Monday, 16 May 2016 Top Quant Alphas Taiwan Networking 4 TENCENT HOLDINGS LTD. (700 HK) PETRON CORP. (PCOR PH) Panning for gold Kaylin Tsai HKT TRUST & HKT LTD. (6823 HK) AAC TECHS.HDG.INCO. (2018 HK) We identify three major drivers behind the outperformance of the Taiwan Networking sector vs the tech PICC PR.& CLTY.CO.LTD. (2328 HK) industry since 2015: 1) rising white box switching and speed migration; 2) increasing car connectivity and ADAS/V2X penetration; and, 3) the migration in home network connection and Smart Home. Bottom Quant Alphas TRUE CORPORATION PCL. (TRUE TH) ALMN.CORP.OF CHINA LTD. (601600 CN) Epistar (Downgrade to Neutral) 5 SINOPEC OILF.SER.CORP. (600871 CN) CHINA OILFIELD SVS.LTD. (601808 CN) Benefits from business re-engineering to take longer to Louis Cheng Source: Macquarie Research. Data as at 11/05/2016. realise Screening for all stocks in Asia with Market Cap over US$2bn. Epistar reported disappointing 1Q16 earnings, i.e. LPS of NT$1.49 vs our original expectation of LPS NT$1.2 and consensus' LPS NT$1.0. We believe this suggests the benefits from business re- engineering should take longer time to realise.
KrisEnergy (Downgrade to Neutral) 6
Balance-sheet risks to the fore Aditya Suresh At KrisEnergy's 1Q results this morning, CEO Keith Cameron noted: "the general lack of confidence in the upstream sector has impacted the support we are receiving from financial institutions, which will lead to significant corporate actions".
Wistron NeWeb (Initiating coverage with Outperform) 7
Enjoy the ride Kaylin Tsai We initiate coverage on Wistron NeWeb (WNC) with an Outperform rating and a NT$87 target price based on 13x 2017E PER. WNC specializes in RF/satellite technologies and has penetrated the automotive market with car satellite radio/module, connectivity module and radar sensors shipping to tier-one car OEM suppliers.
MediaTek (Upgrade to Neutral) 8
Upside from disposal gain Patrick Liao We upgrade Mediatek to Neutral from Underperform. Mediatek said on 13 May it will sell its Chinese subsidiary, AutoChips, to NavInfo (002405 CH, Not rated) for US$600m.
Bangkok Life Assurance (Outperform) 9
Brilliance China Automotive (Outperform) 10
Cadila Healthcare (Outperform) 11
China Overseas Land (Neutral) 12
Glenmark Pharmaceuticals (Outperform) 13
Honda Motor (Outperform) 14
Innolux (Neutral) 15
Please refer to page 58 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Japan Display (Neutral) 16
Konica Minolta (Outperform) 17
LIG NEX1 (Outperform) 18
MacVisit: Arcadyan 19
MacVisit: D-Link 20
MacVisit: Differ Group 21
MacVisit: Gemtek 22
MacVisit: SerComm 23
Mega FHC (Underperform) 24
Mirae Asset Securities (Underperform) 25
Mizuho Financial Group (Neutral) 26
Nikon (Neutral) 27
Noble Group (Neutral) 28
NTT (Outperform) 29
Samsung Electronics (Outperform) 30
Samsung Life Insurance (Outperform) 31
SBS Holdings (Outperform) 32
Shenzhou International (Outperform) 33
Shinsegae (Neutral) 34
Silicon Works (Outperform) 35
SMIC (Outperform) 36
SUMCO (Outperform) 37
Sumitomo Mitsui Financial (Outperform) 38
Sun Art Retail Group (Neutral) 39
2 Swire Properties (Outperform) 40
T&D Holdings (Downgrade to Neutral) 41
Yanlord (Outperform) 42
Yungtay Engineering (Underperform) 43
In case you missed it 44
China A-Share Autos 45
China Auto Daily 46
China banks 47
China Internet 48
China Internet 49
Hong Kong telecom sector 50
Indonesia Cement 51
Japan credit cards 52
Macau gaming 53
Taiwan textile & footwear 54
CPMC Holdings (Underperform) 55
Digital Garage Inc. (Outperform) 56
Macquarie Commodities Comment 57
3
TAIWAN Taiwan Networking Panning for gold Identifying the value behind the loT volume We identify three major drivers behind the outperformance of the Taiwan Networking sector vs the tech industry since 2015: 1) rising white box switching and speed migration; 2) increasing car connectivity and ADAS/V2X penetration; and, 3) the migration in home network connection and Smart Home. We prefer companies with higher exposure and growth potential in switches and car connectivity/ADAS, as they have higher entry barriers and are at an early stage of a secular growth trend. While the home networking market offers basic LT demand, it has lower IoT value share and higher pricing competition. Based on these beliefs, we have an Outperform on Accton (2345 TT) and Wistron NeWeb (6285 TT), but a Neutral on Alpha Networks (3380 TT).
#1 White box switches and speed migration – 2016 the year Inside With the commoditization of server/storage, we expect white box switching Panning for gold 2 market to show a 53% CAGR in 2015-18. We expect a major take-off in 2016 from the 18% penetration in the Public Cloud switch market in 2015 (or 1.5% of Connected cars 18 the total switch market) as new-gen silicon and software capability (SDN) Smarter and more connected home 26 becomes more accessible. Furthermore, migration to 40G/100G high speed Appendices 33 switches in the datacenter market should support value growth as their ASP is ~10x that of avg. switches. We believe Accton is a purer play on these trends. Glossary 34 #2 Increasing car connectivity and ADAS/V2X penetration
We estimate the global car telematics solution market (diagnostics and Stock picks infotainment) will grow from US$12bn in 2015 to US$50bn+ in 2020, (out of the Mkt US$150bn+ global connected car market in 2020). In-car entertainment is driving Cap ADTV CP TP TSR Ticker Company Rec (US$m) (US$m) (LC) (LC) (%) penetration of car connectivity – Bluetooth/Wi-Fi/cellular/satellite. Rising driving 2345 TT Accton O 601 7.5 36.5 41.0 21% safety awareness is leading to initiatives in ADAS/V2X, providing secular growth 3380 TT Alpha Networks N 210 1.3 15.5 14.5 0% in radar sensor demand. Among Taiwan networking companies, only Wistron 6285 TT Wistron NeWeb has meaningful revenue contribution from auto electronics, due to the NeWeb O 772 6.1 75.1 87.0 21% high entry barriers in this segment. Source: FactSet, Macquarie Research, May 2016 Close price on May 12 #3 Migration in home network connection and Smart Home Migration in global home networking is progressing in different ways: 1) Related research expansion of broadband coverage; for example, the aggressive optical fibre deployment in China, which boosts demand for xPON boxes; 2) upgrade in Accton connections such as ADSL to VDSL/G.fast or DOCSIS 3.0 to 3.1 for fixed Alpha Networks broadband and Wi-Fi 802.11a/b/g/n to 802.11ac for wireless; and, 3) the build-up of “Smart Homes” with IP cameras, sensors and customized gateways leveraging the home network. Taiwan networking companies mainly serve as hardware ODMs. With low entry barriers, outperformers are often those focusing on high-end, customized products, or those having share gains (client/region).
Analyst(s) Initiations: Accton/Wistron NeWeb - OP, Alpha Networks-N Kaylin Tsai +886 2 2734 7523 [email protected] We are the first foreign broker to initiate on the sector and to cover Accton and Jeffrey Ohlweiler Alpha Networks (May 11). Given an increased base in 2015 sales/stock +886 2 2734 7512 [email protected] performance, we prefer names with higher technology/industry entry barriers, 13 May 2016 pricing/order sustainability, and attractive valuations. We initiate on Wistron Macquarie Capital Securities Limited, NeWeb with an OP for its exposure to car connectivity and ADAS, plus attractive Taiwan Branch valuation. We prefer Accton (OP) over Alpha Networks (N), as we believe the former has more growth potential in white box and high speed switching.
Please refer to page 35 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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TAIWAN Epistar 2448 TT Neutral Benefits from business re-engineering Price (at 05:30, 12 May 2016 GMT) NT$18.00
Valuation NT$ 19.40 to take longer to realise - Price to Book 12-month target NT$ 19.40 Event Upside/Downside % +7.8 12-month TSR % +7.8 . Epistar reported disappointing 1Q16 earnings, i.e. LPS of NT$1.49 vs our Volatility Index Medium original expectation of LPS NT$1.2 and consensus’ LPS NT$1.0. We believe GICS sector this suggests the benefits from business re-engineering should take longer Semiconductors & Semiconductor time to realise. Equipment Market cap NT$m 15,246 . Downgrade to Neutral from Outperform. Cut TP to NT$19.4 (0.5x 2H16- Market cap US$m 469 1H17E PB) from NT$31.2 (0.7x 2H16-1H17E PB). Free float % 20 Impact 30-day avg turnover US$m 5.5 Number shares on issue m 847.0 . 1Q16 results missed on severe pricing pressure. Epistar’s 1Q16 revenue
of NT$6.1bn (+3% QoQ, -9% YoY) was 2-13% above our original estimates Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E and the Street’s expectation. However, GM of -7.3% was 0.7-7.7ppt shy of Revenue m 25,510 25,515 33,443 30,921 Macq/consensus, due mainly to more severe pricing competition. This, with Reported profit m -3321 -3242 -2730 -2680 operating leverage, translates to a 2.6-9.7ppt OPM miss. All in all, LPS of EPS rep NT$ -3.02 -2.95 -2.48 -2.44 EPS rep growth % nmf 2.3 15.8 1.8 NT$1.49 (vs LPS of NT$2.4 in 4Q15) was lower than expectation of LPS PER rep x nmf nmf nmf nmf NT$1.0 to NT$1.2. Total DPS NT$ 0.00 0.00 0.00 0.00 Total div yield % 0.0 0.0 0.0 0.0 . Guiding full UT rate for four-element production lines in 2Q16. ROA % -4.0 -3.9 -2.9 -3.0 ROE % -5.9 -6.8 -6.5 -6.9 Management guided to 2Q16 demand seeing a meaningful recovery, with EV/EBITDA x 9.7 11.2 7.2 6.5 four-element LED (margin accretive product) seeing full utilization rate while P/BV x 0.4 0.4 0.5 0.5 commoditized LED’s utilization rate improving to 80% (from 70% in 1Q16). 2448 TT rel TAIEX performance, & rec history . Benefits from product/client portfolio re-engineering takes longer to realise. Epistar kicked off its fab consolidation plan together with product/client mix improvement in 4Q15. Backed by richer mix of niche products (e.g. automotive, industrial), management sees a limited impact on both revenue and earnings from capacity loss. Notably, management guided the high margins four-element products to account for 13-15% of Epistar’s automotive sales in 2016 from 9-10% in 2015. We look for the benefits from business re-engineering to take longer time to realise. We would stay on the sidelines until more signs of UV/IR LED and other niche products with high
Note: Recommendation timeline - if not a continuous line, then there was no ASP/margins to offset the loss on commoditized LED products. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 Earnings and target price revision (all figures in NT$ unless noted, TP in TWD) . We cut 2016E LPS to NT$2.95 (from LPS NT$1.04 previously), mainly to
factor in weaker-than-expected 1Q16 results and benefits from business re- engineering taking longer to realise. This, with intensifying industry competition, leaves limited possibility for the company to turn around in the next two years, and we look for 2017-18E LPS of NT$2.44-2.48. Price catalyst
. 12-month price target: NT$19.40 based on a Price to Book methodology. Analyst(s) Louis Cheng, CFA . Catalyst: Industry supply-demand rebalance, new products ramp-up. +886 2 2734 7526 [email protected] Jeffrey Ohlweiler Action and recommendation +886 2 2734 7512 [email protected]
. Downgrade to Neutral from Outperform. TP of NT$19.4 is now based on 0.5x 13 May 2016 2H16-1H17E PB (from 0.7x previously). We lower our target multiple to 0.5x Macquarie Capital Securities Limited, forward PB (vs trough of 0.4x, peak of 1.5x, 3-year avg of 1.0x). Taiwan Branch
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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SINGAPORE KrisEnergy KRIS SP Neutral Balance-sheet risks to the fore Price (at 07:21, 13 May 2016 GMT) S$0.16
Valuation S$ 0.15-0.61 Event - RNAV 12-month target S$ 0.15 . At KrisEnergy’s 1Q results this morning, CEO Keith Cameron noted: "the Upside/Downside % -6.2 general lack of confidence in the upstream sector has impacted the 12-month TSR % -6.2 support we are receiving from financial institutions, which will lead to Volatility Index High significant corporate actions". To reflect this funding risk, we lower our GICS sector Energy one-year price target to our bear-case valuation of S$0.15 (S$0.36 prior) and Market cap S$m 239 downgrade our recommendation to Neutral. Market cap US$m 182 Free float % 22 . Longer-term upside. To the extent Kris overcomes its near-term funding 30-day avg turnover US$m 0.1 obstacle, we note that our base-case NAV of S$0.32 (prior S$0.36) is Number shares on issue m 1,494 materially above the current share price.
Investment fundamentals Impact Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 60.2 183.7 261.9 352.7 . Challenged cash position. Kris ended 1Q16 with US$65mn cash on hand EBITDA m 25.2 37.9 62.9 99.9 versus US$100mn debt due within one year and US$248mn debt due in EBIT m 25.2 37.9 62.9 99.9 Reported profit m -48.6 -61.2 -24.1 -29.1 2017/18. As part of a negotiated amendment to its revolving credit facility, Kris EPS rep ¢ -4.5 -4.1 -1.6 -2.0 is required to: a) repay US$55mn by July 2016; b) raise a minimum PER rep x nmf nmf nmf nmf Total DPS ¢ 0.0 0.0 0.0 0.0 US$100mn and US$50mn capital by June 2016 and Nov 2016; and c) repay Total div yield % 0.0 0.0 0.0 0.0 the remaining US$67mn outstanding by March 2017. In addition, Kris' ROA % 2.7 3.6 5.7 8.9 ROE % -10.6 -10.8 -3.9 -4.9 S$130mn (US$95mn) and S$200mn (US$146mn) are due in June 2017 and EV/EBITDA x 15.8 11.9 7.2 4.5 Aug 2018, respectively. Even with the ramp-up in production and in turn Net debt/equity % 55.6 26.6 46.8 64.5 EBITDA—MQe US$55/85/135mn 2016/17/18—funding risks are material. P/BV x 0.2 0.3 0.3 0.3
. Operations tracking largely per plan. 1Q production of 19.0 kboe/d (MQ KRIS SP rel SNGPORI performance, & 19.9) is up 30% q/q, 147% y/y helped by the ramp-up of its Nong Yao and rec history Wassana fields in the Gulf of Thailand. Lifting cost of US$10.1/boe (MQ 10) is down 20% q/q, helped by the ramp-up in production. That said, the realized oil price in 1Q was a low US$21/bbl (MQ 27) due to an above- normal discount to Dubai and Brent crude price of US$6-11/bbl. In turn, this was explained by higher discounts for first shipments and the poorer grade of Wassana crude. Earnings and target price revision
. Price target cut to reflect our bear-case NAV. 2016E/17E new EPS US Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. cents/sh (0.4)/(0.2) versus prior (0.2)/1.8 due to higher Wassana crude Source: FactSet, Macquarie Research, May 2016 discount. Target price cut from S$0.36 to S$0.15.
Price catalyst . 12-month price target: S$0.15 based on a RNAV methodology. . Catalyst: Oil price rebound; funding progress. Action and recommendation . While we see longer-term share price upside, funding issues and the lack of liquidity dominate near term. Analyst(s) Aditya Suresh, CFA Path to 100% Upside +852 3922 1265 [email protected] We view KrisEnergy as an Emerging Leader that can potentially generate a 100% return James Hubbard, CFA over three years. See inside for details +852 3922 1226 [email protected] Macquarie Governance and Risk Score (MGRS) 13 May 2016 On our proprietary Governance and Risk Score KrisEnergy scores in the fourth quartile of our current universe coverage. Macquarie Capital Limited
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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TAIWAN Wistron NeWeb Enjoy the ride We initiate coverage on Wistron NeWeb (WNC) with an Outperform rating and a NT$87 target price based on 13x 2017E PER. WNC specializes in RF/satellite technologies and has penetrated the automotive market with car satellite radio/module, connectivity module and radar sensors shipping to tier-one car OEM suppliers. We estimate auto-related products contributed 20% to 2015 sales, the highest among Taiwan networking companies, and expect the business to become WNC’s major sales and earnings driver riding on increasing penetration of connected cars and ADAS. Capacity expansions in Kun Shan (contributed in 3Q15) and Hsinchu (3Q16E) indicate WNC’s commitment to growth in the next two to three years. Automotive: LT beneficiary of connected cars and ADAS WNC was an early mover in auto-electronics, starting with supplying car satellite
components to Sirius XM in 2008, then expanding into car connectivity modules 6285 TT Outperform and radar sensors. WNC has already penetrated many global tier-one car OEM suppliers such as Continental, and is protected by high entry barriers given the Price (at 05:30, 12 May 2016 GMT) NT$75.10 long certification process for the automotive industry.
Valuation NT$ 80.00- We expect WNC’s auto-related business sales to see a 17% CAGR in 2015-18 on 94.00 two catalysts: (1) global LTE-enabled car penetration rising from 15% in 2015 to - PER 12-month target NT$ 87.00 75%+ by 2020; and (2) rising ADAS penetration (from <10% currently) creating Upside/Downside % +15.8 demand for radar sensors. With higher margins than the corporate average, 12-month TSR % +20.7 robust auto-related sales growth should also drive WNC’s earnings growth. Volatility Index Medium Smart meter: 2020 timeline; WNC to expand to EU in 4Q16 GICS sector Technology Hardware & Equipment We expect global smart meter installation to grow from 570m units in 2015 to Market cap NT$m 25,174 852m units in 2018, supported by government-led deployment. We note that Market cap US$m 774 many countries (EU, UK, Japan, etc) have set 2020 as the timeline for full (or very 30-day avg turnover US$m 7.3 extensive) conversion to smart meters. WNC has already shipped smart meter Number shares on issue m 335.2 communication boards/modules to Japan and the US, and will expand to the EU
Investment fundamentals in 4Q16. We expect its smart meter business (~6% of 2015 sales) to show a 17% Year end 31 Dec 2015A 2016E 2017E 2018E CAGR on new client penetration. Revenue m 52,183 55,466 61,139 66,625 Reported profit m 1,973 1,982 2,239 2,522 Smart Home: steady growth on home automation/security EPS adj NT$ 5.88 5.91 6.68 7.52 EPS adj growth % 47.4 0.5 12.9 12.7 We expect global home networking device market revenue to see a 7% CAGR in PER adj x 12.8 12.7 11.2 10.0 Total DPS NT$ 3.70 3.63 4.10 4.62 2015-23, driven by increasing global network coverage, technology migration and Total div yield % 4.9 4.8 5.5 6.2 growing adoption of home automation/security systems. WNC’s smart home ROA % 9.1 8.8 9.1 9.7 ROE % 16.7 15.5 16.4 17.2 segment contributed 67% of its 2015 sales (80%+ of which related to digital EV/EBITDA x 6.5 5.8 5.3 4.8 home/networking products) and we model a 5% CAGR in segment sales in 2015- Net debt/equity % -15.3 -13.8 -20.1 -24.5 P/BV x 2.0 1.9 1.8 1.7 18. WNC’s core competencies are its comprehensive product portfolio on various
wireless technologies, and long-term relationships with major telco clients. Source: FactSet, Macquarie Research, May 2016 (all figures in NT$ unless noted, TP in TWD) Recent weakness a good entry point for longer-term view
Our target 13x PE is supported by 13% earnings growth in ‘17/18. The stock has Analyst(s) Kaylin Tsai corrected 10% (vs the Taiex down 1%) in the past week as WNC guided down ‘16 +886 2 2734 7523 [email protected] forecasts due to near term smart meter component shortage caused by the Japan Jeffrey Ohlweiler earthquake in April and conservative home business in ‘16 on inventory +886 2 2734 7512 [email protected] adjustment of a US telco client. While ‘16 earnings growth is reduced, the lowered 13 May 2016 valuation at 13x/11x 2016/17 PE (below its 5-year historical avg of 15x, in line with Macquarie Capital Securities Limited, peers, and below the avg for auto-electronics component suppliers at 17x/14x) Taiwan Branch provides a better entry point for its long-term growth catalysts in ‘17-‘18.
Please refer to page 19 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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TAIWAN MediaTek 2454 TT Neutral Upside from disposal gain Price (at 04:00, 12 May 2016 GMT) NT$200.00
Valuation NT$ 190.00- Event 200.00 - PER . We upgrade Mediatek to Neutral from Underperform. 12-month target NT$ 195.00 Upside/Downside % -2.5 . Mediatek said on 13 May it will sell its Chinese subsidiary, AutoChips, to 12-month TSR % +3.1 NavInfo (002405 CH, Not rated) for US$600m. Completion of the transaction Volatility Index Medium is scheduled for 4Q16, subject to various relevant regulatory approvals. GICS sector Mediatek expects a NT$10-12bn disposal gain from this transaction to be Semiconductors & Semiconductor recognized in 2016-18. After factoring in the disposal gain, we raise our TP to Equipment NT$195 from NT$160 on an unchanged 12x 2016E PE. Upgrade to Neutral Market cap NT$m 314,400 from Underperform. Market cap US$m 9,664 30-day avg turnover US$m 51.2 Impact Number shares on issue m 1,572 . Expanding automotive IC and IoV: In addition to selling AutoChips, Investment fundamentals Mediatek also plans to invest or co-invest with NavInfo no more than Year end 31 Dec 2015A 2016E 2017E 2018E US$100m in automotive ICs and Internet of Vehicles (IoV). NavInfo is China’s Revenue bn 213.3 244.4 229.2 238.8 Reported profit bn 26.0 25.2 23.6 21.7 largest and worldwide No. 3 provider of digital maps. From this cooperation, EPS rep NT$ 16.60 16.14 15.11 13.87 Mediatek expects to become better attuned to opportunities in the IoV market. EPS rep growth % -44.8 -2.8 -6.4 -8.2 PER rep x 12.0 12.4 13.2 14.4 Mediatek will continue to leverage its expertise in wireless communications Total DPS NT$ 11.00 11.30 10.58 9.71 and image processing, and along with NavInfo, to jointly develop and cultivate Total div yield % 5.5 5.6 5.3 4.9 ROA % 7.4 6.0 5.3 5.4 the automotive IC and autonomous car markets, with an eye for opportunities ROE % 10.6 10.4 9.5 8.5 in ADAS and Telematics. EV/EBITDA x 6.4 6.9 7.3 7.0 Net debt/equity % -42.2 -33.4 -30.9 -30.0 . No impact to Mediatek’s core operation in the near-term: We appreciate P/BV x 1.3 1.3 1.2 1.2 Mediatek’s effort to expand into the automotive IC market and diversify its 2454 TT rel TAIEX performance, & rec product portfolio. However, we view this deal as having limited impact on history Mediatek’s core operation in the near-term as the automotive market usually takes a longer time for qualification. We still expect Mediatek to see pricing pressure from its competitors in smartphone market. Thus, we keep our sales, GM and OPM assumptions unchanged. Earnings and target price revision
. We increase 2016-18 earnings by 21%/23%/9% to factor in the disposal gain (NT$5/5/2bn being recognized in 2016/17/18), with operating profit unchanged. Accordingly, we raise our target price to NT$195 from NT$160 on Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. unchanged 12x 2016E PE. Source: FactSet, Macquarie Research, May 2016 (all figures in NT$ unless noted, TP in TWD) Price catalyst
. 12-month price target: NT$195.00 based on a PER methodology.
. Catalyst: monthly sales, earnings results, and smartphone demand. Analyst(s) Macquarie Capital Securities Limited, Taiwan Action and recommendation Branch Patrick Liao . Mediatek’s share price has dropped 23% since December 2015, vs the +886 2 2734 7515 [email protected] Lynn Luo Taiex’s 3% drop in the same period. We remain cautious on Mediatek’s +886 2 2734 7534 [email protected] earnings and margins given the severe competition, but we believe the share Jeffrey Ohlweiler price largely reflects the concerns, and will be supported by positive news and +886 2 2734 7512 [email protected] Macquarie Capital Limited dividend yield in the near term. Upgrade from Underperform to Neutral with a Allen Chang new TP of NT$195 (12x 2016E PE). +852 3922 1136 [email protected]
13 May 2016
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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THAILAND Bangkok Life Assurance BLA TB Outperform Hit by extra policy reserves Price (at 05:28, 13 May 2016 GMT) Bt36.25
Valuation Bt 42.51 Event - DCF (WACC 12.1%, beta 1.1, ERP 8.0%, RFR 3.0%, TGR 8.6%) 12-month target Bt 43.00 . BLA today reported a1Q16 net loss of Bt6.9bn vs Bt2.3bn net profit in 4Q15 Upside/Downside % +18.6 and Bt765m net profit in 1Q15. Excluding Bt10.4bn extra policy reserves, the 12-month TSR % +20.7 results would have been approximately Bt1.4bn vs our forecast of Bt1.2bn. Volatility Index Medium GICS sector Insurance Impact Market cap Btm 61,806 . Better-than-expected premium revenue with better product mix. BLA’s Market cap US$m 1,728 1Q16 net earned premium (NEP) came in at Bt13.0bn (up 1% QoQ but down Free float % 9 17% YoY) vs our forecast of Bt10.8bn. Product mix of new business was 30-day avg turnover US$m 0.9 slightly better with more contribution from high margin products at both Number shares on issue m 1,705 bancassurance and agent channels. As at 1Q15, credit life accounted for 27% Investment fundamentals vs 25% of total bancassurance new sales while whole-life and pension Year end 31 Dec 2015A 2016E 2017E 2018E products represented 56% of total agent new sales vs 53% in 1Q15. Life Prem m 44,175 49,568 55,651 61,108 Life Total Rev m 55,573 62,025 69,506 76,988 Pretax Life Op Inc m 4,807 -4409 6,830 7,383 . Bt10.4bn extra policy reserves. 1Q16 policy reserves came in at Bt17.8bn, PBT m 4,886 -4478 6,830 7,383 or 139% of NEP vs 59% in 4Q15 and 77% in 1Q15. The sharp increase in Reported profit m 4,108 -3340 5,763 6,249 Net Op Income m 4,108 -3340 5,763 6,249 policy reserves can be attributed to Bt10.4bn extra policy reserves due to the EPS adj Bt 2.42 -1.96 3.38 3.67 impact of a flattening yield curve. The average discount rate declined to 2.2% PER adj x 15.0 nmf 10.7 9.9 DPS Bt 0.64 0.52 0.84 0.91 vs 3.7% in 1Q15. Excluding Bt10.4bn extra policy reserves, policy reserves to Dividend yield % 1.8 1.4 2.3 2.5 NEP would have been 58% vs our forecast of 67%. Total SH Funds m 26,990 27,222 31,587 36,303 BV/S Bt 15.84 15.97 18.53 21.30 . Investment income in line. Total investment income was Bt2.7bn, up 10% ROE % 15.6 -12.3 19.6 18.4 ROA % 1.8 -1.2 1.8 1.7 QoQ and 8% YoY, in line with our forecast. Net investment return was 5.4% P/BV x 2.3 2.3 2.0 1.7 with 3.7% from fixed income investment, 1.0% from realised gains and 0.7% Tot Embedded Val m 51,240 56,519 62,519 69,179 from dividend income. BLA TB rel SET performance, & rec history Earnings and target price revision
. We cut our 2016E earnings to a Bt3.3bn net loss from Bt4.9bn net profit due to extra policy reserves in 1Q16. We cut 2017-18E earnings by 4% due to a higher benefit payment assumption. TP is lowered to Bt43 (from Bt45) due to earnings downgrades. TP is rolled forward to 2Q17 (from 4Q16). Price catalyst . 12-month price target: Bt43.00 based on a DDM methodology.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Catalyst: 2Q16 results, better product mix, higher investment yield Source: FactSet, Macquarie Research, May 2016 (all figures in THB unless noted) Action and recommendation
. We maintain our OP with a lower TP of Bt43 from Bt45. Valuations are less demanding on 2017E PER of 10.7x, PBV of 2.0x and P/EV of 1.2x. We also like the way BLA is making an effort to improve its product mix which will result in more sustained profitability. . The higher investment value from a flattening yield curve would have almost Analyst(s) Passakorn Linmaneechote, CFA offset the impact of extra policy reserves, if BLA were allowed to mark-to- +662 694 7728 market its investment portfolio. Therefore 1Q16 net losses (as well as our net [email protected] loss forecast in 2016E) in our opinion should not have a material impact on 13 May 2016 BLA’s dividend payment. Its capital ratio in 1Q16 also improved to 329% from Macquarie Securities (Thailand) Limited 309% in 4Q15 which shows that BLA’s financial strength is intact.
