Vista Land & Lifescapes (VLL

Philippines Real Estate 26 October 2017

Vista Land & Lifescapes (VLL PM) Vista Land & Lifescapes

Target price: PHP7.10 Share price (26 Oct): PHP5.85 | Up/downside: +21.4%

Initiation: a quality home and mall builder

 Initiating with a Buy (1) rating and 12-month TP of PHP7.10 Micaela Abaquita +63 2 7373021  End-user and provincial focus to benefit from infra and rural growth [email protected]  Improving earnings visibility with retail-oriented leasing expansion

Investment case: We initiate coverage of Vista Land & Lifescapes (VLL) Share price performance with a Buy (1) rating and 12-month TP of PHP7.10, offering 21% upside (PHP) (%) potential. In our view, the stock is currently undervalued and should trade at 6.5 115 a discount closer to its past-5-year average on the back of: 1) accelerated 6.0 109 pre-sales growth as its active and strategic pursuit of the overseas Filipino 5.6 103 5.1 96 worker (OFW) and local end-user markets bears fruit, and 2) improved 4.6 90 earnings visibility as it grows its predominantly retail recurring income base, Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 following its acquisition of Starmalls Inc in 2015. Vista Land (LHS) Relative to PCOMP Index (RHS)

VLL is an end-user-oriented property developer with strong brand 12-month range 4.65-6.40 recognition in the low-cost and affordable horizontal space, via its Camella Market cap (USDbn) 1.45 brand. Consistent with its end-user thrust, it also has the largest provincial 3m avg daily turnover (USDm) 0.49 Shares outstanding (m) 12,839 residential revenue exposure among property names under our coverage. Major shareholder Fine Properties Inc. (51.9%) In 1H17, pre-sales growth accelerated to 12% YoY, from 2% YoY in 2016, driven by a recovery in the demand from OFWs and improved confidence Financial summary (PHP) among locals who were encouraged by the increased visibility of Year to 31 Dec 17E 18E 19E infrastructure developments. As a result, the company hiked its launch Revenue (m) 35,984 41,177 46,554 guidance for 2017 from an initial PHP30bn to as high as PHP50bn. We Operating profit (m) 13,035 15,228 17,586 Net profit (m) 8,918 10,153 11,399 forecast VLL’s residential revenue to rise by a CAGR of 12.4% from 2016- Core EPS (fully-diluted) 0.695 0.791 0.888 19 and account for 81% of real-estate revenue by 2019. EPS change (%) 2.7 13.8 12.3 Daiwa vs Cons. EPS (%) 0.1 0.6 (0.8) PER (x) 8.4 7.4 6.6 VLL is also aggressively expanding its malls business. While older Dividend yield (%) 2.2 2.4 2.8 Starmalls (now under VLL) visibly cater to the mass market, its newer malls DPS 0.126 0.142 0.162 have been upgraded and re-branded to cater to the broader middle market PBR (x) 0.4 0.4 0.3 as well – a development we believe remains underappreciated given the EV/EBITDA (x) 10.9 9.9 9.1 ROE (%) 11.4 11.8 12.0 widespread impression that Starmalls cater only to the low-income market. Source: FactSet, Daiwa forecasts Our “on-the-ground” research gives us conviction that VLL can hit 1.3m sq m of retail GFA by 2018, from 882k sq m in 2016. We expect rental revenue to rise by a 2016-19E CAGR of 25%, and reach 19% of revenue by 2019.

Catalysts: We see higher-than-expected remittances growth and the government’s initiatives to accelerate infrastructure and rural development as key catalysts given VLL’s exposure to the OFW and provincial markets.

Valuation: Our NAV-based 12-month TP of PHP7.10 for VLL assumes: 1) raw landbank valued at market, 2) residential business valued at NPV of inventory, 3) an 11% cap rate on rental EBITDA, and 4) a 55% NAV discount as we see corporate governance issues related to its Starmalls acquisition offsetting any narrowing of the discount from improved earnings visibility.

Risks: Given its exposure to the residential segment and the OFW market, we see a considerable hike in interest rates and a significant slowdown in remittances growth as the key downside risks to our call.

See important disclosures, including any required research certifications, beginning on page 22

Vista Land & Lifescapes (VLL PM): 26 October 2017

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook VLL: net income

We forecast VLL’s net income attributable to equity holders 12 19 20 of the parent to rise by a 2016-19E CAGR of 13%, as we 18 10 14 project revenue to rise by a 14.5% CAGR over the same 13 14 16 12 12 14 period. 8 12 6 10 We see revenue being driven by a 12% 3-year CAGR in 8 4 the residential segment as pre-sales grow steadily on the 6 4 back of healthy end-user demand and continued provincial 2 expansion. Meanwhile, we expect rental revenue to rise by 6.2 7.0 7.9 8.9 10.2 11.4 2 0 0 a faster 25% 3-year CAGR as VLL expands its leasing 2014 2015 2016 2017E 2018E 2019E space from 951k sq m of GFA as of 1H17 to 1.3m sq m of Net income (PHPbn) YoY growth (%) GFA by 2018E. By 2019E, we expect rental revenue to Source: Company, Daiwa forecasts account for 19% of revenue (ex. miscellaneous revenue) Note: Net income attributable to equity holders of the parent from 15% as of 2016.

