Thursday, 11 September 2014 Top Quant Alphas China Steel 3 PICC PR.& CLTY.CO.LTD. (2328 HK) BANK OF CHINA LTD. (3988 HK) Margin improvement to continue Hefei Deng TENCENT HOLDINGS LTD. (700 HK) THE LINK RL.EST.INV.TST. (823 HK) Our Global Commodities team has reduced its 2014-16E iron ore price forecasts by 8%/16%/18%, and also cut its projected Chinese domestic HRC prices by 3%/5%/6%. The team expects rapid growth in Bottom Quant Alphas iron ore supply and aggressive displacement to weigh on the market in medium-to-long term. HTC CORP. (2498 TW) ESPRIT HOLDINGS LTD. (330 HK) GUNGHO ONLINE ENTM.INCO. (3765 JP) India Pulse: Media 4 JAPAN DISPLAY INCO. (6740 JP) Source: Macquarie Research. Data as at 09/09/2014. The Sister Act Nitin Mohta Screening for all stocks in Asia with Market Cap over US$2bn. Good traction for Zindagi. We analyse the initial viewership trends of the sister GEC channel of Zee TV launched in June last week - Zindagi. Our sampling of the shows had indicated that the channel would be able to garner decent traction and the viewership trends confirm our thesis.
MacqTech Express 5
iPhone 6 implications for Asia Ellen Tseng Apple launched the iPhone 6(4.7”) / iPhone 6 Plus (5.5”), Apple Pay (mobile payment system) and Apple Watch at its September 9 event. The iPhone 6 and iPhone 6 Plus look in line with our expectations, while Apple Pay is an important mobile-payment initiative, incorporating NFC and SE- embedded solutions.
PEC’s Strategy Weekly 6
Japan and global equities Peter Eadon-Clarke Stocks and sectors: As Japan's domestic drivers dissipate, below, Japan has converged with our ongoing bullish house view on global equity markets - John O'Connell & Matthew Brook's latest report is here.
Axis Bank (Outperform) 7
Asset quality trends are improving Suresh Ganapathy We met Axis Bank's management to discuss asset quality trends, margins and growth outlook. Key takeaways are highlighted below. Stress on incremental asset quality is easing: The bank's exposure to large levered groups has declined marginally, from 10% in 2Q and 3Q14 to 8.6% in 1Q15.
China CNR Corp (Outperform) 8
Toshiba (Outperform) 9
Baoshan Iron & Steel (Outperform) 10
Angang Steel (Outperform) 11
Maanshan Iron & Steel (Underperform) 12
Apple (Outperform) 13
Please refer to page 31 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. American Express (Neutral) 14
Amata Corporation (Neutral) 15
Bit-isle inc. (Outperform) 16
Hindustan Petroleum (Outperform) 17
MacVisit: PIA 18
Midland Holdings (Neutral) 19
Sony (Outperform) 20
Rakuten (Neutral) 21
XL Axiata (Outperform) 22
Asia-Pacific Telecoms 23
China Property 24
China telecom sector 25
Have phone no wallet redux 26
Japan Casinos 27
Regional Plantations 28
Macquarie Agri-view 29
Macquarie Commodities Comment 30
2
CHINA
China Steel Macquarie’s iron ore and steel price forecast changes Margin improvement to continue
2014 2015 Event New Old Chg New Old Chg Avg. HRC US$/t 606 607 -0.1% 613 596 2.7% Our Global Commodities team has reduced its 2014-16E iron ore price forecasts Chinese HRC US$/t 467 483 -3.3% 495 521 -5.0% by 8%/16%/18%, and also cut its projected Chinese domestic HRC prices by Iron ore US$/t 102 111 -7.8% 92 110 -16.4% 3%/5%/6%. The team expects rapid growth in iron ore supply and aggressive Steel scrap US$/t 340 339 0.1% 318 326 -2.3% displacement to weigh on the market in medium-to-long term. We believe China China HCC Rmb/t 127 127 0.0% 131 131 0.0% flat steel names will continue to see margin expansion in 2014~15E. We thus cut Changes to ratings, TPs and earnings our earnings projection for Baosteel by 2%–7% and adjust our projection for EPS Angang’s earnings by -2% to +2%, but this still leaves our earnings forecasts 6% Reco. TP 2014E 2015E 2016E to 48% above 2015 consensus, respectively. Our top picks remain Baosteel and New Old New chg % New chg % New chg % New chg % Baosteel OP OP 5.20 0% 0.42 -7% 0.52 -2% 0.53 -5% Angang, while we stay bearish on Maanshan. Angang OP OP 6.10 0% 0.20 -2% 0.36 2% 0.36 0% Maanshan UP UP 1.30 0% 0.02 -7% 0.06 6% 0.05 3% Impact *Baosteel's share price in RMB, while Angang's and Maanshan's in HK$ Price cuts for both iron ore and Chinese steel products. Our commodities Valuation comps team has cut its iron ore price forecasts by between 5%–20% for 2014–19E, with more low-cost supply coming into the market displacing the high-cost iron ore Upside P/B EV/EBITDA supply from China. Meanwhile, our China steel price forecasts are cut 3%~6% in Price Reco. TP (%) 14E 15E 14E 15E Baosteel 4.54 OP 5.20 15% 0.64 0.59 4.5 3.9 tandem with the iron ore price declines as overcapacity persists despite a Angang 5.54 OP 6.10 10% 0.65 0.60 6.4 5.2 gradual improvement in fundamentals. Maanshan 1.80 UP 1.30 -28% 0.47 0.44 5.9 5.0 *Baosteel's share price in RMB, while Angang's and Steel mill margin improvement to be sustained. Despite reduced price Maanshan's in HK$ forecasts for both iron ore and steel, we maintain our view that steel mills will see Consensus rises for Baosteel/Angang, slightly stronger margins in 2014/15E, especially for those focusing on flat steel but drops for Maanshan product with strong demand. Given the lag effect of raw material prices being consumed, we expect steel margins to rise to their highest levels in three years Pre interim result Post interim result Change % 2014E 2015E 2014E 2015E 2014E 2015E in 4Q14, with continued margin expansion into 2015E. Baosteel 0.44 0.49 0.44 0.50 0.0% 1.2% Angang 0.16 0.23 0.18 0.24 8.0% 2.2% Slight revisions to China steel stock earnings. We reflect the lower price iron Maanshan 0.03 0.07 0.01 0.06 -64% -12% ore and steel price forecasts in our models. Baosteel’s 2014~16E earnings are Stocks YTD performance trimmed 4%~7% on increased fixed production costs on the Zhanjiang project YTD start-up. Despite this, we still see its 2015E earnings growing 24% yoy with our Performance 20% estimate 6% above consensus. We cut Angang’s 2014E EPS by 2% and lift its 12% 15% 2015E earnings 2%. Our forecasts are 10%~48% above 2014~16E consensus. 10% 8% 5% We cut Maanshan’s 2014E earnings 7% and raise its 2015/16E EPS 6%/3%, 0% -5% -2% with our 2014~16E forecasts 10%/11%/47% below consensus. -10% -15% Consensus raised for Baosteel/Angang cut for Maanshan. We compare the -20% -16% -25% consensus earnings estimates for the steel stocks pre- and post interim results. -30% 2014/15E consensus for Baosteel is raised 0%/1.2%, Angang up 8.0% and 2.2%, -35% Jan-14 Mar-14 May-14 Jul-14 Sep-14 while Maanshan was downgraded by a sharp 64%/12%. We expect to see Angang Maanshan Baosteel HSI further consensus upgrades for Baosteel/Angang.
Source: Bloomberg, Macquarie Research, September Top picks: Baosteel and Angang 2014. Prices as of 5 September 2014 We keep Baosteel and Angang as top picks. We think Baosteel (600019 CH, Rmb4.54, Outperform, TP: Rmb5.20) could be a better play as the leading player in the steel sector, particularly with the impending A-H share through train launch. Analyst(s) Hefei Deng It is trading at 0.59x 2015E P/B with a 4.6% dividend yield. We expect Angang +852 3922 1136 [email protected] (347 HK, HK$5.54, Outperform, TP: HK$6.10) to see rapid sales growth in auto Matty Zhao steel and high-margin heavy section steel. Its product mix restructure should +852 3922 1293 [email protected] help secure profitability. It is trading at 0.60x 2015E P/B. We are cautious on 10 September 2014 Maanshan (323 HK, HK$1.87, Underperform, TP: HK$1.30) due to its weak Macquarie Capital Securities Limited earnings, despite margin improvement and a possible one-off gain from Hefei
plant closure. The stock is trading at 0.45x 2015E P/B.
Please refer to page 17 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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INDIA India Pulse: Media The Sister Act Event . Good traction for Zindagi. We analyse the initial viewership trends of the sister GEC channel of Zee TV launched in June last week - Zindagi. Our sampling of the shows had indicated that the channel would be able to garner decent traction and the viewership trends confirm our thesis. Our chat with Media Planners and Buyers indicates that the new channel has met the expectations of advertisers and could even surprise positively in days to come. In related development – this week Sony launched another Hindi GEC, Sony Pal and we shall keep a close eye on the fallout of this new launch on
the fragmentation in the ad market.
. Cyclical uptick could help ad growth. Two years of subdued economic Four week rolling viewership share growth had hurt the TV advertising industry. With a potential acceleration in
(%) the economy into FY16 we think TV broadcasters linked to cyclicality of ad 30% revenues could do well. Within our coverage - Zee remains the most 25% attractive media stock to play this uptrend. 20% 15% 10% Impact 5% 0% . What’s the latest with Zindagi? Zee had launched its latest GEC in the last Star Plus Zee TV Colors Sony week of June. The initial viewership trends of the channel have started Star Plus Zee TV Colors Sony coming in from mid July. The trends are encouraging as the channel has been able to gross 29 million GVTs. (details on Pg2). We note that one of the four Source: TellyTRP.in,Macquarie Research, Sep 2014 initial shows has been brought back on air due to popular demand from Change in four week viewership share viewers.
(%) . Zee TV – the flagship channel is steady. Zee continues to hold on to its #2 1.0% slot in the Hindi GEC space. The gains this week were helped by its lead 0.5% shows Jodha Akbar and Kumkum Bhagya. We note that there is a time leap 0.0% expected in Jodha Akbar in October and it would be crucial to see how -0.5% viewers react to that change in the story track. -1.0% -1.5% . What’s competition doing? The crucial new shows that have been launched Star Plus Zee TV Colors Sony in the past two weeks/expected to be launched soon are the KBC Season 8 Star Plus Zee TV Colors Sony on Sony, Dare 2 Dance (reality dance show) on Life Ok.
Source: TellyTRP.in,Macquarie Research, Sep 2014 Outlook Recommendation Table . Comfortable with our 20% ad growth. We had raised our ad growth Stock CMP TP TSR forecast for Zee to 20% for FY15 from 18% earlier. These trends are Name Reco (Rs.) (Rs.) (%) Volatility supportive of our upgrade, in our view. Zee OP 283 320 13% Low/Medium Dish TV OP 54 78 43% Medium D B Corp OP 338 350 3% Low . Launch of a new channel – Sony Pal. We see launching of supplementary HT Media OP 109 120 10% Medium Hindi entertainment channels by the leading broadcasters as an effective way Jagran N 124 97 -22% Low/Medium of mitigating the ad cap introduced last year. Initial viewership sampling of the Source: Bloomberg, Macquarie Research, Sep 2014 channel suggests that Sony Pal is more of a mainstream Hindi GEC vs.
