Deutsche Bank Markets Research
Rating Company Date 25 November 2015 Sell Hongdu Aviation Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 25 Nov 2015 (CNY) 26.73 Industrials 600316.SS 600316 CH SHH 600316 Price target - 12mth (CNY) 15.00 Manufacturing 52-week range (CNY) 51.67 - 16.58
Shanghai Composite 3,616
Hopes for restructuring fully priced in; Nick Zheng, CFA Sky Hong, CFA initiating with Sell Research Analyst Research Analyst (+852) 2203 6198 (+852) 2203 6131 Organic growth not sufficient to support demanding valuation; Sell [email protected] [email protected] We initiate coverage on Hongdu Aviation, China’s largest military training aircraft (trainer) supplier, with Sell and a target price of Rmb15. While we are positive on China’s trainer upgrade cycle, we believe Hongdu's near-term Price/price relative earnings outlook remains lukewarm due to a slower-than-expected production 60 ramp-up. Substantially higher-than-peer valuation multiples are therefore 50 unjustifiable based on its organic growth. 40 Long-term beneficiary of trainer upgrade cycle, but near-term risks persists 30 In light of the accelerated progress in modernizing the PLA’s combat aircraft, 20 10 we see significant upgrade potential for China’s trainer fleet. With the 11/13 5/14 11/14 5/15 introduction of the L-15 advanced trainer model, we believe Hongdu is poised Hongdu Aviation to benefit from the PLA’s trainer upgrade cycle in the long term. That said, in Shanghai Composite (Rebased) the near term, we do not expect the kick-start of a new model cycle to restore Performance (%) 1m 3m 12m Hongdu’s earnings to their peak level due to a disruption in production caused by its factory relocation. We forecast an EPS CAGR of 17% during 2015-2017, Absolute 12.1 24.9 1.3 from a low base. Our earnings estimates are 14-22% below Bloomberg Shanghai Composite 5.9 21.9 40.8
Finance LP consensus. Source: Deutsche Bank
Scope for asset restructuring exists, but great level of uncertainty involved We believe Hongdu’s rich valuation may have been built largely upon the hopes of asset injections in relation to AVIC’s aero-equipment segment. We note that the previously-proposed injection of AVIC’s aero-equipment assets into Chengfei Integration (002190.SZ) was not completed which suggests that Hongdu may not be the vehicle for consolidation in this segment. Valuation and risks We use an EV/Sales-based valuation methodology across all A-share listed defense airframers, as their earnings are largely constricted by the current “cost-plus-5%” pricing mechanism for military products. Our target price of Rmb15 is based on an EV/Sales of 2.7x on FY16E, one s.d below its mid-cycle level to reflect near-term downside risk to earnings. There is very significant asset injection potential, but even a hypothetical >400% EPS accretion would still result in an elevated P/E of 30-40x. Key upside risks include significant asset restructuring and a better-than-expected production ramp-up of the L-15.
Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 2,860.5 3,450.7 3,631.0 4,055.9 4,558.5 EBITDA (CNYm) 169.0 203.0 228.4 274.9 345.6 Reported NPAT (CNYm) 90.9 98.7 89.9 115.1 158.6 DB EPS FD(CNY) 0.13 0.14 0.13 0.16 0.22 DB EPS growth (%) 3.8 8.6 -8.9 28.0 37.8 PER (x) 136.0 147.3 213.2 166.5 120.9 EV/EBITDA (x) 64.3 69.3 82.3 69.1 55.6 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
25 November 2015
Manufacturing Hongdu Aviation
Model updated:24 November 2015 Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E
Running the numbers Financial Summary Asia DB EPS (CNY) 0.12 0.13 0.14 0.13 0.16 0.22 Reported EPS (CNY) 0.12 0.13 0.14 0.13 0.16 0.22 China DPS (CNY) 0.01 0.04 0.01 0.04 0.05 0.07 BVPS (CNY) 6.4 6.6 6.9 7.0 7.1 7.3 Manufacturing Weighted average shares (m) 717 717 717 717 717 717 Hongdu Aviation Average market cap (CNYm) 9,876 12,367 14,538 19,168 19,168 19,168 Enterprise value (CNYm) 7,820 10,863 14,072 18,808 19,001 19,205 Reuters: 600316.SS Bloomberg: 600316 CH Valuation Metrics P/E (DB) (x) 112.7 136.0 147.3 213.2 166.5 120.9 Sell P/E (Reported) (x) 112.7 136.0 147.3 213.2 166.5 120.9 Price (25 Nov 15) CNY 26.73 P/BV (x) 2.13 2.62 4.08 3.83 3.77 3.68
Target Price CNY 15.00 FCF Yield (%) nm nm nm nm nm nm Dividend Yield (%) 0.1 0.2 0.0 0.1 0.2 0.2 52 Week range CNY 16.58 - 51.67 EV/Sales (x) 3.5 3.8 4.1 5.2 4.7 4.2 Market Cap (m) CNYm 19,168 EV/EBITDA (x) 49.8 64.3 69.3 82.3 69.1 55.6 EV/EBIT (x) 91.0 121.1 114.6 131.5 104.4 78.7 USDm 3,000 Income Statement (CNYm) Company Profile Sales revenue 2,233 2,860 3,451 3,631 4,056 4,559 Jiangxi Hongdu Aviation Industry Co., Ltd. designs, Gross profit 272 246 204 270 330 417 manufactures, and markets training planes, planes for EBITDA 157 169 203 228 275 346 agricultural and forestry uses, and other aviation products Depreciation 70 75 75 80 88 96 and spare parts. The Company also processes consumer Amortisation 2 5 5 5 5 5 products and provides aviation services. EBIT 86 90 123 143 182 244 Net interest income(expense) 16 13 -9 -38 -47 -57 Associates/affiliates 1 4 3 3 3 3 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) -1 -3 1 0 0 0 Profit before tax 102 103 119 108 138 190 Price Performance Income tax expense 14 10 18 16 21 29 Minorities 0 2 2 2 2 3 60 Other post-tax income/(expense) 0 0 0 0 0 0 50 Net profit 88 91 99 90 115 159
