227.0 924.0 1,178.0 1,098.6 1,130.6 1,129.6 1,168.1 1,210.4 Lifting volume ('000 TEU) 4,834.7 4,158.5 4,767.7 5,033.1 5,217.2 5,278.3 5,459.2 5,664.2 Bunker price (USD/ton) 511.0 375.0 458.0 624.0 664.0 610.0 600.0 600.0 Avg freight rate growth (%) 9.6 (24.7) 27.5 (6.7) 2.9 (0.1) 3.4 3.6 Lifting volume growth (%) 5.1 (14.0) 14.6 5.6 3.7 1.2 3.4 3.8 Bunker price growth (%) 45.4 (32.0) 29.7 36.2 6.4 (8.1) (1.6) 0.0 Vessel capacity growth (%) 5.7 (16.1) 22.6 8.3 8.8 7.8 9.0 3.3

 Profit and loss (USDm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Container transportation and logistics R 6,503 4,326 6,009 5,987 6,433 6,503 6,936 7,436 Rental income and others 28 24 25 25 26 26 26 26 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 6,531 4,350 6,033 6,012 6,459 6,529 6,962 7,462 Other income 32 9 45 64 118 86 86 86 COGS (5,469) (4,060) (4,405) (5,228) (5,560) (5,552) (5,765) (5,998) SG&A (471) (405) (485) (402) (441) (446) (475) (509) Other op.expenses (226) (227) (269) (271) (248) (269) (298) (324) Operating profit 398 (332) 919 175 329 349 510 717 Net-interest inc./(exp.) (81) (35) (29) (26) (33) (30) (27) (27) Assoc/forex/extraord./others 6 6 9 14 15 15 15 15 Pre-tax profit 323 (362) 899 162 311 334 498 705 Tax (25) (14) (29) (23) (14) (15) (22) (31) Min. int./pref. div./others (25) (26) 997 42 (1) (1) (1) (2) Net profit (reported) 272 (402) 1,867 182 296 319 475 673 Net profit (adjusted) 294 (378) 862 139 296 319 475 673 EPS (reported)(USD) 0.435 (0.643) 2.983 0.290 0.474 0.510 0.759 1.075 EPS (adjusted)(USD) 0.470 (0.604) 1.378 0.222 0.474 0.510 0.759 1.075 EPS (adjusted fully-diluted)(USD) 0.470 (0.604) 1.378 0.222 0.474 0.510 0.759 1.075 DPS (USD) 0.110 0.000 2.838 0.070 0.118 0.174 0.237 0.316 EBIT 398 (332) 919 175 329 349 510 717 EBITDA 543 (127) 1,166 409 552 594 784 1,017

 Cash flow (USDm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 323 (362) 899 162 311 334 498 705 Depreciation and amortisation 189 214 266 256 247 269 298 324 Tax paid (16) (8) (8) (33) (18) (17) (24) (33) Change in working capital (217) (205) (2) (195) (132) (119) (127) (131) Other operational CF items 69 9 20 55 18 14 12 12 Cash flow from operations 348 (352) 1,175 246 425 482 656 877 Capex (409) (376) (218) (744) (737) (1,010) (810) (610) Net (acquisitions)/disposals 15 (50) 2,108 72 (30) 4 4 4 Other investing CF items 149 97 (2,587) 2,614 (107) (5) (35) (40) Cash flow from investing (245) (329) (698) 1,942 (875) (1,011) (841) (646) Change in debt 504 525 584 282 627 300 300 300 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (126) (29) (325) (1,500) (30) (75) (110) (149) Other financing CF items (551) (249) (612) (274) (459) (556) (356) (314) Cash flow from financing (172) 247 (353) (1,492) 138 (331) (166) (163) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (68) (435) 124 695 (312) (860) (351) 68 Free cash flow (60) (728) 956 (498) (313) (528) (154) 267 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (USDm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 1,805 1,225 3,852 2,099 1,862 1,083 813 962 Inventory 90 84 96 150 154 155 160 166 Accounts receivable 336 275 358 356 426 429 452 478 Other current assets 1,020 1,422 250 235 324 324 354 389 Total current assets 3,250 3,006 4,556 2,839 2,765 1,992 1,779 1,995 Fixed assets 3,781 3,798 3,860 4,205 4,665 5,207 5,571 5,759 Goodwill & intangibles 47 53 47 40 39 38 37 36 Other non-current assets 623 473 612 649 796 982 1,155 1,278 Total assets 7,702 7,330 9,075 7,733 8,265 8,219 8,542 9,067 Short-term debt 143 432 248 439 556 356 314 315 Accounts payable 203 232 261 330 785 352 364 377 Other current liabilities 674 527 518 395 12 445 445 445 Total current liabilities 1,020 1,192 1,027 1,164 1,352 1,154 1,123 1,136 Long-term debt 2,183 2,136 2,416 2,233 2,326 2,270 2,256 2,241 Other non-current liabilities 77 34 77 79 72 72 72 72 Total liabilities 3,280 3,362 3,520 3,476 3,750 3,495 3,450 3,449 Share capital 63 63 63 63 63 63 63 63 Reserves/R.E./others 4,324 3,882 5,486 4,188 4,447 4,655 5,021 5,546 Shareholders' equity 4,387 3,945 5,548 4,251 4,509 4,717 5,083 5,608 Minority interests 34247767810 Total equity & liabilities 7,702 7,330 9,075 7,733 8,265 8,219 8,542 9,067 EV 4,338 5,152 2,596 4,347 4,756 5,280 5,495 5,334 Net debt/(cash) 522 1,343 (1,188) 573 1,020 1,543 1,757 1,594 BVPS (USD) 7.010 6.303 8.866 6.793 7.206 7.538 8.123 8.962

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 15.6 (33.4) 38.7 (0.4) 7.4 1.1 6.6 7.2 EBITDA (YoY) (28.4) n.a. n.a. (64.9) 34.8 7.7 32.0 29.7 Operating profit (YoY) (42.1) n.a. n.a. (81.0) 88.2 6.1 46.2 40.7 Net profit (YoY) (46.7) n.a. n.a. (83.9) 113.8 7.6 48.9 41.6 Core EPS (fully-diluted) (YoY) (46.7) n.a. n.a. (83.9) 113.8 7.6 48.9 41.6 Gross-profit margin 16.3 6.7 27.0 13.0 13.9 15.0 17.2 19.6 EBITDA margin 8.3 n.a. 19.3 6.8 8.5 9.1 11.3 13.6 Operating-profit margin 6.1 n.a. 15.2 2.9 5.1 5.3 7.3 9.6 Net profit margin 4.5 (8.7) 14.3 2.3 4.6 4.9 6.8 9.0 ROAE 6.9 n.a. 18.2 2.8 6.8 6.9 9.7 12.6 ROAA 3.9 n.a. 10.5 1.6 3.7 3.9 5.7 7.6 ROCE 6.1 n.a. 12.5 2.3 4.6 4.7 6.8 9.1 ROIC 7.8 (6.5) 18.4 3.3 6.1 5.7 7.4 9.8 Net debt to equity 11.9 34.0 net cash 13.5 22.6 32.7 34.6 28.4 Effective tax rate 7.7 n.a. 3.2 14.2 4.4 4.4 4.4 4.4 Accounts receivable (days) 21.5 25.6 19.1 21.7 22.1 23.9 23.1 22.7 Current ratio (x) 3.2 2.5 4.4 2.4 2.0 1.7 1.6 1.8 Net interest cover (x) 4.9 n.a. 31.6 6.7 10.0 11.8 18.8 26.6 Net dividend payout 25.3 n.a. 95.1 24.1 25.0 34.2 31.2 29.4 Free cash flow yield n.a. n.a. 24.8 n.a. n.a. n.a. n.a. 6.9 Source: FactSet, Daiwa forecasts

 Company profile OOIL is a Hong Kong-based container-shipping company with an operating capacity of 452,246 TEUs. In the past decade, the company entered the China property market, but announced on 18 January 2010 that it would exit the property-development business by disposing of this business.

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Industrials / China 1052 HK Industrials / China 9 July 2013

Yuexiu Transport Infrastructure

Yuexiu Transport Infrastructure Target (HKD): 4.68  4.45 Upside: 19.3% 1052 HK 5 Jul price (HKD): 3.73

Should benefit from a change in pricing policy 1 Buy 2 Outperform (unchanged) • We expect more good news from the toll-by-weight policy and 3 Hold asset acquisitions in 2H13 4 Underperform • Near-term earnings should be supported by improving 5 Sell profitability of its new asset • The 2013E dividend yield of 7.4% looks attractive and is likely to limit any share-price downside

reduced losses YoY for 2013. its outlook. Our 2013E EPS is 13.5% Meanwhile, the recent introduction lower than that of Bloomberg of restrictions on the size of trucks in consensus as we factor in the recent Guangzhou city should mean a rise traffic data.