Zindagi. To that extent, it appears it would be competing more with Life Ok. Analyst(s) Nitin Mohta . News broadcasters could benefit from advertising revival. We do not +91 22 6720 4090 [email protected] Karan Parmanandka actively cover any of the plain news broadcasters (like TV Today, NDTV and +91 22 6720 4089 [email protected] Zee Media) but cyclical nature of advertising revenues could help some of
these mid cap names. Even so, in addition to company fundamentals one 10 September 2014 should also watch out for potential political leanings of the promoters of these Macquarie Capital Securities India (Pvt) news channels. Ltd
Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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GLOBAL MacqTech Express The iPhone 6/6 plus specs Name iPhone 6 iPhone 6 Plus iPhone 6 implications for Asia Model Picture Event
. Apple launched the iPhone 6(4.7”) / iPhone 6 Plus (5.5”), Apple Pay (mobile payment system) and Apple Watch at its September 9 event. The iPhone 6 Dimensions 138.1 x 67 x 158 x 78 x 6.9mm 7.1mn and iPhone 6 Plus look in line with our expectations, while Apple Pay is an Weight: 129g 172g important mobile-payment initiative, incorporating NFC and SE-embedded Launch Date Sep-14 Sep-14 Embedded OS: Apple iOS 8 Apple iOS 8 solutions. Apple Watch, priced at $349, would start in early 1Q15. CPU: Apple A8(64-bit) Apple A8(64 bit) ROM capacity: 16/64/128GB 16/64/128GB Impact RAM capacity: 1GB LPDDR3 1GB LPDDR3 Display Diagonal: 4.7" 5.5" . Focus more on replacement cycle than just larger screen iPhone 6: Display Resolution: 1334 x 750 1920 x 1080 Expansion Not supported Not supported While the new hardware specifications (slimmer design/Plus with OIS) were Interfaces: mostly in line with market expectations, the new A8 processor and NFC Camera resolution: 8MP (F/2.2) 8MP(F/2.2) + OIS technology are two major improvements. The A8 application processor is a Secondary Camera: 1.2MP 1.2MP 64-bit LTE with a clock speed of 1.4GHZ, offering 50% faster graphic Battery Capacity: 1810mAh 2915mAH Contract price $199/$299/$399 $299/$399/$499 performance and is 50% more power-efficient than the iPhone 5S. Apple has Source: Macquarie Research, September 2014 also added M8 motion coprocessors to the iPhone 6, which pair well with
fitness apps. It has also introduced Apply pay, a mobile payments app, which
will allow users to pay for goods and services using payment information Asia Top picks linked to iTunes accounts. We believe this will take time to ramp up. Hon Hai (2317 TT, OP: TP: NT$112) . Pricing of Apple iPhone 6 /iPhone 6 Plus is no surprise: The iPhone 6 will Pegatron (4938 TT, OP, TP: NT$74) be available at $199/$299/$399 for 16/64/128 GB for a 2-year contract in the US, same pricing as at the iPhone 5S launch. The iPhone 6 Plus is priced at Catcher (2474 TT. OP, TP: NT$366) $100 more at each level. Based on prior surveys, 23% of consumers would TSMC (2330 TT, OP. TP: NT$127) choose the iPhone 6 Plus if its premium to the iPhone 6 was less than $100. Apple’s pricing seems to be in line with market expectations. Both phones will Largan (3008 TT, OP, TP:NT$3120) be available for sale on 19 September, with preorders starting Friday. We LG Display (034220KS, TP: Won$44,000) expect strong iPhone 6 build in our Asia supply chain. Nitto Denko (6988 JP, ¥5589, OP, TP: ¥6400) . Apple also launched the Apple Watch at US$349: The price tag is higher Also read Apple - Phones great, Payments than other existing smartphone offerings at <~$300. The Watch is powered by promising, Watch ? the custom-built Apple S1 SOC and Taptic engine, which is a vibrating motor that provides physical feedback on receiving notifications. The screen uses a
flexible retina display and laminated sapphire glass to protect it from scratches. Analyst(s) Outlook Macquarie Capital Securities Limited, Taiwan Branch . Positive for iPhone replacement cycle: We believe there is positive iPhone Ellen Tseng +886 2 2734 7524 [email protected] 6 replacement cycle in next 6-12 months. Aggressive US carrier promotion, Jeff Su consumer preference for a larger screen/64 bit Processor and the Apple Pay +886 2 2734 7512 [email protected] could all help boost demand from current iOS users (300m+) as well as Tammy Lai +886 2 2734 7525 [email protected] new/returning iPhone users. Macquarie Securities Korea Limited Daniel Kim . Our favourite iPhone Plays in Asia: We highlight subsector implication in +82 2 3705 8641 [email protected] this report and identify key beneficiaries in our Asia coverage universe as Soyun Shin +82 2 3705 8659 [email protected] being Largan, Catcher, LG Display, Hon Hai, Pegatron, Nitto Denko and TSMC. Macquarie Capital Securities (Japan) Limited Damian Thong, CFA . Post-launch, sell-through is key to watch: The event had few surprises, +81 3 3512 7877 [email protected] given strong share price rally pre-Apple iPhone 6/Watch launch. We expect George Chang +81 3 3512 7854 [email protected] the market will need to wait for sell-through data to drive share price Macquarie Capital (USA) Inc. performance further from this level. Ben Schachter +1 212 231 0644 [email protected]
10 September 2014
Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
5
ASIA PEC’s Strategy Weekly Japan and global equities Stocks and sectors: As Japan’s domestic drivers dissipate, below, Japan has converged with our ongoing bullish house view on global equity markets - John O’Connell & Matthew Brook’s latest report is here. Our top stock picks begin on page 2. After a year of no major sector moves in Japan, we turn to David Doyle’s Rate hikes and sector selection for preferences for the next six months. “Cyclicals” are favoured, from page 27. We believe it’s a stock-picking TOPIX bull market .Another source of stock ideas is in Japanese sector laggards versus their global industry peers, from page 9. Motor vehicles, Energy Materials and Process Industries are examples. Fiscal reconstruction is now Japan’s dominant policy: Around November,
we expect the decision to be made to implement the October 2015 increase in the consumption tax rate to 10% from 8%. As offsets, we expect both a public works heavy supplementary budget and the BOJ extending its ¥50tr pa JGB Real GDP forecasts buying program through 2015 - we are not expecting a step-up in the program, Macquarie Consensus nor a duration extension. We expect Japan’s real GDP growth to decelerate Ann avg % 2014E 2015E 2014E 2015E US 2.0 2.6 2.1 3.1 during 2015, table left. EU 1.4 1.6 1.1 1.5 Japan 1.5 1.3 1.5 1.2 China 7.4 7.0 7.4 7.2 Korea 3.6 3.6 3.6 3.7 Examining why the FY3/15E TOPIX cyclical recovery ROE is just 9% India 5.0 6.3 5.4 6.2 Indonesia 5.6 6.0 5.2 5.6 20 August 2014 PEC’s strategy weekly: A focus on ROEs in Japan Source: Consensus Economics, Macquarie Research, 27 August 2014 PEC’s strategy weekly: Stalling governance reforms in Japan September 2014 Source: Macquarie Research, September 2014 Marquee List (Prices: 5/09/2014)
CP TP +/- On our estimates, FY3/15 sees the completion of Japan’s delayed cyclical Stock Code Rec (¥) (¥) (%) earnings recovery. TOPIX EPS from FY3/16 are expected to grow at a trend Daiwa Securities 8601 OP 879 975 11.0 7% p.a. rate, broadly in line with earnings growth globally. The table below Hitachi 6501 OP 801 1,000 24.8 Shikoku Power 9507 OP 1,286 2,400 86.6 shows how this translates into TOPIX target prices as quarters roll past. Rolling Sony 6758 OP 2,056 2,300 11.9 our target price forward one quarter increases it by 25 TOPIX points. Yamada Denki 9831 OP 337 500 48.4 SUMCO 3436 OP 951 1,300 36.7 SMM 5713 OP 1,718 2,400 39.7 Source: FactSet, Macquarie Research, Septembert 2014 Steady 7% pa TOPIX earnings growth and TOPIX target prices
2015 2016 Mar Jun Sept Dec Mar Jun Sept Dec 12 months EPS to: 95 96.75 98.5 100.25 102 103.75 105.5 107.25 13x PER (rounded) 1235 1260 1280 1305 1325 1350 1375 1395 14x PER (rounded) 1330 1355 1380 1405 1430 1455 1480 1505 Note: Our FY3/15E, FY3/16E, and FY3/17E TOPIX EPS are 95, 102, and 109 respectively. Source: Macquarie Research, September 2014
Our current 12-month TOPIX target price of 1350 is equivalent to around 13x the then (i.e. in 12 months time) 12-month forward earnings to end June 2016. Analyst(s) Peter Eadon-Clarke We moved the target PER down to 13x back in March 2014 with the jump in +81 3 3512 7850 [email protected] uncertainty associated with the BOJ not announcing its 2015 operational details Myungdae Chung +81 3 3512 7878 [email protected] at that time, as we had expected. Monetary policy works with a lag.
In our opinion, the lack of forward guidance clarity from the BOJ is one reason 10 September 2014 Macquarie Capital Securities (Japan) why the private sector has not been embracing risk and beginning a new credit Limited cycle up-swing, from page 38.
Please refer to page 54 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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INDIA Axis Bank AXSB IN Outperform Asset quality trends are improving Price (at 12:20, 08 Sep 2014 GMT) Rs420.65
Valuation Rs 447.00 Event - Gordon Growth Model 12-month target Rs 447.00 . We met Axis Bank’s management to discuss asset quality trends, margins Upside/Downside % +6.3 and growth outlook. Key takeaways are highlighted below. 12-month TSR % +7.6 Volatility Index Medium Impact GICS sector Banks . Stress on incremental asset quality is easing: The bank’s exposure to Market cap Rsm 992,022 large levered groups has declined marginally, from 10% in 2Q and 3Q14 to Market cap US$m 16,460 8.6% in 1Q15. The bank’s confidence in these groups’ creditworthiness has Free float % 8 improved in the last 6-12 months, mainly because companies are taking steps 30-day avg turnover US$m 22.4 to reduce debt on their balance sheets. Equity infusion and non-core asset Number shares on issue m 2,358 sales are happening. If de-leveraging continues, it will enable these groups to Investment fundamentals come out of their stressed situations. The bank has conservatively kept its Year end 31 Mar 2014A 2015E 2016E 2017E guidance for stressed asset formation unchanged at Rs65bn (mainly due to Net interest Inc bn 119.5 135.5 158.1 192.1 Non interest Inc bn 74.1 88.0 104.7 124.3 backlog of earlier cases). Incremental stress has tapered off and FY16 may PBT bn 93.5 98.6 120.4 151.3 see lower level of stressed asset formation compared to FY15. The bank PBT growth % 23.8 5.4 22.1 25.7 Reported profit bn 62.2 66.0 80.6 101.4 estimates credit cost at 70-80bps in FY15-16, but specific provisions for NPAs Adjusted profit bn 62.2 66.0 80.6 101.4 to be lower and general provisions to be higher due to regulations. EPS rep Rs 26.47 28.12 34.33 43.15 EPS rep growth % 19.6 6.2 22.1 25.7 . PER rep x 15.9 15.0 12.3 9.7 Capex-led loan growth will take time: Capex-led loan growth is clearly Total DPS Rs 4.69 5.20 5.72 6.16 missing as disbursements for new investment decisions will take time. The Total div yield % 1.1 1.2 1.4 1.5 ROA % 1.7 1.6 1.6 1.7 bank already has good market share in wholesale loans and it therefore ROE % 17.4 16.1 17.2 18.5 believes it cannot grow faster than the industry. The corporate loan book may P/BV x 12.9 2.3 2.0 1.7 grow at a high-single-digit rate in FY15. Retail and SME sectors are expected AXSB IN rel BSE Sensex performance, to grow at 25% and 20%+ respectively. Within retail, non-mortgage products & rec history like auto and unsecured loans may grow at higher rates due to base effect. . Retail franchise strong and improving; margins to remain above 3.5%: The CASA ratio is expected to remain stable at ~40% levels. Deposit base is much more granular now as compared to earlier years. Retail term deposits are 55% of total term deposits – up 500-700bps in the last one year. Management retained its earlier guidance of 3.5% NIM in the medium term. . Other key takeaways: 1) Internal earnings generation rate is 15% (RoE of
18-20% and payout ratio at 17%). Tier 1 capital is at 12.6% and the bank will Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. raise further capital once tier 1 is near 10%. Therefore it does not require any Source: FactSet, Macquarie Research, September 2014 equity capital for next 2-3 years. 2) Cost-to-income ratio may inch up a bit due (all figures in INR unless noted) to branch expansion. The company plans to increase branch network by 10% every year. 3) Axis Bank has sold very few assets to ARC and like other private sector banks, it prefers to resolve NPL issues internally. Earnings and target price revision . No change.
Analyst(s) Price catalyst Suresh Ganapathy, CFA +91 22 6720 4078 [email protected] . 12-month price target: Rs447.00 based on a Gordon Growth Model Parag Jariwala, CFA methodology. +91 22 6720 4083 [email protected]
. Catalyst: lower asset quality pressure and better loan growth 10 September 2014 Macquarie Capital Securities India (Pvt) Action and recommendation Ltd
. Maintain Outperform with a TP of Rs447.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
7
HONG KONG China CNR Corp 6199 HK Outperform New contract wins Price (at 07:59, 10 Sep 2014 GMT) HK$6.83 Event Valuation HK$ 6.95 - PER . CNR announced recent new contract wins today (10 September 2014). The 12-month target HK$ 6.95 total value of the new contract wins amounts to Rmb6,489m, representing 6% Upside/Downside % +1.8 of our forecasted 2014 revenue. 12-month TSR % +4.0 . Wind turbine-related sales contracts represent 53% of the total new contracts. Volatility Index Medium RTV sales contracts represent 21% of total new contract wins. MU sales GICS sector Capital Goods contracts make up for 17% of the total new contract wins. Sales contracts for Market cap HK$m 82,223 Market cap US$m 10,733 freight wagons, passenger coaches and traction systems for RTVs each Free float % 47 represent 3% of total contract wins. 30-day avg turnover US$m 14.0 Impact Number shares on issue m 12,038 . Robust new contract wins year to date: Led by robust growth of domestic Investment fundamentals railway and urban transit investment, as well as the rapid growth of overseas Year end 31 Dec 2013A 2014E 2015E 2016E business, CNR has achieved robust new contract wins YTD. The total value Revenue bn 96.8 107.6 120.9 133.3 of new contracts has reached Rmb96.4bn, representing 90% of our EBIT bn 6.0 7.2 8.3 9.4 EBIT growth % 20.1 19.5 15.7 12.5 forecasted 2014 revenue. As at end-2013, the company had a backlog of Reported profit bn 4.1 5.1 6.0 6.8 Rmb81.8bn. Adjusted profit bn 4.1 5.1 6.0 6.8 EPS rep Rmb 0.40 0.45 0.49 0.55 . Incoming new MU tenders from CRC: China Railway Construction EPS rep growth % 17.3 12.5 8.9 12.8 EPS adj Rmb 0.40 0.45 0.49 0.55 Corporation (1186 HK, HK$7.40, Outperform, TP: HK$8.19) rolled out the first EPS adj growth % 17.6 12.3 9.1 12.8 MU tender in 2014 for 175 sets of 350km/h MUs and 57 sets of 250km/h MUs PER rep x 13.5 12.0 11.0 9.8 in August. The total tender value calculated based on implied ASP from PER adj x 13.5 12.0 11.0 9.8 Total DPS Rmb 0.10 0.11 0.12 0.14 market expectations of Rmb200m/set could reach Rmb46.4bn. Assuming Total div yield % 1.8 2.1 2.3 2.6 CSR Corp (1766 HK, HK$7.16, Outperform, TP: HK$8.00) and CNR equally ROA % 5.3 5.6 5.7 5.9 ROE % 11.4 11.6 11.6 12.0 share the tender, each would win about Rmb23.2bn of new MU orders, which EV/EBITDA x 8.2 8.2 7.2 6.5 represents another 88% of our MU revenue forecast for CNR in 2015. CNR Net debt/equity % 34.8 14.0 12.6 10.0 P/BV x 1.5 1.3 1.2 1.1 management expects CRC to make another MU tender of over 300 sets.