Valuation VLL: historical PER Our PHP7.10 NAV-based target price is based on: 1) its 16 efficient landbank valued at market prices, 2) its residential 14 12 business valued at NPV of inventory, and 3) an 11% cap 10 rate on rental EBITDA. We applied a 55% discount to NAV 8 6 – wider than its 50% past-5-year average discount – as we 4 see recent corporate governance issues related to its 2 Starmalls acquisition weighing on the stock and offsetting 0

any narrowing of the discount by improved earnings

6/26/2014 9/26/2016 9/26/2013 3/26/2014 9/26/2014 3/26/2015 6/26/2015 9/26/2015 3/26/2016 6/26/2016 3/26/2017 6/26/2017 9/26/2017

visibility. 6/26/2013

12/26/2013 12/26/2014 12/26/2015 12/26/2016

-2SD -1SD AVERAGE At our TP, VLL would trade at a 1-year forward PER of +2SD +1SD PE

9.5x, largely in line with its past 5-year average PER of 9x. Source: Bloomberg, Daiwa forecasts

Earnings revisions VLL: consensus EPS forecasts The consensus forecasts have been steady recently. The 10 1.2 steep downward revision in 2016 was due to the Starmalls 8 1 acquisition, the structure and valuation of which resulted in 0.8 6 30% EPS dilution. 0.6 4 0.4 Going forward, we expect revisions to be skewed upwards 2 0.2 on the back of the company’s accelerating pre-sales 0 0 growth and its upgraded 2017 launch guidance from

PHP30bn to PHP50bn.

7-Apr-15 7-Oct-15 7-Apr-16 7-Oct-16 7-Apr-17 7-Oct-17

7-Jun-17 7-Jun-15 7-Jun-16

7-Feb-16 7-Feb-17

7-Aug-15 7-Dec-16 7-Dec-15 7-Aug-16 7-Aug-17 Price BEst Standard EPS, Adj+ 2018 A BEst Standard EPS, Adj+ 2017* A Source: Bloomberg

Vista Land & Lifescapes (VLL PM): 26 October 2017

Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Pre-sales, PHP bn n.a. n.a. 51.7 56.7 57.8 69.3 80.5 85.0 Residential launches, PHP bn n.a. n.a. 26.6 40.4 26.2 49.8 49.8 49.8 Additional retail GLA, '000 sqm n.a. n.a. 31.1 27.8 201.1 132.0 132.0 0.0 Additional office GLA, '000 sqm n.a. n.a. 0.0 9.9 49.8 0.0 0.0 0.0

Profit and loss (PHPm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Residential n.a. n.a. 23,081 25,212 25,668 29,338 32,962 36,496 Rental n.a. n.a. 1,527 2,246 4,375 5,536 6,946 8,622 Other Revenue n.a. n.a. 900 1,231 953 1,109 1,269 1,435 Total Revenue n.a. n.a. 25,508 28,690 30,996 35,984 41,177 46,554 Other income n.a. n.a. 0 0 0 0 0 0 COGS n.a. n.a. (11,032) (12,254) (12,321) (14,132) (15,860) (17,561) SG&A n.a. n.a. (4,371) (4,724) (4,541) (5,255) (5,998) (6,768) Other op.expenses n.a. n.a. (2,084) (2,168) (3,053) (3,561) (4,091) (4,638) Operating profit n.a. n.a. 8,021 9,543 11,080 13,035 15,228 17,586 Net-interest inc./(exp.) n.a. n.a. (964) (1,348) (1,372) (2,028) (2,697) (3,516) Assoc/forex/extraord./others n.a. n.a. (29) (7) (26) 0 0 0 Pre-tax profit n.a. n.a. 7,028 8,188 9,683 11,007 12,531 14,070 Tax n.a. n.a. (741) (1,001) (1,582) (1,871) (2,130) (2,392) Min. int./pref. div./others n.a. n.a. (130) (155) (193) (218) (248) (279) Net profit (reported) n.a. n.a. 6,156 7,032 7,907 8,918 10,153 11,399 Net profit (adjusted) n.a. n.a. 6,156 7,032 7,907 8,918 10,153 11,399 EPS (reported)(PHP) n.a. n.a. 0.721 0.622 0.676 0.695 0.791 0.888 EPS (adjusted)(PHP) n.a. n.a. 0.721 0.622 0.676 0.695 0.791 0.888 EPS (adjusted fully-diluted)(PHP) n.a. n.a. 0.721 0.622 0.676 0.695 0.791 0.888 DPS (PHP) n.a. n.a. 0.119 0.091 0.112 0.126 0.142 0.162 EBIT n.a. n.a. 8,021 9,543 11,080 13,035 15,228 17,586 EBITDA n.a. n.a. 8,702 10,309 12,078 14,210 16,588 19,137

Cash flow (PHPm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax n.a. n.a. 7,028 8,188 9,683 11,007 12,531 14,070 Depreciation and amortisation n.a. n.a. 681 913 1,145 1,322 1,508 1,698 Tax paid n.a. n.a. (741) (1,001) (1,582) (1,871) (2,130) (2,392) Change in working capital n.a. n.a. (4,238) (6,012) (4,235) (5,604) (5,996) (6,294) Other operational CF items n.a. n.a. 3,035 (2,373) 1,388 514 677 1,384 Cash flow from operations n.a. n.a. 5,765 (285) 6,399 5,368 6,590 8,467 Capex n.a. n.a. (10,993) (15,329) (9,408) (11,788) (11,830) (11,878) Net (acquisitions)/disposals n.a. n.a. (10,363) (1,363) (6,199) (926) 0 0 Other investing CF items n.a. n.a. 0 0 0 0 0 0 Cash flow from investing n.a. n.a. (21,356) (16,692) (15,607) (12,714) (11,830) (11,878) Change in debt n.a. n.a. 18,373 19,354 14,836 10,000 7,000 7,000 Net share issues/(repurchases) n.a. n.a. (30) (2,182) (160) 0 0 0 Dividends paid n.a. n.a. (926) (1,235) (1,432) (1,616) (1,823) (2,075) Other financing CF items n.a. n.a. (935) 650 (1,151) (1,878) (2,525) (3,324) Cash flow from financing n.a. n.a. 16,482 16,588 12,092 6,506 2,653 1,601 Forex effect/others n.a. n.a. (29) (7) (26) 0 0 0 Change in cash n.a. n.a. 862 (395) 2,859 (840) (2,588) (1,810) Free cash flow n.a. n.a. (5,228) (15,614) (3,008) (6,419) (5,240) (3,412) Source: FactSet, Daiwa forecasts

