Financials / China 10 September 2014

A new landscape China Securities Sector

• We expect the Shanghai-Hong Kong Stock Connect scheme to lift Positive (unchanged) normalised A-share ADT to CNY200-250bn level Neutral • Commission rate downtrend looks inevitable, but larger and diversified players should be less vulnerable Negative

• Upgrade CGS to Outperform (2), should benefit from higher A- share turnover; downgrade CITICS to Hold (3) on rich valuation

immediately after the start of the (6881 HK, HKD6.06) stands to scheme, lifting the trading volume benefit from a near-term rise in A- on the Shanghai Stock Exchange. Its share turnover, and hence upgrade it ADT is also likely to be boosted by to Outperform (2), from Hold (3). improving domestic investor We downgrade Citic Securities Leon Qi, CFA sentiment. (CITICS) (6030 HK, HKD19.20) to (852) 2532 4381 Hold (3), from Outperform (2), due [email protected] Over the next 1-2 years, the potential to its rich-looking valuation after its introduction of the Shenzhen Hong- recent good rally and the Kong Stock Connect scheme and profitability drag from its overseas ■ What's new inclusion of A-shares in the various operation. While our business-model MSCI indices should provide transformation story remains intact sustainable support to A-share We reaffirm our Positive rating on for the China Securities Sector (see turnover. Thus, we expect A-share the China Securities Sector as we see Great transformation - Stage 2: ADT to stabilise at CNY200-250bn its long-term structural growth Capital is key, of 6 January 2014), over the next few years, vs. a level of opportunities and business model we expect investors’ focus to shift CNY150-220bn over the past 5 transformation as attractive. The key back to the traditional brokerage years, after the initial short-term risks to our call are lower-than- businesses over the next few positive impact from the start of the expected ADT in Mainland China months, with the start of the SHKSC programme. and execution risks in rolling out Shanghai-Hong Kong Stock Connect new financial products. (SHKSC) programme approaching. Commission rate downtrend. We believe that with the rise of ■ How we differ Meanwhile, brokerage commission online low-cost brokers in China and Unlike the market, we think the rates have been under pressure the relaxation of brokerage account- SHKSC will lift normalised A-share across the sector since 2Q14 as opening rules in October, ADT sustainably even after the online low-cost brokers gradually commission rates will inevitably initial impacts from the launch of emerge in China and the regulator decline further. the SHKSC. plans to loosen brokerage account- opening rules. We expect to see Securities firms will have to rely on higher ADT and lower average cross-selling and comprehensive commission rates for the sector over Key stock calls service capacity to retain clients over New Prev. the next few years. the long term. Large players with Haitong Securities (6837 HK) economies of scale in their costs and Rating Buy Buy ■ What's the impact more diversified product mixes Target 16.00 15.00 Higher normalised ADT. The should be more resilient under Upside  24.4% SHKSC will start officially in mid-to- industry-wide commission pressure. China Galaxy Securities (6881 HK) late-October. The scheme should Rating Outperform Hold bring about an unprecedented ■ What we recommend Target 6.60 5.50 opening-up of China’s stock market While we remain confident in Upside  8.9% to overseas investors without any Haitong Securities’ (HTS) (6837 CITIC Securities (6030 HK) pre-approved quota system. As a Rating Hold Outperform HK, HKD12.86, Buy [1]) long-term Target 20.00 19.00 result, we expect overseas funds to business transformation, we believe crowd into Mainland equity markets Upside  4.2% China Galaxy Securities (CGS), Source: Daiwa forecasts.

See important disclosures, including any required research certifications, beginning on page 26 China Securities Sector 10 September 2014

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 China Galaxy Securities 6881 HK 6.06 Outperform Hold 6.60 5.50 20.0% 0.343 0.320 7.3% 0.384 0.353 8.6% CITIC Securities 6030 HK 19.20 Hold Outperform 20.00 19.00 5.3% 0.660 0.681 (3.0%) 0.721 0.760 (5.2%) Haitong Securities 6837 HK 12.86 Buy Buy 16.00 15.00 6.7% 0.580 0.580 0.0% 0.698 0.704 (0.8%) Source: Daiwa forecasts

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Contents

A new landscape ...... 4 SHKSC likely to lift level of normalised A-share turnover ...... 4 Commission rates still under pressure ...... 7 Valuation and risks ...... 9 Appendix – company comparisons ...... 12

Company Section Haitong Securities ...... 15 China Galaxy Securities ...... 18 CITIC Securities ...... 21

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listed on the Hong Kong Exchange directly for the first time. This will be the first time China has opened up its stock market, allowing in global investors without a specific pre-approved quota system. (For details of the SHKSC, see the following table).

A new landscape Currently, global investors can only invest indirectly in China’s stock markets through Qualified Foreign We believe the start of the SHKSC scheme Institutional Investor (QFII) or Renminbi Qualified Foreign Institutional Investor (RQFII) quotas. As at the will bring a sustainable boost to the A- end of July 2014, the combined QFII (USD58bn) and share market’s ADT. But commission RQFII (CNY258bn) quotas accounted for only 2.4% of rates are likely to decline over the long the total A-share market cap. term. Under the SHKSC programme, however, the initial total net buying quota for northbound trading (ie, SHKSC likely to lift level of Hong Kong investors trading on the Shanghai market) of CNY300bn will be as large as almost half of the normalised A-share turnover existing combined QFII and RQFII quota. Note that the trading quota for the SHKSC programme will be The SHKSC programme calculated on a net basis (ie, the quota is the difference The SHKSC, also known as Stock Connect or Stock between buy orders and sell orders). Hence, the total Link, was officially announced on 10 April 2014. Under trading volume under the SHKSC scheme will be much the SHKSC, global investors (both institutional and larger than the above-mentioned quota of CNY300bn. retail) will be allowed to trade eligible A-share stocks listed on the Shanghai Stock Exchange without a pre- On a daily basis, the northbound daily trading quota of approved quota system. CNY13bn under the SHKSC will bring an additional 7% of ADT to the A-share markets, if fully utilised. Also, the SHKSC scheme will allow qualified Mainland institutions and individuals to trade stocks that are

 Overview of the SHKSC programme Shanghai Connect for Hong Kong investors (Northbound trading) Hong Kong Connect for Mainland China investors (Southbound trading) Clearance currency CNY CNY Daily quota CNY13bn CNY10.5bn Initial total quota CNY300bn CNY250bn Qualification None A minimum account balance of CNY500,000 % of qualified investors 100% Less than 1% Eligible stocks Stocks in SSE 180 index, SSE 380 index, and dual-listed stocks Stocks in the Hang Seng large-cap index, Hang Seng mid-cap index, and dual- listed stocks Regulator CSRC SFC Market cap of tradable stocks Around CNY16tn Around HKD22tn % of total market cap Around 90% Around 84% Source: China Securities Regulatory Commission (CSRC), HKEx, Shanghai Stock Exchange, Daiwa

 Trading details and differences of SHKSC Shanghai Connect for Hong Kong investors (Northbound trading) Hong Kong Connect for Mainland China investors (Southbound trading) Trading days Closed when either market is closed Closed when either market is closed Trading interval limit T+1 T+0 Trading hours 9:30am - 11:30am; 1:00pm - 3:00pm 9:30am - 12:00pm; 1:00pm - 4:00pm Pre-trading hours 9:15am - 9:25am 9:00am - 9:30am Lot size 100 shares No specific rules Share price movement limit Daily share price change cannot be more than 10% (5% for "ST" shares) None Short-selling rules Naked short selling prohibited and investors cannot participate in the Mainland's No short-selling allowed margin trading and securities lending businesses Source: CSRC, HKEx, Shanghai Stock Exchange, Daiwa

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Currently, the preparations to launch the SHKSC Over the long term, however, we expect the trading programme are on track with a few system testing velocity of global investors to be lower than that of local efforts under way. The programme will be officially investors in China. launched on 13, 20 or 27 October this year. Currently, the A-share market accounts for around 7% Also, on 5 September, the CSRC spokesperson said the of the combined market cap of the global stock regulator is studying the possibility of a Shenzhen- markets. However, its ADT market share accounts for Hong Kong Stock Connect scheme and it is likely that around 11% of the global amount (for 7M14). The A- Shenzhen Stock Exchange-listed stocks will also be share market’s share of ADT is higher than its share of available to global investors in Hong Kong in the near the global market capitalisation, suggesting higher future. turnover velocity in Mainland China. Velocity on the Hong Kong Stock Exchange, for example, is only one- Differences in valuation/cost of funds third of that in China. likely to be evened out It is understandable that China’s trading velocity is Currently, A-shares on average are trading at around a higher than that of the global average, as China is a 10% discount to their H-share peers. This is almost the retail-driven market with almost 80% of trades coming biggest gap seen since 2007. Given the substantial from retail investors. However, global investors tend to price divergences for a number of dual-listed stocks in have more of a long-term value philosophy and thus both Shanghai and Hong Kong, we believe arbitrageurs tend to hold stocks for longer than investors in China, will try to take advantage of this, and that ultimately especially when they invest in low-valued A-share blue- they will help to even out the cost of capital in both chip stocks. markets over time.