6199 HK rel HSI performance, & rec . Continuous RTV and overseas order inflow: RTV new contract wins history represent 21% of total new contract wins. The company also made a breakthrough in supplying traction systems and other components for RTVs used on the Xi’an Metro Line 2. The total contract value was Rmb170m, representing 3% of total new contract wins. CNR gained Rmb1, 506m in overseas contracts, which represents 23% of total new contract wins. CNR signed two MU new-build contracts to supply diesel engine-powered MUs and electricity-powered MUs to Argentina and Brazil. Total contract value reached Rmb1, 072m, representing 4.1% of our forecasted 2015 MU revenue. In addition to the MU overseas order, CNR also signed two contracts supplying
Note: Recommendation timeline - if not a continuous line, then there was no freight wagons and passenger carriages to the Australian and Mozambican Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2014 markets. (all figures in Rmb unless noted, TP in HKD) Earnings and target price revision
. No change. Price catalyst . 12-month price target: HK$6.95 based on a PER methodology. Analyst(s) . Catalyst: CRC tenders and 3Q results in October. Saiyi He, CFA +852 3922 3585 [email protected] Action and recommendation Kelly Zou . We are hosting a post-results NDR for CNR in Hong Kong and Singapore this +86 21 2412 9068 [email protected] week. We will provide more detailed updates post the meetings with 10 September 2014 management and investors. We remain positive on the railway equipment Macquarie Capital Securities Limited sector.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
8
JAPAN Toshiba 6502 JP Outperform Apple is again NAND’s best friend Price (at 06:00, 09 Sep 2014 GMT) ¥471
Valuation ¥ 590 Conclusion - Price to Book 12-month target ¥ 590 . We believe Apple’s iPhone 6 and iPhone 6 Plus are positive for the NAND Upside/Downside % +25.2 flash market outlook – and specifically for Apple’s key suppliers Toshiba and 12-month TSR % +27.7 SanDisk. We maintain our Outperform rating on Toshiba and ¥590 TP. Volatility Index Medium GICS sector Capital Goods . In line with our US colleague Deepon Nag (What if Apple boosts its NAND Market cap ¥bn 1,998 content?, 8 Sep 2014), we believe Apple’s NAND flash demand will be Market cap US$m 18,955 supportive of the demand and pricing environment in 2015. 30-day avg turnover US$m 62.5 Impact Number shares on issue m 4,238
Investment fundamentals . In line with our expectations, Apple’s iPhone 6 line-up will come in Year end 31 Mar 2014A 2015E 2016E 2017E 16GB/64GB/128GB variants: Unlike the iPhone 5S, the iPhone 6 will not come Revenue bn 6,502.5 6,807.9 6,910.4 7,036.6 in 32GB variants. We believe that Apple is encouraging consumers to buy EBIT bn 290.8 385.6 445.6 478.2 iPhones with more NAND flash, with Apple benefitting from the high marginal EBIT growth % 49.6 32.6 15.6 7.3 Recurring profit bn 180.9 332.2 405.4 439.4 revenue/profit per GB. Consumers effectively pay US$1.56/GB for an additional Reported profit bn 50.8 179.5 225.0 244.8 64GB of NAND flash when they choose the 128GB model over the 64GB model EPS rep ¥ 12.0 42.4 53.2 57.8 EPS rep growth % -34.5 253.4 25.4 8.8 vs the US$0.38/GB implied by the current 64Gbit MLC contract price. For PER rep x 39.3 11.1 8.9 8.2 Apple, the US$/GB decrease between the iPhone 5S and the iPhone 6 is likely Total DPS ¥ 8.0 10.0 16.0 18.0 Total div yield % 1.7 2.1 3.4 3.8 to be offset by the bit volume rise, and the downtrend in NAND procurement ROA % 4.7 6.1 6.8 7.1 costs stemming from Toshiba/SanDisk’s migration to 19nm-A then to 15nm. ROE % 5.8 13.9 15.7 15.3 EV/EBITDA x 6.7 5.3 4.6 4.2 Net debt/equity % 73.7 65.2 59.6 52.6 . We believe the new iPhone 6 line-up could almost double average NAND P/BV x 1.6 1.5 1.3 1.2 flash content in Apple’s iPhones to ~55GB, from ~30GB, by end-2015. The
6502 JP vs TOPIX, & rec history pace would be in excess of the ~40%/year industry bit growth rate, providing a solid demand tailwind. This would mean a breakout from the stagnation in average NAND flash content per iPhone in 2013-14. We estimate that Apple accounted for ~15% of world NAND flash demand in 1H14, with iPhones alone accounting for almost 10%. A rise in NAND flash content per device could result in iPhones alone accounting for almost 14% of global NAND demand in 2015. . Toshiba is planning for sustained demand growth: Toshiba has started up Fab 5 Phase 2, which will provide scope for further capacity growth into 2015 alongside the 15nm technology migration, which has just begun. “New Fab 2” is Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. now under construction on the site of the old 200mm Fab 2, aimed to support Source: FactSet, Macquarie Research, September 2014 initial production of BiCS 3D NAND flash in 2015-16. We believe Toshiba is (all figures in JPY unless noted) now planning for Fab 6; per a Nikkan Kogyo article this week, this may potentially be located adjacent to the existing fabs in Yokkaichi subject to procurement of land from the prefectural government. We would expect Fab 6 to be operational by 2018, and targeted for the ramp-up of BiCS 3D NAND. Earnings and target price revision
Analyst(s) . No change. Our last major update was in NAND flash stronger in 2Q (12 Aug). Damian Thong, CFA +81 3 3512 7877 [email protected] Price catalyst Claudio Aritomi +81 3 3512 7858 [email protected] . 12-month price target: ¥590 based on a Price to Book methodology. Len Assakul +81 3 3512 7879 [email protected] . Catalyst: We expect a solid QoQ lift in NAND flash profit.
10 September 2014 Action and recommendation Macquarie Capital Securities (Japan) . Toshiba remains one of our top picks in Japan tech. We prefer the shares to Limited those of other chip firms such as Rohm (6963 JP, ¥6,730, Neutral, TP: ¥6,000) and Renesas Electronics (6723 JP, ¥945, Underperform, TP: ¥765). Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
9
CHINA Baoshan Iron & Steel 600019 CH Outperform The most preferred steel player Price (at 04:00, 05 Sep 2014 GMT) Rmb4.54
Valuation Rmb 4.39 Event - Price to Book 12-month target Rmb 5.20 . Our Global Commodities team has reduced its forecasts for 2014~16E iron Upside/Downside % +14.5 ore prices by 8%/16%/18%, and also cut Chinese domestic HRC price 12-month TSR % +20.0 estimates by 3%/5%/6% for 2014~16E. Our China HCC price is unchanged Volatility Index Low after our previous price cut in July, with a 21%/3% yoy drop for 2014/15E. GICS sector Materials . We cut our Baosteel 2014/15/16E EPS by 2%~7% to Rmb0.42/0.52/0.53 to Market cap Rmbm 79,228 reflect lower prices of iron ore and steel. We also see the Zhanjiang project Market cap US$m 12,901 Free float % 20 coming into operation in 2015/16E increasing fixed production before ramping 30-day avg turnover US$m 22.3 up to full capacity, but the volume increase would likely offset the negative Number shares on issue m 17,451 impact to earnings to some extent. We expect margin expansion to continue through 2H14 and 2015E, and believe Baosteel would benefit from the A-H Investment fundamentals through train as the leader in the steel sector. Maintain TP of Rmb5.2 and OP. Year end 31 Dec 2013A 2014E 2015E 2016E Revenue bn 188.3 184.4 190.3 197.9 Impact EBIT bn 7.6 10.8 12.9 13.3 EBIT growth % -46.6 41.4 19.7 2.8 Reported profit bn 5.6 6.9 8.6 8.7 . Unique product mix to secure profitability. Auto and home appliance steel Adjusted profit bn 5.6 6.9 8.6 8.7 demand is likely to see the most growth in 2014~16E, and both segments EPS rep Rmb 0.34 0.42 0.52 0.53 EPS rep growth % -43.4 25.4 24.5 0.9 account for over 50% of Baosteel’s total output. Thanks to the unique product EPS adj Rmb 0.33 0.42 0.52 0.53 mix, Baosteel has maintained stable selling prices amid the weak steel EPS adj growth % -43.6 25.8 24.5 0.9 PER rep x 13.5 10.8 8.7 8.6 market, with CRC and HRC prices down only 1.5% and 6%. Baosteel also PER adj x 13.6 10.8 8.7 8.6 sees full orders in auto steel for 3Q and maintains stable sales prices. Total DPS Rmb 0.20 0.21 0.26 0.00 Total div yield % 4.4 4.6 5.8 0.0 . Volume to grow from 2015 onwards. With no overhaul plan in 2015, we ROA % 3.4 4.6 5.2 5.1 ROE % 5.1 6.1 7.1 6.7 expect Baosteel’s volume to reach 23mnt in 2015, up from the current 22mnt. EV/EBITDA x 6.1 4.5 3.9 3.7 The Zhanjiang #1 furnace ramping up in 4Q15E would contribute ~1mnt of Net debt/equity % 24.8 24.9 28.0 29.2 P/BV x 0.7 0.6 0.6 0.6 steel billet next year. When construction is complete in 4Q16, Zhanjiang would add more output and benefit from the ~15mnt supply deficit in the 600019 CH rel HSI performance, & rec Guangdong steel market. history . Solid profitability to benefit from A-H through train. In 1H14, the 88 key mid-to-large steel mills recorded profit of Rmb7.48bn, up 133.5% HoH, of which Baosteel contributed nearly 60% as the leading player in the steel sector. With solid profitability and a high dividend yield, we think Baosteel would be a better play on the sector after A-H through train launch. . R&D to ensure long term development. With advanced technology and experience in the steel sector, Baosteel expects the future auto consumption upgrade to bring opportunities for high-strength steel and electrical steel, in Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. which Baosteel has a leading edge. R&D also focuses on aluminium materials Source: FactSet, Macquarie Research, September 2014 used in auto and e-commerce business to ensure future development. (all figures in Rmb unless noted, TP in CNY)
Earnings and target price revision . We cut 2014/15/16E EPS to Rmb0.42/0.52/0.53, maintain OP. Price catalyst Analyst(s) . 12-month price target: Rmb5.20 based on a Price to Book methodology. Hefei Deng +852 3922 1136 [email protected] . Catalyst: Big move in iron ore price and steel price; progress delay in projects Matty Zhao +852 3922 1293 [email protected] Action and recommendation 10 September 2014 . Baosteel is our preferred play in the steel sector. We believe it could be a Macquarie Capital Securities Limited better play given the solid profitability and leading position after A-H trough
train launch. It is trading at 0.59x 2015e P/B. Maintain Outperform.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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HONG KONG Angang Steel 347 HK Outperform Volume growth in high-margin product Price (at 04:00, 08 Sep 2014 GMT) HK$5.54
Valuation HK$ 2.27 Event - Price to Book 12-month target HK$ 6.10 . Our Global Commodities team has reduced its forecasts for 2014~16E iron Upside/Downside % +10.1 ore prices by 8%/16%/18%, and also cut Chinese domestic HRC price 12-month TSR % +10.1 estimates by 3%/5%/6% for 2014~16E. Our China HCC price is unchanged Volatility Index High after the previous price cut in July, with a 21%/3% yoy drop for 2014/15E. GICS sector Materials Market cap HK$m 40,082 . We revise our Angang 2014/15/16F EPS by -2%–2% to Rmb0.20/0.36/0.36 to Market cap US$m 5,172 reflect lower prices of iron ore and steel. We also our cut admin expense Free float % 29 forecasts due to lower maintenance costs while raising the income tax ratio on 30-day avg turnover US$m 6.4 potential adjustment in deferred tax assets. We expect Angang to see Number shares on issue m 7,235 continued margin expansion and robust growth in sales volume. Maintain TP
of HK$6.1 and OP. Investment fundamentals Year end 31 Dec 2013A 2014E 2015E 2016E Impact Revenue m 75,329 75,398 78,515 80,863 EBIT m 1,349 2,885 4,755 4,929 EBIT growth % nmf 113.9 64.8 3.6 . Volume to grow at ~10%. 1H14 production volume was 10.2mnt, up 7.5% Reported profit m 770 1,429 2,571 2,622 yoy, and sales volume was 10.2mnt, up 9.8% yoy. With robust growth in Adjusted profit m 770 1,429 2,571 2,622 EPS rep Rmb 0.11 0.20 0.36 0.36 downstream demand and orders, Angang has seen the capacity utilisation EPS rep growth % nmf 85.5 80.0 2.0 rate rise to ~91% in 2Q from 90% in 1Q. We expect Angang can maintain EPS adj Rmb 0.11 0.20 0.36 0.36 EPS adj growth % nmf 85.5 80.0 2.0 stable production in 2H14, and thus volume growth reach ~10% yoy. PER rep x 41.2 22.2 12.4 12.1 PER adj x 41.2 22.2 12.4 12.1 . Strong increase in auto steel vol. Angang produced auto steel of 1.64mnt, Total DPS Rmb 0.01 0.00 0.00 0.00 of which 400kt was HRC, 710kt CRC and 500kt galvanized steel. With auto Total div yield % 0.2 0.0 0.0 0.0 ROA % 1.4 3.1 5.0 4.9 steel orders still robust in the coming months, we expect auto steel volume to ROE % 1.6 3.0 5.2 5.0 reach 3.3mnt in 2014, up 32% compared to last year’s 2.5mnt. As one of the EV/EBITDA x 8.6 6.4 5.2 5.1 Net debt/equity % 47.6 37.6 25.4 14.1 three steel companies that provide heavy railway steel product, Angang also P/BV x 0.7 0.7 0.6 0.6 expects rapid growth in related section steel, with gross margin ~27%.
347 HK rel HSI performance, & rec . Sales price to remain relatively stable. Angang saw CRC steel prices down history by 4% yoy in Jan-Aug, HRC flattish yoy and wire rod down by 5% yoy (vs. China domestic average rebar prices down 10% yoy in the same period). We expect Angang’s steel price could remain relatively stable in 2H14, and only decline by 5% on average in 2014. . Margin to continue expansion. With a weaker iron ore price in 2H14, we expect Angang could continue to see an improving steel margin. Due to 2- month delay in pricing of iron ore purchased from the parent co., we expect the low iron ore price in 2Q and 3Q could translate into production cost for 3Q
Note: Recommendation timeline - if not a continuous line, then there was no and 4Q, and Angang is likely to reach higher margins in 4Q this year. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2014 Earnings and target price revision (all figures in Rmb unless noted, TP in HKD)
. We change 2014/15/16F EPS to Rmb0.20/0.36/0.36, maintain TP and OP. Price catalyst
. 12-month price target: HK$6.10 based on a Price to Book methodology. Analyst(s) Hefei Deng . Catalyst: Iron ore price declines less than expected. +852 3922 1136 [email protected] Matty Zhao Action and recommendation +852 3922 1293 [email protected] . We believe Angang would see rapid sales volume in auto steel and high- 10 September 2014 margin heavy section steel that have higher margins. Margin expansion could Macquarie Capital Securities Limited continue through 2H14 and 2015 despite a two-month delay in iron ore pricing. It is trading at 0.60x 2015E P/B. Maintain Outperform.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
11
HONG KONG Maanshan Iron & Steel 323 HK Underperform Weak sales price and low margin Price (at 04:00, 08 Sep 2014 GMT) HK$1.80
Valuation HK$ 0.71 Event - Price to Book 12-month target HK$ 1.30 . Our Global Commodities team reduced their 2014-16E iron ore price Upside/Downside % -27.8 forecasts by 8%/16%/18%, and also cut Chinese domestic HRC price 12-month TSR % -27.8 forecasts by 3%/5%/6%. Our China HCC price estimate is unchanged after Volatility Index Medium the previous price cut in July, a with 21%/3% yoy drop for 2014/15E. GICS sector Materials Market cap HK$m 13,862 . We change Maanshan’s 2014/15/16E EPS by -7% to +6% to Market cap US$m 1,858 Rmb0.02/0.06/0.05 to reflect lower prices of iron ore and steel. We expect Free float % 39 Maanshan to break even and turn profitable in 2H14; also the Hefei plant 30-day avg turnover US$m 2.7 closure might bring in a one-off gain on asset disposal. However, with large Number shares on issue m 7,701 exposure to long steel production and the construction sector, Maanshan is
likely to see weak earnings performance and it is less likely to see a notable Investment fundamentals Year end 31 Dec 2013A 2014E 2015E 2016E earnings recovery. Maintain TP of HK$1.30 and Underperform rating. Revenue m 73,849 66,365 72,727 73,064 EBIT m 419 801 1,348 1,463 Impact EBIT growth % nmf 91.4 68.2 8.6 Reported profit m 157 166 439 411 . Weak steel selling price. As Maanshan has 27% sales exposure to the Adjusted profit m 157 166 439 411 EPS rep Rmb 0.02 0.02 0.06 0.05 construction sector and over 50% of its steel output is long products, EPS rep growth % nmf 5.7 164.4 -6.6 Maanshan’s selling price has seen the worst performance among peers. EPS adj Rmb 0.02 0.02 0.06 0.05 EPS adj growth % nmf 5.7 164.4 -6.6 Section steel price was down by 9% yoy and CRC price down by 8% yoy. PER rep x 69.9 66.1 25.0 26.7 PER adj x 69.9 66.1 25.0 26.7 . Low margin in long steel products. Although long product sales improved Total DPS Rmb 0.00 0.00 0.00 0.00 on a recent recovery in the property sector, margins remained low at -1% to Total div yield % 0.0 0.0 0.0 0.0 ROA % 0.6 1.1 1.8 1.8 +0.1%, and that of flat product was also only 2.9%. Train wheel steel saw a ROE % 0.7 0.7 1.9 1.7 high gross margin of 18.4% in 1H14, but only contributed 10% to profit. EV/EBITDA x 6.8 5.9 5.0 4.7 Net debt/equity % 77.0 73.6 72.8 75.3 Despite margin improvement since July, Maanshan’s gross margin should P/BV x 0.5 0.5 0.5 0.5 continue to remain weak, dragged down by the weak long product segment.