40 DB adjustments (including dilution) 0 0 0 0 0 0 30 DB Net profit 88 91 99 90 115 159 20 Cash Flow (CNYm) 10 Nov 13Feb 14May 14Aug 14Nov 14Feb 15May 15Aug 15 Cash flow from operations -386 -68 -401 38 10 37 Net Capex -366 -581 -848 -150 -180 -200 Hongdu Aviation Free cash flow -751 -650 -1,249 -112 -170 -163 Shanghai Composite (Rebased) Equity raised/(bought back) 0 0 0 0 0 0 Margin Trends Dividends paid -7 -9 -59 -7 -27 -35 Net inc/(dec) in borrowings -50 -10 622 169 200 200 8.0 Other investing/financing cash flows 26 207 94 12 3 -7 7.0 Net cash flow -782 -463 -592 62 7 -4 6.0 Change in working capital -522 -202 -516 -124 -194 -230
5.0 Balance Sheet (CNYm) 4.0 Cash and other liquid assets 1,481 1,110 582 644 651 647 3.0 Tangible fixed assets 1,137 1,779 2,592 2,661 2,754 2,857 12 13 14 15E 16E 17E Goodwill/intangible assets 91 139 143 138 133 128 EBITDA Margin EBIT Margin Associates/investments 642 621 736 739 742 745
Other assets 2,894 3,785 4,859 5,052 5,577 6,186 Growth & Profitability Total assets 6,245 7,435 8,911 9,234 9,856 10,563 Interest bearing debt 50 208 831 1,000 1,200 1,400 30 4 Other liabilities 1,581 2,460 3,142 3,211 3,542 3,922 25 3 Total liabilities 1,631 2,669 3,973 4,211 4,742 5,322 3 20 Shareholders' equity 4,597 4,748 4,918 5,001 5,089 5,213 2 15 2 Minorities 17 19 21 23 25 28 10 1 Total shareholders' equity 4,613 4,766 4,939 5,023 5,114 5,241 5 1 Net debt -1,431 -902 249 356 549 753 0 0 12 13 14 15E 16E 17E Key Company Metrics Sales growth (%) 22.4 28.1 20.6 5.2 11.7 12.4 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 5.1 3.8 8.6 -8.9 28.0 37.8 Solvency EBITDA Margin (%) 7.0 5.9 5.9 6.3 6.8 7.6 EBIT Margin (%) 3.8 3.1 3.6 3.9 4.5 5.4 20 20 Payout ratio (%) 8.2 31.6 7.3 30.0 30.0 30.0 10 ROE (%) 1.9 1.9 2.0 1.8 2.3 3.1 15 0 Capex/sales (%) 16.4 20.3 24.6 4.1 4.4 4.4 -10 10 Capex/depreciation (x) 5.2 7.3 10.6 1.8 1.9 2.0 -20 Net debt/equity (%) -31.0 -18.9 5.0 7.1 10.7 14.4 5 -30 Net interest cover (x) nm nm 14.3 3.8 3.9 4.3
-40 0 Source: Company data, Deutsche Bank estimates 12 13 14 15E 16E 17E
Net debt/equity (LHS) Net interest cover (RHS)
Nick Zheng, CFA +852 2203 6198 [email protected]
Page 2 Deutsche Bank AG/Hong Kong
25 November 2015
Manufacturing Hongdu Aviation
Investment thesis
Outlook
Jiangxi Hongdu Aviation Industry (“Hongdu Aviation”) is China’s largest military training aircraft supplier, with a full product spectrum spanning from primary trainers to advanced trainers.
Overall, we are positive on China’s military training aircraft market as we head into the 13th Five-Year Plan period, in light of the PLA’s urgent need for a fleet upgrade and the rising modernization level of jet fighters, which would require advanced trainers for pilot training. That said, we expect Hongdu’s earnings growth to be affected by production disruption, mainly as a result of factory relocation (to be completed in 2017). We expect its earnings growth to bottom out in 2015, followed by a gradual recovery in 2016/2017. Overall, we forecast an EPS CAGR of 17% during 2015-2017, driven in part by a weak comparison.
As Hongdu is AVIC’s only aviation-related listing platform within the aero- equipment segment (jet fighters, missiles, and trainers), we do not rule out the possibility of potential injections from AVIC but the previously-proposed asset injection of AVIC’s aero-equipment assets into Chengfei Integration (002190.SZ), albeit failed , suggest Hongdu Aviation might not necessarily be the listing consolidation platform for the segment.
Valuation
We use an EV/Sales-based valuation methodology across all A-share listed defense airframers, as their earnings are very volatile driven by the current “cost-plus-5%” pricing mechanism for military products. However, we believe this may be relaxed in the long-term as part of the government’s broad-based pricing deregulation. We believe Hongdu’s extremely high valuation multiples (at P/E of >150x and P/B of c.4x on FY16E) are unjustified in light of its organic growth prospects (17% EPS CAGR during 2015-2017E) and weak ROE generation (c.2% in FY16E). Our scenario analysis suggests that potential asset injection has been fully priced in. We therefore derive our target price of Rmb15 based on an EV/Sales of 2.7x on FY16E, which is one standard deviation below its mid-cycle average to reflect near-term earnings downside risk due to factory relocation. Our target price implies >40% downside potential to the current share price.
Risks
Key upside risks include: 1) an unexpected increase in the PLA’s procurement of trainers; 2) pricing deregulation of defense equipment (currently using a cost-plus-5-percent pricing mechanism); 3) significant asset injections from AVIC involving defense assets within the aero-equipment segment; 4) faster- than-expected factory relocation; and 5) better-than-expected export orders for trainers.