 China stock markets: turnover velocity Apart from the low-valued blue-chip names, sectors 60% such as TMT, Brewery and Traditional Chinese Medicine could also benefit from the SHKSC, due to 50% the scarcity value of stocks in these sectors. 40%

Sustainable boost likely to A-share ADT 30% Despite all the positives seen helping to lift the daily 20% turnover of the Mainland stock markets, we think that over the long term, A-share ADT will not continue to 10% increase forever, but will stabilise at CNY200-250bn. 0% Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Turnover velocity 5-year avg We expect buying flow from overseas investors to boost daily turnover after the SHKSC programme gets Source: CSRC, WIND, Daiwa underway, as well as the potential start of Shenzhen- Hong Kong stock connect scheme, and/or the potential inclusion of China A-shares in major global indices.

 China stock markets: ADT (CNYbn) 500 400%

400 300%

300 200%

200 100%

100 0%

0 (100%) Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14

ADT 5-year avg YoY (RHS) Source: CSRC, WIND, Daiwa

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Sanity check: relationship between fund CNY320bn of fund inflows over June-August led to flows and daily turnover CNY3.27tn of turnover over this period.

We have sought to estimate the relationship between The CNY320bn of inflows is comparable to the initial overseas fund inflows for the A-share market and its cumulative northbound quota for the SHKSC of impact on ADT. Our conclusion is that over the past 3 CNY300bn. Assuming that most of the trades in the months, inflows of CNY320bn through the QFII and initial few months after the launch of the SHKSC RQFII products have led to around CNY43bn in programme will be buy orders (as overseas investors do incremental ADT on top of the normalised ADT over not yet have initial positions in A-share stocks), the the past 5 years. value of net fund inflows should be similar to the net

quota. Thus, we estimate that the “incremental” We have picked the 2 largest RQFII ETFs (Southern turnover after the launch of the SHKSC will be A50 and China AMC SHSZ300). Over the past 3 CNY3.07tn. Assuming that the net quota is utilised months, both have seen significant fund inflows due to fully within 3 months, the “incremental” ADT would be the market’s expectations that large-cap A-share stocks CNY49bn, suggesting A-share ADT to be around will rise after the introduction of the SHKSC CNY239bn. programme. Net inflows (ie, net increase in AUM) over

June-August 2014 were CNY28.2bn. Given that the Taking into consideration the potential expansion of combined quota of these 2 ETFs currently represents the initial SHKSC quota, the likely Shenzhen-Hong about 9% of the total combined QFII/RQFII quota, and Kong Stock Connect, and the potentially continuous that the other QFII/RQFII funds should have seen a expansion of the A-share market cap, we think the A- similar magnitude of fund inflows, we estimate that share ADT will stabilise at CNY200-250bn over the total inflows over June-August were around next few years. CNY320bn.

 The largest 2 RQFII ETFs: trend in AUM Next step: the inclusion of A shares in the (HKDbn) MSCI? 70 There was much talk in the market that China’s A- 60 shares might be included in the MSCI indices in early 50 2014. However, they failed to appear in early 2014, due 40 mainly to their limited international accessibility. The 30 SHKSC programme should address this issue as 20 overseas investors will be able to invest freely in 10 Mainland China stocks once the programme is 0 launched.

Jul-13 Jul-14 Apr-13 Oct-13 Apr-14 Jan-13 Jan-14 Jun-13 Jun-14 Feb-13 Mar-13 Feb-14 Mar-14 Nov-12 Dec-12 Aug-13 Sep-13 Nov-13 Dec-13 Aug-14 May-13 May-14 At the end of August 2014, the market cap of China’s A- China AMC SHSZ 300 ETF Southern A50 ETF share market accounted for about 7% of the combined Source: WIND, Daiwa market cap of the global stock markets (comparable to London and Tokyo). We believe that once the We have taken the average ADT for the past 5 years accessibility issue is addressed, the inclusion of A- (CNY190bn) to be the normalised level of ADT in order shares in global indices will be only a matter of time. to calculate the normalised turnover, which works out at CNY12.16tn for June-August 2014. The actual In addition, if this does materialise, incremental buying turnover over this period totalled CNY15.43tn, of index-tracking funds should support a high level of suggesting to us that the “incremental” turnover from normalised ADT. fund inflows was CNY3.27tn for June-August 2014, or

CNY51bn on a daily basis. In other words, the

 The MSCI indices that might include A shares at some point Funds tracking these Partial inclusion: 5% inclusion factor Full inclusion: 100% inclusion factor Index indices (USDbn) Weight (%) Fund size (USDbn) Weight (%) Fund size (USDbn) MSCI Emerging Markets 1,400 0.50% 7.0 9.40% 127.8 MSCI Asia ex Japan 370 0.30% 1.1 5.70% 22.3 MSCI World 1,700 0.05% 0.9 1.10% 18.7 3,470 9.1 168.8

Source: Hong Kong Economic Times Note: based on funds tracking these major MSCI indices; the MSCI estimates that the size of all the funds tracking its various MSCI indices is about USD8,400bn

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On the cost side, we understand that by offering Commission rates still under services purely online, Sinolink saves on most of the pressure commission expenses paid to its sales staff. However, we argue that there are costs that cannot be saved, China’s brokerage business saw another round of which should be constraints for brokers to cut fees commission rates decline in 1H14, with the average rate aggressively. squeezed to 7.5bps, from 7.8bps for 2013. The sector was subject to an intensified commission rate price war Apart from commission rebates to sales and exchange waged by low-cost online business models during 1H14. membership fees, securities firms are facing charges Though price competition seems to have been tamed from the exchanges and IT expenses. We understand for the time being, we are concerned that the further that the average exchange charges are around 0.9bps relaxation of brokerage account opening rules will put and IT expenses are slightly above 1bps. Hence, overall further downward pressure on brokerage commission the hard cost constraint for the brokerage business is rates. Admittedly, the industry’s consolidation may around 2bps. mitigate the extent of the decline.  China: brokerage expenses paid to stock exchanges (bps) A-share stocks B-share stocks Mutual funds For the above-mentioned reasons, we forecast the Transaction fee 0.696 2.6 0.45 average brokerage commission rate to drop by another Regulation fee 0.2 0.2 0 3bps over 2H14, and to be squeezed further, to Total* 0.896 2.8 0.45 averages of 6.9bps for 2015 and 6.5bps for 2016. Source: Shanghai and Shenzhen Stock Exchanges Note: Excludes stamp tax, which is collected by brokers on behalf of the tax authority  China Securities Sector: average brokerage commission rate Sinolink’s share of the brokerage market remained at (bp) 15 about 0.7% for several years before it launched Yong 14 Jin Bao in February this year. Yong Jin Bao caused a 13.2 13 wave of market-share increases for Sinolink due to its 12 attractive commission rate. It led to Sinolink seeing an 11 9.7 almost 40% rise in its share of the brokerage market in 10 the few months following its launch. 9 8.0 7.8 7.8 8 7.5 7.2 6.9 Since May 2014, however, Sinolink’s market share 7 6.5 6 appears to have plateaued at around 1% and even saw a 5 decline in August. We believe this is due to the 2009 2010 2011 2012 2013 1H14 2H14E 2015E 2016E relatively simple service that Yong Jin Bao offers, and

Source: Securities Association of China, Daiwa estimates the inconvenience involved in switching accounts due to the regulatory restrictions on account openings in Internet brokers waging a price war China. The former will be a long-term obstacle to small players competing for market share by cutting prices, Since early 2014, some local China brokers have been while the latter may be dismantled by potential teaming up with Internet players to offer ultra-low regulatory changes. commission rates for online brokerage services. The most notable example has been Sinolink Securities  Sinolink: monthly brokerage market share (Sinolink) partnering with Tencent on an online- 1.2% brokerage platform called Yong Jin Bao, which offers a 1.06% 1.1% commission rate as low as 2bps. Besides, Huatai 1.01% 1.01% Securities offers a 3bps commission rate on brokerage 1.0% 0.91% 0.92% services to selected clients. 0.9% 0.84%

0.8% 0.75% 0.74% 0.70% 0.69% We regard Yong Jin Bao as more of a pricing strategy 0.67% 0.67% rather than product innovation, and also note that it is 0.7% Launch of putting pressure on commission rates in the sector. 0.6% "Yongjinbao" Brokerage commission rates have been declining modestly in recent years. The market has been 0.5% 2010 2011 2012 2013 expecting a modest decline in commission rates, but we Jul-14 Apr-14 Jun-14 Jan-14 Feb-14 Mar-14 Aug-14 May-14 think 2bps or 3bps is far below market expectations. Source: Securities Association of China, Daiwa estimates

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Relaxation of account-opening rules Due to fierce competition in the brokerage business creates more competition and declining commission rates, small brokerages that are not able to offer value-added services are barely Currently, there is a “single account” requirement operating at breakeven levels. Hence, from an implemented by the Shanghai Stock Exchange. This economic perspective some of them are on the verge of means that each investor can only open a brokerage being taken over. Thin commission rates and the account with one broker: investors have to close their increasingly stretched balance sheets of local existing accounts if they want to switch to another governments are the economic reasons leading to M&A broker to enjoy lower commission rates. in the China Securities Sector.