9
HONG KONG Brilliance China Automotive 1114 HK Outperform Retail sales dip ahead of X1 launch Price (at 06:17, 13 May 2016 GMT) HK$7.59
Valuation HK$ 9.60 Event - PER 12-month target HK$ 9.60 . Friday afternoon during market hours, BMW reported retail sales for April in Upside/Downside % +26.5 China. Total retail sales of the BMW brand fell 8.8% YoY to 32,501 units as 12-month TSR % +29.7 the volume of locally made models slipped 9.4% YoY to 21,750 units. With the Volatility Index High X1 shipping just 12 units in April, we expect the bulk of sales were the 5 GICS sector Automobiles & Series and 3 Series, with sales of the new 2 Series Active Tourer (AT) likely Components around the 1k level. With the new X1 launching on 20 May, we expect retail Market cap HK$m 38,234 volumes to pick up from June/July. We continue to like Brilliance China on a Market cap US$m 4,726 multi-year basis for the strong new model line-up from BMW and reiterate our Free float % 29 Outperform rating. 30-day avg turnover US$m 16.9 Number shares on issue m 5,037 Impact
Investment fundamentals . X1 run-out appears completed: BMW Brilliance (BBA) stopped making the Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 4,862.9 5,972.3 7,034.3 7,986.6 X1 at the beginning of the year, with just 13 units produced in January and EBIT m -651.8 -627.4 -587.9 -546.5 none since. With retail sales of locally made models popping to a record EBIT growth % -103.6 3.7 6.3 7.1 Reported profit m 3,494.7 3,843.4 4,241.9 6,495.2 31,750 units in March, it appears that run-out of the X1 was more or less EPS rep Rmb 0.70 0.76 0.84 1.29 completed in March. This could explain why the launch of the X1 has been EPS rep growth % -35.3 10.0 10.4 53.1 brought forward to late May from the initially indicated July. It is not clear, PER rep x 9.2 8.3 7.5 4.9 Total DPS Rmb 0.09 0.10 0.23 0.42 however, the extent to which production of the new long-wheel-base X1 can Total div yield % 1.4 1.6 3.6 6.6 be accelerated, given it is a new model on a new line, but at least dealers will ROA % -2.6 -2.2 -1.8 -1.5 ROE % 19.0 17.8 17.1 22.8 be able to take orders. If production is accelerated, there could be upside to EV/EBITDA x 8.6 7.7 7.0 4.6 our forecast of 53k for the year. Net debt/equity % -7.8 -3.1 -4.5 -10.9 P/BV x 1.6 1.4 1.2 1.0 . Steady sales of 3 Series and 5 Series: Shipments of the 3 Series, which 1114 HK rel HSI performance, & rec had a facelift last September, have been solid, rising 12.0% for the first 4 history months. Shipments of the 5 Series started the year on a soft note due to inventory adjustment in the channel, but the past two months have been over 12k units. Overall demand appears to be steady. . New 2 Series AT likely to take time to ramp: We have not yet had much colour on how the new 2 Series AT is selling. A total of 1,107 units were shipped in March following its late-March launch and a further 1,709 units in April. Brilliance has commented that it will take time for the market to understand the product and become familiar with it. Further, it is being
Note: Recommendation timeline - if not a continuous line, then there was no produced on a new line, so typically the ramp of production of a new model on Macquarie coverage at the time or there was an embargo period. a new line can take a few months. We are looking for shipments of 6-7k in 1H, Source: FactSet, Macquarie Research, May 2016 (all figures in Rmb unless noted, TP in HKD) so it is for the most part on track thus far.
Earnings and target price revision
. No change. Analyst(s) Price catalyst Janet Lewis, CFA +852 3922 5417 [email protected] Zhixuan Lin . 12-month price target: HK$9.60 based on a PER methodology. +86 21 2412 9006 [email protected] Eric Zong . Catalyst: Monthly sales on 10th; 1H results in late August. +852 3922 4749 [email protected] Allen Yuan Action and recommendation +86 21 2412 9009 [email protected]
. BBA has the most visible line-up of new models through 2019. Although run- 13 May 2016 outs of models will pressure margins in 2016-17, we expect 2018 to be a Macquarie Capital Limited strong year. At current levels, we view the shares as very attractive and maintain our Outperform rating.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
10
INDIA Cadila Healthcare CDH IN Outperform Inline 4Q, Moraiya the key catalyst! Price (at 09:14, 13 May 2016 GMT) Rs333.45
Valuation Rs 400.00 Event - PER 12-month target Rs 400.00 . CDH IN reported 4QFY16 results with sales of Rs24.5b (up 7% YoY) and Upside/Downside % +20.0 EBITDA of Rs5.8b (up 17% YoY) slightly ahead of our and consensus 12-month TSR % +21.0 estimates. While valuations remain supportive, we think multiples could be Volatility Index Low/Medium under pressure near term, driven by uncertainty around Moraiya remediation GICS sector and future approvals. CDH guided that it would invite the FDA for re- Pharmaceuticals, Biotechnology & Life inspection post completion of the remediation plan this month. They intend to Sciences also seek a meeting with the USFDA in the next couple of months. We Market cap Rsm 341,889 maintain our Outperform rating. Market cap US$m 5,031 Free float % 25 Impact 30-day avg turnover US$m 3.2 . US (~40% of revenue) remains key medium-term lever with Moraiya the Number shares on issue m 1,025 only potential hiccup: US delivered sales of ~ Rs9.6b (down ~2% YoY, and Investment fundamentals ~10% QoQ). Incremental competition to HCQS and lack of meaningful Year end 31 Mar 2015A 2016E 2017E 2018E approval drove the sequential decline. CDH is guiding to 20 approvals in the Revenue bn 86.5 98.4 105.8 124.7 EBIT bn 14.7 20.8 21.1 25.2 US (from SEZ, Baddi and facilities in US) for FY17 which could meaningfully EBIT growth % 47.0 41.7 1.4 19.4 help accelerate US sales. Confidence is based on site-transfer of several Recurring profit bn 14.6 21.3 21.6 26.2 Reported profit bn 11.5 15.2 16.8 20.5 products from Moraiya to an alternative site. Niche opportunistic launches Adjusted profit bn 11.6 15.3 16.8 20.5 (Asacol HD, Prevacid ODT, Toprol XL) could be a key upside catalyst when EPS rep Rs 11.24 14.87 16.45 19.99 EPS rep growth % 43.2 32.3 10.6 21.5 the approval comes through, likely now only by 2HFY17. CDH has the option EPS adj Rs 11.32 14.90 16.45 19.99 to launch an Authorized generic for Asacol HD by July 2016 in the absence of EPS adj growth % 41.2 31.6 10.4 21.5 PER rep x 29.7 22.4 20.3 16.7 their own approval (Key data point to watch near-term). We assume Moraiya PER adj x 29.5 22.4 20.3 16.7 resolution only by end CY16 / early CY17. Total DPS Rs 2.40 3.20 3.45 4.16 Total div yield % 0.7 1.0 1.0 1.2 . India (~32% of revenue): grew at ~13% YoY. According to IMS, secondary ROA % 17.2 21.8 19.7 20.3 ROE % 30.1 31.8 28.0 27.3 sales growth for CDH for 4Q was 7.6% vs. IPM growth of 13%. Management EV/EBITDA x 20.2 14.9 14.6 12.4 continues to guide for recovery in India sales going forward with mid-teens Net debt/equity % 42.1 21.5 17.9 6.8 P/BV x 8.0 6.4 5.1 4.1 growth being achieved as early at 2QFY17E. Impact of the new NLEM list/ FDC ban/ WPI deflation driven price cut is insignificant with total annual CDH IN rel BSE Sensex performance, & rec history impact not exceeding > 1% of India Sales. . Key takeaways from 4Q con-call: (i) New approvals from the SEZ facility which is approved by the USFDA will help drive near term growth (ii) R&D expense would be ~ 7% of sales in the foreseeable future (ANDA filing expenses – 75% and 25% for others) (iii) FY17 tax rate would be 20% and capex around Rs10b. (iv) Expect EBITDA margin to be ~22% for FY17 Earnings and target price revision . We tweaked down our 2017 eps by 0.2%.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Price catalyst Source: FactSet, Macquarie Research, May 2016 (all figures in INR unless noted) . 12-month price target: Rs400.00 based on a PER methodology.
. Catalyst: 1) Moraiya Warning letter resolution 2) US approvals Analyst(s) Abhishek Singhal Action and recommendation +91 22 6720 4086 [email protected] Alankar Garude, CFA . CDH is trading at a PER of ~17x FY18E earnings. Valuations are fairly +91 22 6720 4134 [email protected] attractive, in our view, given CDH’s healthy ROE of ~30%, strong balance 13 May 2016 sheet and a large US pipeline which will provide multi-year growth Macquarie Capital Securities India (Pvt) opportunities. Further escalation of the warning letter at Moraiya into an Ltd import alert (probability of which remains low in our view) remains the biggest risk to our thesis.
Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
11
HONG KONG China Overseas Land Shenzhen, Chengdu, Huizhou, Wanning
Beijing, Guangzhou, Qingdao, Tianjin, Foshan, Zhuhai, Changsha, Shantou CITIC can help, but at a high price Shanghai, Changchun, Suzhou, Wuxi, Yangzhou, Dongguan, Jiujiang, Boao, Haikou, Lingshui EPS accretive but not for NAV One of the most commonly asked questions by investors in the past two months was whether COLI’s proposed acquisition of CITIC mainland China residential assets is EPS and NAV accretive. Yes and No. Without full details of CITIC assets, we caution readers that most of the analysis in this report is based on our estimates, which are subject to change when the companies release a deal circular around the end of June. For now, we maintain our Neutral rating (downgraded two months ago due to this deal) on COLI without incorporating the
new projects in our forecasts yet. 688 HK Neutral The CITIC projects should contribute core earnings of between HK$4-5bn per year next three years, with close to a third contributed by a Shenzhen JV project, Price (at 06:20, 13 May 2016 GMT) HK$22.15 Qianhai Times. If this project is not part of the deal, EPS will not be accretive.
Valuation HK$ 21.86 Issuance of 10% new shares by COLI to CITIC should result in earnings dilution - DCF of around HK$3bn each year in 2016 and 2017. It is difficult to make the deal 12-month target HK$ 26.56 NAV accretive due to the expensive purchase price comprising stock, assets and Upside/Downside % +19.9 debts assumption. We estimate base case NAV reduction of HK$26bn or 12-month TSR % +22.9 HK$2.68/share and a bull case NAV reduction of HK$8bn and a blue-sky Volatility Index Medium scenario where NAV can increase by HK$20bn GICS sector Real Estate Market cap HK$m 218,412 Deal must go through Market cap US$m 27,572 The deal is big and impactful on COLI and it is needed urgently if management Free float % 19 still believes in growing the company’s bottom line. COLI has been relatively 30-day avg turnover US$m 57.4 quiet in the land market throughout 2015 and YTD 2016, partly in order to Number shares on issue m 9,861 reserve capital for this mega deal. If this deal does not go through, sales will fall Investment fundamentals off a cliff in 2017 and beyond. The acquired assets can provide HK$268bn of Year end 31 Dec 2015A 2016E 2017E 2018E attributable saleable resources, a 52% boost of COLI’s current resources. We Revenue bn 115.0 176.4 170.4 103.1 EBIT bn 37.5 48.0 48.2 27.6 project gross sales of HK$48bn in 2017 and HK$62bn in 2018, which should EBIT growth % 2.5 28.1 0.4 -42.8 fill 66% of the sales gap in the next two years. For the remaining 34%, COLI Reported profit bn 33.3 33.3 33.6 21.5 Adjusted profit bn 27.6 33.0 33.6 21.1 needs to be more active in land acquisition or M&A deals to replenish resources. EPS rep HK$ 3.54 3.49 3.41 2.18 EPS rep growth % 17.3 -1.5 -2.2 -36.0 Challenges in integration and execution EPS adj HK$ 2.94 3.44 3.41 2.14 EPS adj growth % 14.5 17.2 -1.0 -37.1 Our biggest worries are issues that may arise during the integration of the teams PER rep x 6.3 6.4 6.5 10.2 of two large, prestigious and well-established SOEs but with different PER adj x 7.5 6.4 6.5 10.3 Total DPS HK$ 0.92 0.67 0.68 0.43 management styles. The acquisition of COLI’s parent assets in 2015 was Total DPS growth % 57.0 -27.5 1.9 -37.1 followed by the departure of three out of seven EDs of the company. CITIC Total div yield % 4.2 3.0 3.1 1.9 ROA % 9.0 11.4 11.7 6.8 projects have room for improvement: cost control, asset churn, pricing, gearing ROE % 16.9 16.2 14.7 8.4 and product positioning. These all become upside potential when COLI takes EV/EBITDA x 6.0 4.6 4.6 8.1 Net debt/equity % 6.6 -28.7 -62.9 -72.2 over the projects but execution is key. Based on the short history of corporate P/BV x 1.1 1.0 0.9 0.8 M&A in the China real estate industry, potential surprises are more likely to be
Source: FactSet, Macquarie Research, May 2016 negative. With such sizable and expensive acquisitions from such an entrenched (all figures in HKD unless noted) SOE competitor, the risk of slippage and its consequence are multiple times
Analyst(s) bigger than the problems associated with last year’s parent’s assets acquisitions. David Ng, CFA +852 3922 1291 [email protected] Between a rock and a hard place Wilson Ho, CFA +852 3922 3248 [email protected] Without the CITIC acquisition, saleable resources will certainly drop off a cliff in Raymond Liu, CFA 2017. With the acquisition, uncertainties rise due to challenges of merging two +852 3922 3629 [email protected] prestigious SOEs with very different styles. We remain cautious on the deal and Catherine Li +852 3922 1161 [email protected] post-deal execution 12 months after. The stock is down 15% versus a sector down 11% over the past two months but we remain cautious on the deal and 13 May 2016 post-deal execution 12 months after. We will review our estimates and target Macquarie Capital Limited price further once the deal circular releases more details around the end of June.
Please refer to page 17 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
12
INDIA Glenmark Pharmaceuticals GNP IN Outperform Guiding to >25% top-line growth Price (at 09:14, 12 May 2016 GMT) Rs861.15
Valuation Rs 1,140.00 Event - Sum of Parts 12-month target Rs 1,140.00 . GNP reported 4QFY16 results and held an earnings conference call today. Upside/Downside % +32.4 We present the key takeaways from the con-call. Adjusting for the one-offs 12-month TSR % +32.6 (forex loss of ~Rs940mn and one-time additional legal cost of Rs650m) Volatility Index Medium EBITDA was Rs4.6b for 4Q (margin of ~20% down 230 bps QoQ) GICS sector Pharmaceuticals, Biotechnology & Life Impact Sciences . FY17 guidance in line with our estimates: Glenmark expects to report sales Market cap Rsm 242,844 growth in excess of 25% for FY17 (Macquarie estimate: 24.3%) including Market cap US$m 3,646 Zetia. The US-based business should grow 15-20%, excluding Zetia. Margins Free float % 50 in our view should significantly expand, driven by the US franchise. India 30-day avg turnover US$m 7.0 Number shares on issue m 282.0 growth should be in the 10-15% range, impacted by factors like the FDC ban and the NLEM (National List of Essential Medicines). Management remains Investment fundamentals confident that the India business will continue to grow strong over the long Year end 31 Mar 2015A 2016E 2017E 2018E term. R&D as % to sales will be capped @11%. Revenue bn 66.1 76.5 94.9 109.4 EBIT bn 11.6 11.6 23.9 26.1 . Venezuela: GNP reported FY16 sales of Rs3.2bn, EBITDA of Rs1.27bn and EBIT growth % 8.4 0.6 105.2 9.3 Recurring profit bn 9.7 10.0 22.4 25.1 PAT of Rs750m. The company has written off receivables (inventory net of all Reported profit bn 4.8 4.9 16.9 18.9 commitments) which the Venezuelan subsidiary owed it. GNP stopped Adjusted profit bn 7.5 7.0 16.9 18.9 EPS rep Rs 17.52 17.46 59.99 67.07 supplies to Venezuela in Nov-15 and only sold local inventory worth ~US$7m EPS rep growth % -12.3 -0.4 243.7 11.8 in 4Q. Net write-off this quarter related to Venuzuela: (1) translation losses EPS adj Rs 27.64 24.88 59.99 67.07 EPS adj growth % 3.4 -10.0 141.1 11.8 due to currency depreciation above EBITDA were Rs840m; and, (2) Rs1b PER rep x 49.1 49.3 14.4 12.8 written off directly to the FCTR account on the B/S. At the end of FY16 ~ Rs3b PER adj x 31.2 34.6 14.4 12.8 Total DPS Rs 2.00 2.00 2.00 2.00 of cash was still lying in the subsidiary with potential risk of it being written off. Total div yield % 0.2 0.2 0.2 0.2 ROA % 13.1 12.2 23.4 22.2 . Cash Generation: GNP’s net debt at FY16 end stood at Rs31.5bn vs. Rs30b ROE % 25.1 23.2 43.7 33.7 in FY15 despite the capital raise. GNP expects launch of Zetia in 4QFY17 EV/EBITDA x 18.7 19.1 10.3 9.4 Net debt/equity % 101.1 102.0 54.0 29.7 help generate significant cash, which will be used to pay down debt. Lack of P/BV x 7.8 7.9 5.2 3.7 free cash generation has been a key concern on the stock and we expect GNP IN rel BSE Sensex performance, & significant growth in the US over the medium term to help offset this. rec history . Other takeaways:(i) Expect Seretide launch in a few European countries, late FY17 (device tied up with Celon); (ii) Fixed asset additions in FY16 were Rs4.75bn and intangible assets of Rs2.98bn (largely due to the Celon inhaler deal); (iii) FCTR impacted for FY16 by Rs3b (Venezuela Rs1.1b, Swiss sub by Rs1.18b, and the rest from Argentina, Brazil and Russia); and, (iv) Cash conversion days stood at 99 in FY16 (receivable days of 120, inventory days of 75 and payable days of 96) vs 97 days in FY15.
Earnings and target price revision Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . No change. Source: FactSet, Macquarie Research, May 2016 (all figures in INR unless noted) Price catalyst
. 12-month price target: Rs1,140.00 based on a Sum of Parts methodology. Analyst(s) Abhishek Singhal . Catalyst: 1) Incremental US approval, 2) Zetia launch in 3Q FY17 +91 22 6720 4086 [email protected] Alankar Garude, CFA Action and recommendation +91 22 6720 4134 [email protected] . We argue for a multiple rerating of the stock, given a superior earnings growth 13 May 2016 profile, improving ROIC and a currently negatively valued innovation option, Macquarie Capital Securities India (Pvt) which is counterintuitive to us. Valuations look attractive, with GNP shares Ltd trading at a PER of ~13x FY18E EPS. Current weakness is an opportunity for
investors to add positions with a 12-month view. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
13
JAPAN Honda Motor 7267 JP Outperform Recall subsides but SG&A picks up Price (at 06:00, 10 May 2016 GMT) ¥3,045
Valuation ¥ 4,200 Conclusion - PER . 12-month target ¥ 4,200 Honda reported FY3/16 Q4 results after market close on May 13. Q4 results Upside/Downside % +37.9 were hit by a large Takata recall charge, but the underlying performance was 12-month TSR % +42.3 solid. FY3/17 guidance was disappointing given the tailwind Honda should be Volatility Index Low/Medium experiencing from product flow and the clearing of the Takata recall; rising GICS sector Automobiles & SG&A seems to be the culprit. However, Honda remains our longer-term top pick Components as it has the best product flow among auto majors. Reiterate Outperform rating. Market cap ¥bn 5,523 Impact Market cap US$m 51,779 Free float % 27 . Ex one-timer and FX, Q4 result was solid: Q4 revenue ¥3.66tn vs. ¥3.70tn 30-day avg turnover US$m 129.3 consensus, with OP loss of ¥64bn vs. consensus ¥146bn (3.9% OPM) as Foreign ownership % Honda booked a ¥267bn charge related to Takata airbag recall. FX also served Number shares on issue m 1,814 as a ¥43bn headwind, but underlying volume, mix, and cost improvement trends Investment fundamentals were strong; ex recall/FX, OP would have been a robust ¥246bn (6.7% OPM). Year end 31 Mar 2015A 2016E 2017E 2018E . Takata charge bigger than expected, but positive to shares: Honda Revenue bn 13,328 14,620 15,767 15,998 EBIT bn 671 701 814 994 booked a ¥267bn charge on 21mn units related to the Takata recall. EBIT growth % -10.6 4.6 16.1 22.1 Management explained that this recall takes care of the remaining inflators Recurring profit bn 806 686 818 1,001 Reported profit bn 509 538 626 740 without desiccants. The recall was higher and earlier than we had anticipated Adjusted profit bn 606 538 626 740 (our estimate was ¥150bn on 15M units in FY3/17 Q1; see p.11-12 of this note EPS rep ¥ 283 299 347 411 EPS rep growth % -11.3 5.6 16.3 18.3 for details). However, we still view this positively as this substantially reduces EPS adj ¥ 336 299 347 411 the opacity surrounding future recall concerns, in our view. EPS adj growth % 5.5 -11.1 16.3 18.3 PER rep x 10.8 10.2 8.8 7.4 Turning to inflators with desiccants, Honda commented that it currently has no PER adj x 9.1 10.2 8.8 7.4 Total DPS ¥ 88 88 130 146 plans to recall them, but will make a final decision upon the completion of Total div yield % 2.9 2.9 4.3 4.8 testing being conducted. This ‘open issue’ will remain an overhang for Honda ROA % 4.0 3.8 4.2 5.0 ROE % 9.6 7.9 8.8 10.0 shares, in our view. We continue to believe that Honda will not recall these EV/EBITDA x 6.6 4.5 4.1 3.9 inflators; if it did the cost would be ¥360bn (see p.11-12 of this note for details). Net debt/equity % 78.8 95.4 89.7 79.6 P/BV x 0.8 0.8 0.8 0.7 . FY 3/17 guidance bogged down by high SG&A expense: Honda is
7267 JP vs. TOPIX, & rec history forecasting ¥600bn OP for FY 3/17, well below cons ¥746bn and our ¥814bn estimates. Our ¥105/USD assumption is in line with the company’s, but Honda also sees an additional ¥121bn of headwinds from other currencies, which is significantly higher than our estimate. Our volume assumptions are also ahead of Honda’s, by 115k on the auto side and 400k on the motorcycle side, which should be worth about ¥25bn. Adjusting our ¥814bn estimate for FX and volume, we are still ~¥90bn above guidance; we believe the discrepancy arises from higher than expected SG&A expense. Management explained that the need to invest in future technology (such as fuel efficiency, connectivity, ADAS) is
Note: Recommendation timeline - if not a continuous line, then there was no increasing, which likely lead Honda to bake in higher than historical SG&A. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 Earnings and target price revision (all figures in JPY unless noted)
. We will revisit our forecasts and target pending further updates from Honda.
Analyst(s) Price catalyst Takuo Katayama +81 3 3512 7856 [email protected] . 12-month price target: ¥4,200 based on a PER methodology. Eric Verkuilen +81 3 3512 7388 [email protected] . Catalyst: Monthly US/China sales data, FY3/17 Q1 results (Jul).
16 May 2016 Action and recommendation Macquarie Capital Securities (Japan) . Honda remains our longer-term top pick as it has the best product cadence Limited among major automakers. The new Civic kicked it all off in Nov 2015, followed by FMCs of the Ridgeline, Odyssey, and the CR-V later this year. Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
14
TAIWAN Innolux 3481 TT Neutral Time is running out Price (at 05:30, 13 May 2016 GMT) NT$9.55
Valuation NT$ 10.40 Event - Price to Book 12-month target NT$ 10.40 . Innolux reported disappointing 1Q16 earnings—a loss per share of NT$0.86 Upside/Downside % +8.9 vs Macq/consensus’ loss estimate of NT$0.25-0.57/share. Innolux has show- th 12-month TSR % +8.9 cased its 7.6” OLED on 12 May 2016, we would stay on the sidelines until Volatility Index Medium we see more signs of a further ramp-up in OLED. GICS sector . We reiterate Neutral, keeping our target price unchanged at NT$10.4 (P/BV of Technology Hardware & Equipment 0.4x on average of 2H16E and 1H17E book values). Market cap NT$m 95,048 Market cap US$m 2,824 Impact Free float % 28 30-day avg turnover US$m 10.2 . 1Q16 results missed expectation due to disappointing margins. Innolux’s Number shares on issue m 9,953 1Q16 revenue of NT$56.4bn (-31% QoQ, -44% YoY) was18% below consensus, due mainly to price competition and impact of earthquakes. GM, Investment fundamentals at -7.2%, was 7.1ppt/14.1ppt shy of our and the Street’s expectation, due to Year end 31 Dec 2015A 2016E 2017E 2018E Revenue bn 364.1 303.0 291.6 270.6 pricing pressure and lower-than-expected utilisation rate. This, with operating Reported profit bn 10.8 0.4 5.6 6.2 leverage, translates to a 7.6-12.0 OPM miss. Overall, LPS (loss per share) of EPS rep NT$ 1.09 0.04 0.56 0.62 EPS rep growth % -51.9 -96.5 1,375.3 11.0 NT$0.86 (vs LPS of NT$0.68 in 4Q15) was considerably higher than PER rep x 8.8 252.4 17.1 15.4 Macq/consensus’ LPS estimates of NT$0.25-0.57. Total DPS NT$ 0.60 0.00 0.00 0.00 Total div yield % 6.3 0.0 0.0 0.0 . 2Q16 to be another challenging quarter. We expect more near-term ROA % 5.1 1.2 1.5 1.5 ROE % 4.6 0.2 2.4 2.7 headwind before synergies from Sharp start paying off. We are now modelling EV/EBITDA x 1.2 2.0 2.0 2.8 2Q16 revenue to decline by 19% YoY (but +35% QoQ from the low base in P/BV x 0.4 0.4 0.4 0.4 1Q16 as some production lines were curtailed post earthquake in Feb), with 3481 TT rel TAIEX performance, & rec GM/OPM to decline by 5.7-6.0ppt YoY due to intensifying competition. history . Advanced-panel development the key to grow amidst intensifying mezzanine threat. While we believe Innolux has been speeding up its advanced-technologies development (equipment procurement, R&D, capacity building), we believe time is of the essence for Innolux to further ramp up capacity, given an intensifying mezzanine threat (i.e. Korea/Japan peers in the high-end segment and China rivals in the mid- to low-end segment). Notably, we expect a-Si (amorphous silicon) demand from smartphone makers to slow down due to market saturation, while OLED (organic light- emitting diode) and LTPS (low-temperature polycrystalline silicon) panels see Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. stronger demand, driven by smartphone brands’ product differentiation. We Source: FactSet, Macquarie Research, May 2016 appreciate Innolux’s solid R&D and strong execution by leveraging Hon Hai (all figures in NT$ unless noted, TP in TWD) group’s resources, but we also see Chinese peers catching up, backed by
government support. Earnings and target price revision . We cut our 2016 EPS estimate to NT$0.04 from NT$0.53, to factor-in weaker- Analyst(s) than-expected 1Q16 and worsening industry supply-demand from Chinese Macquarie Capital Securities Limited, Taiwan panel makers’ capacity ramp-up. The earnings revision resulted in <1% Branch Louis Cheng, CFA change to our valuation base (i.e. P/BV on average of 2H16 and 1H17E BV). +886 2 2734 7526 [email protected] Jeffrey Ohlweiler Price catalyst +886 2 2734 7512 [email protected] Macquarie Capital Limited . 12-month price target: NT$10.40 based on a Price to Book methodology. Allen Chang +852 3922 1136 [email protected] . Catalyst: Industry supply-demand rebalance, new business development. Verena Jeng +852 3922 3766 [email protected] Action and recommendation
13 May 2016 . Reiterate N. TP of NT$10.4 (0.4x 2H16E/1H17E PB) is unchanged. Our target PB target multiple of 0.4x is the company’s trough PB multiple.
Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
15
JAPAN Japan Display 6740 JP Neutral Lagging behind in AMOLED Price (at 06:00, 13 May 2016 GMT) ¥200
Valuation ¥ 200 Conclusion - Price to Book 12-month target ¥ 200 . We highlight impressions post the FY3/16 results on 12 May, and the group Upside/Downside % +0.0 meeting. One take-away is that JDI looks to be lagging behind in AMOLED 12-month TSR % +0.0 R&D – especially vs market leader Samsung. We reiterate our Neutral rating. Volatility Index High Impact GICS sector Technology Hardware & Equipment . FY3/16 results: Revenues rose 29% YoY to ¥989bn and OP increased 225% Market cap ¥m 120,282 YoY to ¥16.7bn, but the results came in below our forecasts (OP ¥21bn) and Market cap US$m 1,108 market expectations. Weak LTPS panel demand from Apple was a major 30-day avg turnover US$m 10.6 factor behind the sales shortfall; JDI also booked significant charges and Number shares on issue m 601.4 impairments, including ¥11.2bn in non-operating charges linked to the sudden Investment fundamentals Yen appreciation in the March quarter. Year end 31 Mar 2016A 2017E 2018E 2019E . 1H FY3/17 outlook: JDI is guiding to an 11% QoQ revenue increase in FY1Q to Revenue bn 989.1 998.1 993.0 964.3 EBIT bn 16.7 17.3 30.3 32.5 ¥195bn, driven by higher sales to China smartphone firms (we assume Huawei EBIT growth % 224.7 3.8 74.9 7.3 is a major customer). JDI expects further growth to ¥200-300bn in FY2Q, again Recurring profit bn -28.0 7.1 22.3 23.5 Reported profit bn -31.8 2.3 15.1 14.7 driven by China firms as well as a pickup in shipments to their top customer (i.e. EPS rep ¥ -53.1 3.9 25.0 24.4 Apple). We estimate FY1Q OP of ¥1bn, rising to ¥5.4bn in FY2Q. EPS rep growth % -160.1 nmf 546.3 -2.5 PER rep x nmf 51.6 8.0 8.2 . JDI seems cautious on their AMOLED traction: Management Total DPS ¥ 0.0 0.0 0.0 0.0 Total div yield % 0.0 0.0 0.0 0.0 acknowledges that while they are still targeting mass production of AMOLED ROA % 2.0 2.0 3.2 3.5 panels in 2018, they may not initially be a leading supplier to their main ROE % -8.1 0.9 4.2 4.0 EV/EBITDA x 1.1 0.9 0.8 0.8 customer (i.e. Apple). JDI continues to lag in terms of development – the firm Net debt/equity % -2.9 4.6 -7.8 0.8 has only just announced ¥50bn in capex, spread over two years, for a P/BV x 0.3 0.3 0.3 0.3 development line to be housed at the Mobara Gen 6 fab, and there is no 6740 JP vs TOPIX, & rec history indication that they will imminently commit to a mass production line. In contrast, Sharp/HH have committed to ¥200bn in spending on AMOLED capacity in 2016-19, and Samsung is already well ahead in mass production experience, as highlighted by Daniel Kim. . Priority is still on LTPS-LCD: Our impression is that JDI would rather take full advantage of its leading position in LTPS-LCD than pour resources into rushing AMOLED into production. JDI’s ‘divided loyalties’ between LTPS-LCD and AMOLED, historical indecision, and lack of resources – the company would like customer prepayments/funding for its investments have in our view already set Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. them back. If JDI fails to secure significant AMOLED business at Apple, their Source: FactSet, Macquarie Research, May 2016 fallback will be to non-smartphone applications. Notably, JDI has highlighted (all figures in JPY unless noted) new goals for automotive display sales – ¥300bn in automotive LTPS panel
sales by 2021. But it is not clear than this would offset a drop in their sales to Apple, which likely accounted for >50% of their panel sales in FY3/16. Earnings and target price revision . We have cut our FY3/17 OP estimate by 37% and our FY3/18 OP forecast by 28%. We have lowered our TP to ¥200 from ¥260 based on 0.3x P/B FY3/18E. Analyst(s) Damian Thong, CFA Price catalyst +81 3 3512 7877 [email protected] Ansel Laudo . 12-month price target: ¥200 based on a Price to Book methodology. +81 3 3512 7874 [email protected] . Catalyst: Apple demand. 16 May 2016 Macquarie Capital Securities (Japan) Action and recommendation Limited . We plan on a further review; however in line with the Macquarie team view, we are bearish on the outlook for the FPD industry due to oversupply risks.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
16
JAPAN Konica Minolta 4902 JP Outperform Targeting growth despite headwinds Price (at 06:00, 12 May 2016 GMT) ¥965
Valuation ¥ 1,105- Conclusion 1,275 - Price to Book . K-M provided better guidance (+10% YoY to ¥66bn OP, vs MRE of ¥63bn) 12-month target ¥ 1,105 than we had expected, and reaffirmed their growth stance. Against the context Upside/Downside % +14.5 of a more challenging environment and Yen appreciation, we believe K-M is 12-month TSR % +17.6 executing well relative to peers such as Canon and Ricoh. K-M remains our Volatility Index Medium preferred pick in office/production printing equipment. Outperform; TP: ¥1,105. GICS sector Technology Hardware & Equipment Impact Market cap ¥m 485,071 . FY3/16 results: Revenues rose 3% YoY to ¥1.03tr but OP fell 9% to ¥60.1bn, Market cap US$m 4,448 in line with the Nikkei preview but below our ¥63bn forecast and the ¥73bn 30-day avg turnover US$m 19.5 goal, due to Yen appreciation vs the Euro, competitive pressures in printing Number shares on issue m 502.7 systems and higher investments and reform costs. NP of ¥32bn, down 22%, Investment fundamentals included a ¥3.8bn DTA impairment in tandem with the corporate tax rate cut. Year end 31 Mar 2016A 2017E 2018E 2019E Revenue bn 1,031.7 1,047.8 1,077.3 1,115.7 . Business Technologies: BT revenues and OP missed our estimates by 2% EBIT bn 60.1 64.2 70.5 78.8 and 6% respectively, notably due to volume shortfalls e.g. in Production Printing EBIT growth % -9.3 6.9 9.7 11.8 Recurring profit bn 58.0 63.8 69.4 77.7 (PP). On a YoY comparison forex headwinds were a major pressure. In FY3/17, Reported profit bn 32.0 42.7 46.5 52.1 K-M projects a 3% OP decline on flat revenue, due to pressure in Office. EPS rep ¥ 64.4 86.6 94.2 105.5 EPS rep growth % -0.4 34.4 8.8 12.1 Office/Services sales rose 2% YoY to ¥597.2bn and Commercial/ PER rep x 15.0 11.1 10.2 9.1 Total DPS ¥ 30.0 30.0 30.0 35.0 Industrial Printing sales rose 6% to ¥224.6bn. The forex drag on BT OP Total div yield % 3.1 3.1 3.1 3.6 was ¥8.6bn, i.e. 12% pressure vs FY3/15 OP. Higher volumes and cost ROA % 6.2 6.5 6.9 7.5 ROE % 6.3 8.1 8.4 8.9 cuts held the OP fall to 3% YoY to ¥70.2bn. Ex-forex, OP growth would EV/EBITDA x 4.9 4.7 4.4 4.1 have been 9%. Net debt/equity % 13.3 11.3 6.2 1.8 P/BV x 0.9 0.9 0.8 0.8 A3 MFP units rose a solid 5% YoY in FY3/16 and +7% YoY in 4Q – good 4902 JP vs TOPIX, & rec history performance vs peers. A3 colour MFP units overall rose 3% YoY and a solid 9% YoY in 4Q, while A3 mono MFP units increased 7% YoY in the FY. On the negative side, Office Product non-hardware revenue growth decelerated to -0.3% YoY ex-forex with particular weakness in Japan (-2%). This was offset by 4.5% growth in Production Printing non-hardware sales. Disappointingly, K-M missed targets for the new colour MFPs; in Europe and the US, only 55% and 44% of sales came from the new MFPs (vs 60% and 50% targets). Also disappointing were flat colour PP units with short-falls in Mid PP due to competition; K-M only reached 76% of the Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. WW target. Source: FactSet, Macquarie Research, May 2016 (all figures in JPY unless noted) . Industrial Products: Revenues decreased 6% YoY and OP fell 14% YoY to
¥17bn – slightly above MRE. As expected, a 17% YoY drop in Functional Materials (TAC film) was the major drag. In FY3/17, K-M projects 29% OP growth driven by colour measurement equipment and recovery in TAC film. Earnings and target price revision . We have raised our FY3/17 OP estimate by 2%; our FY3/17-18 NP estimates have been lifted by 6% and 4%. Our ¥1,105 TP is unchanged (1x P/B FY3/18E). Analyst(s) Damian Thong, CFA Price catalyst +81 3 3512 7877 [email protected] Ansel Laudo . 12-month price target: ¥1,105 based on a Price to Book methodology. +81 3 3512 7874 [email protected] . Catalyst: FPD panel production; forex movements; MFP and PP sales trends. 13 May 2016 Macquarie Capital Securities (Japan) Action and recommendation Limited . K-M is our favoured office equipment stock. . Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
17
KOREA LIG NEX1 079550 KS Outperform Export capability will be proven Price (at 06:00, 13 May 2016 GMT) Won96,200
Valuation Won 194,020 Event - DCF (WACC 8.0%, beta 1.0, ERP 6.0%, RFR 2.0%, TGR 3.0%) 12-month target Won 155,000 . LIG Nex1 reported 1Q16 OP of Won27.1bn (+82% QoQ, +45% YoY), which Upside/Downside % +61.1 met the consensus estimate but missed our forecast of Won49.4bn (Fig 1). 12-month TSR % +63.0 Volatility Index High Impact GICS sector Capital Goods . The miss was due to slower-than-expected backlog-to-revenue Market cap Wonbn 2,116 conversion: We assumed a backlog-to-revenue conversion ratio of 12.5% in Market cap US$m 1,813 1Q16 based on 3Q-4Q15 trends, because the quarterly financials became 30-day avg turnover US$m 10.7 available only from 3Q15 after the IPO. However, the actual backlog-to- Number shares on issue m 22.00 revenue conversion ratio was only 6.6% in 1Q16, so revenue missed our Investment fundamentals estimate by 22% (Figs 2, 4). Despite weaker revenue, the fixed costs such as Year end 31 Dec 2015A 2016E 2017E 2018E labour and SG&A expenses were largely in line with our estimates, so the Revenue bn 1,903.7 2,063.7 2,381.8 3,117.3 EBIT bn 112.2 185.2 228.5 385.4 operating profit missed by a bigger margin – 45% against our estimate (Fig 4). EBIT growth % 55.8 65.1 23.4 68.7 The company explains 1Q revenue weakness is due to seasonality as their Reported profit bn 83.0 143.6 179.8 305.3 Adjusted profit bn 85.1 143.9 180.2 306.1 deliveries tend to get concentrated towards the year-end and says this EPS rep Won 3,953 6,526 8,172 13,875 seasonal pattern will be repeated going forward. Thus, we lower our backlog- EPS rep growth % 56.4 65.1 25.2 69.8 EPS adj Won 4,027 6,543 8,193 13,915 to-revenue conversion ratios going forward, as we assume much lower ratios EPS adj growth % 53.6 62.5 25.2 69.8 in the first halves (Fig 3), and this leads us to lower our revenue estimates for PER rep x 24.3 14.7 11.8 6.9 PER adj x 23.9 14.7 11.7 6.9 2017 and 2018 by 12% and 3% (Fig 5). Total DPS Won 940 1,630 2,040 3,470 Total div yield % 1.0 1.7 2.1 3.6 . We think LIG Nex1 will start generating meaningful export revenue from ROA % 6.6 9.9 10.7 14.8 2018: We note the new order intake in 4Q15 was noticeably large at Won2.2 ROE % 18.2 22.9 24.0 32.1 EV/EBITDA x 13.2 9.0 7.5 4.8 trillion (Fig 6). The company disclosed details on Won434bn of new orders in Net debt/equity % -5.2 -3.5 -9.3 -23.9 4Q through public filings, but it says it cannot disclose details on the P/BV x 3.7 3.1 2.6 2.0 remainder due to a confidentiality agreement with its client. We suspect the 079550 KS rel KOSPI performance, & remainder is partially a major export order, as LIG Nex1’s CEO said the rec history company was marketing the Raybolt anti-tank missile to a Middle Eastern country in his interview with the Chosun Ilbo in February 2015. We highlighted in our initiation report that the market underestimated LIG Nex1’s export potential, and we think our thesis will be proven in 2018, when the new order likely to have been won in 4Q15 will start generating meaningful revenue. The company says it is in advanced negotiations with multiple potential foreign buyers, so we think additional export order wins are likely in late 2016. Earnings and target price revision
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . We leave our 2016 OP forecast the same, but we cut our 2017 and 2018 Source: FactSet, Macquarie Research, May 2016 estimates by 28% and 7% on downward revenue revisions. But, this is simply (all figures in Won unless noted, TP in KRW) a revenue recognition timing issue, as we raise 2019-20 OP forecasts by 8-38%
(Fig 5). We lower our TP to Won155,000 from Won175,000. We derive our Won155,000 TP by applying a target PER of 11.2x (20% discount to the global peer average) to our 2018 EPS estimate, because FY18 is when many projects currently in the R&D pipeline move into production phases.
Analyst(s) Price catalyst Kwang Cho +822 3705 4953 [email protected] . 12-month price target: Won155,000 based on a PER methodology. Rose Kim +822 3705 9815 [email protected] . Catalyst: Major export order wins.
16 May 2016 Action and recommendation Macquarie Securities Korea Limited . We maintain Outperform.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
18
TAIWAN
MacVisit: Arcadyan
3596 TT Not rated Stock price as of 12/05/2016 NT$ 48.0 Expansion outside Europe GICS sector Technology Hardware & Equipment . Arcadyan is a leading CPE (customer-premises equipment) manufacturer Market cap US$m 250 Avg Value Traded (3m) US$m 9.7 specializing in broadband access, multimedia and wireless technologies. It is 12m high/low NT$ 55.9/18.4 22% owned by Compal (2324 TT, NT$17.90, Underperform, TP: NT$15.30). PER FY16 x 10.1 The company’s share of global broadband CPE market revenue was ~7% in P/BV FY16 x 1.2 2014, with mainly telco operator customers such as Deutsch Telekom. Arcadyan has three product categories: (a) Broadband (70% of 2015 sales), Historical financials which includes IAD (Integrated Access Device, ~30% of 2015 sales), STB (Set-top-box, ~30%), PON (Passive optical network, 4%), etc, (b) gateway YE Dec (NT$m) 2012A 2013A 2014A 2015A Revenue 15,037 17,015 17,428 19,975 (23%), and (c) Wi-Fi module (7%). Among these, IAD and STB have higher YoY growth -13.5% 13.2% 2.4% 14.6% margins than the corporate average. Operating profit 336 622 815 536 YoY growth -40% 85% 31% -34% . EPS (NT$) 2.52 4.15 4.29 3.06 4K STB driving midterm growth for the industry: According to IHS, the YoY growth -39% 65% 3% -29% global pay-TV UHD (4K) STB market, valued by operators’ purchases, is GM 12.4% 14.2% 15.7% 11.9% expected to grow from US$240m in 2015 to US$5.4bn in 2019. This would be OPM 2.2% 3.7% 4.7% 2.7% Source: Company data, FactSet, May 2016 driven by launch of UHD service and supported content by service providers (cable/telco/satellite). Arcadyan focuses on IP STB for telcos, which saw 50% sales growth in 2015 thanks to new customers. The company expects the Share Price Driver increasing 4K STB penetration to further drive midterm growth and sustain the ASP. Arcadyan also has a JV with Compal, called Compal Broadband Thematic Networks, producing cable TV STB, which contributes non-op income. Growth . Technology migration the growth catalyst for IAD: For Arcadyan, IAD Value products refer to integrated devices combining at least two of the following Event three functions – DSL, Wi-Fi, or VoIP. With ADSL upgrading to VDSL/G.fast Source: Macquarie Research, May 2016 and the Wi-Fi migration to 802.11ac standards, the company expects the
sustainable demand and ASP to maintain the growth momentum for IAD Price chart products, in addition to new order wins.
(NT$) . Lowering Europe sales concentration opens another door: With 60%+ 70 sales exposure to Europe (mainly telcos) in 2015, Arcadyan suffered from 60 EUR depreciation, which largely eroded the high margins for IAD and STB. 50 40 And it also faced fierce pricing competition from Huawei and ZTE, which are 30 more popular in Europe than in the US. Hence, in 2016, the company is 20 expanding more in non-European markets such as the Americas, Japan, 10
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Dec Nov May . Expect 2016 sales to grow 15%+ with improving margins; 1Q16 tracking 3596 Arcadyan above this: Management expect 2016 sales to grow at least 15% on a few Source: FactSet, May 2016 drivers: (1) VDSL replacement and slightly higher ASP in IAD, (2) stable growth for STB, and (3) PON shipment growth. As the European contracts are mostly refreshed and with less EUR exposure, the company expects gross margin in the 12-15% range, improving from 11.9% in 2015. In 1Q16, Arcadyan’s sales increased 26% YoY (+3% QoQ) with gross margin of 15.2%. Analyst(s) . Valuation and stock performance: The stock is trading at 10x/9x 2016/2017 Kaylin Tsai +886 2 2734 7523 [email protected] PE (vs. its 3-year historical avg. of 10x) based on Bloomberg consensus Jeffrey Ohlweiler earnings estimates. The share price is almost double the trough in early Aug +886 2 2734 7512 [email protected] 2015. The dividend payout ratio for the company is 50%+, and it recently 13 May 2016 announced a cash dividend of NT$1.6, implying 52% payout and 4% dividend Macquarie Capital Securities Limited, yield. Taiwan Branch
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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TAIWAN
MacVisit: D-Link
2332 TT Not rated Stock price as of 12/05/2016 NT$ 9.5 Ongoing transformation GICS sector Technology Hardware & Equipment . D-link is a global #3 consumer brand for WLAN (wireless local area network) Market cap US$m 203 Avg Value Traded (3m) US$m 0.6 devices in revenue and global #1 consumer IP cam in shipments. Established 12m high/low NT$ 15.3/7.8 in 1986 and listed in 1994, D-Link has ~70% revenue exposure to the PER FY15 x nm consumer market and ~60% to emerging markets (EM). Its 2015 revenue split P/BV FY15 x 0.6 was 27% switch, 37% wireless (inc. AP (access point), router, wireless network cards), 16% broadband (inc. xDSL, cable modem), 12% digital home Historical financials (inc. IP camera, OTT STB, NAS (network-attached storage)), and 9% other. YE Dec (NT$m) 2012A 2013A 2014A 2015A . D-Link outsources all its hardware production. One of its production partners Revenue 32,467 30,558 30,306 26,614 is Alpha Networks (3380 TT, N), its ODM spin-off in 2003 in which D-Link still YoY growth -0.1% -5.9% -0.8% -12.2% has 35% share. Others include Cameo (6142 TT, NR). Operating profit 693 398 307 -1,587 YoY growth -22% -43% -23% nm . Competition in the consumer market, currency and slow economy led to EPS (NT$) 1.23 1.06 0.10 (2.90) YoY growth -19% -14% -91% nm losses in 2015: D-Link’s 2015 sales declined 12% YoY and turned to an GM 29.2% 26.4% 27.3% 24.2% operating loss of NT$1.6bn, or -6.0% OPM vs. 1.0% in 2014. Given high OPM 2.1% 1.3% 1.0% -6.0% exposure to the consumer market and the emerging markets, D-Link has Source: Company data, FactSet, May 2016 been suffering from pricing competition from TP-Link, Huawei, ZTE, etc. Even hardware brand names such as Xiaomi and Asustek are entering the market. Share Price Driver Due to low entry barriers and product commoditization for the industry, D-Link Thematic has to cut prices and pay a higher rebate to sustain its market share, which leads to a lower top line and margins. In addition, the slower economy in Growth emerging markets depressed end demand and D-Link incurred inventory Value provision losses. The unfavourable currencies also caused FX losses. D-Link Event continued to report an operating loss in 1Q16. Source: Macquarie Research, December 2015 . Focus on margin recovery and high end/niche products: D-Link has been
trying to increase exposure to niche or high-end products targeting telco, SMB Price chart and enterprise, eg. the introduction of cloud switches and high-end router (NT$) (US$300+ vs. US$30-40 for an average one). D-Link also expects to ride on 35 the 802.11ac upgrade cycle for both enterprise and consumer markets in 30 2016. It got orders from Chunghwa Telecom in November 2015 for its 25 20 enterprise AP with 802.11ac to increase public Wi-Fi speed. 15 10 . Smart home – from hardware to platform: Leveraging its global leading 5 position in consumer IP cam, wireless technology and its software platform
0 (eg.“Mydlink” for IP cam), D-Link expects the increasing smart home adoption to
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May May May May May into the market via telcos, which has become a major group of providers for 2332 D-Link smart home services. This business model could provide larger volume but Source: TEJ, May 2016 lower margins as D-Link could serve only as a white box hardware provider.
. Top management reshuffle and organization readjustment: D-Link has gone through a top management reshuffle in 2015 including the CEO, president, and CFO. The Chairman and brother of the founder, Mr. Kao, retired in March 2016. The position was taken over by John Hsuan, honorary Analyst(s) vice chairman of UMC (2303 TT). The company also executed a 10% global Kaylin Tsai +886 2 2734 7523 [email protected] headcount reduction in 2015 to reduce opex. Jeffrey Ohlweiler +886 2 2734 7512 [email protected] . Valuation and stock performance: D-Link doesn’t have Bloomberg consensus estimates. Based on 2015 financials, it is trading at 0.6x PB, below 13 May 2016 its three-year average of 0.8x. It didn’t pay any dividend due to earnings loss Macquarie Capital Securities Limited, in 2015. The share price has been declining since 2011 due to intensifying Taiwan Branch competition in the brand market.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
20
HONG KONG
MacVisit: Differ Group
6878 HK Not rated Stock price as of 12/05/2016 HK$ 0.68 Dare to be different (II) GICS sector Specialty Finance Differ Group is a private-sector, non-bank financial company headquartered in Market cap US$m 372 Avg Value Traded (3m) US$m 0.55 Xiamen. The company could be seen as an interesting play on China’s financial 12m high/low HK$ 2.66/0.59 deregulation and liberalisation, specifically the promotion of finance leasing, PER FY15 x 39 micro-credit, and distressed asset management as authorities seek to diversify P/BV FY14 x 3.8 away from China’s SOE bank-dominant financial system. What has changed? Historical financials …Quite a lot has happened at Differ since our last MacVisit note of December YE Dec (Rmb m) 2013A 2014A 2015A 2014. Differ is de-emphasizing its traditional credit guarantee and lending Revenue 76 118 183 % growth 35 55 55 businesses to Fujian-based SME manufacturers. The company’s strategy now is EBITDA 57 99 149 to focus more on specific areas of finance leasing. To that end, last year Differ % growth 34 74 50 acquired Jiashi, a private-sector Fujian-based finance leasing firm, in a move EPS 0.01 0.02 0.03 % growth N/A 39 42 that almost doubled the size of its 2H15 loans & receivables. The company is EBIT Margin 72 82 80 also getting more active in distressed-asset management. Source: Company data, Bloomberg,May 2016 Finance lease initiatives: Management sees select opportunities in state- supported initiatives including the growth of Fujian’s long-distance fishing fleet Share Price Driver and the use of agricultural drones for the application of pesticides. So far Differ has financed 10 vessels and plans to add another four by year-end. Since Thematic embarking on the agricultural drone finance project, Differ has financed 250 units Growth totaling RMB50m and plans to ramp this up to 500 units by yearend. Differ Value reckons this nascent industry could be worth an annual RMB10bn nationally. Event Distressed-asset management: Teaming up with the AMCs. On May 6, Differ Source: Macquarie Research, May 2016 issued US$30m in CBs to SOE asset managers Huarong and Cinda. Roughly
half of the proceeds will be used to fund its own distressed asset management business. Differ targets an IRR of 30% on this business, where it sees significant Share price history growth potential. But actual IRR on projects executed in 2015 was higher at 42%. Operational update. Differ’s total revenues grew 55.1% YoY to RMB183.2 3.00 million in 2015 driven by the financial services (+53% YoY), finance lease (+91%) 2.50 and direct loan (+25%) segments. Net income surged 45% YoY to RMB105.5 2.00 1.50 million and EPS of RMB0.0256 was up 40% from the previous year. These P&L 1.00 numbers only include one month of consolidation of the acquired finance lease 0.50
0.00 firm (which was consolidated starting from December). After transferring its
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Share price (HKD) 90-day MA Risks. A small-cap finance firm from Fujian might face some investor bias given China’s macro headwinds. Asset quality could be a downside risk for Differ’s Note: Data includes Differ’s previous GEM listing (prior financing exposures, and not just an opportunity for its distressed asset business. ticker code: 8076 HK). Source: Bloomberg, May 2016 Provisioning was zero in 2014 and 0.5% in 2015, and management says it has pulled back from higher risk exposures. More specifically to the current initiatives,
state support for the finance lease initiatives could be withdrawn, in which case
the growth opportunities in these areas could be less compelling. What makes it interesting? Analyst(s) As a general statement, we like non-SOEs where founders and key decision Matthew Smith, CFA makers retain significant stakes in the economic outcome of the business—we +86 21 2412 9022 [email protected] Erin Lin only wish there were more of them in the Chinese financials space. In particular, +86 21 2412 9028 [email protected] the combination of policy-makers’ gradual moves toward economic marketization
including promotion of finance lease industries, the group’s ability to be flexible 13 May 2016 during challenging times for creditors in China, and the rising supply of Macquarie Capital Limited distressed assets in China could make the stock interesting to investors.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
21
TAIWAN
MacVisit: Gemtek
4906 TT Not rated Stock price as of 12/05/2016 NT$ 16.4 A different IoT business model GICS sector Technology Hardware & Equipment . Gemtek is a broadband and wireless CPE (customer-premises equipment) Market cap US$m 151 Avg Value Traded (3m) US$m 1.7 supplier with 80%+ sales contribution from telcos /service providers. Its 2015 12m high/low NT$ 24.8/11.1 sales breakdown was 36% broadband access products (IP STB, DSL, GPON), PER FY16 x 20.3 15% Smart Home (hardware for home automation/security systems), 5% P/BV FY16 x 0.6 Cloud foundry (Cloud operation of smart home and other IoT projects), 11% AP routers, 17% telecom infrastructure (LTE routers, small cells), and 16% Wi-Fi clients (Wi-Fi modules). Historical financials YE Dec (NT$m) 2012A 2013A 2014A 2015A . Recurring/high margin Cloud Foundry revenue to be the long term Revenue 26,421 19,929 17,684 17,530 growth driver: Cloud Foundry refers to the cloud operation which carries, YoY growth -6.4% -24.6% -11.3% -0.9% manages, and routes messages from end devices to different application Operating profit 1,083 174 -202 111 YoY growth 630% -84% nm nm services in smart home and smart city projects. This is recurring revenue EPS (NT$) 3.01 1.48 0.23 0.69 which accounted for 5% of Gemtek’s 2015 sales, and the company expects YoY growth 7425% -51% -84% 200% the contribution to increase to 15-20% in 2016. Gemtek expects this unique GM 12.8% 11.7% 10.5% 12.2% OPM 4.1% 0.9% -1.1% 0.6% business model (using hardware as the vehicle to charge cloud operation fees) Source: Company data, FactSet,May 2016 to be the long term growth catalyst and drive its margins.
. Smart Home – total HW and Cloud solution for security service Share Price Driver providers: Gemtek started providing residential gateways, IP cameras, sensor devices, etc, combined with Cloud management system, to Taiwan’s Thematic biggest security service provider, SIGMU (9917 TT), in late 2015. Aside from Growth one-time revenue for the hardware, Gemtek will charge SIGMU an operation Value fee periodically for cloud services such as cloud video recording, sensor data Event collection, end device management, notification, etc. Gemtek will ship new Source: Macquarie Research, May 2016 products to SIGMU in 2Q16 and expects to benefit from the increasing adoption of intelligent home automation/surveillance systems of SIGMU. Price chart . Smart City – expect 16 cities to be covered by 2016, application revenue
(NT$) driving sales growth from 2017: Gemtek works with govts and/or operators 50 on smart city applications. So far it has established LPWAN (Low-Power 45 40 Wide-Area Network) APs for free to cover Taipei (Taiwan) and Chungshan 35 30 (Guangdong, China) cities. It has confirmed that it will ship 300k trackers in 25 20 2016 to be applied to electrical scooters (anti-theft) in Chungshan city, for 15 10 which Gemtek will charge a US$1-2 cloud operation fee per tracker per year. 5
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Dec Nov May 4906 GEMTEK market, ie, objects that need to be monitored or can generate valuable information for residents. For example, Chungshan city is also going to apply Source: TEJ, May 2016 Gemtek’s trackers on manholes to prevent theft, according to the company. Gemtek expects the investments in cloud operation to harvest in 2017 as the revenue from tracker hardware and recurring cloud service fees kicks in. . Expect flattish 2016 before meaningful contribution from smart city projects in 2017: Gemtek’s 2015 sales were flattish as the merger of AT&T and DirecTV in July 2015 reduced its STB orders as clients shifted to satellite Analyst(s) Kaylin Tsai STB. While the order loss could be offset by broadband upgrades to +886 2 2734 7523 [email protected] VDSL/G.fast and LTE small cell shipment growth in 2016, with no significant Jeffrey Ohlweiler sales contribution from smart city projects the company expects 2016 sales +886 2 2734 7512 [email protected] growth to be flattish. But better product mix will be positive to its margins. 13 May 2016 . Valuation and stock performance: Gemtek is trading at 20x/15x of 2016/17 Macquarie Capital Securities Limited, PE (vs. its 3-year avg. of 18x) and 0.6x/0.6x PB based on Bloomberg ests. Taiwan Branch
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
22
TAIWAN
MacVisit: SerComm
5388 TT Not rated Stock price as of 12/05/2016 NT$ 75.7 Get connected, and get smarter GICS sector Technology Hardware & Equipment . SerComm is a leading global CPE (customer-premises equipment) supplier – Market cap US$m 578 Avg Value Traded (3m) US$m 6.4 top 3 in Wi-Fi IAD (integrated access device), FTTx (Fibre-to-the-x, x is where 12m high/low NT$ 89.8/60.1 the fibre ends) products, small cells and a No.1 IP camera supplier in North PER FY16 (Bloomberg) x 11.7 America. About 80% of its sales are from telcos/service providers including P/BV FY16 (Bloomberg) x 2.4 AT&T, China Mobile, Deutsche Telekom and Softbank.
. Its 2015 sales grew 51% YoY, mainly driven by China FTTH (Fiber-to-the- Historical financials Home) deployment. It has ~20% share in China FTTH box market, implying YE Dec (NT$m) 2012A 2013A 2014A 2015A ~15% share globally. Its 2015 sales breakdown: 65% from Home Gateway, Revenue 19,268 19,077 23,193 35,012 16% from Smart Home Control/Surveillance, 9% from SMB Products, and YoY growth 45.5% -1.0% 21.6% 51.0% 10% from Fixed-Mobile Products. SerComm expects future sales growth to be Operating profit 1,033 872 1,180 1,665 YoY growth 84% -16% 35% 41% driven by Smart Home and Fixed-Mobile which have higher margins, while EPS (NT$) 3.90 4.19 4.21 5.57 Home Gateway to be stable and support the economies of scale. The YoY growth 19% 7% 0% 32% company guided 10-20% growth for both top and bottom line in 2016. Its GM 15.5% 16.1% 15.8% 14.2% OPM 5.4% 4.6% 5.1% 4.8% 1Q16 sales grew 39% YoY and earnings grew 60% YoY. Source: Company data, FactSet,May 2016 . Home Gateway - China FTTH deployment peaked in 2015: SerComm’s Home Gateway business includes fibre, cable, and DSL CPE, which has large Share Price Driver volume but lower margins. The segment sales grew 89% in 2015, mainly Thematic driven by FTTH box shipments (12m units in 2015 vs. 4m in 2014) to China on “Broadband China” project. The project originally targeted net increase of Growth 80m FTTH users in 2015-2016, splitting half-half in each year. But the 2015A Value user net add was 51m with 60m+ units FTTH box shipment. Assuming there Event is no upward revision for FTTH user target, the company expects it to sustain Source: Macquarie Research, May 2016 similar FTTH box shipment backed by market share gain and excess FTTH box demand from Chinese telcos. It will also grow cable sales on share gain Price chart in DOCSIS3.0 (Data Over Cable Service Interface Specification) market.
(NT$) . Smart Home - 30% sales growth p.a. on telco’s expansion: SerComm 100 provides total IP-based hardware solutions (Gateway, IP CAM, sensors) with 90 80 integrated software platform to telco operators, mainly in the US/EU, for their 70 60 home automation/security services. This is a rather new initiative for telcos to 50 40 expand their ARPU leveraging their existing network and subscription base. 30 20 SerComm expects telcos to gradually gain market share from traditional 10
0 security service providers on a low base and support a ~30% sales growth p.a.