Deutsche Bank AG/Hong Kong Page 3
25 November 2015
Manufacturing Hongdu Aviation
Valuation and risks
Target price of Rmb15; hopes for asset injections already in the price
Historically, Hongdu Aviation has been trading at extremely high valuation multiples (on P/E, P/B, and EV/Sales bases) ever since 2009. However, we believe this is largely unjustified given the company’s NPAT has almost halved since 2009, while its ROE also fell sharply to a meager 2% in 2014 from 2009’s 11% as the domestic training aircraft market underwent an abrupt downturn. We noticed that Hongdu Aviation’s valuation multiple hike, despite a lack of fundamentals, coincided with the sector’s outperformance, which was largely driven by a series of asset restructurings in the sector.
In addition to the market’s excessive-optimism about Hongdu’s advanced trainer development and its potential involvement in the development of unmanned aerial vehicles (“UAVs”), we believe Hongdu’s high valuation multiples might also have been built upon the hope of a future injection of AVIC’s defense assets within the aero-equipment segment. That said, our analysis (assuming AVIC’s core aero-equipment assets are injected into Hongdu, see Figure 13) suggests that such hope has been fully priced in. In line with our valuation methodology for all A-share listed defense airframers, we derive our target price of Rmb15 based on an EV/Sales of 2.7x on FY16E, which is one standard deviation below its historical long-term mid-cycle average. Our target price implies a P/E of 93.4x.
Figure 1: Hongdu Aviation – historical 1yr fwd EV/Sales Figure 2: Hongdu Aviation – historical 1yr fwd EV/Sales (long-term) (past five years) 20.0 14.0 18.0 12.0 16.0 14.0 10.0 8.0x 12.0 8.0 10.0 7.9x
8.0 6.0 5.3x EV/Sales (x) EV/Sales EV/Sales (x) EV/Sales 6.0 5.2x 4.0 4.0 2.0 2.7x 2.0 2.5x 0.0 0.0
1yr fwd EV/Sales (x) Avg EV/Sales 1yr fwd EV/Sales (x) Avg EV/Sales +1 STDEV -1 STDEV +1 STDEV -1 STDEV
Source: Bloomberg Finance LP, Company data, Deutsche Bank estimates Source: Bloomberg Finance LP, Company data, Deutsche Bank estimates
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25 November 2015
Manufacturing Hongdu Aviation
Figure 3: Hongdu Aviation – historical 1yr fwd P/E (long- Figure 4: Hongdu Aviation – historical 1yr fwd PB vs. term) ROE (long-term)
400.0 8.0 12.0 350.0 10.0 300.0 6.0 8.0 250.0 4.3x 200.0 167.5x 4.0 6.0
2.9x
P/B (x) P/B P/E (x) P/E 150.0 4.0 (%) ROE 100.0 2.0 1.6x 2.0 50.0 19.4x 93.4x 0.0 0.0 0.0
1yr fwd P/B (x) Avg P/B 1yr fwd P/E (x) Avg P/E +1 STDEV -1 STDEV +1 STDEV -1 STDEV 1yr fwd ROE (RHS, %)
Source: Bloomberg Finance LP, Company data, Deutsche Bank estimates Source: Bloomberg Finance LP, Company data, Deutsche Bank estimates
Upside risks
We summarize below the key upside risks to our investment thesis and rating.
Sector-wise An unexpected increase in military spending
An unexpected increase in the PLA’s trainer procurement
Pricing deregulation of defense equipment (currently using a cost-plus- 5-percent pricing mechanism)
The Chinese government’s relaxation of airspace controls, which could potentially boost demand for general-purpose aircraft Company-specific A faster-than-expected factory relocation
Significant asset injections from AVIC involving defense assets within the aero-equipment segment (jet fighters, air-to-air missiles, UAVs, and Guizhou Aircraft’s trainer business)
Better-than-expected export orders for trainers (L-15 and K-8)
A better-than-expected order flow for Hongdu’s general-purpose aircraft (N-5A and N-5B)
Larger-than-expected government subsidies in relation to its factory relocation
Deutsche Bank AG/Hong Kong Page 5
25 November 2015
Manufacturing Hongdu Aviation
A leading trainer manufacturer in China
China’s prime contractor for military training aircraft
Hongdu Aviation is China’s largest trainer manufacturer, with a complete product spectrum including primary, intermediate, and advanced trainers. As of the end of 2014, 76% of China’s trainer fleet is produced by Hongdu Aviation, followed by Guizhou Aircraft with a 20% market share. The CJ-6 and K-8 are Hongdu’s two star products, which dominate China’s primary and intermediate trainer markets.
Figure 5: China’s trainer market Figure 6: China’s trainer market Figure 7: China’s trainer market share breakdown by producer (as of share breakdown by model (as of share breakdown by level of trainer end-2014) end-2014) (as of end-2014)
Guizhou JL-9 1% Aircraft JJ-7 Advanced 20% 19% 20% Xi'An Aircraft 2% HY-7 CJ-6 Primary Harbin 2% 42% 42% Aircraft 1% Shenyang Aircraft 1% JL-8/K-8 34% Hongdu Intermediate Aviation HJ-5 38% 76% 1% JJ-6 1% Source: IISS, Deutsche Bank Source: IISS, Deutsche Bank Source: IISS, Deutsche Bank
Its K-8 model is also successfully breaking into overseas markets with exports Figure 8: K-8 ownership in the to regions including Africa, Asia, and Latin America. overseas market (as of end-2014)
Zimbabwe Myanmar Tanzania Zambia 11 12 With the introduction of the L-15 advanced trainer, we believe Hongdu 6 15 4% 5% Pakistan 2% 6% Aviation is set to break into China’s advanced training aircraft market, which is Sudan 39 Ghana 12 15% 4 5% currently dominated by Guizhou Aircraft’s JJ-7 and JL-9. Sri Lanka 2% 7 Namibia 3% 4 2% Venezuela Bangladesh 15 4 6% 1% Bolivia China’s build-up of modern combat aircraft to drive 6 2% demand for advanced trainers Egypt 120 47% Although China possesses the world’s second-largest trainer fleet, after that of Source: IISS, Deutsche Bank the US, advanced trainers account for only 20% of its total trainer inventory. As the fleet of jet fighters is upgraded, the demand for new, more advanced trainers will naturally follow.