As most brokers in China currently require an investor About one-third of the securities firms in China are to be physically present when opening or closing their controlled by local governments, which have different accounts, some investors may be deterred from priorities than private investors. While the local switching brokers. governments hope the securities firms make a profit,

the companies also serve as a brand for the province or We understand that the CSRC and the Shanghai Stock city, and sometimes facilitate the funding of local- Exchange are planning to revise this rule after October government entities. this year, in order to enable securities accounts with more features, such as the ability to make bill In addition, they create jobs and contribute to GDP and payments, fund transfers, and even to make purchases local tax revenue. This is why local governments are of goods online. reluctant to have securities firms under their control go

bankrupt or be taken over by larger players. However, We believe that relaxing the securities-account rules as local governments themselves face increasingly tight would increase the functionality of securities accounts balance sheets, they are under increased pressure to and allow them to play a more important role in sell their stakes in local securities firms in exchange for meeting investors’ financial service needs, especially in cash and avoid further losses in future. terms of wealth management. However, allowing investors to open multiple accounts with multiple Besides market incentives, industry consolidation is brokers lowers the switching costs of retail investors also driven by regulatory forces. According to the “1 and might trigger a more fierce commission price war. control 1 minority” rule issued by the CSRC in 2008, all

entities are only allowed to have a controlling stake in Industry consolidation is a mitigating no more than 1 securities firm and a minority stake in factor in declining commission rates no more than 1 securities firm. In total, an entity can China’s brokerage market is very fragmented and is have stakes in no more than 2 securities firms. characterised by low industry concentration. There are about 100 players operating stock-brokerage In an effort to consolidate its securities-firm businesses currently. The top-10 companies only had subsidiaries with an aim to comply with the regulatory an aggregate market share of 48% for 7M14. requirement, Hongyuan Securities merged with Shenyin Wanguo Securities in 1H14. Following this, on  Brokerage market shares of China’s major securities firms a pro-forma basis, the combined brokerage market (7M14) share of the new entity will be 5.7%, the 3rd-highest in 8% 7.08% 6.50% the sector. Besides, Guotai Junan Securities has 7% acquired Shanghai Securities in 1H14. 6% 5.14% 4.94% 4.88% 5% 4.16% 4.01% 3.82% 3.74% Among the 3 securities firms in which Huijin has non- 4% 3.41% controlling stakes, we believe it sees CICC as the most 3% important one to retain. Hence, the company is likely 2% to try to find buyers for its stakes in China Securities 1% and UBS Securities. We expect further consolidation of 0% Huijin’s subsidiaries, helping to reduce the overall HTS CGS Huatai

CITICS number of players in the industry. China Guosen China Shenyin Wanguo Guangfa Securities Merchants Guotai Junan Diversified large players stay competitive Source: WIND, Daiwa Note: data for CITICS is on a consolidated basis, which includes its parent, Citic Securities by offering a comprehensive service (Zhejiang), and Citic Securities (Shandong) We believe that over the long term, China’s currently commoditised brokerage market will become stratified

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(ie, develop different layers). In addition, low (or even Low-cost brokers, such as e-trade, target price- negative) margins for small brokers may present sensitive, mass-market retail investors, feature low opportunities for large players to consolidate the commission rates and offer minimal service. At the industry. high end there are institutional brokers providing in- depth services to institutional clients. In the middle, Currently, China’s brokerage services have minimal there are wealth managers such as Charles Schwab differentiation, and the premium on brokerage fees filling the gap between the low-cost brokers and resulting from high-quality services is minimal, dedicated institutional service providers. because the country’s stock markets are dominated by retail investors. Although still at an early stage, China brokers, especially industry leaders such as Citic Securities We think that going forward, small and less-diversified (CITICS) and Haitong Securities (HTS), are beginning players will have to cut prices in order to maintain to identify various types of clients and are trying to market share, while large companies and those offering provide different types of services to them. a comprehensive service targeting institutional and high-end individual customers will compete on the quality of services, and attract customers by offering a Valuation and risks wide spectrum of capital market-related services. Hence, the pace of decline in the commission rate for Valuation large players should be more modest than for small Following their recent rally, the share prices of the 3 H- companies. share listed China securities firms are trading currently at 2014E PBRs of 1.4-1.8x (based on our BVPS forecasts). The large players have been taking market share in the China brokerage business since 2010. The combined  HTS: share price and 12-month forward PBR market share for the top-5 players in the sector rose Rolling PBR (x) Price (HKD) from 23.9% for 2010 to 28.4% for 1H14, an increase of 1.8 16 4.5pp. 1.6 14

This was because the large players were able to offer a 1.4 12 more comprehensive range of value-added services, in 1.2 10 our view. In addition, large players are more likely to achieve cost discipline through economies of scale and 1.0 8 in return offer better services provided their per-unit Jul-14 Jul-13 Jul-12 Jan-14 Jan-13 Mar-14 Mar-13 Sep-14 Sep-13 Nov-13 Sep-12 Nov-12 May-14 May-13 cost is the same compared with smaller peers. May-12 One-year forward rolling PBR Average PBR -1SD +1SD  China Securities Sector: brokerage market concentration Price

50% Source: Bloomberg, Daiwa

45% 47.5% 47.6%  CGS: share price and 12-month forward PBR 45.6% Rolling PBR (x) Price (HKD) 40% 43.2% 1.6 8 39.9% 39.2% 35% 1.4 7 27.5% 28.4% 30% 1.2 6 25.5% 25.7% 23.9% 24.1% 25% 1.0 5

20% 0.8 4 2009 2010 2011 2012 2013 1H14 Jul-14 C5 C10 Jul-13 Apr-14 Oct-13 Jun-14 Jun-13 Jan-14

Feb-14 Mar-14 Aug-14 Aug-13 Sep-13 Nov-13 Dec-13 May-14 May-13

Source: CSRC, WIND, Daiwa One-year forward rolling PBR Average PBR Note: C5 & C10 refer to the combined market shares of the top-5 or top-10 players in the sector -1SD +1SD Price

If we take a look at the stock brokerage industry in the Source: Bloomberg, Daiwa US, it has also faced a challenge from low-cost online brokers. Over time, the industry business model has been gradually emerging as different players have targeted different market segments.

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 CITICS: share price and 12-month forward PBR  Relative valuations: ROEs and PBRs (2014E) Rolling PBR (x) Price (HKD) PBR (2014E) 2.2 22 2.0 2.0 20 1.9 1.8 18 1.8 CITICS - H Guangfa 1.6 16 1.7 1.4 14 China 1.6 CITICS - A Merchants 1.2 12 1.5 HTS - H 1.0 10 1.4 Huatai HTS - A Everbright Galaxy 1.3 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Jun-12 Jun-13 Jun-14 Feb-12 Feb-13 Feb-14 Dec-11 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 1.2 One-year forward rolling PBR Average PBR 4 5 6 7 8 9 10 -1SD +1SD Price ROE (2014E)

Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa forecasts Note: based on share prices as of 10 September 2014 For 2014-16, we forecast net-profit CAGRs of 23% for HTS, 21% for CITICS, and 12% for CGS. CITICS is trading currently at a PBR premium of about 20% to HTS on the H-share market, while both stocks  China Securities Sector: net-profit forecasts are trading at similar valuations on the A-share market. 2014E 2015E 2016E 2013- Given the similar business mix in the 2 companies’ 16E domestic operations, we expect the large H-share Net profit YoY Net profit YoY Net profit YoY CAGR (CNYm) (%) (CNYm) (%) (CNYm) (%) (%) valuation gap to narrow over the coming months. CITICS 7,273 39% 7,938 9% 9,317 17% 21.1% The valuation gap has been narrowing over the past 12 CITICS - pro 6,187 18% 7,938 28% 9,317 17% 21.1% months, and we expect arbitrage opportunities brought forma HTS 5,563 38% 6,689 20% 7,482 12% 22.9% about by the SHKSC programme to facilitate additional CGS 2,589 21% 2,892 12% 2,984 3% 11.8% narrowing. Thus, we retain our preference for HTS in Source: Daiwa forecasts terms of valuation.

 China Securities Sector: EPS forecasts  PBR premium of CITICS vs. HTS 2014E 2015E 2016E 2013-16E 30% EPS YoY EPS YoY EPS YoY CAGR (CNY) (%) (CNY) (%) (CNY) (%) (%) 20% CITICS 0.660 39% 0.721 9% 0.846 17% 21.1% CITICS - pro 0.561 39% 0.721 9% 0.846 17% 21.1% 10% forma HTS 0.580 38% 0.698 20% 0.781 12% 22.9% 0% CGS 0.343 12% 0.384 12% 0.396 3% 8.8% Source: Daiwa forecasts (10%)

Compared with their A-share peers (20%) Given the small number of major China securities firms (30%)

listed on the Hong Kong Stock Exchange, we use the Jul-12 Jul-13 Jul-14 Jan-13 Jan-14 Mar-13 Mar-14 Nov-12 Nov-13 Sep-12 Sep-13 Sep-14 May-12 major securities companies listed on the A-share May-13 May-14 H-share A-share

market to provide relative values. We use the Source: Bloomberg, Daiwa relationship between our and the Bloomberg- consensus 2014 ROE forecasts and PBRs for them to Comparison with regional and global peers analyse their fair values. Our regression results indicate a positive correlation between the companies’ ROEs Due to the small number of H-share-listed China and PBRs. brokers, we include large- and mid-sized A-share-listed brokers in our comparison. In addition, regional and Both HTS and CGS look undervalued (their respective global securities houses may also be good valuation PBR/ROE data points lie below the linear regression references. line in the following chart) compared with their peers. CITICS’s H-share lies above the regression line, suggesting the stock might be overvalued.