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Nov Dec May 5388 SerComm . Fixed Mobile - increasing demand for IAD and small cell: IAD refers to Source:TEJ, May 2016 customized gateway integrating multiple functions, which has higher margins than traditional gateway (~20% vs. high single-low teens %). For example, SerComm provides IADs to Orange, a French telco, with wireless charging, audio/video sharing applications. The company expects more customized IAD demand in the future as telcos are differentiating their services. For small cell, which is like a micro base station to extend cellular coverage more cost efficiently, SerComm has shipped to China Mobile, AT&T, Softbank, and is Analyst(s) Kaylin Tsai the sole supplier for Chunghwa Telecom. SerComm also expects to benefit +886 2 2734 7523 [email protected] from LTE deployment driving 4G small cell demand. Jeffrey Ohlweiler +886 2 2734 7512 [email protected] . Valuation and stock performance: The stock is trading at 12x/10x PE based
on 2016/2017 Bloomberg consensus earnings estimates (number of analysts: 13 May 2016 10) vs. its 3-year historical average of 14.9x. SerComm announced Macquarie Capital Securities Limited, NT$4/share cash dividend based on 2015 earnings, which implies dividend Taiwan Branch yield of 5%. Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
23
TAIWAN Mega FHC 2886 TT Underperform A victim of two currencies Price (at 05:30, 13 May 2016 GMT) NT$22.90
Valuation NT$ 18.00- Event 19.50 - Price to Book . 1Q16 result a miss. Mega reported net profit of NT$7,653mn or 12-month target NT$ 19.00 NT$0.56/share, down from NT$8,205mn in 1Q15 but flattish vs. NT$7,668mn Upside/Downside % -17.0 in 4Q15. Excluding MTM gains on CBs (NT$1.1bn in 1Q16), the result was 12-month TSR % -11.4 behind the consensus (NT$30bn for the full-year) while the trend appears to Volatility Index Low be weaker. Due to further shrinkage in foreign currency (FC) book, core GICS sector Banks revenue including interest income, fee income and FX spread were down 3% Market cap NT$m 311,436 QoQ (or +4% YoY) while we also expect recent weak equity markets to hurt Market cap US$m 9,680 its profits in 2Q16 as well as higher credit costs going forward. For more Free float % 77 details, please refer to Taiwan Banks - Our biggest concern is… 30-day avg turnover US$m 15.8 Number shares on issue m 13,600 Impact
Investment fundamentals . USD appreciation bites. NII declined by 4% QoQ and rose by only 1% YoY Year end 31 Dec 2015A 2016E 2017E 2018E Net interest Inc m 39,032 35,364 34,985 38,226 as its NIM declined to 1.19% in 1Q16 from 1.24% in 4Q15. The sharp decline Non interest Inc m 19,252 17,957 17,260 17,881 in NIM was mainly driven by falling LDR in FC book, mostly in USD, and Underlying profit m 32,752 27,719 25,839 28,850 PBT m 35,109 26,142 21,274 23,238 shrinkage in Rmb-assets. Due to USD appreciation, total FC-denominated PBT growth % -0.6 -25.5 -18.6 9.2 assets, including corporate loans, interbank borrowing, forfeiting and Reported profit m 29,416 21,940 17,881 19,518 factorings declined by 3% QoQ and 20% YoY (Figure 3) while FC deposits Profit bonus exp m 29,416 21,940 17,881 19,518 Adjusted profit m 29,416 21,940 17,881 19,518 rose by 2% QoQ and 18% YoY. As a result, loan-to-deposit ratio for FC book EPS rep NT$ 2.35 1.61 1.31 1.44 fell to 70% in 1Q16 from 82% in 4Q15 and 89% in 1Q15. EPS rep growth % -3.3 -31.4 -18.5 9.2 EPS bonus exp NT$ 2.35 1.61 1.31 1.44 EPS bonus growth % -3.3 -31.4 -18.5 9.2 . Rmb depreciation also hurts. NII on Rmb-denominated assets declined to PER rep x 9.7 14.2 17.4 16.0 NT$145mn in 1Q16 from NT$645mn in 4Q15 and NT$1,061mn in 1Q15 and PER bonus exp x 9.7 14.2 17.4 16.0 Total DPS NT$ 1.49 1.29 1.08 1.15 accounted for 2% of Group NII now (vs. 7% in 4Q15 and 12% in 1Q15) Total div yield % 6.5 5.6 4.7 5.0 because Rmb deposits fell to NT$113bn in 1Q16 from NT$148bn in 4Q15 and ROA % 0.9 0.6 0.5 0.6 ROE % 10.6 7.4 6.0 6.5 NIM fell to 0.50% in 1Q16 from 1.49% in 4Q15 and 2.10% in 1Q15. Equity to assets % 6.8 nmf nmf nmf P/BV x 1.1 1.0 1.0 1.0 . Both loan balance and fees declined. Fees declined by 9% QoQ due to
2886 TT rel TAIEX performance, & rec weak corp. loan fees and brokage commissions. In particular, corporate loan history fees fell by 9% QoQ as FC loans declined by 4.8% QoQ and 2.2% YoY and management is cautious about the growth outlook. Wealth mgmt fees fell by 8% QoQ but still grew by 19% YoY thanks to bancassurance. . Asset quality remains intact so far. Net provision was NT$1.2bn in 1Q16 compared to net recoveries of NT$938mn in 4Q15 and NT$365mn in 1Q15 as management decided to raise its reserves for the potential weak economy. NPL ratio rose slightly to 0.09% in 1Q16 from 0.08% in 4Q15 with coverage ratio as high as 1625%. However, we’re still concerned about its asset quality post rapid growth overseas and in real estate sector over the last few years. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 Earnings and target price revision (all figures in NT$ unless noted, TP in TWD) . No change
Analyst(s) Price catalyst Dexter Hsu +886 2 2734 7530 [email protected] . 12-month price target: NT$19.00 based on a GGM methodology. Stella Li +886 2 2734 7514 [email protected] . Catalyst: USDCNH, interest rate, equity market, credit costs
13 May 2016 Action and recommendation Macquarie Capital Securities Limited, Taiwan Branch . Reiterate UP. Except further slowdown in revenue growth, we expect higher credit costs to be the next catalyst for the stock price.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
24
KOREA Mirae Asset Securities 037620 KS Underperform Merger plan announced with in-line Price (at 06:00, 13 May 2016 GMT) Won22,900
Valuation Won 20,000 1Q16 results - Price to Book 12-month target Won 20,000 Event Upside/Downside % -12.7 12-month TSR % -11.8 . Mirae Asset Securities (MAS) reported 1Q16 NP of Won40bn, down 41% YoY, Volatility Index High in line with our estimate and the Bloomberg consensus of Won41bn. GICS sector Diversified Financials . The company announced that it will merge with Mirae Asset Daewoo (MAD) st Market cap Wonbn 2,617 (previously KDB Daewoo Securities). The scheduled merger date is 1 Market cap US$m 2,295 November 2016 and the merger ratio is set at 1:2.9716317 (MAD:MAS). Free float % 62 Impact 30-day avg turnover US$m 11.8 Number shares on issue m 114.3 . Generally in-line 1Q16 results: MAS’ 1Q16 net profit was in line with our
Investment fundamentals estimate. Operating profit was Won11bn higher than expected, but non-OP Year end 31 Dec 2015A 2016E 2017E 2018E was Won13bn lower than our expectation; MAS’ non-op has been fluctuating Revenue bn 476.9 510.4 533.8 567.2 according to business results of other affiliates such as Mirae Asset Life and EBIT bn 148.5 171.3 182.7 201.6 EBIT growth % -25.6 15.4 6.7 10.3 Mirae Asset Venture, and etc. Reported profit bn 169.8 177.8 186.2 200.1 Adjusted profit bn 169.8 177.8 186.2 200.1 . The bigger operating profit was mainly attributed by stronger-than-expected EPS rep Won 2,414 1,556 1,629 1,751 net trading gains on an improved trading environment since mid-Feb 2016. EPS rep growth % -11.8 -35.6 4.7 7.5 EPS adj Won 2,639 1,556 1,629 1,751 Overall operations remained lukewarm; net interest income was slightly better EPS adj growth % -3.4 -41.1 4.7 7.5 than expected, but net commission income was weaker than our expectation. PER rep x 9.5 14.7 14.1 13.1 PER adj x 8.7 14.7 14.1 13.1 Total DPS Won 400 200 200 200 . MAD’s earnings will be reflected into MAS’ consolidated results from Total div yield % 1.7 0.9 0.9 0.9 2Q16: As MAS acquired 43% stake of MAD as of 18 Mar 2016, MAS’ ROA % 0.6 0.6 0.7 0.7 ROE % 5.9 5.1 5.1 5.2 consolidated earnings will partly include MAD’s results from 2Q16. In EV/EBITDA x 16.2 14.1 13.3 12.1 annualised terms, MAS’ ROE should normalise to 7% levels, similar to the Net debt/equity % 30.7 27.3 27.2 27.1 P/BV x 0.8 0.7 0.7 0.7 pre-rights offering levels until 3Q15.
037620 KS rel KOSPI performance, & . Easing uncertainties vs. remaining concerns: So far, MAS has managed the rec history acquisition process quite smoothly on the back of the regulators’ supportive stance, in our view. However, in order for us to become more positive on the stock, we think MAS should provide more clarity to ease following key concerns: 1) Asset-to-equity ratio will surge from 880% to above 1000%, closely approaching to the regulatory guidance of 1100%; 2) Revenue mix could deteriorate, more skewing to traditional business; and 3) One-off integration costs and potential increases in labour cost through PMI process may weigh on near-term earnings visibility
Note: Recommendation timeline - if not a continuous line, then there was no Earnings and target price revision Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 . No change. We will reflect MAD’s earnings into MAS’s and review our target (all figures in Won unless noted, TP in KRW) price after further analysis.
Price catalyst
. 12-month price target: Won20,000 based on a Price to Book methodology. Analyst(s) Joe Huh . Catalyst: Smooth PMI process, Successfully dealing with leverage issue +82 2 3705 8676 [email protected] Chan Hwang Action and recommendation +82 2 3705 8643 [email protected] . We think it is positive that MAS has smoothly managed the acquisition/ 13 May 2016 merger process so far. However, we are still cautious about whether MAS Macquarie Securities Korea Limited successfully dealing with the anticipated concerns in the PMI process, going forward.
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN Mizuho Financial Group 8411 JP Neutral Driving safely for the next three FYs Price (at 06:00, 13 May 2016 GMT) ¥167
Valuation ¥ 160 Event - Price to Book 12-month target ¥ 160 . Mizuho FG announced FY3/16 results after market on 13th May. FY3/16 NP Upside/Downside % -4.2 (JP¥670.9bn) was 2.3% higher than our forecast (JP¥656bn), but FY3/17E 12-month TSR % +0.6 NP guidance (JP¥600bn) was 9.4% lower than ours (JP¥662bn). DPS for Volatility Index Low/Medium FY3/17E is JP¥7.50/share, no change from FY3/16, vis-à-vis our forecast of GICS sector Banks JP¥8.00/share. Market cap ¥bn 4,180 Market cap US$m 37,821 Impact Free float % 45 . Non-interest income and stock-related gains contributed in FY3/16. 30-day avg turnover US$m 242.9 Although net interest income decreased due to shrinking spreads, non- Foreign ownership % na Number shares on issue m 25,031 interest income and stock-related gains steadily pushed up NP. Investment trust sales slowed down in H2, but other non-interest income such as Investment fundamentals overseas, settlement & foreign exchange, and solution business-related Year end 31 Mar 2015A 16CoE 2016E 2017E supported the increase. In FY3/17, Mizuho plans to generate gains of Net interest Inc bn 1,129.4 na 1,081.9 1,069.1 Non interest Inc bn 1,118.3 na 1,164.2 1,161.1 JP¥125bn from the unwinding of cross shareholding. Underlying profit bn 896.1 na 881.0 851.4 PBT bn 990.6 na 1,019.8 997.4 . New medium-term plan is conservative. Due mainly to the uncertainty of PBT growth % 0.5 na 2.9 -2.2 Recurring profit bn 1,010.9 na 1,009.8 987.4 the business environment, the financial goals of the new medium-term plan Reported profit bn 611.9 550.0 655.6 661.8 (FY3/17-FY3/19) are mostly conservative; Target CET1 capital around 10% Adjusted profit bn 627.3 na 640.7 646.9 EPS rep ¥ 25.2 22 26.5 26.1 (8.77% in FY3/16), Consolidated ROE around 8% (10.0% in FY3/16), Cross EPS rep growth % -11.6 na 5.4 -1.6 shareholding to unwind around JP¥550bn (no change from the existing target) EPS adj ¥ 25.8 na 25.9 25.5 EPS adj growth % -8.8 na 0.5 -1.6 etc. These goals are based on the following assumptions, which may raise PER rep x 6.6 na 6.3 6.4 concerns in the market; 3M TIBOR 0.05%, 10Y JGB 0.30%, Nikkei average PER adj x 6.5 na 6.4 6.5 Total DPS ¥ 7.5 7.0 8.0 8.0 JP¥19k, and 122JP¥/USD in FY3/19. More details will be explained at th Total div yield % 4.5 3.6 4.8 4.8 Mizuho’s large meeting on 24 May. ROA % 0.3 na 0.3 0.3 ROE % 8.6 na 7.6 7.3 . No increase in FY3/17E dividend. Mizuho will not increase its dividend, nor Equity to assets % 3.3 na 3.4 nmf P/BV x 0.5 na 0.5 0.5 start share buybacks in FY3/17. They give priority to stable dividend payment.
8411 JP vs TOPIX, & rec history Earnings and target price revision
. No change. We will review our earnings estimates after meeting with the bank. Price catalyst
. 12-month price target: ¥160 based on a Price to Book methodology.
. Catalyst: NIRP, the progress of new medium-term plan
Action and recommendation Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Maintain Neutral. We think Mizuho FG’s issue is the profit generation Source: FactSet, Macquarie Research, May 2016 capability that leads to the slow capital accumulation. This eventually results (all figures in JPY unless noted) in the low shareholder returns. However, taking their medium-term plan into
consideration, it is likely that for the next three FYs, they will drive safely and give priority to strengthening financials and increasing capital.
Analyst(s) Keisuke Moriyama +81 3 3512 7476 [email protected]
16 May 2016 Macquarie Capital Securities (Japan) Limited
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 Nikon 7731 JP Neutral Quake-hit DSCs, but 90 LCD steppers Price (at CLOSE#, 13 May 2016) ¥1,537
Valuation ¥ 1,600 Conclusion - Price to Book 12-month target ¥ 1,600 . Post-results we reiterate our Neutral rating. There may be some disappointment Upside/Downside % +4.1 at the less-than-expected profit boost from very strong LCD stepper units, but 12-month TSR % +5.4 the earthquake disruption to the DSC business should be within expectations. Volatility Index Low/Medium Impact GICS sector Consumer Durables & Apparel . FY3/16 OP of ¥36.7bn exceeded our estimate of ¥34bn by 8% and met the Market cap ¥m 616,183 consensus estimate. Imaging Products OP (cameras) missed our forecast by Market cap US$m 5,673 9%, and also fell short of guidance – but this was offset by stronger results in 30-day avg turnover US$m 49.0 Precision Equipment and other segments. We were most impressed by Number shares on issue m 400.9 Instruments, which exceeded targets on strength in microscopes. Investment fundamentals . FY3/17 OP guidance of ¥46bn is 16% below consensus and 10% less than Year end 31 Mar 2016A 2017E 2018E 2019E Revenue bn 822.9 810.2 874.0 843.9 our prior estimate. While our first impression is that guidance may be EBIT bn 36.7 49.5 60.0 42.5 conservative, it is also likely that we had underestimated corporate costs. We EBIT growth % -15.5 34.9 21.3 -29.3 Recurring profit bn 42.9 48.8 63.0 45.7 have trimmed our forecasts to reflect this. Reported profit bn 22.2 33.4 42.7 31.0 . Imaging Products OP guidance of ¥35bn is below our prior ¥38bn EPS rep ¥ 55.9 84.1 107.6 78.1 EPS rep growth % 20.9 50.6 27.9 -27.4 estimate, reflecting a larger-than-expected earthquake impact (~¥10bn hit in EPS adj growth % 6.5 6.2 27.9 -27.4 1H). Management expects CIS output at Sony to be restored by July, and they PER rep x 27.5 18.3 14.3 19.7 PER adj x 19.4 18.3 14.3 19.7 plan on attaining full production of DSCs in 2H. Near-term, Nikon will tap parts Total DPS ¥ 18.0 20.0 20.0 20.0 inventories in the supply-chain, and prioritise higher-margin product (e.g. mid- Total div yield % 1.2 1.3 1.3 1.3 ROA % 3.8 5.3 6.3 4.3 range DSLRs). Due to this factor, and the previously-disclosed C-DSC delays ROE % 5.7 6.0 7.2 5.0 due to software and chip issues, C-DSC units are projected to fall 58% this FY, EV/EBITDA x 6.1 5.8 5.1 6.3 Net debt/equity % -27.0 -31.6 -34.8 -37.5 vs a 21% fall in DSLRs. Guidance includes a ¥10bn YoY cut in ad spending, P/BV x 1.1 1.1 1.0 1.0 and Yen appreciation drag (¥110/US$). 7731 JP vs TOPIX, & rec history . Precision Equipment OP guidance of ¥40bn is in line with prior MRE of ¥39bn, while revenue guidance of ¥260bn is 9% higher. Nikon has guided to a robust 90 LCD steppers in FY3/17 (including 75 G6 tools, of which about half are the new FX-68S) – well above our prior 75-unit forecast. Also Nikon sees 26 new IC steppers, vs our prior estimate of 15. Given these unit targets, we’d have expected a higher OP, but Nikon may be building in risk of asset write- downs (e.g. like in FY3/16, when they wrote off all the 450mm-related assets). We estimate that of the 9 ArF immersion (ArF-i) tools projected for FY3/17, Nikon assumes 3 for Micron (the evaluation tools pushed out from last FY) and Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. 6 for Intel. We see high risk to the former – the lack of progress in the trial is a Source: FactSet, Macquarie Research, May 2016 negative indicator – but we see upside potential to the Intel units. We assume (all figures in JPY unless noted) that Nikon has ~30% share of the ArF-i for Intel’s 10nm process. The strength of LCD stepper units raises questions of sustainability; Nikon assumes a market of 200 units over two years with 120 this year, implying a >30% fall next year. Earnings and target price revision
. We have cut FY3/17 and FY3/18 OP ests by 3% and 16% respectively. Our TP Analyst(s) is now ¥1,600 (from ¥1,750) based on 1x P/B FY3/18E (LTROE/CoE: 5%/5%). Damian Thong, CFA +81 3 3512 7877 [email protected] Price catalyst Ansel Laudo +81 3 3512 7874 [email protected] . 12-month price target: ¥1,600 based on a Price to Book methodology. 13 May 2016 . Catalyst: Recovery in DSC production. Macquarie Capital Securities (Japan) Limited Action and recommendation
. We rate Nikon at Neutral with a ¥1,600 TP. Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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SINGAPORE Noble Group NOBL SP Neutral One miss too many Price (at 06:15, 13 May 2016 GMT) S$0.36
Valuation S$ 0.37 Event - Price to Book 12-month target S$ 0.37 . We cut our 2016E and 2017E estimates by 17% and 14% following 1Q16’s Upside/Downside % +4.2 earnings miss. Our new forecasts still bake in a profit recovery and improved 12-month TSR % +4.2 cash conversion, but the realization of these forecasts depends on how fast Volatility Index High operations can return to “normal” post the higher than expected uncertainty GICS sector Capital Goods that accompanied the recent refinancing exercise. Given the low visibility in Market cap S$m 2,393 this regard, we continue to value Noble on a one year forward P/BV approach, Market cap US$m 1,628 which now yields S$0.37 down from S$0.43 before. Given the limited upside Free float % 32 for such a “High” volatility stock we cut our rating to Neutral from Outperform. 30-day avg turnover US$m 12.7 Number shares on issue m 6,739 Impact
Investment fundamentals . 1Q16 weak; outlook a bit better. Noble’s clean 1Q16 of US$57m was light, Year end 31 Dec 2015A 2016E 2017E 2018E as trading was hamstrung by weak credit availability amid the uncertainty Revenue m 66,712 53,071 59,695 69,200 EBIT m -1255 565 685 731 around its refinancing. Short term debt has now been rolled over for 2016, EBIT growth % nmf nmf 21.4 6.6 albeit at higher interest rates (though these were not quantified) and with a Reported profit m -1672 322 440 483 Adjusted profit m 132 314 416 459 higher dependence on secured lending. With this uncertainty now behind the EPS rep ¢ -25.8 4.8 6.5 7.2 company, management did signal a return to better operating conditions on EPS rep growth % nmf nmf 36.6 9.7 EPS adj ¢ 2.0 4.7 6.2 6.8 the call, and said that its targeted commodity markets continued to present EPS adj growth % -61.7 129.0 32.4 10.2 attractive trading opportunities, which could not be pursued in 1Q16. The PER rep x nmf 5.4 4.0 3.6 PER adj x 12.8 5.6 4.2 3.8 speed and efficacy at which these can be realized remains difficult to gauge. Total DPS ¢ 0.0 0.0 0.6 0.7 Total div yield % 0.0 0.0 2.4 2.6 . Plans to raise up to another US$1b to improve liquidity. Noble’s operating ROA % -6.8 3.7 4.8 4.7 FCF backslid into a worrying large negative position (-US$537m) as accounts ROE % 3.2 9.1 10.9 10.8 EV/EBITDA x -3.5 7.8 6.4 6.0 payable contracted by US$1.5b amid tighter credit conditions. As it did for the Net debt/equity % 119.5 93.8 86.9 86.6 operating results, Noble guided to a more normal working capital evolution P/BV x 0.5 0.5 0.4 0.4 from 2Q16. Liquidity headroom continues to look weak (Fig 2) and Noble NOBL SP rel SNGPORI performance, & indicated it was considering a range of options for raising up to US$1b in new rec history capital, including further asset sales, scaling down low returning businesses, and strategic investment, which brings with it dilution risk. Earnings and target price revision
. We cut our 2016E and 2017E estimates in S$ by 17% and 14% and our price target falls by a similar amount from S$0.43 to S$0.37. Our P/BV approach is largely unchanged, baking in a 16% cost of equity. It also takes in an 11% ROE which will take some work to achieve (last 4Q “clean” quarters: 6-7%).
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Price catalyst Source: FactSet, Macquarie Research, May 2016 (all figures in USD unless noted, TP in SGD) . 12-month price target: S$0.37 based on a Price to Book methodology.
. Catalyst: Corporate actions; Quarterly results; Rating agency actions Action and recommendation
. Will our rating downgrade call the bottom in Noble? We’d be very happy with Analyst(s) such an outcome. But given the recent run of results which have chipped Conrad Werner away at our forecasts and ongoing challenges in Noble’s end markets, we +65 6601 0182 [email protected] foresee a lurching grind as a more likely outcome. 13 May 2016 Macquarie Governance and Risk Score (MGRS) Macquarie Capital Securities On our proprietary Governance and Risk Score Noble Group scores in the fourth quartile of (Singapore) Pte. Limited our current universe coverage.
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN NTT 9432 JP Outperform Good progress Price (at CLOSE#, 13 May 2016) ¥4,992
Valuation ¥ 5,500 Conclusion - Sum of Parts 12-month target ¥ 5,500 . NTT Group’s FY results were strong with revenues and profits ahead of us Upside/Downside % +10.2 and consensus. New guidance for FY3/17 has a revenue decline because of 12-month TSR % +12.6 FX headwinds at the global businesses, but OP guidance is for 6.1% YoY Volatility Index Low growth, ahead of us and consensus. 4Q was another strong quarter for the GICS sector fixed-line companies, which delivered revenues and profits ahead of our Telecommunication Services expectations (see Figs.1-2). We remain positive on the outlook for the NTT Market cap ¥bn 10,463 Group and maintain our Outperform rating. Market cap US$m 96,342 30-day avg turnover US$m 146.2 Impact Number shares on issue m 2,096 . The shareholder return theme continues: NTT announced a ¥350bn Investment fundamentals buyback program for this year (better than the ¥250bn we expected) for up to Year end 31 Mar 2015A 2016E 2017E 2018E 68m shares or 3.2% of outstanding shares. NTT is also hiking the dividend to Revenue bn 11,095 11,490 11,489 11,572 EBIT bn 1,085 1,297 1,352 1,414 ¥120 per share (up from ¥110 and in line with our estimate). The dividend EBIT growth % -10.6 19.6 4.3 4.6 implies a payout ratio target of 33.1%. Management hasn’t set a firm payout Recurring profit bn 1,067 1,247 1,346 1,402 Reported profit bn 518 666 739 768 target but promises to deliver a steadily growing dividend over time. EPS rep ¥ 242 318 360 385 EPS rep growth % -6.8 31.4 13.2 6.9 . Tweaking the mid-term plan: Management also revised up the mid-term PER rep x 20.6 15.7 13.9 13.0 Total DPS ¥ 90 110 120 130 plan targets for EPS (from at least ¥350 to at least ¥400 by Mar18) and cost Total div yield % 1.8 2.2 2.4 2.6 reductions (from at least ¥600bn to at least ¥800bn). These appear readily ROA % 5.3 6.2 6.4 6.6 ROE % 6.0 7.3 7.6 7.7 achievable to us and management has a good track record of delivering. EV/EBITDA x 4.8 4.5 4.4 4.3 Net debt/equity % 32.0 28.1 25.5 23.3 . Depreciation change allows for some cleaning house: NTT will realize a P/BV x 1.2 1.2 1.1 1.0 ¥480bn boost in accounting profits from the change in depreciation methods 9432 JP vs TOPIX, & rec history (from accelerated to straight line) but is offsetting this with ¥460bn in spending. The split of spend is expected to be 80% on mainly non-cash items (e.g. accelerated depreciation on older facilities) and 20% on cash costs, but management said they might not spend all of the ¥460bn and the cash spend in particular will only be used if it will enhance their competitive position. FY3/17 guidance for EBITDA is a ¥154bn decline, or -5% YoY, to ¥3,068bn. . Global growth intact but FX headwinds hurt: Total 4Q overseas sales grew 8.3% YoY but declined QoQ to ¥472bn, hampered by FX headwinds. The global OP margin expanded to 4.2% (vs. 3.8% last year) and management Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. expressed confidence in margin improvements from these companies, but the Source: FactSet, Macquarie Research, May 2016 largest gains are expected to come late in the mid-term plan period through (all figures in JPY unless noted) FY3/18. Any positive contribution to global OP from the IT Services deal with Dell won’t be seen until next year. Please see our note on that deal here. Earnings and target price revision
. No change. Price catalyst Analyst(s) Nathan Ramler, CFA . 12-month price target: ¥5,500 based on a Sum of Parts methodology. +81 3 3512 7875 [email protected] Aya Haruyama . Catalyst: shareholder returns programs; wholesale fiber & global growth; +81 3 3512 7867 [email protected] overseas growth and profit delivery; Docomo progress and profit delivery.