323 HK rel HSI performance, & rec . Core business to be loss-making. Maanshan recorded a loss in 1H14 history mainly due to furnaces not operating smoothly which led to higher fixed cost. With the furnace operation back to normal, Maanshan has returned to the breakeven level since June. However, we think profit in the coming months would be rather weak despite turning profitable and the core business should still see a full-year loss in 2014. . One-off profit from Hefei plant closure. Maanshan is going to close down its Hefei steel plant in October this year, and expect to get compensation from the government on land and plants. This one-off gain is likely to contribute to
Note: Recommendation timeline - if not a continuous line, then there was no full-year earnings and help to record a profit in 2014. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2014 Earnings and target price revision (all figures in Rmb unless noted, TP in HKD)
. We change Maanshan’s 2014/15/16E EPS by -7% to +6% to Rmb0.02/0.06/0.05. Maintain TP of HK$1.30 and Underperform rating. Price catalyst
Analyst(s) . 12-month price target: HK$1.30 based on a Price to Book methodology. Hefei Deng +852 3922 1136 [email protected] . Catalyst: Larger than expected earnings recovery. Matty Zhao +852 3922 1293 [email protected] Action and recommendation 10 September 2014 . With weak performance in property, we expect low-margin long steel would Macquarie Capital Securities Limited continue to weigh on Maanshan’s earnings performance. We forecast Maanshan to achieve breakeven in 2014/15E. It is trading at 0.45x 2015E P/B.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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GLOBAL Apple AAPL US Outperform Phones great, Payments promising, Watch ? Price (at 20:00, 09 Sep 2014 GMT) US$97.99
Valuation US$ 104.00 Event - DCF (WACC 10.6%, beta 1.4, ERP 6.0%, RFR 2.7%) . AAPL hosted its iPhone 6 / Apple Watch launch event this afternoon. 12-month target US$ 104.00 12-month TSR % +8.1 Impact GICS sector The Bottom Line – The phone looks great, payments are promising however the Technology Hardware & Equipment watch needs to prove that it truly enhances users' lives. On the phone, keep the Market cap US$m 586,751 investment thesis simple, consumers want a bigger phone and many consumers 30-day avg turnover US$m 5,533.9 want to remain in or join the Apple ecosystem. Beyond that, most of the improved Number shares on issue m 5,988 specs are incremental but taken together this will clearly be the best phone on the Investment fundamentals market. Both sizes will sell well and likely be supply constrained at least through end Year end 30 Sep 2013A 2014E 2015E 2016E of year. We expect this will be best selling iPhone ever. Revenue bn 170.9 179.6 193.5 196.3 EBIT bn 49.0 51.5 55.0 55.9 On payments, we think Apple, with its scale, brand and track record, has the best EPS adj US$ 5.68 6.31 6.86 7.02 EPS adj growth % -9.9 11.1 8.7 2.3 shot of making this a reality. However, given that payments will only work with the PER adj x 17.2 15.5 14.3 14.0 new devices, it will take time to ramp, both among users and merchants. Importantly, EV/EBITDA x 11.2 10.0 9.2 9.0 while AAPL did not discuss its economics during the presentation, sources we spoke AAPL US vs S&P 500, & rec history with at the event indicated that AAPL will earn money from both physical and online transactions (this was unclear heading into the event). They were adamant that neither the retailer nor the customer would pay anything. We believe that it is highly likely that for in-store sales through Apple Pay, AAPL will earn some percentage of the 15-25bps concession that they negotiated on Apple Pay "card present" transactions. Online payments have better economics available for AAPL and it will be able to collect more data than offline, data that it can use for advertising and other services.
Regarding the watch, we are more cautious. It is clearly the best wearable we have Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. seen yet however we simply need to see more proof that it will really enhance users' Source: FactSet, Macquarie Capital (USA), September lives enough that they will: 2014 (all figures in USD unless noted) 1) Pay at least $349 (with higher-end units likely costing much more).
2) Be willing to wear it every day. 3) Be willing to charge it every day. The bottom line is that the event had few surprises but enough positives for AAPL to maintain its value. Going forward, selling out the iPhone will not be enough to drive Analyst(s) the stock meaningfully higher. Payments need to show promise and the watch will Macquarie Capital (USA) Inc. Ben Schachter need to sell beyond AAPL fanatics. Additionally, post-iPhone 6, investors will once +1 212 231 0644 [email protected] again look for the long-awaited TV screen, an Apple TV update and a large-format Kevin Smithen +1 212 231 0695 [email protected] iPad. We, as always, continue to focus on apps, software, & services to drive EBIT Vincent Caintic, CFA growth throughout the entire ecosystem. Reiterate O/P rating and raise tgt to $104. +1 212 231 1814 [email protected] Kevin McVeigh Earnings and target price revision +1 212 231 6191 [email protected] John Merrick . No change to estimates, increase target from $102 to $104. +1 212 231 6598 [email protected] Macquarie Capital Securities Limited, Taiwan Price catalyst Branch . 12-month price target: US$104.00 based on a PER methodology. Jeff Su +886 2 2734 7512 [email protected] . Catalyst: new product announcements app store data, F4Q’14 earnings report 9 September 2014 Action and recommendation
. Affirm Outperform rating.
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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UNITED STATES American Express AXP US Neutral Wait and See on NFC Price (at 20:00, 09 Sep 2014 GMT) US$87.90
Valuation US$ 91.00- Event 93.00 - PER . Apple unveiled their Apple Pay mobile payment platform on September 9. 12-month target US$ 91.00 12-month TSR % +4.8 . Josh Silverman, President of Consumer Products and Services at American GICS sector Diversified Express, presented at an industry conference on September 8. Financials . Macquarie published an industry report on the impact of Near Field Market cap US$m 91,993 Communication (NFC) payment platforms on September 8. 30-day avg turnover US$m 264.9 Number shares on issue m 1,047 Impact
Investment fundamentals . “The swipe isn’t broken”. We wait and see whether transaction frictions are Year end 31 Dec 2013A 2014E 2015E 2016E reduced/eliminated through the NFC platform, and have not built in incremental EPS adj US$ 4.88 5.35 5.99 6.78 EPS adj growth % 10.8 9.8 11.9 13.1 economics from mobile payments into our AXP and DFS models. We think PER adj x 18.0 16.4 14.7 13.0 overall consumer spend is the key driver to card earnings growth, whether it AXP US vs S&P 500, & rec history takes place through a swipe or a tap. . A recent report suggests that Apple Pay has been able to negotiate 15 – 25bps lower card transaction fees from American Express. While this would erode margins, we think there could be upside if AXP is able to capture more market share, particularly as Apple’s platform appears to have agreements with only 5 financial institutions according to the report. In either case, we think it will take some time before the NFC payments become a meaningful portion of AXP’s consumer spend.
Note: Recommendation timeline - if not a continuous line, then there was no . Over time, we think technology will help American Express establish faster, Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Capital (USA), September more direct relationships with merchants (e.g. tailoring offers and rewards 2014 based on phone location), which could drive more consumer spend and build (all figures in USD unless noted) value to businesses that accept Amex cards.
. Discover has time to side with the winner in the NFC platform space, in our view. As with AXP, we think consumer spend is the key driver for DFS (US$62.94, OP, TP: US$74.00), and we like Discover’s model of driving card loan economics through rewards. Discover has not been listed as a network provider for Apply Pay, and DFS’s partnership with PayPal is not yet a meaningful contributor to results. Earnings and target price revision . No change. Price catalyst
. 12-month price target: US$91.00 based on a DCF methodology.
Analyst(s) . Catalyst: near-term GDP growth and spend trends. Vincent Caintic, CFA +1 212 231 1814 [email protected] Action and recommendation 9 September 2014 . Maintain Neutral. We think current share prices adequately reflect moderate Macquarie Capital (USA) Inc. EPS growth, driven by 1) still-slow GDP growth, and 2) a ramping up of revenues in 2015 from investments made in 2Q14.
Please refer to page 2 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
14
THAILAND Amata Corporation AMATA TB Neutral Just a hiccup Price (at 10:30, 09 Sep 2014 GMT) Bt16.90
Valuation Bt 40.00 Event - DCF 12-month target Bt 18.00 . Despite the sluggish pre-land sale and land transfer during the first half, Upside/Downside % +6.5 AMATA expects better momentum for the rest of the year. However, a 12-month TSR % +10.2 significant pick-up in its performance will likely be delayed into the fourth Volatility Index Medium quarter, instead of 3Q as previously guided. We see the delayed revenue GICS sector Real Estate recognition between quarters as a hiccup with minimum impact on its Market cap Btm 18,032 fundamentals and our earnings projections. Maintain Neutral and Bt18.0 TP. Market cap US$m 563 Free float % 20 Impact 30-day avg turnover US$m 2.0 . A slip in land transfer. Due to the Land Department problems, AMATA’s Number shares on issue m 1,067 transfer of its land title deed to clients may be delayed into the fourth quarter. Investment fundamentals It expects to transfer 100 rai of land in 3Q14 (mostly from Amata City and Thai Year end 31 Dec 2013A 2014E 2015E 2016E Chinese), vs 619 rai in 1Q and 31 rai in 2Q. Then, the land transfer will Revenue m 7,312.0 7,583.8 7,713.3 8,672.8 EBIT m 2,343.6 2,638.1 2,762.2 3,121.8 significantly rise to 500 rai in 4Q, mostly from Amata Nakorn. Management EBIT growth % 23.1 12.6 4.7 13.0 forecasts 2014 land transfers of 1,200-1,300 rai, vs 1,008 rai last year. Reported profit m 1,515.6 1,617.0 1,666.3 1,787.9 Adjusted profit m 1,417.8 1,617.0 1,666.3 1,787.9 EPS rep Bt 1.42 1.52 1.56 1.68 . Pre-land sale could be lower than expected. According to management, EPS rep growth % 4.9 6.7 3.0 7.3 AMATA is now finalising several pre-land sale agreements. Its official forecast EPS adj Bt 1.33 1.52 1.56 1.68 EPS adj growth % 34.9 14.1 3.0 7.3 for pre-land sale is 1,000 rai for 2014 vs 282 rai YTD (until mid-Aug). Thus, PER rep x 11.9 11.2 10.8 10.1 we foresee a chance of its pre-land sales this year falling short of PER adj x 12.7 11.2 10.8 10.1 Total DPS Bt 0.57 0.61 0.62 0.62 management’s target of 10-20%. Total DPS growth % 4.9 6.7 3.0 0.0 Total div yield % 3.4 3.6 3.7 3.7 . Secure revenue vs backlog. AMATA expects total revenue growth of +10% ROA % 10.2 11.7 11.6 12.0 this year (vs our forecast of +4%). At end-2Q14, AMATA had a backlog of ROE % 16.6 18.3 16.9 16.3 EV/EBITDA x 8.7 7.8 7.3 6.5 Bt4.5bn (1,100 rai): Bt3.0bn from Amata Nakorn (AN), Bt0.7bn from Amata Net debt/equity % 56.2 42.0 44.5 49.3 City (AC) and Bt0.8bn from Thai Chinese (TC). Of the total backlog, 70% P/BV x 2.2 1.9 1.7 1.6 should be realised as revenue this year and the rest next year. AMATA TB rel SET performance, & rec history . Amata’s Vietnam listing and REIT. Amata’s Vietnam IPO is likely to be delayed into mid-2015, while revenue recognition should take place in 2016. However, the divestment of its ready-built factories with estimated total value of Bt4.75bn to its Amata REIT should take place in 4Q14. Earnings and target price revision . No change. Price catalyst
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . 12-month price target: Bt18.00 based on a Sum of Parts methodology. Source: FactSet, Macquarie Research, September 2014 (all figures in THB unless noted) . Catalyst: Positive: Rising land sale momentum and GM. Negative: Delay of
land transfers. Action and recommendation . Maintain Neutral and TP of Bt18.0. AMATA is trading at 10.8x 2015E PER Analyst(s) and a 50% discount to NAV. Our TP of Bt18 implies 45% discount to NAV and Patti Tomaitrichitr, CFA 11.5x 2015E PER. Future catalysts could be the upcoming expansion of the +66 2 694 7727 [email protected] eco-car project phase 2, when new players look to expand or acquire new 10 September 2014 industrial estates in Thailand. Macquarie Securities (Thailand) Limited
Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie may be an Issuer of Derivative Warrants on securities mentioned in this report.