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25 November 2015
Manufacturing Hongdu Aviation
Figure 9: Comparison of fixed-wing Figure 10: Comparison of advanced Figure 11: Advanced trainers vs. trainer fleet (2014) trainers as % of trainer fleet (2014) modern jet fighters (2014)
US Russia Egypt 35% China US India South Korea 34% South Korea Japan Turkey U.S 33% Turkey UK UK Turkey 30% Russia Egypt China 30% South Korea India
Egypt China Russia 14% 0 500 1,000 1,500 2,000 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% # of fleet Basic/Intermediate Advanced % of advanced Advanced trainer/modern jet fighter
Source: IISS, Deutsche Bank. Note: Only dedicated training Source: IISS, Deutsche Bank. Note: Only dedicated training Source: IISS, Deutsche Bank. Note: Only dedicated training aircraft are included. aircraft are included. aircraft are included.
Looking ahead, we believe China’s jet fighter upgrade cycle should drive domestic demand for advanced trainers (including L-15 and JL-9). We expect a total of 140 advanced trainer units to be commissioned during 2015-2020, including 90 units of the L-15.
Our current forecast has taken into consideration the potential constraint due to its reliance on engine supply from Ukrainian Motor Sich (AL222-24F). That said, there was a total order for 250 units of such engines placed by China back in 2011, which should be sufficient for the manufacture of 125 L-15 trainer units (two turbofan engines are required for each L-15 trainer).
Figure 12: People’s Liberation Army—fixed-wing training aircraft inventory (2011-2020E) Trainers Manufacturer 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E Net +/- Primary 438 438 438 438 438 438 438 438 438 438 0 CJ-6 Hongdu Aviation 438 438 438 438 438 438 438 438 438 438 0 Intermediate 92 402 402 402 402 402 402 402 402 402 0 HJ-5 Harbin Aircraft 5 5 5 5 5 5 5 5 5 5 0 JJ-6 Shenyang Aircraft 14 14 14 14 14 14 14 14 14 14 0 JL-8/K-8 Hongdu Aviation 52 362 362 362 362 362 362 362 362 362 0 HY-7 Xi'An Aircraft 21 21 21 21 21 21 21 21 21 21 0 Advanced 66 216 216 216 226 246 266 291 321 356 140 JJ-7 Guizhou Aircraft 54 204 204 204 204 204 204 204 204 204 0 JL-9 Guizhou Aircraft 12 12 12 12 12 22 32 42 52 62 50 JL-10/L-15 Hongdu Aviation 0 0 0 0 10 20 30 45 65 90 90
Total 596 1,056 1,056 1,056 1,066 1,086 1,106 1,131 1,161 1,196 140 % of advanced 11% 20% 20% 20% 21% 23% 24% 26% 28% 30% Advanced trainer/modern jet 12% 32% 31% 30% 29% 29% 28% 28% 29% 30% fighter Annual addition 460 0 0 10 20 20 25 30 35 Source: IISS, Deutsche Bank estimates.
Deutsche Bank AG/Hong Kong Page 7
25 November 2015
Manufacturing Hongdu Aviation
Scope for further asset injection
The only listing vehicle within aero-equipment segment that currently holds aviation-related assets…
Hongdu Aviation and Chengfei Integration (002190.SZ, NC) are the two listing platforms within AVIC’s aero-equipment segment (previously known as the defense segment), which is deemed as AVIC’s core business segment specializing in research, design, manufacture, and distribution of jet fighters, trainers, unmanned aerial vehicles, missiles, etc. Major business enterprises within the segment include Chengdu Aircraft Industry, Shenyang Aircraft Industry, Guizhou Aircraft Industry, and Hongdu Aviation Industry Group.
Currently, only part of the trainer business within this segment is listed via Hongdu Aviation and its controlling shareholder AviChina. Although Chengfei Integration is counted as one of the listing platforms in AVIC’s aero-equipment segment, it is currently engaged only in car molds, aircraft molds, and frame businesses.
Figure 13: Organizational chart—AVIC’s aero-equipment segment (as of end-1H15)
SASAC
100%
Aviation Industry Corporation of China 51.26% AviChina (2357.HK) ("AVIC")
100%
36.7% AVIC Aero-Equipment
Unlisted business entities Research institutes Listed companies
8.15% 94.15% 2% 100% Shenyang Aircraft Industry Shenyang Aircraft Design Institute Hongdu Aviation (600316.SS) 43.77%
8.15% 100% 2% 100% Chengdu Aircraft Industry Chengdu Aircraft Design Institute Chengfei Integration (002190.SZ) 52.28%
100% 100% Hongdu Aviation Industry Guizhou Aircraft Design Institute
2.7% 100% Guizhou Aviation Aircraft Air-to-air Missile Research Institute
Source: Company data, Deutsche Bank
Page 8 Deutsche Bank AG/Hong Kong
25 November 2015
Manufacturing Hongdu Aviation
…but Chengfei Integration was previously selected as the consolidation platform for AVIC’s aero-equipment segment
On May 19, 2014, Chengfei Integration announced its asset injection plan to acquire Chengdu Aircraft Industry, Shenyang Aircraft Industry, and Hongdu Technology (Hongdu Aviation Industry’s missile business) through a share placement. The proposed transaction suggested that Chengfei Integration would be the consolidation platform for AVIC’s aero-equipment segment upon the completion of the asset injection.
The announcement came, to a large extent, as a negative surprise to Hongdu Aviation, as the market had previously expected Hongdu Aviation to be the consolidation platform for AVIC’s aero-equipment segment, given that the company was the only listing vehicle that held aviation-related assets at that time.
Nevertheless, the asset injection plan was later revoked by the State Administration of Science, Technology, and Industry for National Defense (“SASTIND”) in December 2014 due to concerns about monopolies.
While it is unclear whether AVIC will continue to pursue such a restructuring plan in the near future, we believe that asset restructuring, regardless of which form it takes, is bound to happen in the medium to longer term if AVIC is committed to further increasing its asset securitization level.