- 10 - China Securities Sector 10 September 2014

 Global investment banks: valuation comparison Bloomberg Market cap Current Target Upside PBR (x) PER (x) ROE % ROA % Leverage (x) Company code Rating (USDbn) price price (%) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E China - H shares CITIC Securities 6030 HK Hold 24 19.20 20.00 4.2% 1.8 1.7 23.0 21.1 8.1 8.3 2.5 2.2 3.4 4.0 Haitong Securities 6837 HK Buy 16 12.86 16.00 24.4% 1.5 1.4 17.5 14.6 8.7 9.6 2.8 2.5 3.1 3.8 Galaxy Securities 6881 HK Outperform 6 6.06 6.60 8.9% 1.4 1.3 14.0 12.5 10.0 10.5 2.7 2.5 3.4 3.9 Sector 46 11.8% 1.6 1.5 19.9 17.7 8.6 9.0 2.6 2.3 3.3 3.9 CHINA - A SHARE CITIC Securities 600030 CH NR 24 13.30 n/a n/a 1.6 1.5 19.5 17.5 8.3 8.7 2.5 2.2 3.4 4.0 Haitong Securities 600837 CH NR 16 10.16 n/a n/a 1.5 1.4 17.5 14.4 8.7 9.7 2.8 2.5 3.1 3.8 GF Securities 000776 CH NR 10 10.61 n/a n/a 1.7 1.6 18.5 15.9 9.2 9.0 2.7 2.5 3.4 3.6 China Merchants Sec 600999 CH NR 10 11.05 n/a n/a 1.6 1.5 20.2 17.4 9.0 9.4 3.1 3.1 3.0 3.1 Huatai Securities 601688 CH NR 8 8.89 n/a n/a 1.3 1.3 18.5 16.1 7.2 7.7 2.6 2.7 2.8 2.9 Everbright Securities 601788 CH NR 5 9.14 n/a n/a 1.3 1.3 27.4 22.1 4.7 5.1 1.8 1.8 2.6 2.8 Founder Securities 601901 CH NR 5 6.03 n/a n/a 1.9 1.6 26.8 22.9 9.1 7.6 3.7 3.0 2.5 2.6 Hongyuan Securities 000562 CH NR 5 12.15 n/a n/a 3.0 2.8 35.7 32.0 8.2 10.2 2.7 2.8 3.0 3.7 Industrial Securities 601377 CH NR 5 11.85 n/a n/a 2.2 2.1 28.0 23.4 7.0 8.3 2.3 2.1 3.0 3.9 Sector 79 1.6 1.4 19.9 17.2 8.3 8.6 2.7 2.5 3.1 3.5 REGIONAL Nomura Holdings 8604 JP Hold 25 686 700 2.0% 1.0 0.9 13.2 11.4 7.1 7.7 0.4 0.4 17.7 19.1 Daiwa Securities 8601 JP NR 15 887 n/a n/a 1.3 1.3 11.5 13.5 10.7 9.2 0.6 0.5 17.8 17.2 Yuanta Financial 2885 TT NR 5 16.00 n/a n/a 1.0 1.0 16.5 16.9 5.9 5.9 1.1 1.0 5.3 5.8 Samsung Securities 016360 KS NR 4 48,550 n/a n/a 1.1 1.0 28.4 21.0 4.7 4.9 0.8 0.7 5.8 7.0 Daewoo Securities 006800 KS NR 4 11,850 n/a n/a 1.0 0.9 26.5 25.9 3.9 3.8 0.5 0.5 7.4 7.6 Sector 53 1.1 1.0 15.0 14.3 7.6 7.4 0.6 0.5 14.9 15.6 GLOBAL Goldman Sachs GS US Underperform 81 177.40 159.00 -10.4% 1.1 1.0 10.8 10.3 10.5 10.3 0.9 0.9 12.1 11.4 UBS UBSN VX NR 69 16.35 n/a n/a 1.2 1.2 15.0 11.3 7.5 10.5 0.4 0.6 21.3 17.5 Morgan Stanley MS US Underperform 67 33.91 31.00 -8.6% 1.0 0.9 13.0 11.7 7.7 8.4 0.6 0.7 12.8 12.4 Credit Suisse Group CSGN VX NR 44 25.39 n/a n/a 1.0 0.9 13.7 9.0 5.0 10.5 0.2 0.6 24.1 17.8 Lazard LAZ US NR 7 54.28 n/a n/a 10.7 8.0 18.7 15.8 64.9 66.6 12.4 13.7 5.2 4.8 Sector 267 1.3 1.2 13.1 10.8 9.5 11.4 0.9 1.1 16.5 14.1 Source: Bloomberg, *Daiwa forecasts Note: based on share prices as of 10 September 2014, except for Europe and US listed stocks as of 9 September 2014.

Risks The main risks to our Positive rating for the China Securities Sector are lower-than-expected ADT in Mainland China and the execution risks associated with rolling out new financial products.

If the ADT in A shares were to fall below CNY150bn shortly after the launch of the SHKSC programme, brokerage volume would drop significantly. In addition, a weak brokerage market would likely see competition over brokerage commission rates intensify, exacerbating the securities firms’ brokerage income.

On the back of the gradual deregulation of the China Securities Sector that is still ongoing, most securities firms are developing innovative products to explore all the possible market opportunities. Clearly, there are execution risks associated with such new businesses. For example, some of the new financial products might fall into a grey regulatory area, while others may have hidden risks for the issuer.

- 11 - China Securities Sector 10 September 2014

Appendix – company comparisons

 China Securities Sector: revenue breakdown per disclosures  China Securities Sector: revenue breakdown by business line (1H14) (1H14) 100% 100% 4% 18% 14% 80% 30% 80% 2% 11% 60% 35% 17% 60% 47% 6% 40% 27% 40% 14% 8% 18% 70% 6% 20% 22% 23% 20% 39% 19% 27% 0% CITICS HTS CGS 0% Lending Traditional brokerage Investment banking CITICS HTS CGS Asset management Trading Financial leasing Brokerage Investment banking Asset management Trading Others Others

Source: Companies Source: Daiwa estimates

 China Securities Sector: ROA (1H13 and 1H14)  China Securities Sector: ROE (1H13 and 1H14) (%) (%) 5.0 12 10.20 10.40 4.01 9.12 9.10 4.0 10 8.90 3.19 2.99 8 2.60 3.0 2.40 2.12 6 4.84 2.0 4 1.0 2

0.0 0 CITICS HTS CGS CITICS HTS CGS 1H13 1H14 1H13 1H14

Source: Companies Source: Companies

 China Securities Sector: revenue, profit, and net margins  China Securities Sector: cost-to-income ratio (1H13 and 1H14) (1H14) (CNYm) (%) 18,000 40% 70 66.4 64.5 65.3 16,000 63.2 32.3% 65 14,000 30% 12,000 28.0% 60 57.1 25.0% 10,000 20% 55 8,000 6,000 50 46.7 10% 4,000 45 2,000 40 0 0% CITICS HTS CGS CITICS HTS CGS Revenue (LHS) Net Profit (LHS) Profit margin (RHS) 1H13 1H14

Source: Companies Source: Companies

- 12 - China Securities Sector 10 September 2014

 China Securities Sector: no. of branches (June 2014)  China Securities Sector: brokerage market share (2012 to 1H14) 400 (%) 334 7 6.45 350 6.2 6.17 5.8 286 6 300 5.1 5.2 5.28 5.15 4.8 4.79 4.68 5 4.5 250 188 4 200 3 150 2 100 1 50 0 0 2012 2013 1H13 1H14 CITICS HTS CGS CITICS HTS CGS

Source: Shanghai Stock Exchange Source: CSRC, WIND, Daiwa

 China Securities Sector: number of IPO deals (7M14)  China Securities Sector: amount of IPO underwriting proceeds (7M14) 12 (CNYbn) 10 10 6 5 8 7 3.9 6 4 3.6 3.3 6 2.5 444 3 2.2 4 333 2 2 1.6 1.5 2 0.9 0.9 0.8 1 0 0 HTS CITICS Guosen Sinolink Guangfa CITICS China Guosen Minsheng China Securities Everbright Guangfa Guoyuan Northeast Securiites Merchants Huatai Lianhe Guotai Junan Huatai Lianhe China Securiites China UBS Securities UBS China Merchants China

Source: Shanghai and Shenzhen Stock Exchange, Daiwa Source: Shanghai and Shenzhen Stock Exchange, Daiwa Note: Including IPOs that have received final listing approval and those pending listing. As Note: Including IPOs that have received final listing approval and those pending listing. As of 4 September 2014 of 4 September 2014