15
JAPAN Bit-isle inc. 3811 JP Outperform Termination of coverage Price (at 06:00, 09 Sep 2014 GMT) ¥684
Valuation ¥ 700-800 Conclusion - EV/EBITDA 12-month target ¥ 740 . We are terminating coverage of Bit-isle. We believe the company is not Upside/Downside % +8.2 focusing enough on its core business in data centres instead placing 12-month TSR % +10.1 emphasis on solar parks. With low liquidity and a data centre story that is Volatility Index High pushed out with risks of new entrants we see that Bit-isle’s attractiveness is GICS sector Software & waning. Having said that Bit-isle’s valuations are not too challenging but we Services feel there are better opportunities elsewhere in the small-mid cap space. Market cap ¥m 24,387 Market cap US$m 230 Impact Free float % 53 30-day avg turnover US$m 1.8 . Data Centres under pressure: With the new iDC5 due for completion from Foreign ownership % 12.6 November 2014 we think this only exacerbates the excess supply condition Number shares on issue m 35.65 that Bit-isle suffers. With utilisation set to drop from 72% to 61% in FY7/15E we think Bit-isle’s profitability will continue to suffer Investment fundamentals Year end 31 Jul 2013A 2014E 2015E 2016E . Bookend clientele: Bit-isle’s main clientele are small sized corporations and Revenue m 16,565 17,784 19,333 21,162 turnover remains excessive. On the other side of the ledger, large SNS EBIT m 3,136 2,871 2,898 4,406 EBIT growth % 14.2 -8.4 0.9 52.0 customers like Gree (3632 JP, ¥777, Underperform, TP: ¥500, David Gibson) Recurring profit m 2,874 2,638 2,687 4,185 are cutting back on racks as the game market moves from browser to native Reported profit m 1,667 1,662 1,758 3,100 Adjusted profit m 1,667 1,662 1,563 2,469 app. Gree is 12% of the total racks in operation. We continue to believe that EPS rep ¥ 50.6 50.4 53.3 94.0 Bit-isle must look for more stable customers. EPS rep growth % 34.2 -0.3 5.8 76.3 EPS adj ¥ 50.6 50.4 47.4 74.9 EPS adj growth % 19.7 -0.3 -5.9 58.0 . What are you?: We continue to view the focus on solar park construction as PER rep x 13.5 13.6 12.8 7.3 a distraction. While it may have sensible economics and the possession of a PER adj x 13.5 13.6 14.4 9.1 Total DPS ¥ 11.0 13.0 13.0 15.0 power wholesale license may open doors with power liberalisation in the Total div yield % 1.6 1.9 1.9 2.2 future we still think it is a mask for an increasingly ailing rack business. ROA % 10.6 9.7 9.8 14.3 ROE % 19.6 17.0 14.5 21.1 . Guidance:. The weaker FY7/15E guidance is a reflection of the company’s EV/EBITDA x 4.7 4.7 4.2 3.6 Net debt/equity % 102.8 109.5 69.5 32.0 changing landscape. Pre Lehman shock the company had a good track P/BV x 2.5 2.2 2.0 1.8 record of beating guidance but with pressure in its core rack business we see
3811 JP vs TOPIX, & rec history that earnings momentum will likely stay weaker. Earnings and target price revision . No change. TP of ¥740 based on 4.6x EV/EBITDA Price catalyst
. 12-month price target: ¥740 based on a EV/EBITDA methodology.
. Catalyst: iDC5 utilisation rates
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Action and recommendation Source: FactSet, Macquarie Research, September 2014 (all figures in JPY unless noted) . Bit-isle is going through an awkward adjustment phase. With the risk of
cancellation from its largest customer Gree over the coming 12 months, we feel the rack environment could continue to be volatile although its activity in We would prefer that Bit-isle focuses on driving its core business. We think Analyst(s) the company is losing focus on what it should be. We are all for business Michael Newman diversification but we think that the company must do more about stemming +81 3 3512 7920 [email protected] the exodus of customers. The FY7/14 results will be viewed very dimly by the market and as we’ve continually said, the company has only served to 10 September 2014 Macquarie Capital Securities (Japan) highlight management credibility issues again as we wrote back in June 2013. Limited
Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
16
INDIA Hindustan Petroleum HPCL IN Outperform Maximum leverage to oil subsidy cuts Price (at 12:20, 09 Sep 2014 GMT) Rs493.40
Valuation Rs 562.00 Event - Sum of Parts 12-month target Rs 506.00 . We met the management of HPCL to discuss their growth plans and impact of Upside/Downside % +2.6 diesel price deregulation; and came away positive on HPCL’s ability to ramp- 12-month TSR % +6.4 up refining capacity & face private sector retail competition. We maintain OP Volatility Index Medium on HPCL with an increased TP of Rs 506 (vs Rs 462 earlier). GICS sector Energy Impact Market cap Rsm 167,079 Market cap US$m 2,759 . Brownfield refinery expansions to raise overall capacity by 68%: HPCL is Free float % 47 upgrading and debottlenecking its Mumbai refinery from 6.5 to 8 MMTPA, and 30-day avg turnover US$m 17.8 may further expand it to 9.5 MMT. It also plans to hike Vizag refinery capacity Number shares on issue m 338.6 from 8.33 to 15 MMTPA, for which land clearance has been completed and
Investment fundamentals Engineers India is currently doing a detailed feasibility study. Overall, HPCL Year end 31 Mar 2014A 2015E 2016E 2017E aims to spend US$ 2.88bn to raise its refinery capacity by 69% over 3 years Revenue bn 2,341.6 1,782.7 1,797.6 1,779.1 post getting clearances; & hopes to get environmental approvals by EoCY14. EBIT bn 22.6 37.5 44.3 46.9 EBIT growth % 21.8 65.7 18.3 5.9 The new Rajasthan government is reviewing all major projects including the Reported profit bn 10.5 15.7 20.4 23.3 planned US$ 6.2bn, 9 MMTPA greenfield refinery in Barmer (74% HPCL). EPS rep Rs 30.98 46.23 60.19 68.73 EPS rep growth % 109.5 49.2 30.2 14.2 . Marketing capex of Rs 30bn/year to boost retail network & penetration: PER rep x 15.9 10.7 8.2 7.2 Total DPS Rs 18.13 18.49 19.86 20.62 HPCL has the second largest retail network in India (~13000 outlets, which is Total div yield % 3.7 3.7 4.0 4.2 25% of overall) and the second largest number of LPG/Kerosene dealers after ROA % 2.4 4.0 4.8 5.2 ROE % 7.5 10.5 12.7 13.2 IOCL. Faced with prospects of diesel deregulation which shall revive private EV/EBITDA x 5.4 4.1 3.7 3.5 retailer (RIL, Essar, Shell) competition, HPCL has adopted network planning Net debt/equity % 357.7 305.0 273.0 228.7 models for retail outlets and mandates a >15% IRR for new outlets. Since the P/BV x 1.2 1.1 1.0 0.9 last time when deregulation led to private sector grabbing ~15% market-share HPCL IN rel BSE Sensex performance, over 2 years, HPCL has raised its throughput/outlet by 15-20kl/month (15%). & rec history Also, HPCL’s market share loss was the least amongst the PSU at that time. . Bhatinda refinery making US$5-6/bbl GRMs, running at >100%: Post the startup issues and a mild fire advancing planned maintenance, the 50% JV HMEL refinery is now running at more than its 9 MMTPA capacity. HPCL management expects normalized GRM of US$8/bbl+, which with an opex of US$1-1.5/bbl shall make the refinery profitable. HPCL plans for a low-cost expansion to 11 MMT over 2 years.
. Govt cash reimbursements have speeded up: HPCL is still to receive only Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Rs 25bn of last-year’s allocation: HPCL management indicated that with the Source: FactSet, Macquarie Research, September 2014 decline in overall subsidies the time-lag between cash allocation and disbursal (all figures in INR unless noted) has reduced to 3 months for the >6 months it was earlier. This helps reduce
Detailed recent report on oil deregulation: working capital requirements, which cuts OMCs interest expense (24-65% of India Oil marketing Companies – heading to a EBIT) as 55-70% of their debt is short-term working capital loans. sweet spot in the near-term Earnings and target price revision
. TP raised to Rs506 on cutting NAV discount to 10%, hiked investment value Price catalyst Analyst(s) . 12-month price target: Rs506.00 based on a Sum of Parts methodology. Abhishek Agarwal +91 22 6720 4079 . Catalyst: Clarity on modalities of Diesel deregulation; direct benefits transfer [email protected] Action and recommendation 10 September 2014 . We believe the 25% jump in HPCL stock in 1 month (vs Nifty +8%) is in line Macquarie Capital Securities India (Pvt) with our subsidy reduction thesis, which has been accelerated due to a drop Ltd in crude below US$100/bbl. We believe that the subsidy-reduction theme may carry HPCL beyond fair value in the near term. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN MacVisit: PIA 4337 Not Rated The winning ticket Price (at CLOSE on 9 Sep 2014 ) ¥1,831
TSE Sector Services Conclusion Market cap ¥m 25,804 . PIA is Japan’s largest ticket operator and remains confident it can defend its Market cap US$m 245.8 position. PIA upwardly revised forecasts twice in FY3/14, beating its initial
EPS by 63%. The domestic ticket market continues to be dominated by three 30-day avg turnover US$m 0.1 players (linked to the major convenience store chains covered by Toby Foreign ownership % 1.0 Williams), including Lawson Ticket (Lawson (2651 JP, ¥7,360, Outperform, Number shares on issue m 14.1 Performance (%) Absolute Rel TOPIX TP: ¥8,600) and ePlus (FamilyMart (8028 JP, ¥4,250, Outperform, TP: 1m 3.4 -2.2 ¥5,100). PIA has a link with 7-11 Seven & I (3382 JP, ¥4,125, Neutral, TP: 3m 5.2 0.0 ¥4,000). The company is not sure where Yahoo Ticket (Yahoo Japan (4689 1yr 7.2 -5.2 JP, ¥415, Outperform, TP: ¥650) will get traction given its new partnership 52 weeks (¥) high low with Avex (7860 JP, ¥1,652, Outperform, TP: ¥2,065). PIA says live concert 1,922 1,631 growth in Japan has been prevalent post the March 2011 disaster and it is Note: US$ market cap assumes a ¥105/US$ FX rate. confident it can win the rights to the 2019 Rugby World Cup in Japan and get Source: Factset, Toyo Keizai, September 2014 a slice of the ticketing for the 2020 Tokyo Olympics, which should be Investment fundamentals announced by Dec 2014. PIA trades at 23.5x FY3/16 TK EPS. Year end 31 Mar 14A 15CoE 15TK 16TK Revenue m 128,138 118,000 118,000 120,000 Impact EBIT m 899 1,100 1,100 1,200 EBIT growth % 136.6 22.4 22.4 1.7 Recurring profit m 899 1,100 1,100 1,200 . On a winning ticket: In FY3/14, PIA revised earnings up twice, as stronger Reported profit m 813 1,000 1,000 1,100 ticket turnover driven by net sales helped. PIA has 15mn customers that are EPS rep ¥ 57.7 71.0 71.0 78.1 EPS rep growth % 112.9 23.1 23.1 10.0 registered on its network which it extensively targets. The company thinks its PER rep x 31.7 25.8 25.8 23.5 FY3/15 guidance is conservative at ¥118bn (-8.0%) revenue given the ¥128bn Total DPS ¥ 10.0 12.0 12.0 12.0 Total div yield % 0.5 0.7 0.7 0.7 achieved last FY. ROE % 17.6 18.6 18.6 17.6 Net debt/equity % -305.5 na na na . CVS dominate: The CVS dominate the ¥300bn ticket market comprising P/BV x 5.2 4.5 4.5 3.8 90%+ of all distribution. PIA claims to have a 40% share. While most tickets
4337 rel Topix Performance are booked on the web, most settle and collect those tickets at a CVS. The CVS make very little margin but view it as another avenue to sell other items 2500 180 160 2000 140 while customers purchase their tickets. 120 1500 100 1000 80 . But...: The ticketing market remains very much driven by paper tickets but 60 500 40 PIA feels that down the line cell-phone ticketing is possible and there is 20
0 0 discussion the Olympics may have such a system implemented.
11 13 12
12 13 14
12 13 14
11 12 13 14
- - -
- - -
- - -
- - - -
Jun Jun Jun
Mar Mar Mar
Dec Dec Sep Dec Sep Sep Sep . Rugby World Cup: PIA is confident it can be the sole ticket agency for the
PIA Corporation (4337) PIA Corporation / TOPIX 1st Section 2019 RWC to be held in Japan.
Source: FactSet, September 2014 (all figures in JPY . 2020 Olympics: PIA expects a decision to be made by year-end. It is likely to unless noted) be syndicated among the ticket providers. While the margin is low it is likely
the sum total of tickets by value could exceed ¥100bn. . Ticketing: 40% of revenue and 30% of OP is driven by live music with the balance of revenue/OP split between sport (soccer, baseball), theatre/stage and leisure evenly. Outlook
Analyst(s) . PIA is confident that the major ticket providers will continue to hold onto the Michael Newman lion’s share of the market. While the advent of internet/electronic tickets are +81 3 3512 7920 [email protected] inevitable it believes that security and the infrastructure to issue are still not a threat at this stage. The Yahoo Ticket venture remains uncertain at this stage. 10 September 2014 Macquarie Capital Securities (Japan) While Avex is the live music largest concert provider in Japan it is not clear Limited how quickly Yahoo Ticket can facilitate distribution.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
18
HONG KONG Midland Holdings 1200 HK Neutral Still facing challenges Price (at 06:16, 10 Sep 2014 GMT) HK$3.83
Valuation HK$ 3.48 Event - EV/EBIT 12-month target HK$ 3.48 . Midland (MIDL) narrowed its net loss in 1H14 by 62% to HK$36m vs Upside/Downside % -9.1 HK$108m in 2H13, thanks to the improvement in its primary sales volume. 12-month TSR % -9.1 Competitive pricing by developers on new launches helped improve the Volatility Index Medium transaction volume by 133% to HK$108bn in 8M14. However, better earning GICS sector Real Estate visibility still hinges on secondary market volume, in our view. YTD secondary Market cap HK$m 2,750 residential turnover amounted to HK$18.3bn, 30% and 47% below the 2013 Market cap US$m 355 and the 2010 average. We see more uncertainties due to policy risk for the Free float % 63 HK residential market. We raise our TP by 8% to HK$3.48/sh on our primary 30-day avg turnover US$m 0.4 sales growth assumptions of 5% and 20% for 2015-16. Maintain Neutral. Number shares on issue m 718.0
Investment fundamentals Impact Year end 31 Dec 2013A 2014E 2015E 2016E . We are seeing early signs of improvement on cost control, which is Revenue m 3,357.7 3,820.8 3,832.0 4,213.7 EBIT m -213.0 -113.0 -56.5 133.8 encouraging given the high operating leverage of the agency business. Staff EBIT growth % nmf 47.0 50.0 nmf cost and rental expenses were lowered by 0.2% and 2.6% YoY to HK$1,024m Reported profit m -203.4 -83.8 -38.0 116.2 Adjusted profit m -207.5 -83.7 -38.0 116.2 (54% of operating cost) and HK$296m (16% of total). However, we note that EPS rep ¢ -28.4 -11.7 -5.3 16.2 rebate incentives, including customers and co-operative agents, increased EPS rep growth % nmf 58.9 54.7 nmf EPS adj ¢ -28.9 -11.7 -5.3 16.2 significantly by 82% to HK$311m (16% of total). EPS adj growth % nmf 59.7 54.6 nmf PER rep x nmf nmf nmf 23.7 . Primary volumes rebound: With more competitive pricings on developers’ PER adj x nmf nmf nmf 23.7 Total DPS ¢ 0.0 0.0 0.0 11.3 new launches given austerity measures, we expect primary sales continue to Total DPS growth % nmf 0.0 0.0 nmf take market shares from the secondary market. It would also help partially Total div yield % 0.0 0.0 0.0 3.0 ROA % -6.3 -3.5 -1.8 4.2 offset the secondary market weakness. In the first 8 months of 2014, private ROE % -14.1 -6.5 -3.1 9.3 primary residential sales were up 133.3% YoY to HK$108.3bn, while EV/EBITDA x -12.2 -38.0 200.4 9.1 Net debt/equity % -65.5 -67.3 -70.3 -75.5 secondary sales were up 4.9% YoY to HK$146.6bn. P/BV x 2.1 2.2 2.3 2.1 . MIDL’s financial position is healthy with a net cash position of HK$957m 1200 HK rel HSI performance, & rec (35% of market cap), or HK$1.33/sh by the end of June 2014. Total cash history balance amounted to HK$1,379m, versus borrowings of HK$423m. Earnings and target price revision
. We raise our TP by 8.1% to HK$3.48/sh on our primary sales growth assumptions of 5% and 20% for 2015-16, using 2017E 5x normalised EV/EBIT. We expect MIDL to continue suffer loss in 2015 before turning around in 2016 and earnings normalising in 2017E.