13 May 2016 Action and recommendation Macquarie Capital Securities (Japan) Limited . NTT is our top pick within the Japanese telecom space. Please also see our latest note on NTT DoCoMo - Operational progress; D&A change.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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KOREA Samsung Electronics 005930 KS Outperform FAQs to its POLED opportunity Price (at CLOSE#, 13 May 2016)Won1,253,000
Valuation Won 1,700,000 Event - Price to Book 12-month target Won 1,700,000 . We provide feedback regarding our recent note on Samsung Electronics Upside/Downside % +35.7 (SEC) (Taking a leap forward with OLED dated on 10 May 2016). The stock 12-month TSR % +38.1 remains on our Marquee Buy list. Volatility Index Low/Medium GICS sector Impact Technology Hardware & Equipment . We disagree with the weak near-term earnings momentum view. We see Market cap Wonbn 208,875 some concerns on the sequential earnings fall in 2Q16 in light of the weak Market cap US$m 178,900 Free float % 31 DRAM price, heavy marketing expense for GS7 phones, and the rebound in 30-day avg turnover US$m 177.6 the Won/US$. However, the pace of DRAM price erosion is similar to previous Number shares on issue m 166.7 quarters, while seasonality is kicking in (double-digit bit shipment growth). ‘Buy 1 Get 1 Free’ marketing of Galaxy S7 phone is mostly funded by telecom Investment fundamentals operators. Moreover, its huge LCD losses in 1Q16 should be substantially Year end 31 Dec 2015A 2016E 2017E 2018E Revenue bn 200,660 205,580 217,813 230,528 reduced from the normalized operation. EBIT bn 26,413 27,135 30,799 35,365 EBIT growth % 5.5 2.7 13.5 14.8 . Technology leadership in POLED likely to be longer than expected. Reported profit bn 19,060 21,035 24,303 27,818 POLED technology, unlike LCD, is not standardized. In other words, it will Adjusted profit bn 18,694 20,447 23,623 27,041 EPS rep Won 112,028 128,625 152,443 178,412 take a fairly long time for late-comers to catch up. SEC commands a 98% EPS rep growth % -18.5 14.8 18.5 17.0 share of the mobile OLED panel market and it successfully commercialized EPS adj Won 109,880 125,061 148,244 173,507 EPS adj growth % -19.0 13.8 18.5 17.0 the ‘Edge’ screen. It has a strong grip on the entire OLED eco-system, not PER rep x 11.2 9.7 8.2 7.0 only materials but also key equipment. So, we think SEC should enjoy PER adj x 11.4 10.0 8.5 7.2 Total DPS Won 21,000 30,000 40,000 50,000 dominant share of POLED for iPhone even 3 years from now, while the Total div yield % 1.7 2.4 3.2 4.0 iPhone LCD panel market was shared by LG Display, Japan Display and ROA % 11.2 11.0 11.9 12.8 ROE % 10.8 11.2 12.0 12.3 Sharp. EV/EBITDA x 3.2 2.9 2.6 2.3 Net debt/equity % -32.7 -32.6 -31.4 -33.6 . Is 20% OPM assumption realistic? If so, is it sustainable? In our note, we P/BV x 1.2 1.1 1.0 0.8 provided operating margin comparison among various Apple’s vendors. 005930 KS rel KOSPI performance, & Several enjoyed high/stable margins, when their products were competitive rec history and Apple had limited choices of vendors. That said, considering the importance of display and the technology challenge, we believe 20% margin is more than achievable. With big positive operating leverage, we see significant room to lower its production costs in the future. . True that POLED is a 2018/19 story. But, the market will discount it much earlier. We admit that the full impact from iPhone adoption of POLED screen is likely to come through in 2018-19. Nonetheless, the market is likely to factor in this important development much earlier. While its profit contribution should be not significant, <10% even in 2018, finding a new growth engine in this Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. tech behemoth, in our view, will be positive for the firm’s overall valuation. Source: FactSet, Macquarie Research, May 2016 (all figures in Won unless noted, TP in KRW) Earnings and target price revision
. No change. Price catalyst Analyst(s) Daniel Kim . 12-month price target: Won1,700,000 based on a Price to Book methodology. +82 2 3705 8641 [email protected] Ryan Kim . Catalyst: DRAM/NAND prices. Shipment of Galaxy S7 models. +822 3705 8771 [email protected] Action and recommendation 13 May 2016 Macquarie Securities Korea Limited . Stay invested.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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KOREA Samsung Life Insurance 032830 KS Outperform Strong investment results drove Price (at 06:00, 12 May 2016 GMT)Won106,000
Valuation Won 135,000 bigger bottom-line profits - P/EV 12-month target Won 135,000 Event Upside/Downside % +27.4 12-month TSR % +29.2 . Samsung Life Insurance (SLI) reported 1Q16 net profit of Won1,240bn versus Volatility Index Low/Medium our estimate of Won1,153bn and the consensus of Won1,364bn. While the GICS sector Insurance insurer’s underwriting results were slightly weaker than expected, its Market cap Wonbn 21,200 investment gains were strong enough to offset the negative. Market cap US$m 18,078 Free float % 31 Impact 30-day avg turnover US$m 21.8 . Underwriting results were slightly weaker on slower growth in premium Number shares on issue m 200.0 and unfavourable weather conditions: Although SLI’s underwriting Investment fundamentals expenses came in smaller than expected, its underwriting loss of Won1,650bn Year end 31 Dec 2015A 2016E 2017E 2018E was bigger than our loss estimate of Won1,548bn. However, if we consider 1) NEP bn 0 0 0 0 Underwriting Result bn 0 0 0 0 its slower growth in premium was led by savings products and 2) increased Investment Income bn 0 0 0 0 claims on respiratory diseases from fine dust (which were much more serious Pretax PC Op Inc bn 0 0 0 0 Life Prem bn 17,354 17,475 17,613 17,785 than previous years), we do not think weaker underwriting should be a key Life Total Rev bn 23,783 25,311 24,449 24,776 reason to be bearish on the stock. Pretax Life Op Inc bn 61 1,579 657 788 PBT bn 1,372 2,811 1,863 1,973 . 30bp higher investment yield lead its stronger bottom-line profits: The Reported profit bn 1,210 2,236 1,412 1,495 Net Op Income bn 1,210 2,236 1,412 1,495 insurer’s net investment yield came in at 4.0% (excluding one-offs) versus our EPS adj Won 6,048 11,182 7,060 7,476 estimate of 3.7%. If we consider that SLI’s one-off investment gains PER adj x 17.5 9.5 15.0 14.2 DPS Won 1,800 2,000 2,200 2,400 (Won742bn from the purchase of Samsung Card shares and Won27bn from Dividend yield % 1.7 1.9 2.1 2.3 disposal of buildings) were smaller than our estimate of Won820bn, its core Total SH Funds bn 23,722 24,581 25,643 26,753 BV/S Won 118,609 122,905 128,214 133,765 net profit should be even bigger than estimated. Although its net investment ROE % 5.3 9.3 5.6 5.7 yield would only decline in a low interest rate environment, the erosion of ROA % 0.5 0.9 0.6 0.6 P/BV x 0.9 0.9 0.8 0.8 investment yield could be slower than we have estimated. Tot Embedded Val bn 25,298 27,948 30,021 32,227 . Meaningful increase in RBC ratio should be positive: Samsung Life’s RBC 032830 KS rel KOSPI performance, & rec history ratio improved to 350% in 1Q16 from 337% in 4Q15 on the back of 1) strong bottom-line results in 1Q16 and 2) valuation gains from fixed income markets. Given uncertainties over capital positions after the adoption of IFRS 4 in 2020 have been a key lagging factor for the stock’s performance, its strong capital gains should be positive for investor sentiment. 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. Source: FactSet, Macquarie Research, May 2016 . 12-month price target: Won135,000 based on a P/EV methodology. (all figures in Won unless noted, TP in KRW) . Catalyst: 1. Signs of interest rate cycle bottoming; 2. Regaining momentum in
premium growth; and 3. Excess capital deployment on an ongoing basis Action and recommendation Analyst(s) Chan Hwang . We believe that SLI is undervalued, especially considering the insurer’s strong +82 2 3705 8643 [email protected] capital position and improving business outlook for VNB growth. In addition, Yu Ra Kim +82 2 3705 9982 [email protected] the insurer’s strong results in 1Q16 should improve investor sentiment on the stock despite uncertainties over the capital burden from IFRS 4 13 May 2016 implementation from 2020. Maintain Outperform. Macquarie Securities Korea Limited
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 SBS Holdings 2384 JP Outperform Back on track Price (at 06:00, 13 May 2016 GMT) ¥697
Valuation ¥ 1,750 Conclusion - Sum of Parts 12-month target ¥ 1,750 . SBS reported Q1 results. Revenue was ¥33.6b (-15%) with roughly ¥7b of Upside/Downside % +151.1 Transpole sales dropping out. OP was ¥0.6b (-13% YoY) and NP was ¥0.7b 12-month TSR % +153.9 (-71% YoY), as a one-off gain was booked in Q1 last year. Volatility Index High GICS sector Transportation . SBS revised up 2016 H1 OP from ¥1.1b to ¥5.1b (+4b) and revised up FY Market cap ¥m 27,224 12/16 OP forecasts from ¥6.2b to ¥6.4b (+0.4b). Full year NP was revised up Market cap US$m 286 from ¥3.6b to ¥4.3b, with EPS lifted from ¥90 to ¥108. Free float % 42 . The stock spiked 14% and was stop high (+99) to ¥796. 30-day avg turnover US$m 1.1 Foreign ownership % 10 Impact Number shares on issue m 39.06 . Q1 results are solid, but are basically in line with our expectations. Today’s Investment fundamentals move in the share price was probably due to excessive pessimism and was Year end 31 Dec 2015A 2016E 2017E 2018E likely exacerbated by low liquidity. Revenue bn 158.0 146.4 157.8 163.8 EBIT bn 5.3 6.7 8.4 9.6 EBIT growth % 30.5 25.2 24.8 14.7 . The H1 revision up is a timing issue. SBS is selling the Kawagoe logistics Recurring profit bn 5.8 7.1 8.1 9.3 property earlier than expected, and is able to book profits early. The true Reported profit bn -3.8 4.6 6.3 7.2 Adjusted profit bn 7.5 4.6 5.3 6.2 revision up is the ¥0.4b increase to full year OP. ¥0.4b is split between better- EPS rep ¥ -97.7 118.2 162.2 184.3 than expected profits from the Kawagoe sale and that 3PL expansion costs EPS rep growth % nmf nmf 37.2 13.6 EPS adj ¥ 190.8 118.5 136.6 158.7 are proving to be slightly lower than originally forecast. EPS adj growth % 340.9 -37.9 15.3 16.1 PER rep x nmf 5.9 4.3 3.8 . Domestic Q1 logistics profit was lower by ¥0.1b from expansion costs. PER adj x 3.7 5.9 5.1 4.4 Stripping that out, logistics OP would have been ¥0.41b, up 17% YoY. Total DPS ¥ 16.0 20.0 25.0 25.0 Total div yield % 2.3 2.9 3.6 3.6 2 ROA % 4.2 5.3 6.5 7.0 . Once the 3PL expansion (7 facilities, 50,000m , 16% capacity) is finished, we ROE % 24.8 16.2 17.6 17.6 think domestic OP margins can normalize towards 3%, from 1% now. EV/EBITDA x 5.3 6.6 5.8 5.2 Net debt/equity % 172.1 155.2 126.1 98.7 P/BV x 1.0 0.9 0.9 0.7 Earnings and target price revision
2384 JP vs TOPIX, & rec history . No change to our target price. We cut 2016 EPS by 10% to adjust for the divestiture of Transpole and increased expansion costs. We raise 2017 EPS by 5% to account for 3PL expansion, one-off costs dropping out and continued profitable real estate sales. We add 2018 forecasts. Price catalyst
. 12-month price target: ¥1,750 based on a Sum of Parts methodology.
. Catalyst: (1) the market regaining trust in management driven by good
Note: Recommendation timeline - if not a continuous line, then there was no earnings (2) Logistics profit growth from 3PL and Amazon Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 Action and recommendation (all figures in JPY unless noted)
. Maintain Outperform. . While we “never doubted” SBS (as the break-up value of the balance sheet is worth 3 to 4x SBS’s market cap), we admit we are happy to get some good news after the 2015 Transpole debacle. Analyst(s) William Montgomery, CFA . SBS’s shares had entered a liquidity trap. This revision up and price action +81 3 3512 7864 [email protected] hopefully can restore investor interest in SBS. 16 May 2016 . SBS shares are deeply undervalued, in our view, both on a SOP basis and Macquarie Capital Securities (Japan) using PER. On the company’s ¥108 EPS the stock at ¥796 is now only 7x Limited PER. On our forward estimates the stock drops to below 5x.
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 Shenzhou International 2313 HK Outperform Share price correction overdone Price (at 13:33, 13 May 2016 GMT) HK$36.70
Valuation HK$ 44.80 Event - PER 12-month target HK$ 44.80 . We reiterate Outperform on Shenzhou post the share price correction which Upside/Downside % +22.1 we think is unjustified. The share price is down 10% over the last several days 12-month TSR % +23.9 on concerns of a contagion effect from the earnings miss of Taiwanese Volatility Index Low textiles companies together with weak performance of US department stores. GICS sector We believe there is a need to distinguish between Shenzhou and its peers in Consumer Durables & Apparel terms of different client mix and category exposure, where orders from Market cap HK$m 51,343 Shenzhou’s sportswear clients remain robust, as we have highlighted in our Market cap US$m 6,616 note published last week during the Greater China Conference. 30-day avg turnover US$m 14.6 Number shares on issue m 1,399 Impact
Investment fundamentals . US department stores commented that active wear has been an Year end 31 Dec 2015A 2016E 2017E 2018E outperformer despite challenging retail environment. Investors we talked Revenue m 12,639 14,229 16,319 18,530 EBIT m 2,987 3,421 4,158 4,577 to are concerned about inventory issues in the US for sportswear brands. EBIT growth % 15.3 14.6 21.5 10.1 When we look into individual department store performance, Macy's Reported profit m 2,356 2,726 3,341 3,688 Adjusted profit m 2,356 2,726 3,340 3,687 commented that active performed relatively well while Kohl's specifically EPS rep Rmb 1.57 1.82 2.22 2.46 mentioned that active, particularly New Balance and NIKE comps were very EPS rep growth % 13.9 15.7 22.5 10.4 EPS adj Rmb 1.57 1.82 2.22 2.46 strong, up 19% YoY and mid-teens comp for the quarter. Together with EPS adj growth % 14.0 15.7 22.5 10.4 adidas US business increasing by 22% YoY on FX adjusted basis we believe PER rep x 19.6 17.0 13.8 12.5 PER adj x 19.6 17.0 13.8 12.5 concerns on ath-leisure/sportswear slowdown in US maybe overdone. Total DPS Rmb 0.84 0.56 0.69 0.76 Total div yield % 2.7 1.8 2.2 2.5 . Shenzhou has one of the highest sportswear client mix among peers. ROA % 17.4 17.7 19.2 18.8 ROE % 18.9 19.4 20.7 19.9 We believe there is a meaningful difference between Shenzhou and its peers EV/EBITDA x 12.8 11.0 9.2 8.4 in terms of client mix. Shenzhou’s sportswear branded customer mix is over Net debt/equity % -8.9 -12.8 -19.9 -26.1 P/BV x 3.5 3.1 2.7 2.3 60% which are channel-agnostic compared to US department store retailers. This exposure is meaningfully higher than its peer garment manufacturers. 2313 HK rel HSI performance, & rec We believe the underperformance, inventory and potential pricing pressure of history the channel customers would have little relevance to Shenzhou. . Our order outlook remains unchanged and innovative Flyknit orders. We continue to expect Shenzhou volume to grow 10-13% per year for FY16-FY18, in line with management’s guidance, with sportswear clients outperforming casual and lingerie categories. We expect Flyknit to increase its revenue contribution for Shenzhou given Nike’s scaling up Flyknit as a sustainable innovation. Shenzhou is the only listed company to benefit from this one-piece fabric technology and we estimate its revenue contribution will move up from
Note: Recommendation timeline - if not a continuous line, then there was no current 5.5% to 9% by 2016. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 Earnings and target price revision (all figures in Rmb unless noted, TP in HKD)
. No change. Price catalyst
. 12-month price target: HK$44.80 based on a PER methodology. Analyst(s) Terence Chang . Catalyst: 1HFY16 results, brand customer’s results/commentary. +852 3922 3581 [email protected] Linda Huang, CFA Action and recommendation +852 3922 4068 [email protected] . Maintain Outperform. After the share price correction, Shenzhou is trading at 16 May 2016 17x FY16 PER. Macquarie Capital Limited
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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KOREA Shinsegae 004170 KS Neutral Outlook still uncertain Price (at 06:00, 12 May 2016 GMT)Won207,000
Valuation Won 203,000 Event - PER 12-month target Won 203,000 . Shinsegae released 1Q16 results after market hours. Gross sales reached Upside/Downside % -1.9 Won1.27tr, up 3% YoY and OP fell to Won62.1bn, down 13% YoY. OP 12-month TSR % -1.4 missed consensus and our forecasts by 6% and 9%, respectively. Volatility Index Medium GICS sector Retailing Impact Market cap Wonbn 2,038 . Earnings miss largely due to weaker-than-expected sales. Shinsegae Market cap US$m 1,713 Dept Store posted SSSg of -1.9% in 1Q16 due to partial retail space closure Free float % 65 of its main store for DFS construction from Feb 1, despite space expansion of 30-day avg turnover US$m 6.7 Gangnam and Centum stores (by 50%+ each) from Mar. Although these two Number shares on issue m 9.85 stores enjoyed 17-23% YoY growth in sales in Mar-Apr, we estimate that Investment fundamentals actual sales/sqm decreased 20%+, indicating lower sales efficiency for now. Year end 31 Dec 2015A 2016E 2017E 2018E However, 1Q16 OP margin was in line with our expectation at 4.4%, down Revenue bn 2,564.0 3,158.8 3,700.1 4,090.3 EBIT bn 261.9 284.0 338.8 343.2 0.3ppt YoY. Meanwhile, its online sales increased 28% YoY with a slight rise EBIT growth % -4.2 8.4 19.3 1.3 in operating loss (to Won6bn from Won5bn). The margin compression of Reported profit bn 433.2 193.4 226.5 225.9 Adjusted profit bn 402.0 159.0 186.0 185.5 online could be attributed to increased ad cost (c.Won1.5bn); thus is likely to EPS rep Won 43,999 19,647 23,011 22,948 be eased from 2Q16, in our view. EPS rep growth % 132.8 -55.3 17.1 -0.3 EPS adj Won 40,828 16,149 18,897 18,845 . EPS adj growth % 156.7 -60.4 17.0 -0.3 Ongoing cost pressures likely in FY16. We remain cautious of earnings PER rep x 4.7 10.5 9.0 9.0 outlook for Shinsegae in FY16. Given that Shinsegae has aggressive capacity PER adj x 5.1 12.8 11.0 11.0 expansion plans to launch three dept stores (Gimhae in Jun, Hanam in Sep, Total DPS Won 1,150 1,150 1,150 1,150 Total div yield % 0.6 0.6 0.6 0.6 and Daegu in Dec) in FY16, we think cost pressures will linger throughout the ROA % 3.2 3.3 3.7 3.6 year and may continue into FY17. In addition, Shinsegae’s new DFS, which is ROE % 10.6 3.9 4.3 4.1 EV/EBITDA x 7.9 7.1 6.2 6.0 scheduled to open May 18, is likely to lower earnings visibility further due to Net debt/equity % 40.1 45.4 49.1 45.5 initial opening costs and uncertainty of customer traffic at least at an early P/BV x 0.5 0.5 0.5 0.4 stage. The company targets to reach breakeven in its DFS business in FY16 004170 KS rel KOSPI performance, & annually, in line with our current forecast, but we concede that our level of rec history conviction is low. Earnings and target price revision
. Our earnings forecasts are under review until we have detailed financials. No change in our target price. Price catalyst
. 12-month price target: Won203,000 based on a PER methodology.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Catalyst: Monthly SSSg, store expansion execution, DFS development, Source: FactSet, Macquarie Research, May 2016 Samsung Life stake disposal. (all figures in Won unless noted)
Action and recommendation
. We think the stock is fairly valued at FY16E PER of 13x with 8% FY16E OP growth. Neutral maintained.
Analyst(s) HongSuk Na, CFA +82 2 3705 8678 [email protected] KJ Lee +822 3705 9935 [email protected]
13 May 2016 Macquarie Securities Korea Limited
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
34
KOREA Silicon Works 108320 KS Outperform Shrugging off slow seasonality Price (at CLOSE#, 13 May 2016) Won33,050
Valuation Won 40,000- Event 41,000 - PER . Silicon Works (SW) reported better-than-expected results in 1Q16, after the 12-month target Won 41,000 market close on 13 March, 2016. Outperform. Upside/Downside % +24.1 12-month TSR % +27.1 Impact Volatility Index Medium . Record-high sales and OP for Q1. Its sales of Won159bn came in 13% GICS sector above our forecast, rising 83%YoY. OP of Won14.9bn surprisingly has beaten Semiconductors & Semiconductor Equipment both our and the Street’s expectations by 58% and 28%, respectively. The Market cap Wonm 537,393 pricing pressure from its key client (LG Display) and the slow seasonality was Market cap US$m 460 more than offset by the positive impacts from improving sales mix. Admittedly, Free float % 63 we under-estimated the mix impacts, while the rising R&D investment (now 30-day avg turnover US$m 1.5 8.8% of sales in 1Q16 versus 7.3% in 2015) on new initiatives was sufficiently Number shares on issue m 16.26 absorbed by strong revenue growth.
Investment fundamentals . Strong driver IC sales (Won126bn, up 117%YoY), both COG and COF. Year end 31 Dec 2015A 2016E 2017E 2018E COG (chip on glass) driver IC sales of Won71bn were better than expected Revenue bn 535.8 655.4 695.6 753.1 EBIT bn 55.8 57.4 63.2 68.6 due to the following two reasons; TDDI (touch embedded driver IC one chip EBIT growth % 54.7 2.9 10.0 8.6 solution) sales for G5 phone, LG’ new flagship smartphone, were strong, Reported profit bn 48.3 50.9 52.0 54.9 Adjusted profit bn 48.3 50.9 52.0 54.9 accounting for 35% of COG sales. This is because SW has become a sole EPS rep Won 2,973 3,130 3,196 3,378 vendor of TDDI solution from G5 phone versus a multi-vendor status with EPS rep growth % 60.3 5.3 2.1 5.7 EPS adj Won 2,973 3,130 3,196 3,378 Synaptics before. Another reason is that LG Display enjoyed 50% share in the EPS adj growth % 60.3 5.3 2.1 5.7 newly introduced 9.7” iPad Pro. Meanwhile, COF (chip on film) sales were PER rep x 11.1 10.6 10.3 9.8 PER adj x 11.1 10.6 10.3 9.8 equally strong at Won55bn, as the mix improvement to UHD resolution TV Total DPS Won 1,000 1,000 1,200 1,400 along with vendor share gain continued. Total div yield % 3.0 3.0 3.6 4.2 ROA % 13.3 12.1 12.3 12.3 . Compelling evidence of SW becoming a comprehensive fabless for LG. ROE % 15.0 14.3 13.6 13.3 EV/EBITDA x 4.4 4.4 4.3 4.2 T-Con and PMIC sales continued to grow 15% and 12%, respectively. Like Net debt/equity % -66.0 -69.7 -68.5 -69.5 COF driver IC, these two products are moving up the value ladder (larger size P/BV x 1.5 1.5 1.4 1.2 UHD resolution screen) and gathering more vendor share at LG Display. It’s 108320 KS rel KOSPI performance, & encouraging that the take-off of OLED TV bodes well for PMIC and drive-IC rec history sales outlook. One caveat is that T-Con for OLED TV panels will be transferred to SW from LGE later than originally anticipated, likely 2017. . Management seems still low-balling 2016 guidance. Despite the company’s conservative guidance, we expect its top line to grow 22% and operating margin to reach over 9%. This will generate the free cash flows of over Won55bn in 2016 again. Earnings and target price revision
Note: Recommendation timeline - if not a continuous line, then there was no . We raise our 2016/17 EPS forecasts by 19%/7%, respectively. Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 . We accordingly raise our target price 5% to Won41,000, the same 13x PE. (all figures in Won unless noted, TP in KRW)
Price catalyst
Analyst(s) . 12-month price target: Won41,000 based on a PER methodology. Daniel Kim +82 2 3705 8641 [email protected] . Catalyst: The pace of improving sales mix compared to the pricing pressure Ryan Kim on key products. +822 3705 8771 [email protected]
Action and recommendation 13 May 2016 Macquarie Securities Korea Limited . We continue to beat the drum for the company. Outperform.
Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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HONG KONG SMIC 981 HK Outperform Better margin outlook Price (at 03:43, 13 May 2016 GMT) HK$0.66
Valuation HK$ 0.90 Event - Price to Book 12-month target HK$ 0.90 . SMIC reported 1Q16 results/2Q16 guidance on May 12 and held its Upside/Downside % +36.4 conference call on 13 May. 1Q16 earnings beat on better OPM. 2Q16 sales 12-month TSR % +36.4 guidance of +3-7% QoQ was slightly better than expected, with 25-27%GM Volatility Index Medium guidance 1-3ppt higher than expected. SMIC raised 2016 GM guidance to GICS sector mid-20% from low-to-mid 20%, while retaining its 20% revenue growth Semiconductors & Semiconductor expectation. Equipment Market cap HK$m 27,833 Impact Market cap US$m 3,587 30-day avg turnover US$m 10.0 . Better margin outlook on solid utilization: SMIC now guides 2016 GM to Number shares on issue m 42,171 be mid-20%, from low-to-mid 20% previously, as it sees strong demand through rest of the year and expects capacity to maintain high utilization. Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E SMIC kept its 20% revenue growth target for 2016, and expects to see similar Revenue m 2,236.4 2,713.8 2,963.6 3,320.3 growth in the next few years. We believe SMIC is well-positioned as the most EBIT m 222.0 193.5 217.8 266.9 preferred foundry for customers seeking manufacturing partners in China. EBIT growth % 70.5 -12.8 12.5 22.5 Reported profit m 253.4 205.2 231.2 279.8 . Slower 28nm ramp up offset by strong 40nm demand: SMIC’s revenue EPS rep ¢ 0.7 0.5 0.5 0.7 EPS rep growth % 44.6 -25.6 12.7 21.0 contribution from 28nm only inched up to 0.4% in 1Q16 from 0.3% in 4Q15. PER rep x 13.0 17.5 15.5 12.8 Management cut its 28nm revenue contribution target from double-digit-% to Total DPS ¢ 0.0 0.0 0.0 0.0 Total div yield % 0.0 0.0 0.0 0.0 5-8% by 4Q16, mainly due to customer product transition. SMIC still expects ROA % 3.4 2.5 2.5 2.8 28nm volume ramp up in 2H16. Also, SMIC sees strong demand for 40nm ROE % 7.6 5.4 5.7 6.5 EV/EBITDA x 4.8 3.6 3.0 2.7 from several applications like WiFi, TV, RF, STB, etc. It also plans to increase Net debt/equity % 2.6 27.5 36.4 38.6 2016 foundry capex to US$2.5m from US$2.1m, mainly for 40nm capacity P/BV x 1.0 0.9 0.9 0.8 and preparing for the 28nm ramp next year. 981 HK rel HSI performance, & rec history . Vertical integration with JCET positive for long-term: SMIC’s US$410m investment in JCET (details in our 28 April report) is to meet the industry trend and customers’ requests on greater integration between front-end and back- end IC manufacturing. We’re seeing increasing vertical integration across the semi industry, including TSMC’s inroad into packaging with InFO technology, and ASE’s vertical integration with its EMS subsidiary, USI. Through the JCET strategic partnership, we believe SMIC will be able to expand its addressable market in the long-term. In addition, SMIC will also seek M&A opportunities to expand its customer base and addressable market.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Earnings and target price revision Source: FactSet, Macquarie Research, May 2016 (all figures in USD unless noted, TP in HKD) . We raise 2016 earnings by 19% to factor in 1Q16 results and a better margin
outlook, but keep our target price unchanged on limited impact on BVPS. Price catalyst Analyst(s) Macquarie Capital Securities Limited, Taiwan . 12-month price target: HK$0.90 based on a Price to Book methodology. Branch Patrick Liao . Catalyst: Earnings results/outlook, progress of advanced technologies. +886 2 2734 7515 [email protected] Lynn Luo Action and recommendation +886 2 2734 7534 [email protected] Jeffrey Ohlweiler . Reiterate Outperform rating with a target price of HK$0.90. We believe SMIC +886 2 2734 7512 [email protected] Macquarie Capital Limited will continue to build 28nm capacity through 2018, helping to drive growth. We Allen Chang expect SMIC’s earnings to show a 17% CAGR in 2016-18 and we remain +852 3922 1136 [email protected] positive on the long-term sustainability of its core foundry business. 13 May 2016
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN SUMCO 3436 JP Outperform 2Q OP trough and 300mm recovery Price (at 06:00, 12 May 2016 GMT) ¥703
Valuation ¥ 1,165 Conclusion - Price to Book 12-month target ¥ 1,165 . SUMCO reported 1Q results on 12 May after the close. While the 1Q OP Upside/Downside % +65.7 result was in line with our estimate, we think the market will be disappointed 12-month TSR % +69.2 with the softer-than-expected 2Q outlook. We think the market’s focus will Volatility Index High quickly shift to the prospective cyclical recovery in 2H, with 2Q OP likely the GICS sector trough for the year. The reality of delayed price recovery and a moderated Semiconductors & Semiconductor volume trajectory lead us to lowered estimates and a reduced TP of ¥1,165 Equipment (from ¥1,500), but we continue to see significant upside potential from the Market cap ¥m 206,180 current level and maintain our Outperform rating. Market cap US$m 1,891 30-day avg turnover US$m 31.9 Impact Number shares on issue m 293.3 . Revenues down 5.6% QoQ in 1Q, then stable in 2Q: 1Q revenues Investment fundamentals decreased 5.6% QoQ to ¥51.8bn pulling OP down 7.9% to ¥3.6bn (7% OPM). Year end 31 Dec 2015A 2016E 2017E 2018E Both the revenue and OP results were in line with our forecasts. ASP erosion Revenue bn 236.8 218.2 238.0 263.5 seems to have been at least 2%. EBIT bn 29.4 20.1 32.2 41.4 EBIT growth % 14.8 -31.8 60.6 28.3 . 2Q revenue guidance is flattish QoQ, but OP is to decrease further to ¥2bn Recurring profit bn 25.5 17.0 30.0 40.0 Reported profit bn 19.7 12.7 24.3 30.8 from ¥3.6bn in 1Q (vs our prior estimate of ¥5bn), with pressure from the EPS rep ¥ 70.1 43.4 83.0 105.1 stronger Yen (¥110/US$ vs ¥118.3/US$ in 1Q), and a ¥0.4bn Kumamoto EPS rep growth % 10.8 -38.1 91.3 26.6 PER rep x 10.0 16.2 8.5 6.7 earthquake impact. For 1H, SUMCO has indicated a 3% YoY ASP erosion. Total DPS ¥ 20.0 20.0 35.0 50.0 Total div yield % 2.8 2.8 5.0 7.1 . What was positive: (1) SUMCO sees recovery in 300mm wafer volumes in ROA % 5.9 4.1 6.4 8.3 2Q to ~4.8-5.2m/mo from ~4.8m/mo in 1Q (+4% QoQ on the mid-point), driven ROE % 10.8 6.0 11.1 13.1 EV/EBITDA x 6.5 8.1 6.0 5.0 by a rise in foundry epi-wafer demand towards the latter half of 2Q; (2) 300mm Net debt/equity % 54.5 54.3 40.7 33.2 epi-wafer price erosion has eased and QoQ ASP erosion seems limited in 2Q; P/BV x 0.9 1.0 0.9 0.8 (3) The main market players look to have halted their price war, though 3436 JP vs TOPIX, & rec history SUMCO noted some lingering pressure due to supply from smaller players trying to keep their factories utilised; (4) Expectations of improving demand for 200mm and smaller wafers from the automotive and other sectors. . What was negative: (1) Forex headwinds; (2) No visibility on price increases, which look unlikely until the latter part of 2017; (3) Toned-down expectations for memory sector 300mm polished wafer demand, with 2Q demand likely to be damp; (4) Low yields in the initial production of wafers for 10nm chip-making. . 2H OP to rebound: SUMCO noted that yield issues with the production of
Note: Recommendation timeline - if not a continuous line, then there was no wafers specified for 10nm chip-making will hurt 2Q margins. But SUMCO Macquarie coverage at the time or there was an embargo period. expects yields to improve in 2H. In addition, we expect margins to be lifted by Source: FactSet, Macquarie Research, May 2016 (all figures in JPY unless noted) a rise in epi-wafer volumes in general, and growth in 200mm and smaller
diameter wafers. We estimate 145% HoH (and 29% YoY) OP growth in 2H. Earnings and target price revision . We have cut our FY12/16-18 OP estimates by 28%-36%, to reflect the limited visibility on price increases. We have lowered our TP to ¥1,165 from ¥1,500 based on 1.4x P/B FY12/18E (LTROE/CoE of 10%/7%), vs the current 0.8x. Analyst(s) Damian Thong, CFA Price catalyst +81 3 3512 7877 [email protected] Ansel Laudo . 12-month price target: ¥1,165 based on a Price to Book methodology. +81 3 3512 7874 [email protected] . Catalyst: QoQ wafer shipments in 2Q and recovery of small-wafer demand. 13 May 2016 Action and recommendation Macquarie Capital Securities (Japan) Limited . We maintain our Outperform rating on SUMCO at the cycle trough, but
acknowledge that we are disappointed by the lack of price discipline.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN Sumitomo Mitsui Financial 8316 JP Outperform Giving priority to capital accumulation Price (at 06:00, 13 May 2016 GMT) ¥3,360
Valuation ¥ 3,600 Conclusion - Price to Book 12-month target ¥ 3,600 . SMFG announced FY3/16 results after market on 13th May. FY3/16 NP Upside/Downside % +7.1 (JPY646.7bn) was 15.7% lower than our forecast (JPY767bn), and FY3/17E 12-month TSR % +11.9 NP guidance (JPY700bn) was 6.4% lower than ours (JPY748bn). DPS for Volatility Index Medium FY3/17E is JPY150/share, no change from FY3/16, vis-à-vis our forecast of GICS sector Banks JPY160/share. NP in 4Q was only JPY20bn, as their consumer finance Market cap ¥bn 4,751 subsidiaries made Kabarai provisions of JPY141bn. Market cap US$m 42,941 Free float % 45 Impact 30-day avg turnover US$m 274.0 . Expecting progress in unwinding of cross share holdings: To accelerate Foreign ownership % na Number shares on issue m 1,414 the unwinding of cross share holdings, SMFG plans to sell JPY100bn of shares at acquisition value every FY. It disclosed the acquisition value of Investment fundamentals shares that the bank has already received approval from their clients to sell. Year end 31 Mar 2015A 16CoE 2016E 2017E At the end of FY03/16, the approved amount reached JPY60bn. It is also Net interest Inc bn 1,505.2 na 1,519.0 1,474.5 Non interest Inc bn 1,475.2 na 1,494.6 1,561.2 noted that expected stock-related gains are not included in their guidance for Underlying profit bn 1,321.1 na 1,296.1 1,283.9 FY3/17E, meaning that the potential upside is here. PBT bn 1,309.4 na 1,266.1 1,219.4 PBT growth % -8.0 na -3.3 -3.7 Recurring profit bn 1,321.2 1,110.0 1,276.1 1,229.4 . Credit cost from overseas energy sector: Credit cost from the overseas Reported profit bn 753.6 680.0 767.4 748.3 energy sector (non-Japanese clients) was JPY32bn in FY3/16, accounting for Adjusted profit bn 765.4 na 777.4 758.3 EPS rep ¥ 551.2 497 561.3 550.1 31% of total consolidated credit cost. In FY3/17, it is expected to rise to EPS rep growth % -9.9 na 1.8 -2.0 JPY50bn, accounting for 28%. Of its USD55bn exposure, 6% of total EPS adj ¥ 559.8 na 568.6 557.4 EPS adj growth % -9.5 na 1.6 -2.0 exposure, the upstream sub-sector accounted for 27% at the end of FY3/16. PER rep x 6.1 na 6.0 6.1 PER adj x 6.0 na 5.9 6.0 . One-time loss in 4Q: Consumer finance subsidiaries made Kabarai Total DPS ¥ 140.0 120.0 155.0 160.0 provisions of JPY141bn in 4Q, of which JPY122bn was by SMBC Consumer Total div yield % 4.2 2.9 4.6 4.8 ROA % 0.4 na 0.4 0.4 Finance and JPY19bn by Cedyna. It corresponds to potential Kabarai ROE % 9.4 na 8.4 7.8 requests for the next 2.8 years. The decline in FY3/16 NP is explained by this Equity to assets % 3.9 na 4.0 nmf P/BV x 0.5 na 0.5 0.5 factor.