in truck traffic on YTI’s Guangzhou Forecast revisions (%) Kelvin Lau Northern Second Ring Expressway Year to 31 Dec 13E 14E 15E (852) 2848 4467 in 2H13. Revenue change (2.9) (3.0) (3.1) [email protected] Net profit change (6.1) (5.5) (5.3) Core EPS (FD) change (6.1) (5.5) (5.3) Factoring in the January-May traffic and revenue data, we cut our 2013- Source: Daiwa forecasts ■ What's new 15 EPS forecasts by 5-6%. We believe YTI will benefit from an Share price performance improved pricing policy in the ■ What we recommend (HKD) (% ) sector, the likely implementation of Following the cuts to our forecasts, 4.5 115 a toll-by-weight system in 4.2 106 we lower our DCF-based six-month 3.9 98 Guangdong Province, and the target price to HKD4.45 from contributions from newly acquired 3.5 89 HKD4.68. We maintain our 3.2 80 toll roads and asset acquisitions. Outperform (2) rating. Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Yuexiu Trn (LHS) Relative to HSI (RHS) ■ What's the impact The stock is trading currently at an We expect the current review of toll- average 2013-14E PER of 9.3x, road charges by the government to 12-month range 3.34-4.49 which is in line with its past-five- Market cap (USDbn) 0.80 be positive for the sector as it should year average PER of 9.3x. However, 3m avg daily turnover (USDm) 0.44 provide benchmarks for future tariff as we forecast EPS growth of 17-31% Shares outstanding (m) 1,673 Major shareholder uexiu Enterprises (Holding) Ltd. (60.7%) rises. Meanwhile, the potential YoY for 2013-15 and a continuous introduction of a toll-by-weight ROE improvement, we believe the Financial summary (CNY) system by the end of 2013 would be current valuation is undemanding. a positive earnings driver for YTI. Year to 31 Dec 13E 14E 15E Revenue (m) 1,700 1,926 2,119 We estimate that a toll-by-weight The current 2013E dividend yield is Operating profit (m) 899 1,063 1,191 system would increase YTI’s 2014 7.4%, which should limit the share- Net profit (m) 475 609 714 net profit by 10%, assuming it came Core EPS (fully-diluted) 0.284 0.364 0.427 price downside. Risks to our view EPS change (%) 31.0 28.3 17.3 into effect by the end of this year. include lower-than-expected traffic Daiwa vs Cons. EPS (%) (13.5) (4.2) (2.3) increase and a negative pricing- PER (x) 10.4 8.1 6.9 Also, we expect newly bought toll regulation policy. Dividend yield (%) 7.4 8.2 9.5 roads, such as the Hanxiao and DPS 0.218 0.241 0.281 PBR (x) 0.6 0.5 0.5 Weixu expressways, to see strong ■ How we differ revenue growth, and the Changzhu EV/EBITDA (x) 8.1 6.6 5.7 We are one of only six brokers ROE (%) 5.7 7.0 7.7 and Qianlian expressways to see covering YTI and remain positive on Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Average daily traffic growth (%) 0.1 (1.5) 21.6 0.5 9.7 12.1 8.1 8.2 Average daily toll revenue growth (%) (1.7) 10.7 25.8 3.4 0.8 6.9 8.8 8.8 Average daily traffic (vehicles/day) 438,624.0 432,081.0 525,379.4 527,830.0 579,082.0 649,066.6 701,529.1 758,914.7 Average daily toll revenue ('000/day) 7,565.4 8,378.4 10,537.3 10,896.0 10,981.3 11,736.7 12,768.8 13,898.7

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Toll revenue Revenues 905 1,001 1,253 1,322 1,485 1,686 1,919 2,118 Construction revenue Revenues 4 19 95 311 65 65 65 65 Other Revenue (33) (34) (42) (46) (51) (51) (58) (64) Total Revenue 877 986 1,306 1,587 1,499 1,700 1,926 2,119 Other income 00000000 COGS (218) (243) (395) (552) (356) (393) (419) (447) SG&A (21) (36) (36) (59) (76) (80) (84) (88) Other op.expenses (151) (201) (241) (251) (279) (329) (361) (393) Operating profit 487 506 633 726 788 899 1,063 1,191 Net-interest inc./(exp.) (18) (37) (35) (139) (272) (272) (284) (301) Assoc/forex/extraord./others 278 113 250 272 291 307 250 305 Pre-tax profit 747 582 848 859 806 933 1,029 1,195 Tax (79) (83) (146) (134) (249) (187) (202) (230) Min. int./pref. div./others (126) (116) (167) (167) (131) (175) (194) (226) Net profit (reported) 543 382 535 558 427 571 633 738 Net profit (adjusted) 516 457 516 481 362 475 609 714 EPS (reported)(CNY) 0.325 0.229 0.319 0.334 0.255 0.341 0.378 0.441 EPS (adjusted)(CNY) 0.308 0.273 0.308 0.287 0.216 0.284 0.364 0.427 EPS (adjusted fully-diluted)(CNY) 0.308 0.273 0.308 0.287 0.216 0.284 0.364 0.427 DPS (CNY) 0.143 0.141 0.187 0.197 0.163 0.218 0.241 0.281 EBIT 487 506 633 726 788 899 1,063 1,191 EBITDA 638 707 874 977 1,067 1,227 1,423 1,584

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 747 582 848 859 806 933 1,029 1,195 Depreciation and amortisation 151 201 241 251 279 329 361 393 Tax paid (36) (62) (114) (156) (200) (187) (202) (230) Change in working capital 7 22 (33) 24 (49) 0 0 0 Other operational CF items (349) (186) (303) (220) (411) (327) (389) (426) Cash flow from operations 520 557 639 758 425 748 799 932 Capex (10) (32) (107) (778) (142) (150) (150) (149) Net (acquisitions)/disposals (9) (41) (81) (835) (52) 0 0 0 Other investing CF items 39 (244) 307 (108) (646) 358 358 358 Cash flow from investing 19 (317) 119 (1,721) (840) 208 208 209 Change in debt (204) (113) (160) 453 508 373 373 373 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (273) (257) (451) (481) (356) (331) (384) (437) Other financing CF items 0 0 0 179 22 0 0 0 Cash flow from financing (477) (370) (611) 152 173 42 (11) (64) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 61 (130) 148 (812) (242) 998 996 1,077 Free cash flow 510 525 532 (21) 283 598 649 783 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 2,098 1,954 2,112 1,298 1,057 2,055 3,052 4,129 Inventory 1117202133384347 Accounts receivable 27 95 1,154 818 702 796 902 992 Other current assets 0 255 25 0 202 202 202 202 Total current assets 2,135 2,321 3,311 2,137 1,993 3,090 4,197 5,369 Fixed assets 6,249 7,275 7,829 11,441 14,210 14,281 14,321 14,328 Goodwill & intangibles 111 187 302 308 408 408 408 408 Other non-current assets 2,219 2,370 2,400 2,260 2,099 2,099 2,099 2,099 Total assets 10,715 12,152 13,842 16,147 18,710 19,878 21,025 22,204 Short-term debt 120 313 583 598 615 615 615 615 Accounts payable 137 188 961 611 612 658 689 721 Other current liabilities 9 22 39 39 58 210 308 319 Total current liabilities 266 523 1,583 1,249 1,285 1,483 1,612 1,655 Long-term debt 863 1,226 1,472 3,766 5,812 6,185 6,558 6,930 Other non-current liabilities 720 943 1,101 1,174 1,529 1,529 1,529 1,529 Total liabilities 1,850 2,692 4,156 6,188 8,626 9,197 9,699 10,114 Share capital 148 147 147 147 147 147 147 147 Reserves/R.E./others 7,260 7,473 7,666 7,787 7,947 8,370 8,821 9,357 Shareholders' equity 7,408 7,620 7,814 7,934 8,094 8,517 8,968 9,505 Minority interests 1,457 1,841 1,873 2,026 1,990 2,165 2,359 2,585 Total equity & liabilities 10,715 12,153 13,843 16,147 18,711 19,879 21,026 22,204 EV 3,192 4,300 4,664 8,057 10,346 9,895 9,465 8,987 Net debt/(cash) (1,115) (415) (57) 3,065 5,370 4,745 4,121 3,417 BVPS (CNY) 4.427 4.554 4.670 4.742 4.838 5.090 5.360 5.681

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 0.9 12.4 32.5 21.6 (5.6) 13.4 13.3 10.0 EBITDA (YoY) 4.3 10.7 23.7 11.8 9.2 15.0 16.0 11.3 Operating profit (YoY) 28.6 3.8 25.2 14.8 8.5 14.1 18.3 12.1 Net profit (YoY) 14.3 (11.4) 12.8 (6.7) (24.7) 31.0 28.3 17.3 Core EPS (fully-diluted) (YoY) (10.7) (11.4) 12.8 (6.7) (24.7) 31.0 28.3 17.3 Gross-profit margin 75.1 75.3 69.7 65.2 76.3 76.9 78.3 78.9 EBITDA margin 72.8 71.7 66.9 61.6 71.2 72.2 73.9 74.8 Operating-profit margin 55.6 51.3 48.5 45.8 52.6 52.9 55.2 56.2 Net profit margin 58.9 46.4 39.5 30.3 24.2 27.9 31.6 33.7 ROAE 6.9 6.1 6.7 6.1 4.5 5.7 7.0 7.7 ROAA 4.7 4.0 4.0 3.2 2.1 2.5 3.0 3.3 ROCE 4.9 4.8 5.6 5.6 5.1 5.3 5.9 6.2 ROIC 5.6 5.2 5.6 5.4 3.8 4.7 5.5 6.2 Net debt to equity net cash net cash net cash 38.6 66.3 55.7 46.0 35.9 Effective tax rate 10.5 14.3 17.3 15.6 30.8 20.0 19.7 19.2 Accounts receivable (days) 7.1 22.4 174.6 226.7 185.0 160.8 160.8 163.1 Current ratio (x) 8.0 4.4 2.1 1.7 1.6 2.1 2.6 3.2 Net interest cover (x) 27.0 13.8 18.2 5.2 2.9 3.3 3.7 4.0 Net dividend payout 44.0 61.7 58.4 58.9 63.7 63.7 63.7 63.7 Free cash flow yield 10.3 10.6 10.8 n.a. 5.7 12.1 13.2 15.9 Source: FactSet, Daiwa forecasts

 Company profile Formerly GZI Transportation, Yuexiu Transport Infrastructure (YTI) is engaged in the investment, operation and management of expressways, national highways and bridges in China, mainly in Guangdong Province.