Price catalyst Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . 12-month price target: HK$3.48 based on an EV/EBIT methodology. Source: FactSet, Macquarie Research, September 2014 (all figures in HKD unless noted) . Catalyst: Improvement in secondary transaction volume.
Action and recommendation
. We have a Neutral rating on the stock with a target price of HK$3.48/share Analyst(s) based on 5.0x 2017E normalised EBIT multiple based on the historical Raymond Liu, CFA average and the reflection of tough market conditions (See Fig 11). We view +852 3922 3629 [email protected] the real agency business to remain challenging despite signs of improvement David Ng, CFA +852 3922 1291 [email protected] in the primary market. Share price catalysts hinge on sustainable Hong Kong primary residential sales going forward and the recovery of secondary sales. 10 September 2014 Macquarie Capital Securities Limited
Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN Sony 6758 JP Outperform Handsets with fewer hang-ups Price (at 06:00, 09 Sep 2014 GMT) ¥2,042
Valuation ¥ 2,300 Conclusion - Price to Book 12-month target ¥ 2,300 . We believe Sony will unveil reforms to its handset business when they Upside/Downside % +12.6 announce 2Q results. In this report, we provide an overview of what we 12-month TSR % +14.0 expect. We reiterate our Outperform rating and ¥2,300 TP. Volatility Index Medium GICS sector Impact Consumer Durables & Apparel . We expect a revamp announcement post 2Q: We expect Sony to evolve its Market cap ¥bn 2,049 mobile strategy, streamline its product line and tighten up operations. Market cap US$m 19,446 30-day avg turnover US$m 158.3 Smartphones comprise Sony’s largest single business by revenues, and thus Number shares on issue m 1,004 we expect significant attention to be drawn to prospective reform moves.
Investment fundamentals . We expect the focus will be on fundamental reforms. We do not expect big Year end 31 Mar 2014A 2015E 2016E 2017E headcount cuts (we assume <5% of the Sony Mobile total), as we do not see Revenue bn 7,771.9 7,656.0 7,611.3 7,409.6 significant excesses here. After all, HTC has ~85% more headcount than Sony EBIT bn 29.7 139.3 401.1 428.9 EBIT growth % -87.1 369.8 188.0 6.9 Mobile while having only half the revenues. From a different perspective, Mobile Recurring profit bn 28.9 141.5 387.5 421.3 may account for 17% of group revenues, but just 7% of headcount. Instead we Reported profit bn -127.1 -45.5 201.0 226.5 EPS rep ¥ -125 -38 167 189 think Sony will seek to boost its gross margin by shifting its product mix towards EPS rep growth % nmf 69.6 nmf 12.7 higher-end products, optimising R&D spending with fewer “globalised” models PER rep x nmf nmf 12.2 10.8 Total DPS ¥ 25 25 30 36 like the Xperia Z3 flagship, and by increasing pressure on suppliers to reduce Total div yield % 1.2 1.2 1.5 1.8 procurement and manufacturing cost. Also we see potential that Sony may ROA % 0.2 0.9 2.6 2.8 ROE % -5.7 -2.1 8.9 9.3 reduce its presence in markets where rivalry is high and where they have an EV/EBITDA x 6.1 5.6 3.6 3.4 inferior strategic position vis-à-vis telecom carriers (e.g. in China). Net debt/equity % 8.9 13.9 5.7 -4.9 P/BV x 0.9 1.1 1.0 1.0 . We assume in our model an impairment+restructuring charge of ¥60bn in 6758 JP vs TOPIX, & rec history FY3/15. We expect that this will be dominated by an impairment of goodwill – we assume this will be cut by 30-35%. In this report we present our approach behind this estimate. We do note however that if Sony were to use multiples to estimate a fair value for Sony Mobile, the derived valuations would probably exceed the carrying value – implying no need for impairment. This would give upside to our FY3/15 OP estimate, but may disappoint a market primed for the symbolism of an impairment taken in tandem with reform. We point out that much goodwill is impaired via a non-cash charge, future reported profits will not be affected since Sony does not amortise goodwill under USGAAP.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Games still the driver. We expect Destiny – launched on 9 September – to be Source: FactSet, Macquarie Research, September 2014 a driver for global PS4 volumes through CY4Q. In the UK, the release of (all figures in JPY unless noted) Destiny has driven cumulative PS4 sales to over 1m units and likely ~50% above total XB1 units (comparable to the PS4’s outperformance vs the XB1 globally). Microsoft’s main counter this month (till 17 Sep) is a free game offer in the US, which may win them some market share, but unlikely sustained traction. Earnings and target price revision Analyst(s) Damian Thong, CFA . No changes. Last major update: A new high score for the PS4 (15 August). +81 3 3512 7877 [email protected] Claudio Aritomi Price catalyst +81 3 3512 7858 [email protected] Len Assakul . 12-month price target: ¥2,300 based on a Price to Book methodology. +81 3 3512 7879 [email protected]
. Catalyst: TGS (18-19 Sep). Announcement of Sony Mobile reforms post 2Q. 10 September 2014 Macquarie Capital Securities (Japan) Action and recommendation Limited . We reiterate our bullish stance on the shares of Sony. We have a TP of ¥2,300; in our 15 August report we suggested a scenario for upside to ¥3,000. Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
20
JAPAN Rakuten 4755 JP Neutral Never standing still Price (at 06:00, 09 Sep 2014 GMT) ¥1,254
Valuation ¥ 1,200 Conclusion - Sum of Parts 12-month target ¥ 1,200 . Rakuten held presentations from the business heads for financial services, Upside/Downside % -4.3 Kobo, and Viber before a keynote presentation from CEO Mikitani in which he 12-month TSR % -4.0 announced the acquisition of and strategic plans for Ebates. Rakuten remains Volatility Index High to us a fascinating business of many parts. Much boils down to management’s GICS sector Retailing ability to execute and to drive new growth through its organic plans and M&A Market cap ¥bn 1,664 strategy. We continue to harbor some concerns about M&A and the losses it Market cap US$m 15,794 has been incurring, but we are encouraged by recent cost controls. 30-day avg turnover US$m 55.6 Number shares on issue m 1,327 Impact
Investment fundamentals . The Ebates deal: Rakuten confirmed previous media speculation that they Year end 31 Dec 2013A 2014E 2015E 2016E are buying 100% of Ebates, a US online cash-back site that drives e- Revenue bn 518.6 590.2 658.1 726.1 commerce for retailers, for US$1bn in cash. Although we were originally EBIT bn 90.2 105.6 144.8 186.8 EBIT growth % 24.9 17.1 37.1 29.0 concerned by the size of the deal and note that Rakuten’s strategy of Recurring profit bn 88.6 104.6 144.8 186.8 investing in overseas companies has struggled historically, in this case we Reported profit bn 43.5 62.6 86.9 120.8 EPS rep ¥ 33.0 47.4 65.8 91.4 believe there is an interesting strategic rationale for bringing Ebates into the EPS rep growth % 123.6 43.4 38.9 39.0 Rakuten group, although it does not come cheaply, in our view. CEO PER rep x 38.0 26.5 19.1 13.7 Total DPS ¥ 4.0 4.0 4.0 4.0 Mikitani's vision is to build a membership-based, loyalty-driven marketplace to Total div yield % 0.3 0.3 0.3 0.3 compete against giant players like Amazon in a different way. ROA % 3.4 3.2 4.1 5.0 ROE % 15.6 19.1 21.9 24.6 . Financial services: Mr. Masayuki Hosaka head of the financial services EV/EBITDA x 14.8 12.7 9.7 7.8 Net debt/equity % 1.9 74.3 55.1 33.9 businesses, presented plans to improve margins, to expand the business P/BV x 5.5 4.6 3.8 3.0 geographically, and to find synergies across the financial companies within 4755 JP vs TOPIX, & rec history Rakuten. Overall, we are encouraged by the good progress we've seen from these businesses and expect them to show steady growth and contribution to the group. . Kobo is under new management, implementing a strategy to turn the business profitable. Mr. Takahito Aiki, the new Kobo CEO, presented plans for the business with the view that in the past Kobo tried to do too much, particularly in light of the strong competition in the space. We agree and think that signs of progress in the latest results and moving Kobo towards break- even can be a significant improvement and encouragement to investors. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Talking about Viber: We worry about Viber’s costs and ability to add Source: FactSet, Macquarie Research, September 2014 (all figures in JPY unless noted) significant value to the group, but management presented a plan for growing
the business and a vision for monetizing the expanding user base. Viber plans three significant iOS/Android releases in 2014 to add more communication channels, to become more social, improve security, and add new monetization features (games later in 4Q). They expect games will be more significant for revenues than stickers but have no plans to develop games on their own. Earnings and target price revision Analyst(s) Nathan Ramler, CFA . No change. +81 3 3512 7875 [email protected] Kazuhito Kumagaya Price catalyst +81 3 3512 7867 [email protected] . 12-month price target: ¥1,200 based on a Sum of Parts methodology. 10 September 2014 . Catalyst: Ichiba growth; M&A progress; cost controls. Macquarie Capital Securities (Japan) Limited Action and recommendation . Maintain Neutral. Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
21
INDONESIA XL Axiata EXCL IJ Outperform Margins to bounce in 4Q Price (at 09:06, 09 Sep 2014 GMT) Rp6,750
Valuation Rp 6,800 Event - DCF 12-month target Rp 6,800 . We met with management to discuss the AXIS integration, EXCL’s medium- Upside/Downside % +0.7 term outlook for profitability and competition within data. We re-iterate our 12-month TSR % +1.1 positive view on EXCL despite the recent share price rallying towards our 12- Volatility Index Medium month price target. The potential for further consensus upgrades driven by GICS sector stronger operating performance and improving margins remains a key driver Telecommunication Services medium term. Moreover, our Rp8,000 blue sky valuation (see p2) implies a Market cap Rpbn 57,608 further 18% upside. Importantly, EXCL’s valuation looks attractive on a Market cap US$m 4,896 normalised FY15E EV/EBITDA of 7.2x, at a 20% discount to regional peers. Free float % 14 30-day avg turnover US$m 8.1 Impact Number shares on issue m 8,534 . Trough margins in 2Q. Management expect margins to sequentially improve Investment fundamentals in 3Q/4Q with Axis likely to be EBITDA neutral in FY15. The key question for Year end 31 Dec 2013A 2014E 2015E 2016E Revenue bn 21,350 24,068 25,726 27,392 investors we believe is whether EXCL’s improved organic performance will EBITDA bn 8,659 9,170 10,774 12,107 deliver similar margins to its pre-Axis levels of ~40% or alternatively have EBITDA growth % -11.1 5.9 17.5 12.4 Reported profit bn 1,033 -553 595 1,263 returned to ~42-43%. We see this largely as a function of EXCL’s own EPS rep Rp 121 -66 70 150 execution on data/voice and sms, however, more importantly, of the broader EPS rep growth % -63.0 nmf nmf 112.2 competitive dynamics which remain favourable. While management expect PER rep x 55.8 nmf 95.8 45.1 Total DPS Rp 135 43 0 42 margin improvement near term, they appear cautious relative to consensus. Total div yield % 2.0 0.6 0.0 0.6 ROA % 7.7 5.2 5.4 6.8 . AXIS integration on track. To date, all of Axis’ customers and its billing ROE % 9.5 -0.3 4.3 8.6 EV/EBITDA x 9.9 9.2 7.9 7.0 systems have been fully migrated onto EXCL’s platform. Importantly, on Axis’ Net debt/equity % 107.9 197.9 194.1 176.6 unprofitable products, EXCL has already applied price increases. EXCL now P/BV x 3.8 4.2 4.0 3.8 has a consolidated subscriber base of 63m. Some of its sites are also being EXCL IJ rel JSX performance, & rec relocated to minimise overlap of the networks, with limited cost implications - history EXCL is looking to complete this during 2015. Otherwise, the actual network migration will be fully integrated by year-end. A key benefit near term from the acquisition is the 2G network quality improvement from the acquired 1800 spectrum, which should also ease near term capex requirements. . Regional pricing strategies driving data competition. EXCL stopped short of suggesting data pricing was moving up uniformly across Indonesia, highlighting differences within various regions depending on market structure and available network capacity. Encouragingly, management see network
Note: Recommendation timeline - if not a continuous line, then there was no utilisation rates relatively high for most players, perhaps with the exception of Macquarie coverage at the time or there was an embargo period. Indosat given its modernised network. While believing data pricing is Source: FactSet, Macquarie Research, September 2014 (all figures in IDR unless noted) unsustainably low, EXCL noted data is still the only segment available to
penetrate market share, given interconnect-related barriers to voice/SMS. On LTE, 2016 appears a more realistic timeframe for Indonesia, however only on a niche scale, and remains dependent on spectrum refarming of 1800MHz. Analyst(s) Earnings and target price revision PT Macquarie Capital Securities Indonesia Riaz Hyder . No change. +62 21 2598 8486 [email protected] Macquarie Capital Securities (Malaysia) Sdn. Bhd. Price catalyst Prem Jearajasingam +60 3 2059 8989 [email protected] Macquarie Capital Securities (Japan) Limited . 12-month price target: Rp6,800 based on a DCF methodology. Nathan Ramler, CFA +81 3 3512 7875 [email protected] . Catalyst: 3Q earnings in October.