Vista Land & Lifescapes (VLL PM): 26 October 2017

Financial summary continued … Balance sheet (PHPm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment n.a. n.a. 10,820 8,140 12,505 11,665 9,077 7,267 Inventory n.a. n.a. 17,926 22,856 22,955 26,328 29,548 32,717 Accounts receivable n.a. n.a. 24,720 28,394 32,246 36,203 40,842 45,681 Other current assets n.a. n.a. 2,829 3,815 3,807 4,110 4,495 4,877 Total current assets n.a. n.a. 56,295 63,205 71,513 78,306 83,962 90,542 Fixed assets n.a. n.a. 42,050 55,342 63,374 73,987 84,457 94,784 Goodwill & intangibles n.a. n.a. 0 147 147 147 147 147 Other non-current assets n.a. n.a. 26,642 34,201 39,734 41,809 43,433 45,138 Total assets n.a. n.a. 124,988 152,895 174,768 194,250 211,999 230,612 Short-term debt n.a. n.a. 8,083 3,940 7,570 0 12,862 0 Accounts payable n.a. n.a. 7,558 11,208 11,400 13,137 14,854 16,582 Other current liabilities n.a. n.a. 3,475 3,309 2,831 3,124 3,654 4,022 Total current liabilities n.a. n.a. 19,117 18,457 21,801 16,261 31,370 20,604 Long-term debt n.a. n.a. 37,226 60,724 71,929 89,500 83,638 103,500 Other non-current liabilities n.a. n.a. 4,388 3,749 4,542 4,542 4,542 4,542 Total liabilities n.a. n.a. 60,730 82,930 98,273 110,302 119,550 128,646 Share capital n.a. n.a. 8,572 12,688 13,147 13,147 13,147 13,147 Reserves/R.E./others n.a. n.a. 52,940 54,399 61,803 69,105 77,435 86,759 Shareholders' equity n.a. n.a. 61,512 67,087 74,950 82,252 90,582 99,906 Minority interests n.a. n.a. 2,746 2,878 1,545 1,696 1,867 2,060 Total equity & liabilities n.a. n.a. 124,988 152,895 174,768 194,250 211,999 230,612 EV n.a. n.a. 112,346 134,512 143,651 154,641 164,400 173,403 Net debt/(cash) n.a. n.a. 34,489 56,523 66,995 77,835 87,422 96,232 BVPS (PHP) n.a. n.a. 7.200 10.799 12.650 13.883 15.289 16.864

Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) n.a. n.a. n.a. 12.5 8.0 16.1 14.4 13.1 EBITDA (YoY) n.a. n.a. n.a. 18.5 17.2 17.7 16.7 15.4 Operating profit (YoY) n.a. n.a. n.a. 19.0 16.1 17.6 16.8 15.5 Net profit (YoY) n.a. n.a. n.a. 14.2 12.4 12.8 13.8 12.3 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. (13.7) 8.7 2.7 13.8 12.3 Gross-profit margin n.a. n.a. 56.8 57.3 60.2 60.7 61.5 62.3 EBITDA margin n.a. n.a. 34.1 35.9 39.0 39.5 40.3 41.1 Operating-profit margin n.a. n.a. 31.4 33.3 35.7 36.2 37.0 37.8 Net profit margin n.a. n.a. 24.1 24.5 25.5 24.8 24.7 24.5 ROAE n.a. n.a. 20.0 10.9 11.1 11.4 11.8 12.0 ROAA n.a. n.a. 9.9 5.1 4.8 4.8 5.0 5.2 ROCE n.a. n.a. 14.6 7.8 7.6 7.9 8.4 8.9 ROIC n.a. n.a. 7.3 7.4 6.9 7.1 7.4 7.7 Net debt to equity n.a. n.a. 56.1 84.3 89.4 94.6 96.5 96.3 Effective tax rate n.a. n.a. 10.5 12.2 16.3 17.0 17.0 17.0 Accounts receivable (days) n.a. n.a. 176.9 337.9 357.0 347.2 341.5 339.2 Current ratio (x) n.a. n.a. 2.9 3.4 3.3 4.8 2.7 4.4 Net interest cover (x) n.a. n.a. 8.3 7.1 8.1 6.4 5.6 5.0 Net dividend payout n.a. n.a. 16.4 14.7 16.6 18.1 18.0 18.2 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Vista Land is a Philippine property developer well-known for its affordable and mid-market house and lot developments under the Camella brand. It has one of the highest provincial exposure, with over 50% of its residential real estate revenues outside of Metro Manila. Its recent acquisition fo Starmalls, provides a mall-driven recurring base, which it aims to grow aggressively in the coming years.

Vista Land & Lifescapes (VLL PM): 26 October 2017

End-user focused provincial home builder

VLL is focused on end- VLL is an end-user oriented property developer, largely known for its low-cost and user demand and has a affordable horizontal (house and lot) projects, especially in cities and provinces outside of strong provincial Metro Manila. The residential segment accounted for most of its revenue at 83% as of presence 2016.

The company has 5 arms under its portfolio:

VLL: residential arms Camella Communities CrownAsia Brittany Vista Residences Residential properties outside Residential housing in Mega High-end house and lots within Vertical residential projects in Markets the Camella brand in Info Mega Manila under Camella Manila under the Crown Asia masterplanned communities Mega Manila under the Vista Mega Manila brand brand under the Brittany brand Residences brand Ownership 100% 100% 100% 100% 100% Low-cost and affordable Market segment Low-cost & affordable Upper mid-cost High-end Affordable to upper mid-cost (provincial) Price range PHP12m PHP2-16m Offering House and lots House and lots House and lots House and lots Condos Source: Company

VLL: residential arms 120

100

80 43 47 50 52 60

40 32 28 28 33 1 20 5 4 3 11 5 43 21 9 13 0 8 2014 2015 2016 1H17 Vista Residences Brittany Crown Asia Communities Phils Camella

Source: Company Note: The Camella Homes brand is under both Camella and Communities

Camella Homes is sold VLL’s Camella Homes is a brand strongly recognised in the low-cost and affordable space, both under Camella accounting for 75-86% of its residential revenue since 2014. (Mega Manila) and Communities Philippines Consistent with its end-user thrust, VLL derives more than 50% of its residential real-estate (outside Mega Manila) revenue from outside of Metro Manila. This is suggested by the 52% share of Communities Philippines, which focuses on projects outside of the capital. As of 1H17, VLL was present in 125 cities and municipalities in 45 provinces nationwide.