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Industrials / China 753 HK Industrials / China 9 July 2013

Air China

Air China Target (HKD): 8.00  7.50 Upside: 41.8% 753 HK 5 Jul price (HKD): 5.29

Profitability looks set to improve in 2H13 1 Buy (unchanged) 2 Outperform • We expect Air China’s 1H13 net profit to decline by 18% YoY due 3 Hold to a weak domestic passenger yield 4 Underperform • But we believe the 2H13 outlook for net profit is much better, 5 Sell backed by the earnings contribution of Cathay Pacific • We reaffirm our Buy rating and believe the worst is now behind Air China

for 2013. Management previously more positive view of AC’s earnings guided for respective 15% YoY and outlook for 2H13 and the traffic and 13% YoY increases. yield recovery we expect in 2014.

CX’s management recently gave Forecast revisions (%) Kelvin Lau bullish guidance on CX’s profitability Year to 31 Dec 13E 14E 15E (852) 2848 4467 and forecast a recovery in long-haul Revenue change (5.9) (6.5) (6.5) [email protected] traffic in 2H13. Both factors should be Net profit change (16.1) (9.1) (1.6) Core EPS (FD) change (16.1) (9.1) (1.6) positive for AC, which has a 29.99% stake in CX (as at end-2012). AC also Source: Daiwa forecasts ■ What's new stands to benefit from the recovery in Although we expect weak 1H13 results traffic on Japan routes that we Share price performance for Air China (AC), we believe an forecast for 2H13. (HKD) (% ) improved earnings outlook for Cathay 7.5 135 6.8 124 Pacific Airways (CX) (293 HK, ■ What we recommend 6.0 113 HKD13.5, Buy [1]), along with a likely We reduce our 2013-15E EPS by 2- recovery in passenger yields and 5.3 101 16%, mainly to factor in our 4.5 90 recovery in traffic on Japan routes, expectation of a weak 1H13 net profit. Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 will drive AC’s net profit in 2H13. In turn, our six-month target price Air China (LHS) Relative to HSI (RHS) declines to HKD7.50 (from ■ What's the impact HKD8.00), based on an unchanged Following our recent meeting with 12-month range 4.50-7.39 PBR of 1.4x for 2013E, in line with the Market cap (USDbn) 8.28 AC’s management, we are revising our industry’s adjusted average PBR for 3m avg daily turnover (USDm) 10.14 forecasts and assumptions for 2013- 2010. We assume an international jet- Shares outstanding (m) 12,137 Major shareholder CNAHC (51.5%) 15. For 1H13, we now expect AC to fuel price of USD120/bbl for 2013E report an 8% YoY decline in its net and USD118/bbl for 2014-15E. We Financial summary (CNY) profit to CNY869m, owing mainly to a reaffirm our Buy (1) rating, as we weak domestic yield. Still, we think Year to 31 Dec 13E 14E 15E believe 2H13 will bring a much better Revenue (m) 109,587 119,684 131,568 AC’s domestic peers face much larger earnings outlook for AC, together with Operating profit (m) 9,111 10,275 11,374 declines in their 1H13 net profits, with potential share-price catalysts. Risks Net profit (m) 5,332 6,818 8,136 some likely to post net losses. Core EPS (fully-diluted) 0.436 0.557 0.665 to our call include lower-than- EPS change (%) 20.0 27.9 19.3 expected traffic and yield increases, In 2H13, we expect management to Daiwa vs Cons. EPS (%) 2.5 9.1 7.1 and a higher-than-expected jet-fuel PER (x) 9.6 7.5 6.3 scale back its capacity-expansion price rise. Dividend yield (%) 1.1 1.3 1.6 plans in a bid to boost yields. We now DPS 0.044 0.056 0.067 PBR (x) 1.0 0.9 0.8 assume AC’s domestic and ■ How we differ EV/EBITDA (x) 4.7 4.2 3.6 international passenger capacity will Our revised 2014E EPS is 9% above increase by 10% and 5%, respectively, ROE (%) 10.1 11.5 12.3 the Bloomberg consensus, given our Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Overall RPK growth (%) (1.8) 9.8 40.0 16.8 5.1 9.2 7.9 8.0 Overall RFTK growth (%) (6.8) (2.3) 37.2 0.1 3.3 7.0 10.0 10.0 Overall ASK growth (%) 2.9 7.4 33.9 14.8 6.5 8.5 7.9 8.4 Overall AFTK growth (%) (7.5) 2.4 20.7 4.1 3.6 5.0 9.0 10.0 Overall PLF (%) 74.9 76.5 80.0 81.5 80.4 80.9 80.9 80.6 Overall CLF (%) 56.8 54.2 61.6 59.3 59.1 60.3 60.8 60.8 Overall passenger yield growth (%) 1.8 (10.3) 14.0 4.9 (1.0) (0.0) 1.2 1.8 Cargo Yield growth (%) 5.1 (23.1) 21.0 (3.2) (6.1) 0.0 2.0 2.0 Int'l jet-fuel price (USD/bbl) 122.1 70.1 90.1 126.0 126.9 120.0 118.0 118.0

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Passenger revenue 43,352 42,695 68,138 83,510 86,899 94,857 103,554 113,867 Cargo revenue 7,185 5,396 10,072 9,833 8,421 9,010 10,110 11,343 Other Revenue 2,342 2,435 4,119 4,813 5,456 5,720 6,020 6,358 Total Revenue 52,879 50,527 82,329 98,157 100,775 109,587 119,684 131,568 Other income (3,692) (4,101) (6,241) (7,742) (6,566) (7,665) (8,926) (10,473) COGS (44,758) (37,243) (56,291) (72,078) (75,805) (80,638) (87,192) (95,313) SG&A 00000000 Other op.expenses (6,365) (7,051) (8,569) (9,561) (10,376) (12,173) (13,290) (14,407) Operating profit (1,937) 2,131 11,227 8,775 8,028 9,111 10,275 11,374 Net-interest inc./(exp.) (1,696) (1,174) (1,389) (1,354) (2,163) (2,105) (1,848) (1,810) Assoc/forex/extraord./others (7,344) 4,109 4,995 1,933 710 596 1,135 1,701 Pre-tax profit (10,978) 5,066 14,834 9,355 6,576 7,603 9,562 11,265 Tax 1,611 (263) (2,498) (2,292) (1,648) (1,887) (2,266) (2,569) Min. int./pref. div./others 111 51 (331) 20 (291) (338) (431) (514) Net profit (reported) (9,256) 4,854 12,005 7,082 4,637 5,378 6,865 8,182 Net profit (adjusted) (4,827) 2,245 10,790 6,321 4,409 5,332 6,818 8,136 EPS (reported)(CNY) (0.780) 0.410 1.031 0.582 0.382 0.440 0.561 0.669 EPS (adjusted)(CNY) (0.407) 0.190 0.927 0.520 0.363 0.436 0.557 0.665 EPS (adjusted fully-diluted)(CNY) (0.407) 0.190 0.927 0.520 0.363 0.436 0.557 0.665 DPS (CNY) 0.000 0.000 0.118 0.118 0.044 0.044 0.056 0.067 EBIT (1,937) 2,131 11,227 8,775 8,028 9,111 10,275 11,374 EBITDA 7,276 11,979 23,997 22,937 22,631 25,808 28,386 30,946

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax (10,978) 5,066 14,834 9,355 6,576 7,603 9,562 11,265 Depreciation and amortisation 6,365 7,051 8,569 9,561 10,376 12,173 13,290 14,407 Tax paid (650) 28 (503) (3,466) (3,072) (1,887) (2,266) (2,569) Change in working capital 3,302 (644) 678 6,798 (3,204) 1,767 243 286 Other operational CF items 6,954 (6,037) (5,213) (2,577) (1,216) (702) (1,441) (2,200) Cash flow from operations 4,994 5,465 18,366 19,670 9,460 18,954 19,388 21,190 Capex (7,552) (7,916) (17,246) (22,750) (14,853) (15,000) (15,000) (15,000) Net (acquisitions)/disposals 159 (165) 1,928 3,914 311 0 0 0 Other investing CF items 191 (4,585) 1,260 (2,833) 3,013 296 498 691 Cash flow from investing (7,202) (12,666) (14,058) (21,669) (11,529) (14,704) (14,502) (14,309) Change in debt 3,866 6,813 1,042 92 3,199 4,566 7,243 7,243 Net share issues/(repurchases) 0 0 6,421 0 0 1,051 0 0 Dividends paid (838) 0 0 (1,524) (1,523) (777) (538) (686) Other financing CF items (157) 136 0 0 0 0 0 0 Cash flow from financing 2,870 6,948 7,463 (1,432) 1,676 4,841 6,706 6,557 Forex effect/others (190) (20) (71) (161) (61) (61) (61) (61) Change in cash 472 (273) 11,700 (3,593) (454) 9,030 11,530 13,376 Free cash flow (2,558) (2,451) 1,120 (3,080) (5,393) 3,954 4,388 6,190 Source: FactSet, Daiwa forecasts