10 September 2014 Action and recommendation
. Outperform maintained.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
22
ASIA Asia-Pacific Telecoms 12-mo. telecom performances (rebased)
130 Globally connected 125 120 Thought of the week 115 110 The team published a major report looking at mobile payment possibilities. The 105 telecom operators are keen to find additional revenue streams, especially when 100 95 those come with services that can encourage additional subs growth, entice 90 subs to move up the value chain (e.g. take smartphones), and improve customer
stability and stickiness. With the personal nature and portability of mobile
2/11/13 2/01/14 2/03/14 2/05/14 2/07/14 2/09/14 2/09/13 devices, they are a unique tool for matching applications with users on an as- Asia-Pac exJ Japan World exAP needed basis and for pushing information and products to individual consumers
at the most suitable times. The telcos have been working with a variety of Source: FactSet, September 2014 partners to explore the possibilities that location-based services and mobile
payments can offer. At this stage, in most markets our telecom teams don’t Preferred telco stocks in each market expect location-based services or mobile payments to be a major revenue driver Total FY1 FY1 for the telcos yet, but they are seeing a variety of telecom operators across the sh’hldr EV/ FY1 Div region offering them and gaining some benefit from the services available to both Market Company return EBITDA PER yld enterprises and individuals. We expect to see more development in the months China Mobile -5.4% 4.0 15.9 1.7 and years ahead and generally view this as incrementally positive for the telcos. HK HKT 5.4% 9.8 24.4 4.9 India Idea 5.2% 8.0 22.8 0.0 Indonesia XL Axiata -1.2% 9.3 nmf 0.6 Chart of the week: iOS estimated accumulated installed subs base (m) Japan KDDI 18.8% 4.9 11.9 2.6 Korea KT Corp 20.3% 5.7 nmf 0.0 Malaysia Tel. Malaysia 41.4% 7.2 24.2 4.4 Singapore SingTel 15.3% 7.2 17.1 4.5 Taiwan Taiwan Mob 9.7% 9.1 16.1 4.4 Thailand AIS 35.1% 9.3 16.7 6.0 Source: Macquarie Research, September 2014
Source: Gartner, Macquarie Research, September 2014 Analyst(s) Macquarie Capital Securities (Japan) Limited Nathan Ramler, CFA Connecting the dots +81 3 3512 7875 [email protected] Macquarie Capital Securities Limited Sprint - The path to $9+bn in 2016 EBITDA: With the recent pricing initiatives Danny Chu, CFA by Sprint in the US, investors are clearly worried about a possible downgrade to +852 3922 4762 [email protected] PT Macquarie Capital Securities Indonesia consensus EBITDA forecast. On the contrary, our telco analyst Kevin Smithen Riaz Hyder thinks that Sprint’s EBITDA could continue to benefit from equipment instalment +62 21 2598 8486 [email protected] Macquarie Capital Securities (Malaysia) Sdn. Bhd. plans (EIP), falling churn, higher subs and unrealized opex cuts that will more than Prem Jearajasingam offset the ARPU compression from the new wireless pricing. +60 3 2059 8989 [email protected] Macquarie Securities Korea Limited DIRECTV - What’s Next and What’s Important: We expect the AT&T-DTV Eugene Jung spread will narrow ahead of the upcoming shareholder vote on the 25th as well +82 2 3705 8686 [email protected] Macquarie Securities (Australia) Limited as additional clarity around renewal of the NFL Sunday Ticket and regulatory Andrew Levy, CFA hurdles. Next up, the combo will likely raise wireline/wireless competition (e.g. +61 2 8232 5165 [email protected] Macquarie Securities (Thailand) Limited price wars) and unleash other areas of consolidation in US/LatAm. Piyachat Ratanasuvan +662 694 7982 [email protected] Vodafone Group - The stars are aligning...exploiting its toolset: Our June Macquarie Capital Securities India (Pvt) Ltd upgrade of Vodafone was based on: 1) improving European and group service Abhishek Singhal +91 22 6720 4086 [email protected] revenue trend and relative performance; 2) sustainable dividend; 3) M&A optionality given lowered expectations. We reiterate our Outperform rating as we 10 September 2014 head into the year-end. CY4Q is normally a constructive quarter.
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
23
CHINA
China Property
China developers’ contracted sales growth (by August 2014) August sales up 16% MoM
60% Top 5 Bottom 5 Event 50% 40% 30% . 14 out of 16 key developers that have reported August sales showed a 20% MoM increase, reversing the soft sales in July, during which 31 out of 33 10% 0% developers that we track posted a decline on a MoM basis. So far, only 7 -10% -20% cities have not yet relaxed the purchase restrictions, after Xining, the -30% provincial capital of Qinghai Province joined the relaxing camp on 6
-40%
SZIN
CCLN
CIFI
FANT
SUNC GREE
BJCL CGAR
-50% EVER GEMA September. In addition to the four T1 cities, Zhuhai, Sanya, and Nanjing are the remaining cities that have not yet annouced any relaxation. . Seperately, we noticed that Hangzhou’s property market bottomed in Source: Company data, Macquarie Research, September August with a rebound in sales volume. This should send a positive signal to 2014 the national property market as Hangzhou’s performance has been a leading China developers’ sales achieved rate indicator of the national performance. We expect stronger sales in (by August 2014) September and October. We reiterate our forecast for physical new residential prices to bottom around the end of September. 90% Top 5 Bottom 5 80% . Shimao Property (813 HK, HK$18.10, Outperform, TP: HK$26.73) 70% 60% delivered decent sales of Rmb6.0bn sales in August, up 9% MoM and 36% 50% YoY. 8M14 sales were Rmb43.7bn, up 6% YoY at 54.6% of its target. We 40% 30% believe it is increasingly challenging for the company to meet its target of 20% Rmb80bn. The company needs to achieve a record-high level of Rmb9b each
10% month for the next four months. We forecast it to finish with Rmb77bn sales
SZIN
CCLN
CIFI FANT
0% GREE
BJCL
EVER VANK YUEX GEMA this year, 4% below its target. . Evergrande (3333 HK, HK$3.28, Neutral, TP: HK$3.22) posted soft sales of
Source: Company data, Macquarie Research, September Rmb9.9bn in August, down 8% MoM or down 13% YoY. YTD it has achieved 2014 Rmb90bn sales (+40% YoY), completing 81.8% of its Rmb110bn sales target.
The target completion ratio is the highest amongst the key developers, while its peers have only achieved 59% of the target in 8M14 on average. Earlier during the interim results presentation, management expressed confidence that sales would be well above target. . Country Garden (2007 HK, HK$3.36, Outperform, TP: HK$4.32) posted moderate sales of Rmb7.5bn in August, up 13% MoM or down 37% YoY. Ytd, it achieved Rmb72.5b sales at 57% of its target. We expect more upside with sales of Rmb146bn this year to reflect its strong penetration capabilities in new cities. Flattish ASP achieved in Aug at Rmb7,043 psm vs July. ASP in 2013 reached Rmb6,654/sqm. Outlook . Sales of the 16 developers increased by 16% MoM on average, vs a 36% MoM drop in July. On a YoY basis, sales increased by 20%. The 16 Analyst(s) Wilson Ho, CFA developers had completed 59% of their full-year target by the end of August. +852 3922 3248 [email protected] Although some developers will miss the target this year, we believe the David Ng, CFA market will shift the focus in accelerating sales performance in the months +852 3922 1291 [email protected] Catherine Zhu ahead, on back of a gradual market recovery, and more new launches in +86 21 2412 9083 [email protected] September and October. Raymond Liu, CFA +852 3922 3629 [email protected] . Our preferences are, first, small caps, such as Kaisa Group (1638 HK, HK$3.04, Outperform, TP: HK$5.07), Sunac China (1918 HK, HK$6.55, 10 September 2014 Macquarie Capital Securities Limited Outperform, TP: HK$8.49) and KWG Property (1813 HK, HK$6.13, Outperform, TP: HK$8.07), then big caps, such as China Resources Land (1109 HK, HK$18.80, Outperform, TP: HK$27.71). Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
24
CHINA
China telecom sector Coverage summary Local Target China gotta wait for iPhone 6 price price TSR Ticker Rating (HK$) (HK$) (%) Event China Mobile 941 HK OP 101.30 105.00 7.0 China Telecom 728 HK OP 5.17 4.80 -5.4 . Apple announced the next generation of iPhone (iPhone 6 and iPhone 6 China Unicom 762 HK N 13.90 13.20 -3.7 Plus). The new iPhone will debut on 19 September in the US and in 9 other Source: Company data, Macquarie Research, September 2014; prices as of 8 September, 2014 markets. It is a minor surprise that China (Mobile / Telecom / Unicom) is not included in the first batch of countries to get the iPhone 6. 941 HK rel HSI perf, & rec history . For in-depth analysis of the new iPhone, please refer to Macq Tech Express: iPhone 6 implications for Asia and Apple: Phones great, Payments promising, Watch? (published on 10 September, 2014). Impact . Sharp contrast when compared with the launch of iPhone 5S. Back in September 2013, Apple launched iPhone 5S on the same date in the US and China. For the iPhone 6 and iPhone 6 Plus, the launch date for China has yet to be announced by Apple. 728 HK rel HSI perf, & rec history . China Mobile’s robust 4G subscriber growth could be fuelled by the upcoming launch of iPhone 6 in China. With China Mobile currently being the only domestic operator with nationwide 4G coverage, we expect the company to emphasize in its advertising campaign that it is the only domestic operator with nationwide 4G coverage in order to capture the bulk of high- ARPU 4G subscribers. . Market could gauge the domestic operators’ commitment to cutting SG&A expenses by looking at iPhone handset subsidies. All three domestic telecom operators have announced a scaling back of their
respective SG&A (including handset subsidies). Given operators tend to offer 762 HK rel HSI perf, & rec history the biggest amount of handset subsidies along with iPhone, we believe the upcoming launch of iPhone 6 in China should offer us a glimpse of the operators’ commitment to reducing their respective SG&A expenses. Outlook . Our order of preference remains: China Mobile (Outperform) > China Telecom (Outperform) > China Unicom (Neutral).
Launch dates for different generations of iPhone Source: FactSet, Macquarie Research, September 2014 US launch date China Mobile China Telecom China Unicom
iPhone 29-Jun-07 na na na iPhone 3G 11-Jul-08 na na na iPhone 3GS 19-Jun-09 na na 30-Oct-09 iPhone 4 24-Jun-10 na na 25-Sep-10 iPhone 4S 14-Oct-11 na 9-Mar-12 13-Jan-12 Analyst(s) iPhone 5 21-Sep-12 na 14-Dec-12 14-Dec-12 iPhone 5S 20-Sep-13 17-Jan-14 20-Sep-13 20-Sep-13 Macquarie Capital Securities Limited iPhone 6 19-Sep-14 TBD TBD TBD Danny Chu, CFA +852 3922 4762 [email protected] Note: Apple did not announce the launch date of iPhone 6 for China. Laetitia Yu Source: Company data, Macquarie Research, September 2014 +852 3922 4725 [email protected] Macquarie Capital Securities (Japan) Limited Nathan Ramler, CFA +81 3 3512 7875 [email protected]
10 September 2014
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
25
GLOBAL Have phone no wallet redux 5 payment surprises from Apple iPhone 6 and Watch as expected The announcements by Apple for iPhone 6, Watch and Apple Pay were broadly in line with our 8th Sept Have phone no wallet redux report. Ben Schachter and Jeff Su outline the impact for Apple and the food chain while Ellen Tseng outlined the impact for Asian Apple suppliers. Damian Thong/Deepon Nag believe iPhone 6 is positive for NAND demand. But for Apple Pay we think there
were some important new developments. Inside 5 Apple Pay surprises The Apple Pay announcement contained some surprises as compared to our 5 new payment surprises 2 report. Apple Pay Impressions 4 1) Apple does not store transaction data or the credit card details in the phone – The 63% of iOS installed base is in US, Apple has tokenised the credit card and improved security; not accessing China, Japan and UK. 5 transaction data is a little surprising and reflects consumers’ concerns post recent security breaches. Who benefits from NFC/iBeacon? 7 2) ITunes’ 800m accounts are not being used…yet.
3) Apple Watch with NFC is compatible with iPhone 5 onwards – hence a bigger potential starting installed base in 2015
4) There is no PC or Mac NFC payments option for consumers – perhaps this would be added later when Macs are upgraded? 5) Watch tethered can be used for NFC transactions without the fingerprint authentication - unclear how this works but Visa/MasterCard has confirmed Analyst(s) Apple will do other analysis to ensure security. Macquarie Capital Securities (Japan) Limited David Gibson, CFA We think Apple will need to form alliances with other banks globally to offer their +81 3 3512 7880 [email protected] cards for the service outside the USA. We see the potential for Apple to include Damian Thong, CFA +81 3 3512 7877 [email protected] loyalty programs longer term which has become important in markets like Japan. Nathan Ramler, CFA +81 3 3512 7875 [email protected] Apple Impact Macquarie Capital Securities Limited, Taiwan Branch On payments, Ben Schachter thinks Apple, with its scale, brand and track Jeff Su record, has the best shot of making this a reality. However, given that payments +886 2 2734 7512 [email protected] will only work with the new devices, it will take time to ramp, both among users Ellen Tseng +886 2 2734 7524 [email protected] and merchants. Importantly, while AAPL did not discuss its economics during the Macquarie Capital Securities Limited presentation, sources we spoke with at the event indicated that AAPL will earn Ismael Pili +852 3922 4774 [email protected] money from both physical and online transactions (this was unclear heading into Linda Huang, CFA the event). They were adamant that neither the retailer nor the customer would +852 3922 4068 [email protected] pay anything. Ben believes that it is highly likely that for in-store sales through Macquarie Capital (USA) Inc. Ben Schachter Apple Pay, AAPL will earn some percentage of the 15-25bps concession that +1 212 231 0644 [email protected] they negotiated on Apple Pay "card present" transactions. Liz Dunn +1 212 231 8066 [email protected] Telco, Banking, Retail impact Vincent Caintic, CFA +1 212 231 1814 [email protected] Kevin McVeigh Nathan Ramler thinks that payments, in particular, could improve subs’ stability. +1 212 231 6191 [email protected] Linda Huang thinks the move could benefit all department store retailers in Macquarie Securities (Australia) Limited HK/China, in particular Golden Eagle and Intime. Ismael Pili believes that larger Michael Wiblin, CFA +61 2 8232 6089 [email protected] banks like Hang Seng or ICBC could benefit from the move because they have been at the forefront of tech adoption. More details in our Have phone no wallet 10 September 2014 redux report. Michael Wiblin’s Australian Banks report about IT Arms Race
provides a useful context.Inside are Apple foodchain exposure tables as well.