 China Securities Sector: debt underwriting (2013 and 7M14)  China Securities Sector: unhedged equity and derivative investment exposure (CNYbn) (CNYm) 120 107 40,000 86.3% 100% 35,000 100 80% 83 30,000 80 25,000 51.5% 60% 60 20,000 34 38 15,000 40% 40 31 23 10,000 12.7% 20 20% 5,000 0 0 0% CITICS Haitong CGS CITICS (1H14) HTS (1H14) CGS (2013) 1H13 1H14 Value of equity securities and derivatives (CNYm) as % of net capital (RHS)

Source: CSRC, WIND, Daiwa Source: Companies

- 13 - China Securities Sector 10 September 2014

 China Securities Sector: unhedged fixed-income investment  China Securities Sector: margin loan and stock repo market exposure shares (end-August 2014) (CNYm) (CNYbn) 100,000 215.4% 250% 80

80,000 200% 60 27 60,000 150% 40 86.3% 18 40,000 67.5% 100% 1 20 42 20,000 50% 27 23 0 0% 0 CITICS (1H14) HTS (1H14) CGS (2013) CITICS HTS CGS Value of fixed income securities and derivatives (CNYm) as % of net capital (RHS) Margin lending Stock repo

Source: Companies Source: CSRC, WIND, Daiwa

 China Securities Sector: leverage ratios (end-1H14)  China Securities Sector: net capital and net-capital ratios (end-1H14) (x) (CNYm) 4.0 3.72 50,000 81.8% 90% 3.40 3.5 3.17 3.23 80% 40,000 60.7% 70% 3.0 2.59 57.1% 60% 2.5 30,000 1.91 50% 2.0 40% 1.5 20,000 30% 1.0 10,000 20% 0.5 10% 0.0 0 0% CITICS HTS CGS CITICS (1H14) HTS (1H14) CGS (2013) Gross leverage Net leverage Net capital (CNYm) Net capital as % of net assets (RHS)

Source: Companies Source: Companies

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Financials / China 6837 HK Financials / China 10 September 2014

Haitong Securities

Haitong Securities Target (HKD): 15.00  16.00 Upside: 24.4% 6837 HK 10 Sep price (HKD): 12.86

Financial leasing a new driver 1 Buy (unchanged) • HTS’s newly acquired financial leasing unit offers accretive ROE 2 Outperform for its overall earnings 3 Hold • Recovering the impairments on bond investments should help 4 Underperform smooth out some seasonality in 2H earnings 5 Sell • Target price raised to HKD16.0, reiterate Buy (1) rating

Recovering the impairments on ■ How we differ bond investments. Recall that We are more positive on the HTS suffered substantial trading potential synergies arising from losses on debt investments in 2H13 HTS’s acquisition of the financial through asset management products leasing business. Leon Qi, CFA issued by its own subsidiary, which Forecast revisions (%) (852) 2532 4381 was a key reason for its large HoH Year to 31 Dec 14E 15E 16E [email protected] net profit drop. HTS made a Revenue change 1.4 0.1 3.9 Net profit change - (0.8) 7.0 CNY180m impairment in 2H14 to Core EPS (FD) change - (0.8) 7.0 cushion this unrealised loss of Source: Daiwa forecasts ■ What's new CNY160m, which we believe was Apart from the continued growth of sufficient. (Please refer to Bond Share price performance Haitong Securities’ (HTS) lending losses fully provisioned, published businesses, its newly acquired (HKD) (%) on 28 January 2014.) Now that the 14.5 110 financial leasing unit and reversal of bond market has stabilised since bond trading provisions should also 13.3 103 early 2014, we understand HTS 12.0 95 help its 2H14 earnings. started to reverse the provision in 10.8 88 1H14 modestly by around CNY20m, 9.5 80 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 ■ What's the impact and by around CNY5-20m every HTS’s financial leasing arm month in 2H14. This should help Haitong Se (LHS) Relative to HSI (RHS) contributed 8% of its revenue in smooth out some seasonality in its 1H14, with just 4% of HTS’s total earnings. 12-month range 9.59-14.18 capital. The lending balance also Market cap (USDbn) 15.90 increased by 25-30% HoH, on our ■ What we recommend 3m avg daily turnover (USDm) 21.15 estimates, due to effective client Shares outstanding (m) 9,585 We are raising our 2014-16 ADT Major shareholder Bright Food (Group) Co. Ltd (4.7%) referrals among HTS’s various assumptions to CNY220bn from business lines. CNY200bn, but factor in the Financial summary (CNY) pressure on the margin finance Year to 31 Dec 14E 15E 16E  HTS: revenue mix (1H14) interest rate. We reaffirm our Buy Revenue (m) 19,222 24,175 29,618 Others Lending Operating profit (m) 7,381 8,815 9,832 22.1% 21.8% (1) rating on HTS and raise our Financial Net profit (m) 5,563 6,689 7,482 Gordon Growth Model-derived 6- Core EPS (fully-diluted) 0.580 0.698 0.781 leasing Traditional 8.0% brokerage month target price to HKD16.0 EPS change (%) 37.9 20.2 11.9 17.5% Daiwa vs Cons. EPS (%) 9.3 11.3 8.0 Trading (from HKD15.0), which implies a 17.1% 1.9x (from 1.8x) 2014E PBR. The PER (x) 17.5 14.6 13.0 Dividend yield (%) 1.7 2.1 2.3 Investment main downside risks would be Asset banking DPS 0.174 0.209 0.234 management 7.6% market-share losses for the lending PBR (x) 1.5 1.4 1.3 5.9% businesses and faster-than-expected ROE (%) 8.7 9.6 10.1 Source: Company, Daiwa estimates commission rate declines. Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 26 China Securities Sector 10 September 2014

Financial summary

 Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E A-share ADT (CNY mn) 222,288 227,557 173,922 131,573 200,000 220,000 220,000 220,000 Brokerage mkt share of company (%) 4.2 4.1 4.1 4.5 4.8 5.1 5.4 5.6 Commission rate for company (%) 0.147 0.118 0.100 0.100 0.092 0.086 0.081 0.076 Mkt annual equity financing (YoY, %) n.a. 162.9 (43.9) (37.6) (6.5) 80.0 20.0 20.0 Mkt annual debt financing (YoY, %) n.a. 0.9 54.7 28.6 (2.6) 20.0 20.0 20.0 Stock market annual return (%) 80.0 (14.3) (21.7) 3.2 (6.7) 0.0 0.0 0.0 Bond market annual return (%) 2.2 1.0 5.5 4.4 (0.5) 5.0 5.0 5.0 Margin finance bal (mkt) (CNY mn) n.a. 12,772 38,201 89,516 346,530 544,252 608,540 654,051 Cost-to-income (%) 45.6 54.1 56.8 55.6 46.7 41.2 35.9 32.3

 Profit and loss (CNYm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Gross fee and commission income 8,753 8,384 6,567 5,210 6,751 8,193 8,479 9,523 Gross interest income 1,407 1,647 2,553 2,879 3,671 6,983 10,737 13,898 Investment income 888 1,078 1,507 2,404 2,150 3,798 4,684 5,896 Other income 267 196 233 251 231 249 274 301 Total Revenue 11,316 11,305 10,860 10,743 12,803 19,222 24,175 29,618 Fee and commission expense (-) (998) (1,176) (1,044) (828) (849) (1,245) (1,207) (1,278) Finance costs(-) (245) (281) (460) (704) (1,484) (3,914) (6,676) (10,225) Business tax(-) 00000000 Other Operating Expenses (4,157) (4,936) (5,129) (5,149) (5,132) (6,683) (7,477) (8,284) Operating profit 5,916 4,912 4,227 4,061 5,338 7,381 8,815 9,832 Profit from Assoc/JV 66 78 73 66 117 123 138 143 Other Inc/Exp/Extord. (+/-)00000000 Pre-tax profit 5,982 4,990 4,300 4,127 5,455 7,505 8,953 9,975 Tax (1,320) (1,122) (1,018) (875) (1,174) (1,651) (1,970) (2,194) Min. int./pref. div./others (114) (182) (179) (215) (246) (291) (294) (298) Net profit (reported) 4,548 3,686 3,103 3,038 4,035 5,563 6,689 7,482 Net profit (adjusted) 4,548 3,686 3,103 3,038 4,035 5,563 6,689 7,482 EPS (reported)(CNY) 0.553 0.448 0.377 0.333 0.421 0.580 0.698 0.781 EPS (adjusted)(CNY) 0.553 0.448 0.377 0.333 0.421 0.580 0.698 0.781 EPS (adjusted fully-diluted)(CNY) 0.553 0.448 0.377 0.333 0.421 0.580 0.698 0.781 DPS (CNY) 0.200 0.150 0.150 0.126 0.120 0.174 0.209 0.234 Source: FactSet, Daiwa forecasts