Camella Homes Camella Homes

Source: Daiwa Source: Daiwa

Vista Land & Lifescapes (VLL PM): 26 October 2017

VLL: geographic footprint

Source: Company

We still see a lot of scope for further provincial expansion for VLL given its 2,658 hectares of attributable raw landbank, mostly outside of Metro Manila.

VLL: landbank breakdown (as of 1H17) VLL has 2,658 hectares Landbank (hectares) of landbank nationwide Mindanao 10%

Visayas Metro Manila 15% 29%

Luzon ex-MM 46%

Source: Company

VLL’s geographic With decades of experience building houses in the countryside, VLL prides itself in having presence and provincial established expertise in rural property development, especially given the unique property development challenges that come with the archipelagic nature of the Philippines. VLL has developed mean it is well poised to processes to successfully ensure the validity of land titles, securing required local and benefit from accelerated national government approvals and tapping its extensive network of contractors and infrastructure and suppliers all over the country. These capabilities give VLL an advantage amid the stronger countryside thrust for provincial expansion among the big developers. development

Vista Land & Lifescapes (VLL PM): 26 October 2017

A deliberate strategy Given the average price According to VLL, the average selling price of a Camella house ranges between PHP2.0m of a Camella house, VLL and PHP2.5m. In general, the company targets this price point and maintains margins by targets households with adjusting the fittings that come with a housing unit, depending on its land cost. VLL is monthly incomes of deliberate in targeting households that can afford around PHP20k in monthly amortisation P60k via bank financing. Typically, banks would grant such housing loans to households with monthly incomes of at least P60k, like dual-income families and those with OFWs. Many of these households are located in cities and provinces outside Metro Manila, where home ownership is aspirational and end-user demand remains robust.

Sample amortisation for a PHP2.0m and PHP2.5m property 10-year loan 8-year loan Gross monthly Gross monthly Property value (PHPm) Monthly amortisation income required Monthly amortisation income required 2.0 20,923 52,308 23,857 59,644 2.5 26,154 65,385 29,822 74,554 Source: BPI loan calculator

The OFW market is a Indeed, the OFW market contributes significantly to VLL’s residential demand, accounting significant source of pre- for 50% to 60% of its pre-sales over the past 5 years. This, along with steady local end- sale demand for VLL user demand, supported VLL’s 2011-16 pre-sales CAGR of 13.6%.

VLL: gross pre-sales and YoY growth

Pre-sales rose by a 2011- 90 81 85 25% 80 16 CAGR of 13.6% 69 20% 70 20% 57 58 60 52 16% 15% 50 12% 40 10% 10% 30

20 5% 6% 10 2% 0 0% 2014 2015 2016 2017E 2018E 2019E Pre-sales (PHPbn) YoY growth (%)

Source: Company, Daiwa forecasts Note: The company estimates reservation cancellation on gross pre-sales at 25%

In 2016, pre-sales growth slowed to 2% YoY as lower oil prices threatened the job security of some OFWs in the Middle East, dampening their buying confidence. According to the company, although this did not result in existing buyers cancelling or withdrawing purchase contracts, it did prompt potential buyers to withhold purchases or to trade down to lower- priced projects.

Pre-sales accelerated in In 1H17, pre-sale growth accelerated, rising by 12% YoY to PHP32.3bn. According to VLL, 1H17 from a recovery in this was driven primarily by strong demand from both the OFW and local markets. OFW sales and pick-up in local demand  OFWs accounted for 55% of pre-sales as of 1H17 from 50% in 2016. The company noted a pick-up in pre-sales, not only from OFWs in the Middle East but also in the US, brought about by its deliberate effort to shift its marketing efforts to the latter given the aforementioned oil crisis. The launch of projects in Baguio and Boracay complemented the strategy as Filipinos in the US are more interested in vacation or retirement homes in the Philippines, for which the aforementioned locations are suitable.

 On the local front, VLL observed that the increased visibility of infrastructure development has encouraged purchases in areas expected to benefit from new roads and transport systems.

Vista Land & Lifescapes (VLL PM): 26 October 2017

 Additionally, the company’s expansion into 26 new second-tier cities in 1H17 provided new geographical sources of pre-sale demand. In these areas, OFW deployment is robust and new infrastructure is being built.

VLL has raised its Encouraged by strong pre-sales in the first half, the company has upgraded its residential guidance from PHP30bn project launch guidance to PHP50bn from PHP30bn originally. In 1H17, VLL launched 25 worth of launches to projects worth P28.8bn, 57% of its revised launch target. We look for pre-sales to rise by a PHP50bn 13.7% 2016-19E CAGR on the back of steady launches beginning this year. Supported by continued pre-sales growth, we forecast the company’s residential revenue to rise by a 2016-19E CAGR of 12%.

VLL: launches and pre-sales VLL: residential revenue and share of total

90 81 85 94 94 40,000 95 80 92 69 35,000 70 90 57 58 30,000 85 60 52 50 50 50 84 46 25,000 83 85 50 81 40 40 20,000 40 31 15,000 80 26 27 26 30 26 21 10,000 75

20 5,000

20,772 23,082 25,212 25,668 29,338 32,962 36,496 10 0 70 0 2013 2014 2015 2016 2017E 2018E 2019E 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Residential revenues (PHPm) Share of residential to real estate revenues (%) Launches (PHPbn) Pre-sales (PHPbn) Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Mitigating cash flow risks VLL offers prospective buyers various payment schemes. As of 2016, 80% of buyers have availed themselves of bank financing, while 12% and 8% have opted for in-house financing and spot and deferred cash, respectively.