What if Hongdu Aviation is the consolidation platform?
Hypothetical analysis suggests this scenario is fully included in the stock price This section aims to quantify the potential impact on Hongdu Aviation’s earnings and valuation metrics under the hypothetical scenario that Hongdu Aviation is the listing platform for AVIC’s aero-equipment segment. In this scenario, we assume that Hongdu Aviation, rather than Chengfei Integration, will acquire Chengdu Aircraft Industry, Shenyang Aircraft Industry, and Hongdu Technology and Science from AVIC. Our key assumptions include:
We assume no significant change to the appraisal value of the acquired companies compared to the numbers provided in the asset injection circular released in November 2014.
We assume the asset injections will be 100% funded by equity through a share placement, which has been a common practice used by other AVIC affiliates in the past even when the acquirer was in a net cash position.
We assume that the issue price for the share placement will be the average share price for the preceding 20 trading days, which is a common price-setting mechanism used in share placements in the A- share market.
We assume that the profit figures for 2014 and 2015 for the three companies to be acquired are based on earnings estimates provided in Chengfei Integration’s transaction circular released in November 2014, given that the latest financials are not available for the three companies.
Deutsche Bank AG/Hong Kong Page 9
25 November 2015
Manufacturing Hongdu Aviation
While Hongdu Aviation’s EPS would see a very substantial enhancement upon the completion of the asset injections, we believe such an impact has been more than priced in, as its pro-forma P/E on FY15 would have been normalized to a more reasonable level.
Figure 14: Hypothetical analysis – what if core assets of AVIC’s aero-equipment segment are injected into Hongdu Aviation now? NPAT (Rmb mn) Acquired assets % stake Book value *Appraisal value % premium 2012A 2013A *2014E *2015E acquired (Rmb mn) (Rmb mn) Shenyang Aircraft Corporation 100% 4,404 7,786 77% 362 248 329 383 Chengdu Aircraft Corporation 100% 3,312 7,190 117% 257 380 405 464 Hongdu Science & Technology 100% 455 565 24% 15 30 34 42 Subtotal 8,171 15,541 90% 633 658 769 889 Equity weighted 8,171 15,541 90% 633 658 769 889 Implied P/E (x) 20.2x 17.5x
*Issue px # of shares Proceeds (Rmb (Rmb/shr) (mn) mn) Equity raising* 25.57 608 15,541
Pre Post Increase % accretion 2015E NPAT (Rmb mn) 90 979 889 989% Weighted avg shrs (mn shares) 717 1,325 608 85% 2015 EPS 0.13 0.74 0.61 489% Implied P/E (x) at last closing px 212.4x 36.0x
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates. Note: 1) 2014 and 2015 numbers for acquired companies are based on earnings estimates provided in Chengfei Integration’s circular; 2) We assume no significant change to the appraisal value for the acquired companies; 3) We assume issue price for share placement to be the average price for the proceeding 20 trading day – a common price-setting mechanism used for share placement in A-share market; 4) We assume all the acquisition consideration will be funded by equity – a common practice used by other AVIC affiliates in the past.
Restructuring uncertainties linger in the near term
Despite the failed attempt by AVIC to consolidate its aero-equipment segment, we believe the group is committed to pushing forward on the asset securitization progress for the segment. While it is still uncertain whether AVIC will pursue a similar asset restructuring plan again in the near term, we believe that having a single consolidation listing platform is likely to be AVIC’s ultimate plan for the segment in the longer term.
Introducing strategic investments through several of AVIC’s listcos seems to be a near-term alternative given their jet fighter businesses (mainly Chengdu Aircraft and Shenyang Aircraft) are likely in need of capital. As an intermediate solution, it is also likely that AVIC could consider offloading its missile-related assets (from Hongdu Science & Technology) and/or trainer-related assets (from Guizhou Aviation Aircraft) to Hongdu Aviation, in our view. However, the earnings impact might be limited given the size of such asset injections.
Page 10 Deutsche Bank AG/Hong Kong
25 November 2015
Manufacturing Hongdu Aviation
Earnings forecast
Near-term earnings outlook affected by factory relocation and L-15 production ramp-up
Due to the rezoning of Nanchang city, Hongdu Aviation will relocate its production base to a newly constructed industrial park. Up to now, phase I of the production base has been completed and put into use. Management has guided that the relocation is likely to be completed by 2017, until which time Hongdu’s production will be adversely affected.
Therefore, we expect Hongdu’s revenue growth to bottom out this year, as we believe 2015 is a transitioning year in which the production volume of the L-15 is yet to pick up (hence its low profitability) while the adverse impact from factory relocation has already kicked in.
Figure 15: Revenue growth to Figure 16: Margin to rebound with Figure 17: Earnings growth to return gradually recover after plant increasing delivery of L-15 trainers positive from 2016 relocation is completed 5,000 30% 16.0% 15.0% 180 50% 4,500 160 40% 25% 14.0% 4,000 140 30% 12.2% 20% 3,500 20% 120 3,000 12.0% 10% 100 2,500 15% 0% 10.0% 9.1% 80
2,000 8.6% -10% yoy chg% yoy yoy chg% yoy 8.1% 60 1,500 10% 7.4% -20% 8.0% mn) (Rmb NPAT Revenue (Rmb mn) (Rmb Revenue 1,000 40 -30% 5% 5.9% 20 500 6.0% -40% 0 0% 0 -50% 4.0% 2011A 2012A 2013A 2014A 2015E 2016E 2017E Total Revenue yoy chg% Blended GP margin NPAT yoy chg%
Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates
That said, despite the high level of trainer backlog on hand as of end-2014 (up Figure 18: Hongdu Aviation – trainer >100% oya), we did not model a significant pick-up in sales from 2016 as backlog trend (2007-2014) production is likely to be constrained by the ongoing factory relocation, albeit to a lesser extent. Overall, we expect sales to grow by 5%/12%/12% in 180 120% 160 100% 2015/2016/2017. 140 80%
120 60% yoy yoy chg% Hongdu’s GP margin has witnessed a significant contraction from 2011’s 15% 100 40% to a meager 6% in 2014, which was largely driven by a surge in fixed-cost 80 20% allocation in the initial stage of production of the L-15. With the continued 60 0% ramp-up in L-15 production, we expect the GP margin to recover gradually, but (units) backlog Trainer 40 -20% 20 -40% it is unlikely that it will return to a double-digit level, as L-15 delivery is likely to 0 -60% remain at a suppressed level.