- 49 - China Transportation Sector 9 July 2013

Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 2,987 2,707 14,402 15,457 12,048 24,072 35,602 48,978 Inventory 1,243 1,385 1,609 1,810 1,637 1,637 1,637 1,637 Accounts receivable 1,850 2,054 3,092 2,701 3,010 3,273 3,273 3,273 Other current assets 4,337 2,405 3,873 3,385 5,746 6,093 6,093 6,093 Total current assets 10,418 8,551 22,976 23,353 22,440 35,075 46,605 59,982 Fixed assets 71,821 75,045 96,153 112,399 125,370 130,196 133,906 136,499 Goodwill & intangibles 407 396 1,699 1,348 1,370 1,370 1,370 1,370 Other non-current assets 17,756 23,927 37,942 38,749 38,411 37,951 37,857 37,763 Total assets 100,401 107,919 158,770 175,850 187,591 204,593 219,738 235,613 Short-term debt 19,395 20,615 27,706 30,825 34,167 31,490 31,490 31,490 Accounts payable 6,924 6,046 8,100 10,417 9,355 10,134 10,134 10,134 Other current liabilities 16,407 10,538 16,578 20,089 15,824 17,227 17,227 17,227 Total current liabilities 42,725 37,199 52,385 61,332 59,346 58,851 58,851 58,851 Long-term debt 33,824 42,688 58,221 58,590 67,731 74,974 82,217 89,461 Other non-current liabilities 3,396 4,078 6,793 7,603 8,237 11,640 12,784 13,406 Total liabilities 79,945 83,965 117,398 127,525 135,313 145,466 153,853 161,718 Share capital 12,251 12,251 12,892 12,892 12,892 13,085 13,085 13,085 Reserves/R.E./others 7,691 11,665 28,546 33,224 36,767 43,085 49,412 56,908 Shareholders' equity 19,943 23,916 41,438 46,116 49,659 56,170 62,497 69,993 Minority interests 514 39 (67) 2,210 2,619 2,957 3,388 3,902 Total equity & liabilities 100,401 107,919 158,770 175,850 187,591 204,593 219,738 235,613 EV 95,194 99,168 107,991 113,492 129,153 122,033 118,177 112,558 Net debt/(cash) 50,231 60,595 71,525 73,958 89,850 82,392 78,105 71,973 BVPS (CNY) 1.628 1.952 3.214 3.577 3.852 4.293 4.776 5.349

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 3.9 (4.4) 62.9 19.2 2.7 8.7 9.2 9.9 EBITDA (YoY) (37.4) 64.6 100.3 (4.4) (1.3) 14.0 10.0 9.0 Operating profit (YoY) n.a. n.a. 426.9 (21.8) (8.5) 13.5 12.8 10.7 Net profit (YoY) n.a. n.a. 380.7 (41.4) (30.3) 20.9 27.9 19.3 Core EPS (fully-diluted) (YoY) n.a. n.a. 388.7 (43.9) (30.1) 20.0 27.9 19.3 Gross-profit margin 15.4 26.3 31.6 26.6 24.8 26.4 27.1 27.6 EBITDA margin 13.8 23.7 29.1 23.4 22.5 23.6 23.7 23.5 Operating-profit margin n.a. 4.2 13.6 8.9 8.0 8.3 8.6 8.6 Net profit margin (9.1) 4.4 13.1 6.4 4.4 4.9 5.7 6.2 ROAE n.a. 10.2 33.0 14.4 9.2 10.1 11.5 12.3 ROAA n.a. 2.2 8.1 3.8 2.4 2.7 3.2 3.6 ROCE n.a. 2.6 10.5 6.6 5.5 5.7 6.0 6.1 ROIC (2.8) 2.6 9.5 5.6 4.6 4.8 5.5 6.1 Net debt to equity 251.9 253.4 172.6 160.4 180.9 146.7 125.0 102.8 Effective tax rate n.a. 5.2 16.8 24.5 25.1 24.8 23.7 22.8 Accounts receivable (days) 16.0 14.1 11.4 10.8 10.3 10.5 10.0 9.1 Current ratio (x) 0.2 0.2 0.4 0.4 0.4 0.6 0.8 1.0 Net interest cover (x) n.a. 1.8 8.1 6.5 3.7 4.3 5.6 6.3 Net dividend payout n.a. 0.0 11.5 20.3 11.5 10.0 10.0 10.0 Free cash flow yield n.a. n.a. 2.2 n.a. n.a. 7.8 8.7 12.2 Source: FactSet, Daiwa forecasts

 Company profile As at the end of December 2012, Air China was the largest commercial airline in China, based on market capitalisation, and operated 461 aircraft. CNAHC has a 51.5% stake in Air China.

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Industrials / China 1055 HK Industrials / China 9 July 2013

China Southern Airlines

China Southern Airlines Target (HKD): 4.60  4.20 Upside: 39.5% 1055 HK 5 Jul price (HKD): 3.01

Undemanding valuation with improving 2H13 outlook 1 Buy (from Outperform) 2 Outperform • Upgrading to Buy on the back of undemanding valuation and 3 Hold improving industry outlook in 2H13E 4 Underperform • We forecast a 67% YoY net-profit decline for 1H13 due to a fall in 5 Sell the domestic passenger yield • However, we expect CSA to benefit from a gradual recovery in domestic passenger demand and a low fuel price in 2H13

Factoring in our expectation of weak are cautious on passenger-yield 1H13 results, we cut our 2013-15 growth for 2013E. However, we see a EPS forecasts by 10-24%. better earnings recovery in 2H13E.

■ What we recommend Forecast revisions (%) Kelvin Lau On the back of our forecast cuts, we Year to 31 Dec 13E 14E 15E (852) 2848 4467 lower our six-month target price to Revenue change (2.3) (3.3) (3.3) [email protected] HKD4.20 (from HKD4.60). Net profit change (10.4) (19.6) (24.4) Core EPS (FD) change (10.4) (19.6) (24.4) Still, CSA’s share price is now close Source: Daiwa forecasts ■ What's new to its past-three-year low. Its current While we expect weak 1H13 revenue 2013E PBR of 0.7x is well below its Share price performance and earnings for China Southern past-five-year average of 1.1x. As (HKD) (% ) Airlines (CSA), we believe this is such, we believe the likely weak 4.7 115 already reflected in its share price 1H13 results are already priced in. 4.3 106 and that the stock looks more We expect a gradual recovery in 3.9 98 attractively valued now than in the 3.4 89 domestic passenger demand and a 3.0 80 recent past. lower jet-fuel price to help improve Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

profitability for 2H13. Given this, we Ch South (LHS) Relative to HSI (RHS) ■ What's the impact upgrade our rating on CSA to Buy For 1H13, we forecast CSA’s net (1), from Outperform (2). 12-month range 3.00-4.68 profit to decline by 67% YoY to Market cap (USDbn) 4.00 CNY138m, due mainly to a likely Our new target price is based on a 3m avg daily turnover (USDm) 5.73 weaker-than-expected increase in target PBR of 1.0x, now at a 30% Shares outstanding (m) 10,306 the domestic passenger yield for discount (20% discount previously) Major shareholder CSA Holding (52.8%) 2Q13. As such, we reduce our 2013 to the China Aviation Sector’s domestic passenger-yield forecast to average 2010 trading PBR. We apply Financial summary (CNY) a 3% YoY decline (from a 1% YoY fall Year to 31 Dec 13E 14E 15E a greater discount due to Revenue (m) 106,474 116,678 130,098 previously). disappointing domestic demand in Operating profit (m) 3,767 4,205 4,292 1H13. The risks to our call include Net profit (m) 2,809 3,067 3,219 However, we believe the domestic lower-than-expected traffic and Core EPS (fully-diluted) 0.273 0.298 0.312 passenger yield will improve slightly yield increases, and higher-than- EPS change (%) 16.7 9.2 5.0 for 2H13, as we expect the Big-3 Daiwa vs Cons. EPS (%) (15.9) (17.3) (28.4) expected jet-fuel price rises. PER (x) 8.7 8.0 7.6 China airlines to reduce their Dividend yield (%) 2.4 2.6 2.7 capacity growth on the back of the ■ How we differ DPS 0.057 0.062 0.065 weak domestic demand in 1H13. Our 2013-15E EPS are 16-28% below PBR (x) 0.7 0.6 0.6 EV/EBITDA (x) 5.4 4.9 4.6 the Bloomberg-consensus forecasts ROE (%) 8.2 8.4 8.2 as we expect weak 1H13 results and Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Contents Financial summary  Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Overall RPK growth (%) 0.0 0.1 19.7 9.9 10.8 9.9 9.4 9.4 Overall RFTK growth (%) (0.1) (0.0) 79.4 12.2 15.0 2.6 10.7 10.0 Overall ASK growth (%) 0.0 0.1 13.8 7.5 12.2 9.4 9.4 9.4 Overall AFTK growth (%) (0.0) 0.1 49.8 10.3 8.6 2.4 10.6 10.0 Overall PLF (%) 0.7 0.8 79.2 81.0 79.9 80.3 80.3 80.3 Overall CLF (%) 0.4 0.4 49.2 50.1 53.0 53.1 53.1 53.1 Overall passenger yield growth (%) 0.0 0.0 (11.2) 14.7 7.9 (0.8) (2.3) 0.1 Cargo Yield growth (%) 0.0 (0.2) 4.1 (5.3) (1.3) (2.0) 0.0 2.0 Int'l jet-fuel price (USD/bbl) 122.1 70.1 90.1 126.0 126.9 120.0 118.0 118.0