For typical bank financing for a Camella unit, the company collects a downpayment (usually 20% of the full purchase price) on a staggered basis for 15 months. The company starts construction on the 11th month and with a 4-month construction period, completes and recognises full sale in the 15th month. With a 51% gross-profit margin, this implies that when VLL begins construction in month 11, 29% of the cost has already been paid; and by the time it is finished, 40% of the cost has already been covered.

Because the company does not build until the 11th month, by which time cancellations are nil, the inventory it carries largely are lots it has launched, at least in the horizontal space.

Vista Land & Lifescapes (VLL PM): 26 October 2017

Building a retail-oriented recurring base

As of 1H17, leasing In 2015, VLL (in which the Villar family, through Fine Properties Inc, controlled a 53.5% accounted for 16% of stake at the time) acquired Starmalls Inc, which was also owned by the Villar family. At the VLL’s real-estate time, Starmalls owned and operated 10 malls with 227,814 sq m of GFA and 2 BPO offices revenue with 80,243 sq m of GFA. As of 1H17, VLL now has 17 malls, 56 commercial centres (small retail spaces within its residential projects) and 4 offices spanning 951,533 sq m of GFA.

As of 1H17, leasing accounted for 16% of VLL’s revenue and 23% of its earnings.

VLL: leasing GFA VLL: real-estate revenue split 1,400 120

1,200 195 100 6 8 15 16 17 19 1,000 181 80 800 181 60 600 131 1,105 94 92 40 85 84 83 81 400 819 701 501 200 20

0 0 2015 2016 2017E 2018E 2014 2015 2016 2017E 2018E 2019E

Malls & retail stores GFA ('000 sqm) Office GFA ('000 sqm) Residential (%) Leasing (%) Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Note: Total revenue excludes miscellaneous

Upgrading its retail malls Starmalls Inc is widely The first Starmall was established in 1979 in Las Piñas. Older Starmalls visibly cater to the known as a mass-market low-income mass market (broader C and D income bracket). Many of these are major mall operator transport hubs as they are located along transport systems or major thoroughfares, making them highly suitable for the mass market.

Newer Starmalls are Meanwhile, VLL’s newer malls catering to the broad B market are better designed with being re-branded as more modern features and large open spaces. These malls tend to house foreign retail Vista Malls as they now brands such as H&M. To correct the perception that these malls are limited to the low- cater to the broader income market, VLL is rebranding its newer malls Vista Malls. Some of its anchor tenants middle income bracket include All Home (DiY/Hardware), All Day grocery stores and the Coffee Project. The Villar family also recently introduced All Toys, All Electric and All Sports in order to ensure a complete retail offering within its malls.

Our “on-the-ground” research VLL’s newer malls are We recently toured some of VLL’s malls and came away impressed overall by the evolution better built/executed and execution especially of its newer malls. than we initially expected Although many of its malls still cater to the mass market (as evidenced by the tenants), VLL has been deliberate in elevating the design of its malls in anticipation of other developers upgrading their own malls. Indeed, the company applies the same emphasis on quality to its malls as it does to its residential projects. Subsequent photos show that its newer malls are miles ahead, in terms of design and quality, of older Starmalls, which were low-end.

Vista Land & Lifescapes (VLL PM): 26 October 2017

VLL: select tenants VLL’s anchor tenants make up 35% of its retail GFA

Source: Company

Evia. At the higher end of the spectrum stands Evia, a Mediterranean-inspired mall along Daanghari, which is within Metro Manila, but outside the primary CBDs. In our opinion, the mall is well-designed and the theme better-executed than similarly themed malls in the CBDs – a testament to the emphasis the developer puts on quality. The Villar family’s newer retail offerings (All Toys, All Electric and All Sports) were first introduced here, given the relatively upscale profile of nearby residents.

VLL: Evia centre map

Source: Google maps

VLL Evia Mall (interior) VLL Evia Mall (interior)

Source: Daiwa Source Daiwa

Vista Land & Lifescapes (VLL PM): 26 October 2017

VLL Evia Mall (interior) VLL Evia Mall (interior)

Source: Daiwa Source Daiwa

Vista Mall Sta. Rosa. We also toured Vista Mall, Sta. Rosa in Laguna, which was re- branded from Starmall. The mall was designed with open spaces and houses mid-end brands such as fast-fashion brand H&M. Its anchor tenants are likewise furnished and designed according to the rising standards of the broad middle class to which it caters. This mall looks vastly different to the older Starmalls.

Vista Mall Sta. Rosa (Laguna) Vista Mall Sta. Rosa (Laguna)

Source: Daiwa Source: Daiwa Note: Photos taken before mall hours Note: Photos taken before mall hours

Vista Mall Sta. Rosa (Laguna) All Home in Vista Mall Sta. Rosa (Laguna)

Source: Daiwa Source: Daiwa Note: Photos taken before mall hours Note: Photos taken before mall hours

Vista Land & Lifescapes (VLL PM): 26 October 2017

All Day Grocery Store in Vista Mall Sta. Rosa (Laguna) All Day Grocery Store in Vista Mall Sta. Rosa (Laguna)

Source: Daiwa Source: Daiwa Note: Photos taken before mall hours Note: Photos taken before mall hours

Starmalls Alabang. VLL is also renovating and refurbishing some of its older malls. We recently visited Starmalls, Alabang, a transport hub located along the last PNR station. The mall management has opened a transport terminal catering to nearly all forms of mass transportation beside the mall. Given its location, Starmalls Alabang has always been popular among the C and D income brackets.

A recent survey commissioned by mall management showed an increased number of mall goers coming from the upper C income segment following their upgrade. Among the changes made to the mall include:

 Mall flooring was re-tiled and air-conditioning was improved significantly.