8316 JP vs TOPIX, & rec history . No increase in FY3/17E dividend: SMFG will not increase dividend, or buy back shares in FY3/17. In terms of share buyback, their prudent approach to capital policy remains unchanged, as the Basel rules are not clear yet. Earnings and target price revision
. No change. We will review our earnings estimates after also meeting with the bank. 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: ¥3,600 based on a Price to Book methodology. Source: FactSet, Macquarie Research, May 2016 (all figures in JPY unless noted) . Catalyst: NIRP, capital policy (dividend and share buyback start),
reorganization of the group Action and recommendation
Analyst(s) . Maintain Outperform. Kabarai provision was based on their best effort Keisuke Moriyama forecast for the next 2.8 years. As well as preparing for the potential losses, it +81 3 3512 7476 [email protected] allowed SMFG to give priority to accumulate capital. We expect it will 16 May 2016 eventually contribute to higher shareholder returns. Macquarie Capital Securities (Japan) Limited
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 Sun Art Retail Group 6808 HK Neutral Let’s not get too excited Price (at 08:00, 12 May 2016 GMT) HK$5.16
Valuation HK$ 4.70 Event - PER 12-month target HK$ 4.70 . Sun Art’s 1Q16 net profit of Rmb1,026m, down 3.5% YoY, came in slightly Upside/Downside % -8.9 ahead of our expectation and reached 48% and 43% of our and consensus 12-month TSR % -5.5 FY16 net profit forecasts. Given 1Q is traditionally the peak season for Volatility Index Medium grocery retailers, it remains to be seen if the company can overcome the GICS sector Food & Staples tough operating environment. Therefore, we maintain our Neutral rating with a Retailing higher TP of HK$4.7 based on an unchanged 17x FY17E PER. Market cap HK$m 49,225 Market cap US$m 6,342 Impact Free float % 11 . Short-lived SSSg recovery? 1Q16 SSSg turned positive to 1.1%, where 30-day avg turnover US$m 4.5 ASP was up 3% but traffic was down 1.9%, improving from -4.2% recorded in Number shares on issue m 9,540 4Q15 and -3.2% in 1Q15. While SSSg was around +2% to +3% from Jan to Investment fundamentals Feb, it dipped into negative territory at more than 5% decline in Mar due to an Year end 31 Dec 2015A 2016E 2017E 2018E earlier Lantern Festival this year and weaker home-appliance sales. For April, Revenue bn 96.4 103.3 107.1 112.7 EBIT bn 3.6 3.4 3.2 3.5 SSSg returned to a flattish level and mgmt maintains previous guidance for EBIT growth % -15.2 -5.5 -5.1 9.7 SSSg to be flat this year. With no near-term catalysts in sight, we remain Reported profit bn 2.4 2.3 2.2 2.4 Adjusted profit bn 2.4 2.3 2.2 2.4 cautious on any potential SSSg recovery. We estimate Sun Art’s SSSg to be EPS rep Rmb 0.26 0.24 0.23 0.25 flattish in both FY16 and FY17. EPS rep growth % -15.7 -5.4 -5.2 9.8 EPS adj Rmb 0.26 0.24 0.23 0.25 . Disciplined OPEX spending not enough to prevent operating deleverage. EPS adj growth % -15.6 -5.5 -5.2 9.8 PER rep x 16.9 17.9 18.9 17.2 Despite rental income’s +14% YoY growth having outpaced group revenue’s PER adj x 16.9 17.9 18.9 17.2 +5.9% YoY, GPM stayed flat YoY at 21.6% in 1Q16. This implies that Total DPS Rmb 0.16 0.15 0.14 0.16 Total div yield % 3.7 3.5 3.3 3.6 merchandise gross margin actually deteriorated as lower-margin fresh ROA % 6.6 6.0 5.4 5.7 produce grew faster than non-food products. Thanks to stringent cost control, ROE % 12.1 10.9 9.9 10.3 EV/EBITDA x 5.4 5.8 5.8 5.3 OPM YoY contraction narrowed to 0.4ppt in 1Q16 vs 0.8ppt in 1Q15. Namely, Net debt/equity % -27.5 -25.4 -26.2 -26.7 operating expenses including operating lease, depreciation and amortization P/BV x 2.0 1.9 1.8 1.7 and maintenance were well under control. Meanwhile, ongoing minimum 6808 HK rel HSI performance, & rec wage hike continues to put the company under pressure as labour expense history as a % of sales grew 0.2ppt YoY to 7.3%. . E-commerce to remain a profit drag in the near term. Sun Art continues to actively ramp up its e-commerce platform, Feiniu.com, and it is progressing within mgmt expectations so far. During the quarter, GMV rose 3-4x YoY and mgmt expects similar momentum to continue throughout the year. Average ticket size was Rmb160-170. To our surprise, Feiniu operating loss only accounted for 4.5% of the group profit in 1Q16. While mgmt expects to contain Feiniu operating loss within 6% to 7% of group profit this year.
Note: Recommendation timeline - if not a continuous line, then there was no However, we are sceptical whether this is achievable, given it is still in early Macquarie coverage at the time or there was an embargo period. stages of development with considerable investment to be incurred in the Source: FactSet, Macquarie Research, May 2016 future. Thus, we estimate e-commerce loss to account for 15.1% and 19.8% (all figures in Rmb unless noted, TP in HKD) of total net profit in FY16/17 respectively.
Earnings and target price revision . We raise our FY16 and FY17 earnings by 9% and 6% respectively. Analyst(s) Linda Huang, CFA Price catalyst +852 3922 4068 [email protected] Sunny Chow . 12-month price target: HK$4.70 based on a PER methodology. +852 3922 3768 [email protected] . Catalyst: 1H16 results 13 May 2016 Macquarie Capital Limited Action and recommendation
. Maintain Neutral. We suggest investors to stay on the sidelines for now.
Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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HONG KONG Swire Properties 1972 HK Outperform Strong reversions at HK offices Price (at 06:19, 13 May 2016 GMT) HK$19.74
Valuation HK$ 26.80 Event - DCF 12-month target HK$ 24.10 . Swire Properties released its 1QFY16 operating statement. Upside/Downside % +22.1 . In 1Q16, Hong Kong office portfolio delivered strong performance with 12-month TSR % +25.6 positive rental reversions. Pacific Place office saw higher spot rents while Volatility Index Low GICS sector Real Estate occupancy was slightly down. Hong Kong shopping malls tenants sales Market cap HK$m 115,596 worsened despite being fully let. Spot rents at Taikoo Hui Offices increased Market cap US$m 14,835 while ONE INDIGO office occupancy continued to trend down. Retail sales Free float % 18 growth at China malls remained positive but normalized. Residential sales 30-day avg turnover US$m 5.9 were particularly strong with the successful launch of ALASSIO in Hong Kong. Number shares on issue m 5,856 Somerset House redevelopment is expected to be completed by 2018.
Investment fundamentals Impact Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 16,447 16,954 13,683 12,999 . Pacific Place office and One Island East positive reversion. In 1Q16, the EBIT m 9,091 9,601 8,638 8,545 EBIT growth % 0.6 5.6 -10.0 -1.1 Hong Kong office portfolio rental reversion was at +10% to +32% YoY. Pacific Reported profit m 14,072 7,333 6,691 6,675 Place office saw +13% rental uplift, compared to -1.0% in FY15 where it was Adjusted profit m 7,307 7,333 6,691 6,675 EPS rep HK$ 2.41 1.25 1.14 1.14 cycling through the peak rents signed in CY11&12. One Island East registered EPS rep growth % 47.9 -47.9 -8.8 -0.2 an impressive +32% positive rental reversion. Occupancy rate for the Pacific EPS adj HK$ 1.25 1.25 1.14 1.14 EPS adj growth % 2.2 0.4 -8.8 -0.2 Place office declined -200bps QoQ to 98% PER rep x 8.2 15.7 17.3 17.3 PER adj x 15.8 15.7 17.3 17.3 . Pacific Place Mall showed no improvement. In 1Q16, Pacific Place Mall Total DPS HK$ 0.71 0.71 0.65 0.65 retail sales declined by -15.4% YoY, which underperformed Hong Kong retail Total DPS growth % 7.6 0.4 -8.8 -0.2 Total div yield % 3.6 3.6 3.3 3.3 sales 1Q16 growth of -12.5% YoY. However, considering Pacific Place’s ROA % 3.4 3.5 3.2 3.1 position as a high-end luxurious mall, it outperformed Hong Kong retail sales ROE % 3.4 3.4 3.0 3.0 EV/EBITDA x 14.2 14.6 16.1 16.3 1Q16 growth for ‘jewellery, watches, clocks & other valuable gifts’ of -23.2% Net debt/equity % 15.3 13.0 12.0 11.2 YoY. Cityplaza Mall and Citygate Outlets retail sales growth were -3.9% YoY P/BV x 0.5 0.5 0.5 0.5 and -14.0% YoY, respectively. 1972 HK rel HSI performance, & rec history . China offices and malls. TaiKoo Hui office remained fully let while ONE INDIGO office occupancy continued to lower by -100bps QoQ to 91% as at end-1Q16. Retail sales growth remained positive but normalized, except for Sino-Ocean Taikoo Li Chengdu which saw +138.9% YoY higher sales as it continued to ramp up since opening in late 2014. . 204 residential units sold, including 176 units at ALASSIO, 6 units at AREZZO in Hong Kong, 5 units at REACH and 17 units at RISE of the Miami Brickell City Centre project. The average sale price of ALASSIO was HK$27,656psf based on saleable area. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 Earnings and target price revision (all figures in HKD unless noted) . No change.
Price catalyst
. 12-month price target: HK$24.10 based on a 10% discount to DCF Analyst(s) methodology. Kai Tan +852 3922 3720 [email protected] . Catalyst: HK monthly retail sales. Jensen Hui +852 3922 3373 [email protected] Action and recommendation
13 May 2016 . We maintain Outperform recommendation. Swire Properties is currently Macquarie Capital Limited trading at 0.54x price to 31 December 2015 book value of HK$36.97/share. This represents an ~18% discount to the average P:BV since listing of 0.66x.
Please refer to page 12 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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JAPAN T&D Holdings 8795 JP Neutral Total return disappoints Price (at 06:00, 13 May 2016 GMT) ¥1,016
Valuation ¥ 800-1,200 Conclusion - Price to Book 12-month target ¥ 1,000 . We downgrade our rating on T&D from Outperform to Neutral and lower our Upside/Downside % -1.6 TP from ¥1400 to ¥1000, following FY3/16 results. The company’s FY3/16 NP 12-month TSR % +1.4 came in 11% lower vs. BBG consensus expectations and NP guidance for Volatility Index Medium next year is also 16% lower vs. Street expectations. Shareholder returns GICS sector Insurance under-promised – we have lower expectations for future shareholder returns Market cap ¥m 692,404 as the company’s ESR has significantly weakened given challenging markets. Market cap US$m 6,227 Free float % 40 Impact 30-day avg turnover US$m 34.6 . Disappointment with shareholder returns. DPS of ¥30 was above our Foreign ownership % Number shares on issue m 681.5 forecast of ¥28 and in line with consensus expectations, but the buyback amount of ¥14bn is lower vs. our expectation of ¥20bn. The company stated Investment fundamentals that its total shareholder returns (divs & buybacks) are equal to 40% of Year end 31 Mar 2016A 2017E 2018E 2019E adjusted profits, which is the minimum of their new target figure (40%+ of Life Total Rev bn 1,948.4 1,693.0 1,698.0 1,723.0 PBT bn 110.2 101.6 102.6 104.6 adjusted profits). Given the company’s relatively strong capital position and Reported profit bn 72.5 72.8 73.8 73.8 conservative strategy, we are disappointed with the company’s payouts. The EPS adj ¥ 111.0 113.5 117.4 119.6 PER adj x 9.2 9.0 8.7 8.5 company stated that more details regarding its shareholder return policy will DPS ¥ 30.0 30.0 30.0 30.0 be provided in its MTP (scheduled to be released on 23 May), but guided that Dividend yield % 3.0 3.0 3.0 3.0 Total SH Funds bn 1,214.1 1,254.0 1,297.3 1,297.3 no significant changes are likely to be made to its existing policy. BV/S ¥ 1,865.9 1,970.4 2,078.3 2,115.9 ROE % 5.7 5.9 5.8 5.7 . Lower earnings expected. Profits likely came in below expectations due to ROA % 0.5 0.5 0.5 0.5 P/BV x 0.5 0.5 0.5 0.5 the ¥11.8bn of provisions made for its retirement guarantees (given the drop in interest rates) and lower revenues/profits generated through TDFL’s 8795 JP vs TOPIX, & rec history variable insurance business. We are not very optimistic regarding the company’s short/mid-term earnings prospects as yield income is likely to contract (lower interest rates) and the company stated that capital gains would likely be lower in FY3/17E (¥81 bn in FY3/16). . ESR at 150%: not excessively high anymore. The company stated that its economic solvency ratio (ESR) was 162% as at March 2016 with the current level likely ~150% (the company’s stated minimum level is 133%). The company stated that it does not plan to take any immediate action to boost its
Note: Recommendation timeline - if not a continuous line, then there was no capital levels. Challenging market conditions have cut the company’s ESR Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 levels significantly YoY (ESR was 200%+ in FY3/15). We no longer believe (all figures in JPY unless noted) the company has a ‘Fortress’ capital position and we have lower expectations
regarding the company’s future shareholder payout potential. Earnings and target price revision
. We lower our FY3/17E NP by 19%, FY3/18E NP by 21%, and incorporate a FY3/19E NP of ¥74bn. Price catalyst
. 12-month price target: ¥1,000 based on a NAV methodology.
Analyst(s) . Catalyst: New MTP announcement (schedule 23 May 2016). Leo Nakada, CFA +81 3 3512 6050 [email protected] Action and recommendation 13 May 2016 . Downgrade to Neutral. Shareholder returns under-promised and earnings Macquarie Capital Securities (Japan) guidance was weak. We expect lacklustre share price performance on the Limited back of these results. We no longer recommend any Japanese life companies for the time being.
Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
41
SINGAPORE Yanlord YLLG SP Outperform From ASP hikes to margin expansion Price (at 08:58, 12 May 2016 GMT) S$1.15
Valuation S$ 2.46 Event - DCF 12-month target S$ 1.59 . Yanlord is the best-performing China property stock, up 15% YTD (sector Upside/Downside % +38.9 down 14%), and remains our small-cap top pick. 1Q16 results were strong 12-month TSR % +40.8 (see details here). We believe that its strong 4M16 contracted sales of Volatility Index Low Rmb13.1bn (up 195% YoY) and representing 48.5% of its full-year target (vs GICS sector Real Estate peer average at +73% YoY and 35% of target) should ease concerns about its Market cap S$m 2,231 sales performance. We update the latest ASP and raise our contracted sales Market cap US$m 1,630 forecast from Rmb31.0bn in 2016 to Rmb31.2 and from Rmb29.7bn to Free float % 24 Rmb29.8bn in 2017. We continue to see spillover effects, thanks to strong 30-day avg turnover US$m 1.9 liquidity. From Shanghai to Suzhou; from Shenzhen to Zhuhai; from Beijing to Number shares on issue m 1,949 Tianjin, these are cities where Yanlord is well placed to benefit rising market Investment fundamentals sentiment, ASP and margin. Maintain OP. Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 16,581 19,571 28,599 35,168 . Macquarie’s quant model currently holds a strong positive view on Yanlord. EBIT m 3,466 4,855 7,753 8,660 The strongest style exposure is Price Momentum, indicating this stock has EBIT growth % 28.4 40.1 59.7 11.7 Reported profit m 1,469 2,057 2,990 3,228 had strong medium- to long-term returns which often persist into the future. Adjusted profit m 1,095 2,057 2,990 3,228 EPS rep Rmb 0.75 1.06 1.53 1.66 Impact EPS rep growth % 8.2 40.1 45.3 8.0 EPS adj Rmb 0.56 1.06 1.53 1.66 EPS adj growth % 60.7 87.8 45.3 8.0 . With a high run-rate achieved and a strong net-cash balance sheet, we PER rep x 7.2 5.2 3.6 3.3 believe the company is in a good position in improving its earnings quality, PER adj x 9.7 5.2 3.6 3.3 notably gross margin and financing cost. Total DPS Rmb 0.07 0.11 0.15 0.17 Total DPS growth % 18.7 52.9 45.3 8.0 Total div yield % 1.3 1.9 2.8 3.0 . While ASP hike may slow down its sales, it will in turn translate into margin ROA % 4.7 5.7 8.3 9.5 expansion ahead, and help offset the impact of lower margin of newly ROE % 5.5 9.9 13.2 12.7 EV/EBITDA x 3.3 2.4 1.5 1.3 acquired projects. We forecast the gross margin to improve at 31% for FY16F Net debt/equity % 2.7 -7.2 -41.1 -51.8 (vs 28.6% in 1Q16), thanks to the delivery of Nanjing projects, and 33% for P/BV x 0.5 0.5 0.4 0.4 FY17F. The company also plans to lower the financing cost by 1) replacing YLLG SP rel SNGPORI performance, & the Rmb2b dim-sum bond due this month, and redeem the high-yield US rec history bond though it may record a loss in P&L. . On dividend, the increase should be in line with strong earnings growth (up 87% in 2016) with potential payout ratio increase further down the road. We currently forecast a 10% payout at 1.9% yield for FY16F and 2.7% for FY17F. Earnings and target price revision
. Core profit: FY16E +0.2%, FY17E +2.4%. Price target marginally changed Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. from SGD1.58/share to SGD1.59/share. Source: FactSet, Macquarie Research, May 2016 (all figures in Rmb unless noted, TP in SGD) Price catalyst
. 12-month price target: S$1.59 based on a DCF methodology.
. Catalyst: Dividend increase, more land acquisition Analyst(s) Macquarie Capital Limited Action and recommendation Wilson Ho, CFA +852 3922 3248 [email protected] . Maintain OP. The stock is our small-cap top pick. It is trading at 5.2x FY16E Catherine Li +852 3922 1161 [email protected] PER and 53% discount to NAV. Macquarie Capital Securities (Singapore) Pte. Limited Tuck Yin Soong +65 6601 0838 [email protected]
13 May 2016
Please refer to page 16 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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TAIWAN Yungtay Engineering 1507 TT Underperform The calm before the storm Price (at 14:06, 12 May 2016 GMT) NT$46.90
Valuation NT$ 30.00- Event 55.00 - PER . We have begun to see a significant profit decline in Yungtay’s China elevator 12-month target NT$ 33.00 segment – OP profit down 50% YoY in 1Q16, missing our forecast by 50%, Upside/Downside % -29.6 mainly because of lower GM%. We believe lower-ASP orders and a sharp 12-month TSR % -24.8 order decline since 2H15 will further hurt Yungtay’s financial performance Volatility Index Low/Medium from 2H16. Although its consolidated GM% seems resilient in 1Q16, due to a GICS sector Capital Goods strong rise in Taiwan profits on delivery of higher-margin projects, we think Market cap NT$m 19,267 this is unsustainable and not enough to cover China headwinds. Reiterate UP. Market cap US$m 593 Free float % 81 Impact 30-day avg turnover US$m 0.5 Number shares on issue m 410.8 . Sluggish orders leading to softer revenue in 2H16. New orders in 1Q16 dropped 40% YoY, significantly worse than the industry’s 8% decline, which Investment fundamentals we believe is mainly due to 1) regional mix effect: 65% of orders are from Year end 31 Dec 2015A 2016E 2017E 2018E Revenue m 23,099 20,780 20,740 21,378 high housing inventory in T3/4 cities, and 2) market share loss even in lower- Reported profit m 1,850 1,561 1,358 1,315 tier cities due to rising competition from international JV brands and local Profit bonus exp m 1,850 1,561 1,358 1,315 Adjusted profit m 1,833 1,577 1,358 1,315 peers. From 4Q15-1Q16, orders slumped 42% YoY, which should turn to a EPS rep NT$ 4.50 3.80 3.30 3.20 16-21% YoY revenue decline in 2H16, given 1-2 year order lead times. EPS rep growth % -8.5 -15.6 -13.0 -3.1 EPS adj NT$ 4.46 3.84 3.30 3.20 . Margin compression cycle kicking off. GM% in China dropped 1.4ppts to EPS adj growth % -6.1 -14.0 -13.9 -3.1 PER rep x 10.4 12.3 14.2 14.7 25.6% in 1Q16, the lowest level in the past six quarters, 2.6ppts below our PER adj x 10.5 12.2 14.2 14.7 forecast, leading OP profit to decline 50% YoY, 50% below our forecast. We Total DPS NT$ 0.00 2.28 1.98 1.92 Total div yield % 0.0 4.9 4.2 4.1 previously expected lower material price to still offer downside protection. ROA % 7.5 6.0 5.1 5.0 However, this is not enough to cover the headwinds from keen price ROE % 15.5 12.9 10.7 10.2 EV/EBITDA x 5.2 6.4 7.0 7.0 competition (6% decline in ASP) and smaller scale (-15% YoY decline in Net debt/equity % -38.9 -45.9 -45.9 -45.9 instalment). We believe the margin compression cycle has already kicked off P/BV x 1.6 1.5 1.5 1.5 and will become more severe in 2H16, when it started to book lower-ASP 1507 TT rel TAIEX performance, & rec orders and lacks the benefits from cheaper material. We expect GM% will history slump to 21% in 2H16 from 25% in 1H16. . Negative implication from leaders – Keen pricing competition + potential market share loss. KONE, OTIS and Schindler, which jointly owned a 40% share in China, all saw continued ASP decline in their new orders, suggesting the pricing competition is still intense. We believe Yungtay will not be immune to pricing pressure, given weaker brand power and smaller operating scale. Schindler also highlighted it is gaining share in lower-tier cities via aggressive expansion, reaffirming our view that Yungtay is losing in its main territories.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Earnings and target price revision Source: FactSet, Macquarie Research, May 2016 (all figures in NT$ unless noted, TP in TWD) . Largely unchanged. NT$33 TP, based on an unchanged 10x 2017E PER.
Price catalyst
. 12-month price target: NT$33.00 based on a PER methodology. Analyst(s) Benson Pan . Catalyst: monthly operating data, China housing data. +886 2 2734 7527 [email protected] Corinne Jian, CFA Action and recommendation +886 2 2734 7522 [email protected] . Reiterate Underperform on Yungtay, as we believe its financial performance 13 May 2016 will substantially worsen in 2H16. If there’s any share price rebound on Macquarie Capital Securities Limited, resilient GM% in 1Q16, driven mainly by the delivery of high-margin projects Taiwan Branch in TW and we think this is unsustainable, it would be a good time to sell/short.
Please refer to page 11 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
43
ASIA/AUSTRALASIA In case you missed it The top 6% of this week’s Asia-Pac Ideas The table-banger of the week was Daniel Kim’s deep dive on an under- researched new growth driver for Samsung—plastic OLED. Daniel thinks our iPhones will all change dramatically with POLED starting next year, with top/bottom/side bezels getting thrown out and the thumbprint-reading technology going on-screen. Read more below. Samsung Electronics - Taking a leap forward with OLED Daniel Kim
Samsung has found a third profit center, next to DRAM and smartphone— POLED. From next year, we expect iPhone to adopt this, allowing for unlimited “In case you missed it” highlights the design freedom and future resolution upgrade. TAM is estimated at US$15bn per very best of our Asia Pacific research. year (20% margins) and Samsung is likely to enjoy a dominant position. Raise Every report we publish is assessed for proprietary research content and OP forecasts 7%/13% and reiterate as a Marquee Buy Idea with 34% upside. actionable investment ideas for our Australian Quant Action - Getting the Short End of the Stick Zhe Chen clients – details inside. We hope you find it useful and appreciate all Aggregate market short interest is at historically high levels, and is elevated feedback. across sectors. Short exposures have increased off the back of predictable
factor returns and strong returns to long-short portfolios. This trend has reversed. More research highlights inside Short interest has historically predicted future returns. The least-shorted stocks Greater China Tech – Signals at GCC outperformed the most shorted stocks by 13.2% per annum. Alpha Networks – A turnaround is not enough Accton Technology - Switch to success Kaylin Tsai Konami – 30% premium to peers not justified Cookpad – Strategy clarified – rationalisation.. As the likes of Facebook and Amazon surge their investments in data-centers, Greater China Consumer – Status Quo opportunities are emerging down the tech supply chain. We initiate on Accton Fanuc – Short-term pain for long-term gains (market caps USD530m) with 38% total share return and a NT$41 TP, based on Indonesia cigarettes – What BAT hits the road 11x 2017E PE. Accton is a purer play white-box/high-speed switch producer. We China Lodging – Rising clarity, another upgrade forecast its white-box switch sales (15% of its 2015 sales) to show a 41% CAGR Japan Strategy – Timing the next BOJ move for 2015-18, helped by speed migration. A dividend yield of 10% a plus. We Crompton Greaves – SEBI approval for CGCEL expect a rebound post 1Q results and long anticipated analyst mtg. Eclat Textile – Garment price pressure seen Capital – Time for a vegetarian diet? Viktor Shvets
Is China over-invested? The issue is not the level of capital stock, but rather its pace of accumulation & direction (physical/traditional vs new/soft). ASEAN/Korea/JP cases show rapid increases precede credit crisis and/or slowdown. The solution for China is non-capital market domestic structural reforms. But reform prospects are fading. Corporates are the canary in a coal mine facing lengthening cash collection cycle and falling ROEs. Stress is rising. Key theme at Greater China Conference: Divergent Erwin Sanft Companies with widening divergence are all outperforming the rest of China's corporate universe by a wide margin. Policy makers continue to monitor growth closely ahead of next year's political transition and we expect upward revisions Research Quality Panel to consensus earnings. China equities offer 20% upside to our modest index Macquarie Capital Limited Jake Lynch targets. Our ‘Eagle’ picks offer the best value-growth combinations. +852 3922 3583 [email protected] Macquarie Capital Securities (Singapore) Pte. SG REITs - Overseas expansion: Importance of scale Tuck Yin Soong Limited Peter Bennett Expansion into overseas markets will be a theme for REITs, for the next 6-12 +65 6601 0847 [email protected] months. We are, however, guarded on smaller overseas expansion. We prefer Macquarie Securities (Australia) Limited Paul Checchin REITs with a larger scale in the selected overseas markets. We are cautious on +61 2 8232 4197 [email protected] REITs that expand into too many markets. Our order of preference is for
Residential, Retail, Office, Industrial, and lastly Hospitality. 13 May 2016
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
44
CHINA/GREATER CHINA China A-Share Autos China auto coverage Name Ticker Rating Price TP +/- % Cash, dividend and shareholdings of OEMs Great Wall-H 2333 HK OP 5.73 12.50 118% the national team Great Wall-A 601633 CH OP 8.54 10.40 22% Changan-B 200625 CH OP 10.98 31.90 191% Event Changan-A 000625 CH OP 14.78 26.60 80% Brilliance 1114 HK OP 7.59 9.60 26% . We highlight several trends after the A-Share auto and parts companies SAIC 600104 CH OP 20.06 27.70 38% reported their full-year 2015 and 1Q2016 results: Dongfeng 489 HK OP 8.05 17.50 117% GAC 2238 HK OP 8.41 11.50 37% All companies under coverage are net cash except BYD. The net Geely 175 HK OP 3.68 3.60 -2% Yutong Bus 600066 CH OP 21.46 28.00 30% cash/equity ratio rose from 15.3% at end of 2014 to 21.4% in 2015; King Long 600686 CH OP 13.29 18.00 35% BAIC 1958 HK OP 5.92 8.10 37% The overall profit payout was raised to 42.3% in FY15 from 31.5% in FY14; BYD-H 1211 HK UP 42.25 24.00 -43% The national team raised its shareholdings in the auto and parts companies BYD-A 002594 CH UP 59.51 20.00 -66% Auto parts to 2.4% at the end of 1Q2016. Huayu 600741 CH OP 14.29 21.00 47% Xinchen 1148 HK OP 1.13 2.80 148% Impact Fuyao-H 3606 HK OP 17.08 23.00 35% Fuyao-A 600660 CH OP 14.09 19.00 35% . The auto industry is cash rich: Most auto companies are net cash except Minth Group 425 HK OP 19.98 21.00 5% BYD as of 2015 year end. The average net cash/equity ratio increased 6.1ppt Nexteer 1316 HK OP 7.80 10.00 28% to 21.4% by the end of 2015. Among the passenger vehicle OEMs, Changan Dealers Baoxin 1293 HK OP 4.60 5.50 20% has the highest net cash/equity ratio of 46.8%, followed by SAIC (27.6%). DCH 1828 HK OP 3.16 4.45 41% BYD was in net debt position, with the net debt/equity ratio at 86.1%. Bus Zhengtong 1728 HK OP 2.98 5.20 74% companies, including King Long Bus (93.2%) and Yutong Bus (51.7%), have Zhongsheng 881 HK N 3.72 3.50 -6% a stronger cash position compared with PV companies. Yongda 3669 HK OP 3.56 5.50 54% 1. Prices are denominated in Rmb for A-share stocks and . Paying more dividends to shareholders: The overall profit payout ratio HK$ for B-share and H-share stocks. 2. Updated as of 13 May. among key A-share auto companies was raised by 10.8ppt YoY to 42.3% in Source: Bloomberg, Macquarie Research, May 2016 2015. Yutong Bus proposed the highest payout ratio of 93.9%, a big jump
from the high level of 56.5% in 2014. Huayu raised its profit payout ratio to
53.4% in 2015 from 30.1% in 2014. Changan raised its profit payout ratio from roughly 15% in the past to 30.0% in 2015. Fuyao Glass also offered a
generous dividend payout ratio at 68.4%. BYD continued to pay no dividends due to its high gearing ratio and heavy capex investment. . The national team increased its stake in auto sector: The national team, mainly CFS (China Securities Finance Corporation) and Central Huijin (Central Huijin Investment), entered the China A-share market in July 2015 as part of the government’s efforts to stabilize the volatile market. CFS and Huijin became major shareholders (top-10 shareholders listed in the annual/quarterly report) in a number of auto companies. The average equity stake rose from 2.2% at end of 2015 to 2.4% at end of 1Q2016. The national team could reduce its position if the A-share market stabilises, or if regulators decide not to intervene in the market anymore. This could depress share Analyst(s) Zhixuan Lin prices but it also offers buying opportunities. +86 21 2412 9006 [email protected] Janet Lewis, CFA Outlook +852 3922 5417 [email protected] Allen Yuan . We believe the China A-share auto companies are attractive for long-term +86 21 2412 9009 [email protected] investors for their good asset quality, high profit payout ratio and Eric Zong +852 3922 4749 [email protected] undemanding valuations. Leo Lin +852 3922 1098 [email protected]
13 May 2016 Macquarie Capital Limited
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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CHINA China Auto Daily China auto coverage & share price performance (12 May) News & announcements, 13 May Name Ticker Price Change Rating TP Auto OEM Key news: Great Wall-H 2333 HK 5.73 0.9% OP 12.50 Great Wall-A 601633 CH 8.54 0.6% OP 10.40 . NDRC (National Development and Reform Commission) auto industry Changan-B 200625 CH 10.98 -0.7% OP 31.90 capacity study shows that the overall capacity utilisation rate of passenger Changan-A 000625 CH 14.78 0.6% OP 26.60 Brilliance 1114 HK 7.59 1.3% OP 9.60 vehicle (PV) manufacturers was 81% in 2015, a relatively healthy level SAIC 600104 CH 20.06 0.0% OP 27.70 compared with the 52% utilisation rate for commercial vehicles (CV). By the Dongfeng 489 HK 8.05 0.5% OP 17.50 end of 2015, total production capacity for PVs and CVs was 25.75m and GAC 2238 HK 8.41 -2.0% OP 11.50 5.47m units, respectively (Source: Gasgoo) Geely 175 HK 3.68 -1.1% OP 3.60 Yutong Bus 600066 CH 21.46 2.8% OP 28.00 . NDRC: EV power battery capacity from 19 key enterprises in China has King Long 600686 CH 13.29 0.9% OP 18.00 BAICMotor 1958 HK 5.92 -1.7% OP 8.10 reached 30.5GWh by the end of 2015. (Source: ITDCW) BYD-H 1211 HK 42.25 0.7% UP 24.00 . Ford might launch the new generation Focus in 2017 with an extended BYD-A 002594 CH 59.51 2.1% UP 20.00 Parts supplier wheelbase. (Source: Internet Info Agency) Huayu 600741 CH 14.29 0.8% OP 21.00 Xinchen 1148 HK 1.13 -1.7% OP 2.80 . BAIC’s Senova brand added ~100 dealer stores to its distribution network Fuyao Glass-H 3606 HK 17.08 -1.5% OP 23.00 and raised the total number to 350 during the past 4 months, which drove Fuyao Glass-A 600660 CH 14.09 -0.2% OP 19.00 28% YoY sales growth in 4M16. (Source: Internet Info Agency) Minth Group 425 HK 19.98 1.1% OP 21.00 Nexteer 1316 HK 7.80 -0.9% OP 10.00 . Dongfeng Motor aims to achieve a market share of 15-18% in the new Auto dealer energy vehicle market by 2020 with a sales volume of 300k units. (Source: Baoxin 1293 HK 4.60 -2.5% OP 5.50 CPCA) DCH 1828 HK 3.16 0.6% OP 4.45 Zhengtong 1728 HK 2.98 -2.0% OP 5.20 Recent research: Zhongsheng 881 HK 3.72 -2.4% N 3.50 Yongda 3669 HK 3.56 -2.7% OP 5.50 . Dah Chong Hong – Balancing out business lines Note: 1. Prices are denominated in Rmb for A-share stocks and HKD for B-share and H-share stocks. 2. Updated as of 12 May closing prices.