- 16 - China Securities Sector 10 September 2014

Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment 94,181 78,743 54,850 55,371 58,687 61,622 65,791 70,277 Fee and commission receivables 677 980 873 1,113 1,647 4,184 4,966 5,690 Advances to customers 2,035 5,814 6,463 11,339 27,465 41,838 49,657 56,895 Reverse repo & bank placement 0 2,120 606 2,235 9,037 29,097 67,275 127,487 Financial assets 19,545 21,956 29,365 43,704 57,898 66,994 84,377 116,555 Long-term equity investments 216 543 926 1,728 2,231 2,343 2,460 2,583 Other assets 4,076 5,256 5,895 10,992 12,158 35,194 41,956 48,416 Total assets 120,730 115,413 98,977 126,482 169,124 241,272 316,481 427,902 Accounts payable 66,580 63,682 38,014 36,957 40,430 41,857 43,950 46,147 Repo and bank placements 6,898 2,922 9,525 18,191 27,567 56,818 99,763 168,055 Financial liabilities 0 0 2,521 8,761 15,303 33,221 50,757 76,908 Bonds payable 0 0 0 0 17,940 34,520 41,424 49,708 Other liabilities 2,733 3,192 2,307 2,143 3,779 5,243 6,291 7,549 Total liabilities 76,212 69,796 52,366 66,052 105,018 171,658 242,185 348,368 Share capital 8,228 8,228 8,228 9,585 9,585 9,585 9,585 9,585 Reserves/R.E./others 35,186 36,240 36,815 49,095 51,922 57,432 62,114 67,351 Shareholders' equity 43,414 44,467 45,042 58,680 61,507 67,016 71,699 76,936 Minority interests 1,105 1,149 1,568 1,751 2,598 2,598 2,598 2,598 Total equity & liabilities 120,730 115,413 98,977 126,482 169,124 241,272 316,481 427,902 BVPS (CNY) 5.276 5.405 5.474 6.433 6.417 6.992 7.480 8.027

 Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Gross fee and commission (YoY) n.a. (4.2) (21.7) (20.7) 29.6 21.4 3.5 12.3 Operating profit (YoY) n.a. (17.0) (13.9) (3.9) 31.4 38.3 19.4 11.5 Net profit (YoY) n.a. (19.0) (15.8) (2.1) 32.8 37.9 20.2 11.9 EPS (YoY) (FD) n.a. (19.0) (15.8) (11.7) 26.4 37.9 20.2 11.9 ROAE 11.1 8.4 6.9 5.9 6.7 8.7 9.6 10.1 ROAA 4.7 3.1 2.9 2.7 2.7 2.7 2.4 2.0 Net dividend payout 36.2 33.5 39.8 37.9 28.5 30.0 30.0 30.0 Brokerage commission/Op inc 66.9 57.4 41.6 33.5 41.4 34.0 29.9 26.5 Inv banking commission/Op inc 5.4 11.9 12.0 9.7 11.6 13.9 13.2 17.4 Assest mgmt inc / Op inc 6.7 6.5 9.5 8.6 6.5 5.5 5.2 5.0 Interest inc / Op inc 10.5 12.4 20.1 21.7 19.3 20.0 23.2 18.9 Inv inc / Op inc 8.0 9.8 14.5 23.9 19.0 24.8 26.8 30.4 Leverage 2.7 2.5 2.1 2.1 2.6 3.5 4.3 5.4 Cost-to-income 47.7 56.6 61.1 62.2 58.3 61.6 63.5 66.8 Net capital ratio 779.2 571.7 1,456.9 1,578.2 1,281.4 1,352.0 1,161.2 1,022.1 Source: FactSet, Daiwa forecasts

 Company profile Haitong Securities (HTS) is a leading full-service investment bank in China. It was established in Shanghai in 1988 and was listed on the Shanghai Stock Exchange and Hong Kong Stock Exchange in 2007 and 2012, respectively. Its principal business lines include brokerage, investment banking, asset management, proprietary trading and direct investment.

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Financials / China 6881 HK Financials / China 10 September 2014

China Galaxy Securities

China Galaxy Securities Target (HKD): 5.50  6.60 Upside: 8.9% 6881 HK 10 Sep price (HKD): 6.06

Upgrading: the place to go for better ADT 1 Buy 2 Outperform (from Hold) • CGS stands to benefit the most from a near-term boost in ADT 3 Hold that we expect from the launch of the SHKSC programme 4 Underperform • Its margin-finance market share has stabilised and now 5 Sell accounts for a larger proportion of revenue • Upgrading to Outperform (2); raising our target price to HKD6.60

1H14. Some 23% of CGS’ revenue think it will be difficult for CGS to now comes from its lending grow its institutional-focused stock- businesses (vs. 15% for 2013). repo business, although its retail-  focused margin-lending business  China Securities Sector: revenue mix will likely prosper. (1H14)  Leon Qi, CFA 100% Forecast revisions (%) (852) 2532 4381 Year to 31 Dec 14E 15E 16E 80% [email protected] Revenue change 5.3 3.9 2.7 60% Net profit change 7.3 8.6 10.7 47% 40% Core EPS (FD) change 7.3 8.6 10.7 27% 18% 20% Source: Daiwa forecasts ■ What's new 19% 22% 23% Although Galaxy Securities’ (CGS) 0% CITICS HTS CGS Share price performance reliance on its brokerage business Lending Traditional brokerage has led to lower margins and less Investment banking Asset management (HKD) (%) Trading Financial leasing 7.5 125 diversified revenue sources, we Others 6.6 114 think this is reflected in its valuation Source: Companies, Daiwa estimates 5.8 103 (which is the lowest versus peers), ■ What we recommend 4.9 91 and that a boost in ADT driven by 4.0 80 the start of the upcoming SHKSC We raise our 2014 ADT assumption Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 programme should boost earnings. for CGS to CNY220bn (from CGS Co Ltd (LHS) Relative to HSI (RHS) CNY200bn) and factor in the developments in its margin-finance ■ What's the impact 12-month range 4.27-7.09 Brokerage-centric model. business. Accordingly, we raise our Market cap (USDbn) 5.89 Unlike CGS’ 2 larger peers, which 2014-16E earnings by 7-11%. We raise 3m avg daily turnover (USDm) 13.24 started diversifying a few years ago, our Gordon Growth Model-based 6- Shares outstanding (m) 7,537 Galaxy Financial Holdings (69.6%) CGS only started its transformation month target price to HKD6.60 (from Major shareholder process last year. Although its HKD5.50), implying a 2014E PBR of brokerage business accounted for a 1.5x (from 1.2x). We upgrade our Financial summary (CNY) rating from Hold (3) to Outperform Year to 31 Dec 14E 15E 16E smaller proportion of revenue in Revenue (m) 10,312 11,993 13,270 1H14, this business still accounted (2) on its sensitivity to A-share ADT Operating profit (m) 3,481 3,887 4,013 for almost half of its revenue over and undemanding valuation. The key Net profit (m) 2,589 2,892 2,984 the period (excluding its margin- downside risk would be a faster-than- Core EPS (fully-diluted) 0.343 0.384 0.396 expected fall in commission rates. EPS change (%) 11.7 11.7 3.2 finance and stock-repo businesses). Daiwa vs Cons. EPS (%) (0.7) (2.4) (11.0) PER (x) 14.0 12.5 12.1 Rising margin-finance. After a ■ How we differ Dividend yield (%) 2.9 3.2 3.3 year of market-share losses in 2013, Unlike the market, we believe the DPS 0.137 0.153 0.158 CGS’ margin-lending business performances of CGS’ different PBR (x) 1.4 1.3 1.2 ROE (%) 10.0 10.5 10.2 recovered some market share in lending businesses will vary. We Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 26 China Securities Sector 10 September 2014

Financial summary

 Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E A-share ADT (CNYm) 78,907 850,320 487,148 545,769 200,000 220,000 220,000 220,000 Brokerage mkt share of company (%) n.a. 1.4 1.9 1.2 5.2 5.3 5.4 5.4 Commission rate for company (%) n.a. 0.103 0.083 0.083 0.080 0.076 0.072 0.070 Mkt annual equity financing (YoY, %) n.a. 162.9 (43.9) (37.6) (6.5) 80.0 20.0 20.0 Mkt annual debt financing (YoY, %) 46.0 0.9 54.7 28.6 (2.6) 20.0 20.0 20.0 Stock market annual return (%) 80.0 (14.3) (21.7) 3.2 (6.7) 0.0 0.0 0.0 Bond market annual return (%) 2.2 1.0 5.5 4.4 (0.5) 5.0 5.0 5.0 Margin finance bal (mkt) (CNYm) 0 12,772 38,201 89,516 326,991 514,297 575,981 620,189 Cost-to-income (%) n.a. 50.1 60.0 63.7 57.5 54.9 52.8 53.5