 Micro-retailers, which previously occupied nearly all of the ground floor, were designated areas of the mall, as glass enclosed restaurants and stores were opened in their place.

Starmalls Alabang Starmalls Alabang

Source: Daiwa Source Daiwa

 The central space on the ground floor was kept open and now features a stage where local celebrities perform song and dance numbers. Local clothing brands with slightly higher price points, such as Folded and Hung, CLN and Bioessence, have likewise opened.

Vista Land & Lifescapes (VLL PM): 26 October 2017

Starmalls Alabang

Source: Daiwa

 A government wing is being opened on one of the floors and will house the Land Transportation Office (LTO) Renewal Center, Philhealth, NBI Clearance center and the Philippine Post Office to name a few of the new government agencies that will be moving in as tenants.

 The kids’ zone has likewise been upgraded with new activities. It has become a popular venue for company events for the family and children’s parties.

Starmalls Alabang Starmalls Alabang

Source: Daiwa Source Daiwa

Overall, VLL is adopting the following strategies, depending on the location.

 It has been building large “destination” malls, with a wide variety of restaurants and recreational activities. These are positioned as weekend get-away’s for the family. Destination malls help guard against online shopping and provide one-stop shopping convenience, especially amid worsening traffic.

 VLL also plans to build retail space within its residential communities, as it pursues the integrated township model.

Vista Land & Lifescapes (VLL PM): 26 October 2017

Opportunistic on the office segment VLL is taking an The acquisition of Starmalls also brought BPO commercial centres into VLL. As of 1H17, it opportunistic approach had 181k sq m of office/corporate GFA. Presently, offices account for 19% of VLL’s leasing to the office segment GFA. The company intends to be opportunistic on the launch of new office space, and we and will likely open think VLL will launch new office towers within its townships to complement the rest of its office towers within development. suitable townships Venturing into hotels VLL has also ventured VLL has also started venturing into hotels, first with the acquisition of Boracay Sands Hotel into the hotels business and with the launch of its own brand of hotels, Mella.

In 2016, VLL forayed into the beach resort segment with the purchase of Boracay Sands, a 54-room Mediterranean-themed beachfront boutique in Boracay. Room rates in the boutique hotel range between PHP5,000 and PHP7,000 per night. The purchase of this beach resort has allowed VLL to get a feel for hotel operations as it looks into further expanding in the hospitality segment.

It launched Mella, its In 2016, the company launched its own brand of hotels, which it called Mella, a derivative own brand of hotels of its housing brand Camella. According to various media reports, VLL plans to build 4 such hotels; however, according to the company, presently only 1 is under construction, and it is expected to start operations next year. The company is still in the process of finalising further details on the operations and branding (ie, positioning, pricing) of this hotel chain, although it has noted that this will likely be a business hotel.

Strong leasing growth projected We forecast rental As the company looks to expand its leasing GFA from 881k sq m in 2016 to 1.3m sq m in revenue to rise by a 25% 2018, we forecast its rental revenue to rise by a 25% 2016-19E CAGR and account for 3-year CAGR 19% of revenue by 2019 from 15% in 2016.

Expansion plans beyond 2018 are under way, although details have yet to be disclosed.

VLL: rental revenue and leasing GFA 10 1,300 1,300 1,400 9 1,200 8 1,000 882 7 1,000 6 632 800 5 4 600 3 400 2 200 1 2.2 4.4 5.5 6.9 8.6 0 0 2015 2016 2017E 2018E 2019E

Rental revenues (PHPbn) Leasing GFA ('000 sqm) Source: Company, Daiwa forecasts

Vista Land & Lifescapes (VLL PM): 26 October 2017

Healthy financials

We forecast earnings to Overall, we forecast VLL’s net income attributable to equity holders of the parent to rise by rise by a 13% CAGR a 2016-19E CAGR of 13%, as we project revenue to rise by a 14.5% CAGR over the same from 2016-19E period.

VLL: net income VLL: revenue breakdown 12 18.6 20 50 16 18 18 45 14 1.4 16 10 12 1.3 8.6 14.2 13.8 16 40 13 14 12.8 11 6.9 12.4 12.3 35 1.1 14 5.5 12 8 30 1.0 12 1.2 4.4 10 25 0.9 2.2 1.5 8 8 6 10 20 36.5 6 8 15 29.3 33.0 4 25.2 25.7 6 10 23.1 4 4 2 2 5 6.2 7.0 7.9 8.9 10.2 11.4 2 0 0 0 0 2014 2015 2016 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E Residential (PHPbn) Rental income (PHPbn)

Net income (PHPbn) YoY growth (%) Miscellaneous (PHPbn) YoY growth (%) Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Note: Net income attributable to equity holders of the parent

14.5% 3-year revenue We expect the company’s revenue to be driven by a 12% 3-year CAGR for the residential CAGR to be driven by a segment and a 25% 3-year rental revenue CAGR. By 2019, we expect rental revenue to 12% residential revenue account for 18% of the company’s overall revenue from 14% as of 2016. Unlike other CAGR and 25% rental companies, VLL does not set a target mix as it intends to embrace the potential growth of revenue CAGR the residential segment.

We expect the gross VLL’s gross-profit margin has been steady, hovering between 50% and 51% over the past margin to be maintained 3 years (2014-16). Operating expenses as a percentage of sales have likewise been stable, ranging from 24% to 25% in the past 3 years. We expect these to be maintained over the next 3 years (2017-19).

VLL: gross-profit margin VLL: opex as % of revenue 55 28 50.6 50.8 50.8 50.8 50.8 25.3 50.0 26 24.5 24.5 24.5 24.5 50 24.0 24 45 22 20 40 18 35 16 14 30 12 25 10 2014 2015 2016 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E

Gross profit margin (%) Opex as % of revenues Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

We expect the growing contribution of higher-margin rental revenue to lead to an improvement in the operating margin over the next 3 years; however, the impact on earnings would likely be muted by a higher effective tax rate. The effective tax rate has been rising on the back of the increased contribution of the recurring segments (ie, leasing, which do not enjoy the same tax incentives as VLL’s residential business given the price range of most of its projects).