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Passenger revenue 50,412 50,059 68,704 81,492 89,544 96,152 105,304 117,451 Cargo revenue 3,501 2,908 5,436 5,760 6,556 6,586 7,288 8,177 Other Revenue 1,375 1,835 2,355 3,143 3,414 3,736 4,087 4,471 Total Revenue 55,288 54,802 76,495 90,395 99,514 106,474 116,678 130,098 Other income 00000000 COGS (48,605) (43,340) (55,591) (69,415) (78,054) (82,331) (89,772) (101,065) SG&A (5,532) (6,014) (7,821) (9,375) (9,559) (10,686) (11,953) (13,398) Other op.expenses (5,746) (5,971) (7,065) (7,689) (8,264) (9,690) (10,748) (11,344) Operating profit (4,595) (523) 6,018 3,916 3,637 3,767 4,205 4,292 Net-interest inc./(exp.) (1,884) (1,429) (1,172) (888) (1,141) (1,232) (1,303) (1,193) Assoc/forex/extraord./others 1,755 2,384 3,243 3,902 2,242 1,946 1,990 2,038 Pre-tax profit (4,724) 432 8,089 6,930 4,738 4,480 4,892 5,136 Tax (62) 95 (1,677) (840) (954) (875) (956) (999) Min. int./pref. div./others (37) (197) (620) (980) (1,165) (691) (755) (793) Net profit (reported) (4,823) 330 5,792 5,110 2,619 2,914 3,182 3,344 Net profit (adjusted) (4,489) (1,091) 3,739 3,074 2,350 2,809 3,067 3,219 EPS (reported)(CNY) (0.735) 0.047 0.697 0.520 0.260 0.283 0.309 0.324 EPS (adjusted)(CNY) (0.684) (0.154) 0.450 0.313 0.234 0.273 0.298 0.312 EPS (adjusted fully-diluted)(CNY) (0.684) (0.154) 0.450 0.313 0.234 0.273 0.298 0.312 DPS (CNY) 0.000 0.000 0.000 0.200 0.050 0.057 0.062 0.065 EBIT (4,595) (523) 6,018 3,916 3,637 3,767 4,205 4,292 EBITDA 5,678 10,571 18,381 16,259 16,798 18,403 20,106 20,788

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax (4,724) 432 8,089 6,930 4,738 4,480 4,892 5,136 Depreciation and amortisation 5,746 5,971 7,065 7,689 8,264 9,690 10,748 11,344 Tax paid (399) (210) (193) (2,571) (1,237) (875) (956) (999) Change in working capital 2,284 3,895 (604) 3,843 1,181 1,131 1,494 1,904 Other operational CF items (1,752) (1,129) (2,915) (3,334) (1,242) (491) (535) (583) Cash flow from operations 1,155 8,959 11,442 12,557 11,704 13,936 15,644 16,803 Capex (8,364) (15,007) (13,469) (20,038) (15,733) (16,000) (15,000) (13,000) Net (acquisitions)/disposals 554 452 1,971 1,531 527 522 522 522 Other investing CF items 20 77 (70) (3,450) 3,053 (7) 1 1 Cash flow from investing (7,790) (14,478) (11,568) (21,957) (12,153) (15,485) (14,477) (12,477) Change in debt 7,332 2,000 (4,381) 7,552 2,429 607 (4,240) (4,240) Net share issues/(repurchases) 0 2,980 10,572 0 0 0 0 0 Dividends paid (28) (10) (6) (121) (1,976) (491) (555) (606) Other financing CF items 156 243 2 1,428 215 0 0 0 Cash flow from financing 7,460 5,213 6,187 8,859 668 116 (4,795) (4,846) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 825 (306) 6,061 (541) 219 (1,433) (3,628) (520) Free cash flow (7,209) (6,048) (2,027) (7,481) (4,029) (2,064) 644 3,803 Source: FactSet, Daiwa forecasts

- 52 - China Transportation Sector 9 July 2013

Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Cash & short-term investment 4,649 4,343 10,404 9,863 10,082 8,649 5,021 4,500 Inventory 1,213 1,229 1,256 1,355 1,618 1,708 1,708 1,708 Accounts receivable 2,688 2,767 3,386 7,135 3,992 4,271 4,681 5,219 Other current assets 698 1,318 813 1,132 1,095 1,005 1,005 1,005 Total current assets 9,248 9,657 15,859 19,485 16,787 15,633 12,414 12,432 Fixed assets 70,558 81,732 90,283 103,651 118,729 128,774 131,415 133,461 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 3,236 3,361 5,193 6,276 6,938 6,938 6,938 6,938 Total assets 83,042 94,750 111,335 129,412 142,454 151,344 150,767 152,832 Short-term debt 25,959 18,883 10,978 20,573 24,393 29,240 29,240 29,240 Accounts payable 3,858 7,504 5,934 9,053 7,880 8,534 9,358 10,322 Other current liabilities 11,721 11,711 15,413 14,787 16,458 17,299 18,501 20,142 Total current liabilities 41,538 38,098 32,325 44,413 48,731 55,072 57,099 59,703 Long-term debt 28,586 39,762 44,652 43,090 49,567 49,000 43,088 39,177 Other non-current liabilities 3,439 3,628 4,042 4,132 4,422 4,424 4,378 4,249 Total liabilities 73,563 81,488 81,019 91,635 102,720 108,496 104,566 103,129 Share capital 6,561 8,003 9,818 9,818 9,818 9,818 9,818 9,818 Reserves/R.E./others 460 2,348 16,999 22,357 23,021 25,444 28,043 30,750 Shareholders' equity 7,021 10,351 26,817 32,175 32,839 35,262 37,861 40,568 Minority interests 2,458 2,911 3,499 5,602 6,895 7,586 8,341 9,135 Total equity & liabilities 83,042 94,750 111,335 129,412 142,454 151,344 150,767 152,832 EV 75,578 80,735 72,060 82,178 93,144 99,548 98,020 95,422 Net debt/(cash) 49,896 54,302 45,226 53,800 63,878 69,591 67,308 63,916 BVPS (CNY) 1.070 1.293 2.731 3.277 3.186 3.422 3.674 3.936

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 1.6 (0.9) 39.6 18.2 10.1 7.0 9.6 11.5 EBITDA (YoY) (49.1) 86.2 73.9 (11.5) 3.3 9.6 9.3 3.4 Operating profit (YoY) n.a. n.a. n.a. (34.9) (7.1) 3.6 11.6 2.1 Net profit (YoY) n.a. n.a. n.a. (17.8) (23.6) 19.5 9.2 5.0 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. (30.4) (25.4) 16.7 9.2 5.0 Gross-profit margin 12.1 20.9 27.3 23.2 21.6 22.7 23.1 22.3 EBITDA margin 10.3 19.3 24.0 18.0 16.9 17.3 17.2 16.0 Operating-profit margin n.a. n.a. 7.9 4.3 3.7 3.5 3.6 3.3 Net profit margin (8.1) (2.0) 4.9 3.4 2.4 2.6 2.6 2.5 ROAE n.a. n.a. 20.1 10.4 7.2 8.2 8.4 8.2 ROAA n.a. n.a. 3.6 2.6 1.7 1.9 2.0 2.1 ROCE n.a. n.a. 7.6 4.2 3.4 3.2 3.5 3.6 ROIC (7.7) (0.8) 6.7 4.1 3.0 2.8 3.0 3.0 Net debt to equity 710.7 524.6 168.6 167.2 194.5 197.4 177.8 157.6 Effective tax rate n.a. n.a. 20.7 12.1 20.1 19.5 19.5 19.4 Accounts receivable (days) 18.9 18.2 14.7 21.2 20.4 14.2 14.0 13.9 Current ratio (x) 0.2 0.3 0.5 0.4 0.3 0.3 0.2 0.2 Net interest cover (x) n.a. n.a. 5.1 4.4 3.2 3.1 3.2 3.6 Net dividend payout n.a. 0.0 0.0 38.4 19.2 20.0 20.0 20.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. 2.6 15.5 Source: FactSet, Daiwa forecasts

 Company profile As at the end of December 2012, China Southern Airlines was the largest commercial airline in China, based on fleet size, and operated 491 aircraft. China Southern Air Holding has a 53% stake in China Southern Airlines.

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Industrials / Hong Kong 1919 HK Industrials / Hong Kong 9 July 2013

China COSCO

China COSCO Target (HKD): 4.00  4.00 Upside: 22.7% 1919 HK 5 Jul price (HKD): 3.26

More asset sales likely 1 Buy (unchanged) • We expect more asset sales in 2H13 in order for the company to 2 Outperform achieve a positive reported-basis bottom line for 2013 3 Hold • We believe sentiment towards its dry-bulk business will improve 4 Underperform in 2H13 on receding concerns about overcapacity in 2014 5 Sell • Reaffirm Buy; container-shipping freight-rate hike expected in 3Q13 and potential policy support would be catalysts

We now forecast a 2013 net loss of than the market on a profitability CNY2bn (CNY1.3bn previously), and recovery from 2H13 onwards, driven cut our 2014-15E net profit by 5-6% by a turnaround in the company’s due to the weaker-than-expected dry-bulk business.

freight-rate rises on Asia-Europe Forecast revisions (%) Kelvin Lau routes in 1H13. However, we still Year to 31 Dec 13E 14E 15E (852) 2848 4467 expect a small net profit, including Revenue change (2.0) (1.9) (1.9) [email protected] disposal gains, on a reported basis. Net profit change n.a. (6.2) (5.2) Core EPS (FD) change n.a. (6.2) (5.2)