 Profit and loss (CNYm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Gross fee and commission income n.a. 6,869 4,664 3,831 5,039 5,531 5,947 6,350 Gross interest income n.a. 1,243 1,629 1,699 2,666 3,661 4,745 5,403 Investment income n.a. 314 104 395 697 1,088 1,253 1,445 Other income n.a. 34 33 38 23 32 48 72 Total Revenue n.a. 8,460 6,431 5,962 8,426 10,312 11,993 13,270 Fee and commission expense (-) n.a. (209) (169) (108) (171) (161) (183) (195) Finance costs(-) n.a. (329) (309) (279) (685) (1,171) (1,770) (2,162) Business tax(-) n.a. (397) (278) (254) (392) (431) (518) (621) Other Operating Expenses n.a. (3,635) (3,414) (3,434) (4,285) (5,068) (5,635) (6,278) Operating profit n.a. 3,891 2,261 1,886 2,893 3,481 3,887 4,013 Profit from Assoc/JV n.a. 0 0 0 (0) 0 0 0 Other Inc/Exp/Extord. (+/-)n.a.0000000 Pre-tax profit n.a. 3,891 2,261 1,886 2,893 3,481 3,887 4,013 Tax n.a. (1,100) (676) (454) (738) (870) (972) (1,003) Min. int./pref. div./others n.a. (14) (7) (13) (20) (22) (24) (26) Net profit (reported) n.a. 2,777 1,578 1,420 2,135 2,589 2,892 2,984 Net profit (adjusted) n.a. 2,777 1,578 1,420 2,135 2,589 2,892 2,984 EPS (reported)(CNY) n.a. 0.463 0.263 0.237 0.308 0.343 0.384 0.396 EPS (adjusted)(CNY) n.a. 0.463 0.263 0.237 0.308 0.343 0.384 0.396 EPS (adjusted fully-diluted)(CNY) n.a. 0.463 0.263 0.237 0.308 0.343 0.384 0.396 DPS (CNY) n.a. 0.000 0.000 0.000 0.067 0.137 0.153 0.158 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment n.a. 80,260 45,849 41,148 37,458 44,586 47,015 49,585 Fee and commission receivables n.a. 129 108 203 301 3,158 3,823 4,428 Advances to customers n.a. 533 2,549 5,439 18,393 31,575 38,228 44,281 Reverse repo & bank placement n.a. 60 592 810 1,284 1,541 1,695 1,864 Financial assets n.a. 8,854 6,044 12,104 15,760 18,186 20,887 24,884 Long-term equity investments n.a. 0 0 0 20 22 24 26 Other assets n.a. 4,428 4,074 4,592 5,069 6,460 7,642 9,051 Total assets n.a. 94,265 59,215 64,296 78,284 105,527 119,314 134,120 Accounts payable n.a. 76,795 41,231 39,746 36,451 42,622 44,753 46,990 Repo and bank placements n.a. 0 3 5,483 9,188 22,563 31,710 41,561 Financial liabilities n.a. 0 0 19 303 363 436 523 Bonds payable n.a. 0 0 0 4,000 9,500 9,500 9,500 Other liabilities n.a. 2,925 1,854 1,489 2,920 3,504 4,205 5,046 Total liabilities n.a. 79,720 43,088 46,737 52,863 78,552 90,604 103,620 Share capital n.a. 6,000 6,000 6,000 7,537 7,537 7,537 7,537 Reserves/R.E./others n.a. 8,460 10,004 11,430 17,638 19,191 20,926 22,716 Shareholders' equity n.a. 14,460 16,004 17,430 25,175 26,728 28,463 30,253 Minority interests n.a. 84 123 129 247 247 247 247 Total equity & liabilities n.a. 94,265 59,215 64,296 78,284 105,527 119,314 134,120 BVPS (CNY) n.a. 2.410 2.667 2.905 3.627 3.546 3.776 4.014

 Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Gross fee and commission (YoY) n.a. n.a. (32.1) (17.9) 31.6 9.8 7.5 6.8 Operating profit (YoY) n.a. n.a. (41.9) (16.6) 53.4 20.3 11.7 3.2 Net profit (YoY) n.a. n.a. (43.2) (10.0) 50.4 21.3 11.7 3.2 EPS (YoY) (FD) n.a. n.a. (43.2) (10.0) 30.0 11.7 11.7 3.2 ROAE n.a. n.a. 10.4 8.5 10.0 10.0 10.5 10.2 ROAA n.a. n.a. 2.1 2.3 3.0 2.8 2.6 2.4 Net dividend payout n.a. 0.0 0.0 0.0 21.9 40.0 40.0 40.0 Brokerage commission/Op inc n.a. 74.8 64.6 54.3 58.8 49.3 42.5 37.9 Inv banking commission/Op inc n.a. 9.4 11.2 12.5 6.2 10.5 14.6 18.0 Assest mgmt inc / Op inc n.a. 0.4 0.4 0.7 1.7 1.9 2.0 2.0 Interest inc / Op inc n.a. 15.3 26.7 25.1 26.3 27.8 29.7 29.7 Inv inc / Op inc n.a. 3.6 1.4 6.5 6.7 10.0 10.6 11.5 Leverage n.a. 648.1 367.2 366.2 307.9 391.2 415.6 439.7 Cost-to-income n.a. 54.0 64.8 68.4 65.7 66.2 67.6 69.8 Net capital ratio n.a. 298.3 436.2 662.6 909.0 1,223.9 836.3 677.8 Source: FactSet, Daiwa forecasts

 Company profile Established in 2007, China Galaxy Securities (CGS) was the sixth-largest securities firm in China in terms of revenue in 2012, and had the securities industry’s largest branch network nationwide as of the end of 2012. The company’s traditional strength is in the brokerage business. CGS was listed on the Hong Kong Stock Exchange on 22 May 2013.

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Financials / China 6030 HK Financials / China 10 September 2014

CITIC Securities

CITIC Securities Target (HKD): 19.00  20.00 Upside: 4.2% 6030 HK 10 Sep price (HKD): 19.20

Advantages in price 1 Buy • Share price rallies on rising expectations due to Stock Connect, 2 Outperform relieved capital constraints, and good 1H results 3 Hold (from Outperform) • Regulations not an issue for higher leverage now; the key is the 4 Underperform cost of borrowing 5 Sell • Downgrade to Hold (3) from Outperform (2) after recent rally and drag from overseas markets

discussing relaxing the rules on net ■ How we differ capital ratios so that securities firms Unlike the consensus, we think will be able to take up more SHKSC will lead to an upward shift leverage. As such, the current 48% in normalised ADT on the A-share requirement might be reduced to market. Leon Qi, CFA 24%. If that is the case, the most Forecast revisions (%) (852) 2532 4381 binding capital metric will be the net Year to 31 Dec 14E 15E 16E [email protected] capital/liabilities ratio, which Revenue change (0.7) (1.8) 0.6 Net profit change (3.0) (5.2) (0.1) theoretically allows securities firms Core EPS (FD) change (3.0) (5.2) (0.1) to gear up to 10x leverage. Source: Daiwa forecasts ■ What's new Citic Securities’ (CITICS) net capital ■ What we recommend Share price performance constraints were relieved after its We increase our ADT assumptions large one-off property revaluation (HKD) (%) from CNY200bn to CNY220bn over 22 125 gain in 1H14. However, its overseas 2014-16. We also factor in weak operation turned out to be a drag on 20 115 market turnover in overseas markets 18 105 its overall profitability in 1H14. where CLSA operates and its higher- 16 95 than-expected costs. 14 85 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 We believe that while CITICS has the best cross-border service After the large share-price increase CITIC Sec (LHS) Relative to HSI (RHS) capacity among all Chinese over the past 3 months, CITICS’ securities firms, the near-term valuation seems a bit demanding to 12-month range 14.20-21.60 earnings impact might have already us, and hence we are downgrading Market cap (USDbn) 27.29 3m avg daily turnover (USDm) 15.77 been priced in. our rating to Hold (3) from Shares outstanding (m) 11,017 Outperform (2). Our updated Gordon Major shareholder CITIC Limited (20.9%) ■ What's the impact Growth Model derives a revised 6- 15% rally in 3 months. CITICS’ month target price of HKD20.0, share price has rallied strongly over Financial summary (CNY) which implies a 2.0x (1.9x previously) Year to 31 Dec 14E 15E 16E the past 3 months driven by: 1) 2014E PBR. We are lowering our Revenue (m) 33,362 39,830 48,443 rising expectations for the SHKSC to 2014-16E earnings by 0.1-5.2% due to Operating profit (m) 9,632 10,576 12,505 bring higher volume and index value Net profit (m) 7,273 7,938 9,317 lower-than-expected revenue from Core EPS (fully-diluted) 0.660 0.721 0.846 in Shanghai, 2) better-than-expected overseas operations. The key 1H14 earnings, and 3) potential EPS change (%) 38.7 9.1 17.4 downside risk to our view would be Daiwa vs Cons. EPS (%) 2.2 (4.3) (3.5) relaxation of the net capital rules for rising interest expenses due to more PER (x) 23.0 21.1 18.0 securities firms in China. corporate bond and sub-debt Dividend yield (%) 1.3 1.4 1.7 DPS 0.198 0.216 0.254 issuances, while the upside risk is an Net capital. Apart from CITICS’ PBR (x) 1.8 1.7 1.6 aggressive rebound in ADT in ROE (%) 8.1 8.3 9.2 own higher net capital, the CSRC is overseas markets. Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 26 China Securities Sector 10 September 2014