As a result, we expect Hongdu’s bottom line to return to a growth trajectory in Source: Company data, Deutsche Bank 2016/2017, driven partly by a weak comparison, as we forecast a c10% decline in 2015. Overall, we expect Hongdu’s NPAT to grow at a CAGR of 18% during 2015-2017.
Deutsche Bank AG/Hong Kong Page 11
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Figure 19: Hongdu Aviation – key revenue and GP assumptions 2011A 2012A 2013A 2014A 2015E 2016E 2017E Total Revenue 1,825 2,233 2,860 3,451 3,631 4,056 4,559 yoy chg% 6% 22% 28% 21% 5% 12% 12% Aviation products 1,540 1,567 1,671 1,864 1,813 1,971 2,242 yoy chg% 43% 2% 7% 12% -3% 9% 14% Trainers 881 565 951 904 994 1,143 yoy chg% -36% 68% -5% 10% 15% Others 687 1,106 912 909 977 1,099 yoy chg% 61% -18% 0% 7% 13% Civil product components 0 17 94 204 245 294 353 yoy chg% NM NM 452% 116% 20% 20% 20% Axle products 84 99 122 118 124 130 137 yoy chg% 239% 17% 24% -3% 5% 5% 5% Technical cooperation 89 67 78 89 98 108 119 yoy chg% 6% -25% 18% 14% 10% 10% 10% General aviation service 19 15 16 11 12 13 15 yoy chg% 44% -24% 9% -30% 10% 10% 10% Other business 93 469 879 1,165 1,339 1,540 1,694 yoy chg% -82% 403% 87% 33% 15% 15% 10%
GP margin (%) Aviation products 14.8% 14.0% 11.2% 5.7% 7.5% 9.0% 11.0% Civil product components NA 18.3% 5.5% 5.8% 5.0% 5.5% 6.0% Axle products 6.7% 12.9% 11.2% 18.3% 18.0% 18.0% 18.0% Technical cooperation 24.6% 22.3% 27.2% 28.1% 28.1% 28.1% 28.1% General aviation service 22.0% 33.7% 11.5% -2.6% 25.0% 25.0% 25.0% Other business 14.9% 3.6% 2.0% 3.3% 5.2% 5.1% 5.1% Blended GP margin 15.0% 12.2% 8.6% 5.9% 7.4% 8.1% 9.1% Source: Company data, Deutsche Bank estimates
Our earnings estimates stand at 14-22% below Bloomberg Finance LP consensus, as we believe the market has not yet fully factored in the disruption to production caused by the relocation of the factory, while at the same time it has placed too much confidence in the company’s ability to improve its margins.
Figure 20: Deutsche Bank estimates vs. Bloomberg Finance LP consensus estimates (2015E-2017E) 2015E 2016E 2017E
DBe Consensus Diff DBe Consensus Diff DBe Consensus Diff Revenue (Rmb mn) 3,631 3,871 -6% 4,056 4,368 -7% 4,559 4,990 -9% Net profit (Rmb mn) 90 105 -14% 115 147 -22% 159 198 -20% EPS (Rmb/share) 0.13 0.23 -45% 0.16 0.34 -53% 0.22 0.28 -20% Source: Bloomberg Finance LP, Deutsche Bank estimates
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Summary of financials
Figure 21: Hongdu Aviation – P&L summary Rmb in millions (PRC GAAP) 2011A 2012A 2013A 2014A 2015E 2016E 2017E Revenue 1,825 2,233 2,860 3,451 3,631 4,056 4,559 Cost of sales (1,551) (1,960) (2,614) (3,247) (3,361) (3,726) (4,142) Gross profit 274 272 246 204 270 330 417 GPM% 15.0% 12.2% 8.6% 5.9% 7.4% 8.1% 9.1%
Operating expenses (260) (216) (224) (180) (189) (211) (237) Business taxes (1) (1) (1) (1) (1) (1) (2) Selling expenses (32) (23) (29) (33) (35) (39) (43) Admin expenses (228) (190) (194) (146) (154) (172) (193) Impairment loss of assets 1 (0) (1) 0 0 1 1
Other gains/losses (net) 63 29 67 99 62 63 65 Other investment income 33 29 47 87 50 50 50 Change in fair value 0 0 0 0 0 0 0 Non-operating income 31 1 22 14 15 16 19 Non-operating expenses (1) (2) (1) (3) (3) (3) (4)
EBIT 77 86 90 123 143 182 244 EBIT margin% 4.2% 3.8% 3.1% 3.6% 3.9% 4.5% 5.4% Total D&A expense (70) (71) (79) (80) (85) (93) (101) EBITDA 147 157 169 203 228 275 346 EBITDA margin 8.1% 7.0% 5.9% 5.9% 6.3% 6.8% 7.6% Net finance expenses 25 15 9 (7) (38) (47) (57) Share of profit of associates & JCEs (1) 1 4 3 3 3 3
Earnings before taxes 100 102 103 119 108 138 190 Income tax expenses (17) (14) (10) (18) (16) (21) (29)
Net profit 84 88 93 101 92 117 162 Minority interest (0) 0 (2) (2) (2) (2) (3) Net profit attributable to shareholders 83 88 91 99 90 115 159 Net margin 4.6% 3.9% 3.2% 2.9% 2.5% 2.8% 3.5% yoy chg% -43% 5% 4% 9% -9% 28% 38% Dividend 0 7 29 7 27 35 48
EPS (Rmb/share) 0.116 0.122 0.127 0.138 0.13 0.16 0.22 DPS (Rmb/share) 0.000 0.010 0.040 0.010 0.04 0.05 0.07 Source: Company data, Deutsche Bank estimates
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Figure 22: Hongdu Aviation – balance sheet summary Rmb in millions (PRC GAAP) 2011A 2012A 2013A 2014A 2015E 2016E 2017E Non-current assets 1,630 2,043 2,761 3,661 3,729 3,819 3,921 PP&E 804 1,122 1,765 2,578 2,647 2,740 2,843 Investment property 15 15 14 14 14 14 14 Intangible assets 74 91 139 143 138 133 128 Goodwill 0 0 0 0 0 0 0 Long-term prepaid expenses 1 2 2 2 2 2 2 Long-term equity investment 494 495 314 316 319 322 325 Held to maturity financial assets 0 0 0 0 0 0 0 Available-for-sale financial assets 196 147 307 420 420 420 420 Deferred tax assets 2 2 1 1 1 1 1 Other non-current assets 44 170 218 187 187 187 187