Vista Land & Lifescapes (VLL PM): 26 October 2017

VLL: effective tax rate VLL’s effective tax rate (% ) 18 17.0 17.0 17.0 has been rising with the 16.3 16 increasing contribution 14 12.2 of rental revenue 12 10.6 10 8 6 4 2 0 2014 2015 2016 2017E 2018E 2019E Effective tax rate

Source: Company, Daiwa forecasts

Gearing remains within Gearing levels remain manageable. Given the company’s leasing expansion plans, we the company’s comfort expect net debt-to-equity to rise to 0.96 by 2019E from 0.89 in 2016. We note that level including long-term investments used to hedge its dollar bonds, which therefore fully covers them, we estimate net gearing to be at the 0.5x level in 2017. This is the net gearing metric the company tracks. According to management, VLL’s gearing is within the company’s comfort levels and way below the 2.5x net gearing levels mandated by its bond covenants. This gives the company scope to borrow to fund its leasing expansion. As such, VLL has no near-term need to raise equity.

VLL: net gearing (excl. long-term investments that hedge and fully covers for its dollar bonds) (%) 120 94.6 96.5 96.3 100 89.4 84.3 80 56.1 60

0 2014 2015 2016 2017E 2018E 2019E

Net debt-to-equity Source: Company, Daiwa forecasts

VLL: net gearing (with LT investments that hedge and fully cover its dollar bonds) (%) 80 69.8 67.2 70 62.4 60 53.1 55.2 50 40 28.0 30 17.0 20 10 0 2013 2014 2015 2016 2017E 2018E 2019E Net debt-to-equity

Source: Company, Daiwa forecasts Note: When VLL borrows in USD, it invests the proceeds in investments that match the maturity of its USD borrowing

Vista Land & Lifescapes (VLL PM): 26 October 2017

Valuation and risks Valuation Our PHP7.10 TP implies We initiate coverage of VLL with a Buy (1) rating, as our discounted NAV approach yields a 21% upside potential PHP7.10 target price, implying 21% upside potential.

NAV summary Value (PHPm) 1H18E Comments Efficient landbank 168,909 Market prices Residential 51,679 NPV of inventory Rental 39,716 11% cap rate Other investments 30,023 Book value Net cash/(debt) -86,231 Gross value 204,096 Minority interests -1,782 Net asset value 202,314

Number of shares outstanding 12,839

NAV/share 15.75 Discount 55% Target price 7.10 Source: Daiwa estimates

Landbank. VLL has over 2,600 hectares of landbank available for development. This includes 2,321 hectares of landbank owned by the company and 336.2 hectares of attributable land under joint ventures. We value its landbank using estimates of 1-year forward market prices, adjusted for a blended efficiency of 50%, given that most of its landbank is outside of Metro Manila. These estimates are based on known transacted prices as well as adjusted postings on property websites. We estimate VLL’s landbank to rise by an annual average rate of 10% over 2017-19E.

VLL: landbank breakdown (1H17) VLL has 2,658 hectares Landbank (hectares) of landbank nationwide Mindanao 10%

Visayas Metro Manila 15% 29%

Luzon ex-MM 46%

Source: Company

Residential inventory. We value residential inventory by estimating the market value of its inventory 1-year forward. This is based on our inventory forecast in the balance sheet, marked up according to its gross-profit margin.

Cap rates. We value the rental segment using an 11% cap rate. In the Philippines, there is no consolidated database reporting cap rates. Hence, we rely on reported yields of property consultants such as Colliers and Jones Lang LaSalle, as well as implied cap rates based on available information on comparable properties. Cap rates are then adjusted based on proximity to CBDs.

For offices, yields in Metro Manila average 8-9%, with premium buildings in prime CBDs even yielding as low as 7%. For malls in prime locations, we estimate yields at 6-7%, while low-end malls have yields above 10%. We have applied an 11% cap rate for VLL’s rental EBITDA considering the profile of its malls (broad mid and mass market) as well as their locations (many outside of Metro Manila).

Vista Land & Lifescapes (VLL PM): 26 October 2017

We apply a 55% discount Discount to NAV. We applied a 55% discount to NAV. The discounts to NAV of property to NAV as we think names vary widely from one another. On the narrow end of the spectrum are recurring- corporate governance driven companies with high earnings visibility, such as SM Prime, which has an average concerns may weigh on discount to NAV of 10%. Meanwhile, at the wide end of the spectrum are companies with the stock in the near large landholdings in rural areas such as Filinvest Land, which has an average discount to term NAV of around 60%. Other issues such as poor corporate governance practices also tend to widen a company’s discount to NAV.

The 55% discount to NAV applied to VLL is closer to the wider end of the spectrum as it remains predominantly a residential business with a sizeable landbank in rural areas. However, this discount is wider than its 50% average discount. Although improving earnings visibility warrants a narrower discount to NAV, we think that recent corporate governance issues offset this and will be an overhang on the stock at least for the next 12 months. Recall that the acquisition of Starmalls, which was also owned by the Villar group, resulted in significant earnings dilution, at the expense of minority holders.

The transaction involved VLL acquiring 88.25% of the outstanding common capital stock of its sister company, Starmall, from the Fine Properties Group (the Villar family’s holding firm) for PHP4.51/share. As a condition of the purchase, 97.5% (net of fees) of the proceeds were reinvested into shares of VLL by the company, subscribing to new VLL shares at PHP7.15/share. Prior to this transaction in 2014, the Villar family/Fine Properties Group controlled 53.5% of VLL shares; following the transaction, the Villar family’s ownership stake has increased to at least 62% through new shares issued to family members and companies controlled by the family. The valuation of Starmalls was deemed expensive as the PHP4.51/share valuation implied over a 40x PER – much higher than the PER of similar retail-oriented property companies like Robinsons Land (RLC PM, Not Rated) and SM Prime (SMPH PM, PHP35.75, Underperform [4]) at the time. Because the transaction required the re-investment of proceeds into VLL, over 4.5bn new shares were subscribed to, resulting in approximately 30% EPS dilution.