Financial summary

 Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E A-share ADT (CNY mn) 222,288 227,557 173,922 131,573 200,000 220,000 220,000 220,000 Brokerage mkt share of company (%) 5.0 5.3 5.5 5.8 6.2 6.2 6.4 6.4 Commission rate for company (%) 0.126 0.098 0.097 0.089 0.087 0.083 0.080 0.076 Mkt annual equity financing (YoY, %) 0.0 162.9 (43.9) (37.6) (6.5) 80.0 20.0 20.0 Mkt annual debt financing (YoY, %) n.a. 0.9 54.7 28.6 (2.6) 20.0 20.0 20.0 Stock market annual return (%) 80.0 (14.3) (21.7) 3.2 (6.7) 0.0 0.0 0.0 Bond market annual return (%) 2.2 1.0 5.5 4.4 (0.5) 5.0 5.0 5.0 Margin finance bal (mkt) (CNY mn) n.a. 12,772 38,201 89,516 346,530 544,252 608,540 654,051 Cost-to-income - exclude finance cost 42.1 43.9 42.1 54.1 51.2 51.3 47.6 44.9 (%)

 Profit and loss (CNYm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Gross fee and commission income 18,151 16,598 9,713 7,090 10,699 15,730 17,426 18,812 Gross interest income 2,019 1,988 2,056 2,172 4,090 7,984 12,955 19,487 Investment income 3,428 11,501 14,393 3,648 5,259 7,901 9,069 9,726 Other income 270 194 209 161 231 1,746 381 419 Total Revenue 23,868 30,281 26,371 13,071 20,279 33,362 39,830 48,443 Fee and commission expense (-) (1,232) (1,740) (1,067) (801) (1,061) (5,459) (5,998) (6,538) Finance costs(-) (618) (685) (655) (948) (3,260) (6,610) (10,281) (14,176) Business tax(-) (1,034) (962) (488) (401) (773) (1,004) (1,105) (1,215) Other Operating Expenses (7,785) (10,599) (9,545) (5,867) (8,550) (10,656) (11,871) (14,009) Operating profit 13,199 16,296 14,615 5,055 6,635 9,632 10,576 12,505 Profit from Assoc/JV 103 24 416 432 211 251 274 301 Other Inc/Exp/Extord. (+/-)00000000 Pre-tax profit 13,302 16,320 15,031 5,487 6,846 9,883 10,850 12,806 Tax (3,214) (4,184) (2,427) (1,180) (1,538) (2,220) (2,438) (2,877) Min. int./pref. div./others (1,104) (825) (28) (69) (64) (390) (474) (612) Net profit (reported) 8,984 11,311 12,576 4,237 5,244 7,273 7,938 9,317 Net profit (adjusted) 8,984 11,311 12,576 4,237 5,244 7,273 7,938 9,317 EPS (reported)(CNY) 1.355 1.137 1.234 0.385 0.476 0.660 0.721 0.846 EPS (adjusted)(CNY) 1.355 1.137 1.234 0.385 0.476 0.660 0.721 0.846 EPS (adjusted fully-diluted)(CNY) 1.355 1.137 1.234 0.385 0.476 0.660 0.721 0.846 DPS (CNY) 0.500 0.500 0.465 0.300 0.150 0.198 0.216 0.254 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (CNYm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment 139,043 80,356 69,205 59,687 67,810 78,603 84,056 89,934 Fee and commission receivables 364 392 36 48 440 528 634 761 Advances to customers 423 1,975 2,967 9,423 34,302 52,850 57,247 61,560 Reverse repo & bank placement 1,903 1,866 1,366 794 22,092 55,882 109,550 192,170 Financial assets 56,984 58,028 56,955 77,109 112,094 123,604 130,907 138,513 Long-term equity investments 1,263 1,762 9,479 9,796 4,298 5,157 6,189 7,426 Other assets 6,827 8,798 8,273 11,651 30,319 46,316 52,144 55,962 Total assets 206,807 153,178 148,280 168,508 271,354 362,942 440,727 546,326 Accounts payable 112,478 62,081 36,477 34,807 45,196 50,558 53,086 55,740 Repo and bank placements 17,923 6,902 14,333 24,944 60,414 119,992 163,022 231,442 Financial liabilities 6 435 1,134 1,446 23,701 23,967 24,285 24,667 Bonds payable 1,500 1,500 1,500 1,500 26,177 42,177 62,177 82,177 Other liabilities 10,086 11,413 7,846 19,127 26,463 31,756 38,107 45,728 Total liabilities 141,993 82,330 61,290 81,823 181,952 268,449 340,677 439,755 Share capital 6,630 9,946 11,017 11,017 11,017 11,017 11,017 11,017 Reserves/R.E./others 54,969 60,489 75,570 75,448 76,672 81,762 87,319 93,841 Shareholders' equity 61,599 70,435 86,587 86,465 87,688 92,779 98,336 104,858 Minority interests 3,215 413 403 219 1,714 1,714 1,714 1,714 Total equity & liabilities 206,807 153,178 148,280 168,508 271,354 362,942 440,727 546,326 BVPS (CNY) 9.291 7.082 8.495 7.848 7.959 8.422 8.926 9.518

 Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Gross fee and commission (YoY) 35.9 (8.6) (41.5) (27.0) 50.9 47.0 10.8 8.0 Operating profit (YoY) 38.1 23.5 (10.3) (65.4) 31.3 45.2 9.8 18.2 Net profit (YoY) 23.0 25.9 11.2 (66.3) 23.8 38.7 9.1 17.4 EPS (YoY) (FD) 23.0 (16.1) 8.5 (68.8) 23.8 38.7 9.1 17.4 ROAE 15.4 17.1 16.0 4.9 6.0 8.1 8.3 9.2 ROAA 5.2 6.3 8.3 2.7 2.4 2.3 2.0 1.9 Net dividend payout 36.9 44.0 37.7 78.0 31.5 30.0 30.0 30.0 Brokerage commission/Op inc 50.7 31.9 18.7 29.8 39.0 32.3 30.7 27.2 Inv banking commission/Op inc 11.2 11.1 8.2 22.8 13.3 11.2 12.9 13.0 Assest mgmt inc / Op inc 14.8 12.6 12.8 2.6 8.9 13.1 13.1 12.5 Interest inc / Op inc 8.6 6.7 8.5 10.1 5.0 5.1 9.0 15.5 Inv inc / Op inc 15.9 38.8 53.2 29.9 29.4 29.5 30.7 28.4 Leverage 319.1 216.2 170.5 194.4 303.5 384.1 440.5 512.6 Cost-to-income 44.7 46.2 44.6 61.3 67.3 71.1 73.4 74.2 Net capital ratio 491.8 524.6 2,246.3 1,333.0 849.7 1,081.9 991.9 1,000.4 Source: FactSet, Daiwa forecasts

 Company profile CITIC Securities (CITICS) is a leading full-service investment bank in China, with a market share of 6.2% in terms of brokerage trading volume in 2013. Its core business scope covers brokerage, underwriting and sponsorship, proprietary trading and asset management.

- 23 - China Securities Sector 10 September 2014

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking Kosuke MIZUNO (852) 2848 4949 / [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] (852) 2773 8273 Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Regional Research Co-head Shipbuilding; Steel John HETHERINGTON (852) 2773 8787 [email protected] Jun Yong BANG (82) 2 787 9168 [email protected] Regional Deputy Head of Asia Pacific Research Tyres; Chemicals Rohan DALZIELL (852) 2848 4938 [email protected] Mike OH (82) 2 787 9179 [email protected] Regional Head of Product Management Capital Goods (Construction and Machinery) Kevin LAI (852) 2848 4926 [email protected] Sang Hee PARK (82) 2 787 9165 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Consumer/Retail Christie CHIEN (852) 2848 4482 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China) TAIWAN Jonas KAN (852) 2848 4439 [email protected] Mark CHANG (886) 2 8758 6245 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property Head of Taiwan Research Leon QI (852) 2532 4381 [email protected] Steven TSENG (886) 2 8758 6252 [email protected] Banking (Hong Kong, China); Broker (China) IT/Technology Hardware (PC Hardware) Alison LAW (852) 2532 4308 [email protected] Christine WANG (886) 2 8758 6249 [email protected] Head of Regional Consumer; Consumer (Hong Kong/China); Gaming and Leisure (Hong Kong, China) IT/Technology Hardware (Automation); Cement; Consumer Jamie SOO (852) 2773 8529 [email protected] Kylie HUANG (886) 2 8758 6248 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (Handsets and Components) Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China) INDIA Lynn CHENG (852) 2773 8822 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] IT/Electronics (Semiconductor) Head of India Research; Strategy; Banking/Finance Dennis IP (852) 2848 4068 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) Capital Goods; Utilities John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China) SINGAPORE Joey CHEN (852) 2848 4483 [email protected] Adrian LOH (65) 6499 6548 [email protected] Steel (China) Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and Kelvin LAU (852) 2848 4467 [email protected] China); Capital Goods (Singapore) Head of Transportation (Hong Kong, China); Transportation (Regional) David LUM (65) 6329 2102 [email protected] Carrie YEUNG (852) 2773 8243 [email protected] Property and REITs Transportation (Hong Kong, China) Evon TAN (65) 6499 6546 [email protected] Jibo MA (852) 2848 4489 [email protected] Property and REITs Head of Custom Products Group; Custom Products Group Ramakrishna MARUVADA (65) 6499 6543 [email protected] Thomas HO (852) 2773 8716 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (China, ASEAN & India) Custom Products Group Jame OSMAN (65) 6321 3092 [email protected]

Telecom (ASEAN & India); Pharmaceuticals and Healthcare (Singapore) PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

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

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

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The following explains the rating system in the report as compared to relevant local indices, 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, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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