Current assets 4,456 4,202 4,674 5,250 5,505 6,037 6,642 Cash and cash equivalents 2,263 1,481 1,110 582 644 651 647 Account receivables and note receivables 986 1,294 1,866 2,136 2,248 2,511 2,822 Prepayments and other receivables 128 156 49 30 32 35 40 Inventories 1,079 1,269 1,594 2,293 2,374 2,632 2,925 Other current assets 0 1 55 209 209 209 209
Total assets 6,086 6,245 7,435 8,911 9,234 9,856 10,563
Current liabilities 1,457 1,567 2,541 3,821 3,860 4,191 4,610 Short-term borrowings 100 50 208 830 800 800 800 Long-term borrowings due within one year 0 0 0 1 0 0 40 Account payables and note payables 914 1,013 1,847 2,312 2,393 2,653 2,949 Other payables and accruals 378 458 409 591 611 678 753 Tax payables 25 7 37 49 16 21 29 Dividend payables 0 0 0 0 0 0 0 Other current liabilities 39 39 39 39 39 39 39
Non-current liabilities 64 64 128 152 352 552 712 Long-term borrowings 0 0 0 0 200 400 560 Bonds payable 0 0 0 0 0 0 0 Long-term payables and other payables 56 56 59 65 65 65 65 Deferred tax liabilities 8 8 20 38 38 38 38 Other non-current liabilities 0 0 49 49 49 49 49
Total liabilities 1,521 1,631 2,669 3,973 4,211 4,742 5,322
Total shareholders' equity 4,547 4,597 4,748 4,918 5,001 5,089 5,213 Share capital 717 717 717 717 717 717 717 Reserves and Res 3,830 3,879 3,846 3,916 3,999 4,087 4,211 Other comprehensive income 0 0 184 285 285 285 285 FX effects 0 0 0 0 0 0 0 Minority interests 18 17 19 21 23 25 28 Total equity 4,566 4,613 4,766 4,939 5,023 5,114 5,241 Total liabilities and equity 6,086 6,245 7,435 8,911 9,234 9,856 10,563 Source: Company data, Deutsche Bank estimates
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Figure 23: Hongdu Aviation – cash flow summary Rmb in millions (PRC GAAP) 2011A 2012A 2013A 2014A 2015E 2016E 2017E Profit before tax 100 102 103 119 108 138 190 Depreciation and amortization 70 71 79 80 85 93 101 Provisions for impairment of assets (1) 0 1 (0) 0 0 0 Gains from disposals 1 1 1 0 0 0 0 Net interest expense 3 7 11 25 38 47 57 Investment income (32) (30) (51) (90) (53) (53) (53) Others (29) 0 0 0 0 0 0 Change in working capital (369) (522) (202) (516) (124) (194) (230) Income tax paid (17) (14) (10) (18) (16) (21) (29) Net cash flow from operating activities (273) (386) (68) (401) 38 10 37
Capex (127) (368) (582) (849) (150) (180) (200) Investment payment 0 (6) (2) 0 0 0 0 Investment income 33 29 2 3 50 50 50 Disposals 5 5 159 91 0 0 0 Others 0 0 49 0 8 8 8 Net cash flow from investing activities (89) (340) (374) (755) (92) (122) (142)
Issuance of equity capital 0 0 0 0 0 0 0 Issuance of bonds 0 0 0 0 0 0 0 Capital contributions 15 0 0 0 0 0 0 New borrowings 100 278 80 830 1,000 1,000 1,000 Repayment of borrowings 0 (328) (90) (208) (831) (800) (800) Dividend & Interest paid (239) (7) (9) (59) (53) (82) (100) Interest expenses 167 0 0 0 0 0 0 Net cash flow from financing activities 43 (57) (19) 563 116 118 100
Net increase/(decrease) in cash and cash equivalents (319) (782) (462) (592) 62 7 (4) Effect of changes in FX rate (1) (0) (0) 0 0 0 0 Cash at beginning of year 2,583 2,263 1,481 1,019 427 489 495 Cash and cash equivalents at end of year 2,263 1,481 1,019 427 489 495 491 Source: Company data, Deutsche Bank estimates
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Company background
Company description
Jiangxi Hongdu Aviation Industry Co. Ltd. is a Jiangxi-based company Figure 24: Hongdu Aviation – engaged principally in the research, development, manufacture, and revenue breakdown by segment distribution of aviation products with a key focus on trainers and general- (2014) purpose aircraft. The company is also engaged in the provision of relevant Other technical coordination services and general aviation services, as well as the products 0% manufacture and distribution of axle products and civil product components. Sales of raw materials 34%
Aviation General products Figure 25: Hongdu Aviation – shareholding structure (as of end-1H15) aviation 54% service 0% SASAC Technical cooperation 3% 75% 100% Axle Hongdu Aerospace Haihong Measurement Civil product products & Control Technology components 3% 6% 35% Aviation Industry Corporation of China Hongdu CNC Machinery ("AVIC") Source: Company data, Deutsche Bank 34% AVIC Hongdu Investment Int'l 100% 51.26%
AviChina (2357.HK) 100% AVIC Hongdu Aviation Industry Group Hongdu Technology
4.38% 43.77% 11.90% AVIC Xiaolong Investment Mgmt Jiangxi Hongdu Aviation Industry (600316.SS)
85% 25.5% Hongdu Electromechanical Hongdu Commercial Aircraft
51%
76.19% Changjiang General Aviation Hongdu Aviation Industry Import & Export 48.0% 23.81% 51% Source: Company data, Deutsche Bank
Hongdu Aviation’s trainer product offerings mainly Figure 26: Hongdu Aviation – key aviation product offering include advanced trainers (L- 15), medium-advanced trainers (K-8), and basic trainers (CJ-6). Its general- purpose aircraft business mainly focuses on agricultural aircraft including the N-5A and N-5B models.