Please refer to page 11 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
26
GLOBAL
Japan Casinos Pachislot portion of total sales (%) Pachislot v. Casino
20.0% 17.7% 18.0% Conclusion 16.0% 14.9% 14.0% 12.0% . We believe that a ministry report that there are 5.4m problem gamblers in 10.0% 8.0% 5.7% Japan has resulted in swift tightening of regulation of the pachislot industry. 6.0% 3.2% 4.0% We believe Integrated Resorts (casino) promotion legislation will pass in Nov 2.0% 0.0% 2014 because social issues can be adequately addressed, implementation Sega Capcom Konami Sankyo legislation will be enacted in 2015 and enable a 2020 or later launch. Source: Company data, Macquarie Research, September 2014 Impact
Company sales mix (FY3/15g, ¥bn) . Pachislot regulation tightening: Press reports confirmed that tighter Pachislot regulation will come into effect 16 Sep. Sega Sammy on 29 Aug downgraded its 1H unit pachislot forecasts by 20% as a result but upgraded 500.0 its OP forecasts because of robust Pachinko sales. The tighter regulation is 400.0 just the stricter implementation of current regulation rather than new rules and will be negative for Pachislot sales. It is likely the stricter rules will cause 300.0 delayed machine launches and higher costs which is likely to weigh most on 200.0 less profitable smaller companies. Capcom with 90% of its pachinko/pachislot 100.0 business linked to pachislot and 18% of total company sales represents one of the larger potential impacts. Sankyo derives 15% of its sales from Pachislot - Sega Capcom Konami Sankyo while Sega is 6% and Konami 3%. Konami believes it will see little impact because its pachislot machines are more games than gambling. Pachislot Pachinko Other . 5.4m problem gamblers already: A study group for the Ministry of Health, Source: Company data, Macquarie Research, September Labor and Welfare on 21 Aug estimates 5.36m people in Japan, or 4.8% of 2014 the adult population (8.7% of men, 1.8% of women) have a pathalogical Pachinko/Pachislot GGR US$180bn gambling problem. This problem gambling ratio is well above Canada 0.9%, France 1.24% ,South Korea 0.8% and the US 1-2%. We believe this report highlights a gambling problem for the pachinko industry which has no official $205 $200 20 support network nor are such problems openly discussed. As a result, we $200 believe the sudden tightening of Pachislot (like US slot machines with rotating $195 15 drums) regulations, which has the highest gambling element, is linked to this $190 $184 $185 $179 $181 10 report. Press reports suggests problem gambling and Tokyo governor’s $180 disinterest is why perception has grown that casino legislation may not pass. $175 5 $170 $165 0 . Preparing for IR legislation in Nov: Despite these concerns, we think 2009 2010 2011 2012 promotion of Integrated Resorts (casino) legislation will pass in the Nov Diet session because social concerns can be alliviated by the allocation of part of GGR ($bn) gambling tax receipts to support networks and for it to start before any casino Pachinko/Pachislot Players (m, RHS) opens. Note that the Abe Cabinet’s policy is the approval of intergrated resort legislation which we think could drive over $20bn in GGR across up to 10 Source: Company data, Macquarie Research, September casinos (2 major cities+ 2 region initially though). The National Police Agency 2014 is against casino’s due to social concerns however it oversees the regulation of the pachinko industry which has helped to amass the 5.4m problem Analyst(s) gamblers from US$181bn pachinko/pachislot industry. We believe in Japan Macquarie Capital Securities (Japan) Limited 1) taxes will be done at both the national and local levels with both set at David Gibson, CFA +81 3 3512 7880 [email protected] single-digit rates, making the business competitive globally, 2) Gambling will Macquarie Capital (USA) Inc. be less than 10% of the area of Integrated Resorts 3) Japanese will be the Chad Beynon +1 212 231 2634 [email protected] primary target with one press report suggesting the proportion could be as high as 80% and hence less in competition with VIP driven businesses in 10 September 2014 Macau and Singapore.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
27
MALAYSIA/SINGAPORE/INDONESIA
Regional Plantations
Regional Plantations coverage Price Target Another wave of weak prices likely Company Rec (lcy) (lcy) Upside Event IOI Corp UP 4.81 4.52 -6% Sime Darby N 9.40 9.33 -1% KL Kepong N 21.98 25.57 16% . Malaysian Palm Oil Board’s August inventory numbers were above market Felda Global N 3.81 4.37 15% expectations and crossed the psychological 2mt mark. Inventory of 2.05mt Genting Plantations UP 9.96 9.45 -5% Golden Agri N 0.51 0.50 -2% was up 22% MoM and up 23% YoY. Strong export numbers for the first 10 Indofood Agri N 0.87 1.10 27% days of September are providing some price support, but we doubt this will First Resources N 2.07 2.10 1% Astra Agro UP 25,300 22,000 -13% last long. London Sumatra N 1,855 2,100 13% Note: Share price data as of 9 September 2014 Impact Source: Bloomberg, Macquarie Research, September 2014 . Shocking production growth: August production was up 22% MoM vs. ours and street expectations of 15% growth. While this could partly be explained by Our CPO price assumptions higher number of working days after the Raya holidays in July, the numbers CY13A CY14E CY15E CY16E still look enormous. We understand from industry checks that production US$/tonne (FOB) - 747 780 856 903 Malaysia could peak this year in October, which means that we could potentially be RM/tonne (FOB) 2,374 2,586 2,796 2,900 looking at three months of production exceeding the 2mt mark. Note that last Source: Macquarie Research, September 2014 year there was no single month of 2mt production, while even in 2012, there was just one month of production above 2mt. This means that Malaysian CPO production for 2014 could exceed 20mt vs. consensus and our expectations of ~19.5mt. . Strong start to exports for September, but could be short-lived: Cargo surveyors reported a 41% MoM increase in exports for the first 10 days of September.This is likely due to attractive price of CPO vs. gas oil (Fig 4) as well as the widening of the price discount between CPO and other oils towards end-August. However, we believe this strength could be short-lived, given: (1) CPO-soy oil price discount has narrowed quite considerably once again to US$68/t (FOB) – Fig5; (2) CPO-gas oil spread has narrowed in recent days as crude oil and diesel prices have weakened globally; and (3) industry checks suggest that China demand for palm oil remains considerably weak. Even assuming a strong seasonal pick-up in exports over Sep-Dec period (9% over May-Aug, same as last year), Malaysian inventories could peak at around 2.5mt, similar to 2012 levels. . Malaysia – Indonesia competition to rise: Indonesia is set to follow Malaysia in removing export taxes possibly from next month, which would make Indonesian exporters reserved sellers in the September month. This might divert some of the demand to Malaysia in the near term, but would mean significant competition from Indonesia from next month onwards. This is obviously bearish for prices going into the peak production season, especially with strong production growth in both countries and rising inventories. Outlook . There remains clear downside risk to both ours and consensus CPO price forecasts for this year and next. However, we expect the pricing environment to improve next year from current levels, as we expect a biological yield Analyst(s) downcycle in 2015, which will likely limit supply growth for palm oil. We expect Sunaina Dhanuka +60 3 2059 8993 [email protected] profit-taking on Indonesian and Singaporean names in the near term.
10 September 2014 Macquarie Capital Securities (Malaysia) Sdn. Bhd.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
28
GLOBAL Macquarie Agri-view
USD Percentage Change in Grains & Oilseed Futures Sep 2014 grains and oilseed update
CBOT Soymeal Feature article Minneapolis Wheat . In this note, we highlight our thoughts in front of this week’s USDA WASDE ZCE Wheat report. As yield expectations have increased through the last month, corn and soybean prices have continued their descent. As prices have fallen sharply on KBT Wheat the approach to this month’s WASDE report, it is more difficult for the USDA Dalian Soyoil to produce a bearish report. In our view, the risk is that the USDA make a CBOT Corn more conservative increase to US production than the market expects,
ASX Wheat causing a short covering rally in prices. Any price support will likely be short- lived, as the US farmer will be a heavy hedger into a rally. CBOT Wheat
MATIF Rapeseed Bloomberg consensus, Macquarie & USDA WASDE expectations ICE Canola
Dalian Soymeal Consensus
MATIF Wheat MACQ USDA Low Average High 2014/15 Production m/bu LIFFE Wheat Corn 14,209 14,032 14,036 14,250 14,595 MATIF Maize Soybean 3,893 3,816 3,824 3,815 4,035 CBOT Soyoil 2014/15 Ending Stocks m/bu
CBOT Soybean Corn 2,240 1,808 1,811 1,995 2,256 Soybean 353 430 353 461 564 -15% 5% Wheat 716 663 633 669 716 08/08 to 08/09 Source: USDA. Macquarie Research. September 2014
Source: Reuters, Macquarie Research, September 2014
Report Highlights
. Corn – Prices have moved lower through the last month, as yield expectations have increased. We currently forecast US corn yields at 171.7bu/acre. Whilst corn prices have fallen, the US's competitiveness on the export market has shown little improvement. High domestic transportation costs are giving a competitive edge to the other major corn export origins. . Wheat – As the 2014 northern hemisphere harvest nears a close, yield expectations have continued to shift higher. We would expect the USDA to further increase production projections for Europe and the former Soviet Union in this week’s WASDE report. Dryness in the southeast should see them pull back their Australia production forecast though. Whilst production will be bumper, poor harvest weather will see far greater volumes of feed wheat produced in many locations. The lack of quality wheat supplies is unlikely to change the path of futures prices; cash milling wheat will though attract a far greater premium. . Soybeans – Oilseeds have seen a sharp price correction in the last month; the key catalyst has been the rains through the US which are expected to Analyst(s) have bolstered this year’s soybean yield. We forecast US soybean yields at Chris Gadd 46.5bu/acre, a record high level. Whilst a record-breaking crop in the US will +44 203 037 1957 [email protected] Daryna Kovalska see a boost to supplies, a large South American crop and aggressive +44 203 037 2732 [email protected] Brazilian export program will be required to ensure a heavy ending stock in
the US. In the near term, soybean prices may continue to weaken, and we 10 September 2014 would expect prices to attract a risk premium into year-end as they reflect Macquarie Capital (Europe) Limited uncertainty with regard to South American production.
Please refer to page 10 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
29
GLOBAL
Commodities Comment LME cash price % change US$/tonne day on day A thermal coal market full of Aluminium 2,020 -0.6 Copper 6,894 0.5 uncertainty Lead 2,100 -0.5 Nickel 18,647 -1.0 . Thermal coal prices have come under renewed pressure, over the past week Tin 20,961 0.3 in particular, on fears that China is close to implementing quality-based Zinc 2,296 0.2 Cobalt 32,412 0.0 restrictions on coal imports. While we remain sceptical that the current Molybdenum 27,500 -1.8 proposed ban on high ash, high sulphur material will be enacted, in today’s note we asses what the likely implications of this worst-case scenario would Other prices be. We also take a look at supply performance by the world’s largest exporter, % change day on day Indonesia (~45% global export share), for which there is currently no Gold (US$/oz) 1,251 -0.4 consensus on whether exports are up or down YTD. One thing is certain Silver (US$/oz) 19.01 0.1 however – the 17% CAGR growth rate of Indonesian exports seen over the Platinum (US$/oz) 1,382 -0.9 Palladium (US$/oz) 856 -3.4 last decade is not being maintained. Oil WTI 91.68 -1.2 Latest news USD:EUR exchange rate 1.291 0.0 AUD:USD exchange rate 0.916 -0.4 . Palladium fell 3.4% on Wednesday on long liquidation, after last month’s rally
LME/COMEX stocks above the $900/t psychological ceiling. Other precious metals also fell, to new Tonnes Change multi-month lows. Meanwhile base metals drifted lower during morning Aluminium 4,742,175 -6,550 trading, before recovering some ground during the SHFE night session LME copper 155,625 925 (starting 2pm UK time). Overall, nickel was down 1%, falling back to levels Comex copper 27,613 329 Lead 224,925 0 prior recent news flow from the Philippines. Nickel 331,980 -162 Tin 11,295 -1,055 . China Railway Corporation (CRC) said Chinese railway fixed asset Zinc 756,050 20,350 investment in the first eight months has reached 405 billion yuan ($65.3 billion), an increase of nearly 20% YoY. As discussed in our latest note, CRC Source: LME, Comex, Nymex, SHFE, Metal Bulletin, raised their spending target this year to 800 billion yuan from the original Reuters, LBMA, Macquarie Research, September 2014 budget of 630 billion in the beginning of the year, encompassing 64 projects.
The increased spending on railway construction is clearly supportive to metals consumption. And as half of the target has been implemented and the state- owned company said they have fixed funding for the full year investment, we expect railway investment in the remainder of the year to be strong. . Just as with its peer iron ore, the current pressure to cut production in the Chinese steel sector (plus reduced buying in Japan and Europe) is impacting Analyst(s) the spot metallurgical coal price. The latest Platts Premium HCC assessment Macquarie Capital (Europe) Limited has dropped below $110/t FOB Australia for the first time since April 1. With Colin Hamilton Q4 contract negotiations underway, this does skew risk to the downside +44 20 3037 4061 [email protected] Stefan Ljubisavljevic compared to the $120/t rollover expected by the market. However, the current +44 20 3037 4247 [email protected] spot price is only $2/t below levels when the last contract was agreed. Jim Lennon Senior Commodities Consultant +44 20 3037 4271 [email protected] . As 62% iron ore assessments drop towards $80/t CFR China, the relative Yubin Fu +44 203 037 2622 [email protected] inertia in ferrous scrap prices means the scrap to iron ore ratio is now the Vivienne Lloyd highest since daily prices were launched in 2008. For scrap, steelmakers are +44 203 037 4530 [email protected] now paying 2.93x the price of an iron unit in iron ore. This compares with a Matthew Turner +44 20 3037 4340 [email protected] 1.93x average over the history of the series. Macquarie Capital Securities Limited Angela Bi . Global shipments of semiconductors, which give a guide to demand for tin in +86 21 2412 9086 [email protected] solder alloys (around 50% total use), were up 8% YoY in July according to Chen Shao th +86 21 2412 9041 [email protected] latest WSTS data. This marks the 15 consecutive month of YoY gains. YTD Graeme Train shipments are up 10% YoY and all regions, with the exception of Japan, are +86 21 2412 9035 [email protected] performing strongly. Although the data is provided on a value basis and hence 11 September 2014 obscures thrifting and miniaturisation effects, we reaffirm our view that tin demand is currently not a problem and that the recent tin price underperformance is related to stronger supply (Tin in a tangle).
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30 Macquarie Research Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return
Recommendation proportions – For quarter ending 30 June 2014 AU/NZ Asia RSA USA CA EUR Outperform 51.67% 60.69% 34.67% 42.33% 55.41% 44.84% (for US coverage by MCUSA, 6.76% of stocks followed are investment banking clients) Neutral 33.00% 23.93% 38.67% 50.92% 38.51% 35.87% (for US coverage by MCUSA, 7.25% of stocks followed are investment banking clients) Underperform 15.33% 15.38% 26.67% 6.75% 6.08% 19.28% (for US coverage by MCUSA, 0.48% of stocks followed are investment banking clients)
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