Source: Bloomberg, Macquarie Research, May 2016.
Analyst(s) Zhixuan Lin +86 21 2412 9006 [email protected] Janet Lewis, CFA +852 3922 5417 [email protected] Allen Yuan +86 21 2412 9009 [email protected] Eric Zong +852 3922 4749 [email protected] Leo Lin +852 3922 1098 [email protected]
13 May 2016 Macquarie Capital Limited
Please refer to page 2 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
46
CHINA
China banks
China April loan & deposit data (%) 16-Feb Mar-16 Apr-16 Moderation in loan expansion in April RMB LDR 69.7% 69.4% 69.4% Total LDR 71.76% 71.37% 71.29% Event MoM chg +0.02% -0.39% -0.08% Loan Growth . Today’s PBOC data release indicates a reduction in April from the fast loan RMB loans (YoY) 14.8% 14.8% 14.5% Total loan (YoY) 13.6% 13.4% 13.0% expansion of 1Q16. Total loans expanded by just +0.5% MoM, the slowest sequential pace since Oct 2015. Total loans have now expanded by RMB4.9 RMB loans (MoM) 0.8% 1.4% 0.6% Total loans (MoM) 0.7% 1.2% 0.5% trillion YTD, which is 9.7% lower than the RMB5.4trn in Jan-Apr 2015. Even stripping out FX loans, total loans YTD increased RMB5.2 trillion, +1.7% YoY. RMB loan (YTD) 3.5% 4.9% 5.5% Total loan (YTD) 3.2% 4.5% 5.0% Impact Deposit Growth RMB deposits (YoY) 13.3% 13.0% 12.9% . System loans expanded +0.5% MoM / 13.0% YoY. RMB loans grew +0.6% Total deposits (YoY) 13.0% 12.6% 12.6% MoM / +14.5% YoY in April, slightly slower than the Jan-Mar levels. RMB
RMB deposits (MoM) 0.6% 1.8% 0.6% retail loans remain strong, (+1.5% MoM / +6.2% YTD / 17.9% YoY), with MLT Total deposit (MoM) 0.6% 1.8% 0.6% loans (largely mortgages), growing +2.2% MoM / +8.4% YTD / +23.5% YoY.
RMB deposit (YTD) 2.1% 4.0% 4.6% . Total deposits expanded by 0.6% MoM / 12.6% YoY. RMB deposit growth Total deposit (YTD) 2.2% 4.0% 4.6% (+0.6% MoM / +12.9% YoY) also continued to outpace FX deposits. Source: CEIC, PBOC, Macquarie Research, May 2016 . LDR declined again, but by less than March. Total LDR was 71.3% (-8bp RMB loan YoY pace remains strong, but MoM / +28bp YoY) and 69.4% for the RMB book (flat MoM / +100bp YoY). slowing MoM
YTD increase in total bank loans now running slightly lower than 2015
18.0% 14.5% 13.0% 25.0% 8,000 12.9% 23.5% 7,000
8.0%
2012
Aug Sep Nov
Jan Jun
Feb Jul Oct
Apr Apr May Mar 20.0%
6,000
-
-
- -
- -
12
- -
- - -
-
13
11 16
15 15
12 14
14 11 15 13 5,000
15.0%
RMB loans (YoY) 4,000 10.0% 3,000 RMB deposits (YoY) 8.5% 5.0% 2,000 5.0% Source: CEIC, PBOC, Macquarie Research, May 2016 6.0% 6.3% 1,000 4.8% 5.6% 5.6% 0.0% 0 LDR slightly down MoM Jan-Apr Jan-Apr Jan-Apr Jan-Apr Jan-Apr Jan-Apr Jan-Apr Jan-Apr 09 10 11 12 13 14 15 16
Aggregate loan increase YTD, RMB bn (RHS) Loans growth, YTD (LHS) 75.0% 71.3% 70.0% 69.4% Source: CEIC, PBOC, Macquarie Research, May 2016 65.0%
Outlook
Oct
Dec
Sep Feb Aug
Jul
Jan Jun
Apr May Apr
60.0% Nov
Mar
-
- - -
12 -
- . -
- Limited upside for banks in our view. The slowdown in loans and overall
- - - -
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11 13 16
15 15
12 14
11 12 14 15
13
TSR in April is in line with indications from authorities that the credit ramp of
RMB LDR Total LDR 1Q16 needed to be curtailed. We see this as a wise and prudent policy. But realistically the market is not likely to get excited about the bank stocks as Source: CEIC, PBOC, Macquarie Research, May 2016 loan growth slows down. Moreover, the system NPL ratio (1Q16: 1.75%, +8bp
Analyst(s) QoQ / +36bp YoY) could start to increase more quickly in 2Q16 as a result of Matthew Smith, CFA the slowing gross loan denominator. Recognizing the reality of asset quality +86 21 2412 9022 [email protected] deterioration is positive, but not likely to boost sentiment. Elaine Zhou +852 3922 3278 [email protected] . We prefer CCB-H as our top sector pick for investors who require China bank
exposure, mainly due to its sector-high CET1 ratio of 13.46% at 1Q16, as well 16 May 2016 Macquarie Capital Limited as relatively stable asset quality vs ICBC, the other sector bellwether, which has seen NPLs rise more rapidly and has allowed its loan loss coverage to decline below the erstwhile regulatory minimum. Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
47
CHINA/HONG KONG/ UNITED STATES China Internet
Privatisation companies A-share IPO and ADR privatisation Latest Current price Event announcement / proposed date price At our Greater China Conference last week, we hosted a panel session on A- CHINA MOBILE-ADR 9/06/2015 Completed FOCUS MEDIA-ADR 13/08/2012 Completed share IPO and ADR privatisation with panellists from Shenzhen Stock Exchange, GIANT INTERA-ADR 25/11/2013 Completed PWC, Grandall Legal Group and Shinel Capital. SHANDA GAMES-ADR 27/01/2014 Completed PERFECT WORL-ADR 2/01/2015 Completed WUXI PHARMAT-ADR 30/04/2015 Completed Impact SUNGY MOBILE-ADR 13/04/2015 Completed VIMICRO INTE-ADR 22/06/2015 Completed Valuation gap triggered privatisation wave and A-share relisting. OMNIVISION TECH 14/08/2014 Completed MINDRAY MEDI-ADR 4/11/2015 Completed For the past two years, US-listed Chinese ADRs have traded at big valuation HOMEINNS HOT-ADR 7/12/2015 Completed discount to A-share peers. Even after the recent A-share market correction, YOUKU TUDOU INC 6/11/2015 Completed BONA FILM GR-ADR 12/06/2015 Completed Internet and media stocks on A-share main boards are still trading at 53x on JIAYUAN.COM INTE 7/12/2015 -2% average, vs 27x of US and HK listed ones. The persistent valuation gap between TAOMEE HOLDI-ADR 1/06/2015 -3% QIHOO 360 TE-ADR 17/06/2015 -9% two markets triggered 30 Chinese companies announced privatisation in the past IDREAMSKY TE-ADR 15/06/2015 -6% two years. As shown in table 1, 3 companies have completed the relisting in A AIRMEDIA-ADR 19/06/2015 -28% ELONG INC-SP ADR 3/08/2015 0% share market, 11 entered into definitive agreements including Qihoo and COUNTRY-SPON ADR 14/08/2015 -1% iDreamsky. CHINA MING Y-ADS 1/11/2015 -5% KU6 MEDIA-ADR 1/02/2016 -9% Lengthy process of A-share IPO makes backdoor listing a preferred choice E-HOUSE CHIN-ADR 3/11/2015 -4% XUEDA EDU GP-ADR 27/07/2015 -7% According to the panellist from PWC, 651 companies are queuing for China IPO. CHINA CORD BLOOD 27/04/2015 -3% E-COMMERCE C-ADR 8/03/2016 -31% Among them, 215 have lined up for more than 3 years and 139 for 2-3 years. JA SOLAR HOL-ADR 5/06/2015 -18% Among the 321 companies who obtained an IPO approval since Jan 2015, the IKANG HEALTH-ADR 14/12/2015 -27% CHINA INFORMATIO 22/06/2015 -73% average time in queue was about 2.9 years. In addition, listing directly is also KONGZHONG-ADR 29/06/2015 -36% subject to valuation cap. 99% of the A-share companies listed since June 2014 MOMO INC-ADR 23/06/2015 -40% RENREN INC-ADR 10/06/2015 -36% were IPOed at below 23x FY1 PE. In contrast, the backdoor listing or asset 21VIANET-ADR 10/06/2015 -42% injection can significantly shorten the timeframe of relisting for ADR companies YY INC-ADR 9/07/2015 -31% ZHAOPIN LTD-ADR 5/05/2016 -12% and help them enjoy more flexibility on pricing. JUMEI INTERNATIO 17/02/2016 -19% AUTOHOME INC-ADR 18/04/2016 -19% Accounting issues during the US delisting to A-share relisting process SORL AUTO PARTS 31/10/2015 -42% WANDA COMM-H 3/30/2016 7% Ms Shen from PWC discussed five accounting issues to address for those Source: Bloomberg, Company data, Macquarie Research, companies returning to A-share market. 1) Discrepancies between the May 2016
accounting principles in the US and China; 2) Treatment of share-based compensation; 3) Completeness of business or assets to be injected; 4) Table of content Treatment of goodwill and intangible assets; 5) whether the accumulated loss of Zhaopin Soufun the shell company may affect the restructured company’s ability to pay dividend. Case study: Qihoo Focus Media Impact from tightening regulations on A-share backdoor listing Transformation of A-share IPO Chinese IPO framework The night before our panel discussion, SINA IT reported that CSRC plans to tighten policy evolution New third board a rising platform rules on the back-door listing and asset restructure by requiring 6-year lockup period and cap the PE at 20x. Further on May 11, Xinhua Media said CSRC will prohibit follow-on share issuance of non-internet and media related A-share companies from investing in Internet finance, gaming, film and virtual reality (VR) assets. We believe Analyst(s) this underscores regulators’ concern that several A-share companies’ valuation may Wendy Huang, CFA +852 3922 3378 [email protected] have been inflated by the speculation on internet and media asset injection from Hillman Chan, CFA privatized US companies. Government also intends to regulate US-ADRs to fund the +852 3922 3716 [email protected] privatization through a crowd-funding platform. Julia Pan +852 3922 4211 [email protected] As a result, US ADRs in privatization declined 20-30% in the past week and the Joe Yu +852 3922 1160 [email protected] value of A-share shell companies have declined more. In our view, the relisting
valuation and the timeframe for 11 companies that signed a definitive agreement 16 May 2016 will be affected and there will be penalty if they cancel the privatisation. 14 Macquarie Capital Limited companies have not yet entered a binding agreement. We believe their ability to attract funding for privatisation will be significantly affected.
Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
48
HONG KONG/CHINA China Internet Panellists:
Mr. Zeng Guang, Secretary General, China Fintech development Shenzhen Internet Finance Association Event Mr. Soul Htite, Founder and CEO, . We hosted a panel session to discuss the latest developments and regulatory Dianrong.com, Co-founder of Lending changes in the Fintech industry in China at our GCC conference last week. Club Key takeaways as follows. Mr. Lin Yanjun, SVP and CSO, 9fbank.com Impact Mr. Branden Chen, CFO, Suishou . Structural imbalance creates RMB 16T addressable market for Fintech. Technology According to Dianrong CEO, Fintech has a RMB 16 trillion total addressable market. China’s rapidly growing middle class and SME merchants’ credit needs are currently underserved by traditional financial institutionals due to lack of credit history. There’s a structural imbalance between China’s borrowers and lenders. On the asset side (borrowers), corporates rely heavily on indirect bank loan financing vs. direct financing through capital markets. Indirect funding accounts for 0.92% of China GDP vs. 0.1% in the US. On the investor side (lender), China’s cash deposit to GDP ratio is too high due to lack of investment channels. The ratio is 80% in China vs. 54% in the U.S.
. P2P market expected to reach RMB 5.3T by 2020. P2P loan origination
expected to reach RMB 5.3T in 2020, with 15-20 five year CAGR reaching 66%, according to Oliver Wyman estimates. As a reference point, 24% of
unsecured loans in the U.S. were issued by Fintech companies in 2015; and no bank issued more unsecured loans than lending clubs. . Regulation will continue to evolve and the “unfit players” will be washed out this year. Zeng Guang believes the government is very serious about tightening regulation this year; industry will face a round of re-shuffling. Smaller players will have a hard time surviving, and possibly only 10-20% of firms could survive. Existing players may want to apply for licenses just to fend off regulation and scrutiny. Panellists all agree that the formation of a national internet finance association, which is headed by the former PBOC vice chair, is a meaningful improvement regarding industry regulation. A regulation was issued on May 11, in which CSRC will prohibit non-internet and media related A-share companies from doing follow- on share issuance in Internet finance and three other industries. . Infrastructure, distribution platform, and innovative products are the three pillars of Fintech. The current Chinese Fintech ecosystem can be split into three categories, 1) Infrastructure tools, i.e. credit score companies, financial info portal, and virtual currencies. Prominent examples are Seasame Credit, East Money, and QQ coin. 2) Distribution Analyst(s) platforms, i.e. third party payment platforms and product sales channels. Wendy Huang, CFA Prominent examples are Alipay, WeBank. 3) Innovative products, i.e. +852 3922 3378 [email protected] Joe Yu P2P, crowd funding, consumer finance. Prominent examples are Yirendai, +852 3922 1160 [email protected] Dianrong, JD crowd funding, and JD Baitiao. Hillman Chan, CFA +852 3922 3716 [email protected] Julia Pan +852 3922 4211 [email protected]
13 May 2016 Macquarie Capital Limited
Please refer to page 3 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
49
HONG KONG
Hong Kong telecom sector
6823 HK rel HSI perf, & rec history Let’s get ready to rumble…in 2018 Event
. Office of the Communications Authority (OFCA, the telecom regulatory body of Hong Kong) is soliciting views and comments on the arrangements for reassignment of the frequency spectrum in the 900 MHz and 1800 MHz frequency bands upon expiry of the existing assignments.
Impact 315 HK rel HSI perf, & rec history . We note 36% of existing frequency spectrum potentially up for grabs. We note the assignments for a total of 198.6 MHz of spectrum are due to expire between 2020 and 2021. Based on our computation, the 198.6 MHz of spectrum represents ~36% of frequency spectrum currently owned by Hong Kong’s four major mobile operators (China Mobile HK, HKT, Hutchison Telecom, SmarTone). . OFCA mentioned three possible options: (1) first right of refusal offered to the operator currently using the spectrum; (2) all the frequency spectrum to be reassigned via open auction; (3) a hybrid solution, mixing the former two options.
215 HK rel HSI perf, & rec history . We do not expect an imminent resolution of this situation. Based on past experience, the regulatory body needs to finalize arrangements two years before expiry of the existing assignments. As a result, that implies the regulatory body needs to finalize arrangements in 2018 and 2019. We do not expect an imminent resolution in this year. . We believe the operators are likely to oppose open auction. In our view, one undesirable scenario is a financially well-funded mobile operator could easily dominate the bidding process by submitting irrationally high bidding prices. As a result, mobile operators with actual spectrum needs could
Source: FactSet, Macquarie Research, May 2016 potentially be denied equal opportunity to obtain adequate frequency spectrum. . We may see another hike of mobile tariffs post reassignment of the frequency spectrum. Given all four mobile operators are affected by the reassignment of frequency spectrum, we do not expect any one of the four operators will absorb the entire cost internally. Therefore, we expect to see another hike of mobile tariffs post reassignment of the frequency spectrum. . We expect the 900 MHz frequency bands will be more expensive than the 1800 MHz frequency bands. Due to the fact that lower frequency spectrum allows better indoor penetration of mobile signals, therefore, we expect in the upcoming auction of 900 MHz and 1800 MHz frequency bands, we expect to see the transaction price (per MHz) to be higher for the 900 MHz band (Figure 2 shows recent transaction price for spectrum in Hong Kong). Outlook
Analyst(s) . HKT Trust (6823 HK, Outperform) remains our preferred pick in Hong Kong Macquarie Capital Limited Danny Chu, CFA telecom universe given: (1) stable earnings growth as it does not own volatile +852 3922 4762 [email protected] businesses; (2) more flexible dividend policy to smooth volatility of dividends Susana So due to earnings fluctuation; (3) mobile business no longer being a drag for the +852 3922 1108 [email protected] Macquarie Capital Securities (Japan) Limited company; (4) local telephony business stabilizing, as competitors are Nathan Ramler, CFA reassessing business strategies. +81 3 3512 7875 [email protected]
13 May 2016
Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
50
INDONESIA
Indonesia Cement
Hostiles in sight
Event
. For the first time, we have visibility on Anhui’s volumes in the Indonesian Cement Association’s (ASI) April-16 data. Other new incumbents such as Cemindo (Merah Putih), Jui Shin (Garuda), and Siam (Jawa) continue to battle for market share as well. The Big 3 continue to face volume (and pricing) pressures, with Indocement (INTP) and Holcim’s (SMCB) April volumes tanking 15%/17% YoY, respectively. Visuals are available overleaf. Impact . Anhui moving nationwide? Anhui posted 87kt domestic sales volume during April, or 1.0mt annualized vs its respective 1.5mtpa production capacity, implying ~67% plant utilization rate. Anhui’s April sales mostly focused on Kalimantan (in particular, South Kalimantan, where its plant is located), taking up 64% of its total sales volume for the month. This is followed by Java (14%)—West Java was 4%, East Java 9%, and Central Java 2% of total— then Eastern Indonesia (10%), Sulawesi (8%), Sumatra (2%), and finally Nusa Tenggara (1%). It seems to us Anhui is attempting to challenge Semen Indonesia’s (SMGR) nationwide dominance by trying to make its mark across the archipelagos (other new players are mostly targeting Java markets only), albeit still largely concentrated in the Kalimantan markets for now. . Cemindo & Jui Shin pose pricing threats? National market share for Anhui during April was 1.9%. Out of 5 new players accounted for by ASI, Cemindo has the highest share of all—2.7% during April (company has held the highest share since last year)—followed by Anhui, Siam (1.9%), Jui Shin (1.8%), and Pan Asia (1.0%). Looking at historical data points, monthly market share trends have been tracking higher for both Cemindo and Jui Shin, suggesting price pressures have been largely exerted by these two players (Anhui should have contributed as well, though not captured yet in official data). . A mixed bag for Big 3: Most of the Big 3 did not perform well for the month of April. INTP’s domestic volume during the month fell 15% YoY, SMCB tanked 17% YoY, while SMGR was the only one posting positive growth of 5% YoY. 4M16 domestic volume growth was as follows: 1) SMGR -0.4% YoY, 2) INTP -2.6% YoY, and 3) SMCB +3.5% YoY. SMGR’s 4M16 domestic market share slipped 1.6 ppt YoY to 41.6%, INTP’s fell by a similar magnitude to 26.9%, while SMCB’s was largely flat YoY at 13.7%. . ASP challenging: 1Q16 implied cement ASPs were mostly tracking lower YoY. ASP for SMGR was down by 3% YoY during the period, while INTP’s ASP took a dive by falling 10% YoY. SMCB posted 1% increase in implied ASP. As per SMGR’s explanation, domestic bulk markets (especially in West Java—INTP’s home market) are facing the largest price pressures, while bag markets are slightly more benign. Previously, INTP highlighted that bulk ASP is generally Rp150k/t lower than bag ASP, although one would get ~Rp50k/t Analyst(s) Stanley Liong cost-savings given no packaging costs, thus net-net is ~Rp100k/t lower for +6221 2598 8381 [email protected] bulk (or roughly 10% to current implied blended cement ASPs).
13 May 2016 Outlook PT Macquarie Capital Securities Indonesia . We are reviewing our investment thesis on Indonesian cement names.
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
51 JAPAN
Japan credit cards
Beats, misses, and surprises Aeon Financial: summary forecasts (¥ bn) Reven OP NP OPM NPM Event ues (%) (%) FY3/16A Actual 359.7 59.4 35.8 16.5% 9.9% . Aeon Financial (8570, ¥2,431, OP, TP ¥2,700) and Credit Saison (8253, ¥2,051, FY3/17E COE 380.0 63.0 37.0 16.6% 9.7% N, TP ¥2,200) reported FY3/16 results after the market close on May 13, 2016. MACQ 379.1 62.9 35.7 16.6% 9.4% BBG 385.0 64.9 37.0 16.9% 9.6% Post-results, we are slightly more cautious on Aeon Financial due to the lower- FY3/18E MACQ 401.0 68.0 38.7 17.0% 9.7% than-expected DPS. BBG 410.2 69.8 39.7 17.0% 9.7% Source: Company data, Bloomberg, Macquarie Research, Impact May 2016
. Aeon Financial: earnings good but FY3/17E DPS light
FY3/16 NP came in 13% higher vs. our forecast and 7% higher vs. BBG Credit Saison: summary forecasts consensus. The company forecasts FY3/17E NP of ¥37bn which is 4% (¥ bn) Reven Ordina Net OPM NPM ues ry profit (%) (%) above our forecast and in line with consensus. profit FY3/17E DPS guidance of ¥68 looks light (MACQ: ¥70, consensus: ¥73). FY3/16 A 269.9 43.8 26.2 16% 10% FY3/17E COE 278.0 50.0 38.5 18% 14% The company stated that it plans to use more capital to invest in its FY3/17E MACQ 276.5 55.3 32.3 20% 12% business (ex. systems, employees.) – we would like to get more clarity on FY3/17E BBG 279.8 53.9 37.8 19% 14% FY3/18E MACQ 283.9 51.2 33.8 18% 12% what the company chooses to invest in. FY3/18E BBG 290.4 52.3 37.3 18% 13% The company realized ¥13.4bn of securitization income in FY3/16 (vs. Source: Company data, Bloomberg, Macquarie Research, May 2016 MACQ ¥10bn). Profits were derived as follows: ¥9bn from housing loans, ¥2.3bn from revo, and ¥2.1bn other assets. The ¥2.3bn of revo securitization was a surprise to us, given that the company previously stated that it was unlikely to securitize any of its revo assets. Unsecured loans (sum of cash advances and small loans) as at FY3/16 were up 12.2% YoY – lower than the company’s initial target of +15% but largely expected. The company expects growth of ~7% for FY3/17E which is more or less in line with our expectations. The company realized kabarai provisions of ¥3.9bn (vs. MACQ: ¥2.7bn). We forecast provisions of ¥1bn for FY3/17E and zero for FY3/18E. . Credit Saison: earnings miss and new MTP FY3/16 NP of ¥26.2bn was ~8% lower vs. our forecast and ~12% lower vs. consensus. The company’s FY3/17E NP guidance of ¥38.5bn is ~19% higher vs. our current forecast of ¥32.3bn and 2% higher vs. the consensus forecast of ¥37.8bn. We expect the company to realize ~¥4bn of extraordinary losses from the systems implementation in FY3/17E. Key KPIs in March were weak: card shopping transaction values were up only 2.4% YoY (FY3/16 growth of +4% well below target of +9%), revo growth moderated to 14.8% YoY (from 16% in Feb), and cash advances continued to contract (-0.8% YoY vs. -0.5% YoY in Feb). The company announced its new MTP (FY3/17-19E) in which the company targets OP of ¥60bn by FY3/19E (~5% higher than the current consensus) – a strategic change in its card business and overseas expansion appear to be the key themes in its new MTP. We will find out Analyst(s) more details on 16 May when the company holds its presentation. Leo Nakada, CFA +81 3 3512 6050 [email protected] The company realized ¥3.5bn of ‘settlement received’ as an extraordinary
gain – we would like to get more clarity. 16 May 2016 Macquarie Capital Securities (Japan) Outlook Limited . Maintain Outperform on Aeon Financial and Neutral on Credit Saison, pending a fuller review.