Source: Company data, Deutsche Bank
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Figure 27: Hongdu Aviation—management profiles Name Age Position Experience & Qualifications Mr. Song Chengzhi 51 Chairman A Master’s degree majoring in aerospace engineering from Northwestern Polytechnic University; Researcher; Special government allowances of the State Council. Previously served as director of Aerodynamics & Strength Division, deputy director of product development, board director, vice president, and Chief Engineer at Chengdu Aircraft Industry. Previously served as secretary of the Communist Party, vice chairman, and vice president at Jiangxi Hongdu Aviation Industry Group. Mr. Song also serves as chairman, president, and vice secretary of the Communist Party at Hongdu Aviation Industry Group. Mr. Zhang Bo 50 Board Director A Bachelor’s degree majoring in missile design from Northwestern Polytechnic University. Previously served as deputy director of missile design institute at Nanchang Aircraft Industry; deputy director, assistant vice president, and director of missile design institute at Jiangxi Hongdu Aviation Industry Group; vice president and secretary of the Communist Party at Hongdu Aviation. He also serves as vice chairman, vice president, and secretary of the Communist Party at Hongdu Aviation Industry Group. Mr. Chen Fengchun 52 Board Director Master of Science in Economics from Dongbei University of Finance and Economics; Researcher level accountant. Previously served as deputy director and director of pricing and cost division of accounting department, director of internal settlement division, and director of cost control division at Nanchang Aircraft Industry; CFO of Fenglong Corp at Hongdu Aviation Industry Group; deputy director, director, and deputy CFO at Hongdu Aviation. He also serves as vice president and CFO at Hongdu Aviation Industry Group. Mr. Cao Chun 49 Board Director Master of Science in Economics from Dongbei University of Finance and Economics; Researcher and President level accountant. Previously served as Director of Cost Control Division of Accounting Department at Nanchang Aircraft Industry; Director of Cost Control Division of Accounting Department at Hongdu Aviation Industry Group; Director of Accounting Department, Deputy Chief Accountant, Board Secretary, and Chief Accountant at Hongdu Aviation. Mr. Ni Xianping 59 Board Director Graduated with a Bachelor’s degree majoring in helicopter design, a Master’s degree majoring in helicopter design, and a doctorate degree majoring in air vehicle design from Nanjing University of Aeronautics and Astronautics; A researcher. Previously served as an engineer, deputy director of pneumatic division, assistant to chief engineer, the director of the office of chief engineer, deputy chief engineer, deputy director- general and director-general of China Helicopter Research Institute; deputy chief engineer of AVIC II, director-general of Helicopter Department, and chief engineer of AVIC II. Ni also serves as the chairman of the supervisory committee of AVIC Engine Shareholding Co., Ltd., AVIC Aviation Engine Corporation PLC, AVIC Helicopter, Avicopter, a director of China Aviation Industry General Aircraft Co., Ltd., and AVIC Heavy Machinery Co., Ltd, and vice president of AviChina. Mr. Yang Dongsheng 50 Board Director A Bachelor’s degree, a Master’s degree from Beihang University, and an EMBA degree from Cheung Kong Graduate School of Business. Previously served as deputy CFO of defense department at AVIC, deputy CFO of AVIC Aero- Equipment. Mr. Yang also serves as Vice President of AVIC Aero-Equipment. Mr. Zhao Zhuo 43 Board Director A Bachelor’s degree and a Master’s degree majoring in engineering management and an EMBA degree from University of Texas at Arlington College of Business; A researcher. Secretary of general office at AVIC II; deputy director-general at manager department at AviChina; director of division II of commission for discipline inspection department at AVIC II; director- general of internal audit department at AviChina. Mr. Zhao also serves as director-general of securities market department at AviChina. Mr. Zeng Wen 47 Board Director A Bachelor’s degree and a Master’s degree majoring in engine from Northwestern Polytechnic University; Researcher. Previously served as a project manager of global support company, chief representative of Pakistan representative office, a project manager of export department, director of after-sales division, assistant manager of export department, and assistant president at China National Aero- Technology Import & Export Corp (“CATIC”). Mr. Zeng also serves as vice president of CATIC. Mr. Xi Weiqun 47 Board Director A Master’s degree holder; Senior accountant. Previously worked in AVIC and AVIC II; director-general of financial management department of AviChina. Mr. Xi also serves as director-general of strategic investment department at AviChina. Source: Company reports, Deutsche Bank
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Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Hongdu Aviation 600316.SS 26.73 (CNY) 25 Nov 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=600316.SS
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Nick Zheng
Historical recommendations and target price: Hongdu Aviation (600316.SS) (as of 11/25/2015)
60.00 Previous Recommendations
Strong Buy 50.00 Buy Market Perform Underperform Not Rated 40.00 Suspended Rating
Current Recommendations 30.00 Buy
Hold Security PriceSecurity 20.00 Sell Not Rated Suspended Rating
10.00 *New Recommendation Structure as of September 9,2002
0.00 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Date
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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 share-holder return (TSR = percentage change in 450 52 % share price from current price to projected target price 400 350 38 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 18 % 10 % holder return, we recommend that investors sell the 100 11 % 50 13 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 1. Newly issued research recommendations and
target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
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Additional Information
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David Folkerts-Landau Chief Economist and Global Head of Research
Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research
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