■ What we recommend Source: Daiwa forecasts ■ What's new We reiterate our Buy (1) rating. We As a result of its weakness in recent expect positive share-price catalysts Share price performance months, China COSCO’s share price in 2H13 in the form of more details (HKD) (% ) now reflects expectations of weak of government policy support for the 4.8 110 1H13 results, in our view, while we 4.2 100 shipping industry, freight-rate hikes 3.7 90 expect improved profitability and for the company’s container- positive catalysts to emerge in 2H13. 3.1 80 shipping business in 3Q13, and a 2.6 70 recovery in investor sentiment Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 ■ What's the impact towards its dry-bulk business on the Ch COSCO (LHS) Relative to HSI (RHS) For 1H13, we forecast a net loss of back of easing concerns about CNY3.1bn for the company, industry over-capacity in 2014. excluding one-off gains. However, 12-month range 2.76-4.73 Market cap (USDbn) 4.30 including its gain from the sale of We maintain our six-month target 3m avg daily turnover (USDm) 4.21 COSCO Logistic and its share of the price at HKD4 given only a minor Shares outstanding (m) 10,216 Major shareholder China Ocean Shipping (52.8%) gain from subsidiary COSCO revision to our 2013E BVPS, and Pacific’s disposal of China remains based on a 2013E PBR of Financial summary (CNY) International Marine Container, we 1.8x, in line with the stock’s average forecast only a small net loss of Year to 31 Dec 13E 14E 15E trading PBR from 2006-10, prior to Revenue (m) 80,016 75,829 77,665 CNY187m for the half. its acquisition of COSCO Logistic. Operating profit (m) (2,472) 2,039 3,139 The main risks to our view would be Net profit (m) (2,042) 2,234 3,120 We believe management will look to Core EPS (fully-diluted) (0.200) 0.219 0.305 weaker-than-expected cargo traffic EPS change (%) n.a. n.a. 39.6 spin off more non-core assets, such and freight-rate increases, and a as office buildings and/or land, so as Daiwa vs Cons. EPS (%) n.a. n.a. 41.4 higher-than-expected fuel price. PER (x) n.a. 11.8 8.4 to boost China COSCO’s bottom line Dividend yield (%) 0.0 0.0 0.0 in 2H13. We would view this ■ How we differ DPS 0.000 0.000 0.000 positively, as resources could then PBR (x) 1.4 1.2 1.1 We are one of only two sell-side EV/EBITDA (x) 41.9 11.0 8.8 be focused on the core shipping analysts with a Buy rating for China business. ROE (%) n.a. 10.9 13.5 COSCO. We are more optimistic Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Avg freight rate (USD/TEU) 925.8 592.8 905.9 743.0 813.5 793.0 851.7 851.7 Lifting volume ('000 TEU) 5,792.6 5,234.3 6,214.0 6,910.0 8,016.2 8,676.6 9,222.7 9,407.2 Bunker price (USD/ton) 511.0 375.0 466.0 650.0 664.0 610.0 600.0 600.0 Avg freight rate growth (%) (6.4) (36.9) 51.0 (21.7) 4.2 (4.1) 4.7 0.0 Lifting volume growth (%) 1.5 (9.6) 18.7 11.2 16.0 8.2 6.3 2.0 Bunker price growth (%) 36.6 (26.6) 24.3 39.5 2.2 (8.1) (1.6) 0.0 Vessel capacity growth (%) 14.1 13.0 9.5 8.8 13.3 12.7 1.9 (0.9)

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Dry bulk shipping Revenues 70,889 26,583 31,727 22,299 14,977 13,094 14,587 14,878 Container shipping and related busines 45,108 28,130 47,385 42,927 50,995 53,197 59,197 60,741 Other Revenue 15,843 13,750 17,375 19,413 22,358 13,725 2,046 2,046 Total Revenue 131,839 68,463 96,488 84,639 88,329 80,016 75,829 77,665 Other income (2,565) 2,359 698 795 140 140 140 140 COGS (106,000) (68,941) (80,533) (85,930) (86,639) (73,653) (65,148) (65,645) SG&A (4,724) (4,670) (4,993) (5,541) (5,237) (4,832) (4,637) (4,753) Other op.expenses (4,114) (3,618) (4,011) (4,258) (4,077) (4,142) (4,145) (4,268) Operating profit 14,436 (6,408) 7,649 (10,296) (7,484) (2,472) 2,039 3,139 Net-interest inc./(exp.) (107) (723) (159) 429 (1,585) (1,513) (1,246) (1,185) Assoc/forex/extraord./others 1,341 918 1,720 2,013 1,671 4,934 1,906 1,886 Pre-tax profit 15,671 (6,214) 9,210 (7,854) (7,397) 948 2,700 3,840 Tax (2,974) (451) (1,196) (1,031) (740) (527) (61) (156) Min. int./pref. div./others (1,091) (804) (1,228) (1,610) (1,422) (65) (404) (565) Net profit (reported) 11,606 (7,468) 6,785 (10,495) (9,559) 357 2,234 3,120 Net profit (adjusted) 11,606 (7,468) 6,785 (10,495) (9,559) (2,042) 2,234 3,120 EPS (reported)(CNY) 1.136 (0.731) 0.664 (1.027) (0.936) 0.035 0.219 0.305 EPS (adjusted)(CNY) 1.136 (0.731) 0.664 (1.027) (0.936) (0.200) 0.219 0.305 EPS (adjusted fully-diluted)(CNY) 1.136 (0.731) 0.664 (1.027) (0.936) (0.200) 0.219 0.305 DPS (CNY) 0.290 0.000 0.090 0.000 0.000 0.000 0.000 0.000 EBIT 14,436 (6,408) 7,649 (10,296) (7,484) (2,472) 2,039 3,139 EBITDA 18,186 (2,951) 11,238 (6,640) (3,575) 1,663 6,177 7,400

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 15,671 (6,214) 9,210 (7,854) (7,397) 948 2,700 3,840 Depreciation and amortisation 3,749 3,457 3,589 3,656 3,908 4,135 4,138 4,261 Tax paid (4,854) (501) (290) (487) (548) (527) (61) (156) Change in working capital 7,003 (6,186) (1,715) (151) (2,896) (62) (62) (62) Other operational CF items 3,819 1,007 200 (39) 1,727 (3,169) 567 504 Cash flow from operations 25,389 (8,436) 10,994 (4,876) (5,206) 1,326 7,281 8,387 Capex (18,040) (10,729) (8,499) (8,546) (11,394) (4,150) (4,150) (4,150) Net (acquisitions)/disposals 411 352 (2,460) 1,510 (39) 14,001 (338) (338) Other investing CF items (4,942) 1,781 78 1,340 2,151 1,770 1,770 1,770 Cash flow from investing (22,571) (8,595) (10,881) (5,696) (9,282) 11,622 (2,718) (2,718) Change in debt 7,975 33,464 1,592 14,643 10,238 (1,118) (2,753) (2,753) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (2,669) (3,360) (626) (1,666) (381) 0 0 0 Other financing CF items (12,823) (885) 1,819 (1,271) 3,999 (2,586) (2,581) (2,498) Cash flow from financing (7,517) 29,219 2,785 11,707 13,856 (3,704) (5,334) (5,251) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (4,699) 12,187 2,897 1,135 (632) 9,244 (771) 418 Free cash flow 7,349 (19,165) 2,495 (13,422) (16,600) (2,824) 3,131 4,237 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 32,356 44,280 47,381 47,473 46,765 56,008 55,237 55,655 Inventory 1,539 1,783 2,117 3,387 2,731 2,731 2,731 2,731 Accounts receivable 10,543 8,700 10,961 11,899 13,564 8,818 8,371 8,567 Other current assets 650 464 152 0 54 54 54 54 Total current assets 45,088 55,227 60,610 62,759 63,114 67,611 66,393 67,007 Fixed assets 55,849 63,025 67,096 73,030 80,643 76,274 76,482 76,566 Goodwill & intangibles 186 214 210 196 202 155 107 59 Other non-current assets 18,887 20,356 23,065 21,474 21,248 12,651 12,611 12,572 Total assets 120,010 138,822 150,982 157,459 165,208 156,691 155,593 156,204 Short-term debt 3,650 7,233 5,870 21,713 14,118 10,753 10,753 10,753 Accounts payable 15,412 17,799 20,392 23,799 24,213 19,500 17,911 18,027 Other current liabilities 10,284 2,508 2,281 2,481 2,082 4,229 5,081 4,892 Total current liabilities 29,345 27,540 28,543 47,993 40,413 34,482 33,746 33,673 Long-term debt 23,296 53,117 54,927 55,314 79,086 82,286 79,286 76,286 Other non-current liabilities 5,462 4,630 5,211 3,982 4,011 4,011 4,011 4,011 Total liabilities 58,104 85,287 88,681 107,288 123,510 120,779 117,043 113,970 Share capital 10,216 10,216 10,216 10,216 10,216 10,216 10,216 10,216 Reserves/R.E./others 41,927 32,720 37,613 24,479 14,921 9,070 11,304 14,424 Shareholders' equity 52,144 42,936 47,829 34,695 25,137 19,287 21,521 24,640 Minority interests 9,763 10,599 14,472 15,475 16,561 16,625 17,030 17,594 Total equity & liabilities 120,010 138,822 150,982 157,459 165,208 156,691 155,593 156,204 EV 20,257 42,311 38,717 55,197 72,695 69,740 67,916 65,062 Net debt/(cash) (5,410) 16,070 13,416 29,553 46,439 37,031 34,802 31,384 BVPS (CNY) 5.104 4.203 4.682 3.396 2.460 1.888 2.107 2.412