52
HONG KONG/ CHINA/ SINGAPORE Macau gaming
Recent research reports Top weekly events & hot dates May 12, 2016 Macau gaming – Midterm review announcement Event May 11, 2016 Wynn Macau (1128 HK) – Concerns on EPS dilution remain . No.1: Weekly table-only GGR at HK$570m, 2% above CYTD average, but May 11, 2016 MGM China (880 HK) – MGM Cotai below our expectation. Industry sources and CEIC estimate that for the first opening, the swing factor May 09, 2016 Macau gaming – Weekly table-only GGR at eight days in May 2016, average daily Macau table-only gaming revenue was HK$570m HK$570m, up 10% MoM, or 2% above the CYTD average daily run-rate of May 06, 2016 Wynn Macau (1128 HK) – 1Q16 adjusted HK$559m. EBITDA inline with preliminary estimates… May 05, 2016 MGM China (2282 HK) - 1Q16 adjusted . No.2: Midterm review announcement. DICJ has announced the mid-term EBITDA 5% ahead of our forecast May 05, 2016 Melco Crown Entertainment - Buybacks review results and issued three press releases. Interim Review of Gaming diluted by SC performance Liberalization for Games of Fortune"; "Synergetic Effect Between Gaming and May 04, 2016 Melco Crown Entertainment (MPEL US) - Non-gaming Elements; "DICJ continues to strengthen regulation and 1Q16 adjusted EBITDA miss; 9.6% share repurchase a positive surprise supervision to promote healthy development of junket promotion” While the May 04, 2016 SJM Holdings Limited - Cost control still in increasing non-gaming offerings by the six major gaming operators should be place positive for concession renewals in 2020-22, we believe the share prices in May 02, 2016 Macau gaming - Apr GGR of MOP17.3bn, - 9.5% YoY the near term will be overshadowed by the increasing emphasis on regulating Apr 28, 2016 Galaxy Entertainment – Repositioning to the junket system. continue Apr 27, 2016 Galaxy Entertainment (27 HK) – 1Q16 . No 3: Wynn Macau (1128 HK) – Concerns on EPS dilution remain. Wynn adjusted EBITDA broadly in line with consensus but Macau’s 1Q16 operating statistics (our first results read flashnote can be missed our forecast by 6% Apr 25, 2016 Sands China – The Parisian to be EPS viewed here) were solid with QoQ market share expansion and improving accretive adjusted EBITDA margin. However, we maintain our Underperform Apr 25, 2016 Macau gaming – Weekly table-only GGR at recommendation. Our FY16-18E adjusted EBITDA forecasts are 13-20% HK$443m Apr 21, 2016 Sands China - Investment thesis intact below Bloomberg consensus, and we reiterate the view that the Wynn Palace
opening will be EPS dilutive in FY17. We believe that the Street Share price and index value underestimates additional D&A and finance costs associated with the Wynn movements Palace post completion (FY18E PER: 30.2x). Management’s adjusted Company 1w 1m 3m CYTD EBITDA scenario analysis of the Wynn Palace looks too aggressive to us. SJM -2% -11% -7% -14% Wynn 5% -6% 43% 23% Galaxy 3% -13% 8% 3% . No 4: MGM China (2282 HK) – MGM Cotai opening, the swing factor. We Sands China 1% -10% 11% 3% change MGM China’s FY16-18E adjusted EBITDA by +0%/-13% post the MGM China -2% -13% 15% 6% Melco Crown -2% -14% 3% -13% 1Q16 operating statistics (our first results read flashnote can be viewed here). Index 1w 1m 3m CYTD We believe MGM is fairly valued at 14.5x FY16E EV/EBITDA, while MGM MSCI HK -1% -5% 10% -5% MSCI ASxJP 0% -4% 11% -2% Cotai opening may further slip to 2Q17 which can trigger further consensus HSI -1% -6% 9% -9% MSCI China -1% -8% 11% -10% earnings downgrades. CYTD, MGM China’s share price increased 6%, HKCEI -1% -8% 12% -13% outperforming the peer group average by 5ppt. Source: CEIC, Macquarie Research, Priced as at 12 May 2016 . No 5. MMGI of China import value growth of -10.9% YoY in April 2016. Macau gaming operators This is one of the three pillars of the Macquarie Macau Gaming Index (MMGI). Price TP TSR The linear regression R squared with Macau GGR is 0.48. In April 2016, the Ticker Company Rec LC LC % growth rate was -10.9% YoY versus -7.6% YoY in Mar 2016. 1928 HK Sands China OP 27.35 32.50 24% 27 HK Galaxy N 25.15 26.50 7% MPEL US Melco Crown N 14.59 14.50 0% Hot dates 2282 HK MGM China N 10.24 9.50 -4% 880 HK SJM Holdings N 4.77 4.50 -5% . The focuses of this week’s hot dates are weekly GGR data, China off- 1128 HK Wynn Macau UP 11.12 7.70 -29% Source: Bloomberg, Macquarie Research, Priced as at 12 balance-sheet finance growth, China residential real estate investment growth May 2016 and Apr Macau visitor arrivals. Analyst(s) Kai Tan Date Market Event Risk Impact +852 3922 3720 [email protected] 16-May-16 Macau Weekly GGR table-only data ↑ We expect daily GGR to ~HK$589m Maggie Jiang 18-May-16 China China residential real estate ↓ Likely to decrease in April +852 3922 3328 [email protected] investment growth Jensen Hui 18-May-16 China China off balance sheet finance growth ↑ Better growth rate ~+3% YoY +852 3922 3373 [email protected] 23-May-16 China Apr Macau visitor arrivals ↑ Likely to increase in April
Source: Bloomberg data, Macquarie Research, May 2016 13 May 2016 Macquarie Capital Limited
Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
53
GLOBAL Taiwan textile & footwear Kohl’s SSSg trend
% US retailers’ spring woes continue 5 Event 3 . Nordstrom (JWN US, US$45.43, Neutral, TP: US$35.00, Laurent Vasilescu) 1 reported weak 1Q16 (quarter ended April) and cut guidance on 12 May after -1 market close; the share price fell ~17% in after hours trading. Our US analyst, -3 Laurent, maintained a Netural and lowered his TP by 20% post the result. -5 . Kohl’s (KSS US, Not rated) also reported a weak 1Q16 and 2016 outlook on
12 May; its share price dropped 9% post the result.
1Q14 2Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16
Source: Company data, Macquarie Research, May 2016 . We see negative implications of weak spring sales in North America for the Taiwan textile & footwear sector. Kohl’s contributed 22.2% of Makalot’s total Nordstrom’s SSSg trend (company revenue in 2015; ~35% of Eclat’s revenue is from channel clients, such as total, full price store, discount store) Nordstrom, Macy’s, and Kohl’s.
8.0% Impact 6.0% 4.0% . Nordstrom’s 1Q16 EPS 43% missed; cut 2016 guidance. Nordstrom’s 2.0% 1Q16 sales grew 1% YoY, missing consensus by 1%. SSSg dropped 1.7% in 0.0% 1Q16, compared with flat of consensus, the first time decline since 3Q09. The -2.0% company also cut 2016 EPS guidance by 20% to US$2.50-2.70 from -4.0% US$3.10-3.35 and SSSg to -1~1% from 0~2% previously. We also noticed its -6.0% full price store SSSg declined 4.3% YoY while the discount store grew 4.6%
YoY, implying more frugal consumer behaviour. Gross margin and operating
3Q14 3Q15 1Q14 2Q14 4Q14 1Q15 2Q15 4Q15 1Q16 Company total full price store margin fell 2.4ppts and 4.4ppts YoY in 1Q16. Mgt said there’s a lot of discount store excess product out in the market place and heavy discounting going on. Source: Company data, Macquarie Research, May 2016 . Kohl’s 2016 outlook weaker than expected. Kohl’s 1Q16 sales dropped 4%
YoY, missing consensus by 4%. EPS dropped 51% YoY to US$0.31, 15% Nordstrom and Kohl’s suppliers in Asia lower than consensus. Worse, Kohl’s 1Q16 SSSg dropped 3.9%, first time Name Code Product Sales % drop in the past 5 quarters, worse than +0.4% of consensus. Gross margin Eclat 1476 TT Fabric/apparel 35% from channel and operating margin dropped 1.4ppts and 4.1ppts YoY in 1Q16. The client such as Nordstrom and company doesn’t provide updated forecast. Macy’s Makalot 1477 TT Apparel 22% from Kohl’s . Slower revenue growth and margin pressure for suppliers. We’ve seen Hansae. 105630 KS Apparel 12% from Kohl’s, weak spring sales so far from results of Macy’s, Fossil, GAP, VFC and Sear’s, Macy’s Lululemon. We expect suppliers’ slower revenue growth and margin pressure and JCP from brand/retailer clients to continue in the remainder of the year. Source: Company data, Macquarie Research, May 2016
Outlook
. Nordstrom and Kohl’s results implied weak spring sales in North America. While most investors believe it’s only a short-term inventory issue, we believe it is a demand issue. We downgraded Taiwan textile & footwear stocks on 07 Analyst(s) Oct 2015 (see our report, Taking a breather). We are worried about slower Macquarie Capital Securities Limited, Taiwan Branch demand growth, margin pressure from clients and de-rating risk in the Corinne Jian, CFA midterm. See our Dec 2015 report- Signs of fading demand and 27 April +886 2 2734 7522 [email protected] report - From sweet spot to double whammy. Marcus Yang +886 2 2734 7532 [email protected] Benson Pan Valuation summary +886 2 2734 7527 [email protected] Jack Hsu Market Daily Div Net Cap trading Price TP PER PER PBR ROE yield gearing +886 2 2734 7518 [email protected] Name Code US$m US$m Lcy Rec NT$ Upside 16E 17E 16E 16E 16E 16E Macquarie Capital (USA) Inc. Laurent Vasilescu Eclat 1476 TT 2,398 27.2 290.0 U 250 -14% 18.5 16.1 5.0 31% 3% -30% +1 212 231 8046 [email protected] Makalot 1477 TT 922 13.2 151.0 U 130 -14% 14.2 13.4 3.2 23% 6% -21% Toung Loong 4401 TT 293 0.6 79.2 N 85 7% 14.9 13.0 3.5 24% 5% 26% Feng Tay 9910 TT 2,951 7.8 123.5 U 120 -3% 16.4 14.5 5.1 33% 4% 2% 13 May 2016 Source: Macquarie Research, May 2016. Pricing date: 12 May 2016.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
54
HONG KONG CPMC Holdings 906 HK Underperform Cessation of coverage Price (at 07:59, 11 May 2016 GMT) HK$3.32
Valuation HK$ 3.59 Event - DCF (WACC 7.2%, beta 1.0, ERP 7.0%, RFR 3.0%, TGR 4.0%) 12-month target HK$ 3.59 . We cease coverage on CPMC Holdings. Upside/Downside % +8.1 12-month TSR % +10.1 Impact Volatility Index Medium . Our original thesis on CPMC was that consolidation of the packaging sector GICS sector Materials would raise CPMC returns on capital employed. The first part of that thesis Market cap HK$m 3,312 has started to bear out. CPMC’s main domestic private competitor, ORG Market cap US$m 427 Packaging, last November announced it was taking a 27% stake in CPMC. Free float % 40 30-day avg turnover US$m 0.4 . However, what we failed to anticipate was the emergence of a shareholding Number shares on issue m 997.6 structure that was clearly disadvantageous to minority shareholders.
Investment fundamentals Specifically, as we have highlighted in previous research, we view ORG Year end 31 Dec 2015A 2016E 2017E 2018E having two board seats on CPMC’s board, without having to make a General Revenue m 5,103.7 5,467.5 5,815.0 6,003.1 Offer, as effectively as free option at the expense of minority shareholders. EBIT m 373.9 377.7 404.4 421.7 EBIT growth % -11.1 1.0 7.1 4.3 . In the meantime, ORG Pack has full strategic visibility onto CPMC and Reported profit m 282.9 257.6 276.6 289.2 Adjusted profit m 231.5 247.6 266.6 279.2 presumably (with two out of eight board seats) can exert significant influence EPS rep Rmb 0.28 0.26 0.28 0.29 on CPMC’s management (possibly to its own interest). EPS rep growth % -18.1 -8.9 7.4 4.5 EPS adj Rmb 0.23 0.25 0.27 0.28 EPS adj growth % -19.8 7.0 7.7 4.7 . The upside risk is suggested by the HK$6.00 that ORG bid in November; PER rep x 9.8 10.8 10.1 9.6 however, we think the downside risk is greater – that effectively ORG simply PER adj x 12.0 11.2 10.4 10.0 uses its current position to its own advantage. Total DPS Rmb 0.06 0.05 0.06 0.06 Total div yield % 2.2 2.0 2.1 2.2 ROA % 4.8 4.7 4.8 4.7 . In the company’s latest FY15 results, management gave guidance on FY16E ROE % 5.5 5.7 5.9 5.9 capex of~Rmb400m and capacity expansion of 200m/500m for two-piece EV/EBITDA x 6.9 6.7 6.3 6.2 Net debt/equity % 37.0 35.7 33.5 27.3 cans in FY16/17E. We struggle to reconcile the strategy of capacity expansion P/BV x 0.7 0.6 0.6 0.6 with low utilisation rates.
906 HK rel HSI performance, & rec . CPMC trades at 0.7x P/B FY15 and 11.1x FY16E PER. We think these history valuations are not attractive in the low/no growth environment for most packaged F&B in China. Earnings and target price revision
. No change. Price catalyst
. 12-month price target: HK$3.59 based on a DCF methodology.
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. . Catalyst: Upside risk is a bid closer to the HK$6.00 that ORG bid in Nov. Source: FactSet, Macquarie Research, May 2016 (all figures in Rmb unless noted, TP in HKD) Action and recommendation
. We believe that ORG will eventually have to make a general offer for CPMC. But with liquidity being very low, fundamentals deteriorating and ORG holding Analyst(s) all the cards, minority shareholder may have to wait an extended period of Jake Lynch time while CPMC’s value deteriorates. +852 3922 3583 [email protected] Erin Lin +86 21 2412 9028 [email protected] Alfred Hong +852 3922 3385 [email protected]
13 May 2016 Macquarie Capital Limited
Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
55
JAPAN Digital Garage Inc. 4819 JP Outperform Mixed results but tracking behind Price (at 06:00, 13 May 2016 GMT) ¥2,189
Valuation ¥ 2,470 Conclusion - Sum of Parts 12-month target ¥ 2,470 . 3Q was ahead of our forecasts for the core marketing business. However Upside/Downside % +12.8 payments are tracking slightly behind. Incubation improved but to reach 12-month TSR % +14.1 guidance it needs to drive 58% of its pre-tax guidance in 4Q alone. Overall Volatility Index Medium OP for 9 months is only 60% of FY6/16 guidance. We adjust our sum-of-the- GICS sector Software & parts for current market prices of its investments including Kakaku.com (2371 Services JP, ¥2,063, Underperform, TP: ¥1,660) and as a result increase TP from 2180 Market cap ¥m 103,516 to 2470. We terminate coverage, reallocating resources. Final Market cap US$m 947 recommendation is Outperform. Free float % 72 30-day avg turnover US$m 7.2 Impact Foreign ownership % 33.71 Number shares on issue m 47.29 . What was good: Sales growth for 3Q was an impressive 39% YoY up from the 11% for the 1H driven by strong Incubation (IT) and Marketing (MT). MT in Investment fundamentals Year end 30 Jun 2015A 16CoE 2016E 2017E particular grew at 41% up from the 15% in 2Q driven by an expansion into Revenue m 38,087 41,000 42,383 45,411 native app advertising business which now represents 26% of the division EBIT m 4,810 5,200 4,713 5,705 sales mix up from 10% in the same period last year. OPM for MT was stable EBIT growth % 84.4 8 -2.0 21.0 Recurring profit m 7,610 8,200 7,009 8,527 at 6.8% versus 6.6% in 2Q. Payment (FT) sales were stable at 12.1% growth Reported profit m 5,082 5,500 4,575 5,491 YoY as compared to 2Q growth at 12.5%. Payment (FT) volumes processed EPS rep ¥ 108.1 117 97.3 116.8 EPS rep growth % 79.3 8.2 -10.0 20.0 in 3Q were ¥294bn which was growing faster at 18% YoY than the sales PER rep x 20.2 20.4 22.5 18.7 growth of 12% which indicates some ASP erosion. GMO Payments in the Total DPS ¥ 5.0 15.0 25.0 27.0 Total div yield % 0.2 0.7 1.1 1.2 same qtr processed ¥470bn in transactions +24% YoY while sales were ROA % 6.1 na 5.6 6.8 +36% YoY. Marketing (MT) OP was 84% of our FY6/16 forecasts which ROE % 14.1 na 17.0 19.0 EV/EBITDA x 12.1 na 12.4 10.4 suggests it might beat our estimates. Payment (FT) OP is 71% of our FY6/16 Net debt/equity % -59.9 na -10.6 -16.2 forecasts which suggests a slight miss for the FY versus our forecasts. P/BV x 3.6 na 3.4 3.0
. What was bad: Incubation (IT) OP was ¥0.9bn which was significantly up 4819 JP vs TOPIX, & rec history from -¥0.35bn in 2Q and -¥0.008bn last year. IT pre tax profit is only 42% of FY6/16 guidance which suggests a miss versus the company’s plan unless significant assets/investments are sold in 4Q. Total company 9M OP was ¥3.1bn which is only 59.7% of FY guidance which suggests guidance might be hard to achieve. . NAV depends on Payments: We have updated our NAV/Sum-of-the-parts valuation for current market values. As a result we increase our TP from 2180 to 2470 and maintain Outperform. We have applied a 19.5x FY6/16 OP to
Note: Recommendation timeline - if not a continuous line, then there was no value the payments business which is growing at 12-15% pa. More bullish Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 investors could use the value of GMO Payment (3769, NR) which is trading (all figures in JPY unless noted) on 60x OP which would imply a TP of ¥3600 (+65%) for DG if we used the
same multiple for Payments. However GMO sales are growing at 36-40% pa. Earnings and target price revision
. No change. Price catalyst Analyst(s) David Gibson, CFA . 12-month price target: ¥2,470 based on a Sum of Parts methodology. +81 3 3512 7880 [email protected] . Catalyst: FY6/16 results 13 May 2016 Macquarie Capital Securities (Japan) Action and recommendation Limited . Outperform. We terminate coverage to allocate resources elsewhere.
Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
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GLOBAL
Commodities Comment LME cash price % change US$/tonne day on day Zinc metal market slow ex-Asia, Aluminium 1,517 -0.8 Copper 4,636 0.2 stocks feeding any extra needs Lead 1,708 0.2 Nickel 8,599 0.1 . Macquarie attended (and presented at) Metal Bulletin’s 20th Zinc & its Markets Tin 16,657 -0.1 seminar in Madrid this week, where we had the opportunity to sit down with Zinc 1,880 1.0 Cobalt 23,452 -1.0 many of Europe’s key producers, traders and consumers. The mood was Molybdenum 14,830 0.0 even, with a definite improvement in European demand sentiment versus the same event a year ago, but a clear sense that metal stocks are more than Other prices sufficient to cover any spot requirements. The question of off-warrant stock % change day on day levels in Europe was much discussed; meanwhile, those active in or Gold (US$/oz) 1,266 -1.0 knowledgeable about North American markets also said that stocks in NOLA Silver (US$/oz) 17.09 -0.8 can feed that market easily. Premiums have been flat in both regions, with Platinum (US$/oz) 1,040 -2.3 Palladium (US$/oz) 589 -2.5 some expecting a downward move on easy availability at the present time. Oil WTI 46.21 -0.1 . All of this tells us that the concentrates tightness is yet to feed down the chain USD:EUR exchange rate 1.129 -0.8 AUD:USD exchange rate 0.727 -0.7 into the metal market, and so we would not be surprised to see a short-term reset in zinc prices from here. Some participants might view such a move as LME/COMEX stocks an entry point for buyers, and we would concur: Into 2H, our view remains Tonnes Change strongly positive, with 3Q and 4Q prices expected to range between $1,900/t Aluminium 2,584,400 -4,825 LME copper 156,675 -3,325 and $2,200/t as metal production begins to slip on the emerging feed deficit. Comex copper 57,763 -255 Lead 176,075 25 Latest news Nickel 412,344 -1,674 Tin 6,425 100 . China’s April liquidity figures surprised to the downside – new RMB loans Zinc 390,375 -1,125 came in at only Rmb555.6bn, down sharply from Rmb1.37trn in March, and Source: LME, Comex, Nymex, SHFE, Metal Social Finance contracted significantly to only Rmb751bn from Rmb2.336trn Bulletin, Reuters, LBMA, Macquarie Research, in March. All components of Social Finance came down sequentially, with the May 2016 drop in RMB loans and corporate bonds (down from Rmb646bn in March to Articles of the Week Rmb210bn in April) being particularly large.
. China seeking security of cobalt supply . Newly issued long-term loans to households remained strong at Rmb428bn,
. Tin on the crest of a wave largely flat from March, reflecting buoyant property sales, but outstanding . Ferrochrome price inflection another sign of long-term corporate loans have instead fallen by Rmb43bn. Although today’s weak numbers may be partly driven by banks’ motivation to move some of stainless improvement their businesses off balance sheet, they could also suggest a tightening . China April trade numbers: a pull back from stance of the monetary policy, something suggested in the hawkish comment March highs on People’s Daily from an unnamed “authoritative figure” this Monday.
Analyst(s) . Global car sales, a key consumer of many commodities and especially Macquarie Capital (Europe) Limited platinum and palladium, rose 3.5% YoY in April, we calculate from our Vivienne Lloyd +44 20 3037 4530 [email protected] database of 62 leading national car markets. YTD sales have risen by 2.6%, Colin Hamilton slightly below our 3% forecast for the full year, but growth is accelerating. The +44 20 3037 4061 [email protected] Jim Lennon Senior Commodities Consultant strongest markets were China, for which we estimate sales rose 6.1% +44 20 3037 4271 [email protected] (passenger vehicles were up 6.5% but light trucks and imports grew at a Matthew Turner slower pace), and the EU, up 9.1%, supported by double-digit % growth for +44 20 3037 4340 [email protected] Stefan Ljubisavljevic Spain and Italy. US sales grew by a slower but still solid 3.4%. But Brazil, +44 20 3037 4247 [email protected] down 26%, remains a large drag on global growth. For platinum the surge in Macquarie Capital Limited Chen Shao EU sales is of less benefit than it might be as the diesel share of the market +86 21 2412 9041 [email protected] continues to decline – down 2.5% points YoY, which is sufficient to reduce the Lynn Zhao 9.1% growth in all EU sales to a 3.9% increase in diesel. +86 21 2412 9035 [email protected] Macquarie Capital Securities (Singapore) Pte. . Registration remains open for Macquarie’s annual Global Metals, Mining Limited Ian Roper and Materials Conference 2016 being held on June 15–16 at the Omni +65 66 010 698 [email protected] Berkshire Place Hotel in New York.
13 May 2016
Please refer to page 20 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
57 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 – 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 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients)
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Asia Research Head of Equity Research Software and Internet Transport & Infrastructure Peter Redhead (Global – Head) (852) 3922 4836 Wendy Huang (Asia) (852) 3922 3378 Janet Lewis (Asia) (852) 3922 5417 Matt Nacard (Asia – Head) (852) 3922 1362 David Gibson (Asia) (813) 3512 7880 Azita Nazrene (ASEAN) (603) 2059 8980 Hillman Chan (China, Hong Kong) (852) 3922 3716 Corinne Jian (Taiwan) (8862) 2734 7522 Automobiles/Auto Parts Nitin Mohta (India) (9122) 6720 4090 Utilities & Renewables Janet Lewis (China) (852) 3922 5417 Nathan Ramler (Japan) (813) 3512 7875 Zhixuan Lin (China) (8621) 2412 9006 Prem Jearajasingam (Malaysia) (603) 2059 8989 Alan Hon (Hong Kong) (852) 3922 3589 Amit Mishra (India) (9122) 6720 4084 Oil, Gas and Petrochemicals Inderjeetsingh Bhatia (India) (9122) 6720 4087 Lyall Taylor (Indonesia) (6221) 2598 8489 Prem Jearajasingam (Malaysia) (603) 2059 8989 Takuo Katayama (Japan) (813) 3512 7856 James Hubbard (Asia) (852) 3922 1226 Karisa Magpayo (Philippines) (632) 857 0899 James Hong (Korea) (822) 3705 8661 Aditya Suresh (Asia) (852) 3922 1265 Duke Suttikulpanich (ASEAN) (65) 6601 0148 Commodities Banks and Non-Bank Financials Abhishek Agarwal (India) (9122) 6720 4079 Colin Hamilton (Global) (4420) 3037 4061 Matthew Smith (China) (8621) 2412 9022 Polina Diyachkina (Japan) (813) 3512 7886 Ian Roper (65) 6601 0698 Suresh Ganapathy (India) (9122) 6720 4078 Anna Park (Korea) (822) 3705 8669 Jim Lennon (4420) 3037 4271 Lyall Taylor (Indonesia) (6221) 2598 8489 Isaac Chow (Malaysia) (603) 2059 8982 Lynn Zhao (8621) 2412 9035 Keisuke Moriyama (Japan) (813) 3512 7476 Pharmaceuticals and Healthcare Matthew Turner (4420) 3037 4340 Leo Nakada (Japan) (813) 3512 6050 Rakesh Arora (9122) 6720 4093 Chan Hwang (Korea) (822) 3705 8643 Abhishek Singhal (India) (9122) 6720 4086 Gilbert Lopez (Philippines) (632) 857 0892 David Lee (Korea) (822) 3705 8686 Economics Thomas Stoegner (Singapore) (65) 6601 0854 Property Peter Eadon-Clarke (Global) (813) 3512 7850 Dexter Hsu (Taiwan) (8862) 2734 7530 Larry Hu (China, Hong Kong) (852) 3922 3778 Passakorn Linmaneechote (Thailand) (662) 694 7728 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Tanvee Gupta Jain (India) (9122) 6720 4355 Conglomerates David Ng (China, Hong Kong) (852) 3922 1291 Kai Tan (China, Hong Kong) (852) 3922 3720 Quantitative / CPG Gilbert Lopez (Philippines) (632) 857 0892 Raymond Liu (China, Hong Kong) (852) 3922 3629 Gurvinder Brar (Global) (4420) 3037 4036 Wilson Ho (China) (852) 3922 3248 Consumer and Gaming Woei Chan (Asia) (852) 3922 1421 Abhishek Bhandari (India) (9122) 6720 4088 Anthony Ng (Asia) (852) 3922 1561 Linda Huang (China, Hong Kong) (852) 3922 4068 William Montgomery (Japan) (813) 3512 7864 Danny Deng (Asia) (852) 3922 4646 Kai Tan (China) (852) 3922 3720 Aiman Mohamad (Malaysia) (603) 2059 8986 Per Gullberg (Asia) (852) 3922 1478 Zibo Chen (Hong Kong) (852) 3922 1130 Kervin Sisayan (Philippines) (632) 857 0893 Amit Mishra (India) (9122) 6720 4084 Corinne Jian (Taiwan) (8862) 2734 7522 Strategy/Country Fransisca Widjaja (Singapore) (65) 6601 0847 Patti Tomaitrichitr (Thailand) (662) 694 7727 Viktor Shvets (Asia, Global) (852) 3922 3883 Hendy Soegiarto (Indonesia) (6221) 2598 8369 Resources / Metals and Mining Chetan Seth (Asia) (852) 3922 4769 Toby Williams (Japan) (813) 3512 7392 Peter Eadon-Clarke (Japan) (813) 3512 7850 HongSuk Na (Korea) (822) 3705 8678 Rakesh Arora (India) (9122) 6720 4093 David Ng (China, Hong Kong) (852) 3922 1291 Karisa Magpayo (Philippines) (632) 857 0899 Stanley Liong (Indonesia) (6221) 2598 8381 Erwin Sanft (China, Hong Kong) (852) 3922 1516 Polina Diyachkina (Japan) (813) 3512 7886 Emerging Leaders Rakesh Arora (India) (9122) 6720 4093 Anna Park (Korea) (822) 3705 8669 Lyall Taylor (Indonesia) (6221) 2598 8489 Jake Lynch (China, Asia) (852) 3922 3583 Technology Chan Hwang (Korea) (822) 3705 8643 Aditya Suresh (Asia) (852) 3922 1265 Gilbert Lopez (Philippines) (632) 857 0892 Neel Sinha (ASEAN) (65) 6601 0562 Damian Thong (Asia, Japan) (813) 3512 7877 Conrad Werner (Singapore) (65) 6601 0182 Timothy Lam (Hong Kong) (852) 3922 1086 Allen Chang (852) 3922 1136 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Mike Allen (Japan) (813) 3512 7859 (China, Hong Kong, Taiwan) Alastair Macdonald (Thailand) (662) 694 7753 Kwang Cho (Korea) (822) 3705 4953 Nitin Mohta (India) (9122) 6720 4090
David Gibson (Japan) (813) 3512 7880 Industrials George Chang (Japan) (813) 3512 7854 Find our research at Janet Lewis (Asia) (852) 3922 5417 Daniel Kim (Korea) (822) 3705 8641 Macquarie: www.macquarie.com.au/research Patrick Dai (China) (8621) 2412 9082 Soyun Shin (Korea) (822) 3705 8659 Thomson: www.thomson.com/financial Inderjeetsingh Bhatia (India) (9122) 6720 4087 Patrick Liao (Taiwan) (8862) 2734 7515 Reuters: www.knowledge.reuters.com Louis Cheng (Taiwan) (8862) 2734 7526 Bloomberg: MAC GO Lyall Taylor (Indonesia) (6221) 2598 8489 Factset: http://www.factset.com/home.aspx Kenjin Hotta (Japan) (813) 3512 7871 Telecoms CapitalIQ www.capitaliq.com James Hong (Korea) (822) 3705 8661 Email [email protected] for access Nathan Ramler (Asia, Japan) (813) 3512 7875 Insurance Danny Chu (852) 3922 4762 Scott Russell (Asia, Japan) (852) 3922 3567 (China, Hong Kong, Taiwan) Leo Nakada (Japan) (813) 3512 6050 Abhishek Agarwal (India) (9122) 6720 4079 Chan Hwang (Korea) (822) 3705 8643 David Lee (Korea) (822) 3705 8686 Prem Jearajasingam (Malaysia, Singapore) (603) 2059 8989 Kervin Sisayan (Philippines) (632) 857 0893
Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Jeffrey Chung (Asia) (852) 3922 2074 Ruben Boopalan (Singapore) (603) 2059 8888 Michael Santos (Philippines) (632) 857 0813 Jeff Evans (Boston) (1 617) 598 2508 Erica Wang (Taiwan) (8862) 2734 7586 Chris Reale (New York) (1 212) 231 2555 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Angus Kent (Thailand) (662) 694 7601 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41) 22 818 7712 Ben Musgrave (UK/Europe) (44) 20 3037 4882 Justin Morrison (Singapore) (65) 6601 0288 Riaz Hyder (Indonesia) (6221) 2598 8486 Julien Roux (UK/Europe) (44) 20 3037 4867 Isaac Huang (Taiwan) (8862) 2734 7582 Brendan Rake (Thailand) (662) 694 7707 Nick Cant (Japan) (65) 6601 0210 Sales Trading John Jay Lee (Korea) (822) 3705 9988 Mike Keen (UK/Europe) (44) 20 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Adam Zaki (Asia) (852) 3922 2002 Eric Roles (New York) (1 212) 231 2559 Stanley Dunda (Indonesia) (6221) 515 1555 Gino C Rojas (Philippines) (632) 857 0861
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