We note though that, according to the company, it is no longer looking to fold any other businesses into VLL.

Undemanding valuation VLL: historical PER 16 14 12 10 8 6 4 2

8/26/2015 6/26/2013 8/26/2013 2/26/2014 4/26/2014 6/26/2014 8/26/2014 2/26/2015 4/26/2015 6/26/2015 2/26/2016 4/26/2016 6/26/2016 8/26/2016 2/26/2017 4/26/2017 6/26/2017 8/26/2017

12/26/2014 10/26/2013 12/26/2013 10/26/2014 10/26/2015 12/26/2015 10/26/2016 12/26/2016 -2SD -1SD AVERAGE +2SD +1SD PE

Source: Bloomberg, Daiwa forecasts Note: Drop in PER following the Starmalls acquisition

The steep drop in share price occurred following the announcement on the acquisition of Starmalls (discussed earlier) as the share priced adjusted for the dilution that resulted from the transaction. Although VLL says it no longer has businesses that it is looking to fold into the company, we think it will take a while for market sentiment to overcome the significant dilution that arose from the acquisition of Starmalls, and we expect this corporate governance issue to continue to weigh on the stock in the near term. Should its recurring business continue to provide evidence of successful expansion and deliver strong results, the valuation should re-rate closer to its average historical, in our view.

Vista Land & Lifescapes (VLL PM): 26 October 2017

At our target price, VLL would trade at a 1-year forward PER of 9.5x, largely in line with its past 5-year average PER of 9x. With pre-sales accelerating as the company’s active pursuit of the OFW market bears fruit and retail expansion boost recurring income, we initiate coverage with a Buy (1) rating.

Peer comparison Price Daiwa PER (x) PBR (x) FNAV Target NAV TP Company Ticker (PHP) rating 2017E 2018E 2017E 2018E (PHP) Discount (PHP) Ayala Land ALI PM 42.8 Outperform (2) 25.6 22.1 3.9 3.5 57.0 20% 46 Filinvest Land FLI PM 1.95 Buy (1) 8.0 7.1 0.7 0.7 4.8 55% 2.15 Megaworld MEG PM 5.29 Hold (3) 13.5 12.1 1.3 1.2 10.1 50% 5.0 SM Prime SMPH PM 35.75 Underperform (4) 37.4 32.7 3.5 3.2 31.7 10% 29 Vista Land VLL PM 5.85 Buy (1) 8.4 7.4 0.4 0.4 15.75 55% 7.1 Source: Bloomberg, Daiwa forecasts Note: prices as of close on 26 October 2017; FNAV = forward NAV

Catalysts and risks Catalysts The government’s Higher-than-expected remittances growth is a key catalyst given Vista Land’s active pursuit commitment to of the OFW market. infrastructure and rural development bode well Accelerated infrastructure and rural development is a key catalyst for the stock. Market for the stock, given its prices of beneficiary land areas tend to rise with the substantial certainty that an provincial exposure infrastructure project will be in place (ie, groundbreaking), potentially boosting land values and therefore its NAV.

Income tax cuts from the government tax reform initiative could boost disposable incomes, especially of the broad middle class, which is the primary target market of VLL.

Risks A considerable hike in A considerable hike in interest rates is a key downside risk to forecasts, especially as the interest rates and residential segment still accounts for most of VLL’s earnings. However, presently, the risk significant slowdown in of a significant hike is low with inflation remaining benign. The central bank has set its remittances are key risks inflation target at 2-4% in the next 2 years. to our call A significant slowdown in remittances is a secondary risk as the OFW market accounts for 50% to 60% of VLL’s pre-sales and is an important target market of the company.

Vista Land & Lifescapes (VLL PM): 26 October 2017

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Craig CORK (852) 2848 4463 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Paul KITNEY (852) 2848 4947 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Strategist for Asia Pacific; Strategy (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kevin LAI (852) 2848 4926 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Chief Economist for Asia ex-Japan; Macro Economics (Regional) Olivia XIA (852) 2773 8736 [email protected] TAIWAN Macro Economics (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Head of Automobiles; Transportation and Industrial (Hong Kong/China) Nora HOU (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] Banking; Diversified financials; Insurance Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Yan LI (852) 2773 8822 [email protected] IT/Technology Hardware (PC Hardware) Kylie HUANG (886) 2 8758 6248 [email protected] Banking (China) Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Helen CHIEN (886) 2 8758 6254 [email protected] Consumer (Hong Kong/China) Adrian CHAN (852) 2848 4427 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Jamie SOO (852) 2773 8529 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Gaming and Leisure (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Alex LIU (852) 2848 4976 [email protected] Capital Goods; Utilities

Internet (Hong Kong/China) SINGAPORE Carlton LAI (852) 2532 4349 [email protected] Ramakrishna MARUVADA (65) 6499 6543 [email protected] Small/Mid Cap (Hong Kong/China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Dennis IP (852) 2848 4068 [email protected] David LUM (65) 6329 2102 [email protected] Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) Banking; Property and REITs Jonas KAN (852) 2848 4439 [email protected] Royston TAN (65) 6321 3086 [email protected] Head of Hong Kong and China Property Oil and Gas; Capital Goods Cynthia CHAN (852) 2773 8243 [email protected] Peter NG (65) 6499 6546 [email protected] Property (China) Property; Small/Mid Cap Thomas HO (852) 2773 8716 [email protected] Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

Custom Products Group

PHILIPPINES Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg Ilag (63) 2 737 3023 [email protected] Utilities; Energy

Vista Land & Lifescapes (VLL PM): 26 October 2017

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Vista Land & Lifescapes (VLL PM): 26 October 2017

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Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. 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.

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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 analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst 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, unless otherwise stated, 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 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 65.9% Hold** 20.1% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2017. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

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.

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