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) 17.5 (48.1) 40.9 (12.3) 4.4 (9.4) (5.2) 2.4 EBITDA (YoY) (35.6) n.a. n.a. n.a. n.a. n.a. 271.4 19.8 Operating profit (YoY) (40.1) n.a. n.a. n.a. n.a. n.a. n.a. 53.9 Net profit (YoY) (40.4) n.a. n.a. n.a. n.a. n.a. n.a. 39.6 Core EPS (fully-diluted) (YoY) (47.9) n.a. n.a. n.a. n.a. n.a. n.a. 39.6 Gross-profit margin 19.6 n.a. 16.5 n.a. 1.9 8.0 14.1 15.5 EBITDA margin 13.8 n.a. 11.6 n.a. n.a. 2.1 8.1 9.5 Operating-profit margin 10.9 n.a. 7.9 n.a. n.a. n.a. 2.7 4.0 Net profit margin 8.8 (10.9) 7.0 (12.4) (10.8) (2.6) 2.9 4.0 ROAE 23.5 n.a. 15.0 n.a. n.a. n.a. 10.9 13.5 ROAA 9.8 n.a. 4.7 n.a. n.a. n.a. 1.4 2.0 ROCE 17.5 n.a. 6.5 n.a. n.a. n.a. 1.6 2.4 ROIC 24.5 (10.2) 9.2 (13.2) (8.9) (1.4) 2.7 4.1 Net debt to equity net cash 37.4 28.1 85.2 184.7 192.0 161.7 127.4 Effective tax rate 19.0 n.a. 13.0 n.a. n.a. 55.5 2.3 4.1 Accounts receivable (days) 33.0 51.3 37.2 49.3 52.6 51.0 41.4 39.8 Current ratio (x) 1.5 2.0 2.1 1.3 1.6 2.0 2.0 2.0 Net interest cover (x) 135.3 n.a. 48.0 n.a. n.a. n.a. 1.6 2.6 Net dividend payout 25.5 n.a. 13.6 n.a. n.a. 0.0 0.0 0.0 Free cash flow yield 27.9 n.a. 9.5 n.a. n.a. n.a. 11.9 16.1 Source: FactSet, Daiwa forecasts

 Company profile China COSCO is the world’s second-largest integrated shipping company in terms of capacity. The company provides a wide range of container shipping, dry-bulk shipping, logistics services, terminal and container leasing services for both international and domestic customers. As at the end of 2012, the company had 332 dry-bulk vessels with a total capacity of 30m DWT, and 174 container vessels with a total capacity of 0.76m TEUs (and an average age of 10 years)

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Industrials / Hong Kong 2866 HK Industrials / Hong Kong 9 July 2013

China Shipping Container Lines

China Shipping Container Lines Target (HKD): 2.70  2.40 Upside: 23.7% 2866 HK 5 Jul price (HKD): 1.94

Potential beneficiary of a freight- rate hike cycle 1 Buy (unchanged) 2 Outperform • CSCL stands to benefit from potential freight rate hikes in 3Q13, 3 Hold especially for its Asia-Europe routes 4 Underperform • We think its current share price already reflects likely weak 1H13 5 Sell results due to disappointingly low freight rate increases YTD • Reaffirm Buy; valuation looks undemanding, further industry capacity cuts and low bunker price should be stock catalysts

Also, the recent bunker price decline ■ How we differ should improve profitability for and Our 2014E EPS is 12% above the sentiment towards CSCL from 2H13. Bloomberg consensus, as we are more We now assume a bunker price of upbeat on a freight rate rise in 3Q13E.

USD610/tonne (formerly Forecast revisions (%) Kelvin Lau USD640/tonne) for 2013E, and Year to 31 Dec 13E 14E 15E (852) 2848 4467 USD600/tonne (formerly Revenue change (6.1) (3.4) (4.3) [email protected] USD640/tonne) for 2014-15E. Net profit change n.a. (27.1) (24.1) Core EPS (FD) change n.a. (27.1) (24.1)

■ What we recommend Source: Daiwa forecasts ■ What's new We forecast a full-year 2013 net loss We expect weak 1H13 results for of CNY709m (vs. a net profit of Share price performance China Shipping Container Lines CNY718m before), and reduce our (HKD) (% ) (CSCL), due to lower freight rate 2014-15E EPS by 24-27%, reflecting 2.7 115 increases recently than we had 2.3 103 mainly worse-than-previously- 2.0 90 expected for its Asia-Europe routes, expected profitability for CSCL’s but believe its recent share-price 1.6 78 Asia-Europe routes in 1H13E. 1.2 65 retreat reflects negative sentiment Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 on this front. We are positive about As a result of our earnings cuts, we Ch Ship CL (LHS) Relative to HSI (RHS) CSCL’s business outlook in 2H13, on lower our six-month target price to potentially better freight-rate hikes, HKD2.40 (from HKD2.70), which is industry capacity cuts, and assuming 12-month range 1.40-2.68 still based on a PBR of 0.9x, at a 20% Market cap (USDbn) 2.92 the bunker price stays low. discount to the Asia shipping 3m avg daily turnover (USDm) 8.80 industry’s average PBR of 1.2x during Shares outstanding (m) 11,683 Major shareholder China Shipping (Group) (47.5%) ■ What's the impact 2010 (an industry recovery year, like We forecast CSCL to post a net loss 2013). Our target multiple is in line Financial summary (CNY) of CNY1.3bn for 1H13 (in line with with CSCL’s past-three-year average. the CNY1.3bn net loss for 1H12), due Year to 31 Dec 13E 14E 15E We reaffirm our Buy (1) rating on Revenue (m) 32,351 35,546 37,015 mainly to weaker-than-previously- CSCL. We consider its current Operating profit (m) (515) 1,559 2,529 expected freight rates and trading valuation as undemanding, and expect Net profit (m) (709) 1,269 1,742 volume on its Asia-Europe routes. Core EPS (fully-diluted) (0.061) 0.109 0.149 a near-term share-price boost from EPS change (%) n.a. n.a. 37.3 Still, we expect the successful freight likely sustained freight rate hikes. rate hikes since 1 July to be sustained Daiwa vs Cons. EPS (%) n.m. 12.0 (16.3) PER (x) n.a. 14.1 10.3 in the coming 3Q13 peak season, given The key risks to our view would be Dividend yield (%) 0.0 0.0 0.0 capacity cuts already by liners globally lower-than-expected cargo volume DPS 0.000 0.000 0.000 and a likely seasonal pick-up in trade PBR (x) 0.7 0.7 0.6 and freight-rate rises, and a reversal of EV/EBITDA (x) 23.4 7.6 5.2 demand for the new school year and the bunker price downtrend. Christmas orders. ROE (%) n.a. 4.8 6.2 Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 China Transportation Sector 9 July 2013

Financial summary

 Key assumptions Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Avg freight rate (USD/TEU) 711.7 423.5 707.2 587.6 659.1 662.7 700.1 714.1 Lifting volume ('000 TEU) 6,998.0 6,741.8 7,208.1 7,438.0 8,030.4 8,161.9 8,488.4 8,658.2 Bunker price (USD/ton) 511.0 375.0 466.0 650.0 664.0 610.0 600.0 600.0 Avg freight rate growth (%) 1.7 (40.5) 67.0 (16.9) 12.2 0.5 5.6 2.0 Lifting volume growth (%) (4.1) (3.7) 6.9 3.2 8.0 1.6 4.0 2.0 Bunker price growth (%) 36.6 (26.6) 24.3 39.5 2.2 (8.1) (1.6) 0.0 Vessel capacity growth (%) 10.5 (0.6) 3.3 19.2 (1.3) (3.7) 3.0 0.0

 Profit and loss (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Container shipping & related business 34,616 19,503 34,499 27,909 32,154 31,912 35,060 36,476 Container terminal & related business 273 238 310 338 397 439 486 539 Other Revenue 0 0 0 0 0 0 (0) 0 Total Revenue 34,889 19,740 34,809 28,246 32,551 32,351 35,546 37,015 Other income (122) 201 291 305 1,812 399 399 399 COGS (32,507) (23,928) (28,412) (28,913) (31,255) (30,653) (31,645) (32,034) SG&A (530) (688) (840) (689) (958) (990) (1,055) (1,104) Other op.expenses (1,353) (1,558) (1,381) (1,458) (1,536) (1,622) (1,687) (1,746) Operating profit 377 (6,232) 4,466 (2,509) 613 (515) 1,559 2,529 Net-interest inc./(exp.) 64 (153) (130) (84) (366) (129) (155) (128) Assoc/forex/extraord./others (367) (64) (17) (33) (93) (93) (93) (93) Pre-tax profit 74 (6,449) 4,320 (2,626) 155 (737) 1,311 2,309 Tax 2 (22) (86) (74) 419 23 (34) (555) Min. int./pref. div./others (29) (17) (30) (43) (49) 5 (9) (12) Net profit (reported) 47 (6,489) 4,203 (2,743) 525 (709) 1,269 1,742 Net profit (adjusted) 47 (6,489) 4,203 (2,743) (385) (709) 1,269 1,742 EPS (reported)(CNY) 0.004 (0.555) 0.360 (0.235) 0.045 (0.061) 0.109 0.149 EPS (adjusted)(CNY) 0.004 (0.555) 0.360 (0.235) (0.033) (0.061) 0.109 0.149 EPS (adjusted fully-diluted)(CNY) 0.004 (0.555) 0.360 (0.235) (0.033) (0.061) 0.109 0.149 DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT 377 (6,232) 4,466 (2,509) 613 (515) 1,559 2,529 EBITDA 1,730 (4,674) 5,848 (1,051) 2,149 1,107 3,246 4,275

 Cash flow (CNYm) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Profit before tax 74 (6,449) 4,320 (2,626) 155 (737) 1,311 2,309 Depreciation and amortisation 1,353 1,558 1,381 1,458 1,536 1,622 1,687 1,746 Tax paid 00000000 Change in working capital 3,075 1,230 (93) (956) (624) (3) (132) (49) Other operational CF items (1,407) (73) (170) (270) (930) 66 36 (511) Cash flow from operations 3,095 (3,735) 5,438 (2,394) 136 948 2,902 3,495 Capex (6,755) (1,414) (2,115) (5,386) (2,115) (1,495) (1,419) (1,200) Net (acquisitions)/disposals 214 (51) 45 (161) 3,370 (20) (20) (19) Other investing CF items (2,424) 154 71 159 137 234 234 234 Cash flow from investing (8,966) (1,311) (1,999) (5,388) 1,392 (1,282) (1,206) (985) Change in debt 4,392 7,135 4,379 7,736 11,010 3,000 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (481) (5) (4) (6) (5) (5) (5) (5) Other financing CF items (2,803) (6,833) (3,966) (3,383) (10,772) (1,912) (1,938) (1,911) Cash flow from financing 1,107 296 409 4,347 233 1,083 (1,943) (1,916) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (4,763) (4,749) 3,848 (3,435) 1,761 750 (246) 594 Free cash flow (3,660) (5,148) 3,323 (7,780) (1,979) (547) 1,483 2,295 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 11,687 6,937 10,648 7,073 8,832 9,582 9,336 9,929 Inventory 472 874 883 1,206 1,238 1,194 1,228 1,228 Accounts receivable 2,265 1,573 1,792 1,801 2,264 2,250 2,472 2,574 Other current assets 429 128 194 237 590 590 590 590 Total current assets 14,853 9,513 13,518 10,318 12,924 13,616 13,626 14,322 Fixed assets 33,450 33,234 33,705 37,049 35,677 35,906 36,002 35,766 Goodwill & intangibles 13 26 26 23 29 29 29 29 Other non-current assets 1,459 1,519 1,768 2,022 2,575 2,578 2,580 2,581 Total assets 49,775 44,292 49,016 49,412 51,205 52,128 52,238 52,697 Short-term debt 4,175 2,433 3,225 5,049 1,528 1,528 1,528 1,528 Accounts payable 3,284 4,071 4,339 3,820 3,884 3,823 3,948 4,001 Other current liabilities 1,691 1,105 1,089 922 938 938 938 938 Total current liabilities 9,150 7,609 8,654 9,792 6,350 6,289 6,414 6,467 Long-term debt 4,232 8,352 8,276 10,809 15,364 16,836 15,307 13,779 Other non-current liabilities 3,897 2,354 2,124 1,911 2,017 2,244 2,479 2,660 Total liabilities 17,279 18,314 19,054 22,512 23,732 25,369 24,201 22,906 Share capital 11,683 11,683 11,683 11,683 11,683 11,683 11,683 11,683 Reserves/R.E./others 20,078 13,544 17,502 14,340 14,845 14,136 15,405 17,146 Shareholders' equity 31,761 25,227 29,185 26,023 26,529 25,819 27,088 28,829 Minority interests 735 751 777 877 945 940 949 962 Total equity & liabilities 49,775 44,292 49,016 49,412 51,205 52,128 52,238 52,697 EV 14,249 21,269 18,244 26,016 25,288 25,931 24,584 22,400 Net debt/(cash) (3,280) 3,848 853 8,785 8,060 8,782 7,500 5,378 BVPS (CNY) 2.719 2.159 2.498 2.227 2.271 2.210 2.319 2.468

 Key ratios (%) Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015E Sales (YoY) (10.7) (43.4) 76.3 (18.9) 15.2 (0.6) 9.9 4.1 EBITDA (YoY) (69.9) n.a. n.a. n.a. n.a. (48.5) 193.3 31.7 Operating profit (YoY) (91.4) n.a. n.a. n.a. n.a. n.a. n.a. 62.3 Net profit (YoY) (98.5) n.a. n.a. n.a. n.a. n.a. n.a. 37.3 Core EPS (fully-diluted) (YoY) (98.8) n.a. n.a. n.a. n.a. n.a. n.a. 37.3 Gross-profit margin 6.8 n.a. 18.4 n.a. 4.0 5.2 11.0 13.5 EBITDA margin 5.0 n.a. 16.8 n.a. 6.6 3.4 9.1 11.6 Operating-profit margin 1.1 n.a. 12.8 n.a. 1.9 n.a. 4.4 6.8 Net profit margin 0.1 (32.9) 12.1 (9.7) (1.2) (2.2) 3.6 4.7 ROAE 0.1 n.a. 15.4 n.a. n.a. n.a. 4.8 6.2 ROAA 0.1 n.a. 9.0 n.a. n.a. n.a. 2.4 3.3 ROCE 0.9 n.a. 11.4 n.a. 1.4 n.a. 3.5 5.6 ROIC 1.4 (21.1) 14.4 (7.5) 1.7 (1.5) 4.3 5.4 Net debt to equity net cash 15.3 2.9 33.8 30.4 34.0 27.7 18.7 Effective tax rate n.a. n.a. 2.0 n.a. n.a. n.a. 2.6 24.0 Accounts receivable (days) 33.5 35.5 17.6 23.2 22.8 25.5 24.2 24.9 Current ratio (x) 1.6 1.3 1.6 1.1 2.0 2.2 2.1 2.2 Net interest cover (x) n.a. n.a. 34.4 n.a. 1.7 n.a. 10.1 19.8 Net dividend payout 0.0 n.a. 0.0 n.a. 0.0 n.a. 0.0 0.0 Free cash flow yield n.a. n.a. 18.6 n.a. n.a. n.a. 8.3 12.8 Source: FactSet, Daiwa forecasts

 Company profile China Shipping Container Lines (CSCL) operates container-liner services and other related services. As at the end of 2012, CSCL operated 145 vessels with a total capacity of 595,000 TEUs. China Shipping (Group) is the company's major shareholder, with a 47.5% stake currently

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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 John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Deputy Head of Asia Pacific Research; Regional Head of Product Management Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Pranab Kumar SARMAH (852) 2848 4441 [email protected] Shipbuilding; Steel Daiwa’sRegional Head A ofsia Research Pacific Promotion Research Directory 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) Anderson CHA (82) 2 787 9185 [email protected] Christie CHIEN (852) 2848 4482 [email protected] Banking/Finance Macro Economics (Taiwan) Mike OH (82) 2 787 9179 [email protected] Jonas KAN (852) 2848 4439 [email protected] Capital Goods (Construction and Machinery) Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Sang Hee PARK (82) 2 787 9165 [email protected] Property Coordinator; Property Developers (Hong Kong) Consumer/Retail Jeff CHUNG (852) 2773 8783 [email protected] Jae H LEE (82) 2 787 9173 [email protected] Automobiles and Components (China) IT/Electronics (Tech Hardware and Memory Chips) Grace WU (852) 2532 4383 [email protected] Joshua OH (82) 2 787 9176 [email protected] Head of Greater China FIG; Banking (Hong Kong, China) IT/Electronics (Handset Components) Jerry YANG (852) 2773 8842 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Banking (Taiwan)/Diversified Financials (Taiwan and China) Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Leon QI (852) 2532 4381 [email protected] SoYoung WANG (82) 2 787 9133 [email protected] Banking (Hong Kong, China) Transportation/Logistics Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics TAIWAN Equipments and Machinery (Hong Kong, China) Mark CHANG (886) 2 8758 6245 [email protected] Winston CAO (852) 2848 4469 [email protected] Head of Research Capital Goods – Machinery (China) Steven TSENG (886) 2 8758 6252 [email protected] Bing ZHOU (852) 2773 8782 [email protected] IT/Technology Hardware (PC Hardware) Consumer/Retail (Hong Kong, China); Hotels, Restaurants and Leisure - Casinos and Gaming (Hong Kong, Macau) Christine WANG (886) 2 8758 6249 [email protected] Cris XU (852) 2773 8736 [email protected] IT/Technology Hardware (Automation); Cement; Consumer Household & Personal Products (China) Lynn CHENG (886) 2 8758 6253 [email protected] Eric CHEN (852) 2773 8702 [email protected] IT/Electronics (Semiconductor) Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Rita HSU (886) 2 8758 6254 [email protected] Felix LAM (852) 2532 4341 [email protected] Small/Mid Cap Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China) INDIA John CHOI (852) 2773 8730 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Regional Head of Small/Medium Cap; Small/Mid Cap (Regional); Head of Research; Strategy; Banking/Finance Head of Multi-Industries (Hong Kong, China); Internet (China) Navin MATTA (91) 22 6622 8411 [email protected] Joey CHEN (852) 2848 4483 [email protected] Automobiles and Components Steel (China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Capital Goods; Utilities Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional) Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group Deepak PODDAR (91) 22 6622 1016 [email protected] Thomas HO (852) 2773 8716 [email protected] Materials Custom Products Group Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities PHILIPPINES SINGAPORE Rommel RODRIGO (63) 2 813 7344 [email protected] ext 302 Adrian LOH (65) 6499 6548 [email protected] Head of Philippines Research; Strategy; Capital Goods; Materials Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Srikanth VADLAMANI (65) 6499 6570 [email protected] Banking (ASEAN) David LUM (65) 6329 2102 [email protected] Property and REITs Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)

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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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